Rush Enterprises, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Interim financial statements are unaudited. Rush operates a nationwide commercial-vehicle dealership network and reports one primary segment, Truck; smaller tire, insurance and ranch operations are included in “All Other.”
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $1,348.8 million | $1,203.5 million | $2,589.6 million | $2,248.3 million |
| Gross profit | $243.4 million | $209.1 million | $470.4 million | $397.0 million |
| Operating income | $43.4 million | $37.4 million | $75.8 million | $62.3 million |
| Net income | $29.4 million | $22.0 million | $50.4 million | $36.5 million |
| Diluted EPS | $0.72 | $0.54 | $1.23 | $0.90 |
- Q2 revenue rose 12.1%; first-half revenue rose 15.2%. First-half commercial-vehicle sales increased 15.5%, aftermarket revenue 14.9%, and lease and rental revenue 11.7%.
- Gross margin was 18.0% in Q2 and 18.2% for the first half, compared with 17.4% and 17.7%, respectively. Management attributed improvement primarily to a more favorable mix, including a higher contribution from aftermarket products and services.
- Operating margin was 3.2% in Q2 and 2.9% for the first half; net margin was 2.2% and 2.0%, respectively. First-half SG&A was 13.5% of revenue versus 13.8% a year earlier.
- Net interest expense increased 59.1% in Q2 and 56.7% in the first half, attributed mainly to higher LIBOR and inventory levels. The effective tax rate was 25.0% for both 2018 periods, versus 39.0% in Q2 2017 and 38.75% in the first half of 2017.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $190.0 million, compared with $130.7 million. Investing cash outflow was $112.5 million, including $116.2 million of property and equipment purchases; financing cash outflow was $53.7 million. Cash increased $23.8 million to $148.3 million.
- At June 30, cash was $148.3 million, working capital was approximately $200.1 million, and total assets were $3.02 billion. Inventory was $1.13 billion, up from $1.03 billion at year-end 2017.
- Balance-sheet floor plan notes payable were $868.0 million. Long-term debt was $590.5 million including current maturities ($155.7 million current; $434.7 million long-term), and capital lease obligations totaled $74.7 million. Separately, management reported $665.8 million outstanding under the BMO floor plan agreement and approximately $133.8 million under Ford’s wholesale financing agreement.
- No borrowings were outstanding on the $100 million Working Capital Facility or the $17.5 million secured line of credit; $5.9 million remained available on the latter after letters of credit. Management said available funds and expected operating cash flows should meet requirements for at least 12 months. The company reported compliance with debt covenants.
Changes, outlook and notable items
- Q2 aftermarket revenue increased 15.4%; new and used vehicle revenue increased 10.4%. New heavy-duty unit sales declined 4.0% in Q2, partly due to timing of fleet transactions and manufacturer capacity constraints, while medium-duty sales rose 13.0% and used-vehicle sales rose 17.9%.
- Management expected 2018 aftermarket revenue growth of 12%–15%, lease and rental revenue growth of 5%–10%, and Class 8 sales to accelerate in the second half, while noting capacity limits could defer deliveries into 2019. Other stated 2018 expectations included approximately 2,000 light-duty vehicles and 7,500–8,500 used vehicles sold. Class 8 and medium-duty market-share, gross-margin, and SG&A expectations are detailed in the filing.
- A significant unusual expense was accelerated ERP-platform amortization: $19.9 million in the first half, including $9.7 million in Q2, after the company determined components needed earlier replacement. This contributed to higher depreciation and amortization expense.
- The company expected to finance $165 million–$190 million of 2018 lease/rental truck purchases and spend $25 million–$30 million on recurring capital expenditures; a new Atlanta facility was estimated at $8.6 million. First-half share repurchases totaled $45.9 million.
- After quarter-end, the board declared an initial quarterly dividend of $0.12 per share, estimated at approximately $4.7 million, payable August 29, 2018. The filing also reports a $1.72 billion commercial-vehicle order backlog at June 30, up from $1.13 billion a year earlier; orders may be canceled.
Risks and contingencies
- Interest-rate exposure is material: management estimated a 100-basis-point LIBOR move could change annual interest expense by approximately $9.5 million.
- Business results are cyclical and sensitive to economic conditions, fuel prices, rates, credit availability, regulation, customer cycles and vehicle-manufacturer capacity. Management also noted possible used-vehicle supply and market-share pressures.
- Auction-rate securities with a $6.0 million fair value remained illiquid after failed auctions; management said this did not materially impair operating funding capacity. A further 10% fair-value decline could reduce equity or, if other-than-temporary, produce a $0.6 million loss.
- The company disclosed $2.6 million of unrecognized tax benefits and a federal examination of its 2015 return; the potential impact was not determinable. It reported no pending litigation expected to have a material adverse effect, while noting the inherent uncertainty of claims and environmental exposures.
- Lease accounting standard Topic 842 was expected to take effect January 1, 2019; the company anticipated a material effect on the balance sheet. Adoption of revenue standard Topic 606 in 2018 had no material revenue impact.
Investor verification points
- Check whether vehicle production constraints, order cancellations and backlog conversion support management’s sales outlook.
- Monitor inventory growth, floor-plan balances, borrowing costs and sensitivity to LIBOR, alongside cash generation and capital spending.
- Assess whether aftermarket growth and margins offset vehicle-sales mix, ERP amortization and rising interest expense.
- Follow the 2015 tax examination, unrecognized tax benefits, auction-rate security liquidity, and the balance-sheet impact of Topic 842 adoption.
- Verify subsequent dividend payments and repurchases against liquidity needs, debt covenants and the stated capital-allocation plans.