Titan Machinery Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended April 30, 2016; comparative period ended April 30, 2015. Titan sells, services and rents agricultural and construction equipment in the U.S. and Europe. Unless stated otherwise, amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $284.9 million | $353.2 million |
| Gross profit / margin | $53.5 million / 18.8% | $60.4 million / 17.1% |
| Operating income (loss) | $(1.2) million | $1.7 million |
| Net loss attributable to Titan | $(3.7) million | $(6.3) million |
| Diluted loss per share | $(0.17) | $(0.29) |
| Cash from (used in) operating activities | $(24.9) million | $14.3 million |
Cash used in investing activities was $0.7 million and cash used in financing activities was $0.6 million. Cash ended the quarter at $63.8 million, down from $89.5 million at January 31, 2016. The company’s non-GAAP operating cash flow, adjusted for floorplan financing and equipment-inventory equity changes, was $(5.8) million versus $7.8 million a year earlier.
Balance sheet and liquidity
- At April 30, 2016, total assets were $1.006 billion, including $684.8 million of inventory. Total stockholders’ equity was $336.6 million.
- Floorplan payable was $446.3 million. Senior convertible notes had $119.9 million face value and $108.1 million carrying value; long-term debt, including current maturities, totaled $39.6 million.
- Titan reported no borrowings on its $75 million working-capital revolver and approximately $1.0 billion of discretionary floorplan credit facilities, of which about $431.1 million was outstanding.
- Management said available cash, operating cash flow and borrowing capacity were expected to meet liquidity needs for at least 12 months. The company was in compliance with financial covenants at quarter-end and was not subject to the Wells Fargo fixed-charge coverage covenant.
Material changes and management commentary
- Revenue declined 19.3%; same-store sales fell 18.9%. Agriculture same-store sales dropped 25.1%, primarily reflecting lower equipment sales amid weak farm economics and customer demand.
- Agriculture revenue fell 25.5% and its pretax loss widened to $3.8 million from $1.1 million. Construction revenue declined 3.9%, while its pretax loss narrowed to $2.0 million from $3.6 million. International revenue decreased 12.8%; its pretax loss improved to $0.5 million from $4.4 million.
- Gross profit fell 11.4%, but gross margin rose to 18.8%, reflecting a greater contribution from higher-margin parts and service and improved equipment margins in Construction and International. Operating expenses decreased 4.6%, but rose as a share of revenue to 19.1% from 16.2% as lower sales reduced fixed-cost leverage.
- GAAP loss per share improved to $(0.17) from $(0.29), but company-reported non-GAAP diluted loss per share worsened to $(0.21) from $(0.13). The non-GAAP comparison excludes specified items and is not a substitute for GAAP results.
Unusual items, outlook and risks
- In April 2016, Titan repurchased $30.1 million face value of convertible notes for $25.0 million cash, recording a pretax gain of approximately $2.1 million. The repurchase reduced the notes’ face value to $119.9 million.
- Ukrainian hryvnia remeasurement losses were $0.2 million, compared with $2.0 million a year earlier. Realignment costs were $0.2 million versus $1.6 million.
- The filing gives no specific revenue or earnings guidance. Management cited continuing pressure from low agricultural commodity prices and projected farm income, oversupply of agricultural equipment, lower oil prices affecting certain construction markets, and restricted credit and geopolitical conditions in Ukraine.
- Interest-rate sensitivity analysis estimated that a 1 percentage-point rate increase or decrease would reduce or increase pretax earnings and cash flow by approximately $2.5 million over the next 12 months, holding other factors constant. Management warned that further significant UAH devaluation could materially affect results and cash flows.
- The company reported no current material litigation. It stated disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether equipment demand and same-store sales stabilize, particularly in Agriculture, and whether elevated inventory can be reduced without further margin pressure.
- How operating cash flow develops after the quarter’s working-capital and floorplan-financing movements, and whether liquidity assumptions remain consistent with covenant compliance.
- The remaining convertible-note balance, repayment schedule and financing costs following the repurchase.
- The sustainability of higher gross margins and the gap between GAAP and non-GAAP loss per share, including the adjustments used in management’s non-GAAP measures.
- Developments in farm income, oil-related construction activity, Ukrainian credit and currency conditions, and applicable interest rates.