Titan Machinery Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended April 30, 2018, compared with the three months ended April 30, 2017. Titan operates agricultural and construction equipment dealerships in the U.S. and Europe, with Agriculture, Construction and International reporting segments. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $245.7 million | $264.1 million |
| Gross profit / margin | $47.6 million / 19.4% | $48.9 million / 18.5% |
| Operating expenses | $46.7 million | $52.0 million |
| Operating income (loss) | $0.8 million | ($5.4 million) |
| Net loss | ($1.6 million) | ($5.9 million) |
| Diluted loss per share | ($0.07) | ($0.27) |
| Cash from (used in) operating activities | ($27.0 million) | $40.9 million |
| Cash from (used in) investing activities | ($2.6 million) | ($9.7 million) |
| Cash from (used in) financing activities | $33.4 million | ($28.2 million) |
Revenue declined 7.0%; same-store sales fell 4.0%. Equipment revenue was down 6.6%, parts 8.9%, service 4.9%, and rental and other 8.9%. Equipment gross margin improved to 9.6% from 7.4%, lifting consolidated gross margin, while service and rental/other margins declined. Operating expenses fell 10.1%, mainly reflecting savings from the prior-year restructuring. No restructuring charges were recorded this quarter, versus $2.3 million a year earlier. Adjusted diluted loss per share, a non-GAAP measure, was also ($0.07), versus ($0.19).
Segments and balance sheet
- Agriculture: Revenue fell 12.7% to $142.9 million; pretax income improved to $1.3 million from a $3.9 million loss. Same-store sales fell 7.9%.
- Construction: Revenue declined 2.1% to $62.1 million; pretax loss widened to $2.9 million from $2.6 million. Rental fleet dollar utilization decreased to 18.3% from 19.3%.
- International: Revenue rose 9.8% to $40.7 million, but the segment recorded a $0.1 million pretax loss versus $0.6 million pretax income, as operating costs increased.
- At April 30, cash was $57.3 million; inventory was $518.2 million, up from $472.5 million at January 31; and total assets were $809.4 million.
- Floorplan payable was $320.9 million, compared with $247.4 million at January 31. Senior convertible notes had $65.6 million principal outstanding and mature May 1, 2019. Long-term debt, including current maturities and the notes’ carrying value, was approximately $86.4 million.
Operating cash use reflected seasonal inventory stocking, including a $42.4 million inventory cash outflow. Management’s adjusted operating cash flow measure showed $25.6 million used, versus $6.8 million used in the prior-year quarter. Cash increased to $57.3 million, supported by $47.4 million of net borrowing under non-manufacturer floorplan financing and other financing activity.
Outlook, risks and notable items
- Management said current cash, operating cash generation and available credit were expected to meet liquidity needs for at least the next 12 months. It expected to have sufficient cash and borrowing capacity to repay the $65.6 million notes at maturity.
- The Wells Fargo facility’s scheduled October 2020 maturity depends on meeting a 1.1-to-1 fixed-charge coverage test and a liquidity test on February 1, 2019. Failure would make amounts outstanding immediately due. Management anticipated meeting the tests based on current projections; the company reported covenant compliance at quarter-end.
- Management cited weak agricultural conditions: USDA-estimated 2017 net farm income was about 25% below its five-year average, and USDA projected a further 6.7% decrease in 2018. Low commodity prices, farm income, customer financing, weather and equipment oversupply were identified as demand risks.
- On April 30, 2018, Titan agreed to acquire four Case IH dealership locations in Germany. The seller generated approximately $30 million of revenue in its most recent fiscal year; closing was expected in July 2018.
- A Romanian competition authority investigation involving Titan’s Romanian subsidiary and other machinery dealers remained preliminary; the company could not estimate a potential loss. The filing also notes currency exposure, including $5.0 million of net Ukrainian hryvnia monetary assets, and interest-rate sensitivity of approximately $1.5 million in annual pretax earnings and cash flow for a 1 percentage-point rate change.
- ASC 606 adoption had no material effect. Titan anticipated that adoption of lease accounting standard ASC 842 in February 2019 would materially increase balance-sheet assets and liabilities, but not materially affect earnings or cash flows.
Important facts for investors to verify
- Progress in repaying or refinancing the convertible notes before their May 1, 2019 maturity, and compliance with the February 2019 Wells Fargo tests.
- Whether inventory growth converts into sales and operating cash flow, and whether equipment margins remain improved.
- Demand and same-store sales trends, particularly in Agriculture, alongside Construction rental utilization and International operating costs.
- Completion and financing of the German dealership acquisition, and any developments in the Romanian investigation.
- The eventual balance-sheet impact of ASC 842 and the effects of interest-rate, currency, weather and farm-income risks.