Rush Enterprises, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. Rush operates one reportable segment, a nationwide commercial-vehicle dealership and services network.
Business context and results
The company sells new and used trucks and buses and provides parts, repair, leasing, rental, financing, insurance, upfitting and related services. New and used vehicle sales were the largest revenue source; aftermarket products and services contributed a substantial majority of gross profit.
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $4.714 billion | $4.215 billion |
| Gross profit | $829.9 million; 17.6% margin | $718.0 million; 17.0% margin |
| Operating income | $148.7 million; 3.2% of revenue | $80.7 million; 1.9% of revenue |
| Income before taxes | $136.4 million | $66.4 million |
| Net income | $172.1 million; diluted EPS $4.20 | $40.6 million; diluted EPS $1.00 |
| Operating cash flow | $152.7 million | $521.2 million |
| Cash and cash equivalents, year-end | $124.5 million | $82.0 million |
| Working capital, year-end | $202.9 million | $118.3 million |
| Inventory, year-end | $1.033 billion | $840.3 million |
At year-end, floor-plan notes payable were $778.6 million, long-term debt including current maturities was $611.5 million, and capital lease obligations were $83.1 million. The company reported compliance with its debt covenants. It had no borrowings outstanding on its $100 million working-capital facility and $5.6 million available on a separate secured line of credit.
Changes versus FY 2016
- Revenue rose 11.8%; gross profit increased 15.6%. Heavy-duty truck unit sales grew 21.0%, while medium-duty sales declined 1.6% and light-duty sales declined 0.9%.
- Aftermarket revenue increased 10.4% to $1.471 billion and represented 64.7% of gross profit. The dealership absorption ratio improved to 121.0% from 112.2%.
- Operating income increased to $148.7 million. SG&A rose 7.4% in dollars but declined as a share of revenue, to approximately 13.4%.
- Reported net income included an $82.9 million one-time tax benefit, primarily from revaluing deferred taxes after the federal corporate tax rate reduction. The company also recorded a $5.3 million benefit from excess tax benefits on share-based compensation. Consequently, reported net income and EPS substantially overstate the improvement in pretax operating performance.
- Operating cash flow fell sharply from $521.2 million, principally as inventory increased by $147.5 million and accounts receivable increased by $29.4 million. Cash nevertheless increased by $42.5 million during 2017.
Outlook, risks and unusual items
- For 2018, management cited industry forecasts of 247,000 U.S. Class 8 sales and 244,750 Class 4–7 sales. Rush expected Class 8 market share of 5.7%–6.2%, medium-duty share of 4.5%–5.5%, and approximately 1,700 light-duty sales.
- Management expected 2018 aftermarket revenue growth of 9%–10%, lease and rental revenue growth of 5%–10%, and used-vehicle sales of approximately 7,500–8,500 units. It forecast aftermarket gross margins of 36.0%–36.5%, Class 8 margins of 7.0%–7.5%, and SG&A of 13.5%–14.5% of revenue. These are management estimates, not guarantees.
- Management said available funds were sufficient for operating needs for at least 12 months. Planned 2018 spending included $20–$25 million of recurring capital expenditures, $165–$190 million of lease and rental vehicles (expected to be financed), and $8.6 million remaining on a Denton, Texas facility project.
- Backlog increased to $1.074 billion from $830.3 million. Orders may be cancelled, and backlog is not a guarantee of revenue or earnings; management expected to fill most orders during 2018.
- Interest-rate exposure is material: management estimated a 100-basis-point LIBOR move could change annual interest expense by about $8.7 million. The floor-plan agreement, with $875 million commitment, expires June 30, 2019 and may be terminated by the lender on 120 days’ notice.
- The business depends significantly on PACCAR/Peterbilt and also on Navistar and other manufacturers. Franchise agreements are generally nonexclusive; key Peterbilt and other agreements had near-term expirations. Loss or unfavorable renewal of franchises, supply disruptions, economic cyclicality, inventory values and competition are important risks.
- The company held $6.4 million of auction-rate securities with limited liquidity, although it said this did not materially constrain funding. Environmental conditions at some dealerships, litigation, self-insurance estimates, cybersecurity and severe weather are also risks; management reported no pending litigation expected to have a material adverse effect.
- A first-quarter 2018 review found that major components of the SAP enterprise software platform would need earlier replacement. The $31.9 million net book value of components expected to be replaced was to be amortized over February–August 2018; the company also had a $3.8 million contractual SAP obligation.
- The company repurchased $33.8 million of Class B shares in 2017 and authorized a new $40 million repurchase program through November 29, 2018. No dividends were paid in 2017 or 2016.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Assess normalized earnings and EPS excluding the $82.9 million tax remeasurement benefit and the $5.3 million share-based tax benefit.
- Review inventory growth, its floor-plan funding, and whether the 2017 operating cash-flow decline reverses as inventory is sold.
- Check backlog conversion and cancellations, actual 2018 truck volumes, market share, and aftermarket growth and margins against management’s forecasts.
- Monitor franchise renewals and manufacturer concentration, particularly Peterbilt agreement expirations and the ownership-related termination provisions.
- Confirm access to floor-plan financing through its 2019 maturity and track variable-rate debt exposure, covenant headroom and liquidity.
- Verify the 2018 SAP replacement schedule and resulting amortization expense, and monitor completion and cost of the Denton facility project.