Titan Machinery Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended April 30, 2020; comparisons are with the three months ended April 30, 2019. Titan Machinery sells, services, and rents agricultural and construction equipment through U.S. and European dealerships. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $310.2 | $278.3 |
| Gross profit / margin | $58.4 / 18.8% | $53.9 / 19.4% |
| Operating income | $5.1 | $1.2 |
| Net income (loss) | $2.3 | ($0.4) |
| Diluted EPS | $0.10 | ($0.02) |
| Operating cash flow | ($5.4) | $2.9 |
| Investing cash flow | ($5.1) | ($8.0) |
| Financing cash flow | $17.7 | $11.8 |
Revenue increased 11.5%, led by equipment sales (+12.7%), parts (+9.0%), and service (+12.1%); rental and other revenue was nearly flat. Same-store sales rose 11.0%. Gross profit grew 8.4%, but margin fell 0.6 percentage points, mainly because equipment margins were lower and equipment represented a larger share of sales than higher-margin parts and service. Operating expenses increased slightly to $53.1 million but declined as a share of revenue, from 18.9% to 17.1%.
Management reported adjusted diluted EPS, a non-GAAP measure, of $0.15 versus $0.02. Adjustments included ERP transition costs, impairment charges, and Ukraine currency remeasurement. The filing cautions that this measure is supplemental, not a substitute for GAAP results.
Segments and material changes
- Agriculture: Revenue grew 25.9% to $193.6 million; pretax income increased to $6.2 million from $1.9 million. Higher equipment, parts, and service sales reflected replacement demand, used-inventory sales, difficult prior harvest conditions, and the Uglem-Ness acquisition.
- Construction: Revenue declined 15.0% to $60.1 million; pretax loss widened to $2.9 million from $2.2 million. The filing cites weaker customer sentiment, lower oil prices, COVID-related economic slowdown, and the prior-year closure/sale of the Albuquerque store. Rental fleet dollar utilization declined to 18.9% from 20.5%.
- International: Revenue increased 5.0% to $56.5 million, but the segment recorded a $0.3 million pretax loss versus $0.2 million income. Ukraine hryvnia remeasurement losses more than offset revenue growth.
Liquidity, debt, and balance sheet
At April 30, 2020, cash was $50.8 million, total assets $969.7 million, and stockholders’ equity $347.1 million. Inventory was $583.4 million, down from $597.4 million at January 31, 2020. Receivables, net, were $76.4 million.
Floorplan payables were $378.3 million, compared with $371.8 million at January 31. Long-term debt, including current maturities, totaled $53.3 million; this excludes floorplan payables and lease liabilities. Operating lease liabilities totaled $96.8 million. The company reported total floorplan credit lines of $762 million; the filing does not state a single clear figure for unused borrowing availability.
On April 3, Titan entered into a new secured bank facility of up to $250 million: a $185 million floorplan facility and a $65 million operating revolver, maturing April 2025. The facility generally has no financial covenant unless excess availability falls below a specified threshold, when a fixed-charge coverage ratio applies. Titan said it was in compliance with applicable covenants and expected cash, operating cash flow, and available borrowing capacity to meet liquidity needs for at least 12 months.
Operating cash flow was negative despite the quarterly profit, reflecting working-capital movements, including reduced liabilities. Management’s non-GAAP adjusted operating cash flow, which adjusts for floorplan financing and inventory-equity changes, was a use of $3.6 million, versus a use of $37.4 million a year earlier. This measure should be considered alongside GAAP cash flow.
Outlook, risks, and unusual items
- COVID-19 created substantial uncertainty. U.S. stores closed to the public March 23 but continued operating with social-distancing measures; reopening to the public began May 4. Management could not predict the pandemic’s duration or financial impact.
- Management expected lower agricultural commodity prices to pressure equipment demand, while parts and service could be less affected. It expected construction revenue categories to face pressure from lower oil prices, unemployment, weaker GDP, and reduced infrastructure spending. International operations faced additional restrictions and less government support for farm customers.
- The filing provides no quantified earnings or revenue guidance. Management’s liquidity assessment assumes available cash flow and borrowing capacity; COVID-related demand, supply-chain, and financing risks could alter that outlook.
- A $0.2 million long-lived asset impairment was recorded in the Construction segment. The company also reported $0.8 million of Ukraine remeasurement adjustment for non-GAAP reporting purposes.
- After quarter-end, Titan closed its acquisition of HorizonWest on May 4 for $6.9 million, plus $2.7 million of inventory purchased separately. HorizonWest reported approximately $26 million of revenue in its most recent fiscal year.
- A Romanian competition authority investigation involving Titan’s Romanian subsidiary remained preliminary; the company could not estimate a potential loss. Titan said other ordinary-course legal matters were not expected to have a material impact.
- A 1-percentage-point interest-rate increase was estimated to reduce pretax earnings and cash flow by approximately $1.8 million over 12 months. The filing said a hypothetical 10% foreign-exchange movement would not have a material impact, though Ukraine currency losses affected the quarter.
Investor verification points
- Check subsequent results for COVID-19 effects on dealership activity, customer demand, manufacturer supply, and store operations.
- Track equipment margins, used-equipment inventory, inventory turnover, and the company’s dependence on floorplan financing.
- Monitor Construction segment losses and rental utilization, and International segment currency exposure.
- Verify actual borrowing availability and covenant headroom under the bank and manufacturer credit facilities.
- Follow the Romanian competition investigation and the integration and purchase accounting for HorizonWest.