Titan Machinery Inc. — Q3 FY2014 Form 10-Q
Reporting period: Three and nine months ended October 31, 2013. The company sells, services and rents agricultural and construction equipment in North America and Europe; its reportable segments are Agriculture, Construction and International. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Revenue | $588.0 | $582.1 | $1,517.8 | $1,413.9 |
| Gross profit | $93.6 | $94.1 | $251.1 | $234.8 |
| Gross margin | 15.9% | 16.2% | 16.5% | 16.6% |
| Operating expenses | $75.0 | $64.0 | $214.1 | $175.3 |
| Operating income | $18.6 | $30.1 | $37.0 | $59.5 |
| Net income attributable to Titan | $5.8 | $14.1 | $9.2 | $26.9 |
| Diluted EPS | $0.27 | $0.66 | $0.43 | $1.27 |
Q3 revenue rose 1.0%, but same-store sales fell 4.5%; acquisitions contributed $32.2 million and were partly offset by a $26.4 million same-store decline. Equipment revenue fell 3.2%, while parts, service and rental/other revenue increased. Lower equipment and rental margins, higher operating costs and increased interest expense drove the earnings decline. Operating expenses were 12.7% of revenue versus 11.0% a year earlier. For the nine months, revenue grew 7.3%, including $126.9 million from acquisitions, while same-store sales declined 1.7%; net income attributable to Titan fell about 66%.
Cash flow, balance sheet and liquidity
- Cash was $113.4 million at October 31, 2013, down from $124.4 million at January 31, 2013. Total assets were $1,730.9 million; stockholders’ equity was $410.2 million.
- Operating cash flow was negative $107.4 million for the nine months, chiefly reflecting a $287.4 million inventory increase, partly offset by $151.1 million of increased floorplan notes payable. Management’s non-GAAP operating cash flow, adjusted for floorplan activity, was negative $12.0 million.
- Investing cash flow was negative $11.0 million and financing cash flow was positive $107.4 million for the nine months.
- Inventory rose to $1,175.7 million from $929.2 million at fiscal year-end. Management attributed the build to lower-than-expected equipment sales, seasonal stocking and expansion in International operations, and expected equipment inventory excluding acquisitions to decline in the final fiscal quarter.
- Floorplan notes payable were $937.2 million, versus $689.4 million at January 31; long-term debt excluding current maturities was $85.7 million, and senior convertible notes had $150.0 million face value and $128.1 million carrying value. The company reported approximately $160.1 million of remaining availability on specified floorplan lines and said it was compliant with floorplan covenants.
- Management believed available cash, operating cash flow and borrowing capacity would meet liquidity needs for at least 12 months. In November, Wells Fargo commitments were amended: the working-capital line increased from $75.0 million to $112.5 million, the Wells Fargo floorplan line decreased from $375.0 million to $350.0 million, and facility maturities were extended to August 31, 2018. Agricredit’s floorplan facility increased by $75.0 million to $225.0 million.
Segments, outlook and risks
- Agriculture: Q3 revenue fell 4.1% and pretax income fell 32.9% to $16.7 million. Lower commodity prices, higher equipment prices, pressure on used-equipment values and weaker same-store sales weighed on performance.
- Construction: Q3 revenue rose 15.8%, but the segment recorded a $3.4 million pretax loss versus $0.5 million income a year earlier. Acquired stores and network-building costs, industry challenges and lower rental-fleet utilization contributed.
- International: Q3 revenue rose 42.7%, largely from acquisitions and new locations, but the segment had a $1.0 million pretax loss versus $1.4 million income. Nine-month same-store sales increased 14.8%, though the segment reported a nine-month pretax loss.
- Management cited lower agricultural commodity prices, delayed spring weather, lower projected crop yields in some operating areas, increased equipment prices and difficult construction-market conditions. Weather can make results seasonal and volatile. A 1 percentage-point interest-rate change was estimated to affect next-12-month pretax earnings and cash flow by about $5.5 million.
- Construction and International reporting units had pretax losses; management warned that failure to improve in line with projections could result in impairment of some or all of $6.4 million of goodwill and $2.8 million of indefinite-lived distribution rights.
- The company entered a forward-starting $100 million interest-rate swap fixing the rate at 1.901% from September 30, 2014 through September 30, 2018. It also had foreign-currency hedges. No specific earnings or revenue guidance was provided.
- Two Montana Construction stores were planned to close and merge with nearby locations before January 31, 2014; estimated lease-exit costs were approximately $0.5 million. The filing reported no material pending legal proceedings.
Investor verification points
- Track whether inventory declines as management expected in the final fiscal quarter, and whether equipment sales recover.
- Assess inventory financing availability, floorplan balances, interest costs and compliance with amended credit covenants.
- Monitor same-store sales, equipment margins, rental utilization and acquired-store expense levels, particularly in Construction and International.
- Review reporting-unit performance and impairment assumptions for Construction and International goodwill and distribution rights.
- Confirm the timing and cost of the Montana store closures and the effect of subsequent credit-facility amendments.