Titan Machinery Inc 10-Q for FY2022 Q3
Titan Machinery Inc. (TITN)
10-Q
2021-12-03
For: 2021-10-31
View Original
Added on
April 11, 2026
About this 10-Q
Titan Machinery Inc filed this 10-Q on December 3, 2021, covering the quarter ended October 31, 2021 (FY2022 Q3).
Headline figures
Quarter ended October 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $453.98M
- up 25.8% from $360.87M a year earlier
- Net income
- $21.82M
- up 120.1% from net income of $9.91M a year earlier
- Diluted EPS
- $0.97
- up 120.5% from $0.44 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2021
OR
For the transition period from ____ to ____
Commission File No. 001-33866
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | |||||||
(Address of Principal Executive Offices)
Registrant’s telephone number (701) 356-0130
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | | |||||||||||
| Emerging growth company | | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
As of November 29, 2021, 22,590,916 shares of Common Stock, $0.00001 par value, of the registrant were outstanding.
TITAN MACHINERY INC.
QUARTERLY REPORT ON FORM 10-Q
Table of Contents
| Page No. | ||||||||
| PART I. | FINANCIAL INFORMATION | |||||||
| ITEM 1. | FINANCIAL STATEMENTS | |||||||
| Condensed Consolidated Balance Sheets | ||||||||
| Condensed Consolidated Statements of Operations | ||||||||
| Condensed Consolidated Statements of Comprehensive Income | ||||||||
| Condensed Consolidated Statements of Stockholders' Equity | ||||||||
| Condensed Consolidated Statements of Cash Flows | ||||||||
| Notes to Condensed Consolidated Financial Statements | ||||||||
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |||||||
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |||||||
| ITEM 4. | CONTROLS AND PROCEDURES | |||||||
| PART II. | OTHER INFORMATION | |||||||
| ITEM 1. | LEGAL PROCEEDINGS | |||||||
| ITEM 1A. | RISK FACTORS | |||||||
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |||||||
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | |||||||
| ITEM 4. | MINE SAFETY DISCLOSURES | |||||||
| ITEM 5. | OTHER INFORMATION | |||||||
| ITEM 6. | EXHIBITS | |||||||
| Exhibit Index | ||||||||
| Signatures | ||||||||
2
PART I. — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TITAN MACHINERY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share data)
| October 31, 2021 | January 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash | $ | $ | |||||||||
| Receivables, net of allowance for expected credit losses | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other | |||||||||||
| Total current assets | |||||||||||
| Noncurrent Assets | |||||||||||
| Property and equipment, net of accumulated depreciation | |||||||||||
| Operating lease assets | |||||||||||
| Deferred income taxes | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net of accumulated amortization | |||||||||||
| Other | |||||||||||
| Total noncurrent assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Floorplan payable | |||||||||||
| Current maturities of long-term debt | |||||||||||
| Current operating lease liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Accrued expenses and other | |||||||||||
| Income taxes payable | |||||||||||
| Total current liabilities | |||||||||||
| Long-Term Liabilities | |||||||||||
| Long-term debt, less current maturities | |||||||||||
| Operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total long-term liabilities | |||||||||||
| Commitments and Contingencies (Note 16) | |||||||||||
| Stockholders' Equity | |||||||||||
Common stock, par value $ | |||||||||||
| Additional paid-in-capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive income (loss) | ( | ||||||||||
| Total stockholders' equity | |||||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements
3
TITAN MACHINERY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Equipment | $ | $ | $ | $ | |||||||||||||||||||
| Parts | |||||||||||||||||||||||
| Service | |||||||||||||||||||||||
| Rental and other | |||||||||||||||||||||||
| Total Revenue | |||||||||||||||||||||||
| Cost of Revenue | |||||||||||||||||||||||
| Equipment | |||||||||||||||||||||||
| Parts | |||||||||||||||||||||||
| Service | |||||||||||||||||||||||
| Rental and other | |||||||||||||||||||||||
| Total Cost of Revenue | |||||||||||||||||||||||
| Gross Profit | |||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Impairment of Goodwill | |||||||||||||||||||||||
| Impairment of Intangible and Long-Lived Assets | |||||||||||||||||||||||
| Income from Operations | |||||||||||||||||||||||
| Other Income (Expense) | |||||||||||||||||||||||
| Interest and other income (expense) | ( | ||||||||||||||||||||||
| Floorplan interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Income Before Income Taxes | |||||||||||||||||||||||
| Provision for Income Taxes | |||||||||||||||||||||||
| Net Income | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per Share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted Average Common Shares: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
4
TITAN MACHINERY INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net Income | $ | $ | $ | $ | |||||||||||||||||||
| Other Comprehensive Income (Loss) | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||||||||||||||
| Comprehensive Income | $ | $ | $ | $ | |||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
5
TITAN MACHINERY INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
| Shares Outstanding | Amount | ||||||||||||||||||||||||||||||||||
| BALANCE, January 31, 2020 | $ | — | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Cumulative-effect adjustment of adopting ASC 326, Financial Instruments - Credit Losses | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| 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 | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| BALANCE, April 30, 2020 | — | ( | |||||||||||||||||||||||||||||||||
| 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 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| BALANCE, July 31, 2020 | — | ( | |||||||||||||||||||||||||||||||||
| 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 | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| BALANCE, October 31, 2020 | $ | — | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
| Shares Outstanding | Amount | ||||||||||||||||||||||||||||||||||
| BALANCE, January 31, 2021 | $ | — | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| BALANCE, April 30, 2021 | — | ( | |||||||||||||||||||||||||||||||||
| Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| BALANCE, July 31, 2021 | — | 391,852 | |||||||||||||||||||||||||||||||||
| Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| BALANCE, October 31, 2021 | $ | — | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
6
TITAN MACHINERY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
| Nine Months Ended October 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating Activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by (used for) operating activities | |||||||||||
| Depreciation and amortization | |||||||||||
| Impairment | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Stock-based compensation expense | |||||||||||
| Noncash interest expense | |||||||||||
| Noncash lease expense | |||||||||||
| Other, net | ( | ||||||||||
| Changes in assets and liabilities | |||||||||||
| Receivables, prepaid expenses and other assets | ( | ||||||||||
| Inventories | |||||||||||
| Manufacturer floorplan payable | ( | ||||||||||
| Accounts payable, deferred revenue, accrued expenses and other and other long-term liabilities | ( | ( | |||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Net Cash Provided by Operating Activities | |||||||||||
| Investing Activities | |||||||||||
| Rental fleet purchases | ( | ( | |||||||||
| Property and equipment purchases (excluding rental fleet) | ( | ( | |||||||||
| Proceeds from sale of property and equipment | |||||||||||
| Acquisition consideration, net of cash acquired | ( | ||||||||||
| Other, net | ( | ||||||||||
| Net Cash Used for Investing Activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| Net change in non-manufacturer floorplan payable | ( | ( | |||||||||
| Proceeds from long-term debt borrowings | |||||||||||
| Principal payments on long-term debt and finance leases | ( | ( | |||||||||
| Payment of debt issuance costs | ( | ||||||||||
| Other, net | ( | ( | |||||||||
| Net Cash Used for Financing Activities | ( | ( | |||||||||
| Effect of Exchange Rate Changes on Cash | ( | ||||||||||
| Net Change in Cash | ( | ||||||||||
| Cash at Beginning of Period | |||||||||||
| Cash at End of Period | $ | $ | |||||||||
| Supplemental Disclosures of Cash Flow Information | |||||||||||
| Cash paid during the period | |||||||||||
| Income taxes, net of refunds | $ | $ | |||||||||
| Interest | $ | $ | |||||||||
| Supplemental Disclosures of Noncash Investing and Financing Activities | |||||||||||
| Net property and equipment financed with long-term debt, finance leases, accounts payable and accrued liabilities | $ | $ | |||||||||
| Long-term debt to acquire finance leases | $ | $ | |||||||||
| Net transfer of assets from (to) property and equipment to (from) inventories | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements
7
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 nine-month period ended October 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2022. The information contained in the consolidated balance sheet as of January 31, 2021 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, 2021 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, Iowa, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Wisconsin and Wyoming, and its European stores are located in Bulgaria, Germany, Romania, and Ukraine.
Impact of the COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, and the President of the United States declared the COVID-19 outbreak as a national emergency. The nature of COVID-19 led to worldwide shutdowns and halting of commercial and interpersonal activity as governments imposed regulations in efforts to control the spread of the pandemic, such as shelter-in-place orders and quarantines. The Company's products and services were determined to be essential in the markets we serve and accordingly operations have been allowed to continue throughout the pandemic. The extent and duration of the impact of COVID-19 on the operations and financial position of the Company and on the global economy is uncertain. Uncertainty remains regarding the magnitude and duration of the pandemic and resulting financial effects. Increased infection rates and any future responses to mitigate the spread of the virus, including any potential vaccination mandates that would apply to our employees, could impact our business and our financial results in future periods.
Recently, the Department 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. This standard became effective in November 2021, giving companies 30 days to comply with most requirements and 60 days to comply with the testing requirements. In response to a court ruling, in mid-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 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.
Additionally, some of the Company's supply vendors are facing production, supply chain and staffing challenges as they work to achieve production capacity and lead times consistent with pre-pandemic levels. As a result, the Company has experienced some disruptions and delays on delivery of certain inventory. The Company has assessed the impacts of the COVID-19 pandemic on its results of operations for the three and nine months ended October 31, 2021 and 2020, and although there have been logistical and other challenges, no material adverse impacts were identified.
8
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
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Allocation to participating securities | ( | ( | ( | ( | |||||||||||||||||||
| Net income attributable to Titan Machinery Inc. common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic weighted-average common shares outstanding | |||||||||||||||||||||||
| Plus: incremental shares from vesting of restricted stock units | |||||||||||||||||||||||
| Diluted weighted-average common shares outstanding | |||||||||||||||||||||||
| Earnings Per Share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
NOTE 3 - REVENUE
9
| Three Months Ended October 31, 2021 | Three Months Ended October 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Agriculture | Construction | International | Total | Agriculture | Construction | International | Total | ||||||||||||||||||||||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
| Equipment | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Parts | |||||||||||||||||||||||||||||||||||||||||||||||
| Service | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||||||||
Revenue from contracts with customers | |||||||||||||||||||||||||||||||||||||||||||||||
| Rental | |||||||||||||||||||||||||||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Nine Months Ended October 31, 2021 | Nine Months Ended October 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Agriculture | Construction | International | Total | Agriculture | Construction | International | Total | ||||||||||||||||||||||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
| Equipment | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Parts | |||||||||||||||||||||||||||||||||||||||||||||||
| Service | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||||||||
Revenue from contracts with customers | |||||||||||||||||||||||||||||||||||||||||||||||
| Rental | |||||||||||||||||||||||||||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Unbilled Receivables and Deferred Revenue
Unbilled receivables from contracts with customers amounted to $21.8 million and $12.9 million as of October 31, 2021 and January 31, 2021, 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 $34.1 million and $57.7 million as of October 31, 2021 and January 31, 2021, 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 nine months ended October 31, 2021 and 2020, the Company recognized $55.8 million and $40.9 million, respectively, of revenue that was included in the deferred revenue balance as of January 31, 2021 and January 31, 2020, respectively. No material amount of revenue was recognized during the nine months ended October 31, 2021 or 2020 from performance obligations satisfied in previous periods.
The Company has elected as a practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of service of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for parts installed and services performed. The contracts for which the practical expedient has been applied include (i) equipment revenue transactions, which do not have a stated contractual term but are short-term in nature, and (ii) service revenue transactions, which also do not have a stated contractual term but are generally completed within 30 days. For such service contracts, we recognize revenue over time 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
10
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.
| October 31, 2021 | January 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Trade and unbilled receivables from contracts with customers | |||||||||||
| Trade receivables due from customers | $ | $ | |||||||||
| Unbilled receivables | |||||||||||
| Less allowance for expected credit losses | |||||||||||
| Trade receivables due from finance companies | |||||||||||
| Trade and unbilled receivables from rental contracts | |||||||||||
| Trade receivables | |||||||||||
| Unbilled receivables | |||||||||||
| Less allowance for expected credit losses | |||||||||||
| Other receivables | |||||||||||
| Due from manufacturers | |||||||||||
| Other | |||||||||||
| Receivables, net of allowance for expected credit losses | $ | $ | |||||||||
| Agriculture | Construction | International | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Balance at January 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||
| Current expected credit loss provision | ( | ||||||||||||||||||||||
| Write-offs charged against allowance | |||||||||||||||||||||||
| Credit loss recoveries collected | |||||||||||||||||||||||
| Foreign exchange impact | — | — | ( | ( | |||||||||||||||||||
| Balance at April 30, 2021 | |||||||||||||||||||||||
| Current expected credit loss provision | ( | ( | |||||||||||||||||||||
| Write-offs charged against allowance | |||||||||||||||||||||||
| Credit loss recoveries collected | — | ||||||||||||||||||||||
| Foreign exchange impact | — | — | |||||||||||||||||||||
| Balance at July 31, 2021 | |||||||||||||||||||||||
| Current expected credit loss provision | ( | ( | |||||||||||||||||||||
| Write-offs charged against allowance | |||||||||||||||||||||||
| Credit loss recoveries collected | — | ||||||||||||||||||||||
| Foreign exchange impact | — | — | ( | ( | |||||||||||||||||||
| Balance at October 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||
11
| Agriculture | Construction | International | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Balance at February 1, 2020 | $ | $ | $ | $ | |||||||||||||||||||
| Current expected credit loss provision | |||||||||||||||||||||||
| Write-offs charged against allowance | |||||||||||||||||||||||
| Credit loss recoveries collected | |||||||||||||||||||||||
| Foreign exchange impact | — | — | ( | ( | |||||||||||||||||||
| Balance at April 30, 2020 | |||||||||||||||||||||||
| Current expected credit loss provision | |||||||||||||||||||||||
| Write-offs charged against allowance | |||||||||||||||||||||||
| Credit loss recoveries collected | — | — | |||||||||||||||||||||
| Foreign exchange impact | — | — | |||||||||||||||||||||
| Balance at July 31, 2020 | |||||||||||||||||||||||
| Current expected credit loss provision | ( | ( | |||||||||||||||||||||
| Write-offs charged against allowance | |||||||||||||||||||||||
| Credit loss recoveries collected | — | ||||||||||||||||||||||
| Foreign exchange impact | — | — | |||||||||||||||||||||
| Balance at October 31, 2020 | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Impairment losses (recoveries) on: | |||||||||||||||||||||||
| Receivables from sales contracts | $ | $ | ( | $ | $ | ||||||||||||||||||
| Receivables from rental contracts | ( | ||||||||||||||||||||||
| $ | $ | ( | $ | $ | |||||||||||||||||||
NOTE 5 - INVENTORIES
| October 31, 2021 | January 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| New equipment | $ | $ | |||||||||
| Used equipment | |||||||||||
| Parts and attachments | |||||||||||
| Work in process | |||||||||||
| $ | $ | ||||||||||
12
NOTE 6 - PROPERTY AND EQUIPMENT
| October 31, 2021 | January 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Rental fleet equipment | $ | $ | |||||||||
| Machinery and equipment | |||||||||||
| Vehicles | |||||||||||
| Furniture and fixtures | |||||||||||
| Land, buildings, and leasehold improvements | |||||||||||
| Less accumulated depreciation | |||||||||||
| $ | $ | ||||||||||
NOTE 7 - INTANGIBLE ASSETS
| Agriculture | Construction | International | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| January 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency translation | — | — | ( | ( | |||||||||||||||||||
| Impairment | — | — | ( | ( | |||||||||||||||||||
| October 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||
NOTE 8 - FLOORPLAN PAYABLE/LINES OF CREDIT
13
The Company's outstanding balances of floorplan lines of credit as of October 31, 2021 and January 31, 2021, consisted of the following:
| October 31, 2021 | January 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| CNH Industrial | $ | $ | |||||||||
| DLL Finance | |||||||||||
| Other outstanding balances with manufacturers and non-manufacturers | |||||||||||
| $ | $ | ||||||||||
As of October 31, 2021 and January 31, 2021, the U.S. floorplan payables were generally all non-interest bearing. As of October 31, 2021, foreign floorplan payables carried various interest rates primarily ranging from 1.40 % to 4.48 %, compared to a range of 1.40 % to 4.82 % as of January 31, 2021. The Company had non-interest bearing floorplan payables of $147.2 million and $98.8 million, on October 31, 2021 and January 31, 2021, 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
Bank Syndicate Credit Agreement
On June 4, 2021, the Bank Syndicate Agreement was amended to add a benchmark replacement reference rate when the LIBOR Rate is no longer published. The identified replacement reference rate is the secured overnight financing rate (SOFR). The benchmark transition event will occur at the earliest to occur of (i) the date that all available tenors of LIBOR have permanently ceased to be reported, (ii) June 30, 2023, or (iii) the date of agreement by the banks party to the Bank Syndicate agreement and the Company to replace the LIBOR Rate. The SOFR Rate is based upon one month, two month, three month, six month, and 12 month SOFR plus between 11.4 basis points and 71.5 basis points depending on the available tenor used. In no event will the SOFR Rate be less than zero. The applicable margin is determined based on excess availability under the Bank Syndicate Agreement and ranges from 1.5% to 2%. The Company does not believe implementation of this new benchmark rate will have a material effect on its results of operations. In addition, the amendment reduced the current floor of the LIBOR Rate from 0.5% to 0.0%
DLL Finance Floorplan Payable Line of Credit
In August 2021, the Company entered into an amendment to the credit facility with DLL Finance LLC. The amendment reduced the available borrowings under this facility from $60.0 million to $50.0 million, increased the variable interest rate on outstanding balances from three-month LIBOR plus an applicable margin of 2.85% per annum to three-month LIBOR plus an applicable margin of 3.0% per annum, and eliminated the 0.15% non-utilization fee. DLL Finance LLC may terminate the facility in its sole discretion at any time.
CNH Industrial Floorplan Payable Line of Credit
Effective October 1, 2021, CNH updated their interest rate structure on the Company's credit facility to a tier-based rate program. The new interest rate that will be payable by the Company on outstanding borrowings will be dependent on the Company's Retail Finance Market Share and will range from 0.5% to 2.75% plus the prime rate. Previously, the credit facility charged interest at a rate equal to the prime rate plus 3.25% for the financing of new and used equipment inventories and rental fleet assets.
14
NOTE 9 - LONG TERM DEBT
| Description | Maturity Dates | Interest Rates | October 31, 2021 | January 31, 2021 | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Mortgage loans, secured | Various through May 2039 | 2.1% to 5.1% | $ | $ | ||||||||||||||||||||||
| Sale-leaseback financing obligations | Various through December 2030 | 3.4% to 10.3% | ||||||||||||||||||||||||
| Vehicle loans, secured | Various through September 2027 | 2.1% to 3.9% | ||||||||||||||||||||||||
| Other | January 2021 | 2.6% | ||||||||||||||||||||||||
| Total debt | ||||||||||||||||||||||||||
| Less: current maturities | ||||||||||||||||||||||||||
| Long-term debt, net | $ | $ | ||||||||||||||||||||||||
NOTE 10 - DERIVATIVE INSTRUMENTS
The Company holds derivative instruments for the purpose of minimizing exposure to fluctuations in foreign currency exchange rates to which the Company is exposed in the normal course of its operations.
From time to time, the Company uses foreign currency forward contracts to hedge the effects of fluctuations in exchange rates on outstanding intercompany loans. The Company does not formally designate and document such derivative instruments as hedging instruments; however, the instruments are an effective economic hedge of the underlying foreign currency exposure. Both the gain or loss on the derivative instrument and the offsetting gain or loss on the underlying intercompany loan are recognized in earnings immediately, thereby eliminating or reducing the impact of foreign currency exchange rate fluctuations on net income. The Company's foreign currency forward contracts generally have three-month maturities, maturing on the last day of each fiscal quarter. The notional value of outstanding foreign currency contracts as of January 31, 2021 was $8.0 million. There were no outstanding foreign currency contracts as of October 31, 2021.
As of January 31, 2021, the fair value of the Company's outstanding derivative instruments was not material. Derivative instruments recognized as assets are recorded in prepaid expenses and other in the condensed consolidated balance sheets, and derivative instruments recognized as liabilities are recorded in accrued expenses and other in the condensed consolidated balance sheets.
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Foreign currency contract gain (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
15
NOTE 11 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| Foreign Currency Translation Adjustment | Net Investment Hedging Gain | Total Accumulated Other Comprehensive Income (Loss) | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance, January 31, 2021 | $ | ( | $ | $ | |||||||||||||
| Other comprehensive loss | ( | — | ( | ||||||||||||||
| Balance, April 30, 2021 | ( | ( | |||||||||||||||
| Other comprehensive income | — | ||||||||||||||||
| Balance, July 31, 2021 | ( | ||||||||||||||||
| Other comprehensive loss | ( | — | ( | ||||||||||||||
| Balance, October 31, 2021 | $ | ( | $ | $ | ( | ||||||||||||
| Foreign Currency Translation Adjustment | Net Investment Hedging Gain | Total Accumulated Other Comprehensive Income (Loss) | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance, January 31, 2020 | $ | ( | $ | $ | ( | ||||||||||||
| Other comprehensive loss | ( | — | ( | ||||||||||||||
| Balance, April 30, 2020 | ( | ( | |||||||||||||||
| Other comprehensive income | — | ||||||||||||||||
| Balance, July 31, 2020 | ( | ( | |||||||||||||||
| Other comprehensive income | — | ||||||||||||||||
| Balance, October 31, 2020 | $ | ( | $ | $ | ( | ||||||||||||
NOTE 12 - 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.
16
| Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||||||||||||||||||
| Classification | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
| Finance lease cost: | ||||||||||||||||||||||||||||||||
| Amortization of leased assets | Operating expenses | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Interest on lease liabilities | Other interest expense | |||||||||||||||||||||||||||||||
| Operating lease cost | Operating expenses and rental and other cost of revenue | |||||||||||||||||||||||||||||||
| Short-term lease cost | Operating expenses | |||||||||||||||||||||||||||||||
| Variable lease cost | Operating expenses | |||||||||||||||||||||||||||||||
| Sublease income | Interest and other income | ( | ( | ( | ( | |||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Classification | October 31, 2021 | January 31, 2021 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Operating lease assets | Operating lease assets | $ | $ | |||||||||||||||||
Finance lease assets(a) | Property and equipment, net of accumulated depreciation | |||||||||||||||||||
| Total leased assets | $ | $ | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current | ||||||||||||||||||||
| Operating | Current operating lease liabilities | $ | $ | |||||||||||||||||
| Finance | Accrued expenses and other | |||||||||||||||||||
| Noncurrent | ||||||||||||||||||||
| Operating | Operating lease liabilities | |||||||||||||||||||
| Finance | Other long-term liabilities | |||||||||||||||||||
| Total lease liabilities | $ | $ | ||||||||||||||||||
| Operating | Finance | |||||||||||||||||||
| Leases | Leases | Total | ||||||||||||||||||
| Fiscal Year Ended January 31, | (in thousands) | |||||||||||||||||||
| 2022 (remainder) | $ | $ | $ | |||||||||||||||||
| 2023 | ||||||||||||||||||||
| 2024 | ||||||||||||||||||||
| 2025 | ||||||||||||||||||||
| 2026 | ||||||||||||||||||||
| 2027 | ||||||||||||||||||||
| Thereafter | ||||||||||||||||||||
| Total lease payments | ||||||||||||||||||||
| Less: Interest | ||||||||||||||||||||
| Present value of lease liabilities | $ | $ | $ | |||||||||||||||||
| October 31, 2021 | |||||
| Weighted-average remaining lease term (years): | |||||
| Operating leases | |||||
| Financing leases | |||||
| Weighted-average discount rate: | |||||
| Operating leases | % | ||||
| Financing leases | % | ||||
17
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 October 31, 2021 and January 31, 2021:
| October 31, 2021 | January 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Rental fleet equipment | $ | $ | |||||||||
| Less accumulated depreciation | |||||||||||
| $ | $ | ||||||||||
NOTE 13 - FAIR VALUE MEASUREMENTS
As of October 31, 2021 and January 31, 2021, the fair value of the Company's foreign currency contracts, which are either assets or liabilities measured at fair value on a recurring basis, was not material. These foreign currency contracts were valued using a discounted cash flow analysis, which is an income approach, utilizing readily observable market data as inputs, which is classified as a Level 2 fair value measurement.
The Company also valued certain long-lived assets at fair value on a non-recurring basis as of January 31, 2021 as part of its long-lived asset impairment testing. The estimated fair value of such assets as of January 31, 2021 was $0.8 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 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 October 31, 2021 and January 31, 2021. 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:
| October 31, 2021 | January 31, 2021 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| Carrying amount | |||||||||||||||||
| Fair value | |||||||||||||||||
18
NOTE 14 - INCOME TAXES
NOTE 15 - BUSINESS COMBINATIONS
Fiscal 2021
On May 4, 2020, the Company acquired certain assets of HorizonWest Inc. This acquired CaseIH agriculture dealership complex consisted of three agriculture equipment stores in Scottsbluff and Sidney, Nebraska and Torrington, Wyoming, which expanded the Company's agriculture presence in Nebraska and into Wyoming. The total consideration paid for the acquired business was $6.8 million in cash.
In connection with the acquisition, the Company acquired from CNH Industrial and certain other manufacturers equipment and parts inventory previously owned by HorizonWest Inc. Upon acquiring those inventories, the Company was offered floorplan financing by the manufacturer. In total, the Company acquired inventory and recognized a corresponding financing liability of $2.7 million. The recognition of these inventories and the associated financing liabilities are not included as part of the accounting for the business combination.
Purchase Price Allocation
The above acquisition has been accounted for under the acquisition method of accounting, which requires the Company to estimate the acquisition date fair value of the assets acquired and liabilities assumed. The accounting for the purchase price allocation was complete as of January 31, 2021. The following table presents the aggregate purchase price allocations for the HorizonWest acquisition completed as of January 31, 2021:
| January 31, 2021 | |||||||||||
| (in thousands) | |||||||||||
| Assets acquired: | |||||||||||
| Cash | $ | ||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other | |||||||||||
| Property and equipment | |||||||||||
| Operating lease assets | |||||||||||
| Intangible assets | |||||||||||
| Goodwill | |||||||||||
| Liabilities assumed: | |||||||||||
| Current operating lease liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Net assets acquired | $ | ||||||||||
| Goodwill recognized by segment: | |||||||||||
| Agriculture | $ | ||||||||||
| Goodwill expected to be deductible for tax purposes | $ | ||||||||||
The recognition of goodwill in the above business combination arose from the acquisition of an assembled workforce and anticipated synergies expected to be realized. For the business combination occurring during the fiscal year ended January 31, 2021, the Company recognized a non-competition intangible asset of $0.1 million and a distribution rights intangible asset of $0.2 million. The non-competition asset 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
19
NOTE 16 - 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 17 - 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.
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Agriculture | $ | $ | $ | $ | |||||||||||||||||||
| Construction | |||||||||||||||||||||||
| International | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Income (Loss) Before Income Taxes | |||||||||||||||||||||||
| Agriculture | $ | $ | $ | $ | |||||||||||||||||||
| Construction | ( | ||||||||||||||||||||||
| International | ( | ( | |||||||||||||||||||||
| Segment income before income taxes | |||||||||||||||||||||||
| Shared Resources | ( | ( | |||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| October 31, 2021 | January 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Total Assets | |||||||||||
| Agriculture | $ | $ | |||||||||
| Construction | |||||||||||
| International | |||||||||||
| Segment assets | |||||||||||
| Shared Resources | |||||||||||
| Total | $ | $ | |||||||||
20
NOTE 18 - SUBSEQUENT EVENTS
21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report, and the audited consolidated financial statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.
Overview
We own and operate a network of full service agricultural and construction equipment stores in the United States and Europe. Based upon information provided to us by CNH Industrial N.V. or its U.S. subsidiary CNH Industrial America, LLC, we are the largest retail dealer of Case IH Agriculture equipment in the world, one of the largest retail dealers of Case Construction equipment in North America and one of the largest retail dealers of New Holland Agriculture and New Holland Construction equipment in the U.S. 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 on September 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 in the United States and the rest of the world, and the effectiveness of those vaccines in slowing or stopping the spread of COVID-19 and mitigating the economic effects of the pandemic.
The Company continues to effectively execute its strategy while managing the ongoing effects of the COVID-19 pandemic. The Company's products and services were determined to be essential in the markets we serve and accordingly operations have been allowed to continue throughout the pandemic. Since the beginning of the COVID-19 pandemic, the safety of our employees and customers has been, and continues to be, our top concern.
Recently, the Department 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, in mid-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
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 ended October 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
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 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
On May 4, 2020, the Company acquired certain assets of HorizonWest Inc. This acquired Case IH agriculture dealership complex consisted of three agriculture equipment stores in Scottsbluff and Sidney, Nebraska and Torrington, Wyoming, which expanded the Company's agriculture presence in Nebraska and into Wyoming. 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 three HorizonWest 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 ended January 31, 2021. There have been no changes in our critical accounting policies and estimates since January 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
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
Three Months Ended October 31, 2021 Compared to Three Months Ended October 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
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.
26
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.
27
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
Nine Months Ended October 31, 2021 Compared to Nine Months Ended October 31, 2020
Consolidated Results
Revenue
| Nine Months Ended October 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
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) | $ | 1,936 | $ | 332 | $ | 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.
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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
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 October 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 with DLL Finance.
Our equipment inventory turnover increased from 1.6 times for the rolling 12 month period ended October 31, 2020 to 3.1 times for the rolling 12 month period ended October 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 ended October 31, 2021 as compared to the same period ended October 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 of October 31, 2021 from 52.1% as of January 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 of October 31, 2021, 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 October 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
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 of October 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 ended January 31, 2021, and in other materials filed or to be filed by the Company with the Securities and Exchange Commission (and included in oral statements or other written statements made or to be made by the Company).
Forward-looking statements are statements based on future expectations and specifically may include, among other things, statements relating to our expectations regarding exchange rate and interest rate impact 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 of OSHA'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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in interest rates and foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates.
Interest Rate Risk
Exposure to changes in interest rates results from borrowing activities used to fund operations. For fixed rate debt, interest rate changes affect the fair value of financial instruments but do not impact earnings or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. We have both fixed and floating rate financing. Some of our floating rate credit facilities contain minimum rates of interest to be charged. Based upon our interest-bearing balances and interest rates as of October 31, 2021, holding other variables constant, a one percentage point increase in interest rates for the next 12-month period would decrease pre-tax earnings and cash flow by approximately $0.3 million. Conversely, a one percentage point decrease in interest rates for the next 12-month period would result in an increase to pre-tax earnings and cash flow of approximately $0.3 million. At October 31, 2021, we had floorplan payables of $174.7 million, of which approximately $27.4 million was variable-rate floorplan payable and $147.2 million was non-interest bearing. In addition, at October 31, 2021, we had total long-term debt, including finance lease obligations, of $81.9 million, of which all was fixed rate debt.
Foreign Currency Exchange Rate Risk
Our foreign currency exposures arise as the result of our foreign operations. We are exposed to transactional foreign currency exchange rate risk through our foreign entities’ holding assets and liabilities denominated in currencies other than their functional currency. In addition, the Company is exposed to foreign currency transaction risk as a result of certain intercompany financing transactions. The Company attempts to manage its transactional foreign currency exchange rate risk through the use of derivative financial instruments, primarily foreign exchange forward contracts, or through natural hedging instruments. Based upon balances and exchange rates as of October 31, 2021, holding other variables constant, we believe that a hypothetical 10% increase or decrease in all applicable foreign exchange rates would not have a material impact on our results of operations or cash flows. As of October 31, 2021, our Ukrainian subsidiary had $1.2 million of net monetary assets denominated in Ukrainian hryvnia ("UAH"). We have attempted to minimize our net monetary asset position in Ukraine through reducing overall asset levels in Ukraine and at times through borrowing in UAH which serves as a natural hedging instrument offsetting our net UAH denominated assets. At certain times, currency and payment controls imposed by the National Bank of Ukraine have limited our ability to manage our net monetary asset position.
In addition to transactional foreign currency exchange rate risk, we are also exposed to translational foreign currency exchange rate risk as we translate the results of operations and assets and liabilities of our foreign operations from their functional currency to the U.S. dollar. As a result, our results of operations, cash flows and net investment in our foreign operations may be adversely impacted by fluctuating foreign currency exchange rates. We believe that a hypothetical 10% increase or decrease in all applicable foreign exchange rates, holding all other variables constant, would not have a material impact on our results of operations or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. After evaluating the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer, with the participation of the Company’s management, have concluded that the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are effective.
(b) Changes in internal controls. There has not been any change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during its most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
36
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are, from time to time, subject to claims and suits arising in the ordinary course of business. Such claims have, in the past, generally been covered by insurance. There can be no assurance that our insurance will be adequate to cover all liabilities that may arise out of claims brought against us, or that our insurance will cover all claims. We are not currently a party to any material litigation.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report, including the important information in “Forward-Looking Statements,” you should carefully consider the “Risk Factors” discussed in our Form 10-K for the fiscal year ended January 31, 2021, as filed with the Securities and Exchange Commission. Among other things, those factors, if they were to occur, could cause our actual results to differ materially from those expressed in our forward-looking statements in this report, and may materially adversely affect our business, financial condition, or results of operations. In addition to those factors, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits - See “Exhibit Index” on page immediately prior to signatures.
37
EXHIBIT INDEX
TITAN MACHINERY INC.
FORM 10-Q
| No. | Description | |||||||
| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||
| 101 | Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended October 31, 2021, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Condensed Consolidated Financial Statements. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: | December 2, 2021 | ||||||||||
| TITAN MACHINERY INC. | |||||||||||
| By | /s/ Mark Kalvoda | ||||||||||
| Mark Kalvoda | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
39
EXHIBIT 31.1
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, David J. Meyer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Titan Machinery Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: December 2, 2021
| /s/ David J. Meyer | |||||
| David J. Meyer | |||||
| Board Chair and Chief Executive Officer | |||||
EXHIBIT 31.2
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, Mark Kalvoda, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Titan Machinery Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: December 2, 2021
| /s/ Mark Kalvoda | |||||
| Mark Kalvoda | |||||
| Chief Financial Officer | |||||
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Titan Machinery Inc. (the “Company”) on Form 10-Q for the quarter ended October 31, 2021 as filed with the Securities and Exchange Commission (the “Report”), I, David J. Meyer, Board Chair and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: December 2, 2021
| /s/ David J. Meyer | |||||
| David J. Meyer | |||||
| Board Chair and Chief Executive Officer | |||||
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Titan Machinery Inc. (the “Company”) on Form 10-Q for the quarter ended October 31, 2021 as filed with the Securities and Exchange Commission (the “Report”), I, Mark Kalvoda, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: December 2, 2021
| /s/ Mark Kalvoda | |||||
| Mark Kalvoda | |||||
| Chief Financial Officer | |||||