Rush Enterprises, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2012, compared with Q1 2011; balance-sheet comparisons are with December 31, 2011. Rush operates a network of 70 commercial-vehicle centers in 14 states, selling new and used vehicles and providing parts, service, leasing, rental, financing and insurance. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total revenue | $777.3 | $446.1; up 74.2% |
| Gross profit / margin | $128.3 / 16.5% | $82.4 / 18.5% |
| Operating income | $29.4 | $12.8 |
| Net income | $15.9 | $7.3 |
| EPS, basic / diluted | $0.41 / $0.40 | $0.19 / $0.19 |
| Net cash used in operating activities | $(130.2) | $(17.3) |
| Cash and cash equivalents at period end | $163.8 | $207.8 at Dec. 31, 2011 |
| Working capital | $206.8 | Not stated for the comparative date |
- Revenue growth reflected new and used vehicle sales, up 98.9%, and parts, service and body-shop sales, up 35.1%. New-vehicle unit sales rose 101.5%; heavy-duty unit sales rose 103.6%.
- SG&A increased 42.3% to $93.0 million, but fell to 12.0% of revenue from 14.6%. Net interest expense increased 175.1% to $3.3 million, primarily with higher truck inventory.
- Parts, service and body-shop gross margin was 39.9%, versus 39.1%; Class 8 truck gross margin was 7.4%, versus 6.3%. Total gross margin declined as lower-margin vehicle sales grew to 71.0% of revenue from 62.2%.
- At March 31, current assets were $1,080.6 million and current liabilities $873.8 million (current ratio about 1.24). Inventory was $808.1 million, versus $649.6 million at year-end.
- Balance-sheet obligations included $628.6 million of floor-plan notes, $342.0 million of long-term debt including current maturities, and $44.3 million of capital-lease obligations. The filing reports compliance with debt covenants. The $10.0 million secured line had no advances; $7.7 million was pledged for letters of credit, leaving $2.3 million available.
- Operating cash use was driven principally by a $152.0 million inventory increase and a $35.0 million decrease in accrued expenses. Management’s non-GAAP adjusted operating cash flow, excluding specified floor-plan financing draws, was $(22.3) million versus positive $15.5 million in Q1 2011.
Changes, outlook and management commentary
- Management attributed stronger sales to improved economic conditions, increased commercial-vehicle demand, greater vehicle utilization and acquisitions completed in 2011. Parts and service sales also benefited from aging vehicles and energy-sector activity.
- Management expected 2012 pretax income to increase from 2011, parts and service sales to remain strong, and leasing and rental revenue to grow 20%–25%. It forecast parts/service gross margins of 39%–41%, Class 8 truck margins of 6.5%–7.5%, medium-duty margins of 4.5%–5.5%, used-vehicle margins of 8%–10%, and lease/rental margins of 14.5%–16.5%. Expected SG&A was 11%–13% of revenue and the effective tax rate 37%–39%.
- The company expected to purchase or lease about $110 million of trucks for leasing operations in 2012, financed, and incur $10 million–$12 million of recurring capital expenditures. It said available funds were sufficient for operating requirements for at least 12 months.
- Commercial-vehicle order backlog was about $649.3 million at March 31, up from $576.2 million a year earlier; management expected to fill all backlog orders during 2012. Company forecasts included 2012 sales of about 10,000–10,800 Class 8 trucks, 6,700–7,400 medium-duty vehicles, 1,200 light-duty vehicles and 5,200–6,000 used vehicles. These are management expectations, not guarantees.
Risks, contingencies and unusual items
- Results remain exposed to commercial-vehicle market cyclicality, economic conditions, customer demand, credit availability, competition, interest rates and seasonal patterns. Management noted that vehicle production constraints could limit deliveries and that used-vehicle volumes depend on sourcing adequate quality inventory.
- At March 31, floor-plan borrowings and variable-rate real-estate debt were about $711.8 million. A 100-basis-point LIBOR change could alter annual interest expense by about $7.1 million; $44.4 million of interest-rate swaps hedge part of the exposure.
- The company held illiquid auction-rate securities with a $6.6 million fair value and $7.6 million cost basis. Auctions had failed; management said it could hold them and did not expect the liquidity constraint to materially affect operations. A further 10% impairment could reduce equity by about $0.7 million or, if other-than-temporary, result in a similar earnings charge.
- Management reported ordinary-course litigation without a known matter expected to materially affect results, while noting litigation outcomes are uncertain. Environmental contamination is known at some properties; future compliance, remediation or acquisition-related costs could be material. Unrecognized tax benefits were $1.3 million, with $51,000 accrued interest.
- The company was implementing SAP across its centers and leasing operations, with conversion planned by the end of 2014 and ongoing costs of about $0.3 million–$0.4 million per month. It reported no goodwill impairment in the 2011 annual test and no current impairment charge identified.
- Management identified no material change in the risk factors disclosed in its 2011 Form 10-K. Forward-looking estimates depend on assumptions and may differ materially from actual results.
Important facts for investors to verify
- Whether vehicle demand, production capacity and backlog deliveries support management’s 2012 unit-sales and earnings expectations.
- Whether inventory growth converts into sales and operating cash flow, and how floor-plan financing and interest costs evolve.
- Whether the lower consolidated gross margin persists as vehicle sales form a larger share of revenue, and whether parts/service margins meet forecasts.
- The liquidity and valuation of auction-rate securities, interest-rate exposure after hedging, and compliance with debt covenants.
- Potential environmental, litigation and tax exposures, plus the cost and execution of the SAP rollout and dealership expansion.