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EX-32.2 - EXHIBIT 32.2 - Titan Machinery Inc.a10qfy18q2ex322.htm
EX-32.1 - EXHIBIT 32.1 - Titan Machinery Inc.a10qfy18q2ex321.htm
EX-31.2 - EXHIBIT 31.2 - Titan Machinery Inc.a10qfy18q2ex312.htm
EX-31.1 - EXHIBIT 31.1 - Titan Machinery Inc.a10qfy18q2ex311.htm
EX-10.2 - EXHIBIT 10.2 - Titan Machinery Inc.a10qfy18q2ex102.htm
EX-10.1 - EXHIBIT 10.1 - Titan Machinery Inc.a10qfy18q2ex101.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 July 31, 2017
 
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, a smaller reporting company, or an "emerging growth company".  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
 x
 
 
 
 
 
Non-accelerated filer
o
(Do not check if smaller reporting company)
Smaller reporting company
 o
 
 
 
 
 
Emerging growth company
o
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. YES o    NO  x

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 August 31, 2017 was: Common Stock, $0.00001 par value, 22,030,870 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 July 31, 2017 and January 31, 2017
 
Consolidated Statements of Operations for the three and six months ended July 31, 2017 and 2016
 
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended July 31, 2017 and 2016
 
Consolidated Statements of Cash Flows for the six months ended July 31, 2017 and 2016
 
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
Exhibit Index
 
Signatures
 

2


PART I. — FINANCIAL INFORMATION
 
ITEM 1.                FINANCIAL STATEMENTS
 
TITAN MACHINERY INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share data)
 
July 31, 2017
 
January 31, 2017
Assets


 
 
Current Assets
 
 
 
Cash
$
57,526

 
$
53,151

Receivables (net of allowance of $3,158 and $3,630 as of July 31, 2017 and January 31, 2017, respectively)
63,698

 
60,082

Inventories
517,464

 
478,266

Prepaid expenses and other
10,465

 
10,989

Income taxes receivable
6,049

 
5,380

Total current assets
655,202

 
607,868

Noncurrent Assets
 
 
 
Intangible assets, net of accumulated amortization
4,960

 
5,001

Property and equipment, net of accumulated depreciation
160,613

 
156,647

Deferred income taxes
334

 
547

Other
1,312

 
1,359

Total noncurrent assets
167,219

 
163,554

Total Assets
$
822,421

 
$
771,422

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
16,331

 
$
17,326

Floorplan payable
308,025

 
233,228

Current maturities of long-term debt
1,477

 
1,373

Customer deposits
20,769

 
26,366

Accrued expenses and other
28,918

 
30,533

Total current liabilities
375,520

 
308,826

Long-Term Liabilities
 
 
 
Senior convertible notes
70,975

 
88,501

Long-term debt, less current maturities
49,169

 
38,236

Deferred income taxes
3,263

 
9,500

Other long-term liabilities
8,769

 
5,180

Total long-term liabilities
132,176

 
141,417

Commitments and Contingencies


 


Stockholders' Equity
 
 
 
Common stock, par value $.00001 per share, 45,000 shares authorized; 22,031 shares issued and outstanding at July 31, 2017; 21,836 shares issued and outstanding at January 31, 2017

 

Additional paid-in-capital
244,522

 
240,615

Retained earnings
72,977

 
85,347

Accumulated other comprehensive loss
(2,774
)
 
(4,783
)
Total stockholders' equity
314,725

 
321,179

Total Liabilities and Stockholders' Equity
$
822,421

 
$
771,422

 See Notes to Consolidated Financial Statements

3


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Revenue
 
 
 
 
 
 
 
Equipment
$
167,881

 
$
173,301

 
$
335,796

 
$
358,175

Parts
55,580

 
58,336

 
112,163

 
115,845

Service
30,509

 
31,296

 
59,275

 
62,288

Rental and other
14,901

 
15,400

 
25,755

 
26,885

Total Revenue
268,871

 
278,333

 
532,989

 
563,193

Cost of Revenue
 
 
 
 
 
 
 
Equipment
154,729

 
160,906

 
310,246

 
331,230

Parts
39,103

 
41,118

 
79,460

 
81,619

Service
11,444

 
12,045

 
22,238

 
23,645

Rental and other
10,788

 
11,331

 
19,319

 
20,218

Total Cost of Revenue
216,064

 
225,400

 
431,263

 
456,712

Gross Profit
52,807

 
52,933

 
101,726

 
106,481

Operating Expenses
50,523

 
51,487

 
102,510

 
105,989

Restructuring Costs
5,549

 
24

 
7,893

 
271

Income (Loss) from Operations
(3,265
)
 
1,422

 
(8,677
)
 
221

Other Income (Expense)
 
 
 
 
 
 
 
Interest income and other income
682

 
612

 
1,460

 
749

Floorplan interest expense
(2,163
)
 
(3,806
)
 
(4,819
)
 
(7,549
)
Other interest expense
(2,464
)
 
(2,777
)
 
(4,584
)
 
(3,770
)
Loss Before Income Taxes
(7,210
)
 
(4,549
)
 
(16,620
)
 
(10,349
)
Benefit from Income Taxes
(2,024
)
 
(1,847
)
 
(5,502
)
 
(3,789
)
Net Loss Including Noncontrolling Interest
$
(5,186
)
 
$
(2,702
)
 
$
(11,118
)
 
$
(6,560
)
Less: Loss Attributable to Noncontrolling Interest

 
(182
)
 

 
(356
)
Net Loss Attributable to Titan Machinery Inc.
$
(5,186
)
 
$
(2,520
)
 
$
(11,118
)
 
$
(6,204
)
Net Loss Allocated to Participating Securities - Note 1
99

 
51

 
222

 
117

Net Loss Attributable to Titan Machinery Inc. Common Stockholders
$
(5,087
)
 
$
(2,469
)
 
$
(10,896
)
 
$
(6,087
)
Earnings (Loss) per Share - Note 1
 
 
 
 
 
 
 
Earnings (Loss) per Share - Basic
$
(0.24
)
 
$
(0.12
)
 
$
(0.51
)
 
$
(0.29
)
Earnings (Loss) per Share - Diluted
$
(0.24
)
 
$
(0.12
)
 
$
(0.51
)
 
$
(0.29
)
Weighted Average Common Shares - Basic
21,546

 
21,205

 
21,461

 
21,204

Weighted Average Common Shares - Diluted
21,546

 
21,205

 
21,461

 
21,204

 
See Notes to Consolidated Financial Statements


4


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Net Loss Including Noncontrolling Interest
$
(5,186
)
 
$
(2,702
)
 
$
(11,118
)
 
$
(6,560
)
Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
930

 
(435
)
 
1,391

 
319

Unrealized gain (loss) on interest rate swap cash flow hedge derivative instrument, net of tax expense (benefit) of ($142) for the three months ended July 31, 2016, and $19 and ($200) for the six months ended July 31, 2017 and 2016

 
(213
)
 
29

 
(300
)
Reclassification of loss on interest rate swap cash flow hedge derivative instrument included in net loss, net of tax benefit of $68 and $144 for the three months ended July 31, 2017 and 2016, and $394 and $292 for the six months ended July 31, 2017 and 2016
104

 
216

 
592

 
439

Total Other Comprehensive Income (Loss)
1,034

 
(432
)
 
2,012

 
458

Comprehensive Loss
(4,152
)
 
(3,134
)
 
(9,106
)
 
(6,102
)
Comprehensive Loss Attributable to Noncontrolling Interest

 
(147
)
 

 
(333
)
Comprehensive Loss Attributable To Titan Machinery Inc.
$
(4,152
)
 
$
(2,987
)
 
$
(9,106
)
 
$
(5,769
)
 
See Notes to Consolidated Financial Statements


5


TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Six Months Ended July 31,
 
2017
 
2016
Operating Activities
 
 
 
Net loss including noncontrolling interest
$
(11,118
)
 
$
(6,560
)
Adjustments to reconcile net loss including noncontrolling interest to net cash provided by operating activities
 
 
 
Depreciation and amortization
12,268

 
12,828

Deferred income taxes
(4,927
)
 
792

Stock-based compensation expense
1,732

 
1,205

Noncash interest expense
2,139

 
2,616

Unrealized foreign currency gain on loans to international subsidiaries
(1,329
)
 
(413
)
Gain on repurchase of senior convertible notes
(40
)
 
(2,102
)
Other, net
(536
)
 
187

Changes in assets and liabilities
 
 
 
Receivables, prepaid expenses and other assets
(2,340
)
 
(3,731
)
Inventories
(31,981
)
 
13,644

Manufacturer floorplan payable
107,833

 
52,048

Accounts payable, customer deposits, accrued expenses and other and other long-term liabilities
(4,562
)
 
(18,273
)
Income taxes
(262
)
 
8,194

Net Cash Provided by Operating Activities
66,877

 
60,435

Investing Activities
 
 
 
Rental fleet purchases
(10,222
)
 
(2,156
)
Property and equipment purchases (excluding rental fleet)
(7,472
)
 
(2,750
)
Proceeds from sale of property and equipment
2,253

 
1,383

Other, net
78

 
(66
)
Net Cash Used for Investing Activities
(15,363
)
 
(3,589
)
Financing Activities
 
 
 
Net change in non-manufacturer floorplan payable
(38,030
)
 
(66,856
)
Repurchase of senior convertible notes
(19,340
)
 
(24,983
)
Proceeds from long-term debt borrowings
33,000

 

Principal payments on long-term debt
(22,722
)
 
(1,349
)
Loan provided to non-controlling interest holder

 
(2,148
)
Other, net
(482
)
 
(56
)
Net Cash Used for Financing Activities
(47,574
)
 
(95,392
)
Effect of Exchange Rate Changes on Cash
435

 
171

Net Change in Cash
4,375

 
(38,375
)
Cash at Beginning of Period
53,151

 
89,465

Cash at End of Period
$
57,526

 
$
51,090

Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid (received) during the period
 
 
 
Income taxes, net of refunds
$
3

 
$
(12,915
)
Interest
$
7,240

 
$
11,084

Supplemental Disclosures of Noncash Investing and Financing Activities
 
 
 
Net property and equipment financed with long-term debt, accounts payable and accrued expenses and other
$
1,262

 
$
2,381

Net transfer of assets from property and equipment to inventories
$
(1,905
)
 
$
2,065

Acquisition of non-controlling interest through satisfaction of outstanding receivables
$

 
$
4,324


See Notes to Consolidated Financial Statements

6


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 six-month period ended July 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2018. The information contained in the balance sheet as of January 31, 2017 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, 2017 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, impairment of long-lived 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. 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 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.

7


The following table sets forth the calculation of the denominator for basic and diluted EPS:
 
Three Months Ended July 31,

Six Months Ended July 31,
 
2017

2016

2017

2016
 
(in thousands, except per share data)

(in thousands, except per share data)
Basic Weighted-Average Common Shares Outstanding
21,546


21,205


21,461


21,204

Plus: Incremental Shares From Assumed Exercise of Stock Options







Diluted Weighted-Average Common Shares Outstanding
21,546


21,205


21,461


21,204

 
 
 
 
 
 
 
 
Anti-Dilutive Shares Excluded From Diluted Weighted-Average Common Shares Outstanding:
 
 
 
 
 
 
 
Stock Options
133

 
138

 
143

 
148

Shares Underlying Senior Convertible Notes (conversion price of $43.17)
1,748

 
2,777

 
1,748

 
2,777

 
 
 
 
 
 
 
 
Earnings (Loss) per Share - Basic
$
(0.24
)

$
(0.12
)

$
(0.51
)

$
(0.29
)
Earnings (Loss) per Share - Diluted
$
(0.24
)

$
(0.12
)

$
(0.51
)

$
(0.29
)
Recent Accounting Guidance
Accounting guidance adopted
In July 2015, the Financial Accounting Standards Board (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 adopted this guidance on a prospective basis on February 1, 2017. Under the former guidance for measuring inventory, the Company recognized 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 adoption of this guidance did not have a material effect on the Company's 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 adopted this guidance on February 1, 2017. Under the new guidance, excess tax benefits or deficiencies related to share-based compensation that were previously recorded to equity are now recognized as a discrete tax benefit or expense in the statement of operations. The impact on income tax expense (benefit) was not material for the first quarter of fiscal 2018. Excess tax benefits are no longer reclassified out of cash flows from operating activities to financing activities in the statement of cash flows. We elected to apply this cash flow presentation requirement prospectively. The amount of excess tax benefits recognized for the three and six months ended July 31, 2017 and 2016 were not material. Cash paid by an employer when directly withholding shares for tax withholding purposes are required to be classified as a financing activity in the statement of cash flows. This method of presentation is consistent with the Company's historical presentation. Also under the new standard, the Company elected to account for forfeitures of share-based instruments as they occur, as compared to the previous guidance under which the Company estimated the number of forfeitures. The Company applied the accounting change on a modified retrospective basis as a cumulative-effect adjustment to retained earnings as of February 1, 2017. The following table summarizes the impact to the Company’s consolidated balance sheet:
 
As of February 1, 2017
 
Balance Sheet Classification
 
Additional paid-in capital
 
Deferred income tax liability
 
Retained earnings
 
(in thousands)
 
Increase (Decrease)
Impact of cumulative-effect adjustment from adoption of ASU 2016-09
$
2,087

 
$
(835
)
 
$
(1,252
)

8



Accounting guidance not yet adopted
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.
We are in the process of assessing the impact adoption of this standard will have on our consolidated financial statements and related disclosures. Our implementation efforts to date consist of an identification and assessment of our primary revenue streams and performing contract analyses over a sample of contracts within each of our revenue streams. Based on our assessment to date, we do not expect the adoption of this standard to have a material impact on our revenue recognition policies for our equipment, parts or service revenues. ASC 606 does not apply to the recognition of our rental revenues as the accounting for such revenues is governed by other authoritative guidance. We anticipate adopting the standard by use of the modified retrospective approach. In addition, we are continuing to evaluate the changes necessary to our business processes, systems and controls to support recognition and disclosure under the new standard.
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, with elective reliefs, which requires application of the guidance for all periods presented. We anticipate adopting the new standard on February 1, 2019, and expect to elect the package of practical expedients afforded under the guidance, including the use of hindsight to determine the lease term. While we continue to evaluate this standard, we anticipate this standard will have a material impact on our consolidated balance sheets due to the capitalization of a right-of-use asset and lease liability associated with our current operating leases, but do not believe it will have a material impact on our consolidated statements of operations or cash flows.
In May 2017, the FASB amended authoritative guidance on modifications related to stock compensation, codified in ASC 718, Compensation - Stock Compensation. The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. The guidance is effective for the Company as of the first quarter of its fiscal year ending January 31, 2019. The Company does not believe the update will have a material impact on its consolidated financial statements.
NOTE 2—INVENTORIES
 
July 31, 2017
 
January 31, 2017
 
(in thousands)
New equipment
$
305,510

 
$
235,161

Used equipment
135,418

 
160,503

Parts and attachments
74,977

 
81,734

Work in process
1,559

 
868

 
$
517,464

 
$
478,266


9


NOTE 3—PROPERTY AND EQUIPMENT
 
July 31, 2017
 
January 31, 2017
 
(in thousands)
Rental fleet equipment
$
127,884

 
$
124,417

Machinery and equipment
21,618

 
22,255

Vehicles
35,282

 
36,384

Furniture and fixtures
43,388

 
39,875

Land, buildings, and leasehold improvements
61,715

 
59,481

 
289,887

 
282,412

Less accumulated depreciation
(129,274
)
 
(125,765
)
 
$
160,613

 
$
156,647

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's captive finance subsidiary, 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.    
As of July 31, 2017, the Company had discretionary floorplan lines of credit for equipment inventory purchases totaling approximately $741.0 million, which includes a $140.0 million Floorplan Payable Line under its second amended and restated credit agreement with Wells Fargo (the "Wells Fargo Credit Agreement"), a $450.0 million credit facility with CNH Industrial Capital, a $45.0 million credit facility with DLL Finance and the U.S. dollar equivalent of $106.0 million in credit facilities related to our foreign subsidiaries. Floorplan payables relating to these credit facilities totaled approximately $296.2 million of the total floorplan payable balance of $308.0 million outstanding as of July 31, 2017 and $228.3 million of the total floorplan payable balance of $233.2 million outstanding as of January 31, 2017. 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 July 31, 2017, the interest-bearing U.S. floorplan payables carried various interest rates primarily ranging from 3.49% to 6.53%, and the foreign floorplan payables carried various interest rates primarily ranging from 0.92% to 7.23%.
As of July 31, 2017, 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 July 31, 2017, the Company had a $60.0 million Working Capital Line under the Wells Fargo Credit Agreement. The Company had $26.0 million and $13.0 million outstanding on this Working Capital Line as of July 31, 2017 and January 31, 2017. As of July 31, 2017, the Working Capital Line carried an interest rate of 3.73%.
Wells Fargo Credit Agreement
As a result of our ongoing equipment inventory reduction and related reduction in floorplan financing needs, in May 2017, the Company provided notice to Wells Fargo of its election to reduce the maximum credit amount available under the Wells Fargo Credit Agreement from an aggregate $275.0 million to an aggregate $200.0 million, comprised of a $70.0 million reduction in the Floorplan Payable Line, from $210.0 million to $140.0 million, and a $5.0 million reduction in the Working Capital Line, from $65.0 million to $60.0 million.
As a result of the reduction of the maximum credit amount available under the Wells Fargo Credit Agreement, in the second quarter of fiscal 2018, the Company wrote off $0.4 million of capitalized debt issuance costs. This charge is recorded in other interest expense in the Consolidated Statements of Operations.

10


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:
 
July 31, 2017
 
January 31, 2017
 
(in thousands except conversion
rate and conversion price)
Principal value
$
75,470

 
$
95,725

Unamortized debt discount
(3,968
)
 
(6,368
)
Unamortized debt issuance costs
(527
)
 
(856
)
Carrying value of senior convertible notes
$
70,975

 
$
88,501

 
 
 
 
Carrying value of equity component, net of deferred taxes
$
15,192

 
$
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

 
 
For the six months ended July 31, 2017, the Company repurchased an aggregate of $20.3 million face value of its senior convertible notes with $19.3 million in cash.
The Company recognized interest expense associated with its senior convertible notes as follows:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
(in thousands)
Cash Interest Expense
 
 
 
 
 
 
 
Coupon interest expense
$
708

 
$
1,124

 
$
1,491

 
$
2,461

Noncash Interest Expense
 
 
 
 
 
 
 
Amortization of debt discount
540

 
793

 
1,111

 
1,703

Amortization of transaction costs
74

 
114

 
154

 
247

 
$
1,322

 
$
2,031

 
$
2,756

 
$
4,411

The senior convertible notes mature on May 1, 2019, unless purchased earlier by the Company, redeemed or converted. As of July 31, 2017, the unamortized debt discount will be amortized over a remaining period of approximately 1.8 years. As of July 31, 2017 and January 31, 2017, 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 consolidated statements of operations periods presented.

11



NOTE 6—DERIVATIVE INSTRUMENTS
The Company holds derivative instruments for the purpose of minimizing exposure to fluctuations in foreign currency exchange rates and benchmark interest rates to which the Company is exposed in the normal course of its operations.
Cash Flow Hedge
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 interest rate swap instrument was designated as a cash flow hedging instrument and accordingly changes in the effective portion of the fair value of the instrument have been 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.
    In April 2017, the Company elected to terminate its outstanding interest rate swap instrument. The Company paid $0.9 million to terminate the instrument. This cash payment is presented as a financing cash outflow in the consolidated statements of cash flows.
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:
 
July 31, 2017
 
January 31, 2017
 
(in thousands)
Cash flow hedges:
 
 
 
Interest rate swap
$

 
$
100,000

Derivatives not designated as hedging instruments:
 
 
 
Foreign currency contracts
13,300

 
18,021

The following table sets forth the fair value of the Company’s outstanding derivative instruments. Liability derivatives are included in accrued expenses in the consolidated balance sheets.
 
Fair Value as of:
 
July 31, 2017
 
January 31, 2017
 
(in thousands)
Liability Derivatives:
 
 
 
Derivatives designated as hedging instruments:
 
 
 
Cash flow hedges:
 
 
 
Interest rate swap
$

 
$
1,155

Derivatives not designated as hedging instruments:
 
 
 
Foreign currency contracts
238

 
200

Total Liability Derivatives
$
238

 
$
1,355


12



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 six months ended July 31, 2017 and 2016, respectively.
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
 
OCI
 
Income (Loss)
 
OCI
 
Income (Loss)
 
OCI
 
Income (Loss)
 
OCI
 
Income (Loss)
 
(in thousands)
 
(in thousands)
Dervatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
Interest rate swap (a)

 
(172
)
 
(356
)
 
(360
)
 
48

 
(986
)
 
(500
)
 
(731
)
Dervatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
Foreign currency contracts (b)

 
(988
)
 

 
626

 

 
(1,056
)
 

 
(14
)
Total Derivatives
$

 
$
(1,160
)
 
$
(356
)
 
$
266

 
$
48

 
$
(2,042
)
 
$
(500
)
 
$
(745
)
 
(a) No material hedge ineffectiveness has been recognized. The amounts shown in Income (Loss) above are reclassification amounts from accumulated other comprehensive income (loss) and are recorded in floorplan interest expense in the consolidated statements of operations.
(b) Amounts are included in Interest income and other income (expense) in the consolidated statements of operations.
For the three months ended April 30, 2017, the Company reclassified $0.6 million of pre-tax accumulated losses on its interest rate swap instrument from accumulated other comprehensive income (loss) to income as the original forecasted interest payments, which served as the hedged item underlying the interest rate swap instrument, were no longer probable of occurring during the time period over which such transactions were previously anticipated to occur. As of July 31, 2017, the Company had $0.1 million in remaining pre-tax net unrealized losses associated with its interest rate swap cash flow hedging instrument recorded in accumulated other comprehensive income (loss), all of which the Company expects will be reclassified into income over the next 12 months.

13



NOTE 7—FAIR VALUE OF FINANCIAL INSTRUMENTS
The liabilities which are measured at fair value on a recurring basis as of July 31, 2017 and January 31, 2017 are as follows:
 
July 31, 2017
 
January 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
 
(in thousands)
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
$

 
$

 
$

 
$

 
$

 
$
1,155

 
$

 
$
1,155

Foreign currency contracts

 
238

 

 
238

 

 
200

 

 
200

Total Financial Liabilities
$

 
$
238

 
$

 
$
238

 
$

 
$
1,355

 
$

 
$
1,355

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, 2017 as part of its long-lived asset impairment testing. The estimated fair value of such assets as of January 31, 2017 was $3.6 million and consisted of real estate assets and fair value was determined by utilizing market and income approaches incorporating both observable and unobservable inputs, and are deemed to be Level 3 fair value inputs. The most significant unobservable inputs used in the fair value measurements under the market approach include adjustments to observable market sales information to incorporate differences in geographical locations and age and condition of subject assets, and the most significant unobservable inputs under the income approach include forecasted net cash generated from the use of the subject assets and the discount rate applied to such cash flows to arrive at a fair value estimate. In addition, in certain instances as of January 31, 2017, 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 sales values were deemed to be nominal. All such fair value measurements were based on unobservable inputs and thus are Level 3 fair value inputs. No long-lived assets were valued at fair value on a non-recurring basis as of July 31, 2017.
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 July 31, 2017 and January 31, 2017, respectively. The following table provides details on the senior convertible notes as of July 31, 2017 and January 31, 2017. 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.
 
July 31, 2017
 
January 31, 2017
 
Estimated Fair Value
 
Carrying Value
 
Face Value
 
Estimated Fair Value
 
Carrying Value
 
Face Value
 
(in thousands)
 
(in thousands)
Senior convertible notes
$
73,000

 
$
70,975

 
$
75,470

 
$
87,000

 
$
88,501

 
$
95,725


14


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 July 31,

Six Months Ended July 31,
 
2017

2016

2017

2016
 
(in thousands)
 
(in thousands)
Revenue
 
 
 
 
 
 
 
Agriculture
$
138,545

 
$
153,713

 
$
302,170

 
$
332,520

Construction
77,890

 
83,132

 
141,310

 
161,133

International
52,436

 
41,488

 
89,509

 
69,540

Total
$
268,871

 
$
278,333

 
$
532,989

 
$
563,193

 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
 
 
 
 
Agriculture
$
(6,882
)
 
$
(4,325
)
 
$
(10,779
)
 
$
(8,083
)
Construction
930

 
626

 
(1,703
)
 
(1,418
)
International
283

 
(175
)
 
878

 
(692
)
Segment income (loss) before income taxes
(5,669
)
 
(3,874
)
 
(11,604
)
 
(10,193
)
Shared Resources
(1,541
)
 
(675
)
 
(5,016
)
 
(156
)
Total
$
(7,210
)
 
$
(4,549
)
 
$
(16,620
)
 
$
(10,349
)
 
 
July 31, 2017
 
January 31, 2017
 
(in thousands)
Total Assets
 
 
 
Agriculture
$
393,330

 
$
411,726

Construction
238,337

 
221,092

International
137,853

 
106,899

Segment assets
769,520

 
739,717

Shared Resources
52,901

 
31,705

Total
$
822,421

 
$
771,422

NOTE 9—RESTRUCTURING COSTS
In February 2017, to better align the Company's cost structure and business in certain markets, the Company announced a restructuring plan (the "Fiscal 2018 Restructuring Plan"), to close one Construction location and 14 Agriculture locations. As of July 31, 2017, the Company has closed and fully exited all of these locations. The Fiscal 2018 Restructuring Plan is expected to result in a significant reduction of expenses while allowing the Company to continue to provide a leading level of service to its customers. In total, over the term of the Fiscal 2018 Restructuring Plan, the Company anticipates recognizing approximately $15.0 million of restructuring charges consisting primarily of fixed asset impairment charges, lease termination costs and termination benefits. The Company anticipates the restructuring charges to be approximately $10.0 million, $3.0 million and $2.0 million within its Agriculture, Construction and Shared Resources segments.
    

15


Restructuring costs associated with the Company's Fiscal 2018 Restructuring Plan are summarized in the following table. Such costs are included in the restructuring costs line in the consolidated statements of operations. Cumulative amounts reflect restructuring costs recognized to date associated with the Fiscal 2018 Restructuring Plan and include restructuring costs recognized in the fourth quarter of fiscal 2017.
 
Three Months Ended
July 31, 2017

 
Six Months Ended
July 31, 2017
 
Cumulative Amount
 
(in thousands)
Lease accrual and termination costs
$
4,069

 
$
4,322

 
$
4,322

Termination benefits
1,906

 
3,724

 
3,724

Impairment of fixed assets, net of gains on asset disposition
(565
)
 
(565
)
 
2,392

Asset relocation and other costs
139

 
412

 
460

 
$
5,549

 
$
7,893

 
$
10,898

Restructuring charges associated with the Company's Fiscal 2018 Restructuring Plan are summarized by segment in the following table:
 
Three Months Ended
July 31, 2017

 
Six Months Ended
July 31, 2017
 
Cumulative Amount
 
(in thousands)
Segment
 
 
 
 
 
Agriculture
$
5,194

 
$
6,672

 
$
7,775

Construction
252

 
338

 
2,240

Shared Resources
103

 
883

 
883

Total
$
5,549

 
$
7,893

 
$
10,898

A reconciliation of the beginning and ending exit cost liability balance, of which $3.3 million is included in other long-term liabilities and $1.9 million is included in accrued expenses and other in the consolidated balance sheets, follows:
 
Lease Accrual & Termination Costs
 
Termination Benefits
 
Asset Relocation & Other Costs
 
Total
 
(in thousands)
 
 
Balance, January 31, 2017
$

 
$

 
$

 
$

Exit costs incurred and charged to expense
4,322

 
3,418

 
412

 
8,152

Exit costs paid
(536
)
 
(2,000
)
 
(412
)
 
(2,948
)
Balance, July 31, 2017
$
3,786

 
$
1,418

 
$

 
$
5,204

Restructuring charges recognized for the six months ended July 31, 2016 totaled $0.3 million, and for the three months ended July 31, 2016 were not material. These charges were the result of prior cost reduction plans. As of January 31, 2017, these plans were substantially complete.
NOTE 10—RELATED PARTY TRANSACTIONS
Effective February 1, 2017, the Company and Peter Christianson (our former President and former member of our Board of Directors), who is a brother of Tony Christianson (a member of our Board of Directors), agreed to terminate a consulting arrangement between the parties. In connection with the termination, the Company agreed to pay Mr. Peter Christianson the sum of $0.7 million, payable in two equal installments in fiscal 2018 and 2019. All unvested stock options and shares of restricted stock held by Mr. Peter Christianson will continue to vest as scheduled. As a result of the termination agreement, the Company recognized for the six months ended July 31, 2017, a total of $0.8 million in termination costs, consisting of $0.7 million for future cash payments owed to Mr. Peter Christianson and $0.1 million for unvested shares of restricted stock. These termination costs are included in restructuring costs in the consolidated statements of operations.

16


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, 2017
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 low 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 August 2017, the U.S. Department of Agriculture ("USDA") published its U.S. farm sector financial indicators. The USDA projected net farm income for calendar year 2017 to remain relatively flat as compared to calendar year 2016 and decrease 30.4% as compared to the most recent five-year average. These industry conditions have negatively impacted our customer demand, resulting in decreased equipment revenue and an oversupply of equipment inventory in our geographic footprint.
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, continued through 2016, and remained at lower prices in fiscal 2017 and 2018, 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 loss including noncontrolling interest was $5.2 million, or $0.24 per diluted share, for the three months ended July 31, 2017, compared to a net loss including noncontrolling interest of $2.7 million, or $0.12 per diluted share, for the three months ended July 31, 2016. On an adjusted basis, our diluted loss per share was $0.04 for the three months ended July 31, 2017, compared to an adjusted diluted loss per share of $0.12 for the three months ended July 31, 2016. 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 3.4% for the second quarter of fiscal 2018, as compared to the second quarter last year, driven by the result of our store closings associated with our Fiscal 2018 Restructuring Plan, and also impacted by the result of our expanded marketing of aged equipment inventory during fiscal 2017, but partially offset by increased revenues in our International segment.
Total gross profit margin increased to 19.6% for the second quarter of fiscal 2018, as compared to 19.0% for the second quarter of fiscal 2017. The increase in gross profit margin was primarily the result of higher gross profit margins on equipment revenues.
Floorplan interest expense decreased 43.2% in the second quarter of fiscal 2018, as compared to the second quarter last year, primarily due to a decrease in our average interest-bearing inventory in the second quarter of fiscal 2018.
Restructuring costs amounted to $5.5 million in the second quarter of fiscal 2018. See the Fiscal 2018 Restructuring Plan section below for further details.

17


Fiscal 2018 Restructuring Plan
In February 2017, to better align the Company's cost structure and business in certain markets, the Company announced a dealership restructuring plan, which included the anticipated closure of one Construction location and 14 Agriculture locations. As of July 31, 2017, the Company has closed and fully exited all of these locations. The restructuring plan is expected to result in a significant reduction of expenses while allowing the Company to continue to provide a leading level of service to its customers. In total, the Company anticipates recognizing approximately $15.0 million of restructuring charges consisting primarily of fixed asset impairment charges, lease termination costs and termination benefits. The Company recognized $3.0 million of restructuring charges in the fourth quarter of fiscal 2017 and $7.9 million for the six months ended July 31, 2017.
See also the Non-GAAP Financial Measures section below for the impact of these costs on 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, 2017.
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. Comparative financial data for each of our four sources of revenue are expressed below.
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
 
(dollars in thousands)
 
(dollars in thousands)
Equipment
 
 
 
 
 

 
 

Revenue
$
167,881

 
$
173,301

 
$
335,796

 
$
358,175

Cost of revenue
154,729

 
160,906

 
310,246

 
331,230

Gross profit
$
13,152

 
$
12,395

 
$
25,550

 
$
26,945

Gross profit margin
7.8
%
 
7.2
%
 
7.6
%
 
7.5
%
Parts
 
 
 
 
 
 
 
Revenue
$
55,580

 
$
58,336

 
$
112,163

 
$
115,845

Cost of revenue
39,103

 
41,118

 
79,460

 
81,619

Gross profit
$
16,477

 
$
17,218

 
$
32,703

 
$
34,226

Gross profit margin
29.6
%
 
29.5
%
 
29.2
%
 
29.5
%
Service
 
 
 
 
 
 
 
Revenue
$
30,509

 
$
31,296

 
$
59,275

 
$
62,288

Cost of revenue
11,444

 
12,045

 
22,238

 
23,645

Gross profit
$
19,065

 
$
19,251

 
$
37,037

 
$
38,643

Gross profit margin
62.5
%
 
61.5
%
 
62.5
%
 
62.0
%
Rental and other
 
 
 
 
 
 
 
Revenue
$
14,901

 
$
15,400

 
$
25,755

 
$
26,885

Cost of revenue
10,788

 
11,331

 
19,319

 
20,218

Gross profit
$
4,113

 
$
4,069

 
$
6,436

 
$
6,667

Gross profit margin
27.6
%
 
26.4
%
 
25.0
%
 
24.8
%

18


The following table sets forth our statements of operations data expressed as a percentage of total revenue for the periods indicated:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2016
 
2017
 
2016
Revenue
 
 
 
 
 

 
 

Equipment
62.5
 %
 
62.3
 %
 
63.1
 %
 
63.5
 %
Parts
20.7
 %
 
21.0
 %
 
21.0
 %
 
20.6
 %
Service
11.3
 %
 
11.2
 %
 
11.1
 %
 
11.1
 %
Rental and other
5.5
 %
 
5.5
 %
 
4.8
 %
 
4.8
 %
Total Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Total Cost of Revenue
80.4
 %
 
81.0
 %
 
80.9
 %
 
81.1
 %
Gross Profit Margin
19.6
 %
 
19.0
 %
 
19.1
 %
 
18.9
 %
Operating Expenses
18.7
 %
 
18.5
 %
 
19.2
 %
 
18.9
 %
Restructuring Costs
2.1
 %
 
 %
 
1.5
 %
 
 %
Income (Loss) from Operations
(1.2
)%
 
0.5
 %
 
(1.6
)%
 
 %
Other Income (Expense)
(1.5
)%
 
(2.1
)%
 
(1.5
)%
 
(1.8
)%
Loss Before Income Taxes
(2.7
)%
 
(1.6
)%
 
(3.1
)%
 
(1.8
)%
Benefit from Income Taxes
(0.8
)%
 
(0.6
)%
 
(1.0
)%
 
(0.6
)%
Net Loss Including Noncontrolling Interest
(1.9
)%
 
(1.0
)%
 
(2.1
)%
 
(1.2
)%
Less: Loss Attributable to Noncontrolling Interest
 %
 
(0.1
)%
 
 %
 
(0.1
)%
Net Loss Attributable to Titan Machinery Inc.
(1.9
)%
 
(0.9
)%
 
(2.1
)%
 
(1.1
)%
Three Months Ended July 31, 2017 Compared to Three Months Ended July 31, 2016
Consolidated Results
Revenue
 
Three Months Ended July 31,
 

 
Percent
 
2017
 
2016
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Equipment
$
167,881

 
$
173,301

 
$
(5,420
)
 
(3.1
)%
Parts
55,580

 
58,336

 
(2,756
)
 
(4.7
)%
Service
30,509

 
31,296

 
(787
)
 
(2.5
)%
Rental and other
14,901

 
15,400

 
(499
)
 
(3.2
)%
Total Revenue
$
268,871

 
$
278,333

 
$
(9,462
)
 
(3.4
)%
 
The decrease in revenue for the second quarter of fiscal 2018 was primarily the result of our store closings associated with our Fiscal 2018 Restructuring Plan and the impact of incremental revenue associated with our expanded marketing of aged equipment inventory within our Agriculture and Construction segments in the second quarter of fiscal 2017. Approximately $29.8 million of equipment revenue was recognized in the second quarter of fiscal 2017 as the result of our expanded marketing plan. The decrease in Agriculture and Construction segment revenue was partially offset by an increase in revenue in our International segment.

19


Gross Profit
 
Three Months Ended July 31,
 
Increase/
 
Percent
 
2017
 
2016
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Gross Profit
 
 
 
 
 
 
 
Equipment
$
13,152

 
$
12,395

 
$
757

 
6.1
 %
Parts
16,477

 
17,218

 
(741
)
 
(4.3
)%
Service
19,065

 
19,251

 
(186
)
 
(1.0
)%
Rental and other
4,113

 
4,069

 
44

 
1.1
 %
Total Gross Profit
$
52,807

 
$
52,933

 
$
(126
)
 
(0.2
)%
Gross Profit Margin
 
 
 
 
 
 
 
Equipment
7.8
%
 
7.2
%
 
0.6
 %
 
8.3
 %
Parts
29.6
%
 
29.5
%
 
0.1
 %
 
0.3
 %
Service
62.5
%
 
61.5
%
 
1.0
 %
 
1.6
 %
Rental and other
27.6
%
 
26.4
%
 
1.2
 %
 
4.5
 %
Total Gross Profit Margin
19.6
%
 
19.0
%
 
0.6
 %
 
3.2
 %
Gross Profit Mix
 
 
 
 
 
 
 
Equipment
24.9
%
 
23.4
%
 
1.5
 %
 
6.4
 %
Parts
31.2
%
 
32.5
%
 
(1.3
)%
 
(4.0
)%
Service
36.1
%
 
36.4
%
 
(0.3
)%
 
(0.8
)%
Rental and other
7.8
%
 
7.7
%
 
0.1
 %
 
1.3
 %
Total Gross Profit Mix
100.0
%
 
100.0
%
 


 


 
Gross profit for the second quarter of fiscal 2018 was flat with the comparable period last year. The decrease in revenue in the second quarter of fiscal 2018 was offset by higher gross profit margins on equipment revenue as compared to the same period last year. The increase in total gross profit margin from 19.0% for the second quarter of fiscal 2017 to 19.6% for the second quarter of fiscal 2018 was mainly due to higher gross profit margins on equipment revenue.
Our company-wide absorption increased to 80.1% for the second quarter of fiscal 2018 compared to 77.8% during the same period last year as our decrease in gross profit from parts, service and rental and other in fiscal 2018 was more than offset by a reduction in our fixed operating costs and floorplan interest expense.
Operating Expenses
 
Three Months Ended July 31,
 
Increase/
 
Percent
 
2017
 
2016
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Operating Expenses
$
50,523

 
$
51,487

 
$
(964
)
 
(1.9
)%
Operating Expenses as a Percentage of Revenue
18.7
%
 
18.5
%
 
0.2
%
 
1.1
 %
Our operating expenses in the second quarter of fiscal 2018 decreased $1.0 million as compared with the same period last year, which primarily are the result of cost savings arising from our Fiscal 2018 Restructuring Plan. The increase in operating expenses as a percentage of total revenue was primarily due to the decrease in total revenue in the second quarter of fiscal 2018, as compared to the second quarter of fiscal 2017, which negatively affected our ability to leverage our fixed operating costs.
Restructuring Costs
 
Three Months Ended July 31,
 
 
 
Percent
 
2017
 
2016
 
Increase
 
Change
 
(dollars in thousands)
 
 
Restructuring Costs
$
5,549

 
$
24

 
$
5,525

 
n/m

20


The restructuring costs recognized in the second quarters of fiscal 2018 and 2017 are charges associated with the result of our restructuring plans and associated exit costs, including accruals for lease terminations and remaining lease obligations, termination benefits, and the costs associated with relocating certain assets of our closed stores. The Company anticipates recognizing approximately $4.0 million of additional restructuring costs during the remainder of fiscal 2018.
Other Income (Expense)
 
Three Months Ended July 31,
 
Increase/
 
Percent
 
2017
 
2016
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Interest income and other income
$
682

 
$
612

 
$
70

 
11.4
 %
Floorplan interest expense
(2,163
)
 
(3,806
)
 
(1,643
)
 
(43.2
)%
Other interest expense
(2,464
)
 
(2,777
)
 
(313
)
 
(11.3
)%
The decrease in floorplan interest expense for the second quarter of fiscal 2018, as compared to the second quarter of fiscal 2017, was primarily due to a decrease in our average interest-bearing inventory in the second quarter of fiscal 2018. Interest expense associated with our senior convertible notes, which is reflected in other interest expense, decreased $0.7 million in the second quarter of fiscal 2018 compared to the second quarter of fiscal 2017 due to interest savings resulting from our repurchases. Other interest expense includes $0.4 million of debt issuance cost write-offs recognized in the second quarter of fiscal 2018 as a result of our election to reduce the maximum available credit under our Wells Fargo Credit Agreement.
Benefit from Income Taxes
 
Three Months Ended July 31,
 

 
Percent
 
2017
 
2016
 
Increase
 
Change
 
(dollars in thousands)
 
 
Benefit from Income Taxes
$
(2,024
)
 
$
(1,847
)
 
$
177

 
9.6
%
 
Our effective tax rate was 28.1% for the second quarter of fiscal 2018 and 40.6% for the same period last year. The difference in our effective tax rate is primarily due to the change in mix of our domestic and foreign income or losses before income taxes in relation to our total loss before income taxes, and the impact of valuation allowances recognized for deferred tax assets, including net operating losses, in certain of our domestic and international jurisdictions.
Segment Results
Certain financial information for our Agriculture, Construction and International business segments is set forth below. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Revenue between segments is immaterial.
 
Three Months Ended July 31,
 
Increase/
 
Percent
 
2017
 
2016
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 
Revenue
 
 
 
 
 
 
 
Agriculture
$
138,545

 
$
153,713

 
$
(15,168
)
 
(9.9
)%
Construction
77,890

 
83,132

 
(5,242
)
 
(6.3
)%
International
52,436

 
41,488

 
10,948

 
26.4
 %
Total
$
268,871

 
$
278,333

 
$
(9,462
)
 
(3.4
)%
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
 
 
 
 
Agriculture
$
(6,882
)
 
$
(4,325
)
 
$
(2,557
)
 
(59.1
)%
Construction
930

 
626

 
304

 
48.6
 %
International
283

 
(175
)
 
458

 
261.7
 %
Segment income (loss) before income taxes
(5,669
)
 
(3,874
)
 
(1,795
)
 
(46.3
)%
Shared Resources
(1,541
)
 
(675
)
 
(866
)
 
(128.3
)%
Total
$
(7,210
)
 
$
(4,549
)
 
$
(2,661
)
 
(58.5
)%

21


Agriculture 
Agriculture segment revenue for the second quarter of fiscal 2018 decreased 9.9% compared to the same period last year. Same-store sales decreased 0.2% over the second quarter of fiscal 2017. The revenue decrease was primarily due to a decrease in revenue resulting from the impact of our store closings associated with our Fiscal 2018 Restructuring Plan.
Agriculture segment loss before income taxes was $6.9 million for the second quarter of fiscal 2018 compared to a $4.3 million loss before income taxes for the second quarter of fiscal 2017. The increased segment loss before income taxes was largely the result of restructuring charges incurred under our Fiscal 2018 Restructuring Plan, which amounted to $5.2 million in the second quarter of fiscal 2018, but partially offset by operating expense savings as a result of this plan and a decrease in floorplan interest expense as the result of a decrease in our interest-bearing inventory in the second quarter of fiscal 2018. The decrease in segment revenue was largely offset by a higher gross profit margin.
Construction
Construction segment revenue for the second quarter of fiscal 2018 decreased 6.3% compared to the same period last year. The revenue decrease was due to a same-store sales decrease of 5.8% over the second quarter of fiscal 2017, and was primarily the result of decreased equipment revenue, largely resulting from the impact of the incremental revenue associated with our expanded marketing of aged equipment inventory that occurred in the second quarter of fiscal 2017, which totaled $14.0 million, but was partially offset by positive end user demand.
Our Construction segment income before income taxes was $0.9 million for the second quarter of fiscal 2018 compared to $0.6 million for the second quarter of fiscal 2017. The increase in segment results was primarily due to a decrease in floorplan interest expense that was the result of a decrease in our average interest-bearing inventory in the second quarter of fiscal 2018 and a decrease in operating expenses related to cost savings from our restructuring plan. The decrease in expenses was partially offset by decreases in equipment revenues and gross profit. The dollar utilization of our rental fleet decreased slightly from 25.3% in the second quarter of fiscal 2017 to 24.9% in the second quarter of fiscal 2018.
International
International segment revenue for the second quarter of fiscal 2018 increased 26.4% compared to the same period last year primarily due to increased equipment revenue. Equipment revenue increased in the second quarter of fiscal 2018 primarily due to the build-out of our footprint, availability of subvention funds and positive crop conditions in certain of our markets.
Our International segment income before income taxes was $0.3 million for the second quarter of fiscal 2018 compared to loss before income taxes of $0.2 million for the same period last year. The increase in segment income before income taxes was primarily due to the increase in segment revenue as noted above, but partially offset by an increase in operating expenses resulting from the continued build-out of our footprint and presence in our European markets.
Shared Resources/Eliminations
We incur centralized expenses/income at our general corporate level, which we refer to as “Shared Resources,” and then allocate most of these net expenses to our segments. Since these allocations are set early in the year, and a portion is planned to be unallocated, unallocated balances may occur. Shared Resource segment loss before income taxes was $1.5 million for the second quarter of fiscal 2018 compared to loss before income taxes of $0.7 million for the same period last year. For the second quarter of fiscal 2018, loss before income taxes was impacted by $0.4 million in debt issuance cost write-offs as a result of our election to reduce the maximum available credit under our Wells Fargo Credit Agreement.

22


Six Months Ended July 31, 2017 Compared to Six Months Ended July 31, 2016
Consolidated Results
Revenue 
 
Six Months Ended July 31,
 

 
Percent
 
2017
 
2016
 
Decrease
 
Change
 
(dollars in thousands)
 
 

Equipment
$
335,796

 
$
358,175

 
$
(22,379
)
 
(6.2
)%
Parts
112,163

 
115,845

 
(3,682
)
 
(3.2
)%
Service
59,275

 
62,288

 
(3,013
)
 
(4.8
)%
Rental and other
25,755

 
26,885

 
(1,130
)
 
(4.2
)%
Total Revenue
$
532,989

 
$
563,193

 
$
(30,204
)
 
(5.4
)%
The decrease in revenue for the first six months of fiscal 2018 was primarily the result of our store closings associated with our Fiscal 2018 Restructuring Plan and the impact of incremental revenue associated with our expanded marketing of aged equipment inventory within our Agriculture and Construction segments in the second quarter of fiscal 2017. Approximately $46.8 million of equipment revenue was recognized in the first six months of fiscal 2017 as the result of our expanded marketing plan. The decrease in Agriculture and Construction segment revenue was partially offset by an increase in revenue in our International segment.
Gross Profit
 
Six Months Ended July 31,
 
Increase/
 
Percent
 
2017
 
2016
 
(Decrease)
 
Change
 
(dollars in thousands)
 
 

Gross Profit
 
 
 
 
 
 
 
Equipment
$
25,550

 
$
26,945

 
$
(1,395
)
 
(5.2
)%
Parts
32,703

 
34,226

 
(1,523
)
 
(4.4
)%
Service
37,037

 
38,643

 
(1,606
)
 
(4.2
)%
Rental and other
6,436

 
6,667

 
(231
)
 
(3.5
)%
Total Gross Profit
$
101,726

 
$
106,481

 
$
(4,755
)
 
(4.5
)%
Gross Profit Margin
 
 
 
 
 
 
 
Equipment
7.6
%
 
7.5
%
 
0.1
 %
 
1.3
 %
Parts
29.2
%
 
29.5
%
 
(0.3
)%
 
(1.0
)%
Service
62.5
%
 
62.0
%
 
0.5
 %
 
0.8
 %
Rental and other
25.0
%
 
24.8
%
 
0.2
 %
 
0.8
 %
Total Gross Profit Margin
19.1
%
 
18.9
%
 
0.2
 %
 
1.1
 %
Gross Profit Mix
 
 
 
 
 
 
 
Equipment
25.1
%
 
25.3
%
 
(0.2
)%
 
(0.8
)%
Parts
32.2
%
 
32.1
%
 
0.1
 %
 
0.3
 %
Service
36.4
%
 
36.3
%
 
0.1
 %
 
0.3
 %
Rental and other
6.3
%
 
6.3
%
 
 %
 
 %
Total Gross Profit Mix
100.0