Titan Machinery Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS TITAN MACHINERY INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except per share data) October 31, 2021 January 31, 2021 Assets Current Assets Cash $ 90,540 $ 78,990 Receivables, net of allowance for expected credit losses 85,842 69,109 Inventories 412,674 418,458 Prepaid expenses and other 15,121 13,677 Total current assets 604,177 580,234 Noncurrent Assets Property and equipment, net of accumulated depreciation 175,328 147,165 Operating lease assets 59,950 74,445 Deferred income taxes 6,726 3,637 Goodwill 1,433 1,433 Intangible assets, net of accumulated amortization 6,535 7,785 Other 1,070 1,090 Total noncurrent assets 251,042 235,555 Total Assets $ 855,219 $ 815,789 Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 24,312 $ 20,045 Floorplan payable 174,659 161,835 Current maturities of long-term debt 5,667 4,591 Current operating lease liabilities 9,922 11,772 Deferred revenue 35,207 59,418 Accrued expenses and other 49,133 48,791 Income taxes payable 6,783 11,048 Total current liabilities 305,683 317,500 Long-Term Liabilities Long-term debt, less current maturities 70,502 44,906 Operating lease liabilities 59,264 73,567 Other long-term liabilities 6,192 8,535 Total long-term liabilities 135,958 127,008 Commitments and Contingencies (Note 16) Stockholders' Equity Common stock, par value $ .00001 per share, 45,000 shares authorized; 22,592 shares issued and outstanding at October 31, 2021; 22,553 shares issued and outstanding at January 31, 2021 — — Additional paid-in-capital 253,782 252,913 Retained earnings 160,482 116,869 Accumulated other comprehensive income (loss) ( 686 ) 1,499 Total stockholders' equity 413,578 371,281 Total Liabilities and Stockholders' Equity $ 855,219 $ 815,789 See Notes to Condensed Consolidated Financial Statements 3 Table of C ontents TITAN MACHINERY INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data) Three Months Ended October 31, Nine Months Ended October 31, 2021 2020 2021 2020 Revenue Equipment $ 329,814 $ 240,901 $ 878,528 $ 662,060 Parts 80,521 76,778 208,464 194,846 Service 32,026 30,696 89,405 84,282 Rental and other 11,614 12,497 27,914 33,357 Total Revenue 453,975 360,872 1,204,311 974,545 Cost of Revenue Equipment 288,576 215,770 772,584 593,048 Parts 55,654 53,556 146,184 136,205 Service 10,249 10,254 29,314 28,263 Rental and other 7,016 8,741 17,754 23,379 Total Cost of Revenue 361,495 288,321 965,836 780,895 Gross Profit 92,480 72,551 238,475 193,650 Operating Expenses 62,943 54,115 176,460 160,252 Impairment of Goodwill — 1,453 — 1,453 Impairment of Intangible and Long-Lived Assets — 1,102 1,498 1,318 Income from Operations 29,537 15,881 60,517 30,627 Other Income (Expense) Interest and other income (expense) 616 ( 360 ) 1,935 333 Floorplan interest expense ( 259 ) ( 757 ) ( 1,027 ) ( 2,811 ) Other interest expense ( 1,071 ) ( 940 ) ( 3,292 ) ( 2,884 ) Income Before Income Taxes 28,823 13,824 58,133 25,265 Provision for Income Taxes 7,007 3,912 14,521 6,691 Net Income $ 21,816 $ 9,912 $ 43,612 $ 18,574 Earnings per Share: Basic $ 0.97 $ 0.44 $ 1.93 $ 0.83 Diluted $ 0.97 $ 0.44 $ 1.93 $ 0.83 Weighted Average Common Shares: Basic 22,213 22,132 22,228 22,089 Diluted 22,222 22,137 22,238 22,091 See Notes to Condensed Consolidated Financial Statements 4 Table of C ontents TITAN MACHINERY INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands) Three Months Ended October 31, Nine Months Ended October 31, 2021 2020 2021 2020 Net Income $ 21,816 $ 9,912 $ 43,612 $ 18,574 Other Comprehensive Income (Loss) Foreign currency translation adjustments ( 744 ) 2,181 ( 2,185 ) 2,431 Comprehensive Income $ 21,072 $ 12,093 $ 41,427 $ 21,005 See Notes to Condensed Consolidated Financial Statements 5 Table of C ontents 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 issued on grant of restricted stock and exercise of stock options, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax 2 — ( 8 ) — — ( 8 ) Stock-based compensation expense — — 691 — — 691 Net Income — — — 9,912 — 9,912 Other comprehensive income — — — — 2,181 2,181 BALANCE, October 31, 2020 22,555 $ — $ 252,270 $ 116,087 $ ( 789 ) $ 367,568 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 Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax ( 4 ) — ( 4 ) — — ( 4 ) Stock-based compensation expense — — 657 — — 657 Net income — — — 21,816 — 21,816 Other comprehensive income — — — — ( 744 ) ( 744 ) BALANCE, October 31, 2021 22,592 $ — $ 253,782 $ 160,482 $ ( 686 ) $ 413,578 See Notes to Condensed Consolidated Financial Statements 6 TITAN MACHINERY INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Nine Months Ended October 31, 2021 2020 Operating Activities Net income $ 43,612 $ 18,574 Adjustments to reconcile net income to net cash provided by (used for) operating activities Depreciation and amortization 16,336 17,731 Impairment 1,498 2,771 Deferred income taxes ( 3,116 ) 2,117 Stock-based compensation expense 1,850 1,872 Noncash interest expense 163 125 Noncash lease expense 7,558 8,613 Other, net 690 ( 694 ) Changes in assets and liabilities Receivables, prepaid expenses and other assets ( 18,463 ) 4,479 Inventories 3,181 76,495 Manufacturer floorplan payable 45,801 ( 46,466 ) Accounts payable, deferred revenue, accrued expenses and other and other long-term liabilities ( 18,532 ) ( 15,555 ) Operating lease liabilities ( 8,303 ) ( 9,248 ) Net Cash Provided by Operating Activities 72,275 60,814 Investing Activities Rental fleet purchases ( 12,159 ) ( 6,799 ) Property and equipment purchases (excluding rental fleet) ( 17,534 ) ( 9,406 ) Proceeds from sale of property and equipment 667 795 Acquisition consideration, net of cash acquired — ( 6,790 ) Other, net 20 ( 16 ) Net Cash Used for Investing Activities ( 29,006 ) ( 22,216 ) Financing Activities Net change in non-manufacturer floorplan payable ( 30,104 ) ( 40,779 ) Proceeds from long-term debt borrowings 6,380 5,326 Principal payments on long-term debt and finance leases ( 6,593 ) ( 4,417 ) Payment of debt issuance costs — ( 700 ) Other, net ( 998 ) ( 209 ) Net Cash Used for Financing Activities ( 31,315 ) ( 40,779 ) Effect of Exchange Rate Changes on Cash ( 404 ) 268 Net Change in Cash 11,550 ( 1,913 ) Cash at Beginning of Period 78,990 43,721 Cash at End of Period $ 90,540 $ 41,808 Supplemental Disclosures of Cash Flow Information Cash paid during the period Income taxes, net of refunds $ 22,130 $ 31 Interest $ 4,091 $ 5,813 Supplemental Disclosures of Noncash Investing and Financing Activities Net property and equipment financed with long-term debt, finance leases, accounts payable and accrued liabilities $ 15,795 $ 8,555 Long-term debt to acquire finance leases $ 7,761 $ — Net transfer of assets from (to) property and equipment to (from) inventories $ 2,168 $ 2,731 See Notes to Condensed Consolidated Financial Statements 7 Table of C ontents 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 nine-month period ended October 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, 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 impact of COVID-19 on the operations and financial position of the Company and on the global economy is uncertain. Uncertainty remains regarding the magnitude and duration of the pandemic and resulting financial effects. Increased infection rates and any future responses to mitigate the spread of the virus, including any potential vaccination mandates that would apply to our employees, could impact our business and our financial results in future periods. Recently, the Department of Labor's Occupational Safety and Health Administration ("OSHA") announced an emergency temporary standard requiring all employers with at least 100 employees to ensure their employees are fully vaccinated or require weekly testing for unvaccinated employees. This standard became effective in November 2021, giving companies 30 days to comply with most requirements and 60 days to comply with the testing requirements. In response to a court ruling, in mid-November 2021, OSHA announced that it had suspended all activities related to implementation of this new regulation pending further litigation. The exact impact that this new regulation could have on our Company is uncertain at this time. However, it could result in employee attrition, difficulty in fulfilling future labor needs, additional costs related to compliance and may have an adverse effect on our future operating results. Additionally, 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 nine months ended October 31, 2021 and 2020, and although there have been logistical and other challenges, no material adverse impacts were identified. 8 Table of C ontents 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. 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 amending 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 October 31, Nine Months Ended October 31, 2021 2020 2021 2020 (in thousands, except per share data) Numerator: Net income $ 21,816 $ 9,912 $ 43,612 $ 18,574 Allocation to participating securities ( 309 ) ( 186 ) ( 655 ) ( 301 ) Net income attributable to Titan Machinery Inc. common stockholders $ 21,507 $ 9,726 $ 42,957 $ 18,273 Denominator: Basic weighted-average common shares outstanding 22,213 22,132 22,228 22,089 Plus: incremental shares from vesting of restricted stock units 9 5 10 2 Diluted weighted-average common shares outstanding 22,222 22,137 22,238 22,091 Earnings Per Share: Basic $ 0.97 $ 0.44 $ 1.93 $ 0.83 Diluted $ 0.97 $ 0.44 $ 1.93 $ 0.83 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. 9 Table of C ontents The following tables present our revenue disaggregated by revenue source and segment: Three Months Ended October 31, 2021 Three Months Ended October 31, 2020 Agriculture Construction International Total Agriculture Construction International Total (in thousands) (in thousands) Equipment $ 205,230 $ 49,679 $ 74,905 $ 329,814 $ 146,410 $ 47,766 $ 46,725 $ 240,901 Parts 52,090 13,413 15,018 80,521 50,527 14,072 12,179 76,778 Service 23,003 6,819 2,204 32,026 22,316 6,497 1,883 30,696 Other 824 622 132 1,578 824 628 102 1,554 Revenue from contracts with customers 281,147 70,533 92,259 443,939 220,077 68,963 60,889 349,929 Rental 359 9,202 475 10,036 548 10,067 328 10,943 Total revenues $ 281,506 $ 79,735 $ 92,734 $ 453,975 $ 220,625 $ 79,030 $ 61,217 $ 360,872 Nine Months Ended October 31, 2021 Nine Months Ended October 31, 2020 Agriculture Construction International Total Agriculture Construction International Total (in thousands) (in thousands) Equipment $ 530,895 $ 148,511 $ 199,122 $ 878,528 $ 396,759 $ 130,497 $ 134,804 $ 662,060 Parts 132,515 37,449 38,500 208,464 123,077 38,548 33,221 194,846 Service 63,908 19,773 5,724 89,405 59,466 19,514 5,302 84,282 Other 2,301 1,477 413 4,191 2,386 1,871 325 4,582 Revenue from contracts with customers 729,619 207,210 243,759 1,180,588 581,688 190,430 173,652 945,770 Rental 803 22,076 844 23,723 1,638 26,432 705 28,775 Total revenues $ 730,422 $ 229,286 $ 244,603 $ 1,204,311 $ 583,326 $ 216,862 $ 174,357 $ 974,545 Unbilled Receivables and Deferred Revenue Unbilled receivables from contracts with customers amounted to $ 21.8 million and $ 12.9 million as of October 31, 2021 and January 31, 2021, respectively. This 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 $ 34.1 million and $ 57.7 million as of October 31, 2021 and January 31, 2021, respectively. 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 nine months ended October 31, 2021 and 2020, the Company recognized $ 55.8 million and $ 40.9 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 nine months ended October 31, 2021 or 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 in the amount for 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 10 Table of C ontents 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. October 31, 2021 January 31, 2021 (in thousands) Trade and unbilled receivables from contracts with customers Trade receivables due from customers $ 36,280 $ 31,664 Unbilled receivables 21,842 12,909 Less allowance for expected credit losses 2,600 2,994 55,522 41,579 Trade receivables due from finance companies 14,899 14,133 Trade and unbilled receivables from rental contracts Trade receivables 5,520 4,329 Unbilled receivables 1,025 520 Less allowance for expected credit losses 1,892 1,939 4,653 2,910 Other receivables Due from manufacturers 9,200 8,720 Other 1,568 1,767 10,768 10,487 Receivables, net of allowance for expected credit losses $ 85,842 $ 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 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 Current expected credit loss provision ( 3 ) 26 ( 8 ) 15 Write-offs charged against allowance 87 29 6 122 Credit loss recoveries collected 2 3 — 5 Foreign exchange impact — — ( 19 ) ( 19 ) Balance at October 31, 2021 $ 211 $ 1,049 $ 1,340 $ 2,600 11 Table of C ontents 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 Current expected credit loss provision 30 12 ( 256 ) ( 215 ) Write-offs charged against allowance 44 21 48 114 Credit loss recoveries collected 2 18 — 20 Foreign exchange impact — — 67 67 Balance at October 31, 2020 $ 196 $ 1,088 $ 1,769 $ 3,053 The following table presents impairment losses (recoveries) on receivables arising from sales contracts with customers and receivables arising from rental contracts: Three Months Ended October 31, Nine Months Ended October 31, 2021 2020 2021 2020 (in thousands) Impairment losses (recoveries) on: Receivables from sales contracts $ 20 $ ( 213 ) $ 340 $ 307 Receivables from rental contracts 54 ( 59 ) 24 92 $ 74 $ ( 272 ) $ 364 $ 399 NOTE 5 - INVENTORIES October 31, 2021 January 31, 2021 (in thousands) New equipment $ 235,585 $ 206,683 Used equipment 87,741 131,369 Parts and attachments 86,711 78,982 Work in process 2,637 1,424 $ 412,674 $ 418,458 12 Table of C ontents NOTE 6 - PROPERTY AND EQUIPMENT October 31, 2021 January 31, 2021 (in thousands) Rental fleet equipment $ 81,676 $ 77,530 Machinery and equipment 23,570 23,354 Vehicles 59,222 55,884 Furniture and fixtures 43,717 43,678 Land, buildings, and leasehold improvements 117,606 90,730 325,791 291,176 Less accumulated depreciation 150,463 144,011 $ 175,328 $ 147,165 The Company includes depreciation expense related to its rental fleet and its trucking fleet, for hauling equipment, in Cost of Revenue, which was $ 2.6 million and $ 3.1 million for the three months ended October 31, 2021 and 2020 and $ 6.4 million and $ 7.8 million for the nine months ended October 31, 2021 and 2020, respectively. All other depreciation expense is included in Operating Expenses, which was $ 2.9 million for the three months ended October 31, 2021 and 2020 and $ 8.9 million and $ 8.5 million for the nine months ended October 31, 2021 and 2020, respectively. 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 October 31, 2021, the Company identified no such asset group and no impairment was recorded. The Company recognized $0.2 million million in impairment charges for the three months ended October 31, 2020 . For the nine months ended October 31, 2021 and October 31, 2020, the Company recognized impairment charges of $ 0.4 million and $ 0.5 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 nine months ended October 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 ) October 31, 2021 $ 6,265 $ 72 $ — $ 6,337 The Company performs impairment testing, at least annually, of its indefinite-lived distribution rights intangible assets. There were no indicators of impairment in the three months ended October 31, 2021. The Company did not recognize any impairment charges for the three months ended October 31, 2021 and recognized $1.1 million in impairment charges for the nine months ended October 31, 2021, as it fully impaired the remaining indefinite-lived intangible assets of the German reporting unit in the second quarter. NOTE 8 - FLOORPLAN PAYABLE/LINES OF CREDIT As of October 31, 2021, the Company had floorplan lines of credit totaling $ 753.0 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 Third Amended and Restated Credit Agreement (the "Bank Syndicate Agreement"), and (iii) a $ 50.0 million credit facility with DLL Finance LLC. 13 Table of C ontents The Company's outstanding balances of floorplan lines of credit as of October 31, 2021 and January 31, 2021, consisted of the following: October 31, 2021 January 31, 2021 (in thousands) CNH Industrial $ 123,303 $ 86,792 DLL Finance 8,899 10,667 Other outstanding balances with manufacturers and non-manufacturers 42,457 64,376 $ 174,659 $ 161,835 As of October 31, 2021 and January 31, 2021, the U.S. floorplan payables were generally all non-interest bearing. As of October 31, 2021, foreign floorplan payables carried various interest rates primarily ranging from 1.40 % to 4.48 %, compared to a range of 1.40 % to 4.82 % as of January 31, 2021. The Company had non-interest bearing floorplan payables of $ 147.2 million and $ 98.8 million, on October 31, 2021 and January 31, 2021, respectively. The Company has 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. Bank Syndicate Credit Agreement 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 to occur of (i) the date that all available tenors of LIBOR have permanently ceased to be reported, (ii) June 30, 2023, or (iii) the date of 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 will the SOFR Rate be less than zero. The applicable margin is determined based on excess availability under the Bank Syndicate Agreement and ranges from 1.5% to 2%. 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% DLL Finance Floorplan Payable Line of Credit 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 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. CNH Industrial Floorplan Payable Line of Credit Effective October 1, 2021, CNH updated their interest rate structure on the Company's credit facility to a tier-based rate program. The new interest rate that will be payable by the Company on outstanding borrowings will be dependent on the Company's Retail Finance Market Share and will range from 0.5% to 2.75% plus the prime rate. Previously, the credit facility charged interest at a rate equal to the prime rate plus 3.25% for the financing of new and used equipment inventories and rental fleet assets. 14 Table of C ontents NOTE 9 - LONG TERM DEBT The following is a summary of long-term debt as of October 31, 2021 and January 31, 2021: Description Maturity Dates Interest Rates October 31, 2021 January 31, 2021 (in thousands) Mortgage loans, secured Various through May 2039 2.1% to 5.1% $ 52,419 $ 22,916 Sale-leaseback financing obligations Various through December 2030 3.4% to 10.3% 13,246 16,505 Vehicle loans, secured Various through September 2027 2.1% to 3.9% 10,504 9,999 Other January 2021 2.6% — 77 Total debt 76,169 49,497 Less: current maturities 5,667 4,591 Long-term debt, net $ 70,502 $ 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. In the third quarter of fiscal 2022, the Company purchased buildings and real estate assets of an additional eleven of its U.S. dealer locations and financed these purchases with $10.2 million of long term debt. All of 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. From time to time, 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 October 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 nine months ended October 31, 2021 and 2020. Gains and losses are recognized in Interest and other income in the consolidated statements of operations: Three Months Ended October 31, Nine Months Ended October 31, 2021 2020 2021 2020 (in thousands) Foreign currency contract gain (loss) $ — $ 471 $ ( 159 ) $ 660 15 Table of C ontents 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 nine month periods ended October 31, 2021 and October 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 Other comprehensive loss ( 744 ) — ( 744 ) Balance, October 31, 2021 $ ( 3,397 ) $ 2,711 $ ( 686 ) 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 ) Other comprehensive income 2,181 — 2,181 Balance, October 31, 2020 $ ( 3,500 ) $ 2,711 $ ( 789 ) 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. 16 Table of C ontents The components of lease expense were as follows: Three Months Ended October 31, Nine Months Ended October 31, Classification 2021 2020 2021 2020 (in thousands) (in thousands) Finance lease cost: Amortization of leased assets Operating expenses $ 227 $ 395 $ 915 $ 1,176 Interest on lease liabilities Other interest expense 49 108 201 351 Operating lease cost Operating expenses and rental and other cost of revenue 3,632 4,541 11,132 13,329 Short-term lease cost Operating expenses 66 81 198 270 Variable lease cost Operating expenses 502 739 1,755 2,109 Sublease income Interest and other income ( 226 ) ( 136 ) ( 643 ) ( 419 ) $ 4,250 $ 5,728 $ 13,558 $ 16,816 Right-of-use lease assets and lease liabilities consist of the following: Classification October 31, 2021 January 31, 2021 (in thousands) Assets Operating lease assets Operating lease assets $ 59,950 $ 74,445 Finance lease assets (a) Property and equipment, net of accumulated depreciation 5,856 12,426 Total leased assets $ 65,806 $ 86,871 Liabilities Current Operating Current operating lease liabilities $ 9,922 $ 11,772 Finance Accrued expenses and other 4,078 9,823 Noncurrent Operating Operating lease liabilities 59,264 73,567 Finance Other long-term liabilities 1,692 2,911 Total lease liabilities $ 74,956 $ 98,073 (a) Finance lease assets are recorded net of accumulated amortization of $1.7 million as of October 31, 2021 and $3.0 million as of January 31, 2021. Maturities of lease liabilities as of October 31, 2021 are as follows: Operating Finance Leases Leases Total Fiscal Year Ended January 31, (in thousands) 2022 (remainder) $ 3,546 $ 3,562 $ 7,108 2023 13,480 845 14,325 2024 12,591 520 13,111 2025 11,978 439 12,417 2026 11,822 301 12,123 2027 11,091 270 11,361 Thereafter 19,933 572 20,505 Total lease payments 84,441 6,509 90,950 Less: Interest 15,255 739 15,994 Present value of lease liabilities $ 69,186 $ 5,770 $ 74,956 The weighted-average lease term and discount rate as of October 31, 2021 are as follows: October 31, 2021 Weighted-average remaining lease term (years): Operating leases 6.7 Financing leases 2.3 Weighted-average discount rate: Operating leases 6.1 % Financing leases 5.7 % 17 Table of C ontents 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 condensed consolidated balance sheet, of our Construction segment as of October 31, 2021 and January 31, 2021: October 31, 2021 January 31, 2021 (in thousands) Rental fleet equipment $ 81,676 $ 77,530 Less accumulated depreciation 28,744 28,916 $ 52,932 $ 48,614 NOTE 13 - FAIR VALUE MEASUREMENTS As of October 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 October 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: October 31, 2021 January 31, 2021 (in thousands) Carrying amount 62,923 32,992 Fair value 64,300 34,185 18 Table of C ontents NOTE 14 - INCOME TAXES Our effective tax rate was 24.3 % and 28.3 % for the three months ended October 31, 2021 and 2020, respectively and was 25.0 % and 26.5 % for the nine months ended October 31, 2021 and 2020, respectively. The effective tax rate for the three and nine months ended October 31, 2021 and 2020 were subject to variation due to various factors such as the impact of certain discrete items, mainly the vesting of share-based compensation, the mix of domestic and foreign income, recognition of a valuation allowance on certain of our foreign deferred tax assets and foreign currency gains and losses. 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 the HorizonWest acquisition 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 fiscal year 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 distribution rights assets are indefinite-lived intangible assets not subject to amortization. The Company estimated the fair value of the 19 Table of C ontents 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 its 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 October 31, Nine Months Ended October 31, 2021 2020 2021 2020 (in thousands) (in thousands) Revenue Agriculture $ 281,506 $ 220,625 $ 730,422 $ 583,326 Construction 79,735 79,030 229,286 216,862 International 92,734 61,217 244,603 174,357 Total $ 453,975 $ 360,872 $ 1,204,311 $ 974,545 Income (Loss) Before Income Taxes Agriculture $ 19,618 $ 13,575 $ 42,910 $ 26,490 Construction 3,564 1,448 6,518 ( 50 ) International 6,260 ( 2,424 ) 9,498 ( 3,136 ) Segment income before income taxes 29,442 12,599 58,926 23,304 Shared Resources ( 619 ) 1,225 ( 793 ) 1,961 Total $ 28,823 $ 13,824 $ 58,133 $ 25,265 October 31, 2021 January 31, 2021 (in thousands) Total Assets Agriculture $ 393,775 $ 349,697 Construction 190,233 185,534 International 159,601 177,213 Segment assets 743,609 712,444 Shared Resources 111,610 103,345 Total $ 855,219 $ 815,789 20 Table of C ontents NOTE 18 - SUBSEQUENT EVENTS On December 1, 2021, the Company acquired certain assets of Jaycox Implement, Inc. The acquired business consisted of three agricultural equipment stores in Worthington and Luverne, Minnesota and Lake Park, Iowa. In its most recent fiscal year, Jaycox Implement, Inc. generated revenue of approximately $ 91 million. These locations will be included in the Company's Agriculture segment. The total cash consideration paid for the acquired business was $ 28.2 million. The Company has committed to acquire the real estate of Jaycox Implement, Inc., subject to customary closing conditions, for a purchase price of $ 5.5 million and anticipates completing the real estate acquisition by January 31, 2022. The Company has considered the disclosure requirements of ASC 805-10-50-2 and ASC 805-10-50-4 but has not included certain required disclosures in this report due to the timing of the transaction. 21 Table of C ontents