Rush Enterprises, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results; amounts below are in millions except per-share data. Rush operates a network of commercial-vehicle dealerships and related parts, service, leasing, finance and insurance businesses, reported principally as one Truck Segment.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $745.1 | $696.4 | $2,358.3 | $1,804.5 |
| Gross profit | $125.2 | $113.8 | $383.1 | $301.7 |
| Operating income | $27.6 | $28.3 | $89.0 | $62.9 |
| Net income | $14.9 | $16.0 | $48.2 | $35.8 |
| Diluted EPS | $0.38 | $0.41 | $1.22 | $0.92 |
| Gross margin | 16.8% | 16.3% | 16.2% | 16.7% |
- Q3: Revenue rose 7.0%, but net income fell about 7.1% and operating income fell about 2.5%. Gross profit increased 10.0%; higher SG&A and interest expense weighed on earnings. SG&A was $91.3 million, or 12.2% of revenue, versus $79.7 million, or 11.4%, a year earlier. Net interest expense rose 78.6% to $3.4 million, mainly because of higher truck inventory.
- Nine months: Revenue increased 30.7%, gross profit 27.0%, pretax income 35.4% and net income about 34.6%. Diluted EPS increased to $1.22 from $0.92. Revenue growth reflected higher truck sales, parts and service activity, leasing and acquisitions; gross margin declined to 16.2% from 16.7%.
- Revenue mix: Q3 parts, service and body-shop sales rose 15.4%; new and used vehicle revenue rose 3.1%; lease and rental revenue rose 22.2%. Q3 new heavy-duty unit sales declined 8.1%, while medium-duty, light-duty and used unit sales increased.
- Cash flow: Nine-month operating cash flow was $89.0 million, compared with cash used of $50.5 million in 2011. Investing used $129.7 million, including $130.1 million of property and equipment purchases; financing provided $63.2 million. Cash increased $22.5 million to $230.3 million.
Financial position and liquidity
At September 30, 2012, total assets were $1,862.9 million and shareholders’ equity was $591.5 million. Working capital was approximately $240.2 million. Current assets were $1,054.7 million and current liabilities $814.6 million. Inventory was $715.9 million, up from $649.6 million at year-end 2011.
Current liabilities included $575.2 million of floor-plan notes and $70.8 million of current long-term debt. Long-term debt, net of current maturities, was $305.0 million; capital lease obligations totaled $48.0 million, including current maturities. The company reported $538.4 million outstanding under its GE Capital floor-plan agreement and $36.8 million under Ford Motor Credit financing. Management said cash and available resources were sufficient for at least the next 12 months; the $10 million secured credit line had $2.3 million available after letters of credit.
Changes, outlook and risks
- Truck demand was softer in Q3 amid economic and political uncertainty; management said heavy-duty demand had been stronger in the first half. Q3 heavy-duty deliveries decreased even as the broader U.S. Class 8 market grew, according to the company’s cited industry data.
- Management expected parts, service and body-shop sales to remain strong through 2012. Its stated 2012 expectations included lease and rental revenue growth of 20%–25%; parts/service gross margins of about 38%–41%; Class 8 margins of 6.5%–7.0%; medium-duty margins of 4.5%–5.0%; used-vehicle margins of 7.5%–8.5%; and an effective tax rate of 37%–39%. These are management expectations, not guarantees. No specific consolidated revenue or earnings guidance was provided.
- Management expected to purchase or lease $20–$30 million of trucks for leasing operations in the remainder of 2012, with financing, and planned $2–$5 million of recurring capital expenditures. Construction was underway for dealership facilities in Ardmore, Oklahoma, and Corpus Christi, Texas.
- The company had agreed to acquire an Ohio dealership group, subject to regulatory approval and customary closing conditions, with closing expected in Q4 2012. UD Trucks announced it would end U.S. distribution at year-end 2012; Rush expected no material financial impact and planned continued parts and service support at affected locations.
- At September 30, the commercial-vehicle order backlog was $664.4 million, down from $696.0 million a year earlier. Orders may not necessarily convert to revenue on a predictable schedule.
- Interest-rate exposure was material: a 100-basis-point LIBOR move was estimated to change annual interest expense by approximately $6.4 million on applicable floor-plan and variable-rate real-estate borrowings. The company had $42.6 million notional of interest-rate swaps.
- The company held $6.6 million of illiquid auction-rate securities, against a $7.6 million cost basis, and said it intended and was able to hold them until liquidity returned. Goodwill and franchise-right values remain subject to impairment testing. The filing also describes ordinary-course litigation, environmental compliance and potential site-remediation exposures; management did not believe these were currently material. Tax authorities could examine specified federal and state tax years.
Management identified general economic conditions, commercial-truck cyclicality, customer demand, interest rates, competition, regulation and seasonality among factors that could cause actual results to differ from forward-looking statements. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Ohio acquisition closed as expected, and its financing, contribution and integration costs.
- Subsequent truck orders and deliveries, backlog conversion, and whether Q3 softness in heavy-duty demand persisted.
- Inventory levels, floor-plan borrowings, interest expense and compliance with debt covenants as investment and leasing activity continued.
- Parts/service performance and vehicle-category margins against management’s stated ranges, particularly used-truck margins.
- Liquidity and valuation developments for the auction-rate securities, plus any material changes in environmental, litigation or tax exposures.