What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-12-08 compared with 2022-09-09 · 128 added, 128 removed, 271 unchanged (49% of the section changed)

9 unchanged sentences

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.

Based o n September 2022 U.S.

Department of Agriculture publications, the estimate of net farm income for calendar year 2022 indicated an approximate 5.2% increase as compared to calendar year 2021, and an approximate 48.5% increase in net farm income for calendar year 2021 as compared to calendar year 2020.

For the third quarter of fiscal 2023, our net income was $41.3 million, or $1.82 per diluted share, compared to a fiscal 2022 third quarter net income of $21.8 million, or $0.97 per diluted share.

Our adjusted diluted earnings per share was $1.83 for the third quarter of fiscal 2023, compared to $0.96 for the third 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.

• Revenue in the third quarter of fiscal 2023 increased by 47.3% compared to the third quarter of fiscal 2022.

The revenue increase was primarily driven by total Company same store sales increase of 34.0% compared to the prior year third quarter and the acquisition of the Heartland Companies, Mark's Machinery, and Jaycox Implement in August 2022, April 2022, and December 2021, respectively.

Total equipment sales increased 54.3% and total parts sales increased 35.0%.

• Gross profit in the third quarter of fiscal 2023 increased 50.9% compared to the third quarter of fiscal 2022.

The increase in gross profit was primarily the result of increased sales and strong gross profit margins particularly in equipment where margins increased to 14.3% in the third quarter of fiscal 2023 from 12.5% in the third quarter of fiscal 2022.

Parts gross profit margins also increased to 33.6% in the third quarter of fiscal 2023 from 30.9% in the third quarter of fiscal 2022.

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.

1 unchanged sentence

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.

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 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.

2 unchanged sentences

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

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 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 been able to relocate outside of Ukraine and continue to work, while the customer support and sales teams have remained in Ukraine.

For the nine months ended October 31, 2022, Titan Machinery Ukraine's revenues are down approximately 38.8% from the prior year period.

As of October 31, 2022, the Company had total assets of $28.7 million in Ukraine.

The physical assets (e.g.

1 unchanged sentence

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.

The situation in Ukraine is highly complex and continues to evolve.

If the Company cannot provide efficient and uninterrupted services to its customers, 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.

Further, any major breakdown or closure of utility services, any major threat to civilians in our footprint, disruption of commodity exports from Ukraine, or international banking disruption could materially impact the operations and liquidity of Titan Machinery Ukraine.

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 $ 94.4 million in cash consideration.

1 unchanged sentence

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.

The Heartland Companies are included in the Agriculture segment.

In the most recent completed fiscal year, the Heartland Companies generated revenue of approximately $214 million.

15 unchanged sentences

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.

In June, the Company began the phased roll-out integrating three existing locations to the new ERP.

We will continue our phased roll-out until all remaining domestic locations have been transitioned to the new ERP.

Critical Accounting Policies and Estimates

10 unchanged sentences

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

Three Months Ended July 31, Six Months Ended July 31,

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

2022 2021 2022 2021

18 unchanged sentences

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,

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

2022 2021 2022 2021

8 unchanged sentences

Income from Operations 8.2 % 6.5 % 7.0 % 5.0 %

Other Income (Expense) (0.1) % (0.2) % (0.2) % (0.2) %

Other Expense — % (0.2) % (0.1) % (0.2) %

Income Before Income Taxes 8.2 % 6.3 % 6.9 % 4.8 %

1 unchanged sentence

Net Income 6.2 % 4.8 % 5.2 % 3.6 %

Three Months Ended July 31, 2022 Compared to Three Months Ended July 31, 2021

Three Months Ended October 31, 2022 Compared to Three Months Ended October 31, 2021

Consolidated Results

Three Months Ended July 31, Increase/ Percent

Three Months Ended October 31, Increase/ Percent

2022 2021 (Decrease) Change

5 unchanged sentences

Total Revenue $ 668,773 $ 453,975 $ 214,798 47.3 %

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.

Total revenue for the third quarter of fiscal 2023 was 47.3% or $214.8 million higher than the third quarter of fiscal 2022 driven primarily by an increase in Company-wide same-store sales of 34.0% and our acquistions of Jaycox Implement, Mark's Machinery, and the Heartland Companies, completed in December 2021, April 2022, and August 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

Three Months Ended October 31, Increase/ Percent

2022 2021 (Decrease) Change

17 unchanged sentences

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 for the third quarter of fiscal 2023 increased 50.9% or $47.1 million, as compared to the same period last year.

Gross profit margin also improved to 20.9% in the current quarter from 20.4% in the prior year quarter.

1 unchanged sentence

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.

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 — decreased to 95.9% for the third quarter of fiscal 2023 compared to 97.8% during the same period last year as the increase in gross profit from parts, rental fleet, and service in the third quarter of fiscal 2023 was more than offset by increased floorplan interest expenses and operating expenses less commission expense on equipment sales.

Operating Expenses

Three Months Ended July 31, Increase/ Percent

Three Months Ended October 31, Increase/ Percent

2022 2021 (Decrease) Change

2 unchanged sentences

Operating Expenses as a Percentage of Revenue 12.7 % 13.9 % (1.2) % (8.6) %

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.

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

Our operating expenses in the third quarter of fiscal 2023 increased 34.8% as compared to the third quarter of fiscal 2022.

The increase in operating expenses was primarily the result of an increase in variable expenses associated with increased sales as well as additional operating expenses due to acquistions that have taken place in the past year.

Operating expenses as a percentage of revenue decreased to 12.7% in the third quarter of fiscal 2023 from 13.9% in the third quarter of fiscal 2022.

The decrease in operating expenses as a percentage of revenue was due to the increase in total revenue in the third quarter of fiscal 2023, as compared to the third quarter of fiscal 2022, which positively affected our ability to leverage our fixed operating costs.

Three Months Ended October 31, Increase/ Percent

2022 2021 (Decrease) Change

(dollars in thousands)

Interest and other income $ 873 $ 654 $ 219 33.5 %

Interest and other income $ 1,805 $ 616 $ 1,189 n/m

Floorplan interest expense (588) (259) 329 127.0 %

Other interest expense (1,258) (1,071) 187 17.5 %

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 interest and other income compared to fiscal 2022 was primarily the result of a strengthening U.S.

dollar relative to the Euro creating foreign currency gains in fiscal 2023.

The increase in floorplan interest expense of 127.0% was due to drawing on our floorplan line to fund the acquisition of the Heartland Companies in the third quarter of fiscal 2023.

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

Three Months Ended October 31, Increase/ Percent

2022 2021 (Decrease) Change

1 unchanged sentence

Provision for Income Taxes $ 13,421 $ 7,007 $ 6,414 91.5 %

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.

Our effective tax rate was 24.5 % and 24.3 % for the three months ended October 31, 2022 and October 31, 2021, respectively.

In reviewing our foreign deferred tax assets as of October 31, 2022, it was concluded that based on recent income and sources of future income of our Bulgarian subsidiary, that the release of the remaining valuation allowance of our Bulgarian subsidiary was warranted.

In the third quarter of fiscal 2023, the Company recorded a benefit of $0.3 million from the release of the valuation allowance related to the Company's Bulgarian subsidiary.

The effective tax rate for the three months ended October 31, 2022 and 2021 were also subject to various other factors such as the impact of certain discrete items, mainly the vesting of share-based compensation and the mix of domestic and foreign income.

Segment Results

2 unchanged sentences

Revenue between segments is immaterial.

Three Months Ended July 31, Increase/ Percent

Three Months Ended October 31, Increase/ Percent

2022 2021 (Decrease) Change

7 unchanged sentences

Construction 6,065 3,564 2,501 70.2 %

International 5,870 430 5,440 n/m

International 8,488 6,260 2,228 35.6 %

Segment Income Before Income Taxes 56,597 29,442 27,155 92.2 %

1 unchanged sentence

Total $ 54,678 $ 28,823 $ 25,855 89.7 %

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.

Agriculture segment revenue for the third quarter of fiscal 2023 increased 75.2% compared to the third quarter of fiscal 2022.

The higher revenue was driven primarily by an increase in same-store sales of 46.4% as well as our acquistions of Jaycox Implement, Mark's Machinery, and the Heartland Companies, completed in December 2021, April 2022, and August 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.

Agriculture segment income before income taxes for the third quarter of fiscal 2023 was $42.0 million compared to $19.6 million for the third 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 $2.0 million benefit recognized on the expected achievement of annual manufacturer incentive programs.

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.

Construction segment revenue for the third quarter of fiscal 2023 increased 8.4% compared to the third quarter of fiscal 2022.

Same-store sales in our Construction segment increased 34.2% for the third quarter of fiscal 2023, as compared to the third quarter of fiscal 2022 which more than offset the divestitures 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.

Construction activity in our footprint continued to be elevated, which was the primary factor in the same store sales growth.

Our Construction segment income before taxes was $6.1 million for the third quarter of fiscal 2023 compared to $3.6 million in the third 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.

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 31.4% in the third quarter of fiscal 2022 to 34.3% in the third 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.

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.

International segment revenue was $89.0 million for the third quarter of fiscal 2023 compared to $92.7 million in the third quarter of fiscal 2022.

The decrease in segment revenues was primarily due to a 40.7% decrease in total revenue from our Ukrainian subsidiary and a 14.4% devaluation from the prior year period of the Euro, the functional currency in much of our international footprint.

On a constant currency basis, revenue was up $9.2 million or 9.9%

Our International segment income before income taxes was $8.5 million for the third quarter of fiscal 2023 compared to segment income before income taxes of $6.3 million for the same period last year.

The increase in segment pre-tax income was primarily the result of improved gross profit margin of the three main revenue streams, equipment, parts, and service.

Shared Resources/Eliminations

1 unchanged sentence

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.

Six Months Ended July 31, 2022 Compared to Six Months Ended July 31, 2021

Shared Resources loss before income taxes was $1.9 million for the third quarter of fiscal 2023 compared to a loss before income taxes of $0.6 million for the same period last year.

The lower shared resources results were primarily driven by $0.6 million of acquisition related expenses incurred for the Heartland Companies acquisition.

Nine Months Ended October 31, 2022 Compared to Nine Months Ended October 31, 2021

Consolidated Results

Six Months Ended July 31, Increase/ Percent

Nine Months Ended October 31, Increase/ Percent

2022 2021 (Decrease) Change

5 unchanged sentences

Total Revenue $ 1,626,323 $ 1,204,311 $ 422,012 35.0 %

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.

Total revenue for the first nine months of fiscal 2023 was up 35.0% or $422.0 million compared to the first nine months of fiscal 2022, driven primarily by an increase in Company-wide same-store sales of 29.7% and our acquistions of Jaycox Implement, Mark's Machinery, and the Heartland Companies, completed in December 2021, April 2022, and August 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.

Six Months Ended July 31, Increase/ Percent

Nine Months Ended October 31, Increase/ Percent

2022 2021 (Decrease) Change

17 unchanged sentences

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

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.

Gross profit increased 38.8% or $92.5 million for the first nine months of fiscal 2023, as compared to the same period last year.

Gross profit margin also improved to 20.4% in the current quarter from 19.8%, in the prior year quarter.

The increase in gross profit margin was primarily due to stronger equipment margins which was positively impacted by a healthy inventory, favorable end market conditions, and a $4.6 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 for the first nine months of fiscal 2023 increased to 89.6%, as compared to 86.7% during the same period last year, as the increase in gross profit from parts, rental, and service more than offset the increase in operating expenses during the nine month period compared to that of the prior year nine month period.

Operating Expenses

Six Months Ended July 31, Increase/ Percent

Nine Months Ended October 31, Increase/ Percent

2022 2021 (Decrease) Change

2 unchanged sentences

Operating Expenses as a Percentage of Revenue 13.4 % 14.7 % (1.3) % (8.8) %

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.

Our operating expenses for the first nine months of fiscal 2023 increased $41.4 million as compared to the first nine months of fiscal 2022.

The increase in operating expenses was a result of an increase in variable expenses associated with increased sales as well as acquistions that have occurred in the last twelve months.

Operating expenses as a percentage of revenue decreased to 13.4% in the first nine months of fiscal 2023 from 14.7% in the first nine 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 nine months of fiscal 2023, as compared to the first nine months of fiscal 2022, which positively affected our ability to leverage our fixed operating costs.

Impairment Charges

Six Months Ended July 31, Increase/ Percent

Nine Months Ended October 31, Increase/ Percent

2022 2021 (Decrease) Change

1 unchanged sentence

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.

We did not recognize any impairment charges in the first nine months of fiscal 2023.

In the first nine 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

Nine Months Ended October 31, Increase/ Percent

2022 2021 (Decrease) Change

3 unchanged sentences

Other interest expense (3,803) (3,292) 511 15.5 %

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.

The increase in interest and other income compared to fiscal 2022 was primarily the result of a strengthening U.S.

dollar relative to the Euro, creating foreign currency gains in fiscal 2023.

Floorplan interest expense increased 5.8% for the first nine months of fiscal 2023, as compared to the same period last year, primarily due to increased interest bearing borrowings.

The increase in other interest expense in the first nine months of fiscal 2023, as compared to the first nine months of fiscal 2022, is the result of increased fixed rate, long term debt on real estate purchased during fiscal 2022 and 2023.

Provision for Income Taxes

Six Months Ended July 31, Increase/ Percent

Nine Months Ended October 31, Increase/ Percent

2022 2021 Decrease Change

1 unchanged sentence

Provision for Income Taxes $ 27,656 $ 14,521 $ 13,135 90.5 %

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.

Our effective tax rate was 24.8% for the first nine months of fiscal 2023 and 25.0% for the same period last year.

In the third quarter of fiscal 2023, the Company recorded a benefit of $0.3 million from the release of the valuation allowance related to the Company's Bulgarian subsidiary.

The effective tax rate for the nine months ended October 31, 2022 and 2021 is also subject to variation due to factors such as the impact of certain discrete items, mainly the vesting of share-based compensation and the mix of domestic and foreign income.

Segment Results

2 unchanged sentences

Revenue between segments is immaterial.

Six Months Ended July 31, Increase/ Percent

Nine Months Ended October 31, Increase/ Percent

2022 2021 (Decrease) Change

7 unchanged sentences

Construction 13,197 6,518 6,679 102.5 %

International 10,195 3,238 6,957 n/m

International 18,683 9,498 9,185 96.7 %

Segment Income Before Income Taxes 115,267 58,926 56,341 95.6 %

1 unchanged sentence

Total $ 111,412 $ 58,133 $ 53,279 91.7 %

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.

Agriculture segment revenue for the first nine months of fiscal 2023 increased 58.9% compared to the same period last year.

The higher revenue was driven primarily by an increase in same-store sales of 39.9% for the first nine months of fiscal 2023, as compared to the same period last year as well as the acquisitions of Jaycox Implement, Mark's Machinery, and the Heartland Companies in December 2021, April 2022, and August 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 segment revenue for the first six months of fiscal 2023 decreased 8.4% compared to the same period last year.

Agriculture segment income before income taxes was $83.4 million for the first nine months of fiscal 2023 compared to $42.9 million over the first nine months of fiscal 2022.

The improvement in segment results was primarily the result of higher equipment revenue along with higher gross profit margin on equipment driven by increased demand, healthy inventory, and a $4.6 million benefit recognized on the expected achievement of annual manufacturer incentive programs.

Construction segment revenue for the first nine months of fiscal 2023 decreased 2.6% 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 24.9%.

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.

Our Construction segment income before income taxes was $13.2 million for the first nine months of fiscal 2023 compared to $6.5 million for the first nine 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.

The dollar utilization of our rental fleet increased from 25.8% in the first nine months of fiscal 2022 to 30.7% in the first nine 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

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.

International segment revenue for the first nine months of fiscal 2023 decreased 1.0% compared to the same period last year.

The decrease in revenue was primarily due to a 10.9% devaluation of the Euro, the functional currency in much of our international footprint, but was partially offset by high commodity prices which drove demand for equipment sales, in the first nine months of fiscal 2023.

On a constant currency basis, revenue was up 9.9% or $24.2 million compared to the prior year period.

The segment was also negatively impacted by a 38.8% decrease in revenues from our Ukrainian subsidiary due to the Russia-Ukraine conflict compared to the first nine months of fiscal 2022.

Our International segment income before income taxes was $18.7 million for the first nine months of fiscal 2023 compared to $9.5 million for the same period last year.

The higher segment results were primarily the result of improved gross

profit margin of the three main revenue streams, equipment, parts, and service.

There were no fixed or intangible asset impairment charges recognized in the first nine months of fiscal 2023 while $1.5 million was recognized in the first nine months of fiscal 2022, related to the impairment of certain intangible and long-lived assets of our German subsidiary.

Shared Resources/Eliminations

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

Shared Resources 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.

Shared Resources loss before income taxes was $3.9 million for the first nine months of fiscal 2023 compared to a loss before income taxes of $0.8 million for the same period last year.

The lower shared resources results were driven by $1.1 million of acquisition related expenses incurred for the Heartland Companies acquisition.

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

Three Months Ended July 31, Six Months Ended July 31,

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

2022 2021 2022 2021

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Adjusted Diluted EPS $ 1.83 $ 0.96 $ 3.72 $ 1.98

(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.

(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 October 31, 2022 and 2021 or the impairment charge for the period ended October 31, 2021.

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

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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.

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.

As of October 31, 2022, the Company had floorplan payable lines of credit for equipment purchases totaling $777.0 million, which is primarily comprised of a $500.0 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 3.1 times for the rolling 12 month period ended October 31, 2021 to 3.6 times for the rolling 12 month period ended October 31, 2022.

The increase in equipment turnover was attributable to an increase in equipment sales over the rolling 12 month period ended October 31, 2022 as compared to the same period ended

October 31, 2021.

Our equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, decreased to 42.4% as of October 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 conjunction with 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.

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

As of October 31, 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 October 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 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.

Net cash used for operating activities was $7.1 million for the first nine months of fiscal 2023, compared to net cash provided by operating activities of $72.3 million for the first nine months of fiscal 2022.

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.

Net cash used for investing activities was $124.0 million for the first nine months of fiscal 2023, compared to $29.0 million for the first nine months of fiscal 2022.

The increase in cash used for investing activities was primarily the result of the business acquisitions of Mark's Machinery and the Heartland Companies in the first nine 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.

Net cash provided by financing activities was $34.3 million for the first nine months of fiscal 2023 compared to cash used for financing activities of $31.3 million for the first nine 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 nine months of fiscal 2023, as the Company drew on its Bank Syndicate floorplan loan in fiscal 2023, to fund the Heartland Companies acquisition.

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.

As of October 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.

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Forward-looking statements are contained in this Quarterly Report on Form 10-Q, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in our Annual Report on Form 10-K for the year ended January 31, 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,

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.

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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis