Titan Machinery Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended January 31, 2020. The filing is an annual report, not a standalone calendar-quarter filing; it also reports fiscal fourth-quarter results. Amounts below are U.S. dollars.
Business context
Titan operates 107 agricultural and construction equipment dealerships in the U.S. and Europe through Agriculture, Construction and International segments. It sells new and used equipment, parts, repair and maintenance services, and rentals. CNH Industrial is its primary supplier; it provided about 74% of new Agriculture equipment, 70% of Construction equipment and 62% of International equipment sold in FY2020.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $1,305.2 million | $1,261.5 million |
| Gross profit / margin | $250.8 million / 19.2% | $231.6 million / 18.4% |
| Operating income | $21.3 million | $27.5 million |
| Net income | $14.0 million | $12.2 million |
| Diluted EPS | $0.63 | $0.55 |
| Adjusted EBITDA (non-GAAP) | $53.1 million | $49.8 million |
| Cash from operating activities | $1.0 million | $46.6 million |
- Revenue rose 3.5%; company-wide same-store sales increased 1.6%. Parts revenue increased 11.1% and service revenue 14.2%, while equipment revenue grew 0.9% and rental and other revenue was nearly flat.
- Gross margin improved on a richer parts-and-service mix and better rental-fleet utilization. Operating expenses rose 12.0% to $225.7 million, including ERP transition costs, acquisition-related expenses and costs supporting higher business volumes. Consequently, operating income declined despite higher gross profit.
- Net income benefited from a $4.6 million release of U.S. deferred-tax valuation allowance; the effective tax rate was 4.8%, versus 24.6% in FY2019. FY2020 included $7.2 million of ERP transition costs and $3.8 million of impairment charges. Adjusted measures exclude specified items and are non-GAAP.
- GAAP operating cash flow fell sharply, primarily due to a $99.5 million inventory increase. Management’s non-GAAP adjusted operating cash flow, which adjusts for non-manufacturer floorplan financing and assumes constant inventory equity, was $17.8 million versus $47.4 million.
- Cash was $43.7 million at year-end, versus $56.7 million. Inventory rose to $597.4 million from $491.1 million; equipment inventory turnover declined to 1.5 times from 1.8 times. Floorplan payables were $371.8 million, including $166.6 million interest-bearing and $205.2 million non-interest-bearing.
- Long-term debt was $51.6 million, including $13.8 million current maturities; the $45.6 million remaining balance of senior convertible notes was repaid at maturity in May 2019. Operating lease liabilities totaled $100.6 million. The company reported compliance with its credit covenants at January 31, 2020.
- Fiscal Q4 revenue was $351.0 million versus $359.6 million a year earlier; net income was $0.7 million versus a $2.2 million loss. The FY2020 fourth-quarter result included the $4.6 million tax benefit.
Material changes and segment trends
- Agriculture revenue increased 3.1% and pretax income rose to $18.0 million; same-store sales grew 2.7%, primarily from parts and service.
- Construction revenue rose 6.0%; its pretax loss narrowed to $2.3 million from $4.4 million, reflecting higher revenue and improved margins, partly offset by higher expenses.
- International revenue increased 1.4%, but same-store sales declined 7.9% and pretax income fell to $0.5 million from $5.2 million, amid weaker equipment revenue and higher expenses.
- Acquisitions included the ESB German dealership assets and the Northwood, North Dakota dealership in FY2020; AGRAM, acquired in FY2019, contributed a full year of results in FY2020.
- The company adopted lease-accounting standard ASC 842, recognizing $88.3 million in operating lease assets and $100.6 million in operating lease liabilities at year-end. Adoption also reduced opening retained earnings by $5.5 million.
Outlook, risks and contingencies
- No full-year revenue or earnings guidance is provided. Management estimated FY2021 capital spending of approximately $20 million excluding rental fleet purchases, plus approximately $15 million for the rental fleet. It stated that available cash, operating cash flow and credit facilities were expected to cover liquidity needs for at least 12 months, subject to operating conditions and covenant compliance.
- COVID-19 was identified as a material uncertainty after year-end. Titan temporarily restricted public access to its stores beginning March 23, 2020, while continuing service and sales through staffing, technology, mobile service and alternative delivery. The company said the impact on operations, results and customer demand could not then be reasonably estimated.
- On April 3, 2020, Titan replaced its prior bank facility with a $250 million syndicated facility: $185 million for floorplan financing and $65 million for working capital, maturing April 3, 2025. It repaid amounts outstanding under the prior facility.
- Major risks include dependence on CNH Industrial and its dealership agreements and financing, cyclical farm and construction markets, commodity prices, weather, customer credit availability, inventory valuation and floorplan costs, variable interest rates, foreign currency and geopolitical exposure, technician shortages, ERP implementation, and COVID-19-related disruption.
- Contingencies include residual-value guarantees with a maximum exposure of approximately $3.4 million and a recorded liability of approximately $3.2 million. A Romanian competition investigation was ongoing; the company could not estimate a potential loss. Management said other ordinary-course legal matters were not expected to be material.
Important facts for investors to verify
- Whether the tax-allowance release and other nonrecurring adjustments make reported net income and adjusted earnings less representative of ongoing performance.
- Inventory aging, turnover, used-equipment values and the ability to reduce inventory without sacrificing sales or margins.
- Cash generation after floorplan activity and the terms, availability and covenant headroom under the April 2020 credit facility.
- The financial and operational effects of COVID-19, including customer demand, supply availability and store operations.
- Whether International segment performance recovers and whether Construction can return to profitability.
- Progress, cost and timing of the ERP transition; the filing says its planned implementation moved to the first half of FY2022.
- Completion and economics of the proposed HorizonWest acquisition, expected at filing time to close in May 2020, and the outcome of the Romanian investigation.