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

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
 
 FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended April 30, 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 May 31, 2019, 22,183,799 shares of Common Stock, $0.00001 par value, of the registrant were outstanding.


Table of Contents

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

 
 
Page No.
PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
 
Consolidated Balance Sheets as of April 30, 2019 and January 31, 2019
 
Consolidated Statements of Operations for the three months ended April 30, 2019 and 2018
 
Consolidated Statements of Comprehensive Income (Loss) for the three months ended April 30, 2019 and 2018
 
Consolidated Statements of Stockholders' Equity for the three months ended April 30, 2019 and 2018
 
Consolidated Statements of Cash Flows for the three months ended April 30, 2019 and 2018
 
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
 

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PART I. — FINANCIAL INFORMATION
 
ITEM 1.                FINANCIAL STATEMENTS
 
TITAN MACHINERY INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share data)
 
April 30, 2019
 
January 31, 2019
Assets
 
 
 
Current Assets
 
 
 
Cash
$
63,331

 
$
56,745

Receivables, net of allowance for doubtful accounts
85,853

 
77,500

Inventories
568,262

 
491,091

Prepaid expenses and other
12,229

 
15,556

Total current assets
729,675

 
640,892

Noncurrent Assets
 
 
 
Property and equipment, net of accumulated depreciation
144,794

 
138,950

Operating lease assets
97,404

 

Deferred income taxes
3,091

 
3,010

Goodwill
1,631

 
1,161

Intangible assets, net of accumulated amortization
7,343

 
7,247

Other
1,168

 
1,178

Total noncurrent assets
255,431

 
151,546

Total Assets
$
985,106

 
$
792,438

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
26,039

 
$
16,607

Floorplan payable
374,271

 
273,756

Senior convertible notes
45,644

 
45,249

Current maturities of long-term debt
2,628

 
2,067

Current operating lease liabilities
12,137

 

Deferred revenue
35,394

 
46,409

Accrued expenses and other
30,091

 
36,364

Total current liabilities
526,204

 
420,452

Long-Term Liabilities
 
 
 
Long-term debt, less current maturities
23,871

 
20,676

Operating lease liabilities
95,375

 

Deferred income taxes
4,341

 
4,955

Other long-term liabilities
6,573

 
11,044

Total long-term liabilities
130,160

 
36,675

Commitments and Contingencies


 


Stockholders' Equity
 
 
 
Common stock, par value $.00001 per share, 45,000 shares authorized; 22,184 shares issued and outstanding at April 30, 2019; 22,218 shares issued and outstanding at January 31, 2019

 

Additional paid-in-capital
248,534

 
248,423

Retained earnings
83,319

 
89,228

Accumulated other comprehensive loss
(3,111
)
 
(2,340
)
Total stockholders' equity
328,742

 
335,311

Total Liabilities and Stockholders' Equity
$
985,106

 
$
792,438

 See Notes to Consolidated Financial Statements

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Table of Contents

TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
 
Three Months Ended April 30,
 
2019
 
2018
Revenue
 
 
 
Equipment
$
193,956

 
$
167,770

Parts
51,938

 
46,863

Service
22,831

 
20,036

Rental and other
9,567

 
9,045

Total Revenue
278,292

 
243,714

Cost of Revenue
 
 
 
Equipment
173,154

 
149,223

Parts
36,814

 
33,238

Service
7,483

 
6,866

Rental and other
6,941

 
6,829

Total Cost of Revenue
224,392

 
196,156

Gross Profit
53,900

 
47,558

Operating Expenses
52,555

 
46,727

Impairment of Long-Lived Assets
135

 

Income from Operations
1,210

 
831

Other Income (Expense)
 
 
 
Interest income and other income (expense)
794

 
385

Floorplan interest expense
(877
)
 
(1,350
)
Other interest expense
(1,642
)
 
(2,031
)
Loss Before Income Taxes
(515
)
 
(2,165
)
Benefit from Income Taxes
(70
)
 
(551
)
Net Loss
$
(445
)
 
$
(1,614
)
 
 
 
 
Earnings (Loss) per Share:
 
 
 
Basic
$
(0.02
)
 
$
(0.07
)
Diluted
$
(0.02
)
 
$
(0.07
)
 
 
 
 
Weighted Average Common Shares:
 
 
 
Basic
21,872

 
21,734

Diluted
21,872

 
21,734

 
See Notes to Consolidated Financial Statements


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TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
 
 
Three Months Ended April 30,
 
2019
 
2018
Net Loss
$
(445
)
 
$
(1,614
)
Other Comprehensive Income (Loss)
 
 
 
Foreign currency translation adjustments
(771
)
 
1,301

Comprehensive Loss
$
(1,216
)
 
$
(313
)
 
See Notes to Consolidated Financial Statements


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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
 
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 and exercise of stock options, 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


See Notes to Consolidated Financial Statements


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TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Three Months Ended April 30,
 
2019
 
2018
Operating Activities
 
 
 
Net loss
$
(445
)
 
$
(1,614
)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities
 
 
 
Depreciation and amortization
6,064

 
5,526

Impairment
135

 

Deferred income taxes
(316
)
 
(804
)
Stock-based compensation expense
603

 
540

Noncash interest expense
401

 
729

Noncash lease expense
3,062

 

Other, net
11

 
342

Changes in assets and liabilities
 
 
 
Receivables, prepaid expenses and other assets
(5,593
)
 
(3,803
)
Inventories
(78,254
)
 
(42,351
)
Manufacturer floorplan payable
89,599

 
24,653

Accounts payable, deferred revenue, accrued expenses and other and other long-term liabilities
(9,289
)
 
(10,244
)
Operating lease liabilities
(3,126
)
 

Net Cash Provided by (Used for) Operating Activities
2,852

 
(27,026
)
Investing Activities
 
 
 
Rental fleet purchases
(3,886
)
 
(2,121
)
Property and equipment purchases (excluding rental fleet)
(1,604
)
 
(692
)
Proceeds from sale of property and equipment
416

 
411

Acquisition consideration, net of cash acquired
(2,972
)
 

Other, net
8

 
(184
)
Net Cash Used for Investing Activities
(8,038
)
 
(2,586
)
Financing Activities
 
 
 
Net change in non-manufacturer floorplan payable
12,772

 
47,376

Proceeds from long-term debt borrowings
373

 
6

Principal payments on long-term debt and finance leases
(878
)
 
(13,425
)
Other, net
(492
)
 
(607
)
Net Cash Provided by Financing Activities
11,775

 
33,350

Effect of Exchange Rate Changes on Cash
(3
)
 
120

Net Change in Cash
6,586

 
3,858

Cash at Beginning of Period
56,745

 
53,396

Cash at End of Period
$
63,331

 
$
57,254

Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid (received) during the period
 
 
 
Income taxes, net of refunds
$
517

 
$
906

Interest
$
1,712

 
$
1,954

Supplemental Disclosures of Noncash Investing and Financing Activities
 
 
 
Net property and equipment financed with long-term debt, finance leases, accounts payable and accrued liabilities
$
5,861

 
$
836

Net transfer of assets to (from) property and equipment from (to) inventories
$
(371
)
 
$
1,853


See Notes to Consolidated Financial Statements

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TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1 - BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“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 three-month period ended April 30, 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.





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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.

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(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.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted EPS:
 
Three Months Ended April 30,
 
2019
 
2018
 
(in thousands, except per share data)
Numerator:
 
 
 
Net loss
$
(445
)
 
$
(1,614
)
Allocation to participating securities

 
26

Net loss attributable to Titan Machinery Inc. common stockholders
$
(445
)
 
$
(1,588
)
Denominator:
 
 
 
Basic weighted-average common shares outstanding
21,872

 
21,734

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

 

Diluted weighted-average common shares outstanding
21,872

 
21,734

 
 
 
 
Earnings (Loss) Per Share:
 
 
 
Basic
$
(0.02
)
 
$
(0.07
)
Diluted
$
(0.02
)
 
$
(0.07
)
 
 
 
 
Anti-dilutive shares excluded from diluted weighted-average common shares outstanding:
 
 
 
Stock options and restricted stock units
8

 
58

Shares underlying senior convertible notes
1,057

 
1,520

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 April 30, 2019
 
Agriculture
 
Construction
 
International
 
Total
 
(in thousands)
Equipment
$
107,864

 
$
43,046

 
$
43,046

 
$
193,956

Parts
29,976

 
12,704

 
9,258

 
51,938

Service
14,985

 
6,521

 
1,325

 
22,831

Other
618

 
593

 
22

 
1,233

Revenue from contracts with customers
153,443

 
62,864

 
53,651

 
269,958

Rental
332

 
7,879

 
123

 
8,334

Total revenues
$
153,775

 
$
70,743

 
$
53,774

 
$
278,292


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Three Months Ended April 30, 2018
 
Agriculture
 
Construction
 
International
 
Total
 
(in thousands)
Equipment
$
98,112

 
$
36,038

 
$
33,620

 
$
167,770

Parts
29,232

 
11,473

 
6,158

 
46,863

Service
13,840

 
5,516

 
680

 
20,036

Other
544

 
712

 
33

 
1,289

Revenue from contracts with customers
141,728

 
53,739

 
40,491

 
235,958

Rental
226

 
7,305

 
225

 
7,756

Total revenues
$
141,954

 
$
61,044

 
$
40,716

 
$
243,714

Unbilled Receivables and Deferred Revenue
Unbilled receivables amounted to $16.0 million and $11.2 million as of April 30, 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 $33.8 million and $44.9 million as of April 30, 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 three months ended April 30, 2019 and 2018, the Company recognized $30.5 million and $17.2 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 months ended April 30, 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.
NOTE 4 - RECEIVABLES
 
April 30, 2019
 
January 31, 2019
 
(in thousands)
Trade and unbilled receivables from contracts with customers
 
 
 
Trade receivables due from customers
$
39,030

 
$
38,827

Trade receivables due from finance companies
20,165

 
10,265

Unbilled receivables
15,950

 
11,222

Trade and unbilled receivables from rental contracts
 
 
 
Trade receivables
6,124

 
6,386

Unbilled receivables
894

 
828

Other receivables
 
 
 
Due from manufacturers
6,930

 
12,950

Other
580

 
550

Total receivables
89,673

 
81,028

Less allowance for doubtful accounts
(3,820
)
 
(3,528
)
Receivables, net of allowance for doubtful accounts
$
85,853

 
$
77,500


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The Company recognized impairment losses on receivables arising from sales contracts with customers of $0.3 million and $0.2 million for the three months ended April 30, 2019 and 2018, and recognized impairment losses on receivables arising from rental contracts of $0.1 million and $0.04 million for the three months ended April 30, 2019 and 2018.
NOTE 5 - INVENTORIES
 
April 30, 2019
 
January 31, 2019
 
(in thousands)
New equipment
$
352,395

 
$
258,081

Used equipment
137,449

 
158,951

Parts and attachments
76,327

 
72,760

Work in process
2,091

 
1,299

 
$
568,262

 
$
491,091

NOTE 6 - PROPERTY AND EQUIPMENT
 
April 30, 2019
 
January 31, 2019
 
(in thousands)
Rental fleet equipment
$
113,704

 
$
111,164

Machinery and equipment
21,780

 
21,646

Vehicles
46,850

 
42,330

Furniture and fixtures
40,434

 
40,645

Land, buildings, and leasehold improvements
63,326

 
63,091

 
286,094

 
278,876

Less accumulated depreciation
(141,300
)
 
(139,926
)
 
$
144,794

 
$
138,950

During the three months ended April 30, 2019, the Company, as the result of a current period operating loss combined with historical losses and anticipated future operating losses of a store location, recognized within its Construction segment a long-lived asset impairment charge of $0.1 million.
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 $8.7 million of the ERP application will be amortized on a straight-line basis over the estimated remaining period of use. For the three months ended April 30, 2019, the Company recognized an additional $0.9 million of amortization expense, which decreased operating income accordingly, increased net loss by approximately $0.7 million and increased the reported basic and diluted loss per share by approximately $0.04.
NOTE 7 - FLOORPLAN PAYABLE/LINES OF CREDIT
As of April 30, 2019, the Company had floorplan lines of credit totaling $640.0 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 $45.0 million credit facility with DLL Finance LLC.

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As of April 30, 2019 and January 31, 2019, the Company's outstanding balances of floorplan payables and lines of credit consisted of the following:
 
April 30, 2019
 
January 31, 2019
 
(in thousands)
CNH Industrial
$
219,106

 
$
120,319

Wells Fargo Credit Agreement (floorplan payable line)
57,000

 
49,100

DLL Finance
29,350

 
13,432

Other outstanding balances with manufacturers and non-manufacturers
68,815

 
90,905

 
$
374,271

 
$
273,756

As of April 30, 2019, the interest-bearing U.S. floorplan payables carried various interest rates ranging from 4.50% to 6.11%, compared to a range of 4.77% to 6.30% as of January 31, 2019. As of April 30, 2019, foreign floorplan payables carried various interest rates primarily ranging from 0.94% to 8.48%, compared to a range of 0.94% to 8.51% as of January 31, 2019. As of April 30, 2019 and January 31, 2019, $232.0 million and $151.7 million of outstanding floorplan payable were non-interest bearing. As of April 30, 2019, the Company had a compensating balance arrangement under one 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 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 is 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. The amount that the Company was able to borrow under the Wells Fargo Credit Agreement was temporarily reduced by the amount of outstanding senior convertible notes from the February 1, 2019 maturity testing date through May 1, 2019, the maturity date of the senior convertible notes.

NOTE 8 - DEFERRED REVENUE
 
April 30, 2019
 
January 31, 2019
 
(in thousands)
Deferred revenue from contracts with customers
$
33,817

 
$
44,893

Deferred revenue from rental and other contracts
1,577

 
1,516

 
$
35,394

 
$
46,409

NOTE 9 - SENIOR CONVERTIBLE NOTES

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The Company’s 3.75% senior convertible notes consist of the following:
 
April 30, 2019
 
January 31, 2019
 
(in thousands except conversion
rate and conversion price)
Principal value
$
45,644

 
$
45,644

Unamortized debt discount

 
(350
)
Unamortized debt issuance costs

 
(45
)
Carrying value of senior convertible notes
$
45,644

 
$
45,249

 
 
 
 
Carrying value of equity component, net of deferred taxes
$
14,923

 
$
14,923

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

 
 
Conversion price (per share of common stock)
$
43.17

 
 
The Company recognized interest expense associated with its senior convertible notes as follows:
 
Three Months Ended April 30,
 
2019
 
2018
 
(in thousands)
Cash Interest Expense
 
 
 
Coupon interest expense
$
421

 
$
605

Noncash Interest Expense
 
 
 
Amortization of debt discount
350

 
469

Amortization of transaction costs
45

 
64

 
$
816

 
$
1,138

The effective interest rate of the liability component was equal to 7.3% for each of the consolidated statements of operations periods presented. The senior convertible notes matured on May 1, 2019. The Company repaid the outstanding principal balance in full on the maturity date.
NOTE 10 - LONG TERM DEBT

The following is a summary of long-term debt as of April 30, 2019 and January 31, 2019:
 
April 30, 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
$
18,709

 
$
19,010

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
4,292

 

Real estate mortgage bearing interest at 2.09%, payable in monthly installments, maturing on June 30, 2026, secured by real estate assets
2,837

 
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
661

 
755

 
26,499

 
22,743

Less current maturities
(2,628
)
 
(2,067
)
 
$
23,871

 
$
20,676

NOTE 11 - 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.

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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. The notional value of outstanding foreign currency contracts as of April 30, 2019 and January 31, 2019 was $13.1 million and $14.1 million.
As of April 30, 2019 and 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 (loss) from the the Company’s derivative instruments for the three months ended April 30, 2019 and 2018. Gains and losses are recognized in interest income and other income (expense) in the consolidated statements of operations:
 
Three Months Ended April 30,
 
2019
 
2018
 
(in thousands)
Foreign currency contracts
$
202

 
$
534

NOTE 12 - 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 April 30, 2019 and April 30, 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
)

 
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
)

NOTE 13 - LEASES
As Lessee

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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.


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The components of lease expense were as follows:
 
 
Classification
 
Three Months Ended April 30, 2019
 
 
 
 
(in thousands)
Finance lease cost:
 
 
 
 
Amortization of leased assets
 
Operating expenses
 
$
376

Interest on lease liabilities
 
Other interest expense
 
139

Operating lease cost
 
Operating expenses & rental and other cost of revenue
 
4,816

Short-term lease cost
 
Operating expenses
 
80

Variable lease cost
 
Operating expenses
 
620

Sublease income
 
Interest income and other income (expense)
 
(168
)
 
 
 
 
$
5,863

    Right-of-use lease assets and lease liabilities consist of the following:
 
 
Classification
 
April 30, 2019
 
 
 
 
(in thousands)
Assets
 
 
 
 
Operating lease assets
 
Operating lease assets
 
$
97,404

Finance lease assets(a)
 
Property and equipment, net of accumulated depreciation
 
6,470

Total leased assets
 
 
 
$
103,874

Liabilities
 
 
 
 
Current
 
 
 
 
Operating
 
Current operating lease liabilities
 
$
12,137

Finance
 
Accrued expenses and other
 
1,544

Noncurrent
 
 
 
 
Operating
 
Operating lease liabilities
 
95,375

Finance
 
Other long-term liabilities
 
4,725

Total lease liabilities
 
 
 
$
113,781

 
 
 
 
 
(a)Finance lease assets are recorded net of accumulated amortization of $0.5 million as of April 30, 2019.    
Maturities of lease liabilities as of April 30, 2019 are as follows:
 
 
Operating
 
Finance
 
 
 
 
Leases
 
Leases
 
Total
Fiscal Year Ended January 31,
 
(in thousands)
2020
 
$
13,824

 
$
1,533

 
$
15,357

2021
 
17,275

 
1,927

 
19,202

2022
 
16,500

 
1,607

 
18,107

2023
 
15,538

 
1,015

 
16,553

2024
 
14,667

 
353

 
15,020

2025
 
13,546

 
309

 
13,855

Thereafter
 
46,910

 
1,392

 
48,302

Total lease payments
 
138,260

 
8,136

 
146,396

Less: Interest
 
30,748

 
1,867

 
32,615

Present value of lease liabilities
 
$
107,512

 
$
6,269

 
$
113,781

    


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Table of Contents

The weighted-average lease term and discount rate as of April 30, 2019 are as follows:
 
April 30, 2019
Weighted-average remaining lease term (years):
 
Operating leases
8.6

Financing leases
5.2

Weighted-average discount rate:
 
Operating leases
6.1
%
Financing leases
9.8
%
Other lease information is as follows:
 
Three Months Ended April 30, 2019
 
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
4,752

Operating cash flows from finance leases
139

Financing cash flows from finance leases
403

Operating lease assets obtained in exchange for new operating lease liabilities
253

Finance lease assets obtained in exchange for new finance lease liabilities
410

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

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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 April 30, 2019 and January 31, 2019:
 
April 30, 2019
 
January 31, 2019
 
(in thousands)
Rental fleet equipment
$
113,704

 
$
111,164

Less accumulated depreciation
50,066

 
50,399

 
$
63,638

 
$
60,765

NOTE 14 - FAIR VALUE MEASUREMENTS
As of April 30, 2019 and 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 April 30, 2019 and January 31, 2019 as part of its long-lived asset impairment testing. The estimated fair value of such assets as of April 30, 2019 and January 31, 2019 was $0.2 million and $0.9 million. 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.
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 April 30, 2019 and January 31, 2019. Fair value of these financial instruments was estimated based on Level 2 fair value inputs.
NOTE 15 - INCOME TAXES
Our effective tax rate was 13.6% for the three months ended April 30, 2019 compared to an effective tax rate of 25.5% for the three months ended April 30, 2018. Our effective tax rate differs from the domestic federal statutory tax rate due to changes in mix of domestic and foreign income or losses and the impact of the recognition of valuation allowances on our U.S. federal, state and certain of our foreign deferred tax assets, including net operating losses.
NOTE 16 - 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 transaction was accounted for as a business combination. The total consideration transferred for the acquired business was $3.0 million paid in cash. The business assets acquired consisted of $1.5 million in inventory, $0.8 million of other tangible assets, and $0.7 million of intangible assets, which included $0.5 million of goodwill that will be assigned to the International segment and is expected to be deductible for income tax purposes. The recognition of goodwill arose primarily from the acquisition of an assembled workforce. Acquisition-related transaction costs were not material. 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.

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Table of Contents

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 provides the Company the opportunity to expand our international presence into the large, well-established German market.
The AGRAM acquisition 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 fair value of the consideration paid exceeded the estimated fair value of the assets acquired and liabilities assumed, which resulted in the recognition of $0.9 million of goodwill. The recognition of goodwill arose from the acquisition of an assembled workforce and anticipated synergies within our International segment. The entire goodwill amount was assigned to the International segment and is not expected to be deductible for income tax purposes. The Company recognized a customer relationship intangible asset in the amount of $0.1 million, which will be amortized over a three-year period, and recognized a distribution rights intangible asset in the amount of $1.8 million that is an indefinite-lived intangible asset not subject to amortization. The Company estimated the fair value of the customer relationship and distribution rights intangible assets using a multi-period excess earnings model, an income approach. All acquisition-related costs, which amounted to $0.2 million, have been expensed as incurred and recognized as operating expenses in the consolidated statement of operations.
The allocation of the purchase price to the assets acquired and liabilities assumed was as follows:
(in thousands)
 
Assets acquired:
 
Cash
$
3,857

Receivables
5,340

Inventories
21,725

Prepaid expenses and other
887

Property and equipment
3,512

Intangible assets
1,944

Goodwill
924

Other
61

 
$
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
$
19,156

NOTE 17 - 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 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.

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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 18 - 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 months ended April 30, 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 April 30,
 
2019

2018
 
(in thousands)
Revenue
 
 
 
Agriculture
$
153,775

 
$
141,954

Construction
70,743

 
61,044

International
53,774

 
40,716

Total
$
278,292

 
$
243,714

 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
Agriculture
$
1,876

 
$
1,323

Construction
(2,222
)
 
(2,897
)
International
216

 
(87
)
Segment income (loss) before income taxes
(130
)
 
(1,661
)
Shared Resources
(385
)
 
(504
)
Total
$
(515
)
 
$
(2,165
)
 
 
April 30, 2019
 
January 31, 2019
 
(in thousands)
Total Assets
 
 
 
Agriculture
$
408,102

 
$
316,224

Construction
280,342

 
227,261

International
208,848

 
170,187

Segment assets
897,292

 
713,672

Shared Resources
87,814

 
78,766

Total
$
985,106

 
$
792,438

NOTE 19 - 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 quarterly period ended April 30, 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 less than 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

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not material to the results of operations for the previously reported quarterly period. The Company has restated its accompanying statement of operations to correct for this immaterial error for the three months ended April 30, 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 month period ended April 30, 2018:
 
Three Months Ended April 30, 2018
 
As Previously Reported
 
Corrections
 
As Corrected
 
(dollars in thousands)
Revenue
 
 
 
 
 
Equipment
$
156,904

 
$
10,866

 
$
167,770

Parts
51,535

 
(4,672
)
 
46,863

Service
27,356

 
(7,320
)
 
20,036

Rental and other
9,883

 
(838
)
 
9,045

Total Revenue
245,678

 
(1,964
)
 
243,714

Cost of Revenue
 
 
 
 
 
Equipment
141,767

 
7,456

 
149,223

Parts
36,658

 
(3,420
)
 
33,238

Service
11,201

 
(4,335
)
 
6,866

Rental and other
8,494

 
(1,665
)
 
6,829

Total Cost of Revenue
198,120

 
(1,964
)
 
196,156

Gross Profit
$
47,558

 
$

 
$
47,558



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ITEM 2.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim 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.
The agriculture industry is experiencing low agriculture commodity prices and net farm income. Based on U.S. Department of Agriculture ("USDA") publications, the most recent estimate of net farm income for calendar year 2018 decreased an estimated 16.0% as compared to calendar year 2017 and is approximately 15.0% below the average for the five-year period ending December 31, 2018. Lower net farm income over this five-year period has led to reduced demand for equipment purchases, service work and parts, negatively impacting same-store sales, equipment revenue and equipment gross profit margin, and has caused an oversupply of equipment inventory in our geographic footprint. In addition, these agriculture industry conditions have also led to a reduction of purchases of construction equipment by customers in the agriculture industry, negatively impacting certain of our Construction stores. Based on its March 2019 report, the USDA projected net farm income for calendar year 2019 to increase 10.0% as compared to calendar year 2018.
Our net loss was $0.4 million, or $0.02 per diluted share, for the first quarter of fiscal 2020, compared to a net loss of $1.6 million, or $0.07 per diluted share, for the first quarter of fiscal 2019. Our adjusted diluted earnings per share was $0.02 for the first quarter of fiscal 2020, compared to an adjusted diluted loss per share of $0.07 for the first 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 measure. Significant factors impacting the quarterly comparisons were:
Revenue increased 14.2% in the first quarter of fiscal 2020, as compared to the first quarter last year. This increase in revenue was the result of increases from each of our four principal sources of business, equipment, parts, service and rental and other, and across each of our three operating segments, Agriculture, Construction and International. Our AGRAM acquisition in the third quarter of fiscal 2019 also contributed to the revenue increase in the first quarter of fiscal 2020 as compared to the first quarter last year.
Gross profit margin for the first quarter of fiscal 2020 of 19.4% is consistent with the 19.5% gross profit margin for the first quarter of fiscal 2019. A slight decrease in equipment gross profit margin in the first quarter of fiscal 2020, as compared to the first quarter last year, was substantially offset by increased service and rental and other gross profit margins.
Operating expenses increased $5.8 million, or 12.5%, in the first quarter of fiscal 2020, as compared to the first quarter last year. Operating expenses as a percentage of revenue decreased from 19.2% in the first quarter of fiscal 2019 to 18.9% in the first quarter of fiscal 2020. The increase in operating expenses is primarily the result of our AGRAM acquisition in the third quarter of fiscal 2019, incremental costs associated with our ERP transition, and increased variable expenses associated with higher levels of equipment sales.
Floorplan and other interest expense decreased a combined 25.5% in the first quarter of fiscal 2020, as compared to the first quarter last year, primarily due to a decrease in our level of interest-bearing inventory in the first quarter of fiscal 2020 and our repurchase of $20.0 million face value of our senior convertible notes in the second quarter of fiscal 2019.
AGRAM Acquisition
On July 2, 2018, we continued our strategy of acquiring dealerships in desired market areas with our acquisition of 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

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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 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. The new ERP application is expected to provided 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.
In the first quarter of fiscal 2020, we recognized $0.9 million of additional amortization expense of our current ERP application. In addition, we recognized $0.1 million of expense for other ERP transition costs. We expect to recognize for the remainder of fiscal 2020 incremental ERP transition costs, which includes the incremental amortization of our current ERP application and external costs associated with implementing the new ERP application, of approximately $6.0 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 13, 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 quarter ended April 30, 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 less than 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 19 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.

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Comparative financial data for each of our four sources of revenue are expressed below.
 
Three Months Ended April 30,
 
2019
 
2018
 
(dollars in thousands)
Equipment
 
 
 
Revenue
$
193,956

 
$
167,770

Cost of revenue
173,154

 
149,223

Gross profit
$
20,802

 
$
18,547

Gross profit margin
10.7
%
 
11.1
%
Parts
 
 
 
Revenue
$
51,938

 
$
46,863

Cost of revenue
36,814

 
33,238

Gross profit
$
15,124

 
$
13,625

Gross profit margin
29.1
%
 
29.1
%
Service
 
 
 
Revenue
$
22,831

 
$
20,036

Cost of revenue
7,483

 
6,866

Gross profit
$
15,348

 
$
13,170

Gross profit margin
67.2
%
 
65.7
%
Rental and other
 
 
 
Revenue
$
9,567

 
$
9,045

Cost of revenue
6,941

 
6,829

Gross profit
$
2,626

 
$
2,216

Gross profit margin
27.4
%
 
24.5
%
The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated:
 
Three Months Ended April 30,
 
2019
 
2018
Revenue
 
 
 
Equipment
69.7
 %
 
68.8
 %
Parts
18.7
 %
 
19.2
 %
Service
8.2
 %
 
8.2
 %
Rental and other
3.4
 %
 
3.7
 %
Total Revenue
100.0
 %
 
100.0
 %
Total Cost of Revenue
80.6
 %
 
80.5
 %
Gross Profit Margin
19.4
 %
 
19.5
 %
Operating Expenses
18.9
 %
 
19.2
 %
Impairment of Intangible and Long-Lived Assets
 %
 
 %
Income from Operations
0.4
 %
 
0.3
 %
Other Income (Expense)
(0.6
)%
 
(1.2
)%
Loss Before Income Taxes
(0.2
)%
 
(0.9
)%
Benefit from Income Taxes
 %
 
(0.2
)%
Net Loss
(0.2
)%
 
(0.7
)%



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Three Months Ended April 30, 2019 Compared to Three Months Ended April 30, 2018
Consolidated Results
Revenue
 
Three Months Ended April 30,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Equipment
$
193,956

 
$
167,770

 
$
26,186

 
15.6
%
Parts
51,938

 
46,863

 
5,075

 
10.8
%
Service
22,831

 
20,036

 
2,795

 
13.9
%
Rental and other
9,567

 
9,045

 
522

 
5.8
%
Total Revenue
$
278,292

 
$
243,714

 
$
34,578

 
14.2
%
 
The increase in revenue for the first quarter of fiscal 2020 compared to the first quarter of fiscal 2019 was the result of increased revenue from all revenue sources and across all segments. Same-store sales increased 11.1% primarily as a result of an increase in equipment revenue but also positively impacted by parts and service revenue increases. Revenue was also positively impacted by our AGRAM acquisition completed in the third quarter of fiscal 2019.
Gross Profit
 
Three Months Ended April 30,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Gross Profit
 
 
 
 
 
 
 
Equipment
$
20,802

 
$
18,547

 
$
2,255

 
12.2
 %
Parts
15,124

 
13,625

 
1,499

 
11.0
 %
Service
15,348

 
13,170

 
2,178

 
16.5
 %
Rental and other
2,626

 
2,216

 
410

 
18.5
 %
Total Gross Profit
$
53,900

 
$
47,558

 
$
6,342

 
13.3
 %
Gross Profit Margin
 
 
 
 
 
 
 
Equipment
10.7
%
 
11.1
%
 
(0.4
)%
 
(3.6
)%
Parts
29.1
%
 
29.1
%
 
 %
 
 %
Service
67.2
%
 
65.7
%
 
1.5
 %
 
2.3
 %
Rental and other
27.4
%
 
24.5
%
 
2.9
 %
 
11.8
 %
Total Gross Profit Margin
19.4
%
 
19.5
%
 
(0.1
)%
 
(0.5
)%
Gross Profit Mix
 
 
 
 
 
 
 
Equipment
38.6
%
 
39.0
%
 
(0.4
)%
 
(1.0
)%
Parts
28.1
%
 
28.6
%
 
(0.5
)%
 
(1.7
)%
Service
28.5
%
 
27.7
%
 
0.8
 %
 
2.9
 %
Rental and other
4.8
%
 
4.7
%
 
0.1
 %
 
2.1
 %
Total Gross Profit Mix
100.0
%
 
100.0
%
 


 


 
Gross profit for the first quarter of fiscal 2020 increased 13.3% as compared to the same period last year. Gross profit margin remained relatively consistent at 19.4% for the first quarter of fiscal 2020 compared to 19.5% for the first quarter of fiscal 2019. The increase in gross profit was the result of increased revenue.
Our company-wide absorption rate increased to 67.8% for the first quarter of fiscal 2020 compared to 66.3% during the same period last year as the increase in gross profit from parts and service in the first quarter of fiscal 2020 exceeded the increase in operating expenses during the period.

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Operating Expenses
 
Three Months Ended April 30,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Operating Expenses
$
52,555

 
$
46,727

 
$
5,828

 
(12.5
)%
Operating Expenses as a Percentage of Revenue
18.9
%
 
19.2
%
 
(0.3
)%
 
1.6
 %
Our operating expenses in the first quarter of fiscal 2020 increased $5.8 million as compared to the first quarter of fiscal 2019 as a result of increased International segment operating expenses resulting from our AGRAM acquisition, incurrence of ERP transitions, and increased variable expenses associated with higher levels of equipment revenue. Operating expenses as a percentage of revenue decreased to 18.9% in the first quarter of fiscal 2020 from 19.2% in the first quarter of fiscal 2019. The decrease in operating expenses as a percentage of total revenue was primarily due to the increase in total revenue in the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019, which positively affected our ability to leverage our fixed operating costs.
Impairment Charges
 
Three Months Ended April 30,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Impairment of Long-Lived Assets
$
135

 
$

 
$
135

 
n/a
We recognized $0.1 million of impairment charges on certain long-lived assets in the first quarter of fiscal 2020. No impairment charges were recognized in the first quarter of fiscal 2019.
Other Income (Expense)
 
Three Months Ended April 30,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Interest income and other income (expense)
$
794

 
$
385

 
$
409

 
106.2
%
Floorplan interest expense
(877
)
 
(1,350
)
 
(473
)
 
35.0
%
Other interest expense
(1,642
)
 
(2,031
)
 
(389
)
 
19.2
%
Floorplan interest expense decreased in the first quarter of fiscal 2020 as compared to the first quarter of fiscal 2019 primarily as a result of lower levels of interest-bearing inventory in the first quarter of fiscal 2020. The decrease in other interest expense in the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019, is primarily the result of decreased interest expense on our senior convertible notes in the first quarter of fiscal 2020 following our repurchase of $20.0 million face value of our senior convertible notes in the second quarter of fiscal 2019.
Provision for Income Taxes
 
Three Months Ended April 30,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Provision for Income Taxes
$
(70
)
 
$
(551
)
 
$
481

 
87.3
%
 
Our effective tax rate was 13.6% for the first quarter of fiscal 2020 and 25.5% for the first 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 recognizing valuation allowances on our deferred tax assets, including net operating losses.

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Table of Contents

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 April 30,
 
Increase/
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Revenue
 
 
 
 
 
 
 
Agriculture
$
153,775

 
$
141,954

 
$
11,821

 
8.3
%
Construction
70,743

 
61,044

 
9,699

 
15.9
%
International
53,774

 
40,716

 
13,058

 
32.1
%
Total
$
278,292

 
$
243,714

 
$
34,578

 
14.2
%
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
 
 
 
 
Agriculture
$
1,876

 
$
1,323

 
$
553

 
41.8
%
Construction
(2,222
)
 
(2,897
)
 
675

 
23.3
%
International
216

 
(87
)
 
303

 
n/m

Segment income (loss) before income taxes
(130
)
 
(1,661
)
 
1,531

 
92.2
%
Shared Resources
(385
)
 
(504
)
 
119

 
23.6
%
Total
$
(515
)
 
$
(2,165
)
 
$
1,650

 
76.2
%
Agriculture 
Agriculture segment revenue for the first quarter of fiscal 2020 increased 8.3% compared to the first quarter of fiscal 2019, all of which was due to a same-store sales increase. The revenue increase was the result of increased equipment revenue arising from customer replacement demand despite the aforementioned difficult industry conditions plus increases in parts and service revenues.
Agriculture segment income before income taxes was $1.9 million for the first quarter of fiscal 2020 compared to $1.3 million for the first quarter of fiscal 2019. The improvement in segment results was primarily the result of increased revenue but partially offset by increased operating expenses, including variable expenses associated with higher equipment revenues.
Construction
Construction segment revenue for the first quarter of fiscal 2020 increased 15.9% compared to the first quarter of fiscal 2019. The increase in revenue, all of which was due to a same-store sales increase, was the result of revenue increases from all sources of business, equipment, parts, service and rental and other.
Our Construction segment loss before income taxes was $2.2 million for the first quarter of fiscal 2020 compared to a $2.9 million loss before income taxes in the first quarter of fiscal 2019. The improvement in segment results was primarily due to increased revenue, but partially offset by increased operating expenses, including variable expenses associated with higher equipment revenues. The dollar utilization of our rental fleet increased from 18.3% in the first quarter of fiscal 2019 to 20.5% in the first quarter of fiscal 2020.
International
International segment revenue for the first quarter of fiscal 2020 increased 32.1% compared to the first quarter of fiscal 2019. The increase in segment revenue was the result of incremental revenue from our AGRAM acquisition completed in the third quarter of fiscal 2019 and a same-store sales increase of 13.6%. The increase in same-store sales was primarily the result of increased equipment and parts revenue.
Our International segment income before income taxes was $0.2 million for the first quarter of fiscal 2020 compared a loss before income taxes of $0.1 million for the same period last year. The improvement in segment results was primarily the result of increased revenue but partially offset by increased operating expenses arising from our AGRAM business following our acquisition in the third quarter of fiscal 2019.

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Table of Contents

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 $0.4 million for the first quarter of fiscal 2020 compared to loss before income taxes of $0.5 million for the same period last year.
Non-GAAP Financial Measures
To supplement net income (loss) and our diluted earnings (loss) per share ("Diluted EPS"), both GAAP measures, we present adjusted net income (loss) and adjusted Diluted EPS, both non-GAAP measures, which include adjustments for ERP transition costs, including accelerated amortization of our current ERP application and external implementation costs of our new ERP application, and impairment charges. We believe that the presentation of adjusted net income (loss) 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 (loss) 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 (loss), a GAAP measure, to adjusted net income (loss) and (ii) Diluted EPS, a GAAP measure, to adjusted Diluted EPS:
 
 
Three Months Ended April 30,
 
 
2019
 
2018
 
 
(dollars in thousands, except per share data)
Adjusted Net Income (Loss)
 
 
 
 
Net Income (Loss)
 
$
(445
)
 
$
(1,614
)
Adjustments
 
 
 
 
ERP transition costs
 
1,016

 

Impairment charges
 
135

 

Total Pre-Tax Adjustments
 
1,151

 

Less: Tax Effect of Adjustments (1)
 
242

 

Total Adjustments
 
909

 

Adjusted Net Income (Loss)
 
$
464

 
$
(1,614
)
 
 
 
 
 
Adjusted Diluted EPS
 
 
 
 
Diluted EPS
 
$
(0.02
)
 
$
(0.07
)
Adjustments (2)
 
 
 
 
ERP transition costs
 
0.05

 

Impairment charges
 

 

Total Pre-Tax Adjustments
 
0.05

 

Less: Tax Effect of Adjustments (1)
 
0.01

 

Total Adjustments
 
0.04

 

Adjusted Diluted EPS
 
$
0.02

 
$
(0.07
)
 
 
 
 
 
(1) The tax effect of adjustments, all of which were U.S. related items, was calculated using a 21% tax rate. The rate was determined based on a 21% federal statutory rate and no impact for state taxes given our valuation allowance against state net operating loss carryforwards.


 
 
(2) Adjustments are net of amounts allocated to participating securities where applicable.
 
 
 


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Table of Contents

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 April 30, 2019, the Company had floorplan payable lines of credit for equipment purchases totaling $640.0 million, which is primarily comprised of a $400.0 million credit facility with CNH Industrial Capital, a $140.0 million floorplan payable line under the Wells Fargo Credit Agreement, and a $45.0 million credit facility with DLL Finance.
The maturity date of our Wells Fargo Credit Agreement was 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 is 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.
Our equipment inventory turnover increased slightly to 1.8 times for the four quarters ended April 30, 2019 compared to 1.7 times for the four quarters ended April 30, 2018. The increase in equipment sales volume over the four quarter period ended April 30, 2019 as compared to the four quarter period ended April 30, 2018 was largely 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 23.6% as of April 30, 2019 from 34.4% as of January 31, 2019. The decrease in our equity in equipment inventory is primarily due to the seasonal stocking of new equipment inventories during the three months ended April 30, 2019 and the higher level of floorplan financing available on such inventories, and borrowing on our floorplan lines of credit in anticipation of repaying the outstanding balance of our 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.
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 April 30, 2019, we were in compliance with the financial covenants under our 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 April 30, 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 Operating Activities

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Table of Contents

Net cash provided by operating activities was $2.9 million for the first three months of fiscal 2020, compared to net cash used for operating activities of $27.0 million for the first three months of fiscal 2019. The change in net cash provided by or used for operating activities is primarily the result of seasonal inventory stocking 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 $37.4 million for the first three months of fiscal 2020 compared to $25.6 million for the first three months of fiscal 2019. The increase in adjusted cash flow used for operating activities for the first three months of fiscal 2020 is primarily the result of increased equipment inventory stock during the first three 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 $8.0 million for the first three months of fiscal 2020, compared to $2.6 million for the first three months of fiscal 2019. The increase in cash used for investing activities was the result of cash used for our acquisition of ESB Agrartechnik and an increased level of property and equipment purchases, including rental fleet, for the first three months of fiscal 2020 compared to the same period last year.
Cash Flow Provided By Financing Activities
Net cash provided by financing activities was $11.8 million for the first three months of fiscal 2020 compared to $33.4 million for the first three months of fiscal 2019. For the first three months of fiscal 2020 and 2019, net cash provided by financing activities was the result of increased non-manufacturer floorplan payables associated with seasonal inventory stocking. During the first three months of fiscal 2019, we repaid all amounts outstanding under the 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.
Our equity in equipment inventory decreased to 23.6% as of April 30, 2019 from 34.4% as of January 31, 2019, and decreased to 27.8% as of April 30, 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
 
Three Months Ended April 30, 2019
 
Three Months Ended April 30, 2018
 
Three Months Ended April 30, 2019
 
Three Months Ended April 30, 2018
 
 (in thousands)
 
 (in thousands)
Cash Flow, As Reported
$
2,852

 
$
(27,026
)
 
$
11,775

 
$
33,350

Adjustment for Non-Manufacturer Floorplan Net Payments
12,772

 
47,376

 
(12,772
)
 
(47,376
)
Adjustment for Constant Equity in Equipment Inventory
(52,996
)
 
(45,998
)
 

 

Adjusted Cash Flow
$
(37,372
)
 
$
(25,648
)
 
$
(997
)
 
$
(14,026
)

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Certain Information Concerning Off-Balance Sheet Arrangements
As of April 30, 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, and our primary liquidity sources and adequacy of our capital resources. Any statements that are not based upon historical facts, including the outcome of events that have not yet occurred and our expectations for future performance, are forward-looking statements. The words “potential,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” “plan,” “anticipate,” and similar words and expressions are intended to identify forward-looking statements. Such statements are based upon the current beliefs and expectations of our management. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, adverse market conditions in the agricultural and construction equipment industries, 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 April 30, 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 $1.4 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 $1.4 million. At April 30, 2019, we had floorplan payables of $374.3 million, of which approximately $142.3 million was variable-rate floorplan payable and $232.0 million was non-interest bearing. In addition, at April 30, 2019, we had total long-term debt, including our senior convertible notes and finance lease obligations, of $78.4 million, all of which 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 April 30, 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 April 30, 2019, our Ukrainian subsidiary had $4.3 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
 
 
 
 
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 April 30, 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:
June 6, 2019
 
 
 
TITAN MACHINERY INC.
 
 
 
 
 
 
 
 
By
/s/ Mark Kalvoda
 
 
 
Mark Kalvoda
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)

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