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Titan Machinery Inc. - Quarter Report: 2014 October (Form 10-Q)

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, 2014
 
Commission File No. 001-33866
 
TITAN MACHINERY INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
No. 45-0357838
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
644 East Beaton Drive
West Fargo, ND 58078-2648
(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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  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  x    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 November 30, 2014 was: Common Stock, $0.00001 par value, 21,411,320 shares.


Table of Contents

TITAN MACHINERY INC.
QUARTERLY REPORT ON FORM 10-Q
 
Table of Contents

 
 
Page No.
PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
 
Consolidated Balance Sheets as of October 31, 2014 and January 31, 2014
 
Consolidated Statements of Operations for the three and nine months ended October 31, 2014 and 2013
 
Consolidated Statements of Comprehensive Income for the three and nine months ended October 31, 2014 and 2013
 
Consolidated Statements of Stockholders' Equity for the nine months ended October 31, 2014 and 2013
 
Consolidated Statements of Cash Flows for the nine months ended October 31, 2014 and 2013
 
Notes to Consolidated Financial Statements
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.
CONTROLS AND PROCEDURES
PART II.
OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
ITEM 4.
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
Signatures
 
Exhibit Index
 

2

Table of Contents

PART I. — FINANCIAL INFORMATION
 
ITEM 1.                FINANCIAL STATEMENTS
 
TITAN MACHINERY INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
October 31, 2014
 
January 31, 2014
 
(Unaudited)
 
 
Assets


 
 
Current Assets
 
 
 
Cash
$
110,222

 
$
74,242

Receivables, net
104,388

 
97,894

Inventories
1,062,123

 
1,075,978

Prepaid expenses and other
15,271

 
24,740

Income taxes receivable
2,327

 
851

Deferred income taxes
13,410

 
13,678

Total current assets
1,307,741

 
1,287,383

Intangibles and Other Assets
 
 
 
Noncurrent parts inventories
4,958

 
5,098

Goodwill
24,742

 
24,751

Intangible assets, net of accumulated amortization
11,211

 
11,750

Other
7,173

 
7,666

Total intangibles and other assets
48,084

 
49,265

Property and Equipment, net of accumulated depreciation
216,947

 
228,000

Total Assets
$
1,572,772

 
$
1,564,648

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
26,680

 
$
23,714

Floorplan payable
761,182

 
750,533

Current maturities of long-term debt
37,467

 
2,192

Customer deposits
20,893

 
61,286

Accrued expenses
38,507

 
36,968

Income taxes payable
48

 
344

Total current liabilities
884,777

 
875,037

Long-Term Liabilities
 
 
 
Senior convertible notes
131,456

 
128,893

Long-term debt, less current maturities
100,712

 
95,532

Deferred income taxes
47,925

 
47,329

Other long-term liabilities
2,869

 
6,515

Total long-term liabilities
282,962

 
278,269

Commitments and Contingencies


 


Stockholders' Equity
 
 
 
Common stock, par value $.00001 per share, 45,000 shares authorized; 21,411 shares issued and outstanding at October 31, 2014; 21,261 shares issued and outstanding at January 31, 2014

 

Additional paid-in-capital
240,057

 
238,857

Retained earnings
164,882

 
169,575

Accumulated other comprehensive income (loss)
(1,895
)
 
339

Total Titan Machinery Inc. stockholders' equity
403,044

 
408,771

Noncontrolling interest
1,989

 
2,571

Total stockholders' equity
405,033

 
411,342

Total Liabilities and Stockholders' Equity
$
1,572,772

 
$
1,564,648

 See Notes to Consolidated Financial Statements

3

Table of Contents

TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
Revenue
 
 
 
 
 
 
 
Equipment
$
343,482

 
$
441,752

 
$
1,008,614

 
$
1,134,885

Parts
80,692

 
80,903

 
219,597

 
214,373

Service
42,410

 
40,646

 
117,941

 
112,516

Rental and other
26,557

 
24,660

 
63,442

 
56,041

Total Revenue
493,141

 
587,961

 
1,409,594

 
1,517,815

Cost of Revenue
 
 
 
 
 
 
 
Equipment
317,702

 
406,867

 
926,863

 
1,039,773

Parts
56,402

 
55,419

 
154,146

 
148,152

Service
15,037

 
14,453

 
42,969

 
40,199

Rental and other
19,309

 
17,616

 
45,333

 
38,595

Total Cost of Revenue
408,450

 
494,355

 
1,169,311

 
1,266,719

Gross Profit
84,691

 
93,606

 
240,283

 
251,096

Operating Expenses
69,459

 
75,005

 
208,406

 
214,083

Realignment Costs

 

 
2,952

 

Income from Operations
15,232

 
18,601

 
28,925

 
37,013

Other Income (Expense)
 
 
 
 
 
 
 
Interest income and other income (expense)
(489
)
 
(260
)
 
(4,095
)
 
674

Floorplan interest expense
(5,444
)
 
(4,779
)
 
(15,345
)
 
(11,944
)
Other interest expense
(3,586
)
 
(3,493
)
 
(10,586
)
 
(10,115
)
Income (Loss) Before Income Taxes
5,713

 
10,069

 
(1,101
)
 
15,628

Provision for Income Taxes
(3,400
)
 
(4,311
)
 
(4,254
)
 
(6,506
)
Net Income (Loss) Including Noncontrolling Interest
$
2,313

 
$
5,758

 
$
(5,355
)
 
$
9,122

Less: Net Income (Loss) Attributable to Noncontrolling Interest
(157
)
 
(67
)
 
(662
)
 
(122
)
Net Income (Loss) Attributable to Titan Machinery Inc.
$
2,470

 
$
5,825

 
$
(4,693
)
 
$
9,244

Earnings (Loss) per Share - Note 1
 
 
 
 
 
 
 
Earnings (Loss) per Share - Basic
$
0.12

 
$
0.27

 
$
(0.22
)
 
$
0.44

Earnings (Loss) per Share - Diluted
$
0.11

 
$
0.27

 
$
(0.22
)
 
$
0.43

Weighted Average Common Shares - Basic
20,994

 
20,901

 
20,977

 
20,879

Weighted Average Common Shares - Diluted
21,102

 
21,031

 
20,977

 
21,029

 
See Notes to Consolidated Financial Statements


4

Table of Contents

TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
Net Income (Loss) Including Noncontrolling Interest
$
2,313

 
$
5,758

 
$
(5,355
)
 
$
9,122

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
(3,351
)
 
1,618

 
(3,505
)
 
791

Unrealized gain (loss) on net investment hedge derivative instruments, net of tax expense (benefit) of $945 and ($177) for the three months ended October 31, 2014 and 2013, respectively, and $975 and $15 for the nine months ended October 31, 2014 and 2013, respectively
1,418

 
(266
)
 
1,464

 
23

Unrealized loss on interest rate swap cash flow hedge derivative instrument, net of tax benefit of ($442) and ($519) for the three months ended October 31, 2014 and 2013, respectively, and (474) and ($519) for the nine months ended October 31, 2014 and 2013, respectively
(664
)
 
(780
)
 
(710
)
 
(780
)
Unrealized gain on foreign currency contract cash flow hedge derivative instruments, net of tax expense of $29 for the nine months ended October 31, 2014

 

 
44

 

Reclassification of loss on interest rate swap cash flow hedge derivative instruments included in net income (loss), net of tax benefit of $60 for the three months ended October 31, 2014 and $60 for the nine months ended October 31, 2014
90

 

 
90

 

Reclassification of loss on foreign currency contract cash flow hedge derivative instruments included in net income (loss), net of tax benefit of $15 for the three months ended October 31, 2014 and $29 for the nine months ended October 31, 2014
23

 

 
43

 

Total Other Comprehensive Income (Loss)
(2,484
)
 
572

 
(2,574
)
 
34

Comprehensive Income (Loss)
(171
)
 
6,330

 
(7,929
)
 
9,156

Comprehensive Income (Loss) Attributable to Noncontrolling Interest
(484
)
 
345

 
(1,002
)
 
92

Comprehensive Income (Loss) Attributable To Titan Machinery Inc.
$
313

 
$
5,985

 
$
(6,927
)
 
$
9,064

 
See Notes to Consolidated Financial Statements


5

Table of Contents

TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands)
 
Common Stock
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Shares Outstanding
 
Amount
 
Additional Paid-In Capital
 
Retained Earnings
 
Foreign Currency Translation Adjustments
 
Unrealized Gains (Losses) on Net Investment Hedges
 
Unrealized Gains (Losses) on Interest Rate Swap Cash Flow Hedges
 
Unrealized Gains (Losses) on Foreign Currency Contract Cash Flow Hedges
 
Total
 
Total Titan Machinery Inc. Stockholders' Equity
 
Noncontrolling Interest
 
Total Stockholders' Equity
Balance, January 31, 2013
21,092

 
$

 
$
236,521

 
$
160,724

 
$
(226
)
 
$
(509
)
 
$

 
$

 
$
(735
)
 
$
396,510

 
$
3,409

 
$
399,919

Common stock issued on grant of restricted stock (net of forfeitures), exercise of stock options and warrants, and tax benefits of equity awards
149

 

 
261

 

 

 

 

 

 

 
261

 

 
261

Other
22

 

 
(49
)
 

 

 

 

 

 

 
(49
)
 
(639
)
 
(688
)
Stock-based compensation expense

 

 
1,598

 

 

 

 

 

 

 
1,598

 

 
1,598

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 
9,244

 

 

 

 

 

 
9,244

 
(122
)
 
9,122

Other comprehensive income (loss)

 

 

 

 
577

 
23

 
(780
)
 

 
(180
)
 
(180
)
 
214

 
34

Total comprehensive income

 

 

 

 

 

 

 

 

 
9,064

 
92

 
9,156

Balance, October 31, 2013
21,263

 
$

 
$
238,331

 
$
169,968

 
$
351

 
$
(486
)
 
$
(780
)
 
$

 
$
(915
)
 
$
407,384

 
$
2,862

 
$
410,246

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 31, 2014
21,261

 
$

 
$
238,857

 
$
169,575

 
$
1,541

 
$
(339
)
 
$
(737
)
 
$
(126
)
 
$
339

 
$
408,771

 
$
2,571

 
$
411,342

Common stock issued on grant of restricted stock (net of forfeitures), exercise of stock options and warrants, and tax benefits of equity awards
150

 

 
(50
)
 

 

 

 

 

 

 
(50
)
 

 
(50
)
Stock-based compensation expense

 

 
1,752

 

 

 

 

 

 

 
1,752

 

 
1,752

Other

 

 
(502
)
 

 

 

 

 

 

 
(502
)
 
420

 
(82
)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(4,693
)
 

 

 

 

 

 
(4,693
)
 
(662
)
 
(5,355
)
Other comprehensive income (loss)

 

 

 

 
(3,165
)
 
1,464

 
(620
)
 
87

 
(2,234
)
 
(2,234
)
 
(340
)
 
(2,574
)
Total comprehensive loss

 

 

 

 

 

 

 

 

 
(6,927
)
 
(1,002
)
 
(7,929
)
Balance, October 31, 2014
21,411

 
$

 
$
240,057

 
$
164,882

 
$
(1,624
)
 
$
1,125

 
$
(1,357
)
 
$
(39
)
 
$
(1,895
)
 
$
403,044

 
$
1,989

 
$
405,033


See Notes to Consolidated Financial Statements

6

Table of Contents

TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) 
 
Nine Months Ended October 31,
 
2014
 
2013
Operating Activities
 
 
 
Net income (loss) including noncontrolling interest
$
(5,355
)
 
$
9,122

Adjustments to reconcile net income including noncontrolling interest to net cash used for operating activities
 
 
 
Depreciation and amortization
23,915

 
23,148

Deferred income taxes
241

 
(231
)
Stock-based compensation expense
1,752

 
1,598

Noncash interest expense
3,501

 
3,394

Unrealized foreign currency (gain) loss on loans to international subsidiaries
2,676

 
(666
)
Other, net
159

 
(330
)
Changes in assets and liabilities, net of purchase of equipment dealerships assets and assumption of liabilities
 
 
 
Receivables, prepaid expenses and other assets
(4,981
)
 
1,545

Inventories
(2,448
)
 
(287,380
)
Manufacturer floorplan payable
(68,489
)
 
151,131

Accounts payable, customer deposits, accrued expenses and other long-term liabilities
(31,734
)
 
(6,171
)
Income taxes
(1,792
)
 
(2,515
)
Net Cash Used for Operating Activities
(82,555
)
 
(107,355
)
Investing Activities
 
 
 
Rental fleet purchases
(502
)
 
(783
)
Property and equipment purchases (excluding rental fleet)
(12,139
)
 
(15,792
)
Net proceeds from sale of property and equipment
13,133

 
10,597

Purchase of equipment dealerships, net of cash purchased
(584
)
 
(4,848
)
Proceeds from net investment hedge derivative instruments
3,359

 
902

Settlement of net investment hedge derivative instruments
(915
)
 
(981
)
Other, net
104

 
(63
)
Net Cash Provided by (Used for) Investing Activities
2,456

 
(10,968
)
Financing Activities
 
 
 
Net change in non-manufacturer floorplan payable
83,232

 
95,330

Proceeds from long-term debt borrowings
49,874

 
61,684

Principal payments on long-term debt
(16,153
)
 
(49,450
)
Other, net
(383
)
 
(194
)
Net Cash Provided by Financing Activities
116,570

 
107,370

Effect of Exchange Rate Changes on Cash
(491
)
 
(39
)
Net Change in Cash
35,980

 
(10,992
)
Cash at Beginning of Period
74,242

 
124,360

Cash at End of Period
$
110,222

 
$
113,368

Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period
 
 
 
Income taxes, net of refunds
$
5,799

 
$
9,124

Interest
$
20,998

 
$
16,981

Supplemental Disclosures of Noncash Investing and Financing Activities
 
 
 
Net property and equipment financed with long-term debt, accounts payable and accrued liabilities
$
4,462

 
$
18,636

Net transfer of assets to property and equipment from inventories
$
9,815

 
$
43,815


See Notes to Consolidated Financial Statements

7

Table of Contents

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 (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The quarterly operating results for Titan Machinery Inc. (the “Company”) are subject to fluctuation due to varying weather patterns, which may impact the timing and amount of equipment purchases, rentals, and after-sales parts and service purchases by the Company’s Agriculture, Construction and International customers. Therefore, operating results for the nine-month period ended October 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2015. The information contained in the balance sheet as of January 31, 2014 was derived from the audited financial statements for the Company 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 the Company’s Form 10-K for the fiscal year ended January 31, 2014 as filed with the SEC.

Nature of Business
 
The Company is engaged in the retail sale, service and rental of agricultural and construction machinery through its stores in the United States and Europe. The Company’s North American stores are located in Arizona, Colorado, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, South Dakota, Wisconsin and Wyoming, and its European stores are located in Bulgaria, Romania, Serbia and Ukraine.
 
Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, particularly related to realization of inventory, initial valuation and impairment analyses of intangible assets, collectability of receivables, and income taxes.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All material accounts, transactions and profits between the consolidated companies have been eliminated in consolidation.

Earnings (Loss) Per Share (“EPS”)
 
The Company uses the two-class method to calculate basic and diluted EPS. Unvested restricted stock awards are considered participating securities because they entitle holders to non-forfeitable rights to dividends during the vesting term. Under the two-class method, basic EPS were computed by dividing net income (loss) attributable to Titan Machinery Inc. after allocation of income (loss) to participating securities by the weighted-average number of shares of common stock outstanding during the year.
 
Diluted EPS were computed by dividing net income (loss) attributable to Titan Machinery Inc. after allocation of income (loss) to participating securities by the weighted-average shares of common stock outstanding after adjusting for potential dilution related to the conversion of all dilutive securities into common stock. All potentially dilutive securities were included in the computation of diluted EPS. There were approximately 104,000 and 99,000 stock options outstanding that were excluded from the computation of diluted EPS for the three months ended October 31, 2014 and 2013, respectively, because they were anti-dilutive. There were approximately 219,000 and 99,000 stock options outstanding that were excluded from the computation of diluted EPS for the nine months ended October 31, 2014 and 2013, respectively, because they were anti-dilutive. None of the approximately 3,474,000 shares underlying the Company’s senior convertible notes were included in the computation of diluted EPS because the Company’s average stock price was less than the conversion price of $43.17.

8

Table of Contents


The following table sets forth the calculation of basic and diluted EPS:
 
Three Months Ended October 31,

Nine Months Ended October 31,
 
2014

2013

2014

2013
 
(in thousands, except per share data)

(in thousands, except per share data)
Numerator











Net Income (Loss) Attributable to Titan Machinery Inc.
$
2,470


$
5,825


$
(4,693
)

$
9,244

Net (Income) Loss Allocated to Participating Securities
(49
)

(97
)

80


(132
)
Net Income (Loss) Attributable to Titan Machinery Inc. Common Stockholders
$
2,421


$
5,728


$
(4,613
)

$
9,112

Denominator











Basic Weighted-Average Common Shares Outstanding
20,994


20,901


20,977


20,879

Plus: Incremental Shares From Assumed Exercise of Stock Options
108


130




150

Diluted Weighted-Average Common Shares Outstanding
21,102


21,031


20,977


21,029

Earnings (Loss) per Share - Basic
$
0.12


$
0.27


$
(0.22
)

$
0.44

Earnings (Loss) per Share - Diluted
$
0.11


$
0.27


$
(0.22
)

$
0.43


Recent Accounting Guidance

In April 2014, the Financial Accounting Standards Board ("FASB") amended authoritative guidance on reporting discontinued operations and disclosures of disposals of components of an entity, codified in Accounting Standard Codification ("ASC") 205-20, Discontinued Operations and 360, Property, Plant, and Equipment. The amended guidance changed the criteria for reporting discontinued operations, to only include disposals that represent a strategic shift and have a major effect on the entity's operations and financial results. The amended guidance also requires entities to provide additional disclosure of disposals reported as discontinued operations, and for disposals that do not qualify for discontinued operations presentation. The Company will adopt this guidance on February 1, 2015. Its adoption is not expected to have a material effect on the Company's consolidated financial statements.

In May 2014, the FASB issued authoritative guidance on accounting for revenue recognition, codified in ASC 606, Revenue from Contracts with Customers. This guidance supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This guidance is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The Company will adopt this guidance on February 1, 2017, using one of two retrospective application methods. The Company has not determined the potential effects on the consolidated financial statements.

In August 2014, the FASB issued authoritative guidance on management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and provide related footnote disclosures, codified in ASC 205-40, Going Concern. The guidance provides a definition of the term substantial doubt, requires an evaluation every reporting period including interim periods, provides principles for considering the mitigating effect of management’s plans, requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, requires an express statement and other disclosures when substantial doubt is not alleviated, and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The Company will adopt this guidance for the year-ended January 31, 2017, and it will apply to each interim and annual period thereafter. Its adoption is not expected to have a material effect on the Company's consolidated financial statements.


9

Table of Contents

NOTE 2—INVENTORIES
 
 
October 31, 2014
 
January 31, 2014
 
(in thousands)
New equipment
$
623,604

 
$
575,518

Used equipment
309,283

 
363,755

Parts and attachments
113,787

 
126,666

Work in process
15,449

 
10,039

 
$
1,062,123

 
$
1,075,978


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—PROPERTY AND EQUIPMENT
 
 
October 31, 2014
 
January 31, 2014
 
(in thousands)
Rental fleet equipment
$
151,199

 
$
145,007

Machinery and equipment
24,867

 
23,382

Vehicles
43,879

 
44,200

Furniture and fixtures
39,033

 
35,860

Land, buildings, and leasehold improvements
58,235

 
60,470

 
317,213

 
308,919

Less accumulated depreciation
(100,266
)
 
(80,919
)
 
$
216,947

 
$
228,000

 
NOTE 4—LINES OF CREDIT / FLOORPLAN PAYABLE

Floorplan Lines of Credit

Floorplan payable balances reflect the amount owed for new equipment inventory purchased from a manufacturer and for used equipment inventory, which is primarily purchased through trade-in on equipment sales. Certain of the manufacturers from which the Company purchases new equipment inventory offer financing on these purchases, either offered directly from the manufacturer or through the manufacturers’ captive finance subsidiaries. CNH Industrial America LLC's captive finance subsidiary, CNH Industrial Capital America LLC ("CNH Industrial Capital"), also provides financing of used equipment inventory. The Company also has floorplan payable balances with non-manufacturer lenders for new and used equipment inventory. Changes in manufacturer floorplan payable are reported as operating cash flows and changes in non-manufacturer floorplan payable are reported as financing cash flows in the Company's consolidated statements of cash flows.

As of October 31, 2014, the Company had discretionary floorplan lines of credit for equipment inventory purchases totaling approximately $1.16 billion, which includes a $350.0 million Floorplan Payable Line with a group of banks led by Wells Fargo Bank, National Association ("Wells Fargo"), a $450.0 million credit facility with CNH Industrial Capital, a $225.0 million credit facility with Agricredit Acceptance LLC and the U.S. dollar equivalent of $135.0 million in credit facilities related to our foreign subsidiaries. Floorplan payables relating to these credit facilities totaled approximately $696.9 million of the total floorplan payable balance of $761.2 million outstanding as of October 31, 2014 and $692.8 million of the total floorplan payable balance of $750.5 million outstanding as of January 31, 2014. As of October 31, 2014, the Company had approximately $411.7 million in available borrowings remaining under these lines of credit (net of adjustments based on borrowing base calculations and standby letters of credit under the Wells Fargo credit agreement, and rental fleet financing and other acquisition-related financing arrangements under the CNH Industrial Capital credit agreement). The U.S. floorplan payables carried various interest rates primarily ranging from 2.78% to 4.98%, and the foreign floorplan payables carried various interest rates primarily ranging from 1.59% to 10.50%, as of October 31, 2014.

Effective October 31, 2014, the Company amended its credit facility with Wells Fargo. The amendment, among other things, replaced the consolidated net income financial covenant with a minimum consolidated income before income taxes

10

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covenant, calculated as the income before income taxes for the last four quarters, adjusted for certain impairment charges, realignment charges, and foreign currency remeasurement losses resulting from a devaluation of the Ukrainian hryvnia. The minimum income before income tax covenant is $10.0 million for the four quarter period ended October 31, 2014, $5.0 million for the period ended January 31, 2015, $6.0 million for each of the two periods ended April 30, 2015 and July 31, 2015, $10.0 million for each of the two periods ended October 31, 2015 and January 31, 2016, and $15.0 million for each period thereafter. The amendment also modified certain borrowing base advance rates and changed the interest rate margin from 1.5% to 2.625% to 1.5% to 2.875% per annum.

Effective October 31, 2014, the Company also amended its credit facility with CNH Industrial Capital. The amendment, amongst other things, replaced the minimum debt service ratio financial covenant with a minimum fixed charge coverage ratio financial covenant of not less than 1.25:1.00, and added or modified related definitions.

Working Capital Line of Credit
 
As of October 31, 2014, the Company had a $112.5 million working capital line of credit under the credit facility with Wells Fargo. The Company had $75.6 million and $47.8 million outstanding on its working capital line of credit as of October 31, 2014 and January 31, 2014, respectively. Amounts outstanding are recorded as long-term debt, within long-term liabilities on the consolidated balance sheets, as the Company does not have an obligation to repay amounts borrowed within one year.

NOTE 5—SENIOR CONVERTIBLE NOTES
 
The Company’s 3.75% Senior Convertible Notes issued on April 24, 2012 (“Convertible Notes”) consisted of the following:
 
October 31, 2014
 
January 31, 2014
 
(in thousands except conversion
rate and conversion price)
Principal value
$
150,000

 
$
150,000

Unamortized debt discount
(18,544
)
 
(21,107
)
Carrying value of senior convertible notes
$
131,456

 
$
128,893

 
 
 
 
Carrying value of equity component, net of deferred taxes
$
15,546

 
$
15,546

 
 
 
 
Conversion rate (shares of common stock per $1,000 principal amount of notes)
23.1626

 
 
Conversion price (per share of common stock)
$
43.17

 
 
     
The Company recognized interest expense associated with its Senior Convertible Notes as follows:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
(in thousands)
Cash Interest Expense
 
 
 
 
 
 
 
Coupon interest expense
$
1,406

 
$
1,406

 
$
4,219

 
$
4,219

Noncash Interest Expense
 
 
 
 
 
 
 
Amortization of debt discount
864

 
806

 
2,563

 
2,392

Amortization of transaction costs
135

 
131

 
402

 
391

 
$
2,405

 
$
2,343

 
$
7,184

 
$
7,002


As of October 31, 2014, the unamortized debt discount will be amortized over a remaining period of approximately 4.5 years. As of October 31, 2014 and January 31, 2014, the if-converted value of the Senior Convertible Notes does not exceed the principal balance. The effective interest rate of the liability component was equal to 7.0% for each of the statements of operations periods presented.
 

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NOTE 6—DERIVATIVE INSTRUMENTS
 
The Company holds derivative instruments for the purpose of minimizing exposure to fluctuations in foreign currency exchange rates to which the Company is exposed in the normal course of its operations.
 
Net Investment Hedges
    
To protect the value of the Company’s investments in its foreign operations against adverse changes in foreign currency exchange rates, the Company may, from time to time, hedge a portion of its net investment in one or more of its foreign subsidiaries. Gains and losses on derivative instruments that are designated and effective as a net investment hedge are included in other comprehensive income and only reclassified into earnings in the period during which the hedged net investment is sold or liquidated. Any hedge ineffectiveness is recognized in earnings immediately.

Cash Flow Hedges
 
On October 9, 2013, the Company entered into a forward-starting interest rate swap instrument which has a notional amount of $100.0 million dollars, became effective September 30, 2014 and matures September 30, 2018. The objective of the instrument is to, beginning on September 30, 2014, protect the Company from changes in benchmark interest rates to which the Company is exposed through certain of its variable interest rate credit facilities. The instrument provides for a fixed interest rate of 1.901% up to the maturity date.

The Company may, from time to time, hedge foreign currency exchange rate risk arising from inventory purchases denominated in Canadian dollars through the use of foreign currency forward contracts. The maximum length of time over which the Company hedges its exposure to the variability in future cash flows associated with the Canadian dollar purchasing is less than 12 months.

The interest rate swap instrument and foreign currency contracts have been designated as cash flow hedging instruments and accordingly changes in the effective portion of the fair value of the instruments are recorded in other comprehensive income and only reclassified into earnings in the period(s) in which the related hedged item affects earnings or the anticipated underlying hedged transactions are no longer probable of occurring. Any hedge ineffectiveness is recognized in earnings immediately.

Derivative Instruments Not Designated as Hedging Instruments
 
The Company uses foreign currency forward contracts to hedge the effects of fluctuations in exchange rates on outstanding intercompany loans. The Company does not formally designate and document such derivative instruments as hedging instruments; however, the instruments are an effective economic hedge of the underlying foreign currency exposure. Both the gain or loss on the derivative instrument and the offsetting gain or loss on the underlying intercompany loan are recognized in earnings immediately, thereby eliminating or reducing the impact of foreign currency exchange rate fluctuations on net income.
 
The following table sets forth the notional value of the Company's outstanding derivative instruments.
 
Notional Amount as of:
 
October 31, 2014
 
January 31, 2014
 
(in thousands)
Net investment hedge:
 
 
 
Foreign currency contracts
$
23,473

 
$
43,742

Cash flow hedges:
 
 
 
Interest rate swap
100,000

 
100,000

Foreign currency contracts

 
4,754

Derivatives not designated as hedging instruments:
 
 
 
Foreign currency contracts
32,812

 
44,775


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The following table sets forth the fair value of the Company’s outstanding derivative instruments. 
 
Fair Value as of:
 
Balance Sheet Location
 
October 31, 2014
 
January 31, 2014
 
 
(in thousands)
 
 
Asset Derivatives:
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
Net investment hedges:
 
 
 
 
 
Foreign currency contracts
$
152

 
$
157

 
Prepaid expenses and other
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts
194

 
279

 
Prepaid expenses and other
Total Asset Derivatives
$
346

 
$
436

 
 
 
 
 
 
 
 
Liability Derivatives:
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
Interest rate swap
$
2,262

 
$
1,227

 
Accrued expenses
Foreign currency contracts

 
211

 
Accrued expenses
Total Liability Derivatives
$
2,262

 
$
1,438

 
 
    
The following table sets forth the gains and losses recognized in other comprehensive income (loss) ("OCI") and income (loss) related to the Company’s derivative instruments for the three and nine months ended October 31, 2014 and 2013, respectively. All amounts included in income (loss) in the table below from derivatives designated as hedging instruments relate to reclassifications from accumulated other comprehensive income.
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
 
 
2014
 
2013
 
2014
 
2013
 
 
 
OCI
 
Income (Loss)
 
OCI
 
Income (Loss)
 
OCI
 
Income (Loss)
 
OCI
 
Income (Loss)
 
Statements of Operations Classification
 
(in thousands)
 
(in thousands)
 
 
Dervatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
2,363

 
$

 
$
(443
)
 
$

 
$
2,439

 
$

 
$
38

 
$

 
N/A
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
(1,106
)
 
(150
)
 
(1,299
)
 

 
(1,184
)
 
(150
)
 
(1,299
)
 

 
Interest income and other income (expense)
Foreign currency contracts

 
(37
)
 

 

 
73

 
(72
)
 

 

 
Cost of revenue - equipment
Dervatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts

 
2,436

 

 
(851
)
 

 
2,582

 

 
(781
)
 
Interest income and other income (expense)
Total Derivatives
$
1,257

 
$
2,249

 
$
(1,742
)
 
$
(851
)
 
$
1,328

 
$
2,360

 
$
(1,261
)
 
$
(781
)
 
 
    
No components of the Company's net investment or cash flow hedging instruments were excluded from the assessment of hedge ineffectiveness.

    

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As of October 31, 2014, the Company had $2.4 million and $0.1 million in pre-tax net unrealized losses associated with its interest rate swap and foreign currency contract cash flow hedging instruments recorded in accumulated other comprehensive income, respectively. The Company expects that $1.7 million and $0.1 million of pre-tax unrealized losses associated with its interest rate swap and foreign currency contracts, respectively, will be reclassified into net income over the next 12 months. 

NOTE 7—FAIR VALUE OF FINANCIAL INSTRUMENTS

The assets and liabilities which are measured at fair value on a recurring basis as of October 31, 2014 and January 31, 2014 are as follows:
 
October 31, 2014
 
January 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
 
(in thousands)
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
346

 
$

 
$
346

 
$

 
$
436

 
$

 
$
436

Total Financial Assets
$

 
$
346

 
$

 
$
346

 
$

 
$
436

 
$

 
$
436

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
$

 
$
2,262

 
$

 
$
2,262

 
$

 
$
1,227

 
$

 
$
1,227

Foreign currency contracts

 

 

 

 

 
211

 

 
211

Total Financial Liabilities
$

 
$
2,262

 
$

 
$
2,262

 
$

 
$
1,438

 
$

 
$
1,438


The valuation for the Company's foreign currency contracts and interest rate swap derivative instruments were valued using discounted cash flow analyses, an income approach, utilizing readily observable market data as inputs.

The Company also has financial instruments that are not recorded at fair value in its consolidated financial statements. 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, which are Level 2 fair value inputs. Based upon current borrowing rates with similar maturities, which are Level 2 fair value inputs, the carrying value of long-term debt approximates the fair value as of October 31, 2014 and January 31, 2014, respectively. The following table provides details on the Senior Convertible Notes as of October 31, 2014 and January 31, 2014. The difference between the face value and the carrying value of these notes is the result of the allocation between the debt and equity components. Fair value of the Senior Convertible Notes was estimated based on Level 2 fair value inputs.
 
October 31, 2014
 
January 31, 2014
 
Estimated Fair Value
 
Carrying Value
 
Face Value
 
Estimated Fair Value
 
Carrying Value
 
Face Value
 
(in thousands)
 
(in thousands)
Senior convertible notes
$
115,254

 
$
131,456

 
$
150,000

 
$
128,522

 
$
128,893

 
$
150,000


NOTE 8—SEGMENT INFORMATION AND OPERATING RESULTS
 
The Company owns and operates a network of full service agricultural and construction equipment stores in the United States and Europe. The Company has three reportable segments: Agriculture, Construction and International. The Company’s segments are organized based on types of products sold and geographic areas, as described in the following paragraphs. The operating results for each segment are reported separately to the Company’s Chief Executive Officer and President to make decisions regarding the allocation of resources, to assess the Company’s operating performance and to make strategic decisions.

The Company’s Agriculture segment sells, services, and rents machinery, and related parts and attachments, for uses ranging from large-scale farming to home and garden use for customers in North America. This segment also includes ancillary sales and services related to agricultural activities and products such as equipment transportation, Global Positioning System (“GPS”) signal subscriptions and finance and insurance products.
 
The Company’s Construction segment sells, services, and rents machinery, and related parts and attachments, for uses ranging from heavy construction to light industrial machinery use to customers in North America. This segment also includes

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ancillary sales and services related to construction activities such as equipment transportation, GPS signal subscriptions and finance and insurance products.
 
The Company’s International segment sells, services, and rents machinery, and related parts and attachments, for uses ranging from large-scale farming and construction to home and garden use to customers in Eastern Europe. It also includes export sales of equipment and parts to customers outside of the United States.
 
Revenue, income (loss) before income taxes and total assets at the segment level are reported before eliminations. The Company retains various unallocated income/(expense) items and assets at the general corporate level, which the Company refers to as “Shared Resources” in the table below. Shared Resources assets primarily consist of cash and property and equipment. Revenue between segments is immaterial. Revenue amounts included in Eliminations primarily relate to transactions within a segment.

Certain financial information for each of the Company’s business segments is set forth below. 
 
Three Months Ended October 31,

Nine Months Ended October 31,
 
2014

2013

2014

2013
 
(in thousands)
 
(in thousands)
Revenue
 
 
 
 
 
 
 
Agriculture
$
346,116

 
$
459,005

 
$
1,013,118

 
$
1,186,893

Construction
110,095

 
109,850

 
325,482

 
290,637

International
53,348

 
40,255

 
127,249

 
107,855

Segment revenue
509,559

 
609,110

 
1,465,849

 
1,585,385

Eliminations
(16,418
)
 
(21,149
)
 
(56,255
)
 
(67,570
)
Total
$
493,141

 
$
587,961

 
$
1,409,594

 
$
1,517,815

 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
 
 
 
 
Agriculture
$
5,150

 
$
16,677

 
$
13,747

 
$
34,451

Construction
77

 
(3,407
)
 
(5,647
)
 
(11,642
)
International
(1,447
)
 
(1,022
)
 
(11,866
)
 
(1,441
)
Segment income (loss) before income taxes
3,780

 
12,248

 
(3,766
)
 
21,368

Shared Resources
971

 
(2,424
)
 
800

 
(4,775
)
Eliminations
962

 
245

 
1,865

 
(965
)
Income (Loss) Before Income Taxes
$
5,713

 
$
10,069

 
$
(1,101
)
 
$
15,628

 
 
October 31, 2014
 
January 31, 2014
 
(in thousands)
Total Assets
 
 
 
Agriculture
$
861,235

 
$
943,212

Construction
424,300

 
308,525

International
181,643

 
195,534

Segment assets
1,467,178

 
1,447,271

Shared Resources
106,885

 
120,335

Eliminations
(1,291
)
 
(2,958
)
Total
$
1,572,772

 
$
1,564,648



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NOTE 9—STORE CLOSINGS AND REALIGNMENT COSTS
To better align its Construction business in certain markets, in April 2014, the Company reduced its Construction-related headcount by approximately 12% primarily through the closing of seven underperforming Construction stores, staff reductions at other dealerships and reductions in support staff at its Shared Resource Center. The closed stores were located in Bozeman, Big Sky and Helena, Montana; Cheyenne, Wyoming; Clear Lake, Iowa; Flagstaff, Arizona; and Rosemount, Minnesota. The Company also closed one Agriculture store in Oskaloosa, Iowa and merged it with the nearby Agriculture store in Pella, Iowa. The Company's remaining stores in each of the respective areas assumed the majority of the distribution rights for the CNH Industrial brand previously held by the stores which have closed. The majority of the assets of the closed stores have been redeployed to other store locations. Certain inventory items which are not sold by any of our remaining stores were sold at auction. The inventory markdown attributable to such items are included in the exit cost summary below. The majority of the exit costs were recognized during the three months ended April 30, 2014; however the remaining costs, which primarily relate to asset relocation and other closing costs, were incurred during the three months ended July 31, 2014.

The following summarizes the exit costs associated with the store closings and realignment that occurred in April 2014. The amounts incurred during the six months ended July 31, 2014 reflect the total amounts expected to be incurred related to the closing of these stores.
 
Amount Incurred During the Three Months Ended October 31, 2014
 
Amount Incurred During the Nine Months Ended October 31, 2014
 
Income Statement Classification
 
(in thousands)
 
 
Construction Segment
 
 
 
 
 
Lease termination costs
$

 
$
1,511

 
Realignment Costs
Employee severance costs

 
451

 
Realignment Costs
Impairment of fixed assets, net of gains on asset disposition

 
(60
)
 
Realignment Costs
Asset relocation and other closing costs

 
362

 
Realignment Costs
 
$

 
$
2,264

 
 
Agriculture Segment
 
 
 
 
 
Lease termination costs
$

 
$
148

 
Realignment Costs
Employee severance costs

 
71

 
Realignment Costs
Impairment of fixed assets, net of gains on asset disposition

 
85

 
Realignment Costs
Asset relocation and other closing costs

 
84

 
Realignment Costs
Inventory cost adjustments

 
471

 
Equipment Cost of Sales
 
$

 
$
859

 
 
Shared Resource Center
 
 
 
 
 
Employee severance costs
$

 
$
300

 
Realignment Costs
 
$

 
$
300

 
 
Total
 
 
 
 
 
Lease termination costs
$

 
$
1,659

 
Realignment Costs
Employee severance costs

 
822

 
Realignment Costs
Impairment of fixed assets, net of gains on asset disposition

 
25

 
Realignment Costs
Asset relocation and other closing costs

 
446

 
Realignment Costs
Inventory cost adjustments

 
471

 
Equipment Cost of Sales
 
$

 
$
3,423

 
 


16

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The Company accrued for lease termination and employee severance costs in April 2014, but exit costs related to impairment, asset relocation and other closing costs and inventory cost adjustments were not accrued but recognized as incurred. A reconciliation of the beginning and ending exit cost liability balance, which is included in accrued expenses in the consolidated balance sheets, follows:
 
Amount
 
(in thousands)
Balance, January 31, 2014
$
548

Exit costs incurred and charged to expense
 
Lease termination costs
1,659

Employee severance costs
822

Exit costs paid
 
Lease termination costs
(514
)
Employee severance costs
(722
)
Adjustments
 
Lease termination costs
(106
)
Balance, October 31, 2014
$
1,687


NOTE 10—INCOME TAXES
The Company incurs a provision for income taxes in jurisdictions in which it has taxable income. Generally the Company receives a benefit for income taxes in jurisdictions in which it has taxable losses unless it has recorded a valuation allowance for that jurisdiction. The fluctuations in our effective income tax rate are primarily due to losses in our international subsidiaries in which we record a valuation allowance against our net operating losses. These losses are available to reduce future taxable income, if earned within the allowable net operating loss carryforward period, in these jurisdictions. The foreign jurisdictions in which the Company operates have net operating loss carryforward periods ranging from five to seven years, with certain jurisdictions having indefinite carryforward periods.
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
 
(dollars in thousands)
 
(dollars in thousands)
Income (Loss) Before Income Taxes
$
5,713

 
$
10,069

 
$
(1,101
)
 
$
15,628

Provision for Income Taxes
(3,400
)
 
(4,311
)
 
(4,254
)
 
(6,506
)
Effective Income Tax Rate
59.5
%
 
42.8
%
 
386.4
%
 
41.6
%

A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
U.S. statutory rate
35.0
%
 
35.0
%
 
(35.0
)%
 
35.0
%
Foreign statutory rates
3.7
%
 
0.6
%
 
(3.7
)%
 
0.6
%
State taxes on income net of federal tax benefit
4.9
%
 
4.9
%
 
(4.9
)%
 
4.9
%
Tax effect of not recording a benefit on losses in jurisdictions with a valuation allowance
7.4
%
 
0.1
%
 
399.0
 %
 
0.1
%
All other, net
8.5
%
 
2.2
%
 
31.0
 %
 
1.0
%
 
59.5
%
 
42.8
%
 
386.4
 %
 
41.6
%


17

Table of Contents

NOTE 11—BUSINESS COMBINATIONS
The Company continued to implement its strategy of consolidating dealerships in desired market areas. Below is a summary of the acquisition completed during the nine months ended October 31, 2014. Pro forma results are not presented as the acquisitions are not considered material, individually or in aggregate, to the Company. The results of operations have been included in the Company’s consolidated statements of operations since the date of the business combination.

On August 29, 2014, the Company acquired certain assets of Midland Equipment, Inc. The acquired entity consisted of one agriculture equipment store in Wayne, Nebraska, which expands the Company's agricultural presence in Nebraska. The allocation of the purchase price is presented in the following table.
 
(in thousands)
Receivables
$
147

Inventories
525

Property and equipment
156

Total assets
$
828

 
 
Cash consideration
$
584

Non-cash consideration: liabilities incurred
244

Total consideration
$
828



18

Table of Contents

ITEM 2.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and related notes included in Item 1 of Part I 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, 2014.
 
Realignment Costs

To better align its Construction business in certain markets, in April 2014, the Company reduced its Construction-related headcount by approximately 12% primarily through the closing of seven underperforming Construction stores, staff reductions at other dealerships and reductions in support staff at its Shared Resource Center. The closed stores were located in Bozeman, Big Sky and Helena, Montana; Cheyenne, Wyoming; Clear Lake, Iowa; Flagstaff, Arizona; and Rosemount, Minnesota. The Company also closed one Agriculture store in Oskaloosa, Iowa and merged it with the nearby Agriculture store in Pella, Iowa. The Company's remaining stores in each of the respective areas assumed the majority of the distribution rights for the CNH Industrial brand previously held by the stores which have closed. We recognized $3.4 million in exit costs during the nine months ended October 31, 2014. See also the Non-GAAP Financial Measures section below for impact of these costs on non-GAAP Diluted EPS.

Foreign Currency Remeasurement Losses

In February of 2014, the National Bank of Ukraine terminated the currency peg of the Ukrainian hryvnia ("UAH") to the USD; subsequent to the decoupling and as a result of the economic and political conditions present in the country, the UAH experienced significant devaluation from the date the currency peg was terminated through the end of the Company’s third fiscal quarter. We recognized $0.5 million and $4.9 million in foreign currency remeasurement losses resulting from a devaluation of the UAH during the three and nine months ended October 31, 2014, respectively. These losses are included in interest income and other income (expense) in our consolidated statements of operations. See also the Non-GAAP Financial Measures section below for impact of these costs on non-GAAP Diluted EPS.

Critical Accounting Policies and Estimates
 
There have been no material changes in our Critical Accounting Policies and Estimates, as disclosed in our Annual Report on Form 10-K for the year ended January 31, 2014.
 
Overview
 
We own and operate a network of full service agricultural and construction equipment stores in the United States and Europe. Based upon information provided to us by CNH Industrial N.V. or its U.S. subsidiary CNH Industrial America, LLC, we are the largest retail dealer of Case IH Agriculture equipment in the world, the largest retail dealer of Case Construction equipment in North America and a major retail dealer of New Holland Agriculture and New Holland Construction equipment in the U.S. We operate our business through three reportable segments, Agriculture, Construction and International. Within each segment, we have four principal sources of revenue: new and used equipment sales, parts sales, service, and equipment rental and other activities.
 
Our net income attributable to Titan Machinery Inc. common stockholders was $2.4 million, or $0.11 per diluted share, for the three months ended October 31, 2014, compared to $5.7 million, or $0.27 per diluted share, for the three months ended October 31, 2013. Our non-GAAP Diluted EPS was $0.14 and $0.27 for the three months ended October 31, 2014 and 2013, respectively. See the Non-GAAP Financial Measures section below for a reconciliation between the GAAP and non-GAAP measures. Significant factors impacting the quarterly comparisons were:
 
Revenue decreased 16.1% for the third quarter of fiscal 2015, as compared to the third quarter last year, primarily due to a decrease in Agriculture same-store sales, and partially offset by an increase in Construction same-store sales;


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Table of Contents

Total gross profit margin increased to 17.2% for the third quarter of fiscal 2015, as compared to 15.9% for the third quarter of fiscal 2014, primarily caused by a change in gross profit mix to our higher-margin parts, service and rental and other businesses;

Floorplan interest expense increased in the third quarter of fiscal 2015, as compared to the same period last year, due to the increase in floorplan payable and the related equipment inventory balances in our International segment, and higher interest rates in Ukraine associated with the political and economic instability that is present in the current fiscal year; and

Interest income and other income (expense) decreased primarily due to foreign currency remeasurement losses in Ukraine, resulting from continued devaluation of the Ukrainian hryvnia in the third quarter of fiscal 2015.

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. Segment information is provided later in this discussion and analysis of our results of operations.
 
Same-store sales for any period represent sales by stores that were part of the Company for the entire comparable periods in the current and preceding fiscal years. We do not distinguish relocated or newly-expanded stores in this same-store analysis. Closed stores are excluded from the same-store analysis. Stores that do not meet the criteria for same-store classification are described as acquisition stores throughout the Results of Operations section in this Quarterly Report on Form 10-Q.
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
 
(dollars in thousands)
 
(dollars in thousands)
Equipment
 
 
 
 
 

 
 

Revenue
$
343,482

 
$
441,752

 
$
1,008,614

 
$
1,134,885

Cost of revenue
317,702

 
406,867

 
926,863

 
1,039,773

Gross profit
$
25,780

 
$
34,885

 
$
81,751

 
$
95,112

Gross profit margin
7.5
%
 
7.9
%
 
8.1
%
 
8.4
%
Parts
 
 
 
 
 
 
 
Revenue
$
80,692

 
$
80,903

 
$
219,597

 
$
214,373

Cost of revenue
56,402

 
55,419

 
154,146

 
148,152

Gross profit
$
24,290

 
$
25,484

 
$
65,451

 
$
66,221

Gross profit margin
30.1
%
 
31.5
%
 
29.8
%
 
30.9
%
Service
 
 
 
 
 
 
 
Revenue
$
42,410

 
$
40,646

 
$
117,941

 
$
112,516

Cost of revenue
15,037

 
14,453

 
42,969

 
40,199

Gross profit
$
27,373

 
$
26,193

 
$
74,972

 
$
72,317

Gross profit margin
64.5
%
 
64.4
%
 
63.6
%
 
64.3
%
Rental and other
 
 
 
 
 
 
 
Revenue
$
26,557

 
$
24,660

 
$
63,442

 
$
56,041

Cost of revenue
19,309

 
17,616

 
45,333

 
38,595

Gross profit
$
7,248

 
$
7,044

 
$
18,109

 
$
17,446

Gross profit margin
27.3
%
 
28.6
%
 
28.5
%
 
31.1
%


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Table of Contents

The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated: 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2014
 
2013
 
2014
 
2013
Revenue
 
 
 
 
 

 
 

Equipment
69.6
 %
 
75.1
 %
 
71.5
 %
 
74.8
 %
Parts
16.4
 %
 
13.8
 %
 
15.6
 %
 
14.1
 %
Service
8.6
 %
 
6.9
 %
 
8.4
 %
 
7.4
 %
Rental and other
5.4
 %
 
4.2
 %
 
4.5
 %
 
3.7
 %
Total Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Total Cost of Revenue
82.8
 %
 
84.1
 %
 
83.0
 %
 
83.5
 %
Gross Profit
17.2
 %
 
15.9
 %
 
17.0
 %
 
16.5
 %
Operating Expenses
14.1
 %
 
12.7
 %
 
14.7
 %
 
14.1
 %
Realignment Costs
 %
 
 %
 
0.2
 %
 
 %
Income from Operations
3.1
 %
 
3.2
 %
 
2.1
 %
 
2.4
 %
Other Income (Expense)
(1.9
)%
 
(1.5
)%
 
(2.2
)%
 
(1.4
)%
Income (Loss) Before Income Taxes
1.2
 %
 
1.7
 %
 
(0.1
)%
 
1.0
 %
Provision for Income Taxes
(0.7
)%
 
(0.7
)%
 
(0.3
)%
 
(0.4
)%
Net Income (Loss) Including Noncontrolling Interest
0.5
 %
 
1.0
 %
 
(0.4
)%
 
0.6
 %
Less: Net Income (Loss) Attributable to Noncontrolling Interest
 %
 
 %
 
(0.1
)%
 
 %
Net Income (Loss) Attributable to Titan Machinery Inc.
0.5
 %
 
1.0
 %
 
(0.3
)%
 
0.6
 %
 
Three Months Ended October 31, 2014 Compared to Three Months Ended October 31, 2013
 
Consolidated Results
 
Revenue 
 
Three Months Ended October 31,
 
Increase/
 
Percent
 
2014
 
2013
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Equipment
$
343,482

 
$
441,752

 
$
(98,270
)
 
(22.2
)%
Parts
80,692

 
80,903

 
(211
)
 
(0.3
)%
Service
42,410

 
40,646

 
1,764

 
4.3
 %
Rental and other
26,557

 
24,660

 
1,897

 
7.7
 %
Total Revenue
$
493,141

 
$
587,961

 
$
(94,820
)
 
(16.1
)%
 
The decrease in revenue for the third quarter of fiscal 2015 was primarily due to a decrease in same-store sales of 14.1% over the comparable prior year period, mainly driven by a decrease in Agriculture same-store sales of 23.8% and partially offset by an increase in Construction segment same-store sales of 10.7%. Agriculture same-store sales decreased primarily due to a decrease in equipment revenue and were negatively impacted by challenging industry conditions such as decreases in agricultural commodity prices and projected net farm income, which have a negative effect on customer sentiment. Changes in actual or anticipated net farm income, or in any of the significant components of net farm income, generally have a direct correlation with agricultural equipment purchases by farmers. In February and August 2014, the U.S. Department of Agriculture published its projections of a decrease in net farm income from calendar year 2013 to 2014. The commodity price of corn and soybeans, which are the predominant crops in our Agriculture store footprint, decreased significantly from the price during the third quarter of fiscal 2014, mainly as a result of a projected increase in U.S. corn and soybean supply compared to the prior year. The increase in Construction segment revenue, which included increases in all lines of the Construction segment's business, resulted from improved industry conditions and the positive impact of operational initiatives.

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Table of Contents

Gross Profit 
 
Three Months Ended October 31,
 
Increase/
 
Percent
 
2014
 
2013
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Gross Profit
 
 
 
 
 
 
 
Equipment
$
25,780

 
$
34,885

 
$
(9,105
)
 
(26.1
)%
Parts
24,290

 
25,484

 
(1,194
)
 
(4.7
)%
Service
27,373

 
26,193

 
1,180

 
4.5
 %
Rental and other
7,248

 
7,044

 
204

 
2.9
 %
Total Gross Profit
$
84,691

 
$
93,606

 
$
(8,915
)
 
(9.5
)%
Gross Profit Margin
 
 
 
 
 
 
 
Equipment
7.5
%
 
7.9
%
 
(0.4
)%
 
(5.1
)%
Parts
30.1
%
 
31.5
%
 
(1.4
)%
 
(4.4
)%
Service
64.5
%
 
64.4
%
 
0.1
 %
 
0.2
 %
Rental and other
27.3
%
 
28.6
%
 
(1.3
)%
 
(4.5
)%
Total Gross Profit Margin
17.2
%
 
15.9
%
 
1.3
 %
 
8.2
 %
Gross Profit Mix
 
 
 
 
 
 
 
Equipment
30.4
%
 
37.3
%
 
(6.9
)%
 
(18.5
)%
Parts
28.7
%
 
27.2
%
 
1.5
 %
 
5.5
 %
Service
32.3
%
 
28.0
%
 
4.3
 %
 
15.4
 %
Rental and other
8.6
%
 
7.5
%
 
1.1
 %
 
14.7
 %
Total Gross Profit Mix
100.0
%
 
100.0
%
 
 %
 
 %
 
The $8.9 million decrease in gross profit for the third quarter of fiscal 2015, as compared to the same period last year, was primarily due to a decrease in revenue. The increase in total gross profit margin from 15.9% for the third quarter of fiscal 2014 to 17.2% for the third quarter of fiscal 2015 was mainly due to a change in gross profit mix to our higher-margin parts, service and rental and other businesses, and partially offset by decreases in gross profit margin on certain of our components of revenue. The change in gross profit mix primarily resulted from decreased equipment revenue causing a change in sales mix.
Operating Expenses
 
Three Months Ended October 31,
 
Increase/
 
Percent
 
2014
 
2013
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Operating Expenses
$
69,459

 
$
75,005

 
$
(5,546
)
 
(7.4
)%
Operating Expenses as a Percentage of Revenue
14.1
%
 
12.7
%
 
1.4
%
 
11.0
 %
 
The $5.5 million decrease in operating expenses, as compared to the same period last year, was primarily due to decreased commissions expense resulting from the decrease in equipment gross profit, and cost savings associated with the closing of eight stores in the first quarter of fiscal 2015. These decreases in operating expenses were partially offset by additional costs associated with expanding our International distribution network. The increase in operating expenses as a percentage of total revenue was primarily due to the decrease in total revenue in the third quarter of fiscal 2015, as compared to the third quarter of fiscal 2014, which negatively affected our ability to leverage our fixed operating costs.

Other Income (Expense) 
 
Three Months Ended October 31,
 
Increase/
 
Percent
 
2014
 
2013
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Interest income and other income (expense)
$
(489
)
 
$
(260
)
 
$
(229
)
 
(88.1
)%
Floorplan interest expense
(5,444
)
 
(4,779
)
 
665

 
13.9
 %
Other interest expense
(3,586
)
 
(3,493
)
 
93

 
2.7
 %

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Table of Contents

 
The decrease in interest income and other income (expense) was primarily due to foreign currency remeasurement losses in Ukraine, resulting from a devaluation of the Ukrainian hryvnia in the third quarter of fiscal 2015. See the Non-GAAP Financial Measures section below for impact of these costs on non-GAAP Diluted EPS. The increase in floorplan interest expense of $0.7 million for the third quarter of fiscal 2015 was primarily due to the increase in floorplan payable and the related equipment inventory balances in our International segment, and higher interest rates in Ukraine associated with the political and economic instability that is present in the current fiscal year.

Provision for Income Taxes
 
Three Months Ended October 31,
 

 
Percent
 
2014
 
2013
 
Decrease
 
Change
 
(dollars in thousands)
 
 
Provision for Income Taxes
$
3,400

 
$
4,311

 
$
(911
)
 
(21.1
)%
 
Our effective tax rate increased to 59.5% for the third quarter of fiscal 2015 compared to 42.8% for the same period last year, primarily due to losses in our international subsidiaries, where we record a valuation allowance against our net operating losses, and the impact of permanent differences and discrete items. The impact of these international subsidiaries' losses on our effective tax rate for the third quarter of fiscal 2015 amounted to 7.4%, and the impact of the permanent differences and discrete items amounted to 8.5%. These items have a larger impact on our effective tax rate in the current year due to our lower income before income taxes than the prior year. See Note 10 of the notes to our consolidated financial statements for additional information regarding our effective tax rate.
 
Segment Results
 
Certain financial information for our Agriculture, Construction and International business segments is set forth below. Revenue and income (loss) before income taxes at the segment level are reported before eliminations. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Revenue between segments is immaterial. Revenue amounts included in Eliminations primarily relate to transactions within a segment.
 
 
Three Months Ended October 31,
 
Increase/
 
Percent
 
2014
 
2013
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Revenue
 
 
 
 
 
 
 
Agriculture
$
346,116

 
$
459,005

 
$
(112,889
)
 
(24.6
)%
Construction
110,095

 
109,850

 
245

 
0.2
 %
International
53,348

 
40,255

 
13,093

 
32.5
 %
Segment revenue
509,559

 
609,110

 
(99,551
)
 
(16.3
)%
Eliminations
(16,418
)
 
(21,149
)
 
4,731

 
22.4
 %
Total
$
493,141

 
$
587,961

 
$
(94,820
)
 
(16.1
)%
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
 
 
 
 
Agriculture
$
5,150

 
$
16,677

 
$
(11,527
)
 
(69.1
)%
Construction
77

 
(3,407
)
 
3,484

 
102.3
 %
International
(1,447
)
 
(1,022
)
 
(425
)
 
(41.6
)%
Segment income (loss) before income taxes
3,780

 
12,248

 
(8,468
)
 
(69.1
)%
Shared Resources
971

 
(2,424
)
 
3,395

 
140.1
 %
Eliminations
962

 
245

 
717

 
292.7
 %
Income (Loss) Before Income Taxes
$
5,713

 
$
10,069

 
$
(4,356
)
 
(43.3
)%

23

Table of Contents

Agriculture
 
Agriculture segment revenue for the third quarter of fiscal 2015 decreased 24.6% compared to the same period last year. The revenue decrease was due to an Agriculture same-store sales decrease of 23.8% over the third quarter of fiscal 2014, which was primarily due to a decrease in equipment revenue, and were negatively impacted by challenging industry conditions, such as decreases in agricultural commodity prices and projected net farm income, which negatively affected customer sentiment in the third quarter of fiscal 2015 as compared to the same period in the prior year. Parts and service same-store sales for the third quarter of fiscal 2015 remained consistent with the third quarter of fiscal 2014. Changes in actual or anticipated net farm income, or in any of the significant components of net farm income, generally have a direct correlation with agricultural equipment purchases by farmers. In February and August 2014, the U.S. Department of Agriculture published its projections of a decrease in net farm income from calendar year 2013 to 2014. The commodity price of corn and soybeans, which are the predominant crops in our Agriculture store footprint, decreased significantly from the price during the third quarter of fiscal 2014, mainly as a result of a projected increase in U.S. corn and soybean supply compared to the prior year.
 
Agriculture segment income before income taxes for the third quarter of fiscal 2015 decreased 69.1% compared to the same period last year, primarily due to the aforementioned decrease in equipment revenue.
 
Construction
 
Construction segment revenue for the third quarter of fiscal 2015 increased 0.2% compared to the same period last year. The revenue increase was due to a same-store sales increase of 10.7% over the third quarter of fiscal 2014, which was offset by the impact of our store closings. The increase in Construction segment revenue, which included increases in all lines of business, resulted from improved industry conditions and the positive impact of operational initiatives.
 
Our Construction segment income before income taxes was $0.1 million for the third quarter of fiscal 2015 compared to segment loss before income taxes of $3.4 million for the third quarter of fiscal 2014. This improvement was primarily due to improved gross profit margin on equipment, a decrease in operating expenses, and partially offset by an increase in floorplan interest expense. The increase in gross profit margin on equipment was primarily due to the aforementioned improved industry conditions. The decrease in operating expense mainly reflects cost savings associated with the closing of seven stores in the first quarter of fiscal 2015. The increase in floorplan interest expense reflects higher equipment inventory balances during the third quarter of fiscal 2015, as compared to the third quarter of fiscal 2014. The dollar utilization of our rental fleet decreased, from 36.9% in the third quarter of fiscal 2014 to 33.6% in the third quarter of fiscal 2015, primarily due to lower rental revenue earned on our rental fleet than the third quarter of last year.
 
International
 
International segment revenue for the third quarter of fiscal 2015 increased $13.1 million compared to the same period last year, primarily due to new store openings, and a same-store sales increase of 33.9%.
 
Our International segment loss before income taxes was $1.4 million for the third quarter of fiscal 2015 compared to $1.0 million for the same period last year. This decrease was primarily due to increases in operating expenses and floorplan interest expense, and a decrease in interest income and other income (expense), as compared to the same period of the prior year. Operating expenses increased due to expanding our distribution network in Eastern Europe, including opening a new store in Ukraine and establishing a European operations center to support our European stores. We believe the political and economic instability in Ukraine has had a negative impact on our revenue, which reduces our ability to leverage these fixed operating costs. The increase in floorplan interest expense for the third quarter of fiscal 2015, as compared to the same period in the prior year, was primarily due to the increase in floorplan payable and the related equipment inventory balances in our International segment, and higher interest rates in Ukraine associated with the political and economic instability that is present in the current fiscal year. The decrease in interest income and other income (expense) was primarily due to foreign currency remeasurement losses in Ukraine, resulting from a further devaluation of the Ukrainian hryvnia in the third quarter of fiscal 2015.

Shared Resources/Eliminations
 
We incur centralized expenses/income at our general corporate level, which we refer to as “Shared Resources,” and then allocate these net expenses to our segments. Since these allocations are set early in the year, unallocated balances may occur.
 
Eliminations remove any inter-company revenue or income (loss) before income taxes residing in our segment results.


24

Table of Contents

Nine Months Ended October 31, 2014 Compared to Nine Months Ended October 31, 2013
 
Consolidated Results
 
Revenue 
 
Nine Months Ended October 31,
 
Increase/
 
Percent
 
2014
 
2013
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Equipment
$
1,008,614

 
$
1,134,885

 
$
(126,271
)
 
(11.1
)%
Parts
219,597

 
214,373

 
5,224

 
2.4
 %
Service
117,941

 
112,516

 
5,425

 
4.8
 %
Rental and other
63,442

 
56,041

 
7,401

 
13.2
 %
Total Revenue
$
1,409,594

 
$
1,517,815

 
$
(108,221
)
 
(7.1
)%
 
The decrease in revenue for the first nine months of fiscal 2015 was primarily due to a decrease in same-store sales of 6.6% over the comparable prior year period, mainly driven by a decrease in Agriculture same-store sales of 14.3% and partially offset by an increase in Construction segment same-store sales of 20.3%. Agriculture same-store sales decreased primarily due to a decrease in equipment revenue and were negatively impacted by challenging industry conditions such as decreases in agricultural commodity prices and projected net farm income, which have a negative effect on customer sentiment. Changes in actual or anticipated net farm income, or in any of the significant components of net farm income, generally have a direct correlation with agricultural equipment purchases by farmers. In February and August 2014, the U.S. Department of Agriculture published its projections of a decrease in net farm income from calendar year 2013 to 2014. The commodity prices of corn and soybeans, which are the predominant crops in our Agriculture store footprint, were significantly lower during the first nine months of fiscal 2015 than the prices during the first nine months of fiscal 2014, mainly as a result of a projected increase in U.S. corn and soybean supply compared to the prior year. The increase in Construction segment revenue, which included increases in all lines of the Construction segment's business, resulted from improved industry conditions and the positive impact of operational initiatives.
Gross Profit 
 
Nine Months Ended October 31,
 
Increase/
 
Percent
 
2014
 
2013
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Gross Profit
 
 
 
 
 
 
 
Equipment
$
81,751

 
$
95,112

 
$
(13,361
)
 
(14.0
)%
Parts
65,451

 
66,221

 
(770
)
 
(1.2
)%
Service
74,972

 
72,317

 
2,655

 
3.7
 %
Rental and other
18,109

 
17,446

 
663

 
3.8
 %
Total Gross Profit
$
240,283

 
$
251,096

 
$
(10,813
)
 
(4.3
)%
Gross Profit Margin
 
 
 
 
 
 
 
Equipment
8.1
%
 
8.4
%
 
(0.3
)%
 
(3.6
)%
Parts
29.8
%
 
30.9
%
 
(1.1
)%
 
(3.6
)%
Service
63.6
%
 
64.3
%
 
(0.7
)%
 
(1.1
)%
Rental and other
28.5
%
 
31.1
%
 
(2.6
)%
 
(8.4
)%
Total Gross Profit Margin
17.0
%
 
16.5
%
 
0.5
 %
 
3.0
 %
Gross Profit Mix
 
 
 
 
 
 
 
Equipment
34.0
%
 
37.9
%
 
(3.9
)%
 
(10.3
)%
Parts
27.3
%
 
26.4
%
 
0.9
 %
 
3.4
 %
Service
31.2
%
 
28.8
%
 
2.4
 %
 
8.3
 %
Rental and other
7.5
%
 
6.9
%
 
0.6
 %
 
8.7
 %
Total Gross Profit Mix
100.0
%
 
100.0
%
 
 %
 
 %
 

25

Table of Contents

The $10.8 million decrease in gross profit for the first nine months of fiscal 2015, as compared to the same period last year, was primarily due to lower equipment revenue and equipment gross profit margin. Total gross profit margin of 17.0% for the first nine months of fiscal 2015 increased from the first nine months of fiscal 2014, mainly due to a change in gross profit mix to our higher-margin parts, service and rental and other businesses, and partially offset by the decreases in gross profit margin on each of our components of revenue. The change in gross profit mix primarily resulted from decreased equipment revenue causing a change in sales mix. The decrease in rental and other gross profit margin resulted from a decrease in the dollar utilization of our rental fleet, from 30.8% in the first nine months of fiscal 2014 to 28.7% in the first nine months of fiscal 2015, primarily due to a higher average size rental fleet for the first nine months of the current year.

Operating Expenses
 
Nine Months Ended October 31,
 
Increase/
 
Percent
 
2014
 
2013
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Operating Expenses
$
208,406

 
$
214,083

 
$
(5,677
)
 
(2.7
)%
Operating Expenses as a Percentage of Revenue
14.7
%
 
14.1
%
 
0.6
%
 
4.3
 %
 
The $5.7 million decrease in operating expenses, as compared to the same period last year, was primarily due to decreased commissions expense resulting from the decrease in equipment gross profit, and cost savings associated with the closing of eight stores in the first quarter of fiscal 2015. These decreases in operating expenses were partially offset by higher occupancy costs associated with store building improvements and additional costs associated with expanding our International distribution network. The increase in operating expenses as a percentage of total revenue was primarily due to the decrease in total revenue in the first nine months of fiscal 2015, as compared to the first nine months of fiscal 2014, which negatively affected our ability to leverage our fixed operating costs.
Realignment Costs
 
Nine Months Ended October 31,
 

 
Percent
 
2014
 
2013
 
Increase
 
Change
 
(dollars in thousands)
 
 
Realignment Costs
$
2,952

 
$

 
$
2,952

 
100.0
%

The realignment costs recognized in the first nine months of fiscal 2015 relate to the the closing of seven underperforming Construction stores, staff reductions at other dealerships and reductions in support staff at the Company's Shared Resource Center that took place in April 2014. The closed stores were located in Bozeman, Big Sky and Helena, Montana; Cheyenne, Wyoming; Clear Lake, Iowa; Flagstaff, Arizona; and Rosemount, Minnesota. The Company also closed its Agriculture store in Oskaloosa, Iowa and merged it with the nearby Agriculture store in Pella, Iowa. See the Non-GAAP Financial Measures section below for impact of these costs on non-GAAP Diluted EPS.

Other Income (Expense) 
 
Nine Months Ended October 31,
 
Increase/
 
Percent
 
2014
 
2013
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Interest income and other income (expense)
$
(4,095
)
 
$
674

 
$
(4,769
)
 
(707.6
)%
Floorplan interest expense
(15,345
)
 
(11,944
)
 
3,401

 
28.5
 %
Other interest expense
(10,586
)
 
(10,115
)
 
471

 
4.7
 %
 
The decrease in interest income and other income (expense) was primarily due to foreign currency remeasurement losses in Ukraine, resulting from a devaluation of the Ukrainian hryvnia in the first nine months of fiscal 2015. See the Non-GAAP Financial Measures section below for impact of these costs on non-GAAP Diluted EPS. The increase in floorplan interest expense of $3.4 million for the first nine months of fiscal 2015 was primarily due to the increase in floorplan payable and the related equipment inventory balances in our International segment, and higher interest rates in Ukraine associated with the political and economic instability that is present in the current fiscal year.


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Provision for Income Taxes
 
Nine Months Ended October 31,
 

 
Percent
 
2014
 
2013
 
Decrease
 
Change
 
(dollars in thousands)
 
 
Provision for Income Taxes
$
4,254

 
$
6,506

 
$
(2,252
)
 
(34.6
)%
 
Our effective tax rate was 386.4% for the first nine months of fiscal 2015, compared to 41.6% for the same period last year. The impact on our effective tax rate for the first nine months of fiscal 2015 of not recording an income tax benefit on losses in jurisdictions with a valuation allowance was 399.0%, as shown in Note 10 of the notes to our consolidated financial statements.
 
Segment Results
 
Certain financial information for our Agriculture, Construction and International business segments is set forth below. Revenue and income (loss) before income taxes at the segment level are reported before eliminations. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Revenue between segments is immaterial. Revenue amounts included in Eliminations primarily relate to transactions within a segment.
 
 
Nine Months Ended October 31,
 
Increase/
 
Percent
 
2014
 
2013
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Revenue
 
 
 
 
 
 
 
Agriculture
$
1,013,118

 
$
1,186,893

 
$
(173,775
)
 
(14.6
)%
Construction
325,482

 
290,637

 
34,845

 
12.0
 %
International
127,249

 
107,855

 
19,394

 
18.0
 %
Segment revenue
1,465,849

 
1,585,385

 
(119,536
)
 
(7.5
)%
Eliminations
(56,255
)
 
(67,570
)
 
11,315

 
16.7
 %
Total
$
1,409,594

 
$
1,517,815

 
$
(108,221
)
 
(7.1
)%
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
 
 
 
 
Agriculture
$
13,747

 
$
34,451

 
$
(20,704
)
 
(60.1
)%
Construction
(5,647
)
 
(11,642
)
 
5,995

 
51.5
 %
International
(11,866
)
 
(1,441
)
 
(10,425
)
 
(723.5
)%
Segment income (loss) before income taxes
(3,766
)
 
21,368

 
(25,134
)
 
(117.6
)%
Shared Resources
800

 
(4,775
)
 
5,575

 
116.8
 %
Eliminations
1,865

 
(965
)
 
2,830

 
293.3
 %
Income (Loss) Before Income Taxes
$
(1,101
)
 
$
15,628

 
$
(16,729
)
 
(107.0
)%
Agriculture
 
Agriculture segment revenue for the first nine months of fiscal 2015 decreased 14.6% compared to the same period last year. The revenue decrease was due to an Agriculture same-store sales decrease of 14.3% compared to the same period last year, which was primarily due to a decrease in equipment revenue. Equipment revenue was negatively impacted by challenging industry conditions, such as decreases in agricultural commodity prices and projected net farm income, which negatively affected customer sentiment in the first nine months of fiscal 2015 as compared to the same period in the prior year. Changes in actual or anticipated net farm income, or in any of the significant components of net farm income, generally have a direct correlation with agricultural equipment purchases by farmers. In February and August 2014, the U.S. Department of Agriculture published its projections of a decrease in net farm income from calendar year 2013 to 2014. The commodity prices of corn and soybeans, which are the predominant crops in our Agriculture store footprint, were significantly lower during the first nine months of fiscal 2015 than the price during the first nine months of fiscal 2014, mainly as a result of a projected increase in U.S. corn and soybean supply compared to the prior year.
 

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Agriculture segment income before income taxes for the first nine months of fiscal 2015 decreased 60.1% compared to the same period last year, primarily due to the aforementioned decrease in equipment revenue, a decrease in equipment gross profit margin and partially offset by a decrease in operating expenses. The compression in equipment gross profit margin was primarily caused by the previously discussed Agriculture industry challenges as well as an oversupply of used equipment in the Agriculture industry. The decrease in operating expenses was primarily due to lower commissions expense resulting from the decrease in equipment gross profit.
 
Construction
 
Construction segment revenue for the first nine months of fiscal 2015 increased 12.0% compared to the same period last year. The revenue increase was due to a same-store sales increase of 20.3% over the first nine months of fiscal 2014. The increase in Construction segment revenue, which included increases in all lines of business, resulted from improved industry conditions and the positive impact of operational initiatives.
 
Our Construction segment loss before income taxes was $5.6 million for the first nine months of fiscal 2015 compared to segment loss before income taxes of $11.6 million for the first nine months of fiscal 2014. This improvement was primarily due to the increase in revenue, decrease in operating expenses, and partially offset by realignment costs. Realignment costs totaling $2.3 million were recognized during the first quarter of fiscal 2015 related to the headcount reductions and closing of seven Construction stores, which was discussed above. The decrease in operating expenses resulted from the cost savings associated with closing these stores. The dollar utilization of our rental fleet decreased, from 30.8% in the first nine months of fiscal 2014 to 28.7% in the first nine months of fiscal 2015, primarily due to a higher average size rental fleet for the first nine months of the current year.
 
International
 
International segment revenue for the first nine months of fiscal 2015 increased $19.4 million compared to the same period last year, primarily due to new store openings, and a same-store sales increase of 22.3%.
 
Our International segment loss before income taxes was $11.9 million for the first nine months of fiscal 2015 compared to segment loss before income taxes of $1.4 million for the same period last year. This increased loss was primarily due to increases in operating expenses and floorplan interest expense, and a decrease in interest income and other income (expense), as compared to the same period of the prior year. Operating expenses increased due to expanding our distribution network in Eastern Europe, including opening a new store in Ukraine and establishing a European operations center to support our European stores. We believe the political and economic instability in Ukraine has had a negative impact on our revenue, which reduces our ability to leverage these fixed operating costs. The increase in floorplan interest expense for the first nine months of fiscal 2015, as compared to the same period in the prior year, was primarily due to the increase in floorplan payable and the related equipment inventory balances in our International segment, and higher interest rates in Ukraine associated with the political and economic instability that is present in the current fiscal year. The decrease in interest income and other income (expense) was primarily due to foreign currency remeasurement losses in Ukraine, resulting from a devaluation of the Ukrainian hryvnia in the first nine months of fiscal 2015.

Shared Resources/Eliminations
 
We incur centralized expenses/income at our general corporate level, which we refer to as “Shared Resources,” and then allocate these net expenses to our segments. Since these allocations are set early in the year, unallocated balances may occur.
 
Eliminations remove any inter-company revenue or income (loss) before income taxes residing in our segment results.

Non-GAAP Financial Measures

To supplement our earnings (loss) per share - diluted ("Diluted EPS") presented on a GAAP basis, we use non-GAAP Diluted EPS, which excludes the impact of our store closing costs and foreign currency remeasurement losses in Ukraine, resulting from a devaluation of the Ukrainian hryvnia. We believe that the presentation of non-GAAP Diluted EPS is relevant and useful to our investors because it provides a measurement of earnings on activities we consider to occur in the ordinary course of our business. Non-GAAP Diluted EPS should be evaluated in addition to, and not considered a substitute for, or superior to, the GAAP measure of Diluted EPS.

    

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The following table reconciles Diluted EPS, a GAAP measure, to non-GAAP Diluted EPS:
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
 
2014
 
2013
 
2014
 
2013
 
 
(dollars in thousands, except per share data)
Net Income (Loss) Attributable to Titan Machinery Inc. Common Stockholders
 
 
 
 
 
 
 
 
Net Income (Loss) Attributable to Titan Machinery Inc. Common Stockholders
 
$
2,421

 
$
5,728

 
$
(4,613
)
 
$
9,112

Non-GAAP Adjustments
 
 
 
 
 
 
 
 
Store Closing Costs (1)
 

 

 
2,035

 

Ukraine Remeasurement (2)
 
508

 

 
4,840

 

Adjusted Net Income Attributable to Titan Machinery Inc. Common Stockholders
 
$
2,929

 
$
5,728

 
$
2,262

 
$
9,112

 
 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
 
Diluted EPS
 
$
0.11

 
$
0.27

 
$
(0.22
)
 
$
0.43

Non-GAAP Adjustments
 
 
 
 
 
 
 
 
Impact of Store Closing Costs (1)
 

 

 
0.10

 

Impact of Ukraine Remeasurement (2)
 
0.03

 

 
0.23

 

Adjusted Diluted EPS
 
$
0.14

 
$
0.27

 
$
0.11

 
$
0.43


(1) See Note 9 of the notes to our consolidated financial statements for details of this matter.
(2) See the Foreign Currency Remeasurement Losses section of Management's Discussion and Analysis of Financial Condition and Results of Operations for details of this matter.

Liquidity and Capital Resources
 
Sources of Liquidity
 
Our primary sources of liquidity are cash reserves, cash from operations, and borrowings under our floorplan payable and other credit facilities. We expect these sources of liquidity to be sufficient to fund our working capital requirements, acquisitions, capital expenditures and other investments in our business, service our debt, pay our tax obligations and commitments and contingencies, and meet any seasonal operating requirements for the foreseeable future, provided, however, that our borrowing capacity under our credit agreements is dependent on compliance with various financial covenants as further described in the "Risk Factors" section of our Annual Report on Form 10-K. We have worked in the past, and will continue to work in the future, with our lenders to implement satisfactory modifications to certain financial covenants as appropriate for the business conditions confronted by us.
 
Adequacy of Capital Resources
 
Our primary uses of cash have been to fund our strategic acquisitions, finance the purchase of inventory, meet debt service requirements and fund operating activities, provide working capital, make payments due under building space operating leases and manufacturer floorplan payables. Based on our current operational performance, we believe our cash flow from operations, available cash and available borrowings under our existing credit facilities will adequately provide our liquidity needs for, at a minimum, the next 12 months. Our main financing arrangements, in which we had discretionary floorplan lines of credit totaling approximately $1.16 billion as of October 31, 2014, are described in Note 4 of the notes to our consolidated financial statements. As of October 31, 2014, we are in compliance with the financial covenants under these agreements. If anticipated operating results create the likelihood of a future covenant violation, we would work with our lenders on an appropriate modification or amendment to our financing arrangements.

Cash Flow

Cash Flow Used For Operating Activities

Net cash used for operating activities was $82.6 million for the nine months ended October 31, 2014, compared to $107.4 million for the nine months ended October 31, 2013. Net cash used for operating activities for the nine months ended

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October 31, 2014 was primarily attributable to decreases in our manufacturer floorplan payable and accounts payable, customer deposits, accrued expenses and other long-term liabilities. The decrease in manufacturer floorplan payable was due to an increase in the use of non-manufacturer floorplan payables for financing of our equipment inventories. Net cash used for operating activities for the nine months ended October 31, 2013 was primarily attributable to an increase in our inventories, partially offset by an increase in manufacturer flooplan payable financing of such inventories. The decrease in net cash used for operating activities for the nine months ended October 31, 2014, compared to the same period in the prior year, was primarily due to a decrease in equipment inventory purchases, net of manufacturer floorplan payable financing of such inventories, as compared to the same period last year. We evaluate our cash flow from operating activities net of all floorplan activity. Taking this adjustment into account, our non-GAAP cash flow provided by operating activities was $0.7 million and cash flow used for operating activities was $12.0 million for the nine months ended October 31, 2014 and 2013, respectively. For reconciliation of this non-GAAP financial measure, please see the Non-GAAP Cash Flow Reconciliation below.
 
Cash Flow Provided By Or Used For Investing Activities
 
Net cash provided by investing activities was $2.5 million for the nine months ended October 31, 2014, compared to net cash used for investing activities of $11.0 million for the nine months ended October 31, 2013. For the nine months ended October 31, 2014, net cash provided by investing activities was primarily comprised of proceeds from the sale property and equipment, and partially offset by property and equipment purchases. For the nine months ended October 31, 2013, net cash used for investing activities was primarily comprised of property and equipment purchases and business combinations consisting of two stores.

Cash Flow Provided By Financing Activities
 
Net cash provided by financing activities was $116.6 million for the nine months ended October 31, 2014 and $107.4 million for the nine months ended October 31, 2013. For the nine months ended October 31, 2014, net cash provided by financing activities primarily consisted of an increase in non-manufacturer floorplan payables, which increased as a result of reductions in manufacturer floorplan payable balances, and proceeds from long-term debt. For the nine months ended October 31, 2013, net cash provided by financing activities primarily consisted of proceeds from long-term debt for rental fleet financing, and an increase in non-manufacturer floorplan payables, which increased as a result of higher equipment inventory balances.
 
Non-GAAP Cash Flow Reconciliation

We consider our cash flow from operating activities to include all equipment inventory financing activity regardless of whether we obtain the financing from a manufacturer or other source. We consider equipment inventory financing with both manufacturers and other sources to be part of the normal operations of our business and use the adjusted cash flow analysis in the evaluation of our equipment inventory and inventory flooring needs. Non-GAAP cash flow used for operating activities is a non-GAAP financial measure which is adjusted for non-manufacturer floorplan payable. The adjustment is equal to the net change in non-manufacturer floorplan payable, as shown on the consolidated statements of cash flows. GAAP categorizes non-manufacturer floorplan payable as financing activities in the consolidated statements of cash flows.

We believe that the presentation of non-GAAP cash flow used for operating activities is relevant and useful to our investors because it provides information on activities we consider normal operations of our business, regardless of financing source. The following table reconciles net cash provided by (used for) operating activities, a GAAP measure, to non-GAAP cash flow provided by (used for) operating activities, and net cash provided by (used for) financing activities, a GAAP measure, to non-GAAP cash flow provided by (used for) financing activities.
 
As Reported
 
Adjustment
 
Non-GAAP Measures
 
(in thousands)
Nine Months Ended October 31, 2014
 
 
 
 
 
Net cash provided by (used for) operating activities
$
(82,555
)
 
$
83,232

 
$
677

Net cash provided by (used for) financing activities
116,570

 
(83,232
)
 
33,338

 
 
 
 
 
 
Nine Months Ended October 31, 2013
 
 
 
 
 
Net cash provided by (used for) operating activities
$
(107,355
)
 
$
95,330

 
$
(12,025
)
Net cash provided by (used for) financing activities
107,370

 
(95,330
)
 
12,040


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Non-GAAP cash flow provided by (used for) operating activities and non-GAAP net cash provided by (used for) financing activities should be evaluated in addition to, and not considered a substitute for, or superior to, the GAAP measures of net cash provided by (used for) operating and financing activities.
 
Certain Information Concerning Off-Balance Sheet Arrangements 
As of October 31, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. In the normal course of our business activities, we lease real estate, vehicles and equipment under operating leases.
PRIVATE SECURITIES LITIGATION REFORM ACT
 
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Such “forward-looking” information is included in this Quarterly Report on Form 10-Q, including in “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations,” as well as in our Annual Report on Form 10-K for the year ended January 31, 2014, and in other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company).
 
Forward-looking statements include all statements based on future expectations and specifically include, among other things, all statements relating to our expectations regarding exchange rate and interest rate impact, farm income levels and performance of the agricultural and construction industries, equipment inventory levels, and our primary liquidity sources and adequacy of our capital resources. Any statements that are not based upon historical facts, including the outcome of events that have not yet occurred and our expectations for future performance, are forward-looking statements. The words “potential,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” “plan,” “anticipate,” and similar words and expressions are intended to identify forward-looking statements. Such statements are based upon the current beliefs and expectations of our management. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, adverse market conditions in the agricultural and construction equipment industries, the continuation of unfavorable conditions in the credit markets and those matters identified and discussed in our Annual Report on Form 10-K under the section titled “Risk Factors.”

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to various market risks, including changes in interest rates and foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates.
 
Interest Rate Risk: Exposure to changes in interest rates results from borrowing activities used to fund operations. For fixed rate debt, interest rate changes affect the fair value of financial instruments but do not impact earnings or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. We have both fixed and floating rate financing. Some of our floating rate credit facilities contain minimum rates of interest to be charged. Based upon balances and interest rates as of October 31, 2014, holding other variables constant, a one percentage point increase in interest rates for the next 12-month period would decrease pre-tax earnings and cash flow by approximately $4.7 million. Conversely, a one percentage point decrease in interest rates for the next 12-month period would result in an increase to pre-tax earnings and cash flow of approximately $4.7 million. At October 31, 2014, we had variable rate floorplan payable of $761.2 million, of which approximately $384.5 million was interest-bearing, variable notes payable and long-term debt of $83.3 million, and fixed rate notes payable and long-term debt of $54.9 million.
 
Foreign Currency Exchange Rate Risk:  Foreign currency exposures arise as the result of our foreign operations. The Company is exposed to foreign currency exchange rate risk, as our net investment in our foreign operations is exposed to changes in foreign currency exchange rates. In addition, the Company is exposed to the translation of foreign currency earnings to the U.S. dollar, whereby the results of our operations and cash flows may be adversely impacted by fluctuating foreign currency exchange rates. The Company is also exposed to foreign currency transaction risk from purchasing inventory in currencies other than the U.S. dollar and as the result of certain intercompany financing transactions. The Company attempts to

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manage its foreign currency exchange rate risk through the use of derivative financial instruments, primarily foreign exchange forward contracts. Based upon balances and exchange rates as of October 31, 2014, holding other variables constant, we believe that a hypothetical 10% increase or decrease in foreign exchange rates would not have a material impact on our results of operations or cash flows.
 
ITEM 4. CONTROLS AND PROCEDURES
 
(a)                                 Evaluation of disclosure controls and procedures. After evaluating the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Quarterly Report, the Company’s Chief Executive Officer and Chief Financial Officer, with the participation of the Company’s management, have concluded that the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are effective.
 
(b)                                 Changes in internal controls. There has not been any change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during its most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


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Table of Contents

PART II. - OTHER INFORMATION
 
ITEM 1.                LEGAL PROCEEDINGS
 
We are, from time to time, subject to claims and suits arising in the ordinary course of business. Such claims have, in the past, generally been covered by insurance. There can be no assurance that our insurance will be adequate to cover all liabilities that may arise out of claims brought against us, or that our insurance will cover all claims. We are not currently a party to any material litigation.

ITEM 1A.             RISK FACTORS
 
In addition to the other information set forth in this report, including the important information in “Private Securities Litigation Reform Act,” you should carefully consider the “Risk Factors” discussed in our Form 10-K for the year ended January 31, 2014 as filed with the Securities and Exchange Commission. Those factors, if they were to occur, could cause our actual results to differ materially from those expressed in our forward-looking statements in this report, and materially adversely affect our financial condition or future results. Although we are not aware of any other factors, aside from those discussed in our Form 10-K, that we currently anticipate will cause our forward-looking statements to differ materially from our future actual results, or materially affect the Company’s financial condition or future results, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial might materially adversely affect our actual business, financial condition and/or operating results.
 
ITEM 2.                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 

We did not have any unregistered sales of equity securities during the fiscal quarter ended October 31, 2014

ITEM 3.                DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.                MINE SAFETY DISCLOSURES
 
Not applicable.

ITEM 5.                OTHER INFORMATION
 
Effective October 31, 2014, the Company entered into Amendment No. 5 to its Amended and Restated Credit Agreement dated March 30, 2012, by and among the Company, Wells Fargo Bank, National Association, and the other lenders party thereto. This credit facility provides to the Company floorplan financing for equipment inventory purchases. The amendment modified the borrowing base advance rates, revised the interest rate pricing, replaced the consolidated net income covenant with a minimum consolidated income before income taxes covenant, as adjusted for certain impairment charges, realignment charges, and foreign currency remeasurement losses, and changed the covenant respecting investment in and guaranties of bank indebtedness of foreign subsidiaries. The foregoing summary of the amendment is qualified by reference to the full text of the amendment, a copy of which is attached to this quarterly report as Exhibit 10.1.

Effective October 31, 2014, the Company entered into an Amendment to the Amended and Restated Wholesale Floor Plan Credit Facility and Security Agreement dated November 13, 2007, by and between the Company and CNH Industrial Capital America LLC. This credit facility provides to the Company floor plan financing for inventory purchases. The amendment, amongst other things, replaced the minimum debt service ratio financial covenant with a minimum fixed charge coverage ratio financial covenant of not less than 1.25:1.00, and added or modified related definitions. The foregoing summary of the amendment is qualified by reference to the full text of the amendment, a copy of which is attached to this quarterly report as Exhibit 10.2.

ITEM 6.                EXHIBITS
 
Exhibits - See “Exhibit Index” on page following signatures.

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SIGNATURES 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated:
December 10, 2014
 
 
 
TITAN MACHINERY INC.
 
 
 
 
 
 
 
 
By
/s/ Mark Kalvoda
 
 
 
Mark Kalvoda
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)

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EXHIBIT INDEX
TITAN MACHINERY INC.
FORM 10-Q
 
Exhibit No.
 
Description
 
 
 
*10.1
 
Fifth Amendment, dated as of December 5, 2014, to Amended and Restated Credit Agreement by and among the registrant, Wells Fargo Bank, National Association, and the Financial Institutions Party Thereto.
 
 
 
*10.2
 
Amendment dated as of December 8, 2014, to Amended and Restated Wholesale Floor Plan Credit Facility and Security Agreement, by and between the registrant and CNH industrial Capital LLC.
 
 
 
*31.1
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
*31.2
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
*32.1
 
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
*32.2
 
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
**101
 
Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended October 31, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements.
 
*Filed herewith
** Furnished herewith
+ Management compensatory plan or arrangement

35