Rush Enterprises, Inc. — Q1 2019 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2019, compared with Q1 2018. Rush operates a nationwide commercial-vehicle dealership network, with parts, service, leasing, rental and related financial services. Its principal reportable segment is Truck.
Financial performance and position
- Revenue: $1.348 billion, up 8.7% from $1.241 billion. New and used vehicle sales rose 8.4%; parts and service sales rose 9.5%; lease and rental revenue rose 3.3%.
- Profit: Gross profit was $256.9 million, up 13.2%; gross margin expanded to 19.1% from 18.3%. Operating income was $56.9 million versus $32.4 million; net income was $37.1 million versus $21.0 million. Diluted EPS increased to $0.98 from $0.51.
- Expenses and margins: SG&A rose 9.0% to $187.2 million and was 13.9% of revenue versus 13.8%. Net interest expense increased 70.9% to $7.4 million. Depreciation and amortization expense fell to $12.9 million from $22.9 million, largely because Q1 2018 included accelerated amortization of replaced ERP components.
- Cash flow: Operating activities used $39.3 million, compared with $117.7 million provided in Q1 2018. The main working-capital use was a $106.3 million inventory increase. Investing activities used $89.2 million, including dealership and fleet capital spending, the Country Ford Trucks acquisition and the RTC Canada investment. Financing activities provided $123.3 million. Cash declined $5.2 million to $126.6 million.
- Liquidity and debt: Working capital was approximately $168.8 million. At March 31, the balance sheet showed $1.111 billion of floor-plan notes, a $75.0 million working-capital-facility draw, $596.0 million of long-term debt including current maturities, and $69.7 million of finance-lease obligations. Adoption of lease accounting added $53.3 million of operating-lease liabilities and corresponding right-of-use assets. The company reported compliance with debt covenants.
- Capital returns: The company paid $4.4 million in dividends and repurchased $25.6 million of stock during the quarter. It declared a further $0.12 per-share dividend for June 2019.
Changes versus Q1 2018
- Revenue and gross profit grew, with gross margin improving by 0.8 percentage points. Management attributed margin improvement to aftermarket operations, vehicle sales and truck leasing and rental.
- New heavy-duty unit sales increased 7.4%; new medium-duty units declined 3.4%; used vehicle units declined 1.0%. The dealership absorption ratio improved to 121.5% from 120.0%.
- Net income increased substantially, helped in part by the absence of the prior-year ERP amortization charge. Higher interest expense and SG&A partly offset operating improvement.
- Operating cash flow shifted from a substantial inflow to an outflow, chiefly because inventory expanded. Results also reflect adoption of the new lease standard on January 1, 2019; comparative 2018 figures were not restated.
Outlook, commentary and notable items
- Management expected 2019 aftermarket revenue growth of 9%–11%, lease and rental revenue growth of 3%–8%, and aftermarket gross margins of approximately 37.5%–38.5%. It expected 2019 SG&A at 12.5%–13.0% of revenue and an effective tax rate of 24%–26%.
- Management expected new Class 8 sales to remain consistent in Q2 and Q3, while noting caution about Q4 market conditions. It forecast 2019 Class 8 market share of 5.6%–6.0%; medium-duty market share of 5.1%–5.4%; approximately 2,200 new light-duty vehicle sales; and 9,000–9,300 used vehicle sales. These are management estimates, not guarantees.
- Management cited strong aftermarket activity and customer demand, but identified economic conditions, truck-market cyclicality, fuel prices, interest rates, credit availability and regulation as business risks. A 100-basis-point change in LIBOR was estimated to change annual interest expense by approximately $11.9 million.
- On February 25, Rush acquired a 50% interest in RTC Canada, which operates 14 Ontario dealerships, and received an option to acquire the remaining interest through February 2024. It also acquired Country Ford Trucks’ Ceres, California assets for approximately $7.9 million.
- After quarter-end, Rush replaced its $875 million floor-plan agreement with a $1.0 billion facility maturing in June 2022. It also guaranteed up to CAN$250 million, plus certain related amounts, of credit facilities for a subsidiary of RTC Canada. These subsequent events add financing capacity and guarantee exposure.
- Commercial-vehicle order backlog was approximately $2.063 billion, up from $1.358 billion a year earlier; orders may be cancelled and do not guarantee revenue. The company reported no pending litigation it believed would have a material adverse effect, while noting the inherent uncertainty of legal matters and potential environmental liabilities.
Investor verification priorities
- Confirm the sustainability of revenue and margin growth, particularly management’s truck-market, aftermarket and margin assumptions.
- Monitor inventory growth, operating cash conversion, floor-plan borrowing and interest-rate sensitivity.
- Review the new floor-plan facility’s terms and the scope and potential exposure of the CAN$250 million RTC Canada guarantee.
- Assess the RTC Canada investment, call option and performance, and verify whether backlog converts to delivered sales.
- Track lease liabilities, fleet investment needs, capital expenditures, dividends and remaining stock-repurchase authorization.