Titan Machinery Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended July 31, 2021; comparisons are with the periods ended July 31, 2020, unless noted. Titan Machinery sells, services and rents agricultural and construction equipment through Agriculture, Construction and International segments in the U.S. and Europe. Amounts below are in millions except per-share data.
Financial performance
- Revenue: Q2 revenue increased 24.4% to $377.6 million; first-half revenue rose 22.3% to $750.3 million. Q2 equipment revenue grew 34.6%; parts and service rose 6.3% and 6.0%, while rental and other revenue fell 12.9%. Company-wide same-store sales increased 27.0% in Q2 and 23.6% for the first half.
- Profit and margins: Q2 gross profit rose 19.7% to $75.0 million, but gross margin declined to 19.9% from 20.7%, reflecting a greater mix of lower-margin equipment sales. Operating income was $16.4 million versus $9.6 million; net income was $11.2 million versus $6.4 million. Diluted EPS was $0.50 versus $0.28. First-half net income was $21.8 million versus $8.7 million, and diluted EPS was $0.97 versus $0.39. Adjusted diluted EPS, a non-GAAP measure, was $0.57 for Q2 and $1.04 for the first half, versus $0.29 and $0.44, respectively.
- Cash flow: First-half operating cash flow was $28.6 million versus $13.0 million. Investing used $19.4 million and financing used $22.4 million, compared with $16.8 million used in investing and $4.5 million provided by financing in the prior-year period. Cash declined to $65.6 million from $79.0 million at January 31, 2021. The company’s non-GAAP adjusted operating cash flow, which includes floorplan activity and an adjustment for constant equipment-inventory equity, was negative $19.0 million versus positive $16.1 million.
- Liquidity and debt: Current assets were $595.4 million and current liabilities $310.5 million at July 31, 2021. Floorplan payable was $185.5 million, up from $161.8 million at January 31; long-term debt, net of current maturities, was $63.6 million, versus $44.9 million. The company reported $771 million of floorplan credit lines. It said cash, operating cash flow and available borrowing capacity should cover liquidity needs for at least 12 months, and reported compliance with applicable credit covenants at quarter-end.
Material changes and segment results
- Agriculture Q2 revenue rose 29.8% and pretax income increased to $12.1 million from $6.8 million, supported by equipment demand and margins.
- Construction Q2 revenue increased 4.1% and pretax income rose to $2.8 million from $1.4 million. Higher construction activity and rental fleet utilization helped; divestiture of the Phoenix and Tucson stores and a smaller rental fleet weighed on revenue.
- International Q2 revenue grew 36.4%; the segment moved to $0.4 million pretax income from a $0.4 million loss. First-half segment revenue rose 34.2%, and pretax income was $3.2 million versus a $0.7 million loss.
- Equipment margins improved: Q2 equipment gross margin was 11.9% versus 11.1%; first-half margin was 11.8% versus 10.4%. Operating expenses increased in dollars but fell as a share of revenue to 15.1% in both Q2 and the first half, from 17.5% and 17.3%, respectively.
- Floorplan interest expense decreased, reflecting lower borrowings and, for the first half, a lower interest-rate environment. Other interest expense rose, primarily due to debt associated with real estate purchases.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects its liquidity sources to meet needs for at least the next 12 months, subject to operating conditions and borrowing capacity.
- Management cited stronger equipment demand associated with higher commodity prices and recent farm income, but noted that drought in parts of North America could reduce future parts and service demand. The filing also cited weather-related seasonality, supply-chain and staffing constraints at vendors, delivery delays, and uncertainty from COVID-19 and variants. Management reported no material adverse COVID-19 impact on results for the periods presented.
- Q2 impairment charges totaled $1.5 million, including $1.1 million for German distribution rights and $0.4 million for International long-lived assets. The German impairment followed lowered expectations for future performance and eliminated the remaining indefinite-lived distribution-rights assets of that reporting unit.
- The first-half effective tax rate was 25.6%; a valuation allowance on certain foreign deferred tax assets, including remaining German deferred tax assets, partly offset the benefit from share-based compensation vesting.
- Interest-rate sensitivity disclosure: a one-percentage-point rate increase was estimated to reduce next-12-month pretax earnings and cash flow by approximately $0.4 million. Management said a hypothetical 10% foreign-exchange move would not materially affect results or cash flows. The company had $2.1 million of net monetary assets denominated in Ukrainian hryvnia.
- The company was converting stores to a new ERP system and anticipated converting the remaining domestic stores within 12 months. It also purchased buildings at 11 U.S. dealer locations previously leased, financing the purchases with $17.7 million of long-term debt during the first quarter.
- Legal proceedings were described as ordinary-course matters with no material litigation currently reported; management said it did not expect existing claims to materially affect financial position, results or cash flows. The filing cautions that outcomes are uncertain and insurance may not cover all claims.
Important facts for investors to verify
- Whether equipment demand, pricing and improved equipment margins persist, and whether equipment mix continues to pressure consolidated gross margin.
- Whether supply constraints, delivery delays, drought and COVID-related uncertainty affect sales, inventory availability or after-sales demand.
- Cash generation after considering floorplan financing: GAAP operating cash flow was positive, while the company’s adjusted measure was negative for the first half.
- Floorplan borrowing availability, covenant headroom, debt costs and the effect of the DLL facility amendment, which reduced its availability from $60 million to $50 million and raised its applicable margin.
- Performance and asset recoverability in the German and broader International operations, including the effect of impairment charges and foreign tax valuation allowances.
- Progress, cost and timing of the ERP rollout and the operating and financing implications of the real estate purchases.