Rush Enterprises, Inc. — Q1 2017 Form 10-Q
Business and period: Full-service commercial vehicle dealer operating a nationwide network of Rush Truck Centers, with vehicle sales, parts and service, leasing and rental, and related financing and insurance. The unaudited quarter ended March 31, 2017; comparisons are with Q1 2016 unless noted.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $1,044.8 million | $1,070.8 million | Down 2.4% |
| Gross profit | $187.9 million | $183.3 million | Up 2.5% |
| Gross margin | 18.0% | 17.1% | Up 0.9 percentage points |
| Operating income | $24.8 million | $8.2 million | Up $16.7 million |
| Net income | $14.5 million | $2.4 million | Up $12.1 million |
| Diluted EPS | $0.36 | $0.06 | |
| Operating cash flow | $37.5 million | $101.2 million | Down $63.7 million |
Parts and service revenue rose 2.4% to $350.1 million, while new and used vehicle sales fell 4.9% to $636.0 million. New vehicle unit sales declined 11.5%, led by a 22.0% drop in medium-duty units; heavy-duty units increased 1.0%. Aftermarket services generated 66.9% of gross profit. Dealership absorption improved to 113.4% from 106.4%.
SG&A was $150.4 million, down 7.4%; the prior-year quarter included $8.1 million of dealership-network restructuring and impairment charges. Net interest expense declined 34.2% to $2.8 million, primarily due to increased floor-plan prepayments. The 2017 effective tax rate was 39.0%, including a $1.1 million benefit from adoption of new stock-compensation accounting guidance.
Balance sheet, liquidity and debt
At March 31, 2017, cash was $89.1 million and working capital was approximately $140.1 million. Current assets were $1,163.5 million and current liabilities were $1,023.4 million. Inventories totaled $872.9 million, up from $840.3 million at year-end 2016.
Floor-plan notes payable were $684.6 million. Long-term debt, including current maturities, totaled $591.4 million; capital lease obligations, including current maturities, totaled $82.6 million. The company reported compliance with debt covenants and stated available funds and expected operating cash flows should meet operating requirements for at least 12 months. Its new $100 million revolving working-capital facility had no advances outstanding at quarter-end; borrowing is subject to borrowing-base limits. The separate $17.5 million secured line had $5.5 million available after $12.0 million was pledged for letters of credit.
Operating cash flow was lower year over year, with inventory growth and receivables increases consuming cash. Investing activities used $32.4 million, including $39.2 million of property and equipment purchases, partly offset by proceeds and other items. Financing activities provided $2.0 million; the company repurchased $7.6 million of stock and made principal payments on debt and leases.
Changes, outlook and management commentary
- Management attributed improved gross margin primarily to a more favorable mix, with lower-margin vehicle sales representing a smaller share of revenue and higher-margin aftermarket services a larger share.
- Management expected 2017 aftermarket-services revenue to increase slightly and blended aftermarket gross margin to be 36.0%–36.3%. It forecast 2017 Class 8 market share of 6.0%–7.0%, medium-duty share of 4.9%–5.5%, and approximately 1,700 light-duty and 6,200–7,000 used-vehicle sales.
- Other 2017 expectations included lease and rental revenue growth of 5%–8%; Class 8 gross margin of 6.5%–7.0%; medium-duty gross margin of 5.7%–6.5%; used-vehicle gross margin of 8%–9%; and SG&A of 13.9%–14.5% of revenue. These are management expectations, not guarantees.
- Management planned $150–$175 million of financed truck purchases for leasing operations and $20–$25 million of recurring capital expenditures in 2017. It expected a tax rate of approximately 38.5%–39.0%.
- Commercial vehicle order backlog was $1,036.2 million, down from $1,072.1 million a year earlier. Orders may be canceled, and the company expected to fill most of the backlog during 2017.
- During Q1, the company opened Peterbilt dealerships in Farmington, New Mexico, and College Station, Texas, and sold one property held for sale. Remaining restructuring-related real estate held for sale totaled $12.9 million; no impairment was recorded in Q1 2017.
Risks and contingencies
- Results are cyclical and sensitive to economic conditions, customer demand, credit availability, fuel prices, regulation and interest rates. Management noted continued challenging over-the-road fleet sales and a nationwide oversupply of used trucks, pressuring used-vehicle values and margins.
- A 100-basis-point change in LIBOR was estimated to change annual interest expense by approximately $7.9 million, based on $790.3 million of floor-plan borrowings and variable-rate real estate debt at quarter-end.
- The company held $6.2 million of illiquid auction-rate securities, valued using Level 3 inputs. A further 10% decline in fair value could reduce equity by about $0.6 million if temporary, or produce a similar income-statement loss if deemed other-than-temporary.
- Environmental compliance and potential remediation liabilities, including known soil or groundwater impacts at some properties, could require additional expenditures. Management believed no material environmental liability currently existed.
- The company reported no pending litigation believed likely to have a material adverse effect and no material change to the risk factors in its 2016 Form 10-K. It had $2.4 million of unrecognized tax benefits and did not anticipate a significant change in the next 12 months.
- The company adopted the new stock-compensation accounting standard in 2017. It planned to adopt the revenue-recognition standard in 2018; management did not expect a significant timing impact for its predominantly point-in-time product sales but was still evaluating disclosure and transition effects.
Important facts for investors to verify
- Whether vehicle demand, particularly medium-duty and fleet sales, and the used-truck oversupply evolve in line with management’s market and margin assumptions.
- Whether stronger earnings translate into improved operating cash generation as inventory and receivables change.
- Availability and cost of floor-plan and other variable-rate financing, covenant headroom, and the effect of interest-rate changes.
- Progress in selling remaining held-for-sale properties and any further restructuring, environmental or impairment costs.
- Execution of the 2017 capital-spending and stock-repurchase plans, and the eventual impact of the new revenue-recognition standard.