Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 31, 2009

Commission File No. 001-33866

 

TITAN MACHINERY INC.

(Exact name of registrant as specified in its charter)

 

 

4876 Rocking Horse Circle
Fargo, ND 58104-6049

(Address of Principal Executive Offices)

 

Registrant’s telephone number (701) 356-0130

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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  x    NO  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).           YES  o    NO  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o		Accelerated filer  x
Non-accelerated filer  o		Smaller reporting company  o
(Do not check if smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x

 

The number of shares outstanding of the registrant’s common stock as of December 1, 2009 was: Common Stock, $0.00001 par value, 17,773,534 shares.

 

 

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TITAN MACHINERY INC.

QUARTERLY REPORT ON FORM 10-Q

 

Table of Contents

 

			Page No.
PART I.	FINANCIAL INFORMATION		1
ITEM 1.		FINANCIAL STATEMENTS	1
		Consolidated Balance Sheets as of October 31, 2009 and January 31, 2009	1
		Consolidated Statements of Operations for the three and nine months ended October 31, 2009 and 2008	2
		Consolidated Statements of Cash Flows for the nine months ended October 31, 2009 and 2008	3
		Notes to Consolidated Financial Statements	5
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	21
ITEM 4.		CONTROLS AND PROCEDURES	21
PART II.	OTHER INFORMATION		22
ITEM 1.		LEGAL PROCEEDINGS	22
ITEM 1A.		RISK FACTORS	22
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	22
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES	22
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	22
ITEM 5.		OTHER INFORMATION	22
ITEM 6.		EXHIBITS	22
Signatures			23
Exhibit Index			24

 

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PART I. – FINANCIAL INFORMATION

 

ITEM 1.                  FINANCIAL STATEMENTS

 

TITAN MACHINERY INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

		October 31,			January 31,
		2009			2009
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	82,376		$	41,047
U.S. treasury bills		—			44,994
Total cash, cash equivalents and U.S. treasury bills		82,376			86,041
Receivables, net		23,593			19,627
Inventories		355,196			241,094
Prepaid expenses		927			532
Income taxes receivable		—			1,433
Deferred income taxes		2,154			1,426
Total current assets		464,246			350,153
INTANGIBLES AND OTHER ASSETS
Noncurrent parts inventories		1,946			1,509
Goodwill		13,679			12,464
Intangible assets, net of accumulated amortization		312			366
Other		563			487
		16,500			14,826
PROPERTY AND EQUIPMENT, net of accumulated depreciation		45,741			45,269
		$	526,487		$	410,248
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	14,596		$	18,652
Floorplan notes payable		261,905			166,481
Current maturities of long-term debt and short-term advances		9,865			7,623
Customer deposits		9,937			15,158
Accrued expenses		10,373			8,308
Income taxes payable		1,584			—
Total current liabilities		308,260			216,222
LONG-TERM LIABILITIES
Long-term debt, less current maturities		23,192			14,810
Deferred income taxes		4,917			3,503
Other long-term liabilities		3,214			1,946
		31,323			20,259
STOCKHOLDERS’ EQUITY
Common stock, par value $.00001 per share, authorized - 25,000 shares; issued and outstanding - 17,770 at October 31, 2009 and 17,657 at January 31, 2009		—			—
Additional paid-in-capital		138,518			137,755
Retained earnings		48,386			36,012
		186,904			173,767
		$	526,487		$	410,248

 

See Notes to Consolidated Financial Statements

 

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TITAN MACHINERY INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

 

		Three Months Ended						Nine Months Ended
		October 31,						October 31,
		2009			2008			2009			2008
REVENUE
Equipment		$	173,367		$	167,950		$	439,374		$	386,705
Parts		32,961			29,794			91,813			74,910
Service		15,854			12,894			44,036			32,626
Other, including trucking and rental		4,836			3,322			11,288			7,207
TOTAL REVENUE		227,018			213,960			586,511			501,448
COST OF REVENUE
Equipment		155,653			148,678			393,405			343,582
Parts		22,291			20,638			63,767			53,121
Service		5,658			5,019			15,844			12,344
Other, including trucking and rental		3,833			2,279			9,388			5,027
TOTAL COST OF REVENUE		187,435			176,614			482,404			414,074
GROSS PROFIT		39,583			37,346			104,107			87,374
OPERATING EXPENSES		27,792			23,153			79,159			60,805
INCOME FROM OPERATIONS		11,791			14,193			24,948			26,569
OTHER INCOME (EXPENSE)
Interest and other income		180			496			531			1,257
Floorplan interest expense		(1,798		)	(783		)	(3,461		)	(2,082		)
Interest expense other		(454		)	(46		)	(1,045		)	(589		)
INCOME BEFORE INCOME TAXES		9,719			13,860			20,973			25,155
PROVISION FOR INCOME TAXES		(3,986		)	(5,675		)	(8,599		)	(10,250		)
NET INCOME		$	5,733		$	8,185		$	12,374		$	14,905
EARNINGS PER SHARE - NOTE 1
EARNINGS PER SHARE - BASIC		$	0.33		$	0.47		$	0.70		$	0.94
EARNINGS PER SHARE - DILUTED		$	0.32		$	0.45		$	0.69		$	0.91
WEIGHTED AVERAGE SHARES - BASIC		17,604			17,553			17,586			15,864
WEIGHTED AVERAGE SHARES - DILUTED		18,013			18,041			17,958			16,374

 

See Notes to Consolidated Financial Statements

 

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TITAN MACHINERY INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

		Nine Months Ended October 31,
		2009			2008
OPERATING ACTIVITIES
Net income		$	12,374		$	14,905
Adjustments to reconcile net income to net cash from operations
Depreciation and amortization		5,888			2,939
Deferred income taxes		680			68
Stock-based compensation expense		720			488
Other		(28		)	(92		)
Changes in assets and liabilities, net of purchase of equipment dealerships assets and assumption of liabilities
Receivables, prepaid expenses and other assets		(4,122		)	2,451
Inventories		(49,981		)	(14,066		)
Floorplan notes payable		5,144			4,637
Accounts payable, customer deposits, accrued expenses and other long-term liabilities		(6,764		)	(1,303		)
Income taxes		3,017			3,761
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES		(33,072		)	13,788
INVESTING ACTIVITIES
Net change in U.S. treasury bills		44,994			(49,904		)
Property and equipment purchases		(11,066		)	(6,072		)
Net proceeds from sale of equipment		338			288
Purchase of equipment dealerships, net of cash purchased		(3,737		)	(24,275		)
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES		30,529			(79,963		)
FINANCING ACTIVITIES
Proceeds from follow-on offering of common stock net of underwriting discount of $4,389 and other direct costs of $396		—			78,815
Net change in non-manufacturer floorplan notes payable		33,664			3,603
Short-term advances related to customer contracts in transit		1,329			—
Proceeds from long-term debt borrowings		20,570			691
Principal payments on long-term debt and subordinated debentures		(11,734		)	(17,916		)
Other		43			40
NET CASH PROVIDED BY FINANCING ACTIVITIES		43,872			65,233
NET CHANGE IN CASH AND CASH EQUIVALENTS		41,329			(942		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		41,047			42,803
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	82,376		$	41,861

 

See Notes to Consolidated Financial Statements

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Page – 2

(in thousands)

 

		Nine Months Ended October 31,
		2009			2008
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period
Income taxes, net of refunds		$	5,710		$	6,178
Interest		$	3,763		$	2,763
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Property and equipment purchased with long-term debt		$	1,772		$	—
Net transfer of equipment from fixed assets to inventories		$	7,684		$	—
Net transfer of financing from long-term debt to floorplan notes payable		$	3,180		$	—
Acquisition of equipment dealership assets in exchange for cash and assumption of liabilities including purchase accounting adjustments on prior acquisitions
Receivables		$	(239	)	$	(1,255	)
Inventories		(6,391		)	(25,644		)
Deferred income taxes, net		133			328
Property and equipment		(851		)	(6,917		)
Intangible assets		—			(250		)
Goodwill		(1,215		)	(1,895		)
Accounts payable		(247		)	350
Floorplan notes payable		2,443			7,476
Customer deposits		205			391
Accrued expenses		188			43
Income taxes payable		(127		)	242
Long-term debt		1,867			735
Non-cash consideration: other long-term liabilities		497			2,121
Cash paid for dealerships, net of cash purchased and adjustments on prior acquisitions		$	(3,737	)	$	(24,275	)

 

See Notes to Consolidated Financial Statements

 

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TITAN MACHINERY INC.

NOTES TO 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 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. Operating results for the nine-month period ended October 31, 2009 are not necessarily indicative of the results that may be expected for the year ending January 31, 2010. The information contained in the balance sheet as of January 31, 2009 was derived from the Company’s audited financial statements for the year then ended. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K for the fiscal year ended January 31, 2009 as filed with the SEC.

 

Nature of Business

 

Titan Machinery Inc. (the “Company”) is engaged in the retail sale, service and rental of agricultural and construction machinery through stores in North Dakota, South Dakota, Minnesota, Iowa, Nebraska, Montana and Wyoming.

 

Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Transportation Solutions, LLC. All significant accounts, transactions and profits between the consolidated companies have been eliminated in consolidation.

 

Fair Value of Financial Instruments

 

The carrying amount of cash, receivables, payables, short-term debt and other current liabilities approximates fair value because of the short maturity and/or frequent repricing of those instruments. Based upon current borrowing rates with similar maturities, the carrying value of the long-term debt approximates the fair value as of October 31, 2009 and January 31, 2009.

 

Recent Accounting Guidance

 

In June 2009, the FASB issued authoritative guidance on the FASB Accounting Standards Codification (“ASC” or “Codification”) and the hierarchy of generally accepted accounting principles, codified in ASC 105, Generally Accepted Accounting Principles. This guidance established the Codification as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, excluding guidance from the SEC, was superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. The Codification does not change GAAP, but instead introduced a new structure that combined all authoritative standards into a comprehensive, topically organized online database. The Codification was effective for interim or annual periods ending after September 15, 2009, and impacted the Company’s financial statement disclosures beginning with the quarter ending October 31, 2009 as all future references to authoritative accounting literature will be referenced in accordance with the Codification.

 

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There will be no changes to the content of the Company’s consolidated financial statements or disclosures as a result of implementing the Codification.

 

In October 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on revenue recognition, codified in ASC 605-25, Revenue Recognition. This guidance modifies the fair value requirements of revenue recognition on multiple element arrangements by allowing the use of the “best estimate of selling price” in addition to vendor specific objective evidence and third-party evidence for determining the selling price of a deliverable. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimates. In addition, the guidance eliminates the residual method of allocation and significantly expands the disclosure requirements for such arrangements. This guidance is effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company is in the process of determining the impact that this guidance will have on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities (“VIEs”), codified in ASC 810, Consolidation. This guidance eliminates the exemption for qualifying special-purpose entities, amends the approach companies use to identify the VIEs for which they are deemed to be the primary beneficiary and are required to consolidate, and requires additional disclosure of an entity’s involvement with a VIE. The guidance requires companies to perform ongoing reassessments of whether it is the primary beneficiary of a VIE. This assessment no longer includes the quantitative-based assessment, and instead requires a qualitative assessment of whether a company has the power to direct the VIE’s activities that most significantly impact the company’s economic performance and whether the entity has the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. This guidance is effective for fiscal years beginning after November 15, 2009. The Company is in the process of determining the impact it will have on the Company’s consolidated financial statements.

 

In May 2009, the FASB issued authoritative guidance on subsequent events, codified in ASC 855, Subsequent Events. This guidance established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted the guidance as of July 31, 2009. Its adoption did not have a material effect on the Company’s consolidated financial statements.

 

In April 2009, the FASB issued authoritative guidance on the accounting and disclosure of assets acquired and liabilities assumed in a business combination that arise from contingencies, and subsequent accounting for these contingencies. This guidance was codified in ASC 805, Business Combinations, and will be effective for the Company on February 1, 2010. Its adoption is not expected to have a material effect on the Company’s consolidated financial statements based on the nature of the assets acquired and liabilities assumed in our business combinations.

 

In April 2009, the FASB issued authoritative guidance that required disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, in addition to inclusion in annual financial statements. This guidance was codified in ASC 820, Fair Value Measurements and Disclosures. The Company adopted this FSP as of July 31, 2009. Its adoption did not have a material effect on the Company’s consolidated financial statements.

 

In February 2008, the FASB issued authoritative guidance on fair value measurements, codified in ASC 820, Fair Value Measurements and Disclosures. This guidance permitted a one year deferral of the application of fair value measurements for all non-financial assets and non-financial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted fair value measurements for non-financial assets and non-financial liabilities on February 1, 2009. Its adoption did not have a material effect on the Company’s results of operations, financial position or cash flows.

 

In December 2007, the FASB issued authoritative guidance on business combinations which provided additional guidance on improving the relevance, representational faithfulness, and comparability of the financial information that a reporting entity provides in its financial reports about a business combination and its effects. This guidance was codified in ASC 805, Business Combinations, and applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted SFAS 141R effective February 1, 2009. Its adoption did not have a material effect on the Company’s consolidated financial statements. Any acquisition made in fiscal 2010 and future periods are subject to this new accounting guidance.

 

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In December 2007, the FASB issued authoritative guidance on accounting and reporting for non-controlling interests in a subsidiary and for the deconsolidation of a subsidiary, codified in ASC 810, Consolidation. This guidance applied to all entities that prepare consolidated financial statements and have an outstanding noncontrolling interest in one or more subsidiaries. The Company adopted this guidance on February 1, 2009. Its adoption did not have a material effect on the Company’s consolidated financial statements.

 

Earnings Per Share

 

The following table sets forth the denominator for the computation of basic and diluted earnings per share:

 

		Three Months Ended October 31,				Nine Months Ended October 31,
(in thousands)		2009		2008		2009		2008
Basic weighted-average shares outstanding		17,604		17,553		17,586		15,864
Plus: Incremental shares from assumed conversions
Restricted Stock		161		86		132		86
Warrants		62		111		74		112
Stock Options		186		291		166		312
Diluted weighted-average shares outstanding		18,013		18,041		17,958		16,374

 

There were 148,500 and 78,500 stock options outstanding as of October 31, 2009 and 2008, respectively, that were not included in the computation of diluted earnings per share because they were anti-dilutive.

 

NOTE 2 -       INVENTORIES

 

		October 31,			January 31,
		2009			2009
		(in thousands)
New equipment		$	207,766		$	132,502
Used equipment		103,633			68,333
Parts, tires and attachments		40,259			37,314
Work in process		3,538			2,945
		$	355,196		$	241,094

 

In addition to the above amounts, the Company has estimated that a portion of its parts inventory will not be sold in the next year. Accordingly, these balances have been classified as noncurrent assets.

 

NOTE 3 -       LINES OF CREDIT / FLOORPLAN NOTES PAYABLE

 

Operating Line of Credit

 

On July 15, 2009, the Company entered into a Loan Agreement (the “Loan Agreement”) with Bremer Bank National Association (“Bremer Bank”) which provides for a $25.0 million revolving operating line of credit (“Revolving Loan”) and a $15.0 million term loan (“Term Loan”). The Revolving Loan may be used to fund short term working capital requirements of the Company, and replaces the Company’s previous $25.0 million operating line of credit with Bremer Bank. The Revolving Loan has a variable interest rate of 0.25% per annum below a Bremer Bank reference rate (subject to a minimum interest rate floor of 4.5%), requires monthly payments of accrued interest commencing August 1, 2009, and has a maturity date of July 14, 2010. Advances under the Loan Agreement are secured by substantially all of the Company’s assets. See discussion of the Term Loan in Note 4.

 

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The Company had no amount outstanding on the Revolving Loan at October 31, 2009. The Loan Agreement contains certain financial covenants which impose minimum levels of current ratio, debt service coverage, and inventory turnover ratio and a maximum level of debt to tangible net worth ratio. As of October 31, 2009, the Company was in compliance with all of these financial covenants.

 

Floorplan Lines of Credit

 

The Company has discretionary floorplan lines of credit for equipment purchases totaling approximately $365.0 million with various lending institutions, including a $300.0 million Wholesale Floorplan Credit Facility with CNH Capital America LLC (“CNH”). The available borrowings under the CNH credit facility are reduced by outstanding floorplan notes payable, rental fleet financing and other acquisition-related financing arrangements with CNH. Prior to September 1, 2009, the interest rate for new borrowings under the CNH Capital floorplan line of credit was equal to the prime rate plus 0.3% per annum for most purposes, subject to any interest-free periods offered by CNH. From September 1, 2009 through January 31, 2010, interest rates range from the prime rate plus 4% to the prime rate plus 6% on new borrowings under the CNH Capital floorplan line of credit, subject to any interest-free periods offered by CNH. The CNH Capital credit facility automatically renews on August 31 of each year through August 31, 2012, unless earlier terminated by either party. Under covenants of the CNH credit facility, the Company has agreed, among other things, to maintain various financial ratio levels and to submit certain financial information. As of October 31, 2009, the Company was in compliance with all floorplan financial covenants.

 

Floorplan notes payable relating to these credit facilities totaled approximately $252.9 million of the total floorplan notes payable balance of $261.9 million outstanding as of October 31, 2009 and $153.8 million of the total floorplan notes payable balance of $166.5 million outstanding as of January 31, 2009. As of October 31, 2009, the Company had approximately $96.9 million in available borrowings remaining under these lines of credit. These floorplan notes carried various interest rates primarily ranging from 3.25 to 9.25% as of October 31, 2009 and January 31, 2009, and are secured by the related inventory. Repayment terms vary by individual notes, but generally payments are made from sales proceeds or rental revenue from the related inventories.

 

NOTE 4 -       LONG-TERM DEBT

 

As discussed in Note 3, on July 15, 2009 the Company entered into a Loan Agreement with Bremer Bank that provides for a $25.0 million Revolving Loan and a $15.0 million Term Loan. The Term Loan will be used for the long term working capital requirements of the Company. The Term Loan has a fixed interest rate of 5.9%, requires monthly payments of principal and interest commencing August 1, 2009, and has a maturity date of July 1, 2014. Advances under the Loan Agreement are secured by substantially all of the Company’s assets. The Loan Agreement contains certain financial covenants that impose minimum levels of current ratio, debt service coverage, and inventory turnover ratio and a maximum level of debt to tangible net worth ratio. As of October 31, 2009, the Company was in compliance with all of these financial covenants. See discussion of the Revolving Loan in Note 3.

 

There was $14.3 million outstanding on this Term Loan as of October 31, 2009. Future maturities on this Term Loan are as follows:

 

 

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NOTE 5 -       INCOME TAXES

 

In August 2009, the Internal Revenue Service (“IRS”) completed its audit of the Company, including the uncertain tax position taken during fiscal 2008. All amounts owed to state and federal taxing authorities were paid prior to October 31, 2009. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the nine months ended October 31, 2009 follows (in thousands):

 

Balance at January 31, 2009		$	446
Additions for tax positions related to current year		—
Additions/reductions for tax positions taken in prior years:
Accrued interest expense		9
Reduction due to final IRS settlement		(14		)
Reductions for tax positions as a result of:
Settlements		(441		)
Lapse of statute of limitations		—
Balance at October 31, 2009		$	—

 

The Company is no longer subject to U.S. federal income tax examinations for fiscal years ending prior to January 31, 2007.

 

NOTE 6 -       STOCK WARRANTS, STOCK OPTIONS AND RESTRICTED STOCK

 

Common Stock Warrants

 

The following table summarizes stock warrant activity for the nine months ended October 31, 2009:

 

(number of warrants and aggregate intrinsic value in thousands)

 

										Weighted
				Weighted						Average
				Average			Aggregate			Remaining
		Number of		Exercise			Intrinsic			Contractual
		Warrants		Price			Value			Life (Years)
Outstanding and exercisable at January 31, 2009		123		$	3.45
Granted		—		—
Exercised		(38	)	3.50
Forfeited		—		—
Outstanding and exercisable at October 31, 2009		85		$	3.43		$	624		2.6

 

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Stock Options

 

The following table summarizes stock option activity for the nine months ended October 31, 2009:

 

(number of stock options and aggregate intrinsic value in thousands)

 

										Weighted
				Weighted						Average
				Average			Aggregate			Remaining
		Number of		Exercise			Intrinsic			Contractual
		Options		Price			Value			Life (Years)
Outstanding at January 31, 2009		646		$	10.91
Granted		5		11.16
Exercised		(8	)	5.32
Forfeited		—		—
Outstanding at October 31, 2009		643		$	10.98		$	1,472		7.3
Exercisable at October 31, 2009		178		$	8.72		$	627		6.9

 

Restricted Stock

 

The following table summarizes restricted stock activity for the nine months ended October 31, 2009:

 

(number of restricted shares in thousands)

 

							Weighted
				Weighted			Average
				Average			Remaining
				Grant Date			Contractual
		Shares		Fair Value			Term
Nonvested at January 31, 2009		92		$	10.18		2.1
Granted		84		13.05
Forfeited		(4	)	10.90
Vested		(11	)	12.78
Nonvested at October 31, 2009		161		$	11.48		2.7

 

The weighted average grant date fair value of restricted stock granted was $13.05 and $20.40 per share for the nine months ended October 31, 2009 and 2008, respectively. The total fair value of restricted stock vested was $133,000 and $13,000 for the nine months ended October 31, 2009 and 2008, respectively. As of October 31, 2009, there was approximately $707,000 of unrecognized compensation cost on non-vested restricted stock that is expected to be recognized over a weighted-average period of 2.7 years.

 

NOTE 7 -       BUSINESS COMBINATIONS

 

On May 1, 2009, the Company acquired 100% of the outstanding stock of Winger Implement, Inc. The acquired entity consisted of one agricultural equipment store located in Winger, Minnesota and expands the Company’s presence in the Red River Valley. The acquisition-date fair value of the total consideration transferred for the dealership was $1,450,000. The Company expects the allocation of the purchase price to be finalized within one year of the acquisition date.

 

On May 28, 2009, the Company acquired certain assets of Arthur Mercantile, Co. The acquired entity consisted of one agricultural equipment store located in Arthur, North Dakota and expands the Company’s presence in the Red River Valley. The acquisition-date fair value of the total consideration transferred for the dealership was $831,697. The Company

 

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expects the allocation of the purchase price to be finalized within one year of the acquisition date. James L. Williams, Arthur Mercantile, Co.’s President and Treasurer, is a Titan Machinery director.

 

On June 30, 2009, the Company acquired certain assets of Valley Equipment, Inc. in Mayville, North Dakota. The acquired entity consisted of one agricultural equipment store and expands the Company’s presence in the Red River Valley. The acquisition-date fair value of the total consideration transferred for the dealership was $753,404. The Company expects the allocation of the purchase price to be finalized within one year of the acquisition date.

 

On August 14, 2009, the Company acquired certain assets of Lickness Bros. Implement Co. The acquired entity consisted of one agricultural equipment store located in Britton, South Dakota and is contiguous to existing markets in Northeast South Dakota and Southeast North Dakota.  The acquisition-date fair value of the total consideration transferred for the dealership was $209,551. The Company expects the allocation of the purchase price to be finalized within one year of the acquisition date.

 

During the nine months ended October 31, 2009 adjustments were recorded to finalize the purchase price allocations of prior acquisitions and for additional consideration of $1,063,000 earned and paid under agreements disclosed in our Form 10-K for the fiscal year ended January 31, 2009 as filed with the SEC. These adjustments and additional consideration resulted in a net increase in goodwill of $862,000.

 

The results of operations have been included in the Company’s consolidated results of operations since the date of each respective business combination. The fair value of assets acquired and liabilities assumed in the above business combinations and adjustments on prior acquisitions are presented in the following table:

 

 

Goodwill of $1,068,000 recorded in the acquisition transactions during the nine months ended October, 31, 2009 is expected to be deductible for tax purposes.

 

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NOTE 8 -       SUBSEQUENT EVENTS

 

On November 2, 2009, the Company closed on the acquisition of certain assets of Oskaloosa Implement Co., for approximately $2,559,000. The acquired entity consisted of two agricultural equipment stores located in Pella and Oskaloosa, Iowa and expands the Company’s presence in Iowa.  Used equipment inventory of approximately $1,752,000, and the related floorplan notes payable and accounts payable, were purchased in October 2009 and are included in the Company’s balance sheet as of October 31, 2009.

 

On November 2, 2009, the Company acquired 100% of the outstanding stock of Valley Farm Equipment, Inc. in Milbank, South Dakota, for approximately $1,860,000. The acquired entity consisted of one agricultural equipment store and is strategically located in the Whetstone Valley in Eastern South Dakota, between Titan Machinery’s existing dealerships in Graceville, Minnesota, Watertown, South Dakota, and Aberdeen, South Dakota.

 

The Company evaluated for the occurrence of subsequent events through December 10, 2009, the issuance date of the Company’s financial statements. No recognized or non-recognized subsequent events occurred except as noted above.

 

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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 consolidated financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report, and the audited consolidated financial statements and 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 year ended January 31, 2009.

 

Critical Accounting Policies

 

There have been no material changes in our Critical Accounting Policies, as disclosed in our Annual Report on Form 10-K for the year ended January 31, 2009.

 

Overview

 

We own and operate one of the largest networks of full service agricultural and construction equipment stores in North America. We are the world’s largest retail dealer of Case IH Agriculture equipment and a major retail dealer of New Holland Agriculture, Case Construction and New Holland Construction equipment in the U.S. We sell and rent agricultural and construction equipment, sell parts, and service the equipment operating in the areas surrounding our stores.

 

Our net income was $5.7 million, or $0.32 per diluted share, for the three months ended October 31, 2009, compared to $8.2 million, or $0.45 per diluted share, for the three months ended October 31, 2008. Significant factors impacting the quarter were:

 

·                  Overall revenue growth was due to acquisitions and was partially offset by declines in same-store sales resulting from a particularly strong agriculture equipment market in the third quarter of fiscal 2009 and a challenging construction market, as compared to the third quarter of fiscal 2009;

 

·                  Increase in gross profits primarily due to increased revenues;

 

·                  Increase in operating expenses as a percent of revenue primarily due to an increased concentration of construction stores in our overall store composition, as well as lower revenues due to the challenging construction market; and

 

·                  Increase in inventories reflecting historical stocking levels to support future sales.

 

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Results of Operations

 

Comparative financial data for each of our four sources of revenue are expressed below. The results for these periods include the operating results of the acquisitions made during these periods. The period-to-period comparisons included below are not necessarily indicative of future results:

 

		Three Months Ended October 31,								Nine Months Ended October 31,
								Percent								Percent
		2009			2008			Change		2009			2008			Change
		(dollars in thousands)								(dollars in thousands)
Equipment
Revenue		$	173,367		$	167,950		3.2	%	$	439,374		$	386,705		13.6	%
Cost of revenue		155,653			148,678			4.7	%	393,405			343,582			14.5	%
Gross profit		$	17,714		$	19,272		(8.1	)%	$	45,969		$	43,123		6.6	%
Parts
Revenue		$	32,961		$	29,794		10.6	%	$	91,813		$	74,910		22.6	%
Cost of revenue		22,291			20,638			8.0	%	63,767			53,121			20.0	%
Gross profit		$	10,670		$	9,156		16.5	%	$	28,046		$	21,789		28.7	%
Service
Revenue		$	15,854		$	12,894		23.0	%	$	44,036		$	32,626		35.0	%
Cost of revenue		5,658			5,019			12.7	%	15,844			12,344			28.4	%
Gross profit		$	10,196		$	7,875		29.5	%	$	28,192		$	20,282		39.0	%
Other, including trucking and rental
Revenue		$	4,836		$	3,322		45.6	%	$	11,288		$	7,207		56.6	%
Cost of revenue		3,833			2,279			68.2	%	9,388			5,027			86.8	%
Gross profit		$	1,003		$	1,043		(3.8	)%	$	1,900		$	2,180		(12.8	)%

 

The following table sets forth our statements of operations data expressed as a percentage for each of our four sources of revenue for the periods indicated:

 

		Three Months Ended October 31,				Nine Months Ended October 31,
		2009		2008		2009		2008
Revenue
Equipment		76.4	%	78.5	%	74.9	%	77.1	%
Parts		14.5	%	13.9	%	15.7	%	15.0	%
Service		7.0	%	6.0	%	7.5	%	6.5	%
Other, including trucking and rental		2.1	%	1.6	%	1.9	%	1.4	%
Total revenue		100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue
Equipment		68.6	%	69.5	%	67.1	%	68.5	%
Parts		9.8	%	9.6	%	10.9	%	10.6	%
Service		2.5	%	2.3	%	2.7	%	2.5	%
Other, including trucking and rental		1.7	%	1.1	%	1.5	%	1.0	%
Total cost of revenue		82.6	%	82.5	%	82.2	%	82.6	%
Gross profit		17.4	%	17.5	%	17.8	%	17.4	%
Operating expenses		12.2	%	10.8	%	13.5	%	12.1	%
Income from operations		5.2	%	6.7	%	4.3	%	5.3	%

 

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