Rush Enterprises, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014. Rush operates a network of commercial-vehicle dealerships and related parts, service, leasing, rental, and finance businesses. Unless stated otherwise, amounts below are in U.S. dollars and millions.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $1,193.5 | $958.7 | +24.5% |
| Gross profit | $193.6 | $165.9 | +16.7% |
| Operating income | $30.3 | $22.7 | +33.3% |
| Net income | $16.8 | $12.0 | +39.7% |
| Diluted EPS | $0.41 | $0.30 | +36.7% |
| Operating cash flow | $(96.6) | $(7.1) | Greater cash use |
Commercial-vehicle sales were $800.2 million, up 33.2%; parts and service revenue was $337.0 million, up 9.1%; and lease and rental revenue was $47.8 million, up 16.6%. New-vehicle unit sales rose 38.9%, led by heavy-duty vehicles (+51.6%) and medium-duty vehicles (+36.6%); light-duty unit sales fell 22.2%.
Gross margin declined to 16.2% from 17.3%, primarily because vehicle sales—a lower-margin category—increased to 67.0% of revenue from 62.7%, while higher-margin parts and service fell to 28.3% of revenue from 32.2%. SG&A was $152.6 million, up 13.5%, but declined to 12.8% of revenue from 14.0%. Operating margin was approximately 2.5% versus 2.4%; net margin was approximately 1.4% versus 1.3%. Aftermarket Services gross margin increased to 36.3% from 35.7%. Net interest expense declined 6.1%; the effective tax rate was 38.75% in both periods.
Cash, liquidity, and debt
Cash and cash equivalents were $47.3 million at March 31, down from $191.5 million at year-end. Working capital was approximately $133.8 million. Management said available funds were sufficient for operating requirements for at least 12 months. Operating cash use reflected working-capital outflows, notably a $84.9 million increase in inventory and a $34.8 million increase in receivables; these were partly associated with business growth and acquisition activity. Investing activities used $109.9 million, including $82.5 million of property and equipment purchases and $27.8 million for acquisitions. Financing activities provided $62.3 million.
Balance-sheet floor plan notes payable were $912.6 million. Long-term debt, including current maturities, totaled $572.6 million; capital lease obligations totaled $59.4 million. The company reported $713.5 million outstanding under its $750 million GE floor plan credit agreement and $74.3 million under Ford Motor Credit’s wholesale financing agreement. A separate $17.5 million secured line had no advances outstanding, but $15.3 million was pledged for letters of credit, leaving $2.2 million available. The company said it was compliant with debt covenants. Variable-rate floor plan and real-estate borrowings were approximately $977.4 million; management estimated a 100-basis-point LIBOR change could alter annual interest expense by about $9.8 million.
Material changes and notable items
- Despite reported growth, management said lower energy-sector activity significantly affected Class 8 sales; increased sales to over-the-road fleets and vocational customers helped offset the impact.
- Dealership absorption ratio increased to 115.3% from 111.2%. Management attributed continued aftermarket demand to repair and maintenance needs.
- Rush acquired Effingham Truck Sales in Illinois in February for approximately $25.3 million, paid in cash. A May 4, 2015 acquisition of Yancey Truck Centers in Georgia, valued at approximately $30.0 million, was disclosed as a subsequent event.
- Management said the SAP system rollout was substantially completed during Q1; conversion of the remaining dealerships and leasing operations was completed in the quarter.
- Cash fell sharply as the company funded working capital, capital expenditures, and acquisitions. Inventory growth was partly financed through floor-plan arrangements.
- The company held $6.9 million of illiquid auction-rate securities, with a $7.4 million cost basis and $0.5 million unrealized loss in accumulated other comprehensive loss. Management said it intended and was able to hold them and did not expect their illiquidity to materially affect funding operations.
Outlook, risks, and contingencies
Management expected Class 8 sales to remain flat through Q2 2015, citing softer order intake after peak late-2014 months and reduced energy-sector activity. It expected aftermarket revenue to increase slightly in 2015, although energy-sector weakness could weigh on it. Other 2015 expectations included lease and rental revenue growth of 15%–20%; aftermarket gross margins of 35%–36%; Class 8 margins of 6%–7%; medium-duty margins of 5%–5.5%; used-vehicle margins of 8%–12%; and an effective tax rate of approximately 38%–39%.
Management cited estimated U.S. 2015 retail markets of 267,000 Class 8 trucks and 208,800 Class 4–7 vehicles, and expected Rush market shares of 6.0%–6.5% and 5.0%–5.5%, respectively. It expected 1,600–2,000 light-duty and 8,500–9,500 used-vehicle sales. These are forward-looking estimates, not guarantees. The March 31 commercial-vehicle order backlog was approximately $1.47 billion versus $1.22 billion a year earlier; orders may be canceled.
Planned 2015 spending included approximately $200 million of trucks for leasing operations, all expected to be financed, and $18 million–$20 million of recurring capital expenditures. The filing also describes ongoing dealership construction and facility projects. Key risks include truck-market cyclicality, fuel and interest rates, credit availability, energy-sector exposure, inventory and used-vehicle values, and environmental regulation or liabilities. Litigation in the ordinary course was not believed to include any pending matter likely to materially affect results, though outcomes remain uncertain. The company reported $1.5 million in unrecognized tax benefits and did not anticipate a significant change in the next 12 months.
Important facts for investors to verify
- Whether the energy-sector slowdown and management’s flat Class 8 sales outlook through Q2 affected subsequent orders, sales, and margins.
- Whether working-capital investment—especially inventory and receivables—reversed into operating cash generation after quarter-end.
- How floor-plan borrowings, other debt, and financing costs evolved, including remaining availability under the GE agreement and covenant compliance.
- Whether the stated 2015 vehicle sales, market-share, margin, leasing-growth, and capital-spending expectations were achieved.
- The performance and integration of the Effingham and Yancey acquisitions, and the effects of dealership construction and leasing-fleet investment.
- Whether liquidity or valuation of the auction-rate securities, tax exposures, environmental matters, or litigation changed materially.