Rush Enterprises, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. The company operates a network of commercial vehicle dealerships and related parts, service, leasing, rental, financing and insurance businesses.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $913.1 million | $745.1 million | $2,459.5 million | $2,358.3 million |
| Gross profit | $150.3 million | $125.2 million | $421.8 million | $383.1 million |
| Operating income | $27.9 million | $27.6 million | $64.3 million | $89.0 million |
| Net income | $15.2 million | $14.9 million | $34.4 million | $48.2 million |
| Diluted EPS | $0.37 | $0.38 | $0.85 | $1.22 |
| Gross margin | 16.5% | 16.8% | 17.1% | 16.2% |
Q3 revenue rose 22.5%, while net income increased about 1.8%; operating income was nearly flat. For the first nine months, revenue rose 4.3%, but operating income fell about 27.8% and net income fell about 28.8%. The nine-month gross-margin improvement reflected a greater contribution from higher-margin parts and service revenue; SG&A rose faster than revenue.
Parts and service revenue increased 22.2% in Q3 and 18.9% year to date. Q3 new and used vehicle revenue increased 22.5%; new vehicle unit sales rose 29.3%, including 14.7% growth in heavy-duty and 46.7% in medium-duty units. Year-to-date new and used vehicle revenue declined 2.4%, reflecting lower heavy-duty sales.
Cash, debt and liquidity
- Cash was $166.3 million at September 30, down from $198.8 million at year-end 2012. Working capital was approximately $226.7 million; management said available funds were sufficient for at least 12 months.
- Nine-month operating cash flow was $77.8 million, versus $89.0 million in 2012. Investing used $189.0 million, including $123.0 million for property and equipment and $63.2 million for acquisitions. Financing provided $78.7 million. Cash decreased $32.5 million.
- Balance-sheet obligations included $588.4 million of floor-plan notes, $447.2 million of current and long-term debt, and $45.6 million of capital lease obligations. The company reported $535.6 million outstanding under its GE Capital credit agreement and $52.8 million under Ford Motor Credit inventory financing.
- The GE Capital facility commitment was increased to $750 million, at three-month LIBOR plus 2.03%, and runs to July 11, 2016; GE Capital may terminate on 120 days’ notice. The company reported compliance with debt covenants. A separate $10 million secured line had $2 million available after letters of credit.
Changes, outlook and notable items
- The company acquired dealership and leasing assets in Missouri, Kansas, Virginia, Ohio and North Carolina during 2013; aggregate cash used for acquisitions in the first nine months was $63.2 million. It completed the Prairie International acquisition in October and said a larger Chicago/Indiana transaction was expected to close in January 2014.
- Management expected parts, service and body shop revenue to remain strong through 2013 and into 2014. Its stated 2013 expectations included lease and rental revenue growth of 30%–35%; parts/service/body shop gross margins of 37%–38%; Class 8 margins of 6.5%–7.0%; medium-duty margins of 5.0%–5.5%; used-vehicle margins of 9.5%–10.5%; and an effective tax rate of about 39%.
- Management cited improving Navistar order intake and projected U.S. Class 8 retail sales of 188,000 units in 2013, 215,000 in 2014 and 221,015 in 2015, based on industry forecasts. Its expected 2013 company market shares were 4.8%–5.3% for Class 8 and 4.5%–5.0% for Class 4–7 vehicles. These are forecasts, not results.
- SG&A included $10.8 million of retirement pay and benefits under a May 2013 agreement with former Chairman W. Marvin Rush. Management also expected elevated general and administrative costs from acquisitions, staffing and technology investment.
- Management expected approximately $125 million of 2013 truck purchases for leasing operations, financed, and $2–$5 million of recurring capital expenditures during the remainder of the year. Dealership construction projects were underway in Corpus Christi, San Antonio and Orlando.
- The company held illiquid auction-rate securities with a $6.6 million fair value against a $7.6 million cost basis; failed auctions limited liquidity. Interest-rate-sensitive floor-plan and variable-rate real-estate debt totaled approximately $666.6 million; management estimated a 100-basis-point LIBOR move could change annual interest expense by about $6.7 million.
- Management reported no pending litigation believed likely to have a material adverse effect and no material change to the risk factors in its 2012 Form 10-K. It noted potential environmental liabilities, including known soil or groundwater contamination at some properties. Disclosure controls were assessed as effective.
Important facts for investors to verify
- The MD&A says nine-month pretax income increased 28.4%, but the financial statements report pretax income of $56.5 million versus $78.9 million, a decline of approximately 28.4%. Confirm the apparent MD&A error; the reported statement figures indicate a decrease.
- Assess whether revenue growth and acquisition contributions can offset rising SG&A and the decline in year-to-date operating income and earnings.
- Track inventory, floor-plan financing, cash generation and the terms and availability of the expanded GE Capital facility, including its termination provisions.
- Evaluate acquisition integration, preliminary purchase-price allocations and the expected contribution of the completed and proposed transactions.
- Monitor the retirement-agreement expense, auction-rate security liquidity and valuation, interest-rate exposure, and environmental and other contingencies.