Titan Machinery Inc. 10-Q

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 September 2020 U.S. Department of Agriculture publications, the estimate of net farm income for calendar year 2020 indicated an approximate 22.7% increase as compared to calendar year 2019, and an approximate 3.0% increase in net farm income for calendar year 2019, as compared to calendar year 2018. For the third quarter of fiscal 2021, our net income was $9.9 million, or $0.44 per diluted share, compared to a fiscal 2020 third quarter net income of $8.2 million, or $0.37 per diluted share. Our adjusted diluted earnings per share was $0.58 for the third quarter of fiscal 2021, compared to $0.48 for the third 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 third quarter of fiscal 2021 was flat compared to the third quarter of fiscal 2020. Increased revenue from parts and service was offset by lower equipment and rental and other revenue. Total same store sales were down 2.1% compared to the prior year third quarter as the Northwood (ND) location was acquired late 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. Parts and service revenue within our Agriculture segment in the third quarter of fiscal 2020 was positively impacted by good harvest conditions throughout most of our footprint. • Impairments in the third quarter of fiscal 2021 were $2.6 million compared to $0.1 million in the third quarter of fiscal 2020. The increase was attributable to the impairment of goodwill and other intangible assets in one of our International reporting units. • Operating expenses decreased 7.0% compared to the third 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 reduced travel and fuel expenses. • Floorplan and other interest expense decreased a combined 29.4% in the third quarter of fiscal 2021, as compared to the third quarter last year, due to an overall lower interest rate environment, a lower interest rate spread under our new five-year Bank Syndicate Agreement that was finalized in April 2020, and a lower borrowings on our line of credit. 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. 24 Table of Contents 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 in March 2020 but continued operations through social distancing means in all areas: equipment, parts, service and rental. Beginning in May 2020, we began fully reopening our stores to the public, following pandemic safety protocols, and by June 2020 all of our locations were once again open to the public. Additionally, our International stores have also been following pandemic safety protocols set forth by each country and local government authority, which at times have included border shutdowns and curfew regulations. With the number of cases within our footprint on the rise throughout the third quarter of fiscal 2021, we continue to follow the requirements of the local authorities for each of our locations to determine mandates and social distancing policies. As a result of some of the improvements we have made since the beginning of the pandemic, such as physical barriers, cleaning policies, social distancing, and mask mandates, the Company has no plans to close all of its U.S. stores to the public as we did in the spring of fiscal 2021. Any such decision to close a U.S. store to the public, if it is made, will be determined on a location by location basis so as to protect our employees and customers while continuing to provide customers with the service expected from the Company. We believe that each of our business segments, has been and will continue to be, impacted by the COVID-19 pandemic to varying degrees, although the actual ultimate impact has been and will continue to be subject to many variables and uncertainties many of which are currently unknown or outside of our control. Agriculture Overall, we believe COVID-19 has created challenging industry conditions resulting in supply chain disruptions affecting areas such as ethanol, livestock and international trade. These conditions impacted agricultural commodities early in the year, but were later offset by other more positive macro conditions, such as U.S. crop production and increased commodity exports. The variability in commodity prices makes it difficult to estimate the extent and timing of this impact on our equipment sales. However, we believe our parts and service business has been less negatively impacted by COVID-19, as our customers are continuing to experience 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 have been negatively impacted in this segment as a result of COVID-19, with such effects expected to continue as long as pandemic related macroeconomic stress and uncertainties persist. Examples of such macroeconomic stressors include: lower oil prices, higher unemployment, lower GDP, and reduced government spending on infrastructure projects. We believe all of these factors have lead to lower overall U.S. construction spending. International In addition to the industry challenges indicated for our Agriculture segment, our International segment is also being negatively 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 have been more negatively impacted than our Agriculture segment because of these additional challenges and the general lack of government support programs for 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 expanded 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 25 Table of Contents On October 1, 2019, we acquired certain assets of Uglem-Ness Co., a single store Case IH agriculture equipment dealership 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 fiscal 2021 and expects all domestic stores to be migrated to the new ERP during the second or third quarter of fiscal 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 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. 26 Table of Contents Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 (dollars in thousands) (dollars in thousands) Equipment Revenue $ 240,901 $ 245,986 $ 662,060 $ 654,376 Cost of revenue 215,770 219,484 593,048 583,345 Gross profit $ 25,131 $ 26,502 $ 69,012 $ 71,031 Gross profit margin 10.4 % 10.8 % 10.4 % 10.9 % Parts Revenue $ 76,778 $ 70,788 $ 194,846 $ 181,928 Cost of revenue 53,556 49,834 136,205 128,380 Gross profit $ 23,222 $ 20,954 $ 58,641 $ 53,548 Gross profit margin 30.2 % 29.6 % 30.1 % 29.4 % Service Revenue $ 30,696 $ 27,553 $ 84,282 $ 77,215 Cost of revenue 10,254 8,950 28,263 25,170 Gross profit $ 20,442 $ 18,603 $ 56,019 $ 52,045 Gross profit margin 66.6 % 67.5 % 66.5 % 67.4 % Rental and other Revenue $ 12,497 $ 16,609 $ 33,357 $ 40,688 Cost of revenue 8,741 10,894 23,379 27,612 Gross profit $ 3,756 $ 5,715 $ 9,978 $ 13,076 Gross profit margin 30.1 % 34.4 % 29.9 % 32.1 % The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated: Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Revenue Equipment 66.8 % 68.2 % 67.9 % 68.6 % Parts 21.3 % 19.6 % 20.0 % 19.1 % Service 8.5 % 7.6 % 8.6 % 8.1 % Rental and other 3.5 % 4.6 % 3.4 % 4.3 % Total Revenue 100.0 % 100.0 % 100.0 % 100.0 % Total Cost of Revenue 79.9 % 80.1 % 80.1 % 80.1 % Gross Profit Margin 20.1 % 19.9 % 19.9 % 19.9 % Operating Expenses 15.0 % 16.1 % 16.4 % 17.4 % Impairment of Goodwill 0.4 % — % 0.1 % — % Impairment of Intangible and Long-Lived Assets 0.3 % — % 0.1 % — % Income from Operations 4.4 % 3.8 % 3.1 % 2.5 % Other Income (Expense) (0.6) % (0.3) % (0.6) % (0.5) % Income Before Income Taxes 3.8 % 3.4 % 2.6 % 2.0 % Provision for Income Taxes 1.1 % 1.2 % 0.7 % 0.6 % Net Income 2.7 % 2.3 % 1.9 % 1.4 % 27 Table of Contents Three Months Ended October 31, 2020 Compared to Three Months Ended October 31, 2019 Consolidated Results Revenue Three Months Ended October 31, Increase/ Percent 2020 2019 (Decrease) Change (dollars in thousands) Equipment $ 240,901 $ 245,986 $ (5,085) (2.1) % Parts 76,778 70,788 5,990 8.5 % Service 30,696 27,553 3,143 11.4 % Rental and other 12,497 16,609 (4,112) (24.8) % Total Revenue $ 360,872 $ 360,936 $ (64) — % Total revenue for the third quarter of fiscal 2021 was virtually flat compared to the third quarter of fiscal 2020. Increased revenue from parts and service was offset by lower equipment and rental and other revenue. Company-wide same-store sales in the third quarter of fiscal 2021 decreased 2.1% versus the comparable period in fiscal 2020. The most significant decrease in same store sales occurred in the International segment with same-store sales decreasing 11.1% from the prior year quarter. Gross Profit Three Months Ended October 31, Increase/ Percent 2020 2019 (Decrease) Change (dollars in thousands) Gross Profit Equipment $ 25,131 $ 26,502 $ (1,371) (5.2) % Parts 23,222 20,954 2,268 10.8 % Service 20,442 18,603 1,839 9.9 % Rental and other 3,756 5,715 (1,958) (34.3) % Total Gross Profit $ 72,551 $ 71,774 $ 778 1.1 % Gross Profit Margin Equipment 10.4 % 10.8 % (0.4) % (3.7) % Parts 30.2 % 29.6 % 0.6 % 2.0 % Service 66.6 % 67.5 % (0.9) % (1.3) % Rental and other 30.1 % 34.4 % (4.3) % (12.5) % Total Gross Profit Margin 20.1 % 19.9 % 0.2 % 1.0 % Gross Profit Mix Equipment 34.6 % 36.9 % (2.3) % (6.2) % Parts 32.0 % 29.2 % 2.8 % 9.6 % Service 28.2 % 25.9 % 2.3 % 8.9 % Rental and other 5.2 % 8.0 % (2.8) % (35.0) % Total Gross Profit Mix 100.0 % 100.0 % Gross profit for the third quarter of fiscal 2021 increased 1.1% or $0.8 million, as compared to the same period last year. Gross profit margin also improved to 20.1% in the current quarter from 19.9% in the prior year quarter. The increase in gross profit and gross profit margin was primarily the result of a change in gross profit mix resulting from a greater percentage of revenue generated by our higher margin parts and service businesses. 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 94.2% for the third quarter of fiscal 2021 compared to 82.6% during the same period last year as the increase in gross profit from parts and service in the third quarter of fiscal 2021 combined with lower operating and floorplan interest expenses generated the improved absorption rate compared to that of the prior year quarter. 28 Table of Contents Operating Expenses Three Months Ended October 31, Increase/ Percent 2020 2019 (Decrease) Change (dollars in thousands) Operating Expenses $ 54,115 $ 58,184 $ (4,069) (7.0) % Operating Expenses as a Percentage of Revenue 15.0 % 16.1 % (1.1) % (6.8) % Our operating expenses in the third quarter of fiscal 2021 decreased 7.0%, as compared to the third quarter of fiscal 2020. The increased operating expenses of four acquired locations, which were not in the prior year quarter, were more than offset by managed expense reductions in our Construction and International segments and various lower operating expenses caused by COVID-19 such as reduced travel and fuel costs. Operating expenses as a percentage of revenue decreased to 15.0% in the third quarter of fiscal 2021 from 16.1% in the third quarter of fiscal 2020. Impairment Charges Three Months Ended October 31, Increase/ Percent 2020 2019 Decrease Change (dollars in thousands) Impairment of Goodwill $ 1,453 $ — $ 1,453 100.0% Impairment of Intangible and Long-Lived Assets 1,103 51 1,052 n/m We recognized $1.5 million in impairment expense related to certain goodwill assets in our International segment in the third quarter of fiscal 2021. We also recognized impairment expense related to other intangible assets and long-lived assets of $1.1 million primarily in our International segment during the same period. The total impairment expense of $2.6 million is an increase compared to the impairment expense in third quarter of fiscal 2020 of $0.1 million. Other Income (Expense) Three Months Ended October 31, Increase/ Percent 2020 2019 (Decrease) Change (dollars in thousands) Interest and other income (expense) $ (360) $ 1,273 $ (1,633) n/m Floorplan interest expense (757) (1,448) (691) (47.7) % Other interest expense (940) (955) (15) (1.6) % Floorplan interest expense decreased 47.7% in the third quarter of fiscal 2021, as compared to the third quarter of fiscal 2020, due to an overall lower interest rate environment, a lower interest rate spread under our new five-year Bank Syndicate Agreement that was finalized in April 2020, and lower borrowings on our line of credit. The decrease in Interest and other income (expense) was primarily due to foreign currency remeasurement losses in Ukraine, resulting from a devaluation of the Ukrainian hyrvnia in the third quarter of fiscal 2021. Provision for Income Taxes Three Months Ended October 31, Increase/ Percent 2020 2019 (Decrease) Change (dollars in thousands) Provision for Income Taxes $ 3,912 $ 4,195 $ (283) (6.7) % Our effective tax rate was 28.3 % for the third quarter of fiscal 2021 and 33.8 % for the third 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, share-based payments, foreign currency fluctuations on our Ukrainian business and a partial valuation allowance recorded on the deferred tax assets of our Germany entity. 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. 29 Table of Contents Three Months Ended October 31, Increase/ Percent 2020 2019 (Decrease) Change (dollars in thousands) Revenue Agriculture $ 220,625 $ 214,073 $ 6,552 3.1 % Construction 79,030 78,031 999 1.3 % International 61,217 68,832 (7,615) (11.1) % Total $ 360,872 $ 360,936 $ (64) — % Income (Loss) Before Income Taxes Agriculture $ 13,575 $ 10,259 $ 3,316 32.3 % Construction 1,448 347 1,101 n/m International (2,424) 2,061 (4,485) n/m Segment income before income taxes 12,599 12,667 (68) (0.5) % Shared Resources 1,225 (258) 1,483 n/m Total $ 13,824 $ 12,409 $ 1,415 11.4 % Agriculture Agriculture segment revenue for the third quarter of fiscal 2021 increased 3.1% compared to the third 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 included in the full prior year quarter. Parts and service also benefited in the quarter from good harvest conditions throughout much of our footprint in the quarter. Same-store sales of our Agriculture segment decreased 1.3% for the third quarter of fiscal 2021 as compared to the third quarter of fiscal 2020. Agriculture segment income before income taxes was $13.6 million for the third quarter of fiscal 2021 compared to $10.3 million for the third quarter of fiscal 2020. The improvement in segment results was primarily due to the higher parts and service revenue as well as the addition of the four acquired locations. Increased operating expenses for the quarter were partially offset by a decrease in traveling expenses due to COVID-19. Lower floorplan and other interest expense for the third quarter of fiscal 2021, as compared to the third quarter of fiscal 2020, also contributed to the improvement in segment results. Construction Construction segment revenue for the third quarter of fiscal 2021 increased 1.3% compared to the third quarter of fiscal 2020. The higher revenue was driven by increases in our equipment sales, as compared to the prior year’s third quarter. This increase was partially offset by lower 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. Higher revenues were offset by the divestiture of the Albuquerque, New Mexico store in the fourth quarter of fiscal 2020. Same-store sales of our Construction segment increased 3.6% for the third quarter of fiscal 2021, as compared to the third quarter of fiscal 2020. Our Construction segment income before taxes was $1.4 million for the third quarter of fiscal 2021 compared to $0.3 million in the third quarter of fiscal 2020. Lower gross profits in this segment were more than offset by managed operating expense reductions and interest expense savings 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 30.4% in the third quarter of fiscal 2020 to 25.7% in the third quarter of fiscal 2021. International International segment revenue and same-store sales, for the third quarter of fiscal 2021 decreased 11.1% compared to the third quarter of fiscal 2020. All primary sources of revenue — equipment, parts and service — declined for the segment's third quarter of fiscal 2021, as compared to the prior year's third quarter. Lower segment revenue was driven by decreased customer demand due to below average yields in certain areas of our International footprint as well as overall challenging economic and business conditions due to COVID-19. 30 Table of Contents Our International segment loss before income taxes was $2.4 million for the third quarter of fiscal 2021 compared to segment income of $2.1 million for the same period last year. The decrease in segment income was the result of lower revenues and impairment of goodwill and other intangible assets in our Germany reporting unit. In the third quarter of fiscal 2020, the International segment was positively impacted by foreign currency gains resulting from a strengthening U.S. dollar relative to the Euro and a strengthening Ukrainian hryvnia relative to the U.S. dollar. 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 $1.2 million for the third quarter of fiscal 2021 compared to a loss before income taxes of $0.3 million for the same period last year. The increase in Shared Resources income was the result of operating expense reductions due to COVID-19 as well as interest expense reductions due to a lower interest rate environment and lower borrowings, compared to the same period last year. 31 Table of Contents Nine Months Ended October 31, 2020 Compared to Nine Months Ended October 31, 2019 Consolidated Results Revenue Nine Months Ended October 31, Increase/ Percent 2020 2019 (Decrease) Change (dollars in thousands) Equipment $ 662,060 $ 654,376 $ 7,684 1.2 % Parts 194,846 181,928 12,918 7.1 % Service 84,282 77,215 7,067 9.2 % Rental and other 33,357 40,688 (7,331) (18.0) % Total Revenue $ 974,545 $ 954,207 $ 20,338 2.1 % Total revenue for the first nine months of fiscal 2021 was up 2.1% or $20.3 million compared to the first nine 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 0.5% 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. Our total revenue increase was also positively impacted by the addition of the four acquired locations. Gross Profit Nine Months Ended October 31, Increase/ Percent 2020 2019 (Decrease) Change (dollars in thousands) Gross Profit Equipment $ 69,012 $ 71,031 $ (2,019) (2.8) % Parts 58,641 53,548 5,093 9.5 % Service 56,019 52,045 3,974 7.6 % Rental and other 9,978 13,076 (3,097) (23.7) % Total Gross Profit $ 193,650 $ 189,700 $ 3,951 2.1 % Gross Profit Margin Equipment 10.4 % 10.9 % (0.5) % (4.6) % Parts 30.1 % 29.4 % 0.7 % 2.4 % Service 66.5 % 67.4 % (0.9) % (1.3) % Rental and other 29.9 % 32.1 % (2.2) % (6.9) % Total Gross Profit Margin 19.9 % 19.9 % — % — % Gross Profit Mix Equipment 35.6 % 37.4 % (1.8) % (4.8) % Parts 30.3 % 28.2 % 2.1 % 7.4 % Service 28.9 % 27.4 % 1.5 % 5.5 % Rental and other 5.2 % 7.0 % (1.8) % (25.7) % Total Gross Profit Mix 100.0 % 100.0 % The $4.0 million increase in gross profit for the first nine months of fiscal 2021, as compared to the same period last year, was primarily due to higher parts and service revenue for the first nine 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 nine months of fiscal 2021 increased to 82.7% as compared to 76.1% during the same period last year as the increase in gross profit from parts and service combined with lower operating expenses and lower floorplan interest expense generated the improved absorption rate compared to that of the prior year nine month period. 32 Table of Contents Operating Expenses Nine Months Ended October 31, Increase/ Percent 2020 2019 (Decrease) Change (dollars in thousands) Operating Expenses $ 160,252 $ 165,594 $ (5,342) (3.2) % Operating Expenses as a Percentage of Revenue 16.4 % 17.4 % (1.0) % (5.7) % Our operating expenses for the first nine months of fiscal 2021 decreased $5.3 million as compared to the first nine months of fiscal 2020. The increased operating expenses of four acquired locations, which were not in the prior year nine-month period, were more than offset by managed expense reductions in our Construction and International segments and various lower operating expenses caused by COVID-19 such as reduced travel and fuel costs. Operating expenses as a percentage of revenue decreased to 16.4% in the first nine months of fiscal 2021 from 17.4% in the first nine months of fiscal 2020. The decrease in operating expenses as a percentage of total revenue was due to lower expenses combined with the increase in total revenue in the first nine months of fiscal 2021, as compared to the the first nine months of fiscal 2020, which positively affected our ability to leverage our fixed operating costs. Restructuring Costs Nine Months Ended October 31, Increase/ Percent 2020 2019 Decrease Change (dollars in thousands) Impairment of Goodwill $ 1,453 $ — $ 1,453 100.0 % Impairment of Intangible and Long-Lived Assets 1,319 186 1,133 n/m We recognized $1.5 million in impairment expense related to certain goodwill assets in the International segment in the first nine months of fiscal 2021. We also recognized $1.3 million, primarily in our International segment, and $0.2 million of impairment charges on certain intangible assets and long-lived assets during first nine months of fiscal 2021 and 2020, respectively. Other Income (Expense) Nine Months Ended October 31, Increase/ Percent 2020 2019 (Decrease) Change (dollars in thousands) Interest and other income (expense) $ 333 $ 2,687 $ (2,354) (87.6) % Floorplan interest expense (2,811) (3,724) (913) (24.5) % Other interest expense (2,884) (3,562) (678) (19.0) % Floorplan interest expense decreased 24.5% for the first nine months of fiscal 2021, as compared to the same period 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. The decrease in other interest expense in the first nine months of fiscal 2021, as compared to the first nine 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 and other income (expense) in the first nine months of fiscal 2021 as compared to the the same period of fiscal 2020 is primarily the result of differences in foreign currency gains and losses recognized during the periods. The U.S. dollar strengthened relative to the Euro and the Ukrainian hyrvia strengthened relative to the U.S. dollar in fiscal 2020 creating foreign currency gains in fiscal 2020. 33 Table of Contents Provision for Income Taxes Nine Months Ended October 31, Increase/ Percent 2020 2019 Decrease Change (dollars in thousands) Provision for Income Taxes $ 6,691 $ 6,041 $ 650 10.8 % Our effective tax rate was 26.5% for the first nine months of fiscal 2021 and 31.3% for the same period last year. In the nine-month period of fiscal our effective tax rate differed from the 21.0% domestic federal statutory tax rate primarily due to the impact of state taxes, share-based payments, foreign currency fluctuations on our Ukrainian business and a partial valuation allowance recorded on the deferred tax assets of our Germany entity. The effective tax rate for the first nine months fiscal 2020 was impacted by foreign currency gains recognized as a result of a strengthening Ukrainian hryvnia, which had increased our effective tax rate by approximately seven percentage points for the first nine months of fiscal 2020. 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. Nine Months Ended October 31, Increase/ Percent 2020 2019 (Decrease) Change (dollars in thousands) Revenue Agriculture $ 583,326 $ 533,538 $ 49,788 9.3 % Construction 216,862 232,813 (15,951) (6.9) % International 174,357 187,856 (13,499) (7.2) % Total $ 974,545 $ 954,207 $ 20,338 2.1 % Income (Loss) Before Income Taxes Agriculture $ 26,490 $ 18,312 $ 8,178 44.7 % Construction (50) (541) 491 90.8 % International (3,136) 2,783 (5,919) n/m Segment income before income taxes 23,304 20,554 2,750 13.4 % Shared Resources 1,961 (1,233) 3,194 n/m Total $ 25,265 $ 19,321 $ 5,944 30.8 % Agriculture Agriculture segment revenue for the first nine months of fiscal 2021 increased 9.3% 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 last year. 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 nine-month period. Same-store sales increased 5.1% for the first nine months of fiscal 2021, as compared to the same period last year. Agriculture segment income before income taxes was $26.5 million for the first nine months of fiscal 2021 compared to $18.3 million over the first nine months of fiscal 2020. The improvement in segment results was the result of increased revenue and a higher mix of higher margin parts and service business, but was partially offset by increased operating expenses due to the addition of four locations. 34 Table of Contents Construction Construction segment revenue for the first nine months of fiscal 2021 decreased 6.9% compared to the same period last year, due to a same-store sales decrease of 4.1% 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 nine-month period, as compared to the prior year’s nine-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 $0.1 million for the first nine months of fiscal 2021 compared to $0.5 million for the first nine months of fiscal 2020. The increase in segment results was primarily due to decreased operating and interest expenses partially offset by lower revenues compared to the prior year preiod. The dollar utilization of our rental fleet decreased from 25.5% in the first nine months of fiscal 2020 to 22.2% in the first nine months of fiscal 2021. International International segment revenue for the first nine months of fiscal 2021 decreased 7.2% 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 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 $3.1 million for the first nine months of fiscal 2021 compared to income before income taxes of $2.8 million for the same period last year. The lower segment results were the result of decreased equipment revenue and the resulting negative impact on our ability to leverage our fixed operating costs within this segment and impairment charges. Impairment charges of $2.3 million were recognized in the first nine months of fiscal 2021, related to the impairment of the goodwill balance and a portion of the distribution rights of our Germany reporting unit. 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 $2.0 million for the first nine months of fiscal 2021 compared to loss before income taxes of $1.2 million for the same period last year. The increase in Shared Resources income was the result of operating expense reductions due to COVID-19 as well as interest expense reductions due to a lower interest rate environment and lower borrowings, compared to the same period last year. 35 Table of Contents 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 valuation allowances for income tax, ERP transition costs, impairment charges and foreign currency remeasurement in Ukraine resulting from valuation changes of the Ukrainian hryvnia. 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 October 31, Nine Months Ended October 31, 2020 2019 2020 2019 (dollars in thousands, except per share data) Adjusted Net Income Net Income $ 9,912 $ 8,214 $ 18,574 $ 13,280 Adjustments ERP transition costs 765 2,062 2,250 4,778 Impairment charges 2,555 51 2,771 186 Ukraine remeasurement (gain) / loss 339 (435) 974 (588) Total Pre-Tax Adjustments 3,659 1,678 5,995 4,376 Less: Tax Effect of Adjustments (1) 1,566 (846) 2,613 (417) Plus: Income Tax Valuation Allowance 1,018 — 1,018 — Total Adjustments 3,111 2,524 4,400 4,793 Adjusted Net Income $ 13,023 $ 10,738 $ 22,974 $ 18,073 Adjusted Diluted EPS Diluted EPS $ 0.44 $ 0.37 $ 0.83 $ 0.60 Adjustments (2) ERP transition costs 0.03 0.09 0.10 0.21 Impairment charges 0.11 — 0.12 0.01 Ukraine remeasurement (gain) / loss 0.02 (0.02) 0.04 (0.03) Total Pre-Tax Adjustments 0.16 0.07 0.26 0.19 Less: Tax Effect of Adjustments (1) 0.07 (0.04) 0.12 (0.02) Plus: Income Tax Valuation Allowance 0.05 — 0.05 — Total Adjustments 0.14 0.11 0.19 0.21 Adjusted Diluted EPS $ 0.58 $ 0.48 $ 1.02 $ 0.81 (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. The tax effect of the Germany related adjustments was calculated using a 29% tax rate. Included in the tax effect of the adjustments is the tax impact of foreign currency changes in Ukraine of $0.7 million for the three months ended October 31, 2020 and $1.3 million for the nine months ended October 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 36 Table of Contents obligations and other commitments and contingencies, and meet any seasonal operating requirements for the foreseeable future, provided 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 on Form 10-K. Equipment Inventory and Floorplan Payable Credit Facilities As of October 31, 2020, the Company had floorplan payable lines of credit for equipment purchases totaling $765.0 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 October 31, 2019 to 1.6 times for the four-quarter period ended October 31, 2020. The decrease in equipment turnover was attributable to a slight decrease in equipment sales and a slight increase in our rolling 12 month average equipment inventory over the four-quarter period ended October 31, 2020 as compared to the four-quarter period ended October 31, 2019. Our equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, increased to 36.0% as of October 31, 2020 from 27.9% as of January 31, 2020. The increase was due to cash generated from operating activities used to pay down floorplan payables. 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 October 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 October 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 $60.8 million for the first nine months of fiscal 2021, compared to net cash used for operating activities of $8.3 million for the first nine 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 nine 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 $56.5 million for the first nine months of fiscal 2021 compared to an adjusted cash flow used for operating activities of $35.0 million for the first nine months of fiscal 2020. The change in adjusted cash flow provided by (used for) operating activities is primarily the result of increased equipment inventory stocking during the previous fiscal year compared to reducing inventories during the first nine 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 $22.2 million for the first nine months of fiscal 2021, compared to $30.8 million for the first nine months of fiscal 2020. The decrease in cash used for investing activities was primarily the result of a 37 Table of Contents decreased level of rental fleet purchases and a decrease in cash paid for acquisitions in the purchase of equipment dealerships for the first nine months of fiscal 2021 compared to the same period last year. Cash Flow Provided by (Used for) Financing Activities Net cash used for financing activities was $40.8 million for the first nine months of fiscal 2021 compared to cash provided by financing activities of $34.9 million for the first nine months of fiscal 2020 . The decrease in cash provided by financing activities was primarily the result of a decrease in proceeds from non-manufacturer floorplan as well as a decrease in proceeds from long term debt borrowings in the first nine months of fiscal 2021 compared to the same period last year. The cash provided by financing activities in fiscal 2020 was partially offset by the repayment of the senior convertible notes. 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 increased to 36.0% as of October 31, 2020 from 27.9% as of January 31, 2020, and decreased to 18.0% as of October 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 Nine Months Ended October 31, 2020 Nine Months Ended October 31, 2019 Nine Months Ended October 31, 2020 Nine Months Ended October 31, 2019 (in thousands) (in thousands) Cash Flow, As Reported $ 60,814 $ (8,289) $ (40,779) $ 34,902 Adjustment for Non-Manufacturer Floorplan (40,779) 62,387 40,779 (62,387) Adjustment for Constant Equity in Equipment Inventory 36,477 (89,076) — — Adjusted Cash Flow $ 56,512 $ (34,978) $ — $ (27,485) Certain Information Concerning Off-Balance Sheet Arrangements As of October 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 38 Table of Contents 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 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. 39 Table of Contents