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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NO. 1-12641
RDO EQUIPMENT CO.
(Exact name of registrant as specified in its charter)
DELAWARE 45-0306084
(State of incorporation) (I.R.S. Employer Identification No.)
2829 SOUTH UNIVERSITY DRIVE
FARGO, NORTH DAKOTA 58103
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (701) 297-4288
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO__.
The number of shares outstanding of the registrant as of October 31, 1998:
Class A Common Stock 5,731,008
Class B Common Stock 7,450,492
----------
Total 13,181,500
==========
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<PAGE>
CAUTIONARY STATEMENT REGARDING
FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The future results of RDO Equipment Co. (the "Company"), including
results reflected in any forward-looking statement made by or on behalf of the
Company, will be impacted by a number of important factors. The factors
identified below in Item 2 under the subsection entitled "Safe Harbor Statement"
are important factors (but not necessarily all important factors) that could
cause the Company's actual future results to differ materially from those
expressed in any forward-looking statement made by or on behalf of the Company.
Words such as "may," "will," "expect," "believe," "anticipate," "estimate," or
"continue" or comparable terminology are intended to identify forward-looking
statements. Forward-looking statements, by their nature, involve substantial
risks and uncertainties.
PART I - FINANCIAL INFORMATON
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
RDO EQUIPMENT CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
- ----------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
October 31, October 31,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Wholegoods sales $ 101,054 $ 73,935 $ 301,681 $ 223,236
Parts and service 40,370 33,239 108,529 86,889
Rental 9,028 4,327 18,176 10,444
--------- --------- --------- ---------
Total revenues 150,452 111,501 428,386 320,569
Cost of revenues (Note 5) 134,528 86,652 357,820 255,106
--------- --------- --------- ---------
Gross profit 15,924 24,849 70,566 65,463
Selling, general and
administrative expenses 22,197 15,827 59,566 43,961
Restructuring charge (Note 5) 2,200 -- 2,200 --
--------- --------- --------- ---------
24,397 15,827 61,766 43,961
Operating income (loss) (8,473) 9,022 8,800 21,502
Interest expense (4,278) (2,017) (10,076) (4,612)
Interest income 738 390 1,069 930
--------- --------- --------- ---------
Income (loss) before income taxes
and minority interest (12,013) 7,395 (207) 17,820
Benefit from (provision for) income taxes 4,889 (2,959) 84 (7,128)
--------- --------- --------- ---------
Income (loss) before minority interest (7,124) 4,436 (123) 10,692
Minority interest (140) (39) (166) (100)
--------- --------- --------- ---------
Net income (loss) $ (7,264) $ 4,397 $ (289) $ 10,592
========= ========= ========= =========
Net income (loss) per share -
basic and diluted $ (0.55) $ 0.33 $ (0.02) $ 0.80
========= ========= ========= =========
Weighted average shares outstanding-basic 13,182 13,181 13,182 13,180
========= ========= ========= =========
Weighted average shares outstanding-diluted 13,182 13,355 13,182 13,293
========= ========= ========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
2
<PAGE>
RDO EQUIPMENT CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
(IN THOUSANDS)(UNAUDITED) 1998 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 784 $ 37
Accounts receivable (less allowance) 59,220 36,204
Receivables from affiliates 1,444 1,361
Inventories (Note 3, 5) 242,087 220,841
Prepaid expense 1,577 704
Deferred income tax benefit 8,690 1,450
----------- -----------
Total current assets 313,802 260,597
Property and equipment, net 62,099 37,469
Other assets:
Deposits 1,252 1,765
Goodwill and other intangibles, net of
accumulated amortization 36,306 19,601
----------- -----------
Total assets $ 413,459 $ 319,432
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
3
<PAGE>
RDO EQUIPMENT CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
(IN THOUSANDS)(UNAUDITED) 1998 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Floor plan payables (Note 4) $ 224,428 $ 163,988
Notes payable and current maturities of long-term debt:
Banks and others 11,790 4,423
Affiliates 13,843 2,149
Accounts payable 8,804 7,376
Accrued liabilities 13,451 9,619
Customer advance deposits 1,422 3,043
Dividends payable 734 734
---------- ----------
Total current liabilities 274,472 191,332
Long-term debt, net of current maturities:
Banks and others 27,313 20,410
Affiliates 3,938 4,371
Deferred income taxes 5,070 1,560
---------- ----------
Total liabilities 310,793 217,673
Minority interest 1,885 689
Stockholders equity:
Preferred stock -- --
Common stocks-
Class A 57 57
Class B 75 75
Additional paid-in-capital 84,471 84,471
Retained earnings 16,178 16,467
---------- ----------
Total stockholders' equity 100,781 101,070
---------- ----------
Total liabilities and stockholders' equity $ 413,459 $ 319,432
========== ==========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
<PAGE>
RDO EQUIPMENT CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended October 31,
(IN THOUSANDS) (UNAUDITED) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net income (loss) $ (289) $ 10,592
Adjustments to reconcile net income (loss) to net
cash provided by operating activities -
Depreciation and amortization 6,845 3,883
Deferred income taxes (3,730) --
Minority interest 166 100
Change in operating assets and liabilities:
Accounts receivable (14,056) (17,254)
Inventories (4,424) (53,902)
Prepaid expenses (647) 24
Deposits 615 (338)
Floor plan payables 46,559 79,142
Accounts payable and accrued liabilities 1,319 11,539
Customer advance deposits (1,652) (885)
----------- -----------
Net cash provided by operating activities 30,706 32,901
Investing activities:
Net purchases of rental equipment (15,483) (11,793)
Net purchase of property and equipment (4,349) (2,578)
Net assets of acquisitions (24,697) (24,983)
Other, net (4,322) 54
----------- -----------
Net cash used for investing activities (48,851) (39,300)
Financing activities:
Proceeds from issuance of long-term debt 13,920 12,926
Payments on long-term debt (6,254) (7,284)
Proceeds from issuance of common stock -- 24
Payment of dividends -- (96)
Net proceeds from bank lines and short-term notes payable 11,226 470
----------- -----------
Net cash provided by financing activities 18,892 6,040
----------- -----------
Increase (decrease) in cash 747 (359)
Cash and cash equivalents, beginning of period 37 459
----------- -----------
Cash and cash equivalents, end of period $ 784 $ 100
=========== ===========
Supplemental disclosures:
Cash payments for interest $ 9,666 $ 4,059
=========== ===========
Cash payments for income taxes $ 6,715 $ 5,557
=========== ===========
Noncash investing and financing activities:
Increase in assets related to acquisitions of dealerships through
issuance and assumption of debt $ 25,522 $ 13,594
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
<PAGE>
RDO EQUIPMENT CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PREPARATION:
The condensed consolidated financial statements for the three and nine
months ended October 31, 1998 and 1997 are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto, contained in the Company's Annual Report to
Stockholders incorporated by reference in the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1998. The results of operations for
the three and nine months ended October 31, 1998 are not necessarily indicative
of the results to be expected for the full year.
2. BUSINESS COMBINATIONS:
During the first three quarters of fiscal 1999 and 1998, the Company
made several acquisitions. These acquisitions have been accounted for using the
purchase method of accounting and, accordingly, the assets acquired and
liabilities assumed have been recorded at their estimated fair values as of the
dates of acquisition. The excess purchase price over the fair value of the
assets acquired and liabilities assumed has been recorded as goodwill.
The following summarizes the net assets acquired, liabilities assumed
and cash purchase price of the acquisitions made during the periods indicated
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Assets acquired $ 24,617 $ -- $ 50,219 $ 38,577
Less: liabilities assumed 11,721 -- 25,522 13,594
-------- -------- -------- --------
Cash purchase price $ 12,896 $ -- $ 24,697 $ 24,983
======== ======== ======== ========
Number of acquisitions 2 -- 5 5
======== ======== ======== ========
</TABLE>
Results of operations for the acquisitions made prior to October 31,
1998 have been included in the accompanying condensed consolidated financial
statements since their respective acquisition dates. The following unaudited
consolidated pro forma results of operations for the three and nine months ended
October 31, 1998 and 1997, give effect to these acquisitions as if they were
completed at the beginning of fiscal 1998. The unaudited pro forma financial
information does not purport to represent what the Company's results of
operations would actually have been if such transactions in fact had occurred at
such a date or to project the Company's results of future operations (in
thousands, except for per share data):
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $151,452 $140,176 $464,816 $421,139
======== ======== ======== ========
Net income $ (7,281) $ 4,585 $ 4 $ 1,478
======== ======== ======== ========
Weighted average shares
outstanding-basic 13,182 13,181 13,182 13,180
======== ======== ======== ========
Weighted average shares
outstanding-diluted 13,182 13,355 13,209 13,293
======== ======== ======== ========
Net income per share -
basic and diluted $ (0.55) $ 0.34 $ -- $ 0.86
======== ======== ======== ========
</TABLE>
6
<PAGE>
3. INVENTORIES:
All inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out method for new equipment and parts
inventory. The specific identification method is used to determine cost for used
equipment.
Inventories consisted of the following at (in thousands):
October 31, January 31,
1998 1998
---- ----
New equipment $181,140 $156,732
Used equipment 31,762 39,392
Parts and other 29,185 24,717
-------- --------
$242,087 $220,841
======== ========
4. FLOOR PLAN PAYABLES:
Floor plan payables are interest and noninterest-bearing financing
arrangements for inventory. The terms of these arrangements generally include a
one to twelve-month interest-free term followed by a term during which interest
is charged. Floor plan payables consist of the following at (in thousands):
October 31, January 31,
1998 1998
---- ----
Interest-bearing $169,628 $ 79,189
Noninterest-bearing 54,800 84,799
-------- --------
$224,428 $163,988
======== ========
5. INVENTORY AND RESTRUCTURING CHARGES
During the third quarter of fiscal year 1999, the Company initiated
corporate actions designed to generate cash, to fund future growth
opportunities, to discontinue non-strategic operations and to achieve more cost
efficient operations. These initiatives were undertaken as the Company assessed
current industry and financial market conditions, primarily the financial
problems in the agricultural economy, that are projected to impact the Company's
business over the next six to 18 months. These initiatives included one-time,
non-recurring charges relating to inventory and asset writedowns, reserves and
severance costs. The Company took a $15.0 million inventory charge which is
included in cost of revenues and a $2.2 million restructuring charge in
connection with asset writedowns and severance costs, which includes exiting the
agricultural irrigation equipment business.
6. EARNINGS PER SHARE:
The following summarizes the computation of weighted average shares
outstanding and net income per share for the periods indicated (in thousands,
except per share data):
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income available to
common shareholders $(7,264) $ 4,397 $ (289) $10,592
======= ======= ======= =======
Weighted average number
of shares outstanding - basic 13,182 13,181 13,182 13,180
Dilutive effect of stock
options outstanding -- 174 -- 113
------- ------- ------- -------
Common and potential common
shares outstanding - diluted 13,182 13,355 13,182 13,293
======= ======= ======= =======
Basic and dilutive net income per share $ (0.55) $ 0.33 $ (0.02) $ 0.80
======= ======= ======= =======
</TABLE>
Net income and net income per share before the inventory and restructuring
charges for the three and nine months ended October 31, 1998 was $2.9 million or
$0.22 per basic and diluted share and $9.9 million or $0.75 per basic and
diluted share, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's strategic plan of internal growth along with growth
through acquisitions resulted in the Company completing several acquisitions
during the first three quarters of fiscal 1999. During the first two quarters of
fiscal 1999, two heavy-duty truck dealerships were acquired in Minneapolis/St.
Paul, Minnesota. One primarily supplied by Volvo and GMC, and the other by Mack.
These two dealerships were consolidated into one Minneapolis/St. Paul location
during the second quarter of fiscal 1999. The acquisition of two additional
heavy-duty truck dealerships in Fargo and Grand Forks, North Dakota, primarily
supplied by Volvo, GMC and Isuzu, was also completed during the second quarter.
During the third quarter of fiscal 1999, four locations primarily engaged in the
distribution, sale, service and rental of material handling equipment were
acquired in Grand Island, Lincoln, and Omaha, Nebraska and Sioux City, Iowa. The
Company also completed, during the third quarter of fiscal 1999, the acquisition
of 89 percent of an agricultural equipment rental business located in Salinas,
California. Total assets acquired relating to all of the above mentioned
acquisitions were approximately $50.2 million with unaudited annual revenues of
approximately $100.0 million.
In addition to growth through acquisitions, the Company during the
first two quarters of fiscal 1999 opened additional locations - four
construction equipment rental locations in Tucson and Show Low, Arizona and
Riverside and Temecula, California, and a Vermeer construction equipment store.
The Company also commenced new construction equipment operations in Lake Havasu,
Arizona. During the third fiscal quarter the Company opened a Hyster material
handling store in Minneapolis, Minnesota. The results of operations of these
acquisitions and openings are included in the Company's results of operations
only for the periods after their applicable acquisition and opening dates.
During the third quarter of fiscal 1999, the Company initiated a number
of corporate actions designed to generate cash, to fund growth opportunities, to
discontinue non-strategic operations and to achieve more cost efficient
operations. These initiatives were undertaken as the Company assessed current
industry and financial market conditions, primarily of the agricultural economy,
that are projected to impact the Company's business over the next six to 18
months. The farm economies served by the Company's agricultural equipment
dealerships have experienced severe financial problems due to recurring excess
moisture and plant disease in the Midwest, reduced exports of food products to
Asia, and continuing erosion of many crop prices worldwide. The Company also
reviewed industry outlooks from manufacturers, forecasts and surveys by
economists, investment analysts and governmental units, and the
8
<PAGE>
status of capital markets for raising equity and debt. These initiatives
included one-time, non-recurring charges related to inventory and asset
writedowns, reserves and severance costs. The Company took a $15.0 million
inventory charge that enabled the Company to initiate a new and more aggressive
pricing strategy with respect to wholegoods sales in the agricultural equipment
business line. This charge is included in cost of revenues. In addition, the
Company recorded a restructuring charge of $2.2 million in connection with asset
writedowns and severance costs, which includes exiting the agricultural
irrigation equipment business.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data:
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE DATA (IN MILLIONS):
Total revenues $ 150.5 $ 111.5 $ 428.4 $ 320.6
Construction 56.1% 59.6% 58.4% 57.6%
Agricultural 26.6% 38.7% 29.3% 40.9%
Truck 17.3% 1.7% 12.3% 1.5%
Construction revenues $ 84.4 $ 66.5 $ 250.0 $ 184.6
Wholegoods sales 65.8% 67.4% 70.0% 68.1%
Parts and service 25.3% 26.8% 23.4% 26.8%
Rental 8.9% 5.8% 6.6% 5.1%
Agricultural revenues $ 40.0 $ 43.1 $ 125.4 $ 131.1
Wholegoods sales 64.0% 65.1% 68.8% 72.4%
Parts and service 32.3% 33.9% 29.9% 26.9%
Rental 3.7% 1.0% 1.3% 0.7%
Truck revenues $ 26.1 $ 1.9 $ 53.0 $ 4.9
Wholegoods sales 76.7% 54.6% 76.5% 54.1%
Parts and service 23.3% 45.4% 23.5% 45.9%
STATEMENT OF OPERATIONS DATA (AS A PERCENTAGE OF TOTAL REVENUES):
Revenues
Wholegoods sales 67.2% 66.3% 70.4% 69.6%
Parts and service 26.8 29.8 25.3 27.1
Rental 6.0 3.9 4.3 3.3
------- ------- ------- -------
Total revenues 100.0 100.0 100.0 100.0
Gross profit 10.6%(1) 22.3% 16.5%(1) 20.4%
Selling, general and
administrative expenses 14.8 14.2 13.9 13.7
Restructuring charge 1.4 -- 0.6 --
------- ------- ------- -------
16.2 14.2 14.5 13.7
Operating income (loss) (5.6) 8.1 2.0 6.7
Interest expense, net 2.4 1.5 2.1 1.2
Provision for (benefit from) taxes (3.2) 2.7 -- 2.2
------- ------- ------- -------
Net income (loss) (4.8)% 3.9% (0.1)% 3.3%
======= ======= ======= =======
</TABLE>
(1) For the three and nine months ended October 31, 1998, gross profit as a
percent of total revenues before the $15.0 million inventory charge was 20.6%
and 20.0%, respectively.
9
<PAGE>
THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1997
REVENUES
Revenues increased approximately $39.0 million, or 35.0%, from $111.5
million for the third quarter of fiscal 1998 to $150.5 million for the third
quarter of fiscal 1999. Construction operations contributed approximately $17.9
million of this increase, with revenues increasing 26.9% to $84.4 million for
the third quarter of fiscal 1999. Construction revenues increased approximately
$5.7 million due to the Company's acquisitions and store openings since the
third quarter of fiscal 1998. Agricultural revenues decreased approximately $3.1
million, with revenues for the third quarter of fiscal 1999 decreasing 7.2% to
$40.0 million. The decrease in agricultural revenues was a result of the Midwest
farm economy causing the Midwest agricultural operations to report lower than
anticipated results, which was partially offset by revenues of $2.2 million from
the Company's acquisitions since the third quarter of fiscal 1998. Truck
operations contributed approximately $24.2 million of the overall increase in
revenues, with revenues increasing 1,273.7% to $26.1 million for the third
quarter of fiscal 1999. The increase in truck revenues was primarily
attributable to the Company's acquisitions since the third quarter of fiscal
1998.
Total wholegoods sales increased approximately $27.2 million, or 36.8%,
from $73.9 million for the third quarter of fiscal 1998 to $101.1 million for
the third quarter of fiscal 1999. Construction operations contributed
approximately $10.7 million of this increase, with sales increasing 23.9% to
$55.5 million. The Company's construction acquisitions and new store openings
since the third quarter of fiscal 1998 resulted in wholegoods sales of $2.5
million in the third quarter of fiscal 1999. Agricultural wholegoods sales
decreased approximately $2.5 million, or 8.9%, to $25.6 million primarily as a
result of the Midwest farm economy. Truck operations contributed approximately
$19.0 million of the increase in wholegoods sales, or 1,900.0%, to $20.0
million. The increase in truck wholegoods sales was primarily attributable to
the Company's acquisitions since the third quarter of fiscal 1998.
Parts and service revenues increased approximately $7.2 million, or
21.7%, from $33.2 million for the third quarter of fiscal 1998 to $40.4 million
for the third quarter of fiscal 1999. The increase in parts and service revenues
was primarily attributable to the Company's acquisitions and new store openings
since the third quarter of fiscal 1998.
Rental revenues of $9.0 million were generated in the third quarter of
fiscal 1999 compared to $4.3 million in the third quarter of fiscal 1998, an
increase of $4.7 million, or 109.3%. Rental revenues increased approximately
$4.0 million due to the Company's acquisitions and store openings since the
third quarter of fiscal 1998.
GROSS PROFIT
Gross profit decreased approximately $8.9 million, or 35.9%, from $24.8
million for the third quarter of fiscal 1998 to $15.9 million for the third
quarter of fiscal 1999. The decrease in gross profit was primarily attributable
to the non-recurring $15.0 million inventory charge discussed above. Gross
profit as a percentage of total revenues for the third quarter of fiscal 1999
and 1998 was 10.6% and 22.3%, respectively. Gross profit, as a percentage of
total revenues before the $15.0 million inventory charge, was 20.6% for the
third quarter of fiscal 1999. Gross profit is affected by the contribution of
revenues by business line and by the mix of revenues within each business line.
Revenues from construction operations provide the Company with higher gross
margins than do agricultural and truck operations. Wholegoods sales provide the
Company with lower gross margins than do parts and service and rental revenues.
10
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percent of total
revenues increased from 14.2% for the third quarter of fiscal 1998 to 14.8% for
the third quarter of fiscal 1999. Total SG&A expenses increased approximately
$6.4 million, from $15.8 million for the third quarter of fiscal 1998 to $22.2
million for the third quarter of fiscal 1999. Approximately $4.3 million of the
increase was due to the operations of the Company's acquisitions and new store
openings since the third quarter of fiscal 1998. SG&A expenses are affected by
the contribution of revenues by business line and by the mix of revenues within
each business line. As a percentage of revenues, SG&A expenses are higher for
construction operations than for agricultural and truck operations and SG&A
expenses are lower for wholegoods sales than for parts and service and rental
revenues.
INTEREST EXPENSE
Interest expense increased approximately $2.3 million, or 115.0%, from
$2.0 million for the third quarter of fiscal 1998 to $4.3 million for the third
quarter of fiscal 1999. The higher levels of interest expense are due to the
Company now operating at more normalized debt levels after having paid down debt
following the initial public offering in January of 1997, the increased number
of stores which has substantially expanded inventory levels and the need to
maintain a larger equipment rental fleet to support the Company's expanded
operations in this line of business.
INCOME TAXES
The estimated benefit from and the provision for taxes as a percentage
of pretax loss or income for the third quarter of fiscal 1999 and 1998 was 40.7%
and 40.0%, respectively.
NET INCOME
The Company reported a net loss of $(7.3) million, or $(0.55) per share
for the third quarter of fiscal 1999, which includes a $15.0 million inventory
charge and a $2.2 million restructuring charge compared to net income of $4.4
million, or $0.33 per share, for the third quarter of fiscal 1998. Net income
and net income per share before inventory and restructuring charges for the
third quarter of fiscal 1999 were $2.9 million and $0.22 per share,
respectively.
NINE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
1997
REVENUES
Revenues increased approximately $107.8 million, or 33.6%, from $320.6
million for the first nine months of fiscal 1998 to $428.4 million for the first
nine months of fiscal 1999. Construction operations contributed approximately
$65.4 million of this increase, with revenues increasing 35.4% to $250.0 million
for the first nine months of fiscal 1999. Construction revenues increased
approximately $10.5 million due to the Company's acquisitions and new store
openings since the third quarter of fiscal 1998. Agricultural revenues decreased
approximately $5.7 million, or 4.4%, to $125.4 million for the first nine months
of fiscal 1999. The decrease in agricultural revenues was a result of the
Midwest farm economy causing the Midwest agricultural operations to report lower
than anticipated results which was partially offset by an increase in revenues
of $2.2 million due to the Company's acquisitions since the third quarter of
fiscal 1998. Truck operations contributed approximately $48.1 million of the
overall increase, with revenues increasing 981.6% to $53.0 million for the first
nine months of fiscal 1999. Truck revenues increased approximately $46.4 million
due to the Company's acquisitions since the third quarter of fiscal 1998.
11
<PAGE>
Total wholegoods sales increased approximately $78.5 million, or 35.2%,
from $223.2 million for the first nine months of fiscal 1998 to $301.7 million
for the first nine months of fiscal 1999. Construction operations contributed
approximately $49.3 million of this increase, with sales increasing 39.2% to
$175.0 million. Of this increase, $5.1 million was due to the Company's
acquisitions and new store openings since the third quarter of fiscal 1998.
Agricultural wholegoods sales decreased approximately $8.7 million, or 9.2%, to
$86.2 million for the first nine months of fiscal 1999, primarily as a result of
the Midwest farm economy. Truck operations contributed approximately $37.9
million of the overall increase, with sales increasing 1,457.7% to $40.5
million. Of this increase, $36.7 million was due to the Company's acquisitions
since the third quarter of fiscal 1998.
Parts and service revenues increased approximately $21.6 million, or
24.9%, from $86.9 million for the first nine months of fiscal 1998 to $108.5
million for the first nine months of fiscal 1999. Of this increase, $13.2
million was due to the Company's acquisitions and new store openings since the
third quarter of fiscal 1998.
Rental revenues of $18.2 million were generated in the first nine
months of fiscal 1999 compared to $10.4 million in the first nine months of
fiscal 1998, an increase of $7.8 million, or 75.0%. Rental revenues increased
approximately $4.5 million due to the Company's acquisitions and store openings
since the third quarter of fiscal 1998.
GROSS PROFIT
Gross profit increased approximately $5.1 million, or 7.9%, from $65.5
million for the first nine months of fiscal 1998 to $70.6 million for the first
nine months of fiscal 1999. Gross profit for the first nine months of fiscal
1999 was decreased by the $15.0 million inventory charge as discussed above.
Gross profit as a percentage of total revenues for the first nine months of
fiscal 1999 and 1998 was 16.5% and 20.4%, respectively. Gross profit, as a
percentage of total revenues before the $15.0 million inventory charge, for the
first nine months of fiscal 1999 was 20.0%. Gross profit is affected by the
contribution of revenues by business line and by the mix of revenues within each
business line. Revenues from construction operations provide the Company with
higher gross margins than do agricultural and truck operations. Wholegoods sales
provide the Company with lower gross margins than do parts and service and
rental revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percent of total
revenues increased from 13.7% for the first nine months of fiscal 1998 to 13.9%
for the first nine months of fiscal 1999. Total SG&A expenses increased
approximately $15.6 million, from $44.0 million for the first nine months of
fiscal 1998 to $59.6 million for the first nine months of fiscal 1999.
Approximately $7.1 million of the increase was due to the operations of the
Company's acquisitions and new store openings since the third quarter of fiscal
1998. SG&A expenses are affected by the contribution of revenues by business
line and by the mix of revenues within each business line. As a percentage of
revenues, SG&A expenses are higher for construction operations than for
agricultural and truck operations. As a percentage of revenues, SG&A expenses
are lower for wholegoods sales than for parts and service and rental revenues.
INTEREST EXPENSE
Interest expense increased approximately $5.5 million, or 119.6%, from
$4.6 million for the first nine months of fiscal 1998 to $10.1 million for the
first nine months of fiscal 1999. The higher levels of interest expense are due
to the Company now operating at more normalized debt levels after having paid
down debt following the initial public offering in January of 1997, the
increased number of stores which has substantially expanded inventory levels and
the need to maintain a larger equipment rental fleet to support the Company's
expanded operations in this line of business.
12
<PAGE>
INCOME TAXES
The estimated provision for taxes as a percentage of pretax income for
the first nine months of fiscal 1999 and 1998 was 40.7% and 40.0%, respectively.
NET INCOME
The Company reported a net loss of $(0.3) million, or $(0.02) per share
for the first nine months of fiscal 1999, which includes a $15.0 million
inventory charge and a $2.2 million restructuring charge compared to net income
of $10.6 million, or $0.80 per share, for the first nine months of fiscal 1998.
Net income and net income per share before inventory and restructuring charges
for the first nine months of fiscal 1999 were $9.9 million and $0.75 per share,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash primarily for financing its inventories of
wholegoods and replacement parts, acquisitions of additional locations and
capital expenditures. Historically, the Company has met these liquidity
requirements primarily through cash flow generated from operating activities,
floor plan financing, and borrowings under credit agreements with Deere &
Company (Deere), Deere Credit Services, Inc. (Deere Credit), Ag Capital Company
(Ag Capital), and commercial banks. In addition, in January 1997, the Company
completed its initial public offering raising net proceeds of $68.3 million
which were used in part to satisfy the Company's working capital needs.
Floor plan financing from Deere and Deere Credit represents the primary
source of financing for wholegoods inventories, particularly for equipment
supplied by Deere. Revolving credit agreements with Deutsche Financial Services
and NationsBanc Leasing Corporation provide financing for rental equipment and
inventory, respectively. The truck inventory is primarily financed with
Associates Commercial Corporation and GMAC Financial Services. All lenders
receive a security interest in the inventory financed. In addition to floor plan
financing supplied by manufacturers, the Company had approximately $40.0 million
of unused credit commitments as of October 31, 1998.
Deere and Deere Credit offer floor plan financing to Deere dealers for
extended periods and with varying interest-free periods, depending on the type
of equipment and to encourage the purchase of wholegoods by dealers in advance
of seasonal retail demand. Down payments are not required and interest may not
be charged for a substantial part of the period for which inventories are
financed. Variable market rates of interest based on the prime rate are charged
on balances outstanding after any interest-free periods, which are currently six
to twelve months for agricultural equipment and one to five months for
construction equipment. Deere also provides financing to dealers on used
equipment accepted in trade and approved equipment from other manufacturers.
Deutsche Financial Services and NationsBanc Leasing Corporation provide
financing using variable market rates of interest based on LIBOR. Associates
Commercial Corporation and GMAC Financial Services provide financing using
variable market rates of interest based on the prime rate.
The Company periodically reviews the terms of its financing
arrangements with its lenders, including the interest rate. For the first nine
months of fiscal 1999, the average interest rate was approximately 7.60% and for
the first nine months of fiscal 1998 was 8.31%. As of October 31, 1998, the
Company had outstanding floor plan payables of approximately $224.4 million, of
which $169.6 million was then interest-bearing.
During the first nine months of fiscal 1999, operating activities
generated cash of approximately $30.7 million. The cash generated from
operations was primarily from increases in floor plan financing, accounts
payable and accrued liabilities. Partially offsetting the increase in cash from
these operating activities were increases in trade receivables from customers
and increases in the Company's inventories.
13
<PAGE>
Cash used for investing activities during the first nine months of
fiscal 1999 was $48.9 million, which was primarily due to purchases of net
assets of acquisitions and purchases of rental equipment. Cash provided by
financing activities provided approximately $18.9 million. The primary source of
cash from financing activities was issuance of long-term debt and increases in
the Company's operating lines primarily to fund purchases of rental equipment.
The Company believes cash from operations, available cash and borrowing
capacity will be sufficient to fund its planned capital expenditures for fiscal
1999.
SEASONALITY
The Company generally experiences a higher volume of wholegoods sales
in the second and third fiscal quarters of each fiscal year due to the crop
growing season and winter weather conditions in the Midwest. Typically, farmers
purchase agricultural equipment immediately prior to planting or harvesting
crops, which occurs during the Company's second and third fiscal quarters. As a
result, sales of agricultural equipment generally are lower in the first and
fourth fiscal quarters. Winter weather in the Midwest also limits construction
to some degree and, therefore, also typically results in lower sales of
construction equipment in the first and fourth fiscal quarters. If the Company
acquires operations in geographical areas other than where it currently has
operations, it may be affected by other seasonal or equipment buying trends.
IMPACT OF YEAR 2000 ISSUES
The Company uses both information technology ("IT") and non-IT systems
and assets which will be affected by the date change in the year 2000. Many
existing computer systems and related applications use only two digits to
identify a year in the date field. As the year 2000 approaches, such programs
may be unable to distinguish years beginning with 20 from years beginning with
19. In addition, such programs may not recognize the year 2000 as a leap year
and fail to include February 29 as a date during the year 2000 or incorrectly
include February 29 in years after 2000. As a result, date sensitive systems and
related applications may fail, or may not process data accurately, before,
during or after the year 2000. The Company is in the midst of an ongoing
analysis to evaluate and address the potential for year 2000 issues to impact
its operations and management of its businesses.
The Company's dealership, equipment rental and financial services
operations rely heavily upon third party systems to support critical day-to-day
operations, including sales, inventory, service and parts operations, accounting
functions, submitting warranty claims, ordering wholegoods and parts, reporting
financial information, and receiving technical information for service
activities. The Company has received and is relying upon assurances from each of
the providers of these systems that year 2000 compliant versions of the systems
have been developed and have been made available to the Company at no additional
cost under existing maintenance agreements. The Company has installed these
updates to make all business software applications year 2000 compliant. In
addition, all application server hardware is year 2000 compliant. The Company
will continue to evaluate these systems, and will monitor all hardware and
software vendors to identify and implement any future releases of corrections
relating to the year 2000.
The Company is also attempting to verify that the critical services
provided by external service providers, such as manufacturers and other
suppliers, public utilities, financial institutions and credit bureaus with
which the Company conducts business, will be available without interruption
during the transition to the year 2000. Financial institutions with which the
Company conducts critical business activities include floorplan lending sources
and retail lending institutions. The Company's survey of suppliers is
approximately ten percent complete, and the Company has not yet identified any
suppliers who will not be year 2000 compliant. The Company expects to complete
this survey by April 30, 1999. In the event third party service providers are
unable to verify their ability to address year 2000 issues, the Company will
explore alternative sources for such services.
14
<PAGE>
In addition to the critical systems and services noted above, the
Company's operations use a variety of non-IT devices and systems containing
embedded technology which may fail, or may not process data accurately, before,
during or after the year 2000. Due to the nature of its operations, the Company
has minimal exposure to embedded technology. Such non-critical devices and
systems include personal computers, software applications, phone systems,
control systems and alarms. The Company has begun evaluating the impact to its
operations of such items and expects to complete this assessment and analysis by
April 30, 1999. The completion of any necessary implementation and testing is
planned for October 31, 1999. The Company expects to identify non-compliant
personal computers and other non-IT equipment which will be replaced during
1999.
Despite the Company's efforts, there is a risk not all possible
problems associated with year 2000 issues will be corrected. Further, despite
assurances that the Company has received or will receive, there can be no
guarantee that the systems and services provided by vendors, or that the systems
of other companies with which the Company does business, will be year 2000
compliant. In addition to risks associated with manufacturers and their year
2000 readiness, the Company believes that its largest risks are associated with
utilities (e.g., electrical power, telephones, data communication lines) which
are beyond the control of the Company. Any non-compliance could result in the
reduction or shutdown of the retail sale of equipment, trucks, parts and
ancillary products, which could have a material adverse effect on the Company.
In connection with acquisitions, the Company attempts to determine
beforehand whether a business being acquired is year 2000 compliant. But that
objective is not always possible, and the Company may be unable to verify year
2000 compliance until after an acquisition is completed.
All costs associated with evaluating and correcting year 2000 issues
are expensed as incurred. To date, the costs associated with reviewing and
correcting year 2000 issues have not been material. Costs of any new equipment
will be expensed or capitalized over the asset's useful life, consistent with
the Company's financial policies. The Company is evaluating the estimated cost
of its year 2000 remediation program in concert with the review of year 2000
issues. The Company expects the total cost of these expenditures will be less
than $250,000 of which approximately $50,000 will be expensed and $200,000
capitalized.
SAFE HARBOR STATEMENT
This statement is made under the Private Securities Litigation Reform
Act of 1995. The future results of the Company, including results related to
forward-looking statements in this Report, involve a number of risks and
uncertainties. Important factors that will affect future results of the Company,
including factors that could cause actual results to differ materially from
those indicated by forward-looking statements, include, but may not be limited
to, those set forth under the caption "Certain Important Factors" in Item 1 of
the Company's Form 10-K dated April 24, 1998, in the Company's Form 8-K dated
April 24, 1998, and in other filings with the Securities and Exchange
Commission. These factors, which are subject to change, include: general
economic conditions worldwide and locally; interest rates; housing starts; fuel
prices; the many interrelated factors that affect farmers' confidence, including
farm cash income, farmer debt levels, worldwide demand for agricultural
products, world grain stocks, commodity prices, weather, animal and plant
diseases, crop pests, harvest yields, real estate values and government farm
programs; legislation, primarily legislation relating to agriculture, the
environment, commerce and government spending on infrastructure; climatic
phenomena such as La Nina and El Nino; pricing, product initiatives and other
actions of competitors in the various industries in which the Company competes,
including manufacturers and retailers; the level of inventories in these
industries; the Company's relationships with its suppliers; production
difficulties, including capacity and supply constraints experienced by the
Company's suppliers; practices by the Company's suppliers; changes in
governmental regulations; employee relations; currency exchange rates;
availability, sufficiency and cost of insurance; securitization transactions and
other financing arrangements relating to the Company's
15
<PAGE>
financial services operations, including credit availability and customer credit
risks; dependence upon the Company's suppliers; termination rights and other
provisions which the Company's suppliers have under dealer and other agreements;
risks associated with growth, expansion and acquisitions; the positions of the
Company's suppliers and other manufacturers with respect to publicly-traded
dealers, dealer consolidation and specific acquisition opportunities; the
Company's acquisition strategies and the integration and successful operation of
acquired businesses; capital needs and capital market conditions; operating and
financial systems to manage rapidly growing operations; dependence upon key
personnel; accounting standards; technological difficulties, especially
involving the Company's suppliers and other third parties, including potential
impact of the year 2000 on processing date-sensitive information, which could
cause the Company to be unable to process customer orders, deliver products or
services, or perform other essential functions; and other risks and
uncertainties. The Company's forward-looking statements are based upon
assumptions relating to these factors. These assumptions are sometimes based
upon estimates, data, communications and other information from suppliers,
government agencies and other sources which may be subject to revision. The
Company makes no commitment to revise forward-looking statements, or to disclose
subsequent facts, events or circumstances that may bear upon forward-looking
statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not currently applicable to the Company.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
The exhibits are listed in the Exhibit Index on page 17 of
this Report.
(b) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K dated October
27, 1998 - Item 7(c). Attached to that Current Report was a copy of a
news release issued by the Company on October 27, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RDO EQUIPMENT CO.
(Registrant)
Date: December 10, 1998 By: /s/ Allan F. Knoll
-----------------------------------
Allan F. Knoll
Chief Financial Officer and Secretary
(principal financial officer)
16
<PAGE>
EXHIBIT INDEX
ITEM NO. ITEM PAGE OF THIS REPORT
- -------- ---- -------------------
27 Financial Data Schedule 18
17
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<LEGEND>
3RD QUARTER ENDED OCTOBER 31, 1998
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 784
<SECURITIES> 0
<RECEIVABLES> 62,083
<ALLOWANCES> 1,419
<INVENTORY> 242,087
<CURRENT-ASSETS> 313,802
<PP&E> 82,132
<DEPRECIATION> 20,033
<TOTAL-ASSETS> 413,459
<CURRENT-LIABILITIES> 274,472
<BONDS> 31,251
0
0
<COMMON> 132
<OTHER-SE> 100,649
<TOTAL-LIABILITY-AND-EQUITY> 413,459
<SALES> 428,386
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<INCOME-PRETAX> (207)
<INCOME-TAX> (84)
<INCOME-CONTINUING> (123)
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<NET-INCOME> (289)
<EPS-PRIMARY> (0.02)
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