Rush Enterprises, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Rush operates a commercial-vehicle dealership network and related parts, service, leasing, rental, finance and insurance businesses, primarily through its Truck Segment. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Revenue | $1,911.8 | $1,563.2 | Up 22.3% |
| Gross profit | $398.8 | $345.4 | Up 15.4%; gross margin 20.9%, down from 22.1% |
| Operating income | $127.8 | $107.5 | Up 18.9%; operating margin 6.7% versus 6.8% |
| Income before taxes | $119.1 | $120.3 | Down 1.0% |
| Net income attributable to Rush | $90.5 | $92.5 | Down 2.2%; diluted EPS $1.60 in both periods |
| Net cash from operations | $92.5 | $34.6 | Higher than prior year |
- New and used vehicle revenue increased 24.2%; aftermarket products and services revenue rose 19.3%; lease and rental revenue rose 21.5%. New vehicle unit sales increased 28.6%, while used vehicle units declined 29.7%.
- SG&A increased 14.4% to $256.8 million, but declined as a share of revenue to 13.4% from 14.4%. Net interest expense rose to $11.0 million from $1.2 million, reflecting higher inventory and interest rates. Other income fell to $2.3 million from $14.1 million; the prior-year period included a $12.5 million gain tied to Cummins’ investment in Momentum Fuel Technologies.
- Cash and cash equivalents were $226.3 million at March 31, up from $201.0 million at December 31, 2022. Working capital was approximately $460.9 million. Total assets were $4.0 billion and shareholders’ equity was $1.8 billion.
- Balance-sheet floor plan notes payable were $1,016.0 million; long-term debt, net of current maturities, was $262.5 million. Finance lease obligations totaled $132.1 million, including current maturities. Management reported compliance with debt covenants.
- Investing activities used $95.5 million, including $90.4 million of property and equipment purchases, of which $75.2 million related to rental and lease vehicles. Financing activities provided $28.3 million. The company paid $12.1 million in dividends and repurchased $24.0 million of stock during the quarter.
Material changes and management outlook
- Revenue growth reflected strong commercial-vehicle demand, increased manufacturer production, and consolidation of RTC Canada, in which Rush acquired an additional 30% interest in May 2022 and now owns 80%.
- Gross margin declined primarily because lower-margin vehicle sales represented a larger share of revenue. Used-vehicle gross margin fell to 5.6% from 15.9%, which management attributed to declining used-vehicle values as new-vehicle production increased.
- For 2023, management expects U.S. Class 8 retail sales of approximately 259,018 units, down 0.1% from 2022, and forecasts Rush sales of 16,000–17,500 U.S. Class 8 trucks. It expects 11,500–13,000 U.S. Class 4–7 vehicles, 1,800–2,000 light-duty vehicles and 6,500–7,500 used commercial vehicles. These are estimates, not guarantees.
- Management projects 2023 lease and rental revenue growth of 9%–11% and aftermarket revenue growth of 9%–12%. Forecast margin ranges include 37.5%–38.5% for aftermarket, 8.8%–9.9% for new heavy-duty trucks, 7.5%–8.5% for new medium-duty vehicles, 8%–10% for used vehicles, and 29%–31% for lease and rental. Expected SG&A is 13%–14% of revenue; the expected effective tax rate is 23%–24%.
- Management expects 2023 purchases or leases of $170–$180 million of vehicles for its leasing operations and $35–$40 million of recurring capital expenditures. A St. Louis-area facility is under construction at an estimated cost of $13.9 million. Management believes available funds and expected operating cash flow are sufficient for at least 12 months.
- Backlog was approximately $4.21 billion at March 31, 2023, versus $3.44 billion a year earlier. Management expects to fill most orders during 2023 if manufacturers meet production schedules, but orders may be cancelled; higher interest rates, lower freight spot rates and extended delivery times could increase cancellation risk.
Risks, contingencies and unusual items
- Supply-chain constraints and manufacturer allocations could limit vehicle deliveries. Inflation and rising interest rates could weigh on customer spending and capital investment. Management estimates a 100-basis-point change in relevant benchmark rates could change annual interest expense by approximately $12.8 million, based on $1,278.4 million of floor plan and lease/rental fleet borrowings.
- Environmental rules, including potential zero-emission vehicle requirements, could raise compliance costs or affect product demand. The company reports known soil or groundwater impacts at some dealerships but does not believe it currently has material environmental liabilities.
- Rush reported no pending litigation it believes is reasonably likely to have a material adverse effect, while noting that litigation outcomes are inherently uncertain. It also reported $5.3 million of unrecognized tax benefits and approximately $0.3 million accrued for related interest.
- The board declared a $0.21-per-share dividend payable June 9, 2023. The company’s $150 million repurchase program expires December 31, 2023; $31.1 million had been repurchased under the program by March 31.
Investor verification checklist
- Track gross-margin trends, especially used-vehicle values and the revenue mix between vehicles and aftermarket services.
- Check inventory, floor plan borrowings, interest costs and liquidity as rates and vehicle deliveries change.
- Assess whether backlog converts to sales on schedule and monitor cancellations, manufacturer production and customer demand.
- Compare actual 2023 sales, revenue and margin performance with management’s stated outlook and verify the effect of RTC Canada consolidation.
- Review capital spending, lease-fleet investment, dividends and share repurchases against operating cash generation.