RUSH ENTERPRISES INC \TX\ (RUSHA) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a full-service, integrated retailer of commercial vehicles and related services. We operate one segment - the Truck Segment. The Truck Segment operates a network of commercial vehicle dealerships primarily under the name “Rush Truck Centers.” Most Rush Truck Centers are a franchised dealer for commercial vehicles manufactured by Peterbilt, International, Hino, Ford, Isuzu, IC Bus or Blue Bird. Through our strategically located network of Rush Truck Centers, we provide one-stop service for the needs of our commercial vehicle customers. We offer an integrated approach to meeting customer needs by providing service, parts and collision repair (collectively, “Aftermarket Products and Services”) in addition to new and used commercial vehicle sales and leasing, insurance and financial services, vehicle upfitting, CNG fuel systems and vehicle telematics products.
Our goal is to continue to serve as the premier service solutions provider to the end-users of commercial vehicles. Our strategic efforts to achieve this goal include continuously expanding our portfolio of Aftermarket Products and Services, broadening the diversity of our commercial vehicle product offerings and extending our network of Rush Truck Centers. Our commitment to provide innovative solutions to service our customers’ needs continues to drive our strong Aftermarket Products and Services revenues.
Our Aftermarket Products and Services include a wide range of capabilities and products such as providing parts, service and collision repairs at certain of our Rush Truck Centers, a fleet of mobile service units, technicians who work in our customers’ facilities, a proprietary line of commercial vehicle parts and accessories, vehicle upfitting, a broad range of diagnostic and analysis capabilities, a suite of telematics products and assembly services for specialized bodies and equipment. Aftermarket Products and Services accounted for 61.7% of our total gross profits in 2022.
Stock Split
On September 15, 2020, our Board of Directors declared a 3-for-2 stock split of our Class A common stock and Class B common stock, which was effected in the form of a stock dividend. On October 12, 2020, we distributed one additional share of stock for every two shares of Class A common stock, par value $0.01 per share, and Class B common stock, par value $0.01 per share, held by shareholders of record as of September 28, 2020. All share and per share data in this Form 10-K have been adjusted and restated to reflect the stock split as if it occurred on the first day of the earliest period presented.
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.
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Summary of 2022
Our results of operations for the year ended December 31, 2022 are summarized below as follows:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Our gross revenues totaled $7,101.7 million, a 38.5% increase from gross revenues of $5,126.1 million in 2021. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Gross profit increased $394.9 million, or 36.1%, compared to 2021. Gross profit as a percentage of sales decreased to 20.9% in 2022, from 21.3% in 2021. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Our new Class 8 heavy-duty unit sales increased 51.8%, compared to 2021, which accounted for 6.3% of the total U.S. market and 1.8% of the total Canadian market. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Our new Class 4-7 medium-duty unit sales increased 5.2%, compared to 2021, including buses, which accounted for 4.6% of the total U.S. market and 2.2% of the total Canadian market. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | New light-duty truck unit sales increased 18.4% in 2022, compared to 2021. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Used truck unit sales decreased 6.0%, compared to 2021, however, used truck revenues increased 28.5%, compared to 2021 due to a sharp increase in used truck values in the first half of 2022. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Aftermarket Products and Services revenues increased $579.1 million, or 32.3%, to $2,372.4 million, compared to $1,793.4 million in 2021. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Lease and rental revenues increased $75.0 million, or 30.3%, to $322.3 million, compared to 2021. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Selling, General and Administrative (“SG&A”) expenses increased $196.5 million, or 26.9%, to $927.8 million, compared to $731.3 million in 2021. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | On May 2, 2022, we completed the acquisition of an additional 30% equity interest in RTC Canada, resulting in us now owning an 80% controlling interest in RTC Canada. |
All of the above increases in new commercial vehicle sales, lease and rental revenues and Aftermarket Products and Services revenues and SG&A expense for 2022 are primarily due to the acquisition of Summit Truck Group, LLC in December 2021 and the inclusion of RTC Canada results of operations beginning in May 2022.
2023 Outlook
According to A.C.T. Research Co., LLC (“A.C.T. Research”), a commercial vehicle industry data and forecasting service provider, new U. S. Class 8 truck retail sales are estimated to total 255,155 truck units in 2023, a 7.8% decrease compared to 259,220 units sold in 2022. We expect our U.S. market share of new Class 8 truck sales to range between 6.0% and 6.5% in 2023. This market share percentage would result in the sale of approximately 15,300 to 16,500 new Class 8 trucks in 2023. We expect to sell approximately 1,000 additional new Class 8 trucks in Canada in 2023.
According to A.C.T. Research, new U. S. Class 4 through 7 commercial vehicle retail sales are estimated to total 253,600 units in 2023, an 8.5% increase compared to 233,679 units sold in 2022. We expect our U.S. market share of new Class 4 through 7 commercial vehicle sales to range between 4.2% and 4.7% in 2023. This market share percentage would result in the sale of approximately 10,750 to 11,900 new Class 4 through 7 commercial vehicles in 2023. We expect to sell approximately 250 additional 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 7,000 to 7,200 used commercial vehicles in 2023.
We expect lease and rental revenue to increase 9% to 11% during 2023, compared to 2022. This projected increase in lease and rental revenue in 2023, compared to 2022, is primarily related to a result of strong demand for rental commercial vehicles and the consolidation of RTC Canada into our operating results.
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We continue to make progress on our strategic initiatives to increase our Aftermarket Products and Services revenues. We believe our Aftermarket Products and Services revenues will increase 9% to 12% in 2023, compared to 2022. This projected increase in Aftermarket Products and Services revenues in 2023, compared to 2022, is primarily related to price increases by the manufacturers of parts we sell and the consolidation of RTC Canada into our operating results.
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.
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. 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 136.6% absorption ratio for the year ended December 31, 2022 and 129.8% absorption ratio for the year ended December 31, 2021.
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 with U.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.
The Company’s significant accounting policies are disclosed in Note 2 of the Notes to Consolidated Financial Statements.
Inventory Reserves
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.
Purchase Price Allocation, Intangible Assets and Goodwill
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.
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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. See Note 2 – Significant Accounting Policies for further discussion of Level 3 fair value.
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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Results of Operations
The following discussion and analysis includes our historical results of operations for 2022, 2021 and 2020. The following table sets forth for the years indicated certain financial data as a percentage of total revenues:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Revenue | ||||||||||||
| New and used commercial vehicle sales | 61.3 | % | 59.3 | % | 60.5 | % | ||||||
| Aftermarket Products and Services sales | 33.4 | 35.0 | 33.8 | |||||||||
| Lease and rental | 4.5 | 4.8 | 5.0 | |||||||||
| Finance and insurance | 0.4 | 0.6 | 0.4 | |||||||||
| Other | 0.4 | 0.3 | 0.3 | |||||||||
| Total revenues | 100.0 | 100.0 | 100.0 | |||||||||
| Cost of products sold | 79.1 | 78.7 | 81.5 | |||||||||
| Gross profit | 20.9 | 21.3 | 18.5 | |||||||||
| Selling, general and administrative | 13.1 | 14.3 | 14.0 | |||||||||
| Depreciation and amortization | 0.7 | 1.0 | 1.2 | |||||||||
| Gain (loss) on sale of assets | 0.0 | 0.0 | 0.0 | |||||||||
| Operating income | 7.1 | 6.0 | 3.3 | |||||||||
| Other income | 0.3 | 0.1 | 0.1 | |||||||||
| Interest expense, net | 0.2 | 0.0 | 0.2 | |||||||||
| Income from continuing operations before income taxes | 7.2 | 6.1 | 3.2 | |||||||||
| Provision (benefit) for income taxes | 1.7 | 1.4 | 0.8 | |||||||||
| Net income | 5.5 | 4.7 | 2.4 | |||||||||
| Net income attributable to noncontrolling interest | 0.0 | 0.0 | 0.0 | |||||||||
| Net income attributable to Rush Enterprises, Inc. | 5.5 | % | 4.7 | % | 2.4 | % |
The following table sets forth the unit sales and revenue for new heavy-duty, new medium-duty, new light-duty and used commercial vehicles and the absorption ratio for the years indicated (revenue in millions):
| % Change | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | 2022 vs 2021 | 2021 vs 2020 | ||||||||||||||||
| Vehicle unit sales: | ||||||||||||||||||||
| New heavy-duty vehicles | 16,778 | 11,052 | 10,670 | 51.8 | % | 3.6 | % | |||||||||||||
| New medium-duty vehicles | 11,025 | 10,485 | 11,311 | 5.2 | % | -7.3 | % | |||||||||||||
| New light-duty vehicles | 2,039 | 1,722 | 1,132 | 18.4 | % | 52.1 | % | |||||||||||||
| Total new vehicle unit sales | 29,842 | 23,259 | 23,113 | 28.3 | % | 0.6 | % | |||||||||||||
| Used vehicles sales | 7,078 | 7,527 | 7,400 | -6.0 | % | 1.7 | % | |||||||||||||
| Vehicle revenue: | ||||||||||||||||||||
| New heavy-duty vehicles | $ | 2,715.3 | $ | 1,661.9 | $ | 1,587.9 | 63.4 | % | 4.7 | % | ||||||||||
| New medium-duty vehicles | 959.1 | 857.1 | 919.7 | 11.9 | % | -6.8 | % | |||||||||||||
| New light-duty vehicles | 104.0 | 79.4 | 50.1 | 31.0 | % | 58.5 | % | |||||||||||||
| Total new vehicle revenue | $ | 3,778.4 | $ | 2,598.4 | $ | 2,557.7 | 45.4 | % | 1.6 | % | ||||||||||
| Used vehicle revenue | $ | 552.9 | $ | 430.4 | $ | 291.5 | 28.5 | % | 47.7 | % | ||||||||||
| Other vehicle revenue:(1) | $ | 20.1 | $ | 11.2 | $ | 14.1 | 79.5 | % | -20.6 | % | ||||||||||
| Dealership absorption ratio: | 136.6 | % | 129.8 | % | 118.7 | % | 5.2 | % | 9.4 | % |
(1) Includes sales of truck bodies, trailers and other new equipment.
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The following table sets forth for the periods indicated the percent of gross profit by revenue source:
| 2022 | 2021 | 2020 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Profit: | ||||||||||||
| New and used commercial vehicle sales | 27.9 | % | 27.7 | % | 25.3 | % | ||||||
| Aftermarket products and services sales | 61.7 | 62.7 | 66.7 | |||||||||
| Lease and rental | 6.7 | 5.4 | 3.9 | |||||||||
| Finance and insurance | 2.0 | 2.6 | 2.5 | |||||||||
| Other | 1.7 | 1.6 | 1.6 | |||||||||
| Total gross profit | 100.0 | % | 100.0 | % | 100.0 | % |
Industry
We operate in the commercial vehicle market. There has historically been a high correlation between new product sales in the commercial vehicle market and the rate of change in U.S. industrial production and the U.S. gross domestic product.
Heavy-Duty Truck Market
The U.S. retail heavy-duty truck market is affected by a number of factors, including general economic conditions, fuel prices, other methods of transportation, environmental and other government regulation, interest rate fluctuations and customer business cycles. According to data published by A.C.T. Research, total U.S. retail sales of new Class 8 trucks in the last ten years have ranged from a low of approximately 187,600 in 2013 to a high of approximately 281,440 in 2019. Class 8 trucks are defined by the American Automobile Association as trucks with a minimum gross vehicle weight rating above 33,000 pounds.
Typically, Class 8 trucks are assembled by manufacturers utilizing certain components that may be manufactured by other companies, including engines, transmissions, axles, wheels and other components. As commercial vehicles and certain commercial vehicle components have become increasingly complex, the ability to provide service for commercial vehicles has become an increasingly competitive factor in the industry. The ability to provide such service requires a significant capital investment in diagnostic and other equipment, parts inventory and highly trained service personnel. EPA and Department of Transportation regulatory guidelines for service processes, including collision center, paint work and waste disposal, require sophisticated equipment to ensure compliance with environmental and safety standards. Differentiation between commercial vehicle dealers has become less dependent on price competition and is increasingly based on a dealer’s ability to offer a wide variety of services to their clients in a timely manner to minimize vehicle downtime. Such services include the following: efficient, conveniently located and easily accessible commercial vehicle service centers with an adequate supply of replacement parts and other aftermarket products and services; financing for commercial vehicle purchases; leasing and rental programs; and the ability to accept multiple unit trade-ins related to large fleet purchases. We believe our one-stop center concept and the size and geographic diversity of our dealership network gives us a competitive advantage in providing these services.
A.C.T. Research currently estimates approximately 255,155 new Class 8 trucks will be sold in the United States in 2023, compared to approximately 259,220 new Class 8 trucks sold in 2022. A.C.T. Research currently forecasts sales of new Class 8 trucks in the U.S. to be approximately 212,000 in 2024.
Medium-Duty Truck Market
Many of our Rush Truck Centers sell medium-duty commercial vehicles manufactured by Peterbilt, International, Hino, Ford or Isuzu, and provide parts and service for medium-duty commercial vehicles. Medium-duty commercial vehicles are principally used in short‑haul markets as delivery vehicles; they typically operate locally and generally do not leave their service areas overnight. We also sell light-duty vehicles (Class 3 and under) at several of our Ford dealerships.
A.C.T. Research currently forecasts sales of new Class 4 through 7 commercial vehicles in the U.S. to be approximately 253,600 units in 2023, compared to 233,679 units in 2022. A.C.T. Research currently forecasts sales of new Class 4 through 7 commercial vehicles in the U.S. to be approximately 252,750 in 2024.
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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Revenues
Total revenues increased $1,975.6 million, or 38.5%, in 2022, compared to 2021.
Our Aftermarket Products and Services revenues increased $579.1 million, or 32.3%, in 2022, compared to 2021. The increase in Aftermarket 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.
Our revenues from sales of new and used commercial vehicles increased $1,311.4 million, or 43.1%, in 2022, compared to 2021. The increase in commercial vehicle revenues was primarily a result of strong demand, the Summit acquisition and the consolidation of RTC Canada into our operating results.
We sold 16,778 new heavy-duty trucks in 2022, a 51.8% increase compared to 11,052 new heavy-duty trucks in 2021. Our share of the new U.S. Class 8 commercial vehicle sales market increased to approximately 6.3% in 2022, from 4.9% in 2021. This increase in new Class 8 truck sales and market share was primarily a result of strong demand for new commercial vehicles, the Summit acquisition and the consolidation of RTC Canada into our operating results.
We sold 11,025 new medium-duty commercial vehicles, including 1,237 buses, in 2022, a 5.2% increase compared to 10,485 new medium-duty commercial vehicles, including 959 buses, in 2021. In 2022, we achieved a 4.6% share of the Class 4 through 7 commercial vehicle market in the U.S., compared to 4.2% in 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.
We sold 2,039 new light-duty vehicles in 2022, an 18.4% increase compared to 1,722 new light-duty vehicles in 2021. Our light-duty vehicle sales benefited from the increased demand for light-duty vehicles in the U.S.
We sold 7,078 used commercial vehicles in 2022, a 6.0% decrease compared to 7,527 used commercial vehicles in 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 $75.0 million, or 30.3%, in 2022, compared to 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 $1.8 million, or 6.4%, in 2022, compared to 2021. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of our operating profits. We expect finance and insurance revenues to fluctuate proportionately with our new and used commercial vehicle sales in 2023.
Other revenues increased $8.2 million, or 46.7% in 2022, compared to 2021. Other revenues consist primarily of document fees related to commercial vehicle sales.
Gross Profit
Gross profit increased $394.9 million, or 36.1%, in 2022, compared to 2021. Gross profit as a percentage of sales decreased to 20.9% in 2022, from 21.3% in 2021. This decrease in gross profit as a percentage of sales was 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 2022, from 59.3% in 2021. Aftermarket Services revenues, a higher margin revenue item, decreased as a percentage of total revenues to 33.4% in 2022, from 35.0% in 2021.
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Gross margins from our Aftermarket Products and Services operations increased to 38.6% in 2022, from 38.1% in 2021. This increase in gross margins was primarily due to increases in parts pricing, increases in parts rebates from our parts suppliers. Gross profit for Aftermarket Products and Services increased to $916.8 million in 2022, from $684.1 million in 2021. Historically, parts operations’ gross margins range from 28% to 30% and 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 2022 and 61.4% in 2021. Service and collision center operations represented 37.2% of total gross profit for Aftermarket Products and Services operations in 2022 and 38.6% 2021. We expect blended gross margins on Aftermarket Products and Services operations to range from 37.5% to 38.5% in 2023.
Gross margins on new Class 8 truck sales increased to 9.9% in 2022, from 9.0% in 2021. This increase was primarily due to strong demand for new Class 8 trucks and the mix of purchasers during 2022. In 2023, 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 increased to 8.1% in 2022, from 7.8% in 2021. This increase was primarily due to the mix of purchasers during 2022. For 2023, 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 9.9% in 2022, from 18.7% in 2021. This decrease was primarily due to declining used commercial vehicle values as new Class 8 vehicle production increased during 2022. This margins in 2021 were primarily a result of the increase in used commercial vehicle values due to strong demand for used commercial vehicles due to production constraints experienced by manufacturers we represent. We expect margins on used commercial vehicles to return to our historical range of between 8.0% and 10.0% in 2023.
Gross margins from commercial vehicle lease and rental sales increased to 31.2% in 2022, from 23.9% in 2021. This increase is primarily related to increased rental fleet utilization and changes initially made in the fall of 2021 with respect to how we finance commercial vehicles for our lease and rental fleet. The interest associated with the WF Credit Agreement, the PLC Agreement and the RTC Canada Revolving Credit Agreement is recorded in interest expense on the Consolidated Statements of Income. Prior to these credit agreements, 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 28.0% 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 revenues, as described above, have limited direct costs and, therefore, contribute a disproportionate share of gross profit.
Selling, General and Administrative Expenses
SG&A expenses increased $196.5 million, or 26.9%, in 2022, compared to 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 13.1% in 2022, from 14.3% in 2021. Annual SG&A expenses as a percentage of total revenues have ranged from approximately 12.4% to 14.3% 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 13.0% to 14.0%. 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.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $2.3 million, or 4.3%, in 2022, compared to 2021.
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Interest Expense, Net
Net interest expense increased $17.4 million, or 980.5%, in 2022, compared to 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 2023 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
Income before income taxes increased $195.6 million, or 62.4%, in 2022, compared to 2021, as a result of the factors described above.
Income Taxes
Income tax expense increased $45.0 million, or 62.2%, in 2022, compared to 2021, as a result of the factors described above. We provided for taxes at a 23.0% effective rate in 2022 and 2021. We expect our effective tax rate to be approximately 23.0% to 24.0% of pretax income in 2023.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
For a discussion of information on the year ended December 31, 2021, refer to Part II Item 7 in the 2021 Annual Report on Form 10-K. Inline XBRL Viewer (sec.gov)
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 December 31, 2022, we had working capital of approximately $439.1 million, including $201.0 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 our various credit agreements. 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 line of credit that provides for a maximum borrowing of $20.0 million. There were no advances outstanding under this secured line of credit at December 31, 2022, however, $14.1 million was pledged to secure various letters of credit related to self-insurance products, leaving $5.9 million available for future borrowings as of December 31, 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 of December 31, 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.
We expect to purchase or lease commercial vehicles worth approximately $170.0 million to $180.0 million for our leasing operations during 2023, 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 2023.
We are currently under contract to construct a new facility in Pontoon Beach, Illinois at an estimated cost of $13.9 million.
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During the fourth quarter of 2022, we paid a cash dividend of $11.4 million. Additionally, on February 14, 2023, our Board of Directors declared a cash dividend of $0.21 per share of Class A and Class B common stock, to be paid on March 16, 2023, to all shareholders of record as of February 27, 2023. The total dividend disbursement is estimated to be approximately $11.4 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.
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 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 with Peterbilt. As of December 31, 2022, we had repurchased $5.8 million of our shares of common stock under the current stock repurchase program. The current stock repurchase program expires on December 31, 2023, 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 of December 31, 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
The following table summarizes our cash flows for the periods indicated (in thousands):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Net cash provided by (used in): | ||||||||||||
| Operating activities | $ | 294,400 | $ | 422,346 | $ | 762,982 | ||||||
| Investing activities | (240,930 | ) | (432,905 | ) | (127,457 | ) | ||||||
| Financing activities | (690 | ) | (153,343 | ) | (505,097 | ) | ||||||
| Effect of exchange rate changes on cash | 118 | − | − | |||||||||
| Net increase (decrease) in cash | $ | 52,898 | $ | (163,902 | ) | $ | 130,428 |
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 2022, operating activities resulted in net cash provided by operations of $294.4 million. Net cash provided by operating activities primarily consisted of $392.1 million in net income, as well as non-cash adjustments related to depreciation and amortization of $199.1 million, deferred income tax of $4.3 million and stock-based compensation of $25.3 million. Cash used in operating activities included an aggregate of $304.5 million net change in operating assets and liabilities. Included in the net change in operating assets and liabilities were primarily the result of $31.4 million from the increase in accounts payable, $34.1 million from the increase in customer deposits and $32.8 million from the increase in accrued liabilities which were offset primarily by cash outflows of $74.6 million from an increase in accounts receivable and $324.5 million from an increase in inventory. The majority of commercial vehicle inventory is financed through our floor plan credit agreements.
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During 2021, operating activities resulted in net cash provided by operations of $422.3 million. Net cash provided by operating activities primarily consisted of $241.4 million in net income, as well as non-cash adjustments related to depreciation and amortization of $169.5 million, deferred income tax of $13.7 million and stock-based compensation of $22.2 million. Cash used in operating activities included an aggregate of $17.4 million net change in operating assets and liabilities. Included in the net change in operating assets and liabilities were cash inflows of $32.3 million from a decrease in accounts receivable, $12.1 million from the increase in accounts payable and $3.0 million from the increase in customer deposits, which were offset by cash outflows of $33.6 million from an increase in inventory and $31.0 million from the decrease in accrued liabilities.
Cash Flows from Investing Activities
During 2022, cash used in investing activities totaled $240.9 million. Cash flows used in investing activities consist primarily of cash used for capital expenditures and business acquisitions. Cash used for business acquisitions was $20.8 million during the year ended December 31, 2022. See Note 15 of the Notes to Consolidated Financial Statements for a detailed discussion of the business acquisitions. Capital expenditures totaled $243.1 million during 2022 and consisted primarily of purchases of property and equipment, improvements to our existing dealership facilities and $168.5 million for purchases of rental and lease vehicles for the rental and leasing operations.
During 2021, cash used in investing activities totaled $432.9 million. Cash flows used in investing activities consist primarily of cash used for capital expenditures and business acquisitions. Cash used for business acquisitions was $269.3 million during the year ended December 31, 2021. See Note 15 of the Notes to Consolidated Financial Statements for a detailed discussion of the business acquisitions. Capital expenditures totaled $167.2 million during 2021 and consisted primarily of purchases of property and equipment, improvements to our existing dealership facilities and $164.6 million for purchases of rental and lease vehicles for the rental and leasing operations.
Cash Flows from Financing Activities
Cash flows used in financing activities include borrowings and repayments of long-term debt and net payments of floor plan notes payable. During 2022, our financing activities resulted in net cash used in financing of $0.7 million. The cash outflows consisted primarily of $1,099.2 million used for principal repayments of long-term debt and capital lease obligations during 2022 and $8.7 million for taxes paid related to net share settlement of equity awards. Additionally, during 2022, we paid cash dividends of $44.6 million and used $93.7 million to repurchase shares of Rush Class A common stock and Rush Class B common stock. These cash outflows were partially offset by $273.9 million from net draws on floor plan notes payable (non-trade), borrowings of $958.3 million of long-term debt and $13.3 million from the issuance of shares related to equity compensation plans.
During 2021, our financing activities resulted in net cash used in financing of $153.3 million. The cash outflows consisted primarily of $468.8 million used for principal repayments of long-term debt and capital lease obligations and $33.6 million used to purchase shares of Rush Class A common stock and Rush Class B common stock during. Additionally, during 2021, we paid cash dividends of $41.1 million. These cash outflows were partially offset by $118.9 million from net draws on floor plan notes payable (non-trade), borrowings of $260.3 million of long-term debt related to the lease and rental fleet and $10.9 million from the issuance of shares related to equity compensation plans.
On September 14, 2021, we entered into the WF Credit Agreement with the WF Lenders and the WF Agent which was amended effective November 30, 2022. Pursuant to the terms of the WF Credit Agreement, 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 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 December 31, 2022, we had approximately $40.5 million outstanding under the WF Credit Agreement.
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On October 1, 2021, we entered into 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 December 31, 2022, we had approximately $185.0 million outstanding under the PLC Agreement.
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. 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. 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 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 December 31, 2022, we had approximately $762.9 million outstanding under the Floor Plan Credit Agreement. The average daily outstanding borrowings under the Floor Plan Credit Agreement were $638.6 million during the year ended December 31, 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.
On May 31, 2022, RTC Canada entered into 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 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 CDOR, plus 1.35%. The RTC Canada Revolving Credit Agreement expires September 14, 2026. On December 31, 2022, we had approximately $49.9 million outstanding under the RTC Canada Revolving Credit Agreement.
On July 15, 2022, RTC Canada entered into 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 expires September 14, 2026. On December 31, 2022, we had approximately $44.6 million outstanding under the RTC Canada Floor Plan Agreement.
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.
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, 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.
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