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Titan Machinery Inc. - Quarter Report: 2019 October (Form 10-Q)


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, 2019
 
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
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.00001 par value per share
TITN
The Nasdaq Stock Market LLC
 
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  YES  x    NO  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
 x
 
 
 
 
 
Non-accelerated filer
o
 
Smaller reporting company
 o
 
 
 
 
 
 
 
 
Emerging growth company
 o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 

As of November 30, 2019, 22,348,499 shares of Common Stock, $0.00001 par value, of the registrant were outstanding.



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

 
 
Page No.
PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
 
Consolidated Balance Sheets
 
Consolidated Statements of Operations
 
Consolidated Statements of Comprehensive Income
 
Consolidated Statements of Stockholders' Equity
 
Consolidated Statements of Cash Flows
 
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
Exhibit Index
 
Signatures
 

2


PART I. — FINANCIAL INFORMATION
 
ITEM 1.                FINANCIAL STATEMENTS
 
TITAN MACHINERY INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share data)
 
October 31, 2019
 
January 31, 2019
Assets
 
 
 
Current Assets
 
 
 
Cash
$
52,420

 
$
56,745

Receivables, net of allowance for doubtful accounts
88,907

 
77,500

Inventories
624,215

 
491,091

Prepaid expenses and other
7,857

 
15,556

Total current assets
773,399

 
640,892

Noncurrent Assets
 
 
 
Property and equipment, net of accumulated depreciation
148,090

 
138,950

Operating lease assets
92,124

 

Deferred income taxes
3,398

 
3,010

Goodwill
2,291

 
1,161

Intangible assets, net of accumulated amortization
9,059

 
7,247

Other
1,163

 
1,178

Total noncurrent assets
256,125

 
151,546

Total Assets
$
1,029,524

 
$
792,438

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
24,439

 
$
16,607

Floorplan payable
445,726

 
273,756

Senior convertible notes

 
45,249

Current maturities of long-term debt
13,280

 
2,067

Current operating lease liabilities
12,002

 

Deferred revenue
12,878

 
46,409

Accrued expenses and other
39,392

 
36,364

Total current liabilities
547,717

 
420,452

Long-Term Liabilities
 
 
 
Long-term debt, less current maturities
35,754

 
20,676

Operating lease liabilities
90,063

 

Deferred income taxes
5,586

 
4,955

Other long-term liabilities
8,125

 
11,044

Total long-term liabilities
139,528

 
36,675

Commitments and Contingencies


 


Stockholders' Equity
 
 
 
Common stock, par value $.00001 per share, 45,000 shares authorized; 22,352 shares issued and outstanding at October 31, 2019; 22,218 shares issued and outstanding at January 31, 2019

 

Additional paid-in-capital
249,984

 
248,423

Retained earnings
97,044

 
89,228

Accumulated other comprehensive loss
(4,749
)
 
(2,340
)
Total stockholders' equity
342,279

 
335,311

Total Liabilities and Stockholders' Equity
$
1,029,524

 
$
792,438

 See Notes to Consolidated Financial Statements

3


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
Equipment
$
245,986

 
$
253,793

 
$
654,376

 
$
625,188

Parts
70,788

 
64,609

 
181,928

 
166,923

Service
27,553

 
24,808

 
77,215

 
68,013

Rental and other
16,609

 
17,703

 
40,688

 
41,734

Total Revenue
360,936

 
360,913

 
954,207

 
901,858

Cost of Revenue
 
 
 
 
 
 
 
Equipment
219,484

 
225,520

 
583,345

 
555,923

Parts
49,834

 
45,666

 
128,380

 
118,254

Service
8,950

 
7,756

 
25,170

 
21,918

Rental and other
10,894

 
12,429

 
27,612

 
29,762

Total Cost of Revenue
289,162

 
291,371

 
764,507

 
725,857

Gross Profit
71,774

 
69,542

 
189,700

 
176,001

Operating Expenses
58,184

 
53,306

 
165,594

 
147,665

Impairment of Long-Lived Assets
51

 
304

 
186

 
459

Restructuring Costs

 
(151
)
 

 
414

Income from Operations
13,539

 
16,083

 
23,920

 
27,463

Other Income (Expense)
 
 
 
 
 
 
 
Interest income and other income (expense)
1,273

 
160

 
2,687

 
2,002

Floorplan interest expense
(1,448
)
 
(1,856
)
 
(3,724
)
 
(4,932
)
Other interest expense
(955
)
 
(1,617
)
 
(3,562
)
 
(6,137
)
Income Before Income Taxes
12,409

 
12,770

 
19,321

 
18,396

Provision for Income Taxes
4,195

 
1,994

 
6,041

 
4,055

Net Income
$
8,214

 
$
10,776

 
$
13,280

 
$
14,341

 
 
 
 
 
 
 
 
Earnings per Share:
 
 
 
 
 
 
 
Basic
$
0.37

 
$
0.49

 
$
0.60

 
$
0.65

Diluted
$
0.37

 
$
0.48

 
$
0.60

 
$
0.65

 
 
 
 
 
 
 
 
Weighted Average Common Shares:
 
 
 
 
 
 
 
Basic
21,973

 
21,835

 
21,936

 
21,799

Diluted
21,976

 
21,842

 
21,942

 
21,806

 
See Notes to Consolidated Financial Statements


4


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
Net Income
$
8,214

 
$
10,776

 
$
13,280

 
$
14,341

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2,650
)
 
187

 
(2,409
)
 
80

Comprehensive Income
$
5,564

 
$
10,963

 
$
10,871

 
$
14,421

 
See Notes to Consolidated Financial Statements


5


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands)

 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Shares Outstanding
 
Amount
 
 
 
 
BALANCE, January 31, 2018
22,102

 
$

 
$
246,509

 
$
77,046

 
$
(1,700
)
 
$
321,855

Common stock issued on grant of restricted stock and exercise of stock options, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax
(22
)
 

 
(598
)
 

 

 
(598
)
Stock-based compensation expense

 

 
540

 

 

 
540

Net loss

 

 

 
(1,614
)
 

 
(1,614
)
Other comprehensive income

 

 

 

 
1,301

 
1,301

BALANCE, April 30, 2018
22,080

 

 
246,451

 
75,432

 
(399
)
 
321,484

Common stock issued on grant of restricted stock and exercise of stock options, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax
138

 

 
(11
)
 

 

 
(11
)
Stock-based compensation expense

 

 
709

 

 

 
709

Net income

 

 

 
5,180

 

 
5,180

Other comprehensive loss

 

 

 

 
(1,408
)
 
(1,408
)
BALANCE, July 31, 2018
22,218

 

 
247,149

 
80,612

 
(1,807
)
 
325,954

Common stock issued on grant of restricted stock and exercise of stock options, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax
2

 

 

 

 

 

Stock-based compensation expense

 

 
664

 

 

 
664

Net income

 

 

 
10,776

 

 
10,776

Other comprehensive income

 

 

 

 
187

 
187

BALANCE, October 31, 2018
22,220

 
$

 
$
247,813

 
$
91,388

 
$
(1,620
)
 
$
337,581


 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Shares Outstanding
 
Amount
 
 
 
 
BALANCE, January 31, 2019
22,218

 
$

 
$
248,423

 
$
89,228

 
$
(2,340
)
 
$
335,311

Cumulative-effect adjustment of adopting ASC 842, Leases

 

 

 
(5,464
)
 
 
 
(5,464
)
Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax
(34
)
 

 
(492
)
 

 

 
(492
)
Stock-based compensation expense

 

 
603

 

 

 
603

Net loss

 

 

 
(445
)
 

 
(445
)
Other comprehensive loss

 

 

 

 
(771
)
 
(771
)
BALANCE, April 30, 2019
22,184

 

 
248,534

 
83,319

 
(3,111
)
 
328,742

Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax
170

 

 

 

 

 

Stock-based compensation expense

 

 
694

 

 

 
694

Net income

 

 

 
5,511

 

 
5,511

Other comprehensive income

 

 

 

 
1,012

 
1,012

BALANCE, July 31, 2019
22,354

 

 
249,228

 
88,830

 
(2,099
)
 
335,959

Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax
(2
)
 

 
(17
)
 

 

 
(17
)
Stock-based compensation expense

 

 
773

 

 

 
773

Net income

 

 

 
8,214

 

 
8,214

Other comprehensive loss

 

 

 

 
(2,650
)
 
(2,650
)
BALANCE, October 31, 2019
22,352

 
$

 
$
249,984

 
$
97,044

 
$
(4,749
)
 
$
342,279


See Notes to Consolidated Financial Statements

6


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Nine Months Ended October 31,
 
2019
 
2018
Operating Activities
 
 
 
Net income
$
13,280

 
$
14,341

Adjustments to reconcile net income to net cash used for operating activities
 
 
 
Depreciation and amortization
21,061

 
17,889

Impairment
186

 
459

Deferred income taxes
629

 
2,657

Stock-based compensation expense
2,070

 
1,913

Noncash interest expense
394

 
2,024

Noncash lease expense
9,251

 

Loss on repurchase of senior convertible notes

 
615

Other, net
(63
)
 
1,116

Changes in assets and liabilities
 
 
 
Receivables, prepaid expenses and other assets
(4,630
)
 
(11,042
)
Inventories
(133,929
)
 
(28,704
)
Manufacturer floorplan payable
113,632

 
28,992

Accounts payable, deferred revenue, accrued expenses and other and other long-term liabilities
(20,697
)
 
(18,534
)
Operating lease liabilities
(9,473
)
 

Net Cash Provided by (Used for) Operating Activities
(8,289
)
 
11,726

Investing Activities
 
 
 
Rental fleet purchases
(12,765
)
 
(4,664
)
Property and equipment purchases (excluding rental fleet)
(7,637
)
 
(4,456
)
Proceeds from sale of property and equipment
1,386

 
1,101

Acquisition consideration, net of cash acquired
(11,752
)
 
(15,299
)
Other, net
13

 
(399
)
Net Cash Used for Investing Activities
(30,755
)
 
(23,717
)
Financing Activities
 
 
 
Net change in non-manufacturer floorplan payable
62,387

 
43,896

Principal payments on senior convertible notes
(45,644
)
 
(20,025
)
Proceeds from long-term debt borrowings
21,865

 
3,183

Principal payments on long-term debt and finance leases
(3,197
)
 
(15,102
)
Other, net
(509
)
 
(643
)
Net Cash Provided by Financing Activities
34,902

 
11,309

Effect of Exchange Rate Changes on Cash
(183
)
 
(471
)
Net Change in Cash
(4,325
)
 
(1,153
)
Cash at Beginning of Period
56,745

 
53,396

Cash at End of Period
$
52,420

 
$
52,243

Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period
 
 
 
Income taxes, net of refunds
$
4,934

 
$
2,662

Interest
$
7,162

 
$
8,965

Supplemental Disclosures of Noncash Investing and Financing Activities
 
 
 
Net property and equipment financed with long-term debt, finance leases, accounts payable and accrued liabilities
$
7,652

 
$
4,391

Net transfer of assets from (to) property and equipment to (from) inventories
$
(2,179
)
 
$
4,476


See Notes to Consolidated Financial Statements

7


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, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2020. The information contained in the consolidated balance sheet as of January 31, 2019 was derived from the audited consolidated financial statements for the Company for the fiscal 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 Annual Report on Form 10-K for the fiscal year ended January 31, 2019 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, Germany, 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, impairment of long-lived assets, collectability of receivables, and income taxes.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material accounts, transactions and profits between the consolidated companies have been eliminated in consolidation.
Reclassifications
Concurrent with the adoption of new lease accounting guidance, the Company elected to reclassify finance lease liabilities in the accompanying consolidated balance sheet as of January 31, 2019 to maintain consistency and comparability between periods presented. The amounts reclassified included $1.3 million from current maturities of long-term debt to accrued expenses and other and $5.1 million from long-term debt, less current maturities to other long-term liabilities. These reclassifications had no impact on total current liabilities, total long-term liabilities or total liabilities and stockholders' equity within the consolidated balance sheets.
Certain reclassifications of amounts previously reported within the consolidated statements of cash flows have been made to maintain consistency and comparability between periods presented. These reclassifications had no impact on previously reported cash flows from operating, investing or financing activities within the consolidated statements of cash flows.





8


Recently Adopted Accounting Guidance
In February 2016, the Financial Accounting Standards Board ("FASB") issued a new leasing standard applicable for lessees and lessors and codified in Accounting Standards Codification 842, Leases, ("ASC 842") to increase transparency and comparability among organizations. Most prominent among the changes in the standard is the recognition on the balance sheet by a lessee of right-of-use assets and lease liabilities for most leases. The standard also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from lease activities. This guidance is effective for reporting periods beginning after December 15, 2018.
The Company adopted the leasing guidance on February 1, 2019 using a prospective transition method at the adoption date and recognized a cumulative-effect adjustment to the opening balance of retained earnings as a result of adoption. Under this method of adoption, prior period amounts are not adjusted and will continue to be reported under accounting standards in effect for those periods. The Company elected the package of practical expedients afforded under the guidance, which applies to leases that commenced prior to adoption and permits an entity not to: 1) reassess whether existing or expired contracts are or contain a lease, 2) reassess the lease classification, and 3) reassess any initial direct costs for any existing leases. The Company did not elect the use of the hindsight practical expedient to determine the lease term, but rather included the lease term as defined under former leasing guidance to capitalize the right-of-use asset and lease liability upon adoption. The Company identified new, and updated existing, internal controls and processes to ensure compliance with the new standard, but such modifications were not deemed to be material to our overall system of internal controls.
Adoption of the new standard for leasing transactions in which the Company is the lessee had a material impact on our consolidated balance sheet but did not have an impact on our consolidated statement of operations or cash flows. The most significant impact was the recognition of right-of-use assets and lease liabilities for operating leases, while the accounting for financing leases remained substantially unchanged. We recognized a cumulative-effect adjustment to retained earnings as of February 1, 2019 of $5.5 million primarily resulting from impairment of operating lease right-of-use assets present on the date of adoption, net of the deferred tax impact. The adoption of the new standard for leasing transactions in which the Company is the lessor did not impact our consolidated balance sheet, statement of operations or cash flows. The Company has included the additional disclosures required under ASC 842 in Note 13.
Adoption of ASC 842 impacted our consolidated balance sheet as of February 1, 2019 as follows:
 
 
January 31, 2019
As Reported
 
ASC 842 Adjustment on February 1, 2019
 
February 1, 2019
As Adjusted
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
Operating lease assets
 
$

 
$
100,469

(a)
 
$
100,469

 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
Current maturities of long-term debt
 
3,340

 
(1,273
)
(b)
 
2,067

Current operating lease liabilities
 

 
12,266

(c)
 
12,266

Accrued expenses and other
 
35,091

 
972

(d)
 
36,063

Long-term debt, less current maturities
 
25,812

 
(5,136
)
(b)
 
20,676

Operating lease liabilities
 

 
98,250

(c)
 
98,250

Deferred income taxes
 
4,955

 
(374
)
(e)
 
4,581

Other long-term liabilities
 
5,908

 
1,228

(f)
 
7,136

Retained earnings
 
89,228

 
(5,464
)
(g)
 
83,764

 
 
 
 
 
 
 
 
(a) Capitalization of operating lease assets, net of straight-line rent accrued liabilities, cease-use liabilities, and right-of-use asset impairment present on the date of adoption.
(b) As described above under Reclassifications, concurrent with the adoption of ASC 842, the Company elected to reclassify current maturities of finance lease liabilities from Current maturities of long-term debt to Accrued expenses and other and the long-term portion of finance lease liabilities from Long-term debt, less current maturities to Other long-term liabilities in the accompanying consolidated balance sheet as of January 31, 2019 to maintain consistency and comparability between periods presented.
(c) Recognition of operating lease liabilities.
(d) As described in (b) above, includes the reclassification of current maturities of finance lease liabilities, net of the reclassification of the current portion of cease-use liabilities to Operating lease assets as part of the adoption of ASC 842.

9


(e) Deferred tax impact of adoption, primarily resulting from operating lease right-of-use asset impairment recognized upon adoption, net of the valuation allowance recognized for such deferred tax assets.
(f) As described in (b) above, includes the reclassification of finance lease liabilities, net of the ASC 842 adoption impact of reclassifying straight-line rent accrued liabilities and cease-use liabilities, and the cumulative-effect adjustment recognized in retained earnings for gains deferred on previous sale-leaseback transactions.
(g) Cumulative-effect adjustment of $6.6 million for operating lease right-of-use asset impairment present on the date of adoption net of the adjustment for deferred gains on previous sale-leaseback transactions of $0.7 million and the deferred tax impact of these adjustments, net of the valuation allowance recognized on such deferred tax assets.
Unadopted Accounting Guidance
In June 2016, the FASB issued a new standard, codified in ASC 326, that modifies how entities measure credit losses on most financial instruments. The new standard replaces the current "incurred loss" model with an "expected credit loss" model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the asset. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We will adopt this standard on February 1, 2020. While we are currently evaluating the impact to our consolidated financial statements of adopting this guidance, we do not anticipate that the guidance will materially impact our consolidated financial statements.
In February 2018, the FASB issued guidance on the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract, codified in ASC 350-40. This guidance aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and may be applied using either a retrospective or prospective transition approach. We will adopt this standard on February 1, 2020 and anticipate applying the prospective transition approach. While we are currently evaluating the impact of adopting this guidance, we do not anticipate that it will materially impact our consolidated financial statements.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted EPS:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net income
$
8,214

 
$
10,776

 
$
13,280

 
$
14,341

Allocation to participating securities
(140
)
 
(186
)
 
(207
)
 
(234
)
Net income attributable to Titan Machinery Inc. common stockholders
$
8,074

 
$
10,590

 
$
13,073

 
$
14,107

Denominator:
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
21,973

 
21,835

 
21,936

 
21,799

Plus: incremental shares from assumed exercises of stock options and vesting of restricted stock units
3

 
7

 
6

 
7

Diluted weighted-average common shares outstanding
21,976

 
21,842

 
21,942

 
21,806

 
 
 
 
 
 
 
 
Earnings Per Share:
 
 
 
 
 
 
 
Basic
$
0.37

 
$
0.49

 
$
0.60

 
$
0.65

Diluted
$
0.37

 
$
0.48

 
$
0.60

 
$
0.65

 
 
 
 
 
 
 
 
Anti-dilutive shares excluded from diluted weighted-average common shares outstanding:
 
 
 
 
 
 
 
Shares underlying senior convertible notes

 
1,057

 

 
1,057


10


NOTE 3 - REVENUE
Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to collect in exchange for those goods or services. Sales, value added and other taxes collected from our customers concurrent with our revenue activities are excluded from revenue.
The following tables present our revenue disaggregated by revenue source and segment:
 
Three Months Ended October 31, 2019
 
Three Months Ended October 31, 2018
 
Agriculture
 
Construction
 
International
 
Total
 
Agriculture
 
Construction
 
International
 
Total
 
(in thousands)
 
(in thousands)
Equipment
$
148,680

 
$
43,299

 
$
54,007

 
$
245,986

 
$
151,247

 
$
43,331

 
$
59,215

 
$
253,793

Parts
44,923

 
13,586

 
12,279

 
70,788

 
40,333

 
12,449

 
11,827

 
64,609

Service
18,885

 
6,674

 
1,994

 
27,553

 
16,758

 
6,336

 
1,714

 
24,808

Other
835

 
826

 
50

 
1,711

 
791

 
1,210

 
53

 
2,054

Revenue from contracts with customers
213,323

 
64,385

 
68,330

 
346,038

 
209,129

 
63,326

 
72,809

 
345,264

Rental
750

 
13,646

 
502

 
14,898

 
568

 
13,668

 
1,413

 
15,649

Total revenues
$
214,073

 
$
78,031

 
$
68,832

 
$
360,936

 
$
209,697

 
$
76,994

 
$
74,222

 
$
360,913

 
Nine Months Ended October 31, 2019
 
Nine Months Ended October 31, 2018
 
Agriculture
 
Construction
 
International
 
Total
 
Agriculture
 
Construction
 
International
 
Total
 
(in thousands)
 
(in thousands)
Equipment
$
367,754

 
$
137,742

 
$
148,880

 
$
654,376

 
$
350,435

 
$
125,596

 
$
149,157

 
$
625,188

Parts
109,952

 
39,356

 
32,620

 
181,928

 
102,854

 
36,363

 
27,706

 
166,923

Service
51,869

 
20,163

 
5,183

 
77,215

 
46,554

 
17,979

 
3,480

 
68,013

Other
2,248

 
2,238

 
202

 
4,688

 
2,061

 
3,005

 
160

 
5,226

Revenue from contracts with customers
531,823

 
199,499

 
186,885

 
918,207

 
501,904

 
182,943

 
180,503

 
865,350

Rental
1,715

 
33,314

 
971

 
36,000

 
1,622

 
32,617

 
2,269

 
36,508

Total revenues
$
533,538

 
$
232,813

 
$
187,856

 
$
954,207

 
$
503,526

 
$
215,560

 
$
182,772

 
$
901,858

Unbilled Receivables and Deferred Revenue
Unbilled receivables amounted to $18.7 million and $11.2 million as of October 31, 2019 and January 31, 2019. The increase in unbilled receivables is primarily the result of a seasonal increase in the volume of our service transactions in which we recognize revenue as our work is performed and prior to customer invoicing.
Deferred revenue from contracts with customers amounted to $11.9 million and $44.9 million as of October 31, 2019 and January 31, 2019. Our deferred revenue most often increases in the fourth quarter of each fiscal year due to a higher level of customer down payments or prepayments and longer time periods between customer payment and delivery of the equipment asset, and the related recognition of equipment revenue, prior to its seasonal use. During the nine months ended October 31, 2019 and 2018, the Company recognized $43.7 million and $30.0 million, respectively, of revenue that was included in the deferred revenue balance as of January 31, 2019 and January 31, 2018, respectively. No material amount of revenue was recognized during the three or nine months ended October 31, 2019 and 2018 from performance obligations satisfied in previous periods.
The Company has elected as a practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of service of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. The contracts for which the practical expedient has been applied include (i) equipment revenue transactions, which do not have a stated contractual term, but are short-term in nature, and (ii) service revenue transactions, which also do not have a stated contractual term but are generally completed within 30 days and for such contracts we recognize revenue over time at the amount to which we have the right to invoice for services completed to date.

11


NOTE 4 - RECEIVABLES
 
October 31, 2019
 
January 31, 2019
 
(in thousands)
Trade and unbilled receivables from contracts with customers
 
 
 
Trade receivables due from customers
$
41,834

 
$
38,827

Trade receivables due from finance companies
15,060

 
10,265

Unbilled receivables
18,744

 
11,222

Trade and unbilled receivables from rental contracts
 
 
 
Trade receivables
8,810

 
6,386

Unbilled receivables
1,363

 
828

Other receivables
 
 
 
Due from manufacturers
6,906

 
12,950

Other
1,116

 
550

Total receivables
93,833

 
81,028

Less allowance for doubtful accounts
(4,926
)
 
(3,528
)
Receivables, net of allowance for doubtful accounts
$
88,907

 
$
77,500

The following table presents impairment losses on receivables arising from sales contracts with customers and receivables arising from rental contracts:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Impairment losses on:
 
 
 
 
 
 
 
Receivables from sales contracts
$
75

 
$
206

 
$
1,061

 
$
536

Receivables from rental contracts
282

 
62

 
779

 
220

 
$
357

 
$
268

 
$
1,840

 
$
756

NOTE 5 - INVENTORIES
 
October 31, 2019
 
January 31, 2019
 
(in thousands)
New equipment
$
417,681

 
$
258,081

Used equipment
125,992

 
158,951

Parts and attachments
78,651

 
72,760

Work in process
1,891

 
1,299

 
$
624,215

 
$
491,091

NOTE 6 - PROPERTY AND EQUIPMENT
 
October 31, 2019
 
January 31, 2019
 
(in thousands)
Rental fleet equipment
$
115,361

 
$
111,164

Machinery and equipment
22,434

 
21,646

Vehicles
49,785

 
42,330

Furniture and fixtures
41,360

 
40,645

Land, buildings, and leasehold improvements
66,278

 
63,091

 
295,218

 
278,876

Less accumulated depreciation
(147,128
)
 
(139,926
)
 
$
148,090

 
$
138,950


12


The Company reviews its long-lived assets for potential impairment whenever events or circumstances indicate that the carrying value of the long-lived asset (or asset group) may not be recoverable. During the three months ended October 31, 2019, the Company determined that a current period operating loss combined with historical losses of a certain store location indicated that the long-lived asset group of the store location may not be recoverable. The Company performed an impairment assessment of this asset group and as a result recognized an impairment charge of $0.1 million within its Construction segment. For the nine months ended October 31, 2019, the Company recognized total impairment charges of $0.2 million within its Construction segment. For the three months ended October 31, 2018, the Company recognized an impairment charge within its Agriculture segment of $0.3 million. For the nine months ended October 31, 2018, the Company recognized total impairment charges of $0.5 million, of which $0.3 million was recognized within the Agriculture segment and $0.2 million within the International segment.
In March 2019, the Company completed an assessment of its Enterprise Resource Planning ("ERP") application and concluded that the Company will begin the process to prepare for conversion to a new ERP application during the fiscal year ending January 31, 2020, with an anticipated implementation of the new ERP application during the first-half of the fiscal year ending January 31, 2021. Beginning in March 2019, the Company prospectively adjusted the useful life of its current ERP application such that it will be fully amortized upon its estimated replacement date. The net book value of the ERP asset of $8.7 million as of March 2019 will be amortized on a straight-line basis over the estimated remaining period of use. For the three and nine months ended October 31, 2019, the Company recognized an additional $1.4 million and $3.7 million of amortization expense, which decreased operating income accordingly, decreased net income by approximately $1.1 million and $2.8 million, and decreased basic and diluted earnings per share by approximately $0.05 and $0.13, respectively.
NOTE 7 - GOODWILL    
Changes in the carrying amount of goodwill during the nine months ended October 31, 2019 are as follows:
 
Agriculture
 
Construction
 
International
 
Total
 
(in thousands)
Balance, January 31, 2019
$
250

 
$

 
$
911

 
$
1,161

Arising from business combinations
699

 

 
499

 
1,198

Foreign currency translation

 

 
(68
)
 
(68
)
Balance, October 31, 2019
$
949

 
$

 
$
1,342

 
$
2,291

NOTE 8 - FLOORPLAN PAYABLE/LINES OF CREDIT
As of October 31, 2019, the Company had floorplan lines of credit totaling $660.0 million, which is primarily comprised of three significant floorplan lines of credit: (i) a $400.0 million credit facility with CNH Industrial, (ii) a $140.0 million line of credit with a group of banks led by Wells Fargo Bank, National Association (the "Wells Fargo Credit Agreement"), and (iii) a $60.0 million credit facility with DLL Finance LLC.
As of October 31, 2019 and January 31, 2019, the Company's outstanding balances of floorplan payables and lines of credit consisted of the following:
 
October 31, 2019
 
January 31, 2019
 
(in thousands)
CNH Industrial
$
245,121

 
$
120,319

Wells Fargo Credit Agreement (floorplan payable line)
98,400

 
49,100

DLL Finance
27,043

 
13,432

Other outstanding balances with manufacturers and non-manufacturers
75,162

 
90,905

 
$
445,726

 
$
273,756

As of October 31, 2019, the interest-bearing U.S. floorplan payables carried various interest rates ranging from 4.28% to 5.60%, compared to a range of 4.77% to 6.30% as of January 31, 2019. As of October 31, 2019, foreign floorplan payables carried various interest rates primarily ranging from 0.86% to 7.88%, compared to a range of 0.94% to 8.51% as of January 31, 2019. As of October 31, 2019 and January 31, 2019, $257.1 million and $151.7 million, respectively, of outstanding floorplan payable were non-interest bearing. As of October 31, 2019, the Company had a compensating balance arrangement under one

13


of its foreign floorplan credit facilities, which requires a minimum cash deposit to be maintained with the lender in the amount of $5.0 million for the term of the credit facility.
Wells Fargo Credit Agreement
The maturity date of the Wells Fargo Credit Agreement was previously contingent upon the results of a maturity test that was performed on February 1, 2019, a date that was three months prior to the scheduled maturity date of the Company's outstanding senior convertible notes. Pursuant to this test, the maturity date for the Wells Fargo Credit Agreement would be October 28, 2020 so long as (i) the Company's fixed charge coverage ratio for the 12 month period ended December 31, 2018 was at least 1.10 to 1.00 and (ii) a liquidity test, requiring that the Company have unrestricted cash on hand plus excess borrowing availability under the Wells Fargo Credit Agreement (on a pro-forma basis reflecting the Company’s repayment in full of its outstanding senior convertible notes) in an amount that was greater than 20% of maximum credit amount under the facility, was met on February 1, 2019. If both financial tests were not satisfied on February 1, 2019, the Wells Fargo Credit Agreement would immediately mature and all amounts outstanding would become immediately due and payable in full. The Company satisfied the maturity test requirements on February 1, 2019, and therefore the maturity date of the Wells Fargo Credit Agreement is October 28, 2020.
CNH Industrial Floorplan Payable Line of Credit
In November 2019, the Company amended its credit facility with CNH Industrial to increase the available borrowings under the facility from $400.0 million to $450.0 million. Domestic available borrowings increased as a result of the amendment from $310.0 million to $360.0 million. Available borrowings of our European businesses remained unchanged at $90.0 million.
DLL Finance Agreement
In October 2019, the DLL Finance agreement was amended and restated to, among other things, increase the available borrowing capacity from $45.0 million to $60.0 million, of which approximately $47.0 million is available for domestic financing and approximately $13.0 million is available for financing in certain of our European markets, to decrease the interest margin on domestic borrowings from 3.00% to 2.85%, and to replace the maximum net leverage ratio covenant with a maximum adjusted debt to tangible net worth covenant of 3.50:1.00. The adjusted debt to tangible net worth covenant is now aligned with the same covenant under our CNH Industrial floorplan financing arrangement.
NOTE 9 - DEFERRED REVENUE
 
October 31, 2019
 
January 31, 2019
 
(in thousands)
Deferred revenue from contracts with customers
$
11,866

 
$
44,893

Deferred revenue from rental and other contracts
1,012

 
1,516

 
$
12,878

 
$
46,409

NOTE 10 - SENIOR CONVERTIBLE NOTES
The Company's senior convertible notes matured, and the outstanding principal balance of $45.6 million was repaid in full, on May 1, 2019. The carrying value of outstanding senior convertible notes previously consisted of the following:
 
October 31, 2019
 
January 31, 2019
 
(in thousands except conversion
rate and conversion price)
Principal value
$

 
$
45,644

Unamortized debt discount

 
(350
)
Unamortized debt issuance costs

 
(45
)
Carrying value of senior convertible notes
$

 
$
45,249

 
 
 
 
Carrying value of equity component, net of deferred taxes
$

 
$
14,923


14


The Company recognized interest expense associated with its senior convertible notes as follows:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
(in thousands)
Cash Interest Expense
 
 
 
 
 
 
 
Coupon interest expense
$

 
$
428

 
$
421

 
$
1,579

Noncash Interest Expense
 
 
 
 
 
 
 
Amortization of debt discount

 
356

 
350

 
1,271

Amortization of transaction costs

 
47

 
45

 
169

 
$

 
$
831

 
$
816

 
$
3,019

The effective interest rate of the liability component was equal to 7.3% for the three months ended October 31, 2018 and the nine months ended October 31, 2019 and 2018.
NOTE 11 - LONG TERM DEBT
The following is a summary of long-term debt as of October 31, 2019 and January 31, 2019:
 
October 31, 2019
 
January 31, 2019
 
(in thousands)
Sale-leaseback financing obligations, interest rates ranging from 3.4% to 10.3% with various maturity dates through December 2030
$
18,093

 
$
19,010

Wells Fargo Credit Agreement - Working Capital Line, interest accrues at a variable rate on outstanding balances, requires monthly payments of accrued interest, matures on October 28, 2020.
10,000

 

Real estate mortgage bearing interest at 5.11%, payable in quarterly installments of $0.3 million, maturing on May 15, 2039, secured by real estate assets
6,827

 

Equipment financing loan, payable in monthly installments over a 72-month term for each funded tranche, bearing interest at 3.89%, secured by vehicle assets
6,369

 

Real estate mortgage bearing interest at 4.62%, payable in monthly installments of $0.04 million with a final payment at maturity of $3.4 million, maturing on June 10, 2024, secured by real estate assets
4,465

 

Real estate mortgage bearing interest at 2.09%, payable in monthly installments, maturing on June 30, 2026, secured by real estate assets
2,549

 
2,978

Other long-term debt primarily bearing interest at three-month EURIBOR plus 2.6%, payable in quarterly installments, maturing on January 31, 2021
731

 
755

 
49,034

 
22,743

Less current maturities
(13,280
)
 
(2,067
)
 
$
35,754

 
$
20,676

NOTE 12 - 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.
The Company uses foreign currency forward contracts to hedge the effects of fluctuations in exchange rates on outstanding intercompany loans. The Company does not formally designate and document such derivative instruments as hedging instruments; however, the instruments are an effective economic hedge of the underlying foreign currency exposure. Both the gain or loss on the derivative instrument and the offsetting gain or loss on the underlying intercompany loan are recognized in earnings immediately, thereby eliminating or reducing the impact of foreign currency exchange rate fluctuations on net income. The Company's foreign currency forward contracts generally have three-month maturities, maturing on the last day of each fiscal quarter. No foreign currency contracts were outstanding as of October 31, 2019. The notional value of outstanding foreign currency contracts as of January 31, 2019 was $14.1 million.

15


As of January 31, 2019, the fair value of the Company's outstanding derivative instruments was not material. Derivative instruments recognized as assets are recorded in prepaid expenses and other in the consolidated balance sheets, and derivative instruments recognized as liabilities are recorded in accrued expenses and other in the consolidated balance sheets.
The following table sets forth the gains and losses recognized in income from the Company’s derivative instruments for the three and nine months ended October 31, 2019 and 2018. Gains and losses are recognized in interest income and other income (expense) in the consolidated statements of operations:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Foreign currency contract gain (loss)
$
(3
)
 
$
634

 
$
365

 
$
1,757

NOTE 13 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following is a summary of the changes in accumulated other comprehensive income (loss), by component, for the periods ended October 31, 2019 and October 31, 2018:
 
Foreign Currency Translation Adjustment
 
Net Investment Hedging Gain
 
Total Accumulated Other Comprehensive Income (Loss)
 
(in thousands)
Balance, January 31, 2019
$
(5,051
)
 
$
2,711

 
$
(2,340
)
Other comprehensive loss
(771
)
 

 
(771
)
Balance, April 30, 2019
(5,822
)
 
2,711

 
(3,111
)
Other comprehensive income
1,012

 

 
1,012

Balance, July 31, 2019
(4,810
)
 
2,711

 
(2,099
)
Other comprehensive loss
(2,650
)
 

 
(2,650
)
Balance, October 31, 2019
$
(7,460
)
 
$
2,711

 
$
(4,749
)
 
Foreign Currency Translation Adjustment
 
Net Investment Hedging Gain
 
Total Accumulated Other Comprehensive Income (Loss)
 
(in thousands)
Balance, January 31, 2018
$
(4,411
)
 
$
2,711

 
$
(1,700
)
Other comprehensive income
1,301

 

 
1,301

Balance, April 30, 2018
(3,110
)
 
2,711

 
(399
)
Other comprehensive loss
(1,408
)
 

 
(1,408
)
Balance, July 31, 2018
(4,518
)
 
2,711

 
(1,807
)
Other comprehensive income
187

 

 
187

Balance, October 31, 2018
$
(4,331
)
 
$
2,711

 
$
(1,620
)

16


NOTE 14 - LEASES
As Lessee
The Company, as lessee, leases certain of its dealership locations, office space, equipment and vehicles under operating and financing classified leasing arrangements. The Company has elected to not record leases with a lease term at commencement of 12 months or less on the consolidated balance sheet; such leases are expensed on a straight-line basis over the lease term. Many real estate lease agreements require the Company to pay the real estate taxes on the properties during the lease term and require that the Company maintain property insurance on each of the leased premises. Such payments are deemed to be variable lease payments as the amounts may change during the term of the lease. Certain leases include renewal options that can extend the lease term for periods of one to ten years. Most real estate leases grant the Company a right of first refusal or other options to purchase the real estate, generally at fair market value, either during the lease term or at its conclusion. In most cases, the Company has not included these renewal and purchase options within the measurement of the right-of-use asset and lease liability. Most often the Company cannot readily determine the interest rate implicit in the lease and thus applies its incremental borrowing rate to capitalize the right-of-use asset and lease liability. We estimate our incremental borrowing rate by incorporating considerations of lease term, asset class and lease currency and geographical market. Our lease agreements do not contain any material non-lease components, residual value guarantees or material restrictive covenants.
The Company subleases a small number of real estate assets to third-parties, primarily dealership locations for which we have ceased operations. All sublease arrangements are classified as operating leases.
The components of lease expense were as follows:
 
 
Classification
 
Three Months Ended October 31, 2019
 
Nine Months Ended October 31, 2019
 
 
 
 
(in thousands)
Finance lease cost:
 
 
 
 
 
 
Amortization of leased assets
 
Operating expenses
 
$
373

 
$
1,080

Interest on lease liabilities
 
Other interest expense
 
143

 
421

Operating lease cost
 
Operating expenses & rental and other cost of revenue
 
4,613

 
14,154

Short-term lease cost
 
Operating expenses
 
41

 
201

Variable lease cost
 
Operating expenses
 
689

 
2,024

Sublease income
 
Interest income and other income (expense)
 
(146
)
 
(468
)
 
 
 
 
$
5,713

 
$
17,412

    







17


Right-of-use lease assets and lease liabilities consist of the following:
 
 
Classification
 
October 31, 2019
 
 
 
 
(in thousands)
Assets
 
 
 
 
Operating lease assets
 
Operating lease assets
 
$
92,124

Finance lease assets(a)
 
Property and equipment, net of accumulated depreciation
 
6,354

Total leased assets
 
 
 
$
98,478

Liabilities
 
 
 
 
Current
 
 
 
 
Operating
 
Current operating lease liabilities
 
$
12,002

Finance
 
Accrued expenses and other
 
1,640

Noncurrent
 
 
 
 
Operating
 
Operating lease liabilities
 
90,063

Finance
 
Other long-term liabilities
 
4,267

Total lease liabilities
 
 
 
$
107,972

 
 
 
 
 
(a)Finance lease assets are recorded net of accumulated amortization of $1.1 million as of October 31, 2019.    
Maturities of lease liabilities as of October 31, 2019 are as follows:
 
 
Operating
 
Finance
 
 
 
 
Leases
 
Leases
 
Total
Fiscal Year Ended January 31,
 
(in thousands)
2020 (remainder)
 
$
4,555

 
$
543

 
$
5,098

2021
 
17,512

 
2,071

 
19,583

2022
 
16,675

 
1,754

 
18,429

2023
 
15,615

 
1,108

 
16,724

2024
 
14,713

 
380

 
15,093

2025
 
13,587

 
342

 
13,929

Thereafter
 
47,171

 
1,416

 
48,585

Total lease payments
 
129,828

 
7,614

 
137,441

Less: Interest
 
27,763

 
1,707

 
29,470

Present value of lease liabilities
 
$
102,065

 
$
5,907

 
$
107,971

The weighted-average lease term and discount rate as of October 31, 2019 are as follows:
 
October 31, 2019
Weighted-average remaining lease term (years):
 
Operating leases
8.2

Financing leases
5.5

Weighted-average discount rate:
 
Operating leases
6.1
%
Financing leases
10.3
%
Other lease information is as follows:
 
Nine Months Ended October 31, 2019
 
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
13,923

Operating cash flows from finance leases
421

Financing cash flows from finance leases
1,374

Operating lease assets obtained in exchange for new operating lease liabilities
1,073

Finance lease assets obtained in exchange for new finance lease liabilities
709


18


Minimum lease payments under operating and capital leases as determined under prior leasing guidance and as of January 31, 2019 were as follows:
 
Operating
 
Capital
 
Leases
 
Leases
Fiscal year ended January 31,
(in thousands)
2020
$
20,117

 
$
1,933

2021
18,786

 
1,831

2022
17,994

 
1,524

2023
17,117

 
882

2024
16,143

 
342

Thereafter
68,409

 
1,701

Total lease payments
$
158,566

 
8,213

Less: Interest
 
 
1,804

Present value of capital lease liabilities
 
 
$
6,409

As Lessor
The Company rents equipment to customers, primarily in the Construction segment, on a short-term basis. Our rental arrangements generally do not include minimum, noncancellable periods as the lessee is entitled to cancel the arrangement at any time. Most often, our rental arrangements extend for periods ranging from a few days to a few months. We maintain a fleet of dedicated rental assets within our Construction segment and, within all segments, may also provide short-term rentals of certain equipment inventory assets. Certain rental arrangements may include rent-to-purchase options whereby customers are given a period of time to exercise an option to purchase the related equipment at an established price with any rental payments paid applied to reduce the purchase price.
All of the Company's leasing arrangements as lessor are classified as operating leases. Rental revenue is recognized on a straight-line basis over the rental period. Rental revenue includes amounts charged for loss and damage insurance on rented equipment. In most cases, our rental arrangements include non-lease components, including delivery and pick-up services. The Company accounts for these non-lease components separate from the rental arrangement and recognizes the revenue associated with these components when the service is performed. The Company has elected to exclude from rental revenue all sales, value added and other taxes collected from our customers concurrent with our rental activities. Rental billings most often occur on a monthly basis and may be billed in advance or in arrears, thus creating unbilled rental receivables or deferred rental revenue amounts. The Company manages the residual value risk of its rented assets by (i) monitoring the quality, aging and anticipated retail market value of our rental fleet assets to determine the optimal period to remove an asset from the rental fleet, (ii) maintaining the quality of our assets through on-site parts and service support and (iii) requiring physical damage insurance of our lessee customers. We primarily dispose of our rental assets through the sale of the asset by our retail sales force.
Revenue generated from leasing activities is disclosed, by segment, in Note 3. The following is the balance of our dedicated rental fleet assets of our Construction segment as of October 31, 2019 and January 31, 2019:
 
October 31, 2019
 
January 31, 2019
 
(in thousands)
Rental fleet equipment
$
115,361

 
$
111,164

Less accumulated depreciation
47,557

 
50,399

 
$
67,804

 
$
60,765

NOTE 15 - FAIR VALUE MEASUREMENTS
As of January 31, 2019, the fair value of the Company's foreign currency contracts, which are either assets or liabilities measured at fair value on a recurring basis, was not material. These foreign currency contracts were valued using a discounted cash flow analysis, an income approach, utilizing readily observable market data as inputs, which is classified as a Level 2 fair value measurement.
The Company also valued certain long-lived assets at fair value on a non-recurring basis as of January 31, 2019 as part of its long-lived asset impairment testing. The estimated fair value of such assets was $0.9 million as of January 31, 2019. Fair value was estimated through an income approach incorporating both observable and unobservable inputs, and are deemed to be Level 3 fair value inputs. The most significant unobservable inputs include forecasted net cash generated from the use of the assets and the discount rate applied to such cash flows to arrive at a fair value estimate. In addition, in certain instances the

19


Company estimated the fair value of long-lived assets to approximate zero as no future cash flows were assumed to be generated from the use of such assets and the expected value to be realized upon disposition was deemed to be nominal.
The Company also has financial instruments that are not recorded at fair value in the consolidated balance sheets, including cash, receivables, payables, long-term debt and senior convertible notes. The carrying amounts of these financial instruments approximated their fair values as of October 31, 2019 and January 31, 2019. Fair value of these financial instruments was estimated based on Level 2 fair value inputs.
NOTE 16 - INCOME TAXES
Our effective tax rate was 33.8% and 15.6% for the three months ended October 31, 2019 and 2018, and was 31.3% and 22.0% for the nine months ended October 31, 2019 and 2018. Our effective tax rate can differ from the domestic federal statutory tax rate due to the mix of domestic and foreign income or losses and the impact of valuation allowances on our U.S. federal, state and certain of our foreign deferred tax assets, including net operating losses. In addition, for the three and nine months ended October 31, 2019, the effective tax rate increased by approximately seven percentage points due to foreign currency gains recognized as a result of a strengthening Ukrainian hryvnia. Differences in the amount of Ukrainian hryvnia foreign currency gains recognized for book and tax accounting are permanent differences that accordingly impacts our effective tax rate. The effective tax rate for the three months ended October 31, 2018 was impacted by certain discrete items recognized during the period and from certain tax planning strategies applied to minimize the impact of the global intangible low-taxed income ("GILTI") provisions for the fiscal year ended January 31, 2019.
NOTE 17 - BUSINESS COMBINATIONS
Fiscal 2020
On January 1, 2019, the Company, through its German subsidiary, acquired certain assets of ESB Agrartechnik GmbH ("ESB"). ESB is a full-service agriculture equipment dealership in Eastern Germany. Our acquisition of ESB further expands our presence in the German market. The total consideration transferred for the acquired business was $3.0 million paid in cash. This acquisition was recognized in the fiscal year ending January 31, 2020 as the acquisition occurred within our International segment in which all entities maintain a calendar year reporting period.
On October 1, 2019, the Company acquired certain assets of Uglem-Ness Co. The acquired business consists of one Case IH agriculture equipment store in Northwood, North Dakota. The service area is contiguous to the Company's existing locations in Grand Forks and Casselton, North Dakota and Ada, Minnesota. The total consideration transferred for the acquired business was $8.8 million paid in cash. The Company has committed to acquire the real estate of the Uglem-Ness Co., subject to customary closing conditions, for a purchase price of $2.1 million. The Company anticipates completing the real estate acquisition by January 31, 2020.
In connection with the acquisition, the Company acquired from CNH Industrial and certain other manufacturers equipment and parts inventory previously owned by Uglem-Ness Co. Upon acquiring such inventories, the Company has been offered floorplan financing by the manufacturer. In total, the Company acquired inventory and recognized a corresponding financing liability of $7.4 million. The recognition of these inventories and the associated financing liabilities are not included as part of the accounting for the business combination.
Fiscal 2019
On July 2, 2018, the Company acquired all interests of two commonly-controlled companies, AGRAM Landtechnikvertrieb GmbH and AGRAM Landtechnik Rollwitz GmbH (collectively "AGRAM"), for $19.2 million in cash consideration. Founded in 1990, AGRAM is a CaseIH and Steyr dealership complex consisting of four agriculture dealership locations in the following cities of Germany: Altranft, Burkau, Gutzkow, and Rollwitz. Our acquisition of these entities provided the Company the opportunity to expand our international presence into the large, well-established German market.
Purchase Price Allocation
Each of the above acquisitions has been accounted for under the acquisition method of accounting, which requires the Company to estimate the acquisition date fair value of the assets acquired and liabilities assumed. The estimated fair values of the acquired assets of Uglem-Ness Co. are provisional estimates due to the short duration of time since the acquisition date. The estimated fair values of assets acquired from Ulgem-Ness Co. included below are based on the best information currently available but are estimates that are subject to change as the Company completes all remaining steps in finalizing the purchase

20


price allocation. The Company expects to finalize the valuation of all assets by January 31, 2020. The accounting for all other acquisitions is complete as of October 31, 2019.
The following table presents the aggregate purchase price allocations for all acquisitions completed during the nine months ended October 31, 2019 and 2018:
 
October 31, 2019
 
October 31, 2018
 
(in thousands)
Assets acquired:
 
 
 
Cash
$

 
$
3,857

Receivables
440

 
5,340

Inventories
6,466

 
21,725

Prepaid expenses and other

 
887

Property and equipment
1,675

 
3,512

Intangible assets
1,973

 
1,944

Goodwill
1,198

 
924

Other

 
61

 
11,752

 
38,250

Liabilities assumed:
 
 
 
Accounts payable

 
1,553

Floorplan payable

 
13,820

Deferred revenue

 
85

Accrued expenses and other

 
1,279

Long-term debt

 
1,725

Deferred income taxes

 
632

 

 
19,094

Net assets acquired
$
11,752

 
$
19,156

 
 
 
 
Goodwill recognized by segment:
 
 
 
Agriculture
$
699

 
$

Construction

 

International
499

 
924

Goodwill expected to be deductible for tax purposes
1,198

 
$

The recognition of goodwill in the above business combinations arose from the acquisition of an assembled workforce and anticipated synergies expected to be realized. For business combinations occurring during the nine months ended October 31, 2019, the Company recognized, in the aggregate, a customer relationship intangible asset of $0.2 million, a non-competition intangible asset of $0.1 million and a distribution rights intangible asset of $1.6 million. For the business combination occurring during the nine months ended October 31, 2018, the Company recognized a customer relationship intangible asset of $0.1 million and a distribution rights intangible asset of $1.8 million. The customer relationship and non-competition assets will be amortized over periods ranging from three to five years. The distribution rights assets are indefinite-lived intangible assets not subject to amortization. The Company estimated the fair value of the intangible assets using a multi-period excess earnings model, an income approach. Acquisition related costs were not material for either the nine months ended October 31, 2019 or 2018, and have been expensed as incurred and recognized as operating expenses in the consolidated statements of operations.
NOTE 18 - CONTINGENCIES
On October 11, 2017, the Romania Competition Council (“RCC”) initiated an administrative investigation of the Romanian Association of Manufacturers and Importers of Agricultural Machinery (“APIMAR”) and all its members, including Titan Machinery Romania. The RCC's investigation involves whether the APIMAR members engaged in anti-competitive practices in their sales of agricultural machinery not involving European Union ("EU") subvention funding programs, by referring to the published sales prices governing EU subvention funded transactions, which prices are mandatorily disclosed to

21


and published by AFIR, a Romanian government agency that oversees the EU subvention funding programs in Romania. The investigation is in a preliminary stage and the Company is currently unable to predict its outcome or reasonably estimate any potential loss that may result from the investigation.
The Company is also engaged in other legal proceedings incidental to the normal course of business. Due to their nature, such legal proceedings involve inherent uncertainties, including but not limited to, court rulings, negotiations between affected parties and governmental intervention. Based upon the information available to the Company and discussions with legal counsel, it is the Company's opinion that the outcome of these various legal actions and claims will not have a material impact on the financial position, results of operations or cash flows. These matters, however, are subject to many uncertainties, and the outcome of any matter is not predictable with assurance.
NOTE 19 - SEGMENT INFORMATION
The Company has three reportable segments: Agriculture, Construction and International. Revenue between segments is immaterial. The Company retains various unallocated income/(expense) items and assets at the general corporate level, which the Company refers to as “Shared Resources” in the table below. Shared Resources assets primarily consist of cash and property and equipment.
Certain financial information for each of the Company’s business segments is set forth below. All revenue amounts for the three and nine months ended October 31, 2018 shown below are presented on an as corrected basis following the correction of an immaterial error identified in previously issued financial statements. Refer to Note 19 for additional details. 
 
Three Months Ended October 31,

Nine Months Ended October 31,
 
2019

2018

2019

2018
 
(in thousands)
 
(in thousands)
Revenue
 
 
 
 
 
 
 
Agriculture
$
214,073

 
$
209,697

 
$
533,538

 
$
503,526

Construction
78,031

 
76,994

 
232,813

 
215,560

International
68,832

 
74,222

 
187,856

 
182,772

Total
$
360,936

 
$
360,913

 
$
954,207

 
$
901,858

 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
 
 
 
 
Agriculture
$
10,259

 
$
9,383

 
$
18,312

 
$
15,666

Construction
347

 
1,154

 
(541
)
 
(1,773
)
International
2,061

 
2,596

 
2,783

 
6,235

Segment income (loss) before income taxes
12,667

 
13,133

 
20,554

 
20,128

Shared Resources
(258
)
 
(363
)
 
(1,233
)
 
(1,732
)
Total
$
12,409

 
$
12,770

 
$
19,321

 
$
18,396

 
 
October 31, 2019
 
January 31, 2019
 
(in thousands)
Total Assets
 
 
 
Agriculture
$
462,881

 
$
316,224

Construction
297,703

 
227,261

International
199,168

 
170,187

Segment assets
959,752

 
713,672

Shared Resources
69,772

 
78,766

Total
$
1,029,524

 
$
792,438



22


NOTE 20 - IMMATERIAL RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
As previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2019, the Company identified an immaterial error within its financial statements, including in the results for the three and nine months ended October 31, 2018. The identified error was the result of incorrectly eliminating certain internal parts and service transactions. The adjustments to correct for this error reduce total revenue and cost of revenue by approximately 1.0% and impact the amounts of previously reported equipment, parts, service and rental and other revenue and cost of revenue amounts, but have no impact on total gross profit, operating or net income, earnings per share, or the consolidated balance sheets or statements of cash flows. Management of the Company has evaluated all relevant quantitative and qualitative factors and has concluded that the error is not material to the results of operations for the previously reported periods. The Company has restated its accompanying statement of operations to correct for this immaterial error for the three and nine months ended October 31, 2018.
Included below is a summary of the previously reported amounts of revenue and cost of revenue, the impact of correcting for this immaterial error, and the as-corrected amounts for the three and nine month periods ended October 31, 2018:
 
Three Months Ended October 31, 2018
 
Nine Months Ended October 31, 2018
 
As Previously Reported
 
Corrections
 
As Corrected
 
As Previously Reported
 
Corrections
 
As Corrected
 
(in thousands)
Revenue
 
 
 
 
 
 
 
 
 
 
 
Equipment
$
241,198

 
$
12,595

 
$
253,793

 
$
590,823

 
$
34,365

 
$
625,188

Parts
70,118

 
(5,509
)
 
64,609

 
181,651

 
(14,728
)
 
166,923

Service
33,560

 
(8,752
)
 
24,808

 
92,187

 
(24,174
)
 
68,013

Rental and other
18,773

 
(1,070
)
 
17,703

 
44,558

 
(2,824
)
 
41,734

Total Revenue
363,649

 
(2,736
)
 
360,913

 
909,219

 
(7,361
)
 
901,858

Cost of Revenue
 
 
 
 
 
 
 
 
 
 
 
Equipment
218,204

 
7,316

 
225,520

 
534,443

 
21,480

 
555,923

Parts
49,481

 
(3,815
)
 
45,666

 
128,683

 
(10,429
)
 
118,254

Service
11,841

 
(4,085
)
 
7,756

 
34,475

 
(12,557
)
 
21,918

Rental and other
14,581

 
(2,152
)
 
12,429

 
35,617

 
(5,855
)
 
29,762

Total Cost of Revenue
294,107

 
(2,736
)
 
291,371

 
733,218

 
(7,361
)
 
725,857

Gross Profit
$
69,542

 
$

 
$
69,542

 
$
176,001

 
$

 
$
176,001



23


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 related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended January 31, 2019
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.
Demand for agriculture equipment and, to a lesser extent, parts and service support, are impacted by agriculture commodity prices and net farm income. Based on U.S. Department of Agriculture publications, the most recent estimate of net farm income for calendar year 2018 indicated an approximate 12.0% increase as compared to calendar year 2017, and estimated an approximate 10.0% increase in net farm income for calendar year 2019, as compared to calendar year 2018.
For the third quarter of fiscal 2020, our net income was $8.2 million, or $0.37 per diluted share, compared to net income of $10.8 million, or $0.48 per diluted share, for the third quarter of fiscal 2019. Our adjusted diluted earnings per share was $0.44 for the third quarter of fiscal 2020, compared to $0.49 for the third quarter of fiscal 2019. See the Non-GAAP Financial Measures section below for a reconciliation of adjusted diluted earnings per share to diluted earnings per share, the most comparable GAAP financial measure. Significant factors impacting the quarterly comparisons were:
Revenue in the third quarter of fiscal 2020 was flat compared to the third quarter of fiscal 2019. Increased revenue from parts and service was offset by lower equipment and rental and other revenue. Equipment revenue within our Agriculture and International segments in the third quarter of fiscal 2020 was impacted by continued uncertainty in the agriculture sector and crop and weather conditions in certain markets.
Gross profit margin in the third quarter of fiscal 2020 improved to 19.9%, compared to 19.3% for the third quarter of fiscal 2019. The improvement in gross profit margin was primarily the result of a change in gross profit mix with more revenue generated by our higher margin parts and service businesses in the third quarter of fiscal 2020, as compared to the third quarter last year.
Operating expenses increased $4.9 million, or 9.2%, in the third quarter of fiscal 2020, as compared to the third quarter last year. Operating expenses as a percentage of revenue increased from 14.8% in the third quarter of fiscal 2019 to 16.1% in the third quarter of fiscal 2020. The increase in operating expenses is primarily the result of incremental costs associated with our ERP transition and increased costs required to support higher business volumes in our Agriculture and Construction segments.
Floorplan and other interest expense decreased a combined 30.8% in the third quarter of fiscal 2020, as compared to the third quarter last year, primarily due to a decrease in our level of interest-bearing inventory in the third quarter of fiscal 2020, and the repayment in full of our senior convertible notes in the second quarter of fiscal 2020.
Our effective tax rate for the third quarter of fiscal 2020 was 33.8%, compared to 15.6% in the third quarter last year. The increase in our effective tax rate for the third quarter of fiscal 2020 was primarily due to foreign currency gains recognized as a result of a strengthening Ukrainian hryvnia.
Acquisitions
Fiscal 2020
On October 1, 2019, we acquired certain assets of Uglem-Ness Co., a single Case IH agriculture equipment store in Northwood, North Dakota. The acquisition continues our strategy of acquiring dealerships in agriculture markets contiguous to our current North American agriculture stores. The service area of Ulgem-Ness is contiguous to our existing locations in Grand Forks and Casselton, North Dakota and Ada, Minnesota. The total consideration paid in the acquisition was $8.8 million, which

24


the Company financed through available cash resources and capacity under our existing floorplan payable and other credit facilities. The Northwood, ND dealership is included within our Agriculture segment.
Fiscal 2019    
On July 2, 2018, we acquired two commonly-controlled companies, AGRAM Landtechnikvertrieb GmbH and AGRAM Landtechnik Rollwitz GmbH (collectively "AGRAM"). AGRAM consists of four Case IH agriculture dealership locations in the following cities of Germany; Altranft, Burkau, Gutzkow, and Rollowitz. Total cash consideration paid in the acquisition was $19.2 million, which the Company financed through available cash resources and capacity under our existing floorplan payable and other credit facilities. The four AGRAM dealerships are included within our International segment.
ERP Transition
In March 2019, the Company completed an assessment of its Enterprise Resource Planning ("ERP") application and concluded that the Company would begin the process to prepare for a conversion to a new ERP application during the fiscal year ending January 31, 2020, with an anticipated implementation of the new ERP application during the first-half of the fiscal year ending January 31, 2021. The new ERP application is expected to provide the latest data-driven and mobile-enabled sales and support tools to improve employee efficiency and deliver an enhanced customer experience. Beginning in March 2019, we prospectively adjusted the useful life of our current ERP application such that it will be fully amortized upon its estimated replacement date.
During the three and nine months ended October 31, 2019, we recognized ERP transition costs, which include additional amortization expense of our current ERP application and external costs associated with implementing the new ERP application, of $2.1 million and $4.8 million, respectively. For the remainder of fiscal 2020, we expect to recognize incremental ERP transition costs of approximately $2.4 million.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are included in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended January 31, 2019. Other than the adoption of the lease accounting guidance described in Note 1, Business Activity and Significant Accounting Policies, and Note 14, Leases, to our consolidated financial statements in this Quarterly Report on Form 10-Q, there have been no other changes in our critical accounting policies since January 31, 2019.
Results of Operations
The results shown below include the operating results of any acquisitions made during these periods and the operating results of any stores closed during these periods up to the date of the store closure. The period-to-period comparisons included below are not necessarily indicative of future results. Segment information is provided later in this discussion and analysis of our results of operations.
All revenue and cost of revenue amounts for three and nine months ended October 31, 2018 are presented on an as corrected basis after correcting for an immaterial error identified during the year ended January 31, 2019 in these previously issued financial statements. The correction of this immaterial error reduced total revenue and cost of revenue by approximately 1.0% and impacted the amounts of previously reported equipment, parts, service and rental and other revenue and cost of revenue, but had no impact on total gross profit, operating or net income, or earnings per-share. See Note 20 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information
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 between 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 excluded stores throughout the Results of Operations section in this Quarterly Report on Form 10-Q.

25


Comparative financial data for each of our four sources of revenue are expressed below.
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
 
(dollars in thousands)
 
(dollars in thousands)
Equipment
 
 
 
 
 

 
 

Revenue
$
245,986

 
$
253,793

 
$
654,376

 
$
625,188

Cost of revenue
219,484

 
225,520

 
583,345

 
555,923

Gross profit
$
26,502

 
$
28,273

 
$
71,031

 
$
69,265

Gross profit margin
10.8
%
 
11.1
%
 
10.9
%
 
11.1
%
Parts
 
 
 
 
 
 
 
Revenue
$
70,788

 
$
64,609

 
$
181,928

 
$
166,923

Cost of revenue
49,834

 
45,666

 
128,380

 
118,254

Gross profit
$
20,954

 
$
18,943

 
$
53,548

 
$
48,669

Gross profit margin
29.6
%
 
29.3
%
 
29.4
%
 
29.2
%
Service
 
 
 
 
 
 
 
Revenue
$
27,553

 
$
24,808

 
$
77,215

 
$
68,013

Cost of revenue
8,950

 
7,756

 
25,170

 
21,918

Gross profit
$
18,603

 
$
17,052

 
$
52,045

 
$
46,095

Gross profit margin
67.5
%
 
68.7
%
 
67.4
%
 
67.8
%
Rental and other
 
 
 
 
 
 
 
Revenue
$
16,609

 
$
17,703

 
$
40,688

 
$
41,734

Cost of revenue
10,894

 
12,429

 
27,612

 
29,762

Gross profit
$
5,715

 
$
5,274

 
$
13,076

 
$
11,972

Gross profit margin
34.4
%
 
29.8
%
 
32.1
%
 
28.7
%
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,
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 

 
 

Equipment
68.2
 %
 
70.3
 %
 
68.6
 %
 
69.3
 %
Parts
19.6
 %
 
17.9
 %
 
19.1
 %
 
18.5
 %
Service
7.6
 %
 
6.9
 %
 
8.1
 %
 
7.5
 %
Rental and other
4.6
 %
 
4.9
 %
 
4.3
 %
 
4.6
 %
Total Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Total Cost of Revenue
80.1
 %
 
80.7
 %
 
80.1
 %
 
80.5
 %
Gross Profit Margin
19.9
 %
 
19.3
 %
 
19.9
 %
 
19.5
 %
Operating Expenses
16.0
 %
 
14.8
 %
 
17.4
 %
 
16.4
 %
Impairment of Intangible and Long-Lived Assets
 %
 
0.1
 %
 
 %
 
0.1
 %
Restructuring Costs
 %
 
 %
 
 %
 
 %
Income from Operations
3.8
 %
 
4.5
 %
 
2.5
 %
 
3.0
 %
Other Income (Expense)
(0.3
)%
 
(0.9
)%
 
(0.5
)%
 
(1.0
)%
Income Before Income Taxes
3.4
 %
 
3.5
 %
 
2.0
 %
 
2.0
 %
Provision for Income Taxes
1.2
 %
 
0.6
 %
 
0.6
 %
 
0.4
 %
Net Income
2.3
 %
 
3.0
 %
 
1.4
 %
 
1.6
 %


26


Three Months Ended October 31, 2019 Compared to Three Months Ended October 31, 2018
Consolidated Results
Revenue
 
Three Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Equipment
$
245,986

 
$
253,793

 
$
(7,807
)
 
(3.1
)%
Parts
70,788

 
64,609

 
6,179

 
9.6
 %
Service
27,553

 
24,808

 
2,745

 
11.1
 %
Rental and other
16,609

 
17,703

 
(1,094
)
 
(6.2
)%
Total Revenue
$
360,936

 
$
360,913

 
$
23

 
 %
 
Total revenue for the third quarter of fiscal 2020 was flat with total revenue in the third quarter of fiscal 2019. Increased parts and service revenue of our Agriculture and Construction segments was offset by lower equipment revenue of our International segment. Company-wide same-store sales was virtually flat in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019.
Gross Profit
 
Three Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Gross Profit
 
 
 
 
 
 
 
Equipment
$
26,502

 
$
28,273

 
$
(1,771
)
 
(6.3
)%
Parts
20,954

 
18,943

 
2,011

 
10.6
 %
Service
18,603

 
17,052

 
1,551

 
9.1
 %
Rental and other
5,715

 
5,274

 
441

 
8.4
 %
Total Gross Profit
$
71,774

 
$
69,542

 
$
2,232

 
3.2
 %
Gross Profit Margin
 
 
 
 
 
 
 
Equipment
10.8
%
 
11.1
%
 
(0.3
)%
 
(2.7
)%
Parts
29.6
%
 
29.3
%
 
0.3
 %
 
1.0
 %
Service
67.5
%
 
68.7
%
 
(1.2
)%
 
(1.7
)%
Rental and other
34.4
%
 
29.8
%
 
4.6
 %
 
15.4
 %
Total Gross Profit Margin
19.9
%
 
19.3
%
 
0.6
 %
 
3.1
 %
Gross Profit Mix
 
 
 
 
 
 
 
Equipment
36.9
%
 
40.7
%
 
(3.8
)%
 
(9.3
)%
Parts
29.2
%
 
27.2
%
 
2.0
 %
 
7.4
 %
Service
25.9
%
 
24.5
%
 
1.4
 %
 
5.7
 %
Rental and other
8.0
%
 
7.6
%
 
0.4
 %
 
5.3
 %
Total Gross Profit Mix
100.0
%
 
100.0
%
 


 


 
Gross profit for the third quarter of fiscal 2020 increased 3.2% as compared to the same period last year. Gross profit margin improved to 19.9% for the third quarter of fiscal 2020 compared to 19.3% for the third quarter of fiscal 2019. The increase in gross profit and gross profit margin was primarily the result of a change in gross profit mix resulting from a greater percentage of revenue generated by our higher margin parts and service businesses. An improvement in rental and other gross profit margin also contributed to the gross profit margin improvement.
Our company-wide absorption rate increased to 82.6% for the third quarter of fiscal 2020 compared to 82.9% during the same period last year as the increase in gross profit from parts, service, and rental and other in the third quarter of fiscal 2020 more than offset the increase in operating expenses during the period. Our absorption rate for the third quarter of fiscal 2020 was negatively impacted by ERP transition costs recognized during the period.

27


Operating Expenses
 
Three Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Operating Expenses
$
58,184

 
$
53,306

 
$
4,878

 
(9.2
)%
Operating Expenses as a Percentage of Revenue
16.1
%
 
14.8
%
 
1.3
%
 
(8.8
)%
Our operating expenses in the third quarter of fiscal 2020 increased $4.9 million, as compared to the third quarter of fiscal 2019, primarily as a result of ERP transition costs incurred in the third quarter of fiscal 2020, and increased costs required to support the higher business volumes in our Agriculture and Construction segments. Operating expenses as a percentage of revenue increased to 16.1% in the third quarter of fiscal 2020 from 14.8% in the third quarter of fiscal 2019. The increase in operating expenses as a percentage of total revenue was primarily due to ERP transition costs recognized in the third quarter of fiscal 2020 and the decrease in International equipment revenue in the third quarter of fiscal 2020, as compared to the third quarter of fiscal 2019, which negatively affected our ability to leverage our fixed operating costs within this segment.
Impairment Charges
 
Three Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Impairment of Long-Lived Assets
$
51

 
$
304

 
$
(253
)
 
83.0%
Restructuring Costs

 
(151
)
 
151

 
100.0%
An immaterial amount of impairment charges on certain long-lived assets was recognized in the third quarter of each of fiscal 2020 and 2019. The restructuring benefit of $0.2 million recognized in the third quarter of fiscal 2019 related to our revised assumptions, based on changes in circumstances, for our cease-use liabilities associated with certain of our previously closed store locations.
Other Income (Expense)
 
Three Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Interest income and other income (expense)
$
1,273

 
$
157

 
$
1,116

 
n/m

Floorplan interest expense
(1,448
)
 
(1,856
)
 
(408
)
 
22.0
%
Other interest expense
(955
)
 
(1,617
)
 
(662
)
 
40.9
%
Floorplan interest expense decreased in the third quarter of fiscal 2020, as compared to the third quarter of fiscal 2019, primarily as a result of lower levels of interest-bearing inventory in the third quarter of fiscal 2020. The decrease in other interest expense in the third quarter of fiscal 2020, as compared to the third quarter of fiscal 2019, is primarily the result of decreased interest expense on our senior convertible notes in the third quarter of fiscal 2020 following our repayment in full of the outstanding balance on May 1, 2019. The increase in interest income and other income (expense) in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019 is primarily the result of differences in foreign currency gains and losses recognized during the periods, with a strengthening U.S. dollar relative to the Euro and a strengthening Ukrainian hyrvnia relative to the U.S. dollar in the third quarter of fiscal 2020 creating foreign currency gains during the period.
Provision for Income Taxes
 
Three Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Provision for Income Taxes
$
4,195

 
$
1,994

 
$
2,201

 
(110.4
)%
 
Our effective tax rate was 33.8% for the third quarter of fiscal 2020 and 15.6% for the third quarter of fiscal 2019. Our effective tax rate is impacted by the mix of income or losses in our domestic and international jurisdictions as well as the impact of valuation allowances on our deferred tax assets, including net operating losses. In addition, our effective tax rate for the third quarter of fiscal 2020 was impacted by foreign currency gains recognized as a result of a strengthening Ukrainian hyrvnia. These foreign currency gains caused our effective tax rate to increase by approximately seven percentage points in the

28


third quarter of fiscal 2020. Our effective tax rate for the third quarter of fiscal 2019 was impacted by certain discrete items recognized during the quarter and from a changing mix of domestic and foreign income and certain tax planning strategies applied to minimize the impact of the global intangible low-taxed income ("GILTI") provisions for fiscal 2019.
Segment Results
Certain financial information for our Agriculture, Construction and International business segments is set forth below. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Revenue between segments is immaterial.
 
Three Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Revenue
 
 
 
 
 
 
 
Agriculture
$
214,073

 
$
209,697

 
$
4,376

 
2.1
 %
Construction
78,031

 
76,994

 
1,037

 
1.3
 %
International
68,832

 
74,222

 
(5,390
)
 
(7.3
)%
Total
$
360,936

 
$
360,913

 
$
23

 
 %
 
 
 
 
 
 
 
 
Income Before Income Taxes
 
 
 
 
 
 
 
Agriculture
$
10,259

 
$
9,383

 
$
876

 
9.3
 %
Construction
347

 
1,154

 
(807
)
 
(69.9
)%
International
2,061

 
2,596

 
(535
)
 
(20.6
)%
Segment income (loss) before income taxes
12,667

 
13,133

 
(466
)
 
(3.5
)%
Shared Resources
(258
)
 
(363
)
 
105

 
28.9
 %
Total
$
12,409

 
$
12,770

 
$
(361
)
 
(2.8
)%
Agriculture 
Agriculture segment revenue for the third quarter of fiscal 2020 increased 2.1% compared to the third quarter of fiscal 2019. Same-store sales of our Agriculture segment increased 1.6% for the third quarter of fiscal 2020, as compared to the third quarter of fiscal 2019. The revenue increase was the result of increased parts and service revenue, but partially offset by decreased equipment revenue due primarily to difficult industry conditions.
Agriculture segment income before income taxes was $10.3 million for the third quarter of fiscal 2020 compared to $9.4 million for the third quarter of fiscal 2019. The improvement in segment results was primarily the result of increased parts and service revenue but partially offset by increased operating expenses required to support this increased activity. Lower floorplan and other interest expense for the third quarter of fiscal 2020, as compared to the third quarter of fiscal 2019, also contributed to the improvement in segment results.
Construction
Construction segment revenue for the third quarter of fiscal 2020 increased 1.3% compared to the third quarter of fiscal 2019. The increase in revenue, all of which was due to a same-store sales increase, was the result of increased parts and service revenue. Equipment and rental and other revenue decreased slightly in the third quarter of fiscal 2020, as compared to the third quarter of fiscal 2019.
Our Construction segment income before income taxes was $0.3 million for the third quarter of fiscal 2020 compared to $1.2 million in the third quarter of fiscal 2019. The increase in segment revenue and an improvement in gross profit margin in the third quarter of fiscal 2020, as compared to the third quarter of fiscal 2019, was more than offset by increased operating expenses and increased floorplan and other interest expense. The amount of impairment and restructuring costs recognized in the third quarter of fiscal 2020, as compared to the third quarter of fiscal 2019, also contributed to decreased income before income taxes for the third quarter of fiscal 2020. The dollar utilization of our rental fleet increased from 28.8% in the third quarter of fiscal 2019 to 30.4% in the third quarter of fiscal 2020.
International
International segment revenue for the third quarter of fiscal 2020 decreased 7.3% compared to the third quarter of fiscal 2019. The decrease in segment revenue, all of which was due to a same-store sales decrease, was primarily the result of

29


decreased equipment revenue resulting from challenging industry conditions in certain of our markets reducing industry volumes in those markets.
Our International segment income before income taxes was $2.1 million for the third quarter of fiscal 2020 compared to $2.6 million for the same period last year. The decrease in segment results was primarily the result of decreased equipment revenue. but partially offset by foreign currency gains recognized in the third quarter of fiscal 2020 resulting from a strengthening U.S. dollar relative to the Euro, and a strengthening Ukrainian hryvnia relative to the U.S. dollar.
Shared Resources/Eliminations
We incur centralized expenses/income at our general corporate level, which we refer to as “Shared Resources,” and then allocate most of these net expenses to our segments. Since these allocations are set early in the year, and a portion is planned to be unallocated, unallocated balances may occur. Shared Resources loss before income taxes was $0.3 million for the third quarter of fiscal 2020 compared to $0.4 million for the same period last year.
Nine Months Ended October 31, 2019 Compared to Nine Months Ended October 31, 2018
Consolidated Results
Revenue 
 
Nine Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Equipment
$
654,376

 
$
625,188

 
$
29,188

 
4.7
 %
Parts
181,928

 
166,923

 
15,005

 
9.0
 %
Service
77,215

 
68,013

 
9,202

 
13.5
 %
Rental and other
40,688

 
41,734

 
(1,046
)
 
(2.5
)%
Total Revenue
$
954,207

 
$
901,858

 
$
52,349

 
5.8
 %
The increase in revenue for the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019 was the result of increased revenue from our equipment, parts and service businesses. Same-store sales increased 3.3% over the comparable prior year period resulting from increased revenues within our Agriculture and Construction segments, but partially offset by a same-store sales decrease within our International segment. Our total revenue increase was also positively impacted by our AGRAM acquisition, which occurred in the third quarter of fiscal 2019.

30


Gross Profit
 
Nine Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Gross Profit
 
 
 
 
 
 
 
Equipment
$
71,031

 
$
69,265

 
$
1,766

 
2.5
 %
Parts
53,548

 
48,669

 
4,879

 
10.0
 %
Service
52,045

 
46,095

 
5,950

 
12.9
 %
Rental and other
13,076

 
11,972

 
1,104

 
9.2
 %
Total Gross Profit
$
189,700

 
$
176,001

 
$
13,699

 
7.8
 %
Gross Profit Margin
 
 
 
 
 
 
 
Equipment
10.9
%
 
11.1
%
 
(0.2
)%
 
(1.8
)%
Parts
29.4
%
 
29.2
%
 
0.2
 %
 
0.7
 %
Service
67.4
%
 
67.8
%
 
(0.4
)%
 
(0.6
)%
Rental and other
32.1
%
 
28.7
%
 
3.4
 %
 
11.8
 %
Total Gross Profit Margin
19.9
%
 
19.5
%
 
0.4
 %
 
2.1
 %
Gross Profit Mix
 
 
 
 
 
 
 
Equipment
37.4
%
 
39.4
%
 
(2.0
)%
 
(5.1
)%
Parts
28.2
%
 
27.7
%
 
0.5
 %
 
1.8
 %
Service
27.4
%
 
26.2
%
 
1.2
 %
 
4.6
 %
Rental and other
7.0
%
 
6.7
%
 
0.3
 %
 
4.5
 %
Total Gross Profit Mix
100.0
%
 
100.0
%
 


 


 
The $13.7 million increase in gross profit for the first nine months of fiscal 2020, as compared to the same period last year, was primarily due to higher revenue for the first nine months of fiscal 2020 and improved gross profit margins, from 19.5% for the first nine months of fiscal 2019 to 19.9% for the first nine months of fiscal 2020. The improvement in gross profit margin was primarily the result of a change in gross profit mix resulting from a greater percentage of revenue generated by our higher margin parts and service businesses. An improvement in rental and other gross profit margin also contributed to the gross profit margin improvement.
Our company-wide absorption for the first nine months of fiscal 2020 decreased slightly to 76.1% as compared to 76.3% during the same period last year. Our absorption rate for the first nine months of fiscal 2020 was negatively impacted by ERP transition costs recognized during the period.
Operating Expenses
 
Nine Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Operating Expenses
$
165,594

 
$
147,665

 
$
17,929

 
(12.1
)%
Operating Expenses as a Percentage of Revenue
17.4
%
 
16.4
%
 
1.0
%
 
(6.1
)%
Our operating expenses for the first nine months of fiscal 2020 increased $17.9 million as compared to the first nine months of fiscal 2019 primarily as a result of increased International segment operating expenses resulting from our AGRAM acquisition, ERP transition costs incurred in the first nine months of fiscal 2020, and increased other costs required to support higher business volumes in our Agriculture and Construction segments. Operating expenses as a percentage of revenue increased to 17.4% in the first nine months of fiscal 2020 from 16.4% in the first nine months of fiscal 2019. The increase in operating expenses as a percentage of total revenue was primarily due to ERP transition costs recognized in the first nine months of fiscal 2020 and the decrease in International equipment revenue in the first nine months of fiscal 2020, which negatively affected our ability to leverage our fixed operating costs within this segment.

31


Restructuring Costs
 
Nine Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
Decrease
 
Change
 
(dollars in thousands)
 
 
Impairment of Long-Lived Assets
$
186

 
$
459

 
$
(273
)
 
59.0%
Restructuring Costs

 
414

 
(414
)
 
100.0
%
We recognized $0.2 million and $0.5 million of impairment charges on certain long-lived assets during first nine months of fiscal 2020 and 2019. Restructuring costs of $0.4 million were recognized during the first nine months of fiscal 2019 related to the Company's revised assumptions, based on changes in circumstances, for our cease-use lease liabilities associated with certain of our previously closed stores.
Other Income (Expense)
 
Nine Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Interest income and other income (expense)
$
2,687

 
$
2,003

 
$
684

 
34.1
%
Floorplan interest expense
(3,724
)
 
(4,932
)
 
(1,208
)
 
24.5
%
Other interest expense
(3,562
)
 
(6,137
)
 
(2,575
)
 
42.0
%
 
The decrease in floorplan interest expense for the first nine months of fiscal 2020, as compared to the same period last year, was primarily due to a decrease in our interest-bearing inventory in the first nine months of fiscal 2020. Interest expense associated with our senior convertible notes, which is reflected in other interest expense, decreased $2.2 million for the first nine months of fiscal 2020, as compared to the same period last year, due to interest expense savings resulting from our partial repurchase of senior convertible notes during the first nine months of fiscal 2019 and the repayment of the remaining outstanding principal balance on the maturity date of May 1, 2019. In addition, other interest expense for the first nine months of fiscal 2019 includes a $0.6 million loss recognized on the senior convertible notes repurchased during the period.
Provision for Income Taxes
 
Nine Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
Decrease
 
Change
 
(dollars in thousands)
 
 
Provision for Income Taxes
$
6,041

 
$
4,055

 
$
1,986

 
(49.0)%
 
Our effective tax rate was 31.3% for the first nine months of fiscal 2020 and 22.0% for the same period last year. Our effective tax rate is impacted by the mix of income or losses in our domestic and international jurisdictions as well as the impact of valuation allowances on our deferred tax assets, including net operating losses. The increase in our effective tax rate for the first nine months of fiscal 2020, as compared to the same period last year, was primarily the result of foreign currency gains recognized as a result of a strengthening Ukrainian hryvnia, which increased our effective tax rate by approximately seven percentage points for the first nine months of fiscal 2020.
Segment Results
Certain financial information for our Agriculture, Construction and International business segments is set forth below. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Revenue between segments is immaterial.

32


 
Nine Months Ended October 31,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Revenue
 
 
 
 
 
 
 
Agriculture
$
533,538

 
$
503,526

 
$
30,012

 
6.0
 %
Construction
232,813

 
215,560

 
17,253

 
8.0
 %
International
187,856

 
182,772

 
5,084

 
2.8
 %
Total
$
954,207

 
$
901,858

 
$
52,349

 
5.8
 %
 
 
 
 
 
 
 
 
Income Before Income Taxes
 
 
 
 
 
 
 
Agriculture
$
18,312

 
$
15,666

 
$
2,646

 
16.9
 %
Construction
(541
)
 
(1,773
)
 
1,232

 
69.5
 %
International
2,783

 
6,235

 
(3,452
)
 
(55.4
)%
Segment income (loss) before income taxes
20,554

 
20,128

 
426

 
2.1
 %
Shared Resources
(1,233
)
 
(1,732
)
 
499

 
28.8
 %
Total
$
19,321

 
$
18,396

 
$
925

 
5.0
 %
Agriculture 
Agriculture segment revenue for the first nine months of fiscal 2020 increased 6.0% compared to the same period last year. Same-store sales increased 5.7% for the first nine months of fiscal 2020, as compared to the same period last year. The revenue increase was the result of increased revenue in each of our equipment, parts and service businesses.
Agriculture segment income before income taxes was $18.3 million for the first nine months of fiscal 2020 compared to $15.7 million over the first nine months of fiscal 2019. The improvement in segment results was largely the result of increased revenue, but partially offset by increased operating expenses required to support increased volumes within this segment.
Construction
Construction segment revenue for the first nine months of fiscal 2020 increased 8.0% compared to the same period last year, all of which was due to a same-store sales increase, and arose from increased revenue from our equipment, parts and service businesses. Rental and other revenue for the first nine months of fiscal 2020 was flat compared to the same period last year.
Our Construction segment loss before income taxes was $0.5 million for the first nine months of fiscal 2020 compared to $1.8 million for the first nine months of fiscal 2019. The improvement in segment results was primarily due to increased revenue and improved gross profit margins, but partially offset by increased operating expenses required to support increased activity within this segment. The dollar utilization of our rental fleet increased from 24.0% in the first nine months of fiscal 2019 to 25.5% in the first nine months of fiscal 2020.
International
International segment revenue for the first nine months of fiscal 2020 increased 2.8% compared to the same period last year primarily due to our AGRAM acquisition that was completed early in the third quarter of fiscal 2019. Partially offsetting the impact of our AGRAM acquisition is a same-store sales decrease of 9.3% in the first nine months of fiscal 2020 compared to the same period last year due to decreased equipment revenue resulting from challenging industry conditions in certain of our markets.
Our International segment income before income taxes was $2.8 million for the first nine months of fiscal 2020 compared to $6.2 million for the same period last year. The decrease in segment results was primarily the result of decreased equipment revenue and the resulting negative impact on our ability to leverage our fixed operating costs within this segment.
Shared Resources/Eliminations
We incur centralized expenses/income at our general corporate level, which we refer to as “Shared Resources,” and then allocate most of these net expenses to our segments. Since these allocations are set early in the year, and a portion is planned to be unallocated, unallocated balances may occur. Shared Resources loss before income taxes was $1.2 million for the first nine months of fiscal 2020 compared to loss before income taxes of $1.7 million for the same period last year.

33


Non-GAAP Financial Measures
To supplement net income and diluted earnings per share ("Diluted EPS"), both GAAP measures, we present adjusted net income and adjusted Diluted EPS, both non-GAAP measures, which include adjustments for ERP transition costs, losses on repurchases of senior convertible notes, and restructuring and impairment charges. We believe that the presentation of adjusted net income and adjusted Diluted EPS is relevant and useful to our management and investors because it provides a measurement of earnings on activities that we consider to occur in the ordinary course of our business. Adjusted net income and adjusted Diluted EPS should be evaluated in addition to, and not considered a substitute for, or superior to, the most comparable GAAP measure. In addition, other companies may calculate these non-GAAP measures in a different manner, which may hinder comparability of our adjusted results with those of other companies.
The following tables reconcile (i) net income, a GAAP measure, to adjusted net income and (ii) Diluted EPS, a GAAP measure, to adjusted Diluted EPS:
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
 
2019
 
2018
 
2019
 
2018
 
 
(dollars in thousands, except per share data)
Adjusted Net Income
 
 
 
 
 
 
 
 
Net Income
 
$
8,214

 
$
10,776

 
$
13,280

 
$
14,341

Adjustments
 
 
 
 
 
 
 
 
ERP transition costs
 
2,062

 

 
4,778

 

Loss on repurchase of senior convertible notes
 

 

 

 
615

Restructuring and impairment charges
 
51

 
153

 
186

 
873

Total Pre-Tax Adjustments
 
2,113

 
153

 
4,964

 
1,448

Less: Tax Effect of Adjustments (1)
 
444

 
32

 
1,042

 
280

Total Adjustments
 
1,669

 
121

 
3,922

 
1,208

Adjusted Net Income
 
$
9,883

 
$
10,897

 
$
17,202

 
$
15,549

 
 
 
 
 
 
 
 
 
Adjusted Diluted EPS
 
 
 
 
 
 
 
 
Diluted EPS
 
$
0.37

 
$
0.48

 
$
0.60

 
$
0.65

Adjustments (2)
 
 
 
 
 
 
 
 
ERP transition costs
 
0.09

 

 
0.21

 

Loss on repurchase of senior convertible notes
 

 

 

 
0.03

Restructuring and impairment charges
 

 
0.01

 
0.01

 
0.04

Total Pre-Tax Adjustments
 
0.09

 
0.01

 
0.22

 
0.07

Less: Tax Effect of Adjustments (1)
 
0.02

 

 
0.05

 
0.01

Total Adjustments
 
0.07

 
0.01

 
0.17

 
0.06

Adjusted Diluted EPS
 
$
0.44

 
$
0.49

 
$
0.77

 
$
0.71

 
 
 
 
 
 
 
 
 
(1) The tax effect of U.S. related adjustments was calculated using a 21% tax rate, determined based on a 21% federal statutory rate and no impact for state taxes given our valuation allowance against state deferred tax assets. No tax effect was recognized for foreign related items as all adjustments occurred in a foreign jurisdiction that has a full valuation allowance on its deferred tax assets.
 
 
(2) Adjustments are net of amounts allocated to participating securities where applicable.
 
 
 
 


34


Liquidity and Capital Resources
Sources of Liquidity
Our primary sources of liquidity are cash reserves, cash generated 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 and lease obligations and other 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 covenants as further described in the "Risk Factors" section of our Annual Report in Form 10-K.
Equipment Inventory and Floorplan Payable Credit Facilities
As of October 31, 2019, the Company had floorplan payable lines of credit for equipment purchases totaling $660.0 million, which is primarily comprised of a $400.0 million credit facility with CNH Industrial, a $140.0 million floorplan payable line under the Wells Fargo Credit Agreement, and a $60.0 million credit facility with DLL Finance.
In November 2019, the Company amended its credit facility with CNH Industrial, increasing the available borrowings from $400.0 million to $450.0 million, which increases our total floorplan lines of credit for equipment purchases to $710.0 million.
The maturity date of our Wells Fargo Credit Agreement was previously contingent upon the results of a maturity test that was performed on February 1, 2019. Pursuant to this test, the maturity date of the Wells Fargo Credit Agreement would be October 28, 2020 so long as (i) the Company's fixed charge coverage ratio for the 12 month period ended December 31, 2018 was at least 1.10 to 1.00 and (ii) a liquidity test, requiring that the Company have unrestricted cash on hand plus excess borrowing availability under the Wells Fargo Credit Agreement (on a pro-forma basis reflecting the Company’s repayment in full of its outstanding Senior Convertible Notes) in an amount that was greater than 20% of maximum credit amount under the facility, was met on February 1, 2019. If both financial tests were not satisfied on February 1, 2019, the Wells Fargo Credit Agreement would immediately mature and all amounts outstanding would become immediately due and payable in full. The Company satisfied the maturity test requirements on February 1, 2019, and therefore the maturity date of the Wells Fargo Credit Agreement is October 28, 2020.
At the maturity date of our Wells Fargo Credit Agreement, we expect to have sufficient available cash and available borrowing capacity under our various other floorplan lines of credit to provide sufficient liquidity to our business. We also expect, prior to the maturity of our Wells Fargo Credit Agreement, to enter into a credit facility with a syndicate of banking partners that is similar in its terms to our current Wells Fargo Credit Agreement.
Our equipment inventory turnover decreased slightly from 1.8 times for the four quarter period ended October 31, 2018 to 1.7 times for the four quarter period ended October 31, 2019. The increase in equipment sales volume over the four quarter period ended October 31, 2019 as compared to the four quarter period ended October 31, 2018 was offset by an increase in our average equipment inventory over these time periods. Our equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan payables, decreased to 18.0% as of October 31, 2019 from 34.4% as of January 31, 2019. The decrease in our equity in equipment inventory is primarily due to the stocking of new equipment inventories during the nine months ended October 31, 2019 and the higher level of floorplan financing available on such inventories, and increased borrowing on our floorplan lines of credit following the repayment of our outstanding senior convertible notes on May 1, 2019.
Senior Convertible Notes
The Company's senior convertible notes matured on May 1, 2019. The Company repaid the outstanding principal balance of $45.6 million on the maturity date using available cash resources and available borrowing capacity under our various floorplan payable lines of credit.
Long-Term Debt
The Company finalized two real estate mortgage financing arrangements during the nine month period ended October 31, 2019. The financing arrangements, with an aggregate outstanding balance as of October 31, 2019 of approximately $11.0 million, require monthly or quarterly installment payments, which in the aggregate amount to approximately $0.5 million quarterly, with one arrangement requiring a final payment at maturity in June 2024 of $3.4 million. The financing arrangements are secured by real estate assets.

35


Adequacy of Capital Resources
Our primary uses of cash have been to fund our operating activities, including the purchase of inventories and providing for other working capital needs, meeting our debt service requirements, making payments due under our various leasing arrangements, funding capital expenditures, including rental fleet assets, and repurchasing and repaying our outstanding senior convertible notes. Based on our current operational performance, we believe our cash flow from operations, available cash and available borrowing capacity under our existing credit facilities will adequately provide for our liquidity needs for, at a minimum, the next 12 months.
As of October 31, 2019, we were in compliance with the financial covenants under our CNH Industrial and DLL Finance credit agreements and we were not subject to the fixed charge coverage ratio covenant under the Wells Fargo Credit Agreement as our adjusted excess availability plus eligible cash collateral (as defined therein) was not less than 15% of the total amount of the credit facility as of October 31, 2019. While not expected to occur, if anticipated operating results create the likelihood of a future covenant violation, we would expect to work with our lenders on an appropriate modification or amendment to our financing arrangements.
Cash Flow
Cash Flow Provided by (Used for) Operating Activities
Net cash used for operating activities was $8.3 million for the first nine months of fiscal 2020, compared to net cash provided by operating activities of $11.7 million for the first nine months of fiscal 2019. The change in net cash provided by (used for) operating activities is primarily the result of increased inventory stock for the first nine months of fiscal 2020 and the mix of floorplan financing between manufacturer and non-manufacturer floorplan financing.
We evaluate our cash flow from operating activities net of all floorplan activity and maintaining a constant level of equity in our equipment inventory. Taking these adjustments into account, our adjusted cash flow used for operating activities was $35.0 million for the first nine months of fiscal 2020 compared to an adjusted cash flow provided by operating activities of $1.5 million for the first nine months of fiscal 2019. The increase in adjusted cash flow used for operating activities for the first nine months of fiscal 2020 is primarily the result of increased equipment inventory stocking during the first nine months of fiscal 2020 as compared to the same period last year. See the Adjusted Cash Flow Reconciliation below for a reconciliation of adjusted cash flow used for operating activities to the GAAP measure of cash flow used for operating activities.
Cash Flow Used for Investing Activities
Net cash used for investing activities was $30.8 million for the first nine months of fiscal 2020, compared to $23.7 million for the first nine months of fiscal 2019. The increase in cash used for investing activities was the result of an increased level of property and equipment purchases, including rental fleet, for the first nine months of fiscal 2020 compared to the same period last year.
Cash Flow Provided by Financing Activities
Net cash provided by financing activities was $34.9 million for the first nine months of fiscal 2020 compared to $11.3 million for the first nine months of fiscal 2019. For both periods, net cash provided by financing activities was impacted by increased non-manufacturer floorplan payables associated with seasonal inventory stocking, repurchasing or repaying our senior convertible notes and repaying other long-term debt obligations. In addition, during the first nine months of fiscal 2020, net cash provided by financing activities was impacted by borrowings under new real estate financing arrangements and borrowings under our working capital line of credit under our Wells Fargo Credit Agreement.
Adjusted 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. GAAP requires the cash flows associated with non-manufacturer floorplan payables to be recognized as financing cash flows in the consolidated statement of cash flows. We consider equipment inventory financing with both manufacturers and other sources to be part of the normal operations of our business. We also evaluate our cash flow from operating activities by assuming a constant level of equity in our equipment inventory. Our equity in our equipment inventory reflects the portion of our equipment inventory balance that is not financed by floorplan payables. Our adjustment to maintain a constant level of equity in our equipment inventory is equal to the difference between our actual level of equity in equipment inventory at each period-end as presented in the consolidated balance sheets compared to the actual level of equity in equipment inventory at the beginning of the fiscal year. We refer to this measure of cash flow as Adjusted Cash Flow.

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Our equity in equipment inventory decreased to 18.0% as of October 31, 2019 from 34.4% as of January 31, 2019, and decreased to 26.2% as of October 31, 2018 from 38.2% as of January 31, 2018.
Adjusted Cash Flow is a non-GAAP financial measure. We believe that the presentation of Adjusted Cash Flow is relevant and useful to our investors because it provides information on activities we consider to be the normal operation of our business, regardless of financing source and level of financing for our equipment inventory. The following table reconciles net cash provided by (used for) operating activities, a GAAP measure, to adjusted net cash provided by (used for) operating activities and net cash provided by (used for) financing activities, a GAAP measure, to adjusted net cash provided by (used for) financing activities.
 
 Net Cash Provided by (Used for) Operating Activities
 
 Net Cash Provided by (Used for) Financing Activities
 
Nine Months Ended October 31, 2019
 
Nine Months Ended October 31, 2018
 
Nine Months Ended October 31, 2019
 
Nine Months Ended October 31, 2018
 
 (in thousands)
 
 (in thousands)
Cash Flow, As Reported
$
(8,289
)
 
$
11,726

 
$
34,902

 
$
11,309

Adjustment for Non-Manufacturer Floorplan
62,387

 
43,896

 
(62,387
)
 
(43,896
)
Adjustment for Constant Equity in Equipment Inventory
(89,076
)
 
(54,109
)
 

 

Adjusted Cash Flow
$
(34,978
)
 
$
1,513

 
$
(27,485
)
 
$
(32,587
)
Certain Information Concerning Off-Balance Sheet Arrangements
As of October 31, 2019, 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.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Forward-looking statements are contained in this Quarterly Report on Form 10-Q, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in our Annual Report on Form 10-K for the year ended January 31, 2019, and in other materials filed or to be filed by the Company with the Securities and Exchange Commission (and included in oral statements or other written statements made or to be made by the Company).
Forward-looking statements are statements based on future expectations and specifically may include, among other things, statements relating to our expectations regarding exchange rate and interest rate impact on our business, the impact of farm income levels on our customers' demand for agricultural equipment and services, the impact of oil prices on market demand for equipment and services, the general market conditions of the agricultural and construction industries, equipment inventory levels, discussion of the anticipated implementation date of our new ERP system, and our primary liquidity sources, including statements relating to our ability to enter into a new credit facility prior to the maturity of our current Wells Fargo Credit Agreement, and the adequacy of our capital resources. Any statements that are not based upon historical facts, including the outcome of events that have not yet occurred and our expectations for future performance, are forward-looking statements. The words “potential,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” “plan,” “anticipate,” and similar words and expressions are intended to identify forward-looking statements. 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, and those matters identified and discussed under the section titled “Risk Factors” in our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q. 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 may materially adversely affect our business, financial condition and/or operating results.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in interest rates and foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates.
Interest Rate Risk
Exposure to changes in interest rates results from borrowing activities used to fund operations. For fixed rate debt, interest rate changes affect the fair value of financial instruments but do not impact earnings or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. We have both fixed and floating rate financing. Some of our floating rate credit facilities contain minimum rates of interest to be charged. Based upon our interest-bearing balances and interest rates as of October 31, 2019, 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 $1.9 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 $1.9 million. At October 31, 2019, we had floorplan payables of $445.7 million, of which approximately $188.6 million was variable-rate floorplan payable and $257.1 million was non-interest bearing. In addition, at October 31, 2019, we had total long-term debt, including finance lease obligations, of $54.9 million, of which $10.0 million was variable rate debt and $44.9 million was fixed rate debt.
Foreign Currency Exchange Rate Risk
Our foreign currency exposures arise as the result of our foreign operations. We are exposed to transactional foreign currency exchange rate risk through our foreign entities’ holding assets and liabilities denominated in currencies other than their functional currency. In addition, the Company is exposed to foreign currency transaction risk as a result of certain intercompany financing transactions. The Company attempts to manage its transactional foreign currency exchange rate risk through the use of derivative financial instruments, primarily foreign exchange forward contracts, or through natural hedging instruments. Based upon balances and exchange rates as of October 31, 2019, holding other variables constant, we believe that a hypothetical 10% increase or decrease in all applicable foreign exchange rates would not have a material impact on our results of operations or cash flows. As of October 31, 2019, our Ukrainian subsidiary had $4.5 million of net monetary assets denominated in Ukrainian hryvnia ("UAH"). We have attempted to minimize our net monetary asset position in Ukraine through reducing overall asset levels in Ukraine and through borrowing in UAH which serves as a natural hedging instrument offsetting our net UAH denominated assets. At certain times, currency and payment controls imposed by the National Bank of Ukraine have limited our ability to manage our net monetary asset position. While the UAH has recently remained relatively stable, an escalation of political tensions or economic instability could lead to significant UAH devaluations, which could have a material impact on our results of operations and cash flows.
In addition to transactional foreign currency exchange rate risk, we are also exposed to translational foreign currency exchange rate risk as we translate the results of operations and assets and liabilities of our foreign operations from their functional currency to the U.S. dollar. As a result, our results of operations, cash flows and net investment in our foreign operations may be adversely impacted by fluctuating foreign currency exchange rates. We believe that a hypothetical 10% increase or decrease in all applicable foreign exchange rates, holding all other variables constant, would not have a material impact on our results of operations or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
(a)                                 Evaluation of disclosure controls and procedures. After evaluating the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer, with the participation of the Company’s management, have concluded that the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are effective.
(b)                                 Changes in internal controls. There has not been any change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during its most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. - OTHER INFORMATION
 
ITEM 1.                LEGAL PROCEEDINGS
We are, from time to time, subject to claims and suits arising in the ordinary course of business. Such claims have, in the past, generally been covered by insurance. There can be no assurance that our insurance will be adequate to cover all liabilities that may arise out of claims brought against us, or that our insurance will cover all claims. We are not currently a party to any material litigation.
ITEM 1A.             RISK FACTORS
In addition to the other information set forth in this Quarterly Report, including the important information in “Forward-Looking Statements,” you should carefully consider the “Risk Factors” discussed in our Form 10-K for the fiscal year ended January 31, 2019, 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 may 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 may materially adversely affect our business, financial condition and/or operating results.
ITEM 2.                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 
None.
ITEM 3.                DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.                MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.                OTHER INFORMATION
None.
ITEM 6.                EXHIBITS
Exhibits - See “Exhibit Index” on page immediately prior to signatures.

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EXHIBIT INDEX
TITAN MACHINERY INC.
FORM 10-Q
 
No.
 
Description
 
 
 
 
Amendment dated November 13, 2018 to the Amended and Restated Wholesale Floor Plan Credit Facility and Security Agreement dated November 13, 2007 by and between the registrant and CNH Industrial Capital America LLC.
 
 
 
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101
 
Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended October 31, 2019, 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.
 




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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 5, 2019
 
 
 
TITAN MACHINERY INC.
 
 
 
 
 
 
 
 
By
/s/ Mark Kalvoda
 
 
 
Mark Kalvoda
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)

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