Rush Enterprises, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; balance-sheet comparisons are with December 31, 2014. The company operates a nationwide commercial-vehicle dealership network, with truck sales, parts and service, leasing and rental, and related financial services as its core activities. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Financial results and position
- Third quarter: Revenue was $1,294.1 million, up 4.3% year over year. Gross profit was $208.0 million, up 4.7%, and gross margin was 16.1% versus 16.0%. Operating income declined to $36.0 million from $41.0 million; net income was $19.9 million versus $23.5 million. Diluted EPS was $0.48 versus $0.57.
- Nine months: Revenue was $3,817.9 million, up 12.9%; gross profit increased 9.2% to $609.3 million. Operating income was $101.9 million versus $98.7 million, and net income was $56.2 million versus $55.3 million. Diluted EPS was $1.37 versus $1.36. Gross margin declined to 16.0% from 16.5%.
- Revenue mix and activity: Q3 truck sales revenue increased 3.1% and aftermarket-services revenue increased 5.9%. New-vehicle unit sales rose 3.6% in Q3; heavy-duty units were nearly flat (+0.6%), while medium-duty units rose 11.7%. For nine months, new-vehicle units rose 16.4%, including a 23.1% increase in heavy-duty trucks.
- Cash flow: Nine-month operating cash flow was $99.5 million, compared with $88.6 million. Investing used $315.4 million, including $250.2 million of property and equipment purchases and $65.1 million for acquisitions. Cash declined $126.5 million, from $191.5 million to $64.9 million. Capital expenditures exceeded operating cash flow by approximately $150.7 million.
- Liquidity and debt: Working capital was $86.4 million. Current assets were $1,431.1 million and current liabilities were $1,344.7 million. Floor-plan notes payable were $921.6 million; long-term debt was $582.3 million including current maturities; capital-lease obligations were $78.0 million. The GE floor-plan facility had $739.8 million outstanding against an $850 million commitment. The company reported $65.7 million outstanding under Ford’s wholesale financing agreement. A separate $17.5 million secured line had $4.8 million available after letters of credit. Management said cash and available resources were sufficient for at least 12 months; debt covenants were in compliance.
- Other balance-sheet items: Inventories were $1,114.8 million, up from $1,024.1 million at year-end; property and equipment rose to $1,090.7 million from $923.1 million. Shareholders’ equity was $832.2 million.
Material changes and management commentary
- Q3 revenue and gross profit grew, but operating income, pretax income and net income fell. SG&A rose 8.5% and increased to 12.4% of revenue from 11.9%; net interest expense increased 32.7%. Management cited continued weakness in energy-sector activity, partly offset by medium-duty sales, fleet business and aftermarket demand outside energy-dependent regions.
- Nine-month growth was supported by higher vehicle volumes and acquisitions. However, the lower-margin commercial-vehicle share of revenue increased, while aftermarket services’ share decreased; this mix change contributed to the decline in gross margin.
- Aftermarket-services revenue and gross profit increased, with management citing acquisitions and ongoing repair and maintenance demand. The company completed its SAP dealership-system conversion in Q3.
- On September 28, the company acquired Las Vegas dealership and PacLease assets for approximately $3.4 million in connection with a Charlotte dealership divestiture. The Charlotte assets had a sale price of approximately $6.4 million, offset by $5.9 million of floor-plan debt and accounts payable. Other 2015 acquisitions included Dallas Truck Center assets.
- Backlog was approximately $1,442.0 million at September 30, versus $1,437.7 million a year earlier. Orders may be cancelled, and backlog is not a guarantee of future revenue.
Outlook, risks and contingencies
- Management expected 2015 lease and rental revenue to grow 13%–14%; aftermarket-services gross margins of 36.5%–37.0%; Class 8 truck gross margins of 6.2%–6.6%; medium-duty margins of 5.5%–6.0%; and used-vehicle margins of 9.5%–11.0%. These are management expectations, not assurances. The filing does not provide clear consolidated revenue or earnings guidance.
- Management expected 2015 SG&A at 12.0%–12.5% of revenue and an effective tax rate of approximately 38.0%–39.0%. It planned approximately $200 million of financed truck purchases for leasing during 2015, plus facility construction and other capital spending.
- Management cited A.C.T. Research forecasts of U.S. Class 8 retail sales of approximately 269,000 in 2015, 248,000 in 2016 and 196,000 in 2017; Rush expected 2015 Class 8 market share of 6.3%–6.8%. These are third-party forecasts and company estimates, not guarantees.
- Interest-rate exposure is significant: approximately $1,002 million of floor-plan borrowings and variable-rate real-estate debt were exposed to LIBOR; a 100-basis-point move could change annual interest expense by approximately $10 million. The GE agreement expires July 2016 and allows the lender to terminate on 120 days’ notice.
- The company held $6.7 million of illiquid auction-rate securities backed by municipal bonds, with failed auctions and a 2030 maturity. Management considered the impairment temporary and said the limited liquidity was not expected to materially affect operations. A further 10% decline could reduce equity by about $0.7 million, or be charged to earnings if other-than-temporary.
- Risks include commercial-truck cyclicality, energy-sector weakness, interest rates, used-vehicle inventory and resale values, environmental compliance and potential liabilities, and litigation. Management reported no pending litigation believed likely to materially affect results and no material change in previously disclosed risk factors. Tax authorities could audit specified federal tax years 2011–2014 and state tax years 2010–2014; $1.5 million of unrecognized tax benefits remained recorded.
- Subsequent to quarter-end, the company bought a corporate aircraft for a net $10.0 million and was under contract to buy its Pico Rivera dealership property for approximately $20.0 million. It also had dealership construction projects underway, with estimated costs disclosed for San Antonio, Odessa, Denver and Columbus.
Important facts for investors to verify
- Whether Q3 earnings pressure persists, particularly the effects of energy-sector activity, truck-sales mix, SG&A and higher interest expense.
- Cash needs and financing capacity given large investment spending, lower cash balances, floor-plan borrowings and the GE facility’s July 2016 expiration.
- Whether the company achieves its stated vehicle-volume, market-share, aftermarket-margin and lease/rental expectations; backlog orders remain cancellable.
- Performance and utilization of the expanded lease-and-rental fleet, including resale values and exposure to energy-dependent customers.
- Liquidity and valuation of the auction-rate securities, and potential environmental, litigation or tax exposures.