Rush Enterprises, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results. Rush operates a commercial-vehicle dealership and services network, reported as one Truck Segment. Q2 results include Summit Truck Group, acquired in December 2021, and consolidate Rush Truck Centres of Canada (RTC Canada) from May 2, 2022, after Rush increased its ownership to 80%.
Financial performance
Amounts below are in millions of dollars unless stated otherwise. Comparisons are year over year.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1,791.2 (+36.1%) | $1,316.0 | $3,354.4 (+31.7%) | $2,547.8 |
| Gross profit / margin | $374.2 / 20.9% | $270.8 / 20.6% | $719.7 / 21.5% | $515.6 / 20.2% |
| Operating income | $135.0 (+85.5%) | $72.8 | $242.5 (+88.0%) | $129.0 |
| Net income attributable to Rush | $110.2 | $58.0 | $202.7 | $103.4 |
| Diluted EPS | $1.92 | $1.00 | $3.52 | $1.79 |
| Operating cash flow | Six-month period: $58.2 | Prior-year six-month period: $237.7 |
- Q2 new and used vehicle sales revenue rose 37.8% to $1,098.3 million; aftermarket products and services revenue increased 34.3% to $598.3 million; lease and rental revenue increased 31.2% to $80.5 million.
- Q2 new heavy-duty vehicle unit sales increased 41.1% to 4,168. Medium-duty sales were nearly flat at 2,815 units; used vehicle unit sales fell 22.2% to 1,629.
- Q2 SG&A increased 22.0% to $225.3 million, but declined to 12.6% of revenue from 14.0%. The dealership absorption ratio improved to 136.4% from 129.1%.
- Q2 net interest expense was $3.2 million, versus net interest income of $0.2 million a year earlier; management cited higher inventory and rising variable interest rates.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $216.7 million, working capital was approximately $443.2 million, and total assets were $3,669.4 million. Cash increased $68.5 million from year-end 2021.
- Six-month operating cash flow fell to $58.2 million from $237.7 million, primarily reflecting cash use from increases in inventory ($193.0 million) and receivables ($85.1 million), partly offset by higher payables and accrued expenses.
- Investing activities used $94.2 million; financing activities provided $104.6 million. The company spent $52.8 million on share repurchases and paid $21.6 million in dividends during the six-month period.
- Balance-sheet floor plan notes payable were $851.7 million, versus $630.7 million at December 31, 2021. Long-term debt, net of current maturities, was $401.8 million, versus $334.9 million. Finance and operating lease obligations are additional liabilities.
- Management reported $1,253.5 million of floor-plan and specified revolving-credit borrowings subject to variable rates; a 100-basis-point rate change was estimated to change annual interest expense by about $12.5 million. The filing separately reports facility balances, including $150.1 million under the Wells Fargo facility, $185.0 million under the PLC facility, $724.1 million under the BMO floor-plan facility and $66.6 million under RTC Canada’s revolving lease/rental facility.
- The company said it was in compliance with debt covenants and expected available liquidity and operating cash flows to cover requirements for at least 12 months. Its $15 million secured line had $14.3 million pledged for letters of credit, leaving $0.7 million available.
Material changes and unusual items
- Performance benefited from strong demand, Summit’s acquired operations and consolidation of RTC Canada. RTC Canada’s acquisition also established a 20% noncontrolling interest.
- Other income included a $12.5 million gain on the sale of a 50% interest in the natural-gas fuel-systems business to Cummins and a $7.0 million remeasurement gain related to obtaining control of RTC Canada.
- Inventory increased to $1,274.0 million from $1,020.1 million at year-end. Goodwill rose to $418.3 million from $370.3 million, including acquisition-related amounts. Purchase price allocations for Summit and RTC Canada remained preliminary.
- Used-truck gross margin declined to 10.6% in Q2 from 17.4%, as management cited softening used-truck values. Lease/rental gross margin increased to 31.3% from 21.2%, partly because fleet financing costs are now recorded in interest expense rather than cost of sales.
Outlook, risks and contingencies
- For 2022, management forecast U.S. Class 8 retail sales of 253,100 units and Rush’s U.S. share of 6.1%–6.4%; it expected 15,500–16,200 U.S. Class 8 sales by Rush. It also expected 350–380 additional Canadian Class 8 sales in the second half.
- Management forecast U.S. Class 4–7 market sales of 230,500 units, Rush share of 4.6%–4.8% and Rush sales of 10,500–11,000; it expected 120–130 additional Canadian Class 5–7 sales in the second half. Other 2022 forecasts included about 1,700 light-duty vehicles and 7,000–7,500 used commercial vehicles.
- Management expected lease and rental revenue growth of 28%–32%, aftermarket products and services revenue growth of 25%–30%, aftermarket gross margin of 38%–39%, and 2022 SG&A of 13%–14% of revenue. It expected used-vehicle margins to move toward the historical 8%–10% range by year-end.
- Commercial-vehicle order backlog was $3,682.9 million at June 30, up from $2,258.9 million a year earlier. Management expected to fill most orders during 2022 and Q1 2023, subject to manufacturers meeting production schedules; orders may be canceled.
- Risks include COVID-related supply-chain constraints affecting truck production and parts availability, manufacturer allocation limits, inflation, rising rates, fuel prices and weaker freight or spot rates. Management warned these factors could constrain deliveries, weaken demand or raise cancellations.
- Planned 2022 spending included $150–$170 million for lease/rental vehicles, mostly financed, and $35–$40 million of recurring capital expenditures. A $0.21-per-share dividend was declared for payment September 12, 2022. The current $100 million repurchase authorization expires December 31, 2022; $58.7 million had been repurchased under it by June 30.
- Management reported no pending litigation it believed reasonably likely to materially affect the company, and no material change to previously disclosed risk factors. It noted potential environmental liabilities and $4.3 million of unrecognized tax benefits; no significant change in those tax benefits was anticipated over the next 12 months.
Important facts for investors to verify
- How much reported growth and margin performance is attributable to acquired businesses versus comparable operations, and how preliminary acquisition accounting may change.
- Whether supply constraints allow delivery of the record backlog, and the extent of order cancellations as rates, fuel costs and freight conditions change.
- Inventory levels, working-capital cash absorption, facility borrowing balances, variable-rate exposure and covenant headroom.
- Whether used-truck margins normalize as management expects, and whether aftermarket growth and lease/rental economics remain durable.
- Execution of the 2022 sales, revenue, margin, capital spending and dividend expectations, which are forward-looking and subject to the risks described in the filing.