ITEM 1. FINANCIAL STATEMENTS
TITAN MACHINERY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share data) | | | | | | | | | | | |
| July 31, 2022 | | January 31, 2022 |
| | | |
Assets | | | |
Current Assets | | | |
Cash | $ | 142,057 | | | $ | 146,149 | |
Receivables, net of allowance for expected credit losses | 96,369 | | | 94,287 | |
Inventories, net | 556,383 | | | 421,758 | |
Prepaid expenses and other | 17,736 | | | 28,135 | |
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Total current assets | 812,545 | | | 690,329 | |
Noncurrent Assets | | | |
Property and equipment, net of accumulated depreciation | 188,964 | | | 178,243 | |
Operating lease assets | 51,888 | | | 56,150 | |
Deferred income taxes | 2,239 | | | 1,328 | |
Goodwill | 9,535 | | | 8,952 | |
Intangible assets, net of accumulated amortization | 11,480 | | | 10,624 | |
Other | 1,220 | | | 1,041 | |
Total noncurrent assets | 265,326 | | | 256,338 | |
Total Assets | $ | 1,077,871 | | | $ | 946,667 | |
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Liabilities and Stockholders' Equity | | | |
Current Liabilities | | | |
Accounts payable | $ | 28,344 | | | $ | 25,644 | |
Floorplan payable | 274,244 | | | 135,415 | |
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Current maturities of long-term debt | 6,650 | | | 5,876 | |
Current operating lease liabilities | 9,465 | | | 9,601 | |
Deferred revenue | 91,819 | | | 134,146 | |
Accrued expenses and other | 42,856 | | | 59,339 | |
Income taxes payable | 6,289 | | | 4,700 | |
Total current liabilities | 459,667 | | | 374,721 | |
Long-Term Liabilities | | | |
Long-term debt, less current maturities | 86,500 | | | 74,772 | |
Operating lease liabilities | 50,998 | | | 55,595 | |
Deferred income taxes | 1,991 | | | 2,006 | |
Other long-term liabilities | 4,438 | | | 4,374 | |
Total long-term liabilities | 143,927 | | | 136,747 | |
Commitments and Contingencies (Note 15) | | | |
Stockholders' Equity | | | |
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 | 255,188 | | | 254,455 | |
Retained earnings | 225,415 | | | 182,916 | |
Accumulated other comprehensive loss | (6,326) | | | (2,172) | |
Total stockholders' equity | 474,277 | | | 435,199 | |
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, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue | | | | | | | |
Equipment | $ | 375,216 | | | $ | 272,733 | | | $ | 731,582 | | | $ | 548,713 | |
Parts | 77,693 | | | 65,317 | | | 146,255 | | | 127,942 | |
Service | 33,365 | | | 29,676 | | | 62,887 | | | 57,379 | |
Rental and other | 10,269 | | | 9,904 | | | 16,825 | | | 16,300 | |
Total Revenue | 496,543 | | | 377,630 | | | 957,549 | | | 750,334 | |
Cost of Revenue | | | | | | | |
Equipment | 323,988 | | | 240,332 | | | 634,222 | | | 484,008 | |
Parts | 52,706 | | | 46,089 | | | 100,015 | | | 90,529 | |
Service | 11,072 | | | 9,771 | | | 21,832 | | | 19,065 | |
Rental and other | 6,078 | | | 6,420 | | | 10,087 | | | 10,737 | |
Total Cost of Revenue | 393,844 | | | 302,612 | | | 766,156 | | | 604,339 | |
Gross Profit | 102,699 | | | 75,018 | | | 191,393 | | | 145,995 | |
Operating Expenses | 68,828 | | | 57,074 | | | 132,980 | | | 113,516 | |
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Impairment of Intangible and Long-Lived Assets | — | | | 1,498 | | | — | | | 1,498 | |
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Income from Operations | 33,871 | | | 16,446 | | | 58,413 | | | 30,981 | |
Other Income (Expense) | | | | | | | |
Interest and other income | 873 | | | 654 | | | 1,365 | | | 1,320 | |
Floorplan interest expense | (245) | | | (350) | | | (499) | | | (768) | |
Other interest expense | (1,349) | | | (1,118) | | | (2,545) | | | (2,222) | |
Income Before Income Taxes | 33,150 | | | 15,632 | | | 56,734 | | | 29,311 | |
Provision for Income Taxes | 8,191 | | | 4,383 | | | 14,235 | | | 7,515 | |
Net Income | $ | 24,959 | | | $ | 11,249 | | | $ | 42,499 | | | $ | 21,796 | |
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Earnings per Share: | | | | | | | |
Basic | $ | 1.10 | | | $ | 0.50 | | | $ | 1.88 | | | $ | 0.97 | |
Diluted | $ | 1.10 | | | $ | 0.50 | | | $ | 1.88 | | | $ | 0.97 | |
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Weighted Average Common Shares: | | | | | | | |
Basic | 22,387 | | | 22,261 | | | 22,350 | | | 22,209 | |
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)
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| Three Months Ended July 31, | | Six Months Ended July 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net Income | $ | 24,959 | | | $ | 11,249 | | | $ | 42,499 | | | $ | 21,796 | |
Other Comprehensive Income (Loss) | | | | | | | |
Foreign currency translation adjustments | (2,963) | | | 937 | | | (4,153) | | | (1,441) | |
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)
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| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| Shares Outstanding | | Amount | | | | |
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 | (33) | | | — | | | (975) | | | — | | | — | | | (975) | |
Stock-based compensation expense | — | | | — | | | 609 | | | — | | | — | | | 609 | |
Net Income | — | | | — | | | — | | | 10,547 | | | — | | | 10,547 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (2,379) | | | (2,379) | |
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 | 76 | | | — | | | (2) | | | — | | | — | | | (2) | |
Stock-based compensation expense | — | | | — | | | 584 | | | — | | | — | | | 584 | |
Net Income | — | | | — | | | — | | | 11,249 | | | — | | | 11,249 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 938 | | | 938 | |
BALANCE, July 31, 2021 | 22,596 | | | — | | | 253,129 | | | 138,665 | | | 58 | | | 391,852 | |
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| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| Shares Outstanding | | Amount | | | | |
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 | (19) | | | — | | | (685) | | | — | | | — | | | (685) | |
Stock-based compensation expense | — | | | — | | | 620 | | | — | | | — | | | 620 | |
Net income | — | | | — | | | — | | | 17,540 | | | — | | | 17,540 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (1,191) | | | (1,191) | |
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 | 126 | | | — | | | (5) | | | — | | | — | | | (5) | |
Stock-based compensation expense | — | | | — | | | 803 | | | — | | | — | | | 803 | |
Net income | — | | | — | | | — | | | 24,959 | | | — | | | 24,959 | |
Other comprehensive income | — | | | — | | | — | | | — | | | (2,963) | | | (2,963) | |
BALANCE, July 31, 2022 | 22,695 | | | — | | | 255,188 | | | 225,415 | | | (6,326) | | | 474,277 | |
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See Notes to Condensed Consolidated Financial Statements
TITAN MACHINERY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) | | | | | | | | | | | |
| Six Months Ended July 31, |
| 2022 | | 2021 |
Operating Activities | | | |
Net income | $ | 42,499 | | | $ | 21,796 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | |
Depreciation and amortization | 10,987 | | | 10,602 | |
Impairment | — | | | 1,498 | |
Deferred income taxes | (1,005) | | | (1,645) | |
Stock-based compensation expense | 1,423 | | | 1,193 | |
Noncash interest expense | 121 | | | 110 | |
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Other, net | 4,583 | | | 5,235 | |
Changes in assets and liabilities | | | |
Receivables, prepaid expenses and other assets | 5,444 | | | (12,384) | |
Inventories | (137,708) | | | (17,166) | |
Manufacturer floorplan payable | 105,415 | | | 56,436 | |
Deferred Revenue | (43,530) | | | (21,063) | |
Accounts payable, accrued expenses and other and other long-term liabilities | (9,182) | | | (16,051) | |
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Net Cash Provided by (Used for) Operating Activities | (20,953) | | | 28,561 | |
Investing Activities | | | |
Rental fleet purchases | (6,020) | | | (8,946) | |
Property and equipment purchases (excluding rental fleet) | (8,487) | | | (10,888) | |
Proceeds from sale of property and equipment | 1,628 | | | 420 | |
Acquisition consideration, net of cash acquired | (7,675) | | | — | |
Other, net | (182) | | | 12 | |
Net Cash Used for Investing Activities | (20,736) | | | (19,402) | |
Financing Activities | | | |
Net change in non-manufacturer floorplan payable | 35,716 | | | (22,731) | |
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Proceeds from long-term debt borrowings | 8,415 | | | 6,451 | |
Principal payments on long-term debt and finance leases | (3,879) | | | (5,117) | |
Payment of debt issuance costs | — | | | — | |
Other, net | (689) | | | (976) | |
Net Cash Provided by (Used for) Financing Activities | 39,563 | | | (22,373) | |
Effect of Exchange Rate Changes on Cash | (1,966) | | | (192) | |
Net Change in Cash | (4,092) | | | (13,406) | |
Cash at Beginning of Period | 146,149 | | | 78,990 | |
Cash at End of Period | $ | 142,057 | | | $ | 65,584 | |
Supplemental Disclosures of Cash Flow Information | | | |
Cash paid during the period | | | |
Income taxes, net of refunds | $ | 11,116 | | | $ | 17,378 | |
Interest | $ | 2,851 | | | $ | 2,797 | |
Supplemental Disclosures of Noncash Investing and Financing Activities | | | |
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 | $ | 6,776 | | | $ | 7,454 | |
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, construction and international customers. Therefore, operating results for the six-months ended July 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2023. The information contained in the consolidated balance sheet as of January 31, 2022 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, 2022 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, and Ukraine.
Russia/Ukraine Geopolitical Conflict
In February, 2022, the ongoing Russia/Ukraine conflict significantly intensified, and the sustained conflict and disruption in the region 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 central Ukraine. The conflict has caused disruptions in our Ukrainian operations, with our revenues for the six-months ended July 31, 2022 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 central Ukraine, it could significantly increase the adverse 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.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted earnings per share (EPS): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Six Months Ended July 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands, except per share data) |
Numerator: | | | | | | | |
Net income | $ | 24,959 | | | $ | 11,249 | | | $ | 42,499 | | | $ | 21,796 | |
Allocation to participating securities | (291) | | | (156) | | | (502) | | | (334) | |
Net income attributable to Titan Machinery Inc. common stockholders | $ | 24,668 | | | $ | 11,093 | | | $ | 41,997 | | | $ | 21,462 | |
Denominator: | | | | | | | |
Basic weighted-average common shares outstanding | 22,387 | | | 22,261 | | | 22,350 | | | 22,209 | |
Plus: incremental shares from vesting of restricted stock units | 5 | | | 15 | | | 7 | | | 11 | |
Diluted weighted-average common shares outstanding | 22,392 | | | 22,276 | | | 22,357 | | | 22,220 | |
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Earnings Per Share: | | | | | | | |
Basic | $ | 1.10 | | | $ | 0.50 | | | $ | 1.88 | | | $ | 0.97 | |
Diluted | $ | 1.10 | | | $ | 0.50 | | | $ | 1.88 | | | $ | 0.97 | |
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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, 2022 | | Six Months Ended July 31, 2022 |
| Agriculture | | Construction | | International | | Total | | Agriculture | | Construction | | International | | Total |
| (in thousands) | | (in thousands) |
Equipment | $ | 270,472 | | | $ | 43,184 | | | $ | 61,560 | | | $ | 375,216 | | | $ | 521,565 | | | $ | 87,002 | | | $ | 123,015 | | | $ | 731,582 | |
Parts | 52,548 | | | 11,816 | | | 13,329 | | | 77,693 | | | 97,054 | | | 23,879 | | | 25,322 | | | 146,255 | |
Service | 24,730 | | | 6,302 | | | 2,333 | | | 33,365 | | | 46,683 | | | 12,125 | | | 4,079 | | | 62,887 | |
Other | 880 | | | 500 | | | 246 | | | 1,626 | | | 1,679 | | | 803 | | | 451 | | | 2,933 | |
Revenue from contracts with customers | 348,630 | | | 61,802 | | | 77,468 | | | 487,900 | | | 666,981 | | | 123,809 | | | 152,867 | | | 943,657 | |
Rental | 326 | | | 8,220 | | | 97 | | | 8,643 | | | 522 | | | 13,177 | | | 193 | | | 13,892 | |
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 | |
Unbilled Receivables and Deferred Revenue
Unbilled receivables from contracts with customers amounted to $24.4 million and $17.1 million as of July 31, 2022 and January 31, 2022, 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 $90.7 million and $132.2 million as of July 31, 2022 and January 31, 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, 2022 and 2021, the Company recognized $105.1 million and $50.8 million, respectively, of revenue that was included in the deferred revenue balance as of January 31, 2022 and January 31, 2021, respectively. No material amount of revenue was recognized during the six months ended July 31, 2022 or 2021 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 at the time we perform the work, in the amount for 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.
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| 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 | |
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Trade receivables due from finance companies | 15,096 | | | 17,937 | |
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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 |
| (in thousands) |
Balance at January 31, 2021 | $ | 228 | | | $ | 1,074 | | | $ | 1,690 | | | $ | 2,992 | |
Current expected credit loss provision | 114 | | | 118 | | | (227) | | | 5 | |
Write-offs charged against allowance | 50 | | | 147 | | | 60 | | | 257 | |
Credit loss recoveries collected | 7 | | | 5 | | | — | | | 12 | |
Foreign exchange impact | — | | | — | | | (31) | | | (31) | |
Balance at July 31, 2021 | $ | 299 | | | $ | 1,050 | | | $ | 1,372 | | | $ | 2,721 | |
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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, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
Impairment losses (recoveries) on: | | | | | | | |
Receivables from sales contracts | $ | 186 | | | $ | 222 | | | $ | 999 | | | $ | 320 | |
Receivables from rental contracts | 43 | | | 3 | | | 32 | | | (30) | |
| $ | 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 6 - PROPERTY AND EQUIPMENT | | | | | | | | | | | |
| July 31, 2022 | | January 31, 2022 |
| (in thousands) |
Rental fleet equipment | $ | 73,014 | | | $ | 65,117 | |
Machinery and equipment | 23,769 | | | 22,819 | |
Vehicles | 62,251 | | | 58,650 | |
Furniture and fixtures | 51,400 | | | 50,228 | |
Land, buildings, and leasehold improvements | 129,102 | | | 123,323 | |
| 339,536 | | | 320,137 | |
Less accumulated depreciation | 150,572 | | | 141,894 | |
| $ | 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, 2022, the Company identified two such asset groups in the Agriculture segment, and performed an impairment test, 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 long-lived assets of $0.4 million in its International segment for the three and six months ended July 31, 2021.
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, 2022: | | | | | | | | | | | | | | | | | | | |
| 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 following presents changes in the carrying amount of goodwill, by segment, for the six months ended July 31, 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 | |
NOTE 8 - FLOORPLAN PAYABLE/LINES OF CREDIT
As of July 31, 2022, the Company had floorplan lines of credit totaling $743.0 million, which is primarily comprised of three floorplan lines of credit: (i) a $450.0 million credit facility with CNH Industrial, (ii) a $185.0 million line of credit under the Third Amended and Restated Credit Agreement (the "Bank Syndicate Agreement"), and (iii) a $50.0 million credit facility with DLL Finance LLC. Additionally, the Company amended its CNH Industrial floorplan line of credit as of August 1, 2022, increasing the total available domestic limit to $410 million and overall limit to $500 million.
The Company's outstanding balances of floorplan lines of credit as of July 31, 2022 and January 31, 2022, consisted of the following: | | | | | | | | | | | |
| July 31, 2022 | | January 31, 2022 |
| (in thousands) |
CNH Industrial | $ | 177,983 | | | $ | 94,054 | |
Bank Syndicate Agreement Floorplan Loan | 41,000 | | | — | |
DLL Finance | 9,187 | | | 8,558 | |
Other outstanding balances with manufacturers and non-manufacturers | 46,074 | | | 32,803 | |
| $ | 274,244 | | | $ | 135,415 | |
In 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, 2022. Generally, all U.S. CNH Industrial and DLL Finance amounts outstanding are non-interest bearing. As of July 31, 2022, foreign floorplan payables carried various interest rates primarily ranging from 1.92% to 8.36%, compared to a range of 1.40% to 6.11% as of January 31, 2022. The Company had non-interest bearing floorplan payables of $210.7 million and $106.8 million, on July 31, 2022 and January 31, 2022, respectively. The Company has 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, 2022 and January 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
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Total debt | | | | | | 93,150 | | | 80,648 | |
Less: current maturities | | | | | | 6,650 | | | 5,876 | |
Long-term debt, net | | | | | | $ | 86,500 | | | $ | 74,772 | |
NOTE 10 - 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, 2022 and July 31, 2021: | | | | | | | | | | | | | | | | | |
| 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) | |
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| 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 | |
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NOTE 11 - 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 | |
Right-of-use lease assets and lease liabilities consist of the following: | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
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(a)Finance lease assets are recorded net of accumulated amortization of $1.8 million as of July 31, 2022 and $1.7 million as of January 31, 2022. Maturities of lease liabilities as of July 31, 2022 are as follows: | | | | | | | | | | | | | | | | | | | | |
| | Operating | | Finance | | |
| | Leases | | Leases | | Total |
Fiscal Year Ended January 31, | | (in thousands) |
2023 (remainder) | | $ | 6,440 | | | $ | 400 | | | $ | 6,840 | |
2024 | | 12,484 | | | 607 | | | 13,091 | |
2025 | | 11,943 | | | 554 | | | 12,497 | |
2026 | | 11,552 | | | 460 | | | 12,012 | |
2027 | | 10,815 | | | 431 | | | 11,246 | |
2028 | | 9,394 | | | 297 | | | 9,691 | |
Thereafter | | 9,839 | | | 343 | | | 10,182 | |
Total lease payments | | 72,467 | | | 3,092 | | | 75,559 | |
Less: Interest | | 12,005 | | | 657 | | | 12,662 | |
Present value of lease liabilities | | $ | 60,462 | | | $ | 2,435 | | | $ | 62,897 | |
The weighted-average lease term and discount rate as of July 31, 2022 are as follows: | | | | | |
| July 31, 2022 |
Weighted-average remaining lease term (years): | |
Operating leases | 6.3 |
Financing leases | 5.2 |
Weighted-average discount rate: | |
Operating leases | 6.2 | % |
Financing leases | 8.2 | % |
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, 2022 and January 31, 2022: | | | | | | | | | | | |
| July 31, 2022 | | January 31, 2022 |
| (in thousands) |
Rental fleet equipment | $ | 73,014 | | | $ | 65,117 | |
Less accumulated depreciation | 25,205 | | | 23,501 | |
| $ | 47,809 | | | $ | 41,616 | |
NOTE 12 - FAIR VALUE MEASUREMENTS
The Company also valued certain long-lived assets at fair value on a non-recurring basis as of January 31, 2022 as part of its long-lived asset impairment testing. The estimated fair value of such assets as of January 31, 2022 was $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, 2022 and January 31, 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, 2022 | | | | January 31, 2022 |
| (in thousands) |
Carrying amount | $ | 81,324 | | | | | $ | 63,237 | |
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 - BUSINESS COMBINATIONS
Fiscal 2023
On April 1, 2022, the Company acquired certain assets of Mark's Machinery, Inc. The acquired business consisted of two agricultural equipment stores in Wagner and Yankton, South Dakota. These locations are included in the Company's Agriculture segment. The total cash consideration transferred for the acquired business was $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 Mark's Machinery, 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 $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
Each of the above acquisitions 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. As of July 31, 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 during the fiscal year ended January 31, 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 | |
The recognition of goodwill in the above business combinations arose from the acquisition of an assembled workforce and anticipated synergies expected to be realized. For the Mark's Machinery acquisition the Company recognized a non-competition intangible asset of $0.1 million and a distribution rights intangible asset of $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 assets 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, amounted to $0.5 million for the period ended July 31, 2022, primarily related to the Heartland acquisition, and acquisition related costs for the period ended January 31, 2022, were not material. All acquisition related costs have been expensed as incurred and recognized as Operating Expenses in the condensed consolidated statements of operations.
NOTE 15 - 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 its 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 16 - SEGMENT INFORMATION
The Company has three 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, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) | | (in thousands) |
Revenue | | | | | | | |
Agriculture | $ | 348,956 | | | $ | 219,364 | | | $ | 667,503 | | | $ | 448,915 | |
Construction | 70,022 | | | 80,943 | | | 136,986 | | | 149,550 | |
International | 77,565 | | | 77,323 | | | 153,060 | | | 151,869 | |
Total | $ | 496,543 | | | $ | 377,630 | | | $ | 957,549 | | | $ | 750,334 | |
| | | | | | | |
Income (Loss) Before Income Taxes | | | | | | | |
Agriculture | $ | 24,895 | | | $ | 12,067 | | | $ | 41,344 | | | $ | 23,292 | |
Construction | 3,923 | | | 2,815 | | | 7,132 | | | 2,953 | |
International | 5,870 | | | 430 | | | 10,195 | | | 3,238 | |
Segment income before income taxes | 34,688 | | | 15,312 | | | 58,671 | | | 29,483 | |
Shared Resources | (1,538) | | | 320 | | | (1,937) | | | (172) | |
Total | $ | 33,150 | | | $ | 15,632 | | | $ | 56,734 | | | $ | 29,311 | |
| | | | | | | | | | | |
| 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, 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 United States. We operate our business through three reportable segments: Agriculture, Construction and International. Within each segment, we have four principal sources of revenue: new and used equipment sales, parts sales, service, and equipment rental and other activities.
Demand for agricultural equipment and, to a lesser extent, parts and service support, is impacted by agricultural commodity prices and net farm income. Based on February 2022 U.S. Department of Agriculture publications, the estimate of net farm income for calendar year 2022 indicated an approximate 4.5% decrease as compared to calendar year 2021, and an approximate 25.1% increase in net farm income for calendar year 2021 as compared to calendar year 2020.
For the second quarter of fiscal 2023, our net income was $25.0 million, or $1.10 per diluted share, compared to a fiscal 2022 second quarter net income of $11.2 million, or $0.50 per diluted share. Our adjusted diluted earnings per share was $1.10 for the second quarter of fiscal 2023, compared to $0.56 for the second quarter of fiscal 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 2023 increased by 31.5% compared to the second quarter of fiscal 2022. Total Company same store sales increased 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 2023 increased 36.9% compared to the second quarter of fiscal 2022. The increase in gross profit was primarily the result of strong equipment sales and equipment gross profit margins increasing to 13.7% in the second quarter of fiscal 2023 from 11.9% in the second quarter of fiscal 2022.
•Gross profit was also positively impacted by strong parts sales, increasing by 30.0% from the prior year period, and strong parts gross profit margins, which increased to 32.2% in the second quarter of fiscal 2023 from 29.4% in the second quarter of fiscal 2022.
Supply Chain
Equipment 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 customers, 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 active conflict in February 2022, most of Titan Machinery Ukraine's customers have been able to continue their work, although at a reduced capacity and schedule. The Company's business systems in Ukraine have continued to function but could be negatively impacted in the future. Some of Titan Machinery Ukraine's back office employees have
been able to relocate outside of Ukraine and continue to work, while the customer support and sales teams have remained in Ukraine. For the six months ended July 31, 2022, 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 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 overlap of our footprints, which will allow us to package deals that will include both commercial application equipment as well as other agricultural and construction equipment to commercial customers within our core footprint. In the most recent completed fiscal year, the Heartland Companies generated revenue of approximately $214 million.
On April 1, 2022, the Company acquired certain assets of Mark's Machinery, Inc. The acquired business consisted of two agricultural equipment stores in Wagner and Yankton, South Dakota. These locations are included in 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 $7.7 million.
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 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 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 locations, over the 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, 2022. There have been no changes in our critical accounting policies and estimates since January 31, 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, |
| 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, |
| 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. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Increase/ | | Percent |
| 2022 | | 2021 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Gross Profit | | | | | | | |
Equipment | $ | 51,228 | | | $ | 32,401 | | | $ | 18,827 | | | 58.1 | % |
Parts | 24,987 | | | 19,228 | | | 5,759 | | | 30.0 | % |
Service | 22,293 | | | 19,905 | | | 2,388 | | | 12.0 | % |
Rental and other | 4,191 | | | 3,484 | | | 707 | | | 20.3 | % |
Total Gross Profit | $ | 102,699 | | | $ | 75,018 | | | $ | 27,681 | | | 36.9 | % |
Gross Profit Margin | | | | | | | |
Equipment | 13.7 | % | | 11.9 | % | | 1.8 | % | | 15.1 | % |
Parts | 32.2 | % | | 29.4 | % | | 2.8 | % | | 9.5 | % |
Service | 66.8 | % | | 67.1 | % | | (0.3) | % | | (0.4) | % |
Rental and other | 40.8 | % | | 35.2 | % | | 5.6 | % | | 15.9 | % |
Total Gross Profit Margin | 20.7 | % | | 19.9 | % | | 0.8 | % | | 4.0 | % |
Gross Profit Mix | | | | | | | |
Equipment | 49.9 | % | | 43.2 | % | | 6.7 | % | | 15.5 | % |
Parts | 24.3 | % | | 25.6 | % | | (1.3) | % | | (5.1) | % |
Service | 21.7 | % | | 26.5 | % | | (4.8) | % | | (18.1) | % |
Rental and other | 4.1 | % | | 4.7 | % | | (0.6) | % | | (12.8) | % |
Total Gross Profit Mix | 100.0 | % | | 100.0 | % | | | | |
Gross profit for the second quarter of fiscal 2023 increased 36.9% or $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 margin 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 expected 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 90.6% for the second quarter of fiscal 2023 compared to 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 2023 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 |
| 2022 | | 2021 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Operating Expenses | $ | 68,828 | | | $ | 57,074 | | | $ | 11,754 | | | 20.6 | % |
Operating Expenses as a Percentage of Revenue | 13.9 | % | | 15.1 | % | | (1.2) | % | | (7.9) | % |
Our operating expenses in the second quarter of fiscal 2023 increased 20.6% as compared to the second quarter of fiscal 2022. The increase in operating expenses was primarily the 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. The decrease in operating expenses as a percentage of revenue was due to the increase in total revenue in the second quarter of fiscal 2023, as compared to the second quarter of fiscal 2022, which positively affected our ability to leverage our fixed operating costs.
Impairment Charges | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | % |
We did not recognize any impairment charges in the second quarter of fiscal 2023. In the second quarter of fiscal 2022, we recognized $1.5 million of impairment charges 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 2023, as compared to the second quarter of fiscal 2022, due to 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 fiscal 2022.
Provision for Income Taxes | | | | | | | | | | | | | | | | | | | | | | | |
| 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 24.7% and 28.0% for the three months ended July 31, 2022 and July 31, 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 six months ended July 31, 2022 and 2021 is subject to variation due to 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.
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 |
| 2022 | | 2021 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Revenue | | | | | | | |
Agriculture | $ | 348,956 | | | $ | 219,364 | | | $ | 129,592 | | | 59.1 | % |
Construction | 70,022 | | | 80,943 | | | (10,921) | | | (13.5) | % |
International | 77,565 | | | 77,323 | | | 242 | | | 0.3 | % |
Total | $ | 496,543 | | | $ | 377,630 | | | $ | 118,913 | | | 31.5 | % |
| | | | | | | |
Income Before Income Taxes | | | | | | | |
Agriculture | $ | 24,895 | | | $ | 12,067 | | | $ | 12,828 | | | 106.3 | % |
Construction | 3,923 | | | 2,815 | | | 1,108 | | | 39.4 | % |
International | 5,870 | | | 430 | | | 5,440 | | | n/m |
Segment Income Before Income Taxes | 34,688 | | | 15,312 | | | 19,376 | | | 126.5 | % |
Shared Resources | (1,538) | | | 320 | | | (1,858) | | | n/m |
Total | $ | 33,150 | | | $ | 15,632 | | | $ | 17,518 | | | 112.1 | % |
Agriculture
Agriculture segment revenue for the second quarter of fiscal 2023 increased 59.1% compared to the second quarter of fiscal 2022. The higher revenue was driven primarily by an increase in same-store sales of 45.7% 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 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. The improvement in segment 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 2023 decreased 13.5% compared to the second quarter of fiscal 2022. However, after taking into account the divestiture of the Billings, Great Falls, and Missoula, Montana, and Gillette, Wyoming stores in the fourth quarter of fiscal 2022 and the first quarter of fiscal 2023 divestiture of our consumer products store in North Dakota, same-store sales in our Construction segment increased 14.9% for the second quarter of fiscal 2023, as compared to the second quarter of fiscal 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 $3.9 million for the second quarter of fiscal 2023 compared to $2.8 million in the second quarter of fiscal 2022. The improvement in segment results was primarily due to an increase in same store sales, as described above and an increase in rental fleet utilization, which led to an increase in 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 26.6% in the second quarter of fiscal 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 2023 compared to $77.3 million in the second quarter of fiscal 2022. While segment revenue was essentially 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, driving an increase in equipment sales.
Our International segment income before income taxes was $5.9 million for the second quarter of fiscal 2023 compared to segment income 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 improved equipment gross profit margin and an impairment of certain intangible and fixed assets in our German 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, unallocated balances may occur. Shared Resources loss before income taxes was $1.5 million for the second quarter of fiscal 2023 compared to income before income taxes of $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, 2022 Compared to Six Months Ended July 31, 2021
Consolidated Results
Revenue | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended July 31, | | Increase/ | | Percent |
| 2022 | | 2021 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Equipment | $ | 731,582 | | | $ | 548,713 | | | $ | 182,869 | | | 33.3 | % |
Parts | 146,255 | | | 127,942 | | | 18,313 | | | 14.3 | % |
Service | 62,887 | | | 57,379 | | | 5,508 | | | 9.6 | % |
Rental and other | 16,825 | | | 16,300 | | | 525 | | | 3.2 | % |
Total Revenue | $ | 957,549 | | | $ | 750,334 | | | $ | 207,215 | | | 27.6 | % |
Total revenue for the first six months of fiscal 2023 was up 27.6% or $207.2 million compared to the first six months of fiscal 2022, driven primarily by an increase in 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 construction activity in our footprint.
Gross Profit | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended July 31, | | Increase/ | | Percent |
| 2022 | | 2021 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Gross Profit | | | | | | | |
Equipment | $ | 97,360 | | | $ | 64,705 | | | $ | 32,655 | | | 50.5 | % |
Parts | 46,240 | | | 37,413 | | | 8,827 | | | 23.6 | % |
Service | 41,055 | | | 38,314 | | | 2,741 | | | 7.2 | % |
Rental and other | 6,738 | | | 5,563 | | | 1,175 | | | 21.1 | % |
Total Gross Profit | $ | 191,393 | | | $ | 145,995 | | | $ | 45,398 | | | 31.1 | % |
Gross Profit Margin | | | | | | | |
Equipment | 13.3 | % | | 11.8 | % | | 1.5 | % | | 12.7 | % |
Parts | 31.6 | % | | 29.2 | % | | 2.4 | % | | 8.2 | % |
Service | 65.3 | % | | 66.8 | % | | (1.5) | % | | (2.2) | % |
Rental and other | 40.0 | % | | 34.1 | % | | 5.9 | % | | 17.3 | % |
Total Gross Profit Margin | 20.0 | % | | 19.5 | % | | 0.5 | % | | 2.6 | % |
Gross Profit Mix | | | | | | | |
Equipment | 50.8 | % | | 44.3 | % | | 6.5 | % | | 14.7 | % |
Parts | 24.2 | % | | 25.6 | % | | (1.4) | % | | (5.5) | % |
Service | 21.5 | % | | 26.2 | % | | (4.7) | % | | (17.9) | % |
Rental and other | 3.5 | % | | 3.9 | % | | (0.4) | % | | (10.3) | % |
Total Gross Profit Mix | 100.0 | % | | 100.0 | % | | | | |
Gross profit increased 31.1% or $45.4 million for the first six months of fiscal 2023, as compared to the same period last year. The increase in gross profit was primarily the result of increased equipment sales and stronger equipment margins for the first six months of fiscal 2023. These higher equipment sales and margins were driven by a 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 annual manufacturer incentive programs. The overall gross profit margin increase from 19.5% to 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 2023 increased to 85.6%, as compared to 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 |
| 2022 | | 2021 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Operating Expenses | $ | 132,980 | | | $ | 113,516 | | | $ | 19,464 | | | 17.2 | % |
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 2023 increased $19.5 million as compared to the first six months of fiscal 2022. The increase in operating expenses was a 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. 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 2023, as compared to the first six months of fiscal 2022, which positively affected our ability to leverage our fixed operating costs.
Impairment Charges | | | | | | | | | | | | | | | | | | | | | | | |
| 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 did not recognize any impairment charges in the first six months of fiscal 2023. In the first six months of fiscal 2022, we recognized $1.5 million of impairment charges on certain intangible and long-lived assets in our International segment.
Other Income (Expense) | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended July 31, | | Increase/ | | Percent |
| 2022 | | 2021 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Interest and other income | $ | 1,365 | | | $ | 1,320 | | | $ | 45 | | | 3.4 | % |
Floorplan interest expense | (499) | | | (768) | | | (269) | | | (35.0) | % |
Other interest expense | (2,545) | | | (2,222) | | | 323 | | | 14.5 | % |
Floorplan interest expense decreased 35.0% for the first six months of fiscal 2023, as compared to the same period last year, primarily due to lower interest bearing inventory, primarily in our international segment. The increase in other interest expense in the first six months of fiscal 2023, as compared to the first six months of fiscal 2022, is the result of increased long term debt on real estate purchased during fiscal 2022 and 2023.
Provision for Income Taxes | | | | | | | | | | | | | | | | | | | | | | | |
| 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 25.1% for the first six months of fiscal 2023 and 25.6% for the same period last year. The effective tax rate for the six months ended July 31, 2022 and 2021 is subject to variation due to factors such as the impact of certain discrete items, mainly the vesting of share-based compensation, the mix of domestic and foreign income, recognition of a valuation allowance on certain of our foreign deferred tax assets and 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 |
| 2022 | | 2021 | | (Decrease) | | Change |
| (dollars in thousands) | | |
Revenue | | | | | | | |
Agriculture | $ | 667,503 | | | $ | 448,915 | | | $ | 218,588 | | | 48.7 | % |
Construction | 136,986 | | | 149,550 | | | (12,564) | | | (8.4) | % |
International | 153,060 | | | 151,869 | | | 1,191 | | | 0.8 | % |
Total | $ | 957,549 | | | $ | 750,334 | | | $ | 207,215 | | | 27.6 | % |
| | | | | | | |
Income Before Income Taxes | | | | | | | |
Agriculture | $ | 41,344 | | | $ | 23,292 | | | $ | 18,052 | | | 77.5 | % |
Construction | 7,132 | | | 2,953 | | | 4,179 | | | 141.5 | % |
International | 10,195 | | | 3,238 | | | 6,957 | | | n/m |
Segment Income Before Income Taxes | 58,671 | | | 29,483 | | | 29,188 | | | 99.0 | % |
Shared Resources | (1,937) | | | (172) | | | (1,765) | | | n/m |
Total | $ | 56,734 | | | $ | 29,311 | | | $ | 27,423 | | | 93.6 | % |
Agriculture
Agriculture segment revenue for the first six months of fiscal 2023 increased 48.7% compared to the same period last year. The 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 Mark's Machinery in December 2021 and April 2022, respectively. The same-store sales increase was driven by increased equipment demand due to higher commodity prices and higher net farm income.
Agriculture segment income before income taxes was $41.3 million for the first six months of fiscal 2023 compared to $23.3 million over the first six months of fiscal 2022. The improvement in segment results was the result of higher equipment revenue along with higher gross profit margin on equipment driven by increased demand, healthy inventory, and a $2.6 million benefit recognized on the expected achievement of annual manufacturer incentive programs.
Construction
Construction segment revenue for the first six months of fiscal 2023 decreased 8.4% compared to the same period last year. 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 increased 19.5%. Higher same-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. The increase in segment results was primarily due to increased construction activity within our footprint and an increase in rental fleet utilization. The dollar utilization of our rental fleet increased from 22.9% in the first six months of fiscal 2022 to 28.6% in the first six months of fiscal 2023.
International
International segment revenue for the first six months of fiscal 2023 increased 0.8% compared to the same period last year. Higher commodity prices are primarily driving demand for equipment sales. The increase in revenue was partially offset by a 9.0% devaluation of the Euro, the functional currency in much of our international footprint, in the first six months of fiscal 2023. The segment was also negatively impacted by a 38% decrease in revenues from our Ukrainian subsidiary due to the Russia-Ukraine conflict compared to the first six months of fiscal 2022.
Our International segment income before income taxes was $10.2 million for the first six months of fiscal 2023 compared to income before income taxes of $3.2 million for the same period last year. The higher segment results were
primarily the result and equipment gross profit margin. There were no fixed or intangible asset impairment charges recognized in the first six months of fiscal 2023 while $1.5 million was recognized in the first six months of fiscal 2022, related to the impairment of certain intangible and long-lived assets of our German 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 $1.9 million for the first six months of fiscal 2023 compared to a loss before income taxes of $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 foreign currency remeasurement gains/losses in 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, |
| | 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, 2022, the Company had floorplan payable lines of credit for equipment purchases totaling $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 $50.0 million credit facility with DLL Finance.
Our equipment inventory turnover increased from 2.7 times for the rolling 12 month period ended July 31, 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 over the rolling 12 month period ended July 31, 2022 as compared to the same period ended July 31, 2021. Our
equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, decreased to 38.3% as of July 31, 2022 from 58.2% as of January 31, 2022. The decrease was primarily due to drawing on our floorplan loan with the Bank Syndicate, in anticipation of 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, 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, 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, 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 of $28.6 million for the first six months of fiscal 2022. The change in net cash provided by (used for) operating activities is primarily the result of an increase in inventories partially offset by an increase in non-interest bearing floorplan lines of credit from manufacturers and higher net income for the first six months of fiscal 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. The increase in cash used for investing activities was primarily the result of the business acquisition of Mark's Machinery in the first six months of fiscal 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 of $22.4 million for the first six months of fiscal 2022. The increase in cash provided by financing activities was primarily the result of increased non-manufactured floorplan payables 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 last year.
Information Concerning Off-Balance Sheet Arrangements
As of July 31, 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, 2022, and in other materials filed by the Company with the Securities and Exchange Commission (and included in oral statements or other written statements made by the Company).
Forward-looking statements are statements based on future expectations and specifically may include, among other things, statements relating to our expectations regarding the performance of our 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, 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.