Titan Machinery Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS TITAN MACHINERY INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except per share data) April 30, 2022 January 31, 2022 Assets Current Assets Cash $ 147,095 $ 146,149 Receivables, net of allowance for expected credit losses 84,870 94,287 Inventories, net 494,167 421,758 Prepaid expenses and other 22,223 28,135 Total current assets 748,355 690,329 Noncurrent Assets Property and equipment, net of accumulated depreciation 183,489 178,243 Operating lease assets 53,980 56,150 Deferred income taxes 2,297 1,328 Goodwill 9,535 8,952 Intangible assets, net of accumulated amortization 11,509 10,624 Other 1,032 1,041 Total noncurrent assets 261,842 256,338 Total Assets $ 1,010,197 $ 946,667 Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 26,817 $ 25,644 Floorplan payable 188,881 135,415 Current maturities of long-term debt 6,270 5,876 Current operating lease liabilities 9,481 9,601 Deferred revenue 129,503 134,146 Accrued expenses and other 47,091 59,339 Income taxes payable 9,456 4,700 Total current liabilities 417,499 374,721 Long-Term Liabilities Long-term debt, less current maturities 81,974 74,772 Operating lease liabilities 53,284 55,595 Deferred income taxes 2,001 2,006 Other long-term liabilities 3,956 4,374 Total long-term liabilities 141,215 136,747 Commitments and Contingencies (Note 15) Stockholders' Equity Common stock, par value $ .00001 per share, 45,000 shares authorized; 22,569 shares issued and outstanding at April 30, 2022; 22,588 shares issued and outstanding at January 31, 2022 — — Additional paid-in-capital 254,390 254,455 Retained earnings 200,456 182,916 Accumulated other comprehensive loss ( 3,363 ) ( 2,172 ) Total stockholders' equity 451,483 435,199 Total Liabilities and Stockholders' Equity $ 1,010,197 $ 946,667 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 April 30, 2022 2021 Revenue Equipment $ 356,366 $ 275,980 Parts 68,562 62,626 Service 29,523 27,702 Rental and other 6,556 6,398 Total Revenue 461,007 372,706 Cost of Revenue Equipment 310,234 243,676 Parts 47,310 44,440 Service 10,760 9,294 Rental and other 4,009 4,318 Total Cost of Revenue 372,313 301,728 Gross Profit 88,694 70,978 Operating Expenses 64,152 56,442 Income from Operations 24,542 14,536 Other Income (Expense) Interest and other income 492 665 Floorplan interest expense ( 254 ) ( 418 ) Other interest expense ( 1,196 ) ( 1,104 ) Income Before Income Taxes 23,584 13,679 Provision for Income Taxes 6,044 3,132 Net Income $ 17,540 $ 10,547 Earnings per Share: Basic $ 0.78 $ 0.47 Diluted $ 0.78 $ 0.47 Weighted Average Common Shares: Basic 22,312 22,168 Diluted 22,321 22,179 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 April 30, 2022 2021 Net Income $ 17,540 $ 10,547 Other Comprehensive Income (Loss) Foreign currency translation adjustments ( 1,191 ) ( 2,379 ) Comprehensive Income $ 16,349 $ 8,168 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, 2021 22,553 $ — $ 252,913 $ 116,869 $ 1,499 $ 371,281 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 ( 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 Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Shares Outstanding Amount BALANCE, January 31, 2022 22,588 $ — $ 254,455 $ 182,916 $ ( 2,172 ) $ 435,199 Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax ( 19 ) — ( 685 ) — — ( 685 ) Stock-based compensation expense — — 620 — — 620 Net income — — — 17,540 — 17,540 Other comprehensive loss — — — — ( 1,191 ) ( 1,191 ) BALANCE, April 30, 2022 22,569 $ — $ 254,390 $ 200,456 $ ( 3,363 ) $ 451,483 See Notes to Condensed Consolidated Financial Statements 6 TITAN MACHINERY INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Three Months Ended April 30, 2022 2021 Operating Activities Net income $ 17,540 $ 10,547 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 5,224 5,207 Deferred income taxes ( 998 ) ( 1,008 ) Stock-based compensation expense 620 609 Noncash interest expense 58 54 Other, net 2,059 2,704 Changes in assets and liabilities Receivables, prepaid expenses and other assets 13,446 ( 1,023 ) Inventories ( 69,321 ) ( 1,615 ) Manufacturer floorplan payable 51,069 19,657 Deferred Revenue ( 6,413 ) ( 10,308 ) Accounts payable, accrued expenses and other and other long-term liabilities ( 7,963 ) 2,132 Net Cash Provided by Operating Activities 5,321 26,956 Investing Activities Rental fleet purchases ( 1,046 ) ( 2,081 ) Property and equipment purchases (excluding rental fleet) ( 4,065 ) ( 7,045 ) Proceeds from sale of property and equipment 836 135 Acquisition consideration, net of cash acquired ( 7,675 ) — Other, net 6 7 Net Cash Used for Investing Activities ( 11,944 ) ( 8,984 ) Financing Activities Net change in non-manufacturer floorplan payable 2,000 ( 9,141 ) Proceeds from long-term debt borrowings 8,415 6,462 Principal payments on long-term debt and finance leases ( 1,743 ) ( 3,181 ) Other, net ( 683 ) ( 974 ) Net Cash Provided by (Used for) Financing Activities 7,989 ( 6,834 ) Effect of Exchange Rate Changes on Cash ( 420 ) ( 399 ) Net Change in Cash 946 10,739 Cash at Beginning of Period 146,149 78,990 Cash at End of Period $ 147,095 $ 89,729 Supplemental Disclosures of Cash Flow Information Cash paid during the period Income taxes, net of refunds $ 102 $ 253 Interest $ 1,386 $ 1,404 Supplemental Disclosures of Noncash Investing and Financing Activities Net property and equipment financed with long-term debt, finance leases, accounts payable and accrued liabilities $ 1,247 $ 15,763 Net transfer of assets from (to) property and equipment to (from) inventories $ ( 891 ) $ 300 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 three-month period ended April 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2023. The information contained in the consolidated balance sheet as of January 31, 2022 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, 2022 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, Nebraska, North Dakota, South Dakota, Wisconsin and Wyoming, and its European stores are located in Bulgaria, Germany, Romania, and Ukraine. Russia/Ukraine Geopolitical Conflict On February 24, 2022, the ongoing Russia/Ukraine conflict significantly intensified. Titan Machinery Ukraine, LLC("Titan Machinery Ukraine"), the Company's wholly owned Ukrainian subsidiary, has ten locations throughout Ukraine primarily in western and central Ukraine. The Company's ability to maintain adequate liquidity for its operations, in Ukraine, is dependent upon a number of factors, including Titan Machinery Ukraine's revenue and earnings, the impact of the conflict on macroeconomic conditions, and Titan Machinery Ukraine's ability to implement further cost savings measures and cash conservation measures, if necessary. The conflict could have a significant adverse impact upon the Company. 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 has amended most of 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. 8 Table of Contents NOTE 2 - EARNINGS PER SHARE The following table sets forth the calculation of basic and diluted earnings per share (EPS): Three Months Ended April 30, 2022 2021 (in thousands, except per share data) Numerator: Net income $ 17,540 $ 10,547 Allocation to participating securities ( 210 ) ( 175 ) Net income attributable to Titan Machinery Inc. common stockholders $ 17,330 $ 10,372 Denominator: Basic weighted-average common shares outstanding 22,312 22,168 Plus: incremental shares from vesting of restricted stock units 9 11 Diluted weighted-average common shares outstanding 22,321 22,179 Earnings Per Share: Basic $ 0.78 $ 0.47 Diluted $ 0.78 $ 0.47 NOTE 3 - REVENUE Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to collect in exchange for those goods or services. Sales, value added and other taxes collected from our customers concurrent with our revenue activities are excluded from revenue. The following tables present our revenue disaggregated by revenue source and segment: Three Months Ended April 30, 2022 Agriculture Construction International Total (in thousands) Equipment $ 251,093 $ 43,819 $ 61,454 $ 356,366 Parts 44,506 12,063 11,993 68,562 Service 21,953 5,823 1,747 29,523 Other 799 303 205 1,307 Revenue from contracts with customers 318,351 62,008 75,399 455,758 Rental 197 4,956 96 5,249 Total revenues $ 318,548 $ 66,964 $ 75,495 $ 461,007 Three Months Ended April 30, 2021 Agriculture Construction International Total (in thousands) Equipment $ 169,257 $ 44,812 $ 61,911 $ 275,980 Parts 39,684 12,108 10,834 62,626 Service 19,753 6,369 1,580 27,702 Other 722 365 92 1,179 Revenue from contracts with customers 229,416 63,654 74,417 367,487 Rental 138 4,954 127 5,219 Total revenues $ 229,554 $ 68,608 $ 74,544 $ 372,706 Unbilled Receivables and Deferred Revenue Unbilled receivables from contracts with customers amounted to $ 20.6 million and $ 17.1 million as of April 30, 2022 and January 31, 2022, 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. 9 Table of Contents Deferred revenue from contracts with customers amounted to $ 128.2 million and $ 132.2 million as of April 30, 2022 and January 31, 2022, 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 three months ended April 30, 2022 and 2021, the Company recognized $ 64.6 million and $ 37.9 million, respectively, of revenue that was included in the deferred revenue balance as of January 31, 2022 and January 31, 2021, respectively. No material amount of revenue was recognized during the three months ended April 30, 2022 or 2021 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 credit quality and have no need for any allowance for expected credit losses. Management continually monitors these receivables and should information be obtained that identifies potential credit risk, an adjustment to the allowance would be made if deemed appropriate. Trade and unbilled receivables from rental contracts are primarily in the United States and are specifically excluded from the accounting guidance in determining an allowance for expected losses. The Company provides an allowance for these receivables based on historical experience and using credit information obtained from continued monitoring of customer accounts. 10 Table of Contents April 30, 2022 January 31, 2022 (in thousands) Trade and unbilled receivables from contracts with customers Trade receivables due from customers $ 30,588 $ 30,041 Unbilled receivables 20,621 17,129 Less allowance for expected credit losses 2,637 1,979 48,572 45,191 Trade receivables due from finance companies 23,197 17,937 Trade and unbilled receivables from rental contracts Trade receivables 2,692 3,055 Unbilled receivables 484 538 Less allowance for expected credit losses 381 469 2,795 3,124 Other receivables Due from manufacturers 7,720 22,979 Other 2,586 5,056 10,306 28,035 Receivables, net of allowance for expected credit losses $ 84,870 $ 94,287 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, 2022 $ 232 $ 166 $ 1,502 $ 1,900 Current expected credit loss provision 3 43 768 814 Write-offs charged against allowance ( 4 ) 45 39 80 Credit loss recoveries collected 16 2 — 18 Foreign exchange impact — — ( 15 ) ( 15 ) Balance at April 30, 2022 $ 255 $ 166 $ 2,216 $ 2,637 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 The increase in the credit loss provision in the International segment, during the three months ended April 30, 2022, was driven by a $ 0.7 million bad debt provision placed on the accounts receivables due from customers of Titan Machinery Ukraine, primarily due to the ongoing Russia-Ukraine conflict. The following table presents impairment losses (recoveries) on receivables arising from sales contracts with customers and receivables arising from rental contracts: Three Months Ended April 30, 2022 2021 (in thousands) Impairment losses (recoveries) on: Receivables from sales contracts $ 813 $ 98 Receivables from rental contracts ( 11 ) ( 34 ) $ 802 $ 64 NOTE 5 - INVENTORIES April 30, 2022 January 31, 2022 (in thousands) New equipment $ 261,348 $ 195,775 Used equipment 125,995 128,047 Parts and attachments 103,872 95,890 Work in process 2,952 2,046 $ 494,167 $ 421,758 12 Table of Contents NOTE 6 - PROPERTY AND EQUIPMENT April 30, 2022 January 31, 2022 (in thousands) Rental fleet equipment $ 66,847 $ 65,117 Machinery and equipment 23,651 22,819 Vehicles 61,095 58,650 Furniture and fixtures 50,637 50,228 Land, buildings, and leasehold improvements 127,355 123,323 329,585 320,137 Less accumulated depreciation 146,096 141,894 $ 183,489 $ 178,243 The Company includes depreciation expense related to its rental fleet and its trucking fleet, for hauling equipment, in Cost of Revenue, which was $ 1.5 million and $ 1.7 million for the three months ended April 30, 2022 and 2021, respectively. All other depreciation expense is included in Operating Expenses, which was $ 3.5 million and $ 3.1 million for the three months ended April 30, 2022 and 2021, 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 April 30, 2022, the Company identified one such asset group, Titan Machinery Ukraine, and performed an impairment test, and concluded that no impairment was present. The Company did not recognize any impairment for the three months ended April 30, 2022 and April 30, 2021 . NOTE 7 - INTANGIBLE ASSETS AND GOODWILL 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 three months ended April 30, 2022: Agriculture Construction Total (in thousands) January 31, 2022 $ 10,136 $ 72 $ 10,208 Arising from business combinations 842 — 842 April 30, 2022 $ 10,978 $ 72 $ 11,050 Goodwill The following presents changes in the carrying amount of goodwill, by segment, for the three months ended April 30, 2022: Agriculture Total (in thousands) January 31, 2022 $ 8,952 $ 8,952 Arising from business combinations 583 583 April 30, 2022 $ 9,535 $ 9,535 NOTE 8 - FLOORPLAN PAYABLE/LINES OF CREDIT As of April 30, 2022, the Company had floorplan lines of credit totaling $ 751.0 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 Contents The Company's outstanding balances of floorplan lines of credit as of April 30, 2022 and January 31, 2022, consisted of the following: April 30, 2022 January 31, 2022 (in thousands) CNH Industrial $ 130,897 $ 94,054 DLL Finance 11,583 8,558 Other outstanding balances with manufacturers and non-manufacturers 46,401 32,803 $ 188,881 $ 135,415 As of April 30, 2022 and January 31, 2022, the U.S. floorplan payables were generally all non-interest bearing. As of April 30, 2022, foreign floorplan payables carried various interest rates primarily ranging from 1.40 % to 6.80 %, compared to a range of 1.40 % to 4.79 % as of January 31, 2022. The Company had non-interest bearing floorplan payables of $ 159.5 million and $ 106.8 million, on April 30, 2022 and January 31, 2022, 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. NOTE 9 - LONG TERM DEBT The following is a summary of long-term debt as of April 30, 2022 and January 31, 2022: Description Maturity Dates Interest Rates April 30, 2022 January 31, 2022 (in thousands) Mortgage loans, secured Various through May 2039 2.1% to 5.1% $ 65,518 $ 57,801 Sale-leaseback financing obligations Various through December 2030 3.4% to 10.3% 12,106 12,382 Vehicle loans, secured Various through September 2027 2.1% to 4.3% 10,620 10,465 Total debt 88,244 80,648 Less: current maturities 6,270 5,876 Long-term debt, net $ 81,974 $ 74,772 NOTE 10 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following is a summary of the changes in accumulated other comprehensive income (loss), by component, for the three month periods ended April 30, 2022 and April 30, 2021: Foreign Currency Translation Adjustment Net Investment Hedging Gain Total Accumulated Other Comprehensive Income (Loss) (in thousands) Balance, January 31, 2022 $ ( 4,883 ) $ 2,711 $ ( 2,172 ) Other comprehensive loss ( 1,191 ) — ( 1,191 ) Balance, April 30, 2022 ( 6,074 ) 2,711 ( 3,363 ) 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 ) 14 Table of Contents NOTE 11 - LEASES As Lessee The Company, as lessee, leases certain of its dealership locations, office space, equipment and vehicles under operating and financing classified leasing arrangements. The Company has elected to not record leases with a lease term at commencement of 12 months or less on the consolidated balance sheet; 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. The components of lease expense were as follows: Three Months Ended April 30, Classification 2022 2021 (in thousands) Finance lease cost: Amortization of leased assets Operating expenses $ 208 $ 395 Interest on lease liabilities Other interest expense 44 108 Operating lease cost Operating expenses and rental and other cost of revenue 3,474 4,541 Short-term lease cost Operating expenses 27 81 Variable lease cost Operating expenses 544 739 Sublease income Interest and other income ( 369 ) ( 136 ) $ 3,928 $ 5,728 Right-of-use lease assets and lease liabilities consist of the following: Classification April 30, 2022 January 31, 2022 (in thousands) Assets Operating lease assets Operating lease assets $ 53,980 $ 56,150 Finance lease assets (a) Property and equipment, net of accumulated depreciation 8,738 9,045 Total leased assets $ 62,718 $ 65,195 Liabilities Current Operating Current operating lease liabilities $ 9,481 $ 9,601 Finance Accrued expenses and other 7,303 7,466 Noncurrent Operating Operating lease liabilities 53,284 55,595 Finance Other long-term liabilities 1,403 1,518 Total lease liabilities $ 71,471 $ 74,180 (a) Finance lease assets are recorded net of accumulated amortization of $1.7 million as of April 30, 2022 and January 31, 2022. 15 Table of Contents Maturities of lease liabilities as of April 30, 2022 are as follows: Operating Finance Leases Leases Total Fiscal Year Ended January 31, (in thousands) 2023 (remainder) $ 9,863 $ 7,330 $ 17,193 2024 12,378 460 12,838 2025 11,834 406 12,240 2026 11,538 308 11,846 2027 10,825 277 11,102 2028 9,397 228 9,625 Thereafter 9,844 344 10,188 Total lease payments 75,679 9,353 85,032 Less: Interest 12,914 647 13,561 Present value of lease liabilities $ 62,765 $ 8,706 $ 71,471 The weighted-average lease term and discount rate as of April 30, 2022 are as follows: April 30, 2022 Weighted-average remaining lease term (years): Operating leases 6.5 Financing leases 1.3 Weighted-average discount rate: Operating leases 6.2 % Financing leases 4.5 % 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 April 30, 2022 and January 31, 2022: April 30, 2022 January 31, 2022 (in thousands) Rental fleet equipment $ 66,847 $ 65,117 Less accumulated depreciation 24,108 23,501 $ 42,739 $ 41,616 16 Table of Contents NOTE 12 - FAIR VALUE MEASUREMENTS As of April 30, 2022 and January 31, 2022, 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, 2022 as part of its long-lived asset impairment testing. The estimated fair value of such assets as of January 31, 2022 was $ 3.1 million. Fair value was estimated through an income approach incorporating both observable and unobservable inputs, and are deemed to be Level 3 fair value inputs. The most significant unobservable inputs include forecasted net cash generated from the use of the assets and the discount rate applied to such cash flows to arrive at a fair value estimate. In addition, in certain instances the Company estimated the fair value of long-lived assets to approximate zero as no future cash flows were assumed to be generated from the use of such assets and the expected value to be realized upon disposition was deemed to be nominal. The Company also has financial instruments that are not recorded at fair value in the consolidated balance sheets, including cash, receivables, payables and long-term debt. The carrying amounts of these financial instruments approximated their fair values as of April 30, 2022 and January 31, 2022. 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: April 30, 2022 January 31, 2022 (in thousands) Carrying amount $ 76,138 $ 68,267 Fair value $ 71,864 $ 63,237 NOTE 13 - INCOME TAXES Our effective tax rate was 25.6 % and 22.9 % for the three months ended April 30, 2022 and 2021, respectively. The effective tax rate for the three months ended April 30, 2022 and 2021 were subject 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, and recognition of a valuation allowance on certain of our foreign deferred tax asset s. 17 Table of Contents NOTE 14 - BUSINESS COMBINATIONS Fiscal 2023 On April 1, 2022, the Company acquired certain assets of Mark's Machinery, Inc. The acquired business consisted of two agricultural equipment stores in Wagner and Yankton, South Dakota. These locations are included in the Company's Agriculture segment. The total cash consideration transferred for the acquired business was $7.7 million. In connection with the acquisition, the Company acquired from CNH Industrial and certain other manufacturers equipment and parts inventory previously owned by Mark's Machinery, Inc. Upon acquiring such inventories, the Company was offered floorplan financing by the respective manufacturers. In total, the Company acquired inventory and recognized a corresponding financing liability of $3.2 million. The recognition of these inventories and the associated financing liabilities are not included as part of the accounting for the business combination. Fiscal 2022 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. These locations are included in the Company's Agriculture segment. The total cash consideration transferred for the acquired business was $28.2 million. The Company completed the real estate purchase on December 31, 2021 for a purchase price of $5.5 million, which was partially financed with long-term debt and the remainder was paid in cash. In connection with the acquisition, the Company acquired from CNH Industrial and certain other manufacturers equipment and parts inventory previously owned by Jaycox Implement, Inc. Upon acquiring such inventories, the Company was offered floorplan financing by the respective manufacturers. In total, the Company acquired inventory and recognized a corresponding financing liability of $5.3 million. The recognition of these inventories and the associated financing liabilities are not included as part of the accounting for the business combination. Purchase Price Allocation Each of the above acquisitions has been accounted for under the acquisition method of accounting, which requires the Company to estimate the acquisition date fair value of the assets acquired and liabilities assumed. As of April 30, 2022, all business combinations completed in fiscal years 2023 and 2022 are preliminary. The following table presents the aggregate purchase price allocations for all acquisitions completed during the fiscal year ended January 31, 2022 and the period ended April 30, 2022: April 30, 2022 January 31, 2022 (in thousands) Assets acquired: Cash $ 1 $ 4 Receivables 478 1,197 Inventories 3,386 13,780 Prepaid expenses and other 66 47 Property and equipment 4,088 8,236 Intangible assets 917 4,121 Goodwill 583 7,519 9,519 34,904 Liabilities assumed: Deferred revenue 1,844 1,261 Net assets acquired $ 7,675 $ 33,643 Goodwill recognized by segment: Agriculture $ 583 $ 7,519 Goodwill expected to be deductible for tax purposes $ 583 $ 7,519 18 Table of Contents The recognition of goodwill in the above business combinations arose from the acquisition of an assembled workforce and anticipated synergies expected to be realized. For the business combination occurring during the period ended April 30, 2022, the Company recognized a non-competition intangible asset of $ 0.1 million and a distribution rights intangible asset of $0.8 million. For the business combination occurring during the fiscal year ended January 31, 2022, the Company recognized a non-competition intangible asset of $ 0.1 million and a distribution rights intangible asset of $ 3.9 million. The non-competition assets will be amortized over periods ranging from three to five years. The distribution rights assets are indefinite-lived intangible assets not subject to amortization. The Company estimated the fair value of the intangible assets using a multi-period excess earnings model, which is an income approach. Acquisition related costs were not material for the periods ended April 30, 2022 or January 31, 2022, and have been expensed as incurred and recognized as Operating Expenses in the condensed consolidated statements of operations. NOTE 15 - CONTINGENCIES The Company is engaged in legal proceedings incidental to the normal course of business. Due to their nature, such legal proceedings involve inherent uncertainties, including but not limited to, court rulings, negotiations between affected parties and governmental intervention. Based upon the information available to the Company and discussions with legal counsel, it is the Company's opinion that the outcome of these various legal actions and claims will not have a material impact on 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 16 - SEGMENT INFORMATION The Company has three reportable segments: Agriculture, Construction and International. Revenue between segments is immaterial. The Company retains various unallocated income/(expense) items and assets at the general corporate level, which the Company refers to as “Shared Resources” in the table below. Shared Resources assets primarily consist of cash and property and equipment. Certain financial information for each of the Company’s business segments is set forth below. Three Months Ended April 30, 2022 2021 (in thousands) Revenue Agriculture $ 318,548 $ 229,554 Construction 66,964 68,608 International 75,495 74,544 Total $ 461,007 $ 372,706 Income (Loss) Before Income Taxes Agriculture $ 16,449 $ 11,224 Construction 3,210 138 International 4,325 2,808 Segment income before income taxes 23,984 14,170 Shared Resources ( 400 ) ( 491 ) Total $ 23,584 $ 13,679 April 30, 2022 January 31, 2022 (in thousands) Total Assets Agriculture $ 536,284 $ 481,190 Construction 166,831 157,846 International 152,003 155,275 Segment assets 855,118 794,311 Shared Resources 155,079 152,356 Total $ 1,010,197 $ 946,667 19 Table of Contents