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, 2022 January 31, 2022 Assets Current Assets Cash $ 142,057 $ 146,149 Receivables, net of allowance for expected credit losses 96,369 94,287 Inventories, net 556,383 421,758 Prepaid expenses and other 17,736 28,135 Total current assets 812,545 690,329 Noncurrent Assets Property and equipment, net of accumulated depreciation 188,964 178,243 Operating lease assets 51,888 56,150 Deferred income taxes 2,239 1,328 Goodwill 9,535 8,952 Intangible assets, net of accumulated amortization 11,480 10,624 Other 1,220 1,041 Total noncurrent assets 265,326 256,338 Total Assets $ 1,077,871 $ 946,667 Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 28,344 $ 25,644 Floorplan payable 274,244 135,415 Current maturities of long-term debt 6,650 5,876 Current operating lease liabilities 9,465 9,601 Deferred revenue 91,819 134,146 Accrued expenses and other 42,856 59,339 Income taxes payable 6,289 4,700 Total current liabilities 459,667 374,721 Long-Term Liabilities Long-term debt, less current maturities 86,500 74,772 Operating lease liabilities 50,998 55,595 Deferred income taxes 1,991 2,006 Other long-term liabilities 4,438 4,374 Total long-term liabilities 143,927 136,747 Commitments and Contingencies (Note 15) Stockholders' Equity Common stock, par value $ .00001 per share, 45,000 shares authorized; 22,695 shares issued and outstanding at July 31, 2022; 22,588 shares issued and outstanding at January 31, 2022 — — Additional paid-in-capital 255,188 254,455 Retained earnings 225,415 182,916 Accumulated other comprehensive loss ( 6,326 ) ( 2,172 ) Total stockholders' equity 474,277 435,199 Total Liabilities and Stockholders' Equity $ 1,077,871 $ 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 July 31, Six Months Ended July 31, 2022 2021 2022 2021 Revenue Equipment $ 375,216 $ 272,733 $ 731,582 $ 548,713 Parts 77,693 65,317 146,255 127,942 Service 33,365 29,676 62,887 57,379 Rental and other 10,269 9,904 16,825 16,300 Total Revenue 496,543 377,630 957,549 750,334 Cost of Revenue Equipment 323,988 240,332 634,222 484,008 Parts 52,706 46,089 100,015 90,529 Service 11,072 9,771 21,832 19,065 Rental and other 6,078 6,420 10,087 10,737 Total Cost of Revenue 393,844 302,612 766,156 604,339 Gross Profit 102,699 75,018 191,393 145,995 Operating Expenses 68,828 57,074 132,980 113,516 Impairment of Intangible and Long-Lived Assets — 1,498 — 1,498 Income from Operations 33,871 16,446 58,413 30,981 Other Income (Expense) Interest and other income 873 654 1,365 1,320 Floorplan interest expense ( 245 ) ( 350 ) ( 499 ) ( 768 ) Other interest expense ( 1,349 ) ( 1,118 ) ( 2,545 ) ( 2,222 ) Income Before Income Taxes 33,150 15,632 56,734 29,311 Provision for Income Taxes 8,191 4,383 14,235 7,515 Net Income $ 24,959 $ 11,249 $ 42,499 $ 21,796 Earnings per Share: Basic $ 1.10 $ 0.50 $ 1.88 $ 0.97 Diluted $ 1.10 $ 0.50 $ 1.88 $ 0.97 Weighted Average Common Shares: Basic 22,387 22,261 22,350 22,209 Diluted 22,392 22,276 22,357 22,220 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, 2022 2021 2022 2021 Net Income $ 24,959 $ 11,249 $ 42,499 $ 21,796 Other Comprehensive Income (Loss) Foreign currency translation adjustments ( 2,963 ) 937 ( 4,153 ) ( 1,441 ) Comprehensive Income $ 21,996 $ 12,186 $ 38,346 $ 20,355 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 issued on grant of restricted stock and exercise of stock options, 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 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 Common stock issued on grant of restricted stock, net of restricted stock forfeitures and restricted stock withheld for employee withholding tax 126 — ( 5 ) — — ( 5 ) Stock-based compensation expense — — 803 — — 803 Net income — — — 24,959 — 24,959 Other comprehensive income — — — — ( 2,963 ) ( 2,963 ) BALANCE, July 31, 2022 22,695 — 255,188 225,415 ( 6,326 ) 474,277 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, 2022 2021 Operating Activities Net income $ 42,499 $ 21,796 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 10,987 10,602 Impairment — 1,498 Deferred income taxes ( 1,005 ) ( 1,645 ) Stock-based compensation expense 1,423 1,193 Noncash interest expense 121 110 Other, net 4,583 5,235 Changes in assets and liabilities Receivables, prepaid expenses and other assets 5,444 ( 12,384 ) Inventories ( 137,708 ) ( 17,166 ) Manufacturer floorplan payable 105,415 56,436 Deferred Revenue ( 43,530 ) ( 21,063 ) Accounts payable, accrued expenses and other and other long-term liabilities ( 9,182 ) ( 16,051 ) Net Cash Provided by (Used for) Operating Activities ( 20,953 ) 28,561 Investing Activities Rental fleet purchases ( 6,020 ) ( 8,946 ) Property and equipment purchases (excluding rental fleet) ( 8,487 ) ( 10,888 ) Proceeds from sale of property and equipment 1,628 420 Acquisition consideration, net of cash acquired ( 7,675 ) — Other, net ( 182 ) 12 Net Cash Used for Investing Activities ( 20,736 ) ( 19,402 ) Financing Activities Net change in non-manufacturer floorplan payable 35,716 ( 22,731 ) Proceeds from long-term debt borrowings 8,415 6,451 Principal payments on long-term debt and finance leases ( 3,879 ) ( 5,117 ) Payment of debt issuance costs — — Other, net ( 689 ) ( 976 ) Net Cash Provided by (Used for) Financing Activities 39,563 ( 22,373 ) Effect of Exchange Rate Changes on Cash ( 1,966 ) ( 192 ) Net Change in Cash ( 4,092 ) ( 13,406 ) Cash at Beginning of Period 146,149 78,990 Cash at End of Period $ 142,057 $ 65,584 Supplemental Disclosures of Cash Flow Information Cash paid during the period Income taxes, net of refunds $ 11,116 $ 17,378 Interest $ 2,851 $ 2,797 Supplemental Disclosures of Noncash Investing and Financing Activities Net property and equipment financed with long-term debt, finance leases, accounts payable and accrued liabilities $ 2,667 $ 9,014 Long-term debt to acquire finance leases $ 6,776 $ 7,454 Net transfer of assets from (to) property and equipment to (from) inventories $ ( 2,849 ) $ 1,269 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-months ended July 31, 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, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota, Washington, Wisconsin, and Wyoming and its European stores are located in Bulgaria, Germany, Romania, and Ukraine. Russia/Ukraine Geopolitical Conflict In February, 2022, the ongoing Russia/Ukraine conflict significantly intensified, and the sustained conflict and disruption in the region is ongoing. 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 conflict has caused disruptions in our Ukrainian operations, with our revenues for the six-months ended July 31, 2022 down 37.7% from the prior year period. These disruptions have not been material to the Company's consolidated financial statements. However, if the conflict intensifies in western and central Ukraine, it could significantly increase the adverse effect on the Company in future periods. 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 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, 2022 2021 2022 2021 (in thousands, except per share data) Numerator: Net income $ 24,959 $ 11,249 $ 42,499 $ 21,796 Allocation to participating securities ( 291 ) ( 156 ) ( 502 ) ( 334 ) Net income attributable to Titan Machinery Inc. common stockholders $ 24,668 $ 11,093 $ 41,997 $ 21,462 Denominator: Basic weighted-average common shares outstanding 22,387 22,261 22,350 22,209 Plus: incremental shares from vesting of restricted stock units 5 15 7 11 Diluted weighted-average common shares outstanding 22,392 22,276 22,357 22,220 Earnings Per Share: Basic $ 1.10 $ 0.50 $ 1.88 $ 0.97 Diluted $ 1.10 $ 0.50 $ 1.88 $ 0.97 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, 2022 Six Months Ended July 31, 2022 Agriculture Construction International Total Agriculture Construction International Total (in thousands) (in thousands) Equipment $ 270,472 $ 43,184 $ 61,560 $ 375,216 $ 521,565 $ 87,002 $ 123,015 $ 731,582 Parts 52,548 11,816 13,329 77,693 97,054 23,879 25,322 146,255 Service 24,730 6,302 2,333 33,365 46,683 12,125 4,079 62,887 Other 880 500 246 1,626 1,679 803 451 2,933 Revenue from contracts with customers 348,630 61,802 77,468 487,900 666,981 123,809 152,867 943,657 Rental 326 8,220 97 8,643 522 13,177 193 13,892 Total revenues $ 348,956 $ 70,022 $ 77,565 $ 496,543 $ 667,503 $ 136,986 $ 153,060 $ 957,549 Three Months Ended July 31, 2021 Six Months Ended July 31, 2021 Agriculture Construction International Total Agriculture Construction International Total (in thousands) (in thousands) Equipment $ 156,408 $ 54,020 $ 62,305 $ 272,733 $ 325,664 $ 98,832 $ 124,217 $ 548,713 Parts 40,742 11,928 12,647 65,317 80,425 24,036 23,481 127,942 Service 21,150 6,585 1,941 29,676 40,904 12,954 3,521 57,379 Other 758 490 188 1,436 1,478 855 281 2,614 Revenue from contracts with customers 219,058 73,023 77,081 369,162 448,471 136,677 151,500 736,648 Rental 306 7,920 242 8,468 444 12,873 369 13,686 Total revenues $ 219,364 $ 80,943 $ 77,323 $ 377,630 $ 448,915 $ 149,550 $ 151,869 $ 750,334 9 Table of Contents Unbilled Receivables and Deferred Revenue Unbilled receivables from contracts with customers amounted to $ 24.4 million and $ 17.1 million as of July 31, 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. Deferred revenue from contracts with customers amounted to $ 90.7 million and $ 132.2 million as of July 31, 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 six months ended July 31, 2022 and 2021, the Company recognized $ 105.1 million and $ 50.8 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 six months ended July 31, 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 at the time we perform the work, 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 July 31, 2022 January 31, 2022 (in thousands) Trade and unbilled receivables from contracts with customers Trade receivables due from customers $ 37,271 $ 30,041 Unbilled receivables 24,435 17,129 Less allowance for expected credit losses 2,722 1,979 58,984 45,191 Trade receivables due from finance companies 15,096 17,937 Trade and unbilled receivables from rental contracts Trade receivables 3,832 3,055 Unbilled receivables 1,057 538 Less allowance for expected credit losses 375 469 4,514 3,124 Other receivables Due from manufacturers 14,556 22,979 Other 3,219 5,056 17,775 28,035 Receivables, net of allowance for expected credit losses $ 96,369 $ 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 $ 244 $ 193 $ 1,542 $ 1,979 Current expected credit loss provision 79 35 846 960 Write-offs charged against allowance 30 97 61 188 Credit loss recoveries collected 16 4 — 20 Foreign exchange impact — — ( 49 ) ( 49 ) Balance at July 31, 2022 $ 309 $ 135 $ 2,278 $ 2,722 Agriculture Construction International Total (in thousands) Balance at January 31, 2021 $ 228 $ 1,074 $ 1,690 $ 2,992 Current expected credit loss provision 114 118 ( 227 ) 5 Write-offs charged against allowance 50 147 60 257 Credit loss recoveries collected 7 5 — 12 Foreign exchange impact — — ( 31 ) ( 31 ) Balance at July 31, 2021 $ 299 $ 1,050 $ 1,372 $ 2,721 The increase in the credit loss provision in the International segment, during the six months ended July 31, 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 July 31, Six Months Ended July 31, 2022 2021 2022 2021 (in thousands) Impairment losses (recoveries) on: Receivables from sales contracts $ 186 $ 222 $ 999 $ 320 Receivables from rental contracts 43 3 32 ( 30 ) $ 229 $ 225 $ 1,031 $ 290 NOTE 5 - INVENTORIES July 31, 2022 January 31, 2022 (in thousands) New equipment $ 325,641 $ 195,775 Used equipment 118,757 128,047 Parts and attachments 109,061 95,890 Work in process 2,924 2,046 $ 556,383 $ 421,758 12 Table of Contents NOTE 6 - PROPERTY AND EQUIPMENT July 31, 2022 January 31, 2022 (in thousands) Rental fleet equipment $ 73,014 $ 65,117 Machinery and equipment 23,769 22,819 Vehicles 62,251 58,650 Furniture and fixtures 51,400 50,228 Land, buildings, and leasehold improvements 129,102 123,323 339,536 320,137 Less accumulated depreciation 150,572 141,894 $ 188,964 $ 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 $ 2.0 million and $ 2.1 million for the three months ended July 31, 2022 and 2021, and $ 3.5 million and $ 3.8 million for the six months ended July 31, 2022 and 2021, respectively. All other depreciation expense is included in Operating Expenses, which was $ 3.6 million and $ 3.0 million for the three months ended July 31, 2022 and 2021 and $ 7.1 million and $ 6.0 million for the six months ended July 31, 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 July 31, 2022, the Company identified two such asset groups in the Agriculture segment, and performed an impairment test, and concluded that no impairment was present, thus the Company did not recognize any impairment for the three and six months ended July 31, 2022. The Company did recognize impairment of long-lived assets of $ 0.4 million in its International segment for the three and six months ended July 31, 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 six months ended July 31, 2022: Agriculture Construction Total (in thousands) January 31, 2022 $ 10,136 $ 72 $ 10,208 Arising from business combinations 842 — 842 July 31, 2022 $ 10,978 $ 72 $ 11,050 Goodwill The following presents changes in the carrying amount of goodwill, by segment, for the six months ended July 31, 2022: Agriculture Total (in thousands) January 31, 2022 $ 8,952 $ 8,952 Arising from business combinations 583 583 July 31, 2022 $ 9,535 $ 9,535 13 Table of Contents NOTE 8 - FLOORPLAN PAYABLE/LINES OF CREDIT As of July 31, 2022, the Company had floorplan lines of credit totaling $ 743.0 million, which is primarily comprised of three 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. Additionally, the Company amended its CNH Industrial floorplan line of credit as of August 1, 2022, increasing the total available domestic limit to $410 million and overall limit to $500 million. The Company's outstanding balances of floorplan lines of credit as of July 31, 2022 and January 31, 2022, consisted of the following: July 31, 2022 January 31, 2022 (in thousands) CNH Industrial $ 177,983 $ 94,054 Bank Syndicate Agreement Floorplan Loan 41,000 — DLL Finance 9,187 8,558 Other outstanding balances with manufacturers and non-manufacturers 46,074 32,803 $ 274,244 $ 135,415 In anticipation of closing the Heartland acquisition on August 1, 2022, the Company drew $ 41.0 million on its Bank Syndicate Floorplan Loan, which had a variable interest rate of 3.21% as of July 31, 2022. Generally, all U.S. CNH Industrial and DLL Finance amounts outstanding are non-interest bearing. As of July 31, 2022, foreign floorplan payables carried various interest rates primarily ranging from 1.92 % to 8.36 %, compared to a range of 1.40 % to 6.11 % as of January 31, 2022. The Company had non-interest bearing floorplan payables of $ 210.7 million and $ 106.8 million, on July 31, 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 July 31, 2022 and January 31, 2022: Description Maturity Dates Interest Rates July 31, 2022 January 31, 2022 (in thousands) Mortgage loans, secured Various through May 2039 2.1% to 5.1% $ 69,834 $ 57,801 Sale-leaseback financing obligations Various through December 2030 3.4% to 10.3% 11,826 12,382 Vehicle loans, secured Various through September 2027 2.1% to 4.3% 11,490 10,465 Total debt 93,150 80,648 Less: current maturities 6,650 5,876 Long-term debt, net $ 86,500 $ 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 six month periods ended July 31, 2022 and July 31, 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 ) Other comprehensive income ( 2,963 ) — ( 2,963 ) Balance, July 31, 2022 $ ( 9,037 ) $ 2,711 $ ( 6,326 ) 14 Table of Contents Foreign Currency Translation Adjustment Net Investment Hedging Gain Total Accumulated Other Comprehensive Income (Loss) (in thousands) Balance, January 31, 2021 $ ( 1,212 ) $ 2,711 $ 1,499 Other comprehensive loss ( 2,379 ) — ( 2,379 ) Balance, April 30, 2021 ( 3,591 ) 2,711 ( 880 ) Other comprehensive income 938 — 938 Balance, July 31, 2021 $ ( 2,653 ) $ 2,711 $ 58 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 July 31, Six Months Ended July 31, Classification 2022 2021 2022 2021 (in thousands) (in thousands) Finance lease cost: Amortization of leased assets Operating expenses $ 207 $ 243 $ 415 $ 688 Interest on lease liabilities Other interest expense 45 64 88 152 Operating lease cost Operating expenses and rental and other cost of revenue 3,164 3,735 6,638 7,501 Short-term lease cost Operating expenses 44 66 70 132 Variable lease cost Operating expenses 473 639 1,018 1,252 Sublease income Interest and other income ( 360 ) ( 219 ) ( 729 ) ( 416 ) $ 3,573 $ 4,528 $ 7,500 $ 9,309 15 Table of Contents Right-of-use lease assets and lease liabilities consist of the following: Classification July 31, 2022 January 31, 2022 (in thousands) Assets Operating lease assets Operating lease assets $ 51,888 $ 56,150 Finance lease assets (a) Property and equipment, net of accumulated depreciation 2,442 9,045 Total leased assets $ 54,330 $ 65,195 Liabilities Current Operating Current operating lease liabilities $ 9,465 $ 9,601 Finance Accrued expenses and other 554 7,466 Noncurrent Operating Operating lease liabilities 50,998 55,595 Finance Other long-term liabilities 1,880 1,518 Total lease liabilities $ 62,897 $ 74,180 (a) Finance lease assets are recorded net of accumulated amortization of $1.8 million as of July 31, 2022 and $1.7 million as of January 31, 2022. Maturities of lease liabilities as of July 31, 2022 are as follows: Operating Finance Leases Leases Total Fiscal Year Ended January 31, (in thousands) 2023 (remainder) $ 6,440 $ 400 $ 6,840 2024 12,484 607 13,091 2025 11,943 554 12,497 2026 11,552 460 12,012 2027 10,815 431 11,246 2028 9,394 297 9,691 Thereafter 9,839 343 10,182 Total lease payments 72,467 3,092 75,559 Less: Interest 12,005 657 12,662 Present value of lease liabilities $ 60,462 $ 2,435 $ 62,897 The weighted-average lease term and discount rate as of July 31, 2022 are as follows: July 31, 2022 Weighted-average remaining lease term (years): Operating leases 6.3 Financing leases 5.2 Weighted-average discount rate: Operating leases 6.2 % Financing leases 8.2 % 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 16 Table of Contents added and other taxes collected from our customers concurrent with our rental activities. Rental billings most often occur on a monthly basis and may be billed in advance or in arrears, thus creating unbilled rental receivables or deferred rental revenue amounts. The Company manages the residual value risk of its rented assets by (i) monitoring the quality, aging and anticipated retail market value of our rental fleet assets to determine the optimal period to remove an asset from the rental fleet, (ii) maintaining the quality of our assets through on-site parts and service support and (iii) requiring physical damage insurance of our lessee customers. We primarily dispose of our rental assets through the sale of the asset by our retail sales force. Revenue generated from leasing activities is disclosed, by segment, in Note 3. The following is the balance of our dedicated rental fleet assets, included in Property and equipment, net of accumulated depreciation in the condensed consolidated balance sheet, of our Construction segment as of July 31, 2022 and January 31, 2022: July 31, 2022 January 31, 2022 (in thousands) Rental fleet equipment $ 73,014 $ 65,117 Less accumulated depreciation 25,205 23,501 $ 47,809 $ 41,616 NOTE 12 - FAIR VALUE MEASUREMENTS 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, in the prior year, 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, 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: July 31, 2022 January 31, 2022 (in thousands) Carrying amount $ 81,324 $ 63,237 Fair value $ 72,516 $ 68,267 NOTE 13 - INCOME TAXES Our effective tax rate was 24.7 % and 28.0 % for the three months ended July 31, 2022 and 2021, respectively and was 25.1 % and 25.6 % for the six months ended July 31, 2022 and 2021, respectively. The effective tax rate for the six months ended July 31, 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 July 31, 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 July 31, 2022: July 31, 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 Mark's Machinery acquisition the Company recognized a non-competition intangible asset of $ 0.1 million and a distribution rights intangible asset of $0.8 million. For the Jaycox acquisition 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, amounted to $0.5 million for the period ended July 31, 2022, primarily related to the Heartland acquisition, and acquisition related costs for the period ended January 31, 2022, were not material. All acquisition related costs 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 July 31, Six Months Ended July 31, 2022 2021 2022 2021 (in thousands) (in thousands) Revenue Agriculture $ 348,956 $ 219,364 $ 667,503 $ 448,915 Construction 70,022 80,943 136,986 149,550 International 77,565 77,323 153,060 151,869 Total $ 496,543 $ 377,630 $ 957,549 $ 750,334 Income (Loss) Before Income Taxes Agriculture $ 24,895 $ 12,067 $ 41,344 $ 23,292 Construction 3,923 2,815 7,132 2,953 International 5,870 430 10,195 3,238 Segment income before income taxes 34,688 15,312 58,671 29,483 Shared Resources ( 1,538 ) 320 ( 1,937 ) ( 172 ) Total $ 33,150 $ 15,632 $ 56,734 $ 29,311 July 31, 2022 January 31, 2022 (in thousands) Total Assets Agriculture $ 559,722 $ 481,190 Construction 196,085 157,846 International 175,921 155,275 Segment assets 931,728 794,311 Shared Resources 146,143 152,356 Total $ 1,077,871 $ 946,667 19 Table of Contents NOTE 17 - SUBSEQUENT EVENTS On July 8, 2022, the Company entered into a definitive purchase agreement to acquire three entities, Heartland Agriculture, LLC, Heartland Solutions, LLC, and Heartland Leverage Lender, LLC, collectively, the "Heartland Companies", which operate a twelve store CaseIH commercial application agriculture dealership complex . In its most recently completed fiscal year ended December 31, 2021, Heartland Companies generated revenue of approximately $214 million. The Company closed on the acquisition, on August 1, 2022 with cash consideration transferred of $94.5 million. The Company primarily used cash on hand for the funding of the purchase price and drew down on the floorplan loan with the Bank Syndicate for the remaining balance. The acquisition will be accounted in accordance with Accounting Standards Codification ("ASC") Topic 805, "Business Combinations". As the acquisition was completed subsequent to July 31, 2022, the consolidated financials statements do not include the results or the financial position of the Heartland Companies. Because the Company has not completed the work of the purchase price allocation needed under ASC 805, the initial accounting for the business combination was incomplete at the time of the issuance of the financial statements, therefore, the Company did not include all of the information regarding the effect of the business combination as permitted by ASC 805-10-50-4 and ASC 805-30-50-3. 20 Table of Contents