Rush Enterprises, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2011; interim financial statements are unaudited. Rush operates a network of commercial-vehicle dealerships and related parts, service, leasing, rental, financing and insurance businesses. The John Deere construction-equipment business sold in September 2010 is reported as discontinued operations.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
- Q3 revenue: $696.4, up 71.6% from $405.8. New and used vehicle sales were $487.3 (up 96.2%); parts and service were $182.6 (up 34.2%).
- Q3 earnings: Gross profit was $113.8, up 45.5%; operating income was $28.3, versus $13.7; continuing-operations income was $16.0, versus $8.0. Net income was $16.0, versus $14.2, which included $6.1 of after-tax income from discontinued operations in Q3 2010. Diluted EPS from continuing operations was $0.41, versus $0.21; diluted net EPS was $0.41, versus $0.37.
- Q3 margins: Gross margin declined to 16.3% from 19.3%, principally because lower-margin vehicle sales made up a larger share of revenue. Operating margin improved to 4.1% from 3.4%; continuing net margin was 2.3% versus 2.0%.
- Nine-month results: Revenue was $1,804.5, up 74.4%; gross profit was $301.7, up 46.9%; operating income was $62.9, versus $28.5; continuing-operations income was $35.8, versus $15.4. Net income was $35.8, versus $22.1, including $6.7 from discontinued operations in 2010. Diluted EPS from continuing operations was $0.92, versus $0.40.
- Cash flow: Nine-month operating cash flow was a use of $50.5, compared with a use of $3.7 in 2010. The filing attributes the 2011 use mainly to increases in inventory and receivables. Management’s non-GAAP adjusted operating cash flow was positive $122.6, versus $54.5, after adjusting for floor-plan financing draws and acquisition-related inventory. Investing cash use was $150.0; financing provided $214.7. Cash rose $14.3 to $183.2.
- Liquidity and debt: Working capital was $163.4; current assets were $797.1 and current liabilities $633.7. Floor-plan notes payable were $424.2; long-term debt, including current maturities, was $286.6; capital lease obligations totaled $43.4. The company reported compliance with debt covenants and believed available funds were sufficient for at least 12 months. Of its $10.0 secured credit line, $2.3 was available after letters of credit.
Material changes and management commentary
- New-vehicle unit sales rose 114.2% in Q3, with heavy-duty sales up 92.7% and medium-duty sales up 119.5%; used-unit sales rose 30.1%. Parts, service and body-shop sales increased 34.2%. The dealership absorption rate was 115.8% for Q3 and 112.8% year to date.
- Management cited improving economic conditions, greater credit availability, aging vehicles and energy-sector activity as factors supporting demand. It reported a commercial-vehicle order backlog of approximately $696.0 at September 30, versus $217.8 a year earlier, and expected to fill the backlog during 2011.
- Management described Q3 as the company’s highest quarterly pretax income to date and emphasized diversification toward aftermarket services and broader vehicle offerings. It also cited constraints on medium-duty vehicle supply and noted that future truck deliveries depend partly on manufacturers’ and suppliers’ production capacity.
- The company acquired Nalley Motor Trucks for approximately $55.3 and Heintzelman’s Truck Center for approximately $4.7, paid in cash. Purchase-price allocations were preliminary. It had also agreed to acquire West Texas Peterbilt and Peck Road Ford, with closings expected in Q4 2011, subject to conditions.
- The company placed $42.5 of SAP software and dealership-management systems in service in August and plans to convert all centers and leasing operations over three years. It expected ongoing SAP costs of $0.3–$0.4 monthly and amortization of approximately $0.2 monthly.
Outlook, risks and unusual items
- Management cited industry forecasts for a continued commercial-vehicle recovery and expected 2011 company market share of 5.0%–5.3% in Class 8 trucks and 3.5%–3.8% in Class 4–7 vehicles. It expected lease and rental revenue growth of 17%–20% for 2011 and used-vehicle sales of approximately 4,200–4,500 units.
- Management’s 2011 margin and expense expectations included parts/service gross margins near 39%, Class 8 truck margins of 6.5%–7.0%, medium-duty margins of 4.5%–5.0%, used-vehicle margins of 8%–10%, lease/rental margins of 16%–18%, SG&A of 11%–13% of revenue, and an effective tax rate near 39%. These are management expectations, not guarantees.
- Planned spending included approximately $90.0 of lease-fleet truck purchases in 2011, expected to be financed, and $3.0–$6.0 of recurring capital expenditures during the remainder of 2011. Acquisition funding and facility expansion may add financing requirements.
- Interest-rate exposure included approximately $531.5 of floor-plan borrowings and variable-rate real-estate debt; a 100-basis-point rate change could affect annual interest expense by approximately $5.3. The company had $45.0 of interest-rate swaps.
- Auction-rate securities had a $6.6 fair value against a $7.6 cost basis; auctions had failed and liquidity remained limited. The company recorded a $1.0 pretax impairment in Q2, deemed temporary, and said it could hold the securities. A further 10% decline could reduce equity by about $0.7 if temporary, or cause a similar pretax loss if other-than-temporary.
- Other risks include truck-market cyclicality, manufacturer supply and customer demand, interest rates, environmental compliance and possible contamination, self-insurance estimates, tax examinations, and ordinary-course litigation. Management said no pending litigation was expected to materially affect results, while acknowledging litigation uncertainty. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether the large order backlog converts to deliveries and revenue as expected, and how supplier capacity affects fulfillment.
- Whether the lower consolidated gross margin persists as vehicle sales grow relative to higher-margin aftermarket business.
- Working-capital needs, inventory growth, floor-plan balances and the distinction between GAAP operating cash flow and management’s non-GAAP adjusted measure.
- Financing, cash requirements and integration costs for acquisitions, facility projects and the SAP rollout.
- Interest-rate exposure, covenant compliance, auction-rate security valuation and any material developments in environmental, tax or litigation matters.