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Item 7. Management’s Discussion and Analysis

2023-03-30 compared with 2022-04-01 · 184 added, 195 removed, 391 unchanged (49% of the section changed)

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You should review the "Information Regarding Forward-Looking Statements" in this Item 7 and "Risk Factors" presented under Item 1A for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis in this annual report.

A discussion of changes in our Financial Results and Cash Flow Comparisons from fiscal year 2020 to fiscal year 2021 has been omitted from this Form 10-K, but may be found in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, filed with the SEC on March 31, 2021.

A discussion of changes in our Financial Results and Cash Flow Comparisons from fiscal year 2021 to fiscal year 2022 has been omitted from this Form 10-K, but may be found in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended January 31, 2022, filed with the SEC on April 1, 2022.

BUSINESS DESCRIPTION

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We are subject to a number of factors that affect our business including those factors discussed in the sections in this annual report entitled "Risk Factors" and "Information Regarding Forward-Looking Statements." Certain of these external factors include, but are not limited to, the following:

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Russia/Ukraine Geopolitical Conflict

As discussed in Risk Factors and Note 22, to the consolidated Financial Statements, our Ukrainian operations closed for a period of time.

While some have reopened others may remain closed indefinitely or perhaps permanently.

To the extent the conflict continues, our International revenues and profits will be adversely affected.

Impact of COVID-19 Pandemic on the Company

The outbreak and global spread of COVID-19, which was declared a pandemic by the World Health Organization and a national emergency by the President of the United States in March 2020, continues to have an impact on society, economies, financial markets, and businesses.

While the Company's products and services were determined to be an essential business, the pandemic has had an impact on our business operations, existing employees and ability to find new employees, customers, and suppliers.

Uncertainty remains regarding the magnitude and duration of the pandemic and the resulting financial effects and will depend on future developments including the efficacy of vaccines, the spread of COVID-19 variants, and the extent of governmental responses, including potential vaccine or testing mandates.

On November 5, 2021, the Department of Labor's Occupational Safety and Health Administration ("OSHA") announced an Emergency Temporary Standard ("ETS") requiring all employers with at least 100 employees to ensure their employees are fully vaccinated or require weekly testing of unvaccinated employees.

On January 13, 2022, the US Supreme Court granted emergency relief to stay the implementation of the ETS and on January 26, 2022, OSHA withdrew the standard.

Although OSHA withdrew the vaccination and testing ETS as an enforceable emergency temporary standard, the agency is not withdrawing the ETS as a proposed rule.

The agency is prioritizing resources and is focusing on finalizing a permanent COVID-19 Healthcare Standard.

The ultimate impact of a permanent standard on the Company, if one were to be adopted, is currently unknown and difficult to predict.

The Company has assessed the impacts of the COVID-19 pandemic on its results of operations for the fiscal year ended January 31, 2022, and although there have been challenges, no material adverse impacts were identified.

We continue to monitor developments involving our workforce, customers, and suppliers and continue to take steps to mitigate against additional impacts.

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 have been, and could continue to 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 for the Company, while the customer support and sales teams have remained in Ukraine.

For the fiscal year ended January 31, 2023, Titan Machinery Ukraine's revenues are down approximately 40.5% from the prior fiscal year.

As of January 31, 2023, the Company had total assets of $27.4 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 Company assets in Ukraine as of January 31, 2022 were $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.

Supply Chain Disruptions

In recent months, we have seen increasing supply chain disruptions, including country of origin production and port delays.

Additionally, trucker, dockworker, and labor shortages, a surge of consumer demand, and other factors have led to industry-wide delays.

In response, we have been, and expect to continue to be, proactive in ordering inventory, parts, and components to ensure our operations can continue without significant delay;

however, we have experienced price increases, disruptions and delays on delivery of certain products.

Equipment availability continues to be challenging as supply chain disruptions throughout 2021 continued throughout 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.

The timing of the completion of equipment and the resulting delivery to the end customer can shift 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 have been further complicated by labor shortages as well as the announcement by CNH Industrial that it will be implementing an equipment allocation methodology to determine production slots for calendar year 2023.

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.

Macroeconomic and Industry Factors

Our Agriculture and International businesses are primarily driven by the demand for agricultural equipment for use in the production of food, fiber, feed grain and renewable energy.

home and garden applications;

and the maintenance of commercial, residential and government properties.

Agriculture industry factors such as changes in agricultural commodity prices and net farm income, have an effect on customer sentiment and their ability to secure financing for equipment purchases.

Macroeconomic and industry factors that affect commodity prices and net farm income include changing worldwide demand for agriculture commodities, crop yields and supply disruptions caused by weather patterns and crop diseases, crop stock levels, production costs, and changing U.S.

dollar foreign currency exchange rates.

dollar foreig n currency exchange rates.

Based on U.S.

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Federal government's direct farm program payments.

Based on its February 2022 report, the USDA projected net farm income for calendar year 2022 to decrease 4.5%, as compared to calendar year 2021.

Based on its February 2023 report, the USDA projected net farm income for calendar year 2023 to decrease 15.9%, as compared to calendar year 2022, but still remain above historical levels.

Our Construction business is primarily impacted by the demand for construction equipment for use in private and government commercial, residential, and infrastructure construction;

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Likewise, any decline in federal allocations to public infrastructure spending over the next few years should negatively impact our future results of operations.

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Seasonality & Weather

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In addition, the fourth quarter typically is a significant period for equipment sales in the U.S.

because of our customers’ year-end tax planning considerations, the timing of dealer incentives and the increase in availability of funds from completed harvests and construction projects.

because of our

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customers’ year-end tax planning considerations, the timing of dealer incentives and the increase in availability of funds from completed harvests and construction projects.

Seasonal weather trends, particularly severe wet or dry conditions, can have a significant impact on regional agricultural and construction market performance by affecting crop production and the ability to undertake construction projects.

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• CNH Industrial’s product prices and incentive and discount programs;

• CNH Industrial's supply of inventory;

• CNH Industrial's supply of inventory and ability to meet delivery timelines;

• CNH Industrial's implementation of an equipment allocation methodology for use in determining production slots in calendar year 2023;

• CNH Industrial's offering of floorplan payable financing for the purchase of a substantial portion of our inventory;

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Such disruptions in the overall economy and financial markets and the related reduction in consumer confidence in the economy, slow activity in the capital markets, negatively affect access to credit on commercially acceptable terms, and may adversely impact our customers' access to credit and the terms of any such credit.

However, if retail interest rates remain low, our business may be positively affected by customers who find financing purchases of our equipment more attractive due to lower borrowing costs.

However, if retail interest rates continue to rise, our business may be negatively affected by customers who find financing purchases of our equipment less attractive due to higher borrowing costs.

Our business is also particularly dependent on our access to credit markets to manage inventory and finance acquisitions.

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To date, in those instances in which we have experienced cost increases, we have been able to increase selling prices to offset much of the increases and expect to continue to do so in the future.

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Significant Items Impacting Our Financial Position and Results of Operations

Jaycox Acquisition

On December 1, 2021, we continued our strategy of acquiring dealerships in desired market areas with our acquisition of Jaycox Implement ("Jaycox").

Jaycox consists of three CaseIH agriculture dealership locations in Worthington and Luverne,

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Minnesota and Lake Park, Iowa.

Heartland Acquisition

On August 1, 2022 we acquired all interests of three entities, Heartland Agriculture, LLC, Heartland Solutions, LLC, and Heartland Leveraged Lender, LLC, (collectively referred to as "Heartland Companies").

The acquired business consisted of 12 CaseIH commercial application agriculture locations, in the states of Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota, Washington, and Wisconsin.

Our acquisition of these entities provides the Company the opportunity for synergies due to overlap of our footprints, which allows 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.

Total cash consideration paid for the business was $94.4 million, which was financed through available cash resources and line of credit availability.

The locations of the 12 Heartland Companies are included within our Agriculture segment.

Mark's Machinery Acquisition

On April 1, 2022, we acquired certain assets of Mark's Machinery, Inc.

The acquired business consisted of two agricultural equipment stores in Wagner and Yankton, South Dakota.

Total cash consideration paid for the business was $7.7 million which was financed through available cash resources.

In conjunction with the acquisition, we purchased the real estate for $2.5 million which was financed with available cash and long term debt.

The three Jaycox locations are included within our Agriculture segment.

The two Mark's Machinery locations are included within our Agriculture segment.

Fargo Tractor Divestiture

On March 1, 2022, we divested our consumer products store in Fargo, ND.

The sale of this location resulted in a $1.4 dollar gain which is included in fiscal 2023 consolidated operating expenses.

The gain on the sale is included in the Construction segment.

Montana and Wyoming Divestiture

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The gain on the sale is included in the Construction segment.

HorizonWest Acquisition

On May 4, 2020, the Company acquired certain assets of HorizonWest Inc.

This acquired Case IH agriculture dealership complex consisted of three agriculture equipment stores in Scottsbluff and Sidney, Nebraska and Torrington, Wyoming, which expands the Company's agriculture presence in Nebraska and into Wyoming.

The total consideration transferred for the acquired business was $6.8 million paid in cash, which the Company financed through available cash resources and capacity under our existing floorplan payable and other credit facilities.

The three HorizonWest dealerships are included within our Agriculture segment.

Critical Accounting Policies and Use of Estimates

In the preparation of financial statements prepared in conformity with U.S.

generally accepted accounting principles ("GAAP"), we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosures.

While we believe the estimates and judgments we use in preparing our financial statements are appropriate, they are subject to future events and uncertainties regarding their outcome and therefore actual results may materially differ from these estimates.

We describe in Note 1, Business Activity and Significant Accounting Polices, of the Notes to our Consolidated Financial Statements the significant accounting policies used in preparing the consolidated financial statements.

We consider the following items in our consolidated financial statements to require significant estimation or judgment.

Revenue Recognition

Equipment revenue transactions include the sale of agricultural and construction equipment and often include both cash and noncash consideration received from our customers, with noncash consideration in the form of used, trade-in, equipment assets.

The amount of revenue recognized in the sale transaction is dependent on the value assigned to the trade-in asset.

Significant judgment is required to estimate the value of trade-in assets.

We assign value based on the estimated selling price for that piece of equipment in the applicable market, less a gross profit amount to be realized at the time the trade-in asset is sold and an estimate of any reconditioning work required to ready the asset for sale.

We estimate future selling prices of trade-in assets using various external industry data and relevant internal information, and consider the impact of various factors including model year, hours of use, overall condition, and other equipment specifications.

Our estimates of the value of trade-in assets are impacted by changing market values of used equipment and the availability of relevant and reliable third-party data.

In instances in which relevant third-party information is not available, the value assigned to trade-in equipment is dependent on internal judgments.

New and used equipment inventories are stated at the lower of cost (specific identification) or net realizable value.

Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

The majority of our used equipment inventory is acquired through trade-ins from our customers and is initially measured and recognized based on the estimated future selling price of the equipment, less a gross profit amount to be realized when the trade-in asset is sold and an estimate of any reconditioning work required to ready the asset for sale.

Subsequent to the initial recognition, all new and used equipment inventories are subject to lower of cost or net realizable value assessments.

We estimate net realizable value using internal information, management judgment and third-party data that considers various factors including age and condition of equipment, hours of use and market conditions.

Generally, used equipment prices are more volatile to changes in market conditions than prices for new equipment due to incentive programs that may be offered by manufacturers to assist in the sale of new equipment.

We review our equipment inventory values and adjust them whenever the carrying amount exceeds the estimated net realizable value.

Parts inventories are valued at the lower of average cost or net realizable value.

We estimate net realizable value of our parts inventories based on various factors including aging and sales history of each type of parts inventory.

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Impairment of Long-Lived Assets

Our long-lived assets consist primarily of property and equipment and operating lease assets.

We review these assets for potential impairment whenever events or circumstances indicate that the carrying value may not be recoverable.

Recoverability is measured by comparing the estimated future undiscounted cash flows of such assets to their carrying values.

If the estimated undiscounted cash flows exceed the carrying value, the carrying value is considered recoverable and no impairment recognition is required.

However, if the sum of the undiscounted cash flows is less than the carrying value of the asset, the second step of the impairment analysis must be performed to measure the amount of the impairment, if any.

The second step of the impairment analysis compares the estimated fair value of the long-lived asset to its carrying value and any amount by which the carrying value exceeds the fair value is recognized as an impairment charge.

When reviewing long-lived assets for impairment, we group long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

Long-lived assets deployed and used by individual store locations are reviewed for impairment at the individual store level.

Other long-lived assets shared across stores within a segment or shared across segments are reviewed for impairment on a segment or consolidated level as appropriate.

During our 2022 fiscal year, we determined that events or circumstances were present that may indicate that the carrying amount of certain of our store long-lived assets might not be recoverable.

The events or circumstances which indicated that certain of our store long-lived assets might not be recoverable included a current period operating loss combined with historical losses and anticipated future operating losses within certain of our stores, or an expectation that a long-lived asset (or asset group) will be disposed of before the end of its previously estimated useful life.

In light of these circumstances, we performed step one of the impairment analysis for these assets, which have a combined carrying value of $25.8 million, to determine if the asset values are recoverable.

In certain cases, the analysis indicated that the carrying value is not recoverable.

The aggregate carrying value of such assets totaled $5.2 million.

Based on this conclusion, we performed step two of the impairment analysis and estimated the fair value of these assets using an income approach that incorporated unobservable inputs including estimated forecasted net cash flows generated from the use and disposition of these assets.

Step two of the analysis indicated that an impairment charge in the amount of $0.4 million was necessary, which related to the International segment.

In all other cases, in which the aggregate carrying value of such assets totaled $20.6 million, our analyses indicated that the carrying values are recoverable based on our estimates of future undiscounted cash flows under step one of the impairment analysis.

Our impairment analyses require significant judgment, including identification of the grouping of long-lived and other assets and liabilities for impairment testing, estimates of future cash flows arising from these groups of assets and liabilities, and estimates of the remaining useful lives of the long-lived assets being evaluated.

Our estimates inherently include a degree of uncertainty and are impacted by macroeconomic and industry conditions, the competitive environment and other factors.

Adverse changes in any of these factors in future periods could result in impairment charges in future periods which could materially impact our results of operations and financial position.

In determining our provision for (benefit from) income taxes, we must make certain judgments and estimates, including an assessment of the realizability of our deferred tax assets.

In evaluating our ability to realize the benefit of our deferred tax assets we consider all available positive and negative evidence, including our historical operating results and our expectation of future taxable income, the availability to implement prudent tax-planning strategies, and the carryforward periods over which the assets may be realized.

These assumptions require significant judgment and estimation.

In reviewing our deferred tax assets as of January 31, 2022, we concluded that a full valuation allowance continued to be warranted on our Ukrainian subsidiary.

It was also concluded that a full valuation allowance was warranted on our German subsidiary which was previously only a partial valuation allowance.

We also recorded a full valuation allowance on our Luxembourg holding company.

Due to improved performance, a partial release of a valuation allowance for the Company's Bulgarian subsidiary was recorded.

In total, valuation allowances of $6.0 million exist for our international entities as of January 31, 2022.

At the end of fiscal year ended January 31, 2021, the Company concluded, a full valuation allowance continued to be warranted in certain jurisdictions.

It was also concluded that a full valuation allowance for the Company's Ukrainian subsidiary was warranted and a partial valuation allowance for the Company's German subsidiary was warranted, as such the Company recorded an additional $3.8 million valuation allowance for these two subsidiaries.

In total, valuation allowances of $6.1 million existed for certain of our international entities as of January 31, 2021.

The initial recognition of, and any changes in, a deferred tax asset valuation allowance are recorded to the provision for income taxes and impacts our effective tax rate.

Our assessment of the need for and magnitude of valuation allowances for

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our deferred tax assets may be impacted by changes in tax laws, our assumptions regarding the ability to generate future taxable income and the availability of tax-planning strategies.

Changes in any of these factors could lead to a change in the recognized valuation allowance which may impact our future results of operations and financial position.

New Accounting Pronouncements

Refer to Note 1, Business Activity and Significant Accounting Polices, of the Notes to our Consolidated Financial Statements for a description of new accounting pronouncements recently adopted or not yet adopted and the impact or anticipated impact of such pronouncements to our consolidated financial statements.

Jaycox Acquisition

On December 1, 2021, we acquired certain assets of Jaycox Implement ("Jaycox").

The acquired business consisted of three CaseIH agriculture dealership locations in Worthington and Luverne, Minnesota and Lake Park, Iowa.

Total cash consideration paid for the business was $28.2 million which was financed through available cash resources.

In conjunction with the acquisition, we purchased the real estate for $5.5 million which was financed with available cash and long term debt.

The three Jaycox locations are included within our Agriculture segment.

Key Financial Metrics

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We do not distinguish relocated or newly-expanded stores in this same-store analysis.

Closed stores are excluded from the same-store analysis.

Absorption is an industry term that refers to the percentage of an equipment dealer's operating expense covered by the combined gross profit from parts, service and rental fleet activity.

We calculate absorption 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.

We calculate absorption by dividing our gross profit from

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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.

We believe that absorption is an important management metric because during economic down cycles our customers tend to postpone new and used equipment purchases while continuing to run, maintain and repair their existing equipment.

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Refer to the Non-GAAP Financial Measures section for a reconciliation of Adjusted EBITDA to net income.

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Key Financial Statement Components

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Costs of other revenue represent costs associated with equipment rental, such as depreciation, maintenance and repairs, as well as costs associated providing transportation, hauling, parts freight, GPS subscriptions and damage waivers, including, among other items, drivers' wages, truck depreciation, fuel costs, shipping costs and our costs related to damage waiver policies.

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Operating Expenses

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This includes long-term debt used to finance the purchase of real estate and vehicles.

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Results of Operations

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Gross profit margin 37.9 % 36.6 %

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The following table sets forth our statements of operations data expressed as a percentage of revenue for the fiscal years indicated.

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Operating Expenses 13.6 % 14.1 %

Impairment of Goodwill — % 0.1 %

Impairment of Intangible and Long-Lived Assets — % 0.1 %

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Total Revenue $ 2,209,306 $ 1,711,906 $ 497,400 29.1 %

The increase in total revenue for fiscal 2022, as compared to fiscal 2021, was primarily the result of Company-wide same-store sales increase of 23.5% over the prior fiscal year and our acquisitions of HorizonWest and Jaycox, completed in May 2020 and December 2021, respectively.

The strong same store sales increase was primarily driven by strong agriculture equipment sales due to higher commodity prices, higher net farm income, and good growing conditions in our international footprint.

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The increase in total revenue for fiscal 2023, as compared to fiscal 2022, was primarily the result of Company-wide same-store sales increase of 22.4% over the prior fiscal year and our acquisitions of Jaycox Implement, Mark's Machinery, and the Heartland Companies, completed in December 2021, April 2022, and August 2022, respectively, which was partially offset by the divestitures in Billings, Great Falls, and Missoula, Montana and Gillette, Wyoming, in January 2022, and Fargo, North Dakota in March 2022.

The strong same store sales increase was primarily driven by agriculture equipment sales, which benefited from high demand levels that were supported by higher commodity prices and higher net farm income.

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Year Ended January 31, Increase/ Percent

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Total Gross Profit Mix 100.0 % 100.0 %

Gross profit increased 27.3% or $71.4 million from fiscal 2021 to fiscal 2022, primarily due to higher revenue and gross profit from our equipment, parts, and service business.

Gross profit increased 32.2% or $107.1 million from fiscal 2022 to fiscal 2023, primarily due to higher revenue and gross profit from our equipment and parts business.

Gross profit margin increased from 19.4% in fiscal 2022 to 19.9% in fiscal 2023.

The increase in overall gross profit margin was primarily due to stronger equipment margins, which were positively impacted by favorable end market conditions, healthy inventory, and a $6.4 million increase in the amount earned under manufacturer incentive programs.

Our company-wide absorption rate improved to 84.6% for fiscal 2022 as compared to 77.7% during fiscal 2021 as the increase in gross profit from parts and service combined with lower floorplan interest expenses more than offset the increase in operating expenses compared to that of fiscal 2021.

The overall absorption rate in fiscal 2022 was positively impacted by a one-time gain of $5.7 million on the fourth quarter divestiture of three Montana and one Wyoming stores in our Construction segment.

The increase in overall gross profit margin was primarily due to stronger equipment margins, which were positively impacted by favorable end market conditions.

Our Company-wide absorption rate declined to 82.7% for fiscal 2023 as compared to 84.6% during fiscal 2022.

The absorption rate in both years was favorably impacted by gains recognized on divestitures in our Construction segment.

There was a gain of $1.4 million recognized on the divestiture of our consumer products store in North Dakota in the fist quarter of fiscal 2023, and a $5.7 million gain recognized on the divestiture of one Wyoming and three Montana stores in the fourth quarter of fiscal 2022.

Excluding these divestiture related gains, absorption was flat at 82.2%.

Operating Expenses

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Operating expenses for fiscal 2023 increased $60.5 million, as compared to fiscal 2022.

The increase in operating expenses was primarily due to variable expenses associated with increased sales, which was partially offset by a one-time gain of $5.7 million on the fourth quarter fiscal 2022 divestiture of three Montana and one Wyoming stores in our Construction segment.

The increase in operating expenses was primarily due to variable expenses associated with increased sales as well as acquisitions that have occurred in the last fourteen months.

In fiscal 2023, operating expenses as a percentage of revenue decreased to 13.6% from 14.1% in fiscal 2022.

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

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Impairment Charges

Year Ended January 31, Percent

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(dollars in thousands)

Impairment of Goodwill $ — $ 1,453 $ (1,453) n/m

Impairment of Intangible and Long-Lived Assets 1,498 1,727 (229) (13.3) %

During fiscal 2022, the Company did not recognize any goodwill impairment charges and recognized a total of $1.5 million of impairment charges related to certain intangible and long-lived assets.

In fiscal 2021, the Company recognized $1.5 million of impairment charges related to goodwill and $1.7 million of impairment charges related to other intangible and long lived assets.

The fiscal 2022 and 2021 impairment expenses were primarily related to the impairment of goodwill and certain other intangible assets in our International segment.

Impairment of Intangible and Long-Lived Assets — 1,498 (1,498) n/m

During fiscal 2023, the Company did not recognize any impairment charges.

In fiscal 2022, the Company recognized $1.5 million of impairment charges related to certain intangible and long-lived assets, in our International segment.

Other Income (Expense)

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(dollars in thousands)

Interest and other income (expense) $ 2,431 $ 527 $ 1,904 n/m

Interest and other income (expense) $ 3,862 $ 2,431 $ 1,431 58.9 %

Floorplan interest expense (1,875) (1,175) 700 59.6 %

Other interest expense (5,069) (4,537) 532 11.7 %

The increase in Interest and other income (expense) compared to fiscal 2021 is primarily the result of fluctuations in foreign currency exchange rates, primarily the Ukrainian currency.

The decrease in floorplan interest expense for fiscal 2022, as compared to fiscal 2021, was due to an overall lower interest rate environment as well as lower borrowings.

The increase in other interest expense in fiscal 2022 is the result of an increased amount of long term debt resulting from real estate purchased in fiscal 2022.

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

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

The increase in floorplan interest expense for fiscal 2023, as compared to fiscal 2022, was primarily due to increased interest-bearing borrowings.

The increase in other interest expense in fiscal 2023 is the result of an increased amount of long term debt resulting from real estate purchased via acquisition or the buyout of previously leased facilities in fiscal 2022 and 2023.

Provision for Income Taxes

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Provision for Income Taxes $ 33,373 $ 20,854 $ 12,519 60.0 %

Our effective tax rate decreased from 37.1% in fiscal 2021 to 24.0% in fiscal 2022.

The Company's effective tax rate decreased due to changes in valuation allowances recognized for deferred tax assets.

In fiscal 2021, the Company added a full valuation allowance for the Company's Ukrainian subsidiary as well as a partial valuation allowance for the Company's German subsidiary.

In fiscal 2022, the Company released a portion of the valuation allowance on its Bulgarian subsidiary's deferred tax assets, which was offset by a valuation allowance on its Luxembourg holding company.

Our effective tax rate increased from 24.0% in fiscal 2022 to 24.7% in fiscal 2023.

The effective tax rate for each of the years ended January 31, 2023 and 2022, is subject to variation due to factors such as impact of certain discrete items, mainly the vesting of share-based compensation, the mix of domestic and foreign income and the impact of valuation allowances on certain of our foreign deferred tax assets.

See Note 14 to our consolidated financial statements for further details on our effective tax rate.

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Segment Results

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Agriculture $ 102,733 $ 60,567 $ 42,166 69.6 %

Construction 15,543 186 15,357 n/m

International 12,552 (6,025) 18,577 n/m

Construction 18,569 15,543 3,026 19.5 %

International 20,197 12,552 7,645 60.9 %

Segment income before income taxes 141,499 88,662 52,837 59.6 %

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Agriculture segment revenue for fiscal 2023 increased 48.8% or $525.0 million compared to the same period last year.

Agriculture same-store sales increased 19.3% for fiscal 2022, as compared to fiscal 2021.

Equipment sales were driven by increased equipment demand due to higher commodity prices and higher net farm income.

The HorizonWest and Jaycox acquisitions, which were completed in May 2020 and December 2021, respectively, also contributed to the total sales growth for the segment.

The higher revenue was driven primarily by an increase in same-store sales of 29.3% for fiscal 2023, as compared to fiscal 2022, 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 demand for equipment due to higher commodity prices and higher net farm income.

Agriculture segment income before income taxes for fiscal 2023 improved by $42.2 million or 69.6% compared to fiscal 2022.

The improvement in segment results was the result of stronger equipment margins which were positively impacted by favorable end market conditions, healthy inventory, and a $5.1 million increase in the amount earned under manufacturer incentive programs.

Decreased inventory levels resulted in lower floorplan interest expense which also contributed to the improvement in segment results.

Construction segment revenue for fiscal 2022 increased 3.7% or $11.4 million compared to fiscal 2021 due to a same-store sales increase of 14.8% which more than offset our divestiture of the Phoenix and Tucson stores in the fourth quarter of fiscal 2021.

Higher equipment sales were driven by increased construction activity throughout the footprint.

The improvement in segment results was primarily the result of higher equipment revenue along with stronger gross profit margin on equipment driven by increased demand.

Construction segment revenue for fiscal 2023 decreased 2.7% or $8.7 million compared to fiscal 2022.

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 25.7%.

Higher same-store sales were driven by increased construction activity throughout our footprint.

The Construction segment income before income taxes was $18.6 million for fiscal 2023 compared to income of $15.5 million for the prior year.

The improvement in segment results was the result of improved equipment margins and lower floorplan and other interest expense.

The segment also benefited from a $5.7 million gain on the divestiture of our Billings, Great Falls, and Missoula, Montana and Gillette, Wyoming locations.

The improvement 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 26.5% in fiscal 2022 to 30.2% in fiscal 2023.

The prior year benefited from a $5.7 million gain on the divestitures of the Billings, Great Falls, and Missoula, Montana and Gillette, Wyoming stores in January 2022.

International

International segment revenue for fiscal 2022 increased 45.2% or $99.0 million compared to fiscal 2021.

Higher segment revenue is being driven by higher commodity prices as well as favorable growing conditions for much of our farming footprint, which had a positive impact on all sources of sales, but primarily equipment sales.

Our International segment income before income taxes was $12.6 million for fiscal 2022, compared to loss before income taxes of $6.0 million for fiscal 2021.

The higher segment results were primarily the result of increased equipment sales and equipment gross profit margin including a $1.3 million increase in manufacturer incentive programs.

Impairment charges of $1.5 million were recognized in fiscal 2022, compared to impairment charges of $2.3 million in fiscal 2021.

International segment revenue for fiscal 2023 decreased 5.9% or $18.9 million compared to fiscal 2022.

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 higher commodity prices which drove demand for equipment sales, in fiscal 2023.

Revenue, net of the effect of foreign currency fluctuations, was up 4.2% or $13.3 million compared to fiscal 2022.

The segment was also negatively impacted by a 40.5% decrease in revenues from our Ukrainian subsidiary due to the Russia-Ukraine conflict, compared to fiscal 2022.

Our International segment income before income taxes was $20.2 million for fiscal 2023, compared to $12.6 million for fiscal 2022.

The higher segment results were primarily the result of improved gross profit margin for our three main revenue streams, equipment, parts, and service.

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

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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

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planned to be unallocated, unallocated balances may occur.

Shared Resource loss before income taxes was $1.8 million for fiscal 2022 compared to income before income taxes of $2.2 million for fiscal 2021.

Since these allocations are set early in the year, and a portion is planned to be unallocated, unallocated balances may occur and cause a difference in reported shared resource expense.

Shared Resource loss before income taxes was $6.3 million for fiscal 2023 compared to $1.8 million for fiscal 2022.

Aside from the allocation difference, the lower shared resources results were driven by $1.1 million o f acquisition related expenses incurred for the Heartland Companies acquisition.

Non-GAAP Financial Measures

To supplement our net income and diluted earnings per share ("diluted EPS"), both GAAP measures, we present, and our management utilizes, adjusted net income, adjusted diluted EPS, and adjusted EBITDA, all non-GAAP financial measures.

Generally, these non-GAAP financial measures include adjustments for items such as ERP transition costs for fiscal year 2021, impairment charges, and foreign currency remeasurement gains/losses in Ukraine.

Generally, these non-GAAP financial measures include adjustments for items such as impairment charges and foreign currency remeasurement gains/losses in Ukraine.

Furthermore, we calculate adjusted EBITDA as our net income (loss), adjusted for net interest (excluding floorplan interest expense), income taxes, depreciation, amortization, and the adjustments included in our non-GAAP reconciliation as described above, for each of the respective periods.

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In addition, other companies may calculate these non-GAAP financial measures in a different manner, which may hinder comparability of our results with those of other companies.

Changes in Presentation of Non-GAAP Financial Measures

Beginning in the third quarter of fiscal 2022, the Company discontinued the use of the adjusted cash-flow measure and revised its presentation of two non-GAAP financials measures, Adjusted Net Income and Adjusted Diluted EPS, to better align with SEC guidance.

The adjustment for income tax valuation allowance, a non-cash tax expense related to the use of deferred tax assets in certain jurisdictions, will no longer be an adjustment included in these two non-GAAP financial measures.

For comparability, references to prior periods' non-GAAP financial measures have also been updated to show the effect of omitting the valuation allowance from Adjusted Net Income and Adjusted Diluted EPS - see tables below.

The following tables reconcile net income and diluted EPS, GAAP financial measures, to adjusted net income, adjusted diluted EPS, and adjusted EBITDA, all non-GAAP financial measures.

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$ 101,868 $ 66,047

ERP transition costs — 2,990

Impairment charges — 1,498

Ukraine remeasurement (gain) / loss 777 (263)

Total Pre-Tax Adjustments 1,235 7,344

Tax Effect of Adjustments (1) — 2,227

Total Adjustments (1) 777 1,235

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Adjustments (2)

ERP transition costs — 0.13

Impairment charges — 0.07

Ukraine remeasurement (gain) / loss 0.03 (0.01)

Total Pre-Tax Adjustments 0.06 0.32

Tax Effect of Adjustments (1) — 0.09

Total Adjustments (1) 0.03 0.06

Adjusted Diluted EPS $ 4.52 $ 2.98

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Year Ended January 31,

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EBITDA 165,168 113,248

ERP transition costs — 2,990

Impairment charges — 1,498

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Adjusted EBITDA $ 165,945 $ 114,483

(1) The tax effect of U.S.

related adjustments was calculated using a 26% tax rate, determined based on a 21% federal statutory rate and a 5% blended state income tax rate.

The tax effect of the Germany related adjustments was calculated using a 29% tax rate.

Included in the tax effect of the adjustments is the tax impact of foreign currency changes in Ukraine of $1.2 million for fiscal 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 or the impairment charge.

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

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As of January 31, 2023, the Company was in compliance with the financial covenants under its credit agreements.

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details on each of these credit facilities are disclosed in Note 8 to our consolidated financial statements included in this annual report.

Additional details on each of these credit facilities are disclosed in Note 8 to our consolidated financial statements included in this annual report.

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As of January 31, 2023, the Company was not subject to the fixed charge ratio covenant under the Bank Syndicate Agreement as our adjusted excess availability plus eligible cash collateral (as defined in the Bank Syndicate Agreement) was not less than 15% of the total amount of the credit facility.

Please refer to Note 8 to our consolidated financial statement included in Item 8 for further information regarding the Company's line of credit.

Our equipment inventory turnover increased to 3.4 times for fiscal 2022 compared to 2.0 times for fiscal 2021.

Our equipment inventories amount decreased 4.2% from January 31, 2021 to January 31, 2022.

The improvement in equipment turnover was due to the combination of the increase in equipment sales volume in fiscal 2022 as compared to fiscal 2021 and a decrease in our average equipment inventory over these time periods.

Our equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, increased to 58.2% as of January 31, 2022, from 52.1% as of January 31, 2021.

The increase in our equity in equipment inventory is primarily due to a high level of cash generation in fiscal 2022, which was applied against interest bearing floorplan payables.

Our equipment inventory turnover decreased slightly to 3.3 times for fiscal 2023 compared to 3.4 times for fiscal 2022.

Our equipment inventory balance increased 65.1% from January 31, 2022 to January 31, 2023.

The decrease in equipment turnover was primarily due to the increase in average equipment inventory in fiscal 2023 as compared to fiscal 2022 but was mostly offset by an increase in equipment cost of sales over these time periods.

Our equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, decreased to 51.7% as of January 31, 2023, from 58.2% as of January 31, 2022.

The decrease was primarily due to drawing on our floorplan loan with the Bank Syndicate to finance acquisitions in fiscal 2023.

Long-Term Debt Facilities

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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;

Our primary uses of cash have been to fund our operating activities, including the purchase of inventory and providing for other working capital needs;

meeting our debt service requirements;

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This will in turn depend on our future acquisition activity, operating performance, general economic conditions, and financial, competitive, business and other factors, some of which are beyond our immediate control.

Based on our current operational performance, we believe our cash flow from operations, available cash, and available borrowings under our existing credit facilities will be adequate to meet our liquidity needs for, at a minimum, the next 12 months.

In fiscal 2023, we used $10.0 million in cash for rental fleet purchases and $27.2 million in cash for property and equipment purchases and financed $6.4 million in property and equipment purchases with long-term debt and finance leases.

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In addition, if we pursue strategic acquisitions, we may require additional equity or debt financing to consummate the transactions, and we cannot assure you that we will succeed in obtaining this financing on favorable terms or at all.

If we incur additional indebtedness to finance any of these transactions, this may place increased

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demands on our cash flow from operations to service the resulting increased debt.

If we incur additional indebtedness to finance any of these transactions, this may place increased demands on our cash flow from operations to service the resulting increased debt.

Our existing debt agreements contain restrictive covenants that may restrict our ability to adopt any of these alternatives.

Any non-compliance by us under the terms of our debt agreements could result in an event of default which, if not cured, could result in the acceleration of our debt.

Any non-compliance by us under the terms

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of our debt agreements could result in an event of default which, if not cured, could result in the acceleration of our debt.

We have met all financial covenants under these credit agreements as of January 31, 2023.

If anticipated operating results create the likelihood of a future covenant violation, we would seek to work with our lenders on an appropriate modification or amendment to our financing arrangements.

We enter into contractual obligations in the ordinary course of business that may require future cash payments.

Such obligations include, but are not limited to, debt arrangements, leasing arrangements, and costs related to Information Technology ("IT"), including ERP expenses.

The Notes to the Consolidated Financial Statements provide additional information in regard to Long Term Debt (Note 10) and Leases (Note 13).

Other purchase obligations consist primarily of IT related expenses with estimated cash payments of $4.7 million for fiscal 2024, as well as a combined $4.7 million for fiscal years 2025, 2026, and 2027.

Cash Flow Provided By Operating Activities

Net cash provided by operating activities in fiscal 2023 was $10.8 million compared to $158.9 million in fiscal 2022.

The decrease in net cash provided by operating activities of $14.1 million from fiscal 2021 to fiscal 2022 is primarily the result of a consistent inventory balance and manufacturer floorplan payable balance during fiscal 2022 compared to a reduction in inventories in fiscal 2021, this was partially offset by an increase in receivables and prepaid expenses for fiscal 2022.

The decrease in net cash provided by operating activities is primarily the result of an increasing inventory balance and a decrease in deferred revenue which were partially offset by an increase in net income and manufacturer floorplan payable balance during fiscal 2023 compared to fiscal 2022.

Cash Flow Used For Investing Activities

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Net cash used for investing activities was $134.1 million in fiscal 2023, compared to $55.2 million in fiscal 2022.

In fiscal 2022, the Company used $37.6 million of cash, compared to use of $20.1 million in fiscal 2021, for additional investment in our rental fleet, vehicles, capital improvements, and purchases of real estate.

In addition, the Company utilized $33.6 million of cash in fiscal 2022, compared to use of $6.8 million in the prior fiscal year, for acquisitions.

The driver was an increase in acquisition activity, as the Company utilized $100.5 million of cash for acquisitions in fiscal 2023, compared to $33.6 million in the prior year.

Cash Flow Provided By (Used For) Financing Activities

Net cash used for financing activities was $35.3 million in fiscal 2022, compared to net cash used for financing activities of $117.9 million in fiscal 2021.

In fiscal 2022, net cash used for financing activities was the result of decreased non-manufacturer floorplan payables, which was reduced due to use of cash provided by operating activities.

Future Cash Requirements

We enter into contractual obligations in the ordinary course of business that may require future cash payments.

Such obligations include, but are not limited to, debt arrangements, leasing arrangements, and costs related to Information Technology ("IT"), including ERP expenses.

The Notes to the Consolidated Financial Statements provide additional information in regard to Long Term Debt (Note 10) and Leases (Note 13).

Other purchase obligations consist primarily of ERP related expenses with estimated cash payments of $4.4 million for fiscal 2023, $9.1 million combined for fiscal years 2024, 2025, and 2026.

Net cash provided by financing activities was $22.0 million in fiscal 2023, compared to net cash used for financing activities of $35.3 million in fiscal 2022.

In fiscal 2023, net cash provided by financing activities was the result of increased non-manufacturer floorplan payables, which was used to finance acquisitions in fiscal 2023.

Critical Accounting Policies and Use of Estimates

In the preparation of financial statements prepared in conformity with U.S.

We consider the following items in our consolidated financial statements to require significant estimation or judgment.

Revenue Recognition

The amount of revenue recognized in the sale transaction is dependent on the value assigned to the trade-in asset.

Significant judgment is required to estimate the value of trade-in assets.

Our estimates of the value of trade-in assets are impacted by changing market values of used equipment and the availability of relevant and reliable third-party data.

In instances in which relevant third-party information is not available, the value assigned to trade-in equipment is dependent on internal judgments.

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New and used equipment inventories are stated at the lower of cost (specific identification) or net realizable value.

Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

Subsequent to the initial recognition, all new and used equipment inventories are subject to lower of cost or net realizable value assessments.

We review our equipment inventory values and adjust them whenever the carrying amount exceeds the estimated net realizable value.

Parts inventories are valued at the lower of average cost or net realizable value.

We estimate net realizable value of our parts inventories based on various factors including aging and sales history of each type of parts inventory.

Impairment of Long-Lived Assets

Our long-lived assets consist primarily of property and equipment and operating lease assets.

We review these assets for potential impairment whenever events or circumstances indicate that the carrying value may not be recoverable.

Recoverability is measured by comparing the estimated future undiscounted cash flows of such assets to their carrying values.

If the estimated undiscounted cash flows exceed the carrying value, the carrying value is considered recoverable and no impairment recognition is required.

Long-lived assets deployed and used by individual store locations are reviewed for impairment at the individual store level.

Other long-lived assets shared across stores within a segment or shared across segments are reviewed for impairment on a segment or consolidated level as appropriate.

During our 2023 fiscal year, we determined that events or circumstances were present that may indicate that the carrying amount of certain of our store long-lived assets might not be recoverable.

In light of these circumstances, we performed step one of the impairment analysis for these assets, which have a combined carrying value of $12.6 million, to determine if the asset values are recoverable.

In all cases, our analyses indicated that the carrying values are recoverable based on our estimates of future undiscounted cash flows under step one of the impairment analysis.

Our estimates inherently include a degree of uncertainty and are impacted by macroeconomic and industry conditions, the competitive environment and other factors.

Adverse changes in any of these factors in future periods could result in impairment charges in future periods which could materially impact our results of operations and financial position.

In determining our provision for income taxes, we must make certain judgments and estimates, including an assessment of the realizability of our deferred tax assets.

These assumptions require significant judgment and estimation.

In reviewing our deferred tax assets as of January 31, 2023, we concluded that a full valuation allowance continued to be warranted on our Ukrainian and German subsidiaries and our Luxembourg holding company.

Due to continued improved performance, a release of the remaining valuation allowance on the Company's Bulgarian subsidiary was recorded.

In total, valuation allowances of $6.5 million exist for our international entities as of January 31, 2023.

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At the end of fiscal year ended January 31, 2022, the Company concluded a full valuation allowance continued to be warranted on our Ukrainian subsidiary.

It was also concluded that a full valuation allowance was warranted on our German subsidiary and we also recorded a full valuation allowance of our Luxembourg holding company.

Due to improved performance, a partial release of a valuation allowance for the Company's Bulgarian subsidiary was recorded.

In total, valuation allowances of $6.0 million existed for certain of our international entities as of January 31, 2022.

The initial recognition of, and any changes in, a deferred tax asset valuation allowance are recorded to the provision for income taxes and impacts our effective tax rate.

Our assessment of the need for, and magnitude of, valuation allowances for our deferred tax assets may be impacted by changes in tax laws, our assumptions regarding the ability to generate future taxable income and the availability of tax-planning strategies.

Changes in any of these factors could lead to a change in the recognized valuation allowance which may impact our future results of operations and financial position.

New Accounting Pronouncements

Information Regarding Forward-Looking Statements

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• our beliefs with respect to factors that will affect demand and seasonality of purchasing in the agricultural and construction industries;

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• our beliefs with respect to our primary supplier (CNH Industrial) of equipment and parts inventory;

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• our beliefs with respect to our employee relations;

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• our assumptions, beliefs and expectations with respect to past and future market conditions, including interest rates, and public infrastructure spending, new environmental standards, and the impact these conditions will have on our operating results;

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• our level of indebtedness and ability to comply with the terms of agreements governing our indebtedness;

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• the risks associated with the expansion of our business;

• the risks resulting from outbreaks or other public health crises, including COVID-19;

• the risks resulting from outbreaks or other public health crises, including the continuing impact of COVID-19 on our business;

• the potential inability to integrate any businesses we acquire;

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Other than as required by law, we undertake no obligation to update these forward-looking statements, even though our situation may change in the future.

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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-K

Item 7. Management’s Discussion and Analysis