10-Q 1 titn-2014731x10q.htm 10-Q TITN- 2014.7.31-10Q
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 July 31, 2014
 
Commission File No. 001-33866
 
TITAN MACHINERY INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
No. 45-0357838
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
644 East Beaton Drive
West Fargo, ND 58078-2648
(Address of Principal Executive Offices)
 
Registrant’s telephone number (701) 356-0130
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  x    NO  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  x    NO  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o
 
Accelerated filer  x
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
(Do not check if smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o    NO  x
 
The number of shares outstanding of the registrant’s common stock as of August 31, 2014 was: Common Stock, $0.00001 par value, 21,413,205 shares.



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 July 31, 2014 and January 31, 2014
 
Consolidated Statements of Operations for the three and six months ended July 31, 2014 and 2013
 
Consolidated Statements of Comprehensive Income for the three and six months ended July 31, 2014 and 2013
 
Consolidated Statements of Stockholders' Equity for the six months ended July 31, 2014 and 2013
 
Consolidated Statements of Cash Flows for the six months ended July 31, 2014 and 2013
 
Notes to Consolidated Financial Statements
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.
CONTROLS AND PROCEDURES
PART II.
OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
ITEM 4.
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
Signatures
 
Exhibit Index
 

2


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


 
 
Current Assets
 
 
 
Cash
$
89,713

 
$
74,242

Receivables, net
86,305

 
97,894

Inventories
1,137,700

 
1,075,978

Prepaid expenses and other
12,461

 
24,740

Income taxes receivable
3,755

 
851

Deferred income taxes
13,274

 
13,678

Total current assets
1,343,208

 
1,287,383

Intangibles and Other Assets
 
 
 
Noncurrent parts inventories
4,903

 
5,098

Goodwill
24,751

 
24,751

Intangible assets, net of accumulated amortization
11,422

 
11,750

Other
7,617

 
7,666

Total intangibles and other assets
48,693

 
49,265

Property and Equipment, net of accumulated depreciation
233,055

 
228,000

Total Assets
$
1,624,956

 
$
1,564,648

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
23,182

 
$
23,714

Floorplan payable
850,347

 
750,533

Current maturities of long-term debt
35,731

 
2,192

Customer deposits
21,055

 
61,286

Accrued expenses
42,648

 
36,968

Income taxes payable

 
344

Total current liabilities
972,963

 
875,037

Long-Term Liabilities
 
 
 
Senior convertible notes
130,592

 
128,893

Long-term debt, less current maturities
66,609

 
95,532

Deferred income taxes
47,357

 
47,329

Other long-term liabilities
2,824

 
6,515

Total long-term liabilities
247,382

 
278,269

Commitments and Contingencies


 


Stockholders' Equity
 
 
 
Common stock, par value $.00001 per share, 45,000 shares authorized; 21,413 shares issued and outstanding at July 31, 2014; 21,261 shares issued and outstanding at January 31, 2014

 

Additional paid-in-capital
239,383

 
238,857

Retained earnings
162,412

 
169,575

Accumulated other comprehensive income
262

 
339

Total Titan Machinery Inc. stockholders' equity
402,057

 
408,771

Noncontrolling interest
2,554

 
2,571

Total stockholders' equity
404,611

 
411,342

Total Liabilities and Stockholders' Equity
$
1,624,956

 
$
1,564,648

 See Notes to Consolidated Financial Statements

3


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2014
 
2013
 
2014
 
2013
Revenue
 
 
 
 
 
 
 
Equipment
$
320,087

 
$
358,388

 
$
665,132

 
$
693,133

Parts
70,526

 
70,633

 
138,905

 
133,470

Service
38,447

 
39,872

 
75,531

 
71,870

Rental and other
21,930

 
19,287

 
36,885

 
31,381

Total Revenue
450,990

 
488,180

 
916,453

 
929,854

Cost of Revenue
 
 
 
 
 
 
 
Equipment
292,879

 
329,083

 
609,161

 
632,906

Parts
49,730

 
48,022

 
97,744

 
92,733

Service
13,529

 
14,383

 
27,932

 
25,746

Rental and other
15,199

 
13,150

 
26,024

 
20,979

Total Cost of Revenue
371,337

 
404,638

 
760,861

 
772,364

Gross Profit
79,653

 
83,542

 
155,592

 
157,490

Operating Expenses
67,795

 
70,145

 
138,947

 
139,078

Realignment Costs
151

 

 
2,952

 

Income from Operations
11,707

 
13,397

 
13,693

 
18,412

Other Income (Expense)
 
 
 
 
 
 
 
Interest income and other income (expense)
(1,028
)
 
337

 
(3,606
)
 
934

Floorplan interest expense
(5,308
)
 
(3,723
)
 
(9,901
)
 
(7,165
)
Other interest expense
(3,559
)
 
(3,455
)
 
(7,000
)
 
(6,622
)
Income (Loss) Before Income Taxes
1,812

 
6,556

 
(6,814
)
 
5,559

Provision for Income Taxes
(2,587
)
 
(2,589
)
 
(854
)
 
(2,195
)
Net Income (Loss) Including Noncontrolling Interest
$
(775
)
 
$
3,967

 
$
(7,668
)
 
$
3,364

Less: Net Income (Loss) Attributable to Noncontrolling Interest
(161
)
 
134

 
(505
)
 
(55
)
Net Income (Loss) Attributable to Titan Machinery Inc.
$
(614
)
 
$
3,833

 
$
(7,163
)
 
$
3,419

Earnings (Loss) per Share - Note 1
 
 
 
 
 
 
 
Earnings (Loss) per Share - Basic
$
(0.03
)
 
$
0.18

 
$
(0.34
)
 
$
0.16

Earnings (Loss) per Share - Diluted
$
(0.03
)
 
$
0.18

 
$
(0.34
)
 
$
0.16

Weighted Average Common Shares - Basic
20,986

 
20,882

 
20,969

 
20,868

Weighted Average Common Shares - Diluted
20,986

 
21,029

 
20,969

 
21,027

 
See Notes to Consolidated Financial Statements


4


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2014
 
2013
 
2014
 
2013
Net Income (Loss) Including Noncontrolling Interest
$
(775
)
 
$
3,967

 
$
(7,668
)
 
$
3,364

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
1,066

 
(30
)
 
(154
)
 
(827
)
Unrealized gain (loss) on net investment hedge derivative instruments, net of tax expense (benefit) of $528 and ($122) for the three months ended July 31, 2014 and 2013, respectively, and $30 and $192 for the six months ended July 31, 2014 and 2013, respectively
793

 
(182
)
 
46

 
289

Unrealized loss on interest rate swap cash flow hedge derivative instruments, net of tax benefit of ($34) for the three months ended July 31, 2014 and ($32) for the six months ended July 31, 2014
(49
)
 

 
(46
)
 

Unrealized gain on foreign currency contract cash flow hedge derivative instruments, net of tax expense of $8 for the three months ended July 31, 2014 and $29 for the six months ended July 31, 2014
12

 

 
44

 

Reclassification of gain on foreign currency contract cash flow hedge derivative instruments included in net loss, net of tax expense of $8 for the three months ended July 31, 2014 and $14 for the six months ended July 31, 2014
11

 

 
20

 

Total Other Comprehensive Income (Loss)
1,833

 
(212
)
 
(90
)
 
(538
)
Comprehensive Income (Loss)
1,058

 
3,755

 
(7,758
)
 
2,826

Comprehensive Income (Loss) Attributable to Noncontrolling Interest
132

 
71

 
(518
)
 
(253
)
Comprehensive Income (Loss) Attributable To Titan Machinery Inc.
$
926

 
$
3,684

 
$
(7,240
)
 
$
3,079

 
See Notes to Consolidated Financial Statements


5


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

 
$

 
$
236,521

 
$
160,724

 
$
(226
)
 
$
(509
)
 
$

 
$

 
$
(735
)
 
$
396,510

 
$
3,409

 
$
399,919

Common stock issued on grant of restricted stock (net of forfeitures), exercise of stock options and warrants, and tax benefits of equity awards
147

 

 
259

 

 

 

 

 

 

 
259

 

 
259

Other

 

 

 

 

 

 

 

 

 

 
(339
)
 
(339
)
Stock-based compensation expense

 

 
992

 

 

 

 

 

 

 
992

 

 
992

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 
3,419

 

 

 

 

 

 
3,419

 
(55
)
 
3,364

Other comprehensive income (loss)

 

 

 

 
(629
)
 
289

 

 

 
(340
)
 
(340
)
 
(198
)
 
(538
)
Total comprehensive income (loss)

 

 

 

 

 

 

 

 

 
3,079

 
(253
)
 
2,826

Balance, July 31, 2013
21,239

 
$

 
$
237,772

 
$
164,143

 
$
(855
)
 
$
(220
)
 
$

 
$

 
$
(1,075
)
 
$
400,840

 
$
2,817

 
$
403,657

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 31, 2014
21,261

 
$

 
$
238,857

 
$
169,575

 
$
1,541

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

 
$
408,771

 
$
2,571

 
$
411,342

Common stock issued on grant of restricted stock (net of forfeitures), exercise of stock options and warrants, and tax benefits of equity awards
152

 

 
(50
)
 

 

 

 

 

 

 
(50
)
 

 
(50
)
Stock-based compensation expense

 

 
1,078

 

 

 

 

 

 

 
1,078

 

 
1,078

Other

 

 
(502
)
 

 

 

 

 

 

 
(502
)
 
501

 
(1
)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(7,163
)
 

 

 

 

 

 
(7,163
)
 
(505
)
 
(7,668
)
Other comprehensive income (loss)

 

 

 

 
(141
)
 
46

 
(46
)
 
64

 
(77
)
 
(77
)
 
(13
)
 
(90
)
Total comprehensive loss

 

 

 

 

 

 

 

 

 
(7,240
)
 
(518
)
 
(7,758
)
Balance, July 31, 2014
21,413

 
$

 
$
239,383

 
$
162,412

 
$
1,400

 
$
(293
)
 
$
(783
)
 
$
(62
)
 
$
262

 
$
402,057

 
$
2,554

 
$
404,611


See Notes to Consolidated Financial Statements

6


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) 
 
Six Months Ended July 31,
 
2014
 
2013
Operating Activities
 
 
 
Net income (loss) including noncontrolling interest
$
(7,668
)
 
$
3,364

Adjustments to reconcile net income including noncontrolling interest to net cash used for operating activities
 
 
 
Depreciation and amortization
14,746

 
13,342

Deferred income taxes
385

 
(64
)
Stock-based compensation expense
1,078

 
992

Noncash interest expense
2,326

 
2,245

Other, net
(68
)
 
404

Changes in assets and liabilities, net of purchase of equipment dealerships assets and assumption of liabilities
 
 
 
Receivables, prepaid expenses and other assets
20,350

 
25,305

Inventories
(68,312
)
 
(218,580
)
Manufacturer floorplan payable
(643
)
 
140,858

Accounts payable, customer deposits, accrued expenses and other long-term liabilities
(38,352
)
 
(10,807
)
Income taxes
(3,249
)
 
(5,540
)
Net Cash Used for Operating Activities
(79,407
)
 
(48,481
)
Investing Activities
 
 
 
Rental fleet purchases
(502
)
 
(432
)
Property and equipment purchases (excluding rental fleet)
(8,249
)
 
(12,523
)
Net proceeds from sale of property and equipment
2,444

 
415

Purchase of equipment dealerships, net of cash purchased

 
(4,848
)
Other, net
328

 
695

Net Cash Used for Investing Activities
(5,979
)
 
(16,693
)
Financing Activities
 
 
 
Net change in non-manufacturer floorplan payable
100,790

 
21,517

Proceeds from long-term debt borrowings
5,832

 
31,113

Principal payments on long-term debt
(5,558
)
 
(9,105
)
Other, net
(264
)
 
(196
)
Net Cash Provided by Financing Activities
100,800

 
43,329

Effect of Exchange Rate Changes on Cash
57

 
(108
)
Net Change in Cash
15,471

 
(21,953
)
Cash at Beginning of Period
74,242

 
124,360

Cash at End of Period
$
89,713

 
$
102,407

Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period
 
 
 
Income taxes, net of refunds
$
3,734

 
$
7,676

Interest
$
13,830

 
$
11,618

Supplemental Disclosures of Noncash Investing and Financing Activities
 
 
 
Net property and equipment financed with long-term debt, accounts payable and accrued liabilities
$
3,968

 
$
13,527

Net transfer of assets to property and equipment from inventories
$
7,218

 
$
42,113

 See Notes to Consolidated Financial Statements

7


TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1—BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The quarterly operating results for Titan Machinery Inc. (the “Company”) are subject to fluctuation due to varying weather patterns, which may impact the timing and amount of equipment purchases, rentals, and after-sales parts and service purchases by the Company’s Agriculture, Construction and International customers. Therefore, operating results for the six-month period ended July 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2015. The information contained in the balance sheet as of January 31, 2014 was derived from the audited financial statements for the Company for the year then ended. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended January 31, 2014 as filed with the SEC.

Subsequent to the issuance of the Company’s interim consolidated financial statements as of and for the period ended April 30, 2014, the Company concluded that the treatment of its prepaid value added tax (“VAT”) asset in Ukraine as a non-monetary asset was incorrect and that the asset should be classified and accounted for as a monetary asset and therefore should be remeasured from Ukrainian Hryvnia (“UAH”) to U.S. Dollars (“USD”) using the current rate as opposed to the historical rate used for non-monetary assets. In addition, in February of 2014, the National Bank of Ukraine terminated the currency peg of the UAH to the USD; subsequent to the decoupling and as a result of the economic and political conditions present in the country, the UAH experienced significant devaluation from the date the currency peg was terminated through the end of the Company’s second fiscal quarter.

The incorrect classification of the VAT asset as a non-monetary asset coupled with the significant devaluation of the UAH resulted in an overstatement of the Company’s assets (Prepaid expenses and other) as of April 30, 2014 and an understatement of the Company’s loss (Interest income and other income (expense)) for the three months ended April 30, 2014. This correction increased the Company’s Net Loss Attributable to Titan Machinery Inc. by $2.3 million (from the previously reported $4.2 million to $6.5 million) and increased the diluted loss per share by $0.11 (from the previously reported $0.20 loss per share to a $0.31 loss per share). This correction is reflected in the accompanying unaudited Consolidated Statements of Operations for the six-month period ended July 31, 2014.

Based on an evaluation of all relevant factors, the Company concluded that this correction was immaterial to the Company’s results for the three months ended April 30, 2014; therefore, the Company determined that an amendment of its previously filed Form 10-Q for the quarterly period ended April 30, 2014 was not necessary, and the correction will be reflected in future 10-K and 10-Q filings.

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

8


Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All material accounts, transactions and profits between the consolidated companies have been eliminated in consolidation.

Earnings (Loss) Per Share (“EPS”)
 
The Company uses the two-class method to calculate basic and diluted EPS. Unvested restricted stock awards are considered participating securities because they entitle holders to non-forfeitable rights to dividends during the vesting term. Under the two-class method, basic EPS were computed by dividing net income attributable to Titan Machinery Inc. after allocation of income to participating securities by the weighted-average number of shares of common stock outstanding during the year.
 
Diluted EPS were computed by dividing net income attributable to Titan Machinery Inc. after allocation of income to participating securities by the weighted-average shares of common stock outstanding after adjusting for potential dilution related to the conversion of all dilutive securities into common stock. All potentially dilutive securities were included in the computation of diluted EPS. There were approximately 125,000 and 99,000 stock options outstanding that were excluded from the computation of diluted EPS for the three months ended July 31, 2014 and 2013, respectively, because they were anti-dilutive. There were approximately 126,000 and 66,000 stock options outstanding that were excluded from the computation of diluted EPS for the six months ended July 31, 2014 and 2013, respectively, because they were anti-dilutive. None of the approximately 3,474,000 shares underlying the Company’s senior convertible notes were included in the computation of diluted EPS because the Company’s average stock price was less than the conversion price of $43.17.

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

Six Months Ended July 31,
 
2014

2013

2014

2013
 
(in thousands, except per share data)

(in thousands, except per share data)
Numerator











Net Income (Loss) Attributable to Titan Machinery Inc.
$
(614
)

$
3,833


$
(7,163
)

$
3,419

Net (Income) Loss Allocated to Participating Securities
11


(56
)

114


(45
)
Net Income (Loss) Attributable to Titan Machinery Inc. Common Stockholders
$
(603
)

$
3,777


$
(7,049
)

$
3,374

Denominator
   


   


   




Basic Weighted-Average Common Shares Outstanding
20,986


20,882


20,969


20,868

Plus: Incremental Shares From Assumed Conversions of Stock Options


147




159

Diluted Weighted-Average Common Shares Outstanding
20,986


21,029


20,969


21,027

Earnings (Loss) per Share - Basic
$
(0.03
)

$
0.18


$
(0.34
)

$
0.16

Earnings (Loss) per Share - Diluted
$
(0.03
)

$
0.18


$
(0.34
)

$
0.16


Recent Accounting Guidance

In April 2014, the Financial Accounting Standards Board ("FASB") amended authoritative guidance on reporting discontinued operations and disclosures of disposals of components of an entity, codified in Accounting Standard Codification ("ASC") 205-20, Discontinued Operations and 360, Property, Plant, and Equipment. The amended guidance changed the criteria for reporting discontinued operations, to only include disposals that represent a strategic shift and have a major effect on the entity's operations and financial results. The amended guidance also requires entities to provide additional disclosure of disposals reported as discontinued operations, and for disposals that do not qualify for discontinued operations presentation. The guidance is effective for disposals of components of an entity occurring in fiscal years beginning after December 15, 2014, with early adoption permitted. The Company will adopt this guidance on February 1, 2015. Its adoption is not expected to have a material effect on the Company's consolidated financial statements.

In May 2014, the FASB issued authoritative guidance on accounting for revenue recognition, codified in ASC 606, Revenue from Contracts with Customers. This guidance supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This guidance is based on the principle that revenue is recognized to depict the transfer of goods or services to

9


customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The Company will adopt this guidance on February 1, 2017, using one of two retrospective application methods. The Company has not determined the potential effects on the consolidated financial statements.

NOTE 2—INVENTORIES
 
 
July 31, 2014
 
January 31, 2014
 
(in thousands)
New equipment
$
666,430

 
$
575,518

Used equipment
329,897

 
363,755

Parts and attachments
122,521

 
126,666

Work in process
18,852

 
10,039

 
$
1,137,700

 
$
1,075,978


In addition to the above amounts, the Company has estimated that a portion of its parts inventory will not be sold in the next year. Accordingly, these balances have been classified as noncurrent assets.
 
NOTE 3—PROPERTY AND EQUIPMENT
 
 
July 31, 2014
 
January 31, 2014
 
(in thousands)
Rental fleet equipment
$
150,807

 
$
145,007

Machinery and equipment
24,473

 
23,382

Vehicles
43,685

 
44,200

Furniture and fixtures
38,101

 
35,860

Land, buildings, and leasehold improvements
69,600

 
60,470

 
326,666

 
308,919

Less accumulated depreciation
(93,611
)
 
(80,919
)
 
$
233,055

 
$
228,000

 
NOTE 4—LINES OF CREDIT / FLOORPLAN PAYABLE

Floorplan Lines of Credit

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

As of July 31, 2014, the Company had discretionary floorplan lines of credit for equipment inventory purchases totaling approximately $1.18 billion, which includes a $350.0 million Floorplan Payable Line with a group of banks led by Wells Fargo Bank, National Association ("Wells Fargo"), a $450.0 million credit facility with CNH Industrial Capital, a $225.0 million credit facility with Agricredit Acceptance LLC and the U.S. dollar equivalent of $152.1 million in credit facilities related to our foreign subsidiaries. Floorplan payables relating to these credit facilities totaled approximately $773.4 million of the total floorplan payable balance of $850.3 million outstanding as of July 31, 2014 and $692.8 million of the total floorplan payable balance of $750.5 million outstanding as of January 31, 2014. As of July 31, 2014, the Company had approximately $319.3 million in available borrowings remaining under these lines of credit (net of adjustments based on borrowing base

10


calculations and standby letters of credit under the Wells Fargo credit agreement, and rental fleet financing and other acquisition-related financing arrangements under the CNH Industrial Capital credit agreement). These U.S. floorplan payables carried various interest rates primarily ranging from 2.78% to 4.98%, and the foreign floorplan payables carried various interest rates primarily ranging from 2.21% to 10.50%, as of July 31, 2014.

Working Capital Line of Credit
 
As of July 31, 2014, the Company had a $112.5 million working capital line of credit under the credit facility with Wells Fargo. The Company had $49.0 million and $47.8 million outstanding on its working capital line of credit as of July 31, 2014 and January 31, 2014, respectively. Amounts outstanding are recorded as long-term debt, within long-term liabilities on the consolidated balance sheets, as the Company does not have an obligation to repay amounts borrowed within one year.

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

 
$
150,000

Unamortized debt discount
(19,408
)
 
(21,107
)
Carrying value of senior convertible notes
$
130,592

 
$
128,893

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

 
$
15,546

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

 
23.1626

Conversion price (per share of common stock)
$
43.17

 
$
43.17

     
The Company recognized interest expense associated with its Senior Convertible Notes as follows:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
(in thousands)
Cash Interest Expense
 
 
 
 
 
 
 
Coupon interest expense
$
1,407

 
$
1,407

 
$
2,813

 
$
2,813

Noncash Interest Expense
 
 
 
 
 
 
 
Amortization of debt discount
864

 
807

 
1,699

 
1,586

Amortization of transaction costs
134

 
131

 
267

 
260

 
$
2,405

 
$
2,345

 
$
4,779

 
$
4,659


As of July 31, 2014, the unamortized debt discount will be amortized over a remaining period of approximately 4.75 years. As of July 31, 2014 and January 31, 2014, the if-converted value of the Senior Convertible Notes does not exceed the principal balance. The effective interest rate of the liability component was equal to 7.00% for the period ended July 31, 2014.
 

11


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

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

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

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

Derivative Instruments Not Designated as Hedging Instruments
 
The Company uses foreign currency forward contracts to hedge the effects of fluctuations in exchange rates on outstanding intercompany loans. The Company does not formally designate and document such derivative instruments as hedging instruments; however, the instruments are an effective economic hedge of the underlying foreign currency exposure. Both the gain or loss on the derivative instrument and the offsetting gain or loss on the underlying intercompany loan are recognized in earnings immediately, thereby eliminating or reducing the impact of foreign currency exchange rate fluctuations on net income.
 
The following table sets forth the notional value of the Company's outstanding derivative instruments.
 
Notional Amount as of:
 
July 31, 2014
 
January 31, 2014
 
(in thousands)
Net investment hedge:
 
 
 
Foreign currency contracts
$
37,837

 
$
43,742

Cash flow hedges:
 
 
 
Interest rate swap
100,000

 
100,000

Foreign currency contracts

 
4,754

Derivatives not designated as hedging instruments:
 
 
 
Foreign currency contracts
40,511

 
44,775


12



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

 
$
157

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

 
279

 
Prepaid expenses and other
Total Asset Derivatives
$

 
$
436

 
 
 
 
 
 
 
 
Liability Derivatives:
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
Net investment hedges:
 
 
 
 
 
Foreign currency contracts
$
72

 
$

 
Accrued expenses
Cash flow hedges:
 
 
 
 
 
Interest rate swap
1,305

 
1,227

 
Accrued expenses
Foreign currency contracts

 
211

 
Accrued expenses
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts
70

 

 
Accrued expenses
Total Liability Derivatives
$
1,447

 
$
1,438

 
 
    
The following table sets forth the gains and losses recognized in other comprehensive income (loss) ("OCI") and income (loss) related to the Company’s derivative instruments for the three and six months ended July 31, 2014 and 2013, respectively.
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
 
 
2014
 
2013
 
2014
 
2013
 
 
 
OCI
 
Income (Loss)
 
OCI
 
Income (Loss)
 
OCI
 
Income (Loss)
 
OCI
 
Income (Loss)
 
Statements of Operations Classification
 
(in thousands)
 
(in thousands)
 
 
Dervatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
1,321

 
$

 
$
(304
)
 
$

 
$
76

 
$

 
$
481

 
$

 
N/A
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
(83
)
 

 

 

 
(78
)
 

 

 

 
N/A
Foreign currency contracts
20

 

 

 

 
73

 

 

 

 
N/A
Dervatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts

 
1,449

 

 
(650
)
 

 
146

 

 
70

 
Interest and other income
Total Derivatives
$
1,258

 
$
1,449

 
$
(304
)
 
$
(650
)
 
$
71

 
$
146

 
$
481

 
$
70

 
 
    
No components of the Company's net investment or cash flow hedging instruments were excluded from the assessment of hedge ineffectiveness.

As of July 31, 2014, the Company had $1.3 million and $0.1 million in pre-tax net unrealized losses associated with its interest rate swap and foreign currency contract cash flow hedging instruments recorded in accumulated other

13


comprehensive income, respectively. The Company expects that $1.4 million and $0.1 million of pre-tax unrealized losses associated with its interest rate swap and foreign currency contracts, respectively, will be reclassified into net income over the next 12 months. 

NOTE 7—FAIR VALUE OF FINANCIAL INSTRUMENTS

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

 
$

 
$

 
$

 
$

 
$
436

 
$

 
$
436

Total Financial Assets
$

 
$

 
$

 
$

 
$

 
$
436

 
$

 
$
436

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
$

 
$
1,305

 
$

 
$
1,305

 
$

 
$
1,227

 
$

 
$
1,227

Foreign currency contracts

 
142

 

 
142

 

 
211

 

 
211

Total Financial Liabilities
$

 
$
1,447

 
$

 
$
1,447

 
$

 
$
1,438

 
$

 
$
1,438


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

The Company also valued certain long-lived assets at fair value on a non-recurring basis during the six months ended July 31, 2014, related to fixed assets at stores closed. The estimated fair value of these assets approximated zero, thus requiring a full impairment charge equal to the carrying values of such assets. The valuation methodologies utilized Level 3 fair value inputs.

The Company also has financial instruments that are not recorded at fair value in its consolidated financial statements. The carrying amount of cash, receivables, payables, short-term debt and other current liabilities approximates fair value because of the short maturity and/or frequent repricing of those instruments, which are Level 2 fair value inputs. Based upon current borrowing rates with similar maturities, which are Level 2 fair value inputs, the carrying value of long-term debt approximates the fair value as of July 31, 2014 and January 31, 2014, respectively. The following table provides details on the Senior Convertible Notes as of July 31, 2014 and January 31, 2014. The difference between the face value and the carrying value of these notes is the result of the allocation between the debt and equity components. Fair value of the Senior Convertible Notes was estimated based on Level 2 fair value inputs.
 
July 31, 2014
 
January 31, 2014
 
Estimated Fair Value
 
Carrying Value
 
Face Value
 
Estimated Fair Value
 
Carrying Value
 
Face Value
 
(in thousands)
 
(in thousands)
Senior convertible notes
$
130,673

 
$
130,592

 
$
150,000

 
$
128,522

 
$
128,893

 
$
150,000


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

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

14


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

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

Six Months Ended July 31,
 
2014

2013

2014

2013
 
(in thousands)
 
(in thousands)
Revenue
 
 
 
 
 
 
 
Agriculture
$
314,354

 
$
367,544

 
$
667,002

 
$
727,888

Construction
113,508

 
97,946

 
215,387

 
180,787

International
43,560

 
39,870

 
73,901

 
67,600

Segment revenue
471,422

 
505,360

 
956,290

 
976,275

Eliminations
(20,432
)
 
(17,180
)
 
(39,837
)
 
(46,421
)
Total
$
450,990

 
$
488,180

 
$
916,453

 
$
929,854

 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
 
 
 
 
Agriculture
$
5,279

 
$
9,775

 
$
8,597

 
$
17,774

Construction
51

 
(1,697
)
 
(5,724
)
 
(8,235
)
International
(5,000
)
 
107

 
(10,419
)
 
(419
)
Segment income (loss) before income taxes
330

 
8,185

 
(7,546
)
 
9,120

Shared Resources
702

 
(1,113
)
 
(171
)
 
(2,351
)
Eliminations
780

 
(516
)
 
903

 
(1,210
)
Income (Loss) Before Income Taxes
$
1,812

 
$
6,556

 
$
(6,814
)
 
$
5,559

 
 
July 31, 2014
 
January 31, 2014
 
(in thousands)
Total Assets
 
 
 
Agriculture
$
885,350

 
$
943,212

Construction
406,997

 
308,525

International
216,400

 
195,534

Segment assets
1,508,747

 
1,447,271

Shared Resources
118,402

 
120,335

Eliminations
(2,193
)
 
(2,958
)
Total
$
1,624,956

 
$
1,564,648



15


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

The following summarizes the exit costs associated with the store closings and realignment that occurred in April 2014. The amounts incurred during the six months ended July 31, 2014 reflect the total amounts expected to be incurred related to the closing of these stores.
 
Amount Incurred During the Three Months Ended July 31, 2014
 
Amount Incurred During the Six Months Ended July 31, 2014
 
Income Statement Classification
 
(in thousands)
 
 
Construction Segment
 
 
 
 
 
Lease termination costs
$
(7
)
 
$
1,511

 
Realignment Costs
Employee severance costs

 
451

 
Realignment Costs
Impairment of fixed assets, net of gains on asset disposition
(212
)
 
(60
)
 
Realignment Costs
Asset relocation and other closing costs
197

 
362

 
Realignment Costs
 
$
(22
)
 
$
2,264

 
 
Agriculture Segment
 
 
 
 
 
Lease termination costs
$
34

 
$
148

 
Realignment Costs
Employee severance costs

 
71

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

 
85

 
Realignment Costs
Asset relocation and other closing costs
52

 
84

 
Realignment Costs
Inventory cost adjustments
67

 
471

 
Equipment Cost of Sales
 
$
153

 
$
859

 
 
Shared Resource Center
 
 
 
 
 
Employee severance costs
$
87

 
$
300

 
Realignment Costs
 
$
87

 
$
300

 
 
Total
 
 
 
 
 
Lease termination costs
$
27

 
$
1,659

 
Realignment Costs
Employee severance costs
87

 
822

 
Realignment Costs
Impairment of fixed assets, net of gains on asset disposition
(212
)
 
25

 
Realignment Costs
Asset relocation and other closing costs
249

 
446

 
Realignment Costs
Inventory cost adjustments
67

 
471

 
Equipment Cost of Sales
 
$
218

 
$
3,423

 
 


16


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

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

Employee severance costs
822

Exit costs paid
 
Lease termination costs
(248
)
Employee severance costs
(722
)
Adjustments
 
Lease termination costs
(109
)
Balance, July 31, 2014
$
1,950


NOTE 10—INCOME TAXES
The Company incurs a provision for income taxes in jurisdictions in which it has taxable income. Generally the Company receives a benefit for income taxes in jurisdictions in which it has taxable losses unless it has recorded a valuation allowance for that jurisdiction. The fluctuations in our effective income tax rate are primarily due to losses in our international subsidiaries in which we record a valuation allowance against our net operating losses. These losses are available to reduce future taxable income, if earned within the allowable net operating loss carryforward period, in these jurisdictions. The foreign jurisdictions in which the Company operates have net operating loss carryforward periods ranging from five to seven years, with certain jurisdictions having indefinite carryforward periods.
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2014
 
2013
 
2014
 
2013
 
(dollars in thousands)
 
(dollars in thousands)
Income (Loss) Before Income Taxes
$
1,812

 
$
6,556

 
$
(6,814
)
 
$
5,559

Provision for Income Taxes
(2,587
)
 
(2,589
)
 
(854
)
 
(2,195
)
Effective Income Tax Rate
142.8
%
 
39.5
%
 
(12.5
)%
 
39.5
%

A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2014
 
2013
 
2014
 
2013
U.S. statutory rate
35.0
%
 
35.0
 %
 
35.0
 %
 
35.0
 %
Foreign statutory rates
1.7
%
 
(1.3
)%
 
1.7
 %
 
(1.1
)%
State taxes on income net of federal tax benefit
4.6
%
 
4.4
 %
 
4.6
 %
 
4.4
 %
Tax effect of not recording a benefit on losses in jurisdictions with a valuation allowance
100.6
%
 
 %
 
(54.9
)%
 
(0.3
)%
All other, net
0.9
%
 
1.4
 %
 
1.1
 %
 
1.5
 %
 
142.8
%
 
39.5
 %
 
(12.5
)%
 
39.5
 %

NOTE 11—SUBSEQUENT EVENTS
On August 29, 2014, the Company acquired certain assets of Midland Equipment, Inc. The acquired entity consisted of one agriculture equipment store in Wayne, Nebraska, which expands the Company's agricultural presence in Nebraska. The acquisition-date fair value of the total consideration transferred for the store was $0.8 million.


17


ITEM 2.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended January 31, 2014.
 
Realignment Costs

To better align its Construction business in certain markets, in April 2014, the Company reduced its Construction-related headcount by approximately 12% primarily through the closing of seven underperforming Construction stores, staff reductions at other dealerships and reductions in support staff at its Shared Resource Center. The closed stores were located in Bozeman, Big Sky and Helena, Montana; Cheyenne, Wyoming; Clear Lake, Iowa; Flagstaff, Arizona; and Rosemount, Minnesota. The Company also closed its Agriculture store in Oskaloosa, Iowa and merged it with the nearby Agriculture store in Pella, Iowa. The Company's remaining stores in each of the respective areas assumed the majority of the distribution rights for the CNH Industrial brand previously held by the stores which have closed. We recognized $0.2 million and $3.4 million in exit costs during the three and six months ended July 31, 2014, respectively.

Critical Accounting Policies and Estimates
 
There have been no material changes in our Critical Accounting Policies and Estimates, as disclosed in our Annual Report on Form 10-K for the year ended January 31, 2014.
 
Overview
 
We own and operate a network of full service agricultural and construction equipment stores in the United States and Europe. Based upon information provided to us by CNH Industrial N.V. or its U.S. subsidiary CNH Industrial America, LLC, we are the largest retail dealer of Case IH Agriculture equipment in the world, the largest retail dealer of Case Construction equipment in North America and a major retail dealer of New Holland Agriculture and New Holland Construction equipment in the U.S. We operate our business through three reportable segments, Agriculture, Construction and International. Within each segment, we have four principal sources of revenue: new and used equipment sales, parts sales, service, and equipment rental and other activities.
 
Our net income (loss) attributable to Titan Machinery Inc. common stockholders was $(0.6) million, or $(0.03) per diluted share, for the three months ended July 31, 2014, compared to $3.8 million, or $0.18 per diluted share, for the three months ended July 31, 2013. Our non-GAAP Diluted EPS was $0.04 and $0.18 for the three months ended July 31, 2014 and 2013, respectively. See the Non-GAAP Financial Measures section below for a reconciliation between the GAAP and non-GAAP measures. Significant factors impacting the quarterly comparisons were:
 
Revenue decreased 7.6% for the second quarter of fiscal 2015, as compared to the second quarter last year, primarily due to a decrease in Agriculture same-store sales, and partially offset by an increase in Construction same-store sales;

Total gross profit margin increased to 17.7% for the second quarter of fiscal 2015, as compared to 17.1% for the second quarter of fiscal 2014, primarily caused by a change in gross profit mix to our higher-margin service and rental and other businesses;

Floorplan interest expense increased in the second quarter of fiscal 2015, as compared to the same period last year, due to higher floorplan payable balances resulting from growth in our equipment inventory, primarily in our International segment; and

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


18


Results of Operations
 
Comparative financial data for each of our four sources of revenue are expressed below. The results for these periods include the operating results of the acquisitions made during these periods. The period-to-period comparisons included below are not necessarily indicative of future results. Segment information is provided later in this discussion and analysis of our results of operations.
 
Same-store sales for any period represent sales by stores that were part of the Company for the entire comparable periods in the current and preceding fiscal years. We do not distinguish relocated or newly-expanded stores in this same-store analysis. Closed stores are excluded from the same-store analysis. Stores that do not meet the criteria for same-store classification are described as acquisition stores throughout the Results of Operations section in this Quarterly Report on Form 10-Q.
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2014
 
2013
 
2014
 
2013
 
(dollars in thousands)
 
(dollars in thousands)
Equipment
 
 
 
 
 

 
 

Revenue
$
320,087

 
$
358,388

 
$
665,132

 
$
693,133

Cost of revenue
292,879

 
329,083

 
609,161

 
632,906

Gross profit
$
27,208

 
$
29,305

 
$
55,971

 
$
60,227

Gross profit margin
8.5
%
 
8.2
%
 
8.4
%
 
8.7
%
Parts
 
 
 
 
 
 
 
Revenue
$
70,526

 
$
70,633

 
$
138,905

 
$
133,470

Cost of revenue
49,730

 
48,022

 
97,744

 
92,733

Gross profit
$
20,796

 
$
22,611

 
$
41,161

 
$
40,737

Gross profit margin
29.5
%
 
32.0
%
 
29.6
%
 
30.5
%
Service
 
 
 
 
 
 
 
Revenue
$
38,447

 
$
39,872

 
$
75,531

 
$
71,870

Cost of revenue
13,529

 
14,383

 
27,932

 
25,746

Gross profit
$
24,918

 
$
25,489

 
$
47,599

 
$
46,124

Gross profit margin
64.8
%
 
63.9
%
 
63.0
%
 
64.2
%
Rental and other
 
 
 
 
 
 
 
Revenue
$
21,930

 
$
19,287

 
$
36,885

 
$
31,381

Cost of revenue
15,199

 
13,150

 
26,024

 
20,979

Gross profit
$
6,731

 
$
6,137

 
$
10,861

 
$
10,402

Gross profit margin
30.7
%
 
31.8
%
 
29.4
%
 
33.1
%


19


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

 
 

Equipment
71.0
 %
 
73.4
 %
 
72.6
 %
 
74.5
 %
Parts
15.6
 %
 
14.5
 %
 
15.2
 %
 
14.4
 %
Service
8.5
 %
 
8.2
 %
 
8.2
 %
 
7.7
 %
Rental and other
4.9
 %
 
3.9
 %
 
4.0
 %
 
3.4
 %
Total Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Total Cost of Revenue
82.3
 %
 
82.9
 %
 
83.0
 %
 
83.1
 %
Gross Profit
17.7
 %
 
17.1
 %
 
17.0
 %
 
16.9
 %
Operating Expenses
15.1
 %
 
14.4
 %
 
15.2
 %
 
14.9
 %
Realignment Costs
 %
 
 %
 
0.3
 %
 
 %
Income from Operations
2.6
 %
 
2.7
 %
 
1.5
 %
 
2.0
 %
Other Income (Expense)
(2.2
)%
 
(1.4
)%
 
(2.2
)%
 
(1.4
)%
Income (Loss) Before Income Taxes
0.4
 %
 
1.3
 %
 
(0.7
)%
 
0.6
 %
Provision for Income Taxes
(0.6
)%
 
(0.5
)%
 
(0.1
)%
 
(0.2
)%
Net Income (Loss) Including Noncontrolling Interest
(0.2