T
I
T
A
N
M
A
C
2 0 1 8
R
A
N
H
I
N
E
R
E
N
Y
I
N
C
.
10 Years P ublicly Traded
N as d a q Clo sin g B ell
D ece m ber 12, 2017
(S ee inside cover)
P
U
A
O
L
R
T
To My Fellow Shareholders
Fiscal 2018 was a landmark year for Titan Machinery. We completed key organization changes that improved our
expense structure and provide a strong foundation for future profitability. We realigned teams and resources to
better leverage our scale and expertise for serving customers across our business segments. And as these pivotal
changes were taking hold, Titan Machinery (TITN) celebrated its 10th anniversary as a publicly traded company on
the NASDAQ stock exchange.
This was an important milestone at a pivotal time for our company. It
has given us an opportunity to reflect on and appreciate all that we’ve
accomplished over the past decade, ranging from our rapid growth,
international expansion, and pioneering participation in product
innovations, to the continuous and often difficult improvements
we’ve driven throughout our business across a prolonged ag market
contraction. Through a decade of highs and lows, I never fail to be
impressed by the resiliency of our customers and the dedication of the
Titan team that supports them day or night, rain or shine, in fields and
on jobsites across Mid-America and Eastern Europe.
Peter Christianson (Retired President), B.J. Knutson (COO),
David Meyer (CEO & Chairman), Mark Kalvoda (CFO), Jeff Bowman (CXO)
Our anniversary has also provided an opportunity to look ahead to our next ten years and consider how our
business will continue to change and grow. The fundamentals of focusing on customers, building a strong team
to meet their needs, and growing our business and bottom line will remain. However, the tools of our trade are
rapidly evolving: Machine control is pushing toward autonomy, crop inputs are being engineered to yield as a
system, and precision ag itself is moving toward decision ag, where big data analytics and artificial intelligence will
help predict, prescribe and personalize each event and interaction while getting ever-better with each.
At Titan Machinery, we are embracing
these changes. The equipment we sell
and service is where the data meets
the dirt and potential is converted to
productivity for our customers who
feed and build our world. We will
continue to innovate and partner with
the best–from steel to silicon–to deliver leading solutions in our markets. We will provide the “Power & Precision
to Grow” for our customers, our employees, our business partners, and for you our valued shareholders.
“I never fail to be impressed by
the resiliency of our customers and
the dedication of the Titan team”
I’m excited by our opportunities to grow together these next ten years!
Best Regards,
David Meyer
Financial Highlights
Titan Machinery Inc.
Financial Highlights
Years ended January 31, 2018 and 2017
(in thousands, except per share data)
Summary Income Statement
Revenue
Cost of Revenue
Gross Profit
Operating Expenses
Impairment of Long-Lived Assets & Restructuring Costs
Income (Loss) from Operations
Other Income (Expense)
Income (Loss) Before Income Taxes
Provision for (Benefit from) Income Taxes
Net Income (Loss) Including Noncontrolling Interest
Less: Net Income (Loss) Attributable to Noncontrolling Interest
Net Income (Loss) Attributable to Titan Machinery Inc.
2018
2017
$
1,202,938
987,638
215,300
$
1,213,080
999,351
213,729
203,203
11,172
925
(15,364)
(14,439)
(7,390)
(7,049)
-
(7,049)
211,372
4,729
(2,372)
(20,341)
(22,713)
(8,178)
(14,535)
(356)
(14,179)
Net (Income) Loss Allocated to Participating Securities
Net Income (Loss) Attributable to Titan Machinery Inc. Common Stockholders
141
(6,908)
$
243
(13,936)
$
Weighted Average Shares --- Basic
Weighted Average Shares --- Diluted
E.P.S. --- Basic
E.P.S. --- Diluted
21,543
21,543
21,294
21,294
$
$
(0.32)
(0.32)
$
$
(0.65)
(0.65)
Summary Balance Sheet
Current Assets
Intangible and Other Assets
Property and Equipment
Total Assets
Current Liabilities
Long-Term Liabilities
Total Liabilities
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
$
$
599,146
10,115
151,047
760,308
607,868
6,907
156,647
771,422
$
$
$
328,289
110,164
438,453
$
308,826
141,417
450,243
321,855
760,308
$
321,179
771,422
$
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2018
Commission File No. 001-33866
___________________________________________
TITAN MACHINERY INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
No. 45-0357838
(IRS Employer
Identification No.)
644 East Beaton Drive
West Fargo, ND 58078-2648
(Address of Principal Executive Offices)
(701) 356-0130
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Common Stock, $0.00001 Par Value
Name of each exchange on which registered: The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
___________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-
K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Emerging Growth Company
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of our common stock held by non-affiliates as of July 31, 2017 was approximately $330.1 million (based on the last sale price of
$17.85 per share on such date as reported on the NASDAQ Global Select Market).
The number of shares outstanding of the registrant's common stock as of March 31, 2018 was 22,101,737 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 2018 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of
Part III of this report.
Table of Contents
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Exhibits, Financial Statement Schedules
Form 10-K Summary
Page No.
1
11
18
19
20
20
21
22
25
50
51
90
90
90
90
90
90
91
91
91
94
We make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 on our website, http://www.titanmachinery.com, as soon as reasonably practicable after filing such
material electronically or otherwise furnishing it to the SEC. We are not including the information on our website as a part of,
or incorporating it by reference into, this Form 10-K.
i
ITEM 1. BUSINESS
Our Company
Overview
We own and operate a network of full service agricultural and construction equipment stores in the United States and
Europe. Based upon information provided to us by CNH Industrial N.V. or its U.S. subsidiary CNH Industrial America, LLC,
collectively referred to in this Form 10-K as CNH Industrial, we are the largest retail dealer of Case IH Agriculture equipment
in the world, the largest retail dealer of Case Construction equipment in North America and a major retail dealer of New
Holland Agriculture and New Holland Construction equipment in the U.S. CNH Industrial is a leading manufacturer and
supplier of agricultural and construction equipment, primarily through the Case IH Agriculture, New Holland Agriculture, Case
Construction and New Holland Construction brands.
We have three primary business segments, Agriculture, Construction and International, within which we engage in
four principal business activities:
•
•
•
•
new and used equipment sales;
parts sales;
equipment repair and maintenance services; and
equipment rental and other activities.
The agricultural equipment we sell and service includes machinery and attachments for uses ranging from large-scale
farming to home and garden purposes. The construction equipment we sell and service includes heavy construction machinery,
light industrial machinery for commercial and residential construction, road and highway construction machinery, and mining
operations equipment.
The new equipment and parts we sell are supplied primarily by CNH Industrial. The used equipment for resale is
acquired through trade-ins from our customers and selective purchases. We sell parts and provide in-store and on-site
equipment repair and maintenance services. We also rent equipment and provide ancillary services such as equipment
transportation, Global Positioning System ("GPS") signal subscriptions, farm data management products, and finance and
insurance products.
We offer our customers a one-stop solution by providing equipment and parts sales, equipment repair and maintenance
services, and rental functions in each store. Our full service approach provides us with multiple points of customer contact and
cross-selling opportunities. We believe our mix of equipment sales and recurring parts and service sales, as well as our diverse
geographic footprint, enables us to operate effectively throughout economic cycles. We also believe our scale, customer service,
diverse and stable customer base, management reporting system and experienced management team provide us with a
competitive advantage in many of our local markets.
Throughout our 38-year operating history, we have built an extensive, geographically contiguous network of 74 stores
in the U.S. and 23 stores in Europe. Our Agriculture stores in the U.S. are located in Iowa, Minnesota, Nebraska, North Dakota
and South Dakota and include several highly productive farming regions, such as the Red River Valley in eastern North Dakota
and northwestern Minnesota, portions of the corn belt in Iowa, eastern South Dakota and southern Minnesota, and along the
I-80 corridor in Nebraska, which sits on top of the Ogallala Aquifer. Our Construction stores are located in Arizona, Colorado,
Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, South Dakota, Wisconsin and Wyoming. Our International
stores are located in the European countries of Bulgaria, Romania, Serbia and Ukraine.
We have a history of growth through acquisitions. Since January 1, 2003, we have completed over 50 acquisitions in
11 states and three European countries. We believe that there will continue to be opportunities for dealership consolidation in
the future, and we expect that acquisitions will continue to be a component of our long-term growth strategy.
Industry Overview
Agricultural Equipment Industry
Agricultural equipment is purchased primarily by commercial farmers for the production of crops used for food, fiber,
feed grain and feedstock for renewable energy. Agricultural equipment is also purchased by "life-style farmers" and for home
and garden applications, and maintenance of commercial, residential and government properties. Deere & Company ("Deere"),
CNH Industrial, and Agco Corporation ("AGCO") are the largest global manufacturers of agricultural equipment and supply a
1
full line of equipment and parts that supply the primary machinery requirements of farmers. In addition to the major
manufacturers, several short-line manufacturers produce specialized equipment that satisfy regional and niche requirements of
farmers. Agricultural equipment manufacturers typically grant dealers in the U.S. sales and marketing areas with designated
store locations to distribute their products.
We believe there are many factors that influence demand for agricultural equipment, parts and repair and maintenance
services, including net farm income, commodity markets, production yields, interest rates, government policies, tax policies,
weather and general economic conditions. Any of these conditions can change materially in a short time period, creating
volatility in demand for our products and services. Federal legislation, such as the Farm Bill, attempts to stabilize the
agriculture industry through various policies including (i) commodity programs consisting of direct, counter-cyclical and price
support payments to farmers; (ii) conservation programs; (iii) crop insurance programs; and (iv) disaster relief programs. We
believe that these various federal policies reduce financial volatility in the agriculture industry and assist farmers in continuing
to operate their farms and equipment during economic down cycles.
Construction Equipment Industry
Construction equipment is purchased primarily for use in commercial, residential and infrastructure construction, as
well as for agriculture, demolition, mining, energy production and forestry operations. Caterpillar, Inc., Deere, Komatsu Ltd.,
the Volvo Group, Terex Corporation, Doosan, and CNH Industrial are some of the largest global manufacturers of construction
and industrial equipment. The market for construction equipment is segmented across multiple categories including earth
moving, lifting, light industrial, asphalt and paving, and concrete and aggregate equipment. As with agricultural equipment,
distribution of construction equipment in the U.S. is executed primarily by manufacturer authorized dealers.
Construction machinery is generally divided into "heavy" and "light" subgroups. Heavy machinery includes large
wheel loaders, large tracked excavators, cranes, crawler dozers, motor graders and articulated haul trucks. Heavy machinery is
generally purchased by construction companies, municipalities, local governments, rental fleet owners, quarrying and mining
companies, waste management companies and forestry-related organizations. Light machinery includes backhoes, landscape
tractors, forklifts, compact excavators and skid steers. Typically, light machinery is purchased by contractors, rental fleet
owners, landscapers, logistics companies, farmers and recreational users.
CNH Industrial and industry reports show that demand for construction equipment in our markets is driven by several
factors, including (i) public spending on roads, highways, sewer and water projects, and other public works projects; (ii) public
and private expenditures for the energy and mining industries, which are driven in part by demand for fossil fuels, metals and
other commodities; (iii) business conditions in the agriculture industry; and (iv) general economic and market conditions of the
construction sector for residential and commercial buildings.
Titan Operating Model
Through our operating model, we strive to empower leadership, develop team expertise, and share best practices at the
field level, while realizing efficiencies and utilizing certain controls at the corporate level. We believe exceptional customer
service is most effectively attained through accountable, well-trained employees in the field, who are supported by various
centralized administrative functions, such as marketing, accounting, human resources, and other functions. Managing our
business as a network of independent expert teams with support and oversight from a centralized shared resources group,
facilitates the proper balance of accountability and the development of local business and customer relationships.
Field Operations
We have developed a functional organization under which we assign to specified geographic regions, within each of
our Agricultural and Construction segments, “expert teams” focused on meeting customers’ needs in equipment and rental sales
and after-market parts and service. We operate primarily through our store locations, but we also execute our service activities
through deployment of mobile repair and service trucks. Each store is staffed by parts employees and service technicians, and
are supervised by area managers. Our sales consultants are assigned sales territories and are supervised by area managers. Our
Construction stores that offer rental services are staffed with area rental managers and rental sales representatives. Under our
operating model, decision-making for customer-related issues is decentralized, with each area manager and/or store employee
having substantial responsibility for matters such as negotiating sales prices for equipment, assisting with customers on parts
and service transactions, customer satisfaction, and providing area market forecasts to be used in establishing appropriate
inventory stocking levels, subject to parameters and objectives set forth by our shared resources group. We believe customers in
our industry view local managers and sales and service personnel as important partners in operating their businesses. Therefore,
we believe developing and supporting our expert teams enables us to grow same-store sales through fostering new customer
relationships and maintaining existing customer relationships.
2
Shared Resources
Our shared resources group provides a range of services to support our stores, including information technology
support, administration, marketing campaigns, human resources management, finance and insurance, central purchasing and
used equipment inventory valuation, accounting, legal, data administration and cash management. We believe these functions
can be run more efficiently when combined and can provide more sophisticated resources to our field employees than an
independent dealership could support alone. We maintain accountability through our management reporting systems, which
provide data on certain key operational and financial metrics on a daily basis, as well as a comprehensive review of financial
performance on a monthly basis. We believe the services provided by our shared resources group enables our expert teams to
achieve a higher level of customer service by freeing them from certain general and administrative functions. If we acquire new
stores, we believe the shared services required to support these stores will grow at a lower rate than our overall growth in store
count.
Management Development and Succession Planning
Our executives and segment leaders work closely with our expert teams to ensure they benefit from our executives'
industry knowledge and perform in line with our management philosophy. We also conduct formal meetings on a regular basis
with our regional and area managers to assess operational and financial objectives, develop near-term strategies and share best
practices across the organization.
Business Strengths
We believe the following attributes are important factors in our ability to compete effectively and achieve our long-
term financial objectives:
Leading North American Equipment Provider with Significant Scale
According to CNH Industrial, we are the largest retail dealer of Case IH Agriculture equipment in the world, the
largest retail dealer of Case Construction equipment in North America and a major retail dealer of New Holland Agriculture
and New Holland Construction equipment in the U.S. We believe our size and large, contiguous geographic market provide us
with several competitive advantages including:
•
•
•
our ability to manage inventory through our centralized inventory management system, thus allowing inventory
exchanges among the stores, which permits us to more effectively manage inventory levels at each store while
providing significant breadth of parts and equipment to our customers;
our ability to use expanded sales channels, including used equipment listings hosted on our website, which enables us
to offer our customers alternative purchasing options; and
our ability to sell inventory to customers in a large geographic area covering Arizona, Colorado, Iowa, Minnesota,
Montana, Nebraska, New Mexico, North Dakota, South Dakota, Wisconsin and Wyoming, which enables us to
capitalize on crop diversification and disparate weather in growing regions, as well as local trends in residential,
infrastructure and commercial construction.
Superior Customer Service at the Local Level
Our actions to centralize numerous administrative functions has enabled our employees in the field to better focus on
customer service as well as eliminating redundant operating expenses. Our centralized functions includes a professional
marketing team that supports all aspects of brand and solution awareness, customer analytics and targeting, and lead generation
through multichannel campaigns that typically incorporate digital marketing (email, website, search, social, syndication), direct
mail, and regional and local advertising and sponsorships. Our marketing function also drives increased engagement and
loyalty through participation in trade shows and industry events and communication and coordination for local store open
houses, service clinics, equipment demonstrations, product showcases and customer appreciation outings.
We spend significant time and resources training our employees to effectively service our customers in each of our
local markets, which we believe will increase our revenue. Our training program involves active participation in all
manufacturer-sponsored training programs and the use of industry experts as consultants for customized training programs and
a training team to assist in the integration of newly-acquired operations. We also partner with several technical colleges to
sponsor students who we plan to eventually employ as service technicians.
We believe that the following capabilities enable us to better service our customers:
•
our ability to staff a large number of highly-trained service technicians across our network of stores, which makes it
possible to schedule repair services on short notice without affecting our technician utilization rates;
3
•
•
our ability to staff and leverage product and application specialists across our network of stores, which makes it
possible to offer valuable pre-sale and aftermarket services, including equipment training, best practices education and
precision farming technology support; and
our ability to innovate and lead our industry through initiatives such as GPS guidance systems to support precision
farming and farm data management products and services, which provide our customers with the latest advances in
technology and operating practices.
Ability to Attract and Retain Superior Employees
We strive to maintain a culture that empowers our employees to make decisions and act within the parameters of our
operating model. We believe this culture and our size gives us a competitive advantage in attracting and retaining the best
employees in our industry. We developed an operating system and process that provides our employees with defined objectives
and frequent feedback of results within an environment that allows them to work independently yet consistently throughout our
company. Through this operating system and process we have established defined financial metrics, which are reviewed with
our various levels of managers on a regular basis to assess performance. We believe this balanced management philosophy
allows our employees a clear understanding of how to succeed in our organization and how to interact with customers who
have come to expect a level of local decision-making autonomy from our employees. Our compensation system focuses on
rewarding our employees for high performance, thus enabling us to attract and retain high performing employees.
Diverse and Stable Customer Base to Avoid Market Volatility
We believe our large and geographically diverse customer base limits our exposure to risks associated with customer
concentration and fluctuations in local market conditions. We have long and stable relationships with our large and diverse
customer base. During fiscal 2018, none of our customers accounted for more than 1.0% of our total revenue. Revenue from
customers located outside of the United States is primarily included in our International segment, which represented 17.4%,
12.4% and 11.8% of total consolidated revenue during fiscal 2018, 2017 and 2016.
Information Technology Systems
Our management reporting systems provide the data and reports that facilitate our ability to make informed financial
and inventory purchasing decisions. We use these systems to actively manage our business and enable our sales employees to
access the available inventory of our other stores before ordering additional parts or equipment from our suppliers and to access
data on values of trade-in units. As a result, we manage our investment in inventory while promptly satisfying our customers'
parts and equipment needs. Our customer relationship management system provides sales, available equipment inventory,
customer information, and other organizational tools to our sales employees.
Experienced Management Team
Our executive team is led by David Meyer, our Board Chair and Chief Executive Officer, who has over 40 years of
industry experience. Our segment leaders, other executive team members, managers in the field, and equipment sales
consultants also have extensive knowledge and experience in our industry. We compensate, develop and review our managers
and sales employees based on an approach that aligns their incentives with the goals and objectives of our company, including
achievement of revenue, profitability, market share and balance sheet objectives. We believe the strength of our management
team will increase our success in the marketplace.
Growth Strategy
We pursue the following growth strategies:
Increase Market Share and Same-Store Sales
We focus on increasing our share of the equipment sold in our markets because our market share impacts current
period revenue and increases our future potential revenue during the life of the sold equipment through recurring parts and
service business. We seek to generate same-store growth and increase market share through:
•
•
employing significant marketing and advertising programs, including targeted direct mailings, internet based
marketing, advertising with targeted local media outlets, participation in and sponsorship of trade shows and industry
events, our Titan Trader monthly magazine, and by hosting open houses, service clinics, equipment demonstrations,
product showcases and customer appreciation outings;
supporting and providing customers with training for evolving technologies, such as precision farming and farm data
management, that are difficult for small operators to support;
4
• maintaining state-of-the-art service facilities, mobile service trucks and trained service technicians to maximize our
customers' equipment uptime through preventative maintenance programs and seasonal 24/7 service support; and
•
utilizing our inventory system to optimize the availability of parts and equipment for our customers.
Strategic Acquisitions
Since January 1, 2003, we have completed over 50 acquisitions in 11 states and three European countries. The
agricultural and construction equipment industries are fragmented and consist of many relatively small, independent businesses
servicing discrete local markets. We believe a favorable climate for dealership consolidation will exist in the future due to
several factors, including the competitiveness of our industry, increased dealer capitalization requirements, increased
technology and resulting sophistication and complexity of equipment, increased expectations from growers and original
equipment manufacturers, and the lack of succession alternatives for current owners. We intend to continue to evaluate and
pursue acquisitions with the objectives of entering new markets, in addition to consolidating distribution within our existing
network, and strengthening our competitive position. We expect that acquisitions will continue to be a component of our long-
term growth strategy.
We regularly assess the acquisition landscape, evaluating potential acquisition candidates in terms of availability and
alignment to our long-term growth strategy. Typically, we have acquired only the working capital and fixed assets that we
believe are necessary to run an efficient store and we do not generally assume any indebtedness. On occasion we have acquired
all of the outstanding equity of a company. Acquisitions are typically financed with available cash balances, floorplan payables
and long-term debt.
The consent of CNH Industrial is required to acquire any CNH Industrial dealership. The consent of our lender group,
led by Wells Fargo Bank, National Association (collectively referred to as "Wells Fargo") is required for the acquisition of
dealerships meeting certain thresholds or other criteria defined in our Second Amended and Restated Credit Facility, as
amended (the "Wells Fargo Credit Agreement").
Suppliers
CNH Industrial—Case IH Agriculture, Case Construction, New Holland Agriculture and New Holland Construction
We have been an authorized dealer of CNH Industrial equipment since our inception in 1980. According to CNH
Industrial, we are the largest retail dealer of Case IH Agriculture equipment in the world, the largest retail dealer of Case
Construction equipment in North America, and a major retail dealer of New Holland Agriculture and New Holland
Construction equipment in the U.S. In fiscal 2018, CNH Industrial supplied approximately 77% of the new equipment sold in
our Agriculture segment, 65% of the new equipment sold in our Construction segment, and 69% of the new equipment sold in
our International segment.
CNH Industrial is a publicly-traded, global leader in the agricultural and construction equipment industries based on
industry market share data. In 2017, CNH Industrial generated $13.8 billion in revenue from its equipment operations. In
addition, CNH Industrial provides financing and insurance products and services to its end-user customers and authorized
dealers through its affiliated business unit, CNH Industrial Capital America, LLC ("CNH Industrial Capital").
CNH Industrial is the world's second largest manufacturer of agricultural equipment, manufacturing the Case IH
Agriculture and New Holland Agriculture brands of equipment. Case IH Agriculture, recognized by the red color of its
equipment, possesses over 170 years of farm equipment heritage. New Holland Agriculture, recognized by the blue color of its
tractors and the yellow color of its harvesting and hay equipment, has over 120 years of farm equipment industry experience.
CNH Industrial's agricultural equipment dealers are assigned authorized store locations but do not have exclusive territories.
The Case Construction and New Holland Construction brands are owned and operated by CNH Industrial. CNH
Industrial's construction equipment dealers are assigned a specific geographic area of responsibility within which the dealers
have the right to sell new Case Construction and New Holland Construction equipment.
We believe that our relationship with CNH Industrial is more than a typical supply relationship; it is strategic for both
our company and CNH Industrial. In that regard, it is in each company's interest to maintain and develop the longstanding
strong relationship we share.
Dealership Agreements
We have entered into separate dealership agreements with CNH Industrial to sell and service the Case IH Agriculture,
New Holland Agriculture, Case Construction and New Holland Construction brands (collectively the “CNH Industrial Dealer
Agreements”). During 2017, we entered into new CNH Industrial Dealer Agreements. As part of our entry into these new
5
agreements, separate CNH Industrial Dealer Agreements were entered into for each of the Company’s North American stores or
store complexes. The terms and conditions of these new CNH Industrial Dealer Agreements are substantially similar to the
terms of the prior dealership agreements with CNH Industrial.
The CNH Industrial Dealer Agreements assign to us a geographically defined area of principal responsibility,
providing us with distribution and product support rights within the identified territory for specific equipment products of the
manufacturer. Although the dealer appointment is non-exclusive, in each territory there is typically only one dealership
responsible for retail sales to end-users, as well as after-sales product support of the equipment. If we sell certain CNH
Industrial equipment outside of our designated sales and service areas, CNH Industrial has the right to require that we pay sales
and service fees for purposes of compensating the dealer assigned to such territory. We are authorized to display and use CNH
Industrial trademarks and trade names at our stores, with certain restrictions.
Under our CNH Industrial Dealer Agreements, we have both the right and obligation to sell the manufacturer’s
equipment and related parts and products and provide customers with services. The CNH Industrial Dealer Agreements impose
various requirements on us regarding the location and appearance of facilities, satisfactory levels of new equipment and parts
inventories, the training of personnel, adequate business enterprise and information technology system, adequate working
capital, maximum adjusted debt to tangible net worth ratio, development of annual sales and marketing goals, and furnishing of
monthly and annual financial information. We must obtain the approval or consent of CNH Industrial in the event of proposed
fundamental changes to our ownership, governance or business structure (defined as "change in control" events) including,
among other things, (i) a merger, consolidation or reorganization, unless securities representing more than 50% of the total
combined voting power of the successor corporation are immediately owned, directly or indirectly, by persons that owned our
securities prior to the transaction; (ii) a sale of all or substantially all of our assets; (iii) any transaction or series of transactions
resulting in a person or affiliated group acquiring 30% or more of the combined voting power of our securities or, in the case of
a competitor of CNH Industrial, 20% or more of the combined voting power of our securities; (iv) a substantial disposition of
shares of our common stock by certain named executives; (v) certain significant changes in the composition of our Board of
Directors; and (vi) replacement of our Chief Executive Officer. The CNH Industrial Dealer Agreements do not establish
mandatory minimum or maximum retail pricing for our equipment or parts sales or service offerings.
The Case IH Agricultural dealership agreement and the Case Construction dealership agreement have fixed terms
expiring on December 31, 2027, and renew automatically for successive 5-year terms unless either party notifies the other party
of its intention not to renew or otherwise exercises its termination rights under the agreement. The New Holland dealership
agreement has a fixed term expiring December 31, 2019, with automatic 1-year renewals unless either party notifies the other
party of its intention not to renew or otherwise exercises its termination rights under the agreement. CNH Industrial has the
right to terminate its dealer agreements with us immediately in certain circumstances, including in the event of (i) our
insolvency or bankruptcy, (ii) a material breach by us of the provisions of a CNH Industrial Dealer Agreement or (iii) our
failure to secure the consent of CNH Industrial prior to the occurrence of “change in control” events. The CNH Industrial
Dealer Agreements governing Case Construction equipment grants CNH Industrial the right to terminate these CNH Industrial
Dealer Agreements for any reason upon 120 days written notice. In addition, we have the right to terminate any of the CNH
Industrial Dealer Agreements at any time, with or without cause, upon 60 days prior written notice. Subject to protections
provided under state dealer protection laws, in the event that CNH Industrial offers a new dealer agreement or an amendment to
the existing CNH Industrial Dealer Agreements to all authorized CNH Industrial dealers located in the state, CNH Industrial is
permitted to terminate our existing CNH Industrial Dealer Agreements for stores located in that state upon at least 180 days’
prior written notice if we refuse or otherwise fail to enter into such new agreements or amendments. In addition, to the extent
CNH Industrial determines that the Company is not meeting its obligations under the CNH Industrial Dealer Agreement with
respect to a particular product, CNH Industrial may, upon 60 days prior written notice to us, remove such product from the
authorized product list allowed to be sold or serviced by us. In the event of termination of any of the CNH Industrial Dealer
Agreements, CNH Industrial is obligated to repurchase the inventory of the CNH Industrial brand applicable to the agreement
being terminated. The CNH Industrial Dealer Agreements generally do not include non-compete provisions that apply during or
after the term of such agreements or limit our operations apart from our designated CNH Industrial dealership store locations.
Our CNH Dealer Agreements for Case Construction equipment, absent consent of CNH Industrial, restrict our ability to sell
competing products (new equipment and parts) of other manufacturers at our Case dealership store locations during the term of
such agreements. Our CNH Industrial Dealer Agreements require us to operate separately from our CNH Industrial dealership
business, any material business activities not related to sales of CNH Industrial products or services to customers in
agricultural, construction, industrial or similar markets.
The CNH Industrial Dealer Agreements and industry practices generally provide that payment on equipment and parts
purchased from CNH Industrial entities is due within 30 days and is typically subject to floorplan payable financing. CNH
Industrial makes available to us any floorplan programs, parts return programs, sales or incentive programs or similar plans or
programs it offers to its other dealers, and provides us with promotional items and marketing materials.
6
Our CNH Dealer Agreements for our European operations are substantially similar in structure to our North America
agreements. However, the European countries in which we operate do not provide dealer protection laws as is the case in the
U.S.
Other Suppliers
In addition to products supplied by CNH Industrial, we sell a variety of new equipment, parts and attachments
supplied by other manufacturers. These products tend to address specialized niche markets and complement the CNH Industrial
products we sell by filling gaps in the CNH Industrial line of products. We believe our offering of products for specialized
niche markets supports our goal of being a one-stop solution for equipment needs at each of our stores. Approximately 28% of
our total new equipment sales in fiscal 2018 resulted from sales of products manufactured by companies other than CNH
Industrial, with our single largest manufacturer other than CNH Industrial representing approximately 2% of our total new
equipment sales. The terms of our arrangements with these other suppliers vary, but most of the dealership agreements contain
termination provisions allowing the supplier to terminate the agreement after a specified notice period, which is typically
30 days. Payment and financing practices with these other suppliers are similar to those practices described above with respect
to CNH Industrial entities.
Operating Segments, Products and Services
We operate our business in three reportable segments, Agriculture, Construction and International. Within each of our
segments, we have four principal sources of revenue: new and used equipment sales, parts sales, equipment repair and
maintenance service, and equipment rental and other business activities. See Note 21 to our consolidated financial statements
included elsewhere in this Form 10-K for additional information regarding our segments.
Equipment Sales
We sell new agricultural and construction equipment manufactured under the CNH Industrial family of brands as well
as equipment from a variety of other manufacturers. The used equipment we sell is primarily acquired through trade-ins from
our customers. The agricultural equipment we sell and service includes tractors, combines and attachments, application
equipment and sprayers, planting and seeding equipment, tillage equipment, hay and forage equipment, and precision farming
technology and related equipment. The construction equipment we sell and service includes compact track loaders, compaction
equipment, cranes, crawler dozers, excavators, forklifts, loader/backhoes, loader/tool carriers, motor graders, skid steer loaders,
telehandlers and wheel loaders. We sell new and used equipment through our in-house retail sales team, which is organized by
geography and operating segment. In certain circumstances, we also sell aged equipment through the use of alternative
channels such as onsite and online auctions. We believe this organizational structure improves the effectiveness of our sales
team, better serves our customers and helps us negotiate advantageous trade-in purchase terms. Equipment sales generate cross-
selling opportunities for us by populating our markets with equipment we repair and maintain and for which we sell parts.
Equipment revenue represented 66.9%, 65.7% and 67.7% of total revenue for the years ended January 31, 2018, 2017 and
2016.
Parts Sales
We sell a broad range of maintenance and replacement parts for brands of equipment that we sell, other makes of
equipment, and other types of equipment and related components. We maintain an extensive in-house parts inventory to provide
timely parts and repair and maintenance support to our customers. We generally are able to acquire out-of-stock parts directly
from manufacturers within two business days. Our parts sales provide us with a relatively stable revenue stream that is less
sensitive to economic cycles than our equipment sales. Parts revenue represented 18.4%, 19.3% and 17.9% of total revenue for
the years ended January 31, 2018, 2017 and 2016.
Repair and Maintenance Services
We provide repair and maintenance services, including warranty repairs, for our customers' equipment. Each of our
stores includes service bays staffed by trained service technicians. Our technicians are also available to make off-site repairs at
the customers' locations. In addition, we provide proactive and comprehensive customer service by maintaining service
histories for each piece of equipment owned by our customers, maintaining 24/7 service hours in times of peak equipment
usage, providing on-site repair services, scheduling off-season maintenance activities with customers, notifying customers of
periodic service requirements and providing training programs to customers to educate them on standard maintenance
requirements. At the time equipment is purchased, we also offer customers the option of purchasing extended warranty
protection provided by our suppliers. Our after-market services have historically provided us with a high-margin, relatively
stable source of revenue through changing economic cycles. Service revenue represented 9.8%, 10.2%, 9.3% of total revenue
for the years ended January 31, 2018, 2017 and 2016.
7
Equipment Rental and Other Business Activities
We rent equipment to our customers, primarily in the Construction segment, on a short-term basis for periods ranging
from a few days to a few months. We actively manage the size, quality, age and composition of our rental fleet and use our
information technology systems to closely monitor and analyze customer demand and rate trends. We maintain the quality of
our fleet through our on-site parts and services support and dispose of rental equipment through our retail sales force. Our
rental activities create cross-selling opportunities for us in equipment sales, including rent-to-own purchase options. In
addition, we provide ancillary equipment support activities such as equipment transportation, GPS signal subscriptions in
connection with precision farming, farm data management products, and CNH Industrial Capital finance and insurance
products. Rental and other revenue represented 4.9%, 4.8% and 5.1% of total revenue for the years ended January 31, 2018,
2017 and 2016.
Geographic Information
Revenue generated from customers located in the U.S. totaled $1.0 billion, $1.1 billion and $1.2 billion for the years
ended January 31, 2018, 2017 and 2016. Revenue generated from customers located outside of the United States is primarily
included in our International segment, which totaled $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, $152.7 million and $159.2 million of our long-lived assets
were held in the U.S. As of January 31, 2018 and 2017, $4.8 million and $3.6 million of our long-lived assets were held in our
European subsidiaries.
Customers
Our North America agriculture customers vary from small, single machine owners to large farming operations,
primarily in the states of Iowa, Minnesota, Nebraska, North Dakota and South Dakota. In fiscal 2018, no single agriculture
customer accounted for more than 2.0% of our Agriculture revenue.
Our Construction customers include a wide range of construction contractors, public utilities, mining and energy
companies, farmers, municipalities and maintenance contractors, primarily in the states of Arizona, Colorado, Iowa, Minnesota,
Montana, Nebraska, New Mexico, North Dakota, South Dakota, Wisconsin and Wyoming. They vary from small, single
machine owners to large firms. In fiscal 2018, no single construction customer accounted for more than 1.0% of our
Construction revenue.
Our International customers vary from small, single machine owners to large farming operations, primarily in the
European countries of Bulgaria, Romania, Serbia and Ukraine. We also sell Case construction equipment in Bulgaria, Ukraine,
and Romania. In fiscal 2018, no single international customer accounted for more than 2.0% of our International revenue.
Our stores and mobile service trucks enable us to efficiently service local and regional customers. We believe our
operating model enables us to satisfy customer requirements and increase revenue through cross-selling opportunities presented
by the various products and services that we offer.
Floorplan Payable Financing
We attempt to maintain at each store, or have readily available at other stores in our network, sufficient new equipment
inventory to satisfy customer demand. Inventory levels fluctuate throughout the year and tend to increase before the primary
sales seasons for agricultural equipment. The cost of financing our inventory is an important factor affecting our financial
results.
CNH Industrial Capital
CNH Industrial Capital offers floorplan payable financing to CNH Industrial dealers to finance the purchase of
inventory from CNH Industrial and for used equipment inventory purchased on trade-ins from our customers. CNH Industrial
Capital provides this financing in part to enable dealers to carry representative inventories of equipment and encourage the
purchase of goods by dealers in advance of seasonal retail demand. CNH Industrial Capital charges variable market rates of
interest based on the prime rate on balances outstanding after any interest-free periods and receives a security interest in
inventory and other assets. Interest-free periods can be up to four months in duration for both new and used agriculture and
construction equipment. CNH Industrial Capital also provides floorplan financing for used equipment accepted in trade,
repossessed equipment and approved equipment from other suppliers, and receives a security interest in such equipment. As of
January 31, 2018, we had a $450.0 million floorplan credit facility with CNH Industrial Capital. In April 2018, the Company
entered into an amendment to the credit facility to decrease available borrowings under this facility to $350.0 million.
8
Other Financing Sources for Equipment
As of January 31, 2018, we had the Wells Fargo Credit Agreement, which includes a $140.0 million wholesale
floorplan line of credit, 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 available to our foreign subsidiaries to finance equipment inventory purchases.
In addition, financing also may be available through floorplan payable financing programs offered by manufacturers
and suppliers, or their third party lenders, from which we purchase equipment inventory.
Sales and Marketing
As part of the Titan Operating Model, we have centralized sales support and marketing management. All of our stores
benefit from our centralized media buys, strategic planning, sales support and training. In addition, we provide our regional and
area managers and their sales teams with flexibility to develop localized sales and marketing strategies.
We currently market our products and services through:
our sales employees, who operate out of our network of local stores and call on customers in the markets surrounding
each store;
our area product support managers, and our store parts managers and service managers, who provide our customers
with comprehensive after-market support;
our website;
local and regional advertising efforts, including broadcast, cable, print and web-based media; and
alternative channels, such as auctions, for selling our aged equipment inventories.
•
•
•
•
•
Equipment Sales Consultants
Our equipment sales employees are referred to as equipment sales consultants, who perform a variety of functions,
such as servicing customers at our stores, calling on existing customers and soliciting new business at farming, construction
and industrial sites. We develop customized marketing programs for our sales force by analyzing each customer group for
profitability, buying behavior and product selection. All members of our sales force are expected to participate in internal and
external manufacturer-sponsored training sessions to develop product and application knowledge, sales techniques and
financial acumen. Our sales force is supported by our corporate marketing department.
Parts Managers and Service Managers
Our parts managers and service managers are involved in our efforts to market parts and service, taking advantage of
our seasonal marketing campaigns in parts and service sales. As a group, they have won multiple awards from our suppliers for
their efforts benefiting both our customers and our key suppliers.
Website
Our used equipment inventories are marketed on our website, www.titanmachinery.com, through an equipment search
feature which allows users to search by equipment type, manufacturer, price and/or by store. A picture of each piece of
equipment is shown, along with the equipment specifications, price and store location. Parts manufactured by the CNH
Industrial brands are marketed and can be purchased directly through our website. Other sales and financing programs are also
marketed through our website. Finally, our website also provides dealer locator search functions and provides the contact
information for the various departments at each of our stores.
Print, Broadcast and Web-Based Advertising Campaigns
Each year we initiate several targeted direct mail, print and broadcast advertising and marketing campaigns. CNH
Industrial and other suppliers periodically provide us with advertising funds, which we primarily use to promote new
equipment, parts and financing programs. We will continue to explore and launch additional sales channels as appropriate,
including, for example, additional internet-based efforts.
Channels for Selling Aged Equipment Inventory
In certain circumstances, we also sell aged equipment inventories through the use of alternative channels such as
onsite and online auctions.
9
Competition
The agricultural and construction equipment sales and distribution industries are highly competitive and fragmented,
with large numbers of companies operating on a regional or local scale. Our competitors range from multi-location, regional
operators to single-location, local dealers and include dealers and distributors of competing equipment brands, including Deere,
Caterpillar and the AGCO brands, as well as other dealers and distributors of the CNH Industrial family of brands. Competition
among equipment dealers, whether they offer agricultural or construction products or both, is primarily based on the price,
value, reputation, quality and design of the products, the customer service and repair and maintenance service provided by the
dealer, the availability of equipment and parts, and the accessibility of stores. While we believe we compete favorably on each
of the identified competitive factors, our sales and margins may be impacted by (i) aggressive pricing competition through
manufacturer discount programs or other competitive pricing tactics, (ii) our ability to obtain higher service gross margins
based on our service quality and reputation and (iii) our ability to attract new and maintain existing customers based on the
availability and quality of the products we offer and our local relationships and reputation.
The number of agricultural and construction equipment dealers operating on a regional scale is limited and we are one
of the principal regional-scale agricultural and construction equipment dealers in the U.S. The primary regional-scale
equipment dealers with whom we compete in the U.S. include RDO Equipment Co., Butler Machinery, Ziegler Inc., Brandt
Holdings Co., Wagner Equipment Co., and Van Wall Equipment.
Information Technology Systems
Our enterprise resource planning ("ERP") system enables us to closely monitor our performance and actively manage
our business on a consolidated and segment basis and includes features that were enhanced to support our operations, including
detailed store-based financial reporting, inventory management and customer relationship management.
Through our ERP system, we maintain a complete database of parts and equipment inventory and a centralized
inventory control system for each segment. Our ERP system enables us to monitor inventory levels and mix at each store and
make adjustments in accordance with our operating plan. Finally, our ERP system is externally connected to CNH Industrial,
enabling us to locate CNH Industrial equipment and parts from various CNH Industrial depots.
Our customer relationship management ("CRM") system provides sales and customer information and other
organizational tools to assist our sales activities. We maintain an extensive customer database that allows us to monitor the
status and maintenance history of our customers' equipment and enables us to more effectively provide parts and services to
meet their needs. We also use our CRM system and customer database to monitor sales information and customer demand.
The data we store in our ERP and CRM systems is backed-up on a daily basis and stored at an off-site location. If
these systems were to become inoperable, we would be able to continue operations through an off-site data center. Further, we
own the software and hardware necessary to operate the ERP system and have employees trained to manage and maintain the
software. In some cases, we rely on external support through the use of third-party consultants to make updates or
enhancements to our ERP system as we deem necessary.
Corporate Information
We were incorporated as a North Dakota corporation in 1980 and reincorporated in Delaware in December 2007 prior
to our initial public offering. Our executive offices are located at 644 East Beaton Drive, West Fargo, ND 58078-2648. Our
telephone number is (701) 356-0130. We maintain a website at www.titanmachinery.com. Our SEC filings are available on the
Investor Relations page of our website or at www.sec.gov.
Intellectual Property
We have registered trademarks for certain names and designs used in our business and have trademark applications
pending for certain others. We generally operate each of our stores under the Titan Machinery name. Case IH, Case and New
Holland are registered trademarks of CNH Industrial, which we use in connection with advertisements and sales as authorized
under our CNH Industrial Dealer Agreements. We also license trademarks and trade names of new equipment from other
suppliers of equipment to us.
Product Warranties
Product warranties for new equipment and parts are provided by the original equipment manufacturer ("OEM"). The
term and scope of these warranties vary greatly by OEM and by product. At the time equipment is purchased, we also offer
customers the option of purchasing extended warranty protection provided by the OEM or through various third-party warranty
providers. We are paid by the OEM for repairs we perform to equipment under warranty. We generally sell used equipment "as
10
is" and without OEM warranty unless the original warranty period has not expired and is transferable. We also offer extended
warranty programs through various third-party warranty providers on certain used equipment.
Seasonality & Weather
The agricultural and construction equipment businesses are highly seasonal, which causes our quarterly results and our
available cash flow to fluctuate during the year. Our customers generally purchase and rent equipment in preparation for, or in
conjunction with, their busy seasons, which for farmers are the spring planting and fall harvesting seasons, and for Construction
customers is dependent on weather seasons in their respective regions, but is typically the second and third quarters of our
fiscal year for much of our Construction footprint. Our parts and service revenues are typically highest during our customers'
busy seasons as well, due to the increased use of their equipment during this time, which generates the need for more parts and
service work. However, weather conditions impact the timing of our customers' busy times, which may cause our quarterly
financial results to differ between fiscal years. In addition, the fourth quarter typically is a significant period for equipment
sales in the U.S. because of our customers’ year-end tax planning considerations, the timing of dealer incentives and the
increase in availability of funds from completed harvests and construction projects.
Seasonal weather trends, particularly severe wet or dry conditions, can have a significant impact on regional
agricultural and construction market performance by affecting crop production yields and the ability to undertake construction
projects. Weather conditions that adversely affect the agricultural or construction markets would have a negative effect on the
demand for our products and services.
In addition, numerous external factors such as credit markets, commodity prices, production yields, and other
circumstances may disrupt normal purchasing practices and buyer sentiment, further contributing to the seasonal fluctuations.
Employees
As of January 31, 2018, we employed 2,017 full-time and 95 part-time employees. Our employees are not covered by
a collective bargaining agreement. We believe our relations with our employees are good.
Governmental Regulation
We are subject to numerous federal, state, and local rules and regulations, including regulations promulgated by the
Environmental Protection Agency and similar state agencies, with respect to storing, shipping, disposing, discharging and
handling hazardous materials and hazardous and non-hazardous waste. The environmental regulations applicable to us are
associated with the repair and maintenance of equipment at our stores including the handling and disposal of oil, fluids,
wastewater and solvent cleaners. Currently, none of our stores or operations exceeds small quantity generation status.
Compliance with these rules and regulations has not had any material effect on our operations, nor do we expect it to in the
future. Further, we have not made, and do not anticipate making, any material capital expenditures related to compliance with
environmental regulations.
ITEM 1A. RISK FACTORS
We are substantially dependent upon CNH Industrial, our primary supplier of equipment and parts inventory.
The majority of our business involves the distribution and after-market parts and servicing of equipment manufactured
by CNH Industrial. In fiscal 2018, CNH Industrial supplied approximately 77% of the new equipment sold in our Agriculture
segment, 65% of the new equipment sold in our Construction segment, and 69% of the new equipment sold in our International
segment, and supplied a significant portion of our parts inventory. Our financial performance and future success are highly
dependent on the overall reputation and success of CNH Industrial in the agricultural and construction equipment
manufacturing industries, including its ability to maintain its competitive position in product innovation, product quality, and
product pricing. In the event that CNH Industrial decided to sell, or reduce its commitment to, its equipment manufacturing
segments or if CNH Industrial changes its distribution system to our detriment, this would have a material adverse effect on our
financial condition and results of operations.
In addition, CNH Industrial provides to us the following:
•
•
•
•
Floorplan payable financing for the purchase of a substantial portion of our equipment inventory;
A significant percentage of the financing used by our customers to purchase CNH Industrial equipment from us;
Reimbursement for warranty work performed by us pursuant to CNH’s product warranties;
Incentive programs and discount programs from time to time that enable us to price our products more competitively;
and
11
•
Promotional and marketing activities on national, regional and local levels.
CNH Industrial may limit or decrease the availability of financing, warranty reimbursements, discounts and rebates, or
other marketing incentives. Our financial performance is impacted by CNH Industrial’s continued commitment to these
programs, which allow us to effectively compete in our markets.
CNH Industrial may change or terminate our CNH Industrial Dealer Agreements.
We have entered into CNH Industrial Dealer Agreements under which we sell CNH Industrial’s branded agricultural
and construction equipment, along with after-market parts and repair services. Subject to applicable state statutes that may
govern the dealer-manufacturer legal relationship, CNH Industrial may terminate our CNH Industrial Dealer Agreements
immediately in certain circumstances, following written notice and cure periods for certain breaches of the agreement, and for
any reason under the Case Construction agreement following 120 days written notice. If CNH Industrial were to terminate all
or any of its CNH Industrial Dealer Agreements with us, our business would be severely harmed.
Furthermore, CNH Industrial may unilaterally change its operating practices under the terms of its CNH Industrial
Dealer Agreements with us to, among other things, change or authorize additional dealers in our sales and service areas, limit
our product offerings, and change pricing or delivery terms. If CNH Industrial were to change the terms of our CNH Industrial
Dealer Agreements or its operating practices in a manner that adversely affects us, our business would be harmed.
Our CNH Industrial Dealer Agreements impose obligations and restrictions on us.
Under our CNH Industrial Dealer Agreements, we are obligated to actively promote the sale of CNH Industrial
equipment within our designated geographic areas of responsibility, fulfill the product warranty obligations of CNH Industrial
(subject to CNH Industrial’s payment to us of the agreed upon reimbursement), maintain adequate facilities and workforce to
service the needs of our customers, and maintain equipment and parts inventories at the level deemed necessary by CNH
Industrial to meet sales goals as stated in the annual business plan mutually agreed upon by us and CNH Industrial, maintain
adequate working capital, and maintain stores only in authorized locations. Our CNH Industrial Dealer Agreements do not
provide us with exclusive dealerships in any territory, and CNH Industrial could elect to create additional dealers in our market
areas in the future, subject to restrictions imposed by state laws.
Consent of CNH Industrial is required for certain material changes in our ownership, governance or business structure,
including the acquisition by any person or group of persons of 30% or more of our outstanding stock or 20% or more of our
outstanding stock if the person or group is a competitor of CNH Industrial. This requirement may have the effect of
discouraging a sale or other change in control of the Company, including transactions that our stockholders might otherwise
deem to be in their best interests.
The acquisition of additional CNH Industrial geographic areas of responsibility and store locations in our Agriculture,
Construction and International segments requires the consent of CNH Industrial under our CNH Industrial Dealer Agreements,
subject to contrary state dealer protection laws. We cannot assume that CNH Industrial will consent to any acquisition of any
stores or dealerships that we may desire to make in the future.
Our CNH Dealer Agreement for Case Construction equipment prohibits us from carrying other suppliers' products
(new equipment and parts) at our Case Construction stores that are competitive with CNH Industrial's products. Our CNH
Industrial Dealer Agreements require us to operate separately, from our CNH Industrial dealership business, any material
business activities not related to sales of CNH Industrial products or services to customers in agricultural, construction,
industrial or similar markets. These restrictions may prevent us from pursuing business activities that we believe are in the best
interests of our stockholders.
Our agricultural equipment, parts and service sales are affected by numerous market factors outside of our control.
Farmers' capital expenditures often follow a cyclical pattern, with increased capital investments typically occurring
during boom cycles spurred by high net farm income and strong farm balance sheets. Net farm income is subject to numerous
external factors such as commodity prices, input costs, production yields, animal diseases and crop pests, federal crop insurance
and subsidy programs. Net farm income also impacts farmland values, which causes overall farm wealth to increase or
decrease, impacting farmers’ sentiment to make investments in equipment. The nature of the agricultural equipment industry is
such that a downturn in demand can occur suddenly, resulting in negative impact on dealers including declining revenues,
reduced profit margins, excess equipment inventories, and increased interest expenses. These downturns may be prolonged, and
during these periods, our revenues and profitability could be harmed. Demand for our parts and service, although not as
cyclical as equipment purchases, can also be negatively affected in agricultural downturns and in regions affected by adverse
weather or growing conditions which result in less acres planted or harvested.
12
Our construction equipment, parts and service sales are affected by numerous market factors outside of our control.
Our construction equipment customers primarily operate in the natural resource development, construction,
transportation, agriculture, manufacturing, industrial processing and utilities industries, which industries generally are capital
intensive and cyclical in nature. Many of our construction equipment customers are directly and indirectly affected by
fluctuations in commodity prices in the agriculture, forestry, metals and minerals, petroleum and natural gas industries.
Prolonged periods of low oil prices and other commodities may cause reduced activity in these sectors which may result in
decreased demand for our products and services by our customers operating in these industries.
Construction contractors' demand for our construction equipment, parts and services is affected by economic
conditions at both a global and a local level. Economic conditions that negatively affect the construction industry, such as the
tightening of credit standards which affect the ability of consumers to obtain financing, could reduce our customers' demand for
our construction equipment. The construction industry in many of our geographical areas has experienced periodic, and
sometimes prolonged, economic down cycles, which negatively impacts sales of construction equipment in those markets.
During these downturns our revenues and profitability could be harmed.
Our customers’ ability to obtain affordable financing is an important factor in their purchasing decisions, and directly
affects our business.
The ability to obtain affordable financing is an important part of a customer's decision to purchase agricultural or
construction equipment. Tight credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed
income, credit, currency and equity markets have the potential to adversely affect available credit for our customers. As net
farm income has decreased in recent years, the borrowing capacity of our farmer customers may have also decreased.
Moreover, in a tighter credit environment, agricultural lenders may discourage their farmer customers from making non-
essential capital expenditures.
Interest rate increases may make equipment purchases less affordable for customers and, as a result, our revenue and
profitability may decrease. We are unable to anticipate the timing and impact of interest rate adjustments.
Changes in governmental policies may reduce demand for agricultural and construction equipment and cause our revenue
to decline.
Changes in federal, state, and international agricultural policies could adversely affect sales of agricultural equipment.
Government programs and subsidies that reduce economic volatility, incentivize agricultural equipment purchases, and enhance
farm income positively influence farmers' demand for agricultural equipment. To the extent that future funding or farm
programs available to individual farmers are reduced, these changes could reduce demand for agricultural equipment and we
could experience a decline in revenue. Changes in government spending on infrastructure projects could adversely affect the
demand for construction equipment and we could experience a decline in revenue. In addition, government trade policies
impacting or limiting the export or import of agricultural commodities could have a material adverse effect on the international
flow of agricultural and other commodities that may cause a decrease in the demand for agricultural equipment if net farm
income declines as a result.
Our financial performance is affected by general industry-wide supply of, and demand for, inventory, over which we have
no control.
Over-production of equipment by one or more manufacturers, or a sudden reduction in demand for equipment, can
dramatically disrupt the market and cause downward pressure on our equipment profit margins. Short-term lease programs in
the agriculture and construction equipment industries have expanded significantly in North America in recent years. When this
equipment comes off lease or rental fleet is sold, there may be a significant increase in the availability of late-model used
equipment, which can aggravate the over-supply condition and put added pressure on our equipment sales and margins, and
have an adverse effect on values of our rental fleet equipment and used equipment inventory.
Our financial performance is dependent on our ability to effectively manage new equipment, used equipment, and parts
inventories.
Our agricultural and construction equipment dealership network requires substantial inventories of equipment and
parts to be maintained at each store to facilitate sales to customers on a timely basis. Our equipment inventory has traditionally
represented 50% or more of our total assets. We need to maintain a proper balance of new and used equipment to assure
satisfactory inventory turnover and to minimize floorplan financing costs.
Our purchases of new equipment and parts are based primarily on projected demand. If actual sales are materially less
than our forecasts, we would experience an over-supply of new equipment inventory. An over-supply of new equipment
13
inventory will generally cause downward pressure on our product sale prices and margins, decrease our inventory turns, and
increase our floorplan financing expenses.
Our used equipment is generally acquired as “trade-ins” from customers in connection with equipment sales to those
customers. In accordance with generally accepted accounting principles, each item of our used equipment inventory is valued at
the lower of cost or market and, therefore, lower of cost or market adjustments to our inventory may be required from time to
time. The amount of these write-downs of inventory are included in our cost of goods sold, and reduce our operating income.
Our estimates of market value for our used equipment may prove to be inaccurate, given the potential for sudden change in
market conditions and other factors beyond our control. Changes from our normal retail marketing channel to more aggressive
marketing channels for specific pieces or categories of equipment inventory, particularly as equipment inventory ages, will
generally cause a modification to our estimate of market value, which may result in a write-down of this inventory's carrying
value. Reductions to our inventory's carrying value may result in a lower profit margin than previously expected. Further,
pricing for and sales of used equipment can be significantly affected by the limited market for certain types of used equipment.
Our international operations expose us to additional risks.
We are currently operating dealership locations in Bulgaria, Romania, Serbia and Ukraine. In fiscal 2018, total
International segment revenues were 17.4% of our consolidated total revenue. As of January 31, 2018, total International
segment assets were 16.6% of our consolidated total assets.
Our operations in international markets subject us to risks related to the differing legal, political, social and regulatory
environments and economic conditions present in the countries in which we operate. Risks inherent in our international
operations include:
•
•
•
•
•
•
•
•
•
•
difficulties in implementing our business model in foreign markets;
costs and diversion of domestic management attention related to oversight of international operations;
unexpected adverse changes in export duties, quotas and tariffs and difficulties in obtaining import licenses;
cyclicality of demand for agricultural equipment, based on availability of European Union government subsidy
programs and tax incentives;
unexpected adverse changes in foreign laws or regulatory requirements;
compliance with a variety of tax regulations, foreign laws and regulations;
compliance with the Foreign Corrupt Practices Act and other U.S. laws that apply to the international operations of
U.S. companies which may be difficult and costly to implement and monitor, can create competitive disadvantages if
our competitors are not subject to such laws, and which, if violated, may result in substantial financial and reputational
harm;
fluctuations in foreign currency exchange rates to which we are exposed may adversely affect the results of our
operations, the value of our foreign assets and liabilities and our cash flows;
the laws of the European countries in which we operate, unlike the U.S., do not include specific dealer protection laws
and, therefore, we may be more susceptible to actions of suppliers that are adverse to our interests such as termination
of our dealer agreements for any reason or installing additional dealers in our designated territories; and
political or economic changes or instability.
An escalation of political tensions or economic instability in Ukraine could create disruption in our Ukrainian
operations. Previous periods of political tension and economic instability caused liquidity problems for our customers, which
negatively impacted their purchasing decisions for our products and services, limited our ability to maintain working capital
loans or increased the cost of maintaining such loans, and as a result of imposed currency exchange controls, restricted our
ability to manage our cash held in Ukraine and our investment in our Ukrainian business. Our operations in Ukraine are subject
to the risks of further devaluation of the local currency, increased interest rates and increased inflation.
These factors, in addition to others that we have not anticipated, may negatively impact our financial condition and
results of operations.
Floorplan financing for our equipment inventory may not be available on favorable terms, which would adversely affect our
growth and results of operations.
We generally purchase our equipment with the assistance of floorplan payable financing programs through CNH
Industrial Capital and our other credit facilities. In the event that our available financing sources are insufficient to satisfy our
14
future requirements, we would be required to obtain financing from other sources. We may not be able to obtain this additional
or alternative financing on commercially reasonable terms or at all. To the extent that this financing cannot be obtained on
commercially reasonable terms or at all, our growth and results of operations would be adversely affected.
Our level of indebtedness could limit our financial and operational flexibility.
As of January 31, 2018, our indebtedness included floorplan payable financing, long-term debt, and Senior
Convertible Notes. In addition, we have obligations under our lease agreements for our store locations and corporate
headquarters.
Our level of indebtedness could have important consequences. For example, it could:
increase our vulnerability to general adverse economic and industry conditions;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general
corporate purposes.
•
•
•
We expect to use cash flow from operations and borrowings under our credit facilities to fund our operations, debt
service and capital expenditures. However, our ability to make these payments depends on our future performance, which will
be affected by financial, business, economic and other factors, many of which may be uncontrollable.
Our Wells Fargo Credit Agreement, as amended, matures on October 28, 2020 provided that certain financial tests are
satisfied as of February 1, 2019, a date that is three-months prior to the scheduled maturity date of the Company's Senior
Convertible Notes. The financial tests require (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 the maximum credit
amount under the facility. If both financial tests are not satisfied on February 1, 2019, the Credit Agreement will immediately
mature and all amounts outstanding become immediately due and payable in full.
The Company anticipates, based on our current modeling projections, that we will satisfy these financial tests on
February 1, 2019. In addition, should the Credit Agreement mature on February 1, 2019, the Company expects to have
sufficient available cash and available borrowings under other credit facilities to repay any amounts outstanding under the
Credit Agreement. However, our ability to meet the financial tests or to repay any amounts outstanding should the Wells Fargo
Credit Agreement become due and payable depends on our future financial performance and the available borrowing capacity
under our various other credit facilities.
The credit agreements governing our indebtedness restrict our ability to engage in certain corporate and financial
transactions, and require us to satisfy financial covenants.
The credit agreements governing our indebtedness contain covenants that, among other things, restrict our ability to:
•
incur more debt;
• make investments;
•
create liens;
• merge or consolidate;
•
•
•
transfer and sell assets;
pay dividends or repurchase stock; and
issue equity instruments.
Our credit facilities with CNH Industrial Capital and DLL Finance require us to satisfy a net leverage ratio and fixed
charge coverage ratio on an ongoing basis, measured at the end of each fiscal quarter. Under our Wells Fargo Credit Agreement,
in the event that excess availability plus eligible cash collateral is less than 15% of the total facility of $200.0 million, we are
required to maintain a fixed charge coverage ratio of at least 1.1 to 1.0. Our ability to borrow under these credit agreements
depends upon compliance with these financial covenants.
Our failure to satisfy any covenant, absent a waiver or amendment, would cause us to be in default under our credit
facilities and would enable our lenders to accelerate payment of the outstanding indebtedness. Moreover, an event of default
accompanied by a demand for accelerated payment under any of our credit facilities would also constitute a default under our
15
Senior Convertible Notes. Each of our credit agreements include cross-default provisions which state that certain types of
defaults under any other indebtedness agreement will also constitute a default under that credit agreement. If an event of default
occurred, and the lender demanded accelerated payment, we may not be able to satisfy such a pay-off request, whether through
internal funds or a new financing.
Our variable rate indebtedness exposes us to interest rate risk.
A substantial portion of our floorplan and working capital borrowings, including the credit facilities with CNH
Industrial Capital, Wells Fargo, DLL Finance, and our international floorplan facilities are at variable rates of interest and
expose us to interest rate risk. As such, our results of operations are sensitive to movements in interest rates. There are many
economic factors outside our control that have in the past and may, in the future, impact rates of interest including publicly
announced indices that underlie the interest obligations related to a certain portion of our debt. Factors that impact interest rates
include governmental monetary policies, inflation, recession, changes in unemployment, the money supply, international
instability impacting domestic and foreign financial markets. Any increases in interest rates could have a material adverse effect
on our financial conditions and results of operations.
Our outstanding Senior Convertible Notes may cause dilution to our existing stockholders and may negatively affect our
financial position and liquidity.
On April 24, 2012, we issued $150 million aggregate principal amount of 3.75% Senior Convertible Notes due May
2019 (the "Senior Convertible Notes") pursuant to an indenture between the Company and Wells Fargo Bank, National
Association (the "Indenture"). The Senior Convertible Notes are convertible into common stock at the option of the holders
under certain conditions. Upon conversion, we will pay cash up to the aggregate principal amount of converted notes and pay
or deliver, as the case may be, cash, shares of our common stock or a combination thereof, at our election, for any conversion
obligation in excess thereof. Additionally, in the event of a fundamental change, as defined in the Indenture, the holders of the
Senior Convertible Notes may require us to purchase all or a portion of their notes for cash at a purchase price equal to 100% of
the principal amount of notes to be purchased, plus accrued and unpaid interest.
The Indenture provides for customary events of default, including, but not limited to, cross acceleration to certain
other indebtedness of us and our subsidiaries. In the case of an event of default, all outstanding Senior Convertible Notes may
become due and payable immediately without further action or notice.
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.
If we issue shares of our common stock to satisfy conversion obligations under the Senior Convertible Notes, our
existing stockholders will experience dilution of their holdings of our stock. Repayment of the principal amount of the Senior
Convertible Notes in cash and, if applicable, satisfaction of our conversion obligations in cash may have a significant negative
effect on our available capital resources and liquidity which may require us to borrow additional amounts pursuant to terms that
are not favorable to us. In addition, even if holders do not elect to convert their Senior Convertible Notes, we could be required
under applicable accounting rules to reclassify all or a portion of the outstanding principal balance of the Senior Convertible
Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The Senior Convertible Notes mature on May 1, 2019, unless earlier purchased by the Company, redeemed or
converted. As of January 31, 2018, the Company has repurchased an aggregate of $84.4 million face value of its Senior
Convertible Notes. As a result, as of January 31, 2018, the remaining face value amount outstanding of Senior Convertible
Notes is $65.6 million. We expect to use cash flow from operations and borrowings under other credit facilities to repay our
Senior Convertible Notes, whether through continued repurchases prior to maturity or at the maturity date. However, our ability
to make such payments depends on our future financial performance and the available borrowing capacity under our various
other credit facilities.
The agricultural and construction equipment industries are highly seasonal, which can cause significant fluctuations in our
results of operations and cash flow.
The agricultural and construction equipment businesses are highly seasonal, which causes our quarterly results to
fluctuate during the year. Farmers generally purchase agricultural equipment and service work in preparation for, or in
conjunction with, the spring planting and fall harvesting seasons. Construction equipment customers’ purchases of equipment
and service work, as well as rental of equipment, are also seasonal in our stores located in colder climates where construction
work slows significantly in the winter months. In addition, the fourth quarter typically is a significant period for equipment
sales in the U.S. because of our customers’ year-end tax planning considerations, the timing of dealer incentives and the
increase in availability of farmers’ funds from completed harvests and construction customers' funds from completed projects.
16
Also, numerous external factors such as credit markets, commodity prices, weather conditions, and other circumstances may
disrupt normal purchasing practices and customers’ sentiment, further contributing to the seasonal fluctuations.
Weather conditions may negatively impact the agricultural and construction equipment markets and affect our financial
results.
Weather conditions, particularly severe floods and droughts, can have a significant adverse effect on regional
agricultural and construction markets. Accordingly, our financial condition and results of operations may be adversely affected
by adverse weather conditions.
Our rental operations subject us to risks including increased maintenance costs if our rental fleet ages, increased costs of
new replacement equipment we use in our fleet, and losses upon disposition of rental fleet units.
Our rental fleet margins are materially impacted by utilization of fleet assets, which is seasonal and can fluctuate
materially due to weather and economic factors. If our rental equipment ages, the costs of maintaining that equipment, if not
replaced within a certain period of time, will likely increase. The cost of new equipment for use in our rental fleet could also
increase due to increased material costs for our suppliers or other factors beyond our control. Furthermore, changes in customer
demand could cause certain of our existing equipment to become obsolete and require us to purchase new equipment at
increased costs.
We include in operating income the difference between the sales price and the depreciated value of an item of rental
equipment sold. The market value of any given piece of rental equipment could be less than its depreciated value at the time it
is sold. The market value of used rental equipment depends on several factors, including:
• market prices for like equipment;
•
•
•
•
hours and condition of the equipment;
time of year that the equipment is sold;
the supply of used equipment on the market; and
general economic conditions.
Any significant decline in the selling prices for used rental equipment, or increased costs resulting from our rental
operations, could have a material adverse effect on our results of operation and cash flow.
Our industry is highly competitive.
The agricultural and construction equipment distribution (including parts and service) and rental industries are highly
competitive and fragmented, with large numbers of companies operating on a regional or local basis. Historically, our
competitors have competed aggressively on the basis of pricing or inventory availability, resulting in decreased margins on our
sales to the extent we choose to match our competitors' pricing. To the extent we choose not to match or remain within a
reasonable competitive distance from our competitors' pricing, we may lose sales volume and market share. In addition, to the
extent CNH Industrial's competitors (such as Deere, Caterpillar, Komatsu, Volvo, and AGCO) provide their dealers with more
innovative or higher quality products, better customer financing, or have more effective marketing programs, our ability to
compete and our results of operations could be adversely affected. In addition, E-commerce companies selling parts have
negatively impacted dealers' parts sales and margins, and it is not expected that this competitive pressure will lessen in the
future.
If our acquisition plans are unsuccessful, we may not achieve our planned long-term revenue growth.
Our ability to grow through the acquisition of additional CNH Industrial geographic areas of responsibility and store
locations or other businesses will be dependent upon the availability of suitable acquisition candidates at acceptable values, our
ability to compete effectively for available acquisition candidates and the availability of capital to complete the acquisitions.
We may not successfully identify suitable targets, or if we do, we may not be able to close the transactions, or if we close the
transactions, they may not be profitable. In addition, CNH Industrial's consent is required for the acquisition of any CNH
Industrial dealership, and the consent of our lenders may be required for certain acquisitions. CNH Industrial typically
evaluates management and performance and capitalization of a prospective acquirer in determining whether to consent to the
sale of a CNH Industrial dealership. There can be no assurance that CNH Industrial or our lenders will consent to any or all
acquisitions of dealerships that we may propose to acquire.
17
Our acquisitions may not be successful.
There are risks associated with acquisitions of new dealerships. These risks include incurring significantly higher than
anticipated capital expenditures and operating expenses; failing to assimilate the operations and personnel of the acquired
dealerships; disrupting our ongoing business; diluting the effectiveness of our management; failing to maintain uniform
standards, controls and policies; and impairing relationships with employees and customers as a result of changes in
management. To the extent we do not successfully avoid or overcome the risks or problems related to acquisitions, our results
of operations and financial condition could be adversely affected. Future acquisitions also may have a significant impact on our
financial position and capital needs, and could cause substantial fluctuations in our quarterly and yearly results of operations.
Acquisitions could include significant goodwill and intangible assets, which may result in future impairment charges that
would reduce our stated earnings.
We are exposed to customer credit risks.
We extend credit to our customers for parts and service work, rental charges, and also for some equipment sales in our
domestic and international operations. If we are unable to manage credit risk issues adequately, or if a large number of
customers should have financial difficulties at the same time, our credit losses could increase above historical levels and our
operating results would be adversely affected. Delinquencies and credit losses generally would be expected to increase if there
was a worsening of economic conditions.
Our business success depends on attracting and retaining qualified personnel.
Our success in executing our operating and strategic plans depends on the efforts and abilities of our management
team and key employees, including the managers of our field operations and our country managers in our International
operations. The failure to attract and retain members of our management team and key employees will harm us.
Selling and renting agricultural and construction equipment, selling parts, and providing repair services subject us to
liability risks that could adversely affect our financial condition and reputation.
Products sold, rented or serviced by us may expose us to potential liabilities for personal injury or property damage
claims that arise from the use of such products. Our commercial liability insurance may not be adequate to cover significant
product liability claims, or we may not be able to secure such insurance on economically reasonable terms. An uninsured or
partially insured claim for which indemnification is not provided could have a material adverse effect on our financial
condition. Furthermore, if any significant claims are made against us or against CNH Industrial or any of our other suppliers,
our business may be adversely affected by any related negative publicity.
Any disruption to or failure of our information systems may negatively affect our ability to monitor and control our
operations.
Our business processes, including marketing of equipment and support services, inventory and logistics, and finance
largely depend upon the integrity of our information systems. Any disruptions to our information systems or the failure of such
systems to operate as expected may adversely affect our operating results by limiting our ability to effectively monitor and
control our operations.
Security breaches, cyberattacks or other disruptions could compromise our information and expose us to liability, which
would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our
proprietary business information and that of our customers, suppliers and business partners, and personally identifiable
information of our customers and employees, in our data centers and on our networks. The secure processing, maintenance and
transmission of this information is critical to our operations and business strategy. Despite our security measures, our
information technology and infrastructure may be vulnerable to cyberattacks by hackers or breached due to employee error,
malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be
accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims
or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our
operations and the services we provide to customers, and damage our reputation, and cause a loss of confidence in our products
and services, which could adversely affect our business/operating margins, revenues and competitive position.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
18
ITEM 2. PROPERTIES
Equipment Stores
As of March 2018, we operate 97 agricultural and construction equipment stores in the United States and Europe in
the following locations.
Agriculture
Segment
Construction
Segment
International
Segment
Total
US States
North Dakota
Minnesota
Iowa
Nebraska
South Dakota
Colorado
Montana
Arizona
New Mexico
Wisconsin
Wyoming
European Countries
Bulgaria
Romania
Ukraine
Serbia
Total
Store Lease Arrangements
9
10
10
11
8
—
—
—
—
—
—
—
—
—
—
48
5
3
3
2
2
3
3
2
1
1
1
—
—
—
—
26
—
—
—
—
—
—
—
—
—
—
—
7
9
6
1
23
14
13
13
13
10
3
3
2
1
1
1
7
9
6
1
97
As of January 31, 2018, we leased 120 facilities with lease arrangements expiring at various dates through January
2031. Many of our lease agreements include fair market value purchase options, rights of first refusal, lease term extension
options, or month-to-month or year-to-year automatic renewal provisions at the conclusion of the original lease period. A
majority of the leases provide for fixed monthly rental payments and require us to pay the real estate taxes on the properties for
the lease periods. We are generally responsible for utilities and maintenance of the leased premises. All of the leases require
that we maintain public liability and personal property insurance on each of the leased premises, and a majority of the leases
require us to indemnify the lessor in connection with any claims arising from the leased premises during our occupation of the
property. We believe our current facilities are adequate to meet our current and anticipated needs.
As part of our due diligence review prior to a dealership acquisition, we evaluate the adequacy, suitability and
condition of the related real estate. Our evaluation typically includes a Phase I environmental study, and if deemed necessary, a
Phase II environmental study, of the real property to determine whether there are any environmental concerns. If any
environmental concerns exist, we generally require that such concerns be addressed prior to acquisition of the dealership.
We have not historically owned significant amounts of real estate, although we evaluate opportunities to invest in our
real estate on a case by case basis.
Headquarters
We currently lease and occupy approximately 48,000 square feet in West Fargo, North Dakota for our headquarters,
which lease expires on January 31, 2028. We continually review our location needs, including the adequacy of our headquarters
space, to ensure our space is sufficient to support our operations. We believe there is ample opportunity for expansion in our
West Fargo headquarters facility if necessary.
19
ITEM 3. LEGAL PROCEEDINGS
We are, from time to time, subject to claims and suits arising in the ordinary course of business. Such claims have, in
the past, generally been covered by insurance. Management believes the resolution of other legal matters will not have a
material effect on our financial condition, results of operation or cash flow, although the ultimate outcome of any such actions
is not assured. Furthermore, our insurance may not be adequate to cover all liabilities that may arise out of claims brought
against us.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of our executive officers are as follows:
Name
David Meyer
Mark Kalvoda
Bryan Knutson
Age
64
46
39
Board Chair and Chief Executive Officer
Position
Chief Financial Officer
Chief Operating Officer
David Meyer is our Board Chair and Chief Executive Officer. Mr. Meyer worked for JI Case Company in 1975. From
1976 to 1980, Mr. Meyer was a partner in a Case/New Holland Dealership with locations in Lisbon, North Dakota and
Wahpeton, North Dakota. In 1980, Mr. Meyer, along with a partner, founded Titan Machinery Inc. Mr. Meyer has served on
both the Case CE and CaseIH Agriculture Dealer Advisory Boards. Mr. Meyer is the past chairman and current board member
of the North Dakota Implement Dealers Association, and currently serves as a Trustee on the University of Minnesota
Foundation.
Mark Kalvoda became our Chief Financial Officer in April 2011 and previously served as our Chief Accounting
Officer since September 2007. Prior to joining us, he held various positions between 2004 and 2007 at American Crystal Sugar
Co., including Corporate Controller, Assistant Secretary and Assistant Treasurer. Prior to working for American Crystal Sugar
Co., he served in various financial positions within Hormel Foods Corporation.
Bryan Knutson became our Chief Operating Officer in August 2017 and previously served as our Vice President, Ag
Operations since 2016. Mr. Knutson joined the company in 2002 where he began his career in equipment sales later advancing
to store manager, complex manager and region manager prior to his current role.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The following table sets forth, for the periods indicated, the high and low sale prices of our common stock as reported
by the Nasdaq Global Select Market.
Fiscal 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$
16.38
$
18.63
17.93
23.75
$
13.00
$
12.74
11.46
15.70
13.24
14.52
11.95
13.94
8.16
10.54
9.29
8.69
As of April 3, 2018, there were approximately 906 record holders of our common stock, which excludes holders
whose stock is held either in nominee name or street name brokerage accounts.
DIVIDENDS
We have not historically paid any dividends on our common stock and do not expect to pay cash dividends on our
common stock in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial condition, operating results, current and anticipated
cash needs, outstanding indebtedness and plans for expansion and restrictions imposed by lenders, if any. Our Well Fargo
Credit Agreement includes provisions which may restrict the Company from making certain cash payments, including for cash
dividends and stock repurchases. The provisions under the Wells Fargo Credit Agreement allow the Company to make dividend
payments provided that as of the date of such payment there is no default or event of default occurring and continuing, 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 the Company's fixed charge coverage ratio
for the 12 month period 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 the provisions of the Wells Fargo Credit Agreement, the Company had an
unrestricted dividend availability of approximately $25.7 million.
UNREGISTERED SALES OF EQUITY SECURITIES
We did not have any unregistered sales of equity securities during the fiscal quarter ended January 31, 2018.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
For information on securities authorized for issuance under our equity compensation plans, refer to Item 12, "Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."
REPURCHASES
We did not engage in any repurchases of our common stock during the fiscal quarter ended January 31, 2018.
21
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return for the last trading day of our last five fiscal years on a $100
investment (assuming dividend reinvestment) on January 31, 2013, the last trading day before our fifth preceding fiscal year, in
each of our common stock, the Russell 2000 Stock Index and the S&P Retailing Group Index.
Titan Machinery Inc.
Russell 2000 Index
S&P 500 Retail Index
ITEM 6. SELECTED FINANCIAL DATA
January 31,
2013
2014
2015
2016
2017
2018
$ 100.00
$
56.38
$
48.88
$
29.37
$
47.77
$
74.33
100.00
100.00
125.36
124.28
129.19
147.58
114.78
170.54
150.96
199.24
174.59
286.58
The data given below, excluding the store count data, as of and for each of the five years in the period ended
January 31, 2018, has been derived from our audited consolidated financial statements. In order to understand the effect of
accounting policies and material uncertainties that could affect our presentation of financial information, this data should be
read in conjunction with our Consolidated Financial Statements and Notes thereto included under Item 8 to this Form 10-K and
in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operation included under
Item 7 of this Form 10-K.
The change in store count, resulting from acquisitions, new store openings, or store closings, has an impact on the
comparability of our statement of operations and balance sheet information. The table below summarizes the net change in our
store count and ending store count for each fiscal year presented.
Store Count Data
Net change in store count during fiscal year
Store count at end of fiscal year
2018
2017
2016
2015
2014
Year Ended January 31,
1
109
(4)
108
(7)
112
2
119
(12)
97
22
Statement of Operations Data:
Revenue
Equipment
Parts
Service
Rental and other
Total Revenue
Cost of Revenue
Equipment
Parts
Service
Rental and other
Total Cost of Revenue
Gross Profit
Operating Expenses
Impairment and Restructuring Costs
Income (Loss) from Operations
Other Income (Expense)
Interest income and other income (expense)
Interest expense
Income (Loss) Before Income Taxes
Provision for (Benefit from) Income Taxes
Net Income (Loss) Including Noncontrolling Interest
Less: Income (Loss) Attributable to Noncontrolling
Interest
Net Income (Loss) Attributable to Titan Machinery
Inc.
Net (Income) Loss Allocated to Participating
Securities
Net Income (Loss) Attributable to Titan Machinery
Inc. Common Stockholders
Earnings (Loss) per Share
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
$
$
$
Year Ended January 31,
2018
2017
2016
2015
2014
(in thousands, except per share data)
$
804,361
$
797,315
$
925,471
$ 1,398,195
$ 1,722,738
222,404
117,318
58,855
233,819
124,076
57,870
245,387
127,457
69,520
270,262
147,356
84,433
275,750
149,082
78,876
1,202,938
1,213,080
1,367,835
1,900,246
2,226,446
743,465
156,455
44,141
43,577
987,638
215,300
203,203
11,172
925
1,635
(16,999)
(14,439)
(7,390)
(7,049)
746,169
164,020
46,284
42,878
999,351
213,729
211,372
4,729
(2,372)
1,524
(21,865)
(22,713)
(8,178)
(14,535)
889,567
173,083
46,814
52,457
1,286,148
1,576,246
189,540
53,924
62,250
192,199
54,608
55,319
1,161,921
1,591,862
1,878,372
205,914
220,524
8,500
(23,110)
(478)
(32,623)
(56,211)
(17,982)
(38,229)
308,384
273,271
34,390
723
(4,272)
(34,791)
(38,340)
(4,923)
(33,417)
348,074
291,202
9,997
46,875
2,109
(30,555)
18,429
10,325
8,104
—
(356)
(337)
(1,260)
(747)
(7,049)
(14,179)
(37,892)
(32,157)
8,851
141
243
717
559
(129)
(6,908) $
(13,936) $
(37,175) $
(31,598) $
8,722
(0.32) $
(0.32) $
(0.65) $
(0.65) $
(1.76) $
(1.76) $
(1.51) $
(1.51) $
0.42
0.41
21,543
21,543
21,294
21,294
21,111
21,111
20,989
20,989
20,894
21,040
23
$
$
$
Balance Sheet Data:
Cash
Receivables, net
Inventories
Prepaid expenses and other
Income taxes receivable
Assets held for sale
Total current assets
Goodwill and intangibles, net
Property and Equipment, net of accumulated
depreciation
Deferred income taxes
Other assets
Total Assets
Accounts payable
Floorplan payable (1)
Current maturities of long-term debt
Customer deposits
Accrued expenses and other
Liabilities held for sale
Income taxes payable
Total current liabilities
Senior convertible notes
Long-term debt, less current maturities
Deferred income taxes
Other long-term liabilities
Total stockholders' equity
2018
2017
2016
2015
2014
January 31,
53,396
60,672
472,467
12,440
171
—
599,146
5,193
$
53,151
60,082
478,266
10,989
5,380
—
607,868
5,001
(in thousands)
$
89,465
65,534
680,482
9,753
13,011
—
$
127,528
$
74,242
84,921
870,901
10,634
166
15,312
105,710
1,068,162
24,740
851
—
858,245
1,109,462
1,273,705
5,134
5,458
36,501
151,047
156,647
183,179
208,680
228,000
547
1,359
—
1,317
—
2,014
—
6,967
771,422
$ 1,047,875
$ 1,325,614
$ 1,545,173
17,326
$
16,863
$
17,659
$
23,714
233,228
444,780
625,162
748,326
1,557
31,159
29,066
—
—
523,425
134,145
38,409
11,135
2,412
7,749
35,090
35,496
2,835
3,529
727,520
129,889
66,563
19,971
3,312
2,192
61,286
36,968
—
344
872,830
125,895
94,940
33,651
6,515
$
$
3,472
1,450
760,308
15,136
247,392
1,574
32,324
31,863
—
—
1,373
26,366
30,533
—
—
328,289
308,826
62,819
34,578
2,275
10,492
88,501
38,236
9,500
5,180
321,855
321,179
338,349
378,359
411,342
Total Liabilities and Stockholders' Equity
$
760,308
$
771,422
$ 1,047,875
$ 1,325,614
$ 1,545,173
(1) Portion of floorplan payable balance which
is interest-bearing as of January 31
47%
72%
75%
75%
56%
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together
with our financial statements and the related notes appearing under Item 8 of this 10-K. Some of the information contained in
this discussion and analysis or set forth elsewhere in this annual report, including information with respect to our plans and
strategy for our business and expected financial results, includes forward-looking statements that involve risks and
uncertainties. You should review the "Information Regarding Forward-Looking Statement" in this Item 7 and "Risk Factors"
presented under Item 1A for a discussion of important factors that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements contained in the following discussion and analysis in this
annual report.
BUSINESS DESCRIPTION
We own and operate a network of full service agricultural and construction equipment stores in the United States and
Europe. Based upon information provided to us by CNH Industrial N.V. or its U.S. subsidiary CNH Industrial America, LLC,
collectively referred to in this annual report as CNH Industrial, we are the largest retail dealer of Case IH Agriculture
equipment in the world, the largest retail dealer of Case Construction equipment in North America and a major retail dealer of
New Holland Agriculture and New Holland Construction equipment in the U.S. We operate our business through three
reportable segments, Agriculture, Construction and International. Within each segment, we have four principal sources of
revenue: new and used equipment sales, parts sales, service, and equipment rental and other activities.
The agricultural equipment we sell and service includes machinery and attachments for uses ranging from large-scale
farming to home and garden use. The construction equipment we sell and service includes heavy construction machinery, light
industrial machinery for commercial and residential construction, road and highway construction machinery and mining
operations equipment. We offer our customers a one-stop solution for their equipment needs through:
•
•
•
•
new and used equipment sales;
parts sales;
equipment repair and maintenance services; and
equipment rental and other activities.
The new equipment and parts we sell are supplied primarily by CNH Industrial. According to public reports filed by
CNH Industrial, CNH Industrial is a leading manufacturer and supplier of agricultural and construction equipment based on the
number of units sold, primarily through the Case IH Agriculture, New Holland Agriculture, Case Construction and New
Holland Construction brands. Sales of new CNH Industrial products accounted for approximately 72% of our new equipment
revenue in fiscal 2018, with our single largest manufacturer other than CNH Industrial representing approximately 2% of our
total new equipment sales. We acquire used equipment for resale primarily through trade-ins from our customers and in some
cases through selective purchases. We sell parts and provide in-store and on-site repair and maintenance services. We rent
equipment and provide other ancillary services such as equipment transportation, GPS signal subscriptions and finance and
insurance products.
Throughout our 38-year operating history we have built an extensive, geographically contiguous network of 74 stores
located in the United States and 23 stores in Europe. We have a history of growth through acquisitions, including over 50
acquisitions in 11 states and three European countries since January 1, 2003. We believe that there will continue to be
opportunities for dealership consolidation in the future, and we expect that acquisitions will continue to be a component of our
long-term growth strategy.
Certain External Factors Affecting our Business
We are subject to a number of factors that affect our business including those factors discussed in the sections in this
annual report entitled "Risk Factors" and "Information Regarding Forward-Looking Statements." Certain of these external
factors include, but are not limited to, the following:
Macroeconomic and Industry Factors
Our Agriculture and International businesses are primarily driven by the demand for agricultural equipment for use in
the production of food, fiber, feed grain and renewable energy; home and garden applications; and the maintenance of
commercial, residential and government properties. Agriculture industry factors such as changes in agricultural commodity
prices and net farm income, have an effect on customer sentiment and our customers' ability to secure financing for their
25
equipment purchases. Macroeconomic and industry factors that affect commodity prices and net farm income include changing
worldwide demand for agriculture commodities, crop yields and supply disruptions caused by weather patterns and crop
diseases, crop stock levels, production costs, and changing U.S. dollar foreign currency exchange rates. Based on U.S.
Department of Agriculture ("USDA") publications, the most recent estimate of net farm income for calendar year 2017
remained relatively flat as compared to calendar year 2016, but is approximately 25% below the average for the five-year
period ending December 31, 2017. Based on its February 2018 report, the USDA projected net farm income for calendar year
2018 to decrease 6.7% as compared to calendar year 2017. The commodity prices of corn and soybeans, which are the
predominant crops in our Agriculture store footprint, decreased significantly during fiscal 2015 and have remained relatively
stable at the lower prices through fiscal 2018. These challenging conditions have reduced demand for equipment purchases,
service work and parts, resulting in decreased same-store sales, equipment revenue and equipment gross profit margin, and
have caused an oversupply of equipment inventory in our geographic footprint.
Our Construction business is primarily impacted by the demand for construction equipment for use in private and
government commercial, residential and infrastructure construction; demolition; maintenance; energy and forestry operations.
Sales of construction equipment historically have fluctuated with general economic cycles. During general economic
downturns, construction equipment retailers tend to experience similar periods of decline and recession. The U.S. Census
Bureau publishes periodic reports of new residential construction by region in the U.S., which we use to analyze general
economic trends in the regions in which we operate and anticipate our customers’ purchasing and rental trends. Decreases in
new residential construction generally cause decreases in our equipment revenue. Certain of our Construction stores,
particularly those in the northern and western parts of our footprint, are impacted by the strength of the oil industry. Oil prices
have not fully rebounded from the significant decrease that occurred during fiscal 2015 and 2016, however oil prices have
increased in fiscal 2018 from fiscal 2017. The lower prices have caused a decrease in oil production and infrastructure activity
in these areas. In addition, the aforementioned agriculture industry conditions have also led to a reduction of purchases of
Construction equipment by customers in the agriculture industry, negatively affecting certain of our Construction stores. These
factors have reduced demand for equipment purchases, equipment rentals, and service work and parts and have caused an
oversupply of equipment inventory and rental fleet in these areas.
During economic downturns, and especially in the agriculture industry, equipment revenue generally decreases but
parts and service revenue tend to be more stable as the amount of land in production remains unchanged and because farmers
may use existing equipment rather than purchasing new equipment. Our gross profit margins on equipment are lower than gross
profits on parts and service. As a result, this change in mix may cause our gross profit margin to increase on a percentage basis
even though our overall gross profit dollars may decrease. Our operating expenses are largely fixed expenses, other than
commissions paid to our equipment sales consultants which generally fluctuate with gross profit. When equipment revenue
decreases, it may have a negative impact on our ability to leverage these fixed costs, and, as a result, may reduce our operating
income.
Seasonality & Weather
The agricultural and construction equipment businesses are highly seasonal, which causes our quarterly results and our
available cash flow to fluctuate during the year. Our customers generally purchase and rent equipment in preparation for, or in
conjunction with, their busy seasons, which for farmers are the spring planting and fall harvesting seasons, and for Construction
customers is dependent on weather seasons in their respective regions, which is typically the second and third quarters of our
fiscal year for much of our Construction footprint. Our parts and service revenues are typically highest during our customers'
busy seasons as well, due to the increased use of their equipment during this time, which generates the need for more parts and
service work. However, weather conditions impact the timing of our customers' busy times, which may cause our quarterly
financial results to fluctuate between fiscal years. In addition, the fourth quarter typically is a significant period for equipment
sales in the U.S. because of our customers’ year-end tax planning considerations, the timing of dealer incentives and the
increase in availability of funds from completed harvests and construction projects.
Seasonal weather trends, particularly severe wet or dry conditions, can have a significant impact on regional
agricultural and construction market performance by affecting crop production and the ability to undertake construction
projects. Weather conditions that adversely affect the agricultural or construction markets decrease the demand for our products
and services.
In addition, numerous external factors such as credit markets, commodity prices, and other circumstances may disrupt
normal purchasing practices and buyer sentiment, further contributing to the seasonal fluctuations.
Dependence on our Primary Supplier
The majority of our business involves the distribution and servicing of equipment manufactured by CNH Industrial. In
fiscal 2018, CNH Industrial supplied approximately 77% of the new equipment sold in our Agriculture segment, 65% of the
26
new equipment sold in our Construction segment, and 69% of the new equipment sold in our International segment, and
represented a significant portion of our parts revenue. Thus, we believe the following factors have a significant impact on our
operating results:
•
•
•
•
•
CNH Industrial’s product offerings, reputation and market share;
CNH Industrial’s product prices and incentive and discount programs;
CNH Industrial's supply of inventory;
CNH Industrial's offering of floorplan payable financing for the purchase of a substantial portion of our inventory; and
CNH Industrial's offering of financing and leasing used by our customers to purchase CNH Industrial equipment from
us.
Credit Market Changes
Changes in credit markets can affect our customers' ability and willingness to make capital expenditures, including
purchasing our equipment. Tight credit markets, a low level of liquidity in many financial markets, and extreme volatility in
fixed income, credit, currency and equity markets have the potential to adversely affect our business. Such disruptions in the
overall economy and financial markets and the related reduction in consumer confidence in the economy, slow activity in the
capital markets, negatively affect access to credit on commercially acceptable terms, and may adversely impact our customers'
access to credit and the terms of any such credit. However, if retail interest rates remain low, our business may be positively
affected by customers who find financing purchases of our equipment more attractive due to lower borrowing costs.
Our business is also particularly dependent on our access to credit markets to manage inventory and finance
acquisitions. We cannot predict what future changes will occur in credit markets or how these changes will impact our business.
Inflation
Inflation has not had a material impact on our operating results and we do not expect it to have a material impact in the
future. To date, in those instances in which we have experienced cost increases, we have been able to increase selling prices to
offset such increases.
Significant Items Impacting Our Financial Position and Results of Operations
Restructuring Plans
We monitor our footprint, overall employee workforce and organizational structure to identify ways to improve our
efficiency, effectiveness and enhance the competitiveness of our business. Depending on market conditions, we may implement
restructuring plans that include the closing of stores or the reduction of our employee workforce. These restructuring plans
include costs associated with employee termination benefits, lease termination costs and asset impairment and disposals.
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 included the closing of one
Construction location and 14 Agriculture locations. As of January 31, 2018, the Company has closed and fully exited all of
these locations. In fiscal 2016, the Company carried out a restructuring plan which begin in fiscal 2015 that reduced our
headcount and resulted in the closing of four Agriculture stores and eight Construction stores. We incurred costs of $10.5
million, $3.3 million and $2.0 million during the fiscal years ended January 31, 2018, 2017 and 2016, related to these activities.
See also the Non-GAAP Financial Measures section below for the impact of these costs on adjusted Diluted EPS.
Inventory Impairment Charges
In the fourth quarter of fiscal 2016 we expanded our marketing of certain aged equipment inventory through
alternative channels rather than our normal retail channels. We recorded an inventory impairment charge of $27.5 million to
equipment cost of revenue in the fourth quarter of fiscal 2016 related to the expanded equipment inventory reduction plan, of
which $11.4 million related to our Agriculture segment, $15.9 million related to our Construction segment and $0.2 million
related to our International segment. During the course of fiscal 2017, the Company substantially completed this expanded
inventory reduction plan.
Use of Estimates and Critical Accounting Policies
In the preparation of financial statements prepared in conformity with U.S. generally accepted accounting principles
("GAAP"), we are required to make estimates, assumptions and judgments that affect reported amounts. These estimates,
27
assumptions and judgments include those related to inventory valuation, initial valuation and impairment analyses of intangible
and long-lived assets, collectability of receivables and income taxes. We update these estimates, assumptions and judgments as
appropriate, which in most cases is at least quarterly. We use our technical accounting knowledge, cumulative business
experience, judgment and other factors in the selection and application of our accounting policies. While we believe the
estimates, assumptions and judgments we use in preparing our financial statements are appropriate, they are subject to factors
and uncertainties regarding their outcome and therefore, actual results may materially differ from these estimates. We believe
the following describe the significant estimates, assumptions and judgments related to our primary critical accounting policies.
See Note 1 in the notes to our consolidated financial statements in this Form 10-K for a comprehensive list of our significant
accounting policies, recent accounting guidance and additional information regarding such policies.
Revenue Recognition
Equipment revenue generally is recognized upon receipt of a signed 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 rent-to-own 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. Equipment
revenue is recognized upon the exercise of the purchase option. Parts revenue is recognized upon delivery of product to
customers. Service revenue is recognized at the time the related services are provided. Rental revenue is recognized over the
period of the respective rental agreement.
Inventories
New and used equipment inventories are stated at the lower of cost (specific identification) or net realizable value. Net
realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of
completion, disposal, and transportation. The majority of our used equipment inventory is acquired through trade-ins from our
customers. The acquisition value assigned to each piece of used equipment inventory acquired through trade-in is determined
based on the estimated selling price for that piece of equipment in the applicable market and estimated reconditioning costs.
Various industry resources are used to assist in the valuation, and we consider all factors, such as model year, hours, overall
condition and estimated reconditioning costs, other equipment specifications, and the market in which we expect to sell the
equipment, when determining the final equipment valuation. Subsequent to the initial recognition, all new and used equipment
inventories are subject to periodic lower of cost or net realizable evaluation that considers various factors including aging of
equipment and market conditions. Generally, used equipment prices are more volatile to changes in market conditions than
prices for new equipment due to incentive programs that may be offered by manufacturers to assist in the sale of new
equipment. We review our equipment inventory values on a monthly basis and adjust them whenever the carrying amount
exceeds the estimated net realizable value. Parts inventories are valued at the lower of average cost or net realizable value. We
estimate net realizable value of our parts inventories based on various factors including aging and sales history of each type of
parts inventory. Work in process represents costs incurred in the reconditioning and preparation for sale of our equipment
inventories.
Impairment of Long-Lived Assets
Our long-lived assets consist of our intangible assets and property and equipment. We review these assets for potential
impairment whenever events or circumstances indicate that the carrying value may not be recoverable. Recoverability is
measured by comparing the estimated future undiscounted cash flows of such assets to their carrying values. If the estimated
undiscounted cash flows exceed the carrying value, the carrying value is considered recoverable and no impairment recognition
is required. However, if the sum of the undiscounted cash flows is less than the carrying value of the asset, the second step of
the impairment analysis must be performed to measure the amount of the impairment, if any. The second step of the impairment
analysis compares the estimated fair value of the long-lived asset to its carrying value and any amount by which the carrying
value exceeds the fair value is recognized as an impairment charge.
When reviewing long-lived assets for impairment, we group long-lived assets with other assets and liabilities at the
lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Long-
lived assets deployed and used by individual store locations are reviewed for impairment at the individual store level. Other
long-lived assets shared across stores within a segment or shared across segments are reviewed for impairment on a segment or
consolidated level as appropriate.
During our 2018 fiscal year we determined that events or circumstances were present that may indicate that the
carrying amount of certain of our store long-lived assets might not be recoverable. The events or circumstances which
indicated that certain of our store long-lived assets might not be recoverable included a current period operating loss combined
with historical losses and anticipated future operating losses within certain of our stores, or an expectation that a long-lived
28
asset (or asset group) will be disposed of before the end of its previously estimated useful life. In light of these circumstances,
we performed step one of the impairment analysis for these assets, which have a combined carrying value of $13.3 million, to
determine if the asset values are recoverable. In certain cases the analysis indicated that the carrying value is not recoverable.
The aggregate carrying value of such assets totaled $2.5 million. Based on this conclusion, we performed step two of the
impairment analysis and estimated the fair value of these assets using primarily the estimated selling prices of similar assets.
Step two of the analysis indicated that an impairment charge in the amount of $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 $10.8 million, our analyses indicated that the carrying values are recoverable
based on our estimates of future undiscounted cash flows under step one of the impairment analysis.
Our analyses incorporated certain key assumptions, including estimated revenue, gross margin and operating expense
levels and an assumption about the remaining useful lives of the long-lived assets being evaluated. Our key assumptions were
developed for each store tested for impairment and were based on our assumptions about overall industry growth or decline
within which each store operates as well as consideration of historical operating performance and our expectation of changes
from such levels. Our analyses also incorporated estimates of the fair value of certain of our long-lived assets. Such estimates
incorporated significant unobservable inputs, including adjustments to market sales information to incorporate differences in
geographical location and age and condition of subject assets, as well as estimates of anticipated net cash flows to be generated
from the use of the subject assets and the discount rate applied to such cash flows.
Our estimates inherently include a degree of uncertainty, but we believe that these estimates and assumptions used in
deriving the estimated future cash flows of these store locations and the estimated fair values of certain long-lived assets are
reasonable and based on the best information currently available. However, adverse changes in macroeconomic or industry
conditions, the competitive environment, or adverse changes in our expectations about the future operating performance of a
store could result in impairment charges in future periods which could materially impact our results of operations and financial
position.
We performed similar impairment analyses during our 2017 and 2016 fiscal years. In fiscal 2017, we recognized
impairment charges of $4.4 million, 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. In fiscal 2016, we recognized impairment charges
of $6.9 million, 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.
Income Taxes
In determining our provision for (benefit from) income taxes, we must make certain judgments and estimates,
including an assessment of the realizability of our deferred tax assets. In evaluating our ability to realize the benefit of our
deferred tax assets we consider all available positive and negative evidence, including our historical operating results and our
expectation of future taxable income, the availability to implement prudent tax-planning strategies, and the carryback, if any,
and carryforward periods over which the assets may be realized. These assumptions require significant judgment and
estimation.
In reviewing our deferred tax assets as of January 31, 2018 and 2017, we concluded that a partial valuation allowance
for U.S. federal and state deferred tax assets of $5.4 million and $3.9 million was warranted. This conclusion was principally
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.
We review our foreign deferred tax assets, including net operating losses, on a jurisdiction-by-jurisdiction basis. 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. This conclusion was principally based on the
presence of historical losses and the anticipated time period over which we may generate taxable income in excess of these
historical losses.
In the fourth quarter of fiscal 2018, the Company concluded, based upon all available evidence, it was more likely
than not 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 initial recognition of, and any changes in, a deferred tax asset valuation allowance are recorded to the provision
for income taxes and impacts our effective tax rate.
29
Our assessment of the need for and magnitude of valuation allowances for our deferred tax assets may be impacted by
changes in tax laws, our assumptions regarding the ability to generate future taxable income and the availability of tax-planning
strategies. Changes in any of these factors could lead to a change in the recognized valuation allowance which may impact our
future results of operations and financial position.
Key Financial Metrics
In addition to tracking our sales and expenses to evaluate our operational performance, we also monitor the following
key financial metrics. The results of some of these metrics are discussed further throughout the Management's Discussion and
Analysis of Financial Condition and Results of Operations section of this Form 10-K.
Inventory Turnover
Inventory turnover measures the rate at which inventory is sold during the year. We calculate it by dividing cost of
sales on equipment and parts for the last twelve months by the average of the month-end balances of our equipment and parts
inventories for the same twelve-month period. We believe that inventory turnover is an important management metric in
evaluating the efficiency at which we are managing and selling our inventories.
Same-Store Results
Same-store results for any period represent results of operations by stores that were part of our company for the entire
comparable period in the preceding fiscal year. We do not distinguish relocated or newly-expanded stores in this same-store
analysis. Closed stores are excluded from the same-store analysis. We believe that tracking this metric is important to
evaluating the success of the Titan Operating Model on a comparable basis.
Absorption
Absorption is an industry term that refers to the percentage of an equipment dealer's fixed operating expense covered
by the combined gross margin from parts, service and rental fleet activity. We calculate absorption in a given period by dividing
our gross profit from sales of parts, service and rental fleet activity (described as "Gross Profit on Recurring Revenue" when
used in reference to absorption discussions) for the period by our operating expenses, less our variable expense of sales
commissions on equipment sales, plus interest expense on floorplan payables and rental fleet debt (described as "Fixed
Operating Expenses" when used in reference to absorption discussions). We believe that absorption is an important
management metric because during economic down cycles our customers tend to postpone new and used equipment purchases
while continuing to run, maintain and repair their existing equipment. Thus, operating at a high absorption rate enables us to
operate profitably throughout economic down cycles. We measure and track absorption on a company-wide basis as well as on
a per store basis.
Dollar Utilization
Dollar utilization is a measurement of asset performance and profitability used in the rental industry. We calculate the
dollar utilization of our rental fleet equipment by dividing the rental revenue earned on our rental fleet by the average gross
carrying value of our rental fleet (comprised of original equipment costs plus additional capitalized costs) for that period. While
our rental fleet has variable expenses related to repairs and maintenance, its primary expense for depreciation is fixed. Low
utilization of our rental fleet has a negative impact on gross profit margin and gross profit dollars due to the fixed depreciation
component. However, high utilization of our rental fleet has a positive impact on gross profit margin and gross profit dollars.
Adjusted EBITDA
EBITDA is a non-GAAP financial measure defined as earnings before finance costs, income taxes, depreciation and
amortization and is a metric frequently used to assess and evaluate financial performance. Management uses Adjusted EBITDA
as a measure of financial performance, as a supplemental measure to evaluate the Company's overall operating performance
and believes it provides a useful metric for comparability between periods and across entities within our industry by excluding
differences in capital structure, income taxes, non-cash charges and certain activities that occur outside of the ordinary course
of our business. We calculate Adjusted EBITDA as our net income (loss) including noncontrolling interest, adjusted for net
interest (excluding floorplan interest expense), income taxes, depreciation, amortization, and items included in our non-GAAP
reconciliation of earnings, for each of the respective periods. Adjusted EBITDA should be evaluated in addition to, and not
considered a substitute for, or superior to, any GAAP measure of net income (loss). In addition, other companies may calculate
Adjusted EBITDA in a different manner, which may hinder comparability with other companies.
30
Adjusted EBITDA (loss) for the years ended January 31, 2018, 2017 and 2016, was calculated as follows:
Net Loss Including Noncontrolling Interest
Adjustments
Interest Expense, Net of Interest Income
Benefit from Income Taxes
Depreciation and amortization
EBITDA (Loss)
Adjustments
Impairment of Long-Lived Assets
Gain on Repurchase of Senior Convertible Notes
Debt Issuance Cost Write-Off
Restructuring Costs
Ukraine Remeasurement (1)
Interest Rate Swap Termination & Reclassification
Gain on Insurance Recoveries
2018
2017
2016
(in thousands)
$
(7,049) $
(14,535) $
(38,229)
7,935
(7,390)
25,105
18,601
673
(22)
416
10,499
—
631
—
12,197
30,798
$
7,112
(8,178)
26,868
11,267
4,410
(3,130)
624
319
195
—
(1,997)
421
11,688
$
12,091
(17,982)
28,538
(15,582)
6,903
—
1,558
1,597
2,485
—
—
12,543
(3,039)
Total Adjustments
Adjusted EBITDA (Loss)
$
____________________________________________________________________
(1) Beginning in the second quarter of fiscal 2017 we discontinued incorporating Ukraine remeasurement losses into our adjusted income (loss) and earnings
(loss) per share calculations. The Ukrainian hryvnia remained relatively stable subsequent to April 30, 2016 and therefore did not significantly impact our
consolidated statement of operations during this period. Absent any future significant hryvnia volatility and resulting financial statement impact, we will not
include Ukraine remeasurement losses in our adjusted amounts in future periods.
Key Financial Statement Components
Revenue
•
•
•
•
Equipment: We derive equipment revenue from the sale of new and used agricultural and construction equipment.
Parts: We derive parts revenue from the sale of parts for brands of equipment that we sell, other makes of equipment,
and other types of equipment and related components. Our parts sales provide us with a relatively stable revenue
stream that is less sensitive to the economic cycles that affect our equipment sales.
Service: We derive services revenue from repair and maintenance services to our customers' equipment. Our repair
and maintenance services provide a high-margin, relatively stable source of revenue through changing economic
cycles.
Rental and other: We derive other revenue from equipment rentals and ancillary equipment support activities such as
equipment transportation, GPS signal subscriptions and reselling finance and insurance products.
Cost of Revenue
•
•
•
•
Equipment: Cost of equipment revenue is the lower of the acquired cost or the market value of the specific piece of
equipment sold.
Parts: Cost of parts revenue is the lower of the acquired cost or the market value of the parts sold, based on average
costing.
Service: Cost of service revenue represents costs attributable to services provided for the maintenance and repair of
customer-owned equipment and equipment then on-rent by customers.
Rental and other: Costs of other revenue represent costs associated with equipment rental, such as depreciation,
maintenance and repairs, as well as costs associated providing transportation, hauling, parts freight, GPS subscriptions
and damage waivers, including, among other items, drivers' wages, fuel costs, shipping costs and our costs related to
damage waiver policies.
31
Operating Expenses
Our operating expenses include sales and marketing expenses, sales commissions (which generally are based upon
equipment gross profit margins), payroll and related benefit costs, insurance expenses, professional fees, property rental and
related costs, property and other taxes, administrative overhead, and depreciation associated with property and equipment
(other than rental equipment).
Floorplan Interest
The cost of financing inventory is an important factor affecting our results of operations. Floorplan payable financing
from CNH Industrial Capital, Wells Fargo, DLL Finance and various credit facilities related to our foreign subsidiaries
represent the primary sources of financing for equipment inventories. CNH Industrial regularly offers interest-free periods as
well as additional incentives and special offers. As of January 31, 2018, 53.3% of our floorplan payable financing was non-
interest bearing.
Other Interest Expense
Interest expense represents the interest on our outstanding debt instruments, including our Senior Convertible Notes,
other than floorplan payable financing facilities. Non-cash interest expense from amortization of the debt discount associated
with our Senior Convertible Notes is also included in this balance.
32
Results of Operations
Comparative financial data for each of our four sources of revenue for fiscal 2018, 2017, and 2016 are expressed
below. The results of these periods include the operating results of the acquisitions made during these periods. The year-to-year
comparisons included below are not necessarily indicative of future results. Information regarding segment revenue and income
(loss) before income taxes is presented for each fiscal year following our discussion of the consolidated results of operations.
Additional information regarding our segments is included in Note 21 of our consolidated financial statements.
Equipment
Revenue
Cost of revenue
Gross profit
Gross profit margin
Parts
Revenue
Cost of revenue
Gross profit
Gross profit margin
Service
Revenue
Cost of revenue
Gross profit
Gross profit margin
Rental and other
Revenue
Cost of revenue
Gross profit
Gross profit margin
Year Ended January 31,
2018
2017
2016
(dollars in thousands)
$
$
$
$
$
$
$
$
804,361
743,465
60,896
7.6%
222,404
156,455
65,949
29.7%
117,318
44,141
73,177
62.4%
58,855
43,577
15,278
$
$
$
$
$
$
$
$
797,315
746,169
51,146
6.4%
233,819
164,020
69,799
29.9%
124,076
46,284
77,792
62.7%
57,870
42,878
14,992
$
$
$
$
$
$
$
$
925,471
889,567
35,904
3.9%
245,387
173,083
72,304
29.5%
127,457
46,814
80,643
63.3%
69,520
52,457
17,063
26.0%
25.9%
24.5%
33
The following table sets forth our statements of operations data expressed as a percentage of revenue for the fiscal
years indicated.
Revenue
Equipment
Parts
Service
Rental and other
Total Revenue
Total Cost of Revenue
Gross Profit Margin
Operating Expenses
Impairment and Restructuring Costs
Income (Loss) from Operations
Other Income (Expense)
Loss Before Income Taxes
Benefit from Income Taxes
Net Income (Loss) Including Noncontrolling Interest
Less: Loss Attributable to Noncontrolling Interest
Net Income (Loss) Attributable to Titan Machinery Inc.
Year Ended January 31,
2018
2017
2016
66.9 %
18.4 %
9.8 %
4.9 %
65.7 %
19.3 %
10.2 %
4.8 %
67.7 %
17.9 %
9.3 %
5.1 %
100.0 %
100.0 %
100.0 %
82.1 %
17.9 %
16.9 %
0.9 %
0.1 %
(1.3)%
(1.2)%
(0.6)%
(0.6)%
— %
(0.6)%
82.4 %
17.6 %
17.4 %
0.4 %
(0.2)%
(1.7)%
(1.9)%
(0.7)%
(1.2)%
— %
(1.2)%
84.9 %
15.1 %
16.2 %
0.6 %
(1.7)%
(2.4)%
(4.1)%
(1.3)%
(2.8)%
— %
(2.8)%
Fiscal Year Ended January 31, 2018 Compared to Fiscal Year Ended January 31, 2017
Consolidated Results
Revenue
Equipment
Parts
Service
Rental and other
Total Revenue
Year Ended January 31,
2018
2017
Increase/
Decrease
Percent
Change
(dollars in thousands)
$
804,361
$
797,315
$
222,404
117,318
58,855
233,819
124,076
57,870
$
1,202,938
$
1,213,080
$
7,046
(11,415)
(6,758)
985
(10,142)
0.9 %
(4.9)%
(5.4)%
1.7 %
(0.8)%
The decrease in total revenue for fiscal 2018, as compared to fiscal 2017, was primarily the result of a decrease in
Agriculture and Construction segment revenue partially offset by an increase in our International segment. Agriculture and
Construction revenue decreased primarily due to our store closings associated with our Fiscal 2018 Restructuring Plan. In
addition, included as revenue in fiscal 2017 was $42.1 million of equipment sales that was recognized as a result of our
expanded marketing efforts of aged inventories.
34
Gross Profit
Gross Profit
Equipment
Parts
Service
Rental and other
Total Gross Profit
Gross Profit Margin
Equipment
Parts
Service
Rental and other
Total Gross Profit Margin
Gross Profit Mix
Equipment
Parts
Service
Rental and other
Total Gross Profit Mix
Year Ended January 31,
2018
2017
Increase/
(Decrease)
Percent
Change
(dollars in thousands)
$
$
60,896
65,949
73,177
15,278
$
51,146
69,799
77,792
14,992
$
215,300
$
213,729
$
9,750
(3,850)
(4,615)
286
1,571
7.6%
29.7%
62.4%
26.0%
17.9%
28.3%
30.6%
34.0%
7.1%
100.0%
6.4%
29.9%
62.7%
25.9%
17.6%
23.9%
32.7%
36.4%
7.0%
100.0%
1.2 %
(0.2)%
(0.3)%
0.1 %
0.3 %
4.4 %
(2.1)%
(2.4)%
0.1 %
— %
19.1 %
(5.5)%
(5.9)%
1.9 %
0.7 %
18.8 %
(0.7)%
(0.5)%
0.4 %
1.7 %
18.4 %
(6.4)%
(6.6)%
1.4 %
— %
Gross profit remained relatively flat, increasing $1.6 million from fiscal 2017 to fiscal 2018. Gross profit margin
remained consistent increasing from 17.6% in fiscal 2017 to 17.9% in fiscal 2018. The increase in gross profit and gross profit
margin was mainly due to higher equipment revenues and higher gross profit margins on equipment revenue.
Our company-wide absorption rate improved to 79.1% for fiscal 2018 from 77.7% for fiscal 2017 as our decrease in
gross profit from parts, service and rental and other in fiscal 2018 was more than offset by a reduction in our fixed operating
costs and floorplan interest expense.
Operating Expenses
Year Ended January 31,
2018
2017
(Decrease)
Percent
Change
(dollars in thousands)
Operating Expenses
$
203,203
$
211,372
$
(8,169)
Operating Expenses as a Percentage of Revenue
16.9%
17.4%
(0.5)%
(3.9)%
(2.9)%
The $8.2 million decrease in operating expenses was primarily the result of cost savings resulting from our Fiscal
2018 Restructuring Plan, in which we reduced our headcount and generated additional cost savings associated with the closing
of 15 stores. The decrease in operating expenses as a percentage of total revenue reflects the benefits of our cost-saving
initiatives.
35
Impairment and Restructuring Costs
Impairment of Long-Lived Assets
Restructuring Costs
Year Ended January 31,
2018
2017
Increase/
Decrease
Percent
Change
(dollars in thousands)
673
10,499
4,410
319
(3,737)
10,180
(84.7)%
N/M
During fiscal 2018, we recognized a total of $0.7 million in impairment expense related to long-lived assets, compared
to impairment expense of $4.4 million in fiscal 2017. The restructuring costs recognized in fiscal 2018 and fiscal 2017 occurred
as a result of our store restructuring plans and associated exit costs, including accruals for lease terminations and remaining
lease obligations, employee termination benefits, and the costs associated with relocating certain assets of our closed stores.
See Note 20 to our consolidated financial statements for further details on our store restructuring plans and associated exit
costs, and the Non-GAAP Financial Measures section below for impact of these amounts on adjusted Diluted EPS.
Other Income (Expense)
Interest income and other income (expense)
$
Floorplan interest expense
Other interest expense
Year Ended January 31,
2018
2017
Increase/
(Decrease)
Percent
Change
(dollars in thousands)
$
1,635
(8,152)
(8,847)
$
1,524
(13,560)
(8,305)
111
(5,408)
542
7.3 %
(39.9)%
6.5 %
The decrease in floorplan interest expense for fiscal 2018, as compared to fiscal 2017, was primarily due to a decrease
in our interest-bearing inventory in fiscal 2018. For fiscal 2017, other interest expense included $3.1 million of gains
recognized as a result of our repurchases of $54.3 million face value of Senior Convertible Notes. Interest expense associated
with our Senior Convertible Notes, which is reflected in other interest expense, decreased $2.3 million in fiscal 2018 compared
to fiscal 2017 due to interest savings resulting from our repurchases of our Senior Convertible Notes. Other interest expense
also includes $0.4 million of debt issuance cost write-offs recognized in fiscal 2018 as a result of our election to reduce the
maximum available credit under our Wells Fargo Credit Agreement.
Benefit from Income Taxes
Year Ended January 31,
2018
2017
Decrease
Percent
Change
(dollars in thousands)
Benefit from Income Taxes
$
(7,390) $
(8,178) $
(788)
(9.6)%
Our effective tax rate changed from 36.0% in fiscal 2017 to 51.2% in fiscal 2018. Our effective tax rate for fiscal 2018
was impacted by the enactment on December 22, 2017 of federal tax legislation commonly referred to as the Tax Cuts and Jobs
Act (the "Tax Act"). The Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%. The Company recorded a net
tax benefit of $1.8 million for the year ended January 31, 2018 as a result of remeasuring its domestic net deferred tax liabilities
at a federal rate of 21% as this is the rate at which these deferred tax amounts are expected to reverse in future periods.
The Company's effective tax rate was also impacted by changes in valuation allowances recognized for deferred tax
assets, including net operating losses in certain of our domestic and international jurisdictions. The Company concluded in the
fourth quarter of fiscal 2018 that, based on 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 in the fourth quarter of fiscal 2018 and recognized a corresponding benefit from income taxes. The
Company's conclusion regarding the realizability of such deferred tax assets was based on our recent profitable operations
resulting in a cumulative profit over the three-year period ending January 31, 2018 in Ukraine, our projections of future
profitability, the relative economic and geopolitical stability in Ukraine and the unlimited carryforward period of net operating
losses in Ukraine.
See Note 14 to our consolidated financial statements for further details on our effective tax rate, and the Non-GAAP
Financial Measures section below for impact of income tax valuation allowance on adjusted Diluted EPS.
36
Segment Results
Revenue
Agriculture
Construction
International
Total
Income (Loss) Before Income Taxes
Agriculture
Construction
International
Segment income (loss) before income taxes
Shared Resources
Total
Agriculture
Year Ended January 31,
2018
2017
Increase/
(Decrease)
Percent
Change
(dollars in thousands)
$
$
$
$
694,025
$
739,167
$
300,019
208,894
323,625
150,288
1,202,938
$
1,213,080
$
(3,678) $
(7,278)
2,205
(8,751)
(5,688)
(14,439) $
(15,781) $
(5,875)
(469)
(22,125)
(588)
(22,713) $
(45,142)
(23,606)
58,607
(10,141)
12,103
(1,403)
2,674
13,374
(5,100)
8,274
(6.1)%
(7.3)%
39.0 %
(0.8)%
76.7 %
(23.9)%
N/M
60.4 %
N/M
36.4 %
Agriculture segment revenue for fiscal 2018 decreased 6.1% compared to the same period last year. The revenue
decrease was primarily due to a decrease in revenue resulting from the impact of our store closings associated with our Fiscal
2018 Restructuring Plan. Agriculture same-store sales for fiscal 2018 increased 4.0% as compared to fiscal 2017.
Agriculture segment loss before income taxes for fiscal 2018 improved by $12.1 million compared to the same period
last year. The decrease in segment loss before income taxes was largely the result of higher gross profit margins on equipment
revenue, operating expense savings as a result of our Fiscal 2018 Restructuring Plan and a decrease in floorplan interest
expense as the result of a decrease in our interest-bearing inventory in fiscal 2018. These improvements were partially offset by
a higher level of restructuring and impairment costs in fiscal 2018 as compared to fiscal 2017.
Construction
Construction segment revenue for fiscal 2018 decreased 7.3% compared to the same period last year. The revenue
decrease was due to a Construction same-store sales decrease of 6.3% compared to the same period last year. This decrease
was primarily the result of decreased equipment revenue. In fiscal 2017 we recognized $19.3 million of equipment revenue as a
result of our expanded marketing efforts of aged inventories, a portion of such revenue was incremental revenue recognized in
fiscal 2017.
Our Construction segment loss before income taxes was $7.3 million for fiscal 2018 compared to $5.9 million for
fiscal 2017. The decline in segment results was primarily due to the decrease in revenue noted above, but partially offset by
decreases in operating expenses and floorplan interest expense. The decrease in operating expenses reflects cost savings
associated with our Fiscal 2018 Restructuring Plan, and the decrease in floorplan interest expense is the result of a decrease in
our interest-bearing inventory in fiscal 2018 as compared to fiscal 2017. The dollar utilization of our rental fleet was 23.6% in
fiscal 2018, which was relatively flat as compared to fiscal 2017 dollar utilization of 24.0%.
International
International segment revenue for fiscal 2018 increased 39.0% compared to the same period last year primarily due to
increased equipment revenue. Equipment revenue increased in fiscal 2018 primarily due to the build-out of our footprint,
availability of government subsidy program funds, and positive crop conditions in certain of our markets.
Our International segment income before income taxes was $2.2 million for fiscal 2018 compared to segment loss
before income taxes of $0.5 million for the same period last year. The increase in segment income before income taxes was
primarily due to the increase in segment revenue as noted above, but partially offset by an increase in operating expenses
resulting from the continued build-out of our footprint and presence in our European markets.
37
Shared Resources/Eliminations
We incur centralized expenses/income at our general corporate level, which we refer to as “Shared Resources,” and
then allocate most of these net expenses to our segments. Since these allocations are set early in the year, and a portion is
planned to be unallocated, unallocated balances may occur. Shared Resource loss before income taxes was $5.7 million for
fiscal 2018 compared to $0.6 million for the same period last year. For fiscal 2018, loss before income taxes was impacted by
$1.5 million in restructuring costs related to the Fiscal 2018 Restructuring Plan and $0.6 million in floorplan interest expense
related to the interest rate swap termination and reclassification. For fiscal 2017, loss before income taxes included a $3.1
million gain recognized as a result of our repurchases of $54.3 million face value of Senior Convertible Notes.
Fiscal Year Ended January 31, 2017 Compared to Fiscal Year Ended January 31, 2016
Consolidated Results
Revenue
Equipment
Parts
Service
Rental and other
Total Revenue
Year Ended January 31,
2017
2016
Decrease
Percent
Change
(dollars in thousands)
$
797,315
$
925,471
$
233,819
124,076
57,870
245,387
127,457
69,520
$
1,213,080
$
1,367,835
$
(128,156)
(11,568)
(3,381)
(11,650)
(154,755)
(13.8)%
(4.7)%
(2.7)%
(16.8)%
(11.3)%
The decrease in total revenue for fiscal 2017, as compared to fiscal 2016, was primarily due to a decrease in same-
store sales of 10.6% and the impact of our store closings during fiscal 2016. The same-store sales decrease was mainly driven
by a decrease in Agriculture same-store sales of 13.9%, which primarily resulted from a decrease in equipment revenue, as well
as a decrease in Construction same-store sales of 3.8%. These decreases in same-store sales were primarily the result of the
challenging industry conditions present in our Agriculture and Construction segments discussed in the Macroeconomic and
Industry Factors section above. The construction industry conditions led to lower rental and other revenue, particularly in our
Construction stores in oil production areas.
38
Gross Profit
Gross Profit
Equipment
Parts
Service
Rental and other
Total Gross Profit
Gross Profit Margin
Equipment
Parts
Service
Rental and other
Total Gross Profit Margin
Gross Profit Mix
Equipment
Parts
Service
Rental and other
Total Gross Profit Mix
Year Ended January 31,
2017
2016
Increase/
(Decrease)
Percent
Change
(dollars in thousands)
$
15,242
$
$
51,146
69,799
77,792
14,992
35,904
72,304
80,643
17,063
$
213,729
$
205,914
$
6.4%
29.9%
62.7%
25.9%
17.6%
23.9%
32.7%
36.4%
7.0%
100.0%
3.9%
29.5%
63.3%
24.5%
15.1%
17.4%
35.1%
39.2%
8.3%
100.0%
(2,505)
(2,851)
(2,071)
7,815
2.5 %
0.4 %
(0.6)%
1.4 %
2.5 %
6.5 %
(2.4)%
(2.8)%
(1.3)%
— %
42.5 %
(3.5)%
(3.5)%
(12.1)%
3.8 %
64.1 %
1.4 %
(0.9)%
5.7 %
16.6 %
37.4 %
(6.8)%
(7.1)%
(15.7)%
— %
The increase in total gross profit margin from 15.1% in fiscal 2016 to 17.6% in fiscal 2017 was primarily due to the
increase in gross profit margin on equipment. Fiscal 2016 equipment gross profit contains a $27.5 million impairment charge
recognized on aged equipment inventories. Excluding the impact of this charge, equipment gross profit margin decreased
slightly in fiscal 2017 from fiscal 2016 as the result of our aggressive pricing and retailing of used equipment inventories in
fiscal 2017 to accelerate our used inventory reduction efforts.
Our company-wide absorption rate improved to 77.7% for fiscal 2017 from 75.0% for fiscal 2016 as our decrease in
gross profit from parts, service and rental and other in fiscal 2017 was exceeded by a reduction in our fixed operating costs and
lower floorplan interest expense.
Operating Expenses
Year Ended January 31,
2017
2016
Increase/
(Decrease)
Percent
Change
(dollars in thousands)
Operating Expenses
$
211,372
$
220,524
$
Operating Expenses as a Percentage of Revenue
17.4%
16.2%
(9,152)
1.2%
(4.2)%
7.4 %
The $9.2 million decrease in operating expenses was primarily the result of our restructuring plan implemented in the
first quarter of fiscal 2016 in which we reduced our headcount by 14% and generated additional cost savings associated with
the closing of four stores. In addition, commission expense in fiscal 2017 decreased relative to the prior year due to the
decrease in equipment gross profit, exclusive of the impact of the $27.5 million impairment charge recognized in fiscal 2016.
The increase in operating expenses as a percentage of total revenue was primarily due to the decrease in total revenue in fiscal
2017, as compared to fiscal 2016, which negatively affected our ability to leverage our fixed operating costs.
39
Impairment & Restructuring Costs
Impairment of Long-Lived Assets
Restructuring Costs
Year Ended January 31,
2017
2016
(Decrease)
Percent
Change
(dollars in thousands)
4,410
319
6,903
1,597
(2,493)
(1,278)
(36.1)%
(80.0)%
During fiscal 2017, we recognized a total of $4.4 million in impairment expense related to long-lived assets, compared
to impairment expense of $6.9 million in fiscal 2016. The restructuring costs recognized in fiscal 2017 and fiscal 2016 occurred
as a result of our restructuring plans and associated exit costs, including accruals for lease terminations and remaining lease
obligations, employee termination benefits, and the costs associated with relocating certain assets of our closed stores. See Note
20 to our consolidated financial statements for further details on our restructuring plans and associated exit costs, and the Non-
GAAP Financial Measures section below for impact of these amounts on adjusted Diluted EPS.
Other Income (Expense)
Interest income and other income (expense)
$
Floorplan interest expense
Other interest expense
Year Ended January 31,
2017
2016
Decrease
Percent
Change
(dollars in thousands)
$
(478) $
(18,334)
(14,289)
1,524
(13,560)
(8,305)
(2,002)
(4,774)
(5,984)
N/M
(26.0)%
(41.9)%
The improvement in interest income and other income (expense) is primarily due to a decrease in foreign currency
remeasurement losses in Ukraine, resulting from changes in the valuation of the Ukrainian hryvnia, which totaled $0.2 million
and $2.5 million for fiscal 2017 and 2016. See the Non-GAAP Financial Measures section below for impact of the Ukraine
foreign currency remeasurement losses on adjusted net income (loss) and adjusted Diluted EPS. The decrease in floorplan
interest expense for fiscal 2017, as compared to last year, was primarily due to a decrease in our interest-bearing inventory in
fiscal 2017. The decrease in other interest expense is primarily due to a $3.1 million gain recognized in fiscal 2017 related to
repurchases of $54.3 million of face value of our Senior Convertible Notes and the interest savings subsequent to the
repurchases. See the Non-GAAP Financial Measures section below for the impact of the gain on repurchase of Senior
Convertible Notes on adjusted net income (loss) and adjusted Diluted EPS.
Benefit from Income Taxes
Year Ended January 31,
2017
2016
(Decrease)
Percent
Change
(dollars in thousands)
Benefit from Income Taxes
$
(8,178) $
(17,982) $
(9,804)
(54.5)%
Our effective tax rate changed from 32.0% in fiscal 2016 to 36.0% in fiscal 2017, primarily due to a change in mix of
our domestic and foreign losses before income taxes in relation to our total loss before income taxes, and the impact of
recognizing valuation allowances on our U.S. federal and state and certain of our foreign deferred tax assets, including net
operating losses. See Note 14 to our consolidated financial statements for further details on our effective tax rate, and the Non-
GAAP Financial Measures section below for impact of income tax valuation allowance on adjusted Diluted EPS.
40
Segment Results
Revenue
Agriculture
Construction
International
Total
Income (Loss) Before Income Taxes
Agriculture
Construction
International
Segment income (loss) before income taxes
Shared Resources
Total
Agriculture
Year Ended January 31,
2017
2016
Increase/
(Decrease)
Percent
Change
(dollars in thousands)
$
$
$
$
739,167
$
864,851
$
323,625
150,288
340,916
162,068
1,213,080
$
1,367,835
$
(125,684)
(17,291)
(11,780)
(154,755)
(15,781) $
(5,875)
(469)
(22,125)
(588)
(22,713) $
(29,710) $
(26,388)
(3,004)
(59,102)
2,891
(56,211) $
13,929
20,513
2,535
36,977
(3,479)
33,498
(14.5)%
(5.1)%
(7.3)%
(11.3)%
46.9 %
77.7 %
84.4 %
62.6 %
(120.3)%
(59.6)%
Agriculture segment revenue for fiscal 2017 decreased 14.5% compared to fiscal 2016. The revenue decrease was due
to a decrease in Agriculture same-store sales of 13.9% as compared to fiscal 2016, which was primarily caused by a decrease in
equipment revenue, largely resulting from the challenging industry conditions discussed in the Macroeconomic and Industry
Factors section above.
Agriculture segment loss before income taxes for fiscal 2017 improved by $13.9 million compared to fiscal 2016
primarily due to an improvement in equipment gross profit and a reduction in operating expenses and floorplan interest
expense, but partially offset by the aforementioned decrease in equipment revenue. The improvement in equipment gross profit
was primarily the result of the $11.4 million equipment inventory impairment charge recognized in fiscal 2016 as discussed in
the Inventory Impairment Charges section above. Excluding the impact of this charge, equipment gross profit margin decreased
slightly in fiscal 2017 from fiscal 2016 as the result of our aggressive pricing and retailing of used equipment inventories in
fiscal 2017 to accelerate our used inventory reduction efforts. The decrease in operating expenses is primarily the result of the
cost savings associated with our restructuring plan implemented in the first quarter of fiscal 2016. Additionally, the decrease in
floorplan interest expense occurred as the result of a decrease in our average interest-bearing inventory during fiscal 2017
compared to fiscal 2016.
Construction
Construction segment revenue for fiscal 2017 decreased 5.1% compared to fiscal 2016, primarily due to a decrease in
Construction same-store sales of 3.8% over fiscal 2016 and due to the impact of our store closings. The decrease in
Construction same-store sales was experienced across all lines of our business and was largely due to the challenging industry
conditions discussed in the Macroeconomic and Industry Factors section above.
Our Construction segment loss before income taxes was $5.9 million for fiscal 2017 compared to segment loss before
income taxes of $26.4 million for fiscal 2016. The improvement in segment loss before income taxes was primarily the result of
an improvement in equipment gross profit and a reduction in operating expenses and floorplan interest expense, but partially
offset by the aforementioned decrease in revenue. The improvement in equipment gross profit was primarily the result of the
$15.9 million equipment inventory impairment charge recognized in fiscal 2016 as discussed in the Inventory Impairment
Charges section above. The decrease in operating expenses reflected cost savings associated with our restructuring plan
implemented in the first quarter of fiscal 2016 and the decrease in floorplan interest expense is the result of a decrease in our
average interest-bearing inventory during fiscal 2017 compared to fiscal 2016. The dollar utilization of our rental fleet was
24.0% in fiscal 2017 which was consistent with fiscal 2016 dollar utilization of 24.3%.
41
International
International segment revenue for fiscal 2017 decreased 7.3% compared to fiscal 2016 due to a same-store sales
decrease of 7.3%. The revenue decrease, which was primarily caused by a decrease in equipment revenue, was largely the
result of continued low global commodity prices affecting customer demand and reduced funding available through European
Union subvention funds in certain of our markets.
Our International segment loss before income taxes was $0.5 million for fiscal 2017 compared to segment loss before
income taxes of $3.0 million for fiscal 2016. This improvement was primarily due to lower foreign currency remeasurement
losses in Ukraine and lower floorplan interest expense, as compared to prior year. Foreign currency remeasurement losses in
Ukraine, resulting from changes in the valuation of the Ukrainian hryvnia, decreased from $2.5 million in fiscal 2016 to $0.2
million in fiscal 2017. Floorplan interest expense decreased in fiscal 2017 compared to fiscal 2016 due to a reduction in
interest-bearing floorplan payables resulting from a reduction in our inventory levels and lower interest rates.
Shared Resources/Eliminations
We incur centralized expenses/income at our general corporate level, which we refer to as “Shared Resources,” and
then allocate most of these net expenses to our segments. Since these allocations are set early in the year, and a portion is
planned to be unallocated, unallocated balances may occur.
Non-GAAP Financial Measures
To supplement our net income (loss) including noncontrolling interest and our diluted earnings (loss) per share
("Diluted EPS"), both GAAP measures, we use adjusted net income (loss) including noncontrolling interest and adjusted
Diluted EPS, both non-GAAP measures, which exclude the impact of gains recognized on repurchases of our Senior
Convertible Notes, the write-off of debt issuance costs, long-lived asset impairment charges, costs associated with our
restructuring activities, gains recognized on insurance recoveries, and foreign currency remeasurement losses in Ukraine. We
believe that the presentation of adjusted net income (loss) including noncontrolling interest and adjusted Diluted EPS is
relevant and useful to our management and investors because it provides a measurement of earnings on activities that we
consider to occur in the ordinary course of our business. Adjusted net income (loss) including noncontrolling interest and
adjusted Diluted EPS should be evaluated in addition to, and not considered a substitute for, or superior to, the most
comparable GAAP measure. In addition, other companies may calculate these non-GAAP measures in a different manner,
which may hinder comparability of our results with those of other companies.
42
The following tables reconcile Net Loss Including Noncontrolling Interest and Diluted EPS, GAAP measures, to
Adjusted Net Loss Including Noncontrolling Interest and Adjusted Diluted EPS, both non-GAAP measures:
Net Loss Including Noncontrolling Interest
Net Loss Including Noncontrolling Interest
Adjustments
Impairment of Long-Lived Assets
Gain on Repurchase of Senior Convertible Notes
Debt Issuance Cost Write-Off
Restructuring Costs
Ukraine Remeasurement (1)
Interest Rate Swap Termination & Reclassification
Gain on Insurance Recoveries
Total Pre-Tax Adjustments
Less: Tax Effect of Adjustments (2)
Less: Benefit from Tax Act
Plus: Income Tax Valuation Allowance (3)
Total Adjustments
Adjusted Net Loss Including Noncontrolling Interest
Diluted EPS
Diluted EPS
Adjustments (4)
Impairment of Long-Lived Assets
Gain on Repurchase of Senior Convertible Notes
Debt Issuance Cost Write-Off
Restructuring Costs
Ukraine Remeasurement (1)
Interest Rate Swap Termination & Reclassification
Gain on Insurance Recoveries
Total Pre-Tax Adjustments
Less: Tax Effect of Adjustments (2)
Less: Benefit from Tax Act
Plus: Income Tax Valuation Allowance (3)
Total Adjustments
Adjusted Diluted EPS
Year Ended January 31,
2018
2017
2016
(dollars in thousands, except per share data)
$
(7,049) $
(14,535) $
(38,229)
673
(22)
416
10,499
—
631
—
12,197
4,103
1,809
(1,920)
4,365
(2,684) $
4,410
(3,130)
624
319
195
—
(1,997)
421
(6)
—
44
383
(14,152) $
6,903
—
1,558
1,597
2,485
—
—
12,543
1,639
—
2,384
8,520
(29,709)
(0.32) $
(0.65) $
(1.76)
0.03
—
0.02
0.48
—
0.03
—
0.56
0.19
0.08
(0.09)
0.20
(0.12) $
0.20
(0.15)
0.03
0.01
0.01
—
(0.10)
—
—
—
—
—
(0.65) $
0.32
—
0.07
0.07
0.12
—
—
0.58
0.19
—
0.11
0.51
(1.25)
$
$
$
(1) Beginning in the second quarter of fiscal 2017 we discontinued incorporating Ukraine remeasurement losses into our adjusted income (loss)
and earnings (loss) per share calculations. The Ukrainian hryvnia (UAH) remained relatively stable subsequent to April 30, 2016 and therefore
did not significantly impact our consolidated statement of operations during this period. Absent any future significant hryvnia volatility and
resulting financial statement impact, we will not include Ukraine remeasurement losses in our adjusted amounts in future periods.
(2) The tax effect of adjustments was calculated using a 33.8% tax rate for the year ended January 31, 2018 and a 35.0% tax rate for the years
ended January 31, 2017 and 2016 for all U.S. related items, which was determined based on the federal statutory rate applicable to the
respective fiscal year and no impact for state taxes given our valuation allowance against state deferred tax assets. No tax effect was
recognized for foreign related items as all adjustments occurred in foreign jurisdictions that have full valuation allowances on deferred tax
assets.
(3) For all fiscal years, amounts reflect the initial valuation allowance recognized for all deferred tax assets for which no previous valuation
allowance existed. In addition, for fiscal 2018, the amount includes the benefit recognized from the release of the valuation allowance on our
Ukrainian deferred tax assets, net of the incremental valuation allowance recognized as a result of restructuring costs incurred in fiscal 2018.
43
(4) Adjustments are net of the impact of amounts attributable to noncontrolling interests and allocated to participating securities.
For other non-GAAP measures, see our discussion of Adjusted EBITDA in the Key Financial Metrics section and our
discussion of Adjusted Cash Flow in the Cash Flow section elsewhere within this Item 7 of our Form 10-K.
Liquidity and Capital Resources
Sources of Liquidity
Our primary sources of liquidity are cash reserves, cash generated from operations, and borrowings under our
floorplan payable and other credit facilities. We expect these sources of liquidity to be sufficient to fund our working capital
requirements, acquisitions, capital expenditures and other investments in our business, service our debt, pay our tax and lease
obligations and other commitments and contingencies, and meet any seasonal operating requirements for the foreseeable future,
provided, however, that our borrowing capacity under our credit agreements is dependent on compliance with various financial
covenants as further described in Note 6 to our consolidated financial statements included in this Form 10-K. We have worked
in the past, and will continue to work in the future, with our lenders to implement satisfactory modifications to these financial
covenants when appropriate for the business conditions confronted by us.
Equipment Inventory and Floorplan Payable Credit Facilities
Floorplan payable balances reflect the amount owed for new equipment inventory purchased from a manufacturer and
used equipment inventory, which is primarily purchased through trade-in on equipment sales, net of unamortized debt issuance
costs incurred for floorplan credit facilities. Certain of the manufacturers from which we purchase new equipment inventory
offer financing on these purchases, either offered directly from the manufacturer or through the manufacturers’ captive finance
affiliate. CNH Industrial's captive finance subsidiary, CNH Industrial Capital, also provides financing of used equipment
inventory. We also have floorplan payable balances with non-manufacturer lenders for new and used equipment inventory.
Borrowings and repayments on manufacturer floorplan facilities are reported as operating cash flows, while borrowings and
repayments on non-manufacturer floorplan facilities are reported as financing cash flows in our consolidated statements of cash
flows.
As of January 31, 2018, we had discretionary floorplan payable lines of credit for equipment purchases totaling $728.1
million, which includes a $140.0 million floorplan payable line under the Wells Fargo Credit Agreement, a $450.0 million
credit facility with CNH Industrial Capital, a $30.0 million credit facility with DLL Finance and the U.S. dollar equivalent of
$108.1 million in credit facilities related to our foreign subsidiaries. The floorplan payable balance relating to these credit
facilities totaled $239.2 million of the total floorplan payable balance of $247.4 million outstanding as of January 31, 2018.
Available borrowing capacity under these lines of credit are reduced by amounts outstanding under such facilities, borrowing
base calculations and amount of standby letters of credit outstanding with respect to the Wells Fargo Credit Agreement, and
certain acquisition-related financing arrangements with respect to the CNH Industrial Capital credit facility.
As of January 31, 2018, the Company was in compliance with the financial covenants under its credit agreements, and
was not subject to the fixed charge ratio covenant under the Wells Fargo Credit Agreement as our adjusted excess availability
plus eligible cash collateral (as defined in the Wells Fargo Credit Agreement) was not less than 15% of the total amount of the
credit facility as of January 31, 2018.
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, are 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 Company anticipates, based on our current modeling projections, that these financial
tests will be satisfied on February 1, 2019.
Additional details on each of these credit facilities is disclosed in Note 6 to our consolidated financial statements
included in this annual report.
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.
44
Our equipment inventory turnover was 1.7 for fiscal 2018 compared to 1.3 for fiscal 2017. Our equipment inventories
increased 1.0% from January 31, 2017 to January 31, 2018. The improvement in our equipment inventory turnover was driven
by a 20.9% reduction in our rolling 12 month average equipment inventory from January 31, 2017 to January 31, 2018. Our
equity in equipment inventory, which reflects the portion of our equipment inventory balance that is not financed by floorplan
payables, decreased to 38.2% as of January 31, 2018 from 41.1% as of January 31, 2017.
Long-Term Debt Facilities
We have a $60.0 million working capital line of credit under the Wells Fargo Credit Agreement (the "Working Capital
Line"). The Working Capital Line is used to finance our working capital requirements and fund certain capital expenditures. As
of January 31, 2018, we had $13.0 million outstanding on the Working Capital Line. We also finance a portion of our rental
fleet and other property and equipment purchases with long-term debt agreements with various lenders.
Adequacy of Capital Resources
Our primary uses of cash have been to fund our operating activities, including the purchase of inventories and
providing for other working capital needs, meeting our debt service requirements, making payments due under our various
leasing arrangements, funding capital expenditures, including rental fleet assets, and, from time to time, opportunistically
repurchasing our outstanding convertible notes. The primary factor affecting our ability to generate cash and to meet existing,
known or reasonably likely cash requirements is our operating performance as impacted by (i) industry factors, (ii) competition,
(iii) general economic conditions, (iv) the timing and extent of acquisitions, and (v) business and other factors including those
identified in Item 1A "Risk Factors" and discussed in this Form 10-K.
Our ability to service our debt will depend upon our ability to generate the necessary cash. This will depend on our
future acquisition activity, operating performance, general economic conditions, and financial, competitive, business and other
factors, some of which are beyond our immediate control. Based on our current operational performance, we believe our cash
flow from operations, available cash and available borrowings under our existing credit facilities will be adequate to meet our
liquidity needs for, at a minimum, the next 12 months.
In fiscal 2018, we used $12.6 million in cash for rental fleet purchases and $13.5 million in cash for property and
equipment purchases. The property and equipment purchases primarily related to the purchase of vehicles and the construction
or purchase of real estate assets. In fiscal 2017, we used $3.1 million in cash for rental fleet purchases, $9.3 million in cash for
property and equipment purchases, and financed $2.5 million in property and equipment purchases with long-term debt. The
property and equipment purchases primarily related to the purchase of vehicles, trucks and real estate. We expect our cash
expenditures for property and equipment, exclusive of rental fleet, for fiscal 2019 to be approximately $15.0 million and expect
cash expenditures for rental fleet for fiscal 2019 to be approximately $10.0 million. The actual amount of our fiscal 2019
capital expenditures will depend upon factors such as general economic conditions, growth prospects for our industry and our
decisions regarding financing and leasing options. We currently expect to finance property and equipment purchases with
borrowings under our existing credit facilities, financing with long-term debt, with available cash or with cash flow from
operations. We may need to incur additional debt if we pursue any future acquisitions.
There can be no assurances, however, that our business will generate sufficient cash flow from operations or that
future borrowings will be available under the credit facilities with Wells Fargo, CNH Industrial Capital and DLL Finance in
amounts sufficient to allow us to service our indebtedness and to meet our other commitments. If we are unable to generate
sufficient cash flow from operations or to obtain sufficient future borrowings, we may be required to seek one or more
alternatives such as refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise
additional debt or equity capital. There can be no assurances that we will be able to succeed with one of these alternatives on
commercially reasonable terms, if at all. In addition, if we pursue strategic acquisitions, we may require additional equity or
debt financing to consummate the transactions, and we cannot assure you that we will succeed in obtaining this financing on
favorable terms or at all. If we incur additional indebtedness to finance any of these transactions, this may place increased
demands on our cash flow from operations to service the resulting increased debt. Our existing debt agreements contain
restrictive covenants that may restrict our ability to adopt any of these alternatives. Any non-compliance by us under the terms
of our debt agreements could result in an event of default which, if not cured, could result in the acceleration of our debt. We
have met all financial covenants under these credit agreements as of January 31, 2018. We do not anticipate being in violation
of any financial covenants in the foreseeable future. If anticipated operating results create the likelihood of a future covenant
violation, we would seek to work with our lenders on an appropriate modification or amendment to our financing
arrangements.
45
Cash Flow
Cash Flow Provided By Operating Activities
Net cash provided by operating activities in fiscal 2018 was $95.8 million compared to $141.0 million in fiscal 2017.
The decrease in net cash provided by operating activities of $45.2 million from fiscal 2017 to fiscal 2018 was primarily
attributable to changes in inventory, net of related changes in manufacturer floorplan payable balances. We evaluate our cash
flow from operating activities net of all floorplan payable activity and maintaining a constant level of equity in our inventory.
Taking these adjustments into account, our adjusted cash provided by operating activities was $45.6 million for fiscal 2018
compared to $88.8 million for fiscal 2017. This decrease from fiscal 2017 to fiscal 2018 in adjusted cash provided by operating
activities was primarily due to the aforementioned change in inventory, net of the related changes in floorplan payable balances.
For reconciliation of this adjusted cash provided by operating activities to the comparative GAAP financial measure, please see
the Adjusted Cash Flow Reconciliation below.
Net cash provided by operating activities was $141.0 million in fiscal 2017 compared to net cash provided by
operating activities of $231.9 million in fiscal 2016. The decrease in net cash provided by operating activities of $90.9 million
from fiscal 2016 to fiscal 2017 was primarily attributable to changes in inventory, net of related changes in manufacturer
floorplan payable balances. Our adjusted cash provided by operating activities was $88.8 million for fiscal 2017 and was $44.3
million for fiscal 2016. This increase from fiscal 2016 to fiscal 2017 in adjusted cash provided by operating activities was
primarily due to the aforementioned decrease in inventories, net of the related changes in floorplan payable balances. For
reconciliation of adjusted cash provided by operating activities to the comparative GAAP financial measure, please see the
Adjusted Cash Flow Reconciliation below.
Cash Flow Used For Investing Activities
Net cash used for investing activities is primarily comprised of cash used for property and equipment purchases,
including rental fleet, and for business acquisitions.
Net cash used for investing activities was $24.6 million in fiscal 2018, compared to net cash used for investing
activities of $9.1 million in fiscal 2017. In fiscal 2018, we used $26.1 million of cash for property and equipment purchases,
primarily related to rental fleet, vehicles and construction or purchase of real estate assets. These uses of cash were offset by
$5.0 million received upon the sale of property and equipment. The increase in net cash used for investing activities from fiscal
2017 to fiscal 2018 was primarily due an increase in property and equipment purchases in fiscal 2018.
Net cash used for investing activities was $9.1 million in fiscal 2017, compared to net cash provided by investing
activities of $0.1 million in fiscal 2016. In fiscal 2017, we had cash used for property and equipment purchases, including
rental fleet, totaling $12.4 million, which primarily related to rental fleet, vehicle and truck purchases. These uses of cash were
offset by $2.4 million received upon the sale of property and equipment. The decrease in net cash used for investing activities
from fiscal 2016 to fiscal 2017 was primarily due to lower proceeds from the sale of property and equipment and electing to
purchase property and equipment without financing such purchases.
Cash Flow Used For Financing Activities
Net cash used for financing activities was $71.5 million in fiscal 2018, compared to net cash used for financing
activities of $168.0 million in fiscal 2017. In fiscal 2018, net cash used for financing activities primarily resulted from the
repayment of our non-manufacturer floorplan payables and the use of $29.1 million in cash to repurchase a portion of our
Senior Convertible Notes. We may from time to time continue to repurchase our Senior Convertible Notes depending on
prevailing market conditions, our available liquidity and other factors. Such repurchases may be material to our consolidated
financial statements.
Net cash used for financing activities was $168.0 million in fiscal 2017 and $269.0 million in fiscal 2016. In fiscal
2017, net cash used for financing activities primarily resulted from the repayment of our non-manufacturer floorplan payables
and the use of $46.0 million in cash to repurchase a portion of our Senior Convertible Notes.
Adjusted Cash Flow Reconciliation
We consider our cash flow from operating activities to include all equipment inventory financing activity regardless of
whether we obtain the financing from a manufacturer or other source. GAAP requires the cash flows associated with non-
manufacturer floorplan payables to be recognized as financing cash flows in the consolidated statement of cash flows. We
consider equipment inventory financing with both manufacturers and other sources to be part of the normal operations of our
business. We also evaluate our cash flow from operating activities by assuming a constant level of equity in our equipment
inventory. Our equity in our equipment inventory reflects the portion of our equipment inventory balance that is not financed
by floorplan payables. Our adjustment to maintain a constant level of equity in our equipment inventory is equal to the
46
difference between our actual level of equity in equipment inventory at each period-end presented on the consolidated
statements of cash flows compared to the actual level of equity in equipment inventory at the beginning of the fiscal year. We
refer to this measure of cash flow as Adjusted Cash Flow.
Our equity in equipment inventory was 38.2%, 41.1% and 24.8% as of January 31, 2018, 2017 and 2016.
Adjusted Cash Flow is a non-GAAP financial measure. We believe that the presentation of Adjusted Cash Flow is
relevant and useful to our investors because it provides information on activities we consider normal operations of our business,
regardless of financing source and level of financing for our equipment inventory. The following table reconciles net cash
provided by operating activities, a GAAP measure, to adjusted net cash provided by operating activities and net cash used for
financing activities, a GAAP measure, to adjusted cash flow used for financing activities.
Net Cash Provided by Operating Activities
Net Cash Used for Financing Activities
Year Ended January 31,
Year Ended January 31,
2018
2017
2016
2018
2017
2016
(in thousands)
(in thousands)
Cash Flow, As Reported
$
95,821
$
140,997
$
231,884
$
(71,466) $
(167,976) $
(268,956)
(38,626)
(116,558)
(221,912)
38,626
116,558
221,912
Adjustment for Non-
Manufacturer Floorplan
Net Payments
Adjustment for Constant
Equity in Equipment
Inventory
Adjusted Cash Flow
$
45,592
$
88,839
$
44,302
$
(11,603)
64,400
34,330
—
(32,840) $
—
(51,418) $
—
(47,044)
Certain Information Concerning Off-Balance Sheet Arrangements
As of January 31, 2018, we did not have any relationships with unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not exposed
to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. In the normal course
of our business activities, we lease real estate, vehicles and equipment under operating leases.
Contractual and Commercial Commitment Summary
Our contractual obligations and commercial commitments as of January 31, 2018 are summarized below:
Contractual Obligations
Total
Less Than
1 Year
Payments Due By Period
1 to 3 Years
3 to 5 Years
(in thousands)
More Than
5 Years
Long-term debt obligations (1)
$
51,528
$
3,769
$
20,400
$
6,227
$
21,132
Senior convertible note obligations (2)
Operating lease (3)
Purchase obligations (4)
Total
68,711
168,589
4,636
293,464
$
$
2,455
20,081
1,549
27,854
$
66,256
33,680
3,087
123,423
$
—
31,133
—
37,360
$
—
83,695
—
104,827
(1) Includes obligations under our working capital line of credit with Wells Fargo, financing and capital lease obligations, and estimates
of interest payable under all such obligations.
(2) Includes coupon payments of interest on the contractual payment dates and payment of the principal balance on maturity in May
2019.
(3) Includes minimum lease payment obligations under operating leases. Amounts do not include insurance or real estate taxes, which
we include in our operating expenses and which we estimate will be approximately $3.1 million for the less than 1 year period, $5.2
million for the 1 to 3 year period, $5.2 million for the 3 to 5 year period, and $10.0 million for the more than 5 years period for a
total of approximately $23.6 million. See Note 12 to our consolidated financial statements for a description of our operating lease
obligations.
(4) Primarily represents contracts related to information technology systems.
47
Information Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. We
include "forward-looking" information in this Form 10-K, including this Item 7, as well as in other materials filed or to be filed
by us with the Securities and Exchange Commission (as well as information included in oral statements or other written
statements made or to be made by us).
This Form 10-K contains forward-looking statements that involve risks and uncertainties. In some cases, you can
identify forward-looking statements by the following words: "anticipate," "believe," "continue," "could," "estimate," "expect,"
"intend," "may," "ongoing," "plan," "potential," "predict," "project," "should," "will," "would," or the negative of these terms or
other comparable terminology, although not all forward-looking statements contain these words. These statements involve
known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different from the information expressed or implied by these forward-looking
statements. Forward-looking statements are only predictions and are not guarantees of performance. These statements are based
on our management's beliefs and assumptions, which in turn are based on currently available information. Our forward-looking
statements in this Form 10-K generally relate to the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our beliefs and intentions with respect to our growth strategy, including growth through acquisitions, the profitability
of acquisitions, the types of acquisition targets we intend to pursue, the availability of suitable acquisition targets, our
ability to identify such targets, the industry climate for dealer consolidation, and our ability to implement our growth
strategy;
our beliefs with respect to factors that will affect demand and seasonality of purchasing in the agricultural and
construction industries;
our beliefs with respect to our primary supplier (CNH Industrial) of equipment and parts inventory;
our beliefs with respect to the equipment market, our competitors and our competitive advantages;
our beliefs with respect to the impact of government subsidies on the agriculture economy;
our beliefs with respect to the impact of natural resource exploration and related commodity prices in our operating
region on our operating results;
our beliefs with respect to the impact of government regulations;
our beliefs with respect to continued operations in the event of information systems inoperability;
our beliefs with respect to our business strengths, including the Titan Operating Model, the diversity of our customer
base, and the growth rate of our shared resources expenditures and our marketing efforts;
our plans and beliefs with respect to real property used in our business;
our plans and beliefs regarding future sales, sales mix, and marketing activities;
our beliefs and assumptions regarding the payment of dividends and repatriation of earnings from foreign operations;
our beliefs and assumptions regarding valuation reserves, equipment inventory balances, fixed operating expenses, and
absorption rate;
our beliefs and expectations regarding our restructuring activities including the amount and recognition of related
costs;
our beliefs and expectations regarding the effects of the political climate and economy in Ukraine;
our beliefs and assumptions with respect to our rental equipment operations;
our beliefs with respect to our employee relations and the impact of employee training and management strength on
our revenues;
our assumptions, beliefs and expectations with respect to past and future market conditions, including interest rates,
and public infrastructure spending, new environmental standards, and the impact these conditions will have on our
operating results;
our beliefs with respect to the impact of our credit agreements, including future interest expense, limits on corporate
transactions, financial covenant compliance, and ability to negotiate amendments or waivers;
our beliefs with respect to the impact of increase or decrease in applicable foreign exchange rates;
48
•
•
•
•
our beliefs with respect to the adequacy of our capital resources and the funding of debt service obligations and capital
expenditures;
our plans and assumptions for future capital expenditures;
our cash needs, sources of liquidity, and the adequacy of our working capital; and
our expectations regarding the impact of inflation.
Forward-looking statements are only predictions and are not guarantees of performance. These statements are based
on our management's beliefs and assumptions, which in turn are based on currently available information. Important
assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products,
the expansion of product offerings geographically, the timing and cost of planned capital expenditures, competitive conditions
and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known
and unknown risks and uncertainties, which could cause actual results that differ materially from those contained in any
forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not
limited to, the following:
•
•
•
•
•
•
•
•
•
incorrect assumptions regarding our cash needs;
general economic conditions and construction activity in the markets where we operate;
our relationships with equipment suppliers;
our leverage;
the risks associated with the expansion of our business;
the potential inability to integrate any businesses we acquire;
competitive pressures;
compliance with laws and regulations; and
other factors discussed under "Risk Factors" or elsewhere in this Form 10-K.
You should read the risk factors and the other cautionary statements made in this Form 10-K as being applicable to all
related forward-looking statements wherever they appear in this Form 10-K. We cannot assure you that the forward-looking
statements in this Form 10-K will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate,
the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not
regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans
in any specified timeframe, if at all. Other than as required by law, we undertake no obligation to update these forward-looking
statements, even though our situation may change in the future.
49
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in interest rates and foreign currency exchange rates.
Market risk is the potential loss arising from adverse changes in market rates and prices such as interest rates and foreign
currency exchange rates.
Interest Rate Risk
Exposure to changes in interest rates results from borrowing activities used to fund operations. For fixed rate debt,
interest rate changes affect the fair value of financial instruments but do not impact earnings or cash flows. Conversely, for
floating rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash
flows, assuming other factors are held constant. We have both fixed and floating rate financing. Some of our floating rate credit
facilities contain minimum rates of interest to be charged. Based upon our interest-bearing balances and interest rates as of
January 31, 2018, holding other variables constant, a one percentage point increase in interest rates for the next 12-month
period would decrease pre-tax earnings and cash flow by approximately $1.3 million. Conversely, a one percentage point
decrease in interest rates for the next 12-month period would result in an increase to pre-tax earnings and cash flow of
approximately $1.3 million. At January 31, 2018, we had total floorplan payables of $247.4 million, of which $115.4 million
was interest-bearing at variable interest rates and $132.0 million was non-interest bearing. At January 31, 2018, we also had
long-term debt, including our Senior Convertible Notes, of $99.0 million, of which $13.0 million was variable rate debt and
$86.0 million was fixed rate debt.
Foreign Currency Exchange Rate Risk
Our foreign currency exposures arise as the result of our foreign operations. We are exposed to transactional foreign
currency exchange rate risk through our foreign entities’ holding assets and liabilities denominated in currencies other than
their functional currency. In addition, the Company is exposed to foreign currency transaction risk as a result of certain
intercompany financing transactions. The Company attempts to manage its transactional foreign currency exchange rate risk
through the use of derivative financial instruments, primarily foreign exchange forward contracts, or through natural hedging
instruments. Based upon balances and exchange rates as of January 31, 2018, holding other variables constant, we believe that
a hypothetical 10% increase or decrease in all applicable foreign exchange rates would not have a material impact on our
results of operations or cash flows. As of January 31, 2018, our Ukrainian subsidiary had $7.3 million of net monetary assets
denominated in Ukrainian hryvnia (UAH). Our net monetary asset position as of January 31, 2018 was impacted by a large
volume of UAH cash receipts totaling approximately $3.0 million immediately prior to year-end that could not be immediately
converted to U.S. dollars. In addition, the release of our valuation allowance against our deferred tax assets, which totaled $3.0
million as of January 31, 2018, has the effect of increasing the amount of net monetary assets as our deferred tax assets are
monetary assets that are no longer fully offset by a valuation allowance. We have attempted to minimize our net monetary asset
position through reducing overall asset levels in Ukraine and through borrowing in UAH which serves as a natural hedging
instrument offsetting our net UAH denominated assets. At certain times, currency and payment controls imposed by the
National Bank of Ukraine have limited our ability to manage our net monetary asset position. While the UAH remained
relatively stable in fiscal 2018, an escalation of political tensions or economic instability could lead to further, significant UAH
devaluations which could have a material impact on our results of operations and cash flows.
In addition to transactional foreign currency exchange rate risk, we are also exposed to translational foreign currency
exchange rate risk as we translate the results of operations and assets and liabilities of our foreign operations from their
functional currency to the U.S. dollar. As a result, our results of operations, cash flows and net investment in our foreign
operations may be adversely impacted by fluctuating foreign currency exchange rates. We believe that a hypothetical 10%
increase or decrease in all applicable foreign exchange rates, holding all other variables constant, would not have a material
impact on our results of operations or cash flows.
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Balance Sheets of the Company as of January 31, 2018 and 2017, and the related Consolidated
Statements of Operations, Comprehensive Income (Loss), Stockholders' Equity, and Cash Flows for the years ended
January 31, 2018, 2017 and 2016, and the notes thereto, have been audited by Deloitte & Touche LLP, an independent
registered public accounting firm.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Titan Machinery Inc.—Financial Statements
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 31, 2018 and 2017
Consolidated Statements of Operations for the fiscal years ended January 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended January 31, 2018, 2017 and
2016
Consolidated Statements of Stockholders' Equity for the fiscal years ended January 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the fiscal years ended January 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Page
52
53
54
55
56
57
58
59
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Titan Machinery Inc.
West Fargo, North Dakota
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Titan Machinery Inc. and subsidiaries (the “Company”) as
of January 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’
equity, and cash flows for each of the three years in the period ended January 31, 2018, and the related notes and the schedule
listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of January 31, 2018 and 2017, and the results of
its operations and its cash flows for each of the three years in the period ended January 31, 2018, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of January 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated April 6, 2018, expressed an unqualified opinion on the Company’s internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
April 6, 2018
We have served as the Company's auditor since 2013.
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Titan Machinery Inc.
West Fargo, North Dakota
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Titan Machinery Inc. and subsidiaries (the "Company") as of
January 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of January 31, 2018, based on criteria established in Internal
Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements and financial statement schedule as of and for the fiscal year ended January 31,
2018, of the Company and our report dated April 6, 2018, expressed an unqualified opinion on those consolidated financial
statements and financial statement schedule.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
April 6, 2018
53
TITAN MACHINERY INC.
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 2018 AND 2017
(in thousands, except per share data)
Assets
Current Assets
Cash
Receivables (net of allowance of $2,951 and $3,630 as of January 31, 2018 and January 31, 2017,
respectively)
Inventories
Prepaid expenses and other
Income taxes receivable
Total current assets
Noncurrent Assets
Intangible assets, net of accumulated amortization
Property and Equipment, net of accumulated depreciation
Deferred income taxes
Other
Total noncurrent assets
Total Assets
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable
Floorplan payable
Current maturities of long-term debt
Customer deposits
Accrued expenses and other
Total current liabilities
Long-Term Liabilities
Senior convertible notes
Long-term debt, less current maturities
Deferred income taxes
Other long-term liabilities
Total long-term liabilities
Commitments and Contingencies (Notes 11 and 12)
Stockholders' Equity
Common stock, par value $.00001 per share, 45,000 shares authorized; 22,102 shares issued and
outstanding at January 31, 2018; 21,836 shares issued and outstanding at January 31, 2017
Additional paid-in-capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
Total Liabilities and Stockholders' Equity
January 31, 2018
January 31, 2017
$
53,396
$
53,151
60,672
472,467
12,440
171
599,146
5,193
151,047
3,472
1,450
161,162
$
$
760,308
$
15,136
$
247,392
1,574
32,324
31,863
328,289
62,819
34,578
2,275
10,492
110,164
—
246,509
77,046
(1,700)
321,855
60,082
478,266
10,989
5,380
607,868
5,001
156,647
547
1,359
163,554
771,422
17,326
233,228
1,373
26,366
30,533
308,826
88,501
38,236
9,500
5,180
141,417
—
240,615
85,347
(4,783)
321,179
771,422
See Notes to Consolidated Financial Statements
$
760,308
$
54
TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 2018, 2017 AND 2016
(in thousands, except per share data)
Revenue
Equipment
Parts
Service
Rental and other
Total Revenue
Cost of Revenue
Equipment
Parts
Service
Rental and other
Total Cost of Revenue
Gross Profit
Operating Expenses
Impairment of Long-Lived Assets
Restructuring Costs
Income (Loss) from Operations
Other Income (Expense)
Interest income and other income (expense)
Floorplan interest expense
Other interest expense
Loss Before Income Taxes
Benefit from Income Taxes
Net Loss Including Noncontrolling Interest
Less: Net Loss Attributable to Noncontrolling Interest
Net Loss Attributable to Titan Machinery Inc.
Net Loss Allocated to Participating Securities - Note 1
Net Loss Attributable to Titan Machinery Inc. Common Stockholders
Earnings (Loss) per Share - Note 1
Basic
Diluted
Weighted Average Common Shares
Basic
Diluted
2018
2017
2016
$
804,361
$
797,315
$
222,404
117,318
58,855
233,819
124,076
57,870
925,471
245,387
127,457
69,520
1,202,938
1,213,080
1,367,835
743,465
156,455
44,141
43,577
987,638
215,300
203,203
673
10,499
925
1,635
(8,152)
(8,847)
(14,439)
(7,390)
(7,049)
—
(7,049)
141
(6,908) $
746,169
164,020
46,284
42,878
999,351
213,729
211,372
4,410
319
(2,372)
1,524
(13,560)
(8,305)
(22,713)
(8,178)
(14,535)
(356)
(14,179)
243
(13,936) $
889,567
173,083
46,814
52,457
1,161,921
205,914
220,524
6,903
1,597
(23,110)
(478)
(18,334)
(14,289)
(56,211)
(17,982)
(38,229)
(337)
(37,892)
717
(37,175)
(0.32) $
(0.32) $
(0.65) $
(0.65) $
(1.76)
(1.76)
21,543
21,543
21,294
21,294
21,111
21,111
$
$
$
See Notes to Consolidated Financial Statements
55
TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JANUARY 31, 2018, 2017 AND 2016
(in thousands)
Net Loss Including Noncontrolling Interest
Other Comprehensive Income (Loss)
Foreign currency translation adjustments
Unrealized gain on net investment hedge derivative instruments, net of
tax expense of $132 for the year ended January 31, 2016
Unrealized gain (loss) on interest rate swap cash flow hedge derivative
instrument, net of tax expense (benefit) of $19, $105, and ($524) for the
years ended January 31, 2018, 2017 and 2016
Reclassification of loss on interest rate swap cash flow hedge derivative
instrument included in net loss, net of tax benefit of $436, $554, and
$702 for the years ended January 31, 2018, 2017 and 2016
Reclassification of loss on foreign currency contract cash flow hedge
derivative instruments included in net loss, net of tax benefit of $24 for
the years ended January 31, 2016
Total Other Comprehensive Income (Loss)
Comprehensive Loss
Comprehensive Loss Attributable to Noncontrolling Interest
Comprehensive Loss Attributable To Titan Machinery Inc.
$
2018
2017
2016
$
(7,049) $
(14,535) $
(38,229)
2,399
(1,090)
(4,598)
—
29
655
—
3,083
(3,966)
—
(3,966) $
—
158
830
—
(102)
(14,637)
(333)
(14,304) $
201
(785)
1,053
37
(4,092)
(42,321)
(1,067)
(41,254)
See Notes to Consolidated Financial Statements
56
TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 2018, 2017 AND 2016
(in thousands)
Common Stock
Accumulated Other Comprehensive Income (Loss)
Shares
Outstanding
Amount
Additional
Paid-In
Capital
Retained
Earnings
Foreign
Currency
Translation
Adjustments
Unrealized
Gains
(Losses) on
Net
Investment
Hedges
Unrealized
Gains
(Losses) on
Interest
Rate Swap
Cash Flow
Hedges
Unrealized
Gains
(Losses) on
Foreign
Currency
Contract
Cash Flow
Hedges
Total Titan
Machinery
Inc.
Stockholders'
Equity
Total
Noncontrolling
Interest
Total
Stockholders'
Equity
BALANCE, JANUARY 31, 2015
21,406
$ — $ 240,180
$137,418
$
(1,632)
$
2,510
$
(1,940)
$
(37)
$ (1,099)
$
376,499
$
1,860
$
378,359
Common stock issued on grant of
restricted stock (net of
forfeitures), exercise of stock
options, and tax benefits of
equity awards
Stock-based compensation
expense
Other
Comprehensive loss:
Net income (loss)
Other comprehensive income
(loss)
Total comprehensive loss
198
—
—
—
—
—
BALANCE, JANUARY 31, 2016
21,604
Common stock issued on grant of
restricted stock (net of
forfeitures), exercise of stock
options, and tax benefits of
equity awards
Stock-based compensation
expense
Acquisition of non-controlling
interest
Comprehensive loss:
Net loss
Other comprehensive income
(loss)
Total comprehensive loss
232
—
—
—
—
—
BALANCE, JANUARY 31, 2017
21,836
ASU 2016-09 cumulative effect
adjustment
Common stock issued on grant of
restricted stock (net of
forfeitures), exercise of stock
options, and tax benefits of
equity awards
Stock-based compensation
expense
Repurchase of Senior
Convertible Notes
Comprehensive loss:
Net loss
Other comprehensive income
(loss)
Total comprehensive loss
—
266
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
208
2,103
—
—
—
—
—
—
—
(37,892)
—
—
—
—
—
—
(3,868)
—
—
—
—
—
201
—
—
—
—
—
268
—
242,491
99,526
(5,500)
2,711
(1,672)
(355)
2,145
(3,666)
—
—
—
—
—
—
—
—
(197)
(14,179)
—
—
—
(1,113)
—
—
—
—
—
—
—
—
—
—
—
988
—
240,615
85,347
(6,810)
2,711
(684)
2,087
(1,252)
—
—
—
989
3,441
(623)
—
—
—
—
—
—
(7,049)
—
—
—
—
—
—
2,399
—
—
—
—
—
—
—
—
—
—
—
684
—
—
—
—
—
37
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
208
2,103
—
—
—
—
208
2,103
—
(37,892)
(337)
(38,229)
(3,362)
—
(3,362)
(41,254)
(730)
(1,067)
(4,092)
(42,321)
(4,461)
337,556
793
338,349
—
—
(355)
2,145
—
—
(355)
2,145
(197)
(3,863)
(460)
(4,323)
—
(14,179)
(356)
(14,535)
(125)
—
(125)
(14,304)
23
(333)
(4,783)
321,179
—
—
—
—
—
3,083
—
835
989
3,441
(623)
(7,049)
3,083
(3,966)
—
—
—
—
—
—
—
—
(102)
(14,637)
321,179
835
989
3,441
(623)
(7,049)
3,083
(3,966)
BALANCE, JANUARY 31, 2018
22,102
$ — $ 246,509
$ 77,046
$
(4,411)
$
2,711
$
— $
— $ (1,700)
$
321,855
$
— $
321,855
See Notes to Consolidated Financial Statements
57
TITAN MACHINERY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2018, 2017 AND 2016
(in thousands)
Operating Activities
Net loss including noncontrolling interest
Adjustments to reconcile net loss including noncontrolling interest to net cash provided by operating
activities
Depreciation and amortization
Impairment of long-lived assets
Deferred income taxes
Stock-based compensation expense
Noncash interest expense
Gain on repurchase of Senior Convertible Notes
Other, net
Changes in assets and liabilities
Receivables, prepaid expenses and other assets
Inventories
Manufacturer floorplan payable
Accounts payable, customer deposits, accrued expenses and other long-term liabilities
Income taxes
Net Cash Provided by Operating Activities
Investing Activities
Rental fleet purchases
Property and equipment purchases (excluding rental fleet)
Proceeds from sale of property and equipment
Acquisition consideration, net of cash acquired
Proceeds from insurance recoveries
Other, net
Net Cash Used for Investing Activities
Financing Activities
Net change in non-manufacturer floorplan payable
Repurchase of Senior Convertible Notes
Proceeds from long-term debt borrowings
Principal payments on long-term debt
Loan provided to non-controlling interest holder
Payment of debt issuance costs
Other, net
Net Cash Used for Financing Activities
Effect of Exchange Rate Changes on Cash
Net Change in Cash
Cash at Beginning of Period
Cash at End of Period
Supplemental Disclosures of Cash Flow Information
Cash paid during the period
Income taxes, net of refunds
Interest
Supplemental Disclosures of Noncash Investing and Financing Activities
Net property and equipment financed with long-term debt, accounts payable and accrued liabilities
Business combination assets acquired through direct financing
Long-term debt extinguished upon sale of property and equipment
Net transfer of assets from property and equipment to inventories
Acquisition of non-controlling interest through satisfaction of outstanding receivables
2018
2017
2016
$
(7,049)
$
(14,535)
$
(38,229)
25,105
673
(8,920)
3,441
3,651
(22)
(2,406)
(1,002)
20,338
46,141
8,445
7,417
95,812
(12,578)
(13,537)
5,030
(3,652)
—
148
(24,589)
(38,626)
(29,093)
33,001
(36,786)
—
(27)
65
(71,466)
488
245
53,151
53,396
$
(5,555)
13,634
752
871
$
$
$
$
— $
3,609
$
— $
26,868
4,410
(2,841)
2,145
5,314
(3,130)
(925)
(1,885)
211,793
(95,341)
1,824
7,300
140,997
(3,137)
(9,288)
2,388
—
1,431
(519)
(9,125)
(116,558)
(46,013)
14,009
(17,199)
(2,148)
(34)
(33)
(167,976)
(210)
(36,314)
89,465
53,151
$
(13,086)
20,782
2,496
$
$
$
— $
— $
7,454
4,324
$
$
28,538
6,903
(9,171)
2,103
6,717
—
(696)
24,326
196,983
45,005
(14,318)
(16,277)
231,884
(341)
(8,070)
7,777
—
—
508
(126)
(221,912)
72,907
(116,876)
—
(3,397)
322
(268,956)
(865)
(38,063)
127,528
89,465
7,324
25,840
12,156
—
3,315
3,912
—
$
$
$
$
$
$
$
$
See Notes to Consolidated Financial Statements
58
TITAN MACHINERY INC.
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.
59
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.
60
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
Furniture and fixtures
Vehicles
Rental fleet
3 - 10 years
3 - 10 years
5 - 10 years
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
61
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.
62
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:
Basic Weighted-Average Common Shares Outstanding
Plus: Incremental Shares From Assumed Exercise of Stock Options
Diluted Weighted-Average Common Shares Outstanding
Year Ended January 31,
2018
2017
2016
(in thousands, except per share data)
21,543
—
21,543
21,294
—
21,294
21,111
—
21,111
Anti-Dilutive Shares Excluded From Diluted Weighted-Average Common
Shares Outstanding
Stock Options
Shares Underlying Senior Convertible Notes (conversion price of $43.17)
87
1,521
139
2,217
174
3,474
Earnings (Loss) per Share
Basic
Diluted
Revenue Recognition
$
$
(0.32) $
(0.32) $
(0.65) $
(0.65) $
(1.76)
(1.76)
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
63
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.
64
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
65
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:
Additional paid-in
capital
As of February 1, 2017
Balance Sheet Classification
Deferred income tax
liability
(in thousands)
Increase (Decrease)
Retained earnings
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
66
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
Trade accounts receivable
Due from customers
Due from finance companies
Due from manufacturers
Unbilled receivables due from customers
Total trade accounts receivable
Less allowance for doubtful accounts
NOTE 3—INVENTORIES
New equipment
Used equipment
Parts and attachments
Work in process
January 31, 2018
January 31, 2017
(in thousands)
$
32,829
$
8,906
10,074
11,814
63,623
(2,951)
60,672
$
$
31,636
14,319
9,107
8,650
63,712
(3,630)
60,082
January 31, 2018
January 31, 2017
(in thousands)
$
258,559
$
141,450
71,110
1,348
472,467
$
$
235,161
160,503
81,734
868
478,266
67
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4—PROPERTY AND EQUIPMENT
Rental fleet equipment
Machinery and equipment
Vehicles
Furniture and fixtures
Land, buildings, and leasehold improvements
Less accumulated depreciation
January 31, 2018
January 31, 2017
(in thousands)
$
123,430
$
124,417
22,025
37,741
39,851
62,243
22,255
36,384
39,875
59,481
285,290
(134,243)
151,047
$
282,412
(125,765)
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:
Cost
January 31, 2018
Accumulated
Amortization
(in thousands)
Net
Cost
January 31, 2017
Accumulated
Amortization
(in thousands)
Net
Covenants not to compete
$
$
440
440
$
$
(369) $
(369) $
71
71
$
$
970
970
$
$
(851) $
(851) $
119
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,
2019
2020
2021
2022
2023
Amount
(in thousands)
$
$
32
20
9
5
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.
68
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
69
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
70
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.
71
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.
72
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:
Principal value
Unamortized debt discount
Unamortized debt issuance costs
Carrying value of senior convertible notes
Carrying value of equity component, net of deferred taxes
Conversion rate (shares of common stock per $1,000 principal amount of notes)
Conversion price (per share of common stock)
January 31, 2018
January 31, 2017
(in thousands, except conversion rate
and conversion price)
95,725
(6,368)
(856)
88,501
15,546
$
$
$
$
65,644
(2,497)
(328)
62,819
14,923
$
$
$
23.1626
43.17
The Company recognized interest expense associated with its Senior Convertible Notes as follows:
Cash Interest Expense
Coupon interest expense
Noncash Interest Expense
Amortization of debt discount
Amortization of transaction costs
Year Ended January 31,
2018
2017
2016
(in thousands)
$
$
2,782
$
4,355
$
5,625
2,104
290
2,849
439
5,176
$
7,643
$
3,703
552
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.
73
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:
Sale-leaseback financing obligations and capital leases, interest rates primarily ranging from
3.4% to 12.6%,with various maturity dates through December 2030
Working Capital Line payable to Wells Fargo (see details in Note 6)
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
Less current maturities
Long-term debt maturities are as follows:
January 31, 2018
January 31, 2017
(in thousands)
$
23,152
$
13,000
24,665
13,000
—
36,152
(1,574)
34,578
$
1,944
39,609
(1,373)
38,236
$
Years Ending January 31,
Minimum Lease
Payments
Interest
Present Value of
Minimum Lease
Payments
(in thousands)
Other Long-
Term Debt
Sale-Leaseback Financing Obligations & Capital Leases
Total Present
Value of
Minimum Lease
Payments and
Other Long-
Term Debt
2019
2020
2021
2022
2023
Thereafter
$
3,372
$
1,798
$
1,574
$
— $
3,448
3,324
3,161
3,066
21,133
1,712
1,701
1,592
1,474
6,075
1,736
1,623
1,569
1,592
15,058
13,000
—
—
—
—
$
37,504
$
14,352
$
23,152
$
13,000
$
1,574
14,736
1,623
1,569
1,592
15,058
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.
74
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:
Cash flow hedges:
Interest rate swap
Derivatives not designated as hedging instruments:
Foreign currency contracts
Notional Amount as of:
January 31, 2018
January 31, 2017
(in thousands)
—
100,000
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
Cash flow hedges:
Interest rate swap (a)
Foreign currency contracts (b)
Derivatives Not Designated as Hedging Instruments:
Foreign currency contracts (c)
Total Derivatives
$
— $
— $
— $
— $
333
$
—
48
—
—
48
$
(1,091)
—
263
—
(1,384)
—
(1,309)
—
(1,755)
(61)
(1,510)
$ (2,601) $
—
263
365
$ (1,019) $
—
(976) $
996
(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
75
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
Compensation
Sales, payroll, real estate and value added taxes
Interest
Insurance
Income taxes payable
Derivative liabilities
Other
NOTE 11—CONTINGENCIES AND GUARANTEES
Guarantees
January 31, 2018
January 31, 2017
(in thousands)
$
16,413
$
16,163
4,448
1,148
3,004
2,419
—
4,431
3,871
1,372
1,524
144
1,355
6,104
$
31,863
$
30,533
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
76
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,
2019
2020
2021
2022
2023
Thereafter
Amount
(in thousands)
$
$
20,081
17,668
16,012
15,708
15,425
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
77
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:
U.S.
Foreign
Total
2018
2017
2016
(in thousands)
$
$
(16,644) $
2,205
(14,439) $
(22,244) $
(469)
(22,713) $
(53,211)
(3,000)
(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:
Current
Federal
State
Foreign
Total current taxes
Deferred
Federal
State
Foreign
Total deferred taxes
2018
2017
2016
(in thousands)
$
$
$
130
50
1,350
1,530
(6,247)
270
(2,943)
(8,920)
(7,390) $
(5,368) $
(85)
116
(5,337)
(1,819)
(471)
(551)
(2,841)
(8,178) $
(9,193)
147
235
(8,811)
(7,766)
(1,427)
22
(9,171)
(17,982)
78
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:
U.S. statutory rate
Foreign statutory rates
State taxes on income net of federal tax benefit
Valuation allowances
U.S. statutory rate reduction
All other, net
2018
2017
2016
(33.8)%
1.4 %
(4.3)%
(4.4)%
(13.9)%
3.8 %
(51.2)%
(35.0)%
(35.0)%
2.8 %
(4.3)%
(2.7)%
— %
3.2 %
0.6 %
(4.1)%
5.7 %
— %
0.8 %
(36.0)%
(32.0)%
Deferred tax assets and liabilities consist of the following as of January 31, 2018 and 2017:
Deferred tax assets:
Inventory allowances
Intangible Assets
Net operating losses
Accrued liabilities and other
Receivables
Hedging and derivatives
Stock-based compensation
Other
Total deferred tax assets
Valuation allowances
Deferred tax assets, net of valuation allowances
Deferred tax liabilities:
Property and equipment
Senior convertible notes
Total deferred tax liabilities
Net deferred tax asset (liability)
2018
2017
(in thousands)
$
5,061
$
11,622
3,763
12,366
5,084
719
—
1,119
1,241
29,353
(7,717)
21,636
$
6,065
6,679
4,573
1,034
541
845
1,060
32,419
(8,968)
23,451
(19,810) $
(629)
(20,439) $
(29,942)
(2,462)
(32,404)
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.
79
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.
80
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:
Outstanding at January 31, 2017
Granted
Exercised
Forfeited
Outstanding at January 31, 2018
Exercisable at January 31, 2018
Number of Stock
Options
Weighted Average
Exercise Price
(in thousands)
Aggregate
Intrinsic Value
(in thousands)
Weighted Average
Remaining
Contractual Life
(Years)
271
—
(184)
(19)
68
68
$
$
$
12.50
—
8.90
14.31
21.63
21.63
$
$
$
1,008
1.0
18
18
0.5
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.
81
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:
Range of Exercise Prices
$ 10.20-14.69
$ 21.21-26.84
Restricted Stock Awards ("RSAs")
Stock Options Outstanding and Exercisable
Weighted Average
Remaining
Contractual Life
(Years)
Weighted Average
Exercise Price
0.8 $
0.5
0.5
$
10.97
22.71
21.63
Number
(in thousands)
6
62
68
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:
Nonvested at January 31, 2017
Granted
Forfeited
Vested
Nonvested at January 31, 2018
Weighted Average
Grant Date Fair
Value
Weighted Average
Remaining
Contractual Life
(Years)
Shares
(in thousands)
509
$
130
(32)
(201)
406
$
14.83
17.47
15.13
15.03
16.24
2.6
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.
82
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes RSU activity for the year ended January 31, 2018:
Nonvested at January 31, 2017
Granted
Forfeited
Vested
Nonvested at January 31, 2018
Weighted Average
Grant Date Fair
Value
Weighted Average
Remaining
Contractual Life
(Years)
Shares
(in thousands)
72
$
11
(58)
(3)
22
$
18.57
17.58
16.72
11.63
14.70
1.0
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:
Financial Assets
Foreign currency contracts
Total Financial Assets
Financial Liabilities
Interest rate swap
Foreign currency contracts
Total Financial Liabilities
$
$
$
$
January 31, 2018
January 31, 2017
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
(in thousands)
(in thousands)
— $
— $
13
13
$
$
— $
— $
13
13
$
$
— $
— $
— $
— $
— $
— $
—
—
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
— $ 1,155
200
—
— $ 1,355
$
$
— $ 1,155
200
—
— $ 1,355
83
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
(in thousands)
Estimated Fair
Value
Carrying Value
Face Value
(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.
84
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Lease accrual and termination costs
Termination benefits
Impairment of fixed assets, net of gains on asset disposition
Asset relocation and other costs
Cumulative
Amount
Year Ended January 31,
2018
2017
(in thousands)
$
5,681
$
5,681
$
5,053
2,206
516
5,053
(751)
516
—
—
2,957
—
$
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.
Lease accrual and termination costs
Termination benefits
Impairment of fixed assets, net of gains on asset disposition
Asset relocation and other costs
Restructuring charges are summarized by segment in the following table:
Segment
Agriculture
Construction
International
Shared Resources
Total
Year Ended January 31,
2017
2016
$
$
(128) $
399
—
48
692
774
369
126
319
$
1,961
Year Ended January 31,
2018
2017
2016
(in thousands)
$
6,886
2,093
62
1,458
$
983
$
1,914
—
379
982
645
—
334
$
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:
Balance, January 31, 2017
Exit costs incurred and charged to expense
Exit costs paid
Balance, January 31, 2018
Lease Accrual &
Termination
Costs
Termination
Benefits
Asset
Relocation &
Other Costs
Total
(in thousands)
— $
5,681
(288)
5,393
—
4,568
(4,164)
404
— $
516
(516)
—
—
10,765
(4,968)
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.
85
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.
Revenue
Agriculture
Construction
International
Total
Income (Loss) Before Income Taxes
Agriculture
Construction
International
Segment income (loss) before income taxes
Shared Resources
Total
Total Impairment
Agriculture
Construction
International
Segment impairment
Shared Resources
Total
Year Ended January 31,
2018
2017
2016
(in thousands)
694,025
$
739,167
$
300,019
208,894
323,625
150,288
864,851
340,916
162,068
1,202,938
$
1,213,080
$
1,367,835
(3,678) $
(7,278)
2,205
(8,751)
(5,688)
(14,439) $
175
498
—
673
—
673
$
$
(15,781) $
(5,875)
(469)
(22,125)
(588)
(22,713) $
1,888
2,155
325
4,368
42
4,410
$
$
(29,710)
(26,388)
(3,004)
(59,102)
2,891
(56,211)
3,975
2,752
—
6,727
176
6,903
$
$
$
$
$
$
86
TITAN MACHINERY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended January 31,
2018
2017
2016
Restructuring Costs
Agriculture
Construction
International
Segment impairment
Shared Resources
Total
Interest Income
Agriculture
Construction
International
Segment interest income
Shared Resources
Total
Interest Expense
Agriculture
Construction
International
Segment interest expense
Shared Resources
Total
Depreciation and Amortization
Agriculture
Construction
International
Segment depreciation and amortization
Shared Resources
Total
Capital Expenditures
Agriculture
Construction
International
Segment capital expenditures
Shared Resources
Total
Total Assets
Agriculture
Construction
International
Segment assets
Shared Resources
Total
$
$
$
$
$
$
$
$
$
$
6,886
2,093
62
9,041
1,458
10,499
164
314
9
487
9
496
5,781
7,750
2,510
16,041
958
16,999
5,411
14,297
1,366
21,074
4,031
25,105
2,950
20,080
1,332
24,362
1,753
26,115
$
$
$
$
$
$
$
$
$
$
(120) $
60
—
(60)
379
319
$
183
341
31
555
12
567
11,201
10,196
2,884
24,281
(2,416)
21,865
6,128
15,288
1,394
22,810
4,058
26,868
1,585
5,480
898
7,963
4,462
12,425
$
$
$
$
$
$
$
$
738
635
—
1,373
224
1,597
159
396
68
623
17
640
15,596
12,575
4,159
32,330
293
32,623
7,760
15,965
1,255
24,980
3,558
28,538
2,861
1,492
657
5,010
3,401
8,411
January 31, 2018
January 31, 2017
$
(in thousands)
$
400,017
211,154
126,251
737,422
22,886
$
760,308
$
411,726
221,092
106,899
739,717
31,705
771,422
87
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.
(in thousands, except per share data)
Earnings (Loss)
per Share-Basic
Earnings (Loss)
per Share-Diluted
2018
First quarter
$
264,118
$
48,919
$
Second quarter
Third quarter
Fourth quarter
2017
268,871
330,341
339,608
52,807
61,477
52,097
First quarter
$
284,860
$
53,548
$
Second quarter
Third quarter
Fourth quarter
278,333
332,266
317,621
52,933
58,426
48,822
(5,932) $
(5,186)
2,384
1,685
(3,858) $
(2,702)
264
(8,239)
(5,932) $
(5,186)
2,384
1,685
(3,684) $
(2,520)
264
(8,239)
(0.27) $
(0.24)
0.11
0.08
(0.17) $
(0.12)
0.01
(0.38)
(0.27)
(0.24)
0.11
0.08
(0.17)
(0.12)
0.01
(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.
88
Schedule II—Valuation and Qualifying Accounts and Reserves
Titan Machinery Inc.
Classification
Valuation reserve deduction from
receivables:
Beginning
Balance
Additions
Charged to
Expenses
Deductions for
Write-offs, Net of
Recoveries
Foreign currency
translation
adjustment
Ending Balance
(in thousands)
Year ended January 31, 2018
$
3,630
$
2,333
$
Year ended January 31, 2017
Year ended January 31, 2016
3,591
4,218
3,399
3,896
(3,138) $
(3,428)
(4,591)
126
$
68
68
2,951
3,630
3,591
89
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. After evaluating the effectiveness of the Company's disclosure
controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 ("Exchange Act") as of the end of
the period covered by this Form 10-K, our Chief Executive Officer and Chief Financial Officer, with the participation of the
Company's management, have concluded that the Company's disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e)) are effective.
Management's Report on Internal Control Over Financial Reporting. Our management is responsible for establishing
and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Under the supervision and with the participation of management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). Based on this evaluation, management has concluded that our internal control over financial
reporting was effective as of January 31, 2018.
Deloitte & Touche LLP, the independent registered public accounting firm that audited the consolidated financial
statements included in this Form 10-K, has also audited our internal control over financial reporting as of January 31, 2018, as
stated in their attestation report included in Item 8 of this Form 10-K.
Changes in Internal Control over Financial Reporting. There has not been any change in the Company's internal
control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during its most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Other than the information included in Part I of this Form 10-K under the heading "Executive Officers of the
Registrant," the information required by Item 10 is incorporated by reference to the sections labeled "Board of Directors,"
"Corporate Governance" and "Section 16(a) Beneficial Ownership Reporting Compliance," all of which will appear in our
definitive proxy statement for our 2018 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the sections labeled "Compensation
Discussion and Analysis," "Compensation Committee Report," "Compensation Committee Interlocks and Insider
Participation," "Executive Compensation," and "Non-Employee Director Compensation," all of which will appear in our
definitive proxy statement for our 2018 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated herein by reference to the sections entitled "Security Ownership
of Principal Stockholders and Management" and "Executive Compensation - Equity Compensation Plan Information," both of
which will appear in our definitive proxy statement for our 2018 Annual Meeting of Stockholders.
90
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated herein by reference to the sections entitled "Corporate
Governance—Independence" and "Certain Relationships and Related Transactions," both of which will appear in our definitive
proxy statement for our 2018 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference to the section entitled "Fees of the
Independent Registered Public Accounting Firm," which will appear in our definitive proxy statement for our 2018 Annual
Meeting of Stockholders.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this report.
PART IV
(1) Financial Statements. The following financial statements are included in Part II, Item 8 of this Annual Report on
Form 10-K:
Report of Deloitte & Touche LLP on Consolidated Financial Statements as of January 31, 2018 and 2017 and for
each the three years in the period ended January 31, 2018
Report of Deloitte & Touche LLP on Internal Control Over Financial Reporting as of January 31, 2018
Consolidated Balance Sheets as of January 31, 2018 and 2017
Consolidated Statements of Operations for each of the three years in the period ended January 31, 2018
Consolidated Statements of Comprehensive Income (loss) for each of the three years in the period ended
January 31, 2018
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended January 31, 2018
Consolidated Statements of Cash Flows for each of the three years in the period ended January 31, 2018
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. The following consolidated financial statement schedule should be read in
conjunction with the consolidated financial statements and Report of Deloitte & Touche LLP on the consolidated
financial statements included in Part II, Item 8 of this annual report on Form 10-K:
Schedule II—Valuation and Qualifying Accounts and Reserves
All other financial statement schedules have been omitted, because they are not applicable, are not required, or the
information is included in the Financial Statements or Notes thereto
(3) Exhibits. See the Exhibit Index to our Form 10-K immediately following below:
91
No.
EXHIBIT INDEX
TITAN MACHINERY INC.
FORM 10-K
Description
3.1 Certificate of Incorporation of the registrant, as amended (incorporated herein by reference to Exhibit 3.1 of the
registrant's Quarterly Report on Form 10-Q filed with the Commission on September 10, 2012).
3.2 Bylaws of the registrant, as amended (incorporated herein by reference to Exhibit 3.2 of the registrant's Annual
Report on Form 10-K filed with the Commission on April 16, 2009 as File No. 001-33866).
4.1 Specimen Certificate representing shares of common stock of Titan Machinery Inc. (incorporated by reference to
Exhibit 4.1 of the registrant's Amendment No. 6 to Registration Statement on Form S-1, Reg. No. 333-145526,
filed with the Commission on December 3, 2007).
4.2
Indenture, dated as of April 24, 2012, by and between the registrant and Wells Fargo Bank, National Association,
as Trustee (incorporated by reference to Exhibit 4.1 of the registrant's Current Report on Form 8-K filed with the
Commission on April 24, 2012).
10.1 Amended and Restated Employment Agreement, dated March 6, 2013, between David Meyer and the registrant
(incorporated herein by reference to Exhibit 10.2 of the registrant's Annual Report on Form 10-K filed with the
Commission on April 10, 2013).**
10.1.1 Amendment dated March 1, 2014 to the Amended and Restated Employment Agreement, dated March 6, 2013,
between David Meyer and the registrant (incorporated herein by reference to Exhibit 10.54 of the registrant's
Annual Report on Form 10-K filed with the Commission on April 11, 2014).**
10.2 Amended and Restated Employment Agreement, dated September 4, 2015, between Mark Kalvoda and the
registrant (incorporated herein by reference to Exhibit 10.3 of the registrant's Quarterly Report on Form 10-Q filed
with the Commission on September 9, 2015).**
10.2.1 Amendment dated September 1, 2016 to the Amended and Restated Employment Agreement, dated September 4,
2015 between Mark Kalvoda and the registrant (incorporated herein by reference to Exhibit 10.2 of the registrant’s
Quarterly Report on Form 10-Q filed with the Commission on September 1, 2016).**
10.3 Agricultural Equipment Sales & Service Agreement, dated May 31, 2017, between CNH Industrial America LLC
and the registrant (incorporated herein by reference to Exhibit 10.3 of the registrant's Quarterly Report on Form
10-Q filed with the Commission on June 2, 2017).
10.3.1 Amendment to the Agricultural Equipment Sales & Service Agreement, dated May 31, 2017, between CNH
Industrial America LLC and the registrant (incorporated herein by reference to Exhibit 10.4 of the registrant's
Quarterly Report on Form 10-Q filed with the Commission on June 2, 2017).
10.4 Construction Equipment Sales & Service Agreement, dated May 31, 2017, between CNH Industrial America LLC
and the registrant (incorporated herein by reference to Exhibit 10.1 of the registrant's Quarterly Report on Form
10-Q filed with the Commission on June 2, 2017).
10.4.1 Amendment to the Construction Equipment Sales & Service Agreement, dated May 31, 2017, between CNH
Industrial America LLC and the registrant (incorporated herein by reference to Exhibit 10.2 of the registrant's
Quarterly Report on Form 10-Q filed with the Commission on June 2, 2017).
10.5 New Holland Equipment Sales & Service Agreement, dated May 31, 2017, between CNH Industrial America LLC
and the registrant (incorporated herein by reference to Exhibit 10.5 of the registrant's Quarterly Report on Form
10-Q filed with the Commission on June 2, 2017).
10.5.1 Amendment to the New Holland Equipment Sales & Service Agreement, dated May 31, 2017, between CNH
Industrial America LLC and the registrant (incorporated herein by reference to Exhibit 10.6 of the registrant's
Quarterly Report on Form 10-Q filed with the Commission on June 2, 2017).
10.6 Dealer Security Agreement dated April 14, 2003 between New Holland North America, Inc. and the registrant
(incorporated herein by reference to Exhibit 10.14 of the registrant's Amendment No. 2 to Registration Statement
on Form S-1, Reg. No. 333-145526, filed with the Commission on October 10, 2007).
10.7 Dealer Security Agreements between CNH America LLC and the registrant (incorporated herein by reference to
Exhibit 10.15 of the registrant's Amendment No. 2 to Registration Statement on Form S-1, Reg. No. 333-145526,
filed with the Commission on October 10, 2007).
10.8 Amended and Restated Wholesale Floorplan Credit Facility and Security Agreement, dated November 13, 2007,
between CNH Capital America LLC and the registrant (incorporated herein by reference to Exhibit 10.25 of the
registrant's Amendment No. 5 to Registration Statement on Form S-1, Reg. No. 333-145526, filed with the
Commission on November 27, 2007).
92
No.
10.8.1 Letter Agreement with CNH Capital America, LLC dated September 30, 2011, amending the November 13, 2007
Description
Amended and Restated Wholesale Floorplan Credit Facility and Security Agreement (incorporated herein by
reference to Exhibit 10.3 of the registrant's Quarterly Report on Form 10-Q filed with the Commission on
December 9, 2011).
10.8.2 Letter Agreement with CNH Capital America, LLC dated November 20, 2012, amending the November 13, 2007
Amended and Restated Wholesale Floorplan Credit Facility and Security Agreement (incorporated herein by
reference to Exhibit 10.1 of the registrant's Quarterly Report on Form 10-Q filed with the Commission on
December 6, 2012).
10.8.3 Letter Agreement with CNH Capital America, LLC dated February 15, 2013, amending the November 13, 2007
Amended and Restated Wholesale Floorplan Credit Facility and Security Agreement (incorporated herein by
reference to Exhibit 10.49 of the registrant's Annual Report on Form 10-K filed with the Commission on April 10,
2013).
10.8.4 Amendment dated December 8, 2014 to the Amended and Restated Wholesale Floor Plan Credit Facility and
Security Agreement dated November 13, 2007 by and between the registrant and CNH Industrial Capital America
LLC (incorporated herein by reference to Exhibit 10.2 of the registrant's Quarterly Report on Form 10-Q filed with
the Commission on December 10, 2014).
10.8.5 Second Amendment dated March 31, 2016 to the Amended and Restated Wholesale Floor Plan Credit Facility and
Security Agreement dated November 13, 2007 by and between the registrant and CNH Industrial Capital America
LLC (incorporated herein by reference to Exhibit 10.17.5 of the registrant's Annual Report on Form 10-K filed
with the Commission on April 13, 2016).
10.8.6 Amendment dated October 5, 2017 to the Amended and Restated Wholesale Floor Plan Credit Facility and
Security Agreement dated November 13, 2007 by and between the registrant and CNH Industrial Capital America
LLC (incorporated herein by reference to Exhibit 10.2 of the registrant's Quarterly Report on Form 10-Q filed with
the Commission on December 7, 2017).
10.8.7* Amendment dated April 1, 2018 to the Amended and Restated Wholesale Floor Plan Credit Facility and Security
Agreement dated November 13, 2007 by and between the registrant and CNH Industrial Capital America LLC.
10.9 Second Amended and Restated Credit Agreement dated as of October 28, 2015 by and among the registrant, Wells
Fargo Bank, National Association, and the Financial Institutions Party Thereto (incorporated by reference to
Exhibit 10.1 of the registrant's Current Report on Form 8-K filed with the Commission on November 2, 2015).
10.9.1 Amendment No. 1 to Second Amended and Restated Credit Agreement dated December 29, 2015 by and among
the registrant, Wells Fargo Bank, National Association, and the Financial Institutions Party Thereto (incorporated
herein by reference to Exhibit 10.18.1 of the registrant's Annual Report on Form 10-K filed with the Commission
on April 13, 2016).
10.9.2 Amendment No. 2 to Second Amended and Restated Credit Agreement dated March 25, 2016 by and among the
registrant, Wells Fargo Bank, National Association, and the Financial Institutions Party Thereto (incorporated
herein by reference to Exhibit 10.18.2 of the registrant's Annual Report on Form 10-K filed with the Commission
on April 13, 2016).
10.9.3 Amendment No. 3 to Second Amended and Restated Credit Agreement dated December 8, 2016 by and among the
registrant, Wells Fargo Bank, National Association, and the Financial Institutions Party Thereto (incorporated
herein by reference to Exhibit 10.17.3 of the registrant's Annual Report on Form 10-K filed with the Commission
on April 7, 2017).
10.9.4 Amendment No. 4 to Second Amended and Restated Credit Agreement dated March 1, 2017 by and among the
registrant, Wells Fargo Bank, National Association, and the Financial Institutions Party Thereto (incorporated
herein by reference to Exhibit 10.17.4 of the registrant's Annual Report on Form 10-K filed with the Commission
on April 7, 2017).
10.9.5* Amendment No. 5 to Second Amended and Restated Credit Agreement dated February 12, 2018 by and among the
registrant, Wells Fargo Bank, National Association, and the Financial Institutions Party Thereto.
10.10 Amended and Restated 2005 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the
registrant's Current Report on Form 8-K filed with the Commission on June 6, 2011).**
10.11 Form of Incentive Stock Option Agreement under the 2005 Equity Incentive Plan (incorporated herein by
reference to Exhibit 10.22 of the registrant's Amendment No. 2 to Registration Statement on Form S-1, Reg.
No. 333-145526, filed with the Commission on October 10, 2007).**
93
No.
10.12 Form of Non-Qualified Stock Option Agreement under the 2005 Equity Incentive Plan (incorporated herein by
Description
reference to Exhibit 10.23 of the registrant's Amendment No. 2 to Registration Statement on Form S-1, Reg.
No. 333-145526, filed with the Commission on October 10, 2007).**
10.13 Form of Restricted Stock Agreement under the 2005 Equity Incentive Plan (incorporated herein by reference to
Exhibit 10.24 of the registrant's Amendment No. 2 to Registration Statement on Form S-1, Reg. No. 333-145526,
filed with the Commission on October 10, 2007).**
10.14 Titan Machinery Inc. 2014 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the
registrant's Current Report on Form 8-K filed with the Commission on June 3, 2014).**
10.15 Form of Titan Machinery Inc. Performance Award Agreement under the 2014 Equity Incentive Plan (incorporated
herein by reference to Exhibit 10.1 of the registrant's Quarterly Report on Form 10-Q filed with the Commission
on June 5, 2014).**
10.16 Form of Titan Machinery Inc. Restricted Stock Agreement (for non-employee directors) under the 2014 Equity
Incentive Plan (incorporated herein by reference to Exhibit 10.2 of the registrant's Quarterly Report on Form 10-Q
filed with the Commission on June 5, 2014).**
10.17 Form of Titan Machinery Inc. Restricted Stock Agreement under the 2014 Equity Incentive Plan (incorporated
herein by reference to Exhibit 10.3 of the registrant's Quarterly Report on Form 10-Q filed with the Commission
on June 5, 2014).**
10.18 Form of Titan Machinery Inc. Restricted Stock Unit Agreement under the 2014 Equity Incentive Plan
(incorporated herein by reference to Exhibit 10.2 of the registrant's Quarterly Report on Form 10-Q filed with the
Commission on September 9, 2014).**
10.19 Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.34 of the
registrant's Annual Report on Form 10-K filed with the Commission on April 11, 2012).
10.20 Titan Machinery Inc. Non-Employee Director Compensation Plan (incorporated herein by reference to
Exhibit 10.2 of the registrant's Quarterly Report on Form 10-Q filed with the Commission on September 9,
2015).**
10.21 Description of Titan Machinery Inc.’s Executive Cash Bonus Plan (incorporated herein by reference to Exhibit
10.34 of the registrant’s Annual Report on Form 10-K filed with the Commission on April 15, 2015**
21.1* Subsidiaries of Titan Machinery Inc.
23.1* Consent of Deloitte & Touche LLP
24.1* Power of Attorney
31.1* Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1* Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2* Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 The following materials from Titan Machinery Inc.'s Annual Report on Form 10-K for the year ended January 31,
2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of
Operations for the fiscal years ended January 31, 2018, 2017 and 2016, (ii) the Consolidated Statements of
Operations for the fiscal years ended January 31, 2018, 2017 and 2016, (iii) the Consolidated Statements of
Comprehensive Income (Loss) for the fiscal years ended January 31, 2018, 2017 and 2016, (iv) the Consolidated
Statements of Stockholders' Equity for the fiscal years ended January 31, 2018, 2017 and 2016, (v) the
Consolidated Statements of Cash Flows for the fiscal years ended January 31, 2018, 2017 and 2016, and (vi) the
Notes to the Consolidated Financial Statements.
______________________________________________________
*
**
Filed herewith
Indicates management contract or compensatory plan or arrangement.
TEM 16. FORM 10-K SUMMARY
Not applicable.
94
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: April 6, 2018
TITAN MACHINERY INC.
By
/s/ DAVID J. MEYER
David J. Meyer,
Board Chair and Chief Executive Officer
By
/s/ MARK KALVODA
Mark Kalvoda,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
/s/ DAVID J. MEYER
David J. Meyer
/s/ MARK KALVODA
Mark Kalvoda
*
Tony Christianson
*
Stanley Dardis
*
Stan Erickson
*
Christine Hamilton
*
John Henderson
*
Jody Horner
*
Richard Mack
Board Chair, Chief Executive Officer (principal
executive officer)
Title
Date
April 6, 2018
Chief Financial Officer (principal financial officer and
principal accounting officer)
April 6, 2018
Director
Director
Director
Director
Director
Director
Director
April 6, 2018
April 6, 2018
April 6, 2018
April 6, 2018
April 6, 2018
April 6, 2018
April 6, 2018
*By
/s/ MARK KALVODA
Mark Kalvoda, Attorney-in-Fact
95
Board of Directors
David Meyer
Board Chair & CEO, Titan Machinery Inc.
West Fargo, ND
Tony Christianson
Chairman, Cherry Tree Companies, LLC
Minnetonka, MN
Stanley Dardis
Retired CEO and Director, Bremer Financial Corporation
Woodbury, MN
Stan Erickson
President and CEO, Liberty Capital, Inc.
Minneapolis, MN
Christine Hamilton
Co-owner and Managing Partner, Christiansen Land and Cattle, Ltd.
Co-owner, Dakota Packing, Inc.
Kimball, SD
John Henderson
Retired Executive Chairman and President, Oncore Manufacturing, LLC
Kingwood, TX
Jody Horner
President, Midland University
Fremont, NE
Richard Mack
Senior Advisor and former Chief Financial Officer, The Mosaic Company
Plymouth, MN
Independent Public Accountant
Deloitte & Touche LLP
Minneapolis, MN
Investor Contact
ICR, Inc.
John Mills
(646) 277-1254
Stock Transfer Agent
Computershare Inc.
Canton, MA
Titan Machinery Inc.
644 East Beaton Drive West Fargo, ND 58078
Telephone: 701.356.0130 www.titanmachinery.com