Rush Enterprises, Inc. — Q1 2013 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2013, compared with the same period in 2012. Rush operates a nationwide commercial-vehicle dealership network, with truck sales, parts and service, leasing and rental, and related offerings. It reported one principal segment: Truck.
Key financial metrics
Amounts below are in millions of dollars, rounded, except per-share figures and percentages.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $756.8 | $777.3 | Down 2.6% |
| Gross profit / margin | $133.8 / 17.7% | $128.3 / 16.5% | Profit up 4.3% |
| Operating income / margin | $24.6 / 3.2% | $29.4 / 3.7% | Down 16.2% |
| Net income | $13.5 | $15.9 | Down 14.8% |
| Diluted EPS | $0.34 | $0.40 | Down $0.06 |
| Operating cash flow | $57.1 | $(130.2) | Improved |
| Cash and cash equivalents, at period end | $205.0 | $163.8 | Up year over year |
Vehicle sales revenue fell 11.3% to $489.6 million; parts and service revenue rose 17.7% to $231.5 million; and lease and rental revenue increased 28.4% to $30.1 million. Gross-margin improvement reflected a shift toward higher-margin aftermarket revenue, while aftermarket gross margin itself declined to 37.1% from 39.9%.
At March 31, 2013, current assets were $981.3 million and current liabilities were $734.4 million; management reported working capital of approximately $246.9 million. Floor-plan notes payable were $498.3 million, compared with $534.5 million at year-end 2012. Long-term debt, including current maturities, totaled approximately $407.5 million; capital lease obligations totaled approximately $49.2 million. The company reported compliance with its debt covenants.
Material changes and management commentary
- New and used commercial-vehicle sales declined, led by a 24.6% reduction in heavy-duty truck units. Medium-duty, light-duty, and used-vehicle units increased.
- Parts, service, and body-shop sales benefited from aging vehicles, expanded offerings, and the December 2012 acquisition of nine Ohio dealerships. Management said aftermarket sales were expected to remain strong through 2013.
- SG&A increased 9.8% to $102.1 million, and rose to 13.5% of revenue from 12.0%. Depreciation and amortization also increased, partly due to the Ohio acquisition and facility expansion.
- Operating cash flow benefited chiefly from lower inventory and receivables and higher payables, partly offset by a decrease in accrued expenses. Investing cash outflow was $29.4 million, including $30.2 million of property and equipment purchases. Financing cash outflow was $21.4 million, including net repayments of non-trade floor-plan financing.
Outlook, risks, and unusual items
- Management forecast 2013 lease and rental revenue growth of 20%–25%, parts/service/body-shop blended gross margins of 37%–39%, and an effective tax rate of 37%–39%. It also expected SG&A at 11%–12% of revenue, although Q1 was above that range.
- Management’s 2013 market expectations included U.S. Class 8 retail sales of approximately 198,000 units and Rush market share of 5.2%–5.5%; it expected medium-duty market share of 4.1%–4.6%, approximately 1,500 light-duty sales, and 4,800–5,300 used-vehicle sales. These are forecasts, not results.
- Confirmed commercial-vehicle order backlog was $770.8 million at March 31, 2013, versus $649.3 million a year earlier; the company expected to fill the backlog during 2013.
- Planned 2013 investment included approximately $125 million of trucks for leasing operations, expected to be financed, and $15–$18 million of recurring capital expenditures. A $40 million share-repurchase authorization was approved in February; no shares were repurchased in Q1.
- Interest-rate exposure is material: $565.9 million of floor-plan and variable-rate real-estate debt was outstanding. Management estimated that a 100-basis-point rate change could alter annual interest expense by approximately $5.7 million. Cash-rate sensitivity was estimated at approximately $2.1 million of annual interest income per 100 basis points.
- The company held $6.6 million of illiquid auction-rate securities, with a $7.6 million cost basis, valued using Level 3 inputs. A further 10% decline could reduce equity by approximately $0.7 million if temporary, or result in a similar income-statement loss if other-than-temporary.
- Other risks include cyclical truck demand, energy-sector weakness, manufacturer and customer concentration, environmental compliance and potential remediation, self-insurance estimates, and ordinary-course litigation. Management said it knew of no pending claim expected to materially affect the company, while noting litigation outcomes remain uncertain. No material change to the risks in the 2012 Form 10-K was reported.
Important facts for investors to verify
- Whether aftermarket growth and margin performance offset continued softness in heavy-duty truck sales, and how the Ohio dealerships affect costs and absorption.
- Whether management’s market, revenue, margin, expense, capital-spending, and backlog expectations are achieved.
- Debt and interest-rate exposure, including floor-plan balances, financing terms, covenant compliance, and the planned financing of fleet additions.
- The valuation and liquidity status of auction-rate securities and the company’s exposure to environmental, self-insurance, tax, and litigation contingencies.
- Progress and any actual purchases under the $40 million share-repurchase authorization.