RUSH ENTERPRISES INC TX Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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, as well as statements regarding
the effects COVID-19 may have on our business and financial results. These
forward-looking statements reflect the best judgments of the Company about the
future events and trends based on the beliefs of the Company’s management as
well as assumptions made by and information currently available to the Company’s
management. Use of the words “may,” “should,” “continue,” “plan,” “potential,”
“anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases
of similar import, as they relate to the Company or its subsidiaries or Company
management, are intended to identify forward-looking statements but are not the
exclusive means of identifying such statements. Forward-looking statements
reflect our current view of the Company with respect to future events and are
subject to risks and uncertainties that could cause actual results to differ
materially from those in such statements. Please read Item 1A. “Risk Factors” in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2021,
for a discussion of certain of those risks. Other unknown or unpredictable
factors could also have a material adverse effect on future results. Although
the Company believes that its expectations are reasonable as of the date of this
Form 10-Q, it can give no assurance that such expectations will prove to be
correct. The Company does not intend to update or revise any forward-looking
statements unless securities laws require it to do so, and the Company
undertakes no obligation to publicly release any revisions to forward-looking
statements, whether because of new information, future events or otherwise.

The following comments should be read in conjunction with the Company’s
consolidated financial statements and related notes included elsewhere in this
Quarterly Report on Form 10-Q.

Note Regarding Trademarks Commonly Used in the Company’s Filings

Peterbilt® is a registered trademark 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. Blue Bird® is a registered
trademark of Blue Bird Investment Corporation. IC Bus® is a registered trademark
of IC Bus, LLC. Hino® is a registered trademark of Hino Motors, Ltd. Isuzu® is a
registered trademark of Isuzu Motors Limited. Ford Motor Credit Company® is a
registered trademark of Ford Motor Company. Ford® is a registered trademark of
Ford Motor Company. Cummins® is a registered trademark of Cummins, Inc. This
report contains additional trade names or trademarks of other companies. Our use
of such trade names or trademarks should not imply any endorsement or
relationship with such companies.



General


Rush Enterprises, Inc. was incorporated in Texas in 1965 and consists of one
reportable segment, the Truck Segment, and conducts business through its
subsidiaries. Our principal offices are located at 555 IH 35 South, Suite 500,
New Braunfels, Texas 78130.

We are a full-service, integrated retailer of commercial vehicles and related
services. The Truck Segment includes our operation of a network of commercial
vehicle dealerships under the name “Rush Truck Centers.” Rush Truck Centers primarily sell commercial vehicles manufactured by Peterbilt, International,
Hino, Ford, Isuzu, 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 125 franchised Rush Truck Centers in 23 states. In 2019, we purchased a 50% equity interest in an entity in
Canada, Rush Truck Centres of Canada Limited (“RTC Canada”), which currently
owns and operates 15 International dealership locations in Ontario, Canada.

Our business strategy consists of providing solutions to the commercial vehicle
industry through our network of commercial vehicle dealerships. We offer an
integrated approach to meeting customer needs by providing service, parts and
collision repairs in addition to new and used commercial vehicle sales and
leasing, plus financial services, vehicle upfitting, CNG fuel systems through
our joint venture with Cummins and vehicle telematics products. We intend to
continue to implement our business strategy, reinforce customer loyalty and
remain a market leader by continuing to develop our Rush Truck Centers as we
expand our product offerings and extend our dealership network through strategic
acquisitions of new locations and opening new dealerships to enable us to better
serve our customers.




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The COVID-19 Pandemic and Its Impact on Our Business

While the COVID-19 pandemic may not be over, business conditions have improved
significantly since the onset of the pandemic in the second quarter of 2020.
However, our industry continues to be impacted by supply chain issues generally
believed to be attributable to the COVID-19 pandemic that are negatively
affecting new commercial vehicle production and the availability of aftermarket
parts.




Outlook



A.C.T. Research Co., LLC (“A. C.T. Research“), a commercial vehicle industry
data and forecasting service provider, currently forecasts new U.S. Class 8
retail truck sales to be 244,500 units in 2022, which would represent a 7.5%
increase compared to 2021. We expect our market share of new Class 8 truck sales
to range between 5.8% and 6.1% in 2022. This market share percentage would
result in the sale of approximately 14,300 to 15,000 new Class 8 trucks in 2022,
based on A.C.T. Research’s current U.S. retail sales estimate of 244,500 units.

With respect to new U.S. Class 4-7 retail commercial vehicle sales, A.C.T.
Research
currently forecasts sales to be 263,200 units in 2022, which would
represent a 5.6% increase compared to 2021. We expect our market share of new
Class 4 through 7 commercial vehicle sales to range between 4.0% and 4.2% in
2022. This market share percentage would result in the sale of approximately
10,500 to 11,000 new Class 4 through 7 commercial vehicles in 2022, based on
A.C.T. Research’s current U.S. retail sales estimates of 263,200 units.

We expect to sell approximately 1,700 light-duty vehicles and approximately
7,800 to 8,200 used commercial vehicles in 2022. We expect lease and rental
revenue to increase 25% to 30% during 2022, compared to 2021.

We believe our Aftermarket Products and Services revenues will increase 20% to
25% in 2022, compared to 2021.

The above projections for new commercial vehicle sales will depend on our
ability to obtain commercial vehicles from the manufacturers we represent based
on allocations from the manufacturers and supply chain issues affecting
manufacturers. In addition, we are beginning to see elevated fuel prices and
lower spot market rates and believe inflation and rising interest rates may
begin to negatively impact consumer spending and capital expenditures across a
variety of industries we support. We are monitoring these and other economic
factors that may impact industry demand moving forward. However, with the
ongoing integration of our strategic initiatives into our newly acquired
dealership locations, and our continued disciplined approach to expense
management, we believe our financial results will continue to be strong in 2022.

In addition, all of the above projections for new commercial vehicle sales,
lease and rental revenues and Aftermarket Products and Services revenues include
the dealership and Idealease locations that we acquired on December 13, 2021,
when we completed the acquisition of certain of the assets of the of Summit
Truck Group, LLC
and certain of its subsidiaries and affiliates (collectively,
“Summit”), which included full-service commercial vehicle dealerships and
Idealease franchises in Arkansas, Kansas, Missouri, Tennessee and Texas (the
“Summit Acquisition”). The Summit Acquisition included Summit’s dealerships
representing International, IC Bus, Idealease, Isuzu and other commercial
vehicle manufacturers.

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.




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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 recorded 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 test goodwill for impairment annually in the fourth quarter, or
whenever events or changes in circumstances indicate an impairment may have
occurred. Because we operate a single reporting unit, the Truck Segment, the
impairment test is performed at that level by comparing the estimated fair value
of the reporting unit to the carrying value of the reporting unit. We estimate
the fair value of the reporting unit using a “step one” analysis utilizing a
fair-value-based approach that uses a discounted cash flow analysis of projected
future results to determine if it is more likely than not that the fair value of
a reporting unit is less than its carrying amount. Determining the fair value of
goodwill is subjective in nature and often involves the use of estimates and
assumptions including, without limitation, use of estimates of future prices and
volumes for our products, capital needs, economic trends and other factors which
are inherently difficult to forecast. If actual results, or the plans and
estimates used in future impairment analyses are lower than the original
estimates used to assess the recoverability of these assets, we could incur
impairment charges in a future period. The annual impairment test was performed
in the fourth quarter of 2021. No impairment of goodwill was identified during
2021 and no circumstances or events occurred in the first quarter of 2022 that
would require a test for impairment.



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.




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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


We recognize revenue when our customer obtains control of promised goods or
services, in an amount that reflects the consideration which we expect to
receive in exchange for those goods or services. To determine revenue
recognition for arrangements that we determine are within the scope of ASU
2014-09, “Revenue from Contracts with Customers (“Topic 606”), we perform the
following five steps: (i) identify the contract with a customer; (ii) identify
the performance obligations in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the performance obligations in the
contract; and (v) recognize revenue when (or as) we satisfy a performance
obligation. We only apply the five-step model to contracts when it is probable
that we will collect the consideration we are entitled to in exchange for the
goods or services we transfer to the customer. At contract inception, once the
contract is determined to be within the scope of Topic 606, we assess the goods
or services promised within each contract and determine those that are
performance obligations. We then assess whether each promised good or service is
distinct and recognize as revenue the amount of the transaction price that is
allocated to the respective performance obligation when (or as) the performance
obligation is satisfied.



Leases


We lease commercial vehicles and real estate under finance and operating leases.
We determine whether an arrangement is a lease at its inception. For leases with
terms greater than twelve months, we record a lease asset and liability at the
present value of lease payments over the term. Many of our leases include
renewal options and termination options that are factored into our determination
of lease payments when appropriate.

When available, we use the rate implicit in the lease to discount lease payments
to present value; however, most of our leases do not provide a readily
determinable implicit rate. Therefore, we must estimate our incremental
borrowing rate to discount the lease payments based on information available at
lease commencement.

We lease commercial vehicles that we own to customers. Lease and rental revenue
is recognized over the period of the related lease or rental agreement. Variable
rental revenue is recognized when it is earned.



Allowance for Credit Losses


All trade receivables are reported on the consolidated balance sheet at their
cost basis adjusted for any write-offs and net of allowances for credit losses.
We maintain allowances for credit losses, which represent an estimate of
expected losses over the remaining contractual life of our receivables after
considering current market conditions and estimates for supportable forecasts,
when appropriate. The estimate is a result of our ongoing assessments and
evaluations of collectability, historical loss experience, and future
expectations in estimating credit losses in each of our receivable portfolios
(commercial vehicle receivables, manufacturers’ receivables, parts and service
receivables, leasing receivables and other trade receivables). For trade
receivables, we use the probability of default and our historical loss
experience rates by portfolio and apply them to a related aging analysis while
also considering customer and economic risk where appropriate. Determination of
the proper amount of allowances by portfolio requires us to exercise our
judgment about the timing, frequency and severity of credit losses that could
materially affect the provision for credit losses and, as a result, net
earnings. The allowances take into consideration numerous quantitative and
qualitative factors that include receivable type, historical loss experience,
collection experience, current economic conditions, estimates for supportable
forecasts (when appropriate) and credit risk characteristics.




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Results of Operations


The following discussion and analysis includes our historical results of
operations for the three months ended March 31, 2022 and 2021.




The following table sets forth certain financial data as a percentage of total
revenues:



                                          Three Months Ended March 31,
                                            2022                2021

New and used commercial vehicle sales            59.9 %              60.7 %
Parts and service sales                          34.7                33.8
Lease and rental                                  4.6                 4.7
Finance and insurance                             0.5                 0.5
Other                                             0.3                 0.3
Total revenues                                  100.0               100.0
Cost of products sold                            77.9                80.1
Gross profit                                     22.1                19.9
Selling, general and administrative              14.4                14.2
Depreciation and amortization                     0.8                 1.1
Gain on sale of assets                            0.0                 0.0
Operating income                                  6.8                 4.6
Other income                                      0.9                 0.0
Interest expense, net                             0.1                 0.0
Income before income taxes                        7.7                 4.6
Provision for income taxes                        1.8                 0.9
Net income                                        5.9 %               3.7 %




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



                                          Three Months Ended March 31,
                                            2022                2021
Gross Profit:
New and used commercial vehicle sales            29.2 %              28.9 %
Parts and service sales                          60.5                62.9
Lease and rental                                  6.6                 4.1
Finance and insurance                             2.2                 2.6
Other                                             1.5                 1.5
Total gross profit                              100.0 %             100.0 %




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The following table sets forth the unit sales and revenues for new heavy-duty,
new medium-duty, new light-duty and used commercial vehicles and the absorption
ratio (revenue in millions):



                                 Three Months Ended
                                      March 31,
                                  2022          2021        % Change
Vehicle unit sales:
New heavy-duty vehicles             3,528        2,995           17.8 %
New medium-duty vehicles            2,141        2,334           -8.3 %
New light-duty vehicles               481          395           21.8 %
Total new vehicle unit sales        6,150        5,724            7.4 %

Used vehicles                       2,395        1,924           24.5 %

Vehicle revenues:
New heavy-duty vehicles        $    546.1      $ 450.0           21.4 %
New medium-duty vehicles            178.0        188.2           -5.4 %
New light-duty vehicles              23.8         18.4           29.3 %
Total new vehicle revenue      $    747.9      $ 656.6           13.9 %

Used vehicle revenue           $    185.7      $  88.3          110.3 %

Other vehicle revenues:(1)     $      2.1      $   2.8          -25.0 %

Dealership absorption ratio:        136.3 %      122.6 %         11.4 %

(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 our Aftermarket Products and Services departments by the
overhead expenses of all of a dealership’s departments, except for the selling
expenses of the new and used commercial vehicle departments and carrying costs
of new and used commercial vehicle inventory. When 100% absorption is achieved,
all of the gross profit from the sale of a commercial vehicle, after sales
commissions and inventory carrying costs, directly impacts operating profit. Our
commercial vehicle dealerships achieved a 136.3% absorption ratio for the first
quarter of 2022, compared to a 122.6% absorption ratio for the first quarter of
2021.

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021



Revenues


Total revenues increased $331.4 million, or 26.9%, in the first quarter of 2022,
compared to the first quarter of 2021. This increase was primarily the result of
continued recovery of the national economy, strong demand for new and used
commercial vehicle and the Summit Acquisition, which increased revenues across
all areas of our business.

Our Aftermarket Products and Services revenues increased $127.5 million, or
30.7%, in the first quarter of 2022, compared to the first quarter of 2021. Our
Aftermarket Parts and Services continue to benefit from a strong national
economy.

Revenues from sales of new and used commercial vehicles increased
$188.0 million, or 25.1%, in the first quarter of 2022, compared to the first
quarter of 2021. The strong national economy, which led to historically high
freight rates throughout the country, continues to maintain strong demand for
commercial vehicles.

We sold 3,528 new Class 8 trucks in the first quarter of 2022, a 17.8% increase
compared to 2,995 new Class 8 trucks in the first quarter of 2021. This increase
in new Class 8 truck sales was primarily a result of the Summit Acquisition.

We sold 2,141 new Class 4 through 7 commercial vehicles, including 193 buses, in
the first quarter of 2022, a 8.3% decrease compared to 2,334 new medium-duty
commercial vehicles, including 140 buses, in the first quarter of 2021. Our new
Class 4 through 7 commercial vehicle sales were negatively impacted by new
commercial vehicle production constraints that affected the manufacturers we
represent.




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We sold 481 new light-duty vehicles in the first quarter of 2022, a 21.8%
increase compared to 395 new light-duty vehicles in the first quarter of 2021.
Our light-duty vehicle sales benefited from the increased demand for light-duty
vehicles in the U.S.

We sold 2,395 used commercial vehicles in the first quarter of 2022, a 24.5%
increase compared to 1,924 used commercial vehicles in the first quarter of
2021. Demand for used commercial vehicles remained strong in the first quarter
of 2022. However, the number of used commercial vehicles we will be able to sell
in 2022 depends on our ability to acquire quality used commercial vehicle
inventory. We believe used truck demand and values will decrease when new truck
production increases to a level adequate to meet customer demand; however, we
believe demand for used trucks will remain strong throughout 2022.

Commercial vehicle lease and rental revenues increased $13.1 million, or 22.5%,
in the first quarter of 2022, compared to the first quarter of 2021. The
increase was partly due to increased rental fleet utilization and strong demand
for vehicles to lease, which was impacted by the limited supply of new
commercial vehicles.

Finance and insurance revenues increased $1.1 million, or 16.4%, in the first
quarter of 2022, compared to the first quarter of 2021. The increase in finance
and insurance revenues was partially due to sales of finance and insurance
products to a higher percentage of new and used commercial vehicle purchasers in
the first quarter of 2022. Finance and insurance revenues have limited direct
costs and, therefore, contribute a disproportionate share of our operating
profits.

Other income increased $1.7 million, or 46.5%, in the first quarter of 2022,
compared to the first quarter of 2021. Other income consists primarily of
document fees related to commercial vehicle sales.



Gross Profit


Gross profit increased $100.6 million, or 41.1%, in the first quarter of 2022,
compared to the first quarter of 2021. Gross profit as a percentage of sales
increased to 22.1% in the first quarter of 2022, from 19.9% in the first quarter
of 2021. This increase in gross profit as a percentage of sales is a result of
increased gross margins related to new and used commercial vehicle sales and an
increase in Aftermarket Products and Services as a percentage of our overall
product sales mix.

Gross margins from our Aftermarket Products and Services operations increased to
38.5% in the first quarter of 2022, compared to 37.0% in the first quarter of
2021. This increase is primarily related increases in parts pricing and
increases in parts rebates from parts suppliers. Gross profit from our
Aftermarket Products and Services operations increased to $209.1 million in the
first quarter of 2022, from $153.9 million in the first quarter of 2021.
Historically, gross margins on parts sales range from 28% to 30% and gross
margins on service and collision center operations range from 66% to 68%. Gross
profits from parts sales represented 62.5% of total gross profit for Aftermarket
Products and Services operations in the first quarter of 2022 and 59.5% in the
first quarter of 2021. Service and collision center operations represented 37.5%
of total gross profit for Aftermarket Products and Services operations in the
first quarter of 2022 and 40.5% in the first quarter of 2021. We expect blended
gross margins on Aftermarket Products and Services operations to range from
37.5% to 38.5% in 2022.

Gross margins on new Class 8 truck sales increased to 9.7% in the first quarter
of 2022, from 8.9% in the first quarter of 2021. This increase is primarily due
to strong demand for new Class 8 trucks and the mix of purchasers during the
first quarter of 2022. In 2022, we expect overall gross margins from new
heavy-duty truck sales of approximately 8.0% to 9.5%.

Gross margins on new Class 4 through 7 commercial vehicle sales increased to
8.6% in the first quarter of 2022, from 7.1% in the first quarter of 2021. This
increase is primarily due to the mix of purchasers during the first quarter of
2022 and strong demand for new Class 4 through 7 commercial vehicles. For 2022,
we expect overall gross margins from new medium-duty commercial vehicle sales of
approximately 7.5% to 8.5%, but this will largely depend upon the mix of
purchasers and types of vehicles sold.

Gross margins on used commercial vehicle sales decreased to 15.9% in the first
quarter of 2022, from 18.1% in the first quarter of 2021. This decrease is
primarily due to a softening in used truck values as new Class 8 vehicle
production begins to increase. We expect margins on used commercial vehicles to
gradually decrease throughout 2022 as new commercial vehicle production
increases and reach their historical range between 8.0% and 10.0% by the end of
2022.




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Gross margins from truck lease and rental sales increased to 31.9% in the first
quarter of 2022, from 17.5% in the first quarter of 2021. This increase is
primarily related to increased rental fleet utilization and changes to the way
we finance commercial vehicles for our lease and rental fleet. In September of
2021, we entered into a credit agreement (“the WF Credit Agreement”) with the
lenders signatory thereto (the “WF Lenders”) and Wells Fargo Bank, National
Association
(“WF”), as Administrative Agent (in such capacity, the “WF Agent”)
that allows us to finance a portion of our Idealease lease and rental fleet
through a general borrowing facility. In October of 2021, we entered into that
certain Amended and Restated Inventory Financing and Purchase Money Security
Agreement with PLC, a division of PACCAR Financial Corp. (the “PLC Agreement”)
in the amount of $300.0 million to be used in connection with the acquisition of
PacLease lease and rental fleet vehicles. The interest associated with the WF
Credit Agreement and the PLC Agreement is recorded in interest expense on the
Consolidated Statement of Income. Prior to the WF Credit Agreement and the PLC
Agreement, interest expense associated with our lease and rental fleet purchases
was recorded in cost of sales because each borrowing was directly related to
each lease and rental vehicle purchased. This change in the structure of
financing of our lease and rental fleet results in increased gross margins from
our commercial vehicle lease and rental sales. We expect gross margins from
lease and rental sales of approximately 31.0% to 33.0% during 2022. Our policy
is to depreciate our lease and rental fleet using a straight-line method over
each customer’s contractual lease term. The lease unit is depreciated to a
residual value that approximates fair value at the expiration of the lease term.
This policy results in us realizing reasonable gross margins while the unit is
in service and a corresponding gain or loss on sale when the unit is sold at the
end of the lease term.

Finance and insurance revenues and other income, as described above, have
limited direct costs and, therefore, contribute a disproportionate share of
gross profit.

Selling, General and Administrative Expenses

Selling, General and Administrative (“SG&A”) expenses increased $49.5 million,
or 28.3%, in the first quarter of 2022, compared to the first quarter of 2021.
This increase primarily resulted from increased personnel expense and increased
selling expense, compared to the first quarter of 2021, and in addition,
increased general and administrative expense associated with the Summit
Acquisition. SG&A expenses as a percentage of total revenues increased to 14.4%
in the first quarter of 2022, from 14.2% in the first quarter of 2021. Annual
SG&A expenses as a percentage of total revenues have ranged from approximately
12.4% to 14.3% over the last five years. In general, when new and used
commercial vehicle revenues decrease as a percentage of total revenues, SG&A
expenses as a percentage of total revenues will be at the higher end of this
range. For 2022, we expect SG&A expenses as a percentage of total revenues to
range from 13.0% to 14.0%, due to the increase in revenues from sales of new and
used commercial vehicles and Aftermarket Products and Services revenues. We
expect the selling portion of SG&A expenses to be approximately 25.0% to 30.0%
of new and used commercial vehicle gross profit.



Interest Expense, Net


Net interest expense increased $0.7 million, or 140.4%, in the first quarter of
2022, compared to the first quarter of 2021. This increase in interest expense
is a result of the increase in inventory levels compared to 2021. We expect net
interest expense in 2022 to increase due to interest related to lease and rental
borrowings, but the amount of the increase will depend on inventory levels,
interest rate fluctuations and the amount of cash available to make prepayments
on our floor plan arrangements.



Income before Income Taxes


As a result of the factors described above, income from continuing operations
before income taxes increased $63.7 million, or 112.5%, in the first quarter of
2022, compared to the first quarter of 2021.



Income Taxes


Income taxes increased $16.6 million, or 146.7%, in the first quarter of 2022,
compared to the first quarter of 2021. We provided for taxes at a 23.2%
effective rate in the first quarter of 2022 and 20.0% in the first quarter of
2021. The tax rate in the first quarter of 2021 was primarily impacted by the
tax benefit related to the gain associated with vesting and exercise of equity
awards granted through our long-term incentive plan. We expect our effective tax
rate to be approximately 23.0% to 24.0% of pretax income in 2022.

Liquidity and Capital Resources

Our short-term cash requirements are primarily for working capital, inventory
financing, the renovation and expansion of existing facilities and the
construction or purchase of new facilities. Historically, these cash
requirements have been met through the retention of profits, borrowings under
our floor plan arrangements and bank financings. As of March 31, 2022, we had
working capital of approximately $394.9 million, including $209.5 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 floor
plan 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.




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We continually evaluate our liquidity and capital resources based upon: (i) our
cash and cash equivalents on hand; (ii) the funds that we expect to generate
through future operations; (iii) current and expected borrowing availability
under our secured line of credit, working capital lines of credit available
under certain of our credit agreements and our Floor Plan Credit Agreement; and
(iv) the potential impact of our capital allocation strategy and any
contemplated or pending future transactions, including, but not limited to,
acquisitions, equity repurchases, dividends, or other capital expenditures. We
believe we will have sufficient liquidity to meet our debt service and working
capital requirements, commitments and contingencies, debt repayments,
acquisitions, capital expenditures and any operating requirements for at least
the next twelve months.

We have a secured line of credit that provides for a maximum borrowing of $15.0
million
. There were no advances outstanding under this secured line of credit on
March 31, 2022, however, $14.3 million was pledged to secure various letters of
credit related to self-insurance products, leaving $0.7 million available for
future borrowings as of March 31, 2022.

Our long-term debt, floor plan financing agreements and the WF Credit Agreement
require us to satisfy various financial ratios such as the leverage ratio, the
asset coverage ratio and the fixed charge coverage ratio. As of March 31, 2022,
we were in compliance with all debt covenants related to debt secured by lease
and rental units, our floor plan credit agreements and the WF Credit Agreement.
We do not anticipate any breach of the covenants in the foreseeable future.

We expect to purchase or lease commercial vehicles worth approximately $150.0
million
to $170.0 million for our leasing operations during 2022, depending on
customer demand, most of which will be financed. We also expect to make capital
expenditures for the purchase of recurring items such as computers, shop tools
and equipment and company vehicles of approximately $35.0 million to $40.0
million
during 2022.

During the first quarter of 2022, we paid a cash dividend of $11.1 million.
Additionally, on April 26, 2022, our Board of Directors declared a cash dividend
of $0.19 per share of Class A and Class B Common Stock, to be paid on June 10,
2022
, to all shareholders of record as of May 12, 2022. The total dividend
disbursement is estimated at approximately $10.5 million. We expect to continue
paying cash dividends on a quarterly basis. However, there is no assurance as to
future dividends because the declaration and payment of such dividends is
subject to the business judgment of our Board of Directors and will depend on
historic and projected earnings, capital requirements, covenant compliance and
financial conditions and such other factors as our Board of Directors deem
relevant.

On November 30, 2021, we announced that our Board of Directors approved a new
stock repurchase program authorizing management to repurchase, from time to
time, up to an aggregate of $100.0 million of our shares of Class A Common Stock
and/or Class B Common Stock. In connection with the adoption of the new stock
repurchase plan, we terminated the prior stock repurchase plan, which was
scheduled to expire on December 31, 2021. Repurchases, if any, will be made at
times and in amounts as we deem appropriate and may be made through open market
transactions at prevailing market prices, privately negotiated transactions or
by other means in accordance with federal securities laws. The actual timing,
number and value of repurchases under the stock repurchase program will be
determined by management at its discretion and will depend on a number of
factors, including market conditions, stock price and other factors, including
those related to the ownership requirements of our dealership agreements with
Peterbilt. As of March 31, 2022, we had repurchased $20.2 million of our shares
of common stock under the current stock repurchase program. The current stock
repurchase program expires on December 31, 2022, and may be suspended or
discontinued at any time.

We anticipate funding the capital expenditures for the improvement and expansion
of existing facilities and recurring expenses through our operating cash flows.
We have the ability to fund the construction or purchase of new facilities
through our operating cash flows or by financing.

We have no other material commitments for capital expenditures as of March 31,
2022
. However, we will continue to purchase vehicles for our lease and rental
operations and authorize capital expenditures for the improvement or expansion
of our existing dealership facilities and construction or purchase of new
facilities based on market opportunities.



Cash Flows


Cash and cash equivalents increased by $61.4 million during the three months
ended March 31, 2022, and increased by $4.0 million during the three months
ended March 31, 2021. The major components of these changes are discussed below.

Cash Flows from Operating Activities

Cash flows from operating activities include net income adjusted for non-cash
items and the effects of changes in working capital. During the first quarter of
2022, operating activities resulted in net cash provided by operations of $34.6
million
. Net cash provided by operating activities primarily consisted of $92.5
million
in net income adjusted by the gain of $12.5 million related to the joint
venture transaction, as well as non-cash adjustments related to depreciation and
amortization of $45.8 million, deferred income tax benefit of $1.0 million and
stock-based compensation of $13.8 million. Cash provided by operating activities
included an aggregate of $101.7 million net change in operating assets and
liabilities. Included in the net change in operating assets and liabilities was
primarily cash outflows of $58.8 million from the increase in accounts
receivable, $98.3 million from the increase in inventory, $8.7 million from the
decrease in customer deposits, which were offset by cash inflows of $64.2
million
from the net increase in accounts payable and accrued liabilities. The
majority of our commercial vehicle inventory is financed through our floor plan
credit agreements.




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During the first quarter of 2021, operating activities resulted in net cash
provided by operations of $40.1 million. Net cash provided by operating
activities primarily consisted of $45.3 million in net income, as well as
non-cash adjustments related to depreciation and amortization of $42.6 million,
deferred income tax benefit of $8.4 million and stock-based compensation of
$11.5 million. Cash provided by operating activities included an aggregate of
$50.1 million net change in operating assets and liabilities. Included in the
net change in operating assets and liabilities was primarily cash outflows of
$14.7 million from the increase in accounts receivable, $1.8 million from the
increase in inventory, $0.7 million in the increase in other current assets,
$1.6 million from the net decrease in accounts payable and accrued liabilities,
$31.2 million from the decrease in customer deposits.

Cash Flows from Investing Activities

During the first quarter of 2022, cash used in investing activities totaled
$16.3 million. Cash flows used in investing activities consist primarily of cash
used for capital expenditures. Capital expenditures totaled $45.7 million during
the first quarter of 2022 and consisted primarily of purchases of property and
equipment, improvements to our existing dealership facilities and $27.8 million
for purchases of rental and lease vehicles for the rental and leasing
operations. The cash outflows were offset by the cash inflow of $27.5 million
related to Cummins, Inc.’s acquisition of a 50% equity interest in Momentum Fuel
Technologies.

During the first quarter of 2021, cash used in investing activities was $32.2
million
. Cash flows used in investing activities consist primarily of cash used
for capital expenditures. Capital expenditures of $32.9 million consisted
primarily of $8.3 million for purchases of property and equipment and
improvements to our existing dealership facilities and $24.6 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 quarter of 2022, financing activities provided $43.1 million in net
cash flow. Cash outflows were primarily related to $208.0 million used for
principal repayments of long-term debt and finance lease obligations, $14.4
million
used for the repurchase of our common stock and $11.1 million used for
the payment of cash dividends. These cash outflows were offset by cash inflows
related to borrowings of $207.5 million of long-term debt and $71.5 million used
for net draws on floor plan (non-trade).

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 quarter of 2021, financing activities used $4.0 million in net cash
flow. Cash outflows were primarily related to $46.8 million used for principal
repayments of long-term debt and capital lease obligations, $6.6 million used
for the repurchase of our common stock and $9.9 million used for the payment of
cash dividends. These cash outflows were offset by cash inflows related to
borrowings of $28.2 million of long-term debt and $38.5 million used for net
draws on floor plan (non-trade). The borrowings of long-term debt were related
to purchasing units for the rental and leasing operations.

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, the
WF Lenders have agreed to make up to $250.0 million of revolving credit loans
for certain of our capital expenditures, including commercial vehicle purchases
for 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 rate plus (i) 1.25% or (ii) 1.5%, depending on our consolidated
leverage ratio or (B) on or after the term SOFR transition date, the term SOFR
rate plus (i) 1.25% or (ii) 1.5%, depending on our consolidated leverage ratio.
The WF Credit Agreement expires on September 14, 2024, although, upon the
occurrence and during the continuance of an event of default, the WF Agent has
the right to, or upon the request of the required lenders must, terminate the
commitments and declare all outstanding principal and interest due and payable.
We may terminate the commitments at any time. On March 31, 2022, we had
approximately $153.4 million outstanding under the WF Credit Agreement.




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On October 1, 2021, we entered into the PLC Agreement. Pursuant to the terms of
the PLC Agreement, PLC agreed to make up to $300.0 million of revolving credit
loans to finance certain of our capital expenditures, including commercial
vehicle purchases and other equipment to be leased or rented through our
PacLease franchises. We may borrow, repay and reborrow amounts pursuant to the
PLC Agreement from time to time until the maturity date, provided, however, that
the outstanding principal amount on any date shall not exceed the borrowing
base. Advances under the PLC Agreement bear interest per annum, payable on the
fifth day of the following month, at our option, at either (A) the prime rate,
minus 1.55%, provided that the floating rate of interest is subject to a floor
of 0%, or (B) a fixed rate, to be determined between us and PLC in each instance
of borrowing at a fixed rate. The PLC Agreement expires on October 1, 2025,
although either party has the right to terminate the PLC Agreement at any time
upon 180 days written notice. If we terminate the PLC Agreement prior to October
1, 2025
, then all payments will be deemed to be voluntary prepayments subject to
a potential prepayment premium. On March 31, 2022, we had approximately $185.0
million
outstanding under the PLC Agreement.

Most of our commercial vehicle purchases are made on terms requiring payment to
the manufacturer within 15 days or less from the date the commercial vehicles
are invoiced from the factory. On September 14, 2021, we entered into Floor Plan
Credit Agreement with BMO Harris and the lenders signatory thereto. Prior to the
Floor Plan Credit Agreement, we financed the majority of all new commercial
vehicle inventory and the loan value of our used commercial vehicle inventory
under the Fourth Amended and Restated Floor Plan Credit Agreement with BMO
Harris and the majority of such financings will continue to occur under the
Floor Plan Credit Agreement. The Floor Plan Credit Agreement includes an
aggregate loan commitment of $1.0 billion. Borrowings under the Floor Plan
Credit Agreement bear interest at an annual rate equal to (A) the greater of (i)
zero and (ii) one month LIBOR rate, determined on the last day of the prior
month, plus (B) 1.10% and are payable monthly. Loans under the Floor Plan Credit
Agreement for the purchase of used inventory are limited to $150.0 million and
loans for working capital purposes are limited to $200.0 million. The Floor Plan
Credit Agreement expires September 14, 2026, although BMO Harris has the right
to terminate at any time upon 360 days written notice and we may terminate at
any time, subject to specified limited exceptions. On March 31, 2022, we had
approximately $591.4 million outstanding under the Floor Plan Credit Agreement.
The average daily outstanding borrowings under the Floor Plan Credit Agreement
were $522.8 million during the three months ended March 31, 2022. We utilize our
excess cash on hand to pay down our outstanding borrowings under the Floor Plan
Credit Agreement, and the resulting interest earned is recognized as an offset
to our gross interest expense under the Floor Plan Credit Agreement.

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.



Backlog


On March 31, 2022, our backlog of commercial vehicle orders was approximately
$3,441.4 million, compared to a backlog of commercial vehicle orders of
approximately $1,736.0 million on March 31, 2021. This increase in our backlog
is primarily due to production constraints experienced by the manufacturers we
represent. Our backlog is determined quarterly by multiplying the number of new
commercial vehicles for each particular type of commercial vehicle ordered by a
customer at 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 March 31, 2022, and we expect to
fill the majority of our backlog orders during 2022, assuming that the
manufacturers we represent can meet their current production schedule. Our
current backlog is the largest it has ever been in our Company’s history. Given
the potential for industry headwinds in the coming months caused by lower spot
rates and higher interest rates and fuel prices, which could negatively impact
industry demand for new commercial vehicles moving forward, we believe that the
longer it takes to fill our backlog, the greater the risk that a significant
amount of commercial vehicle orders currently reflected in our backlog could be
cancelled.




Seasonality



Our Truck Segment is moderately seasonal. Seasonal effects on new commercial
vehicle sales related to the seasonal purchasing patterns of any single customer
type are mitigated by the diverse geographic locations of our dealerships and
our diverse customer base, including regional and national fleets, local and
state governments, corporations and owner-operators. However, commercial vehicle
Aftermarket Products and Services operations historically have experienced
higher sales volumes in the second and third quarters.




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Cyclicality


Our business is dependent on a number of factors including general economic
conditions, fuel prices, interest rate fluctuations, credit availability,
environmental and other government regulations and customer business cycles.
Unit sales of new commercial vehicles have historically been subject to
substantial cyclical variation based on these general economic conditions.
According to data published by A.C.T. Research, total U.S. retail sales of new
Class 8 commercial vehicles have ranged from a low of approximately 110,000 in
2010, to a high of approximately 281,440 in 2019. Through geographic expansion,
concentration on higher margin Aftermarket Products and Services and
diversification of our customer base, we have attempted to reduce the negative
impact of adverse general economic conditions or cyclical trends affecting the
Class 8 commercial vehicle industry on our earnings.

Environmental Standards and Other Governmental Regulations

We are subject to federal, state and local environmental laws and regulations
governing the following: discharges into the air and water; the operation and
removal of underground and aboveground storage tanks; the use, handling, storage
and disposal of hazardous substances, petroleum and other materials; and the
investigation and remediation of environmental impacts. As with commercial
vehicle dealerships generally, and vehicle service, parts and collision center
operations in particular, our business involves the generation, use, storage,
handling and contracting for recycling or disposal of hazardous materials or
wastes and other environmentally sensitive materials. We have incurred, and will
continue to incur, capital and operating expenditures and other costs in
complying with such laws and regulations.

Our operations involving the use, handling, storage and disposal of hazardous
and nonhazardous materials are subject to the requirements of the federal
Resource Conservation and Recovery Act, or RCRA, and comparable state statutes.
Pursuant to these laws, federal and state environmental agencies have
established approved methods for handling, storage, treatment, transportation
and disposal of regulated substances with which we must comply. Our business
also involves the operation and use of aboveground and underground storage
tanks. These storage tanks are subject to periodic testing, containment,
upgrading and removal under RCRA and comparable state statutes. Furthermore,
investigation or remediation may be necessary in the event of leaks or other
discharges from current or former underground or aboveground storage tanks.

We may also have liability in connection with materials that were sent to
third­party recycling, treatment, or disposal facilities under the federal
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
and comparable state statutes. These statutes impose liability for investigation
and remediation of environmental impacts without regard to fault or the legality
of the conduct that contributed to the impacts. Responsible parties under these
statutes may include the owner or operator of the site where impacts occurred
and companies that disposed, or arranged for the disposal, of the hazardous
substances released at these sites. These responsible parties also may be liable
for damages to natural resources. In addition, it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the release of hazardous
substances or other materials into the environment.

The federal Clean Water Act and comparable state statutes require containment of
potential discharges of oil or hazardous substances, and require preparation of
spill contingency plans. Water quality protection programs govern certain
discharges from some of our operations. Similarly, the federal Clean Air Act and
comparable state statutes regulate emissions of various air emissions through
permitting programs and the imposition of standards and other requirements.

The Environmental Protection Agency (“EPA“) and the National Highway Traffic
Safety Administration
(“NHTSA”), on behalf of the U.S. Department of
Transportation
, issued rules associated with reducing greenhouse gas (“GHG”)
emissions and improving the fuel efficiency of medium and heavy-duty trucks and
buses for current model years through 2027. In addition, in August 2021, the
President of the United States issued an executive order intended to increase
fuel efficiency, further reduce GHG emissions and speed up the development of
“zero-emission” vehicles. The executive order calls for the EPA and the
Secretary of Transportation to adopt new rules and regulations for commercial
vehicles starting as early as model year 2027. Similarly, in June 2020, the
California Air Resources Board adopted a final rule that is intended to phase
out the sale of diesel-powered commercial vehicles over time by requiring a
certain percentage of each manufacturer’s commercial vehicles sold within the
state to be “zero-emission vehicles,” or “near-zero emission vehicles,” starting
in model year 2024. In addition, in July 2020, a group of fifteen U.S. states
and the District of Columbia entered into a joint memorandum of understanding
that commits each of them to work together to advance and accelerate the market
for electric Class 3 through 8 commercial vehicles; one additional state signed
in 2021. Four of the states that signed are states where we operate new
commercial vehicle dealerships: California, Colorado, North Carolina and
Virginia. The signatories to the memorandum all agreed on a goal of ensuring
that 100% of new Class 3 through 8 commercial vehicles are zero emission by
2050, with an interim target of 30% zero emission by 2030. Attaining these goals
would likely require the adoption of new laws and regulations and we cannot
predict at this time whether such laws and regulations would have an adverse
impact on our business. Additional regulations could result in increased
compliance costs, additional operating restrictions or changes in demand for our
products and services, which could have a material adverse effect on our
business, financial condition and results of operations.




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We do not believe that we currently have any material environmental liabilities
or that compliance with environmental laws and regulations will have a material
adverse effect on our results of operations, financial condition or cash flows.
However, soil and groundwater impacts are known to exist at some of our
dealerships. Further, environmental laws and regulations are complex and subject
to change. In addition, in connection with acquisitions, it is possible that we
will assume or become subject to new or unforeseen environmental costs or
liabilities, some of which may be material. In connection with our dispositions,
or prior dispositions made by companies we acquire, we may retain exposure for
environmental costs and liabilities, some of which may be material. Compliance
with current or amended, or new or more stringent, laws or regulations, stricter
interpretations of existing laws or the future discovery of environmental
conditions could require additional expenditures by us, which could materially
adversely affect our results of operations, financial condition or cash flows.
In addition, such laws could affect demand for the products that we sell.

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