Titan Machinery Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2018; the filing also reports fourth-quarter results. Titan Machinery operates agricultural and construction equipment dealerships in the U.S. and Eastern Europe, with Agriculture, Construction, and International segments. It sells equipment, parts, services, and rentals. CNH Industrial is its principal supplier.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1,202.9 million | $1,213.1 million |
| Gross profit / margin | $215.3 million / 17.9% | $213.7 million / 17.6% |
| Operating income (loss) | $0.9 million | ($2.4 million) |
| Net loss attributable to Titan | ($7.0 million) | ($14.2 million) |
| Basic and diluted EPS | ($0.32) | ($0.65) |
| Cash from operating activities | $95.8 million | $141.0 million |
- Adjusted EBITDA, a non-GAAP measure, was $30.8 million, versus $11.7 million. Adjusted cash provided by operating activities, also non-GAAP, was $45.6 million, versus $88.8 million.
- Equipment sales were 66.9% of revenue; parts 18.4%, service 9.8%, and rental and other 4.9%. Equipment gross margin improved to 7.6% from 6.4%; parts and service margins were 29.7% and 62.4%, respectively.
- At January 31, 2018, cash was $53.4 million, inventory $472.5 million, and current liabilities $328.3 million. Floorplan payables totaled $247.4 million. Long-term debt was $36.2 million, and convertible-note face value outstanding was $65.6 million (carrying value $62.8 million).
- Year-end discretionary floorplan credit lines totaled $728.1 million; an April 2018 amendment reduced them to $628.1 million. The company reported covenant compliance at year-end and expected liquidity to meet needs for at least 12 months, subject to performance and borrowing availability.
Changes versus prior year
- Revenue declined 0.8%. Agriculture revenue fell 6.1% and Construction fell 7.3%, partly reflecting the closure of 15 stores; International revenue rose 39.0%.
- Agriculture same-store sales increased 4.0%, while Construction same-store sales declined 6.3%. International segment income before taxes improved to $2.2 million from a $0.5 million loss. Agriculture’s pretax loss narrowed to $3.7 million; Construction’s widened to $7.3 million.
- Gross profit increased slightly as equipment margins improved. Operating expenses fell 3.9% to $203.2 million, primarily from restructuring-related savings. The company-wide absorption rate rose to 79.1% from 77.7%.
- Operating cash flow declined from $141.0 million to $95.8 million, mainly due to inventory and related floorplan financing movements. Cash used in investing was $24.6 million; cash used in financing was $71.5 million, including $29.1 million to repurchase convertible notes.
Outlook, commentary, and risks
- The filing gives no specific FY2019 revenue or earnings guidance. Management expected FY2019 capital spending of approximately $15 million excluding rental fleet and approximately $10 million for rental fleet.
- Management cited persistently low crop commodity prices and farm income below recent historical averages as pressures on agricultural demand. It also noted subdued oil-related activity in parts of its construction footprint; higher oil prices in FY2018 provided some improvement.
- The FY2018 restructuring plan closed one Construction and 14 Agriculture locations and incurred $10.5 million of FY2018 charges; cumulative charges were approximately $13.5 million. Long-lived asset impairment charges were $0.7 million.
- Tax items materially affected reported results: the Tax Act rate change generated a $1.8 million benefit, and the company released a $3.5 million valuation allowance on Ukrainian deferred tax assets. The FY2018 net tax benefit was $7.4 million.
- Debt and liquidity risks include $65.6 million of convertible notes due May 2019 and Wells Fargo facility maturity tests scheduled for February 1, 2019. Failure to meet the fixed-charge and liquidity tests could make that facility immediately due; management expected to meet the tests.
- Other key risks include dependence on CNH Industrial for equipment, parts, financing and dealer support; cyclical and seasonal demand, weather, inventory valuation and used-equipment pricing; variable-rate debt; Eastern European currency and political risks; and competition. A Romanian competition authority investigation involving Titan Machinery Romania was preliminary, with potential loss not estimable. Management said ordinary-course legal matters were not expected to have a material effect.
- Fourth-quarter FY2018 revenue was $339.6 million and net income was $1.7 million. Annual GAAP net loss remained $7.0 million despite improved results.
Important facts for investors to verify
- Whether Agriculture and Construction demand and same-store sales continued to improve after the reporting period, and whether restructuring savings offset lost revenue.
- Current floorplan availability, borrowing-base limits, covenant headroom, and progress toward the February 2019 Wells Fargo tests and May 2019 note repayment.
- Whether inventory levels, used-equipment values, and equipment gross margins remain sustainable in weak or volatile markets.
- The assumptions supporting realization of Ukrainian deferred tax assets and the status and potential outcome of the Romanian competition investigation.
- Post-year-end credit-facility amendments and their effect on liquidity; reported year-end credit capacity differs from the reduced capacity disclosed for April 2018.