Rush Enterprises, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Comparisons are with Q1 2020 unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Rush operates a nationwide commercial-vehicle dealership network through its Truck Segment, selling new and used vehicles and providing parts, service, leasing, rental, financing and insurance. It also has smaller retail tire, insurance agency and guest ranch businesses. The filing describes more than 100 Rush Truck Centers in 22 states.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Total revenue | $1,231.8 | $1,286.7; down 4.3% |
| Gross profit / margin | $244.8 / 19.9% | $234.5 / 18.2% |
| Operating income / margin | $56.2 / 4.6% | $35.2 / 2.7% |
| Income before taxes | $56.6 | $31.7; up 78.8% |
| Net income | $45.3 | $23.1 |
| Basic / diluted EPS | $0.82 / $0.79 | $0.42 / $0.41 |
| Operating cash flow | $40.1 | $138.8 |
| Cash and cash equivalents | $316.1 at March 31 | $312.0 at December 31, 2020 |
| Working capital | $368.4 | As of March 31, 2021 |
| Total net liquidity | Approximately $421.6 | Includes cash and $105.5 available under credit agreements, excluding floor-plan facilities |
| Long-term debt, including current maturities | $505.1 | At March 31, 2021 |
| Floor-plan notes payable | $550.3 | Balance-sheet amount at March 31, 2021 |
The MD&A separately reports $456.6 million outstanding under the Floor Plan Credit Agreement at March 31, 2021. The filing text does not reconcile this figure to the $550.3 million balance-sheet floor-plan amount; investors may wish to verify the scope of each balance.
Cash used in investing activities was $32.2 million, including $32.9 million of property and equipment purchases. Financing activities used $4.0 million. The company declared dividends of $0.18 per share in Q1, compared with $0.09 a year earlier.
Material changes versus Q1 2020
- Revenue declined, mainly as commercial-vehicle sales fell 5.3%. New vehicle unit sales decreased 13.4%, including a 28.5% decline in medium-duty units; used vehicle unit sales increased 23.5%.
- Gross profit increased 4.4% and gross margin rose to 19.9%, with management citing stronger used-truck margins and a more favorable product mix. Used-vehicle gross margin was 18.1%, versus 5.7%.
- SG&A declined 5.5% to $175.0 million, reflecting expense reductions and lower selling expense. Net interest expense fell 89.4% to $0.5 million, attributed to lower inventory levels and floor-plan interest rates.
- Net income nearly doubled, while operating cash flow declined to $40.1 million from $138.8 million. The prior-year quarter benefited from a $153.6 million cash inflow from inventory reduction; Q1 2021 operating cash flow was also affected by lower customer deposits and other working-capital movements.
- Commercial vehicle backlog increased to approximately $1.736 billion from $1.091 billion a year earlier. Orders may be cancelled, and the company has no contractual right to the backlog revenue if cancelled.
Guidance, outlook and management commentary
- Management said business conditions had improved and believed the worst effects of the COVID-19 pandemic were behind the company, while noting uncertainty remained.
- A.C.T. Research forecast 2021 U.S. retail sales of 248,400 Class 8 trucks and 251,500 Class 4–7 vehicles. Rush expected respective market shares of 5.5%–6.0% and 4.3%–5.0%, equivalent to approximately 13,600–14,900 Class 8 and 10,800–12,500 Class 4–7 sales.
- Management expected approximately 1,600 light-duty and 7,000–7,500 used commercial vehicles sold in 2021; lease and rental revenue growth of 6%–9%; and Aftermarket Products and Services revenue growth of 8%–10%, each compared with 2020.
- Expected 2021 gross margins: aftermarket 36.5%–37.5%; new heavy-duty trucks 7.5%–8.5%; new medium-duty vehicles 6.5%–7.5%; and used commercial vehicles approximately 10%–14%. Management expected SG&A at 13%–14% of revenue, an effective tax rate of 23%–25%, and lower net interest expense than in 2020.
- Supply-chain and component shortages had caused manufacturer production interruptions and could constrain new-vehicle availability through 2021. Parts supply constraints were expected to affect the industry over the next two quarters, although management did not expect a significant overall effect on its 2021 aftermarket revenue.
- Planned 2021 spending included $150–$180 million for lease and rental vehicles, to be financed, and $30–$35 million for recurring capital expenditures. The $100 million share-repurchase program had $8.3 million repurchased by March 31 and expires December 31, 2021.
Risks, contingencies and unusual items
- The business remains exposed to economic and truck-industry cycles, vehicle and parts availability, customer demand, fuel prices, credit availability and interest rates. A 100-basis-point change in LIBOR was estimated to change annual interest expense by approximately $5.9 million.
- COVID-19 impacts remained difficult to predict. Management also identified risks from environmental compliance and remediation, self-insurance estimates, litigation and potential impairment of goodwill or franchise rights. No material franchise-right impairment was recorded; management reported no pending litigation it believed would materially affect financial position or results.
- The company reported compliance with debt covenants and believed available funds and expected operating cash flows were sufficient for operating requirements for at least the next 12 months. The $100 million working-capital facility had no outstanding draws and expires no later than June 30, 2022.
- The Q1 effective tax rate was 20%, compared with 28% in Q1 2020, primarily reflecting a tax benefit from vesting and exercise of equity awards. The filing reported $3.3 million of unrecognized tax benefits; it did not anticipate a significant change in that amount over the next 12 months.
Important facts for investors to verify
- Reconcile the $550.3 million balance-sheet floor-plan payable with the $456.6 million outstanding under the named Floor Plan Credit Agreement.
- Monitor whether the elevated backlog converts to deliveries and revenue, given cancellation rights and manufacturing constraints.
- Assess whether used-truck margins, aftermarket growth and the company’s 2021 sales and margin assumptions prove sustainable.
- Track operating cash flow and working-capital movements, especially customer deposits and receivables, against reported earnings.
- Review exposure to variable interest rates, floor-plan financing and the company’s planned lease-fleet and capital spending.