Titan Machinery Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS TITAN MACHINERY INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except per share data) April 30, 2021 January 31, 2021 Assets Current Assets Cash $ 89,729 $ 78,990 Receivables, net of allowance for expected credit losses 71,928 69,109 Inventories 415,660 418,458 Prepaid expenses and other 11,275 13,677 Total current assets 588,592 580,234 Noncurrent Assets Property and equipment, net of accumulated depreciation 158,364 147,165 Operating lease assets 68,962 74,445 Deferred income taxes 4,613 3,637 Goodwill 1,433 1,433 Intangible assets, net of accumulated amortization 7,696 7,785 Other 1,081 1,090 Total noncurrent assets 242,149 235,555 Total Assets $ 830,741 $ 815,789 Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 24,618 $ 20,045 Floorplan payable 169,108 161,835 Current maturities of long-term debt 5,128 4,591 Current operating lease liabilities 10,624 11,772 Deferred revenue 49,109 59,418 Accrued expenses and other 37,110 48,791 Income taxes payable 14,508 11,048 Total current liabilities 310,205 317,500 Long-Term Liabilities Long-term debt, less current maturities 64,868 44,906 Operating lease liabilities 69,030 73,567 Other long-term liabilities 7,555 8,535 Total long-term liabilities 141,453 127,008 Commitments and Contingencies (Note 15) Stockholders' Equity Common stock, par value $ .00001 per share, 45,000 shares authorized; 22,520 shares issued and outstanding at April 30, 2021; 22,553 shares issued and outstanding at January 31, 2021 — — Additional paid-in-capital 252,547 252,913 Retained earnings 127,416 116,869 Accumulated other comprehensive income (loss) ( 880 ) 1,499 Total stockholders' equity 379,083 371,281 Total Liabilities and Stockholders' Equity $ 830,741 $ 815,789 See Notes to Consolidated Financial Statements 3 Table of Contents TITAN MACHINERY INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data) Three Months Ended April 30, 2021 2020 Revenue Equipment $ 275,980 $ 218,505 Parts 62,626 56,614 Service 27,702 25,600 Rental and other 6,398 9,489 Total Revenue 372,706 310,208 Cost of Revenue Equipment 243,676 197,046 Parts 44,440 39,617 Service 9,294 8,345 Rental and other 4,318 6,790 Total Cost of Revenue 301,728 251,798 Gross Profit 70,978 58,410 Operating Expenses 56,442 53,058 Impairment of Intangible and Long-Lived Assets — 216 Income from Operations 14,536 5,136 Other Income (Expense) Interest and other income 665 130 Floorplan interest expense ( 418 ) ( 1,152 ) Other interest expense ( 1,104 ) ( 966 ) Income Before Income Taxes 13,679 3,148 Provision for Income Taxes 3,132 886 Net Income $ 10,547 $ 2,262 Earnings per Share: Basic $ 0.47 $ 0.10 Diluted $ 0.47 $ 0.10 Weighted Average Common Shares: Basic 22,168 22,012 Diluted 22,179 22,012 See Notes to Consolidated Financial Statements 4 Table of Contents TITAN MACHINERY INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands) Three Months Ended April 30, 2021 2020 Net Income $ 10,547 $ 2,262 Other Comprehensive Loss Foreign currency translation adjustments ( 2,379 ) ( 528 ) Comprehensive Income $ 8,168 $ 1,734 See Notes to Consolidated Financial Statements 5 Table of Contents TITAN MACHINERY INC. CONDENSED 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, 2020 22,335 $ — $ 250,607 $ 97,717 $ ( 3,220 ) $ 345,104 Cumulative-effect adjustment of adopting ASC 326, Financial Instruments - Credit Losses — — — ( 204 ) — ( 204 ) 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 ( 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 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Shares Outstanding Amount BALANCE, January 31, 2021 22,553 $ — $ 252,913 $ 116,869 $ 1,499 $ 371,281 Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax ( 33 ) — ( 975 ) — — ( 975 ) Stock-based compensation expense — — 609 — — 609 Net income — — — 10,547 — 10,547 Other comprehensive loss — — — — ( 2,379 ) ( 2,379 ) BALANCE, April 30, 2021 22,520 $ — $ 252,547 $ 127,416 $ ( 880 ) $ 379,083 See Notes to Consolidated Financial Statements 6 TITAN MACHINERY INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Three Months Ended April 30, 2021 2020 Operating Activities Net income $ 10,547 $ 2,262 Adjustments to reconcile net income to net cash provided by (used for) operating activities Depreciation and amortization 5,207 5,375 Impairment of long-lived assets — 216 Deferred income taxes ( 1,008 ) 117 Stock-based compensation expense 609 645 Noncash interest expense 54 27 Noncash lease expense 2,528 2,833 Other, net 176 ( 54 ) Changes in assets and liabilities Receivables, prepaid expenses and other assets ( 1,023 ) ( 1,125 ) Inventories ( 1,615 ) 11,941 Manufacturer floorplan payable 19,657 ( 10,669 ) Accounts payable, deferred revenue, accrued expenses and other and other long-term liabilities ( 5,440 ) ( 13,919 ) Operating lease liabilities ( 2,736 ) ( 3,091 ) Net Cash Provided by (Used for) Operating Activities 26,956 ( 5,442 ) Investing Activities Rental fleet purchases ( 2,081 ) ( 3,378 ) Property and equipment purchases (excluding rental fleet) ( 7,045 ) ( 2,036 ) Proceeds from sale of property and equipment 135 313 Other, net 7 ( 21 ) Net Cash Used for Investing Activities ( 8,984 ) ( 5,122 ) Financing Activities Net change in non-manufacturer floorplan payable ( 9,141 ) 18,781 Proceeds from long-term debt borrowings 6,462 1,112 Principal payments on long-term debt and finance leases ( 3,181 ) ( 1,309 ) Payment of debt issuance costs — ( 670 ) Other, net ( 974 ) ( 200 ) Net Cash Provided by (Used for) Financing Activities ( 6,834 ) 17,714 Effect of Exchange Rate Changes on Cash ( 399 ) ( 36 ) Net Change in Cash 10,739 7,114 Cash at Beginning of Period 78,990 43,721 Cash at End of Period $ 89,729 $ 50,835 Supplemental Disclosures of Cash Flow Information Cash paid during the period Income taxes, net of refunds $ 253 $ 365 Interest $ 1,404 $ 2,262 Supplemental Disclosures of Noncash Investing and Financing Activities Net property and equipment financed with long-term debt, finance leases, accounts payable and accrued liabilities $ 15,763 $ 2,085 Net transfer of assets from (to) property and equipment to (from) inventories $ 300 $ ( 888 ) See Notes to Consolidated Financial Statements 7 Table of Contents TITAN MACHINERY INC. NOTES TO CONDENSED 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, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2022. The information contained in the consolidated balance sheet as of January 31, 2021 was derived from the audited consolidated financial statements of 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, 2021 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 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 Company's products and services were determined to be essential in the markets we serve and accordingly operations have been allowed to continue throughout the pandemic. Certain of the Company's supply vendors are facing production and staffing challenges as they work to achieve production capacity and lead times consistent with pre-pandemic levels. The pandemic has created other supply chain challenges such as delays in components and supplies and freight markets continue to have challenges with driver shortages, strong demand for consumer goods, extended lead times, and driver retention and recruitment issues. As a result, the Company has experienced some disruptions and delays on delivery of certain materials. The Company has assessed the impacts of the COVID-19 pandemic on its results of operations for the three months ended April 30, 2021 and 2020, and although there have been logistical and other challenges, no material adverse impacts were identified. 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, goodwill, or indefinite lived intangible 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 Accounting Guidance Not Yet Adopted In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update ("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 updating its credit agreements to include language regarding the successor or alternate rate to LIBOR, and a review of other contracts and agreements is on-going. The Company does not expect the guidance to have a material impact on its results of operations, financial position, cash flows, or disclosures. NOTE 2 - EARNINGS PER SHARE The following table sets forth the calculation of basic and diluted Earnings Per Share (EPS): Three Months Ended April 30, 2021 2020 (in thousands, except per share data) Numerator: Net income $ 10,547 $ 2,262 Allocation to participating securities ( 175 ) ( 32 ) Net income attributable to Titan Machinery Inc. common stockholders $ 10,372 $ 2,230 Denominator: Basic weighted-average common shares outstanding 22,168 22,012 Plus: incremental shares from vesting of restricted stock units 11 — Diluted weighted-average common shares outstanding 22,179 22,012 Earnings Per Share: Basic $ 0.47 $ 0.10 Diluted $ 0.47 $ 0.10 NOTE 3 - REVENUE Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to collect in exchange for those goods or services. Sales, value added and other taxes collected from our customers concurrent with our revenue activities are excluded from revenue. The following tables present our revenue disaggregated by revenue source and segment: Three Months Ended April 30, 2021 Agriculture Construction International Total (in thousands) Equipment $ 169,257 $ 44,812 $ 61,911 $ 275,980 Parts 39,684 12,108 10,834 62,626 Service 19,753 6,369 1,580 27,702 Other 722 365 92 1,179 Revenue from contracts with customers 229,416 63,654 74,417 367,487 Rental 138 4,954 127 5,219 Total revenues $ 229,554 $ 68,608 $ 74,544 $ 372,706 9 Table of Contents Three Months Ended April 30, 2020 Agriculture Construction International Total (in thousands) Equipment $ 139,749 $ 34,253 $ 44,503 $ 218,505 Parts 35,079 11,460 10,075 56,614 Service 17,720 6,212 1,668 25,600 Other 733 518 104 1,355 Revenue from contracts with customers 193,281 52,443 56,350 302,074 Rental 346 7,671 117 8,134 Total revenues $ 193,627 $ 60,114 $ 56,467 $ 310,208 Unbilled Receivables and Deferred Revenue Unbilled receivables from contracts with customers were $ 17.0 million and $ 12.9 million as of April 30, 2021 and January 31, 2021. 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 were $ 47.6 million and $ 57.7 million as of April 30, 2021 and January 31, 2021. Our deferred revenue most often increases in the fourth quarter of each fiscal year due to a higher level of customer down payments or prepayments and longer time periods between customer payment and delivery of the equipment asset, and the related recognition of equipment revenue, prior to its seasonal use. During the three months ended April 30, 2021 and 2020, the Company recognized $37.9 million and $29.7 million, respectively, of revenue that was included in the deferred revenue balance as of January 31, 2021 and January 31, 2020, respectively. No material amount of revenue was recognized during the three months ended April 30, 2021 and 2020 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 parts installed and 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. 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 United States and are specifically excluded from the accounting guidance in determining an allowance for expected losses. The Company provides an allowance for these receivables based on historical experience and using credit information obtained from continued monitoring of customer accounts. 10 Table of Contents April 30, 2021 January 31, 2021 (in thousands) Trade and unbilled receivables from contracts with customers Trade receivables due from customers $ 32,634 $ 31,664 Unbilled receivables 17,005 12,909 Less allowance for expected credit losses 2,908 2,994 46,731 41,579 Trade receivables due from finance companies 13,732 14,133 Trade and unbilled receivables from rental contracts Trade receivables 4,133 4,329 Unbilled receivables 549 520 Less allowance for expected credit losses 1,899 1,939 2,783 2,910 Other receivables Due from manufacturers 7,152 8,720 Other 1,530 1,767 8,682 10,487 Receivables, net of allowance for expected credit losses $ 71,928 $ 69,109 Following is a summary of allowance for credit losses on trade and unbilled accounts receivable by segment: Agriculture Construction International Total (in thousands) Balance at January 31, 2021 $ 228 $ 1,074 $ 1,690 $ 2,992 Current expected credit loss provision 30 68 ( 2 ) 96 Write-offs charged against allowance 17 84 38 139 Credit loss recoveries collected — 4 — 4 Foreign exchange impact — — ( 50 ) ( 50 ) Balance at April 30, 2021 $ 241 $ 1,062 $ 1,600 $ 2,903 Agriculture Construction International Total (in thousands) 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 Foreign exchange impact — — ( 29 ) ( 29 ) Balance at April 30, 2020 $ 230 $ 1,062 $ 1,816 $ 3,108 11 Table of Contents The following table presents impairment losses (recoveries) on receivables arising from sales contracts with customers and receivables arising from rental contracts: Three Months Ended April 30, 2021 2020 (in thousands) Impairment losses (recoveries) on: Receivables from sales contracts $ 98 $ 143 Receivables from rental contracts ( 34 ) 138 $ 64 $ 281 NOTE 5 - INVENTORIES April 30, 2021 January 31, 2021 (in thousands) New equipment $ 212,010 $ 206,683 Used equipment 118,383 131,369 Parts and attachments 83,118 78,982 Work in process 2,149 1,424 $ 415,660 $ 418,458 NOTE 6 - PROPERTY AND EQUIPMENT April 30, 2021 January 31, 2021 (in thousands) Rental fleet equipment $ 79,014 $ 77,530 Machinery and equipment 23,368 23,354 Vehicles 56,948 55,884 Furniture and fixtures 43,673 43,678 Land, buildings, and leasehold improvements 101,280 90,730 304,283 291,176 Less accumulated depreciation 145,919 144,011 $ 158,364 $ 147,165 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 April 30, 2021, the Company identified no such asset groups and no impairment was recorded . For the three months ended April 30, 2020, the Company recognized an impairment charge of $ 0.2 million within its Construction segment. 12 Table of Contents 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 includes a variable interest rate on outstanding balances, charges a 0.25% non-usage fee on the average monthly unused amount, 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 ranges from 0.5% to 1.0% for Base Rate Loans and 1.5% to 2.0% for LIBOR Rate Loans. 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 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 April 30, 2021, the Company had floorplan lines of credit totaling $ 770.0 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 April 30, 2021 and January 31, 2021, the Company's outstanding balances of floorplan lines of credit consisted of the following: April 30, 2021 January 31, 2021 (in thousands) CNH Industrial $ 91,402 $ 86,792 DLL Finance 9,788 10,667 Other outstanding balances with manufacturers and non-manufacturers 67,918 64,376 $ 169,108 $ 161,835 As of April 30, 2021 and January 31, 2021, the U.S. floorplan payables were generally all non-interest bearing. As of April 30, 2021, foreign floorplan payables carried various interest rates primarily ranging from 1.40 % to 4.81 %, compared to a range of 1.40 % to 4.82 % as of January 31, 2021. As of April 30, 2021 and January 31, 2021, $ 120.2 million and $ 98.8 million, respectively, of outstanding floorplan payables were non-interest bearing. As of April 30, 2021, 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. 13 Table of Contents NOTE 8 - LONG TERM DEBT The following is a summary of long-term debt as of April 30, 2021 and January 31, 2021: Description Maturity Dates Interest Rates April 30, 2021 January 31, 2021 (in thousands) Mortgage loans, secured Various through May 2039 2.1% to 5.1% $ 43,413 $ 22,916 Sale-leaseback financing obligations Various through December 2030 3.4% to 10.3% 16,172 16,505 Vehicle loans, secured Various through June 2026 1.7% to 3.9% 10,411 9,999 Other January 2021 2.6% — 77 Total debt 69,996 49,497 Less: current maturities 5,128 4,591 Long-term debt, net $ 64,868 $ 44,906 The Company purchased buildings and real estate assets of eleven of its U.S. dealer locations in the first quarter of fiscal 2022 and financed these purchases with long term debt of $17.7 million. These dealer locations were previously leased from third party lessors. NOTE 9 - 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 on net income. The Company's foreign currency forward contracts generally have three-month maturities, maturing on the last day of each fiscal quarter. The notional value of outstanding foreign currency contracts as of January 31, 2021 was $ 8.0 million. There were no outstanding foreign currency contracts as of April 30, 2021. As of January 31, 2021, 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 months ended April 30, 2021 and 2020. Gains and losses are recognized in Interest and other income in the consolidated statements of operations: Three Months Ended April 30, 2021 2020 (in thousands) Foreign currency contract loss $ ( 351 ) $ ( 13 ) NOTE 10 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following is a summary of the changes in accumulated other comprehensive income (loss), by component, for the periods ended April 30, 2021 and April 30, 2020: 14 Table of Contents Foreign Currency Translation Adjustment Net Investment Hedging Gain Total Accumulated Other Comprehensive Income (Loss) (in thousands) Balance, January 31, 2021 $ ( 1,212 ) $ 2,711 $ 1,499 Other comprehensive loss ( 2,379 ) — ( 2,379 ) Balance, April 30, 2021 $ ( 3,591 ) $ 2,711 $ ( 880 ) 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 ) NOTE 11 - 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 April 30, Classification 2021 2020 (in thousands) Finance lease cost: Amortization of leased assets Operating expenses $ 445 $ 392 Interest on lease liabilities Other interest expense 88 126 Operating lease cost Operating expenses and rental and other cost of revenue 3,766 4,463 Short-term lease cost Operating expenses 66 80 Variable lease cost Operating expenses 613 635 Sublease income Interest and other income ( 197 ) ( 152 ) $ 4,781 $ 5,544 15 Table of Contents Right-of-use lease assets and lease liabilities consist of the following: Classification April 30, 2021 January 31, 2021 (in thousands) Assets Operating lease assets Operating lease assets $ 68,962 $ 74,445 Finance lease assets (a) Property and equipment, net of accumulated depreciation 3,252 12,426 Total leased assets $ 72,214 $ 86,871 Liabilities Current Operating Current operating lease liabilities $ 10,624 $ 11,772 Finance Accrued expenses and other 922 9,823 Noncurrent Operating Operating lease liabilities 69,030 73,567 Finance Other long-term liabilities 2,375 2,911 Total lease liabilities $ 82,951 $ 98,073 (a) Finance lease assets are recorded net of accumulated amortization of $2.0 million as of April 30, 2021 and $3.0 million as of January 31, 2021. Maturities of lease liabilities as of April 30, 2021 are as follows: Operating Finance Leases Leases Total Fiscal Year Ended January 31, (in thousands) 2022 (remainder) $ 11,412 $ 887 $ 12,299 2023 14,394 914 15,308 2024 13,457 587 14,044 2025 13,035 498 13,533 2026 12,873 359 13,232 2027 12,207 309 12,516 Thereafter 21,022 774 21,796 Total lease payments 98,400 4,328 102,728 Less: Interest 18,746 1,031 19,777 Present value of lease liabilities $ 79,654 $ 3,297 $ 82,951 The weighted-average lease term and discount rate as of April 30, 2021 are as follows: April 30, 2021 Weighted-average remaining lease term (years): Operating leases 7.3 Financing leases 5.8 Weighted-average discount rate: Operating leases 6.1 % Financing leases 8.7 % 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 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 16 Table of Contents 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, included in Property and equipment, net of accumulated depreciation in the consolidated balance sheet, of our Construction segment as of April 30, 2021 and January 31, 2021: April 30, 2021 January 31, 2021 (in thousands) Rental fleet equipment $ 79,014 $ 77,530 Less accumulated depreciation 28,594 28,916 $ 50,420 $ 48,614 NOTE 12 - FAIR VALUE MEASUREMENTS As of April 30, 2021 and January 31, 2021, 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 January 31, 2021 as part of its long-lived asset impairment testing. The estimated fair value of such assets as of January 31, 2021 was $ 0.8 million. Fair value was estimated through an income approach incorporating both observable and unobservable inputs, and are deemed to be Level 3 fair value inputs. The most significant unobservable inputs include forecasted net cash generated from the use of the assets and the discount rate applied to such cash flows to arrive at a fair value estimate. 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 April 30, 2021 and January 31, 2021. Fair value of these financial instruments was estimated based on Level 2 fair value inputs. NOTE 13 - INCOME TAXES Our effective tax rate was 22.9 % and 28.1 % for the three months ended April 30, 2021 and April 30, 2020. The effective tax rate for the three months ending April 30, 2021 was benefited by the vesting of share-based compensation. For the three months ending April 30, 2020, the effective tax rate benefited from a weakening hryvnia in our Ukrainian business but was offset by increased tax expense on the vesting of share-based compensation. NOTE 14 - 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 expanded 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. Purchase Price Allocation 17 Table of Contents The above acquisition has been accounted for under the acquisition method of accounting, which requires the Company to estimate the acquisition date fair value of the assets acquired and liabilities assumed. The accounting for the purchase price allocation was complete as of January 31, 2021. The following table presents the aggregate purchase price allocations for all acquisitions completed as of January 31, 2021: January 31, 2021 (in thousands) Assets acquired: Cash $ 1 Receivables — Inventories 4,260 Prepaid expenses and other 48 Property and equipment 1,752 Operating lease assets 2,006 Intangible assets 245 Goodwill 484 8,796 Liabilities assumed: Current operating lease liabilities 159 Operating lease liabilities 1,847 2,006 Net assets acquired $ 6,790 Goodwill recognized by segment: Agriculture $ 484 Goodwill expected to be deductible for tax purposes $ 484 The recognition of goodwill in the above business combination arose from the acquisition of an assembled workforce and anticipated synergies expected to be realized. For the business combination occurring during the twelve months ended January 31, 2021, the Company recognized a non-competition intangible asset of $0.1 million and a distribution rights intangible asset of $ 0.2 million. The 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 fiscal year ended January 31, 2021, and have been expensed as incurred and recognized as operating expenses in the consolidated statements of operations. NOTE 15 - CONTINGENCIES The Company is engaged in legal proceedings incidental to the normal course of business. Due to their nature, such legal proceedings involve inherent uncertainties, including but not limited to, court rulings, negotiations between affected parties and governmental intervention. Based upon the information available to the Company and discussions with legal counsel, it is the Company's opinion that the outcome of these various legal actions and claims will not have a material impact on the financial position, results of operations or cash flows. These matters, however, are subject to many uncertainties, and the outcome of any matter is not predictable with assurance. NOTE 16 - 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. 18 Table of Contents Certain financial information for each of the Company’s business segments is set forth below. Three Months Ended April 30, 2021 2020 (in thousands) Revenue Agriculture $ 229,554 $ 193,627 Construction 68,608 60,114 International 74,544 56,467 Total $ 372,706 $ 310,208 Income (Loss) Before Income Taxes Agriculture $ 11,224 $ 6,162 Construction 138 ( 2,873 ) International 2,808 ( 280 ) Segment income before income taxes 14,170 3,009 Shared Resources ( 491 ) 139 Total $ 13,679 $ 3,148 April 30, 2021 January 31, 2021 (in thousands) Total Assets Agriculture $ 357,428 $ 349,697 Construction 189,291 185,534 International 176,608 177,213 Segment assets 723,327 712,444 Shared Resources 107,414 103,345 Total $ 830,741 $ 815,789 19 Table of Contents