Rush Enterprises, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Rush operates a nationwide commercial-vehicle dealership network, primarily through its Truck Segment, selling new and used vehicles and providing parts, service, leasing, rental, financing and insurance.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $1,376.1m | $1,257.5m | $3,965.7m | $3,505.8m |
| Gross profit / margin | $249.1m / 18.1% | $220.0m / 17.5% | $719.4m / 18.1% | $617.0m / 17.6% |
| Operating income | $58.6m | $48.4m | $134.5m | $110.7m |
| Net income | $41.7m | $29.8m | $92.1m | $66.3m |
| Diluted EPS | $1.03 | $0.72 | $2.27 | $1.62 |
- Q3 revenue rose 9.4%, gross profit 13.2%, and net income 39.9% year over year. For the first nine months, revenue increased 13.1%, gross profit 16.6%, and net income 39.0%.
- Q3 gross-margin improvement reflected a higher share of aftermarket products and services, a higher-margin business, relative to vehicle sales. Aftermarket revenue grew 13.6% in Q3 and 14.4% year to date.
- Q3 SG&A was $177.4m, or 12.9% of revenue; net interest expense was $4.5m, up 44.1%. Nine-month depreciation and amortization increased 53.6%, largely due to accelerated amortization of replaced ERP components.
- Operating cash flow was $203.0m for the first nine months, versus $170.3m in 2017. Investing activities used $165.8m, including $176.2m of capital expenditures; financing activities provided $43.8m. Cash increased $81.0m to $205.6m.
Balance sheet and liquidity
- At September 30, 2018, total assets were $3,189.8m and shareholders’ equity was $1,089.2m. Working capital was approximately $234.2m.
- Inventory was $1,270.9m, up from $1,033.3m at year-end 2017. Floor-plan notes payable were $990.6m. Long-term debt, including current maturities, totaled approximately $599.4m; capital lease obligations totaled approximately $71.7m.
- The company reported $205.6m cash and no outstanding borrowings on its $100m working-capital facility. Of a separate $17.5m secured line, $11.6m supported letters of credit, leaving $5.9m available. Management said available funds and expected operating cash flows should cover needs for at least 12 months; the company was in compliance with debt covenants.
Changes, outlook and notable items
- Vehicle sales trends were mixed: Q3 heavy-duty unit sales fell 8.8% year over year, while medium-duty sales rose 18.4%, light-duty sales 26.8%, and used-vehicle sales 26.0%. Management attributed lower heavy-duty sales partly to prior-year fleet-delivery timing and current supply-chain constraints.
- Management expected strong Q4 Class 8 sales, but warned that product mix could pressure truck margins. It anticipated typical seasonal softness in aftermarket demand beginning in Q4. The Q3 absorption ratio was 122.4%, versus 120.9% a year earlier.
- 2018 outlook included aftermarket revenue growth of 14%–15%; lease and rental revenue growth of 10%–12%; and approximate gross-margin ranges of 7.5%–8.0% for Class 8, 5.7%–6.2% for medium-duty, and 11%–12% for used vehicles. Management expected SG&A at 13.0%–13.5% of revenue and an effective tax rate of approximately 24.25%. It also forecast 2,000–2,200 light-duty and 8,000–8,500 used vehicle sales. These are management estimates, not guarantees.
- Commercial-vehicle order backlog was $2,089.4m at September 30, versus $1,005.8m a year earlier. Orders may be cancelled, and the company has no contractual right to the reported backlog revenue if cancellations occur.
- The company recorded approximately $19.9m of accelerated ERP-platform amortization in Q1 and Q2 after determining that components needed earlier replacement. Nine-month ERP amortization was $21.2m. No impairment of manufacturer franchise rights was recorded.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate; the company’s 2017 results included a provisional $82.9m tax benefit from deferred-tax remeasurement. A 2015 federal tax examination was underway, but the company did not expect a material financial-statement impact.
- The company paid a $0.12-per-share Q3 dividend and repurchased approximately $12.1m of shares during the quarter. After quarter-end, the board declared another $0.12 dividend and authorized a new share-repurchase program of up to $150m, replacing the prior program.
- Interest-rate exposure is material: approximately $1,073.6m of floor-plan borrowings and variable-rate real-estate debt were exposed to LIBOR; a 100-basis-point rate change was estimated to change annual interest expense by about $10.7m. Other disclosed risks include commercial-vehicle cyclicality, supply constraints, competition, regulation, environmental obligations and possible uninsured litigation claims.
Investor verification priorities
- Confirm whether the large order backlog converts to deliveries and revenue; orders are cancellable and delivery timing varies.
- Track inventory growth, floor-plan financing costs, interest-rate movements and the impact of supply constraints and vehicle mix on margins.
- Assess the ERP replacement’s remaining costs and amortization, and the expected balance-sheet effect of adopting the lease standard in 2019.
- Verify execution of management’s 2018 revenue, unit-sales, margin, SG&A and tax-rate outlook; these expectations are subject to market and operating risks.
- Monitor discretionary buybacks and dividends, covenant compliance, and developments in the federal tax examination, litigation and environmental matters.