Rush Enterprises, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with Q1 2015 unless stated otherwise. Dollar amounts below are in millions except per-share data.
Business context
Rush operates a network of more than 100 commercial vehicle dealerships in 21 states. Its Truck Segment sells new and used vehicles and provides parts, service, leasing, rental and related financial services. The company identifies one reportable segment; smaller tire, insurance and ranch operations are included in “All Other.”
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $1,070.8 | $1,193.5; down 10.3% |
| Gross profit / margin | $183.3 / 17.1% | $193.6 / 16.2% |
| Operating income / margin | $8.2 / 0.8% | $30.3 / 2.5% |
| Net income | $2.4 | $16.8; down 85.7% |
| diluted EPS | $0.06 | $0.41 |
| Operating cash flow | $101.2 | $(96.6) |
| Cash and cash equivalents at period end | $72.7 | $64.8 at Dec. 31, 2015 |
| Working capital at period end | $94.8 | — |
| Total assets | $2,796.8 | $2,852.0 at Dec. 31, 2015 |
Q1 revenue from new and used commercial vehicle sales was $668.5, down from $800.2. Parts and service revenue rose 1.5% to $341.9; lease and rental revenue rose 6.5% to $50.9. Gross margin improved mainly because lower-margin vehicle sales were a smaller share of revenue, while parts and service made up a larger share. SG&A was $162.5, or 15.2% of revenue, versus $152.6, or 12.8%, a year earlier.
Cash from operations benefited substantially from inventory reduction: inventory decreased $49.9 during the quarter. Investing cash outflow was $52.6, including $53.9 of property and equipment purchases; financing cash outflow was $40.8. Cash increased $7.8 overall.
At March 31, balance-sheet obligations included $826.0 of floor-plan notes, $636.2 of long-term debt including current maturities, and $86.5 of capital lease obligations. The $850 million floor-plan credit facility had $608.7 outstanding, while a separate Ford inventory financing agreement had $60.6 outstanding. The filing states the company complied with its debt covenants.
Material changes and management commentary
- New heavy-duty vehicle sales fell 34.2% in units to 2,679; new vehicle sales overall fell 11.2% in units. Medium-duty unit sales rose 21.8%, partly offsetting the heavy-duty decline.
- Management cited capacity added after near-record 2015 Class 8 sales, weaker used-vehicle values, energy-sector softness and uncertainty in freight as factors hurting sales and profitability. The dealership absorption ratio declined to 106.4% from 115.3%.
- The company began consolidating its dealership network and recorded about $8.1 of restructuring expense, including impairment charges and severance/contract termination costs. Approximately 100 employees were reduced. Certain real estate was classified as held for sale; related assets totaled $19.3 at quarter-end.
- Management reported no material change in the risk factors from its 2015 Form 10-K and stated that disclosure controls were effective.
Outlook, risks and contingencies
- Management expected 2016 Class 8 retail sales of about 207,000 units based on an industry forecast, but cautioned actual sales could be lower. It estimated its 2016 Class 8 market share at 5%–6%; medium-duty share at 5%–5.5%.
- Company estimates for 2016 included lease and rental revenue growth of 7%–10%, Aftermarket Services revenue roughly flat, SG&A at 13%–14% of revenue and an effective tax rate of about 39.25%. Expected gross-margin ranges: Aftermarket Services 36%–37%; Class 8 vehicles 6.2%–6.6%; medium-duty 5.5%–6.0%; used vehicles 8%–10%; lease/rental sales 12%–14%.
- Management expected to purchase or lease $220–$250 of trucks for leasing operations in 2016, all financed; recurring capital expenditures were estimated at $20–$25. Remaining contracted facility construction and real estate costs were estimated at $10.4. It believed cash and expected operating flows would cover requirements for at least 12 months.
- The $850 million floor-plan facility was scheduled to expire July 11, 2016. The filing provides no subsequent renewal terms. A 100-basis-point change in LIBOR was estimated to change annual interest expense by about $9.5, based on $950.1 of floor-plan and variable-rate real-estate debt.
- The company held $6.7 of illiquid auction-rate securities, valued using Level 3 inputs, with a $0.5 unrealized loss against cost. A further 10% decline could reduce equity by about $0.7; if deemed other-than-temporary, it could result in a similar income-statement loss.
- Management believed no pending litigation would materially affect the company, while noting ordinary-course litigation and environmental exposures could still create material costs. Tax benefits of $2.3 remained unrecognized; management did not anticipate a significant change in that amount over the next 12 months.
Important facts for investors to verify
- Whether the floor-plan facility was renewed or replaced before its July 11, 2016 expiration, and on what terms.
- Whether inventory liquidation, lower Class 8 demand and used-truck residual values continued to pressure revenue and margins.
- Progress and cash costs of dealership consolidation, including the sale and valuation of the $19.3 of assets held for sale.
- Whether operating cash flow remains supported by working-capital releases or improves through underlying earnings.
- Actual capital spending and financing for the lease/rental fleet, and performance against management’s 2016 outlook.
- Developments affecting the illiquid auction-rate securities, tax positions, environmental matters and interest-rate exposure.