Rush Enterprises, Inc. — Q3 2019 Form 10-Q
Business and period. This unaudited filing covers the quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Rush operates a network of commercial-vehicle dealerships and related parts, service, leasing, rental and finance businesses; the Truck Segment is its sole reportable segment.
Financial performance
Dollar amounts below are in millions unless stated otherwise.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,599.3 | $1,376.1 | $4,492.1 | $3,965.7 |
| Gross profit | $264.8 | $249.1 | $791.2 | $719.4 |
| Operating income | $58.3 | $58.6 | $177.0 | $134.5 |
| Income before tax | $52.2 | $54.2 | $156.2 | $121.2 |
| Net income | $39.1 | $41.7 | $117.8 | $92.1 |
| Diluted EPS | $1.05 | $1.03 | $3.13 | $2.27 |
- Q3 revenue rose 16.2% year over year, led by new and used vehicle sales, up 21.8%; aftermarket products and services revenue increased 6.5%. Net income declined 6.1%, while diluted EPS increased modestly, reflecting lower weighted-average shares.
- For the first nine months, revenue increased 13.3%, net income 28.0%, and diluted EPS from $2.27 to $3.13. Depreciation and amortization fell 29.3%, primarily because 2018 included accelerated amortization of replaced ERP-system components.
- Gross margin was 16.6% in Q3 versus 18.1% a year earlier and 17.6% for the nine months versus 18.1%. Management attributed the quarterly decline mainly to vehicle sales making up a larger share of revenue than higher-margin aftermarket sales. Q3 operating margin was 3.7% versus 4.3%; nine-month operating margin improved to 3.9% from 3.3%.
- Q3 net interest expense increased 72.1% to $7.7 million; nine-month expense increased 74.3% to $23.1 million, primarily reflecting higher inventory levels and borrowings. The effective tax rate was 26.25% in Q3 and 24.9% year to date.
Cash flow, financial position and liquidity
- Nine-month operating cash flow was $221.6 million, compared with $203.0 million in 2018. Investing cash outflow was $258.8 million, including $230.6 million of property and equipment purchases, $10.2 million for dealership acquisitions and $22.5 million for the RTC Canada investment and call option. Financing cash outflow was $8.5 million. Cash declined $45.6 million to $86.1 million.
- At September 30, 2019, current assets were $1.729 billion and current liabilities $1.519 billion, for working capital of approximately $209.9 million. Inventory was $1.385 billion. Management said cash and expected operating cash flow should meet operating requirements for at least 12 months.
- Balance-sheet debt included $1.051 billion of floor-plan notes, $621.4 million of long-term debt including current maturities, and $78.1 million of finance lease obligations. Adoption of the lease standard also added $56.7 million of operating lease obligations and $56.4 million of right-of-use assets. The filing reports no advances under the $100 million working-capital facility or the separate secured line at quarter-end; $5.9 million remained available on the secured line after letters of credit.
- The company reported compliance with debt covenants. Its $1.0 billion floor-plan credit agreement had approximately $853.2 million outstanding; the filing also reports $124.9 million outstanding under Ford Motor Credit’s wholesale financing agreement.
Changes, outlook and risks
- New vehicle volumes drove growth: Q3 new heavy-duty unit sales rose 29.9% and medium-duty sales 36.3%; used vehicle units declined 15.0%. Q3 aftermarket revenue rose 6.5%, and dealership absorption ratio eased to 120.0% from 122.4%.
- Management expected 2019 aftermarket revenue growth of 7%–8%, lease and rental revenue growth of 3%–5%, and aftermarket gross margins of 37.5%–38.0%. It expected 2019 SG&A to be 12.5%–13.0% of revenue and an effective tax rate of approximately 25%–26%.
- Management viewed Q3 as the peak of the current Class 8 truck sales cycle, expected Q4 sales to be lower than Q3 and forecast a significant decline in new Class 8 sales in 2020 versus 2019. It also anticipated possible Q4 moderation in medium-duty sales following large fleet deliveries in Q2 and Q3. These are management expectations, not guarantees.
- September 30 order backlog was $1.260 billion, down from $2.089 billion a year earlier. Orders may be canceled and do not represent guaranteed revenue. Management expected to fill backlog orders through the rest of 2019 and first half of 2020.
- Planned 2019 purchases or leases of vehicles for leasing operations were $180–$190 million, expected to be financed; recurring capital expenditures were estimated at $30–$35 million. The company repurchased $53.8 million of stock and paid $13.6 million of dividends in the first nine months. The repurchase program had $29.9 million remaining at September 30 and was scheduled to expire December 31, 2019.
- Notable exposures include interest-rate sensitivity: a 100-basis-point LIBOR change could change annual interest expense by approximately $11.1 million. The company guaranteed up to CAD250 million of certain RTC Canada subsidiary credit facilities and guaranteed approximately $43.5 million of vehicle residual values. Management reported no pending litigation expected to materially affect results, while noting ordinary-course litigation and environmental liabilities as potential risks.
- In February 2019, Rush acquired a 50% interest in Rush Truck Centres of Canada and received a call option to acquire the remaining interest through February 2024. The investment was $25.2 million at quarter-end, including the valued guaranty; equity income was included in other income.
- The company adopted the new lease accounting standard on January 1, 2019, bringing operating lease assets and liabilities onto the balance sheet; 2018 comparatives were not restated. Management said no material change had occurred in disclosed risk factors and described disclosure controls as effective.
Key facts for investors to verify
- Whether the expected Class 8 sales-cycle downturn and lower backlog convert into reduced vehicle revenue, margins or earnings.
- Whether aftermarket growth and margins continue to offset lower-margin vehicle mix, and whether used-truck margins stabilize.
- Inventory financing, floor-plan utilization, interest-rate exposure and covenant headroom as demand changes.
- Cash requirements for rental-fleet investment, acquisitions, dividends and repurchases, including the status of the repurchase program after its stated expiration.
- Performance and funding implications of the RTC Canada investment, CAD250 million guaranty and vehicle residual-value guarantees.
- Potential outcomes of environmental matters, tax audits and ordinary-course litigation; the filing does not quantify a material expected loss for these matters.