Rush Enterprises, Inc. — 2018 Form 10-K
Business and period. This annual report covers the fiscal year ended December 31, 2018; quarterly figures below include the fourth quarter. Rush operates one reportable segment, a network of more than 100 commercial-vehicle dealerships in 22 states, selling new and used trucks and providing parts, service, leasing, rental, financing and related offerings. Aftermarket services provide a recurring revenue stream and generated 63.4% of gross profit.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $5.506 billion | $4.714 billion |
| Gross profit / gross margin | $978.3 million / 17.8% | $829.9 million / 17.6% |
| Operating income / margin | $202.9 million / 3.7% | $148.7 million / 3.2% |
| Net income | $139.1 million | $172.1 million |
| Diluted earnings per share | $3.45 | $4.20 |
| Cash from operating activities | $215.4 million | $152.7 million |
| Cash and working capital at year-end | $131.7 million / $194.6 million | $124.5 million / $202.9 million |
- Revenue increased 16.8%; new and used vehicle sales rose 18.9%, aftermarket revenue rose 13.5% to $1.670 billion, and lease and rental revenue rose 9.6% to $238.2 million.
- Gross profit increased 17.9%. Aftermarket gross margin improved to 37.1% from 36.5%; overall dealership absorption ratio was 122.4%, versus 121.0%.
- Net income fell despite higher pretax income: 2017 included an $82.9 million tax benefit from revaluing deferred taxes after U.S. corporate tax reform. 2018’s effective tax rate was 24.2%; 2017’s was 38.25% before that one-time benefit.
- Net interest expense rose 59.9% to $19.7 million, reflecting higher LIBOR and greater inventory. Depreciation and amortization expense rose 40.8% to $70.5 million, primarily due to accelerated amortization of replaced ERP components.
- Year-end total assets were $3.201 billion and shareholders’ equity was $1.067 billion. Balance-sheet floor-plan notes payable were $1.023 billion; long-term debt was $601.2 million and capital lease obligations were $69.1 million. Inventory increased to $1.340 billion from $1.033 billion.
- Operating cash flow was $215.4 million, while investing activities used $227.2 million, including $238.3 million of capital expenditures. The inventory increase used $255.0 million of operating cash, partly offset by floor-plan trade borrowings and increases in payables and accrued liabilities.
Fourth-quarter results
2018 fourth-quarter revenue was $1.540 billion, gross profit $258.8 million, operating income $68.4 million, pretax income $62.0 million and net income $47.0 million; diluted EPS was $1.20. Fourth-quarter 2017 revenue was $1.208 billion and net income was $105.9 million, including the substantial tax benefit recorded that year.
Changes, outlook and management commentary
- New vehicle unit sales rose 15.9% to 29,776; used vehicle sales rose 13.6% to 8,021. Class 8 share declined to about 5.7% from 6.6% in a stronger overall market, while Class 4–7 share was 5.0%.
- Order backlog increased to $1.935 billion from $1.074 billion. Orders may be canceled, and backlog is not a guarantee of future revenue or earnings; the company expected to fill most orders during 2019.
- Management’s 2019 estimates included U.S. Class 8 retail sales of 259,500 and Class 4–7 sales of 262,300. Rush expected Class 8 share of 5.6%–6.0%, Class 4–7 share of 5.1%–5.4%, about 2,200 light-duty sales, 9,000–9,300 used vehicle sales, lease/rental revenue growth of 5%–10%, and aftermarket revenue growth of 9%–11%.
- Management projected 2019 aftermarket gross margin of 37.0%–37.5%, Class 8 gross margin of 7.0%–8.0%, Class 4–7 gross margin of 5.7%–6.2%, used vehicle gross margin of 8%–10%, and SG&A of 12.5%–13.0% of revenue. These are estimates, not guarantees.
- Cash and expected operating cash flows were considered sufficient for at least 12 months. The company was in compliance with debt covenants at year-end. It expected $30–$40 million in recurring capital expenditures and $165–$190 million of lease/rental vehicle purchases or leases in 2019, all of the latter to be financed.
- In February 2019, Rush announced a proposed 50% investment in an Ontario dealership venture for approximately CAD $30 million, subject to customary closing conditions; it expected equity-method accounting.
Risks, contingencies and unusual items
- Financing and rates: The principal BMO floor-plan agreement had an $875 million commitment and was due to expire June 30, 2019; it could also be terminated on 120 days’ notice. The company reported $798.4 million outstanding under it. A separate Ford inventory facility had $139.0 million outstanding. Management estimated a 100-basis-point LIBOR change could alter annual interest expense by about $11 million.
- Manufacturer and franchise concentration: Peterbilt/PACCAR is a key supplier, and International/Navistar is also significant. Dealership agreements are generally nonexclusive and have finite renewal dates; certain Peterbilt agreements include ownership/change-of-control conditions. Loss or unfavorable renewal of important franchises could materially affect operations.
- Economic and operating risks: Truck sales are cyclical and sensitive to economic activity, fuel prices, interest rates, credit availability and customer demand. Other identified risks include inventory valuation, goodwill or franchise-right impairment, environmental liabilities, cybersecurity, severe weather, and technological changes such as electrification or autonomous vehicles.
- Unusual items: The company recognized $19.9 million of 2018 amortization on replaced ERP components. It adopted revenue-recognition Topic 606 in 2018 with no material revenue impact. Adoption of lease accounting Topic 842 in January 2019 was expected to add about $51.9 million of operating lease right-of-use assets and liabilities, with no material income-statement effect.
- Management reported no pending litigation believed likely to have a material adverse effect, while noting ordinary-course claims and the uncertainty of litigation. Environmental impacts were known at some dealership sites, although management did not consider current environmental liabilities material.
Investor facts to verify
- Renewal or replacement of the floor-plan facility before its June 2019 expiration, and the terms and availability of inventory financing.
- Whether the large backlog converts to deliveries and profit, given cancellation risk and the company’s exposure to truck-market cycles.
- Whether forecast aftermarket growth and margins, vehicle volumes and 2019 expense targets are achieved.
- Inventory growth, borrowing levels and interest-rate sensitivity, alongside cash generation and planned capital spending.
- Continued access to Peterbilt/PACCAR and Navistar/International franchises, including relevant renewal and ownership conditions.
- Completion and financial impact of the proposed Canadian investment, and the effect of the ERP amortization and lease-accounting adoption.