Rush Enterprises, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone Q4 filing; the filing also provides unaudited quarterly results. Amounts below are in U.S. dollars.
Business context
Rush operates a single reportable Truck Segment, a network of 78 commercial vehicle dealerships in 15 states. Its services include new and used truck sales, parts and service, leasing and rental, financing, and insurance. The company emphasizes its aftermarket business, which contributed 63.4% of gross profit in 2012.
Financial and operating performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $3,090.6 million | $2,580.6 million | +19.8% |
| Gross profit / margin | $500.8 million / 16.2% | $423.3 million / 16.4% | +18.3%; margin down 0.2 points |
| Operating income / margin | $114.2 million / 3.7% | $97.3 million / 3.8% | +17.3% |
| Net income | $62.5 million | $55.2 million | +13.1% |
| Diluted EPS | $1.57 | $1.42 | +10.6% |
| Operating cash flow | $219.3 million | $(81.4) million | Improved by $300.7 million |
- Revenue growth reflected higher truck sales, parts and service activity, leasing and rental, and acquisitions. New and used vehicle revenue rose 19.3%; parts and service revenue rose 21.0%.
- New truck sales totaled 18,427 units, up 18.6%; used sales were 4,744 units, up 2.0%. Parts and service gross margin eased to 38.8% from 39.5%; used truck margin fell to 8.3% from 9.4%.
- Net interest expense increased 81.8% to $13.0 million, principally reflecting larger inventory levels and interest-rate swaps. The effective tax rate was 38.3% versus 38.8%.
- Q4 comparison: Revenue was $732.3 million versus $776.1 million in Q4 2011; net income was $14.2 million versus $19.4 million. Q4 diluted EPS was $0.36 versus $0.50.
Liquidity, debt and cash flow
- At year-end, cash and cash equivalents were $198.8 million and working capital was $217.6 million. Management said available funds were sufficient for operating requirements for at least 12 months.
- Debt and financing included $534.5 million of floor-plan notes, $399.7 million of long-term debt, and $50.0 million of capital lease obligations. Long-term debt maturities included $80.0 million due in 2013. The company reported covenant compliance.
- Investing activities used $274.3 million, including $171.0 million of property and equipment purchases and $104.6 million for acquisitions. Financing activities provided $46.0 million; cash declined $9.0 million during the year.
- Inventory was $691.0 million, up from $649.6 million. The $600 million GE Capital floor-plan facility had approximately $500 million outstanding; it may be terminated without cause on 120 days’ notice. Ford inventory financing had $34.5 million outstanding.
Changes, outlook and key risks
- The December 31, 2012 MVI Group acquisition expanded Rush into seven Ohio truck and bus dealership locations and related leasing franchises; the transaction was valued at approximately $104.5 million. Acquisition and purchase-price allocation figures were preliminary.
- Management expected 2013 parts, service and body shop sales to remain strong. Its stated estimates included Class 8 sales market share of 5.2%–5.5%, medium-duty share of 4.1%–4.6%, and lease and rental revenue growth of 20%–25%. It forecast parts/service blended gross margin of 38%–40%, Class 8 truck margin of 6.5%–7.0%, and a tax rate of 37%–39%. These are management expectations, not guarantees.
- Management cited U.S. industry forecasts of approximately 198,000 Class 8 truck sales and 184,000 Class 4–7 sales in 2013. Backlog was $719.2 million, up from $678.7 million; orders may be cancelled, and backlog is not a measure of future earnings.
- Planned 2013 spending included $125 million of leasing trucks, expected to be financed; $15 million–$18 million of recurring capital expenditures; and dealership construction in Ardmore, Oklahoma and Corpus Christi, Texas. A $40 million share repurchase authorization was approved February 1, 2013, but does not require purchases. No dividends were paid in 2011 or 2012.
- Major exposures include dependence on PACCAR/Peterbilt (Peterbilt trucks represented 47.4% of total revenue), cyclical truck demand and oil-and-gas customer activity, variable interest rates, and reliance on floor-plan financing. A 100-basis-point LIBOR change was estimated to affect annual interest expense by approximately $6.2 million.
- The company held illiquid auction-rate securities with a $6.6 million fair value and $7.6 million cost basis; further impairment is possible. Environmental rules and known soil or groundwater contamination at some properties may create future costs. Management reported no material environmental liabilities and no pending litigation it believed would materially affect financial position or results, while acknowledging uncertainty.
- Goodwill was $198.3 million; the fourth-quarter 2012 impairment test found no impairment. The financial statement audit and the auditor’s internal-control opinion were unqualified; management also concluded controls were effective.
Important facts for investors to verify
- Whether the 2013 truck-demand, market-share, margin and lease-growth expectations were achieved, and how the company performed after the Ohio acquisition.
- Inventory levels, truck valuation allowances, parts/service margins, and the conversion of reported operating cash flow into sustainable cash generation.
- Debt maturities, financing costs, covenant headroom, and continued availability of the GE Capital floor-plan facility.
- The liquidity and valuation of auction-rate securities, environmental exposures, and any changes in manufacturer franchise or control requirements.
- The filing gives conflicting figures for year-end availability under the secured line of credit: the MD&A states $2.4 million available, while a note states $2.6 million. Verify the correct amount and related letter-of-credit collateral.