Rocky Mountain Dealerships Inc.
Annual Report 2018

Plain-text annual report

ROCKY MOUNTAIN DEALERSHIPS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS For the Year Ended December 31, 2018 ROCKY MOUNTAIN DEALERSHIPS INC. MANAGEMENT'S DISCUSSION & ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2018 This Management’s Discussion and Analysis (“MD&A”) was prepared as of March 12, 2019, and is provided to assist readers in understanding Rocky Mountain Dealerships Inc.’s financial performance for the year ended December 31, 2018. It should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2018 and 2017 together with the notes thereto. The results reported herein have been derived from consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and, unless otherwise indicated, are presented in thousands of Canadian dollars. Unless the context otherwise requires, use in this MD&A of “RME”, “we”, “us”, or “our” means Rocky Mountain Dealerships Inc. and its subsidiaries, all of which are wholly-owned. RME’s common shares trade on the Toronto Stock Exchange under the symbol ‘RME’. Additional information relating to RME, including RME’s Annual Information Form, dated March 12, 2019 (“AIF”), is available at www.sedar.com. This MD&A contains forward-looking information and statements (collectively, “FLS”). See the section “Caution Regarding Forward-Looking Information and Statements” for a discussion of the risks, uncertainties and assumptions relating to those statements. SELECTED FINANCIAL INFORMATION Earnings before finance costs and income taxes 12,748 $ thousands Sales Cost of sales Gross profit Gross profit as a % of sales Selling, general and administrative Loss (gain) on derivative financial instruments Loss on vacant land Restructuring charges Finance costs Earnings before income taxes Income taxes Net earnings Net earnings as a % of sales Earnings per share Basic Diluted Dividends per share Book value / share – December 31 Non-IFRS Measures(1) Adjusted Diluted Earnings per Share Adjusted EBITDA Operating SG&A Operating SG&A as a % of sales Quarter ended December 31, Year ended December 31, 2018 2017 2016 2018 2017 2016 273,699 235,378 38,321 14.0 285,749 1,051,088 251,633 34,116 11.9 909,626 141,462 13.5 959,341 819,917 139,424 14.5 930,435 797,028 133,407 14.3 27,251 (3,131) 25,205 100,129 (605) 3,587 295,421 255,257 40,164 13.6 26,595 821 — — 3,559 9,189 2,557 6,632 2.2 0.34 0.34 — — 14,201 2,799 11,402 3,134 8,268 3.0 0.42 0.42 — — 9,516 3,346 6,170 1,466 4,704 1.6 0.24 0.24 0.1225 0.1150 0.1150 0.33 11,285 25,729 8.7 0.40 12,886 23,042 8.4 0.23 8,176 23,044 8.1 — — 37,746 13,093 24,653 6,771 17,882 1.7 0.90 0.90 0.4750 10.46 0.95 34,816 95,159 9.1 99,754 (4,578) 641 — 43,607 11,921 31,686 8,777 22,909 2.4 1.18 1.18 0.4600 10.05 1.16 40,176 89,097 9.3 (720) 97,970 (4,751) 1,360 3,564 35,264 14,343 20,921 5,955 14,966 1.6 0.77 0.77 0.4600 9.13 0.83 31,621 89,238 9.6 87,626 Operating Cash Flow before Changes in Floor Plan (34,858) (36,367) 14,542 (50,509) (1) See further discussion in “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 2 SUMMARY OF THE QUARTER ENDED DECEMBER 31, 2018 While early snowfalls in mid-to-late September across the Canadian Prairies delayed harvest, more normal weather for the remainder of the year allowed for essentially all crops to be harvested in most areas. Despite an uncertain start, we demonstrated strong sales in the face of equipment pricing headwinds. SALES AND MARGINS • Sales increased 7.9% or $21,722 to $295,421 compared with $273,699 for the same period in 2017 due primarily to $15,953 of acquired sales for the quarter. • Gross profit increased by 4.8% or $1,843 to $40,164 from $38,321 for the same period in 2017. COST STRUCTURE • As a percentage of sales, Operating SG&A for the fourth quarter of 2018 increased by 0.3% to 8.7% compared with 8.4% for the same period in 2017. The modest increase is due largely to the fixed nature of the costs associated with the recently acquired inventory/stores. • Finance costs for the quarter ended December 31, 2018 increased 27.2% or $760 to $3,559 compared with $2,799 during the same period in 2017 due primarily to an increase in the average level of interest-bearing floor plan. EARNINGS • Adjusted EBITDA for the quarter ended December 31, 2018 decreased by 12.4% or $1,601 to $11,285 compared with $12,886 for the same period in 2017. • Adjusted Diluted Earnings per Share decreased by 17.5% or $0.07 to $0.33 for the fourth quarter of 2018, compared with $0.40 for the same period of 2017. NORMAL COURSE ISSUER BID ("NCIB") • During the fourth quarter of 2018, RME also repurchased 400 thousand of its outstanding common shares pursuant to an NCIB. SUMMARY OF THE YEAR ENDED DECEMBER 31, 2018 RME hit a significant milestone in 2018 reporting record revenues of $1,051,088, up 9.6% year-over-year. This increase in revenue reflects growth in both same store and acquired sales and is in line with our growth plan that was announced in May of 2018. SALES AND MARGINS • Sales increased 9.6% or $91,747 to $1,051,088 compared with $959,341 for the same period in 2017. The increase is largely due to a $65,389 increase in same store new equipment sales, reflecting both stronger market demand and out-of-season deliveries of harvest equipment. • Gross profit increased by 1.5% or $2,038 to $141,462 from $139,424 for the same period in 2017. COST STRUCTURE • As a percentage of sales, Operating SG&A for the year ended December 31, 2018 decreased by 0.2% to 9.1% compared with 9.3% for the same period in 2017 due to increased sales. • Finance costs for the year ended December 31, 2018 increased 9.8% or $1,172 to $13,093 compared with $11,921 during the same period in 2017 due primarily to an increase in the average level of interest-bearing floor plan. EARNINGS • Adjusted EBITDA for the year ended December 31, 2018 decreased by 13.3% or $5,360 to $34,816 compared with $40,176 for the same period in 2017. • Adjusted Diluted Earnings per Share decreased by 18.1% or $0.21 to $0.95 for the year ended December 31, 2018, compared with $1.16 for the same period of 2017. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 3 BALANCE SHEET AND INVENTORY For the year ended December 31, 2018, inventory turns were 1.73 times, down from 1.81 times for fiscal 2017. Used equipment inventories increased as a result of trades taken on increased new equipment sales as well as business acquisitions. The increase in used equipment inventory also reflects an increase in the average cost per unit. COMPANY OVERVIEW Headquartered in Calgary, Alberta, RME is Canada’s largest agriculture equipment dealer with a network of full-service equipment stores across the Canadian Prairie Provinces. During 2018, RME also established a presence in the United States (“U.S.”) with our used equipment distribution location in Tonganoxie, Kansas. RME is Canada’s largest retail dealer of CNH equipment, which includes Case IH, New Holland, and Case Construction. We are also a major independent dealer of equipment from a number of other “short-line” manufacturers. We offer our customers a one-stop solution for their equipment needs through new and used equipment sales, parts sales, repairs and maintenance services and third-party equipment financing and insurance services. In addition, we provide or arrange other ancillary offerings such as GPS signal subscriptions and geomatics services. MARKET FUNDAMENTALS AND OUTLOOK RME is primarily engaged in the business of selling agriculture equipment to grain, oilseed and pulse crop farmers in Alberta, Saskatchewan and Manitoba. In addition to equipment price, demand for agriculture equipment is supported by farming incomes which, in turn, are a function of commodity prices, quantity and quality of the crop, as well as input costs. Many of these factors are influenced by weather conditions on both a local and, to an extent, global basis. Changes in these demand drivers can cause our customers’ buying patterns to shift. The agriculture sector exhibits cyclical surges in demand and profitability driven by these macroeconomic factors, as well as other factors that can impact our industry. Equipment utilization rates, by contrast, are less volatile as agricultural equipment tends to incur hours in the field regardless of weather or economic conditions. The business of farming requires producers to work their fields each year. Circumstances may exist, however, that cause farmers to opt for used equipment in lieu of new equipment, or they may elect to maintain rather than replace their fleets. Our broad range of product and service offerings enables us to respond to these shifts in buying patterns and provides a measure of stability within our financial results. COMPETITIVE LANDSCAPE Our distribution contracts grant us the right to sell new equipment and parts as well as provide warranty service for some of the world’s leading equipment brands across Canada’s Prairie Provinces. Significant barriers to entry exist in this market, which help us maintain our position as an exclusive supplier of these brands within our sales territories. Our installed base and customer relationships create an annuity of equipment sales and product support revenue, which help drive dependable earnings and cash flow. CROP OUTLOOK In its Outlook for Principal Field Crops dated February 22, 2019, Agriculture and Agri-Foods Canada forecasted a modest 0.6% year-over-year decline in the production of principal field crops for the 2018-2019 farm year, despite an unusually late harvest in certain regions. While the early 2018 snowfall is expected to cause some deterioration in grade, the resulting additional moisture should bode well for the 2019 growing season. U.S. MARKET In October 2018, RME commenced an initiative to sell late-model used equipment to farmers based in the U.S. To this end, RME entered into a lease for a property in Tonganoxie, Kansas, which is located on the outskirts of Kansas City. This location is situated in close proximity to the vibrant agriculture markets of Kansas, Iowa, Nebraska, Missouri and Oklahoma. With minimal capital and startup costs, we will be able to give our U.S. customers more visibility into RME's used equipment offerings, while also helping to establish RME within the U.S. dealership landscape. At present, we anticipate that this facility will only handle the sale of late-model used equipment. In early 2019, this location commenced operations. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 4 CAPITAL ALLOCATION STRATEGY AND GROWTH PLAN Our success has enabled us to consider a variety of capital allocation strategies, including returning capital to shareholders, acquisitive growth and further debt reductions. To that end, RME repurchased and canceled 400 thousand of its common shares pursuant to an NCIB during the fourth quarter of 2018. With the improvements we have made to our operational model and integration capabilities, we are well-positioned to pursue, and are actively seeking, further acquisitive growth opportunities. RME anticipates continued stability or modest growth in its dividend through this process. During 2018, RME launched its growth plan that aims to grow revenues to at least $1.5 billion in 2023. RME intends to do this through a combination of revenue sources including: • $200 million in organic growth through RME’s present geographic foot print; • $200 million in acquired top-line revenue in Canada and/or the U.S.; and • $100 million in revenue synergies on assets that are acquired through this growth plan. As part of this growth plan, during fiscal 2023 RME is targeting Adjusted Earnings of $33.8 million and Adjusted EBITDA of $60.0 million. Please note that the adoption of IFRS 16, ‘Leases’ on January 1, 2019 is expected to increase Adjusted EBITDA. RME will recalibrate its Adjusted EBITDA target to reflect the new accounting standard once adopted and preserve the targeted $19.8 million improvement in this metric. Our progress to-date with respect to these growth initiatives as represented by RME’s results on a trailing twelve month basis (“TTM”) is summarized in the chart titled TTM vs. Target. While encouraging, our growth in revenues has yet to translate into progress against our Adjusted Earnings and Adjusted EBITDA targets. Competitive market pressures have weighed on margins during the TTM ended December 31, 2018. Meanwhile, costs associated with acquired locations as well as investment in our sales force have contributed to increased operating costs and resulted in reductions in both Adjusted Earnings and Adjusted EBITDA relative to their respective 2017 benchmark values. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 5 During 2018, RME completed the acquisitions of John Bob Farm Equipment (“JBFE”) and the New Holland Agriculture dealership in Olds, Alberta (“Olds”). RME estimates average historical sales for the acquired stores during the period from acquisition date to December 31, 2018, to be $27,598 and has presented this as “acquired” revenues during the TTM ended December 31, 2018. The decomposition of progress towards our revenue growth initiative is presented in the chart titled Revenue Growth Initiative below. In the near- to mid-term, we will continue to pursue acquisitive growth opportunities. We typically target dealership operations in areas with similar farm characteristics and crop profiles to our existing operations. This means that Case IH and New Holland agriculture equipment dealers in the Canadian Prairies continue to be of interest to us. We view acquisitions in the Canadian Prairies as scale acquisitions, where acquired dealerships are fully integrated into our network. One immediate source of accretion in an acquisition is our ability to redistribute inventory throughout a broader network of dealerships, enabling us to better scale our investment in inventory. Another area of interest to us is the U.S., particularly those states falling between the eastern slopes of the Rocky Mountains and the mid-west. U.S. regions with crops similar to the crop mix of the Canadian Prairies currently benefit from good economics, and farming operations in these regions are supportive of ongoing equipment purchases. While we would require manufacturer approval prior to doing so, a significant acquisition in these regions of the U.S. would be transformational. RESULTS OF OPERATIONS We use the terms “acquired” versus “same store” in assessing our revenue. Each acquired store has an average historical level of sales prior to being acquired by RME. When we discuss “acquired” results, we are referring to these average historical levels. This base level of activity continues to be classified as acquired until such time as the acquired store has been included in our dealership network for twelve months after which point, all activity is classified as “same store”. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 6 SALES Fourth Quarter (“Q4”) 2018 vs. Q4 2017 $ thousands Sales New equipment Used equipment Parts Service Total sales Gross profit Gross margin % 2018 2017 Total Change Acquired Same Store 163,757 99,369 23,690 8,605 295,421 40,164 13.6 155,378 89,245 21,132 7,944 273,699 38,321 14.0 8,379 10,124 2,558 661 21,722 1,843 (0.4) 7,477 4,776 2,649 1,051 15,953 902 5,348 (91) (390) 5,769 For the quarter ended December 31, 2018, total sales increased by $21,722 or 7.9% to $295,421 from $273,699 during the same period in 2017 due primarily to $15,953 of acquired sales for the quarter. On a same store basis, the late completion of harvest activity, namely in Central and Northern Alberta, supported activity levels during the fourth quarter of 2018. Meanwhile, RME continued to focus its sales efforts on used equipment leading to a $5,348 improvement relative to Q4 2017. Year-to-Date (“YTD”) 2018 vs. YTD 2017 $ thousands Sales New equipment Used equipment Parts Service Total sales Gross profit Gross margin % 2018 2017 Total Change Acquired Same Store 514,110 393,311 111,015 32,652 1,051,088 141,462 13.5 435,683 381,577 109,568 32,513 959,341 139,424 14.5 78,427 11,734 1,447 139 91,747 2,038 (1.0) 13,038 8,265 4,501 1,794 27,598 65,389 3,469 (3,054) (1,655) 64,149 For the year ended December 31, 2018, total sales increased by $91,747 or 9.6% to $1,051,088 from $959,341 in 2017. The increase was largely due to a $65,389 increase in same store new equipment sales, reflecting both stronger market demand and out-of-season deliveries of harvest equipment. Acquired sales contributed $27,598 to the year-over-year increase. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 7 PARTS AND SERVICE ACTIVITY Parts and service activity (collectively “Product Support”) is, in some cases, performed for the benefit of other departments within RME. This activity is excluded from reported parts and service revenues. Management assesses overall Product Support activity to ensure that the resources deployed are adequate in light of total activity. Product Support activity is reconciled to our reported revenues for the respective departments as follows: $ thousands Parts activity Total activity Internal activity eliminated Reported revenues Service activity Total activity Internal activity eliminated Reported revenues Quarter ended December 31, 2017 2018 Change Year ended December 31, 2017 2018 Change 27,075 (3,385) 23,690 13,197 (4,592) 8,605 24,443 (3,311) 21,132 12,201 (4,257) 7,944 2,632 (74) 2,558 126,234 (15,219) 111,015 122,231 (12,663) 109,568 996 (335) 661 54,755 (22,103) 32,652 50,435 (17,922) 32,513 4,003 (2,556) 1,447 4,320 (4,181) 139 1,586 Total reported Product Support revenues 32,295 29,076 3,219 143,667 142,081 Q4 2018 vs. Q4 2017 Product Support revenues for the quarter increased by 11.1% or $3,219 to $32,295 compared with $29,076 in the same period of 2017 due primarily to locations acquired during 2018. YTD 2018 vs. YTD 2017 Product Support revenues for 2018 increased by 1.1% or $1,586 to $143,667 compared with $142,081 in 2017. The reconditioning of trades taken on increased equipment sales volumes consumed much of the year-over-year increase in overall Product Support activity levels. So while activity levels were up 4.8%, the shift toward internal activity constrained reported Product Support revenue growth to 1.1%. GROSS PROFIT Q4 2018 vs. Q4 2017 Gross profit for the quarter ended December 31, 2018 increased by $1,843 or 4.8% to $40,164 compared with $38,321 for the same period in 2017. As a percent of sales, gross profit decreased to 13.6% compared with 14.0% during the same period of 2017. During the fourth quarter of 2018, transactional level margins continued to reflect the highly competitive conditions in the Western Canadian agriculture equipment marketplace. Elevated sales levels have, however, largely negated the impact of lower margins on gross profit dollars. Our sales performance also translated into an increase in incentives from our original equipment manufacturers (“OEMs”). YTD 2018 vs. YTD 2017 Gross profit for 2018 increased by $2,038 or 1.5% to $141,462 compared with $139,424 during the same period in 2017. Gross profit as a percent of sales decreased to 13.5% in 2018 compared with 14.5% during the same period of 2017. A favourable sales volume variance was largely offset by an unfavourable variance in sales prices, however, the elevated sales levels resulted in additional incentives recognized from our OEMs. SELLING, GENERAL AND ADMINISTRATIVE RME assesses its Operating SG&A relative to total sales in analyzing its results (see the definition and reconciliation of Operating SG&A in the “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below). Operating SG&A is comprised of facility, administrative and compensation related expenditures, the majority of which are fixed in the short-term. The largest variable component of RME’s Operating SG&A is commission associated with the sale of equipment inventory. RME targets Operating SG&A of less than 10% of sales on an annual basis. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 8 $ thousands Variable sales commissions Other Operating SG&A Operating SG&A Operating SG&A as a % of sales Q4 2018 vs. Q4 2017 Quarter ended December 31, 2017 2018 Change Year ended December 31, 2017 2018 Change 3,449 22,280 25,729 8.7 3,531 19,511 23,042 8.4 (82) 2,769 2,687 0.3 13,617 81,542 95,159 9.1 13,303 75,794 89,097 9.3 314 5,748 6,062 (0.2) Operating SG&A for the fourth quarter of 2018 increased by $2,687 or 11.7% to $25,729 from $23,042 in 2017. The increase is due primarily to costs associated with the locations acquired during 2018. As a percentage of sales, Operating SG&A for the quarter ended December 31, 2018 increased by 0.3% to 8.7% from 8.4% in 2017. YTD 2018 vs. YTD 2017 For the year ended December 31, 2018, Operating SG&A increased by $6,062 or 6.8% to $95,159 from $89,097 in 2017. The year-over-year increase reflects the impact of the locations acquired during 2018 as well as our investment in customer- facing personnel in response to elevated activity levels. As a percentage of sales, Operating SG&A for the year ended December 31, 2018 decreased by 0.2% to 9.1% from 9.3% in 2017, within our target of 10% on an annual basis. FINANCE COSTS Q4 2018 vs. Q4 2017 Finance costs for the quarter ended December 31, 2018 increased by $760 or 27.2% to $3,559 from $2,799 for the same period in 2017, due to a quarter-over-quarter increase in the average amount drawn on RME’s interest-bearing credit facilities. YTD 2018 vs. YTD 2017 Finance costs for the year ended December 31, 2018 increased $1,172 or 9.8% to $13,093 from $11,921 in 2017, as a result of an increase in the average balances being carried on RME’s interest-bearing credit facilities. NET EARNINGS Q4 2018 vs. Q4 2017 Net earnings for the quarter ended December 31, 2018 decreased by $1,636 or 19.8% to $6,632 from $8,268 in 2017. Additional gross profit was more than offset by increases in Operating SG&A and finance costs. Earnings per share on a basic and diluted basis for the fourth quarter of 2018 decreased by $0.08 or 19.0% to $0.34 from $0.42 for the same period in 2017. The impact on net earnings of RME’s derivative financial instruments and other unusual or non-recurring items can be significant. Management uses the Non-IFRS measure Adjusted Diluted Earnings per Share to evaluate earnings excluding such items. Refer to the “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below for the definition and reconciliation of Adjusted Diluted Earnings per Share. Adjusted Diluted Earnings per Share for the quarter ended December 31, 2018 decreased $0.07 or 17.5% to $0.33 from $0.40 for the same period in 2017. YTD 2018 vs. YTD 2017 Net earnings for the year ended December 31, 2018 decreased by $5,027 or 21.9% to $17,882 from $22,909 in 2017. Additional gross profit was more than offset by increases in Operating SG&A and finance costs. Earnings per share on a basic and diluted basis for 2018 decreased by $0.28 or 23.7% to $0.90 from $1.18 in 2017. Adjusted Diluted Earnings per Share for the year ended December 31, 2018 decreased by $0.21 or 18.1% to $0.95 from $1.16 for the same period in 2017. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 9 ADJUSTED EBITDA RME analyzes its Adjusted EBITDA in order to consistently compare periods by removing the impact of fluctuations in tax rates, long-term assets, financing costs related to our capital structure and our share price. See the definition and reconciliation of Adjusted EBITDA in the “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below. As part of our analysis of Adjusted EBITDA, RME deconstructs the period-over-period variance in gross profit dollars into the following components: • Sales volume variance – quantifies the impact on gross profit dollars arising from the change in consolidated sales volume for the period, holding overall gross margin flat. • Sales price variance – quantifies the impact on gross profit of period-over-period changes in gross margin percentages. RME quantifies this impact at a revenue stream level with our revenue streams consisting of sales of new equipment, used equipment, parts and service. The sum of these variances constitutes our sales price variance. RME notes that the impact of the period-over-period change in OEM incentives is presented separately (see below) and is therefore excluded from sales price variance. • Change in sales mix – our revenue streams generate differing profit margins, with product support activities generating comparatively higher margins than equipment sales. The change in sales mix quantifies the impact of shifts in the relative contributions of our various revenue streams to our overall reported sales for a period. RME notes that this metric captures only shifts between revenue streams and does not capture the impact of mix within a revenue stream. • OEM incentives recognized – quantifies the impact on gross profit dollars of the period-over-period change in OEM incentives recognized. Q4 2018 vs. Q4 2017 Adjusted EBITDA for the quarter ended December 31, 2018 decreased by $1,601 or 12.4% to $11,285 from $12,886 for the same period in 2017. Increased gross profit was more than offset by increases in Operating SG&A and short-term finance costs associated with RME’s floor plan facilities. The change in fourth quarter Adjusted EBITDA from 2017 to 2018 can be reconciled as follows: Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 10 YTD 2018 vs. YTD 2017 For the year ended December 31, 2018, Adjusted EBITDA decreased by $5,360 or 13.3% to $34,816 from $40,176 in 2017. Additional gross profit year-over-year was more than offset by increases in Operating SG&A and short-term finance costs associated with RME’s floor plan facilities. The change in annual Adjusted EBITDA from 2017 to 2018 can be reconciled as follows: SUMMARY OF QUARTERLY RESULTS $ thousands, except per share amounts Sales Gross profit Gross margin % SG&A Other expense (income) Finance costs Income taxes Net earnings Diluted earnings per share Q4 2018 Q3 2018 Q2 2018 Q1 2018 Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 295,421 40,164 13.6 233,374 36,235 15.5 302,639 38,100 12.6 219,654 26,963 12.3 273,699 38,321 14.0 238,812 38,807 16.3 236,890 35,518 15.0 209,940 26,778 12.8 285,749 34,116 11.9 26,595 821 3,559 2,557 6,632 0.34 24,434 511 3,659 2,083 5,548 0.28 25,631 829 3,133 2,385 6,122 0.31 23,469 1,426 2,742 (254) (420) (0.02) 27,251 (3,131) 2,799 3,134 8,268 0.42 24,834 (1,308) 3,105 3,327 8,849 0.46 24,566 923 3,026 2,092 4,911 0.25 23,103 (421) 2,991 224 881 0.05 25,205 (605) 3,346 1,466 4,704 0.24 Seasonal revenue cycles are common in the agriculture industry as a result of weather conditions, the timing of crop receipts and farming cycles and the timing of equipment deliveries from manufacturers. As a result, our financial results may vary between quarters. The first quarter is generally the weakest due to the lack of agriculture activity and winter shutdowns. Seeding activity typically commences between the latter part of the first quarter and the beginning of the second quarter. Harvest generally begins towards the middle of the third quarter, and continues through into the fourth quarter. Fourth quarter sales activity also includes post-harvest purchases that are typical in the agriculture sector. Weather conditions including a prolonged winter, excess moisture or drought, may shift the timing of farming activities between fiscal periods, impacting sales activity and profitability as a consequence. While weather continues to have a significant influence on overall demand, advances made in farming practices, seed technology and application techniques, have helped to mitigate this exposure to some extent and reinforce the agriculture industry fundamentals. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 11 STATEMENT OF FINANCIAL POSITION – SUMMARY $ thousands Assets Inventory Other current assets Total current assets Property and equipment Deferred tax asset Derivative financial assets Intangible assets Goodwill Total assets Liabilities and equity Floor plan payable Other current liabilities Total current liabilities Long-term debt Obligations under finance leases Deferred tax liability Derivative financial liabilities Total liabilities Shareholders’ equity Total liabilities and equity December 31, 2018 December 31, 2017 December 31, 2016 560,518 60,107 620,625 49,975 420 983 178 21,856 694,037 403,180 53,840 457,020 31,282 254 — 1,672 490,228 203,809 694,037 469,540 64,112 533,652 42,229 — 4,109 343 18,776 599,109 305,342 61,889 367,231 30,919 75 561 464 399,250 199,859 599,109 440,783 67,384 508,167 48,586 1,304 578 507 18,776 577,918 296,061 61,761 357,822 40,778 521 — 1,871 400,992 176,926 577,918 RME’s primary investment is in inventory, which is comprised predominantly of new and used agriculture equipment. We have a diverse customer base for our equipment and strive to carry an appropriate mix of both new and used equipment to best serve our customers. We manage our inventory levels and composition through our sales and procurement functions with the intention of growing our equipment revenues while improving the efficiency of our investment in inventory as measured by turns. In measuring inventory turns, RME calculates average inventory as a simple average of five quarterly observations including opening and ending balances for the period as well as the three intervening quarter-end balances. Inventory turns and days in inventory for the trailing twelve-month periods are as follows: $ thousands, except turns and days Inventory expensed through cost of sales – trailing 12 months Average total inventory – trailing 12 months (quarterly observations) Inventory turns Days in inventory December 31, 2018 December 31, 2017 December 31, 2016 897,408 519,238 1.73 211 807,010 445,497 1.81 201 782,802 476,198 1.64 222 RME’s equipment inventory as at December 31, 2018 increased as follows: • Used equipment inventory was $388,488, representing an increase of $73,494 or 23.3% compared with December 31, 2017. This increase is the result of trades taken on elevated equipment sales, particularly during the first half of 2018 as well as equipment inventory acquired through the purchase of complementary businesses. The increase in used equipment inventory also reflects an increase in average cost per unit. • New equipment inventory was $130,475, representing an increase of $14,547 or 12.5% compared with December 31, 2017, due primarily to inventory acquired through the purchase of complementary businesses. Overall, total inventory turns moderated during the trailing twelve-months ended December 31, 2018, as compared with the same period a year ago. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 12 RME finances its investment in inventory through various floor plan facilities. RME is under no obligation to finance any of its equipment inventory and can typically pay-down and redraw on these facilities to generate or make use of available cash. The composition of RME’s equipment inventory and associated floor plan payables can be summarized as follows: $ thousands New equipment Used equipment Total equipment inventory Floor plan payable Inventory leverage ratio December 31, 2018 December 31, 2017 December 31, 2016 130,475 388,488 518,963 403,180 77.7 115,928 314,994 430,922 305,342 70.9 113,517 289,485 403,002 296,061 73.5 During 2018, equipment inventory levels increased $88,041 or 20.4%, whereas draws on our floor plan facilities have increased $97,838 or 32.0% over the same period. In recent years, RME had made temporary use of available cash by paying down interest-bearing floor plan debt. In response to the acquisitive activity undertaken during 2018 as well as the repurchase of common shares pursuant to a NCIB, RME has reinstated a more historically normal level of inventory leverage and applied much of the cash generated therefrom to finance these initiatives. As a result, at December 31, 2018, our inventory leverage ratio was 77.7%, up from 70.9% at December 31, 2017, and from 73.5% at December 31, 2016. Non-current financial liabilities as at December 31, 2018 amounted to $33,208 (December 31, 2017 – $31,458, December 31, 2016 – $43,170). LIQUIDITY We assess liquidity in terms of our ability to generate sufficient cash flow, along with other sources of liquidity including cash and borrowings, to fund our operations and growth in operations. Net cash flow is affected by the following items: • Operating activities, including, the levels of inventory, floor plan payable and other components of working capital; • Financing activities, including bank credit facilities, long-term debt, distributions to shareholders and other capital market activities; and • Investing activities, including capital expenditures, dispositions of fixed assets and acquisitions of complementary businesses. SUMMARY OF CASH INFLOWS (OUTFLOWS) For the respective years ended December 31, cash inflows (outflows) were as follows: $ thousands 2018 2017 2016 Net earnings Effect of non-cash items in net earnings and changes in working capital Cash flows from operating activities Cash flows from financing activities Cash flows from investing activities Net (decrease) increase in cash Effect of foreign exchange on cash Cash, beginning of period Cash, end of period Operating Cash Flow before Changes in Floor Plan CASH FLOWS FROM OPERATING ACTIVITIES 17,882 7,705 25,587 (12,572) (21,119) (8,104) 53 20,097 12,046 (50,509) 22,909 (15,954) 6,955 (13,985) (1,415) (8,445) — 28,542 20,097 (720) 14,966 12,197 27,163 (6,694) (8,617) 11,852 — 16,690 28,542 87,626 RME assesses its Operating Cash Flow before Changes in Floor Plan in analyzing its cash flows from operating activities. See the definition and reconciliation of Operating Cash Flow before Changes in Floor Plan in the “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 13 RME is eligible to finance its equipment inventory using its various floor plan facilities. Floor plan facilities are asset-backed lending arrangements whereby each draw is associated with a specific piece of equipment. RME is under no obligation to finance any of its equipment inventory and, as a general rule, financed units can be paid out for a period of time and refinanced at a later date. Adjusting cash flows from operating activities for changes in the balance of floor plan payable allows management to isolate and analyze cash flows from operating activities, prior to any sources or uses of cash associated with equipment financing decisions. Operating Cash Flow before Changes in Floor Plan for the year ended December 31, 2018 was an outflow of $50,509 compared to an outflow of $720 during 2017. The incremental outflow year-over-year is primarily attributable to the growth in our inventory balance. Cash flows from operating activities for the year ended December 31, 2018 increased by $18,632 compared to the same period in 2017. In recent years, RME had been making temporary use of available cash by paying-down interest-bearing floor plan, reducing our carrying cost. During 2018, draws on our various floor plan facilities exceeded the growth in our inventory levels. The surplus funds generated were applied to businesses acquired during the year and shares repurchased pursuant to an NCIB. The increase in the level of floor plan payable relative to equipment inventory realigns our inventory leverage ratio to a more historically normal level as we redeploy some of this capital in a more productive capacity. CASH FLOWS FROM FINANCING ACTIVITIES Cash flows from financing activities pertained primarily to debt and dividend payments as well as net proceeds associated with the financing of business acquisitions. During the year ended December 31, 2018, cash outflows from financing activities decreased by $1,413 over the same period in 2017. During the year ended December 31, 2018, dividends, scheduled principal repayments on our debt facilities and cash paid to repurchase common share under the NCIB were partially offset by $7,401 in draws on our Term Facility associated with the acquisitive activity undertaken during 2018. CASH FLOWS FROM INVESTING ACTIVITIES Cash flows from investing activities is comprised of consideration paid for the acquisition of complementary businesses, maintenance capital spend and facility construction expenditures, offset by any proceeds received on the disposition of such assets. Cash outflows associated with investing activities for the year ended December 31, 2018 increased by $19,704 compared to the same period last year, due primarily to business acquisitions during 2018. CAPITAL RESOURCES We use operating cash flows to finance the purchase of inventory, service our debt requirements, pay dividends, and fund our operating activities, including working capital, both operating and finance leases and floor plan payable. Our ability to service our debt and distribute dividends to shareholders will depend upon our ability to generate cash, which depends on our future operating performance, general economic conditions, availability of adequate credit facilities, compliance with debt covenants, as well as other factors, some of which are beyond our control. Based on our current operational performance, we believe that cash flows from operations, along with existing credit facilities, will provide for our capital needs. FINANCE FACILITIES RME has a credit facility with a syndicate of lenders (the “Syndicated Facility”). The Syndicated Facility is a revolving facility, secured in favour of the syndicate by a general security agreement. During 2018, the Syndicated Facility was amended, extending the maturity date to September 24, 2021. Other amendments included the redistribution of overall facility limits between the Operating and Term Facilities as well as a reduction of the debt to tangible net worth covenant threshold to 4.0:1.0 from 5.0:1.0. The reduction of this threshold also eliminated the highest pricing tier which was associated with a debt to tangible net worth ratio of between 4.0:1.0 – 5.0:1.0. Subsequent to these amendments, advances under the Syndicated Facility may be made based on our lenders’ prime rate or the U.S. base rate plus 1.0% – 1.8% or based on the banker’s acceptance (“BA”) rate plus 2.0% – 2.8%. RME pays standby fees of between 0.4% – 0.6% per annum on any undrawn portion of the Syndicated Facility. The standby fees and premiums on base interest rates within the respective ranges are determined based on RME’s ratio of debt to tangible net worth. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 14 The Syndicated Facility consists of: • The “Operating Facility” – which may be utilized to advance up to the lesser of the established borrowing base and $50,000. The borrowing base is supported by otherwise unencumbered assets including certain accounts receivable, inventory and items of property and equipment, less priority payables. This facility may be used to finance general corporate operating requirements. • The “Flooring Facility” – which may be utilized to finance up to 75% of the value of eligible equipment inventory to a maximum of $125,000. Draws against the Flooring Facility are repayable over a term of 28 months, however, they become due in full upon the sale of the associated equipment. • The “Term Facility” – which may be utilized to finance up to 60% of the cost of acquisitions and 75% of the cost of real estate assets to a maximum of $85,000. Draws are repayable in quarterly installments with acquisition and real estate related draws amortized over periods of 7 and 15 years, respectively. Including the syndicated Flooring Facility, we have total floor plan facilities of approximately $593,580 (inclusive of seasonal increases) from various lending institutions for the purpose of financing equipment inventory. These facilities are made available to RME by the equipment manufacturers’ captive finance companies or divisions (such as CNH Industrial Capital Canada Ltd.), as well as by banks and specialty lenders. In addition to our available cash balance of $12,046 as at December 31, 2018, we have $286,538 available on our various credit facilities. $ thousands Operating Facility Term Facility Various floor plan facilities OEM floor plan facilities Syndicated Flooring Facility Other floor plan facilities Total Facility limit Amount drawn Available 50,000 85,000 240,000 125,000 228,580 728,580 — 38,266 155,897 75,448 172,431 442,042 50,000 46,734 84,103 49,552 56,149 286,538 In addition to the facility limits, the availability of funds under these credit facilities is limited or otherwise constrained by the adequacy of the underlying assets available to securitize a proposed draw and by customary negative covenants. These restrictions are not expected to affect RME’s access to required capital in the foreseeable future. The existing credit facilities are considered sufficient and appropriate for RME’s capital requirements. FINANCIAL COVENANTS Pursuant to agreements with lenders, RME is required to monitor and report compliance with certain financial ratios on a quarterly basis. Each lender defines its own calculation of these measures. Detailed descriptions of covenant calculations are available within RME’s various material credit agreements filed on Sedar at www.sedar.com. These financial covenants are summarized as follows: December 31, 2018 December 31, 2017 Threshold Result Threshold Result Fixed charge coverage ratio Assesses the ability to cover fixed charges by expressing free-cash flows generated as a ratio of committed obligations on a trailing 12-month basis. Debt to tangible net worth Assesses solvency by expressing debt as a ratio of tangible net assets. Current ratio Assesses liquidity by expressing current assets as a ratio of current liabilities. 1.91 1.55 2.70 2.40 1.38 2.21 1.67 2.21 1.83 1.48 As at December 31, 2018 and 2017, RME was in compliance with all externally imposed capital requirements. RME’s continued compliance with its financial covenants is dependent on various factors which influence our financial results including, but not limited to, overall demand for our products and services and the timing of that demand influenced Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 15 by weather and other factors. In the event that our financial results or position deteriorate, there is a risk that we may fail to comply with our financial covenants, most notably, our fixed charge coverage ratios. Failing to meet these covenants would constitute a default event which may result in, among other restrictions and remedies, the associated debt becoming due and restrictions being placed on RME’s ability to draw on its facilities or make distributions to shareholders. DERIVATIVE FINANCIAL INSTRUMENTS RME utilizes derivative financial instruments to hedge its exposure to changes in interest rates and fluctuations in the valuation of its common shares. We do not use derivatives to speculate, but rather as a risk management tool. RME’s portfolio of derivative financial instruments consists of interest rate and total return swaps. Losses (gains) recognized on derivative financial instruments are as follows: $ thousands Recognized in net earnings Recognized in other comprehensive (loss) income – net of tax Tax on amount recognized in other comprehensive (loss) income Interest Rate Swaps 2018 2017 3,587 962 357 (4,578) (2,852) (1,055) RME has several interest rate swaps related to portions of its Term Facility and various floor plan facilities (collectively, the “Hedged Facilities”). The Hedged Facilities each bear interest at a floating rate based on the prevailing BA rate. The interest rate swaps hedge our exposure to fluctuations in the BA rate. RME’s hedged and at risk positions are summarized as follows: $ thousands Hedged position Current debt Maturity Type Rate % Amount $ Rate % Amount $ December 31, 2018 December 31, 2017 Floor plan facility #1 Floor plan facility #2 Floor plan facility #3 Floor plan facility #4 August, 2018 September, 2020 September, 2022 August, 2025 Non-amortizing Non-amortizing Non-amortizing Non-amortizing(1) Long-term debt Term Facility Total position hedged April, 2023 Amortizing Position at risk – floating-rate debt Position hedged % (1) Notional amount expands to $60,000 in October, 2020. — 5.1 4.4 4.9 4.7 3.5 4.5 — 35,000 50,000 25,000 110,000 25,479 135,479 303,476 44.6 4.2 5.1 5.4 — 5.0 3.5 4.7 25,000 35,000 50,000 — 110,000 30,671 140,671 229,754 61.2 The interest rate swaps are accounted for using hedge accounting. If we sell or terminate a hedged item, or it matures before the related hedging instrument is terminated, we recognize in income any unrealized gain or loss on the derivative instrument. In accounting for these cash flow hedges, changes in fair value of the swaps are included in the consolidated statement of other comprehensive income to the extent the hedge continues to be effective. The related other comprehensive amounts are allocated to net earnings in the same period in which the hedged item affects net earnings. To the extent that changes in the fair value of these derivatives are not completely offset by changes in the fair value of the hedged items, the ineffective portions of the hedging relationships are recorded immediately in net earnings. For the year ended December 31, 2018, we recognized in net earnings, mark-to-market gain of $91, respectively, on our interest rate swaps (2017 – gain of $104). Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 16 Total Return Swaps RME has several total return swap arrangements to hedge the exposure associated with increases in its share price on its outstanding Director Share Units (“DSUs”) and Share Appreciation Rights (“SARs”). If not renewed or unwound by RME, these arrangements mature between March and July, 2020. It is RME’s intention to maintain a hedged position which approximately matches the quantity of, and terms associated with, the DSUs and SARs. The hedging relationship with the SARs is ineffective to the extent that RME’s share price falls below the strike price of the SARs. RME does not apply hedge accounting to these relationships and as such, gains and losses arising from marking these derivatives to market are recognized in net earnings in the period in which they arise. For the year ended December 31, 2018, we recognized an unrealized mark-to-market loss of $3,678 (2017 – gain of $4,474). During the first quarter of 2018, RME also unwound its hedged position by 510 thousand shares for cash proceeds of $1,683. This unwinding realigned our hedged position with our position at risk. RME’s hedged and at risk positions are summarized as follows: In thousands of shares/units except per share amounts Hedged position Position at risk: DSUs SARs Total Position hedged % DIVIDENDS December 31, 2018 December 31, 2017 Weighted average price/ share $ 9.14 Shares/ units Weighted average price/ share $ Shares/ units 660 85 565 650 101.5 9.34 1,170 60 599 659 177.5 On March 4, 2019, RME’s Board of Directors (the "Board") approved a quarterly dividend of $0.1225 per common share on its outstanding common shares. The common share dividend is payable on March 29, 2019, to shareholders of record at the close of business on March 15, 2019. SHARE CAPITAL – OUTSTANDING SHARES Changes in the number of issued and outstanding common shares during the years ended December 31, 2018 and 2017 are as follows: Thousands January 1 Shares purchased under NCIB Shares issued upon exercise of stock options December 31 2018 2017 19,877 (400) 11 19,488 19,384 — 493 19,877 During 2018, RME implemented an NCIB to repurchase existing common shares. At December 31, 2018, RME had repurchased 400 thousand shares under the NCIB. As at March 12, 2019, there were 19,488 thousand common shares outstanding. RME also has a stock option plan under which the Board may grant options to directors, officers, and employees of RME at an exercise price equal to the market price of RME’s common shares at the time of the grant. The plan limits the number of options issuable to a maximum of 10% of the issued and outstanding common shares from time to time. Options granted carry neither voting rights nor rights to dividends. The general terms of stock options granted under the plan include a maximum exercise period of five years and a vesting period of three years with one-third of the grant vesting on each of the first three anniversary dates following the date of grant. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 17 As at December 31, 2018, there were 139 thousand fully-vested options outstanding with an exercise price of $11.52. These options expire on March 27, 2019. As at March 12, 2019, there were 139 thousand options outstanding. CONTRACTUAL OBLIGATIONS RME’s contractual obligations consist primarily of its floor plan payable used to finance the purchase of new, and to a lesser extent, used equipment. RME has classified its floor plan payable as current as the corresponding inventory to which it relates has also been classified as current. Floor plan payable accounts for the majority of RME’s contractual obligations which will be discharged within the next 12 months. In addition to certain curtailment requirements, draws on our floor plan facilities become due upon the sale of the underlying piece of equipment inventory. Other significant contractual obligations outstanding as at December 31, 2018, include trade payables, accruals and other, long-term debt consisting predominantly of the Term Facility and operating lease commitments which relate primarily to RME’s facilities. Lease terms are between one and eleven years and most building leases contain renewal options for periods ranging from three to five years. RME assesses its liquidity based on the period in which cash flows are expected to occur. The following table summarizes RME’s expected undiscounted cash flows for obligations existing at December 31, 2018, assuming the Syndicated Facility is renewed prior to maturity on September 24, 2021. The analysis is based on foreign exchange rates and interest rates in effect at the date of the consolidated statement of financial position, and includes both principal and interest cash flows. $ thousands Total 2019 2020-2021 2022-2023 Thereafter Trade payables, accruals and other Floor plan payable Long-term debt Obligations under finance leases Operating lease obligations Derivative financial liabilities Total contractual obligations 24,283 416,441 44,150 583 35,101 2,556 523,114 24,283 416,441 8,466 307 8,491 461 458,449 — — 16,044 246 13,773 1,005 31,068 — — 10,571 30 8,688 693 19,982 — — 9,069 — 4,149 397 13,615 In the event that the Syndicated Facility is not renewed prior to its maturity, the cash outflow for long-term debt outstanding as at December 31, 2018, would be $33,257 in 2020-2021, $11 in 2022-2023 and $Nil thereafter. RELATED PARTY TRANSACTIONS During the years ended December 31, 2018 and 2017, RME entered into the following transactions with related parties: $ thousands Equipment and product support sales Expenditures Rental payments on RME facilities Equipment purchases Vehicle purchases Flight costs Donations Other expenses 2018 2017 4,398 2,683 5,833 3,158 1,376 101 — 39 5,987 1,278 — 55 57 42 Donations made by RME are comprised of payments to Ag for Life. During 2017, RME settled the remaining lease obligation associated with a vacated industrial facility which was leased from a related party for total consideration of $467. During 2017, RME also received $360 in lease inducements from a related party as part of a new leasehold agreement. Both of these amounts have been presented above within “Rental payments on RME facilities”. All related parties are either directly or indirectly owned by a member of senior management or director of RME and/or a close family member thereof. These transactions were made on terms equivalent to those that prevail in arm’s length transactions and are made only if such terms can be substantiated. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 18 The remuneration of the directors and officers identified as RME's key management for the respective years ended December 31 is as follows: $ thousands Salary and short-term benefits Post-retirement benefits Share-based compensation Total 2018 2017 1,881 32 (2,070) (157) 3,054 35 2,973 6,062 Amounts due from (to) related parties are included in the consolidated statement of financial position under trade receivables and other (trade payables, accruals and other) and are as follows: $ thousands Due from related parties Due to related parties December 31, 2018 December 31, 2017 4 (106) 27 (1,087) The amounts due from related parties are not secured and are to be settled in cash. As at December 31, 2018 and 2017, the amounts due from related parties are considered collectible and, therefore, have not been provided for in the loss allowance provision. During the year ended December 31, 2018, $Nil has been recognized in bad debt expenses with respect to related party transactions (2017 – $Nil). RME has contractual obligations to related parties in the form of facility leases. As at December 31, 2018, these contractual obligations and due dates, are as follows: $ thousands Total 2019 2020-2021 2022-2023 Thereafter Operating lease obligations 26,530 5,890 10,328 6,599 3,713 OFF-BALANCE SHEET ARRANGEMENTS We use off-balance sheet financing in connection with numerous operating leases. These leases relate to RME’s buildings and certain operating assets with lease terms of up to 11 years. Most building leases contain renewal options for periods of 3 to 5 years. In some instances, the counterparty to RME’s operating lease obligations is a related party. Refer to the “Related Party Transactions” section of this MD&A for a discussion of the terms and amounts of such arrangements. The range of expiry dates on the current operating leases extend until July 2027. CRITICAL ACCOUNTING ESTIMATES The preparation of the consolidated financial statements requires that certain estimates and judgments be made with respect to the reported amounts of sales and expenses and the carrying amounts of assets and liabilities. These estimates are based on historical experience and management’s judgment. Anticipating future events involves uncertainty and consequently, the estimates used by management in the preparation of the consolidated financial statements may change as future events unfold, additional information is acquired or RME’s operating environment changes. Management considers the following items to be the most significant of these estimates. LOSS ALLOWANCE PROVISION Trade Receivables RME applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. Historical loss rates are adjusted if, and to the extent that, future loss rates are expected to differ from historical averages. Other Receivables The credit quality of these financial assets is assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates. Historical loss rates are adjusted if, and to the extent that, future loss rates are expected to differ from historical averages. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 19 INVENTORY VALUATION Equipment is valued at the lower of cost and net realizable value, with cost being determined on a specific item, actual cost basis, and net realizable value being based on the recent sales of the same or similar equipment inventory or market values as established by industry publications, less the costs to sell. The value assigned to equipment inventory acquired through trade-in is based on recent sales of the same or similar equipment inventory or market values as established by industry publications. Parts inventory is recorded at the lower of cost and net realizable value, with cost being determined on an average cost basis and net realizable value being determined by recent sales of the same or similar parts inventory, less the costs to sell. Impairment losses and reversals of impairment losses are recorded within cost of sales. REVENUE RECOGNITION Sale of goods RME sells goods which include new and used equipment and parts. Revenue is recognized when control of the goods has transferred to the customer. Control has been transferred at the point in time when the following conditions have been met: i. RME has transferred to the customer the control of ownership of the goods; ii. the goods have been delivered; iii. RME has a present right to payment; iv. the customer has legal title; and v. the customer has accepted the asset. Payment of the parts transaction price is due immediately when the customer purchases the part or by the terms of the customer’s established credit. It is RME’s policy to sell parts to the end customer with the right of return and we estimate returns based on an analysis of historical results. Therefore, a contract liability (estimated parts refunds) and a right to the returned good (contract asset) are recognized for the parts estimated to be returned. The validity of this assumption and the estimated amount of returns are reassessed at each reporting date. Sale of goods - Bill and hold arrangement RME sells new and used equipment where RME retains physical possession of the equipment until it is transferred to the customer in the future. For a bill and hold arrangement, control has been transferred at a point in time when the following conditions have been met: i. the equipment is ready for physical transfer to the customer; the customer has made the decision to put the equipment in a bill and hold arrangement; ii. RME does not have the ability to use the equipment or to direct it to another customer; and iii. the equipment is identified separately as belonging to the customer. The consideration on such transactions is due when the equipment arrives at one of RME’s locations. When consideration has been received but one or more terms and/or conditions of the sale remain unfulfilled, any consideration received is recorded on the consolidated statements of financial position as a contract liability for customer deposits. Rendering of service Revenue derived from the rendering of services is recognized upon completion of the service when the following has occurred: i. the amount of revenue can be measured reliably; ii. it is probable that the economic benefits associated with the transaction will flow to RME; and iii. the stage of completion of the transaction at the end of the reporting period can be measured reliably. Payment of the transaction price is due when the service is completed. Labour hours and parts used from rendering of a service that is not complete is considered a cost incurred to fulfill a contract and is disclosed in the consolidated statements of financial position as a contract asset. Financing component RME does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, RME does not adjust any of the transaction prices for the time value of money. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 20 DEPRECIATION PERIODS AND METHODS Items of property and equipment are depreciated commencing on the date they are ready for use using the following methods and rates: Land Buildings Not depreciated Straight-line over 20 years Computer equipment Straight-line over 3 – 6 years Furniture and fixtures Straight-line over 5 – 10 years Leasehold improvements Straight-line over the lesser of the lease term (including renewals) and useful life Shop tools and equipment Straight-line over 3 – 10 years Vehicles Straight-line over 3 – 5 years GOODWILL For the purposes of impairment testing, goodwill is allocated to a cash-generating unit (“CGU”). The recoverable amount of a CGU is determined using a value in use calculation. The key assumptions for the value in use calculation are those regarding discount and growth rates. These key assumptions are based on past experience, which has been adjusted for anticipated changes in future periods. As at December 31, 2018 and 2017, RME prepared cash flow forecasts derived from the most recent financial plans prepared by management and extrapolated these cash flows into perpetuity using growth assumptions relevant to the business sector. The growth rate used for the purposes of these analyses was 2.0%. As at December 31, 2018, the rate used to discount the forecasted cash flows was 12.8% (2017 – 12.3%), and represents RME’s estimate of the appropriate pre-tax discount rate, given current market assessments of the time value of money and the risks specific to the particular CGU. As at December 31, 2018 and 2017, the recoverable amount of the CGU to which goodwill has been allocated exceeded its carrying value and therefore, no impairment charge was recognized. RME has conducted a sensitivity analysis based on possible changes in the key assumptions used for the impairment tests. Had the estimated cost of capital used in determining the pre-tax discount rates been 4.5% (2017 – 4.6%) higher than management’s estimates or had the estimated growth rate used in extrapolating forecasted results been 10.0% (2017 – 8.5%) lower than management's estimates, the recoverable amount of the CGU would equal its carrying amount for the respective periods. Any additional negative change in these assumptions would cause goodwill to be impaired with such impairment loss recognized in net earnings. DERIVATIVE FINANCIAL INSTRUMENTS RME utilizes floating-to-fixed interest rate swaps to manage its interest rate exposure. These derivatives are initially recognized on the date the contract is entered into and are subsequently re-measured at their fair values. The fair values of the interest rate swaps are calculated as the net present value of the estimated future cash flows expected to arise on the variable and fixed legs, determined using applicable yield curves at each measurement date. Swap curves, which incorporate credit spreads applicable to large commercial banks, are typically used to calculate expected future cash flows and the present values thereof. Adjustments are also made to reflect RME’s own credit risk and the credit risk of the counterparty, if different from the spread implicit in the swap curve. RME also has several total return swap arrangements to hedge the exposure associated with increases in its share price on its outstanding DSUs and SARs. These derivatives accrue to RME, any gains (losses) associated with changes in the value of its common shares as well as dividends paid on its hedged position, net of interest costs charged by the bank to build and hold their positions. These derivatives are initially recognized on the date the contract is entered into and are subsequently re-measured at their fair values. The fair values are calculated as the net present value of estimated future cash flows. BUSINESS COMBINATIONS Assets acquired and liabilities assumed pursuant to business combinations are measured at their acquisition date fair values. Where appropriate, management bases its fair value estimates on observable third party data as reported by sources deemed both reputable and qualified. In the case of inventory acquired, management estimates the value in the manner discussed within the “Net Realizable Value of Inventory” section above. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 21 Goodwill is measured as the excess of the fair value of consideration transferred over the acquisition-date fair value of the net identifiable assets acquired. The purchase price allocation is subject to change throughout the duration of the measurement period. The measurement period is the period from the date of acquisition, to the date RME obtains complete information about facts and circumstances that existed as of the acquisition date and is subject to a maximum of one year. IMPAIRMENT OF ASSETS OTHER THAN GOODWILL At the end of each reporting period, RME reviews the carrying amounts of its identifiable assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the assets is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, RME estimates the recoverable amount of the CGU to which the asset belongs. A CGU is subject to impairment testing as described under the heading "Goodwill”. Where an impairment loss subsequently reverses, the carrying amount of the assets (or CGU) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined, net of amortization or depreciation, had no impairment loss been recognized for the asset. A reversal of impairment loss is recognized immediately in net earnings. SHARE-BASED PAYMENTS Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. RME follows the fair value based method of accounting, using the Black-Scholes option pricing model, whereby compensation expense is recognized over the vesting period and is based on RME’s estimate of awards that will ultimately vest, with a corresponding increase to contributed surplus. Cash-settled share-based payments are recorded as liabilities and are measured initially at their fair values. At the end of each reporting period and at the date of settlement, these liabilities are remeasured at fair value, with any changes recognized in net earnings for the period. MANUFACTURER INCENTIVES Certain manufacturers offer annual performance incentives which are linked to RME’s market share achievement and annual settlement volumes. RME uses estimated annual market share statistics derived from current and historical results which have been adjusted for any anticipated changes in the current year, as well as annual settlement volume to accrue manufacturer incentives earned during the year. These programs are subject to change at the discretion of the OEM. Annual performance incentives are recorded as a reduction to cost of sales. A credit to our account for the annual performance incentive is typically received in the first quarter of the fiscal year. CHANGES IN ACCOUNTING POLICIES NEW STANDARDS AND AMENDMENTS IN EFFECT ON JANUARY 1, 2018 As outlined in Note 4 to the consolidated financial statements for the years ended December 31, 2018 and 2017, certain prior period financial results contained herein have been restated pursuant to the retrospective adoption of IFRS 15 and 9 IFRS 15, ‘Revenue from Contracts with Customers’ Effective January 1, 2018, the Company adopted IFRS 15, ‘Revenue from Contracts with Customers’. IFRS 15 replaces IAS 11, ‘Construction Contracts’, IAS, ‘18 Revenue’ and IFRS 13, ‘Customer Loyalty Programs’, as well as various other interpretations regarding revenue. IFRS 15 provides a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. Refer to Note 4 of the consolidated financial statements for the years ended December 31, 2018 and 2017 for details on the impacts of this new accounting standard. IFRS 9, ‘Financial Instruments’ Effective January 1, 2018, the Company adopted IFRS 9, ‘Financial Instruments’. IFRS 9 introduces new requirements for: (i) the classification and measurement of financial assets and financial liabilities and (ii) the recognition and measurement of impairment for financial assets. IFRS 9 introduces a simplified hedge accounting model that aligns more closely with risk management. Refer to Note 4 of the consolidated financial statements for the years ended December 31, 2018 and 2017 for details on the impacts of this new accounting standard. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 22 Amendment to IFRS 7, ‘Financial Instruments: Disclosures on Derecognition’ Effective January 1, 2018, the Company adopted the amendments to IFRS 7, ‘Financial Instruments: Disclosures’. In conjunction with the transition from IAS 39, ‘Financial Instruments: Recognition and Measurement’ to IFRS 9, ‘Financial Instruments’, IFRS 7 was amended to require additional disclosure in the year of transition. NEW STANDARDS AND AMENDMENTS NOT YET IN EFFECT IFRS 16, ‘Leases’ IFRS 16, 'Leases' replaces IAS 17, 'Leases' and requires most leases to be recognized as assets and liabilities on the statement of financial position. This standard includes an optional exemption for certain short-term leases and leases of low-value assets and is effective for fiscal periods beginning on or after January 1, 2019. Refer to Note 2 of the consolidated financial statements for the years ended December 31, 2018 and 2017 for details on the impacts of this new accounting standard. RISKS AND UNCERTAINTIES Risk factors faced by RME are listed in RME’s AIF under the heading “Risk Factors” and can be found on SEDAR. These risk factors include industry risks associated with agriculture and industrial equipment dealerships and others, including but not limited to: (i) economic conditions; (ii) weather and climate conditions; (iii) commodity prices; (iv) inventory risk; (v) import product restrictions and foreign trade risk; (vi) information systems and cybersecurity; (vii) interest rates; (viii) reliance on key manufacturers; (ix) seasonality and cyclicality; (x) government regulation; (xi) labour relations; (xii) restrictions on and impediments to acquisitions; (xiii) foreign exchange exposure; (xiv) health, safety and environmental laws and regulation; (xv) nature of dealership agreements; (xvi) competition; (xvii) industry oversupply; (xviii) credit facilities; (xix) consolidation within the equipment manufacturing industry; (xx) customer credit risks; (xxi) growth risks; (xxii) available floor plan financing; (xxiii) unfavorable conditions in key geographic markets; (xxiv) non-exclusive nature of key geographic markets; (xxv) continued ability to pay dividend; (xxvi) indemnification and insurance; (xxvii) branch leases; (xxviii) key personnel; (xxix) labour costs and shortages; (xxx) product liability risks; (xxxi) freight costs; (xxxii) changes in common share value; (xxxiii) future warranty claims; (xxxiv) integration of acquisitions; (xxxv) issuance of additional common shares; (xxxvi) aviation risks; and (xxxvii) forward-looking information may prove inaccurate. Our success largely depends on the abilities and experience of our senior management team and other key personnel. These employees carry a significant amount of the management responsibility of our business and are important for setting strategic direction and dealing with certain significant customers. Our future performance will also depend on our ability to attract, develop, and retain highly qualified employees in all areas of our business. We face significant competition for individuals with the skills required to develop, market and support our products and services. If we fail to recruit and retain sufficient numbers of these highly skilled employees, we may not be able to achieve our growth objectives and our business may be adversely affected. FINANCIAL INSTRUMENTS Through its financial instruments, RME has exposure to the following risks: credit risk, market risk (consisting of foreign currency exchange risk, interest rate risk and equity price risk), and liquidity risk. CREDIT RISK Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to RME. RME has a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a means of mitigating the risk of financial loss from defaults. The creditworthiness of counterparties is determined using information supplied by independent rating agencies where available and, if not available, RME uses other publicly available financial information and its own trading records to rate its major customers. RME’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed regularly. RME’s exposure to credit risk on its cash balance and derivative financial assets is mitigated as these financial assets are held with major financial institutions with strong credit ratings. During 2018, RME recognized $98 in bad debt expense (2017 – recovery of $81). Bad debt expense (recovery) is recognized within SG&A expenses. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 23 MARKET RISK Market risk is the risk from changes in market prices, such as changes in foreign currency exchange rates, interest rates and the market price of RME’s common shares, which will affect RME’s earnings as well as the value of the financial instruments held and cash-settled share-based instruments outstanding. Foreign Currency Exchange Risk The OEMs we do business with are geographically diversified, requiring us to conduct business in two currencies: U.S. dollars and Canadian dollars. As a result, we have foreign currency exposure with respect to purchases of U.S. dollar denominated products (inventory) and we experience foreign currency gains and losses thereon. The nature of exposure to foreign exchange fluctuations differs between equipment manufacturers and the various dealer agreements with them. A weakening of the U.S. dollar in comparison to the Canadian dollar will generally have a positive effect on our performance by lowering our cost of goods sold. However, as the markets in which we operate are highly competitive, a declining U.S. dollar also has the effect of reducing sales prices in Canadian dollars and, as a consequence, we cannot capture the entire potential benefit of a declining U.S. dollar environment. By contrast, a strengthening U.S. dollar will increase the cost of equipment purchases. If we are unable to fully offset the increase in cost of goods through price increases, our financial results will be negatively affected. We mitigate some of this risk by occasionally purchasing forward contracts for U.S. dollars on large transactions to cover the period from the time the equipment is ordered from the manufacturer to the payment date. During 2018, RME recognized a foreign exchange gain of $556 (2017 – gain of $692). Foreign exchange gains are recognized within SG&A expenses. Interest Rate Risk We finance our equipment inventory, certain capital expenditures, business acquisitions and occasionally, our other general working capital requirements, by way of various financing facilities under which we are charged interest at floating rates. As a result, rising interest rates have the effect of increasing our overall costs. To the extent that we cannot pass on such increased costs to our customers, our net earnings or cash flow may decrease. In addition, many of our customers finance the equipment they purchase from us. A customer’s decision to purchase may be affected by interest rates available to finance the purchase. RME manages its interest rate risk by using floating-to-fixed interest rate swaps when appropriate. Generally, RME will obtain floor plan financing and long-term debt at floating rates. When RME enters into a floating-to-fixed interest rate swap, it agrees with a third party to exchange the difference between the fixed and floating contract rates based on agreed notional amounts. Refer to the “Derivative Financial Instruments” section of this MD&A for additional information and gains (losses) on derivative financial instruments. Equity Price Risk As part of its overall compensation of directors, officers and employees, RME has issued cash-settled share-based payments in the form of DSUs and SARs. The DSUs are valued on a per DSU basis at an amount equal to the volume weighted average trading price of RME’s common shares over the immediately preceding 20-day trading period. The SARs are revalued at each reporting date using the Black-Scholes option pricing model. Increases in RME’s share value result in additional compensation expense to RME related to these two programs. As share-based payments, the DSUs and SARs are not accounted for as financial instruments. RME has entered into several total return swaps to hedge the exposure associated with increases in its share value on its outstanding DSUs and SARs. The total return swaps are classified as derivative financial instruments. The intent of these derivatives is to offset the incremental cost to RME associated with increases in its common share price on its cash-settled share-based payments. Refer to the “Derivative Financial Instruments” section of this MD&A for additional information and gains (losses) on derivative financial instruments. LIQUIDITY RISK RME’s objective is to have sufficient liquidity to meet its liabilities when due. RME monitors its cash balance and cash flows generated from operations as well as available credit facilities to meet its requirements. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 24 Refer to the “Adequacy of Capital Resources” section of this MD&A for a discussion of the liquidity risks faced by RME as well as a description of RME’s various credit facilities. NON-IFRS MEASURES Throughout this MD&A, we use terms which do not have standardized meanings under IFRS. As these non-IFRS financial measures do not have standardized meanings prescribed by IFRS, they are unlikely to be comparable to similar measures presented by other issuers. Our definition for each term is as follows: • “Adjusted Diluted Earnings per Share” is calculated by eliminating from net earnings, the after-tax impact of the losses (gains) arising from RME’s derivative financial instruments and DSUs, as well as the expense (recovery) associated with its SARs. These items arise primarily from changes in RME’s share price as well as fluctuations in interest rates and are not reflective of RME’s core operations. RME also adjusts for any non-recurring charges (recoveries) recognized in net earnings. Management deems non- recurring charges (recoveries) to be unusual or infrequent items that RME incurs outside of its common day-to-day operations. Adjusting for these items allows management to isolate and analyze diluted earnings per share from core business operations. For the periods presented, restructuring costs associated with amalgamating our industrial operations, losses recognized on the impairment and subsequent disposition of vacant land and costs associated with the acquisition and integration of complimentary business have been classified as non-recurring charges. The losses on the sale of vacant land are not expected to give rise to a reduction in our tax provision. • “Adjusted EBITDA” is derived by eliminating the following items from net earnings: finance costs associated with long- term debt; income taxes; depreciation and amortization; the impact of the losses (gains) arising from derivative financial instruments and DSUs; and the expense (recovery) associated with SARs. Adjusting net earnings for these items allows management to consistently compare periods by removing the impact of fluctuations in tax rates, long-term assets, financing costs related to RME’s capital structure and RME’s share price. RME also adjusts for any non-recurring charges (recoveries) recognized in Adjusted EBITDA. Management deems non- recurring charges (recoveries) to be unusual or infrequent items that RME incurs outside of its common day-to-day operations. Adjusting for these items allows management to isolate and analyze EBITDA from core business operations. For the periods presented, restructuring costs associated with amalgamating our industrial operations, losses recognized on the impairment and subsequent disposition of vacant land and costs associated with the acquisition and integration of complimentary business have been classified as non-recurring charges. • “Operating SG&A” is calculated by eliminating from SG&A, depreciation and amortization expense as well as the impact of the losses (gains) arising from RME’s DSUs and the expense (recovery) associated with its SARs. These items arise primarily from changes in RME’s share price and are not reflective of RME’s core operations. RME also adjusts for any non-recurring charges (recoveries) recognized in SG&A. Management deems non-recurring charges (recoveries) to be unusual or infrequent items that RME incurs outside of its common day-to-day operations. For the periods presented, costs associated with the acquisition and integration of complimentary business have been classified as non-recurring charges. The assessment of Operating SG&A facilitates the evaluation of discretionary expenses from ongoing operations. We target a sub-10% Operating SG&A as a percentage of total sales on an annual basis. • “Operating Cash Flow before Changes in Floor Plan” is calculated by eliminating the impact of the change in floor plan payable (excluding floor plan assumed pursuant to business combinations) from cash flows from operating activities. Adjusting cash flows from operating activities for changes in the balance of floor plan payable allows management to isolate and analyze operating cash flows during a period, prior to any sources or uses of cash associated with equipment financing decisions. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 25 RECONCILIATION OF NON-IFRS MEASURES TO IFRS ADJUSTED DILUTED EARNINGS PER SHARE $ thousands 2018 2017 2016 2018 2017 2016 Quarter Ended December 31, Year Ended December 31, Earnings used in the calculation of diluted earnings per share Loss (gain) on derivative financial instruments (Gain) loss on DSUs SAR (recovery) expense Acquisition and integration costs Non-deductible loss on vacant land Restructuring charges Tax effect of adjustments (27%) Earnings used in the calculation of Adjusted Diluted Earnings per Share Weighted average diluted shares used in the calculation of diluted earnings per share (in thousands) Adjusted Diluted Earnings per Share ADJUSTED EBITDA 6,632 821 (125) (841) 6 — — 38 8,268 (3,131) 162 2,231 — — — 199 4,704 17,882 22,909 14,966 (605) 16 230 — — — 97 3,587 (354) (2,443) 541 — — (359) (4,578) 245 2,995 — 641 — 361 (4,751) 220 757 — 1,360 3,564 57 6,531 7,729 4,442 18,854 22,573 16,173 19,793 0.33 19,515 0.40 19,384 0.23 19,862 0.95 19,413 1.16 19,384 0.83 $ thousands 2018 2017 2016 2018 2017 2016 Quarter Ended December 31, Year Ended December 31, Net earnings Finance costs associated with long-term debt Depreciation and amortization expense Income taxes EBITDA Loss (gain) on derivative financial instruments (Gain) loss on DSUs SAR (recovery) expense Acquisition and integration costs Loss on vacant land Restructuring charges Adjusted EBITDA OPERATING SG&A 6,632 409 1,826 2,557 11,424 821 (125) (841) 6 — — 11,285 8,268 406 1,816 3,134 13,624 (3,131) 162 2,231 — — — 12,886 4,704 450 1,915 1,466 8,535 (605) 16 230 — — — 8,176 17,882 1,606 7,226 6,771 33,485 3,587 (354) (2,443) 541 — — 34,816 22,909 1,770 7,417 8,777 40,873 (4,578) 245 2,995 — 641 — 40,176 14,966 1,795 7,755 5,955 30,471 (4,751) 220 757 — 1,360 3,564 31,621 $ thousands 2018 2017 2016 2018 2017 2016 Quarter Ended December 31, Year Ended December 31, SG&A Depreciation and amortization expense Gain (loss) on DSUs SAR recovery (expense) Acquisition and integration costs Operating SG&A Operating SG&A as a % of sales 26,595 (1,826) 125 841 (6) 25,729 8.7 27,251 (1,816) (162) (2,231) — 23,042 8.4 25,205 (1,915) (16) (230) — 23,044 8.1 100,129 (7,226) 354 2,443 (541) 95,159 9.1 99,754 (7,417) (245) (2,995) — 89,097 9.3 97,970 (7,755) (220) (757) — 89,238 9.6 Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 26 OPERATING CASH FLOW BEFORE CHANGES IN FLOOR PLAN $ thousands 2018 2017 2016 2018 2017 2016 Quarter Ended December 31, Year Ended December 31, Cash flow from operating activities Net (increase) decrease in floor plan payable(1) Floor plan assumed pursuant to business combinations Operating Cash Flow before Changes in Floor Plan 11,228 (46,061) 3,424 (39,791) 12,917 1,625 25,587 (97,838) 6,955 (7,675) 27,163 60,463 (25) — — 21,742 — — (34,858) (36,367) 14,542 (50,509) (720) 87,626 (1) – Includes change in floor plan payable classified as liabilities associated with assets held for sale. INTERNAL CONTROLS OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) have, as at December 31, 2018, designed, or caused to be designed under their supervision, disclosure controls and procedures ("DC&P") to provide reasonable assurance that: (i) material information relating to RME is made known to them by others, particularly during the period in which the annual and interim filings are being prepared; and (ii) information required to be disclosed by RME in its annual filings, interim filings, or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time period specified in securities legislation. The CEO and CFO have designed or caused to be designed under their supervision, internal controls over financial reporting ("ICFR") to provide reasonable assurance regarding the reliability of RME’s financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. RME's management, under the supervision of the CEO and CFO, used the criteria and framework established in the 2013 Internal Controls - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") to design RME's ICFR. As at December 31, 2018, the CEO and CFO have evaluated the design and operation of RME’s DC&P and ICFR and concluded that they were effective. During the quarter ended December 31, 2018, there were no changes in RME’s ICFR that have materially affected, or are reasonably likely to materially affect RME’s ICFR. It should be noted that a control system, no matter how well conceived or operated, can provide only reasonable, but not absolute, assurance that the objectives of the control system will be met and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud. CAUTION REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS This MD&A contains FLS within the meaning of applicable securities legislation which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of RME or industry results, to be materially different from any future results, events, expectations, performance or achievements expressed or implied by such FLS. All statements, other than statements of historical fact, included herein may be FLS. FLS typically contain words or phrases such as “may”, “outlook”, “objective”, “intend”, “estimate”, “anticipate”, “should”, “could”, “would”, “will”, “expect”, “believe”, “plan”, “predict” and other similar terminology suggesting future outcomes or events. FLS involve numerous assumptions and should not be read as guarantees of future performance or results. Such statements will not necessarily be accurate indications of whether or not such future performance or results will be achieved. Readers of this MD&A should not unduly rely on FLS as a number of factors, many of which are beyond the control of RME, could cause actual performance or results to differ materially from the performance or results discussed in the FLS. In particular, FLS in this MD&A include but are not limited to, the following: (i) disclosure under the heading “Market Fundamentals and Outlook”; (ii) continuing demand for RME’s products and services, and the cyclical nature of agriculture equipment demand and any revenue or inventory statements or forecasts attributed thereto; (iii) disclosure under the heading “Capital Allocation Strategy and Growth Plan”, including discussion regarding RME’s acquisition plans, prospects and activities; (iv) statements regarding RME’s plans to maintain its current dividend, continue to pay down debt and keep RME’s balance sheet ready for a potential transaction; (v) statements pertaining to the anticipated crop outlook in Western Canada, including the anticipated area seed to field crops, crop yield and quality and the weather conditions associated with crop yields; (vi) statements regarding the disparity between the Canadian and U.S. dollars and the impact such disparity may have on RME’s business and new equipment pricing in Canada; (vii) any discussion regarding RME’s anticipated inventory balance and profile, and a continued availability of brand name products carried by RME; (viii) discussion on the fundamentals of RME’s business, including discussions regarding growth in GDP, farmers’ crop receipts and profitability, field crop outlook Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 27 and the future demand for agriculture equipment and commodities; (ix) statements regarding customer buying patterns, including the extent to which we are able to convert new equipment customers to used equipment customers; (x) statements regarding the impact of a change in incentive programs from RME’s manufacturer on RME’s reported cost of sales during 2018; (xi) statements regarding RME’s anticipated gross margins; (xii) any statements or discussions regarding RME’s inventory management and any expected increases or decreases in RME’s inventory levels, and the timing and delivery thereof; (xiii) statements that we believe cash flow from operations, along with existing credit facilities, will provide for our capital needs; (xiv) discussion around Operating SG&A expenses, including the seasonal variances and expectations in Operating SG&A and RME’s targeted annual Operating SG&A; (xv) discussion that the first quarter is generally the weakest financial quarter and that the fourth quarter is generally the strongest quarter financially; (xvi) statements that our installed base and customer relationships, create an annuity of equipment sales and product support revenue, which help drive dependable earnings and cash flow; (xvii) statements that weather conditions may impact sales activity for any given period; (xviii) statements concerning RME’s ongoing compliance with, or potential breaches of, its covenants under its credit facilities, including the Syndicated Facially; (xix) statements concerning RME’s expected undiscounted cash flows as at December 31, 2018; (xx) statements that imply any future earnings, profitability, economic benefit or other financial results resulting from any future acquisitions; (xxi) statements implying or discussing future growth or acquisition opportunities in Canada, the U.S. or elsewhere; and (xxii) statements regarding any anticipated losses recognized as a result of the unwinding of RME’s equity hedge position. With respect to the FLS listed above and contained in this MD&A, RME has made assumptions regarding, among other things: (i) expectations that commodity prices will continue to remain above historical levels; (ii) increasing food demand, as well as increasing crop land dedicated to bio-fuel production, will cause producers to improve their productivity, and as a result invest in new equipment; (iii) expectations that increases in farmer liquidity would generally correlate to farmers making capital re-investments in their business, so as to increase their productivity and lower their input costs, which investments may include RME’s products and services; (iv) inventory levels will fluctuate during a year, both positively and negatively, based on timing of equipment deliveries, and volume of whole-good sales involving a unit taken in on trade; (v) the general GDP growth and/or relative economic stability in the markets we operate in; (vi) the trend towards larger farms in the agriculture sector will continue to benefit further farm equipment sales as larger farm operations tend to replace their equipment more frequently; (vii) RME’s cash flow will remain sufficient to, in connection with its credit facilities, adequately finance its capital needs; (viii) as stores are consolidated, certain functions can be centralized thereby reducing SG&A costs as a result; (ix) the anticipated improvement in ongoing revenue and cash-flow, including parts and service revenue, as our installed base increases; (x) expectations that no material change will happen to our OEM relationships; (xi) expectations that customers who purchase their equipment from RME will, generally, return to RME for their product support needs; (xii) our realigned investment in inventory is consistent with current market demand; and (xiii) RME will remain in compliance with all of its debt covenants under the terms of the Syndicated Facility and will be able to renew its Syndicated Facility prior to maturity on September 24, 2021. RME’s actual results could differ materially from those anticipated in the FLS in this MD&A as a result of the risk factors set forth herein under the heading “Risks and Uncertainties” and the risk factors set forth in RME’s AIF. Although the FLS contained in this MD&A are based upon what management of RME believes are reasonable assumptions, RME cannot assure investors that actual performance or results will be consistent with these FLS. These statements reflect current expectations regarding future events and operating performance and are based on information currently available to RME’s management. There can be no assurance that the plans, intentions or expectations upon which these FLS are based will occur. All FLS in this MD&A are qualified in their entirety by the cautionary statements herein and those set forth in RME’s AIF available on SEDAR at www.sedar.com. These FLS and outlook are made as of the date of this document and, except as required by applicable law, RME assumes no obligation to update or revise them to reflect new events or circumstances. Certain measures set forth in this MD&A may be considered to be future-oriented financial information or a financial outlook within the meaning of applicable securities legislation. Financial outlook and future-oriented financial information contained in this MD&A are based on assumptions about future events based on management's assessment of the relevant information currently available. In particular, this MD&A contains RME’s projected revenue growth as at 2023, which is based on, among other things: (i) the various assumptions as to RME’s increased revenue sources through 2023 as disclosed in this MD&A or in RME’s AIF; (ii) RME's ability to find parties willing to sell their dealership operations at reasonable prices; (iii) RME's ability to obtain and/or maintain OEM approval for its acquisitive growth strategy; (iv) the products RME sells (and by implication, the products RME's OEMs manufacture) continue to meet the ever-evolving needs of RME's customer base; (v) that demand drivers including, but not limited to, weather, foreign exchange or government regulation will not materially impact customer demand; and (vi) that farmer cash receipts and balance sheets remain strong. The future-oriented financial information and financial outlook contained in this MD&A is included to provide readers with information regarding RME’s current expectations and plans regarding its future operations. Readers are cautioned that any such financial outlook and future-oriented financial information contained herein may not be appropriate for other purposes and therefore should not be used for purposes other than those for which it is disclosed herein. Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 28 ROCKY MOUNTAIN DEALERSHIPS INC. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES For the Years Ended December 31, 2018 & 2017 Kpfgrgpfgpv!cwfkvqt”u!tgrqtv! Vq!vjg!Ujctgjqnfgtu!qh!Tqem{!Oqwpvckp!Fgcngtujkru!Kpe/! Qwt!qrkpkqp! 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