Rush Enterprises, Inc. — Q2 2013 Form 10-Q
Business and period: Full-service commercial vehicle dealership operator with 84 Rush Truck Centers in 17 states, reporting for the quarter and six months ended June 30, 2013. Financial amounts below are in millions unless stated otherwise. Comparisons are with the corresponding 2012 period.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $789.7 | $835.8 | $1,546.5 | $1,613.2 |
| Gross profit / margin | $137.7 / 17.4% | $129.6 / 15.5% | $271.5 / 17.5% | $257.9 / 16.0% |
| Operating income | $11.8 | $32.0 | $36.4 | $61.3 |
| Net income | $5.6 | $17.4 | $19.2 | $33.3 |
| Diluted EPS | $0.14 | $0.44 | $0.47 | $0.84 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $36.7 | $(67.2) |
- Q2 revenue declined 5.5%; net income fell 67.7%. For the first half, revenue declined 4.1% and net income fell 42.5%.
- Gross profit increased despite lower revenue, mainly as higher-margin parts and service became a larger share of sales. Q2 parts and service revenue rose 16.6%, while new and used truck sales fell 15.0%.
- Q2 SG&A was $118.6 million, up 29.4%, and included $10.8 million for the former chairman’s retirement and transition agreement. SG&A was 15.0% of revenue versus 11.0% a year earlier.
- Q2 new heavy-duty truck unit sales decreased 25.8%; total new vehicle units decreased 12.7%. Used vehicle units increased 22.2%. Parts and service gross margin was 37.2%, down from 38.7%.
Financial position and liquidity
- At June 30, cash was $203.5 million, working capital was approximately $244.1 million, and total assets were $1.97 billion. Cash increased $4.8 million from year-end 2012.
- Inventory was $752.2 million, up from $691.0 million at December 31, 2012. Floor-plan notes payable were $572.3 million. Long-term debt, including current maturities, totaled $419.7 million; capital lease obligations totaled $47.7 million.
- First-half investing cash outflow was $85.8 million, including $82.5 million of property and equipment purchases. Financing provided $53.8 million. Management said available funds were sufficient for operating requirements for at least the next 12 months.
- The company reported compliance with its debt covenants. A $10 million secured line had no advances outstanding, but $8 million supported letters of credit, leaving $2 million available.
- On July 11, 2013, the GE Capital credit commitment was increased from $600 million to $750 million, with a stated rate of three-month LIBOR plus 2.03% and a July 11, 2016 expiration. GE Capital may terminate on 120 days’ notice; the amendment also provides for a working-capital fee on certain voluntary prepayments.
Outlook, commentary, and notable items
- Management expected parts, service, and body shop revenue to remain strong through 2013; it forecast lease and rental revenue growth of 30%–35% for the year.
- Company 2013 estimates included Class 8 market share of 4.8%–5.3%, medium-duty share of 4.1%–4.6%, 1,500 light-duty vehicle sales, and 5,500–6,000 used vehicle sales. It expected parts/service blended gross margin of 37%–39%, Class 8 truck margin of 6.5%–7.5%, medium-duty margin of 4.5%–5.5%, and used-truck margin of 8.5%–10.5%.
- Management expected 2013 SG&A of 11%–14% of revenue and an effective tax rate of approximately 37%–39%. It anticipated approximately $125 million of financed truck purchases for leasing operations in 2013 and $7–$10 million of recurring capital expenditures during the remainder of the year.
- Backlog was $703.5 million at June 30, down from $753.2 million a year earlier; the company expected to fill most orders during 2013. Management cited lower U.S. Class 8 sales and increased overhead as pressures on results, alongside ongoing investment in facilities, technology, service capacity, and acquisitions.
- The company acquired Piedmont International Trucks assets for approximately $3.5 million in May and completed its Midwest Truck Sales acquisition in July. A Virginia dealership acquisition was expected in fall 2013.
- Risks include commercial-truck market cyclicality, interest-rate exposure, inventory and used-vehicle values, acquisition execution, environmental compliance, and litigation. The company reported no pending litigation it believed could materially affect results, but noted ordinary-course claims and potential environmental liabilities, including known soil or groundwater contamination at some properties.
- Auction-rate securities remained illiquid, with a $6.6 million fair value against $7.6 million cost. The company said it intended and was able to hold them; a further 10% impairment could reduce equity or income by about $0.7 million, depending on impairment classification.
Important facts for investors to verify
- Whether the sharp earnings decline is primarily explained by the one-time $10.8 million retirement charge and truck-sales mix, or also signals persistent cost or demand weakness.
- Whether parts/service growth and forecast lease/rental expansion can offset lower heavy-duty truck volumes, and whether the backlog converts as expected.
- Inventory financing, debt and lease balances, interest-rate sensitivity, and the complete terms and termination provisions of the amended GE Capital facility.
- Execution and costs of announced dealership acquisitions, facility projects, and the planned expansion of the SAP system to all current centers by the end of 2014.
- Potential changes in auction-rate security valuations, environmental exposures, and tax uncertainties; the filing reported $1.4 million of unrecognized tax benefits at June 30, 2013.