XNAS:TITN Titan Machinery Inc Quarterly Report 10-Q Filing - 4/30/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 


 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 30, 2012

Commission File No. 001-33866

 

TITAN MACHINERY INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

No. 45-0357838

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

644 East Beaton Drive

West Fargo, ND 58078-2648

(Address of Principal Executive Offices)

 

Registrant’s telephone number (701) 356-0130

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

 

The number of shares outstanding of the registrant’s common stock as of May 31, 2012 was: Common Stock, $0.00001 par value, 20,948,420 shares.

 

 

 



Table of Contents

 

TITAN MACHINERY INC.

QUARTERLY REPORT ON FORM 10-Q

 

Table of Contents

 

 

 

 

 

Page No.

 

 

 

 

 

PART I.            FINANCIAL INFORMATION

 

3

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of April 30, 2012 and January 31, 2012

3

 

 

 

 

 

 

 

 

Consolidated Statements of Operations for the three months ended April 30, 2012 and 2011

4

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three months ended April 30, 2012 and 2011

5

 

 

 

 

 

 

 

 

Consolidated Statement of Stockholders’ Equity for the three months ended April 30, 2012

6

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended April 30, 2012 and 2011

7

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

15

 

 

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

23

 

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

23

 

 

 

 

PART II.          OTHER INFORMATION

 

24

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

24

 

 

 

 

 

ITEM 1A.

RISK FACTORS

24

 

 

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

24

 

 

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

24

 

 

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

24

 

 

 

 

 

ITEM 5.

OTHER INFORMATION

24

 

 

 

 

 

ITEM 6.

EXHIBITS

25

 

 

 

 

 

Signatures

26

 

 

 

 

Exhibit Index

27

 



Table of Contents

 

PART I. — FINANCIAL INFORMATION

 

ITEM 1.                FINANCIAL STATEMENTS

 

TITAN MACHINERY INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

 

 

April 30,

 

January 31,

 

 

 

2012

 

2012

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

106,717

 

$

79,842

 

Receivables, net

 

53,679

 

82,518

 

Inventories

 

823,195

 

748,047

 

Prepaid expenses and other

 

5,128

 

2,108

 

Income taxes receivable

 

 

3,140

 

Deferred income taxes

 

5,256

 

5,370

 

Total current assets

 

993,975

 

921,025

 

 

 

 

 

 

 

INTANGIBLES AND OTHER ASSETS

 

 

 

 

 

Noncurrent parts inventories

 

3,147

 

2,792

 

Goodwill

 

26,255

 

24,404

 

Intangible assets, net of accumulated amortization

 

11,459

 

10,793

 

Other

 

7,850

 

2,776

 

Total intangibles and other assets

 

48,711

 

40,765

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net of accumulated depreciation

 

167,759

 

126,282

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,210,445

 

$

1,088,072

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable

 

$

37,322

 

$

28,424

 

Floorplan notes payable

 

571,170

 

552,428

 

Current maturities of long-term debt

 

4,566

 

4,755

 

Customer deposits

 

25,247

 

49,540

 

Accrued expenses

 

21,903

 

26,735

 

Income taxes payable

 

233

 

 

Total current liabilities

 

660,441

 

661,882

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

Senior convertible notes

 

123,378

 

 

Long-term debt, less current maturities

 

21,607

 

57,405

 

Deferred income taxes

 

38,926

 

28,592

 

Other long-term liabilities

 

2,087

 

2,854

 

Total long-term liabilities

 

185,998

 

88,851

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock, par value $.00001 per share, authorized - 25,000 shares; issued and outstanding - 20,939 at April 30, 2012 and 20,911 at January 31, 2012

 

 

 

Additional paid-in-capital

 

234,651

 

218,156

 

Retained earnings

 

125,848

 

118,251

 

Accumulated other comprehensive income (loss)

 

112

 

(70

)

Total Titan Machinery Inc. stockholders’ equity

 

360,611

 

336,337

 

Noncontrolling interest

 

3,395

 

1,002

 

Total stockholders’ equity

 

364,006

 

337,339

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,210,445

 

$

1,088,072

 

 

See Notes to Consolidated Financial Statements

 

3



Table of Contents

 

TITAN MACHINERY INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

 

 

 

Three Months Ended April 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

REVENUE

 

 

 

 

 

Equipment

 

$

322,528

 

$

249,229

 

Parts

 

58,844

 

41,910

 

Service

 

29,752

 

20,964

 

Rental and other

 

10,599

 

6,062

 

TOTAL REVENUE

 

421,723

 

318,165

 

 

 

 

 

 

 

COST OF REVENUE

 

 

 

 

 

Equipment

 

292,085

 

223,301

 

Parts

 

40,653

 

29,720

 

Service

 

10,363

 

7,908

 

Rental and other

 

8,213

 

4,433

 

TOTAL COST OF REVENUE

 

351,314

 

265,362

 

 

 

 

 

 

 

GROSS PROFIT

 

70,409

 

52,803

 

 

 

 

 

 

 

OPERATING EXPENSES

 

54,856

 

39,436

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

15,553

 

13,367

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

Interest and other income

 

488

 

285

 

Floorplan interest expense

 

(2,898

)

(1,162

)

Interest expense other

 

(793

)

(275

)

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

12,350

 

12,215

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

(4,891

)

(4,947

)

 

 

 

 

 

 

NET INCOME INCLUDING NONCONTROLLING INTEREST

 

7,459

 

7,268

 

 

 

 

 

 

 

NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

138

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO TITAN MACHINERY INC.

 

$

7,597

 

$

7,268

 

 

 

 

 

 

 

EARNINGS PER SHARE - NOTE 1

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE - BASIC

 

$

0.36

 

$

0.41

 

EARNINGS PER SHARE - DILUTED

 

$

0.36

 

$

0.40

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES - BASIC

 

20,723

 

17,754

 

WEIGHTED AVERAGE SHARES - DILUTED

 

20,962

 

18,141

 

 

See Notes to Consolidated Financial Statements

 

4



Table of Contents

 

TITAN MACHINERY INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended April 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

NET INCOME INCLUDING NONCONTROLLING INTEREST

 

$

7,459

 

$

7,268

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

249

 

 

 

 

 

 

 

 

TOTAL OTHER COMPREHENSIVE INCOME

 

249

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

7,708

 

7,268

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(71

)

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO TITAN MACHINERY INC.

 

$

7,779

 

$

7,268

 

 

See Notes to Consolidated Financial Statements

 

5



Table of Contents

 

TITAN MACHINERY INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands)

 

 

 

 

 

 

 

 

 

Accumulated

 

Total Titan

 

 

 

 

 

 

 

Common Stock

 

Additional

 

 

 

Other

 

Machinery Inc.

 

 

 

Total

 

 

 

Shares

 

 

 

Paid-In

 

Retained

 

Comprehensive

 

Stockholders’

 

Noncontrolling

 

Stockholders’

 

 

 

Outstanding

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Equity

 

Interest

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, JANUARY 31, 2012

 

20,911

 

$

 

$

218,156

 

$

118,251

 

$

(70

)

$

336,337

 

$

1,002

 

$

337,339

 

Senior convertible notes offering

 

 

 

15,501

 

 

 

15,501

 

 

15,501

 

Common stock issued on grant of restricted stock, exercise of stock options and warrants, and tax benefits of equity awards

 

28

 

 

636

 

 

 

636

 

 

636

 

Issuance of subsidiary shares to noncontrolling interest holders

 

 

 

 

 

 

 

2,464

 

2,464

 

Stock-based compensation expense

 

 

 

358

 

 

 

358

 

 

358

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

7,597

 

 

7,597

 

(138

)

7,459

 

Other comprehensive income

 

 

 

 

 

182

 

182

 

67

 

249

 

Total comprehensive income (loss)

 

 

 

 

 

 

7,779

 

(71

)

7,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, APRIL 30, 2012

 

20,939

 

$

 

$

234,651

 

$

125,848

 

$

112

 

$

360,611

 

$

3,395

 

$

364,006

 

 

See Notes to Consolidated Financial Statements

 

6



Table of Contents

 

TITAN MACHINERY INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended April 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income including noncontrolling interest

 

$

7,459

 

$

7,268

 

Adjustments to reconcile net income to net cash provided by (used for) operating activities

 

 

 

 

 

Depreciation and amortization

 

4,927

 

2,642

 

Deferred income taxes

 

114

 

20

 

Stock-based compensation expense

 

358

 

301

 

Other, net

 

73

 

4

 

Changes in assets and liabilities, net of purchase of equipment dealerships assets and assumption of liabilities

 

 

 

 

 

Receivables, prepaid expenses and other assets

 

27,590

 

(6,011

)

Inventories

 

(40,396

)

(29,542

)

Floorplan notes payable

 

(2,111

)

4,253

 

Accounts payable, customer deposits, accrued expenses and other long-term liabilities

 

(26,240

)

16,383

 

Income taxes

 

3,373

 

(249

)

 

 

 

 

 

 

NET CASH USED FOR OPERATING ACTIVITIES

 

(24,853

)

(4,931

)

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Rental fleet purchases

 

(16,233

)

(463

)

Property and equipment purchases (excluding rental fleet)

 

(1,725

)

(1,823

)

Net proceeds from sale of property and equipment

 

61

 

647

 

Purchase of equipment dealerships, net of cash acquired

 

(8,396

)

(7,039

)

Other, net

 

11

 

4

 

 

 

 

 

 

 

NET CASH USED FOR INVESTING ACTIVITIES

 

(26,282

)

(8,674

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from senior convertible notes offering, net of direct issuance costs of $4,753

 

145,247

 

 

Net change in non-manufacturer floorplan notes payable

 

(22,669

)

22,731

 

Proceeds from long-term debt borrowings

 

1,300

 

 

Principal payments on long-term debt

 

(47,806

)

(3,993

)

Proceeds from sale of subsidiary shares to noncontrolling interest holders

 

2,464

 

 

Other, net

 

(612

)

362

 

 

 

 

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

77,924

 

19,100

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

 

86

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

26,875

 

5,495

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

79,842

 

76,112

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

106,717

 

$

81,607

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

Cash paid during the period

 

 

 

 

 

Income taxes, net of refunds

 

$

1,165

 

$

5,171

 

 

 

 

 

 

 

Interest

 

$

3,556

 

$

1,252

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

Property and equipment financed with long-term debt

 

$

10,514

 

$

251

 

 

 

 

 

 

 

Net transfer of assets to property and equipment from inventories

 

$

15,966

 

$

8,097

 

 

 

 

 

 

 

Net transfer of financing to long-term debt from floorplan notes payable

 

$

 

$

1,696

 

 

See Notes to Consolidated Financial Statements

 

7



Table of Contents

 

TITAN MACHINERY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 -                  BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The quarterly operating results for Titan Machinery Inc. (the “Company”) are subject to fluctuation due to varying weather patterns, which may impact the timing and amount of equipment purchases, rentals, and after-sales parts and service purchases by the Company’s Agriculture and Construction customers. Therefore, operating results for the three-month period ended April 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2013. The information contained in the balance sheet as of January 31, 2012 was derived from the audited financial statements for the Company for the year then ended. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended January 31, 2012 as filed with the SEC.

 

Nature of Business

 

The Company is engaged in the retail sale, service and rental of agricultural and construction machinery through stores in the United States and Europe. The Company’s North American stores are located in North Dakota, South Dakota, Minnesota, Iowa, Nebraska, Montana, Wyoming, Wisconsin and Colorado, and its European stores are located in Romania and Bulgaria.

 

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, initial valuation and impairment analyses of intangible assets, and income taxes.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant accounts, transactions and profits between the consolidated companies have been eliminated in consolidation.

 

Fair Value of Financial Instruments

 

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. Based upon current borrowing rates with similar maturities of our long-term debt instruments, the carrying value of the long-term debt approximates the fair value as of April 30, 2012 and January 31, 2012. As of April 30, 2012, the fair value of our senior convertible notes was approximately $161.8 million versus a carrying value of approximately $123.4 million. Fair value of the senior convertible notes was estimated based on quoted market prices for these instruments.

 

8



Table of Contents

 

Earnings Per Share

 

The Company uses the two-class method to calculate basic and diluted earnings per share. 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 earnings per share were computed by dividing net income attributable to Titan Machinery Inc. after allocation of income to participating securities by the weighted-average number of shares of common stock outstanding during the year.

 

Diluted earnings per share were computed by dividing net income attributable to Titan Machinery Inc. after allocation of income 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 earnings per share. There were 10,000 options outstanding as of April 30, 2012 which were not included in the computation of diluted earnings per share because they were anti-dilutive. There were no stock options outstanding as of April 30, 2011 that were anti-dilutive.

 

The following table sets forth the calculation of basic and diluted earnings per share:

 

 

 

Three Months Ended April 30,

 

 

 

2012

 

2011

 

 

 

(in thousands, except per share data)

 

Numerator

 

 

 

 

 

Net income attributable to Titan Machinery Inc.

 

$

7,597

 

$

7,268

 

Net income allocated to participating securities

 

(70

)

(68

)

Net income attributable to Titan Machinery Inc. common stockholders

 

$

7,527

 

$

7,200

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

Basic weighted-average common shares outstanding

 

20,723

 

17,754

 

Plus: Incremental shares from assumed conversions

 

 

 

 

 

Warrants

 

30

 

30

 

Stock options

 

209

 

357

 

Diluted weighted-average common shares outstanding

 

20,962

 

18,141

 

 

 

 

 

 

 

Earnings per share - basic

 

$

0.36

 

$

0.41

 

 

 

 

 

 

 

Earnings per share - diluted

 

$

0.36

 

$

0.40

 

 

NOTE 2 -                  INVENTORIES

 

 

 

April 30,

 

January 31,

 

 

 

2012

 

2012

 

 

 

(in thousands)

 

New equipment

 

$

528,983

 

$

445,513

 

Used equipment

 

200,906

 

219,849

 

Parts and attachments

 

85,235

 

76,073

 

Work in process

 

8,071

 

6,612

 

 

 

 

 

 

 

 

 

$

823,195

 

$

748,047

 

 

In addition to the above amounts, the Company has estimated that a portion of its parts inventory will not be sold in the next year. Accordingly, these balances have been classified as noncurrent assets.

 

9



Table of Contents

 

NOTE 3 -                  PROPERTY AND EQUIPMENT

 

 

 

April 30,

 

January 31,

 

 

 

2012

 

2012

 

 

 

(in thousands)

 

Rental fleet equipment

 

$

97,888

 

$

62,440

 

Machinery and equipment

 

18,335

 

17,562

 

Vehicles

 

29,057

 

28,277

 

Furniture and fixtures

 

20,888

 

19,097

 

Land, buildings, and leasehold improvements

 

41,934

 

34,705

 

 

 

 

 

 

 

 

 

$

208,102

 

$

162,081

 

Less accumulated depreciation

 

(40,343

)

(35,799

)

 

 

 

 

 

 

 

 

$

167,759

 

$

126,282

 

 

NOTE 4 -                  LINES OF CREDIT / FLOORPLAN NOTES PAYABLE

 

Operating Line of Credit

 

As of April 30, 2012, the Company had a $75.0 million working capital line of credit under an Amended and Restated Credit Agreement (the “Credit Agreement”) with a group of banks led by Wells Fargo Bank, National Association. The Company had $1.1 million and $33.9 million outstanding on its operating lines of credit as of April 30, 2012 and January 31, 2012, respectively. 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.

 

Floorplan Lines of Credit

 

As of April 30, 2012, the Company had discretionary floorplan lines of credit for equipment purchases totaling approximately $800.0 million with various lending institutions, including $300.0 million under the aforementioned Credit Agreement, a $350.0 million Wholesale Floorplan Credit Facility with CNH Capital America LLC (“CNH Capital”) and a $150.0 million Wholesale Financing Plan with Rental Agreement with Agricredit Acceptance LLC. Floorplan notes payable relating to these credit facilities totaled approximately $514.8 million of the total floorplan notes payable balance of $571.2 million outstanding as of April 30, 2012 and $505.6 million of the total floorplan notes payable balance of $552.4 million outstanding as of January 31, 2012. As of April 30, 2012, the Company had approximately $274.2 million in available borrowings remaining under these lines of credit (net of standby letters of credit under the aforementioned Credit Agreement and rental fleet financing and other acquisition-related financing arrangements under the CNH Capital credit facility). These floorplan notes carried various interest rates primarily ranging from 2.24% to 7.25% as of April 30, 2012, subject to interest-free periods offered by CNH Capital. As of April 30, 2012, the Company was in compliance with all floorplan financial covenants.

 

NOTE 5 -                  SENIOR CONVERTIBLE NOTES

 

On April 24, 2012, the Company issued through a private offering of $150 million of 3.75% Senior Convertible Notes (the “Convertible Notes”). The 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 Convertible Notes are unsecured and unsubordinated obligations; rank equal in right of payment to our existing and future unsecured indebtedness that is not subordinated; are effectively subordinated in right of payment to our existing and future secured indebtedness; and are structurally subordinated to all existing and future indebtedness and liabilities of our subsidiaries.

 

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The Convertible Notes are initially convertible into our common stock at a conversion rate of 23.1626 shares of common stock per $1,000 principal amount of convertible notes, representing 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 defined in the indenture governing the 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 note, the Company will settle the conversion obligation in cash up to the aggregate principal amount of the notes being converted, and any conversion obligation in excess thereof will be settled in cash, shares of our common stock, or a combination thereof, at our election, subject to certain limitations as defined in the Indenture.

 

Holders of the Convertible Notes may convert their notes at the applicable conversion rate under 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 our 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 Convertible Notes is less than 98% of the product of the last reported sale price of our common stock on such trading day and the applicable conversion rate on such trading day.

 

iii.                                    If we call any or all of the 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 Convertible Notes who convert their 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, holders of the Convertible Notes may require us to purchase all or a portion of their notes for cash at a price equal to 100% of the principal amount of the Convertible Notes to be purchased plus any accrued but unpaid interest.

 

The number of shares we may deliver upon conversion of the Convertible Notes will be subject to certain limitations, and we are subject to certain other obligations and restrictions related to such share caps, as described in the Indenture. On or after May 6, 2015, we may redeem for cash all or a portion of the Convertible Notes if the last reported sale price of our 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 we provide 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 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 Convertible Notes may declare all of the Convertible Notes to be due and payable immediately.

 

In accounting for the Convertible Notes, we 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 Convertible Notes. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the 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 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 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 Convertible Notes is measured as the residual difference between the aggregate face value of the 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 Convertible Notes were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being

 

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Table of Contents

 

amortized using the effective interest rate method and recognized as non-cash interest expense over the expected term of the Convertible Notes. Transaction costs allocated to the equity component reduced the value of the equity component recognized in stockholders’ equity.

 

Proceeds upon issuance of the Convertible Notes were as follows:

 

 

 

April 24,

 

 

 

2012

 

 

 

(in thousands)

 

Principal value

 

$

150,000

 

Less: transaction costs

 

(4,753

)

Net proceeds, senior convertible notes

 

$

145,247

 

 

 

 

 

Amounts recognized at issuance:

 

 

 

Senior convertible notes, net

 

$

123,319

 

Additional paid-in capital

 

15,501

 

Transaction costs allocated to the liability component

 

(3,907

)

Long-term deferred tax liability

 

10,334

 

Net proceeds, senior convertible notes

 

$

145,247

 

 

As of April 30, 2012, the Convertible Notes consisted of the following:

 

 

 

April 30,

 

 

 

2012

 

 

 

(in thousands except

 

 

 

conversion rate

 

 

 

and conversion price)

 

Principal value

 

$

150,000

 

Unamortized debt discount

 

(26,622

)

Carrying value of senior convertible notes

 

$

123,378

 

 

 

 

 

Carrying value of equity component, net of deferred taxes

 

$

15,501

 

 

 

 

 

Conversion rate (shares of common stock per $1,000 principal amount of notes)

 

23.1626

 

Conversion price (per share of common stock)

 

$

43.17

 

 

As of April 30, 2012, the unamortized debt discount will be amortized over a seven-year period. The if-converted value as of April 30, 2012 does not exceed the principal balance of the Convertible Notes. For the period ended April 30, 2012, the Company recognized $59,000 of non-cash interest expense related to the amortization of the debt discount and the liability-allocated transaction costs. The effective interest rate of the liability component for the period ended April 30, 2012 was equal to 7.00%. Prior to April 30, 2012, the Company used the proceeds from the Convertible Notes to reduce certain interest-bearing floorplan notes payable and long-term debt balances.

 

NOTE 6 -                     BUSINESS COMBINATIONS

 

The Company continued to implement its strategy of consolidating dealerships in desired market areas. Below is a summary of the acquisitions completed for the three months ended April 30, 2012. In certain of the business combination transactions the Company recognized goodwill. Factors contributing to the recognition of goodwill include an evaluation of future and historical financial performance, the value of the workforce acquired and proximity to other existing and future planned Company locations. Pro forma results are not presented as the acquisitions are not considered material, individually or in aggregate, to the Company. The results of operations have been included in the Company’s consolidated results of operations since the date of each respective business combination.

 

On February 27, 2012, the Company acquired certain assets of the Colorado division of Adobe Truck & Equipment, LLC. The acquired entity consisted of three construction equipment stores in Denver, Colorado Springs, and Loveland, Colorado. The acquisition establishes the Company’s first construction equipment stores in Colorado and allows the Company

 

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Table of Contents

 

to have the exclusive Case Construction contract for all of Colorado east of the Rocky Mountains. The acquisition-date fair value of the total consideration transferred for the stores was $3.4 million.

 

On March 5, 2012, the Company acquired certain assets of Rimex 1-Holding EAD. The acquired entity consisted of seven agricultural equipment stores in the following cities in Bulgaria: Sofia, Dobrich, Burgas, Pleven, Ruse, Montana, and Stara Zagora. The acquisition expands the Company’s operations in Europe and provides a significant opportunity to leverage its domestic operating model and dealership experience into an additional growth platform. The acquisition-date fair value of the total consideration transferred for the stores was $2.6 million. Subsequent to the acquisition, Titan Machinery Bulgaria EAD issued a 30% ownership interest to the former owner of the acquired entity for $2.5 million. The 30% ownership interest in Titan Machinery Bulgaria EAD is included in the consolidated financial statements as a noncontrolling interest.

 

On March 30, 2012, the Company acquired certain assets of Haberer’s Implement, Inc. The acquired entity consisted of one agricultural equipment store in Bowdle, South Dakota which is contiguous to the Company’s existing locations in Aberdeen, Redfield and Highmore, South Dakota and Wishek, North Dakota. The acquisition-date fair value of the total consideration transferred for the store was $1.2 million.

 

On April 2, 2012, the Company acquired certain assets of East Helena Rental, LLC. The acquired entity consisted of one construction equipment rental store in Helena, Montana which is contiguous to the Company’s existing locations in Missoula, Great Falls, Bozeman and Big Sky, Montana. The acquisition-date fair value of the total consideration transferred for the store was $0.6 million.

 

The allocations of the purchase prices in the above business combinations are presented in the following table. The estimated fair values of the intangible assets acquired are provisional estimates which are subject to change upon completion of the final valuation.

 

 

 

April 30,

 

 

 

2012

 

 

 

(in thousands)

 

Receivables

 

$

1,337

 

Inventories

 

10,198

 

Prepaid expenses and other

 

352

 

Property and equipment

 

1,833

 

Intangible assets

 

802

 

Goodwill

 

1,820

 

 

 

 

 

 

 

$

16,342

 

 

 

 

 

Accounts payable

 

$

3,094

 

Floorplan notes payable

 

2,839

 

Customer deposits

 

1,440

 

Accrued expenses

 

6

 

 

 

 

 

 

 

$

7,379

 

 

 

 

 

Cash consideration

 

8,396

 

Non-cash consideration: liabilities incurred

 

567

 

Total consideration

 

$

8,963

 

 

 

 

 

Goodwill related to the Agriculture operating segment

 

$

761

 

Goodwill related to the Construction operating segment

 

$

1,059

 

 

 

 

 

Goodwill expected to be deductible for tax purposes

 

$

1,820

 

 

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Table of Contents

 

NOTE 7 -                     SEGMENT INFORMATION AND OPERATING RESULTS

 

Revenue, income before income tax and total assets at the segment level are reported before eliminations. The Company retains various unallocated income/(expense) items and assets at the general corporate level, which the Company refers to as “Shared Resources” in the table below. Shared Resources assets primarily consist of cash and property and equipment. Intersegment revenue is immaterial.

 

Certain financial information for each of the Company’s business segments is set forth below.

 

 

 

Three Months Ended April 30,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Revenue

 

 

 

 

 

Agriculture

 

$

360,135

 

$

286,978

 

Construction

 

81,608

 

44,139

 

Segment revenue

 

441,743

 

331,117

 

Eliminations

 

(20,020

)

(12,952

)

Total

 

$

421,723

 

$

318,165

 

 

 

 

 

 

 

Income (Loss) Before Income Taxes

 

 

 

 

 

Agriculture

 

$

14,338

 

$

12,959

 

Construction

 

(380

)

652

 

Segment income (loss) before income taxes

 

13,958

 

13,611

 

Shared Resources

 

(752

)

(1,127

)

Eliminations

 

(856

)

(269

)

Income before income taxes

 

$

12,350

 

$

12,215

 

 

 

 

April 30,

 

January 31,

 

 

 

2012

 

2012

 

 

 

(in thousands)

 

Total Assets

 

 

 

 

 

Agriculture

 

$

747,808

 

$

781,098

 

Construction

 

323,388

 

250,474

 

Segment assets

 

1,071,196

 

1,031,572

 

Shared Resources

 

141,468

 

57,882

 

Eliminations

 

(2,219

)

(1,382

)

Total

 

$

1,210,445

 

$

1,088,072

 

 

NOTE 8 -                     SUBSEQUENT EVENTS

 

Subsequent to April 30, 2012, the Company entered into a Purchase Agreement to acquire certain assets of Curly Olney’s, Inc. The acquisition consists of two agricultural equipment stores in McCook and Imperial, Nebraska and expands the Company’s agriculture presence in Nebraska. The Company expects the closing date to be on or around July 2, 2012.

 

On June 1, 2012, at the Annual Meeting of Stockholders, the stockholders approved an amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of common stock to 45,000,000.

 

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Table of Contents

 

ITEM 2.                             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended January 31, 2012.

 

Critical Accounting Policies

 

There have been no material changes in our Critical Accounting Policies, as disclosed in our Annual Report on Form 10-K for the year ended January 31, 2012.

 

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 Global N.V. or its U.S. subsidiary CNH America, LLC, collectively referred to in this Quarterly Report as CNH, 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 two reportable segments, Agriculture and Construction. Within each segment, we have four principal sources of revenue: new and used equipment sales, parts sales, service, and equipment rental and other activities.

 

Our net income attributable to Titan Machinery Inc. common stockholders was $7.5 million, or $0.36 per diluted share, for the three months ended April 30, 2012, compared to $7.2 million, or $0.40 per diluted share, for the three months ended April 30, 2011. Significant factors impacting the quarterly comparisons were:

 

·                  Increase in revenue due to acquisitions and same-store sales growth in both our Agriculture and Construction segments primarily resulting from the continuation of a strong agriculture market and improved construction market in the region in which we do business;

 

·                  Increase in gross profit primarily due to increased revenue, partially offset by a decrease in equipment gross profit margin which was negatively impacted by greater equipment availability in the market, as compared to the strong equipment margins experienced in the first quarter of the prior year; and

 

·                  Operating expenses as a percentage of total revenue increased to 13.0% for the three months ended April 30, 2012 compared to 12.4% for the three months ended April 30, 2011, primarily due to our Construction segment comprising a larger portion of our business and the expansion of our rental activity in the current year.

 

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Table of Contents

 

Results of Operations

 

Comparative financial data for each of our four sources of revenue are expressed below. The results for these periods include the operating results of the acquisitions made during these periods. The period-to-period comparisons included below are not necessarily indicative of future results. Segment information is provided later in this discussion and analysis of our results of operations.

 

 

 

Three Months Ended April 30,

 

Percent

 

 

 

2012

 

2011

 

Change

 

 

 

(dollars in thousands)

 

 

 

Equipment

 

 

 

 

 

 

 

Revenue

 

$

322,528

 

$

249,229

 

29.4

%

Cost of revenue

 

292,085

 

223,301

 

30.8

%

Gross profit

 

$

30,443

 

$

25,928

 

17.4

%

Gross profit margin

 

9.4

%

10.4

%

(1.0

)%

 

 

 

 

 

 

 

 

Parts

 

 

 

 

 

 

 

Revenue

 

$

58,844

 

$

41,910

 

40.4

%

Cost of revenue

 

40,653

 

29,720

 

36.8

%

Gross profit

 

$

18,191

 

$

12,190

 

49.2

%

Gross profit margin

 

30.9

%

29.1

%

1.8

%

 

 

 

 

 

 

 

 

Service

 

 

 

 

 

 

 

Revenue

 

$

29,752

 

$

20,964

 

41.9

%

Cost of revenue

 

10,363

 

7,908

 

31.0

%

Gross profit

 

$

19,389

 

$

13,056

 

48.5

%

Gross profit margin

 

65.2

%

62.3

%

2.9

%

 

 

 

 

 

 

 

 

Rental and other

 

 

 

 

 

 

 

Revenue

 

$

10,599

 

$

6,062

 

74.8

%

Cost of revenue

 

8,213

 

4,433

 

85.3

%

Gross profit

 

$

2,386

 

$

1,629

 

46.5

%

Gross profit margin

 

22.5

%

26.9

%

(4.4

)%

 

16



Table of Contents

 

The following table sets forth our statements of operations data expressed as a percentage for each of our four sources of revenue for the periods indicated:

 

 

 

Three Months Ended April 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

Equipment

 

76.4

%

78.3

%

Parts

 

14.0

%

13.2

%

Service

 

7.1

%

6.6

%

Rental and other

 

2.5

%

1.9

%

Total revenue

 

100.0

%

100.0

%

 

 

 

 

 

 

Total cost of revenue

 

83.3

%

83.4

%

 

 

 

 

 

 

Gross profit

 

16.7

%

16.6

%

 

 

 

 

 

 

Operating expenses

 

13.0

%

12.4

%

 

 

 

 

 

 

Income from operations

 

3.7

%

4.2

%

 

 

 

 

 

 

Other income (expense)

 

(0.8

)%

(0.4

)%

 

 

 

 

 

 

Income before income taxes

 

2.9

%

3.8

%

 

 

 

 

 

 

Provision for income taxes

 

(1.1

)%

(1.5

)%

 

 

 

 

 

 

Net income including noncontrolling interest

 

1.8

%

2.3

%

 

 

 

 

 

 

Net loss attributable to noncontrolling interest

 

0.0

%

0.0

%

 

 

 

 

 

 

Net income attributable to Titan Machinery Inc.

 

1.8

%

2.3

%

 

Three Months Ended April 30, 2012 Compared to Three Months Ended April 30, 2011

 

Consolidated Results

 

Revenue

 

 

 

Three Months Ended April 30,

 

 

 

Percent

 

 

 

2012

 

2011

 

Increase

 

Change

 

 

 

(dollars in thousands)

 

 

 

Equipment

 

$

322,528

 

$

249,229

 

$

73,299

 

29.4

%

Parts

 

58,844

 

41,910

 

16,934

 

40.4

%

Service

 

29,752

 

20,964

 

8,788

 

41.9

%

Rental and other

 

10,599

 

6,062

 

4,537

 

74.8

%

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

$

421,723

 

$

318,165

 

$

103,558

 

32.5

%

 

The increase in revenue for the three months ended April 30, 2012, as compared to the same period last year, was due to acquisitions contributing $52.4 million and same-store sales growth contributing $51.2 million to current period revenue. This revenue growth was in both our Agriculture and Construction segments and resulted from the continuation of a strong agriculture market, improved construction market in the region in which we do business, and growth in the rental business in our Construction segment. The increase in our rental business reflects our initiative to expand this growth platform through strategic acquisitions, new store openings, and an increase in the size of our rental fleet.

 

17



Table of Contents

 

Gross Profit

 

 

 

Three Months Ended April 30,

 

Increase/

 

Percent

 

 

 

2012

 

2011

 

(Decrease)

 

Change

 

 

 

(dollars in thousands)

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

Equipment

 

$

30,443

 

$

25,928

 

$

4,515

 

17.4

%

Parts

 

18,191

 

12,190

 

6,001

 

49.2

%

Service

 

19,389

 

13,056

 

6,333

 

48.5

%

Rental and other

 

2,386

 

1,629

 

757

 

46.5

%

 

 

 

 

 

 

 

 

 

 

Total Gross Profit

 

$

70,409

 

$

52,803

 

$

17,606

 

33.3

%

 

 

 

 

 

 

 

 

 

 

Gross Profit Margin

 

 

 

 

 

 

 

 

 

Equipment

 

9.4

%

10.4

%

(1.0

)%

(9.6

)%

Parts

 

30.9

%

29.1

%

1.8

%

6.2

%

Service

 

65.2

%

62.3

%

2.9

%

4.7

%

Rental and other

 

22.5

%

26.9

%

(4.4

)%

(16.4

)%

 

 

 

 

 

 

 

 

 

 

Total Gross Profit Margin

 

16.7

%

16.6

%

0.1

%

0.6

%

 

 

 

 

 

 

 

 

 

 

Gross Profit Mix

 

 

 

 

 

 

 

 

 

Equipment

 

43.2

%

49.1

%

(5.9

)%

(12.0

)%

Parts

 

25.9

%

23.1

%

2.8

%

12.1

%

Service

 

27.5

%

24.7

%

2.8

%

11.3

%

Rental and other

 

3.4

%

3.1

%

0.3

%

9.7

%

 

 

 

 

 

 

 

 

 

 

Total Gross Profit Mix

 

100.0

%

100.0

%

0.0

%

0.0

%

 

The $17.6 million increase in gross profit for the three months ended April 30, 2012, as compared to the same period last year, was primarily due to increased revenue. Acquisitions contributed $8.8 million to the increase in gross profit for the three months ended April 30, 2012, while increases in same-store gross profit contributed the remaining $8.8 million. Gross profit margin was 16.7% for the first quarter of fiscal 2013, compared to 16.6% for the first quarter of fiscal 2012. Our overall gross profit margin was positively impacted by increases in gross profit margin and higher revenues for parts and service, offset primarily by decreases in gross profit margin on equipment and rental and other. Equipment gross profit margins decreased to 9.4% in the first quarter of fiscal 2013 compared to the historically strong equipment margins of 10.4% in the first quarter of fiscal 2012. The equipment gross profit margin in the first quarter of fiscal 2013 was negatively impacted by increased equipment availability in the market. The gross profit margin on rental and other in the first quarter of fiscal 2012 was positively impacted by strong demand for rental equipment in areas affected by flooding in the region in which we do business, which did not reoccur in the first quarter of fiscal 2013. In addition, we grew our rental fleet during the first quarter of fiscal 2013 to support increased forecasted activity causing a lower initial utilization as these rental fleet units are marketed in our fleet.

 

Operating Expenses

 

 

 

Three Months Ended April 30,

 

 

 

Percent

 

 

 

2012

 

2011

 

Increase

 

Change

 

 

 

(dollars in thousands)

 

 

 

Operating Expenses

 

$

54,856

 

$

39,436

 

$

15,420

 

39.1

%

Operating expenses as a percentage of revenue

 

13.0

%

12.4

%

0.6

%

4.8

%

 

The $15.4 million increase in operating expenses, as compared to the same period last year, was primarily due to the additional costs associated with acquisitions, such as compensation, rent, travel and depreciation. As a percentage of total revenue, operating expenses increased to 13.0% for the first quarter of fiscal 2013 compared to 12.4% for the first quarter of fiscal 2012 due to our Construction segment comprising a larger portion of our business, as compared to the same period last year. Our Construction segment has higher operating expenses as a percentage of revenue compared to our Agriculture

 

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segment. In addition, our Construction segment also includes additional operating expenses associated with the expansion of our rental business.

 

Other Income (Expense) 

 

 

 

Three Months Ended April 30,

 

 

 

Percent

 

 

 

2012

 

2011

 

Increase

 

Change

 

 

 

(dollars in thousands)

 

 

 

Interest and other income

 

$

488

 

$

285

 

$

203

 

71.2

%

Floorplan interest expense

 

(2,898

)

(1,162

)

1,736

 

149.4

%

Interest expense other

 

(793

)

(275

)

518

 

188.4

%

 

The increases in floorplan interest expense of $1.7 million and interest expense other of $0.5 million were primarily due to the increase in floorplan notes payable and long-term debt balances for the three months ended April 30, 2012, as compared to the same period in the prior year.

 

Provision for Income Taxes

 

 

 

Three Months Ended April 30,

 

 

 

Percent

 

 

 

2012

 

2011

 

Decrease

 

Change

 

 

 

(dollars in thousands)

 

 

 

Provision for income taxes

 

$

4,891

 

$

4,947

 

$

(56

)

(1.1

)%

 

Our effective tax rate decreased from 40.5% for the three months ended April 30, 2011 to 39.6% for the three months ended April 30, 2012. The decrease in our effective tax rate from the comparable period in the prior year primarily reflects a decrease in the effect of permanent differences between financial and income tax reporting, such as incentive stock options, and the effect of lower international statutory income tax rates.

 

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Segment Results

 

Certain financial information for our Agriculture and Construction business segments is set forth below. Revenue and income (loss) before income taxes at the segment level are reported before eliminations. “Shared Resources” in the table below refers to the various unallocated income/(expense) items that we have retained at the general corporate level. Intersegment revenue is immaterial.

 

 

 

Three Months Ended April 30,

 

Increase/

 

Percent

 

 

 

2012

 

2011

 

(Decrease)

 

Change

 

 

 

(dollars in thousands)

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Agriculture

 

$

360,135

 

$

286,978

 

$

73,157

 

25.5

%

Construction

 

81,608

 

44,139

 

37,469

 

84.9

%

Segment revenue

 

441,743

 

331,117

 

110,626

 

33.4

%

Eliminations

 

(20,020

)

(12,952

)

(7,068

)

(54.6

)%

Total

 

$

421,723

 

$

318,165

 

$

103,558

 

32.5

%

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Income Taxes

 

 

 

 

 

 

 

 

 

Agriculture

 

$

14,338

 

$

12,959

 

$

1,379

 

10.6

%

Construction

 

(380

)

652

 

(1,032

)

(158.3

)%

Segment income (loss) before income taxes

 

13,958

 

13,611

 

347

 

2.5

%

Shared Resources

 

(752

)

(1,127

)

375

 

33.3

%

Eliminations

 

(856

)

(269

)

(587

)

(218.2

)%

Income before income taxes

 

$

12,350

 

$

12,215

 

$

135

 

1.1

%

 

Agriculture

 

Agriculture segment revenue for the three months ended April 30, 2012 increased 25.5% compared to the same period last year. The revenue increase was due to acquisitions and an Agriculture same-store sales increase of 13.4% over the first quarter of fiscal 2012. The same-store sales growth primarily reflected a strong market driven by increased net farm income for calendar year 2011.

 

Agricultural segment income before income taxes for the three months ended April 30, 2012 increased 10.6% compared to the same period last year, primarily due to higher Agriculture segment revenue and increased parts and service gross profit margins. These increases were primarily offset by a decrease in gross profit margin for equipment which was negatively impacted by greater equipment availability in the market and an increase in floorplan interest expense resulting from higher floorplan notes payable balances as compared to the same period in the prior year.

 

Construction

 

Construction segment revenue for the three months ended April 30, 2012 increased 84.9% compared to the same period last year. The revenue increase was due to acquisitions, a Construction same-store sales increase of 34.9% over the first quarter of fiscal 2012, and growth in the rental business. The same-store sales growth was positively impacted by an improved construction market in the region in which we do business and the increase in our rental business reflects our initiative to expand this growth platform through strategic acquisitions, new store openings, and an increase in the size of our rental fleet.

 

Our Construction segment experienced a loss before income taxes of $0.4 million for the three months ended April 30, 2012, compared to a segment income before income taxes of $0.7 million in the same period last year. This decrease was primarily caused by a decrease in gross profit margin on rental, which is a slower period due to the seasonal nature of this business, an increase in operating expenses as a percentage of revenue and an increase in interest expense. The gross profit margin on rental and other in the first quarter of fiscal 2012 was positively impacted by strong demand for rental equipment in areas affected by flooding in the region in which we do business, which did not reoccur in the first quarter of fiscal 2013. In addition, we grew our rental fleet during the first quarter of fiscal 2013 to support increased forecasted activity causing a lower initial utilization as these rental fleet units are marketed in our fleet. Operating expenses in the first quarter of fiscal 2013 included additional operating expenses associated with the expansion of our rental business. The increase in interest expense

 

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primarily resulted from an increase in floorplan notes payable and rental fleet long-term debt balances, as compared to the same period in the prior year.

 

Shared Resources/Eliminations

 

We incur centralized expenses/income at our general corporate level, which we refer to as “Shared Resources,” and then allocate these net expenses to our segments. Since these allocations are set early in the year, unallocated balances may occur.

 

Eliminations remove any inter-company revenue or income before income taxes residing in our segment results.

 

Liquidity and Capital Resources

 

Cash Flow from Operating Activities

 

For the three months ended April 30, 2012, cash used for operating activities was $24.9 million. Our cash used for operations was primarily the result of an increase in net cash for inventories of $40.4 million and a net decrease in accounts payable, customer deposits, accrued expenses and other long-term liabilities of $26.2 million. This amount was principally offset by our reported net income including noncontrolling interest of $7.5 million, an add-back of non-cash depreciation and amortization of $4.9 million and a net decrease in receivables, prepaid expenses and other assets of $27.6 million. The increase in inventories primarily reflects new equipment stocking to support forecasted equipment sales. We evaluate our cash flow from operating activities net of all floorplan activity. Taking this adjustment into account, our non-GAAP cash flow provided by operating activities was $1.7 million and $17.8 million as of April 30, 2012 and 2011, respectively. For reconciliation of this non-GAAP financial measure, please see the Non-GAAP Cash Flow Reconciliation below.

 

For the three months ended April 30, 2011, our cash used for operating activities was $4.9 million. Our cash used for operations was primarily the result of our reported net income of $7.3 million, an add-back of non-cash depreciation and amortization of $2.6 million, a net increase in accounts payable, customer deposits, accrued expenses and other long-term liabilities of $16.4 million, and an increase in floorplan notes payable of $4.3 million. This amount was principally offset by an increase in net cash from inventories of $29.5 million and a net increase in receivables, prepaid expenses and other assets of $6.0 million.

 

Cash Flow from Investing Activities

 

For the three months ended April 30, 2012, cash used for investing activities was $26.3 million. Our cash flow from investing activities primarily consisted of purchases of equipment dealerships (net of cash purchased) of $8.4 million and purchases of rental fleet of $16.2 million.

 

For the three months ended April 30, 2011, cash used for investing activities was $8.7 million. Our cash flow from investing activities primarily consisted of purchases of equipment dealerships (net of cash purchased) of $7.0 million and purchases of property and equipment of $1.8 million.

 

Cash Flow from Financing Activities

 

For the three months ended April 30, 2012, cash provided by financing activities was $77.9 million. Our cash flow from financing activities was primarily the result of proceeds from our Senior Convertible Notes offering of $145.2 million, offset by a decrease in non-manufacturer floorplan notes payable of $22.7 million and principal payments on long-term debt and short-term advances exceeding proceeds from long-term debt by $46.5 million. We used the proceeds from our Senior Convertible Notes to reduce certain interest-bearing floorplan notes payable and long-term debt balances.

 

For the three months ended April 30, 2011, cash provided by financing activities was $19.1 million. Our cash flow from financing activities was primarily the result of an increase in non-manufacturer floorplan notes payable of $22.7 million and principal payments on long-term debt and short-term advances exceeding proceeds from long-term debt by $4.0 million.

 

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Non-GAAP 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.  We consider equipment inventory financing with both manufacturers and other sources to be part of the normal operations of our business and use the adjusted cash flow analysis in the evaluation of our equipment inventory and inventory flooring needs.  Non-GAAP cash flow provided by (used for) operating activities is a non-GAAP financial measure which is adjusted for the following:

 

·                  Non-manufacturer floorplan notes payable: The adjustment is equal to the net change in non-manufacturer floorplan notes payable, as shown on the consolidated statements of cash flows. GAAP categorizes non-manufacturer floorplan payable as financing activities in the consolidated statements of cash flows.

 

·                  Impact of senior convertible notes: We issued $150.0 million of Senior Convertible Notes (“Convertible Notes”) in April 2012. We used a significant amount of the proceeds from the Convertible Notes to reduce our floorplan notes payable balances, resulting in a higher level of equity in our equipment inventory than we have historically maintained. To analyze the impact of this fluctuation of equity in our equipment inventory, we use this adjustment to maintain a constant level of equipment financing. The adjustment is equal to the difference between our actual equity in inventory at the balance sheet date and our historical average level of equity in inventory of 15%. GAAP categorizes proceeds from our Convertible Notes offering as financing activities in the consolidated statements of cash flows.

 

We believe that the presentation of non-GAAP cash flow provided by (used for) operating activities is relevant and useful to our investors because it provides information on activities we consider normal operations of our business, regardless of financing source. The following table reconciles net cash provided by (used for) operating activities, a GAAP measure, to non-GAAP cash flow provided by (used for) operating activities and net cash provided by (used for) financing activities, a GAAP measure, to non-GAAP cash flow provided by (used for) financing activities (in thousands):

 

 

 

 

 

Adjustment

 

Adjustment

 

Non-GAAP

 

 

 

As Reported

 

(1)

 

(2)

 

Measures

 

 

 

(in thousands)

 

Three months ended April 30, 2012

 

 

 

 

 

 

 

 

 

Net cash provided by (used for) operating activities

 

$

(24,853

)

$

(22,669

)

$

49,236

 

$

1,714

 

Net cash provided by (used for) financing activities

 

77,924

 

22,669

 

(49,236

)

 

51,357

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 30, 2011

 

 

 

 

 

 

 

 

 

Net cash provided by (used for) operating activities

 

$

(4,931

)

$

22,731

 

$

 

$

17,800

 

Net cash provided by (used for) financing activities

 

19,100

 

(22,731

)

 

 

(3,631

)

 


(1) - Net change in non-manufacturer floorplan notes payable

(2) - Impact of Convertible Notes

 

Non-GAAP cash flow provided by (used for) operating activities should be evaluated in addition to, and not considered a substitute for, or superior to, other GAAP measures such as net cash provided by (used for) operating activities.

 

Sources of Liquidity

 

Our primary sources of liquidity are cash reserves, cash flow from operations, proceeds from the issuance of debt and equity, and borrowings under our credit facilities. We expect that ongoing requirements for debt service and capital expenditures will be funded from these sources.

 

Adequacy of Capital Resources

 

Our primary uses of cash have been to fund our strategic acquisitions, finance the purchase of inventory, meet debt service requirements and fund operating activities, working capital, payments due under building space operating leases and manufacturer floorplan notes payable. Based on our current operational performance, we believe our cash flow from operations,

 

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available cash and available borrowings under the existing credit facilities will adequately provide our liquidity needs for, at a minimum, the next 12 months.

 

Certain Information Concerning Off-Balance Sheet Arrangements

 

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose entities or variable interest 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 rental equipment and buildings under operating leases.

 

PRIVATE SECURITIES LITIGATION REFORM ACT

 

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Such “forward-looking” information is included in this Quarterly Report on Form 10-Q, including in “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations,” as well as in our Annual Report on Form 10-K for the year ended January 31, 2012, and in other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company).

 

Forward-looking statements include all statements based on future expectations and specifically include, among other things, all statements relating to our expectations regarding acquisition closing dates, interest rates and our primary liquidity sources and adequacy of our capital resources. Any statements that are not based upon historical facts, including the outcome of events that have not yet occurred and our expectations for future performance, are forward-looking statements. The words “potential,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” “plan,” “anticipate,” and similar words and expressions are intended to identify forward-looking statements. Such statements are based upon the current beliefs and expectations of our management. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, adverse market conditions in the agricultural and construction equipment industries, the continuation of unfavorable conditions in the credit markets and those matters identified and discussed in our Annual Report on Form 10-K under the section titled “Risk Factors.”

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk from changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices such as interest rates. 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 value but do impact future earnings and cash flows, assuming other factors are held constant. We have both fixed and floating rate financing.

 

Based upon balances and interest rates as of April 30, 2012, 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 $3.0 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 $3.0 million. At April 30, 2012, we had variable rate floorplan notes payable of $571.2 million, of which approximately $302.6 million was interest-bearing, variable notes payable and long-term debt of $1.1 million, and fixed rate notes payable and long-term debt of $25.1 million.

 

Our policy is not to enter into derivatives or other financial instruments for trading or speculative purposes.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a)                                 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 (the “Exchange Act”) as of the end of the period covered by this Quarterly Report, the Company’s 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.

 

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(b)                                 Changes in internal controls. 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.

 

PART II. - OTHER INFORMATION

 

ITEM 1.                                                LEGAL PROCEEDINGS

 

We are currently not a party to any material pending legal proceedings.

 

ITEM 1A.                                       RISK FACTORS

 

In addition to the other information set forth in this report, including the important information in “Private Securities Litigation Reform Act,” you should carefully consider the “Risk Factors” discussed in our Form 10-K for the year ended January 31, 2012 as filed with the Securities and Exchange Commission. Those factors, if they were to occur, could cause our actual results to differ materially from those expressed in our forward-looking statements in this report, and materially adversely affect our financial condition or future results. Although we are not aware of any other factors, aside from the below and those discussed in our Form 10-K, that we currently anticipate will cause our forward-looking statements to differ materially from our future actual results, or materially affect the Company’s financial condition or future results, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial might materially adversely affect our actual business, financial condition and/or operating results.

 

Our outstanding 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 2019 (the “Convertible Notes”) pursuant to an indenture between the Company and Wells Fargo Bank, National Association (the “Indenture”).  The Convertible Notes will be convertible 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 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 Convertible Notes may become due and payable immediately without further action or notice.

 

If we issue shares of our common stock to satisfy conversion obligations under the Convertible Notes, our existing stockholders will experience dilution of their holdings of our stock.  Repayment of the principal amount of the 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 Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal balance of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

 

ITEM 2.                                                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.                                                DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.                                                MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5.                                                OTHER INFORMATION

 

On March 30, 2012, the Company entered into an Amended and Restated Credit Agreement (the “Agreement”) with a syndicated group of lenders comprised of Wells Fargo Bank, National Association (“Wells Fargo”), CoBank, ACB, Bank of America, N.A., U.S. Bank National Association, Bank of the West, a California banking corporation, Bremer Bank, N.A., and Comerica Bank (collectively, the “Lenders”). Also on March 30, 2012, the Company and certain subsidiaries of the Company entered into an Amended and Restated Security Agreement with Wells Fargo (the “Security Agreement”). The following is a description of certain terms of the Agreement and Security Agreement.

 

The Agreement amends and restates in its entirety the Company’s Credit Agreement dated October 31, 2010 with Wells Fargo and certain other lenders, as amended, and provides for an aggregate $375 million financing commitment by the Lenders, consisting of an aggregate floorplan financing commitment of $300 million (the “Floorplan Facility”) and an aggregate working capital commitment of $75 million (the “Working Capital Facility”) (together, the “Facilities”). The Floorplan Facility may be used to advance up to 90% of the value of eligible new inventory plus 85% of the value of eligible used inventory. The Working Capital Facility may be used to advance up to 80% of the Company’s eligible accounts, 85% of the value of eligible rental equipment, plus 75% of the Company’s eligible parts and attachments inventory, plus 50% of the Company’s eligible work i