Rush Enterprises, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. Unless otherwise noted, dollar amounts are in millions. The company operates a nationwide commercial-vehicle dealership network, with one reportable Truck Segment.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,257.5 | $1,096.0 | $3,505.8 | $3,193.3 |
| Gross profit / margin | $220.0 / 17.5% | $181.3 / 16.5% | $617.0 / 17.6% | $545.1 / 17.1% |
| Operating income | $48.4 | $27.6 | $110.7 | $57.3 |
| Net income | $29.8 | $14.9 | $66.3 | $28.1 |
| Diluted EPS | $0.72 | $0.37 | $1.62 | $0.69 |
- Growth and margins: Q3 revenue rose 14.7%, gross profit 21.4%, and net income about 100%. Nine-month revenue increased 9.8%, gross profit 13.2%, and net income about 136%. SG&A was $159.3 million in Q3 and $469.0 million year to date; as a share of revenue it was about 12.7% and 13.4%, respectively.
- Cash flow: Nine-month operating cash flow was $170.3 million, down from $386.8 million. Inventory growth used $87.8 million of cash in 2017, compared with a $199.2 million cash source from inventory reductions in 2016. Investing cash use was $129.7 million, including $138.8 million of property and equipment purchases. Financing provided $5.3 million. Cash increased $45.9 million to $127.9 million.
- Liquidity: Working capital was approximately $180.3 million at September 30. Management said cash and expected operating cash flows should cover operating needs for at least 12 months. The $100 million working-capital facility had no borrowings; the separate $17.5 million secured line had $5.6 million available after letters of credit.
- Debt and obligations: Balance-sheet floor-plan notes payable were $707.0 million; current and long-term debt totaled $592.8 million; capital lease obligations totaled $80.3 million. The company reported $578.8 million outstanding under its main floor-plan agreement and $88.8 million under Ford’s wholesale financing agreement. It was in compliance with debt covenants.
- Other balance-sheet items: Total assets were $2,759.0 million, versus $2,603.0 million at year-end 2016. Inventory was $961.0 million, up from $840.3 million; cash was $127.9 million, versus $82.0 million.
Material changes and operating trends
- Q3 commercial-vehicle sales grew 17.2%; aftermarket products and services revenue increased 11.7%. New heavy-duty unit sales rose 20.6%, and new medium-duty units rose 14.5%; used-vehicle units declined 2.9% and light-duty units declined 14.5%.
- Q3 vehicle-sales gross margins improved, particularly for Class 8 trucks (7.8% versus 6.9%) and used vehicles (11.9% versus 4.8%). Medium-duty margins fell to 5.4% from 6.7%. Lease-and-rental margins increased to 17.3% from 12.6%.
- The dealership absorption ratio rose to 120.9% from 112.6%. Net interest expense fell 5.6% in Q3 and 22.8% year to date.
- The nine-month comparison includes $8.1 million of dealership-consolidation restructuring expenses in 2016, including real-estate and fixed-asset impairments. No new impairment loss was reported for the 2017 periods presented.
Outlook, risks, and contingencies
- Management expected aftermarket revenue to remain solid in Q4, with seasonal softness; Class 8 and medium-duty sales were expected to remain strong in Q4 and into 2018. The filing cites third-party U.S. Class 8 retail sales forecasts of approximately 190,000 units in 2017 and 218,000 in 2018, and management estimated its 2017 Class 8 market share at 6.5%–7.0%.
- For 2017, management projected aftermarket gross margins of 36.3%–36.5%, Class 8 margins of 7.5%–8.0%, medium-duty margins of 5.5%–6.0%, used-vehicle margins of 9.5%–10.5%, and lease-and-rental margins of 15.5%–16.5%. It expected SG&A at 13.4%–14.2% of revenue and an effective tax rate of 38.5%–39.0%.
- Expected 2017 lease/rental truck purchases were $150–$175 million, all to be financed; recurring capital expenditures were estimated at $20–$25 million. Nine-month purchases of lease/rental units included $103.6 million directly offset by long-term borrowings.
- September 30 commercial-vehicle order backlog was $1,005.8 million, up from $836.4 million a year earlier. Orders can be canceled and do not represent guaranteed revenue.
- Interest-rate exposure: approximately $806.1 million of floor-plan borrowings and variable-rate real-estate debt; a 100-basis-point LIBOR change could alter annual interest expense by about $8.1 million.
- The company held $6.4 million of illiquid auction-rate securities tied to municipal bonds. A further 10% decline in fair value could reduce equity by about $0.64 million if temporary, or produce a similar loss in earnings if other-than-temporary. The securities were valued using Level 3 inputs.
- Management reported no pending litigation believed likely to materially affect results, but noted uninsured or partially insured claims could be material. Environmental compliance, known soil and groundwater impacts at some properties, economic cyclicality, and vehicle emissions regulation remain risks. No material change to previously disclosed risk factors was reported.
- Adoption of the new revenue-recognition standard was planned for January 1, 2018 using the modified retrospective method; management did not expect a material financial-statement impact based on its preliminary review. Lease accounting changes were planned for adoption in 2019.
Important facts for investors to verify
- Whether Q4 and 2018 truck demand, market-share assumptions, and backlog conversion support management’s outlook.
- Whether vehicle and aftermarket margin improvements persist, especially given weaker medium-duty margins and lower finance-and-insurance revenue.
- Inventory growth, floor-plan utilization, financing costs, and the funding of planned lease/rental fleet purchases.
- The extent to which 2017 earnings benefited from stock-compensation tax benefits: $1.9 million in Q3 and $3.9 million year to date.
- Liquidity and valuation developments for the auction-rate securities, and any changes in environmental or litigation exposures.