RUSH ENTERPRISES INC annual report, FY2013

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Rush Enterprises, Inc. — 2013 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; quarterly figures below include the fourth quarter. Rush operates a single reportable Truck Segment, a U.S. network of commercial vehicle dealerships offering new and used vehicle sales, parts, service, leasing, rental, financing and insurance. Parts and service are a recurring, higher-margin component of the business. The financial statements were audited by Ernst & Young, which issued unqualified opinions on the financial statements and internal controls.

Financial performance and liquidity

  • Revenue: $3.385 billion, up 9.5% from 2012. New and used commercial vehicle sales were $2.240 billion; parts and service $988.3 million; leasing and rental $129.6 million.
  • Profit and margins: Gross profit rose 14.2% to $572.0 million; gross margin improved to 16.9% from 16.2%. Operating income fell to $91.8 million from $114.2 million; net income was $49.2 million versus $62.5 million. Diluted EPS was $1.22 versus $1.57. Net margin was approximately 1.5% versus 2.0%.
  • Fourth quarter: Revenue was $925.2 million, gross profit $150.2 million, operating income $27.5 million and net income $14.9 million. Diluted EPS was $0.37, compared with $0.36 in fourth-quarter 2012; quarterly figures are unaudited.
  • Cash flow: Operating cash flow was $173.5 million, down from $219.3 million. Investing activities used $269.7 million, including $191.6 million of property and equipment purchases and $72.7 million for acquisitions. Financing activities provided $114.7 million. Cash increased $18.5 million to $217.3 million.
  • Liquidity and debt: Working capital was $224.3 million. Year-end floor-plan notes payable were $593.6 million; long-term debt, including current maturities, was $482.8 million; capital lease obligations were $45.5 million. The $750 million GE Capital floor-plan facility had $546.1 million outstanding, and the Ford inventory facility had $47.5 million outstanding. The company reported compliance with debt covenants. A separate $15 million credit line had $7 million available after letters of credit.
  • Other metrics: Inventory was $802.2 million, up from $691.0 million. The dealership absorption ratio was 114.0%, compared with 115.9%. Confirmed vehicle-order backlog was $810.2 million, up from $719.2 million; management expected most of it to be filled in 2014, but orders can be cancelled.

Material changes versus 2012

  • Revenue growth reflected acquisitions and increases in parts and service, lease and rental, used vehicles, and medium- and light-duty sales. Parts and service revenue grew 20.9%; new heavy-duty truck units fell 3.8%, while medium-duty units rose 18.5% and used-vehicle units rose 35.0%.
  • Gross margin improved mainly because parts and service represented a larger share of revenue. However, operating income and net income declined as SG&A rose 24.5% to $450.3 million, faster than revenue.
  • SG&A included $10.8 million of retirement pay and benefits under an agreement with former Chairman W. Marvin Rush. Management also cited acquisition-related costs and added resources and technology to support growth.
  • Net interest expense declined 17.9% to $10.7 million, primarily reflecting a lower rate under the GE Capital floor-plan agreement.
  • Acquisitions during 2013 expanded the network in North Carolina, Missouri, Kansas, Ohio, Virginia and Illinois. A separate January 2014 acquisition covering Illinois and Indiana locations was valued at approximately $144.7 million, including cash and Class B shares.

Outlook, risks and unusual items

  • 2014 outlook: Management expected another record year, with higher revenue across business areas, strong Truck Segment cash flow and earnings growth partly offset by spending on growth initiatives. It forecast 2014 lease and rental revenue growth of 20%–30%, and provided segment margin expectations including 6.5%–7.0% for Class 8 trucks, 5.0%–5.5% for medium-duty vehicles, 8.0%–10.0% for used vehicles and 35.0%–37.0% for parts, service and body shop. Management estimated SG&A at 13%–14% of revenue and an effective tax rate of 38%–39%. These are expectations, not guarantees.
  • Management cited industry forecasts of 213,500 U.S. Class 8 retail sales and 193,500 Class 4–7 sales in 2014. Its expected Class 8 share was 4.8%–5.3%; medium-duty share was 4.5%–5.0%. Outcomes depend on demand, execution and market conditions.
  • Key risks include commercial-truck cyclicality; exposure to major suppliers, particularly PACCAR/Peterbilt and Navistar; dealership agreement renewals and change-of-control provisions; potential interruption or replacement of floor-plan financing; interest-rate sensitivity; oil and gas customer cyclicality; inventory valuation; goodwill impairment; environmental liabilities; and weather-related disruption.
  • Variable-rate floor-plan and real-estate debt totaled approximately $669.8 million; management estimated a 100-basis-point LIBOR move could change annual interest expense by about $6.7 million. The GE facility can be terminated by the lender on 120 days’ notice.
  • The company held illiquid auction-rate securities with a $6.6 million fair value and $7.6 million cost basis; auctions had failed. Management considered the impairment temporary and continued to receive interest. Environmental contamination was known at some properties, though management reported no current material environmental liability. No pending litigation was identified as expected to have a material adverse effect.
  • Management reported effective disclosure controls and internal control over financial reporting. The SAP system rollout continued, with completion targeted for the first quarter of 2015.

Important facts for investors to verify

  • Whether 2014 revenue and earnings growth materialized after the acquisitions and planned growth spending, and how much growth was organic versus acquired.
  • Whether SG&A, including the effect of the $10.8 million retirement item, moderated as expected and whether improved gross margin translated into stronger operating profitability.
  • Inventory levels, floor-plan borrowings and financing availability, including lender termination rights, refinancing alternatives and sensitivity to interest rates.
  • Backlog conversion and cancellations, truck-market volumes, product mix, and the durability of parts-and-service margins and absorption.
  • Supplier franchise renewals, concentration in Peterbilt/PACCAR and Navistar, acquisition integration, and the impact of environmental or other contingencies and the illiquid auction-rate securities.