Rush Enterprises, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2020, compared with Q1 2019. Rush operates a nationwide commercial-vehicle dealership network, selling new and used vehicles and providing parts, service, leasing, rental and related financial services. Amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $1,286.7 | $1,348.3 | Down 4.6% |
| Gross profit / margin | $234.5 / 18.2% | $256.9 / 19.1% | Profit down 8.7% |
| Operating income / margin | $35.2 / 2.7% | $56.9 / 4.2% | Down 38.1% |
| Net income | $23.1 | $37.1 | Down 37.7% |
| Diluted EPS | $0.62 | $0.98 | Down 36.7% |
| Operating cash flow | $138.8 | $(39.3) | Improved |
| Cash and equivalents, quarter end | $137.5 | $126.6 | Q1 2020 cash decreased $44.1 from year-end 2019 |
- Revenue mix: commercial vehicle sales were $789.6, parts and service $428.0, leasing and rental $60.8, finance and insurance $4.5, and other $3.9. Vehicle sales fell 5.8%; parts and service fell 2.4%; leasing and rental increased 2.3%.
- Margins and profitability weakened: cost of products sold was 81.8% of revenue versus 80.9%; SG&A was 14.4% versus 13.9%. Used-vehicle gross margin declined to 5.7% from 10.6%, reflecting inventory write-downs; aftermarket margin declined to 36.6% from 37.7%.
- Operating cash flow benefited substantially from a $153.6 inventory reduction, partly offset by higher receivables and lower customer deposits. Investing activities used $47.3; financing activities used $135.6. Capital expenditures were $49.5, including $34.5 for rental and leasing vehicles.
- At March 31, current assets were $1,557.6 and current liabilities $1,351.8, for working capital of approximately $205.8. Management reported total net liquidity of $243.2, including $137.5 cash and $105.7 available under credit agreements, excluding floor-plan facilities.
- Debt included $888.7 of floor-plan notes payable and $610.5 of long-term debt, including current maturities. Finance-lease obligations totaled $98.6; operating-lease obligations totaled $56.5. The $100.0 working-capital facility had no borrowings and was extended to June 2022. The company reported compliance with debt covenants.
Material changes and management commentary
- Compared with Q1 2019, total revenue declined $61.7 and pretax income fell 36.1% to $31.7. Lower vehicle and aftermarket gross profit were key pressures; lower net interest expense, down 35.2% to $4.8, provided a partial offset.
- New heavy-duty unit sales fell 13.5% to 3,078; medium-duty sales rose 24.9% to 3,264; used-vehicle sales fell 15.3% to 1,558. Dealership absorption ratio decreased to 114.3% from 121.5%.
- Commercial-vehicle order backlog was $1,091.4 at March 31, 2020, versus $2,063.2 a year earlier; orders may be cancelled.
- Rush Truck Centers remained open as essential businesses, though some hours changed and in-person sales were curtailed. Management said Q1 pandemic effects were limited overall, with a negative impact on used-vehicle sales and aftermarket revenue in March, but expected a substantial adverse impact for the foreseeable future.
- Manufacturers represented by Rush suspended production at certain plants. Management anticipated significant pandemic-related pressure on new truck sales in Q2 and Q3 and expected aftermarket revenue to be negatively affected in Q2. Customers were delaying purchases amid economic uncertainty.
Outlook, risks and unusual items
- Management withdrew its previously issued 2020 estimates and said it could not provide a full-year outlook due to uncertainty. A.C.T. Research forecast 2020 U.S. retail sales of 127,500 Class 8 units, down 54.7% from 2019, and 147,400 Class 4–7 units, down 44.8%.
- Management estimated $30–$35 million of 2020 recurring capital expenditures, excluding uncertain vehicle purchases for leasing and rental. It expected operating cash flows and available funding to meet operating needs for at least 12 months.
- The company suspended its share repurchase program on March 24, 2020; Q1 repurchases were $19.9 million. Executives and directors reduced compensation, and management was identifying further cost savings and deferring capital spending where appropriate.
- The board declared a $0.13-per-share dividend payable June 10, 2020, estimated at approximately $4.7 million. Management expected quarterly dividends to continue but cautioned that future payments are not assured.
- Rush performed an interim goodwill assessment in response to COVID-19 and recorded no impairment. The pandemic’s duration and severity could nevertheless lead to future impairment. Expected-credit-loss accounting was adopted in Q1 with no material financial-statement impact; the allowance for credit losses ended at $1.7 million.
- Market risk: a 100-basis-point change in LIBOR was estimated to change annual interest expense by approximately $9.5 million. Other risks include manufacturer interruptions, changing customer demand, liquidity and covenant pressures, environmental obligations, and ordinary-course litigation. Management did not identify pending litigation expected to materially affect financial position or results.
Key facts for investors to verify
- Whether sales, margins, receivables and credit-loss allowances deteriorated further as pandemic disruption continued after March 31.
- How quickly vehicle manufacturers resumed production and whether the sharply lower backlog converted to delivered sales or cancellations.
- Whether inventory reductions and operating cash flow were sustainable, and how floor-plan balances and available liquidity evolved.
- Compliance with debt covenants, interest-rate exposure, and the capacity to maintain dividends amid weaker earnings and cash needs.
- Whether lower used-truck values, lease-fleet utilization, or prolonged economic weakness led to further write-downs or goodwill impairment.