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, 2024. Overview We own and operate a network of full service agricultural and construction equipment stores in the United States, Australia, 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 four reportable segments: Agriculture, Construction, Europe and Australia. 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 2024 U.S. Department of Agriculture publications, net farm income is estimated to decrease by 25.5% in calendar year 2024, as compared to calendar year 2023, but remain in line with the average inflation adjusted net farm income for the previous 20 years. For the first quarter of fiscal 2025, our net income was $9.4 million, or $0.41 per diluted share, compared to a fiscal 2024 first quarter net income of $27.0 million, or $1.19 per diluted share. Significant factors impacting the quarterly comparisons were: • Gross profit margin decreased to 19.4% for first quarter of fiscal 2025, as compared to 20.8% for the first quarter of fiscal 2024. The decrease in gross profit margin is primarily the result of a normalization of equipment gross profit margin as supply has caught up with demand. • Floorplan interest expense increased by $5.8 million in the first quarter of fiscal 2025 as compared to the same period in fiscal 2024, due to an increase in interest bearing inventory. • Revenue in the first quarter of fiscal 2025 increased by 10.4% compared to the first quarter of fiscal 2024. The revenue increase was led by additional revenue resulting from the acquisition of O'Connors, in October 2023. Acquisitions Fiscal 2024 J.J. O’Connor & Sons Pty. Ltd. Acquisition On October 2, 2023, we acquired all of the outstanding equity interests of O’Connors. The acquired business consisted of 15 CaseIH dealership locations and one parts center in the states of New South Wales, South Australia, and Victoria in Southeastern Australia. O'Connors has been a successful Case IH complex, and our acquisition of this entity provides the Company with the opportunity to expand our international presence into the large, well-established Australian agriculture market. Total cash consideration paid for O'Connors was $66.5 million, which was financed through available cash resources and line of credit availability. The 15 O’Connors store locations are included within our new Australia segment. 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, which it plans to complete by the end of fiscal year 2025. 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, 2024. There have been no changes in our critical accounting policies and estimates since January 31, 2024. 21 Table of Contents 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 April 30, 2024 2023 (dollars in thousands) Equipment Revenue $ 468,089 $ 429,376 Cost of revenue 412,239 368,262 Gross profit $ 55,850 $ 61,114 Gross profit margin 11.9 % 14.2 % Parts Revenue $ 108,226 $ 96,606 Cost of revenue 73,151 65,103 Gross profit $ 35,075 $ 31,503 Gross profit margin 32.4 % 32.6 % Service Revenue $ 45,079 $ 34,933 Cost of revenue 16,776 12,409 Gross profit $ 28,303 $ 22,524 Gross profit margin 62.8 % 64.5 % Rental and other Revenue $ 7,309 $ 8,716 Cost of revenue 4,782 5,277 Gross profit $ 2,527 $ 3,439 Gross profit margin 34.6 % 39.5 % 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 April 30, 2024 2023 Revenue Equipment 74.5 % 75.4 % Parts 17.2 % 17.0 % Service 7.2 % 6.1 % Rental and other 1.1 % 1.5 % Total Revenue 100.0 % 100.0 % Total Cost of Revenue 80.6 % 79.2 % Gross Profit Margin 19.4 % 20.8 % Operating Expenses 15.8 % 14.3 % Income from Operations 3.6 % 6.5 % Other Expense (1.6) % (0.3) % Income Before Income Taxes 2.0 % 6.2 % Provision for Income Taxes 0.5 % 1.5 % Net Income 1.5 % 4.7 % Three Months Ended April 30, 2024 Compared to Three Months Ended April 30, 2023 Consolidated Results Revenue Three Months Ended April 30, Increase/ Percent 2024 2023 (Decrease) Change (dollars in thousands) Equipment $ 468,089 $ 429,376 $ 38,713 9.0 % Parts 108,226 96,606 11,620 12.0 % Service 45,079 34,933 10,146 29.0 % Rental and other 7,309 8,716 (1,407) (16.1) % Total Revenue $ 628,703 $ 569,631 $ 59,072 10.4 % Total revenue for the first quarter of fiscal 2025 was 10.4% or $59.1 million higher than the first quarter of fiscal 2024 driven primarily due to the acquisition of O'Connors that was completed in October 2023. Same-store sales increased by 1.1%, driven by an increase of 4.3% by the Agriculture segment, which was partially offset by European same-store sales decrease of 15.5%. 23 Table of Contents Three Months Ended April 30, Increase/ Percent 2024 2023 (Decrease) Change (dollars in thousands) Gross Profit Equipment $ 55,850 $ 61,114 $ (5,264) (8.6) % Parts 35,075 31,503 3,572 11.3 % Service 28,303 22,524 5,779 25.7 % Rental and other 2,527 3,439 (912) (26.5) % Total Gross Profit $ 121,755 $ 118,580 $ 3,175 2.7 % Gross Profit Margin Equipment 11.9 % 14.2 % (2.3) % (16.2) % Parts 32.4 % 32.6 % (0.2) % (0.6) % Service 62.8 % 64.5 % (1.7) % (2.6) % Rental and other 34.6 % 39.5 % (4.9) % (12.4) % Total Gross Profit Margin 19.4 % 20.8 % (1.4) % (6.7) % Gross Profit Mix Equipment 45.9 % 51.5 % (5.6) % (10.9) % Parts 28.8 % 26.6 % 2.2 % 8.3 % Service 23.2 % 19.0 % 4.2 % 22.1 % Rental and other 2.1 % 2.9 % (0.8) % (27.6) % Total Gross Profit Mix 100.0 % 100.0 % Gross profit for the first quarter of fiscal 2025 increased 2.7% or $3.2 million, as compared to the same period last year. Gross profit margin declined to 19.4% in the current quarter from 20.8% in the prior year quarter. The decrease in gross profit margin is primarily the result of a normalization of equipment gross profit margin as supply has caught up with demand. 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 71.2% for the first quarter of fiscal 2025 compared to 83.5% during the same period last year, led by increased floorplan interest expense in the first quarter of fiscal 2025 compared to the same period last year. Operating Expenses Three Months Ended April 30, Increase/ Percent 2024 2023 (Decrease) Change (dollars in thousands) Operating Expenses $ 99,158 $ 81,315 $ 17,843 21.9 % Operating Expenses as a Percentage of Revenue 15.8 % 14.3 % 1.5 % 10.5 % Our operating expenses in the first quarter of fiscal 2025 increased 21.9% as compared to the first quarter of fiscal 2024. The increase in operating expenses was led by additional operating expenses due to acquisitions that have taken place in the past year. Operating expenses as a percentage of revenue increased to 15.8% in the first quarter of fiscal 2025 from 14.3% in the first quarter of fiscal 2024. 24 Table of Contents Three Months Ended April 30, Increase/ Percent 2024 2023 (Decrease) Change (dollars in thousands) Interest and other income (expense) $ (288) $ 720 $ (1,008) (140.0) % Floorplan interest expense (7,064) (1,272) 5,792 455.3 % Other interest expense (2,459) (1,274) 1,185 93.0 % The change in interest and other income (expense) for the first quarter of fiscal 2025 compared to the first quarter of fiscal 2024 was primarily the result of foreign currency fluctuations in the quarter, creating foreign currency losses for the first quarter fiscal 2025. The increase in floorplan interest expense for the first quarter of fiscal 2025 as compared to the first quarter of fiscal 2024 was primarily due to a higher level of interest-bearing inventory in the first quarter of fiscal 2025. The increase in other interest expense in the first quarter of fiscal 2025 is the result of an increased amount of long term debt outstanding resulting from real estate purchased as part of dealership acquisitions and purchases of previously leased facilities in fiscal 2024 as well as increased borrowing on our CNH Industrial revolver line of credit. Provision for Income Taxes Three Months Ended April 30, Increase/ Percent 2024 2023 (Decrease) Change (dollars in thousands) Provision for Income Taxes $ 3,345 $ 8,474 $ (5,129) (60.5) % Our effective tax rate was 26.2 % and 23.9 % for each of the three months ended April 30, 2024 and April 30, 2023, respectively. The effective tax rates for the three months ended April 30, 2024 and 2023 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. The Organization for Economic Co-operation and Development’s (“OECD”) Pillar Two Global Anti-Base Erosion (“GloBE”) model rules, issued under the OECD Inclusive Framework on Base Erosion and Profit Shifting, introduce a global minimum tax of 15% applicable to multinational enterprise groups with consolidated financial statement revenue in excess of €750 million. Numerous foreign jurisdictions have already enacted tax legislation based on the GloBE rules, with some effective as early as January 1, 2024. As of April 30, 2024, we recognized a nominal income tax expense for Pillar Two GloBE minimum tax. The Company is continuously monitoring the evolving application of this legislation and assessing its potential impact on our future tax liability. 25 Table of Contents Segment Results Certain financial information for our Agriculture, Construction, Europe and Australia 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 April 30, Increase/ Percent 2024 2023 (Decrease) Change (dollars in thousands) Revenue Agriculture $ 447,687 $ 423,195 $ 24,492 5.8 % Construction 71,492 71,996 (504) (0.7) % Europe 65,105 74,440 (9,335) (12.5) % Australia $ 44,419 $ — $ 44,419 *N/M Total $ 628,703 $ 569,631 $ 59,072 10.4 % Income (Loss) Before Income Taxes Agriculture $ 13,045 $ 24,152 $ (11,107) (46.0) % Construction 268 4,533 (4,265) (94.1) % Europe 1,350 6,384 (5,034) (78.9) % Australia (486) — (486) *N/M Segment Income Before Income Taxes 14,177 35,069 (20,892) (59.6) % Shared Resources (1,391) 370 (1,761) 475.9 % Total $ 12,786 $ 35,439 $ (22,653) (63.9) % *N/M = Not Meaningful Agriculture Agriculture segment revenue for the first quarter of fiscal 2025 increased 5.8% compared to the first quarter of fiscal 2024. The higher revenue was driven primarily by the increase in same-store sales in our Agriculture segment of 4.3%. Same-store sales was positively impacted by the availability of equipment, but was partially offset by softer demand for equipment purchases which is being negatively impacted by the expected decrease in net farm income. Agriculture segment income before income taxes for the first quarter of fiscal 2025 was $13.0 million compared to $24.2 million for the first quarter of fiscal 2024. The decrease in gross profit is primarily the result of a normalization of equipment gross profit margin as supply has caught up with demand. Construction Construction segment revenue for the first quarter of fiscal 2025 was essentially flat compared to the first quarter of fiscal 2024. Our Construction segment income before taxes was $0.3 million for the first quarter of fiscal 2025 compared to $4.5 million in the first quarter of fiscal 2024. The decrease in segment results was led by increases in operating expenses and floorplan interest expense. The dollar utilization of our rental fleet decreased from 26.8% in the first quarter of fiscal 2024 to 21.7% in the first quarter of fiscal 2025. Dollar fleet utilization 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. Europe Europe segment revenue was $65.1 million for the first quarter of fiscal 2025 compared to $74.4 million in the first quarter of fiscal 2024. The decrease in revenue was impacted by a lower demand, which was impacted by a decrease in global commodity prices and higher interest rates. Our Europe segment income before income taxes was $1.4 million for the first quarter of fiscal 2025 compared to segment income before income taxes of $6.4 million for the same period last year. The decrease in segment pre-tax income was primarily the result of decreased equipment sales as noted above as well as gross profit margin normalization of equipment sales as supply has caught up with demand. 26 Table of Contents Australia We entered into the Australian market in October 2023 with the O'Connor acquisition. Australia segment revenue for fiscal 2024 was $44.4 million. Our Australia segment loss before income taxes was $0.5 million for the first quarter of fiscal 2025. Shared Resources/Eliminations We incur centralized expenses/income at our general corporate level, which we refer to as “Shared Resources,” and then allocate most of these net expenses to our segments. Since these allocations are set early in the year, unallocated balances may occur. Shared Resources loss before income taxes was $1.4 million for the first quarter of fiscal 2025 compared to profit before income taxes of $0.4 million for the same period last year. The lower Shared Resources results were primarily driven by foreign currency fluctuations. 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 April 30, 2024, the Company had floorplan payable lines of credit for equipment purchases totaling $1.4 billion, which is primarily comprised of a $875.0 million credit facility with CNH Industrial, a $275.0 million floorplan payable line and a $75.0 million working capital line of credit under the Bank Syndicate Agreement, and a $80.0 million credit facility with DLL Finance. Our equipment inventory turnover decreased from 3.0 times for the rolling 12 month period ended April 30, 2023 to 2.0 times for the rolling 12 month period ended April 30, 2024. The decrease in equipment turnover was attributable to an increase in equipment inventory over the rolling 12 month period ended April 30, 2024. Our equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, decreased to 16.3% as of April 30, 2024 from 18.2% as of January 31, 2024. 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, 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 April 30, 2024, 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 April 30, 2024. 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 $32.4 million for the first three months of fiscal 2025, compared to $77.7 million for the first three months of fiscal 2024. The change in net cash used for operating activities is primarily the result of timing and collections of accounts receivable, which was partially offset by lower net income for the first three months of fiscal 2025. 27 Table of Contents Cash Flow Used for Investing Activities Net cash used for investing activities was $12.9 million for the first three months of fiscal 2025, compared to $26.3 million for the first three months of fiscal 2024. The decrease in cash used for investing activities was primarily the result of the acquisitions of Pioneer Farm Equipment and MAREP in the first three months of fiscal 2024. Cash Flow Provided by Financing Activities Net cash provided by financing activities was $43.1 million for the first three months of fiscal 2025 compared to $98.2 million for the first three months of fiscal 2024. The decrease in cash provided by financing activities was primarily the result of lower drawings on our non-manufacturer floorplan lines of credit in the first three months of fiscal 2025. Information Concerning Off-Balance Sheet Arrangements As of April 30, 2024, 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, 2024, 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 applicable 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. 28 Table of Contents