Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing under Item 8 of this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report, including information with respect to our plans and strategy for our business and expected financial results, includes forward-looking statements that involve risks and uncertainties. You should review the "Information Regarding Forward-Looking Statement" in this Item 7 and "Risk Factors" presented under Item 1A for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis in this annual report.
A discussion of changes in our Financial Results and Cash Flow Comparisons from fiscal year 2019 to fiscal year 2020 has been omitted from this Form 10-K, but may be found in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended January 31, 2020, filed with the SEC on April 7, 2020.
BUSINESS DESCRIPTION
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, collectively referred to in this Form 10-K as CNH Industrial, we are the largest retail dealer of Case IH Agriculture equipment in the world, one of the largest retail dealers of Case Construction equipment in North America and one of the largest retail dealers 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.
The agricultural equipment we sell and service includes machinery and attachments for uses ranging from large-scale farming to home and garden use. The construction equipment we sell and service includes heavy construction machinery, light industrial machinery for commercial and residential construction, road and highway construction machinery, energy, and forestry operations equipment. We offer our customers a one-stop solution for their equipment needs through:
• new and used equipment sales;
• parts sales;
• equipment repair and maintenance services; and
• equipment rental and other activities.
The new equipment and parts we sell are supplied primarily by CNH Industrial. According to its public reports, CNH Industrial is a leading manufacturer and supplier of agricultural and construction equipment based on the number of units sold, primarily through the Case IH Agriculture, New Holland Agriculture, Case Construction and New Holland Construction brands. Sales of new CNH Industrial products accounted for approximately 72% of our new equipment revenue in fiscal 2021, with our single largest manufacturer other than CNH Industrial representing approximately 2% of our total new equipment sales. We acquire used equipment for resale primarily through trade-ins from our customers and in some cases through selective purchases. We sell parts and provide in-store and on-site repair and maintenance services. We rent equipment and provide other ancillary services such as equipment transportation, GPS signal subscriptions, farm data management systems, precision farming equipment, and finance and insurance products.
Throughout our 40-year operating history, we have built an extensive, geographically contiguous network of 75 stores located in the United States and 34 stores in Europe. We have a history of growth through acquisitions, including over 50 acquisitions in 11 U.S. states and four European countries since January 1, 2003. We believe that there will continue to be opportunities for dealership consolidation in the future, and we expect that acquisitions will continue to be a component of our long-term growth strategy.
Certain External Factors Affecting our Business
We are subject to a number of factors that affect our business including those factors discussed in the sections in this annual report entitled "Risk Factors" and "Information Regarding Forward-Looking Statements." Certain of these external factors include, but are not limited to, the following:
Impact of 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
26
Table of Contents
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 has been highly fluid 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 in March 2020 but continued operations through social distancing means in all areas: equipment, parts, service and rental. Beginning in May 2020, we began to fully reopen 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.
As vaccine distributions begin, we continue to follow the requirements of the local authorities for each of our locations to determine mandates and social distancing policies. Practices and policies we have put in place at the beginning of the pandemic, such as physical barriers, additional cleaning services, social distancing, and mask mandates, will continue until such time COVID-19 does not appear to be a threat.
Each of our segments has been, and will continue to be, impacted differently and to a varying degree. The complete impact of the pandemic will continue to be subject to many variables and uncertainties many of which are currently unknown or outside of our control. A brief overview of the impact COVID-19 has had on each of our business segments is listed below.
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 fiscal 2021, but were more than offset by positive macro conditions later in fiscal 2021, such as U.S. crop production, increased commodity exports and 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 our Construction 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 that all of these factors have led 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 our International 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.
Macroeconomic and Industry Factors
Our Agriculture and International businesses are primarily driven by the demand for agricultural equipment for use in the production of food, fiber, feed grain and renewable energy; home and garden applications; and the maintenance of commercial, residential and government properties. Agriculture industry factors such as changes in agricultural commodity prices and net farm income, have an effect on customer sentiment and their ability to secure financing for equipment purchases. Macroeconomic and industry factors that affect commodity prices and net farm income include changing worldwide demand for agriculture commodities, crop yields and supply disruptions caused by weather patterns and crop diseases, crop stock levels, production costs, and changing U.S. dollar foreign currency exchange rates. Based on U.S. Department of Agriculture ("USDA") publications, the most recent estimate of net farm income for calendar year 2020 increased 46% compared to calendar year 2019 due to the U.S. Federal government's direct farm program payments, U.S. crop production, and increased commodity exports. Based on its February 2021 report, the USDA projected net farm income for calendar year 2021 to decrease 8.1%, as compared to calendar year 2020.
27
Table of Contents
Our Construction business is primarily impacted by the demand for construction equipment for use in private and government commercial, residential, and infrastructure construction; demolition; maintenance; energy and forestry operations. Industry reports show that demand for construction equipment in our markets is driven by several factors, one of which is public infrastructure spending, including roads and highways, sewer and water. Any growth in federal allocations to public infrastructure spending over the next few years should positively impact our future results of operations. Likewise, any decline in federal allocations to public infrastructure spending over the next few years should negatively impact our future results of operations.
Seasonality & Weather
The agricultural and construction equipment businesses are highly seasonal, which causes our quarterly results and our available cash flow to fluctuate during the year. Our customers generally purchase and rent equipment in preparation for, or in conjunction with, their busy seasons, which for farmers are the spring planting and fall harvesting seasons; and which for Construction customers is typically the second and third quarters of our fiscal year for much of our Construction footprint. Our parts and service revenues are typically highest during our customers' busy seasons as well, due to the increased use of their equipment during this time, which generates the need for more parts and service work. However, weather conditions impact the timing of our customers' busy times, which may cause greater than expected fluctuations in our quarterly financial results year over year. In addition, the fourth quarter typically is a significant period for equipment sales in the U.S. because of our customers’ year-end tax planning considerations, the timing of dealer incentives and the increase in availability of funds from completed harvests and construction projects.
Seasonal weather trends, particularly severe wet or dry conditions, can have a significant impact on regional agricultural and construction market performance by affecting crop production and the ability to undertake construction projects. Weather conditions that adversely affect the agricultural or construction markets decrease the demand for our products and services.
In addition, numerous external factors such as credit markets, commodity prices, and other circumstances may disrupt normal purchasing practices and buyer sentiment, further contributing to the seasonal fluctuations.
Dependence on our Primary Supplier
The majority of our business involves the distribution and servicing of equipment manufactured by CNH Industrial. In fiscal 2021, CNH Industrial supplied approximately 74% of the new equipment sold in our Agriculture segment, 71% of the new equipment sold in our Construction segment, and 68% of the new equipment sold in our International segment, and represented a significant portion of our parts revenue. Thus, we believe the following factors have a significant impact on our operating results:
• CNH Industrial’s product offerings, reputation and market share;
• CNH Industrial’s product prices and incentive and discount programs;
• CNH Industrial's supply of inventory;
• CNH Industrial's offering of floorplan payable financing for the purchase of a substantial portion of our inventory; and
• CNH Industrial's offering of financing and leasing used by our customers to purchase CNH Industrial equipment from us.
Credit Market Changes
Changes in credit markets can affect our customers' ability and willingness to make capital expenditures, including purchasing our equipment. Tight credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets have the potential to adversely affect our business. Such disruptions in the overall economy and financial markets and the related reduction in consumer confidence in the economy, slow activity in the capital markets, negatively affect access to credit on commercially acceptable terms, and may adversely impact our customers' access to credit and the terms of any such credit. However, if retail interest rates remain low, our business may be positively affected by customers who find financing purchases of our equipment more attractive due to lower borrowing costs.
Our business is also particularly dependent on our access to credit markets to manage inventory and finance acquisitions. We cannot predict what future changes will occur in credit markets or how these changes will impact our business.
28
Table of Contents
Inflation
Inflation has not had a material impact on our operating results and we do not expect it to have a material impact in the future. To date, in those instances in which we have experienced cost increases, we have been able to increase selling prices to offset such increases.
Critical Accounting Policies and Use of Estimates
In the preparation of financial statements prepared in conformity with U.S. generally accepted accounting principles ("GAAP"), we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosures. While we believe the estimates and judgments we use in preparing our financial statements are appropriate, they are subject to future events and uncertainties regarding their outcome and therefore actual results may materially differ from these estimates. We describe in Note 1, Business Activity and Significant Accounting Polices, of the Notes to our Consolidated Financial Statements the significant accounting policies used in preparing the consolidated financial statements. We consider the following items in our consolidated financial statements to require significant estimation or judgment.
Revenue Recognition
Equipment revenue transactions include the sale of agricultural and construction equipment and often include both cash and noncash consideration received from our customers, with noncash consideration in the form of used, trade-in, equipment assets. The amount of revenue recognized in the sale transaction is dependent on the value assigned to the trade-in asset. Significant judgment is required to estimate the value of trade-in assets. We assign value based on the estimated selling price for that piece of equipment in the applicable market, less a gross profit amount to be realized at the time the trade-in asset is sold and an estimate of any reconditioning work required to ready the asset for sale. We estimate future selling prices of trade-in assets using various external industry data and relevant internal information, and consider the impact of various factors including model year, hours of use, overall condition, and other equipment specifications. Our estimates of the value of trade-in assets are impacted by changing market values of used equipment and the availability of relevant and reliable third-party data. In instances in which relevant third-party information is not available, the value assigned to trade-in equipment is dependent on internal judgments.
Inventories
New and used equipment inventories are stated at the lower of cost (specific identification) or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The majority of our used equipment inventory is acquired through trade-ins from our customers and is initially measured and recognized based on the estimated future selling price of the equipment, less a gross profit amount to be realized when the trade-in asset is sold and an estimate of any reconditioning work required to ready the asset for sale. Subsequent to the initial recognition, all new and used equipment inventories are subject to lower of cost or net realizable value assessments. We estimate net realizable value using internal information, management judgment and third-party data that considers various factors including age and condition of equipment, hours of use and market conditions. Generally, used equipment prices are more volatile to changes in market conditions than prices for new equipment due to incentive programs that may be offered by manufacturers to assist in the sale of new equipment. We review our equipment inventory values and adjust them whenever the carrying amount exceeds the estimated net realizable value.
Parts inventories are valued at the lower of average cost or net realizable value. We estimate net realizable value of our parts inventories based on various factors including aging and sales history of each type of parts inventory.
Impairment of Long-Lived Assets
Our long-lived assets consist primarily of property and equipment and operating lease assets. We review these assets for potential impairment whenever events or circumstances indicate that the carrying value may not be recoverable. Recoverability is measured by comparing the estimated future undiscounted cash flows of such assets to their carrying values. If the estimated undiscounted cash flows exceed the carrying value, the carrying value is considered recoverable and no impairment recognition is required. However, if the sum of the undiscounted cash flows is less than the carrying value of the asset, the second step of the impairment analysis must be performed to measure the amount of the impairment, if any. The second step of the impairment analysis compares the estimated fair value of the long-lived asset to its carrying value and any amount by which the carrying value exceeds the fair value is recognized as an impairment charge.
When reviewing long-lived assets for impairment, we group long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Long-lived assets deployed and used by individual store locations are reviewed for impairment at the individual store level. Other
29
Table of Contents
long-lived assets shared across stores within a segment or shared across segments are reviewed for impairment on a segment or consolidated level as appropriate.
During our 2021 fiscal year, we determined that events or circumstances were present that may indicate that the carrying amount of certain of our store long-lived assets might not be recoverable. The events or circumstances which indicated that certain of our store long-lived assets might not be recoverable included a current period operating loss combined with historical losses and anticipated future operating losses within certain of our stores, or an expectation that a long-lived asset (or asset group) will be disposed of before the end of its previously estimated useful life. In light of these circumstances, we performed step one of the impairment analysis for these assets, which have a combined carrying value of $31.5 million, to determine if the asset values are recoverable. In certain cases, the analysis indicated that the carrying value is not recoverable. The aggregate carrying value of such assets totaled $6.4 million. Based on this conclusion, we performed step two of the impairment analysis and estimated the fair value of these assets using an income approach that incorporated unobservable inputs including estimated forecasted net cash flows generated from the use and disposition of these assets. Step two of the analysis indicated that an impairment charge in the amount of $0.9 million was necessary, of which $0.3 million related to the Agriculture segment and $0.6 million related to the Construction segment. In all other cases, in which the aggregate carrying value of such assets totaled $25.2 million, our analyses indicated that the carrying values are recoverable based on our estimates of future undiscounted cash flows under step one of the impairment analysis.
Our impairment analyses require significant judgment, including identification of the grouping of long-lived and other assets and liabilities for impairment testing, estimates of future cash flows arising from these groups of assets and liabilities, and estimates of the remaining useful lives of the long-lived assets being evaluated. Our estimates inherently include a degree of uncertainty and are impacted by macroeconomic and industry conditions, the competitive environment and other factors. Adverse changes in any of these factors in future periods could result in impairment charges in future periods which could materially impact our results of operations and financial position.
Income Taxes
In determining our provision for (benefit from) income taxes, we must make certain judgments and estimates, including an assessment of the realizability of our deferred tax assets. In evaluating our ability to realize the benefit of our deferred tax assets we consider all available positive and negative evidence, including our historical operating results and our expectation of future taxable income, the availability to implement prudent tax-planning strategies, and the carryforward periods over which the assets may be realized. These assumptions require significant judgment and estimation.
In reviewing our deferred tax assets as of January 31, 2021, we concluded that a full valuation allowance continued to be warranted in certain jurisdictions. It was also concluded that a full valuation allowance for the Company's Ukrainian subsidiary was warranted and a partial valuation allowance for the Company's German subsidiary was warranted, as such the Company recorded an additional $3.8 million valuation allowance for these two subsidiaries. In total, valuation allowances of $6.1 million exist for our international entities as of January 31, 2021.
At the end of fiscal year ended January 31, 2020, the Company concluded, based upon all available evidence, it was more likely than not that it would have sufficient future taxable income to realize the Company’s federal and state deferred tax assets. As a result, the Company released the $4.6 million valuation allowance associated with deferred tax assets and recognized a corresponding benefit from income taxes in the consolidated statement of operations for the year ended January 31, 2020. The Company's conclusion regarding the realizability of such deferred tax assets was based on recent profitable domestic operations resulting in a cumulative profit over the three-year period ending January 31, 2020 and our projections of future profitability in the U.S.
In reviewing our foreign deferred tax assets as of January 31, 2020, we concluded that a full valuation allowance was warranted in certain jurisdiction locations. In total, valuation allowances of $2.2 million existed for certain of our international entities as of January 31, 2020.
The initial recognition of, and any changes in, a deferred tax asset valuation allowance are recorded to the provision for income taxes and impacts our effective tax rate. Our assessment of the need for and magnitude of valuation allowances for our deferred tax assets may be impacted by changes in tax laws, our assumptions regarding the ability to generate future taxable income and the availability of tax-planning strategies. Changes in any of these factors could lead to a change in the recognized valuation allowance which may impact our future results of operations and financial position.
New Accounting Pronouncements
Refer to Note 1, Business Activity and Significant Accounting Polices, of the Notes to our Consolidated Financial Statements for a description of new accounting pronouncements recently adopted or not yet adopted and the impact or anticipated impact of such pronouncements to our consolidated financial statements.
30
Table of Contents
Key Financial Metrics
In addition to tracking our sales and expenses to evaluate our operational performance, we also monitor the following key financial metrics. The results of some of these metrics are discussed further throughout the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-K.
Inventory Turnover
Inventory turnover measures the rate at which inventory is sold during the year. We calculate it by dividing cost of sales on equipment and parts for the last twelve months by the average of the month-end balances of our equipment and parts inventories for the same twelve-month period. We believe that inventory turnover is an important management metric in evaluating the efficiency at which we are managing and selling our inventories.
Same-Store Results
Same-store results for any period represent results of operations by stores that were part of our Company for the entire comparable period in the preceding fiscal year. We do not distinguish relocated or newly-expanded stores in this same-store analysis. Closed stores are excluded from the same-store analysis.
Absorption
Absorption is an industry term that refers to the percentage of an equipment dealer's operating expense covered by the combined gross profit from parts, service and rental fleet activity. We calculate absorption 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. We believe that absorption is an important management metric because during economic down cycles our customers tend to postpone new and used equipment purchases while continuing to run, maintain and repair their existing equipment. Thus, operating at a high absorption rate enables us to operate profitably throughout economic down cycles.
Dollar Utilization
Dollar utilization is a measurement of asset performance and profitability used in the rental industry. We calculate the dollar utilization of our rental fleet equipment 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. While our rental fleet has variable expenses related to repairs and maintenance, its primary expense for depreciation is fixed. Low dollar utilization of our rental fleet has a negative impact on gross profit margin and gross profit dollars due to the fixed depreciation component. However, high dollar utilization of our rental fleet has a positive impact on gross profit margin and gross profit dollars.
Adjusted EBITDA
EBITDA is a non-GAAP financial measure defined as earnings before finance costs, income taxes, depreciation and amortization and is a metric frequently used to assess and evaluate financial performance. Management uses Adjusted EBITDA as a measure of financial performance, as a supplemental measure to evaluate the Company's overall operating performance and believes it provides a useful metric for comparability between periods and across entities within our industry by excluding differences in capital structure, income taxes, non-cash charges and certain activities that occur outside of the ordinary course of our business. We calculate Adjusted EBITDA as our net income (loss), adjusted for net interest (excluding floorplan interest expense), income taxes, depreciation, amortization, and items included in our non-GAAP reconciliation, for each of the respective periods. Adjusted EBITDA should be evaluated in addition to, and not considered a substitute for, or superior to, any GAAP measure of net income (loss). In addition, other companies may calculate Adjusted EBITDA in a different manner, which may hinder comparability with other companies. The Company's Adjusted EBITDA for the fiscal years ended January 31, 2021 and 2020 was $65.4 million and $52.5 million, respectively. Refer to the Non-GAAP Financial Measures section for a reconciliation of Adjusted EBITDA to net income.
Key Financial Statement Components
Revenue
• Equipment : We derive equipment revenue from the sale of new and used agricultural and construction equipment.
• Parts: We derive parts revenue from the sale of parts for brands of equipment that we sell, other makes of equipment, and other types of equipment and related components. Our parts sales provide us with a relatively stable revenue stream that is less sensitive to the economic cycles that affect our equipment sales.
31
Table of Contents
• Service: We derive service revenue from repair and maintenance services to our customers' equipment. Our repair and maintenance services provide a high-margin, relatively stable source of revenue through changing economic cycles.
• Rental and other: We derive other revenue from equipment rentals and ancillary equipment support activities such as equipment transportation, GPS signal subscriptions and reselling financial and insurance products.
Cost of Revenue
• Equipment: Cost of equipment revenue is the lower of the acquired cost or the net realizable value of the specific piece of equipment sold.
• Parts: Cost of parts revenue is the lower of the acquired cost or the market value of the parts sold, based on average costing.
• Service: Cost of service revenue represents costs attributable to services provided for the maintenance and repair of customer-owned equipment and equipment then on-rent by customers.
• Rental and other: Costs of other revenue represent costs associated with equipment rental, such as depreciation, maintenance and repairs, as well as costs associated providing transportation, hauling, parts freight, GPS subscriptions and damage waivers, including, among other items, drivers' wages, fuel costs, shipping costs and our costs related to damage waiver policies.
Operating Expenses
Our operating expenses include sales and marketing expenses, sales commissions (which generally are based upon equipment gross profit margins), payroll and related benefit costs, insurance expenses, professional fees, property rental and related costs, property and other taxes, administrative overhead, and depreciation associated with property and equipment (other than rental equipment).
Floorplan Interest
The cost of financing inventory is an important factor affecting our results of operations. Floorplan payable financing from CNH Industrial Capital, the Bank Syndicate Agreement, DLL Finance and various credit facilities related to our foreign subsidiaries represent the primary sources of financing for equipment inventories. CNH Industrial regularly offers interest-free periods as well as additional incentives and special offers. As of January 31, 2021, 61.0% of our floorplan payable financing was non-interest bearing.
Other Interest Expense
Interest expense represents the interest on our debt instruments, including on our previously outstanding Senior Convertible Notes, other than floorplan payable financing facilities. Non-cash interest expense from amortization of the debt discount associated with our previously outstanding Senior Convertible Notes is also included in this balance.
32
Table of Contents
Results of Operations
Comparative financial data for each of our four sources of revenue for fiscal 2021 and 2020 are presented below. The results include the acquisitions made during these periods. The year-to-year comparison included below is not necessarily indicative of future results. Information regarding segment revenue and income (loss) before income taxes is presented for each fiscal year following our discussion of the consolidated results of operations. Additional information regarding our segments is included in Note 22 of our consolidated financial statements.
The comparative financial data for fiscal 2019 and the comparison of fiscal 2020 to fiscal 2019 have been omitted from this Form 10-K but may be found in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended January 31, 2020, filed with the SEC on April 7, 2020.
Year Ended January 31,
2021 2020
(dollars in thousands)
Equipment
Revenue $ 1,016,071 $ 917,202
Cost of revenue 911,170 818,707
Gross profit $ 104,901 $ 98,495
Gross profit margin 10.3 % 10.7 %
Parts
Revenue $ 244,676 $ 234,217
Cost of revenue 171,873 165,190
Gross profit $ 72,803 $ 69,027
Gross profit margin 29.8 % 29.5 %
Service
Revenue $ 107,229 $ 99,165
Cost of revenue 36,692 33,446
Gross profit $ 70,537 $ 65,719
Gross profit margin 65.8 % 66.3 %
Rental and other
Revenue $ 43,246 $ 54,587
Cost of revenue 30,125 37,010
Gross profit $ 13,121 $ 17,577
Gross profit margin 30.3 % 32.2 %
33
Table of Contents
The following table sets forth our statements of operations data expressed as a percentage of revenue for the fiscal years indicated.
Year Ended January 31,
2021 2020
Revenue
Equipment 72.0 % 70.3 %
Parts 17.3 % 17.9 %
Service 7.6 % 7.6 %
Rental and other 3.1 % 4.2 %
Total Revenue 100.0 % 100.0 %
Total Cost of Revenue 81.5 % 80.8 %
Gross Profit Margin 18.5 % 19.2 %
Operating Expenses 15.6 % 17.3 %
Impairment of Goodwill 0.1 % — %
Impairment of Intangible and Long-Lived Assets 0.1 % 0.3 %
Income from Operations 2.7 % 1.6 %
Other Income (Expense) (0.5) % (0.5) %
Income Before Income Taxes 2.2 % 1.1 %
Provision for Income Taxes 0.8 % 0.1 %
Net Income 1.4 % 1.1 %
Fiscal Year Ended January 31, 2021 Compared to Fiscal Year Ended January 31, 2020
Consolidated Results
Revenue
Year Ended January 31, Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Equipment $ 1,016,071 $ 917,202 $ 98,869 10.8 %
Parts 244,676 234,217 10,459 4.5 %
Service 107,229 99,165 8,064 8.1 %
Rental and other 43,246 54,587 (11,341) (20.8) %
Total Revenue $ 1,411,222 $ 1,305,171 $ 106,051 8.1 %
The increase in total revenue for fiscal 2021, as compared to fiscal 2020, was primarily the result of strong agriculture equipment sales due to U.S. crop production and increased commodity exports, which increased net farm income. Our total revenue increase over the prior year was also impacted by our acquisitions of Northwood and HorizonWest. Company-wide same-store sales increased 6.9% over the prior fiscal year, which was driven by equipment sales within our Agriculture segment.
34
Table of Contents
Gross Profit
Year Ended January 31, Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Gross Profit
Equipment $ 104,901 $ 98,495 $ 6,406 6.5 %
Parts 72,803 69,027 3,776 5.5 %
Service 70,537 65,719 4,818 7.3 %
Rental and other 13,121 17,577 (4,456) (25.4) %
Total Gross Profit $ 261,362 $ 250,818 $ 10,544 4.2 %
Gross Profit Margin
Equipment 10.3 % 10.7 % (0.4) % (3.7) %
Parts 29.8 % 29.5 % 0.3 % 1.0 %
Service 65.8 % 66.3 % (0.5) % (0.8) %
Rental and other 30.3 % 32.2 % (1.9) % (5.9) %
Total Gross Profit Margin 18.5 % 19.2 % (0.7) % (3.6) %
Gross Profit Mix
Equipment 40.1 % 39.3 % 0.8 % 2.0 %
Parts 27.9 % 27.5 % 0.4 % 1.5 %
Service 27.0 % 26.2 % 0.8 % 3.1 %
Rental and other 5.0 % 7.0 % (2.0) % (28.6) %
Total Gross Profit Mix 100.0 % 100.0 %
Gross profit increased 4.2% or $10.5 million from fiscal 2020 to fiscal 2021, primarily due to higher revenue and gross profit from our equipment, parts, and service business partially offset by lower rental gross profit. Gross profit margin decreased from 19.2% in fiscal 2020 to 18.5% in fiscal 2021. The decrease in overall gross profit margin was primarily the result of a change in sales mix, with a greater proportion of revenue earned from equipment during fiscal 2021 as compared to the higher margin parts and service revenue during fiscal 2020 . Additionally, rental and other gross profit was negatively impacted by a decrease in the size of the total rental fleet as well as a decrease in fleet dollar utilization to 22.2% in fiscal 2021 compared to 25.4% in fiscal 2020.
Our company-wide absorption rate improved to 77.7% for fiscal 2021 as compared to 72.0% during fiscal 2020 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 fiscal 2020.
Operating Expenses
Year Ended January 31, Percent
2021 2020 Decrease Change
(dollars in thousands)
Operating Expenses $ 220,774 $ 225,722 $ (4,948) (2.2) %
Operating Expenses as a Percentage of Revenue 15.6 % 17.3 % (1.7) % (9.8) %
Operating expenses for fiscal 2021 decreased $4.9 million, as compared to fiscal 2020. The increased operating expenses of four acquired locations, 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. Fiscal 2020 also included additional depreciation expense for the ERP transition as the estimated useful life of our current ERP was adjusted to coincide with the estimated go-live date of the new ERP. In fiscal 2021, operating expenses as a percentage of revenue decreased to 15.6% from 17.3% in 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 fiscal 2021 compared to fiscal 2020, which positively affected our ability to leverage our fixed operating costs.
35
Table of Contents
Impairment and Restructuring Costs
Year Ended January 31, Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Impairment of Goodwill $ 1,453 $ — $ 1,453 n/m
Impairment of Long-Lived Assets 1,727 3,764 (2,037) (54.1) %
During fiscal 2021, we recognized a total of $3.2 million of impairment expenses related to certain goodwill, other intangible assets, and long-lived assets, as compared to $3.8 million in fiscal 2020. The fiscal 2021 impairment expenses were primarily related to the impairment of goodwill and certain other intangible assets in our International segment.
Other Income (Expense)
Year Ended January 31, Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Interest and other income (expense) $ 527 $ 3,126 $ (2,599) (83.1) %
Floorplan interest expense (3,339) (5,354) (2,015) (37.6) %
Other interest expense (3,843) (4,452) (609) (13.7) %
The decrease in Interest and other income (expense) compared to 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. The decrease in floorplan interest expense for fiscal 2021, as compared to fiscal 2020, was due to an overall lower interest rate environment as well as a decrease in our interest-bearing inventory in fiscal 2021.
Provision for Income Taxes
Year Ended January 31, Percent
2021 2020 Increase Change
(dollars in thousands)
Provision for Income Taxes $ 11,397 $ 699 $ 10,698 n/m
Our effective tax rate increased from 4.8% in fiscal 2020 to 37.1% in fiscal 2021. The Company's effective tax rate increased due to changes in valuation allowances recognized for deferred tax assets. In fiscal 2020, the Company concluded that a release of its domestic valuation allowance of $4.6 million for U.S. federal and state deferred tax assets was warranted. In fiscal 2021, the Company concluded that a full valuation allowance was warranted for the Company's Ukrainian subsidiary and a partial valuation allowance for the Company's German subsidiary. The Company recorded an additional $3.8 million valuation allowance from the Ukraine and Germany subsidiaries.
See Note 15 to our consolidated financial statements for further details on our effective tax rate.
36
Table of Contents
Segment Results
Year Ended January 31, Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Revenue
Agriculture $ 886,485 $ 749,042 $ 137,443 18.3 %
Construction 305,745 320,034 (14,289) (4.5) %
International 218,992 236,095 (17,103) (7.2) %
Total $ 1,411,222 $ 1,305,171 $ 106,051 8.1 %
Income (Loss) Before Income Taxes
Agriculture $ 34,422 $ 18,036 $ 16,386 90.9 %
Construction 186 (2,290) 2,476 n/m
International (6,025) 504 (6,529) n/m
Segment income before income taxes 28,583 16,250 12,333 75.9 %
Shared Resources 2,170 (1,598) 3,768 n/m
Total $ 30,753 $ 14,652 $ 16,101 109.9 %
Agriculture
Agriculture segment revenue for fiscal 2021 increased 18.3% or $137.4 million compared to the same period last year. Agriculture same-store sales increased 14.4% for fiscal 2021, as compared to fiscal 2020. Total segment revenue and same-store sales were primarily driven by increased equipment sales. The Northwood and HorizonWest acquisitions, which were completed in October 2019 and May 2020, respectively, also contributed to the total sales growth for the segment.
Agriculture segment income before income taxes for fiscal 2021 improved by $16.4 million or 90.9% compared to fiscal 2020. The improvement in segment performance was largely the result of increased gross profit, partially offset by an increase in operating expenses.
Construction
Construction segment revenue for fiscal 2021 decreased 4.5% or $14.3 million compared to fiscal 2020 due to a same-store sales decrease of 1.4% and our divestiture of the Albuquerque, New Mexico store in the fourth quarter of fiscal 2020. Our Construction segment experienced decreased revenues across all revenue categories: equipment, parts, service, and rental and other. The decrease in revenue in the segment was driven by more difficult industry conditions such as lower oil prices and a general slow down in the economy due to COVID-19.
The Construction segment income before income taxes was $0.2 million for fiscal 2021 compared to a loss of $2.3 million for the prior year. The improvement in segment results was primarily due to decreased operating and interest expenses partially offset by lower revenues compared to the prior year.
International
International segment revenue for fiscal 2021 decreased 7.2% or $17.1 million compared to fiscal 2020. 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 $6.0 million for fiscal 2021, compared to income before income taxes of $0.5 million for fiscal 2020. The lower segment results were primarily due to impairment charges, decreased equipment gross profits from reduced customer demand resulting from below average crop yields in certain areas of our footprint, as well as overall challenging economic and business conditions due to COVID-19. Impairment charges of $2.3 million were recognized in fiscal 2021, relating 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
37
Table of Contents
planned to be unallocated, unallocated balances may occur. Shared Resource income before income taxes was $2.2 million for fiscal 2021 compared to a loss of $1.6 million for fiscal 2020. 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, lower interest rates under the new credit facility, and a lower level of borrowings.
Non-GAAP Financial Measures
To supplement our net income and diluted earnings per share ("diluted EPS"), both GAAP measures, we present and our management utilizes adjusted net income, adjusted diluted EPS, and Adjusted EBITDA, all non-GAAP financial measures. Generally, these non-GAAP financial measures include adjustments for items such as valuation allowances for income tax, costs associated with impairment charges, Ukraine remeasurement gains/losses and charges associated with our Enterprise Resource Planning (ERP) system transition. We believe that the presentation of adjusted net income, adjusted diluted EPS and adjusted EBITDA 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, adjusted diluted EPS, and adjusted EBITDA should be evaluated in addition to, and not considered a substitute for, or superior to, the most comparable GAAP financial measure. In addition, other companies may calculate these non-GAAP financial measures in a different manner, which may hinder comparability of our results with those of other companies.
The following tables reconcile net income and diluted EPS, GAAP financial measures, to adjusted net income, adjusted diluted EPS, and adjusted EBITDA, all non-GAAP financial measures.
38
Table of Contents
Year Ended January 31,
2021 2020
(dollars in thousands, except per share data)
Adjusted Net Income
Net Income
$ 19,356 $ 13,953
Adjustments
ERP transition costs 2,990 7,175
Impairment charges 3,180 3,764
Ukraine remeasurement (gain) / loss 1,174 (616)
Total Pre-Tax Adjustments 7,344 10,323
Tax Effect of Adjustments (1) (2,227) (1,036)
Adjustment for Tax Valuation Allowance 3,759 (4,611)
Total Adjustments 8,876 4,676
Adjusted Net Income
$ 28,232 $ 18,629
Year Ended January 31,
2021 2020
(dollars in thousands, except per share data)
Adjusted Diluted EPS
Diluted EPS $ 0.86 $ 0.63
Adjustments (2)
ERP transition costs 0.13 0.32
Impairment charges 0.14 0.17
Ukraine remeasurement (gain) / loss 0.05 (0.02)
Total Pre-Tax Adjustments 0.32 0.47
Tax Effect of Adjustments (1) (0.10) (0.05)
Adjustment for Tax Valuation Allowance 0.18 (0.21)
Total Adjustments 0.40 0.21
Adjusted Diluted EPS $ 1.26 $ 0.84
Adjusted EBITDA
Net Income
$ 19,356 $ 13,953
Adjustments
Interest expense, net of interest income 3,574 4,121
Provision for income taxes 11,397 699
Depreciation and amortization 23,701 28,067
EBITDA 58,028 46,840
Adjustments
ERP transition costs 2,990 2,497
Impairment charges 3,180 3,764
Ukraine remeasurement (gain) / loss 1,174 (616)
Total Adjustments 7,344 5,645
Adjusted EBITDA $ 65,372 $ 52,485
(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 $1.2 million for fiscal 2021.
(2) Adjustments are net of the impact of amounts allocated to participating securities where applicable
39
Table of Contents
For a discussion of other non-GAAP financial measures, see our discussion of Adjusted Cash Flow in the Cash Flow section elsewhere within this Item 7 of our Form 10-K.
Liquidity and Capital Resources
Sources of Liquidity
Our primary sources of liquidity are cash reserves, cash generated from operations, and borrowings under our floorplan payable and other credit facilities. 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 financial covenants as further described in Note 8 to our consolidated financial statements included in this Form 10-K. We have worked in the past, and will continue to work in the future if necessary, with our lenders to implement satisfactory modifications to these financial covenants when appropriate for the business conditions confronted by us.
Equipment Inventory and Floorplan Payable Credit Facilities
Floorplan payable balances reflect the amount owed for new equipment inventory purchased from a manufacturer and used equipment inventory, which is primarily purchased through trade-in on equipment sales, net of unamortized debt issuance costs incurred for floorplan credit facilities. Certain of the manufacturers from which we purchase new equipment inventory offer financing on these purchases, either offered directly from the manufacturer or through the manufacturers’ captive finance affiliate. CNH Industrial's captive finance subsidiary, CNH Industrial Capital, also provides financing of used equipment inventory. We also have floorplan payable balances with non-manufacturer lenders for new and used equipment inventory. Borrowings and repayments on manufacturer floorplan facilities are reported as operating cash flows, while borrowings and repayments on non-manufacturer floorplan facilities are reported as financing cash flows in our consolidated statements of cash flows.
As of January 31, 2021, we had floorplan payable lines of credit for equipment purchases totaling $773.0 million, which includes a $450.0 million credit facility with CNH Industrial Capital, a $185.0 million floorplan payable line under the Bank Syndicate Agreement, a $60.0 million credit facility with DLL Finance, and additional credit facilities related to our foreign subsidiaries. Available borrowing capacity under these lines of credit are reduced by amounts outstanding under such facilities, borrowing base calculations and amount of standby letters of credit outstanding with respect to the Bank Syndicate Agreement, and certain acquisition-related financing arrangements with respect to the CNH Industrial Capital credit facility. As of January 31, 2021, the Company was in compliance with the financial covenants under its credit agreements. Additional details on each of these credit facilities are disclosed in Note 8 to our consolidated financial statements included in this annual report.
The maturity date for the Wells Fargo Credit Agreement previously was October 28, 2020. Effective April 3, 2020, we entered into an amended and restated credit agreement with the Bank Syndicate, which has a maturity date of April 3, 2025. As of January 31, 2021, the Company was not subject to the fixed charge ratio covenant under the Bank Syndicate Agreement as our adjusted excess availability plus eligible cash collateral (as defined in the Bank Syndicate Agreement) was not less than 15% of the total amount of the credit facility. Please refer to Note 8 to our consolidated financial statement included in Item 8 for further information regarding the Company's line of credit.
Our equipment inventory turnover increased to 2.0 times for fiscal 2021 compared to 1.5 times for fiscal 2020. Our equipment inventories amount decreased 34.5% from January 31, 2020 to January 31, 2021. The equipment turnover improved due to the combination of the increase in equipment sales volume in fiscal 2021 as compared to fiscal 2020 and a decrease in our average equipment inventory over these time periods. Our equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, increased to 52.1% as of January 31, 2021 from 27.9% as of January 31, 2020. The increase in our equity in equipment inventory is primarily due to a high level of cash generation in fiscal 2021, which was applied against interest bearing floorplan payables.
Long-Term Debt Facilities
As of January 31, 2021, we had a $65.0 million working capital line of credit under the Bank Syndicate Agreement (the "Revolver Loan"). The Revolver Loan is used to finance our working capital requirements and fund certain capital expenditures, as needed. As of January 31, 2021, the Company did not have a need to utilize any of the Revolver Loan, as such the outstanding balance was zero. The Company may also decide in the future to finance a portion of our rental fleet as well as our capital expenditures using long-term debt from various lenders.
40
Table of Contents
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 the purchase of rental fleet assets. The primary factor affecting our ability to generate cash and to meet cash requirements, is our operating performance as impacted by (i) industry factors, (ii) competition, (iii) general economic conditions, (iv) the timing and extent of acquisitions, and (v) business and other factors including those identified in Item 1A "Risk Factors" and discussed in this Form 10-K.
Our ability to service our debt will depend upon our ability to generate necessary cash. This will in turn depend on our future acquisition activity, operating performance, general economic conditions, and financial, competitive, business and other factors, some of which are beyond our immediate control. Based on our current operational performance, we believe our cash flow from operations, available cash, and available borrowings under our existing credit facilities will be adequate to meet our liquidity needs for, at a minimum, the next 12 months.
In fiscal 2021, we used $7.1 million in cash for rental fleet purchases and $13.0 million in cash for property and equipment purchases and financed $19.5 million in property and equipment purchases with long-term debt and finance leases. The property and equipment purchases in fiscal 2021 primarily related to improvements to, or purchases of, real estate assets and the purchase of vehicles. In fiscal 2020, we used $14.3 million in cash for rental fleet purchases, $10.7 million in cash for property and equipment purchases, and financed $11.0 million in property and equipment purchases with long-term debt. The property and equipment purchases in fiscal 2020 primarily related to the purchase of vehicles, trucks and real estate. We expect our cash expenditures for property and equipment, exclusive of rental fleet purchases, for fiscal 2022 to be approximately $20.0 million and expect cash expenditures for our rental fleet for fiscal 2022 to be approximately $15.0 million. The actual amount of our fiscal 2022 capital expenditures will depend upon factors such as general economic conditions, growth prospects for our industry and our decisions regarding financing and leasing options. We currently expect to finance property and equipment purchases with borrowings under our existing credit facilities, financing with long-term debt, with available cash or with cash flow from operations. We may need to incur additional debt if we pursue any future acquisitions.
There can be no assurances, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available under the credit facilities with the Bank Syndicate, CNH Industrial Capital and DLL Finance in amounts sufficient to allow us to service our indebtedness and to meet our other commitments. If we are unable to generate sufficient cash flow from operations or to obtain sufficient future borrowings, we may be required to seek one or more alternatives such as refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. There can be no assurances that we will be able to succeed with one of these alternatives on commercially reasonable terms, if at all. In addition, if we pursue strategic acquisitions, we may require additional equity or debt financing to consummate the transactions, and we cannot assure you that we will succeed in obtaining this financing on favorable terms or at all. If we incur additional indebtedness to finance any of these transactions, this may place increased demands on our cash flow from operations to service the resulting increased debt. Our existing debt agreements contain restrictive covenants that may restrict our ability to adopt any of these alternatives. Any non-compliance by us under the terms of our debt agreements could result in an event of default which, if not cured, could result in the acceleration of our debt. We have met all financial covenants under these credit agreements as of January 31, 2021. If anticipated operating results create the likelihood of a future covenant violation, we would seek to work with our lenders on an appropriate modification or amendment to our financing arrangements.
41
Table of Contents
Cash Flow
Cash Flow Provided By Operating Activities
Net cash provided by operating activities in fiscal 2021 was a record $173.0 million compared to $1.0 million in fiscal 2020. The increase in net cash provided by operating activities of $172.0 million from fiscal 2020 to fiscal 2021 was primarily the result of a reduction in inventory and increase in net income. We evaluate our cash flow from operating activities net of all floorplan payable activity and maintain a constant level of equity in our inventory. Taking these adjustments into account, our adjusted cash flow provided by operating activities was $148.5 million for fiscal 2021 compared to $17.8 million for fiscal 2020. For a reconciliation of this adjusted cash flow provided by operating activities to the comparative GAAP financial measure, refer to the Adjusted Cash Flow Reconciliation below.
Cash Flow Used For Investing Activities
Net cash used for investing activities is primarily comprised of cash used for property and equipment purchases, including rental fleet purchases, and for business acquisitions.
Net cash used for investing activities was $20.3 million in fiscal 2021, compared to $36.5 million in fiscal 2020. In fiscal 2021, the Company used $20.1 million of cash, compared to $25.0 million in fiscal 2020, for additional investment in our rental fleet, vehicles, capital improvements, and purchases of real estate. In addition, the Company utilized $6.8 million of cash in fiscal 2021, compared to $13.9 million in the prior fiscal year, for acquisitions.
Cash Flow Provided By (Used For) Financing Activities
Net cash used for financing activities was $117.9 million in fiscal 2021, compared to net cash provided by financing activities of $22.9 million in fiscal 2020. In fiscal 2021, net cash used for financing activities was the result of decreased non-manufacturer floorplan payables, which we were able to reduce with the additional cash generated from operating activities. Additionally, in fiscal 2020, long-term financing proceeds of $18.9 million were utilized to purchase previously leased assets, vehicles and real estate.
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 sources. 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 presented on the consolidated statements of cash flows 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 was 52.1% and 27.9% as of January 31, 2021 and 2020, respectively.
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 normal operations of our business, regardless of financing source and level of financing for our equipment inventory. The following table reconciles net cash provided by operating activities, a GAAP financial measure, to adjusted cash flow provided by operating activities; and net cash used for financing activities, a GAAP financial measure, to adjusted cash flow used for financing activities.
Net Cash Provided by (Used for) Operating Activities Net Cash Provided by (Used for) Financing Activities
Year Ended January 31, Year Ended January 31,
2021 2020 2021 2020
(in thousands) (in thousands)
Cash Flow, As Reported $ 172,996 $ 955 $ (117,939) $ 22,869
Adjustment for Non-Manufacturer Floorplan Net Payments (106,414) 50,158 106,414 (50,158)
Adjustment for Constant Equity in Equipment Inventory 81,900 (33,359) — —
Adjusted Cash Flow $ 148,482 $ 17,754 $ (11,525) $ (27,289)
42
Table of Contents
Certain Information Concerning Off-Balance Sheet Arrangements
As of January 31, 2021, 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. In the normal course of our business activities, we lease real estate, vehicles and equipment under operating leases.
Contractual and Commercial Commitment Summary
Our contractual obligations and commercial commitments as of January 31, 2021 are summarized below:
Payments Due By Period
Contractual Obligations Total Less Than
1 Year 1 to 3 Years 3 to 5 Years More Than
5 Years
(in thousands)
Long-term debt obligations (1) $ 77,772 $ 17,255 $ 15,961 $ 16,591 $ 27,965
Operating lease (2) 105,518 16,521 29,757 25,987 33,253
Purchase obligations (3) 13,760 4,163 6,667 2,930 —
Total $ 197,050 $ 37,939 $ 52,385 $ 45,508 $ 61,218
(1) Includes obligations under our finance lease and financing obligations, long-term debt obligations and estimates of interest payable under all such obligations.
(2) Includes minimum lease payment obligations under operating leases. Amounts do not include insurance or real estate taxes, which we include in our operating expenses and which we estimate will be approximately $2.6 million for the less than 1 year period, $4.9 million for the 1 to 3 year period, $4.2 million for the 3 to 5 year period, and $5.8 million for the more than 5 years period for a total of approximately $17.5 million. See Note 16 to our consolidated financial statements for a description of our operating lease obligations.
(3) Primarily represents contracts related to information technology systems.
Information Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. We include "forward-looking" information in this Form 10-K, including this Item 7, as well as in other materials filed or to be filed by us with the SEC (as well as information included in oral statements or other written statements made or to be made by us).
This Form 10-K contains forward-looking statements that involve risks and uncertainties. In some cases, you can identify forward-looking statements by the following words: "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "ongoing," "plan," "potential," "predict," "project," "should," "will," "would," or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management's beliefs and assumptions, which in turn are based on currently available information. Our forward-looking statements in this Form 10-K generally relate to the following:
• our beliefs and intentions with respect to our growth strategies, including growth through strategic acquisitions, the types of acquisition targets we intend to pursue, the availability of suitable acquisition targets, the industry climate for dealer consolidation, and our ability to implement our growth strategies;
• our beliefs with respect to factors that will affect demand and seasonality of purchasing in the agricultural and construction industries;
• our beliefs with respect to our primary supplier (CNH Industrial) of equipment and parts inventory;
• our beliefs with respect to the equipment market, our competitors and our competitive advantages;
• our beliefs with respect to the impact of U.S federal government policies on the agriculture economy;
• our beliefs with respect to the impact of commodity prices for the fossil fuels and other commodities on our operating results;
• our beliefs with respect to the impact of government regulations;
43
Table of Contents
• our beliefs with respect to our business strengths and the diversity of our customer base;
• our plans and beliefs with respect to real property used in our business;
• our plans and beliefs regarding future sales, sales mix, and marketing activities;
• our beliefs and assumptions regarding the payment of dividends;
• our beliefs and assumptions regarding valuation reserves, equipment inventory balances, fixed operating expenses, and absorption rate;
• our beliefs and expectations regarding the effects of the political climate and economy in Ukraine;
• our beliefs and assumptions with respect to our rental equipment operations;
• our beliefs with respect to our employee relations;
• our assumptions, beliefs and expectations with respect to past and future market conditions, including interest rates, and public infrastructure spending, new environmental standards, and the impact these conditions will have on our operating results;
• our beliefs with respect to the impact of our credit agreements, including future interest expense, limits on corporate transactions, financial covenant compliance, and ability to negotiate amendments or waivers, if needed;
• our beliefs with respect to the impact of increase or decrease in applicable foreign exchange rates;
• our plans and assumptions for future capital expenditures;
• our cash needs, sources of liquidity, and the adequacy of our working capital.
Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management's beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results that differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
• the scope, duration and impact of the COVID-19 pandemic on the Company's operations and business;
• incorrect assumptions regarding our cash needs and the amount of inventory we need on hand;
• general economic conditions and construction activity in the markets where we operate;
• our dependence of CNH Industrial and our relationships with other equipment suppliers;
• our level of indebtedness and ability to comply with the terms of agreements governing our indebtedness;
• the risks associated with the expansion of our business;
• the risks resulting from outbreaks or other public health crises, including COVID-19;
• the potential inability to integrate any businesses we acquire;
• competitive pressures;
• significant fluctuations in the price of our common stock
• risks related to our dependence on our information technology systems and the impact of potential breaches and other disruptions
• compliance with laws and regulations; and
• other factors discussed under "Risk Factors" or elsewhere in this Form 10-K.
You should read the risk factors and the other cautionary statements made in this Form 10-K as being applicable to all related forward-looking statements wherever they appear in this Form 10-K. We cannot assure you that the forward-looking statements in this Form 10-K will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans
44
Table of Contents
in any specified timeframe, if at all. Other than as required by law, we undertake no obligation to update these forward-looking statements, even though our situation may change in the future.
45
Table of Contents