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, 2025. 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, 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 upon February 2025 U.S. Department of Agriculture publications, calendar year 2024 net farm income is estimated to have decreased by 23.6% compared to 2022. The U.S. federal government recently imposed significant tariffs on imports from a broad range of countries. In response, some countries have enacted or are expected to enact retaliatory tariffs on U.S. exports. Although the overall impact of these trade measures remains uncertain, we recognize the possibility of increases in the wholesale prices that we pay for our equipment and parts inventory. These higher wholesale prices could compress our margins if we are unable to fully pass on these cost increases to our retail customers. Additionally, retaliatory tariffs may negatively affect U.S. agricultural exports, which could have downstream effects on our core customer base in the farming sector. Some analysts have also cautioned that prolonged disruptions to global trade could increase the risk of broader macroeconomic challenges, including the possibility of a recession. For the first quarter of fiscal 2026, our net loss was $13.2 million, or $0.58 per diluted share, compared to a fiscal 2025 first quarter net income of $9.4 million, or $0.41 per diluted share. Significant factors impacting the quarterly comparisons were: • Revenue in the first quarter of fiscal 2026 decreased by 5.5% compared to the first quarter of fiscal 2025. The revenue decrease was led by softening of demand for equipment purchases due to the expected decline of net farm income this growing season. • Gross profit margin decreased to 15.3% for the first quarter of fiscal 2026, as compared to 19.4% for the first quarter of fiscal 2025. The decrease in gross profit margin is due to lower equipment margins, driven by softer retail demand and elevated inventory levels across the industry. 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, 2025. There have been no changes in our critical accounting policies and estimates since January 31, 2025. Key Financial Metrics In addition to tracking our sales and expenses to evaluate our operational performance, we also monitor the following key financial metrics. The results of some of these metrics are discussed further throughout this Item 2. Absorption Absorption is an industry term that refers to the percentage of an equipment dealer's operating expense covered by the combined gross profit from parts, service and rental fleet activity. We calculate absorption by dividing our gross profit from sales of parts, service and rental fleet by our operating expenses, less commission expense on equipment sales, plus interest expense on rental fleet debt. This calculation of absorption does not include floorplan interest expense. We believe that absorption is an important management metric because during economic down cycles our customers tend to postpone new and used equipment purchases while continuing to run, maintain and repair their existing equipment. Thus, operating at a high absorption rate enables us to operate profitably throughout economic down cycles. 19 Table of Contents Dollar Utilization Dollar utilization is a measurement of asset performance and profitability used in the rental industry. We calculate the dollar utilization of our rental fleet equipment 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. While our rental fleet has variable expenses related to repairs and maintenance, its primary expense for depreciation is fixed. Low dollar utilization of our rental fleet has a negative impact on gross profit margin and gross profit dollars due to the fixed depreciation component. However, high dollar utilization of our rental fleet has a positive impact on gross profit margin and gross profit dollars. Inventory Turnover Inventory turnover measures the rate at which inventory is sold during the year. We calculate it by dividing cost of sales on equipment for the last twelve months by the average of the month-end balances of our equipment and parts inventories for the same twelve-month period. We believe that inventory turnover is an important management metric in evaluating the efficiency at which we are managing and selling our inventories. Same-Store Results 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. Results of Operations The results presented below include the operating results of each 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. Additional information regarding our segments is included in Note 17, Business Segment and Geographic Information, in Item 1. Comparative financial data for each of our four sources of revenue are expressed below. Three Months Ended April 30, 2025 2024 (dollars in thousands) Equipment Revenue $ 436,840 $ 468,089 Cost of revenue 407,349 412,239 Gross profit $ 29,491 $ 55,850 Gross profit margin 6.8 % 11.9 % Parts Revenue $ 105,629 $ 108,226 Cost of revenue 73,080 73,151 Gross profit $ 32,549 $ 35,075 Gross profit margin 30.8 % 32.4 % Service Revenue $ 44,017 $ 45,079 Cost of revenue 16,609 16,776 Gross profit $ 27,408 $ 28,303 Gross profit margin 62.3 % 62.8 % Rental and other Revenue $ 7,850 $ 7,309 Cost of revenue 6,363 4,782 Gross profit $ 1,487 $ 2,527 Gross profit margin 18.9 % 34.6 % 20 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, 2025 2024 Revenue Equipment 73.5 % 74.5 % Parts 17.8 % 17.2 % Service 7.4 % 7.2 % Rental and other 1.3 % 1.1 % Total Revenue 100.0 % 100.0 % Total Cost of Revenue 84.7 % 80.6 % Gross Profit Margin 15.3 % 19.4 % Operating Expenses 16.2 % 15.8 % (Loss) Income from Operations (1.0) % 3.6 % Other Expense (1.9) % (1.6) % (Loss) Income Before Income Taxes (2.9) % 2.0 % (Benefit) Provision for Income Taxes (0.7) % 0.5 % Net (Loss) Income (2.2) % 1.5 % Three Months Ended April 30, 2025 Compared to Three Months Ended April 30, 2024 Consolidated Results Revenue Three Months Ended April 30, Increase/ Percent 2025 2024 (Decrease) Change (dollars in thousands) Equipment $ 436,840 $ 468,089 $ (31,249) (6.7) % Parts 105,629 108,226 (2,597) (2.4) % Service 44,017 45,079 (1,062) (2.4) % Rental and other 7,850 7,309 541 7.4 % Total Revenue $ 594,336 $ 628,703 $ (34,367) (5.5) % Total revenue for the first quarter of fiscal 2026 declined by 5.5% or $34.4 million compared to the first quarter of fiscal 2025 primarily due to challenging industry conditions such as decreases in agricultural commodity prices and projected net farm income which have a negative effect on customer sentiment. Further, February 2025 U.S. Department of Agriculture publications estimated calendar year 2024 net farm income to have decreased by 23.6% compared to 2022. 21 Table of Contents Three Months Ended April 30, Increase/ Percent 2025 2024 (Decrease) Change (dollars in thousands) Gross Profit Equipment $ 29,491 $ 55,850 $ (26,359) (47.2) % Parts 32,549 35,075 (2,526) (7.2) % Service 27,408 28,303 (895) (3.2) % Rental and other 1,487 2,527 (1,040) (41.2) % Total Gross Profit $ 90,935 $ 121,755 $ (30,820) (25.3) % Gross Profit Margin Equipment 6.8 % 11.9 % (5.1) % (42.9) % Parts 30.8 % 32.4 % (1.6) % (4.9) % Service 62.3 % 62.8 % (0.5) % (0.8) % Rental and other 18.9 % 34.6 % (15.7) % (45.4) % Total Gross Profit Margin 15.3 % 19.4 % (4.1) % (21.1) % Gross Profit Mix Equipment 32.4 % 45.9 % (13.5) % (29.4) % Parts 35.8 % 28.8 % 7.0 % 24.3 % Service 30.1 % 23.2 % 6.9 % 29.7 % Rental and other 1.7 % 2.1 % (0.4) % (19.0) % Total Gross Profit Mix 100.0 % 100.0 % Gross profit for the first quarter of fiscal 2026 decreased 25.3% or $30.8 million, as compared to the same period last year. Gross profit margin declined to 15.3% in the current quarter from 19.4% in the prior year quarter. The decrease in gross profit margin was primarily due to lower equipment margins, driven by softer retail demand and the Company's initiatives to manage inventory to targeted levels. Our Company-wide absorption rate decreased to 75.5% for the first quarter of fiscal 2026 compared to 77.1% during the same period last year. The decrease in our absorption rate was primarily due to lower gross profit in the first quarter of fiscal 2026 compared to the same period last year. Operating Expenses Three Months Ended April 30, Increase/ Percent 2025 2024 (Decrease) Change (dollars in thousands) Operating Expenses $ 96,404 $ 99,158 $ (2,754) (2.8) % Operating Expenses as a Percentage of Revenue 16.2 % 15.8 % 0.4 % 2.5 % Our operating expenses in the first quarter of fiscal 2026 decreased 2.8% as compared to the first quarter of fiscal 2025. The decrease was primarily driven by lower variable expenses associated with the year-over-year decline in revenue and profitability. Operating expenses as a percentage of revenue increased to 16.2% in the first quarter of fiscal 2026 from 15.8% in the first quarter of fiscal 2025. 22 Table of Contents Impairment Charges Three Months Ended April 30, Increase/ Percent 2025 2024 (Decrease) Change (dollars in thousands) Impairment of Intangible and Long-Lived Assets $ 266 $ — n/m n/m *n/m - not meaningful In the first quarter of fiscal 2026, we recognized $0.3 million in impairment expense related to other intangible and long-lived assets in our Agriculture segment. Other Income (Expense) Three Months Ended April 30, Increase/ Percent 2025 2024 (Decrease) Change (dollars in thousands) Interest and other income (expense) $ (488) $ (288) $ 200 69.4 % Floorplan interest expense $ (6,526) $ (7,064) $ (538) (7.6) % Other interest expense $ (4,533) $ (2,459) $ 2,074 84.3 % The decrease in floorplan interest expense for the first quarter of fiscal 2026 as compared to the first quarter of fiscal 2025 was primarily due to a lower level of interest-bearing inventory. The increase in other interest expense in the first quarter of fiscal 2026 is the result of an increased amount of long-term debt outstanding resulting from the Company's acquisition of previously leased facilities in fiscal 2025 as well as an increase in facilities being financed with finance leases. (Benefit) Provision for Income Taxes Three Months Ended April 30, Increase/ Percent 2025 2024 (Decrease) Change (dollars in thousands) (Benefit) Provision for Income Taxes $ (4,078) $ 3,345 $ (7,423) (221.9) % Our effective tax rate was 23.6 % and 26.2 % for the three months ended April 30, 2025 and 2024, respectively. The effective tax rate for the three months ended April 30, 2025 and 2024, is subject to variation of the impact of certain discrete items, mainly the vesting of share-based compensation, the mix of domestic and foreign income and the impact of the recognition of valuation allowance on our foreign deferred tax assets. 23 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 2025 2024 (Decrease) Change (dollars in thousands) Revenue Agriculture $ 384,386 $ 447,687 $ (63,301) (14.1) % Construction 72,129 71,492 637 0.9 % Europe 93,858 65,105 28,753 44.2 % Australia 43,963 44,419 (456) (1.0) % Total $ 594,336 $ 628,703 $ (34,367) (5.5) % (Loss) Income Before Income Taxes Agriculture $ (12,777) $ 13,045 $ (25,822) n/m Construction (4,180) 268 (4,448) n/m Europe 4,710 1,350 3,360 248.9 % Australia (561) (486) (75) (15.4) % Segment (Loss) Income Before Income Taxes (12,808) 14,177 (26,985) n/m Shared Resources (4,474) (1,391) (3,083) (221.6) % Total $ (17,282) $ 12,786 $ (30,068) n/m *n/m - not meaningful Agriculture Agriculture segment revenue for the first quarter of fiscal 2026 decreased 14.1% compared to the first quarter of fiscal 2025, primarily driven by a decrease in equipment revenue, which resulted from challenging industry conditions, such as decreases in agricultural commodity prices and projected net farm income, which negatively affected customer sentiment in the first quarter of fiscal 2026, as compared to the same period in the prior year. Changes in actual or anticipated net farm income generally have a direct correlation with the retail demand for equipment. Agriculture segment loss before income taxes for the first quarter of fiscal 2026 was $12.8 million compared to income of $13.0 million before income taxes for the first quarter of fiscal 2025. The decrease in gross profit is primarily due to lower sales, which is being driven by softening demand, and lower equipment margins. Construction Construction segment revenue for the first quarter of fiscal 2026 increased 0.9% compared to the first quarter of fiscal 2025. Our Construction segment loss before income taxes was $4.2 million for the first quarter of fiscal 2026 compared to $0.3 million income before income taxes in the first quarter of fiscal 2025. The decrease in segment results was primarily related to lower equipment margins compared to same period last year. Additionally, the dollar utilization of our rental fleet decreased from 21.7% in the first quarter of fiscal 2025 to 20.1% in the first quarter of fiscal 2026. Europe Europe segment revenue was $93.9 million for the first quarter of fiscal 2026 compared to $65.1 million in the first quarter of fiscal 2025. The increase in revenue resulted from an increase in equipment demand, which was driven by a stronger than expected response to European Union stimulus programs in Romania. Our Europe segment income before income taxes was $4.7 million for the first quarter of fiscal 2026 compared to $1.4 million in the first quarter of fiscal 2025. The increase in segment pre-tax income was primarily the result of increased equipment sales as noted above. 24 Table of Contents Australia Australia segment revenue was $44.0 million for the first quarter of fiscal 2026 compared to $44.4 million in the first quarter of fiscal 2025. Our Australia segment loss before income taxes was $0.6 million for the first quarter of fiscal 2026 compared to $0.5 million in 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 $4.5 million for the first quarter of fiscal 2026 compared to $1.4 million for the same period last year. 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. However, our borrowing capacity under our floorplan and other credit facilities is dependent on compliance with various covenants as further described in the “Risk Factors” section and Note 8 to our Condensed Consolidated Financial Statement contained in our Annual Report on Form 10-K. Equipment Inventory and Floorplan and Working Capital Payable Credit Facilities As of April 30, 2025, the Company had floorplan payable lines of credit for equipment purchases totaling $1.5 billion, which is primarily comprised of a $875.0 million credit facility with CNH, a $390.0 million floorplan payable line and a $110.0 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 2.0 times for the rolling 12 month period ended April 30, 2024 to 1.7 times for the rolling 12 month period ended April 30, 2025. The decrease in equipment turnover was attributable to an increase in equipment inventory over the rolling 12 month period ended April 30, 2025 and a decline in demand for equipment purchases. Our equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, decreased to 21.2% as of April 30, 2025 from 25.9% as of January 31, 2025. 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. During fiscal 2025, we received various letters from CNH and DLL Finance that waived the consolidated fixed charge coverage ratio covenant for the periods through January 31, 2026, and therefore as of April 30, 2025, we were not subject to this financial covenant under our CNH and DLL Finance credit agreements. We were also 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, 2025. The financial covenants also require us to maintain an adjusted debt to tangible net worth ratio of 3.5, which is measured on a quarterly basis. While not expected to occur, if operating results were to create the likelihood of a future covenant violation, we would continue to work with our lenders on an appropriate modification or amendment to our financing arrangements. Cash Flow Cash Flow Provided by (Used for) Operating Activities Net cash provided by operating activities was $6.2 million for the first three months of fiscal 2026, compared to net cash used for operating activities of $32.4 million for the three months ended April 30, 2024. The change in cash from operating 25 Table of Contents activities was primarily attributable to changes in inventory and a changing mix in floorplan financing, which was partially offset by a decrease in net income for the first three months of fiscal 2026 compared to the prior year period. Cash Flow Used for Investing Activities Net cash used for investing activities was $5.2 million for the first three months of fiscal 2026, compared to $12.9 million for the first three months of fiscal 2025. The decrease in net cash used for investing activities was primarily due to a decrease of purchases of property and equipment compared to the prior year period. Cash Flow (Used for) Provided by Financing Activities Net cash used for financing activities was $15.8 million for the first three months of fiscal 2026 compared to net cash provided by financing activities $43.1 million for the first three months of fiscal 2025. The change in cash from financing activities was primarily driven by lower non-manufacturing floorplan payables during the first three months of fiscal 2026. Information Concerning Off-Balance Sheet Arrangements As of April 30, 2025, 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, 2025, 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 general market conditions of the agricultural and construction industries, equipment inventory levels and our ability to manage inventory down to target levels and the effects of these actions on future results, and our primary liquidity sources being sufficient to meet future business needs for the foreseeable future, and the adequacy of our capital resources to provide for our liquidity needs for the next 12 months. 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 operations, 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, the impact of those conditions and obligations imposed on us under the CaseIH dealer agreements entered into in connection with our acquisition of the Heartland companies', commercial application equipment business, our substantial dependence on CNH, including CNH'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. 26 Table of Contents