Titan Machinery Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2020 (the third quarter and first nine months of fiscal 2021). Amounts below are in millions of dollars unless stated otherwise.
Business context
Titan Machinery operates agricultural and construction equipment dealerships, rental, parts and service businesses in the United States and Europe. It reports Agriculture, Construction and International segments. The quarter was conducted amid the COVID-19 pandemic; U.S. stores had reopened to the public by June 2020, with safety protocols in place.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $360.9 | $360.9 | $974.5 | $954.2 |
| Gross profit / margin | $72.6 / 20.1% | $71.8 / 19.9% | $193.7 / 19.9% | $189.7 / 19.9% |
| Operating income | $15.9 | $13.5 | $30.6 | $23.9 |
| Net income | $9.9 | $8.2 | $18.6 | $13.3 |
| Diluted EPS | $0.44 | $0.37 | $0.83 | $0.60 |
| Adjusted diluted EPS (non-GAAP) | $0.58 | $0.48 | $1.02 | $0.81 |
Quarterly revenue was essentially flat: parts revenue rose 8.5% and service revenue rose 11.4%, offset by equipment revenue down 2.1% and rental and other revenue down 24.8%. Higher parts-and-service contribution lifted gross margin. Operating expenses declined 7.0%, helping raise operating income despite $2.6 million of impairment charges.
For the nine months, revenue increased 2.1%, led by Agriculture and higher parts and service sales. Gross margin remained 19.9%; lower equipment and rental margins offset improved parts and service results. Operating expenses declined 3.2%. Net income increased 39.9% year over year.
Segments and material changes
- Agriculture: Q3 revenue increased 3.1% to $220.6 million and pretax income rose to $13.6 million from $10.3 million. Nine-month revenue increased 9.3% and pretax income was $26.5 million versus $18.3 million. Acquired stores, replacement demand and parts and service contributed.
- Construction: Q3 revenue increased 1.3% to $79.0 million and pretax income was $1.4 million versus $0.3 million. Nine-month revenue declined 6.9% to $216.9 million; the segment recorded a $0.1 million pretax loss. Management cited weaker industry conditions and lower rental fleet utilization.
- International: Q3 revenue fell 11.1% to $61.2 million; the segment recorded a $2.4 million pretax loss versus $2.1 million income. Nine-month revenue declined 7.2% and the pretax loss was $3.1 million versus $2.8 million income. Lower demand and Germany impairments weighed on results.
- Unusual items: The company recorded $1.5 million of goodwill impairment and $0.9 million of Germany distribution-rights impairment, alongside other long-lived asset impairment. The Germany charges reflected reduced expectations for future performance, including effects of COVID-19 and difficult market conditions. Adjusted earnings exclude impairments, ERP transition costs, Ukraine currency remeasurement and certain tax valuation-allowance effects.
- Acquisition: Titan acquired three HorizonWest agricultural dealership locations for $6.8 million in May 2020, expanding in Nebraska and Wyoming.
Cash flow, balance sheet and liquidity
- Cash from operating activities for the first nine months was $60.8 million, versus cash used of $8.3 million a year earlier, primarily reflecting inventory reduction. Company-defined adjusted operating cash flow was $56.5 million, versus cash used of $35.0 million.
- Investing activities used $22.2 million, compared with $30.8 million used in the prior period. Financing activities used $40.8 million, compared with $34.9 million provided in the prior period. Cash declined $1.9 million from the fiscal-year opening balance to $41.8 million.
- At October 31, 2020, total assets were $900.9 million, total current assets $656.8 million and current liabilities $381.2 million. Inventory was $532.7 million, down from $597.4 million at January 31, 2020.
- Floorplan payable was $287.8 million, down from $371.8 million at January 31. Long-term debt, net of current maturities, was $55.1 million; current maturities were $4.4 million. Total long-term debt including finance leases was $64.4 million. Operating lease liabilities totaled $93.2 million.
- The company reported $41.8 million in cash and $765.0 million of floorplan credit lines. Its amended bank facility provides up to $250 million, including a $185 million floorplan facility and $65 million revolver, and matures in April 2025. Management said available cash, operating cash flow and borrowing capacity should meet liquidity needs for at least 12 months; the company reported compliance with applicable covenants.
Outlook, risks and other disclosures
The filing provides no specific earnings or revenue guidance. Management said results remain uncertain because of COVID-19, market conditions, customer demand, manufacturer supply and operations, and the effects of oil prices and economic activity on construction. Agriculture demand is sensitive to commodity prices and farm income; management cited favorable U.S. farm-income estimates and government support programs, while noting uncertainty. International operations faced additional restrictions and weaker demand. Management expected all domestic stores to transition to the new ERP system in the second or third quarter of fiscal 2022.
Other risks include weather-related seasonality, foreign currency movements, variable interest rates, inventory and residual-value exposure, and potential limits on store operations or manufacturer production due to the pandemic. A Romanian competition investigation remained preliminary; the company could not estimate a potential loss. Titan said other ordinary-course legal proceedings were not expected to materially affect its financial position, results or cash flows. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether parts-and-service growth and improved gross-profit mix can continue, especially if equipment sales or rental activity weaken.
- Whether the International segment stabilizes and whether further Germany impairment or valuation-allowance charges arise.
- How COVID-19, manufacturer supply, customer demand, commodity prices, oil prices and government support affect sales and liquidity.
- Whether operating cash flow remains positive as inventory and floorplan balances change, and whether borrowing availability and covenant compliance remain adequate.
- Progress, cost and timing of the ERP rollout, expected for domestic stores in fiscal 2022’s second or third quarter.
- The outcome of the Romanian Competition Council investigation; the filing states that the potential loss cannot currently be estimated.