Titan Machinery Inc, a network of full-service agricultural and construction equipment stores, announced it has entered into definitive purchase agreements to acquire Heartland Ag Systems, Heartland Solutions and related affiliates ("Heartland"), the largest Case IH Application Equipment distributorship in North America providing application-focused solutions for commercial applicators, for an aggregate $110 million, subject to final working capital and other closing adjustments (the "Transaction"). The Transaction consideration will be comprised predominantly of balance sheet cash. In the full year period ended December 31, 2021, Heartland generated revenue of $213.9 million and EBITSA of $15.3 million.
Heartland Ag Systems traces its roots to 1966 and is the largest Case IH Application Equipment distributorship in North America and one of the leading national distributors for sprayer parts and accessories. Heartland has exclusive distribution agreements across 17 midwestern and northwestern states, supported by 12 retail stores, six of which are within Titan Machinery's existing Agriculture footprint, as well as Agriculture and related commercial application equipment manufacturing at their Hutchinson, MN headquarters. Heartland is well diversified with a strong parts & service business that represents approximately 30% of full year 2021 revenues and generated pre-tax margins of 4.2%, presenting a similar profile to that of Titan Machinery's existing business.
David Meyer, Titan Machinery's chairman and CEO, stated, "We are proud to announce our definitive agreement to acquire Heartland Ag Systems today. This transaction is significant for Titan Machinery both in size and strategic fit. Most importantly, this gives Titan Machinery access to the full product line of Case IH application equipment, including self-propelled sprayers and fertilizer applications, along with incremental sales opportunities to package with tractors, tillage and construction equipment to the commercial application customer. The increased parts, service and technical capabilities we bring to the commercial application customers is our highly productive core Agriculture footprint, combined with the long-term business relationships Heartland has developed with the commercial application customers, will be a win/win for Titan Machinery, Heartland, Case IH and the hundreds of commercial application providers in our core markets."
He added, "Titan Machinery is uniquely able to integrate these two industry leading businesses, creating a complete distribution model of this scale - covering both the farmers and commercial applicator - with our expansive footprint across the Upper Midwest region, high-level of customer service and commitment to operating excellence. We see immediate revenue synergies to be captured in the first full year of operation, and we expect to generate additional growth and margin expansion as we enhance our combined network. We are excited to add Heartland's experienced leadership team and look forward to a bright future together as we welcome the entire Heartland organization to the Titan Machinery family."
Strategic and Financial Highlights
Expanded market opportunity through access to commercial application market - Strategically provides Titan Machinery access to the Case IH full-line of application equipment product line (i.e.: self-propelled sprayers, fertilizer applicators), enhancing competitiveness with the commercial application customer.
Significant value driver within Titan Machinery's existing footprint - Distribution integration creates substantial revenue synergies for Titan Machinery in first full fiscal year of ownership, estimated to be approximately $60 million of run-rate sales, through equipment packaging programs (ie.: self-propelled sprayer with tractors, tillage and construction/material handling equipment). The Company estimates that this will translate to approximately $0.13 of diluted earnings per share.
Parts & Service growth opportunity provides additional driver of same-store sales growth - Customer service and distribution is maximized at the local level. Titan Machinery's highly synergistic footprint in the Upper Midwest instantly improves access to parts and service for the commercial application customers and is expected to provide additional growth beyond the formal synergies outlined today.
Accretive transaction with long-term margin expansion opportunity - Including the aforementioned synergies along with Heartland's base calendar 2021 business, the Transaction would equate to approximately $274 million in revenue, $0.43 in diluted earnings per share, and $19.5 million in EBITDA. Beyond this, the Company anticipates additional long-term pre-tax margin expansion opportunity through leveraging Titan's existing infrastructure, optimizing existing operations and growing the Parts & Service business.
Enhances Titan Machinery's M&A strategy with new commercial capabilities - Titan Machinery's full line dealership M&A strategy is enhanced in new Titan Machinery markets with Case IH application equipment only dealer agreements. Collaborative efforts within Case IH and select Case IH dealer groups outside of Titan's core footprint for joint retail transactions (sprayers and tractors.) Over time, the Company expects ongoing distribution optimization within the expanded footprint as it complies with the terms of its forthcoming Case IH application equipment dealer agreements.
Additional Transaction Details:
The definitive agreement to acquire Heartland contemplates an acquisition price of approximately $110 million, subject to final working capital and other closing adjustments, with the amount comprised primarily of cash from the Company's balance sheet.
It is anticipated that all of Heartland's 340 employees will join Titan Machinery. Heartland's management team is expected to remain in place throughout and following the integration.
The Transaction is subject to customary closing conditions and is expected to close in August of 2022.
Fiscal 2023 Modeling Assumptions:
The following are the Company's current expectations for fiscal 2023 modeling assumptions, which reflect the partial year accretion of the Transaction. Note the seasonality of the commercial application business, which tends to be heavier in the first fiscal half to align with the spring planting and summer application seasons. There are no changes to the Company's outlook or underlying assumptions beyond the expected accretion from the Transaction.
(1) Includes the full year impact of the Jaycox acquisition, which closed in December 2021, the partial year impact of the Mark's Machinery acquisition, which closed in April 2022, and the expected partial year impact of the Heartland acquisition, assuming an August closing.
(2) Includes the full year impact of the Montana and Wyoming divestiture in January 2022 and the partial year impact of the North Dakota divestiture in March 2022. Adjusting full year fiscal 2022 revenue by approximately $73 million, representing the fiscal 2022 revenue of these divested stores, results in a same-store sales assumption of up approximately 10-15%.
(3) Includes a reduction in revenue of approximately 50% from our Ukraine subsidiary compared to fiscal 2022.
(4) Includes the expected partial year impact of the Heartland acquisition, and an estimated loss of approximately $0.15 per share for our Ukraine subsidiary.
Conference Call and Supplement Presentation Information:
The Company will host a conference call and audio webcast today at 7:30 a.m. Central time (8:30 a.m. Eastern time). Investors interested in participating in the live call can dial (877) 704-4453 from the U.S. International callers can dial (201) 389-0920. A telephone replay will be available approximately two hours after the call concludes and will be available through Monday, July 25, 2022, by dialing (844) 512-2921 from the U.S., or (412) 317-6671 from international locations, and entering confirmation code 13731160. An archive of the audio webcast will be available on the Company's website under Investor Relations at www.titanmachinery.com for 30 days following the audio webcast.
The Company has produced a supplemental presentation that will accompany the prepared remarks on the conference call is available on the Company's website under Investor Relations at www.titanmachinery.com.
Non-GAAP Financial Measures:
Within this release, the Company refers to certain adjusted financial measures, which have directly comparable GAAP financial measures as identified in this release. The Company believes that these non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide more information to assist investors in evaluating current period performance and in assessing future performance. For these reasons, internal management reporting also includes non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, and not superior to or as a substitute for, the GAAP financial measures presented in this release and the Company's financial statements and other publicly filed reports. Non-GAAP financial measures presented in this release may not be comparable to similarly titled measures used by other companies. Investors are encouraged to review the reconciliations of adjusted financial measures used in this release to their most directly comparable GAAP financial measures. These reconciliations are attached to this release. The table included in the Non-GAAP Reconciliations section reconcile EBITDA to net income.