RUSH ENTERPRISES, INC. Certain statements contained in this Form 10-Q (or otherwise made by the Company or on the Company's behalf from time to time in other reports, filings with theSecurities and Exchange Commission ("SEC"), news releases, conferences, website postings or otherwise) that are not statements of historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act of 1934, as amended (the "Exchange Act"), notwithstanding that such statements are not specifically identified. Forward-looking statements include statements about the Company's financial position, business strategy and plans and objectives of management of the Company for future operations, as well as statements regarding the effects COVID-19 may have on our business and financial results. These forward-looking statements reflect the best judgments of the Company about the future events and trends based on the beliefs of the Company's management as well as assumptions made by and information currently available to the Company's management. Use of the words "may," "should," "continue," "plan," "potential," "anticipate," "believe," "estimate," "expect" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements reflect our current view of the Company with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in such statements. Please read Item 1A. "Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , for a discussion of certain of those risks. Other unknown or unpredictable factors could also have a material adverse effect on future results. Although the Company believes that its expectations are reasonable as of the date of this Form 10-Q, it can give no assurance that such expectations will prove to be correct. The Company does not intend to update or revise any forward-looking statements unless securities laws require it to do so, and the Company undertakes no obligation to publicly release any revisions to forward-looking statements, whether because of new information, future events or otherwise.
The following comments should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
Note Regarding Trademarks Commonly Used in the Company's Filings
Peterbilt® is a registered trademark ofPeterbilt Motors Company . PACCAR® is a registered trademark of PACCAR, Inc. PacLease® is a registered trademark ofPACCAR Leasing Corporation . Navistar® is a registered trademark of Navistar International Corporation. International® is a registered trademark ofNavistar International Transportation Corp. Idealease is a registered trademark ofIdealease, Inc. akaIdealease of North America, Inc. Blue Bird® is a registered trademark ofBlue Bird Investment Corporation . IC Bus® is a registered trademark ofIC Bus, LLC . Hino® is a registered trademark of Hino Motors, Ltd. Isuzu® is a registered trademark of Isuzu Motors Limited. Ford® is a registered trademark of Ford Motor Company. Cummins® is a registered trademark of Cummins, Inc. This report contains additional trade names or trademarks of other companies. Our use of such trade names or trademarks should not imply any endorsement or relationship with such companies. GeneralRush Enterprises, Inc. was incorporated inTexas in 1965 and consists of one reportable segment, the Truck Segment, and conducts business through its subsidiaries. Our principal offices are located at 555 IH 35 South, Suite 500,New Braunfels, Texas 78130. We are a full-service, integrated retailer of commercial vehicles and related services. The Truck Segment includes our operation of a network of commercial vehicle dealerships under the name "Rush Truck Centers ."Rush Truck Centers primarily sell commercial vehicles manufactured byPeterbilt , International, Hino,Ford , Isuzu, IC Bus and Blue Bird. Through our strategically located network ofRush Truck Centers , we provide one-stop service for the needs of our commercial vehicle customers, including retail sales of new and used commercial vehicles, aftermarket parts sales, service and repair facilities, financing, leasing and rental, and insurance products. OurRush Truck Centers are principally located in high traffic areas throughoutthe United States andOntario, Canada . Since commencing operations as aPeterbilt heavy-duty truck dealer in 1966, we have grown to operate over 125 franchisedRush Truck Centers in 23 states. In 2019, we purchased a 50% equity interest in an entity inCanada ,Rush Truck Centres of Canada Limited ("RTCCanada ") and onMay 2, 2022 , we purchased an additional 30% equity interest in RTC Canada that increased our equity interest to 80%. RTC Canada currently owns and operates 15 International dealership locations inOntario . Prior to acquiring the additional 30%, we accounted for the equity interest in RTC Canada using the equity method of accounting. Now, the operating results of RTC Canada are consolidated in the Consolidated Statements of Operations, the Statements of Comprehensive Income, the Consolidated Balance Sheets and commercial vehicle unit sales data as ofMay 2, 2022 . 16
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Our business strategy consists of providing solutions to the commercial vehicle industry through our network of commercial vehicle dealerships. We offer an integrated approach to meeting customer needs by providing service, parts and collision repairs in addition to new and used commercial vehicle sales and leasing, plus financial services, vehicle upfitting, CNG fuel systems through our joint venture with Cummins and vehicle telematics products. We intend to continue to implement our business strategy, reinforce customer loyalty and remain a market leader by continuing to develop ourRush Truck Centers as we expand our product offerings and extend our dealership network through strategic acquisitions of new locations and opening new dealerships in our existing areas of operation to enable us to better serve our customers.
The COVID-19 Pandemic and Its Impact on Our Business
While business conditions have improved significantly since the onset of the Covid-19 pandemic in the second quarter of 2020, our industry continues to be impacted by supply chain issues generally believed to be attributable to the COVID-19 pandemic that are negatively affecting new commercial vehicle production and the availability of aftermarket parts. OutlookA.C.T. Research Co., LLC ("A.C.T. Research "), a commercial vehicle industry data and forecasting service provider, currently forecasts newU.S. Class 8 retail truck sales to be 258,600 units in 2022, which would represent a 13.7% increase compared to 2021. We expect our U.S. market share of new Class 8 truck sales to range between 6.2% and 6.5% in 2022. This market share percentage would result in the sale of approximately 16,000 to 16,700 new Class 8 trucks in 2022. We expect to sell approximately 200 additional new Class 8 trucks inCanada in the fourth quarter of 2022. With respect to newU.S. Class 4-7 retail commercial vehicle sales,A.C.T. Research currently forecasts sales to be 230,975 units in 2022, which would represent a 7.5% decrease compared to 2021. We expect our U.S. market share of new Class 4 through 7 commercial vehicle sales to range between 4.5% and 4.8% in 2022. This market share percentage would result in the sale of approximately 10,500 to 11,000 new Class 4 through 7 commercial vehicles in 2022. We expect to sell approximately 60 additional new Class 5 through 7 commercial vehicles inCanada in the fourth quarter of 2022.
We expect to sell approximately 1,800 light-duty vehicles and approximately 6,800 to 7,200 used commercial vehicles in 2022. We expect lease and rental revenues to increase 28% to 32% during 2022, compared to 2021.
We believe our Aftermarket Products and Services revenues will increase 28% to 33% in 2022, compared to 2021.
The above projections for new commercial vehicle sales will depend on our ability to obtain commercial vehicles from the manufacturers we represent and such projections could be negatively impacted by manufacturer allocation decisions and supply chain issues affecting manufacturers' production. In addition, we continue to monitor inflation and rising interest rates, which may negatively impact consumer spending and capital expenditures across a variety of industries we support. All of the above projections for new commercial vehicle sales, lease and rental revenues and Aftermarket Products and Services revenues include the dealership andIdealease locations that we acquired onDecember 13, 2021 , when we completed the acquisition of certain of the assets of the ofSummit Truck Group, LLC and certain of its subsidiaries and affiliates (collectively, "Summit"). In addition, all of the above projections for new commercial vehicle sales, lease and rental revenues and Aftermarket Products and Services revenues include RTCCanada .
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. We believe the following accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined by specific identification of new and used commercial vehicle inventory and by the first-in, first-out method for tires, parts and accessories. As the market value of our inventory typically declines over time, reserves are established based on historical loss experience and market trends. These reserves are charged to cost of sales and reduce the carrying value of our inventory on hand. An allowance is provided when it is anticipated that cost will exceed net realizable value less a reasonable profit margin. 17
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Purchase Price Allocation, Intangible Assets and
Purchase price allocation for business combinations and asset acquisitions
requires the use of accounting estimates and judgments to allocate the purchase
price to the identifiable tangible and intangible assets acquired and
liabilities assumed based on their respective fair values. We determine whether
substantially all the fair value of the gross assets acquired is concentrated in
a single identifiable asset or a group of similar identifiable assets. If so,
the single asset or group of assets, as applicable, is not a business. If not,
we determine whether the single asset or group of assets, as applicable, meets
the definition of a business.
In connection with our business combinations, we record certain intangible
assets, including franchise rights. We periodically review the estimated useful
lives and fair values of our identifiable intangible assets, taking into
consideration any events or circumstances that might result in a diminished fair
value or revised useful life.
The excess purchase price over the fair value of assets acquired is recorded as
goodwill. We assess goodwill for impairment annually in the fourth quarter, or
whenever events or changes in circumstances indicate an impairment may have
occurred. If impaired, the carrying values of the assets are written down to
fair value using Level 3 inputs.
Insurance Accruals
We are partially self-insured for a portion of the claims related to our
property and casualty insurance programs, which requires us to make estimates
regarding expected losses to be incurred. We engage a third-party administrator
to assess any open claims and we adjust our accrual accordingly on a periodic
basis. We are also partially self-insured for a portion of the claims related to
our workers' compensation and medical insurance programs. We use actuarial
information provided from third-party administrators to calculate an accrual for
claims incurred, but not reported, and for the remaining portion of claims that
have been reported.
Changes in the frequency, severity and development of existing claims could
influence our reserve for claims and financial position, results of operations
and cash flows. We do not believe there is a reasonable likelihood that there
will be a material change in the estimates or assumptions we used to calculate
our self-insured liabilities. However, if actual results are not consistent with
our estimates or assumptions, we may be exposed to losses or gains that could be
material.
Accounting for Income Taxes
Management's judgment is required to determine the provisions for income taxes
and to determine whether deferred tax assets will be realized in full or in
part. Deferred income tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. When it is more likely than
not that all or some portion of specific deferred income tax assets will not be
realized, a valuation allowance must be established for the amount of deferred
income tax assets that are determined not to be realizable. Accordingly, the
facts and financial circumstances impacting deferred income tax assets are
reviewed quarterly and management's judgment is applied to determine the amount
of valuation allowance required, if any, in any given period.
Our income tax returns are periodically audited by tax authorities. These audits
include questions regarding our tax filing positions, including the timing and
amount of deductions. In evaluating the exposures associated with our various
tax filing positions, we adjust our liability for unrecognized tax benefits and
income tax provision in the period in which an uncertain tax position is
effectively settled, the statute of limitations expires for the relevant taxing
authority to examine the tax position or when more information becomes
available.
Our liability for unrecognized tax benefits contains uncertainties because
management is required to make assumptions and to apply judgment to estimate the
exposures associated with our various filing positions. Our effective income tax
rate is also affected by changes in tax law, the level of earnings and the
results of tax audits. Although we believe that the judgments and estimates are
reasonable, actual results could differ, and we may be exposed to losses or
gains that could be material. An unfavorable tax settlement would generally
require use of our cash and result in an increase in our effective income tax
rate in the period of resolution. A favorable tax settlement would be recognized
as a reduction in our effective income tax rate in the period of resolution. Our
income tax expense includes the impact of reserve provisions and changes to
reserves that we consider appropriate, as well as related interest.
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Revenue Recognition
We recognize revenue when our customer obtains control of promised goods or
services, in an amount that reflects the consideration which we expect to
receive in exchange for those goods or services. To determine revenue
recognition for arrangements that we determine are within the scope of ASU
2014-09, "Revenue from Contracts with Customers ("Topic 606"), we perform the
following five steps: (i) identify the contract with a customer; (ii) identify
the performance obligations in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the performance obligations in the
contract; and (v) recognize revenue when (or as) we satisfy a performance
obligation. We only apply the five-step model to contracts when it is probable
that we will collect the consideration we are entitled to in exchange for the
goods or services we transfer to the customer. At contract inception, once the
contract is determined to be within the scope of Topic 606, we assess the goods
or services promised within each contract and determine those that are
performance obligations. We then assess whether each promised good or service is
distinct and recognize as revenue the amount of the transaction price that is
allocated to the respective performance obligation when (or as) the performance
obligation is satisfied.
Leases
We lease commercial vehicles and real estate under finance and operating leases.
We determine whether an arrangement is a lease at its inception. For leases with
terms greater than twelve months, we record a lease asset and liability at the
present value of lease payments over the term. Many of our leases include
renewal options and termination options that are factored into our determination
of lease payments when appropriate.
When available, we use the rate implicit in the lease to discount lease payments
to present value; however, most of our leases do not provide a readily
determinable implicit rate. Therefore, we must estimate our incremental
borrowing rate to discount the lease payments based on information available at
lease commencement.
We lease commercial vehicles that we own to customers. Lease and rental revenue
is recognized over the period of the related lease or rental agreement. Variable
rental revenue is recognized when it is earned.
Allowance for Credit Losses
All trade receivables are reported on the consolidated balance sheet at their
cost basis adjusted for any write-offs and net of allowances for credit losses.
We maintain allowances for credit losses, which represent an estimate of
expected losses over the remaining contractual life of our receivables after
considering current market conditions and estimates for supportable forecasts,
when appropriate. The estimate is a result of our ongoing assessments and
evaluations of collectability, historical loss experience, and future
expectations in estimating credit losses in each of our receivable portfolios
(commercial vehicle receivables, manufacturers' receivables, parts and service
receivables, leasing receivables and other trade receivables). For trade
receivables, we use the probability of default and our historical loss
experience rates by portfolio and apply them to a related aging analysis while
also considering customer and economic risk where appropriate. Determination of
the proper amount of allowances by portfolio requires us to exercise our
judgment about the timing, frequency and severity of credit losses that could
materially affect the provision for credit losses and, as a result, net
earnings. The allowances take into consideration numerous quantitative and
qualitative factors that include receivable type, historical loss experience,
collection experience, current economic conditions, estimates for supportable
forecasts (when appropriate) and credit risk characteristics.
Foreign Currency Transactions
The functional currency of our foreign subsidiary, RTC Canada, is its local
currency. Results of operations for RTC Canada are translated in USD using the
average exchange rate on a monthly basis during the quarter. The assets and
liabilities of RTC Canada are translated into USD using the exchange rate in
effect on the balance sheet date. The related translation adjustments are
recorded as a separate component of our Consolidated Statements of Shareholders'
Equity in the line item Accumulated other comprehensive income.
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Table of Contents Results of Operations
The following discussion and analysis includes our historical results of
operations for the three months and nine months ended
The following table sets forth certain financial data as a percentage of total revenues for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Revenue
New and used commercial vehicle
sales 61.3 % 57.6 % 60.9 % 59.6 %
Aftermarket products and services
sales 33.4 36.6 33.8 34.8
Lease and rental sales 4.6 4.9 4.6 4.8
Finance and insurance 0.4 0.5 0.4 0.5
Other 0.3 0.4 0.3 0.3
Total revenues 100.0 100.0 100.0 100.0
Cost of products sold 79.5 77.7 78.9 79.1
Gross profit 20.5 22.3 21.1 20.9
Selling, general and administrative 13.0 14.2 13.3 14.1
Depreciation and amortization 0.8 1.0 0.8 1.1
Gain on sale of assets 0.1 0.0 0.1 0.0
Operating income 6.8 7.1 7.1 5.7
Other income 0.0 0.2 0.4 0.1
Interest expense, net 0.3 0.0 0.2 0.0
Income before income taxes 6.5 7.3 7.3 5.8
Provision for income taxes 1.6 1.8 1.7 1.3
Net income 4.9 5.5 5.6 4.5
Net income attributable to
noncontrolling interest 0.0 0.0 0.0 0.0
Net income attributable to Rush
Enterprises, Inc. 4.9 % 5.5 % 5.6 % 4.5 %
The following table sets forth for the periods indicated the percent of gross
profit by revenue source:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Gross Profit:
New and used commercial vehicle sales 25.3 % 25.8 % 27.4 % 27.7 %
Aftermarket products and services sales 63.8 64.5 62.1 63.2
Lease and rental 7.1 5.6 6.8 4.9
Finance and insurance 2.0 2.4 2.1 2.6
Other 1.8 1.7 1.6 1.6
Total gross profit 100.0 % 100.0 % 100.0 % 100.0 %
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The following table sets forth the unit sales and revenues for new heavy-duty,
new medium-duty, new light-duty and used commercial vehicles and our absorption
ratio (revenue in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 % Change 2022 2021 % Change
Vehicle unit sales:
New heavy-duty
vehicles 4,200 2,537 65.5 % 11,896 8,486 40.2 %
New medium-duty
vehicles 3,223 2,792 15.4 % 8,179 7,951 2.9 %
New light-duty
vehicles 608 361 68.4 % 1,497 1,228 21.9 %
Total new vehicle
unit sales 8,031 5,690 41.1 % 21,572 17,665 22.1 %
Used vehicles 1,763 1,712 3.0 % 5,787 5,730 1.0 %
Vehicle revenues:
New heavy-duty
vehicles $ 688.3 $ 376.2 83.0 % $ 1,925.7 $ 1,261.1 52.7 %
New medium-duty
vehicles 284.1 230.4 23.3 % 702.4 644.9 8.9 %
New light-duty
vehicles 30.5 16.4 86.0 % 74.5 56.2 32.6 %
Total new vehicle
revenue $ 1,002.9 $ 623.0 61.0 % $ 2,702.6 $ 1,986.2 37.7 %
Used vehicle revenue $ 131.5 $ 103.0 27.7 % $ 459.7 $ 303.9 51.3 %
Other vehicle
revenues:(1) $ 7.8 $ 3.3 136.4 % $ 13.9 $ 8.2 69.5 %
Absorption ratio: 136.2 % 134.0 % 1.8 % 136.6 % 128.7 % 6.1 %
(1) Includes sales of truck bodies, trailers and other new equipment.
Key Performance Indicator Absorption Ratio Management uses several performance metrics to evaluate the performance of our commercial vehicle dealerships and considersRush Truck Centers' "absorption ratio" to be of critical importance. Absorption ratio is calculated by dividing the gross profit from our Aftermarket Products and Services departments by the overhead expenses of all of a dealership's departments, except for the selling expenses of the new and used commercial vehicle departments and carrying costs of new and used commercial vehicle inventory. When 100% absorption is achieved, all of the gross profit from the sale of a commercial vehicle, after sales commissions and inventory carrying costs, directly impacts operating profit. Our commercial vehicle dealerships achieved a 136.2% absorption ratio for the third quarter of 2022 compared to a 134.0% absorption ratio for the third quarter of 2021.
Three Months Ended
Revenues Total revenues increased$597.8 million , or 47.2%, in the third quarter of 2022, compared to the third quarter of 2021. This increase was primarily a result of strong freight demand which, continues to drive strong demand for new and used commercial vehicles, the Summit acquisition and the consolidation of RTC Canada into our operating results, which increased revenues across all areas of our business. Our Aftermarket Products and Services revenues totaled$622.1 million in the third quarter of 2022, up 34.4% from the third quarter of 2021. The increase inAftermarket Parts and Services revenues was primarily a result of strong demand, inflation, the Summit acquisition and the consolidation of RTC Canada into our operating results. Revenues from sales of new and used commercial vehicles increased$412.9 million , or 56.6%, in the third quarter of 2022, compared to the third quarter of 2021. The increase in commercial vehicle revenues was primarily a result of strong demand, the Summit acquisition and the consolidation of RTCCanada into our operating results. We sold 4,200 new Class 8 trucks in the third quarter of 2022, a 65.5% increase compared to 2,537 new Class 8 trucks sold in the third quarter of 2021. This increase in new Class 8 truck sales was primarily a result of strong demand for new commercial vehicles, the Summit acquisition and the consolidation of RTCCanada into our operating results. NewU.S. Class 8 retail truck sales totaled 67,939 units in the third quarter of 2022, an increase of 27.0% compared to the third quarter of 2021, according toACT Research . 21
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We sold 3,223 new Class 4 through 7 medium-duty commercial vehicles, including 537 buses, in the third quarter of 2022, a 15.4% increase compared to 2,792 new medium-duty commercial vehicles, including 410 buses, in the third quarter of 2021. Our new Class 4 through 7 commercial vehicle sales increased due to strong demand for new commercial vehicles, the Summit acquisition and the consolidation of RTC Canada into our operating results. NewU.S. Class 4 through 7 retail commercial vehicle sales totaled 60,211 units in the third quarter of 2022, up 0.7% compared to the third quarter of 2021, according toACT Research .
We sold 608 light-duty vehicles in the third quarter of 2022, a 68.4% increase compared to 361 light-duty vehicles sold in the third quarter of 2021.
We sold 1,763 used commercial vehicles in the third quarter of 2022, a 3.0% increase compared to 1,712 used commercial vehicles in the third quarter of 2021. We believe used commercial vehicle demand and values will continue to decrease as new commercial vehicle production increases to a level adequate to meet customer demand.
Commercial vehicle lease and rental revenues increased$23.0 million , or 36.7%, in the third quarter of 2022, compared to the third quarter of 2021. This increase in commercial vehicle lease and rental revenues was primarily a result of strong demand for rental commercial vehicles, the Summit acquisition and the consolidation of RTC Canada into our operating results. Finance and insurance revenues increased$0.8 million , or 11.5%, in the third quarter of 2022, compared to the third quarter of 2021. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of our operating profits. Gross Profit Gross profit increased$99.1 million , or 35.1%, in the third quarter of 2022, compared to the third quarter of 2021. This increase in gross profit is primarily due to strong demand for commercial vehicles and aftermarket services, the Summit acquisition and the consolidation of RTC Canada into our operating results. Gross profit as a percentage of sales decreased to 20.5% in the third quarter of 2022, from 22.3% in the third quarter of 2021. This decrease in gross profit as a percentage of sales is a result of a change in our product sales mix. Commercial vehicle sales, a lower margin revenue item, increased as a percentage of total revenues to 61.3% in the third quarter of 2022, from 57.6% in the third quarter of 2021. Aftermarket Services revenues, a higher margin revenue item, decreased as a percentage of total revenues to 33.4% in the third quarter of 2022, from 36.6% in the third quarter of 2021. Gross margins from our Aftermarket Products and Services operations decreased to 39.1% in the third quarter of 2022, from 39.3% in the third quarter of 2021. Gross profit for the Aftermarket Products and Services departments increased to$243.4 million in the third quarter of 2022, from$182.2 million in the third quarter of 2021. This increase in gross profit from our Aftermarket Products and Services operations is primarily due to increases in parts pricing, increases in parts rebates from our parts suppliers, the Summit acquisition and the consolidation of RTC Canada into our operating results. Historically, gross margins on parts sales range from 28% to 30% and gross margins on service and collision center operations range from 66% to 68%. Gross profits from parts sales represented 62.8% of total gross profit for Aftermarket Products and Services operations in the third quarter of 2022 and 62.4% in the third quarter of 2021. Service and collision center operations represented 37.2% of total gross profit for Aftermarket Products and Services operations in the third quarter of 2022 and 37.6% in the third quarter of 2021. Gross margins on new Class 8 truck sales increased to 9.9% in the third quarter of 2022, from 8.7% in the third quarter of 2021. This increase is primarily due to strong demand for new Class 8 trucks and the mix of purchasers during the third quarter of 2022. In 2022, we expect overall gross margins from new heavy-duty truck sales of approximately 8.8% to 9.9%. Gross margins on new Class 4 through 7 commercial vehicle sales slightly decreased to 7.9% in the third quarter of 2022, from 8.0% in the third quarter of 2021. For 2022, we expect overall gross margins from new medium-duty commercial vehicle sales of approximately 7.5% to 8.5%, but this will largely depend upon the mix of purchasers and types of vehicles sold. Gross margins on used commercial vehicle sales decreased to 1.6% in the third quarter of 2022, from 19.7% in the third quarter of 2021. This decrease is primarily due to declining used truck values as new Class 8 vehicle production begins to increase. We expect margins on used commercial vehicles to reach a range between 6.0% and 8.0% by the end of 2022. 22
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Gross margins from truck lease and rental sales increased to 31.8% in the third
quarter of 2022, from 25.1% in the third quarter of 2021. This increase is
primarily related to increased rental fleet utilization and changes to the way
we finance commercial vehicles for our lease and rental fleet. In September of
2021, we entered into a credit agreement ("the WF Credit Agreement") with the
lenders signatory thereto (the "WF Lenders") and Wells Fargo Bank, National
Association ("WF"), as Administrative Agent (in such capacity, the "WF Agent")
that allows us to finance a portion of our Idealease lease and rental fleet
through a general borrowing facility. In October of 2021, we entered into that
certain Amended and Restated Inventory Financing and Purchase Money Security
Agreement with PLC, a division of PACCAR Financial Corp. (the "PLC Agreement")
in the amount of $300.0 million to be used in connection with the acquisition of
PacLease lease and rental fleet vehicles. The interest associated with the WF
Credit Agreement and the PLC Agreement is recorded in interest expense on the
Consolidated Statements of Income. Prior to the WF Credit Agreement and the PLC
Agreement, interest expense associated with our lease and rental fleet purchases
was recorded in cost of sales because each borrowing was directly related to
each lease and rental vehicle purchased. This change in the structure of
financing of our lease and rental fleet results in increased gross margins from
our commercial vehicle lease and rental sales. We expect gross margins from
lease and rental sales of approximately 31.0% to 33.0% during 2022. Our policy
is to depreciate our lease and rental fleet using a straight-line method over
each customer's contractual lease term. The lease unit is depreciated to a
residual value that approximates fair value at the expiration of the lease term.
This policy results in us realizing reasonable gross margins while the unit is
in service and a corresponding gain or loss on sale when the unit is sold at the
end of the lease term.
Finance and insurance revenues and other income, as described above, have limited direct costs and, therefore, contribute a disproportionate share of gross profit.
Selling, General and Administrative Expenses
Selling, General and Administrative ("SG&A") expenses increased $62.7 million ,
or 34.9%, in the third quarter of 2022, compared to the third quarter of 2021.
This increase primarily resulted from increased general and administrative
expense associated with the Summit acquisition and consolidation of RTC Canada
into our operating results. SG&A expenses as a percentage of total revenues
decreased to 13.0% in the third quarter of 2022, from 14.2% in the third quarter
of 2021. Annual SG&A expenses as a percentage of total revenues have ranged from
12.4% to 14.3% over the last five years. In general, when new and used
commercial vehicle revenues decrease as a percentage of total revenues, SG&A
expenses as a percentage of total revenues will be at the higher end of this
range. For 2022, we expect SG&A expenses as a percentage of total revenues to
range from 13.0% to 14.0%, due to the increase in revenues from sales of new and
used commercial vehicles and Aftermarket Products and Services revenues. We
expect the selling portion of SG&A expenses to be approximately 25.0% to 30.0%
of new and used commercial vehicle gross profit.
Depreciation and Amortization Expense
Depreciation and amortization expense increased
Interest Expense, Net Net interest expense increased$6.0 million , or 2,215.5%, in the third quarter of 2022, compared to the third quarter of 2021. This increase in interest expense is a result of the increase in inventory levels and rising interest rates on our variable rate debt compared to 2021. We expect net interest expense in 2022 to increase due to interest related to lease and rental borrowings and floor plan debt, but the amount of the increase will depend on inventory levels, interest rate fluctuations and the amount of cash available to make prepayments on our floor plan arrangements. Income before Income Taxes As a result of the factors described above, income before income taxes increased$28.7 million , or 31.2%, in the third quarter of 2022, compared to the third quarter of 2021. Income Taxes Income taxes increased$7.4 million , or 33.1%, in the third quarter of 2022, compared to the third quarter of 2021. We provided for taxes at a 24.79% effective rate in the third quarter of 2022 and 24.75% in the third quarter of 2021. We expect our effective tax rate to be approximately 23.0% to 24.0% of pretax income in 2022. 23
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Nine Months Ended
Unless otherwise stated below, our variance explanations and future expectations with regard to the items discussed in this section are set forth in the discussion of the Three Months EndedSeptember 30, 2022 Compared to Three Months EndedSeptember 30, 2021 . Revenues
Total revenues increased
Aftermarket Products and Services revenues increased
Revenues from the sales of new and used commercial vehicles increased
We sold 11,896 new Class 8 heavy-duty trucks during the first nine months of 2022, a 40.2% increase compared to 8,486 new Class 8 heavy-duty trucks in the first nine months of 2021. According toA.C.T. Research , newU.S. Class 8 truck sales increased 9.3% in the first nine months of 2022, compared to the first nine months of 2021. We sold 8,179 new Class 4 through 7 medium-duty commercial vehicles, including 1,041 buses, during the first nine months of 2022, a 2.9% increase compared to 7,951 new Class 4 through 7 medium-duty commercial vehicles, including 788 buses, in the first nine months of 2021.A.C.T. Research estimates that unit sales of new Class 4 through 7 commercial vehicles, including buses, in theU.S decreased approximately 7.4% in the first nine months of 2022, compared to the first nine months of 2021. We sold 1,497 new light-duty commercial vehicles during the first nine months of 2022, a 21.9% increase compared to 1,228 light-duty commercial vehicles in the first nine months of 2021.
We sold 5,787 used commercial vehicles during the first nine months of 2022, a 1.0% increase compared to 5,730 used commercial vehicles in the first nine months of 2021.
Truck lease and rental revenues increased
Finance and insurance revenues increased
Gross Profit Gross profit increased$303.2 million , or 38.0%, in the first nine months of 2022, compared to the first nine months of 2021. Gross profit as a percentage of sales increased to 21.1% in the first nine months of 2022, from 20.9% in the first nine months of 2021. Gross margins from our Aftermarket Products and Services operations increased to 38.8% in the first nine months of 2022, from 38.1% in the first nine months of 2021. Gross profit for the Aftermarket Products and Services departments was$683.5 million in the first nine months of 2022, compared to$504.5 million in the first nine months of 2021. Gross profits from parts sales represented 63.0% of total gross profit for Aftermarket Products and Services operations in the first nine months of 2022 and 61.0% in the first nine months of 2021. Service and collision center operations represented 37.0% of total gross profit for Aftermarket Products and Services operations in the first nine months of 2022 and 39.0% in the first nine months of 2021.
Gross margins on new Class 8 truck sales increased to 9.9% in the first nine months of 2022, from 8.9% in the first nine months of 2021.
Gross margins on new Class 4 through 7 medium-duty commercial vehicle sales increased to 7.9% in the first nine months of 2022, from 7.5% in the first nine months of 2021.
Gross margins on used commercial vehicle sales decreased to 10.2% in the first nine months of 2022, from 18.4% in the first nine months of 2021.
Gross margins from truck lease and rental sales increased to 31.6% in the first nine months of 2022, from 21.3% in the first nine months of 2021.
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Selling, General and Administrative Expenses
SG&A expenses increased$152.8 million , or 28.3%, in the first nine months of 2022, compared to the first nine months of 2021. SG&A expenses equaled 13.3% of total revenue in the first nine months of 2022, and 14.1% in the first nine months of 2021.
Depreciation and Amortization Expense
Depreciation and amortization expense increased
Interest Expense, Net
Net interest expense increased
Income before Income Taxes
Income before income taxes increased
Provision for Income Taxes
Income taxes increased
Liquidity and Capital Resources
Our short-term cash requirements are primarily for working capital, inventory financing, the renovation and expansion of existing facilities and the construction or purchase of new facilities. Historically, these cash requirements have been met through the retention of profits, borrowings under our floor plan arrangements and bank financings. As ofSeptember 30, 2022 , we had working capital of approximately$390.0 million available to fund our operations, including$219.5 million in cash. We believe that these funds, together with expected cash flows from operations, are sufficient to meet our operating requirements for at least the next twelve months. From time to time, we utilize our excess cash on hand to pay down our outstanding borrowings under our floor plan credit agreement withBMO Harris Bank N.A . ("BMO Harris") (the "Floor Plan Credit Agreement") and the WF Credit Agreement. The resulting interest earned on the Floor Plan Credit Agreement is recognized as an offset to our interest expense. We continually evaluate our liquidity and capital resources based upon: (i) our cash and cash equivalents on hand; (ii) the funds that we expect to generate through future operations; (iii) current and expected borrowing availability under our secured line of credit, working capital lines of credit available under certain of our credit agreements and our Floor Plan Credit Agreement; and (iv) the potential impact of our capital allocation strategy and any contemplated or pending future transactions, including, but not limited to, acquisitions, equity repurchases, dividends, or other capital expenditures. We believe we will have sufficient liquidity to meet our debt service and working capital requirements, commitments and contingencies, debt repayments, acquisitions, capital expenditures and any operating requirements for at least the next twelve months. We have a secured line of credit that provides for a maximum borrowing of$15.0 million . There were no advances outstanding under this secured line of credit onSeptember 30, 2022 , however,$14.3 million was pledged to secure various letters of credit related to self-insurance products, leaving$0.7 million available for future borrowings as ofSeptember 30, 2022 . Our long-term debt, floor plan financing agreements and the WF Credit Agreement require us to satisfy various financial ratios such as the leverage ratio, the asset coverage ratio and the fixed charge coverage ratio. As ofSeptember 30, 2022 , we were in compliance with all debt covenants related to debt secured by lease and rental units, our floor plan credit agreements and the WF Credit Agreement. We do not anticipate any breach of the covenants in the foreseeable future. 25
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We expect to purchase or lease commercial vehicles worth approximately$150.0 million to$170.0 million for our leasing operations during 2022, depending on customer demand, most of which will be financed. We also expect to make capital expenditures for the purchase of recurring items such as computers, shop tools and equipment and company vehicles of approximately$35.0 million to$40.0 million during 2022.
We are currently under contract to construct a new facility in
During the third quarter of 2022, we paid a cash dividend of$11.5 million . Additionally, onOctober 25, 2022 , our Board of Directors declared a cash dividend of$0.21 per share of Class A and Class B Common Stock, to be paid onDecember 9, 2022 , to all shareholders of record as ofNovember 10, 2022 . The total dividend disbursement is estimated at approximately$11.5 million . We expect to continue paying cash dividends on a quarterly basis. However, there is no assurance as to future dividends because the declaration and payment of such dividends is subject to the business judgment of our Board of Directors and will depend on historic and projected earnings, capital requirements, covenant compliance and financial conditions and such other factors as our Board of Directors deem relevant. OnNovember 30, 2021 , we announced that our Board of Directors approved a new stock repurchase program authorizing management to repurchase, from time to time, up to an aggregate of$100.0 million of our shares of Class A Common Stock and/or Class B Common Stock. In connection with the adoption of the new stock repurchase plan, we terminated the prior stock repurchase plan, which was scheduled to expire onDecember 31, 2021 . Repurchases, if any, will be made at times and in amounts as we deem appropriate and may be made through open market transactions at prevailing market prices, privately negotiated transactions or by other means in accordance with federal securities laws. The actual timing, number and value of repurchases under the stock repurchase program will be determined by management at its discretion and will depend on a number of factors, including market conditions, stock price and other factors, including those related to the ownership requirements of our dealership agreements withPeterbilt . As ofSeptember 30, 2022 , we had repurchased$91.8 million of our shares of common stock under the current stock repurchase program. The current stock repurchase program expires onDecember 31, 2022 , and may be suspended or discontinued at any time. We anticipate funding the capital expenditures for the improvement and expansion of existing facilities and recurring expenses through our operating cash flows. We have the ability to fund the construction or purchase of new facilities through our operating cash flows or by financing. We have no other material commitments for capital expenditures as ofSeptember 30, 2022 . However, we will continue to purchase vehicles for our lease and rental operations and authorize capital expenditures for the improvement or expansion of our existing dealership facilities and construction or purchase of new facilities based on market opportunities. Cash Flows Cash and cash equivalents increased by$71.4 million during the nine months endedSeptember 30, 2022 and decreased by$52.4 million during the nine months endedSeptember 30, 2021 . The major components of these changes are discussed below.
Cash Flows from Operating Activities
Cash flows from operating activities include net income adjusted for non-cash items and the effects of changes in working capital. During the first nine months of 2022, operating activities resulted in net cash provided by operations of$183.3 million . Net cash provided by operating activities primarily consisted of$293.8 million in net income, as well as non-cash adjustments related to depreciation and amortization of$146.5 million , gain on sale of property and equipment, gain on joint venture and gain on business acquisition of$21.9 million , stock-based compensation of$21.6 million and the benefit for deferred income tax expense of$7.9 million . Cash used by operating activities included an aggregate of$264.5 million net change in operating assets and liabilities. Included in the net change in operating assets and liabilities were cash inflows of$44.1 million from the increase in accounts payable,$9.7 million from the increase in customer deposits and$25.5 million from the increase in accrued expenses, which was offset primarily by cash outflows of$264.7 million from the increase in inventories and$75.1 million from the increase in accounts receivable. The majority of our commercial vehicle inventory is financed through our floor plan credit agreements. During the first nine months of 2021, operating activities resulted in net cash provided by operations of$438.6 million . Net cash provided by operating activities primarily consisted of$172.8 million in net income, as well as non-cash adjustments related to depreciation and amortization of$126.7 million , stock-based compensation of$18.3 million and the benefit for deferred income tax expense of$23.0 million . Cash provided by operating activities included an aggregate of$148.2 million net change in operating assets and liabilities. Included in the net change in operating assets and liabilities were cash inflows of$147.3 million from the decrease in inventories,$23.2 million from the decrease in accounts receivable and$16.7 million from the increase in accounts payable, which was offset by cash outflows of$8.4 million from decreases in accrued liabilities and$30.4 million from the decrease in customer deposits. 26
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Cash Flows from Investing Activities
During the first nine months of 2022, cash used in investing activities was$168.2 million . Cash flows used in investing activities consists primarily of cash used for capital expenditures. Capital expenditures were$175.2 million during the first nine months of 2022 and consisted primarily of purchases of property and equipment and improvements to our existing dealership facilities. Property and equipment purchases during the first nine months of 2022 included$122.3 million for additional units for the rental and leasing operations. During the first nine months of 2021, cash used in investing activities was$121.4 million . Cash flows used in investing activities consists primarily of cash used for capital expenditures. Capital expenditures were$122.3 million during the first nine months of 2021 and consisted primarily of purchases of property and equipment and improvements to our existing dealership facilities. Property and equipment purchases during the first nine months of 2021 included$88.0 million for additional units for the rental and leasing operations.
Cash Flows from Financing Activities
Cash flows from financing activities include borrowings and repayments of long-term debt and net proceeds of floor plan notes payable, non-trade. During the first nine months of 2022, financing activities resulted in net cash provided in financing of$56.6 million , primarily related to$277.3 million from net draws on floor plan notes payable, non-trade,$695.2 million from borrowings of long-term debt and$11.1 million from the issuance of shares related to equity compensation plans. These cash inflows were offset by cash outflows of$799.8 million used for principal repayments of long-term debt and capital lease obligations,$52.3 million used for repurchases of common stock,$8.7 million for taxes paid related to net share settlement of equity awards and$33.1 million used for payment of cash dividends. During the first nine months of 2021, financing activities resulted in net cash used in financing of$369.6 million , primarily related to$157.4 million from net payments on floor plan notes payable, non-trade,$232.8 million used for principal repayments of long-term debt and capital lease obligations,$21.7 million used for repurchases of common stock and$30.5 million used for payment of cash dividends. These cash outflows were offset by cash inflows of$6.4 million from the issuance of shares related to equity compensation plans and borrowings of$66.4 million of long-term debt. The borrowings of long-term debt were primarily related to purchasing units for the rental and leasing operations. OnSeptember 14, 2021 , we entered into the WF Credit Agreement with the WF Lenders and the WF Agent. Pursuant to the terms of the WF Credit Agreement, the WF Lenders have agreed to make up to$250.0 million of revolving credit loans for certain of our capital expenditures, including commercial vehicle purchases for ourIdealease leasing and rental fleet, and general working capital needs. We expect to use the revolving credit loans available under the WF Credit Agreement primarily for the purpose of purchasing commercial vehicles for ourIdealease lease and rental fleet. We may borrow, repay and reborrow amounts pursuant to the WF Credit Agreement from time to time until the maturity date. Borrowings under the WF Credit Agreement bear interest per annum, payable on each interest payment date, as defined in the WF Credit Agreement, at (A) the daily SOFR rate plus (i) 1.25% or (ii) 1.5%, depending on our consolidated leverage ratio or (B) on or after the term SOFR transition date, the term SOFR rate plus (i) 1.25% or (ii) 1.5%, depending on our consolidated leverage ratio. The WF Credit Agreement expires onSeptember 14, 2024 , although, upon the occurrence and during the continuance of an event of default, the WF Agent has the right to, or upon the request of the required lenders must, terminate the commitments and declare all outstanding principal and interest due and payable. We may terminate the commitments at any time. OnSeptember 30, 2022 , we had approximately$73.1 million outstanding under the WF Credit Agreement. OnOctober 1, 2021 , we entered into the PLC Agreement. Pursuant to the terms of thePLC Agreement, PLC agreed to make up to$300.0 million of revolving credit loans to finance certain of our capital expenditures, including commercial vehicle purchases and other equipment to be leased or rented through our PacLease franchises. We may borrow, repay and reborrow amounts pursuant to the PLC Agreement from time to time until the maturity date, provided, however, that the outstanding principal amount on any date shall not exceed the borrowing base. Advances under the PLC Agreement bear interest per annum, payable on the fifth day of the following month, at our option, at either (A) the prime rate, minus 1.55%, provided that the floating rate of interest is subject to a floor of 0%, or (B) a fixed rate, to be determined between us and PLC in each instance of borrowing at a fixed rate. The PLC Agreement expires onOctober 1, 2025 , although either party has the right to terminate the PLC Agreement at any time upon 180 days written notice. If we terminate the PLC Agreement prior toOctober 1, 2025 , then all payments will be deemed to be voluntary prepayments subject to a potential prepayment premium. OnSeptember 30, 2022 , we had approximately$185.0 million outstanding under the PLC Agreement. 27
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Most of our commercial vehicle purchases are made on terms requiring payment to the manufacturer within 15 days or less from the date the commercial vehicles are invoiced from the factory. OnSeptember 14, 2021 , we entered into Floor Plan Credit Agreement with BMO Harris and the lenders signatory thereto. The Floor Plan Credit Agreement includes an aggregate loan commitment of$1.0 billion . Borrowings under the Floor Plan Credit Agreement bear interest at an annual rate equal to (A) the greater of (i) zero and (ii) one month LIBOR rate, determined on the last day of the prior month, plus (B) 1.10% and are payable monthly. Loans under the Floor Plan Credit Agreement for the purchase of used inventory are limited to$150.0 million and loans for working capital purposes are limited to$200.0 million . The Floor Plan Credit Agreement expiresSeptember 14, 2026 , although BMO Harris has the right to terminate at any time upon 360 days written notice and we may terminate at any time, subject to specified limited exceptions. OnSeptember 30, 2022 , we had approximately$727.3 million outstanding under the Floor Plan Credit Agreement. The average daily outstanding borrowings under the Floor Plan Credit Agreement were$611.6 million during the nine months endedSeptember 30, 2022 . We utilize our excess cash on hand to pay down our outstanding borrowings under the Floor Plan Credit Agreement, and the resulting interest earned is recognized as an offset to our gross interest expense under the Floor Plan Credit Agreement. OnMay 31, 2022 , RTC Canada entered into that certain BMO Revolving Lease and Rental Credit Agreement (the "RTC Canada Revolving Agreement") with Bank of Montreal ("BMO"). Pursuant to the terms of the RTC Canada Revolving Agreement, BMO agreed to make up to$140.0 million of revolving credit loans to finance certain of RTC Canada's capital expenditures, including commercial vehicle purchases and other equipment to be leased or rented through RTC Canada'sIdealease franchise. Advances under the RTC Canada Revolving Agreement bear interest per annum, payable on the first business day of each calendar month, at the Canadian Dollar Offered Rate (CDOR), plus 1.35%. The RTC Canada Revolving Agreement expiresSeptember 14, 2026 . OnSeptember 30, 2022 , we had approximately$48.9 million outstanding under the RTC Canada Revolving Agreement. OnJuly 15, 2022 , RTC Canada entered into that certain Amended and Restated BMO Wholesale Financing and Security Agreement (the "RTC Canada Floor Plan Agreement") with BMO. Pursuant to the terms of the Agreement, BMO agreed to make up to$116.7 million CAD of revolving credit loans to finance RTC Canada's purchase of new and used vehicle inventory. Loans to purchase used vehicle inventory are limited to twenty percent (20%) of the credit limit available at such time. RTC Canada may borrow, repay and reborrow loans from time to time until the maturity date, provided, however, that the outstanding principal amount on any date shall not exceed the credit limits set forth above with respect to new and used vehicles. Advances under the RTC Canada Floor Plan Agreement bear interest per annum, payable on the first business day of each calendar month, at CDOR, plus 0.90% and in the case of an advance required to be made in USD dollars, at LIBOR, plus 1.10%. The RTC Canada Floor Plan Agreement expiresSeptember 14, 2026 . OnSeptember 30, 2022 , we had approximately$37.2 million outstanding under the RTC Canada Floor Plan Agreement.Navistar Financial Corporation andPeterbilt offer trade terms that provide an interest-free inventory stocking period for certain new commercial vehicles. This interest-free period is generally 15 to 60 days. If the commercial vehicle is not sold within the interest-free period, we then finance the commercial vehicle under the Floor Plan Credit Agreement. Backlog OnSeptember 30, 2022 , our backlog of commercial vehicle orders was approximately$3,300.1 million , compared to a backlog of commercial vehicle orders of approximately$2,720.2 million onSeptember 30, 2021 . This increase in our backlog is primarily due to the Summit acquisition and the consolidation of RTC Canada into our operating results, in addition to production constraints experienced by the manufacturers we represent. Our backlog is determined quarterly by multiplying the number of new commercial vehicles for each particular type of commercial vehicle ordered by a customer at ourRush Truck Centers by the recent average selling price for that type of commercial vehicle. We include only confirmed orders in our backlog. However, such orders are subject to cancellation. In the event of order cancellation, we have no contractual right to the total revenues reflected in our backlog. The delivery time for a custom-ordered commercial vehicle varies depending on the truck specifications and demand for the particular model ordered. We sell the majority of our new heavy-duty commercial vehicles by customer special order and we sell the majority of our medium- and light-duty commercial vehicles out of inventory. Orders from a number of our major fleet customers are included in our backlog as ofSeptember 30, 2022 , and we expect to fill the majority of our backlog orders during 2022 and the first quarter of 2023, assuming that the manufacturers we represent can meet their current production schedule. Our current backlog continues to be much higher than normal. Given the potential for industry headwinds in the coming months caused by lower spot rates and higher interest rates and fuel prices, which could negatively impact industry demand for new commercial vehicles moving forward, we believe that the longer it takes to fill our backlog, the greater the risk that a significant amount of commercial vehicle orders currently reflected in our backlog could be cancelled. 28
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Table of Contents Seasonality Our Truck Segment is moderately seasonal. Seasonal effects on new commercial vehicle sales related to the seasonal purchasing patterns of any single customer type are mitigated by the diverse geographic locations of our dealerships and our diverse customer base, including regional and national fleets, local and state governments, corporations and owner-operators. However, commercial vehicle Aftermarket Products and Services operations historically have experienced higher sales volumes in the second and third quarters. Cyclicality Our business is dependent on a number of factors including general economic conditions, fuel prices, interest rate fluctuations, credit availability, environmental and other government regulations and customer business cycles. Unit sales of new commercial vehicles have historically been subject to substantial cyclical variation based on these general economic conditions. According to data published byA.C.T. Research , totalU.S. retail sales of new Class 8 commercial vehicles have ranged from a low of approximately 110,000 in 2010, to a high of approximately 281,440 in 2019. Through geographic expansion, concentration on higher margin Aftermarket Products and Services and diversification of our customer base, we have attempted to reduce the negative impact of adverse general economic conditions or cyclical trends affecting the Class 8 commercial vehicle industry on our earnings.
Environmental Standards and Other Governmental Regulations
We are subject to federal, state and local environmental laws and regulations
governing the following: discharges into the air and water; the operation and
removal of underground and aboveground storage tanks; the use, handling, storage
and disposal of hazardous substances, petroleum and other materials; and the
investigation and remediation of environmental impacts. As with commercial
vehicle dealerships generally, and vehicle service, parts and collision center
operations in particular, our business involves the generation, use, storage,
handling and contracting for recycling or disposal of hazardous materials or
wastes and other environmentally sensitive materials. We have incurred, and will
continue to incur, capital and operating expenditures and other costs in
complying with such laws and regulations.
Our operations involving the use, handling, storage and disposal of hazardous
and nonhazardous materials are subject to the requirements of the federal
Resource Conservation and Recovery Act, or RCRA, and comparable state statutes.
Pursuant to these laws, federal and state environmental agencies have
established approved methods for handling, storage, treatment, transportation
and disposal of regulated substances with which we must comply. Our business
also involves the operation and use of aboveground and underground storage
tanks. These storage tanks are subject to periodic testing, containment,
upgrading and removal under RCRA and comparable state statutes. Furthermore,
investigation or remediation may be necessary in the event of leaks or other
discharges from current or former underground or aboveground storage tanks.
We may also have liability in connection with materials that were sent to
thirdparty recycling, treatment, or disposal facilities under the federal
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
and comparable state statutes. These statutes impose liability for investigation
and remediation of environmental impacts without regard to fault or the legality
of the conduct that contributed to the impacts. Responsible parties under these
statutes may include the owner or operator of the site where impacts occurred
and companies that disposed, or arranged for the disposal, of the hazardous
substances released at these sites. These responsible parties also may be liable
for damages to natural resources. In addition, it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the release of hazardous
substances or other materials into the environment.
The federal Clean Water Act and comparable state statutes require containment of
potential discharges of oil or hazardous substances, and require preparation of
spill contingency plans. Water quality protection programs govern certain
discharges from some of our operations. Similarly, the federal Clean Air Act and
comparable state statutes regulate emissions of various air emissions through
permitting programs and the imposition of standards and other requirements.
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TheEnvironmental Protection Agency ("EPA ") and theNational Highway Traffic Safety Administration ("NHTSA"), on behalf of theU.S. Department of Transportation , issued rules associated with reducing greenhouse gas ("GHG") emissions and improving the fuel efficiency of medium and heavy-duty trucks and buses for current model years through 2027. In addition, inAugust 2021 , the President ofthe United States issued an executive order intended to increase fuel efficiency, further reduce GHG emissions and speed up the development of "zero-emission" vehicles. The executive order calls for theEPA and the Secretary of Transportation to adopt new rules and regulations for commercial vehicles starting as early as model year 2027. Similarly, inJune 2020 , theCalifornia Air Resources Board adopted a final rule that is intended to phase out the sale of diesel-powered commercial vehicles over time by requiring a certain percentage of each manufacturer's commercial vehicles sold within the state to be "zero-emission vehicles," or "near-zero emission vehicles," starting in model year 2024. In addition, inJuly 2020 , a group of fifteenU.S. states and theDistrict of Columbia entered into a joint memorandum of understanding that commits each of them to work together to advance and accelerate the market for electric Class 3 through 8 commercial vehicles; two additional states have since signed. Five of the states that signed are states where we operate new commercial vehicle dealerships:California ,Colorado ,Nevada ,North Carolina andVirginia . The signatories to the memorandum all agreed on a goal of ensuring that 100% of new Class 3 through 8 commercial vehicles are zero emission by 2050, with an interim target of 30% zero emission by 2030. Attaining these goals would likely require the adoption of new laws and regulations and we cannot predict at this time whether such laws and regulations would have an adverse impact on our business. Additional regulations could result in increased compliance costs, additional operating restrictions or changes in demand for our products and services, which could have a material adverse effect on our business, financial condition and results of operations. We do not believe that we currently have any material environmental liabilities or that compliance with environmental laws and regulations will have a material adverse effect on our results of operations, financial condition or cash flows. However, soil and groundwater impacts are known to exist at some of our dealerships. Further, environmental laws and regulations are complex and subject to change. In addition, in connection with acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. In connection with our dispositions, or prior dispositions made by companies we acquire, we may retain exposure for environmental costs and liabilities, some of which may be material. Compliance with current or amended, or new or more stringent, laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions could require additional expenditures by us, which could materially adversely affect our results of operations, financial condition or cash flows. In addition, such laws could affect demand for the products that we sell.
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