Rush Enterprises, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. Comparisons are with the corresponding 2018 periods. Rush operates a nationwide commercial-vehicle dealership network, with one reportable segment, Truck. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,544.6 | $1,348.8 | $2,892.9 | $2,589.6 |
| Gross profit | $269.5 | $243.4 | $526.4 | $470.4 |
| Operating income | $61.8 | $43.4 | $118.7 | $75.8 |
| Net income | $41.6 | $29.4 | $78.7 | $50.4 |
| Diluted EPS | $1.10 | $0.72 | $2.08 | $1.23 |
- Q2 revenue rose 14.5%, gross profit 10.7%, operating income 42.3%, and net income 41.6% year over year. For the first half, revenue rose 11.7%, gross profit 11.9%, operating income 56.5%, and net income 56.1%.
- Gross margin was 17.4% in Q2 versus 18.0% a year earlier; first-half gross margin was 18.2% in both periods. Operating margin improved to 4.0% from 3.2% in Q2 and to 4.1% from 2.9% for the first half. Net margin was 2.7% versus 2.2% in Q2 and 2.7% versus 2.0% for the first half.
- Q2 new and used commercial-vehicle revenue increased 19.6%; aftermarket products and services revenue increased 6.0%. New vehicle sales made up a larger share of revenue, contributing to lower consolidated Q2 gross margin. Aftermarket gross margin improved to 39.2% from 37.3%.
- Net interest expense increased 79.6% in Q2 and 75.3% in the first half, reflecting higher LIBOR and larger inventory balances. Lower depreciation and amortization versus 2018 partly reflects a $19.9 million first-half 2018 charge for replaced ERP-platform components.
- Cash flow: First-half operating cash flow was negative $31.9 million, versus positive $190.0 million in 2018, primarily reflecting inventory growth of $136.6 million and increases in receivables. Investing cash outflow was $181.7 million, including $153.1 million of property and equipment purchases, $10.2 million of acquisitions, and $22.5 million for the Canadian investment. Financing provided $193.2 million. Cash declined $20.4 million to $111.3 million.
- Liquidity and debt: Working capital was approximately $184.3 million. At June 30, current assets were $1,882.5 million and current liabilities $1,698.3 million. Balance-sheet obligations included $1,190.1 million of floor-plan notes, $60.0 million drawn on the working-capital facility, $607.3 million of long-term debt including current maturities, and $73.7 million of finance-lease obligations. Operating-lease liabilities were $51.8 million following adoption of the new lease standard.
- Floor-plan borrowings and variable-rate real-estate debt totaled approximately $1,252.4 million; management estimated a 100-basis-point LIBOR movement could change annual interest expense by about $12.5 million.
Material changes, outlook and risks
- Management attributed growth to strong vehicle deliveries, including vocational and large-fleet demand, and continued execution of aftermarket initiatives. Q2 heavy-duty truck unit sales rose 28.0%; medium-duty units rose 11.3%.
- Management expected aftermarket revenue growth of 7%–9% for 2019, lease and rental revenue growth of 3%–5%, and aftermarket gross margins of 37.5%–38.5%. It expected 2019 Class 8 market share of 5.3%–5.6% and sales of approximately 14,500–15,500 units, based on the cited industry forecast. Management anticipated Class 8 sales would begin declining in Q4 2019 and decline significantly in 2020, citing excess freight capacity and sharply lower recent orders. Medium-duty demand was expected to remain strong through 2019.
- Other 2019 expectations included Class 8 gross margins of 7.5%–8.0%, medium-duty gross margins of 5.5%–6.0%, used-vehicle gross margins of 8%–9%, SG&A of 12.5%–13.0% of revenue, and an effective tax rate of 24%–26%. These are management estimates, not guarantees.
- Capital plans included $165 million–$190 million of financed vehicle purchases or leases for the rental and leasing fleet and $30 million–$40 million of recurring capital expenditures. The company reported $16.1 million of purchase obligations for facility projects and real estate.
- Rush acquired a 50% interest in Rush Truck Centres of Canada, which acquired Tallman Group operating assets, and held a call option to acquire the remaining interest through February 2024. Rush also guaranteed certain Canadian affiliate credit facilities up to CAD 250 million; the guarantee was valued at $5.0 million. The filing says enforcement-related interest, fees and expenses are outside that cap.
- The company adopted lease accounting Topic 842 on January 1, 2019, recognizing operating lease assets and liabilities; 2018 comparative figures were not restated. It reported $40.4 million of guaranteed commercial-vehicle residual values under operating and finance lease arrangements.
- Management said it had adequate funds and expected cash flows to meet operating requirements for at least 12 months, and reported compliance with debt covenants. The working-capital facility was stated to expire March 21, 2020; the filing also lists a June 28, 2019 amendment, so the effect of that amendment on the stated maturity should be checked.
- Principal risks include truck-market cyclicality, interest-rate exposure, inventory and working-capital demands, vehicle residual values, environmental compliance and possible liabilities, and ordinary-course litigation. Management reported no known pending litigation expected to have a material adverse effect, while noting litigation outcomes are uncertain. No material change in reported risk factors was identified.
Most important facts for investors to verify
- Whether the June 28 credit-agreement amendment changed the stated March 2020 working-capital-facility maturity, and the facility’s current availability and covenants.
- Inventory growth, negative operating cash flow, and the extent to which inventory is financed through floor-plan borrowings.
- Class 8 order trends and the assumptions behind management’s forecast of a significant 2020 sales decline.
- The terms, valuation, and potential exposure associated with the Canadian guarantee, call option, and 50% equity-method investment.
- Progress on repurchases and dividends: the company had repurchased $104.0 million under its $150.0 million program by June 30, 2019; the Board later declared a $0.13-per-share dividend payable in September.