Titan Machinery Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended October 31, 2017 (fiscal 2018). Financial amounts below are in U.S. dollars; figures are rounded to millions unless otherwise noted.
Business context and reporting period
Titan Machinery operates agricultural and construction equipment dealerships in the U.S. and Europe, with Agriculture, Construction and International reporting segments. Results are seasonal and can vary with weather. Management cited weak farm income and commodity prices, soft equipment demand and excess inventory in some markets; construction demand in parts of the footprint also remained affected by oil and infrastructure activity.
Financial performance and liquidity
- Third-quarter revenue: $330.3 million, down 0.6% year over year. Equipment revenue rose 1.8%; parts and service revenue declined 6.5% and 6.6%, respectively.
- Third-quarter profitability: Gross profit was $61.5 million, up 5.2%, and gross margin improved to 18.6% from 17.6%, principally on better equipment margins. Operating income was $8.5 million versus $5.0 million. Net income attributable to Titan was $2.4 million, or $0.11 per diluted share, versus $0.3 million, or $0.01. Adjusted diluted EPS, a non-GAAP measure, was $0.20 versus a loss of $0.01.
- Nine-month results: Revenue was $863.3 million, down 3.6%; gross profit was $163.2 million, down 1.0%, while gross margin increased to 18.9% from 18.4%. Operating results were approximately breakeven, with a $0.2 million operating loss versus $5.2 million of operating income. Net loss attributable to Titan was $8.7 million, or $0.40 per diluted share, compared with a $5.9 million loss, or $0.27 per share. Adjusted diluted loss per share was $0.03 versus $0.36.
- Segments, third quarter: Agriculture revenue fell 9.2% to $186.5 million, but the segment returned to $4.9 million of pretax income from a $1.8 million loss. Construction revenue fell 9.7% to $72.9 million and its pretax loss widened to $2.4 million. International revenue increased 54.2% to $70.9 million and pretax income rose to $2.5 million.
- Cash flow: Nine-month operating cash flow was $56.0 million versus $74.4 million. Management’s non-GAAP adjusted operating cash flow, which adjusts for floorplan activity and inventory equity changes, was negative $10.8 million versus positive $34.4 million. Investing cash outflow was $18.9 million; financing cash outflow was $46.9 million. Cash declined $9.3 million from the fiscal-year start to $43.9 million.
- Balance sheet and funding: At October 31, cash was $43.9 million, current assets $655.7 million and current liabilities $385.9 million. Inventory was $529.8 million, up from $478.3 million at January 31. Floorplan payable was $322.4 million, up from $233.2 million. Convertible notes had a $62.3 million carrying value; long-term debt, including current maturities, totaled $37.4 million. Titan reported $727.4 million of discretionary floorplan lines and said it was in compliance with credit covenants.
- Debt actions: Titan repurchased $30.1 million face value of convertible notes for $29.1 million cash during the nine months. The notes mature May 1, 2019. Floorplan interest expense fell 42.3% in the quarter as average interest-bearing inventory decreased.
Material changes, outlook and risks
- Revenue comparisons were affected by store closures and prior-year sales from expanded marketing of aged equipment inventory: approximately $10.8 million of equipment revenue in the prior-year quarter and $41.0 million in the prior-year nine-month period. International growth partly offset weaker Agriculture and Construction sales.
- A restructuring plan closed one Construction location and 14 Agriculture locations. Cumulative charges were $13.5 million through October 31; management anticipated approximately $15.0 million total charges, including about $1.5 million more during the remainder of fiscal 2018, and expected the plan to reduce expenses.
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management stated that cash, operating cash flow and available borrowings were expected to meet liquidity needs for at least the next 12 months, subject to credit-facility covenants.
- Management cited USDA projections that 2017 net farm income would be relatively flat versus 2016 and 30.4% below the latest five-year average. Risks include agricultural and construction market weakness, inventory levels, weather, interest rates, foreign exchange and customers’ access to financing. A one-percentage-point interest-rate increase was estimated to reduce annual pretax earnings and cash flow by about $1.6 million.
- Romania’s Competition Council opened a preliminary investigation involving Titan Machinery Romania and other agricultural machinery industry members regarding possible anticompetitive practices. Titan said it could not predict the outcome or reasonably estimate a potential loss.
- The company terminated an interest-rate swap in April 2017, paying $0.9 million, and reclassified $0.6 million of accumulated losses to earnings after forecast interest payments were no longer considered probable. Adoption of the new revenue standard was planned for February 1, 2018; management did not expect a material effect on equipment, parts or service revenue recognition. The new lease standard was expected to materially increase balance-sheet assets and liabilities.
Most important facts for investors to verify
- Whether equipment margins and lower operating costs can offset continuing weak Agriculture and Construction demand.
- Inventory growth, inventory turnover and reliance on floorplan financing, including availability and covenant headroom under credit facilities.
- Cash generation after inventory and floorplan adjustments, rather than reported operating cash flow alone.
- Remaining restructuring charges, realized cost savings and any further dealership changes.
- Outcome and potential financial exposure from the Romanian competition investigation.
- Convertible-note repayment or conversion needs before the May 2019 maturity, and the balance of remaining debt.