Rush Enterprises, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparative periods ended June 30, 2010. Unaudited consolidated results. Amounts are in millions unless stated otherwise.
Business context
Rush operates commercial-vehicle dealerships and related parts, service, leasing, rental, financing and insurance businesses. Its sole reportable segment is Truck. The 2010 sale of its John Deere construction-equipment business is reflected as discontinued operations. First-half 2011 results include the acquisitions of Nalley Motor Trucks in Atlanta and Heintzelman’s Truck Center in Orlando.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $662.0 | $329.8 | $1,108.1 | $629.1 |
| Gross profit | $105.5 | $69.2 | $187.9 | $127.2 |
| Operating income | $21.8 | $10.4 | $34.6 | $14.7 |
| Continuing-operations income | $12.5 | $5.4 | $19.8 | $7.3 |
| Net income | $12.5 | $5.7 | $19.8 | $7.9 |
| Diluted EPS | $0.32 | $0.15 | $0.51 | $0.21 |
- Q2 revenue rose 100.7% year over year; first-half revenue rose 76.1%. Q2 new and used truck sales increased 143.9%; parts, service and body-shop revenue increased 43.8%.
- Gross margin narrowed to 15.9% from 21.0% in Q2 and to 17.0% from 20.2% for the half, chiefly because lower-margin vehicle sales made up more of revenue. Q2 operating margin was 3.3%, versus 3.1%; first-half operating margin was 3.1%, versus 2.4%.
- Q2 continuing-operations income increased to $12.5 million from $5.4 million. 2010 net income also included discontinued-operations income of $0.3 million for Q2 and $0.6 million for the half.
- Cash from operating activities was negative $36.0 million in the first half, compared with positive $5.5 million a year earlier, largely reflecting increases in inventory and receivables. Management’s non-GAAP adjusted operating cash flow, which reclassifies most floor-plan draws, was positive $65.5 million, versus $50.0 million.
- Cash was $146.3 million at June 30, down from $169.0 million at year-end 2010. Working capital was $140.9 million. Investing cash outflow was $109.8 million, including $60.8 million of property and equipment purchases and $60.0 million for acquisitions; financing provided $123.2 million.
- At June 30, floor-plan notes payable were $352.6 million; current and long-term debt totaled $264.8 million; capital-lease obligations totaled $41.5 million. The $450 million GE Capital floor-plan facility had approximately $340.9 million outstanding, with another $11.6 million under Navistar’s floor-plan program. The company reported covenant compliance.
Changes, outlook and commentary
- Truck demand and deliveries rebounded sharply: Q2 new heavy-duty unit sales increased 190.7% and medium-duty sales increased 90.4% year over year. Management cited stronger demand, improving credit availability, higher vehicle utilization and acquisitions as growth drivers.
- Management expected 2012 and 2013 to be growth years for the U.S. Class 8 market, while warning that economic weakness in automotive, manufacturing or construction could make recovery slower and more gradual. It cited an industry forecast of about 183,000 U.S. Class 8 retail sales in 2011 and estimated company market share of 4.5%–5.0%; manufacturer and supplier production could constrain deliveries.
- For 2011, management expected lease and rental revenue growth of 17%–20%; Class 8 truck gross margins of 6.5%–7.5%; medium-duty margins of 5.5%–6.2%; used-truck margins around 10%; parts, service and body-shop margins of 39%–41%; and SG&A of 12%–15% of revenue. It expected an effective tax rate of 36%–39% and higher pretax income than in 2010.
- Confirmed commercial-vehicle orders totaled $705.7 million at June 30, versus $154.4 million a year earlier; the company expected to fill the backlog during 2011. It expected 2011 used-vehicle sales of 4,200–4,500 units and approximately 17%–20% growth in lease and rental revenue.
- The SAP implementation was expected to enter service in Q3 2011. Approximately $40.0 million of the estimated $41.0 million project cost had been spent; about $1.0 million more was expected in 2011. Once operational, SAP was expected to add about $1.0 million of quarterly SG&A, $0.7 million of quarterly amortization and $0.3 million of quarterly interest expense.
Risks, contingencies and unusual items
- Results are exposed to commercial-vehicle market cyclicality, general economic conditions, customer demand, interest rates, credit availability, competition and manufacturers’ ability to supply vehicles. A 100-basis-point LIBOR change was estimated to affect annual interest expense by about $4.5 million; a similar change in rates on cash investments could affect annual interest income by about $1.0 million.
- The company held auction-rate securities with a $6.6 million fair value and $7.6 million cost basis. A $1.0 million pretax temporary impairment was recorded in other comprehensive loss. The securities remained illiquid, although management said they continued to pay interest and did not expect the liquidity constraint to materially affect operations.
- The company had $45.0 million of interest-rate swaps designated as cash-flow hedges. Their fixed rates were scheduled to take effect around January 1, 2012. Counterparty and market risks remain.
- Unrecognized tax benefits were $1.5 million, plus $130,000 accrued interest; management did not anticipate a significant change over the next 12 months. Ordinary-course litigation was not expected by management to have a material effect, but outcomes are uncertain.
- Environmental regulations and known soil or groundwater contamination at some properties could lead to additional costs; the company said it was not aware of material environmental liabilities. Management identified no material change in the risk factors disclosed in its 2010 Form 10-K.
Important facts for investors to verify
- Whether strong vehicle sales and the large order backlog convert to deliveries and revenue without further pressure on vehicle gross margins.
- Inventory, receivables and floor-plan financing trends, and the difference between GAAP operating cash flow and management’s non-GAAP adjusted measure.
- Acquisition contributions, integration costs and the timing and recurring expense effects of the SAP system.
- Debt and interest-rate exposure, covenant headroom, and liquidity if demand or vehicle supply weakens.
- The valuation and liquidity of auction-rate securities, as well as potential tax, litigation and environmental exposures.