Titan Machinery Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2017 (first quarter of fiscal 2018); comparison is with the three months ended April 30, 2016. Titan operates agricultural and construction equipment dealerships in the U.S. and Europe, with Agriculture, Construction and International segments.
Financial performance and liquidity
- Revenue: $264.1 million, down 7.3% year over year. Equipment revenue was $167.9 million (-9.2%); parts $56.6 million (-1.6%); service $28.8 million (-7.2%); rental and other $10.9 million (-5.5%). Same-store sales declined 4.4%.
- Profitability: Gross profit was $48.9 million, down 8.6%; gross margin was 18.5%, versus 18.8%. Operating expenses fell 4.6% to $52.0 million, but restructuring costs rose to $2.3 million from $0.2 million. Operating loss was $5.4 million, versus $1.2 million.
- Net loss: $5.9 million, or $0.27 per diluted share, versus $3.9 million, or $0.17 per diluted share. Adjusted diluted loss per share, a non-GAAP measure, was $0.19 versus $0.21.
- Segments: Agriculture revenue fell 8.5% to $163.6 million and pretax loss was $3.9 million. Construction revenue fell 18.7% to $63.4 million and pretax loss was $2.6 million. International revenue increased 32.2% to $37.1 million, with pretax income of $0.6 million versus a $0.5 million loss.
- Cash flow: Operating cash flow was positive $40.9 million, versus negative $24.9 million, largely reflecting changes in manufacturer floorplan financing. The company’s adjusted operating cash flow measure was negative $6.8 million versus negative $5.8 million. Investing cash outflow was $9.7 million, including $5.6 million for rental fleet and $4.6 million for other property and equipment. Financing cash outflow was $28.2 million, including $19.3 million to repurchase convertible notes. Cash ended at $56.2 million.
- Balance sheet and liquidity: Current assets were $616.5 million and current liabilities $328.4 million. Floorplan payables were $259.6 million. Convertible notes had a $70.4 million carrying value; other current and long-term debt totaled $57.6 million. The company reported $808 million of discretionary floorplan credit lines at quarter-end and said it was in compliance with financial covenants. In May, it elected to reduce those lines to approximately $738 million.
Changes, outlook and risks
- Management attributed weaker Agriculture and Construction demand to low commodity prices, projected lower farm income, and weak oil-related activity in some construction markets. USDA’s February 2017 forecast projected 2017 farm income down 8.7% from 2016 and 32.5% from the recent five-year average.
- A February restructuring plan covers one Construction and 14 Agriculture locations. The company expected to exit the remaining Agriculture locations by the end of July 2017 and anticipated approximately $13 million in total charges, including about $7 million more during the remainder of fiscal 2018. Costs include impairments, lease termination and employee termination costs.
- Titan repurchased $20.3 million face value of convertible notes for $19.3 million cash. It also terminated its $100 million interest-rate swap, paying $0.9 million; $0.6 million of accumulated losses was reclassified to expense.
- Management believed cash, operating cash flow and available credit would meet needs for at least 12 months. No specific revenue or earnings guidance was provided. Key sensitivities include equipment demand, inventory and floorplan financing, interest rates and foreign exchange. A 1 percentage-point rate increase was estimated to reduce annual pretax earnings and cash flow by about $1.9 million.
- New CNH Industrial dealership agreements were signed May 30, 2017. Terms include termination rights, operating obligations and change-of-control consent requirements; the Case Construction agreement also includes certain product exclusivity restrictions. The filing reported no material litigation.
Most important facts for investors to verify
- Whether Agriculture and Construction demand and same-store sales stabilize, and whether International growth continues.
- Whether inventory reductions and restructuring deliver the expected cost savings and approximately $13 million total charge estimate.
- How operating cash generation looks after separating floorplan financing movements from underlying working-capital performance.
- Available borrowing capacity, covenant compliance and the effects of the May credit-line reduction.
- Convertible-note repurchases, remaining debt obligations and the expense effects of the terminated swap.
- The impact of the new CNH agreements and continuing agricultural, construction, interest-rate and currency risks.