Titan Machinery Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS TITAN MACHINERY INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except per share data) July 31, 2021 January 31, 2021 Assets Current Assets Cash $ 65,584 $ 78,990 Receivables, net of allowance for expected credit losses 82,068 69,109 Inventories 427,109 418,458 Prepaid expenses and other 20,684 13,677 Total current assets 595,445 580,234 Noncurrent Assets Property and equipment, net of accumulated depreciation 162,657 147,165 Operating lease assets 66,934 74,445 Deferred income taxes 5,265 3,637 Goodwill 1,433 1,433 Intangible assets, net of accumulated amortization 6,558 7,785 Other 1,079 1,090 Total noncurrent assets 243,926 235,555 Total Assets $ 839,371 $ 815,789 Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 20,649 $ 20,045 Floorplan payable 185,549 161,835 Current maturities of long-term debt 5,455 4,591 Current operating lease liabilities 10,755 11,772 Deferred revenue 37,977 59,418 Accrued expenses and other 47,751 48,791 Income taxes payable 2,335 11,048 Total current liabilities 310,471 317,500 Long-Term Liabilities Long-term debt, less current maturities 63,624 44,906 Operating lease liabilities 66,678 73,567 Other long-term liabilities 6,746 8,535 Total long-term liabilities 137,048 127,008 Commitments and Contingencies (Note 15) Stockholders' Equity Common stock, par value $ .00001 per share, 45,000 shares authorized; 22,596 shares issued and outstanding at July 31, 2021; 22,553 shares issued and outstanding at January 31, 2021 — — Additional paid-in-capital 253,129 252,913 Retained earnings 138,665 116,869 Accumulated other comprehensive income 58 1,499 Total stockholders' equity 391,852 371,281 Total Liabilities and Stockholders' Equity $ 839,371 $ 815,789 See Notes to Condensed 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 July 31, Six Months Ended July 31, 2021 2020 2021 2020 Revenue Equipment $ 272,733 $ 202,654 $ 548,713 $ 421,159 Parts 65,317 61,454 127,942 118,068 Service 29,676 27,986 57,379 53,586 Rental and other 9,904 11,371 16,300 20,860 Total Revenue 377,630 303,465 750,334 613,673 Cost of Revenue Equipment 240,332 180,231 484,008 377,278 Parts 46,089 43,032 90,529 82,649 Service 9,771 9,665 19,065 18,010 Rental and other 6,420 7,849 10,737 14,636 Total Cost of Revenue 302,612 240,777 604,339 492,573 Gross Profit 75,018 62,688 145,995 121,100 Operating Expenses 57,074 53,079 113,516 106,137 Impairment of Intangible and Long-Lived Assets 1,498 — 1,498 216 Income from Operations 16,446 9,609 30,981 14,747 Other Income (Expense) Interest and other income 654 562 1,320 692 Floorplan interest expense ( 350 ) ( 901 ) ( 768 ) ( 2,054 ) Other interest expense ( 1,118 ) ( 978 ) ( 2,222 ) ( 1,944 ) Income Before Income Taxes 15,632 8,292 29,311 11,441 Provision for Income Taxes 4,383 1,892 7,515 2,779 Net Income $ 11,249 $ 6,400 $ 21,796 $ 8,662 Earnings per Share: Basic $ 0.50 $ 0.28 $ 0.97 $ 0.39 Diluted $ 0.50 $ 0.28 $ 0.97 $ 0.39 Weighted Average Common Shares: Basic 22,261 22,118 22,209 22,068 Diluted 22,276 22,119 22,220 22,068 See Notes to Condensed Consolidated Financial Statements 4 Table of Contents TITAN MACHINERY INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands) Three Months Ended July 31, Six Months Ended July 31, 2021 2020 2021 2020 Net Income $ 11,249 $ 6,400 $ 21,796 $ 8,662 Other Comprehensive Income (Loss) Foreign currency translation adjustments 937 778 ( 1,441 ) 250 Comprehensive Income $ 12,186 $ 7,178 $ 20,355 $ 8,912 See Notes to Condensed 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 issued on grant of restricted stock and exercise of stock options, 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 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 Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax 76 — ( 2 ) — — ( 2 ) Stock-based compensation expense — — 584 — — 584 Net income — — — 11,249 — 11,249 Other comprehensive income — — — — 938 938 BALANCE, July 31, 2021 22,596 $ — $ 253,129 $ 138,665 $ 58 $ 391,852 See Notes to Condensed Consolidated Financial Statements 6 TITAN MACHINERY INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Six Months Ended July 31, 2021 2020 Operating Activities Net income $ 21,796 $ 8,662 Adjustments to reconcile net income to net cash provided by (used for) operating activities Depreciation and amortization 10,602 11,286 Impairment 1,498 216 Deferred income taxes ( 1,645 ) ( 944 ) Stock-based compensation expense 1,193 1,181 Noncash interest expense 110 75 Noncash lease expense 5,073 5,717 Other, net 162 ( 368 ) Changes in assets and liabilities Receivables, prepaid expenses and other assets ( 12,384 ) 3,347 Inventories ( 17,166 ) 31,885 Manufacturer floorplan payable 56,436 ( 26,726 ) Accounts payable, deferred revenue, accrued expenses and other and other long-term liabilities ( 31,627 ) ( 15,140 ) Operating lease liabilities ( 5,487 ) ( 6,156 ) Net Cash Provided by (Used for) Operating Activities 28,561 13,035 Investing Activities Rental fleet purchases ( 8,946 ) ( 6,001 ) Property and equipment purchases (excluding rental fleet) ( 10,888 ) ( 4,472 ) Proceeds from sale of property and equipment 420 489 Acquisition consideration, net of cash acquired — ( 6,790 ) Other, net 12 ( 20 ) Net Cash Used for Investing Activities ( 19,402 ) ( 16,794 ) Financing Activities Net change in non-manufacturer floorplan payable ( 22,731 ) 7,229 Proceeds from long-term debt borrowings 6,451 1,112 Principal payments on long-term debt and finance leases ( 5,117 ) ( 2,952 ) Payment of debt issuance costs — ( 670 ) Other, net ( 976 ) ( 200 ) Net Cash Provided by (Used for) Financing Activities ( 22,373 ) 4,519 Effect of Exchange Rate Changes on Cash ( 192 ) 3 Net Change in Cash ( 13,406 ) 763 Cash at Beginning of Period 78,990 43,721 Cash at End of Period $ 65,584 $ 44,484 Supplemental Disclosures of Cash Flow Information Cash paid during the period Income taxes, net of refunds $ 17,378 $ ( 228 ) Interest $ 2,797 $ 4,103 Supplemental Disclosures of Noncash Investing and Financing Activities Net property and equipment financed with long-term debt, finance leases, accounts payable and accrued liabilities $ 9,014 $ 4,645 Long-term debt to acquire finance leases $ 7,454 $ — Net transfer of assets from (to) property and equipment to (from) inventories $ 1,269 $ 319 See Notes to Condensed 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 six-month period ended July 31, 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 condensed 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. The extent and duration of the COVID-19 impact, on the operations and financial position of the Company and on the global economy, is uncertain. Uncertainty remains regarding emerging variant strains of COVID-19, and regarding the length of time it will take for the COVID-19 pandemic to subside.We will continue to take action as necessary as the health and safety of our employees and customers remain our top priority. Some of the Company's supply vendors are facing production, supply chain and staffing challenges as they work to achieve production capacity and lead times consistent with pre-pandemic levels. As a result, the Company has experienced some disruptions and delays on delivery of certain inventory. The Company has assessed the impacts of the COVID-19 pandemic on its results of operations for the three and six months ended July 31, 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 July 31, Six Months Ended July 31, 2021 2020 2021 2020 (in thousands, except per share data) Numerator: Net income $ 11,249 $ 6,400 $ 21,796 $ 8,662 Allocation to participating securities ( 156 ) ( 101 ) ( 334 ) ( 129 ) Net income attributable to Titan Machinery Inc. common stockholders $ 11,093 $ 6,299 $ 21,462 $ 8,533 Denominator: Basic weighted-average common shares outstanding 22,261 22,118 22,209 22,068 Plus: incremental shares from vesting of restricted stock units 15 1 11 — Diluted weighted-average common shares outstanding 22,276 22,119 22,220 22,068 Earnings Per Share: Basic $ 0.50 $ 0.28 $ 0.97 $ 0.39 Diluted $ 0.50 $ 0.28 $ 0.97 $ 0.39 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, 2021 Three Months Ended July 31, 2020 Agriculture Construction International Total Agriculture Construction International Total (in thousands) (in thousands) Equipment $ 156,408 $ 54,020 $ 62,305 $ 272,733 $ 110,601 $ 48,478 $ 43,575 $ 202,654 Parts 40,742 11,928 12,647 65,317 37,470 13,016 10,968 61,454 Service 21,150 6,585 1,941 29,676 19,429 6,806 1,751 27,986 Other 758 490 188 1,436 829 725 119 1,673 Revenue from contracts with customers 219,058 73,023 77,081 369,162 168,329 69,025 56,413 293,767 Rental 306 7,920 242 8,468 743 8,694 261 9,698 Total revenues $ 219,364 $ 80,943 $ 77,323 $ 377,630 $ 169,072 $ 77,719 $ 56,674 $ 303,465 9 Table of Contents Six Months Ended July 31, 2021 Six Months Ended July 31, 2020 Agriculture Construction International Total Agriculture Construction International Total (in thousands) (in thousands) Equipment $ 325,664 $ 98,832 $ 124,217 $ 548,713 $ 250,349 $ 82,732 $ 88,078 $ 421,159 Parts 80,425 24,036 23,481 127,942 72,550 24,476 21,042 118,068 Service 40,904 12,954 3,521 57,379 37,150 13,017 3,419 53,586 Other 1,478 855 281 2,614 1,562 1,243 223 3,028 Revenue from contracts with customers 448,471 136,677 151,500 736,648 361,611 121,468 112,762 595,841 Rental 444 12,873 369 13,686 1,089 16,365 378 17,832 Total revenues $ 448,915 $ 149,550 $ 151,869 $ 750,334 $ 362,700 $ 137,833 $ 113,140 $ 613,673 Unbilled Receivables and Deferred Revenue Unbilled receivables from contracts with customers amounted to $ 20.1 million and $ 12.9 million as of July 31, 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 amounted to $ 37.1 million and $ 57.7 million as of July 31, 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 six months ended July 31, 2021 and 2020, the Company recognized $ 50.8 million and $ 37.0 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 six months ended July 31, 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. For such service 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. 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 10 Table of Contents accounts. July 31, 2021 January 31, 2021 (in thousands) Trade and unbilled receivables from contracts with customers Trade receivables due from customers $ 35,859 $ 31,664 Unbilled receivables 20,050 12,909 Less allowance for expected credit losses 2,721 2,994 53,188 41,579 Trade receivables due from finance companies 14,491 14,133 Trade and unbilled receivables from rental contracts Trade receivables 5,034 4,329 Unbilled receivables 924 520 Less allowance for expected credit losses 1,843 1,939 4,115 2,910 Other receivables Due from manufacturers 8,642 8,720 Other 1,632 1,767 10,274 10,487 Receivables, net of allowance for expected credit losses $ 82,068 $ 69,109 11 Table of Contents 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 Current expected credit loss provision 84 50 ( 225 ) ( 91 ) Write-offs charged against allowance 33 64 21 118 Credit loss recoveries collected 7 1 — 8 Foreign exchange impact — — 19 19 Balance at July 31, 2021 $ 299 $ 1,049 $ 1,373 $ 2,721 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 Current expected credit loss provision 16 95 265 376 Write-offs charged against allowance 47 78 98 223 Credit loss recoveries collected 9 — — 9 Foreign exchange impact — — 23 23 Balance at July 31, 2020 $ 208 $ 1,079 $ 2,006 $ 3,293 The following table presents impairment losses (recoveries) on receivables arising from sales contracts with customers and receivables arising from rental contracts: Three Months Ended July 31, Six Months Ended July 31, 2021 2020 2021 2020 (in thousands) Impairment losses (recoveries) on: Receivables from sales contracts $ 222 $ 377 $ 320 $ 520 Receivables from rental contracts 3 13 ( 30 ) 151 $ 225 $ 390 $ 290 $ 671 12 Table of Contents NOTE 5 - INVENTORIES July 31, 2021 January 31, 2021 (in thousands) New equipment $ 238,116 $ 206,683 Used equipment 97,390 131,369 Parts and attachments 89,616 78,982 Work in process 1,987 1,424 $ 427,109 $ 418,458 NOTE 6 - PROPERTY AND EQUIPMENT July 31, 2021 January 31, 2021 (in thousands) Rental fleet equipment $ 82,695 $ 77,530 Machinery and equipment 23,410 23,354 Vehicles 57,638 55,884 Furniture and fixtures 43,294 43,678 Land, buildings, and leasehold improvements 103,062 90,730 310,099 291,176 Less accumulated depreciation 147,442 144,011 $ 162,657 $ 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 July 31, 2021, the Company determined that a current period operating loss combined with historical losses of a certain business unit indicated that the long-lived asset group may not be recoverable. The Company performed an impairment assessment of this asset group and as a result an impairment charge of $ 0.4 million was recognized within its International segment for the three months ended July 31, 2021. The Company did not have any impairment charges for the three months ended July 31, 2020 . For the six months ended July 31, 2021 and July 31, 2020, the Company recognized an impairment charge of $ 0.4 million and $ 0.2 million, respectively. NOTE 7 - INTANGIBLE ASSETS Indefinite-Lived Intangible Assets The Company's indefinite-lived intangible assets consist of distribution rights assets. The following is a summary of the changes in indefinite-lived intangible assets, by segment, for the six months ended July 31, 2021: Agriculture Construction International Total (in thousands) January 31, 2021 $ 6,265 $ 72 $ 1,161 $ 7,498 Foreign currency translation — — ( 22 ) ( 22 ) Impairment — — ( 1,139 ) ( 1,139 ) July 31, 2021 $ 6,265 $ 72 $ — $ 6,337 The Company performs at least an annual impairment testing of its indefinite-lived distribution rights intangible assets and, due to ongoing losses, an interim test was completed during the three months ended July 31, 2021 for our German distribution rights asset. Under the impairment test, the fair value of distribution rights intangible assets is estimated based on a multi-period excess earnings model, an income approach. This model allocates future estimated earnings of the store/complex amongst working capital, fixed assets and other intangible assets of the store/complex and any remaining earnings (the "excess earnings") are allocated to the distribution rights intangible assets. The earnings allocated to the distribution rights are then discounted to arrive at the present value of the future estimated excess earnings, which represents the estimated fair value of the distribution rights intangible asset. The discount rate applied reflects the Company's estimate of the weighted-average cost of capital of comparable companies plus an additional risk premium to reflect the additional risk inherent in the distribution rights asset. 13 Table of Contents The results of the Company's impairment testing for the German distribution rights intangible asset for the three months ended July 31, 2021, indicated that the estimated fair value of the tested distribution rights was below the carrying value of the asset, thus requiring an impairment to be recognized. Impairment charges of $1.1 million were recognized for the three and six months ended July 31, 2021 and included in Impairment of Intangible and Long-Lived Assets in the condensed consolidated statements of operations. This impairment removed all remaining indefinite-lived intangible assets from the balance sheet of the German reporting unit. The impairment charges arose as the result of lowered expectations of the future financial performance of this reporting unit. There were no indefinite-lived intangible impairment charges for the three and six months ended July 31, 2020. NOTE 8 - 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 borrowing 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 zero. 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 effective interest rate on the Company's borrowings is then calculated by adding an applicable margin to the LIBOR Rate or Base Rate. The applicable margin 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. On June 4, 2021, the Bank Syndicate Agreement was amended to add a benchmark replacement reference rate when the LIBOR Rate is no longer published. The identified replacement reference rate is the secured overnight financing rate (SOFR).The benchmark transition event will occur at the earliest of (i) the date all available Tenors of LIBOR have been permanently ceased to be reported, (ii) June 30, 2023, or (iii) any agreement by the banks party to the Bank Syndicate agreement and the Company to replace the LIBOR Rate. The SOFR rate is based upon one month, two month, three month, six month, and 12 month SOFR plus between 11.4 basis points and 71.5 basis points depending on the available tenor used. In no event shall the SOFR Rate be less than zero. The applicable margin rate is the same as outlined above for the LIBOR Rate Loans. The Company does not believe implementation of this new benchmark rate will have a material effect on its results of operations. In addition, the amendment reduced the current floor of the LIBOR Rate from 0.5% to 0.0% The Bank Syndicate Agreement does not obligate the Company to maintain financial covenants, except in the event that excess availability (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 intend or have the obligation to repay amounts borrowed within one year. As of July 31, 2021, the Company had floorplan lines of credit totaling $ 771.0 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. In August 2021, the Company entered into an amendment to the credit facility with DLL Finance LLC. The amendment reduced the available borrowings under this facility from $60.0 million to $50.0 million, increased the variable interest rate on outstanding balances from three-month LIBOR plus an applicable margin of 2.85% per annum to three-month 14 Table of Contents LIBOR plus an applicable margin of 3.0% per annum, and eliminated the 0.15% non-utilization fee. DLL Finance LLC may terminate the facility in its sole discretion at any time. As of July 31, 2021 and January 31, 2021, the Company's outstanding balances of floorplan lines of credit consisted of the following: July 31, 2021 January 31, 2021 (in thousands) CNH Industrial $ 133,481 $ 86,792 DLL Finance 9,984 10,667 Other outstanding balances with manufacturers and non-manufacturers 42,084 64,376 $ 185,549 $ 161,835 As of July 31, 2021 and January 31, 2021, the U.S. floorplan payables were generally all non-interest bearing. As of July 31, 2021, foreign floorplan payables carried various interest rates primarily ranging from 1.40 % to 4.79 %, compared to a range of 1.40 % to 4.82 % as of January 31, 2021. As of July 31, 2021 and January 31, 2021, $ 148.7 million and $ 98.8 million, respectively, of outstanding floorplan payables were non-interest bearing. As of July 31, 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. NOTE 9 - LONG TERM DEBT The following is a summary of long-term debt as of July 31, 2021 and January 31, 2021: Description Maturity Dates Interest Rates July 31, 2021 January 31, 2021 (in thousands) Mortgage loans, secured Various through May 2039 2.1% to 5.1% $ 42,734 $ 22,916 Sale-leaseback financing obligations Various through December 2030 3.4% to 10.3% 15,834 16,505 Vehicle loans, secured Various through June 2026 1.7% to 3.9% 10,511 9,999 Other January 2021 2.6% — 77 Total debt 69,079 49,497 Less: current maturities 5,455 4,591 Long-term debt, net $ 63,624 $ 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 10 - 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 July 31, 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 condensed consolidated balance sheets, and derivative instruments recognized as liabilities are recorded in accrued expenses and other in the condensed consolidated balance sheets. The following table sets forth the gains and losses recognized in income from the Company’s derivative instruments for the six months ended July 31, 2021 and 2020. Gains and losses are recognized in Interest and other income in the consolidated statements of operations: Three Months Ended July 31, Six Months Ended July 31, 2021 2020 2021 2020 (in thousands) Foreign currency contract gain (loss) $ 192 $ 202 $ ( 159 ) $ 189 NOTE 11 - 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, 2021 and July 31, 2020: 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 ) Other comprehensive income 938 — 938 Balance, July 31, 2021 $ ( 2,653 ) $ 2,711 $ 58 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 ) NOTE 12 - 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; these 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. These 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. 15 Table of Contents The components of lease expense were as follows: Three Months Ended July 31, Six Months Ended July 31, Classification 2021 2020 2021 2020 (in thousands) (in thousands) Finance lease cost: Amortization of leased assets Operating expenses $ 243 $ 389 $ 688 $ 781 Interest on lease liabilities Other interest expense 64 117 152 242 Operating lease cost Operating expenses and rental and other cost of revenue 3,735 4,325 7,501 8,788 Short-term lease cost Operating expenses 66 110 132 190 Variable lease cost Operating expenses 639 735 1,252 1,370 Sublease income Interest and other income ( 219 ) ( 131 ) ( 416 ) ( 283 ) $ 4,528 $ 5,545 $ 9,309 $ 11,088 Right-of-use lease assets and lease liabilities consist of the following: Classification July 31, 2021 January 31, 2021 (in thousands) Assets Operating lease assets Operating lease assets $ 66,934 $ 74,445 Finance lease assets (a) Property and equipment, net of accumulated depreciation 3,094 12,426 Total leased assets $ 70,028 $ 86,871 Liabilities Current Operating Current operating lease liabilities $ 10,755 $ 11,772 Finance Accrued expenses and other 851 9,823 Noncurrent Operating Operating lease liabilities 66,678 73,567 Finance Other long-term liabilities 2,288 2,911 Total lease liabilities $ 80,572 $ 98,073 (a) Finance lease assets are recorded net of accumulated amortization of $1.7 million as of July 31, 2021 and $3.0 million as of January 31, 2021. Maturities of lease liabilities as of July 31, 2021 are as follows: Operating Finance Leases Leases Total Fiscal Year Ended January 31, (in thousands) 2022 (remainder) $ 7,688 $ 553 $ 8,241 2023 14,527 928 15,455 2024 13,572 607 14,179 2025 13,033 525 13,558 2026 12,955 384 13,339 2027 12,212 351 12,563 Thereafter 21,026 774 21,800 Total lease payments 95,013 4,122 99,135 Less: Interest 17,580 983 18,563 Present value of lease liabilities $ 77,433 $ 3,139 $ 80,572 The weighted-average lease term and discount rate as of July 31, 2021 are as follows: July 31, 2021 Weighted-average remaining lease term (years): Operating leases 6.9 Financing leases 5.7 Weighted-average discount rate: Operating leases 6.1 % Financing leases 8.8 % 16 Table of Contents 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, we may also provide short-term rentals of certain equipment inventory assets. Some 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 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 July 31, 2021 and January 31, 2021: July 31, 2021 January 31, 2021 (in thousands) Rental fleet equipment $ 82,695 $ 77,530 Less accumulated depreciation 28,373 28,916 $ 54,322 $ 48,614 NOTE 13 - FAIR VALUE MEASUREMENTS As of July 31, 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 July 31, 2021 and January 31, 2021. Fair value of these financial instruments was estimated based on Level 2 fair value inputs. The estimated fair value of the Company's Level 2 long-term debt, which is provided for disclosure purposes only, is as follows: July 31, 2021 January 31, 2021 (in thousands) Carrying amount 53,245 32,992 Fair value 54,600 34,185 17 Table of Contents NOTE 14 - INCOME TAXES Our effective tax rate was 28.0 % and 22.8 % for the three months ended July 31, 2021 and 2020, respectively and was 25.6 % and 24.3 % for the six months ended July 31, 2021 and 2020, respectively. The effective tax rate for the six months ended July 31, 2021 was benefited by the vesting of share-based compensation but was offset by the recognition of a valuation allowance on certain of our foreign deferred tax assets including recording a valuation allowance on the remaining deferred tax assets of our Germany entity. For the six months ended July 31, 2020, the effective tax rate benefited from a weakening Ukrainian currency but was offset by increased tax expense on the vesting of share-based compensation. NOTE 15 - 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 paid for the acquired business was $ 6.8 million 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 those 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 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 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 asset will be amortized over periods ranging from three to five years. The 18 Table of Contents 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 16 - 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 it's 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. NOTE 17 - 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, 2021 2020 2021 2020 (in thousands) (in thousands) Revenue Agriculture $ 219,364 $ 169,072 $ 448,915 $ 362,700 Construction 80,943 77,719 149,550 137,833 International 77,323 56,674 151,869 113,140 Total $ 377,630 $ 303,465 $ 750,334 $ 613,673 Income (Loss) Before Income Taxes Agriculture $ 12,067 $ 6,752 $ 23,292 $ 12,914 Construction 2,815 1,375 2,953 ( 1,498 ) International 430 ( 432 ) 3,238 ( 711 ) Segment income before income taxes 15,312 7,695 29,483 10,705 Shared Resources 320 597 ( 172 ) 736 Total $ 15,632 $ 8,292 $ 29,311 $ 11,441 July 31, 2021 January 31, 2021 (in thousands) Total Assets Agriculture $ 380,000 $ 349,697 Construction 191,908 185,534 International 182,187 177,213 Segment assets 754,095 712,444 Shared Resources 85,276 103,345 Total $ 839,371 $ 815,789 19 Table of Contents