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EX-32.2 - EXHIBIT 32.2 - Titan Machinery Inc.a10qfy17q3ex322.htm
EX-32.1 - EXHIBIT 32.1 - Titan Machinery Inc.a10qfy17q3ex321.htm
EX-31.2 - EXHIBIT 31.2 - Titan Machinery Inc.a10qfy17q3ex312.htm
EX-31.1 - EXHIBIT 31.1 - Titan Machinery Inc.a10qfy17q3ex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
 
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended October 31, 2016
 
Commission File No. 001-33866
 
TITAN MACHINERY INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
No. 45-0357838
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
644 East Beaton Drive
West Fargo, ND 58078-2648
(Address of Principal Executive Offices)
 
Registrant’s telephone number (701) 356-0130
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  x    NO  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  x    NO  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o
 
Accelerated filer  x
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
(Do not check if smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o    NO  x
 
The number of shares outstanding of the registrant’s common stock as of November 30, 2016 was: Common Stock, $0.00001 par value, 21,819,309 shares.



TITAN MACHINERY INC.
QUARTERLY REPORT ON FORM 10-Q
 
Table of Contents

 
 
Page No.
PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
 
Consolidated Balance Sheets as of October 31, 2016 and January 31, 2016
 
Consolidated Statements of Operations for the three and nine months ended October 31, 2016 and 2015
 
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended October 31, 2016 and 2015
 
Consolidated Statements of Stockholders' Equity for the nine months ended October 31, 2016 and 2015
 
Consolidated Statements of Cash Flows for the nine months ended October 31, 2016 and 2015
 
Notes to Consolidated Financial Statements
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.
CONTROLS AND PROCEDURES
PART II.
OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
ITEM 4.
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
Signatures
 
Exhibit Index
 

2


PART I. — FINANCIAL INFORMATION
 
ITEM 1.                FINANCIAL STATEMENTS
 
TITAN MACHINERY INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share data)
 
October 31, 2016
 
January 31, 2016
Assets


 
 
Current Assets
 
 
 
Cash
$
52,431

 
$
89,465

Receivables (net of allowance of $3,733 and $3,591 as of October 31, 2016 and January 31, 2016, respectively)
71,803

 
56,552

Inventories
607,629

 
689,464

Prepaid expenses and other
7,491

 
9,753

Income taxes receivable
4,559

 
13,011

Total current assets
743,913

 
858,245

Noncurrent Assets
 
 
 
Intangible assets, net of accumulated amortization
5,026

 
5,134

Property and equipment, net of accumulated depreciation
169,964

 
183,179

Other
1,394

 
1,317

Total noncurrent assets
176,384

 
189,630

Total Assets
$
920,297

 
$
1,047,875

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
22,888

 
$
16,863

Floorplan payable
372,055

 
444,780

Current maturities of long-term debt
15,464

 
1,557

Customer deposits
16,215

 
31,159

Accrued expenses
35,403

 
28,914

Income taxes payable

 
152

Total current liabilities
462,025

 
523,425

Long-Term Liabilities
 
 
 
Senior convertible notes
87,754

 
134,145

Long-term debt, less current maturities
25,427

 
38,409

Deferred income taxes
10,531

 
11,135

Other long-term liabilities
2,217

 
2,412

Total long-term liabilities
125,929

 
186,101

Commitments and Contingencies


 


Stockholders' Equity
 
 
 
Common stock, par value $.00001 per share, 45,000 shares authorized; 21,819 shares issued and outstanding at October 31, 2016; 21,604 shares issued and outstanding at January 31, 2016

 

Additional paid-in-capital
242,019

 
242,491

Retained earnings
93,586

 
99,526

Accumulated other comprehensive loss
(3,262
)
 
(4,461
)
Total Titan Machinery Inc. stockholders' equity
332,343

 
337,556

Noncontrolling interest

 
793

Total stockholders' equity
332,343

 
338,349

Total Liabilities and Stockholders' Equity
$
920,297

 
$
1,047,875

 See Notes to Consolidated Financial Statements

3


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Revenue
 
 
 
 
 
 
 
Equipment
$
212,194

 
$
215,692

 
$
570,369

 
$
681,691

Parts
69,261

 
73,838

 
185,106

 
197,439

Service
33,777

 
34,116

 
96,065

 
99,860

Rental and other
17,034

 
21,329

 
43,919

 
53,371

Total Revenue
332,266

 
344,975

 
895,459

 
1,032,361

Cost of Revenue
 
 
 
 
 
 
 
Equipment
201,140

 
198,095

 
532,370

 
628,280

Parts
48,387

 
51,673

 
130,006

 
138,626

Service
11,828

 
12,449

 
35,473

 
36,136

Rental and other
12,485

 
15,617

 
32,703

 
39,674

Total Cost of Revenue
273,840

 
277,834

 
730,552

 
842,716

Gross Profit
58,426

 
67,141

 
164,907

 
189,645

Operating Expenses
53,143

 
53,484

 
159,132

 
165,979

Impairment and Realignment Costs
275

 
22

 
546

 
1,519

Income from Operations
5,008

 
13,635

 
5,229

 
22,147

Other Income (Expense)
 
 
 
 
 
 
 
Interest income and other income (expense)
502

 
722

 
1,251

 
(565
)
Floorplan interest expense
(3,294
)
 
(4,602
)
 
(10,843
)
 
(13,945
)
Other interest expense
(2,160
)
 
(4,041
)
 
(5,930
)
 
(11,228
)
Income (Loss) Before Income Taxes
56

 
5,714

 
(10,293
)
 
(3,591
)
Provision for (Benefit from) Income Taxes
(208
)
 
2,231

 
(3,997
)
 
(354
)
Net Income (Loss) Including Noncontrolling Interest
$
264

 
$
3,483

 
$
(6,296
)
 
$
(3,237
)
Less: Net Income (Loss) Attributable to Noncontrolling Interest

 
27

 
(356
)
 
(395
)
Net Income (Loss) Attributable to Titan Machinery Inc.
$
264

 
$
3,456

 
$
(5,940
)
 
$
(2,842
)
Net (Income) Loss Allocated to Participating Securities - Note 1
(8
)
 
(72
)
 
120

 
53

Net Income (Loss) Attributable to Titan Machinery Inc. Common Stockholders
$
256

 
$
3,384

 
$
(5,820
)
 
$
(2,789
)
Earnings (Loss) per Share - Note 1
 
 
 
 
 
 
 
Earnings (Loss) per Share - Basic
$
0.01

 
$
0.16

 
$
(0.27
)
 
$
(0.13
)
Earnings (Loss) per Share - Diluted
$
0.01

 
$
0.16

 
$
(0.27
)
 
$
(0.13
)
Weighted Average Common Shares - Basic
21,218

 
21,129

 
21,208

 
21,093

Weighted Average Common Shares - Diluted
21,269

 
21,218

 
21,208

 
21,093

 
See Notes to Consolidated Financial Statements


4


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Net Income (Loss) Including Noncontrolling Interest
$
264

 
$
3,483

 
$
(6,296
)
 
$
(3,237
)
Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
626

 
(100
)
 
945

 
(3,829
)
Unrealized gain on net investment hedge derivative instruments, net of tax expense of $5 for the three months ended October 31, 2015, and $133 for the nine months ended October 31, 2015

 
7

 

 
200

Unrealized gain (loss) on interest rate swap cash flow hedge derivative instrument, net of tax expense (benefit) of $91 and ($321) for the three months ended October 31, 2016 and 2015, respectively, and ($109) and ($290) for the nine months ended October 31, 2016 and 2015, respectively
137

 
(482
)
 
(163
)
 
(436
)
Reclassification of loss on interest rate swap cash flow hedge derivative instruments included in net income (loss), net of tax benefit of $133 and $213 for the three months ended October 31, 2016 and 2015, respectively, and $426 and $532 for the nine months ended October 31, 2016 and 2015, respectively
200

 
320

 
638

 
798

Reclassification of loss on foreign currency contract cash flow hedge derivative instruments included in net income (loss), net of tax benefit of $2 for the three months ended October 31, 2015 and $7 for the nine months ended October 31, 2015

 
2

 

 
10

Total Other Comprehensive Income (Loss)
963

 
(253
)
 
1,420

 
(3,257
)
Comprehensive Income (Loss)
1,227

 
3,230

 
(4,876
)
 
(6,494
)
Comprehensive Income (Loss) Attributable to Noncontrolling Interest

 
(13
)
 
(333
)
 
(1,046
)
Comprehensive Income (Loss) Attributable To Titan Machinery Inc.
$
1,227

 
$
3,243

 
$
(4,543
)
 
$
(5,448
)
 
See Notes to Consolidated Financial Statements


5


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands)
 
Common Stock
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Shares Outstanding
 
Amount
 
Additional Paid-In Capital
 
Retained Earnings
 
Foreign Currency Translation Adjustments
 
Unrealized Gains (Losses) on Net Investment Hedges
 
Unrealized Gains (Losses) on Interest Rate Swap Cash Flow Hedges
 
Unrealized Gains (Losses) on Foreign Currency Contract Cash Flow Hedges
 
Total
 
Total Titan Machinery Inc. Stockholders' Equity
 
Noncontrolling Interest
 
Total Stockholders' Equity
Balance, January 31, 2015
21,406

 
$

 
$
240,180

 
$
137,418

 
$
(1,632
)
 
$
2,510

 
$
(1,940
)
 
$
(37
)
 
$
(1,099
)
 
$
376,499

 
$
1,860

 
$
378,359

Common stock issued on grant of restricted stock (net of forfeitures and shares withheld for income taxes), exercise of stock options, and tax benefits of equity awards
170

 

 
170

 

 

 

 

 

 

 
170

 

 
170

Stock-based compensation expense

 

 
1,799

 

 

 

 

 

 

 
1,799

 

 
1,799

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(2,842
)
 

 

 

 

 

 
(2,842
)
 
(395
)
 
(3,237
)
Other comprehensive income (loss)

 

 

 

 
(3,178
)
 
200

 
362

 
10

 
(2,606
)
 
(2,606
)
 
(651
)
 
(3,257
)
Total comprehensive loss

 

 

 

 

 

 

 

 

 
(5,448
)
 
(1,046
)
 
(6,494
)
Balance, October 31, 2015
21,576

 
$

 
$
242,149

 
$
134,576

 
$
(4,810
)
 
$
2,710

 
$
(1,578
)
 
$
(27
)
 
$
(3,705
)
 
$
373,020

 
$
814

 
$
373,834

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 31, 2016
21,604

 
$

 
$
242,491

 
$
99,526

 
$
(5,500
)
 
$
2,711

 
$
(1,672
)
 
$

 
$
(4,461
)
 
$
337,556

 
$
793

 
$
338,349

Common stock issued on grant of restricted stock (net of forfeitures and shares withheld for income taxes), exercise of stock options, and tax benefits of equity awards
215

 

 
(357
)
 

 

 

 

 

 

 
(357
)
 

 
(357
)
Stock-based compensation expense

 

 
1,805

 

 

 

 

 

 

 
1,805

 

 
1,805

Repurchase of Senior Convertible Notes

 

 
1,746

 

 

 

 

 

 

 
1,746

 

 
1,746

Acquisition of non-controlling interest

 

 
(3,666
)
 

 
(198
)
 

 

 

 
(198
)
 
(3,864
)
 
(460
)
 
(4,324
)
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(5,940
)
 

 

 

 

 

 
(5,940
)
 
(356
)
 
(6,296
)
Other comprehensive income (loss)

 

 

 

 
922

 

 
475

 

 
1,397

 
1,397

 
23

 
1,420

Total comprehensive loss

 

 

 

 

 

 

 

 

 
(4,543
)
 
(333
)
 
(4,876
)
Balance, October 31, 2016
21,819

 
$

 
$
242,019

 
$
93,586

 
$
(4,776
)
 
$
2,711

 
$
(1,197
)
 
$

 
$
(3,262
)
 
$
332,343

 
$

 
$
332,343


See Notes to Consolidated Financial Statements

6


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Nine Months Ended October 31,
 
2016
 
2015
Operating Activities
 
 
 
Net income (loss) including noncontrolling interest
$
(6,296
)
 
$
(3,237
)
Adjustments to reconcile net income (loss) including noncontrolling interest to net cash provided by operating activities
 
 
 
Depreciation and amortization
19,896

 
21,588

Impairment
275

 
193

Deferred income taxes
825

 
474

Stock-based compensation expense
1,805

 
1,799

Noncash interest expense
4,305

 
5,286

Unrealized foreign currency (gain) loss on loans to international subsidiaries
(44
)
 
778

Gain on repurchase of Senior Convertible Notes
(3,130
)
 

Other, net
(980
)
 
(649
)
Changes in assets and liabilities
 
 
 
Receivables, prepaid expenses and other assets
(18,070
)
 
9,828

Inventories
91,222

 
72,437

Manufacturer floorplan payable
(20,821
)
 
124,305

Accounts payable, customer deposits, accrued expenses and other long-term liabilities
(2,546
)
 
(27,845
)
Income taxes
7,957

 
(6,196
)
Net Cash Provided by Operating Activities
74,398

 
198,761

Investing Activities
 
 
 
Rental fleet purchases
(3,094
)
 
(292
)
Property and equipment purchases (excluding rental fleet)
(7,121
)
 
(5,713
)
Proceeds from sale of property and equipment
2,285

 
5,135

Proceeds upon settlement of net investment hedge derivative instruments

 
337

Payments upon settlement of net investment hedge derivative instruments

 
(23
)
Proceeds from insurance recoveries
1,431

 

Other, net
(517
)
 
196

Net Cash Used for Investing Activities
(7,016
)
 
(360
)
Financing Activities
 
 
 
Net change in non-manufacturer floorplan payable
(54,478
)
 
(201,320
)
Repurchase of Senior Convertible Notes
(46,013
)
 

Proceeds from long-term debt borrowings

 
59,088

Principal payments on long-term debt
(1,935
)
 
(101,465
)
Payment of debt issuance costs
(31
)
 
(3,381
)
Loan provided to non-controlling interest holder
(2,148
)
 

Other, net
(33
)
 
143

Net Cash Used for Financing Activities
(104,638
)
 
(246,935
)
Effect of Exchange Rate Changes on Cash
222

 
(585
)
Net Change in Cash
(37,034
)
 
(49,119
)
Cash at Beginning of Period
89,465

 
127,528

Cash at End of Period
$
52,431

 
$
78,409

Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid (received) during the period
 
 
 
Income taxes, net of refunds
$
(12,942
)
 
$
5,283

Interest
$
15,544

 
$
18,492

Supplemental Disclosures of Noncash Investing and Financing Activities
 
 
 
Net property and equipment financed with long-term debt, accounts payable and accrued liabilities
$
2,818

 
$
747

Long-term debt extinguished upon sale of property and equipment
$

 
$
3,315

Net transfer of assets from property and equipment to inventories
$
(4,411
)
 
$
(5,743
)
Acquisition of non-controlling interest through satisfaction of outstanding receivables
$
4,324

 
$


See Notes to Consolidated Financial Statements

7


TITAN MACHINERY INC.
NOTES TO 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, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2017. The information contained in the balance sheet as of January 31, 2016 was derived from the audited financial statements for the Company for the year then ended. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2016 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 Arizona, Colorado, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, South Dakota, Wisconsin and Wyoming, and its European stores are located in Bulgaria, Romania, Serbia and Ukraine. 
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, initial valuation and impairment of 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 and majority-owned subsidiaries. All material accounts, transactions and profits between the consolidated companies have been eliminated in consolidation.
In June 2016, the Company acquired all of the outstanding ownership interest held by the non-controlling interest holder of the Company's Bulgarian subsidiary. Total consideration, which amounted to $4.3 million, was in the form of the satisfaction of outstanding receivables owed to the Company by the noncontrolling interest holder. As the Company had a controlling interest in the Bulgarian subsidiary prior to the acquisition, the acquisition was accounted for as an equity transaction which resulted in a decrease in the Company's additional paid-in capital in the amount of $3.7 million and a decrease in the Company's accumulated other comprehensive income in the amount of $0.2 million. Subsequent to this acquisition, all of the Company's subsidiaries are wholly-owned.
Earnings (Loss) Per Share (“EPS”)
The Company uses the two-class method to calculate basic and diluted EPS. Unvested restricted stock awards are considered participating securities because they entitle holders to non-forfeitable rights to dividends during the vesting term. Under the two-class method, basic EPS was computed by dividing net income (loss) attributable to Titan Machinery Inc. after allocation of net income (loss) to participating securities by the weighted-average number of shares of common stock outstanding during the relevant period.
Diluted EPS was computed by dividing net income attributable to Titan Machinery Inc. after allocation of net income (loss) to participating securities by the weighted-average shares of common stock outstanding after adjusting for potential

8


dilution related to the conversion of all dilutive securities into common stock. All potentially dilutive securities were included in the computation of diluted EPS. All anti-dilutive securities were excluded from the computation of diluted EPS.
The following table sets forth the calculation of the denominator for basic and diluted EPS:
 
Three Months Ended October 31,

Nine Months Ended October 31,
 
2016

2015

2016

2015
 
(in thousands, except per share data)

(in thousands, except per share data)
Basic Weighted-Average Common Shares Outstanding
21,218


21,129


21,208


21,093

Plus: Incremental Shares From Assumed Exercise of Stock Options
51


89





Diluted Weighted-Average Common Shares Outstanding
21,269


21,218


21,208


21,093

 
 
 
 
 
 
 
 
Anti-Dilutive Shares Excluded From Diluted Weighted-Average Common Shares Outstanding:
 
 
 
 
 
 
 
Stock Options
141,000

 
89,000

 
146,000

 
191,000

Shares Underlying Senior Convertible Notes (conversion price of $43.17)
2,217

 
3,474

 
2,217

 
3,474

 
 
 
 
 
 
 
 
Earnings (Loss) per Share - Basic
$
0.01


$
0.16


$
(0.27
)

$
(0.13
)
Earnings (Loss) per Share - Diluted
$
0.01


$
0.16


$
(0.27
)

$
(0.13
)
Recent Accounting Guidance
In May 2014 and August 2015, the FASB issued authoritative guidance on accounting for revenue recognition, codified in ASC 606, Revenue from Contracts with Customers. This guidance has been amended on various occasions and supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This guidance is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The Company will adopt this guidance on February 1, 2018, and will employ one of the two retrospective application methods. The Company has not determined the potential effects adoption of this standard will have on the consolidated financial statements.
In August 2014, the FASB issued authoritative guidance on management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and provide related footnote disclosures, codified in ASC 205-40, Going Concern. The guidance provides a definition of the term substantial doubt, requires an evaluation every reporting period including interim periods, provides principles for considering the mitigating effect of management’s plans, requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, requires an express statement and other disclosures when substantial doubt is not alleviated, and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The Company will adopt this guidance for the year-ended January 31, 2017, and it will apply to each interim and annual period thereafter. The Company does not expect the adoption to have a material effect on the consolidated financial statements.
In July 2015, the FASB amended authoritative guidance on accounting for the measurement of inventory, codified in ASC 330, Inventory. The amended guidance requires inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company will adopt this guidance on February 1, 2017. Under the current guidance for measuring inventory, the Company recognizes lower-of-cost-or-market adjustments using a definition of market value as net realizable value reduced by an allowance for a normal profit margin. Upon implementation of the new authoritative guidance, market is defined solely as net realizable value. The Company does not anticipate that the adoption of this guidance will have a material effect on the consolidated financial statements.
In February 2016, the FASB amended authoritative guidance on leases, codified in ASC 842, Leases. The amended guidance requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The provisions of this guidance are to be applied using a modified retrospective approach,

9


with elective reliefs, which requires application of the guidance for all periods presented. The Company has not determined the potential effects adoption of this standard will have on the consolidated financial statements.
In March 2016, the FASB amended authoritative guidance on stock-based compensation, codified in ASC 718, Compensation - Stock Compensation. The amended guidance changes the accounting for certain aspects of share-based payments, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statements of cash flows. The Company will adopt this guidance on February 1, 2017. The manner of application varies by the various provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective approach, while others are applied prospectively. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

NOTE 2—INVENTORIES
 
October 31, 2016
 
January 31, 2016
 
(in thousands)
New equipment
$
331,847

 
$
323,393

Used equipment
182,039

 
267,893

Parts and attachments
81,265

 
87,807

Work in process
12,478

 
10,371

 
$
607,629

 
$
689,464

NOTE 3—PROPERTY AND EQUIPMENT
 
October 31, 2016
 
January 31, 2016
 
(in thousands)
Rental fleet equipment
$
131,102

 
$
137,754

Machinery and equipment
22,697

 
23,051

Vehicles
37,397

 
36,537

Furniture and fixtures
39,538

 
38,149

Land, buildings, and leasehold improvements
64,772

 
63,460

 
295,506

 
298,951

Less accumulated depreciation
(125,542
)
 
(115,772
)
 
$
169,964

 
$
183,179

During the third quarter of fiscal 2017, the Company determined that the current period operating loss combined with historical losses and anticipated future operating losses within certain of its stores was an indication that certain long-lived assets of these stores may not be recoverable. The Company performed step one of the impairment analysis for these assets which have a combined carrying value of $6.2 million. In certain cases, for assets with an aggregate carrying value of $2.6 million, the analysis indicated that the carrying value is not recoverable. Accordingly, the Company performed step two of the impairment analysis and estimated the fair value of these assets using estimated selling prices of similar assets. Step two of the analysis indicated that an impairment charge in the amount of $0.3 million was necessary, of which $0.2 million related to the Agriculture segment and $0.1 million related to the Construction segment. In all other cases, in which the aggregate carrying value of such assets totaled $3.6 million, the Company's analyses indicated that the carrying values are recoverable based on its estimates of future undiscounted cash flows under step one of the impairment analysis.

10


NOTE 4—LINES OF CREDIT / FLOORPLAN PAYABLE
Floorplan Lines of Credit
Floorplan payable balances reflect the amount owed for new equipment inventory purchased from a manufacturer and for used equipment inventory, which is primarily acquired through trade-in on equipment sales. Certain of the manufacturers from which the Company purchases new equipment inventory offer financing on these purchases, either offered directly from the manufacturer or through the manufacturers’ captive finance subsidiaries. CNH Industrial America LLC's captive finance subsidiary, CNH Industrial Capital America LLC ("CNH Industrial Capital"), also provides financing of used equipment inventory. The Company also has floorplan payable balances with non-manufacturer lenders for new and used equipment inventory. Cash flows associated with manufacturer floorplan payable are reported as operating cash flows while cash flows associated with non-manufacturer floorplan payable are reported as financing cash flows in the Company's consolidated statements of cash flows. The Company has three significant floorplan lines of credit for U.S. operations, floorplan credit facilities for its foreign subsidiaries, and other floorplan payable balances with non-manufacturer lenders and manufacturers.
In August 2016, as a result of the Company's equipment inventory reduction and related reduction in floorplan financing needs, the Company provided notice to Wells Fargo Bank, National Association of its election to reduce the maximum credit amount available under the Second Amended and Restated Credit Agreement (the "Wells Fargo Credit Agreement") from an aggregate $350.0 million to an aggregate $275.0 million, comprised of a $65.0 million reduction in the Floorplan Payable Line, from $275.0 million to $210.0 million, and a $10.0 million reduction in the Working Capital Line, from $75.0 million to $65.0 million.  Also in August 2016, the Company elected to reduce the maximum credit amount available under its credit facility with DLL Finance LLC ("DLL Finance"), from $110.0 million to $90.0 million.
As a result of the reduction of the maximum credit amount available under the Wells Fargo Credit Agreement, in the third quarter of fiscal 2017, the Company wrote-off $0.6 million of capitalized debt issuance costs. This charge is recorded in other interest expense in the Consolidated Statements of Operations.   
As of October 31, 2016, the Company had discretionary floorplan lines of credit for equipment inventory purchases totaling approximately $856.2 million, which includes a $210.0 million Floorplan Payable Line under the Wells Fargo Credit Agreement, a $450.0 million credit facility with CNH Industrial Capital, a $90.0 million credit facility with DLL Finance and the U.S. dollar equivalent of $106.2 million in credit facilities related to our foreign subsidiaries. Floorplan payables relating to these credit facilities totaled approximately $362.8 million of the total floorplan payable balance of $372.1 million outstanding as of October 31, 2016 and $420.7 million of the total floorplan payable balance of $444.8 million outstanding as of January 31, 2016. The remaining outstanding balances relate to equipment inventory financing from manufacturers and non-manufacturer lenders other than the lines of credit described above. As of October 31, 2016, the interest-bearing U.S. floorplan payables carried various interest rates primarily ranging from 2.74% to 6.09%, and the foreign floorplan payables carried various interest rates primarily ranging from 1.49% to 7.70%.
As of October 31, 2016, the Company had a compensating balance arrangement under one of its foreign floorplan credit facilities which requires a minimum cash deposit to be maintained with the lender in the amount of $5.0 million for the term of the credit facility.
Working Capital Line
As of October 31, 2016, the Company had a $65 million Working Capital Line under the Wells Fargo Credit Agreement. The Company had no amount outstanding on this Working Capital Line as of October 31, 2016 and January 31, 2016.

11


NOTE 5—SENIOR CONVERTIBLE NOTES
The Company’s 3.75% Senior Convertible Notes issued on April 24, 2012 (“Senior Convertible Notes”) consisted of the following:
 
October 31, 2016
 
January 31, 2016
 
(in thousands except conversion
rate and conversion price)
Principal value
$
95,725

 
$
150,000

Unamortized debt discount
(7,024
)
 
(13,946
)
Unamortized debt issuance costs
(947
)
 
(1,909
)
Carrying value of Senior Convertible Notes
$
87,754

 
$
134,145

 
 
 
 
Carrying value of equity component, net of deferred taxes
$
13,800

 
$
15,546

 
 
 
 
Conversion rate (shares of common stock per $1,000 principal amount of notes)
23.1626

 
 
Conversion price (per share of common stock)
$
43.17

 
 
In April and September 2016, the Company repurchased an aggregate of $54.3 million face value ($49.1 million carrying value) of its Senior Convertible Notes with $46.0 million in cash, and recognized a pre-tax gain of approximately $3.1 million, of which $2.1 million was recognized in the first quarter and $1.0 million was recognized in the third quarter of fiscal 2017. These gains are included in other interest expense in the Consolidated Statements of Operations.
The Company recognized interest expense associated with its Senior Convertible Notes as follows:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
(in thousands)
Cash Interest Expense
 
 
 
 
 
 
 
Coupon interest expense
$
996

 
$
1,406

 
$
3,457

 
$
4,219

Noncash Interest Expense
 
 
 
 
 
 
 
Amortization of debt discount
703

 
925

 
2,406

 
2,745

Amortization of transaction costs
100

 
138

 
347

 
412

 
$
1,799

 
$
2,469

 
$
6,210

 
$
7,376

The Senior Convertible Notes mature on May 1, 2019, unless earlier purchased by the Company, redeemed or converted. As of October 31, 2016, the unamortized debt discount will be amortized over a remaining period of approximately 2.5 years. As of October 31, 2016 and January 31, 2016, the if-converted value of the Senior Convertible Notes did not exceed the principal balance. The effective interest rate of the liability component was equal to 7.3% for each of the statements of operations periods presented.

12


NOTE 6—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.
Net Investment Hedges
To protect the value of the Company’s investments in its foreign operations against adverse changes in foreign currency exchange rates, the Company may, from time to time, hedge a portion of its net investment in one or more of its foreign subsidiaries. Gains and losses on derivative instruments that are designated and effective as a net investment hedge are included in other comprehensive income and only reclassified into earnings in the period during which the hedged net investment is sold or liquidated. Any hedge ineffectiveness is recognized in earnings immediately.
Cash Flow Hedges
On October 9, 2013, the Company entered into a forward-starting interest rate swap instrument, which has a notional amount of $100.0 million, an effective date of September 30, 2014 and a maturity date of September 30, 2018. The objective of the instrument is to, beginning on September 30, 2014, protect the Company from changes in benchmark interest rates to which the Company is exposed through certain of its variable interest rate credit facilities. The instrument provides for a fixed interest rate of 1.901% up to the maturity date.
The Company may, from time to time, hedge foreign currency exchange rate risk arising from inventory purchases denominated in Canadian dollars through the use of foreign currency forward contracts. The maximum length of time over which the Company hedges its exposure to the variability in future cash flows associated with the Canadian dollar purchasing is less than 12 months.
The interest rate swap instrument and foreign currency contracts have been designated as cash flow hedging instruments and accordingly changes in the effective portion of the fair value of the instruments are recorded in other comprehensive income and only reclassified into earnings in the period(s) in which the related hedged item affects earnings or the anticipated underlying hedged transactions are no longer probable of occurring. Any hedge ineffectiveness is recognized in earnings immediately.
Derivative Instruments Not Designated as Hedging Instruments
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 following table sets forth the notional value of the Company's outstanding derivative instruments.
 
Notional Amount as of:
 
October 31, 2016
 
January 31, 2016
 
(in thousands)
Cash flow hedges:
 
 
 
Interest rate swap
$
100,000

 
$
100,000

Derivatives not designated as hedging instruments:
 
 
 
Foreign currency contracts
15,844

 
13,148


13


The following table sets forth the fair value of the Company’s outstanding derivative instruments. Asset derivatives are included in prepaid expenses and other in the consolidated balance sheets, and liability derivatives are included in accrued expenses in the consolidated balance sheets.
 
Fair Value as of:
 
October 31, 2016
 
January 31, 2016
 
(in thousands)
Asset Derivatives:
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
Foreign currency contracts
$

 
$
125

Total Asset Derivatives
$

 
$
125

 
 
 
 
Liability Derivatives:
 
 
 
Derivatives designated as hedging instruments:
 
 
 
Cash flow hedges:
 
 
 
Interest rate swap
$
2,012

 
$
2,836

Derivatives not designated as hedging instruments:
 
 
 
Foreign currency contracts
121

 

Total Liability Derivatives
$
2,133

 
$
2,836

The following table sets forth the gains and losses (before the related income tax effects) recognized in other comprehensive income (loss) ("OCI") and income (loss) related to the Company’s derivative instruments for the three and nine months ended October 31, 2016 and 2015, respectively.
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
 
OCI
 
Income (Loss)
 
OCI
 
Income (Loss)
 
OCI
 
Income (Loss)
 
OCI
 
Income (Loss)
 
(in thousands)
 
(in thousands)
Dervatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
Net investment hedges:
 
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$

 
$
12

 
$

 
$

 
$

 
$
333

 
$

Cash flow hedges:
 
 
 
 
 
 
 
 
Interest rate swap (a)
228

 
(333
)
 
(803
)
 
(446
)
 
(272
)
 
(1,064
)
 
(727
)
 
(1,330
)
Foreign currency contracts (b)

 

 

 
(4
)
 

 

 

 
(17
)
Dervatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
Foreign currency contracts (c)

 
126

 

 
(54
)
 

 
112

 

 
751

Total Derivatives
$
228

 
$
(207
)
 
$
(791
)
 
$
(504
)
 
$
(272
)
 
$
(952
)
 
$
(394
)
 
$
(596
)
 
(a) No material hedge ineffectiveness has been recognized. The amounts shown in Income (Loss) above are reclassification amounts from accumulated other comprehensive income and are recorded in floorplan interest expense in the consolidated statements of operations.
(b) Amounts are included in Cost of revenue - equipment in the consolidated statements of operations.
(c) Amounts are included in Interest income and other income (expense) in the consolidated statements of operations.
No components of the Company's net investment or cash flow hedging instruments were excluded from the assessment of hedge ineffectiveness.
As of October 31, 2016, the Company had $2.0 million in pre-tax net unrealized losses associated with its interest rate swap cash flow hedging instrument recorded in accumulated other comprehensive income. The Company expects that $1.2

14


million of pre-tax unrealized losses associated with its interest rate swap will be reclassified into income over the next 12 months.
NOTE 7—FAIR VALUE OF FINANCIAL INSTRUMENTS
The assets and liabilities which are measured at fair value on a recurring basis as of October 31, 2016 and January 31, 2016 are as follows:
 
October 31, 2016
 
January 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
 
(in thousands)
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$

 
$

 
$

 
$

 
$
125

 
$

 
$
125

Total Financial Assets
$

 
$

 
$

 
$

 
$

 
$
125

 
$

 
$
125

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
$

 
$
2,012

 
$

 
$
2,012

 
$

 
$
2,836

 
$

 
$
2,836

Foreign currency contracts

 
121

 

 
121

 

 

 

 

Total Financial Liabilities
$

 
$
2,133

 
$

 
$
2,133

 
$

 
$
2,836

 
$

 
$
2,836

The valuation for the Company's foreign currency contracts and interest rate swap derivative instruments were valued using discounted cash flow analyses, an income approach, utilizing readily observable market data as inputs.
The Company also valued certain long-lived assets at fair value on a non-recurring basis as of January 31, 2016 as part of its long-lived asset impairment testing. The estimated fair value of such assets as of January 31, 2016 was $5.6 million and consisted of real estate assets where fair value was estimated by a professional appraisal of such assets. The real estate appraisals utilized market and income approaches incorporating both observable and unobservable inputs, and are deemed to be Level 3 fair value inputs. In addition, in certain instances as of October 31, 2016 and January 31, 2016, the Company estimated the fair value of certain 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 sales values of such assets were deemed to be nominal. All such fair value measurements were based on unobservable inputs and thus are Level 3 fair value inputs.
The Company also has financial instruments that are not recorded at fair value in its consolidated financial statements. The carrying amount of cash, receivables, payables, short-term debt and other current liabilities approximates fair value because of the short maturity and/or frequent repricing of those instruments, which are Level 2 fair value inputs. Based upon current borrowing rates with similar maturities, which are Level 2 fair value inputs, the carrying value of long-term debt approximates the fair value as of October 31, 2016 and January 31, 2016, respectively. The following table provides details on the Senior Convertible Notes as of October 31, 2016 and January 31, 2016. The difference between the face value and the carrying value of these notes is the result of the allocation between the debt and equity components, and unamortized debt issuance costs. Fair value of the Senior Convertible Notes was estimated based on Level 2 fair value inputs.
 
October 31, 2016
 
January 31, 2016
 
Estimated Fair Value
 
Carrying Value
 
Face Value
 
Estimated Fair Value
 
Carrying Value
 
Face Value
 
(in thousands)
 
(in thousands)
Senior convertible notes
$
85,000

 
$
87,754

 
$
95,725

 
$
105,000

 
$
134,145

 
$
150,000


15


NOTE 8—SEGMENT INFORMATION AND OPERATING RESULTS
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,
 
2016

2015

2016

2015
 
(in thousands)
 
(in thousands)
Revenue
 
 
 
 
 
 
 
Agriculture
$
205,540

 
$
211,302

 
$
538,060

 
$
660,606

Construction
80,789

 
87,023

 
241,922

 
249,601

International
45,937

 
46,650

 
115,477

 
122,154

Total
$
332,266

 
$
344,975

 
$
895,459

 
$
1,032,361

 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
 
 
 
 
Agriculture
$
(1,798
)
 
$
4,219

 
$
(9,881
)
 
$
693

Construction
(105
)
 
1,413

 
(1,523
)
 
(3,089
)
International
604

 
351

 
(88
)
 
(3,074
)
Segment income (loss) before income taxes
(1,299
)
 
5,983

 
(11,492
)
 
(5,470
)
Shared Resources
1,355

 
(269
)
 
1,199

 
1,879

Total
$
56

 
$
5,714

 
$
(10,293
)
 
$
(3,591
)
 
 
October 31, 2016
 
January 31, 2016
 
(in thousands)
Total Assets
 
 
 
Agriculture
$
475,418

 
$
557,579

Construction
264,393

 
294,891

International
127,703

 
109,706

Segment assets
867,514

 
962,176

Shared Resources
52,783

 
85,699

Total
$
920,297

 
$
1,047,875


16


NOTE 9—STORE CLOSINGS AND REALIGNMENT COSTS
Exit costs associated with the Company's store closings and realignment activities are summarized in the following table. Such costs are included in Impairment and Realignment Costs in the consolidated statements of operations.
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
(in thousands)
Agriculture Segment
 
 
 
 
 
 
 
Lease termination costs (a)
$

 
$
(38
)
 
$
(120
)
 
$
223

Employee severance costs

 
(15
)
 

 
225

Impairment of fixed assets, net of gains on asset disposition

 

 

 
10

Asset relocation and other closing costs

 
(34
)
 

 
34

 
$

 
$
(87
)
 
$
(120
)
 
$
492

Construction Segment
 
 
 
 
 
 
 
Lease termination costs (a)
$

 
$
46

 
$
(8
)
 
$
137

Employee severance costs

 
29

 
21

 
362

Impairment of fixed assets, net of gains on asset disposition

 
10

 

 
106

Asset relocation and other closing costs

 
(5
)
 

 
88

 
$

 
$
80

 
$
13

 
$
693

Shared Resource Center
 
 
 
 
 
 
 
Lease termination costs (a)
$

 
$
(12
)
 
$

 
$
37

Employee severance costs

 

 
378

 
187

Impairment of fixed assets, net of gains on asset disposition

 
41

 

 
110

 
$

 
$
29

 
$
378

 
$
334

Total
 
 
 
 
 
 
 
Lease termination costs (a)
$

 
$
(4
)
 
$
(128
)
 
$
397

Employee severance costs

 
14

 
399

 
774

Impairment of fixed assets, net of gains on asset disposition

 
51

 

 
226

Asset relocation and other closing costs

 
(39
)
 

 
122

 
$

 
$
22

 
$
271

 
$
1,519

 
(a) Net of gain on changes in lease termination accrual assumptions
A reconciliation of the beginning and ending exit cost liability balance, which is included in accrued expenses in the consolidated balance sheets, follows:
 
Amount
 
(in thousands)
Balance, January 31, 2016
$
660

Exit costs incurred and charged to expense
 
Lease termination costs
(128
)
Employee severance costs
399

Exit costs paid
 
Lease termination costs
(430
)
Employee severance costs
(399
)
Balance, October 31, 2016
$
102


17


NOTE 10—INCOME TAXES
The Company incurs a provision for income taxes in jurisdictions in which it has taxable income. Generally the Company receives a benefit for income taxes in jurisdictions in which it has taxable losses unless it has recorded a valuation allowance for that jurisdiction. These losses are available to reduce future taxable income in these jurisdictions if earned within the allowable net operating loss carryforward period. The foreign jurisdictions in which the Company operates have net operating loss carryforward periods ranging from five to seven years, with certain jurisdictions having indefinite carryforward periods.
The components of income (loss) before income taxes are as follows:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
(in thousands)
U.S.
$
(547
)
 
$
5,363

 
$
(10,204
)
 
$
(521
)
Foreign
603

 
351

 
(89
)
 
(3,070
)
Total
$
56

 
$
5,714

 
$
(10,293
)
 
$
(3,591
)
A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
U.S. statutory rate
35.0
 %
 
35.0
 %
 
(35.0
)%
 
(35.0
)%
Foreign statutory rates
(406.2
)%
 
(0.2
)%
 
1.2
 %
 
22.4
 %
State taxes on income net of federal tax benefit
4.2
 %
 
4.2
 %
 
(4.2
)%
 
(4.2
)%
Change in valuation allowance
(221.1
)%
 
(11.1
)%
 
(4.4
)%
 
27.8
 %
Tax effect of Ukrainian hryvnia devaluation(a)
55.2
 %
 
6.4
 %
 
2.2
 %
 
(13.3
)%
All other, net
166.7
 %
 
4.7
 %
 
1.4
 %
 
(7.6
)%

(366.1
)%
 
39.0
 %
 
(38.8
)%
 
(9.9
)%
 
(a) Represents the tax impact of differences in foreign currency losses recognized as the result of Ukrainian hryvnia devaluation between Ukrainian taxable income (loss) and financial reporting income (loss).

18


ITEM 2.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report, and the audited consolidated financial statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended January 31, 2016.
 
Overview
We own and operate a network of full service agricultural and construction equipment stores in the United States and Europe. Based upon information provided to us by CNH Industrial N.V. or its U.S. subsidiary CNH Industrial America, LLC, we are the largest retail dealer of Case IH Agriculture equipment in the world, the largest retail dealer of Case Construction equipment in North America and a major retail dealer of New Holland Agriculture and New Holland Construction equipment in the U.S. We operate our business through three reportable segments, Agriculture, Construction and International. Within each segment, we have four principal sources of revenue: new and used equipment sales, parts sales, service, and equipment rental and other activities.
The agriculture industry has been experiencing challenging conditions such as decreases in agricultural commodity prices and net farm income, which, among other things, have a negative effect on customer sentiment and our customers' ability to secure financing for their equipment purchases. Changes in actual or anticipated net farm income generally have a direct correlation with agricultural equipment purchases by farmers. In November of 2016, the U.S. Department of Agriculture ("USDA") published its U.S. farm sector financial indicators. The USDA projected net farm income for 2016 to decrease 34% as compared to the most recent five-year average. These industry conditions have negatively impacted our customer demand, resulting in decreased same-store sales and equipment revenue and an oversupply of equipment inventory in the agriculture industry in fiscal 2017.
Certain of our Construction stores, particularly those in the northern and western parts of our footprint, are impacted by the strength of the oil industry. The significant decrease in oil prices, which began in the third quarter of fiscal 2015 and continued through the first nine months of fiscal 2017, has caused a decrease in oil production and infrastructure activity in these areas. In addition, the aforementioned agriculture industry conditions have also led to a reduction of purchases of construction equipment by customers in the agriculture industry, negatively affecting certain of our Construction stores. These factors have reduced demand for equipment purchases, equipment rentals, and service work and parts, and have caused an oversupply of equipment inventory and rental fleet equipment in these areas.
Our net income including noncontrolling interest was $0.3 million, or $0.01 per diluted share, for the three months ended October 31, 2016, compared to $3.4 million, or $0.16 per diluted share, for the three months ended October 31, 2015. On a non-GAAP basis, adjusted diluted loss per share was $0.01 for the three months ended October 31, 2016, compared to non-GAAP adjusted diluted earnings per share of $0.20 for the three months ended October 31, 2015. See the Non-GAAP Financial Measures section below for a reconciliation of these non-GAAP measures to the most comparable GAAP measures. Significant factors impacting the quarterly comparisons were:
Revenue decreased 3.7% for the third quarter of fiscal 2017, as compared to the third quarter last year, driven by a decrease in same-store sales in both our Agriculture and Construction segments;
Total gross profit margin decreased to 17.6% for the third quarter of fiscal 2017, as compared to 19.5% for the third quarter of fiscal 2016. The decrease in gross profit margin was primarily the result of equipment gross margin compression as we accelerated our used inventory reduction efforts in the third quarter of fiscal 2017 by aggressively retailing used equipment inventories. In addition, a changing mix of equipment sales more heavily weighted towards used equipment revenue in the third quarter of fiscal 2017 also contributed to the lower gross profit margin;
Floorplan interest expense decreased 28.4% in the third quarter of fiscal 2017, as compared to the third quarter last year, primarily due to a decrease in our average interest-bearing inventory in the third quarter of fiscal 2017; other interest expense decreased 46.5% in the third quarter of fiscal 2017, as compared to the third quarter last year, due primarily to a $1.0 million gain recognized in the third quarter of fiscal 2017 related to repurchases of $24.2 million of our Senior Convertible Notes and to the interest savings resulting from that repurchase and the repurchase of $30.1 million of Senior Convertible Notes in April 2016.


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Realignment Costs
We recognized $0.3 million and $1.5 million in realignment costs during the nine months ended October 31, 2016 and 2015, respectively. To better align our cost structure and re-balance staffing levels with the evolving needs of the business, in March 2015, we approved a realignment plan that reduced our headcount by approximately 14%, which included headcount reductions at stores in each of our operating segments and our Shared Resource Center, as well as from the closing of three Agriculture stores and one Construction store. Our remaining stores in each of the respective areas assumed the distribution rights for the CNH Industrial brand previously held by the closed stores. See also the Non-GAAP Financial Measures section below for the impact of these costs on adjusted net income (loss) and adjusted Diluted EPS.
Foreign Currency Remeasurement Losses
In February of 2014, the National Bank of Ukraine terminated the currency peg of the Ukrainian hryvnia ("UAH") to the USD; subsequent to this currency decoupling and as a result of the economic and political conditions present in the country, the UAH experienced significant devaluation from the date the currency peg was terminated through July 2015, and continued to experience more modest volatility through April 2016. We recognized foreign currency remeasurement losses resulting from a devaluation of the UAH totaling $0.2 million and $2.3 million for the nine months ended October 31, 2016 and 2015, respectively. These losses are included in interest income and other income (expense) in our consolidated statements of operations. See also the Non-GAAP Financial Measures section below for impact of these costs on adjusted net income (loss) and adjusted Diluted EPS.
Critical Accounting Policies and Estimates
There have been no material changes in our Critical Accounting Policies and Estimates, as disclosed in our Annual Report on Form 10-K for the year ended January 31, 2016.
Results of Operations
The results shown below include the operating results of any acquisitions made during these periods. The period-to-period comparisons included below are not necessarily indicative of future results. Segment information is provided later in this discussion and analysis of our results of operations.
Same-store sales for any period represent sales by stores that were part of the Company for the entire comparable periods in the current and preceding fiscal years. We do not distinguish relocated or newly-expanded stores in this same-store analysis. Closed stores are excluded from the same-store analysis. Stores that do not meet the criteria for same-store classification are described as excluded stores throughout the Results of Operations section in this Quarterly Report on Form 10-Q.

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Comparative financial data for each of our four sources of revenue are expressed below.
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
 
(dollars in thousands)
 
(dollars in thousands)
Equipment
 
 
 
 
 

 
 

Revenue
$
212,194

 
$
215,692

 
$
570,369

 
$
681,691

Cost of revenue
201,140

 
198,095

 
532,370

 
628,280

Gross profit
$
11,054

 
$
17,597

 
$
37,999

 
$
53,411

Gross profit margin
5.2
%
 
8.2
%
 
6.7
%
 
7.8
%
Parts
 
 
 
 
 
 
 
Revenue
$
69,261

 
$
73,838

 
$
185,106

 
$
197,439

Cost of revenue
48,387

 
51,673

 
130,006

 
138,626

Gross profit
$
20,874

 
$
22,165

 
$
55,100

 
$
58,813

Gross profit margin
30.1
%
 
30.0
%
 
29.8
%
 
29.8
%
Service
 
 
 
 
 
 
 
Revenue
$
33,777

 
$
34,116

 
$
96,065

 
$
99,860

Cost of revenue
11,828

 
12,449

 
35,473

 
36,136

Gross profit
$
21,949

 
$
21,667

 
$
60,592

 
$
63,724

Gross profit margin
65.0
%
 
63.5
%
 
63.1
%
 
63.8
%
Rental and other
 
 
 
 
 
 
 
Revenue
$
17,034

 
$
21,329

 
$
43,919

 
$
53,371

Cost of revenue
12,485

 
15,617

 
32,703

 
39,674

Gross profit
$
4,549

 
$
5,712

 
$
11,216

 
$
13,697

Gross profit margin
26.7
%
 
26.8
%
 
25.5
%
 
25.7
%
The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated:

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Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2016
 
2015
 
2016
 
2015
Revenue
 
 
 
 
 

 
 

Equipment
63.9
 %
 
62.5
 %
 
63.7
 %
 
66.0
 %
Parts
20.8
 %
 
21.4
 %
 
20.7
 %