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 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 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.
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 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
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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. 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 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 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.
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 $ 94.4 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. 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.
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 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
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 October 31, Nine Months Ended October 31,
2022 2021 2022 2021
(dollars in thousands) (dollars in thousands)
Equipment
Revenue $ 508,996 $ 329,814 $ 1,240,579 $ 878,528
Cost of revenue 436,156 288,576 1,070,378 772,584
Gross profit $ 72,840 $ 41,238 $ 170,201 $ 105,944
Gross profit margin 14.3 % 12.5 % 13.7 % 12.1 %
Parts
Revenue $ 108,719 $ 80,521 $ 254,974 $ 208,464
Cost of revenue 72,146 55,654 172,162 146,184
Gross profit $ 36,573 $ 24,867 $ 82,812 $ 62,280
Gross profit margin 33.6 % 30.9 % 32.5 % 29.9 %
Service
Revenue $ 38,960 $ 32,026 $ 101,847 $ 89,405
Cost of revenue 13,456 10,249 35,288 29,314
Gross profit $ 25,504 $ 21,777 $ 66,559 $ 60,091
Gross profit margin 65.5 % 68.0 % 65.4 % 67.2 %
Rental and other
Revenue $ 12,098 $ 11,614 $ 28,923 $ 27,914
Cost of revenue 7,435 7,016 17,522 17,754
Gross profit $ 4,663 $ 4,598 $ 11,401 $ 10,160
Gross profit margin 38.5 % 39.6 % 39.4 % 36.4 %
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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 October 31, Nine Months Ended October 31,
2022 2021 2022 2021
Revenue
Equipment 76.1 % 72.6 % 76.2 % 73.0 %
Parts 16.3 % 17.7 % 15.7 % 17.3 %
Service 5.8 % 7.1 % 6.3 % 7.4 %
Rental and other 1.8 % 2.6 % 1.8 % 2.3 %
Total Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Total Cost of Revenue 79.1 % 79.6 % 79.6 % 80.2 %
Gross Profit Margin 20.9 % 20.4 % 20.4 % 19.8 %
Operating Expenses 12.7 % 13.9 % 13.4 % 14.7 %
Income from Operations 8.2 % 6.5 % 7.0 % 5.0 %
Other Expense — % (0.2) % (0.1) % (0.2) %
Income Before Income Taxes 8.2 % 6.3 % 6.9 % 4.8 %
Provision for Income Taxes 2.0 % 1.5 % 1.7 % 1.2 %
Net Income 6.2 % 4.8 % 5.2 % 3.6 %
Three Months Ended October 31, 2022 Compared to Three Months Ended October 31, 2021
Consolidated Results
Revenue
Three Months Ended October 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Equipment $ 508,996 $ 329,814 $ 179,182 54.3 %
Parts 108,719 80,521 28,198 35.0 %
Service 38,960 32,026 6,934 21.7 %
Rental and other 12,098 11,614 484 4.2 %
Total Revenue $ 668,773 $ 453,975 $ 214,798 47.3 %
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.
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Three Months Ended October 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Gross Profit
Equipment $ 72,840 $ 41,238 $ 31,602 76.6 %
Parts 36,573 24,867 11,706 47.1 %
Service 25,504 21,777 3,727 17.1 %
Rental and other 4,663 4,598 65 1.4 %
Total Gross Profit $ 139,580 $ 92,480 $ 47,100 50.9 %
Gross Profit Margin
Equipment 14.3 % 12.5 % 1.8 % 14.4 %
Parts 33.6 % 30.9 % 2.7 % 8.7 %
Service 65.5 % 68.0 % (2.5) % (3.7) %
Rental and other 38.5 % 39.6 % (1.1) % (2.8) %
Total Gross Profit Margin 20.9 % 20.4 % 0.5 % 2.5 %
Gross Profit Mix
Equipment 52.2 % 44.6 % 7.6 % 17.0 %
Parts 26.2 % 26.9 % (0.7) % (2.6) %
Service 18.3 % 23.5 % (5.2) % (22.1) %
Rental and other 3.3 % 5.0 % (1.7) % (34.0) %
Total Gross Profit Mix 100.0 % 100.0 %
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. 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 $2.0 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 — 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 October 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Operating Expenses $ 84,861 $ 62,943 $ 21,918 34.8 %
Operating Expenses as a Percentage of Revenue 12.7 % 13.9 % (1.2) % (8.6) %
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.
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Three Months Ended October 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
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 %
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 October 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Provision for Income Taxes $ 13,421 $ 7,007 $ 6,414 91.5 %
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.
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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 October 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Revenue
Agriculture $ 493,324 $ 281,506 $ 211,818 75.2 %
Construction 86,403 79,735 6,668 8.4 %
International 89,046 92,734 (3,688) (4.0) %
Total $ 668,773 $ 453,975 $ 214,798 47.3 %
Income Before Income Taxes
Agriculture $ 42,044 $ 19,618 $ 22,426 114.3 %
Construction 6,065 3,564 2,501 70.2 %
International 8,488 6,260 2,228 35.6 %
Segment Income Before Income Taxes 56,597 29,442 27,155 92.2 %
Shared Resources (1,919) (619) (1,300) n/m
Total $ 54,678 $ 28,823 $ 25,855 89.7 %
Agriculture
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 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
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 31.4% in the third quarter of fiscal 2022 to 34.3% in the third quarter of fiscal 2023.
International
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%
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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
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 $1.9 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.
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Nine Months Ended October 31, 2022 Compared to Nine Months Ended October 31, 2021
Consolidated Results
Revenue
Nine Months Ended October 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Equipment $ 1,240,579 $ 878,528 $ 362,051 41.2 %
Parts 254,974 208,464 46,510 22.3 %
Service 101,847 89,405 12,442 13.9 %
Rental and other 28,923 27,914 1,009 3.6 %
Total Revenue $ 1,626,323 $ 1,204,311 $ 422,012 35.0 %
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.
Gross Profit
Nine Months Ended October 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Gross Profit
Equipment $ 170,201 $ 105,944 $ 64,257 60.7 %
Parts 82,812 62,280 20,532 33.0 %
Service 66,559 60,091 6,468 10.8 %
Rental and other 11,401 10,160 1,241 12.2 %
Total Gross Profit $ 330,973 $ 238,475 $ 92,498 38.8 %
Gross Profit Margin
Equipment 13.7 % 12.1 % 1.6 % 13.2 %
Parts 32.5 % 29.9 % 2.6 % 8.7 %
Service 65.4 % 67.2 % (1.8) % (2.7) %
Rental and other 39.4 % 36.4 % 3.0 % 8.2 %
Total Gross Profit Margin 20.4 % 19.8 % 0.6 % 3.0 %
Gross Profit Mix
Equipment 51.5 % 44.4 % 7.1 % 16.0 %
Parts 25.0 % 26.1 % (1.1) % (4.2) %
Service 20.1 % 25.2 % (5.1) % (20.2) %
Rental and other 3.4 % 4.3 % (0.9) % (20.9) %
Total Gross Profit Mix 100.0 % 100.0 %
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.
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Operating Expenses
Nine Months Ended October 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Operating Expenses $ 217,841 $ 176,460 $ 41,381 23.5 %
Operating Expenses as a Percentage of Revenue 13.4 % 14.7 % (1.3) % (8.8) %
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
Nine Months Ended October 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 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)
Nine Months Ended October 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Interest and other income $ 3,170 $ 1,936 $ 1,234 63.7 %
Floorplan interest expense (1,087) (1,027) 60 5.8 %
Other interest expense (3,803) (3,292) 511 15.5 %
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
Nine Months Ended October 31, Increase/ Percent
2022 2021 Decrease Change
(dollars in thousands)
Provision for Income Taxes $ 27,656 $ 14,521 $ 13,135 90.5 %
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 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 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.
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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.
Nine Months Ended October 31, Increase/ Percent
2022 2021 (Decrease) Change
(dollars in thousands)
Revenue
Agriculture $ 1,160,829 $ 730,422 $ 430,407 58.9 %
Construction 223,389 229,286 (5,897) (2.6) %
International 242,105 244,603 (2,498) (1.0) %
Total $ 1,626,323 $ 1,204,311 $ 422,012 35.0 %
Income Before Income Taxes
Agriculture $ 83,387 $ 42,910 $ 40,477 94.3 %
Construction 13,197 6,518 6,679 102.5 %
International 18,683 9,498 9,185 96.7 %
Segment Income Before Income Taxes 115,267 58,926 56,341 95.6 %
Shared Resources (3,855) (793) (3,062) n/m
Total $ 111,412 $ 58,133 $ 53,279 91.7 %
Agriculture
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 $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
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 $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 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 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
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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
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 $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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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 October 31, Nine Months Ended October 31,
2022 2021 2022 2021
(dollars in thousands, except per share data)
Adjusted Net Income
Net Income $ 41,257 $ 21,816 $ 83,756 $ 43,612
Adjustments
Impairment charges — — — 1,498
Ukraine remeasurement (gain) / loss (1) 234 (113) 549 (296)
Total Pre-Tax Adjustments 234 (113) 549 1,202
Adjusted Net Income $ 41,491 $ 21,703 $ 84,305 $ 44,814
Adjusted Diluted EPS
Diluted EPS $ 1.82 $ 0.97 $ 3.70 $ 1.93
Adjustments (2)
Impairment charges — — — 0.07
Ukraine remeasurement (gain) / loss (1) 0.01 (0.01) 0.02 (0.02)
Total Pre-Tax Adjustments 0.01 (0.01) 0.02 0.05
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 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.
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 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
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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, 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
Cash Flow Provided by (Used for) Operating Activities
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. 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 nine months of fiscal 2023.
Cash Flow Used for Investing Activities
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 $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 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.
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, 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
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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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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.