Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report, and the audited consolidated financial statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended January 31, 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 CaseIH 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 Europe, formerly International. Starting in the fourth quarter fiscal 2024, our fourth segment will be Australia, see Note 1 - Business Activity and Significant Accounting Policies for further details. 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 August 2023 U.S. Department of Agriculture publications, the estimate of net farm income for calendar year 2023 indicated an approximate 22.8% decrease as compared to calendar year 2022, and an approximate 30.7% increase in net farm income for calendar year 2022 as compared to calendar year 2021.
For the third quarter of fiscal 2024, our net income was $30.2 million, or $1.32 per diluted share, compared to a fiscal 2023 third quarter net income of $41.3 million, or $1.82 per diluted share. Significant factors impacting the quarterly comparisons were:
• Revenue in the third quarter of fiscal 2024 increased by 3.8% compared to the third quarter of fiscal 2023. The revenue increase was led by additional revenue resulting from the acquisition of Pioneer Farm Equipment, in February 2023. Same-store sales remained stable, on top of the record performance from prior year which saw same-store growth of 34%.
• Gross profit margin decreased to 19.9% for third quarter of fiscal 2024, as compared to 20.9% for the third quarter of fiscal 2023. The decrease in gross profit margin is primarily the result of a partial normalization of equipment gross profit margin as supply of many product categories has caught up with demand. Another factor is the prior year equipment gross profit benefited from the recognition of a $2.0 million accrual on the expected achievement of annual manufacturer incentive programs, which is not included in the results for the third quarter of fiscal 2024.
• Floorplan interest expense increased by $3.5 million in the third quarter of fiscal 2024 as compared to the same period in fiscal 2023, due to an increase in interest bearing inventory and higher interest rates.
Supply Chain
While we continue to experience less than desired shipments of certain product categories, primarily high-horsepower tractors, self-propelled sprayers and wheel loaders, for most other product categories we have been able to receive enough inventory to meet demand and also have stock available for sale.
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 nine months ended October 31, 2023, Titan Machinery Ukraine's revenues are down approximately 10.3% from the prior year period.
As of October 31, 2023, the Company had total assets of $32.3 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, were $27.4 million.
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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 closed on the acquisition on October 2, 2023, see Note 18 - Subsequent Event for further details. The consideration paid is approximately $ 62 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 funded the acquisition with cash on hand and using the proceeds of additional indebtedness incurred under the floorplan and working capital loans of the Bank Syndicate Agreement.
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 Europe 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, as it allow us to package deals that 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.
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.
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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 October 31, Nine Months Ended October 31,
2023 2022 2023 2022
(dollars in thousands) (dollars in thousands)
Equipment
Revenue $ 521,775 $ 508,996 $ 1,431,272 $ 1,240,579
Cost of revenue 454,598 436,156 1,237,660 1,070,378
Gross profit $ 67,177 $ 72,840 $ 193,612 $ 170,201
Gross profit margin 12.9 % 14.3 % 13.5 % 13.7 %
Parts
Revenue $ 114,962 $ 108,719 $ 320,077 $ 254,974
Cost of revenue 78,585 72,146 216,775 172,162
Gross profit $ 36,377 $ 36,573 $ 103,302 $ 82,812
Gross profit margin 31.6 % 33.6 % 32.3 % 32.5 %
Service
Revenue $ 44,767 $ 38,960 $ 122,178 $ 101,847
Cost of revenue 14,393 13,456 41,010 35,288
Gross profit $ 30,374 $ 25,504 $ 81,168 $ 66,559
Gross profit margin 67.8 % 65.5 % 66.4 % 65.4 %
Rental and other
Revenue $ 12,611 $ 12,098 $ 32,785 $ 28,923
Cost of revenue 8,198 7,435 20,549 17,522
Gross profit $ 4,413 $ 4,663 $ 12,236 $ 11,401
Gross profit margin 35.0 % 38.5 % 37.3 % 39.4 %
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The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated:
Three Months Ended October 31, Nine Months Ended October 31,
2023 2022 2023 2022
Revenue
Equipment 75.2 % 76.1 % 75.1 % 76.2 %
Parts 16.6 % 16.3 % 16.8 % 15.7 %
Service 6.4 % 5.8 % 6.4 % 6.3 %
Rental and other 1.8 % 1.8 % 1.7 % 1.8 %
Total Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Total Cost of Revenue 80.1 % 79.1 % 79.5 % 79.6 %
Gross Profit Margin 19.9 % 20.9 % 20.5 % 20.4 %
Operating Expenses 13.3 % 12.7 % 13.8 % 13.4 %
Income from Operations 6.7 % 8.2 % 6.7 % 7.0 %
Other Expense (0.8) % — % (0.6) % (0.1) %
Income Before Income Taxes 5.8 % 8.2 % 6.2 % 6.9 %
Provision for Income Taxes 1.5 % 2.0 % 1.5 % 1.7 %
Net Income 4.3 % 6.2 % 4.6 % 5.2 %
Three Months Ended October 31, 2023 Compared to Three Months Ended October 31, 2022
Consolidated Results
Revenue
Three Months Ended October 31, Increase/ Percent
2023 2022 (Decrease) Change
(dollars in thousands)
Equipment $ 521,775 $ 508,996 $ 12,779 2.5 %
Parts 114,962 108,719 6,243 5.7 %
Service 44,767 38,960 5,807 14.9 %
Rental and other 12,611 12,098 513 4.2 %
Total Revenue $ 694,115 $ 668,773 $ 25,342 3.8 %
Total revenue for the third quarter of fiscal 2024 was 3.8% or $25.3 million higher than the third quarter of fiscal 2023 driven primarily by our acquisition of Pioneer Farm Equipment completed in February 2023.
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Three Months Ended October 31, Increase/ Percent
2023 2022 (Decrease) Change
(dollars in thousands)
Gross Profit
Equipment $ 67,177 $ 72,840 $ (5,663) (7.8) %
Parts 36,377 36,573 (196) (0.5) %
Service 30,374 25,504 4,870 19.1 %
Rental and other 4,413 4,663 (250) (5.4) %
Total Gross Profit $ 138,341 $ 139,580 $ (1,239) (0.9) %
Gross Profit Margin
Equipment 12.9 % 14.3 % (1.4) % (9.8) %
Parts 31.6 % 33.6 % (2.0) % (6.0) %
Service 67.8 % 65.5 % 2.3 % 3.5 %
Rental and other 35.0 % 38.5 % (3.5) % (9.1) %
Total Gross Profit Margin 19.9 % 20.9 % (1.0) % (4.8) %
Gross Profit Mix
Equipment 48.6 % 52.2 % (3.6) % (6.9) %
Parts 26.3 % 26.2 % 0.1 % 0.4 %
Service 22.0 % 18.3 % 3.7 % 20.2 %
Rental and other 3.1 % 3.3 % (0.2) % (6.1) %
Total Gross Profit Mix 100.0 % 100.0 %
Gross profit for the third quarter of fiscal 2024 decreased 0.9% or $1.2 million, as compared to the same period last year. Gross profit margin also declined to 19.9% in the current quarter from 20.9% in the prior year quarter. The decrease in gross profit margin is primarily the result of a partial normalization of equipment gross profit margin as supply of many product categories has caught up with demand. Another factor is the prior year equipment gross profit benefited from the recognition of a $2.0 million accrual on the expected achievement of annual manufacturer incentive programs, which is not included in the results for the third 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 87.4% for the third quarter of fiscal 2024 compared to 95.9% during the same period last year, led by increased floorplan interest expense in the third quarter of fiscal 2024 compared to the same period last year.
Operating Expenses
Three Months Ended October 31, Increase/ Percent
2023 2022 (Decrease) Change
(dollars in thousands)
Operating Expenses $ 92,115 $ 84,861 $ 7,254 8.5 %
Operating Expenses as a Percentage of Revenue 13.3 % 12.7 % 0.6 % 4.7 %
Our operating expenses in the third quarter of fiscal 2024 increased 8.5% as compared to the third 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 increased to 13.3% in the third quarter of fiscal 2024 from 12.7% in the third quarter of fiscal 2023.
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Three Months Ended October 31, Increase/ Percent
2023 2022 (Decrease) Change
(dollars in thousands)
Interest and other income (expense) $ (235) $ 1,804 $ (2,039) (113.0) %
Floorplan interest expense (4,045) (588) 3,457 587.9 %
Other interest expense (1,494) (1,257) 237 18.9 %
The change in interest and other income (expense) compared to fiscal 2023 was primarily the result of foreign currency fluctuations in the quarter, creating foreign currency losses in fiscal 2024. The increase in floorplan interest expense for the third quarter of fiscal 2024 as compared to the third quarter of fiscal 2023 was primarily due to a higher level of interest-bearing inventory and a higher interest rate in the third quarter of fiscal 2024.
Provision for Income Taxes
Three Months Ended October 31, Increase/ Percent
2023 2022 (Decrease) Change
(dollars in thousands)
Provision for Income Taxes $ 10,259 $ 13,421 $ (3,162) (23.6) %
Our effective tax rate was 25.4 % and 24.5 % for each of the three months ended October 31, 2023 and October 31, 2022, respectively. The effective tax rates for the three months ended October 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 Europe business segments is presented below. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Revenue between segments is immaterial.
Three Months Ended October 31, Increase/ Percent
2023 2022 (Decrease) Change
(dollars in thousands)
Revenue
Agriculture $ 531,404 $ 493,324 $ 38,080 7.7 %
Construction 77,508 86,403 (8,895) (10.3) %
Europe 85,203 89,046 (3,843) (4.3) %
Total $ 694,115 $ 668,773 $ 25,342 3.8 %
Income Before Income Taxes
Agriculture $ 35,130 $ 42,044 $ (6,914) (16.4) %
Construction 4,057 6,065 (2,008) (33.1) %
Europe 5,146 8,488 (3,342) (39.4) %
Segment Income Before Income Taxes 44,333 56,597 (12,264) (21.7) %
Shared Resources (3,881) (1,919) 1,962 102.2 %
Total $ 40,452 $ 54,678 $ (14,226) (26.0) %
Agriculture
Agriculture segment revenue for the third quarter of fiscal 2024 increased 7.7% compared to the third quarter of fiscal 2023. The higher revenue was driven primarily by the recent acquisition of Pioneer Farm Equipment, completed in February 2023, as well as an increase in same-store sales in our Agriculture segment of 3.5% on top of last year's record performance. Same-store sales was constrained by delayed OEM deliveries and capacity constraints or our service department as we
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prioritized supporting our customers through harvest which limited our ability to process and deliver pre-sold units to customers.
Agriculture segment income before income taxes for the third quarter of fiscal 2024 was $35.1 million compared to $42.0 million for the third quarter of fiscal 2023. The decrease in gross profit is primarily the result of a partial normalization of equipment gross profit margin as supply of many product categories has caught up with demand. Another factor is the prior year equipment gross profit benefited from the recognition of a $2.0 million accrual on the expected achievement of annual manufacturer incentive programs, which is not included in the results for the third quarter of fiscal 2024.
Construction
Construction segment revenue for the third quarter of fiscal 2024 decreased 10.3% compared to the third quarter of fiscal 2023. The year-over-year decrease in revenue was primarily driven by the timing of equipment deliveries which shifted some revenue into the fourth quarter of this year as compared to the third and fourth quarters of the prior year.
Our Construction segment income before taxes was $4.1 million for the third quarter of fiscal 2024 compared to $6.1 million in the third quarter of fiscal 2023. The decrease in segment results was primarily due to a decrease 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 34.3% in the third quarter of fiscal 2023 to 33.2% in the third quarter of fiscal 2024.
Europe
Europe segment revenue was $85.2 million for the third quarter of fiscal 2024 compared to $89.0 million in the third quarter of fiscal 2023. The decrease in revenue was impacted by a softening demand which was negatively impacted by dry conditions in the region as well as being negatively impacted by a 4.2% decrease in total revenue from our Ukrainian subsidiary due to the Russia-Ukraine conflict, compared to the third quarter of fiscal 2023.
Our Europe segment income before income taxes was $5.1 million for the third quarter of fiscal 2024 compared to segment income before income taxes of $8.5 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 $3.9 million for the third quarter of fiscal 2024 compared to a loss before income taxes of $1.9 million for the same period last year. The lower shared resources results were primarily from increase in floorplan interest expense as well as $0.6 million of acquisition related expenses incurred for the O'Connors acquisition.
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Nine Months Ended October 31, 2023 Compared to Nine Months Ended October 31, 2022
Consolidated Results
Revenue
Nine Months Ended October 31, Increase/ Percent
2023 2022 (Decrease) Change
(dollars in thousands)
Equipment $ 1,431,272 $ 1,240,579 $ 190,693 15.4 %
Parts 320,077 254,974 65,103 25.5 %
Service 122,178 101,847 20,331 20.0 %
Rental and other 32,785 28,923 3,862 13.4 %
Total Revenue $ 1,906,312 $ 1,626,323 $ 279,989 17.2 %
Total revenue for the first nine months of fiscal 2024 was up 17.2% or $280.0 million compared to the first nine months of fiscal 2023, driven primarily by our acquisitions of Mark's Machinery, the Heartland Companies, and Pioneer Farm Equipment completed in April 2022, August 2022, and February 2023, respectively as well as an increase in Company-wide same-store sales of 4.3%. 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
Nine Months Ended October 31, Increase/ Percent
2023 2022 (Decrease) Change
(dollars in thousands)
Gross Profit
Equipment $ 193,612 $ 170,201 $ 23,411 13.8 %
Parts 103,302 82,812 20,490 24.7 %
Service 81,168 66,559 14,609 21.9 %
Rental and other 12,236 11,401 835 7.3 %
Total Gross Profit $ 390,318 $ 330,973 $ 59,345 17.9 %
Gross Profit Margin
Equipment 13.5 % 13.7 % (0.2) % (1.5) %
Parts 32.3 % 32.5 % (0.2) % (0.6) %
Service 66.4 % 65.4 % 1.0 % 1.5 %
Rental and other 37.3 % 39.4 % (2.1) % (5.3) %
Total Gross Profit Margin 20.5 % 20.4 % 0.1 % 0.5 %
Gross Profit Mix
Equipment 49.6 % 51.5 % (1.9) % (3.7) %
Parts 26.5 % 25.0 % 1.5 % 6.0 %
Service 20.8 % 20.1 % 0.7 % 3.5 %
Rental and other 3.1 % 3.4 % (0.3) % (8.8) %
Total Gross Profit Mix 100.0 % 100.0 %
Gross profit increased 17.9% or $59.3 million for the first nine months of fiscal 2024, as compared to the same period last year. Gross profit margin also improved to 20.5% in the first nine months of fiscal 2024 from 20.4% 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 nine months of fiscal 2024 increased to 95.9%, as compared to 89.6% 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 nine-month period compared to that of the prior year nine-month period.
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Operating Expenses
Nine Months Ended October 31, Increase/ Percent
2023 2022 (Decrease) Change
(dollars in thousands)
Operating Expenses $ 262,182 $ 217,841 $ 44,341 20.4 %
Operating Expenses as a Percentage of Revenue 13.8 % 13.4 % 0.4 % 3.0 %
Our operating expenses for the first nine months of fiscal 2024 increased $44.3 million as compared to the first nine 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 13.8% in the first nine months of fiscal 2024 from 13.4% in the first nine months of fiscal 2023.
Other Income (Expense)
Nine Months Ended October 31, Increase/ Percent
2023 2022 (Decrease) Change
(dollars in thousands)
Interest and other income (expense) $ 1,129 $ 3,169 $ (2,040) (64.4) %
Floorplan interest expense (7,774) (1,087) 6,687 615.2 %
Other interest expense (4,008) (3,802) 206 5.4 %
The change in interest and other income (expense) compared to fiscal 2023 was primarily the result of foreign currency fluctuations in the nine months period, creating foreign currency losses in fiscal 2024. Floorplan interest expense increased $6.7 million for the first nine months of fiscal 2024, as compared to the same period last year, primarily due to increased interest bearing borrowings, resulting from higher inventory levels, as well as a higher interest rate environment.
Provision for Income Taxes
Nine Months Ended October 31, Increase/ Percent
2023 2022 Decrease Change
(dollars in thousands)
Provision for Income Taxes $ 29,004 $ 27,656 $ 1,348 4.9 %
Our effective tax rate was 24.7% for the first nine months of fiscal 2024 and 24.8% for the same period last year. The effective tax rate for the nine months ended October 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.
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Segment Results
Certain financial information for our Agriculture, Construction and Europe business segments is presented below. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Revenue between segments is immaterial.
Nine Months Ended October 31, Increase/ Percent
2023 2022 (Decrease) Change
(dollars in thousands)
Revenue
Agriculture $ 1,423,669 $ 1,160,829 $ 262,840 22.6 %
Construction 232,368 223,389 8,979 4.0 %
Europe 250,275 242,105 8,170 3.4 %
Total $ 1,906,312 $ 1,626,323 $ 279,989 17.2 %
Income Before Income Taxes
Agriculture $ 92,311 $ 83,387 $ 8,924 10.7 %
Construction 13,746 13,197 549 4.2 %
Europe 17,097 18,683 (1,586) (8.5) %
Segment Income Before Income Taxes 123,154 115,267 7,887 6.8 %
Shared Resources (5,671) (3,855) 1,816 47.1 %
Total $ 117,483 $ 111,412 $ 6,071 5.4 %
Agriculture
Agriculture segment revenue for the first nine months of fiscal 2024 increased 22.6% 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 4.7% for the first nine 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 for new and used equipment.
Agriculture segment income before income taxes was $92.3 million for the first nine months of fiscal 2024 compared to $83.4 million over the first nine months of fiscal 2023. The improvement in segment results was primarily the result of higher equipment revenue.
Construction
Construction segment revenue for the first nine months of fiscal 2024 increased 4.0% 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 4.8%. Construction activity in our footprint sustained at healthy levels, which was the primary factor in the same-store sales growth.
Our Construction segment income before income taxes was $13.7 million for the first nine months of fiscal 2024 compared to $13.2 million for the first nine 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 from 30.7% in the first nine months of fiscal 2023 to 30.1% in the first nine months of fiscal 2024.
Europe
Europe segment revenue for the first nine months of fiscal 2024 increased 3.4% 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 nine months of fiscal 2024, which more than offset a 10.3% decrease in revenues from our Ukrainian subsidiary due to the Russia-Ukraine conflict compared to the first nine months of fiscal 2023.
Our Europe segment income before income taxes was $17.1 million for the first nine months of fiscal 2024 compared to $18.7 million for the same period last year. The decrease in segment pre-tax income was primarily the result of increased operating expenses.
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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 planned to be unallocated, unallocated balances may occur. Shared Resources loss before income taxes was $5.7 million for the first nine months of fiscal 2024, which included $1.1 million of acquisition related expenses incurred for the O'Connors acquisition, compared to a loss before income taxes of $3.9 million for the same period last year.
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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 and Working Capital Payable Credit Facilities
As of October 31, 2023, the Company had floorplan payable lines of credit for equipment purchases totaling $923.0 million, which is primarily comprised of a $500.0 million credit facility with CNH Industrial, a $250.0 million floorplan payable line and a $75.0 million working capital line of credit 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 October 31, 2022 to 2.4 times for the rolling 12 month period ended October 31, 2023. The decrease in equipment turnover was attributable to an increase in equipment inventory over the rolling 12 month period ended October 31, 2023 as compared to the same period ended October 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 20.9% as of October 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 as availability has improved, as well as drawing on our floorplan loan with the Bank Syndicate in conjunction with the O'Connor acquisition.
Adequacy of Capital Resources
Our primary uses of cash have been to fund our operating activities, including the purchase of inventories and providing for other working capital needs, meeting our debt service requirements, making payments due under our various leasing arrangements, and funding capital expenditures, including rental fleet assets, and funding acquisitions. Based on our current operational performance, we believe our cash flow from operations, available cash and available borrowing capacity under our existing credit facilities will adequately provide for our liquidity needs for, at a minimum, the next 12 months.
As of October 31, 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 October 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 $82.1 million for the first nine months of fiscal 2024, compared to net cash used for operating activities of $7.1 million for the first nine 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 nine months of fiscal 2024.
Cash Flow Used for Investing Activities
Net cash used for investing activities was $64.1 million for the first nine months of fiscal 2024, compared to $124.0 million for the first nine months of fiscal 2023. The decrease in cash used for investing activities was primarily the result of the acquisition of Mark's Machinery and the Heartland Companies in the first nine months of fiscal 2023 which was partially offset by the acquisitions of Pioneer Farm Equipment, MAREP, and Midwest Truck in the first nine months of fiscal 2024.
Cash Flow Provided by Financing Activities
Net cash provided by financing activities was $170.3 million for the first nine months of fiscal 2024 compared to $34.3 million for the first nine months of fiscal 2023. The increase in cash provided by financing activities was primarily the result of increased non-manufacturer floorplan payables in the first nine months of fiscal 2024, as the Company drew on its Bank Syndicate Agreement floorplan loan in fiscal 2024, to finance higher inventory levels.
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Information Concerning Off-Balance Sheet Arrangements
As of October 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 integrate and realize growth opportunities and synergies in connection with the O'Connors acquisition, the risk that we have assumed unforeseen or other liabilities in connection with the 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 and may cause results to differ materially from those contained in any forward-looking statement. Other than as required by law, we disclaim any obligation to update such risks and uncertainties or to publicly announce results of revisions to any of the forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect future events or developments.
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