Titan Machinery Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended October 31, 2016 (fiscal 2017). Comparisons are with the corresponding 2015 periods. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context
Titan operates agricultural and construction equipment dealerships in the United States and Europe, with Agriculture, Construction and International reportable segments. Revenue comes from equipment sales, parts, service, and rental and other activities. The interim statements are unaudited.
Financial performance
- Third-quarter revenue: $332.3 million, down 3.7%; same-store sales fell 3.6%. Equipment revenue was $212.2 million, parts $69.3 million, service $33.8 million, and rental and other $17.0 million.
- Third-quarter earnings and margins: Gross profit was $58.4 million, down 13.0%, and gross margin fell to 17.6% from 19.5%. Operating income was $5.0 million versus $13.6 million. Net income attributable to Titan was $0.3 million, or $0.01 per diluted share, versus $3.5 million, or $0.16 per share.
- Nine-month revenue: $895.5 million, down 13.3%; same-store sales fell 12.9%. Equipment revenue declined 16.3%, the largest source of the decrease.
- Nine-month earnings and margins: Gross profit was $164.9 million, down 13.0%; gross margin held at 18.4%. Operating income was $5.2 million versus $22.1 million. Net loss attributable to Titan was $5.9 million, or $0.27 per diluted share, compared with a $2.8 million loss, or $0.13 per share.
- Cash flow: Nine-month operating cash flow was $74.4 million, compared with $198.8 million. Investing used $7.0 million; financing used $104.6 million. Management’s non-GAAP operating cash flow measure, adjusted for floorplan financing movements and inventory equity, was $34.4 million versus $32.9 million.
- Balance sheet and liquidity: At October 31, cash was $52.4 million; current assets were $743.9 million and current liabilities $462.0 million. Inventory was $607.6 million. Floorplan payable was $372.1 million. Long-term debt, including current maturities, was $40.9 million; senior convertible notes had $95.7 million principal and $87.8 million carrying value. Total assets were $920.3 million and stockholders’ equity $332.3 million. The company reported $856 million of discretionary floorplan credit lines and no draw on its $65 million working-capital line.
Material changes and management commentary
- Agriculture revenue for the first nine months fell 18.6%, reflecting an 18.1% same-store sales decline, particularly in equipment. Management cited lower agricultural commodity prices and USDA-projected 2016 farm income 34% below the most recent five-year average.
- Construction revenue was pressured by reduced oil production and infrastructure activity in some regions, as well as weaker purchases by agricultural customers. International demand was affected by low global commodity prices.
- In the third quarter, Titan accelerated used-equipment inventory reductions through aggressive retail pricing. This compressed equipment gross margin; used equipment also represented a greater share of equipment sales. Inventory declined 28.2% year over year, while equipment inventory turnover was 1.1 versus 1.3 a year earlier.
- Cost reductions and lower average interest-bearing inventory reduced operating costs and floorplan interest expense. Third-quarter floorplan interest expense fell 28.4%; other interest expense fell 46.5%, partly reflecting convertible-note repurchases.
- During the first nine months, Titan repurchased $54.3 million face value of convertible notes for $46.0 million cash and recognized a $3.1 million pre-tax gain. It also reduced the Wells Fargo and DLL Finance credit-facility limits; the reduction prompted a $0.6 million third-quarter write-off of debt issuance costs.
- Management said available cash, operating cash flow and borrowing capacity should meet liquidity needs for at least the next 12 months, subject to operating performance and compliance with credit-agreement covenants. The company reported covenant compliance at October 31, 2016. No specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- Management identified challenging agricultural and construction markets, equipment oversupply, weather-driven seasonality, lower customer demand, interest-rate changes and foreign-exchange movements as risks. Continued significant Ukrainian hryvnia devaluation could materially affect results and cash flows; the currency had been relatively stable since July 2015.
- A one-percentage-point interest-rate increase was estimated to reduce pre-tax earnings and cash flow by approximately $1.7 million over the next 12 months, holding other factors constant.
- Titan recorded $0.3 million of long-lived asset impairment in the quarter after certain stores’ operating losses and expected future losses indicated potential recoverability issues. Nine-month impairment and realignment costs were $0.5 million, compared with $1.5 million a year earlier.
- The company acquired the remaining noncontrolling interest in its Bulgarian subsidiary in June 2016 for $4.3 million, satisfied through receivables owed by the holder; its subsidiaries were wholly owned thereafter.
- Titan reported no material litigation and stated that disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether equipment demand, especially in Agriculture, stabilizes and whether used-inventory reductions improve turnover without further material margin pressure.
- Whether cash generation remains adequate as operating cash flow is affected by inventory levels and changes in manufacturer and non-manufacturer floorplan financing.
- Available borrowing capacity, covenant headroom and the terms and maturity profile of floorplan facilities and convertible notes.
- Whether the company’s stated 12-month liquidity assessment remains valid under continued weak farm income, construction/oil-market conditions or adverse currency and interest-rate movements.
- The size and timing of any further impairments, restructuring charges, debt repurchases or other unusual items; the filing gives no quantified forward earnings guidance.