Titan Machinery(TITN) - 2022 Q4 - Annual Report

PART I Item 1. Business Titan Machinery operates agricultural and construction equipment dealerships in the U.S. and Europe, offering sales, parts, service, and rentals, primarily as a CNH Industrial dealer Company Overview and Operations Titan Machinery operates agricultural and construction equipment dealerships in the U.S. and Europe, segmented by Agriculture, Construction, and International, with growth driven by acquisitions - Titan Machinery operates a network of full service agricultural and construction equipment stores in the United States and Europe, primarily as an authorized dealer of CNH Industrial N.V.[10] - The Company is the largest retail dealer of Case IH Agriculture equipment in the world, one of the largest retail dealers of Case Construction equipment in North America and one of the largest retail dealers of New Holland Agriculture and New Holland Construction equipment in the United States[10] - Business is operated in three reportable segments: Agriculture, Construction and International, with four principal business activities: new and used equipment sales, parts sales, equipment repair and maintenance services, and equipment rental and other activities[11][15] - The company has grown through acquisitions, completing over 50 dealership acquisitions since January 1, 2003, across 11 U.S. states and four European countries, and plans for continued consolidation[13] Products and Services The company generates revenue from new and used equipment sales, parts, services, and rentals, with parts and services offering stable, high-margin streams - Four principal sources of revenue: new and used equipment sales, parts sales, equipment repair and maintenance services, and equipment rental and other business activities[14] Revenue Mix by Source (Fiscal Years Ended January 31) | Revenue Source | FY2022 (%) | FY2021 (%) | FY2020 (%) | | :------------- | :--------- | :--------- | :--------- | | Equipment Sales | 75.4% | 72.0% | 70.3% | | Parts Sales | 15.6% | 17.3% | 17.9% | | Service | 6.8% | 7.6% | 7.6% | | Rental and Other | 2.2% | 3.1% | 4.2% | - Parts sales and equipment repair and maintenance services provide relatively stable, high-margin revenue streams that are less sensitive to economic cycles than equipment sales[16][17] Industry Overview Demand for agricultural equipment is influenced by farm income and commodity markets, while construction equipment sales are driven by infrastructure spending and economic conditions - Demand for agricultural equipment is influenced by net farm income, commodity markets, production yields, tariffs, interest rates, government policies (e.g., Farm Bill, CARES Act), and local growing conditions[21] - Demand for construction equipment is driven by public spending on infrastructure (roads, highways, sewer, water), public and private expenditures for energy industries, agriculture industry conditions, and general economic conditions in the construction sector[23] Business Strengths and Growth Strategy The company's strengths include centralized management and customer service, with a growth strategy focused on increasing sales, market share, and strategic acquisitions - Business strengths include centralized inventory management, superior local customer service (highly-trained technicians, product specialists, precision farming support), ability to act on acquisition opportunities, superior centralized marketing systems, ability to attract and retain superior employees, and a diverse and stable customer base[24][25][26][27][28][29][30] - Growth strategy involves increasing same-store sales and market share through extensive marketing, training on evolving technologies (precision farming), maintaining state-of-the-art service facilities, and centrally managing inventory[31][32] - Strategic acquisitions are a key component of long-term growth, with over 50 dealerships acquired since 2003, aiming to enter new markets, consolidate distribution, and strengthen competitive position[13][32] Suppliers and Dealership Agreements The company heavily relies on CNH Industrial for equipment and financing, operating under dealership agreements that impose various requirements and termination conditions - CNH Industrial supplied approximately 76% of new equipment in Agriculture, 66% in Construction, and 70% in International segments in fiscal 2022, and also provides financing and insurance products[36] - Dealership agreements with CNH Industrial assign geographically defined areas, impose requirements on facilities, inventory, personnel training, IT systems, working capital, and debt ratios, and require consent for fundamental changes in ownership or business structure[39][40] - Case IH Agriculture and Case Construction agreements expire December 31, 2027, with automatic 5-year renewals; New Holland agreements are 12-month with 1-year renewals. CNH Industrial can terminate agreements under certain conditions, including material breach or change in control without consent[42][43] - European CNH Industrial Dealer Agreements, except for Ukraine, grant exclusive territories and do not have fixed terms, but can be terminated with 24 months' notice for any reason[45] Customers and Financing Customers include diverse farming and construction operations, with inventory management heavily reliant on floorplan payable financing, much of which is non-interest bearing - Customers include small to large farming operations in North America and Europe, and a wide range of construction contractors, public utilities, and energy companies in North America[47][48][49] - No single customer accounted for more than 1.0% of Agriculture revenue or 2.0% of Construction/International revenue in fiscal 2022, indicating a diverse customer base[47][48][49] - Floorplan payable financing is crucial for inventory management, primarily from CNH Industrial Capital ($450.0M facility), a Bank Syndicate ($185.0M facility), and DLL Finance LLC ($50.0M facility)[51][52] - As of January 31, 2022, 78.8% of floorplan payable financing was non-interest bearing, reducing financing costs[208] Sales, Marketing, and Competition Marketing efforts utilize sales consultants and digital channels, operating in a highly competitive and fragmented industry where price, service, and technology are key differentiators - Marketing channels include equipment sales consultants, area product support managers, store parts and service managers, the company website (www.titanmachinery.com), local/regional advertising, and alternative channels like auctions for aged inventory[53][54][55][56][57] - The agricultural and construction equipment sales and distribution industries are highly competitive and fragmented, with competition based on price, value, reputation, quality, technology, customer service, and availability of equipment and parts[58] Corporate Information and Operations This section provides corporate details, including seasonality, human capital management, and environmental and governmental regulatory compliance - Incorporated in North Dakota in 1980, reincorporated in Delaware in 2007, with executive offices in West Fargo, ND[60] - Holds registered trademarks for business names and designs, and licenses trademarks from CNH Industrial and other suppliers[61] - Product warranties for new equipment and parts are provided by the OEM, with Titan Machinery performing repairs and being reimbursed. Used equipment is generally sold 'as is' unless the original warranty is transferable[62] Seasonality & Weather Business operations are highly seasonal, with quarterly results and cash flow fluctuating based on agricultural and construction cycles, significantly impacted by weather - Agricultural and construction equipment businesses are highly seasonal, causing quarterly results and cash flow to fluctuate[63] - Peak seasons: spring planting and fall harvesting for agriculture; Q2 and Q3 for construction. Parts and service revenues are also highest during busy seasons[63] - Weather conditions (e.g., severe wet/dry) significantly impact regional market performance and demand for products/services[64] - Fourth quarter is a significant period for U.S. equipment sales due to year-end tax planning, dealer incentives, and increased funds from harvests/projects[63] Human Capital The company focuses on attracting, developing, and retaining talent through comprehensive compensation, training, and a commitment to employee health and safety Employee Count (as of January 31, 2022) | Category | U.S. | Europe | Total | | :------- | :--- | :----- | :---- | | Full-time | 1,637 | 651 | 2,288 | | Part-time | N/A | N/A | 148 | - Committed to attracting, developing, and retaining talent through relationships with schools, continuous monitoring for experienced individuals, and fostering diverse, equal, and inclusive workplaces[66][67] - Compensation programs include base salary/hourly, commissions, cash bonuses, health/dental, 401(k), paid time off, and tuition assistance[68] - Significant resources are devoted to staff training and development, including career-enhancing academic programs and internal talent advancement[69] - Employee engagement surveys and turnover data (especially for service technicians) are monitored to improve retention and motivation[70][71] - Employee health and safety are paramount, with safety performance data tracked, aggregated, reviewed monthly by executive leadership, and quarterly by the Board of Directors[72] Environmental and Other Governmental Regulation The company is subject to extensive environmental laws and regulations, alongside various federal, state, and local laws governing business conduct and data privacy - Subject to wide range of environmental laws and regulations (e.g., Clean Water Act, RCRA, CERCLA) governing discharges, storage, waste handling, and remediation, incurring compliance costs[77][78][79][80] - Also subject to federal, state, and local laws regulating business conduct, including sales, marketing, taxation, employment practices, working conditions, and data privacy across numerous jurisdictions[81] Item 1A. Risk Factors The company faces diverse risks including supplier dependence, market volatility, international instability, financial pressures, and regulatory compliance challenges Risks Related to Reliance on CNH Industrial The company's substantial dependence on CNH Industrial for equipment, parts, and financing creates significant operational and strategic risks - Substantial dependence on CNH Industrial for new equipment (76% Agriculture, 66% Construction, 70% International in FY2022) and parts inventory[82] - Reliance on CNH Industrial for financial assistance (floorplan/retail financing) and marketing support is critical for competitiveness[84][85] - Risks include CNH Industrial's failure to offer competitive products, supply chain disruptions affecting manufacturing output, and adverse events impacting CNH Industrial's financial performance or reputation[83][87][88] - CNH Industrial dealer agreements impose restrictions, including potential termination rights, unilateral changes to operating practices, and required consent for material changes in ownership or acquisitions, which could impair growth[89][90][91][92][93] Risks Related to Economic Conditions Economic conditions, including net farm income, commodity prices, infrastructure spending, and interest rates, significantly impact equipment sales and customer purchasing decisions - Agriculture equipment sales are significantly affected by net farm income, influenced by commodity prices, export ability, farmer profitability, and agricultural policies[96] - Local growing conditions (droughts, excess rain) also influence farmer buying sentiment[97] - Construction equipment sales are affected by public infrastructure spending, capital spending in energy/forestry/mining, and new residential/non-residential construction[100][103] - Rising interest rates increase financing costs for customers, potentially decreasing equipment purchases and company revenue/profitability[101] Risks Related to Competitive Conditions The highly competitive and fragmented industry, coupled with market disruptions and e-commerce, poses risks to pricing, sales, and profit margins - Industry is highly competitive and fragmented, leading to aggressive pricing and potential margin decreases if the company matches competitors[104] - Over-production, sudden demand reduction, or increased availability of used equipment (e.g., off-lease units, rental fleet sales) can disrupt the market and pressure sales/margins[102] - Competition from other major manufacturers (Deere, Caterpillar, Komatsu, Volvo, and AGCO) with innovative products, lower costs, better financing, or effective marketing can adversely affect the company's ability to compete[104] - E-commerce companies selling parts have negatively impacted parts sales and margins, a trend expected to continue[104] Risks Related to Supply Chain Ongoing supply chain disruptions, including production delays and labor shortages, lead to price increases and delivery delays, potentially causing business losses - Continuing supply chain disruptions (production/port delays, labor shortages, surge in demand) lead to price increases and delivery delays for products[105] - These disruptions may cause the company to lose business despite proactive inventory ordering[105] Risks of International Operations International operations expose the company to diverse legal, political, and economic risks, with the Russian-Ukraine conflict significantly disrupting Ukrainian business and asset management - International operations (18.6% of FY2022 revenue) in Bulgaria, Germany, Romania, and Ukraine expose the company to risks from differing legal, political, social, and regulatory environments, and economic conditions[106][107] - Risks include difficulties in implementing business models, management attention diversion, adverse changes in duties/tariffs, cyclical demand based on EU subsidies, foreign law compliance, Foreign Corrupt Practices Act compliance, and foreign currency exchange rate fluctuations[107] - The Russian-Ukraine conflict has significantly disrupted Ukrainian operations, leading to temporary store closures, potential asset write-offs, and impacts on customer liquidity and purchasing decisions[107][108] - Currency exchange controls and other restrictions may limit the ability to manage cash held in Ukraine and investment in the Ukrainian business, with potential for further local currency devaluation and increased inflation[108] Risks Related to Financial Matters Financial performance is vulnerable to inventory management, high indebtedness, interest rate fluctuations, ERP system implementation, seasonality, customer credit, and rental fleet costs - Financial performance depends on effective inventory management; over-supply of new equipment or inaccurate used equipment valuations can lead to lower margins and increased floorplan financing costs[110][111][112] - High indebtedness (floorplan, real estate mortgages, long-term debt) limits financial and operational flexibility and requires compliance with covenants (net leverage ratio, fixed charge coverage ratio)[113][114][116] - Variable rate indebtedness exposes the company to interest rate risk, with a one percentage point increase potentially decreasing pre-tax earnings and cash flow by approximately $0.3 million[118][267] - Implementation of a new ERP system poses risks to accurate record-keeping, efficient operations, and timely SEC filings if not successfully managed[119][120] - Seasonal business causes significant fluctuations in results and cash flow, and customer credit risks can increase losses, especially during economic downturns[121][122][123] - Rental operations face risks from increased maintenance costs as the fleet ages, higher costs for new replacement equipment, and potential losses upon disposition if market value is less than depreciated value[124][125] Risks Related to Governmental Regulation New regulations, such as 'right to repair' legislation and stricter emission standards, could increase competition, reduce margins, and raise costs for the company and its customers - Enactment of 'right to repair' legislation could increase competition for repair services, lead to loss of parts sales, and result in margin compression on parts and service revenue[126][128] - New or more stringent greenhouse gas emission standards could increase manufacturing costs for suppliers, likely passed on to the company and customers, negatively impacting equipment purchasing decisions[129][130][131] Risks of Growth Strategy Acquisition-based growth strategies carry inherent risks, including integration failures, increased expenses, business disruption, and potential impairment charges - Acquisition plans may be unsuccessful due to lack of suitable candidates, inability to compete for targets, or insufficient capital[132] - Acquisitions carry risks of higher-than-anticipated capital/operating expenses, integration failures (operations, personnel), employee attrition, business disruption, management dilution, and potential impairment charges for goodwill/intangible assets[133] Human Capital Risks The company's success depends on attracting and retaining qualified employees, particularly skilled service technicians, with labor market competition and potential organizing activities posing significant challenges - Success depends on attracting and retaining qualified management and key employees, especially skilled service technicians, where a shortage exists[134][135] - Technician shortage may negatively impact customer service, increase compensation expense, and reduce service gross margins[135] - Difficulties in hiring and retaining employees due to increased labor market competition (partially COVID-19 related) can impair efficiency and growth opportunities[136][137] - Labor organizing activities, though not currently resulting in collective bargaining agreements, could lead to work stoppages, increased costs, reduced operating margins, and decreased business flexibility[138] Liability and Data Security Risks Product liability claims and information system security breaches pose significant risks, potentially leading to financial losses, regulatory penalties, and reputational damage - Product liability risks from selling/renting/servicing equipment could result in personal injury or property damage claims, potentially exceeding insurance coverage and harming financial condition/reputation[139] - Security breaches or disruptions to information systems (due to hackers, employee error, or catastrophic events) could compromise sensitive data, leading to legal claims, regulatory penalties (e.g., EU GDPR), operational disruptions, and reputational damage[141] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - No unresolved staff comments[143] Item 2. Properties Titan Machinery operates 109 stores in the U.S. and Europe, primarily leased, with some owned facilities and a leased headquarters Store Locations by Segment and Region (as of January 31, 2022) | Region | Agriculture | Construction | International | Total | | :------------- | :---------- | :----------- | :------------ | :---- | | United States | 55 | 19 | — | 74 | | European Countries | — | — | 35 | 35 | | Total | 55 | 19 | 35 | 109 | - As of January 31, 2022, 66 store facilities are leased, with various lease arrangements expiring through January 31, 2031[144] - The company owns 39 U.S. and 4 German dealership facilities, financed with long-term debt and mortgages[145] - Headquarters in West Fargo, ND, is leased (48,000 sq ft) with lease expiring January 31, 2028, with ample expansion opportunity[147] Item 3. Legal Proceedings The company is involved in ordinary course legal proceedings, generally covered by insurance, with no anticipated material adverse effect on financials - Subject to claims and suits in the ordinary course of business, generally covered by insurance[148] - Management believes resolution of legal matters will not have a material effect on financial condition, results of operation, or cash flow[148] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[149] PART II Information About Our Executive Officers Titan Machinery's executive team, including CEO David Meyer, CFO Mark Kalvoda, and COO Bryan Knutson, brings extensive industry experience Executive Officers | Name | Age | Position | | :---------- | :-- | :-------------------------- | | David Meyer | 68 | Board Chair and Chief Executive Officer | | Mark Kalvoda | 50 | Chief Financial Officer and Treasurer | | Bryan Knutson | 43 | Chief Operating Officer | - David Meyer (CEO) has over 40 years of industry experience and co-founded Titan Machinery Inc. in 1980[151] - Mark Kalvoda (CFO) became CFO in April 2011, previously Chief Accounting Officer[152] - Bryan Knutson (COO) became COO in August 2017, having started in equipment sales in 2002[153] Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Titan Machinery's common stock trades on Nasdaq, has not paid dividends, and has shown significant growth over five years, outperforming the Russell 2000 Index Market Information and Dividends The company's common stock trades on Nasdaq, with approximately 575 record holders, and no historical dividend payments or recent equity security repurchases - Common stock trades on Nasdaq under symbol 'TITN'[155] - Approximately 575 record holders of common stock as of March 28, 2022[155] - No historical dividend payments; future dividends are at the board's discretion[156] - No unregistered sales or repurchases of equity securities during the fiscal quarter ended January 31, 2022[157][158] Stock Performance Graph Titan Machinery's stock has shown significant cumulative total return over five years, outperforming the Russell 2000 Index but underperforming the S&P 500 Retail Index Cumulative Total Return on $100 Investment (January 31, 2017 - January 31, 2022) | Index | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | | :-------------------- | :----- | :----- | :----- | :----- | :----- | :----- | | Titan Machinery Inc. | $100.00 | $155.61 | $135.70 | $88.41 | $154.24 | $223.03 | | Russell 2000 Index | $100.00 | $115.65 | $110.10 | $118.52 | $152.27 | $148.95 | | S&P 500 Retail Index | $100.00 | $143.84 | $150.77 | $180.19 | $253.16 | $275.65 | - Titan Machinery Inc. stock showed a cumulative return of $223.03 on a $100 investment by January 31, 2022, outperforming the Russell 2000 Index ($148.95) but underperforming the S&P 500 Retail Index ($275.65) over the five-year period from January 31, 2017[160] Item 6. Reserved Item 6 is reserved - Item 6 is reserved[160] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MD&A reviews Titan Machinery's business, external factors, operations, accounting policies, financial metrics, and results, covering liquidity, capital, and future outlook Business Description Titan Machinery operates 109 full-service agricultural and construction equipment stores in the U.S. and Europe, primarily as a leading dealer for CNH Industrial brands, generating revenue from equipment sales, parts, service, and rentals - Titan Machinery operates 109 full-service agricultural and construction equipment stores in the U.S. (74) and Europe (35), primarily as a leading dealer for CNH Industrial brands[163][165] - Four principal revenue sources: new and used equipment sales, parts sales, service, and equipment rental and other activities[163][164] - CNH Industrial products accounted for approximately 73% of new equipment revenue in fiscal 2022[164] Certain External Factors Affecting our Business External factors such as geopolitical conflicts, supply chain disruptions, macroeconomic conditions, seasonality, and inflation significantly impact the company's business performance Geopolitical Conflicts and Pandemic Impact Geopolitical conflicts, particularly in Ukraine, have significantly disrupted international operations, while the COVID-19 pandemic had no material adverse impact on fiscal 2022 results - Russian-Ukraine conflict significantly disrupted Ukrainian operations, leading to temporary store closures and potential adverse effects on International revenues and profits[167] - COVID-19 pandemic had challenges but no material adverse impacts were identified on results of operations for fiscal year ended January 31, 2022, as company's products and services were deemed essential[168][170] Supply Chain, Macroeconomic, and Industry Factors Ongoing supply chain disruptions, macroeconomic conditions, and industry-specific factors like commodity prices and infrastructure spending significantly influence business performance - Increasing supply chain disruptions (production/port delays, labor shortages) have led to price increases and delivery delays, despite proactive ordering[171] - Agriculture business is driven by agricultural commodity prices and net farm income; USDA projected a 4.5% decrease in net farm income for calendar year 2022 compared to 2021[172] - Construction business demand is impacted by public infrastructure spending (roads, highways, sewer, water) and capital spending in natural resource, construction, transportation, agriculture, manufacturing, industrial processing, and utilities industries[173] Seasonality, Supplier Dependence, Credit Market, and Inflation Operating results are impacted by business seasonality, heavy reliance on CNH Industrial, credit market changes, and inflationary pressures on costs - Highly seasonal business causes quarterly results and cash flow fluctuations, with peak activity tied to agricultural seasons (spring planting, fall harvesting) and construction seasons (Q2/Q3)[174] - Operating results are significantly impacted by dependence on CNH Industrial's product offerings, prices, inventory supply, and financing programs[177] - Changes in credit markets affect customer capital expenditures and the company's ability to manage inventory and finance acquisitions[178][179] - Inflationary pressures have increased inventory, supply, and labor costs, which the company has largely offset by increasing selling prices[180] Significant Items Impacting Our Financial Position and Results of Operations Key financial impacts include strategic acquisitions of agriculture dealerships and the divestiture of construction dealerships, affecting segment composition and financial gains - Acquired Jaycox Implement (3 CaseIH agriculture dealerships in MN, IA) for $28.2 million cash on December 1, 2021, expanding Agriculture segment[181][182] - Divested four Construction segment dealerships in Montana and Wyoming on January 24, 2022, resulting in a $5.7 million gain[183] - Acquired HorizonWest Inc. (3 Case IH agriculture dealerships in NE, WY) for $6.8 million cash on May 4, 2020, expanding Agriculture segment[184] Critical Accounting Policies and Use of Estimates This section details critical accounting policies and estimates for revenue recognition, inventories, impairment of long-lived assets, and income taxes, which require significant management judgment Revenue Recognition and Inventories Revenue recognition for equipment sales involves significant judgment in trade-in valuation, while inventories are valued at the lower of cost or net realizable value, influenced by market conditions - Revenue recognition for equipment sales requires significant judgment in estimating the value of trade-in assets, based on estimated selling price, gross profit, and reconditioning costs, which are impacted by changing market values and third-party data availability[186] - New and used equipment inventories are stated at the lower of cost or net realizable value, with estimates influenced by age, condition, hours of use, and market conditions; used equipment prices are more volatile[187] - Parts inventories are valued at the lower of average cost or net realizable value, estimated based on aging and sales history[188] Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment by comparing estimated future cash flows to carrying values, with fair value estimated using unobservable inputs if impairment is indicated - Long-lived assets are reviewed for impairment when carrying value may not be recoverable, comparing estimated future undiscounted cash flows to carrying values[189] - If not recoverable, fair value is estimated using an income approach with unobservable inputs (forecasted net cash flows, remaining useful lives) to determine impairment[191][192] - In fiscal 2022, a $0.4 million impairment charge was recognized related to long-lived assets in the International segment due to operating losses and anticipated future losses[191] Income Taxes Income tax provision requires judgments and estimates, including assessing deferred tax asset realizability and applying valuation allowances, impacting the effective tax rate - Income tax provision requires judgments and estimates, including assessing the realizability of deferred tax assets[193] - Valuation allowances are applied when it is more likely than not that deferred tax assets will not be realized, impacting the effective tax rate[193][196] - As of January 31, 2022, full valuation allowances were warranted for Ukrainian, German, and Luxembourg subsidiaries, while a partial release was recorded for the Bulgarian subsidiary, totaling $6.0 million in valuation allowances for international entities[194][195][437] New Accounting Pronouncements The company is evaluating ASU No. 2020-04 (Reference Rate Reform) for LIBOR transition, with no material impact expected on financial statements - Evaluating ASU No. 2020-04 (Reference Rate Reform) for LIBOR transition; no material impact expected on financial statements[357] Key Financial Metrics Key financial metrics include Inventory Turnover, Same-Store Results, Absorption, and Dollar Utilization, alongside Adjusted EBITDA as a non-GAAP measure for performance evaluation - Key financial metrics include Inventory Turnover, Same-Store Results, Absorption, and Dollar Utilization[200][201][202][203] - Absorption rate (operating expense covered by parts, service, rental gross profit) is a key metric for profitability during economic down cycles[202] - Adjusted EBITDA is a non-GAAP measure used to evaluate overall operating performance, excluding differences in capital structure, income taxes, non-cash charges, and non-ordinary course activities[204] Key Financial Statement Components This section outlines the primary components of the financial statements, including revenue sources, cost of revenue, operating expenses, and various interest expenses - Revenue sources: Equipment, Parts, Service, Rental and other[205] - Cost of Revenue corresponds to each revenue source, including depreciation for rental/trucking equipment[210] - Operating Expenses include sales/marketing, commissions, payroll, insurance, professional fees, property costs, and depreciation (excluding rental/trucking equipment)[207] - Floorplan Interest is a key cost of financing inventory, with 78.8% non-interest bearing as of January 31, 2022[208] - Other Interest Expense covers interest on debt instruments other than floorplan financing, such as real estate and vehicle loans[209] Results of Operations The company achieved significant consolidated revenue and gross profit growth in fiscal 2022, driven by strong same-store sales and improved segment performance Consolidated Results Consolidated revenue and gross profit increased significantly in fiscal 2022, driven by same-store sales growth and improved equipment margins, while operating expenses were leveraged Consolidated Revenue (FY2022 vs. FY2021) | Revenue Source | FY2022 ($K) | FY2021 ($K) | Increase/ (Decrease) ($K) | Percent Change | | :------------- | :---------- | :---------- | :------------------------ | :------------- | | Equipment | 1,291,684 | 1,016,071 | 275,613 | 27.1% | | Parts | 266,916 | 244,676 | 22,240 | 9.1% | | Service | 115,641 | 107,229 | 8,412 | 7.8% | | Rental and other | 37,665 | 43,246 | (5,581) | (12.9)% | | Total Revenue | 1,711,906 | 1,411,222 | 300,684 | 21.3% | - Total revenue increase primarily due to Company-wide same-store sales increase of 23.5% and acquisitions (HorizonWest, Jaycox)[215] Consolidated Gross Profit (FY2022 vs. FY2021) | Gross Profit Source | FY2022 ($K) | FY2021 ($K) | Increase/ (Decrease) ($K) | Percent Change | | :------------------ | :---------- | :---------- | :------------------------ | :------------- | | Equipment | 161,479 | 104,901 | 56,578 | 53.9% | | Parts | 80,592 | 72,803 | 7,789 | 10.7% | | Service | 76,870 | 70,537 | 6,333 | 9.0% | | Rental and other | 13,783 | 13,121 | 662 | 5.0% | | Total Gross Profit | 332,724 | 261,362 | 71,362 | 27.3% | Consolidated Gross Profit Margin (FY2022 vs. FY2021) | Gross Profit Margin | FY2022 (%) | FY2021 (%) | Change (%) | Percent Change | | :------------------ | :--------- | :--------- | :--------- | :------------- | | Equipment | 12.5% | 10.3% | 2.2% | 21.4% | | Parts | 30.2% | 29.8% | 0.4% | 1.3% | | Service | 66.5% | 65.8% | 0.7% | 1.1% | | Rental and other | 36.6% | 30.3% | 6.3% | 20.8% | | Total Gross Profit Margin | 19.4% | 18.5% | 0.9% | 4.9% | - Overall gross profit margin increased to 19.4% (from 18.5%) due to stronger equipment margins and a $6.4 million increase in manufacturer incentive programs[217] - Company-wide absorption rate improved to 84.6% in fiscal 2022 (from 77.7% in fiscal 2021), positively impacted by a $5.7 million gain on divestiture of four Construction segment stores[218] Operating Expenses (FY2022 vs. FY2021) | Metric | FY2022 ($K) | FY2021 ($K) | Increase/ (Decrease) ($K) | Percent Change | | :-------------------------------- | :---------- | :---------- | :------------------------ | :------------- | | Operating Expenses | 241,044 | 220,774 | 20,270 | 9.2% | | Operating Expenses as % of Revenue | 14.1% | 15.6% | (1.5)% | (9.6)% | - Operating expenses increased $20.3 million but decreased as a percentage of revenue to 14.1% due to increased total revenue leveraging fixed costs, partially offset by a $5.7 million gain on divestiture[219] Impairment Charges (FY2022 vs. FY2021) | Impairment Type | FY2022 ($K) | FY2021 ($K) | Decrease ($K) | Percent Change | | :-------------------------------- | :---------- | :---------- | :------------ | :------------- | | Goodwill | — | 1,453 | (1,453) | n/m | | Intangible and Long-Lived Assets | 1,498 | 1,727 | (229) | (13.3)% | - No goodwill impairment in fiscal 2022; $1.5 million impairment for intangible/long-lived assets (primarily International segment), down from $3.2 million in fiscal 2021[220] Other Income (Expense) (FY2022 vs. FY2021) | Item | FY2022 ($K) | FY2021 ($K) | Increase/ (Decrease) ($K) | Percent Change | | :-------------------------- | :---------- | :---------- | :------------------------ | :------------- | | Interest and other income (expense) | 2,431 | 527 | 1,904 | n/m | | Floorplan interest expense | (1,175) | (3,339) | (2,164) | (64.8)% | | Other interest expense | (4,537) | (3,843) | 694 | 18.1% | - Increase in interest and other income due to foreign currency fluctuations (primarily Ukrainian currency). Decrease in floorplan interest expense due to lower rates and borrowings. Increase in other interest expense due to increased long-term debt from real estate purchases[221] Provision for Income Taxes (FY2022 vs. FY2021) | Metric | FY2022 ($K) | FY2021 ($K) | Increase ($K) | Percent Change | | :------------------------ | :---------- | :---------- | :------------ | :------------- | | Provision for Income Taxes | 20,854 | 11,397 | 9,457 | 83.0% | | Effective Tax Rate | 24.0% | 37.1% | (13.1)% | (35.3)% | - Effective tax rate decreased from 37.1% to 24.0% due to changes in valuation allowances for deferred tax assets (partial release for Bulgaria, full allowance for Germany/Luxembourg)[222] Segment Results All segments, Agriculture, Construction, and International, reported increased revenue and improved income before taxes in fiscal 2022, driven by strong demand and strategic actions Segment Revenue (FY2022 vs. FY2021) | Segment | FY2022 ($K) | FY2021 ($K) | Increase/ (Decrease) ($K) | Percent Change | | :------------ | :---------- | :---------- | :------------------------ | :------------- | | Agriculture | 1,076,751 | 886,485 | 190,266 | 21.5% | | Construction | 317,164 | 305,745 | 11,419 | 3.7% | | International | 317,991 | 218,992 | 98,999 | 45.2% | | Total | 1,711,906 | 1,411,222 | 300,684 | 21.3% | Segment Income (Loss) Before Income Taxes (FY2022 vs. FY2021) | Segment | FY2022 ($K) | FY2021 ($K) | Increase/ (Decrease) ($K) | Percent Change | | :------------ | :---------- | :---------- | :------------------------ | :------------- | | Agriculture | 60,567 | 34,422 | 26,145 | 76.0% | | Construction | 15,543 | 186 | 15,357 | n/m | | International | 12,552 | (6,025) | 18,577 | n/m | | Segment Total | 88,662 | 28,583 | 60,079 | 210.2% | - Agriculture segment revenue increased 21.5% (19.3% same-store sales) due to higher equipment demand from commodity prices and net farm income; income before taxes improved 76.0% from stronger equipment margins and lower floorplan interest[226][227] - Construction segment revenue increased 3.7% (14.8% same-store sales), with income before taxes improving significantly to $15.5 million (from $0.2 million) due to improved equipment margins, lower interest, and a $5.7 million divestiture gain[228][229] - International segment revenue increased 45.2% due to higher commodity prices and favorable growing conditions; income before taxes turned profitable at $12.6 million (from a $6.0 million loss) driven by increased equipment sales and gross profit margin, despite $1.5 million in impairment charges[230][231] Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted Net Income, Adjusted Diluted EPS, and Adjusted EBITDA to evaluate performance, adjusting for non-recurring items - Uses non-GAAP measures (Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA) to evaluate financial performance and comparability, adjusting for ERP transition costs, impairment charges, and Ukraine foreign currency remeasurement[234] - Adjusted EBITDA is calculated as net income (loss) adjusted for net interest (excluding floorplan interest), income taxes, depreciation, amortization, and other non-GAAP reconciliation items[234] - Revised presentation of Adjusted Net Income and Adjusted Diluted EPS in Q3 fiscal 2022 to exclude income tax valuation allowance adjustments, aligning with SEC guidance[235] Adjusted Net Income and Diluted EPS (FY2022 vs. FY2021) | Metric | FY2022 ($K) | FY2021 ($K) | | :------------------------ | :---------- | :---------- | | Net Income | 66,047 | 19,356 | | Total Adjustments | 1,235 | 5,117 | | Adjusted Net Income | 67,282 | 24,473 | | Diluted EPS | 2.92 | 0.86 | | Total Adjustments (per share) | 0.06 | 0.23 | | Adjusted Diluted EPS | 2.98 | 1.09 | Adjusted EBITDA (FY2022 vs. FY2021) | Metric | FY2022 ($K) | FY2021 ($K) | | :-------------------------- | :---------- | :---------- | | Net Income | 66,047 | 19,356 | | Interest expense, net of interest income | 4,208 | 3,574 | | Provision for income taxes | 20,854 | 11,397 | | Depreciation and amortization | 22,139 | 23,701 | | EBITDA | 113,248 | 58,028 | | Total Adjustments | 1,235 | 7,344 | | Adjusted EBITDA | 114,483 | 65,372 | Liquidity and Capital Resources Primary liquidity sources include cash, operations, and floorplan financing, with capital expected to be adequate for the next 12 months, though acquisitions may require additional funding Sources of Liquidity and Floorplan Financing Liquidity is primarily derived from cash, operations, and substantial floorplan payable lines of credit, with improved inventory turnover and equity in equipment inventory - Primary liquidity sources: cash reserves, cash from operations, and borrowings under floorplan payable and other credit facilities[239] - Total floorplan payable lines of credit: $752.0 million as of January 31, 2022, including $450.0 million from CNH Industrial Capital, $185.0 million from Bank Syndicate, and $50.0 million from DLL Finance[241] - Equipment inventory turnover increased to 3.4 times in fiscal 2022 (from 2.0 times in fiscal 2021) due to increased sales volume and decreased average inventory[244] - Equity in equipment inventory increased to 58.2% as of January 31, 2022 (from 52.1% as of January 31, 2021), driven by high cash generation applied against interest-bearing floorplan payables[244] Long-Term Debt Facilities and Adequacy of Capital The company finances real estate with long-term debt and expects current liquidity to meet needs for the next 12 months, with future acquisitions potentially requiring additional financing - Had a $65.0 million Revolver Loan under the Bank Syndicate Agreement for working capital, with zero outstanding balance as of January 31, 2022[245] - Finances real estate purchases with long-term debt and may use it for rental fleet and capital expenditures[245] - Current cash flow from operations, available cash, and existing credit facilities are expected to meet liquidity needs for at least the next 12 months[247] - Future acquisitions may require additional equity or debt financing, which could increase demands on cash flow and be subject to restrictive covenants[249] Cash Flow Operating cash flow decreased due to consistent inventory balances, while investing cash used increased for rental fleet, property, and acquisitions, and financing cash used decreased Net Cash Flow (FY2022 vs. FY2021) | Activity | FY2022 ($K) | FY2021 ($K) | Change ($K) | | :-------------------------- | :---------- | :---------- | :---------- | | Operating Activities | 158,916 | 172,996 | (14,080) | | Investing Activities | (55,198) | (20,297) | (34,901) | | Financing Activities | (35,335) | (117,939) | 82,604 | - Decrease in operating cash flow due to consistent inventory/manufacturer floorplan balances in FY2022 vs. inventory reduction in FY2021[251] - Increase in investing cash used due to higher rental fleet purchases ($14.6M vs $7.1M), property/equipment purchases ($23.0M vs $13.0M), and acquisition consideration ($33.6M vs $6.8M)[248][253] - Decrease in financing cash used due to decreased non-manufacturer floorplan payables[254] Future Cash Requirements Future cash requirements include significant expenditures for property, equipment, rental fleet, and ongoing ERP system implementation expenses - Expected cash expenditures for property and equipment (excluding rental fleet) for fiscal 2023: approximately $25.0 million[248] - Expected cash expenditures for rental fleet for fiscal 2023: approximately $10.0 million[248] - ERP-related expenses are estimated at $4.4 million for fiscal 2023 and $9.1 million for fiscal years 2024-2026[255] Information Regarding Forward-Looking Statements The report contains forward-looking statements based on management's beliefs and assumptions, which are subject to known and unknown risks and uncertainties - Report contains forward-looking statements regarding growth strategies, market demand, supplier reliance, competitive advantages, government policies, property plans, sales/marketing, dividends, financial metrics, geopolitical impacts, rental operations, employee relations, market conditions, credit agreements, foreign exchange rates, capital expenditures, and liquidity[257][258][261] - Statements are based on management's beliefs and assumptions, but involve known and unknown risks and uncertainties that could cause actual results to differ materially[257][260] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates and foreign currency, with the Russian-Ukraine conflict posing significant uncertainty for Ukrainian assets - Exposed to interest rate risk from variable rate debt; a one percentage point increase would decrease pre-tax earnings and cash flow by approximately $0.3 million[267] - Exposed to foreign currency exchange rate risk from foreign operations, managed through derivative financial instruments (foreign exchange forward contracts) and natural hedging[268] - Russian-Ukraine conflict significantly intensifies foreign currency risk, particularly for Ukrainian hryvnia (UAH) assets ($1.7 million net monetary assets as of Jan 31, 2022), limiting ability to manage net monetary asset position and risking material impact from devaluations[268] PART III Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements, auditor reports, and detailed notes on business activities, accounting policies, and financial components Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements and internal control, highlighting the valuation of used equipment inventories as a critical audit matter - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements for the period ended January 31, 2022, stating they present fairly in conformity with GAAP[275] - Also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of January 31, 2022[276] - Critical Audit Matter: Valuation of Used Equipment Inventories, due to significant management judgments in determining initial fair value and subsequent net realizable value[280][281] Report of Independent Registered Public Accounting Firm on Internal Control Deloitte & Touche LLP issued an unqualified opinion on the effectiveness of internal control over financial reporting as of January 31, 2022, based on COSO criteria - Deloitte & Touche LLP issued an unqualified opinion on the effectiveness of internal control over financial reporting as of January 31, 2022, based on COSO criteria[285] Consolidated Financial Statements This section includes the Consolidated Balance Sheets, Statements of Operations, Comprehensive Income, Stockholders' Equity, and Cash Flows for the past three fiscal years - Includes Consolidated Balance Sheets, Statements of Operations, Comprehensive Income, Stockholders' Equity, and Cash Flows for fiscal years ended January 31, 2022, 2021, and 2020[273] Notes to Consolidated Financial Statements This section provides detailed notes on business activities, significant accounting policies, and various financial statement components, including the impact of the Russia-Ukraine conflict Business Activity and Significant Accounting Policies The company's business involves retail sales, service, and rental of agricultural and construction machinery, with operations significantly impacted by seasonality, CNH Industrial reliance, and the Russia-Ukraine conflict - Nature of business: retail sale, service, and rental of agricultural and construction machinery in the U.S. and Europe[304] - Russia/Ukraine conflict significantly intensified on Feb 24, 2022, interrupting Ukrainian operations (10 locations temporarily closed); total assets in Ukraine were $32.7 million as of Jan 31, 2022, with $24.8 million identified as higher risk assets[305][306][485] - COVID-19 pandemic had challenges but no material adverse impacts were identified on results of operations for fiscal year ended January 31, 2022[310] - Business is highly seasonal, with quarterly results and cash flows fluctuating based on agricultural and construction busy seasons[311] - Heavy reliance on CNH Industrial for new equipment, rental equipment, and parts, with dealership authorizations and floorplan facilities subject to guidelines and covenants[319][320] - Revenue recognition policies detailed for equipment (point in time, trade-in valuation judgment), parts (point in time), service (over time, right to invoice), and rental/other (straight-line for rental, point in time for delivery/pick-up)[322][323][324][325][326] - New and used equipment inventories are stated at the lower of cost or net realizable value, with estimates considering age, condition, hours of use, and market conditions[332] - Goodwill and indefinite-lived intangible assets (distribution rights) are tested for impairment annually; definite-lived intangibles (customer relationships, covenants not to compete) are amortized[334][336] - Long-lived assets are reviewed for impairment when carrying value may not be recoverable, leading to a $0.4 million impairment charge in the International segment in FY2022[339][341] - Uses asset and liability method for income taxes, with deferred tax assets reduced by valuation allowances when realizability is uncertain; $6.0 million in valuation allowances for international entities as of Jan 31, 2022[347][194] Earnings Per Share Earnings per share are calculated using the two-class method, with detailed figures provided for basic and diluted EPS over the past three fiscal years - Uses the two-class method for basic and diluted EPS, treating unvested restricted stock awards as participating securities[358] Earnings Per Share (FY2022, FY2021, FY2020) | Metric | FY2022 | FY2021 | FY2020 | | :------------------------------------------ | :----- | :----- | :----- | | Net income attributable to common stockholders ($K) | 65,070 | 19,031 | 13,732 | | Basic weighted-average common shares outstanding (K) | 22,238 | 22,100 | 21,946 | | Diluted weighted-average common shares outstanding (K) | 22,248 | 22,104 | 21,953 | | Basic EPS | $2.93 | $0.86 | $0.63 | | Diluted EPS | $2.92 | $0.86 | $0.63 | Revenue Revenue is disaggregated by segment and source, with a significant increase in deferred revenue primarily due to increased equipment sales activity and longer lead times Revenue by Segment and Source (FY2022) | Revenue Source | Agriculture ($K) | Construction ($K) | International ($K) | Total ($K) | | :------------------------ | :--------------- | :---------------- | :----------------- | :--------- | | Equipment | 823,590 | 209,318 | 258,776 | 1,291,684 | | Parts | 166,623 | 50,449 | 49,844 | 266,916 | | Service | 81,506 | 26,401 | 7,734 | 115,641 | | Other | 3,006 | 1,913 | 517 | 5,436 | | Rental | 2,026 | 29,083 | 1,120 | 32,229 | | Total Revenues | 1,076,751 | 317,164 | 317,991 | 1,711,906 | Deferred Revenue from Contracts with Customers | Date | Amount ($K) | | :---------------- | :---------- | | January 31, 2022 | 132,193 | | January 31, 2021 | 57,731 | - Increase in deferred revenue primarily due to increased equipment sales activity and longer lead times on new equipment delivery from manufacturers[364] Receivables Receivables are presented net of an allowance for expected credit losses, with trade receivables from finance companies and manufacturers historically showing no credit losses - Allowance for expected credit losses provided on non-rental receivables, determined by applying historical credit loss percentages to aging categories[366][367] - Trade receivables from finance companies and manufacturers have not historically resulted in credit losses[368] Receivables, Net of Allowance for Expected Credit Losses (as of January 31) | Category | 2022 ($K) | 2021 ($K) | | :------------------------------------------ | :---------- | :---------- | | Trade and unbilled receivables from customers | 45,191 | 41,579 | | Trade receivables due from finance companies | 17,937 | 14,133 | | Trade and unbilled receivables from rental contracts | 3,124 | 2,910 | | Other receivables (from manufacturers, etc.) | 28,035 | 10,487 | | Total Receivables, net | 94,287 | 69,109 | Allowance for Credit Losses on Trade and Unbilled Accounts Receivable (by Segment) | Segment | Balance at Jan 31, 2021 ($K) | Current Expected Credit Loss Provision ($K) | Write-offs, Net of Recoveries ($K) | Balance at Jan 31, 2022 ($K) | | :------------ | :--------------------------- | :---------------------------------------- | :-------------------------------- | :--------------------------- | | Agriculture | 229 | 137 | 166 | 244 | | Construction | 1,074 | 186 | 1,076 | 193 | | International | 1,691 | (8) | 111 | 1,542 | | Total | 2,994 | 315 | 1,353 | 1,979 | Inventories Inventories comprise new equipment, used equipment, parts and attachments, and work in process, totaling $421.8 million as of January 31, 2022 Inventories (as of January 31) | Category | 2022 ($K) | 2021 ($K) | | :------------------ | :---------- | :---------- | | New equipment | 195,775 | 206,683 | | Used equipment | 128,047 | 131,369 | | Parts and attachments | 95,890 | 78,982 | | Work in process | 2,046 | 1,424 | | Total | 421,758 | 418,458 | Property and Equipment Property and equipment, net, increased to $178.2 million, including rental fleet, machinery, vehicles, furnit