Table ofContents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC  20549**

 

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**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended July 31, 2010**

 

**Commission File No. 001-33866**

 

**TITAN MACHINERY INC.**

(Exact name of registrant as specified in itscharter)

 

| **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’stelephone number **(701) 356-0130**

 

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

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files) YES o  NO o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer or a smaller reportingcompany.  See the definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of 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 (asdefined in Rule 12b-2 of the Exchange Act). YES o  NO x

 

The number of shares outstanding of the registrant’s common stock as ofAugust 31, 2010 was: Common Stock, $0.00001 par value, 17,852,784 shares.

 

 

 

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Table of Contents

 

**TITAN MACHINERY INC.**

**QUARTERLY REPORT ON FORM 10-Q**

 

**Table of Contents**

 
| ** **         | **Page No.**                                                                                     |
|--------------------|-------------------------------------------------------------------------------------------------------|
| **PART I.**   | **FINANCIAL INFORMATION**                                                                             | 1 |
|               |                                                                                                  |   |
| ITEM  1.           | FINANCIAL STATEMENTS                                                                                  | 1 |
|               |                                                                                                  |   |
|               | Consolidated Balance Sheets as of July 31, 2010  and January 31, 2010                       | 1 |
|               |                                                                                                  |   |
|               | Consolidated Statements of Operations for the three  and six months ended July 31, 2010 and 2009 | 2 |
|               |                                                                                                  |   |
|               | Consolidated Statements of Cash Flows for the six  months ended July 31, 2010 and 2009           | 3 |
|               |                                                                                                  |   |
|               | Notes to Consolidated Financial Statements                                                            | 5 |
|               |                                                                                                  |   |
| ITEM 2.            | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS           | 12 |
|               |                                                                                                  |   |
| ITEM 3.            | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                           | 23 |
|               |                                                                                                  |   |
| ITEM 4.            | CONTROLS AND  PROCEDURES                                                                              | 24 |
|               |                                                                                                  |   |
| **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.            | (REMOVED AND  RESERVED)                                                                               | 24 |
|               |                                                                                                  |   |
| ITEM 5.            | OTHER INFORMATION                                                                                     | 24 |
|               |                                                                                                  |   |
| ITEM  6.           | EXHIBITS                                                                                              | 24 |
|               |                                                                                                  |   |
| Signatures         | 25                                                                                                    |
|               |                                                                                                  |
| Exhibit Index | 26                                                                                                    |
|                    |                                                                                                       |  |  |

 

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Tableof Contents

 

**PART I. — FINANCIAL INFORMATION**

 

**ITEM 1.                  FINANCIAL STATEMENTS**

 

**TITAN MACHINERY INC.**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except per share data)**

** **
| ** **                                                                                                                                                         | ** ** | **July 31,** | ** ** | **January 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2010**          | ** ** | **2010**             | ** ** |
| ** **                                                                                                                                                         | ** ** | **(Unaudited)**   | ** ** | ** **           | ** ** |
| **ASSETS**                                                                                                                                                         |       |              |       |                 |       |
|                                                                                                                                                               |       |              |       |                 |       |
| CURRENT ASSETS                                                                                                                                                     |       |              |       |                 |       |
| Cash and cash equivalents                                                                                                                                          |       | $                 | 61,461     |                 | $          | 76,185 |   |
| Receivables, net                                                                                                                                                   |       | 29,478            |       | 22,254               |       |
| Inventories                                                                                                                                                        |       | 419,945           |       | 347,580              |       |
| Prepaid expenses                                                                                                                                                   |       | 633               |       | 1,009                |       |
| Income taxes receivable                                                                                                                                            |       | —            |       | 1,595                |       |
| Deferred income taxes                                                                                                                                              |       | 2,867             |       | 2,266                |       |
|                                                                                                                                                               |       |              |       |                 |       |
| Total current assets                                                                                                                                               |       | 514,384           |       | 450,889              |       |
|                                                                                                                                                               |       |              |       |                 |       |
| INTANGIBLES AND OTHER ASSETS                                                                                                                                       |       |              |       |                 |       |
| Noncurrent parts inventories                                                                                                                                       |       | 1,983             |       | 1,642                |       |
| Goodwill                                                                                                                                                           |       | 16,247            |       | 14,762               |       |
| Intangible assets, net of accumulated amortization                                                                                                                 |       | 408               |       | 295                  |       |
| Other                                                                                                                                                              |       | 845               |       | 620                  |       |
|                                                                                                                                                               |       | 19,483            |       | 17,319               |       |
|                                                                                                                                                               |       |              |       |                 |       |
| PROPERTY AND EQUIPMENT, net of accumulated  depreciation                                                                                                           |       | 53,938            |       | 46,604               |       |
|                                                                                                                                                               |       |              |       |                 |       |
|                                                                                                                                                               |       | $                 | 587,805    |                 | $          | 514,812 |   |
|                                                                                                                                                               |       |              |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                     |       |              |       |                 |       |
|                                                                                                                                                               |       |              |       |                 |       |
| CURRENT LIABILITIES                                                                                                                                                |       |              |       |                 |       |
| Accounts payable                                                                                                                                                   |       | $                 | 15,312     |                 | $          | 12,352 |   |
| Floorplan notes payable                                                                                                                                            |       | 317,506           |       | 249,872              |       |
| Current maturities of long-term debt and  short-term advances                                                                                                      |       | 8,801             |       | 7,218                |       |
| Customer deposits                                                                                                                                                  |       | 6,928             |       | 12,974               |       |
| Accrued expenses                                                                                                                                                   |       | 9,780             |       | 9,870                |       |
| Income taxes payable                                                                                                                                               |       | 489               |       | —               |       |
|                                                                                                                                                               |       |              |       |                 |       |
| Total current liabilities                                                                                                                                          |       | 358,816           |       | 292,286              |       |
|                                                                                                                                                               |       |              |       |                 |       |
| LONG-TERM LIABILITIES                                                                                                                                              |       |              |       |                 |       |
| Long-term debt, less current maturities                                                                                                                            |       | 24,351            |       | 21,852               |       |
| Deferred income taxes                                                                                                                                              |       | 6,604             |       | 6,356                |       |
| Other long-term liabilities                                                                                                                                        |       | 2,584             |       | 3,794                |       |
| ** **                                                                                                                                                         |       | 33,539            |       | 32,002               |       |
|                                                                                                                                                               |       |              |       |                 |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                          |       |              |       |                 |       |
| Common stock, par value $.00001 per share,  authorized - 25,000 shares; issued and outstanding - 17,851 at July 31,  2010 and 17,777 at January 31, 2010 |       | —            |       | —               |       |
| Additional paid-in-capital                                                                                                                                         |       | 139,428           |       | 138,775              |       |
| Retained earnings                                                                                                                                                  |       | 56,022            |       | 51,749               |       |
|                                                                                                                                                               |       | 195,450           |       | 190,524              |       |
|                                                                                                                                                               |       |              |       |                 |       |
|                                                                                                                                                               |       | $                 | 587,805    |                 | $          | 514,812 |   |

 

See Notes to Consolidated Financial Statements

 

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**TITAN MACHINERY INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)**

**(in thousands, except per share data)**

** **
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **July 31,**      | ** ** | **July 31,**    | ** ** |
| ** **                           | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| REVENUE                              |       |                   |       |                 |       |   |   |   |   |
| Equipment                            |       | $                      | 153,131    |                 | $          | 141,142 |   | $ | 303,491 |   | $ | 266,007 |   |
| Parts                                |       | 33,947                 |       | 32,454               |       | 69,010 |   | 58,852 |   |
| Service                              |       | 17,502                 |       | 15,640               |       | 34,053 |   | 28,182 |   |
| Other, including trucking and rental |       | 5,086                  |       | 3,956                |       | 8,569 |   | 6,452 |   |
| TOTAL REVENUE                        |       | 209,666                |       | 193,192              |       | 415,123 |   | 359,493 |   |
|                                 |       |                   |       |                 |       |   |   |   |   |
| COST OF REVENUE                      |       |                   |       |                 |       |   |   |   |   |
| Equipment                            |       | 138,342                |       | 125,452              |       | 275,143 |   | 237,752 |   |
| Parts                                |       | 24,184                 |       | 22,939               |       | 49,370 |   | 41,476 |   |
| Service                              |       | 6,970                  |       | 5,586                |       | 12,941 |   | 10,186 |   |
| Other, including trucking and rental |       | 4,122                  |       | 3,207                |       | 7,178 |   | 5,555 |   |
| TOTAL COST OF REVENUE                |       | 173,618                |       | 157,184              |       | 344,632 |   | 294,969 |   |
|                                 |       |                   |       |                 |       |   |   |   |   |
| GROSS PROFIT                         |       | 36,048                 |       | 36,008               |       | 70,491 |   | 64,524 |   |
|                                 |       |                   |       |                 |       |   |   |   |   |
| OPERATING EXPENSES                   |       | 29,212                 |       | 26,662               |       | 59,008 |   | 51,367 |   |
|                                 |       |                   |       |                 |       |   |   |   |   |
| INCOME FROM OPERATIONS               |       | 6,836                  |       | 9,346                |       | 11,483 |   | 13,157 |   |
|                                 |       |                   |       |                 |       |   |   |   |   |
| OTHER INCOME (EXPENSE)               |       |                   |       |                 |       |   |   |   |   |
| Interest and other income            |       | 34                     |       | 140                  |       | 207 |   | 351 |   |
| Floorplan interest expense           |       | (1,911                 | )          | (932                 | )          | (3,712 | ) | (1,663 | ) |
| Interest expense other               |       | (358                   | )          | (328                 | )          | (735 | ) | (591 | ) |
|                                 |       |                   |       |                 |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES           |       | 4,601                  |       | 8,226                |       | 7,243 |   | 11,254 |   |
|                                 |       |                   |       |                 |       |   |   |   |   |
| PROVISION FOR INCOME TAXES           |       | (1,887                 | )          | (3,375               | )          | (2,970 | ) | (4,613 | ) |
|                                 |       |                   |       |                 |       |   |   |   |   |
| NET INCOME                           |       | $                      | 2,714      |                 | $          | 4,851 |   | $ | 4,273 |   | $ | 6,641 |   |
|                                 |       |                   |       |                 |       |   |   |   |   |
| EARNINGS PER SHARE - NOTE 1          |       |                   |       |                 |       |   |   |   |   |
|                                 |       |                   |       |                 |       |   |   |   |   |
| EARNINGS PER SHARE - BASIC           |       | $                      | 0.15       |                 | $          | 0.28 |   | $ | 0.24 |   | $ | 0.38 |   |
| EARNINGS PER SHARE - DILUTED         |       | $                      | 0.15       |                 | $          | 0.27 |   | $ | 0.24 |   | $ | 0.37 |   |
|                                 |       |                   |       |                 |       |   |   |   |   |
| WEIGHTED AVERAGE SHARES - BASIC      |       | 17,635                 |       | 17,589               |       | 17,626 |   | 17,577 |   |
| WEIGHTED AVERAGE SHARES - DILUTED    |       | 18,080                 |       | 17,998               |       | 18,060 |   | 17,930 |   |

 

See Notes to Consolidated Financial Statements

 

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** **

**TITAN MACHINERY INC.**

**CONSOLIDATED STATEMENTS OFCASH FLOWS (UNAUDITED)**

**(in thousands)**

 
| ** **                                                                                                        | ** ** | **Six Months Ended July 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| OPERATING ACTIVITIES                                                                                              |       |                               |       |   |   |
| Net income                                                                                                        |       | $                                  | 4,273      |   | $ | 6,641 |   |
| Adjustments to reconcile net income to net cash  from operations                                                  |       |                               |       |   |   |
| Depreciation and amortization                                                                                     |       | 4,204                              |       | 3,962 |   |
| Deferred income taxes                                                                                             |       | (353                               | )          | 329 |   |
| Stock-based compensation expense                                                                                  |       | 564                                |       | 432 |   |
| Other                                                                                                             |       | (87                                | )          | (22 | ) |
| Changes in assets and liabilities, net of purchase  of equipment dealerships assets and assumption of liabilities |       |                               |       |   |   |
| Receivables, prepaid expenses and other assets                                                                    |       | (6,848                             | )          | (755 | ) |
| Inventories                                                                                                       |       | (28,261                            | )          | (35,238 | ) |
| Floorplan notes payable                                                                                           |       | (818                               | )          | 2,989 |   |
| Accounts payable, customer deposits, accrued  expenses and other long-term liabilities                            |       | (4,918                             | )          | (8,785 | ) |
| Income taxes                                                                                                      |       | 2,084                              |       | 3,042 |   |
|                                                                                                              |       |                               |       |   |   |
| NET CASH PROVIDED BY (USED FOR) OPERATING  ACTIVITIES                                                             |       | (30,160                            | )          | (27,405 | ) |
|                                                                                                              |       |                               |       |   |   |
| INVESTING ACTIVITIES                                                                                              |       |                               |       |   |   |
| Net change in U.S. treasury bills                                                                                 |       | —                             |       | 44,994 |   |
| Property and equipment purchases                                                                                  |       | (6,250                             | )          | (7,635 | ) |
| Net proceeds from sale of equipment                                                                               |       | 434                                |       | 190 |   |
| Purchase of equipment dealerships, net of cash  purchased                                                         |       | (2,423                             | )          | (4,025 | ) |
| Other, net                                                                                                        |       | (293                               | )          | — |   |
|                                                                                                              |       |                               |       |   |   |
| NET CASH PROVIDED BY (USED FOR) INVESTING  ACTIVITIES                                                             |       | (8,532                             | )          | 33,524 |   |
|                                                                                                              |       |                               |       |   |   |
| FINANCING ACTIVITIES                                                                                              |       |                               |       |   |   |
| Net change in non-manufacturer floorplan notes  payable                                                           |       | 23,444                             |       | 25,185 |   |
| Short-term advances related to customer contracts  in transit, net                                                |       | (358                               | )          | 2,700 |   |
| Proceeds from long-term debt borrowings                                                                           |       | 4,671                              |       | 20,388 |   |
| Principal payments on long-term debt                                                                              |       | (3,878                             | )          | (9,458 | ) |
| Other                                                                                                             |       | 89                                 |       | — |   |
|                                                                                                              |       |                               |       |   |   |
| NET CASH PROVIDED BY (USED FOR) FINANCING  ACTIVITIES                                                             |       | 23,968                             |       | 38,815 |   |
|                                                                                                              |       |                               |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                                                           |       | (14,724                            | )          | 44,934 |   |
|                                                                                                              |       |                               |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                                  |       | 76,185                             |       | 41,047 |   |
|                                                                                                              |       |                               |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                                        |       | $                                  | 61,461     |   | $ | 85,981 |   |

 

See Notes to Consolidated Financial Statements

 

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**CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(in thousands)**

 
| ** **                                                                                                                                                      | ** ** | **Six Months Ended July 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                                                                                               |       |                               | ** ** | ** ** | ** ** |
| Cash paid during the period                                                                                                                                     |       |                               |       |   |   |
| Income taxes, net of refunds                                                                                                                                    |       | $                                  | 1,247      |   | $ | 1,688 |   |
|                                                                                                                                                            |       |                               |       |   |   |
| Interest                                                                                                                                                        |       | $                                  | 4,460      |   | $ | 2,206 |   |
|                                                                                                                                                            |       |                               |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND  FINANCING ACTIVITIES                                                                                         |       |                               |       |   |   |
| Property and equipment purchased with long-term  debt                                                                                                           |       | $                                  | 3,647      |   | $ | 1,688 |   |
|                                                                                                                                                            |       |                               |       |   |   |
| Net transfer of equipment from (to) fixed assets  to (from) inventories                                                                                         |       | $                                  | (1,744     | ) | $ | 4,292 |   |
|                                                                                                                                                            |       |                               |       |   |   |
| Acquisition of equipment dealership assets in  exchange for cash and assumption of liabilities including purchase accounting  adjustments on prior acquisitions |       |                               |       |   |   |
| Receivables                                                                                                                                                     |       | $                                  | —     |   | $ | (305 | ) |
| Inventories                                                                                                                                                     |       | (2,000                             | )          | (6,203 | ) |
| Deferred income taxes, net                                                                                                                                      |       | —                             |       | 133 |   |
| Property and equipment                                                                                                                                          |       | (231                               | )          | (786 | ) |
| Goodwill                                                                                                                                                        |       | (1,485                             | )          | (1,238 | ) |
| Accounts payable, customer deposits and accrued  expenses                                                                                                       |       | 17                                 |       | 182 |   |
| Floorplan notes payable                                                                                                                                         |       | 819                                |       | 2,398 |   |
| Income taxes payable                                                                                                                                            |       | —                             |       | (73 | ) |
| Long-term debt                                                                                                                                                  |       | —                             |       | 1,867 |   |
|                                                                                                                                                            |       |                               |       |   |   |
| Non-cash consideration: other long-term  liabilities                                                                                                            |       | 457                                |       | — |   |
| Cash paid for dealerships, net of cash purchased  and adjustments on prior acquisitions                                                                         |       | $                                  | (2,423     | ) | $ | (4,025 | ) |

 

See Notes to Consolidated Financial Statements

 

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TITAN MACHINERY INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

(UNAUDITED)

 

**NOTE 1 -****                    ****BUSINESSACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES**

 

*Basisof Presentation*

 

The unaudited consolidated financial statements included herein havebeen prepared pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”) for interim reporting. Accordingly, they do notinclude all the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded. Operating results for the six-month period ended July 31, 2010are not necessarily indicative of the results that may be expected for the yearending January 31, 2011. The information contained in the balance sheet asof January 31, 2010 was derived from the audited financial statements forTitan Machinery Inc. (the “Company”) for the year then ended. Theseconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and notes thereto included in theCompany’s Form 10-K for the fiscal year ended January 31, 2010 asfiled with the SEC.

 

*Natureof Business*

 

Titan Machinery Inc. is engaged in the retail sale, service andrental of agricultural and construction machinery through stores in NorthDakota, South Dakota, Minnesota, Iowa, Nebraska, Montana and Wyoming.

 

*Estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from thoseestimates.

 

*Principlesof Consolidation*

 

The consolidated financial statements include the accounts of theCompany and its wholly-owned subsidiary, Transportation Solutions LLC. Allsignificant accounts, transactions and profits between the consolidatedcompanies have been eliminated in consolidation.

 

*Fair Value of FinancialInstruments*

 

The carrying amount of cash, receivables, payables, short-term debt andother current liabilities approximates fair value because of the short maturityand/or frequent repricing of those instruments. Based upon current borrowingrates with similar maturities, the carrying value of the long-term debtapproximates the fair value as of July 31, 2010 and January 31, 2010.

 

*Exit and Disposal Costs*

 

The Company accounts for exit or disposal activities, including storeclosures, in accordance with Financial Accounting Standards Board (“FASB”)Accounting Standards Codification (“ASC”) 420, *Exit orDisposal Cost Obligations.*Such costs mainly include leasetermination costs and employee termination costs. The Company records aliability for any remaining lease obligations, net of estimated sublease incomeor estimated loss on disposal if the Company buys and subsequently sells theleased property, as of the date the Company ceases using the property. Anysubsequent adjustments to that liability as a result of changes in estimatesare recorded in the period incurred. The Company records a liability foremployee termination costs at the date the termination benefits werecommunicated to the employees.

 

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As part of the Company’s Construction business action plan, in April 2010,the Company decided to close its Construction store in Columbia Falls, Montana.The primary exit costs relate to estimated lease termination costs of $185,000and employee termination costs of $27,000. The Company is transferring themajority of the assets and related floorplan notes payable and long-term debtto other stores. Exit costs of $110,000 and $75,000 are included in the lineitems of operating expenses and interest and other income, respectively, on theconsolidated statements of operations for the three and six months ended July 31,2010. A reconciliation of the beginning and ending liability balance follows:

 
| ** **                                 | ** ** | **(in thousands)** | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| Balance at January 31, 2010           |       | $                  | —     |   |
| Exit costs incurred and charged to expense |       | 212                |       |
| Exit costs paid                            |       | (60                | )          |
| Balance at July 31, 2010              |       | $                  | 152        |   |
|                                            |            |                    |            |  |  |

 

*Recent Accounting Guidance*

 

In July 2010, the FASBissued authoritative guidance on financing receivables and the allowance forcredit losses, codified in ASC 310, *Receivables*.This guidance amends the current disclosure requirements to provide a greaterlevel of disaggregated information about the credit quality of its financingreceivables and its allowance for credit losses. The guidance also requires anentity to disclose credit quality indicators, past due information, andmodifications of its financing receivables. The guidance is effective forinterim and annual reporting periods ending after December 15, 2010. TheCompany is in the process of determining the impact that this guidance willhave on the Company’s consolidated financial statements.

 

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*EarningsPer Share*

 

The following table sets forth the denominator for the computation ofbasic and diluted earnings per share:

 
| ** **                                        | ** ** | **Three Months Ended July 31,** | ** ** | **Six Months Ended July 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                        | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                        | ** ** | **(in thousands)**                   | ** ** | **(in thousands)**                 | ** ** |
|                                              |       |                                 |       |                               |       |   |   |   |   |
| Basic weighted-average shares outstanding         |       | 17,635                               |       | 17,589                             |       | 17,626 |   | 17,577 |   |
| Plus: Incremental shares from assumed conversions |       |                                 |       |                               |       |   |   |   |   |
| Restricted Stock                                  |       | 187                                  |       | 137                                |       | 177 |   | 117 |   |
| Warrants                                          |       | 56                                   |       | 79                                 |       | 58 |   | 80 |   |
| Stock Options                                     |       | 202                                  |       | 193                                |       | 199 |   | 156 |   |
| Diluted weighted-average shares outstanding       |       | 18,080                               |       | 17,998                             |       | 18,060 |   | 17,930 |   |

 

There were 139,000 and 164,000 stock options outstanding as of July 31,2010 and 2009, respectively, that were not included in the computation ofdiluted earnings per share because they were anti-dilutive.

 

**NOTE 2 -****                    ****INVENTORIES**

 
| ** **            | ** ** | **July 31,**  | ** ** | **January 31,** | ** ** |
|-----------------------|------------|--------------------|------------|----------------------|------------|
| ** **            | ** ** | **2010**           | ** ** | **2010**             | ** ** |
| ** **            | ** ** | **(in thousands)** | ** ** |
| New equipment         |       | $                  | 237,463    |                 | $          | 174,193 |   |
| Used equipment        |       | 132,930            |       | 127,884              |       |
| Parts and attachments |       | 45,356             |       | 42,611               |       |
| Work in process       |       | 4,196              |       | 2,892                |       |
|                  |       |               |       |                 |       |
|                  |       | $                  | 419,945    |                 | $          | 347,580 |   |

 

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

 

**NOTE 3 -****                    ****LINESOF CREDIT / FLOORPLAN NOTES PAYABLE**

 

*OperatingLine of Credit*

 

The Company entered into a Loan Agreement (the “Loan Agreement”) withBremer Bank National Association (“Bremer Bank”) on July 15, 2009, asamended on July 13, 2010, which provides for a $25.0 million revolvingoperating line of credit (“Revolving Loan”) and a $12.9 million term loan (“TermLoan”). The Revolving Loan may be used to fund short term working capitalrequirements of the Company, and replaces the Company’s previous $25.0 millionoperating line of credit with Bremer Bank. The Revolving Loan has a variableinterest rate of 0.25% per annum below a Bremer Bank reference rate (subject toa minimum interest rate floor of 4.5%) on outstanding balances, has a 0.5%non-usage fee on the average monthly unused amount, requires monthly paymentsof accrued interest, and has a maturity date of July 12, 2011. Advancesunder the Loan Agreement are secured by substantially all of the Company’sassets. See details of the Term Loan in the long-term debt schedule in theCompany’s Form 10-K for the fiscal year ended January 31, 2010 asfiled with the SEC.

 

The Company had no amount outstanding on the Revolving Loan at July 31,2010. The Loan Agreement contains certain financial covenants which imposeminimum levels of current ratio, debt service coverage, and inventory turnoverratio

 

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anda maximum level of debt to tangible net worth ratio. As of July 31, 2010,the Company was in compliance with all of these financial covenants.

 

*FloorplanLines of Credit*

 

The Company has discretionary floorplan lines of credit for equipmentpurchases totaling approximately $400.0 million with various lendinginstitutions, including a $300.0 million Wholesale Floorplan Credit Facilitywith CNH Capital America LLC (“CNH Capital”) and $50.0 million with GECommercial Distribution Finance Corporation (“GE”). The available borrowingsunder the CNH Capital credit facility are reduced by outstanding floorplannotes payable, rental fleet financing and other acquisition-related financingarrangements with CNH Capital. During fiscal 2010, interest rates for newborrowings under the CNH Capital floorplan line of credit ranged from the primerate plus 0.3% to the prime rate plus 6% per annum, subject to anyinterest-free periods offered by CNH Capital. Beginning in February 2010,interest rates are equal to the prime rate plus 4% on new borrowings, subjectto any interest-free periods offered by CNH Capital. The CNH Capital creditfacility automatically renews on August 31 of each year throughAugust 31, 2012, unless earlier terminated by either party. Undercovenants of the CNH Capital credit facility, the Company has agreed, amongother things, to maintain various financial ratio levels and to submit certainfinancial information. It also contains various restrictive covenants thatrequire prior consent of CNH Capital if the Company desires to engage in anyacquisition of, consolidation or merger with any other business entity in whichthe Company is not the surviving company; create subsidiaries; move anycollateral outside of the U.S.; or sell, rent, lease or otherwise dispose ortransfer any of the collateral, other than in the ordinary course of business.CNH Capital’s consent is also required for the acquisition of any CNHdealership. In addition, the CNH Capital credit facility restricts the Company’sability to incur any liens upon any substantial part of its assets.

 

The GE credit facility may be used to purchase new and used inventoryfrom vendors approved by GE, or to finance or refinance new or used inventory.The interest rate on borrowings under the GE floorplan line of credit is equalto the three-month LIBOR rate plus 5.5%. The GE credit facility may beterminated by either party on 60 days notice. Under covenants of the GE creditfacility, the Company has agreed, among other things, to maintain variousfinancial ratio levels and to submit certain financial information. It alsocontains various restrictive covenants regarding related party transactionsoutside of the ordinary course of business and requires GE’s prior consent ifthe Company desires to engage in any acquisition meeting certain financialthresholds; make any investments outside of the ordinary course of business; orhave a change in control, as defined by the agreement.

 

Floorplan notes payable relating to these credit facilities totaledapproximately $303.2 million of the total floorplan notes payable balance of$317.5 million outstanding as of July 31, 2010 and $245.3 million of thetotal floorplan notes payable balance of $249.9 million outstanding as of January 31,2010. As of July 31, 2010, the Company had approximately $82.2 million inavailable borrowings remaining under these lines of credit. These floorplannotes carried various interest rates primarily ranging from 3.25 to 7.25% as ofJuly 31, 2010, subject to interest-free periods offered by CNH Capital,and are secured by the related inventory. Repayment terms vary by individualnotes, but generally payments are made from sales proceeds or rental revenuefrom the related inventories. As of July 31, 2010, the Company was incompliance with all floorplan financial covenants.

 

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**NOTE 4 -****                    ****BUSINESSCOMBINATIONS**

 

On June 1, 2010, the Company acquired certain assets of HubbardImplement, Inc. The acquired entity consisted of one agriculturalequipment store located in Iowa Falls, Iowa which is contiguous to theCompany’s existing locations in Grundy Center and Waverly, Iowa. Theacquisition-date fair value of the total consideration transferred for thedealership was $1,496,000.

 

During the six months ended July 31, 2010 adjustments wererecorded for additional consideration of $1,384,000 earned and paid underagreements disclosed in the Company’s Form 10-K for the fiscal year ended January 31,2010 as filed with the SEC. This additional consideration resulted in a netincrease in goodwill of $1,384,000.

 

The results of operations have been included in the Company’sconsolidated results of operations since the date of the business combination.The fair value of assets acquired and liabilities assumed in the above businesscombinations and adjustments on prior acquisitions are presented in thefollowing table:

 

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| ** **                                              | ** ** | **July 31,**  | ** **  |
|---------------------------------------------------------|------------|--------------------|-------------|
| ** **                                              | ** ** | **2010**           | ** **  |
| ** **                                              | ** ** | **(in thousands)** | ** **  |
| Cash                                                    |       | $                  | 1           |   |
| Inventories                                             |       | 2,000              |        |
| Property and equipment                                  |       | 231                |        |
| Goodwill                                                |       | 1,485              |        |
|                                                    |       |               |        |
|                                                    |       | $                  |  3,717 |   |
| ** **                                              | ** ** | ** **         | ** **  |
| Floorplan notes payable                                 |       | $                  | 819         |   |
| Customer deposits                                       |       | 17                 |        |
| ** **                                              | ** ** | ** **         | ** **  |
|                                                    |       | $                  |  836   |   |
|                                                    |       |               |        |
| Cash consideration                                      |       | 2,424              |        |
| Non-cash consideration: other long-term  liabilities    |       | 457                |        |
| Total consideration                                     |       | $                  | 2,881       |   |
|                                                    |       |               |        |
| Goodwill related to the Agriculture operating  segment  |       | $                  | 1,485       |   |
| Goodwill related to the Construction operating  segment |       | $                  | —      |   |

 

**NOTE 5 -****                    ****SEGMENTINFORMATION AND OPERATING RESULTS**

 

Certain financial information for each of the Company’s businesssegments is set forth below. Revenues, income before income tax and totalassets at the segment level are reported before eliminations. The Companyretains various unallocated income/(expense) items and assets at the generalcorporate level, which the Company refers to as “Shared Resources” in the tablebelow. Shared Resource assets primarily consist of cash and property andequipment. Intersegment revenues are immaterial.

 

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| ** **                                | ** ** | **Three Months Ended July 31,** | ** ** | **Six Months Ended July 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                | ** ** | **(in thousands)**                   | ** ** | **(in thousands)**                 | ** ** |
| **Revenues**                              |       |                                 |       |                               |       |   |   |   |   |
| Agriculture                               |       | $                                    | 181,522    |                               | $          | 170,366 |   | $ | 362,904 |   | $ | 318,695 |   |
| Construction                              |       | 36,209                               |       | 30,451                             |       | 68,313 |   | 55,149 |   |
| Segment revenues                          |       | 217,731                              |       | 200,817                            |       | 431,217 |   | 373,844 |   |
| Eliminations                              |       | (8,065                               | )          | (7,625                             | )          | (16,094 | ) | (14,351 | ) |
| Total                                     |       | $                                    | 209,666    |                               | $          | 193,192 |   | $ | 415,123 |   | $ | 359,493 |   |
|                                      |       |                                 |       |                               |       |   |   |   |   |
| **Income (Loss) Before Income Taxes**     |       |                                 |       |                               |       |   |   |   |   |
| Agriculture                               |       | $                                    | 6,246      |                               | $          | 10,002 |   | $ | 11,038 |   | $ | 15,718 |   |
| Construction                              |       | (852                                 | )          | (785                               | )          | (2,767 | ) | (2,735 | ) |
| Segment income (loss) before income taxes |       | 5,394                                |       | 9,217                              |       | 8,271 |   | 12,983 |   |
| Shared Resources                          |       | (643                                 | )          | (751                               | )          | (634 | ) | (1,222 | ) |
| Eliminations                              |       | (150                                 | )          | (240                               | )          | (394 | ) | (507 | ) |
| Income before income taxes                |       | $                                    | 4,601      |                               | $          | 8,226 |   | $ | 7,243 |   | $ | 11,254 |   |

 
| ** **       | ** ** | **July 31,**  | ** ** | **January 31,** | ** ** |
|------------------|------------|--------------------|------------|----------------------|------------|
| ** **       | ** ** | **2010**           | ** ** | **2010**             | ** ** |
| ** **       | ** ** | **(in thousands)** | ** ** |
| **Total Assets** |       |               |       |                 |       |
| Agriculture      |       | $                  | 433,970    |                 | $          | 350,086 |   |
| Construction     |       | 91,486             |       | 87,910               |       |
| Segment assets   |       | 525,456            |       | 437,996              |       |
| Shared Resources |       | 63,559             |       | 77,631               |       |
| Eliminations     |       | (1,210             | )          | (815                 | )          |
| Total            |       | $                  | 587,805    |                 | $          | 514,812 |   |

 

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

 

Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our interim unauditedconsolidated financial statements and related notes included in Item 1 of Part 1of this Quarterly Report, and the audited consolidated financial statements andnotes thereto and Management’s Discussion and Analysis of Financial Conditionand Results of Operations contained in our Annual Report on Form 10-K forthe year ended January 31, 2010.

 

**Critical Accounting Policies**

 

Therehave been no material changes in our Critical Accounting Policies, as disclosedin our Annual Report on Form 10-K for the year ended January 31,2010.

 

**Overview**

 

Weown and operate a network of full service agricultural and constructionequipment stores in the United States. Based upon information provided to us byCNH Global N.V. or its U.S. subsidiary CNH America LLC, collectivelyreferred to in our Form 10-K for the year ended January 31, 2010 asCNH, we are the world’s largest retail dealer of Case IH Agriculture equipmentand a major retail dealer of New Holland Agriculture, Case Construction and NewHolland Construction equipment in the U.S. We have two primary businesssegments, Agriculture and Construction, within each of which we sell and rentnew and used equipment, sell parts, and service the equipment in the marketssurrounding our stores.

 

Ournet income was $2.7 million, or $0.15 per diluted share, for the three monthsended July 31, 2010, compared to $4.9 million, or $0.27 per diluted share,for the three months ended July 31, 2009. Significant factors impactingthe quarterly comparisons were:

 

·                  Increase inrevenue primarily due to Agriculture acquisitions and same-store sales growthin our Construction segment;

 

·                  Comparablegross profits to our second quarter of last year, which resulted from lowermargins (primarily on equipment and service) on higher overall revenues in thethree months ending July 31, 2010; and

 

·                  Increase infloorplan interest expense due to higher floorplan notes payable balances andhigher interest rates.

 

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**Results of Operations**

 

Comparativefinancial data for each of our four sources of revenue are expressed below. Theresults for these periods include the operating results of the acquisitionsmade during these periods. The period-to-period comparisons included below arenot necessarily indicative of future results. Segment information is providedlater in this discussion and analysis of our results of operations.

 
| ** **                           | ** ** | **Three Months Ended July 31,** | ** ** | **Six Months Ended July 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | ** **                           | ** ** | ** **                         | ** ** | **Percent** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                           | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **Change** | ** ** | **2010** | ** ** | **2009** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)**           | ** ** | ** **                         | ** ** | **(dollars in thousands)** | ** ** | ** ** | ** ** |
| Equipment                            |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Revenue                              |       | $                                    | 153,131    |                               | $          | 141,142 |   | 8.5 | % | $ | 303,491 |   | $ | 266,007 |   | 14.1 | % |
| Cost of revenue                      |       | 138,342                              |       | 125,452                            |       | 10.3 | % | 275,143 |   | 237,752 |   | 15.7 | % |
| Gross profit                         |       | $                                    | 14,789     |                               | $          | 15,690 |   | (5.7 | )% | $ | 28,348 |   | $ | 28,255 |   | 0.3 | % |
| Gross profit margin                  |       | 9.7                                  | %          | 11.1                               | %          | (1.4 | )% | 9.3 | % | 10.6 | % | (1.3 | )% |
|                                 |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Parts                                |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Revenue                              |       | $                                    | 33,947     |                               | $          | 32,454 |   | 4.6 | % | $ | 69,010 |   | $ | 58,852 |   | 17.3 | % |
| Cost of revenue                      |       | 24,184                               |       | 22,939                             |       | 5.4 | % | 49,370 |   | 41,476 |   | 19.0 | % |
| Gross profit                         |       | $                                    | 9,763      |                               | $          | 9,515 |   | 2.6 | % | $ | 19,640 |   | $ | 17,376 |   | 13.0 | % |
| Gross profit margin                  |       | 28.8                                 | %          | 29.3                               | %          | (0.5 | )% | 28.5 | % | 29.5 | % | (1.0 | )% |
|                                 |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Service                              |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Revenue                              |       | $                                    | 17,502     |                               | $          | 15,640 |   | 11.9 | % | $ | 34,053 |   | $ | 28,182 |   | 20.8 | % |
| Cost of revenue                      |       | 6,970                                |       | 5,586                              |       | 24.8 | % | 12,941 |   | 10,186 |   | 27.0 | % |
| Gross profit                         |       | $                                    | 10,532     |                               | $          | 10,054 |   | 4.8 | % | $ | 21,112 |   | $ | 17,996 |   | 17.3 | % |
| Gross profit margin                  |       | 60.2                                 | %          | 64.3                               | %          | (4.1 | )% | 62.0 | % | 63.9 | % | (1.9 | )% |
|                                 |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Other, including trucking and rental |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Revenue                              |       | $                                    | 5,086      |                               | $          | 3,956 |   | 28.6 | % | $ | 8,569 |   | $ | 6,452 |   | 32.8 | % |
| Cost of revenue                      |       | 4,122                                |       | 3,207                              |       | 28.5 | % | 7,178 |   | 5,555 |   | 29.2 | % |
| Gross profit                         |       | $                                    | 964        |                               | $          | 749 |   | 28.7 | % | $ | 1,391 |   | $ | 897 |   | 55.1 | % |
| Gross profit margin                  |       | 19.0                                 | %          | 18.9                               | %          | 0.1 | % | 16.2 | % | 13.9 | % | 2.3 | % |

 

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Thefollowing table sets forth our statements of operations data expressed as apercentage for each of our four sources of revenue for the periods indicated:

 
| ** **                           | ** ** | **Three Months Ended July 31,** | ** ** | **Six Months Ended July 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                 |       |                                 |       |                               |       |   |   |   |   |
| Revenue                              |       |                                 |       |                               |       |   |   |   |   |
| Equipment                            |       | 73.0                                 | %          | 73.1                               | %          | 73.1 | % | 74.0 | % |
| Parts                                |       | 16.2                                 | %          | 16.8                               | %          | 16.6 | % | 16.4 | % |
| Service                              |       | 8.4                                  | %          | 8.1                                | %          | 8.2 | % | 7.8 | % |
| Other, including trucking and rental |       | 2.4                                  | %          | 2.0                                | %          | 2.1 | % | 1.8 | % |
| Total revenue                        |       | 100.0                                | %          | 100.0                              | %          | 100.0 | % | 100.0 | % |
|                                 |       |                                 |       |                               |       |   |   |   |   |
| Total cost of revenue                |       | 82.8                                 | %          | 81.4                               | %          | 83.0 | % | 82.1 | % |
|                                 |       |                                 |       |                               |       |   |   |   |   |
| Gross profit                         |       | 17.2                                 | %          | 18.6                               | %          | 17.0 | % | 17.9 | % |
|                                 |       |                                 |       |                               |       |   |   |   |   |
| Operating expenses                   |       | 13.9                                 | %          | 13.8                               | %          | 14.2 | % | 14.2 | % |
|                                 |       |                                 |       |                               |       |   |   |   |   |
| Income from operations               |       | 3.3                                  | %          | 4.8                                | %          | 2.8 | % | 3.7 | % |
|                                 |       |                                 |       |                               |       |   |   |   |   |
| Other income (expense)               |       | (1.1                                 | )%         | (0.5                               | )%         | (1.1 | )% | (0.6 | )% |
|                                 |       |                                 |       |                               |       |   |   |   |   |
| Income before income taxes           |       | 2.2                                  | %          | 4.3                                | %          | 1.7 | % | 3.1 | % |
|                                 |       |                                 |       |                               |       |   |   |   |   |
| Provision for income taxes           |       | (0.9                                 | )%         | (1.8                               | )%         | (0.7 | )% | (1.3 | )% |
|                                 |       |                                 |       |                               |       |   |   |   |   |
| Net income                           |       | 1.3                                  | %          | 2.5                                | %          | 1.0 | % | 1.8 | % |

 

***Three Months Ended July 31,2010 Compared to Three Months Ended July 31, 2009***

 

**Consolidated Results**

 

*Revenue*

 
| ** **                           | ** ** | **Three months ended July 31,** | ** ** | ** ** | ** ** | **Percent**  | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------|------------|--------------|------------|
| ** **                           | ** ** | **2010**                             | ** ** | **2009**   | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)**           | ** ** | ** ** | ** ** |
| Equipment                            |       | $                                    | 153,131    |       | $          | 141,142      |       | $ | 11,989 |   | 8.5 | % |
| Parts                                |       | 33,947                               |       | 32,454     |       | 1,493        |       | 4.6 | % |
| Service                              |       | 17,502                               |       | 15,640     |       | 1,862        |       | 11.9 | % |
| Other, including trucking and rental |       | 5,086                                |       | 3,956      |       | 1,130        |       | 28.6 | % |
|                                 |       |                                 |       |       |       |         |       |   |   |
| Total Revenue                        |       | $                                    | 209,666    |       | $          | 193,192      |       | $ | 16,474 |   | 8.5 | % |

 

Theincrease in revenue for the three months ended July 31, 2010, as comparedto the same period last year, was due to acquisitions contributing $10.0million and same-store sales growth contributing $6.5 million, representing asame-store sale growth of 3.4% over the prior year quarter. The revenue growthfrom acquisitions occurred in our Agriculture segment and the same-store salesgrowth primarily came from our Construction segment.  The sales increases in the Constructionsegment are due in part to the execution of our fiscal 2011 Constructionbusiness action plan in the first half of fiscal 2011, which includedright-sizing our rental fleet, changing key Construction personnel andimplementing the Titan strong-store operating model into the fiscal 2009Construction acquisition stores.

 

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*Cost of Revenue*

 
| ** **                           | ** ** | **Three months ended July 31,** | ** ** | ** ** | ** ** | **Percent**  | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------|------------|--------------|------------|
| ** **                           | ** ** | **2010**                             | ** ** | **2009**   | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)**           | ** ** | ** ** | ** ** |
| Equipment                            |       | $                                    | 138,342    |       | $          | 125,452      |       | $ | 12,890 |   | 10.3 | % |
| Parts                                |       | 24,184                               |       | 22,939     |       | 1,245        |       | 5.4 | % |
| Service                              |       | 6,970                                |       | 5,586      |       | 1,384        |       | 24.8 | % |
| Other, including trucking and rental |       | 4,122                                |       | 3,207      |       | 915          |       | 28.5 | % |
|                                 |       |                                 |       |       |       |         |       |   |   |
| Total cost of revenue                |       | $                                    | 173,618    |       | $          | 157,184      |       | $ | 16,434 |   | 10.5 | % |

 

Theincrease in cost of revenue for the three months ended July 31, 2010, ascompared to the same period last year, was due to increased sales primarily inour equipment business. Acquisitions contributed $8.4 million of the increasein total cost of revenue, while same-store sales growth contributed $8.0million of the increase. As a percentage of revenue, cost of revenue was 82.8%compared to 81.4% for the second quarter of fiscal 2010.

 

*Gross Profit*

 
| ** **                           | ** ** | **Three months ended July 31,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                           | ** ** | **2010**                             | ** ** | **2009**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)**           | ** ** | ** **    | ** ** |
| **Gross Profit**                     |       |                                 |       |          |       |           |       |   |   |   |   |   |
| Equipment                            |       | $                                    | 14,789     |          | $          | 15,690         |       | $ | (901 | ) | (5.7 | )% |
| Parts                                |       | 9,763                                |       | 9,515         |       | 248            |       | 2.6 | % |
| Service                              |       | 10,532                               |       | 10,054        |       | 478            |       | 4.8 | % |
| Other, including trucking and rental |       | 964                                  |       | 749           |       | 215            |       | 28.7 | % |
|                                 |       |                                 |       |          |       |           |       |   |   |
| Total Gross Profit                   |       | $                                    | 36,048     |          | $          | 36,008         |       | $ | 40 |   | 0.1 | % |
|                                 |       |                                 |       |          |       |           |       |   |   |
| **Gross Profit Margin**              |       |                                 |       |          |       |           |       |   |   |
| Equipment                            |       | 9.7                                  | %          | 11.1          | %          | (1.4           | )%         | (12.6 | )% |
| Parts                                |       | 28.8                                 | %          | 29.3          | %          | (0.5           | )%         | (1.7 | )% |
| Service                              |       | 60.2                                 | %          | 64.3          | %          | (4.1           | )%         | (6.4 | )% |
| Other, including trucking and rental |       | 19.0                                 | %          | 18.9          | %          | 0.1            | %          | 0.5 | % |
|                                 |       |                                 |       |          |       |           |       |   |   |
| Total Gross Profit Margin            |       | 17.2                                 | %          | 18.6          | %          | (1.4           | )%         | (7.5 | )% |
|                                 |       |                                 |       |          |       |           |       |   |   |
| **Gross Profit Mix**                 |       |                                 |       |          |       |           |       |   |   |
| Equipment                            |       | 73.0                                 | %          | 73.1          | %          | (0.1           | )%         | (0.1 | )% |
| Parts                                |       | 16.2                                 | %          | 16.8          | %          | (0.6           | )%         | (3.6 | )% |
| Service                              |       | 8.4                                  | %          | 8.1           | %          | 0.3            | %          | 3.7 | % |
| Other, including trucking and rental |       | 2.4                                  | %          | 2.0           | %          | 0.4            | %          | 20.0 | % |
|                                 |       |                                 |       |          |       |           |       |   |   |
| Total Gross Profit Mix               |       | 100.0                                | %          | 100.0         | %          | 0.0            | %          | 0.0 | % |

 

Grossprofits were flat for the three months ended July 31, 2010, as compared tothe same period last year. Acquisitions contributed $1.6 million to theincrease in gross profit for the three months ended July 31, 2010, whilesame-store gross profits decreased $1.5 million.  Contributing to the quarter over quartercomparable gross profits were increased revenues offset by lower marginsprimarily in the equipment (down 1.4% to 9.7%) and service (down 4.1% to 60.2%)areas of our business.  Pricing pressurefrom our competition continues to compress equipment margins quarter overquarter.  We anticipate this trend tomoderate in the second half of the year as a result of increased equipmentdemand.  Although our service marginswere down we experienced a revenue increase of 11.9% in our service arearesulting in a positive gross profit contribution from service of $0.5 millionover the prior year quarter.  The lowerservice margins can partially be attributed to higher labor cost of salesrelated to the investment in new technicians through headcount additions,internship programs and service training as well as comparing to strong secondquarter service margins in fiscal 2010.

 

Totalgross profit margins were down 1.4% to 17.2% in the second quarter of fiscal2011, compared to 18.6% in the second quarter of fiscal 2010. The decrease intotal gross profit margins was primarily due to the lower equipment and servicemargins discussed above.

 

15

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*Operating Expenses*

* *
| ** **         | ** ** | **Three months ended July 31,** | ** ** | ** ** | ** ** | **Percent**  | ** ** |
|--------------------|------------|-----------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **         | ** ** | **2010**                                            | ** ** | **2009**   | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **         | ** ** | **(dollars in thousands)**                | ** ** | ** ** | ** ** |
| Operating Expenses |       | $                                                   | 29,212     |       | $          | 26,662       |       | $ | 2,550 |   | 9.6 | % |
|                    |            |                                                     |            |            |            |              |            |  |  |  |  |  |

 

The $2.6 million increase in operating expenses, as compared to thesame period last year, was primarily due to the additional costs associatedwith acquisitions such as compensation, rent and depreciation. As a percentageof total revenue, operating expenses remained relatively flat at 13.9% for thesecond quarter of fiscal 2011 compared to 13.8% for the second quarter offiscal 2010.

 

*Other Income (Expense)*

 
| ** **                 | ** ** | **Three months ended July 31,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                 | ** ** | **2010**                                            | ** ** | **2009**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
|                       |       | **(dollars in thousands)**                |       |          |       |
| Interest and other income  |       | $                                                   | 34         |          | $          | 140            |       | $ | (106 | ) | (75.7 | )% |
| Floorplan interest expense |       | (1,911                                              | )          | (932          | )          | 979            |       | 105.0 | % |
| Interest expense           |       | (358                                                | )          | (328          | )          | 30             |       | 9.1 | % |
|                            |            |                                                     |            |               |            |                |            |  |  |  |  |  |

 

Floorplan interest expense increased $1.0 million for the three monthsended July 31, 2010, as compared to the same period in the prior year. Increasesin floorplan notes payable balances accounted for 51% of this increase while higherinterest rates generated the remaining 49% increase, as compared to the prioryear quarter.

 

*Provision for Income Taxes*

* *
| ** **                 | ** ** | **Three months ended July 31,** | ** ** | ** ** | ** ** | **Percent**  | ** ** |
|----------------------------|------------|--------------------------------------|------------|------------|------------|--------------|------------|
| ** **                 | ** ** | **2010**                             | ** ** | **2009**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **(dollars  in thousands)**          | ** ** | ** ** | ** ** |
| Provision for income taxes |       | $                                    | 1,887      |       | $          | 3,375        |       | $ | (1,488 | ) | (44.1 | )% |
|                            |            |                                      |            |            |            |              |            |  |  |  |  |  |

 

The effective tax rate was 41.0% for the three months ended July 31,2010 and 2009.

 

**Segment Results**

 

Certain financial information for our Agriculture and Constructionbusiness segments is set forth below. Revenues and income (loss) before incometaxes at the segment level are reported before eliminations.  “Shared Resources” in the table below refersto the various unallocated income/(expense) items that we have retained at thegeneral corporate level. Intersegment revenues are immaterial.

 

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| ** **                                | ** ** | **Three months ended July 31,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                                | ** ** | **2010**                             | ** ** | **2009**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                                | ** ** | **(dollars  in thousands)**          | ** ** | ** **    | ** ** |
| **Revenues**                              |       |                                 |       |          |       |           |       |   |   |
| Agriculture                               |       | $                                    | 181,522    |          | $          | 170,366        |       | $ | 11,156 |   | 6.5 | % |
| Construction                              |       | 36,209                               |       | 30,451        |       | 5,758          |       | 18.9 | % |
| Segment revenues                          |       | 217,731                              |       | 200,817       |       | 16,914         |       | 8.4 | % |
| Eliminations                              |       | (8,065                               | )          | (7,625        | )          | (440           | )          | (5.8 | )% |
| Total                                     |       | $                                    | 209,666    |          | $          | 193,192        |       | $ | 16,474 |   | 8.5 | % |
|                                      |       |                                 |       |          |       |           |       |   |   |
| **Income (Loss) Before Income Taxes**     |       |                                 |       |          |       |           |       |   |   |
| Agriculture                               |       | $                                    | 6,246      |          | $          | 10,002         |       | $ | (3,756 | ) | (37.6 | )% |
| Construction                              |       | (852                                 | )          | (785          | )          | (67            | )          | (8.5 | )% |
| Segment income (loss) before income taxes |       | 5,394                                |       | 9,217         |       | (3,823         | )          | (41.5 | )% |
| Shared Resources                          |       | (643                                 | )          | (751          | )          | 108            |       | 14.4 | % |
| Eliminations                              |       | (150                                 | )          | (240          | )          | 90             |       | 37.5 | % |
| Income before income taxes                |       | $                                    | 4,601      |          | $          | 8,226          |       | $ | (3,625 | ) | (44.1 | )% |

 

*Agriculture*

 

Agriculture revenues for the three months ended July 31, 2010increased 6.5% compared to the same period last year. The revenue increase wasprimarily due to Agriculture segment acquisitions occurring over the past year,which consisted of eight stores. Same-store-sales for the Agriculture segment remained relatively flat,reflecting an increase of 0.6% over the second quarter of fiscal 2010.

 

Income before income taxes decreased 37.6% primarily due to lowerAgriculture gross profit margins on equipment revenues, which is reflective ofincreased pricing pressures from our competition, as well as higher floorplaninterest expense resulting from increased floorplan notes payable balances andincreased interest rates in the second quarter of fiscal 2011 compared to thesame period last year.

 

*Construction*

 

Construction revenues for the three months ended July 31, 2010increased 18.9% compared to the same period last year. The revenue increase wasprimarily due to a Construction same-store sales increase of 18.7% over thesecond quarter of fiscal 2010.

 

Loss before income taxes increased 8.5% primarily due to higherfloorplan interest expense resulting from increased floorplan notes payablebalances and increased interest rates in the second quarter of fiscal 2011compared to the same period last year. Also contributing to the loss wereadditional second quarter exit costs of $92,000 related to the closing of ourstore in Columbia Falls, Montana. Partially offsetting these additionalexpenses was higher Construction segment gross profits due to increasedrevenues over the prior year second quarter.

 

*Shared Resources/Eliminations*

 

Shared Resources allocations to each of oursegments are set early in the year and therefore unallocated balances mayoccur.  The Shared Resource amountdecreased $0.1 million in the second quarter of fiscal 2011 compared to theprior year.

 

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

 

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***Six Months Ended July 31,2010 Compared to Six Months Ended July 31, 2009***

 

**Consolidated Results**

 

*Revenue*

* *
| ** **                           | ** ** | **Six Months Ended July 31,** | ** ** | ** ** | ** ** | **Percent**  | ** ** |
|--------------------------------------|------------|------------------------------------|------------|------------|------------|--------------|------------|
| ** **                           | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)**         | ** ** | ** ** | ** ** |
| Equipment                            |       | $                                  | 303,491    |       | $          | 266,007      |       | $ | 37,484 |   | 14.1 | % |
| Parts                                |       | 69,010                             |       | 58,852     |       | 10,158       |       | 17.3 | % |
| Service                              |       | 34,053                             |       | 28,182     |       | 5,871        |       | 20.8 | % |
| Other, including trucking and rental |       | 8,569                              |       | 6,452      |       | 2,117        |       | 32.8 | % |
|                                 |       |                               |       |       |       |         |       |   |   |
| Total Revenue                        |       | $                                  | 415,123    |       | $          | 359,493      |       | $ | 55,630 |   | 15.5 | % |

 

The increase in revenue for the six months ended July 31, 2010, ascompared to the same period last year, was due to acquisitions contributing$27.7 million and same-store sales growth contributing $27.9 million,representing a same-store sales growth of 7.9% over the prior year six months.This revenue growth was achieved in both our Agriculture and Constructionsegments.

 

*Cost of Revenue*

* *
| ** **                           | ** ** | **Six Months Ended July 31,** | ** ** | ** ** | ** ** | **Percent**  | ** ** |
|--------------------------------------|------------|------------------------------------|------------|------------|------------|--------------|------------|
| ** **                           | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(dollars  in thousands)**        | ** ** | ** ** | ** ** |
| Equipment                            |       | $                                  | 275,143    |       | $          | 237,752      |       | $ | 37,391 |   | 15.7 | % |
| Parts                                |       | 49,370                             |       | 41,476     |       | 7,894        |       | 19.0 | % |
| Service                              |       | 12,941                             |       | 10,186     |       | 2,755        |       | 27.0 | % |
| Other, including trucking and rental |       | 7,178                              |       | 5,555      |       | 1,623        |       | 29.2 | % |
|                                 |       |                               |       |       |       |         |       |   |   |
| Total cost of revenue                |       | $                                  | 344,632    |       | $          | 294,969      |       | $ | 49,663 |   | 16.8 | % |

 

The increase in cost of revenue for the six months ended July 31,2010, as compared to the same period last year, was primarily due to increasedrevenue. Acquisitions contributed $23.6 million of the increase in total costof revenue, while same-store sales growth contributed $26.1 million of theincrease. As a percentage of revenue, cost of revenue was 83.0% compared to82.1% for the first six months of fiscal 2010.

 

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*Gross Profit*

 
| ** **                           | ** ** | **Six Months Ended July 31,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|--------------------------------------|------------|-------------------------------|------------|---------------|------------|----------------|------------|
| ** **                           | ** ** | **2010**                      | ** ** | **2009**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(dollars  in thousands)**   | ** ** | ** **    | ** ** |
| **Gross Profit**                     |       |                          |       |          |       |           |       |   |   |
| Equipment                            |       | $                             | 28,348     |          | $          | 28,255         |       | $ | 93 |   | 0.3 | % |
| Parts                                |       | 19,640                        |       | 17,376        |       | 2,264          |       | 13.0 | % |
| Service                              |       | 21,112                        |       | 17,996        |       | 3,116          |       | 17.3 | % |
| Other, including trucking and rental |       | 1,391                         |       | 897           |       | 494            |       | 55.1 | % |
|                                 |       |                          |       |          |       |           |       |   |   |
| Total Gross Profit                   |       | $                             | 70,491     |          | $          | 64,524         |       | $ | 5,967 |   | 9.2 | % |
|                                 |       |                          |       |          |       |           |       |   |   |
| **Gross Profit Margin**              |       |                          |       |          |       |           |       |   |   |
| Equipment                            |       | 9.3                           | %          | 10.6          | %          | (1.3           | )%         | (12.3 | )% |
| Parts                                |       | 28.5                          | %          | 29.5          | %          | (1.0           | )%         | (3.4 | )% |
| Service                              |       | 62.0                          | %          | 63.9          | %          | (1.9           | )%         | (3.0 | )% |
| Other, including trucking and rental |       | 16.2                          | %          | 13.9          | %          | 2.3            | %          | 16.5 | % |
|                                 |       |                          |       |          |       |           |       |   |   |
| Total Gross Profit Margin            |       | 17.0                          | %          | 17.9          | %          | (0.9           | )%         | (5.0 | )% |
|                                 |       |                          |       |          |       |           |       |   |   |
| **Gross Profit Mix**                 |       |                          |       |          |       |           |       |   |   |
| Equipment                            |       | 73.1                          | %          | 74.0          | %          | (0.9           | )%         | (1.2 | )% |
| Parts                                |       | 16.6                          | %          | 16.4          | %          | 0.2            | %          | 1.2 | % |
| Service                              |       | 8.2                           | %          | 7.8           | %          | 0.4            | %          | 5.1 | % |
| Other, including trucking and rental |       | 2.1                           | %          | 1.8           | %          | 0.3            | %          | 16.7 | % |
|                                 |       |                          |       |          |       |           |       |   |   |
| Total Gross Profit Mix               |       | 100.0                         | %          | 100.0         | %          | 0.0            | %          | 0.0 | % |

 

The $6.0 million increase in gross profit for the six months ended July 31,2010, as compared to the same period last year, was primarily due to increasedrevenue. Acquisitions contributed $4.2 million to the increase in gross profitfor the six months ended July 31, 2010, while increases in same-storegross profits contributed the remaining $1.8 million. Offsetting the positiveeffect to gross profits of higher revenue were lower margins primarily onequipment, which decreased 1.3% from 10.6% to 9.3% in the six months ended July 31,2010.  The equipment margin compressionis due to pricing pressure from our competitors.  We anticipate this trend to moderate in thesecond half of the year as a result of increased equipment demand. Partsmargins were down 1.0% to 28.5% and service margins were down 1.9% to 62.0%;however, we are still realizing increased same-store gross profits in both ofthese areas.  The decrease in equipment,parts and service margins were the primary factors in decreasing total grossprofit margins to 17.0% for the six months ended July 31, 2010 from 17.9%in the prior year six month period.

 

*Operating Expenses*

 
| ** **         | ** ** | **Six Months Ended July 31,** | ** ** | ** ** | ** ** | **Percent**  | ** ** |
|--------------------|------------|------------------------------------|------------|------------|------------|--------------|------------|
| ** **         | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **         | ** ** | **(dollars  in thousands)**        | ** ** | ** ** | ** ** |
| Operating Expenses |       | $                                  | 59,008     |       | $          | 51,367       |       | $ | 7,641 |   | 14.9 | % |
|                    |            |                                    |            |            |            |              |            |  |  |  |  |  |

 

The $7.6 million increase in operating expenses for the first sixmonths of fiscal 2011, as compared to the same period last year, was primarilydue to the additional costs associated with acquisitions such as compensation,rent and depreciation. As a percentage of total revenue, operating expensesremained flat at 14.2% for the first six months of fiscal 2011 compared to14.2% for the first six months of fiscal 2010.

 

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*Other Income (Expense)*

 
| ** **                 | ** ** | **Six Months Ended July 31,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|----------------------------|------------|------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                 | ** ** | **2010**                           | ** ** | **2009**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **(dollars  in thousands)**        | ** ** | ** **    | ** ** |
| Interest and other income  |       | $                                  | 207        |          | $          | 351            |       | $ | (144 | ) | (41.0 | )% |
| Floorplan interest expense |       | (3,712                             | )          | (1,663        | )          | 2,049          |       | 123.2 | % |
| Interest expense           |       | (735                               | )          | (591          | )          | 144            |       | 24.4 | % |
|                            |            |                                    |            |               |            |                |            |  |  |  |  |  |

 

Floorplan interest expense increased $2.0 million for the six monthsended July 31, 2010, as compared to the same period in the prior year. Increasesin floorplan notes payable balances accounted for 60% of this increase whilehigher interest rates generated the remaining 40% increase, as compared to theprior year six months.

 

*Provision for Income Taxes*

 
| ** **                 | ** ** | **Six Months Ended July 31,** | ** ** | ** ** | ** ** | **Percent**  | ** ** |
|----------------------------|------------|------------------------------------|------------|------------|------------|--------------|------------|
| ** **                 | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **(dollars in thousands)**         | ** ** | ** ** | ** ** |
| Provision for income taxes |       | $                                  | 2,970      |       | $          | 4,613        |       | $ | (1,643 | ) | (35.6 | )% |
|                            |            |                                    |            |            |            |              |            |  |  |  |  |  |

 

The effective tax rate was 41.0% for the six months ended July 31,2010 and 2009.

 

**Segment Results**

 

Certain financial information for our Agriculture and Constructionbusiness segments is set forth below. Revenues and income (loss) before incometaxes at the segment level are reported before eliminations.  “Shared Resources” in the table below refersto the various unallocated income/(expense) items that we have retained at thegeneral corporate level. Intersegment revenues are immaterial.

 
| ** **                                | ** ** | **Six Months Ended July 31,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|-------------------------------------------|------------|------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                                | ** ** | **2010**                           | ** ** | **2009**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
|                                      |       | **(dollars  in thousands)**        |       |          |       |
| **Revenues**                              |       |                               |       |          |       |           |       |   |   |
| Agriculture                               |       | $                                  | 362,904    |          | $          | 318,695        |       | $ | 44,209 |   | 13.9 | % |
| Construction                              |       | 68,313                             |       | 55,149        |       | 13,164         |       | 23.9 | % |
| Segment revenues                          |       | 431,217                            |       | 373,844       |       | 57,373         |       | 15.3 | % |
| Eliminations                              |       | (16,094                            | )          | (14,351       | )          | (1,743         | )          | (12.1 | )% |
| Total                                     |       | $                                  | 415,123    |          | $          | 359,493        |       | $ | 55,630 |   | 15.5 | % |
|                                      |       |                               |       |          |       |           |       |   |   |
| **Income (Loss) Before Income Taxes**     |       |                               |       |          |       |           |       |   |   |
| Agriculture                               |       | $                                  | 11,038     |          | $          | 15,718         |       | $ | (4,680 | ) | (29.8 | )% |
| Construction                              |       | (2,767                             | )          | (2,735        | )          | (32            | )          | (1.2 | )% |
| Segment income (loss) before income taxes |       | 8,271                              |       | 12,983        |       | (4,712         | )          | (36.3 | )% |
| Shared Resources                          |       | (634                               | )          | (1,222        | )          | 588            |       | 48.1 | % |
| Eliminations                              |       | (394                               | )          | (507          | )          | 113            |       | 22.3 | % |
| Income before income taxes                |       | $                                  | 7,243      |          | $          | 11,254         |       | $ | (4,011 | ) | (35.6 | )% |

 

*Agriculture*

 

Agriculture revenues for the six months ended July 31, 2010increased 13.9% compared to the same period last year. The revenue increase wasdue to acquisitions and an Agriculture same-store sales increase of 6.4% overthe six months ended July 31, 2009.

 

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Income before income tax decreased 29.8% primarily due to lowerAgriculture gross profit margins on equipment revenues, which is reflective ofincreased pricing pressures from our competition, as well as higher floorplaninterest expense resulting from increased floorplan notes payable balances andincreased interest rates for the six months ended July 31, 2010 comparedto the same period last year.

 

*Construction*

 

Construction revenues for the six months ended July 31, 2010increased 23.9% compared to the same period last year. The revenue increase wasdue to acquisitions and a Construction same-store sales increase of 16.3% overthe six months ended July 31, 2009.

 

Loss before income taxes increased 1.2% primarily due to higherfloorplan interest expense resulting from increased floorplan notes payablebalances and increased interest rates in the six months ended July 31,2010 compared to the same period last year.  Also contributing to the loss was $212,000 inexit costs related to the closing of our store in Columbia Falls, Montana.  Partially offsetting these additionalexpenses were higher Construction segment gross profits due to increasedrevenues in the six months ended July 31, 2010 compared to the same periodlast year.

 

*Shared Resources/Eliminations*

 

Shared Resources allocations to each of oursegments are set early in the year and therefore unallocated balances mayoccur.  The Shared Resource amountdecreased $0.6 million in the first six months of fiscal 2011 compared to theprior year.

 

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

 

**Liquidity and Capital Resources**

 

*CashFlow from Operating Activities*

 

For the six months ended July 31, 2010, our cash flow used foroperating activities was $30.2 million. Our cash flow used for operations wasprimarily the result of our reported net income of $4.3 million and an add-backof non-cash depreciation and amortization of $4.2 million. This amount wasprincipally offset by an increase in net cash used for inventories of $28.3million, a net increase in receivables, prepaid expenses and other assets of$6.8 million and a net decrease in accounts payable, customer deposits, accruedexpenses and other long-term liabilities of $4.9 million. The increase ininventories primarily reflects new equipment purchases to support future sales.  We expect our inventory levels to decreasefrom current levels by the end of the fiscal year because of seasonally higherequipment sales in the second half of our fiscal year.

 

For the six months ended July 31, 2009, our cash flow used inoperating activities was $27.4 million. Our cash flow from operations wasprimarily the result of our reported net income of $6.6 million, an increase infloorplan notes payable of $3.0 million, an increase in income taxes payable of$3.0 million, and an add-back of non-cash depreciation and amortization of $4.0million. This amount was principally offset by an increase in inventories of$35.2 million and a net decrease in accounts payable, customer deposits,accrued expenses and other long-term liabilities of $8.8 million. The increasein inventories reflected historical stocking levels to support future sales.

 

We evaluate our cash flow from operatingactivities net of all floorplan activity and short-term advances related tocustomer contracts in transit.  Takingthese adjustments into account, our non-GAAP cash flow used for operatingactivities as of July 31, 2010 was $7.1 million.  For areconciliation of this non-GAAP financial measure, please see the Non-GAAP CashFlow Reconciliation section below.

 

*CashFlow from Investing Activities*

 

For the six months ended July 31, 2010, cash used for investingactivities was $8.5 million. Our cash flow used for investing activitiesprimarily consisted of purchases of property and equipment of $6.3 million andthe purchases of equipment dealerships (net of cash purchased) of $2.4 million.

 

Forthe six months ended July 31, 2009, cash provided by investing activitieswas $33.5 million. Our cash provided by investing activities primarilyconsisted of the sale of U.S. treasury bills of $45.0 million, offset bypurchases of property and equipment for $7.6 million.

 

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*CashFlow from Financing Activities*

 

For the six months ended July 31, 2010, cash provided by financingactivities was $24.0 million. Cash provided by financing activities wasprimarily the result of an increase in non-manufacturer floorplan notes payableof $23.4 million and proceeds from long-term debt borrowings exceedingprincipal payments on long-term debt by $0.8 million.

 

For the six months ended July 31, 2009, cash provided by financingactivities was $38.8 million. Cash provided by financing activities wasprimarily the result of an increase in non-manufacturer floorplan payable of$25.2 million and proceeds from long-term debt and short term advancesexceeding principal payments on long-term debt by $13.6 million.

 

*Non-GAAP Cash Flow Reconciliation*

 

Non-GAAP cash flow provided by (used for)operating activities is a non-GAAP financial measure which is adjusted for thefollowing:

 

·                  Non-manufacturerfloorplan notes payable: We review our cash flow from operating activities toinclude all floorplan notes payable activity regardless of whether we obtainthe financing from a manufacturer or a non-manufacturer.  We consider inventory financing with bothmanufacturers and non-manufacturers to be part of the normal operations of ourbusiness and use the adjusted cash flow analysis in the evaluation of ourinventory and inventory flooring needs. GAAP categorizes non-manufacturer floorplan payable as financingactivities in the Consolidated Statements of Cash Flows.

 

·                  Short-termadvances related to customer contracts in transit:  We review our cash flow from operatingactivities to include short-term advances related to customer contracts intransit.  These advances are directlyrelated to our contracts in transit and are considered part of our workingcapital.  GAAP categorizes short-termadvances related to customer contracts in transit as financing activities inthe Consolidated Statements of Cash Flows.

 

The following table reconciles net cash provided by (used for)operating activities, a GAAP measure, to non-GAAP cash flow provided by (usedfor) operating activities for the six months ended July 31, 2010 and 2009and net cash provided by (used for) financing activities, a GAAP measure, tonon-GAAP cash flow provided by (used for) financing activities for the sixmonths ended July 31, 2010 and 2009:

 
| ** **                                            | ** ** | ** **              | ** ** | **Adjustment** | ** ** | **Adjustment** | ** ** | **Non-GAAP** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|--------------|------------|
| ** **                                            | ** ** | **As Reported**         | ** ** | **(1)**        | ** ** | **(2)**        | ** ** | **Measures** | ** ** |
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| **Six months ended July 31,  2010:**             |       |                    |       |           |       |           |       |         |       |
| Net cash provided by (used for) operating  activities |       | $                       | (30,160    | )              | $          | 23,444         |       | $            | (358       | ) | $ | (7,074 | ) |
| Net cash provided by (used for) financing  activities |       | 23,968                  |       | (23,444        | )          | 358            |       | 882          |       |
|                                                  |       |                    |       |           |       |           |       |         |       |
| **Six months ended July 31,  2009:**             |       |                    |       |           |       |           |       |         |       |
| Net cash provided by (used for) operating  activities |       | $                       | (27,405    | )              | $          | 25,185         |       | $            | 2,700      |   | $ | 480 |   |
| Net cash provided by (used for) financing  activities |       | 38,815                  |       | (25,185        | )          | (2,700         | )          | 10,930       |       |

 

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

(2) - Net change in short-term advances related to customer contractsin transit

 

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

 

**Sources of Liquidity**

 

Our primary sources of liquidity are cash reserves, cash flow fromoperations, proceeds from the issuance of debt and borrowings under our creditfacilities. For more information on our credit facilities, please see Note 3 tothe consolidated financial statements in this Quarterly Report on Form 10-Q.  We expect that ongoing requirements for debtservice and capital expenditures will be funded from these sources.

 

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**Adequacyof Capital Resources**

 

Our primary uses of cash have been to fund our strategic acquisitions,finance the purchase of inventory, meet debt service requirements and fundoperating activities, working capital, payments due under building spaceoperating leases and manufacturer floorplan notes payable. Based on our currentoperational performance, we believe our cash flow from operations, availablecash and available borrowings under the existing credit facilities willadequately 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 orfinancial partnerships, such as entities often referred to as structuredfinance, special purpose entities or variable interest entities, which wouldhave been established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes. We are,therefore, not exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in these relationships. In the normal course ofour business activities, we lease rental equipment and buildings under operatingleases.

 

**PRIVATE SECURITIES LITIGATION REFORM ACT**

 

The Private Securities Litigation Reform Act of 1995 provides a “safeharbor” for forward-looking statements. Such “forward-looking” information isincluded in this Quarterly Report on Form 10-Q, including in “Management’sDiscussion And Analysis Of Financial Condition And Results Of Operations,” aswell as in our Annual Report on Form 10-K for the year ended January 31,2010 that was filed with the Securities and Exchange Commission, and in other materialsfiled or to be filed by the Company with the Securities and Exchange Commission(as well as information included in oral statements or other written statementsmade or to be made by the Company).

 

Forward-looking statements include all statements based on futureexpectations and specifically include, among other things, all statementsrelating to our expectations regarding our primary liquidity sources,expectations as to gross margins and inventory, and expectations as to adequacyof our capital resources. Any statements that are not based upon historicalfacts, including the outcome of events that have not yet occurred and ourexpectations 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-lookingstatements. Such statements are based upon the current beliefs and expectationsof our management. Such forward-looking information involves important risksand uncertainties that could significantly affect anticipated results in thefuture and, accordingly, such results may differ from those expressed in anyforward-looking statements made by or on behalf of the Company. These risks anduncertainties include, but are not limited to, adverse market conditions in theagricultural and construction equipment industries, the continuation ofunfavorable conditions in the credit markets and those matters identified anddiscussed in our Annual Report on Form 10-K under the section titled “RiskFactors.”

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to market risk from changes in interest rates. Marketrisk is the potential loss arising from adverse changes in market rates andprices such as interest rates. For fixed rate debt, interest rate changesaffect the fair value of financial instruments but do not impact earnings orcash flows. Conversely, for floating rate debt, interest rate changes generallydo 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 ratefinancing.

 

Based upon balances and interest rates as of July 31, 2010,holding other variables constant, a one percentage point increase in interestrates for the next 12-month period would decrease pre-tax earnings and cashflow by approximately $1.7 million. Conversely, a one percentage point decreasein interest rates for the next 12-month period would result in an increase topre-tax earnings and cash flow of approximately $1.7 million. At July 31,2010, we had variable rate floorplan notes payable of $317.5 million, of whichapproximately $151.3 million was interest-bearing, variable notes payable andlong-term debt of $13.8 million, and fixed rate notes payable and long-termdebt of $19.3 million.

 

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

 

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**ITEM 4.**CONTROLS ANDPROCEDURES**

 

(a)                                  *Evaluationof disclosure controls and procedures*. After evaluating theeffectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) ofthe Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of theperiod covered by this quarterly report, our Chief Executive Officer and ChiefFinancial Officer with the participation of the Company’s management, haveconcluded that the Company’s disclosure controls and procedures (as defined inExchange Act Rule 13a-15(e)) are effective to ensure that information thatis required to be disclosed by the Company in reports that it files under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the rules of the Securities and Exchange Commission.Our Chief Executive Officer and Chief Financial Officer, with the participationof the Company’s management, have also concluded that the Company’s disclosurecontrols and procedures are effective to ensure that information required to bedisclosed in reports filed or submitted under the Exchange Act is accumulatedand communicated to management, including our principal executive officer andprincipal financial officer, to allow timely decisions regarding requireddisclosures.

 

(b)                                 *Changesin internal controls*. There has not been any change in the Company’sinternal 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 controlover financial reporting.

 

**PART II. - OTHER INFORMATION**

 

**ITEM 1.****                                               ****LEGALPROCEEDINGS**

 

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

 

**ITEM 1A.****                                      ****RISKFACTORS**

 

In addition to the other information set forth in this report,including the important information in “Private Securities Litigation ReformAct,” you should carefully consider the “Risk Factors” discussed in our Form 10-Kfor the year ended January 31, 2010 as filed with the Securities andExchange Commission. Those factors, if they were to occur, could cause ouractual results to differ materially from those expressed in our forward-lookingstatements in this report, and materially adversely affect our financialcondition or future results. Although we are not aware of any other factorsthat we currently anticipate will cause our forward-looking statements todiffer materially from our future actual results, or materially affect theCompany’s financial condition or future results, additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial might materially adversely affect our actual business, financialcondition and/or operating results.

 

**ITEM 2.****                                               ****UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3.****                                               ****DEFAULTSUPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.****                                               ****(REMOVEDAND RESERVED)**

 

None.

 

**ITEM 5.****                                               ****OTHERINFORMATION**

 

None.

 

**ITEM 6.****                                               ****EXHIBITS**

 

Exhibits - See “Exhibit Index”on page following signatures.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

Dated:September 8, 2010

 
|   | **TITAN  MACHINERY INC.** |
|--------|---------------------------|
|   |                      |   |
|   |                      |   |
|   | By                        |   | /s/  Peter J. Christianson |
|   |                      | Peter  J. Christianson |
|   |                      | President  and Chief Financial Officer |
|   |                      | (Principal  Financial Officer) |
|        |                           |  |  |

 

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EXHIBIT INDEX

TITAN MACHINERY INC.

FORM 10-Q

 
| **Exhibit No.** | ** ** | **Description**                                                                                           |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------|
| *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 |

 

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*Filedherewith

 

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