Rush Enterprises, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a quarterly filing; fourth-quarter results are included below. Rush operates one reportable segment, a network of commercial vehicle dealerships and related parts, service, leasing, rental, financing and insurance businesses.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $5,809.8 million | $5,506.2 million | +5.5% |
| Gross profit / margin | $1,025.6 million / 17.7% | $978.3 million / 17.8% | Gross profit +4.8% |
| Operating income / margin | $216.4 million / 3.7% | $202.9 million / 3.7% | +6.7% |
| Net income | $141.6 million | $139.1 million | +1.8% |
| Diluted EPS | $3.77 | $3.45 | +9.3% |
| Cash from operations | $421.3 million | $215.4 million | +$205.9 million |
Revenue growth reflected higher new commercial vehicle sales and aftermarket activity. Aftermarket products and services generated $1,762.5 million, or 30.3% of revenue, and 64.9% of gross profit. New and used vehicle sales were $3,757.6 million, or 64.7% of revenue. New vehicle unit sales rose 6.4%; used vehicle units fell 3.5%. SG&A increased 6.9% to $753.7 million, and net interest expense rose 46.4% to $28.8 million, primarily reflecting higher inventory levels. The effective tax rate was 25.3%, versus 24.2%.
Fourth quarter: Revenue was $1,317.7 million, compared with $1,540.4 million in Q4 2018; net income was $23.8 million, compared with $47.0 million. Diluted EPS was $0.64 versus $1.20. The filing presents these quarterly figures as unaudited.
Cash, liquidity and debt
- Year-end cash was $181.6 million; working capital was $205.2 million. Management said available funds and expected operating cash flows were sufficient for at least the next 12 months.
- Year-end floor-plan notes payable were $996.3 million, compared with $1,023.0 million in 2018. Total long-term debt, including current maturities, was $627.7 million; finance lease obligations were $92.4 million. Adoption of the lease standard brought $57.7 million of operating-lease liabilities onto the balance sheet.
- The $1.0 billion floor-plan facility had $846.8 million outstanding under the BMO Harris agreement; the separate Ford inventory financing balance was $115.0 million. The BMO facility expires June 30, 2022 and is generally priced at one-month LIBOR plus 1.25%.
- Operating cash flow was $421.3 million; investing cash flow was negative $320.5 million, including $293.5 million of capital expenditures; financing cash flow was negative $50.9 million. Cash increased $49.9 million during the year.
- The company reported compliance with debt covenants at year-end. A 100-basis-point change in LIBOR was estimated to change annual interest expense by approximately $10.5 million.
Changes, strategy and outlook
- Aftermarket revenue rose 5.5%, with gross margin improving to 37.7% from 37.1%. New heavy-duty truck margin rose to 8.1% from 7.9%; used truck margin fell to 8.9% from 12.0%.
- Commercial vehicle order backlog declined to $1,236.5 million at year-end from $1,934.9 million. Orders may be cancelled; management expected to fill most of the year-end backlog during 2020.
- Rush acquired a 50% interest in Rush Truck Centres of Canada, which operates 14 International dealerships in Ontario, and obtained an option to buy the remaining interest through February 2024. It also acquired dealerships in California and Florida and sold substantially all assets of Central California Truck & Trailer Sales.
- Management’s early-2020 outlook anticipated a 32.5% decline in U.S. Class 8 retail sales and a 5.1% decline in Class 4–7 sales. Rush forecast 2020 Aftermarket revenue growth of 1%–3%, lease and rental revenue growth of 5%–10%, and expected SG&A of 13.5%–14.0% of revenue. These are management estimates, not reported results.
- Management expected 2020 aftermarket gross margins of 37%–38%, new heavy-duty truck margins of 7%–8%, medium-duty margins of 5%–6%, and used vehicle margins of 8%–10%. It expected net interest expense to decrease, subject to inventory, rates and cash available for floor-plan prepayments.
- The company declared $0.50 per share in dividends for 2019 and authorized a new share repurchase program of up to $100 million, expiring December 31, 2020. It expected $180–$190 million of lease/rental vehicle purchases and $30–$35 million of recurring capital expenditures in 2020.
Risks, contingencies and unusual items
- Results are exposed to commercial vehicle market cycles, economic conditions, interest rates and customer financing availability. The business depends materially on Peterbilt/PACCAR and also relies on Navistar and other manufacturers for vehicles, parts, incentives and franchise rights. Peterbilt agreements include ownership/change-of-control provisions; many franchise agreements have relatively short renewal terms.
- Inventory valuation is a significant estimate and was identified as the audit’s critical audit matter. The auditor reported an unqualified opinion on the financial statements and internal controls. No goodwill impairment was recorded in 2019.
- Rush guaranteed up to CAD 250 million of certain RTC Canada credit facilities; the guarantee was valued at $5.1 million and included in the investment. The company’s investment in RTC Canada was $25.7 million at year-end.
- Management disclosed occasional cyberattacks, including phishing and ransomware, which it said were remediated without known data leakage or material impact. Environmental conditions are known at some dealership sites, though management did not believe current environmental liabilities were material. Ordinary-course litigation was disclosed; management did not identify pending matters expected to have a material adverse effect.
- Other risks include goodwill or franchise-right impairment, self-insurance and product-liability claims, environmental regulation, changing vehicle technologies, and the concentration of voting control. A proposed Traton acquisition of Navistar was disclosed as pending at the filing date; Rush said it could not predict the effect of any change in Navistar ownership.
Important facts for investors to verify
- Whether the forecast decline in Class 8 demand and the lower backlog translated into weaker vehicle volumes, margins or inventory values.
- Whether aftermarket growth and dealership absorption (120.2% in 2019 versus 122.4% in 2018) supported earnings through a truck-market downturn.
- Floor-plan borrowing availability, refinancing and renewal of the working-capital facility, and sensitivity to interest rates and benchmark-rate transition.
- RTC Canada’s operating performance and the company’s CAD 250 million guarantee exposure, including the terms and use of its call option.
- Inventory reserves, used-truck resale values, and whether the disclosed debt, lease and capital commitments remain manageable alongside dividends and repurchases.