Titan Machinery Inc. 10-Q

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, 2023. 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 February 2023 U.S. Department of Agriculture publications, the estimate of net farm income for calendar year 2023 indicated an approximate 15.9% decrease as compared to calendar year 2022, and an approximate 15.5% increase in net farm income for calendar year 2022 as compared to calendar year 2021. For the second quarter of fiscal 2024, our net income was $31.3 million, or $1.38 per diluted share, compared to a fiscal 2023 second quarter net income of $25.0 million, or $1.10 per diluted share. Significant factors impacting the quarterly comparisons were: • Revenue in the second quarter of fiscal 2024 increased by 29.4% compared to the second quarter of fiscal 2023. The revenue increase was led by additional revenue resulting from the acquisitions of the Heartland Companies and Pioneer Farm Equipment, in August 2022 and February 2023, respectively. In addition, total Company same-store sales also increased by 12.1% compared to the prior year second quarter (for a description of how we compute same-store sales, see discussion under Results of Operations), • Gross profit in the second quarter of fiscal 2024 increased 29.9% compared to the second quarter of fiscal 2023. The increase in gross profit was primarily the result of increased sales due to the aforementioned acquisitions and strong same-store sales. Supply Chain Equipment availability of certain product categories continues to be constrained as supply chain disruptions and labor shortages have caused many manufacturers to be unable to meet demand. Meanwhile, customer demand has remained strong, driven by favorable agriculture fundamentals. This has caused certain product categories to be supplied on an allocation basis with abnormally long lead times. While we continue to experience less than desired shipments of certain product categories, primarily high-horsepower tractors and self-propelled sprayers, there are other product categories for which we have been able to receive enough inventory to meet demand and also have stock available for sale. We will continue to work with our manufacturers to source the high demand equipment to fulfill as much customer demand as possible. Russian-Ukrainian Conflict In February 2022, Russian military forces invaded Ukraine, and although the length, impact, and outcome of the ongoing conflict in Ukraine is highly unpredictable, this conflict has led, and could continue to lead, to significant market and other disruptions, including instability in financial markets, supply chain interruptions, political and social instability, and increases in cyberattacks. We are actively monitoring the situation in Ukraine and assessing its impact on our business. For the six months ended July 31, 2023, Titan Machinery Ukraine's revenues are down approximately 13.6% from the prior year period. As of July 31, 2023, the Company had total assets of $33.5 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, 2023, was $27.4 million. 20 Table of Contents 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 2024 On August 29, 2023, the Company entered into a definitive purchase agreement to acquire J.J. O’Connor & Sons Pty. Ltd. ("O’Connors"), which operates 15 CaseIH dealership locations and one parts center in the states of New South Wales, South Australia, and Victoria in Southeastern Australia. In its most recently completed fiscal year ended June 30, 2023, O’Connors generated revenue of approximately $258 million. The Company plans to close on the acquisition in the fourth quarter of calendar 2023. The consideration paid is estimated to be $63 million, subject to final working capital and other purchase price closing adjustments. The acquisition will be accounted for in accordance with Accounting Standards Codification ("ASC") Topic 805, "Business Combinations". The Company plans to fund the acquisition with cash on hand and additional indebtedness under the floorplan and working capital loans of the Bank Syndicate. On September 1, 2023, the Company entered into Amendment No. 3 to the Third Amended and Restated Credit Agreement with the Bank Syndicate, the amendment increased the Floorplan loan capacity from $185 million to $250 million and the Revolver loan capacity from $65 million to $75 million. On June 1, 2023, the Company acquired certain assets of Midwest Truck. The acquired business consists of one location in Dawson, Minnesota. This location is included in the Company's Agriculture segment. The total consideration transferred for the acquired business was $4.0 million paid in cash which includes the purchase of the real estate. On May 1, 2023, the Company, through its German Subsidiary, Titan Machinery Deutschland GmbH, acquired certain assets of MAREP related to its full-service agriculture dealership businesses located in Mühlengeez and Radelübbe,Germany. Our acquisition of these assets from MAREP further expands our presence in the German market. The total consideration transferred for the acquired business was $4.4 million paid in cash, which includes the real estate of the Mühlengeez location. These locations are included in the Company's international segment. On February 1, 2023, the Company acquired certain assets of Pioneer Farm Equipment. The acquired business consists of five agriculture equipment stores in American Falls, Blackfoot, Idaho Falls, Rexburg, and Rupert, Idaho. These locations are included in the Company's Agriculture segment. The total consideration transferred for the acquired business was $19.5 million paid in cash, which includes $9.4 million for the purchase of the real estate. In connection with the acquisition, the Company acquired from CNH Industrial and certain other manufacturers equipment and parts inventory previously owned by Pioneer Farm Equipment. Upon acquiring these inventories, the Company was offered floorplan financing by the manufacturer. In total, the Company acquired inventory and recognized a corresponding liability of $12.7 million. The recognition of these inventories and associated financing liabilities are not included as part of the accounting for the business combination. Fiscal 2023 On August 1, 2022, the Company acquired all outstanding equity 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 prior to the acquisition, the Heartland Companies generated revenue of approximately $214 million. 21 Table of Contents 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 the Company's Agriculture segment. In its most recent fiscal year prior to the acquisition, Mark's Machinery, Inc. generated revenue of approximately $34.0 million. The total cash consideration paid for the acquired business was $ 7.7 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 has implemented a phased roll-out plan to integrate all of its domestic stores to the new ERP. We will continue the phased rollout 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, 2023. There have been no changes in our critical accounting policies and estimates since January 31, 2023. Results of Operations The results presented below include the operating results of any acquisition made during these periods, from the date of acquisition, as well as the operating results of any stores closed or divested during these periods, up to the date of the store closure. The period-to-period comparisons included below are not necessarily indicative of future results. Segment information is provided later in the discussion and analysis of our results of operations. Same-store sales for any period represent sales by stores that were part of the Company for the entire comparable period in the current and preceding fiscal years. We do not distinguish between relocated or recently expanded stores in this same-store analysis. Closed stores are excluded from the same-store analysis. Stores that do not meet the criteria for same-store classification are described as excluded stores throughout this Results of Operations section. Comparative financial data for each of our four sources of revenue are expressed below. Three Months Ended July 31, Six Months Ended July 31, 2023 2022 2023 2022 (dollars in thousands) (dollars in thousands) Equipment Revenue $ 480,122 $ 375,216 $ 909,498 $ 731,582 Cost of revenue 414,800 323,988 783,062 634,222 Gross profit $ 65,322 $ 51,228 $ 126,436 $ 97,360 Gross profit margin 13.6 % 13.7 % 13.9 % 13.3 % Parts Revenue $ 108,510 $ 77,693 $ 205,116 $ 146,255 Cost of revenue 73,086 52,706 138,190 100,015 Gross profit $ 35,424 $ 24,987 $ 66,926 $ 46,240 Gross profit margin 32.6 % 32.2 % 32.6 % 31.6 % Service Revenue $ 42,478 $ 33,365 $ 77,411 $ 62,887 Cost of revenue 14,208 11,072 26,617 21,832 Gross profit $ 28,270 $ 22,293 $ 50,794 $ 41,055 Gross profit margin 66.6 % 66.8 % 65.6 % 65.3 % Rental and other Revenue $ 11,458 $ 10,269 $ 20,174 $ 16,825 Cost of revenue 7,075 6,078 12,351 10,087 Gross profit $ 4,383 $ 4,191 $ 7,823 $ 6,738 Gross profit margin 38.3 % 40.8 % 38.8 % 40.0 % 22 Table of Contents The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated: Three Months Ended July 31, Six Months Ended July 31, 2023 2022 2023 2022 Revenue Equipment 74.7 % 75.6 % 75.0 % 76.4 % Parts 16.9 % 15.6 % 16.9 % 15.3 % Service 6.6 % 6.7 % 6.4 % 6.6 % Rental and other 1.8 % 2.1 % 1.7 % 1.7 % Total Revenue 100.0 % 100.0 % 100.0 % 100.0 % Total Cost of Revenue 79.2 % 79.3 % 79.2 % 80.0 % Gross Profit Margin 20.8 % 20.7 % 20.8 % 20.0 % Operating Expenses 13.8 % 13.9 % 14.0 % 13.9 % Income from Operations 6.9 % 6.8 % 6.8 % 6.1 % Other Expense (0.5) % (0.1) % (0.4) % (0.2) % Income Before Income Taxes 6.5 % 6.7 % 6.4 % 5.9 % Provision for Income Taxes 1.6 % 1.6 % 1.5 % 1.5 % Net Income 4.9 % 5.0 % 4.8 % 4.4 % Three Months Ended July 31, 2023 Compared to Three Months Ended July 31, 2022 Consolidated Results Revenue Three Months Ended July 31, Increase/ Percent 2023 2022 (Decrease) Change (dollars in thousands) Equipment $ 480,122 $ 375,216 $ 104,906 28.0 % Parts 108,510 77,693 30,817 39.7 % Service 42,478 33,365 9,113 27.3 % Rental and other 11,458 10,269 1,189 11.6 % Total Revenue $ 642,568 $ 496,543 $ 146,025 29.4 % Total revenue for the second quarter of fiscal 2024 was 29.4% or $146.0 million higher than the second quarter of fiscal 2023 driven primarily by our recent acquisitions of the Heartland Companies and Pioneer Farm Equipment completed in August 2022 and February 2023, respectively, as well as an increase in Company-wide same-store sales of 12.1%. Strong same-store sales were primarily driven by equipment sales, which benefited from improved availability of inventory in certain product categories and the sustained high demand of both agriculture and construction equipment. 23 Table of Contents Three Months Ended July 31, Increase/ Percent 2023 2022 (Decrease) Change (dollars in thousands) Gross Profit Equipment $ 65,322 $ 51,228 $ 14,094 27.5 % Parts 35,424 24,987 10,437 41.8 % Service 28,270 22,293 5,977 26.8 % Rental and other 4,383 4,191 192 4.6 % Total Gross Profit $ 133,399 $ 102,699 $ 30,700 29.9 % Gross Profit Margin Equipment 13.6 % 13.7 % (0.1) % (0.7) % Parts 32.6 % 32.2 % 0.4 % 1.2 % Service 66.6 % 66.8 % (0.2) % (0.3) % Rental and other 38.3 % 40.8 % (2.5) % (6.1) % Total Gross Profit Margin 20.8 % 20.7 % 0.1 % 0.5 % Gross Profit Mix Equipment 49.0 % 49.9 % (0.9) % (1.8) % Parts 26.6 % 24.3 % 2.3 % 9.5 % Service 21.2 % 21.7 % (0.5) % (2.3) % Rental and other 3.2 % 4.1 % (0.9) % (22.0) % Total Gross Profit Mix 100.0 % 100.0 % Gross profit for the second quarter of fiscal 2024 increased 29.9% or $30.7 million, as compared to the same period last year. Gross profit margin also improved slightly to 20.8% in the current quarter from 20.7% in the prior year quarter. The increase in gross profit margin was primarily due to a shift to higher margin parts sales relative to equipment sales. Equipment gross profit was impacted in the prior year by a $2.6 million benefit recognized on the expected achievement of annual manufacturer incentive programs, which is not included in the results for the second quarter of fiscal 2024. 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 88.9% for the second quarter of fiscal 2024 compared to 90.6% during the same period last year, due to increased floorplan interest expense in the second quarter of fiscal 2024 compared to the same period last year. Operating Expenses Three Months Ended July 31, Increase/ Percent 2023 2022 (Decrease) Change (dollars in thousands) Operating Expenses $ 88,751 $ 68,828 $ 19,923 28.9 % Operating Expenses as a Percentage of Revenue 13.8 % 13.9 % (0.1) % (0.7) % Our operating expenses in the second quarter of fiscal 2024 increased 28.9% as compared to the second quarter of fiscal 2023. The increase in operating expenses was primarily the result of the additional operating expenses due to acquisitions that have taken place in the past year as well as an increase in variable expenses associated with increased sales. Operating expenses as a percentage of revenue decreased to 13.8% in the second quarter of fiscal 2024 from 13.9% in the second quarter of fiscal 2023. The decrease in operating expenses as a percentage of revenue was due to the increase in total revenue in the second quarter of fiscal 2024, as compared to the second quarter of fiscal 2023, which positively affected our ability to leverage our fixed operating costs. 24 Table of Contents Three Months Ended July 31, Increase/ Percent 2023 2022 (Decrease) Change (dollars in thousands) Interest and other income $ 641 $ 873 $ (232) (26.6) % Floorplan interest expense (2,457) (245) 2,212 n/m Other interest expense (1,241) (1,349) (108) (8.0) % The increase in floorplan interest expense for the second quarter of fiscal 2024 as compared to the second quarter of fiscal 2023 was primarily due to a higher level of interest-bearing inventory in the second quarter of fiscal 2024. Provision for Income Taxes Three Months Ended July 31, Increase/ Percent 2023 2022 (Decrease) Change (dollars in thousands) Provision for Income Taxes $ 10,270 $ 8,191 $ 2,079 25.4 % Our effective tax rate was 24.7 % for each of the three months ended July 31, 2023 and July 31, 2022. The effective tax rates for the three months ended July 31, 2023 and 2022 were subject to various factors such as the impact of certain discrete items, mainly the vesting of share-based compensation and the mix of domestic and foreign income. Segment Results Certain financial information for our Agriculture, Construction and International business segments is presented below. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Revenue between segments is immaterial. Three Months Ended July 31, Increase/ Percent 2023 2022 (Decrease) Change (dollars in thousands) Revenue Agriculture $ 469,069 $ 348,956 $ 120,113 34.4 % Construction 82,863 70,022 12,841 18.3 % International 90,636 77,565 13,071 16.9 % Total $ 642,568 $ 496,543 $ 146,025 29.4 % Income Before Income Taxes Agriculture $ 33,029 $ 24,895 $ 8,134 32.7 % Construction 5,156 3,923 1,233 31.4 % International 5,568 5,870 (302) (5.1) % Segment Income Before Income Taxes 43,753 34,688 9,065 26.1 % Shared Resources (2,162) (1,538) (624) (40.6) % Total $ 41,591 $ 33,150 $ 8,441 25.5 % Agriculture Agriculture segment revenue for the second quarter of fiscal 2024 increased 34.4% compared to the second quarter of fiscal 2023. The higher revenue was driven primarily by the recent acquisitions of the Heartland Companies and Pioneer Farm Equipment, completed in August 2022 and February 2023, respectively, as well as an increase in same-store sales in our Agriculture segment of 10.0%. Strong same-store sales were primarily driven by equipment sales, which benefited from improved inventory availability of inventory in certain product categories and the sustained high demand of equipment. 25 Table of Contents Agriculture segment income before income taxes for the second quarter of fiscal 2024 was $33.0 million compared to $24.9 million for the second quarter of fiscal 2023. The improvement in segment results was primarily the result of higher equipment revenue, led by the acquisitions stated above as well as higher same-store sales. Construction Construction segment revenue for the second quarter of fiscal 2024 increased 18.3% compared to the second quarter of fiscal 2023. Construction activity in our footprint has remained at high levels, which was the primary factor in the year-over-year growth. Our Construction segment income before taxes was $5.2 million for the second quarter of fiscal 2024 compared to $3.9 million in the second quarter of fiscal 2023. The improvement in segment results was primarily due to an increase in revenue. 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 decreased slightly from 31.9% in the second quarter of fiscal 2023 to 30.2% in the second quarter of fiscal 2024. International International segment revenue was $90.6 million for the second quarter of fiscal 2024 compared to $77.6 million in the second quarter of fiscal 2023. The increase in segment revenue benefited from improved availability of inventory in certain product categories and the sustained high demand of equipment, which more than offset a 16.0% decrease in total revenue from our Ukrainian subsidiary due to the Russia-Ukraine conflict, compared to the second quarter of fiscal 2023. Our International segment income before income taxes was $5.6 million for the second quarter of fiscal 2024 compared to segment income before income taxes of $5.9 million for the same period last year. The decrease in segment pre-tax income was primarily the result of increased operating expenses. 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 $2.2 million for the second quarter of fiscal 2024 compared to a loss before income taxes of $1.5 million for the same period last year. The lower shared resources results were led by $0.5 million of acquisition related expenses incurred for the pending O'Connors acquisition. 26 Table of Contents Six Months Ended July 31, 2023 Compared to Six Months Ended July 31, 2022 Consolidated Results Revenue Six Months Ended July 31, Increase/ Percent 2023 2022 (Decrease) Change (dollars in thousands) Equipment $ 909,498 $ 731,582 $ 177,916 24.3 % Parts 205,116 146,255 58,861 40.2 % Service 77,411 62,887 14,524 23.1 % Rental and other 20,174 16,825 3,349 19.9 % Total Revenue $ 1,212,199 $ 957,549 $ 254,650 26.6 % Total revenue for the first six months of fiscal 2024 was up 26.6% or $254.7 million compared to the first six months of fiscal 2023, driven primarily by an increase in Company-wide same-store sales of 8.2% and our acquisitions of Mark's Machinery, the Heartland Companies, and Pioneer Farm Equipment completed in April 2022, August 2022, and February 2023, respectively. The same-store sales increase was primarily driven by equipment sales, which benefited from improved availability of inventory in certain product categories and the sustained high demand of both agriculture and construction equipment. Gross Profit Six Months Ended July 31, Increase/ Percent 2023 2022 (Decrease) Change (dollars in thousands) Gross Profit Equipment $ 126,436 $ 97,360 $ 29,076 29.9 % Parts 66,926 46,240 20,686 44.7 % Service 50,794 41,055 9,739 23.7 % Rental and other 7,823 6,738 1,085 16.1 % Total Gross Profit $ 251,979 $ 191,393 $ 60,586 31.7 % Gross Profit Margin Equipment 13.9 % 13.3 % 0.6 % 4.5 % Parts 32.6 % 31.6 % 1.0 % 3.2 % Service 65.6 % 65.3 % 0.3 % 0.5 % Rental and other 38.8 % 40.0 % (1.2) % (3.0) % Total Gross Profit Margin 20.8 % 20.0 % 0.8 % 4.0 % Gross Profit Mix Equipment 50.2 % 50.8 % (0.6) % (1.2) % Parts 26.6 % 24.2 % 2.4 % 9.9 % Service 20.2 % 21.5 % (1.3) % (6.0) % Rental and other 3.0 % 3.5 % (0.5) % (14.3) % Total Gross Profit Mix 100.0 % 100.0 % Gross profit increased 31.7% or $60.6 million for the first six months of fiscal 2024, as compared to the same period last year. Gross profit margin also improved to 20.8% in the first six months of fiscal 2024 from 20.0% in the same period last year. The increase in gross profit margin was primarily due to gross profit mix shift, to higher margin parts sales relative to equipment sales. Our Company-wide absorption rate for the first six months of fiscal 2024 increased to 86.3%, as compared to 85.6% 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 and interest expense on floorplan payables, during the six-month period compared to that of the prior year six-month period. 27 Table of Contents Operating Expenses Six Months Ended July 31, Increase/ Percent 2023 2022 (Decrease) Change (dollars in thousands) Operating Expenses $ 170,066 $ 132,980 $ 37,086 27.9 % Operating Expenses as a Percentage of Revenue 14.0 % 13.9 % 0.1 % 0.7 % Our operating expenses for the first six months of fiscal 2024 increased $37.1 million as compared to the first six months of fiscal 2023. The increase in operating expenses was a result of an increase in variable expenses associated with increased sales as well as acquisitions that have occurred in the last twelve months. Operating expenses as a percentage of revenue increased slightly to 14.0% in the first six months of fiscal 2024 from 13.9% in the first six months of fiscal 2023. Other Income (Expense) Six Months Ended July 31, Increase/ Percent 2023 2022 (Decrease) Change (dollars in thousands) Interest and other income $ 1,362 $ 1,365 $ (3) (0.2) % Floorplan interest expense (3,729) (499) 3,230 n/m Other interest expense (2,514) (2,545) (31) (1.2) % Floorplan interest expense increased $3.2 million for the first six months of fiscal 2024, as compared to the same period last year, primarily due to increased interest bearing borrowings, resulting from higher inventory levels. Provision for Income Taxes Six Months Ended July 31, Increase/ Percent 2023 2022 Decrease Change (dollars in thousands) Provision for Income Taxes $ 18,745 $ 14,235 $ 4,510 31.7 % Our effective tax rate was 24.3% for the first six months of fiscal 2024 and 25.1% for the same period last year. The effective tax rate for the six months ended July 31, 2023 and 2022 was 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. 28 Table of Contents Segment Results Certain financial information for our Agriculture, Construction and International business segments is presented below. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Revenue between segments is immaterial. Six Months Ended July 31, Increase/ Percent 2023 2022 (Decrease) Change (dollars in thousands) Revenue Agriculture $ 892,266 $ 667,503 $ 224,763 33.7 % Construction 154,860 136,986 17,874 13.0 % International 165,073 153,060 12,013 7.8 % Total $ 1,212,199 $ 957,549 $ 254,650 26.6 % Income Before Income Taxes Agriculture $ 57,181 $ 41,344 $ 15,837 38.3 % Construction 9,689 7,132 2,557 35.9 % International 11,952 10,195 1,757 17.2 % Segment Income Before Income Taxes 78,822 58,671 20,151 34.3 % Shared Resources (1,790) (1,937) 147 7.6 % Total $ 77,032 $ 56,734 $ 20,298 35.8 % Agriculture Agriculture segment revenue for the first six months of fiscal 2024 increased 33.7% compared to the same period last year. The higher revenue was driven primarily by the acquisitions of Mark's Machinery, the Heartland Companies, and Pioneer Farm Equipment in April 2022, August 2022, and February 2023, respectively, as well as an increase in same-store sales of 7.2% for the first six months of fiscal 2024, as compared to the same period last year. The same-store sales increase was primarily driven by equipment sales, which benefited from improved availability of inventory in certain product categories and the sustained high demand of new and used equipment. Agriculture segment income before income taxes was $57.2 million for the first six months of fiscal 2024 compared to $41.3 million over the first six months of fiscal 2023. The improvement in segment results was primarily the result of higher equipment revenue. Construction Construction segment revenue for the first six months of fiscal 2024 increased 13.0% compared to the same period last year. When accounting for the divestitures of the North Dakota consumer products store in March 2022, same-store sales increased 14.3%. 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 income taxes was $9.7 million for the first six months of fiscal 2024 compared to $7.1 million for the first six months of fiscal 2023. The increase in segment results was primarily due to an increase in same-store sales, as described above. The dollar utilization of our rental fleet decreased slightly from 28.6% in the first six months of fiscal 2023 to 28.5% in the first six months of fiscal 2024. International International segment revenue for the first six months of fiscal 2024 increased 7.8% compared to the same period last year. The increase in segment revenues benefited from improved availability of inventory in certain product categories and the sustained high demand of equipment in the first six months of fiscal 2024, which more than offset a 13.6% decrease in revenues from our Ukrainian subsidiary due to the Russia-Ukraine conflict compared to the first six months of fiscal 2023. Our International segment income before income taxes was $12.0 million for the first six months of fiscal 2024 compared to $10.2 million for the same period last year. The higher segment results were primarily the result of increased equipment sales and improved equipment gross profit margin. 29 Table of Contents Shared Resources/Eliminations We incur centralized expenses/income at our general corporate level, which we refer to as “Shared Resources,” and then allocate most of these net expenses to our segments. Since these allocations are set early in the year, and a portion is planned to be unallocated, unallocated balances may occur. Shared Resources loss before income taxes was $1.8 million for the first six months of fiscal 2024, which included $0.5 million of acquisition related expenses incurred for the O'Connors acquisition, compared to a loss before income taxes of $1.9 million for the same period last year. 30 Table of Contents Liquidity and Capital Resources Sources of Liquidity Our primary sources of liquidity are cash reserves, cash generated from operations, and borrowings under our floorplan and other credit facilities. We expect these sources of liquidity to be sufficient to fund our working capital requirements, acquisitions, capital expenditures and other investments in our business, service our debt, pay our tax and lease obligations and other commitments and contingencies, and meet any seasonal operating requirements for the foreseeable future, provided that our borrowing capacity under our credit agreements is dependent on compliance with various covenants as further described in the "Risk Factors" section of our Annual Report on Form 10-K. Equipment Inventory and Floorplan Payable Credit Facilities As of July 31, 2023, the Company had floorplan payable lines of credit for equipment purchases totaling $781.0 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 decreased from 3.6 times for the rolling 12 month period ended July 31, 2022 to 2.7 times for the rolling 12 month period ended July 31, 2023. The decrease in equipment turnover was attributable to an increase in equipment inventory over the rolling 12 month period ended July 31, 2023 as compared to the same period ended July 31, 2022. Our equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, decreased to 24.9% as of July 31, 2023 from 51.7% as of January 31, 2023. The decrease in our equity in equipment inventory is primarily due to the stocking of new equipment inventories. 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 July 31, 2023, we were in compliance with the financial covenants under our CNH Industrial and DLL Finance credit agreements and we were not subject to the fixed charge coverage ratio covenant under the Bank Syndicate Agreement as our adjusted excess availability plus eligible cash collateral (as defined therein) was not less than 15% of the lesser of (i) aggregate borrowing base and (ii) maximum credit amount as of July 31, 2023. 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 Used for Operating Activities Net cash used for operating activities was $122.7 million for the first six months of fiscal 2024, compared to net cash used for operating activities of $21.0 million for the first six months of fiscal 2023. The change in net cash used for operating activities is primarily the result of an increase in inventories and a decrease in deferred revenue, which were partially offset by an increase in non-interest bearing floorplan lines of credit from manufacturers and higher net income for the first six months of fiscal 2024. Cash Flow Used for Investing Activities Net cash used for investing activities was $50.7 million for the first six months of fiscal 2024, compared to $20.7 million for the first six months of fiscal 2023. The increase in cash used for investing activities was primarily the result of the acquisitions of Pioneer Farm Equipment, MAREP, and Midwest Truck in the first six months of fiscal 2024, compared to the acquisition of Mark's Machinery in the first six months of fiscal 2023. Cash Flow Provided by Financing Activities Net cash provided by financing activities was $181.8 million for the first six months of fiscal 2024 compared to $39.6 million for the first six months of fiscal 2023 . The increase in cash provided by financing activities was primarily the result of increased non-manufacture floorplan payables in the first six months of fiscal 2024, as the Company drew on its Bank Syndicate floorplan loan in fiscal 2024, to finance higher inventory levels. 31 Table of Contents Information Concerning Off-Balance Sheet Arrangements As of July 31, 2023, 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, 2023, 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, the impact of farm income levels on customer demand for agricultural equipment and services, the effectiveness and expected benefits 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 and sources of liquidity. Any statements that are not based upon historical facts, including the outcome of events that have not yet occurred and our expectations for future performance, are forward-looking statements. The words “potential,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” “plan,” “anticipate,” and similar words and expressions are intended to identify forward-looking statements. These statements are based upon the current beliefs and expectations of our management. These forward-looking statements involve important risks and uncertainties that could significantly affect anticipated results or outcomes in the future and, accordingly, actual results or outcomes may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, the impact of the Russia -Ukraine conflict on our Ukrainian subsidiary, our ability to successfully consummate, integrate and realize growth opportunities and synergies in connection with the pending O'Connors acquisition, the risk that we assume unforeseen or other liabilities in connection with the pending O'Connors acquisition and the impact of those conditions and obligations imposed on us under the CaseIH dealer agreements entered into in connection with the Heartland Companies acquisition 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, disruptions of supply chains and associated impacts on the Company's supply vendors and their ability to provide the Company with sufficient and timely inventory to meet customer demand, 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. 32 Table of Contents