Titan Machinery Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2020, the second quarter of fiscal 2021. Unless noted otherwise, amounts are U.S. dollars.
Business context and performance
Titan operates agricultural and construction equipment dealerships, rental operations, and parts and service businesses in the United States and Europe. It reports Agriculture, Construction and International segments. During the quarter, stores closed to the public in March because of COVID-19 had reopened by June, with safety protocols in place.
| Metric | Three months ended July 31, 2020 | Prior-year quarter | Six months ended July 31, 2020 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $303.5 million | $315.0 million | $613.7 million | $593.3 million |
| Gross profit / margin | $62.7 million / 20.7% | $64.0 million / 20.3% | $121.1 million / 19.7% | $117.9 million / 19.9% |
| Operating income | $9.6 million | $9.2 million | $14.7 million | $10.4 million |
| Net income | $6.4 million | $5.5 million | $8.7 million | $5.1 million |
| Diluted EPS | $0.28 | $0.25 | $0.39 | $0.23 |
Quarterly adjusted diluted EPS, a non-GAAP measure, was $0.29 versus $0.31 a year earlier; for the six months it was $0.44 versus $0.33. The filing adjusts for ERP transition costs, impairment charges and Ukrainian currency remeasurement.
Financial position, cash flow and liquidity
- Cash was $44.5 million at July 31, 2020, compared with $43.7 million at January 31, 2020. Current assets were $698.1 million and current liabilities $449.9 million.
- Inventory was $570.7 million, down from $597.4 million at fiscal year-end. Floorplan payables were $352.2 million, down from $371.8 million.
- Long-term debt, net of current maturities, was $48.7 million; current maturities were $3.9 million. The company also reported operating lease liabilities of $95.5 million in total.
- Operating cash flow for the six months was $13.0 million, versus cash used of $6.3 million in the prior-year period. Management’s non-GAAP adjusted operating cash flow was $16.1 million versus cash used of $49.3 million. The improvement mainly reflected inventory reduction.
- Investing cash outflow was $16.8 million, including $6.8 million for the HorizonWest acquisition; financing cash inflow was $4.5 million. Cash increased by $0.8 million over the six months.
- The amended bank facility provides up to $250 million: a $185 million floorplan facility and a $65 million operating line. Titan reported $763 million in total equipment floorplan lines, subject to borrowing-base calculations and other limits. It said it was in compliance with applicable financial covenants and expected available cash, operating cash flow and borrowing capacity to meet needs for at least 12 months.
Changes, management commentary and outlook
- Quarterly revenue declined 3.7% year over year as lower equipment and rental/other revenue outweighed growth in parts and service. Same-store sales fell 5.8%. For the six months, revenue rose 3.4%, with same-store sales up 2.1%.
- Agriculture was the main source of six-month growth: segment revenue rose 13.5% and pretax income increased to $12.9 million from $8.1 million. Construction revenue fell 11.0%, and its six-month pretax loss widened to $1.5 million. International revenue fell 4.9% and shifted to a $0.7 million pretax loss.
- Quarterly gross margin improved with a higher contribution from parts and service, while the six-month margin eased slightly. Operating expenses fell year over year in both periods, reflecting managed cost reductions and lower pandemic-related travel and fuel expenses, partly offset by costs from acquired locations.
- Management cited COVID-19 uncertainty, lower agricultural commodity prices, supply-chain and border disruptions, and weaker construction demand associated with oil prices, unemployment and economic conditions. It said the pandemic’s duration and financial impact could not be predicted. No specific financial guidance was provided.
- Titan acquired three HorizonWest agriculture dealership locations in Nebraska and Wyoming for $6.8 million in May 2020. It is implementing a new ERP system, with all domestic stores expected to transition in the first half of fiscal 2022.
- The company identified a Romanian competition authority investigation involving its Romanian subsidiary and an industry association; the investigation was preliminary, and Titan could not estimate a potential loss. It said other ordinary-course legal matters were not expected to have a material effect.
Important facts for investors to verify
- Whether COVID-19, commodity prices, manufacturer supply and construction-market weakness further affect demand, store operations and liquidity.
- Whether Agriculture’s growth can offset continued weakness in Construction and International, including lower construction rental utilization.
- Floorplan borrowing availability, borrowing-base limits, covenant headroom and the effects of variable interest rates; Titan estimated a one-percentage-point rate increase would reduce annual pretax earnings and cash flow by about $1.7 million.
- Execution, costs and timing of the ERP rollout and integration of acquired dealerships.
- Developments in the Romanian competition investigation and any resulting financial exposure.