NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. The quarterly operating results for Titan Machinery Inc. (the “Company”) are subject to fluctuation due to varying weather patterns, which may impact the timing and amount of equipment purchases, rentals, and after-sales parts and service purchases by the Company’s Agriculture, Construction and International customers. Therefore, operating results for the three-month period ended April 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2021. The information contained in the consolidated balance sheet as of January 31, 2020 was derived from the audited consolidated financial statements for the Company for the fiscal year then ended. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020 as filed with the SEC.
Nature of Business
The Company is engaged in the retail sale, service and rental of agricultural and construction machinery through its stores in the United States and Europe. The Company’s North American stores are located in Arizona, Colorado, Iowa, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Wisconsin and Wyoming, and its European stores are located in Bulgaria, Germany, Romania, Serbia and Ukraine.
Impact of the COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, and the President of the United States declared the COVID-19 outbreak as a national emergency. The nature of COVID-19 led to worldwide shutdowns and halting of commercial and interpersonal activity as governments imposed regulations in efforts to control the spread of the pandemic, such as shelter-in-place orders and quarantines. The pandemic is a highly fluid and rapidly evolving situation, and we cannot anticipate with any certainty the length, scope, or severity of such restrictions in each of the markets that we operate. See Item 1A. Risk Factors for more information on possible impacts.
Since the beginning of the COVID-19 pandemic, the safety of our employees and customers has been and continues to be our top concern. At the onset of the pandemic we organized a COVID Task Force to implement safety protocols and to quickly respond to matters, in the event of a positive case at one of our locations.
Even though we are considered an essential business, in response to the COVID-19 pandemic, the company closed its U.S. stores to the public on March 23, 2020 but continued operations through social distancing means in all areas: equipment, parts, service and rental. Beginning May 4, 2020, we began fully reopening our stores to the public, following pandemic safety protocols applicable to the locations. Additionally, our International stores have also been following pandemic safety protocols applicable to each location.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, particularly related to realization of inventory, impairment of long-lived assets, collectability of receivables, and income taxes.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material accounts, transactions and profits between the consolidated companies have been eliminated in consolidation.
Recently Adopted Accounting Guidance
In June 2016, the FASB issued a new standard, codified in ASC 326, that modifies how entities measure credit losses on most financial instruments. The new standard replaced the "incurred loss" model with an "expected credit loss" model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the asset. The guidance impacts the Company on its accounts receivable portfolio but specifically excluded receivables from operating lease arrangements and, therefore, the Company’s receivables from rental contracts were not impacted. The guidance also requires new disclosures to allow the users of the financial statements to understand the credit risk inherent in a portfolio and how management monitors the credit quality of the portfolio, management’s estimate of expected credit losses, and changes in the estimate of expected credit losses that have taken place during the reporting period.
The Company adopted the new guidance on February 1, 2020 using a modified retrospective approach and recognized an immaterial cumulative-effect adjustment to retained earnings as of the effective date. The Company identified and updated existing internal controls and procedures to ensure compliance with the new guidance, but such modifications were not deemed to be material to the Company's overall system of internal control. While the adoption of this ASU did not have a material impact on the Company's consolidated financial statements, it required changes to the Company's process of estimating expected credit losses on trade receivables.
Following is a summary of allowance for credit losses on trade and unbilled accounts receivable:
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Balance at February 1, 2020
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Current Expected Credit Loss Provision
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Write-offs Charged Against the Allowance
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Credit Loss Recoveries Collected
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F/X Impact
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Balance at April 30, 2020
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(in thousands)
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Agriculture
|
$
|
181
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|
|
$
|
14
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|
|
$
|
5
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|
|
$
|
40
|
|
|
$
|
—
|
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$
|
230
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Construction
|
1,016
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|
113
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71
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|
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4
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|
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—
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1,062
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International
|
1,746
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|
|
226
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133
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6
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(29)
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1,816
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$
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2,943
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$
|
353
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$
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209
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$
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50
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$
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(29)
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$
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3,108
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|
In February 2018, the FASB issued guidance on the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract, codified in ASC 350-40. This guidance aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This standard was adopted on February 1, 2020 and was applied using the prospective transition approach. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.
Unadopted Accounting Guidance
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU No. 2020-04”), which provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. ASU 2020-04 is effective upon issuance and can be applied through December 31, 2022. The Company is currently evaluating its contracts and hedging relationships that reference LIBOR to determine if the Company will adopt the new guidance.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted EPS:
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Three Months Ended April 30,
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2020
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2019
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(in thousands, except per share data)
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Numerator:
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Net income (loss)
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$
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2,262
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$
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(445)
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Allocation to participating securities
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(32)
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—
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Net income (loss) attributable to Titan Machinery Inc. common stockholders
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$
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2,230
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$
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(445)
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Denominator:
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Basic weighted-average common shares outstanding
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22,012
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21,872
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Plus: incremental shares from vesting of restricted stock units
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—
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—
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Diluted weighted-average common shares outstanding
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22,012
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21,872
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Earnings Per Share:
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Basic
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$
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0.10
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$
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(0.02)
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Diluted
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$
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0.10
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$
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(0.02)
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Anti-dilutive shares excluded from diluted weighted-average common shares outstanding:
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Restricted stock units
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9
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8
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Shares underlying senior convertible notes
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—
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1,057
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NOTE 3 - REVENUE
Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to collect in exchange for those goods or services. Sales, value added and other taxes collected from our customers concurrent with our revenue activities are excluded from revenue.
The following tables present our revenue disaggregated by revenue source and segment:
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Three Months Ended April 30, 2020
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Agriculture
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Construction
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International
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Total
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(in thousands)
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Equipment
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$
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139,749
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$
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34,253
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$
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44,503
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$
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218,505
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Parts
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35,079
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11,460
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|
10,075
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|
56,614
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Service
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17,720
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6,212
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1,668
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25,600
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Other
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733
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518
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|
104
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1,355
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Revenue from contracts with customers
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193,281
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52,443
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56,350
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302,074
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Rental
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346
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7,671
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117
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8,134
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Total revenues
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$
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193,627
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$
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60,114
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$
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56,467
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$
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310,208
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Three Months Ended April 30, 2019
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Agriculture
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Construction
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International
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Total
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(in thousands)
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Equipment
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$
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107,864
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|
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$
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43,046
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$
|
43,046
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|
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$
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193,956
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Parts
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|
|
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|
|
29,976
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|
|
12,704
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|
|
9,258
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|
|
51,938
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Service
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14,985
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|
|
6,521
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|
|
1,325
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|
22,831
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Other
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|
|
|
|
|
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|
|
618
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|
593
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|
|
22
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|
|
1,233
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Revenue from contracts with customers
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153,443
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|
62,864
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|
53,651
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|
|
269,958
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Rental
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|
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|
|
332
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|
|
7,879
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|
|
123
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|
|
8,334
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Total revenues
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|
|
$
|
153,775
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|
|
$
|
70,743
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|
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$
|
53,774
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|
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$
|
278,292
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Unbilled Receivables and Deferred Revenue
Unbilled receivables amounted to $17.1 million and $13.9 million as of April 30, 2020 and January 31, 2020. The increase in unbilled receivables is primarily the result of a seasonal increase in the volume of our service transactions in which we recognize revenue as our work is performed and prior to customer invoicing.
Deferred revenue from contracts with customers amounted to $27.9 million and $39.5 million as of April 30, 2020 and January 31, 2020. Our deferred revenue most often increases in the fourth quarter of each fiscal year due to a higher level of customer down payments or prepayments and longer time periods between customer payment and delivery of the equipment asset, and the related recognition of equipment revenue, prior to its seasonal use. During the three months ended April 30, 2020 and 2019, the Company recognized $29.7 million and $30.5 million, respectively, of revenue that was included in the deferred revenue balance as of January 31, 2020 and January 31, 2019, respectively. No material amount of revenue was recognized during the three months ended April 30, 2020 and 2019 from performance obligations satisfied in previous periods.
The Company has elected as a practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of service of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. The contracts for which the practical expedient has been applied include (i) equipment revenue transactions, which do not have a stated contractual term, but are short-term in nature, and (ii) service revenue transactions, which also do not have a stated contractual term but are generally completed within 30 days and for such contracts we recognize revenue over time at the amount to which we have the right to invoice for services completed to date.
NOTE 4 - RECEIVABLES
The Company provides an allowance for expected credit losses on its nonrental receivables in accordance with the guidance in ASU 2016-13. To measure the expected credit losses, receivables have been grouped based on shared credit risk characteristics as shown in the table below.
Trade and unbilled receivables from contracts with customers have credit risk and the allowance is determined by applying expected credit loss percentages to aging categories based on historical experience that are updated each quarter. The rates may also be adjusted to the extent future events are expected to differ from historical results. Given that the credit terms for these receivables are short-term, changes in credit loss percentages due to future events may not occur on a frequent basis. In addition, the allowance is adjusted based on information obtained by continued monitoring of individual customer credit.
Trade receivables from finance companies, other receivables due from manufacturers, and other receivables have not historically resulted in any credit losses to the Company. These receivables are short-term in nature and deemed to be of good credit quality and have no need for any allowance for expected credit losses. Management continually monitors these receivables and should information be obtained that identifies potential credit risk, an adjustment to the allowance would be made if deemed appropriate.
Trade and unbilled receivables from rental contracts are primarily in the US and are specifically excluded from the guidance in ASU 2016-13 in determining an allowance for expected losses. The Company does provide an allowance for these receivables based on historical experience and using credit information obtained from continued monitoring of customer accounts.
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|
|
|
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|
|
April 30, 2020
|
|
January 31, 2020
|
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(in thousands)
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|
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Trade and unbilled receivables from contracts with customers
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Trade receivables due from customers
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$
|
32,962
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|
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$
|
36,400
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|
Trade receivables due from finance companies
|
17,388
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|
|
12,352
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|
Unbilled receivables
|
17,076
|
|
|
13,944
|
|
Trade and unbilled receivables from rental contracts
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|
|
|
Trade receivables
|
5,581
|
|
|
7,381
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|
Unbilled receivables
|
741
|
|
|
861
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|
Other receivables
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|
|
|
Due from manufacturers
|
6,565
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|
|
5,763
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|
Other
|
1,346
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|
|
1,198
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|
Total receivables
|
81,659
|
|
|
77,899
|
|
Less allowance for expected credit losses
|
(5,229)
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|
|
(5,123)
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|
Receivables, net of allowance for expected credit losses
|
$
|
76,430
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|
|
$
|
72,776
|
|
The following table presents impairment losses on receivables arising from sales contracts with customers and receivables arising from rental contracts:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
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(in thousands)
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|
|
|
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|
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Impairment losses on:
|
|
|
|
|
|
|
|
Receivables from sales contracts
|
$
|
143
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|
|
$
|
328
|
|
|
|
|
|
Receivables from rental contracts
|
138
|
|
|
83
|
|
|
|
|
|
|
$
|
281
|
|
|
$
|
411
|
|
|
|
|
|
NOTE 5 - INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2020
|
|
January 31, 2020
|
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(in thousands)
|
|
|
New equipment
|
$
|
346,703
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|
|
$
|
358,339
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|
Used equipment
|
154,538
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|
|
157,535
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|
Parts and attachments
|
80,294
|
|
|
79,813
|
|
Work in process
|
1,900
|
|
|
1,707
|
|
|
$
|
583,435
|
|
|
$
|
597,394
|
|
NOTE 6 - PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2020
|
|
January 31, 2020
|
|
(in thousands)
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|
|
Rental fleet equipment
|
$
|
104,888
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|
|
$
|
104,133
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|
Machinery and equipment
|
22,773
|
|
|
22,682
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|
Vehicles
|
51,837
|
|
|
51,850
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|
Furniture and fixtures
|
42,043
|
|
|
41,720
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|
Land, buildings, and leasehold improvements
|
72,407
|
|
|
70,408
|
|
|
293,948
|
|
|
290,793
|
|
Less accumulated depreciation
|
(145,655)
|
|
|
(145,231)
|
|
|
$
|
148,293
|
|
|
$
|
145,562
|
|
The Company reviews its long-lived assets for potential impairment whenever events or circumstances indicate that the carrying value of the long-lived asset (or asset group) may not be recoverable. During the three months ended April 30, 2020, the Company determined that a current period operating loss combined with historical losses of certain store locations indicated that the long-lived asset group of the store locations may not be recoverable. The Company performed an impairment assessment of this asset group and as a result recognized an impairment charge of $0.2 million within its Construction segment.
In March 2019, the Company completed an assessment of its Enterprise Resource Planning ("ERP") application and concluded that the Company would begin the process to prepare for conversion to a new ERP application. The Company currently anticipates a pilot store to be on the new ERP system in the second quarter of the current fiscal year and all stores to be on the new ERP application in the first half of the fiscal year ending January 31, 2022. We have prospectively adjusted the useful life of our current ERP application such that it will be fully amortized upon its estimated replacement date. The net book value of the ERP asset of $1.8 million as of April 30, 2020 will be amortized on a straight-line basis over the estimated remaining period of use.
NOTE 7 - FLOORPLAN PAYABLE/LINES OF CREDIT
On April 3, 2020, the Company entered into a Third Amended and Restated Credit Agreement with a group of banks (the "Bank Syndicate"), that amended and restated the Company's prior $200.0 million credit facility, dated October 28, 2015. The Bank Syndicate provides for a secured credit facility in an amount up to $250.0 million, consisting of a $185.0 million floorplan facility (the "Floorplan Loan") and a $65.0 million operating line (the "Revolver Loan"), and changed the interest rates as compared to the prior credit facility, amongst other things. The amounts available under the Bank Syndicate are subject to base calculations and reduced by outstanding standby letters of credit and certain reserves. The Bank Syndicate has a variable interest rate on outstanding balances, has a 0.25% non-usage fee on the average monthly unused amount (replacing the previous non-usage fee of 0.25% to 0.375%), and requires monthly payments of accrued interest. The Company elects at the time of any advance to choose a Base Rate Loan or a LIBOR Rate Loan. The LIBOR Rate is based upon one month, two month, or three month LIBOR, as chosen by the Company, but in no event shall the LIBOR Rate be less than 0.50%. The Base Rate is the greater of (a) the prime rate of interest announced, from time to time, by Bank of America; (b) the Federal Funds Rate plus 0.5%, (c) one month LIBOR plus 1%, but in no event shall the Base Rate be less than zero. The applicable margin rate is determined based on excess availability under the Bank Syndicate and ranges from 0.5% to 1.0% for Base Rate Loans and 1.5% to 2.0% for LIBOR Rate Loans. The new applicable margins under the Bank Syndicate are up to 0.5% less than the existing margins under the prior credit facility.
The Bank Syndicate does not obligate the Company to maintain financial covenants, except in the event that excess availability (each as defined in the Bank Syndicate) is less than 15% of the lower of the borrowing base or the size of the maximum credit line, at which point the Company is required to maintain a fixed charge coverage ratio (“FCCR”) of at least 1.10:1.00. The Bank Syndicate includes various restrictions on the Company and its subsidiaries’ activities, including, under certain conditions, limitations on the Company’s ability to make certain cash payments including cash dividends and stock repurchases, issuance of equity instruments, acquisitions and divestitures, and entering into new indebtedness transactions. The Bank Syndicate matures on April 3, 2025.
The Floorplan Loan under the Bank Syndicate is used to finance equipment inventory purchases. Amounts outstanding are recorded as floorplan payable, within current liabilities on the consolidated balance sheets, as the Company intends to repay amounts borrowed within one year.
The Revolver Loan under the Bank Syndicate is used to finance rental fleet equipment and for general working capital requirements of the Company. Amounts outstanding are recorded as long-term debt, within long-term liabilities on the consolidated balance sheets, as the Company does not have the intention or obligation to repay amounts borrowed within one year.
As of April 30, 2020, the Company had floorplan lines of credit totaling $762.0 million, which is primarily comprised of three significant floorplan lines of credit: (i) a $450.0 million credit facility with CNH Industrial, (ii) a $185.0 million line of credit with the Bank Syndicate, and (iii) a $60.0 million credit facility with DLL Finance LLC.
As of April 30, 2020 and January 31, 2020, the Company's outstanding balances of floorplan payables and lines of credit consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2020
|
|
January 31, 2020
|
|
(in thousands)
|
|
|
CNH Industrial
|
$
|
179,602
|
|
|
$
|
187,690
|
|
Bank Syndicate Floorplan Loan
|
102,900
|
|
|
—
|
|
Wells Fargo Floorplan Payable Line
|
—
|
|
|
82,700
|
|
DLL Finance
|
30,198
|
|
|
30,657
|
|
Other outstanding balances with manufacturers and non-manufacturers
|
65,602
|
|
|
70,725
|
|
|
$
|
378,302
|
|
|
$
|
371,772
|
|
As of April 30, 2020, the interest-bearing U.S. floorplan payables carried various interest rates ranging primarily from 2.52% to 4.12%, compared to a range of 4.05% to 4.81% as of January 31, 2020. As of April 30, 2020, foreign floorplan payables carried various interest rates primarily ranging from 0.98% to 6.33%, compared to a range of 0.86% to 7.66% as of January 31, 2020. As of April 30, 2020 and January 31, 2020, $201.9 million and $205.2 million, respectively, of outstanding floorplan payable were non-interest bearing. As of April 30, 2020, the Company had a compensating balance arrangement under one of its foreign floorplan credit facilities, which requires a minimum cash deposit to be maintained with the lender in the amount of $5.0 million for the term of the credit facility.
NOTE 8 - DEFERRED REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2020
|
|
January 31, 2020
|
|
(in thousands)
|
|
|
Deferred revenue from contracts with customers
|
$
|
27,889
|
|
|
$
|
39,512
|
|
Deferred revenue from rental and other contracts
|
1,274
|
|
|
1,456
|
|
|
$
|
29,163
|
|
|
$
|
40,968
|
|
NOTE 9 - SENIOR CONVERTIBLE NOTES
The Company's senior convertible notes matured, and the outstanding principal balance of $45.6 million was repaid in full, on May 1, 2019.
The Company recognized interest expense associated with its senior convertible notes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(in thousands)
|
|
|
Cash Interest Expense
|
|
|
|
|
|
|
|
Coupon interest expense
|
|
|
|
|
$
|
—
|
|
|
$
|
421
|
|
Noncash Interest Expense
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
|
|
—
|
|
|
350
|
|
Amortization of transaction costs
|
|
|
|
|
—
|
|
|
45
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
816
|
|
The effective interest rate of the liability component was equal to 0.0% for the three months ended April 30, 2019.
NOTE 10 - LONG TERM DEBT
The following is a summary of long-term debt as of April 30, 2020 and January 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2020
|
|
January 31, 2020
|
|
(in thousands)
|
|
|
Sale-leaseback financing obligations, interest rates ranging from 3.4% to 10.3% with various maturity dates through December 2030
|
$
|
17,469
|
|
|
$
|
17,781
|
|
Bank Syndicate - Working Capital Line, interest accrues at a variable rate on outstanding balances, requires monthly payments of accrued interest, matures April 2025
|
10,000
|
|
|
10,000
|
|
Real estate mortgage bearing interest at 5.11%, payable in annual installments of $0.3 million, maturing on May 15, 2039, secured by real estate assets
|
6,827
|
|
|
6,827
|
|
Equipment financing loan, payable in monthly installments over a 72-month term for each funded tranche, bearing interest at 3.89%, secured by vehicle assets
|
7,350
|
|
|
7,468
|
|
Real estate mortgage bearing interest at 4.62%, payable in monthly installments of $0.04 million with a final payment at maturity of $3.4 million, maturing on June 10, 2024, secured by real estate assets
|
4,366
|
|
|
4,416
|
|
Real estate mortgage bearing interest at 4.4%, payable in monthly installments of $0.01 million with a final payment at maturity of $1.0 million, maturing on January 1, 2027, secured by real estate assets
|
1,474
|
|
|
1,489
|
|
Real estate mortgage bearing interest at 2.09%, payable in monthly installments, maturing on June 30, 2026, secured by real estate assets
|
2,396
|
|
|
2,520
|
|
Other long-term debt primarily bearing interest at three-month EURIBOR plus 2.6%, payable in quarterly installments, maturing on January 31, 2021
|
3,427
|
|
|
1,067
|
|
|
53,309
|
|
|
51,568
|
|
Less current maturities
|
(3,787)
|
|
|
(13,779)
|
|
|
$
|
49,522
|
|
|
$
|
37,789
|
|
NOTE 11 - DERIVATIVE INSTRUMENTS
The Company holds derivative instruments for the purpose of minimizing exposure to fluctuations in foreign currency exchange rates to which the Company is exposed in the normal course of its operations.
The Company uses foreign currency forward contracts to hedge the effects of fluctuations in exchange rates on outstanding intercompany loans. The Company does not formally designate and document such derivative instruments as hedging instruments; however, the instruments are an effective economic hedge of the underlying foreign currency exposure. Both the gain or loss on the derivative instrument and the offsetting gain or loss on the underlying intercompany loan are recognized in earnings immediately, thereby eliminating or reducing the impact of foreign currency exchange rate fluctuations on net income. The Company's foreign currency forward contracts generally have three-month maturities, maturing on the last day of each fiscal quarter. No foreign currency contracts were outstanding as of January 31, 2020. The notional value of outstanding foreign currency contracts as of April 30, 2020 was $13.0 million.
As of April 30, 2020, the fair value of the Company's outstanding derivative instruments was not material. Derivative instruments recognized as assets are recorded in prepaid expenses and other in the consolidated balance sheets, and derivative instruments recognized as liabilities are recorded in accrued expenses and other in the consolidated balance sheets.
The following table sets forth the gains and losses recognized in income from the Company’s derivative instruments for the three months ended April 30, 2020 and 2019. Gains and losses are recognized in interest income and other income (expense) in the consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Foreign currency contract gain (loss)
|
$
|
(13)
|
|
|
$
|
202
|
|
|
|
|
|
NOTE 12 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following is a summary of the changes in accumulated other comprehensive income (loss), by component, for the periods ended April 30, 2020 and April 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
|
Net Investment Hedging Gain
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
|
(in thousands)
|
|
|
|
|
Balance, January 31, 2020
|
$
|
(5,931)
|
|
|
$
|
2,711
|
|
|
$
|
(3,220)
|
|
Other comprehensive loss
|
(528)
|
|
|
—
|
|
|
(528)
|
|
Balance, April 30, 2020
|
$
|
(6,459)
|
|
|
$
|
2,711
|
|
|
$
|
(3,748)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
|
Net Investment Hedging Gain
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
|
(in thousands)
|
|
|
|
|
Balance, January 31, 2019
|
$
|
(5,051)
|
|
|
$
|
2,711
|
|
|
$
|
(2,340)
|
|
Other comprehensive loss
|
(771)
|
|
|
—
|
|
|
(771)
|
|
Balance, April 30, 2019
|
$
|
(5,822)
|
|
|
$
|
2,711
|
|
|
$
|
(3,111)
|
|
NOTE 13 - LEASES
As Lessee
The Company, as lessee, leases certain of its dealership locations, office space, equipment and vehicles under operating and financing classified leasing arrangements. The Company has elected to not record leases with a lease term at commencement of 12 months or less on the consolidated balance sheet; such leases are expensed on a straight-line basis over the lease term. Many real estate lease agreements require the Company to pay the real estate taxes on the properties during the lease term and require that the Company maintain property insurance on each of the leased premises. Such payments are deemed to be variable lease payments as the amounts may change during the term of the lease. Certain leases include renewal options that can extend the lease term for periods of one to ten years. Most real estate leases grant the Company a right of first refusal or other options to purchase the real estate, generally at fair market value, either during the lease term or at its conclusion. In most cases, the Company has not included these renewal and purchase options within the measurement of the right-of-use asset and lease liability. Most often the Company cannot readily determine the interest rate implicit in the lease and thus applies its incremental borrowing rate to capitalize the right-of-use asset and lease liability. The Company estimates its incremental borrowing rate by incorporating considerations of lease term, asset class and lease currency and geographical market. The Company's lease agreements do not contain any material non-lease components, residual value guarantees or material restrictive covenants.
The Company subleases a small number of real estate assets to third-parties, primarily dealership locations for which it has ceased operations. All sublease arrangements are classified as operating leases.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
Three Months Ended April 30, 2020
|
|
Three Months Ended April 30, 2019
|
|
|
|
|
(in thousands)
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
Amortization of leased assets
|
|
Operating expenses
|
|
|
$
|
392
|
|
|
$
|
376
|
|
Interest on lease liabilities
|
|
Other interest expense
|
|
|
126
|
|
|
139
|
|
Operating lease cost
|
|
Operating expenses & rental and other cost of revenue
|
|
|
4,463
|
|
|
4,816
|
|
Short-term lease cost
|
|
Operating expenses
|
|
|
80
|
|
|
80
|
|
Variable lease cost
|
|
Operating expenses
|
|
|
635
|
|
|
620
|
|
Sublease income
|
|
Interest income and other income (expense)
|
|
|
(152)
|
|
|
(168)
|
|
|
|
|
|
$
|
5,544
|
|
|
$
|
5,863
|
|
Right-of-use lease assets and lease liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
April 30, 2020
|
|
January 31, 2020
|
|
|
|
|
(in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating lease assets
|
|
$
|
84,577
|
|
|
$
|
88,281
|
|
Finance lease assets(a)
|
|
Property and equipment, net of accumulated depreciation
|
|
6,002
|
|
|
6,297
|
|
Total leased assets
|
|
|
|
$
|
90,579
|
|
|
$
|
94,578
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating
|
|
Current operating lease liabilities
|
|
$
|
12,320
|
|
|
$
|
12,259
|
|
Finance
|
|
Accrued expenses and other
|
|
1,714
|
|
|
1,708
|
|
Noncurrent
|
|
|
|
|
|
|
Operating
|
|
Operating lease liabilities
|
|
84,499
|
|
|
88,387
|
|
Finance
|
|
Other long-term liabilities
|
|
3,747
|
|
|
4,103
|
|
Total lease liabilities
|
|
|
|
$
|
102,280
|
|
|
$
|
106,457
|
|
|
|
|
|
|
|
|
(a)Finance lease assets are recorded net of accumulated amortization of $1.8 million as of April 30, 2020.
Maturities of lease liabilities as of April 30, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Finance
|
|
|
|
|
Leases
|
|
Leases
|
|
Total
|
Fiscal Year Ended January 31,
|
|
(in thousands)
|
|
|
|
|
2021 (remainder)
|
|
$
|
13,393
|
|
|
$
|
1,609
|
|
|
$
|
15,002
|
|
2022
|
|
16,887
|
|
|
1,851
|
|
|
18,738
|
|
2023
|
|
15,748
|
|
|
1,206
|
|
|
16,954
|
|
2024
|
|
14,824
|
|
|
476
|
|
|
15,300
|
|
2025
|
|
13,691
|
|
|
393
|
|
|
14,084
|
|
2026
|
|
13,539
|
|
|
312
|
|
|
13,851
|
|
Thereafter
|
|
33,624
|
|
|
1,083
|
|
|
34,707
|
|
Total lease payments
|
|
121,706
|
|
|
6,930
|
|
|
128,636
|
|
Less: Interest
|
|
24,887
|
|
|
1,469
|
|
|
26,356
|
|
Present value of lease liabilities
|
|
$
|
96,819
|
|
|
$
|
5,461
|
|
|
$
|
102,280
|
|
The weighted-average lease term and discount rate as of April 30, 2020 are as follows:
|
|
|
|
|
|
|
April 30, 2020
|
Weighted-average remaining lease term (years):
|
|
Operating leases
|
7.7
|
Financing leases
|
5.3
|
Weighted-average discount rate:
|
|
Operating leases
|
6.1
|
%
|
Financing leases
|
9.8
|
%
|
As Lessor
The Company rents equipment to customers, primarily in the Construction segment, on a short-term basis. Our rental arrangements generally do not include minimum, noncancellable periods as the lessee is entitled to cancel the arrangement at any time. Most often, our rental arrangements extend for periods ranging from a few days to a few months. We maintain a fleet of dedicated rental assets within our Construction segment and, within all segments, may also provide short-term rentals of certain equipment inventory assets. Certain rental arrangements may include rent-to-purchase options whereby customers are given a period of time to exercise an option to purchase the related equipment at an established price with any rental payments paid applied to reduce the purchase price.
All of the Company's leasing arrangements as lessor are classified as operating leases. Rental revenue is recognized on a straight-line basis over the rental period. Rental revenue includes amounts charged for loss and damage insurance on rented equipment. In most cases, our rental arrangements include non-lease components, including delivery and pick-up services. The
Company accounts for these non-lease components separate from the rental arrangement and recognizes the revenue associated with these components when the service is performed. The Company has elected to exclude from rental revenue all sales, value added and other taxes collected from our customers concurrent with our rental activities. Rental billings most often occur on a monthly basis and may be billed in advance or in arrears, thus creating unbilled rental receivables or deferred rental revenue amounts. The Company manages the residual value risk of its rented assets by (i) monitoring the quality, aging and anticipated retail market value of our rental fleet assets to determine the optimal period to remove an asset from the rental fleet, (ii) maintaining the quality of our assets through on-site parts and service support and (iii) requiring physical damage insurance of our lessee customers. We primarily dispose of our rental assets through the sale of the asset by our retail sales force.
Revenue generated from leasing activities is disclosed, by segment, in Note 3. The following is the balance of our dedicated rental fleet assets of our Construction segment as of April 30, 2020 and January 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2020
|
|
January 31, 2020
|
|
(in thousands)
|
|
|
Rental fleet equipment
|
$
|
104,888
|
|
|
$
|
104,133
|
|
Less accumulated depreciation
|
39,814
|
|
|
42,076
|
|
|
$
|
65,074
|
|
|
$
|
62,057
|
|
NOTE 14 - FAIR VALUE MEASUREMENTS
As of April 30, 2020 and January 31, 2020, the fair value of the Company's foreign currency contracts, which are either assets or liabilities measured at fair value on a recurring basis, was not material. These foreign currency contracts were valued using a discounted cash flow analysis, an income approach, utilizing readily observable market data as inputs, which is classified as a Level 2 fair value measurement.
The Company also valued certain long-lived assets at fair value on a non-recurring basis as of April 30, 2020 and January 31, 2020 as part of its long-lived asset impairment testing. The estimated fair value of such assets as of April 30, 2020 and January 31, 2020 was $0.4 million and $2.8 million, respectively. Fair value was estimated through an income approach incorporating both observable and unobservable inputs, and are deemed to be Level 3 fair value inputs. The most significant unobservable inputs include forecasted net cash generated from the use of the assets and the discount rate applied to such cash flows to arrive at a fair value estimate. In addition, in certain instances the Company estimated the fair value of long-lived assets to approximate zero as no future cash flows were assumed to be generated from the use of such assets and the expected value to be realized upon disposition was deemed to be nominal.
The Company also has financial instruments that are not recorded at fair value in the consolidated balance sheets, including cash, receivables, payables and long-term debt. The carrying amounts of these financial instruments approximated their fair values as of April 30, 2020 and January 31, 2020. Fair value of these financial instruments was estimated based on Level 2 fair value inputs.
NOTE 15 - INCOME TAXES
Our effective tax rate was 28.1% for the three months ended April 30, 2020 compared to an effective tax rate of 13.6% for the three months ended April 30, 2019. Our effective tax rate differs from the domestic federal statutory tax rate due to the mix of domestic and foreign income or losses and the impact of the recognition of valuation allowances on our foreign deferred tax assets, including net operating losses.
NOTE 16 - BUSINESS COMBINATIONS
On January 1, 2019, the Company, through its German subsidiary, acquired certain assets of ESB Agrartechnik GmbH ("ESB"). ESB is a full-service agriculture equipment dealership in Eastern Germany. Our acquisition of ESB further expanded our presence in the German market. The total consideration transferred for the acquired business was $3.0 million paid in cash. This acquisition was recognized in the fiscal year ended January 31, 2020 as the acquisition occurred within our International segment in which all entities maintain a calendar year reporting period.
On October 1, 2019, the Company acquired certain assets of Uglem-Ness Co. The acquired business consists of one Case IH agriculture equipment store in Northwood, North Dakota. The service area is contiguous to the Company's existing locations in Grand Forks and Casselton, North Dakota and Ada, Minnesota. The total consideration transferred for the acquired business was $10.9 million paid in cash, including the acquired real estate, which was finalized in January 2020 for $2.1 million.
In connection with the acquisition, the Company acquired from CNH Industrial and certain other manufacturers equipment and parts inventory previously owned by Uglem-Ness Co. Upon acquiring such inventories, the Company was offered floorplan financing by the manufacturer. In total, the Company acquired inventory and recognized a corresponding financing liability of $7.4 million. The recognition of these inventories and the associated financing liabilities are not included as part of the accounting for the business combination.
Purchase Price Allocation
Each of the above acquisitions has been accounted for under the acquisition method of accounting, which requires the Company to estimate the acquisition date fair value of the assets acquired and liabilities assumed. The accounting for all business combinations was complete as of January 31, 2020. The following table presents the aggregate purchase price allocations for all acquisitions completed as of January 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
January 31, 2020
|
|
|
|
(in thousands)
|
Assets acquired:
|
|
|
|
|
|
|
|
Receivables
|
|
|
$
|
440
|
|
Inventories
|
|
|
6,466
|
|
|
|
|
|
Property and equipment
|
|
|
3,810
|
|
Intangible assets
|
|
|
1,973
|
|
Goodwill
|
|
|
1,198
|
|
|
|
|
|
|
|
|
13,887
|
|
|
|
|
|
Liabilities assumed:
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Net assets acquired
|
|
|
$
|
13,887
|
|
|
|
|
|
Goodwill recognized by segment:
|
|
|
|
Agriculture
|
|
|
$
|
699
|
|
Construction
|
|
|
—
|
|
International
|
|
|
499
|
|
Goodwill expected to be deductible for tax purposes
|
|
|
$
|
1,198
|
|
The recognition of goodwill in the above business combinations arose from the acquisition of an assembled workforce and anticipated synergies expected to be realized. For the business combinations occurring during the twelve months ended January 31, 2020, the Company recognized a customer relationship intangible asset of $0.2 million, a non-competition intangible asset of $0.1 million, and a distribution rights intangible asset of $1.6 million. The customer relationship and non-competition assets will be amortized over periods ranging from three to five years. The distribution rights assets are indefinite-lived intangible assets not subject to amortization. The Company estimated the fair value of the intangible assets using a multi-period excess earnings model, an income approach. Acquisition related costs were not material for fiscal year ended January 31, 2020, and have been expensed as incurred and recognized as operating expenses in the consolidated statements of operations.
NOTE 17 - CONTINGENCIES
On October 11, 2017, the Romania Competition Council (“RCC”) initiated an administrative investigation of the Romanian Association of Manufacturers and Importers of Agricultural Machinery (“APIMAR”) and all its members, including Titan Machinery Romania. The RCC's investigation involves whether the APIMAR members engaged in anti-competitive practices in their sales of agricultural machinery not involving European Union ("EU") subvention funding programs, by referring to the published sales prices governing EU subvention funded transactions, which prices are mandatorily disclosed to and published by AFIR, a Romanian government agency that oversees the EU subvention funding programs in Romania. The investigation is in a preliminary stage and the Company is currently unable to predict its outcome or reasonably estimate any potential loss that may result from the investigation.
The Company is also engaged in other legal proceedings incidental to the normal course of business. Due to their nature, such legal proceedings involve inherent uncertainties, including but not limited to, court rulings, negotiations between
affected parties and governmental intervention. Based upon the information available to the Company and discussions with legal counsel, it is the Company's opinion that the outcome of these various legal actions and claims will not have a material impact on the financial position, results of operations or cash flows. These matters, however, are subject to many uncertainties, and the outcome of any matter is not predictable with assurance.
NOTE 18 - SEGMENT INFORMATION
The Company has three reportable segments: Agriculture, Construction and International. Revenue between segments is immaterial. The Company retains various unallocated income/(expense) items and assets at the general corporate level, which the Company refers to as “Shared Resources” in the table below. Shared Resources assets primarily consist of cash and property and equipment.
Certain financial information for each of the Company’s business segments is set forth below.
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Three Months Ended April 30,
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2020
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2019
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(in thousands)
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Revenue
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Agriculture
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$
|
193,627
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|
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$
|
153,775
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Construction
|
|
|
|
|
60,114
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|
|
70,743
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International
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|
|
|
|
56,467
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|
|
53,774
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Total
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|
|
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$
|
310,208
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|
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$
|
278,292
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|
|
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|
|
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Income (Loss) Before Income Taxes
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Agriculture
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$
|
6,162
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|
|
$
|
1,876
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Construction
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|
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|
(2,873)
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(2,222)
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International
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(280)
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|
|
216
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Segment income (loss) before income taxes
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|
|
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|
3,009
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(130)
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Shared Resources
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|
|
|
|
139
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|
|
(385)
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Total
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$
|
3,148
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|
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$
|
(515)
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|
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|
|
|
|
|
|
|
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|
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April 30, 2020
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January 31, 2020
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(in thousands)
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Total Assets
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Agriculture
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$
|
436,040
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|
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$
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444,942
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Construction
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272,402
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|
|
275,645
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International
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192,966
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|
|
191,513
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Segment assets
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901,408
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|
|
912,100
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Shared Resources
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68,331
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|
|
63,243
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Total
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$
|
969,739
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|
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$
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975,343
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NOTE 19 - SUBSEQUENT EVENTS
On January 31, 2020, the Company entered into a definitive purchase agreement to acquire HorizonWest Inc., which owns a three store CaseIH agriculture dealership complex in Scottsbluff and Sidney, Nebraska and Torrington, Wyoming. In its most recent fiscal year, HorizonWest generated revenue of approximately $26 million. The Company closed on the acquisition on May 4, 2020. The total purchase price was $6.9 million, which does not include the $2.7 million of associated inventory that the Company concurrently purchased from CNH Industrial under standard terms. Due to the limited time since the date of the acquisition, it is impracticable for the Company to make certain business combination disclosures at this time as the Company is still gathering information that is necessary for the required business combination disclosures. The net assets acquired consist primarily of working capital and fixed assets.