Titan Machinery Inc. — Q3 FY2013 Form 10-Q
Reporting period: Quarter and nine months ended October 31, 2012; comparisons are with the corresponding 2011 periods. Amounts are in millions unless otherwise noted. Titan operates agricultural and construction equipment dealerships in the U.S. and Europe.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Revenue | $582.1 | $423.0 | $1,413.9 | $1,052.0 |
| Gross profit / margin | $94.1 / 16.2% | $74.0 / 17.5% | $234.8 / 16.6% | $182.7 / 17.4% |
| Operating income | $30.1 | $23.9 | $59.5 | $49.1 |
| Net income attributable to Titan | $14.1 | $12.8 | $26.9 | $26.4 |
| Diluted EPS | $0.66 | $0.61 | $1.27 | $1.31 |
- Q3 revenue rose 37.6%; management attributed $57.3 million to acquisitions and $101.9 million to same-store growth. Nine-month revenue rose 34.4%, including $168.9 million from acquisitions and $193.0 million from same-store growth.
- Equipment sales were the largest growth driver: up 46.1% in Q3 and 37.9% for the nine months. Equipment represented 78.4% of Q3 revenue, versus 73.8% a year earlier.
- Gross margin declined as equipment contributed a larger share of gross profit; for the nine-month period, management also cited lower equipment margins amid competitive markets and drought-related softening in agricultural customer demand. Operating expenses increased, but declined as a share of revenue to 11.0% in Q3 and 12.4% year to date.
- Q3 floorplan interest expense was $3.7 million and other interest expense $2.9 million, up from $2.6 million and $0.3 million, respectively. Nine-month amounts were $9.0 million and $6.5 million, versus $5.1 million and $0.9 million.
Cash, liquidity and debt
- Cash was $115.7 million at October 31, versus $79.8 million at January 31. Current assets were $1,269.6 million and current liabilities $889.7 million; inventories of $1,048.0 million made up most current assets, up from $748.0 million at fiscal year-end.
- Operating cash flow was negative $172.7 million for the nine months, mainly reflecting a $212.9 million inventory cash investment. Investing cash flow was negative $47.9 million, including dealership, rental-fleet, and other property purchases. Financing cash flow was positive $257.3 million, including $145.2 million net proceeds from convertible notes and a $118.7 million increase in non-manufacturer floorplan borrowing.
- At October 31, floorplan notes payable were $782.4 million; long-term debt was $79.5 million including current maturities; and convertible notes had a $124.9 million carrying value. The $150 million notes carry 3.75% coupon interest, mature in 2019, and had a $43.17 initial conversion price.
- Management reported approximately $188.9 million of available borrowing under specified floorplan lines at October 31 and said cash, operating cash flow, and available credit should meet liquidity needs for at least 12 months. It expected new-equipment inventory, excluding acquisitions, to decline in fiscal Q4.
Segments, outlook and risks
- Agriculture revenue increased 39.2% in Q3 and 31.2% year to date; segment pretax income increased 29.9% and 15.9%, respectively. Construction revenue grew 22.5% in Q3 and 49.8% year to date, but segment pretax income fell 84.1% and 82.9%, respectively. Management cited competitive equipment markets, lower equipment margins, and higher floorplan and rental-fleet interest costs.
- Management gave no specific earnings or revenue guidance in the supplied filing text. Results are subject to seasonal and weather-related fluctuations. It cited agricultural and construction market conditions, credit-market conditions, interest rates, and foreign-currency exposure as risks.
- One percentage point higher interest rates, with other factors held constant, was estimated to reduce next-12-month pretax earnings and cash flow by about $4.5 million. Foreign-exchange hedges may not eliminate currency risk and can expose the company to counterparty credit risk.
- After quarter-end, Titan increased the CNH floorplan facility from $350 million to $450 million. A Wells Fargo amendment increased its floorplan line from $300 million to $375 million, raised the maximum stated LIBOR margin range, and changed certain financial covenants. Titan reported compliance with floorplan financial covenants as of October 31.
- Acquisitions during the period expanded U.S. agriculture and construction operations and Bulgarian operations. After quarter-end, Titan acquired two Nebraska and Arizona dealership groups and agreed to acquire a Serbian store, with closing expected around December 14, 2012.
- The company reported no material pending legal proceedings, effective disclosure controls, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether inventory levels and equipment demand evolve as management expected, particularly given drought-related demand softness and the planned Q4 inventory reduction.
- Whether equipment-margin compression and the steep decline in Construction segment pretax income persist.
- Availability, pricing, and covenant terms of floorplan credit after the amendments, and the impact of higher rates on financing costs.
- How acquisitions affect cash needs, debt, integration costs, and reported growth compared with same-store performance.
- The cash-flow profile after adjusting for inventory financing: management’s non-GAAP operating cash flow was negative $32.9 million for the nine months, versus negative $14.1 million a year earlier; it should be considered alongside GAAP cash flow, not as a substitute for it.