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Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

 

Commission file number 0-20797

 

RUSH ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 

Texas

74-1733016

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

555 IH 35 South, New Braunfels, TX

78130

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (830) 302-5200

 

Securities registered pursuant to Section 12(b) of the Act: 

Class A and Class B Common Stock, $.01 par value

NASDAQ Global Select Market

Title of each class

Name of each exchange on which registered

         

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes

 

No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

 Yes

 

No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 Yes

 

No

                                            

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 Yes 

 

No

                    

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

 
     

(Do not check if a smaller reporting company.)

   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                           

 Yes

 

No

 

 

The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2015 was approximately $939,968,581 based upon the last sales price on June 30, 2015 on The NASDAQ Global Select MarketSM of $26.21 for the registrant’s Class A Common Stock and $24.00 for the registrant’s Class B Common Stock. Shares of Common Stock held by each executive officer and director and by each shareholder affiliated with a director or an executive officer have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

The registrant had 30,397,361 shares Class A Common Stock and 10,093,305 shares of Class B Common Stock outstanding on February 23, 2016.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrant’s definitive proxy statement for the registrant’s 2016 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than April 29, 2016, are incorporated by reference into Part III of this Form 10-K.

 

 

RUSH ENTERPRISES, INC.

 

Index to Form 10-K

 

Year ended December 31, 2015

 

   

Page No.

       
Part I
       

Item 1

Business

1

 

Item 1A

Risk Factors

15

 

Item 1B

Unresolved Staff Comments

21

 

Item 2

Properties

22

 

Item 3

Legal Proceedings

22

 

Item 4

Mine Safety Disclosures

22

 
       

Part II

       

Item 5

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

23  

Item 6

Selected Financial Data

25

 

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26  

Item 7A

Quantitative and Qualitative Disclosures about Market Risk

40

 

Item 8

Financial Statements and Supplementary Data

42

 

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

75  

Item 9A

Controls and Procedures

75

 

Item 9B

Other Information

76

 
       

Part III

       

Item 10

Directors, Executive Officers and Corporate Governance

77

 

Item 11

Executive Compensation

77

 

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

77  

Item 13

Certain Relationships and Related Transactions, and Director Independence

78

 

Item 14

Principal Accountant Fees and Services

78

 
       

Part IV

       

Item 15

Exhibits, Financial Statement Schedules

79

 

 

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Form 10-K (or otherwise made by the Company or on the Company’s behalf from time to time in other reports, filings with the Securities and Exchange Commission (“SEC”), news releases, conferences, website postings or otherwise) that are not statements of historical fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”), notwithstanding that such statements are not specifically identified. Forward-looking statements include statements about the Company’s financial position, business strategy and plans and objectives of management of the Company for future operations. These forward-looking statements reflect the best judgments of the Company about the future events and trends based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. Use of the words “may,” “should,” “continue,” “plan,” “potential,” “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements reflect our current view of the Company with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in such statements. Please read Item 1A. “Risk Factors” for a discussion of certain of those risks. Other unknown or unpredictable factors could also have a material adverse effect on future results. Although the Company believes that its expectations are reasonable as of the date of this Form 10-K, it can give no assurance that such expectations will prove to be correct. The Company does not intend to update or revise any forward-looking statements unless securities laws require it to do so, and the Company undertakes no obligation to publicly release any revisions to forward-looking statements, whether because of new information, future events or otherwise.

 

NOTE REGARDING TRADEMARKS COMMONLY USED IN THE COMPANY’S FILINGS

 

Peterbilt® is a registered trademark of Peterbilt Motors Company. PACCAR® is a registered trademark of PACCAR, Inc. PacLease® is a registered trademark of PACCAR Leasing Corporation. Navistar® is a registered trademark of Navistar International Corporation. International® is a registered trademark of Navistar International Transportation Corp. Idealease is a registered trademark of Idealease, Inc. aka Idealease of North America, Inc. Blue Bird® is a registered trademark of Blue Bird Investment Corporation. IC Bus® is a registered trademark of IC Bus, LLC. Fuso® is a registered trademark of Mitsubishi Fuso Truck and Bus Corporation. Hino® is a registered trademark of Hino Motors, Ltd. Isuzu® is a registered trademark of Isuzu Motors Limited. Ford Motor Credit Company® is a registered trademark of Ford Motor Company. Ford® is a registered trademark of Ford Motor Company. SAP® is a registered trademark of SAP Aktiengesellschaft. IBM® is a registered trademark of International Business Machines Corporation. This report contains additional trade names or trademarks of other companies. Our use of such trade names or trademarks should not imply any endorsement or relationship with such companies.

 

PART I

 

Item 1.

Business

 

References herein to “the Company,” “Rush Enterprises,” “Rush,” “we,” “our” or “us” mean Rush Enterprises, Inc., a Texas corporation, and its subsidiaries unless the context requires otherwise.

 

Access to Company Information

 

We electronically file annual reports, quarterly reports, proxy statements and other reports and information statements with the SEC. You may read and copy any of the materials that we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. You may obtain information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings are also available to you on the SEC’s website at www.sec.gov.

 

We make certain of our SEC filings available, free of charge, through its website, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports. These filings are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website address is www.rushenterprises.com. The information contained on our website, or on other websites linked to our website, is not incorporated into this report or otherwise made part of this report.

 

 

General

 

Rush Enterprises, Inc. was incorporated in Texas in 1965 and consists of one reportable segment, the Truck Segment and conducts business through our subsidiaries. Our principal offices are located at 555 IH 35 South, Suite 500, New Braunfels, Texas 78130.

 

We are a full-service, integrated retailer of commercial vehicles and related services. The Truck Segment includes the Company’s operation of a regional network of commercial vehicle dealerships under the name “Rush Truck Centers.” Rush Truck Centers primarily sell commercial vehicles manufactured by Peterbilt, International, Hino, Ford, Isuzu, Mitsubishi Fuso, IC Bus or Blue Bird. Through our strategically located network of Rush Truck Centers, we provide one-stop service for the needs of our commercial vehicle customers, including retail sales of new and used commercial vehicles, aftermarket parts sales, service and repair facilities, financing, leasing and rental, and insurance products.

 

Our Rush Truck Centers are principally located in high traffic areas throughout the United States. Since commencing operations as a Peterbilt heavy-duty truck dealer in 1966, we have grown to operate over 100 Rush Truck Centers in 21 states.

 

Our business strategy consists of providing solutions to the commercial vehicle industry through our network of commercial vehicle dealerships. We offer an integrated approach to meeting customer needs by providing service, parts and collision repair in addition to new and used commercial vehicle sales and leasing, plus financial services, vehicle upfitting, CNG fuel systems, vehicle telematics products, chrome accessories and tires. We intend to continue to implement our business strategy, reinforce customer loyalty and remain a market leader by continuing to develop our Rush Truck Centers as we expand our product offerings and extend our dealership network through strategic acquisitions of new locations and opening new dealerships in our existing areas of operations.

 

Rush Truck Centers. Our Rush Truck Centers are located in Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas, Utah and Virginia. The following chart reflects our franchises and parts, service and body shop operations by location as of February 29, 2016:

 

Rush Truck Center

Location

Commercial Vehicle

Franchise(s)

Truck

Sales

Parts

and

Service

Body

Shop

         

Alabama:

Mobile

Peterbilt

Yes

Yes

Yes

         

Arizona:

Flagstaff

Peterbilt

No

Yes

No

Phoenix

Peterbilt, Hino

Yes

Yes

Yes

Tucson

Peterbilt, Hino

Yes

Yes

No

Yuma

Peterbilt

Yes

Yes

No

         

California:

Fontana Heavy-Duty

Peterbilt

Yes

Yes

Yes

Fontana Medium-Duty

Peterbilt, Hino, Isuzu

Yes

Yes

No

Fontana Vocational

None

No

Yes

No

Pico Rivera

Peterbilt

Yes

Yes

Yes

San Diego

Peterbilt, Hino

Yes

Yes

No

Sylmar

Peterbilt

Yes

Yes

No

Whittier

Ford, Isuzu

Yes

Yes

No

         

Colorado:

Denver Heavy-Duty

Peterbilt

Yes

Yes

Yes

Denver Medium-Duty

Ford, Isuzu

Yes

Yes

No

Greeley

Peterbilt

Yes

Yes

No

Pueblo

Peterbilt

Yes

Yes

No

 

 

Rush Truck Center

Location

Commercial Vehicle

Franchise(s)

Truck

Sales

Parts

and

Service

Body

Shop

         

Florida:

Haines City

Peterbilt

Yes

Yes

Yes

Jacksonville

Peterbilt, Hino

Yes

Yes

No

Lake City

Peterbilt

Yes

Yes

No

Orlando Heavy-Duty

Peterbilt, Isuzu

Yes

Yes

No

Orlando Light & Medium-Duty

Ford

Yes

Yes

No

Orlando South

Isuzu

Yes

Yes

No

Tampa

Peterbilt

Yes

Yes

No

         

Georgia:

Albany

International, IC Bus

Yes

Yes

Yes

Atlanta

International, Hino, Isuzu, IC Bus

Yes

Yes

No

Atlanta Bus Center

IC Bus

Yes

Yes

Yes

Blackshear

International, IC Bus

Yes

Yes

No

Augusta North

International, IC Bus

Yes

Yes

No

Augusta South

International, IC Bus

Yes

Yes

No

Columbus North

Isuzu, IC Bus

Yes

Yes

No

Columbus South

International, IC Bus

Yes

Yes

No

Doraville

International, Hino, Isuzu, IC Bus

Yes

Yes

No

Gainesville

International, IC Bus

Yes

Yes

No

Macon

International

Yes

Yes

No

Smyrna

International, Hino, Isuzu, IC Bus

Yes

Yes

No

Tifton North

International, IC Bus

Yes

Yes

No

Tifton South

International, IC Bus

Yes

Yes

No

Valdosta

International

Yes

Yes

No

         

Idaho:

Boise

International, Hino, IC Bus

Yes

Yes

Yes

Idaho Falls

International, IC Bus

Yes

Yes

Yes

Lewiston

International

Yes

Yes

No

Twin Falls

International

Yes

Yes

No

         

Illinois:

Bloomington

International, Hino

Yes

Yes

No

Carol Stream

International

Yes

Yes

No

Champaign

International

Yes

Yes

Yes

Chicago

International

Yes

Yes

Yes

Decatur

International

Yes

Yes

No

Effingham

International

Yes

Yes

Yes

Grayslake

International

Yes

Yes

No

Huntley

International

Yes

Yes

No

Joliet

International

Yes

Yes

No

Kankakee

International

Yes

Yes

No

Mount Vernon

International

Yes

Yes

No

Ottawa

International

Yes

Yes

No

Quincy

International

Yes

Yes

No

Springfield

International

Yes

Yes

Yes

         

Indiana:

Brazil

International

Yes

Yes

No

Gary

International

Yes

Yes

No

Indianapolis

International

Yes

Yes

Yes

         

Kansas:

Kansas City

Hino, Isuzu

Yes

Yes

No

         

Missouri:

St. Peters

International

Yes

Yes

No

St. Louis

International

Yes

Yes

No

 

 

Rush Truck Center

Location

Commercial Vehicle

Franchise(s)

Truck

Sales

Parts

and

Service

Body

Shop

         

Nevada:

Las Vegas

Peterbilt

Yes

Yes

No

         

New Mexico:

Albuquerque

Peterbilt

Yes

Yes

Yes

Las Cruces

Peterbilt

Yes

Yes

No

         

North Carolina:

Asheville

International

Yes

Yes

No

Charlotte

International, Hino, Isuzu

Yes

Yes

Yes

Hickory

International

Yes

Yes

No

Statesville

International

Yes

Yes

No

         

Ohio:

Akron

International, IC Bus

Yes

Yes

No

Cincinnati

International, IC Bus, Isuzu, Ford, Mitsubishi Fuso

Yes

Yes

Yes

Cleveland

International, IC Bus

Yes

Yes

No

Columbus

International, IC Bus, Isuzu (1)

Yes

Yes

No

Dayton

International, IC Bus, Isuzu

Yes

Yes

No

Findlay

International, IC Bus

Yes

Yes

No

Lima

International, IC Bus

Yes

Yes

No

Springfield

International

No

Yes

No

         

Oklahoma:

Ardmore

Peterbilt

Yes

Yes

No

Oklahoma City

Peterbilt, Hino, Ford, Isuzu

Yes

Yes

Yes

Tulsa

Peterbilt, Hino

Yes

Yes

Yes

         

Oregon:

Ontario

International

Yes

Yes

No

         

Tennessee:

Nashville

Peterbilt

Yes

Yes

Yes

         

Texas:

Abilene

Peterbilt

Yes

Yes

No

Alice

Peterbilt, Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

Amarillo

Peterbilt

Yes

Yes

No

Austin

Peterbilt, Hino, Isuzu, Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

Brownsville

Peterbilt, Elkhart

Yes

Yes

No

Corpus Christi

Peterbilt, Hino, Isuzu, Blue Bird, Elkhart

Yes

Yes

No

Cotulla

Peterbilt

No

Yes

No

Dalhart

Peterbilt

No

Yes

No

Dallas Heavy-Duty

Peterbilt, Blue Bird, Micro Bird, Elkhart

Yes

Yes

Yes

Dallas Medium-Duty

Peterbilt, Hino, Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

Dallas Light & Medium-Duty

Ford, Isuzu

Yes

Yes

No

El Paso

Peterbilt, Hino, Isuzu

Yes

Yes

Yes

Fort Worth

Peterbilt, Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

Houston

Peterbilt, Hino, Blue Bird, Micro Bird, Elkhart

Yes

Yes

Yes

Houston Bus Center

Peterbilt, Hino, Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

Laredo

Peterbilt, Blue Bird, Micro Bird, Elkhart

Yes

Yes

Yes

 

(1)  The physical location of our Isuzu dealership is in our Rush Truck Leasing-Columbus location.

 

 

Rush Truck Center

Location

Commercial Vehicle

Franchise(s)

Truck

Sales

Parts

and

Service

Body

Shop

         

Lubbock

Peterbilt

Yes

Yes

No

Lufkin

Peterbilt, Blue Bird, Micro Bird, Elkhart

Yes

Yes

Yes

Odessa

Peterbilt

Yes

Yes

No

Pharr

Peterbilt, Hino, Blue Bird, Micro Bird, Elkhart

Yes

Yes

Yes

San Antonio

Peterbilt, Hino, Blue Bird, Micro Bird, Elkhart

Yes

Yes

Yes

San Antonio Bus

Blue Bird, Micro Bird, Elkhart

Yes

Yes

Yes

Sealy

Peterbilt, Isuzu, Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

Texarkana

Peterbilt, Hino, Isuzu,

Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

Tyler

Peterbilt, Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

Waco

Peterbilt, Hino, Isuzu,

Blue Bird, Micro Bird, Elkhart

Yes

Yes

No

         

Utah:

Helper

International

Yes

Yes

No

Farr West

International, IC Bus

Yes

Yes

No

Salt Lake City

International, IC Bus, Mitsubishi Fuso

Yes

Yes

Yes

Springville

International, Mitsubishi Fuso

Yes

Yes

No

St. George

International, Mitsubishi Fuso

Yes

Yes

No

         

Virginia:

Chester

International

Yes

Yes

No

Fredericksburg

International

Yes

Yes

No

Richmond

International

Yes

Yes

Yes

         

 

We also have dedicated used truck facilities in Willowbrook and Wilmington, Illinois, Knoxville, Tennessee, Dallas, Texas and Orlando, Florida.

 

Leasing and Rental Services. Through certain of our Rush Truck Centers and several stand-alone Rush Truck Leasing Centers, we provide a broad line of product selections for lease or rent, including Class 4, Class 5, Class 6, Class 7 and Class 8 trucks, heavy-duty cranes and refuse vehicles. Our lease and rental fleets are offered on a daily, monthly or long-term basis. The following chart reflects our leasing franchises by location:

 

Rush Truck Leasing

Location

Franchise

Standalone or

in a Rush

Truck Center

     

Alabama:

Birmingham

PacLease

Standalone

Arizona:

 

Phoenix

PacLease

Standalone

California:

Fontana

PacLease

Standalone

Pico Rivera

PacLease

Standalone

San Diego

PacLease

In RTC

Sylmar

PacLease

In RTC

Colorado:

Denver

PacLease

In RTC

Florida:

Orlando

PacLease

Standalone

Tampa

PacLease

In RTC

Jacksonville

PacLease

Standalone

 

 

Rush Truck Leasing

Location

Franchise

Standalone or

in a Rush

Truck Center

     

Idaho:

Boise

Idealease

In RTC

Idaho Falls

Idealease

In RTC

Illinois:

Carol Stream

Idealease

In RTC

Chicago

Idealease

In RTC

Effingham

Idealease

In RTC

Huntley

Idealease

In RTC

Joliet

Idealease

In RTC

Springfield

Idealease

In RTC

Indiana:

Indianapolis

Idealease

In RTC

Gary

Idealease

In RTC

Missouri:

St. Louis

Idealease

In RTC

St. Peters

Idealease

In RTC

North Carolina:

Charlotte

Idealease

Standalone

New Mexico:

Albuquerque

PacLease

Standalone

Nevada:

Las Vegas

PacLease

In RTC

Ohio:

Cincinnati

Idealease

Standalone

Oakwood Village

Idealease

Standalone

Columbus

Idealease

In RTC

Dayton

Idealease

In RTC

Oklahoma:

Oklahoma City

PacLease

In RTC

Tennessee:

Nashville

PacLease

In RTC

Texas:

Austin

PacLease

Standalone

Corpus Christi

PacLease

In RTC

El Paso

PacLease

In RTC

Fort Worth

PacLease

In RTC

Houston

PacLease

Standalone

Lubbock

PacLease

In RTC

San Antonio

PacLease

In RTC

Virginia:

Richmond

Idealease

Standalone

Norfolk

Idealease

Standalone

Utah:

Salt Lake City

Idealease

Standalone

 

In addition to the locations in the above table, Rush Truck Leasing also provides full-service maintenance on customers’ vehicles at several of our customers’ facilities.

 

Financial and Insurance Products. At our Rush Truck Centers, we offer third-party financing to assist customers in purchasing new and used commercial vehicles. Additionally, we sell, as agent through our insurance agency, a complete line of property and casualty insurance, including collision and liability insurance on commercial vehicles, cargo insurance and credit life insurance.

 

Other Businesses. Perfection Equipment offers installation of equipment, equipment repair, parts installation, and paint and body repair at our location in Oklahoma City. Perfection Equipment specializes in up-fitting trucks used by oilfield service providers and other specialized service providers.

 

 

World Wide Tires stores operate in three locations in Texas. World Wide Tires primarily sells tires for use on commercial vehicles.

 

Custom Vehicle Solutions operates in two locations in Texas. Custom Vehicle Solutions provides new vehicle pre-delivery inspections, truck modifications, natural gas fuel system installations, and body, chassis upfit and component installation.

 

Momentum Fuel Technologies manufactures compressed natural gas fuel systems for commercial vehicles.

 

Industry

 

See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Industry” for a description of our industry and the markets in which we operate.

 

Our Business Strategy

 

Operating Strategy. Our strategy is to operate an integrated dealer network that provides service solutions to the commercial vehicle industry. Our strategy includes the following key elements:

 

 

One-Stop Centers. We have developed our commercial vehicle dealerships as “one-stop centers” that offer an integrated approach to meeting customer needs. We provide service, parts and collision repair, new and used commercial vehicles sales, leasing and rental, plus financial services including finance and insurance. We believe that this full-service strategy also helps to mitigate cyclical economic fluctuations because the parts and service sales at our dealerships generally tend to be less volatile than our new and used commercial vehicle sales.

 

 

Aftermarket Services. Our aftermarket capabilities now include a wide range of services and products, including a fleet of mobile service units, mobile technicians who work in our customers’ facilities, a proprietary line of parts and accessories, factory-certified service for alternative fuel vehicles and assembly service for specialized bodies and equipment. Offering a variety of aftermarket products and services at our dealerships allows us to meet the expanding needs of our customers and leverage our dealership facilities to offer more services.

 

 

Branding Program. We employ a branding program for our new vehicle dealerships through distinctive signage and uniform marketing programs to take advantage of our existing name recognition and to communicate the standardized high quality of our products and reliability of our services throughout our dealership network.

 

 

Management by Dealership Units. At each of our dealerships, we operate one or more of the following departments: new commercial vehicle sales, used commercial vehicle sales, financial services, parts, service or body shop. Our general managers measure and manage the operations of each dealership according to the specific departments operating at that location. We believe that this system enhances the profitability of all aspects of a dealership and increases our overall operating margins. Operating goals for each department at each of our dealerships are established annually and managers are rewarded for performance.

 

Growth Strategy. Through our expansion and acquisition initiatives, we have grown to operate a large, multistate, full-service network of commercial vehicle dealerships. As described below, we intend to continue to grow our business by expanding our product and service offerings, through acquisitions in new geographic areas and by opening new dealerships in our existing areas of responsibility.

 

 

Expansion of Product and Service Offerings. We intend to continue to expand our product lines within our dealerships by adding product categories and service capabilities that are both complementary to our existing product lines and well suited to our operating model. We believe that there are many additional product and service offerings that would complement our primary product lines. We will continue to take advantage of technological advances to the vehicles we sell that provide us with the opportunity to offer vehicle owners more aftermarket options and the ability to maximize the performance of vehicles in their fleets using telematics and other technologies.

 

 

 

Expansion Into New Geographic Areas. We plan to continue to expand our dealership network by acquiring dealerships in areas of the U.S. where we do not already have dealerships. We believe the geographic diversity of our Rush Truck Center network has significantly expanded our customer base while reducing the effects of local economic cycles.

 

 

Open New Rush Truck Centers in Existing Areas of Operation. We continually evaluate opportunities to increase our market presence by adding new Rush Truck Centers to underserved markets within our current areas of operation.

 

Management of Our Dealerships

 

Rush Truck Centers

 

Our Rush Truck Centers are responsible for sales of new and used commercial vehicles, as well as related parts and services.

 

Commercial Vehicle Parts and Service. Commercial vehicle-related parts and service revenues accounted for approximately $1,382.4 million, or 27.7%, of our total revenues for 2015, and 64.1% of our gross profit. The parts and service business enhances our sales and service functions and is a source of recurring revenue. Rush Truck Centers carry a wide variety of commercial vehicle parts in inventory. Certain Rush Truck Centers also feature fully equipped service and body shop facilities, the combination and configuration of which varies by location, capable of handling a broad range of repairs on most commercial vehicles. Each Rush Truck Center is a warranty service center for the commercial vehicle manufacturers represented at that location and most are also authorized service centers for other vehicle component manufacturers, including Cummins, Eaton and Allison. We have approximately 2,400 service and body shop bays throughout our Rush Truck Center network. We also have approximately 300 mobile service units and 200 technicians who staff our customers’ facilities.

 

Our service departments perform warranty and non-warranty repairs on commercial vehicles. The cost of warranty work is generally reimbursed by the applicable manufacturer at retail commercial rates. Warranty related parts and service revenues accounted for approximately $137.0 million, or 2.8%, of our total revenues for 2015. Additionally, we provide a wide array of services, including assembly service for specialized truck bodies and truck mounted equipment. Our goal is to provide our customers any service that they need related to their commercial vehicles.

 

As part of our leasing and rental operations, we also enter into contracts to provide full-service maintenance on some customers’ vehicles. We had 1,345 vehicles under contract maintenance as of December 31, 2015, and 1,197 vehicles under contract maintenance as of December 31, 2014. The full-service maintenance revenues and retail service revenues are included as parts and service revenues on the Consolidated Statements of Income.

 

New Commercial Vehicle Sales.   New commercial vehicle sales represent the largest portion of our revenue, accounting for approximately $3,022.1 million, or 60.7%, of our total revenues in 2015. Of this total, new Class 8 heavy-duty truck sales accounted for approximately $2,133.2 million, or 42.8% of our total revenues for 2015, and 70.6% of our new commercial vehicle revenues for 2015.

 

Our Rush Truck Centers that sell new and used Class 8 heavy-duty trucks may also sell medium-duty and light-duty commercial vehicles. Certain Rush Truck Centers sell medium-duty commercial vehicles manufactured by Peterbilt, Hino, Isuzu, Ford, International or Mitsubishi Fuso and buses manufactured by Blue Bird, IC BUS and Elkhart and light-duty commercial vehicles manufactured by Ford (see Part I, Item 1, “General – Rush Truck Centers” for information on which brands we sell at each Rush Truck Center). New medium-duty commercial vehicle sales, excluding new bus sales, accounted for approximately $711.1 million, or 14.3% of our total revenues for 2015, and 23.5% of our new commercial vehicle revenues for 2015. New light-duty commercial vehicle sales accounted for approximately $60.2 million, or 1.2% of our total revenues for 2015, and 2.0% of our new commercial vehicle revenues for 2015. New bus sales accounted for approximately $97.8 million, or 2.0% of our total revenues for 2015, and 3.2% of our new commercial vehicle revenues for 2015.

 

A significant portion of our new commercial vehicle sales are to fleet customers. Because of the size and geographic scope of our Rush Truck Center network, our strong relationships with our fleet customers and our ability to handle large quantities of used commercial vehicle trade-ins, we are able to successfully market and sell to fleet customers nationwide. We believe that we have a competitive advantage over most other dealers in that we can absorb multi-unit trade-ins often associated with fleet sales and effectively disperse the used commercial vehicles for resale throughout our dealership network and our dedicated used truck facilities. We believe that the broad range of services we offer to purchasers of commercial vehicles at the time of purchase and post-purchase has resulted in a high level of customer loyalty.

 

 

Used Commercial Vehicle Sales.  Used commercial vehicle sales accounted for approximately $338.7 million, or 6.8%, of our total revenues for 2015. We sell used commercial vehicles at our dedicated used truck facilities and most of our Rush Truck Centers. We believe that we are well positioned to market used commercial vehicles due to our ability to recondition them for resale utilizing the parts and service departments of our Rush Truck Centers and our ability to move used commercial vehicles between Rush Truck Centers and our dedicated used truck facilities to satisfy customer demand. The majority of our used commercial vehicle inventory consists of commercial vehicles taken as trade-ins from new truck customers or retired from our lease and rental fleet, but we also supplement our used commercial vehicle inventory by purchasing used commercial vehicles from third parties for resale, as market conditions warrant.

 

New and Used Commercial Vehicle Financing.  Our Rush Truck Centers have personnel responsible for arranging third-party financing for our product offerings. Generally, commercial vehicle finance contracts are memorialized through the use of installment contracts, which are secured by the commercial vehicles financed, and require a down payment, with the remaining balance financed over a two to seven-year period. The majority of finance contracts are sold to third parties without recourse to us. We provide an allowance for repossession losses and early repayment penalties.

 

Truck Leasing and Rental.   Truck leasing and rental revenues accounted for approximately $199.9 million, or 4.0%, of our total revenues for 2015. At our Rush Truck Leasing locations, we engage in full-service truck leasing through PacLease and Idealease. Rented trucks are also generally serviced at our facilities. We had 7,800 vehicles in our lease and rental fleet, including cranes, as of December 31, 2015 compared to 6,876 vehicles as of December 31, 2014. Generally, we sell trucks that have been retired from our lease and rental fleet through the used sales operations at our Rush Truck Centers. Historically, we have realized gains on the sale of used lease and rental trucks.

 

Insurance Products

 

The sale of financial and insurance products accounted for approximately $21.2 million, or 0.4%, of our total revenues for 2015. Finance and insurance revenues have minimal direct costs and, therefore, contribute a disproportionate share of our operating profits. We sell, as agent, a complete line of property and casualty insurance to commercial vehicle owners. Our agency is licensed to sell truck liability, collision and comprehensive, workers’ compensation, cargo, and credit life insurance coverage offered by a number of leading insurance companies. Our renewal rate in 2015 was approximately 77%. We also have licensed insurance agents at several Rush Truck Centers.

 

Sales and Marketing

 

Our established history of operations in the commercial vehicle business has resulted in a strong customer base that is diverse in terms of geography, industry and scale of operations. Our customers include regional and national truck fleets, corporations, local governments and owner operators. During 2015, no single customer accounted for more than 10% of our sales by dollar volume. We generally promote our products and related services through direct customer contact by our sales personnel, advertisements in trade magazines and online and attendance at industry shows.

 

In an effort to enhance our name recognition and to communicate the standardized high level of quality products and services provided at our Rush Truck Centers, we implement our “Rush” brand name concept at each of our new vehicle dealerships.

 

Facility Management

 

Personnel. Each of our facilities is typically managed by a general manager who oversees the operations, personnel and the financial performance of the location, subject to the direction of a regional manager and personnel at our corporate headquarters. Additionally, each full-service Rush Truck Center is typically staffed by a sales manager, parts manager, service manager, body shop manager, sales representatives, parts employees, and other service and make-ready employees, as appropriate, given the services offered. The sales staff of each Rush Truck Center is compensated on a salary plus commission or a commission only basis, while managers receive a combination of salary and performance bonus. We believe that our employees are among the highest paid in the industry, which enables us to attract and retain qualified personnel.

 

 

We have been successful in retaining our senior management, regional managers and general managers. To promote communication and efficiency in operating standards, regional managers and members of senior management attend company-wide strategy sessions each year. In addition, management personnel attend various industry sponsored leadership and management seminars and receive continuing education on the products we distribute, marketing strategies and management information systems.

 

Compliance with Policies. Each Rush Truck Center is audited regularly for compliance with corporate policies and procedures. These routine unannounced internal audits objectively measure dealership performance with respect to corporate expectations in the management and administration of sales, commercial vehicle inventory, parts inventory, parts sales, service sales, body shop sales, corporate policy compliance, human resources compliance, and environmental and safety compliance matters.

 

Purchasing and Suppliers. We believe that pricing is an important element of our marketing strategy. Because of our size, we benefit from volume purchases at favorable prices that permit us to achieve a competitive pricing position in the industry. We purchase our commercial vehicle inventory and proprietary parts and accessories directly from the applicable vehicle manufacturer, wholesale distributors, or other sources that provide the most favorable pricing. Most purchasing commitments are negotiated by personnel at our corporate headquarters. Historically, we have been able to negotiate favorable pricing levels and terms, which enable us to offer competitive prices for our products.

 

Management Information Systems. We utilize our management information systems to monitor the inventory level of commercial vehicles and parts at each of our dealerships. Management tracks historic sales levels of different product lines, which enables management to identify the appropriate level and combination of inventory and forms the basis of our operating plan.

 

Information received from industry analysts allows us to determine market share statistics and gross volume sales numbers for our products as well as those of competitors. Local management remains aware of changes within markets we service and are able to realign product lines and add new commercial vehicle models as demands of the market change.

 

Distribution and Inventory Management. We utilize an inventory tracking system that allows for the prompt transfer of inventory among various Rush Truck Centers. The transfer of inventory reduces delays in delivery, helps maximize inventory turns and assists in controlling problems created by overstock and understock situations. Our network is linked directly to our major suppliers for purposes of ordering vehicles and parts and managing parts inventory levels. Automated reordering and communication systems allow us to maintain proper inventory levels and permit us to have inventory delivered to our locations, or directly to customers, typically within 24 hours of an order being placed.

 

Recent Acquisitions

 

On September 28, 2015, in connection with the divestiture of our Peterbilt dealership in Charlotte, North Carolina, we acquired certain assets of Peterbilt of Las Vegas, Inc., which operated a commercial vehicle dealership in Las Vegas, Nevada.  This location is operating as a Rush Truck Center and is a full-service Peterbilt dealership. The acquisition also included a PacLease commercial vehicle rental and leasing business.  The dealership swap was a like-kind exchange for tax purposes and enabled us to be consistent with our strategy of not having dealerships representing multiple Class 8 manufacturers in the same market as we continue to operate a facility representing International, Hino and Isuzu trucks in Charlotte. The sale price for the assets in Charlotte, North Carolina was approximately $6.4 million, which was offset by floor plan and accounts payable of $5.9 million. The purchase price for the assets in Las Vegas, Nevada was approximately $3.4 million, which was paid in cash.

 

On July 27, 2015, we acquired certain assets of Dallas Truck Center, Inc., which included real estate and used truck inventory, in Dallas, Texas. We are now operating this facility as Rig Tough Used Trucks, Dallas. The transaction was valued at approximately $3.3 million, with the purchase price paid in cash.

 

On May 4, 2015, we acquired certain assets of Yancey Truck Centers, LLC, which operated commercial vehicle dealerships in Albany, Blackshear, Tifton, Valdosta, Augusta, Columbus and Macon, Georgia.  These locations are operating as Rush Truck Centers and offer commercial vehicle sales, parts and service for International trucks.  The acquisition also included an Idealease commercial vehicle rental and leasing business. The purchase price for the assets, goodwill, franchise rights and dealership properties was approximately $30.1 million, which was paid in cash and a portion financed under our floor plan arrangement.

 

 

On February 9, 2015, we acquired certain assets of Effingham Truck Sales, Inc. The acquisition included International commercial truck dealerships and an Idealease commercial vehicle rental and leasing business in Effingham and Mount Vernon, Illinois. The purchase price for the assets, goodwill, and dealership properties was approximately $25.3 million, which was paid in cash.

 

On December 8, 2014, we acquired certain assets of North Florida Truck Parts, Inc. which included a commercial parts and service facility in Lake City, Florida. The Lake City location is operating as a full-service Rush Truck Center and offers commercial vehicles manufactured by Peterbilt. The purchase price for the assets, goodwill and dealership property was $4.2 million, which was paid in cash.

 

On November 3, 2014, we acquired certain assets of House of Trucks, Inc., which included used commercial vehicle facilities in Willowbrook and Wilmington, Illinois. The transaction was valued at approximately $6.9 million, with the purchase price paid in cash.

 

On July 1, 2014, we acquired certain assets of Truck Parts Depot, Inc. which included a commercial parts and service facility in Gainesville, Georgia. The Gainesville location is operating as a full-service Rush Truck Center and offers commercial vehicles manufactured by International. The transaction was valued at approximately $500,000, with the purchase price paid in cash.

 

On June 25, 2014, a joint venture was established to further expand our used commercial vehicle sales network. As a result, we own 50% of Central California Truck and Trailer Sales, LLC (“CCTTS”), which has multiple locations in California that sell used trucks. In connection with the formation of this joint venture, we contributed $2.2 million.

 

In January 2014, we acquired certain assets of CIT, Inc., which did business as Chicago International Trucks, Mcgrenho L.L.C., which did business as Indy Truck Sales, and Indiana Mack Leasing, LLC; and the membership interests of Idealease of Chicago, LLC. The acquisition included International commercial vehicle dealerships and Idealease commercial vehicle rental and leasing businesses in Carol Stream, Chicago, Grayslake, Huntley, Joliet, Kankakee and Ottawa, Illinois, and Brazil, Gary and Indianapolis, Indiana. The purchase price for the assets, membership interests, goodwill and dealership properties was approximately $146.6 million, which was paid in cash and 83,091 shares of our Class B Common Stock with a total value of $2.0 million on the date of acquisition.

 

 

See Note 15 of the Notes to Consolidated Financial Statements for a detailed discussion of the allocation of the purchase price of these acquisitions.

 

Competition

 

There is, and will continue to be, significant competition both within our current markets and in new markets we may enter. We anticipate that competition between us and other dealers will continue to increase in our current markets and on a national level based on the following:

 

 

the ability to keep customers’ vehicles operational which is dependent on the accessibility of dealership locations;

 

 

the number of dealership locations representing the manufacturers that we represent and other manufacturers, which impacts manufacturers ability to provide more consistent, higher quality service in a timely manner across their dealer networks;

 

 

price, value, quality and design of the products sold; and

 

 

attention to customer service (including technical service).

 

Our dealerships compete with dealerships representing other manufacturers including commercial vehicles manufactured by Mack, Freightliner, Kenworth, Volvo, and Western Star. We believe that our dealerships are able to compete with manufacturer-owned dealers, independent dealers, independent service centers, parts wholesalers, commercial vehicle wholesalers, rental service companies and industrial auctioneers in distributing our products and providing service because of the following: the overall quality and reputation of the products we sell; the “Rush” brand name recognition and reputation for quality service; the geographic scope of our dealership network; the breadth of vehicles offered in our dealership network; and our ability to provide comprehensive parts and service support, as well as financing, insurance and other customer services.

 

Dealership Agreements

 

Peterbilt. We have entered into nonexclusive dealership agreements with Peterbilt which authorize us to act as a dealer of Peterbilt heavy- and medium-duty trucks. Our Peterbilt areas of responsibility currently encompass areas in the states of Alabama, Arizona, California, Colorado, Florida, New Mexico, Nevada, Oklahoma, Tennessee and Texas. These dealership agreements currently have terms expiring between March 2016 and December 2018 and impose certain operational obligations and financial requirements upon us and our dealerships. Our dealership agreements with Peterbilt may be terminated by Peterbilt in the event that the aggregate voting power of W. Marvin Rush, W.M. “Rusty” Rush, other members of the Rush family and certain executives of the Company decreases below 22%. Sales of new Peterbilt commercial vehicles accounted for approximately 36.1% of our total revenues for 2015.

 

International. We have entered into nonexclusive dealership agreements with Navistar which authorize us to act as a dealer of International heavy- and medium-duty trucks and IC buses. Our Navistar areas of responsibility currently encompass areas in the states of Georgia, Idaho, Illinois, Indiana, Missouri, North Carolina, Ohio, Oregon, Utah and Virginia. These dealership agreements currently have terms expiring between March 2016 and May 2020 and impose certain operational obligations and financial requirements upon us and our dealerships. Sales of new International commercial vehicles accounted for approximately 14.3% of our total revenues for 2015.

 

 

Other Commercial Vehicle Suppliers. In addition to our dealership agreements with Peterbilt, various Rush Truck Centers have entered into dealership agreements with other commercial vehicle manufacturers including Blue Bird, Ford, Hino, Isuzu, Micro Bird and Mitsubishi Fuso, which currently have terms expiring between August 2016 and November 2018. These dealership agreements impose operating requirements upon us and require consent from the affected supplier for sale or transfer of such dealership agreement. Sales of new non-Peterbilt and non-International commercial vehicles accounted for approximately 10.2% of our total revenues for 2015.

 

Any termination or non-renewal of our dealership agreements must follow certain guidelines established by both state and federal legislation designed to protect motor vehicle dealers from arbitrary termination or non-renewal of franchise agreements. The federal Automobile Dealers Day in Court Act and other similar state laws provide that the termination or non-renewal of a motor vehicle dealership agreement must be done in “good faith” and upon a showing of “good cause” by the manufacturer for such termination or non-renewal, as such terms have been defined by statute and interpreted in case law.

 

Floor Plan Financing

 

During 2015, we financed the majority of all new commercial vehicle inventory purchases and the loan value of our used commercial vehicle inventory under a credit agreement (the “Floor Plan Credit Agreement”) with General Electric Capital Commercial, Inc. (“GE Capital”). On September 15, 2015, we entered into the Second Amended and Restated Credit Agreement with GE Capital. The amendment increased the aggregate loan commitment to $850.0 million. Effective December 1, 2015, GE Capital resigned as Administrative Agent of the Floor Plan Credit Agreement and BMO Harris Bank N.A. (“BMO Harris”) was appointed in its place. Borrowings under the Floor Plan Credit Agreement bear interest at an annual rate equal to the three month LIBOR rate, determined on the last day of the prior month, plus 2.03% and are payable monthly.  In addition, we are required to pay a monthly working capital fee equal to 0.35% per annum multiplied by the amount of voluntary prepayments of new and used inventory loans. Loans under the Floor Plan Credit Agreement for the purchase of used inventory are limited to $150.0 million. The Floor Plan Credit Agreement expires July 11, 2016, although BMO Harris has the right to terminate the Floor Plan Credit Agreement at any time upon 120 days’ written notice. We may terminate the Floor Plan Credit Agreement at any time, although if we do so we must pay a prepayment processing fee of $300,000, subject to specified limited exceptions. On December 31, 2015, we had approximately $628.2 million outstanding under the Floor Plan Credit Agreement. Periodically, we utilize our excess cash on hand to pay down our outstanding borrowings under the Floor Plan Credit Agreement, and the resulting interest earned is recognized as an offset to our gross interest expense under the Floor Plan Credit Agreement.

 

In June 2012, we entered into a wholesale financing agreement with Ford Motor Credit Company that provides for the financing of, and is collateralized by, our new Ford vehicle inventory. This wholesale financing agreement bears interest at a rate of Prime plus 150 basis points minus certain incentives and rebates; however, the prime rate is defined to be a minimum of 3.75%. As of December 31, 2015, the interest rate on the wholesale financing agreement was 5.25% before considering the applicable incentives. As of December 31, 2015, we had an outstanding balance of $62.4 million under the Ford Motor Credit Company wholesale financing agreement.

 

Product Warranties

 

The manufacturers we represent provide retail purchasers of their products with a limited warranty against defects in materials and workmanship, excluding certain specified components that are separately warranted by the suppliers of such components. We provide a warranty on our branded parts and related service. We also provide an extended warranty beyond the manufacturer’s warranty on new school buses sold in the State of Texas, as required by state law.

 

We generally sell used commercial vehicles in “as is” condition without a manufacturer’s warranty, although manufacturers sometimes will provide a limited warranty on their used products if such products have been properly reconditioned prior to resale or if the manufacturer’s warranty on such product is transferable and has not expired. We do not provide any warranty on used commercial vehicles.

 

Trademarks

 

The trademarks and trade names of the manufacturers we represent, which are used in connection with our marketing and sales efforts, are subject to limited licenses included in our dealership agreements with each manufacturer. The licenses are for the same periods as our dealership agreements. These trademarks and trade names are widely recognized and are important in the marketing of our products. Each licensor engages in a continuous program of trademark and trade name protection. We hold registered trademarks from the U.S. Patent and Trademark Office for the following names used in this document: “Rush Enterprises,” “Rush Truck Center,” “Associated Truck Insurance Services,” “Chrome Country,” “Rig Tough,” “CVS Custom Vehicle Solutions” and “Momentum Fuel Technologies.”

 

 

Employees

 

On December 31, 2015, we had 6,700 employees. 

 

We have entered into collective bargaining agreements covering certain employees in Chicago, Illinois, which will expire on May 6, 2017, Joliet, Illinois, which will expire on May 5, 2018 and Carol Stream, Illinois, which will expire on May 4, 2019. 

 

There have been no strikes, work stoppages or slowdowns during the negotiations of the foregoing collective bargaining agreements or at any time in the Company’s history, although no assurances can be given that such actions will not occur.

 

Seasonality

 

Our Truck Segment is moderately seasonal. Seasonal effects on new commercial vehicle sales related to the seasonal purchasing patterns of any single customer type are mitigated by the diverse geographic locations of our dealerships and our diverse customer base, including regional and national fleets, local governments, corporations and owner operators. However, commercial vehicle parts and service operations historically have experienced higher sales volumes in the second and third quarters.

 

Backlog

 

On December 31, 2015, our backlog of commercial vehicle orders was approximately $1,223.9 million as compared to a backlog of commercial vehicle orders of approximately $1,502.8 million on December 31, 2014. Our backlog is determined quarterly by multiplying the number of new commercial vehicles for each particular type of commercial vehicle ordered by a customer at our Rush Truck Centers by the recent average selling price for that type of commercial vehicle. We include only confirmed orders in our backlog. However, such orders are subject to cancellation. In the event of order cancellation, we have no contractual right to the total revenues reflected in our backlog. The delivery time for a custom-ordered commercial vehicle varies depending on the truck specifications and demand for the particular model ordered. We sell the majority of our new heavy-duty commercial vehicles by customer special order and we sell the majority of our medium- and light-duty commercial vehicles out of inventory. Orders from a number of our major fleet customers are included in our backlog as of December 31, 2015 and we expect to fill the majority of our backlog orders during 2016.

 

Environmental Standards and Other Governmental Regulations

 

We are subject to a wide range of federal, state and local environmental laws and regulations, including those governing discharges into the air and water; the operation and removal of underground and aboveground storage tanks; the use, handling, storage and disposal of hazardous substances, petroleum and other materials; and the investigation and remediation of environmental impacts. As with commercial vehicle dealerships generally, and aftermarket services operations in particular, our business involves the generation, use, storage, handling and contracting for recycling or disposal of hazardous materials or wastes and other environmentally sensitive materials. We have incurred, and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations.

 

Our operations involving the use, handling, storage and disposal of hazardous and nonhazardous materials are subject to the requirements of the federal Resource Conservation and Recovery Act, or RCRA, and comparable state statutes. Pursuant to these laws, federal and state environmental agencies have established approved methods for handling, storage, treatment, transportation and disposal of regulated substances and wastes with which we must comply. Our business also involves the operation and use of aboveground and underground storage tanks. These storage tanks are subject to periodic testing, containment, upgrading and removal under RCRA and comparable state statutes. Furthermore, investigation or remediation may be necessary in the event of leaks or other discharges from current or former underground or aboveground storage tanks.

 

 

We may also have liability in connection with materials that were sent to third-party recycling, treatment, or disposal facilities under the federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, and comparable state statutes. These statutes impose liability for investigation and remediation of environmental impacts without regard to fault or the legality of the conduct that contributed to the impacts. Responsible parties under these statutes may include the owner or operator of the site where impacts occurred and companies that disposed or arranged for the disposal of the hazardous substances released at these sites. These responsible parties also may be liable for damages to natural resources. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances or other materials into the environment.

 

The federal Clean Water Act and comparable state statutes prohibit discharges into regulated waters without the necessary permits, require containment of potential discharges of oil or hazardous substances, and require preparation of spill contingency plans. Water quality protection programs govern certain discharges from some of our operations. Similarly, the federal Clean Air Act and comparable state statutes regulate emissions of various air emissions through permitting programs and the imposition of standards and other requirements.

 

We believe that we do not currently have any material environmental liabilities and that compliance with environmental laws and regulations will not, individually or in the aggregate, have a material adverse effect on our results of operations, financial condition or cash flows. However, soil and groundwater impacts are known to exist at some of our current properties. Further, environmental laws and regulations are complex and subject to change. In addition, in connection with acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. In connection with our dispositions, or prior dispositions made by companies we acquire, we may retain exposure for environmental costs and liabilities, some of which may be material. Compliance with current or amended, or new or more stringent, laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions could require additional expenditures by us, and those expenditures could be material.

 

The Environmental Protection Agency (“EPA”) and the National Highway Traffic Safety Administration (“NHTSA”), on behalf of the U.S. Department of Transportation, issued final rules on September 15, 2011 associated with reducing greenhouse gas (“GHG”) emissions and improving the fuel efficiency of medium and heavy-duty trucks and buses beginning in model year 2014 and being phased in through model year 2018.  On June 19, 2015, the EPA and NHTSA proposed further GHG and fuel efficiency standards that would apply to medium and heavy-duty vehicles and buses and would be phased in between model years 2021 through 2027.  We do not believe that the foregoing adopted or proposed standards will negatively impact our business, however, future legislation or other new regulations that may be adopted to address GHG emissions or fuel efficiency standards may negatively impact our business.  Additional regulations could result in increased compliance costs, additional operating restrictions or changes in demand for our products and services, which could have a material adverse effect on our business, financial condition and results of operations.

 

Item 1A.

Risk Factors

 

An investment in our common stock is subject to certain risks inherent to our business. In addition to the other information contained in this Form 10-K, we recommend that you carefully consider the following risk factors in evaluating our business. If any of the following risks actually occur, our financial condition and results of operations could be materially adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment. This report is qualified in its entirety by these risk factors.

 

 

Risks Related to Our Business

 

We are dependent upon PACCAR for the supply of Peterbilt trucks and parts, the sale of which generates the majority of our revenues.

 

At certain Rush Truck Centers, we operate as a dealer of Peterbilt trucks and parts pursuant to dealership agreements with Peterbilt, a division of PACCAR. We have no control over the management or operation of Peterbilt or PACCAR. During 2015, the majority of our revenues resulted from sales of trucks purchased from Peterbilt and parts purchased from PACCAR Parts. Due to our dependence on PACCAR and Peterbilt, we believe that our long-term success depends, in large part, on the following:

 

 

our ability to maintain our dealership agreements with Peterbilt;

 

 

the manufacture and delivery of competitively-priced, high quality Peterbilt trucks by Peterbilt in quantities sufficient to meet our requirements;

 

 

the overall success of PACCAR and Peterbilt;

 

 

PACCAR’s continuation of its Peterbilt division; and

 

 

the maintenance of goodwill associated with the Peterbilt brand, which can be adversely affected by decisions made by PACCAR, Peterbilt and the owners of other Peterbilt dealerships.

 

A negative change in any of the preceding, or a change in control of PACCAR, could have a material adverse effect on our operations, revenues and profitability.

 

We are dependent upon Navistar for the supply of International trucks and parts and IC busses and parts, the sale of which generate a significant portion of our revenues.

 

At certain Rush Truck Centers, we operate as a dealer of International trucks and parts and IC busses and parts pursuant to dealership agreements with International and IC Bus, each of which are divisions of Navistar. We have no control over the management or operation of International, IC Bus or Navistar. During 2015, a significant portion of our revenues resulted from sales of trucks purchased from International, busses purchased from IC Bus and parts purchased from Navistar. Due to our dependence on Navistar, International and IC Bus, we believe that our long-term success depends, in large part, on the following:

 

 

our ability to maintain our dealership agreements with International and IC Bus;

 

 

the manufacture and delivery of competitively-priced, high quality International trucks and IC busses in quantities sufficient to meet our requirements;

 

 

the overall success of Navistar; and

 

 

the maintenance of goodwill associated with the International and IC Bus brands, which can be adversely affected by decisions made by Navistar and the owners of other International and IC Bus dealerships.

 

A negative change in any of the preceding, or a change in control of Navistar, could have a material adverse effect on our operations, revenues and profitability.

 

Our dealership agreements may be terminable upon a change of control and we cannot control whether our controlling shareholder and management maintain their current ownership positions.

 

We have entered into nonexclusive dealership agreements with Peterbilt that authorize us to act as a dealer of Peterbilt trucks. Peterbilt may terminate our dealership agreements in the event of a change of control of the Company or if we violate any number of provisions in the dealership agreements. Under our Peterbilt dealership agreements, the following constitute a change of control: (i) with respect to the election of directors, the aggregate voting power held by W. Marvin Rush, W. M. “Rusty” Rush, Barbara Rush, Robin M. Rush, David C. Orf, James Thor, Martin A. Naegelin, Scott Anderson, Derrek Weaver, Steven Keller, Corey Lowe and Rich Ryan (collectively, the “Dealer Principals”) decreases below 22% (such persons controlled 30.33% of the aggregate voting power with respect to the election of directors as of December 31, 2015); or (ii) any person or entity other than the Dealer Principals and their respective associates or any person or entity who has been approved in writing by PACCAR, owns common stock with a greater percentage of the voting power with respect to the election of our directors than the Dealer Principals and their respective associates, in the aggregate, or any person other than W. Marvin Rush, W. M. “Rusty” Rush, Robin M. Rush or any person who has been approved in writing by PACCAR holds the office of Chairman of the Board, President or Chief Executive Officer of the Company. We have no control over the transfer or disposition by W. Marvin Rush or by his estate of his common stock. If W. Marvin Rush or W.M. “Rusty” Rush were to sell their Class B Common Stock or bequest their Class B Common Stock to a person or entity other than the Dealer Principles or if their estates are required to liquidate their Class B Common Stock to pay estate taxes or otherwise, the change of control provisions of the Peterbilt dealership agreements may be triggered and give Peterbilt the right to terminate our dealership agreements. If our dealership agreements with Peterbilt are terminated, we will lose the right to purchase Peterbilt products and operate as an authorized Peterbilt dealer, which would have a material adverse effect on our operations, revenues and profitability.

 

 

Our dealership agreements are non-exclusive and have relatively short terms which could result in non-renewal or imposition of less favorable terms upon renewal.

 

Our dealership agreements generally do not provide us with exclusive dealerships in any territory. The manufacturers we represent could elect to create additional dealers in our market areas in the future, subject to restrictions imposed by state laws. While dealership agreements typically restrict dealers from operating sales or service facilities outside their assigned territory, such agreements do not restrict fleet or other sales or marketing activity outside the assigned territory. Accordingly, we engage in fleet sales and other marketing activities outside our assigned territories and other dealers engage in similar activities within our territories.

 

Our dealership agreements with the manufacturers we represent have current terms expiring between March 2016 and May 2020. Upon expiration of each agreement, we must negotiate a renewal. Management expects that, consistent with in some cases decades of past practice, each of our dealership agreements will be renewed before their respective termination dates, provided that we do not breach any of the material terms of the agreements.

 

Management attempts to mitigate the risk that any manufacturer would not renew a dealership agreement by providing superior representation of each brand that we represent in each of our areas of responsibility. We deliver superior representation to our manufacturers by continuously investing substantial capital into our dealership locations, marketing and personnel. Senior members of our management team also communicate with management of the manufacturers that we represent on a regular basis, which we believe allows us to identify any potentially problematic issues as early as possible so that we can begin working on solutions that are mutually agreeable. In addition to the proactive steps that management takes, the risks that our dealership agreements will not be renewed are also mitigated by dealer protection laws that exist in each of the states that our dealerships are located. Many of these state dealer franchise laws restrict manufacturers’ ability to refuse to renew dealership agreements or to impose new terms upon renewal. However, to the extent such laws did allow for non-renewal or the imposition of new terms, the relatively short terms would give manufacturers the opportunity to exercise such rights. Any non-renewal or imposition of less favorable terms upon renewal could have an adverse impact on our business and in the case of the Peterbilt dealership agreements, would have an adverse impact on our business.

 

If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, nonrenewal or renegotiation of their dealership agreements.

 

We depend on our vehicle dealership agreements for a substantial portion of our revenues and profitability. State dealer laws generally provide that a manufacturer may not terminate or refuse to renew a dealership agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or nonrenewal. Manufacturers’ lobbying efforts may lead to the repeal or revision of state motor vehicle dealer laws. If motor vehicle dealer laws are repealed or amended in the states in which we operate dealerships, the manufacturers we represent may be able to terminate our vehicle dealership agreements without providing advance notice, an opportunity to cure or a showing of good cause. Without the protection of state dealer laws, or if such laws are weakened, we will be subject to higher risk of termination or non-renewal of our vehicle dealership agreements. Termination or non-renewal of our vehicle dealership agreements would have a material adverse effect on our operations, revenues and profitability.

 

We may be required to obtain additional financing to maintain adequate inventory levels.

 

Our business requires inventories held for sale to be maintained at dealer locations in order to facilitate immediate sales to customers on demand. We generally purchase inventories with the assistance of floor plan financing agreements. Our primary floor plan financing agreement, the Floor Plan Credit Agreement, expires on July 11, 2016 and may be terminated without cause upon 120 days’ notice. In the event that our floor plan financing becomes insufficient to satisfy our future requirements or our floor plan providers are unable to continue to extend credit under our floor plan agreements, we would need to obtain similar financing from other sources. There is no assurance that such additional floor plan financing or alternate financing could be obtained or, if obtained, that it will be on commercially reasonable terms.

 

 

Impairment in the carrying value of goodwill and other indefinite-lived intangible assets could negatively affect our operating results.

 

We have a substantial amount of goodwill on our balance sheet as a result of acquisitions we have completed. Approximately 99% of this goodwill is concentrated in our Truck Segment. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. Goodwill is not amortized, but instead is evaluated for impairment at least annually, or more frequently if potential interim indicators exist that could result in impairment. In testing for impairment, if the carrying value of a reporting unit exceeds its current fair value as determined based on the discounted future cash flows of the reporting unit, the goodwill is considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and conditions that could result in impairment include weak economic activity, adverse changes in the regulatory environment, any matters that impact the ability of the manufacturers we represent to provide trucks to us, issues with our franchise rights, or other factors leading to reductions in expected long-term sales or profitability. Determination of the fair value of a reporting unit includes developing estimates that are highly subjective and incorporate calculations that are sensitive to minor changes in underlying assumptions. Management’s assumptions are subject to change as more information becomes available. Changes in these assumptions could result in an impairment charge in the future, which could have a significant adverse impact on our reported earnings.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Goodwill” for more information regarding the potential impact of changes in assumptions.

 

Changes in interest rates could have a material adverse effect on our profitability. 

 

      Our Floor Plan Credit Agreement and some of our other debt are subject to variable interest rates. Therefore, our interest expense would rise with any increase in interest rates. A rise in interest rates may also have the effect of depressing demand in the interest rate sensitive aspects of our business, particularly new and used commercial vehicle sales, because many of our customers finance such purchases. As a result, a rise in interest rates may have the effect of simultaneously increasing our costs and reducing our revenues, which could materially affect our business, financial condition and results of operations. See “Quantitative and Qualitative Disclosures about Market Risk” for a discussion regarding our interest rate sensitivity.

 

Our business is subject to a number of economic risks.

 

New and used commercial vehicle retail sales tend to experience periods of decline when general economic conditions worsen, characterized by oversupply and weak demand. We may experience sustained periods of decreased commercial vehicle sales in the future. Any decline or change of this type could materially affect our business, financial condition and results of operations. In addition, adverse regional economic and competitive conditions in the geographic markets in which we operate could materially adversely affect our business, financial condition and results of operations. Our new commercial vehicle sales volume therefore may differ from industry sales fluctuations.

 

Economic conditions and the other factors described above also may materially adversely impact our sales of parts and repair services, and finance and insurance products.

 

A significant percentage of our revenues come from customers in the oil and gas exploration and production industry, a historically cyclical industry.

 

In certain markets, many of our customers provide oil and gas production services. The oil and gas exploration and production industry is a historically cyclical industry characterized by significant changes in the levels of exploration and development activities. Oil and gas prices, and market expectations of potential changes in those prices, significantly affect the levels of those activities. The decline in oil prices since the fall of 2014 has adversely affected our business and results of operations. Continued reduction in oil and gas prices could materially adversely affect our business, financial condition and results of operations.

 

 

If we lose key personnel or are unable to attract additional qualified personnel, our business could be adversely affected because we rely on the industry knowledge and relationships of our key personnel.  

 

We believe that our success depends significantly upon the efforts and abilities of our executive management and key employees. Additionally, our business is dependent upon our ability to continue to attract and retain qualified personnel, such as executive officers, managers and dealership personnel. The loss of the services of one or more members of our senior management team could have a material adverse effect on us and materially impair the efficiency and productivity of our operations. In addition, the loss of any of our key employees or the failure to attract additional qualified executive officers, managers and dealership personnel could have a material adverse effect on our business and may materially impact the ability of our dealerships to conduct their operations in accordance with our business strategy.

 

We depend on relationships with suppliers for sales incentives, discounts and similar programs which are material to our operations.

 

We depend on suppliers for sales incentives, discounts, warranties and other programs that are intended to promote our use of their components. Most of the incentives and discounts are individually negotiated and not always the same as those made available to our competitors. These incentives and discounts are material to our operations. A reduction or discontinuation of a component supplier’s incentive program could have a material adverse effect on our profitability.

 

We are dependent on the ongoing success of the manufacturers we represent and adverse conditions affecting the manufacturers we represent may negatively impact our revenues and profitability. 

 

The success of each of our dealerships is dependent on the manufacturers represented at each dealership in several ways. Our ability to sell new vehicles and replacement parts is dependent on the ability of the manufacturers we represent to produce and deliver new vehicles and replacement parts to our dealerships. Additionally, our dealerships perform warranty work for vehicles under manufacturer product warranties, which are billed to the appropriate vehicle manufacturer or component supplier as opposed to invoicing our customer. We generally have significant receivables from manufacturers for warranty and service work performed for our customers. In addition, we rely on manufacturers to varying extents for product training, marketing materials, and other items for our stores. Our business, results of operations, and financial condition could be materially adversely affected as a result of any event that has a material adverse effect on the manufacturers we represent.

 

The manufacturers we represent may be adversely impacted by economic downturns, significant declines in the sales of their new vehicles, labor strikes or similar disruptions (including within their major suppliers), rising raw materials costs, rising employee benefit costs, adverse publicity that may reduce consumer demand for their products (including due to bankruptcy), product defects, vehicle recall campaigns, litigation, poor product mix or unappealing vehicle design, governmental laws and regulations, or other adverse events. Our results of operations, financial condition or cash flows could be adversely affected if one or more of the manufacturers we represent are impacted by any of the foregoing adverse events.

 

Actions taken in response to continued operational losses by manufacturers we represent, including bankruptcy or reorganizations, could have a material adverse effect on our sales volumes and profitability. In addition, such actions could lead to the impairment of one or more of our franchise rights, inventories, fixed assets and other related assets, which in turn could have a material adverse effect on our financial condition and results of operations. For example, during the second quarter of 2009, General Motors made the decision to terminate its medium-duty GMC truck production and wind-down our medium-duty GMC truck franchises, which forced us to take a significant pre-tax asset impairment charge in the second quarter of 2009. Actions taken in response to continued operational losses by manufacturers we represent, including bankruptcy or reorganizations, could also eliminate or reduce such manufacturers’ indemnification obligations to our dealerships, which could increase our risk in products liability actions.

 

The dollar amount of our backlog, as stated at any given time, is not necessarily indicative of our future earnings.

 

As of December 31, 2015, our backlog of new commercial vehicle orders was approximately $1,223.9 million. Our backlog is determined quarterly by multiplying the number of new commercial vehicles for each particular type of commercial vehicle ordered by a customer at our Rush Truck Centers by the recent average selling price for that type of commercial vehicle. We only include confirmed orders in our backlog. However, such orders are subject to cancellation. In the event of order cancellation, we have no contractual right to the total revenues reflected in our backlog.

 

Reductions in backlog due to cancellation by a customer or for other reasons will adversely affect, potentially to a material extent, the revenue and profit we actually receive from orders projected in our backlog. If we were to experience significant cancellations of orders in our backlog, our financial condition could be adversely affected.

 

 

Our dealerships are subject to federal, state and local environmental regulations that may result in claims and liabilities, which could be material.

 

We are subject to a wide range of federal, state and local environmental laws and regulations, including those governing discharges into the air and water; the operation and removal of underground and aboveground storage tanks; the use, handling, storage and disposal of hazardous substances, petroleum and other materials; and the investigation and remediation of contamination. As with commercial vehicle dealerships generally, and service, parts and body shop operations in particular, our business involves the generation, use, storage, handling and contracting for recycling or disposal of hazardous materials or wastes and other environmentally sensitive materials. Any non-compliance with these laws and regulations could result in significant fines, penalties and remediation costs which could adversely affect our results of operations, financial condition or cash flows.

 

We may also have liability in connection with materials that were sent to third-party recycling, treatment, or disposal facilities under federal and state statutes. In that case, laws and regulations may make us responsible for liability relating to the investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination. In connection with our acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. In connection with dispositions of businesses, or dispositions previously made by companies we acquire, we may retain exposure for environmental costs and liabilities, some of which may be material.

 

Further, environmental laws and regulations are complex and subject to change. Compliance with current or amended, or new or more stringent, laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions could require additional expenditures by us which could materially adversely affect our results of operations, financial condition or cash flows.

 

Disruptions to our information technology systems and breaches in data security could adversely affect our business.

 

We rely upon our information technology systems to manage all aspects of our business, including processing and recording sales to, and payments from, customers, managing inventory, communicating with manufacturers and vendors and financial reporting. Any inability to manage these systems, including with respect to matters related to system and data security, privacy, reliability, compliance, performance and access, as well as any inability of these systems to fulfill their intended purpose within our business, could have an adverse effect on our business. In addition, in the ordinary course of business, we collect and store sensitive data and information, including our proprietary business information and that of our customers, suppliers and business partners, as well as personally identifiable information about our employees. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, human errors, acts of vandalism, or other events. Any security breach or event resulting in the misappropriation, loss, or other unauthorized disclosure of confidential information, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors and result in litigation or regulatory actions, all of which could have a material adverse effect on our business and reputation.

 

Natural disasters and adverse weather events can disrupt our business. 

 

      Some of our dealerships are located in regions of the United States where natural disasters and severe weather events (such as hurricanes, earthquakes, fires, floods, tornadoes and hail storms) may disrupt our operations, which may adversely impact our business, results of operations, financial condition and cash flows. In addition to business interruption, our business is subject to substantial risk of property loss due to the significant concentration of property at dealership locations. Although we have substantial insurance to cover this risk, we may be exposed to uninsured or underinsured losses that could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

 

Risks Related to Our Common Stock

 

We are controlled by two shareholders and their affiliates.

 

Collectively, W. Marvin Rush and W. M. “Rusty” Rush and their affiliates own approximately 0.3% of our issued and outstanding shares of Class A Common Stock and 34.1% of our issued and outstanding Class B Common Stock. W. Marvin Rush and W.M. “Rusty” Rush collectively control approximately 29.7% of the aggregate voting power of our outstanding shares and voting power which is superior to that of any other person or group. The interests of W. Marvin Rush and W.M. “Rusty” Rush may not be consistent with the interests of all shareholders. As a result of such ownership, W. Marvin Rush and W.M. “Rusty” Rush have the power to effectively control the Company, including the election of directors, the determination of matters requiring shareholder approval and other matters pertaining to corporate governance.

 

Our dealership agreements could discourage another company from acquiring us.

 

Our dealership agreements with Peterbilt impose ownership requirements on certain officers of the Company. All of our dealer agreements include restrictions on the sale or transfer of the underlying franchises. These ownership requirements and restrictions may prevent or deter prospective acquirers from acquiring control of us and, therefore, may adversely impact the value of our common stock.

 

Additionally, W. Marvin Rush and W.M. “Rusty” Rush have granted Peterbilt a right of first refusal to purchase their respective shares of common stock in the event that they desire to transfer in excess of 100,000 shares in any 12-month period to any person other than an immediate family member, an associate or another Dealer Principal. However, in the case of W. Marvin Rush, certain shares of his Class B Common Stock of the Company are exempt from his rights of first refusal agreement. These rights of first refusal, the number of shares owned by W. Marvin Rush and W.M. “Rusty” Rush and their affiliates, the requirement in our dealership agreements that the Dealer Principals retain a controlling interest in us, the restrictions on the sale or transfer of our franchises contained in our dealer agreements combined with the ability of the Board of Directors to issue shares of preferred stock without further vote or action by the shareholders, may discourage, delay or prevent a change in control without further action by our shareholders, which could adversely affect the market price of our common stock or prevent or delay a merger or acquisition that our shareholders may consider favorable.

 

Actions by our shareholders or prospective shareholders that would violate any of the above restrictions on our dealership agreements are generally outside our control. If we are unable to renegotiate these restrictions, we may be forced to terminate or sell one or more of our dealerships, which could have a material adverse effect on us. These restrictions may also inhibit our ability to raise required capital or to issue our stock as consideration for future acquisitions.

 

Class A Common Stock has limited voting power.

 

Each share of Class A Common Stock ranks substantially equal to each share of Class B Common Stock with respect to receipt of any dividends or distributions declared on shares of common stock and the right to receive proceeds on liquidation or dissolution of us after payment of our indebtedness and liquidation preference payments to holders of any preferred shares. However, holders of Class A Common Stock have 1/20th of one vote per share on all matters requiring a shareholder vote, while holders of Class B Common Stock have one full vote per share.

 

Our Class B Common Stock has a low average daily trading volume. As a result, sales of our Class B Common Stock could cause the market price of our Class B Common Stock to drop, and it may be difficult for a stockholder to liquidate its position in our Class B Common Stock quickly without adversely affecting the market price of such shares.

 

The market price of our Class B Common Stock has historically been lower than the market price of our Class A Common Stock. The volume of trading in our Class B Common Stock varies greatly and may often be light. As of December 31, 2015, the three-month average daily trading volume of our Class B Common Stock was approximately 31,000 shares, with several days having a trading volume below 6,000 shares. If any large shareholder were to begin selling shares in the market, the added available supply of shares could cause the market price of our Class B Common Stock to drop. In addition, the lack of a robust resale market may require a shareholder to sell a large number of shares of our Class B Common Stock in increments over time to mitigate any adverse impact of the sales on the market price of our Class B Common Stock.

 

Item 1B.

Unresolved Staff Comments

 

None

 

 

Item 2.

Properties

 

Our corporate headquarters are located in New Braunfels, Texas. As of December 2015, we also own or lease numerous facilities used in our operations in the following states: Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Missouri, New Mexico, Nevada, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas, Utah and Virginia.

 

We lease a hangar in New Braunfels, Texas for the corporate aircraft. We also own and operate a guest ranch of approximately 9,500 acres near Cotulla, Texas, which is used for client development purposes.

 

Item 3.

Legal Proceedings

 

From time to time, we are involved in litigation arising out of our operations in the ordinary course of business. We maintain liability insurance, including product liability coverage, in amounts deemed adequate by management. To date, aggregate costs to us for claims, including product liability actions, have not been material. However, an uninsured or partially insured claim, or claim for which indemnification is not available, could have a material adverse effect on our financial condition or results of operations. We believe that there are no claims or litigation pending, the outcome of which could have a material adverse effect on our financial position or results of operations. However, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on our financial condition or results of operations for the fiscal period in which such resolution occurred.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities

 

Our common stock trades on The NASDAQ Global Select MarketSM under the symbols RUSHA and RUSHB.

 

The following table sets forth the high and low sales prices for the Class A Common Stock and Class B Common Stock for the fiscal periods indicated and as quoted on The NASDAQ Global Select MarketSM.

 

   

2015

   

2014

 
   

 

High

   

Low

   

High

   

Low

 

Class A Common Stock

                               
                                 

First Quarter

  $ 32.59     $ 25.94     $ 32.69     $ 26.32  

Second Quarter

    28.73       25.55       36.15       31.19  

Third Quarter

    27.00       22.58       37.49       33.01  

Fourth Quarter

    27.45       19.04       38.27       30.71  
                                 

Class B Common Stock

                               
                                 

First Quarter

  $ 28.28     $ 23.73     $ 28.23     $ 22.28  

Second Quarter

    26.81       23.17       31.64       27.47  

Third Quarter

    25.01       20.82       32.88       28.96  

Fourth Quarter

    25.84       20.08       32.54       26.68  

 

As of February 11, 2016, there were approximately 30 record holders of the Class A Common Stock and approximately 39 record holders of the Class B Common Stock.

 

We did not pay dividends during the fiscal year ended December 31, 2015, or the fiscal year ended December 31, 2014. The Board of Directors intends to retain any earnings of the Company to support operations and to finance expansion. Any future determination as to the payment of dividends will be at the discretion of the Board of Directors of the Company and will depend on the Company’s financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant.

 

As of December 31, 2015, we have not sold any securities in the last three years that were not registered under the Securities Act.

 

We did not repurchase any shares of our Class A Common Stock or Class B Common Stock during the fourth quarter of 2015.

 

Information regarding the Company’s equity compensation plans is incorporated by reference from Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters,” of this annual report on Form 10-K, and should be considered an integral part of this Item 5.

  

 

Performance Graph

 

The following graph shows the value as of December 31, 2015, of a $100 investment in the Company’s common stock made on December 31, 2010 (with dividends reinvested), as compared with similar investments based on (i) the value of the S&P 500 Index (with dividends reinvested) and (ii) the value of a market-weighted Peer Group Index composed of the common stock of PACCAR, Inc., Werner Enterprises, Inc., Penske Automotive Group, Inc. and Lithia Motors, Inc., in each case on a “total return” basis assuming reinvestment of dividends. The market-weighted Peer Group Index values were calculated from the beginning of the performance period. The historical stock performance shown below is not necessarily indicative of future expected performance.

Measurement

Date

 

Rush

Enterprises, Inc.

   

S&P 500

   

Peer

Group

 

12/31/2010

  $ 100.00     $ 100.00     $ 100.00  

12/31/2011

    98.47       102.11       74.43  

12/31/2012

    98.55       118.45       94.57  

12/31/2013

    143.21       156.82       132.65  

12/31/2014

    156.35       178.29       155.80  

12/31/2015

    113.71       180.75       121.99  

 

The foregoing performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act or the Exchange Act.

 

 

Item 6.

Selected Financial Data

 

The information below was derived from the audited consolidated financial statements included in this report and reports we have previously filed with the SEC. This information should be read together with those consolidated financial statements and the notes to those consolidated financial statements. These historical results are not necessarily indicative of the results to be expected in the future. The selected financial data presented below may not be comparable between periods in all material respects or indicative of our future financial position or results of operations due primarily to acquisitions and discontinued operations which occurred during the periods presented. See Note 15 to the Company’s Consolidated Financial Statements for a discussion of such acquisitions. The selected financial data presented below should be read in conjunction with our other financial information included elsewhere herein.

 

   

Year Ended December 31,

 
   

2015

   

2014

   

2013

   

2012

   

2011

 

SUMMARY OF INCOME STATEMENT DATA

 

(in thousands, except per share amounts)

 

Revenues

                                       

New and used commercial vehicle sales

  $ 3,360,808     $ 3,195,873     $ 2,239,847     $ 2,149,335     $ 1,801,964  

Parts and service sales

    1,382,447       1,315,694       988,317       817,280       675,277  

Lease and rental

    199,867       177,561       129,638       100,247       83,426  

Finance and insurance

    21,150       19,988       15,320       13,638       10,867  

Other

    15,461       18,240       11,583       10,067       9,077  

Total revenues

    4,979,733       4,727,356       3,384,705       3,090,567       2,580,611  

Cost of products sold

    4,194,786       3,971,310       2,812,691       2,589,800       2,157,334  

Gross profit

    784,947       756,046       572,014       500,767       423,277  

Selling, general and administrative

    619,268       573,670       450,340       361,727       306,273  

Depreciation and amortization

    43,859       40,786       29,925       25,016       20,084  

Gain (loss) on sale of assets

    (544 )     151       5       176       418  

Operating income

    121,276       141,741       91,754       114,200       97,338  

Interest expense, net

    13,473       11,198       10,693       13,017       7,161  

Income before income taxes

    107,803       130,543       81,061       101,183       90,177  

Provision (benefit) for income taxes

    41,750       50,586       31,844       38,728       34,964  

Net income

  $ 66,053     $ 79,957     $ 49,217     $ 62,455     $ 55,213  
                                         

Earnings per common share - Basic:

                                       

Net income

  $ 1.64     $ 2.01     $ 1.25     $ 1.62     $ 1.46  
                                         

Earnings per common share - Diluted:

                                       

Net income

  $ 1.61     $ 1.96     $ 1.22     $ 1.57     $ 1.42  
                                         

Weighted average shares outstanding:

                                       

Basic

    40,271       39,783       39,405       38,643       37,861  

Diluted

    41,093       40,894       40,506       39,688       39,014  

 

 

   

Year Ended December 31,

 
   

2015

   

2014

   

2013

   

2012

   

2011

 

OPERATING DATA

                                       

Unit vehicle sales −

                                       

New vehicles

    29,780       27,459       19,931       18,427       15,540  

Used vehicles

    7,922       7,893       6,405       4,744       4,649  

Total unit vehicles sales

    37,702       35,352       26,336       23,171       20,189  

Truck lease and rental units (including units under contract maintenance and crane units)

    9,145       8,073       6,315       5,359       4,000  

 

   

December 31,

 
   

2015

   

2014

   

2013

   

2012

   

2011

 
   

(in thousands)

 

BALANCE SHEET DATA

                                       

Working capital

  $ 79,549     $ 152,517     $ 207,984     $ 202,983     $ 176,928  

Inventories

    1,061,198       1,024,104       802,220       690,953       649,626  

Total assets

    2,852,008       2,675,875       2,151,521       1,866,936       1,705,415  
                                         

Floor plan notes payable

    854,758       845,977       593,649       534,520       520,693  

Long-term debt, including current portion

    647,755       578,254       482,781       399,664       328,287  

Capital lease obligations, including current portion

    83,765       57,250       45,467       49,973       45,554  

Total shareholders’ equity

    844,897       764,339       665,381       607,946       531,234  

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We are a full-service, integrated retailer of commercial vehicles and related services. We operate one segment - the Truck Segment. The Truck Segment operates a regional network of commercial vehicle dealerships under the name “Rush Truck Centers.” Rush Truck Centers primarily sell commercial vehicles manufactured by Peterbilt, International, Hino, Ford, Isuzu, Mitsubishi Fuso, IC Bus or Blue Bird. Through our strategically located network of Rush Truck Centers, we provide one-stop service for the needs of our commercial vehicle customers. We offer an integrated approach to meeting customer needs by providing service, parts and collision repair in addition to new and used commercial vehicle sales and leasing, insurance and financial services, vehicle upfitting, CNG fuel systems, vehicle telematics products, chrome accessories and tires. 

 

Our goal is to continue to serve as the premier service solutions provider to the commercial vehicle industry. Our strategic efforts to achieve this goal include continuously expanding our portfolio of aftermarket services, broadening the diversity of our commercial vehicle product offerings and extending our network of service points across the United States. Our commitment to provide innovative solutions to service our customers’ business needs continues to drive our strong parts, service and body shop (collectively, “Aftermarket Services”) revenues.

 

Our Aftermarket Services include a wide range of capabilities and products such as a fleet of mobile service units, mobile technicians who work in our customers’ facilities, a proprietary line of commercial vehicle parts and accessories, a broad range of diagnostic and analysis capabilities, a suite of telematics products, factory-certified service for alternative fuel vehicles and assembly service for specialized bodies and equipment. As a result of our efforts to expand our Aftermarket Services, Aftermarket Services accounted for 64.1% of our total gross profits in 2015.

 

2015 Highlights

 

The following are the more significant developments in our business during the year ended December 31, 2015:

 

 

Our gross revenues totaled $4,979.7 million in 2015, a 5.3% increase from gross revenues of $4,727.4 million in 2014.

 

 

Gross profit increased $28.9 million, or 3.8%, in 2015, compared to 2014. Gross profit as a percentage of sales decreased to 15.8% in 2015 from 16.0% in 2014.

 

 

 

Our Class 8 heavy-duty sales, which accounted for 6.7% of the total U.S. market, increased 6.6% over 2014.

 

 

Our Class 4-7 medium-duty sales, which accounted for 5.2% of the total U.S. market, increased 13.3% over 2014. Light-duty truck sales decreased 2.3% compared to 2014.

 

 

Aftermarket Service revenues were $1,382.4 million in 2015, compared to $1,315.7 million in 2014.

 

 

Selling, General and Administrative expenses increased $45.6 million, or 7.9%, in 2015, compared to 2014.

 

 

We completed the conversion of all of our Rush Truck Centers and Rush Truck Leasing operations to the SAP dealership management system in the third quarter of 2015.

 

We also completed the following growth initiatives:

 

 

On September 28, 2015, in connection with the divestiture of our Peterbilt dealership in Charlotte, North Carolina, we acquired certain assets of Peterbilt of Las Vegas, Inc., which operated a commercial vehicle dealership in Las Vegas, Nevada.  This location is operating as a Rush Truck Center and is a full-service Peterbilt dealership. The acquisition also included a PacLease commercial vehicle rental and leasing business.  The dealership swap was a like-kind exchange for tax purposes and enabled us to be consistent with our strategy of not having dealerships representing multiple Class 8 manufacturers in the same market, as we continue to operate a facility representing International, Hino and Isuzu trucks in Charlotte.

 

 

Momentum Fuel Technologies sold it first natural gas fuel system on November 23, 2015.

 

 

On July 27, 2015, we acquired certain assets of Dallas Truck Center, Inc., which included real estate and used truck inventory, in Dallas, Texas. This location is operating as Rig Tough Used Trucks, Dallas.

 

 

On May 4, 2015, we acquired certain assets of Yancey Truck Centers, LLC, which operated commercial vehicle dealerships in Albany, Blackshear, Tifton, Valdosta, Augusta, Columbus and Macon, Georgia.  These locations are operating as Rush Truck Centers and offer commercial vehicle sales, parts and service for International trucks.  The acquisition also included an Idealease commercial vehicle rental and leasing business. 

 

 

On February 9, 2015, we acquired certain assets of Effingham Truck Sales, Inc. The acquisition included International commercial truck dealerships and an Idealease commercial vehicle rental and leasing business in Effingham and Mount Vernon, Illinois.

 

2016 Outlook

 

According to A.C.T. Research Co., LLC (“A.C.T. Research”), a truck industry data and forecasting service provider, U. S. Class 8 retail sales are estimated to total 222,000 units in 2016, a 12.2% decrease compared to 253,000 units in 2015. We believe that U.S. Class 8 retail sales could decrease even further than the current A.C.T. Research estimates due to current trends pointing to decreasing freight volumes, decreased demand that should be expected as a result of 2015 being the best truck sales year since 2006, lower used truck values and decreased drilling activity in the energy sector.

 

According to A.C.T. Research ,U. S. Class 4-7 retail sales are estimated to reach 218,350 units, up 0.1% over 2015. We believe our Class 4-7 vehicle sales will remain stable through 2016.

 

We also expect our Aftermarket Services revenue to be negatively impacted by the decreased activity in the energy sector during 2016. We are pursuing initiatives to help offset these expected lost revenues, however, we do not anticipate results from these efforts to take full effect until the second half of 2016.

 

 

Key Performance Indicator

 

Absorption Ratio. Management uses several performance metrics to evaluate the performance of our commercial vehicle dealerships and considers Rush Truck Centers’ “absorption ratio” to be of critical importance. Absorption ratio is calculated by dividing the gross profit from the parts, service and body shop departments by the overhead expenses of all of a dealership’s departments, except for the selling expenses of the new and used commercial vehicle departments and carrying costs of new and used commercial vehicle inventory. When 100% absorption is achieved, all of the gross profit from the sale of a commercial vehicle, after sales commissions and inventory carrying costs, directly impacts operating profit. In 1999, our commercial vehicle dealerships’ absorption ratio was approximately 80%. Since 1999, we have made a concerted effort to increase our absorption ratio. Our commercial vehicle dealerships achieved a 115.6% absorption ratio for the year ended December 31, 2015 and 117.8% absorption ratio for the year ended December 31, 2014.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. We believe the following accounting policies, which are also described in Note 2 of the Notes to the Consolidated Financial Statements, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Inventories

 

Inventories are stated at the lower of cost or market value. Cost is determined by specific identification of new and used commercial vehicles inventory and by the first-in, first-out method for tires, parts and accessories. As the market value of our inventory typically declines over time, reserves are established based on historical loss experience and market trends. These reserves are charged to cost of sales and reduce the carrying value of our inventory on hand. An allowance is provided when it is anticipated that cost will exceed net realizable value less a reasonable profit margin.

 

Goodwill

 

Goodwill is tested for impairment by reporting unit utilizing a two-step process at least annually, or more frequently when events or changes in circumstances indicate that the asset might be impaired. The first step requires us to compare the fair value of the reporting unit, which is the same as the segment, to the respective carrying value. We consider our Truck Segment to be a reporting unit for purposes of this analysis. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is greater than the fair value, there is an indication that impairment may exist and a second step is required. In the second step of the analysis, the implied fair value of the goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment loss.

 

We determine the fair value of our reporting unit using the discounted cash flow method. The discounted cash flow method uses various assumptions and estimates regarding revenue growth rates, future gross margins, future selling, general and administrative expenses and an estimated weighted average cost of capital. The analysis is based upon available information regarding expected future cash flows of each reporting unit discounted at rates consistent with the cost of capital specific to the reporting unit. This type of analysis contains uncertainties because it requires us to make assumptions and to apply judgment regarding our knowledge of our industry, information provided by industry analysts, and our current business strategy in light of present industry and economic conditions. If any of these assumptions change, or fail to materialize, the resulting decline in our estimated fair value could result in a material impairment charge to the goodwill associated with the reporting unit.

 

We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we used to test for impairment losses on goodwill. However, if actual results are not consistent with our estimates or assumptions, or certain events occur that might adversely affect the reported value of goodwill in the future, we may be exposed to an impairment charge that could be material. Such events may include, but are not limited to, strategic decisions made in response to economic and competitive conditions or the impact of the current economic environment.

 

 

Goodwill was tested for impairment during the fourth quarter and no impairment was required. The fair value of our reporting unit exceeded the carrying value of its net assets. As a result, we were not required to conduct the second step of the impairment test. We do not believe our reporting unit is at risk of failing step one of the impairment test.

 

Insurance Accruals

 

We are partially self-insured for a portion of the claims related to our property and casualty insurance programs, requiring it to make estimates regarding expected losses to be incurred. We engage a third-party administrator to assess any open claims and we adjust our accrual accordingly on a periodic basis. We are also partially self-insured for a portion of the claims related to our workers’ compensation and medical insurance programs. We use actuarial information provided from third-party administrators to calculate an accrual for claims incurred, but not reported, and for the remaining portion of claims that have been reported.

 

Changes in the frequency, severity, and development of existing claims could influence our reserve for claims and financial position, results of operations and cash flows. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we used to calculate our self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in our estimate would have changed our reserve for these losses at December 31, 2015 by $1.1 million.

 

Accounting for Income Taxes

 

Management judgment is required to determine the provisions for income taxes and to determine whether deferred tax assets will be realized in full or in part. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When it is more likely than not that all or some portion of specific deferred income tax assets will not be realized, a valuation allowance must be established for the amount of deferred income tax assets that are determined not to be realizable. Accordingly, the facts and financial circumstances impacting state deferred income tax assets are reviewed quarterly and management’s judgment is applied to determine the amount of valuation allowance required, if any, in any given period.

 

Our income tax returns are periodically audited by tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions. In evaluating the exposures associated with our various tax filing positions, we adjust our liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available.

 

Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions. Our effective income tax rate is also affected by changes in tax law, the level of earnings and the results of tax audits. Although we believe that the judgments and estimates are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. An unfavorable tax settlement generally would require use of our cash and result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution. Our income tax expense includes the impact of reserve provisions and changes to reserves that it considers appropriate, as well as related interest.

 

 

Derivative Instruments and Hedging Activities

 

From 2012 until 2015, we utilized derivative financial instruments to manage our interest rate risk relating to the variability of cash flows and changes in the fair value of our financial instruments caused by movements in interest rates. We assessed hedge effectiveness at the inception and during the term of each hedge. Derivatives are reported at fair value on the accompanying Consolidated Balance Sheets.

  

The effective portion of the gain or loss on our cash flow hedges are reported as a component of accumulated other comprehensive loss. Hedge effectiveness was assessed quarterly by comparing the changes in cumulative gain or loss from the interest rate swap with the cumulative changes in the present value of the expected future cash flows of the interest rate swap that are attributable to changes in the LIBOR rate.

 

New Accounting Standards

 

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. We early adopted ASU 2015-17 during the fourth quarter of 2015 on a retrospective basis. Adoption had no impact on our results of operations.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which is intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In order to meet that objective, the new standard requires recognition of the assets and liabilities that arise from leases. A lessee will be required to recognize on the balance sheet the assets and liabilities for leases with lease terms of more than 12 months.  Accounting by lessors will remain largely unchanged from current U.S. generally accepted accounting principles. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.

 

 

Results of Operations

 

The following discussion and analysis includes our historical results of operations for 2015, 2014 and 2013. The following table sets forth for the years indicated certain financial data as a percentage of total revenues:

 

   

Year Ended December 31,

 
   

2015

   

2014

   

2013

 
                         

New and used commercial vehicle sales

    67.5

%

    67.6

%

    66.2

%

Parts and service sales

    27.8       27.8       29.2  

Lease and rental

    4.0       3.8       3.8  

Finance and insurance

    0.4       0.4       0.5  

Other

    0.3       0.4       0.3  

Total revenues

    100.0       100.0       100.0  
                         

Cost of products sold

    84.2       84.0       83.1  

Gross profit

    15.8       16.0       16.9  
                         

Selling, general and administrative

    12.4       12.1       13.3  

Depreciation and amortization

    0.9       0.9       0.9  

Operating income

    2.5       3.0       2.7  

Interest expense, net

    0.3       0.2       0.3  

Income from continuing operations before income taxes

    2.2       2.8       2.4  

Provision for income taxes

    0.8       1.1       0.9  

Net income

    1.4

%

    1.7

%

    1.5

%

 

The following table sets forth the unit sales and revenue for new heavy-duty, new medium-duty, new light-duty and used commercial vehicles and the absorption ratio for the years indicated (revenue in millions):

 

                   

% Change

 
 

2015

 

2014

 

2013

 

2015

vs

2014

 

2014

vs

2013

 

Vehicle unit sales:

                             

New heavy-duty vehicles

  16,874     15,833     9,545     6.6 %   65.9 %

New medium-duty vehicles

  11,241     9,922     8,441     13.3 %   17.5 %

New light-duty vehicles

  1,665     1,704     1,945     -2.3 %   -12.4 %

Total new vehicle unit sales

  29,780     27,459     19,931     8.4 %   37.8 %
                               

Used vehicles sales

  7,922     7,893     6,405     0.3 %   23.2 %
                               

Vehicle revenue:

                             

New heavy-duty vehicles

$ 2,133.2   $ 2,087.4   $ 1,304.9     2.2 %   60.0 %

New medium-duty vehicles

  808.9     708.9     604.9     14.1 %   17.2 %

New light-duty vehicles

  60.2     58.2     63.2     3.4 %   -7.9 %

Total new vehicle revenue

$ 3,002.3   $ 2,854.5   $ 1,973.0     5.2 %   44.7 %
                               

Used vehicle revenue

$ 338.7   $ 327.7   $ 252.4     3.4 %   29.8 %
                               

Other vehicle revenue:(1)

$ 19.8   $ 13.7   $ 14.4     44.5 %   -4.9 %
                               

Dealership absorption ratio:

  115.6 %   117.8 %   114.0 %   -1.9 %   3.3 %

 

 

(1)

Includes sales of truck bodies, trailers and other new equipment

 

 

 

The following table sets forth for the periods indicated the percent of gross profit by revenue source:

 

   

2015

   

2014

   

2013

 

Gross Profit:

                       

New and used commercial vehicle sales

    28.3

%

    29.1

%

    27.3

%

Parts and service sales

    64.1       62.6       64.4  

Lease and rental

    2.9       3.3       3.6  

Finance and insurance

    2.7       2.6       2.7  

Other

    2.0       2.4       2.0  

Total gross profit

    100.0

%

    100.0

%

    100.0

%

 

Industry

 

We operate in the commercial vehicle market. There has historically been a high correlation between new product sales in the commercial vehicle market and the rate of change in U.S. industrial production and the U.S. gross domestic product.

 

Heavy-Duty Truck Market

 

The U.S. retail heavy-duty truck market is affected by a number of factors relating to general economic conditions, including fuel prices, government regulation, interest rate fluctuations, economic recessions, other methods of transportation and customer business cycles. Accordingly, unit sales of new commercial vehicles have historically been subject to substantial cyclical variation based on general economic conditions. According to data published by A.C.T. Research, over the last 10 years total U.S. retail sales of new Class 8 trucks have ranged from a low of approximately 97,000 in 2009 to a high of approximately 253,000 in 2015. Class 8 trucks are defined by the American Automobile Association as trucks with a minimum gross vehicle weight rating above 33,000 pounds.

 

Typically, Class 8 trucks are assembled by manufacturers utilizing certain components that may be manufactured by other companies, including engines, transmissions, axles, wheels and other components. As commercial vehicles and certain commercial vehicle components have become increasingly complex, the ability to provide state-of-the-art service for commercial vehicles has become a competitive factor in the industry. The ability to provide such service requires a significant capital investment in diagnostic and other equipment, parts inventory and highly trained service personnel. EPA and DOT regulatory guidelines for service processes, including body shop, paint work and waste disposal, require sophisticated operating and testing equipment to ensure compliance with environmental and safety standards. Differentiation between commercial vehicle dealers has become less dependent on price competition and is increasingly based on a dealer’s ability to offer a wide variety of services to their clients in a timely manner to minimize vehicle downtime. Such services include the following: efficient, conveniently located and easily accessible commercial vehicle service centers with an adequate supply of replacement parts; financing for commercial vehicle purchases; leasing and rental programs; and the ability to accept multiple unit trade-ins related to large fleet purchases. We believe our one-stop center concept and the size and geographic diversity of our dealer network gives us a competitive advantage in providing these services.

 

A.C.T. Research currently estimates approximately 222,000 new Class 8 trucks will be sold in the United States in 2016, compared to approximately 253,000 new Class 8 trucks sold in 2015. A.C.T. Research currently forecasts sales of new Class 8 trucks in the U.S. to be approximately 198,000 in 2017.

 

Medium-Duty Truck Market

 

Many of our Rush Truck Centers sell medium-duty commercial vehicles manufactured by Peterbilt, International, Hino, Ford, Mitsubishi Fuso or Isuzu, and all of our Rush Truck Centers provide parts and service for medium-duty commercial vehicles. Medium-duty commercial vehicles are principally used in short-haul, local markets as delivery vehicles. Medium-duty commercial vehicles typically operate locally and generally do not leave their service areas overnight. We also sell light-duty vehicles (Class 3 and under) at five of our Ford dealerships.

 

A.C.T. Research currently forecasts sales of new Class 4 through 7 commercial vehicles in the U.S. to be approximately 218,350 in 2016, compared to 218,123 in 2015. A.C.T. Research currently forecasts sales of new Class 4 through 7 commercial vehicles in the U.S. to be approximately 226,600 in 2017. 

 

 

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

 

Revenues

 

Revenues increased $252.4 million, or 5.3%, in 2015, compared to 2014.

 

Our Aftermarket Services revenues increased $66.8 million, or 5.1%, in 2015, compared to 2014. This increase was the result of acquisitions in 2014 and overall strong demand for repair and maintenance of vehicles. We expect our Aftermarket Services revenues to decrease slightly during 2016 compared to 2015, Aftermarket Services are being negatively impacted by the decrease in drilling activity in the energy sector.

 

Revenues from sales of new and used commercial vehicles increased $164.9 million, or 5.2%, in 2015, compared to 2014.

 

We sold 16,874 heavy-duty trucks in 2015, a 6.6% increase compared to 15,833 heavy-duty trucks in 2014. According to A.C.T. Research, U.S. Class 8 retail sales totaled 253,000 in 2015, an increase of approximately 12.9%, compared to 2014. Our share of the U.S. Class 8 truck sales market decreased to approximately 6.7% in 2015, from 7.1% in 2014. We expect our U.S. Class 8 truck sales market share to range between 6.0% and 7.0% in 2016. This market share percentage would result in the sale of approximately 13,300 to 15,500 of Class 8 trucks in 2016 based on A.C.T. Research’s current U.S. retail sales estimate of 222,000 units.

 

We sold 11,241 medium-duty commercial vehicles, including 1,140 buses, in 2015, a 13.3% increase compared to 9,922 medium-duty commercial vehicles, including 1,504 buses, in 2014. According to A.C.T. Research, U.S. Class 4 through 7 retail sales totaled 218,350 in 2015, an increase of approximately 8.3%, compared to 2014. In 2015, we achieved a 5.2% share of the Class 4 through 7 market in the U.S. We expect our market share to range between 5.0% and 5.5% of the U.S. Class 4 through 7 commercial vehicle sales in 2016. This market share percentage would result in the sale of approximately 10,900 to 12,000 of Class 4 through 7 commercial vehicles in 2016 based on A.C.T. Research’s current U.S. retail sales estimates of 218,350 units.

 

We sold 1,665 light-duty vehicles in 2015, a 2.3% decrease compared to 1,704 light-duty vehicles in 2014. We expect to sell approximately 1,900 light-duty vehicles in 2016.

 

We sold 7,922 used commercial vehicles in 2015, a 0.4% increase compared to 7,893 used commercial vehicles in 2014. We expect to sell approximately 8,200 to 8,500 used commercial vehicles in 2016. The volume of used commercial vehicle sales will be largely dependent upon our ability to acquire quality used commercial vehicles and maintain an adequate used commercial vehicle inventory throughout 2016.

 

Truck lease and rental revenues increased $22.3 million, or 12.6%, in 2015, compared to 2014. The increase in lease and rental revenues was primarily due to the increased number of units put into service in the lease and rental fleet. We expect lease and rental revenue to increase 10% to 15% during 2016, compared to 2015.

 

Finance and insurance revenues increased $1.2 million, or 5.8%, in 2015, compared to 2014. The increase in finance and insurance revenue was primarily a result of the increase in finance penetration rates and increased activity in our insurance business. We expect finance and insurance revenue to fluctuate proportionately with our new and used commercial vehicle sales in 2016. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of our operating profits.

 

Other income decreased $2.8 million, or 15.2% in 2015, compared to 2014. Other income consists primarily of the gain on sale realized on trucks from the lease and rental fleet, document fees related to commercial vehicle sales and income from CCTTS, our joint venture.

 

Gross Profit

 

Gross profit increased $28.9 million, or 3.8%, in 2015, compared to 2014. Gross profit as a percentage of sales decreased to 15.8% in 2015, from 16.0% in 2014, which is primarily related to the decrease in overall truck sales margins in 2015.

 

 

Gross margins from our Aftermarket Services operations increased to 36.4% in 2015, from 36.0% in 2014. Gross profit for Aftermarket Services increased to $503.3 million in 2015, from $473.3 million in 2014. Historically, parts operations’ gross margins range from 27% to 28% and service and body shop operations range from 67% to 68%. Gross profits from parts sales represented 55.5% of total gross profit for Aftermarket Services operations in 2015 and 55.2% in 2014. Service and body shop operations represented 44.5% of total gross profit for Aftermarket Services operations in 2015 and 44.8% 2014. We expect blended gross margins on Aftermarket Services operations to range from 36.5% to 37.0% in 2016.

 

Gross margins on Class 8 truck sales decreased to 6.5% in 2015, from 7.1% in 2014. This decrease is attributable to the sales mix in 2015, which consisted of more sales to over-the-road fleet customers, a lower margin revenue item. In 2016, we expect overall gross margins from Class 8 truck sales of approximately 6.2% to 6.6%. We recorded a net charge to cost of sales of $1.5 million to increase our new heavy-duty truck valuation allowance in 2015, compared to $1.1 million in 2014.

 

Gross margins on medium-duty commercial vehicle sales increased to 5.9% in 2015, from 5.6% in 2014. For 2016, we expect overall gross margins from medium-duty commercial vehicle sales of approximately 5.5% to 6.0%, but this will largely depend upon the mix of purchasers and types of vehicles sold. We recorded a net charge to cost of sales of $1.9 million to increase our new medium-duty commercial vehicle valuation allowance in 2015, compared to $1.6 million in 2014.

 

Gross margins on used commercial vehicle sales increased to 9.6% in 2015, from 9.0% in 2014. We expect margins on used commercial vehicles to range between 8.0% and 10.0% during 2016 depending upon general economic conditions and our ability to acquire quality used vehicles. We recorded a net charge to cost of sales of $4.7 million to increase our used commercial vehicle valuation allowance in 2015, compared to $5.0 million in 2014.

 

Gross margins from truck lease and rental sales decreased to 11.5% in 2015, from 13.9% in 2014. This decrease is primarily related to the decrease in drilling activity in the energy sector and related business activity. We expect gross margins from lease and rental sales of approximately 12.0% to 14.0% during 2016, as we expect to continue to grow our lease and rental fleet. Our policy is to depreciate our lease and rental fleet using a straight line method over each customer’s contractual lease term. The lease unit is depreciated to a residual value that approximates fair value at the expiration of the lease term. This policy results in the Company realizing reasonable gross margins while the unit is in service and a corresponding gain or loss on sale when the unit is sold at the end of the lease term.

 

Finance and insurance revenues and other income, as described above, have limited direct costs and, therefore, contribute a disproportionate share of gross profit.

 

Selling, General and Administrative Expenses

 

Selling, General and Administrative (“SG&A”) expenses increased $45.6 million, or 7.9%, in 2015, compared to 2014. SG&A expenses as a percentage of total revenues increased to 12.4% in 2015, from 12.1% in 2014. SG&A expenses as a percentage of total revenues have historically ranged from 10.0% to 15.0%. In general, when new and used commercial vehicle revenues decrease as a percentage of total revenues, SG&A expenses as a percentage of total revenues will be at, or exceed, the higher end of this range. For 2016, we expect SG&A expenses as a percentage of total revenues to range from 11.0% to 12.0% and the selling portion of SG&A expenses to be approximately 25.0% to 30.0% of new and used commercial vehicle gross profit. In 2016, we expect the general and administrative portion of SG&A expenses to decrease by approximately 3.0% to 4.0%, compared to 2015.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense increased $3.1 million, or 7.5%, in 2015 compared to 2014. This increase was primarily due to the construction of new dealerships, dealership expansions and acquisitions. In 2014 we initiated a plan to sell our corporate aircraft and determined that the carrying value of the corporate aircraft was no longer recoverable. We recognized a $3.4 million in pre-tax non-cash asset impairment charge during the year ended December 31, 2014. The impairment loss is included in depreciation and amortization expense on the Consolidated Statements of Income. Our corporate aircraft was sold in connection with the purchase of a replacement aircraft in 2015.

 

 

Interest Expense, Net

 

Net interest expense increased $2.3 million, or 20.3%, in 2015, compared to 2014. Net interest expense in 2016 will depend on inventory levels and the amount of cash available to make prepayments on the Floor Plan Credit Agreement.

 

Income before Income Taxes

 

Income before income taxes decreased $22.7 million in 2015, compared to 2014, as a result of the factors described above.

 

Income Taxes 

 

Income taxes decreased $8.8 million in 2015, compared to 2014. We provided for taxes at a 38.73% effective rate in 2015 compared to an effective rate of 38.75% in 2014. We expect our effective tax rate to be approximately 38.5% to 39.0% of pretax income in 2016.

 

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

 

Revenues

 

Revenues increased $1,342.7 million, or 39.7%, in 2014, compared to 2013.

 

Our Aftermarket Services revenues increased $327.4 million, or 33.1%, in 2014, compared to 2013. This increase was primarily the result of acquisitions that occurred after the second half of 2013.

 

Revenues from sales of new and used commercial vehicles increased $956.0 million, or 42.7%, in 2014, compared to 2013.

 

We sold 15,833 heavy-duty trucks in 2014, a 65.9% increase compared to 9,545 heavy-duty trucks in 2013. This increase was primarily the result of acquisitions that occurred after the second half of 2013 and continued replacement of aging commercial vehicles. According to A.C.T. Research, U.S. Class 8 retail sales totaled 224,000 in 2014, an increase of approximately 19.4%, compared to 2013. Our share of the U.S. Class 8 truck sales market increased to approximately 7.1% in 2014, from 5.1% in 2013.

 

We sold 9,922 medium-duty commercial vehicles, including 1,504 buses, in 2014, a 17.5% increase compared to 8,441 medium-duty commercial vehicles, including 1,413 buses, in 2013. According to A.C.T. Research, U.S. Class 4 through 7 retail sales totaled 201,000 in 2014, an increase of approximately 11.9%, compared to 2013. In 2014, we achieved a 4.9% share of the Class 4 through 7 commercial vehicle sales market in the U.S.

 

We sold 1,704 light-duty vehicles in 2014, a 12.4% decrease compared to 1,945 light-duty vehicles in 2013.

 

We sold 7,893 used commercial vehicles in 2014, a 23.2% increase compared to 6,405 used commercial vehicles in 2013. The increase in sales of used commercial vehicles was primarily due to acquisitions after the second half of 2013 and strong demand for used trucks.

 

Truck lease and rental revenues increased $47.9 million, or 37.0%, in 2014, compared to 2013. The increase in lease and rental revenue was primarily due to acquisitions after the second half of 2013.

 

Finance and insurance revenues increased $4.7 million, or 30.5%, in 2014, compared to 2013. The increase in finance and insurance revenue was primarily a result of the increase in finance penetration rates and increased activity in our insurance business.

 

Other income increased $6.7 million, or 57.5% in 2014, compared to 2013.

 

 

Gross Profit

 

Gross profit increased $184.0 million, or 32.2%, in 2014, compared to 2013. Gross profit as a percentage of sales decreased to 16.0% in 2014, from 16.9% in 2013. This decrease in gross profit as a percentage of sales was a result of a change in our product sales mix. Commercial vehicle sales, a lower margin revenue item, increased as a percentage of total revenues to 67.6% in 2014, from 66.2% in 2013. Aftermarket Services revenues, a higher margin revenue item, decreased as a percentage of total revenues to 27.8% in 2014, from 29.2% in 2013.

 

Gross margins from our Aftermarket Services operations decreased to 36.0% in 2014, from 37.3% in 2013. Gross profit for Aftermarket Services operations increased to $473.3 million in 2014, from $368.3 million in 2013. Gross profits from parts sales represented 55.2% of total gross profit for Aftermarket Services operations in 2014 and 55.3% in 2013. Service and body shop operations represented 44.8% of total gross profit for Aftermarket Services operations in 2014 and 44.7% in 2013.

 

Gross margins on Class 8 truck sales increased to 7.1% in 2014, from 6.8% in 2013. We recorded a net charge to cost of sales of $1.1 million to increase our new heavy-duty truck valuation allowance in 2014, compared to $1.2 million in 2013.

 

Gross margins on medium-duty commercial vehicle sales increased to 5.6% in 2014, from 5.2% in 2013. We recorded a net charge to cost of sales of $1.6 million to increase our new medium-duty commercial vehicle valuation allowance in 2014, compared to $1.2 million in 2013.

 

Gross margins on used commercial vehicle sales decreased to 9.0% in 2014, from 9.2% in 2013. We recorded a net charge to cost of sales of $5.0 million to increase our used commercial vehicle valuation allowance in 2014, compared to $3.1 million in 2013.

 

Gross margins from truck lease and rental sales decreased to 13.9% in 2014, from 15.7% in 2013.

 

Finance and insurance revenues and other income, as described above, have limited direct costs and, therefore, contribute a disproportionate share of gross profit.

 

Selling, General and Administrative Expenses

 

SG&A expenses increased $123.3 million, or 27.4%, in 2014, compared to 2013. This increase was primarily due to acquisitions that occurred after the second half of 2013. SG&A expenses as a percentage of total revenues decreased to 12.1% in 2014, from 13.3% in 2013.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense increased $10.9 million, or 36.3%, in 2014 compared to 2013. This increase was primarily due to acquisitions that occurred in 2013 and the construction of new dealerships and dealership expansions. We recognized a $3.4 million in pre-tax non-cash asset impairment charge during the year ended December 31, 2014 in connection with the initiation of our plan to sell our corporate aircraft.

 

Interest Expense, Net

 

Net interest expense increased $500,000, or 4.7%, in 2014, compared to 2013.

 

Income before Income Taxes

 

Income before income taxes increased $49.5 million in 2014, compared to 2013, as a result of the factors described above.

 

Income Taxes 

 

Income taxes increased $18.7 million in 2014, compared to 2013. We provided for taxes at a 38.75% effective rate in 2014 compared to an effective rate of 39.3% in 2013.

 

 

Liquidity and Capital Resources

 

Our short-term cash requirements are primarily for working capital, inventory financing, the improvement and expansion of existing facilities and the construction or purchase of new facilities. Historically, these cash requirements have been met through the retention of profits, borrowings under our floor plan financing arrangements and bank financings. As of December 31, 2015, we had working capital of approximately $79.5 million, including $64.8 million in cash available to fund our operations. We believe that these funds, together with expected cash flows from operations, are sufficient to meet our operating requirements for at least the next twelve months. From time to time, we utilize our excess cash on hand to pay down our outstanding borrowings under the Floor Plan Credit Agreement, and the resulting interest earned is recognized as an offset to our gross interest expense under the Floor Plan Credit Agreement.

 

We have a secured line of credit that provides for a maximum borrowing of $17.5 million. There were no advances outstanding under this secured line of credit at December 31, 2015, however, $12.7 million was pledged to secure various letters of credit related to self-insurance products, leaving $4.8 million available for future borrowings as of December 31, 2015.

 

Our long-term real estate debt and floor plan financing agreements require us to satisfy various financial ratios such as the debt-to-worth ratio, leverage ratio and the fixed charge coverage ratio and certain requirements for tangible net worth and GAAP net worth. As of December 31, 2015, we were in compliance with all debt covenants related to debt secured by real estate, lease and rental units and our floor plan credit agreements. We do not anticipate any breach of the covenants in the foreseeable future.

 

We expect to purchase or lease trucks worth approximately $220.0 million to $250.0 million for our leasing operations during 2016, depending on customer demand, all of which will be financed. We also expect to make capital expenditures for recurring items such as computers, shop tools and equipment and vehicles of approximately $20.0 million to $25.0 million during 2016.

 

We are currently under contracts to construct or remodel various dealership facilities and purchase real estate at an estimated remaining cost of $18.4 million. The construction projects are estimated to continue through 2016.

 

On December 4, 2015, we announced that our Board of Directors authorized the repurchase, from time to time, of up to an aggregate of $40.0 million shares of Class A Common Stock and/or Class B Common Stock. This stock repurchase program replaced a prior $40 million repurchase program. Repurchases, if any, will be made at times and in amounts as we deem appropriate and may be made through open market transactions at prevailing market prices, privately negotiated transactions or by other means in accordance with federal securities laws. The actual timing, number and value of repurchases under the new stock repurchase program will be determined by management at its discretion and will depend on a number of factors, including market conditions, stock price and other factors, including those related to the ownership requirements of its dealership agreements with Peterbilt. The stock repurchase program expires on November 30, 2016, and may be suspended or discontinued at any time.

 

We anticipate funding the capital expenditures for the improvement and expansion of existing facilities and recurring expenses through our operating cash flows. We have the ability to fund the construction or purchase of new facilities through our operating cash flows or by financing 70% to 80% of the appraised value of such facility.

 

We have no other material commitments for capital expenditures as of December 31, 2015, except that we will continue to purchase vehicles for our lease and rental division and authorize capital expenditures for improvement and expansion of our existing dealership facilities and construction or purchase of new facilities based on market opportunities.

 

Cash Flows

 

Cash and cash equivalents decreased by $126.6 million during the year ended December 31, 2015, and decreased by $25.8 million during the year ended December 31, 2014. The major components of these changes are discussed below.

 

 

Cash Flows from Operating Activities

 

Cash flows from operating activities include net income adjusted for non-cash items and the effects of changes in working capital. During 2015, operating activities resulted in net cash provided by operations of $227.3 million. Net cash provided by operating activities primarily consisted of $66.1 million in net income, as well as non-cash adjustments related to depreciation and amortization of $144.9 million, deferred income taxes of $31.6 million and stock-based compensation of $12.4 million. Cash used in operating activities included an aggregate of $28.6 million net change in operating assets and liabilities. Included in the net change in operating assets and liabilities were cash inflows of $11.9 million from a decrease in accounts receivable and $18.7 million from decreases in inventory, net of acquisitions, which were offset by cash outflows of $3.7 million from an increase in other current assets, $17.0 million from the net decrease in floor plan, trade borrowings, $22.4 million from a decrease in customer deposits, and $16.2 million from decreases in accounts payable and accrued liabilities. The majority of commercial vehicle inventory is financed through our floor plan credit agreements.

 

 

During 2014, operating activities resulted in net cash provided by operations of $88.9 million. Net cash provided by operating activities primarily consisted of $80.0 million in net income, as well as non-cash adjustments related to depreciation and amortization of $126.5 million, deferred income taxes of $25.2 million, stock-based compensation of $11.3 million. Cash used in operating activities included an aggregate of $150.7 million net change in operating assets and liabilities. Included in the net change in operating assets and liabilities were cash inflows of $44.9 million from the net increase in floor plan, trade borrowings and $51.0 million provided by increases in accounts payable and accrued liabilities, which were offset by cash outflows of $151.9 million from increases in inventory, net of acquisitions, $67.7 million from an increase in accounts receivable, $13.8 million from a decrease in customer deposits and $13.2 million from an increase in other current assets.

 

In June 2012, we entered into a wholesale financing agreement with Ford Motor Credit Company that provides for the financing of, and is collateralized by, our Ford new vehicle inventory. This wholesale financing agreement bears interest at a rate of Prime plus 150 basis points minus certain incentives and rebates; however, the prime rate is defined to be a minimum of 3.75%. As of December 31, 2015, the interest rate on the wholesale financing agreement was 5.25% before considering the applicable incentives. As of December 31, 2015, we had an outstanding balance of approximately $62.4 million under the Ford Motor Credit Company wholesale financing agreement.

 

Cash Flows from Investing Activities

 

During 2015, cash used in investing activities was $436.2 million. Cash flows used in investing activities consist primarily of cash used for capital expenditures and business acquisitions. Capital expenditures of $367.8 million consisted primarily of purchases of property and equipment and improvements to our existing dealership facilities and $177.6 million for additional units for the rental and leasing operations, which were directly offset by borrowings of long-term debt. Cash used for business acquisitions was $69.0 million during the year ended December 31, 2015. See Note 15 of the Notes to Consolidated Financial Statements for a detailed discussion of the business acquisitions. We expect to purchase or lease trucks worth approximately $220.0 million to $250.0 million for our leasing operations in 2016, depending on customer demand, all of which will be financed. During 2016, we expect to make capital expenditures for recurring items such as computers, shop equipment and vehicles of $20.0 million to $25.0 million.

 

During 2014, cash used in investing activities was $416.4 million. Cash flows used in investing activities consist primarily of cash used for capital expenditures and business acquisitions. Capital expenditures of $260.8 million consisted primarily of purchases of property and equipment and improvements to our existing dealership facilities and $167.6 million for additional units for the rental and leasing operations, which were directly offset by borrowings of long-term debt. Cash used for business acquisitions was $157.6 million during the year ended December 31, 2014. See Note 15 of the Notes to Consolidated Financial Statements for a detailed discussion of the business acquisitions.

 

Cash Flows from Financing Activities

 

Cash flows provided by financing activities include borrowings and repayments of long-term debt and net payments of floor plan notes payable. During 2015, we generated $82.4 million in net cash flow from financing activities, primarily related to borrowings of $218.0 million of long-term debt, $31.6 million from net draws on floor plan notes payable, non-trade and $3.8 million from the issuance of shares related to equity compensation plans. These cash inflows were partially offset by cash outflows of $169.2 million used for principal repayments of long-term debt and capital lease obligations and $1.5 million used to purchase 56,077 shares of Rush Class B common stock during 2015. The borrowings of long-term debt were primarily related to purchasing units for the rental and leasing operations.

 

 

During 2014, we generated $301.6 million in net cash flow from financing activities, primarily related to borrowings of $214.6 million of long-term debt, $207.5 million from net draws on floor plan notes payable, non-trade and $12.0 million from the issuance of shares related to equity compensation plans. These cash inflows were partially offset by cash outflows of $125.4 million used for principal repayments of long-term debt and capital lease obligations and $12.3 million used to purchase 449,152 shares of Rush Class B common stock during 2014. The borrowings of long-term debt were primarily related to purchasing units for the rental and leasing operations.

 

Most of our commercial vehicle purchases are made on terms requiring payment to the manufacturer within 15 days or less from the date the commercial vehicles are invoiced from the factory. During 2015, we financed the majority of all new commercial vehicle inventory and the loan value of our used commercial vehicle inventory under the Floor Plan Credit Agreement. On September 15, 2015, we entered into the Second Amended and Restated Credit Agreement with GE Capital. The amendment increased the aggregate loan commitment to $850.0 million. Effective December 1, 2015, GE Capital resigned as Administrative Agent of the Floor Plan Credit Agreement and BMO Harris Bank N.A. (“BMO Harris”) was appointed in its place. Borrowings under the Floor Plan Credit Agreement bear interest at an annual rate equal to the three month LIBOR rate, determined on the last day of the prior month, plus 2.03% and are payable monthly.  In addition, we are required to pay a monthly working capital fee equal to 0.35% per annum multiplied by the amount of voluntary prepayments of new and used inventory loans. Loans under the Floor Plan Credit Agreement for the purchase of used inventory are limited to $150.0 million. The Floor Plan Credit Agreement expires July 11, 2016, although BMO Harris has the right to terminate the Floor Plan Credit Agreement at any time upon 120 days’ written notice. We may terminate the Floor Plan Credit Agreement at any time, although if we do so we must pay a prepayment processing fee of $300,000, subject to specified limited exceptions. On December 31, 2015, we had approximately $792.4 million outstanding under the Floor Plan Credit Agreement. The average daily outstanding borrowings under the Floor Plan Credit Agreement were $692.3 million during the year ended December 31, 2015. Periodically, we utilize our excess cash on hand to pay down our outstanding borrowings under the Floor Plan Credit Agreement, and the resulting interest earned is recognized as an offset to our gross interest expense under the Floor Plan Credit Agreement.

 

Navistar Financial Corporation and Peterbilt offer trade terms that provide an interest-free inventory stocking period for certain new commercial vehicles.  If the commercial vehicle is not sold within the interest-free period, we then finance the commercial vehicle under the Floor Plan Credit Agreement. 

 

Cyclicality

 

Our business is dependent on a number of factors relating to general economic conditions, including fuel prices, interest rate fluctuations, credit availability, economic recessions, environmental and other government regulations and customer business cycles. Unit sales of new commercial vehicles have historically been subject to substantial cyclical variation based on these general economic conditions. According to data published by A.C.T. Research, in recent years total U.S. retail sales of new Class 8 trucks have ranged from a low of approximately 97,000 in 2009, to a high of approximately 291,000 in 2006. Through geographic expansion, concentration on higher margin Aftermarket Services and diversification of our customer base, we have taken steps to reduce the negative impact of adverse general economic conditions or cyclical trends affecting the heavy-duty truck industry on our earnings.

 

Off-Balance Sheet Arrangements

 

Other than operating leases, we do not have any obligation under any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the Company is a party, that has or is reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. A summary of our operating lease obligations by fiscal year is included in the “Contractual Obligations” section below.

 

 

Contractual Obligations 

 

We have certain contractual obligations that will impact our short and long-term liquidity. At December 31, 2015, such obligations were as follows (in thousands):

 

   

Payments Due by Period

 

Contractual Obligations

 


Total

   

Less than 1
year

   

1-3
years

   

3-5
years

   

More than
5 years

 
   

(in thousands)

 

Long-term debt obligations (1)

  $ 647,755     $ 151,024     $ 243,145     $ 193,746     $ 59,840  

Capital lease obligations(2)

    91,916       17,181       33,607       27,358       13,770  

Operating lease obligations(3)

    46,421       11,218       12,192       6,522       16,489  

Floor plan debt obligation

    854,758       854,758                    

Interest obligations (4)

    83,294       43,225       27,377       11,547       1,145  

Purchase obligations(5)

    30,278       15,403       4,963       4,618       5,294  

Total