Rush Enterprises, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Rush operates a nationwide network of commercial vehicle dealerships and related parts, service, leasing, rental, and financial services businesses. The Truck Segment is its sole reportable segment. Financial amounts below are in U.S. dollars; millions unless otherwise indicated.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $1,563.2 million | $1,231.8 million | +26.9% |
| Gross profit / gross margin | $345.4 million / 22.1% | $244.8 million / 19.9% | +41.1%; +2.2 percentage points |
| Operating income | $107.5 million | $56.2 million | +91.2% |
| Net income | $92.5 million | $45.3 million | +104.0% |
| Diluted EPS | $1.60 | $0.79 | +102.5% |
| Operating cash flow | $34.6 million | $40.1 million | Down $5.6 million |
- Revenue growth was led by commercial vehicle sales and aftermarket products and services. Aftermarket revenue rose 30.7%; new and used vehicle revenue rose 25.1%. New heavy-duty unit sales increased 17.8%, while medium-duty sales declined 8.3%; used vehicle units rose 24.5%.
- Gross margin improvement reflected stronger new and used vehicle margins and a greater aftermarket mix. SG&A increased 28.3% to $224.4 million; SG&A was 14.4% of revenue versus 14.2% a year earlier.
- Cash and cash equivalents were $209.5 million at March 31, up from $148.1 million at year-end. Working capital was approximately $394.9 million. Inventories increased to $1,111.1 million from $1,020.1 million.
- Balance-sheet liabilities included $702.2 million of current floor plan notes payable, $338.4 million of long-term debt, and finance and operating lease obligations. Separately, the company reported $591.4 million outstanding under its BMO floor plan facility, $153.4 million under the Wells Fargo facility, and $185.0 million under the PACCAR facility. The filing’s descriptions do not reconcile these facility balances directly to the balance-sheet line items.
- Investing activities used $16.3 million, including $45.7 million of property and equipment purchases, partly offset by $27.5 million received in the Cummins transaction. Financing activities provided $43.1 million. The company paid $11.1 million in dividends and repurchased $14.4 million of stock during the quarter.
Material changes and unusual items
- Q1 results include a $12.5 million gain on the sale of a 50% interest in Momentum Fuel Technologies to a Cummins subsidiary. Rush received $27.5 million and retained a joint-venture interest accounted for under the equity method.
- The Summit Truck Group acquisition, completed in December 2021, contributed dealership operations to Q1 2022; therefore, year-over-year results are not fully comparable on an unchanged-business basis. The purchase price allocation remained preliminary.
- Gross margin on used commercial vehicle sales fell to 15.9% from 18.1%. Lease and rental gross margin rose to 31.9% from 17.5%; management said a change in fleet financing presentation moved related interest expense from cost of sales to interest expense.
- After quarter-end, on May 2, 2022, Rush acquired an additional 30% of RTC Canada for approximately $20 million, increasing ownership to 80%; it expects to consolidate RTC Canada from the acquisition date.
Outlook, risks, and contingencies
- Management cited industry forecasts of 244,500 U.S. Class 8 retail sales and 263,200 Class 4–7 retail sales in 2022. Rush projected Class 8 market share of 5.8%–6.1%, Class 4–7 share of 4.0%–4.2%, approximately 1,700 light-duty sales, and 7,800–8,200 used commercial vehicle sales.
- Management expected 2022 lease and rental revenue growth of 25%–30% and aftermarket revenue growth of 20%–25%. It forecast aftermarket gross margins of 37.5%–38.5%, new heavy-duty margins of 8.0%–9.5%, new medium-duty margins of 7.5%–8.5%, and used-vehicle margins declining toward 8%–10% by year-end. Expected SG&A was 13%–14% of revenue and the effective tax rate 23%–24%.
- Management said it expected strong 2022 results, while noting production constraints and parts shortages, inflation, rising interest rates and fuel prices, and lower spot freight rates as potential pressures. The company stated liquidity was sufficient for at least the next twelve months and that it was in compliance with debt covenants.
- Commercial vehicle order backlog was $3,441.4 million versus $1,736.0 million a year earlier, its highest reported level. Orders may be cancelled, and fulfillment depends on manufacturers meeting production schedules; management warned that delays and industry headwinds could increase cancellation risk.
- A 100-basis-point increase or decrease in LIBOR, SOFR, or prime rates was estimated to change annual interest expense by approximately $10.4 million, based on $1,040.6 million of specified borrowings. COVID-related supply-chain disruption remained a stated uncertainty.
- Rush reported no litigation believed reasonably likely to have a material adverse effect and no material change to risk factors from its 2021 Form 10-K. It disclosed $4.3 million of unrecognized tax benefits; management did not anticipate a significant change in the next twelve months.
Important facts for investors to verify
- How much of revenue and earnings growth reflects Summit’s contribution, pricing, and vehicle mix versus underlying comparable-dealership growth.
- Whether manufacturers can deliver against the record backlog, and how cancellations, production limits, and used-truck price normalization affect sales and margins.
- The reconciliation and maturity, interest-rate, and covenant terms of floor plan, Wells Fargo, PACCAR, and other debt and lease financing.
- Whether working-capital and inventory growth, planned fleet purchases, capital spending, dividends, and repurchases remain supportable by operating cash flow.
- The financial and integration effects of consolidating RTC Canada following the May 2022 ownership increase.