SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
___________________________________________
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE
FISCAL YEAR ENDED JANUARY 31,
2020
Commission
File No. 001-33866
___________________________________________
TITAN
MACHINERY INC.
(Exact name of
registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction
of
Incorporation or
Organization)
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No. 45-0357838
(IRS Employer
Identification
No.)
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644 East
Beaton Drive
West Fargo,
ND 58078-2648
(Address of
Principal Executive Offices)
(701) 356-0130
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each
class
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Trading Symbol(s)
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Name of each exchange on which
registered
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Common Stock, $0.00001 par
value per share
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TITN
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The Nasdaq Stock Market
LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
___________________________________________
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
Yes o No x
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No x
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 every
Interactive Data File required to be submitted 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 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 definitions of "large
accelerated filer," "accelerated filer," "smaller reporting
company," and "emerging growth company" in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
x
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Non-accelerated filer
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Smaller reporting company
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Emerging Growth Company
o
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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. o
Indicate by check
mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o No x
The aggregate
market value of our common stock held by non-affiliates as
of July 31, 2019
was
approximately $386.4 million
(based on the last
sale price of $20.74 per share on such date as
reported on the NASDAQ Global Select Market).
The number of
shares outstanding of the registrant's common stock as of
March 31,
2020 was 22,335,152 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the
proxy statement for the registrant's 2020 Annual Meeting of Stockholders
are incorporated by reference into Items 10, 11, 12, 13 and 14
of Part III of this report.
Table of
Contents
We make
available, free of charge, copies of our annual report on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, on our website,
http://www.titanmachinery.com,
as soon as reasonably practicable after filing such material
electronically or otherwise furnishing it to the Securities and
Exchange Commission ("SEC"). We are not including the information
on our website as a part of, or incorporating it by reference into,
this Form 10-K.
ITEM
1. BUSINESS
Our
Company
Titan Machinery
Inc. and its subsidiaries (collectively, "Titan Machinery," the
"Company," "we," or "our") own and operate a network of full
service agricultural and construction equipment stores in the
United States and Europe. We have been an authorized dealer of CNH
Industrial N.V. or its U.S. subsidiaries (collectively referred to
in this Form 10-K as "CNH Industrial") since our inception in
1980. CNH Industrial is a leading manufacturer and supplier of
agricultural and construction equipment, which includes the Case IH
Agriculture, New Holland Agriculture, Case Construction and New
Holland Construction brands. Based upon information provided to us
by CNH Industrial, 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. In addition to the CNH Industrial brands, we
sell and service equipment made by a variety of other
manufacturers.
We operate our
business in three reportable segments, Agriculture, Construction
and International, within which we engage in four principal
business activities:
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new and used equipment
sales;
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equipment repair and
maintenance services; and
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equipment rental and other
activities.
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We offer our
customers a one-stop solution by providing equipment and parts
sales, equipment repair and maintenance services, and rental
functions in each store. Our full service approach provides us with
multiple points of customer contact and cross-selling
opportunities. We believe our mix of equipment sales and recurring
parts and service sales, as well as our diverse geographic
footprint, provide us with diversification, which we believe aids
in reducing the risks we face associated with adverse economic
cycles that affect particular geographic markets or segments. We
also believe our scale, customer service, diverse and stable
customer base, centralized resources, and experienced management
team provide us with a competitive advantage in many of our local
markets.
Throughout
our 39-year operating history, we
have built an extensive, geographically contiguous network
of 74 stores in the U.S.
and 33 stores in Europe. Our
Agriculture stores in the U.S. are located in Iowa, Minnesota,
Nebraska, North Dakota and South Dakota and include several highly
productive farming regions, such as the Red River Valley in eastern
North Dakota and northwestern Minnesota, portions of the corn belt
in Iowa, eastern South Dakota and southern Minnesota, and along the
I-80 corridor in Nebraska, which sits on top of the Ogallala
Aquifer. Our Construction stores are located in Arizona, Colorado,
Iowa, Minnesota, Montana, Nebraska, North Dakota, South Dakota,
Wisconsin and Wyoming. Our International stores are located in the
European countries of Bulgaria, Germany, Romania, Serbia and
Ukraine.
We have a history
of growth through acquisitions. Since January 1, 2003, we have
completed the acquisition of over 50 dealerships located in
11 U.S. states and
four
European
countries, along with establishing new startup operations and a
network of stores in Ukraine. We believe that there will continue
to be opportunities for dealership consolidation in the future, and
we expect that acquisitions will continue to be a component of our
long-term growth strategy.
Products and
Services
Within each of
our segments, we have four principal sources of revenue: new and
used equipment sales, parts sales, equipment repair and maintenance
services, and equipment rental and other business
activities.
New and
Used Equipment Sales
We sell new
agricultural and construction equipment manufactured under the CNH
Industrial family of brands as well as equipment from a variety of
other manufacturers. The used equipment we sell is primarily
acquired through trade-ins from our customers. The agricultural
equipment we sell and service includes machinery and attachments
for uses ranging from large-scale farming to home and garden
purposes. The construction equipment we sell and service includes
heavy construction machinery, light industrial machinery for
commercial and residential construction, road and highway
construction machinery, and mining operations equipment. Equipment
sales generate cross-selling opportunities by populating our
markets with equipment in need of service and parts. Equipment
revenue represented 70.3%, 72.1% and 70.8% of total revenue for the
fiscal years ended January 31,
2020, 2019 and 2018.
Parts
Sales
We maintain an
extensive in-house parts inventory to provide timely parts and
repair and maintenance support to our customers. Our parts sales
provide a relatively stable revenue stream that is less sensitive
to economic cycles than our equipment sales. Parts revenue
represented 17.9%, 16.7% and 17.0% of total revenue for the
fiscal years ended January 31,
2020, 2019 and 2018.
Equipment
Repair and Maintenance Services
We provide repair
and maintenance services, including warranty repairs, for our
customers' equipment. All of our stores have service bays staffed
by trained service technicians. In addition, our technicians are
able to make off-site repairs at customer locations. We provide
proactive and comprehensive customer service by maintaining service
histories for each piece of equipment owned by our customers,
maintaining 24/7 service hours in times of peak equipment usage,
providing on-site repair services, scheduling off-season
maintenance activities with customers, notifying customers of
periodic service requirements and providing training programs to
customers in order to educate them on standard maintenance
requirements. Our after-market repair and maintenance services have
historically provided a high-margin, relatively stable source of
revenue through changing economic cycles. Service revenue
represented 7.6%, 6.9%, and 7.4% of total revenue for the
fiscal years ended January 31,
2020, 2019 and 2018.
Equipment
Rental and Other Business Activities
We rent equipment
to our customers, primarily in the Construction segment, for
periods ranging from a few days to seasonal rentals. We actively
manage the size, quality, age and composition of our rental fleet
and closely monitor and analyze customer demand and rate trends. We
service our fleet through our on-site parts and services team, and
market our rental equipment through our retail sales force. Our
rental activities create cross-selling opportunities in equipment
sales, including rent-to-own purchase options on our non-fleet
rentals.
We provide
ancillary equipment support activities such as equipment
transportation, Global Positioning System ("GPS") signal
subscriptions and other precision farming products, farm data
management products, and CNH Industrial finance and insurance
products.
Equipment rental
and other revenue represented 4.2%, 4.3% and 4.7% of total revenue for the
fiscal years ended January 31,
2020, 2019 and 2018.
Industry
Overview
Agricultural
Equipment Industry
Agricultural
equipment is purchased primarily by commercial farmers for the
production of crops used for food, fiber, feed grain and feedstock
for renewable energy. Agricultural equipment is also purchased by
"life-style farmers" and for home and garden applications, and for
maintenance of commercial, residential and government properties.
Deere & Company ("Deere"), CNH Industrial, and Agco Corporation
("AGCO") are the largest global manufacturers of agricultural
equipment and they each manufacture a full line of equipment and
parts that supply the primary machinery requirements of farmers. In
addition to the major manufacturers, several short-line
manufacturers produce specialized equipment that satisfies various
niche requirements of farmers. Agricultural equipment manufacturers
typically grant dealers in the U.S. defined sales and marketing
territories with designated store locations to distribute their
products.
We believe there
are many factors that influence demand for agricultural equipment,
parts and repair and maintenance services, including net farm
income, commodity markets, production yields, tariffs and trade
policies, interest rates, government policies, European Union
subvention funds and individual European country subsidies, tax
policies, local growing conditions, and general economic
conditions. Any of these conditions can change materially in a
short time period, creating volatility in demand for our products
and services. Federal legislation, such as the Farm Bill, attempts
to stabilize the agriculture industry through various policies
including (i) commodity programs consisting of direct,
counter-cyclical and price support payments to farmers;
(ii) conservation programs; (iii) crop insurance
programs; and (iv) disaster relief programs. For the past two
growing seasons, the U.S. Federal government has furnished market
facilitation program payments to farmers or ranchers to compensate
for the adverse impact of U.S.-China trade policies, which payments
have assisted our customers. We believe that these various federal
policies reduce financial volatility in the agriculture industry
and assist farmers in continuing to operate their farms during
economic down cycles and through the adverse headwinds caused by
trade policies and tariffs.
Construction
Equipment Industry
Construction
equipment is purchased primarily for use in commercial, residential
and infrastructure construction, as well as for agriculture,
demolition, mining, energy production and forestry operations.
Caterpillar, Inc., Deere, Komatsu Ltd.,
the Volvo Group,
Terex Corporation, Doosan, and CNH Industrial are some of the
largest global manufacturers of construction and industrial
equipment. The market for construction equipment is segmented
across multiple categories including earth moving, lifting, light
industrial, asphalt and paving, and concrete and aggregate
equipment. As with agricultural equipment, distribution of
construction equipment in the U.S. is accomplished primarily
through manufacturer authorized dealers.
CNH Industrial
and industry reports show that demand for construction equipment in
our markets is driven by several factors, including (i) public
spending on roads, highways, sewer and water projects, and other
public works projects; (ii) public and private expenditures
for the energy and mining industries, which are driven in part by
demand for fossil fuels, metals and other commodities; (iii)
business conditions in the agriculture industry; and
(iv) general economic and market conditions of the
construction sector for residential and commercial
buildings.
Business
Strengths
We believe the
following attributes are important factors in our ability to
compete effectively and to achieve our long-term financial
objectives:
Centralized
Inventory Management
We believe our
significant scale enables us to centrally manage our inventory,
permitting us to more effectively manage inventory levels at each
store while still providing a significant breadth of equipment and
parts inventories to our customers throughout our footprint.
Moreover, our floorplan financing capacity enables us to
opportunistically purchase and carry inventory to satisfy market
demands.
Superior
Customer Service at the Local Level
Our
centralization of numerous administrative functions better
positions our employees in the field to focus on customer service.
We believe that the following capabilities enable us to better
service our customers:
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our ability to staff a large
number of highly-trained service technicians across our network of
stores, which makes it possible to schedule repair services on
short notice without affecting our technician utilization
rates;
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our ability to staff and
leverage product and application specialists across our network of
stores, which makes it possible to offer valuable pre-sale and
aftermarket services, including equipment training, best practices
education and precision farming technology support;
and
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our ability to innovate and
lead our industry through initiatives such as precision farming and
farm data management products and services, which provide our
customers with the latest advances in technology and operating
practices.
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We spend
significant time and resources training our employees to
effectively service our customers in each of our local markets. Our
training program involves active participation in all
manufacturer-sponsored training programs, the use of industry
experts for customized training programs, and a centralized
training team to assist in training programs and the integration of
newly-acquired dealerships. We also partner with several technical
colleges to sponsor students who we plan to eventually employ as
service technicians.
Ability to
Act on Acquisition Opportunities
We believe that
our experienced management team and access to capital enables us to
be opportunistic in responding to accretive growth opportunities,
primarily arising from the continued consolidation of the dealer
network.
Superior
Centralized Marketing Systems
Our shared
resource group includes a professional marketing team that supports
all aspects of brand and solution awareness, customer analytics and
targeting, and lead generation through multichannel campaigns that
typically incorporate digital marketing (email, website, search,
social and syndication), direct mail, and regional and local
advertising and sponsorships. Our marketing functions also drive
increased customer engagement and loyalty through participation in
trade shows and industry events and communication and coordination
for local store open houses, service clinics, equipment
demonstrations, product showcases and customer appreciation
outings.
Ability to
Attract and Retain Superior Employees.
We recognize that
attracting and retaining talented employees is essential to
achieving outstanding company performance. We strive to develop our
employees through a structured training program, and to invest in
our employees' development. In addition, we strive to implement a
compensation system that rewards employees for high performance. We
believe that our efforts in these areas will enable us to attract
and retain superior employees, necessary for us to be successful in
our industry.
Diverse and
Stable Customer Base Reduces Market Risk
Our large
geographic footprint covering 11 U.S. states and five European
countries provides a diversified customer base. We believe that
this diverse customer base reduces the potential impact of risks
associated with customer concentration and fluctuations in local
market conditions. During fiscal 2020, none of our customers
accounted for more than 1.0% of our total revenue. Revenue
from customers located outside of the United States is primarily
included in our International segment, which represented
18.1%, 18.4% and 17.5% of total consolidated revenue
during fiscal 2020, 2019 and 2018. In addition, our large
geographic footprint enables us to capitalize on crop
diversification and disparate weather in growing regions, as well
as local trends in residential, infrastructure and commercial
construction.
Experienced
Management Team
Our executive
team is led by David Meyer, our Board Chair and Chief Executive
Officer, who has over 40 years of industry experience. Our other
executive team members, managers in the field, and equipment sales
consultants also have extensive knowledge and experience in our
industry. We compensate, develop and review our managers and sales
employees based on an approach that aligns their incentives with
the goals and objectives of our Company, including achievement of
revenue, profitability, market share and balance sheet objectives.
We believe the strength of our management team will improve our
success in the marketplace.
Growth
Strategy
We pursue the
following growth strategies:
Increasing
Same-Store Sales and Market Share
Increasing
same-store sales and market share is one of our priorities. This
type of growth both enhances our current period revenue and
increases our potential future revenue during the life of the sold
equipment as a result of the potential for recurring parts and
service business. We seek to generate growth in same-store sales
and market share through the following:
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employing significant
marketing and advertising programs, including targeted direct
mailings, internet based marketing, advertising with targeted local
media outlets, participation in and sponsorship of trade shows and
industry events, our Titan Trader monthly magazine, and by hosting
open houses, service clinics, equipment demonstrations, product
showcases and customer appreciation outings;
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supporting and providing
customers with training on evolving technologies, such as precision
farming and farm data management, which are difficult for small
dealers to support;
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maintaining state-of-the-art
service facilities, mobile service trucks and trained service
technicians to maximize our customers' equipment uptime through
preventative maintenance programs and seasonal 24/7 service
support; and
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centrally managing our
inventory to optimize the availability of equipment and parts for
our customers.
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Strategic
Acquisitions
Since January 1,
2003, we have completed the acquisition of over 50 dealerships
located in 11 U.S. states and
four
European
countries. In addition, we have added dealership locations in
Ukraine through new start-up operations. The agricultural and
construction equipment industries are fragmented and consist of
many relatively small, independent businesses serving discrete
local markets. We believe a favorable climate for dealership
consolidation will continue to exist in the future due to several
factors, including the competitiveness of our industry, increased
dealer capitalization requirements, increased sophistication and
complexity of equipment and related technologies, increased
expectations from our customers and our equipment suppliers, and
the lack of succession alternatives for many current owners. We
intend to pursue acquisitions with the objectives of entering new
markets, consolidating distribution within our existing footprint,
and strengthening our competitive position. We expect that
opportunistic acquisitions will continue to be a component of our
long-term growth strategy.
We regularly
assess the acquisition landscape, evaluating potential acquisitions
in terms of availability and alignment to our long-term growth
strategy. Typically, we have acquired only the working capital and
fixed assets that we believe are necessary to run an efficient
store and we do not generally assume any indebtedness. On occasion,
we have acquired all of the outstanding equity of a company.
Acquisitions are typically financed with available cash balances,
floorplan payable line of credit capacity, and long-term
debt.
The consent of
CNH Industrial is required to acquire any CNH Industrial
dealership. Additionally, the consent of our lender group,
consisting of a number of national and regional banks (the "Bank
Syndicate"), is required for acquisitions meeting certain
thresholds or other criteria as defined in our credit agreement
(which credit agreement was formerly referred to
as the "Wells
Fargo Credit Agreement"). Effective as of April 3,
2020, we
amended and restated the Wells Fargo Credit Agreement, which we now
refer to as the "Bank Syndicate Credit Facility."
Suppliers
CNH
Industrial—Case IH Agriculture, Case Construction, New Holland
Agriculture and New Holland Construction
CNH Industrial is
a publicly-traded, global leader in the agricultural and
construction equipment industries. In 2019, CNH Industrial
generated $13.7 billion
in revenue from
its equipment operations. CNH Industrial is the world's second
largest manufacturer of agricultural equipment, manufacturing the
Case IH Agriculture and New Holland Agriculture brands of
equipment. Case IH Agriculture, recognized by the red color of its
equipment, possesses over 170 years of farm equipment
heritage. New Holland Agriculture, recognized by the blue color of
its tractors and the yellow color of its harvesting and hay
equipment, has over 120 years of farm equipment industry
experience. The Case Construction and New Holland Construction
brands are owned and operated by CNH Industrial.
In fiscal
2020, CNH Industrial supplied
approximately 74% of the new equipment sold in
our Agriculture segment, 70% of the new equipment sold in
our Construction segment, and 62% of the new equipment sold in
our International segment. In addition, CNH Industrial provides
financing and insurance products and services to our end-user
customers through its affiliate CNH Industrial Capital America, LLC
("CNH Industrial Capital").
Our relationship
with CNH Industrial is more than a typical supply relationship; it
is strategic for both our Company and CNH Industrial. In that
regard, we believe that it is in each company's interest to
maintain and develop the longstanding strong relationship we
share.
Dealership
Agreements
We have entered
into separate dealership agreements with CNH Industrial to sell and
service the Case IH Agriculture, New Holland Agriculture, Case
Construction and New Holland Construction brands (collectively the
“CNH Industrial Dealer Agreements”). Separate CNH Industrial Dealer
Agreements exist for each of our North American stores or store
complexes, and for each of the European countries in which we
operate. The structure of the North American and European
agreements are very similar. Except as noted, the following
discussion describes the North American CNH Industrial Dealer
Agreements.
Each of the CNH
Industrial Dealer Agreements assign to us a geographically defined
area of primary responsibility, providing us with distribution and
product support rights within the identified territory for specific
equipment products. Although the dealer appointment is
non-exclusive, in each territory there is typically only one dealer
responsible for retail sales to end-users and for after-sales
product support of the equipment. If we sell certain CNH Industrial
construction equipment outside of our designated sales and service
areas, CNH Industrial has the right to require that we pay sales
and service fees for purposes of compensating the dealer assigned
to such territory. We are authorized to display and use CNH
Industrial trademarks and trade names at our stores, with certain
restrictions.
Under our CNH
Industrial Dealer Agreements, we have both the right and obligation
to sell CNH Industrial equipment and related parts and products and
to provide customers with repair services. The CNH Industrial
Dealer Agreements impose various requirements on us regarding the
location and appearance of facilities, satisfactory levels of new
equipment and parts inventories, the training of personnel,
adequate business enterprise and information technology system,
adequate working capital, a maximum adjusted debt to tangible net
worth ratio, development of annual sales and marketing goals, and
furnishing of monthly and annual financial information to CNH
Industrial. We must obtain the approval or consent of CNH
Industrial in the event of proposed fundamental changes to our
ownership, governance or business structure (defined as "change in
control" events) including, among other things, (i) a merger,
consolidation or reorganization, unless securities representing
more than 50% of the total combined voting power of the successor
corporation are immediately owned, directly or indirectly, by
persons that owned our securities prior to the transaction; (ii) a
sale of all or substantially all of our assets; (iii) any
transaction or series of transactions resulting in a person or
affiliated group acquiring 30% or more of the combined voting power
of our securities or, in the case of a competitor of CNH
Industrial, 20% or more of the combined voting power of our
securities; (iv) a substantial disposition of shares of our common
stock by certain named executives; (v) certain significant changes
in the composition of our Board of Directors; and (vi) replacement
of our Chief Executive Officer. The CNH Industrial Dealer
Agreements do not establish mandatory minimum or maximum retail
pricing for our equipment, parts, or service
offerings.
The Case IH
Agricultural dealership agreement and the Case Construction
dealership agreement have fixed terms expiring on December 31,
2027, and renew automatically for successive 5-year terms unless
either party notifies the other party of its intention not to renew
or otherwise exercises its termination rights under the agreement.
The New Holland dealership agreement is a 12-month agreement, with
automatic 1-year renewals unless either party notifies the other
party of its intention not to renew or otherwise exercises its
termination rights under the agreement.
CNH Industrial
has the right to terminate its dealer agreements with us
immediately in certain circumstances, including in the event of (i)
our insolvency or bankruptcy, (ii) a material breach by us of the
provisions of a CNH Industrial Dealer Agreement or (iii) our
failure to secure the consent of CNH Industrial prior to the
occurrence of a “change in control” event. The CNH Industrial
Dealer Agreements governing Case Construction equipment grants CNH
Industrial the right to terminate these CNH Industrial Dealer
Agreements for any reason upon 120 days prior written notice. In
addition, we have the right to terminate any of the CNH Industrial
Dealer Agreements at any time, with or without cause, upon 60 days
prior written notice. Subject to protections provided under state
dealer protection laws, in the event that CNH Industrial offers a
new dealer agreement or an amendment to the existing CNH Industrial
Dealer Agreements to all authorized CNH Industrial dealers located
in the state, CNH Industrial is permitted to terminate our existing
CNH Industrial Dealer Agreements for stores located in that state
upon at least 180 days prior written notice if we refuse or
otherwise fail to enter into such new agreements or amendments. In
addition, to the extent CNH Industrial determines that we are not
meeting our obligations under the CNH Industrial Dealer Agreement
with respect to a particular product, CNH Industrial may, upon 60
days prior written notice to us, remove such product from the
authorized product list allowed to be sold or serviced by us. In
the event of termination of any of the CNH Industrial Dealer
Agreements, CNH Industrial is obligated to repurchase the inventory
of the CNH Industrial brand applicable to the agreement being
terminated. The CNH Industrial Dealer Agreements generally do not
include non-compete provisions that apply during or after the term
of such agreements or limit our operations apart from our
designated CNH Industrial dealership store locations. Our CNH
Dealer Agreements for Case Construction equipment, absent consent
of CNH Industrial, restrict our ability to sell competing products
(new equipment and parts) of other manufacturers at our Case
dealership store locations during the term of such agreements. Our
CNH Industrial Dealer Agreements require us to operate any material
business activities not related to sales of CNH Industrial products
or services to customers in agricultural, construction, industrial
or similar markets separately from our CNH Industrial dealership
business.
The CNH
Industrial Dealer Agreements and industry practices generally
provide that payment on equipment and parts purchased from CNH
Industrial entities is due within 30 days, at which time the
equipment inventory is then financed through one of our floorplan
payable credit facilities. CNH Industrial makes available to us any
floorplan programs, parts return programs, sales or incentive
programs or similar plans or programs it offers to its other
dealers, and provides us with promotional items and marketing
materials.
The CNH
Industrial Dealer Agreements for our European operations, with the
exception of Ukraine, grant to us exclusive territories. We are
restricted in our ability to sell competing products in our
assigned territories. Our CNH Dealer Agreements of our European
operations do not have a fixed term. CNH Industrial can terminate
these agreements immediately in certain circumstances constituting
cause, and for any reason upon twenty-four (24) months' prior
written notice.
Other
Suppliers
In addition to
products supplied by CNH Industrial, we sell a variety of new
equipment and parts supplied by other manufacturers. These products
tend to address specialized niche markets and complement the CNH
Industrial products we sell by filling gaps in the CNH Industrial
line of products. We believe our offering of products for
specialized niche markets supports our goal of being a one-stop
solution for our customers' equipment needs at each of our stores.
Approximately 30% of our total new equipment
sales in fiscal 2020 resulted from sales of
products manufactured by companies other than CNH Industrial, with
our single largest manufacturer other than CNH Industrial
representing approximately 2% of our total new equipment
sales. The terms of our arrangements with these other suppliers
vary, but most of the dealership agreements contain termination
provisions allowing the supplier to terminate the agreement after a
specified notice period, which is typically 30 days. Payment
and financing practices with these other suppliers are similar to
those practices described above with respect to the CNH Industrial
entities.
Customers
Our North America
agriculture customers vary from small, single machine owners to
large farming operations, primarily in the states of Iowa,
Minnesota, Nebraska, North Dakota and South Dakota. In
fiscal 2020, no single agriculture
customer accounted for more than 1.0% of our Agriculture
revenue.
Our Construction
customers include a wide range of construction contractors, public
utilities, mining, forestry, energy companies, farmers,
municipalities and maintenance contractors, primarily in the states
of Arizona, Colorado, Iowa, Minnesota, Montana, Nebraska, North
Dakota, South Dakota, Wisconsin and Wyoming. They vary in size from
small, single machine owners to large firms. In fiscal
2020, no single construction
equipment customer accounted for more than 2.0% of our Construction
revenue.
Our International
customers vary from small, single machine owners to large farming
operations, primarily in the European countries of Bulgaria,
Germany, Romania, Serbia and Ukraine. We also sell Case
construction equipment in Bulgaria and Romania. In fiscal
2020, no single international
customer accounted for more than 3.0% of our International
revenue.
Floorplan
Payable Financing
We attempt to
maintain at each store, or have readily available at other stores
in our network, sufficient new equipment inventory to satisfy
customer demand. Inventory levels fluctuate throughout the year and
tend to increase before the primary sales seasons for agricultural
equipment. The cost of floorplan payable financing is an important
factor affecting our financial results.
CNH Industrial
Capital offers floorplan payable financing to CNH Industrial
dealers to finance the purchase of inventory from CNH Industrial
and for used equipment inventory purchased on trade-ins from our
customers. CNH Industrial Capital provides this financing in part
to enable dealers to carry representative inventories of equipment
and encourage the purchase of goods by dealers in advance of
seasonal retail demand. CNH Industrial Capital charges variable
market rates of interest based on the prime rate on balances
outstanding after any interest-free periods and receives a security
interest in inventory and other assets. Interest-free periods are
generally about four months in duration for both new and used
agriculture and construction equipment. As of January 31,
2020, we
had a $450.0 million
floorplan credit
facility with CNH Industrial Capital.
In addition to
the CNH Industrial Capital floorplan line of credit, as of
January 31,
2020, we
also had a $140.0 million
wholesale
floorplan line of credit under the Wells Fargo Credit Agreement,
and a
$60.0 million credit facility with DLL
Finance LLC that can be used to finance inventory purchases.
Effective as of April 3,
2020, we
amended and restated the Wells Fargo Credit Agreement (hereafter
referred to as the "Bank Syndicate Credit Facility"), under which
we have total borrowing capacity of $250.0 million, $185.0 million
allocated to a floorplan line and $65.0 million allocated to an
operating line. In addition, we have other lines of credit offered
by various financial institutions as well as floorplan payable
financing programs offered by manufacturers and suppliers, or their
third party lenders, from which we purchase equipment
inventory.
Sales and
Marketing
We currently
market our products and services through:
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our sales employees, who
operate out of our network of local stores and call on customers in
the markets surrounding each store;
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our area product support
managers, and our store parts managers and service managers, who
provide our customers with comprehensive after-market
support;
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local and regional
advertising efforts, including broadcast, cable, print and
web-based media; and
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alternative channels, such as
auctions, for selling our aged equipment inventories.
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Equipment
Sales Consultants and Centralized Support
Our equipment
sales employees (who we refer to as "equipment sales consultants")
perform a variety of functions, such as servicing customers at our
stores, calling on existing customers, and soliciting new business
at farming, construction and industrial sites. We develop
customized marketing programs for our sales force by analyzing each
customer group for profitability, buying behavior and product
selection. All members of our sales force are expected to
participate in internal and external manufacturer-sponsored
training sessions to develop product and application knowledge,
sales techniques and financial acumen. Our shared resources group
provides centralized sales and marketing support for our field
operations, and coordinates centralized media buys, strategic
planning, sales support and training. In addition, we enable our
regional and area managers and their sales teams to develop
localized sales and marketing strategies.
Parts
Managers and Service Managers
Our parts
managers and service managers are involved in our efforts to market
parts and service, taking advantage of our seasonal marketing
campaigns in parts and service sales. As a group, they have won
multiple awards from our suppliers for their efforts benefiting
both our customers and our key suppliers.
Website
Our used
equipment inventories are marketed on our website,
www.titanmachinery.com,
through an
equipment search feature which allows users to search by equipment
type, manufacturer, price and/or store. A picture of each piece of
equipment is shown, along with the equipment specifications, price
and store location. Parts manufactured by the CNH Industrial brands
are marketed and can be purchased directly through our website.
Other sales and financing programs are also marketed through our
website. Finally, our website provides dealer locater search
functions and provides the contact information for the various
departments at each of our stores.
Print,
Broadcast and Web-Based Advertising Campaigns
Each year we
initiate several targeted direct mail, print and broadcast
advertising and marketing campaigns. CNH Industrial and other
suppliers periodically provide us with advertising funds, which we
primarily use to promote new equipment, parts and financing
programs. We will continue to explore and launch additional sales
channels as appropriate, including, for example, additional
internet-based efforts.
Channels
for Selling Aged Equipment Inventory
In certain
circumstances, we sell aged equipment inventories through the use
of alternative channels such as onsite and online
auctions.
Competition
The agricultural
and construction equipment sales and distribution industries are
highly competitive and fragmented, with large numbers of companies
operating on a regional or local scale. Our competitors range from
multi-location, regional operators to single-location dealers and
include dealers and distributors of competing equipment brands,
including Deere, Caterpillar and the AGCO brands, as well as other
dealers and distributors of the CNH Industrial family of brands.
Competition among equipment dealers, whether they offer
agricultural or construction products or both, is primarily based
on the price, value, reputation, quality and design of the
products, customer service including repair and maintenance service
provided by the dealer, the availability of equipment and parts,
and the accessibility of stores. While we believe we compete
favorably on each of these competitive factors, our sales and
margins may be impacted by (i) aggressive pricing competition
by equipment manufacturers or their dealers, (ii) our ability to
obtain higher service margins based on our service quality and
reputation, and (iii) our ability to attract new and maintain
existing customers based on the availability and quality of the
products we offer and our local relationships and
reputation.
We are one of the
established regional-scale agricultural and construction equipment
dealers in the U.S. and Europe. The number of other agricultural
and construction equipment dealers operating on a regional scale is
limited. Our primary regional-scale competitors include RDO
Equipment Co., Butler Machinery, Ziegler Inc., Brandt
Holdings Co., Wagner Equipment Co., 21st Century Equipment,
LLC, AKRS Equipment, C & B Operations, LLC, and Van Wall
Equipment.
Corporate
Information
We were
incorporated as a North Dakota corporation in 1980 and
reincorporated in Delaware in December 2007 prior to our initial
public offering. Our executive offices are located at 644 East
Beaton Drive, West Fargo, ND 58078-2648. Our telephone number
is (701) 356-0130. We maintain a website at
www.titanmachinery.com. Our SEC filings are
available on the Investor Relations page of our website or at
www.sec.gov.
Intellectual
Property
We have
registered trademarks for certain names and designs used in our
business and have trademark applications pending for certain
others. We generally operate each of our stores under the Titan
Machinery name. Case IH, Case and New Holland are registered
trademarks of CNH Industrial, which we use in connection with
advertisements and sales as authorized under our CNH Industrial
Dealer Agreements. We also license trademarks and trade names from
other suppliers of equipment to us.
Product
Warranties
Product
warranties for new equipment and parts are provided by the original
equipment manufacturer ("OEM"). The term and scope of these
warranties vary greatly by OEM and by product. At the time
equipment is purchased, we also offer customers the option of
purchasing extended warranty protection provided by the OEM or
through various third-party warranty providers. We are paid by the
OEM for repairs we perform on equipment under warranty. We
generally sell used equipment "as is" and without OEM warranty
unless the original warranty period has not expired and is
transferable. We also offer extended warranty programs on certain
used equipment through various third-party warranty
providers.
Seasonality
& Weather
The agricultural
and construction equipment businesses are highly seasonal, which
causes our quarterly results and our cash flow to fluctuate during
the year. Our customers generally purchase and rent equipment in
preparation for, or in conjunction with, their busy seasons. For
farmers, the busy seasons are spring planting and fall harvesting.
For Construction customers, the busy season is typically the second
and third quarters of our fiscal year for much of our Construction
footprint, subject to weather conditions. Our parts and service
revenues are typically highest during our customers' busy seasons
as well, due to the increased use of their equipment during this
time, which generates the need for more parts and service work.
Weather
conditions impact
the timing of our customers' busy times, which may cause our
quarterly financial results to differ between fiscal years. In
addition, the fourth quarter typically is a significant period for
equipment sales in the U.S. because of our customers’ year-end tax
planning considerations, the timing of dealer incentives and the
increase in availability of funds from completed harvests and
construction projects.
Seasonal weather
trends, particularly severe wet or dry conditions, can have a
significant impact on regional agricultural and construction market
performance by affecting crop production yields and the ability to
undertake construction projects. Weather conditions that adversely
affect the agricultural or construction markets would have a
negative effect on the demand for our products and
services.
In addition,
numerous external factors such as credit markets, commodity prices,
production yields, and other circumstances may disrupt normal
purchasing practices and buyer sentiment, further contributing to
the seasonal fluctuations.
Employees
As of
January 31,
2020, we
employed 1,612 full-time and
118
part-time
employees. Our employees are not covered by a collective bargaining
agreement. We believe our relations with our employees are
good.
Governmental
Regulation
We are subject to
numerous federal, state, and local rules and regulations, including
regulations promulgated by the Environmental Protection Agency and
similar state agencies, with respect to storing, shipping,
disposing, discharging and handling hazardous materials and
hazardous and non-hazardous waste. The environmental regulations
applicable to us are associated with the repair and maintenance of
equipment at our stores including the handling and disposal of oil,
fluids, wastewater and solvent cleaners. Currently, none of our
stores or operations exceeds small quantity generation status.
Compliance with these rules and regulations has not had any
material effect on our operations, nor do we expect it to in the
future. Further, we have not made, and do not anticipate making,
any material capital expenditures related to compliance with
environmental regulations.
ITEM
1A. RISK FACTORS
We are substantially dependent upon CNH Industrial, our primary
supplier of equipment and parts inventory.
The substantial
majority of our business involves the sale and distribution of new
equipment and after-market parts supplied by CNH Industrial and the
servicing of equipment manufactured by CNH Industrial. In
fiscal 2020, CNH Industrial supplied
approximately 74% of the new equipment sold in
our Agriculture segment, 70% of the new equipment sold in
our Construction segment, and 62% of the new equipment sold in
our International segment, and supplied a significant portion of
our parts inventory.
In addition to
being our primary supplier, CNH Industrial provides us with the
following important inputs for our business:
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Floorplan payable
financing for the purchase of a substantial portion of our
equipment inventory;
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Retail financing
used by many of our customers to purchase CNH Industrial equipment
from us;
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Reimbursement for
warranty work performed by us pursuant to CNH’s product
warranties;
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Incentive
programs and discount programs offered from time to time that
enable us to price our products more competitively;
and
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Promotional and
marketing activities on national, regional and local
levels.
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Our financial
performance and future success are highly dependent on the overall
reputation, brand and success of CNH Industrial in the agricultural
and construction equipment manufacturing industries, including its
ability to maintain a competitive position in product innovation,
product quality, and product pricing, and its ability to continue
to provide financing to both us and our retail customers, and
warranty reimbursements for service work that we
perform.
CNH Industrial may change or terminate our CNH Industrial Dealer
Agreements.
We have entered
into CNH Industrial Dealer Agreements under which we sell CNH
Industrial’s branded agricultural and construction equipment, along
with after-market parts and repair services. Subject to applicable
state statutes that may govern the dealer-manufacturer legal
relationship, CNH Industrial may terminate our CNH Industrial
Dealer Agreements immediately in certain circumstances, following
written notice and cure periods for certain breaches of the
agreement, and for
any reason under
the Case Construction agreement following 120 days prior written
notice. If CNH Industrial were to terminate all or any of its CNH
Industrial Dealer Agreements with us, our business would be
severely harmed.
Furthermore, CNH
Industrial may unilaterally change its operating practices under
the terms of its CNH Industrial Dealer Agreements with us to, among
other things, change or authorize additional dealers in our sales
and service areas, change its distribution system to the detriment
of its dealers like us, limit our product offerings, and change
pricing or delivery terms. If CNH Industrial were to change the
terms of our CNH Industrial Dealer Agreements or its operating
practices in a manner that adversely affects us, our business and
results of operations would be harmed.
Our CNH Industrial
Dealer Agreements impose obligations and restrictions on
us.
Under our CNH
Industrial Dealer Agreements, we are obligated to actively promote
the sale of CNH Industrial equipment within our designated
geographic areas of responsibility, fulfill the product warranty
obligations of CNH Industrial (subject to CNH Industrial’s payment
to us of the agreed upon reimbursement), maintain adequate
facilities and workforce to service the needs of our customers, and
maintain equipment and parts inventories at the level deemed
necessary by CNH Industrial to meet sales goals as stated in the
annual business plan mutually agreed upon by us and CNH Industrial,
maintain adequate working capital, and maintain stores only in
authorized locations. Our CNH Industrial Dealer Agreements do not
provide us with exclusive dealerships in any territory (except in
our European territories), and CNH Industrial could elect to
authorize additional dealers in our market areas in the future,
subject to state dealer protection laws.
Consent of CNH
Industrial is required for certain material changes in our
ownership, governance or business structure, including the
acquisition by any person or group of persons of 30% or more of our
outstanding stock or 20% or more of our outstanding stock if the
person or group is a competitor of CNH Industrial. This requirement
may have the effect of discouraging a sale or other change in
control of the Company, including transactions that our
stockholders might otherwise deem to be in their best
interests.
The acquisition
of additional CNH Industrial geographic areas of responsibility and
store locations in our Agriculture, Construction and International
segments requires the consent of CNH Industrial under our CNH
Industrial Dealer Agreements, subject to contrary state dealer
protection laws. CNH Industrial may decide to decline, in its sole
discretion, to consent to any acquisition of an additional CNH
Industrial store location we may pursue. If CNH Industrial is
unwilling to consent to any future proposed acquisition of
additional dealerships, our ability to execute on our acquisition
strategy and to grow our business may be impaired. We cannot assume
that CNH Industrial will consent to any acquisition of stores or
dealerships that we may desire to make in the future.
Our CNH
Industrial Dealer Agreements require us to operate any material
business activities not related to sales of CNH Industrial products
or services to customers in agricultural, construction, industrial
or similar markets separately from our CNH Industrial dealership
business. Our CNH Industrial Dealer Agreement for Case Construction
equipment prohibits us from carrying other suppliers' products (new
equipment and parts) at our Case Construction stores that are
competitive with CNH Industrial's products. These restrictions may
discourage or prevent us from pursuing business activities that we
believe are in the best interests of our stockholders.
Our agricultural equipment, parts and service sales are affected by
numerous market factors outside of our control.
Farmers' capital
expenditures often follow a cyclical pattern, with increased
capital investments typically occurring during boom cycles spurred
by high net farm income and strong farmer balance sheets. The USDA
has forecasted net farm income, a broad measure of farm
profitability, to be $93.6 billion for calendar year 2019, which is
approximately 18.1% above the average for the five-year period
ended December 31, 2019. Net farm income is subject to numerous
external factors that are beyond the control of the individual
farmer such as commodity prices, import tariffs and other trade
regulations including developments in U.S.-China trade relations,
input costs, production yields, animal diseases and crop pests,
federal crop insurance and subsidy programs. Net farm income also
impacts farmland values, which causes overall farm wealth to
increase or decrease, impacting farmers’ sentiment to make
investments in equipment. The nature of the agricultural industry
is such that a downturn in equipment demand can occur suddenly,
resulting in negative impact on dealers including declining
revenues, reduced profit margins, excess new and used equipment
inventories, and increased floorplan interest expenses. These
downturns may be prolonged, and during these periods, our revenues
and profitability could be harmed. Demand for our parts and
service, although not as cyclical as equipment purchases, also can
be negatively affected in agricultural downturns and in regions
affected by adverse weather or growing conditions which result in
fewer acres planted or harvested.
Our construction equipment, parts and service sales are affected by
numerous market factors outside of our control.
Our construction
equipment customers primarily operate in the natural resource
development, construction, transportation, agriculture,
manufacturing, industrial processing and utilities industries,
which industries generally are capital intensive and cyclical in
nature. Many of our construction equipment customers are directly
and indirectly affected by
fluctuations in
commodity prices in the agriculture, forestry, metals and minerals,
petroleum and natural gas industries. Prolonged periods of low oil
prices, natural gas prices and other commodity prices may cause
reduced activity in these sectors which may result in decreased
demand for our products and services by our customers operating in
these industries.
Construction
contractors' demand for our construction equipment, parts and
repair services is affected by economic conditions at both a global
and a local level. Economic conditions that negatively affect the
construction industry, such as the tightening of credit standards
which affect the ability of consumers or businesses to obtain
financing for construction projects, could reduce our customers'
demand for our construction equipment. The construction industry in
many of our geographical areas has experienced periodic, and
sometimes prolonged, economic down cycles, which negatively impacts
sales of construction equipment in those markets. During these
downturns our revenues and profitability could be
harmed.
Actual or threatened epidemics, pandemics, outbreaks, or other
public health crises could result in disruptions in our supply
chain, decreased customer demand, lower oil and other commodity
prices and volatility in the stock market and the global economy,
which could materially and adversely impact our business, results
of operations and financial condition.
Actual or
threatened epidemics, pandemics, outbreaks, or other public health
crises could materially and adversely impact or disrupt our
operations, adversely affect the local economies where we operate
and negatively impact our customers’ spending in the impacted
regions or depending upon the severity, globally, which could
materially and adversely impact our business, results of operations
and financial condition. For example, since December 2019, a strain
of novel coronavirus (“COVID-19”) surfaced in China and has spread
into the United States, Europe and several other parts of the
world, resulting in certain supply chain disruptions, volatilities
in the stock market, lower oil and other commodity prices due to
diminished demand, economic challenges for ethanol producers, and
lockdown on international travels, all of which could adversely
impact the global economy and result in decreased demand from our
customers. There is significant uncertainty around the breadth and
duration of the business disruptions related to COVID-19, as well
as its impact on the U.S. economy. Moreover, an epidemic, pandemic,
outbreak or other public health crisis, such as COVID-19, could
adversely affect our ability to adequately staff and manage our
business. The extent to which COVID-19 impacts our business,
results of operations and financial condition will depend on future
developments, which are highly uncertain, rapidly changing and
cannot be predicted, including new information that may emerge
concerning the severity of COVID-19 and the actions taken to
contain it or treat its impact.
Our customers’ ability to obtain affordable financing is an
important factor in their purchasing decisions, and directly
affects our business.
The ability to
obtain affordable financing is an important part of a customer's
decision to purchase agricultural or construction equipment. As net
farm income and farm wealth have decreased in recent years, the
borrowing capacity of our farmer customers may have also decreased.
Moreover, in a tighter credit environment, agricultural lenders may
discourage their farmer customers from making non-essential capital
expenditures.
Interest rate
increases may make equipment purchases less affordable for
customers and, as a result, our revenue and profitability may
decrease. We are unable to anticipate the timing and impact of
interest rate adjustments.
Changes in governmental policies may reduce demand for agricultural
and construction equipment and cause our revenue to
decline.
Changes in
federal, state, and international agricultural policies could
adversely affect sales of agricultural equipment. Government
programs and subsidies that reduce economic volatility, incentivize
agricultural equipment purchases, and enhance farm income
positively influence farmers' demand for agricultural equipment. To
the extent that future funding or farm programs available to
individual farmers are reduced, or, in the case of the U.S. Federal
government's market facilitation program, this program is not
renewed, these changes could reduce demand for agricultural
equipment and we could experience a decline in revenue. Government
sponsored conservation programs could remove acres from
agricultural production, reducing demand for our products and
services. Changes in government spending on infrastructure projects
could adversely affect the demand for construction equipment and we
could experience a decline in revenue. The ability to export
agricultural products is critical to our agriculture customers. As
a result, tariffs and other government trade agreements, policies
or regulations impacting or limiting the export or import of
agricultural commodities, such as China's import tariffs, could
have a material adverse effect on the international flow of
agricultural and other commodities, which may cause a decrease in
the demand for agricultural equipment. Furthermore, the U.S.
federal government has initiated tariffs, such as the current steel
tariff, on certain foreign goods, including raw materials,
commodities, and products manufactured outside the United States
that are used in our manufacturers’ production processes. These
tariffs could in turn increase our cost of sales as a result of
price increases implemented by our domestic suppliers, which we may
not be able to pass on to our customers.
The equipment distribution market is subject to supply-demand
imbalances arising from factors over which we have no
control.
Over-production
of equipment by one or more manufacturers, or a sudden reduction in
demand for equipment, can dramatically disrupt the equipment market
and cause downward pressure on our equipment profit margins.
Customer leasing arrangements in the agriculture and construction
equipment industries may also impact the level of industry-wide
equipment inventory supplies. When leased equipment comes off
lease, there may be an increase in the availability of late-model
used equipment, which can create an inventory over-supply condition
and put pressure on our equipment sales and margins, and have an
adverse effect on values of our used equipment inventory and rental
fleet equipment. Similarly, rental house companies engage in
regular sales of rental fleet units, which can further disrupt the
supply-demand balance. However, we have no control over or ability
to significantly influence any of the foregoing inputs into the
equipment distribution markets, but expect that we will be subject
to the negative impact, including downward pressure on equipment
profit margins, resulting from any supply-demand imbalances arising
therefrom.
Our financial performance is dependent on our ability to
effectively manage our inventory.
Our agricultural
and construction equipment dealership network requires substantial
inventories of equipment and parts to be maintained at each store
and company-wide to facilitate sales to customers on a timely
basis. Our equipment inventory has traditionally represented 50% or
more of our total assets. We need to maintain a proper balance of
new and used equipment to assure satisfactory inventory turnover
and to minimize floorplan financing costs.
Our purchases of
new equipment and parts are based primarily on projected demand. If
actual sales are materially less than our forecasts, for example,
because of the unexpected effects on consumer demand caused by
COVID-19, we would experience an over-supply of new equipment
inventory. An over-supply of new equipment inventory will generally
cause downward pressure on our product sale prices and margins,
decrease our inventory turns, and increase our floorplan financing
expenses.
Our used
equipment is generally acquired as “trade-ins” from customers in
connection with equipment sales to those customers. Equipment
inventories are stated at the lower of cost or market value.
Adjustments to market value of inventory are recognized as a cost
of sales, negatively impacting earnings, in the periods in which
they occur. Our estimates of market value for our used equipment,
as determined at the time of the trade-in, may prove to be
inaccurate, given the potential for sudden change in market
conditions and other factors beyond our control. Changes from our
normal retail marketing channel to more aggressive marketing
channels for specific pieces or categories of equipment inventory,
particularly as equipment inventory ages, will generally result in
lower sales prices. Pricing and sales of used equipment can be
significantly affected by the limited market for certain types of
used equipment.
Our international operations expose us to additional
risks.
We currently
operate dealership locations in Bulgaria, Germany, Romania, Serbia
and Ukraine. In fiscal 2020, total International segment
revenues were 18.1% of our consolidated total
revenue. As of January 31, 2020, total International segment
assets were 19.6% of our consolidated total
assets.
Our operations in
international markets subject us to risks related to the differing
legal, political, social and regulatory environments and economic
conditions in the countries in which we operate. Risks inherent in
our international operations include:
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difficulties in
implementing our business model in foreign markets;
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costs and
diversion of domestic management attention related to oversight of
international operations;
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unexpected
adverse changes in export duties, quotas and tariffs and
difficulties in obtaining import licenses;
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cyclicality of
demand in European Union member states for agricultural equipment,
based on availability of European Union government subsidy programs
and tax incentives;
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unexpected
adverse changes in foreign laws or regulatory
requirements;
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compliance with a
variety of tax regulations, foreign laws and
regulations;
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compliance with
the Foreign Corrupt Practices Act and other U.S. laws that apply to
the international operations of U.S. companies which may be
difficult and costly to implement and monitor, can create
competitive disadvantages if our competitors are not subject to
such laws, and which, if violated, may result in substantial
financial and reputational harm;
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fluctuations in
foreign currency exchange rates to which we are exposed may
adversely affect the results of our operations, the value of our
foreign assets and liabilities and our cash flows;
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the laws of the
European countries in which we operate, unlike U.S. states, do not
include specific dealer protection laws and, therefore, we may be
more susceptible to actions of suppliers that are adverse to our
interests such as termination of our dealer agreements for any
reason or installing additional dealers in our designated
territories; and
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geo-political or
economic instability.
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Any escalation of
political tensions or economic instability in Ukraine, including as
a result of heightened tensions between Ukraine and the Russian
Federation, could create significant disruption in our Ukrainian
operations and may have an adverse effect on our business
operations in Ukraine. Previous periods of political tension and
economic instability in Ukraine caused liquidity problems for our
customers, which negatively impacted their purchasing decisions for
our products and services, limited our ability to maintain working
capital loans or increased the cost of maintaining such loans, and
as a result of imposed currency exchange controls, restricted our
ability to manage our cash held in Ukraine and our investment in
our Ukrainian business. Our operations in Ukraine are subject to
the risks of further devaluation of the local currency, increased
interest rates and increased inflation.
These factors, in
addition to others that we have not anticipated, may negatively
impact our financial condition and results of
operations.
Floorplan financing for our equipment inventory may not be
available on favorable terms, which would adversely affect our
growth and results of operations.
We generally
purchase our equipment with the assistance of floorplan payable
financing programs through CNH Industrial Capital and our other
credit facilities. In the event that our available financing
sources are insufficient to satisfy our future requirements, we
would be required to obtain financing from other sources. We may
not be able to obtain this additional or alternative financing on
commercially reasonable terms or at all. To the extent that this
financing cannot be obtained on commercially reasonable terms or at
all, our growth and results of operations would be adversely
affected.
Our level of indebtedness could limit our financial and operational
flexibility.
As of
January 31,
2020, our
indebtedness included floorplan payable financing, real estate
mortgage financing arrangements that are secured by real estate
assets and other long-term debt. In addition, we have obligations
under our lease agreements for our store locations and corporate
headquarters.
Our level of
indebtedness could have important consequences. For example, it
could:
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increase our
vulnerability to general adverse economic and industry
conditions;
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limit our
flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and
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limit our ability
to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate
purposes.
|
We expect to use
cash flow from operations and borrowings under our credit
facilities to fund our operations, debt service and capital
expenditures. However, our ability to make these payments depends
on our future performance, which will be affected by financial,
business, economic and other factors, many of which may be beyond
our control.
The credit agreements governing our indebtedness restrict our
ability to engage in certain corporate and financial transactions,
and require us to satisfy financial covenants.
The credit
agreements governing our indebtedness contain covenants that, among
other things, may limit or place conditions on our ability
to:
|
|
•
|
merge,
consolidate, or make certain acquisitions;
|
|
|
•
|
transfer and sell
assets;
|
|
|
•
|
pay dividends or
repurchase stock; and
|
|
|
•
|
issue equity
instruments.
|
Our credit
facilities with CNH Industrial Capital and DLL Finance require us
to satisfy a net leverage ratio and fixed charge coverage ratio on
an ongoing basis, measured at the end of each fiscal quarter. Under
the Bank Syndicate Credit Facility, if our excess availability
(i.e., borrowing base capacity less outstanding loan balance and
certain reserves) falls below a certain threshold, we become
subject to a minimum fixed charge coverage ratio. Our ability to
borrow under these credit agreements depends upon compliance with
these financial covenants.
Our failure to
satisfy any covenant, absent a waiver or amendment, would cause us
to be in default under our credit facilities and would enable our
lenders to accelerate payment of the outstanding indebtedness. Each
of our credit agreements include cross-default provisions which
state that certain types of defaults under any other indebtedness
agreement will also constitute a default under that credit
agreement. If an event of default occurred, and the lender demanded
accelerated payment, we may not be able to satisfy a pay-off
request, whether through internal funds or a new
financing.
Our variable rate indebtedness exposes us to interest rate
risk.
A substantial
portion of our floorplan and working capital borrowings, including
the credit facilities with CNH Industrial Capital, the Bank
Syndicate, DLL Finance, and our international floorplan facilities
are at variable rates of interest and expose us to interest rate
risk. As such, our results of operations are sensitive to movements
in interest rates. There are many economic factors outside our
control that have in the past and may, in the future, impact rates
of interest including publicly announced indices that underlie the
interest obligations related to a certain portion of our debt.
Factors that impact interest rates include governmental monetary
policies, inflation, recession, changes in unemployment, the money
supply, and international instability impacting domestic and
foreign financial markets. Any increases in interest rates could
have a material adverse effect on our financial conditions and
results of operations.
Changes affecting the availability of the London Interbank Offered
Rate (“LIBOR”) may have consequences for the Company that cannot
yet reasonably be predicted.
The Company has
outstanding credit facilities, including the Bank Syndicate Credit
Facility and the Company’s credit facility with DLL Finance, with
variable interest rates based on LIBOR. The LIBOR benchmark has
been subject of national, international, and other regulatory
guidance and proposals for reform. In July 2017, the U.K. Financial
Conduct Authority announced that it intends to stop persuading or
compelling banks to submit rates for calculation of LIBOR after
2021. These reforms may cause LIBOR to perform differently than in
the past and LIBOR may ultimately cease to exist after 2021.
Alternative benchmark rate(s) may replace LIBOR and could affect
the Company’s credit facilities. At this time, it is not possible
to predict the effect of any changes to LIBOR, any phase out of
LIBOR or any establishment of alternative benchmark rates. Any new
benchmark rate will likely not replicate LIBOR exactly. Any changes
to benchmark rates may have an uncertain impact on our cost of
funds and our access to the capital markets, which could impact our
results of operations and cash flows.
We are in the process of implementing a new enterprise resource
planning (“ERP”) system, and problems with the design or
implementation of this ERP system could interfere with our business
and operations.
We are engaged in
the implementation of a new ERP system. The ERP system is designed
to accurately maintain the Company’s books and records and provide
information to the Company’s management team important to the
operation of our business. The Company’s ERP transition has
required, and will continue to require, the investment of
significant human and financial resources. We may not be able to
successfully implement the ERP transition without experiencing
delays, increased costs and other difficulties. Beyond cost and
scheduling, potential flaws in the implementation of an ERP system
may pose risks to the Company’s ability to operate successfully and
efficiently, including timely and accurate SEC filings. If we are
unable to successfully implement the new ERP system as planned, our
financial position, results of operations and cash flows could be
negatively impacted.
The agricultural and construction equipment industries are highly
seasonal, which can cause significant fluctuations in our results
of operations and cash flow.
The agricultural
and construction equipment businesses are highly seasonal, which
causes our quarterly results to fluctuate during the year. Farmers
generally purchase agricultural equipment and service work in
preparation for, or in conjunction with, the spring planting and
fall harvesting seasons. Construction equipment customers’
purchases of equipment and service work, as well as rental of
equipment, are also seasonal in our stores located in colder
climates where construction work slows significantly in the winter
months. In addition, the fourth quarter typically is a significant
period for equipment sales in the U.S. because of our customers’
year-end tax planning considerations, the timing of dealer
incentives and the increase in availability of farmers’ funds from
completed harvests and construction customers' funds from completed
projects. Also, numerous external factors such as credit markets,
commodity prices, weather conditions, and other circumstances may
disrupt normal purchasing practices and customers’ sentiment,
further contributing to the seasonal fluctuations.
Weather conditions may negatively impact the agricultural and
construction equipment markets and affect our financial
results.
Weather
conditions, particularly severe floods and droughts, can have a
significant adverse effect on growing conditions and on regional
agricultural and construction markets. Adverse weather conditions
may result in fewer acres being planted or harvested by farmers and
reduced crop yields on those acres that are planted. Accordingly,
our financial condition and results of operations may be adversely
affected by adverse weather conditions.
Our rental operations subject us to risks including increased
maintenance costs as our rental fleet ages, increased costs of new
replacement equipment we use in our fleet, and losses upon
disposition of rental fleet units.
Our rental fleet
margins are materially impacted by utilization of fleet assets,
which is seasonal and can fluctuate materially due to weather and
economic factors. If our rental equipment ages, the costs of
maintaining that equipment, if not replaced within a certain period
of time, will likely increase. The cost of new equipment for use in
our rental fleet could also increase due to increased material
costs for our suppliers or other factors beyond our control.
Furthermore, changes in customer demand could cause some of our
existing equipment to become obsolete and require us to purchase
new equipment at increased costs.
Upon the sale of
a rental fleet unit, we include in operating income the difference
between the sales price and the depreciated value of the equipment
sold. The market value of any given piece of rental equipment could
be less than its depreciated value at the time it is sold. The
market value of used rental equipment depends on several factors,
including:
|
|
•
|
market prices for
like equipment;
|
|
|
•
|
hours and
condition of the equipment;
|
|
|
•
|
time of year that
the equipment is sold;
|
|
|
•
|
the supply of
used equipment in the market; and
|
|
|
•
|
general economic
conditions.
|
Any significant
decline in the selling prices for used rental equipment, or
increased costs resulting from our rental operations, could have a
material adverse effect on our results of operation and cash
flow.
Our industry is highly competitive.
The agricultural
and construction equipment distribution (including parts and
service) and rental industries are highly competitive and
fragmented, with large numbers of companies operating on a regional
or local basis. Historically, our competitors have competed
aggressively on the basis of pricing or inventory availability,
resulting in decreased margins on our sales to the extent we choose
to match our competitors' pricing. To the extent we choose not to
match or remain within a reasonable competitive distance from our
competitors' pricing, we may lose sales volume and market share. In
addition, to the extent CNH Industrial's competitors (such as
Deere, Caterpillar, Komatsu, Volvo, and AGCO) provide their dealers
with more innovative or higher quality products, better customer
financing, or have more effective marketing programs or the CNH
Industrial reputation or brand are tarnished in the marketplace or
with our customers, our ability to compete and our results of
operations could be adversely affected. In addition, e-commerce
companies selling parts have negatively impacted dealers' parts
sales and margins, and it is expected that this competitive
pressure will only continue to increase in the future.
If our acquisition plans are unsuccessful, we may not achieve our
planned long-term revenue growth.
Our ability to
grow through the acquisition of additional CNH Industrial
geographic areas of responsibility and store locations or other
businesses will be dependent upon the availability of suitable
acquisition candidates at acceptable values, our ability to compete
effectively for available acquisition candidates and the
availability of capital to complete the acquisitions. We may not
successfully identify suitable targets, or if we do, we may not be
able to close the transactions, or if we close the transactions,
they may not be profitable. In addition, CNH Industrial's consent
is required for the acquisition of any CNH Industrial dealership,
and the consent of our lenders may be required for certain
acquisitions. CNH Industrial typically evaluates management,
historical performance, and capitalization of a prospective
acquirer in determining whether to consent to the sale of a CNH
Industrial dealership. There can be no assurance that CNH
Industrial or our lenders will consent to any acquisitions of
dealerships that we may propose.
Our acquisitions may not be successful.
There are risks
associated with acquisitions of new dealerships. These risks
include incurring significantly higher than anticipated capital
expenditures and operating expenses; failing to assimilate the
operations and personnel of the acquired dealerships; disrupting
our ongoing business; diluting the effectiveness of our management;
failing to maintain uniform
standards,
controls and policies; and impairing relationships with employees
and customers as a result of changes in management. To the extent
we do not successfully avoid or overcome the risks or problems
related to acquisitions, our results of operations and financial
condition could be adversely affected. Future acquisitions also may
have a significant impact on our financial position and capital
needs, and could cause substantial fluctuations in our quarterly
and yearly results of operations. Acquisitions could include
significant goodwill and intangible assets, which may result in
future impairment charges that would reduce our stated
earnings.
We are exposed to customer credit risks.
We extend credit
to our customers for parts and service work, rental charges, and
also for some equipment sales in our domestic and international
operations. If we are unable to manage credit risk issues
adequately, or if a large number of customers should have financial
difficulties at the same time, our credit losses could increase
above historical levels and our operating results would be
adversely affected. Delinquencies and credit losses generally would
be expected to increase if there was a worsening of economic
conditions.
Our business success depends on attracting and retaining qualified
personnel.
Our success in
executing our operating and strategic plans depends on the efforts
and abilities of our management team and key employees, including
the managers of our field operations and our country managers in
our International operations. The failure to attract and retain
members of our management team and key employees will harm
us.
Over the past
several months, the equipment industry has experienced a shortage
of qualified service technicians. If this trend worsens and we are
not able to hire and retain qualified service technicians at
acceptable levels, our ability to satisfy customers' service needs
would be negatively impacted. Moreover, the technician shortage may
increase our service technician compensation expense, and reduce
our gross margins on service work.
Selling and renting agricultural and construction equipment,
selling parts, and providing repair services subject us to
liability risks that could adversely affect our financial condition
and reputation.
Products sold,
rented or serviced by us may expose us to potential liabilities for
personal injury or property damage claims that arise from the use
of such products. Our commercial liability insurance may not be
adequate to cover significant product liability claims, or we may
not be able to secure such insurance on economically reasonable
terms. An uninsured or partially insured claim for which
indemnification from the manufacturer is not available could have a
material adverse effect on our financial condition. Furthermore, if
any significant claims are made against us or against CNH
Industrial or any of our other suppliers, our business may be
adversely affected by any related negative publicity or any adverse
impact on the reputation or brand of any of our suppliers,
including CNH Industrial.
Labor organizing and other activities could negatively impact
us.
The unionization
of all or a substantial portion of our workforce could result in
work slowdowns or stoppages, could increase our overall costs,
could reduce our operating margins and reduce the efficiency of our
operations at the affected locations, could adversely affect our
flexibility to run our business competitively, and could otherwise
have a material adverse effect on our business, financial condition
and results of operations.
Our common stock price has fluctuated significantly and may
continue to do so in the future.
The price at
which our common stock trades may be volatile and could be subject
to significant fluctuations in response to our operating results
and financial condition as set forth in our earnings releases,
guidance estimates released by agricultural or construction
equipment manufacturers that serve the markets in which we operate,
announcements by our competitors, analyst recommendations, our
ability to meet or exceed analysts’ or investors’ expectations,
fluctuations in the price of crop commodities and natural
resources, the condition of the financial markets, and other
factors. Quarterly fluctuations resulting from the seasonality of
our business may cause our results of operations and cash flows to
underperform in relation to our quarterly modeling assumptions or
the expectations of financial analysts or investors, which may
cause volatility or decreases in our stock price.
The Company’s
stock price is dependent in part on the multiple of earnings that
investors are willing to pay. That multiple is in part dependent on
investors’ perception of the Company’s future earnings growth
prospects. If investors’ perception of the Company’s earnings
growth prospects change, the Company’s earnings multiple may
decline, and its stock price could be adversely
affected.
In addition, the
stock market in recent years has experienced extreme price and
volume fluctuations that often have been unrelated or
disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions,
may adversely affect the market price of our common stock
notwithstanding our actual operating performance.
Security breaches and other disruptions could compromise our
information and expose us to liability, which would cause our
business and reputation to suffer.
The efficient
operation of our business is dependent on our information
technology systems. We use information technology systems to
record, process and summarize financial information and results of
operations for internal reporting purposes and to comply with
regulatory financial reporting, legal and tax requirements.
Additionally, in the ordinary course of our business, we collect
and store sensitive data, including proprietary business
information, of our customers and suppliers, as well as personally
identifiable information of our customers and employees, in our
data centers and on our networks. The secure operation of these
information technology networks and the systems of the third
parties with whom we do business and the processing and maintenance
of information is critical to our operations. Despite our and the
third parties with whom we do business' security measures and
business continuity plans, our information technology and
infrastructure may be vulnerable to damage, disruptions or
shutdowns due to attacks by hackers or breaches due to employee
error or malfeasance or other disruptions arising from power
outages, telecommunication failures, terrorist acts, natural
disasters, or other catastrophic events. The occurrence of these
events could compromise our networks, and the information stored
there could be accessed, publicly disclosed, lost or stolen. Any
such access, disclosure or other loss of information could result
in legal claims or proceedings, liability or regulatory penalties
under laws that protect the privacy of personally identifiable
information, disrupt our operations, and damage our reputation,
which could adversely affect our business, results of operations,
and financial condition. In particular, given our Europe
operations, the European Union General Data Protection Regulation
imposes stringent data protection requirement and provides
significant penalties for noncompliance. In addition, as security
threats continue to evolve and increase in frequency and
sophistication, we may need to invest additional resources to
protect the security of our systems.
We maintain cyber
risk insurance, but this insurance may not be sufficient to cover
all of our losses from any future breaches of our
systems.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Equipment
Stores
As of
January 31,
2020, we
operate 107 agricultural and construction
equipment stores in the United States and Europe in the following
locations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
Segment
|
|
Construction
Segment
|
|
International
Segment
|
|
Total
|
US States
|
|
|
|
|
|
|
|
North Dakota
|
10
|
|
|
5
|
|
|
—
|
|
|
15
|
|
Minnesota
|
10
|
|
|
3
|
|
|
—
|
|
|
13
|
|
Iowa
|
10
|
|
|
3
|
|
|
—
|
|
|
13
|
|
Nebraska
|
11
|
|
|
2
|
|
|
—
|
|
|
13
|
|
South Dakota
|
8
|
|
|
2
|
|
|
—
|
|
|
10
|
|
Colorado
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Montana
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Arizona
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Wisconsin
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Wyoming
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
European
Countries
|
|
|
|
|
|
|
|
Bulgaria
|
—
|
|
|
—
|
|
|
7
|
|
|
7
|
|
Germany
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
Romania
|
—
|
|
|
—
|
|
|
12
|
|
|
12
|
|
Ukraine
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
Serbia
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Total
|
49
|
|
|
25
|
|
|
33
|
|
|
107
|
|
Store Lease
Arrangements
As of
January 31,
2020, we
leased 94 store facilities with lease
arrangements expiring at various dates through January 31,
2031. Many
of our lease agreements include fair market value purchase options,
rights of first refusal, lease term extension options, or
month-to-month or year-to-year automatic renewal provisions at the
conclusion of the original lease period. A majority of the leases
provide for fixed monthly rental payments and require us to pay the
real estate taxes on the properties for the lease periods. We are
generally responsible for utilities and maintenance of the leased
premises. All of the leases require that we maintain public
liability, property casualty, and personal property insurance on
each of the leased premises. The leases generally require us to
indemnify the lessor in connection with any claims arising from the
leased premises during our occupation of the property. We believe
our facilities are adequate to meet our current and anticipated
needs.
As part of our
due diligence review prior to a dealership acquisition, we evaluate
the adequacy, suitability and condition of the related real estate.
Our evaluation typically includes a Phase I environmental
study, and if deemed necessary, a Phase II environmental
study, of the real property to determine whether there are any
environmental concerns. If any environmental concerns exist, we
generally require that such concerns be addressed prior to
acquisition of the dealership.
We have not
historically owned significant amounts of real estate, although we
evaluate opportunities to invest in our real estate on a case by
case basis. We currently own the store facilities for 9 U.S.
dealership locations and 4 Germany dealership locations. We have
incurred debt financing and granted mortgages on these owned
facilities. The remainder of our U.S. and international store
locations are leased from third parties.
Headquarters
We currently
lease and occupy approximately 48,000 square feet in West Fargo,
North Dakota for our headquarters, this lease expires on
January 31, 2028. We continually review our location needs,
including the adequacy of our headquarters space, to ensure our
space is sufficient to support our operations. We believe there is
ample opportunity for expansion in our West Fargo headquarters
facility if necessary.
ITEM
3. LEGAL PROCEEDINGS
We are, from time
to time, subject to claims and suits arising in the ordinary course
of business. Such claims have, in the past, generally been covered
by insurance. Management believes the resolution of other legal
matters will not have a material effect on our financial condition,
results of operation or cash flow, although the ultimate outcome of
any such actions is not assured. Furthermore, our insurance may not
be adequate to cover all liabilities that may arise out of claims
brought against us.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
INFORMATION
ABOUT OUR EXECUTIVE OFFICERS
The names, ages
and positions of our executive officers are as
follows:
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Name
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|
Age
|
|
Position
|
David Meyer
|
|
66
|
|
Board Chair and Chief
Executive Officer
|
Mark Kalvoda
|
|
48
|
|
Chief Financial Officer and
Treasurer
|
Bryan Knutson
|
|
41
|
|
Chief Operating
Officer
|
David
Meyer is
our Board Chair and Chief Executive Officer. Mr. Meyer worked for
JI Case Company in 1975. From 1976 to 1980, Mr. Meyer was a partner
in a Case/New Holland Dealership with locations in Lisbon, North
Dakota and Wahpeton, North Dakota. In 1980, Mr. Meyer, along with a
partner, founded Titan Machinery Inc. Mr. Meyer has served on both
the Case CE and CaseIH Agriculture Dealer Advisory Boards. Mr.
Meyer is the past chairman of the North Dakota Implement Dealers
Association, and currently serves as a Trustee on the University of
Minnesota Foundation.
Mark
Kalvoda became our Chief Financial
Officer in April 2011 and previously served as our Chief Accounting
Officer since September 2007. Prior to joining us, he held various
positions between 2004 and 2007 at American Crystal Sugar Co.,
including Corporate Controller, Assistant Secretary and Assistant
Treasurer. Prior to working for American Crystal Sugar Co., he
served in various financial positions within Hormel Foods
Corporation.
Bryan
Knutson became our Chief Operating
Officer in August 2017 and previously served as our Vice President,
Ag Operations since 2016. Mr. Knutson joined the company in 2002
where he began his career in equipment sales later advancing to
store manager, complex manager and region manager prior to his
current role. Mr. Knutson is a current board member of the Pioneer
Equipment Dealers Association.
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market
Information
Our common stock
is listed for trading on the NASDAQ Stock Market and trades under
the symbol "TITN". As of March 31,
2020,
there were approximately 665 record holders of our common
stock, which excludes holders whose stock is held either in nominee
name or street name brokerage accounts.
DIVIDENDS
We have not
historically paid any dividends on our common stock and do not
expect to pay cash dividends on our common stock in the foreseeable
future. Payment of future cash dividends, if any, will be at the
discretion of our board of directors after taking into account
various factors, including our financial condition, operating
results, current and anticipated cash needs, outstanding
indebtedness and plans for expansion and restrictions imposed by
lenders, if any.
UNREGISTERED
SALES OF EQUITY SECURITIES
We did not have
any unregistered sales of equity securities during the fiscal
quarter ended January 31,
2020.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS
For information
on securities authorized for issuance under our equity compensation
plans, refer to Item 12, "Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters."
REPURCHASES
We did not engage
in any repurchases of our common stock during the fiscal quarter
ended January 31,
2020.
STOCK
PERFORMANCE GRAPH
The following
graph compares the cumulative total return for the last trading day
of our last five fiscal years on a $100 investment (assuming
dividend reinvestment) on January 31, 2015, the last trading day before
our fifth preceding fiscal year, in each of our common stock, the
Russell 2000 Stock Index and the S&P Retailing Group
Index.
|
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|
|
|
|
|
|
|
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|
|
January 31,
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
Titan Machinery
Inc.
|
$
|
100.00
|
|
|
$
|
60.08
|
|
|
$
|
97.74
|
|
|
$
|
152.09
|
|
|
$
|
132.63
|
|
|
$
|
86.41
|
|
Russell 2000
Index
|
100.00
|
|
|
88.84
|
|
|
116.86
|
|
|
135.15
|
|
|
129.01
|
|
|
138.71
|
|
S&P 500 Retail
Index
|
100.00
|
|
|
115.56
|
|
|
135.00
|
|
|
194.19
|
|
|
203.54
|
|
|
243.26
|
|
ITEM
6. SELECTED FINANCIAL DATA
The data given
below, excluding the store count data, as of and for each of the
five years in the period ended January 31,
2020, has
been derived from our audited consolidated financial statements. In
order to understand the effect of accounting policies and material
uncertainties that could affect our presentation of financial
information, this data should be read in conjunction with our
Consolidated Financial Statements and Notes thereto included under
Item 8 to this Form 10-K and in conjunction with
Management's Discussion and Analysis of Financial Condition and
Results of Operation included under Item 7 of this
Form 10-K.
The change in
store count, resulting from acquisitions, new store openings, or
store closings, has an impact on the comparability of our statement
of operations and balance sheet information. The table below
summarizes the net change in our store count and ending store count
for each fiscal year presented.
|
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|
|
Year Ended
January 31,
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
Store Count
Data
|
|
|
|
|
|
|
|
|
|
Net change in store count
during fiscal year
|
3
|
|
|
7
|
|
|
(12
|
)
|
|
1
|
|
|
(4
|
)
|
Store count at end of fiscal
year
|
107
|
|
|
104
|
|
|
97
|
|
|
109
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
January 31,
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
(in
thousands, except per share data)
|
Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Equipment
|
$
|
917,202
|
|
|
$
|
909,178
|
|
|
$
|
844,768
|
|
|
$
|
838,037
|
|
|
$
|
972,496
|
|
Parts
|
234,217
|
|
|
210,796
|
|
|
203,231
|
|
|
214,103
|
|
|
222,982
|
|
Service
|
99,165
|
|
|
86,840
|
|
|
88,794
|
|
|
94,408
|
|
|
94,216
|
|
Rental and other
|
54,587
|
|
|
54,691
|
|
|
55,813
|
|
|
55,149
|
|
|
66,098
|
|
Total Revenue
|
1,305,171
|
|
|
1,261,505
|
|
|
1,192,606
|
|
|
1,201,697
|
|
|
1,355,792
|
|
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
Equipment
|
818,707
|
|
|
812,467
|
|
|
764,649
|
|
|
769,924
|
|
|
917,779
|
|
Parts
|
165,190
|
|
|
149,615
|
|
|
143,729
|
|
|
149,212
|
|
|
156,563
|
|
Service
|
33,446
|
|
|
29,036
|
|
|
30,679
|
|
|
31,490
|
|
|
30,121
|
|
Rental and other
|
37,010
|
|
|
38,799
|
|
|
38,249
|
|
|
37,342
|
|
|
45,415
|
|
Total Cost of
Revenue
|
1,054,353
|
|
|
1,029,917
|
|
|
977,306
|
|
|
987,968
|
|
|
1,149,878
|
|
Gross Profit
|
250,818
|
|
|
231,588
|
|
|
215,300
|
|
|
213,729
|
|
|
205,914
|
|
Operating
Expenses
|
225,722
|
|
|
201,537
|
|
|
203,203
|
|
|
211,372
|
|
|
220,524
|
|
Impairment and Restructuring
Costs
|
3,764
|
|
|
2,570
|
|
|
11,172
|
|
|
4,729
|
|
|
8,500
|
|
Income (Loss) from
Operations
|
21,332
|
|
|
27,481
|
|
|
925
|
|
|
(2,372
|
)
|
|
(23,110
|
)
|
Other Income
(Expense)
|
|
|
|
|
|
|
|
|
|
Interest income and other
income (expense)
|
3,126
|
|
|
2,547
|
|
|
1,635
|
|
|
1,524
|
|
|
(478
|
)
|
Interest expense
|
(9,806
|
)
|
|
(13,874
|
)
|
|
(16,999
|
)
|
|
(21,865
|
)
|
|
(32,623
|
)
|
Income (Loss) Before Income
Taxes
|
14,652
|
|
|
16,154
|
|
|
(14,439
|
)
|
|
(22,713
|
)
|
|
(56,211
|
)
|
Provision for (Benefit from)
Income Taxes
|
699
|
|
|
3,972
|
|
|
(7,390
|
)
|
|
(8,178
|
)
|
|
(17,982
|
)
|
Net Income (Loss)
Including Noncontrolling Interest
|
13,953
|
|
|
12,182
|
|
|
(7,049
|
)
|
|
(14,535
|
)
|
|
(38,229
|
)
|
Less: Loss
Attributable to Noncontrolling Interest
|
—
|
|
|
—
|
|
|
—
|
|
|
(356
|
)
|
|
(337
|
)
|
Net Income (Loss)
Attributable to Titan Machinery Inc.
|
$
|
13,953
|
|
|
$
|
12,182
|
|
|
$
|
(7,049
|
)
|
|
$
|
(14,179
|
)
|
|
$
|
(37,892
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per
Share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.63
|
|
|
$
|
0.55
|
|
|
$
|
(0.32
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(1.76
|
)
|
Diluted
|
$
|
0.63
|
|
|
$
|
0.55
|
|
|
$
|
(0.32
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(1.76
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares
Outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
21,946
|
|
|
21,809
|
|
|
21,543
|
|
|
21,294
|
|
|
21,111
|
|
Diluted
|
21,953
|
|
|
21,816
|
|
|
21,543
|
|
|
21,294
|
|
|
21,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
31,
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
(in
thousands)
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
43,721
|
|
|
$
|
56,745
|
|
|
$
|
53,396
|
|
|
$
|
53,151
|
|
|
$
|
89,465
|
|
Receivables, net
|
72,776
|
|
|
77,500
|
|
|
60,672
|
|
|
60,082
|
|
|
65,534
|
|
Inventories
|
597,394
|
|
|
491,091
|
|
|
472,467
|
|
|
478,266
|
|
|
680,482
|
|
Prepaid expenses and
other
|
13,655
|
|
|
15,556
|
|
|
12,440
|
|
|
10,989
|
|
|
9,753
|
|
Income taxes
receivable
|
—
|
|
|
—
|
|
|
171
|
|
|
5,380
|
|
|
13,011
|
|
Total current
assets
|
727,546
|
|
|
640,892
|
|
|
599,146
|
|
|
607,868
|
|
|
858,245
|
|
Goodwill and intangibles,
net
|
10,694
|
|
|
8,408
|
|
|
5,193
|
|
|
5,001
|
|
|
5,134
|
|
Property and
equipment, net of accumulated depreciation
|
145,562
|
|
|
138,950
|
|
|
151,047
|
|
|
156,647
|
|
|
183,179
|
|
Operating lease
assets
|
88,281
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Deferred income
taxes
|
2,147
|
|
|
3,010
|
|
|
3,472
|
|
|
547
|
|
|
—
|
|
Other assets
|
1,113
|
|
|
1,178
|
|
|
1,450
|
|
|
1,359
|
|
|
1,317
|
|
Total Assets
|
$
|
975,343
|
|
|
$
|
792,438
|
|
|
$
|
760,308
|
|
|
$
|
771,422
|
|
|
$
|
1,047,875
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
16,976
|
|
|
$
|
16,607
|
|
|
$
|
15,136
|
|
|
$
|
17,326
|
|
|
$
|
16,863
|
|
Floorplan payable
(1)
|
371,772
|
|
|
273,756
|
|
|
247,392
|
|
|
233,228
|
|
|
444,780
|
|
Senior convertible
notes
|
—
|
|
|
45,249
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Current maturities of
long-term debt (2)
|
13,779
|
|
|
2,067
|
|
|
1,574
|
|
|
1,373
|
|
|
1,557
|
|
Current operating lease
liabilities
|
12,259
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Deferred revenue
|
40,968
|
|
|
46,409
|
|
|
32,324
|
|
|
26,366
|
|
|
31,159
|
|
Accrued expenses and other
(2)
|
38,409
|
|
|
36,364
|
|
|
31,863
|
|
|
30,533
|
|
|
29,066
|
|
Total current
liabilities
|
494,163
|
|
|
420,452
|
|
|
328,289
|
|
|
308,826
|
|
|
523,425
|
|
Senior convertible
notes
|
—
|
|
|
—
|
|
|
62,819
|
|
|
88,501
|
|
|
134,145
|
|
Long-term debt, less current
maturities (2)
|
37,789
|
|
|
20,676
|
|
|
34,578
|
|
|
38,236
|
|
|
38,409
|
|
Operating lease
liabilities
|
88,387
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Deferred income
taxes
|
2,055
|
|
|
4,955
|
|
|
2,275
|
|
|
9,500
|
|
|
11,135
|
|
Other long-term liabilities
(2)
|
7,845
|
|
|
11,044
|
|
|
10,492
|
|
|
5,180
|
|
|
2,412
|
|
Total stockholders'
equity
|
345,104
|
|
|
335,311
|
|
|
321,855
|
|
|
321,179
|
|
|
338,349
|
|
Total Liabilities and
Stockholders' Equity
|
$
|
975,343
|
|
|
$
|
792,438
|
|
|
$
|
760,308
|
|
|
$
|
771,422
|
|
|
$
|
1,047,875
|
|
|
|
|
|
|
|
|
|
|
|
(1) Portion of
floorplan payable balance which is interest-bearing as of January
31, of the relevant year
|
45
|
%
|
|
45
|
%
|
|
47
|
%
|
|
72
|
%
|
|
75
|
%
|
(2) Amounts as of, and prior
to January 31, 2018, do not include the reclassification of finance
leases from current maturities of long-term debt to accrued
expenses and other, as well as, long-term debt, less current
maturities to other long-term liabilities. See Note 1 of our
consolidated financial statements for further detail.
|
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should
read the following discussion and analysis of our financial
condition and results of operations together with our financial
statements and the related notes appearing under Item 8 of
this Form10-K. Some of the information contained in this discussion
and analysis or set forth elsewhere in this annual report,
including information with respect to our plans and strategy for
our business and expected financial results, includes
forward-looking statements that involve risks and uncertainties.
You should review the "Information Regarding Forward-Looking
Statement" in this Item 7 and "Risk Factors" presented under
Item 1A for a discussion of important factors that could cause
actual results to differ materially from the results described in
or implied by the forward-looking statements contained in the
following discussion and analysis in this annual
report.
A
discussion of changes in our Financial Results and Cash Flow
Comparisons from fiscal year 2018 to fiscal year 2019 has been
omitted from this Form 10-K, but may be found in Item 7 of Part II
of our Annual Report on Form 10-K for the fiscal year ended January
31, 2019, filed with the SEC on April 5, 2019.
BUSINESS
DESCRIPTION
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, collectively referred
to in this annual report as CNH Industrial, 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 agricultural
equipment we sell and service includes machinery and attachments
for uses ranging from large-scale farming to home and garden use.
The construction equipment we sell and service includes heavy
construction machinery, light industrial machinery for commercial
and residential construction, road and highway construction
machinery, mining, energy, and forestry operations equipment. We
offer our customers a one-stop solution for their equipment needs
through:
|
|
•
|
new and used equipment
sales;
|
|
|
•
|
equipment repair and
maintenance services; and
|
|
|
•
|
equipment rental and other
activities.
|
The new equipment
and parts we sell are supplied primarily by CNH Industrial.
According to its public reports, CNH Industrial is a leading
manufacturer and supplier of agricultural and construction
equipment based on the number of units sold, primarily through the
Case IH Agriculture, New Holland Agriculture, Case Construction and
New Holland Construction brands. Sales of new CNH Industrial
products accounted for approximately 70% of our new equipment revenue
in fiscal 2020, with our single largest
manufacturer other than CNH Industrial representing
approximately 2% of our total new equipment
sales. We acquire used equipment for resale primarily through
trade-ins from our customers and in some cases through selective
purchases. We sell parts and provide in-store and on-site repair
and maintenance services. We rent equipment and provide other
ancillary services such as equipment transportation, GPS signal
subscriptions, farm data management systems, precision farming
equipment, and finance and insurance products.
Throughout
our 39-year operating history, we
have built an extensive, geographically contiguous network
of 74 stores located in the
United States and 33 stores in Europe. We
have a history of growth through acquisitions, including over 50
acquisitions in 11 U.S. states and
four
European
countries since January 1, 2003. We believe that there will
continue to be opportunities for dealership consolidation in the
future, and we expect that acquisitions will continue to be a
component of our long-term growth strategy.
Certain
External Factors Affecting our Business
We are subject to
a number of factors that affect our business including those
factors discussed in the sections in this annual report entitled
"Risk Factors" and "Information Regarding Forward-Looking
Statements." Certain of these external factors include, but are not
limited to, the following:
Macroeconomic
and Industry Factors
Our Agriculture
and International businesses are primarily driven by the demand for
agricultural equipment for use in the production of food, fiber,
feed grain and renewable energy; home and garden applications; and
the maintenance of commercial, residential and government
properties. Agriculture industry factors such as changes in
agricultural commodity prices and net farm income, have an effect
on customer sentiment and their ability to secure financing for
equipment purchases. Macroeconomic and industry factors that affect
commodity prices and net farm income include changing worldwide
demand for agriculture commodities, crop yields and supply
disruptions caused by weather patterns and crop diseases, crop
stock levels, production costs, and changing U.S. dollar foreign
currency exchange rates. Based on U.S. Department of Agriculture
("USDA") publications, the most recent estimate of net farm income
for calendar year 2019 increased 12% compared to calendar year 2018
due to the U.S. Federal government's direct farm program payments.
Based on its February 2020 report, the USDA projected net farm
income for calendar year 2020 to increase 3.0%, as compared to
calendar year 2019.
During economic
downturns, and especially in the agriculture industry, equipment
revenue generally decreases; however, parts and service revenue
tend to be more stable, as the amount of land in production remains
unchanged. Additionally, farmers maintain existing equipment rather
than purchase new equipment. Our gross profit margins on equipment
sales are lower than our gross profit margins on parts and service.
As a result, a change in sales mix may cause our gross profit
margin to increase on a percentage basis even though our overall
gross profit dollars may decrease. Our operating expenses are
largely fixed expenses, other than commissions paid to our
equipment sales consultants, which generally fluctuate with gross
profit. When equipment revenue decreases, it may have a negative
impact on our ability to leverage these fixed costs, and, as a
result, may reduce our operating income.
Seasonality
& Weather
The agricultural
and construction equipment businesses are highly seasonal, which
causes our quarterly results and our available cash flow to
fluctuate during the year. Our customers generally purchase and
rent equipment in preparation for, or in conjunction with, their
busy seasons, which for farmers are the spring planting and fall
harvesting seasons; and which for Construction customers is
typically the second and third quarters of our fiscal year for much
of our Construction footprint. Our parts and service revenues are
typically highest during our customers' busy seasons as well, due
to the increased use of their equipment during this time, which
generates the need for more parts and service work. However,
weather conditions impact the timing of our customers' busy times,
which may cause greater than expected fluctuations in our quarterly
financial results year over year. In addition, the fourth quarter
typically is a significant period for equipment sales in the U.S.
because of our customers’ year-end tax planning considerations, the
timing of dealer incentives and the increase in availability of
funds from completed harvests and construction
projects.
Seasonal weather
trends, particularly severe wet or dry conditions, can have a
significant impact on regional agricultural and construction market
performance by affecting crop production and the ability to
undertake construction projects. Weather conditions that adversely
affect the agricultural or construction markets decrease the demand
for our products and services.
In addition,
numerous external factors such as credit markets, commodity prices,
and other circumstances may disrupt normal purchasing practices and
buyer sentiment, further contributing to the seasonal
fluctuations.
Dependence
on our Primary Supplier
The majority of
our business involves the distribution and servicing of equipment
manufactured by CNH Industrial. In fiscal 2020, CNH Industrial supplied
approximately 74% of the new equipment sold in
our Agriculture segment, 70% of the new equipment sold in
our Construction segment, and 62% of the new equipment sold in
our International segment, and represented a significant portion of
our parts revenue. Thus, we believe the following factors have a
significant impact on our operating results:
|
|
•
|
CNH Industrial’s product
offerings, reputation and market share;
|
|
|
•
|
CNH Industrial’s product
prices and incentive and discount programs;
|
|
|
•
|
CNH Industrial's supply of
inventory;
|
|
|
•
|
CNH Industrial's offering of
floorplan payable financing for the purchase of a substantial
portion of our inventory; and
|
|
|
•
|
CNH Industrial's offering of
financing and leasing used by our customers to purchase CNH
Industrial equipment from us.
|
Credit
Market Changes
Changes in credit
markets can affect our customers' ability and willingness to make
capital expenditures, including purchasing our equipment. Tight
credit markets, a low level of liquidity in many financial markets,
and extreme volatility in fixed income, credit, currency and equity
markets have the potential to adversely affect our business. Such
disruptions in the overall economy and financial markets and the
related reduction in consumer confidence in the economy, slow
activity in the capital markets, negatively affect access to credit
on commercially acceptable terms, and may adversely impact our
customers' access to credit and the terms of any such credit.
However, if retail interest rates remain low, our business may be
positively affected by customers who find financing purchases of
our equipment more attractive due to lower borrowing
costs.
Our business is
also particularly dependent on our access to credit markets to
manage inventory and finance acquisitions. We cannot predict what
future changes will occur in credit markets or how these changes
will impact our business.
Inflation
Inflation has not
had a material impact on our operating results and we do not expect
it to have a material impact in the future. To date, in those
instances in which we have experienced cost increases, we have been
able to increase selling prices to offset such
increases.
Significant
Items Impacting Our Financial Position and Results of
Operations
AGRAM
Acquisition
On July 2, 2018,
we continued our strategy of acquiring dealerships in desired
market areas with our acquisition of two commonly-controlled
companies, AGRAM Landtechnikvertrieb GmbH and AGRAM Landtechnik
Rollwitz GmbH (collectively "AGRAM"). AGRAM consists of four Case
IH agriculture dealership locations in the following cities of
Germany: Altranft, Burkau, Gutzkow, and Rollowitz. Total cash
consideration paid in the acquisition was $19.2 million, which we
financed through available cash resources and capacity under our
existing floorplan payable and other credit facilities. The four
AGRAM dealerships are included within our International
segment.
Critical
Accounting Policies and Use of Estimates
In the
preparation of financial statements prepared in conformity with
U.S. generally accepted accounting principles ("GAAP"), we are
required to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses and the related
disclosures. While we believe the estimates and judgments we use in
preparing our financial statements are appropriate, they are
subject to future events and uncertainties regarding their outcome
and therefore actual results may materially differ from these
estimates. We describe in Note 1, Business
Activity and Significant Accounting Polices, of the Notes to our
Consolidated Financial Statements the significant accounting
policies used in preparing the consolidated financial statements.
We consider the following items in our consolidated financial
statements to require significant estimation or
judgment.
Revenue
Recognition
Equipment revenue
transactions include the sale of agricultural and construction
equipment and often include both cash and noncash consideration
received from our customers, with noncash consideration in the form
of used, trade-in, equipment assets. The amount of revenue
recognized in the sale transaction is dependent on the value
assigned to the trade-in asset. Significant judgment is required to
estimate the value of trade-in assets. We assign value based on the
estimated selling price for that piece of equipment in the
applicable market, less a gross profit amount to be realized at the
time the trade-in asset is sold and an estimate of any
reconditioning work required to ready the asset for sale. We
estimate future selling prices of trade-in assets using various
external industry data and relevant internal information, and
consider the impact of various factors including model year, hours
of use, overall condition, and other equipment specifications. Our
estimates of the value of trade-in assets are impacted by changing
market values of used equipment and the availability of relevant
and reliable third-party data. In instances in which relevant
third-party information is not available, the value assigned to
trade-in equipment is dependent on internal judgments.
Inventories
New and used
equipment inventories are stated at the lower of cost (specific
identification) or net realizable value. Net realizable value is
the estimated selling price in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and
transportation. The majority of our used equipment inventory is
acquired through trade-ins from our customers and is initially
measured and recognized based on the estimated future selling price
of the equipment, less a gross profit amount to be realized when
the trade-in asset is sold and an estimate of any reconditioning
work required to ready the
asset for sale.
Subsequent to the initial recognition, all new and used equipment
inventories are subject to lower of cost or net realizable value
assessments. We estimate net realizable value using internal
information, management judgment and third-party data that
considers various factors including age of equipment, hours of use
and market conditions. Generally, used equipment prices are more
volatile to changes in market conditions than prices for new
equipment due to incentive programs that may be offered by
manufacturers to assist in the sale of new equipment. We review our
equipment inventory values and adjust them whenever the carrying
amount exceeds the estimated net realizable value.
Parts inventories
are valued at the lower of average cost or net realizable value. We
estimate net realizable value of our parts inventories based on
various factors including aging and sales history of each type of
parts inventory.
Impairment
of Long-Lived Assets
Long-Lived
Assets. Our long-lived assets consist
primarily of property and equipment and operating lease assets. We
review these assets for potential impairment whenever events or
circumstances indicate that the carrying value may not be
recoverable. Recoverability is measured by comparing the estimated
future undiscounted cash flows of such assets to their carrying
values. If the estimated undiscounted cash flows exceed the
carrying value, the carrying value is considered recoverable and no
impairment recognition is required. However, if the sum of the
undiscounted cash flows is less than the carrying value of the
asset, the second step of the impairment analysis must be performed
to measure the amount of the impairment, if any. The second step of
the impairment analysis compares the estimated fair value of the
long-lived asset to its carrying value and any amount by which the
carrying value exceeds the fair value is recognized as an
impairment charge.
When reviewing
long-lived assets for impairment, we group long-lived assets with
other assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows
of other assets and liabilities. Long-lived assets deployed and
used by individual store locations are reviewed for impairment at
the individual store level. Other long-lived assets shared across
stores within a segment or shared across segments are reviewed for
impairment on a segment or consolidated level as
appropriate.
During our
2020
fiscal year, we
determined that events or circumstances were present that may
indicate that the carrying amount of certain of our store
long-lived assets might not be recoverable. The events or
circumstances which indicated that certain of our store long-lived
assets might not be recoverable included a current period operating
loss combined with historical losses and anticipated future
operating losses within certain of our stores, or an expectation
that a long-lived asset (or asset group) will be disposed of before
the end of its previously estimated useful life. In light of these
circumstances, we performed step one of the impairment analysis for
these assets, which have a combined carrying value of
$35.4
million,
to determine if the asset values are recoverable. In certain cases,
the analysis indicated that the carrying value is not recoverable.
The aggregate carrying value of such assets totaled
$9.4
million.
Based on this conclusion, we performed step two of the impairment
analysis and estimated the fair value of these assets using an
income approach that incorporated unobservable inputs including
estimated forecasted net cash flows generated from the use and
disposition of these assets. Step two of the analysis indicated
that an impairment charge in the amount of $3.1 million was
necessary, of which $2.3 million related to the Agriculture segment
and $0.8 million related to the Construction segment. In all other
cases, in which the aggregate carrying value of such assets
totaled $26.0
million,
our analyses indicated that the carrying values are recoverable
based on our estimates of future undiscounted cash flows under step
one of the impairment analysis.
Our impairment
analyses require significant judgment, including identification of
the grouping of long-lived and other assets and liabilities for
impairment testing, estimates of future cash flows arising from
these groups of assets and liabilities, and estimates of the
remaining useful lives of the long-lived assets being evaluated.
Our estimates inherently include a degree of uncertainty and are
impacted by macroeconomic and industry conditions, the competitive
environment and other factors. Adverse changes in any of these
factors in future periods could result in impairment charges in
future periods which could materially impact our results of
operations and financial position.
Income
Taxes
In determining
our provision for (benefit from) income taxes, we must make certain
judgments and estimates, including an assessment of the
realizability of our deferred tax assets. In evaluating our ability
to realize the benefit of our deferred tax assets we consider all
available positive and negative evidence, including our historical
operating results and our expectation of future taxable income, the
availability to implement prudent tax-planning strategies, and the
carryforward periods over which the assets may be realized. These
assumptions require significant judgment and
estimation.
In reviewing our
deferred tax assets as of January 31, 2019, we concluded that
a partial valuation allowance for U.S. federal and state deferred
tax assets was warranted. In total we had recognized a valuation
allowance of $4.4 million
as of January 31,
2019. This conclusion was principally based on the presence of
historical losses and our expected future sources of taxable
income, including the anticipated future reversal of our existing
deferred tax assets and liabilities. We review our foreign deferred
tax assets, including net operating losses, on a
jurisdiction-by-jurisdiction basis. As of January 31, 2019,
we
concluded that a
valuation allowance for certain of our foreign deferred tax assets,
including net operating losses, was warranted. In total we have
recognized a valuation allowance in the amount of
$2.3
million.
This conclusion was principally based on the presence of historical
losses and the anticipated time period over which we may generate
taxable income in excess of these historical losses.
During the fiscal
year ended January 31,
2020, the
Company concluded, based upon all available evidence, it was more
likely than not that it would have sufficient future taxable income
to realize the Company’s federal and state deferred tax assets. As
a result, the Company released the $4.6 million valuation allowance
associated with deferred tax assets and recognized a corresponding
benefit from income taxes in the consolidated statement of
operations for the year ended January 31,
2020. At
fiscal year end 2020, the remaining foreign valuation allowance
was $2.2
million and there was no domestic
valuation allowance. The Company's conclusion regarding the
realizability of such deferred tax assets was based on recent
profitable domestic operations resulting in a cumulative profit
over the three-year period ending January 31, 2020
and our
projections of future profitability in the U.S.
The initial
recognition of, and any changes in, a deferred tax asset valuation
allowance are recorded to the provision for income taxes and
impacts our effective tax rate. Our assessment of the need for and
magnitude of valuation allowances for our deferred tax assets may
be impacted by changes in tax laws, our assumptions regarding the
ability to generate future taxable income and the availability of
tax-planning strategies. Changes in any of these factors could lead
to a change in the recognized valuation allowance which may impact
our future results of operations and financial
position.
New
Accounting Pronouncements
Refer to Note
1, Business
Activity and Significant Accounting Polices, of the Notes to our
Consolidated Financial Statements for a description of new
accounting pronouncements recently adopted or not yet adopted and
the impact or anticipated impact of such pronouncements to our
consolidated financial statements.
Key
Financial Metrics
In addition to
tracking our sales and expenses to evaluate our operational
performance, we also monitor the following key financial metrics.
The results of some of these metrics are discussed further
throughout the Management's Discussion and Analysis of Financial
Condition and Results of Operations section of this Form
10-K.
Inventory
Turnover
Inventory
turnover measures the rate at which inventory is sold during the
year. We calculate it by dividing cost of sales on equipment and
parts for the last twelve months by the average of the month-end
balances of our equipment and parts inventories for the same
twelve-month period. We believe that inventory turnover is an
important management metric in evaluating the efficiency at which
we are managing and selling our inventories.
Same-Store
Results
Same-store
results for any period represent results of operations by stores
that were part of our Company for the entire comparable period in
the preceding fiscal year. We do not distinguish relocated or
newly-expanded stores in this same-store analysis. Closed stores
are excluded from the same-store analysis.
Absorption
Absorption is an
industry term that refers to the percentage of an equipment
dealer's operating expense covered by the combined gross profit
from parts, service and rental fleet activity. We calculate
absorption by dividing our gross profit from sales of parts,
service and rental fleet by our operating expenses, less commission
expense on equipment sales, plus interest expense on floorplan
payables and rental fleet debt. We believe that absorption is an
important management metric because during economic down cycles our
customers tend to postpone new and used equipment purchases while
continuing to run, maintain and repair their existing equipment.
Thus, operating at a high absorption rate enables us to operate
profitably throughout economic down cycles.
Dollar
Utilization
Dollar
utilization is a measurement of asset performance and profitability
used in the rental industry. We calculate the dollar utilization of
our rental fleet equipment by dividing the rental revenue earned on
our rental fleet by the average gross carrying value of our rental
fleet (comprised of original equipment costs plus additional
capitalized costs) for that period. While our rental fleet has
variable expenses related to repairs and maintenance, its primary
expense for depreciation is fixed. Low dollar utilization of our
rental fleet has a negative impact on gross profit margin and gross
profit dollars due to the fixed
depreciation
component. However, high dollar utilization of our rental fleet has
a positive impact on gross profit margin and gross profit
dollars.
Adjusted
EBITDA
EBITDA is a
non-GAAP financial measure defined as earnings before finance
costs, income taxes, depreciation and amortization and is a metric
frequently used to assess and evaluate financial performance.
Management uses Adjusted EBITDA as a measure of financial
performance, as a supplemental measure to evaluate the Company's
overall operating performance and believes it provides a useful
metric for comparability between periods and across entities within
our industry by excluding differences in capital structure, income
taxes, non-cash charges and certain activities that occur outside
of the ordinary course of our business. We calculate Adjusted
EBITDA as our net income (loss), adjusted for net interest
(excluding floorplan interest expense), income taxes, depreciation,
amortization, and items included in our non-GAAP reconciliation,
for each of the respective periods. Adjusted EBITDA should be
evaluated in addition to, and not considered a substitute for, or
superior to, any GAAP measure of net income (loss). In addition,
other companies may calculate Adjusted EBITDA in a different
manner, which may hinder comparability with other companies. The
Company's Adjusted EBITDA for the fiscal years ended January
31, 2020 and 2019 was $53.1 million
and
$49.8
million,
respectively. Refer to the Non-GAAP Financial Measures section for
a reconciliation of Adjusted EBITDA to net income.
Key
Financial Statement Components
Revenue
|
|
•
|
Equipment:
We derive equipment revenue from the sale of new and used
agricultural and construction equipment.
|
|
|
•
|
Parts:
We derive parts
revenue from the sale of parts for brands of equipment that we
sell, other makes of equipment, and other types of equipment and
related components. Our parts sales provide us with a relatively
stable revenue stream that is less sensitive to the economic cycles
that affect our equipment sales.
|
|
|
•
|
Service:
We derive service
revenue from repair and maintenance services to our customers'
equipment. Our repair and maintenance services provide a
high-margin, relatively stable source of revenue through changing
economic cycles.
|
|
|
•
|
Rental and
other: We
derive other revenue from equipment rentals and ancillary equipment
support activities such as equipment transportation, GPS signal
subscriptions and reselling financial and insurance
products.
|
Cost of
Revenue
|
|
•
|
Equipment:
Cost of equipment
revenue is the lower of the acquired cost or the market value of
the specific piece of equipment sold.
|
|
|
•
|
Parts:
Cost of parts
revenue is the lower of the acquired cost or the market value of
the parts sold, based on average costing.
|
|
|
•
|
Service:
Cost of service
revenue represents costs attributable to services provided for the
maintenance and repair of customer-owned equipment and equipment
then on-rent by customers.
|
|
|
•
|
Rental and
other: Costs of other revenue
represent costs associated with equipment rental, such as
depreciation, maintenance and repairs, as well as costs associated
providing transportation, hauling, parts freight, GPS subscriptions
and damage waivers, including, among other items, drivers' wages,
fuel costs, shipping costs and our costs related to damage waiver
policies.
|
Operating
Expenses
Our operating
expenses include sales and marketing expenses, sales commissions
(which generally are based upon equipment gross profit margins),
payroll and related benefit costs, insurance expenses, professional
fees, property rental and related costs, property and other taxes,
administrative overhead, and depreciation associated with property
and equipment (other than rental equipment).
Floorplan
Interest
The cost of
financing inventory is an important factor affecting our results of
operations. Floorplan payable financing from CNH Industrial
Capital, the Bank Syndicate Credit Facility, DLL Finance and
various credit facilities related to our foreign subsidiaries
represent the primary sources of financing for equipment
inventories. CNH Industrial regularly offers interest-free periods
as well as additional incentives and special offers. As of
January 31,
2020, 55.2% of our floorplan payable
financing was non-interest bearing.
Other
Interest Expense
Interest expense
represents the interest on our debt instruments, including on our
previously outstanding Senior Convertible Notes, other than
floorplan payable financing facilities. Non-cash interest expense
from amortization of the debt discount associated with our
previously outstanding Senior Convertible Notes is also included in
this balance.
Results of
Operations
Comparative
financial data for each of our four sources of revenue for
fiscal 2020 and 2019 are presented below. The
results include the acquisitions made during these periods. The
year-to-year comparison included below is not necessarily
indicative of future results. Information regarding segment revenue
and income (loss) before income taxes is presented for each fiscal
year following our discussion of the consolidated results of
operations. Additional information regarding our segments is
included in Note 25 of our consolidated financial
statements.
The comparative
financial data for fiscal 2018 and the comparison of fiscal 2019 to
fiscal 2018 have been omitted from this Form 10-K but may be found
in Item 7 of Part II of our Annual Report on Form 10-K for the
fiscal year ended January 31,
2019,
filed with the SEC on April 5, 2019.
|
|
|
|
|
|
|
|
|
|
Year Ended
January 31,
|
|
2020
|
|
2019
|
|
(dollars in
thousands)
|
Equipment
|
|
|
|
Revenue
|
$
|
917,202
|
|
|
$
|
909,178
|
|
Cost of revenue
|
818,707
|
|
|
812,467
|
|
Gross profit
|
$
|
98,495
|
|
|
$
|
96,711
|
|
Gross profit
margin
|
10.7
|
%
|
|
10.6
|
%
|
Parts
|
|
|
|
Revenue
|
$
|
234,217
|
|
|
$
|
210,796
|
|
Cost of revenue
|
165,190
|
|
|
149,615
|
|
Gross profit
|
$
|
69,027
|
|
|
$
|
61,181
|
|
Gross profit
margin
|
29.5
|
%
|
|
29.0
|
%
|
Service
|
|
|
|
Revenue
|
$
|
99,165
|
|
|
$
|
86,840
|
|
Cost of revenue
|
33,446
|
|
|
29,036
|
|
Gross profit
|
$
|
65,719
|
|
|
$
|
57,804
|
|
Gross profit
margin
|
66.3
|
%
|
|
66.6
|
%
|
Rental and other
|
|
|
|
Revenue
|
$
|
54,587
|
|
|
$
|
54,691
|
|
Cost of revenue
|
37,010
|
|
|
38,799
|
|
Gross profit
|
$
|
17,577
|
|
|
$
|
15,892
|
|
Gross profit
margin
|
32.2
|
%
|
|
29.1
|
%
|
The following
table sets forth our statements of operations data expressed as a
percentage of revenue for the fiscal years indicated.
|
|
|
|
|
|
|
|
Year Ended
January 31,
|
|
2020
|
|
2019
|
Revenue
|
|
|
|
Equipment
|
70.3
|
%
|
|
72.1
|
%
|
Parts
|
17.9
|
%
|
|
16.7
|
%
|
Service
|
7.6
|
%
|
|
6.9
|
%
|
Rental and other
|
4.2
|
%
|
|
4.3
|
%
|
Total Revenue
|
100.0
|
%
|
|
100.0
|
%
|
Total Cost of
Revenue
|
80.8
|
%
|
|
81.6
|
%
|
Gross Profit
Margin
|
19.2
|
%
|
|
18.4
|
%
|
Operating
Expenses
|
17.3
|
%
|
|
16.0
|
%
|
Impairment of Intangible and
Long-Lived Assets
|
0.3
|
%
|
|
0.2
|
%
|
Income from
Operations
|
1.6
|
%
|
|
2.2
|
%
|
Other Income
(Expense)
|
(0.5
|
)%
|
|
(0.9
|
)%
|
Income Before Income
Taxes
|
1.1
|
%
|
|
1.3
|
%
|
Provision for Income
Taxes
|
0.1
|
%
|
|
0.3
|
%
|
Net Income
|
1.1
|
%
|
|
1.0
|
%
|
Fiscal Year
Ended January 31,
2020 Compared to
Fiscal Year Ended January 31,
2019
Consolidated
Results
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
January 31,
|
|
Increase/
|
|
Percent
|
|
2020
|
|
2019
|
|
(Decrease)
|
|
Change
|
|
(dollars
in thousands)
|
|
|
Equipment
|
$
|
917,202
|
|
|
$
|
909,178
|
|
|
$
|
8,024
|
|
|
0.9
|
%
|
Parts
|
234,217
|
|
|
210,796
|
|
|
23,421
|
|
|
11.1
|
%
|
Service
|
99,165
|
|
|
86,840
|
|
|
12,325
|
|
|
14.2
|
%
|
Rental and other
|
54,587
|
|
|
54,691
|
|
|
(104
|
)
|
|
(0.2
|
)%
|
Total Revenue
|
$
|
1,305,171
|
|
|
$
|
1,261,505
|
|
|
$
|
43,666
|
|
|
3.5
|
%
|
The increase in
total revenue for fiscal 2020, as compared to
fiscal 2019, was primarily the result of
increased parts and service revenue within our Agriculture and
Construction segments. Company-wide same-store sales were
relatively flat, increasing 1.6% over the prior fiscal year,
which was driven by parts and service revenue. Our total revenue
increase over the prior year was also impacted by our acquisitions
of AGRAM and Northwood.
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
January 31,
|
|
Increase/
|
|
Percent
|
|
2020
|
|
2019
|
|
(Decrease)
|
|
Change
|
|
(dollars
in thousands)
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
Equipment
|
$
|
98,495
|
|
|
$
|
96,711
|
|
|
$
|
1,784
|
|
|
1.8
|
%
|
Parts
|
69,027
|
|
|
61,181
|
|
|
7,846
|
|
|
12.8
|
%
|
Service
|
65,719
|
|
|
57,804
|
|
|
7,915
|
|
|
13.7
|
%
|
Rental and other
|
17,577
|
|
|
15,892
|
|
|
1,685
|
|
|
10.6
|
%
|
Total Gross
Profit
|
$
|
250,818
|
|
|
$
|
231,588
|
|
|
$
|
19,230
|
|
|
8.3
|
%
|
Gross Profit
Margin
|
|
|
|
|
|
|
|
Equipment
|
10.7
|
%
|
|
10.6
|
%
|
|
0.1
|
%
|
|
0.9
|
%
|
Parts
|
29.5
|
%
|
|
29.0
|
%
|
|
0.5
|
%
|
|
1.7
|
%
|
Service
|
66.3
|
%
|
|
66.6
|
%
|
|
(0.3
|
)%
|
|
(0.5
|
)%
|
Rental and other
|
32.2
|
%
|
|
29.1
|
%
|
|
3.1
|
%
|
|
10.7
|
%
|
Total Gross Profit
Margin
|
19.2
|
%
|
|
18.4
|
%
|
|
0.8
|
%
|
|
4.3
|
%
|
Gross Profit
Mix
|
|
|
|
|
|
|
|
Equipment
|
39.3
|
%
|
|
41.8
|
%
|
|
(2.5
|
)%
|
|
(6.0
|
)%
|
Parts
|
27.5
|
%
|
|
26.4
|
%
|
|
1.1
|
%
|
|
4.2
|
%
|
Service
|
26.2
|
%
|
|
25.0
|
%
|
|
1.2
|
%
|
|
4.8
|
%
|
Rental and other
|
7.0
|
%
|
|
6.8
|
%
|
|
0.2
|
%
|
|
2.9
|
%
|
Total Gross Profit
Mix
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
Gross profit
increased 8.3% or $19.2 million
from
fiscal 2019 to fiscal 2020, primarily due to higher
revenue from our parts and service business in fiscal 2020. Gross
profit margin increased from 18.4% in fiscal 2019 to 19.2% in fiscal 2020. The improvement in overall
gross profit margin was the result of an improved sales mix, a
greater percentage of revenue was generated by our higher margin
parts and service businesses. Additionally, an increase in our
rental fleet dollar utilization to 25.4% in fiscal 2020 compared to
23.9% in fiscal 2019 resulted in an improvement in rental and other
gross profit, as well as gross profit margin.
Our company-wide
absorption rate improved to 72.0% for fiscal
2020
as compared
to 71.6% during fiscal 2019, due to
additional parts and service gross profit partially offset by
increased expenses.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
January 31,
|
|
|
|
Percent
|
|
2020
|
|
2019
|
|
Increase
|
|
Change
|
|
(dollars
in thousands)
|
|
|
Operating
Expenses
|
$
|
225,722
|
|
|
$
|
201,537
|
|
|
$
|
24,185
|
|
|
12.0
|
%
|
Operating
Expenses as a Percentage of Revenue
|
17.3
|
%
|
|
16.0
|
%
|
|
1.3
|
%
|
|
8.1
|
%
|
Operating
expenses for fiscal 2020 increased $24.2
million,
as compared to fiscal 2019. In fiscal
2020, operating expenses as a
percentage of revenue increased to 17.3% from 16.0% in fiscal 2019. Operating expenses
increased primarily as a result of costs arising from the ERP
transition, a full year of expenses for AGRAM, expenses associated
with our acquisition of the Northwood, North Dakota dealership
location (October 2019), and increased other costs required to
support higher business volumes in our Agriculture and Construction
segments. These expense increases combined with relatively flat
same-store sales resulted in the 1.3% increase in operating
expenses as a percentage of revenue.
Impairment
and Restructuring Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
January 31,
|
|
Increase/
|
|
Percent
|
|
2020
|
|
2019
|
|
(Decrease)
|
|
Change
|
|
(dollars
in thousands)
|
|
|
Impairment of Long-Lived
Assets
|
$
|
3,764
|
|
|
$
|
2,156
|
|
|
$
|
1,608
|
|
|
75.0
|
%
|
Restructuring
Costs
|
—
|
|
|
414
|
|
|
(414
|
)
|
|
n/m
|
|
During
fiscal 2020, we recognized a total
of $3.8
million of
impairment expenses related to long-lived assets, as compared
to $2.2
million in
fiscal 2019. The fiscal 2020 impairment
expenses were related to certain store assets in the Agriculture
and Construction segments, and primarily related to the impairment
of right-of-use assets identified after the initial adoption of the
new lease accounting standard guidance in ASC 842, which we adopted
in fiscal year 2020.
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
January 31,
|
|
Increase/
|
|
Percent
|
|
2020
|
|
2019
|
|
(Decrease)
|
|
Change
|
|
(dollars
in thousands)
|
|
|
Interest income and other
income (expense)
|
$
|
3,126
|
|
|
$
|
2,548
|
|
|
$
|
578
|
|
|
22.7
|
%
|
Floorplan interest
expense
|
(5,354
|
)
|
|
(6,114
|
)
|
|
(760
|
)
|
|
12.4
|
%
|
Other interest
expense
|
(4,452
|
)
|
|
(7,761
|
)
|
|
(3,309
|
)
|
|
42.6
|
%
|
The decrease in
floorplan interest expense for fiscal 2020, as compared to
fiscal 2019, was primarily due to a
decrease in our interest-bearing inventory in fiscal
2020. Interest expense associated
with our Senior Convertible Notes, which is reflected in other
interest expense, decreased in fiscal 2020 compared to fiscal
2019, due to interest savings
resulting from the payoff of our Senior Convertible Notes on May 1,
2019.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
January 31,
|
|
|
|
Percent
|
|
2020
|
|
2019
|
|
(Decrease)
|
|
Change
|
|
(dollars
in thousands)
|
|
|
Provision for Income
Taxes
|
$
|
699
|
|
|
$
|
3,972
|
|
|
$
|
(3,273
|
)
|
|
82.4
|
%
|
Our effective tax
rate decreased from 24.6% in fiscal 2019 to 4.8% in fiscal 2020. The Company's effective tax
rate decreased due to changes in valuation allowances recognized
for deferred tax assets. In fiscal 2020, the Company concluded that
a release of its domestic valuation allowance of $4.6 million for
U.S. federal and state deferred tax assets was warranted. This
conclusion was principally based on the presence of three years of
cumulative income and our projections of future
profitability.
See Note 18 to
our consolidated financial statements for further details on our
effective tax rate.
Segment
Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
January 31,
|
|
Increase/
|
|
Percent
|
|
2020
|
|
2019
|
|
(Decrease)
|
|
Change
|
|
(dollars
in thousands)
|
|
|
Revenue
|
|
|
|
|
|
|
|
Agriculture
|
$
|
749,042
|
|
|
$
|
726,793
|
|
|
$
|
22,249
|
|
|
3.1
|
%
|
Construction
|
320,034
|
|
|
301,989
|
|
|
18,044
|
|
|
6.0
|
%
|
International
|
236,095
|
|
|
232,723
|
|
|
3,371
|
|
|
1.4
|
%
|
Total
|
$
|
1,305,171
|
|
|
$
|
1,261,505
|
|
|
$
|
43,664
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Taxes
|
|
|
|
|
|
|
|
Agriculture
|
$
|
18,036
|
|
|
$
|
16,799
|
|
|
$
|
1,237
|
|
|
7.4
|
%
|
Construction
|
(2,290
|
)
|
|
(4,400
|
)
|
|
2,110
|
|
|
48.0
|
%
|
International
|
504
|
|
|
5,160
|
|
|
(4,656
|
)
|
|
(90.2
|
)%
|
Segment income before income
taxes
|
16,250
|
|
|
17,559
|
|
|
(1,309
|
)
|
|
(7.5
|
)%
|
Shared Resources
|
(1,598
|
)
|
|
(1,405
|
)
|
|
(192
|
)
|
|
(13.7
|
)%
|
Total
|
$
|
14,652
|
|
|
$
|
16,154
|
|
|
$
|
(1,501
|
)
|
|
(9.3
|
)%
|
Agriculture
Agriculture
segment revenue for fiscal 2020 increased 3.1% or $22.2 million
compared to the
same period last year. Agriculture same-store sales
increased 2.7% for fiscal
2020,
as compared to fiscal 2019. Total segment revenue and
same-store sales were primarily driven by increased parts and
service business. The Northwood acquisition, which closed in
October 2019, also contributed to the total sales growth for the
segment.
Agriculture
segment income before income taxes for fiscal 2020 improved by
$1.2
million or 7.4% compared to the same period
last year. The improvement in segment performance was largely the
result of increased parts and service sales, partially offset by
increases in operating expenses, as well as floorplan
interest.
Construction
Construction
segment revenue for fiscal 2020 improved 6.0% or $18.0 million
compared to
fiscal 2019. Same-store sales growth
accounted for 6.1% of the 6.0% segment revenue increase. Our
Construction segment experienced increased revenues across all
revenue categories: equipment, parts, service, and rental and
other.
The Construction
segment loss before income taxes was $2.3 million
for fiscal
2020
compared
to $4.4
million for the prior year. The
improvement in segment results was due to increased revenue and
improved gross profit margins, partially offset by higher operating
expenses required to support increased activity within this
segment.
International
International
segment revenue for fiscal 2020 increased 1.4% or $3.4 million
compared to
fiscal 2019, primarily due to a full
year of results from our AGRAM acquisition plus an increase in
parts and service sales. Partially offsetting the impact of our
AGRAM acquisition and parts and service sales growth was a
same-store sales decrease of 7.9% in fiscal 2020 compared to
the prior year due to decreased equipment revenue resulting from
challenging industry conditions in certain of our
markets.
Our International
segment income before income taxes was $0.5 million
for fiscal
2020, compared to
$5.2
million for the same period last
year. The decrease in segment income before income taxes was
primarily due to decreased equipment revenue and the resulting
negative impact on our ability to leverage our fixed operating
costs within this segment as well as an overall increase in segment
operating expenses.
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 loss before income
taxes was $1.6 million
for fiscal
2020
compared
to $1.4
million for fiscal
2019.
Non-GAAP Financial Measures
To supplement our
net income and diluted earnings per share ("diluted EPS"), both
GAAP measures, we present and our management utilizes adjusted net
income, adjusted diluted EPS, and adjusted EBITDA, all non-GAAP
financial measures. Generally, these non-GAAP financial measures
include adjustments for items such as valuation allowances for
income tax, restructuring costs, long-lived asset impairment
charges, gains and losses recognized on the repurchase of our
Senior Convertible Notes, ERP start-up costs, and other gains and
losses. We believe that the presentation of adjusted net income,
adjusted diluted EPS and adjusted EBITDA is relevant and useful to
our management and investors because it provides a measurement of
earnings on activities that we consider to occur in the ordinary
course of our business. Adjusted net income, adjusted diluted EPS,
and adjusted EBITDA should be evaluated in addition to, and not
considered a substitute for, or superior to, the most comparable
GAAP financial measure. In addition, other companies may calculate
these non-GAAP financial measures in a different manner, which may
hinder comparability of our results with those of other
companies.
The following
tables reconcile net income and diluted EPS, GAAP financial
measures, to adjusted net income, adjusted diluted EPS, and
adjusted EBITDA, all non-GAAP financial measures.
|
|
|
|
|
|
|
|
|
|
Year Ended
January 31,
|
|
2020
|
|
2019
|
|
(dollars in
thousands, except per share data)
|
Adjusted Net
Income
|
|
|
|
Net
Income
|
$
|
13,953
|
|
|
$
|
12,182
|
|
Adjustments
|
|
|
|
ERP transition
costs
|
7,175
|
|
|
—
|
|
Loss on repurchase of senior
convertible notes
|
—
|
|
|
615
|
|
Restructuring &
impairment charges
|
3,764
|
|
|
2,570
|
|
Total Pre-Tax
Adjustments
|
10,939
|
|
|
3,185
|
|
Less: Tax Effect of
Adjustments (1)
|
2,571
|
|
|
636
|
|
Less: Income Tax Valuation
Allowance (2)
|
4,611
|
|
|
—
|
|
Total
Adjustments
|
3,757
|
|
|
2,549
|
|
Adjusted Net
Income
|
$
|
17,710
|
|
|
$
|
14,731
|
|
|
|
|
|
|
Year Ended
January 31,
|
|
2020
|
|
2019
|
|
(dollars in
thousands, except per share data)
|
Adjusted
Diluted EPS
|
|
|
|
Diluted EPS
|
$
|
0.63
|
|
|
$
|
0.55
|
|
Adjustments (3)
|
|
|
|
ERP transition
costs
|
0.32
|
|
|
—
|
|
Loss on repurchase of senior
convertible notes
|
—
|
|
|
0.03
|
|
Restructuring &
impairment charges
|
0.17
|
|
|
0.12
|
|
Total Pre-Tax
Adjustments
|
0.49
|
|
|
0.15
|
|
Less: Tax Effect of
Adjustments (1)
|
0.12
|
|
|
0.03
|
|
Less: Income Tax Valuation
Allowance (2)
|
0.21
|
|
|
—
|
|
Total
Adjustments
|
0.16
|
|
|
0.12
|
|
Adjusted Diluted
EPS
|
$
|
0.79
|
|
|
$
|
0.67
|
|
|
|
|
|
Adjusted
EBITDA
|
|
|
|
Net
Income
|
$
|
13,953
|
|
|
$
|
12,182
|
|
Adjustments
|
|
|
|
Interest expense, net of
interest income
|
4,121
|
|
|
6,818
|
|
Provision for income
taxes
|
699
|
|
|
3,972
|
|
Depreciation and
amortization
|
28,067
|
|
|
23,605
|
|
EBITDA
|
46,840
|
|
|
46,577
|
|
Adjustments
|
|
|
|
ERP transition costs
(excluding depreciation)
|
2,497
|
|
|
—
|
|
Loss on repurchase of senior
convertible notes
|
—
|
|
|
615
|
|
Restructuring &
impairment charges
|
3,764
|
|
|
2,570
|
|
Total
Adjustments
|
6,261
|
|
|
3,185
|
|
Adjusted EBITDA
|
$
|
53,101
|
|
|
$
|
49,762
|
|
|
|
(1)
|
The tax effect of adjustments
for all U.S. related items was determined using the federal and
state statutory tax rates applicable to the respective period with
an impact for state taxes given our valuation allowances against
deferred tax assets. The federal statutory tax rate for the fiscal
years ended January 31, 2020 and 2019 was 23.5% and 21.0%,
respectively.
|
|
|
(2)
|
Amounts reflect the tax
benefit recognized from the release of the valuation allowance on
our U.S. deferred tax assets.
|
|
|
(3)
|
Adjustments are net of the
impact of amounts allocated to participating securities where
applicable.
|
For a discussion
of other non-GAAP financial measures, see our discussion of
Adjusted Cash Flow in the Cash Flow section elsewhere within this
Item 7 of our Form 10-K.
Liquidity
and Capital Resources
Sources of
Liquidity
Our primary
sources of liquidity are cash reserves, cash generated from
operations, and borrowings under our floorplan payable and other
credit facilities. We expect these sources of liquidity to be
sufficient to fund our working capital requirements, acquisitions,
capital expenditures and other investments in our business, service
our debt, pay our tax and lease obligations and other commitments
and contingencies, and meet any seasonal operating requirements for
the foreseeable future, provided, however, that our borrowing
capacity under our credit agreements is dependent on compliance
with various financial covenants as further described in Note 8 to
our consolidated financial statements included in this Form 10-K.
We have worked in the past, and will continue to work in the
future, with our lenders to implement satisfactory modifications to
these financial covenants when appropriate for the business
conditions confronted by us.
Equipment
Inventory and Floorplan Payable Credit Facilities
Floorplan payable
balances reflect the amount owed for new equipment inventory
purchased from a manufacturer and used equipment inventory, which
is primarily purchased through trade-in on equipment sales, net of
unamortized debt issuance costs incurred for floorplan credit
facilities. Certain of the manufacturers from which we purchase new
equipment inventory offer financing on these purchases, either
offered directly from the manufacturer or through the
manufacturers’ captive finance affiliate. CNH Industrial's captive
finance subsidiary, CNH Industrial Capital, also provides financing
of used equipment inventory. We also have floorplan payable
balances with non-manufacturer lenders for new and used equipment
inventory. Borrowings and repayments on manufacturer floorplan
facilities are reported as operating cash flows, while borrowings
and repayments on non-manufacturer floorplan facilities are
reported as financing cash flows in our consolidated statements of
cash flows.
As of
January 31,
2020, we
had floorplan payable lines of credit for equipment purchases
totaling $717.0
million,
which includes a $450.0 million
credit facility
with CNH Industrial Capital, a $140.0 million
floorplan payable
line under the Wells Fargo Credit Agreement, a $60.0 million
credit facility
with DLL Finance, and additional credit facilities related to our
foreign subsidiaries. Available borrowing capacity under these
lines of credit are reduced by amounts outstanding under such
facilities, borrowing base calculations and amount of standby
letters of credit outstanding with respect to the Wells Fargo
Credit Agreement, and certain acquisition-related financing
arrangements with respect to the CNH Industrial Capital credit
facility. As of January 31,
2020, the
Company was in compliance with the financial covenants under its
credit agreements. Additional details on each of these credit
facilities is disclosed in Note 8 to our consolidated financial
statements included in this annual report.
As of January 31,
2020, the Company was not subject to the fixed charge ratio
covenant under the Wells Fargo Credit Agreement as our adjusted
excess availability plus eligible cash collateral (as defined in
the Wells Fargo Credit Agreement) was not less than 15% of the
total amount of the credit facility. The maturity date for the
Wells Fargo Credit Agreement was October 28, 2020. Effective
April 3,
2020, we
entered into an amended and restated credit agreement with the Bank
Syndicate, which has a maturity date of April 3, 2025. Please refer
to Note 27 to our consolidated financial statement included in Item
8 for further information regarding the Company's line of
credit.
Our equipment
inventory turnover decreased to 1.5 times for fiscal
2020
compared
to 1.8 times for fiscal
2019. Our equipment inventories
amount increased 23.7% from January 31, 2019 to
January 31, 2020. The increase in equipment sales volume in fiscal
2020 as compared to fiscal 2019 was offset by the increase in our
average equipment inventory over these time periods. Our equity in
equipment inventory, which reflects the portion of our equipment
inventory balance that is not financed by floorplan payables,
decreased to 27.9% as of January 31, 2020
from
34.4%
as of
January 31,
2019. The
decrease in our equity in equipment inventory is primarily due to
the stocking of new equipment inventories and the higher level of
floorplan financing available on such inventories, and increased
borrowing on our floorplan lines of credit following the repayment
of our outstanding Senior Convertible Notes on May 1,
2019.
Senior
Convertible Notes
The Company's
Senior Convertible Notes had a maturity date of May 1, 2019. The
outstanding principal balance of Senior Convertible Notes as
of January 31, 2019
was
$45.6
million.
In fiscal 2020, the Company repaid the remaining
outstanding
Senior Convertible Notes, which repayment was primarily funded from
non-manufacturer floorplan payables in addition to cash generated
from business activities.
Long-Term
Debt Facilities
As of January 31,
2020, we had a $60.0 million
working capital
line of credit under the Wells Fargo Credit Agreement (the "Working
Capital Line"). Under the recently executed Bank Syndicate Facility
Agreement, the Company's working capital line increased to $65.0
million. The Working Capital Line is used to finance our working
capital requirements and fund certain capital expenditures. As
of January 31,
2020, the
Company had utilized $10.0 million or 17% of the Working Capital
Line. The Company may also decide in the future to finance a
portion of our rental fleet as well as our capital expenditures
using long-term debt from various lenders.
Adequacy of
Capital Resources
Our primary uses
of cash have been to fund our operating activities, including the
purchase of inventories and providing for other working capital
needs; meeting our debt service requirements; making payments due
under our various leasing arrangements; funding capital
expenditures, including the purchase of rental fleet assets; and
from time to time, opportunistically repurchasing our previously
outstanding Senior Convertible Notes. The primary factor affecting
our ability to generate cash and to meet cash requirements, is our
operating performance as impacted by (i) industry factors,
(ii) competition, (iii) general economic conditions, (iv)
the timing and extent of acquisitions, and (v) business and
other factors including those identified in Item 1A "Risk
Factors" and discussed in this Form 10-K.
Our ability to
service our debt will depend upon our ability to generate necessary
cash. This will depend on our future acquisition activity,
operating performance, general economic conditions, and financial,
competitive, business and other factors, some of which are beyond
our immediate control. Based on our current operational
performance, we believe our cash flow from operations, available
cash, and available borrowings under our existing credit facilities
will be adequate to meet our liquidity needs for, at a minimum, the
next 12 months.
In fiscal
2020, we used $14.3 million
in cash for
rental fleet purchases and
$10.7 million in cash for property and
equipment purchases and financed $11.0 million
in property and
equipment purchases with long-term debt and capital leases. The
property and equipment purchases primarily related to the purchase
of vehicles and improvements to, or purchase of, real estate
assets. In fiscal 2019, we used $5.7 million
in cash for
rental fleet purchases, $6.3 million
in cash for
property and equipment purchases, and financed $5.2 million
in property and
equipment purchases with long-term debt. The property and equipment
purchases primarily related to the purchase of vehicles, trucks and
real estate. We expect our cash expenditures for property and
equipment, exclusive of rental fleet purchases, for fiscal
2021
to be
approximately $20.0 million
and expect cash
expenditures for our rental fleet for fiscal 2021 to be approximately
$15.0
million.
The actual amount of our fiscal 2021 capital expenditures will
depend upon factors such as general economic conditions, growth
prospects for our industry and our decisions regarding financing
and leasing options. We currently expect to finance property and
equipment purchases with borrowings under our existing credit
facilities, financing with long-term debt, with available cash or
with cash flow from operations. We may need to incur additional
debt if we pursue any future acquisitions.
There can be no
assurances, however, that our business will generate sufficient
cash flow from operations or that future borrowings will be
available under the credit facilities with the Bank Syndicate, CNH
Industrial Capital and DLL Finance in amounts sufficient to allow
us to service our indebtedness and to meet our other commitments.
If we are unable to generate sufficient cash flow from operations
or to obtain sufficient future borrowings, we may be required to
seek one or more alternatives such as refinancing or restructuring
our indebtedness, selling material assets or operations or seeking
to raise additional debt or equity capital. There can be no
assurances that we will be able to succeed with one of these
alternatives on commercially reasonable terms, if at all. In
addition, if we pursue strategic acquisitions, we may require
additional equity or debt financing to consummate the transactions,
and we cannot assure you that we will succeed in obtaining this
financing on favorable terms or at all. If we incur additional
indebtedness to finance any of these transactions, this may place
increased demands on our cash flow from operations to service the
resulting increased debt. Our existing debt agreements contain
restrictive covenants that may restrict our ability to adopt any of
these alternatives. Any non-compliance by us under the terms of our
debt agreements could result in an event of default which, if not
cured, could result in the acceleration of our debt. We have met
all financial covenants under these credit agreements as of
January 31,
2020. If
anticipated operating results create the likelihood of a future
covenant violation, we would seek to work with our lenders on an
appropriate modification or amendment to our financing
arrangements.
Cash
Flow
Cash Flow
Provided By Operating Activities
Net cash
provided
by operating activities in
fiscal 2020 was $1.0 million
compared
to $46.6
million in
fiscal 2019. The decrease in net cash
provided by operating activities of $45.6 million
from
fiscal 2019 to fiscal 2020 was primarily attributable to
changes in inventory. We evaluate our cash flow from operating
activities net of all floorplan payable activity and maintain a
constant level of equity in our inventory. Taking these adjustments
into account, our adjusted cash flow provided by
operating
activities was $17.8 million
for fiscal
2020
compared
to $47.4
million for fiscal
2019.
For a reconciliation of this adjusted cash flow provided by
operating activities to the comparative GAAP financial measure,
refer to the Adjusted Cash Flow Reconciliation below.
Cash Flow
Used For Investing Activities
Net cash used for
investing activities is primarily comprised of cash used for
property and equipment purchases, including rental fleet purchases,
and for business acquisitions.
Net cash
used for
investing
activities was $36.5 million
in fiscal
2020, compared to
$25.8
million in
fiscal 2019. In fiscal
2020, the Company used
$25.0
million of
cash, compared to $12.0 million
in fiscal 2019,
for additional investment in our rental fleet, vehicles, capital
improvements, and purchases of real estate. In addition, the
Company utilized $13.9 million of cash, compared to $15.3 million
in the prior fiscal year, for acquisitions.
Cash Flow
Provided By (Used For) Financing Activities
Net cash
provided
by financing activities
was $22.9
million in
fiscal 2020, compared to net cash
used for
financing
activities of $16.7 million
in fiscal
2019. In fiscal
2020, net cash
provided
by financing activities was the
result of increased non-manufacturer floorplan payables, the
proceeds of which were partially used to repay $45.6 million
face value of our
Senior Convertible Notes, which matured on May 1, 2019.
Additionally, in fiscal 2020, long-term financing proceeds of
$18.9
million were utilized to purchase
previously leased assets, vehicles and real estate.
Adjusted
Cash Flow Reconciliation
We consider our
cash flow from operating activities to include all equipment
inventory financing activity regardless of whether we obtain the
financing from a manufacturer or other source. GAAP requires the
cash flows associated with non-manufacturer floorplan payables to
be recognized as financing cash flows in the consolidated statement
of cash flows. We consider equipment inventory financing with both
manufacturers and other sources to be part of the normal operations
of our business. We also evaluate our cash flow from operating
activities by assuming a constant level of equity in our equipment
inventory. Our equity in our equipment inventory reflects the
portion of our equipment inventory balance that is not financed by
floorplan payables. Our adjustment to maintain a constant level of
equity in our equipment inventory is equal to the difference
between our actual level of equity in equipment inventory at each
period-end presented on the consolidated statements of cash flows
compared to the actual level of equity in equipment inventory at
the beginning of the fiscal year. We refer to this measure of cash
flow as Adjusted Cash Flow.
Our equity in
equipment inventory was 27.9% and 34.4% as of January 31, 2020
and
2019, respectively.
Adjusted Cash
Flow is a non-GAAP financial measure. We believe that the
presentation of Adjusted Cash Flow is relevant and useful to our
investors because it provides information on activities we consider
normal operations of our business, regardless of financing source
and level of financing for our equipment inventory. The following
table reconciles net cash provided by operating activities, a GAAP
financial measure, to adjusted cash flow provided by operating
activities; and net cash used for financing activities, a GAAP
financial measure, to adjusted cash flow used for financing
activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used for) Operating Activities
|
Net Cash
Provided by (Used for) Financing Activities
|
|
Year Ended
January 31,
|
Year Ended
January 31,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(in
thousands)
|
(in
thousands)
|
Cash Flow, As
Reported
|
$
|
955
|
|
|
$
|
46,605
|
|
|
$
|
22,869
|
|
|
$
|
(16,727
|
)
|
Adjustment for
Non-Manufacturer Floorplan Net Payments
|
50,158
|
|
|
16,818
|
|
|
(50,158
|
)
|
|
(16,818
|
)
|
Adjustment for
Constant Equity in Equipment Inventory
|
(33,359
|
)
|
|
(16,030
|
)
|
|
—
|
|
|
—
|
|
Adjusted Cash
Flow
|
$
|
17,754
|
|
|
$
|
47,393
|
|
|
$
|
(27,289
|
)
|
|
$
|
(33,545
|
)
|
Certain
Information Concerning Off-Balance Sheet Arrangements
As of
January 31,
2020, we
did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. We
are, therefore, not exposed to any financing, liquidity, market or
credit risk that could arise if we had engaged in these
relationships. In the normal course of our business activities, we
lease real estate, vehicles and equipment under operating
leases.
Contractual
and Commercial Commitment Summary
Our contractual
obligations and commercial commitments as of January 31, 2020
are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due
By Period
|
Contractual
Obligations
|
|
Total
|
|
Less
Than
1
Year
|
|
1 to 3
Years
|
|
3 to 5
Years
|
|
More
Than
5
Years
|
|
|
(in
thousands)
|
Long-term debt obligations
(1)
|
|
$
|
74,798
|
|
|
$
|
18,466
|
|
|
$
|
15,330
|
|
|
$
|
15,522
|
|
|
$
|
25,480
|
|
Operating lease
(2)
|
|
126,998
|
|
|
18,714
|
|
|
32,578
|
|
|
28,530
|
|
|
47,176
|
|
Purchase obligations
(3)
|
|
18,207
|
|
|
4,850
|
|
|
7,232
|
|
|
6,125
|
|
|
—
|
|
Total
|
|
$
|
220,003
|
|
|
$
|
42,030
|
|
|
$
|
55,140
|
|
|
$
|
50,177
|
|
|
$
|
72,656
|
|
|
|
(1)
|
Includes obligations under our
capital lease and financing obligations, long-term debt obligations
and estimates of interest payable under all such
obligations.
|
|
|
(2)
|
Includes minimum lease payment
obligations under operating leases. Amounts do not include
insurance or real estate taxes, which we include in our operating
expenses and which we estimate will be approximately
$2.3
million for
the less than 1 year period, $4.3 million
for the 1 to
3 year period, $3.9 million
for the 3 to
5 year period, and $6.7 million
for the more than
5 years period for a total of approximately
$17.2
million.
See Note 16 to our consolidated financial statements for a
description of our operating lease obligations.
|
|
|
(3)
|
Primarily represents contracts
related to information technology systems.
|
Information
Regarding Forward-Looking Statements
The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. We include "forward-looking"
information in this Form 10-K, including this Item 7, as well as in
other materials filed or to be filed by us with the SEC (as well as
information included in oral statements or other written statements
made or to be made by us).
This Form 10-K
contains forward-looking statements that involve risks and
uncertainties. In some cases, you can identify forward-looking
statements by the following words: "anticipate," "believe,"
"continue," "could," "estimate," "expect," "intend," "may,"
"ongoing," "plan," "potential," "predict," "project," "should,"
"will," "would," or the negative of these terms or other comparable
terminology, although not all forward-looking statements contain
these words. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our
industry's actual results, levels of activity, performance or
achievements to be materially different from the information
expressed or implied by these forward-looking statements.
Forward-looking statements are only predictions and are not
guarantees of performance. These statements are based on our
management's beliefs and assumptions, which in turn are based on
currently available information. Our forward-looking statements in
this Form 10-K generally relate to the following:
|
|
•
|
our beliefs and
intentions with respect to our growth strategies, including growth
through strategic acquisitions, the types of acquisition targets we
intend to pursue, the availability of suitable acquisition targets,
the industry climate for dealer consolidation, and our ability to
implement our growth strategies;
|
|
|
•
|
our beliefs with
respect to factors that will affect demand and seasonality of
purchasing in the agricultural and construction
industries;
|
|
|
•
|
our beliefs with
respect to our primary supplier (CNH Industrial) of equipment and
parts inventory;
|
|
|
•
|
our beliefs with
respect to the equipment market, our competitors and our
competitive advantages;
|
|
|
•
|
our beliefs with
respect to the impact of U.S federal government policies on the
agriculture economy;
|
|
|
•
|
our beliefs with
respect to the impact of commodity prices for the fossil fuels and
other commodities on our operating results;
|
|
|
•
|
our beliefs with
respect to the impact of government regulations;
|
|
|
•
|
our beliefs with
respect to our business strengths and the diversity of our customer
base;
|
|
|
•
|
our plans and
beliefs with respect to real property used in our
business;
|
|
|
•
|
our plans and
beliefs regarding future sales, sales mix, and marketing
activities;
|
|
|
•
|
our beliefs and
assumptions regarding the payment of dividends;
|
|
|
•
|
our beliefs and
assumptions regarding valuation reserves, equipment inventory
balances, fixed operating expenses, and absorption
rate;
|
|
|
•
|
our beliefs and
expectations regarding the effects of the political climate and
economy in Ukraine;
|
|
|
•
|
our beliefs and
assumptions with respect to our rental equipment
operations;
|
|
|
•
|
our beliefs with
respect to our employee relations;
|
|
|
•
|
our assumptions,
beliefs and expectations with respect to past and future market
conditions, including interest rates, and public infrastructure
spending, new environmental standards, and the impact these
conditions will have on our operating results;
|
|
|
•
|
our beliefs with
respect to the impact of our credit agreements, including future
interest expense, limits on corporate transactions, financial
covenant compliance, and ability to negotiate amendments or
waivers, if needed;
|
|
|
•
|
our beliefs with
respect to the impact of increase or decrease in applicable foreign
exchange rates;
|
|
|
•
|
our plans and
assumptions for future capital expenditures;
|
|
|
•
|
our cash needs,
sources of liquidity, and the adequacy of our working capital;
and
|
|
|
•
|
our expectations
regarding the impact of inflation.
|
Forward-looking
statements are only predictions and are not guarantees of
performance. These statements are based on our management's beliefs
and assumptions, which in turn are based on currently available
information. Important assumptions relating to the forward-looking
statements include, among others, assumptions regarding demand for
our products, the expansion of product offerings geographically,
the timing and cost of planned capital expenditures, competitive
conditions and general economic conditions. These assumptions could
prove inaccurate. Forward-looking statements also involve known and
unknown risks and uncertainties, which could cause actual results
that differ materially from those contained in any forward-looking
statement. Many of these factors are beyond our ability to control
or predict. Such factors include, but are not limited to, the
following:
|
|
•
|
incorrect
assumptions regarding our cash needs and the amount of inventory we
need on hand;
|
|
|
•
|
general economic
conditions and construction activity in the markets where we
operate;
|
|
|
•
|
our dependence of
CNH Industrial and our relationships with other equipment
suppliers;
|
|
|
•
|
our level of
indebtedness and ability to comply with the terms of agreements
governing our indebtedness;
|
|
|
•
|
the risks
associated with the expansion of our business;
|
|
|
•
|
the risks
resulting from outbreaks or other public health crises, including
COVID-19;
|
|
|
•
|
the potential
inability to integrate any businesses we acquire;
|
|
|
•
|
significant
fluctuations in the price of our common stock
|
|
|
•
|
risks related to
our dependence on our information technology systems and the impact
of potential breaches and other disruptions
|
|
|
•
|
compliance with
laws and regulations; and
|
|
|
•
|
other factors
discussed under "Risk Factors" or elsewhere in this Form
10-K.
|
You should read
the risk factors and the other cautionary statements made in this
Form 10-K as being applicable to all related forward-looking
statements wherever they appear in this Form 10-K. We cannot assure
you that the forward-looking statements in this Form 10-K will
prove to be accurate. Furthermore, if our forward-looking
statements prove to be inaccurate, the inaccuracy may be material.
In light of the significant uncertainties in these forward-looking
statements, you should not regard these statements as a
representation or warranty by us or any other person that we will
achieve our objectives and plans
in any specified
timeframe, if at all. Other than as required by law, we undertake
no obligation to update these forward-looking statements, even
though our situation may change in the future.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are exposed to
various market risks, including changes in interest rates and
foreign currency exchange rates. Market risk is the potential loss
arising from adverse changes in market rates and prices such as
interest rates and foreign currency exchange rates.
Interest
Rate Risk
Exposure to
changes in interest rates results from borrowing activities used to
fund operations. For fixed rate debt, interest rate changes affect
the fair value of financial instruments but do not impact earnings
or cash flows. Conversely, for floating rate debt, interest rate
changes generally do not affect the fair market value but do impact
future earnings and cash flows, assuming other factors are held
constant. We have both fixed and floating rate financing. Some of
our floating rate credit facilities contain minimum rates of
interest to be charged. Based upon our interest-bearing balances
and interest rates as of January 31,
2020,
holding other variables constant, a one percentage point increase
in interest rates for the next 12-month period would decrease
pre-tax earnings and cash flow by approximately $1.8
million.
Conversely, a one percentage point decrease in interest rates for
the next 12-month period would result in an increase to pre-tax
earnings and cash flow of approximately $1.8
million.
At January 31,
2020, we
had total floorplan payables of $371.8
million,
of which $166.6 million
was
interest-bearing at variable interest rates and $205.2 million
was non-interest
bearing. In addition, at January 31,
2020, we
had total long-term debt of $57.4
million,
all of which was fixed rate debt.
Foreign
Currency Exchange Rate Risk
Our foreign
currency exposures arise as the result of our foreign operations.
We are exposed to transactional foreign currency exchange rate risk
through our foreign entities holding assets and liabilities
denominated in currencies other than their functional
currency. In addition, the Company is exposed to foreign
currency transaction risk as a result of certain intercompany
financing transactions. The Company attempts to manage its
transactional foreign currency exchange rate risk through the use
of derivative financial instruments, primarily foreign exchange
forward contracts, or through natural hedging
instruments. Based upon balances and exchange rates as of
January 31, 2020, holding other variables
constant, we believe that a hypothetical 10% increase or decrease
in all applicable foreign exchange rates would not have a material
impact on our results of operations or cash flows. As of
January 31, 2020, our Ukrainian subsidiary
had $3.8
million of
net monetary assets denominated in Ukrainian hryvnia (UAH). We have
attempted to minimize our net monetary asset position through
reducing overall asset levels in Ukraine and through borrowing in
UAH which serves as a natural hedging instrument offsetting our net
UAH denominated assets. At certain times, currency and payment
controls imposed by the National Bank of Ukraine have limited our
ability to manage our net monetary asset position. While the UAH
remained relatively stable in fiscal 2019, an escalation of
political tensions or economic instability could lead to
significant UAH devaluations, which could have a material impact on
our results of operations and cash flows.
In addition to
transactional foreign currency exchange rate risk, we are also
exposed to translational foreign currency exchange rate risk as we
translate the results of operations and assets and liabilities of
our foreign operations from their functional currency to the U.S.
dollar. As a result, our results of operations, cash flows and
net investment in our foreign operations may be adversely impacted
by fluctuating foreign currency exchange rates. We believe
that a hypothetical 10% increase or decrease in all applicable
foreign exchange rates, holding all other variables constant, would
not have a material impact on our results of operations or cash
flows.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The Consolidated
Balance Sheets of the Company as of January 31, 2020
and
2019, and the related
Consolidated Statements of Operations, Comprehensive Income (Loss),
Stockholders' Equity, and Cash Flows for the years ended
January 31,
2020, 2019 and 2018, and the notes thereto, have
been audited by Deloitte & Touche LLP, an independent
registered public accounting firm.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
Page
|
Titan
Machinery Inc.—Financial Statements
|
|
Audited
Consolidated Financial Statements
|
|
Report of Independent
Registered Public Accounting Firm
|
|
Report of Independent
Registered Public Accounting Firm
|
|
Consolidated Balance Sheets
as of January 31, 2020 and 2019
|
|
Consolidated Statements of
Operations for the fiscal years ended January 31, 2020, 2019 and
2018
|
|
Consolidated Statements of
Comprehensive Income (Loss) for the fiscal years ended January 31,
2020, 2019 and 2018
|
|
Consolidated Statements of
Stockholders' Equity for the fiscal years ended January 31, 2020,
2019 and 2018
|
|
Consolidated Statements of
Cash Flows for the fiscal years ended January 31, 2020, 2019 and
2018
|
|
Notes to Consolidated
Financial Statements
|
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of
Directors and Stockholders of Titan
Machinery Inc.
Opinion on
the Financial Statements
We have audited
the accompanying consolidated balance sheets of Titan
Machinery Inc. and subsidiaries (the “Company”) as of
January 31, 2020 and 2019, the related consolidated statements
of operations, comprehensive income (loss), stockholders’ equity,
and cash flows for each of the three years in the period ended
January 31, 2020, and the related notes and the schedule listed in
the Index at Item 15 (collectively referred to as the "financial
statements"). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the
Company as of January 31, 2020 and 2019, and the results of its
operations and its cash flows for each of the three years in the
period ended January 31, 2020, in conformity with accounting
principles generally accepted in the United States of
America.
We have also
audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of January 31, 2020,
based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report
dated April 6, 2020, expressed an unqualified opinion on the
Company’s internal control over financial reporting.
Basis for
Opinion
These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our
audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a r