Rush Enterprises, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited consolidated results. Rush operates a nationwide commercial vehicle dealership network, with truck sales, aftermarket parts and service, leasing and rentals, and related financial services as its core businesses.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $1,026.5 | $1,330.3 | $2,097.3 | $2,523.8 |
| Gross profit / margin | $180.5 / 17.6% | $207.6 / 15.6% | $363.7 / 17.3% | $401.3 / 15.9% |
| Operating income / margin | $21.6 / 2.1% | $35.6 / 2.7% | $29.8 / 1.4% | $65.9 / 2.6% |
| Net income | $10.8 | $19.6 | $13.2 | $36.4 |
| Diluted EPS | $0.27 | $0.48 | $0.32 | $0.89 |
| Net interest expense | $3.8 | $3.6 | $8.0 | $6.5 |
- Q2 revenue declined 22.8%; net income declined 44.7%. For the first six months, revenue fell 16.9% and net income fell 63.7%.
- New and used commercial vehicle revenue was $636.9 million in Q2, down 30.6%. Parts and service revenue declined 7.0%, while lease and rental revenue increased 5.8%.
- Despite lower gross profit dollars, gross margin improved as lower-margin vehicle sales made up a smaller share of revenue and higher-margin aftermarket services a larger share. Q2 SG&A fell 9.4% in dollars but rose to 14.2% of revenue from 12.1%; depreciation and amortization increased 18.4%.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $223.0 million, versus $62.3 million in 2015. The 2016 result benefited substantially from working-capital cash inflows, including $58.0 million from lower inventory and $27.6 million from lower receivables.
- Investing cash outflow was $115.7 million, including $115.3 million of property and equipment purchases. Financing cash outflow was $79.4 million, including debt and lease repayments and $20.3 million of share repurchases. Cash increased $27.8 million to $92.7 million.
- At June 30, 2016, working capital was approximately $97.9 million. Current assets were $1,302.5 million and current liabilities $1,204.6 million. Management said available funds were sufficient for operating requirements for at least the next 12 months.
- Balance-sheet obligations included $830.1 million of floor-plan notes, $631.5 million of long-term debt including current maturities, and $83.9 million of capital lease obligations. The company reported $846.0 million of shareholders’ equity and $2,812.7 million of total assets.
- A $17.5 million secured line of credit had no advances outstanding; $13.2 million was pledged for letters of credit, leaving $4.3 million available. The company reported compliance with debt covenants.
- On July 7, 2016, after quarter-end, the company amended its floor-plan credit agreement, raising aggregate commitments to $875 million. The filing reported approximately $658 million outstanding under the prior agreement at June 30.
Material changes and unusual items
- New heavy-duty truck sales were particularly weak: Q2 unit sales fell 44.9%, compared with a 23% decline in the U.S. Class 8 market cited by the company. Six-month heavy-duty unit sales fell 39.9%. Medium-duty sales increased 8.5% for the first six months.
- The company cited energy-sector softness, a changing freight environment, excess Class 8 fleet capacity, depressed used-truck values, and reduced demand from major fleet customers. Used vehicle unit sales fell 12.9% in Q2.
- Rush initiated dealership-network consolidations and reported approximately $9.0 million of pretax restructuring costs in the first half, including impairment, severance, lease cancellation and contract termination costs. Approximately 100 employees were reduced. Assets held for sale totaled $20.2 million at June 30.
- Commercial vehicle order backlog was $878.7 million at June 30, down from $1,054.9 million a year earlier; confirmed orders may be cancelled.
- Cash and cash equivalents increased, but the company’s operating cash flow included significant inventory and receivables reductions. These working-capital benefits may not recur at the same level.
Outlook, risks and contingencies
- Management expected new and used Class 8 sales to remain at current levels through 2016 and Class 4–7 sales to remain flat with Q2. It forecast 2016 Class 8 market share of 5.0%–6.0%, medium-duty share of 5.0%–5.5%, approximately 1,500 light-duty sales, and approximately 7,000 used vehicle sales.
- Management expected aftermarket revenue to be relatively flat year over year; lease and rental revenue to increase 6%–8%; 2016 aftermarket gross margin of 36%–37%; and SG&A of 13.5%–14.5% of revenue. These are management expectations, not a company-wide revenue or earnings forecast.
- Planned 2016 spending included $150 million–$200 million for lease and rental trucks, all expected to be financed, and $20 million–$25 million for recurring capital expenditures. A Colorado property purchase estimated at $6.8 million was expected to close in Q3.
- Interest-rate exposure was significant: the filing estimated that a 100-basis-point change in LIBOR could change annual interest expense by approximately $9.5 million. The company had no interest-rate swaps outstanding at June 30.
- The company held $6.4 million of illiquid auction-rate securities, valued using Level 3 inputs. A further 10% decline could reduce equity by about $0.6 million if temporary, or result in a similar income-statement loss if other-than-temporary.
- Management reported no pending litigation it believed would materially affect financial position or results, and no material change in the risk factors disclosed in its 2015 Form 10-K. It noted potential exposure to uninsured claims, environmental liabilities, regulatory changes, and uncertain tax positions; $2.3 million of unrecognized tax benefits were recorded.
- Management stated that disclosure controls were effective as of June 30, 2016, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Class 8 demand, major-fleet orders, used-truck values, and the reported backlog stabilize or deteriorate further.
- Whether aftermarket performance and margins can offset weaker vehicle sales, and whether management’s 2016 operating expectations remain achievable.
- How much of first-half operating cash flow came from temporary working-capital reductions, and whether cash generation can support capital spending, debt service, and repurchases.
- The terms, availability, and ongoing cost of the amended $875 million floor-plan facility, alongside total debt and floating-rate exposure.
- Proceeds and timing from property sales, and any additional costs or savings from dealership consolidation and restructuring.