Rush Enterprises Inc \TX\: Form 10-Q for the period ended Sep 30, 2023

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 the Securities 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. 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 ended December 31, 2022, 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 of Peterbilt Motors Company. PACCAR® is a registered trademark of PACCAR, Inc. PacLease® is a registered trademark of PACCAR Leasing Corporation. Navistar® is a registered trademark of Navistar International, Inc. International® is a registered trademark of Navistar, Inc. Idealease is a registered trademark of Idealease, Inc. aka Idealease of North America, Inc. Blue Bird® is a registered trademark of Blue Bird Investment Corporation. IC Bus® is a registered trademark of IC 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. Dennis Eagle® is a registered trademark of Dennis Eagle Limited. 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.

General

Rush Enterprises, Inc. was incorporated in Texas 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 by Peterbilt, International, Hino, Ford, Isuzu, Dennis Eagle, IC Bus and Blue Bird. Through our strategically located network of Rush 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.

Our Rush Truck Centers are principally located in high traffic areas throughout the United States and Ontario, Canada. Since commencing operations as a Peterbilt heavy-duty truck dealer in 1966, we have grown to operate over 125 franchised Rush Truck Centers in 23 states. In 2019, we purchased a 50% equity interest in an entity in Canada, Rush Truck Centres of Canada Limited (“RTC Canada”) and on May 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 in Ontario. 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 of May 2, 2022.

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 our Rush 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.

Outlook

A.C.T. Research Co., LLC (“A. C.T. Research”), a commercial vehicle industry data and forecasting service provider, currently forecasts new U.S. Class 8 retail truck sales to be 278,000 units in 2023, which would represent a 7.2% increase compared to 2022. We expect our U.S. market share of new Class 8 truck sales to range between 5.9% and 6.5% in 2023. This market share percentage would result in the sale of approximately 16,000 to 17,500 new Class 8 trucks in 2023. Additionally, we expect to sell approximately 600 new Class 8 trucks in Canada in 2023.

With respect to new U.S. Class 4 through 7 retail commercial vehicle sales, A.C.T. Research currently forecasts sales to be 253,500 units in 2023, which would represent an 8.5% increase compared to 2022. We expect our U.S. market share of new Class 4 through 7 commercial vehicle sales to range between 4.5% and 5.1% in 2023. This market share percentage would result in the sale of approximately 11,500 to 13,000 new Class 4 through 7 commercial vehicles in 2023. Additionally, we expect to sell approximately 400 new Class 5 through 7 commercial vehicles in Canada in 2023.

We expect to sell approximately 1,800 to 2,000 light-duty vehicles and approximately 6,700 to 7,300 used commercial vehicles in 2023.

We expect lease and rental revenue to increase 10% to 15% during 2023, compared to 2022. This projected increase in lease and rental revenue is primarily related to strong demand for lease commercial vehicles and the consolidation of RTC Canada into our operating results.

With respect to Aftermarket Products and Services, growth in our aftermarket revenues moderated in the third quarter of 2023 compared to earlier in the year, and we expect that challenging economic conditions that are currently affecting many of our customers, including high interest rates and low freight rates, will continue to negatively impact our Aftermarket Product and Services revenues going forward. In addition, we believe that the industry may experience some deflation with respect to the prices of certain commodity parts due to softening demand. However, despite a challenging operating environment, we believe that the diversity of our customer base, as well as our focus on operational excellence, mobile service and supporting large national fleets, will allow us to offset some of the current industry challenges, and that our results will continue to outpace the industry.

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, supply chain issues affecting manufacturers’ production and delivery delays by truck body upfitters due to supply issues, which are primarily affecting medium-duty truck deliveries. In addition, we continue to monitor inflation, interest rates and freight rates, which may negatively impact consumer spending and capital expenditures across a variety of industries we support.

Critical Accounting Policies and Estimates

The preparation of our interim unaudited consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities in our interim unaudited consolidated financial statements and accompanying notes. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates, judgments and assumptions on an ongoing basis, and while we believe that our estimates, judgments and assumptions are reasonable, they are based upon information available at the time. Actual results might differ from these estimates under different assumptions or conditions.

Our significant accounting policies are discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Critical Accounting Policies and Estimates" in our Form 10-K. There were no material changes to our significant accounting policies.

Results of Operations

The following discussion and analysis includes our historical results of operations for the three months and nine months ended September 30, 2023 and 2022.

The following table sets forth certain financial data as a percentage of total revenues for the periods indicated:

The following table sets forth for the periods indicated the percent of gross profit by revenue source:

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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):

Key Performance Indicator

Absorption Ratio

Management uses several performance metrics to evaluate the performance of our commercial vehicle dealerships and considers Rush Truck Centers’ “absorption ratio” to be of critical importance. Our 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 132.8% absorption ratio for the third quarter of 2023 compared to a 136.2% absorption ratio for the third quarter of 2022.

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Revenues

Total revenues increased $116.5 million, or 6.2%, in the third quarter of 2023, compared to the third quarter of 2022. This increase was primarily the result of strong demand for new commercial vehicles and increased production of commercial vehicles from the manufacturers we represent.

Our Aftermarket Products and Services revenues totaled $643.6 million in the third quarter of 2023, up 3.5% from the third quarter of 2022. The slight increase in Aftermarket Parts and Services revenues was related to the continued stabilization of parts pricing and economic pressures that are negatively affecting our over-the-road customers.

Revenues from sales of new and used commercial vehicles increased $93.6 million, or 8.2%, in the third quarter of 2023, compared to the third quarter of 2022. The increase in new commercial vehicle revenues was primarily a result of strong demand and increased production of commercial vehicles from the manufacturers we represent.

We sold 4,326 new Class 8 trucks in the third quarter of 2023, a 3.0% increase compared to 4,200 new Class 8 trucks sold in the third quarter of 2022. The increase in new Class 8 truck sales was primarily a result of strong demand and increased production of commercial vehicles from the manufacturers we represent. New U.S. Class 8 retail truck sales totaled 68,010 units in the third quarter of 2023, an increase of 0.1% compared to the third quarter of 2022, according to ACT Research.

We sold 3,244 new Class 4 through 7 medium-duty commercial vehicles, including 422 buses, in the third quarter of 2023, a 0.7% increase compared to 3,223 new medium-duty commercial vehicles, including 537 buses, in the third quarter of 2022. Our new Class 4 through 7 commercial vehicle sales were flat on a year-over-year basis primarily due to allocation decisions from the manufacturers we represent. We are still experiencing limited production of medium-duty commercial vehicles from the manufacturers we represent. New U.S. Class 4 through 7 retail commercial vehicle sales totaled 65,683 units in the third quarter of 2023, up 9.1% compared to the third quarter of 2022, according to ACT Research.

We sold 425 light-duty vehicles in the third quarter of 2023, a 30.1% decrease compared to 608 light-duty vehicles sold in the third quarter of 2022.

We sold 1,797 used commercial vehicles in the third quarter of 2023, a 1.9% increase compared to 1,763 used commercial vehicles in the third quarter of 2022. We expect used commercial vehicle demand and values to remain low through 2023 due to new commercial vehicle production continuing to increase, high interest rates and anticipated low freight rates.

Commercial vehicle lease and rental revenues increased $3.8 million, or 4.4%, in the third quarter of 2023, compared to the third quarter of 2022. This increase in commercial vehicle lease and rental revenues was primarily a result of strong demand for lease commercial vehicles.

Finance and insurance revenues decreased $1.3 million, or 17.3%, in the third quarter of 2023, compared to the third quarter of 2022. This decrease is primarily due to the mix of purchasers of commercial vehicles. During the third quarter of 2023, most of our sales were to larger fleets, which usually arrange their own financing. We are more likely to provide financing to owner-operators and smaller fleets, which comprised a smaller percentage of commercial vehicle sales during the third quarter of 2023. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of our operating profits.

Gross Profit

Gross profit increased $13.0 million, or 3.4%, in the third quarter of 2023, compared to the third quarter of 2022. Gross profit as a percentage of sales decreased to 19.9% in the third quarter of 2023, from 20.5% in the third quarter of 2022. 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 62.4% in the third quarter of 2023, from 61.3% in the third quarter of 2022. Aftermarket Products and Services revenues, a higher margin revenue item, decreased as a percentage of total revenues to 32.5% in the third quarter of 2023, from 33.4% in the third quarter of 2022.

Gross margins from our Aftermarket Products and Services operations decreased to 36.2% in the third quarter of 2023, from 39.1% in the third quarter of 2022. Gross profit for the Aftermarket Products and Services departments decreased to $232.7 million in the third quarter of 2023, from $243.4 million in the third quarter of 2022. This decrease is primarily related to continued stabilization of parts pricing and softening demand due to difficult economic conditions impacting many of our customers. 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 58.4% of total gross profit for Aftermarket Products and Services operations in the third quarter of 2023 and 62.8% in the third quarter of 2022. Service and collision center operations represented 41.6% of total gross profit for Aftermarket Products and Services operations in the third quarter of 2023 and 37.2% in the third quarter of 2022. We expect blended gross margins on Aftermarket Products and Services operations to range from 36.0% to 38.0% in 2023.

Gross margins on new Class 8 truck sales remained flat at 9.9% in the third quarter of 2023 and the third quarter of 2022. In 2023, we expect overall gross margins from new heavy-duty truck sales of approximately 9.0% to 10.0%.

Gross margins on new Class 4 through 7 commercial vehicle sales increased to 9.2% in the third quarter of 2023, from 7.9% in the third quarter of 2022. This increase was primarily due to the mix of purchasers during the third quarter of 2023. For 2023, we expect overall gross margins from new medium-duty commercial vehicle sales of approximately 8.5% to 9.5%, but this will largely depend upon the mix of purchasers and types of vehicles sold.

Gross margins on used commercial vehicle sales increased to 11.3% in the third quarter of 2023, from 1.6% in the third quarter of 2022. This increase was primarily due to strategic inventory management of our used commercial vehicle inventory. We expect margins on used commercial vehicles to range between 8.0% and 10.0% in 2023.

Gross margins from truck lease and rental sales decreased to 30.6% in the third quarter of 2023, from 31.8% in the third quarter of 2022. This decrease is primarily related to a decrease in rental utilization rates. We expect gross margins from lease and rental sales of approximately 29.0% to 31.0% during 2023. 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 $14.5 million, or 6.0%, in the third quarter of 2023, compared to the third quarter of 2022. This increase primarily resulted from increased personnel expense, increased selling expense and other increased costs due to inflation, compared to the third quarter of 2022. SG&A expenses as a percentage of total revenues remained constant at 13.0% in the third quarter of 2023 and 2022. Annual SG&A expenses as a percentage of total revenues have ranged from approximately 12.4% to 14.4% over the last five years. In general, when new and used commercial vehicle revenues increase as a percentage of total revenues, SG&A expenses as a percentage of total revenues will be at the lower end of this range. For 2023, we expect SG&A expenses as a percentage of total revenues to range from 12.8% to 13.5%. For 2023, 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.

Interest Expense, Net

Net interest expense increased $7.9 million, or 126.2%, in the third quarter of 2023, compared to the third quarter of 2022. 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 2022. We expect net interest expense in 2023, compared to 2022, to increase due to interest related to our working capital lines of credit 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 decreased $13.0 million, or 10.8%, in the third quarter of 2023, compared to the third quarter of 2022.

Income Taxes

Income taxes decreased $3.0 million, or 9.9%, in the third quarter of 2023, compared to the third quarter of 2022. We provided for taxes at a 25.0% effective rate in the third quarter of 2023 and 24.79% in the third quarter of 2022. We expect our effective tax rate to be approximately 24.0% to 25.0% of pretax income in 2023.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

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 Ended September 30, 2023 Compared to Three Months Ended September 30, 2022.

Revenues

Total revenues increased $676.8 million, or 13.0%, in the first nine months of 2023, compared to the first nine months of 2022. This increase was primarily the result of strong demand for new commercial vehicles, increased production of commercial vehicles from the manufacturers we represent and the consolidation of RTC Canada into our operating results as of May 2022.

Aftermarket Products and Services revenues increased $179.3 million, or 10.2%, in the first nine months of 2023, compared to the first nine months of 2022. The increase in Aftermarket Parts and Services revenues was related to healthy demand during the first six months of 2023 and the consolidation of RTC Canada into our operating results.

Revenues from the sales of new and used commercial vehicles increased $472.1 million, or 14.9%, in the first nine months of 2023, compared to the first nine months of 2022. The increase in new commercial vehicle revenues was primarily a result of strong demand, increased production of commercial vehicles from the manufacturers we represent and the consolidation of RTC Canada into our operating results.

We sold 12,991 new Class 8 heavy-duty trucks during the first nine months of 2023, a 9.2% increase compared to 11,896 new Class 8 heavy-duty trucks in the first nine months of 2022. According to A.C.T. Research, new U.S. Class 8 truck sales increased 12.9% in the first nine months of 2023, compared to the first nine months of 2022.

We sold 9,757 new Class 4 through 7 medium-duty commercial vehicles, including 1,232 buses, during the first nine months of 2023, a 19.3% increase compared to 8,179 new Class 4 through 7 medium-duty commercial vehicles, including 1,041 buses, in the first nine months of 2022. A.C.T. Research estimates that unit sales of new Class 4 through 7 commercial vehicles, including buses, in the U.S increased approximately 9.2% in the first nine months of 2023, compared to the first nine months of 2022.

We sold 1,381 new light-duty commercial vehicles during the first nine months of 2023, a 7.7% decrease compared to 1,497 light-duty commercial vehicles in the first nine months of 2022.

We sold 5,350 used commercial vehicles during the first nine months of 2023, a 7.6% decrease compared to 5,787 used commercial vehicles in the first nine months of 2022.

Truck lease and rental revenues increased $27.1 million, or 11.4%, in the first nine months of 2023, compared to the first nine months of 2022. This increase in commercial vehicle lease and rental revenues was primarily a result of strong demand for lease commercial vehicles and the consolidation of RTC Canada into our operating results.

Finance and insurance revenues decreased $3.8 million, or 16.8%, in the first nine months of 2023, compared to the first nine months of 2022.

Gross Profit

Gross profit increased $106.0 million, or 9.6%, in the first nine months of 2023, compared to the first nine months of 2022. Gross profit as a percentage of sales decreased to 20.5% in the first nine months of 2023, from 21.1% in the first nine months of 2022.

Gross margins from our Aftermarket Products and Services operations decreased to 37.4% in the first nine months of 2023, from 38.8% in the first nine months of 2022. Gross profit for the Aftermarket Products and Services departments was $726.5 million in the first nine months of 2023, compared to $683.5 million in the first nine months of 2022. This increase is primarily related to the consolidation of RTC Canada into our operating results and strong parts and service demand in the first six months of 2023. Gross profits from parts sales represented 60.1% of total gross profit for Aftermarket Products and Services operations in the first nine months of 2023 and 63.0% in the first nine months of 2022. Service and collision center operations represented 39.9% of total gross profit for Aftermarket Products and Services operations in the first nine months of 2023 and 37.0% in the first nine months of 2022.

Gross margins on new Class 8 truck sales increased to 10.0% in the first nine months of 2023, from 9.9% in the first nine months of 2022.

Gross margins on new Class 4 through 7 medium-duty commercial vehicle sales increased to 8.9% in the first nine months of 2023, from 7.9% in the first nine months of 2022.

Gross margins on used commercial vehicle sales increased to 10.8% in the first nine months of 2023, from 10.2% in the first nine months of 2022.

Gross margins from truck lease and rental sales decreased to 30.4% in the first nine months of 2023, from 31.6% in the first nine months of 2022.

Selling, General and Administrative Expenses

SG&A expenses increased $78.2 million, or 11.3%, in the first nine months of 2023, compared to the first nine months of 2022. SG&A expenses equaled 13.1% of total revenue in the first nine months of 2023, and 13.3% in the first nine months of 2022. This increase primarily resulted from increased personnel expense, increased selling expense and other increased costs due to inflation, compared to the first nine months of 2022, and in addition, increased general and administrative expense associated with consolidation of RTC Canada into our operating results.

Interest Expense, Net

Net interest expense increased $26.8 million, or 250.9%, in the first nine months of 2023, compared to the first nine months of 2022.

Income before Income Taxes

Income before income taxes decreased $23.9 million, or 6.3%, in the first nine months of 2023, compared to the first nine months of 2022.

Provision for Income Taxes

Income taxes remained flat in the first nine months of 2023, compared to the first nine months of 2022. We provided for taxes at a 24.4% rate in the first nine months of 2023 and a 22.9% rate in the first nine months of 2022.

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 of September 30, 2023, we had working capital of approximately $425.7 million, including $192.0 million in cash, available to fund our operations. 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 various credit agreements. The resulting interest earned on the floor plan credit agreement with BMO Harris Bank N.A. (“BMO Harris”) (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, cash equivalents and restricted cash 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 $20.0 million. There were no advances outstanding under this secured line of credit on September 30, 2023, however, $18.0 million was pledged to secure various letters of credit related to self-insurance products, leaving $2.0 million available for future borrowings as of September 30, 2023.

Our long-term debt, floor plan financing agreements and the credit agreement with Wells Fargo Bank, National Association 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 of September 30, 2023, 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.

We expect to purchase or lease commercial vehicles worth approximately $240.0 million to $260.0 million for our leasing operations during 2023, depending on customer demand. 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 2023.

We are currently under contract to construct a new facility in the St. Louis, Missouri area at an estimated cost of $13.9 million.

During the third quarter of 2023, we paid a cash dividend of $13.7 million. On July 25, 2023, the Company’s Board of Directors declared a three-for-two stock split with respect to both the Company’s Class A and Class B common stock. The stock split was effected in the form of a stock dividend paid on August 28, 2023, to shareholders of record as of August 7, 2023. Holders of the Company’s common stock received an additional one-half share for each share of common stock held as of the record date. Additionally, on October 24, 2023, our Board of Directors declared a cash dividend of $0.17 per share of Class A and Class B common stock, to be paid on December 12, 2023, to all shareholders of record as of November 9, 2023. 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.

On December 2, 2022, 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 $150.0 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 on December 31, 2022. 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 of shares 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. As of September 30, 2023, we had repurchased $114.9 million of our shares of common stock under the current stock repurchase program, excluding federal excise tax. The current stock repurchase program expires on December 31, 2023, and may be suspended or discontinued at any time.

The Inflation Reduction Act of 2022 imposed a nondeductible 1% excise tax on the net value of certain stock repurchases made after December 31, 2022. We have reflected the applicable excise tax in treasury stock as part of the cost basis of the stock repurchased.

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 of September 30, 2023. 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, cash equivalents and restricted cash decreased by $9.1 million during the nine months ended September 30, 2023 and increased by $71.4 million during the nine months ended September 30, 2022. 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 2023, operating activities resulted in net cash provided by operations of $211.1 million. Net cash provided by operating activities primarily consisted of $269.9 million in net income, as well as non-cash adjustments related to depreciation and amortization of $165.1 million, gain on sale of property and equipment of $0.6 million, stock-based compensation of $25.3 million and the benefit for deferred income tax expense of $3.5 million. Cash used by operating activities included an aggregate of $252.2 million net change in operating assets and liabilities. Included in the net change in operating assets and liabilities were cash inflows of $4.5 million from the increase in accounts payable, which was offset primarily by cash outflows of $193.7 million from the increase in inventories, $42.8 million from the increase in accounts receivable, $13.3 million from the decrease in customer deposits and $4.1 million from the decrease in accrued expenses. The majority of our commercial vehicle inventory is financed through our floor plan credit agreements.

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.

Cash Flows from Investing Activities

During the first nine months of 2023, cash used in investing activities was $291.0 million. Cash flows used in investing activities consist primarily of cash used for the acquisition of property and equipment. Acquisition of property and equipment totaled $289.1 million during the first six months of 2023 and consisted primarily of purchases of machine and shop equipment, furniture and fixtures, real estate and facilities, improvements to our existing dealership facilities and $210.5 million for purchases of rental and lease vehicles for our rental and leasing operations.

During the first nine months of 2022, cash used in investing activities was $168.2 million. Cash flows used in investing activities consist primarily of cash used for the acquisition of property and equipment. Acquisition of property and equipment totaled $175.2 million during the first nine months of 2022 and consisted primarily of purchases of machine and shop equipment, furniture and fixtures, real estate and facilities, improvements to our existing dealership facilities and $122.3 million for purchases of rental and lease vehicles for our 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 2023, financing activities resulted in net cash provided by financing activities of $70.8 million, primarily related to $188.4 million from net draws on floor plan notes payable, non-trade, $995.1 million from borrowings of long-term debt and $14.7 million from the issuance of shares related to equity compensation plans. These cash inflows were offset by cash outflows of $976.2 million used for principal repayments of long-term debt and capital lease obligations, $107.0 million used for repurchases of common stock, $7.0 million for taxes paid related to net share settlement of equity awards and $37.1 million used for payment of cash dividends.

During the first nine months of 2022, financing activities resulted in net cash provided by financing activities 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.

On September 14, 2021, we entered into 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”) which was amended effective November 30, 2022. Pursuant to the terms of the WF Credit Agreement (as amended), the WF Lenders have agreed to make up to $175.0 million of revolving credit loans for certain of our capital expenditures, including commercial vehicle purchases for our Idealease 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 our Idealease 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 simple, secured overnight financing rate (“SOFR”) 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 plus (i) 1.25% or (ii) 1.5%, depending on our consolidated leverage ratio. The WF Credit Agreement expires on September 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. On September 30, 2023, we had approximately $104.8 million outstanding under the WF Credit Agreement.

On October 1, 2021, we entered into that certain Amended and Restated Inventory Financing and Purchase Money Security Agreement with PACCAR Leasing Company (“PLC”), a division of PACCAR Financial Corp. (the “PLC Agreement”). Pursuant to the terms of the PLC 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 on October 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 to October 1, 2025, then all payments will be deemed to be voluntary prepayments subject to a potential prepayment premium. On September 30, 2023, we had approximately $150.0 million outstanding under the PLC Agreement.

Most of our commercial vehicle purchases are made on terms requiring payment to the manufacturer within 15 to 60 days or less from the date the commercial vehicles are invoiced from the factory. Navistar Financial Corporation and Peterbilt 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. On September 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. Prior to June 1, 2023, borrowings under the Floor Plan Credit Agreement bore interest at an annual rate equal to (A) the greater of (i) zero and (ii) one month London Interbank Offered Rate (“LIBOR”), determined on the last day of the prior month, plus (B) 1.10% and were payable monthly. On May 31, 2023, we entered into the First Amendment to the Floor Plan Credit Agreement that changed the benchmark interest rate to Term SOFR, as defined by the First Amendment. Effective June 1, 2023, borrowings under the Floor Plan Credit Agreement now bear interest per annum, payable monthly, at (A) the greater of (i) zero and (ii) Term SOFR, plus (B) 1.20%. Borrowings 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 expires September 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. On September 30, 2023, we had approximately $947.7 million outstanding under the Floor Plan Credit Agreement. The average daily outstanding borrowings under the Floor Plan Credit Agreement were $855.5 million during the nine months ended September 30, 2023. 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.

On May 31, 2022, RTC Canada entered into that certain BMO Revolving Lease and Rental Credit Agreement (the “RTC Canada Revolving Credit Agreement”) with BMO. Pursuant to the terms of the RTC Canada Revolving Credit Agreement, BMO agreed to make up to $120.0 million CAD 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’s Idealease franchise, with an additional $20.0 million CAD available upon the request of RTC Canada and consent of BMO. Advances under the RTC Canada Revolving Credit Agreement bear interest per annum, payable on the first business day of each calendar month, at the Canadian Offered Dollar Rate (“CDOR”), plus 1.35%. The RTC Canada Revolving Credit Agreement expires September 14, 2026. On September 30, 2023, we had approximately $71.7 million CAD outstanding under the RTC Canada Revolving Credit Agreement.

On July 15, 2022, RTC Canada entered into that certain Amended and Restated BMO Wholesale Financing and Security Agreement (the “RTC Canada Floor Plan Agreement”) with Bank of Montreal (“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. Prior to June 1, 2023, advances under the RTC Canada Floor Plan Agreement bore 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%. On June 1, 2023, RTC Canada entered into the First Amendment to the RTC Canada Floor Plan Agreement that changed the interest rate in the case of an advance required to be made in USD dollars to Term SOFR, as defined by the First Amendment. Effective June 1, 2023, advances required to be made in USD dollars under the RTC Canada Floor Plan Agreement will now bear interest per annum, payable monthly, at Term SOFR, plus 1.20%. The RTC Canada Floor Plan Agreement expires September 14, 2026. On September 30, 2023, we had approximately $67.2 million CAD outstanding under the RTC Canada Floor Plan Agreement.

Backlog

On September 30, 2023, our backlog of commercial vehicle orders was approximately $3,297.4 million, compared to a backlog of commercial vehicle orders of approximately $3,300.1 million on September 30, 2022. The flatness of our backlog reflects the allocation decisions of the manufacturers we represent and continued demand associated with 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 our Rush 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 of September 30, 2023, and we expect to fill the majority of our backlog orders during the remainder of 2023 and the first half of 2024, 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, 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.

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, 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 by A.C.T. Research, in the last ten years, total U.S. retail sales of new Class 8 commercial vehicles have ranged from a low of approximately 187,600 in 2013, 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 third‑party 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.

The Environmental Protection Agency (“EPA”) and the National Highway Traffic Safety Administration (“NHTSA”), on behalf of the U.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, in August 2021, the President of the 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 the EPA and the Secretary of Transportation to adopt new rules and regulations for commercial vehicles starting as early as model year 2027. Similarly, in June 2020, the California Air Resources Board (“CARB”) adopted a final rule that is intended to phase out the sale of internal combustion engine 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 July 2023, CARB and various manufacturers of heavy-duty commercial vehicles and engines, including PACCAR, Navistar, Ford, Hino, Isuzu and Cummins, entered into the Clean Truck Partnership, whereby the manufacturers agreed to comply with CARB’s emission requirements where applicable, regardless of whether any entity challenges CARB’s rule-making authority, and CARB agreed to work with manufacturers to provide reasonable lead time to meet CARB’s requirements and before imposing new regulations. In addition, CARB agreed to align its nitrogen oxide emissions rules with the EPA’s, which go into effect starting in model year 2027, and modify certain of its 2024 nitrogen oxide emissions regulations for which manufacturers will provide offsets as needed to meet California’s emission targets. Since July 2020, a group of eighteen U.S. states and the District of Columbia have entered into a joint memorandum of understanding that adopts at least a portion of CARB’s emissions regulations and commits each of them to work together to advance and accelerate the market for electric Class 3 through 8 commercial vehicles. Six of the states are states where we operate new commercial vehicle dealerships: California, Colorado, Nevada, New Mexico, North Carolina and Virginia. 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 vehicles 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.

Market risk represents the risk of loss that may impact the financial position, results of operations, or cash flows of the Company due to adverse changes in financial market prices, including interest rate risk, and other relevant market rate or price risks.

We are exposed to market risk through interest rates related to our floor plan financing agreements, the WF Credit Agreement, the PLC Agreement and discount rates related to finance sales. Our floor plan debt is based on SOFR and CDOR, the WF Credit Agreement is based on SOFR, the RTC Canada Revolving Agreement is based on CDOR and the PLC Agreement is based on the prime rate. As of September 30, 2023, we had floor plan borrowings and borrowings from WF, BMO and PLC in the amount of $1,429.1 million. Assuming an increase or decrease in SOFR, CDOR or the prime rate of 100 basis points, annual interest expense could correspondingly increase or decrease by approximately $14.3 million.

The Company, under the supervision and with the participation of management, including the Company’s principal executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the principal executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2023 to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to Company management, including the principal executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A, Part I of our 2022 Annual Report on Form 10-K (the “2022 Annual Report”) describes some of the risks and uncertainties associated with our business that have the potential to materially affect our business, financial condition or results of operations.

There has been no material change in our risk factors disclosed in our 2022 Annual Report.