Rush Enterprises, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Unless otherwise stated, financial amounts below are in millions of dollars. Rush operates a network of commercial vehicle dealerships and related parts, service, leasing, rental, finance and insurance businesses.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $1,182.5 | $789.7 | $2,141.1 | $1,546.5 |
| Gross profit | $193.3 | $137.7 | $359.3 | $271.5 |
| Operating income | $34.9 | $11.8 | $57.7 | $36.4 |
| Net income | $19.8 | $5.6 | $31.9 | $19.2 |
| Diluted EPS | $0.49 | $0.14 | $0.78 | $0.47 |
| Gross margin | 16.4% | 17.4% | 16.8% | 17.5% |
| Operating margin | 3.0% | 1.5% | 2.7% | 2.3% |
- Q2 revenue grew 49.7% year over year; first-half revenue grew 38.5%. Q2 and first-half net income increased approximately 252% and 66%, respectively.
- Truck sales drove much of the growth: Q2 new vehicle unit sales rose 53.7%, including heavy-duty units up 74.4% and medium-duty units up 48.7%. Used vehicle unit sales rose 33.1%.
- Gross margin declined as lower-margin vehicle sales grew to a larger share of revenue. Parts, service and body shop revenue benefited from acquisitions and demand to maintain older vehicles; their gross margin also declined year over year.
- Q2 SG&A was $149.3 million, or 12.6% of revenue, versus 15.0% a year earlier. Q2 net interest expense was $2.5 million. The effective tax rate was 38.75% for both Q2 and the first half.
Cash flow, liquidity and debt
- First-half operating cash flow was $46.6 million, versus $36.7 million in 2013. Investing used $261.3 million, including $147.3 million for acquisitions and $116.2 million for property and equipment. Financing provided $128.3 million. Cash fell $86.3 million to $131.0 million.
- At June 30, cash was $131.0 million, working capital was approximately $142.9 million, and current assets and current liabilities were $1,189.3 million and $1,046.3 million, respectively. Management said available funds were sufficient for operating requirements for at least 12 months.
- Balance-sheet floor plan notes payable were $686.9 million. Long-term debt, including current maturities, totaled $539.9 million; capital lease obligations totaled $44.7 million. The GE Capital credit agreement had a $750 million commitment and approximately $632.5 million outstanding. Ford vehicle financing outstanding was $54.4 million.
- A separate secured line of credit had no advances outstanding; $11.5 million was pledged for letters of credit, leaving $3.5 million available. The company reported compliance with debt covenants.
- Variable-rate floor plan and real-estate debt totaled approximately $758.8 million; management estimated a 100-basis-point rate change would change annual interest expense by about $7.6 million.
Changes, outlook and notable items
- January 2014 acquisition of Illinois and Indiana truck dealerships and leasing operations had a preliminary purchase price of approximately $145.1 million, principally cash, plus $2.0 million in stock. Acquired operations contributed to year-over-year growth. The company also formed a 50%-owned California used-truck joint venture, contributing $2.2 million.
- Management described freight and economic conditions as supportive, citing strong truck demand, market-share gains and aged-vehicle maintenance needs. Backlog was $1,279.9 million at June 30, up from $703.5 million a year earlier; the company expected to fill most orders during 2014.
- 2014 expectations included Class 8 truck market share of 5.8%–6.2%, medium-duty share of 4.9%–5.5%, approximately 2,000 light-duty sales and 7,500–8,500 used vehicle sales. Management expected lease and rental revenue growth of 35%–40%; blended parts, service and body shop margins of 35%–37%; Class 8 margins of 6.5%–7.6%; and medium-duty margins of 5.1%–5.6%. These are management estimates, not guarantees.
- Management expected 2014 SG&A at 12.5%–13.5% of revenue and an effective tax rate of approximately 38%–39%. Planned 2014 recurring capital expenditures were $16–$18 million; lease-fleet truck purchases or leases were expected to be approximately $170 million, financed. Several dealership construction projects were underway, with estimated completion through Q2 2015.
- Q2 included $2.0 million of CNG fuel-system research and development expense under an agreement with 3M; additional development costs were expected. Q2 2013 included a $10.8 million retirement and benefits charge for former Chairman W. Marvin Rush, affecting the comparison.
- The company held illiquid auction-rate securities with $6.8 million fair value and $7.4 million cost basis; auctions had failed, although securities continued to pay interest. It also had $36.8 million notional interest-rate swaps, with a $0.7 million liability fair value.
- Risks include truck-market cyclicality, interest rates, vehicle demand and supply, execution and integration of acquisitions, environmental obligations, and possible impairment of goodwill or franchise rights. Management reported no pending litigation expected to materially affect results, no material change in previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether truck demand, backlog conversion and forecast market-share gains persist, and how much growth reflects acquired operations.
- Whether higher vehicle-sales volume can offset lower consolidated gross margin and margin pressure in parts/service and leasing.
- Working-capital and inventory needs, cash generation, acquisition and construction spending, and debt and floor-plan financing levels.
- Progress and future costs of the 3M CNG initiative, dealership expansion, and SAP rollout, which management planned to complete by Q2 2015.
- Liquidity and valuation assumptions for auction-rate securities, interest-rate exposure, and the company’s ability to maintain covenant compliance.