Rush Enterprises, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; filed November 8, 2016. Rush operates a network of commercial-vehicle dealerships and related parts, service, leasing, rental, and finance businesses. Its sole reportable segment is Truck.
Financial performance
Amounts below are in millions of dollars, except per-share figures and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,096.0 | $1,294.1 | $3,193.3 | $3,817.9 |
| Gross profit | $181.3 | $208.0 | $545.1 | $609.3 |
| Gross margin | 16.5% | 16.1% | 17.1% | 16.0% |
| Operating income | $27.6 | $36.0 | $57.3 | $101.9 |
| Net income | $14.9 | $19.9 | $28.1 | $56.2 |
| Diluted EPS | $0.37 | $0.48 | $0.69 | $1.37 |
- Q3 revenue declined 15.3% year over year; nine-month revenue fell 16.4%. New and used vehicle sales were the primary drag: down 19.9% in Q3 and 22.6% for the nine-month period.
- Q3 new heavy-duty unit sales fell 31.5%, while used-vehicle unit sales declined 17.2%. Parts and service revenue decreased 6.7% in Q3, partly due to energy-sector weakness and dealership consolidations.
- Higher-margin aftermarket services made up a larger share of revenue, lifting overall gross margin despite lower gross profit. Used-truck gross margin weakened sharply to 4.8% in Q3 from 10.4%, amid excess used Class 8 inventory and lower values.
- SG&A declined in dollars but rose as a share of revenue: 13.0% in Q3 versus 12.4%, and 14.1% for nine months versus 12.5%. Nine-month pretax income declined 49.8%.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $386.8 million, versus $99.5 million in 2015. The 2016 total included a $199.2 million cash benefit from lower inventory and $24.2 million from lower prepaid and other assets; net income was $28.1 million.
- Investing cash outflow was $154.9 million, including $159.5 million of property and equipment purchases. Financing cash outflow was $205.0 million, including $142.2 million of net repayments of non-trade floor-plan borrowings and $33.3 million of share repurchases. Cash increased $26.9 million to $91.7 million.
- At September 30, working capital was approximately $110.4 million. The company said cash and available funds were sufficient for operating requirements for at least 12 months. Its $17.5 million secured line had no borrowings; $12.3 million supported letters of credit, leaving $5.2 million available.
- Balance-sheet current floor-plan notes payable were $711.9 million. Long-term debt was $494.6 million plus $132.7 million of current maturities; capital-lease obligations totaled $86.4 million, including current maturities. The filing separately reports $606.6 million outstanding under the July 2016 floor-plan credit agreement and $61.7 million under Ford wholesale financing. The filing does not clearly reconcile these facility figures to total floor-plan notes payable.
- The company reported compliance with debt covenants. It estimated that a 100-basis-point rate change could alter annual interest expense by approximately $8.2 million, based on $826.1 million of floor-plan and variable-rate real-estate debt.
Outlook, risks, and unusual items
- Management expected Q4 sales to be slightly below Q3 seasonally; new Class 8 sales were also expected to decline slightly, while medium-duty sales were expected to remain approximately consistent with Q3.
- For 2016, management forecast U.S. Class 8 market sales of about 201,000 units and Rush market share of 5.0%–5.6%; it anticipated roughly 10,000–11,200 Rush Class 8 sales. Forecasts also included 11,500–12,700 medium-duty sales, 1,600 light-duty sales, and 6,700–7,500 used-vehicle sales.
- Other 2016 expectations included 4%–5% growth in lease and rental revenue; aftermarket gross margins of 36.0%–36.3%; SG&A at 13.9%–14.5% of revenue; and an effective tax rate near 39%. These are management estimates, not guarantees.
- Backlog was $836.4 million at September 30, down from $1,442.0 million a year earlier. Orders may be cancelled, and the company has no contractual right to the associated revenue if cancelled.
- In 2016 the company began consolidating its dealership network. It reported approximately $9.0 million of restructuring costs for nine months, including impairment charges, severance for about 100 employees, and lease/contract termination costs. Certain property was classified as held for sale; $15.7 million remained on the balance sheet after two properties were sold in Q3.
- Market risks include truck-industry cyclicality, softer freight demand, energy-sector weakness, excess used-truck supply, and interest-rate exposure. Auction-rate securities worth $6.2 million remained illiquid; they had a $6.7 million cost basis and a $0.5 million unrealized loss. Management said it intended and was able to hold them and did not expect the illiquidity to impair funding operations.
- The company disclosed ordinary-course litigation and environmental compliance exposure, but said no pending litigation was believed likely to materially affect results. It noted known soil and groundwater impacts at some properties and the possibility of future environmental costs. No material change to previously disclosed risk factors was reported.
- Management expected $150–$160 million of 2016 truck purchases or leases for its leasing operations, all to be financed. It also disclosed a November 2016 Colorado real-estate purchase of $6.8 million and a planned Las Vegas purchase estimated at $4.8 million; these events occurred or were contemplated after the September 30 balance-sheet date.
Important facts for investors to verify
- Whether truck demand, especially Class 8, stabilizes and whether the reduced backlog converts to deliveries without significant cancellations.
- Whether inventory-driven operating cash flow is repeatable; the large 2016 cash inflow reflected a substantial inventory reduction.
- Used-truck pricing and margins, alongside the pace and cost of dealership consolidation and real-estate sales.
- Current floor-plan balances, borrowing terms, covenant headroom, and sensitivity to interest rates; the disclosed facility amounts do not fully reconcile to balance-sheet floor-plan notes payable.
- Progress on the remaining $6.6 million of authorized repurchases indicated as available at September 30, 2016, and the program’s November 30, 2016 expiration.
- Potential tax, environmental, litigation, and auction-rate-security valuation developments; the filing does not quantify the ultimate outcomes of these contingencies.