The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
ORGANIZATION AND OPERATIONS:
|
Rush Enterprises, Inc. (the “Company”) was incorporated in 1965 under the laws of the State of Texas. The Company operates a network of commercial vehicle dealerships that primarily sell commercial vehicles manufactured by Peterbilt, International, Hino, Ford, Isuzu, FUSO, IC Bus or Blue Bird. Through its strategically located network of Rush Truck Centers, the Company provides one-stop service for the needs of its 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.
2.
|
SIGNIFICANT ACCOUNTING POLICIES:
|
Principles of Consolidation
The consolidated financial statements presented herein include the accounts of Rush Enterprises, Inc. together with its consolidated subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
Estimates in Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash and other money market instruments. The Company considers all highly liquid investments with an original maturity of ninety days or less to be cash equivalents.
Allowance for Doubtful Receivables and Repossession Losses
The Company provides an allowance for doubtful receivables and repossession losses after considering historical loss experience and other factors that might affect the collection of accounts receivable and the ability of customers to meet their obligations on finance contracts sold by the Company.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by specific identification of new and used commercial vehicle inventory and by the first-in, first-out method for tires, parts and accessories. As the market value of the Company’s 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 the Company’s inventory on hand. An allowance is provided when it is anticipated that cost will exceed net realizable value less a reasonable profit margin.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated useful lives. Leasehold improvements are amortized over the useful life of the improvement, or the term of the lease, whichever is shorter. Provision for depreciation of property and equipment is calculated primarily on a straight-line basis. The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest, when incurred, is added to the cost of underlying assets and is amortized over the estimated useful life of such assets. The Company capitalized interest of approximately $387,800 related to major capital projects during 2019. The cost, accumulated depreciation and amortization and estimated useful lives of certain of the Company’s assets are summarized as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
|
Estimated Life
(Years)
|
|
Land
|
|
$
|
137,416
|
|
|
$
|
134,873
|
|
|
|
–
|
|
|
Buildings and improvements
|
|
|
474,106
|
|
|
|
434,049
|
|
|
10
|
–
|
39
|
|
Leasehold improvements
|
|
|
34,350
|
|
|
|
27,165
|
|
|
2
|
–
|
39
|
|
Machinery and shop equipment
|
|
|
82,594
|
|
|
|
73,578
|
|
|
5
|
–
|
20
|
|
Furniture, fixtures and computers
|
|
|
73,846
|
|
|
|
67,330
|
|
|
3
|
–
|
15
|
|
Transportation equipment
|
|
|
99,127
|
|
|
|
92,385
|
|
|
3
|
–
|
15
|
|
Lease and rental vehicles
|
|
|
968,121
|
|
|
|
914,708
|
|
|
1
|
–
|
8
|
|
Construction in progress
|
|
|
16,874
|
|
|
|
16,310
|
|
|
|
|
|
|
Accumulated depreciation and amortization
|
|
|
(606,503
|
)
|
|
|
(576,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,279,931
|
|
|
$
|
1,184,053
|
|
|
|
|
|
|
The Company recorded depreciation expense of $158.7 million and amortization expense of $16.8 million for the year ended December 31, 2019, depreciation expense of $149.1 million and amortization expense of $36.0 million for the year ended December 31, 2018, depreciation expense of $140.3 million and amortization expense of $17.6 million for the year ended December 31, 2017.
As of December 31, 2019, the Company had $85.8 million in lease and rental vehicles under various finance leases included in property and equipment, net of accumulated amortization of $43.0 million. The Company recorded depreciation and amortization expense of $120.1 million related to lease and rental vehicles in lease and rental cost of products sold for the year ended December 31, 2019, $114.6 million for the year ended December 31, 2018 and $107.9 million for the year ended December 31, 2017.
Goodwill
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the purchase method. The Company tests goodwill for impairment annually during the fourth quarter, or when indications of potential impairment exist. These indicators would include a significant change in operating performance, or a planned sale or disposition of a significant portion of the business, among other factors. The Company tests for goodwill impairment utilizing a fair value approach at the reporting unit level. The Company has deemed its reporting unit to be the Truck Segment, as all components of the Truck Segment are similar.
The impairment test for goodwill involves comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss. The second step includes hypothetically valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination and comparing the hypothetical implied fair value of the reporting unit’s goodwill to the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the hypothetical implied fair value of the goodwill, the Company would recognize an impairment loss in an amount equal to the excess, not to exceed the carrying amount. The Company determines the fair values calculated in an impairment test using the discounted cash flow method, which requires assumptions and estimates regarding future revenue, expenses and cash flow projections. The analysis is based upon available information regarding expected future cash flows of its reporting unit discounted at rates consistent with the cost of capital specific to the reporting unit.
No impairment write down was required in the fourth quarter of 2019. However, the Company cannot predict the occurrence of certain events that might adversely affect the reported value of goodwill in the future.
The following table sets forth the change in the carrying amount of goodwill for the Company for the years ended December 31, 2019 and 2018 (in thousands):
Balance December 31, 2018
|
|
$
|
291,391
|
|
Acquisitions
|
|
|
751
|
|
Balance December 31, 2019
|
|
$
|
292,142
|
|
Other Assets
ERP Platform
The total capitalized costs of the Company’s SAP enterprise resource planning software platform (“ERP Platform”) of $8.9 million are recorded on the Consolidated Balance Sheet in Other Assets. Amortization expense relating to the ERP Platform, which is recognized in depreciation and amortization expense in the Consolidated Statements of Income and Comprehensive Income, was $1.9 million for the year ended December 31, 2019 and $21.7 million for the year ended December 31, 2018. The Company estimates that amortization expense relating to the ERP Platform will be approximately $1.9 million for each of the next five years.
In the first quarter of 2018, as part of an assessment that involved a technical feasibility study of the then current ERP Platform, the Company determined that a majority of the components of this ERP Platform would require replacement earlier than originally anticipated; in prior disclosures, the Company had referred to the ERP Platform separately as the SAP enterprise software and SAP dealership management system. In accordance with Accounting Standards Codification (“ASC”) Topic 350-40, in the first quarter of 2018, the Company adjusted the useful life of these components that were replaced so that the respective net book values of the components were fully amortized upon replacement in May 2018. The Company amortized the remaining net book value of the components that were replaced on a straight-line basis in February 2018 through May 2018. The Company recorded amortization expense of $19.9 million in 2018 related to the components of the ERP Platform that were replaced. The ERP Platform asset and related amortization are reflected in the Truck Segment.
Franchise Rights
The Company’s only significant identifiable intangible assets, other than goodwill, are rights under franchise agreements with manufacturers. The fair value of the franchise right is determined at the acquisition date by discounting the projected cash flows specific to each acquisition. The carrying value of the Company’s manufacturer franchise rights was $7.0 million at December 31, 2019 and December 31, 2018, and is included in Other Assets on the accompanying Consolidated Balance Sheet. The Company has determined that manufacturer franchise rights have an indefinite life, as there are no economic or other factors that limit their useful lives and they are expected to generate cash flows indefinitely due to the historically long lives of the manufacturers’ brand names. Furthermore, to the extent that any agreements evidencing manufacturer franchise rights have expiration dates, the Company expects that it will be able to renew those agreements in the ordinary course of business. Accordingly, the Company does not amortize manufacturer franchise rights.
Due to the fact that manufacturer franchise rights are specific to geographic region, the Company has determined that evaluating and including all locations acquired in the geographic region is the appropriate level for purposes of testing franchise rights for impairment. Management reviews indefinite-lived manufacturer franchise rights for impairment annually during the fourth quarter, or more often if events or circumstances indicate that an impairment may have occurred. The Company is subject to financial statement risk to the extent that manufacturer franchise rights become impaired due to decreases in the fair market value of its individual franchises.
The significant estimates and assumptions used by management in assessing the recoverability of manufacturer franchise rights include estimated future cash flows, present value discount rate and other factors. Any changes in these estimates or assumptions could result in an impairment charge. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgment. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluations of manufacturer franchise rights can vary within a range of outcomes.
No impairment write down was required in the period presented. The Company cannot predict the occurrence of certain events that might adversely affect the reported value of manufacturer franchise rights in the future.
Equity Method Investment and Call Option
On February 25, 2019, the Company acquired a 50% equity interest in RTC Canada, which acquired the operating assets of Tallman Group, the largest International Truck dealer in Canada. The Company was also granted a call option in the purchase agreement that provides the Company with the right to acquire the remaining 50% equity interest in RTC Canada until the close of business on February 25, 2024. The value of the Company’s call option was $3.6 million as of December 31, 2019 and is reported in Other Assets on the Consolidated Balance Sheet.
On April 25, 2019, the Company entered into a Guaranty Agreement (“Guaranty”) with Bank of Montreal (“BMO”), pursuant to which the Company agreed to guaranty up to CAD250 million (the “Guaranty Cap”) of certain credit facilities entered into by and between Tallman Truck Centre Limited (“TTCL”) and BMO. The Company owned a 50% equity interest in TTCL, which was the sole owner of RTC Canada. Later in 2019, RTC Canada and TTCL were amalgamated into RTC Canada. Interest, fees and expenses incurred by BMO to enforce its rights with respect to the guaranteed obligations and its rights against the Company under the Guaranty are not subject to the Guaranty Cap. In exchange for the Guaranty, RTC Canada is receiving a reduced rate of interest on its credit facilities with BMO. The Guaranty was valued at $5.1 million as of December 31, 2019 and is included in the investment in RTC Canada. As of December 31, 2019, the Company’s investment in RTC Canada is $25.7 million. The Company’s equity income in RTC Canada is included in Other income on the Consolidated Statements of Income.
Income Taxes
Management’s 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 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.
In determining its provision for income taxes, the Company uses an annual effective income tax rate based on annual income, permanent differences between book and tax income, and statutory income tax rates. The effective income tax rate also reflects its assessment of the ultimate outcome of tax audits. The Company adjusts its annual effective income tax rate as additional information on outcomes or events becomes available. Discrete events such as audit settlements or changes in tax laws are recognized in the period in which they occur.
The Company’s income tax returns are periodically audited by tax authorities. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions. In evaluating the exposures associated with its various tax filing positions, the Company adjusts its 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.
The Company’s liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with its various filing positions. The Company’s effective income tax rate is also affected by changes in tax law, the level of earnings and the results of tax audits. Although the Company believes that the judgments and estimates are reasonable, actual results could differ, and the Company may be exposed to losses or gains that could be material. An unfavorable tax settlement would generally require use of the Company’s cash and result in an increase in its effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in the Company’s effective income tax rate in the period of resolution. The Company’s income tax expense includes the impact of reserve provisions and changes to reserves that it considers appropriate, as well as related interest.
Revenue Recognition Policies
Effective January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (“Topic 606”),” using the modified retrospective transition method. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under Topic 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations. The Company then assesses whether each promised good or service is distinct and recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. For a complete discussion of accounting for revenue, see Note 19 – Revenue of the Notes to Consolidated Financial Statements.
Cost of Sales
For the Company’s new and used commercial vehicle operations, cost of sales consists primarily of the Company’s actual purchase price, plus make-ready expenses, less any applicable manufacturers’ incentives. For the Company’s parts operations, cost of sales consists primarily of the Company’s actual purchase price, less any applicable manufacturers’ incentives. For the Company’s service and collision center operations, technician labor cost is the primary component of cost of sales. For the Company’s rental and leasing operations, cost of sales consists primarily of depreciation and amortization, rent, maintenance costs, license costs and interest expense on the lease and rental fleet owned and leased by the Company. There are no costs of sales associated with the Company’s finance and insurance revenue or other revenue.
Leases
The Company leases commercial vehicles and real estate under finance and operating leases. The Company determines whether an arrangement is a lease at its inception. For leases with terms greater than twelve months, the Company records a lease asset and liability at the present value of lease payments over the term. Many of the Company’s leases include renewal options and termination options that are factored into its determination of lease payments when appropriate.
When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of its leases do not provide a readily determinable implicit rate. Therefore, the Company must estimate its incremental borrowing rate to discount the lease payments based on information available at lease commencement.
The Company leases commercial vehicles that the Company owns to customers. Lease and rental revenue is recognized over the period of the related lease or rental agreement. Variable rental revenue is recognized when it is earned.
Taxes Assessed by a Governmental Authority
The Company accounts for sales taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction on a net (excluded from revenues) basis.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of incentive based compensation for sales, finance and general management personnel, salaries for administrative personnel and expenses for rent, marketing, insurance, utilities, research and development and other general operating purposes.
Stock Based Compensation
The Company applies the provisions of ASC topic 718-10, “Compensation – Stock Compensation,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including grants of employee stock options, restricted stock units, restricted stock awards and employee stock purchases under the Employee Stock Purchase Plan, based on estimated fair values.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods.
Compensation expense for all share-based payment awards is recognized using the straight-line single-option method. Stock-based compensation expense is recognized based on awards expected to vest. Accordingly, stock based compensation expense has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include the Company’s expected stock price volatility over the term of the awards and actual and projected stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s stock options have characteristics that are significantly different from traded options and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation models may not provide an accurate measure of the fair value that value may not be indicative of the fair value observed in a market transaction between a willing buyer and a willing seller.
The following table reflects the weighted-average fair value of stock options granted during each period using the Black-Scholes option valuation model with the following weighted-average assumptions used:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Expected stock volatility
|
|
|
31.29
|
%
|
|
|
31.68
|
%
|
|
|
33.54
|
%
|
Weighted-average stock volatility
|
|
|
31.29
|
%
|
|
|
31.68
|
%
|
|
|
33.54
|
%
|
Expected dividend yield
|
|
|
1.13
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Risk-free interest rate
|
|
|
2.45
|
%
|
|
|
2.69
|
%
|
|
|
2.17
|
%
|
Expected life (years)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Weighted-average fair value of stock options granted
|
|
$
|
12.56
|
|
|
$
|
15.46
|
|
|
$
|
12.33
|
|
The Company computes its historical stock price volatility in accordance with ASC Topic 718-10. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The expected life of stock options represents the weighted-average period the stock options are expected to remain outstanding.
Advertising Costs
Advertising costs are expensed as incurred. Advertising and marketing expense was $11.5 million for 2019, $10.4 million for 2018 and $9.5 million for 2017. Advertising and marketing expense is included in selling, general and administrative expense.
Accounting for Internal Use Software
The Company’s accounting policy with respect to accounting for computer software developed or obtained for internal use is consistent with ASC topic 350-40, which provides guidance on accounting for the costs of computer software developed or obtained for internal use and identifies characteristics of internal-use software. The Company has capitalized software costs, including capitalized interest, of approximately $8.9 million at December 31, 2019, net of accumulated amortization of $10.2 million, and had $10.8 million, net of accumulated amortization of $8.3 million at December 31, 2018.
Insurance
The Company is partially self-insured for a portion of the claims related to its property and casualty insurance programs. Accordingly, the Company is required to estimate expected losses to be incurred. The Company engages a third-party administrator to assess any open claims and the Company adjusts its accrual accordingly on an annual basis. The Company is also partially self-insured for a portion of the claims related to its worker’s compensation and medical insurance programs. The Company uses 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.
Fair Value Measurements
The Company has various financial instruments that it must measure at fair value on a recurring basis. See Note 9 – Financial Instruments and Fair Value of the Notes to Consolidated Financial Statements, for further information. The Company also applies the provisions of fair value measurement to various nonrecurring measurements for its financial and nonfinancial assets and liabilities.
Applicable accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The Company measures its assets and liabilities using inputs from the following three levels of the fair value hierarchy:
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 includes unobservable inputs that reflect the Company’s assumptions about what factors market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.
Acquisitions
The Company uses the acquisition method of accounting for the recognition of assets acquired and liabilities assumed through acquisitions at their estimated fair values as of the date of acquisition. Any excess consideration transferred over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. While the Company uses its best estimates and assumptions to measure the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which is not to exceed one year from the date of acquisition, any changes in the estimated fair values of the net assets recorded for the acquisitions will result in an adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Consolidated Statements of Income.
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)," which modifies the measurement of expected credit losses of certain financial instruments. Credit losses on trade and other receivables, held-to-maturity debt securities, and other instruments will reflect the Company's current estimate of the expected credit losses and will generally result in the earlier recognition of allowance for losses. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company will adopt the standard effective January 1, 2020. The Company is currently evaluating the impact of and approach to adopting this new accounting guidance and does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
3.
|
SUPPLIER CONCENTRATION:
|
Major Suppliers and Dealership Agreements
The Company has entered into dealership agreements with various manufacturers of commercial vehicles and buses (“Manufacturers”). These agreements are nonexclusive agreements that allow the Company to stock, sell at retail and service commercial vehicles and sell parts from the Manufacturers in the Company’s defined market. The agreements allow the Company to use the Manufacturers’ names, trade symbols and intellectual property and expire as follows:
Manufacturer
|
|
Expiration Dates
|
Peterbilt
|
|
November 2021 through September 2022
|
International
|
|
May 2020 through January 2024
|
Isuzu
|
|
Indefinite
|
Hino
|
|
Indefinite
|
Ford
|
|
Indefinite
|
FUSO
|
|
February 2020 through August 2023
|
Blue Bird
|
|
August 2024
|
IC Bus
|
|
May 2020 through December 2022
|
These agreements, as well as agreements with various other Manufacturers, impose a number of restrictions and obligations on the Company, including restrictions on a change in control of the Company and the maintenance of certain required levels of working capital. Violation of these restrictions could result in the loss of the Company’s right to purchase the Manufacturers’ products and use the Manufacturers’ trademarks.
The Company purchases its new Peterbilt vehicles from Peterbilt and most of the parts sold at its Peterbilt dealerships from PACCAR, Inc, the parent company of Peterbilt, at prevailing prices charged to all franchised dealers. Sales of new Peterbilt trucks accounted for approximately 61.6% of the Company’s new vehicle sales revenue for the year ended December 31, 2019, 62.5% of the Company’s new vehicle sales revenue for the year ended December 31, 2018, and 65.2% of the Company’s new vehicle sales revenue for the year ended December 31, 2017.
Primary Lenders
The Company purchases its new and used commercial vehicle inventories with the assistance of floor plan financing programs as described in Note 7 to these Notes to Consolidated Financial Statements. The Company’s floor plan financing agreements provide that the occurrence of certain events will be considered events of default. In the event that the Company’s floor plan financing becomes insufficient, or its relationship with any of its current primary lenders terminates, the Company would need to obtain similar financing from other sources. Management believes it can obtain additional floor plan financing or alternative financing if necessary.
The Company also acquires lease and rental vehicles with the assistance of financing agreements with PACCAR Leasing Company, Bank of America and Wells Fargo. The financing agreements are secured by a lien on the acquired vehicle. The terms of the financing agreements are similar to the corresponding lease agreements with the Company’s customers.
Concentrations of Credit Risks
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with what it considers to be quality financial institutions based on periodic assessments of such institutions. The Company’s cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.
The Company controls credit risk through credit approvals and by selling a majority of its trade receivables, other than vehicle accounts receivable, without recourse. Concentrations of credit risk with respect to trade receivables are reduced because a large number of geographically diverse customers make up the Company’s customer base; however, substantially all of the Company’s business is concentrated in the United States commercial vehicle markets and related aftermarkets.
The Company generally sells finance contracts it enters into with customers to finance the purchase of commercial vehicles to third parties. These finance contracts are sold by the Company both with and without recourse. A majority of the Company’s finance contracts are sold without recourse. The Company provides an allowance for doubtful receivables and a reserve for repossession losses related to finance contracts sold with recourse. Historically, the Company’s allowances and reserves have covered losses inherent in these receivables.
The Company’s accounts receivable, net, consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable from sale of vehicles
|
|
$
|
82,991
|
|
|
$
|
100,013
|
|
Trade receivables other than vehicles
|
|
|
68,376
|
|
|
|
60,716
|
|
Warranty claims
|
|
|
16,819
|
|
|
|
10,427
|
|
Other accounts receivable
|
|
|
16,942
|
|
|
|
20,910
|
|
Less allowance for bad debt and warranty claims
|
|
|
(1,424
|
)
|
|
|
(1,416
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
183,704
|
|
|
$
|
190,650
|
|
The Company’s inventories, net, consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
New commercial vehicles
|
|
$
|
967,785
|
|
|
$
|
976,464
|
|
Used commercial vehicles
|
|
|
84,610
|
|
|
|
96,126
|
|
Parts and accessories
|
|
|
273,185
|
|
|
|
259,396
|
|
Other
|
|
|
17,763
|
|
|
|
19,573
|
|
Less allowance
|
|
|
(17,263
|
)
|
|
|
(11,636
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,326,080
|
|
|
$
|
1,339,923
|
|
Valuation and allowance accounts include the following (in thousands):
|
|
Balance
Beginning
of Year
|
|
|
Net
Charged to
Costs and
Expenses
|
|
|
Net Write-
Offs
|
|
|
Balance
End
of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for accounts receivable
|
|
$
|
987
|
|
|
$
|
2,065
|
|
|
$
|
(2,038
|
)
|
|
$
|
1,014
|
|
Reserve for warranty receivables
|
|
|
429
|
|
|
|
1,661
|
|
|
|
(1,680
|
)
|
|
|
410
|
|
Reserve for parts inventory
|
|
|
7,050
|
|
|
|
4,460
|
|
|
|
(3,849
|
)
|
|
|
7,661
|
|
Reserve for commercial vehicle inventory
|
|
|
4,587
|
|
|
|
12,489
|
|
|
|
(7,474
|
)
|
|
|
9,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for accounts receivable
|
|
$
|
616
|
|
|
$
|
2,183
|
|
|
$
|
(1,812
|
)
|
|
$
|
987
|
|
Reserve for warranty receivables
|
|
|
210
|
|
|
|
2,031
|
|
|
|
(1,812
|
)
|
|
|
429
|
|
Reserve for parts inventory
|
|
|
6,230
|
|
|
|
2,744
|
|
|
|
(1,924
|
)
|
|
|
7,050
|
|
Reserve for commercial vehicle inventory
|
|
|
5,953
|
|
|
|
3,550
|
|
|
|
(4,916
|
)
|
|
|
4,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for accounts receivable
|
|
$
|
549
|
|
|
$
|
625
|
|
|
$
|
(558
|
)
|
|
$
|
616
|
|
Reserve for warranty receivables
|
|
|
114
|
|
|
|
713
|
|
|
|
(617
|
)
|
|
|
210
|
|
Reserve for parts inventory
|
|
|
4,885
|
|
|
|
1,414
|
|
|
|
(69
|
)
|
|
|
6,230
|
|
Reserve for commercial vehicle inventory
|
|
|
5,102
|
|
|
|
5,997
|
|
|
|
(5,146
|
)
|
|
|
5,953
|
|
Allowance for Doubtful Receivables
The Company sells a majority of its customer accounts receivable on a non-recourse basis to a third-party that is responsible for qualifying the customer for credit at the point of sale. If the third-party approves the customer for credit, then the third-party assumes all credit risk related to the transaction. For accounts receivable that the Company does not sell or that are sold with recourse to the Company, an allowance for doubtful receivables is provided after considering historical loss experience and other factors that might affect the collection of such accounts receivable.
The Company provides an allowance for uncollectible warranty receivables. The Company evaluates the collectability of its warranty claims receivable based on a combination of factors, including aging and correspondence with the applicable manufacturer. Management reviews the warranty claims receivable aging and adjusts the allowance based on historical experience. The Company records charge-offs related to warranty receivables after it is determined that a receivable will not be fully collected.
Inventory
The Company provides a reserve for obsolete and slow moving parts. The reserve is reviewed and, if necessary, adjustments are made on a quarterly basis. The Company relies on historical information to support its reserve. Once the inventory is written down, the Company does not reverse any reserve balance until the inventory is sold.
The valuation for new and used commercial vehicle inventory is based on specific identification. A detail of new and used commercial vehicle inventory is reviewed and, if necessary, adjustments to the value of specific vehicles are made on a quarterly basis.
7.
|
FLOOR PLAN NOTES PAYABLE AND LINES OF CREDIT:
|
Floor Plan Notes Payable
Floor plan notes are financing agreements to facilitate the Company’s purchase of new and used commercial vehicle inventory. These notes are collateralized by the inventory purchased and accounts receivable arising from the sale thereof. The Company’s Floor Plan Credit Agreement provides for a loan commitment of up to $1.0 billion and has the interest rate benchmarked to LIBOR, as defined in the agreement. The interest rate under the Company’s Floor Plan Credit Agreement is the one month LIBOR rate plus 1.25%. The interest rate applicable to the Company’s Floor Plan Credit Agreement was approximately 2.95% at December 31, 2019. The Company utilizes its excess cash on hand to pay down its outstanding borrowings under its Floor Plan Credit Agreement, and the resulting interest earned is recognized as an offset to the Company’s gross interest expense under the Floor Plan Credit Agreement. The Company is required to pay a monthly working capital fee equal to 0.16% per annum multiplied by the amount of voluntary prepayments of new and used inventory loans.
The Company finances substantially all of the purchase price of its new commercial vehicle inventory and the loan value of its used commercial vehicle inventory under its Floor Plan Credit Agreement, under which BMO Harris pays the manufacturer directly with respect to new commercial vehicles. Amounts borrowed under the Company’s Floor Plan Credit Agreement are due when the related commercial vehicle inventory (collateral) is sold and the sales proceeds are collected by the Company. The Company’s Floor Plan Credit Agreement expires June 30, 2022, although BMO Harris has the right to terminate the Floor Plan Credit Agreement at any time upon 360 days written notice and the Company may terminate at any time, subject to specified limited exceptions. On December 31, 2019, the Company had approximately $846.8 million outstanding under its Floor Plan Credit Agreement.
In June 2012, the Company entered into a wholesale financing agreement with Ford Motor Credit Company that provides for the financing of, and is collateralized by, the Company’s new Ford vehicle inventory. This wholesale financing agreement bears interest at a rate of Prime plus 150 basis points minus certain incentives and rebates. As of December 31, 2019, the interest rate on the wholesale financing agreement was 6.25% before considering the applicable incentives that the Company is qualified to receive. On December 31, 2019, the Company had an outstanding balance of approximately $115.0 million under the Ford Motor Credit Company wholesale financing agreement.
The Company’s weighted average interest rate for floor plan notes payable was 2.6% for the year ended December 31, 2019, and 1.9% for the year ended December 31, 2018, which is net of interest related to prepayments of new and used inventory loans.
Assets pledged as collateral were as follows (in thousands):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Inventories, new and used vehicles at cost based on specific identification, net of allowance
|
|
$
|
1,042,794
|
|
|
$
|
1,068,003
|
|
Vehicle sale related accounts receivable
|
|
|
74,907
|
|
|
|
100,013
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,117,701
|
|
|
$
|
1,168,016
|
|
|
|
|
|
|
|
|
|
|
Floor plan notes payable related to vehicles
|
|
$
|
996,336
|
|
|
$
|
1,023,019
|
|
Lines of Credit
The Company has 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, 2019; however, $12.3 million was pledged to secure various letters of credit related to self-insurance products, leaving $5.2 million available for future borrowings as of December 31, 2019.
The Company’s Working Capital Facility with BMO Harris includes up to $100.0 million of revolving credit loans available to it for working capital, capital expenditures and other general corporate purposes. The amount of the borrowings under the Working Capital Facility are subject to borrowing base limitations based on the value of the Company’s eligible parts inventory and company vehicles. The Working Capital Facility includes a $20 million letter of credit sublimit. Borrowings under the Working Capital Facility bear interest at rates based on LIBOR or the Base Rate (as such terms are defined in the Working Capital Facility), plus an applicable margin determined based on outstanding borrowing under the Working Capital Facility. In addition, the Company is required to pay a commitment fee on the amount unused under the Working Capital Facility. The Working Capital Facility expires on the earlier of (i) March 21, 2020 and (ii) the date on which all commitments under the Working Capital Facility shall have terminated, whether as a result of the occurrence of the Commitment Termination Date (as defined in the Working Capital Facility) or otherwise. There were no advances outstanding under the Working Capital Facility as of December 31, 2019.
Long-term debt was comprised of the following (in thousands):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Variable interest rate term notes
|
|
$
|
58,416
|
|
|
$
|
80,355
|
|
Fixed interest rate term notes
|
|
|
569,262
|
|
|
|
520,818
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
627,678
|
|
|
|
601,173
|
|
|
|
|
|
|
|
|
|
|
Less: current maturities
|
|
|
(189,265
|
)
|
|
|
(161,955
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt, net of current maturities
|
|
$
|
438,413
|
|
|
$
|
439,218
|
|
As of December 31, 2019, long-term debt maturities were as follows (in thousands):
2020
|
|
|
189,265
|
|
2021
|
|
|
127,557
|
|
2022
|
|
|
115,337
|
|
2023
|
|
|
96,053
|
|
2024
|
|
|
66,424
|
|
Thereafter
|
|
|
33,042
|
|
|
|
|
|
|
Total
|
|
$
|
627,678
|
|
The interest rates on the Company’s variable interest rate notes are based on various LIBOR benchmark rates. The interest rates on the notes ranged from approximately 3.3% to 3.7% on December 31, 2019. Payments on the notes range from approximately $5,330 to $125,833 per month, plus interest. Maturities of these notes range from June 2020 to June 2025.
The Company’s fixed interest rate notes had interest rates that ranged from approximately 3.0% to 7.6% on December 31, 2019. Payments on the notes range from $255 to $72,315 per month. Maturities of these notes range from January 2020 to May 2029.
The proceeds from the issuance of the notes were used primarily to acquire land, buildings and improvements and vehicles for the Company’s lease and rental fleet. The notes are secured by the assets acquired with the proceeds of such notes.
The Company’s long-term real estate debt agreements, floor plan financing arrangements and the Working Capital Facility require the Company to satisfy various financial ratios such as the debt to worth ratio, leverage ratio, the fixed charge coverage ratio and certain requirements for tangible net worth and GAAP net worth. As of December 31, 2019, the Company was in compliance with all debt covenants. The Company does not anticipate any breach of the covenants in the foreseeable future.
9.
|
FINANCIAL INSTRUMENTS AND FAIR VALUE:
|
The Company measures certain financial assets and liabilities at fair value on a recurring basis. Financial instruments consist primarily of cash, accounts receivable, accounts payable and floor plan notes payable. The carrying values of the Company’s financial instruments approximate fair value due either to their short-term nature or existence of variable interest rates, which approximate market rates. Certain methods and assumptions were used by the Company in estimating the fair value of financial instruments at December 31, 2019, and 2018. The carrying value of current assets and current liabilities approximates the fair value due to the short maturity of these items.
The fair value of the Company’s long-term debt is based on secondary market indicators. Because the Company’s debt is not quoted, estimates are based on each obligation’s characteristics, including remaining maturities, interest rate, credit rating, collateral and liquidity. Accordingly, the Company concluded that the valuation measurement inputs of its long-term debt represent, at its lowest level, current market interest rates available to the Company for similar debt and the Company’s current credit standing. The Company has categorized such debt within Level 2 of the hierarchy framework. The carrying amount approximates fair value.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (“Topic 842”),” which was 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. The standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than twelve months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
A lease is classified as a finance lease if any of the following conditions exist on the date of lease commencement:
|
●
|
The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
|
|
●
|
The lease provides the lessee an option to purchase the underlying asset, and that option is reasonably certain to be exercised.
|
|
●
|
The lease term is for the major part of the remaining economic life of the underlying asset.
|
|
●
|
The present value of the lease payments equals or exceeds substantially all of the fair value of the underlying asset.
|
|
●
|
The underlying asset is of such a specialized nature that only the lessee can use it without major modifications.
|
|
●
|
The lessor expects to have no alternative use for the leased asset at the end of the lease.
|
The Company adopted Topic 842 on January 1, 2019. The Company applied a modified retrospective transition approach for all leases existing at, or entered into after, January 1, 2019. The Consolidated Financial Statements for the year ended December 31, 2019 are presented under the new standard, while the comparative years ended December 31, 2018 and 2017 are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy. The Company applied the practical expedients permitted within Topic 842, which among other things, allows it to retain its existing assessment of whether an arrangement is, or contains, a lease and whether such lease is classified as an operating or finance lease. The Company made an accounting policy election that keeps leases with an initial term of twelve months or less off of the balance sheet and results in recognizing those lease payments in the Consolidated Statements of Income and Comprehensive Income on a straight-line basis over the lease term.
The Company leases commercial vehicles and real estate under finance and operating leases. The Company determines whether an arrangement is a lease at its inception. For leases with terms greater than twelve months, the Company records the related asset and obligation at the present value of lease payments over the term. Many of the Company’s leases include renewal options and/or termination options that are factored into its determination of lease payments when appropriate. The Company has elected not to account for lease and nonlease components as a single combined lease component as lessee.
When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of its leases do not provide a readily determinable implicit rate. Therefore, the Company must estimate its incremental borrowing rate to discount the lease payments based on information available at lease commencement.
Lease of Vehicles as Lessee
The Company leases commercial vehicles as the lessee under finance leases and operating leases. The lease terms vary from one month to ten years. Commercial vehicle finance leases continue to be reported on the Consolidated Balance Sheet, while operating leases were added to the Consolidated Balance Sheet in 2019 with the adoption of Topic 842. These vehicles are then subleased or rented by the Company to customers under various agreements. The Company received sublease income under non-cancelable subleases of $24.0 million for the year ended December 31, 2019.
The Company usually guarantees the residual value of vehicles under operating lease and finance lease arrangements. At December 31, 2019, the Company guaranteed commercial vehicle residual values of approximately $49.2 million under operating lease and finance lease arrangements.
Lease of Facilities as Lessee
The Company’s facility leases are classified as operating leases and primarily reflect its use of dealership facilities and office space. The lease terms vary from one year to 88 years, some of which include options to extend the lease term, and some of which include options to terminate the lease within one year. The Company considers these options in determining the lease term used to establish its right-of-use assets and lease liabilities.
Components of lease cost are as follows (in thousands):
|
|
|
|
Twelve Months
Ended
|
|
Component
|
|
Classification
|
|
December 31,
2019
|
|
Operating lease cost
|
|
SG&A expense
|
|
$
|
13,633
|
|
Finance lease cost – amortization of right-of-use assets
|
|
Lease and rental cost of products sold
|
|
|
14,312
|
|
Finance lease cost – interest on lease liabilities
|
|
Lease and rental cost of products sold
|
|
|
3,372
|
|
Short-term lease cost
|
|
SG&A expense
|
|
|
594
|
|
Supplemental cash flow information and non-cash activity related to operating and finance leases are as follows (in thousands):
|
|
Twelve Months
Ended
|
|
|
|
December 31,
2019
|
|
Operating cash flow information:
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
17,005
|
|
Financing cash flow information:
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
8,331
|
|
Non-cash activity:
|
|
|
|
|
Operating lease right-of-use assets obtained in exchange for lease obligations
|
|
$
|
57,197
|
|
Weighted-average remaining lease term and discount rate for operating and finance leases as of December 31, 2019 are as follows:
Weighted-average remaining lease term (in months)
|
|
|
70
|
|
Weighted-average discount rate
|
|
|
4.6
|
%
|
Maturities of lease liabilities by fiscal year for finance leases and operating leases as of December 31, 2019 are as follows (in thousands):
|
|
Finance
Leases
|
|
|
Operating
Leases
|
|
2020
|
|
$
|
26,670
|
|
|
$
|
11,471
|
|
2021
|
|
|
20,865
|
|
|
|
10,960
|
|
2022
|
|
|
17,064
|
|
|
|
9,855
|
|
2023
|
|
|
12,341
|
|
|
|
8,363
|
|
2024
|
|
|
13,663
|
|
|
|
8,218
|
|
2025 and beyond
|
|
|
13,678
|
|
|
|
25,643
|
|
Total lease payments
|
|
$
|
104,281
|
|
|
$
|
74,510
|
|
Less: Imputed interest
|
|
|
(11,911
|
)
|
|
|
(16,841
|
)
|
Present value of lease liabilities
|
|
$
|
92,370
|
|
|
$
|
57,669
|
|
Lease of Vehicles as Lessor
The Company leases commercial vehicles that the Company owns to customers primarily over periods of one to ten years. The Company applied the practical expedient permitted within Topic 842 that allows it not to separate lease and nonlease components. Nonlease components typically consist of maintenance and licensing for the commercial vehicle. The variable nonlease components are generally based on mileage. Some leases contain an option for the lessee to purchase the commercial vehicle.
The Company’s policy is to depreciate its 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.
Sales-type leases are recognized by the Company as lease receivables. The lessee obtains control of the underlying asset and the Company recognizes sales revenue upon lease commencement. The receivable for sales-type leases at December 31, 2019 in the amount of $5.6 million is reflected in Other Assets on the Consolidated Balance Sheet.
Minimum rental payments to be received for non-cancelable leases and subleases in effect as of December 31, 2019, are as follows (in thousands):
2020
|
|
$
|
129,595
|
|
2021
|
|
|
102,574
|
|
2022
|
|
|
78,244
|
|
2023
|
|
|
56,089
|
|
2024
|
|
|
34,524
|
|
Thereafter
|
|
|
19,555
|
|
Total
|
|
$
|
420,581
|
|
Rental income during the year ended December 31, 2019, and 2018, consisted of the following (in thousands):
|
|
2019
|
|
|
2018
|
|
Minimum rental payments
|
|
$
|
215,288
|
|
|
$
|
206,528
|
|
Nonlease payments
|
|
|
32,261
|
|
|
|
31,710
|
|
Total
|
|
$
|
247,549
|
|
|
$
|
238,238
|
|
As of December 31, 2018, minimum lease payments under non-cancelable finance leases and operating leases by period were expected to be as follows (in thousands):
|
|
Finance
Leases
|
|
|
Operating
Leases
|
|
2019
|
|
$
|
22,033
|
|
|
$
|
12,295
|
|
2020
|
|
|
19,113
|
|
|
|
10,466
|
|
2021
|
|
|
14,894
|
|
|
|
8,190
|
|
2022
|
|
|
11,062
|
|
|
|
7,078
|
|
2023
|
|
|
5,095
|
|
|
|
5,196
|
|
Thereafter
|
|
|
2,963
|
|
|
|
22,463
|
|
Total lease payments
|
|
$
|
75,160
|
|
|
$
|
65,688
|
|
Less: Imputed interest
|
|
|
(6,046
|
)
|
|
|
|
|
Present value of lease liabilities
|
|
$
|
69,114
|
|
|
|
|
|