# RUSH ENTERPRISES INC \TX\ (RUSHA) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from RUSH ENTERPRISES INC \TX\'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1012019/000143774924005362/rusha20231231_10k.htm
Accession: 0001437749-24-005362
Filing date: 2024-02-23
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/RUSHA/
All MD&A years: /company/RUSHA/mda/
Previous year: /company/RUSHA/mda/fy2022/ (FY 2022)
Next year: /company/RUSHA/mda/fy2024/ (FY 2024)

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, Dennis Eagle, 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 59.5% of our total gross profits in 2023.

Stock Split

On July 25, 2023, the Board of Directors of the Company declared a 3-for-2 stock split of the Company’s Class A common stock and Class B common stock, which was effected in the form of a stock dividend. On August 28, 2023, the Company 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 August 7, 2023. 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.

Summary of 2023

Our results of operations for the year ended December 31, 2023 are summarized below as follows:

[[GREPCENT_TABLE]]
[["","\u25cf","Our gross revenues totaled $7,925.0 million, a 11.6% increase from gross revenues of $7,101.7 million in 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Gross profit increased $105.9 million, or 7.1%, compared to 2022. Gross profit as a percentage of sales decreased to 20.1% in 2023, from 20.9% in 2022."]]
[[/GREPCENT_TABLE]]

32

Table of Contents

[[GREPCENT_TABLE]]
[["","\u25cf","Our new Class 8 heavy-duty unit sales increased 4.0%, compared to 2022, which accounted for 6.2% of the total U.S. market and 2.0% of the total Canadian market."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Our new Class 4 through 7 medium-duty unit sales increased 20.3%, compared to 2022, including buses, which accounted for 5.1% of the total U.S. market and 2.9% of the total Canadian market."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","New light-duty truck unit sales decreased 9.4% in 2023, compared to 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Used truck unit sales increased 0.6% in 2023, compared to 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Aftermarket Products and Services revenues increased $189.7 million, or 8.0% to $2,562.1 million, compared to $2,372.4 million in 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Lease and rental revenues increased $31.5 million, or 9.8%, to $353.8 million, compared to 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Selling, General and Administrative (\u201cSG&A\u201d) expenses increased $93.9 million, or 10.1%, to $1,021.7 million, compared to $927.8 million in 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Net interest expense increased $33.8 million, or 176.7%, in 2023, compared to 2022."]]
[[/GREPCENT_TABLE]]

2024 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 214,300 truck units in 2024, a 21.1% decrease compared to 271,607 units sold in 2023. We expect our U.S. market share of new Class 8 truck sales to range between 6.3% and 6.8% in 2024. This market share percentage would result in the sale of approximately 13,500 to 14,500 new Class 8 trucks in 2024. We expect to sell approximately 650 additional new Class 8 trucks in Canada in 2024.

According to A.C.T. Research, new U. S. Class 4 through 7 commercial vehicle retail sales are estimated to total 254,250 units in 2024, a 0.6% increase compared to 252,649 units sold in 2023. We expect our U.S. market share of new Class 4 through 7 commercial vehicle sales to range between 4.8% and 5.3% in 2024. This market share percentage would result in the sale of approximately 12,200 to 13,400 new Class 4 through 7 commercial vehicles in 2024. We expect to sell approximately 350 additional new Class 5 through 7 commercial vehicles in Canada in 2024.

We expect to sell approximately 1,800 to 2,000 light-duty vehicles and approximately 6,500 to 7,500 used commercial vehicles in 2024.

We expect lease and rental revenue to increase approximately 3% during 2024, compared to 2023.

We believe our Aftermarket Products and Services revenues will increase 1% to 5% in 2024, compared to 2023. In 2024, we expect demand for Aftermarket Products and Services in the first half of the year to be consistent with demand in the second half of 2023. 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 through the first half of 2024. However, we are hopeful that the current freight recession may begin to ease by late summer, which we believe could provide a tailwind to the aftermarket industry in the second half of 2024. During 2024, we will continue to focus on our strategic initiatives, including supporting large national account customers and expanding our service technician workforce.

We expect that retail sales of new Class 8 trucks will decline compared to 2023, as pent-up demand in the market from the last few years has now been largely met. Production of new Class 4 through 7 vehicles currently continues to increase and we believe that demand will likely be consistent with 2023, though delivery delays by truck body upfitters due to supply issues could negatively impact the timing of 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.

33

Table of Contents

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 135.3% absorption ratio for the year ended December 31, 2023, and 136.6% absorption ratio for the year ended December 31, 2022.

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.

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.

34

Table of Contents

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.

Results of Operations

The following discussion and analysis includes our historical results of operations for 2023, 2022 and 2021. The following table sets forth for the years indicated certain financial data as a percentage of total revenues:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022","","","2021"],["Revenue"],["New and used commercial vehicle sales","","","62.6","%","","","61.3","%","","","59.3","%"],["Aftermarket Products and Services sales","","","32.3","","","","33.4","","","","35.0"],["Lease and rental","","","4.5","","","","4.5","","","","4.8"],["Finance and insurance","","","0.3","","","","0.4","","","","0.6"],["Other","","","0.3","","","","0.4","","","","0.3"],["Total revenues","","","100.0","","","","100.0","","","","100.0"],["Cost of products sold","","","79.9","","","","79.1","","","","78.7"],["Gross profit","","20.1","","","20.9","","","","21.3"],["Selling, general and administrative","","","12.9","","","","13.1","","","","14.3"],["Depreciation and amortization","","","0.7","","","","0.7","","","","1.0"],["Gain (loss) on sale of assets","","","0.0","","","","0.0","","","","0.0"],["Operating income","","","6.5","","","","7.1","","","","6.0"],["Other income","","","0.0","","","","0.3","","","","0.1"],["Interest expense, net","","","0.7","","","","0.2","","","","0.0"],["Income from continuing operations before income taxes","","","5.8","","","","7.2","","","","6.1"],["Provision for income taxes","","","1.4","","","","1.7","","","","1.4"],["Net income","","","4.4","","","","5.5","","","","4.7"],["Net income attributable to noncontrolling interest","","","0.0","","","","0.0","","","","0.0"],["Net income attributable to Rush Enterprises, Inc.","","","4.4","%","","","5.5","%","","","4.7","%"]]
[[/GREPCENT_TABLE]]

35

Table of Contents

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):

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","% Change"],["","","2023","","","2022","","","2021","","","2023 vs 2022","","","2022 vs 2021"],["Vehicle unit sales:"],["New heavy-duty vehicles","","","17,457","","","","16,778","","","","11,052","","","","4.0","%","","","51.8","%"],["New medium-duty vehicles","","","13,264","","","","11,025","","","","10,485","","","","20.3","","","","5.2"],["New light-duty vehicles","","","1,848","","","","2,039","","","","1,722","","","","(9.4",")","","","18.4"],["Total new vehicle unit sales","","","32,569","","","","29,842","","","","23,259","","","","9.1","%","","","28.3","%"],["Used vehicles sales","","","7,117","","","","7,078","","","","7,527","","","","0.6","%","","","(6.0",")%"],["Vehicle revenue:"],["New heavy-duty vehicles","","$","3,083.1","","","$","2,715.3","","","$","1,661.9","","","","13.5","%","","","63.4","%"],["New medium-duty vehicles","","","1,312.0","","","","959.1","","","","857.1","","","","36.8","","","","11.9"],["New light-duty vehicles","","","108.8","","","","104.0","","","","79.4","","","","4.6","","","","31.0"],["Total new vehicle revenue","","$","4,503.9","","","$","3,778.4","","","$","2,598.4","","","","19.2","%","","","45.4","%"],["Used vehicle revenue","","$","414.7","","","$","552.9","","","$","430.4","","","","(25.0",")%","","","28.5","%"],["Other vehicle revenue:(1)","","$","39.4","","","$","20.1","","","$","11.2","","","","96.0","%","","","79.5","%"],["Dealership absorption ratio:","","","135.3","%","","","136.6","%","","","129.8","%","","","(1.0",")%","","","5.2","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Includes sales of truck bodies, trailers and other new equipment."]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","2021"],["Gross Profit:"],["New and used commercial vehicle sales","","","30.4","%","","","27.9","%","","","27.7","%"],["Aftermarket products and services sales","","","59.8","","","","61.7","","","","62.7"],["Lease and rental","","","6.6","","","","6.7","","","","5.4"],["Finance and insurance","","","1.5","","","","2.0","","","","2.6"],["Other","","","1.7","","","","1.7","","","","1.6"],["Total gross profit","","","100.0","%","","","100.0","%","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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.

36

Table of Contents

A.C.T. Research currently estimates approximately 214,300 new Class 8 trucks will be sold in the United States in 2024, compared to approximately 271,607 new Class 8 trucks sold in 2023. A.C.T. Research currently forecasts sales of new Class 8 trucks in the U.S. to be approximately 249,000 in 2025.

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 254,250 units in 2024, compared to 252,649 units in 2023. A.C.T. Research currently forecasts sales of new Class 4 through 7 commercial vehicles in the U.S. to be approximately 268,750 in 2025.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Revenues

Total revenues increased $823.4 million, or 11.6%, in 2023, compared to 2022.

Our Aftermarket Products and Services revenues increased $189.7 million, or 8.0%, in 2023, compared to 2022. The increase in Aftermarket Parts and Services revenues was primarily related to healthy demand for products and services during the first six months of 2023 and also related to the consolidation of RTC Canada into our operating results for the full year in 2023.

Our revenues from sales of new and used commercial vehicles increased $606.6 million, or 13.9%, in 2023, compared to 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 17,457 new Class 8 trucks in 2023, a 4.0% increase compared to 16,778 new heavy-duty trucks in 2022. Our share of the new U.S. Class 8 commercial vehicle sales market decreased to approximately 6.2% in 2023, from 6.3% in 2022. Our share of the new Canada Class 8 truck market was approximately 2.0% in 2023. 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.

We sold 13,264 new medium-duty commercial vehicles, including 1,564 buses, in 2023, a 20.3% increase compared to 11,025 new medium-duty commercial vehicles, including 1,237 buses, in 2022. In 2023, we achieved a 5.1% share of the Class 4 through 7 commercial vehicle market in the U.S., compared to 4.6% in 2022. Our share of the Canada medium-duty commercial vehicles market was approximately 2.9% in 2023. The increase in our Class 4 through 7 commercial vehicle sales in 2023 was primarily a result of strong demand and increased production of commercial vehicles from the manufacturers we represent.

We sold 1,848 new light-duty vehicles in 2023, a 9.4% decrease compared to 2,039 new light-duty vehicles in 2022.

We sold 7,117 used commercial vehicles in 2023, an 0.6% increase compared to 7,078 used commercial vehicles in 2022. We expect used commercial vehicle demand to remain at current levels. We expect that the rate at which used commercial vehicles are depreciating will continue to decrease and that valuations will stabilize during 2024.

37

Table of Contents

Commercial vehicle lease and rental revenues increased $31.5 million, or 9.8%, in 2023, compared to 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 $5.5 million, or 18.4%, in 2023, compared to 2022. This decrease is primarily due to the mix of purchasers of commercial vehicles.  During 2023, most of our sales were to larger fleets, which usually arrange their own financing and insurance. We are more likely to provide financing to owner-operators and smaller fleets, which comprised a smaller percentage of commercial vehicle sales during 2023. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of our operating profits.

Other revenues increased $1.0 million, or 3.9% in 2023, compared to 2022. Other revenues consist primarily of the gains related to the disposition of our lease and rental fleet and document fees related to commercial vehicle sales.

Gross Profit

Gross profit increased $105.9 million, or 7.1%, compared to 2022. Gross profit as a percentage of sales decreased to 20.1% in 2023, from 20.9% in 2022. 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 62.6% in 2023, from 61.3% in 2022. Aftermarket Products and Services revenues, a higher margin revenue item, decreased as a percentage of total revenues to 32.3% in 2023, from 33.4% in 2022.

Gross margins from our Aftermarket Products and Services operations decreased to 37.2% in 2023, from 38.6% in 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, especially our over-the-road customers. Gross profit for Aftermarket Products and Services increased to $952.8 million in 2023, from $916.8 million in 2022. This increase is primarily related strong parts and service demand in the first six months of 2023 and also related to the consolidation of RTC Canada into our operating results for twelve months in 2023. 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 59.5% of total gross profit for Aftermarket Products and Services operations in 2023 and 62.8% in 2022. Service and collision center operations represented 40.5% of total gross profit for Aftermarket Products and Services operations in 2023 and 37.2% 2022. We expect blended gross margins on Aftermarket Products and Services operations to range from 36.0% to 38.0% in 2024.

Gross margins on new Class 8 truck sales decreased to 9.7% in 2023, from 9.9% in 2022. In 2024, we expect overall gross margins from new heavy-duty truck sales of approximately 8.5% to 9.5%.

Gross margins on new Class 4 through 7 commercial vehicle sales increased to 9.0% in 2023, from 8.1% in 2022. This increase was primarily due to the mix of purchasers during 2023. For 2024, we expect overall gross margins from new medium-duty commercial vehicle sales of approximately 8.0% to 9.0%, but this will largely depend upon the mix of purchasers and types of vehicles sold.

Gross margins on used commercial vehicle sales increased to 12.4% in 2023, from 9.9% in 2022. This increase was primarily due to the 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 2024.

Gross margins from commercial vehicle lease and rental sales decreased to 29.9% in 2023, from 31.2% in 2022. This decrease is primarily related to a decrease in rental utilization rates and increased maintenance costs for the lease and rental fleet. We expect gross margins from lease and rental sales of approximately 29.0% to 31.0% during 2024. 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.

38

Table of Contents

Selling, General and Administrative Expenses

SG&A expenses increased $93.9 million, or 10.1%, in 2023, compared to 2022. This increase primarily resulted from increased personnel expense, increased selling expense and the consolidation of RTC Canada into our operating results for twelve months in 2023. SG&A expenses as a percentage of total revenues decreased to 12.9% in 2023, from 13.0% in 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 2024, we expect SG&A expenses as a percentage of total revenues to range from 13.0% to 14.0%. For 2024, 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 $4.2 million, or 7.5%, in 2023, compared to 2022.

Interest Expense, Net

Net interest expense increased $33.8 million, or 176.7%, in 2023, compared to 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 2024, compared to 2023, 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

Income before income taxes decreased $47.3 million, or 9.3%, in 2023, compared to 2022, as a result of the factors described above.

Income Taxes

Income tax expense decreased $3.2 million, or 2.8%, in 2023, compared to 2022, as a result of the factors described above. We provided for taxes at a 24.7% effective rate in 2023 and 23.0% in 2022. We expect our effective tax rate to be approximately 24.0% to 25.0% of pretax income in 2024.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

For a discussion of information on the year ended December 31, 2022, refer to Part II Item 7 in the 2022 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, 2023, we had working capital of approximately $587.0 million, including $183.7 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.

39

Table of Contents

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 as of December 31, 2023, however, $17.9 million was pledged to secure various letters of credit related to self-insurance products, leaving $2.1 million available for future borrowings as of December 31, 2023.

Our 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, 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 $200.0 million to $225.0 million for our leasing operations during 2024, 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 2024.

During the fourth quarter of 2023, we paid a cash dividend of $13.5 million. Additionally, on February 13, 2024, 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 March 18, 2024, to all shareholders of record as of February 27, 2024. The total dividend disbursement is estimated to be approximately $13.2 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 5, 2023, 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, 2023. 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, 2023, we had repurchased $65.3 million of our shares of common stock under the current stock repurchase program. The current stock repurchase program expires on December 31, 2024, 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, 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.

40

Table of Contents

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022","","","2021"],["Net cash provided by (used in):"],["Operating activities","","$","295,713","","","$","294,400","","","$","422,346"],["Investing activities","","","(387,030",")","","","(240,930",")","","","(432,905",")"],["Financing activities","","","73,962","","","","(690",")","","","(153,343",")"],["Effect of exchange rate changes on cash","","","36","","","","118","","","","\u2212"],["Net (decrease) increase in cash","","$","(17,319",")","","$","52,898","","","$","(163,902",")"]]
[[/GREPCENT_TABLE]]

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 2023, operating activities resulted in net cash provided by operations of $295.7 million. Net cash provided by operating activities primarily consisted of $348.1 million in net income, as well as non-cash adjustments related to depreciation and amortization of $221.1 million, provision for deferred income tax of $7.6 million and stock-based compensation of $30.4 million. Cash used in operating activities included an aggregate of $310.6 million net change in operating assets and liabilities. Included in the net change in operating assets and liabilities were primarily the result of $28.8 million from the decrease in customer deposits and $7.2 million from the decrease in accrued liabilities which were offset primarily by cash outflows of $38.3 million from an increase in accounts receivable, $10.6 million from the decrease in accounts payable and $297.7 million from an increase in inventory. The majority of commercial vehicle inventory is financed through our floor plan credit agreements.

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.

Cash Flows from Investing Activities

During 2023, cash used in investing activities totaled $387.0 million. Cash flows used in investing activities consist primarily of cash used for capital expenditures and business acquisitions. Cash used for business acquisitions was $16.1 million during the year ended December 31,2023. See Note 15 of the Notes to Consolidated Financial Statements for a detailed discussion of the business acquisitions. Capital expenditures totaled $368.9 million during 2023 and consisted primarily of purchases of property and equipment, improvements to our existing dealership facilities and $263.9 million for purchases of rental and lease vehicles for the rental and leasing operations.

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.

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 2023, our financing activities resulted in net cash received in financing of $74.0 million. The cash outflows consisted primarily of $1,309.3 million used for principal repayments of long-term debt and finance lease obligations and $7.0 million for taxes paid related to net share settlement of equity awards. Additionally, during 2023, we paid cash dividends of $50.6 million and used $211.8 million to repurchase shares of Rush Class A common stock and Rush Class B common stock. These cash outflows were partially offset by $205.5 million from net draws on floor plan notes payable (non-trade), borrowings of $1,429.1 million of long-term debt and $18.1 million from the issuance of shares related to equity compensation plans.

41

Table of Contents

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.

On September 14, 2021, we entered into the WF Credit Agreement with the WF lenders and the WF Agent. Pursuant to the terms of the WF Credit Agreement (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 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, 2026, 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, 2023, we had approximately $100.2 million outstanding under the WF Credit Agreement.

On November 1, 2023, 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. In addition, we must maintain a minimum balance of $190.0 million. 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 1.95%, 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 December 1, 2025, although either party has the right to terminate the PLC Agreement at any time upon 180 days written notice. On December 31, 2023, we had approximately $265.0 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 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 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 in the amendment. Effective June 1, 2023, borrowings under the Floor Plan Credit Agreement 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 December 31, 2023, we had approximately $984.4 million outstanding under the Floor Plan Credit Agreement. The average daily outstanding borrowings under the Floor Plan Credit Agreement were $870.1 million during the twelve months ended December 31, 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.

42

Table of Contents

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, 2023, we had approximately $64.7 million CAD 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. 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 in the amendment. Effective June 1, 2023, advances required to be made in USD dollars under the RTC Canada Floor Plan Agreement bear interest per annum, payable monthly, at Term SOFR, plus 1.20%. The RTC Canada Floor Plan Agreement expires September 14, 2026. On December 31, 2023, we had approximately $55.9 million CAD outstanding under the RTC Canada Floor Plan Agreement. 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.

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, freight rates, 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.