Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report, and the audited consolidated financial statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022.
Overview
We own and operate a network of full service agricultural and construction equipment stores in the United States and Europe. Based upon information provided to us by CNH Industrial N.V. or its U.S. subsidiary CNH Industrial America, LLC, we are the largest retail dealer of Case IH Agriculture equipment in the world, one of the largest retail dealers of Case Construction equipment in North America and one of the largest retail dealers of New Holland Agriculture and New Holland Construction equipment in the United States. We operate our business through three reportable segments: Agriculture, Construction and International. Within each segment, we have four principal sources of revenue: new and used equipment sales, parts sales, service, and equipment rental and other activities.
Demand for agricultural equipment and, to a lesser extent, parts and service support, is impacted by agricultural commodity prices and net farm income. Based on February 2022 U.S. Department of Agriculture publications, the estimate of net farm income for calendar year 2022 indicated an approximate 4.5% decrease as compared to calendar year 2021, and an approximate 25.1% increase in net farm income for calendar year 2021 as compared to calendar year 2020.
For the second quarter of fiscal 2023, our net income was $25.0 million, or $1.10 per diluted share, compared to a fiscal 2022 second quarter net income of $11.2 million, or $0.50 per diluted share. Our adjusted diluted earnings per share was $1.10 for the second quarter of fiscal 2023, compared to $0.56 for the second quarter of fiscal 2022. See the Non-GAAP Financial Measures section below for a reconciliation of adjusted diluted earnings per share to diluted earnings per share, the most comparable GAAP financial measure. Significant factors impacting the quarterly comparisons were:
• Revenue in the second quarter of fiscal 2023 increased by 31.5% compared to the second quarter of fiscal 2022. Total Company same store sales increased 32.1% compared to the prior year second quarter. Same store sales increased in each of our three reporting segments.
• Gross profit in the second quarter of fiscal 2023 increased 36.9% compared to the second quarter of fiscal 2022. The increase in gross profit was primarily the result of strong equipment sales and equipment gross profit margins increasing to 13.7% in the second quarter of fiscal 2023 from 11.9% in the second quarter of fiscal 2022.
• Gross profit was also positively impacted by strong parts sales, increasing by 30.0% from the prior year period, and strong parts gross profit margins, which increased to 32.2% in the second quarter of fiscal 2023 from 29.4% in the second quarter of fiscal 2022.
Supply Chain
Equipment availability continues to be challenging as supply chain disruptions throughout 2021 and continuing into 2022, along with increased domestic and global demand for equipment inventory, have caused many manufacturers to be unable to produce enough equipment to meet demand. Many manufacturers have partially built equipment at their factories waiting for certain parts and components in order to finish production and ship the equipment to dealers. The timing as to the receipt of those parts and components may move completion of that equipment and the resulting delivery to the end customer from quarter to quarter or in some cases, year to year, thereby potentially impacting when we are able to receive the inventory, enter into sales transactions with our customers, and recognize the revenue. These supply chain issues are further complicated by labor shortages including the ongoing strike at the CNH Industrial plants in Racine, Wisconsin and Burlington, Iowa, as well as the recent announcement by CNH Industrial that it will be implementing an equipment allocation methodology to determine production slots starting in late calendar year 2022. All of these factors may limit our ability to match customer demand on certain products in fiscal 2024. We will continue to work with our manufacturers to source future inventory to fulfill as much customer demand as possible.
Russian-Ukrainian Conflict
Since the onset of the active conflict in February 2022, most of Titan Machinery Ukraine's customers have been able to continue their work, although at a reduced capacity and schedule. The Company's business systems in Ukraine have continued to function but could be negatively impacted in the future. Some of Titan Machinery Ukraine's back office employees have
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been able to relocate outside of Ukraine and continue to work, while the customer support and sales teams have remained in Ukraine. For the six months ended July 31, 2022, Titan Machinery Ukraine's revenues are down approximately 37.7% from the prior year period.
As of July 31, 2022, the Company had total assets of $33.1 million in Ukraine. The physical assets (e.g. inventory and fixed assets) are almost exclusively located in central and western areas of the country. Total assets in Ukraine as of January 31, 2022, was $32.7 million.
The situation is highly complex and continues to evolve. If the Company cannot provide efficient and uninterrupted services, this could worsen the conflict's adverse effect on the Company's operations and business in Ukraine. In addition, the Company's ability to maintain adequate liquidity for our operations in Ukraine is dependent on a number of factors, including Titan Machinery Ukraine's revenue and earnings, which have been and could continue to be significantly impacted by the conflict. Further, any additional military movement back into central and western Ukraine or any major threat to civilians in those areas or international banking disruption could materially impact the operations and liquidity of Titan Machinery Ukraine.
Acquisitions
Fiscal 2023
On August 1, 2022, the Company acquired all interests of three entities, Heartland Agriculture, LLC, Heartland Solutions, LLC, and Heartland Leveraged Lender, LLC, (collectively referred to as "Heartland Companies") for $94.5 million in cash consideration. The Heartland Companies consist of twelve CaseIH commercial application agriculture locations, in Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota, Washington, and Wisconsin. The Heartland Companies have been a successful CaseIH commercial application dealer group and our acquisition of these entities provides the Company the opportunity for synergies due to the overlap of our footprints, which will allow us to package deals that will include both commercial application equipment as well as other agricultural and construction equipment to commercial customers within our core footprint. In the most recent completed fiscal year, the Heartland Companies generated revenue of approximately $214 million.
On April 1, 2022, the Company acquired certain assets of Mark's Machinery, Inc. The acquired business consisted of two agricultural equipment stores in Wagner and Yankton, South Dakota. These locations are included in our Agriculture segment. In its most recent fiscal year, Mark's Machinery, Inc. generated revenue of approximately $34.0 million. The total cash consideration paid for the acquired business was $7.7 million.
Fiscal 2022
On December 1, 2021, the Company acquired certain assets of Jaycox Implement, Inc. The acquired business consisted of three agricultural equipment stores in Worthington and Luverne, Minnesota and Lake Park, Iowa. These locations are included in our Agriculture segment. In its most recent fiscal year, Jaycox Implement, Inc. generated revenue of approximately $91 million. The total cash consideration paid for the acquired business was $33.6 million.
ERP Transition
The Company is in the process of converting to a new Enterprise Resource Planning ("ERP") application. The new ERP application is expected to provide data-driven and mobile-enabled sales and support tools to improve employee efficiency and deliver an enhanced customer experience. The Company integrated one pilot store on the new ERP system in the second quarter of fiscal 2021 and also integrated the five stores acquired through the Jaycox Implement and Mark's Machinery acquistions in December 2021 and April 2022, respectively. In June, the Company began the phased roll-out integrating three existing location to the new ERP. We will continue our phased roll-out to the remaining domestic locations, over the second half of fiscal 2023 and continue into fiscal 2024.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are included in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended January 31, 2022. There have been no changes in our critical accounting policies and estimates since January 31, 2022.
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Results of Operations
The results presented below include the operating results of any acquisition made during these periods, from the date of acquisition, as well as the operating results of any stores closed or divested during these periods, up to the date of the store closure. The period-to-period comparisons included below are not necessarily indicative of future results. Segment information is provided later in the discussion and analysis of our results of operations.
Same-store sales for any period represent sales by stores that were part of the Company for the entire comparable period in the current and preceding fiscal years. We do not distinguish between relocated or recently expanded stores in this same-store analysis. Closed stores are excluded from the same-store analysis. Stores that do not meet the criteria for same-store classification are described as excluded stores throughout this Results of Operations section.
Comparative financial data for each of our four sources of revenue are expressed below.
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
(dollars in thousands) (dollars in thousands)
Equipment
Revenue $ 375,216 $ 272,733 $ 731,582 $ 548,713
Cost of revenue 323,988 240,332 634,222 484,008
Gross profit $ 51,228 $ 32,401 $ 97,360 $ 64,705
Gross profit margin 13.7 % 11.9 % 13.3 % 11.8 %
Parts
Revenue $ 77,693 $ 65,317 $ 146,255 $ 127,942
Cost of revenue 52,706 46,089 100,015 90,529
Gross profit $ 24,987 $ 19,228 $ 46,240 $ 37,413
Gross profit margin 32.2 % 29.4 % 31.6 % 29.2 %
Service
Revenue $ 33,365 $ 29,676 $ 62,887 $ 57,379
Cost of revenue 11,072 9,771 21,832 19,065
Gross profit $ 22,293 $ 19,905 $ 41,055 $ 38,314
Gross profit margin 66.8 % 67.1 % 65.3 % 66.8 %
Rental and other
Revenue $ 10,269 $ 9,904 $ 16,825 $ 16,300
Cost of revenue 6,078 6,420 10,087 10,737
Gross profit $ 4,191 $ 3,484 $ 6,738 $ 5,563
Gross profit margin 40.8 % 35.2 % 40.0 % 34.1 %
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The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated:
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
Revenue
Equipment 75.6 % 72.2 % 76.4 % 73.1 %
Parts 15.6 % 17.3 % 15.3 % 17.1 %
Service 6.7 % 7.9 % 6.6 % 7.6 %
Rental and other 2.1 % 2.6 % 1.7 % 2.2 %
Total Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Total Cost of Revenue 79.3 % 80.1 % 80.0 % 80.5 %
Gross Profit Margin 20.7 % 19.9 % 20.0 % 19.5 %
Operating Expenses 13.9 % 15.1 % 13.9 % 15.1 %
Income from Operations 6.8 % 4.4 % 6.1 % 4.1 %
Other Income (Expense) (0.1) % (0.2) % (0.2) % (0.2) %
Income Before Income Taxes 6.7 % 4.1 % 5.9 % 3.9 %
Provision for Income Taxes 1.6 % 1.2 % 1.5 % 1.0 %
Net Income 5.0 % 3.0 % 4.4 % 2.9 %
Three Months Ended July 31, 2022 Compared to Three Months Ended July 31, 2021
Consolidated Results
Revenue
Three Months Ended July 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Equipment $ 375,216 $ 272,733 $ 102,483 37.6 %
Parts 77,693 65,317 12,376 18.9 %
Service 33,365 29,676 3,689 12.4 %
Rental and other 10,269 9,904 365 3.7 %
Total Revenue $ 496,543 $ 377,630 $ 118,913 31.5 %
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Total revenue for the second quarter of fiscal 2023 was 31.5% or $118.9 million higher than the second quarter of fiscal 2022 driven primarily by an increase in Company-wide same-store sales of 32.1% and our acquistions of Jaycox Implement and Mark's Machinery, completed in December 2021 and April 2022, respectively. The same-store sales increase was primarily driven by favorable commodity prices, higher net farm income and increased construction activity in our footprint.
Three Months Ended July 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Gross Profit
Equipment $ 51,228 $ 32,401 $ 18,827 58.1 %
Parts 24,987 19,228 5,759 30.0 %
Service 22,293 19,905 2,388 12.0 %
Rental and other 4,191 3,484 707 20.3 %
Total Gross Profit $ 102,699 $ 75,018 $ 27,681 36.9 %
Gross Profit Margin
Equipment 13.7 % 11.9 % 1.8 % 15.1 %
Parts 32.2 % 29.4 % 2.8 % 9.5 %
Service 66.8 % 67.1 % (0.3) % (0.4) %
Rental and other 40.8 % 35.2 % 5.6 % 15.9 %
Total Gross Profit Margin 20.7 % 19.9 % 0.8 % 4.0 %
Gross Profit Mix
Equipment 49.9 % 43.2 % 6.7 % 15.5 %
Parts 24.3 % 25.6 % (1.3) % (5.1) %
Service 21.7 % 26.5 % (4.8) % (18.1) %
Rental and other 4.1 % 4.7 % (0.6) % (12.8) %
Total Gross Profit Mix 100.0 % 100.0 %
Gross profit for the second quarter of fiscal 2023 increased 36.9% or $27.7 million, as compared to the same period last year. Gross profit margin also improved to 20.7% in the current quarter from 19.9% in the prior year quarter. The increase in gross profit margin was primarily due to stronger equipment margins, which were positively impacted by a healthy inventory, favorable end market conditions, and a $2.6 million benefit recognized on the expected achievement of annual manufacturer incentive programs. The increase in equipment margins, was partially offset by the gross profit mix shift, to lower margin equipment sales relative to parts, service, and rental sales.
Our Company-wide absorption rate — which is calculated by dividing our gross profit from sales of parts, service and rental fleet by our operating expenses, less commission expense on equipment sales, plus interest expense on floorplan payables and rental fleet debt — increased to 90.6% for the second quarter of fiscal 2023 compared to 86.2% during the same period last year as the increase in gross profit from parts, rental fleet, and service in the second quarter of fiscal 2023 combined with lower floorplan interest expenses more than offset the increase in operating expenses during the period.
Operating Expenses
Three Months Ended July 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Operating Expenses $ 68,828 $ 57,074 $ 11,754 20.6 %
Operating Expenses as a Percentage of Revenue 13.9 % 15.1 % (1.2) % (7.9) %
Our operating expenses in the second quarter of fiscal 2023 increased 20.6% as compared to the second quarter of fiscal 2022. The increase in operating expenses was primarily the result of an increase in variable expenses associated with increased sales. Operating expenses as a percentage of revenue decreased to 13.9% in the second quarter of fiscal 2023 from 15.1% in the second quarter of fiscal 2022. The decrease in operating expenses as a percentage of revenue was due to the increase in total revenue in the second quarter of fiscal 2023, as compared to the second quarter of fiscal 2022, which positively affected our ability to leverage our fixed operating costs.
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Impairment Charges
Three Months Ended July 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Impairment of Intangible and Long-Lived Assets — 1,498 (1,498) 100.0 %
We did not recognize any impairment charges in the second quarter of fiscal 2023. In the second quarter of fiscal 2022, we recognized $1.5 million of impairment charges on certain intangible and long-lived assets in our International segment.
Other Income (Expense)
Three Months Ended July 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Interest and other income $ 873 $ 654 $ 219 33.5 %
Floorplan interest expense (245) (350) (105) (30.0) %
Other interest expense (1,349) (1,118) 231 20.7 %
Interest and other income increased by $0.2 million in the second quarter of fiscal 2023, as compared to the second quarter of fiscal 2022, due to increased sublease rental income of facilities that were divested in January 2022. The decrease in floorplan interest expense of 30.0% was due to decreased levels of interest bearing inventory in the International segment. The increase in other interest expense was primarily due to increased fixed rate, long term debt from real estate purchases throughout fiscal 2022.
Provision for Income Taxes
Three Months Ended July 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Provision for Income Taxes $ 8,191 $ 4,383 $ 3,808 86.9 %
Our effective tax rate was 24.7 % and 28.0 % for the three months ended July 31, 2022 and July 31, 2021, respectively, and was 25.1 % and 25.6 % for the six months ended July 31, 2022 and 2021, respectively. The effective tax rate for each of the six months ended July 31, 2022 and 2021 is subject to variation due to factors such as the impact of certain discrete items, mainly the vesting of share-based compensation, the mix of domestic and foreign income and recognition of a valuation allowance on certain of our foreign deferred tax assets.
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Segment Results
Certain financial information for our Agriculture, Construction and International business segments is presented below. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Revenue between segments is immaterial.
Three Months Ended July 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Revenue
Agriculture $ 348,956 $ 219,364 $ 129,592 59.1 %
Construction 70,022 80,943 (10,921) (13.5) %
International 77,565 77,323 242 0.3 %
Total $ 496,543 $ 377,630 $ 118,913 31.5 %
Income Before Income Taxes
Agriculture $ 24,895 $ 12,067 $ 12,828 106.3 %
Construction 3,923 2,815 1,108 39.4 %
International 5,870 430 5,440 n/m
Segment Income Before Income Taxes 34,688 15,312 19,376 126.5 %
Shared Resources (1,538) 320 (1,858) n/m
Total $ 33,150 $ 15,632 $ 17,518 112.1 %
Agriculture
Agriculture segment revenue for the second quarter of fiscal 2023 increased 59.1% compared to the second quarter of fiscal 2022. The higher revenue was driven primarily by an increase in same-store sales of 45.7% and our acquistions of Jaycox Implement and Mark's Machinery, completed in December 2021 and April 2022, respectively. The same-store sales increase was primarily driven by favorable commodity prices and higher net farm income.
Agriculture segment income before income taxes for the second quarter of fiscal 2023 was $24.9 million compared to $12.1 million for the second quarter of fiscal 2022. The improvement in segment results was primarily the result of increased revenues and stronger equipment margins which were positively impacted by favorable end market conditions, healthy inventory, and a $2.6 million benefit recognized on the expected achievement of annual manufacturer incentive programs.
Construction
Construction segment revenue for the second quarter of fiscal 2023 decreased 13.5% compared to the second quarter of fiscal 2022. However, after taking into account the divestiture of the Billings, Great Falls, and Missoula, Montana, and Gillette, Wyoming stores in the fourth quarter of fiscal 2022 and the first quarter of fiscal 2023 divestiture of our consumer products store in North Dakota, same-store sales in our Construction segment increased 14.9% for the second quarter of fiscal 2023, as compared to the second quarter of fiscal 2022. The driving factor of the same-store sales increase was parts, service, and rental and other which increas ed 18.1%, 11.7%, and 20.0%, r espectively, from the second quarter of fiscal 2023, as compared to the second quarter of fiscal 2022.
Our Construction segment income before taxes was $3.9 million for the second quarter of fiscal 2023 compared to $2.8 million in the second quarter of fiscal 2022. The improvement in segment results was primarily due to an increase in same store sales, as described above and an increase in rental fleet utilization, which led to an increase in rental gross profit margin. The dollar utilization — which is calculated by dividing the rental revenue earned on our rental fleet by the average gross carrying value of our rental fleet (comprised of original equipment costs plus additional capitalized costs) for that period — of our rental fleet increased from 26.6% in the second quarter of fiscal 2022 to 31.9% in the second quarter of fiscal 2023.
International
International segment revenue was $77.6 million for the second quarter of fiscal 2023 compared to $77.3 million in the second quarter of fiscal 2022. While segment revenue was essentially flat, a 25% decrease in total revenue from our Ukrainian subsidiary due to the Russia-Ukraine conflict, and the significant devaluation of the Euro, the functional currency in much of our international footprint, were more than offset by a same-store sales increase of 5.9% due to many of the same macroeconomic factors as the Agriculture segment, driving an increase in equipment sales.
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Our International segment income before income taxes was $5.9 million for the second quarter of fiscal 2023 compared to segment income before income taxes of $0.4 million for the same period last year. The increase in segment pre-tax income was primarily the result of improved equipment gross profit margin and an impairment of certain intangible and fixed assets in our German subsidiary in the second quarter of fiscal 2022.
Shared Resources/Eliminations
We incur centralized expenses/income at our general corporate level, which we refer to as “Shared Resources,” and then allocate most of these net expenses to our segments. Since these allocations are set early in the year, unallocated balances may occur. Shared Resources loss before income taxes was $1.5 million for the second quarter of fiscal 2023 compared to income before income taxes of $0.3 million for the same period last year. The lower shared resources results were driven by $0.5 million of acquisition related expenses incurred for the Heartland Companies acquisition.
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Six Months Ended July 31, 2022 Compared to Six Months Ended July 31, 2021
Consolidated Results
Revenue
Six Months Ended July 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Equipment $ 731,582 $ 548,713 $ 182,869 33.3 %
Parts 146,255 127,942 18,313 14.3 %
Service 62,887 57,379 5,508 9.6 %
Rental and other 16,825 16,300 525 3.2 %
Total Revenue $ 957,549 $ 750,334 $ 207,215 27.6 %
Total revenue for the first six months of fiscal 2023 was up 27.6% or $207.2 million compared to the first six months of fiscal 2022, driven primarily by an increase in Company-wide same-store sales of 27.1% and our acquistions of Jaycox Implement and Mark's Machinery, completed in December 2021 and April 2022, respectively. The same-store sales increase was primarily driven by favorable commodity prices, higher net farm income and increased construction activity in our footprint.
Gross Profit
Six Months Ended July 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Gross Profit
Equipment $ 97,360 $ 64,705 $ 32,655 50.5 %
Parts 46,240 37,413 8,827 23.6 %
Service 41,055 38,314 2,741 7.2 %
Rental and other 6,738 5,563 1,175 21.1 %
Total Gross Profit $ 191,393 $ 145,995 $ 45,398 31.1 %
Gross Profit Margin
Equipment 13.3 % 11.8 % 1.5 % 12.7 %
Parts 31.6 % 29.2 % 2.4 % 8.2 %
Service 65.3 % 66.8 % (1.5) % (2.2) %
Rental and other 40.0 % 34.1 % 5.9 % 17.3 %
Total Gross Profit Margin 20.0 % 19.5 % 0.5 % 2.6 %
Gross Profit Mix
Equipment 50.8 % 44.3 % 6.5 % 14.7 %
Parts 24.2 % 25.6 % (1.4) % (5.5) %
Service 21.5 % 26.2 % (4.7) % (17.9) %
Rental and other 3.5 % 3.9 % (0.4) % (10.3) %
Total Gross Profit Mix 100.0 % 100.0 %
Gross profit increased 31.1% or $45.4 million for the first six months of fiscal 2023, as compared to the same period last year. The increase in gross profit was primarily the result of increased equipment sales and stronger equipment margins for the first six months of fiscal 2023. These higher equipment sales and margins were driven by a healthy inventory and favorable end market conditions. Higher equipment margins were also benefited from a $2.6 million benefit recognized on the expected achievement of annual manufacturer incentive programs. The overall gross profit margin increase from 19.5% to 20.0% was primarily due to stronger equipment margins and rental margins, but was partially offset due to a shift in gross profit mix to lower margin equipment sales relative to parts, service, and rental sales.
Our Company-wide absorption rate for the first six months of fiscal 2023 increased to 85.6%, as compared to 81.0% during the same period last year, as the increase in gross profit from parts, rental, and service combined with lower floorplan
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interest expense more than offset the increase in operating expenses during the six month period compared to that of the prior year six month period.
Operating Expenses
Six Months Ended July 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Operating Expenses $ 132,980 $ 113,516 $ 19,464 17.2 %
Operating Expenses as a Percentage of Revenue 13.9 % 15.1 % (1.2) % (7.9) %
Our operating expenses for the first six months of fiscal 2023 increased $19.5 million as compared to the first six months of fiscal 2022. The increase in operating expenses was a result of an increase in variable expenses associated with increased sales. Operating expenses as a percentage of revenue decreased to 13.9% in the first six months of fiscal 2023 from 15.1% in the first six months of fiscal 2022. The decrease in operating expenses as a percentage of total revenue was due to the increase in total revenue in the first six months of fiscal 2023, as compared to the first six months of fiscal 2022, which positively affected our ability to leverage our fixed operating costs.
Impairment Charges
Six Months Ended July 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Impairment of Intangible and Long-Lived Assets — 1,498 (1,498) 100.0 %
We did not recognize any impairment charges in the first six months of fiscal 2023. In the first six months of fiscal 2022, we recognized $1.5 million of impairment charges on certain intangible and long-lived assets in our International segment.
Other Income (Expense)
Six Months Ended July 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Interest and other income $ 1,365 $ 1,320 $ 45 3.4 %
Floorplan interest expense (499) (768) (269) (35.0) %
Other interest expense (2,545) (2,222) 323 14.5 %
Floorplan interest expense decreased 35.0% for the first six months of fiscal 2023, as compared to the same period last year, primarily due to lower interest bearing inventory, primarily in our international segment. The increase in other interest expense in the first six months of fiscal 2023, as compared to the first six months of fiscal 2022, is the result of increased long term debt on real estate purchased during fiscal 2022 and 2023.
Provision for Income Taxes
Six Months Ended July 31, Increase/ Percent
2022 2021 Decrease Change
(dollars in thousands)
Provision for Income Taxes $ 14,235 $ 7,515 $ 6,720 89.4 %
Our effective tax rate was 25.1% for the first six months of fiscal 2023 and 25.6% for the same period last year. The effective tax rate for the six months ended July 31, 2022 and 2021 is subject to variation due to factors such as the impact of certain discrete items, mainly the vesting of share-based compensation, the mix of domestic and foreign income, recognition of a valuation allowance on certain of our foreign deferred tax assets and foreign currency gains and losses.
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Segment Results
Certain financial information for our Agriculture, Construction and International business segments is presented below. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Revenue between segments is immaterial.
Six Months Ended July 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Revenue
Agriculture $ 667,503 $ 448,915 $ 218,588 48.7 %
Construction 136,986 149,550 (12,564) (8.4) %
International 153,060 151,869 1,191 0.8 %
Total $ 957,549 $ 750,334 $ 207,215 27.6 %
Income Before Income Taxes
Agriculture $ 41,344 $ 23,292 $ 18,052 77.5 %
Construction 7,132 2,953 4,179 141.5 %
International 10,195 3,238 6,957 n/m
Segment Income Before Income Taxes 58,671 29,483 29,188 99.0 %
Shared Resources (1,937) (172) (1,765) n/m
Total $ 56,734 $ 29,311 $ 27,423 93.6 %
Agriculture
Agriculture segment revenue for the first six months of fiscal 2023 increased 48.7% compared to the same period last year. The higher revenue was driven primarily by an increase in same-store sales of 35.8% for the first six months of fiscal 2023, as compared to the same period last year as well as the acquisitions of Jaycox Implement and Mark's Machinery in December 2021 and April 2022, respectively. The same-store sales increase was driven by increased equipment demand due to higher commodity prices and higher net farm income.
Agriculture segment income before income taxes was $41.3 million for the first six months of fiscal 2023 compared to $23.3 million over the first six months of fiscal 2022. The improvement in segment results was the result of higher equipment revenue along with higher gross profit margin on equipment driven by increased demand, healthy inventory, and a $2.6 million benefit recognized on the expected achievement of annual manufacturer incentive programs.
Construction
Construction segment revenue for the first six months of fiscal 2023 decreased 8.4% compared to the same period last year. However, when accounting for the divestitures of the Billings, Great Falls, and Missoula, Montana and Gillette, Wyoming stores in January 2022, and the North Dakota consumer products store in March 2022, same-store sales increased 19.5%. Higher same-store sales were driven by increased construction activity throughout the footprint.
Our Construction segment income before income taxes was $7.1 million for the first six months of fiscal 2023 compared to income before income taxes of $3.0 million for the first six months of fiscal 2022. The increase in segment results was primarily due to increased construction activity within our footprint and an increase in rental fleet utilization. The dollar utilization of our rental fleet increased from 22.9% in the first six months of fiscal 2022 to 28.6% in the first six months of fiscal 2023.
International
International segment revenue for the first six months of fiscal 2023 increased 0.8% compared to the same period last year. Higher commodity prices are primarily driving demand for equipment sales. The increase in revenue was partially offset by a 9.0% devaluation of the Euro, the functional currency in much of our international footprint, in the first six months of fiscal 2023. The segment was also negatively impacted by a 38% decrease in revenues from our Ukrainian subsidiary due to the Russia-Ukraine conflict compared to the first six months of fiscal 2022.
Our International segment income before income taxes was $10.2 million for the first six months of fiscal 2023 compared to income before income taxes of $3.2 million for the same period last year. The higher segment results were
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primarily the result and equipment gross profit margin. There were no fixed or intangible asset impairment charges recognized in the first six months of fiscal 2023 while $1.5 million was recognized in the first six months of fiscal 2022, related to the impairment of certain intangible and long-lived assets of our German subsidiary.
Shared Resources/Eliminations
We incur centralized expenses/income at our general corporate level, which we refer to as “Shared Resources,” and then allocate most of these net expenses to our segments. Since these allocations are set early in the year, and a portion is planned to be unallocated, unallocated balances may occur. Shared Resources loss before income taxes was $1.9 million for the first six months of fiscal 2023 compared to a loss before income taxes of $0.2 million for the same period last year. The lower shared resources results were driven by $0.5 million of acquisition related expenses incurred for the Heartland Companies acquisition.
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Non-GAAP Financial Measures
To supplement net income and diluted earnings per share ("Diluted EPS"), both GAAP measures, we present adjusted net income and adjusted Diluted EPS, both non-GAAP measures, which include adjustments for items such as foreign currency remeasurement gains/losses in Ukraine and impairment charges. We believe that the presentation of adjusted net income and adjusted Diluted EPS is relevant and useful to our management and investors because it provides a measurement of earnings on activities that we consider to occur in the ordinary course of our business. Adjusted net income and adjusted Diluted EPS should be evaluated in addition to, and not considered a substitute for, or superior to, the most comparable GAAP measure. In addition, other companies may calculate these non-GAAP measures in a different manner, which may hinder comparability of our adjusted results with those of other companies.
The following tables reconcile (i) net income, a GAAP measure, to adjusted net income and (ii) Diluted EPS, a GAAP measure, to adjusted Diluted EPS:
Three Months Ended July 31, Six Months Ended July 31,
2022 2021 2022 2021
(dollars in thousands, except per share data)
Adjusted Net Income
Net Income $ 24,959 $ 11,249 $ 42,499 $ 21,796
Adjustments
Impairment charges — 1,498 — 1,498
Ukraine remeasurement (gain) / loss (1) 21 (53) 315 (183)
Total Pre-Tax Adjustments 21 1,445 315 1,315
Adjusted Net Income $ 24,980 $ 12,694 $ 42,814 $ 23,111
Adjusted Diluted EPS
Diluted EPS $ 1.10 $ 0.50 $ 1.88 $ 0.97
Adjustments (2)
Impairment charges — 0.07 — 0.07
Ukraine remeasurement (gain) / loss (1) — (0.01) 0.01 (0.01)
Total Pre-Tax Adjustments — 0.06 0.01 0.06
Adjusted Diluted EPS $ 1.10 $ 0.56 $ 1.89 $ 1.03
(1) Due to the income tax valuation allowance on the Ukrainian and German subsidiaries, there are no tax adjustments of the Ukraine remeasurement (gain)/loss for the periods ended July 31, 2022 and 2021 or the impairment charge for the period ended July 31, 2021.
(2) Adjustments are net of amounts allocated to participating securities where applicable.
Liquidity and Capital Resources
Sources of Liquidity
Our primary sources of liquidity are cash reserves, cash generated from operations, and borrowings under our floorplan and other credit facilities. We expect these sources of liquidity to be sufficient to fund our working capital requirements, acquisitions, capital expenditures and other investments in our business, service our debt, pay our tax and lease obligations and other commitments and contingencies, and meet any seasonal operating requirements for the foreseeable future, provided that our borrowing capacity under our credit agreements is dependent on compliance with various covenants as further described in the "Risk Factors" section of our Annual Report on Form 10-K.
Equipment Inventory and Floorplan Payable Credit Facilities
As of July 31, 2022, the Company had floorplan payable lines of credit for equipment purchases totaling $743.0 million, which is primarily comprised of a $450.0 million credit facility with CNH Industrial, a $185.0 million floorplan payable line under the Bank Syndicate Agreement, and a $50.0 million credit facility with DLL Finance.
Our equipment inventory turnover increased from 2.7 times for the rolling 12 month period ended July 31, 2021 to 3.6 times for the rolling 12 month period ended July 31, 2022. The increase in equipment turnover was attributable to an increase in equipment sales over the rolling 12 month period ended July 31, 2022 as compared to the same period ended July 31, 2021. Our
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equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, decreased to 38.3% as of July 31, 2022 from 58.2% as of January 31, 2022. The decrease was primarily due to drawing on our floorplan loan with the Bank Syndicate, in anticipation of the Heartland acquisition.
Adequacy of Capital Resources
Our primary uses of cash have been to fund our operating activities, including the purchase of inventories and providing for other working capital needs, meeting our debt service requirements, making payments due under our various leasing arrangements, and funding capital expenditures, including rental fleet assets, and funding acquisitions. Based on our current operational performance and taking into account the use of cash to pay the purchase price on the Heartland acquisition, we believe our cash flow from operations, available cash and available borrowing capacity under our existing credit facilities will adequately provide for our liquidity needs for, at a minimum, the next 12 months.
As of July 31, 2022, we were in compliance with the financial covenants under our CNH Industrial and DLL Finance credit agreements and we were not subject to the fixed charge coverage ratio covenant under the Bank Syndicate Agreement as our adjusted excess availability plus eligible cash collateral (as defined therein) was not less than 15% of the lesser of (i) aggregate borrowing base and (ii) maximum credit amount as of July 31, 2022. While not expected to occur, if anticipated operating results were to create the likelihood of a future covenant violation, we would expect to work with our lenders on an appropriate modification or amendment to our financing arrangements.
Cash Flow
Cash Flow Provided by (Used for) Operating Activities
Net cash used for operating activities was $21.0 million for the first six months of fiscal 2023, compared to net cash provided by operating activities of $28.6 million for the first six months of fiscal 2022. The change in net cash provided by (used for) operating activities is primarily the result of an increase in inventories partially offset by an increase in non-interest bearing floorplan lines of credit from manufacturers and higher net income for the first six months of fiscal 2023.
Cash Flow Used for Investing Activities
Net cash used for investing activities was $20.7 million for the first six months of fiscal 2023, compared to $19.4 million for the first six months of fiscal 2022. The increase in cash used for investing activities was primarily the result of the business acquisition of Mark's Machinery in the first six months of fiscal 2023.
Cash Flow Provided by (Used for) Financing Activities
Net cash provided by financing activities was $39.6 million for the first six months of fiscal 2023 compared to cash used for financing activities of $22.4 million for the first six months of fiscal 2022 . The increase in cash provided by financing activities was primarily the result of increased non-manufactured floorplan payables in the first six months of fiscal 2023, as the Company drew on its Bank Syndicate floorplan loan in anticipation of the August 2022 acquisition of the Heartland Companies, compared to last year.
Information Concerning Off-Balance Sheet Arrangements
As of July 31, 2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Therefore, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Forward-looking statements are contained in this Quarterly Report on Form 10-Q, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in our Annual Report on Form 10-K for the year ended January 31, 2022, and in other materials filed by the Company with the Securities and Exchange Commission (and included in oral statements or other written statements made by the Company).
Forward-looking statements are statements based on future expectations and specifically may include, among other things, statements relating to our expectations regarding the performance of our Ukrainian subsidiary within our International segment, the impact of farm income levels on customer demand for agricultural equipment and services, the impact of the COVID-19 pandemic on our business, the effectiveness of our new ERP system and the timing of the phased roll-out of the ERP system to the Company's domestic locations, the general market conditions of the agricultural and construction industries,
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equipment inventory levels, and our primary liquidity sources, and the adequacy of our capital resources. Any statements that are not based upon historical facts, including the outcome of events that have not yet occurred and our expectations for future performance, are forward-looking statements. The words “potential,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” “plan,” “anticipate,” and similar words and expressions are intended to identify forward-looking statements. These statements are based upon the current beliefs and expectations of our management. These forward-looking statements involve important risks and uncertainties that could significantly affect anticipated results or outcomes in the future and, accordingly, actual results or outcomes may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, the impact of the Russia -Ukraine conflict on our Ukrainian subsidiary, our ability to successfully integrate and realize growth opportunities and synergies in connection with the Heartland acquisition, the risk that we assume unforeseen or other liabilities in connection with the Heartland acquisition and the impact of those conditions and obligations imposed on us under the new CaseIH dealer agreements for the commercial application equipment business, our substantial dependence on CNH Industrial, including CNH Industrial's ability to design, manufacture and allocate inventory to our stores in quantities necessary to satisfy our customer's demands, the duration, scope and impact of the COVID-19 pandemic on the Company's operations and business, including the disruption of supply chains and associated impacts on the Company's supply vendors, adverse market conditions in the agricultural and construction equipment industries, and those matters identified and discussed under the section titled “Risk Factors” in our Annual Report on Form 10-K. In addition to those matters, there may exist additional risks and uncertainties not currently known to us or that we currently deem to be immaterial that may materially adversely affect our business, financial condition or results of operations.
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