What changed in this filing

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Item 1A. Risk Factors

2023-03-30 compared with 2022-04-01 · 70 added, 66 removed, 218 unchanged (38% of the section changed)

The following risks should be considered in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, including the risks and uncertainties described in the forward-looking statements, and our financial statements and the related notes appearing under Item 8 of this Form 10-K.

The following is a cautionary discussion of risks, uncertainties and assumptions that we believe are material to our business.

These risks may affect our operating results and, individually or in the aggregate, could cause our actual results to differ materially from past and projected future results.

Some of these risks and uncertainties could affect particular revenue sources or segments, while others could affect our full business.

Although risks are organized by headings, and each risk is discussed separately, many are interrelated.

Except as required by applicable law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise.

You should, however, consult any subsequent disclosures we make from time to time in materials filed with the SEC.

Risks related to our Reliance on CNH Industrial

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First, we rely on CNH Industrial for new equipment inventory.

Our ability to maintain or grow market share is dependent on CNH Industrial’s ability to design, manufacture, and allocate to our stores at the right time high quality and desirable products that compare favorably to those of our principal competitors in terms of price, quality, functionality, features, connected and digital solutions, and autonomy.

Supply chain issues and labor shortages could diminish the manufacturing output of CNH Industrial's plants, resulting in our stores not receiving inventories in the expected quantities and timelines necessary to satisfy customer demand.

Any failure of CNH Industrial to offer competitive products, or delays in bringing strategic new products to market, could have a material adverse effect on our business, results of operations and financial condition.

Our ability to maintain or grow market share is dependent on CNH Industrial’s ability to design, manufacture, allocate and deliver to our stores at the right time high quality and desirable products that compare favorably to those of our principal competitors in terms of price, quality, functionality, features, connected and digital solutions, and autonomy.

Supply chain issues, labor disputes such as strikes, and labor shortages could diminish the manufacturing output of CNH Industrial's plants, resulting in our stores not receiving inventories in the expected quantities and timelines necessary to satisfy customer demand.

Any failure of CNH Industrial to offer competitive products, or delays in bringing strategic new products to market or delivery of ordered products to our stores could have a material adverse effect on our business, results of operations and financial condition.

Second, CNH Industrial supports our business by providing financial assistance and marketing support including the following:

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• Retail financing used by many of our customers to purchase CNH Industrial equipment from us;

• Incentive programs and discount programs offered from time to time that enable us to price our products more competitively;

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• Incentive, financing, and discount programs offered from time to time that enable us to price our products more competitively;

• Promotional and marketing activities on national, regional and local levels.

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Third, CNH Industrial provides product warranties and, in some cases, extended warranties to our customers.

Our stores perform warranty work for equipment under these product warranties, and we direct bill CNH Industrial as opposed to invoicing the store customer.

Our stores perform warranty work for equipment under these product warranties, and we direct bill CNH Industrial as opposed to invoicing the customer.

At any particular time, we have significant receivables from CNH Industrial for warranty work performed.

CNH Industrial’s commitment to its product warranties is important to both our market share success and our parts and service revenue.

CNH Industrial may be adversely impacted by economic downturns, industry declines, natural disasters, labor strikes or similar disruptions, financial performance and liquidity concerns, supply shortages or rising raw materials costs, failed strategic initiatives, or other adverse events.

CNH Industrial’s commitment to its product warranties is important to both our market share success and our warranty related parts and service revenue.

CNH Industrial may be adversely impacted by global economic conditions and economic downturns, industry declines, natural disasters, labor strikes or similar disruptions, changes in interest rates, energy prices, inflation, financial performance and liquidity concerns, supply shortages or rising raw materials costs, failed strategic initiatives, or other adverse events.

Our business, results of operations, and financial condition could be materially adversely affected as a result of any event that has a material adverse effect on CNH Industrial.

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Furthermore, our financial performance and future success are highly dependent on the overall reputation, brand and success of CNH Industrial in the agricultural and construction equipment manufacturing industries, including its ability to maintain a competitive position in product innovation, product quality, and product pricing.

The terms of our CNH Industrial dealer agreements subject us to restrictions that may adversely impact our business including our ability to acquire additional stores.

The terms of our CNH Industrial dealer agreements subject us to restrictions that may adversely impact our business.

We have entered into CNH Industrial Dealer Agreements under which we sell CNH Industrial’s branded agricultural and construction equipment, along with after-market parts and repair services.

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Our CNH Industrial Dealer Agreements require us to operate any material business activities not related to sales of CNH Industrial products or services to customers in agricultural, construction, industrial or similar markets separately from our CNH Industrial dealership business.

In addition, our CNH Industrial Dealer Agreement for Case Construction equipment prohibits us from carrying other suppliers' products (new equipment and parts) at our Case Construction stores that are

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competitive with CNH Industrial's products.

These restrictions may discourage or prevent us from pursuing activities that we believe will grow our business.

Risks Related to Economic Conditions Affecting our Customers' Demand for our Products and Services

Our agriculture equipment sales are significantly affected by net farm income, which is influenced by factors which we have no control.

Our agriculture equipment sales are significantly affected by net farm income, which is influenced by factors over which we have no control.

Farmers' capital expenditures often follow a cyclical pattern, with increased equipment purchases typically occurring during boom cycles spurred by high net farm income and strong farmer balance sheets.

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• the price of agricultural commodities and the ability to competitively export agricultural commodities;

• the profitability of agricultural enterprises, farmers’ income and their capitalization;

• the demand for food products;

• the cost of farm inputs including value of land, seed, fertilizer, fuel, labor and other inputs;

• the demand for food products and products made with farm commodities such as bio fuels;

▪ the availability of stocks from previous harvests;

• agricultural policies, including aid and subsidies to agricultural enterprises provided by governments, policies impacting commodity prices or limiting the export or import of commodities, and alternative fuel mandates.

In addition to macroeconomic drivers of net farm income, local growing conditions also influence farmers’ buying sentiment within the affected geography.

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In addition to macroeconomic drivers of net farm income, local growing conditions also influence farmers’ buying sentiment.

Therefore, droughts, excess rain, hail, and other unfavorable climatic conditions affecting certain geographic regions will adversely impact the local farmers’ buying sentiment.

The nature of the agricultural industry is such that a downturn in equipment demand can occur suddenly, resulting in negative impact on dealers in the form of declining revenues, reduced profit margins, excess new and used equipment inventories, and increased floorplan interest expenses.

These downturns may be prolonged, and during these periods, our revenues and profitability could be harmed.

The nature of the agricultural industry is such that a downturn in equipment demand can occur suddenly, resulting in negative impacts on dealers in the form of declining revenues, reduced or negative profit margins, excess new and used equipment inventories, lower inventory turns, and increased floorplan interest expenses.

These downturns may be prolonged, and during these periods, our revenues and profitability could be harmed, including severely .

Demand for our parts and repair services, although not as cyclical as equipment purchases, also can be negatively affected in agricultural industry downturns and in regions affected by adverse weather or growing conditions which result in fewer acres planted or harvested.

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The construction equipment market is influenced by factors such as:

• public infrastructure spending;

• new residential and non-residential construction;

• capital spending in oil and gas, forestry, agricultural and mining.

• the amount and timing of public infrastructure spending;

• the level of new residential and non-residential construction;

• the amount of capital spending in oil and gas, forestry, agricultural and mining.

The construction industry in many of our geographical areas has experienced periodic, and sometimes prolonged, economic down cycles.

During these downturns, our revenues and profitability could be adversely impacted.

Inflationary increases to cost of equipment combined with higher interest rates may negatively impact our customers' equipment purchasing decisions.

Many of our customers finance their equipment purchases.

The ability to obtain affordable financing is an important part of a customer's decision to purchase agricultural or construction equipment.

Projected interest rate hikes will increase financing costs of our customers, which may make equipment purchases less affordable for customers and, as a result, our revenue and profitability may decrease.

Periods of elevated inflation and increased interest rates will increase financing costs and installment payment obligations of our customers, which may make equipment purchases less affordable for customers and impact purchasing decisions and, as a result, our revenue and profitability may decrease.

Risks Related to the Competitive Conditions of the Equipment Distribution Industry

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We have no control over or ability to significantly influence any of the foregoing factors affecting the equipment distribution markets.

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Our industry is highly competitive.

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In addition, e-commerce companies selling parts have negatively impacted dealers' parts sales and margins, and we expect that this competitive pressure will continue to increase in the future.

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The recent agreements of equipment manufacturers, including CNH Industrial, to provide farmers and independent repair shops access to diagnostic tools, combined with an enactment of proposed right to repair legislation, could negatively impact our repair services business .

Proposed state and federal legislation has been introduced, including in states in our footprint, that generally would require the manufacturers of products to provide the purchaser and/or independent repair technicians with documents, diagnostic software, and other information that would allow the equipment to be repaired without having it returned to the dealer for repair.

Separately, the American Farm Bureau Federation and CNH Industrial brands, Case IH and New Holland, signed a memorandum of understanding in March 2023 that allows farmers and independent repair shops to access CNH Industrial's brand manuals, tools, product guides and information to self-diagnose and self-repair machines, as well as provides support from CNH Industrial brands for farmers and independent repair shops to directly purchase diagnostic tools.

The Memorandum of Understanding follows a similar format as agreed to by John Deere earlier this year which, in turn, follows the auto industry format.

It is difficult to predict the impact that right to repair legislation, if enacted in any our states of operation, or the CNH Memorandum of Understanding, will have on our repair services business.

Risks Related to Supply Chain

Following the business interruptions caused by COVID-19, our suppliers have experienced continuing supply chain disruptions, including country of origin production and port delays.

Additionally, trucker, dockworker, and labor shortages, a surge of consumer demand, and other factors have led to industry-wide delays and inflationary trends.

Our suppliers' challenges directly affect us through price increases, and disruptions and delays on delivery of certain products, which may cause us to lose business.

Our business has been adversely impacted by supply chain distributions.

Our suppliers have experienced continuing supply chain disruptions, including country of origin production and port delays.

Additionally, trucker, dockworker, and labor shortages, a surge of consumer demand, and other factors have led to industry-wide delays and inflationary trends, which have also impacted the Company.

Our suppliers' challenges directly affect us through price increases, which we may be unable to pass along to our customers, and disruptions and delays on delivery of certain products, which may cause us to lose business or delay our ability to recognize revenue.

Risks of International Operations

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• costs and diversion of domestic management attention related to oversight of international operations;

• unexpected adverse changes in export duties, quotas and tariffs and difficulties in obtaining import licenses;

• unexpected adverse changes in export duties, currency or payment controls that impact our ability to repatriate funds from the county, quotas and tariffs and difficulties in obtaining import licenses;

• cyclicality of demand in European Union member states for agricultural equipment, based on availability of European Union government subsidy programs and tax incentives;

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• geopolitical or economic instability in the regions in which we operate, including the impact of the Russian invasion of Ukraine.

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The Russian-Ukraine conflict has presented significant challenges and risks for our Ukraine operations.

The Russian military occupation of Ukraine has significantly disrupted our Ukrainian operations and resulted in the shut-down of our 10 Ukrainian stores for a period of time, some of which have reopened.

The outcome of the Russian military operation remains unclear and we cannot predict when or if our stores and business operations will reopen.

The military conflict and related political instability may make it impossible for us to effectively operate our Ukraine dealerships, which may result in our decision to cease operations in Ukraine.

The Russian military occupation of Ukraine has significantly disrupted our Ukrainian operations and resulted in the temporary shut-down of our 9 Ukrainian stores during early fiscal 2023, all locations have since reopened.

The outcome of the Russian military operation remains unclear and we cannot predict the impact this conflict will have on our Ukrainian operations.

In fiscal 2023, revenues of our Ukrainian subsidiary declined 40.5% from fiscal 2022 and the conflict could continue to negatively impact revenues in fiscal 2024.

The military conflict and related political instability, if it intensifies, may make it impossible for us to effectively operate our Ukraine dealerships, which may result in our decision to cease operations in Ukraine.

This would result in asset write-offs and a loss in revenues and profits.

See additional information in Note 1 to the Consolidated Financial Statements at Item 8.

Even if we are able to continue operations, we expect that the military conflict will significantly impact our customers' liquidity and their purchasing decisions for our

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products and services.

If no crops are planted or the upcoming growing season is negatively impacted, it will limit our ability to maintain working capital loans or increase the cost of maintaining such loans, and as a result of imposed currency exchange controls and other restrictions, restrict our ability to manage our cash held in Ukraine and our investment in our Ukrainian business.

Even if we are able to continue operations, we expect that the military conflict has significantly impacted, and we expect will continue to impact our customers' liquidity and their purchasing decisions for our products and services.

If no crops are planted or the upcoming growing season is negatively impacted, it will limit our ability to generate cash and repay outstanding debt, and as a result of imposed currency exchange controls and other restrictions, restrict our ability to manage our cash held in Ukraine and our investment in our Ukrainian business.

The military intervention has disrupted our Ukrainian work force, with certain employees being called to active military duty and other employees leaving the country and working remotely.

Additional risks related to our operations in Ukraine, likely made more acute by the impact of the military conflict, include further devaluation of the local currency, increased interest rates and increased inflation.

These factors, in addition to others that we have not anticipated, may negatively impact our financial condition and results of operations.

These factors, in addition to others, have negatively impacted our financial condition and results of operations in 2022 and may continue to impact our business in Ukraine in future periods, including on a more acute basis.

Risks Related to Financial Matters

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Adjustments to market value of inventory are recognized as a cost of sales, negatively impacting earnings, in the periods in which they occur.

Our estimates of net realizable value for our used equipment, as determined at the time of the trade-in, may prove to be inaccurate, given the potential for sudden changes in market conditions and other factors beyond our control.

Our estimates of net realizable value for our used equipment, as determined at the time of the trade-in or in connection with an acquisition of a new dealership, may prove to be inaccurate, given the potential for sudden changes in market conditions and other factors beyond our control.

Moving from our normal retail marketing channel to more aggressive marketing channels for specific pieces or categories of equipment inventory, particularly as equipment inventory ages, will generally result in lower sales prices.

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However, our cash flow and ability to borrow depends on our future performance, which will be affected by financial, business, economic and other factors, many of which may be beyond our control.

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The credit agreements governing our indebtedness restrict our ability to engage in certain corporate and financial transactions, and require us to satisfy financial covenants.

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• pay dividends or repurchase stock;

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• issue equity instruments.

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We have, and may continue to experience challenges as we work toward the completion of the ERP conversion.

Beyond cost and scheduling, potential flaws in the implementation of an ERP system may pose risks to the Company’s ability to operate successfully and efficiently, including timely and accurate SEC filings.

Beyond cost and scheduling, potential flaws in the implementation of an ERP system may pose risks to the Company’s ability to operate successfully and efficiently, including our ability to prepare timely and accurate SEC filings.

If we are unable to successfully implement the new ERP system as planned, our financial position, results of operations and cash flows could be negatively impacted.

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The agricultural and construction equipment industries are highly seasonal, which can cause significant fluctuations in our results of operations and cash flow.

The agricultural and construction equipment businesses are highly seasonal, which causes our quarterly results to fluctuate during the year.

The agricultural and construction equipment businesses are highly seasonal, which causes our quarterly results and cash flows to fluctuate during the year.

Farmers generally purchase agricultural equipment and service work in preparation for, or in conjunction with, the spring planting and fall harvesting seasons.

Construction equipment customers’ purchases of equipment and service work, as well as rental of equipment, are also seasonal in our stores located in colder climates where construction work slows significantly in the winter months.

Construction equipment customers’ purchases of equipment and service work, as well as rental of equipment, are also seasonal in our stores located in colder climates where

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construction work slows significantly in the winter months.

In addition, the fourth quarter typically is a significant period for equipment sales in the United States because of our customers’ year-end tax planning considerations, the timing of dealer incentives and the increase in availability of farmers’ funds from completed harvests and construction customers' funds from completed projects.

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We extend credit to our customers for parts and service work, rental charges, and also for some equipment sales in our domestic and international operations.

If we are unable to manage these credit risk issues adequately, or if a large number of customers should have financial difficulties at the same time, our credit losses could increase above historical levels and our

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operating results would be adversely affected.

Delinquencies and credit losses generally would be expected to increase if there was a worsening of economic conditions in any of our reporting segments.

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Any significant decline in the selling prices for used rental equipment, or increased costs resulting from our rental operations, could have an adverse effect on our results of operations and cash flows.

Risks Related to Governmental Regulation

Enactment of "right to repair" legislation could adversely affect the sales and profitability of our parts and service business.

Proposed state and federal legislation has been introduced that generally would require the manufacturers of products to provide the purchaser and/or independent repair technicians with documents, diagnostic software, and other information that would allow the equipment to be repaired without having it returned to the dealer for repair.

Moreover, recent versions of the proposed legislation require that the manufacturer sell certain spare parts to users and third-party repair shops at the same price as offered by the manufacturer to its authorized dealers.

To date, no form of legislation has passed in the states where we do business or at the federal level.

It is difficult to predict whether any form of this legislation will be enacted in any of the states where we do business or at the federal level.

If enacted, however, any such legislation could have negative impacts on our parts and service business as follows:

• Increased competition for repair services.

We would become subject to additional competition from independent repair shops and/or other equipment dealers’ repair shops, who would have greater access to manufacturer furnished diagnostic tools as necessary to perform repair and maintenance services on CNH Industrial branded equipment.

• Loss of parts sales .

If customers, third-party repair shops, and/or parts vendors are able to purchase parts directly from the manufacturer at the same price as available to us, then our parts business would be negatively impacted.

• Margin Compression on Parts and Service Revenue .

With the increased competition for repair service and parts sales, we would expect that this new competition would result in margin compression in our sales.

Climate and Weather Risks

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Many scientific reports predict that severe weather events can be expected to become more frequent as a result of global climate change.

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New or more stringent greenhouse gas emission standards designed to address climate change could increase costs of the equipment we purchase from our suppliers and increase our customers’ costs of operations.

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The regulation of GHG emissions from the equipment we sell could result in additional manufacturing costs to our suppliers who, in turn, will likely pass along those costs to us.

We may not be successful in passing along the equipment price increases to our customers, which could impact our results of operation.

To the extent that we attempt to pass along price increases to our customers, the increased costs of equipment will likely negatively affect their purchasing decisions.

We may not be successful in passing along the equipment price

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increases to our customers, which could impact our results of operation.

To the extent that we attempt to pass along price increases to our customers, the increased costs of equipment may negatively affect their purchasing decisions.

Moreover, the GHG regulations could increase other input costs for our customers, such as fuel and fertilizer, and impose indirect compliance-related costs on our customers.

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These risks include incurring significantly higher than anticipated capital expenditures and operating expenses;

failing to integrate the operations and personnel of the acquired dealerships;

unexpected liabilities;

synergies, economies of scale and cost reductions not occurring as anticipated;

failing to integrate the operations and personnel of the acquired dealerships;

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To the extent we do not successfully avoid or overcome the risks or problems related to acquisitions, our results of operations and financial condition could be adversely affected.

Future acquisitions also may have a significant impact on our financial position and capital needs, and could cause substantial fluctuations in our quarterly and yearly results of operations.

Acquisitions could include significant goodwill and intangible assets.

Future acquisitions also may have a significant impact on our financial position and capital needs, and could cause substantial fluctuations in our quarterly and yearly results of operations or result in a diversion of management's time and attention from our core business.

Acquisitions could include significant intangible assets and goodwill.

If the acquisitions giving rise to these intangible assets are unsuccessful, this may result in future impairment charges that would reduce our stated earnings.

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Moreover, the technician shortage may increase our service technician compensation expense, and reduce our gross margins on service work.

In addition, in recent years it has been unusually difficult to hire and retain employees, which we believe is primarily attributable to COVID-19 pandemic related factors and which in turn has created increased competition in labor markets.

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In addition, in recent years it has been unusually difficult to hire and retain employees, which we believe is primarily attributable to market conditions which in turn has created increased competition in labor markets.

Difficulties in hiring and retaining employees and heightened competition for employees may impact our ability to serve customers, increase our costs, and impair our efficiency and effectiveness and our ability to pursue growth opportunities.

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The unionization of all or a substantial portion of our workforce could result in work slowdowns or stoppages, could increase our overall costs, could reduce our operating margins and reduce the efficiency of our operations at the affected locations, could adversely affect our flexibility to run our business competitively, and could otherwise have an adverse effect on our business.

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Liability Risks

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The secure operation of these information technology networks and the systems of the third parties with whom we do business and the processing and maintenance of information is critical to our operations.

Despite our and the third parties with whom we do business' security measures and business continuity plans, our information technology and infrastructure may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers or breaches due to employee error or malfeasance or other disruptions arising from power outages, telecommunication failures, terrorist acts, natural disasters, or other catastrophic events.

Despite the security measures and business continuity plans, put in place by us and our third party providers, our information technology and infrastructure may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers or breaches due to employee error or malfeasance or other disruptions arising from power outages, telecommunication failures, terrorist acts, natural disasters, or other catastrophic events.

The occurrence of these events could compromise our networks, and the information stored there could be accessed, publicly disclosed, lost or stolen.

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We maintain cyber risk insurance, but this insurance may not be sufficient to cover all of our losses from any future breaches of our systems.

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UNRESOLVED STAFF COMMENTS

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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-K

Item 1A. Risk Factors