Rush Enterprises, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. Amounts are in millions except per-share data and vehicle units. Rush operates a U.S. network of commercial vehicle dealerships providing vehicle sales, parts and service, leasing and rental, financing, and insurance. It reported one primary segment, Truck.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Total revenue | $958.7 | $756.8 | +26.7% |
| Gross profit | $165.9 | $133.8 | +24.0%; gross margin 17.3%, down from 17.7% |
| Operating income | $22.7 | $24.6 | Down from prior year |
| Income before taxes | $19.6 | $22.1 | Down 11.2% |
| Net income | $12.0 | $13.5 | Down 11.3% |
| Diluted EPS | $0.30 | $0.34 | Down from prior year |
| Operating cash flow | $(7.1) | $57.1 | Working-capital outflow in 2014 |
| Cash and cash equivalents | $94.4 | $217.3 at Dec. 31, 2013 | Quarter-end balance |
- New and used vehicle sales were $600.9 million, up 22.7%; parts and service sales were $309.0 million, up 33.5%; lease and rental revenue was $41.0 million, up 36.0%.
- SG&A increased 31.7% to $134.4 million and rose to 14.0% of revenue from 13.5%. Net interest expense rose 24.5% to $3.1 million. The filing attributes expense growth largely to acquisitions, network investments, and higher inventory.
- At March 31, total assets were $2,263.7 million and shareholders’ equity was $681.9 million. Current liabilities were $979.1 million. Floor-plan notes payable were $659.3 million; long-term debt was $519.7 million including current maturities; capital lease obligations were $45.9 million including current maturities.
- Management reported working capital of approximately $145.5 million and said available funds were sufficient for operating requirements for at least 12 months. The $15 million secured line of credit had no advances outstanding, but $11.8 million was pledged for letters of credit, leaving $3.2 million available.
Material changes and notable items
- On January 13, 2014, Rush acquired Chicago-area and Indiana dealership, leasing, and rental businesses for approximately $145.1 million, paid in cash and 83,091 Class B shares valued at $2.0 million. The acquisition added 10 locations; preliminary purchase accounting included $47.4 million of goodwill. Results include the acquired operations from the acquisition date.
- Investing cash outflow was $194.2 million, including $143.1 million for acquisitions and $53.2 million for property and equipment. Financing provided $78.4 million, including $61.9 million of long-term borrowings and $45.2 million of net non-trade floor-plan draws. Cash declined $122.9 million during the quarter.
- Backlog of confirmed commercial vehicle orders was approximately $1,219.3 million at March 31, versus $770.8 million a year earlier. Management expected to fill most orders during 2014.
- The Board authorized a new stock repurchase program of up to $40 million, replacing the prior program. The company repurchased 158,624 Class B shares during the quarter; the filing reported $36.8 million remaining under the new authorization at March 31.
- Quarter-end auction-rate securities had a fair value of $6.6 million, versus $7.6 million cost basis. Auctions had failed and liquidity remained limited; the company said it intended and was able to hold them until liquidity returned.
Outlook, risks, and contingencies
- Management expected 2014 parts, service, and body-shop sales to remain strong; lease and rental revenue growth of 35%–40%; and Class 8 truck share of 5.5%–6.0%. It expected approximately 2,000 light-duty vehicle sales and 7,500–8,500 used vehicle sales.
- Expected 2014 gross-margin ranges: parts/service/body shop 35%–37%; Class 8 trucks 6.5%–7.5%; medium-duty vehicles 5.1%–5.6%; used vehicles 8%–10%; and lease/rental 13.5%–15.5%. Expected SG&A was 13.5%–14.5% of revenue; expected effective tax rate was 38%–39%.
- Planned 2014 capital items included approximately $170 million of lease/rental truck purchases, all expected to be financed, and $16–$18 million of recurring capital expenditures. Three dealership construction projects had estimated costs totaling $17.9 million and were expected to continue through Q1 2015.
- Interest-rate exposure is significant: floor-plan and variable-rate real-estate borrowings totaled approximately $733.3 million; a 100-basis-point LIBOR change was estimated to change annual interest expense by about $7.3 million. Swaps covered $37.5 million notional amount.
- Management cited vehicle-market cyclicality, economic conditions, interest rates, competition, customer and supplier relationships, regulation, seasonality, and execution of acquisitions and technology integration as risks. Environmental compliance and possible liabilities at current or acquired properties, goodwill or franchise-right impairment, and uninsured or partially insured claims are also potential exposures.
- The company reported compliance with debt covenants and no pending litigation believed likely to have a material adverse effect. It accrued $1.5 million for unrecognized tax benefits and did not anticipate a significant change in that amount over the next 12 months. Management reported disclosure controls effective as of March 31, 2014 and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether acquisition-related growth, integration costs, and goodwill are developing in line with management’s expectations.
- Whether revenue growth translates into improved operating profit, given lower gross margin and higher SG&A as a share of sales.
- Inventory, receivables, customer deposits, and floor-plan financing trends, and their effects on operating cash flow and liquidity.
- Debt and interest-rate sensitivity, financing needs for fleet and facility investment, and compliance with credit-agreement terms.
- Backlog conversion, vehicle-market forecasts, margin assumptions, and the execution of management’s 2014 outlook.
- Liquidity and valuation of auction-rate securities, environmental exposures, and tax contingencies.