Rush Enterprises, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; balance-sheet figures are as of June 30, 2012, compared with December 31, 2011. Unless otherwise noted, amounts below are in millions of dollars. Rush operates a network of commercial-vehicle dealerships and related parts, service, leasing, financing and insurance businesses.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $835.8 | $662.0 | $1,613.2 | $1,108.1 |
| Gross profit | $129.6 | $105.5 | $257.9 | $187.9 |
| Operating income | $32.0 | $21.8 | $61.3 | $34.6 |
| Net income | $17.4 | $12.5 | $33.3 | $19.8 |
| Diluted EPS | $0.44 | $0.32 | $0.84 | $0.51 |
| Gross margin | 15.5% | 15.9% | 16.0% | 17.0% |
- Growth and mix: Q2 revenue rose 26.3%, with new and used truck sales up 28.2% and parts, service and body-shop sales up 22.2%. New truck unit sales increased 26.4%; heavy-duty units rose 19.0% and medium-duty units 41.4%. The six-month revenue increase was 45.6%.
- Profitability: Q2 operating margin was 3.8% versus 3.3% a year earlier; net margin was 2.1% versus 1.9%. Gross margin declined as lower-margin vehicle sales made up a larger share of revenue. Six-month net income increased 68.4%.
- Cash flow: Operating activities used $67.2 in the first half, versus $36.0 used in the prior-year period, principally reflecting a $167.6 inventory increase and lower accrued expenses. Investing activities used $78.2, including $78.5 of property and equipment purchases; financing activities provided $106.6. Cash declined $38.8 to $169.0.
- Liquidity: Working capital was approximately $220.9; management said available funds were sufficient for operating needs for at least 12 months. Current assets were $1,110.9 and current liabilities $890.0.
- Debt: Floor-plan notes payable were $634.6; long-term debt was $357.2 including current maturities; capital lease obligations were $44.6. The company reported $583.8 outstanding under its GE Capital floor-plan agreement and $36.1 under a new Ford Motor Credit wholesale-financing agreement. A $10.0 secured credit line had $2.3 available after letters of credit. Debt covenants were reported in compliance.
- Other balance-sheet items: Inventories rose to $829.0 from $649.6; total assets were $1,885.4 and shareholders’ equity $574.7 at June 30.
Material changes versus the prior period
- Revenue and earnings grew substantially, supported by higher vehicle deliveries, aftermarket sales and the contribution of 2011 acquisitions. Parts, service and body-shop gross profit rose to $80.7 in Q2 from $66.9.
- Q2 gross margin fell 0.4 percentage points; six-month gross margin fell 1.0 point. Q2 parts/service/body-shop gross margin declined to 38.7% from 39.3%, while used-vehicle margin fell to 8.3% from 10.2%.
- Q2 net interest expense increased 113.1% to $3.4, primarily due to higher truck inventory. Six-month net interest expense was $6.7, up 139.7%.
- Backlog of confirmed commercial-vehicle orders increased to $753.2 from $705.7 a year earlier; the company expected to fill most orders during 2012.
Outlook, commentary and risks
- Management expected 2012 income before taxes to exceed 2011, but said commercial-vehicle demand could soften in the second half because of economic and political uncertainty. The company estimated U.S. 2012 Class 8 retail sales of 180,000–185,000 units and expected its share to be 5.2%–5.4%; manufacturer and component-supplier capacity could constrain deliveries.
- Management expected parts, service and body-shop sales to remain strong. Other 2012 expectations included lease/rental revenue growth of 20%–25%, SG&A of 11%–13% of revenue, and an effective tax rate of 37%–39%. These are management estimates, not guarantees.
- Planned 2012 leasing-fleet truck purchases were approximately $115.0, to be financed; recurring capital expenditures were estimated at $12.0–$18.0. A dealership in Ardmore, Oklahoma, was under construction at an estimated cost of $4.9.
- Interest-rate exposure is material: a 100-basis-point change in LIBOR was estimated to change annual interest expense by approximately $6.9. Interest-rate swaps had $43.6 notional value. The company also held illiquid auction-rate securities valued at $6.6, with $7.6 cost basis; a further 10% decline could reduce equity or produce an approximately $0.7 impairment charge, depending on the assessment.
- Risks include commercial-vehicle cyclicality, interest rates, supplier capacity, environmental compliance and potential liabilities, self-insurance estimates, goodwill/franchise-rights impairment, and ordinary-course litigation. Management said no pending litigation was expected to materially affect results, while acknowledging litigation uncertainty. No material change to previously disclosed risk factors was reported.
- Disclosure controls were assessed as effective at June 30, 2012; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Monitor inventory, floor-plan borrowing, operating cash flow and interest expense as vehicle volumes and inventory financing change.
- Assess whether revenue growth can be sustained without further gross-margin compression, particularly in vehicle sales, used trucks and leasing.
- Track order backlog conversion, second-half demand, supplier production capacity and actual market share against management’s estimates.
- Review liquidity and the financing terms and covenants for floor-plan, real-estate and leasing-fleet debt; only $2.3 remained available on the secured line.
- Check the valuation and liquidity of auction-rate securities and the potential sensitivity of reported value to interest rates and impairment judgments.
- The MD&A says demand remained strong in the “first half of 2021,” although this is a 2012 filing. Verify the intended year; the text appears inconsistent.