Titan Machinery Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 31, 2015 (the third quarter and first nine months of fiscal 2016). Unless otherwise noted, figures are in U.S. dollars.
Business context
Titan sells, services and rents agricultural and construction machinery through stores in the United States and Europe. Its reportable segments are Agriculture, Construction and International. Results are exposed to seasonal weather patterns and customer demand for equipment and aftermarket services.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $345.0 million | $493.1 million | $1,032.4 million | $1,409.6 million |
| Gross profit / margin | $67.1 million / 19.5% | $84.7 million / 17.2% | $189.6 million / 18.4% | $240.3 million / 17.0% |
| Operating income | $13.6 million | $15.2 million | $22.1 million | $28.9 million |
| Net income (loss) attributable to Titan | $3.5 million | $2.5 million | $(2.8) million | $(4.7) million |
| Diluted EPS | $0.16 | $0.11 | $(0.13) | $(0.22) |
For the nine months, cash from operating activities was $198.8 million, versus cash used of $82.6 million in the prior year; investing activities used $0.4 million, and financing activities used $246.9 million. Management’s non-GAAP operating cash flow measure, adjusting for non-manufacturer floorplan financing and inventory equity changes, was $32.9 million versus $(15.1) million.
At October 31, 2015, cash was $78.4 million, inventories $813.8 million, total assets $1,193.7 million, and stockholders’ equity $373.8 million. Current assets were $1,002.1 million and current liabilities $613.7 million. Floorplan payable was $546.6 million; senior convertible notes had a $150.0 million principal balance and $135.1 million carrying value. Long-term debt, including current maturities, was approximately $30.0 million. The company reported approximately $1.0 billion of discretionary floorplan credit lines and $14.7 million outstanding on its $75 million Wells Fargo working-capital revolver.
Changes versus prior comparable period
- Q3 revenue fell 30.0%; equipment revenue declined 37.2%. Same-store sales decreased 29.0%, including a 37.4% decline in Agriculture and an 8.3% decline in Construction.
- Q3 gross profit decreased 20.7%, but gross margin rose 2.3 percentage points, primarily from a greater contribution by higher-margin parts and improved equipment margins. Operating expenses fell 23.0%, while operating expenses as a share of revenue increased to 15.5% from 14.1%.
- Nine-month revenue decreased 26.8% and gross profit decreased 21.1%. The nine-month net loss narrowed from $4.7 million to $2.8 million attributable to Titan, though pretax loss widened to $3.6 million from $1.1 million.
- Inventory declined from $879.4 million at January 31, 2015 to $813.8 million; floorplan payable declined from $627.2 million to $546.6 million. Equipment inventory turnover was 1.3 versus 1.5 for the four quarters ended October 31.
Outlook, commentary, risks and unusual items
- Management cited lower crop commodity prices and projected farm income, weaker farm-equipment demand, and low oil prices affecting construction activity in parts of its footprint. The USDA projected a 38.2% decrease in 2015 net farm income versus 2014. Management also reported oversupply of equipment inventory in agriculture and of equipment and rental fleet in affected construction markets.
- Management said available cash, operating cash flow and credit facilities should meet liquidity needs for at least the next 12 months, subject to compliance with credit covenants. The filing provides no specific revenue or earnings guidance.
- A March 2015 realignment reduced headcount by approximately 14% and included closing three Agriculture stores and one Construction store. Estimated total costs were approximately $2.0 million; $1.5 million was recognized in the first nine months of fiscal 2016.
- Ukraine hryvnia remeasurement losses were $2.3 million for the first nine months, versus $4.9 million a year earlier. The amended Wells Fargo facility led to a $1.0 million write-off of debt issuance costs in Q3; the nine-month statement reports $1.6 million of related write-offs. Non-GAAP diluted EPS, excluding specified debt-cost, realignment and Ukraine items, was $0.20 for Q3 and $0.06 for nine months.
- The October 2015 Wells Fargo amendment established a $275 million floorplan facility and $75 million revolver, removed several prior financial covenants, and requires a fixed-charge coverage ratio of at least 1.1 if availability plus eligible cash collateral falls below 15% of the total facility. Titan said it was not subject to that covenant at quarter-end and was in compliance with applicable financial covenants.
- Risks include continued agricultural and construction weakness, inventory and rental-fleet demand, foreign currency movements, interest-rate exposure, and covenant compliance. A 1 percentage-point interest-rate increase was estimated to reduce pretax earnings and cash flow by approximately $3.3 million over 12 months. Titan reported no current material litigation and no defaults on senior securities.
Important facts for investors to verify
- Whether declining equipment demand, especially in Agriculture, stabilizes and whether inventory levels and turnover improve.
- Whether cost reductions and stronger gross margins can offset lower sales and fixed-cost deleverage.
- Cash-flow quality: reported operating cash flow benefited from inventory reductions and a shift toward manufacturer floorplan financing; compare it with the company’s non-GAAP measure.
- Available borrowing capacity, covenant headroom and refinancing timing, including the convertible notes’ May 2019 maturity and the Wells Fargo facility’s maturity provisions.
- Further effects of Ukraine currency exposure, lower oil prices, and any additional realignment or inventory impairment costs.