Rush Enterprises, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Amounts are in U.S. dollars; financial amounts below are in millions unless stated otherwise. Rush operates a nationwide commercial-vehicle dealership network, with truck sales, aftermarket parts and service, and leasing and rental as core activities.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1,203.5 | $1,026.5 | $2,248.3 | $2,097.3 |
| Gross profit | $209.1 | $180.5 | $397.0 | $363.7 |
| Operating income | $37.4 | $21.6 | $62.3 | $29.8 |
| Net income | $22.0 | $10.8 | $36.5 | $13.2 |
| Diluted EPS | $0.54 | $0.27 | $0.90 | $0.32 |
- Q2 revenue rose 17.2% year over year; new and used vehicle sales increased 21.8%, and aftermarket sales rose 11.5%. Heavy-duty truck unit sales increased 29.3%; aftermarket growth reflected stronger energy-sector and vocational activity.
- Q2 gross margin was 17.4%, down from 17.6%, as lower-margin vehicle sales made up a larger share of revenue. Operating margin improved to 3.1% from 2.2%; net margin was 1.8% versus 1.1%.
- Q2 SG&A increased 9.1% to $159.4 million, slower than revenue growth. Net interest expense declined 25.0% to $2.8 million. Pretax income grew 94.2% to $34.6 million.
- For the first half, revenue increased 7.2%, gross profit 9.1%, operating income more than doubled, and net income increased to $36.5 million. Gross margin improved to 17.7% from 17.3%; SG&A was 13.8% of revenue versus 14.7%.
Cash flow, liquidity and debt
- First-half operating cash flow was $130.7 million, compared with $223.0 million in 2016. Inventory growth used $52.4 million of cash; the prior-year period benefited from inventory reductions. Investing cash outflow was $71.2 million, including $79.6 million of capital expenditures. Financing cash outflow was $17.8 million. Cash increased $41.8 million to $123.8 million.
- At June 30, 2017, working capital was approximately $145.0 million. Current assets were $1,221.0 million and current liabilities $1,077.7 million. Management said cash and expected operating cash flows should fund operating requirements for at least 12 months.
- Balance-sheet debt included $692.1 million of floor-plan notes, $580.8 million of long-term debt including current maturities, and $81.8 million of capital-lease obligations. The company reported $545.9 million outstanding under its BMO floor-plan agreement and $83.4 million under Ford Motor Credit’s wholesale financing agreement. No borrowings were outstanding under the new $100 million working-capital facility; $5.5 million remained available under a separate secured line after letters of credit.
- Management reported compliance with debt covenants. Variable-rate floor-plan and real-estate debt totaled approximately $794.3 million; a 100-basis-point rate change was estimated to affect annual interest expense by about $7.9 million.
Outlook, commentary and risks
- Management expected Q3 new-truck sales to remain near Q2 levels and aftermarket revenue to remain strong. For 2017, it forecast Class 8 market share of 6%–7%, medium-duty share of 4.5%–5.5%, about 1,700 light-duty sales, and 6,200–7,000 used-vehicle sales. It projected lease-and-rental revenue growth of 3%–6%.
- Management’s 2017 estimates included aftermarket gross margins of 36.3%–36.5%, Class 8 vehicle margins of 6.5%–7.0%, medium-duty margins of 5.7%–6.5%, used-vehicle margins of 8.5%–10.0%, lease-and-rental margins of 15%–17%, SG&A of 13.5%–14.3% of revenue, and an effective tax rate of 38.5%–39.0%. These are management expectations, not guaranteed results.
- Management cited improving energy-sector activity, vocational demand, and replacement demand, but noted that excess used-truck supply continued to pressure trade-in values. The business is cyclical and sensitive to economic conditions, fuel prices, credit availability, and interest rates.
- Backlog was $1,127.5 million, up from $878.7 million a year earlier; orders can be cancelled and do not assure revenue. The company planned $150–$175 million of financed leasing-fleet purchases and $20–$25 million of recurring capital expenditures in 2017.
- Q2 included a $0.9 million tax benefit from adoption of stock-compensation accounting guidance; the first-half benefit was $2.0 million. The company recorded no 2017 impairment of auction-rate securities; a $0.469 million fair-value increase was recorded in Q2 through accumulated other comprehensive income. Prior-year results included restructuring and asset-impairment charges.
- Other risks include illiquid auction-rate securities ($6.4 million fair value), environmental compliance and potential liabilities, insurance and litigation exposure, and estimates used for goodwill and franchise-right impairment testing. Management reported no pending litigation it believed would materially affect results and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether vehicle and aftermarket demand, market-share expectations, and the $1,127.5 million backlog convert into sales and cash flow, especially given cancellable orders and used-truck supply.
- Inventory levels, floor-plan borrowings, interest-rate exposure, and the financing and returns associated with planned leasing-fleet investment.
- Whether management’s margin, SG&A, tax-rate, and revenue expectations are achieved; assess the contribution of the stock-compensation tax benefit to reported earnings.
- Liquidity and valuation developments for auction-rate securities, as well as any material environmental, legal, tax, or impairment developments.
- Progress on the share-repurchase authorization: $29.7 million had been purchased through June 30, with $10.3 million remaining under the program.