10-K 1 titn-2015131x10k.htm 10-K TITN-2015.1.31-10K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2015
Commission File No. 001-33866
___________________________________________
TITAN MACHINERY INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
No. 45-0357838
(IRS Employer
Identification No.)
644 East Beaton Drive
West Fargo, ND 58078-2648
(Address of Principal Executive Offices)
(701) 356-0130
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Common Stock, $0.00001 Par Value
Name of each exchange on which registered: The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
___________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No x
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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x
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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer x
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No x
The aggregate market value of our common stock held by non-affiliates as of July 31, 2014 was approximately $255.6 million (based on the last sale price of $14.66 per share on such date as reported on the NASDAQ Global Select Market).
The number of shares outstanding of the registrant's common stock as of April 1, 2015 was 21,397,231 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 2015 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this report.
 



Table of Contents
 
 
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We make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act on our web site, http://www.titanmachinery.com, as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. We are not including the information on our web site as a part of, or incorporating it by reference into, our Form 10-K.

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ITEM 1.    BUSINESS
Our Company
Overview
We own and operate a network of full service agricultural and construction equipment stores in the United States ("U.S.") and Europe. Based upon information provided to us by CNH Industrial N.V. or its U.S. subsidiary CNH Industrial America, LLC, collectively referred to in this Form 10-K as CNH Industrial, 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 have three primary business segments, Agriculture, Construction and International, within which we sell and rent new and used equipment, sell parts, and service equipment.
The agricultural equipment we sell and service includes machinery and attachments for uses ranging from large-scale farming to home and garden purposes. The construction equipment we sell and service includes heavy construction and light industrial machinery for commercial and residential construction, road and highway construction, and mining operations. Within our operating segments, we engage in four principal business activities:
new and used equipment sales;
parts sales;
repair and maintenance services; and
equipment rental and other activities.
The new equipment and parts we sell are supplied primarily by CNH Industrial. CNH Industrial is a leading manufacturer and supplier of agricultural and construction equipment, primarily through the Case IH Agriculture, New Holland Agriculture, Case Construction and New Holland Construction brands. The used equipment for resale is acquired through trade-ins from our customers and selective purchases. We sell parts and provide in-store and on-site repair and maintenance services. We also rent equipment and provide ancillary services such as equipment transportation, Global Positioning System ("GPS") signal subscriptions, and finance and insurance products.
We offer our customers a one-stop solution by providing equipment and parts sales, repair and maintenance services, and rental functions in each store. Our full service approach provides us with multiple points of customer contact and substantial cross-selling opportunities. We believe our mix of equipment and recurring parts and service sales enables us to operate effectively throughout economic cycles. We also believe our significant scale, superior customer service, diverse and stable customer base, management reporting system and experienced management team provide us with a competitive advantage in many of our local markets.
Throughout our 35-year operating history we have built an extensive, geographically contiguous network of 92 stores in the U.S., including two outlet stores, and 16 stores in Europe. Our Agriculture stores in the U.S. are located in Iowa, Minnesota, Nebraska, North Dakota and South Dakota and include several highly productive farming regions, such as the Red River Valley in eastern North Dakota and northwestern Minnesota, certain portions of the corn belt in Iowa, eastern South Dakota and southern Minnesota, and along the Interstate-80 corridor in Nebraska, which sits on top of the Ogallala Aquifer. Our Construction stores are located in Arizona, Colorado, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, South Dakota, Wisconsin and Wyoming. Our International stores are located in the European countries of Bulgaria, Romania, Serbia and Ukraine.
Our executives have extensive industry experience. David Meyer, our Board Chair and Chief Executive Officer, founded our company in 1980. In 2002, we acquired two stores owned by C.I. Farm Power, Inc., a business owned by our President and Director, Peter Christianson, which he co-founded in 1988. Based on our collective industry experience, we developed the Titan Operating Model, which combines management accountability and decision-making at the store level with centralized, back-office support and expertise. Our executives work closely with our store managers to develop the managers' industry knowledge and ensure these managers achieve operational excellence consistent with our management philosophy.
We have a history of growth through acquisitions. Since January 1, 2003, we have completed 52 acquisitions consisting of 110 stores operating in 11 states and three European countries, including 37 acquisitions consisting of 79 stores completed since our initial public offering on December 11, 2007. We have a well-established track record of integrating acquired stores through the Titan Operating Model, retaining acquired-store employees and maintaining acquired-store

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customer relationships. We expect that acquisitions will continue to be an important component of our consolidated and segment growth.
Industry Overview
We believe Caterpillar, Inc., Deere & Company ("Deere"), CNH Industrial, Komatsu Ltd., Agco Corporation ("AGCO"), the Volvo Group, Terex Corporation and Ingersoll-Rand Co. Ltd. are the largest global manufacturers of agricultural and construction equipment. These companies generated revenue from their equipment operations of $52.1 billion for Caterpillar Inc., $33.0 billion for Deere, $18.5 billion for CNH Industrial, $18.9 billion for Komatsu Ltd., 9.7 billion for AGCO, $6.8 billion for Volvo Group and $7.3 billion for Terex Corporation, for the most recent fiscal year-ends for which information is currently available.
Agricultural Equipment Industry
Agricultural equipment is purchased primarily for the production of food, fiber, feed grain and feedstock for renewable energy. Certain equipment is also purchased for home and garden applications, and maintenance of commercial, residential and government properties. Deere, CNH Industrial and AGCO are the largest global manufacturers of agricultural equipment and supply a full line of equipment and parts that address the primary machinery requirements of farmers. In addition to the major manufacturers, several short-line manufacturers produce specialized equipment that addresses regional and niche requirements of farmers. Agricultural equipment manufacturers typically grant dealers in the U.S. authorized store locations, not exclusive territories, to distribute their products.
We believe there are many factors that influence demand for agricultural equipment, parts and repair and maintenance services, including commodity markets, interest rates, government policies, tax policies, weather and general economic conditions. Any of these conditions can change materially in a short time period, creating volatility in demand for our products and services at any point in time. Federal legislation, such as the recently enacted Farm Bill, attempts to stabilize the agriculture industry through various policies including (i) commodity programs consisting of direct, counter-cyclical and price support payments to farmers; (ii) conservation programs; (iii) crop insurance programs; and (iv) disaster relief programs. We believe that these various federal policies reduce financial volatility and help ensure that farmers operate their farms and equipment during economic down cycles, thus stabilizing demand for equipment, replacement parts, and repair and maintenance services.
Construction Equipment Industry
Construction equipment is purchased primarily for commercial, residential and infrastructure construction, as well as for demolition, maintenance, mining, energy production and forestry operations. The market for construction equipment is segmented across multiple categories including earth moving, lifting, light industrial, asphalt and paving, and concrete and aggregate equipment. As in the agricultural equipment market, distribution of construction equipment in the U.S. is executed primarily by manufacturer authorized dealers; however, manufacturers' dealership agreements in the construction industry typically assign exclusive distribution territories.
Construction machinery is generally divided into "heavy" and "light" subgroups. Heavy machinery includes large wheel loaders, large tracked excavators, cranes, crawler dozers, motor graders and articulated haul trucks. Light machinery includes backhoe landscape tractors, forklifts, compact excavators and skid steers. Heavy machinery is generally purchased by construction companies, municipalities, local governments, rental fleet owners, quarrying and mining companies, waste management companies and forestry-related organizations. Typically, light machinery is purchased by contractors, rental fleet owners, landscapers, logistics companies, farmers and recreational users. Although demand for construction equipment is affected by weather and seasonal factors, it is usually less susceptible to seasonal changes than the agricultural equipment industry.
CNH Industrial and industry reports show that demand for construction equipment in our markets is driven by several factors, including (i) public spending on roads, highways, sewer and water projects, and other public works projects; (ii) public and private expenditures for the energy and mining industries, which are driven in part by demand for fossil fuels, metals and other commodities; and (iii) general economic and market conditions of the construction sector for residential and commercial buildings.
Titan Operating Model
We believe the Titan Operating Model is a key element to our continued success. Through the Titan Operating Model, we empower leadership and share best practices at the store level while realizing efficiencies and utilizing certain controls at the corporate level. We believe exceptional customer service is most effectively attained through accountable store employees who are supported by centralized administrative, finance and marketing functions. By managing our business as a network of independent stores supported by a centralized, shared resources group, we ensure coordination of the entire enterprise while

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promoting the development of local business and customer relationships at the store level. We have implemented the Titan Operating Model in our North American stores within our Agriculture and Construction reporting segments.
Strong Store Model
Each of our stores is run by a store manager who is reviewed and compensated based on the store's achievement of revenue, profitability, market share and balance sheet objectives. Also, each store is typically staffed by a parts manager, a service manager and field marketers, and certain of our Construction stores are staffed with rental account managers, all of whom report directly to the store manager. Under our operating model, decision-making for customer-related issues is decentralized, with each store manager responsible for matters such as the type of equipment to stock, equipment pricing, staffing levels and customer satisfaction. This operating model enables each store manager to concentrate on customers' equipment, parts, service and rental needs, while our shared resources group manages the administrative functions of the store. We believe customers in our industry view store managers and sales and service personnel as important partners in operating their businesses. Therefore, we believe developing and supporting strong store managers enables us to grow same-store sales through fostering new customer relationships and further developing existing customer relationships.
Shared Resources
Our shared resources group provides a range of services to support our stores, including service administration, information technology support, administration, marketing campaigns, human resources management, finance and insurance, central purchasing, accounting, legal, data administration and cash management. We believe these functions can be run more efficiently when combined and can provide more sophisticated tools to our store managers than an independent dealership could support alone. We maintain accountability through our management reporting systems, which provide data on certain key operational and financial metrics on a daily basis, as well as a comprehensive review of financial performance on a monthly basis. We believe the services provided by our shared resources group enables our stores to achieve a higher level of customer service by freeing them from certain general and administrative functions and enables a more competitive market presence at a lower cost than if our stores operated independently. Furthermore, as we acquire new stores, we believe the shared services required to support these stores will grow at a lower rate than our overall growth in store count.
Management Development and Succession Planning
Our executives work closely with our regional and store managers and mid-level corporate managers to ensure the managers benefit from our executives' industry knowledge and execute operational excellence in line with our management philosophy. We also conduct formal meetings on a monthly basis with our store managers and regional managers to assess operational and financial objectives, develop near-term strategies and share best practices across the organization. We believe the relationships among our executives, segment managers, regional managers, store managers and mid-level corporate managers will sustain our financial success through continued implementation of our effective operating model, as well as provide a strong pool of capable successors to our current team of executives, regional managers and store managers. Further, we seek to staff our stores with entrepreneurial individuals trained, including through our programs, and motivated to progress to higher level management positions.
Business Strengths
In addition to the Titan Operating Model, we believe the following attributes of our business model and market position are important factors in our ability to compete effectively and achieve our long-term financial objectives:
Leading North American Equipment Provider with Significant Scale
According to CNH Industrial, 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 believe our size and large, contiguous geographic market provide us with several competitive advantages including:
our ability to manage inventory through our centralized inventory management system, thus allowing inventory exchanges among the stores, which permits us to maintain only the inventory deemed needed by each store while providing significant breadth of parts and equipment to our customers;
our ability to use expanded sales channels, including used equipment listings hosted on our website, which enables us to offer our customers alternative purchasing options; and
our ability to sell inventory to customers in a large geographic area covering Arizona, Colorado, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, South Dakota, Wisconsin and Wyoming, which enables us to

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capitalize on crop diversification and disparate weather throughout this area, as well as local trends in residential, infrastructure and commercial construction.
Customer Focus at the Local Level
As part of the Titan Operating Model, we centralize general and administrative functions and finance resources. This strategy enables our store employees to focus exclusively on customers and eliminates redundant operating expenses. We also centralize our marketing resources to offer our stores and field marketers professional marketing support that includes targeted direct mailings, advertising with targeted local media outlets, participation in and sponsorship of trade shows and industry events, our Titan Trader monthly magazine, and our hosting of open houses, service clinics, equipment demonstrations, product showcases and customer appreciation outings. We believe this operating structure, which focuses on serving our customers on a local level, will allow us to increase market share.
Superior Customer Service to Attract and Retain Customers
We believe our ability to respond quickly to our customers' demands is key to profitable growth. Our executives are committed to maintaining a customer-focused culture. We spend significant time and resources training our employees to effectively service our customers in each of our local markets, which we believe will increase our revenue. Our training program involves active participation in all manufacturer-sponsored training programs and the use of industry experts as consultants for customized training programs and a training team to assist in the integration of newly-acquired operations. We also partner with several technical colleges to sponsor students who we plan to eventually employ. In particular, the following capabilities enable us to better service our customers:
our ability to staff a large number of highly-trained service technicians across our network of stores, which makes it possible to schedule repair services on short notice without affecting our technician utilization rates;
our ability to staff and leverage product and application specialists across our network of stores, which makes it possible to offer valuable pre-sale and aftermarket services, including equipment training, best practices education and precision farming technology support; and
our ability to innovate and lead our industry through initiatives such as GPS guidance systems to support precision farming in our geographic markets, which provide our customers with the latest advances in technology and operating practices.
Unique Entrepreneurial Culture to Attract and Retain Superior Employees
We strive to maintain an entrepreneurial culture that empowers our employees to make decisions and act within the parameters of a proven operating process and system. We believe this culture and our size gives us a competitive advantage in attracting and retaining the best employees in our industry. We developed an operating system and process that provides our employees with defined objectives and frequent feedback of results within an entrepreneurial environment that allows them to work independently yet consistently throughout our company. Through this operating system and process we have established defined financial metrics on a balanced scorecard, which is used monthly with each store manager to assess performance. Each store manager is empowered to operate the individual store as appropriate within the guidelines set by the operating system and process. This balanced management philosophy enables our employees to understand clearly how they succeed in our organization and how to interact with customers who expect a level of autonomy from our employees. Our compensation system focuses on rewarding our employees for high performance, thus enabling us to retain most of those employees who perform at or above expectations. This system also enables us to attract talented individuals outside of our industry and train them to perform at a high level within a relatively short period of time.
Diverse and Stable Customer Base to Avoid Market Volatility
We believe our large and diverse customer base limits our exposure to risks associated with customer concentration and fluctuations in local market conditions. We have long and stable relationships with many of our customers. During fiscal 2015, none of our customers accounted for more than 1.0% of our total revenue. Revenue from external customers located outside of the United States is primarily included in our International segment, which totaled approximately 8.8%, 6.6% and 3.3% of total revenue during fiscal 2015, 2014 and 2013 respectively.
Information Technology Systems
Our management reporting systems provide the data and reports that facilitate our ability to make informed financial and inventory level decisions. We use these systems to actively manage our business and enable each store to access the available inventory of our other stores before ordering additional parts or equipment from our suppliers. As a result, we manage our investment in inventory while promptly satisfying our customers' parts and equipment needs. Our customer relationship

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management system provides sales, available wholegoods, and customer information and other organizational tools to our field marketers, store managers and regional managers. In addition, utilizing the information provided by the systems assists in the training and development of management personnel.
Experienced Management Team
Our executive team is led by David Meyer, our Board Chair and Chief Executive Officer, and Peter Christianson, our President and Director, who have approximately 40 and 36 years, respectively, of industry experience. Our segment managers, regional managers, store managers and field marketers also have extensive knowledge and experience in our industry. In addition, we compensate, develop and review our regional managers and store managers based on an approach that aligns their incentives with the goals and objectives of our company, including achievement of revenue, profitability, market share and balance sheet objectives. We believe the strength of our management team will help our success in the marketplace.
Growth Strategy
We pursue the following growth strategies:
Increase Market Share and Same-Store Sales
We focus on increasing our share of the equipment sold in our markets because our market share impacts current period revenue and compounds our revenue over the life of the equipment sold through recurring parts and service business. We seek to generate same-store growth and increase market share through:
employing significant marketing and advertising programs, including targeted direct mailings, advertising with targeted local media outlets, participation in and sponsorship of trade shows and industry events, our Titan Trader monthly magazine, and by hosting open houses, service clinics, equipment demonstrations, product showcases and customer appreciation outings;
supporting and providing customers with training for evolving technologies, such as precision farming, that are difficult for single-store operators to support;
maintaining state-of-the-art service facilities, mobile service trucks and trained service technicians to maximize our customers' equipment uptime through preventative maintenance programs and seasonal 24/7 service support; and
utilizing our inventory system to maximize parts and equipment availability for our customers.
Pursue Strategic Acquisitions
The agricultural and construction equipment industries are fragmented and consist of many relatively small, independent businesses servicing discrete local markets. We believe a favorable climate for dealership consolidation exists due to several factors, including the competitiveness of our industry, growing dealer capitalization requirements and the lack of succession alternatives for current owners. We intend to continue to evaluate and pursue acquisitions with the objectives of entering new markets, consolidating distribution within our established network and strengthening our competitive position.
We have a track record of completing and integrating acquisitions and have used acquisitions to enter new markets. We look to add stores through acquisitions that offer attractive growth opportunities, high demand for the equipment we sell and services we offer, management strength, and contiguity with our existing geography.
We believe that we are effectively able to identify attractive acquisition candidates due to our leadership position in the industry, our track record of completing and integrating acquisitions, and our contacts in and knowledge of our industry and geographic region. We regularly assess the acquisition landscape, evaluating potential acquisition candidates in terms of their availability and desirability to our long-term growth strategy. In addition, we believe acquisition economics in our industry have been and will continue to be conducive to executing our long-term growth strategy. Typically, we acquire only the working capital and fixed assets we believe are necessary to run an efficient store and assume only the liabilities related to financing the inventory and working capital acquired, although we sometimes acquire all the equity of a company. We, therefore, typically calculate our net purchase price of an acquisition as the value paid for the assets acquired, including intangible assets, less the amount of any liabilities assumed. Upon completion of an acquisition we generally refinance the equipment inventory acquired through our existing floorplan payable financing options.
The consent of CNH Industrial is required to acquire any CNH Industrial dealership. The consent of the group of banks led by Wells Fargo Bank, National Association (collectively referred to as "Wells Fargo") is required for the acquisition of dealerships meeting certain thresholds or other criteria defined in our Senior Secured Credit Facility, as amended and restated (the "Credit Agreement").

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We have completed the acquisition of 52 dealers, totaling 110 stores, since January 1, 2003. Of these acquisitions, 35 dealers consisting of 60 stores are included in the Agriculture segment, 13 dealers consisting of 40 stores are included in the Construction segment, and 3 dealers consisting of 10 stores are included in the International segment. See Item 2 for more information about our current store locations.
Integrate New Dealers into the Titan Operating Model
Upon consummation of each North American acquisition, we integrate acquired stores into our operations by implementing the Titan Operating Model to enhance each acquired store's performance within its target market. We generally complete integration of a store within 18 months, although it may take longer for acquired stores to fully realize the benefits of the Titan Operating Model. We believe the Titan Operating Model provides us with multiple points of customer contact, creates cross-selling opportunities, fosters strong customer relationships and supports a culture of individual accountability that increases our revenue and provides a strong platform for future growth.
Suppliers
CNH Industrial—Case IH Agriculture, Case Construction, New Holland Agriculture and New Holland Construction
We have a longstanding relationship with CNH Industrial and, according to CNH Industrial, 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. Thus, our relationship with CNH Industrial is more than a typical supply relationship; it is strategic for both our company and CNH Industrial. In that regard, it is in our mutual interests to maintain the longstanding strong relationship we share.
We have been an authorized dealer of Case agricultural equipment since our inception in 1980. We added the other CNH Industrial brands as Case grew, acquired other brands and merged with New Holland in 1999. In fiscal 2015, CNH Industrial supplied approximately 74% of the new equipment sold in our Agriculture segment, 65% of the new equipment sold in our Construction segment, and 74% of the new equipment sold in our International segment.
CNH Industrial is a global leader in the agricultural and construction equipment industries based on the number of units sold. In 2014, CNH Industrial generated $18.5 billion in revenue from their equipment operations. In addition, CNH Industrial provides financing and insurance products and services to its end-user customers and authorized dealers through its CNH Industrial Capital America, LLC ("CNH Industrial Capital") business unit. CNH Industrial is a publicly-traded company.
CNH Industrial is the world's second largest manufacturer of agricultural equipment. CNH Industrial owns and operates the Case IH Agriculture and New Holland Agriculture brands. Case IH Agriculture, recognized by the red color of its equipment, possesses over 170 years of farm equipment heritage. New Holland Agriculture, recognized by the blue color of its tractors and the yellow color of its harvesting and hay equipment, has over 110 years of farm equipment industry experience. CNH Industrial's agricultural equipment dealers are assigned authorized store locations but do not have exclusive territories.
CNH Industrial is one of the world's largest manufacturers of construction equipment in terms of market share, owning and operating the Case Construction and New Holland Construction brands. CNH Industrial's construction equipment dealers are assigned a specific geographic area of responsibility within which the dealers have the right to sell new Case Construction and New Holland Construction equipment.
Dealership Agreements
We have entered into separate dealership agreements with certain CNH Industrial entities to sell the Case IH Agriculture, New Holland Agriculture, Case Construction and New Holland Construction brands (collectively the “CNH Industrial Dealer Agreements”), as required to serve as a distributor for such entities.
The CNH Industrial Dealer Agreements assign to us a geographically defined area of principal responsibility, providing us with distribution and product support rights within the identified territory for specific equipment products of the manufacturer. Although the dealer appointment is non-exclusive, in each territory there is typically only one dealership responsible for retail sales to end-users, as well as after-sales product support of the equipment. If we sell certain Case construction equipment outside of our designated sales and service areas and do not perform the warranty work on such equipment, CNH Industrial has the right to require that we pay sales and service fees for purposes of compensating the dealer assigned to such territory. We are authorized to display and use CNH Industrial trademarks and trade names at our stores, with certain restrictions.
Under our CNH Industrial Dealer Agreements, we have both the right and obligation to sell the manufacturer’s equipment and related parts and products and provide customers with services. The CNH Industrial Dealer Agreements impose various requirements on us regarding the location and appearance of facilities, satisfactory levels of new equipment and parts

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inventories, the training of personnel, adequate business enterprise and information technology system, adequate working capital, minimum fixed charge coverage ratio, maximum adjusted debt to tangible net worth ratio, development of annual sales and marketing goals, and furnishing of monthly and annual financial information. We must obtain the approval or consent of CNH Industrial in the event of proposed fundamental changes to our ownership, governance or business structure (defined as "change in control" events) including among other things (i) a merger, consolidation or reorganization; (ii) a sale of all or substantially all of our assets; (iii) any transaction or series of transactions resulting in a person or affiliated group acquiring 20% or more of the combined voting power of our securities; (v) a substantial disposition of common shares by certain named executives; (vii) certain significant changes in the composition of the Board of Directors; (vi) replacement of certain named executive officers; and (vii) engaging in material business activities outside of the equipment sales and service industry. The CNH Industrial Dealer Agreements do not establish mandatory minimum or maximum retail pricing for our equipment sales or service/parts.
The CNH Industrial Dealer Agreements do not have a fixed term and remain in effect until either party exercises its termination rights under the agreement. The CNH Industrial entities have the right to terminate their dealer agreements with us immediately in certain circumstances, including in the event of our insolvency, bankruptcy or our material breach of provisions of the agreement, if a direct competitor of CNH Industrial (or an affiliated group of such competitor) acquires 20% or more of the combined voting power of our securities, the failure to secure the consent of CNH Industrial for change in control events, and in some cases, for any reason following 90 days written notice. In the event of termination of any of the CNH Industrial Dealer Agreements, CNH Industrial is obligated to repurchase the inventory of the CNH Industrial brand applicable to the agreement being terminated. The CNH Industrial Dealer Agreements generally do not include specific non-compete provisions that apply during or after the term of such agreements, although our form agreement with Case Construction does include limitations on our ability to sell competing products during the term of such agreement.
The dealership agreements and industry practices generally provide that payment on equipment and parts purchased from CNH Industrial entities is due within 30 days and is typically subject to floorplan payable financing. With respect to sales of equipment, payments from customers, which are typically financed by a third party, are due upon sale. Payments from customers for parts and services are due within 30 days. CNH Industrial makes available to us any floorplans, parts return programs, sales or incentive programs or similar plans or programs it offers to other dealers, and provides us with promotional items and marketing materials.
Other Suppliers
In addition to products supplied by CNH Industrial, we sell a variety of new equipment, parts and attachments supplied by other manufacturers. These products tend to address specialized niche markets and to complement the CNH Industrial products we sell by filling gaps in the CNH Industrial line of products. We believe our offering of products for specialized niche markets supports our goal of being a one-stop solution for equipment needs at each of our stores. Approximately 28% of our total new equipment sales in fiscal 2015 resulted from sales of products manufactured by companies other than CNH Industrial, with our single largest manufacturer other than CNH Industrial representing approximately 3% of our total new equipment sales. The terms of our arrangements with these other suppliers vary, but most of the dealership agreements contain termination provisions allowing the supplier to terminate the agreement after a specified notice period, which is typically 30 days. Payment and financing practices with these other suppliers are similar to those practices described above with respect to CNH Industrial entities.
Operating Segments, Products and Services
We operate our business in three reportable segments, Agriculture, Construction and International. Within each of our segments, we have four principal sources of revenue: new and used equipment sales, parts sales, repair and maintenance service, and equipment rental and other business activities. See Note 21 to our consolidated financial statements included elsewhere in this annual report for additional information regarding our segments.
Equipment Sales
We sell new agricultural and construction equipment manufactured under the CNH Industrial family of brands as well as equipment from a variety of other manufacturers. The used equipment we sell is primarily from inventory acquired through trade-ins from our customers and selective purchases. The agricultural equipment we sell and service includes application equipment and sprayers, combines and attachments, hay and forage equipment, planting and seeding equipment, precision farming technology, tillage equipment, and tractors. The construction equipment we sell and service includes articulated trucks, compact track loaders, compaction equipment, cranes, crawler dozers, excavators, forklifts, loader/backhoes, loader/tool carriers, motor graders, skid steer loaders, telehandlers and wheel loaders. We sell new and used equipment through our in-house retail sales force, which is organized by geography and operating segment. We also sell used equipment through our two outlet stores, which specialize in the sale of aged used equipment. We believe this organizational structure improves the

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effectiveness of our sales force, better serves our customers and helps us negotiate advantageous trade-in purchase terms. Equipment sales generate cross-selling opportunities for us by populating our markets with equipment we repair and maintain and for which we sell parts. Equipment revenue represented 73.6%, 77.4% and 80.3% of total revenue for the years ended January 31, 2015, 2014 and 2013, respectively.
Parts Sales
We sell a broad range of maintenance and replacement parts on equipment that we sell, as well as other types of equipment. We maintain an extensive in-house parts inventory to provide timely parts and repair and maintenance support to our customers. We generally are able to acquire out-of-stock parts directly from manufacturers within two business days. Our parts sales provide us with a relatively stable revenue stream that is less sensitive to economic cycles than our equipment sales. Parts revenue represented 14.2%, 12.4% and 11.0% of total revenue for the years ended January 31, 2015, 2014 and 2013, respectively.
Repair and Maintenance Services
We provide repair and maintenance services, including warranty repairs, for our customers' equipment. Each of our stores includes service bays staffed by trained service technicians. Our technicians are also available to make off-site repairs at the customers' locations. In addition, we provide proactive and comprehensive customer service by maintaining service histories for each piece of equipment owned by our customers, maintaining 24/7 service hours in times of peak service usage, providing on-site repair services, scheduling off-season maintenance activities with customers, notifying customers of periodic service requirements and providing training programs to customers to educate them as to standard maintenance requirements. At the time equipment is purchased, we also offer customers the option of purchasing extended warranty protection provided by our suppliers. Our after-market services have historically provided us with a high-margin, relatively stable source of revenue through changing economic cycles. Service revenue represented 7.8%, 6.7%, 5.8% of total revenue for the years ended January 31, 2015, 2014 and 2013, respectively.
Equipment Rental and Other Business Activities
We rent equipment to our customers, primarily in the Construction segment, on a short-term basis for periods ranging from a few days to a few months. We actively manage the size, quality, age and composition of our rental fleet and use our information technology systems to closely monitor and analyze customer demand and rate trends. We maintain the quality of our fleet through our on-site parts and services support and dispose of rental equipment through our retail sales force. Our rental activities create cross-selling opportunities for us in equipment sales. In addition, we provide ancillary equipment support activities such as equipment transportation, GPS signal subscriptions in connection with precision farming and reselling CNH Industrial Capital finance and insurance products. Rental and other revenue represented 4.4%, 3.5% and 2.9% of total revenue for the years ended January 31, 2015, 2014 and 2013, respectively.
Geographic Information
Revenue generated from external customers located in the U.S. totaled approximately $1.7 billion, $2.1 billion and $2.1 billion for the years ended January 31, 2015, 2014 and 2013, respectively. Revenue generated from external customers located outside of the United States is primarily included in our International segment, which totaled approximately $166.4 million, $145.9 million and $72.5 million for the years ended January 31, 2015, 2014 and 2013, respectively. As of January 31, 2015, 2014 and 2013, $209.4 million and $258.6 million and $235.5 million of our long-lived assets were held in the U.S. As of January 31, 2015, 2014 and 2013, $6.1 million and $7.3 million and $5.4 million of our long-lived assets were held in our European subsidiaries, respectively.
Customers
Our Agriculture customers vary from small, single machine owners to large farming operations, primarily in the states of Iowa, Minnesota, Nebraska, North Dakota and South Dakota. In fiscal 2015, no single customer accounted for more than 1.0% of our Agriculture revenue.
Our Construction customers include a wide range of construction contractors, public utilities, mining and energy companies, municipalities and maintenance contractors, primarily in the states of Arizona, Colorado, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, South Dakota, Wisconsin and Wyoming. They vary from small, single machine owners to large firms. In fiscal 2015, no single customer accounted for more than 1.0% of our Construction revenue.
Our International customers vary from small, single machine owners to large farming operations, primarily in the European countries of Bulgaria, Romania, Serbia and Ukraine. In fiscal 2015, there was no single customer for which the loss of such customer would have a significant impact on our International revenue.

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Our stores enable us to closely service local and regional customers. We believe the Titan Operating Model enables us to satisfy customer requirements and increase revenue through cross-selling opportunities presented by the various products and services that we offer. A significant portion of our U.S. customers finance their equipment purchases through CNH Industrial Capital.
Floorplan Payable Financing
We attempt to maintain at each store, or have readily available at other stores in our network, sufficient inventory to satisfy customer needs. Inventory levels fluctuate throughout the year and tend to increase before the primary sales seasons for agricultural equipment. The cost of financing our inventory is an important factor affecting our financial results.
CNH Industrial Capital
CNH Industrial Capital offers floorplan payable financing to CNH Industrial dealers to finance the purchase of inventory from CNH Industrial and for used equipment inventory purchased on trade-ins from our customers. CNH Industrial Capital provides this financing in part to enable dealers to carry representative inventories of equipment and encourage the purchase of goods by dealers in advance of seasonal retail demand. CNH Industrial Capital charges variable market rates of interest based on the prime rate on balances outstanding after any interest-free periods and receives a security interest in inventory and other assets. The interest-free periods, which CNH Industrial offers periodically in the form of additional incentives or special offers, typically average four months for new and used agriculture equipment and new construction equipment. CNH Industrial Capital also provides financing for used equipment accepted in trade, repossessed equipment and approved equipment from other suppliers, and receives a security interest in such equipment. As of January 31, 2015, we had a $450.0 million floorplan payable credit facility with CNH Industrial Capital.
Other Financing Sources for Equipment
As of January 31, 2015, we had a Credit Agreement with Wells Fargo, which includes a $350.0 million wholesale floorplan payable line of credit, a $225.0 million credit facility with Agricredit Acceptance LLC ("Agricredit"), and the U.S. dollar equivalent of $133.0 million in credit facilities related to its foreign subsidiaries to finance equipment inventory purchases. The Wells Fargo and Agricredit credit facilities were amended effective April 2015, which reduced the available borrowings to $275.0 million and $200.0 million, respectively.
In addition, financing also may be available through floorplan payable financing programs offered by other manufacturers and other suppliers from which we purchase equipment inventory, which may be financed by such suppliers themselves or through third party lenders.
Sales and Marketing
As part of the Titan Operating Model, we have centralized sales support and marketing management. All of our stores benefit from our centralized media buys, strategic planning, sales support and training. At the same time, however, we provide our store managers and their sales teams with flexibility to localize sales and marketing.
We currently market our products and services through:
our employee field marketers, who operate out of our network of local stores and call on customers in the markets surrounding each store;
parts managers and service managers, who provide our customers with comprehensive after-market support;
local and national advertising efforts, including broadcast, cable, print and web-based media; and
our remarketing division, which trades and sells used equipment through our outlet store and website.
Field Marketers
Our field marketers perform a variety of functions, such as servicing customers at our stores, calling on existing customers and soliciting new business at farming, construction and industrial sites. These field marketers target customers in specific areas, and we develop customized marketing programs for our sales force by analyzing each customer group for profitability, buying behavior and product selection. All members of our sales force are encouraged to participate in internal and external manufacturer-sponsored training sessions to develop product and application knowledge, sales techniques and financial acumen. Our sales force is supported by our corporate marketing department.

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Parts Managers and Service Managers
Our parts managers and service managers are involved in our uptime service efforts, taking advantage of our seasonal marketing campaigns in parts and service sales. As a group, they have won multiple awards from our suppliers for their efforts benefiting both our customers and our key strategic partners.
Print, Broadcast and Web-Based Advertising Campaigns
Each year we initiate several targeted direct mail, print and broadcast advertising and marketing campaigns. CNH Industrial and other suppliers periodically provide us with advertising funds, which we primarily use to promote new equipment, parts and financing programs. We will continue to explore and launch additional sales channels as appropriate, including, for example, new internet-based efforts.
Remarketing Division
Our remarketing division capitalizes on sales opportunities for aged used equipment transferred out of our retail stores. We have two outlet stores that sell used equipment. In addition, we are actively engaged in marketing equipment through our website.
Competition
The agricultural and construction equipment sales and distribution industries are highly competitive and fragmented, with large numbers of companies operating on a regional or local scale. Our competitors range from multi-location, regional operators to single-location, local dealers and include dealers and distributors of competing equipment brands, including Deere, Caterpillar and the AGCO brands, as well as other dealers and distributors of the CNH Industrial family of brands. Competition among equipment dealers, whether they offer agricultural or construction products or both, is primarily based on the price, value, reputation, quality and design of the products offered by the dealer, the customer service and repair and maintenance service provided by the dealer, the availability of equipment and parts, and the accessibility of stores. While we believe we compete favorably on each of the identified competitive factors, our sales and margins may be impacted depending on (i) the extent of aggressive pricing competition through manufacturer discount programs or other competitive pricing tactics, (ii) our ability to obtain higher service gross margins based on our service quality and reputation and (iii) our ability to attract new and maintain existing customers based on the availability and quality of the products we offer and our local relationships and reputation.
The number of agricultural and construction equipment dealers operating on a regional scale is limited and we are one of the principal regional-scale agricultural and construction equipment dealers in the U.S. The primary regional-scale equipment dealers with whom we compete in the U.S. include RDO Equipment Co., Butler Machinery, Ziegler Inc. and Brandt Holdings Co. RDO Equipment Co. is a Deere and Vermeer agricultural and construction equipment dealer with more than 70 dealerships in nine states, including North Dakota, South Dakota, Minnesota, Arizona and Montana. Butler Machinery is a Caterpillar construction and AGCO agriculture equipment dealer with 18 locations in North Dakota, South Dakota and Nebraska. Ziegler Inc. is a Caterpillar construction and AGCO agriculture equipment dealer with 26 locations in four states, including Minnesota, Iowa and Wisconsin. Brandt Holdings owns Deere, Vermeer and Bobcat construction and agricultural equipment dealers with 25 locations in eight states including Iowa, Minnesota, Nebraska, North Dakota, and South Dakota.
Information Technology Systems
Our enterprise resource planning ("ERP") system enables us to closely monitor our performance and actively manage our business on a consolidated and segment basis and includes features that were enhanced to support the Titan Operating Model, including detailed store-based financial reporting, inventory management and customer relationship management.
Through our ERP system we maintain a complete database of parts and equipment inventory and a centralized inventory control system for each segment. Our ERP system enables each store to access the available inventory of our other stores before ordering additional parts or equipment from our suppliers. We are also able to monitor inventory levels and mix at each store and make adjustments in accordance with our operating plan. Finally, our ERP system is externally connected to CNH Industrial, enabling us to locate CNH Industrial equipment and parts from various CNH Industrial depots.
Our customer relationship management ("CRM") system provides sales and customer information and other organizational tools to assist our sales force. We maintain an extensive customer database that allows us to monitor the status and maintenance history of our customers' equipment and enables us to more effectively provide parts and services to meet their needs. We also use our CRM system and customer database to monitor sales information and customer demand.
The data we store in our ERP and CRM systems is backed-up on a daily basis and stored at an off-site location. Thus, if these systems were to become inoperable, we would be able to continue operations through an off-site data center. Further,

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we own the software and hardware necessary to operate the ERP system and have employees trained to manage and maintain the software without reliance on external support.
Corporate Information
We were incorporated as a North Dakota corporation in 1980 and reincorporated in Delaware in December 2007 prior to our initial public offering. Our executive offices are located at 644 East Beaton Drive, West Fargo, ND 58078-2648. Our telephone number is (701) 356-0130. We maintain a web site at www.titanmachinery.com. All of our SEC filings are available on the Investor Relations page of our web site, or at www.sec.gov.
Intellectual Property
We have registered trademarks for certain names and designs used in our business and have trademark applications pending for certain others. We generally operate each of our stores under the Titan Machinery name. Case IH, Case and New Holland are registered trademarks of CNH Industrial, which we use in connection with advertisements and sales as authorized under our dealership agreements. We license trademarks and trade names of new equipment from other suppliers of equipment to us.
Product Warranties
Product warranties for new equipment and parts are provided by our suppliers. The term and scope of these warranties vary greatly by supplier and by product. At the time equipment is purchased, we also offer customers the option of purchasing extended warranty protection provided by our suppliers. Suppliers pay us for repairs we perform to equipment under warranty. We generally sell used equipment "as is" and without manufacturer's warranty, although manufacturers sometimes provide limited warranties if the supplier's original warranty is transferable and has not expired. We also offer extended warranty programs, through various third party warranty providers, on certain used equipment.
Seasonality & Weather
The agricultural and construction equipment businesses are highly seasonal, which causes our quarterly results and our available cash flow to fluctuate during the year. Our customers generally purchase and rent equipment in preparation for, or in conjunction with, their busy seasons, which for farmers are the spring planting and fall harvesting seasons, and for Construction customers is dependent on weather seasons in their respective regions, which is typically the second and third quarters of our fiscal year for much of our Construction footprint. Our parts and service revenues are typically highest during our customers' busy seasons as well, due to the increased use of their equipment during this time, which generates the need for more parts and service work. However, weather conditions impact the timing of our customers' busy times, which may cause our quarterly financial results to differ between fiscal years. In addition, the fourth quarter typically is a significant period for equipment sales in the U.S. because of our customers’ year-end tax planning considerations, the timing of dealer incentives and the increase in availability of funds from completed harvests and construction projects.
Seasonal weather trends, particularly severe wet or dry conditions, can have a significant impact on regional agricultural and construction market performance by affecting crop production and the ability to undertake construction projects. Weather conditions that adversely affect the agricultural or construction markets would have a negative effect on the demand for our products and services.
In addition, numerous external factors such as credit markets, commodity prices, and other circumstances may disrupt normal purchasing practices and buyer sentiment, further contributing to the seasonal fluctuations.
Employees
As of April 1, 2015, we employed 2,541 full-time and 241 part-time employees. Our employees are not covered by a collective bargaining agreement. We believe our relations with our employees are good.
Governmental Regulation
We are subject to numerous federal, state, and local rules and regulations, including regulations promulgated by the Environmental Protection Agency and similar state agencies, with respect to storing, shipping, disposing, discharging and manufacturing hazardous materials and hazardous and non-hazardous waste. These activities are associated with the repair and maintenance of equipment at our stores. Currently, none of our stores or operations exceeds small quantity generation status. Compliance with these rules and regulations has not had any material effect on our operations, nor do we expect it to in the future. Further, we have not made, and do not anticipate making, any material capital expenditures related to compliance with environmental regulations. However, there can be no assurance that these expectations are accurate, particularly if regulations

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change, unforeseen incidents occur or unknown past contamination or non-compliance is discovered, among other similar events.
ITEM 1A.    RISK FACTORS
We are substantially dependent upon CNH Industrial for the supply of our equipment and parts inventory.
The majority of our business involves the distribution and after-market parts and servicing of equipment manufactured by CNH Industrial. In fiscal 2015, CNH Industrial supplied approximately 74% of the new equipment sold in our Agriculture segment, 65% of the new equipment sold in our Construction segment, and 74% of the new equipment sold in our International segment, and supplied a significant portion of our parts inventory. Our financial performance and future success is highly dependent on the overall reputation and success of CNH Industrial in the agricultural and construction equipment manufacturing industries, including its ability to maintain its competitive position in product innovation, product quality, and product pricing. In the event that CNH Industrial decided to sell, or reduce its commitment to, its equipment manufacturing segments or if CNH Industrial would change its distribution system to our detriment, this would have a material adverse effect on our financial condition and results of operations.
Our ability to successfully compete in our markets is dependent on CNH Industrial providing financing programs for us and our customers, product promotions, and marketing support.
CNH Industrial provides to us the following programs:
Floorplan payable financing for the purchase of a substantial portion of our equipment inventory.
A significant percentage of the financing used by our customers to purchase CNH equipment from us.
Incentive programs and discount programs from time to time that enable us to price our products more competitively.
Promotional and marketing activities on national, regional and local levels.
Our financial performance will depend on CNH Industrial’s continued commitment to these programs which enable us to effectively compete in the market.
CNH Industrial may change or terminate our dealer agreements.
We have entered into dealer agreements with CNH Industrial under which we sell CNH Industrial’s branded agricultural and construction equipment, along with after-market parts and repair services. Subject to applicable state statutes that may govern the dealer-manufacturer legal relationship, CNH Industrial may terminate our dealer agreements immediately in certain circumstances and, in some cases, for any reason 90 days following written notice. If CNH Industrial were to terminate all or any of its dealer agreements with us, our business would be severely harmed.
Furthermore, CNH Industrial may unilaterally change the terms of its agreements with us to, among other things, change our sales and service areas, the product offerings, and pricing or delivery terms. Moreover, CNH Industrial may limit or decrease the availability of financing, warranty reimbursements, discounts and rebates, or other marketing incentives. If CNH Industrial were to change the terms of our dealer agreements or its operating practices in a manner that adversely affects us, our business would be harmed.
Our dealer agreements with CNH Industrial impose obligations and restrictions on us.
Under our dealer agreements with CNH Industrial, we are obligated to actively promote the sale of CNH Industrial equipment within our designated geographic areas of responsibility, fulfill the warranty obligations of CNH Industrial, maintain adequate facilities and workforce to service the needs of our customers, maintain sufficient parts inventory to service the needs of our customers, maintain inventory in proportion to the sales potential in each sales and service geographic area of responsibility, maintain adequate working capital, and maintain stores only in authorized locations.
Consent of CNH Industrial is required for fundamental changes in our ownership, governance or business structure, including the acquisition by another party of 20% or more of our outstanding stock. This requirement may have the effect of discouraging a sale or other change in control of the company, including transactions that our stockholders might deem to be in their best interests.
The acquisition of additional CNH Industrial geographic areas of responsibility and store locations in our Agriculture, Construction and International segments requires the consent of CNH Industrial under our dealer agreements. We can give no assurance that CNH Industrial will consent to any of the acquisitions of dealerships that we may desire to make in the future.

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Our agricultural equipment sales are affected by numerous market factors outside of our control.
Cyclicality is a common feature in farmers’ capital expenditures. Increased capital investments typically occur during boom cycles spurred by high farm profits and increased farm wealth driven by increased farmland values. Farmers’ capital expenditures are also affected by borrowing costs, with expenditures accelerated by low interest rates.
Net farm income is subject to numerous external factors such as commodity prices, input costs, production yields, animal diseases and crop pests, federal crop insurance and subsidy programs, and limits on agricultural exports/imports. Net farm income also impacts farmland values, which causes overall farm wealth to increase or decrease, impacting farmers’ sentiment to make investments in equipment. The nature of the agricultural equipment industry is such that a downturn in demand can occur suddenly, resulting in declining revenues, reduced profit margins, excess equipment inventories, and increased interest expenses. These downturns may be prolonged and during these periods our revenues and profitability could be harmed.
Our construction equipment sales are affected by numerous market factors outside of our control.
Our construction equipment customers primarily operate in the mining, natural resource development, construction, transportation, manufacturing, industrial processing and utilities industries, which industries generally are capital intensive and cyclical in nature. Many of our construction equipment customers are directly and indirectly affected by fluctuations in commodity prices in the agriculture, forestry, metals and minerals, petroleum and natural gas industries. The recent significant drop in the price of oil, as well as the price declines of other natural resource commodities, may cause reduced activity in these sectors, which will result in decreased demand for our products and services by our customers operating in these industries.
Furthermore, customer demand for our products and services may be affected by economic conditions at both a global and a local level. Economic conditions that negatively affect the construction industry, such as the tightening of credit standards which affect the ability of consumers to obtain financing, could reduce our customers' demand for our construction equipment. The construction industry in certain of our geographical areas has experienced a prolonged economic down cycle as a result of certain local and general economic drivers, which negatively impacts sales of construction equipment in those markets. Reduced demand for our construction equipment could negatively affect our financial performance and cash flow.
Our customers’ ability to obtain affordable financing is an important factor in their purchasing decisions, and directly affects our business.
The ability to finance affordable purchases is an important part of a customer's decision to purchase agricultural or construction equipment. Tight credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets have the potential to adversely affect available credit for our customers. As net farm income has decreased in recent years, the borrowing capacity of our farmer customers may have also decreased. Moreover, in a tighter credit environment, agricultural lenders may discourage their farmer customers from making non-essential capital expenditures.
Interest rate increases may make equipment purchases less affordable for customers and, as a result, our revenue and profitability may decrease as we manage excess inventory and reduce prices for equipment. Conversely, any decrease in interest rates may positively affect a customer's decision to purchase agricultural or construction equipment. We are unable to anticipate the timing and impact of interest rate adjustments.
Changes in tax incentives may reduce demand for agricultural and construction equipment and cause our revenue to decline.
Our customers in the agriculture and construction segments have benefited in recent years from Internal Revenue Code Section 168(k) accelerated depreciation, known as “bonus depreciation”, and enhanced Internal Revenue Code Section 179 expensing rules. Absent new federal legislation, these tax incentives are eliminated for calendar year 2015. Our customers may reduce their purchases from us as a result of these tax law changes.
Adverse changes in governmental policies may reduce demand for agricultural and construction equipment and cause our revenue to decline.
Changes in governmental agricultural policy could adversely affect sales of agricultural equipment. Government programs and subsidies that reduce economic volatility and enhance farm income positively influence farmers' demand for agricultural equipment. Future farm bills and U.S. Department of Agriculture ("USDA") budgets may reduce the benefit of these programs. To the extent that future funding or farm programs available to individual farmers are reduced, these changes could reduce demand for agricultural equipment and we could experience a decline in revenue. Changes in government spending on infrastructure projects could adversely affect the demand for construction equipment and we could experience a decline in revenue.

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Our sales and profit margins may also be negatively affected by the final Tier 4B clean diesel emissions standards, which are now in effect. Tier 4 refers to a generation of federal air emissions standards established by the U.S. Environmental Protection Agency (“EPA”) that apply to new diesel engines used in off-road equipment. To satisfy these standards, manufacturers must introduce new cleaner diesel engines which will increase the manufacturing costs of the equipment. To the extent that our suppliers pass on these additional costs to its dealers, as expected, we will pay more for our equipment inventory. We may not be able to pass on these price increases to our customers and maintain our desired margins.
Our financial performance is affected by general industry-wide supply levels of inventory, over which we have no control.
Over-production by one or more manufacturers, or a sudden reduction in demand, can dramatically disrupt the market and cause downward pressure on our equipment profit margins. Short-term lease programs in the agriculture industry and rental companies in the construction industry have expanded significantly in North America in recent years. When this equipment comes off lease or rental fleet is sold, there may be a significant increase in the availability of late-model used equipment, which can worsen the over-supply condition and put added pressure on our equipment sales and margins, and have an adverse effect on residual values for our rental equipment and used equipment.
Conversely, in times of heightened global demand for equipment, which is often driven by external economic and market factors, equipment suppliers may experience difficulty providing all dealerships a reliable supply of new equipment. If our primary supplier, CNH Industrial, cannot supply us with the necessary inventory in response to such demand, then our market share and financial results will suffer.
Our financial performance is dependent on our ability to effectively manage new and used equipment and parts inventories.
Our agricultural and construction equipment dealership network requires substantial inventories of equipment and parts to be maintained at each store to facilitate sales to customers on a timely basis. Our equipment inventory has traditionally represented 50% or more of our total assets. We need to maintain a proper balance of new and used equipment to assure satisfactory inventory turnover and to minimize floorplan financing costs.
Our purchases of new equipment and parts are based in large part on projected demand. Our equipment orders from CNH Industrial typically must be slotted months in advance of actual delivery. If actual sales are materially less than our forecasts, we would experience an over-supply of new equipment inventory. An over-supply of new equipment inventory will generally cause downward pressure on our product sale prices and margins, decrease our inventory turns, and increase our floorplan financing expenses.
Our used equipment is generally acquired as “trade-ins” from customers in connection with equipment sales. In accordance with generally accepted accounting principles, each item of our used equipment inventory is valued at the lower of cost or market. In a down market, our used equipment may not have the value that we attributed to it at the time of the trade and periodic adjustments to those values would be required in accordance with the lower of cost or market accounting principles. The amount of these write-downs of inventory would be included in our cost of goods sold, and reduce our operating income. There can be no assurances that our estimates of market value for our used equipment will prove to be accurate, given the potential for sudden change in market conditions and other factors beyond our control. Further, pricing for and sales of used equipment can be significantly affected by the limited market for certain equipment.
Our international operations expose us to additional risks.
We are currently operating dealership locations in Bulgaria, Romania, Serbia and Ukraine, and also engage in export business to other countries. In fiscal 2015, total International segment revenues were approximately 8.8% of our consolidated total revenue. As of January 31, 2015, total International segment assets were approximately 11.5% of our consolidated total assets.
Our operations in international markets subject us to risks related to the differing legal, political, social and regulatory environments and economic conditions present in the countries in which we operate. Risks inherent in our international operations include:
difficulties in implementing our business model in foreign markets;
costs and diversion of domestic management attention related to oversight of international operations;
unexpected adverse changes in export duties, quotas and tariffs and difficulties in obtaining import licenses;
unexpected adverse changes in foreign laws or regulatory requirements;
compliance with a variety of tax regulations, foreign laws and regulations which may be burdensome;

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compliance with the Foreign Corrupt Practices Act and other U.S. laws that apply to the international operations of U.S. companies which may be difficult and costly to implement and monitor and which, if violated, may result in substantial financial and reputation harm;
fluctuations in foreign currency exchange rates to which we are exposed may adversely affect the results of our operations, the value of our foreign assets and liabilities and our cash flows;
political or economic changes or instability.
These factors, in addition to others that we have not anticipated, may negatively impact our financial condition and results of operations.
The current political and economic instability in Ukraine could create short-term and long-term disruption in our Ukrainian operations. The current instability is causing liquidity problems for certain of our customers which may result in credit losses on our outstanding receivable balances or cause our customers to delay or reduce their purchases of our products and services. Such reduced purchasing by our customers is causing our inventory levels to be higher than expected, contributing to increased carrying costs and reducing our return on assets. In addition, the current instability may affect our ability to secure new, or to continue existing, working capital loans at desired levels or cause such indebtedness to become more expensive. A reduction in borrowing capacity, absent associated reductions in inventory, could require us to make additional capital contributions to our Ukraine operations. Continued political and economic instability could also cause the Ukrainian government to impose additional currency exchange controls or to otherwise restrict our ability to recover and repatriate our investment in our Ukrainian subsidiary. The stabilization of Ukraine’s economy and political structure will depend in large part on the assistance of the international community, which assistance cannot be assured. Absent this stabilization, our ability to profitably transact business in Ukraine could be adversely affected. Our operations in Ukraine are subject to the risks of further devaluation of the local currency, increased interest rates, and increased inflation.
Floorplan financing for our equipment inventory may not be available on favorable terms, which would adversely affect our growth and results of operations.
We generally purchase our equipment with the assistance of floorplan payable financing programs through CNH Industrial Capital and other credit facilities. In the event that our available financing sources are insufficient to satisfy our future requirements, we would be required to obtain financing from other sources. We may not be able to obtain this additional or alternative financing on commercially reasonable terms or at all. To the extent that this financing cannot be obtained or obtained on commercially reasonable terms or at all, our growth and results of operations would be adversely affected.
Our level of indebtedness could limit our financial and operational flexibility.
As of January 31, 2015, our indebtedness included floorplan payable financing, long-term debt, and senior convertible notes. In addition, we have obligations under our long-term real estate lease agreements for our store locations and corporate headquarters.
Our level of indebtedness could have important consequences. For example, it could:
increase our vulnerability to general adverse economic and industry conditions;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes.
We expect to use cash flow from operations and borrowings under our credit facilities to fund our operations, debt service and capital expenditures. However, our ability to make these payments depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control.
The credit agreements governing our indebtedness restrict our ability to engage in certain corporate and financial transactions, and require us to satisfy financial covenants.
The credit agreements governing our indebtedness contain certain covenants that, among other things, restrict our ability to:
incur more debt;
make investments;
create liens;

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merge or consolidate;
transfer and sell assets;
pay dividends;
repurchase shares of stock.
Under our credit facilities, we are required to satisfy certain financial covenants on an ongoing basis, measured at the end of each fiscal quarter. The primary financial covenants which we are subject to include: a maximum net leverage ratio, minimum fixed charge coverage ratio, and minimum consolidated income before income taxes. Our ability to borrow under the credit agreements depends upon compliance with the financial covenants.
Consent of our lenders is required for fundamental changes in our ownership, governance or business structure, including the acquisition by another party of 20% or more of our outstanding stock (under the CNH Industrial Capital credit facility) and 35% or more of our outstanding stock (under the Wells Fargo Credit Agreement). This requirement may have the effect of discouraging a sale or other change in control of the company, including transactions that our stockholders might deem to be in their best interests.
Our failure to satisfy any covenant, absent a waiver or amendment, would cause us to be in default under our credit facilities and would enable our lenders to accelerate payment of the outstanding indebtedness. Moreover, an event of default accompanied by a demand for accelerated payment under any of our credit facilities would also constitute a default under our Senior Convertible Notes. Each of our indebtedness agreements include cross-default provisions which state that certain types of defaults under any other indebtedness agreement will also constitute a default under that credit agreement. If an event of default occurred, and the lender demanded accelerated payment, we may not be able to satisfy such a pay-off request, whether through internal funds or a new financing.
Our variable rate indebtedness exposes us to interest rate risk.
A substantial portion of our borrowings, including the credit facilities with CNH Industrial Capital, Wells Fargo and Agricredit, are at variable rates of interest and expose us to interest rate risk. As such, our results of operations are sensitive to movements in interest rates. There are many economic factors outside our control that have in the past and may, in the future, impact rates of interest including publicly announced indices that underlie the interest obligations related to a certain portion of our debt. Factors that impact interest rates include governmental monetary policies, inflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets. Such increases in interest rates could have a material adverse effect on our financial conditions and results of operations.
The agricultural and construction equipment industries are highly seasonal, which can cause significant fluctuations in our results of operations and cash flow.
The agricultural and construction equipment businesses are highly seasonal, which causes our quarterly results to fluctuate during the year. Farmers generally purchase agricultural equipment and service work in preparation for, or in conjunction with, the spring planting and fall harvesting seasons. Construction equipment customers’ purchases of equipment and service work, as well as rental of equipment, are also seasonal in our stores located in colder climates where construction work slows significantly in the winter months. In addition, the fourth quarter typically is a significant period for equipment sales in the U.S. because of our customers’ year-end tax planning considerations, the timing of dealer incentives and the increase in availability of farmers’ funds from completed harvests and construction customers' funds from completed projects. Also, numerous external factors such as credit markets, commodity prices, weather conditions, and other circumstances may disrupt normal purchasing practices and customers’ sentiment, further contributing to the seasonal fluctuations.
Weather conditions may negatively impact the agricultural and construction equipment markets and affect our financial results.
Weather conditions, particularly severe floods and droughts, can have a significant adverse effect on regional agricultural and construction markets. Accordingly, our financial condition and results of operations may be adversely affected by adverse weather conditions.
Our rental operations subject us to risks including increased maintenance costs if our rental fleet ages, increased costs of new replacement equipment we use in our fleet, and losses upon disposition of rental fleet units.
Our rental fleet margins are materially impacted by utilization of fleet assets, which is seasonal and can fluctuate materially due to weather and economic factors. If our rental equipment ages, the costs of maintaining that equipment, if not replaced within a certain period of time, will likely increase. The cost of new equipment for use in our rental fleet could also increase due to increased material costs for our suppliers or other factors beyond our control. Furthermore, changes in customer

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demand could cause certain of our existing equipment to become obsolete and require us to purchase new equipment at increased costs.
We include in operating income the difference between the sales price and the depreciated value of an item of rental equipment sold. The value of any given piece of rental equipment could be less than its depreciated value at the time it is sold. The market value of used rental equipment depends on several factors, including:
market prices for like new equipment;
wear and tear on the equipment;
time of year that the equipment is sold;
the supply of used equipment on the market; and
general economic conditions.
Any significant decline in the selling prices for used rental equipment, or increased costs resulting from our rental operations, could have a material adverse effect on our results of operation and cash flow.
Our business is highly competitive.
The agricultural and construction equipment distribution and rental industries are highly competitive and fragmented, with large numbers of companies operating on a regional or local basis. Historically, our competitors have competed aggressively on the basis of pricing or inventory availability, resulting in decreased margins on our sales to the extent we choose to match our competitors' pricing. To the extent we choose not to match or remain within a reasonable competitive distance from our competitors' pricing, we may lose sales volume. In addition, to the extent CNH Industrial's competitors provide their dealers with more innovative or higher quality products, better customer financing, or have more effective marketing programs, our ability to compete and our results of operations could be adversely affected.
If our acquisition plans are unsuccessful, we may not achieve our planned revenue growth.
Our ability to continue to grow through the acquisition of additional CNH Industrial geographic areas of responsibility and store locations or other businesses will be dependent upon the availability of suitable acquisition candidates at acceptable costs, our ability to compete effectively for available acquisition candidates and the availability of capital to complete the acquisitions. We may not successfully identify suitable targets, or if we do, we may not be able to close the transactions, or if we close the transactions, they may not be profitable. In addition, CNH Industrial's consent is required for the acquisition of any CNH Industrial dealership, and the consent of our lenders may be required for certain acquisitions. CNH Industrial typically evaluates management, dealer concentration, and performance and capitalization of a prospective acquirer in determining whether to consent to the sale of a CNH Industrial dealership. There can be no assurance that CNH Industrial or our lenders will consent to any or all acquisitions of dealerships that we may propose.
Our acquisitions may not be successful.
There are risks associated with acquisitions of new dealerships. These risks include incurring significantly higher than anticipated capital expenditures and operating expenses; failing to assimilate the operations and personnel of the acquired dealerships; disrupting our ongoing business; dissipating our management resources; failing to maintain uniform standards, controls and policies; and impairing relationships with employees and customers as a result of changes in management. To the extent we do not successfully avoid or overcome the risks or problems related to acquisitions, our results of operations and financial condition could be adversely affected. Future acquisitions also will have a significant impact on our financial position and capital needs, and could cause substantial fluctuations in our quarterly and yearly results of operations. Acquisitions could include significant goodwill and intangible assets, which may result in future impairment charges that would reduce our stated earnings.
We are exposed to customer credit risks.
We extend credit to our customers for parts and service work in the U.S., and also for some equipment sales in our international operations. If we are unable to manage credit risk issues adequately, or if a large number of customers should have financial difficulties at the same time, our credit losses could increase above historical levels and our operating results would be adversely affected. Delinquencies and credit losses generally would be expected to increase if there was a worsening of economic conditions.

17


Our business success depends on attracting and retaining qualified personnel.
Our success depends in part on the efforts and abilities of our management team and key employees, including the managers of our stores country managers in our International operations. The failure to attract and retain members of our management team and key employees will harm us.
Our outstanding Senior Convertible Notes may cause dilution to our existing stockholders and may negatively affect our financial position and liquidity.
On April 24, 2012, we issued $150 million aggregate principal amount of 3.75% Senior Convertible Notes due May 2019 (the "Senior Convertible Notes") pursuant to an indenture between the Company and Wells Fargo Bank, National Association (the "Indenture"). The Senior Convertible Notes are convertible into common stock at the option of the holders under certain conditions. Upon conversion, we will pay cash up to the aggregate principal amount of converted notes and pay or deliver, as the case may be, cash, shares of our common stock or a combination thereof, at our election, for any conversion obligation in excess thereof. Additionally, in the event of a fundamental change, as defined in the Indenture, the holders of the Senior Convertible Notes may require us to purchase all or a portion of their notes for cash at a purchase price equal to 100% of the principal amount of notes to be purchased, plus accrued and unpaid interest.
The Indenture provides for customary events of default, including, but not limited to, cross acceleration to certain other indebtedness of us and our subsidiaries. In the case of an event of default, all outstanding Senior Convertible Notes may become due and payable immediately without further action or notice.
If we issue shares of our common stock to satisfy conversion obligations under the Senior Convertible Notes, our existing stockholders will experience dilution of their holdings of our stock. Repayment of the principal amount of the Senior Convertible Notes in cash and, if applicable, satisfaction of our conversion obligations in cash may have a significant negative effect on our available capital resources and liquidity which may require us to borrow additional amounts pursuant to terms that are not favorable to us.
In addition, even if holders do not elect to convert their Senior Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal balance of the Senior Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
Selling and renting agricultural and construction equipment, selling parts, and providing repair services subject us to liability risks that could adversely affect our financial condition and reputation.
Products sold, rented or serviced by us may expose us to potential liabilities for personal injury or property damage claims relating to the use of such products. Our product liability insurance may not be adequate to cover product liability claims. Such insurance may not continue to be available on economically reasonable terms. An uninsured or partially insured claim for which indemnification is not provided could have a material adverse effect on our financial condition. Furthermore, if any significant claims are made against us or against CNH Industrial or any of our other suppliers, our business may be adversely affected by any resulting negative publicity.
Our internal control over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to its effectiveness, which could have a significant and adverse effect on our business and reputation.
We are required to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and rules and regulations of the SEC thereunder. If we fail to maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any remedial actions or their impact on our operations. If we are not able to comply with the requirements of Section 404, our independent registered public accounting firm may not be able to certify as to the effectiveness of our internal control over financial reporting, we may be unable to report our financial results accurately or in a timely manner and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
Any disruption to or failure of our information systems may negatively affect our ability to monitor and control our operations.
Our business processes, including marketing of equipment and support services, inventory and logistics, and finance largely depend upon the integrity of our information systems. We use an integrated business system for dealers in the construction or agriculture equipment business. Any disruptions to our information systems or the failure of such systems to

18


operate as expected may adversely affect our operating results by limiting our ability to effectively monitor and control our operations.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations and the services we provide to customers, and damage our reputation, and cause a loss of confidence in our products and services, which could adversely affect our business/operating margins, revenues and competitive position.
Failure to comply with applicable laws and regulations could harm our business and financial results.
Our policies and procedures are designed to comply with all applicable laws, accounting and reporting requirements, tax rules and other regulations and requirements, including those imposed by the SEC, NASDAQ, and foreign countries, as well as applicable trade, labor, healthcare, privacy, anti-bribery and corruption and merchandise laws. The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to additional or changing legal and regulatory requirements, our ongoing expansion into new markets and new channels, and the fact that foreign laws occasionally conflict with domestic laws. In addition to potential damage to our reputation and brand, failure to comply with the various laws and regulations as well as changes in laws and regulations or the manner in which they are interpreted or applied, may result in litigation, civil and criminal liability, damages, fines and penalties, increased cost of regulatory compliance and restatements of our financial statements.
ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.
ITEM 2.    PROPERTIES
Equipment Stores
As of April 2015, we operate 108 agricultural and construction equipment stores in the United States and Europe, including two outlet stores, in the following locations. This store count and listing excludes the three Agriculture stores and one Construction store closed in March 2015. Certain stores (those designated with an *) are included in the Agriculture segment but also sell some construction equipment.

19


Agriculture Segment (65 in United States)
North Dakota (14 stores)
 
Minnesota (14 stores, including 1 outlet)
 
Iowa (13 stores, including 1 outlet)
Arthur
Lidgerwood
 
Ada
Moorhead
 
Anthon
Kingsley
Casselton
Lisbon
 
Albert Lea*
Moorhead (outlet)
 
Avoca
Le Mars
Grand Forks*
Mandan*
 
Crookston*
Pipestone
 
Blairstown
Pella
Jamestown
Mayville
 
Elbow Lake
Redwood Falls
 
Center Point*
Sioux City (outlet)
Kintyre
Wahpeton (2 stores)
 
Fergus Falls
Roseau
 
Cherokee
Waverly
Kulm
Wishek
 
Graceville
Thief River Falls
 
Greenfield
Williams
Lamoure
 
 
Marshall*
Winger
 
Grundy Center
 
South Dakota (11 stores)
 
Nebraska (13 stores)
 
 
Aberdeen (2 stores)*
Pierre*
 
Broken Bow
Lexington*
 
 
 
Highmore
Platte
 
Fremont
McCook
 
 
 
Huron
Redfield
 
Grand Island*
North Platte*
 
 
 
Milbank
Sioux Falls*
 
Hastings
Ord
 
 
 
Miller
Watertown
 
Holdrege
Wahoo
 
 
 
 
 
 
Imperial
Wayne
 
 
 
 
 
 
Kearney*
 
 
 
 
Construction Segment (27 in United States)
North Dakota (6 stores)
 
Montana (3 stores)
 
Minnesota (3 stores)
Bismarck
Minot
 
Billings
Missoula
 
Duluth
Shakopee
Dickinson
Williston
 
Great Falls

 
Rogers
 
Fargo (2 stores)
 
 
 
 
 
 
 
Colorado (3 stores)
 
Iowa (3 stores)
 
Nebraska (2 stores)
Colorado Springs
Windsor
 
Davenport
Sioux City
 
Lincoln
Omaha
Denver

 
Des Moines
 
 
 
 
South Dakota (2 stores)
 
Arizona (2 stores)
 
Wyoming (1 store)
Rapid City
Sioux Falls
 
Phoenix
Tucson
 
Gillette

New Mexico (1 store)
 
Wisconsin (1 store)
 
 
 
Albuquerque
 
 
La Crosse
 
 
 
 
International Segment (16 in Europe)
Europe (16 stores)
 
 
 
Burgas, Bulgaria
Cluj Napoca, Romania
 
 
 
Dobrich, Bulgaria
Constanta, Romania
 
 
 
Montana, Bulgaria
Oradea, Romania
 
 
 
Pleven, Bulgaria
Roman, Romania
 
 
 
Ruse, Bulgaria
Timisoara, Romania
 
 
 
Sofia, Bulgaria
Novi Sad, Serbia
 
 
 
Stara Zagora, Bulgaria
Kiev, Ukraine
 
 
 
Bucharest, Romania
Vinnitsa, Ukraine
 
 
 
Our Agriculture stores are generally located in rural areas on property zoned for commercial use and typically range from 10,000 to 60,000 square feet with three to 20 acres of land. Our Construction stores are generally located within city limits in designated industrial parks or areas of similar use and typically range from 10,000 to 25,000 square feet with three to ten acres of land. Our International stores generally range from 2,000 to 20,000 square feet with 1 to 15 acres of land. We fully

20


utilize the leased space for each of our stores and believe the respective square footage and related acreage is adequate to meet our current and anticipated needs.
Store Lease Arrangements
As of January 31, 2015, we leased 141 buildings under operating lease agreements which expire at various dates through January 2030. We do not intend to own significant amounts of real estate. Therefore, we anticipate that when we need real estate, including as part of acquiring dealerships, we will lease such real estate from third parties, which may include affiliates of our investors, directors or management. We intend for the terms of all of our leases to be commercially reasonable.
Our store lease agreements contain lease periods primarily ranging from automatically renewable month-to-month terms to 15 years in length. Certain of the lease agreements contain terms such as an option to purchase the property at fair value, renew or extend the lease for an additional period at the conclusion of the original lease term or automatically renew the lease term at the conclusion of the original lease period on a month-to-month or year-to-year basis. A majority of the leases provide for fixed monthly rental payments and require us to pay the real estate taxes on the properties for the lease periods. All of the leases require that we maintain public liability and personal property insurance on each of the leased premises, and a majority of the leases require us to indemnify the lessor in connection with any claims arising from the leased premises during our occupation of the property. Most of the leases prohibit us from assigning the lease agreements or subletting the leased premises without the prior written consent of the lessor. In most of our leases, we have been granted a right of first refusal or other options to purchase the property.
As part of our due diligence review prior to a dealership acquisition, we evaluate the adequacy, suitability and condition of the related real estate. Our evaluation typically includes a Phase I environmental study, and if deemed necessary, a Phase II environmental study, of the real property to determine whether there are any environmental concerns. If any environmental concerns exist, we generally require that such concerns be addressed prior to acquisition of the dealership.
We leased one store property pursuant to an operating lease from C.I. Farm Power, Inc., a company affiliated with Peter Christianson, our President and Director, during each of the years ended January 31, 2015, 2014 and 2013. The lease expires on July 31, 2018, subject to the right of either party to terminate upon 60 days' written notice, We also lease buildings from Dealer Sites, LLC ("Dealer Sites"), an entity in which a minority position is owned by an entity affiliated with David Meyer, the Company's Board Chair and Chief Executive Officer, Peter Christianson, the Company's President and a director, and certain other Christianson family members. An entity affiliated with Tony Christianson, one of the Company's directors, formerly held a minority interest in Dealer Sites, LLC until December, 2012. During the year ended January 31, 2013, Dealer Sites was deemed to be a related party, however, as of January 31, 2013 and through the year ended January 31, 2015, Dealer Sites was not deemed to be a related party as total related party ownership in the entity was less than 10%. The Company leased 48 buildings pursuant to different operating lease agreements with Dealer Sites, LLC ("Dealer Sites") as of January 31, 2013.
Headquarters
We currently lease and occupy approximately 48,000 square feet in West Fargo, North Dakota for our headquarters, which lease expires on January 31, 2028. We continually review our location needs, including the adequacy of our headquarters space, to ensure our space is sufficient to support our operations. We believe there is ample opportunity for expansion in the West Fargo area if necessary.
ITEM 3.    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. Management believes the resolution of other legal matters will not have a material effect on our financial condition, results of operation or cash flow, although no assurance can be given with respect to the ultimate outcome of any such actions. Furthermore, there can be no assurance that our insurance will be adequate to cover all liabilities that may arise out of claims brought against us. We are not currently a party to any material litigation.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.

21


EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of our executive officers are as follows:
Name
 
Age
 
Position
David Meyer
 
61
 
Board Chair and Chief Executive Officer
Peter Christianson
 
58
 
President and Director
Mark Kalvoda
 
43
 
Chief Financial Officer
David Meyer is our Board Chair and Chief Executive Officer. Mr. Meyer worked for JI Case Company in 1975. From 1976 to 1980, Mr. Meyer was a partner in a Case/New Holland Dealership with locations in Lisbon, North Dakota and Wahpeton, North Dakota. In 1980, Mr. Meyer, along with a partner, founded Titan Machinery Inc. Mr. Meyer has served on both the Case CE and CaseIH Agriculture Dealer Advisory Boards. Mr. Meyer is the past chairman and current board member of the North Dakota Implement Dealers Association, and currently serves as a Trustee on the University of Minnesota Foundation.
Peter Christianson has been our President and a director since January 2003. Currently, Mr. Christianson is leading Titan Machinery in International Operations. From April 2011 to July 2013, Mr. Christianson was the Chief Operating Officer of Titan Machinery Inc and was the Chief Financial Officer from August 2007 to April 2011. Prior to joining Titan Machinery and since 1988, he was a partner and owner of C.I. Farm Power, Inc., the operator of two of the dealership locations acquired by Titan Machinery in 2002. Peter Christianson and Tony Christianson, one of our directors, are brothers.
Mark Kalvoda became our Chief Financial Officer in April 2011 and previously served as our Chief Accounting Officer since September 2007. Prior to joining us, he held various positions between 2004 and 2007 at American Crystal Sugar Co., including Corporate Controller, Assistant Secretary and Assistant Treasurer. Prior to working for American Crystal Sugar Co., he served in various financial positions within Hormel Foods Corporation.

22


PART II
ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock began trading on December 6, 2007 on the Nasdaq Global Market under the symbol "TITN" in connection with our initial public offering and began trading on the Nasdaq Global Select Market in January 2009. The following table sets forth, for the periods indicated, the high and low sale prices of our common stock as reported by the Nasdaq Global Select Market.
 
High
 
Low
Fiscal 2015
 
 
 
First Quarter
$
20.40

 
$
14.57

Second Quarter
18.25

 
14.51

Third Quarter
14.98

 
11.85

Fourth Quarter
15.45

 
10.69

Fiscal 2014
 
 
 
First Quarter
$
32.00

 
$
20.60

Second Quarter
24.00

 
18.68

Third Quarter
19.64

 
15.75

Fourth Quarter
18.96

 
14.19

As of March 31, 2015, there were approximately 952 record holders of our common stock, excluding holders whose stock is held either in nominee name and/or street name brokerage accounts.
DIVIDENDS
We have not historically paid any dividends on our common stock and do not expect to pay cash dividends on our common stock in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, outstanding indebtedness and plans for expansion and restrictions imposed by lenders, if any. Currently, our Credit Agreement with Wells Fargo restricts our ability to make certain cash payments, including cash dividends, except that we are permitted to pay cash dividends in an amount not to exceed 50% of consolidated net income for the then trailing four quarters, so long as no default or event of default exists prior to or immediately following such action or otherwise results from such action.
UNREGISTERED SALES OF EQUITY SECURITIES
We did not have any unregistered sales of equity securities during the fiscal quarter ended January 31, 2015.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
For information on our equity compensation plans, refer to Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."
REPURCHASES
We did not engage in any repurchases of our Common Stock during the fiscal quarter ended January 31, 2015.

23


STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return for the last trading day of our last five fiscal years on a $100 investment (assuming dividend reinvestment) on January 31, 2008, the last trading day before our fifth preceding fiscal year, in each of our Common Stock, the Russell 2000 Stock Index and the S&P Retailing Group Index.
 
January 31,
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
Titan Machinery Inc.
$
100.00

 
$
219.87

 
$
224.50

 
$
262.34

 
$
147.91

 
$
128.22

Russell 2000 Index
100.00

 
129.77

 
131.69

 
149.84

 
187.84

 
193.57

S&P 500 Retail Index
100.00

 
125.29

 
139.50

 
175.64

 
218.28

 
259.21

ITEM 6.    SELECTED FINANCIAL DATA
The data given below, excluding the store count data, as of and for each of the five years in the period ended January 31, 2015, has been derived from our Audited Consolidated Financial Statements. In order to understand the effect of accounting policies and material uncertainties that could affect our presentation of financial information, such data should be read in conjunction with our Consolidated Financial Statements and Notes thereto included under Item 8 to this Form 10-K and in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operation included under Item 7 to this Form 10-K.
We have a history of growth through acquisitions, which have had a significant impact on the comparability of our statement of operations and balance sheet information. In addition to acquisitions, our store count is also impacted by new store openings and store closings. The table below summarizes the net change in our store count and ending store count for each fiscal year presented.
 
2015
 
2014
 
2013
 
2012
 
2011
Store Count Data
 
 
 
 
 
 
 
 
 
Net change in store count during fiscal year
(7
)
 
2

 
24

 
15

 
6

Store count at end of fiscal year
112

 
119

 
117

 
93

 
78


24



 
Year Ended January 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
 (in thousands, except per share data)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
Equipment
$
1,398,195

 
$
1,722,738

 
$
1,763,877

 
$
1,303,900

 
$
855,443

Parts
270,262

 
275,750

 
242,368

 
201,404

 
140,982

Service
147,356

 
149,082

 
127,779

 
103,474

 
74,506

Rental and other
84,433

 
78,876

 
64,396

 
50,214

 
23,558

Total Revenue
1,900,246

 
2,226,446

 
2,198,420

 
1,658,992

 
1,094,489

Cost of Revenue
 
 
 
 
 
 
 
 
 
Equipment
1,286,148

 
1,576,246

 
1,600,233

 
1,171,618

 
773,060

Parts
189,540

 
192,199

 
169,164

 
140,096

 
100,281

Service
53,924

 
54,608

 
45,748

 
37,236

 
27,767

Rental and other
62,250

 
55,319

 
43,914

 
34,581

 
18,813

Total Cost of Revenue
1,591,862

 
1,878,372

 
1,859,059

 
1,383,531

 
919,921

Gross Profit
308,384

 
348,074

 
339,361

 
275,461

 
174,568

Operating Expenses
273,271

 
291,202

 
247,557

 
193,860

 
130,541

Impairment and Realignment Costs
34,390

 
9,997

 

 

 

Income from Operations
723

 
46,875

 
91,804

 
81,601

 
44,027

Other Income (Expense)
 
 
 
 
 
 
 
 
 
Interest income and other income (expense)
(4,272
)
 
2,109

 
1,654

 
1,643

 
1,794

Interest expense
(34,791
)
 
(30,555
)
 
(22,762
)
 
(9,670
)
 
(8,584
)
Income (Loss) Before Income Taxes
(38,340
)
 
18,429

 
70,696

 
73,574

 
37,237

Provision for (Benefit from) Income Taxes
(4,923
)
 
10,325

 
28,137

 
29,429

 
14,895

Net Income (Loss) Including Noncontrolling Interest
(33,417
)
 
8,104

 
42,559

 
44,145

 
22,342

Less: Net Income (Loss) Attributable to Noncontrolling Interest
(1,260
)
 
(747
)
 
86

 
(15
)
 

Net Income (Loss) Attributable to Titan Machinery Inc.
(32,157
)
 
8,851

 
42,473

 
44,160

 
22,342

Net (Income) Loss Allocated to Participating Securities
559

 
(129
)
 
(443
)
 
(409
)
 
(232
)
Net Income (Loss) Attributable to Titan Machinery Inc. Common Stockholders
$
(31,598
)
 
$
8,722

 
$
42,030

 
$
43,751

 
$
22,110

 
 
 
 
 
 
 
 
 
 
Earnings (Loss) per Share
 
 
 
 
 
 
 
 
 
Basic
$
(1.51
)
 
$
0.42

 
$
2.02

 
$
2.21

 
$
1.25

Diluted
$
(1.51
)
 
$
0.41

 
$
2.00

 
$
2.18

 
$
1.23

Weighted average shares outstanding
 
 
 
 
 
 
 
 
 
Basic
20,989

 
20,894

 
20,787

 
19,809

 
17,658

Diluted
20,989

 
21,040

 
20,987

 
20,110

 
17,961


25


 
January 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
 (in thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash
$
127,528

 
$
74,242

 
$
124,360

 
$
79,842

 
$
76,112

Receivables, net
76,382

 
97,894

 
121,786

 
82,518

 
44,945

Inventories
879,440

 
1,075,978

 
929,216

 
748,047

 
429,844

Prepaid expenses and other
10,634

 
24,740

 
8,178

 
2,108

 
1,003

Income taxes receivable
166

 
851

 
503

 
3,140

 

Deferred income taxes
19,025

 
13,678

 
8,357

 
5,370

 
3,247

Assets held for sale
15,312

 

 

 

 

Total current assets
1,128,487

 
1,287,383

 
1,192,400

 
921,025

 
555,151

Goodwill and intangible assets, net
5,458

 
36,501

 
44,992

 
35,197

 
23,125

Property and Equipment, net of accumulated depreciation
208,680

 
228,000

 
194,641

 
126,282

 
65,372

Other assets
7,122

 
12,764

 
12,041

 
5,568

 
5,198

Total Assets
$
1,349,747

 
$
1,564,648

 
$
1,444,074

 
$
1,088,072

 
$
648,846

 
 
 
 
 
 
 
 
 
 
Accounts payable
$
17,659

 
$
23,714

 
$
28,282

 
$
28,424

 
$
15,957

Floorplan payable (1)
627,249

 
750,533

 
689,410

 
552,428

 
320,801

Current maturities of long-term debt
7,749

 
2,192

 
10,568

 
4,755

 
4,207

Customer deposits
35,090

 
61,286

 
46,775

 
49,540

 
28,180

Accrued expenses
35,496

 
36,968

 
29,590

 
26,735

 
16,816

Liabilities held for sale
2,835

 

 

 

 

Income taxes payable
3,529

 
344

 
310

 

 
2,093

Total current liabilities
729,607

 
875,037

 
804,935

 
661,882

 
388,054

Senior convertible notes
132,350

 
128,893

 
125,666

 

 

Long-term debt, less current maturities
67,123

 
95,532

 
56,592

 
57,405

 
33,409

Deferred income taxes
38,996

 
47,329

 
47,411

 
28,592

 
9,012

Other long-term liabilities
3,312

 
6,515

 
9,551

 
2,854

 
3,814

Total stockholders' equity (2)
378,359

 
411,342

 
399,919

 
337,339

 
214,557

Total Liabilities and Stockholders' Equity
$
1,349,747

 
$
1,564,648

 
$
1,444,074

 
$
1,088,072

 
$
648,846

 
 
 
 
 
 
 
 
 
 
(1) Portion of floorplan payable balance which is interest-bearing as of January 31
75
%
 
56
%
 
61
%
 
52
%
 
52
%
(2) Company's follow-on offering resulted in an increase in total stockholders' equity of $74,898 in fiscal 2012.


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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing under Item 8. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report, including information with respect to our plans and strategy for our business and expected financial results, includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" under Item 1A for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
BUSINESS DESCRIPTION
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, collectively referred to in this annual report as CNH Industrial, 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 agricultural equipment we sell and service includes machinery and attachments for uses ranging from large-scale farming to home and garden use. The construction equipment we sell and service includes heavy construction and light industrial machinery for commercial and residential construction, road and highway construction and mining applications. We offer our customers a one-stop solution for their equipment needs through:
new and used equipment sales;
parts sales;
repair and maintenance services; and
equipment rental and other activities.
The new equipment and parts we sell are supplied primarily by CNH Industrial. According to public reports filed by CNH Industrial, CNH Industrial is a leading manufacturer and supplier of agricultural and construction equipment based on the number of units sold, primarily through the Case IH Agriculture, New Holland Agriculture, Case Construction and New Holland Construction brands. Sales of new CNH Industrial products accounted for approximately 72% of our new equipment revenue in fiscal 2015, with our single largest manufacturer other than CNH Industrial representing approximately 3% of our total new equipment sales. We acquire used equipment for resale through trade-ins from our customers and selective purchases. We sell parts and provide in-store and on-site repair and maintenance services. We rent equipment and provide other ancillary services such as equipment transportation, GPS signal subscriptions and finance and insurance products.
Throughout our 35-year operating history we have built an extensive, geographically contiguous network of 92 stores, including two outlet stores, located in the United States and 16 stores in Europe. We have a history of growth through acquisitions, including 52 acquisitions consisting of 110 stores operating in 11 states and three European countries since January 1, 2003. We expect that acquisitions will continue to be an important component of our long-term growth.
Realignment Costs
To better align our cost structure and re-balance staffing levels with the evolving needs of the business, in March 2015, we approved a realignment plan to reduce our headcount by approximately 14%, which includes headcount reductions at stores in each of our operating segments and our Shared Resource Center, as well as from the closing of three Agriculture stores and one Construction store. We expect to substantially complete these efforts by April 30, 2015. Our remaining stores in each of the respective areas will take over the distribution rights for the CNH Industrial brand previously held by the stores which have closed. We will transfer the majority of the assets of the closed stores to other stores. We estimate the total cost of these activities will be approximately $2.0 million, comprised of an accrual for the net present value of remaining lease obligations, employee severance costs, impairment of certain fixed assets and costs associated with relocation of assets from the closed stores. We recognized approximately $0.1 million in severance costs primarily in our International segment in our fourth quarter ended January 31, 2015, and expect to recognize the remaining $1.9 million of these expenses in our first quarter ended April 30, 2015. See Note 19 to the notes to our consolidated financial statements for additional information regarding these exit costs and activities.
    

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To better align our Construction business in certain markets, in April 2014, we reduced our 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 our Shared Resource Center. We also closed one Agriculture store. Our remaining stores in each of the respective areas assumed the majority of the distribution rights for the CNH Industrial brand previously held by the stores which have closed. We recognized $3.9 million in exit costs during the year ended January 31, 2015. See Note 19 to the notes to our consolidated financial statements for additional information regarding these exit costs and activities. See also the Non-GAAP Financial Measures section below for impact of these costs on non-GAAP Diluted EPS.
Foreign Currency Remeasurement Losses
In February of 2014, the National Bank of Ukraine terminated the currency peg of the Ukrainian hryvnia ("UAH") to the USD; subsequent to the decoupling and as a result of the economic and political conditions present in the country, the UAH has experienced significant devaluation from the date the currency peg was terminated. The functional currency of our Ukrainian subsidiary is the U.S. dollar and, as a result, any currency remeasurement adjustments for non-dollar denominated monetary assets and liabilities held by this subsidiary are reflected in earnings. For the year ended January 31, 2015, we recognized $5.8 million in foreign currency remeasurement losses resulting from the devaluation of the UAH. These losses are included in interest income and other income (expense) in our consolidated statements of operations. See also the Non-GAAP Financial Measures section below for impact of these costs on non-GAAP Diluted EPS.
As of January 31, 2015, our Ukrainian subsidiary had $2.4 million of net monetary assets denominated in UAH. We have attempted to minimize our net monetary asset position through reducing overall asset levels in Ukraine and through borrowing in UAH which serves as a natural hedging instrument offsetting our UAH denominated assets. Currency and payment controls imposed by the National Bank of Ukraine have limited our ability to manage our net monetary asset position. Such restrictions, coupled with the continued devaluation of the UAH, may create exposure for our net monetary assets.
Certain External Factors Affecting our Business
We are subject to a number of factors that affect our business as discussed in the sections entitled "Risk Factors" and "Information Regarding Forward- Looking Statements." Certain of the external factors include, but are not limited to, the following:
Industry Factors
Our Agriculture and International businesses are primarily driven by the demand for agricultural equipment for use in the production of food, fiber, feed grain and renewable energy; home and garden applications; and the maintenance of commercial, residential and government properties. Based on USDA data, we believe farmers in the U.S. have experienced historically strong economic fundamentals in several of the recent years, driven by growing global demand for agricultural commodities in part due to growth in renewable energy and the economies of developing countries. However, beginning in February 2014 and throughout calendar year 2014, the USDA published its projections of a decrease in net farm income in the U.S. from calendar year 2013 to 2014. In February 2015, the USDA published its projections of another decrease in net farm income in the U.S. of 31.8% from calendar year 2014 to 2015. We believe our large and diverse customer base within our geographic footprint of five states and four European countries reduces our exposure to negative events that may occur in a particular area or crop. Additionally, we believe a favorable climate for dealership consolidation will continue to exist, which provides for acquisition opportunities.
Our Construction business is primarily impacted by the demand for construction equipment for use in private and government commercial, residential and infrastructure construction; demolition; maintenance; mining; energy and forestry operations.
Seasonality & Weather
The agricultural and construction equipment businesses are highly seasonal, which causes our quarterly results and our available cash flow to fluctuate during the year. Our customers generally purchase and rent equipment in preparation for, or in conjunction with, their busy seasons, which for farmers are the spring planting and fall harvesting seasons, and for Construction customers is dependent on weather seasons in their respective regions, which is typically the second and third quarters of our fiscal year for much of our Construction footprint. Our parts and service revenues are typically highest during our customers' busy seasons as well, due to the increased use of their equipment during this time, which generates the need for more parts and service work. However, weather conditions impact the timing of our customers' busy times, which may cause our quarterly financial results to differ between fiscal years. In addition, the fourth quarter typically is a significant period for equipment sales in the U.S. because of our customers’ year-end tax planning considerations, the timing of dealer incentives and the increase in availability of funds from completed harvests and construction projects.

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Seasonal weather trends, particularly severe wet or dry conditions, can have a significant impact on regional agricultural and construction market performance by affecting crop production and the ability to undertake construction projects. Weather conditions that adversely affect the agricultural or construction markets have negative effect on the demand for our products and services.
In addition, numerous external factors such as credit markets, commodity prices, and other circumstances may disrupt normal purchasing practices and buyer sentiment, further contributing to the seasonal fluctuations.
Macroeconomic Conditions
Sales of agricultural equipment historically have fluctuated with general farm economic trends, primarily driven by net farm income. Significant factors that affect net farm income include demand for farm products, commodity and livestock prices, crop yields, crop stock levels, and production costs. We use the USDA’s periodic reports of actual and projected net farm income, as well as information on commodity prices and crop yields in the U.S. and worldwide, to analyze and anticipate the impact of our customers’ sentiment on their purchasing trends. Decreases in actual or anticipated net farm income, or in any of the significant components of net farm income, generally cause decreases in equipment revenue. Net farm income has been strong and increasing in several of the recent years, however, as discussed above, net farm income decreased from calendar year 2013 to 2014 and is projected to further decrease in calendar year 2015. We believe these industry expectations had a negative impact on our Agriculture equipment revenue in fiscal 2015 and will continue to negatively impact our Agriculture equipment revenue in fiscal 2016.
Sales of construction equipment historically have fluctuated with general economic cycles. During economic downturns, construction equipment retailers tend to experience similar periods of decline and recession as the general economy. The U.S. Bureau of the Census publishes periodic reports of new residential construction by region in the U.S., which we use to analyze general economic trends in the regions in which we operate and anticipate our customers’ purchasing and rental trends. Decreases in new residential construction generally cause decreases in our equipment revenue.
During economic downturns, and especially in the agriculture industry, equipment revenue generally decreases but parts and service revenue tend to be more stable or even increase as the amount of land in production is unchanged and because farmers may use existing equipment rather than purchasing new equipment. Gross profit margins on equipment are lower than gross profits on parts and service. As a result, this change in mix may cause our gross profit margin to increase even though our overall gross profit dollars may decrease along with the decrease in equipment revenue. Our operating expenses are largely fixed expenses, other than commissions which generally fluctuate with gross profit. When equipment revenue decreases, it may have a negative impact on our ability to leverage these fixed costs, and, as a result, may reduce our operating income.
In addition, oversupply of equipment inventory in the industry, caused by either depressed equipment demand or over-production by suppliers, may have a negative impact on our operating results, particularly equipment gross profit margin.
Dependence on our Primary Supplier
The majority of our business involves the distribution and servicing of equipment manufactured by CNH Industrial. In fiscal 2015, CNH Industrial supplied approximately 74% of the new equipment sold in our Agriculture segment, 65% of the new equipment sold in our Construction segment, and 74% of the new equipment sold in our International segment, and represented a significant portion of our parts revenue. Thus, we believe the following factors have a significant impact on our operating results:
CNH Industrial’s product offerings, reputation and market share
CNH Industrial’s product prices and incentive and discount programs
Supply of inventory from CNH Industrial
CNH Industrial provides floorplan payable financing for the purchase of a substantial portion of our inventory
CNH Industrial provides a significant percentage of the financing used by our customers to purchase CNH Industrial equipment from us.
Credit Market Changes
Changes in credit markets can affect our customers' ability and willingness to make capital expenditures, including purchasing our equipment. Tight credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets have the potential to adversely affect our business. Such disruptions in the overall economy and financial markets and the related reduction in consumer confidence in the economy, slow activity in the capital markets, negatively affect access to credit on commercially acceptable terms, and may adversely impact the access of us

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or our customers to credit and the terms of any such credit. However, if retail interest rates remain low, our business may be positively affected by customers who find financing purchases of our equipment more attractive due to lower borrowing costs.
Our business is also particularly dependent on our access to credit markets to finance acquisitions and manage inventory. Continued tightened lending standards may make it more difficult for us to obtain financing on commercially reasonable terms. We cannot predict what future changes will occur in credit markets or how these changes will impact our business.
Inflation
Inflation has not had a material impact upon operating results and we do not expect it to have such an impact in the future. To date, in those instances in which we have experienced cost increases, we have been able to increase selling prices to offset such increases.
Acquisitions
Since January 1, 2003, we have completed 52 acquisitions consisting of 110 stores operating in 11 states and three European countries, which includes one store in fiscal 2015, two stores in fiscal 2014 and 20 stores in fiscal 2013. These acquisitions have been a significant factor affecting our results of operations and liquidity over the last several years, as noted in the period-to-period comparisons below. We believe a favorable climate for dealership consolidation will continue to exist, which provides for acquisition opportunities. Acquisitions are typically financed with available cash balances, floorplan payables and long-term debt.
Use of Estimates and Critical Accounting Policies
During the preparation of our financial statements, we are required to make estimates, assumptions and judgments that affect reported amounts. These estimates, assumptions and judgments include those related to realization of inventory, initial valuation and impairment analyses of goodwill and other intangible assets, collectability of receivables and income taxes. We update these estimates, assumptions and judgments as appropriate, which in most cases is at least quarterly. We use our technical accounting knowledge, cumulative business experience, judgment and other factors in the selection and application of our accounting policies. While we believe the estimates, assumptions and judgments we use in preparing our financial statements are appropriate, they are subject to factors and uncertainties regarding their outcome and therefore, actual results may materially differ from these estimates. We believe the following describe the significant estimates, assumptions and judgments related to our primary critical accounting policies. See Note 1 in the notes to our consolidated financial statements in this Form 10-K for a comprehensive list of our significant accounting policies, recent accounting guidance and additional information regarding such policies.
Revenue Recognition
Equipment revenue generally is recognized upon receipt of a signed contract and delivery of product to customers. However, in certain circumstances customers request a bill and hold arrangement, in which case equipment revenue is recognized before delivery occurs. Under these bill and hold arrangements, the equipment is available for shipment, the Company has fulfilled all of its pre-delivery performance obligations and received a signed sales contract, and the customer has completed and signed a bill and hold agreement. Credit terms on bill and hold arrangements are consistent with credit terms on all other equipment sales. In addition to outright sales of new and used equipment, certain rental agreements may include rent-to-purchase options. Under these agreements, customers are given a period of time to exercise an option to purchase the related equipment, with a portion of the rental payments being applied to reduce the purchase price. Payments received during the rental period are recorded as rental revenue. Any such equipment is included in inventory until the purchase option is exercised, and the carrying value of the equipment is reduced in accordance with our Inventories policies. Equipment revenue is recognized upon the exercise of the purchase option. Parts revenue is recognized upon delivery of product to customers. Service revenue is recognized at the time the related services are provided. Rental revenue is recognized over the period of the related rental agreement.
Inventories
New and used equipment are stated at the lower of cost (specific identification) or market value with adjustments for decreases in market value on inventory rented but available for sale, estimated as a percentage of the rental income received on such inventory. The majority of our used equipment inventory is acquired through trade-ins from our customers. The acquisition value assigned to each piece of used equipment inventory is determined based on the estimated selling price for that piece of equipment in the applicable market, and estimated reconditioning costs. Various industry resources are used to assist in the valuation, and we consider all factors, such as model year, hours, overall condition and estimated reconditioning costs, other

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equipment specifications, and the market in which we expect to sell the equipment, when determining the final equipment valuation. Subsequent to the initial valuation, all new and used equipment inventories, including that which has been rented, are subject to periodic lower of cost or market evaluation that considers various factors including aging of equipment and market conditions. Generally, used equipment prices are more volatile and dependent on changes in market conditions than prices for new equipment due to incentive programs that may be offered by manufacturers to assist in the sale of new equipment. We review our equipment inventory values on a monthly basis and adjust them whenever the carrying amount exceeds the estimated market value. Parts inventories are valued at the lower of average cost or market value. We estimate a reserve on our parts inventories based on various factors including aging and sales of each type of parts inventory. Work in process is valued at the retail rates of labor incurred and retail parts inventories used on service work in process at year end.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets, including identifiable intangible assets, of the businesses acquired. Goodwill is not amortized, but is tested for impairment annually, or more frequently upon the occurrence of certain events or when circumstances indicate that impairment may be present. We perform our annual impairment test as of the end of our fiscal year.
Goodwill is tested for impairment at the reporting unit level. A reporting unit is defined as an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. Our Agriculture operating segment is the only reporting unit which carries a material goodwill balance.
The goodwill impairment analysis is performed under a two-step impairment model. Step one of the analysis compares the estimated fair value of a reporting unit to its carrying value. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment, if any. The second step measures the amount of impairment loss, if any, by comparing the implied fair value of goodwill, which is estimated by comparing the estimated fair value of the reporting unit as a whole to the fair value of the underlying assets and liabilities of the reporting unit. An impairment charge is recognized for any excess of the carrying value of goodwill over the implied fair value.
We estimate the fair value of our reporting unit using both a market approach in which we apply multiples of earnings before interest, taxes, depreciation and amortization of comparable guideline public companies to that of our reporting unit, and an income approach in which we utilize a discounted cash flow analysis which includes a five-year forecast of future operating performance of the reporting unit and a terminal value which estimates sustained long-term growth. The discount rate applied to the estimated future cash flows reflects our estimate of the weighted-average cost of capital of comparable companies.
We performed our annual impairment test as of the end of our fiscal year and concluded that the estimated fair value of our Agriculture reporting unit was less than the carrying value, and thus we performed step two of the impairment test. The results of step two of the impairment analysis indicated that a full impairment charge of the goodwill value was necessary. As a result, we recognized an impairment charge in the fourth quarter of fiscal 2015 of $24.6 million.
Our estimate of the fair value of our reporting unit incorporated certain key assumptions, including estimated revenue, gross margin and operating expense levels, working capital investments required to support anticipated revenue amounts, capital spending trends, our estimate of long-term sustained growth, and the discount rate applied to the estimated future cash flows.
The impairment charges recognized in the fourth quarter of fiscal 2015 arose as the result of financial results that were lower than expectations for the year ended January 31, 2015, lowered expectations of future financial performance of our Agriculture segment and a lower market capitalization for our company as a whole. Our assumptions about future financial performance were impacted by the current year operating performance and by the anticipated impact that challenging industry conditions existing as of the assessment date and anticipated to be present over the near-term may have on the future financial performance of this reporting unit.
We recognized an impairment charge in the fourth quarter of fiscal 2014 of $5.3 million and $0.9 million of the goodwill associated with the Construction and Romanian reporting units, respectively. Following the impairment charges recognized in the fourth quarter of fiscal 2015, no amount of goodwill remains on our consolidated balance sheet as of January 31, 2015.

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Indefinite-Lived Intangible Assets
Intangible assets with an indefinite life consist of distribution rights with manufacturers. We classify distribution rights as an indefinite-lived intangible asset because our distribution agreements continue indefinitely by their terms, or are routinely awarded or renewed without substantial cost to us or material modifications to the underlying agreements. As such, we believe that our distribution rights intangible assets will contribute to our cash flows for an indefinite period; therefore, the carrying amount of distribution rights is not amortized, but is tested for impairment annually, or more frequently upon the occurrence of certain events or when circumstances indicate that impairment may be present. We perform our annual impairment test as of December 31st of each year. The impairment test is performed by comparing the carrying value of the distribution right asset to its estimated fair value.
Indefinite-lived intangible assets are tested for impairment at the lowest level in which identifiable cash flows can be attributed to the asset. For our distribution rights intangible assets, we have determined that the lowest level of cash flows which can be attributed to the asset is equal to the store, or complex of stores, acquired in the business combination which resulted in the initial recognition of the intangible asset, plus any additional store locations operating within the geographical area of the distribution rights.
Under the impairment test, we estimate the fair value of our distribution rights intangible assets based on a multi-period excess earnings model, an income approach. This model allocates future estimated earnings of the store (complex) amongst working capital, fixed assets and other intangible assets of store (complex) and any remaining earnings (the “excess earnings”) are allocated to the distribution rights intangible assets. The earnings allocated to the distribution rights are then discounted to arrive at the present value of the future estimated excess earnings, which represents the estimated fair value of the distribution rights intangible asset. The discount rate applied reflects our estimate of the weighted-average cost of capital of comparable companies plus an additional risk premium to reflect the additional risk inherent in the distribution right asset.
We performed our annual impairment testing as of December 31, 2014. The results of this testing indicated that the estimated fair value of certain distribution rights assets approximated zero, thus requiring a full impairment charge. In total, we recognized an impairment charge of $5.5 million, of which $4.8 million arose from stores (complexes) within our Agriculture segment and $0.7 million arose from stores (complexes) within our International segment.
The impairment charges recognized within our Agriculture and International segments arose as the result lowered expectations of the future financial performance of these stores (complexes). Our assumptions about future financial performance were impacted by the current year operating performance of these stores (complexes) and by the anticipated impact that challenging industry conditions may have on the future financial performance of these stores (complexes).
Following the aforementioned impairments, we have $4.9 million of distribution rights assets recorded on our consolidated balance sheet as of January 31, 2015. The impairment tests performed on these assets as of December 31, 2014 indicated that the estimated fair value of each asset substantially exceeded the carrying value.
We believe that our estimates and assumptions used in deriving the fair value of each of the distribution rights assets are reasonable and based on the best information available. However, adverse changes in macroeconomic or industry conditions or adverse changes in our expectations about the future operating performance of the store (complex) supporting the distribution rights assets could result in an impairment charge in a future period which could materially impact our results of operations and financial position.
Impairment of Long-Lived Assets
Our long-lived assets consist of our intangible assets and property and equipment. We review these assets for potential impairment whenever events or circumstances indicate that the carrying value may not be recoverable. Recoverability is measured by comparing the estimated future undiscounted cash flows of such assets to their carrying values. If the estimated undiscounted cash flows exceed the carrying value, the carrying value is considered recoverable and no impairment recognition is required. However, if the sum of the undiscounted cash flows is less than the carrying value of the asset, the second step of the impairment analysis must be performed to measure the amount of the impairment, if any. The second step of the impairment analysis compares the estimated fair value of the long-lived asset to its carrying value and any amount by which the carrying value exceeds the fair value is recognized as an impairment charge.
As of the end of our 2015 fiscal year we determined that the current period operating loss combined with historical losses and anticipated future operating losses within certain of our stores was an indication that certain long-lived assets of these stores may not be recoverable. The asset types included in our assessment included immovable long-lived assets (e.g., leasehold improvements) and other assets in which it would be impracticable for us to redeploy the assets to other locations (e.g., furniture and fixtures). We performed the impairment analyses for these assets which have a combined carrying value of $6.6 million.

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In certain cases the analysis indicated that the carrying value is not recoverable. The aggregate carrying value of such assets totaled $1.2 million. Based on this conclusion, we performed step two of the impairment analysis and estimated the fair value of these assets using the estimated selling prices of similar assets. Step two of the analysis indicated that an impairment charge in the amount of $0.4 million was necessary. This impairment charge impacted our Agriculture segment. In all other cases, in which the aggregate carrying value of such assets totaled was $5.4 million, our analyses indicated that the carrying values are recoverable based on our estimates of future undiscounted cash flows under step one of the impairment analysis.
Our analyses incorporated certain key assumptions, including estimated revenue, gross margin and operating expense levels and an assumption about the remaining useful lives of the long-lived assets being evaluated. Our key assumptions were developed for each store tested for impairment and were based on our assumptions about overall industry growth or decline within which each stores operates as well as consideration of historical operating performance and our expectation of changes from such levels.
Our estimates inherently include a degree of uncertainty, but we believe that these estimates and assumptions used in deriving the estimated future cash flows of these store locations are reasonable and based on the best information available. However, adverse changes in macroeconomic or industry conditions, the competitive environment, or adverse changes in our expectations about the future operating performance of the store could result in an impairment charge in a future period which could materially impact our results of operations and financial position.
We performed a similar impairment analysis at the end of our 2014 fiscal year, which indicated that a full impairment charge was necessary, and thus we recognized an impairment loss of $1.5 million, all of which impacted our Construction segment.
Income Taxes
In determining taxable income for financial statement purposes, we must make certain judgments and estimates, including an assessment of the realizability of our deferred tax assets. In evaluating our ability to realize the benefit of our deferred tax assets we consider all available positive and negative evidence, including our historical operating results and our expectation of future taxable income, the availability to implement prudent tax-planning strategies, and the carryback, if any, and carryforward periods over which the assets may be realized. These assumptions require significant judgment and estimation.
In reviewing our deferred tax assets as of the end of fiscal 2015 and 2014, respectively, we concluded that a full valuation allowance for the deferred tax assets in certain of our foreign jurisdictions was warranted. In total, we recognized a valuation allowance of $5.6 million and $1.9 million during the years ended January 31, 2015 and 2014, respectively, which was recorded as an additional provision for income taxes and negatively impacted our effective tax rate. This conclusion was principally based on the presence of historical losses and the anticipated time period over which we may generate taxable income in excess of these historical losses.
Our assessment of the need for and magnitude of the recognized valuation allowances may be impacted by changes in tax laws, our assumptions regarding the ability to generate future taxable income and the availability of tax-planning strategies. Changes in any of these factors could lead to a change in the recognized valuation allowance which may impact our future results of operations and financial position.
Key Financial Metrics
In addition to tracking our sales and expenses to evaluate our operational performance, we also monitor the following key financial metrics. The results of each of these metrics are discussed further throughout the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-K.
Inventory Turnover
Inventory turnover measures the rate at which inventory is sold during the year. We calculate it by dividing cost of sales on equipment and parts for the last twelve months divided by the average of the month-end balances of our equipment and parts inventories for the same twelve-month period.
Same-Store Results
Same-store results for any period represent results of operations by stores that were part of our company for the entire comparable period in the preceding fiscal year. 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 Annual Report on Form

33


10-K. We believe that tracking this metric is important to evaluating the success of the Titan Operating Model on a comparable basis.
Absorption
Absorption is an industry term that refers to the percentage of an equipment dealer's fixed operating expense covered by the combined gross margin from parts, service and rental fleet activity. We calculate absorption in a given period by dividing our gross profit from sales of parts, service and rental fleet activity (described to as "Gross Profit on Recurring Revenue" when used in reference to absorption discussions) for the period by difference between (i) our operating expenses (including interest on floorplan payable and rental fleet debt balances) and (ii) our variable expense of sales commissions on equipment sales and incentive compensation in the same period (described to as "Fixed Operating Expenses" when used in reference to absorption discussions). We believe that absorption is an important management metric because during economic down cycles our customers tend to postpone new and used equipment purchases while continuing to run, maintain and repair their existing equipment. Thus, operating at a high absorption rate enables us to operate profitably throughout economic down cycles. We measure and track absorption on a company-wide basis as well as on a per store basis.
Dollar Utilization
Dollar utilization is a measurement of asset performance and profitability used in the rental industry. We calculate the dollar utilization of our rental fleet equipment by dividing the rental revenue earned on our rental fleet by the average gross carrying value of our rental fleet (comprised of original equipment costs plus additional capitalized costs) for that period. While our rental fleet has variable expenses related to repairs and maintenance, its primary expense for depreciation is fixed. Low utilization of our rental fleet has a negative impact on gross profit margin and gross profit dollars due to the fixed depreciation component. However, high utilization of our rental fleet has a positive impact on gross profit margin and gross profit dollars.
Adjusted EBITDA
EBITDA is defined as earnings before finance costs, income taxes, depreciation and amortization and is a metric frequently used to assess and evaluate financial performance. EBITDA is commonly regarded as an indirect measure of operating cash flow, without the impact of changes in working capital, a significant indicator of success for many businesses, and is a common valuation metric. Management uses adjusted EBITDA and believes it provides a useful metric for comparability between periods by eliminating the impact of finance costs, income taxes, depreciation, amortization and certain activities that occur outside of the ordinary course of our business. We calculate adjusted EBITDA as our net income (loss) including noncontrolling interest, adjusted for net interest (excluding floorplan interest expense), income taxes, depreciation, amortization, and items included in our non-GAAP reconciliation of earnings, for each of the respective periods. Adjusted EBITDA was $47.6 million, $72.0 million and $109.2 million for the years ended January 31, 2015, 2014 and 2013, respectively.
Key Financial Statement Components
Revenue
Equipment: We derive equipment revenue from the sale of new and used agricultural and construction equipment.
Parts: We derive parts revenue from the sale of parts for equipment that we sell, as well as for other equipment makes. Our parts sales provide us with a relatively stable revenue stream that is less sensitive to the economic cycles that affect our equipment sales.
Service: We derive services revenue from repair and maintenance services to our customers' equipment. Our repair and maintenance services provide a high-margin, relatively stable source of revenue through changing economic cycles.
Rental and other: We derive other revenue from equipment rentals and ancillary equipment support activities such as equipment transportation, GPS signal subscriptions and reselling finance and insurance products.
Cost of Revenue
Equipment: Cost of equipment revenue is the lower of the acquired cost or the market value of the specific piece of equipment sold.
Parts: Cost of parts revenue is the lower of the acquired cost or the market value of the parts sold, based on average costing.

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Service: Cost of service revenue represents costs attributable to services provided for the maintenance and repair of customer-owned equipment and equipment then on-rent by customers.
Rental and other: Costs of other revenue represent costs associated with equipment rental, such as depreciation, maintenance and repairs, as well as costs associated providing transportation, hauling, parts freight, GPS subscriptions and damage waivers, including, among other items, drivers' wages, fuel costs, shipping costs and our costs related to damage waiver policies.
Operating Expenses
Our operating expenses include sales and marketing expenses, sales commissions (which generally are based upon equipment gross profit margins), payroll and related benefit costs, insurance expenses, professional fees, property rental and related costs, property and other taxes, administrative overhead, and depreciation associated with property and equipment (other than rental equipment).
Floorplan Interest
The cost of financing inventory is an important factor affecting our results of operations. Floorplan payable financing from CNH Industrial Capital, Wells Fargo, Agricredit and various credit facilities related to our foreign subsidiaries represent the primary sources of financing for equipment inventories. CNH Industrial regularly offers interest-free periods as well as additional incentives and special offers. As of January 31, 2015, approximately 25.5% of our floorplan payable was non-interest bearing.
Other Interest Expense
Interest expense represents the interest on our outstanding debt instruments, including our Senior Convertible Notes issued in April 2012, other than floorplan payable financing facilities. Non-cash interest expense from amortization of the debt discount associated with our Senior Convertible Notes is also included in this balance.

35


Results of Operations
Comparative financial data for each of our four sources of revenue for fiscal 2015, 2014, and 2013 are expressed below. The results of 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. Information regarding segment revenue and income (loss) before income taxes is presented for each period following our discussion of the consolidated results of operations. Additional information regarding our segments is included in Note 21 of our audited financial statements.
 
Year Ended January 31,
 
2015
 
2014
 
2013
 
(dollars in thousands)
Equipment
 
 
 
 
 
Revenue
$
1,398,195

 
$
1,722,738

 
$
1,763,877

Cost of revenue
1,286,148

 
1,576,246

 
1,600,233

Gross profit
$
112,047

 
$
146,492

 
$
163,644

Gross profit margin
8.0
%
 
8.5
%
 
9.3
%
Parts
 
 
 
 
 
Revenue
$
270,262

 
$
275,750

 
$
242,368

Cost of revenue
189,540

 
192,199

 
169,164

Gross profit
$
80,722

 
$
83,551

 
$
73,204

Gross profit margin
29.9
%
 
30.3
%
 
30.2
%
Service
 
 
 
 
 
Revenue
$
147,356

 
$
149,082

 
$
127,779

Cost of revenue
53,924

 
54,608

 
45,748

Gross profit
$
93,432

 
$
94,474

 
$
82,031

Gross profit margin
63.4
%
 
63.4
%
 
64.2
%
Rental and other
 
 
 
 
 
Revenue
$
84,433

 
$
78,876

 
$
64,396

Cost of revenue
62,250

 
55,319

 
43,914

Gross profit
$
22,183

 
$
23,557

 
$
20,482

Gross profit margin
26.3
%
 
29.9
%
 
31.8
%

36


The following table sets forth our statements of operations data expressed as a percentage of revenue for the periods indicated.
 
Year Ended January 31,
 
2015
 
2014
 
2013
Revenue
 
 
 
 
 
Equipment
73.6
 %
 
77.4
 %
 
80.3
 %
Parts
14.2
 %
 
12.4
 %
 
11.0
 %
Service
7.8
 %
 
6.7
 %
 
5.8
 %
Rental and other
4.4
 %
 
3.5
 %
 
2.9
 %
Total Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
Total Cost of Revenue
83.8
 %
 
84.4
 %
 
84.6
 %
Gross Profit Margin
16.2
 %
 
15.6
 %
 
15.4
 %
Operating Expenses
14.4
 %
 
13.1
 %
 
11.2
 %
Impairment and Realignment Costs
1.8
 %
 
0.4
 %
 
 %
Income from Operations
 %
 
2.1
 %
 
4.2
 %
Other Income (Expense)
(2.0
)%
 
(1.3
)%
 
(1.0
)%
Income (Loss) Before Income Taxes
(2.0
)%
 
0.8
 %
 
3.2
 %
Provision for (Benefit from) Income Taxes
(0.2
)%
 
0.4
 %
 
1.3
 %
Net Income (Loss) Including Noncontrolling Interest
(1.8
)%
 
0.4
 %
 
1.9
 %
Less: Net Income (Loss) Attributable to Noncontrolling Interest
(0.1
)%
 
 %
 
 %
Net Income (Loss) Attributable to Titan Machinery Inc.
(1.7
)%
 
0.4
 %
 
1.9
 %
Fiscal Year Ended January 31, 2015 Compared to Fiscal Year Ended January 31, 2014
Consolidated Results
Revenue
 
Year Ended January 31,
 
Increase/
 
Percent
 
2015
 
2014
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Equipment
$
1,398,195

 
$
1,722,738

 
$
(324,543
)
 
(18.8
)%
Parts
270,262

 
275,750

 
(5,488
)
 
(2.0
)%
Service
147,356

 
149,082

 
(1,726
)
 
(1.2
)%
Rental and other
84,433

 
78,876

 
5,557

 
7.0
 %
Total Revenue
$
1,900,246

 
$
2,226,446

 
$
(326,200
)
 
(14.7
)%
The decrease in total revenue for fiscal 2015, as compared to fiscal 2014, was primarily due to a decrease in same-store sales of 14.1%, mainly driven by a decrease in Agriculture same-store sales of 22.0% and partially offset by an increase in Construction same-store sales of 14.9%. Agriculture same-store sales decreased primarily due to a decrease in equipment revenue and were negatively impacted by challenging industry conditions such as decreases in agricultural commodity prices and projected net farm income, which have a negative effect on customer sentiment. Changes in actual or anticipated net farm income, or in any of the significant components of net farm income, generally have a direct correlation with agricultural equipment purchases by farmers. In February, August and December 2014, the U.S. Department of Agriculture published its projections of a decrease in net farm income from calendar year 2013 to 2014. The commodity price of corn and soybeans during fiscal 2015, which are the predominant crops in our Agriculture store footprint, decreased significantly from prices during fiscal 2014, mainly as a result of increases in U.S. corn and soybean supplies compared to the prior year. The increase in Construction segment revenue, which included increases in all lines of the Construction segment's business, resulted from improved industry conditions and the positive impact of operational initiatives.

37


Gross Profit
 
Year Ended January 31,
 
Increase/
 
Percent
 
2015

2014
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Gross Profit
 
 
 
 
 
 
 
Equipment
$
112,047

 
$
146,492

 
$
(34,445
)
 
(23.5
)%
Parts
80,722

 
83,551

 
(2,829
)
 
(3.4
)%
Service
93,432

 
94,474

 
(1,042
)
 
(1.1
)%
Rental and other
22,183

 
23,557

 
(1,374
)
 
(5.8
)%
Total Gross Profit
$
308,384

 
$
348,074

 
$
(39,690
)
 
(11.4
)%
Gross Profit Margin
 
 
 
 
 
 
 
Equipment
8.0
%
 
8.5
%
 
(0.5
)%
 
(5.9
)%
Parts
29.9
%
 
30.3
%
 
(0.4
)%
 
(1.3
)%
Service
63.4
%
 
63.4
%
 
 %
 
 %
Rental and other
26.3
%
 
29.9
%
 
(3.6
)%
 
(12.0
)%
Total Gross Profit Margin
16.2
%
 
15.6
%
 
0.6
 %
 
3.8
 %
Gross Profit Mix
 
 
 
 
 
 
 
Equipment
36.3
%
 
42.1
%
 
(5.8
)%
 
(13.8
)%
Parts
26.2
%
 
24.0
%
 
2.2
 %
 
9.2
 %
Service
30.3
%
 
27.1
%
 
3.2
 %
 
11.8
 %
Rental and other
7.2
%
 
6.8
%
 
0.4
 %
 
5.9
 %
Total Gross Profit Mix
100.0
%
 
100.0
%
 
 %
 
 %
The decrease in total gross profit for fiscal 2015, as compared to fiscal 2014, was primarily due to lower equipment revenue and equipment gross profit margin. The increase in total gross profit margin from 15.6% in fiscal 2014 to 16.2% in fiscal 2015 was due to the change in gross profit mix to our higher-margin parts, service and rental and other businesses, and partially offset by the decrease in gross profit margin on equipment. The compression in equipment gross profit margin was primarily caused by the previously discussed Agriculture industry challenges as well as an oversupply of equipment in the Agriculture industry. The decrease in rental and other gross profit margin was reflective of the decrease in dollar utilization of our rental fleet, from 30.3% in fiscal 2014 to 27.7% in fiscal 2015, which was primarily caused by the lower oil prices affecting rental demand in our oil producing markets as well as lost rental revenue due to the repositioning of rental equipment from the seven Construction stores closed in the first quarter of fiscal 2015 to other Construction stores. Our company-wide absorption rate remained relatively consistent at 70.7% and 71.2% for fiscal 2015 and 2014, respectively. We expect our absorption rate to improve in fiscal 2016 due to reductions in our Fixed Operating Expenses from cost savings associated with the realignment plan approved in the first quarter of fiscal 2016 and lower floorplan interest expense as a result of reductions in equipment inventory balances in fiscal 2016, as compared to fiscal 2015.
Operating Expenses
 
Year Ended January 31,
 
Increase/
 
Percent
 
2015
 
2014
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Operating Expenses
$
273,271

 
$
291,202

 
$
(17,931
)
 
(6.2
)%
Operating Expenses as a Percentage of Revenue
14.4
%
 
13.1
%
 
1.3
%
 
9.9
 %
The decrease in operating expenses was primarily due to decreased commission expense resulting from the decrease in equipment gross profit, and cost savings associated with our realignment activities in the first quarter of fiscal 2015, which included the closing of eight stores and other headcount reductions. These decreases in operating expenses were partially offset by additional costs associated with expanding our International distribution network. The increase in operating expenses as a percentage of total revenue was primarily due to the decrease in equipment revenue in fiscal 2015, as compared to fiscal 2014, which negatively affected our ability to leverage our fixed operating costs.

38


Impairment and Realignment Costs
 
Year Ended January 31,
 

 
Percent
 
2015
 
2014
 
Increase
 
Change
 
(dollars in thousands)
 
 
Impairment and Realignment Costs
$
34,390

 
$
9,997

 
$
24,393

 
244.0
%
During our annual impairment tests in the fourth quarter of fiscal 2015, we determined that certain goodwill, other intangible assets and long-lived assets were impaired, primarily in our Agriculture segment, resulting in $31.2 million impairment expense recognized in fiscal 2015, as compared to impairment costs totaling $9.7 million recognized in fiscal 2014 related to certain goodwill, other intangible assets and long-lived assets in our Construction and International segments. The Company also recognized realignment costs in fiscal 2015 related to the the closing of seven underperforming Construction stores, staff reductions at other dealerships and reductions in support staff at the Company's Shared Resource Center that took place in April 2014. There were no such realignment plans implemented in fiscal 2014. See the Non-GAAP Financial Measures section below for impact of these costs on non-GAAP Diluted EPS.
Other Income (Expense)
 
Year Ended January 31,
 
Increase/
 
Percent
 
2015
 
2014
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Interest income and other income (expense)
$
(4,272
)
 
$
2,109

 
$
(6,381
)
 
(302.6
)%
Floorplan interest expense
(20,477
)
 
(16,764
)
 
3,713

 
22.1
 %
Other interest expense
(14,314
)
 
(13,791
)
 
523

 
3.8
 %
The decrease in interest income and other income (expense) was primarily due to foreign currency remeasurement losses in Ukraine, resulting from a devaluation of the Ukrainian hryvnia in fiscal 2015. See the Non-GAAP Financial Measures section below for the impact of these costs on non-GAAP Diluted EPS. The increase in floorplan interest expense of $3.7 million was primarily due to the increase in average levels of interest-bearing floorplan payable balances.
Provision for (Benefit from) Income Taxes
 
Year Ended January 31,
 

 
Percent
 
2015
 
2014
 
Decrease
 
Change
 
(dollars in thousands)
 
 
Provision for (Benefit from) Income Taxes
$
(4,923
)
 
$
10,325

 
$
(15,248
)
 
(147.7
)%
Our effective tax rate changed from 56.0% in fiscal 2014 to (12.8)% in fiscal 2015, primarily due to losses in both U.S. and foreign jurisdictions. The Company also recorded valuation allowances of $5.6 million and $1.9 million in fiscal 2015 and 2014, respectively, on deferred tax assets, including net operating loss carryforwards, in the foreign jurisdictions which have historical losses. See Note 13 to our consolidated financial statements for further details on our effective tax rate.

39


Segment Results
 
Year Ended January 31,
 
Increase/
 
Percent
 
2015
 
2014
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Revenue
 
 
 
 
 
 
 
Agriculture
$
1,372,716

 
$
1,765,821

 
$
(393,105
)
 
(22.3
)%
Construction
434,639

 
405,822

 
28,817

 
7.1
 %
International
166,379

 
145,884

 
20,495

 
14.0
 %
Segment revenue
1,973,734

 
2,317,527

 
(343,793
)
 
(14.8
)%
Eliminations
(73,488
)
 
(91,081
)
 
17,593

 
19.3
 %
Total
$
1,900,246

 
$
2,226,446

 
$
(326,200
)
 
(14.7
)%
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
 
 
 
 
Agriculture
$
(13,429
)
 
$
59,574

 
$
(73,003
)
 
(122.5
)%
Construction
(10,770
)
 
(28,083
)
 
17,313

 
61.6
 %
International
(17,248
)
 
(5,544
)
 
(11,704
)
 
(211.1
)%
Segment income (loss) before income taxes
(41,447
)
 
25,947

 
(67,394
)
 
(259.7
)%
Shared Resources
2,144

 
(6,650
)
 
8,794

 
132.2
 %
Eliminations
963

 
(868
)
 
1,831

 
210.9
 %
Income (Loss) Before Income Taxes
$
(38,340
)
 
$
18,429

 
$
(56,769
)
 
(308.0
)%
Agriculture
Agriculture segment revenue for fiscal 2015 decreased 22.3% compared to the same period last year. The revenue decrease was due to a decrease in Agriculture same-store sales of 22.0% as compared to fiscal 2014. Agriculture same-store sales decreased primarily due to a decrease in equipment revenue and were negatively impacted by challenging industry conditions such as decreases in agricultural commodity prices and projected net farm income, which have a negative effect on customer sentiment. Changes in actual or anticipated net farm income, or in any of the significant components of net farm income, generally have a direct correlation with agricultural equipment purchases by farmers. In February, August and December 2014, the U.S. Department of Agriculture published its projections of a decrease in net farm income from calendar year 2013 to 2014. The commodity price of corn and soybeans during fiscal 2015, which are the predominant crops in our Agriculture store footprint, decreased significantly from the price during fiscal 2014, mainly as a result of a projected increase in U.S. corn and soybean supply compared to the prior year.
Agriculture segment income before income taxes for fiscal 2015 decreased 122.5% compared to the same period last year, primarily due to the aforementioned decrease in equipment revenue, a decrease in equipment gross profit margin, the aforementioned impairment charges of $30.0 million, and partially offset by a decrease in operating expenses. The compression in equipment gross profit margin was primarily caused by the previously discussed Agriculture industry challenges as well as an oversupply of equipment in the Agriculture industry. The decrease in operating expenses was primarily due to lower commissions expense resulting from the decrease in equipment gross profit.
Construction
Construction segment revenue for fiscal 2015 increased 7.1% compared to the same period last year, primarily due to an increase in Construction same-store sales of 14.9% over fiscal 2014. The increase in Construction segment revenue, which included increases in all lines of business, resulted from improved industry conditions and the positive impact of operational initiatives.
Our Construction segment loss before income taxes was $10.8 million for fiscal 2015 compared to segment loss before income taxes of $28.1 million for fiscal 2014. This improvement was primarily due to the increase in revenue, decreases in operating expenses and impairment costs, and partially offset by realignment costs. Realignment costs totaling $2.6 million were recognized during fiscal 2015 related to the headcount reductions and closing of seven Construction stores, which was discussed above. The decrease in operating expenses resulted from the cost savings associated with closing these stores. The dollar utilization of our rental fleet decreased, from 30.3% in fiscal 2014 to 27.7% in fiscal 2015, primarily due to lower oil

40


prices affecting rental demand in our oil producing markets as well as lost rental revenue due to the repositioning of rental equipment from the seven Construction stores closed in the first quarter of fiscal 2015 to other Construction stores.
International
International segment revenue for fiscal 2015 increased $20.5 million compared to the same period last year, primarily due to acquisitions and new store openings, and an increase in same-store sales.
Our International segment loss before income taxes was $17.2 million for fiscal 2015 compared to segment loss before income taxes of $5.5 million for the same period last year. This increased loss was primarily due to increases in operating expenses and floorplan interest expense, and a decrease in interest income and other income (expense), as compared to the same period of the prior year. Operating expenses increased due to expanding our distribution network in Eastern Europe, including opening a new store in Ukraine and establishing a European operations center to support our European stores. We believe the political and economic instability in Ukraine has had a negative impact on our revenue, which reduces our ability to leverage these fixed operating costs. The increase in floorplan interest expense for fiscal 2015, as compared to the same period in the prior year, was primarily due to the increase in floorplan payable and the related equipment inventory balances, and higher interest rates in Ukraine associated with the political and economic instability that is present in the current fiscal year. The decrease in interest income and other income (expense) was primarily due to foreign currency remeasurement losses in Ukraine, resulting from a devaluation of the Ukrainian hryvnia in fiscal 2015.
Shared Resources/Eliminations
We incur centralized expenses/income at our general corporate level, which we refer to as "Shared Resources," and then allocate these net expenses to our segments. Since these allocations are set early in the year, unallocated or over-allocated balances may occur.
Eliminations remove any inter-company revenues or income before income taxes residing in our segment results.
Fiscal Year Ended January 31, 2014 Compared to Fiscal Year Ended January 31, 2013
Consolidated Results
Revenue
 
Year Ended January 31,
 
Increase/
 
Percent
 
2014
 
2013
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Equipment
$
1,722,738

 
$
1,763,877

 
$
(41,139
)
 
(2.3
)%
Parts
275,750

 
242,368

 
33,382

 
13.8
 %
Service
149,082

 
127,779

 
21,303

 
16.7
 %
Rental and other
78,876

 
64,396

 
14,480

 
22.5
 %
Total Revenue
$
2,226,446

 
$
2,198,420

 
$
28,026

 
1.3
 %
The increase in total revenue for fiscal 2014, as compared to fiscal 2013, was primarily due to acquisitions contributing $157.9 million, offset by a decrease in same-store sales of $129.9 million. This decrease in same-store sales reflected a 6.2% decrease over the prior year and was driven by a decrease in equipment revenue. The decrease in equipment revenue was mainly caused by challenging industry conditions such as decreases in agricultural commodity prices, increased agriculture equipment prices, and continued difficult conditions in the construction industry, which are discussed in more detail in the Segment Reporting section below. Our Agriculture and Construction segments had lower same-store sales in fiscal 2014 compared to fiscal 2013, primarily driven by challenging industry conditions in each of these segments, while our International segment had growth in same-store sales over the comparable period of the prior year.

41


Gross Profit
 
Year Ended January 31,
 
Increase/
 
Percent
 
2014
 
2013
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Gross Profit
 
 
 
 
 
 
 
Equipment
$
146,492

 
$
163,644

 
$
(17,152
)
 
(10.5
)%
Parts
83,551

 
73,204

 
10,347

 
14.1
 %
Service
94,474

 
82,031

 
12,443

 
15.2
 %
Rental and other
23,557

 
20,482

 
3,075

 
15.0
 %
Total Gross Profit
$
348,074

 
$
339,361

 
$
8,713

 
2.6
 %
Gross Profit Margin
 
 
 
 
 
 
 
Equipment
8.5
%
 
9.3
%
 
(0.8
)%
 
(8.6
)%
Parts
30.3
%
 
30.2
%
 
0.1
 %
 
0.3
 %
Service
63.4
%
 
64.2
%
 
(0.8
)%
 
(1.2
)%
Rental and other
29.9
%
 
31.8
%
 
(1.9
)%
 
(6.0
)%
Total Gross Profit Margin
15.6
%
 
15.4
%
 
0.2
 %
 
1.3
 %
Gross Profit Mix
 
 
 
 
 
 
 
Equipment
42.1
%
 
48.2
%
 
(6.1
)%
 
(12.7
)%
Parts
24.0
%
 
21.6
%
 
2.4
 %
 
11.1
 %
Service
27.1
%
 
24.2
%
 
2.9
 %
 
12.0
 %
Rental and other
6.8
%
 
6.0
%
 
0.8
 %
 
13.3
 %
Total Gross Profit Mix
100.0
%
 
100.0
%
 
 %
 
 %
The increase in total gross profit for fiscal 2014, as compared to fiscal 2013, was primarily due to an increase in parts, service and rental and other revenue, and offset mainly by a decrease in gross profit margin on equipment. Acquisitions contributed $22.6 million of the increase in total gross profit, which was offset by a decrease in same-store sale gross profit of $13.9 million. The increase in total gross profit margin from 15.4% in fiscal 2013 to 15.6% in fiscal 2014 was due to the change in gross profit mix to our higher-margin parts and service businesses, and mainly offset by the decrease in gross profit margin on equipment. The decrease in equipment gross profit margin was negatively impacted by the challenging industry conditions such as decreases in commodity prices and increased equipment prices in the agriculture industry, and continued difficult conditions and oversupply of equipment inventory in the construction industry, which factors forced a reduction in equipment prices. These factors are discussed in more detail in the Segment Reporting section below. Our company-wide absorption rate decreased from 77.3% in fiscal 2014 to 71.2% in fiscal 2013 primarily due to the increase in our Fixed Operating Expenses associated with our Construction acquisition stores and expanded Construction and International distribution network, as discussed in the Operating Expenses section below.
Operating Expenses
 
Year Ended January 31,
 

 
Percent
 
2014
 
2013
 
Increase
 
Change
 
(dollars in thousands)
 
 
Operating Expenses
$
291,202

 
$
247,557

 
$
43,645

 
17.6
%
Operating Expenses as a Percentage of Revenue
13.1
%
 
11.2
%
 
1.9
%
 
17.0
%
The increase in operating expenses was primarily due to the additional costs associated with acquisitions and expanding our distribution network, such as compensation, rent, travel and depreciation. As a percentage of total revenue, operating expenses increased to 13.1% in fiscal 2014 compared to 11.2% in fiscal 2013. The increase in operating expenses as a percentage of revenue was caused by the decrease in same-store sales, which negatively affected our ability to leverage fixed operating costs, the Construction stores acquired in fiscal year 2013 and the first quarter of fiscal 2014, and other ongoing costs of building an expanded Construction and International distribution network in these two segments. Most of the recently acquired Construction stores are currently operating at a higher operating expense ratio than our average Construction store, as they are underperforming in regards to revenue levels in the markets in which they are located.

42


Impairment & Realignment Costs
 
Year Ended January 31,
 

 
Percent
 
2014
 
2013
 
Increase
 
Change
 
(dollars in thousands)
 
 
Impairment & Realignment Costs
$
9,997

 
$

 
$
9,997

 
100.0
%
During our annual impairment tests in the fourth quarter of fiscal 2014, we determined that certain goodwill, other intangible assets and long-lived assets were impaired in our Construction and International segments, resulting in $9.7 million impairment expense recognized in fiscal 2014. No such impairment was recognized in fiscal 2013.
Other Income (Expense)
 
Year Ended January 31,
 

 
Percent
 
2014
 
2013
 
Increase
 
Change
 
(dollars in thousands)
 
 
Interest income and other income (expense)
$
2,109

 
$
1,654

 
$
455

 
27.5
%
Floorplan interest expense
(16,764
)
 
(13,297
)
 
3,467

 
26.1
%
Other interest expense
(13,791
)
 
(9,465
)
 
4,326

 
45.7
%
The increase in floorplan interest expense of $3.5 million was due to the increase in floorplan payable balances associated with higher equipment inventory levels in fiscal 2014, as compared to fiscal 2013. The increase in other interest expense of $4.3 million, as compared to the prior year, was primarily due to an increase in long-term debt associated with our rental fleet and our Senior Convertible Notes issued in April 2012.
Provision for Income Taxes
 
Year Ended January 31,
 

 
Percent
 
2014
 
2013
 
Decrease
 
Change
 
(dollars in thousands)
 
 
Provision for Income Taxes
$
10,325

 
$
28,137

 
$