Rush Enterprises, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Financial figures below are in millions of dollars unless otherwise stated. The company operates a nationwide commercial-vehicle dealership network, with truck sales, parts and service, leasing and rental, and finance and insurance activities.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,241.0 | $913.1 | $3,382.2 | $2,459.5 |
| Gross profit | $198.7 | $150.3 | $558.0 | $421.8 |
| Operating income | $41.0 | $27.9 | $98.7 | $64.3 |
| Net income | $23.5 | $15.2 | $55.3 | $34.4 |
| Diluted EPS | $0.57 | $0.37 | $1.36* | $0.85* |
- Q3 revenue rose 35.9%, operating income 47.2% and net income 54.7% year over year. For the first nine months, revenue increased 37.5%, operating income 53.5% and net income 61.0%.
- Gross margin was 16.0% in Q3 versus 16.5% a year earlier; nine-month gross margin was 16.5% versus 17.1%. Management attributed the decline to a higher share of lower-margin vehicle sales. Operating margin improved to 3.3% from 3.1% in Q3 and to 2.9% from 2.6% year to date.
- New and used truck sales drove growth. Q3 new heavy-duty unit sales increased 68.3% and used vehicle sales increased 19.6%. Parts and service revenue rose 32.3%; lease and rental revenue rose 38.1%.
Cash flow, balance sheet and liquidity
- At September 30, cash was $144.7, working capital was approximately $125.3, and current assets and liabilities were $1,260.2 and $1,134.9, respectively. Cash was down $72.6 from year-end 2013. Management said available funds were sufficient for operating requirements for at least 12 months.
- Nine-month operating cash flow was $88.6, investing cash flow was negative $328.4, and financing cash flow was positive $167.2. Investing included $182.2 of property and equipment purchases and $147.8 of acquisition spending. Financing included $153.4 of long-term borrowings and $101.8 of net non-trade floor-plan draws.
- Balance-sheet floor-plan notes payable were $722.1; long-term debt, including current maturities, totaled $551.9; and capital lease obligations totaled $44.0. The company reported $660.9 outstanding under its GE Capital credit agreement and $61.2 under Ford Motor Credit’s inventory facility. It was in compliance with debt covenants.
- A $15.0 secured line of credit had no advances outstanding; $11.5 was pledged for letters of credit, leaving $3.5 available. The GE Capital agreement had a $750.0 commitment and was scheduled to expire July 2016, subject to GE Capital’s termination right.
- Shareholders’ equity was $738.8. The company repurchased $9.4 of Class B shares under its $40.0 buyback authorization as of September 30.
Changes, outlook and notable items
- Growth reflected stronger truck demand as well as acquisitions completed since 2013, including the January 2014 acquisition of Chicago International Trucks and related businesses for approximately $145.1. The company also acquired a Georgia parts and service facility and formed a 50%-owned California used-truck joint venture.
- Management reported record Q3 revenue, net income, Class 8 sales and market share, aftermarket sales, and dealership absorption ratio. The absorption ratio reached 120.2%, compared with 114.6% a year earlier.
- Management expected 2014 Class 8 market share of 6.5%–7.0%, Class 4–7 share of 4.9%–5.3%, approximately 2,000 light-duty vehicle sales, 7,500–8,500 used-vehicle sales, and 38%–40% growth in lease and rental revenue. It expected aftermarket gross margins of 35.5%–36.5%, Class 8 margins of 6.9%–7.5%, medium-duty margins of 5.3%–5.9%, used-vehicle margins of 9.8%–10.5%, and a 2014 effective tax rate of approximately 38%–39%.
- Confirmed order backlog was $1,437.7 at September 30, versus $666.5 a year earlier. Management expected to fill most orders in 2014 and 2015. It cited freight growth and economic improvement, while warning that sustained low oil prices could weaken energy-sector activity and aftermarket demand.
- Management expected approximately $170.0 of lease-fleet truck purchases in 2014, all financed, and $4.0–$6.0 of recurring capital expenditures in the remainder of the year. Dealership construction and renovation contracts were estimated at about $49.0 in total, with projects extending into Q2 2015.
- The company invested $2.0 in research and development for a planned compressed-natural-gas fuel-system venture with 3M; the amount was expensed in SG&A, and additional launch costs were expected. The CIT acquisition added $47.3 of goodwill under a preliminary purchase-price allocation.
- Risks include truck-market cyclicality, interest-rate exposure, environmental compliance and potential liabilities, and the limited liquidity of $6.8 of auction-rate securities. A 100-basis-point LIBOR change was estimated to affect annual interest expense by approximately $7.9. The company reported no litigation expected to have a material adverse effect and no material change to previously disclosed risk factors.
Investor verification points
- EPS presentation: The income statement reports nine-month 2014 basic/diluted EPS of $1.39/$1.36, while Note 4 appears to reverse those figures; the 2013 basic EPS also differs between the two presentations. Verify against the filed financial statements and XBRL data.
- Assess how much of revenue and backlog growth reflects acquisitions versus underlying demand, and whether the backlog converts on expected timing and margins.
- Review the funding needs and returns of fleet purchases, dealership construction, acquisitions and the share-repurchase program, given the decline in cash and increased borrowings.
- Monitor margin trends, especially aftermarket and lease/rental margins, and the company’s sensitivity to interest rates, oil prices and truck-market conditions.
- Review acquisition accounting, including the preliminary $47.3 goodwill allocation for the CIT transaction, and the valuation and liquidity assumptions for auction-rate securities.
*The nine-month diluted EPS figures above follow the consolidated income statement; Note 4 presents conflicting basic/diluted amounts.