ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Certain statements contained in this Form 10-Q (or otherwise made by the Company or on the Company’s behalf from time to time in other reports, filings with the Securities and Exchange Commission (“SEC”), news releases, conferences, website postings or otherwise) that are not statements of historical fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”), notwithstanding that such statements are not specifically identified. Forward-looking statements include statements about the Company’s financial position, business strategy and plans and objectives of management of the Company for future operations. These forward-looking statements reflect the best judgments of the Company about the future events and trends based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. Use of the words “may,” “should,” “continue,” “plan,” “potential,” “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements reflect our current view of the Company with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in such statements. Please read Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, for a discussion of certain of those risks. Other unknown or unpredictable factors could also have a material adverse effect on future results. Although the Company believes that its expectations are reasonable as of the date of this Form 10-Q, it can give no assurance that such expectations will prove to be correct. The Company does not intend to update or revise any forward-looking statements unless securities laws require it to do so, and the Company undertakes no obligation to publicly release any revisions to forward-looking statements, whether because of new information, future events or otherwise.
The following comments should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
Note Regarding Trademarks Commonly Used in the Company’s Filings
Peterbilt
®
is a registered trademark of Peterbilt Motors Company. PACCAR
®
is a registered trademark of PACCAR, Inc. PacLease
®
is a registered trademark of PACCAR Leasing Corporation. Navistar
®
is a registered trademark of Navistar International Corporation.
International
®
is a registered trademark of Navistar International Transportation Corp.
Idealease is a registered trademark of Idealease, Inc. aka Idealease of North America, Inc. B
lue Bird
®
is a registered trademark of Blue Bird Investment Corporation
. IC Bus
®
is a registered trademark of IC Bus, LLC. Fuso
®
is
a registered trademark of
Mitsubishi Fuso Truck and Bus Corporation
.
Hino
®
is a registered trademark of Hino Motors, Ltd. Isuzu
®
is a registered trademark of Isuzu Motors Limited.
Ford Motor Credit Company
®
is a registered trademark of Ford Motor Company.
Ford
®
is a registered trademark of Ford Motor Company
.
SAP
®
is a registered trademark of SAP Aktiengesellschaft. This report contains additional trade names or trademarks of other companies. Our use of such trade names or trademarks should not imply any endorsement or relationship with such companies.
General
Rush Enterprises, Inc. was incorporated in Texas in 1965 and consists of one reportable segment, the Truck Segment. We conduct business through our subsidiaries. Our principal offices are located at 555 IH 35 South, Suite 500, New Braunfels, Texas 78130.
We are a full-service, integrated retailer of commercial vehicles and related services. The Truck Segment includes our operation of a nationwide network of commercial vehicle dealerships under the name “Rush Truck Centers.” Rush Truck Centers primarily sell commercial vehicles manufactured by Peterbilt, International, Hino, Ford, Isuzu, Mitsubishi Fuso, 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, including retail sales of new and used commercial vehicles, aftermarket parts sales, service and repair facilities, financing, leasing and rental and insurance products.
Our Rush Truck Centers are principally located in high traffic areas throughout the United States. Since commencing operations as a Peterbilt heavy-duty truck dealer in 1966, we have grown to operate over 100 Rush Truck Centers in 22 states.
Our business strategy consists of providing solutions to the commercial vehicle industry through our nationwide network of commercial vehicle dealerships. We offer an integrated approach to meeting customer needs by providing service, parts and collision repair in addition to new and used commercial vehicle sales and leasing, plus financial services, vehicle upfitting, CNG fuel systems and vehicle telematics products. We intend to continue to implement our business strategy, reinforce customer loyalty and remain a market leader by continuing to develop our Rush Truck Centers as we expand our product offerings and extend our dealership network through strategic acquisitions of new locations and opening new dealerships to enable us to better serve our customers.
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.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by specific identification of new and used commercial vehicle inventory and by the first-in, first-out method for tires, parts and accessories. As the market value of our inventory typically declines over time, reserves are established based on historical loss experience and market trends. These reserves are charged to cost of sales and reduce the carrying value of our inventory on hand. An allowance is provided when it is anticipated that cost will exceed net realizable value less a reasonable profit margin.
Goodwill
Goodwill is tested for impairment by reporting unit utilizing a two-step process at least annually, or more frequently when events or changes in circumstances indicate that the asset might be impaired. The first step requires us to compare the fair value of the reporting unit (we consider our Truck Segment to be a reporting unit for purposes of this analysis), which is the same as the segment, to the respective carrying value. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is greater than the fair value, there is an indication that impairment may exist and a second step is required. In the second step of the analysis, the implied fair value of the goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment loss.
We determine the fair value of our reporting unit using the discounted cash flow method. The discounted cash flow method uses various assumptions and estimates regarding revenue growth rates, future gross margins, future selling, general and administrative expenses and an estimated weighted average cost of capital. The analysis is based upon available information regarding expected future cash flows of each reporting unit discounted at rates consistent with the cost of capital specific to the reporting unit. This type of analysis contains uncertainties because it requires us to make assumptions and to apply judgment regarding our knowledge of our industry, information provided by industry analysts and our current business strategy in light of present industry and economic conditions. If any of these assumptions change, or fail to materialize, the resulting decline in our estimated fair value could result in a material impairment charge to the goodwill associated with the reporting unit.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we used to test for impairment losses on goodwill. However, if actual results are not consistent with our estimates or assumptions, or certain events occur that might adversely affect the reported value of goodwill in the future, we may be exposed to an impairment charge that could be material.
Goodwill was tested for impairment during the fourth quarter of 2017 and no impairment was required. The fair value of our reporting unit exceeded the carrying value of its net assets. As a result, we were not required to conduct the second step of the impairment test. We do not believe our reporting unit is at risk of failing step one of the impairment test.
Insurance Accruals
We are partially self-insured for a portion of the claims related to our property and casualty insurance programs, which requires us to make estimates regarding expected losses to be incurred. We engage a third-party administrator to assess any open claims and we adjust our accrual accordingly on a periodic basis. We are also partially self-insured for a portion of the claims related to our workers’ compensation and medical insurance programs. We use actuarial information provided from third-party administrators to calculate an accrual for claims incurred, but not reported, and for the remaining portion of claims that have been reported.
Changes in the frequency, severity and development of existing claims could influence our reserve for claims and financial position, results of operations and cash flows. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we used to calculate our self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
Accounting for Income Taxes
Management’s judgment is required to determine the provisions for income taxes and to determine whether deferred tax assets will be realized in full or in part. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When it is more likely than not that all or some portion of specific deferred income tax assets will not be realized, a valuation allowance must be established for the amount of deferred income tax assets that are determined not to be realizable. Accordingly, the facts and financial circumstances impacting deferred income tax assets are reviewed quarterly and management’s judgment is applied to determine the amount of valuation allowance required, if any, in any given period.
Our income tax returns are periodically audited by tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions. In evaluating the exposures associated with our various tax filing positions, we adjust our liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.
Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions. Our effective income tax rate is also affected by changes in tax law, the level of earnings and the results of tax audits. Although we believe that the judgments and estimates are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. An unfavorable tax settlement would generally require use of our cash and result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution. Our income tax expense includes the impact of reserve provisions and changes to reserves that we consider appropriate, as well as related interest.
Revenue Recognition
Effective January 1, 2018, we adopted ASU 2014-09, “
Revenue from Contracts with Customers
(
“
Topic 606
”
)
,” using the modified retrospective transition method. Under this method, we will recognize the cumulative effect of initially applying this accounting standard at the date of initial application. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under Topic 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of Topic 606, we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations. We then assess whether each promised good or service is distinct and recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. For a complete discussion of accounting for revenue, see Note 10 – Revenue of the Notes to Consolidated Financial Statements.
Results of Operations
The following discussion and analysis includes our historical results of operations for the three months and six months periods ended June 30, 2018 and 2017.
The following table sets forth certain financial data as a percentage of total revenues:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New and used commercial vehicle sales
|
|
|
63.5
|
%
|
|
|
64.5
|
%
|
|
|
63.0
|
%
|
|
|
62.8
|
%
|
Aftermarket products and services sales
|
|
|
31.4
|
|
|
|
30.5
|
|
|
|
31.8
|
|
|
|
31.9
|
|
Lease and rental sales
|
|
|
4.4
|
|
|
|
4.4
|
|
|
|
4.5
|
|
|
|
4.6
|
|
Finance and insurance
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Other
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of products sold
|
|
|
82.0
|
|
|
|
82.6
|
|
|
|
81.8
|
|
|
|
82.3
|
|
Gross profit
|
|
|
18.0
|
|
|
|
17.4
|
|
|
|
18.2
|
|
|
|
17.7
|
|
Selling, general and administrative
|
|
|
13.2
|
|
|
|
13.3
|
|
|
|
13.6
|
|
|
|
13.8
|
|
Depreciation and amortization
|
|
|
1.6
|
|
|
|
1.0
|
|
|
|
1.7
|
|
|
|
1.1
|
|
Operating income
|
|
|
3.2
|
|
|
|
3.1
|
|
|
|
2.9
|
|
|
|
2.8
|
|
Interest expense, net
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Income before income taxes
|
|
|
2.9
|
|
|
|
2.9
|
|
|
|
2.6
|
|
|
|
2.5
|
|
Provision for income taxes
|
|
|
0.7
|
|
|
|
1.1
|
|
|
|
0.6
|
|
|
|
0.9
|
|
Net income
|
|
|
2.2
|
%
|
|
|
1.8
|
%
|
|
|
2.0
|
%
|
|
|
1.6
|
%
|
The following table sets forth for the periods indicated the percent of gross profit by revenue source:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New and used commercial vehicle sales
|
|
|
26.9
|
%
|
|
|
27.6
|
%
|
|
|
27.1
|
%
|
|
|
26.6
|
%
|
Aftermarket products and services sales
|
|
|
64.8
|
|
|
|
64.4
|
|
|
|
64.6
|
|
|
|
65.6
|
|
Lease and rental sales
|
|
|
4.2
|
|
|
|
4.2
|
|
|
|
4.1
|
|
|
|
4.0
|
|
Finance and insurance
|
|
|
2.3
|
|
|
|
2.1
|
|
|
|
2.2
|
|
|
|
2.1
|
|
Other
|
|
|
1.8
|
|
|
|
1.7
|
|
|
|
2.0
|
|
|
|
1.7
|
|
Total gross profit
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The following table sets forth the unit sales and revenues for new heavy-duty, new medium-duty, new light-duty and used commercial vehicles and the absorption ratio (revenues in millions):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
%
Change
|
|
|
2018
|
|
|
2017
|
|
|
%
Change
|
|
Vehicle unit sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New heavy-duty vehicles
|
|
|
3,218
|
|
|
|
3,352
|
|
|
|
-4.0
|
%
|
|
|
6,530
|
|
|
|
6,058
|
|
|
|
7.8
|
%
|
New medium-duty vehicles
|
|
|
3,474
|
|
|
|
3,073
|
|
|
|
13.0
|
%
|
|
|
6,179
|
|
|
|
5,626
|
|
|
|
9.8
|
%
|
New light-duty vehicles
|
|
|
679
|
|
|
|
473
|
|
|
|
43.6
|
%
|
|
|
1,110
|
|
|
|
820
|
|
|
|
35.4
|
%
|
Total new vehicle unit sales
|
|
|
7,371
|
|
|
|
6,898
|
|
|
|
6.9
|
%
|
|
|
13,819
|
|
|
|
12,504
|
|
|
|
10.5
|
%
|
Used vehicles
|
|
|
2,055
|
|
|
|
1,743
|
|
|
|
17.9
|
%
|
|
|
3,914
|
|
|
|
3,454
|
|
|
|
13.3
|
%
|
Vehicle
revenue
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New heavy-duty vehicles
|
|
$
|
474.4
|
|
|
$
|
468.3
|
|
|
|
1.3
|
%
|
|
$
|
946.4
|
|
|
$
|
829.7
|
|
|
|
14.1
|
%
|
New medium-duty vehicles
|
|
|
257.0
|
|
|
|
213.2
|
|
|
|
20.5
|
%
|
|
|
456.2
|
|
|
|
402.5
|
|
|
|
13.3
|
%
|
New light-duty vehicles
|
|
|
27.4
|
|
|
|
18.2
|
|
|
|
50.5
|
%
|
|
|
44.0
|
|
|
|
31.8
|
|
|
|
38.4
|
%
|
Total new vehicle revenue
|
|
$
|
758.8
|
|
|
$
|
699.7
|
|
|
|
8.4
|
%
|
|
$
|
1,446.6
|
|
|
$
|
1,264.0
|
|
|
|
14.4
|
%
|
Used vehicle revenue
|
|
$
|
92.8
|
|
|
$
|
72.2
|
|
|
|
28.5
|
%
|
|
$
|
173.4
|
|
|
$
|
141.0
|
|
|
|
23.0
|
%
|
Other
vehicle
revenue
:
(1)
|
|
$
|
5.4
|
|
|
$
|
4.1
|
|
|
|
31.7
|
%
|
|
$
|
10.1
|
|
|
$
|
7.0
|
|
|
|
44.3
|
%
|
Absorption ratio:
|
|
|
122.8
|
%
|
|
|
121.8
|
%
|
|
|
0.8
|
%
|
|
|
121.4
|
%
|
|
|
117.6
|
%
|
|
|
3.2
|
%
|
(1) Includes sales of truck bodies, trailers and other new equipment.
|
Key Performance Indicator
Absorption Ratio
Management uses several performance metrics to evaluate the performance of our commercial vehicle dealerships and considers Rush Truck Centers’ “absorption ratio” to be of critical importance. Absorption ratio is calculated by dividing the gross profit from the parts, service and body shop (collectively, “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 122.8% absorption ratio for the second quarter of 2018 and a 121.8% absorption ratio for the second quarter of 2017.
Three Months Ended
June 30
,
20
1
8
Compared to Three Months Ended
June 30
,
2017
Aftermarket Products and Services revenues totaled $422.9 million in the second quarter of 2018, up 15.4%, compared to the second quarter of 2017. During the second quarter of 2018, Aftermarket Products and Services revenues benefited from our strategic initiatives, particularly through additions to our aftermarket sales organization, a net increase of approximately 300 service technicians in 2018, focus on our all-makes and Rig Tough parts growth, and investment in technology and productivity improvements for our parts operations. We believe our Aftermarket Products and Services revenues will remain solid throughout the second half of 2018.
Our Class 8 vehicle unit sales were down slightly in the second quarter of 2018, compared to 2017, primarily due to the timing of certain large fleet transactions and truck and component manufacturer production capacity constraints, which delayed pending deliveries. However, our new Class 8 truck unit sales are up 7.8% year to date as compared to the first half of last year. The healthy economy created significant activity in virtually all market segments, and especially strong demand from over-the-road, construction and refuse customers. We expect our Class 8 vehicle sales will accelerate through the second half of 2018, although manufacturer production capacity limitations could delay some deliveries into 2019.
Our used commercial vehicle unit sales were up 18% over the second quarter of 2017, and we continue to believe our used commercial vehicle inventory is appropriate to support the market. We believe the strength of the used commercial vehicle market is due in part to extended lead times for new Class 8 truck deliveries, which we believe will help decrease the impact of a large number of used commercial vehicles entering the market through the rest of the year and stabilize used commercial vehicle values.
Our Class 4 through 7 medium-duty commercial vehicle unit sales increased 13.0% in the second quarter of 2018, compared to the second quarter of 2017. Our medium-duty truck sales significantly outpaced the market in the second quarter, due to strong activity from the construction sector and our leasing and rental fleet customers. Due to our continued ability to support customers with a nationwide inventory of ready-to-roll commercial vehicles, we believe our medium-duty commercial vehicle sales will remain strong through the rest of 2018.
Revenues
In the second quarter of 2018, total revenues increased $145.3 million, or 12.1% compared to the second quarter of 2017.
Our Aftermarket Products and Services revenues increased $56.3 million, or 15.4%, in the second quarter of 2018, compared to the second quarter of 2017. This increase was primarily due to increases in aftermarket sales personnel and service technicians, focus on our all-makes parts growth, and investment in technology and productivity improvements for our parts operations. We expect our Aftermarket Products and Services revenues to increase 12% to 15% in 2018, compared to 2017.
Revenues from sales of new and used commercial vehicles increased $81.0 million, or 10.4%, in the second quarter of 2018, compared to the second quarter of 2017, primarily as a result of strong demand for used commercial vehicles and medium-duty commercial vehicles.
We sold 3,218 Class 8 heavy-duty trucks in the second quarter of 2018, a 4.0% decrease compared to 3,352 Class 8 trucks sold in the second quarter of 2017. According to A.C.T. Research Co., LLC (“A.C.T. Research”), a truck industry data and forecasting service provider, the U.S. Class 8 truck market increased 24.7% in the second quarter of 2018 compared to the second quarter of 2017. A.C.T. Research currently forecasts U.S. retail sales of Class 8 trucks of approximately 251,700 units in 2018, 254,000 units in 2019 and 185,000 units in 2020, compared to approximately 197,000 units in 2017. Our share of the U.S. Class 8 truck sales market was approximately 6.6% in 2017. We expect our U.S. Class 8 commercial vehicle sales market share to decline to between 5.5% and 5.9% in 2018. In a robust Class 8 truck market, historically, our market share declines. This market share percentage would result in the sale of approximately 13,800 to 14,850 of Class 8 commercial vehicles in 2018, based on A.C.T. Research’s current U.S. retail sales estimate of 251,700 units.
We sold 3,474 Class 4 through 7 medium-duty commercial vehicles, including 399 buses, in the second quarter of 2018, a 13.0% increase compared to 3,073 Class 4 through 7 commercial vehicles, including 202 buses, sold in the second quarter of 2017. A.C.T. Research estimates that unit sales of Class 4 through 7 commercial vehicles in the U.S. increased approximately 3.6% in the second quarter of 2018, compared to the second quarter of 2017. A.C.T. Research currently forecasts U.S. retail sales of Class 4 through 7 medium-duty commercial vehicles of approximately 251,100 units in 2018, 256,000 units in 2019 and 264,000 in 2020. In 2017, we achieved a 4.5% share of the Class 4 through 7 market in the U.S. We expect our market share to range between 4.7% and 5.2% of the U.S. Class 4 through 7 commercial vehicle sales in 2018. This market share percentage would result in the sale of approximately 11,800 to 13,000 of Class 4 through 7 commercial vehicles in 2018, based on A.C.T. Research’s current U.S. retail sales estimates of 251,100 units.
We sold 679 light-duty vehicles in the second quarter of 2018, a 43.6% increase compared to 473 light-duty vehicles sold in the second quarter of 2017. We expect to sell approximately 2,000 light-duty vehicles in 2018.
We sold 2,055 used commercial vehicles in the second quarter of 2018, a 17.9% increase compared to 1,743 used commercial vehicles sold in the second quarter of 2017. We expect to sell approximately 7,500 to 8,500 used commercial vehicles in 2018.
Commercial vehicle lease and rental revenues increased $5.9 million, or 11.2%, in the second quarter of 2018, compared to the second quarter of 2017. We expect lease and rental revenue to increase 5% to 10% during 2018, compared to 2017.
Finance and insurance revenues increased $1.1 million, or 25.0%, in the second quarter of 2018 compared to the second quarter of 2017. We expect finance and insurance revenues to fluctuate proportionately with our new and used commercial vehicle sales in 2018. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of our operating profits.
Gross Profit
Gross profit increased $34.3 million, or 16.4%, in the second quarter of 2018, compared to the second quarter of 2017. Gross profit as a percentage of sales increased to 18.0% in the second quarter of 2018, from 17.4% in the second quarter of 2017. This increase in gross profit as a percentage of sales is a result of a change in our product sales mix. Commercial vehicle sales, a lower margin revenue item, decreased as a percentage of total revenues to 63.5% in the second quarter of 2018, from 64.5% in the second quarter of 2017. Aftermarket Products and Services revenues, a higher margin revenue item, increased as a percentage of total revenues to 31.4% in the second quarter of 2018, from 30.5% in the second quarter of 2017.
Gross margins from our Aftermarket Products and Services operations increased to 37.3% in the second quarter of 2018, from 36.7% in the second quarter of 2017. Gross profit from our Aftermarket Products and Services operations increased to $157.8 million in the second quarter of 2018, from $134.6 million in the second quarter of 2017. Historically, gross margins on parts sales range from 27% to 28% and gross margins on service and body shop operations range from 61% to 65%. Gross profits from parts sales represented 58% of total gross profit for Aftermarket Products and Services operations in the second quarter of 2018 and the second quarter of 2017. Service and body shop operations represented 42% of total gross profit for Aftermarket Products and Services operations in the second quarter of 2018 and the second quarter of 2017. We expect blended gross margins on Aftermarket Products and Services operations to range from approximately 36.5% to 37.0% in 2018.
Gross margins on Class 8 truck sales increased slightly to 8.1% in the second quarter of 2018, from 8.0% in the second quarter of 2017. In 2018, we expect overall gross margins from Class 8 commercial vehicle sales of approximately 7.5% to 8.0%.
Gross margins on medium-duty commercial vehicle sales decreased to 5.4% in the second quarter of 2018, from 5.6% in the second quarter of 2017. We sold a larger number of lower margin fleet trucks in the second quarter of 2018, compared to the second quarter of 2017. In 2018, we expect overall gross margins from Class 4 through 7 commercial vehicle sales of approximately 5.7% to 6.2%, but this will largely depend upon the mix of purchasers and types of vehicles sold.
Gross margins on used commercial vehicle sales increased to 12.1% in the second quarter of 2018, from 11.6% in the second quarter of 2017. We expect margins on used commercial vehicles to range between 10.0% and 11.5% during 2018.
Gross margins from truck lease and rental sales increased to 17.5% in the second quarter of 2018, from 16.7% in the second quarter of 2017. This increase is primarily related to increased rental fleet utilization. We expect gross margins from lease and rental sales of approximately 16.0% to 18.0% during 2018. 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 the Company realizing reasonable gross margins while the unit is in service and a corresponding gain or loss on sale when the unit is sold at the end of the lease term.
Finance and insurance revenues and other income, as described above, have limited direct costs and, therefore, contribute a disproportionate share of gross profit.
Selling, General and Administrative Expenses
Selling, General and Administrative (“SG&A”) expenses increased $19.3 million, or 12.1%, in the second quarter of 2018, compared to the second quarter of 2017. SG&A expenses as a percentage of total revenues decreased to 13.2% in the second quarter of 2018, from 13.3% in the second quarter of 2017. SG&A expenses as a percentage of total revenues have recently ranged from 12.1% to 14.7%. In general, when new and used commercial vehicle revenues decrease as a percentage of total revenues, SG&A expenses as a percentage of total revenues will be at, or exceed, the higher end of this range. For 2018, we expect SG&A expenses as a percentage of total revenues to range from 13.5% to 14.0% and 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 $9.2 million, or 74.3%, in the second quarter of 2018, compared to the second quarter of 2017. This increase is primarily related to the additional amortization expense related to the replacement of our ERP Platform components. See Note 11 –ERP Platform of the Notes to Consolidated Financial Statements.
Interest Expense, Net
Net interest expense increased $1.7 million, or 59.1%, in the second quarter of 2018, compared to the second quarter of 2017. This increase is primarily related to the increase in the LIBOR rate over the last year and increased inventory levels, compared to the second quarter of 2017. Net interest expense in 2018 will depend on inventory levels, interest rate fluctuations and the amount of cash available to make prepayments on our floor plan arrangements.
Income before Income Taxes
As a result of the factors described above, income before income taxes increased $4.3 million, or 12.6%, in the second quarter of 2018, compared to the second quarter of 2017.
Income Taxes
Income taxes decreased $3.0 million, or 24.2%, in the second quarter of 2018, compared to the second quarter of 2017. In the second quarter of 2018, we recorded a $0.2 million tax benefit related to excess tax benefits of equity compensation which reduced income tax expense. In the second quarter of 2017, we recorded a $1.1 million tax benefit related to excess tax benefits of equity compensation which reduced income tax expense. We provided for taxes at a 25.0% effective rate in the second quarter of 2018 and 39.00% in the second quarter of 2017. We expect our effective tax rate to be approximately 25% of pretax income in 2018.
Six Months Ended June 30,
201
8
, Compared to Six Months Ended June 30,
201
7
Unless otherwise stated below, our variance explanations and future expectations with regard to the items discussed in this section are set forth in the discussion of the “Three Months Ended June 30, 2018, Compared to Three Months Ended June 30, 2017.”
Total revenues increased $341.3 million, or 15.2%, in the first six months of 2018, compared to the first six months of 2017. Sales of new and used commercial vehicles increased $218.2 million, or 15.5%, in the first six months of 2018, compared to the first six months of 2017.
Aftermarket Products and Services revenues increased $106.5 million, or 14.9%, in the first six months of 2018, compared to the first six months of 2017.
We sold 6,530 heavy-duty trucks in the first six months of 2018, a 7.8% increase compared to 6,058 heavy-duty trucks in the first six months of 2017. According to A.C.T. Research, retail sales in the U.S. Class 8 truck market increased 29.6% in the first six months of 2018, compared to the first six months of 2017.
We sold 6,179 medium-duty commercial vehicles, including 687 buses, in the first six months of 2018. This represented a 9.8% increase compared to 5,626 medium-duty commercial vehicles, including 361 buses, in the first six months of 2017. A.C.T. Research estimates that unit sales of Class 4 through 7 commercial vehicles in the United States increased approximately 4.8% in the first six months of 2018, compared to the first six months of 2017.
We sold 1,110 light-duty vehicles in the first six months of 2018, a 35.4% increase compared to 820 light-duty vehicles sold in the first six months of 2017.
We sold 3,914 used commercial vehicles in the first six months of 2018, a 13.3% increase compared to 3,454 used commercial vehicles in the first six months of 2017.
Truck lease and rental revenues increased $12.2 million, or 11.7%, in the first six months of 2018, compared to the first six months of 2017.
Finance and insurance revenues increased $1.9 million, or 23.0%, in the first six months of 2018, compared to the first six months of 2017.
Gross Profit
Gross profit increased $73.4 million, or 18.5%, in the first six months of 2018, compared to the first six months of 2017. Gross profit as a percentage of sales increased to 18.2% in the first six months of 2018, from 17.7% in the first six months of 2017.
Gross margins from Aftermarket Products and Services operations increased to 36.9% in the first six months of 2018, from 36.3% in the first six months of 2017. Gross profit for Aftermarket Products and Services was $303.6 million in the first six months of 2018, compared to $260.2 million in the first six months of 2017. Gross profit from parts sales represented 58% of the total gross profit for Aftermarket Products and Services operations in the first six months of 2018 and 57% in the first six months of 2017. Service and body shop operations represented 42% of the total gross profit for Aftermarket Products and Services operations in the first six months of 2018 and 43% in the first six months of 2017.
Gross margins on Class 8 truck sales were flat at 8.1% in the first six months of 2018, compared to the first six months of 2017.
Gross margins on medium-duty commercial vehicle sales decreased to 6.0% in the first six months of 2018, from 6.1% in the first six months of 2017.
Gross margins on used commercial vehicle sales increased to 11.7% in the first six months of 2018, from 10.1% in the first six months of 2017.
Gross margins from truck lease and rental sales increased to 16.7% in the first six months of 2018, from 15.1% in the first six months of 2017.
Finance and insurance revenues and other income, as described above, have limited direct costs and, therefore, contribute a disproportionate share of gross profit.
Selling, General and Administrative Expenses
SG&A expenses increased $40.6 million, or 13.1%, in the first six months of 2018, compared to the first six months of 2017. SG&A expenses equaled 13.5% of total revenue in the first six months of 2018, compared to 13.8% in the first six months of 2017.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $19.7 million, or 78.9%, in the first six months of 2018, compared to the first six months of 2017.
Interest Expense, Net
Net interest expense increased $3.2 million, or 56.7%, in the first six months of 2018, compared to the first six months of 2017.
Income before Income Taxes
Income before income taxes increased $10.4 million, or 18.3%, in the first six months of 2018, compared to the first six months of 2017.
Provision for Income Taxes
Income taxes decreased $3.6 million, or 17.7%, in the first six months of 2018, compared to the first six months of 2017. In the first six months of 2018, we recorded a $169,000 tax benefit related to excess tax benefits of equity compensation, which reduced income tax expense. In the first six months of 2017, we recorded a $1.8 million tax benefit related to excess tax benefits of equity compensation, which reduced income tax expense. We provided for taxes at a 25.0% rate in the first six months of 2018 and a 38.75% rate in the first six months of 2017.
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 June 30, 2018, we had working capital of approximately $200.1 million, including $148.3 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 credit agreement with BMO Harris Bank N.A. (“BMO Harris”) (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.
We have a secured line of credit that provides for a maximum borrowing of $17.5 million. There were no advances outstanding under this secured line of credit at June 30, 2018, however, $11.6 million was pledged to secure various letters of credit related to self-insurance products, leaving $5.9 million available for future borrowings as of June 30, 2018.
On March 21, 2017, we entered into a working capital facility with BMO Harris (the “Working Capital Facility”). The Working Capital Facility includes up to $100 million of revolving credit loans available to us for working capital, capital expenditures and other general corporate purposes. The amount of the borrowings under the Working Capital Facility are subject to borrowing base limitations based on the value of our eligible parts inventory and company vehicles. The Working Capital Facility includes a $20 million letter of credit sublimit. Borrowings under the Working Capital Facility bear interest at rates based on LIBOR or the Base Rate (as such terms are defined in the Working Capital Facility), plus an applicable margin determined based on outstanding borrowing under the Working Capital Facility. In addition, we are required to pay a commitment fee on the amount unused under the Working Capital Facility. The Working Capital Facility expires on the earlier of (i) March 21, 2020 and (ii) the date on which all commitments under the Floor Plan Working Capital Facility shall have terminated, whether as a result of the occurrence of the Commitment Termination Date (as defined in the Floor Plan Working Capital Facility) or otherwise. There were no advances outstanding under the Working Capital Facility as of June 30, 2018.
Our long-term real estate debt, floor plan financing agreements and the Working Capital Facility require us to satisfy various financial ratios such as the debt-to-worth ratio, leverage ratio and the fixed charge coverage ratio and certain requirements for tangible net worth and GAAP net worth. As of June 30, 2018, we were in compliance with all debt covenants related to debt secured by real estate, lease and rental units, our floor plan credit agreements and the Working Capital Facility. We do not anticipate any breach of the covenants in the foreseeable future.
We expect to purchase or lease trucks worth approximately $165.0 million to $190.0 million for our leasing operations during 2018, depending on customer demand, all of which will be financed. We also expect to make capital expenditures for recurring items such as computers, shop tools and equipment and vehicles of approximately $25.0 million to $30.0 million during 2018.
We are currently under contract to construct a new facility in Atlanta, Georgia at an estimated cost of $8.6 million.
On July 24, 2018, our Board of Directors authorized the Company to initiate a quarterly cash dividend as part of its capital allocation strategy. Accordingly, on July 24, 2018, our Board of Directors declared an initial quarterly cash dividend of $0.12 per share of Class A and Class B Common Stock, to be paid on August 29, 2018, to all shareholders of record as of August 8, 2018. The total dividend disbursement is estimated at approximately $4.7 million.
On November 30, 2017, we announced that our Board of Directors authorized the repurchase, from time to time, of up to an aggregate of $40.0 million shares of Class A Common Stock and/or Class B Common Stock. On March 14, 2018, we announced that our Board of Directors approved an increase of $35.0 million to our existing stock purchase program, up to an aggregate of $75.0 million of our shares of Class A Common Stock and/or Class B Common Stock. 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. The stock repurchase program expires on November 29, 2018, 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 June 30, 2018. However, we will continue to purchase vehicles for our lease and rental division and authorize capital expenditures for improvement and expansion of our existing dealership facilities and construction or purchase of new facilities based on market opportunities.
Cash Flows
Cash and cash equivalents increased by $23.8 million during the six months ended June 30, 2018, and increased by $41.8 million during the six months ended June 30, 2017. The major components of these changes are discussed below.
Cash Flows from Operating Activities
Cash flows from operating activities include net income adjusted for non-cash items and the effects of changes in working capital. During the first six months of 2018, operating activities resulted in net cash provided by operations of $190.0 million. Net cash provided by operating activities primarily consisted of $50.4 million in net income, as well as non-cash adjustments related to depreciation and amortization of $101.0 million, stock-based compensation of $13.8 million and the provision for deferred income tax expense of $4.8 million. Cash provided by operating activities included an aggregate of $20.3 million net change in operating assets and liabilities. Included in the net change in operating assets and liabilities were cash inflows of $33.6 million from increases in accounts payable and accrued liabilities, $4.7 million from an increase in customer deposits and $71.3 million from the net increase in floor plan, trade which were offset by cash outflows of $65.6 million from increases in inventory and $22.8 million from the increase in accounts receivable. The majority of commercial vehicle inventory is financed through our floor plan credit agreements.
During the first six months of 2017, operating activities resulted in net cash provided by operations of $130.7 million. Net cash provided by operating activities primarily consisted of $36.5 million in net income, as well as non-cash adjustments related to depreciation and amortization of $77.7 million and stock-based compensation of $8.7 million. Cash provided by operating activities included an aggregate of $5.3 million net change in operating assets and liabilities. Included in the net change in operating assets and liabilities were cash inflows of $7.1 million from the decrease in accounts receivable, $19.5 million from increases in accounts payable and accrued liabilities, $11.3 million from an increase in customer deposits and $21.0 million from the net increase in floor plan, trade which were offset by cash outflows of $52.4 million from increases in inventory. The majority of commercial vehicle inventory is financed through our floor plan credit agreements.
In June 2012, we entered into a wholesale financing agreement with Ford Motor Credit Company that provides for the financing of, and is collateralized by, our Ford new vehicle inventory. This wholesale financing agreement bears interest at a rate of Prime plus 150 basis points minus certain incentives and rebates. As of June 30, 2018, the interest rate on the wholesale financing agreement was 6.50% before considering the applicable incentives. As of June 30, 2018, we had an outstanding balance of approximately $133.8 million under the Ford Motor Credit Company wholesale financing agreement.
Cash Flows from Investing Activities
During the first six months of 2018, cash used in investing activities was $112.5 million. Cash flows used in investing activities consists primarily of cash used for capital expenditures. Capital expenditures were $116.2 million during the first six months of 2018 and consisted primarily of purchases of property and equipment and improvements to our existing dealership facilities. Property and equipment purchases during the first six months of 2018 included $73.8 million for additional units for the rental and leasing operations, which were directly offset by borrowings of long-term debt. We expect to purchase or lease trucks worth approximately $165.0 million to $190.0 million for our rental and leasing operations in 2018, depending on customer demand, all of which will be financed. During 2018, we expect to make capital expenditures for recurring items such as computers, shop equipment and vehicles of $25.0 million to $30.0 million.
During the first six months of 2017, cash used in investing activities was $71.2 million. Cash flows used in investing activities consist primarily of cash used for capital expenditures. Capital expenditures were $79.6 million during the first six months of 2018 and consisted primarily of purchases of property and equipment and improvements to our existing dealership facilities. Property and equipment purchases during the first six months of 2018 included $56.2 million for additional units for the rental and leasing operations, which were directly offset by borrowings of long-term debt.
Cash Flows from Financing Activities
Cash flows from financing activities include borrowings and repayments of long-term debt and net proceeds of floor plan notes payable, non-trade.
During the first six months of 2018, we used $53.7 million in net cash from financing activities, primarily related to $95.7 million used for principal repayments of long-term debt and capital lease obligations and $45.9 million used for repurchases of common stock. These cash outflows were partially offset by $18.1 million from net draws on floor plan notes payable, non-trade, borrowings of $68.3 million of long-term debt, and $1.6 million from the issuance of shares related to equity compensation plans. The borrowings of long-term debt were primarily related to purchasing units for the rental and leasing operations.
During the first six months of 2017, we used $17.8 million in net cash from financing activities, primarily related to $81.0 million used for principal repayments of long-term debt and capital lease obligations and $24.4 million used for repurchases of common stock. These cash outflows were partially offset by $24.2 million from net draws on floor plan notes payable, non-trade, borrowings of $51.1 million of long-term debt, and $12.8 million from the issuance of shares related to equity compensation plans. The borrowings of long-term debt were primarily related to purchasing units for the rental and leasing operations.
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. We finance the majority of all new commercial vehicle inventory and the loan value of our used commercial vehicle inventory under the Floor Plan Credit Agreement. The Floor Plan Credit Agreement includes an aggregate loan commitment of $875.0 million. Borrowings under the Floor Plan Credit Agreement bear interest at an annual rate equal to (A) the greater of (i) zero and (ii) three month LIBOR rate, determined on the last day of the prior month, plus (B) 1.51% and are payable monthly. In addition, we are required to pay a monthly working capital fee equal to 0.16% per annum multiplied by the amount of voluntary prepayments of new and used inventory loans. Loans under the Floor Plan Credit Agreement for the purchase of used inventory are limited to $150.0 million. We may terminate the Floor Plan Credit Agreement at any time, although if we do so we must pay a prepayment processing fee equal to 1.0% of the aggregate revolving loan commitments if such termination occurs after July 1, 2018 and prior to June 30, 2019, subject to specified limited exceptions. On June 30, 2018, we had approximately $665.8 million outstanding under the Floor Plan Credit Agreement. The average daily outstanding borrowings under the Floor Plan Credit Agreement were $646.0 million during the quarter ended June 30, 2018. 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 days. If the commercial vehicle is not sold within the interest-free period, we then finance the commercial vehicle under the Floor Plan Credit Agreement.
Backlog
On June 30, 2018, our backlog of commercial vehicle orders was approximately $1,719.1 million, compared to a backlog of commercial vehicle orders of approximately $1,127.5 million on June 30, 2017. Our backlog is determined quarterly by multiplying the number of new commercial vehicles for each particular type of commercial vehicle ordered by a customer at our Rush Truck Centers by the recent average selling price for that type of commercial vehicle. We include only confirmed orders in our backlog. However, such orders are subject to cancellation. In the event of order cancellation, we have no contractual right to the total revenues reflected in our backlog. The delivery time for a custom-ordered commercial vehicle varies depending on the truck specifications and demand for the particular model ordered. We sell the majority of our new heavy-duty commercial vehicles by customer special order and we sell the majority of our medium- and light-duty commercial vehicles out of inventory. Orders from a number of our major fleet customers are included in our backlog as of June 30, 2018 and we expect to fill our backlog orders during the remainder of 2018 and the first quarter of 2019.
Seasonality
Our Truck Segment is moderately seasonal. Seasonal effects on new commercial vehicle sales related to the seasonal purchasing patterns of any single customer type are mitigated by the diverse geographic locations of our dealerships and our diverse customer base, including regional and national fleets, local and state governments, corporations and owner-operators. However, commercial vehicle parts and service operations historically have experienced higher sales volumes in the second and third quarters.
Cyclicality
Our business is dependent on a number of factors including general economic conditions, fuel prices, interest rate fluctuations, credit availability, environmental and other government regulations and customer business cycles. Unit sales of new commercial vehicles have historically been subject to substantial cyclical variation based on these general economic conditions. According to data published by A.C.T. Research, in recent years, total U.S. retail sales of new Class 8 commercial vehicles have ranged from a low of approximately 97,000 in 2009, to a high of approximately 253,000 in 2015. 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.
Off-Balance Sheet Arrangements
Other than operating leases, we do not have any obligation under any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the Company is a party, that has or is reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Environmental Standards and Other Governmental Regulations
We are subject to federal, state and local environmental laws and regulations governing the following: discharges into the air and water; the operation and removal of underground and aboveground storage tanks; the use, handling, storage and disposal of hazardous substances, petroleum and other materials; and the investigation and remediation of environmental impacts. As with commercial vehicle dealerships generally, and vehicle service, parts and body shop operations in particular, our business involves the generation, use, storage, handling and contracting for recycling or disposal of hazardous materials or wastes and other environmentally sensitive materials. We have incurred, and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations.
Our operations involving the use, handling, storage and disposal of hazardous and nonhazardous materials are subject to the requirements of the federal Resource Conservation and Recovery Act, or RCRA, and comparable state statutes. Pursuant to these laws, federal and state environmental agencies have established approved methods for handling, storage, treatment, transportation and disposal of regulated substances with which we must comply. Our business also involves the operation and use of aboveground and underground storage tanks. These storage tanks are subject to periodic testing, containment, upgrading and removal under RCRA and comparable state statutes. Furthermore, investigation or remediation may be necessary in the event of leaks or other discharges from current or former underground or aboveground storage tanks.
We may also have liability in connection with materials that were sent to third-party recycling, treatment, or disposal facilities under the federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, and comparable state statutes. These statutes impose liability for investigation and remediation of environmental impacts without regard to fault or the legality of the conduct that contributed to the impacts. Responsible parties under these statutes may include the owner or operator of the site where impacts occurred and companies that disposed, or arranged for the disposal, of the hazardous substances released at these sites. These responsible parties also may be liable for damages to natural resources. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances or other materials into the environment.
The federal Clean Water Act and comparable state statutes require containment of potential discharges of oil or hazardous substances, and require preparation of spill contingency plans. Water quality protection programs govern certain discharges from some of our operations. Similarly, the federal Clean Air Act and comparable state statutes regulate emissions of various air emissions through permitting programs and the imposition of standards and other requirements.
The Environmental Protection Agency (“EPA”) and the National Highway Traffic Safety Administration (“NHTSA”), on behalf of the U.S. Department of Transportation, issued rules associated with reducing greenhouse gas (“GHG”) emissions and improving the fuel efficiency of medium and heavy-duty trucks and buses for model years 2021 through 2027. We do not believe that these rules will negatively impact our business, however, future legislation or other new regulations that may be adopted to address GHG emissions or fuel efficiency standards may negatively impact our business. Additional regulations could result in increased compliance costs, additional operating restrictions or changes in demand for our products and services, which could have a material adverse effect on our business, financial condition and results of operations.
We do not believe that we currently have any material environmental liabilities or that compliance with environmental laws and regulations will have a material adverse effect on our results of operations, financial condition or cash flows. However, soil and groundwater impacts are known to exist at some of our dealerships. Further, environmental laws and regulations are complex and subject to change. In addition, in connection with acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. In connection with our dispositions, or prior dispositions made by companies we acquire, we may retain exposure for environmental costs and liabilities, some of which may be material. Compliance with current or amended, or new or more stringent, laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions could require additional expenditures by us, and those expenditures could be material.