Titan Machinery Inc. — Form 10-Q Summary
Business context and period. Titan Machinery operates agricultural and construction equipment dealerships, parts, service and rental businesses in the U.S. and Europe. This filing covers the third quarter and first nine months of fiscal 2019, ended October 31, 2018; comparisons are with the corresponding fiscal 2018 periods. Unless noted, figures below are in millions of dollars.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $363.6 | $330.3 | $909.2 | $863.3 |
| Gross profit / margin | $69.5 / 19.1% | $61.5 / 18.6% | $176.0 / 19.4% | $163.2 / 18.9% |
| Operating income (loss) | $16.1 | $8.5 | $27.5 | $(0.2) |
| Net income (loss) | $10.8 | $2.4 | $14.3 | $(8.7) |
| Diluted EPS | $0.48 | $0.11 | $0.65 | $(0.40) |
Q3 revenue rose 10.1%, with equipment sales up 11.7%; same-store sales increased 7.3%. Equipment gross margin improved to 9.5% from 7.8%, lifting overall gross margin. Rental and other gross margin declined to 22.3% from 27.4%. For nine months, revenue increased 5.3% and equipment gross margin rose to 9.5% from 7.7%; rental and other gross margin fell to 20.1% from 26.0%. Management also reported adjusted diluted EPS of $0.49 for Q3 and $0.71 for nine months, non-GAAP measures that exclude specified items.
Balance sheet and cash flow
- At October 31, 2018, cash was $52.2, total assets $825.2, and stockholders’ equity $337.6. Current assets were $668.3 and current liabilities $448.5.
- Inventory was $525.3, up from $472.5 at January 31, 2018. Floorplan payable was $332.9, up from $247.4.
- Senior convertible notes had $45.6 face value and $44.8 carrying value and mature May 1, 2019. Total debt, including the notes, was reported as $74.9. Long-term debt excluding the notes was $30.1, including current maturities.
- For the first nine months, operating cash flow was $11.7 versus $56.0 a year earlier; investing cash outflow was $23.7 versus $18.9; financing cash inflow was $11.3 versus a $46.9 outflow. Cash declined $1.2 to $52.2.
- Management’s non-GAAP adjusted operating cash flow was $1.5, compared with a use of $10.8 in the prior period. The company said the reported operating-cash-flow comparison was affected by changes in floorplan financing and inventory-equity levels.
Material changes and management commentary
- Q3 operating performance improved with higher equipment revenue and margins, cost leverage, and substantially lower restructuring charges than the prior year. Nine-month operating expenses declined 3.4%, reflecting restructuring savings, partly offset by acquisition-related costs.
- Agriculture was the largest Q3 growth contributor: revenue increased 13.0% and pretax segment income rose to $9.4 from $4.9. Construction revenue rose 7.9% and the segment returned to pretax income of $1.2 from a $2.4 loss. International revenue increased 4.8%, partly due to the AGRAM acquisition; pretax income was $2.6 versus $2.5.
- On July 2, 2018, Titan acquired four German agriculture dealerships (AGRAM) for $19.2 cash consideration, funded from available cash and credit capacity. Preliminary purchase accounting included $0.8 of goodwill; valuations remained provisional.
- The company repurchased $20.0 face value of convertible notes during the nine months and recorded a $0.6 pretax loss on the repurchase. Remaining notes mature May 1, 2019.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said cash, operating cash flow and available borrowing capacity should meet liquidity needs for at least the next 12 months and expects to have sufficient resources to repay the notes at maturity.
- Management cited persistently challenging agricultural conditions: USDA projections indicated 2018 U.S. farm income would fall 12.1% from 2017 and remain 23.7% below the recent five-year average. Low commodity prices and farm income have weighed on customer sentiment and financing access, reduced demand, and contributed to excess equipment inventory in Titan’s markets. Results may also fluctuate with weather.
- The Wells Fargo credit agreement’s maturity depends on tests on February 1, 2019, including a 1.1:1.0 fixed-charge coverage ratio and a liquidity test. Failure of both tests would cause immediate maturity and repayment; management expected the tests to be met. The convertible notes mature shortly thereafter, in May 2019.
- At October 31, variable-rate floorplan debt was approximately $153.8. Management estimated a 1 percentage-point interest-rate increase would reduce pretax earnings and cash flow by about $1.5 over 12 months. Ukraine currency and political risks were also noted.
- A Romanian Competition Council investigation involving Titan Machinery Romania was at a preliminary stage; the company could not predict the outcome or estimate a potential loss. Other ordinary-course legal matters were not expected to have a material impact, according to management.
- The company expected the lease accounting standard, to be adopted February 1, 2019, to materially increase balance-sheet assets and liabilities, but did not expect a material effect on earnings or cash flows.
Most important facts for investors to verify
- Whether the February 1, 2019 Wells Fargo covenant and liquidity tests were satisfied, and the financing plan for the May 2019 convertible-note maturity.
- Whether equipment inventory levels, floorplan borrowing and customer demand improved or deteriorated after quarter-end, particularly given the farm-income outlook.
- How much of reported earnings improvement reflects sustainable sales and margin gains versus lower restructuring costs, tax effects and other adjustments; review the non-GAAP reconciliations.
- Final AGRAM purchase-price allocation and subsequent contribution to International segment revenue and profitability.
- Outcome and any financial exposure from the Romanian competition investigation.