NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Titan Machinery Inc. and its subsidiaries (collectively, the "Company") are engaged in the retail sale, service and rental of agricultural and construction machinery through its stores in the United States and Europe. The Company's North American stores are located in Arizona, Colorado, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, South Dakota, Wisconsin and Wyoming, and its European stores are located in Bulgaria, Romania, Serbia and Ukraine.
Seasonality
The agricultural and construction equipment businesses are highly seasonal, which causes the Company's quarterly results and cash flows to fluctuate during the year. The Company's 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 for Construction customers is dependent on weather seasons in their respective regions, which is typically the second and third quarters of the Company's fiscal year for much of its Construction footprint. The Company's parts and service revenues are typically highest during its 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 the Company's 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant accounts, transactions and profits between the consolidated companies have been eliminated in consolidation.
The Company's foreign subsidiaries have fiscal years ending on December 31 of each year, consistent with statutory reporting requirements in each of the respective countries. The accounts of the Company's foreign subsidiaries are consolidated as of December 31 of each year. No events occurred related to these subsidiaries in January
2018
that would have materially affected the consolidated financial position, results of operations or cash flows.
In June 2016, the Company acquired all of the outstanding ownership interest held by the noncontrolling interest holder of the Company's Bulgarian subsidiary. Total consideration, which amounted to
$4.3 million
, was in the form of the satisfaction of outstanding receivables owed to the Company by the noncontrolling interest holder. Subsequent to this acquisition, all of the Company's subsidiaries are wholly-owned.
Reclassifications
Certain reclassifications of amounts previously reported have been made to the accompanying consolidated statements of cash flows to maintain consistency and comparability between periods presented. These reclassifications had no impact on previously reported cash flows from operating, investing or financing activities.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
Concentrations of Credit Risk
The Company's sales are to agricultural and construction equipment customers principally in the states and European countries in which its stores are located. The Company extends credit to its customers in the ordinary course of business and monitors its customers' financial condition to minimize its risks associated with trade receivables; however, the Company does not generally require collateral on trade receivables.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's cash balances are maintained in bank deposit accounts, which, at times, are in excess of federally insured limits.
Concentrations in Operations
The Company currently purchases new equipment, rental equipment and the related parts from a limited number of manufacturers. Although no change in suppliers is anticipated, the occurrence of such a change could cause a possible loss of sales and adversely affect operating results. The Company is the holder of authorized dealerships granted by CNH Industrial America, LLC and CNHI International SA (collectively referred to "CNH Industrial") whereby it has the right to act as an authorized dealer for the entity's equipment. The dealership authorizations and floorplan payable facilities can be canceled by the respective entity if the Company does not observe certain established guidelines and covenants.
In addition, the Company believes that the following factors related to concentrations in suppliers, and in particular CNH Industrial, have a significant impact on its operating results:
•
CNH Industrial's product offerings, reputation and market share
•
CNH Industrial's product prices and incentive and discount programs
•
Supply of inventory from CNH Industrial
|
|
•
|
CNH Industrial provides floorplan payable financing for the purchase of a substantial portion of the Company's inventory
|
|
|
•
|
CNH Industrial provides a significant percentage of the financing and lease financing used by the Company's customers to purchase CNH Industrial equipment from the Company.
|
Receivables and Credit Policy
Trade accounts receivable due from customers are uncollateralized customer obligations due under normal trade terms requiring payment within 30 to
90
days from the invoice date. Balances unpaid after the due date based on trade terms are considered past due and begin to accrue interest. Payments of trade receivables are allocated to the specific invoices identified on the customer's remittance advice or, if unspecified, are applied to the earliest unpaid invoices. Trade accounts receivable due from manufacturers relate to discount programs, incentive programs and repair services performed on equipment with a remaining factory warranty. Trade accounts receivable due from finance companies primarily consist of contracts in transit with finance companies and balances due from credit card companies. These receivables do not generally have established payment terms but are collected in relatively short time periods. Unbilled receivables represent unbilled labor hours incurred and parts inventories consumed during the performance of service arrangements for our customers at their retail, or billable, rates.
The carrying amount of trade receivables is reduced by a valuation allowance that reflects management's best estimate of the amounts that will not be collected. Management reviews aged receivable balances and estimates the portion, if any, of the balance that will not be collected. Account balances are charged off after all appropriate means of collection have been exhausted and the potential for recovery is considered remote.
Inventories
New and used equipment 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. All new and used equipment inventories, including that which has been rented, are subject to periodic lower of cost or net realizable value evaluation that considers various factors including aging of equipment and market conditions. Equipment inventory values are adjusted whenever the carrying amount exceeds the net realizable value. Parts inventories are valued at the lower of average cost or net realizable value. The Company estimates its lower of cost or net realizable value adjustments on its parts inventories based on various factors including aging and sales of each type of parts inventory. Work in process represents costs incurred in the reconditioning and preparation for sale of our equipment inventories.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful life of each asset, as summarized below:
|
|
|
Buildings and leasehold improvements
|
Lesser of 10 - 40 years or lease term
|
Machinery and equipment
|
3 - 10 years
|
Furniture and fixtures
|
3 - 10 years
|
Vehicles
|
5 - 10 years
|
Rental fleet
|
3 - 10 years
|
Depreciation for income tax reporting purposes is computed using accelerated methods.
Intangible Assets
Intangible assets with a finite life consist of customer relationships and covenants not to compete, and are carried at cost less accumulated amortization. The Company amortizes the cost of identified intangible assets on a straight-line basis over the expected period of benefit, which is
three
years for customer relationships and the contractual term for covenants not to compete, which range from
five
to
ten
years.
Intangible assets with an indefinite life consist of distribution rights with manufacturers. Distribution rights are classified as an indefinite-lived intangible asset because the Company's distribution agreements continue indefinitely by their terms, or are routinely awarded or renewed without substantial cost or material modifications to the underlying agreements. As such, the Company believes that its distribution rights intangible assets will contribute to its cash flows for an indefinite period; therefore, the carrying amount of distribution rights is not amortized, but is tested for impairment annually, or more frequently upon the occurrence of certain events or when circumstances indicate that impairment may be present. The Company performs its annual impairment test as of December 31st of each year. The impairment test is performed by comparing the carrying value to its estimated fair value. See Note 5 for details and results of the Company's impairment testing in the years ended
January 31, 2018
,
2017
and
2016
.
Impairment of Long-Lived Assets
The Company's long-lived assets consist of its intangible assets and property and equipment. These assets are reviewed for potential impairment when 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 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. All impairment charges recognized are included in the
Impairment of Long-Lived Assets
amount in the consolidated statements of operations.
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 the year ended January 31, 2018, the Company determined that certain events or circumstances, including a current period operating loss combined with historical losses and anticipated future operating losses, or an expectation that a long-lived asset will be disposed of before the end of its previously estimated useful life, within certain of its stores was an indication that the long-lived assets of these stores may not be recoverable. In light of these circumstances, the Company performed step one of the long-lived asset impairment analysis for these assets, which have a combined carrying value of
$13.3 million
. In certain cases, the analyses indicated that the carrying value is not recoverable. The aggregate carrying value of such assets totaled
$2.5 million
. Based on this conclusion, the Company performed step two of the impairment analysis and estimated the fair value of these assets primarily using market and income approaches. Step two of the analysis indicated that an impairment charge in the amount
$0.7 million
was necessary, of which
$0.2 million
related to the Agriculture segment and
$0.5 million
related to the Construction segment. In all other cases, in which the aggregate carrying value of such assets totaled
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$10.8 million
, the Company's analyses indicated that the carrying values are recoverable based on its estimates of future undiscounted cash flows under step one of the impairment analysis.
We performed similar impairment analyses at the end of fiscal 2017 and 2016. The Company recognized impairment charges totaling
$4.4 million
on long-lived assets during the year ended January 31, 2017, of which
$1.9 million
related to the Agriculture segment,
$2.2 million
related to the Construction segment and
$0.3 million
related to the International segment. The Company recognized impairment charges totaling
$6.9 million
on long-lived assets during the year ended January 31, 2016, of which
$4.0 million
related to the Agriculture segment,
$2.8 million
related to the Construction segment and
$0.1 million
related to the Shared Resource Center.
Derivative Instruments
In the normal course of business, the Company is subject to risk from adverse fluctuations in foreign currency exchange rates and benchmark interest rates. The Company may manage its market risk exposures through a program that includes the use of derivative instruments, primarily foreign exchange forward contracts and interest rate derivatives. The Company's objective in managing its exposure to market risk is to minimize the impact on earnings, cash flows and the consolidated balance sheet. The Company does not use derivative instruments for trading or speculative purposes.
All outstanding derivative instruments are recognized in the consolidated balance sheet at fair value. The effect on earnings from recognizing the fair value of the derivative instrument depends on its intended use, the hedge designation, and the effectiveness in offsetting the exposure of the underlying hedged item. Changes in fair values of instruments designated to reduce or eliminate fluctuations in the fair values of recognized assets and liabilities and unrecognized firm commitments are reported currently in earnings along with the change in the fair value of the hedged items. Changes in the effective portion of the fair values of derivative instruments used to reduce or eliminate fluctuations in cash flows of forecasted transactions are reported in other comprehensive income (loss), a component of stockholders' equity. Amounts accumulated in other comprehensive income (loss) are reclassified to earnings when the related hedged items affect earnings or the anticipated transactions are no longer probable. Changes in the fair value of derivative instruments designated to reduce or eliminate fluctuations in the net investment of a foreign subsidiary are reported in other comprehensive income. Changes in the fair value of derivative instruments that are not designated as hedging instruments or do not qualify for hedge accounting treatment are reported currently in earnings. The cash flows related to derivative instruments that are accounted for as cash flow hedges are classified in the same category on the consolidated statements of cash flow as the cash flows from the items being hedged.
For derivative instruments accounted for as hedging instruments, the Company formally designates and documents, at inception, the instrument as a hedge of a specific underlying exposure, the risk management objective and the manner by which the effectiveness of the hedging instrument will be evaluated. At each reporting period after inception, the Company evaluates the hedging instrument's effectiveness in reducing or eliminating the underlying hedged exposure. Any hedge ineffectiveness is recognized in earnings immediately.
Fair Value Measurements
Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Three levels of inputs may be used to measure fair value:
Level 1—Values derived from unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2—Values derived from observable inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets in markets that are not active.
Level 3—Values derived from unobservable inputs for which there is little or no market data available, thereby requiring the reporting entity to develop its own assumptions.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Customer Deposits
Customer deposits consist of advance payments from customers, in the form of cash or equipment to be traded-in.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
The Company uses the asset and liability method to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that a portion or all of the deferred tax assets will not be realized. Changes in valuation allowances are included in its provision for income taxes in the period of the change. Deferred tax assets and liabilities are netted by taxing jurisdiction and presented as either a net asset or liability position, as applicable, on the consolidated balance sheets.
The Company recognizes the financial statement benefit of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured as the largest amount that has a greater than 50% likelihood of being realized. Changes in the recognition or measurement of such positions are reflected in its provision for income taxes in the period of the change. The Company's policy is to recognize interest and penalties related to income tax matters within its provision for income taxes.
Earnings (Loss) Per Share ("EPS")
The Company uses the two-class method to calculate basic and diluted EPS. Unvested restricted stock awards are considered participating securities because they entitle holders to non-forfeitable rights to dividends during the vesting term. Under the two-class method, basic EPS were computed by dividing net income attributable to Titan Machinery Inc. after allocation of income (loss) to participating securities by the weighted-average number of shares of common stock outstanding during the year.
Diluted EPS were computed by dividing net income attributable to Titan Machinery Inc. after allocation of income (loss) to participating securities by the weighted-average shares of common stock outstanding after adjusting for potential dilution related to the conversion of all dilutive securities into common stock. All potentially dilutive securities were included in the computation of diluted EPS. All anti-dilutive securities were excluded from the computation of diluted EPS.
The following table sets forth the calculation of the denominator for basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands, except per share data)
|
Basic Weighted-Average Common Shares Outstanding
|
21,543
|
|
|
21,294
|
|
|
21,111
|
|
Plus: Incremental Shares From Assumed Exercise of Stock Options
|
—
|
|
|
—
|
|
|
—
|
|
Diluted Weighted-Average Common Shares Outstanding
|
21,543
|
|
|
21,294
|
|
|
21,111
|
|
|
|
|
|
|
|
Anti-Dilutive Shares Excluded From Diluted Weighted-Average Common Shares Outstanding
|
|
|
|
|
|
Stock Options
|
87
|
|
|
139
|
|
|
174
|
|
Shares Underlying Senior Convertible Notes (conversion price of $43.17)
|
1,521
|
|
|
2,217
|
|
|
3,474
|
|
|
|
|
|
|
|
Earnings (Loss) per Share
|
|
|
|
|
|
Basic
|
$
|
(0.32
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(1.76
|
)
|
Diluted
|
$
|
(0.32
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(1.76
|
)
|
Revenue Recognition
Equipment revenue is generally recognized upon receipt of a signed sales contract and delivery of product to customers. In addition to outright sales of new and used equipment, certain rental agreements may include rent-to-purchase options. Under these agreements, customers are given a period of time to exercise an option to purchase the related equipment, with a portion of the rental payments being applied to reduce the purchase price. Payments received during the rental period are recorded as rental revenue. Any such equipment is included in inventory until the purchase option is exercised, and the carrying value of the equipment is reduced in accordance with the Company's aforementioned policy. Equipment revenue is recognized upon the exercise of the purchase option. Parts revenue is recognized upon delivery of product to customers. Service revenue is
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recognized at the time the related services are provided. Rental revenue is recognized over the period of the respective rental agreement.
Sales, Excise and Value Added Taxes
The Company has customers in states and municipalities in which those governmental units impose a sales tax on certain sales. The U.S. federal government imposes excise taxes on certain sales. Certain governments of the foreign countries in which the Company operates impose value added taxes on certain sales. The Company collects those sales and excise taxes from its customers and remits the entire amount to the various governmental units. The Company's accounting policy is to exclude the tax collected and remitted from revenue and cost of revenue.
Shipping and Handling Costs
Shipping and handling costs are recorded as cost of revenue and amounts billed to customers for shipping and handling costs are recorded in revenue.
Lessor Accounting
The Company leases equipment from its rental fleet and equipment inventory to customers on operating leases over periods primarily less than
one year
. These leases require a minimum rental payment and contingent rental payment based on machine hours. Rental revenue totaled
$51.6 million
,
$50.5 million
and
$61.4 million
for the years ended
January 31, 2018
,
2017
and
2016
. As of
January 31, 2018
, the Company had
$123.4 million
of rental fleet included in property and equipment and accumulated depreciation of
$51.6 million
. As of
January 31, 2017
, the Company had
$124.4 million
of rental fleet included in property and equipment and accumulated depreciation of
$49.3 million
.
Construction of Leased Assets and Sale-Leaseback Accounting
The Company from time to time performs construction projects on its store locations, which are recorded as property and equipment in the consolidated balance sheet during the construction period. Upon completion, these assets are either placed in service, at which point the depreciation of the asset commences, or are part of a sale-leaseback transaction with a third-party buyer/lessor. In certain other situations the Company enters into build-to-suit construction projects with third-party lessors. Under the applicable lease accounting rules, certain forms of lessee involvement in the construction of the leased asset deem the Company to be the owner of the leased asset during the construction period and requires capitalization of the lessor's total project costs on the consolidated balance sheet with the recognition of a corresponding financing obligation. Upon completion of a project for which the constructed assets are sold to a buyer/lessor or the completion of a capitalized build-to suit construction project, the Company performs a sale-leaseback analysis to determine if the asset and related financing obligation can be derecognized from the consolidated balance sheet. Certain provisions in a number of our lease agreements, primarily provisions regarding repurchase options, are deemed to be continuing involvement in the sold asset which precludes sale recognition. In such cases, the asset remains on the consolidated balance sheet under property and equipment and the proceeds received in the sale-leaseback transaction are recognized as a financing obligation under long-term debt in the consolidated balance sheet. Both the asset and the financing obligation are amortized over the lease term. In instances in which the Company has no continuing involvement in the sold asset, the criteria for sale recognition are met and the asset and any related financing obligation are derecognized from the consolidated balance sheet, and the lease is analyzed for proper accounting treatment as either an operating or capital lease.
See Note 8 for balances of outstanding financing obligations.
Manufacturer Incentives and Discounts
The Company receives various manufacturer incentives and discounts, which are based on a variety of factors. Discounts and incentives related to the purchase of inventory are recognized as a reduction of inventory prices and recognized as a reduction of cost of revenue when the related inventory is sold. Other incentives, reflecting reimbursement of qualifying expenses, are recognized as a reduction of the related expense when earned.
Advertising Costs
Costs incurred for producing and distributing advertising are expensed as incurred. Advertising expense amounted to
$2.2 million
,
$2.9 million
and
$3.3 million
for the years ended
January 31, 2018
,
2017
and
2016
.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Comprehensive Income and Foreign Currency Matters
For the Company, comprehensive income (loss) represents net income adjusted for foreign currency items, including foreign currency translation adjustments and unrealized gains or losses on net investment hedge, interest rate and cash flow derivative instruments. For its foreign subsidiaries in which their local currency is their functional currency, assets and liabilities are translated into U.S. dollars at the balance sheet date exchange rate. Income and expenses are translated at average exchange rates for the year. Foreign currency translation adjustments are recorded directly as other comprehensive income (loss), a component of stockholders' equity. For its foreign subsidiaries in which the local currency is not the functional currency, prior to translation into U.S. dollars, amounts must first be remeasured from the local currency into the functional currency. Nonmonetary assets and liabilities are remeasured at historical exchange rates and monetary assets and liabilities are remeasured at the balance sheet date exchange rate. Income and expenses are remeasured at average exchange rates for the year. Foreign currency remeasurement adjustments are included in the statement of operations.
The Company recognized, in interest income and other income (expense) in its consolidated statements of operations, a net foreign currency transaction gain of
$1.2 million
for the fiscal year ended January 31, 2018 and a net foreign currency transaction
loss
of
$0.7 million
and
$3.8 million
for the fiscal years ended January 31,
2017
and
2016
. These foreign currency transaction gain and losses primarily arise from intercompany loans provided to the Company’s foreign subsidiaries and remeasurement losses resulting from the devaluation of the Ukrainian hryvnia. The Company hedges its intercompany loans balances, the gains and losses on such instruments are disclosed in Note 9 and substantially offset the foreign currency gains or losses arising from these intercompany loans. The net foreign currency loss arising from Ukrainian hryvnia remeasurements amounted to
$0.5 million
,
$0.3 million
and
$2.5 million
for the fiscal years ended January 31,
2018
,
2017
and
2016
.
Stock-Based Compensation
The Company accounts for stock-based compensation at the fair value of the related equity instrument over the applicable service or performance period. Beginning on February 1, 2017 with the adoption of Accounting Standards Update ("ASU") 2016-09,
Compensation-Stock Compensation,
the Company recognizes forfeitures as they occur. Additional information regarding stock-based compensation is summarized in Note 16.
Business Combinations
The Company accounts for business combinations by allocating the purchase price amongst the assets acquired, including identifiable intangible assets, and liabilities assumed based on the fair values of the acquired assets and assumed liabilities. The acquisition accounting is finalized during the measurement period, which may not exceed one year from the date of acquisition. During the measurement period the Company's accounting for the business combination transaction may be based on estimates due to various unknown factors present at the date of acquisition.
Exit and Disposal Costs
Costs related to exit or disposal activities, including store closures, for the Company primarily include lease termination costs, employee termination benefits and other costs associated with moving assets and vacating the stores. The Company records a liability at the net present value of the remaining lease obligations, net of estimated sublease income, as of the date the Company ceases using the property, including removal of any Company assets. Any subsequent adjustments to that liability as a result of changes in estimates are recorded in the period incurred. The Company records a liability for employee termination costs on the date when management, with appropriate approval, has a formal plan, the plan identifies the number of employees by function with the expected date of termination, benefits for the employees have been identified, the plan is unlikely to be changed and the termination benefits have been communicated to the employees. Other related costs are expensed as incurred. Information regarding such transactions is disclosed in Note 20.
Segment Reporting
The Company operates its business in
three
reportable segments, the Agriculture, Construction and International segments. Information regarding these segments is disclosed in Note 21.
Recent Accounting Guidance
Accounting guidance adopted
In July 2015, the Financial Accounting Standards Board (the "FASB") amended authoritative guidance on accounting for the measurement of inventory, codified in ASC 330,
Inventory
. The amended guidance requires inventory to be measured at
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this guidance on a prospective basis on February 1, 2017. Under the former guidance for measuring inventory, the Company recognized lower of cost-or-market adjustments using a definition of market value as net realizable value reduced by an allowance for a normal profit margin. Upon implementation of the new authoritative guidance, market is defined solely as net realizable value. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.
In March 2016, the FASB amended authoritative guidance on stock-based compensation through the issuance of ASU 2016-09 which is codified in ASC 718,
Compensation - Stock Compensation.
The amended guidance changes the accounting for certain aspects of share-based payments, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statements of cash flows. The Company adopted this guidance on February 1, 2017. Under the new guidance, excess tax benefits or deficiencies related to share-based compensation that were previously recorded to equity are now recognized as a discrete tax benefit or expense in the statement of operations. The impact on income tax expense (benefit) was not material for fiscal 2018. Excess tax benefits are no longer reclassified out of cash flows from
operating activities to financing activities in the statement of cash flows. We elected to apply this cash flow presentation requirement prospectively. The amount of excess tax benefits recognized for the years ended January 31, 2018 and 2017 were not material. Cash paid by an employer when directly withholding shares for tax withholding purposes are required to be classified as a financing activity in the statement of cash flows. This method of presentation is consistent with the Company's historical presentation. Also under the new standard, the Company elected to account for forfeitures of share based instruments as they occur, as compared to the previous guidance under which the Company estimated the number of forfeitures. The Company applied the accounting change on a modified retrospective basis as a cumulative-effect adjustment to retained earnings as of February 1, 2017. The following table summarizes the impact to the Company’s consolidated balance sheet:
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|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 1, 2017
|
|
Balance Sheet Classification
|
|
Additional paid-in capital
|
|
Deferred income tax liability
|
|
Retained earnings
|
|
|
|
(in thousands)
|
|
|
|
|
|
Increase (Decrease)
|
|
|
Impact of cumulative-effect adjustment from adoption of ASU 2016-09
|
$
|
2,087
|
|
|
$
|
(835
|
)
|
|
$
|
(1,252
|
)
|
Accounting guidance not yet adopted
In May 2014 and August 2015, the FASB issued authoritative guidance on accounting for revenue recognition, codified in ASC 606,
Revenue from Contracts with Customers
. This guidance has been amended on various occasions and supersedes the revenue recognition requirements in ASC 605,
Revenue Recognition
. This guidance is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The Company will adopt this guidance on February 1, 2018.
We have assessed the impact adoption of this standard will have on our consolidated financial statements and related disclosures. Our implementation efforts consisted of an identification and assessment of our primary revenue streams and the performance of contract analyses of a sample of contracts within each of our revenue streams. Based on our assessment, the adoption of this standard will not have a material impact on our revenue recognition policies for our equipment, parts or service revenues. ASC 606 does not apply to the recognition of our rental revenues as the accounting for such revenues is governed by other authoritative guidance. We will adopt the standard by using the modified retrospective approach. The standard required minimal changes to our business processes, systems and controls to support recognition and disclosure under the new standard.
In February 2016, the FASB amended authoritative guidance on leases, codified in ASC 842,
Leases
. The amended guidance requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The provisions of this guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the guidance for all periods presented. We anticipate adopting the new standard on February 1, 2019, and expect to elect the package of practical expedients afforded under the guidance, including the
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
use of hindsight to determine the lease term. Our implementation efforts to date have consisted of identifying the Company's lease population, selecting a lease software to implement that will assist with the reporting and disclosure requirements under the standard and continuing the process of abstracting and validating the Company's lease information. While we continue to evaluate this standard, we anticipate this standard will have a material impact on our consolidated balance sheets due to the capitalization of a right-of-use asset and lease liability associated with our current operating leases, but do not believe it will have a material impact on our consolidated statements of operations or cash flows.
In May 2017, the FASB amended authoritative guidance on modifications related to stock compensation, codified in ASC 718,
Compensation - Stock Compensation
. The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. The guidance is effective for the Company as of the first quarter of its fiscal year ending January 31, 2019. The Company does not believe the update will have a material impact on its consolidated financial statements.
In August 2017, the FASB amended authoritative guidance on hedge accounting, codified in ASC 815,
Derivatives and
Hedging.
The amendments better align the accounting rules with a company's risk management activities, better reflects economic results of hedging in financial statements, and simplifies hedge accounting treatment. The guidance is effective for the Company as of the first quarter of its fiscal year ending January 31, 2020. The Company is evaluating the impact of this new standard on the financial statements.
NOTE 2—RECEIVABLES
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
January 31, 2017
|
|
(in thousands)
|
Trade accounts receivable
|
|
|
|
Due from customers
|
$
|
32,829
|
|
|
$
|
31,636
|
|
Due from finance companies
|
8,906
|
|
|
14,319
|
|
Due from manufacturers
|
10,074
|
|
|
9,107
|
|
Unbilled receivables due from customers
|
11,814
|
|
|
8,650
|
|
Total trade accounts receivable
|
63,623
|
|
|
63,712
|
|
Less allowance for doubtful accounts
|
(2,951
|
)
|
|
(3,630
|
)
|
|
$
|
60,672
|
|
|
$
|
60,082
|
|
NOTE 3—INVENTORIES
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
January 31, 2017
|
|
(in thousands)
|
New equipment
|
$
|
258,559
|
|
|
$
|
235,161
|
|
Used equipment
|
141,450
|
|
|
160,503
|
|
Parts and attachments
|
71,110
|
|
|
81,734
|
|
Work in process
|
1,348
|
|
|
868
|
|
|
$
|
472,467
|
|
|
$
|
478,266
|
|
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4—PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
January 31, 2017
|
|
(in thousands)
|
Rental fleet equipment
|
$
|
123,430
|
|
|
$
|
124,417
|
|
Machinery and equipment
|
22,025
|
|
|
22,255
|
|
Vehicles
|
37,741
|
|
|
36,384
|
|
Furniture and fixtures
|
39,851
|
|
|
39,875
|
|
Land, buildings, and leasehold improvements
|
62,243
|
|
|
59,481
|
|
|
285,290
|
|
|
282,412
|
|
Less accumulated depreciation
|
(134,243
|
)
|
|
(125,765
|
)
|
|
$
|
151,047
|
|
|
$
|
156,647
|
|
Depreciation expense amounted to
$25.0 million
,
$26.7 million
and
$28.2 million
for the years ended
January 31, 2018
,
2017
and
2016
. The Company had assets related to sale-leaseback financing obligations and capital leases associated with real estate of store locations, which are included in the land, buildings and leasehold improvements balance above. Such assets had gross carrying values totaling
$23.5 million
and
$24.9 million
, and accumulated amortization balances totaling
$4.7 million
and
$3.6 million
, as of
January 31, 2018
and
2017
.
NOTE 5—INTANGIBLE ASSETS AND GOODWILL
The following is a summary of intangible assets with finite lives as of
January 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
January 31, 2017
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
(in thousands)
|
|
(in thousands)
|
Covenants not to compete
|
$
|
440
|
|
|
$
|
(369
|
)
|
|
$
|
71
|
|
|
$
|
970
|
|
|
$
|
(851
|
)
|
|
$
|
119
|
|
|
$
|
440
|
|
|
$
|
(369
|
)
|
|
$
|
71
|
|
|
$
|
970
|
|
|
$
|
(851
|
)
|
|
$
|
119
|
|
Amortization expense was
$0.1 million
,
$0.1 million
and
$0.3 million
for the years ended
January 31, 2018
,
2017
and
2016
. Future amortization expense, as of
January 31, 2018
, is expected to be as follows:
|
|
|
|
|
Years ending January 31,
|
Amount
|
|
(in thousands)
|
2019
|
$
|
32
|
|
2020
|
20
|
|
2021
|
9
|
|
2022
|
5
|
|
2023
|
5
|
|
|
$
|
71
|
|
The value of indefinite lived intangible assets, which consist entirely of distribution rights, was
$5.1 million
as of
January 31, 2018
, of which
$5.0 million
related to the Agriculture segment and
$0.1 million
related to the Construction segment. The value as of January 31,
2017
, was
$4.9 million
, of which
$4.8 million
related to the Agriculture segment and
$0.1 million
related to the Construction segment. Related to the business combination noted in Note 18, there was an additional
$0.2 million
added to the carrying amount in fiscal 2018. There was no change to the carrying amount during fiscal 2017.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company performs the annual impairment testing of its indefinite lived distribution rights intangible assets as of December 31st of each year. Under the impairment test, the fair value of distribution rights intangible assets is estimated based on a multi-period excess earnings model, an income approach. This model allocates future estimated earnings of the store/complex amongst working capital, fixed assets and other intangible assets of the store/complex and any remaining earnings (the “excess earnings”) are allocated to the distribution rights intangible assets. The earnings allocated to the distribution rights are then discounted to arrive at the present value of the future estimated excess earnings, which represents the estimated fair value of the distribution rights intangible asset. The discount rate applied reflects the Company's estimate of the weighted-average cost of capital of comparable companies plus an additional risk premium to reflect the additional risk inherent in the distribution right asset.
The results of the Company's impairment testing for the fiscal years ended January 31, 2018, 2017 and 2016 indicated that
no
impairment charges were necessary.
NOTE 6—FLOORPLAN PAYABLE/LINES OF CREDIT
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 the Company purchases new equipment inventory offer financing on these purchases, either offered directly from the manufacturer or through the manufacturers’ captive finance subsidiaries. CNH Industrial's captive finance subsidiary, CNH Industrial Capital, also provides financing of used equipment inventory. The Company also has floorplan payable balances with non-manufacturer lenders for new and used equipment inventory. Changes in manufacturer floorplan payable are reported as operating cash flows and changes in non-manufacturer floorplan payable are reported as financing cash flows in the Company's consolidated statements of cash flows. The Company has
three
significant domestic floorplan lines of credit, various credit facilities related to its foreign subsidiaries, and other floorplan payable balances with non-manufacturer lenders and manufacturers other than CNH Industrial.
As of
January 31, 2018
, the Company had discretionary floorplan lines of credit for equipment inventory purchases totaling
$728.1 million
, which includes a
$140.0 million
floorplan payable line of credit with a group of banks led by Wells Fargo Bank, National Association ("Wells Fargo"), a
$450.0 million
credit facility with CNH Industrial Capital, a
$30.0 million
credit facility with DLL Finance LLC ("DLL Finance") and the U.S. dollar equivalent of
$108.1 million
in credit facilities related to our foreign subsidiaries. Floorplan payables relating to these credit facilities totaled approximately
$239.2 million
of the total floorplan payable balance of
$247.4 million
outstanding as of
January 31, 2018
and
$228.3 million
of the total floorplan payable balance of
$233.2 million
outstanding as of
January 31, 2017
. The remaining outstanding balances relate to equipment inventory financing from manufacturers and non-manufacturer lenders other than the lines of credit described above. As of
January 31, 2018
, the interest-bearing U.S. floorplan payables carried various interest rates primarily ranging from
4.06%
to
6.50%
, and the foreign floorplan payables carried various interest rates primarily ranging from
0.9%
to
7.6%
.
As of
January 31, 2018
, 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.
The following provides additional information regarding each of the Company's three significant domestic floorplan lines of credit. The outstanding balances on these floorplan lines of credit with Wells Fargo, CNH Industrial Capital and DLL Finance were
$57.5 million
,
$116.2 million
and
$11.5 million
as of
January 31, 2018
, and
$87.0 million
,
$85.2 million
and
$10.8 million
as of
January 31, 2017
.
Wells Fargo Credit Agreement - Floorplan Payable and Working Capital Lines of Credit
As of
January 31, 2018
, the Company had a second amended and restated credit agreement with Wells Fargo (the "Wells Fargo Credit Agreement"), which provides for a
$140.0 million
wholesale floorplan line of credit (the "Floorplan Payable Line") and a
$60.0 million
working capital line of credit (the "Working Capital Line"). The amount available for borrowing under the Floorplan Payable Line is reduced by amounts outstanding thereunder, borrowing base calculations and outstanding standby letters of credit. The Wells Fargo Credit Agreement has a variable interest rate on outstanding balances and has a
0.25%
to
0.375%
non-usage fee on the average monthly unused amount 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 for the duration of one month, two month, or three month LIBOR rate at the time of the loan, as chosen by the Company. The Base Rate is the greatest of (a) the Federal Funds Rate plus
0.5%
, (b) the one month LIBOR Rate plus
1%
, and (c) the prime rate of interest announced, from time to time, within Wells Fargo. The applicable margin rate is determined based on excess
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
availability under the Credit Agreement and ranges from
0.75%
to
1.5%
for Base Rate Loans and
1.75%
to
2.50%
for
LIBOR
Rate Loans.
The Wells Fargo Credit Agreement is secured by substantially all our assets and requires the Company to maintain a fixed charge coverage ratio of at least
1.1
:1.0 if adjusted excess availability plus eligible cash collateral is less than
15%
of the total amount of the credit facility. Based on our adjusted excess availability and cash collateral, we were not subject to the fixed charge coverage ratio as of January 31, 2018. The Wells Fargo Credit Agreement also includes various non-financial covenants, including, under certain conditions, restricting the Company’s ability to make certain cash payments, including for cash dividends and stock repurchases, restricting the Company’s ability to issue equity instruments, restricting the Company’s ability to complete acquisitions or divestitures, and limiting the Company's ability to incur new indebtedness. The provisions in the Wells Fargo Credit Agreement restricting the Company from making certain cash payments, including for cash dividends and stock repurchases, provide that no such payments may be made unless, (i) as of the date of such payment there is no default or event of default occurring and continuing, (ii) the amount remaining available to be borrowed by the Company under the Wells Fargo Credit Agreement is greater than twenty percent of the total borrowing capacity under the Wells Fargo Credit Agreement and (iii) the Company's fixed charge coverage ratio for the 12 month period most recently ended, on a pro-forma basis assuming that such proposed cash payment has been made, is at least
1.1
to 1.0. As of January 31, 2018, under these provisions of the Wells Fargo Credit Agreement, the Company had an unrestricted dividend availability of approximately
$25.7 million
.
As a result of our ongoing equipment inventory reduction and related reduction in floorplan financing needs, in May 2017, the Company provided notice to Wells Fargo of its election to reduce the maximum credit amount available under the Wells Fargo Credit Agreement from an aggregate of
$275.0 million
to an aggregate
$200.0 million
, comprised of a
$70.0 million
reduction in the Floorplan Payable Line, from
$210.0 million
to
$140.0 million
, and a
$5.0 million
reduction in the Working Capital Line, from
$65.0 million
to
$60.0 million
. As a result of this reduction in the maximum credit amount available under the Wells Fargo Credit Agreement, in the second quarter of fiscal 2018 the Company wrote-off
$0.4 million
of capitalized debt issuance costs. This charge is recorded in Other Interest Expense in the consolidated statements of operations.
In February 2018, the Wells Fargo Credit Agreement was amended to (i) move the maturity testing date under the Wells Fargo Credit Agreement from November 1, 2018 to February 1, 2019, a date that is three months prior to the scheduled maturity date of the Company's outstanding Senior Convertible Notes, and (ii) modify the maturity test calculation. The maturity date for the Wells Fargo Credit Agreement will remain
October 28, 2020
so long as (i) the Company's fixed charge coverage ratio for the 12 month period ending December 31, 2018 is at least
1.1
to 1.0 and (ii) a liquidity test, requiring that the Company have unrestricted cash on hand plus excess borrowing availability under the Wells Fargo Credit Agreement (on a pro-forma basis reflecting the Company’s repayment in full of its outstanding Senior Convertible Notes) in an amount that is greater than 20% of maximum credit amount under the facility, is met on February 1, 2019. If both financial tests are not satisfied on February 1, 2019, the Wells Fargo Credit Agreement will immediately mature and all amounts outstanding become immediately due and payable in full.
The Floorplan Payable Line 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 Working Capital Line 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. The balances outstanding on the Working Capital Line as of
January 31, 2018
and
2017
are disclosed in Note 8.
CNH Industrial Capital Floorplan Payable Line of Credit
As of
January 31, 2018
, the Company had a
$450.0 million
credit facility with CNH Industrial Capital. The available borrowings under the CNH Industrial Capital credit facility are reduced by outstanding floorplan payable and other acquisition-related financing arrangements with CNH Industrial Capital. The CNH Industrial Capital credit facility has interest rates equal to the
prime
rate plus
2%
on new borrowings exclusive of borrowing related to rental, which has an interest rate equal to the prime rate plus
3.25%
, subject to any interest-free and reduced interest rate periods offered by CNH Industrial Capital, and automatically renews on August 31st of each year unless earlier terminated by either party. Repayment terms vary by individual notes, but generally payments are made from sales proceeds or rental revenue from the related inventories or rental fleet assets. The balances outstanding with CNH Industrial Capital are secured by the inventory or rental fleet purchased with the floorplan proceeds. The CNH Industrial Capital credit facility contains financial covenants that impose a maximum level of adjusted debt to tangible net worth of
3.00
:1.00 and minimum fixed charge coverage ratio
1.10
:1.00. It also contains various restrictive
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
covenants that require prior consent of CNH Industrial Capital if the Company desires to engage in any acquisition of, consolidation or merger with, any other business entity in which the Company is not the surviving company; create subsidiaries; move any collateral outside of the U.S.; or sell, rent, lease or otherwise dispose or transfer any of the collateral, other than in the ordinary course of business. CNH Industrial Capital's consent is also required for the acquisition of any CNH Industrial dealership. In addition, the CNH Industrial Capital credit facility restricts the Company's ability to incur any liens upon any substantial part of its assets. As of January 31, 2018, the Company was in compliance with the adjusted debt to tangible net worth and fixed charge coverage ratio financial covenants under this credit facility.
The Company amended its credit facility with CNH Industrial during the third quarter of fiscal 2018 to decrease the fixed charge coverage ratio imposed under the credit facility from
1.25
:1.00 to
1.10
:1.00.
In April 2018, the Company entered into an amendment to the credit facility with CNH Industrial Capital, which decreased available borrowings under this facility to
$350.0 million
. As a result of this amendment, our total discretionary floorplan payable lines of credit for equipment purchases was reduced from
$728.1 million
to
$628.1 million
.
DLL Finance Floorplan Payable Line of Credit
As of
January 31, 2018
, the Company had a
$30.0 million
credit facility with DLL Finance. The DLL Finance credit facility may be used to purchase or refinance new and used equipment inventory and has a variable interest rate on outstanding balances of
three-month LIBOR
plus an applicable margin of
3.50%
per annum. The DLL Finance credit facility allows for increase, decrease or termination of the credit facility by DLL Finance on
90 days
notice. The DLL Finance credit facility contains financial covenants that impose a maximum net leverage ratio of
2.50
:1.00 and a minimum fixed charge coverage ratio of
1.10
:1.00. The credit facility also requires the Company to obtain prior consent from DLL Finance if the Company desired to engage in any acquisition meeting certain financial thresholds. The balances outstanding with DLL Finance are secured by the inventory or rental fleet purchased with the floorplan proceeds. Repayment terms vary by individual notes, but generally payments are made from sales proceeds or rental revenue from the related inventories or rental fleet assets. As of January 31, 2018, the Company was in compliance with the net leverage ratio and fixed charge coverage ratio financial covenants under this credit facility.
The Company amended its credit facility with DLL Finance during the third quarter of fiscal 2018, which, among other things, decreased its available borrowings under the credit facility from
$45.0 million
to
$30.0 million
, and decreased the minimum fixed charge coverage ratio imposed under the DLL Finance credit facility from
1.25
:1:00 to
1.10
:1.00.
NOTE 7—SENIOR CONVERTIBLE NOTES
On April 24, 2012, the Company issued through a private offering
$150 million
of 3.75% Senior Convertible Notes (the "Senior Convertible Notes"). The Senior Convertible Notes bear interest at a rate of
3.75%
per year, payable semi-annually in arrears on May 1 and November 1 of each year, commencing on November 1, 2012. The Convertible Notes mature on May 1, 2019, unless earlier purchased by the Company, redeemed or converted.
The Senior Convertible Notes are unsecured and unsubordinated obligations; rank equal in right of payment to the Company's existing and future unsecured indebtedness that is not subordinated; are effectively subordinated in right of payment to the Company's existing and future secured indebtedness; and are structurally subordinated to all existing and future indebtedness and liabilities of the Company's subsidiaries.
The Senior Convertible Notes are initially convertible into the Company's common stock at a conversion rate of 23.1626 shares of common stock per $1,000 principal amount of convertible notes, with an initial effective conversion price of
$43.17
per share of common stock. The conversion rate may be subject to adjustment upon the occurrence of certain specified events as provided in the indenture governing the Senior Convertible Notes, dated April 24, 2012 between the Company and Wells Fargo Bank, National Association, as trustee (the "Indenture"), but will not be adjusted for accrued but unpaid interest. Upon conversion of a Senior Convertible Note, the Company will settle the conversion obligation in cash up to the aggregate principal amount of the Senior Convertible Note being converted, and any conversion obligation in excess thereof will be settled in cash, shares of the Company's common stock, or a combination thereof, at the Company's election, subject to certain limitations as defined in the Indenture.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Holders of the Senior Convertible Notes may convert their notes at the applicable conversion rate under any of the following circumstances:
|
|
i.
|
During any fiscal quarter commencing after July 31, 2012, if for at least 20 trading days (whether or not consecutive) during the
30
consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of the Company's common stock on such trading day is greater than or equal to
120%
of the applicable conversion price on such trading day.
|
|
|
ii.
|
During the
five
consecutive business day period immediately following any
five
consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of the Senior Convertible Notes is less than
98%
of the product of the last reported sale price of the Company's common stock on such trading day and the applicable conversion rate on such trading day.
|
|
|
iii.
|
If the Company calls any or all of the Senior Convertible Notes for redemption at any time prior to the close of business on the business day immediately preceding the redemption date.
|
|
|
iv.
|
Upon the occurrence of corporate transactions specified in the Indenture.
|
|
|
v.
|
At any time on and after February 1, 2019 until the close of business on the business day immediately preceding the maturity date.
|
Holders of the Senior Convertible Notes who convert their Senior Convertible Notes in connection with a make-whole fundamental change, as defined in the Indenture, may be entitled to a make-whole premium in the form of an increase to the conversion rate. In addition, upon the occurrence of a fundamental change, as defined in the Indenture, holders of the Senior Convertible Notes may require the Company to purchase all or a portion of their Senior Convertible Notes for cash at a price equal to
100%
of the principal amount of the Senior Convertible Notes to be purchased plus any accrued but unpaid interest.
The number of shares the Company may deliver upon conversion of the Senior Convertible Notes will be subject to certain limitations, and the Company is subject to certain other obligations and restrictions related to such share caps, as described in the Indenture. On or after May 6, 2015, the Company may redeem for cash all or a portion of the Senior Convertible Notes if the last reported sale price of the Company's common stock has been at least
120%
of the conversion price then in effect for at least
20
trading days (whether or not consecutive) during any
30
consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption.
The Indenture provides for customary events of default, including, but not limited to, cross acceleration to certain other indebtedness of the Company and its subsidiaries. In the case of an event of default arising from specified events of bankruptcy or insolvency, all outstanding Senior Convertible Notes will become due and payable immediately without further action or notice. If any other event of default under the Indenture occurs or is continuing, the trustee or holders of at least
25%
in aggregate principal amount of the then outstanding Senior Convertible Notes may declare all of the Senior Convertible Notes to be due and payable immediately.
In accounting for the Senior Convertible Notes, the Company segregated the liability component of the instrument from the equity component. The liability component was measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the Senior Convertible Notes. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the Senior Convertible Notes at a discount rate of
7.00%
, an interest rate equal to the estimated borrowing rate for similar non-convertible debt. The excess of the aggregate face value of the Senior Convertible Notes over the estimated fair value of the liability component is recognized as a debt discount which will be amortized over the expected life of the Senior Convertible Notes using the effective interest rate method. Amortization of the debt discount is recognized as non-cash interest expense.
The equity component of the Senior Convertible Notes is measured as the residual difference between the aggregate face value of the Senior Convertible Notes and the estimated aggregate fair value of the liability component. The equity component will not be remeasured in subsequent periods provided that the component continues to meet the conditions necessary for equity classification.
The transaction costs incurred in connection with the issuance of the Senior Convertible Notes were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being amortized using the effective interest rate method and recognized as non-cash interest expense over the expected term of the Senior Convertible Notes. Transaction costs allocated to the equity component reduced the value of the equity component recognized in stockholders' equity.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal 2018, the Company repurchased an aggregate of
$30.1 million
face value (
$28.1 million
carrying value) of its Senior Convertible Notes with
$29.1 million
in cash. Of the
$29.1 million
in total cash consideration,
$28.1 million
was attributed to the extinguishment of the liability and
$1.0 million
was attributed to the reacquisition of a portion of the equity component of the instrument. The Company recognized an immaterial net pre-tax gain on the extinguishment of the liability and recognized a
$0.6 million
after-tax reduction in additional paid-in capital from the reacquisition of the equity component. During fiscal 2017, the Company repurchased an aggregate of
$54.3 million
face value (
$49.1 million
carrying value) with
$46.0 million
in cash. All consideration was attributed to the extinguishment of the liability and the Company recognized a pre-tax gain of
$3.1 million
on these repurchases. In total, the Company has repurchased an aggregate of
$84.4 million
face value (
$77.2 million
carrying value) of its Senior Convertible Notes with
$75.1 million
in cash. Gains on repurchases are included in other interest expense in the Consolidated Statements of Operations.
As of
January 31, 2018
and
2017
, the Senior Convertible Notes consisted of the following:
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
January 31, 2017
|
|
(in thousands, except conversion rate and conversion price)
|
Principal value
|
$
|
65,644
|
|
|
$
|
95,725
|
|
Unamortized debt discount
|
(2,497
|
)
|
|
(6,368
|
)
|
Unamortized debt issuance costs
|
(328
|
)
|
|
(856
|
)
|
Carrying value of senior convertible notes
|
$
|
62,819
|
|
|
$
|
88,501
|
|
|
|
|
|
Carrying value of equity component, net of deferred taxes
|
$
|
14,923
|
|
|
$
|
15,546
|
|
|
|
|
|
Conversion rate (shares of common stock per $1,000 principal amount of notes)
|
23.1626
|
|
|
|
Conversion price (per share of common stock)
|
$
|
43.17
|
|
|
|
The Company recognized interest expense associated with its Senior Convertible Notes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Cash Interest Expense
|
|
|
|
|
|
Coupon interest expense
|
$
|
2,782
|
|
|
$
|
4,355
|
|
|
$
|
5,625
|
|
Noncash Interest Expense
|
|
|
|
|
|
Amortization of debt discount
|
2,104
|
|
|
2,849
|
|
|
3,703
|
|
Amortization of transaction costs
|
290
|
|
|
439
|
|
|
552
|
|
|
$
|
5,176
|
|
|
$
|
7,643
|
|
|
$
|
9,880
|
|
As of
January 31, 2018
, the unamortized debt discount will be amortized over a remaining period of approximately
1.25 years
. The if-converted value as of
January 31, 2018
does not exceed the principal balance of the Senior Convertible Notes. The effective interest rate of the liability component was equal to
7.3%
for each of the statements of operations periods presented.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8—LONG-TERM DEBT
The following is a summary of long-term debt as of
January 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
January 31, 2017
|
|
(in thousands)
|
Sale-leaseback financing obligations and capital leases, interest rates primarily ranging from 3.4% to 12.6%,with various maturity dates through December 2030
|
$
|
23,152
|
|
|
$
|
24,665
|
|
Working Capital Line payable to Wells Fargo (see details in Note 6)
|
13,000
|
|
|
13,000
|
|
Fixed rate note payable to Union Bank and Trust Company, interest rate of 4.50%, due in monthly installments including interest with a maturity date of February 2021, secured by fixed assets
|
—
|
|
|
1,944
|
|
|
36,152
|
|
|
39,609
|
|
Less current maturities
|
(1,574
|
)
|
|
(1,373
|
)
|
|
$
|
34,578
|
|
|
$
|
38,236
|
|
Long-term debt maturities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale-Leaseback Financing Obligations & Capital Leases
|
|
|
|
Total Present Value of Minimum Lease Payments and Other Long-Term Debt
|
Years Ending January 31,
|
Minimum Lease Payments
|
|
Interest
|
|
Present Value of Minimum Lease Payments
|
|
Other Long-Term Debt
|
|
|
(in thousands)
|
2019
|
$
|
3,372
|
|
|
$
|
1,798
|
|
|
$
|
1,574
|
|
|
$
|
—
|
|
|
$
|
1,574
|
|
2020
|
3,448
|
|
|
1,712
|
|
|
1,736
|
|
|
13,000
|
|
|
14,736
|
|
2021
|
3,324
|
|
|
1,701
|
|
|
1,623
|
|
|
—
|
|
|
1,623
|
|
2022
|
3,161
|
|
|
1,592
|
|
|
1,569
|
|
|
—
|
|
|
1,569
|
|
2023
|
3,066
|
|
|
1,474
|
|
|
1,592
|
|
|
—
|
|
|
1,592
|
|
Thereafter
|
21,133
|
|
|
6,075
|
|
|
15,058
|
|
|
—
|
|
|
15,058
|
|
|
$
|
37,504
|
|
|
$
|
14,352
|
|
|
$
|
23,152
|
|
|
$
|
13,000
|
|
|
$
|
36,152
|
|
NOTE 9—DERIVATIVE INSTRUMENTS
The Company holds derivative instruments for the purpose of minimizing exposure to fluctuations in foreign currency exchange rates and benchmark interest rates to which the Company is exposed in the normal course of its operations.
Net Investment Hedges
To protect the value of the Company's investments in its foreign operations against adverse changes in foreign currency exchange rates, the Company may, from time to time, hedge a portion of its net investment in one or more of its foreign subsidiaries. Gains and losses on derivative instruments that are designated and effective as a net investment hedge are included in other comprehensive income and only reclassified into earnings in the period during which the hedged net investment is sold or liquidated. Any hedge ineffectiveness is recognized in earnings immediately.
Cash Flow Hedge
On
October 9, 2013
, the Company entered into a forward-starting interest rate swap instrument which had a notional amount of
$100.0 million
, an effective date of
September 30, 2014
and a maturity date of
September 30, 2018
. The objective of the instrument was, beginning on
September 30, 2014
, to protect the Company from changes in benchmark interest rates to which the Company is exposed through certain of its variable interest rate credit facilities. The instrument provided for a fixed interest rate of
1.901%
through the instrument's maturity date.
In April 2017, the Company elected to terminate its outstanding interest rate swap instrument. The Company paid
$0.9 million
to terminate the instrument. This cash payment is presented as a financing cash outflow in the consolidated statements of cash flows.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative Instruments Not Designated as Hedging Instruments
The Company uses foreign currency forward contracts to hedge the effects of fluctuations in exchange rates on outstanding intercompany loans. The Company does not formally designate and document such derivative instruments as hedging instruments; however, the instruments are an effective economic hedge of the underlying foreign currency exposure. Both the gain or loss on the derivative instrument and the offsetting gain or loss on the underlying intercompany loan are recognized in earnings immediately, thereby eliminating or reducing the impact of foreign currency exchange rate fluctuations on net income.
The following table sets forth the notional value of the Company's derivative instruments outstanding as of
January 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
Notional Amount as of:
|
|
January 31, 2018
|
|
January 31, 2017
|
|
(in thousands)
|
Cash flow hedges:
|
|
|
|
Interest rate swap
|
—
|
|
|
100,000
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
Foreign currency contracts
|
14,368
|
|
|
18,021
|
|
Asset derivatives are included in prepaid expenses and other in the consolidated balance sheets, and liability derivatives are included in accrued expenses in the consolidated balance sheets. The fair value of the Company's foreign currency contracts, which were not designated as hedging instruments, were recognized as an asset in the amount of
$13 thousand
as of January 31, 2018 and a liability of
$0.2 million
as of January 31, 2017. The fair value of the Company's interest rate swap cash flow hedge, which was designated as a cash-flow hedging instrument, was a liability derivative of
$1.2 million
as of January 31, 2017.
The following table sets forth the gains and losses recognized in other comprehensive income (loss) ("OCI") and income (loss) related to the Company’s derivative instruments for the years ended
January 31, 2018
,
2017
and
2016
. All amounts included in income (loss) in the table below from derivatives designated as hedging instruments relate to reclassifications from accumulated other comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
|
OCI
|
|
Income
|
|
OCI
|
|
Income
|
|
OCI
|
|
Income
|
|
(in thousands)
|
|
(in thousands)
|
|
(in thousands)
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
333
|
|
|
$
|
—
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap (a)
|
48
|
|
|
(1,091
|
)
|
|
263
|
|
|
(1,384
|
)
|
|
(1,309
|
)
|
|
(1,755
|
)
|
Foreign currency contracts (b)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(61
|
)
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts (c)
|
—
|
|
|
(1,510
|
)
|
|
—
|
|
|
365
|
|
|
—
|
|
|
996
|
|
Total Derivatives
|
$
|
48
|
|
|
$
|
(2,601
|
)
|
|
$
|
263
|
|
|
$
|
(1,019
|
)
|
|
$
|
(976
|
)
|
|
$
|
(820
|
)
|
(a) No material hedge ineffectiveness has been recognized. The amounts show in income (loss) above are reclassification amounts from accumulated other comprehensive income (loss) and are recorded in
Floorplan interest expense
in the consolidated statements of operations
(b) Amounts are included in
Cost of revenue - equipment
in the consolidated statements of operations
(c) Amounts are included in
Interest income and other income (expense)
in the consolidated statements of operations
During the first quarter of fiscal 2018, the Company reclassified
$0.6 million
of pre-tax accumulated losses on its interest rate swap instrument from accumulated other comprehensive income (loss) to income as the original forecasted interest payments, which served as the hedged item underlying the interest rate swap instrument, were no longer probable of occurring
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
during the time period over which such transactions were previously anticipated to occur. As of January 31, 2018, the Company had no remaining pre-tax net unrealized losses associated with its interest rate swap cash flow hedging instrument.
NOTE 10—ACCRUED EXPENSES & OTHER
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
January 31, 2017
|
|
(in thousands)
|
Compensation
|
$
|
16,413
|
|
|
$
|
16,163
|
|
Sales, payroll, real estate and value added taxes
|
4,448
|
|
|
3,871
|
|
Interest
|
1,148
|
|
|
1,372
|
|
Insurance
|
3,004
|
|
|
1,524
|
|
Income taxes payable
|
2,419
|
|
|
144
|
|
Derivative liabilities
|
—
|
|
|
1,355
|
|
Other
|
4,431
|
|
|
6,104
|
|
|
$
|
31,863
|
|
|
$
|
30,533
|
|
NOTE 11—CONTINGENCIES AND GUARANTEES
Guarantees
The Company has provided residual value guarantees to CNH Industrial Capital in connection with certain customer leasing arrangements with CNH Industrial Capital. The Company, as guarantor, may be required to provide payment to CNH Industrial Capital at the termination of the lease agreement if the customer fails to exercise the purchase option under the leasing agreement and the proceeds CNH Industrial Capital receives upon disposition of the leased asset are less than the purchase option price as stipulated in the lease agreement. As of January 31, 2018, the maximum amount of residual value guarantees was approximately
$4.3 million
and the lease agreements have termination dates ranging from 2019 to 2021. As of January 31, 2018, the Company has recognized a liability of approximately
$4.1 million
based on its estimates of the likelihood and amount of residual value guarantees that will become payable at the termination dates of the underlying leasing agreements discounted at a rate of interest to reflect the risk inherent in the liability. The long-term portion of this liability of
$3.9 million
is recorded in other long-term liabilities in the Company's consolidated balance sheets. The short-term portion of this liability of
$0.2 million
is recorded in accrued expenses and other in the Company's consolidated balance sheets.
As of January 31, 2018 and 2017, the Company had
$2.0 million
and
$2.8 million
of guarantees on customer financing with CNH Industrial Capital. In the event that the customer defaulted on the payments owed to CNH Industrial Capital, the Company as the guarantor would be required to make those payments and any accelerated indebtedness to CNH Industrial Capital. Upon such payment, the Company would be entitled to enforce normal creditor rights against the customer including collection action for monetary damages or re-possession of the collateral if CNH Industrial Capital has a perfected security interest. No liabilities associated with these guarantees are included in the consolidated balance sheets as of January 31, 2018 or 2017 as the Company deems the probability of being required to make such payments to be remote.
Litigation
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 engaged in 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 the various legal actions and claims that are incidental to its business will not have a
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
material impact on the financial position, results of operations or cash flows. Such matters, however, are subject to many uncertainties, and the outcome of any matter is not predictable with assurance.
Insurance
The Company has insurance policies with varying deductibility levels for property and casualty losses and is insured for losses in excess of these deductibles on a per claim and aggregate basis. The Company is primarily self-insured for health care claims for eligible participating employees. The Company has stop-loss coverage to limit its exposure to significant claims on a per claim and annual aggregate basis. The Company determines its liabilities for claims, including incurred but not reported losses, based on all relevant information, including actuarial estimates of claim liabilities.
During fiscal 2017, the Company received
$3.0 million
of proceeds from its insurance carriers related to claims submitted for insurable events at two of its locations;
$1.4 million
of proceeds were reflected as investing cash inflows as such amounts were reimbursements associated with the Company's long-lived assets, while the remaining
$1.6 million
was included in cash flows from operating activities as the amounts were reimbursements associated with current assets, business interruption recoveries and cost reimbursements. In total, the Company recognized, as a reduction of operating expenses in its consolidated statements of operations, a gain of
$2.0 million
from insurance recoveries, of which
$0.7 million
arose from business interruption recoveries.
Other Matters
The Company is the lessee under many real estate leases in which it agrees to indemnify the lessor from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities, or a breach of the lease by the lessee. Additionally, from time to time, the Company enters into agreements with third parties in connection with the sale of assets in which it agrees to indemnify the purchaser from certain liabilities or costs arising in connection with the assets. Also, in the ordinary course of business in connection with purchases or sales of goods and services, the Company enters into agreements that may contain indemnification provisions. In the event that an indemnification claim is asserted, the Company's liability would be limited by the terms of the applicable agreement. See additional information on operating lease commitments in Note 12.
NOTE 12—OPERATING LEASE COMMITMENTS
The Company leases
120
buildings under operating lease agreements as well as office equipment and vehicles under various operating lease agreements. Rent and lease expense under all operating leases totaled
$20.0 million
,
$21.3 million
and
$22.9 million
during the years ended
January 31, 2018
,
2017
and
2016
. The leases expire at various dates through
January 2031
. Certain leases have fluctuating minimum lease payments. The Company recognizes lease expense on a straight-line basis over the expected term of the lease.
Approximate future minimum lease payment commitments are as follows:
|
|
|
|
|
Years ending January 31,
|
Amount
|
|
(in thousands)
|
2019
|
$
|
20,081
|
|
2020
|
17,668
|
|
2021
|
16,012
|
|
2022
|
15,708
|
|
2023
|
15,425
|
|
Thereafter
|
83,695
|
|
|
$
|
168,589
|
|
The Company's store lease agreements contain lease periods primarily ranging from automatically renewable month-to-month terms to
15
years in length. Certain of the lease agreements contain terms such as an option to purchase the property at fair value, renew or extend the lease for an additional period at the conclusion of the original lease term or automatically renew the lease term at the conclusion of the original lease period on a month-to-month or year-to-year basis. A majority of the leases provide for fixed monthly rental payments and require the Company to pay the real estate taxes on the properties for the lease periods. All of the leases require that the Company maintains public liability and personal property insurance on each of the leased premises, and a majority of the leases require the Company to indemnify the lessor in connection with any claims
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
arising from the leased premises during its occupation of the property. Most of the leases prohibit assigning the lease agreements or subletting the leased premises without the prior written consent of the lessor. In most of the leases, the Company has been granted a right of first refusal or other options to purchase the property.
NOTE 13—RELATED PARTY TRANSACTIONS
On May 11, 2015, Peter Christianson (our former President and former member of our Board of Directors), who is a brother of Tony Christianson (a member of our Board of Directors), entered into a services agreement (the “Services Agreement") with the Company to begin to provide consulting services to the Company following the end of fiscal 2016 and in connection with the conclusion of his employment with the Company. The Services Agreement has a term of three years, ending on January 31, 2019. During fiscal 2017, Mr. Peter Christianson received
$0.5 million
in fees, including group medical and dental coverage expenses as paid by the Company on behalf of Mr. Peter Christianson, from the Company under the terms of the Services Agreement. Effective February 1, 2017, the parties to the Services Agreement agreed to its termination. In connection with the termination, the Company agreed to pay Mr. Peter Christianson the sum of
$0.7 million
, payable in two equal installments in fiscal 2018 and 2019. As a result of the termination agreement, the Company recognized for fiscal 2018, a total of
$0.8 million
in termination costs, consisting of
$0.7 million
of cash payments owed to Mr. Peter Christianson and
$0.1 million
for unvested shares of restricted stock. As of February 15, 2018, all cash payments have been made. These termination costs are included in restructuring costs in the consolidated statements of operations.
Effective September 8, 2017, the Company sold a real estate asset that was primarily used for field training purposes to Stiklestad LLC for
$1.8 million
. All consideration related to the transaction was exchanged at closing on September 8, 2017, and there are no amounts owed to either party following that date. Stiklestad LLC is owned by members of the family of David Meyer, the Company's Chief Executive Officer. No gain or loss was recognized on the transaction and the Company believes that the selling price approximated fair value.
NOTE 14—INCOME TAXES
The components of income (loss) before income taxes for the years ended
January 31, 2018
,
2017
and
2016
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
U.S.
|
$
|
(16,644
|
)
|
|
$
|
(22,244
|
)
|
|
$
|
(53,211
|
)
|
Foreign
|
2,205
|
|
|
(469
|
)
|
|
(3,000
|
)
|
Total
|
$
|
(14,439
|
)
|
|
$
|
(22,713
|
)
|
|
$
|
(56,211
|
)
|
The provision for (benefit from) income taxes charged to income for the years ended
January 31, 2018
,
2017
and
2016
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Current
|
|
|
|
|
|
Federal
|
$
|
130
|
|
|
$
|
(5,368
|
)
|
|
$
|
(9,193
|
)
|
State
|
50
|
|
|
(85
|
)
|
|
147
|
|
Foreign
|
1,350
|
|
|
116
|
|
|
235
|
|
Total current taxes
|
1,530
|
|
|
(5,337
|
)
|
|
(8,811
|
)
|
Deferred
|
|
|
|
|
|
Federal
|
(6,247
|
)
|
|
(1,819
|
)
|
|
(7,766
|
)
|
State
|
270
|
|
|
(471
|
)
|
|
(1,427
|
)
|
Foreign
|
(2,943
|
)
|
|
(551
|
)
|
|
22
|
|
Total deferred taxes
|
(8,920
|
)
|
|
(2,841
|
)
|
|
(9,171
|
)
|
|
$
|
(7,390
|
)
|
|
$
|
(8,178
|
)
|
|
$
|
(17,982
|
)
|
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The reconciliation of the statutory federal income tax rate to the Company's effective rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
U.S. statutory rate
|
(33.8
|
)%
|
|
(35.0
|
)%
|
|
(35.0
|
)%
|
Foreign statutory rates
|
1.4
|
%
|
|
2.8
|
%
|
|
0.6
|
%
|
State taxes on income net of federal tax benefit
|
(4.3
|
)%
|
|
(4.3
|
)%
|
|
(4.1
|
)%
|
Valuation allowances
|
(4.4
|
)%
|
|
(2.7
|
)%
|
|
5.7
|
%
|
U.S. statutory rate reduction
|
(13.9
|
)%
|
|
—
|
%
|
|
—
|
%
|
All other, net
|
3.8
|
%
|
|
3.2
|
%
|
|
0.8
|
%
|
|
(51.2
|
)%
|
|
(36.0
|
)%
|
|
(32.0
|
)%
|
Deferred tax assets and liabilities consist of the following as of
January 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(in thousands)
|
Deferred tax assets:
|
|
|
|
Inventory allowances
|
$
|
5,061
|
|
|
$
|
11,622
|
|
Intangible Assets
|
3,763
|
|
|
6,065
|
|
Net operating losses
|
12,366
|
|
|
6,679
|
|
Accrued liabilities and other
|
5,084
|
|
|
4,573
|
|
Receivables
|
719
|
|
|
1,034
|
|
Hedging and derivatives
|
—
|
|
|
541
|
|
Stock-based compensation
|
1,119
|
|
|
845
|
|
Other
|
1,241
|
|
|
1,060
|
|
Total deferred tax assets
|
29,353
|
|
|
32,419
|
|
Valuation allowances
|
(7,717
|
)
|
|
(8,968
|
)
|
Deferred tax assets, net of valuation allowances
|
$
|
21,636
|
|
|
$
|
23,451
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Property and equipment
|
$
|
(19,810
|
)
|
|
$
|
(29,942
|
)
|
Senior convertible notes
|
(629
|
)
|
|
(2,462
|
)
|
Total deferred tax liabilities
|
$
|
(20,439
|
)
|
|
$
|
(32,404
|
)
|
|
|
|
|
Net deferred tax asset (liability)
|
$
|
1,197
|
|
|
$
|
(8,953
|
)
|
On December 22, 2017, the U.S. government enacted tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad changes to the U.S. tax code, including, among other things, to 1) reduce the U.S. federal corporate tax rate from 35% to 21%; 2) generally eliminate U.S. federal income taxes on dividends from foreign subsidiaries; 3) institute a one-time transaction tax on certain unrepatriated earnings of an entity's foreign subsidiaries; 4) create a new provision designed to tax global intangible low-taxed income ("GILTI"); 5) creates a new limitation on deductible interest expense; and 6) modify the rules related to uses and limitations of net operating losses.
U.S. accounting rules require a company to record the effects of a tax law change in the period of enactment; however, the Securities and Exchange Commission published Staff Accounting Bulletin No. 118 ("SAB 118"), which provides a measurement period that should not extend beyond one year from the Tax Act enactment date for a company to complete their accounting for the effects of the Tax Act. Under SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting is complete. To the extent that a company's accounting for certain income tax effects is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot develop a provisional estimate, it should continue to apply the tax laws that were in effect immediately before the enactment of the Tax Act.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The enactment of the Tax Act lowered the U.S. federal corporate tax rate from 35% to 21%, accordingly, for the fiscal year ended January 31, 2018, the Company had a blended corporate statutory tax rate of
33.8%
, which is based on the number of days in the fiscal year before and after the enactment date. The Company recorded a net tax benefit of
$1.8 million
for the fiscal year ended January 31, 2018 as a result of remeasuring its domestic deferred tax assets, deferred tax liabilities and any valuation allowances based on the
21%
corporate tax rate at which these deferred tax amounts are expected to reverse in the future. The Tax Act instituted a one-time transaction tax on previously untaxed accumulated and current earnings and profits of our foreign subsidiaries. To determine the amount of the transaction tax, we must determine the amount of post-1986 earnings and profits of our subsidiaries as well as the amount of non-U.S. income taxes paid on such earnings. The Company concluded that no transaction tax is present given the lack of accumulated earnings and profits, on a combined basis, of our foreign subsidiaries.
The Tax Act requires that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in gross income of the U.S. shareholder. Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act. Under U.S. accounting rules, we are allowed to make an accounting policy election of either treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred or factoring such amounts into our measurement of deferred taxes. Our selection of a GILTI accounting policy will depend on analyzing our anticipated future global income to determine whether we expect to have future U.S. GILTI inclusions and, if so, the related tax effects. The Company has not made any adjustments related to potential GILTI tax in our financial statements and has not made a policy decision regarding treating future GILTI inclusions as a current period expense or to recognize deferred taxes for such future inclusions.
As of January 31, 2018, the Company has recorded
$24.4 million
of net operating loss carryforwards within certain of its foreign jurisdictions;
$15.3 million
of net operating loss carryforwards are within jurisdictions with unlimited carryforward periods, while the remaining
$9.1 million
of net operating loss carryforwards expire at various dates between the Company's fiscal years 2018 and 2022. As of January 31, 2018, the Company has recorded
$20.5 million
and
$58.5 million
of net operating loss carryforwards within the U.S. federal and certain of its state jurisdictions, respectively. Our U.S. federal net operating losses have an unlimited carryforward period, while our state net operating losses expire at various dates between the Company's fiscal years 2031 and 2038.
In reviewing our deferred tax assets as of January 31, 2018 and 2017, we concluded that a partial valuation allowance for U.S. federal and state deferred tax assets was warranted. In total, we recognized a valuation allowance of
$5.4 million
and
$3.9 million
as of January 31, 2018 and 2017. In addition, as of January 31, 2018 and 2017, we concluded that a valuation allowance for certain of our foreign deferred tax assets, including net operating losses, was warranted in the amount of
$2.3 million
and
$5.1 million
. The recognition of the valuation allowances for our U.S. and foreign deferred tax assets was based on the presence of historical losses and our expected future sources of taxable income, including taxable income in prior carryback years, if applicable, and the anticipated future reversal of our existing deferred tax assets and liabilities.
In the fourth quarter of fiscal 2018, 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 deferred tax assets of its Ukrainian subsidiary. As a result, the Company released the
$3.5 million
valuation allowance and recognized a corresponding benefit from income taxes in the consolidated statement of operations for the year ended January 31, 2018. The Company's conclusion regarding the realizability of such deferred tax assets was based on recent profitable operations in Ukraine resulting in a cumulative profit over the three-year period ending January 31, 2018, our projections of future profitability in Ukraine, the relative economic and political stability in Ukraine and the unlimited carryforward period of net operating losses in Ukraine.
The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign countries. It is no longer subject to income tax examinations by U.S. federal tax authorities for fiscal years ended on or prior to
January 31, 2014
and state tax authorities for fiscal years ended on or prior to
January 31, 2013
. Due to the short period of time in which the Company has had operations in foreign jurisdictions, all tax years are open for income tax examinations for these entities.
During the fiscal year ended January 31, 2018, the Austrian taxing authority completed their examination of our calendar year 2012 through 2015 Austrian income tax returns and the IRS completed its examination of our fiscal 2016 U.S. federal income tax return. In all cases, the result of these examinations did not have a material impact on the Company's consolidated financial statements. The Company's Ukrainian subsidiary is under audit for calendar years 2012 through 2015.
As of January 31, 2018, the Company had accumulated accrued interest and penalties of
$0.2 million
, and for the fiscal year ended January 31, 2018, the Company recognized
$0.2 million
in interest and penalties in its provision (benefit) for income taxes. The Company had no unrecognized tax benefits as of January 31, 2018 and January 31, 2017.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of January 31, 2018, the Company had accumulated undistributed earnings in non-U.S. subsidiaries of approximately
$5.1 million
. As a result of the Tax Act, such earnings are deemed to be repatriated as of January 31, 2018. Upon actual repatriation, the Company could be subject to additional U.S. or foreign income or withholding taxes. The Company has not recorded a deferred tax liability associated with these undistributed earnings and potential incremental taxes as the Company has concluded that such earnings are to be reinvested outside of the United States indefinitely. The Company estimates that any incremental tax to be paid upon actual repatriation would not be material.
NOTE 15—CAPITAL STRUCTURE
The Company's certificate of incorporation provides it with the authority to issue
50,000,000
shares of
$0.00001
par value stock, consisting of
45,000,000
shares of common stock and
5,000,000
shares classified as undesignated.
NOTE 16—STOCK-BASED COMPENSATION
Stock-Based Compensation Plans
The Company has two stock-based compensation plans, the 2014 Equity Incentive Plan and the 2005 Equity Incentive Plan (collectively the "Plans"), to provide incentive compensation to participants for services that have been or will be performed for continuing as employees or members of the Board of Directors of the Company. Under these plans, which are approved by the stockholders of the Company, the Company may grant incentive stock options, non-qualified stock options and restricted stock for up to a maximum number of shares of common stock set forth in the Plan under all forms of awards. The Company accounts for all stock-based awards at the fair value of the related equity instrument over the applicable service or performance period. Shares issued for stock-based awards consist of authorized but unissued shares. Compensation cost charged to operations under the Plans was
$3.1 million
,
$2.1 million
and
$2.1 million
for the years ended
January 31, 2018
,
2017
and
2016
. The related income tax benefit (net) was
$1.2 million
,
$0.8 million
and
$0.8 million
for the years ended
January 31, 2018
,
2017
and
2016
.
The Company's 2014 Equity Incentive Plan was implemented during the fiscal year ended January 31, 2015 and includes a total of
1,650,000
shares available for grant under this plan. The Company has approximately
832,000
shares authorized and available for future equity awards under the Company's 2014 Equity Incentive Plan as of
January 31, 2018
.
Stock Options
The Company had previously granted stock options to employees and members of the Board of Directors of the Company. The fair value of each stock option granted was estimated using the Black-Scholes option pricing model. Stock options vest over a period of
four
to
six
years for employees and immediately for members of the Board of Directors, and have contractual terms of
five
to
ten
years. The Company recognizes the fair value of stock options as compensation expense ratably over the vesting period of the award.
The following table summarizes stock option activity for the year ended
January 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Options
|
|
Weighted Average Exercise Price
|
|
Aggregate Intrinsic Value
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
Outstanding at January 31, 2017
|
271
|
|
|
$
|
12.50
|
|
|
$
|
1,008
|
|
|
1.0
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(184
|
)
|
|
8.90
|
|
|
|
|
|
Forfeited
|
(19
|
)
|
|
14.31
|
|
|
|
|
|
Outstanding at January 31, 2018
|
68
|
|
|
$
|
21.63
|
|
|
$
|
18
|
|
|
0.5
|
Exercisable at January 31, 2018
|
68
|
|
|
$
|
21.63
|
|
|
$
|
18
|
|
|
0.5
|
The aggregate intrinsic value of stock options exercised was
$1.0 million
for the year ended January 31, 2018, immaterial for the year ended January 31, 2017, and
$0.3 million
for the year ended January 31, 2016. As of
January 31, 2018
, there was
no
unrecognized compensation cost related to stock options as all awards have fully vested.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a summary of information related to stock options outstanding and exercisable at
January 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding and Exercisable
|
Range of Exercise Prices
|
|
Number
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Weighted Average Exercise Price
|
|
|
(in thousands)
|
|
|
|
|
$ 10.20-14.69
|
|
6
|
|
|
0.8
|
|
$
|
10.97
|
|
$ 21.21-26.84
|
|
62
|
|
|
0.5
|
|
22.71
|
|
|
|
68
|
|
|
0.5
|
|
$
|
21.63
|
|
Restricted Stock Awards ("RSAs")
The Company grants RSAs as part of its long-term incentive compensation to employees and members of the Board of Directors of the Company. The fair value of these awards is determined based on the closing market price of the Company's stock on the date of grant. The RSAs primarily vest over a period of
three
to
six
years for employees and over
one
year for members of the Board of Directors. The Company recognizes compensation expense ratably over the vesting period of the award. The restricted common stock underlying these awards are deemed issued and outstanding upon grant, and carry the same voting and dividend rights of unrestricted outstanding common stock.
The following table summarizes the activity for RSAs for the year ended
January 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
(in thousands)
|
|
|
|
|
Nonvested at January 31, 2017
|
509
|
|
|
$
|
14.83
|
|
|
2.6
|
Granted
|
130
|
|
|
17.47
|
|
|
|
Forfeited
|
(32
|
)
|
|
15.13
|
|
|
|
Vested
|
(201
|
)
|
|
15.03
|
|
|
|
Nonvested at January 31, 2018
|
406
|
|
|
$
|
16.24
|
|
|
2.2
|
The weighted-average grant date fair value of RSAs granted was
$17.47
,
$11.01
and
$15.41
during the years ended
January 31, 2018
,
2017
and
2016
. The total fair value of RSAs vested was
$3.6 million
,
$1.3 million
and
$1.7 million
during the years ended
January 31, 2018
,
2017
and
2016
. As of
January 31, 2018
, there was
$5.2 million
of unrecognized compensation cost related to non-vested RSAs that is expected to be recognized over a weighted-average period of
2.2
years.
Restricted Stock Units ("RSUs")
The Company grants RSUs as part of its long-term incentive compensation to certain employees of the Company. The fair value of these awards is determined based on the closing market price of the Company's stock on the date of grant. The RSUs primarily vest over a period of
three
to
six
years. The Company recognizes compensation expense ratably over the vesting period of the award. A portion of the RSUs that have been granted contain performance conditions, and the related compensation cost on these awards is only accrued if it is probable that the performance conditions will be achieved. The restricted common stock underlying these awards are not deemed issued or outstanding upon grant, and do not carry any voting or dividend rights.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes RSU activity for the year ended
January 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
(in thousands)
|
|
|
|
|
Nonvested at January 31, 2017
|
72
|
|
|
$
|
18.57
|
|
|
1.0
|
Granted
|
11
|
|
|
17.58
|
|
|
|
Forfeited
|
(58
|
)
|
|
16.72
|
|
|
|
Vested
|
(3
|
)
|
|
11.63
|
|
|
|
Nonvested at January 31, 2018
|
22
|
|
|
$
|
14.70
|
|
|
2.8
|
The weighted-average grant date fair value of RSUs granted was
$17.58
and
$10.69
during the years ended
January 31, 2018
and
2017
. As of
January 31, 2018
, there was
$0.3 million
of unrecognized compensation cost related to non-vested RSUs that is expected to be recognized over a weighted-average period of
2.8
years.
NOTE 17—EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit-sharing plan ("401(k) Plan") for full-time employees at least
19
years of age. The Company matches
50%
of the first
6%
of participating employees' contributions. In addition, the Company may make a discretionary contribution to the 401(k) Plan as determined by the Board of Directors, with a maximum amount equal to the amount allowed under the IRS regulations. The Company recognized expense for contributions made to the 401(k) Plan totaling
$2.5 million
,
$2.5 million
and
$0.2 million
for the fiscal years ended
January 31, 2018
,
2017
and
2016
. All amounts contributed during these years reflected matching contributions, as no discretionary contributions were made by the Company to the 401(k) Plan.
NOTE 18—BUSINESS COMBINATIONS
On January 15, 2018, the Company acquired certain assets of Pederson's Agri-Service, Inc. The acquired business consists of
one
agricultural equipment store located in Herman, Minnesota which is contiguous to the Company's existing locations in Elbow Lake and Graceville, Minnesota. The total consideration transferred for the acquired business was
$4.5 million
, of which
$3.6 million
was paid in cash and the remaining
$0.9 million
was financed by CNH Industrial with the proceeds from the financing being paid directly to the seller. The business assets acquired consisted of
$3.4 million
in inventory,
$0.6 million
of other net working capital, and
$0.5 million
of intangible assets. Acquisition-related transaction costs were not material. Pro-forma results are not presented as the acquisition is not considered material to the Company. The results of operations of the acquired business were included in the Company's consolidated results of operations since the date of the business combination.
NOTE 19—FAIR VALUE OF FINANCIAL INSTRUMENTS
The assets and liabilities which are measured at fair value on a recurring basis as of
January 31, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
January 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
|
(in thousands)
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total Financial Assets
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,155
|
|
|
$
|
—
|
|
|
$
|
1,155
|
|
Foreign currency contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
200
|
|
|
—
|
|
|
200
|
|
Total Financial Liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,355
|
|
|
$
|
—
|
|
|
$
|
1,355
|
|
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The valuation for the Company's foreign currency contracts and interest rate swap derivative instruments were valued using discounted cash flow analyses, an income approach, utilizing readily observable market data as inputs.
The Company also valued certain long-lived assets at fair value on a non-recurring basis as of January 31, 2018 and 2017 as part of its long-lived asset impairment testing and as the result of classifying certain assets as held for sale and measuring the value of such assets at fair value less costs to sell. The estimated fair value of such assets as of January 31, 2018 and 2017 was
$0.9 million
and
$3.6 million
.
The assets recorded at fair value as of January 31, 2018 and 2017 consisted of real estate assets and fair value was determined by utilizing market and income approaches incorporating both observable and unobservable inputs, and are deemed to be Level 3 fair value inputs. The most significant unobservable inputs used in the fair value measurements under the market approach include adjustments to observable market sales information to incorporate differences in geographical locations and age and condition of subject assets, and the most significant unobservable inputs under the income approach include forecasted net cash generated from the use of the subject assets and the discount rate applied to such cash flows to arrive at a fair value estimate. In addition, in certain instances the Company estimated the fair value of long-lived assets to approximate zero as no future cash flows were assumed to be generated from the use of such assets and the expected sales values were deemed to be nominal. All such fair value measurements were based on unobservable inputs and thus are Level 3 fair value inputs.
The Company also has financial instruments that are not recorded at fair value in its consolidated financial statements. The carrying amount of cash, receivables, payables, short-term debt and other current liabilities approximates fair value because of the short maturity and/or frequent repricing of those instruments, which are Level 2 fair value inputs. Based upon current borrowing rates with similar maturities, which are Level 2 fair value inputs, the carrying value of long-term debt approximates the fair value as of
January 31, 2018
and
2017
. The following table provides details on the Senior Convertible Notes as of
January 31, 2018
and
2017
. The difference between the face value and the carrying value of these notes is the result of the allocation between the debt and equity components, and unamortized debt issuance costs (see Note 7). Fair value of the Senior Convertible Notes was estimated based on Level 2 fair value inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
January 31, 2017
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Face Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Face Value
|
|
(in thousands)
|
|
(in thousands)
|
Senior convertible notes
|
$
|
65,000
|
|
|
$
|
62,819
|
|
|
$
|
65,644
|
|
|
$
|
87,000
|
|
|
$
|
88,501
|
|
|
$
|
95,725
|
|
NOTE 20—RESTRUCTURING COSTS
In February 2017, to better align the Company's cost structure and business in certain markets, the Company announced a dealership restructuring plan (the "Fiscal 2018 Restructuring Plan"), which resulted in the closure of
one
Construction location during the fourth quarter ended January 31, 2017 and the closure of
14
Agriculture locations during fiscal 2018. The Fiscal 2018 Restructuring Plan is expected to result in a significant reduction of expenses while allowing the Company to continue to provide a leading level of service to its customers. In total, over the term of the Fiscal 2018 Restructuring Plan, the Company recognized approximately
$13.5 million
of restructuring charges consisting primarily of fixed asset impairment charges, lease termination costs and termination benefits.
In fiscal 2016, the Company carried out a restructuring plan, which began in fiscal 2015, that reduced the Company's headcount and resulted in the closure of
four
Agriculture stores and
eight
Construction stores. As of January 31, 2017, this restructuring plan was substantially complete.
We incurred costs of
$10.5 million
,
$3.3 million
and
$2.0 million
during the years ended January 31,
2018
,
2017
and
2016
, related to these activities. Such costs are included in the restructuring costs and impairment of long-lived assets lines in the consolidated statements of operations.
Restructuring costs associated with the Company's Fiscal 2018 Restructuring Plan are summarized in the following
table.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
|
Cumulative Amount
|
|
2018
|
|
2017
|
|
(in thousands)
|
Lease accrual and termination costs
|
$
|
5,681
|
|
|
$
|
5,681
|
|
|
$
|
—
|
|
Termination benefits
|
5,053
|
|
|
5,053
|
|
|
—
|
|
Impairment of fixed assets, net of gains on asset disposition
|
2,206
|
|
|
(751
|
)
|
|
2,957
|
|
Asset relocation and other costs
|
516
|
|
|
516
|
|
|
—
|
|
|
$
|
13,456
|
|
|
$
|
10,499
|
|
|
$
|
2,957
|
|
Restructuring costs associated with the Company's fiscal 2016 and 2015 restructuring plans are summarized in the following table.
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
|
2017
|
|
2016
|
|
|
Lease accrual and termination costs
|
$
|
(128
|
)
|
|
$
|
692
|
|
Termination benefits
|
399
|
|
|
774
|
|
Impairment of fixed assets, net of gains on asset disposition
|
—
|
|
|
369
|
|
Asset relocation and other costs
|
48
|
|
|
126
|
|
|
$
|
319
|
|
|
$
|
1,961
|
|
Restructuring charges are summarized by segment in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Segment
|
|
|
|
|
|
Agriculture
|
$
|
6,886
|
|
|
$
|
983
|
|
|
$
|
982
|
|
Construction
|
2,093
|
|
|
1,914
|
|
|
645
|
|
International
|
62
|
|
|
—
|
|
|
—
|
|
Shared Resources
|
1,458
|
|
|
379
|
|
|
334
|
|
Total
|
$
|
10,499
|
|
|
$
|
3,276
|
|
|
$
|
1,961
|
|
A reconciliation of the beginning and ending exit cost liability balance associated with our Fiscal 2018 Restructuring Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Accrual & Termination Costs
|
|
Termination Benefits
|
|
Asset Relocation & Other Costs
|
|
Total
|
|
|
(in thousands)
|
Balance, January 31, 2017
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Exit costs incurred and charged to expense
|
|
5,681
|
|
|
4,568
|
|
|
516
|
|
|
10,765
|
|
Exit costs paid
|
|
(288
|
)
|
|
(4,164
|
)
|
|
(516
|
)
|
|
(4,968
|
)
|
Balance, January 31, 2018
|
|
5,393
|
|
|
404
|
|
|
—
|
|
|
5,797
|
|
As of January 31, 2018,
$4.8 million
of the exit cost liability is included in other long-term liabilities and
$1.0 million
is included in accrued expenses and other in the consolidated balance sheets.
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 21—SEGMENT INFORMATION AND OPERATING RESULTS
The Company has
three
reportable segments: Agriculture, Construction and International. The Company's segments are determined based on management structure, which is organized based on types of products sold and geographic areas, as described in the following paragraphs. The operating results for each segment are reported separately to the Company's Chief Executive Officer to make decisions regarding the allocation of resources, to assess the Company's operating performance and to make strategic decisions.
The Company's Agriculture segment sells, services, and rents machinery, and related parts and attachments, for uses ranging from large-scale farming to home and garden use in North America. This segment also includes ancillary sales and services related to agricultural activities and products such as equipment transportation, Global Positioning System ("GPS") signal subscriptions and finance and insurance products.
The Company's Construction segment sells, services, and rents machinery, and related parts and attachments, for uses ranging from heavy construction to light industrial machinery use to customers in North America. This segment also includes ancillary sales and services related to construction activities such as equipment transportation, GPS signal subscriptions and finance and insurance products.
The Company’s International segment sells, services, and rents machinery, and related parts and attachments, for uses ranging from large-scale farming and construction to home and garden use to customers in Eastern Europe.
Revenue generated from sales to customers outside of the United States was
$208.9 million
,
$150.3 million
and
$162.1 million
for the years ended
January 31, 2018
,
2017
and
2016
. As of
January 31, 2018
and
2017
,
$4.8 million
and
$3.6 million
of the Company's long-lived assets were held in its European subsidiaries.
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 Resource assets primarily consist of cash and property and equipment. Revenue between segments is immaterial.
Certain financial information for each of the Company's business segments is set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Revenue
|
|
|
|
|
|
Agriculture
|
$
|
694,025
|
|
|
$
|
739,167
|
|
|
$
|
864,851
|
|
Construction
|
300,019
|
|
|
323,625
|
|
|
340,916
|
|
International
|
208,894
|
|
|
150,288
|
|
|
162,068
|
|
Total
|
$
|
1,202,938
|
|
|
$
|
1,213,080
|
|
|
$
|
1,367,835
|
|
Income (Loss) Before Income Taxes
|
|
|
|
|
|
Agriculture
|
$
|
(3,678
|
)
|
|
$
|
(15,781
|
)
|
|
$
|
(29,710
|
)
|
Construction
|
(7,278
|
)
|
|
(5,875
|
)
|
|
(26,388
|
)
|
International
|
2,205
|
|
|
(469
|
)
|
|
(3,004
|
)
|
Segment income (loss) before income taxes
|
(8,751
|
)
|
|
(22,125
|
)
|
|
(59,102
|
)
|
Shared Resources
|
(5,688
|
)
|
|
(588
|
)
|
|
2,891
|
|
Total
|
$
|
(14,439
|
)
|
|
$
|
(22,713
|
)
|
|
$
|
(56,211
|
)
|
Total Impairment
|
|
|
|
|
|
Agriculture
|
$
|
175
|
|
|
$
|
1,888
|
|
|
$
|
3,975
|
|
Construction
|
498
|
|
|
2,155
|
|
|
2,752
|
|
International
|
—
|
|
|
325
|
|
|
—
|
|
Segment impairment
|
673
|
|
|
4,368
|
|
|
6,727
|
|
Shared Resources
|
—
|
|
|
42
|
|
|
176
|
|
Total
|
$
|
673
|
|
|
$
|
4,410
|
|
|
$
|
6,903
|
|
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
|
2018
|
|
2017
|
|
2016
|
Restructuring Costs
|
|
|
|
|
|
Agriculture
|
$
|
6,886
|
|
|
$
|
(120
|
)
|
|
$
|
738
|
|
Construction
|
2,093
|
|
|
60
|
|
|
635
|
|
International
|
62
|
|
|
—
|
|
|
—
|
|
Segment impairment
|
9,041
|
|
|
(60
|
)
|
|
1,373
|
|
Shared Resources
|
1,458
|
|
|
379
|
|
|
224
|
|
Total
|
$
|
10,499
|
|
|
$
|
319
|
|
|
$
|
1,597
|
|
Interest Income
|
|
|
|
|
|
Agriculture
|
$
|
164
|
|
|
$
|
183
|
|
|
$
|
159
|
|
Construction
|
314
|
|
|
341
|
|
|
396
|
|
International
|
9
|
|
|
31
|
|
|
68
|
|
Segment interest income
|
487
|
|
|
555
|
|
|
623
|
|
Shared Resources
|
9
|
|
|
12
|
|
|
17
|
|
Total
|
$
|
496
|
|
|
$
|
567
|
|
|
$
|
640
|
|
Interest Expense
|
|
|
|
|
|
Agriculture
|
$
|
5,781
|
|
|
$
|
11,201
|
|
|
$
|
15,596
|
|
Construction
|
7,750
|
|
|
10,196
|
|
|
12,575
|
|
International
|
2,510
|
|
|
2,884
|
|
|
4,159
|
|
Segment interest expense
|
16,041
|
|
|
24,281
|
|
|
32,330
|
|
Shared Resources
|
958
|
|
|
(2,416
|
)
|
|
293
|
|
Total
|
$
|
16,999
|
|
|
$
|
21,865
|
|
|
$
|
32,623
|
|
Depreciation and Amortization
|
|
|
|
|
|
Agriculture
|
$
|
5,411
|
|
|
$
|
6,128
|
|
|
$
|
7,760
|
|
Construction
|
14,297
|
|
|
15,288
|
|
|
15,965
|
|
International
|
1,366
|
|
|
1,394
|
|
|
1,255
|
|
Segment depreciation and amortization
|
21,074
|
|
|
22,810
|
|
|
24,980
|
|
Shared Resources
|
4,031
|
|
|
4,058
|
|
|
3,558
|
|
Total
|
$
|
25,105
|
|
|
$
|
26,868
|
|
|
$
|
28,538
|
|
Capital Expenditures
|
|
|
|
|
|
Agriculture
|
$
|
2,950
|
|
|
$
|
1,585
|
|
|
$
|
2,861
|
|
Construction
|
20,080
|
|
|
5,480
|
|
|
1,492
|
|
International
|
1,332
|
|
|
898
|
|
|
657
|
|
Segment capital expenditures
|
24,362
|
|
|
7,963
|
|
|
5,010
|
|
Shared Resources
|
1,753
|
|
|
4,462
|
|
|
3,401
|
|
Total
|
$
|
26,115
|
|
|
$
|
12,425
|
|
|
$
|
8,411
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
January 31, 2017
|
|
|
Total Assets
|
(in thousands)
|
|
|
Agriculture
|
$
|
400,017
|
|
|
$
|
411,726
|
|
|
|
Construction
|
211,154
|
|
|
221,092
|
|
|
|
International
|
126,251
|
|
|
106,899
|
|
|
|
Segment assets
|
737,422
|
|
|
739,717
|
|
|
|
Shared Resources
|
22,886
|
|
|
31,705
|
|
|
|
Total
|
$
|
760,308
|
|
|
$
|
771,422
|
|
|
|
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 22—SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following reflects selected quarterly financial information for fiscal years
2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Gross Profit
|
|
Net Income (Loss) Including Noncontrolling Interest
|
|
Net Income (Loss) Attributable to Titan Machinery Inc.
|
|
Earnings (Loss) per Share-Basic
|
|
Earnings (Loss) per Share-Diluted
|
|
(in thousands, except per share data)
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
$
|
264,118
|
|
|
$
|
48,919
|
|
|
$
|
(5,932
|
)
|
|
$
|
(5,932
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.27
|
)
|
Second quarter
|
268,871
|
|
|
52,807
|
|
|
(5,186
|
)
|
|
(5,186
|
)
|
|
(0.24
|
)
|
|
(0.24
|
)
|
Third quarter
|
330,341
|
|
|
61,477
|
|
|
2,384
|
|
|
2,384
|
|
|
0.11
|
|
|
0.11
|
|
Fourth quarter
|
339,608
|
|
|
52,097
|
|
|
1,685
|
|
|
1,685
|
|
|
0.08
|
|
|
0.08
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
$
|
284,860
|
|
|
$
|
53,548
|
|
|
$
|
(3,858
|
)
|
|
$
|
(3,684
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.17
|
)
|
Second quarter
|
278,333
|
|
|
52,933
|
|
|
(2,702
|
)
|
|
(2,520
|
)
|
|
(0.12
|
)
|
|
(0.12
|
)
|
Third quarter
|
332,266
|
|
|
58,426
|
|
|
264
|
|
|
264
|
|
|
0.01
|
|
|
0.01
|
|
Fourth quarter
|
317,621
|
|
|
48,822
|
|
|
(8,239
|
)
|
|
(8,239
|
)
|
|
(0.38
|
)
|
|
(0.38
|
)
|
In the fourth quarter of fiscal 2018, the Company recognized a net benefit from income taxes of
$5.3 million
consisting of the net benefit of
$1.8 million
from remeasuring domestic deferred tax assets and liabilities at the new federal statutory tax rate of
21%
following enactment of the Tax Act on December 22, 2017, and a benefit of
$3.5 million
from the release of the valuation allowance previously recognized for deferred tax assets of our Ukrainian subsidiary. Further details of these tax matters are discussed in Note 15.
In the fourth quarter of fiscal 2017, the Company recognized impairment charges totaling
$4.1 million
resulting from impairment testing of long-lived assets. Details of the Company's impairment testing is disclosed in Note 1 and Note 5.
NOTE 23—SUBSEQUENT EVENTS
In February 2018, the Wells Fargo Credit Agreement was amended, see Note 6 for further details.
In April 2018, the Company entered into an amendment to the credit facility with CNH Industrial Capital, which decreased available borrowings under this facility to
$350.0 million
. As a result of this amendment, our total discretionary floorplan payable lines of credit for equipment purchases was reduced from
$728.1 million
to
$628.1 million
.