Rush Enterprises, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance sheet compared with December 31, 2019. Unaudited. Rush operates a nationwide commercial-vehicle dealership network, with vehicle sales, parts and service, leasing and rental, and financing and insurance offerings. Its principal reportable segment is Truck.
Financial performance
Amounts are in millions except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,178.6 | $1,599.3 | $3,467.7 | $4,492.1 |
| Gross profit | $212.5 | $264.8 | $639.3 | $791.2 |
| Operating income | $42.9 | $58.3 | $101.1 | $177.0 |
| Net income | $33.9 | $39.1 | $73.9 | $117.8 |
| Diluted EPS | $0.60 | $0.70 | $1.32 | $2.09 |
| Gross margin | 18.0% | 16.6% | 18.4% | 17.6% |
- Q3 revenue fell 26.3%; commercial-vehicle sales declined 33.5%, and aftermarket products and services revenue fell 12%. New vehicle unit sales were down 38.3%, while used vehicle units rose 10.0%.
- Q3 gross profit declined 19.8%, but gross margin improved as lower-margin vehicle sales made up a smaller share of revenue and higher-margin aftermarket activity a larger share. Aftermarket gross margin itself decreased, partly due to lower supplier rebates and higher inventory-obsolescence reserves.
- Q3 SG&A declined 19.2% to $155.5 million, but increased to 13.2% of revenue from 12.0%. Net interest expense fell 86.3% to $1.1 million, reflecting lower inventory and floor-plan rates.
- For the first nine months, revenue declined 22.8%, operating income 42.9%, and net income 37.3%. Gross margin improved, but SG&A as a share of revenue rose to 14.3% from 12.8%.
Cash flow, liquidity and debt
- Operating cash flow was $590.5 million for the first nine months, versus $221.6 million a year earlier. The increase was substantially supported by a $439.2 million inventory reduction and other working-capital changes, rather than higher earnings.
- Investing cash outflow was $98.9 million, including $107.8 million in capital expenditures. Financing cash outflow was $413.6 million, including net repayments on non-trade floor-plan notes, debt and lease principal payments, dividends, and share repurchases.
- Cash rose to $259.5 million from $181.6 million at year-end. Working capital was approximately $277.2 million. Management reported total net liquidity of approximately $365.2 million, including cash and $105.7 million available under credit agreements, excluding floor-plan facilities.
- Balance-sheet floor-plan notes payable were $613.7 million; long-term debt was $564.9 million, including current maturities. Finance lease obligations totaled $109.2 million. The company reported no draws on its $100 million working-capital facility and compliance with debt covenants at quarter-end.
- Total assets decreased to $3.01 billion from $3.41 billion, principally alongside lower inventory. Shareholders’ equity was $1.23 billion, versus $1.16 billion at year-end.
Outlook, risks and notable items
- Management said COVID-19 had significantly reduced Q3 revenue and expected the pandemic to continue affecting business. Dealerships remained open as essential businesses. Management believed the worst effects might be behind the company, while emphasizing uncertainty around the pandemic and economy.
- Management expected Q4 new Class 8 and medium-duty sales to be similar to Q3. Its cited industry forecast projected 2020 U.S. Class 8 retail sales of 186,300 units, down 33.8% from 2019, and Class 4–7 sales of 216,100 units, down 19.1%. Rush projected 2020 market shares of 5.3%–5.5% for Class 8 and 4.8%–5.0% for Class 4–7.
- For 2020, management expected aftermarket revenue to decline approximately 9%–11%, lease and rental revenue to decline 4%–5%, and SG&A to be 13.8%–14.5% of revenue. It expected an effective tax rate of approximately 26%–28%. These were management estimates, not guarantees.
- Commercial-vehicle backlog was $1.067 billion at September 30, down from $1.260 billion a year earlier. Orders can be cancelled; the company expected to fill the reported backlog during the rest of 2020 and first half of 2021.
- Interest-rate exposure: management estimated that a 100-basis-point change in LIBOR could change annual interest expense by approximately $6.7 million. Other risks include truck-market cyclicality, customer demand, credit availability, environmental regulation, and potential impairment of goodwill or franchise rights if assumptions deteriorate.
- The company reported no pending litigation it believed would materially affect its financial position or results, while noting ordinary-course litigation and the possibility of uninsured or adverse claims. It had $3.0 million of unrecognized tax benefits; management did not anticipate a significant change in the next 12 months.
- A 3-for-2 stock split was distributed on October 12, 2020; reported share and per-share figures were retrospectively adjusted. The board declared a $0.14-per-share dividend in October, payable in December. The company resumed repurchases during Q3 after a pandemic-related suspension; $23.2 million had been repurchased under the program by September 30.
Key facts for investors to verify
- How much of the strong operating cash flow reflects sustainable operations versus inventory reduction and other working-capital movements.
- Whether vehicle volumes, aftermarket demand, gross margins, and backlog recover as management anticipated amid pandemic and industry uncertainty.
- Current floor-plan borrowing, total debt and lease obligations, credit-facility availability, and covenant headroom.
- Whether management’s 2020 revenue, expense, tax-rate and market-share expectations were achieved; these are forward-looking estimates in this filing.
- Potential effects of COVID-19, credit losses, goodwill or franchise-right impairment, environmental matters, and tax examinations.