Rush Enterprises, Inc. — Q1 2018 Form 10-Q
Business and period: Full-service commercial vehicle dealership operator, reporting for the three months ended March 31, 2018, compared with Q1 2017. Its reportable segment is Truck; other operations include tire, insurance and ranch businesses. Financial statements are unaudited.
Financial performance
- Revenue: $1.241 billion, up 18.8% year over year. Commercial vehicle sales were $773.1 million; parts and service, $400.3 million; lease and rental, $57.5 million.
- Profit: Gross profit was $227.0 million, up 20.8%; operating income was $32.4 million, up 30.3%; pretax income was $28.1 million, up 27.3%; net income was $21.0 million, up 45.3%. Diluted EPS was $0.51 versus $0.36.
- Margins: Gross margin increased to 18.3% from 18.0%; operating margin was 2.6% versus 2.4%; net margin was 1.7% versus 1.4%. SG&A fell to 13.8% of revenue from 14.4%. Depreciation and amortization rose to $22.9 million from $12.5 million, principally due to an ERP software write-down through accelerated amortization.
- Cash flow: Operating cash flow was $117.7 million versus $37.5 million. Investing used $47.1 million, including $48.2 million of property and equipment purchases; financing used $63.4 million. Cash increased $7.2 million to $131.7 million. Operating cash flow included a $35.4 million net increase in trade floor-plan financing.
- Liquidity and debt: Working capital was approximately $195.1 million. At March 31, cash was $131.7 million; floor-plan notes payable were $805.5 million; long-term debt, including current maturities, was $597.4 million; and capital lease obligations totaled $78.1 million. The company reported compliance with debt covenants and no borrowing outstanding under its $100 million working-capital facility.
- Capital returns: The company repurchased $38.1 million of shares in Q1. The board increased the repurchase authorization to $75 million; approximately $34.5 million remained available at quarter-end.
Changes and unusual items
- Revenue growth reflected higher vehicle sales and aftermarket activity. New and used vehicle sales rose 21.6%; aftermarket revenue increased 14.3%. New heavy-duty truck unit sales increased 22.4%, and the dealership absorption ratio improved to 120.0% from 113.4%.
- Gross margin improved overall, although Class 8 truck sales margin eased to 8.1% from 8.2%. Used vehicle margin rose to 11.2% from 8.6%.
- The company determined that most components of its ERP platform needed earlier replacement. It recorded $10.2 million of additional amortization in Q1 and expected another $9.3 million in Q2, with replacement expected by May 2018. Before the change, related quarterly amortization was about $0.9 million.
- The 2017 Tax Act reduced the federal corporate rate to 21%. The company had recorded a provisional $82.9 million net tax benefit at year-end 2017; it expected a 25%–26% effective tax rate for 2018. Q1’s effective rate was 25.0%, compared with 39.0% in Q1 2017.
- Revenue standard Topic 606 was adopted January 1, 2018, with no material effect on revenue recognition. The company expected adoption of the new lease standard in 2019 to materially increase balance-sheet lease assets and liabilities, but not materially affect the income statement.
Outlook, risks and contingencies
- Management expected 2018 aftermarket revenue growth of 9%–10%, lease and rental revenue growth of 5%–10%, and aftermarket gross margins of 36.0%–36.5%. It forecast Class 8 sales margins of 7.0%–8.0%, medium-duty margins of 5.7%–6.2%, and used vehicle margins of 8.5%–10.0%.
- Management expected Q2 Class 8 results to be broadly consistent with Q1 and vehicle sales to accelerate in the second half. It anticipated stronger medium-duty and bus sales in Q2 and Q3. For 2018, it estimated U.S. Class 8 market share of 5.7%–6.2%, medium-duty share of 4.5%–5.5%, about 1,700 light-duty sales and 7,500–8,500 used vehicle sales.
- Management stated available funds and expected operating cash flow should cover requirements for at least 12 months. Planned 2018 recurring capital expenditures were $20 million–$25 million; leasing fleet vehicle purchases or leases were estimated at $165 million–$190 million, expected to be financed. Facility projects had $12.2 million of remaining contract costs.
- Interest-rate exposure is significant: approximately $897 million of floor-plan and variable-rate real-estate debt was outstanding; a 100-basis-point LIBOR change could change annual interest expense by about $9 million. Management also cited economic cycles, freight and customer demand, inventory financing, and regulatory and environmental requirements as risks.
- The company held $6.4 million of illiquid auction-rate securities. A further 10% fair-value decline could reduce equity by about $640,000, or result in a loss of that amount if deemed other-than-temporary. Management reported no pending litigation expected to materially affect results, while noting ordinary-course litigation and potential uninsured claims.
Key facts for investors to verify
- Whether the Q2 ERP replacement and remaining $9.3 million amortization estimate occurred as expected, and whether replacement affects costs or operations beyond the disclosed charge.
- Whether forecast 2018 vehicle volumes, market share, aftermarket growth and margin ranges were achieved as market conditions evolved.
- How higher interest rates, inventory levels and floor-plan borrowings affected interest expense and liquidity.
- Actual capital spending, leasing-fleet financing and remaining share-repurchase authorization, as well as any changes in the company’s tax estimates or environmental and litigation exposures.