Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report, and the audited consolidated financial statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.
Overview
We own and operate a network of full service agricultural and construction equipment stores in the United States and Europe. Based upon information provided to us by CNH Industrial N.V. or its U.S. subsidiary CNH Industrial America, LLC, we are the largest retail dealer of Case IH Agriculture equipment in the world, the largest retail dealer of Case Construction equipment in North America and a major retail dealer of New Holland Agriculture and New Holland Construction equipment in the U.S. We operate our business through three reportable segments: Agriculture, Construction and International. Within each segment, we have four principal sources of revenue: new and used equipment sales, parts sales, service, and equipment rental and other activities.
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 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 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
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, and the President of the United States declared the COVID-19 outbreak as a national emergency. The nature of COVID-19 led to worldwide shutdowns and halting of commercial and interpersonal activity as governments imposed regulations in efforts to control the spread of the pandemic, such as shelter-in-place orders and quarantines. The pandemic is a highly fluid and rapidly evolving situation, and we cannot anticipate with any certainty the length, scope, or severity of such restrictions in each of the markets that we operate. See Item 1A. Risk Factors for more information on possible impacts.
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 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. stores to the public on March 23, 2020 but continued operations through social distancing means in all areas: equipment, parts, service and rental. Beginning May 4, 2020, we began fully reopening our stores to the public, following pandemic safety
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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.
Agriculture
Overall, COVID-19 has created industry challenges such as lower agriculture commodity prices as demand deterioration and supply chain disruptions are affecting areas such as ethanol, livestock and international trade. We believe that the existing and anticipated lower commodity prices will reduce our equipment sales, but it is difficult to estimate the extent and timing of this impact given all the variables and uncertainties. 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 $16 billion Coronavirus Food Assistance Program (CFAP).
Construction
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. Examples of such macroeconomic stress include: lower oil prices, higher unemployment, lower GDP, and reduced government spending on infrastructure projects. All of these factors we believe will lead to lower overall U.S. construction spending.
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 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.
Acquisitions
Fiscal 2021
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.
Fiscal 2020
On October 1, 2019, we acquired certain assets of Uglem-Ness Co., a single Case IH agriculture equipment store in Northwood, North Dakota. The acquisition continues our strategy of acquiring dealerships in agriculture markets contiguous to our current North American agriculture stores. The service area of Uglem-Ness is contiguous to our existing locations in Grand Forks and Casselton, North Dakota and Ada, Minnesota. The total consideration paid in the acquisition was $10.9 million, which the Company financed through available cash resources and capacity under our existing floorplan payable and other credit facilities. The Northwood, ND dealership is included within our Agriculture segment.
ERP Transition
The Company is in the process of converting to a new Enterprise Resource Planning ("ERP") application. 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 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.
Critical Accounting Policies and Estimates
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 standards for current expected credit loss and the standard for cloud computing
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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
The results presented below include the operating results of any acquisition made during these periods as well as the operating results of any stores closed during these periods, up to the date of the store closure. The period-to-period comparisons included below are not necessarily indicative of future results. Segment information is provided later in the discussion and analysis of our results of operations.
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. Closed stores are excluded from the same-store analysis. Stores that do not meet the criteria for same-store classification are described as excluded stores throughout the Results of Operations section in this Quarterly Report on Form 10-Q.
Comparative financial data for each of our four sources of revenue are expressed below.
Three Months Ended July 31, Six Months Ended July 31,
2020 2019 2020 2019
(dollars in thousands) (dollars in thousands)
Equipment
Revenue $ 202,654 $ 214,435 $ 421,159 $ 408,390
Cost of revenue 180,231 190,707 377,278 363,861
Gross profit $ 22,423 $ 23,728 $ 43,881 $ 44,529
Gross profit margin 11.1 % 11.1 % 10.4 % 10.9 %
Parts
Revenue $ 61,454 $ 59,202 $ 118,068 $ 111,140
Cost of revenue 43,032 41,732 82,649 78,546
Gross profit $ 18,422 $ 17,470 $ 35,419 $ 32,594
Gross profit margin 30.0 % 29.5 % 30.0 % 29.3 %
Service
Revenue $ 27,986 $ 26,832 $ 53,586 $ 49,662
Cost of revenue 9,665 8,737 18,010 16,219
Gross profit $ 18,321 $ 18,095 $ 35,576 $ 33,443
Gross profit margin 65.5 % 67.4 % 66.4 % 67.3 %
Rental and other
Revenue $ 11,371 $ 14,512 $ 20,860 $ 24,079
Cost of revenue 7,849 9,778 14,636 16,719
Gross profit $ 3,522 $ 4,734 $ 6,224 $ 7,360
Gross profit margin 31.0 % 32.6 % 29.8 % 30.6 %
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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 July 31, Six Months Ended July 31,
2020 2019 2020 2019
Revenue
Equipment 66.8 % 68.1 % 68.6 % 68.8 %
Parts 20.3 % 18.8 % 19.2 % 18.7 %
Service 9.2 % 8.5 % 8.7 % 8.4 %
Rental and other 3.7 % 4.6 % 3.4 % 4.1 %
Total Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Total Cost of Revenue 79.3 % 79.7 % 80.3 % 80.1 %
Gross Profit Margin 20.7 % 20.3 % 19.7 % 19.9 %
Operating Expenses 17.5 % 17.4 % 17.3 % 18.1 %
Income from Operations 3.2 % 2.9 % 2.4 % 1.7 %
Other Income (Expense) (0.4) % (0.6) % (0.5) % (0.6) %
Income Before Income Taxes 2.7 % 2.4 % 1.9 % 1.2 %
Provision for Income Taxes 0.6 % 0.6 % 0.5 % 0.3 %
Net Income 2.1 % 1.7 % 1.4 % 0.9 %
Three Months Ended July 31, 2020 Compared to Three Months Ended July 31, 2019
Consolidated Results
Revenue
Three Months Ended July 31, Increase/ Percent
2020 2019 (Decrease) Change
(dollars in thousands)
Equipment $ 202,654 $ 214,435 $ (11,781) (5.5) %
Parts 61,454 59,202 2,252 3.8 %
Service 27,986 26,832 1,154 4.3 %
Rental and other 11,371 14,512 (3,141) (21.6) %
Total Revenue $ 303,465 $ 314,981 $ (11,516) (3.7) %
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%.
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Gross Profit
Three Months Ended July 31, Increase/ Percent
2020 2019 (Decrease) Change
(dollars in thousands)
Gross Profit
Equipment $ 22,423 $ 23,728 $ (1,305) (5.5) %
Parts 18,422 17,470 952 5.4 %
Service 18,321 18,095 226 1.2 %
Rental and other 3,522 4,734 (1,212) (25.6) %
Total Gross Profit $ 62,688 $ 64,027 $ (1,339) (2.1) %
Gross Profit Margin
Equipment 11.1 % 11.1 % — % — %
Parts 30.0 % 29.5 % 0.5 % 1.7 %
Service 65.5 % 67.4 % (1.9) % (2.8) %
Rental and other 31.0 % 32.6 % (1.6) % (4.9) %
Total Gross Profit Margin 20.7 % 20.3 % 0.4 % 2.0 %
Gross Profit Mix
Equipment 35.8 % 37.1 % (1.3) % (3.5) %
Parts 29.4 % 27.3 % 2.1 % 7.7 %
Service 29.2 % 28.3 % 0.9 % 3.2 %
Rental and other 5.6 % 7.3 % (1.7) % (23.3) %
Total Gross Profit Mix 100.0 % 100.0 %
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 July 31, Increase/ Percent
2020 2019 (Decrease) Change
(dollars in thousands)
Operating Expenses $ 53,079 $ 54,855 $ (1,776) (3.2) %
Operating Expenses as a Percentage of Revenue 17.5 % 17.4 % 0.1 % 0.6 %
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.
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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)
Revenue
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 %
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Agriculture
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
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.
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Six Months Ended July 31, 2020 Compared to Six Months Ended July 31, 2019
Consolidated Results
Revenue
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.
Gross Profit
Six Months Ended July 31, Increase/ Percent
2020 2019 (Decrease) Change
(dollars in thousands)
Gross Profit
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.
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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 and $0.1 million of impairment charges on certain long-lived assets during first six months of fiscal 2021 and 2020.
Other Income (Expense)
Six Months Ended July 31, Increase/ Percent
2020 2019 (Decrease) Change
(dollars in thousands)
Interest income and other income (expense) $ 692 $ 1,414 $ (722) (51.1) %
Floorplan interest expense (2,054) (2,276) (222) (9.8) %
Other interest expense (1,944) (2,607) (663) (25.4) %
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.
Six Months Ended July 31, Increase/ Percent
2020 2019 Decrease Change
(dollars in thousands)
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.
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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.
Six Months Ended July 31, Increase/ Percent
2020 2019 (Decrease) Change
(dollars in thousands)
Revenue
Agriculture $ 362,700 $ 319,464 $ 43,236 13.5 %
Construction 137,833 154,782 (16,949) (11.0) %
International 113,140 119,025 (5,885) (4.9) %
Total $ 613,673 $ 593,271 $ 20,402 3.4 %
Income (Loss) Before Income Taxes
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 before income taxes 10,705 7,887 2,818 35.7 %
Shared Resources 736 (975) 1,711 n/m
Total $ 11,441 $ 6,912 $ 4,529 65.5 %
Agriculture
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 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. 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 six-month period. 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
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 $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.
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International
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. 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 $0.7 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
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 $0.7 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.
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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, impairment charges of long-lived assets and foreign currency remeasurement in Ukraine resulting from valuation changes of the UAH. 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. Adjusted net income and adjusted Diluted EPS should be evaluated in addition to, and not considered a substitute for, or superior to, the most comparable GAAP measure. In addition, other companies may calculate these non-GAAP measures in a different manner, which may hinder comparability of our adjusted results with those of other companies.
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 July 31, Six Months Ended July 31,
2020 2019 2020 2019
(dollars in thousands, except per share data)
Adjusted Net Income
Net Income (Loss) $ 6,400 $ 5,511 $ 8,662 $ 5,066
Adjustments
ERP transition costs 763 1,701 1,484 2,716
Impairment charges — — 216 135
Ukraine remeasurement (gain) / loss (130) (141) 635 (153)
Total Pre-Tax Adjustments 633 1,560 2,335 2,698
Less: Tax Effect of Adjustments (1) 466 186 1,047 429
Total Adjustments 167 1,374 1,288 2,269
Adjusted Net Income $ 6,567 $ 6,885 $ 9,950 $ 7,335
Adjusted Diluted EPS
Diluted EPS $ 0.28 $ 0.25 $ 0.39 $ 0.23
Adjustments (2)
ERP transition costs 0.03 0.08 0.07 0.13
Impairment charges — — 0.01 —
Ukraine remeasurement (gain) / loss — (0.01) 0.02 (0.01)
Total Pre-Tax Adjustments 0.03 0.07 0.10 0.12
Less: Tax Effect of Adjustments (1) 0.02 0.01 0.05 0.02
Total Adjustments 0.01 0.06 0.05 0.10
Adjusted Diluted EPS $ 0.29 $ 0.31 $ 0.44 $ 0.33
(1) The tax effect of U.S. 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 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.
Liquidity and Capital Resources
Sources of Liquidity
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.
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Equipment Inventory and Floorplan Payable Credit Facilities
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 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
Our primary uses of cash have been to fund our operating activities, including the purchase of inventories and providing for other working capital needs, meeting our debt service requirements, making payments due under our various leasing arrangements, and funding capital expenditures, including rental fleet assets. 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 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
Cash Flow Provided by (Used for) Operating Activities
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 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 $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 $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
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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
We consider our cash flow from operating activities to include all equipment inventory financing activity regardless of whether we obtain the financing from a manufacturer or other source. GAAP requires the cash flows associated with non-manufacturer floorplan payables to be recognized as financing cash flows in the consolidated statement of cash flows. We consider equipment inventory financing with both manufacturers and other sources to be part of the normal operations of our business. We also evaluate our cash flow from operating activities by assuming a constant level of equity in our equipment inventory. Our equity in our equipment inventory reflects the portion of our equipment inventory balance that is not financed by floorplan payables. Our adjustment to maintain a constant level of equity in our equipment inventory is equal to the difference between our actual level of equity in equipment inventory at each period-end as presented in the consolidated balance sheets compared to the actual level of equity in equipment inventory at the beginning of the fiscal year. We refer to this measure of cash flow as Adjusted Cash Flow.
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. We believe that the presentation of Adjusted Cash Flow is relevant and useful to our investors because it provides information on activities we consider to be the normal operation of our business, regardless of financing source and level of financing for our equipment inventory. The following table reconciles net cash provided by (used for) operating activities, a GAAP measure, to adjusted net cash provided by (used for) operating activities and net cash provided by (used for) financing activities, a GAAP measure, to adjusted net cash provided by (used for) financing activities.
Net Cash Provided by (Used for) Operating Activities Net Cash Provided by (Used for) Financing Activities
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)
Cash Flow, As Reported $ 13,035 $ (6,303) $ 4,519 $ 13,647
Adjustment for Non-Manufacturer Floorplan 7,229 49,937 (7,229) (49,937)
Adjustment for Constant Equity in Equipment Inventory (4,191) (92,977) — —
Adjusted Cash Flow $ 16,073 $ (49,343) $ (2,710) $ (36,290)
Certain Information Concerning Off-Balance Sheet Arrangements
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.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. 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. Any statements that are not based upon historical facts, including the outcome of events that have not yet occurred and our expectations for future performance, are forward-looking statements. 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
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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. These risks and uncertainties include, but are not limited to, the duration, scope and impact of the COVID-19 pandemic on the Company's operations and business, adverse market conditions in the agricultural and construction equipment industries, and those matters identified and discussed under the section titled “Risk Factors” in our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q. Although we are not aware of any other factors, aside from those discussed in our Form 10-K, that we currently anticipate will cause our forward-looking statements to differ materially from our future actual results, or materially affect the Company’s financial condition or future results, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition and/or operating results.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.