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 report covers the second quarter and six months of fiscal 2018, ended July 31, 2017; comparisons are with the corresponding 2016 periods.
Financial performance
| Metric | Three months ended July 31, 2017 | Three months ended July 31, 2016 | Six months ended July 31, 2017 | Six months ended July 31, 2016 |
|---|---|---|---|---|
| Revenue | $268.9 million | $278.3 million | $533.0 million | $563.2 million |
| Gross profit / margin | $52.8 million / 19.6% | $52.9 million / 19.0% | $101.7 million / 19.1% | $106.5 million / 18.9% |
| Operating income (loss) | $(3.3) million | $1.4 million | $(8.7) million | $0.2 million |
| Net loss attributable to Titan | $(5.2) million | $(2.5) million | $(11.1) million | $(6.2) million |
| Diluted loss per share | $(0.24) | $(0.12) | $(0.51) | $(0.29) |
- Quarterly revenue fell 3.4%; six-month revenue declined 5.4%. Lower Agriculture and Construction sales were partly offset by International growth.
- Quarterly gross profit was nearly flat despite lower revenue, as total gross margin improved to 19.6%, primarily on stronger equipment margins. Six-month gross profit declined 4.5%.
- Quarterly operating results included $5.5 million of restructuring charges; six-month charges were $7.9 million. Excluding specified items, management reported adjusted diluted loss per share of $0.04 for the quarter versus $0.12 a year earlier, and $0.23 for six months versus $0.33.
- Quarterly segment revenue: Agriculture $138.5 million, down 9.9%; Construction $77.9 million, down 6.3%; International $52.4 million, up 26.4%. Agriculture recorded a $6.9 million pretax loss; Construction earned $0.9 million and International $0.3 million pretax.
Cash flow, balance sheet, and debt
- At July 31, 2017, cash was $57.5 million; total assets were $822.4 million; inventory was $517.5 million, up from $478.3 million at January 31, 2017.
- Floorplan payables were $308.0 million, compared with $233.2 million at fiscal year-end. Senior convertible notes had a $75.5 million principal balance and $71.0 million carrying value; other long-term debt, including current maturities, was approximately $50.6 million.
- Six-month operating cash flow was $66.9 million, versus $60.4 million a year earlier. Management’s non-GAAP adjusted operating cash flow, which adjusts for floorplan financing and changes in equipment-inventory equity, was a use of $19.3 million versus a source of $1.1 million.
- Six-month investing cash use was $15.4 million, including $10.2 million for rental fleet and $7.5 million for other property and equipment. Financing cash use was $47.6 million, including $19.3 million to repurchase notes; the company also borrowed $33.0 million and repaid $22.7 million of long-term debt.
- Available discretionary floorplan facilities totaled approximately $741 million. The company said it was in covenant compliance and expected cash, operating cash flow, and available facilities to meet liquidity needs for at least 12 months. It reduced the Wells Fargo agreement’s aggregate maximum from $275 million to $200 million.
Changes, outlook, and risks
- The company closed one Construction and 14 Agriculture locations under its fiscal 2018 restructuring plan. It expects approximately $15 million of total restructuring charges, including about $4 million more during the remainder of fiscal 2018.
- Management cited low agricultural commodity prices and weak farm income as pressures on customer sentiment, financing access, and equipment demand. USDA projections cited in the filing anticipated 2017 farm income to be relatively flat year over year and 30.4% below the recent five-year average.
- Lower oil prices and reduced oil production and infrastructure activity continued to weigh on some Construction markets. Management also cited equipment and rental-fleet oversupply in affected areas.
- Equipment inventory turnover improved to 1.6 from 1.2 for the comparable four-quarter periods, alongside a 24.3% year-over-year reduction in equipment inventory. Inventory remained seasonally higher than fiscal year-end.
- Interest-rate sensitivity: a one-percentage-point rate increase was estimated to reduce pretax earnings and cash flow by approximately $2.0 million over 12 months. The interest-rate swap was terminated in April 2017 for a $0.9 million payment.
- Management noted weather-related seasonality and warned that interim results are not necessarily indicative of full-year results. It provided no specific full-year revenue or earnings guidance in the text provided.
- The company disclosed no material litigation and said disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether the store closures and cost reductions deliver expected savings, and whether remaining restructuring charges stay near the stated estimate.
- Assess the trajectory of Agriculture and Construction demand, inventory levels, and equipment margins against the prior-year comparison affected by aged-inventory sales.
- Reconcile reported operating cash flow with adjusted cash flow and monitor the effects of inventory purchases and floorplan financing on liquidity.
- Review debt maturities, covenant headroom, and the company’s capacity to fund operations while managing floorplan balances and convertible notes due in 2019.
- Monitor International growth and profitability, foreign-exchange exposure, and the effects of farm income, commodity prices, oil activity, and interest rates.