Titan Machinery Inc. — Form 10-Q Summary
Business context and reporting period. Titan Machinery sells, services and rents agricultural and construction equipment through Agriculture, Construction and International segments in the U.S. and Europe. This report covers the quarter and six months ended July 31, 2018, the second quarter and first half of fiscal 2019; comparisons are with the corresponding 2017 periods.
Key financial results
| Metric | Three months ended July 31, 2018 | Six months ended July 31, 2018 |
|---|---|---|
| Revenue | $299.9 million, up 11.5% | $545.6 million, up 2.4% |
| Gross profit / margin | $58.9 million / 19.6% | $106.5 million / 19.5% |
| Operating income (loss) | $10.5 million; prior-year loss $3.3 million | $11.4 million; prior-year loss $8.7 million |
| Net income (loss) | $5.2 million; prior-year loss $5.2 million | $3.6 million; prior-year loss $11.1 million |
| Diluted EPS | $0.23; prior-year loss per share $0.24 | $0.16; prior-year loss per share $0.51 |
Quarterly equipment revenue rose 14.8% to $192.7 million, with equipment gross margin improving to 9.5% from 7.8%. Rental and other gross margin fell to 21.1% from 27.6%. For the first half, equipment margin improved, but rental and other margin declined to 18.4% from 25.0%; overall gross margin increased 0.4 percentage points.
- Cash flow: First-half operating cash use was $14.1 million, versus $66.9 million provided a year earlier. Investing cash use was $5.3 million; financing provided $15.7 million. Cash declined to $49.7 million from $53.4 million at January 31, 2018. Management’s non-GAAP adjusted operating cash flow was negative $36.5 million, compared with negative $19.3 million.
- Liquidity and debt: Current assets were $686.3 million and current liabilities $480.3 million. Floorplan payables were $365.6 million, up from $247.4 million at January 31. Convertible notes had $45.6 million principal outstanding and mature May 1, 2019; their $44.4 million carrying value is classified as current. Total debt including the notes was reported as $68.8 million. The $60 million Wells Fargo working-capital line had no balance outstanding at quarter-end.
- Inventory: Inventory increased to $547.1 million from $472.5 million, principally reflecting higher new-equipment inventory. Equipment inventory turnover was 1.7 times over the four quarters ended July 31, versus 1.6 times a year earlier.
Material changes and management commentary
- Quarterly revenue growth was driven mainly by higher equipment sales in Agriculture and International. Same-store sales rose 11.4%; late spring planting shifted some parts and service activity into the quarter.
- International revenue rose 29.4% in the quarter and 21.3% for the half, supported by equipment demand, available subsidy funding and prior-year crop yields. Agriculture segment results improved substantially; Construction reported a small quarterly pretax loss and a larger first-half loss, primarily reflecting weaker rental margins and higher fleet maintenance costs.
- Operating expenses declined 5.7% in the quarter and 8.0% for the half, primarily from savings following the closure of one Construction and 14 Agriculture locations. Restructuring charges were $0.6 million in each 2018 period, versus $5.5 million for the quarter and $7.9 million for the half in 2017. A separate $0.2 million long-lived-asset impairment was recorded at an International store.
- On a non-GAAP basis, adjusted diluted EPS was $0.28 for the quarter and $0.21 for the half; GAAP diluted EPS was $0.23 and $0.16, respectively. These adjustments exclude specified restructuring, impairment, note-repurchase and other items.
Outlook, risks and unusual items
- Management said cash, operating cash generation and available credit were expected to meet liquidity needs for at least the next 12 months, and expected to have sufficient cash and borrowing capacity to repay the convertible notes at maturity. It also anticipated meeting the Wells Fargo facility’s February 1, 2019 tests: a 1.1-to-1.0 fixed-charge coverage ratio and a liquidity test. Failure of both tests would cause the facility to mature immediately.
- Management cited challenging agricultural conditions, including low commodity prices and farm income. USDA projections cited in the filing forecast 2018 farm income down 13% from 2017 and about 25% below the prior five-year average. The company noted the risk of reduced equipment demand and excess inventory. No specific earnings or revenue guidance was provided.
- On July 2, 2018, Titan acquired German dealership group AGRAM for $19.2 million cash. The acquisition is treated as a third-quarter transaction because of the foreign subsidiaries’ reporting calendar; therefore, no acquisition amounts were included in the quarter ended July 31. The preliminary allocation included $0.8 million goodwill. In August, the DLL Finance floorplan facility was increased from $30 million to $45 million.
- A Romanian competition authority investigation involving Titan’s Romanian subsidiary remained preliminary; the company could not predict the outcome or estimate potential loss. Other ordinary-course legal matters were not expected by management to have a material effect.
- Interest-rate sensitivity analysis estimated that a one-percentage-point change in rates would affect annual pretax earnings and cash flow by approximately $2.0 million. The filing also identifies Ukrainian currency and political/economic risks. Adoption of the new lease standard, planned for February 1, 2019, was expected to materially increase reported assets and liabilities, with no material impact then expected on earnings or cash flows.
Important facts for investors to verify
- Progress toward the February 2019 Wells Fargo covenant and liquidity tests, and the May 2019 convertible-note repayment or refinancing plan.
- Whether higher inventory and negative first-half operating cash flow unwind seasonally, and the effect of inventory levels on floorplan borrowing costs and liquidity.
- Whether agricultural demand, equipment margins and rental-fleet utilization improve or weaken, especially in Construction and Agriculture.
- Final purchase-price allocation and integration performance for the German acquisition, plus any material developments in the Romania investigation.
- The eventual balance-sheet effect of ASC 842 lease adoption and any change to management’s liquidity or outlook statements.