Rush Enterprises, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2015, compared with the same periods in 2014. Rush operates a network of commercial-vehicle dealerships, principally through its Truck Segment, with vehicle sales, parts and service, leasing, rentals and related financial services. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $1,330.3 | $1,182.5 | $2,523.8 | $2,141.1 |
| Gross profit | $207.6 | $193.3 | $401.3 | $359.3 |
| Operating income | $35.6 | $34.9 | $65.9 | $57.7 |
| Net income | $19.6 | $19.8 | $36.4 | $31.9 |
| Diluted EPS | $0.48 | $0.49 | $0.89 | $0.78 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $62.3 | $46.6 |
- Q2 revenue grew 12.5%, while net income declined 1.3%. First-half revenue rose 17.9% and net income rose 14.1%.
- Gross margin was 15.6% in Q2 versus 16.4% a year earlier; first-half gross margin was 15.9% versus 16.8%. Management attributed the quarterly decline mainly to truck sales forming a larger share of revenue than higher-margin aftermarket services.
- Q2 operating margin was 2.7% versus 3.0%; net margin was 1.5% versus 1.7%. Net interest expense increased 41.5% in Q2 to $3.6 million.
- Aftermarket services revenue increased 6.7% in Q2 and 7.9% in the first half. New and used vehicle revenue increased 15.1% in Q2 and 22.9% in the first half.
Cash, liquidity and debt
- Cash and cash equivalents were $72.9 million at June 30, 2015, down from $191.5 million at December 31, 2014. Working capital was approximately $114.4 million. Management said available funds were sufficient for operating needs for at least the next 12 months.
- First-half cash flow: operating activities provided $62.3 million; investing activities used $221.9 million; financing activities provided $41.0 million. Cash declined $118.5 million. Investing included $164.2 million of property and equipment purchases and $57.9 million for acquisitions.
- At June 30, balance-sheet debt included $871.4 million of floor plan notes, $586.0 million of long-term debt including current maturities, and $61.4 million of capital lease obligations. The GE Credit Agreement had approximately $750 million outstanding; the Ford inventory financing agreement had $65 million outstanding.
- A $17.5 million secured line of credit had no advances outstanding, but $15.3 million was pledged for letters of credit, leaving $2.2 million available. The company reported compliance with debt covenants.
- The June 30 amendment to the GE Credit Agreement increased the maximum consolidated leverage ratio from 2.50:1.00 to 3.50:1.00. The agreement was scheduled to expire July 11, 2016; GE Capital could terminate it on 120 days’ notice.
Material changes and notable items
- New heavy-duty truck sales rose 29.1% in Q2, and total new vehicle unit sales rose 13.4%. Used vehicle units were down 0.6%; medium-duty units were down 2.5% and light-duty units down 6.5%.
- Q2 absorption ratio, a measure of aftermarket gross profit relative to dealership overhead, was 118.9%, compared with 120.0% a year earlier.
- Backlog was $1,054.9 million at June 30, down from $1,279.9 million a year earlier. Orders are subject to cancellation.
- Rush acquired specified assets of Yancey Truck Centers in Georgia on May 4 for approximately $30.1 million in cash, adding seven dealership locations and an Idealease rental and leasing business. Purchase-price allocations were preliminary.
- At June 30, total assets were $2.747 billion, versus $2.694 billion at year-end; shareholders’ equity was $808.2 million, versus $764.3 million.
Outlook, risks and contingencies
- Management expected Q3 Class 8 sales to be flat or slightly lower, citing slower order intake in the first half and weakness among energy-sector customers. It expected Class 4–7 and used-truck sales to remain steady through Q3.
- For 2015, management expected aftermarket-services revenue to increase slightly, lease and rental revenue to rise 15%–20%, and lease/rental-fleet truck purchases or leases of about $200 million, depending on demand. It forecast recurring capital expenditures of $18–$20 million.
- Management’s 2015 estimates included Class 8 gross margins of 6%–7%, medium-duty margins of 5%–5.5%, used-truck margins of 8%–10%, and aftermarket-services margins of 35%–37%. These are expectations, not guarantees; the filing does not provide a consolidated full-year earnings or revenue forecast.
- Interest-rate exposure was material: the company estimated a 100-basis-point LIBOR change could alter annual interest expense by approximately $9.5 million. Its $5.1 million notional interest-rate swaps had zero fair value at June 30 and expired July 1, 2015.
- The company held $6.65 million of illiquid auction-rate securities, with underlying municipal bonds maturing in 2030. Management considered the impairment temporary; a further 10% decline could reduce equity by about $665,000, or affect earnings if judged other-than-temporary.
- Management reported no pending litigation expected to have a material adverse effect and no material environmental liabilities known, but acknowledged uninsured-claim, environmental, acquisition and regulatory risks. It noted known soil and groundwater impacts at some properties.
- Management said the energy-sector downturn could weigh on sales and aftermarket activity. The business is also cyclical and exposed to truck demand, fuel prices, credit availability, interest rates and regulation. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether slower truck orders, energy-sector weakness and the lower backlog affect second-half deliveries and margins.
- How the substantial cash decline and planned fleet, facility and aircraft spending affect liquidity, debt and interest costs.
- The status and terms of the GE Credit Agreement after its leverage covenant amendment, including availability and renewal or termination risk.
- Whether acquisition integration and preliminary purchase accounting for Yancey change reported goodwill, assets or results.
- Whether auction-rate securities regain liquidity and whether environmental, litigation or tax contingencies change.
- Management’s filing states disclosure controls were effective at June 30, 2015; investors should review subsequent filings for developments and actual performance versus outlook.