UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 20212022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File No. 001-33866
TITAN MACHINERY INC.
(Exact name of registrant as specified in its charter) | | | | | | | | |
Delaware | | 45-0357838 |
(State or Other Jurisdiction of Incorporation or Organization) | | (IRS Employer Identification No.) |
644 East Beaton Drive
West Fargo, ND 58078-2648
(Address of Principal Executive Offices)
Registrant’s telephone number (701) 356-0130
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.00001 par value per share | TITN | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | |
Large accelerated filer | ☐ | | Accelerated filer | ☒ |
| | | | |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | | |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESYes ☐ NONo ☒
As of August 30, 2021, 22,595,52431, 2022, 22,567,932 shares of Common Stock, $0.00001 par value, of the registrant were outstanding.
TITAN MACHINERY INC.
QUARTERLY REPORT ON FORM 10-Q
Table of Contents
| | | | | | | | |
| | Page No. |
PART I. | FINANCIAL INFORMATION | |
ITEM 1. | FINANCIAL STATEMENTS | |
| Condensed Consolidated Balance Sheets | |
| Condensed Consolidated Statements of Operations | |
| Condensed Consolidated Statements of Comprehensive Income | |
| Condensed Consolidated Statements of Stockholders' Equity | |
| Condensed Consolidated Statements of Cash Flows | |
| Notes to Condensed Consolidated Financial Statements | |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
ITEM 4. | CONTROLS AND PROCEDURES | |
PART II. | OTHER INFORMATION | |
ITEM 1. | LEGAL PROCEEDINGS | |
ITEM 1A. | RISK FACTORS | |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | |
ITEM 4. | MINE SAFETY DISCLOSURES | |
ITEM 5. | OTHER INFORMATION | |
ITEM 6. | EXHIBITS | |
Exhibit Index | | |
Signatures | | |
PART I. — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TITAN MACHINERY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share data) | | | July 31, 2021 | | January 31, 2021 | | July 31, 2022 | | January 31, 2022 |
| Assets | Assets | | | | Assets | | | |
Current Assets | Current Assets | | Current Assets | |
Cash | Cash | $ | 65,584 | | | $ | 78,990 | | Cash | $ | 142,057 | | | $ | 146,149 | |
Receivables, net of allowance for expected credit losses | Receivables, net of allowance for expected credit losses | 82,068 | | | 69,109 | | Receivables, net of allowance for expected credit losses | 96,369 | | | 94,287 | |
Inventories | 427,109 | | | 418,458 | | |
Inventories, net | | Inventories, net | 556,383 | | | 421,758 | |
Prepaid expenses and other | Prepaid expenses and other | 20,684 | | | 13,677 | | Prepaid expenses and other | 17,736 | | | 28,135 | |
| Total current assets | Total current assets | 595,445 | | | 580,234 | | Total current assets | 812,545 | | | 690,329 | |
Noncurrent Assets | Noncurrent Assets | | Noncurrent Assets | |
Property and equipment, net of accumulated depreciation | Property and equipment, net of accumulated depreciation | 162,657 | | | 147,165 | | Property and equipment, net of accumulated depreciation | 188,964 | | | 178,243 | |
Operating lease assets | Operating lease assets | 66,934 | | | 74,445 | | Operating lease assets | 51,888 | | | 56,150 | |
Deferred income taxes | Deferred income taxes | 5,265 | | | 3,637 | | Deferred income taxes | 2,239 | | | 1,328 | |
Goodwill | Goodwill | 1,433 | | | 1,433 | | Goodwill | 9,535 | | | 8,952 | |
Intangible assets, net of accumulated amortization | Intangible assets, net of accumulated amortization | 6,558 | | | 7,785 | | Intangible assets, net of accumulated amortization | 11,480 | | | 10,624 | |
Other | Other | 1,079 | | | 1,090 | | Other | 1,220 | | | 1,041 | |
Total noncurrent assets | Total noncurrent assets | 243,926 | | | 235,555 | | Total noncurrent assets | 265,326 | | | 256,338 | |
Total Assets | Total Assets | $ | 839,371 | | | $ | 815,789 | | Total Assets | $ | 1,077,871 | | | $ | 946,667 | |
| Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | | Liabilities and Stockholders' Equity | |
Current Liabilities | Current Liabilities | | Current Liabilities | |
Accounts payable | Accounts payable | $ | 20,649 | | | $ | 20,045 | | Accounts payable | $ | 28,344 | | | $ | 25,644 | |
Floorplan payable | Floorplan payable | 185,549 | | | 161,835 | | Floorplan payable | 274,244 | | | 135,415 | |
| Current maturities of long-term debt | Current maturities of long-term debt | 5,455 | | | 4,591 | | Current maturities of long-term debt | 6,650 | | | 5,876 | |
Current operating lease liabilities | Current operating lease liabilities | 10,755 | | | 11,772 | | Current operating lease liabilities | 9,465 | | | 9,601 | |
Deferred revenue | Deferred revenue | 37,977 | | | 59,418 | | Deferred revenue | 91,819 | | | 134,146 | |
Accrued expenses and other | Accrued expenses and other | 47,751 | | | 48,791 | | Accrued expenses and other | 42,856 | | | 59,339 | |
Income taxes payable | Income taxes payable | 2,335 | | | 11,048 | | Income taxes payable | 6,289 | | | 4,700 | |
Total current liabilities | Total current liabilities | 310,471 | | | 317,500 | | Total current liabilities | 459,667 | | | 374,721 | |
Long-Term Liabilities | Long-Term Liabilities | | Long-Term Liabilities | |
Long-term debt, less current maturities | Long-term debt, less current maturities | 63,624 | | | 44,906 | | Long-term debt, less current maturities | 86,500 | | | 74,772 | |
Operating lease liabilities | Operating lease liabilities | 66,678 | | | 73,567 | | Operating lease liabilities | 50,998 | | | 55,595 | |
| Deferred income taxes | | Deferred income taxes | 1,991 | | | 2,006 | |
Other long-term liabilities | Other long-term liabilities | 6,746 | | | 8,535 | | Other long-term liabilities | 4,438 | | | 4,374 | |
Total long-term liabilities | Total long-term liabilities | 137,048 | | | 127,008 | | Total long-term liabilities | 143,927 | | | 136,747 | |
Commitments and Contingencies (Note 15) | Commitments and Contingencies (Note 15) | 0 | | 0 | Commitments and Contingencies (Note 15) | |
Stockholders' Equity | Stockholders' Equity | | Stockholders' Equity | |
Common stock, par value $.00001 per share, 45,000 shares authorized; 22,596 shares issued and outstanding at July 31, 2021; 22,553 shares issued and outstanding at January 31, 2021 | — | | | — | | |
Common stock, par value $.00001 per share, 45,000 shares authorized; 22,695 shares issued and outstanding at July 31, 2022; 22,588 shares issued and outstanding at January 31, 2022 | | Common stock, par value $.00001 per share, 45,000 shares authorized; 22,695 shares issued and outstanding at July 31, 2022; 22,588 shares issued and outstanding at January 31, 2022 | — | | | — | |
Additional paid-in-capital | Additional paid-in-capital | 253,129 | | | 252,913 | | Additional paid-in-capital | 255,188 | | | 254,455 | |
Retained earnings | Retained earnings | 138,665 | | | 116,869 | | Retained earnings | 225,415 | | | 182,916 | |
Accumulated other comprehensive income | 58 | | | 1,499 | | |
Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (6,326) | | | (2,172) | |
Total stockholders' equity | Total stockholders' equity | 391,852 | | | 371,281 | | Total stockholders' equity | 474,277 | | | 435,199 | |
Total Liabilities and Stockholders' Equity | Total Liabilities and Stockholders' Equity | $ | 839,371 | | | $ | 815,789 | | Total Liabilities and Stockholders' Equity | $ | 1,077,871 | | | $ | 946,667 | |
See Notes to Condensed Consolidated Financial Statements
TITAN MACHINERY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data) | | | Three Months Ended July 31, | | Six Months Ended July 31, | | Three Months Ended July 31, | | Six Months Ended July 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Revenue | Revenue | | | | | | | | Revenue | | | | | | | |
Equipment | Equipment | $ | 272,733 | | | $ | 202,654 | | | $ | 548,713 | | | $ | 421,159 | | Equipment | $ | 375,216 | | | $ | 272,733 | | | $ | 731,582 | | | $ | 548,713 | |
Parts | Parts | 65,317 | | | 61,454 | | | 127,942 | | | 118,068 | | Parts | 77,693 | | | 65,317 | | | 146,255 | | | 127,942 | |
Service | Service | 29,676 | | | 27,986 | | | 57,379 | | | 53,586 | | Service | 33,365 | | | 29,676 | | | 62,887 | | | 57,379 | |
Rental and other | Rental and other | 9,904 | | | 11,371 | | | 16,300 | | | 20,860 | | Rental and other | 10,269 | | | 9,904 | | | 16,825 | | | 16,300 | |
Total Revenue | Total Revenue | 377,630 | | | 303,465 | | | 750,334 | | | 613,673 | | Total Revenue | 496,543 | | | 377,630 | | | 957,549 | | | 750,334 | |
Cost of Revenue | Cost of Revenue | | Cost of Revenue | |
Equipment | Equipment | 240,332 | | | 180,231 | | | 484,008 | | | 377,278 | | Equipment | 323,988 | | | 240,332 | | | 634,222 | | | 484,008 | |
Parts | Parts | 46,089 | | | 43,032 | | | 90,529 | | | 82,649 | | Parts | 52,706 | | | 46,089 | | | 100,015 | | | 90,529 | |
Service | Service | 9,771 | | | 9,665 | | | 19,065 | | | 18,010 | | Service | 11,072 | | | 9,771 | | | 21,832 | | | 19,065 | |
Rental and other | Rental and other | 6,420 | | | 7,849 | | | 10,737 | | | 14,636 | | Rental and other | 6,078 | | | 6,420 | | | 10,087 | | | 10,737 | |
Total Cost of Revenue | Total Cost of Revenue | 302,612 | | | 240,777 | | | 604,339 | | | 492,573 | | Total Cost of Revenue | 393,844 | | | 302,612 | | | 766,156 | | | 604,339 | |
Gross Profit | Gross Profit | 75,018 | | | 62,688 | | | 145,995 | | | 121,100 | | Gross Profit | 102,699 | | | 75,018 | | | 191,393 | | | 145,995 | |
Operating Expenses | Operating Expenses | 57,074 | | | 53,079 | | | 113,516 | | | 106,137 | | Operating Expenses | 68,828 | | | 57,074 | | | 132,980 | | | 113,516 | |
| Impairment of Intangible and Long-Lived Assets | Impairment of Intangible and Long-Lived Assets | 1,498 | | | — | | | 1,498 | | | 216 | | Impairment of Intangible and Long-Lived Assets | — | | | 1,498 | | | — | | | 1,498 | |
| Income from Operations | Income from Operations | 16,446 | | | 9,609 | | | 30,981 | | | 14,747 | | Income from Operations | 33,871 | | | 16,446 | | | 58,413 | | | 30,981 | |
Other Income (Expense) | Other Income (Expense) | | Other Income (Expense) | |
Interest and other income | Interest and other income | 654 | | | 562 | | | 1,320 | | | 692 | | Interest and other income | 873 | | | 654 | | | 1,365 | | | 1,320 | |
Floorplan interest expense | Floorplan interest expense | (350) | | | (901) | | | (768) | | | (2,054) | | Floorplan interest expense | (245) | | | (350) | | | (499) | | | (768) | |
Other interest expense | Other interest expense | (1,118) | | | (978) | | | (2,222) | | | (1,944) | | Other interest expense | (1,349) | | | (1,118) | | | (2,545) | | | (2,222) | |
Income Before Income Taxes | Income Before Income Taxes | 15,632 | | | 8,292 | | | 29,311 | | | 11,441 | | Income Before Income Taxes | 33,150 | | | 15,632 | | | 56,734 | | | 29,311 | |
Provision for Income Taxes | Provision for Income Taxes | 4,383 | | | 1,892 | | | 7,515 | | | 2,779 | | Provision for Income Taxes | 8,191 | | | 4,383 | | | 14,235 | | | 7,515 | |
Net Income | Net Income | $ | 11,249 | | | $ | 6,400 | | | $ | 21,796 | | | $ | 8,662 | | Net Income | $ | 24,959 | | | $ | 11,249 | | | $ | 42,499 | | | $ | 21,796 | |
| Earnings per Share: | Earnings per Share: | | Earnings per Share: | |
Basic | Basic | $ | 0.50 | | | $ | 0.28 | | | $ | 0.97 | | | $ | 0.39 | | Basic | $ | 1.10 | | | $ | 0.50 | | | $ | 1.88 | | | $ | 0.97 | |
Diluted | Diluted | $ | 0.50 | | | $ | 0.28 | | | $ | 0.97 | | | $ | 0.39 | | Diluted | $ | 1.10 | | | $ | 0.50 | | | $ | 1.88 | | | $ | 0.97 | |
| Weighted Average Common Shares: | Weighted Average Common Shares: | | Weighted Average Common Shares: | |
Basic | Basic | 22,261 | | | 22,118 | | | 22,209 | | | 22,068 | | Basic | 22,387 | | | 22,261 | | | 22,350 | | | 22,209 | |
Diluted | Diluted | 22,276 | | | 22,119 | | | 22,220 | | | 22,068 | | Diluted | 22,392 | | | 22,276 | | | 22,357 | | | 22,220 | |
See Notes to Condensed Consolidated Financial Statements
TITAN MACHINERY INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
| | | Three Months Ended July 31, | | Six Months Ended July 31, | | Three Months Ended July 31, | | Six Months Ended July 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Net Income | Net Income | $ | 11,249 | | | $ | 6,400 | | | $ | 21,796 | | | $ | 8,662 | | Net Income | $ | 24,959 | | | $ | 11,249 | | | $ | 42,499 | | | $ | 21,796 | |
Other Comprehensive Income (Loss) | Other Comprehensive Income (Loss) | | Other Comprehensive Income (Loss) | |
Foreign currency translation adjustments | Foreign currency translation adjustments | 937 | | | 778 | | | (1,441) | | | 250 | | Foreign currency translation adjustments | (2,963) | | | 937 | | | (4,153) | | | (1,441) | |
Comprehensive Income | Comprehensive Income | $ | 12,186 | | | $ | 7,178 | | | $ | 20,355 | | | $ | 8,912 | | Comprehensive Income | $ | 21,996 | | | $ | 12,186 | | | $ | 38,346 | | | $ | 20,355 | |
See Notes to Condensed Consolidated Financial Statements
TITAN MACHINERY INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands)
| | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| | Shares Outstanding | | Amount | | | Shares Outstanding | | Amount | |
BALANCE, January 31, 2020 | 22,335 | | | $ | — | | | $ | 250,607 | | | $ | 97,717 | | | $ | (3,220) | | | $ | 345,104 | | |
Cumulative-effect adjustment of adopting ASC 326, Financial Instruments - Credit Losses | — | | | — | | | — | | | (204) | | | — | | | (204) | | |
BALANCE, January 31, 2021 | | BALANCE, January 31, 2021 | 22,553 | | | $ | — | | | $ | 252,913 | | | $ | 116,869 | | | $ | 1,499 | | | $ | 371,281 | |
Common stock issued on grant of restricted stock and exercise of stock options, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | Common stock issued on grant of restricted stock and exercise of stock options, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | (21) | | | — | | | (201) | | | — | | | — | | | (201) | | Common stock issued on grant of restricted stock and exercise of stock options, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | (33) | | | — | | | (975) | | | — | | | — | | | (975) | |
Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | 645 | | | — | | | — | | | 645 | | Stock-based compensation expense | — | | | — | | | 609 | | | — | | | — | | | 609 | |
Net Income | Net Income | — | | | — | | | — | | | 2,262 | | | — | | | 2,262 | | Net Income | — | | | — | | | — | | | 10,547 | | | — | | | 10,547 | |
Other comprehensive loss | Other comprehensive loss | — | | | — | | | — | | | — | | | (528) | | | (528) | | Other comprehensive loss | — | | | — | | | — | | | — | | | (2,379) | | | (2,379) | |
BALANCE, April 30, 2020 | 22,314 | | | — | | | 251,051 | | | 99,775 | | | (3,748) | | | 347,078 | | |
BALANCE, April 30, 2021 | | BALANCE, April 30, 2021 | 22,520 | | | $ | — | | | $ | 252,547 | | | $ | 127,416 | | | $ | (880) | | | $ | 379,083 | |
Common stock issued on grant of restricted stock and exercise of stock options, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | Common stock issued on grant of restricted stock and exercise of stock options, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | 239 | | | — | | | — | | | — | | | — | | | — | | Common stock issued on grant of restricted stock and exercise of stock options, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | 76 | | | — | | | (2) | | | — | | | — | | | (2) | |
Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | 536 | | | — | | | — | | | 536 | | Stock-based compensation expense | — | | | — | | | 584 | | | — | | | — | | | 584 | |
Net Income | Net Income | — | | | — | | | — | | | 6,400 | | | — | | | 6,400 | | Net Income | — | | | — | | | — | | | 11,249 | | | — | | | 11,249 | |
Other comprehensive income | Other comprehensive income | — | | | — | | | — | | | — | | | 778 | | | 778 | | Other comprehensive income | — | | | — | | | — | | | — | | | 938 | | | 938 | |
BALANCE, July 31, 2020 | 22,553 | | | $ | — | | | $ | 251,587 | | | $ | 106,175 | | | $ | (2,970) | | | $ | 354,792 | | |
BALANCE, July 31, 2021 | | BALANCE, July 31, 2021 | 22,596 | | | — | | | 253,129 | | | 138,665 | | | 58 | | | 391,852 | |
|
| | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| | Shares Outstanding | | Amount | | | Shares Outstanding | | Amount | |
BALANCE, January 31, 2021 | 22,553 | | | $ | — | | | $ | 252,913 | | | $ | 116,869 | | | $ | 1,499 | | | $ | 371,281 | | |
BALANCE, January 31, 2022 | | BALANCE, January 31, 2022 | 22,588 | | | $ | — | | | $ | 254,455 | | | $ | 182,916 | | | $ | (2,172) | | | $ | 435,199 | |
Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | (33) | | | — | | | (975) | | | — | | | — | | | (975) | | Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | (19) | | | — | | | (685) | | | — | | | — | | | (685) | |
Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | 609 | | | — | | | — | | | 609 | | Stock-based compensation expense | — | | | — | | | 620 | | | — | | | — | | | 620 | |
Net income | Net income | — | | | — | | | — | | | 10,547 | | | — | | | 10,547 | | Net income | — | | | — | | | — | | | 17,540 | | | — | | | 17,540 | |
Other comprehensive loss | Other comprehensive loss | — | | | — | | | — | | | — | | | (2,379) | | | (2,379) | | Other comprehensive loss | — | | | — | | | — | | | — | | | (1,191) | | | (1,191) | |
BALANCE, April 30, 2021 | 22,520 | | | — | | | 252,547 | | | 127,416 | | | (880) | | | 379,083 | | |
BALANCE, April 30, 2022 | | BALANCE, April 30, 2022 | 22,569 | | | $ | — | | | $ | 254,390 | | | $ | 200,456 | | | $ | (3,363) | | | $ | 451,483 | |
Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | 76 | | | — | | | (2) | | | — | | | — | | | (2) | | Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | 126 | | | — | | | (5) | | | — | | | — | | | (5) | |
Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | 584 | | | — | | | — | | | 584 | | Stock-based compensation expense | — | | | — | | | 803 | | | — | | | — | | | 803 | |
Net income | Net income | — | | | — | | | — | | | 11,249 | | | — | | | 11,249 | | Net income | — | | | — | | | — | | | 24,959 | | | — | | | 24,959 | |
Other comprehensive income | Other comprehensive income | — | | | — | | | — | | | — | | | 938 | | | 938 | | Other comprehensive income | — | | | — | | | — | | | — | | | (2,963) | | | (2,963) | |
BALANCE, July 31, 2021 | 22,596 | | | $ | — | | | $ | 253,129 | | | $ | 138,665 | | | $ | 58 | | | $ | 391,852 | | |
BALANCE, July 31, 2022 | | BALANCE, July 31, 2022 | 22,695 | | | — | | | 255,188 | | | 225,415 | | | (6,326) | | | 474,277 | |
|
See Notes to Condensed Consolidated Financial Statements
TITAN MACHINERY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) | | | Six Months Ended July 31, | | Six Months Ended July 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Operating Activities | Operating Activities | | | | Operating Activities | | | |
Net income | Net income | $ | 21,796 | | | $ | 8,662 | | Net income | $ | 42,499 | | | $ | 21,796 | |
Adjustments to reconcile net income to net cash provided by (used for) operating activities | | |
Adjustments to reconcile net income to net cash provided by operating activities | | Adjustments to reconcile net income to net cash provided by operating activities | |
Depreciation and amortization | Depreciation and amortization | 10,602 | | | 11,286 | | Depreciation and amortization | 10,987 | | | 10,602 | |
Impairment | Impairment | 1,498 | | | 216 | | Impairment | — | | | 1,498 | |
Deferred income taxes | Deferred income taxes | (1,645) | | | (944) | | Deferred income taxes | (1,005) | | | (1,645) | |
Stock-based compensation expense | Stock-based compensation expense | 1,193 | | | 1,181 | | Stock-based compensation expense | 1,423 | | | 1,193 | |
Noncash interest expense | Noncash interest expense | 110 | | | 75 | | Noncash interest expense | 121 | | | 110 | |
Noncash lease expense | 5,073 | | | 5,717 | | |
| | Other, net | Other, net | 162 | | | (368) | | Other, net | 4,583 | | | 5,235 | |
Changes in assets and liabilities | Changes in assets and liabilities | | Changes in assets and liabilities | |
Receivables, prepaid expenses and other assets | Receivables, prepaid expenses and other assets | (12,384) | | | 3,347 | | Receivables, prepaid expenses and other assets | 5,444 | | | (12,384) | |
Inventories | Inventories | (17,166) | | | 31,885 | | Inventories | (137,708) | | | (17,166) | |
Manufacturer floorplan payable | Manufacturer floorplan payable | 56,436 | | | (26,726) | | Manufacturer floorplan payable | 105,415 | | | 56,436 | |
Accounts payable, deferred revenue, accrued expenses and other and other long-term liabilities | (31,627) | | | (15,140) | | |
Deferred Revenue | | Deferred Revenue | (43,530) | | | (21,063) | |
Accounts payable, accrued expenses and other and other long-term liabilities | | Accounts payable, accrued expenses and other and other long-term liabilities | (9,182) | | | (16,051) | |
| Operating lease liabilities | (5,487) | | | (6,156) | | |
| Net Cash Provided by (Used for) Operating Activities | Net Cash Provided by (Used for) Operating Activities | 28,561 | | | 13,035 | | Net Cash Provided by (Used for) Operating Activities | (20,953) | | | 28,561 | |
Investing Activities | Investing Activities | | Investing Activities | |
Rental fleet purchases | Rental fleet purchases | (8,946) | | | (6,001) | | Rental fleet purchases | (6,020) | | | (8,946) | |
Property and equipment purchases (excluding rental fleet) | Property and equipment purchases (excluding rental fleet) | (10,888) | | | (4,472) | | Property and equipment purchases (excluding rental fleet) | (8,487) | | | (10,888) | |
Proceeds from sale of property and equipment | Proceeds from sale of property and equipment | 420 | | | 489 | | Proceeds from sale of property and equipment | 1,628 | | | 420 | |
Acquisition consideration, net of cash acquired | Acquisition consideration, net of cash acquired | — | | | (6,790) | | Acquisition consideration, net of cash acquired | (7,675) | | | — | |
Other, net | Other, net | 12 | | | (20) | | Other, net | (182) | | | 12 | |
Net Cash Used for Investing Activities | Net Cash Used for Investing Activities | (19,402) | | | (16,794) | | Net Cash Used for Investing Activities | (20,736) | | | (19,402) | |
Financing Activities | Financing Activities | | Financing Activities | |
Net change in non-manufacturer floorplan payable | Net change in non-manufacturer floorplan payable | (22,731) | | | 7,229 | | Net change in non-manufacturer floorplan payable | 35,716 | | | (22,731) | |
| Proceeds from long-term debt borrowings | Proceeds from long-term debt borrowings | 6,451 | | | 1,112 | | Proceeds from long-term debt borrowings | 8,415 | | | 6,451 | |
Principal payments on long-term debt and finance leases | Principal payments on long-term debt and finance leases | (5,117) | | | (2,952) | | Principal payments on long-term debt and finance leases | (3,879) | | | (5,117) | |
Payment of debt issuance costs | Payment of debt issuance costs | — | | | (670) | | Payment of debt issuance costs | — | | | — | |
Other, net | Other, net | (976) | | | (200) | | Other, net | (689) | | | (976) | |
Net Cash Provided by (Used for) Financing Activities | Net Cash Provided by (Used for) Financing Activities | (22,373) | | | 4,519 | | Net Cash Provided by (Used for) Financing Activities | 39,563 | | | (22,373) | |
Effect of Exchange Rate Changes on Cash | Effect of Exchange Rate Changes on Cash | (192) | | | 3 | | Effect of Exchange Rate Changes on Cash | (1,966) | | | (192) | |
Net Change in Cash | Net Change in Cash | (13,406) | | | 763 | | Net Change in Cash | (4,092) | | | (13,406) | |
Cash at Beginning of Period | Cash at Beginning of Period | 78,990 | | | 43,721 | | Cash at Beginning of Period | 146,149 | | | 78,990 | |
Cash at End of Period | Cash at End of Period | $ | 65,584 | | | $ | 44,484 | | Cash at End of Period | $ | 142,057 | | | $ | 65,584 | |
Supplemental Disclosures of Cash Flow Information | Supplemental Disclosures of Cash Flow Information | | | | Supplemental Disclosures of Cash Flow Information | | | |
Cash paid during the period | Cash paid during the period | | Cash paid during the period | |
Income taxes, net of refunds | Income taxes, net of refunds | $ | 17,378 | | | $ | (228) | | Income taxes, net of refunds | $ | 11,116 | | | $ | 17,378 | |
Interest | Interest | $ | 2,797 | | | $ | 4,103 | | Interest | $ | 2,851 | | | $ | 2,797 | |
Supplemental Disclosures of Noncash Investing and Financing Activities | Supplemental Disclosures of Noncash Investing and Financing Activities | | | | Supplemental Disclosures of Noncash Investing and Financing Activities | | | |
Net property and equipment financed with long-term debt, finance leases, accounts payable and accrued liabilities | Net property and equipment financed with long-term debt, finance leases, accounts payable and accrued liabilities | $ | 9,014 | | | $ | 4,645 | | Net property and equipment financed with long-term debt, finance leases, accounts payable and accrued liabilities | $ | 2,667 | | | $ | 9,014 | |
Long-term debt to acquire finance leases | Long-term debt to acquire finance leases | $ | 7,454 | | | $ | — | | Long-term debt to acquire finance leases | $ | 6,776 | | | $ | 7,454 | |
Net transfer of assets from (to) property and equipment to (from) inventories | Net transfer of assets from (to) property and equipment to (from) inventories | $ | 1,269 | | | $ | 319 | | Net transfer of assets from (to) property and equipment to (from) inventories | $ | (2,849) | | | $ | 1,269 | |
See Notes to Condensed Consolidated Financial Statements
TITAN MACHINERY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. The quarterly operating results for Titan Machinery Inc. (the “Company”) are subject to fluctuation due to varying weather patterns, which may impact the timing and amount of equipment purchases, rentals, and after-sales parts and service purchases by the Company’s Agriculture, Constructionagriculture, construction and Internationalinternational customers. Therefore, operating results for the six-month periodsix-months ended July 31, 20212022 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2022.2023. The information contained in the consolidated balance sheet as of January 31, 20212022 was derived from the audited consolidated financial statements of the Company for the fiscal year then ended. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 20212022 as filed with the SEC.
Nature of Business
The Company is engaged in the retail sale, service and rental of agricultural and construction machinery through its stores in the United States and Europe. The Company’s North American stores are located in Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota, Washington, Wisconsin, and Wyoming and its European stores are located in Bulgaria, Germany, Romania, Serbia and Ukraine.
Impact ofRussia/Ukraine Geopolitical Conflict
In February, 2022, the COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic,ongoing Russia/Ukraine conflict significantly intensified, and the President of the United States declared the COVID-19 outbreak as a national emergency. The nature of COVID-19 led to worldwide shutdownssustained conflict and halting of commercial and interpersonal activity as governments imposed regulations in efforts to control the spread of the pandemic, such as shelter-in-place orders and quarantines. The Company's products and services were determined to be essentialdisruption in the markets we serveregion is ongoing. Titan Machinery Ukraine, LLC ("Titan Machinery Ukraine"), the Company's wholly owned Ukrainian subsidiary, has ten locations throughout Ukraine primarily in western and accordinglycentral Ukraine. The conflict has caused disruptions in our Ukrainian operations, have been allowed to continue throughout the pandemic. The extent and duration of the COVID-19 impact, on the operations and financial position of the Company and on the global economy, is uncertain. Uncertainty remains regarding emerging variant strains of COVID-19, and regarding the length of time it will takewith our revenues for the COVID-19 pandemic to subside.We will continue to take action as necessary as the health and safety of our employees and customers remain our top priority.
Some of the Company's supply vendors are facing production, supply chain and staffing challenges as they work to achieve production capacity and lead times consistent with pre-pandemic levels. As a result, the Company has experienced some disruptions and delays on delivery of certain inventory. The Company has assessed the impacts of the COVID-19 pandemic on its results of operations for the three and six monthssix-months ended July 31, 20212022 down 37.7% from the prior year period. These disruptions have not been material to the Company's consolidated financial statements. However, if the conflict intensifies in western and 2020, and although there have been logistical and other challenges, no materialcentral Ukraine, it could significantly increase the adverse impacts were identified.effect on the Company in future periods.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, particularly related to realization of inventory, impairment of long-lived assets, goodwill, or indefinite lived intangible assets, collectability of receivables, and income taxes.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material accounts, transactions and profits between the consolidated companies have been eliminated in consolidation.
Accounting Guidance Not Yet Adopted
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU No. 2020-04”), which provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. ASU 2020-04 is effective upon issuance and can be applied through December 31, 2022. The Company is updating its credit agreements to include language regarding the successor or alternate rate to LIBOR, and a review of other contracts and agreements is on-going. The Company does not expect the guidance to have a material impact on its results of operations, financial position, cash flows, or disclosures.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted Earnings Per Shareearnings per share (EPS): | | | Three Months Ended July 31, | | Six Months Ended July 31, | | Three Months Ended July 31, | | Six Months Ended July 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands, except per share data) | | (in thousands, except per share data) |
Numerator: | Numerator: | | Numerator: | |
Net income | Net income | $ | 11,249 | | | $ | 6,400 | | | $ | 21,796 | | | $ | 8,662 | | Net income | $ | 24,959 | | | $ | 11,249 | | | $ | 42,499 | | | $ | 21,796 | |
Allocation to participating securities | Allocation to participating securities | (156) | | | (101) | | | (334) | | | (129) | | Allocation to participating securities | (291) | | | (156) | | | (502) | | | (334) | |
Net income attributable to Titan Machinery Inc. common stockholders | Net income attributable to Titan Machinery Inc. common stockholders | $ | 11,093 | | | $ | 6,299 | | | $ | 21,462 | | | $ | 8,533 | | Net income attributable to Titan Machinery Inc. common stockholders | $ | 24,668 | | | $ | 11,093 | | | $ | 41,997 | | | $ | 21,462 | |
Denominator: | Denominator: | | | | | | | | Denominator: | | | | | | | |
Basic weighted-average common shares outstanding | Basic weighted-average common shares outstanding | 22,261 | | | 22,118 | | | 22,209 | | | 22,068 | | Basic weighted-average common shares outstanding | 22,387 | | | 22,261 | | | 22,350 | | | 22,209 | |
Plus: incremental shares from vesting of restricted stock units | Plus: incremental shares from vesting of restricted stock units | 15 | | | 1 | | | 11 | | | — | | Plus: incremental shares from vesting of restricted stock units | 5 | | | 15 | | | 7 | | | 11 | |
Diluted weighted-average common shares outstanding | Diluted weighted-average common shares outstanding | 22,276 | | | 22,119 | | | 22,220 | | | 22,068 | | Diluted weighted-average common shares outstanding | 22,392 | | | 22,276 | | | 22,357 | | | 22,220 | |
| Earnings Per Share: | Earnings Per Share: | | Earnings Per Share: | |
Basic | Basic | $ | 0.50 | | | $ | 0.28 | | | $ | 0.97 | | | $ | 0.39 | | Basic | $ | 1.10 | | | $ | 0.50 | | | $ | 1.88 | | | $ | 0.97 | |
Diluted | Diluted | $ | 0.50 | | | $ | 0.28 | | | $ | 0.97 | | | $ | 0.39 | | Diluted | $ | 1.10 | | | $ | 0.50 | | | $ | 1.88 | | | $ | 0.97 | |
|
NOTE 3 - REVENUE
Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to collect in exchange for those goods or services. Sales, value added and other taxes collected from our customers concurrent with our revenue activities are excluded from revenue.
The following tables present our revenue disaggregated by revenue source and segment: | | | Three Months Ended July 31, 2021 | | Three Months Ended July 31, 2020 | | Three Months Ended July 31, 2022 | | Six Months Ended July 31, 2022 |
| | Agriculture | | Construction | | International | | Total | | Agriculture | | Construction | | International | | Total | | Agriculture | | Construction | | International | | Total | | Agriculture | | Construction | | International | | Total |
| | (in thousands) | | (in thousands) | | (in thousands) | | (in thousands) |
Equipment | Equipment | $ | 156,408 | | | $ | 54,020 | | | $ | 62,305 | | | $ | 272,733 | | | $ | 110,601 | | | $ | 48,478 | | | $ | 43,575 | | | $ | 202,654 | | Equipment | $ | 270,472 | | | $ | 43,184 | | | $ | 61,560 | | | $ | 375,216 | | | $ | 521,565 | | | $ | 87,002 | | | $ | 123,015 | | | $ | 731,582 | |
Parts | Parts | 40,742 | | | 11,928 | | | 12,647 | | | 65,317 | | | 37,470 | | | 13,016 | | | 10,968 | | | 61,454 | | Parts | 52,548 | | | 11,816 | | | 13,329 | | | 77,693 | | | 97,054 | | | 23,879 | | | 25,322 | | | 146,255 | |
Service | Service | 21,150 | | | 6,585 | | | 1,941 | | | 29,676 | | | 19,429 | | | 6,806 | | | 1,751 | | | 27,986 | | Service | 24,730 | | | 6,302 | | | 2,333 | | | 33,365 | | | 46,683 | | | 12,125 | | | 4,079 | | | 62,887 | |
Other | Other | 758 | | | 490 | | | 188 | | | 1,436 | | | 829 | | | 725 | | | 119 | | | 1,673 | | Other | 880 | | | 500 | | | 246 | | | 1,626 | | | 1,679 | | | 803 | | | 451 | | | 2,933 | |
Revenue from contracts with customers | Revenue from contracts with customers | 219,058 | | | 73,023 | | | 77,081 | | | 369,162 | | | 168,329 | | | 69,025 | | | 56,413 | | | 293,767 | | Revenue from contracts with customers | 348,630 | | | 61,802 | | | 77,468 | | | 487,900 | | | 666,981 | | | 123,809 | | | 152,867 | | | 943,657 | |
Rental | Rental | 306 | | | 7,920 | | | 242 | | | 8,468 | | | 743 | | | 8,694 | | | 261 | | | 9,698 | | Rental | 326 | | | 8,220 | | | 97 | | | 8,643 | | | 522 | | | 13,177 | | | 193 | | | 13,892 | |
Total revenues | Total revenues | $ | 219,364 | | | $ | 80,943 | | | $ | 77,323 | | | $ | 377,630 | | | $ | 169,072 | | | $ | 77,719 | | | $ | 56,674 | | | $ | 303,465 | | Total revenues | $ | 348,956 | | | $ | 70,022 | | | $ | 77,565 | | | $ | 496,543 | | | $ | 667,503 | | | $ | 136,986 | | | $ | 153,060 | | | $ | 957,549 | |
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| Three Months Ended July 31, 2021 | | Six Months Ended July 31, 2021 |
| Agriculture | | Construction | | International | | Total | | Agriculture | | Construction | | International | | Total |
| (in thousands) | | (in thousands) |
Equipment | $ | 156,408 | | | $ | 54,020 | | | $ | 62,305 | | | $ | 272,733 | | | $ | 325,664 | | | $ | 98,832 | | | $ | 124,217 | | | $ | 548,713 | |
Parts | 40,742 | | | 11,928 | | | 12,647 | | | 65,317 | | | 80,425 | | | 24,036 | | | 23,481 | | | 127,942 | |
Service | 21,150 | | | 6,585 | | | 1,941 | | | 29,676 | | | 40,904 | | | 12,954 | | | 3,521 | | | 57,379 | |
Other | 758 | | | 490 | | | 188 | | | 1,436 | | | 1,478 | | | 855 | | | 281 | | | 2,614 | |
Revenue from contracts with customers | 219,058 | | | 73,023 | | | 77,081 | | | 369,162 | | | 448,471 | | | 136,677 | | | 151,500 | | | 736,648 | |
Rental | 306 | | | 7,920 | | | 242 | | | 8,468 | | | 444 | | | 12,873 | | | 369 | | | 13,686 | |
Total revenues | $ | 219,364 | | | $ | 80,943 | | | $ | 77,323 | | | $ | 377,630 | | | $ | 448,915 | | | $ | 149,550 | | | $ | 151,869 | | | $ | 750,334 | |
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| Six Months Ended July 31, 2021 | | Six Months Ended July 31, 2020 |
| Agriculture | | Construction | | International | | Total | | Agriculture | | Construction | | International | | Total |
| (in thousands) | | (in thousands) |
Equipment | $ | 325,664 | | | $ | 98,832 | | | $ | 124,217 | | | $ | 548,713 | | | $ | 250,349 | | | $ | 82,732 | | | $ | 88,078 | | | $ | 421,159 | |
Parts | 80,425 | | | 24,036 | | | 23,481 | | | 127,942 | | | 72,550 | | | 24,476 | | | 21,042 | | | 118,068 | |
Service | 40,904 | | | 12,954 | | | 3,521 | | | 57,379 | | | 37,150 | | | 13,017 | | | 3,419 | | | 53,586 | |
Other | 1,478 | | | 855 | | | 281 | | | 2,614 | | | 1,562 | | | 1,243 | | | 223 | | | 3,028 | |
Revenue from contracts with customers | 448,471 | | | 136,677 | | | 151,500 | | | 736,648 | | | 361,611 | | | 121,468 | | | 112,762 | | | 595,841 | |
Rental | 444 | | | 12,873 | | | 369 | | | 13,686 | | | 1,089 | | | 16,365 | | | 378 | | | 17,832 | |
Total revenues | $ | 448,915 | | | $ | 149,550 | | | $ | 151,869 | | | $ | 750,334 | | | $ | 362,700 | | | $ | 137,833 | | | $ | 113,140 | | | $ | 613,673 | |
Unbilled Receivables and Deferred Revenue
Unbilled receivables from contracts with customers amounted to $20.1$24.4 million and $12.9$17.1 million as of July 31, 20212022 and January 31, 2021. The2022, respectively. This increase in unbilled receivables is primarily the result of a seasonal increase in the volume of our service transactions in which we recognize revenue as our work is performed and prior to customer invoicing.
Deferred revenue from contracts with customers amounted to $37.1$90.7 million and $57.7$132.2 million as of July 31, 20212022 and January 31, 2021.2022, respectively. Our deferred revenue most often increases in the fourth quarter of each fiscal year due to a higher level of customer down payments or prepayments and longer time periods between customer payment and delivery of the equipment asset, and the related recognition of equipment revenue, prior to its seasonal use. During the six months ended July 31, 20212022 and 2020,2021, the Company recognized $50.8$105.1 million and $37.0$50.8 million, respectively, of revenue that was included in the deferred revenue balance as of January 31, 20212022 and January 31, 2020,2021, respectively. No material amount of revenue was recognized during the six months ended July 31, 2022 or 2021 and 2020 from performance obligations satisfied in previous periods.
The Company has elected as a practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of service of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for parts installed and services performed. The contracts for which the practical expedient has been applied include (i) equipment revenue transactions, which do not have a stated contractual term but are short-term in nature, and (ii) service revenue transactions, which also do not have a stated contractual term but are generally completed within 30 days. For such service contracts, we recognize revenue over time at the time we perform the work, in the amount tofor which we have the right to invoice for services completed to date.
NOTE 4 - RECEIVABLES
The Company provides an allowance for expected credit losses on its nonrental receivables. To measure the expected credit losses, receivables have been grouped based on shared credit risk characteristics as shown in the table below.
Trade and unbilled receivables from contracts with customers have credit risk and the allowance is determined by applying expected credit loss percentages to aging categories based on historical experience that are updated each quarter. The rates may also be adjusted to the extent future events are expected to differ from historical results. In addition, the allowance is adjusted based on information obtained by continued monitoring of individual customer credit.
Trade receivables from finance companies, other receivables due from manufacturers, and other receivables have not historically resulted in any credit losses to the Company. These receivables are short-term in nature and deemed to be of good credit quality and have no need for any allowance for expected credit losses. Management continually monitors these receivables and should information be obtained that identifies potential credit risk, an adjustment to the allowance would be made if deemed appropriate.
Trade and unbilled receivables from rental contracts are primarily in the United States and are specifically excluded from the accounting guidance in determining an allowance for expected losses. The Company provides an allowance for these receivables based on historical experience and using credit information obtained from continued monitoring of customer accounts.
accounts. | | | | | | | | | | | |
| July 31, 2021 | | January 31, 2021 |
| (in thousands) |
Trade and unbilled receivables from contracts with customers | | | |
Trade receivables due from customers | $ | 35,859 | | | $ | 31,664 | |
Unbilled receivables | 20,050 | | | 12,909 | |
Less allowance for expected credit losses | 2,721 | | | 2,994 | |
| 53,188 | | | 41,579 | |
| | | |
Trade receivables due from finance companies | 14,491 | | | 14,133 | |
| | | |
Trade and unbilled receivables from rental contracts | | | |
Trade receivables | 5,034 | | | 4,329 | |
Unbilled receivables | 924 | | | 520 | |
Less allowance for expected credit losses | 1,843 | | | 1,939 | |
| 4,115 | | | 2,910 | |
Other receivables | | | |
Due from manufacturers | 8,642 | | | 8,720 | |
Other | 1,632 | | | 1,767 | |
| 10,274 | | | 10,487 | |
Receivables, net of allowance for expected credit losses | $ | 82,068 | | | $ | 69,109 | |
| | | | | | | | | | | |
| July 31, 2022 | | January 31, 2022 |
| (in thousands) |
Trade and unbilled receivables from contracts with customers | | | |
Trade receivables due from customers | $ | 37,271 | | | $ | 30,041 | |
Unbilled receivables | 24,435 | | | 17,129 | |
Less allowance for expected credit losses | 2,722 | | | 1,979 | |
| 58,984 | | | 45,191 | |
| | | |
Trade receivables due from finance companies | 15,096 | | | 17,937 | |
| | | |
Trade and unbilled receivables from rental contracts | | | |
Trade receivables | 3,832 | | | 3,055 | |
Unbilled receivables | 1,057 | | | 538 | |
Less allowance for expected credit losses | 375 | | | 469 | |
| 4,514 | | | 3,124 | |
Other receivables | | | |
Due from manufacturers | 14,556 | | | 22,979 | |
Other | 3,219 | | | 5,056 | |
| 17,775 | | | 28,035 | |
Receivables, net of allowance for expected credit losses | $ | 96,369 | | | $ | 94,287 | |
Following is a summary of allowance for credit losses on trade and unbilled accounts receivable by segment: | | | | | | | | | | | | | | | | | | | | | | | |
| Agriculture | | Construction | | International | | Total |
| (in thousands) |
Balance at January 31, 2022 | $ | 244 | | | $ | 193 | | | $ | 1,542 | | | $ | 1,979 | |
Current expected credit loss provision | 79 | | | 35 | | | 846 | | | 960 | |
Write-offs charged against allowance | 30 | | | 97 | | | 61 | | | 188 | |
Credit loss recoveries collected | 16 | | | 4 | | | — | | | 20 | |
Foreign exchange impact | — | | | — | | | (49) | | | (49) | |
Balance at July 31, 2022 | $ | 309 | | | $ | 135 | | | $ | 2,278 | | | $ | 2,722 | |
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| | | Agriculture | | Construction | | International | | Total | | Agriculture | | Construction | | International | | Total |
| | (in thousands) | | (in thousands) |
Balance at January 31, 2021 | Balance at January 31, 2021 | $ | 228 | | | $ | 1,074 | | | $ | 1,690 | | | $ | 2,992 | | Balance at January 31, 2021 | $ | 228 | | | $ | 1,074 | | | $ | 1,690 | | | $ | 2,992 | |
Current expected credit loss provision | 30 | | | 68 | | | (2) | | | 96 | | |
Write-offs charged against allowance | 17 | | | 84 | | | 38 | | | 139 | | |
Credit loss recoveries collected | — | | | 4 | | | — | | | 4 | | |
Foreign exchange impact | — | | | — | | | (50) | | | (50) | | |
Balance at April 30, 2021 | 241 | | | 1,062 | | | 1,600 | | | 2,903 | | |
Current expected credit loss provision | Current expected credit loss provision | 84 | | | 50 | | | (225) | | | (91) | | Current expected credit loss provision | 114 | | | 118 | | | (227) | | | 5 | |
Write-offs charged against allowance | Write-offs charged against allowance | 33 | | | 64 | | | 21 | | | 118 | | Write-offs charged against allowance | 50 | | | 147 | | | 60 | | | 257 | |
Credit loss recoveries collected | Credit loss recoveries collected | 7 | | | 1 | | | — | | | 8 | | Credit loss recoveries collected | 7 | | | 5 | | | — | | | 12 | |
Foreign exchange impact | Foreign exchange impact | — | | | — | | | 19 | | | 19 | | Foreign exchange impact | — | | | — | | | (31) | | | (31) | |
Balance at July 31, 2021 | Balance at July 31, 2021 | $ | 299 | | | $ | 1,049 | | | $ | 1,373 | | | $ | 2,721 | | Balance at July 31, 2021 | $ | 299 | | | $ | 1,050 | | | $ | 1,372 | | | $ | 2,721 | |
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| Agriculture | | Construction | | International | | Total |
| (in thousands) |
Balance at February 1, 2020 | $ | 181 | | | $ | 1,016 | | | $ | 1,746 | | | $ | 2,943 | |
Current expected credit loss provision | 14 | | | 113 | | | 226 | | | 353 | |
Write-offs charged against allowance | 5 | | | 71 | | | 133 | | | 209 | |
Credit loss recoveries collected | 40 | | | 4 | | | 6 | | | 50 | |
Foreign exchange impact | — | | | — | | | (29) | | | (29) | |
Balance at April 30, 2020 | 230 | | | 1,062 | | | 1,816 | | | 3,108 | |
Current expected credit loss provision | 16 | | | 95 | | | 265 | | | 376 | |
Write-offs charged against allowance | 47 | | | 78 | | | 98 | | | 223 | |
Credit loss recoveries collected | 9 | | | — | | | — | | | 9 | |
Foreign exchange impact | — | | | — | | | 23 | | | 23 | |
Balance at July 31, 2020 | $ | 208 | | | $ | 1,079 | | | $ | 2,006 | | | $ | 3,293 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The increase in the credit loss provision in the International segment, during the six months ended July 31, 2022, was driven by a $0.7 million bad debt provision placed on the accounts receivables due from customers of Titan Machinery Ukraine, primarily due to the ongoing Russia-Ukraine conflict.The following table presents impairment losses (recoveries) on receivables arising from sales contracts with customers and receivables arising from rental contracts: | | | Three Months Ended July 31, | | Six Months Ended July 31, | | Three Months Ended July 31, | | Six Months Ended July 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands) | | (in thousands) |
Impairment losses (recoveries) on: | Impairment losses (recoveries) on: | | Impairment losses (recoveries) on: | |
Receivables from sales contracts | Receivables from sales contracts | $ | 222 | | | $ | 377 | | | $ | 320 | | | $ | 520 | | Receivables from sales contracts | $ | 186 | | | $ | 222 | | | $ | 999 | | | $ | 320 | |
Receivables from rental contracts | Receivables from rental contracts | 3 | | | 13 | | | (30) | | | 151 | | Receivables from rental contracts | 43 | | | 3 | | | 32 | | | (30) | |
| | $ | 225 | | | $ | 390 | | | $ | 290 | | | $ | 671 | | | $ | 229 | | | $ | 225 | | | $ | 1,031 | | | $ | 290 | |
NOTE 5 - INVENTORIES | | | | | | | | | | | |
| July 31, 2022 | | January 31, 2022 |
| (in thousands) |
New equipment | $ | 325,641 | | | $ | 195,775 | |
Used equipment | 118,757 | | | 128,047 | |
Parts and attachments | 109,061 | | | 95,890 | |
Work in process | 2,924 | | | 2,046 | |
| $ | 556,383 | | | $ | 421,758 | |
NOTE 5 - INVENTORIES | | | | | | | | | | | |
| July 31, 2021 | | January 31, 2021 |
| (in thousands) |
New equipment | $ | 238,116 | | | $ | 206,683 | |
Used equipment | 97,390 | | | 131,369 | |
Parts and attachments | 89,616 | | | 78,982 | |
Work in process | 1,987 | | | 1,424 | |
| $ | 427,109 | | | $ | 418,458 | |
NOTE 6 - PROPERTY AND EQUIPMENT | | | July 31, 2021 | | January 31, 2021 | | July 31, 2022 | | January 31, 2022 |
| | (in thousands) | | (in thousands) |
Rental fleet equipment | Rental fleet equipment | $ | 82,695 | | | $ | 77,530 | | Rental fleet equipment | $ | 73,014 | | | $ | 65,117 | |
Machinery and equipment | Machinery and equipment | 23,410 | | | 23,354 | | Machinery and equipment | 23,769 | | | 22,819 | |
Vehicles | Vehicles | 57,638 | | | 55,884 | | Vehicles | 62,251 | | | 58,650 | |
Furniture and fixtures | Furniture and fixtures | 43,294 | | | 43,678 | | Furniture and fixtures | 51,400 | | | 50,228 | |
Land, buildings, and leasehold improvements | Land, buildings, and leasehold improvements | 103,062 | | | 90,730 | | Land, buildings, and leasehold improvements | 129,102 | | | 123,323 | |
| | 310,099 | | | 291,176 | | | 339,536 | | | 320,137 | |
Less accumulated depreciation | Less accumulated depreciation | 147,442 | | | 144,011 | | Less accumulated depreciation | 150,572 | | | 141,894 | |
| | $ | 162,657 | | | $ | 147,165 | | | $ | 188,964 | | | $ | 178,243 | |
The Company includes depreciation expense related to its rental fleet and its trucking fleet, for hauling equipment, in Cost of Revenue, which was $2.0 million and $2.1 million for the three months ended July 31, 2022 and 2021, and $3.5 million and $3.8 million for the six months ended July 31, 2022 and 2021, respectively. All other depreciation expense is included in Operating Expenses, which was $3.6 million and $3.0 million for the three months ended July 31, 2022 and 2021 and $7.1 million and $6.0 million for the six months ended July 31, 2022 and 2021, respectively.
The Company reviews its long-lived assets for potential impairment whenever events or circumstances indicate that the carrying value of the long-lived asset (or asset group) may not be recoverable. During the three months ended July 31, 2021,2022, the Company determined that a current period operating loss combined with historical losses of a certain business unit indicated thatidentified two such asset groups in the long-lived asset group may not be recoverable. The CompanyAgriculture segment, and performed an impairment assessmenttest, and concluded that no impairment was present, thus the Company did not recognize any impairment for the three and six months ended July 31, 2022. The Company did recognize impairment of this asset group and as a result an impairment chargelong-lived assets of $0.4 million was recognized withinin its International segment for the three and six months ended July 31, 2021. The Company did not have any impairment charges for the three months ended July 31, 2020. For the six months ended July 31, 2021 and July 31, 2020, the Company recognized an impairment charge of $0.4 million and $0.2 million, respectively.
NOTE 7 - INTANGIBLE ASSETS AND GOODWILL
Indefinite-Lived Intangible Assets
The Company's indefinite-lived intangible assets consist of distribution rights assets. The following is a summary of the changes in indefinite-lived intangible assets, by segment, for the six months ended July 31, 2021:2022: | | | | | | | | | | | | | | | | | | | | | | | |
| Agriculture | | Construction | | International | | Total |
| (in thousands) |
January 31, 2021 | $ | 6,265 | | | $ | 72 | | | $ | 1,161 | | | $ | 7,498 | |
| | | | | | | |
Foreign currency translation | — | | | — | | | (22) | | | (22) | |
Impairment | — | | | — | | | (1,139) | | | (1,139) | |
July 31, 2021 | $ | 6,265 | | | $ | 72 | | | $ | — | | | $ | 6,337 | |
| | | | | | | | | | | | | | | | | | | |
| Agriculture | | Construction | | | | Total |
| (in thousands) |
January 31, 2022 | $ | 10,136 | | | $ | 72 | | | | | $ | 10,208 | |
Arising from business combinations | 842 | | | — | | | | | 842 | |
| | | | | | | |
| | | | | | | |
July 31, 2022 | $ | 10,978 | | | $ | 72 | | | | | $ | 11,050 | |
Goodwill
The Company performs at least an annual impairment testingfollowing presents changes in the carrying amount of its indefinite-lived distribution rights intangible assets and, due to ongoing losses, an interim test was completed duringgoodwill, by segment, for the threesix months ended July 31, 2021 for our German distribution rights asset. Under the impairment test, the fair value of distribution rights intangible assets is estimated based on a multi-period excess earnings model, an income approach. This model allocates future estimated earnings of the store/complex amongst working capital, fixed assets and other intangible assets of the store/complex and any remaining earnings (the "excess earnings") are allocated to the distribution rights intangible assets. The earnings allocated to the distribution rights are then discounted to arrive at the present value of the future estimated excess earnings, which represents the estimated fair value of the distribution rights intangible asset. The discount rate applied reflects the Company's estimate of the weighted-average cost of capital of comparable companies plus an additional risk premium to reflect the additional risk inherent in the distribution rights asset.2022:
| | | | | | | | | | | | | | | |
| Agriculture | | | | | | Total |
| (in thousands) |
January 31, 2022 | $ | 8,952 | | | | | | | $ | 8,952 | |
Arising from business combinations | 583 | | | | | | | 583 | |
| | | | | | | |
| | | | | | | |
July 31, 2022 | $ | 9,535 | | | | | | | $ | 9,535 | |
The results of the Company's impairment testing for the German distribution rights intangible asset for the three months ended July 31, 2021, indicated that the estimated fair value of the tested distribution rights was below the carrying value of the asset, thus requiring an impairment to be recognized. Impairment charges of $1.1 million were recognized for the three and six months ended July 31, 2021 and included in Impairment of Intangible and Long-Lived Assets in the condensed consolidated statements of operations. This impairment removed all remaining indefinite-lived intangible assets from the balance sheet of the German reporting unit. The impairment charges arose as the result of lowered expectations of the future financial performance of this reporting unit. There were no indefinite-lived intangible impairment charges for the three and six months ended July 31, 2020.
NOTE 8 - FLOORPLAN PAYABLE/LINES OF CREDIT
On April 3, 2020, the Company entered into a Third Amended and Restated Credit Agreement (the "Bank Syndicate Agreement") with a group of banks that amended and restated the Company's prior $200.0 million credit facility, dated October 28, 2015. The Bank Syndicate Agreement provides for a secured credit facility in an amount up to $250.0 million, consisting of a $185.0 million floorplan facility (the "Floorplan Loan") and a $65.0 million operating line (the "Revolver Loan"), and changed the interest rates as compared to the prior credit facility, amongst other things. The amounts available under the Bank Syndicate Agreement are subject to borrowing base calculations and reduced by outstanding standby letters of credit and certain reserves. The Bank Syndicate Agreement includes a variable interest rate on outstanding balances, charges a 0.25% non-usage fee on the average monthly unused amount, and requires monthly payments of accrued interest. The Company elects at the time of any advance to choose a Base Rate Loan or a LIBOR Rate Loan. The LIBOR Rate is based upon one month, two month, or three month LIBOR, as chosen by the Company, but in no event shall the LIBOR Rate be less than zero. The Base Rate is the greater of (a) the prime rate of interest announced, from time to time, by Bank of America, (b) the Federal Funds Rate plus 0.5%, or (c) one month LIBOR plus 1%, but in no event shall the Base Rate be less than zero. The effective interest rate on the Company's borrowings is then calculated by adding an applicable margin to the LIBOR Rate or Base Rate. The applicable margin is determined based on excess availability under the Bank Syndicate Agreement and ranges from 0.5% to 1.0% for Base Rate Loans and 1.5% to 2.0% for LIBOR Rate Loans.
On June 4, 2021, the Bank Syndicate Agreement was amended to add a benchmark replacement reference rate when the LIBOR Rate is no longer published. The identified replacement reference rate is the secured overnight financing rate (SOFR).The benchmark transition event will occur at the earliest of (i) the date all available Tenors of LIBOR have been permanently ceased to be reported, (ii) June 30, 2023, or (iii) any agreement by the banks party to the Bank Syndicate agreement and the Company to replace the LIBOR Rate. The SOFR rate is based upon one month, two month, three month, six month, and 12 month SOFR plus between 11.4 basis points and 71.5 basis points depending on the available tenor used. In no event shall the SOFR Rate be less than zero. The applicable margin rate is the same as outlined above for the LIBOR Rate Loans. The Company does not believe implementation of this new benchmark rate will have a material effect on its results of operations. In addition, the amendment reduced the current floor of the LIBOR Rate from 0.5% to 0.0%
The Bank Syndicate Agreement does not obligate the Company to maintain financial covenants, except in the event that excess availability (as defined in the Bank Syndicate Agreement) is less than 15% of the lower of the borrowing base or the size of the maximum credit line, at which point the Company is required to maintain a fixed charge coverage ratio of at least 1.10:1.00. The Bank Syndicate Agreement includes various restrictions on the Company and its subsidiaries’ activities, including, under certain conditions, limitations on the Company’s ability to make certain cash payments including cash dividends and stock repurchases, issuance of equity instruments, acquisitions and divestitures, and entering into new indebtedness transactions. The Bank Syndicate Agreement matures on April 3, 2025.
The Floorplan Loan under the Bank Syndicate Agreement is used to finance equipment inventory purchases. Amounts outstanding are recorded as floorplan payable, within current liabilities on the consolidated balance sheets as the Company intends to repay amounts borrowed within one year.
The Revolver Loan under the Bank Syndicate Agreement is used to finance rental fleet equipment and for general working capital requirements of the Company. Amounts outstanding are recorded as long-term debt, within long-term liabilities on the consolidated balance sheets, as the Company does not intend or have the obligation to repay amounts borrowed within one year.
As of July 31, 2021,2022, the Company had floorplan lines of credit totaling $771.0$743.0 million, which is primarily comprised of three significant floorplan lines of credit: (i) a $450.0 million credit facility with CNH Industrial, (ii) a $185.0 million line of credit under the BankThird Amended and Restated Credit Agreement (the "Bank Syndicate Agreement,Agreement"), and (iii) a $60.0$50.0 million credit facility with DLL Finance LLC.
In August 2021, Additionally, the Company entered into an amendmentamended its CNH Industrial floorplan line of credit as of August 1, 2022, increasing the total available domestic limit to the credit facility with DLL Finance LLC. The amendment reduced the available borrowings under this facility from $60.0$410 million and overall limit to $50.0 million, increased the variable interest rate on outstanding balances from three-month LIBOR plus an applicable margin of 2.85% per annum to three-month
LIBOR plus an applicable margin of 3.0% per annum, and eliminated the 0.15% non-utilization fee. DLL Finance LLC may terminate the facility in its sole discretion at any time.$500 million.
As of July 31, 2021 and January 31, 2021, theThe Company's outstanding balances of floorplan lines of credit as of July 31, 2022 and January 31, 2022, consisted of the following: | | | July 31, 2021 | | January 31, 2021 | | July 31, 2022 | | January 31, 2022 |
| | (in thousands) | | (in thousands) |
CNH Industrial | CNH Industrial | $ | 133,481 | | | $ | 86,792 | | CNH Industrial | $ | 177,983 | | | $ | 94,054 | |
| Bank Syndicate Agreement Floorplan Loan | | Bank Syndicate Agreement Floorplan Loan | 41,000 | | | — | |
DLL Finance | DLL Finance | 9,984 | | | 10,667 | | DLL Finance | 9,187 | | | 8,558 | |
Other outstanding balances with manufacturers and non-manufacturers | Other outstanding balances with manufacturers and non-manufacturers | 42,084 | | | 64,376 | | Other outstanding balances with manufacturers and non-manufacturers | 46,074 | | | 32,803 | |
| | $ | 185,549 | | | $ | 161,835 | | | $ | 274,244 | | | $ | 135,415 | |
AsIn anticipation of closing the Heartland acquisition on August 1, 2022, the Company drew $41.0 million on its Bank Syndicate Floorplan Loan, which had a variable interest rate of 3.21% as of July 31, 20212022. Generally, all U.S. CNH Industrial and January 31, 2021, the U.S. floorplan payables were generally allDLL Finance amounts outstanding are non-interest bearing. As of July 31, 2021,2022, foreign floorplan payables carried various interest rates primarily ranging from 1.40%1.92% to 4.79%8.36%, compared to a range of 1.40% to 4.82%6.11% as of January 31, 2021. As2022. The Company had non-interest bearing floorplan payables of $210.7 million and $106.8 million, on July 31, 20212022 and January 31, 2021, $148.7 million and $98.8 million, respectively, of outstanding floorplan payables were non-interest bearing. As of July 31, 2021, the2022, respectively. The Company hadhas a compensating balance arrangement under one of its foreign floorplan credit facilities, which requires a minimum cash deposit to be maintained with the lender in the amount of $5.0 million for the term of the credit facility.
NOTE 9 - LONG TERM DEBT
The following is a summary of long-term debt as of July 31, 20212022 and January 31, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | Maturity Dates | | Interest Rates | | July 31, 2021 | | January 31, 2021 |
| | | | | | (in thousands) |
Mortgage loans, secured | | Various through May 2039 | | 2.1% to 5.1% | | $ | 42,734 | | | $ | 22,916 | |
Sale-leaseback financing obligations | | Various through December 2030 | | 3.4% to 10.3% | | 15,834 | | | 16,505 | |
| | | | | | | | |
Vehicle loans, secured | | Various through June 2026 | | 1.7% to 3.9% | | 10,511 | | | 9,999 | |
Other | | January 2021 | | 2.6% | | — | | | 77 | |
Total debt | | | | | | 69,079 | | | 49,497 | |
Less: current maturities | | | | | | 5,455 | | | 4,591 | |
Long-term debt, net | | | | | | $ | 63,624 | | | $ | 44,906 | |
The Company purchased buildings and real estate assets of eleven of its U.S. dealer locations in the first quarter of fiscal 2022 and financed these purchases with long term debt of $17.7 million. These dealer locations were previously leased from third party lessors. | | | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | Maturity Dates | | Interest Rates | | July 31, 2022 | | January 31, 2022 |
| | | | | | (in thousands) |
Mortgage loans, secured | | Various through May 2039 | | 2.1% to 5.1% | | $ | 69,834 | | | $ | 57,801 | |
Sale-leaseback financing obligations | | Various through December 2030 | | 3.4% to 10.3% | | 11,826 | | | 12,382 | |
| | | | | | | | |
Vehicle loans, secured | | Various through September 2027 | | 2.1% to 4.3% | | 11,490 | | | 10,465 | |
| | | | | | | | |
Total debt | | | | | | 93,150 | | | 80,648 | |
Less: current maturities | | | | | | 6,650 | | | 5,876 | |
Long-term debt, net | | | | | | $ | 86,500 | | | $ | 74,772 | |
NOTE 10 - DERIVATIVE INSTRUMENTS
The Company holds derivative instruments for the purpose of minimizing exposure to fluctuations in foreign currency exchange rates to which the Company is exposed in the normal course of its operations.
The Company uses foreign currency forward contracts to hedge the effects of fluctuations in exchange rates on outstanding intercompany loans. The Company does not formally designate and document such derivative instruments as hedging instruments; however, the instruments are an effective economic hedge of the underlying foreign currency exposure. Both the gain or loss on the derivative instrument and the offsetting gain or loss on the underlying intercompany loan are recognized in earnings immediately, thereby eliminating or reducing the impact of foreign currency exchange rate fluctuations on net income. The Company's foreign currency forward contracts generally have three-month maturities, maturing on the last day of each fiscal quarter. The notional value of outstanding foreign currency contracts as of January 31, 2021 was $8.0 million. There were no outstanding foreign currency contracts as of July 31, 2021.
As of January 31, 2021, the fair value of the Company's outstanding derivative instruments was not material. Derivative instruments recognized as assets are recorded in prepaid expenses and other in the condensed consolidated balance sheets, and derivative instruments recognized as liabilities are recorded in accrued expenses and other in the condensed consolidated balance sheets.
The following table sets forth the gains and losses recognized in income from the Company’s derivative instruments for the six months ended July 31, 2021 and 2020. Gains and losses are recognized in Interest and other income in the consolidated statements of operations: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Six Months Ended July 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands) |
Foreign currency contract gain (loss) | $ | 192 | | | $ | 202 | | | $ | (159) | | | $ | 189 | |
NOTE 11 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following is a summary of the changes in accumulated other comprehensive income (loss), by component, for the six month periods ended July 31, 20212022 and July 31, 2020:2021: | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustment | | Net Investment Hedging Gain | | Total Accumulated Other Comprehensive Income (Loss) |
| (in thousands) |
Balance, January 31, 2021 | $ | (1,212) | | | $ | 2,711 | | | $ | 1,499 | |
Other comprehensive loss | (2,379) | | | — | | | (2,379) | |
Balance, April 30, 2021 | (3,591) | | | 2,711 | | | (880) | |
Other comprehensive income | 938 | | | — | | | 938 | |
Balance, July 31, 2021 | $ | (2,653) | | | $ | 2,711 | | | $ | 58 | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustment | | Net Investment Hedging Gain | | Total Accumulated Other Comprehensive Income (Loss) |
| (in thousands) |
Balance, January 31, 2022 | $ | (4,883) | | | $ | 2,711 | | | $ | (2,172) | |
Other comprehensive loss | (1,191) | | | — | | | (1,191) | |
Balance, April 30, 2022 | (6,074) | | | 2,711 | | | (3,363) | |
Other comprehensive income | (2,963) | | | — | | | (2,963) | |
Balance, July 31, 2022 | $ | (9,037) | | | $ | 2,711 | | | $ | (6,326) | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustment | | Net Investment Hedging Gain | | Total Accumulated Other Comprehensive Income (Loss) |
| (in thousands) |
Balance, January 31, 2020 | $ | (5,931) | | | $ | 2,711 | | | $ | (3,220) | |
Other comprehensive loss | (528) | | | — | | | (528) | |
Balance, April 30, 2020 | (6,459) | | | 2,711 | | | (3,748) | |
Other comprehensive income | 778 | | | — | | | 778 | |
Balance, July 31, 2020 | $ | (5,681) | | | $ | 2,711 | | | $ | (2,970) | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustment | | Net Investment Hedging Gain | | Total Accumulated Other Comprehensive Income (Loss) |
| (in thousands) |
Balance, January 31, 2021 | $ | (1,212) | | | $ | 2,711 | | | $ | 1,499 | |
Other comprehensive loss | (2,379) | | | — | | | (2,379) | |
Balance, April 30, 2021 | (3,591) | | | 2,711 | | | (880) | |
Other comprehensive income | 938 | | | — | | | 938 | |
Balance, July 31, 2021 | $ | (2,653) | | | $ | 2,711 | | | $ | 58 | |
| | | | | |
| | | | | |
NOTE 1211 - LEASES
As Lessee
The Company, as lessee, leases certain of its dealership locations, office space, equipment and vehicles under operating and financing classified leasing arrangements. The Company has elected to not record leases with a lease term at commencement of 12 months or less on the consolidated balance sheet; these leases are expensed on a straight-line basis over the lease term. Many real estate lease agreements require the Company to pay the real estate taxes on the properties during the lease term and require that the Company maintain property insurance on each of the leased premises. These payments are deemed to be variable lease payments as the amounts may change during the term of the lease. Certain leases include renewal options that can extend the lease term for periods of one to ten years. Most real estate leases grant the Company a right of first refusal or other options to purchase the real estate, generally at fair market value, either during the lease term or at its conclusion. In most cases, the Company has not included these renewal and purchase options within the measurement of the right-of-use asset and lease liability. Most often, the Company cannot readily determine the interest rate implicit in the lease and thus applies its incremental borrowing rate to capitalize the right-of-use asset and lease liability. The Company estimates its incremental borrowing rate by incorporating considerations of lease term, asset class and lease currency and geographical market. The Company's lease agreements do not contain any material non-lease components, residual value guarantees or material restrictive covenants.
The Company subleases a small number of real estate assets to third-parties, primarily dealership locations for which it has ceased operations. All sublease arrangements are classified as operating leases.
The components of lease expense were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended July 31, | | Six Months Ended July 31, |
| | Classification | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | (in thousands) | | (in thousands) |
Finance lease cost: | | | | | | | | | | |
Amortization of leased assets | | Operating expenses | | $ | 207 | | | $ | 243 | | | $ | 415 | | | $ | 688 | |
Interest on lease liabilities | | Other interest expense | | 45 | | | 64 | | | 88 | | | 152 | |
Operating lease cost | | Operating expenses and rental and other cost of revenue | | 3,164 | | | 3,735 | | | 6,638 | | | 7,501 | |
Short-term lease cost | | Operating expenses | | 44 | | | 66 | | | 70 | | | 132 | |
Variable lease cost | | Operating expenses | | 473 | | | 639 | | | 1,018 | | | 1,252 | |
Sublease income | | Interest and other income | | (360) | | | (219) | | | (729) | | | (416) | |
| | | | $ | 3,573 | | | $ | 4,528 | | | $ | 7,500 | | | $ | 9,309 | |
The components of lease expense were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended July 31, | | Six Months Ended July 31, |
| | Classification | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | (in thousands) | | (in thousands) |
Finance lease cost: | | | | | | | | | | |
Amortization of leased assets | | Operating expenses | | $ | 243 | | | $ | 389 | | | $ | 688 | | | $ | 781 | |
Interest on lease liabilities | | Other interest expense | | 64 | | | 117 | | | 152 | | | 242 | |
Operating lease cost | | Operating expenses and rental and other cost of revenue | | 3,735 | | | 4,325 | | | 7,501 | | | 8,788 | |
Short-term lease cost | | Operating expenses | | 66 | | | 110 | | | 132 | | | 190 | |
Variable lease cost | | Operating expenses | | 639 | | | 735 | | | 1,252 | | | 1,370 | |
Sublease income | | Interest and other income | | (219) | | | (131) | | | (416) | | | (283) | |
| | | | $ | 4,528 | | | $ | 5,545 | | | $ | 9,309 | | | $ | 11,088 | |
Right-of-use lease assets and lease liabilities consist of the following: | | | | | | | | | | | | | | | | | | | | |
| | Classification | | July 31, 2021 | | January 31, 2021 |
| | | | (in thousands) |
Assets | | | | | | |
Operating lease assets | | Operating lease assets | | $ | 66,934 | | | $ | 74,445 | |
Finance lease assets(a) | | Property and equipment, net of accumulated depreciation | | 3,094 | | | 12,426 | |
Total leased assets | | | | $ | 70,028 | | | $ | 86,871 | |
Liabilities | | | | | | |
Current | | | | | | |
Operating | | Current operating lease liabilities | | $ | 10,755 | | | $ | 11,772 | |
Finance | | Accrued expenses and other | | 851 | | | 9,823 | |
Noncurrent | | | | | | |
Operating | | Operating lease liabilities | | 66,678 | | | 73,567 | |
Finance | | Other long-term liabilities | | 2,288 | | | 2,911 | |
Total lease liabilities | | | | $ | 80,572 | | | $ | 98,073 | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Classification | | July 31, 2022 | | January 31, 2022 |
| | | | (in thousands) |
Assets | | | | | | |
Operating lease assets | | Operating lease assets | | $ | 51,888 | | | $ | 56,150 | |
Finance lease assets(a) | | Property and equipment, net of accumulated depreciation | | 2,442 | | | 9,045 | |
Total leased assets | | | | $ | 54,330 | | | $ | 65,195 | |
Liabilities | | | | | | |
Current | | | | | | |
Operating | | Current operating lease liabilities | | $ | 9,465 | | | $ | 9,601 | |
Finance | | Accrued expenses and other | | 554 | | | 7,466 | |
Noncurrent | | | | | | |
Operating | | Operating lease liabilities | | 50,998 | | | 55,595 | |
Finance | | Other long-term liabilities | | 1,880 | | | 1,518 | |
Total lease liabilities | | | | $ | 62,897 | | | $ | 74,180 | |
| | | | | | |
(a)Finance lease assets are recorded net of accumulated amortization of $1.7$1.8 million as of July 31, 20212022 and $3.0$1.7 million as of January 31, 2021.2022. Maturities of lease liabilities as of July 31, 20212022 are as follows: | | | Operating | | Finance | | | Operating | | Finance | |
| | Leases | | Leases | | Total | | Leases | | Leases | | Total |
Fiscal Year Ended January 31, | Fiscal Year Ended January 31, | | (in thousands) | Fiscal Year Ended January 31, | | (in thousands) |
2022 (remainder) | | $ | 7,688 | | | $ | 553 | | | $ | 8,241 | | |
2023 | | 14,527 | | | 928 | | | 15,455 | | |
2023 (remainder) | | 2023 (remainder) | | $ | 6,440 | | | $ | 400 | | | $ | 6,840 | |
2024 | 2024 | | 13,572 | | | 607 | | | 14,179 | | 2024 | | 12,484 | | | 607 | | | 13,091 | |
2025 | 2025 | | 13,033 | | | 525 | | | 13,558 | | 2025 | | 11,943 | | | 554 | | | 12,497 | |
2026 | 2026 | | 12,955 | | | 384 | | | 13,339 | | 2026 | | 11,552 | | | 460 | | | 12,012 | |
2027 | 2027 | | 12,212 | | | 351 | | | 12,563 | | 2027 | | 10,815 | | | 431 | | | 11,246 | |
2028 | | 2028 | | 9,394 | | | 297 | | | 9,691 | |
Thereafter | Thereafter | | 21,026 | | | 774 | | | 21,800 | | Thereafter | | 9,839 | | | 343 | | | 10,182 | |
Total lease payments | Total lease payments | | 95,013 | | | 4,122 | | | 99,135 | | Total lease payments | | 72,467 | | | 3,092 | | | 75,559 | |
Less: Interest | Less: Interest | | 17,580 | | | 983 | | | 18,563 | | Less: Interest | | 12,005 | | | 657 | | | 12,662 | |
Present value of lease liabilities | Present value of lease liabilities | | $ | 77,433 | | | $ | 3,139 | | | $ | 80,572 | | Present value of lease liabilities | | $ | 60,462 | | | $ | 2,435 | | | $ | 62,897 | |
The weighted-average lease term and discount rate as of July 31, 20212022 are as follows: | | | | | |
| July 31, 20212022 |
Weighted-average remaining lease term (years): | |
Operating leases | 6.96.3 |
Financing leases | 5.75.2 |
Weighted-average discount rate: | |
Operating leases | 6.16.2 | % |
Financing leases | 8.88.2 | % |
As Lessor
The Company rents equipment to customers, primarily in the Construction segment, on a short-term basis. Our rental arrangements generally do not include minimum, noncancellable periods as the lessee is entitled to cancel the arrangement at any time. Most often, our rental arrangements extend for periods ranging from a few days to a few months. We maintain a fleet of dedicated rental assets within our Construction segment and, within all segments, we may also provide short-term rentals of certain equipment inventory assets. Some rental arrangements may include rent-to-purchase options whereby customers are given a period of time to exercise an option to purchase the related equipment at an established price with any rental payments paid applied to reduce the purchase price.
All of the Company's leasing arrangements as lessor are classified as operating leases. Rental revenue is recognized on a straight-line basis over the rental period. Rental revenue includes amounts charged for loss and damage insurance on rented equipment. In most cases, our rental arrangements include non-lease components, including delivery and pick-up services. The Company accounts for these non-lease components separate from the rental arrangement and recognizes the revenue associated with these components when the service is performed. The Company has elected to exclude from rental revenue all sales, value
added and other taxes collected from our customers concurrent with our rental activities. Rental billings most often occur on a monthly basis and may be billed in advance or in arrears, thus creating unbilled rental receivables or deferred rental revenue amounts. The Company manages the residual value risk of its rented assets by (i) monitoring the quality, aging and anticipated retail market value of our rental fleet assets to determine the optimal period to remove an asset from the rental fleet, (ii) maintaining the quality of our assets through on-site parts and service support and (iii) requiring physical damage insurance of our lessee customers. We primarily dispose of our rental assets through the sale of the asset by our retail sales force.
Revenue generated from leasing activities is disclosed, by segment, in Note 3. The following is the balance of our dedicated rental fleet assets, included in Property and equipment, net of accumulated depreciation in the condensed consolidated balance sheet, of our Construction segment as of July 31, 20212022 and January 31, 2021:2022: | | | July 31, 2021 | | January 31, 2021 | | July 31, 2022 | | January 31, 2022 |
| | (in thousands) | | (in thousands) |
Rental fleet equipment | Rental fleet equipment | $ | 82,695 | | | $ | 77,530 | | Rental fleet equipment | $ | 73,014 | | | $ | 65,117 | |
Less accumulated depreciation | Less accumulated depreciation | 28,373 | | | 28,916 | | Less accumulated depreciation | 25,205 | | | 23,501 | |
| | $ | 54,322 | | | $ | 48,614 | | | $ | 47,809 | | | $ | 41,616 | |
NOTE 1312 - FAIR VALUE MEASUREMENTS
As of July 31, 2021 and January 31, 2021, the fair value of the Company's foreign currency contracts, which are either assets or liabilities measured at fair value on a recurring basis, was not material. These foreign currency contracts were valued using a discounted cash flow analysis, which is an income approach, utilizing readily observable market data as inputs, which is classified as a Level 2 fair value measurement.
The Company also valued certain long-lived assets at fair value on a non-recurring basis as of January 31, 20212022 as part of its long-lived asset impairment testing. The estimated fair value of such assets as of January 31, 20212022 was $0.8$3.1 million. Fair value was estimated through an income approach incorporating both observable and unobservable inputs, and are deemed to be Level 3 fair value inputs. The most significant unobservable inputs include forecasted net cash generated from the use of the assets and the discount rate applied to such cash flows to arrive at a fair value estimate. In addition, in certain instances, in the prior year, the Company estimated the fair value of long-lived assets to approximate zero as no future cash flows were assumed to be generated from the use of such assets and the expected value to be realized upon disposition was deemed to be nominal.
The Company also has financial instruments that are not recorded at fair value in the consolidated balance sheets, including cash, receivables, payables and long-term debt. The carrying amounts of these financial instruments approximated their fair values as of July 31, 20212022 and January 31, 2021.2022. Fair value of these financial instruments was estimated based on Level 2 fair value inputs. The estimated fair value of the Company's Level 2 long-term debt, which is provided for disclosure purposes only, is as follows:
| | | July 31, 2021 | | | January 31, 2021 | | July 31, 2022 | | | January 31, 2022 |
| | (in thousands) | | (in thousands) |
Carrying amount | Carrying amount | 53,245 | | | | 32,992 | | Carrying amount | $ | 81,324 | | | | $ | 63,237 | |
Fair value | Fair value | 54,600 | | | | 34,185 | | Fair value | $ | 72,516 | | | | $ | 68,267 | |
NOTE 13 - INCOME TAXES
Our effective tax rate was 24.7% and 28.0% for the three months ended July 31, 2022 and 2021, respectively and was 25.1% and 25.6% for the six months ended July 31, 2022 and 2021, respectively. The effective tax rate for the six months ended July 31, 2022 and 2021 were subject to various factors such as the impact of certain discrete items, mainly the vesting of share-based compensation, the mix of domestic and foreign income, and recognition of a valuation allowance on certain of our foreign deferred tax assets.
NOTE 14 - INCOME TAXES
Our effective tax rate was 28.0% and 22.8% for the three months ended July 31, 2021 and 2020, respectively and was 25.6% and 24.3% for the six months ended July 31, 2021 and 2020, respectively. The effective tax rate for the six months ended July 31, 2021 was benefited by the vesting of share-based compensation but was offset by the recognition of a valuation allowance on certain of our foreign deferred tax assets including recording a valuation allowance on the remaining deferred tax assets of our Germany entity. For the six months ended July 31, 2020, the effective tax rate benefited from a weakening Ukrainian currency but was offset by increased tax expense on the vesting of share-based compensation.
NOTE 1514 - BUSINESS COMBINATIONS
Fiscal 20212023
On May 4, 2020,April 1, 2022, the Company acquired certain assets of HorizonWestMark's Machinery, Inc. ThisThe acquired CaseIH agriculture dealership complexbusiness consisted of three agriculturetwo agricultural equipment stores in ScottsbluffWagner and Sidney, Nebraska and Torrington, Wyoming, which expandedYankton, South Dakota. These locations are included in the Company's agriculture presence in Nebraska and into Wyoming.Agriculture segment. The total cash consideration paidtransferred for the acquired business was $6.8 million in cash.$7.7 million.
In connection with the acquisition, the Company acquired from CNH Industrial and certain other manufacturers equipment and parts inventory previously owned by HorizonWestMark's Machinery, Inc. Upon acquiring thosesuch inventories, the Company was offered floorplan financing by the manufacturer.respective manufacturers. In total, the Company acquired inventory and recognized a corresponding financing liability of $2.7$3.2 million. The recognition of these inventories and the associated financing liabilities are not included as part of the accounting for the business combination.
Fiscal 2022
On December 1, 2021, the Company acquired certain assets of Jaycox Implement, Inc. The acquired business consisted of three agricultural equipment stores in Worthington and Luverne, Minnesota and Lake Park, Iowa. These locations are included in the Company's Agriculture segment. The total cash consideration transferred for the acquired business was $28.2 million. The Company completed the real estate purchase on December 31, 2021 for a purchase price of $5.5 million, which was partially financed with long-term debt and the remainder was paid in cash.
In connection with the acquisition, the Company acquired from CNH Industrial and certain other manufacturers equipment and parts inventory previously owned by Jaycox Implement, Inc. Upon acquiring such inventories, the Company was offered floorplan financing by the respective manufacturers. In total, the Company acquired inventory and recognized a corresponding financing liability of $5.3 million. The recognition of these inventories and the associated financing liabilities are not included as part of the accounting for the business combination.
Purchase Price Allocation
The Each of the above acquisitionacquisitions has been accounted for under the acquisition method of accounting, which requires the Company to estimate the acquisition date fair value of the assets acquired and liabilities assumed. The accounting for the purchase price allocation was complete asAs of JanuaryJuly 31, 2021.2022, all business combinations completed in fiscal years 2023 and 2022 are preliminary. The following table presents the aggregate purchase price allocations for all acquisitions completed as ofduring the fiscal year ended January 31, 2021:2022 and the period ended July 31, 2022:
| | | | | | | | | | | |
| July 31, 2022 | | January 31, 2022 |
| (in thousands) |
Assets acquired: | | | |
Cash | $ | 1 | | | $ | 4 | |
Receivables | 478 | | | 1,197 | |
Inventories | 3,386 | | | 13,780 | |
Prepaid expenses and other | 66 | | | 47 | |
Property and equipment | 4,088 | | | 8,236 | |
| | | |
Intangible assets | 917 | | | 4,121 | |
Goodwill | 583 | | | 7,519 | |
| | | |
| 9,519 | | | 34,904 | |
| | | |
Liabilities assumed: | | | |
| | | |
| | | |
| | | |
Deferred revenue | 1,844 | | | 1,261 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Net assets acquired | $ | 7,675 | | | $ | 33,643 | |
| | | |
Goodwill recognized by segment: | | | |
Agriculture | $ | 583 | | | $ | 7,519 | |
| | | |
| | | |
Goodwill expected to be deductible for tax purposes | $ | 583 | | | $ | 7,519 | |
Table of Contents | | | | | | | |
| | | January 31, 2021 |
| | | (in thousands) |
Assets acquired: | | | |
Cash | | | $ | 1 | |
| | | |
Inventories | | | 4,260 | |
Prepaid expenses and other | | | 48 | |
Property and equipment | | | 1,752 | |
Operating lease assets | | | 2,006 | |
Intangible assets | | | 245 | |
Goodwill | | | 484 | |
| | | |
| | | 8,796 | |
| | | |
Liabilities assumed: | | | |
| | | |
| | | |
Current operating lease liabilities | | | 159 | |
| | | |
| | | |
| | | |
Operating lease liabilities | | | 1,847 | |
| | | |
| | | 2,006 | |
Net assets acquired | | | $ | 6,790 | |
| | | |
Goodwill recognized by segment: | | | |
Agriculture | | | $ | 484 | |
| | | |
| | | |
Goodwill expected to be deductible for tax purposes | | | $ | 484 | |
The recognition of goodwill in the above business combinationcombinations arose from the acquisition of an assembled workforce and anticipated synergies expected to be realized. For the business combination occurring during the twelve months ended January 31, 2021,Mark's Machinery acquisition the Company recognized a non-competition intangible asset of $0.1 million and a distribution rights intangible asset of $0.2$0.8 million. For the Jaycox acquisition the Company recognized a non-competition intangible asset of $0.1 million and a distribution rights intangible asset of $3.9 million. The non-competition assetassets will be amortized over periods ranging from three to five years. The
distribution rights assets are indefinite-lived intangible assets not subject to amortization. The Company estimated the fair value of the intangible assets using a multi-period excess earnings model, which is an income approach. Acquisition related costs, were not materialamounted to $0.5 million for the fiscal yearperiod ended July 31, 2022, primarily related to the Heartland acquisition, and acquisition related costs for the period ended January 31, 2021, and2022, were not material. All acquisition related costs have been expensed as incurred and recognized as operating expensesOperating Expenses in the condensed consolidated statements of operations.
NOTE 1615 - CONTINGENCIES
The Company is engaged in legal proceedings incidental to the normal course of business. Due to their nature, such legal proceedings involve inherent uncertainties, including but not limited to, court rulings, negotiations between affected parties and governmental intervention. Based upon the information available to the Company and discussions with legal counsel, it is the Company's opinion that the outcome of these various legal actions and claims will not have a material impact on it'sits financial position, results of operations or cash flows. These matters, however, are subject to many uncertainties, and the outcome of any matter is not predictable.
NOTE 1716 - SEGMENT INFORMATION
The Company has 3three reportable segments: Agriculture, Construction and International. Revenue between segments is immaterial. The Company retains various unallocated income/(expense) items and assets at the general corporate level, which the Company refers to as “Shared Resources” in the table below. Shared Resources assets primarily consist of cash and property and equipment.
Certain financial information for each of the Company’s business segments is set forth below. | | | Three Months Ended July 31, | | Six Months Ended July 31, | | Three Months Ended July 31, | | Six Months Ended July 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands) | | (in thousands) | | (in thousands) | | (in thousands) |
Revenue | Revenue | | Revenue | |
Agriculture | Agriculture | $ | 219,364 | | | $ | 169,072 | | | $ | 448,915 | | | $ | 362,700 | | Agriculture | $ | 348,956 | | | $ | 219,364 | | | $ | 667,503 | | | $ | 448,915 | |
Construction | Construction | 80,943 | | | 77,719 | | | 149,550 | | | 137,833 | | Construction | 70,022 | | | 80,943 | | | 136,986 | | | 149,550 | |
International | International | 77,323 | | | 56,674 | | | 151,869 | | | 113,140 | | International | 77,565 | | | 77,323 | | | 153,060 | | | 151,869 | |
Total | Total | $ | 377,630 | | | $ | 303,465 | | | $ | 750,334 | | | $ | 613,673 | | Total | $ | 496,543 | | | $ | 377,630 | | | $ | 957,549 | | | $ | 750,334 | |
| Income (Loss) Before Income Taxes | Income (Loss) Before Income Taxes | | Income (Loss) Before Income Taxes | |
Agriculture | Agriculture | $ | 12,067 | | | $ | 6,752 | | | $ | 23,292 | | | $ | 12,914 | | Agriculture | $ | 24,895 | | | $ | 12,067 | | | $ | 41,344 | | | $ | 23,292 | |
Construction | Construction | 2,815 | | | 1,375 | | | 2,953 | | | (1,498) | | Construction | 3,923 | | | 2,815 | | | 7,132 | | | 2,953 | |
International | International | 430 | | | (432) | | | 3,238 | | | (711) | | International | 5,870 | | | 430 | | | 10,195 | | | 3,238 | |
Segment income before income taxes | Segment income before income taxes | 15,312 | | | 7,695 | | | 29,483 | | | 10,705 | | Segment income before income taxes | 34,688 | | | 15,312 | | | 58,671 | | | 29,483 | |
Shared Resources | Shared Resources | 320 | | | 597 | | | (172) | | | 736 | | Shared Resources | (1,538) | | | 320 | | | (1,937) | | | (172) | |
Total | Total | $ | 15,632 | | | $ | 8,292 | | | $ | 29,311 | | | $ | 11,441 | | Total | $ | 33,150 | | | $ | 15,632 | | | $ | 56,734 | | | $ | 29,311 | |
| | | | | | | | | | | |
| July 31, 2021 | | January 31, 2021 |
| (in thousands) |
Total Assets | | | |
Agriculture | $ | 380,000 | | | $ | 349,697 | |
Construction | 191,908 | | | 185,534 | |
International | 182,187 | | | 177,213 | |
Segment assets | 754,095 | | | 712,444 | |
Shared Resources | 85,276 | | | 103,345 | |
Total | $ | 839,371 | | | $ | 815,789 | |
| | | | | | | | | | | |
| July 31, 2022 | | January 31, 2022 |
| (in thousands) |
Total Assets | | | |
Agriculture | $ | 559,722 | | | $ | 481,190 | |
Construction | 196,085 | | | 157,846 | |
International | 175,921 | | | 155,275 | |
Segment assets | 931,728 | | | 794,311 | |
Shared Resources | 146,143 | | | 152,356 | |
Total | $ | 1,077,871 | | | $ | 946,667 | |
NOTE 17 - SUBSEQUENT EVENTS
On July 8, 2022, the Company entered into a definitive purchase agreement to acquire three entities, Heartland Agriculture, LLC, Heartland Solutions, LLC, and Heartland Leverage Lender, LLC, collectively, the "Heartland Companies", which operate a twelve store CaseIH commercial application agriculture dealership complex . In its most recently completed fiscal year ended December 31, 2021, Heartland Companies generated revenue of approximately $214 million. The Company closed on the acquisition, on August 1, 2022 with cash consideration transferred of $94.5 million. The Company primarily used cash on hand for the funding of the purchase price and drew down on the floorplan loan with the Bank Syndicate for the remaining balance.
The acquisition will be accounted in accordance with Accounting Standards Codification ("ASC") Topic 805, "Business Combinations". As the acquisition was completed subsequent to July 31, 2022, the consolidated financials statements do not include the results or the financial position of the Heartland Companies. Because the Company has not completed the work of the purchase price allocation needed under ASC 805, the initial accounting for the business combination was incomplete at the time of the issuance of the financial statements, therefore, the Company did not include all of the information regarding the effect of the business combination as permitted by ASC 805-10-50-4 and ASC 805-30-50-3.
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, 2021.2022.
Overview
We own and operate a network of full service agricultural and construction equipment stores in the United States and Europe. Based upon information provided to us by CNH Industrial N.V. or its U.S. subsidiary CNH Industrial America, LLC, we are the largest retail dealer of Case IH Agriculture equipment in the world, one of the largest retail dealers of Case Construction equipment in North America and one of the largest retail dealers of New Holland Agriculture and New Holland Construction equipment in the U.S.United States. We operate our business through three reportable segments: Agriculture, Construction and International. Within each segment, we have four principal sources of revenue: new and used equipment sales, parts sales, service, and equipment rental and other activities.
Demand for agricultural equipment and, to a lesser extent, parts and service support, areis impacted by agricultural commodity prices and net farm income. Based on February 20212022 U.S. Department of Agriculture publications, the estimate of net farm income for calendar year 20212022 indicated an approximate 8.1%4.5% decrease as compared to calendar year 2020,2021, and an approximate 45.7%25.1% increase in net farm income for calendar year 20202021 as compared to calendar year 2019. Certain areas of our North American Agriculture footprint have been impacted by a drought in recent months and this may reduce demand for parts and service support in upcoming quarters.2020.
For the second quarter of fiscal 2022,2023, our net income was $11.2$25.0 million, or $0.50$1.10 per diluted share, compared to a fiscal 20212022 second quarter net income of $6.4$11.2 million, or $0.28$0.50 per diluted share. Our adjusted diluted earnings per share was $0.57$1.10 for the second quarter of fiscal 2022,2023, compared to $0.29$0.56 for the second quarter of fiscal 2021.2022. See the Non-GAAP Financial Measures section below for a reconciliation of adjusted diluted earnings per share to diluted earnings per share, the most comparable GAAP financial measure. Significant factors impacting the quarterly comparisons were:
•Revenue in the second quarter of fiscal 20222023 increased by 31.5% compared to the second quarter of fiscal 2021. All three segments recognized an increase in revenue from the prior year.2022. Total Company same store sales increased 27.0%32.1% compared to the prior year second quarter. Same store sales increased in each of our three reporting segments.
•Gross profit in the second quarter of fiscal 20222023 increased 19.7%36.9% compared to the second quarter of fiscal 2021.2022. The increase in gross profit was primarily the result of strong equipment sales and equipment gross profit margins that increasedincreasing to 13.7% in the second quarter of fiscal 2023 from 11.9% in the second quarter of fiscal 20222022.
•Gross profit was also positively impacted by strong parts sales, increasing by 30.0% from 11.1%the prior year period, and strong parts gross profit margins, which increased to 32.2% in the second quarter of fiscal 2021.
•Intangible and long-lived asset impairments2023 from 29.4% in the second quarter of fiscal 2022 were $1.5 million compared to no impairment in the second quarter of fiscal 2021. The increase was attributable to the impairment of certain intangible and long-lived assets in one of our International reporting units.
•Floorplan and other interest expense decreased a combined 21.9% in the second quarter of fiscal 2022, as compared to the second quarter last year, due to lower borrowings.2022.
Impact of the COVID-19 Pandemic on the CompanySupply Chain
As discussed in note 1 to our condensed consolidated financial statements, the COVID-19 pandemic has significantly disrupted supply chains and business around the world. Uncertainty remains regarding the emerging variant strains of COVID-19 and regarding the length of time it will take for the COVID-19 pandemic to subside, including the time it will take for vaccines to be broadly distributed and accepted in the United States and the rest of the world, and the effectiveness of those vaccines in slowing or stopping the spread of COVID-19 and mitigating the economic effects of the pandemic.
The Company continues to effectively execute its strategy while managing the ongoing effects of the COVID-19 pandemic. The Company's products and services were determined to be essential in the markets we serve and accordingly operations have been allowed to continue throughout the pandemic. Since the beginning of the COVID-19 pandemic, the safety of our employees and customers has been, andEquipment availability continues to be challenging as supply chain disruptions throughout 2021 and continuing into 2022, along with increased domestic and global demand for equipment inventory, have caused many manufacturers to be unable to produce enough equipment to meet demand. Many manufacturers have partially built equipment at their factories waiting for certain parts and components in order to finish production and ship the equipment to dealers. The timing as to the receipt of those parts and components may move completion of that equipment and the resulting delivery to the end customer from quarter to quarter or in some cases, year to year, thereby potentially impacting when we are able to receive the inventory, enter into sales transactions with our top concern. Atcustomers, and recognize the revenue. These supply chain issues are further complicated by labor shortages including the ongoing strike at the CNH Industrial plants in Racine, Wisconsin and Burlington, Iowa, as well as the recent announcement by CNH Industrial that it will be implementing an equipment allocation methodology to determine production slots starting in late calendar year 2022. All of these factors may limit our ability to match customer demand on certain products in fiscal 2024. We will continue to work with our manufacturers to source future inventory to fulfill as much customer demand as possible.
Russian-Ukrainian Conflict
Since the onset of the pandemic, we organizedactive conflict in February 2022, most of Titan Machinery Ukraine's customers have been able to continue their work, although at a COVID Task Forcereduced capacity and schedule. The Company's business systems in Ukraine have continued to implement safety protocols and to quickly respond to matters related tofunction but could be negatively impacted in the pandemic at our locations.future. Some of Titan Machinery Ukraine's back office employees have
Somebeen able to relocate outside of Ukraine and continue to work, while the Company's supply vendors are facing production, supply chaincustomer support and staffing challenges as they work to achieve production capacity and lead times consistent with pre-pandemic levels. As a result,sales teams have remained in Ukraine. For the Company has experienced some disruptions and delays on delivery of certain materials.
Although there have been logistical and other challenges as a result of COVID-19, there were no material adverse impacts on the Company's results of operations for the three and six months ended July 31, 20212022, Titan Machinery Ukraine's revenues are down approximately 37.7% from the prior year period.
As of July 31, 2022, the Company had total assets of $33.1 million in Ukraine. The physical assets (e.g. inventory and 2020. However,fixed assets) are almost exclusively located in central and western areas of the country. Total assets in Ukraine as of January 31, 2022, was $32.7 million.
The situation is highly complex and continues to evolve. If the Company cannot provide efficient and uninterrupted services, 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 additional military movement back into central and western Ukraine or any major threat to civilians in those areas or international banking disruption could materially impact the operations and liquidity of Titan Machinery Ukraine.
Acquisitions
Fiscal 2023
On August 1, 2022, the Company acquired all interests of three entities, Heartland Agriculture, LLC, Heartland Solutions, LLC, and Heartland Leveraged Lender, LLC, (collectively referred to as "Heartland Companies") for $94.5 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 uncertaintyoverlap of our footprints, which will allow us to package deals that will include both commercial application equipment as well as other agricultural and construction equipment to commercial customers within our core footprint. In the economic outlook resulting frommost recent completed fiscal year, the COVID-19 pandemic, the Company continues to monitor the situation closely.Heartland Companies generated revenue of approximately $214 million.
Acquisitions
Fiscal 2021
On May 4, 2020,April 1, 2022, the Company acquired certain assets of HorizonWestMark's Machinery, Inc. ThisThe acquired Case IH agriculture dealership complexbusiness consisted of three agriculturetwo agricultural equipment stores in ScottsbluffWagner and Sidney, Nebraska and Torrington, Wyoming, which expanded the Company's agriculture presenceYankton, South Dakota. These locations are included in Nebraska and into Wyoming.our Agriculture segment. In its most recent fiscal year, Mark's Machinery, Inc. generated revenue of approximately $34.0 million. The total cash consideration paid for the acquired business was $6.8 million in cash, which$7.7 million.
Fiscal 2022
On December 1, 2021, the Company financed through available cash resourcesacquired certain assets of Jaycox Implement, Inc. The acquired business consisted of three agricultural equipment stores in Worthington and capacity under our existing floorplan payableLuverne, Minnesota and other credit facilities. The three HorizonWest dealershipsLake Park, Iowa. These locations are included withinin our Agriculture segment. In its most recent fiscal year, Jaycox Implement, Inc. generated revenue of approximately $91 million. The total cash consideration paid for the acquired business was $33.6 million.
ERP Transition
The Company is in the process of converting to a new Enterprise Resource Planning ("ERP") application. The new ERP application is expected to provide data-driven and mobile-enabled sales and support tools to improve employee efficiency and deliver an enhanced customer experience. The Company integrated one pilot store on the new ERP system in the second quarter of fiscal 2021; we anticipate2021 and also integrated the five stores acquired through the Jaycox Implement and Mark's Machinery acquistions in December 2021 and April 2022, respectively. In June, the Company began the phased roll-out integrating three existing location to the new ERP. We will continue our phased roll-out to the remaining domestic stores to be converted tolocations, over the ERP within the next 12 months.second half of fiscal 2023 and continue into fiscal 2024.
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, 2021.2022. There have been no changes in our critical accounting policies and estimates since January 31, 2021.2022.
Results of Operations
The results presented below include the operating results of any acquisition made during these periods, from the date of acquisition, as well as the operating results of any stores closed or divested during these periods, up to the date of the store closure. The period-to-period comparisons included below are not necessarily indicative of future results. Segment information is provided later in the discussion and analysis of our results of operations.
Same-store sales for any period represent sales by stores that were part of the Company for the entire comparable period in the current and preceding fiscal years. We do not distinguish between relocated or recently expanded stores in this same-store analysis. Closed stores are excluded from the same-store analysis. Stores that do not meet the criteria for same-store classification are described as excluded stores throughout this Results of Operations section.
Comparative financial data for each of our four sources of revenue are expressed below. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Six Months Ended July 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (dollars in thousands) | | (dollars in thousands) |
Equipment | | | | | | | |
Revenue | $ | 272,733 | | | $ | 202,654 | | | $ | 548,713 | | | $ | 421,159 | |
Cost of revenue | 240,332 | | | 180,231 | | | 484,008 | | | 377,278 | |
Gross profit | $ | 32,401 | | | $ | 22,423 | | | $ | 64,705 | | | $ | 43,881 | |
Gross profit margin | 11.9 | % | | 11.1 | % | | 11.8 | % | | 10.4 | % |
Parts | | | | | | | |
Revenue | $ | 65,317 | | | $ | 61,454 | | | $ | 127,942 | | | $ | 118,068 | |
Cost of revenue | 46,089 | | | 43,032 | | | 90,529 | | | 82,649 | |
Gross profit | $ | 19,228 | | | $ | 18,422 | | | $ | 37,413 | | | $ | 35,419 | |
Gross profit margin | 29.4 | % | | 30.0 | % | | 29.2 | % | | 30.0 | % |
Service | | | | | | | |
Revenue | $ | 29,676 | | | $ | 27,986 | | | $ | 57,379 | | | $ | 53,586 | |
Cost of revenue | 9,771 | | | 9,665 | | | 19,065 | | | 18,010 | |
Gross profit | $ | 19,905 | | | $ | 18,321 | | | $ | 38,314 | | | $ | 35,576 | |
Gross profit margin | 67.1 | % | | 65.5 | % | | 66.8 | % | | 66.4 | % |
Rental and other | | | | | | | |
Revenue | $ | 9,904 | | | $ | 11,371 | | | $ | 16,300 | | | $ | 20,860 | |
Cost of revenue | 6,420 | | | 7,849 | | | 10,737 | | | 14,636 | |
Gross profit | $ | 3,484 | | | $ | 3,522 | | | $ | 5,563 | | | $ | 6,224 | |
Gross profit margin | 35.2 | % | | 31.0 | % | | 34.1 | % | | 29.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Six Months Ended July 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (dollars in thousands) | | (dollars in thousands) |
Equipment | | | | | | | |
Revenue | $ | 375,216 | | | $ | 272,733 | | | $ | 731,582 | | | $ | 548,713 | |
Cost of revenue | 323,988 | | | 240,332 | | | 634,222 | | | 484,008 | |
Gross profit | $ | 51,228 | | | $ | 32,401 | | | $ | 97,360 | | | $ | 64,705 | |
Gross profit margin | 13.7 | % | | 11.9 | % | | 13.3 | % | | 11.8 | % |
Parts | | | | | | | |
Revenue | $ | 77,693 | | | $ | 65,317 | | | $ | 146,255 | | | $ | 127,942 | |
Cost of revenue | 52,706 | | | 46,089 | | | 100,015 | | | 90,529 | |
Gross profit | $ | 24,987 | | | $ | 19,228 | | | $ | 46,240 | | | $ | 37,413 | |
Gross profit margin | 32.2 | % | | 29.4 | % | | 31.6 | % | | 29.2 | % |
Service | | | | | | | |
Revenue | $ | 33,365 | | | $ | 29,676 | | | $ | 62,887 | | | $ | 57,379 | |
Cost of revenue | 11,072 | | | 9,771 | | | 21,832 | | | 19,065 | |
Gross profit | $ | 22,293 | | | $ | 19,905 | | | $ | 41,055 | | | $ | 38,314 | |
Gross profit margin | 66.8 | % | | 67.1 | % | | 65.3 | % | | 66.8 | % |
Rental and other | | | | | | | |
Revenue | $ | 10,269 | | | $ | 9,904 | | | $ | 16,825 | | | $ | 16,300 | |
Cost of revenue | 6,078 | | | 6,420 | | | 10,087 | | | 10,737 | |
Gross profit | $ | 4,191 | | | $ | 3,484 | | | $ | 6,738 | | | $ | 5,563 | |
Gross profit margin | 40.8 | % | | 35.2 | % | | 40.0 | % | | 34.1 | % |
The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Six Months Ended July 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenue | | | | | | | |
Equipment | 72.2 | % | | 66.8 | % | | 73.1 | % | | 68.6 | % |
Parts | 17.3 | % | | 20.3 | % | | 17.1 | % | | 19.2 | % |
Service | 7.9 | % | | 9.2 | % | | 7.6 | % | | 8.7 | % |
Rental and other | 2.6 | % | | 3.7 | % | | 2.2 | % | | 3.4 | % |
Total Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Total Cost of Revenue | 80.1 | % | | 79.3 | % | | 80.5 | % | | 80.3 | % |
Gross Profit Margin | 19.9 | % | | 20.7 | % | | 19.5 | % | | 19.7 | % |
Operating Expenses | 15.1 | % | | 17.5 | % | | 15.1 | % | | 17.3 | % |
| | | | | | | |
Impairment of Intangible and Long-Lived Assets | 0.4 | % | | — | % | | 0.2 | % | | — | % |
Income from Operations | 4.4 | % | | 3.2 | % | | 4.1 | % | | 2.4 | % |
Other Income (Expense) | (0.2) | % | | (0.4) | % | | (0.2) | % | | (0.5) | % |
Income Before Income Taxes | 4.1 | % | | 2.7 | % | | 3.9 | % | | 1.9 | % |
Provision for Income Taxes | 1.2 | % | | 0.6 | % | | 1.0 | % | | 0.5 | % |
Net Income | 3.0 | % | | 2.1 | % | | 2.9 | % | | 1.4 | % |
Three Months Ended July 31, 2021 Compared to Three Months Ended July 31, 2020
Consolidated Results
Revenue | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Increase/ | | Percent |
| 2021 | | 2020 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Equipment | $ | 272,733 | | | $ | 202,654 | | | $ | 70,079 | | | 34.6 | % |
Parts | 65,317 | | | 61,454 | | | 3,863 | | | 6.3 | % |
Service | 29,676 | | | 27,986 | | | 1,690 | | | 6.0 | % |
Rental and other | 9,904 | | | 11,371 | | | (1,467) | | | (12.9) | % |
Total Revenue | $ | 377,630 | | | $ | 303,465 | | | $ | 74,165 | | | 24.4 | % |
Total revenue for the second quarter of fiscal 2022 was 24.4% or $74.2 million higher than the second quarter of fiscal 2021 driven primarily by increased demand for equipment, which increased equipment sales 34.6% from the prior year period. The increased equipment demand was due to higher commodity prices, higher recent net farm income, and good growing conditions in our international footprint. Company-wide same-store sales in the second quarter of fiscal 2022 increased 27.0% versus the comparable period in fiscal 2021. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Six Months Ended July 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue | | | | | | | |
Equipment | 75.6 | % | | 72.2 | % | | 76.4 | % | | 73.1 | % |
Parts | 15.6 | % | | 17.3 | % | | 15.3 | % | | 17.1 | % |
Service | 6.7 | % | | 7.9 | % | | 6.6 | % | | 7.6 | % |
Rental and other | 2.1 | % | | 2.6 | % | | 1.7 | % | | 2.2 | % |
Total Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Total Cost of Revenue | 79.3 | % | | 80.1 | % | | 80.0 | % | | 80.5 | % |
Gross Profit Margin | 20.7 | % | | 19.9 | % | | 20.0 | % | | 19.5 | % |
Operating Expenses | 13.9 | % | | 15.1 | % | | 13.9 | % | | 15.1 | % |
| | | | | | | |
| | | | | | | |
Income from Operations | 6.8 | % | | 4.4 | % | | 6.1 | % | | 4.1 | % |
Other Income (Expense) | (0.1) | % | | (0.2) | % | | (0.2) | % | | (0.2) | % |
Income Before Income Taxes | 6.7 | % | | 4.1 | % | | 5.9 | % | | 3.9 | % |
Provision for Income Taxes | 1.6 | % | | 1.2 | % | | 1.5 | % | | 1.0 | % |
Net Income | 5.0 | % | | 3.0 | % | | 4.4 | % | | 2.9 | % |
Three Months Ended July 31, 2022 Compared to Three Months Ended July 31, 2021
Consolidated Results
Revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Increase/ | | Percent |
| 2022 | | 2021 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Equipment | $ | 375,216 | | | $ | 272,733 | | | $ | 102,483 | | | 37.6 | % |
Parts | 77,693 | | | 65,317 | | | 12,376 | | | 18.9 | % |
Service | 33,365 | | | 29,676 | | | 3,689 | | | 12.4 | % |
Rental and other | 10,269 | | | 9,904 | | | 365 | | | 3.7 | % |
Total Revenue | $ | 496,543 | | | $ | 377,630 | | | $ | 118,913 | | | 31.5 | % |
Total revenue for the second quarter of fiscal 2023 was 31.5% or $118.9 million higher than the second quarter of fiscal 2022 driven primarily by an increase in Company-wide same-store sales of 32.1% and our acquistions of Jaycox Implement and Mark's Machinery, completed in December 2021 and April 2022, respectively. The same-store sales increase was primarily driven by favorable commodity prices, higher net farm income and increased construction activity in our footprint.
Gross Profit | | | Three Months Ended July 31, | | Increase/ | | Percent | | Three Months Ended July 31, | | Increase/ | | Percent |
| | 2021 | | 2020 | | (Decrease) | | Change | | 2022 | | 2021 | | (Decrease) | | Change |
| | (dollars in thousands) | | | | (dollars in thousands) | | |
Gross Profit | Gross Profit | | Gross Profit | |
Equipment | Equipment | $ | 32,401 | | | $ | 22,423 | | | $ | 9,978 | | | 44.5 | % | Equipment | $ | 51,228 | | | $ | 32,401 | | | $ | 18,827 | | | 58.1 | % |
Parts | Parts | 19,228 | | | 18,422 | | | 806 | | | 4.4 | % | Parts | 24,987 | | | 19,228 | | | 5,759 | | | 30.0 | % |
Service | Service | 19,905 | | | 18,321 | | | 1,584 | | | 8.6 | % | Service | 22,293 | | | 19,905 | | | 2,388 | | | 12.0 | % |
Rental and other | Rental and other | 3,484 | | | 3,522 | | | (38) | | | (1.1) | % | Rental and other | 4,191 | | | 3,484 | | | 707 | | | 20.3 | % |
Total Gross Profit | Total Gross Profit | $ | 75,018 | | | $ | 62,688 | | | $ | 12,330 | | | 19.7 | % | Total Gross Profit | $ | 102,699 | | | $ | 75,018 | | | $ | 27,681 | | | 36.9 | % |
Gross Profit Margin | Gross Profit Margin | | | | | | | Gross Profit Margin | | | | | | |
Equipment | Equipment | 11.9 | % | | 11.1 | % | | 0.8 | % | | 7.2 | % | Equipment | 13.7 | % | | 11.9 | % | | 1.8 | % | | 15.1 | % |
Parts | Parts | 29.4 | % | | 30.0 | % | | (0.6) | % | | (2.0) | % | Parts | 32.2 | % | | 29.4 | % | | 2.8 | % | | 9.5 | % |
Service | Service | 67.1 | % | | 65.5 | % | | 1.6 | % | | 2.4 | % | Service | 66.8 | % | | 67.1 | % | | (0.3) | % | | (0.4) | % |
Rental and other | Rental and other | 35.2 | % | | 31.0 | % | | 4.2 | % | | 13.5 | % | Rental and other | 40.8 | % | | 35.2 | % | | 5.6 | % | | 15.9 | % |
Total Gross Profit Margin | Total Gross Profit Margin | 19.9 | % | | 20.7 | % | | (0.8) | % | | (3.9) | % | Total Gross Profit Margin | 20.7 | % | | 19.9 | % | | 0.8 | % | | 4.0 | % |
Gross Profit Mix | Gross Profit Mix | | Gross Profit Mix | |
Equipment | Equipment | 43.2 | % | | 35.8 | % | | 7.4 | % | | 20.7 | % | Equipment | 49.9 | % | | 43.2 | % | | 6.7 | % | | 15.5 | % |
Parts | Parts | 25.6 | % | | 29.4 | % | | (3.8) | % | | (12.9) | % | Parts | 24.3 | % | | 25.6 | % | | (1.3) | % | | (5.1) | % |
Service | Service | 26.5 | % | | 29.2 | % | | (2.7) | % | | (9.2) | % | Service | 21.7 | % | | 26.5 | % | | (4.8) | % | | (18.1) | % |
Rental and other | Rental and other | 4.7 | % | | 5.6 | % | | (0.9) | % | | (16.1) | % | Rental and other | 4.1 | % | | 4.7 | % | | (0.6) | % | | (12.8) | % |
Total Gross Profit Mix | Total Gross Profit Mix | 100.0 | % | | 100.0 | % | | Total Gross Profit Mix | 100.0 | % | | 100.0 | % | |
Gross profit for the second quarter of fiscal 20222023 increased 19.7%36.9% or $12.3$27.7 million, as compared to the same period last year. Gross profit margin also improved to 20.7% in the current quarter from 19.9% in the prior year quarter. The increase in gross profit was driven by equipment sales and equipment margin which increased from 11.1% in the prior year quarter to 11.9% in the current year quarter. The decline in total gross profit margin to 19.9% in the current quarter from 20.7% in the prior year quarter was primarily due to stronger equipment margins, which were positively impacted by a healthy inventory, favorable end market conditions, and a $2.6 million benefit recognized on the shiftexpected achievement of annual manufacturer incentive programs. The increase in equipment margins, was partially offset by the gross profit mix shift, to lower margin equipment sales relative to parts, service, and rental sales.
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 — increased to 86.2%90.6% for the second quarter of fiscal 20222023 compared to 80.9%86.2% during the same period last year as the increase in gross profit from parts, rental fleet, and service in the second quarter of fiscal 20222023 combined with lower floorplan interest expenses more than offset the increase in operating expenses during the period.
Operating Expenses | | | Three Months Ended July 31, | | Increase/ | | Percent | | Three Months Ended July 31, | | Increase/ | | Percent |
| | 2021 | | 2020 | | (Decrease) | | Change | | 2022 | | 2021 | | (Decrease) | | Change |
| | (dollars in thousands) | | | | (dollars in thousands) | | |
Operating Expenses | Operating Expenses | $ | 57,074 | | | $ | 53,079 | | | $ | 3,995 | | | 7.5 | % | Operating Expenses | $ | 68,828 | | | $ | 57,074 | | | $ | 11,754 | | | 20.6 | % |
Operating Expenses as a Percentage of Revenue | Operating Expenses as a Percentage of Revenue | 15.1 | % | | 17.5 | % | | (2.4) | % | | (13.7) | % | Operating Expenses as a Percentage of Revenue | 13.9 | % | | 15.1 | % | | (1.2) | % | | (7.9) | % |
Our operating expenses in the second quarter of fiscal 20222023 increased 7.5%20.6% as compared to the second quarter of fiscal 2021.2022. The increase in operating expenses was primarily due tothe result of an increase in variable expenses associated with increased sales. Operating expenses as a percentage of revenue decreased to 13.9% in the second quarter of fiscal 2023 from 15.1% in the second quarter of fiscal 2022 from 17.5% in the second quarter of fiscal 2021.2022. The decrease in operating expenses as a percentage of revenue was due to the increase in total revenue in the second quarter of fiscal 2022,2023, as compared to the second quarter of fiscal 2021,2022, which positively affected our ability to leverage our fixed operating costs.
Impairment Charges | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Increase/ | | Percent |
| 2021 | | 2020 | | (Decrease) | | Change |
| (dollars in thousands) | | |
| | | | | | | |
Impairment of Intangible and Long-Lived Assets | $ | 1,498 | | | $ | — | | | $ | 1,498 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Increase/ | | Percent |
| 2022 | | 2021 | | (Decrease) | | Change |
| (dollars in thousands) | | |
| | | | | | | |
Impairment of Intangible and Long-Lived Assets | — | | | 1,498 | | | (1,498) | | | 100.0 | % |
The Company recognizedWe did not recognize any impairment expense of $1.5 million related to certain intangible assets and and long-lived assets in its International segmentcharges in the second quarter of fiscal 2022. The Company did not recognize any2023. In the second quarter of fiscal 2022, we recognized $1.5 million of impairment expensecharges on certain intangible and long-lived assets in our International segment.
Other Income (Expense) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Increase/ | | Percent |
| 2022 | | 2021 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Interest and other income | $ | 873 | | | $ | 654 | | | $ | 219 | | | 33.5 | % |
Floorplan interest expense | (245) | | | (350) | | | (105) | | | (30.0) | % |
Other interest expense | (1,349) | | | (1,118) | | | 231 | | | 20.7 | % |
Interest and other income increased by $0.2 million in the second quarter of fiscal 2021.
Other Income (Expense) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Increase/ | | Percent |
| 2021 | | 2020 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Interest and other income | $ | 654 | | | $ | 562 | | | $ | 92 | | | 16.4 | % |
Floorplan interest expense | (350) | | | (901) | | | (551) | | | (61.2) | % |
Other interest expense | (1,118) | | | (978) | | | 140 | | | 14.3 | % |
Floorplan interest expense decreased 61.2% in the second quarter of fiscal 2022,2023, as compared to the second quarter of fiscal 2021,2022, due to lower borrowings.increased sublease rental income of facilities that were divested in January 2022. The decrease in floorplan interest expense of 30.0% was due to decreased levels of interest bearing inventory in the International segment. The increase in other interest expense was primarily due to increased fixed rate, long term debt from real estate purchases throughout the year.fiscal 2022.
Provision for Income Taxes | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Increase/ | | Percent |
| 2021 | | 2020 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Provision for Income Taxes | $ | 4,383 | | | $ | 1,892 | | | $ | 2,491 | | | 131.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Increase/ | | Percent |
| 2022 | | 2021 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Provision for Income Taxes | $ | 8,191 | | | $ | 4,383 | | | $ | 3,808 | | | 86.9 | % |
Our effective tax rate was 28.0%24.7% and 22.8%28.0% for the three months ended July 31, 20212022 and July 31, 2020.2021, respectively, and was 25.1% and 25.6% for the six months ended July 31, 2022 and 2021, respectively. The effective tax rate for each of the threesix months ended July 31, 2022 and 2021 benefited fromis subject to variation due to factors such as the impact of certain discrete items, mainly the vesting of share-based compensation, but was offset by the mix of domestic and foreign income and recognition of a valuation allowance on certain of our foreign deferred tax assets including recording a valuation allowance on the remaining deferred tax assets of our Germany entity. For the three months ending July 31, 2020, the effective tax rate benefited from a weakening Ukrainian currency but was offset by increased tax expense on the vesting of share-based compensation.
assets.
Segment Results
Certain financial information for our Agriculture, Construction and International business segments is presented below. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Revenue between segments is immaterial. | | | Three Months Ended July 31, | | Increase/ | | Percent | | Three Months Ended July 31, | | Increase/ | | Percent |
| | 2021 | | 2020 | | (Decrease) | | Change | | 2022 | | 2021 | | (Decrease) | | Change |
| | (dollars in thousands) | | | | (dollars in thousands) | | |
Revenue | Revenue | | Revenue | |
Agriculture | Agriculture | $ | 219,364 | | | $ | 169,072 | | | $ | 50,292 | | | 29.8 | % | Agriculture | $ | 348,956 | | | $ | 219,364 | | | $ | 129,592 | | | 59.1 | % |
Construction | Construction | 80,943 | | | 77,719 | | | 3,224 | | | 4.1 | % | Construction | 70,022 | | | 80,943 | | | (10,921) | | | (13.5) | % |
International | International | 77,323 | | | 56,674 | | | 20,649 | | | 36.4 | % | International | 77,565 | | | 77,323 | | | 242 | | | 0.3 | % |
Total | Total | $ | 377,630 | | | $ | 303,465 | | | $ | 74,165 | | | 24.4 | % | Total | $ | 496,543 | | | $ | 377,630 | | | $ | 118,913 | | | 31.5 | % |
| Income (Loss) Before Income Taxes | | |
Income Before Income Taxes | | Income Before Income Taxes | |
Agriculture | Agriculture | $ | 12,067 | | | $ | 6,752 | | | $ | 5,315 | | | 78.7 | % | Agriculture | $ | 24,895 | | | $ | 12,067 | | | $ | 12,828 | | | 106.3 | % |
Construction | Construction | 2,815 | | | 1,375 | | | 1,440 | | | 104.7 | % | Construction | 3,923 | | | 2,815 | | | 1,108 | | | 39.4 | % |
International | International | 430 | | | (432) | | | 862 | | | n/m | International | 5,870 | | | 430 | | | 5,440 | | | n/m |
Segment income before income taxes | 15,312 | | | 7,695 | | | 7,617 | | | 99.0 | % | |
Segment Income Before Income Taxes | | Segment Income Before Income Taxes | 34,688 | | | 15,312 | | | 19,376 | | | 126.5 | % |
Shared Resources | Shared Resources | 320 | | | 597 | | | (277) | | | (46.4) | % | Shared Resources | (1,538) | | | 320 | | | (1,858) | | | n/m |
Total | Total | $ | 15,632 | | | $ | 8,292 | | | $ | 7,340 | | | 88.5 | % | Total | $ | 33,150 | | | $ | 15,632 | | | $ | 17,518 | | | 112.1 | % |
Agriculture
Agriculture segment revenue for the second quarter of fiscal 20222023 increased 29.8%59.1% compared to the second quarter of fiscal 2021.2022. The higher revenue was driven primarily by increased equipment demand due to higher commodity prices, higher recent net farm income. Same-storean increase in same-store sales of 45.7% and our acquistions of Jaycox Implement and Mark's Machinery, completed in our Agriculture segment increased 29.3% for the second quarter of fiscalDecember 2021 and April 2022, as compared to the second quarter of fiscal 2021,respectively. The same-store sales increase was primarily driven by an increase in equipment sales.favorable commodity prices and higher net farm income.
Agriculture segment income before income taxes for the second quarter of fiscal 2023 was $24.9 million compared to $12.1 million for the second quarter of fiscal 2022 compared to $6.8 million for the second quarter of fiscal 2021. Higher equipment revenue along with increased gross profit margin on equipment drove the increase in gross profit. Decreased inventory levels resulted in lower floorplan and other interest expense for the second quarter of fiscal 2022, as compared to the second quarter of fiscal 2021, which also contributed to the2022. The improvement in segment results.results was primarily the result of increased revenues and stronger equipment margins which were positively impacted by favorable end market conditions, healthy inventory, and a $2.6 million benefit recognized on the expected achievement of annual manufacturer incentive programs.
Construction
Construction segment revenue for the second quarter of fiscal 2022 increased 4.1%2023 decreased 13.5% compared to the second quarter of fiscal 2021. The higher revenue was driven by increases in our equipment sales, as compared to the prior year’s second quarter. This increase was partially offset by2022. However, after taking into account the divestiture of our Phoenixthe Billings, Great Falls, and Tucson, ArizonaMissoula, Montana, and Gillette, Wyoming stores in the fourth quarter of fiscal 2021 as well as lower rental2022 and other revenue due to a smaller rental fleet. Same-storethe first quarter of fiscal 2023 divestiture of our consumer products store in North Dakota, same-store sales in our Construction segment increased 14.1%14.9% for the second quarter of fiscal 2022,2023, as compared to the second quarter of fiscal 2021.2022. The driving factor of the same-store sales increase was parts, service, and rental and other which increased 18.1%, 11.7%, and 20.0%, respectively, from the second quarter of fiscal 2023, as compared to the second quarter of fiscal 2022.
Our Construction segment income before taxes was $2.8$3.9 million for the second quarter of fiscal 20222023 compared to $1.4$2.8 million in the second quarter of fiscal 2021.2022. The improvement in segment results was primarily due to increased construction activityan increase in same store sales, as well as operational improvements within the segment. Decreased inventory levels resulteddescribed above and an increase in lower floorplan and other interest expense for the second quarter of fiscal 2022, as comparedrental fleet utilization, which led to the second quarter of fiscal 2021, which also contributed to the improvementan increase in segment results.rental gross profit margin. 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 increased from 22.2% in the second quarter of fiscal 2021 to 26.6% in the second quarter of fiscal 2022.2022 to 31.9% in the second quarter of fiscal 2023.
International
International segment revenue was $77.6 million for the second quarter of fiscal 2022 increased 36.4%2023 compared to $77.3 million in the second quarter of fiscal 2021. Higher2022. While segment revenue was drivenessentially flat, a 25% decrease in total revenue from our Ukrainian subsidiary due to the Russia-Ukraine conflict, and the significant devaluation of the Euro, the functional currency in much of our international footprint, were more than offset by a same-store sales increase of 5.9% due to many of the same macroeconomic factors as the Agriculture segment, as well as favorable growing condition throughout most of the farming footprint we serve, which has improved customer sentiment and has had a positive impact ondriving an increase in equipment sales.
Our International segment income before income taxes was $0.4$5.9 million for the second quarter of fiscal 20222023 compared to segment lossincome before income taxes of $0.4 million for the same period last year. The increase in segment pre-tax income was primarily the result of increased equipment sales andimproved equipment gross profit margin and was partially offset by an impairment of certain intangible and fixed assets in our German reporting unit.subsidiary in the second quarter of fiscal 2022.
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 incomeloss before income taxes was $0.3$1.5 million for the second quarter of fiscal 20222023 compared to income before income taxes of $0.6$0.3 million for the same period last year. The lower shared resources results were driven by $0.5 million of acquisition related expenses incurred for the Heartland Companies acquisition.
Six Months Ended July 31, 20212022 Compared to Six Months Ended July 31, 20202021
Consolidated Results
Revenue | | | Six Months Ended July 31, | | Increase/ | | Percent | | Six Months Ended July 31, | | Increase/ | | Percent |
| | 2021 | | 2020 | | (Decrease) | | Change | | 2022 | | 2021 | | (Decrease) | | Change |
| | (dollars in thousands) | | | | (dollars in thousands) | | |
Equipment | Equipment | $ | 548,713 | | | $ | 421,159 | | | $ | 127,554 | | | 30.3 | % | Equipment | $ | 731,582 | | | $ | 548,713 | | | $ | 182,869 | | | 33.3 | % |
Parts | Parts | 127,942 | | | 118,068 | | | 9,874 | | | 8.4 | % | Parts | 146,255 | | | 127,942 | | | 18,313 | | | 14.3 | % |
Service | Service | 57,379 | | | 53,586 | | | 3,793 | | | 7.1 | % | Service | 62,887 | | | 57,379 | | | 5,508 | | | 9.6 | % |
Rental and other | Rental and other | 16,300 | | | 20,860 | | | (4,560) | | | (21.9) | % | Rental and other | 16,825 | | | 16,300 | | | 525 | | | 3.2 | % |
Total Revenue | Total Revenue | $ | 750,334 | | | $ | 613,673 | | | $ | 136,661 | | | 22.3 | % | Total Revenue | $ | 957,549 | | | $ | 750,334 | | | $ | 207,215 | | | 27.6 | % |
Total revenue for the first six months of fiscal 20222023 was up 22.3%27.6% or $136.7$207.2 million compared to the first six months of fiscal 2021, and was2022, driven primarily by increases in revenue from our equipment, parts and service businesses. The 30.3%an increase in equipment sales was the driving factor in the total sales increase from prior year and all three segments saw increases, compared to the prior year period, in equipment sales. Company-wide same-store sales of 27.1% and our acquistions of Jaycox Implement and Mark's Machinery, completed in December 2021 and April 2022, respectively. The same-store sales increase was primarily driven by favorable commodity prices, higher net farm income and increased 23.6% over the comparable prior year period.construction activity in our footprint.
Gross Profit | | | Six Months Ended July 31, | | Increase/ | | Percent | | Six Months Ended July 31, | | Increase/ | | Percent |
| | 2021 | | 2020 | | (Decrease) | | Change | | 2022 | | 2021 | | (Decrease) | | Change |
| | (dollars in thousands) | | | | (dollars in thousands) | | |
Gross Profit | Gross Profit | | Gross Profit | |
Equipment | Equipment | $ | 64,705 | | | $ | 43,881 | | | $ | 20,824 | | | 47.5 | % | Equipment | $ | 97,360 | | | $ | 64,705 | | | $ | 32,655 | | | 50.5 | % |
Parts | Parts | 37,413 | | | 35,419 | | | 1,994 | | | 5.6 | % | Parts | 46,240 | | | 37,413 | | | 8,827 | | | 23.6 | % |
Service | Service | 38,314 | | | 35,576 | | | 2,738 | | | 7.7 | % | Service | 41,055 | | | 38,314 | | | 2,741 | | | 7.2 | % |
Rental and other | Rental and other | 5,563 | | | 6,224 | | | (661) | | | (10.6) | % | Rental and other | 6,738 | | | 5,563 | | | 1,175 | | | 21.1 | % |
Total Gross Profit | Total Gross Profit | $ | 145,995 | | | $ | 121,100 | | | $ | 24,895 | | | 20.6 | % | Total Gross Profit | $ | 191,393 | | | $ | 145,995 | | | $ | 45,398 | | | 31.1 | % |
Gross Profit Margin | Gross Profit Margin | | | | | | | Gross Profit Margin | | | | | | |
Equipment | Equipment | 11.8 | % | | 10.4 | % | | 1.4 | % | | 13.5 | % | Equipment | 13.3 | % | | 11.8 | % | | 1.5 | % | | 12.7 | % |
Parts | Parts | 29.2 | % | | 30.0 | % | | (0.8) | % | | (2.7) | % | Parts | 31.6 | % | | 29.2 | % | | 2.4 | % | | 8.2 | % |
Service | Service | 66.8 | % | | 66.4 | % | | 0.4 | % | | 0.6 | % | Service | 65.3 | % | | 66.8 | % | | (1.5) | % | | (2.2) | % |
Rental and other | Rental and other | 34.1 | % | | 29.8 | % | | 4.3 | % | | 14.4 | % | Rental and other | 40.0 | % | | 34.1 | % | | 5.9 | % | | 17.3 | % |
Total Gross Profit Margin | Total Gross Profit Margin | 19.5 | % | | 19.7 | % | | (0.2) | % | | (1.0) | % | Total Gross Profit Margin | 20.0 | % | | 19.5 | % | | 0.5 | % | | 2.6 | % |
Gross Profit Mix | Gross Profit Mix | | Gross Profit Mix | |
Equipment | Equipment | 44.3 | % | | 36.2 | % | | 8.1 | % | | 22.4 | % | Equipment | 50.8 | % | | 44.3 | % | | 6.5 | % | | 14.7 | % |
Parts | Parts | 25.6 | % | | 29.2 | % | | (3.6) | % | | (12.3) | % | Parts | 24.2 | % | | 25.6 | % | | (1.4) | % | | (5.5) | % |
Service | Service | 26.2 | % | | 29.4 | % | | (3.2) | % | | (10.9) | % | Service | 21.5 | % | | 26.2 | % | | (4.7) | % | | (17.9) | % |
Rental and other | Rental and other | 3.9 | % | | 5.2 | % | | (1.3) | % | | (25.0) | % | Rental and other | 3.5 | % | | 3.9 | % | | (0.4) | % | | (10.3) | % |
Total Gross Profit Mix | Total Gross Profit Mix | 100.0 | % | | 100.0 | % | | Total Gross Profit Mix | 100.0 | % | | 100.0 | % | |
Gross profit increased 20.6%31.1% or $24.9$45.4 million for the first six months of fiscal 2022,2023, as compared to the same period last year. The increase in gross profit was primarily the result of increased equipment sales onand stronger equipment margins for the first six months of fiscal 2022,2023. These higher equipment sales and margins arewere driven by current industry conditionsa healthy inventory and favorable end market conditions. Higher equipment margins were also benefited from a $2.6 million benefit recognized on the expected achievement of lower supply and higher demand.annual manufacturer incentive programs. The overall gross profit margin decreasedincrease from 19.7%19.5% to 19.5%20.0% was primarily due to stronger equipment margins and rental margins, but was partially offset due to a shift in gross profit mix to lower margin equipment sales relative to parts, service, and rental sales.
Our Company-wide absorption rate for the first six months of fiscal 20222023 increased to 81.0%85.6%, as compared to 77.0%81.0% during the same period last year, as the increase in gross profit from parts, rental, and service combined with lower floorplan
interest expense more than offset the increase in operating expenses during the six month period compared to that of the prior year six month period.
Operating Expenses | | | Six Months Ended July 31, | | Increase/ | | Percent | | Six Months Ended July 31, | | Increase/ | | Percent |
| | 2021 | | 2020 | | (Decrease) | | Change | | 2022 | | 2021 | | (Decrease) | | Change |
| | (dollars in thousands) | | | | (dollars in thousands) | | |
Operating Expenses | Operating Expenses | $ | 113,516 | | | $ | 106,137 | | | $ | 7,379 | | | 7.0 | % | Operating Expenses | $ | 132,980 | | | $ | 113,516 | | | $ | 19,464 | | | 17.2 | % |
Operating Expenses as a Percentage of Revenue | Operating Expenses as a Percentage of Revenue | 15.1 | % | | 17.3 | % | | (2.2) | % | | (12.7) | % | Operating Expenses as a Percentage of Revenue | 13.9 | % | | 15.1 | % | | (1.2) | % | | (7.9) | % |
Our operating expenses for the first six months of fiscal 20222023 increased $7.4$19.5 million as compared to the first six months of fiscal 2021.2022. The increase in operating expenses was primarily due toa result of an increase in variable expenses associated with increased sales. Operating expenses as a percentage of revenue decreased to 13.9% in the first six months of fiscal 2023 from 15.1% in the first six months of fiscal 2022 from 17.3% in the first six months of fiscal 2021.2022. The decrease in operating expenses as a percentage of total revenue was due to the increase in total revenue in the first six months of fiscal 2022,2023, as compared to the first six months of fiscal 2021,2022, which positively affected our ability to leverage our fixed operating costs.
Impairment Charges | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended July 31, | | Increase/ | | Percent |
| 2021 | | 2020 | | (Decrease) | | Change |
| (dollars in thousands) | | |
| | | | | | | |
Impairment of Intangible and Long-Lived Assets | 1,498 | | | 216 | | | 1,282 | | | n/m |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended July 31, | | Increase/ | | Percent |
| 2022 | | 2021 | | (Decrease) | | Change |
| (dollars in thousands) | | |
| | | | | | | |
Impairment of Intangible and Long-Lived Assets | — | | | 1,498 | | | (1,498) | | | 100.0 | % |
We recognized $1.5 million indid not recognize any impairment charges in our International segment related to certain intangible and long-lived assets and $0.2 millionthe first six months of impairment charges on certain long-lived assets in our Construction segment duringfiscal 2023. In the first six months of fiscal 2022, we recognized $1.5 million of impairment charges on certain intangible and 2021, respectively.long-lived assets in our International segment.
Other Income (Expense) | | | Six Months Ended July 31, | | Increase/ | | Percent | | Six Months Ended July 31, | | Increase/ | | Percent |
| | 2021 | | 2020 | | (Decrease) | | Change | | 2022 | | 2021 | | (Decrease) | | Change |
| | (dollars in thousands) | | | | (dollars in thousands) | | |
Interest and other income | Interest and other income | $ | 1,320 | | | $ | 692 | | | $ | 628 | | | 90.8 | % | Interest and other income | $ | 1,365 | | | $ | 1,320 | | | $ | 45 | | | 3.4 | % |
Floorplan interest expense | Floorplan interest expense | (768) | | | (2,054) | | | (1,286) | | | (62.6) | % | Floorplan interest expense | (499) | | | (768) | | | (269) | | | (35.0) | % |
Other interest expense | Other interest expense | (2,222) | | | (1,944) | | | 278 | | | 14.3 | % | Other interest expense | (2,545) | | | (2,222) | | | 323 | | | 14.5 | % |
Floorplan interest expense decreased 62.6%35.0% for the first six months of fiscal 2022,2023, as compared to the same period last year, primarily due to lower borrowings and a lower interest rate environment.bearing inventory, primarily in our international segment. The increase in other interest expense in the first six months of fiscal 2022,2023, as compared to the first six months of fiscal 2021,2022, is the result of increased long term debt on real estate purchased in the past year. The increase in Interest and other income in the first six months ofduring fiscal 2022 as compared to the same period of fiscal 2021 is primarily due to the foreign currency remeasurement losses in Ukraine, resulting from a devaluation of the Ukrainian hryvnia in the first quarter of fiscal 2021.
Provision for Income Taxes | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended July 31, | | Increase/ | | Percent |
| 2021 | | 2020 | | Decrease | | Change |
| (dollars in thousands) | | |
Provision for Income Taxes | $ | 7,515 | | | $ | 2,779 | | | $ | 4,736 | | | n/m |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended July 31, | | Increase/ | | Percent |
| 2022 | | 2021 | | Decrease | | Change |
| (dollars in thousands) | | |
Provision for Income Taxes | $ | 14,235 | | | $ | 7,515 | | | $ | 6,720 | | | 89.4 | % |
Our effective tax rate was 25.6%25.1% for the first six months of fiscal 20222023 and 24.3%25.6% for the same period last year. The effective tax rate for the six months ended July 31, 2022 and 2021 benefited fromis subject to variation due to factors such as the impact of certain discrete items, mainly the vesting of share-based compensation, but was offset by the mix of domestic and foreign income, recognition of a valuation allowance on certain of our foreign deferred tax assets including recording a valuation allowance on the remaining deferred tax assetsand foreign currency gains and losses.
Segment Results
Certain financial information for our Agriculture, Construction and International business segments is presented below. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Revenue between segments is immaterial. | | | Six Months Ended July 31, | | Increase/ | | Percent | | Six Months Ended July 31, | | Increase/ | | Percent |
| | 2021 | | 2020 | | (Decrease) | | Change | | 2022 | | 2021 | | (Decrease) | | Change |
| | (dollars in thousands) | | | | (dollars in thousands) | | |
Revenue | Revenue | | Revenue | |
Agriculture | Agriculture | $ | 448,915 | | | $ | 362,700 | | | $ | 86,215 | | | 23.8 | % | Agriculture | $ | 667,503 | | | $ | 448,915 | | | $ | 218,588 | | | 48.7 | % |
Construction | Construction | 149,550 | | | 137,833 | | | 11,717 | | | 8.5 | % | Construction | 136,986 | | | 149,550 | | | (12,564) | | | (8.4) | % |
International | International | 151,869 | | | 113,140 | | | 38,729 | | | 34.2 | % | International | 153,060 | | | 151,869 | | | 1,191 | | | 0.8 | % |
Total | Total | $ | 750,334 | | | $ | 613,673 | | | $ | 136,661 | | | 22.3 | % | Total | $ | 957,549 | | | $ | 750,334 | | | $ | 207,215 | | | 27.6 | % |
| Income (Loss) Before Income Taxes | | |
Income Before Income Taxes | | Income Before Income Taxes | |
Agriculture | Agriculture | $ | 23,292 | | | $ | 12,914 | | | $ | 10,378 | | | 80.4 | % | Agriculture | $ | 41,344 | | | $ | 23,292 | | | $ | 18,052 | | | 77.5 | % |
Construction | Construction | 2,953 | | | (1,498) | | | 4,451 | | | n/m | Construction | 7,132 | | | 2,953 | | | 4,179 | | | 141.5 | % |
International | International | 3,238 | | | (711) | | | 3,949 | | | n/m | International | 10,195 | | | 3,238 | | | 6,957 | | | n/m |
Segment income before income taxes | 29,483 | | | 10,705 | | | 18,778 | | | n/m | |
Segment Income Before Income Taxes | | Segment Income Before Income Taxes | 58,671 | | | 29,483 | | | 29,188 | | | 99.0 | % |
Shared Resources | Shared Resources | (172) | | | 736 | | | (908) | | | n/m | Shared Resources | (1,937) | | | (172) | | | (1,765) | | | n/m |
Total | Total | $ | 29,311 | | | $ | 11,441 | | | $ | 17,870 | | | n/m | Total | $ | 56,734 | | | $ | 29,311 | | | $ | 27,423 | | | 93.6 | % |
Agriculture
Agriculture segment revenue for the first six months of fiscal 20222023 increased 23.8%48.7% compared to the same period last year. We experienced increases across our equipment, partsThe higher revenue was driven primarily by an increase in same-store sales of 35.8% for the first six months of fiscal 2023, as compared to the same period last year as well as the acquisitions of Jaycox Implement and service businesses.EquipmentMark's Machinery in December 2021 and April 2022, respectively. The same-store sales wereincrease was driven by increased equipment demand due to higher commodity prices and higher recent net farm income, as well as current and prior year government support payments.All sources of revenue in this segment benefited from the addition of the three HorizonWest locations (acquired in May 2020) that were not in the full prior year six-month period. Same-store sales increased 21.7% for the first six months of fiscal 2022, as compared to the same period last year.income.
Agriculture segment income before income taxes was $23.3$41.3 million for the first six months of fiscal 20222023 compared to $12.9$23.3 million over the first six months of fiscal 2021.2022. The improvement in segment results was the result of higher equipment revenue along with higher gross profit margin on equipment driven by an industry environmentincreased demand, healthy inventory, and a $2.6 million benefit recognized on the expected achievement of high demand and lower supply. Decreased inventory levels resulted in lower floorplan and other interest expense for the six months ended July 31, 2021, which also contributed to the improvement in segment results.
annual manufacturer incentive programs. Construction
Construction segment revenue for the first six months of fiscal 2022 increased 8.5%2023 decreased 8.4% compared to the same period last year, due to ayear. However, when accounting for the divestitures of the Billings, Great Falls, and Missoula, Montana and Gillette, Wyoming stores in January 2022, and the North Dakota consumer products store in March 2022, same-store sales increase of 19.3% which more than offset our divestiture of the Phoenix and Tucson, Arizona stores in the fourth quarter of fiscal year 2021.increased 19.5%. Higher equipmentsame-store sales were driven by increased construction activity throughout the footprint.
Our Construction segment income before income taxes was $7.1 million for the first six months of fiscal 2023 compared to income before income taxes of $3.0 million for the first six months of fiscal 2022 compared to a loss of $1.5 million for the first six months of fiscal 2021.2022. The increase in segment results was primarily due to increased construction activity as well as operational improvements within the segment. The segment also benefited from decreased inventory levels which resultedour footprint and an increase in lower floorplan and other interest expense for the six months ended July 31, 2021.rental fleet utilization. The dollar utilization of our rental fleet increased from 20.5% in the first six months of fiscal 2021 to 22.9% in the first six months of fiscal 2022.2022 to 28.6% in the first six months of fiscal 2023.
International
International segment revenue for the first six months of fiscal 20222023 increased 34.2%0.8% compared to the same period last year. Higher segmentcommodity prices are primarily driving demand for equipment sales. The increase in revenue is being drivenwas partially offset by manya 9.0% devaluation of the same macroeconomic factors asEuro, the Agriculture segment as well as favorable growing conditions forfunctional currency in much of our farminginternational footprint, which has hadin the first six months of fiscal 2023. The segment was also negatively impacted by a positive impact on all sources38% decrease in revenues from our Ukrainian subsidiary due to the Russia-Ukraine conflict compared to the first six months of sales, but primarily equipment sales.fiscal 2022.
Our International segment income before income taxes was $3.2$10.2 million for the first six months of fiscal 20222023 compared to a lossincome before income taxes of $0.7$3.2 million for the same period last year. The higher segment results were
primarily the result of increased equipment sales and equipment gross profit margin. ImpairmentThere were no fixed or intangible asset impairment charges recognized in the first six months of fiscal 2023 while $1.5 million werewas recognized in the first six months of fiscal 2022, related to the impairment of certain intangible and long-lived assets of our German reporting unit.subsidiary.
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 $0.2$1.9 million for the first six months of fiscal 20222023 compared to incomea loss before income taxes of $0.7$0.2 million for the same period last year. The lower shared resources results were driven by $0.5 million of acquisition related expenses incurred for the Heartland Companies acquisition.
Non-GAAP Financial Measures
To supplement net income and diluted earnings per share ("Diluted EPS"), both GAAP measures, we present adjusted net income and adjusted Diluted EPS, both non-GAAP measures, which include adjustments for items such as valuation allowances for income tax, ERP transition costs for fiscal year 2021, impairment charges and foreign currency remeasurement gains/losses in Ukraine.Ukraine and impairment charges. We believe that the presentation of adjusted net income and adjusted Diluted EPS is relevant and useful to our management and investors because it provides a measurement of earnings on activities that we consider to occur in the ordinary course of our business. Adjusted net income and adjusted Diluted EPS should be evaluated in addition to, and not considered a substitute for, or superior to, the most comparable GAAP measure. In addition, other companies may calculate these non-GAAP measures in a different manner, which may hinder comparability of our adjusted results with those of other companies.
The following tables reconcile (i) net income, a GAAP measure, to adjusted net income and (ii) Diluted EPS, a GAAP measure, to adjusted Diluted EPS: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (dollars in thousands, except per share data) |
Adjusted Net Income | | | | | | | | |
Net Income | | $ | 11,249 | | | $ | 6,400 | | | $ | 21,796 | | | $ | 8,662 | |
Adjustments | | | | | | | | |
ERP transition costs | | — | | | 763 | | | — | | | 1,484 | |
| | | | | | | | |
Impairment charges | | 1,498 | | | — | | | 1,498 | | | 216 | |
Ukraine remeasurement (gain) / loss | | (53) | | | (130) | | | (183) | | | 635 | |
Total Pre-Tax Adjustments | | 1,445 | | | 633 | | | 1,315 | | | 2,335 | |
Less: Tax Effect of Adjustments (1) | | — | | | 466 | | | — | | | 1,047 | |
Plus: Income Tax Valuation Allowance | | 278 | | | — | | | 278 | | | — | |
Total Adjustments | | 1,723 | | | 167 | | | 1,593 | | | 1,288 | |
Adjusted Net Income | | $ | 12,972 | | | $ | 6,567 | | | $ | 23,389 | | | $ | 9,950 | |
| | | | | | | | |
Adjusted Diluted EPS | | | | | | | | |
Diluted EPS | | $ | 0.50 | | | $ | 0.28 | | | $ | 0.97 | | | $ | 0.39 | |
Adjustments (2) | | | | | | | | |
ERP transition costs | | — | | | 0.03 | | | — | | | 0.07 | |
| | | | | | | | |
Impairment charges | | 0.07 | | | — | | | 0.07 | | | 0.01 | |
Ukraine remeasurement (gain) / loss | | (0.01) | | | — | | | (0.01) | | | 0.02 | |
Total Pre-Tax Adjustments | | 0.06 | | | 0.03 | | | 0.06 | | | 0.10 | |
Less: Tax Effect of Adjustments (1) | | — | | | 0.02 | | | — | | | 0.05 | |
Plus: Income Tax Valuation Allowance | | 0.01 | | | — | | | 0.01 | | | — | |
Total Adjustments | | 0.07 | | | 0.01 | | | 0.07 | | | 0.05 | |
Adjusted Diluted EPS | | $ | 0.57 | | | $ | 0.29 | | | $ | 1.04 | | | $ | 0.44 | |
| | | | | | | | |
(1) The tax effect of U.S. related adjustments was calculated using a 26% tax rate, determined based on a 21% federal statutory rate and a 5% blended state income tax rate. Included in the tax effect of the adjustments is the tax impact of foreign currency changes in Ukraine of $0.3 million for the three months ended July 31, 2020 and $0.6 million for the six months ended July 31, 2020. | | |
(2) Adjustments are net of amounts allocated to participating securities where applicable. | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended July 31, | | Six Months Ended July 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (dollars in thousands, except per share data) |
Adjusted Net Income | | | | | | | | |
Net Income | | $ | 24,959 | | | $ | 11,249 | | | $ | 42,499 | | | $ | 21,796 | |
Adjustments | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Impairment charges | | — | | | 1,498 | | | — | | | 1,498 | |
Ukraine remeasurement (gain) / loss (1) | | 21 | | | (53) | | | 315 | | | (183) | |
Total Pre-Tax Adjustments | | 21 | | | 1,445 | | | 315 | | | 1,315 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Adjusted Net Income | | $ | 24,980 | | | $ | 12,694 | | | $ | 42,814 | | | $ | 23,111 | |
| | | | | | | | |
Adjusted Diluted EPS | | | | | | | | |
Diluted EPS | | $ | 1.10 | | | $ | 0.50 | | | $ | 1.88 | | | $ | 0.97 | |
Adjustments (2) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Impairment charges | | — | | | 0.07 | | | — | | | 0.07 | |
Ukraine remeasurement (gain) / loss (1) | | — | | | (0.01) | | | 0.01 | | | (0.01) | |
Total Pre-Tax Adjustments | | — | | | 0.06 | | | 0.01 | | | 0.06 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Adjusted Diluted EPS | | $ | 1.10 | | | $ | 0.56 | | | $ | 1.89 | | | $ | 1.03 | |
| | | | | | | | |
(1) Due to the income tax valuation allowance on the Ukrainian and German subsidiaries, there are no tax adjustments of the Ukraine remeasurement (gain)/loss for the periods ended July 31, 2022 and 2021 or the impairment charge for the period ended July 31, 2021. | | |
(2) Adjustments are net of amounts allocated to participating securities where applicable. | | | | |
Liquidity and Capital Resources
Sources of Liquidity
Our primary sources of liquidity are cash reserves, cash generated from operations, and borrowings under our floorplan and other credit facilities. We expect these sources of liquidity to be sufficient to fund our working capital requirements, acquisitions, capital expenditures and other investments in our business, service our debt, pay our tax and lease
obligations and other commitments and contingencies, and meet any seasonal operating requirements for the foreseeable future, provided that our borrowing capacity under our credit agreements is dependent on compliance with various covenants as further described in the "Risk Factors" section of our Annual Report on Form 10-K.
Equipment Inventory and Floorplan Payable Credit Facilities
As of July 31, 2021,2022, the Company had floorplan payable lines of credit for equipment purchases totaling $771.0$743.0 million, which is primarily comprised of a $450.0 million credit facility with CNH Industrial, a $185.0 million floorplan payable line under the Bank Syndicate Agreement, and a $60.0$50.0 million credit facility with DLL Finance.
Our equipment inventory turnover increased from 1.6 times for the rolling 12 month period ended July 31, 2020 to 2.7 times for the rolling 12 month period ended July 31, 2021.2021 to 3.6 times for the rolling 12 month period ended July 31, 2022. The increase in equipment turnover was attributable to an increase in equipment sales and a decrease in average equipment inventory over the rolling 12 month period ended July 31, 20212022 as compared to the same period ended July 31, 2020.2021. Our
equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, decreased to 44.7%38.3% as of July 31, 20212022 from 52.1%58.2% as of January 31, 2021.2022. The decrease was primarily due to more inventory being financeddrawing on our floorplan loan with non-interest bearing floorplan linesthe Bank Syndicate, in anticipation of credit.the Heartland 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.assets, and funding acquisitions. Based on our current operational performance and taking into account the use of cash to pay the purchase price on the Heartland acquisition, we believe our cash flow from operations, available cash and available borrowing capacity under our existing credit facilities will adequately provide for our liquidity needs for, at a minimum, the next 12 months.
As of July 31, 2021,2022, we were in compliance with the financial covenants under our CNH Industrial and DLL Finance credit agreements and we were not subject to the fixed charge coverage ratio covenant under the Bank Syndicate Agreement as our adjusted excess availability plus eligible cash collateral (as defined therein) was not less than 15% of the lesser of (i) aggregate borrowing base and (ii) maximum credit amount as of July 31, 2021.2022. 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 Provided by (Used for) Operating Activities
Net cash used for operating activities was $21.0 million for the first six months of fiscal 2023, compared to net cash provided by operating activities wasof $28.6 million for the first six months of fiscal 2022, compared to net cash provided by operating activities of $13.0 million for the first six months of fiscal 2021.2022. The change in net cash provided by operating activities is primarily the result of an increase in net income and an increase in the amount of inventory financed with non-interest bearing floorplan lines of credit from manufacturers which was partially offset by an increase in receivables and prepaid expenses for the first six months of fiscal 2022.
We evaluate our cash flow from operating activities net of all floorplan activity and maintaining a constant level of equity in our equipment inventory. Taking these adjustments into account, our adjusted cash flow used for operating activities was $19.0 million for the first six months of fiscal 2022 compared to an adjusted cash flow provided by operating activities of $16.1 million for the first six months of fiscal 2021. The change in adjusted cash flow provided by (used for) operating activities is primarily the result of the amount of inventory financed withan increase in inventories partially offset by an increase in non-interest bearing floorplan lines of credit from manufacturers and a decrease in non-manufacturing floor plan payableshigher net income for the first six months of fiscal 2022. See the Adjusted Cash Flow Reconciliation below for a reconciliation of adjusted cash flow provided by (used for) operating activities to the GAAP measure of cash flow provided by (used for) operating activities.2023.
Cash Flow Used for Investing Activities
Net cash used for investing activities was $20.7 million for the first six months of fiscal 2023, compared to $19.4 million for the first six months of fiscal 2022, compared to $16.8 million for the first six months of fiscal 2021.2022. The increase in cash used for investing activities was primarily the result of an increase in property and equipment purchases as the Company purchased formerly leased buildings and bought out vehicle leasesbusiness acquisition of Mark's Machinery in the first six months of fiscal 2022. 2023.
Cash Flow Provided by (Used for) Financing Activities
Net cash provided by financing activities was $39.6 million for the first six months of fiscal 2023 compared to cash used for financing activities wasof $22.4 million for the first six months of fiscal 2022 compared to. The increase in cash provided by financing activities of $4.5 million for the first six months of fiscal 2021. The decrease in cash provided by
financing activities was primarily the result of an increase in repayments of non-manufacturerincreased non-manufactured floorplan lines of credit partially offset by proceeds from long term debt borrowingspayables in the first six months of fiscal 2023, as the Company drew on its Bank Syndicate floorplan loan in anticipation of the August 2022 acquisition of the Heartland Companies, compared to the same period last year.
Adjusted Cash Flow Reconciliation
We consider our cash flow from operating activities to include all equipment inventory financing activity regardless of whether we obtain the financing from a manufacturer or other source. GAAP requires the cash flows associated with non-manufacturer floorplan payables to be recognized as financing cash flows in the consolidated statement of cash flows. We consider equipment inventory financing with both manufacturers and other sources to be part of the normal operations of our business. We also evaluate our cash flow from operating activities by assuming a constant level of equity in our equipment inventory. Our equity in our equipment inventory reflects the portion of our equipment inventory balance that is not financed by floorplan payables. Our adjustment to maintain a constant level of equity in our equipment inventory is equal to the difference between our actual level of equity in equipment inventory at each period-end as presented in the consolidated balance sheets compared to the actual level of equity in equipment inventory at the beginning of the fiscal year. We refer to this measure of cash flow as Adjusted Cash Flow.
Our equity in equipment inventory decreased to 44.7% as of July 31, 2021 from 52.1% as of January 31, 2021, and decreased to 27.0% as of July 31, 2020 from 27.9% as of January 31, 2020.
Adjusted Cash Flow is a non-GAAP financial measure. We believe that the presentation of Adjusted Cash Flow is relevant and useful to our investors because it provides information on activities we consider to be the normal operation of our business, regardless of financing source and level of financing for our equipment inventory. The following table reconciles net cash provided by (used for) operating activities, a GAAP measure, to adjusted net cash provided by (used for) operating activities and net cash provided by (used for) financing activities, a GAAP measure, to adjusted net cash provided by (used for) financing activities. | | | | | | | | | | | | | | | | | | | | | | | |
| Net Cash Provided by (Used for) Operating Activities | | Net Cash Provided by (Used for) Financing Activities |
| Six Months Ended July 31, 2021 | | Six Months Ended July 31, 2020 | | Six Months Ended July 31, 2021 | | Six Months Ended July 31, 2020 |
| (in thousands) | | (in thousands) |
Cash Flow, As Reported | $ | 28,561 | | | $ | 13,035 | | | $ | (22,373) | | | $ | 4,519 | |
Adjustment for Non-Manufacturer Floorplan | (22,731) | | | 7,229 | | | 22,731 | | | (7,229) | |
Adjustment for Constant Equity in Equipment Inventory | (24,842) | | | (4,191) | | | — | | | — | |
Adjusted Cash Flow | $ | (19,012) | | | $ | 16,073 | | | $ | 358 | | | $ | (2,710) | |
Information Concerning Off-Balance Sheet Arrangements
As of July 31, 2021,2022, 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, 2021,2022, and in other materials filed or to be filed by the Company with the Securities and Exchange Commission (and included in oral statements or other written statements made or to be made by the Company).
Forward-looking statements are statements based on future expectations and specifically may include, among other things, statements relating to our expectations regarding exchange rate and interest rate impact onthe performance of our business,Ukrainian subsidiary within our International segment, the impact of farm income levels on customer demand for agricultural equipment and services, the impact of the COVID-19 pandemic on our business, the effectiveness 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, discussion of the anticipated implementation date of our new ERP system, and our primary liquidity sources, and the adequacy of our capital resources. 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 Heartland acquisition, the risk that we assume unforeseen or other liabilities in connection with the Heartland acquisition and the impact of those conditions and obligations imposed on us under the new CaseIH dealer agreements 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, the duration, scope and impact of the COVID-19 pandemic on the Company's operations and business, including the disruption of supply chains and associated impacts on the Company's supply vendors, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in interest rates and foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates.
Interest Rate Risk
Exposure to changes in interest rates results from borrowing activities used to fund operations. For fixed rate debt, interest rate changes affect the fair value of financial instruments but do not impact earnings or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. We have both fixed and floating rate financing. Some of our floating rate credit facilities contain minimum rates of interest to be charged. Based upon our interest-bearing balances and interest rates as of July 31, 2021,2022, holding other variables constant, a one percentage point increase in interest rates for the next 12-month period would decrease pre-tax earnings and cash flow by approximately $0.4$0.6 million. Conversely, a one percentage point decrease in interest rates for the next 12-month period would result in an increase to pre-tax earnings and cash flow of approximately $0.4$0.6 million. At July 31, 2021,2022, we had floorplan payables of $185.5$274.2 million, of which approximately $36.9$63.5 million was variable-rate floorplan payable and $148.7$210.7 million was non-interest bearing. In addition, at July 31, 2021,2022, we had total long-term debt, including finance lease obligations, of $72.2$94.8 million, all of which all was fixed rate debt.
Foreign Currency Exchange Rate Risk
Our foreign currency exposures arise as the result of our foreign operations. We are exposed to transactional foreign currency exchange rate risk through our foreign entities’ holding assets and liabilities denominated in currencies other than their functional currency. In addition, the Company is exposed to foreign currency transaction risk as a result of certain intercompany financing transactions. The Company attempts to manage its transactional foreign currency exchange rate risk through the use of derivative financial instruments, primarily foreign exchange forward contracts, or through natural hedging instruments. Based upon balances and exchange rates as of July 31, 2021,2022, holding other variables constant, we believe that a hypothetical 10% increase or decrease in all applicable foreign exchange rates would not have a material impact on our results of operations or cash flows. As of July 31, 2021,2022, our Ukrainian subsidiary had $2.1$0.3 million of net monetary assets denominated in Ukrainian hryvnia ("UAH"). We have attempted to minimize our net monetary asset position in Ukraine through reducing overall asset levels in Ukraine and at times through borrowing in UAH which serves as a natural hedging instrument offsetting our net UAH denominated assets. At certain times,Many of the currency and payment controls imposed by the National Bank of Ukraine imposed in February 2022, have limitedbeen relaxed, making it more practicable to manage our abilityUAH exposure. However, the continuation of the Russia/Ukraine conflict could lead to more significant UAH devaluations, similar to the 24% devaluation that occurred in July 2022, or more stringent payment controls in the future. The inability to fully manage our net monetary asset position.position and continued UAH devaluations for an extended period of time, could have a significant adverse impact on our results of operations and cash flows.
In addition to transactional foreign currency exchange rate risk, we are also exposed to translational foreign currency exchange rate risk as we translate the results of operations and assets and liabilities of our foreign operations from their functional currency to the U.S. dollar. As a result, our results of operations, cash flows and net investment in our foreign operations may be adversely impacted by fluctuating foreign currency exchange rates. We believe that a hypothetical 10% increase or decrease in all applicable foreign exchange rates, holding all other variables constant, would not have a material impact on our results of operations or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. After evaluating the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer, with the participation of the Company’s management, have concluded that the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are effective.
(b) Changes in internal controls. There has not been any change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during its most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are, from time to time, subject to claims and suits arising in the ordinary course of business. Such claims have, in the past, generally been covered by insurance. There can be no assurance that our insurance will be adequate to cover all liabilities that may arise out of claims brought against us, or that our insurance will cover all claims. We are not currently a party to any material litigation.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report, including the important information in “Forward-Looking Statements,” you should carefully consider the “Risk Factors” discussed in our Form 10-K for the fiscal year ended January 31, 2021,2022, as filed with the Securities and Exchange Commission. Among other things, those factors, if they were to occur, could cause our actual results to differ materially from those expressed in our forward-looking statements in this report, and may materially adversely affect our business, financial condition, or results of operations. In addition to those factors, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
On September 1st, 2021, the Company and Bryan J. Knutson, the Company’s Chief Operating Officer, entered into an amendment to Mr. Knutson’s existing employment agreement dated September 5, 2018. Under the amendment, Mr. Knutson is eligible to receive an annual restricted stock award equal to the number of shares obtained by dividing his annual base salary in effect on the grant date by the closing sale price of the Company’s common stock on that date. Under the amendment, any such award will be made in accordance with the Company’s Equity Grant Policy and subject to such terms as are recommended by the Company���s Chief Executive Officer and approved by the Compensation Committee of the Board of Directors.None.
ITEM 6. EXHIBITS
Exhibits - See “Exhibit Index” on page immediately prior to signatures.
EXHIBIT INDEX
TITAN MACHINERY INC.
FORM 10-Q
| | | | | | | | |
No. | | Description |
| | |
| | Amendment No. 1 to Securities Purchase Agreement, dated June 4, 2021as of July 28, 2022, by and among Titan Machinery Inc.; Heartland Agriculture, LLC; Gordon Glade, Jeff Keller, Robert Caldwell and Michael Stopkotte; Michael Anderson, Barb Anderson, David Clare, Scott Reins, Shawn Sterling, The Constance Kent Revocable Trust and Lenco Enterprises, LLC; and Robert Caldwell, solely in his capacity as Seller Representative. |
| | |
| | Amendment No. 1 to Securities Purchase Agreement, dated as of July 29, 2022, by and among Titan Machinery Inc.; Heartland Leverage Lender, LLC; Gordon Glade, Jeff Keller and Robert Caldwell; and Robert Caldwell, solely in his capacity as Seller Representative. |
| | |
| | Amendment, dated August 1, 2022, to the Third Amended and Restated Wholesale Floor Plan Credit Facility and Security Agreement, dated April 3, 2020November 13, 2007, by and among the registrant, as Borrower, the financial institutions party thereto, as lenders, Bank ofbetween Titan Machinery Inc. and CNH Industrial Capital America N.A., as Administrative Agent, Bank of American, N.A., Wells Fargo Bank N.A., and Regions Bank, as Joint Lead Arrangers and Joint Book Runners, Wells Fargo Bank, N.A., and Regions Bank, as Joint Syndication Agents, and BBVA USE as Documentation Agent.LLC |
| | |
| | AmendmentAgreement to Grant Commercial Application Equipment Distribution Rights, dated Septemberas of August 1, 20212022, by and between CNH Industrial America LLC and Titan Machinery Inc. |
| | |
| | Form of CaseIH Agriculture Equipment Sales and Service Agreement between CNH Industrial America LLC and Titan Machinery Inc. |
| | |
| | Revision 1 to the Executive EmploymentCase IH Agricultural Equipment Sales and Service Agreement between CNH Industrial America LLC and Titan Machinery Inc. |
| | |
| | Joinder to Third Amended and Restated Credit Agreement, dated September 5, 2018 between Bryan J. Knutsonas of August 31, 2022, by and the registrant. +among Titan Machinery Inc., Heartland Agriculture, LLC, Heartland Ag Kansas, LLC and Bank of America, N.A. |
| | |
| | Joinder to Third Amended and Restated Guaranty and Security Agreement, dated as of August 31, 2022, by and among Titan Machinery Inc., Heartland Agriculture, LLC, Heartland Ag Kansas, LLC and Bank of America, N.A. |
| | |
| | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
101 | | Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended July 31, 2021,2022, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (iv)(v) the Condensed Consolidated Statements of Cash Flows, and (v)(vi) the Notes to the Condensed Consolidated Financial Statements. |
| | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
| | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
+ Management compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | | | | | |
Dated: | September 2, 20218, 2022 | |
| | TITAN MACHINERY INC. |
| | |
| | |
| | By | /s/ Mark Kalvoda |
| | | Mark Kalvoda |
| | | Chief Financial Officer |
| | | (Principal Financial Officer) |