What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-09-04 compared with 2020-06-04 · 204 added, 103 removed, 215 unchanged (59% of the section changed)

9 unchanged sentences

Demand for agricultural equipment and, to a lesser extent, parts and service support, are impacted by agricultural commodity prices and net farm income.

Based on U.S.

Department of Agriculture publications, the most recent estimate of net farm income for calendar year 2019 indicated an approximate 11.0% increase as compared to calendar year 2018, and an approximate 3.3% increase in net farm income for calendar year 2020, as compared to calendar year 2019.

For the first quarter of fiscal 2021, our net income was $2.3 million, or $0.10 per diluted share, compared to a fiscal 2020 first quarter loss of $0.4 million, or $0.02 per diluted share.

Our adjusted diluted earnings per share was $0.15 for the first quarter of fiscal 2021, compared to $0.02 for the first quarter of fiscal 2020.

Based on February 2020 U.S.

Department of Agriculture publications, the estimate of net farm income for calendar year 2019 indicated an approximate 11.0% increase as compared to calendar year 2018, and an approximate 3.3% increase in net farm income for calendar year 2020, as compared to calendar year 2019.

For the second quarter of fiscal 2021, our net income was $6.4 million, or $0.28 per diluted share, compared to a fiscal 2020 second quarter net income of $5.5 million, or $0.25 per diluted share.

Our adjusted diluted earnings per share was $0.29 for the second quarter of fiscal 2021, compared to $0.31 for the second quarter of fiscal 2020.

See the Non-GAAP Financial Measures section below for a reconciliation of adjusted diluted earnings per share to diluted earnings per share, the most comparable GAAP financial measure.

Significant factors impacting the quarterly comparisons were:

• Revenue in the first quarter of fiscal 2021 was 11.5% higher than the first quarter of fiscal 2020.

Increased revenue from equipment, parts and service was offset by slightly lower rental and other revenue.

The higher revenue was driven by increased equipment, parts and service revenue in our Agriculture segment.

Some of the increase in the Agriculture segment came from our Northwood location, which was purchased in October 2019.

• Gross profit margin in the first quarter of fiscal 2021 declined to 18.8%, compared to 19.4% for the first quarter of fiscal 2020.

The decline in gross profit margin was primarily the result of lower equipment margins and a change in our revenue mix with more revenue generated by our equipment business than our higher margin parts and service businesses in the first quarter of fiscal 2021, as compared to the first quarter last year.

• Floorplan and other interest expense decreased a combined 15.9% in the first quarter of fiscal 2021, as compared to the first quarter last year, primarily due the repayment in full of our senior convertible notes in the second quarter of fiscal 2020.

• Revenue in the second quarter of fiscal 2021 was 3.7% lower than the second quarter of fiscal 2020.

Increased revenue from parts and service was more than offset by lower equipment and rental and other revenue.

Total same store sales were down 5.8% compared to the prior year second quarter as the Northwood (ND) location was acquired in the third quarter of fiscal 2020 and the Scottsbluff (NE), Sidney (NE) and Torrington (WY) locations were acquired in the second quarter of fiscal 2021.

• Operating expenses decreased 3.2% compared to the second quarter of fiscal 2020 despite adding the four acquired locations.

This was achieved through managed expense reductions, primarily in the Construction and International segments, and lower expenses in all segments due to the COVID-19 pandemic such as travel and fuel expenses.

• Floorplan and other interest expense decreased a combined 20.5% in the second quarter of fiscal 2021, as compared to the second quarter last year, due to an overall lower interest rate environment as well as a lower interest rate spread under our new five-year Bank Syndicate Agreement that was finalized in April 2020.

Impact of the COVID-19 Pandemic on the Company

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Since the beginning of the COVID-19 pandemic, the safety of our employees and customers has been and continues to be our top concern.

At the onset of the pandemic we organized a COVID Task Force to implement safety protocols and to quickly respond to matters, in the event of a positive case at one of our locations.

At the onset of the pandemic we organized a COVID Task Force to implement safety protocols and to quickly respond to matters related to the pandemic at our locations.

Even though we are considered an essential business, in response to the COVID-19 pandemic, the company closed its U.S.

1 unchanged sentence

equipment, parts, service and rental.

Beginning May 4, 2020, we began fully reopening our stores to the public, following pandemic safety protocols applicable to the locations.

Beginning May 4, 2020, we began fully reopening our stores to the public, following pandemic safety

protocols applicable to the locations.

Additionally, our International stores have also been following pandemic safety protocols applicable to each location.

By June 2020, all of our stores were open to the public but still maintain pandemic safety protocols.

We believe that each of our business segments will be impacted by the pandemic to varying degrees, although the actual impact will be subject to many variables and uncertainties which are currently unknown and outside of our control.

2 unchanged sentences

We believe our parts and service business will be less impacted, as our customers will be experiencing similar levels of wear and tear on their equipment.

Also offsetting some of the challenges in the agriculture industry, will be government support programs for our farm customers, such as the recently announced $16 billion Coronavirus Food Assistance Program (CFAP).

Also offsetting some of the challenges in the agriculture industry, will be government support programs for our farm customers, such as the $16 billion Coronavirus Food Assistance Program (CFAP).

We believe all revenue categories of equipment, parts, service and rental will be impacted in this segment, with such effects continuing so long as pandemic related macroeconomic stress and uncertainties persist.

4 unchanged sentences

International

In addition to the industry challenges indicated for our Agriculture Segment, International is also being impacted by border shutdowns, timing of equipment shipments and more stringent in-country pandemic regulations.

In addition to the industry challenges indicated for our Agriculture Segment, International is also being impacted by border shutdowns, timing of equipment shipments and from time to time more stringent in-country pandemic regulations.

We believe all revenue categories in this segment will experience greater negative impacts than our Agriculture Segment because of these additional challenges along with the general lack of government support programs to our International farm customers.

On May 4, 2020, the Company acquired certain assets of HorizonWest Inc.

This acquired Case IH agriculture dealership complex consisted of three agriculture equipment stores in Scottsbluff and Sidney, Nebraska and Torrington, Wyoming, which expands the Company's agriculture presence in Nebraska and into Wyoming.

The total consideration transferred for the acquired business was $ 6.8 million paid in cash, which the Company financed through available cash resources and capacity under our existing floorplan payable and other credit facilities.

The three HorizonWest dealerships are included within our Agriculture segment.

On October 1, 2019, we acquired certain assets of Uglem-Ness Co., a single Case IH agriculture equipment store in Northwood, North Dakota.

6 unchanged sentences

The new ERP application is expected to provide data-driven and mobile-enabled sales and support tools to improve employee efficiency and deliver an enhanced customer experience.

The Company currently anticipates a pilot store to be on the new ERP system in the second quarter of the current fiscal year and all stores to be on the new ERP application in the first half of the fiscal year ending January 31, 2022.

The Company integrated one pilot store on the new ERP system in the second quarter of the current fiscal year and expects all domestic stores to be on the new ERP application in the first half of the fiscal year ending January 31, 2022.

We have prospectively adjusted the useful life of our current ERP application such that it will be fully amortized upon its estimated replacement date.

1 unchanged sentence

Our critical accounting policies and estimates are included in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.

Other than the adoption of the accounting standard for current expected credit loss and the standard for cloud computing described in Note 1 to our consolidated financial statements in this Quarterly Report on Form 10-Q, there have been no changes in our critical accounting policies since January 31, 2020.

Other than the adoption of the accounting standards for current expected credit loss and the standard for cloud computing

described in Note 1 to our consolidated financial statements in this Quarterly Report on Form 10-Q, there have been no changes in our critical accounting policies since January 31, 2020.

Results of Operations

3 unchanged sentences

Same-store sales for any period represent sales by stores that were part of the Company for the entire comparable period in the current and preceding fiscal years.

We do not distinguish between relocated or recently expanded stores in this

same-store analysis.

We do not distinguish between relocated or recently expanded stores in this same-store analysis.

Closed stores are excluded from the same-store analysis.

1 unchanged sentence

Comparative financial data for each of our four sources of revenue are expressed below.

Three Months Ended April 30,

(dollars in thousands)

Three Months Ended July 31, Six Months Ended July 31,

2020 2019 2020 2019

(dollars in thousands) (dollars in thousands)

Revenue $ 202,654 $ 214,435 $ 421,159 $ 408,390

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The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated:

Three Months Ended April 30,

Three Months Ended July 31, Six Months Ended July 31,

2020 2019 2020 2019

Equipment 66.8 % 68.1 % 68.6 % 68.8 %

6 unchanged sentences

Operating Expenses 17.5 % 17.4 % 17.3 % 18.1 %

Impairment of Intangible and Long-Lived Assets 0.1 % — %

Restructuring Costs — % — %

Income from Operations 3.2 % 2.9 % 2.4 % 1.7 %

3 unchanged sentences

Net Income 2.1 % 1.7 % 1.4 % 0.9 %

Three Months Ended April 30, 2020 Compared to Three Months Ended April 30, 2019

Three Months Ended July 31, 2020 Compared to Three Months Ended July 31, 2019

Consolidated Results

Three Months Ended April 30, Increase/ Percent

Three Months Ended July 31, Increase/ Percent

2020 2019 (Decrease) Change

5 unchanged sentences

Total Revenue $ 303,465 $ 314,981 $ (11,516) (3.7) %

Total revenue for the first quarter of fiscal 2021 was 11.5% or $31.9 million higher than the first quarter of fiscal 2020 driven by revenue increases in equipment, parts, and service.

These increases occurred in our Agriculture and International segments, but were partially offset by lower revenue in our Construction segment.

Company-wide same-store sales in the first quarter of fiscal 2021 increased 11.0% versus the comparable period in the fiscal 2020.

Three Months Ended April 30, Increase/ Percent

Total revenue for the second quarter of fiscal 2021 was down 3.7% or $11.5 million as compared to the second quarter of fiscal 2020 driven by revenue decreases in equipment and rental and other.

These decreases primarily occurred in our Construction and International segments.

Company-wide same-store sales in the second quarter of fiscal 2021 decreased 5.8% versus the comparable period in the fiscal 2020.

Same-store sales decreased in all three segments but most notably in International where same-store sales were down 13.1%.

Three Months Ended July 31, Increase/ Percent

2020 2019 (Decrease) Change

17 unchanged sentences

Total Gross Profit Mix 100.0 % 100.0 %

Gross profit for the first quarter of fiscal 2021 increased 8.4% or $4.5 million, as compared to the same period last year.

However, gross profit margin decreased to 18.8% for the first quarter of fiscal 2021, compared to 19.4% for the first quarter of fiscal 2020.

The increase in gross profit was due to increased revenues.

The decrease in gross profit margins was primarily due to lower equipment margins and a change in revenue mix.

We recognized lower equipment margins on our used Agriculture equipment in the current quarter as we accelerated efforts to sell this inventory.

Revenue mix decreased our overall gross margin in two ways.

First, equipment revenues comprised a larger portion of overall revenues than did our higher margin parts and service business;

and second, our total equipment sales mix was more weighted to Agriculture, which generally experiences lower equipment margins than equipment sold in our Construction and International segments.

Our company-wide absorption rate — which is calculated by dividing our gross profit from sales of parts, service and rental fleet by our operating expenses, less commission expense on equipment sales, plus interest expense on floorplan payables and rental fleet debt — increased to 73.2% for the first quarter of fiscal 2021 compared to 67.8% during the same period last year as the increase in gross profit from parts, service, and rental and other in the first quarter of fiscal 2021 more than offset the increase in operating expenses during the period.

Gross profit for the second quarter of fiscal 2021 decreased 2.1% or $1.3 million, as compared to the same period last year.

The decrease in gross profit was due to the revenue decreases in equipment and rental and other.

Total gross profit margin increased to 20.7% in the current quarter from 20.3% in the prior year quarter primarily due to an increased mix of higher margin parts and service business slightly offset by lower service and rental and other margins.

Our company-wide absorption rate — which is calculated by dividing our gross profit from sales of parts, service and rental fleet by our operating expenses, less commission expense on equipment sales, plus interest expense on floorplan payables and rental fleet debt — increased to 80.9% for the second quarter of fiscal 2021 compared to 77.1% during the same period last year as the increase in gross profit from parts, service, and rental and other in the second quarter of fiscal 2021 combined with lower operating and floorplan interest expenses generated the improved absorption compared to the prior year.

Operating Expenses

Three Months Ended April 30, Increase/ Percent

Three Months Ended July 31, Increase/ Percent

2020 2019 (Decrease) Change

2 unchanged sentences

Operating Expenses as a Percentage of Revenue 17.5 % 17.4 % 0.1 % 0.6 %

Our operating expenses in the first quarter of fiscal 2021 increased slightly, as compared to the first quarter of fiscal 2020.

Operating expenses as a percentage of revenue decreased to 17.1% in the first quarter of fiscal 2021 from 18.9% in the first quarter of fiscal 2020.

The decrease in operating expenses as a percentage of total revenue was due to the increase in total revenue in the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020, which positively affected our ability to leverage our fixed operating costs.

Impairment Charges

Three Months Ended April 30, Increase/ Percent

Our operating expenses in the second quarter of fiscal 2021 decreased 3.2%, as compared to the second quarter of fiscal 2020.

The increased operating expenses of four acquired locations, which were not in the prior year quarter, was more than offset by managed expense reductions in our Construction and International segments and various lower operating expenses caused by COVID-19 such as travel and fuel costs.

Operating expenses as a percentage of revenue remained relatively flat at 17.5% in the second quarter of fiscal 2021 from 17.4% in the second quarter of fiscal 2020.

Other Income (Expense)

Three Months Ended July 31, Increase/ Percent

2020 2019 (Decrease) Change

(dollars in thousands)

Interest income and other income (expense) $ 562 $ 620 $ (58) (9.4) %

Floorplan interest expense (901) (1,399) (498) (35.6) %

Other interest expense (978) (966) 12 1.2 %

Floorplan interest expense decreased 35.6% in the second quarter of fiscal 2021, as compared to the second quarter of fiscal 2020, due to an overall lower interest rate environment as well as a lower interest rate spread under our new five-year Bank Syndicate Agreement that was finalized in April 2020.

Provision for Income Taxes

Three Months Ended July 31, Increase/ Percent

2020 2019 (Decrease) Change

(dollars in thousands)

Provision for Income Taxes $ 1,892 $ 1,916 $ (24) (1.3) %

Our effective tax rate was 22.8 % for the second quarter of fiscal 2021 and 25.8 % for the second quarter of fiscal 2020.

In the current quarter our effective tax rate differed from the 21.0% domestic federal statutory tax rate primarily due to the impact of state taxes and discreet items, such as the tax impact of share-based payments, offset by the tax impact of foreign currency fluctuations on our Ukrainian business.

Segment Results

Certain financial information for our Agriculture, Construction and International business segments is presented below.

“Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level.

Revenue between segments is immaterial.

Three Months Ended July 31, Increase/ Percent

2020 2019 (Decrease) Change

(dollars in thousands)

Agriculture $ 169,072 $ 165,692 $ 3,380 2.0 %

Construction 77,719 84,039 (6,320) (7.5) %

International 56,674 65,250 (8,576) (13.1) %

Total $ 303,465 $ 314,981 $ (11,516) (3.7) %

Income (Loss) Before Income Taxes

Agriculture $ 6,752 $ 6,177 $ 575 9.3 %

Construction 1,375 1,334 41 3.1 %

International (432) 505 (937) n/m

Segment income (loss) before income taxes 7,695 8,016 (321) (4.0) %

Shared Resources 597 (589) 1,186 n/m

Total $ 8,292 $ 7,427 $ 865 11.6 %

Agriculture segment revenue for the second quarter of fiscal 2021 increased 2.0% compared to the second quarter of fiscal 2020.

The higher revenue was driven by increases in our parts and service businesses.

Parts and service revenue continued to benefit from an aging customer fleet and all sources of revenue in this segment benefited from the addition of four locations that were not in the prior year quarter.

Same-store sales of our Agriculture segment decreased 3.5% for the second quarter of fiscal 2021, as compared to the second quarter of fiscal 2020.

Agriculture segment income before income taxes was $6.8 million for the second quarter of fiscal 2021 compared to $6.2 million for the second quarter of fiscal 2020.

The improvement in segment results was primarily due to the higher parts and service revenue.

Construction segment revenue for the second quarter of fiscal 2021 decreased 7.5% compared to the second quarter of fiscal 2020, due to a same-store sales decrease of 4.5% and our divestiture of the Albuquerque, New Mexico store in the fourth quarter of fiscal 2020.

All sources of revenue — equipment, parts, service and rental and other — declined for the segment’s second quarter of 2021, as compared to the prior year’s second quarter.

A larger contributor to the decrease was our rental and other revenue, which was down due to a smaller fleet and lower utilization compared to the prior year driven by more difficult industry conditions such as lower oil prices and a general slowdown in the economy due to COVID-19.

Our Construction segment income before taxes was $1.4 million for the second quarter of fiscal 2021 compared to $1.3 million in the second quarter of fiscal 2020.

Lower revenues in this segment were fully offset by decreases in operating and interest expenses compared to that of the prior year.

The dollar utilization — which is calculated by dividing the rental revenue earned on our rental fleet by the average gross carrying value of our rental fleet (comprised of original equipment costs plus additional capitalized costs) for that period — of our rental fleet decreased from 25.5% in the second quarter of fiscal 2020 to 22.2% in the second quarter of fiscal 2021.

International

International segment revenue and same-store sales, for the second quarter of fiscal 2021 decreased 13.1% compared to the second quarter of fiscal 2020.

All primary sources of revenue — equipment, parts and service — declined for the segment's second quarter of fiscal 2021, as compared to the prior year's second quarter.

Lower segment revenue was driven by decreased customer demand due to below average small grain yields in certain areas of our International footprint as well as overall challenging economic and business conditions due to COVID-19.

Our International segment loss before income taxes was $0.4 million for the second quarter of fiscal 2021 compared to segment income of $0.5 million for the same period last year.

Decreased revenues drove the lower results in this segment but were slightly offset by decreases in operating expenses.

Shared Resources/Eliminations

We incur centralized expenses/income at our general corporate level, which we refer to as “Shared Resources,” and then allocate most of these net expenses to our segments.

Since these allocations are set early in the year, and a portion is planned to be unallocated, unallocated balances may occur.

Shared Resources income before income taxes was $0.6 million for the second quarter of fiscal 2021 compared to a loss before income taxes of $0.6 million for the same period last year.

Six Months Ended July 31, 2020 Compared to Six Months Ended July 31, 2019

Consolidated Results

Six Months Ended July 31, Increase/ Percent

2020 2019 (Decrease) Change

(dollars in thousands)

Equipment $ 421,159 $ 408,390 $ 12,769 3.1 %

Parts 118,068 111,140 6,928 6.2 %

Service 53,586 49,662 3,924 7.9 %

Rental and other 20,860 24,079 (3,219) (13.4) %

Total Revenue $ 613,673 $ 593,271 $ 20,402 3.4 %

Total revenue for the six months of fiscal 2021 was up 3.4% or $20.4 million compared to the first six months of fiscal 2020 and was driven by increases in revenue from our equipment, parts and service businesses.

These increases occurred in our Agriculture segment but were partially offset by lower revenue in our Construction and International segments.

Company-wide same-store sales increased 2.1% over the comparable prior year period.

Same-store sale increases in our Agriculture segment more than offset the decreases in same-store sales in our other two segments.

Six Months Ended July 31, Increase/ Percent

2020 2019 (Decrease) Change

(dollars in thousands)

Equipment $ 43,881 $ 44,529 $ (648) (1.5) %

Parts 35,419 32,594 2,825 8.7 %

Service 35,576 33,443 2,133 6.4 %

Rental and other 6,224 7,360 (1,136) (15.4) %

Total Gross Profit $ 121,100 $ 117,926 $ 3,174 2.7 %

Gross Profit Margin

Equipment 10.4 % 10.9 % (0.5) % (4.6) %

Parts 30.0 % 29.3 % 0.7 % 2.4 %

Service 66.4 % 67.3 % (0.9) % (1.3) %

Rental and other 29.8 % 30.6 % (0.8) % (2.6) %

Total Gross Profit Margin 19.7 % 19.9 % (0.2) % (1.0) %

Gross Profit Mix

Equipment 36.2 % 37.8 % (1.6) % (4.2) %

Parts 29.2 % 27.6 % 1.6 % 5.8 %

Service 29.4 % 28.4 % 1.0 % 3.5 %

Rental and other 5.2 % 6.2 % (1.0) % (16.1) %

Total Gross Profit Mix 100.0 % 100.0 %

The $3.2 million increase in gross profit for the first six months of fiscal 2021, as compared to the same period last year, was primarily due to higher parts and service revenue for the first six months of fiscal 2021 partially offset by lower equipment margins and lower revenues in our rental and other business.

Our company-wide absorption rate for the first six months of fiscal 2021 increased to 77.0% as compared to 72.6% during the same period last year as the increase in gross profit from parts, service and combined with flat operating expenses and lower floorplan interest expense levels compared to that of the prior year six month period.

Operating Expenses

Six Months Ended July 31, Increase/ Percent

2020 2019 (Decrease) Change

(dollars in thousands)

Operating Expenses $ 106,137 $ 107,410 $ (1,273) (1.2) %

Operating Expenses as a Percentage of Revenue 17.3 % 18.1 % (0.8) % (4.4) %

Our operating expenses for the first six months of fiscal 2021 decreased $1.3 million as compared to the first six months of fiscal 2020.

The increased operating expenses of four acquired locations, which were not in the prior year six-month period, was more than offset by managed expense reductions in our Construction and International segments and various lower operating expenses caused by COVID-19 such as travel and fuel costs.

Operating expenses as a percentage of revenue decreased to 17.3% in the first six months of fiscal 2021 from 18.1% in the first six months of fiscal 2020.

The decrease in operating expenses as a percentage of total revenue was due to the slightly lower expenses combined with the increase in total revenue in the first six months of fiscal 2021, as compared to the the first six months of fiscal 2020, which positively affected our ability to leverage our fixed operating costs.

Restructuring Costs

Six Months Ended July 31, Increase/ Percent

2020 2019 Decrease Change

(dollars in thousands)

Impairment of Long-Lived Assets $ 216 $ 135 $ 81 60.0%

We recognized $0.2 million of impairment charges on certain long-lived assets in the first quarter of fiscal 2021 compared to $0.1 million in the first quarter of the prior year.

We recognized $0.2 million and $0.1 million of impairment charges on certain long-lived assets during first six months of fiscal 2021 and 2020.

Other Income (Expense)

Three Months Ended April 30, Increase/ Percent

Six Months Ended July 31, Increase/ Percent

2020 2019 (Decrease) Change

3 unchanged sentences

Other interest expense (1,944) (2,607) (663) (25.4) %

Floorplan interest expense increased in the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020, primarily as a result of increased levels of interest-bearing inventory in the first quarter of fiscal 2021.

The decrease in other interest expense in the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020, is primarily the result of our repayment in full of the outstanding balance of our senior convertible notes in May 2019.

Floorplan interest expense decreased 9.8% for the first six months of fiscal 2021, as compared to the same period last year, due to an overall lower interest rate environment as well as lower interest rate spread under our new five-year Bank Syndicate Agreement that was finalized in April 2020.

The decrease in other interest expense in the first six months of fiscal 2021, as compared to the first six months of fiscal 2020, is the result of our repayment in full of the outstanding balance of our senior convertible notes in May 2019.

The decrease in interest income and other income (expense) was primarily due to foreign currency remeasurement losses in Ukraine, resulting from a devaluation of the Ukrainian hyrvnia in the first quarter of fiscal 2021.

See the Non-GAAP Financial Measures section below for the impact of these costs on non-GAAP Diluted EPS.

Provision for Income Taxes

Three Months Ended April 30, Increase/ Percent

Six Months Ended July 31, Increase/ Percent

2020 2019 Decrease Change

(dollars in thousands)

Provision for Income Taxes $ 886 $ (70) $ 956 n/m

Our effective tax rate was 28.1 % for the first quarter of fiscal 2021 and 13.6 % for the first quarter of fiscal 2020.

Our effective tax rate differs from the domestic federal statutory tax rate due to the mix of domestic and foreign income or losses and the impact of the recognition of valuation allowances on our foreign deferred tax assets, including net operating losses.

Provision for Income Taxes $ 2,779 $ 1,846 $ 933 50.5%

Our effective tax rate was 24.3% for the first six months of fiscal 2021 and 26.7% for the same period last year.

In the six-month period our effective tax rate differed from the 21.0% domestic federal statutory tax rate primarily due to the impact of state taxes and discreet items, such as the tax impact of share-based payments, offset by the tax impact of foreign currency fluctuations on our Ukrainian business.

Segment Results

Certain financial information for our Agriculture, Construction and International business segments is presented below.

1 unchanged sentence

Revenue between segments is immaterial.

Three Months Ended April 30, Increase/ Percent

Six Months Ended July 31, Increase/ Percent

2020 2019 (Decrease) Change

5 unchanged sentences

Income (Loss) Before Income Taxes

Agriculture $ 6,162 $ 1,876 $ 4,286 n/m

Agriculture $ 12,914 $ 8,053 $ 4,861 60.4 %

Construction (1,498) (888) (610) (68.7) %

International (711) 722 (1,433) n/m

Segment income (loss) before income taxes 3,009 (130) 3,139 n/m

Segment income before income taxes 10,705 7,887 2,818 35.7 %

Shared Resources 736 (975) 1,711 n/m

Total $ 3,148 $ (515) $ 3,663 n/m

Agriculture segment revenue for the first quarter of fiscal 2021 increased 25.9% compared to the first quarter of fiscal 2020.

Total $ 11,441 $ 6,912 $ 4,529 65.5 %

Agriculture segment revenue for the first six months of fiscal 2021 increased 13.5% compared to the same period last year.

We experienced increases across our equipment, parts and service businesses.

Equipment sales were supported by replacement demand, efforts to move used equipment, and delay of customer purchases from the fourth quarter of fiscal 2020 to the current quarter due to the late and difficult harvest conditions in parts of our footprint.

Parts and service revenue continued to benefit from an aging customer fleet and challenging operating conditions for our customers.

Same-store sales of our Agriculture segment increased 23.3% for the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020.

Additionally, our revenues were favorably impacted by the third quarter fiscal 2020 acquisition of Uglem-Ness.

Agriculture segment income before income taxes was $6.2 million for the first quarter of fiscal 2021 compared to $1.9 million for the first quarter of fiscal 2020.

The improvement in segment results were due to higher revenues, but were partially offset by increased operating expenses and floorplan interest expense.

Construction segment revenue for the first quarter of fiscal 2021 decreased 15.0% compared to the first quarter of fiscal 2020, due to a same-store sales decrease and the sale of the Albuquerque, New Mexico store in the fourth quarter of fiscal 2020.

All sources of revenue — equipment, parts, service and rental — declined for the segment’s first quarter of 2021, as compared to the prior year’s first quarter.

Equipment sales were supported by replacement demand and the delay of customer purchases from the fourth quarter of fiscal 2020 to the first quarter of the current year due to the late and difficult harvest conditions in areas of our footprint.

Same-store sales increased 9.4% for the first six months of fiscal 2021, as compared to the same period last year.

Agriculture segment income before income taxes was $12.9 million for the first six months of fiscal 2021 compared to $8.1 million over the first six months of fiscal 2020.

The improvement in segment results was largely the result of increased revenue, but was partially offset by increased operating expenses.

Construction segment revenue for the first six months of fiscal 2021 decreased 11.0% compared to the same period last year, due to a same-store sales decrease of 8.0% and our divestiture of the Albuquerque, New Mexico store in the fourth quarter of fiscal year 2020.

All sources of revenue – equipment, parts, service and rental and other – declined in the current year six-month period, as compared to the prior year’s six-month period.

The overall lower same-store sales are a result of decreased customer sentiment, lower oil prices, and a general slowdown in the economy due to COVID-19.

Our Construction segment loss before income taxes was $2.9 million for the first quarter of fiscal 2021 compared to $2.2 million in the first quarter of fiscal 2020.

The increase in segment loss was due to the overall lower revenues, but was partially offset by decreases in operating expenses, as compared to the first quarter of fiscal 2020.

The dollar utilization — which is calculated by dividing the rental revenue earned on our rental fleet by the average gross carrying value of our rental fleet (comprised of original equipment costs plus additional capitalized costs) for that period — of our rental fleet decreased from 20.5% in the first quarter of fiscal 2020 to 18.9% in the first quarter of fiscal 2021.

Our Construction segment loss before income taxes was $1.5 million for the first six months of fiscal 2021 compared to $0.9 million for the first six months of fiscal 2020.

The decrease in segment results was primarily due to decreased lower revenues but partially offset by decreased operating and interest expenses compared to the prior year.

The dollar utilization of our rental fleet decreased from 23.0% in the first six months of fiscal 2020 to 20.5% in the first six months of fiscal 2021.

International

International segment revenue and same-store sales, for the first quarter of fiscal 2021 increased 5.0% compared to the first quarter of fiscal 2020.

The increase in segment revenue occurred early in the quarter and decreased late in the quarter, due to COVID-19 restrictions and negative impact on customer sentiment.

Our International segment loss before income taxes was $0.3 million for the first quarter of fiscal 2021 compared to segment income of $0.2 million for the same period last year.

Increased revenues were more than offset by foreign currency remeasurement losses, resulting from the devaluation of the Ukrainian hryvnia in the first quarter of fiscal 2021.

International segment revenue for the first six months of fiscal 2021 decreased 4.9% compared to the same period last year as a result of lower equipment sales.

Our International segment loss before income taxes was $0.7 million for the first six months of fiscal 2021 compared to income before income taxes of $0.7 million for the same period last year.

The lower segment results was primarily due to decreased equipment revenue.

Shared Resources/Eliminations

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Since these allocations are set early in the year, and a portion is planned to be unallocated, unallocated balances may occur.

Shared Resources income before income taxes was $0.1 million for the first quarter of fiscal 2021 compared to a loss before income taxes of $0.4 million for the same period last year.

Shared Resources income before income taxes was $0.7 million for the first six months of fiscal 2021 compared to loss before income taxes of $1.0 million for the same period last year.

Non-GAAP Financial Measures

To supplement net income and diluted earnings per share ("Diluted EPS"), both GAAP measures, we present adjusted net income and adjusted Diluted EPS, both non-GAAP measures, which include adjustments for ERP transition costs, Ukraine remeasurement, and impairment charges.

We believe that the presentation of adjusted net income and adjusted Diluted EPS is relevant and useful to our management and investors because it provides a measurement of earnings on activities that we consider to occur in the ordinary course of our business.

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The following tables reconcile (i) net income, a GAAP measure, to adjusted net income and (ii) Diluted EPS, a GAAP measure, to adjusted Diluted EPS:

Three Months Ended April 30,

Three Months Ended July 31, Six Months Ended July 31,

2020 2019 2020 2019

(dollars in thousands, except per share data)

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Impairment charges — — 216 135

Ukraine remeasurement 765 (12)

Ukraine remeasurement (gain) / loss (130) (141) 635 (153)

Total Pre-Tax Adjustments 633 1,560 2,335 2,698

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Impairment charges — — 0.01 —

Ukraine remeasurement 0.04 —

Ukraine remeasurement (gain) / loss — (0.01) 0.02 (0.01)

Total Pre-Tax Adjustments 0.03 0.07 0.10 0.12

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related adjustments was calculated using a 26% tax rate, determined based on a 21% federal statutory rate and a 5% blended state income tax rate.

Included in the tax effect of the adjustments is the tax impact of foreign currency changes in Ukraine of $0.3 million for first quarter fiscal 2021.

Included in the tax effect of the adjustments is the tax impact of foreign currency changes in Ukraine of $0.3 million for the three months ended July 31, 2020 and $0.6 million for the six months ended July 31, 2020.

(2) Adjustments are net of amounts allocated to participating securities where applicable.

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Sources of Liquidity

Our primary sources of liquidity are cash reserves, cash generated from operations, and borrowings under our floorplan payable and other credit facilities.

Our primary sources of liquidity are cash reserves, cash generated from operations, and borrowings under our floorplan and other credit facilities.

We expect these sources of liquidity to be sufficient to fund our working capital requirements, acquisitions, capital expenditures and other investments in our business, service our debt, pay our tax and lease obligations and other commitments and contingencies, and meet any seasonal operating requirements for the foreseeable future, provided, however, that our borrowing capacity under our credit agreements is dependent on compliance with various covenants as further described in the "Risk Factors" section of our Annual Report in Form 10-K.

Equipment Inventory and Floorplan Payable Credit Facilities

As of April 30, 2020, the Company had floorplan payable lines of credit for equipment purchases totaling $762.0 million, which is primarily comprised of a $450.0 million credit facility with CNH Industrial, a $185.0 million floorplan payable line under the Bank Syndicate Credit Agreement, and a $60.0 million credit facility with DLL Finance.

Our equipment inventory turnover decreased from 1.8 times for the four-quarter period ended April 30, 2019 to 1.6 times for the four-quarter period ended April 30, 2020.

The increase in equipment sales volume over the four-quarter period ended April 30, 2020 as compared to the four-quarter period ended April 30, 2019 was offset by an increase in our average equipment inventory over these time periods.

Our equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, decreased to 24.5% as of April 30, 2020 from 27.9% as of January 31, 2020.

The decrease in our equity in equipment inventory is primarily due to the stocking of new equipment inventories during the three months ended April 30, 2020 and the higher level of floorplan financing available on such inventories, and increased borrowing on our floorplan lines of credit.

As of July 31, 2020, the Company had floorplan payable lines of credit for equipment purchases totaling $763.0 million, which is primarily comprised of a $450.0 million credit facility with CNH Industrial, a $185.0 million floorplan payable line under the Bank Syndicate Agreement, and a $60.0 million credit facility with DLL Finance.

Our equipment inventory turnover decreased from 1.7 times for the four-quarter period ended July 31, 2019 to 1.6 times for the four-quarter period ended July 31, 2020.

The decrease in equipment turnover was attributable to a slight decrease in equipment sales volume and a 9.3% increase in our rolling 12 month average equipment inventory over the four-quarter period ended July 31, 2020 as compared to the four-quarter period ended July 31, 2019.

Our equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, decreased to 27.0% as of July 31, 2020 from 27.9% as of January 31, 2020.

Long-Term Debt

During the third quarter of fiscal 2020, the Company reclassified the Wells Fargo working capital line of credit outstanding, which had a maturity date of October 28, 2020, from long-term debt to current maturities of long-term debt.

During the first quarter of fiscal of 2021, the Company entered into an amended and restated 5-year credit agreement with the Bank Syndicate.

Therefore, the working capital line of credit outstanding of $10 million was reclassified from current maturities of long-term debt to long-term debt.

During the first quarter of fiscal of 2021, the Company entered into an amended and restated five year credit agreement.

As a result, the working capital line of credit outstanding of $10 million under the prior credit facility was reclassified from current maturities of long-term debt to long-term debt.

Adequacy of Capital Resources

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Based on our current operational performance, we believe our cash flow from operations, available cash and available borrowing capacity under our existing credit facilities will adequately provide for our liquidity needs for, at a minimum, the next 12 months.

As of April 30, 2020, we were in compliance with the financial covenants under our CNH Industrial and DLL Finance credit agreements and we were not subject to the fixed charge coverage ratio covenant under the Bank Syndicate Credit Agreement as our adjusted excess availability plus eligible cash collateral (as defined therein) was not less than 15% of the lesser of (i) aggregate borrowing base and (ii) maximum credit amount as of April 30, 2020.

As of July 31, 2020, we were in compliance with the financial covenants under our CNH Industrial and DLL Finance credit agreements and we were not subject to the fixed charge coverage ratio covenant under the Bank Syndicate Agreement as our adjusted excess availability plus eligible cash collateral (as defined therein) was not less than 15% of the lesser of (i) aggregate borrowing base and (ii) maximum credit amount as of July 31, 2020.

While not expected to occur, if anticipated operating results were to create the likelihood of a future covenant violation, we would expect to work with our lenders on an appropriate modification or amendment to our financing arrangements.

Cash Flow Provided by (Used for) Operating Activities

Net cash used for operating activities was $5.4 million for the first three months of fiscal 2021, compared to net cash provided by operating activities of $2.9 million for the first three months of fiscal 2020.

The change in net cash provided by (used for) operating activities is primarily the result of a reduction in liabilities for the first three months of fiscal 2021.

Net cash provided by operating activities was $13.0 million for the first six months of fiscal 2021, compared to net cash used for operating activities of $6.3 million for the first six months of fiscal 2020.

The change in net cash provided by (used for) operating activities is primarily the result of a reduction in inventory for the first six months of fiscal 2021.

We evaluate our cash flow from operating activities net of all floorplan activity and maintaining a constant level of equity in our equipment inventory.

Taking these adjustments into account, our adjusted cash flow used for operating activities was $3.6 million for the first three months of fiscal 2021 compared to an adjusted cash flow used for operating activities of $37.4 million for the first three months of fiscal 2020.

The adjusted cash flow used for operating activities decreased for the first three months of fiscal 2021, which is primarily the result of increased equipment inventory stocking during the previous

Taking these adjustments into account, our adjusted cash flow provided by operating activities was $16.1 million for the first six months of fiscal 2021 compared to an adjusted cash flow used for operating activities of $49.3 million for the first six months of fiscal 2020.

The change in adjusted cash flow provided by (used for) operating activities is primarly the result of increased equipment inventory stocking during the previous fiscal year compared to reducing inventories during the first six months of fiscal 2021.

See the Adjusted Cash Flow Reconciliation below for a reconciliation of adjusted cash flow used for operating activities to the GAAP measure of cash flow used for operating activities.

Cash Flow Used for Investing Activities

Net cash used for investing activities was $5.1 million for the first three months of fiscal 2021, compared to $8.0 million for the first three months of fiscal 2020.

The decrease in cash used for investing activities was the result of lower cash outflows for acquisitions and rental fleet purchases, as compared to the first quarter of fiscal 2020.

Net cash used for investing activities was $16.8 million for the first six months of fiscal 2021, compared to $14.6 million for the first six months of fiscal 2020.

The increase in cash used for investing activities was primarily the result of an increase in cash outflows for acquisitions as compared to the first six months of fiscal 2020.

Cash Flow Provided by Financing Activities

Net cash provided by financing activities was $17.7 million for the first three months of fiscal 2021 compared to $11.8 million for the first three months of fiscal 2020.

For both periods, net cash provided by financing activities was impacted by increased non-manufacturer floorplan payables associated with seasonal inventory stocking.

Net cash provided by financing activities was $4.5 million for the first six months of fiscal 2021 compared to $13.6 million for the first six months of fiscal 2020.

The decrease in cash provided by financing activities was primarily the result of

higher non-manufacturer floorplan and long-term debt borrowings in the prior year, which was partially offset by the payoff of the senior convertible notes in May 2019.

Adjusted Cash Flow Reconciliation

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We refer to this measure of cash flow as Adjusted Cash Flow.

Our equity in equipment inventory decreased to 24.5% as of April 30, 2020 from 27.9% as of January 31, 2020, and decreased to 23.6% as of April 30, 2019 from 34.4% as of January 31, 2019.

Our equity in equipment inventory decreased to 27.0% as of July 31, 2020 from 27.9% as of January 31, 2020, and decreased to 17.4% as of July 31, 2019 from 34.4% as of January 31, 2019.

Adjusted Cash Flow is a non-GAAP financial measure.

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Net Cash Provided by (Used for) Operating Activities Net Cash Provided by (Used for) Financing Activities

Three Months Ended April 30, 2020 Three Months Ended April 30, 2019 Three Months Ended April 30, 2020 Three Months Ended April 30, 2019

Six Months Ended July 31, 2020 Six Months Ended July 31, 2019 Six Months Ended July 31, 2020 Six Months Ended July 31, 2019

(in thousands) (in thousands)

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Certain Information Concerning Off-Balance Sheet Arrangements

As of April 30, 2020, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

As of July 31, 2020, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

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The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements.

January 31, 2020, and in other materials filed or to be filed by the Company with the Securities and Exchange Commission (and included in oral statements or other written statements made or to be made by the Company).

Forward-looking statements are contained in this Quarterly Report on Form 10-Q, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in our Annual Report on Form 10-K for the year ended January 31, 2020, and in other materials filed or to be filed by the Company with the Securities and Exchange Commission (and included in oral statements or other written statements made or to be made by the Company).

Forward-looking statements are statements based on future expectations and specifically may include, among other things, statements relating to our expectations regarding exchange rate and interest rate impact on our business, the impact of farm income levels on customer demand for agricultural equipment and services, the impact of oil prices on market demand for equipment and services, the impact of the COVID-19 pandemic on our business, the general market conditions of the agricultural and construction industries, equipment inventory levels, discussion of the anticipated implementation date of our new ERP system, and our primary liquidity sources, and the adequacy of our capital resources.

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The words “potential,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” “plan,” “anticipate,” and similar words and expressions are intended to identify forward-looking statements.

Such statements are based upon the current beliefs and expectations of our management.

statements are based upon the current beliefs and expectations of our management.

Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis