Rush Enterprises, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also provides unaudited fourth-quarter results. Rush operates one reportable segment, a U.S. network of commercial-vehicle dealerships offering new and used vehicle sales, parts and service, leasing, rental, financing and insurance.
Financial performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $4,727.4 million | $3,384.7 million | +39.7% |
| Gross profit | $756.0 million | $572.0 million | +32.2% |
| Gross margin | 16.0% | 16.9% | Down 0.9 percentage points |
| Operating income | $141.7 million | $91.8 million | +54.5% |
| Net income | $80.0 million | $49.2 million | +62.5% |
| Diluted EPS | $1.96 | $1.22 | +60.7% |
| Operating cash flow | $88.9 million | $173.5 million | Down $84.6 million |
Quarterly context: Fourth-quarter 2014 revenue was $1,345.2 million, operating income $43.0 million, net income $24.6 million and diluted EPS $0.60. Fourth-quarter 2013 figures were $925.2 million, $27.5 million, $14.9 million and $0.37, respectively.
- Parts and service revenue rose 33.1% to $1,315.7 million and generated 62.6% of gross profit. Vehicle sales revenue increased 42.7% to $3,195.9 million.
- New heavy-duty truck sales rose 65.9% to 15,833 units; medium-duty sales increased 17.5% to 9,922 units; light-duty sales declined 12.4% to 1,704 units. Used vehicle sales increased 23.2% to 7,893 units.
- SG&A rose 27.4% to $573.7 million, mainly reflecting acquisitions, but declined as a share of revenue to 12.1% from 13.3%. Aftermarket-services gross margin decreased to 36.0% from 37.3%.
- Year-end cash was $191.5 million and working capital was $170.9 million, down from $224.3 million a year earlier. Inventory increased to $1,024.1 million from $802.2 million.
- Year-end floor-plan notes payable were $846.0 million; long-term debt, including current maturities, was $578.3 million; and capital-lease obligations, including current maturities, were $57.3 million. Shareholders’ equity was $764.3 million.
Changes, outlook and material items
- Revenue and earnings grew substantially, with acquisitions contributing materially to dealership, aftermarket and leasing growth. Gross margin nevertheless compressed as lower-margin vehicle sales made up a larger share of revenue than higher-margin aftermarket services.
- Cash from operations fell to $88.9 million, primarily amid working-capital investment, including $151.9 million of cash used by inventory growth and $67.7 million by increased receivables. Investing activities used $416.4 million, including $260.8 million for property and equipment and $157.6 million for acquisitions.
- Management expected strong 2015 demand for Class 8 trucks and aftermarket services, while warning that lower oil prices would significantly reduce demand from oil-and-gas customers. Company projections included 15,800–18,400 Class 8 sales, 10,300–11,300 Class 4–7 sales, 8,500–9,500 used vehicle sales and 15%–20% growth in lease and rental revenue. These are management expectations, not guarantees.
- Management forecast 2015 aftermarket gross margins of 35%–36%, Class 8 margins of 6.5%–7.0%, medium-duty margins of 5.0%–5.5%, used-vehicle margins of 8%–10%, and an effective tax rate of approximately 38%–39%.
- The confirmed-order backlog was $1,502.8 million at year-end versus $810.2 million in 2013. Orders can be canceled, and the filing says most were expected to be filled during 2015.
- The company reported a 2.52:1 leverage ratio against a 2.50:1 covenant limit under the GE and Wells Fargo agreements. Lenders waived the breach; Rush was required to regain compliance by March 31, 2015 and thereafter. Management said it did not anticipate further breaches.
- Unusual items included a $3.4 million non-cash impairment charge for the corporate aircraft, which was classified as held for sale, and $2.0 million of CNG-system research and development expense under a 3M initiative. Rush also completed acquisitions, including a major Illinois/Indiana dealership and leasing acquisition for approximately $146.6 million.
- Principal risks include dependence on Peterbilt/PACCAR and Navistar, cyclical truck demand, oil-and-gas exposure, variable interest rates, inventory financing availability, dealership-franchise renewals and control provisions, environmental exposure, and possible goodwill impairment. The company reported no pending litigation it believed would materially affect its financial position or results.
Investor verification priorities
- Confirm that the covenant waiver was resolved and the required leverage compliance was achieved after year-end.
- Assess whether inventory, receivables and acquisition-related working-capital needs converted into cash as planned, given the sharp decline in operating cash flow.
- Test 2015 sales, margin and leasing assumptions against actual results, with particular attention to oil-and-gas customer demand and backlog cancellations.
- Review the scale and terms of floor-plan and other borrowings, including the GE facility’s termination provisions and exposure to higher rates.
- Track integration and returns from acquisitions, the CNG program’s continuing costs, and execution of the dealership-system implementation.
- Review the filed financial statements and notes for full debt maturities, commitments, environmental matters and valuation assumptions. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.