RUSH ENTERPRISES INC annual report, FY2016

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Rush Enterprises, Inc. — FY2016 Form 10-K

Reporting period: Year ended December 31, 2016; filed March 1, 2017. The filing is an annual report, not a standalone fourth-quarter filing. Rush operates one reportable segment: a nationwide commercial-vehicle dealership network offering vehicle sales, parts and service, leasing and rental, and related services.

Financial performance

  • Revenue: $4.215 billion, down 15.4% from $4.980 billion in 2015. New and used vehicle sales declined 21.4%; parts and service revenue fell 3.6%; lease and rental revenue increased 4.1%.
  • Profitability: Gross profit was $718.0 million, down 8.5%; gross margin improved to 17.0% from 15.8%, primarily because higher-margin aftermarket services made up a larger share of revenue. Operating income was $80.7 million, down 33.4%; net income was $40.6 million, down 38.6%. Diluted EPS was $1.00 versus $1.61.
  • Margins: Operating margin was approximately 1.9%, versus 2.5% in 2015; net margin was approximately 1.0%, versus 1.4%. Aftermarket services generated 67.0% of gross profit. Dealership absorption ratio was 112.2%, down from 115.6%.
  • Cash flow: Operating cash flow was $521.2 million, versus $227.3 million. The increase included a $291.8 million cash inflow from lower inventory. Investing activities used $189.4 million; financing activities used $314.6 million. Cash increased $17.2 million to $82.0 million.
  • Liquidity: Working capital was $118.3 million. The company reported $5.5 million available on its secured credit line after $12.0 million was pledged for letters of credit. Management said available funds were sufficient for operating requirements for at least 12 months.
  • Debt: Year-end floor plan notes payable were $646.9 million; long-term debt was $603.2 million, including current maturities, and capital lease obligations were $84.5 million. Debt covenants were met. Variable-rate floor plan and real-estate debt totaled approximately $755.6 million; management estimated a 100-basis-point LIBOR change would affect annual interest expense by about $7.6 million.

Fourth-quarter and year-over-year changes

  • Fourth-quarter 2016 revenue was $1.021 billion, versus $1.162 billion in fourth-quarter 2015. Gross profit was $172.9 million versus $175.7 million; operating income was $23.4 million versus $19.4 million; net income was $12.5 million versus $9.8 million. Diluted EPS was $0.31 versus $0.24.
  • New Class 8 truck sales fell 35.9% to 10,816 units; new vehicle sales overall declined 20.7%. Used-vehicle unit sales fell 11.5%. Medium-duty units declined 0.9%, while light-duty units increased 0.7%.
  • Backlog declined to $830.3 million from $1.224 billion at year-end 2015. Orders are cancellable and do not guarantee future revenue.
  • Inventory fell to $840.3 million from $1.061 billion. Floor plan notes payable declined to $646.9 million from $854.8 million.

Outlook, risks and unusual items

  • Management expected U.S. Class 8 retail sales to decline 21.8% in 2017 to 160,000 units and expected Rush’s Class 8 sales to decline in line with the market. It anticipated Rush Class 8 market share of 5.5%–6.0% and approximately 8,800–9,600 units.
  • Management expected medium-duty sales to remain stable, lease and rental revenue to grow 5%–10%, and aftermarket gross margins to range from 36.0%–36.3%. It forecast SG&A at 13.9%–14.5% of revenue. These are management expectations, not guarantees.
  • The company recorded approximately $9.0 million of pre-tax 2016 restructuring costs associated with dealership consolidation, including asset impairments, severance and other exit costs. Assets held for sale were $14.0 million at year-end. Goodwill impairment testing resulted in no impairment charge.
  • Key risks include commercial-truck cyclicality and weak freight/used-truck conditions; reliance on PACCAR/Peterbilt and Navistar/International; dealership renewal and change-of-control provisions; floor-plan financing availability and variable rates; environmental liabilities; and potential goodwill or franchise-right impairments. Auction-rate securities of $6.2 million remained illiquid, though management did not expect the lack of liquidity to materially affect operations.
  • No dividend was paid in 2016. The company repurchased $43.5 million of shares during the year and authorized a new $40 million repurchase program through November 30, 2017.
  • Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.

Important facts for investors to verify

  • Whether the expected 2017 Class 8 market contraction and lower backlog translated into sales, margins and earnings as forecast.
  • Whether the strong 2016 operating cash flow was sustainable, given that a large portion reflected inventory reduction.
  • Current floor-plan borrowing levels, financing terms, covenant headroom and sensitivity to interest-rate changes.
  • Progress in selling remaining held-for-sale properties and any further restructuring or impairment charges.
  • Renewal status of near-term franchise agreements and any material changes in manufacturer relationships.