Rush Enterprises, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 9, 2023. Rush operates commercial vehicle dealerships and related parts, service, leasing, rental, finance and insurance businesses in the U.S. and Ontario, Canada. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $2,003.1 million | $1,791.2 million | $3,914.8 million | $3,354.4 million |
| Gross profit / margin | $413.8 million / 20.7% | $374.2 million / 20.9% | $812.6 million / 20.8% | $719.7 million / 21.5% |
| Operating income | $142.9 million | $135.0 million | $270.6 million | $242.5 million |
| Income before taxes | $130.5 million | $140.2 million | $249.7 million | $260.5 million |
| Net income attributable to Rush | $98.3 million | $110.2 million | $188.7 million | $202.7 million |
| Diluted EPS | $1.75 | $1.92 | $3.35 | $3.52 |
- Revenue mix and operating trends: Q2 new and used vehicle sales rose 13.9% and aftermarket products and services rose 8.8%; lease and rental revenue increased 9.9%. Finance and insurance revenue fell 20.2%, which management attributed mainly to a greater share of sales to large fleets that arrange their own financing. New vehicle unit sales increased 11.3% in Q2; used vehicle units increased 14.7% in Q2 but declined 11.7% for the first half.
- Margins and costs: Gross profit grew, but total gross margin narrowed as lower-margin vehicle sales made up a larger revenue share. Q2 SG&A rose 13.9% to $256.7 million. Net interest expense increased to $12.2 million from $3.2 million in Q2 and to $23.2 million from $4.4 million for the first half.
- Cash flow: First-half operating cash flow was $114.0 million, versus $58.2 million. Investing activities used $188.9 million, including $186.0 million for property and equipment; $138.6 million of that amount was for lease and rental vehicles. Financing activities provided $65.7 million. Cash decreased $9.2 million to $191.9 million.
- Liquidity and balance sheet at June 30: Working capital was approximately $467.0 million. Current assets were $2,087.8 million and current liabilities $1,620.8 million. Inventories were $1,637.3 million, up from $1,429.4 million at year-end 2022. Floor plan notes payable were $1,125.4 million; long-term debt, net of current maturities, was $245.3 million. Finance lease obligations totaled $136.8 million, and operating lease obligations totaled $106.4 million, including current portions. Total shareholders’ equity was $1,887.3 million.
Material changes and unusual items
- Q2 revenue increased 11.8%, while income before taxes declined 6.9% and net income attributable to Rush declined 10.8%. First-half revenue increased 16.7%, while pretax income declined 4.2% and attributable net income declined 6.9%.
- Management said the Q2 pretax decline was primarily due to a one-time gain related to the 2022 acquisition of an additional 30% interest in Rush Truck Centres of Canada Limited (RTC Canada). The 2022 quarter included a $9.8 million gain; the first-half 2022 statements also included acquisition-related gains. RTC Canada has been consolidated since May 2022, affecting year-over-year comparisons.
- Inventory growth and higher variable interest rates drove higher interest expense. The company reported $1,370.7 million of floor-plan and other specified borrowings exposed to variable rates; a 100-basis-point rate change could change annual interest expense by approximately $13.7 million.
- During the first half, Rush repurchased $63.9 million of stock and paid $23.4 million in cash dividends. It had repurchased $71.4 million under its current $150 million authorization as of June 30; the program expires December 31, 2023.
Outlook, risks and contingencies
- 2023 outlook: Management expected U.S. Class 8 retail sales of 272,600 units and Rush market share of 6.1%–6.6%, corresponding to approximately 16,500–18,000 U.S. Class 8 sales; it expected about 750 Class 8 sales in Canada. For U.S. Class 4–7 vehicles, it forecast 248,150 industry units and Rush share of 4.6%–5.2%, or approximately 11,500–13,000 Rush sales; it expected about 250 Canadian Class 5–7 sales. It also expected 1,800–2,000 light-duty and 6,700–7,300 used vehicle sales.
- Management forecast 2023 lease and rental revenue growth of 10%–15%; aftermarket gross margins of 37.5%–38.5%; new heavy-duty margins of 9.0%–10.0%; new medium-duty margins of 7.5%–8.8%; used-vehicle margins of 8.0%–10.0%; lease and rental margins of 29.0%–31.0%; SG&A of 12.8%–13.5% of revenue; and an effective tax rate of 24.0%–24.5%.
- Management said aftermarket demand was beginning to soften, particularly among over-the-road customers. Risks to projections include manufacturer allocations and production, upfitter delays, inflation, interest and freight rates, and the possibility of lower industry demand. The $4,041.6 million vehicle-order backlog was higher than normal, includes cancellable orders, and may be at increased cancellation risk the longer delivery takes; management expected to fill most orders in 2023 and the first half of 2024, subject to manufacturers meeting schedules.
- Management stated that available funds and expected operating cash flow should meet requirements for at least 12 months and that the company was in compliance with debt covenants at June 30. Planned 2023 spending included $170–$180 million for lease and rental vehicles and $35–$40 million in recurring capital expenditures; a new St. Louis-area facility was under contract at an estimated $13.9 million.
- Environmental regulation, including evolving commercial-vehicle emissions requirements, could increase compliance costs or affect demand. The company reported no pending litigation it believed reasonably likely to have a material adverse effect, while noting ordinary-course litigation and uncertainty. It disclosed $5.3 million of unrecognized tax benefits and said it did not anticipate a significant change over the next 12 months.
- After quarter-end, the board declared a three-for-two stock split, payable August 28, 2023, and a $0.17-per-share cash dividend payable September 22, 2023. The filing says this dividend represents a 21.4% increase on a post-split basis compared with the Q2 dividend.
Important facts for investors to verify
- Whether vehicle demand, manufacturer production and delivery schedules support management’s sales and backlog expectations, and whether orders are cancelled.
- How inventory levels, floor-plan financing and variable interest rates affect interest expense, liquidity and cash generation.
- Whether softening aftermarket demand and changes in vehicle/aftermarket mix pressure gross margins and earnings.
- Progress on capital expenditures, lease-fleet purchases, buybacks and dividends, alongside covenant compliance and borrowing availability.
- The filing states that disclosure controls were effective “as of March 31, 2023” in its Q2 report; investors may wish to verify this date reference, given the period ended June 30, 2023.