TITAN MACHINERY INC. 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 endedJanuary 31, 2021 . Overview We own and operate a network of full service agricultural and construction equipment stores inthe United States andEurope . Based upon information provided to us by CNH Industrial N.V. or itsU.S. subsidiaryCNH Industrial America, LLC , we are the largest retail dealer of Case IH Agriculture equipment in the world, one of the largest retail dealers ofCase Construction equipment inNorth America and one of the largest retail dealers ofNew Holland Agriculture and New Holland Construction equipment in theU.S. 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, are impacted by agricultural commodity prices and net farm income. Based onSeptember 2021 U.S. Department of Agriculture publications, the estimate of net farm income for calendar year 2021 indicated an approximate 19.5% increase as compared to calendar year 2020, and an approximate 19.6% increase in net farm income for calendar year 2020 as compared to calendar year 2019. For the third quarter of fiscal 2022, our net income was$21.8 million , or$0.97 per diluted share, compared to a fiscal 2021 third quarter net income of$9.9 million , or$0.44 per diluted share. Our adjusted diluted earnings per share was$0.96 for the third quarter of fiscal 2022, compared to$0.53 for the third quarter of fiscal 2021. 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 third quarter of fiscal 2022 increased by 25.8% compared to the third quarter of fiscal 2021. Total company same store sales increased 29.9% compared to the prior year third quarter. Same store sales increased in each of the three reporting segments. •Gross profit in the third quarter of fiscal 2022 increased 27.5% compared to the third quarter of fiscal 2021. The increase in gross profit was primarily the result of strong equipment sales and equipment gross profit margins that increased to 12.5% in the third quarter of fiscal 2022 from 10.4% in the third quarter of fiscal 2021. •Floorplan and other interest expense decreased a combined 21.6% in the third quarter of fiscal 2022, as compared to the third quarter last year, due to lower borrowings. Impact of the COVID-19 Pandemic on the Company As discussed in Note 1 to our condensed consolidated financial statements, the COVID-19 pandemic has significantly disrupted supply chains and business around the world. Uncertainty remains regarding the emerging variant strains of COVID-19 and regarding the length of time it will take for the COVID-19 pandemic to subside, including the time it will take for vaccines to be broadly distributed and accepted inthe United States and the rest of the world, and the effectiveness of those vaccines in slowing or stopping the spread of COVID-19 and mitigating the economic effects of the pandemic. The Company continues to effectively execute its strategy while managing the ongoing effects of the COVID-19 pandemic. The Company's products and services were determined to be essential in the markets we serve and accordingly operations have been allowed to continue throughout the pandemic. Since the beginning of the COVID-19 pandemic, the safety of our employees and customers has been, and continues to be, our top concern. Recently, theDepartment of Labor's Occupational Safety and Health Administration ("OSHA") announced an emergency temporary standard requiring all employers with at least 100 employees to ensure their employees are fully vaccinated or require weekly testing for unvaccinated employees. In response to a court ruling, inmid-November 2021 ,OSHA announced that it had suspended all activities related to implementation of this new regulation pending further litigation. The exact impact that this new regulation could have on the our Company is uncertain at this time. However, it could result in employee attrition, difficulty in fulfilling future labor needs, additional costs related to compliance and may have an adverse effect on our future operating results. 22
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Additionally, many of our supply vendors are facing production, supply chain and staffing challenges as they work to increase production capacity. We have been and expect to continue to be proactive in ordering inventory, parts, and components to seek to ensure work will continue without delay; however we have experienced price increases, disruptions and delays on delivery of certain products. Although there have been logistical and other challenges as a result of the COVID-19 pandemic, there were no material adverse impacts on the Company's results of operations for the three and nine months endedOctober 31, 2021 or 2020. However, due to the uncertainty of the economic outlook resulting from the COVID-19 pandemic, the Company continues to monitor the situation closely. Acquisitions Fiscal 2022 OnDecember 1, 2021 , the Company acquired certain assets ofJaycox Implement, Inc. The acquired business consisted of three agricultural equipment stores inWorthington andLuverne, Minnesota andLake Park, Iowa . These locations will be included in our agriculture segment upon closing, starting in the fourth quarter of fiscal 2022. 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$28.2 million . Fiscal 2021 OnMay 4, 2020 , the Company acquired certain assets ofHorizonWest Inc. This acquired Case IH agriculture dealership complex consisted of three agriculture equipment stores inScottsbluff andSidney, Nebraska andTorrington, Wyoming , which expanded the Company's agriculture presence inNebraska and intoWyoming . The total consideration paid for the acquired business was$6.8 million in cash, which the Company financed through available cash resources and capacity under our existing floorplan payable and other credit facilities. The threeHorizonWest dealerships are included within our Agriculture segment. ERP Transition The Company is in the process of converting to a new Enterprise Resource Planning ("ERP") application. The new ERP application is expected to provide data-driven and mobile-enabled sales and support tools to improve employee efficiency and deliver an enhanced customer experience. The Company integrated one pilot store on the new ERP system in the second quarter of fiscal 2021; we anticipate the remaining domestic stores to be converted to the ERP within the next 12 months. 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 endedJanuary 31, 2021 . There have been no changes in our critical accounting policies and estimates sinceJanuary 31, 2021 . Results of Operations The results presented below include the operating results of any acquisition made during these periods 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. 23 -------------------------------------------------------------------------------- Table of C ontents Comparative financial data for each of our four sources of revenue are expressed below. Three Months Ended October 31, Nine Months Ended October 31, 2021 2020 2021 2020 (dollars in thousands) (dollars in thousands) Equipment Revenue$ 329,814 $ 240,901 $ 878,528 $ 662,060 Cost of revenue 288,576 215,770 772,584 593,048 Gross profit$ 41,238 $ 25,131 $ 105,944 $ 69,012 Gross profit margin 12.5 % 10.4 % 12.1 % 10.4 % Parts Revenue$ 80,521 $ 76,778 $ 208,464 $ 194,846 Cost of revenue 55,654 53,556 146,184 136,205 Gross profit$ 24,867 $ 23,222 $ 62,280 $ 58,641 Gross profit margin 30.9 % 30.2 % 29.9 % 30.1 % Service Revenue$ 32,026 $ 30,696 $ 89,405 $ 84,282 Cost of revenue 10,249 10,254 29,314 28,263 Gross profit$ 21,777 $ 20,442 $ 60,091 $ 56,019 Gross profit margin 68.0 % 66.6 % 67.2 % 66.5 % Rental and other Revenue$ 11,614 $ 12,497 $ 27,914 $ 33,357 Cost of revenue 7,016 8,741 17,754 23,379 Gross profit$ 4,598 $ 3,756 $ 10,160 $ 9,978 Gross profit margin 39.6 % 30.1 % 36.4 % 29.9 %
The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated:
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
Revenue
Equipment 72.7 % 66.8 % 72.9 % 67.9 %
Parts 17.7 % 21.3 % 17.3 % 20.0 %
Service 7.1 % 8.5 % 7.4 % 8.6 %
Rental and other 2.6 % 3.5 % 2.3 % 3.4 %
Total Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Total Cost of Revenue 79.6 % 79.9 % 80.2 % 80.1 %
Gross Profit Margin 20.4 % 20.1 % 19.8 % 19.9 %
Operating Expenses 13.9 % 15.0 % 14.7 % 16.4 %
Impairment of Goodwill - % 0.4 % - % 0.1 %
Impairment of Intangible and Long-Lived Assets - % 0.3 % 0.1 % 0.1 %
Income from Operations 6.5 % 4.4 % 5.0 % 3.1 %
Other Income (Expense) (0.2) % (0.6) % (0.2) % (0.6) %
Income Before Income Taxes 6.3 % 3.8 % 4.8 % 2.6 %
Provision for Income Taxes 1.5 % 1.1 % 1.2 % 0.7 %
Net Income 4.8 % 2.7 % 3.6 % 1.9 %
24-------------------------------------------------------------------------------- Table of C ontents Three Months EndedOctober 31, 2021 Compared to Three Months EndedOctober 31, 2020 Consolidated Results Revenue Three Months Ended October 31, Increase/ Percent 2021 2020 (Decrease) Change (dollars in thousands) Equipment$ 329,814 $ 240,901 $ 88,913 36.9 % Parts 80,521 76,778 3,743 4.9 % Service 32,026 30,696 1,330 4.3 % Rental and other 11,614 12,497 (883) (7.1) % Total Revenue$ 453,975 $ 360,872 $ 93,103 25.8 % Total revenue for the third quarter of fiscal 2022 was 25.8% or$93.1 million higher than the third quarter of fiscal 2021 driven primarily by increased demand for equipment, resulting in equipment revenue being 36.9% higher than the prior year period. The increased equipment demand was due to higher commodity prices, higher net farm income, and good growing conditions in our international footprint. Company-wide same-store sales in the third quarter of fiscal 2022 increased 29.9% versus the comparable period in fiscal 2021. Gross Profit Three Months Ended October 31, Increase/ Percent 2021 2020 (Decrease) Change (dollars in thousands) Gross Profit Equipment$ 41,238 $ 25,131 $ 16,107 64.1 % Parts 24,867 23,222 1,645 7.1 % Service 21,777 20,442 1,335 6.5 % Rental and other 4,598 3,756 842 22.4 % Total Gross Profit$ 92,480 $ 72,551 $ 19,929 27.5 % Gross Profit Margin Equipment 12.5 % 10.4 % 2.1 % 20.2 % Parts 30.9 % 30.2 % 0.7 % 2.3 % Service 68.0 % 66.6 % 1.4 % 2.1 % Rental and other 39.6 % 30.1 % 9.5 % 31.6 % Total Gross Profit Margin 20.4 % 20.1 % 0.3 % 1.5 % Gross Profit Mix Equipment 44.6 % 34.6 % 10.0 % 28.9 % Parts 26.9 % 32.0 % (5.1) % (15.9) % Service 23.5 % 28.2 % (4.7) % (16.7) % Rental and other 5.0 % 5.2 % (0.2) % (3.8) % Total Gross Profit Mix 100.0 % 100.0 % Gross profit for the third quarter of fiscal 2022 increased 27.5% or$19.9 million , as compared to the same period last year. Gross profit margin also improved to 20.4% in the current quarter from 20.1% 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 and favorable end market conditions. 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. 25
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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 97.8% for the third quarter of
fiscal 2022 compared to 94.2% during the same period last year as the increase
in gross profit from parts and service in the third quarter of fiscal 2022
combined with lower floorplan interest expenses more than offset the increase in
operating expenses during the period.
Operating Expenses
Three Months Ended October 31, Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Operating Expenses $ 62,943 $ 54,115 $ 8,828 16.3 %
Operating Expenses as a Percentage of Revenue 13.9 % 15.0 % (1.1) % (7.3) %
Our operating expenses in the third quarter of fiscal 2022 increased 16.3% as
compared to the third quarter of fiscal 2021. The increase in operating expenses
was primarily due to variable expenses associated with increased sales.
Operating expenses as a percentage of revenue decreased to 13.9% in the third
quarter of fiscal 2022 from 15.0% in the third quarter of fiscal 2021. The
decrease in operating expenses as a percentage of revenue was due to the
increase in total revenue in the third quarter of fiscal 2022, as compared to
the third quarter of fiscal 2021, which positively affected our ability to
leverage our fixed operating costs.
Impairment Charges
Three Months Ended October 31, Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Impairment of Goodwill $ - $ 1,453 $ (1,453) (100.0) %
Impairment of Intangible and Long-Lived
Assets - 1,102 (1,102) (100.0) %
The Company did not recognize any impairment expense in the third quarter of
fiscal 2022. In the third quarter of fiscal 2021, the Company recognized $1.5
million in impairment expense related to certain goodwill assets in our
International segment. An additional $1.1 million in impairment expense was also
recognized related to other intangible assets and long-lived assets primarily in
our International segment in the third quarter of fiscal 2021.
Other Income (Expense)
Three Months Ended October 31, Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Interest and other income (expense) $ 616 $ (361) $ 977 n/m
Floorplan interest expense (259) (757) (498) (65.8) %
Other interest expense (1,071) (940) 131 13.9 %
Interest and other income (expense) increased by $1.0 million in the third
quarter of fiscal 2022, as compared to the third quarter of fiscal 2021, due to
fluctuations in foreign currency exchange rates, primarily the Ukrainian
currency. The decrease in floorplan interest expense of 65.8% was due to lower
borrowings. 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 October 31, Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Provision for Income Taxes $ 7,007 $ 3,912 $ 3,095 79.1 %
Our effective tax rate was 24.3% and 28.3% for the three months ended
October 31, 2021 and October 31, 2020 . The effective tax rate for each of the
three months ended October 31, 2021 and 2020 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.
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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 October 31, Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Revenue
Agriculture $ 281,506 $ 220,625 $ 60,881 27.6 %
Construction 79,735 79,030 705 0.9 %
International 92,734 61,217 31,517 51.5 %
Total $ 453,975 $ 360,872 $ 93,103 25.8 %
Income (Loss) Before Income Taxes
Agriculture $ 19,618 $ 13,575 $ 6,043 44.5 %
Construction 3,564 1,448 2,116 146.1 %
International 6,260 (2,424) 8,684 n/m
Segment Income Before Income Taxes 29,442 12,599 16,843 133.7 %
Shared Resources (619) 1,225 (1,844) n/m
Total $ 28,823 $ 13,824 $ 14,999 108.5 %
Agriculture
Agriculture segment revenue for the third quarter of fiscal 2022 increased
27.6% compared to the third quarter of fiscal 2021. The higher revenue was
driven primarily by increased equipment demand due to higher commodity prices
and higher net farm income.
Agriculture segment income before income taxes was $19.6 million for the third
quarter of fiscal 2022 compared to $13.6 million for the third quarter of fiscal
2021. Higher equipment revenue along with increased gross profit margin on
equipment drove the largest increase in gross profit. Decreased inventory levels
resulted in lower floorplan and other interest expense for the third quarter of
fiscal 2022, as compared to the third quarter of fiscal 2021, which also
contributed to the improvement in segment results.
Construction
Construction segment revenue for the third quarter of fiscal 2022 was flat
compared to the third quarter of fiscal 2021. However, after taking into account
the divestiture of the Phoenix and Tucson, Arizona stores in the fourth quarter
of fiscal 2021, same-store sales in our Construction segment increased 11.1% for
the third quarter of fiscal 2022, as compared to the third quarter of fiscal
2021. Higher same store sales were driven by increased construction activity
throughout the footprint.
Our Construction segment income before taxes was $3.6 million for the third
quarter of fiscal 2022 compared to $1.4 million in the third quarter of fiscal
2021. The improvement in segment results was primarily due to increased
equipment gross profit margin and decreased inventory levels which resulted in
lower floorplan interest expense for the third quarter of fiscal 2022, as
compared to the third quarter of fiscal 2021. An increase in rental fleet
utilization, led to an increase in rental gross profit margin, which also
contributed to the improvement in segment results. 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 25.7% in the third quarter of fiscal 2021 to 31.4%
in the third quarter of fiscal 2022.
International
International segment revenue, for the third quarter of fiscal 2022 increased
51.5% compared to the third quarter of fiscal 2021. Higher segment revenue was
driven by many of the same macroeconomic factors as the Agriculture segment, as
well as favorable growing conditions throughout most of the farming footprint we
serve, which has improved customer sentiment and has had a positive impact on
equipment sales. The increase was partially offset by the divestiture of our
Novi Sad , Serbia location in the third quarter of fiscal 2022. Same-store sales
in our International segment increased 62.5% for the third quarter of fiscal
2022 as compared to the third quarter of fiscal 2021, primarily driven by an
increase in equipment sales.
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Our International segment income before income taxes was$6.3 million for the third quarter of fiscal 2022 compared to segment loss before income taxes of$2.4 million for the same period last year. The increase in segment pre-tax income was primarily the result of increased equipment sales and equipment gross profit margin. The segment did not recognize any impairment in the third quarter of fiscal 2022 compared to$2.3 million of goodwill and other intangible asset impairment related charges in the third quarter of fiscal 2021. Shared Resources/Eliminations We incur centralized expenses/income at our general corporate level, which we refer to as "Shared Resources," and then allocate most of these net expenses to our segments. Since these allocations are set early in the year, and a portion is planned to be unallocated, unallocated balances may occur. Shared Resources loss before income taxes was$0.6 million for the third quarter of fiscal 2022 compared to income before income taxes of$1.2 million for the same period last year. 28 -------------------------------------------------------------------------------- Table of C ontents Nine Months EndedOctober 31, 2021 Compared to Nine Months EndedOctober 31, 2020 Consolidated Results Revenue Nine Months EndedOctober 31 ,
Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Equipment $ 878,528 $ 662,060 $ 216,468 32.7 %
Parts 208,464 194,846 13,618 7.0 %
Service 89,405 84,282 5,123 6.1 %
Rental and other 27,914 33,357 (5,443) (16.3) %
Total Revenue $ 1,204,311 $ 974,545 $ 229,766 23.6 %
Total revenue for the first nine months of fiscal 2022 was up 23.6% or$229.8 million compared to the first nine months of fiscal 2021, with increases in revenue from our equipment, parts and service businesses. The 32.7% increase in equipment sales was the primary factor in the total sales increase from the prior year period with all three segments recognizing increases, compared to the prior year period. Company-wide same-store sales increased 25.8% over the comparable prior year period. Gross Profit Nine Months Ended October 31, Increase/ Percent 2021 2020 (Decrease) Change (dollars in thousands) Gross Profit Equipment$ 105,944 $ 69,012 $ 36,932 53.5 % Parts 62,280 58,641 3,639 6.2 % Service 60,091 56,019 4,072 7.3 % Rental and other 10,160 9,978 182 1.8 % Total Gross Profit$ 238,475 $ 193,650 $ 44,825 23.1 % Gross Profit Margin Equipment 12.1 % 10.4 % 1.7 % 16.3 % Parts 29.9 % 30.1 % (0.2) % (0.7) % Service 67.2 % 66.5 % 0.7 % 1.1 % Rental and other 36.4 % 29.9 % 6.5 % 21.7 % Total Gross Profit Margin 19.8 % 19.9 % (0.1) % (0.5) % Gross Profit Mix Equipment 44.4 % 35.6 % 8.8 % 24.7 % Parts 26.1 % 30.3 % (4.2) % (13.9) % Service 25.2 % 28.9 % (3.7) % (12.8) % Rental and other 4.3 % 5.2 % (0.9) % (17.3) % Total Gross Profit Mix 100.0 % 100.0 % Gross profit increased 23.1% or$44.8 million for the first nine months of fiscal 2022, 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 nine months of fiscal 2022. These higher equipment sales and margins were driven by a healthy inventory and favorable end market conditions. The overall gross profit margin decreased slightly from 19.9% to 19.8% 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 nine months of fiscal 2022 increased to 86.7%, as compared to 82.7% during the same period last year, as the increase in gross profit from parts and service combined with lower floorplan interest expense more than offset the increase in operating expenses during the nine month period compared to that of the prior year nine month period. 29
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Operating Expenses
Nine Months Ended October 31, Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Operating Expenses $ 176,460 $ 160,252 $ 16,208 10.1 %
Operating Expenses as a Percentage of
Revenue 14.7 % 16.4 % (1.7) % (10.4) %
Our operating expenses for the first nine months of fiscal 2022 increased
$16.2 million as compared to the first nine months of fiscal 2021. The increase
in operating expenses was primarily due to variable expenses associated with
increased sales. Operating expenses as a percentage of revenue decreased to
14.7% in the first nine months of fiscal 2022 from 16.4% in the first nine
months of fiscal 2021. The decrease in operating expenses as a percentage of
total revenue was due to the increase in total revenue in the first nine months
of fiscal 2022, as compared to the first nine months of fiscal 2021, which
positively affected our ability to leverage our fixed operating costs.
Impairment Charges
Nine Months Ended October 31, Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Impairment of Goodwill $ - $ 1,453 $ (1,453) (100.0) %
Impairment of Intangible and Long-Lived
Assets 1,498 1,318 180 13.7 %
We recognized $1.5 million in impairment charges in our International segment
related to certain intangible and long-lived assets and $1.3 million of
impairment charges on certain long-lived assets primarily in our International
segment during the first nine months of fiscal 2022 and 2021, respectively. In
addition, in the first nine months of fiscal 2021, we recognized $1.5 million in
impairment charges related to certain goodwill assets in the International
segment, but had no such impairment charges in the first nine months of fiscal
2022.
Other Income (Expense)
Nine Months Ended October 31, Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Interest and other income (expense)
$ 1,604 n/m Floorplan interest expense (1,027) (2,811) (1,784) (63.5) % Other interest expense (3,292) (2,884) 408 14.1 % Floorplan interest expense decreased 63.5% for the first nine months of fiscal 2022, as compared to the same period last year, primarily due to lower borrowings and a lower interest rate environment. The increase in other interest expense in the first nine months of fiscal 2022, as compared to the first nine months of fiscal 2021, is the result of increased long term debt on real estate purchased during fiscal 2022. The increase in interest and other income in the first nine months of fiscal 2022 as compared to the same period of fiscal 2021 is primarily due to foreign currency gains in fiscal 2022 due to the strengthening of the Ukrainian currency compared to losses in fiscal 2021 due to the devaluation of the Ukranian currency. 30
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Provision for Income Taxes
Nine Months Ended October 31, Increase/ Percent
2021 2020 Decrease Change
(dollars in thousands)
Provision for Income Taxes $ 14,521 $ 6,691 $ 7,830 117.0 %
Our effective tax rate was 25.0% for the first nine months of fiscal 2022 and
26.5% for the same period last year. The effective tax rate for the nine months
ended October 31, 2021 and 2020 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.
Nine Months Ended October 31, Increase/ Percent
2021 2020 (Decrease) Change
(dollars in thousands)
Revenue
Agriculture $ 730,422 $ 583,326 $ 147,096 25.2 %
Construction 229,286 216,862 12,424 5.7 %
International 244,603 174,357 70,246 40.3 %
Total $ 1,204,311 $ 974,545 $ 229,766 23.6 %
Income (Loss) Before Income Taxes
Agriculture $ 42,910 $ 26,490 $ 16,420 62.0 %
Construction 6,518 (50) 6,568 n/m
International 9,498 (3,136) 12,634 n/m
Segment Income Before Income Taxes 58,926 23,304 35,622 n/m
Shared Resources (793) 1,961 (2,754) n/m
Total $ 58,133 $ 25,265 $ 32,868 130.1 %
Agriculture
Agriculture segment revenue for the first nine months of fiscal 2022 increased
25.2% compared to the same period last year. We experienced increases across our
equipment, parts and service businesses. Equipment sales were driven by
increased equipment demand due to higher commodity prices and higher net farm
income. All sources of revenue in this segment benefited from the addition of
the three HorizonWest locations (acquired in May 2020 ) that were not in the full
prior year nine-month period. Same-store sales increased 23.8% for the first
nine months of fiscal 2022, as compared to the same period last year.
Agriculture segment income before income taxes was $42.9 million for the first
nine months of fiscal 2022 compared to $26.5 million over the first nine months
of fiscal 2021. The improvement in segment results was the result of higher
equipment revenue along with higher gross profit margin on equipment driven by
increased demand and healthy inventory. Decreased inventory levels resulted in
lower floorplan and other interest expense for the nine months ended October 31,
2021 , which also contributed to the improvement in segment results.
Construction
Construction segment revenue for the first nine months of fiscal 2022
increased 5.7% compared to the same period last year, due to a same-store sales
increase of 16.3%, which more than offset our divestiture of the Phoenix and
Tucson, Arizona stores in the fourth quarter of fiscal year 2021. Higher
equipment sales were driven by increased construction activity throughout the
footprint.
Our Construction segment income before income taxes was $6.5 million for the
first nine months of fiscal 2022 compared to a loss before income taxes of $0.1
million for the first nine months of fiscal 2021. The increase in segment
results
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was primarily due to increased construction activity as well as operational
improvements within the segment. The segment also benefited from decreased
inventory levels which resulted in lower floorplan and other interest expense
for the nine months ended October 31, 2021 . The dollar utilization of our rental
fleet increased from 22.2% in the first nine months of fiscal 2021 to 25.8% in
the first nine months of fiscal 2022.
International
International segment revenue for the first nine months of fiscal 2022
increased 40.3% compared to the same period last year. Higher segment revenue is
being driven by many of the same macroeconomic factors as the Agriculture
segment as well as favorable growing conditions for much of our farming
footprint which has had a positive impact on all sources of sales, but primarily
equipment sales.
Our International segment income before income taxes was $9.5 million for the
first nine months of fiscal 2022 compared to a loss before income taxes of $3.1
million for the same period last year. The higher segment results were the
result of increased equipment sales and equipment gross profit margin.
Impairment charges of $1.5 million were recognized in the first nine months of
fiscal 2022 compared to $2.3 million in the first nine months of fiscal 2021,
related to the impairment of certain goodwill, other intangible and long-lived
assets of our German reporting unit.
Shared Resources/Eliminations
We incur centralized expenses/income at our general corporate level, which we
refer to as "Shared Resources," and then allocate most of these net expenses to
our segments. Since these allocations are set early in the year, and a portion
is planned to be unallocated, unallocated balances may occur. Shared Resources
loss before income taxes was $0.8 million for the first nine months of fiscal
2022 compared to income before income taxes of $2.0 million for the same period
last year.
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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 ERP transition
costs for fiscal year 2021, impairment charges and foreign currency
remeasurement gains/losses in Ukraine . 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.
Change in Non-GAAP Financial Measures
Beginning in the third quarter of fiscal 2022, the Company discontinued the
use of the adjusted cash-flow measure and revised its presentation of two
non-GAAP measures, Adjusted Net Income and Adjusted Diluted EPS, to better align
with SEC guidance. The adjustment for income tax valuation allowance, a non-cash
tax expense related to the use of deferred tax assets in certain jurisdictions,
will no longer be included in these two non-GAAP measures. For comparability,
references to prior periods' non-GAAP measures have also been updated to show
the effect of omitting the valuation allowance from Adjusted Net Income and
Adjusted Diluted EPS - see table below.
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 October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(dollars in thousands, except per share data)
Adjusted Net Income
Net Income $ 21,816 $ 9,912 $ 43,612 $ 18,574
Adjustments
ERP transition costs - 766 - 2,250
Impairment charges - 2,555 1,498 2,771
Ukraine remeasurement (gain) / loss (113) 338 (296) 973
Total Pre-Tax Adjustments (113) 3,659 1,202 5,994
Less: Tax Effect of Adjustments (1) - 1,566 - 2,613
Total Adjustments (113) 2,093 1,202 3,381
Adjusted Net Income $ 21,703 $ 12,005 $ 44,814 $ 21,955
Adjusted Diluted EPS
Diluted EPS $ 0.97 $ 0.44 $ 1.93 $ 0.83
Adjustments (2)
ERP transition costs - 0.03 - 0.10
Impairment charges - 0.11 0.07 0.12
Ukraine remeasurement (gain) / loss (0.01) 0.02 (0.02) 0.04
Total Pre-Tax Adjustments (0.01) 0.16 0.05 0.26
Less: Tax Effect of Adjustments (1) - 0.07 - 0.12
Total Adjustments (0.01) 0.09 0.05 0.14
Adjusted Diluted EPS $ 0.96 $ 0.53 $ 1.98 $ 0.97
(1) The tax effect of U.S. related adjustments was calculated using a 26% tax rate, determined based
on a 21% federal statutory rate and a 5% blended state income tax rate. Included in the tax effect of
the adjustments is the tax impact of foreign currency changes in Ukraine of $0.7 million for the
three months ended October 31, 2020 and $1.3 million for the nine months ended October 31, 2020 .
(2) Adjustments are net of amounts allocated to participating securities
where applicable.
33-------------------------------------------------------------------------------- Table of C ontents 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 ofOctober 31, 2021 , the Company had floorplan payable lines of credit for equipment purchases totaling$753.0 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 withDLL Finance . Our equipment inventory turnover increased from 1.6 times for the rolling 12 month period endedOctober 31, 2020 to 3.1 times for the rolling 12 month period endedOctober 31, 2021 . The increase in equipment turnover was attributable to an increase in equipment sales and a decrease in average equipment inventory over the rolling 12 month period endedOctober 31, 2021 as compared to the same period endedOctober 31, 2020 . Our equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, decreased to 46.0% as ofOctober 31, 2021 from 52.1% as ofJanuary 31, 2021 . The decrease was due to more inventory being financed with non-interest bearing floorplan lines of credit. 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. Based on our current operational performance, we believe our cash flow from operations, available cash and available borrowing capacity under our existing credit facilities will adequately provide for our liquidity needs for, at a minimum, the next 12 months. As ofOctober 31, 2021 , we were in compliance with the financial covenants under our CNH Industrial andDLL 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 ofOctober 31, 2021 . 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 Operating Activities Net cash provided by operating activities was$72.3 million for the first nine months of fiscal 2022, compared to net cash provided by operating activities of$60.8 million for the first nine months of fiscal 2021. The change in net cash provided by operating activities is primarily the result of an increase in net income and an increase in the amount of inventory financed with non-interest bearing floorplan lines of credit from manufacturers which was partially offset by an increase in receivables and prepaid expenses for the first nine months of fiscal 2022. Cash Flow Used for Investing Activities Net cash used for investing activities was$29.0 million for the first nine months of fiscal 2022, compared to$22.2 million for the first nine months of fiscal 2021. The increase in cash used for investing activities was primarily the result of an increase in property and equipment purchases as the Company purchased formerly leased buildings and bought out vehicle leases in the first nine months of fiscal 2022. Cash Flow Used for Financing Activities Net cash used for financing activities was$31.3 million for the first nine months of fiscal 2022 compared to cash used for financing activities of$40.8 million for the first nine months of fiscal 2021. The decrease in cash used for financing activities was primarily the result of a decrease in repayments of non-manufacturer floorplan lines of credit partially offset by 34 -------------------------------------------------------------------------------- Table of C ontents an increase of principal payments on long term debt in the first nine months of fiscal 2022 compared to the same period last year. Information Concerning Off-Balance Sheet Arrangements As ofOctober 31, 2021 , 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 endedJanuary 31, 2021 , and in other materials filed or to be filed by the Company with theSecurities and Exchange Commission (and included in oral statements or other written statements made or to be made by the Company). Forward-looking statements are statements based on future expectations and specifically may include, among other things, statements relating to our expectations regarding exchange rate and interest rate impact on our business, the impact of farm income levels on customer demand for agricultural equipment and services, the impact of the COVID-19 pandemic on our business, including the impact ofOSHA's emergency regulations regarding vaccination or weekly testing of employees, the general market conditions of the agricultural and construction industries, equipment inventory levels, discussion of the anticipated implementation date of our new ERP system, and our primary liquidity sources, and the adequacy of our capital resources. Any statements that are not based upon historical facts, including the outcome of events that have not yet occurred and our expectations for future performance, are forward-looking statements. The words "potential," "believe," "estimate," "expect," "intend," "may," "could," "will," "plan," "anticipate," and similar words and expressions are intended to identify forward-looking statements. These statements are based upon the current beliefs and expectations of our management. These forward-looking statements involve important risks and uncertainties that could significantly affect anticipated results or outcomes in the future and, accordingly, actual results or outcomes may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, the 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. 35
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