What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-06-04 compared with 2020-12-03 · 102 added, 257 removed, 204 unchanged (64% of the section changed)

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Based upon information provided to us by CNH Industrial N.V.

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.

subsidiary CNH Industrial America, LLC, 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:

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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.

Based on February 2021 U.S.

Department of Agriculture publications, the estimate of net farm income for calendar year 2021 indicated an approximate 8.1% decrease as compared to calendar year 2020, and an approximate 45.7% increase in net farm income for calendar year 2020 as compared to calendar year 2019.

For the first quarter of fiscal 2022, our net income was $10.5 million, or $0.47 per diluted share, compared to a fiscal 2021 first quarter net income of $2.3 million, or $0.10 per diluted share.

Our adjusted diluted earnings per share was $0.46 for the first quarter of fiscal 2022, compared to $0.15 for the first quarter of fiscal 2021.

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.

• Revenue in the first quarter of fiscal 2022 increased compared to the first quarter of fiscal 2021.

All three segments recognized an increase in revenue from the prior year.

Total same store sales increased 20.4% compared to the prior year first quarter.

• Gross profit margin in the first quarter of fiscal 2022 increased to 19.0%, compared to 18.8% for the first quarter of fiscal 2021.

The increase in gross profit margin was primarily the result of strong equipment margins that increased to 11.7% in the first quarter of fiscal 2022 from 9.8% in the first quarter of fiscal 2021.

The increase in total gross profit margin was partially offset by an increased percentage of revenue coming from lower margin equipment sales.

• Floorplan and other interest expense decreased a combined 28.1% in the first quarter of fiscal 2022, as compared to the first quarter last year, due to lower borrowings on our line of credit and an overall lower interest rate environment.

Impact of the COVID-19 Pandemic on the Company

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Risk Factors for more information on possible impacts.

The Company continues to effectively execute its strategy while managing the ongoing effects of the COVID-19 pandemic.

The Company's products and services were determined to be essential in the markets we serve and accordingly operations have been allowed to continue throughout the pandemic.

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.

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).

Although there have been logistical and other challenges as a result of COVID-19 , there were no material adverse impacts on the Company's results of operations for the three months ended April 30, 2021 and 2020.

However, due to the uncertainty of the economic outlook resulting from the COVID-19 pandemic, the Company continues to monitor the situation closely.

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 ultimate impact will continue to be subject to many variables and uncertainties many of which are currently unknown or outside of our control.

Uncertainties include delays in manufacturing and shipping as well as increased cost of materials and freight.

We believe the COVID-19 pandemic has created challenging industry conditions resulting in supply chain disruptions affecting areas such as ethanol, livestock, and international trade.

These conditions have been more than offset by increased customer sentiment due to increased commodity prices as well as government support programs for our farm customers, such as the Coronavirus Food Assistance Program (CFAP).

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.

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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.

Many of the construction projects that were delayed or cancelled last year due the pandemic have been or are planned to resume this construction season.

International

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The three HorizonWest dealerships are included within our Agriculture segment.

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

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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.

The Company integrated one pilot store on the new ERP system in the second quarter of fiscal 2021;

we anticipate the remaining domestic stores to be converted to the ERP within the next 12 months.

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, 2021.

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.

There have been no changes in our critical accounting policies since January 31, 2021.

Results of Operations

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

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

(dollars in thousands) (dollars in thousands)

Three Months Ended April 30,

(dollars in thousands)

Revenue $ 275,980 $ 218,505

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

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Three Months Ended April 30,

Equipment 74.1 % 70.4 %

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Operating Expenses 15.1 % 17.1 %

Impairment of Goodwill 0.4 % — % 0.1 % — %

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

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Net Income 2.8 % 0.7 %

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

Three Months Ended April 30, 2021 Compared to Three Months Ended April 30, 2020

Consolidated Results

Three Months Ended October 31, Increase/ Percent

Three Months Ended April 30, Increase/ Percent

2021 2020 (Decrease) Change

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Total Revenue $ 372,706 $ 310,208 $ 62,498 20.1 %

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.

Three Months Ended October 31, Increase/ Percent

Total revenue for the first quarter of fiscal 2022 was 20.1% or $62.5 million higher than the first quarter of fiscal 2021 driven primarily by increased demand for equipment, which increased equipment sales 26.3% from the prior year period.

Company-wide same-store sales in the first quarter of fiscal 2022 increased 20.4% versus the comparable period in fiscal 2021.

Three Months Ended April 30, Increase/ Percent

2021 2020 (Decrease) Change

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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 for the first quarter of fiscal 2022 increased 21.5% or $12.6 million, as compared to the same period last year.

Gross profit margin also improved to 19.0% in the current quarter from 18.8% 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.

The increase in gross profit margins was primarily due to stronger equipment margins, which were positively impacted by the current industry conditions of a lower supply and higher demand environment.

The increase in equipment margins, was partially offset by the gross profit mix shift, to lower margin equipment sales relative to parts, service, and rental sales.

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 76.0% for the first quarter of fiscal 2022 compared to 73.2% during the same period last year as the increase in gross profit from parts and service in the first quarter of fiscal 2022 combined with lower floorplan interest expenses more than offset the increase in operating expenses during the period.

Operating Expenses

Three Months Ended October 31, Increase/ Percent

Three Months Ended April 30, Increase/ Percent

2021 2020 (Decrease) Change

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Operating Expenses as a Percentage of Revenue 15.1 % 17.1 % (2.0) % (11.7) %

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.

Our operating expenses in the first quarter of fiscal 2022 increased 6.4% as compared to the first quarter of fiscal 2021.

The increase in operating expenses was primarily due to variable expenses associated with increased sales as well as increased costs due to inflation in areas such as fuel and insurance.

Operating expenses as a percentage of revenue decreased to 15.1% in the first quarter of fiscal 2022 from 17.1% in the first quarter of fiscal 2021.

The decrease in operating expenses as a percentage of revenue was due to the increase in total revenue in the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, which positively affected our ability to leverage our fixed operating costs.

Impairment Charges

Three Months Ended October 31, Increase/ Percent

Three Months Ended April 30, Increase/ Percent

2021 2020 (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.

Impairment of Intangible and Long-Lived Assets $ — $ 216 $ (216) 100.0 %

We did not recognized any impairment expense in the first quarter of fiscal 2022.

Total impairment expense recognized in the first quarter of fiscal 2021 was $0.2 million.

Other Income (Expense)

Three Months Ended October 31, Increase/ Percent

Three Months Ended April 30, Increase/ Percent

2021 2020 (Decrease) Change

(dollars in thousands)

Interest and other income (expense) $ (360) $ 1,273 $ (1,633) n/m

Interest and other income $ 665 $ 130 $ 535 n/m

Floorplan interest expense (418) (1,152) (734) (63.7) %

Other interest expense (1,104) (966) 138 14.3 %

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.

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

Floorplan interest expense decreased 63.7% in the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, due to lower borrowings on our line of credit and an overall lower interest rate environment.

Provision for Income Taxes

Three Months Ended October 31, Increase/ Percent

Three Months Ended April 30, Increase/ Percent

2021 2020 (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.

Provision for Income Taxes $ 3,132 $ 886 $ 2,246 n/m

Our effective tax rate was 22.9 % and 28.1 % for the three months ended April 30, 2021 and April 30, 2020.

The effective tax rate for the three months ending April 30, 2021 was benefited by the vesting of share-based compensation.

For the three months ending April 30, 2020, the effective tax rate benefited from a weakening hryvnia in our Ukrainian business but was offset by increased tax expense on the vesting of share-based compensation.

Segment Results

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Revenue between segments is immaterial.

Three Months Ended October 31, Increase/ Percent

Three Months Ended April 30, Increase/ Percent

2021 2020 (Decrease) Change

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International 2,808 (280) 3,088 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 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 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.

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.

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.

Nine Months Ended October 31, 2020 Compared to Nine Months Ended October 31, 2019

Consolidated Results

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.

Nine Months Ended October 31, Increase/ Percent

2020 2019 (Decrease) Change

(dollars in thousands)

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.

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.

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.

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)

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 %

Segment income before income taxes 14,170 3,009 11,161 n/m

Shared Resources (491) 139 (630) n/m

Total $ 25,265 $ 19,321 $ 5,944 30.8 %

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.

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.

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.

Total $ 13,679 $ 3,148 $ 10,531 n/m

Agriculture segment revenue for the first quarter of fiscal 2022 increased 18.6% compared to the first quarter of fiscal 2021.

The higher revenue was driven primarily by increased equipment demand due to higher commodity prices, higher recent net farm income, as well as current and prior year government support payments.

Same-store sales of our Agriculture segment increased 15.3% for the first quarter of fiscal 2022 as compared to the first quarter of fiscal 2021.

Additionally, our revenues were favorably impacted by the second quarter fiscal 2021 acquisition of the three HorizonWest locations.

Agriculture segment income before income taxes was $11.2 million for the first quarter of fiscal 2022 compared to $6.2 million for the first quarter of fiscal 2021.

Higher equipment revenue along with increased gross profit margin on equipment drove the increase in gross profit.

Decreased inventory levels resulted in lower floorplan and other interest expense for the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, which also contributed to the improvement in segment results.

Construction segment revenue for the first quarter of fiscal 2022 increased 14.1% compared to the first quarter of fiscal 2021.

The higher revenue was driven by increases in our equipment sales, as compared to the prior year’s first quarter.

This increase was partially offset by the divestiture of our Phoenix and Tucson, Arizona stores in the fourth quarter of fiscal 2021 as well as lower rental and other revenue due to a smaller rental fleet.

Same-store sales of our Construction segment increased 26.2% for the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021.

Our Construction segment income before taxes was $0.1 million for the first quarter of fiscal 2022 compared to a loss of $2.9 million in the first quarter of fiscal 2021.

The improvement in segment results was primarily due to increased construction activity as well as operational improvements within the segment.

The segment also benefited from managed floorplan interest expense reductions in the first quarter of fiscal 2022 over the same quarter last 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 increased from 18.9% in the first quarter of fiscal 2021 to 19.2% in the first quarter of fiscal 2022.

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.

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.

International segment revenue, for the first quarter of fiscal 2022 increased 32.0% compared to the first quarter of fiscal 2021.

Higher segment revenue was driven by many of the same macroeconomic factors as the Agriculture segment, which have had a positive impact on equipment sales.

Much of the farming footprint we serve is experiencing favorable growing conditions which has improved customer sentiment.

Our International segment income before income taxes was $2.8 million for the first quarter of fiscal 2022 compared to segment loss of $0.3 million for the same period last year.

The increase in segment pre-tax income was primarily the result of increased equipment sales and equipment gross profit margin.

Shared Resources/Eliminations

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

Shared Resources income before income taxes was $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.

Shared Resources loss before income taxes was $0.5 million for the first quarter of fiscal 2022 compared to income before income taxes of $0.1 million for the same period last year.

Non-GAAP Financial Measures

To supplement net income and diluted earnings per share ("Diluted EPS"), both GAAP measures, we present adjusted net income and adjusted Diluted EPS, both non-GAAP measures, which include adjustments for valuation allowances for income tax, ERP transition costs, impairment charges and foreign currency remeasurement in Ukraine resulting from valuation changes of the Ukrainian hryvnia.

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 ERP transition costs for fiscal year 2021, 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.

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

Three Months Ended October 31, Nine Months Ended October 31,

2020 2019 2020 2019

Three Months Ended April 30,

(dollars in thousands, except per share data)

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ERP transition costs — 721

Impairment charges 2,555 51 2,771 186

Impairment of long-lived assets — 216

Ukraine remeasurement (gain) / loss (129) 765

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Tax Effect of Adjustments (1) — 580

Income Tax Valuation Allowance 1,018 — 1,018 —

Total Adjustments (129) 1,122

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Tax Effect of Adjustments (1) — 0.03

Income Tax Valuation Allowance 0.05 — 0.05 —

Total Adjustments (0.01) 0.05

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

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.

Included in the tax effect of the adjustments is the tax impact of foreign currency changes in Ukraine of $0.3 million for the three months ended April 30, 2020.

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

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

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.

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 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.

As of April 30, 2021, the Company had floorplan payable lines of credit for equipment purchases totaling $770.0 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 increased from 1.6 times for the rolling 12 month period ended April 30, 2020 to 2.3 times for the rolling 12 month period ended April 30, 2021.

The increase in equipment turnover was attributable to an increase in equipment sales and a decrease in average equipment inventory over the rolling 12 month period ended April 30, 2021 as compared to the same period ended April 30, 2020.

Our equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, decreased to 48.8% as of April 30, 2021 from 52.1% as of January 31, 2021.

The decrease was due to more inventory being financed with non-interest bearing floorplan lines of credit.

Adequacy of Capital Resources

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

As of 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.

As of April 30, 2021, 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 April 30, 2021.

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

Cash Flow Provided by (Used for) Operating Activities

Net cash 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.

Net cash provided by operating activities was $27.0 million for the first three months of fiscal 2022, compared to net cash used for operating activities of $5.4 million for the first three months of fiscal 2021.

The change in net cash provided by (used for) operating activities is primarily the result of an increase in net income and an increase in the amount of inventory financed with non-interest bearing floorplan lines of credit from manufacturers for the first three months of fiscal 2022.

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.

Taking these adjustments into account, our adjusted cash flow provided by operating activities was $7.0 million for the first three months of fiscal 2022 compared to an adjusted cash flow used for operating activities of $3.6 million for the first three months of fiscal 2021.

The change in adjusted cash flow provided by (used for) operating activities is primarily the result of an increase in net income and an increase in the amount of inventory financed with non-interest bearing floorplan lines of credit from manufacturers for the first three months of fiscal 2022.

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

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.

Net cash used for investing activities was $9.0 million for the first three months of fiscal 2022, compared to $5.1 million for the first three months of fiscal 2021.

The increase in cash used for investing activities was primarily the result of an increase in property and equipment purchases as the Company bought out leased buildings and vehicles in the first three months of fiscal 2022 .

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.

Net cash used for financing activities was $6.8 million for the first three months of fiscal 2022 compared to cash provided by financing activities of $17.7 million for the first three months of fiscal 2021 .

The decrease in cash provided by financing activities was primarily the result of a decrease in proceeds from non-manufacturer floorplan lines of credit partially offset by proceeds from long term debt borrowings in the first three months of fiscal 2022 compared to the same period last year.

Adjusted Cash Flow Reconciliation

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

Our equity in equipment inventory 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.

Our equity in equipment inventory decreased to 48.8% as of April 30, 2021 from 52.1% as of January 31, 2021, and decreased to 24.5% as of April 30, 2020 from 27.9% as of January 31, 2020.

Adjusted Cash Flow is a non-GAAP financial measure.

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

Nine Months Ended October 31, 2020 Nine Months Ended October 31, 2019 Nine Months Ended October 31, 2020 Nine Months Ended October 31, 2019

Three Months Ended April 30, 2021 Three Months Ended April 30, 2020 Three Months Ended April 30, 2021 Three Months Ended April 30, 2020

(in thousands) (in thousands)

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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.

As of April 30, 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.

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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, 2021, 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).

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.

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

Any statements that are not based upon historical facts, including the outcome of events that have not yet occurred and our expectations for future performance, are forward-looking statements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis