10-Q 1 titn-2015430x10q.htm 10-Q TITN- 2015.4.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
 
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended April 30, 2015
 
Commission File No. 001-33866
 
TITAN MACHINERY INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
No. 45-0357838
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
644 East Beaton Drive
West Fargo, ND 58078-2648
(Address of Principal Executive Offices)
 
Registrant’s telephone number (701) 356-0130
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  x    NO  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  x    NO  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o
 
Accelerated filer  x
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
(Do not check if smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o    NO  x
 
The number of shares outstanding of the registrant’s common stock as of May 31, 2015 was: Common Stock, $0.00001 par value, 21,392,881 shares.



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

 
 
Page No.
PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
 
Consolidated Balance Sheets as of April 30, 2015 and January 31, 2015
 
Consolidated Statements of Operations for the three months ended April 30, 2015 and 2014
 
Consolidated Statements of Comprehensive Income for the three months ended April 30, 2015 and 2014
 
Consolidated Statements of Stockholders' Equity for the three months ended April 30, 2015 and 2014
 
Consolidated Statements of Cash Flows for the three months ended April 30, 2015 and 2014
 
Notes to Consolidated Financial Statements
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.
CONTROLS AND PROCEDURES
PART II.
OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
ITEM 4.
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
Signatures
 
Exhibit Index
 

2


PART I. — FINANCIAL INFORMATION
 
ITEM 1.                FINANCIAL STATEMENTS
 
TITAN MACHINERY INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
April 30, 2015
 
January 31, 2015
 
(Unaudited)
 
 
Assets


 
 
Current Assets
 
 
 
Cash
$
104,355

 
$
127,528

Receivables (net of allowance of $4,615 and $4,218 as of April 30, 2015 and January 31, 2015, respectively)
64,892

 
76,382

Inventories
880,060

 
879,440

Prepaid expenses and other
5,179

 
10,634

Income taxes receivable
3,003

 
166

Deferred income taxes
18,488

 
19,025

Assets held for sale
14,946

 
15,312

Total current assets
1,090,923

 
1,128,487

Intangibles and Other Assets
 
 
 
Intangible assets, net of accumulated amortization
5,360

 
5,458

Other
6,649

 
7,122

Total intangibles and other assets
12,009

 
12,580

Property and Equipment, net of accumulated depreciation
194,788

 
208,680

Total Assets
$
1,297,720

 
$
1,349,747

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
17,539

 
$
17,659

Floorplan payable
606,673

 
627,249

Current maturities of long-term debt
24,677

 
7,749

Customer deposits
26,247

 
35,090

Accrued expenses
33,362

 
35,496

Income taxes payable

 
3,529

Liabilities held for sale
1,540

 
2,835

Total current liabilities
710,038

 
729,607

Long-Term Liabilities
 
 
 
Senior convertible notes
133,245

 
132,350

Long-term debt, less current maturities
45,660

 
67,123

Deferred income taxes
39,244

 
38,996

Other long-term liabilities
3,488

 
3,312

Total long-term liabilities
221,637

 
241,781

Commitments and Contingencies


 


Stockholders' Equity
 
 
 
Common stock, par value $.00001 per share, 45,000 shares authorized; 21,392 shares issued and outstanding at April 30, 2015; 21,406 shares issued and outstanding at January 31, 2015

 

Additional paid-in-capital
240,505

 
240,180

Retained earnings
131,114

 
137,418

Accumulated other comprehensive loss
(5,729
)
 
(1,099
)
Total Titan Machinery Inc. stockholders' equity
365,890

 
376,499

Noncontrolling interest
155

 
1,860

Total stockholders' equity
366,045

 
378,359

Total Liabilities and Stockholders' Equity
$
1,297,720

 
$
1,349,747

 See Notes to Consolidated Financial Statements

3


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
 
 
Three Months Ended April 30,
 
2015
 
2014
Revenue
 
 
 
Equipment
$
244,983

 
$
345,045

Parts
61,520

 
68,379

Service
32,902

 
37,084

Rental and other
13,791

 
14,955

Total Revenue
353,196

 
465,463

Cost of Revenue
 
 
 
Equipment
227,033

 
316,282

Parts
43,571

 
48,014

Service
11,360

 
14,403

Rental and other
10,797

 
10,825

Total Cost of Revenue
292,761

 
389,524

Gross Profit
60,435

 
75,939

Operating Expenses
57,110

 
71,152

Impairment and Realignment Costs
1,601

 
2,801

Income from Operations
1,724

 
1,986

Other Income (Expense)
 
 
 
Interest income and other income (expense)
(2,124
)
 
(2,578
)
Floorplan interest expense
(4,599
)
 
(4,593
)
Other interest expense
(3,827
)
 
(3,441
)
Loss Before Income Taxes
(8,826
)
 
(8,626
)
Benefit from Income Taxes
(1,936
)
 
(1,733
)
Net Loss Including Noncontrolling Interest
$
(6,890
)
 
$
(6,893
)
Less: Net Loss Attributable to Noncontrolling Interest
(586
)
 
(344
)
Net Loss Attributable to Titan Machinery Inc.
$
(6,304
)
 
$
(6,549
)
Net Loss Allocated to Participating Securities - Note 1
105

 
60

Net Loss Attributable to Titan Machinery Inc. Common Stockholders
$
(6,199
)
 
$
(6,489
)
Earnings (Loss) per Share - Note 1
 
 
 
Earnings (Loss) per Share - Basic
$
(0.29
)
 
$
(0.31
)
Earnings (Loss) per Share - Diluted
$
(0.29
)
 
$
(0.31
)
Weighted Average Common Shares - Basic
21,044

 
20,951

Weighted Average Common Shares - Diluted
21,044

 
20,951

 
See Notes to Consolidated Financial Statements


4


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
 
 
Three Months Ended April 30,
 
2015
 
2014
Net Loss Including Noncontrolling Interest
$
(6,890
)
 
$
(6,893
)
Other Comprehensive Loss
 
 
 
Foreign currency translation adjustments
(6,191
)
 
(1,220
)
Unrealized gain (loss) on net investment hedge derivative instruments, net of tax expense (benefit) of $44 and ($498) for the three months ended April 30, 2015 and 2014, respectively
67

 
(747
)
Unrealized gain on interest rate swap cash flow hedge derivative instrument, net of tax expense of $72 and $2 for the three months ended April 30, 2015 and 2014, respectively
109

 
3

Unrealized gain on foreign currency contract cash flow hedge derivative instruments, net of tax expense of $21 for the three months ended April 30, 2014

 
32

Reclassification of loss on interest rate swap cash flow hedge derivative instruments included in net loss, net of tax benefit of $172 for the three months ended April 30, 2015
258

 

Reclassification of loss on foreign currency contract cash flow hedge derivative instruments included in net loss, net of tax expense of $5 and $5 for the three months ended April 30, 2015 and April 30, 2014, respectively
8

 
9

Total Other Comprehensive Loss
(5,749
)
 
(1,923
)
Comprehensive Loss
(12,639
)
 
(8,816
)
Comprehensive Loss Attributable to Noncontrolling Interest
(1,705
)
 
(650
)
Comprehensive Loss Attributable To Titan Machinery Inc.
$
(10,934
)
 
$
(8,166
)
 
See Notes to Consolidated Financial Statements


5


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands)
 
Common Stock
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Shares Outstanding
 
Amount
 
Additional Paid-In Capital
 
Retained Earnings
 
Foreign Currency Translation Adjustments
 
Unrealized Gains (Losses) on Net Investment Hedges
 
Unrealized Gains (Losses) on Interest Rate Swap Cash Flow Hedges
 
Unrealized Gains (Losses) on Foreign Currency Contract Cash Flow Hedges
 
Total
 
Total Titan Machinery Inc. Stockholders' Equity
 
Noncontrolling Interest
 
Total Stockholders' Equity
Balance, January 31, 2014
21,261

 
$

 
$
238,857

 
$
169,575

 
$
1,541

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

 
$
408,771

 
$
2,571

 
$
411,342

Common stock issued on grant of restricted stock (net of forfeitures), exercise of stock options, and tax benefits of equity awards
(8
)
 

 
(23
)
 

 

 

 

 

 

 
(23
)
 

 
(23
)
Stock-based compensation expense

 

 
463

 

 

 

 

 

 

 
463

 

 
463

Other

 

 
(502
)
 

 

 

 

 

 

 
(502
)
 
501

 
(1
)
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(6,549
)
 

 

 

 

 

 
(6,549
)
 
(344
)
 
(6,893
)
Other comprehensive income (loss)

 

 

 

 
(914
)
 
(747
)
 
3

 
41

 
(1,617
)
 
(1,617
)
 
(306
)
 
(1,923
)
Total comprehensive loss

 

 

 

 

 

 

 

 

 
(8,166
)
 
(650
)
 
(8,816
)
Balance, April 30, 2014
21,253

 
$

 
$
238,795

 
$
163,026

 
$
627

 
$
(1,086
)
 
$
(734
)
 
$
(85
)
 
$
(1,278
)
 
$
400,543

 
$
2,422

 
$
402,965

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 31, 2015
21,406

 
$

 
$
240,180

 
$
137,418

 
$
(1,632
)
 
$
2,510

 
$
(1,940
)
 
$
(37
)
 
$
(1,099
)
 
$
376,499

 
$
1,860

 
$
378,359

Common stock issued on grant of restricted stock (net of forfeitures), exercise of stock options, and tax benefits of equity awards
(14
)
 

 
(206
)
 

 

 

 

 

 

 
(206
)
 

 
(206
)
Stock-based compensation expense

 

 
531

 

 

 

 

 

 

 
531

 

 
531

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(6,304
)
 

 

 

 

 

 
(6,304
)
 
(586
)
 
(6,890
)
Other comprehensive income (loss)

 

 

 

 
(5,072
)
 
67

 
367

 
8

 
(4,630
)
 
(4,630
)
 
(1,119
)
 
(5,749
)
Total comprehensive loss

 

 

 

 

 

 

 

 

 
(10,934
)
 
(1,705
)
 
(12,639
)
Balance, April 30, 2015
21,392

 
$

 
$
240,505

 
$
131,114

 
$
(6,704
)
 
$
2,577

 
$
(1,573
)
 
$
(29
)
 
$
(5,729
)
 
$
365,890

 
$
155

 
$
366,045


See Notes to Consolidated Financial Statements

6


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) 
 
Three Months Ended April 30,
 
2015
 
2014
Operating Activities
 
 
 
Net loss including noncontrolling interest
$
(6,890
)
 
$
(6,893
)
Adjustments to reconcile net loss including noncontrolling interest to net cash provided by (used for) operating activities
 
 
 
Depreciation and amortization
6,667

 
6,729

Impairment
152

 

Deferred income taxes
497

 
232

Stock-based compensation expense
531

 
463

Noncash interest expense
1,765

 
1,151

Unrealized foreign currency (gain) loss on loans to international subsidiaries
100

 
(1,282
)
Other, net
126

 
646

Changes in assets and liabilities
 
 
 
Receivables, prepaid expenses and other assets
13,525

 
23,925

Inventories
522

 
(41,963
)
Manufacturer floorplan payable
12,980

 
(17,308
)
Accounts payable, customer deposits, accrued expenses and other long-term liabilities
(9,092
)
 
(14,639
)
Income taxes
(6,577
)
 
(5,663
)
Net Cash Provided by (Used for) Operating Activities
14,306

 
(54,602
)
Investing Activities
 
 
 
Rental fleet purchases
(112
)
 
(629
)
Property and equipment purchases (excluding rental fleet)
(2,170
)
 
(5,078
)
Proceeds from sale of property and equipment
634

 
471

Proceeds upon settlement of net investment hedge derivative instruments
180

 

Payments upon settlement of net investment hedge derivative instruments

 
(915
)
Other, net
18

 
28

Net Cash Used for Investing Activities
(1,450
)
 
(6,123
)
Financing Activities
 
 
 
Net change in non-manufacturer floorplan payable
(30,001
)
 
65,305

Proceeds from long-term debt borrowings
811

 
5,832

Principal payments on long-term debt
(5,687
)
 
(2,505
)
Other, net
(443
)
 
(207
)
Net Cash Provided by (Used for) Financing Activities
(35,320
)
 
68,425

Effect of Exchange Rate Changes on Cash
(709
)
 
69

Net Change in Cash
(23,173
)
 
7,769

Cash at Beginning of Period
127,528

 
74,242

Cash at End of Period
$
104,355

 
$
82,011

Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid during the period
 
 
 
Income taxes, net of refunds
$
4,093

 
$
3,973

Interest
$
7,684

 
$
5,475

Supplemental Disclosures of Noncash Investing and Financing Activities
 
 
 
Net property and equipment financed with long-term debt, accounts payable and accrued liabilities
$
77

 
$
1,100

Net transfer of assets to (from) property and equipment from (to) inventories
$
(7,029
)
 
$
1,962


See Notes to Consolidated Financial Statements

7


TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1—BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The quarterly operating results for Titan Machinery Inc. (the “Company”) are subject to fluctuation due to varying weather patterns, which may impact the timing and amount of equipment purchases, rentals, and after-sales parts and service purchases by the Company’s Agriculture, Construction and International customers. Therefore, operating results for the three-month period ended April 30, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2016. The information contained in the balance sheet as of January 31, 2015 was derived from the audited financial statements for the Company for the year then ended. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended January 31, 2015 as filed with the SEC.
The amounts included in the accompanying unaudited Consolidated Statements of Operations for the three-month period ended April 30, 2014 have been updated to reflect a correction in the Company's VAT asset classification as of April 30, 2014. This correction has been previously disclosed in the Company's Form 10-Q for the period ended July 31, 2014 and the Company's Form 10-K for the year ended January 31, 2015 and resulted from the Company's conclusion, reached subsequent to the issuance of the Company’s interim consolidated financial statements as of and for the period ended April 30, 2014, that the treatment of its prepaid value added tax (“VAT”) asset in Ukraine as a non-monetary asset was incorrect and that the asset should be classified and accounted for as a monetary asset and therefore should be remeasured from Ukrainian hryvnia (“UAH”) to U.S. Dollars (“USD”) using the current rate as opposed to the historical rate used for non-monetary assets. In February of 2014, the National Bank of Ukraine terminated the currency peg of the UAH to the USD; subsequent to the decoupling and as a result of the economic and political conditions present in the country, the UAH experienced significant devaluation. The incorrect classification of the VAT asset as a non-monetary asset coupled with the significant devaluation of the UAH resulted in an overstatement of the Company’s assets (Prepaid expenses and other) as of April 30, 2014 and an understatement of the Company’s loss (Interest income and other income (expense)) for the three months ended April 30, 2014. This correction increased the Company’s Net Loss Attributable to Titan Machinery Inc. by $2.3 million (from the previously reported $4.2 million to $6.5 million) and increased the diluted loss per share by $0.11 (from the previously reported $0.20 loss per share to a $0.31 loss per share).
Nature of Business
The Company is engaged in the retail sale, service and rental of agricultural and construction machinery through its stores in the United States and Europe. The Company’s North American stores are located in Arizona, Colorado, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, South Dakota, Wisconsin and Wyoming, and its European stores are located in Bulgaria, Romania, Serbia and Ukraine. 
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, particularly related to realization of inventory, initial valuation and impairment analyses of intangible assets, collectability of receivables, and income taxes.

8


Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All material accounts, transactions and profits between the consolidated companies have been eliminated in consolidation.
Earnings (Loss) Per Share (“EPS”)
The Company uses the two-class method to calculate basic and diluted EPS. Unvested restricted stock awards are considered participating securities because they entitle holders to non-forfeitable rights to dividends during the vesting term. Under the two-class method, basic EPS were computed by dividing net income (loss) attributable to Titan Machinery Inc. after allocation of income (loss) to participating securities by the weighted-average number of shares of common stock outstanding during the year.
Diluted EPS were computed by dividing net income (loss) attributable to Titan Machinery Inc. after allocation of income (loss) to participating securities by the weighted-average shares of common stock outstanding after adjusting for potential dilution related to the conversion of all dilutive securities into common stock. All potentially dilutive securities were included in the computation of diluted EPS. There were approximately 211,000 and 375,000 stock options outstanding that were excluded from the computation of diluted EPS for the three months ended April 30, 2015 and 2014, respectively, because they were anti-dilutive. None of the approximately 3,474,000 shares underlying the Company’s senior convertible notes were included in the computation of diluted EPS because the Company’s average stock price was less than the conversion price of $43.17.
The following table sets forth the calculation of the denominator for basic and diluted EPS:
 
Three Months Ended April 30,
 
2015

2014
 
(in thousands, except per share data)
Basic Weighted-Average Common Shares Outstanding
21,044


20,951

Plus: Incremental Shares From Assumed Exercise of Stock Options



Diluted Weighted-Average Common Shares Outstanding
21,044


20,951

Earnings (Loss) per Share - Basic
$
(0.29
)

$
(0.31
)
Earnings (Loss) per Share - Diluted
$
(0.29
)

$
(0.31
)
Recent Accounting Guidance
In May 2014, the FASB issued authoritative guidance on accounting for revenue recognition, codified in ASC 606, Revenue from Contracts with Customers. This guidance supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This guidance is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. When adopted, the Company will employ one of the two retrospective application methods. The Company has not determined the potential effects adoption of this standard will have on the consolidated financial statements.
In August 2014, the FASB issued authoritative guidance on management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and provide related footnote disclosures, codified in ASC 205-40, Going Concern. The guidance provides a definition of the term substantial doubt, requires an evaluation every reporting period including interim periods, provides principles for considering the mitigating effect of management’s plans, requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, requires an express statement and other disclosures when substantial doubt is not alleviated, and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The Company will adopt this guidance for the year-ended January 31, 2017, and it will apply to each interim and annual period thereafter. Its adoption is not expected to have a material effect on the Company's consolidated financial statements.
In April 2015, the FASB amended authoritative guidance on debt issuance costs, codified in ASC 835-30, Imputation of Interest. The amended guidance changes the balance sheet presentation of debt issuance costs to be a direct deduction from the related debt liability rather than an asset. This guidance is effective for the Company on February 1, 2016, with early adoption permitted. Its adoption is not expected to have a material effect on the Company's consolidated financial statements.

9


NOTE 2—INVENTORIES
 
April 30, 2015
 
January 31, 2015
 
(in thousands)
New equipment
$
451,587

 
$
442,984

Used equipment
314,818

 
318,308

Parts and attachments
100,944

 
107,893

Work in process
12,711

 
10,255

 
$
880,060

 
$
879,440

NOTE 3—PROPERTY AND EQUIPMENT
 
April 30, 2015
 
January 31, 2015
 
(in thousands)
Rental fleet equipment
$
137,616

 
$
148,198

Machinery and equipment
23,858

 
24,071

Vehicles
42,436

 
43,435

Furniture and fixtures
39,697

 
39,421

Land, buildings, and leasehold improvements
57,074

 
57,630

 
300,681

 
312,755

Less accumulated depreciation
(105,893
)
 
(104,075
)
 
$
194,788

 
$
208,680

 
NOTE 4—LINES OF CREDIT / FLOORPLAN PAYABLE
Floorplan Lines of Credit
Floorplan payable balances reflect the amount owed for new equipment inventory purchased from a manufacturer and for used equipment inventory, which is primarily purchased through trade-in on equipment sales. Certain of the manufacturers from which the Company purchases new equipment inventory offer financing on these purchases, either offered directly from the manufacturer or through the manufacturers’ captive finance subsidiaries. CNH Industrial America LLC's captive finance subsidiary, CNH Industrial Capital America LLC ("CNH Industrial Capital"), also provides financing of used equipment inventory. The Company also has floorplan payable balances with non-manufacturer lenders for new and used equipment inventory. Changes in manufacturer floorplan payable are reported as operating cash flows and changes in non-manufacturer floorplan payable are reported as financing cash flows in the Company's consolidated statements of cash flows. The Company has three significant floorplan lines of credit, credit facilities related to its foreign subsidiaries, and other floorplan payable balances with non-manufacturer lenders and manufacturers other than CNH Industrial.
As of April 30, 2015, the Company had discretionary floorplan lines of credit for equipment inventory purchases totaling approximately $1.1 billion, which includes a $275.0 million Floorplan Payable Line with a group of banks led by Wells Fargo Bank, National Association ("Wells Fargo"), a $450.0 million credit facility with CNH Industrial Capital, a $200.0 million credit facility with Agricredit Acceptance LLC and the U.S. dollar equivalent of $128.4 million in credit facilities related to our foreign subsidiaries. Floorplan payables relating to these credit facilities totaled approximately $573.0 million of the total floorplan payable balance of $606.7 million outstanding as of April 30, 2015 and $594.1 million of the total floorplan payable balance of $627.2 million outstanding as of January 31, 2015; the remaining outstanding balances relate to equipment inventory financing from manufacturers and non-manufacturer lenders other than the aforementioned lines of credit. As of April 30, 2015, the U.S. floorplan payables carried various interest rates primarily ranging from 3.31% to 5.02%, and the foreign floorplan payables carried various interest rates primarily ranging from 1.81% to 12.00%.
Working Capital Line of Credit
As of April 30, 2015, the Company had a $87.5 million working capital line of credit under the credit facility with Wells Fargo. The Company had $18.7 million outstanding on its working capital line of credit as of April 30, 2015 and January 31, 2015. Amounts outstanding are recorded as long-term debt, within long-term liabilities on the consolidated balance sheets, as the Company does not have an obligation to repay amounts borrowed within one year.

10


NOTE 5—SENIOR CONVERTIBLE NOTES
The Company’s 3.75% Senior Convertible Notes issued on April 24, 2012 (“Convertible Notes”) consisted of the following:
 
April 30, 2015
 
January 31, 2015
 
(in thousands except conversion
rate and conversion price)
Principal value
$
150,000

 
$
150,000

Unamortized debt discount
(16,755
)
 
(17,650
)
Carrying value of senior convertible notes
$
133,245

 
$
132,350

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

 
$
15,546

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

 
 
Conversion price (per share of common stock)
$
43.17

 
 
The Company recognized interest expense associated with its Senior Convertible Notes as follows:
 
Three Months Ended April 30,
 
2015
 
2014
 
(in thousands)
Cash Interest Expense
 
 
 
Coupon interest expense
$
1,406

 
$
1,406

Noncash Interest Expense
 
 
 
Amortization of debt discount
894

 
835

Amortization of transaction costs
136

 
133

 
$
2,436

 
$
2,374

As of April 30, 2015, the unamortized debt discount will be amortized over a remaining period of approximately 4 years. As of April 30, 2015 and January 31, 2015, the if-converted value of the Senior Convertible Notes did not exceed the principal balance. The effective interest rate of the liability component was equal to 7.0% for each of the statements of operations periods presented.
NOTE 6—DERIVATIVE INSTRUMENTS
The Company holds derivative instruments for the purpose of minimizing exposure to fluctuations in foreign currency exchange rates to which the Company is exposed in the normal course of its operations.
Net Investment Hedges
To protect the value of the Company’s investments in its foreign operations against adverse changes in foreign currency exchange rates, the Company may, from time to time, hedge a portion of its net investment in one or more of its foreign subsidiaries. Gains and losses on derivative instruments that are designated and effective as a net investment hedge are included in other comprehensive income and only reclassified into earnings in the period during which the hedged net investment is sold or liquidated. Any hedge ineffectiveness is recognized in earnings immediately.
Cash Flow Hedges
On October 9, 2013, the Company entered into a forward-starting interest rate swap instrument which has a notional amount of $100.0 million dollars, an effective date of September 30, 2014 and a maturity date of September 30, 2018. The objective of the instrument is to, beginning on September 30, 2014, protect the Company from changes in benchmark interest rates to which the Company is exposed through certain of its variable interest rate credit facilities. The instrument provides for a fixed interest rate of 1.901% up to the maturity date.
The Company may, from time to time, hedge foreign currency exchange rate risk arising from inventory purchases denominated in Canadian dollars through the use of foreign currency forward contracts. The maximum length of time over

11


which the Company hedges its exposure to the variability in future cash flows associated with the Canadian dollar purchasing is less than 12 months.
The interest rate swap instrument and foreign currency contracts have been designated as cash flow hedging instruments and accordingly changes in the effective portion of the fair value of the instruments are recorded in other comprehensive income and only reclassified into earnings in the period(s) in which the related hedged item affects earnings or the anticipated underlying hedged transactions are no longer probable of occurring. Any hedge ineffectiveness is recognized in earnings immediately.
Derivative Instruments Not Designated as Hedging Instruments
The Company uses foreign currency forward contracts to hedge the effects of fluctuations in exchange rates on outstanding intercompany loans. The Company does not formally designate and document such derivative instruments as hedging instruments; however, the instruments are an effective economic hedge of the underlying foreign currency exposure. Both the gain or loss on the derivative instrument and the offsetting gain or loss on the underlying intercompany loan are recognized in earnings immediately, thereby eliminating or reducing the impact of foreign currency exchange rate fluctuations on net income.
The following table sets forth the notional value of the Company's outstanding derivative instruments.
 
Notional Amount as of:
 
April 30, 2015
 
January 31, 2015
 
(in thousands)
Net investment hedge:
 
 
 
Foreign currency contracts
$
7,691

 
$
14,223

Cash flow hedges:
 
 
 
Interest rate swap
100,000

 
100,000

Foreign currency contracts

 

Derivatives not designated as hedging instruments:
 
 
 
Foreign currency contracts
28,578

 
30,030

The following table sets forth the fair value of the Company’s outstanding derivative instruments.
 
Fair Value as of:
 
Balance Sheet Location
 
April 30, 2015
 
January 31, 2015
 
 
(in thousands)
 
 
Liability Derivatives:
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
Net investment hedges:
 
 
 
 
 
Foreign currency contracts
$
88

 
$
19

 
Accrued expenses
Cash flow hedges:
 
 
 
 
 
Interest rate swap
$
2,622

 
$
3,233

 
Accrued expenses
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts
273

 
17

 
Accrued expenses
Total Liability Derivatives
$
2,983

 
$
3,269

 
 
The following table sets forth the gains and losses recognized in other comprehensive income (loss) ("OCI") and income (loss) related to the Company’s derivative instruments for the three months ended April 30, 2015 and 2014, respectively. All amounts included in income (loss) in the table below from derivatives designated as hedging instruments relate to reclassifications from accumulated other comprehensive income.

12


 
Three Months Ended April 30,
 
 
 
2015
 
2014
 
 
 
OCI
 
Income (Loss)
 
OCI
 
Income (Loss)
 
Statements of Operations Classification
 
(in thousands)
 
 
Dervatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Net investment hedges:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
111

 
$

 
$
(1,245
)
 
$

 
N/A
Cash flow hedges:
 
 
 
 
 
 
 
 
 
Interest rate swap
181

 
(430
)
 
5

 

 
Floorplan interest expense
Foreign currency contracts

 
(13
)
 
53

 
(14
)
 
Cost of revenue - equipment
Dervatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Foreign currency contracts

 
82

 

 
(1,303
)
 
Interest income and other income (expense)
Total Derivatives
$
292

 
$
(361
)
 
$
(1,187
)
 
$
(1,317
)
 
 
No components of the Company's net investment or cash flow hedging instruments were excluded from the assessment of hedge ineffectiveness.
As of April 30, 2015, the Company had $2.6 million in pre-tax net unrealized losses associated with its interest rate swap cash flow hedging instrument recorded in accumulated other comprehensive income. The Company expects that $1.6 million of pre-tax unrealized losses associated with its interest rate swap will be reclassified into income over the next 12 months.
NOTE 7—FAIR VALUE OF FINANCIAL INSTRUMENTS
The liabilities which are measured at fair value on a recurring basis as of April 30, 2015 and January 31, 2015 are as follows:
 
April 30, 2015
 
January 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
 
(in thousands)
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
$

 
$
2,622

 
$

 
$
2,622

 
$

 
$
3,233

 
$

 
$
3,233

Foreign currency contracts

 
361

 

 
361

 

 
36

 

 
36

Total Financial Liabilities
$

 
$
2,983

 
$

 
$
2,983

 
$

 
$
3,269

 
$

 
$
3,269

The valuation for the Company's foreign currency contracts and interest rate swap derivative instruments were valued using discounted cash flow analyses, an income approach, utilizing readily observable market data as inputs.
The Company also has financial instruments that are not recorded at fair value in its consolidated financial statements. The carrying amount of cash, receivables, payables, short-term debt and other current liabilities approximates fair value because of the short maturity and/or frequent repricing of those instruments, which are Level 2 fair value inputs. Based upon current borrowing rates with similar maturities, which are Level 2 fair value inputs, the carrying value of long-term debt approximates the fair value as of April 30, 2015 and January 31, 2015, respectively. The following table provides details on the Senior Convertible Notes as of April 30, 2015 and January 31, 2015. The difference between the face value and the carrying value of these notes is the result of the allocation between the debt and equity components. Fair value of the Senior Convertible Notes was estimated based on Level 2 fair value inputs.
 
April 30, 2015
 
January 31, 2015
 
Estimated Fair Value
 
Carrying Value
 
Face Value
 
Estimated Fair Value
 
Carrying Value
 
Face Value
 
(in thousands)
 
(in thousands)
Senior convertible notes
$
117,219

 
$
133,245

 
$
150,000

 
$
111,273

 
$
132,350

 
$
150,000


13


NOTE 8—SEGMENT INFORMATION AND OPERATING RESULTS
The Company has three reportable segments: Agriculture, Construction and International. During the three months ended April 30, 2015, the Company made changes to its internal financial reporting, primarily related to the elimination of transactions within a segment. Previously, the segment results were reported at gross amounts with eliminations reported separately to reconcile to consolidated financial results. During the three months ended April 30, 2015, the Company began reporting these eliminations within the segments to which they relate. The financial information as of January 31, 2015 and for the three months ended April 30, 2014 have been reclassified for comparability with the current year presentation.
Revenue between segments is immaterial. The Company retains various unallocated income/(expense) items and assets at the general corporate level, which the Company refers to as “Shared Resources” in the table below. Shared Resources assets primarily consist of cash, deferred tax assets and property and equipment.
Certain financial information for each of the Company’s business segments is set forth below. 
 
Three Months Ended April 30,
 
2015

2014
 
(in thousands)
Revenue
 
 
 
Agriculture
$
239,855

 
$
344,381

Construction
81,171

 
91,765

International
32,170

 
29,317

Total
$
353,196

 
$
465,463

 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
Agriculture
$
(1,086
)
 
$
3,505

Construction
(3,565
)
 
(5,993
)
International
(4,371
)
 
(5,265
)
Segment income (loss) before income taxes
(9,022
)
 
(7,753
)
Shared Resources
196

 
(873
)
Loss Before Income Taxes
$
(8,826
)
 
$
(8,626
)
 
 
April 30, 2015
 
January 31, 2015
 
(in thousands)
Total Assets
 
 
 
Agriculture
$
681,952

 
$
734,894

Construction
368,407

 
393,573

International
130,886

 
152,587

Segment assets
1,181,245

 
1,281,054

Shared Resources
116,475

 
68,693

Total
$
1,297,720

 
$
1,349,747

NOTE 9—STORE CLOSINGS AND REALIGNMENT COSTS
To better align the Company's cost structure and re-balance staffing levels with the evolving needs of the business, in March 2015, the Company approved a realignment plan that reduced its headcount by approximately 14%, which included headcount reductions at stores in each of its operating segments and its Shared Resource Center, as well as from the closing of three Agriculture stores and one Construction store. The Company's remaining stores in each of the respective areas assumed the distribution rights for the CNH Industrial brand previously held by the closed stores. The Company estimates the total cost of these activities to 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. The Company recognized approximately $0.1 million in exists costs primarily in its International segment in its fourth quarter ended January 31, 2015, and recognized $1.6 million in the three months ended April 30, 2015.

14


To better align its Construction business in certain markets, in April 2014, the Company reduced its Construction-related headcount by approximately 12% primarily through the closing of seven underperforming Construction stores, staff reductions at other dealerships and reductions in support staff at its Shared Resource Center. The Company also closed one Agriculture store. The Company's remaining stores in each of the respective areas assumed the majority of the distribution rights for the CNH Industrial brand previously held by the closed stores. The majority of the assets of the closed stores were redeployed to other store locations. Certain inventory items which are not sold by any of our remaining stores were sold at auction. The inventory markdown attributable to such items are included in the exit cost summary below. The Company incurred $3.2 million in exit costs in the three months ended April 30, 2014 and $3.8 million in exit costs during the year ended January 31, 2015. No additional amounts are expected to be incurred related to the closing of these stores, exclusive of any changes in lease termination accrual assumptions.
The following summarizes the exit costs associated with the aforementioned store closings and realignment activities:
 
 Three Months Ended April 30,
 
 
 
2015
 
2014
 
Income Statement Classification
 
(in thousands)
 
 
Construction Segment
 
 
 
 
 
Lease termination costs
$
261

 
$
1,518

 
Impairment and Realignment Costs
Employee severance costs
258

 
451

 
Impairment and Realignment Costs
Impairment of fixed assets, net of gains on asset disposition
90

 
152

 
Impairment and Realignment Costs
Asset relocation and other closing costs
54

 
165

 
Impairment and Realignment Costs
 
$
663

 
$
2,286

 
 
Agriculture Segment
 
 
 
 
 
Lease termination costs
$
251

 
$
114

 
Impairment and Realignment Costs
Employee severance costs
304

 
71

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

 
85

 
Impairment and Realignment Costs
Asset relocation and other closing costs
85

 
32

 
Impairment and Realignment Costs
Inventory cost adjustments

 
404

 
Equipment Cost of Sales
 
$
640

 
$
706

 
 
International
 
 
 
 
 
Employee severance costs
$

 
$

 
Impairment and Realignment Costs
 
$

 
$

 
 
Shared Resource Center
 
 
 
 
 
Lease termination costs
$
49

 
$

 
Impairment and Realignment Costs
Employee severance costs
$
187

 
$
213

 
Impairment and Realignment Costs
Impairment of fixed assets, net of gains on asset disposition
62

 

 
Impairment and Realignment Costs
 
$
298

 
$
213

 
 
Total
 
 
 
 
 
Lease termination costs
$
561

 
$
1,632

 
Impairment and Realignment Costs
Employee severance costs
749

 
735

 
Impairment and Realignment Costs
Impairment of fixed assets, net of gains on asset disposition
152

 
237

 
Impairment and Realignment Costs
Asset relocation and other closing costs
139

 
197

 
Impairment and Realignment Costs
Inventory cost adjustments

 
404

 
Equipment Cost of Sales
 
$
1,601

 
$
3,205

 

15


In connection with its realignment plan initiated in the first quarter of fiscal 2016, the Company accrued for lease termination and employee severance costs during the quarter ended April 30, 2015, but exit costs related to impairment, asset relocation and other closing costs and inventory cost adjustments were not accrued but recognized as incurred. A reconciliation of the beginning and ending exit cost liability balance, which is included in accrued expenses in the consolidated balance sheets, follows:
 
Amount
 
(in thousands)
Balance, January 31, 2015
$
1,706

Exit costs incurred and charged to expense
 
Lease termination costs
561

Employee severance costs
749

Exit costs paid
 
Lease termination costs
(138
)
Employee severance costs
(644
)
Balance, April 30, 2015
$
2,234

NOTE 10—HELD FOR SALE
The assets and liabilities which are held for sale are presented in the following table:
 
April 30, 2015
 
January 31, 2015
 
(in thousands)
Assets Held for Sale
 
 
 
Receivables
$
79

 
$
147

Inventories
 
 
 
New equipment
5,538

 
6,269

Used equipment
3,448

 
3,973

Parts and attachments
863

 
920

Work in process
86

 
65

Total inventories
9,935

 
11,227

Property and equipment
 
 
 
Machinery and equipment
106

 
114

Vehicles
154

 
155

Furniture and fixtures
51

 
57

Land, buildings, and leasehold improvements
4,621

 
3,612

Total property and equipment
4,932

 
3,938

 
$
14,946

 
$
15,312

 
 
 
 
Liabilities Held for Sale
 
 
 
Accounts payable
$
68

 
$
151

Floorplan payable
1,321

 
1,771

Customer deposits
151

 
913

 
$
1,540

 
$
2,835


NOTE 11—INCOME TAXES
The Company incurs a provision for income taxes in jurisdictions in which it has taxable income. Generally the Company receives a benefit for income taxes in jurisdictions in which it has taxable losses unless it has recorded a valuation allowance for that jurisdiction. These losses are available to reduce future taxable income in these jurisdictions if earned within

16


the allowable net operating loss carryforward period. The foreign jurisdictions in which the Company operates have net operating loss carryforward periods ranging from five to seven years, with certain jurisdictions having indefinite carryforward periods.
The components of loss before income taxes are as follows:
 
Three Months Ended April 30,
 
2015
 
2014
 
(dollars in thousands)
U.S.
$
(4,488
)
 
$
(3,223
)
Foreign
(4,338
)
 
(5,403
)
Total
$
(8,826
)
 
$
(8,626
)
A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows:
 
Three Months Ended April 30,
 
2015
 
2014
U.S. statutory rate
(35.0
)%
 
(35.0
)%
Foreign statutory rates
11.7
 %
 
10.6
 %
State taxes on income net of federal tax benefit
(4.1
)%
 
(4.3
)%
Change in valuation allowance
35.7
 %
 
46.3
 %
Tax effect of Ukrainian hryvnia devaluation(a)
(28.0
)%
 
(36.6
)%
All other, net
(2.2
)%
 
(1.1
)%

(21.9
)%
 
(20.1
)%
 
(a) Represents the tax impact of differences in foreign currency losses recognized as the result of Ukrianian hryvnia devaluation between Ukrainian taxable income (loss) and financial reporting income (loss).

17


ITEM 2.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended January 31, 2015.
 
Realignment Costs
To better align the Company's cost structure and re-balance staffing levels with the evolving needs of the business, in March 2015, the Company approved a realignment plan that reduced its headcount by approximately 14%, which included headcount reductions at stores in each of its operating segments and its Shared Resource Center, as well as from the closing of three Agriculture stores and one Construction store. The Company's remaining stores in each of the respective areas assumed the distribution rights for the CNH Industrial brand previously held by the closed stores. The Company estimates the total cost of these activities to 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. The Company recognized approximately $0.1 million in exit costs primarily in its International segment in the fourth quarter ended January 31, 2015 and recognized $1.6 million in exit costs during the three months ended April 30, 2015 and anticipates recognizing the remaining amount during the three months ended July 31, 2015.
To better align its Construction business in certain markets, in April 2014, the Company reduced its Construction-related headcount by approximately 12% primarily through the closing of seven underperforming Construction stores, staff reductions at other dealerships and reductions in support staff at its Shared Resource Center. The closed stores were located in Bozeman, Big Sky and Helena, Montana; Cheyenne, Wyoming; Clear Lake, Iowa; Flagstaff, Arizona; and Rosemount, Minnesota. The Company also closed one Agriculture store in Oskaloosa, Iowa and merged it with the nearby Agriculture store in Pella, Iowa. The Company's remaining stores in each of the respective areas assumed the majority of the distribution rights for the CNH Industrial brand previously held by the stores which have closed. The Company recognized $3.2 million in exit costs during the three months ended April 30, 2014.
See also the Non-GAAP Financial Measures section below for the impact of these costs on non-GAAP Diluted EPS.
Foreign Currency Remeasurement Losses
In February of 2014, the National Bank of Ukraine terminated the currency peg of the Ukrainian hryvnia ("UAH") to the USD; subsequent to the decoupling and as a result of the economic and political conditions present in the country, the UAH experienced significant devaluation from the date the currency peg was terminated through April 2015. We recognized $2.0 million and $3.1 million in foreign currency remeasurement losses resulting from a devaluation of the UAH during the three months ended April 30, 2015 and April 30, 2014, respectively. These losses are included in interest income and other income (expense) in our consolidated statements of operations. See also the Non-GAAP Financial Measures section below for impact of these costs on non-GAAP Diluted EPS.
Segment Reporting
During the three months ended April 30, 2015, the Company made changes to its internal financial reporting, primarily related to the elimination of transactions within a segment. Previously, the segment results were reported at gross amounts with eliminations reported separately to reconcile to consolidated financial results. During the three months ended April 30, 2015, the Company began reporting these eliminations within the segments to which they relate. The financial information for the three months ended April 30, 2014 have been reclassified for comparability with the current year presentation.

18


The following table provides the reclassified amounts for each of the applicable periods that will be presented in the Company's future financial statements and other filings:
 
Three Months Ended
 
Years Ended
 
April 30, 2014
 
July 31, 2014
 
October 31, 2014
 
January 31, 2015
 
January 31, 2015
 
January 31, 2014
 
(in thousands)
 
(in thousands)
Revenue
 
 
 
 
 
 
 
 
 
 
 
Agriculture
$
344,381

 
$
305,721

 
$
341,547

 
$
354,808

 
$
1,346,457

 
$
1,722,908

Construction
91,765

 
101,747

 
98,246

 
97,677

 
389,435

 
365,421

International
29,317

 
43,522

 
53,348

 
38,167

 
164,354

 
138,117

Total
$
465,463

 
$
450,990

 
$
493,141

 
$
490,652

 
$
1,900,246

 
$
2,226,446

 
 
 
 
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
 
 
 
 
 
 
 
 
Agriculture
$
3,505

 
$
6,494

 
$
6,134

 
$
(27,567
)
 
$
(11,434
)
 
$
62,242

Construction
(5,993
)
 
(368
)
 
15

 
(5,595
)
 
(11,941
)
 
(30,866
)
International
(5,265
)
 
(5,016
)
 
(1,407
)
 
(5,421
)
 
(17,108
)
 
(6,296
)
Segment income (loss) before income taxes
(7,753
)
 
1,110

 
4,742

 
(38,583
)
 
(40,483
)
 
25,080

Shared Resources
(873
)
 
702

 
971

 
1,344

 
2,144

 
(6,650
)
Income (Loss) Before Income Taxes
$
(8,626
)
 
$
1,812

 
$
5,713

 
$
(37,239
)
 
$
(38,339
)
 
$
18,430

 
 
 
 
 
 
 
 
 
 
 
January 31, 2015
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Total Assets
 
 
 
 
 
 
 
 
 
 
 
Agriculture
 
 
 
 
 
 
 
 
 
 
$
734,894

Construction
 
 
 
 
 
 
 
 
 
 
393,573

International
 
 
 
 
 
 
 
 
 
 
152,587

Segment Assets
 
 
 
 
 
 
 
 
 
 
1,281,054

Shared Resources
 
 
 
 
 
 
 
 
 
 
68,693

Total
 
 
 
 
 
 
 
 
 
 
$
1,349,747

Critical Accounting Policies and Estimates
There have been no material changes in our Critical Accounting Policies and Estimates, as disclosed in our Annual Report on Form 10-K for the year ended January 31, 2015.
Overview
We own and operate a network of full service agricultural and construction equipment stores in the United States and Europe. Based upon information provided to us by CNH Industrial N.V. or its U.S. subsidiary CNH Industrial America, LLC, we are the largest retail dealer of Case IH Agriculture equipment in the world, the largest retail dealer of Case Construction equipment in North America and a major retail dealer of New Holland Agriculture and New Holland Construction equipment in the U.S. We operate our business through three reportable segments, Agriculture, Construction and International. Within each segment, we have four principal sources of revenue: new and used equipment sales, parts sales, service, and equipment rental and other activities.
Our net loss attributable to Titan Machinery Inc. common stockholders was $6.2 million, or $0.29 per diluted share, for the three months ended April 30, 2015, compared to $6.5 million, or $0.31 per diluted share, for the three months ended April 30, 2014. Our non-GAAP Diluted Loss Per Share was $0.13 and $0.07 for the three months ended April 30, 2015 and 2014, respectively. See the Non-GAAP Financial Measures section below for a reconciliation between the GAAP and non-GAAP measures. Significant factors impacting the quarterly comparisons were:

19


Revenue decreased 24.1% for the first quarter of fiscal 2016, as compared to the first quarter last year, primarily due to a decrease in Agriculture and Construction same-store sales;
Total gross profit margin increased to 17.1% for the first quarter of fiscal 2016, as compared to 16.3% for the first quarter of fiscal 2015, primarily caused by a change in gross profit mix to our higher-margin parts, service and rental and other businesses;
Operating expenses decreased 19.7% for the first quarter of fiscal 2016, as compared to the first quarter last year, primarily due to our realignment plan implemented in the first quarter of fiscal 2016 which decreased our headcount by 14% and generated additional cost savings from the closing of four stores during the quarter. We recognized $1.6 million of exit costs in the first quarter of fiscal 2016 as a result of implementing our realignment plan.
The continued devaluation of the Ukrainian hryvnia in the first quarter of fiscal 2016 resulted in additional foreign currency remeasurement losses. For the first quarter of fiscal 2016 we recognized $2.0 million in foreign currency remeasurement losses compared to $3.1 million recognized in the first quarter last year.
Results of Operations
Comparative financial data for each of our four sources of revenue are expressed below. The results for these periods include the operating results of the acquisitions made during these periods. The period-to-period comparisons included below are not necessarily indicative of future results. Segment information is provided later in this discussion and analysis of our results of operations.
Same-store sales for any period represent sales by stores that were part of the Company for the entire comparable periods in the current and preceding fiscal years. We do not distinguish relocated or newly-expanded stores in this same-store analysis. Closed stores are excluded from the same-store analysis. Stores that do not meet the criteria for same-store classification are described as excluded stores throughout the Results of Operations section in this Quarterly Report on Form 10-Q.
 
Three Months Ended April 30,
 
2015
 
2014
 
(dollars in thousands)
Equipment
 
 
 
Revenue
$
244,983

 
$
345,045

Cost of revenue
227,033

 
316,282

Gross profit
$
17,950

 
$
28,763

Gross profit margin
7.3
%
 
8.3
%
Parts
 
 
 
Revenue
$
61,520

 
$
68,379

Cost of revenue
43,571

 
48,014

Gross profit
$
17,949

 
$
20,365

Gross profit margin
29.2
%
 
29.8
%
Service
 
 
 
Revenue
$
32,902

 
$
37,084

Cost of revenue
11,360

 
14,403

Gross profit
$
21,542

 
$
22,681

Gross profit margin
65.5
%
 
61.2
%
Rental and other
 
 
 
Revenue
$
13,791

 
$
14,955

Cost of revenue
10,797

 
10,825

Gross profit
$
2,994

 
$
4,130

Gross profit margin
21.7
%
 
27.6
%

20


The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated: 
 
Three Months Ended April 30,
 
2015
 
2014
Revenue
 
 
 
Equipment
69.4
 %
 
74.1
 %
Parts
17.4
 %
 
14.7
 %
Service
9.3
 %
 
8.0
 %
Rental and other
3.9
 %
 
3.2
 %
Total Revenue
100.0
 %
 
100.0
 %
Total Cost of Revenue
82.9
 %
 
83.7
 %
Gross Profit Margin
17.1
 %
 
16.3
 %
Operating Expenses
16.2
 %
 
15.3
 %
Impairment and Realignment Costs
0.5
 %
 
0.6
 %
Income from Operations
0.5
 %
 
0.4
 %
Other Income (Expense)
(3.0
)%
 
(2.3
)%
Loss Before Income Taxes
(2.5
)%
 
(1.9
)%
Benefit from Income Taxes
(0.5
)%
 
(0.4
)%
Net Loss Including Noncontrolling Interest
(2.0
)%
 
(1.5
)%
Less: Net Loss Attributable to Noncontrolling Interest
(0.2
)%
 
(0.1
)%
Net Loss Attributable to Titan Machinery Inc.
(1.8
)%
 
(1.4
)%
 
Three Months Ended April 30, 2015 Compared to Three Months Ended April 30, 2014
Consolidated Results
Revenue 
 
Three Months Ended April 30,
 
Increase/
 
Percent
 
2015
 
2014
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Equipment
$
244,983

 
$
345,045

 
$
(100,062
)
 
(29.0
)%
Parts
61,520

 
68,379

 
(6,859
)
 
(10.0
)%
Service
32,902

 
37,084

 
(4,182
)
 
(11.3
)%
Rental and other
13,791

 
14,955

 
(1,164
)
 
(7.8
)%
Total Revenue
$
353,196

 
$
465,463

 
$
(112,267
)
 
(24.1
)%
 
The decrease in revenue for the first quarter of fiscal 2016 was primarily due to a decrease in same-store sales of 21.9% over the comparable prior year period, mainly driven by a decrease in Agriculture same-store sales of 28.7%. Agriculture same-store sales decreased primarily due to a decrease in equipment revenue and were negatively impacted by challenging industry conditions such as decreases in agricultural commodity prices and projected net farm income, which, among other things, have a negative effect on customer sentiment and our customers' ability to secure financing for their equipment purchases. Changes in actual or anticipated net farm income generally have a direct correlation with agricultural equipment purchases by farmers. Construction same-store sales decreased in the first quarter of fiscal 2016 by 5.9% primarily due the strong revenue amount and revenue growth realized during the first quarter of fiscal 2015 in which we achieved a same-store sale increase of 24.4% over the first quarter of fiscal 2014. The closing of four stores during the quarter ended April 30, 2015 also negatively impacted our revenue. An increase in International same-store sales of 9.7% partially offset the decrease in Agriculture and Construction same-store sales and the impact of our store closings.

21


Gross Profit 
 
Three Months Ended April 30,
 
Increase/
 
Percent
 
2015
 
2014
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Gross Profit
 
 
 
 
 
 
 
Equipment
$
17,950

 
$
28,763

 
$
(10,813
)
 
(37.6
)%
Parts
17,949

 
20,365

 
(2,416
)
 
(11.9
)%
Service
21,542

 
22,681

 
(1,139
)
 
(5.0
)%
Rental and other
2,994

 
4,130

 
(1,136
)
 
(27.5
)%
Total Gross Profit
$
60,435

 
$
75,939

 
$
(15,504
)
 
(20.4
)%
Gross Profit Margin
 
 
 
 
 
 
 
Equipment
7.3
%
 
8.3
%
 
(1.0
)%
 
(12.0
)%
Parts
29.2
%
 
29.8
%
 
(0.6
)%
 
(2.0
)%
Service
65.5
%
 
61.2
%
 
4.3
 %
 
7.0
 %
Rental and other
21.7
%
 
27.6
%
 
(5.9
)%
 
(21.4
)%
Total Gross Profit Margin
17.1
%
 
16.3
%
 
0.8
 %
 
4.9
 %
Gross Profit Mix
 
 
 
 
 
 
 
Equipment
29.7
%
 
37.9
%
 
(8.2
)%
 
(21.6
)%
Parts
29.7
%
 
26.8
%
 
2.9
 %
 
10.8
 %
Service
35.6
%
 
29.9
%
 
5.7
 %
 
19.1
 %
Rental and other
5.0
%
 
5.4
%
 
(0.4
)%
 
(7.4
)%
Total Gross Profit Mix
100.0
%
 
100.0
%
 
 %
 
 %
 
The $15.5 million decrease in gross profit for the first quarter of fiscal 2016, as compared to the same period last year, was primarily due to a decrease in revenue. The increase in total gross profit margin from 16.3% for the first quarter of fiscal 2015 to 17.1% for the first quarter of fiscal 2016 was mainly due to a change in gross profit mix to our higher-margin parts, service and rental and other businesses, and partially offset by decreases in gross profit margin on equipment and rental and other revenue. The compression in equipment gross margin was primarily caused by the previously discussed Agriculture industry challenges, including decreases in agricultural commodity prices and projected net farm income and an over-supply of equipment in the Agriculture industry. The decrease in rental and other gross profit margin was primarily caused by lower oil prices affecting rental demand in our oil producing markets. The reduced rental demand in these markets negatively impacted our rental fleet dollar utilization which decreased from 22.9% in the first quarter of fiscal 2015 to 19.1% in the first quarter of fiscal 2016.
Our company-wide absorption for the first quarter of fiscal 2016 was 73.3% compared to 68.2% during the same period last year. The increase is primarily the result of a reduction of our fixed operating costs from savings associated with our realignment plan implemented in the first quarter of fiscal 2016, but partially offset by a decrease in parts and service gross profit.
Operating Expenses
 
Three Months Ended April 30,
 
Increase/
 
Percent
 
2015
 
2014
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Operating Expenses
$
57,110

 
$
71,152

 
$
(14,042
)
 
(19.7
)%
Operating Expenses as a Percentage of Revenue
16.2
%
 
15.3
%
 
0.9
%
 
5.9
 %
The $14.0 million decrease in operating expenses, as compared to the same period last year, was primarily the result of our realignment plan implemented in the first quarter of fiscal 2016 in which we reduced our headcount by 14% and generated additional cost savings associated with the closing of four stores in the quarter. In addition, our operating expenses were positively impacted by the full-quarter cost savings realized as a result of our realignment plan implemented in the first quarter of fiscal 2015. Commission expense for the first quarter of fiscal 2016 decreased relative to the same period last year due to the decrease in equipment revenue and gross profit. The increase in operating expenses as a percentage of total revenue was

22


primarily due to the decrease in total revenue in the first quarter of fiscal 2016, as compared to the first quarter of fiscal 2015, which negatively affected our ability to leverage our fixed operating costs.
Impairment and Realignment Costs
 
Three Months Ended April 30,
 
 
 
Percent
 
2015
 
2014
 
Increase
 
Change
 
(dollars in thousands)
 
 
Impairment and Realignment Costs
$
1,601

 
$
2,801

 
$
(1,200
)
 
(42.8
)%
The realignment costs recognized in each of the first quarters of fiscal 2016 and fiscal 2015 arise as the result of our store realignment plans and associated exit costs, including accruals for lease terminations and remaining lease obligations, employee severance costs, the impairment of certain fixed assets, and the costs associated with relocating certain assets of our closed stores.
Other Income (Expense) 
 
Three Months Ended April 30,
 
Increase/
 
Percent
 
2015
 
2014
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Interest income and other income (expense)
$
(2,124
)
 
$
(2,578
)
 
$
454

 
17.6
%
Floorplan interest expense
(4,599
)
 
(4,593
)
 
6

 
0.1
%
Other interest expense
(3,827
)
 
(3,441
)
 
386

 
11.2
%
Interest income and other income (expense) is largely comprised of foreign currency remeasurement losses in Ukraine, resulting from the devaluation of the Ukrainian hryvnia. See the Non-GAAP Financial Measures section below for impact of these costs on non-GAAP Diluted EPS. Our floorplan interest expense for the first quarter of fiscal 2016 was consistent with the amount recognized in same period last year. The impact of a decrease in our average interest-bearing inventory in the first quarter of fiscal 2016 was offset by higher interest rates, primarily due to the additional interest cost associated with our interest rate swap instrument. The increase in other interest expense is primarily the result of a $0.5 million write-off of capitalized debt issuance costs. The amendment of our Wells Fargo credit facility executed during the first quarter of fiscal 2016, among other things, lowered our borrowing capacity and such a reduction required the write-off of a portion of the capitalized debt issuance costs associated with this credit facility.
Benefit from Income Taxes
 
Three Months Ended April 30,
 

 
Percent
 
2015
 
2014
 
Decrease
 
Change
 
(dollars in thousands)
 
 
Benefit from