SEC Company Response from RUSH ENTERPRISES INC \TX\ (RUSHA, RUSHB) (CIK 0001012019) (RUSHA) — Mar 10, 2017
RUSH ENTERPRISES INC \TX\ (RUSHA, RUSHB) (CIK 0001012019)
Date: March 10, 2017 · CIK: 0001012019 · Accession: 0001437749-17-004311
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 000-20797
Referenced dates: February 2, 2017
Letter
Via EDGAR Division of Corporation Finance Rush Enterprises, Inc. Form 10-K for the Fiscal Year Ended December 31, 2015 Filed February 29, 2016 File No. 000-20797
Dear Ms. Thompson:
On behalf of Rush Enterprises, Inc. (the “Company”), set forth below are the Company’s responses to comments received from the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”), by letter dated February 2, 2017. For your convenience, the text of the Staff’s comments is set forth below in bold followed by the Company’s responses.
Introduction:
Our nationwide dealership network is designed to be a one-stop source for all of the commercial vehicle needs of our customers. The Company considers its “(1) Parts, Service and Body Shop, (2) Finance, Insurance and Leasing and (3) Retail Sales and Marketing operations,” (collectively, the “Dealership Departments”) as integrated products/services delivered by the Company’s nationwide dealership network. The Company’s Chief Operating Decision Maker, W.M. “Rusty” Rush (our “CODM”), does not assess or make decisions about the allocation of resources to the Dealership Departments separately, in large part due to our contractual obligations to maintain certain of the Dealership Departments in our dealer agreements and the interdependent nature of the Dealership Departments.
One of the most important operating decisions made by our CODM is the determination of which manufacturers the Company will represent. Our CODM considers the requirements to maintain Dealership Departments when making these key operating decisions.
Our dealer agreements contractually obligate us to offer new commercial vehicle sales, parts sales and service operations within our areas of operation. As a result of those agreements, our Dealership Departments are economically dependent upon each other. If we do not sell or lease commercial vehicles, we will not be able to effectively sell parts or perform service. For example, our failure to effectively provide parts and service support for our customers could result in excessive downtime for our customers or noncompliance with our dealer agreements, either of which would result in the loss of commercial vehicle sales. As a result of the interrelated economic dependence of the Dealership Departments, which are both contractual and practical in nature, our CODM cannot make decisions about any Dealership Department without considering the impact such a decision would have on the other Dealership Departments.
U.S. Securities and Exchange Commission Division of Corporation Finance
March 10, 2017
Page 2 of 9
Further, the only operating metric used by the CODM to make key operating decisions and allocate resources is operating income. The volume, sale prices, and cost of many of our commercial vehicle sales to national customers are heavily influenced by our manufacturers. Those are the most significant components of gross margin. The significant costs that are below gross margin include items that affect an entire dealership and not individual Dealership Departments, such as personnel, advertising and facility related expenses. Thus, the key decisions made by the CODM are decisions that affect costs for the Truck Segment as a whole.
Our CODM does not assess the performance of, or make decisions about the allocation of resources to, the Dealership Departments separately due to the nature of the financial information that he receives for the Dealership Departments. We do not prepare discrete financial statements after gross profit for the Dealership Departments. Generally, all of the product and service categories within a dealership share the same facility and are supported by common dealership management. Gross profit is only one component of operating profit and it can be misleading due to the interrelated nature of the Truck Segment, as discussed herein.
For example, we may sell 1,000 commercial vehicles to a national account customer at 1% gross margin (versus normal margins of 6-7%), but we may be awarded $10,000 of parts and service work for each new commercial vehicle prior to its delivery to the customer. If our CODM reviewed the Monthly Vehicle Gross Profit Report (discussed below) on its own, he might draw the conclusion that commercial vehicle gross margins are deteriorating and make an uninformed resource allocation decision related to the Retail Sales and Marketing operations. If he reviewed the Daily Total Backend Unadjusted Gross Profit Per Day Report (discussed below) on its own, it might appear that the parts and service business is experiencing a positive trend when in fact, the increase is the result of one commercial vehicle sales deal. A transaction of this nature is structured to enhance the operating income of the Truck Segment and not an individual Dealership Department, which is why our CODM primarily utilizes operating income in the Monthly Operating Income and Overhead Expense Report (discussed below) to make resource allocation decisions for the Truck Segment. Our CODM is intimately aware of the interdependent relationship of the Dealership Departments, which are interdependent both because of our dealer agreements and the nature of our nationwide dealership network and national account base. For this reason, operating income on a Truck Segment basis is the only metric that he can effectively rely on to assess the performance of the Dealership Departments and to allocate resources to the Dealership Departments.
Although our organizational structure is based on the Dealership Departments, this structure is solely related to facilitating personnel management. We have many employees who have responsibilities across multiple components of our Dealership Departments. For example, we have national accounts sales personnel who sell commercial vehicles to key customers, but also sell parts and service to these same customers. The integrated and interdependent nature of our business leads to discussions between our CODM and each of the Company’s Senior Vice Presidents that cross into many areas of the Company’s operations and not just their particular area of responsibility.
Responses to the Staff’s Comments:
Financial Statements and Supplementary Data
Note 18. Segments, page 73
U.S. Securities and Exchange Commission Division of Corporation Finance
March 10, 2017
Page 3 of 9
1.
We note your response to comment 1. In order to assist us in evaluating your response and your disclosures, please provide the following information:
•
We note that your CODM reviews monthly and daily trend reports of multiple metrics. Please explain in reasonable detail the specific metrics he reviews and how he utilizes this information.
Response:
On a monthly basis, our CODM reviews several reports to formulate an overall assessment of the Truck Segment’s operations The primary report that our CODM utilizes in making key operating decisions for the Truck Segment is the Monthly Operating Income and Overhead Expense Report, which includes the total operating income and total overhead expenses for the Company for the current month and the two prior months. This report provides operating income and total overhead expenses for each of the Company’s dealerships and other operating segments (which do not meet the quantitative thresholds to be reportable segments). However, our CODM focuses his review on the total operating income at the Truck Segment level. Our CODM utilizes the Monthly Operating Income and Overhead Expense Report and the other reports described below in order to monitor business activity for any potential change in the direction the Company’s Truck Segment business is trending.
In addition to the Monthly Operating Income and Overhead Expense Report discussed above, the other reports and associated metrics our CODM reviews on a monthly basis are as follows:
1.
Monthly New Commercial Vehicle Gross Profit – This report shows the total gross profit on new commercial vehicle sales for the trailing 13 months. It includes subtotals for Heavy-Duty, Medium-Duty, Light-Duty, Bus and other.
2.
Monthly New Commercial Vehicle Unit Sales – This report shows the total unit sales of new commercial vehicles for the trailing 13 months. It includes subtotals for Heavy-Duty, Medium-Duty, Light-Duty, Bus and other.
3.
Monthly Used Commercial Vehicle Gross Profit – This report shows the total gross profit on used commercial vehicle sales for the trailing 13 months. It includes subtotals for Heavy-Duty, Medium-Duty, Light-Duty, Bus and other.
4.
Monthly Used Commercial Vehicle Unit Sales – This report shows the total unit sales of used commercial vehicles for the trailing 13 months. It includes subtotals for Heavy-Duty, Medium-Duty, Light-Duty, Bus and other.
5.
Daily Total Backend Unadjusted Gross Profit Per Day – This reports the total daily gross profit from all of the Company’s parts, service and body shop operations for each working day of the current month and each working day of the trailing three months.
U.S. Securities and Exchange Commission Division of Corporation Finance
March 10, 2017
Page 4 of 9
As we explained in our prior response letter, our CODM allocates resources and assesses the Company’s financial performance on a Truck Segment basis. Although our CODM reviews each of the monthly and daily reports described above consisting of multiple metrics to understand both current and developing market conditions, the key metric that our CODM utilizes to review performance and make decisions regarding the allocation of resources is the operating income on a Truck Segment basis. For the reasons discussed above in the introduction, gross profit on a Dealership Department basis is not a useful measure of the Company’s business for making resource allocation decisions, nor are unit sales by themselves, and thus, they cannot be relied upon by our CODM to assess performance or allocate resources. Accordingly, other than the Monthly Operating Income and Overhead Expense Report, none of the other five reports described above stand on their own as useful means to assess performance or allocate resources, but are simply parts of the overall picture that our CODM uses to assess trends that may impact the operating income of the Truck Segment.
•
We note that you have Senior Vice Presidents who report directly to your CODM for each of your (1) Parts, Service and Body Shop, (2) Finance, Insurance and Leasing and (3) Retail Sales and Marketing operations. We also note that your CODM reviews certain financial information, including monthly unit sales and gross profit for vehicle sales and daily gross profit on parts service and body shop sales, prior to his monthly one-on-one meetings with these individuals and that each of these individuals discusses “the overall operations of the dealership network that they oversee.” Please tell us the nature of the specific dealership operations each of these individuals discusses with the CODM in their separate monthly meetings. For example, clarify if the Senior Vice President for Parts, Service and Body Shop operations discusses overall operations of the dealership network, including the Finance, Insurance and Leasing and Retail Sales and Marketing operations, or primarily just the operations he is directly responsible for managing. Also tell us whether each of these individuals discusses any financial information of the dealership network with the CODM and if so, describe to us the specific financial information each discusses.
Response:
The purpose of these meetings is to enable our CODM to maintain his awareness of general market conditions and make more informed resource allocation decisions to the Truck Segment. These are informal meetings without a pre-set agenda. Although our CODM meets with these Senior Vice Presidents to discuss the operations of the Dealership Departments that they oversee, the interdependent nature of the Company’s dealership network generally necessitates that our CODM and each of these Senior Vice Presidents discuss a number of subjects that are outside the scope of that particular person’s direct responsibility and are related to the overall operations of the Company’s national dealership network. For example, if a customer who routinely purchases new commercial vehicles from the Company is having issues with the amount of time its drivers are having to wait to get service at our dealerships or the customer routinely has problems obtaining replacement parts in a timely manner, this can ultimately result in an adverse impact on our commercial vehicle sales. This is because the amount of service downtime our customers have is an increasingly significant basis for their commercial vehicle purchase decisions. Therefore, it is not unusual for our CODM to discuss parts and service operations with the Senior Vice President who oversees commercial vehicle sales efforts. In addition, because the parts and service needs of our leasing operations are largely captive to our dealership network’s parts and service operations, the Senior Vice President who is responsible for leasing often discusses parts and service operations with our CODM.
U.S. Securities and Exchange Commission Division of Corporation Finance
March 10, 2017
Page 5 of 9
Michael J. McRoberts serves as Senior Vice President and Chief Operating Officer of the Company. Mr. McRoberts oversees the Company’s parts, service and body shop operations across its dealership network and the General Managers of all of the Company’s dealership network, except for leasing managers, report up through Mr. McRoberts. When Mr. McRoberts meets with our CODM in his separate monthly meeting, they discuss the parts, service and body shop operations of the Company’s dealership network, but they also discuss other operational issues related to the Company’s dealership network. During these meetings, they discuss the finance, insurance, leasing and rental and commercial vehicle sales operations because these operations are dependent upon parts service and body shop operations and vice versa. For example, each new commercial vehicle sold by one of our dealerships must receive a pre-delivery inspection in one of our dealerships’ service department before it can be delivered. The delivery of a large quantity of new commercial vehicles requires coordination between commercial vehicle sales personnel and service personnel to ensure that the pre-delivery inspections are performed in a timely manner and our customer’s delivery requirements are met. Additionally, the service departments of our dealerships perform a significant amount of warranty work, which requires replacement parts from our parts departments. The parts and service departments at our dealerships are dependent upon the new commercial vehicle sales department to regularly sell commercial vehicles covered by manufacturers’ warranties to maintain a steady flow of warranty work. The fact that almost all of the personnel who work in the Company’s dealerships report up through Mr. McRoberts requires Mr. McRoberts and our CODM to discuss the finance, insurance and commercial vehicles sales operations in their monthly meetings. In Mr. McRoberts’ monthly meetings with our CODM, the financial information that is generally discussed is the trend in total gross profit from all of the Company’s parts, service and body shop operations across the Company’s dealership network and the Company’s operating expenses for the prior month across the Truck Segment. Our CODM does not review an operating income (expense) metric for parts, service and body shop operation
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CORRESP 1 filename1.htm rusha20170310_corresp.htm 555 IH 35 South, Suite 500 – New Braunfels, Texas 78130 – (830) 626-5200 March 10, 2017 Via EDGAR U.S. Securities and Exchange Commission Division of Corporation Finance 100 F Street, N.E. Washington, DC 20549-3561 Attn: Jennifer Thompson, Accounting Branch Chief Office of Consumer Products Re: Rush Enterprises, Inc. Form 10-K for the Fiscal Year Ended December 31, 2015 Filed February 29, 2016 File No. 000-20797 Dear Ms. Thompson: On behalf of Rush Enterprises, Inc. (the “Company”), set forth below are the Company’s responses to comments received from the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”), by letter dated February 2, 2017. For your convenience, the text of the Staff’s comments is set forth below in bold followed by the Company’s responses. Introduction: Our nationwide dealership network is designed to be a one-stop source for all of the commercial vehicle needs of our customers. The Company considers its “(1) Parts, Service and Body Shop, (2) Finance, Insurance and Leasing and (3) Retail Sales and Marketing operations,” (collectively, the “Dealership Departments”) as integrated products/services delivered by the Company’s nationwide dealership network. The Company’s Chief Operating Decision Maker, W.M. “Rusty” Rush (our “CODM”), does not assess or make decisions about the allocation of resources to the Dealership Departments separately, in large part due to our contractual obligations to maintain certain of the Dealership Departments in our dealer agreements and the interdependent nature of the Dealership Departments. One of the most important operating decisions made by our CODM is the determination of which manufacturers the Company will represent. Our CODM considers the requirements to maintain Dealership Departments when making these key operating decisions. Our dealer agreements contractually obligate us to offer new commercial vehicle sales, parts sales and service operations within our areas of operation. As a result of those agreements, our Dealership Departments are economically dependent upon each other. If we do not sell or lease commercial vehicles, we will not be able to effectively sell parts or perform service. For example, our failure to effectively provide parts and service support for our customers could result in excessive downtime for our customers or noncompliance with our dealer agreements, either of which would result in the loss of commercial vehicle sales. As a result of the interrelated economic dependence of the Dealership Departments, which are both contractual and practical in nature, our CODM cannot make decisions about any Dealership Department without considering the impact such a decision would have on the other Dealership Departments. U.S. Securities and Exchange Commission Division of Corporation Finance March 10, 2017 Page 2 of 9 Further, the only operating metric used by the CODM to make key operating decisions and allocate resources is operating income. The volume, sale prices, and cost of many of our commercial vehicle sales to national customers are heavily influenced by our manufacturers. Those are the most significant components of gross margin. The significant costs that are below gross margin include items that affect an entire dealership and not individual Dealership Departments, such as personnel, advertising and facility related expenses. Thus, the key decisions made by the CODM are decisions that affect costs for the Truck Segment as a whole. Our CODM does not assess the performance of, or make decisions about the allocation of resources to, the Dealership Departments separately due to the nature of the financial information that he receives for the Dealership Departments. We do not prepare discrete financial statements after gross profit for the Dealership Departments. Generally, all of the product and service categories within a dealership share the same facility and are supported by common dealership management. Gross profit is only one component of operating profit and it can be misleading due to the interrelated nature of the Truck Segment, as discussed herein. For example, we may sell 1,000 commercial vehicles to a national account customer at 1% gross margin (versus normal margins of 6-7%), but we may be awarded $10,000 of parts and service work for each new commercial vehicle prior to its delivery to the customer. If our CODM reviewed the Monthly Vehicle Gross Profit Report (discussed below) on its own, he might draw the conclusion that commercial vehicle gross margins are deteriorating and make an uninformed resource allocation decision related to the Retail Sales and Marketing operations. If he reviewed the Daily Total Backend Unadjusted Gross Profit Per Day Report (discussed below) on its own, it might appear that the parts and service business is experiencing a positive trend when in fact, the increase is the result of one commercial vehicle sales deal. A transaction of this nature is structured to enhance the operating income of the Truck Segment and not an individual Dealership Department, which is why our CODM primarily utilizes operating income in the Monthly Operating Income and Overhead Expense Report (discussed below) to make resource allocation decisions for the Truck Segment. Our CODM is intimately aware of the interdependent relationship of the Dealership Departments, which are interdependent both because of our dealer agreements and the nature of our nationwide dealership network and national account base. For this reason, operating income on a Truck Segment basis is the only metric that he can effectively rely on to assess the performance of the Dealership Departments and to allocate resources to the Dealership Departments. Although our organizational structure is based on the Dealership Departments, this structure is solely related to facilitating personnel management. We have many employees who have responsibilities across multiple components of our Dealership Departments. For example, we have national accounts sales personnel who sell commercial vehicles to key customers, but also sell parts and service to these same customers. The integrated and interdependent nature of our business leads to discussions between our CODM and each of the Company’s Senior Vice Presidents that cross into many areas of the Company’s operations and not just their particular area of responsibility. Responses to the Staff’s Comments: Financial Statements and Supplementary Data Note 18. Segments, page 73 U.S. Securities and Exchange Commission Division of Corporation Finance March 10, 2017 Page 3 of 9 1. We note your response to comment 1. In order to assist us in evaluating your response and your disclosures, please provide the following information: • We note that your CODM reviews monthly and daily trend reports of multiple metrics. Please explain in reasonable detail the specific metrics he reviews and how he utilizes this information. Response: On a monthly basis, our CODM reviews several reports to formulate an overall assessment of the Truck Segment’s operations The primary report that our CODM utilizes in making key operating decisions for the Truck Segment is the Monthly Operating Income and Overhead Expense Report, which includes the total operating income and total overhead expenses for the Company for the current month and the two prior months. This report provides operating income and total overhead expenses for each of the Company’s dealerships and other operating segments (which do not meet the quantitative thresholds to be reportable segments). However, our CODM focuses his review on the total operating income at the Truck Segment level. Our CODM utilizes the Monthly Operating Income and Overhead Expense Report and the other reports described below in order to monitor business activity for any potential change in the direction the Company’s Truck Segment business is trending. In addition to the Monthly Operating Income and Overhead Expense Report discussed above, the other reports and associated metrics our CODM reviews on a monthly basis are as follows: 1. Monthly New Commercial Vehicle Gross Profit – This report shows the total gross profit on new commercial vehicle sales for the trailing 13 months. It includes subtotals for Heavy-Duty, Medium-Duty, Light-Duty, Bus and other. 2. Monthly New Commercial Vehicle Unit Sales – This report shows the total unit sales of new commercial vehicles for the trailing 13 months. It includes subtotals for Heavy-Duty, Medium-Duty, Light-Duty, Bus and other. 3. Monthly Used Commercial Vehicle Gross Profit – This report shows the total gross profit on used commercial vehicle sales for the trailing 13 months. It includes subtotals for Heavy-Duty, Medium-Duty, Light-Duty, Bus and other. 4. Monthly Used Commercial Vehicle Unit Sales – This report shows the total unit sales of used commercial vehicles for the trailing 13 months. It includes subtotals for Heavy-Duty, Medium-Duty, Light-Duty, Bus and other. 5. Daily Total Backend Unadjusted Gross Profit Per Day – This reports the total daily gross profit from all of the Company’s parts, service and body shop operations for each working day of the current month and each working day of the trailing three months. U.S. Securities and Exchange Commission Division of Corporation Finance March 10, 2017 Page 4 of 9 As we explained in our prior response letter, our CODM allocates resources and assesses the Company’s financial performance on a Truck Segment basis. Although our CODM reviews each of the monthly and daily reports described above consisting of multiple metrics to understand both current and developing market conditions, the key metric that our CODM utilizes to review performance and make decisions regarding the allocation of resources is the operating income on a Truck Segment basis. For the reasons discussed above in the introduction, gross profit on a Dealership Department basis is not a useful measure of the Company’s business for making resource allocation decisions, nor are unit sales by themselves, and thus, they cannot be relied upon by our CODM to assess performance or allocate resources. Accordingly, other than the Monthly Operating Income and Overhead Expense Report, none of the other five reports described above stand on their own as useful means to assess performance or allocate resources, but are simply parts of the overall picture that our CODM uses to assess trends that may impact the operating income of the Truck Segment. • We note that you have Senior Vice Presidents who report directly to your CODM for each of your (1) Parts, Service and Body Shop, (2) Finance, Insurance and Leasing and (3) Retail Sales and Marketing operations. We also note that your CODM reviews certain financial information, including monthly unit sales and gross profit for vehicle sales and daily gross profit on parts service and body shop sales, prior to his monthly one-on-one meetings with these individuals and that each of these individuals discusses “the overall operations of the dealership network that they oversee.” Please tell us the nature of the specific dealership operations each of these individuals discusses with the CODM in their separate monthly meetings. For example, clarify if the Senior Vice President for Parts, Service and Body Shop operations discusses overall operations of the dealership network, including the Finance, Insurance and Leasing and Retail Sales and Marketing operations, or primarily just the operations he is directly responsible for managing. Also tell us whether each of these individuals discusses any financial information of the dealership network with the CODM and if so, describe to us the specific financial information each discusses. Response: The purpose of these meetings is to enable our CODM to maintain his awareness of general market conditions and make more informed resource allocation decisions to the Truck Segment. These are informal meetings without a pre-set agenda. Although our CODM meets with these Senior Vice Presidents to discuss the operations of the Dealership Departments that they oversee, the interdependent nature of the Company’s dealership network generally necessitates that our CODM and each of these Senior Vice Presidents discuss a number of subjects that are outside the scope of that particular person’s direct responsibility and are related to the overall operations of the Company’s national dealership network. For example, if a customer who routinely purchases new commercial vehicles from the Company is having issues with the amount of time its drivers are having to wait to get service at our dealerships or the customer routinely has problems obtaining replacement parts in a timely manner, this can ultimately result in an adverse impact on our commercial vehicle sales. This is because the amount of service downtime our customers have is an increasingly significant basis for their commercial vehicle purchase decisions. Therefore, it is not unusual for our CODM to discuss parts and service operations with the Senior Vice President who oversees commercial vehicle sales efforts. In addition, because the parts and service needs of our leasing operations are largely captive to our dealership network’s parts and service operations, the Senior Vice President who is responsible for leasing often discusses parts and service operations with our CODM. U.S. Securities and Exchange Commission Division of Corporation Finance March 10, 2017 Page 5 of 9 Michael J. McRoberts serves as Senior Vice President and Chief Operating Officer of the Company. Mr. McRoberts oversees the Company’s parts, service and body shop operations across its dealership network and the General Managers of all of the Company’s dealership network, except for leasing managers, report up through Mr. McRoberts. When Mr. McRoberts meets with our CODM in his separate monthly meeting, they discuss the parts, service and body shop operations of the Company’s dealership network, but they also discuss other operational issues related to the Company’s dealership network. During these meetings, they discuss the finance, insurance, leasing and rental and commercial vehicle sales operations because these operations are dependent upon parts service and body shop operations and vice versa. For example, each new commercial vehicle sold by one of our dealerships must receive a pre-delivery inspection in one of our dealerships’ service department before it can be delivered. The delivery of a large quantity of new commercial vehicles requires coordination between commercial vehicle sales personnel and service personnel to ensure that the pre-delivery inspections are performed in a timely manner and our customer’s delivery requirements are met. Additionally, the service departments of our dealerships perform a significant amount of warranty work, which requires replacement parts from our parts departments. The parts and service departments at our dealerships are dependent upon the new commercial vehicle sales department to regularly sell commercial vehicles covered by manufacturers’ warranties to maintain a steady flow of warranty work. The fact that almost all of the personnel who work in the Company’s dealerships report up through Mr. McRoberts requires Mr. McRoberts and our CODM to discuss the finance, insurance and commercial vehicles sales operations in their monthly meetings. In Mr. McRoberts’ monthly meetings with our CODM, the financial information that is generally discussed is the trend in total gross profit from all of the Company’s parts, service and body shop operations across the Company’s dealership network and the Company’s operating expenses for the prior month across the Truck Segment. Our CODM does not review an operating income (expense) metric for parts, service and body shop operation