Titan Machinery Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS TITAN MACHINERY INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except per share data) July 31, 2020 January 31, 2020 Assets Current Assets Cash $ 44,484 $ 43,721 Receivables, net of allowance for expected credit losses 75,782 72,776 Inventories 570,680 597,394 Prepaid expenses and other 7,144 13,655 Total current assets 698,090 727,546 Noncurrent Assets Property and equipment, net of accumulated depreciation 150,496 145,562 Operating lease assets 83,586 88,281 Deferred income taxes 3,337 2,147 Goodwill 2,818 2,327 Intangible assets, net of accumulated amortization 8,568 8,367 Other 1,130 1,113 Total noncurrent assets 249,935 247,797 Total Assets $ 948,025 $ 975,343 Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 20,734 $ 16,976 Floorplan payable 352,215 371,772 Current maturities of long-term debt 3,921 13,779 Current operating lease liabilities 12,158 12,259 Deferred revenue 22,716 40,968 Accrued expenses and other 38,122 38,409 Total current liabilities 449,866 494,163 Long-Term Liabilities Long-term debt, less current maturities 48,665 37,789 Operating lease liabilities 83,341 88,387 Deferred income taxes 2,301 2,055 Other long-term liabilities 9,060 7,845 Total long-term liabilities 143,367 136,076 Commitments and Contingencies Stockholders' Equity Common stock, par value $ .00001 per share, $ 45,000 shares authorized; $ 22,553 shares issued and outstanding at July 31, 2020; $ 22,335 shares issued and outstanding at January 31, 2020 — — Additional paid-in-capital 251,587 250,607 Retained earnings 106,175 97,717 Accumulated other comprehensive loss ( 2,970 ) ( 3,220 ) Total stockholders' equity 354,792 345,104 Total Liabilities and Stockholders' Equity $ 948,025 $ 975,343 See Notes to Consolidated Financial Statements 3 Table of Contents TITAN MACHINERY INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data) Three Months Ended July 31, Six Months Ended July 31, 2020 2019 2020 2019 Revenue Equipment $ 202,654 $ 214,435 $ 421,159 $ 408,390 Parts 61,454 59,202 118,068 111,140 Service 27,986 26,832 53,586 49,662 Rental and other 11,371 14,512 20,860 24,079 Total Revenue 303,465 314,981 613,673 593,271 Cost of Revenue Equipment 180,231 190,707 377,278 363,861 Parts 43,032 41,732 82,649 78,546 Service 9,665 8,737 18,010 16,219 Rental and other 7,849 9,778 14,636 16,719 Total Cost of Revenue 240,777 250,954 492,573 475,345 Gross Profit 62,688 64,027 121,100 117,926 Operating Expenses 53,079 54,855 106,137 107,410 Impairment of Long-Lived Assets — — 216 135 Income from Operations 9,609 9,172 14,747 10,381 Other Income (Expense) Interest and other income 562 620 692 1,414 Floorplan interest expense ( 901 ) ( 1,399 ) ( 2,054 ) ( 2,276 ) Other interest expense ( 978 ) ( 966 ) ( 1,944 ) ( 2,607 ) Income Before Income Taxes 8,292 7,427 11,441 6,912 Provision for Income Taxes 1,892 1,916 2,779 1,846 Net Income $ 6,400 $ 5,511 $ 8,662 $ 5,066 Earnings per Share: Basic $ 0.28 $ 0.25 $ 0.39 $ 0.23 Diluted $ 0.28 $ 0.25 $ 0.39 $ 0.23 Weighted Average Common Shares: Basic 22,118 21,960 22,068 21,917 Diluted 22,119 21,964 22,068 21,922 See Notes to Consolidated Financial Statements 4 Table of Contents TITAN MACHINERY INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands) Three Months Ended July 31, Six Months Ended July 31, 2020 2019 2020 2019 Net Income $ 6,400 $ 5,511 $ 8,662 $ 5,066 Other Comprehensive Income Foreign currency translation adjustments 778 1,012 250 241 Comprehensive Income $ 7,178 $ 6,523 $ 8,912 $ 5,307 See Notes to Consolidated Financial Statements 5 Table of Contents TITAN MACHINERY INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (in thousands) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Shares Outstanding Amount BALANCE, January 31, 2019 22,218 $ — $ 248,423 $ 89,228 $ ( 2,340 ) $ 335,311 Cumulative-effect adjustment of adopting ASC 842, Leases — — — ( 5,464 ) — ( 5,464 ) Common stock issued on grant of restricted stock and exercise of stock options, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax ( 34 ) — ( 492 ) — — ( 492 ) Stock-based compensation expense — — 603 — — 603 Net loss — — — ( 445 ) — ( 445 ) Other comprehensive loss — — — — ( 771 ) ( 771 ) BALANCE, April 30, 2019 22,184 $ — $ 248,534 $ 83,319 $ ( 3,111 ) $ 328,742 Cumulative-effect adjustment of adopting ASC 842, Leases — — — — — — Common stock issued on grant of restricted stock and exercise of stock options, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax 170 — — — — — Stock-based compensation expense — — 694 — — 694 Net Income — — — 5,511 — 5,511 Other comprehensive Income — — — — 1,012 1,012 BALANCE, July 31, 2019 22,354 — 249,228 88,830 ( 2,099 ) 335,959 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Shares Outstanding Amount BALANCE, January 31, 2020 22,335 $ — $ 250,607 $ 97,717 $ ( 3,220 ) $ 345,104 Cumulative-effect adjustment of adopting ASC 326, Credit Loss — — — ( 204 ) — ( 204 ) Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax ( 21 ) — ( 201 ) — — ( 201 ) Stock-based compensation expense — — 645 — — 645 Net income — — — 2,262 — 2,262 Other comprehensive loss — — — — ( 528 ) ( 528 ) BALANCE, April 30, 2020 22,314 $ — $ 251,051 $ 99,775 $ ( 3,748 ) $ 347,078 Cumulative-effect adjustment of adopting ASC 326, Credit Loss — — — — — — Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax 239 — — — — — Stock-based compensation expense — — 536 — — 536 Net income — — — 6,400 — 6,400 Other comprehensive income — — — — 778 778 BALANCE, July 31, 2020 22,553 — 251,587 106,175 ( 2,970 ) 354,792 See Notes to Consolidated Financial Statements 6 TITAN MACHINERY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Six Months Ended July 31, 2020 2019 Operating Activities Net income $ 8,662 $ 5,066 Adjustments to reconcile net income to net cash provided by (used for) operating activities Depreciation and amortization 11,286 13,264 Impairment 216 135 Deferred income taxes ( 944 ) ( 251 ) Stock-based compensation expense 1,181 1,297 Noncash interest expense 75 407 Noncash lease expense 5,717 6,198 Other, net ( 368 ) ( 8 ) Changes in assets and liabilities Receivables, prepaid expenses and other assets 3,347 ( 2,149 ) Inventories 31,885 ( 140,149 ) Manufacturer floorplan payable ( 26,726 ) 128,635 Accounts payable, deferred revenue, accrued expenses and other and other long-term liabilities ( 15,140 ) ( 12,362 ) Operating lease liabilities ( 6,156 ) ( 6,386 ) Net Cash Provided by (Used for) Operating Activities 13,035 ( 6,303 ) Investing Activities Rental fleet purchases ( 6,001 ) ( 9,249 ) Property and equipment purchases (excluding rental fleet) ( 4,472 ) ( 3,101 ) Proceeds from sale of property and equipment 489 670 Acquisition consideration, net of cash acquired ( 6,790 ) ( 2,972 ) Other, net ( 20 ) 14 Net Cash Used for Investing Activities ( 16,794 ) ( 14,638 ) Financing Activities Net change in non-manufacturer floorplan payable 7,229 49,937 Principal payments on senior convertible notes — ( 45,644 ) Proceeds from long-term debt borrowings 1,112 11,786 Principal payments on long-term debt and finance leases ( 2,952 ) ( 1,940 ) Payment of debt issuance costs ( 670 ) — Other, net ( 200 ) ( 492 ) Net Cash Provided by Financing Activities 4,519 13,647 Effect of Exchange Rate Changes on Cash 3 66 Net Change in Cash 763 ( 7,228 ) Cash at Beginning of Period 43,721 56,745 Cash at End of Period $ 44,484 $ 49,517 Supplemental Disclosures of Cash Flow Information Cash paid (received) during the period Income taxes, net of refunds $ ( 228 ) $ 3,064 Interest $ 4,103 $ 4,705 Supplemental Disclosures of Noncash Investing and Financing Activities Net property and equipment financed with long-term debt, finance leases, accounts payable and accrued liabilities $ 4,645 $ 6,133 Net transfer of assets from (to) property and equipment to (from) inventories $ 319 $ ( 2,995 ) See Notes to Consolidated Financial Statements 7 Table of Contents TITAN MACHINERY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. The quarterly operating results for Titan Machinery Inc. (the “Company”) are subject to fluctuation due to varying weather patterns, which may impact the timing and amount of equipment purchases, rentals, and after-sales parts and service purchases by the Company’s Agriculture, Construction and International customers. Therefore, operating results for the six-month period ended July 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2021. The information contained in the consolidated balance sheet as of January 31, 2020 was derived from the audited consolidated financial statements for the Company for the fiscal year then ended. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020 as filed with the SEC. Nature of Business The Company is engaged in the retail sale, service and rental of agricultural and construction machinery through its stores in the United States and Europe. The Company’s North American stores are located in Arizona, Colorado, Iowa, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Wisconsin and Wyoming, and its European stores are located in Bulgaria, Germany, Romania, Serbia and Ukraine. Impact of the COVID-19 Pandemic In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, and the President of the United States declared the COVID-19 outbreak as a national emergency. The nature of COVID-19 led to worldwide shutdowns and halting of commercial and interpersonal activity as governments imposed regulations in efforts to control the spread of the pandemic, such as shelter-in-place orders and quarantines. The pandemic is a highly fluid and rapidly evolving situation, and we cannot anticipate with any certainty the length, scope, or severity of such restrictions in each of the markets that we operate. See Item 1A. Risk Factors for more information on possible impacts. Since the beginning of the COVID-19 pandemic, the safety of our employees and customers has been and continues to be our top concern. At the onset of the pandemic we organized a COVID Task Force to implement safety protocols and to quickly respond to matters, in the event of a positive case at one of our locations. Even though we are considered an essential business, in response to the COVID-19 pandemic, the Company closed its U.S. stores to the public on March 23, 2020 but continued operations through social distancing means in all areas: equipment, parts, service and rental. Beginning May 4, 2020, we began fully reopening our stores to the public, following pandemic safety protocols applicable to the locations. Additionally, our International stores have also been following pandemic safety protocols applicable to each location. By June 2020, all of our stores were open to the public but still maintain pandemic safety protocols. Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, particularly related to realization of inventory, impairment of long-lived assets, collectability of receivables, and income taxes. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material accounts, transactions and profits between the consolidated companies have been eliminated in consolidation. 8 Table of Contents Recently Adopted Accounting Guidance In June 2016, the Financial Accounting Standards Board ("FASB") issued a new standard, codified in ASC 326, that modifies how entities measure credit losses on most financial instruments. The new standard replaced the "incurred loss" model with an "expected credit loss" model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the asset. The guidance impacts the Company on its accounts receivable portfolio but specifically excluded receivables from operating lease arrangements and, therefore, the Company’s receivables from rental contracts were not impacted. The guidance also requires new disclosures to allow the users of the financial statements to understand the credit risk inherent in a portfolio and how management monitors the credit quality of the portfolio, management’s estimate of expected credit losses, and changes in the estimate of expected credit losses that have taken place during the reporting period. The Company adopted the new guidance on February 1, 2020 using a modified retrospective approach and recognized an immaterial cumulative-effect adjustment to retained earnings as of the effective date. The Company identified and updated existing internal controls and procedures to ensure compliance with the new guidance, but such modifications were not deemed to be material to the Company's overall system of internal control. While the adoption of this standard did not have a material impact on the Company's consolidated financial statements, it required changes to the Company's process of estimating expected credit losses on trade receivables. See footnote 4 for further discussion of our accounts receivables. In February 2018, the FASB issued guidance on the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract, codified in ASC 350-40. This guidance aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This standard was adopted on February 1, 2020 and was applied using the prospective transition approach. The adoption of this standard did not have a material impact on the Company's consolidated financial statements. Accounting Guidance Not Yet Adopted In March 2020, the FASB issued ASU No. 2020-04 , Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU No. 2020-04”), which provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. ASU 2020-04 is effective upon issuance and can be applied through December 31, 2022. The Company is currently evaluating its contracts and hedging relationships that reference LIBOR to determine if the Company will adopt the new guidance. 9 Table of Contents NOTE 2 - EARNINGS PER SHARE The following table sets forth the calculation of basic and diluted EPS: Three Months Ended July 31, Six Months Ended July 31, 2020 2019 2020 2019 (in thousands, except per share data) Numerator: Net income $ 6,400 $ 5,511 $ 8,662 $ 5,066 Allocation to participating securities ( 101 ) ( 82 ) ( 129 ) ( 76 ) Net income attributable to Titan Machinery Inc. common stockholders $ 6,299 $ 5,429 $ 8,533 $ 4,990 Denominator: Basic weighted-average common shares outstanding 22,118 21,960 22,068 21,917 Plus: incremental shares from vesting of restricted stock units 1 4 — 5 Diluted weighted-average common shares outstanding 22,119 21,964 22,068 21,922 Earnings Per Share: Basic $ 0.28 $ 0.25 $ 0.39 $ 0.23 Diluted $ 0.28 $ 0.25 $ 0.39 $ 0.23 Anti-dilutive shares excluded from diluted weighted-average common shares outstanding: Restricted stock units — — 18 — NOTE 3 - REVENUE Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to collect in exchange for those goods or services. Sales, value added and other taxes collected from our customers concurrent with our revenue activities are excluded from revenue. The following tables present our revenue disaggregated by revenue source and segment: Three Months Ended July 31, 2020 Three Months Ended July 31, 2019 Agriculture Construction International Total Agriculture Construction International Total (in thousands) (in thousands) Equipment $ 110,601 $ 48,478 $ 43,575 $ 202,654 $ 111,212 $ 51,396 $ 51,827 $ 214,435 Parts 37,470 13,016 10,968 61,454 35,054 13,066 11,082 59,202 Service 19,429 6,806 1,751 27,986 18,000 6,968 1,864 26,832 Other 829 725 119 1,673 793 820 130 1,743 Revenue from contracts with customers 168,329 69,025 56,413 293,767 165,059 72,250 64,903 302,212 Rental 743 8,694 261 9,698 633 11,789 347 12,769 Total revenues $ 169,072 $ 77,719 $ 56,674 $ 303,465 $ 165,692 $ 84,039 $ 65,250 $ 314,981 Six Months Ended July 31, 2020 Six Months Ended July 31, 2019 Agriculture Construction International Total Agriculture Construction International Total (in thousands) (in thousands) Equipment $ 250,349 $ 82,732 $ 88,078 $ 421,159 $ 219,075 $ 94,442 $ 94,873 $ 408,390 Parts 72,550 24,476 21,042 118,068 65,029 25,770 20,341 111,140 Service 37,150 13,017 3,419 53,586 32,984 13,489 3,189 49,662 Other 1,562 1,243 223 3,028 1,412 1,413 152 2,977 Revenue from contracts with customers 361,611 121,468 112,762 595,841 318,500 135,114 118,555 572,169 Rental 1,089 16,365 378 17,832 964 19,668 470 21,102 Total revenues $ 362,700 $ 137,833 $ 113,140 $ 613,673 $ 319,464 $ 154,782 $ 119,025 $ 593,271 10 Table of Contents Unbilled Receivables and Deferred Revenue Unbilled receivables amounted to $ 17.3 million and $ 13.9 million as of July 31, 2020 and January 31, 2020. The increase in unbilled receivables is primarily the result of a seasonal increase in the volume of our service transactions in which we recognize revenue as our work is performed and prior to customer invoicing. Deferred revenue from contracts with customers amounted to $ 21.7 million and $ 39.5 million as of July 31, 2020 and January 31, 2020. Our deferred revenue most often increases in the fourth quarter of each fiscal year due to a higher level of customer down payments or prepayments and longer time periods between customer payment and delivery of the equipment asset, and the related recognition of equipment revenue, prior to its seasonal use. During the six months ended July 31, 2020 and 2019, the Company recognized $ 37.0 million and $ 41.2 million, respectively, of revenue that was included in the deferred revenue balance as of January 31, 2020 and January 31, 2019, respectively. No material amount of revenue was recognized during the three months ended July 31, 2020 and 2019 from performance obligations satisfied in previous periods. The Company has elected as a practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of service of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. The contracts for which the practical expedient has been applied include (i) equipment revenue transactions, which do not have a stated contractual term, but are short-term in nature, and (ii) service revenue transactions, which also do not have a stated contractual term but are generally completed within 30 days and for such contracts we recognize revenue over time at the amount to which we have the right to invoice for services completed to date. NOTE 4 - RECEIVABLES The Company provides an allowance for expected credit losses on its nonrental receivables in accordance with the guidance in ASU 2016-13. To measure the expected credit losses, receivables have been grouped based on shared credit risk characteristics as shown in the table below. Trade and unbilled receivables from contracts with customers have credit risk and the allowance is determined by applying expected credit loss percentages to aging categories based on historical experience that are updated each quarter. The rates may also be adjusted to the extent future events are expected to differ from historical results. Given that the credit terms for these receivables are short-term, changes in credit loss percentages due to future events may not occur on a frequent basis. In addition, the allowance is adjusted based on information obtained by continued monitoring of individual customer credit. Trade receivables from finance companies, other receivables due from manufacturers, and other receivables have not historically resulted in any credit losses to the Company. These receivables are short-term in nature and deemed to be of good credit quality and have no need for any allowance for expected credit losses. Management continually monitors these receivables and should information be obtained that identifies potential credit risk, an adjustment to the allowance would be made if deemed appropriate. Trade and unbilled receivables from rental contracts are primarily in the US and are specifically excluded from the guidance in ASU 2016-13 in determining an allowance for expected losses. The Company does provide an allowance for these receivables based on historical experience and using credit information obtained from continued monitoring of customer accounts. 11 Table of Contents July 31, 2020 January 31, 2020 (in thousands) Trade and unbilled receivables from contracts with customers Trade receivables due from customers $ 35,691 $ 36,400 Unbilled receivables 17,280 13,944 Less allowance for expected credit loss 3,293 2,943 49,678 47,401 Trade receivables due from finance companies 11,813 12,352 Trade and unbilled receivables from rental contracts Trade receivables 5,578 7,381 Unbilled receivables 875 861 Less allowance for expected credit loss 1,979 2,180 4,474 6,062 Other receivables Due from manufacturers 8,819 5,763 Other 998 1,198 9,817 6,961 Receivables, net of allowance for expected credit losses $ 75,782 $ 72,776 Following is a summary of allowance for credit losses on trade and unbilled accounts receivable: Agriculture Construction International Total Balance at February 1, 2020 $ 181 $ 1,016 $ 1,746 $ 2,943 Current Expected Credit Loss Provision 14 113 226 353 Write-offs Charged Against Allowance 5 71 133 209 Credit Loss Recoveries Collected 40 4 6 50 F/X Impact — — ( 29 ) ( 29 ) Balance at April 30, 2020 230 1,062 1,816 3,108 Current Expected Credit Loss Provision 16 95 265 376 Write-offs Charged Against Allowance 47 78 98 223 Credit Loss Recoveries Collected 9 — — 9 F/X Impact — — 23 23 Balance at July 31, 2020 $ 208 $ 1,079 $ 2,006 $ 3,293 The following table presents impairment losses on receivables arising from sales contracts with customers and receivables arising from rental contracts: Three Months Ended July 31, Six Months Ended July 31, 2020 2019 2020 2019 (in thousands) Impairment losses on: Receivables from sales contracts $ 377 $ 658 $ 520 $ 986 Receivables from rental contracts 13 414 151 497 $ 390 $ 1,072 $ 671 $ 1,483 12 Table of Contents NOTE 5 - INVENTORIES July 31, 2020 January 31, 2020 (in thousands) New equipment $ 334,457 $ 358,339 Used equipment 148,239 157,535 Parts and attachments 86,301 79,813 Work in process 1,683 1,707 $ 570,680 $ 597,394 NOTE 6 - PROPERTY AND EQUIPMENT July 31, 2020 January 31, 2020 (in thousands) Rental fleet equipment $ 101,856 $ 104,133 Machinery and equipment 23,346 22,682 Vehicles 53,048 51,850 Furniture and fixtures 42,468 41,720 Land, buildings, and leasehold improvements 76,861 70,408 297,579 290,793 Less accumulated depreciation 147,083 145,231 $ 150,496 $ 145,562 The Company reviews its long-lived assets for potential impairment whenever events or circumstances indicate that the carrying value of the long-lived asset (or asset group) may not be recoverable. During the three months ended July 31, 2020, the Company determined that a current period operating loss combined with historical losses of a certain store location indicated that the long-lived asset group of a store location may not be recoverable. The Company performed an impairment assessment of this asset group and as a result determined an impairment charge was not needed for the three months ended July 31, 2020. For the six months ended July 31, 2020, the Company recognized total impairment charges of $ 0.2 million within its Construction segment. For the three and six months ended July 31, 2019, the Company recognized an impairment charge of $ 0.1 million within its Construction segment. In March 2019, the Company completed an assessment of its Enterprise Resource Planning ("ERP") application and concluded that the Company would begin the process to prepare for conversion to a new ERP application. The Company integrated one pilot store on the new ERP system in the second quarter of the current fiscal year and expects all domestic stores to be on the new ERP application in the first half of the fiscal year ending January 31, 2022. We have prospectively adjusted the useful life of our current ERP application such that it will be fully amortized upon its estimated replacement date. The net book value of the current ERP asset of $1.3 million as of July 31, 2020 will be amortized on a straight-line basis over the estimated remaining period of use. NOTE 7 - FLOORPLAN PAYABLE/ LINES OF CREDIT On April 3, 2020, the Company entered into a Third Amended and Restated Credit Agreement (the "Bank Syndicate Agreement") with a group of banks, that amended and restated the Company's prior $ 200.0 million credit facility, dated October 28, 2015. The Bank Syndicate Agreement provides for a secured credit facility in an amount up to $ 250.0 million, consisting of a $ 185.0 million floorplan facility (the "Floorplan Loan") and a $ 65.0 million operating line (the "Revolver Loan"), and changed the interest rates as compared to the prior credit facility, amongst other things. The amounts available under the Bank Syndicate Agreement are subject to base calculations and reduced by outstanding standby letters of credit and certain reserves. The Bank Syndicate Agreement has a variable interest rate on outstanding balances, has a 0.25% non-usage fee on the average monthly unused amount (replacing the previous non-usage fee of 0.25% to 0.375%), and requires monthly payments of accrued interest. The Company elects at the time of any advance to choose a Base Rate Loan or a LIBOR Rate Loan. The LIBOR Rate is based upon one month, two month, or three month LIBOR, as chosen by the Company, but in no event shall the LIBOR Rate be less than 0.50%. The Base Rate is the greater of (a) the prime rate of interest announced, from time to time, by Bank of America; (b) the Federal Funds Rate plus 0.5%, or (c) one month LIBOR plus 1%, but in no event shall the Base Rate be less than zero. The applicable margin rate is determined based on excess availability under the Bank Syndicate Agreement and 13 Table of Contents ranges from 0.5% to 1.0% for Base Rate Loans and 1.5% to 2.0% for LIBOR Rate Loans. The new applicable margins under the Bank Syndicate Agreement are up to 0.5% less than the existing margins under the prior credit facility. The Bank Syndicate Agreement does not obligate the Company to maintain financial covenants, except in the event that excess availability (each as defined in the Bank Syndicate Agreement) is less than 15% of the lower of the borrowing base or the size of the maximum credit line, at which point the Company is required to maintain a fixed charge coverage ratio of at least 1.10 :1.00. The Bank Syndicate Agreement includes various restrictions on the Company and its subsidiaries’ activities, including, under certain conditions, limitations on the Company’s ability to make certain cash payments including cash dividends and stock repurchases, issuance of equity instruments, acquisitions and divestitures, and entering into new indebtedness transactions. The Bank Syndicate Agreement matures on April 3, 2025. The Floorplan Loan under the Bank Syndicate Agreement e is used to finance equipment inventory purchases. Amounts outstanding are recorded as floorplan payable, within current liabilities on the consolidated balance sheets, as the Company intends to repay amounts borrowed within one year. The Revolver Loan under the Bank Syndicate Agreement is used to finance rental fleet equipment and for general working capital requirements of the Company. Amounts outstanding are recorded as long-term debt, within long-term liabilities on the consolidated balance sheets, as the Company does not have the intention or obligation to repay amounts borrowed within one year. As of July 31, 2020, the Company had floorplan lines of credit totaling $ 763.0 million, which is primarily comprised of three significant floorplan lines of credit: (i) a $ 450.0 million credit facility with CNH Industrial, (ii) a $ 185.0 million line of credit under the Bank Syndicate Agreement, and (iii) a $ 60.0 million credit facility with DLL Finance LLC. As of July 31, 2020 and January 31, 2020, the Company's outstanding balances of floorplan lines of credit consisted of the following: July 31, 2020 January 31, 2020 (in thousands) CNH Industrial $ 151,790 $ 187,690 Bank Syndicate Agreement Floorplan Loan 98,400 — Wells Fargo Floorplan Payable Line — 82,700 DLL Finance 25,064 30,657 Other outstanding balances with manufacturers and non-manufacturers 76,961 70,725 $ 352,215 $ 371,772 As of July 31, 2020, the interest-bearing U.S. floorplan payables carried various interest rates ranging primarily from 2.00 % to 3.31 %, compared to a range of 4.05 % to 4.81 % as of January 31, 2020. As of July 31, 2020, foreign floorplan payables carried various interest rates primarily ranging from 1.34 % to 6.15 %, compared to a range of 0.86 % to 7.66 % as of January 31, 2020. As of July 31, 2020 and January 31, 2020, $ 185.0 million and $ 205.2 million, respectively, of outstanding floorplan payables were non-interest bearing. As of July 31, 2020, the Company had a compensating balance arrangement under one of its foreign floorplan credit facilities, which requires a minimum cash deposit to be maintained with the lender in the amount of $ 5.0 million for the term of the credit facility. NOTE 8 - DEFERRED REVENUE July 31, 2020 January 31, 2020 (in thousands) Deferred revenue from contracts with customers $ 21,686 $ 39,512 Deferred revenue from rental and other contracts 1,030 1,456 $ 22,716 $ 40,968 NOTE 9 - SENIOR CONVERTIBLE NOTES The Company's senior convertible notes matured, and the outstanding principal balance of $ 45.6 million was repaid in full, on May 1, 2019, as such there was no interest expense for the three months ended July 31, 2019. The Company recognized interest expense associated with its senior convertible notes as follows: 14 Table of Contents Six Months Ended July 31, 2020 2019 (in thousands) Cash Interest Expense Coupon interest expense $ — $ 421 Noncash Interest Expense Amortization of debt discount — 350 Amortization of transaction costs — 45 $ — $ 816 NOTE 10 - LONG TERM DEBT The following is a summary of long-term debt as of July 31, 2020 and January 31, 2020: July 31, 2020 January 31, 2020 (in thousands) Sale-leaseback financing obligations, interest rates ranging from 3.4% to 10.3% with various maturity dates through December 2030 $ 17,153 $ 17,781 Bank Syndicate Agreement - Working Capital Line, interest accrues at a variable rate on outstanding balances, requires monthly payments of accrued interest, matures April 2025 10,000 10,000 Real estate mortgage bearing interest at 5.11%, payable in annual installments of $0.3 million, maturing on May 15, 2039, secured by real estate assets 6,485 6,827 Equipment financing loan, payable in monthly installments over a 72-month term for each funded tranche, interest rates ranging from 1.7% to 3.89%, secured by vehicle assets 7,446 7,468 Real estate mortgage bearing interest at 4.62%, payable in monthly installments of $0.04 million with a final payment at maturity of $3.4 million, maturing on June 10, 2024, secured by real estate assets 4,315 4,416 Real estate mortgage interest accrues at a variable rate of 2.5% plus 1-month LIBOR, requires monthly payments of accrued interest, final payment at maturity of $2.0 million, maturing on February 28, 2027, secured by real estate assets 1,964 — Real estate mortgage bearing interest at 4.4%, payable in monthly installments of $0.01 million with a final payment at maturity of $1.0 million, maturing on January 1, 2027, secured by real estate assets 1,458 1,489 Equipment financing loan, payable in monthly installments over a 72-month term, bearing interest at 3.94%, secured by vehicle assets 1,025 — Real estate mortgage bearing interest at 2.09%, payable in monthly installments, maturing on June 30, 2026, secured by real estate assets 2,339 2,520 Other long-term debt primarily bearing interest at three-month EURIBOR plus 2.6%, payable in quarterly installments, maturing on January 31, 2021 401 1,067 52,586 51,568 Less current maturities ( 3,921 ) ( 13,779 ) $ 48,665 $ 37,789 NOTE 11 - DERIVATIVE INSTRUMENTS The Company holds derivative instruments for the purpose of minimizing exposure to fluctuations in foreign currency exchange rates to which the Company is exposed in the normal course of its operations. 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 15 Table of Contents on net income. The Company's foreign currency forward contracts generally have three-month maturities, maturing on the last day of each fiscal quarter. No foreign currency contracts were outstanding as of January 31, 2020. The notional value of outstanding foreign currency contracts as of July 31, 2020 was $ 11.0 million. As of July 31, 2020, the fair value of the Company's outstanding derivative instruments was not material. Derivative instruments recognized as assets are recorded in prepaid expenses and other in the consolidated balance sheets, and derivative instruments recognized as liabilities are recorded in accrued expenses and other in the consolidated balance sheets. The following table sets forth the gains and losses recognized in income from the Company’s derivative instruments for the three and six months ended July 31, 2020 and 2019. Gains and losses are recognized in interest income and other income (expense) in the consolidated statements of operations: Three Months Ended July 31, Six Months Ended July 31, 2020 2019 2020 2019 (in thousands) Foreign currency contract gain $ 202 $ 166 $ 189 $ 368 NOTE 12 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following is a summary of the changes in accumulated other comprehensive income (loss), by component, for the periods ended July 31, 2020 and July 31, 2019: Foreign Currency Translation Adjustment Net Investment Hedging Gain Total Accumulated Other Comprehensive Income (Loss) (in thousands) Balance, January 31, 2020 $ ( 5,931 ) $ 2,711 $ ( 3,220 ) Other comprehensive loss ( 528 ) — ( 528 ) Balance, April 30, 2020 ( 6,459 ) 2,711 ( 3,748 ) Other comprehensive income 778 — 778 Balance, July 31, 2020 $ ( 5,681 ) $ 2,711 $ ( 2,970 ) Foreign Currency Translation Adjustment Net Investment Hedging Gain Total Accumulated Other Comprehensive Income (Loss) (in thousands) Balance, January 31, 2019 $ ( 5,051 ) $ 2,711 $ ( 2,340 ) Other comprehensive loss ( 771 ) — ( 771 ) Balance, April 30, 2019 ( 5,822 ) 2,711 ( 3,111 ) Other comprehensive income 1,012 — 1,012 Balance, July 31, 2019 $ ( 4,810 ) $ 2,711 $ ( 2,099 ) 16 Table of Contents NOTE 13 - LEASES As Lessee The Company, as lessee, leases certain of its dealership locations, office space, equipment and vehicles under operating and financing classified leasing arrangements. The Company has elected to not record leases with a lease term at commencement of 12 months or less on the consolidated balance sheet; such leases are expensed on a straight-line basis over the lease term. Many real estate lease agreements require the Company to pay the real estate taxes on the properties during the lease term and require that the Company maintain property insurance on each of the leased premises. Such payments are deemed to be variable lease payments as the amounts may change during the term of the lease. Certain leases include renewal options that can extend the lease term for periods of one to ten years. Most real estate leases grant the Company a right of first refusal or other options to purchase the real estate, generally at fair market value, either during the lease term or at its conclusion. In most cases, the Company has not included these renewal and purchase options within the measurement of the right-of-use asset and lease liability. Most often the Company cannot readily determine the interest rate implicit in the lease and thus applies its incremental borrowing rate to capitalize the right-of-use asset and lease liability. The Company estimates its incremental borrowing rate by incorporating considerations of lease term, asset class and lease currency and geographical market. The Company's lease agreements do not contain any material non-lease components, residual value guarantees or material restrictive covenants. The Company subleases a small number of real estate assets to third-parties, primarily dealership locations for which it has ceased operations. All sublease arrangements are classified as operating leases. The components of lease expense were as follows: Three Months Ended July 31, Six Months Ended July 31, Classification 2020 2019 2020 2019 (in thousands) (in thousands) Finance lease cost: Amortization of leased assets Operating expenses $ 389 $ 331 $ 781 $ 707 Interest on lease liabilities Other interest expense 117 139 242 278 Operating lease cost Operating expenses & rental and other cost of revenue 4,325 4,725 8,788 9,541 Short-term lease cost Operating expenses 110 80 190 160 Variable lease cost Operating expenses 735 715 1,370 1,335 Sublease income Interest income and other income (expense) ( 131 ) ( 154 ) ( 283 ) ( 321 ) $ 5,545 $ 5,836 $ 11,088 $ 11,700 17 Table of Contents Right-of-use lease assets and lease liabilities consist of the following: Classification July 31, 2020 January 31, 2020 (in thousands) Assets Operating lease assets Operating lease assets $ 83,586 $ 88,281 Finance lease assets (a) Property and equipment, net of accumulated depreciation 8,027 6,297 Total leased assets $ 91,613 $ 94,578 Liabilities Current Operating Current operating lease liabilities $ 12,158 $ 12,259 Finance Accrued expenses and other 4,038 1,708 Noncurrent Operating Operating lease liabilities 83,341 88,387 Finance Other long-term liabilities 3,398 4,103 Total lease liabilities $ 102,935 $ 106,457 (a) Finance lease assets are recorded net of accumulated amortization of $2.2 million as of July 31, 2020 and $1.5 million as of January 31, 2020. Maturities of lease liabilities as of July 31, 2020 are as follows: Operating Finance Leases Leases Total Fiscal Year Ended January 31, (in thousands) 2021 (remainder) $ 8,852 $ 3,404 $ 12,256 2022 17,004 1,873 18,877 2023 16,028 1,226 17,254 2024 15,097 493 15,590 2025 13,961 402 14,363 2026 13,804 311 14,115 Thereafter 34,698 1,084 35,782 Total lease payments 119,444 8,793 128,237 Less: Interest 23,945 1,357 25,302 Present value of lease liabilities $ 95,499 $ 7,436 $ 102,935 The weighted-average lease term and discount rate as of July 31, 2020 are as follows: July 31, 2020 Weighted-average remaining lease term (years): Operating leases 7.6 Financing leases 5.1 Weighted-average discount rate: Operating leases 6.1 % Financing leases 9.7 % As Lessor The Company rents equipment to customers, primarily in the Construction segment, on a short-term basis. Our rental arrangements generally do not include minimum, noncancellable periods as the lessee is entitled to cancel the arrangement at any time. Most often, our rental arrangements extend for periods ranging from a few days to a few months. We maintain a fleet of dedicated rental assets within our Construction segment and, within all segments, may also provide short-term rentals of certain equipment inventory assets. Certain rental arrangements may include rent-to-purchase options whereby customers are given a period of time to exercise an option to purchase the related equipment at an established price with any rental payments paid applied to reduce the purchase price. All of the Company's leasing arrangements as lessor are classified as operating leases. Rental revenue is recognized on a straight-line basis over the rental period. Rental revenue includes amounts charged for loss and damage insurance on rented equipment. In most cases, our rental arrangements include non-lease components, including delivery and pick-up services. The 18 Table of Contents Company accounts for these non-lease components separate from the rental arrangement and recognizes the revenue associated with these components when the service is performed. The Company has elected to exclude from rental revenue all sales, value added and other taxes collected from our customers concurrent with our rental activities. Rental billings most often occur on a monthly basis and may be billed in advance or in arrears, thus creating unbilled rental receivables or deferred rental revenue amounts. The Company manages the residual value risk of its rented assets by (i) monitoring the quality, aging and anticipated retail market value of our rental fleet assets to determine the optimal period to remove an asset from the rental fleet, (ii) maintaining the quality of our assets through on-site parts and service support and (iii) requiring physical damage insurance of our lessee customers. We primarily dispose of our rental assets through the sale of the asset by our retail sales force. Revenue generated from leasing activities is disclosed, by segment, in Note 3. The following is the balance of our dedicated rental fleet assets of our Construction segment as of July 31, 2020 and January 31, 2020: July 31, 2020 January 31, 2020 (in thousands) Rental fleet equipment $ 101,856 $ 104,133 Less accumulated depreciation 38,123 42,076 $ 63,733 $ 62,057 NOTE 14 - FAIR VALUE MEASUREMENTS As of July 31, 2020 and January 31, 2020, the fair value of the Company's foreign currency contracts, which are either assets or liabilities measured at fair value on a recurring basis, was not material. These foreign currency contracts were valued using a discounted cash flow analysis, which is an income approach, utilizing readily observable market data as inputs, which is classified as a Level 2 fair value measurement. The Company also valued certain long-lived assets at fair value on a non-recurring basis as of April 30, 2020 and January 31, 2020 as part of its long-lived asset impairment testing. The estimated fair value of such assets as of April 30, 2020 and January 31, 2020 was $ 0.4 million and $ 2.8 million, respectively. Fair value was estimated through an income approach incorporating both observable and unobservable inputs, and are deemed to be Level 3 fair value inputs. The most significant unobservable inputs include forecasted net cash generated from the use of the assets and the discount rate applied to such cash flows to arrive at a fair value estimate. In addition, in certain instances the Company estimated the fair value of long-lived assets to approximate zero as no future cash flows were assumed to be generated from the use of such assets and the expected value to be realized upon disposition was deemed to be nominal. The Company also has financial instruments that are not recorded at fair value in the consolidated balance sheets, including cash, receivables, payables and long-term debt. The carrying amounts of these financial instruments approximated their fair values as of July 31, 2020 and January 31, 2020. Fair value of these financial instruments was estimated based on Level 2 fair value inputs. NOTE 15 - INCOME TAXES Our effective tax rate was 22.8 % and 25.8 % for the three months ended July 31, 2020 and July 31, 2019 and was 24.3 % and 26.7 % for the six months ended July 31, 2020 and July 31, 2019. Our effective tax rate differs from the domestic federal statutory tax rate due to the impact of state taxes, the mix of domestic and foreign income or losses, the impact of the recognition of valuation allowance on our foreign deferred tax assets, including net operating losses, the impact of foreign currency fluctuations on our Ukrainian business and discrete events that take place throughout the year, primarily the tax impact of share based payments 19 Table of Contents NOTE 16 - BUSINESS COMBINATIONS Fiscal 2021 On May 4, 2020, the Company acquired certain assets of HorizonWest Inc. This acquired CaseIH agriculture dealership complex consisted of three agriculture equipment stores in Scottsbluff and Sidney, Nebraska and Torrington, Wyoming, which expands the Company's agriculture presence in Nebraska and into Wyoming. The total consideration transferred for the acquired business was $ 6.8 million paid in cash. In connection with the acquisition, the Company acquired from CNH Industrial and certain other manufacturers equipment and parts inventory previously owned by HorizonWest Inc. Upon acquiring such inventories, the Company was offered floorplan financing by the manufacturer. In total, the Company acquired inventory and recognized a corresponding financing liability of $ 2.7 million. The recognition of these inventories and the associated financing liabilities are not included as part of the accounting for the business combination. Fiscal 2020 On January 1, 2019, the Company, through its German subsidiary, acquired certain assets of ESB Agrartechnik GmbH ("ESB"). ESB is a full-service agriculture equipment dealership in Eastern Germany. Our acquisition of ESB further expanded our presence in the German market. The total consideration transferred for the acquired business was $ 3.0 million paid in cash. This acquisition was recognized in the fiscal year ended January 31, 2020 as the acquisition occurred within our International segment in which all entities maintain a calendar year reporting period. On October 1, 2019, the Company acquired certain assets of Uglem-Ness Co. The acquired business consists of one Case IH agriculture equipment store in Northwood, North Dakota. The service area is contiguous to the Company's existing locations in Grand Forks and Casselton, North Dakota and Ada, Minnesota. The total consideration transferred for the acquired business was $ 10.9 million paid in cash, including the real estate. The real estate was acquired in January 2020 for $ 2.1 million. In connection with the acquisition, the Company acquired from CNH Industrial and certain other manufacturers equipment and parts inventory previously owned by Uglem-Ness Co. Upon acquiring such inventories, the Company was offered floorplan financing by the manufacturer. In total, the Company acquired inventory and recognized a corresponding financing liability of $ 7.4 million. The recognition of these inventories and the associated financing liabilities are not included as part of the accounting for the business combination. Purchase Price Allocation Each of the above acquisitions has been accounted for under the acquisition method of accounting, which requires the Company to estimate the acquisition date fair value of the assets acquired and liabilities assumed. The accounting for all business combinations was complete as of July 31, 2020. The following table presents the aggregate purchase price allocations for all acquisitions completed during the six months ended July 31, 2020 and twelve months ended January 31, 2020: 20 Table of Contents July 31, 2020 January 31, 2020 (in thousands) Assets acquired: Cash $ 1 $ — Receivables — 440 Inventories 4,260 6,466 Prepaid expenses and other 48 — Property and equipment 1,752 3,810 Operating lease assets 2,006 — Intangible assets 245 1,973 Goodwill 484 1,198 8,796 13,887 Liabilities assumed: Current operating lease liabilities 159 — Operating lease liabilities 1,847 — 2,006 — Net assets acquired $ 6,790 $ 13,887 Goodwill recognized by segment: Agriculture $ 484 $ 699 Construction — — International — 499 Goodwill expected to be deductible for tax purposes $ 484 $ 1,198 The recognition of goodwill in the above business combinations arose from the acquisition of an assembled workforce and anticipated synergies expected to be realized. For the business combinations occurring during the twelve months ended January 31, 2020, the Company recognized a customer relationship intangible asset of $ 0.2 million, a non-competition intangible asset of $ 0.1 million, and a distribution rights intangible asset of $ 1.6 million. For the business combinations occurring during the six months ended July 31, 2020, the Company recognized a non-competition intangible asset of $ 0.1 million, and a distribution rights intangible asset of $ 0.2 million. The customer relationship and non-competition assets will be amortized over periods ranging from three to five years. The distribution rights assets are indefinite-lived intangible assets not subject to amortization. The Company estimated the fair value of the intangible assets using a multi-period excess earnings model, which is an income approach. Acquisition related costs were not material for the six months ended July 31, 2020 and twelve months ended January 31, 2020, and have been expensed as incurred and recognized as operating expenses in the consolidated statements of operations. NOTE 17 - CONTINGENCIES On October 11, 2017, the Romania Competition Council (“RCC”) initiated an administrative investigation of the Romanian Association of Manufacturers and Importers of Agricultural Machinery (“APIMAR”) and all its members, including Titan Machinery Romania. The RCC's investigation involves whether the APIMAR members engaged in anti-competitive practices in their sales of agricultural machinery not involving European Union ("EU") subvention funding programs, by referring to the published sales prices governing EU subvention funded transactions, which prices are mandatorily disclosed to and published by AFIR, a Romanian government agency that oversees the EU subvention funding programs in Romania. The investigation is in a preliminary stage and the Company is currently unable to predict its outcome or reasonably estimate any potential loss that may result from the investigation. The Company is also engaged in other legal proceedings incidental to the normal course of business. Due to their nature, such legal proceedings involve inherent uncertainties, including but not limited to, court rulings, negotiations between affected parties and governmental intervention. Based upon the information available to the Company and discussions with legal counsel, it is the Company's opinion that the outcome of these various legal actions and claims will not have a material impact on the financial position, results of operations or cash flows. These matters, however, are subject to many uncertainties, and the outcome of any matter is not predictable with assurance. 21 Table of Contents NOTE 18 - SEGMENT INFORMATION The Company has three reportable segments: Agriculture, Construction and International. Revenue between segments is immaterial. The Company retains various unallocated income/(expense) items and assets at the general corporate level, which the Company refers to as “Shared Resources” in the table below. Shared Resources assets primarily consist of cash and property and equipment. Certain financial information for each of the Company’s business segments is set forth below. Three Months Ended July 31, Six Months Ended July 31, 2020 2019 2020 2019 (in thousands) (in thousands) Revenue Agriculture $ 169,072 $ 165,692 $ 362,700 $ 319,464 Construction 77,719 84,039 137,833 154,782 International 56,674 65,250 113,140 119,025 Total $ 303,465 $ 314,981 $ 613,673 $ 593,271 Income (Loss) Before Income Taxes Agriculture $ 6,752 $ 6,177 $ 12,914 $ 8,053 Construction 1,375 1,334 ( 1,498 ) ( 888 ) International ( 432 ) 505 ( 711 ) 722 Segment income before income taxes 7,695 8,016 10,705 7,887 Shared Resources 597 ( 589 ) 736 ( 975 ) Total $ 8,292 $ 7,427 $ 11,441 $ 6,912 July 31, 2020 January 31, 2020 (in thousands) Total Assets Agriculture $ 436,826 $ 444,942 Construction 248,390 275,645 International 201,031 191,513 Segment assets 886,247 912,100 Shared Resources 61,778 63,243 Total $ 948,025 $ 975,343 22 Table of Contents