Rush Enterprises, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2022, compared with the same periods in 2021. Rush operates a network of commercial vehicle dealerships in the U.S. and Ontario, Canada, with vehicle sales, parts and service, leasing and rentals, and related financial services. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $1,864.3m | $1,266.5m | $5,218.7m | $3,814.3m |
| Gross profit | $381.4m | $282.3m | $1,101.1m | $797.9m |
| Operating income | $127.0m | $90.2m | $369.6m | $219.2m |
| Net income attributable to Rush | $90.4m | $69.4m | $293.1m | $172.8m |
| Diluted EPS | $1.59 | $1.20 | $5.11 | $2.99 |
| Gross margin | 20.5% | 22.3% | 21.1% | 20.9% |
| Operating margin | 6.8% | 7.1% | 7.1% | 5.7% |
- Q3 revenue rose 47.2%; nine-month revenue rose 36.8%. Vehicle sales and aftermarket products and services were the largest revenue sources.
- Q3 income before taxes was $120.5m, including $6.3m net interest expense. For the nine months, income before taxes was $381.1m and net interest expense was $10.7m.
- Q3 gross margin declined year over year as lower-margin vehicle sales represented a larger share of revenue. Nine-month gross margin improved modestly. SG&A was 13.0% of revenue in Q3 and 13.3% for the nine months, versus 14.2% and 14.1%, respectively.
- Q3 diluted EPS was $1.59; nine-month diluted EPS was $5.11. Dividends declared were $0.21 per share for Q3 and $0.59 per share for the nine months.
Cash flow, balance sheet and liquidity
- Cash was $219.5m at September 30, 2022, compared with $148.1m at December 31, 2021. Working capital was approximately $390.0m.
- Nine-month operating cash flow was $183.3m, down from $438.6m. Inventory growth used $264.7m and receivables growth used $75.1m; the company attributed the lower cash generation largely to working-capital changes. Capital expenditures were $175.2m, including $122.3m for lease and rental units.
- Current assets were $1,809.4m and current liabilities $1,419.4m at quarter-end. Inventory was $1,351.9m.
- Balance-sheet floor plan notes payable were $935.8m; long-term debt, net of current maturities, was $307.1m. Finance lease obligations totaled $110.8m and operating lease obligations totaled $104.9m, including current portions.
- Management said cash, expected operating cash flows and borrowing availability were sufficient for operating needs for at least the next 12 months. The company reported compliance with debt covenants.
- Borrowings for floor plan and lease/rental fleet financing totaled $1,242.9m for the market-risk sensitivity disclosure. A 100-basis-point rate change was estimated to affect annual interest expense by approximately $12.4m.
Material changes versus prior comparable periods
- Q3 commercial vehicle sales revenue increased 56.6%; aftermarket products and services revenue increased 34.4%; lease and rental revenue increased 36.7%. Nine-month increases were 39.7%, 33.2% and 30.3%, respectively.
- Q3 new heavy-duty unit sales increased 65.5% and total new vehicle unit sales increased 41.1%. For the first nine months, new heavy-duty unit sales increased 40.2%.
- Q3 net interest expense increased by $6.0m year over year, which management attributed to higher inventory levels and rising variable interest rates.
- Operating cash flow fell despite higher earnings, primarily reflecting inventory and receivables increases; prior-year operating cash flow benefited from inventory reductions.
- On May 2, 2022, Rush acquired an additional 30% of RTC Canada, bringing its ownership to 80% and bringing the business into consolidated results. The acquisition generated a $7.0m remeasurement gain and established a 20% noncontrolling interest. Purchase accounting remains preliminary.
- Rush sold a 50% interest in Natural Gas Fuel Systems for $27.5m in January 2022, recognizing a $12.5m gain. The remaining investment is accounted for under the equity method.
Outlook, commentary and risks
- For 2022, management cited industry forecasts of 258,600 U.S. Class 8 retail truck sales, up 13.7% from 2021, and 230,975 Class 4–7 sales, down 7.5%. Rush expected U.S. Class 8 market share of 6.2%–6.5% and Class 4–7 share of 4.5%–4.8%.
- Management expected approximately 1,800 light-duty and 6,800–7,200 used commercial vehicles sold in 2022; lease and rental revenue growth of 28%–32%; and aftermarket products and services revenue growth of 28%–33%. These projections include Summit and RTC Canada.
- Management expected 2022 gross margins of approximately 8.8%–9.9% on new heavy-duty trucks, 7.5%–8.5% on new medium-duty vehicles and 31%–33% on lease and rental sales. It expected used-vehicle margins to reach 6%–8% by year-end; Q3 used-vehicle margin had fallen to 1.6% from 19.7% a year earlier.
- Management expected SG&A at 13%–14% of revenue and an effective tax rate of 23%–24% for 2022. It anticipated higher interest expense, dependent on inventory, interest rates and cash available for floor plan repayments.
- Commercial vehicle order backlog was approximately $3,300.1m at September 30, versus $2,720.2m a year earlier. Orders are cancellable; management expected to fill most by year-end 2022 and Q1 2023, subject to manufacturers meeting production schedules. It warned that lower spot rates, higher interest rates and fuel prices could increase cancellations.
- Supply-chain constraints continued to affect new vehicle production and aftermarket parts availability. Management also cited inflation and rising interest rates as potential pressures on customer spending and capital expenditures. Used-vehicle values could decline as new production improves.
- Planned 2022 spending included $150m–$170m for lease and rental vehicles and $35m–$40m for recurring capital expenditures. A new Illinois facility was under construction at an estimated cost of $13.9m.
- The $100m share repurchase authorization had $8.2m remaining at September 30 and was set to expire December 31, 2022. On October 25, the board declared a $0.21-per-share dividend payable December 9, 2022.
- The filing reported no pending litigation considered reasonably likely to have a material adverse effect and no material change in the risk factors from the 2021 Form 10-K. Environmental compliance, self-insurance estimates, tax positions, foreign exchange and acquisition accounting remain areas of uncertainty.
Important facts for investors to verify
- Whether manufacturers can deliver backlog orders on schedule and how much of the cancellable backlog converts to sales.
- Whether inventory levels, floor plan financing costs and rising rates constrain cash flow or margins; the filing estimates a $12.4m annual interest impact per 100-basis-point rate move on specified borrowings.
- How used-truck margins and values evolve as new vehicle production improves, given the sharp Q3 margin decline.
- The contribution of Summit and consolidated RTC Canada to reported growth, and the final purchase-price allocations for both acquisitions.
- Whether the 2022 sales, margin, revenue-growth, SG&A and tax-rate expectations remain achievable amid supply constraints and economic headwinds.