Titan Machinery Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended July 31, 2019 (fiscal 2020). Titan Machinery sells, services, and rents agricultural and construction equipment through Agriculture, Construction, and International segments in the United States and Europe. Unless otherwise indicated, amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended July 31, 2019 | Prior-year quarter | Six months ended July 31, 2019 | Prior-year period |
|---|---|---|---|---|
| Revenue | $315.0 million | $297.2 million | $593.3 million | $540.9 million |
| Gross profit / margin | $64.0 million / 20.3% | $58.9 million / 19.8% | $117.9 million / 19.9% | $106.5 million / 19.7% |
| Operating expenses | $54.9 million | $47.6 million | $107.4 million | $94.4 million |
| Income from operations | $9.2 million | $10.5 million | $10.4 million | $11.4 million |
| Net income | $5.5 million | $5.2 million | $5.1 million | $3.6 million |
| Diluted EPS | $0.25 | $0.23 | $0.23 | $0.16 |
Management also reported non-GAAP adjusted diluted EPS of $0.31 for the quarter versus $0.28, and $0.33 for the six-month period versus $0.21. Adjustments include ERP transition costs and, in prior-year periods, note repurchase losses and restructuring/impairment charges.
- Revenue and margins: Quarterly revenue rose 6.0%, led by Agriculture and Construction; International revenue declined. Gross margin improved chiefly because service represented a greater share of revenue, with rental margin also improving. Six-month revenue increased 9.7%, and gross margin rose 0.2 percentage points.
- Profit and expenses: Quarterly net income increased modestly, but operating income fell as operating expenses rose $7.2 million (15.2%), including costs associated with the AGRAM acquisition, ERP transition, and higher business volumes. Six-month operating income also declined despite higher revenue and gross profit.
- Cash flow: Six-month operating cash flow was negative $6.3 million versus negative $14.1 million; investing cash flow was negative $14.6 million versus negative $5.3 million; financing cash flow was positive $13.6 million versus positive $15.7 million. Cash ended at $49.5 million, down from $56.7 million at January 31, 2019. Management’s non-GAAP adjusted operating cash flow was negative $49.3 million versus negative $36.5 million, reflecting greater inventory stocking.
- Liquidity and debt: Current assets were $773.5 million and current liabilities $553.9 million at quarter-end. Inventory was $629.2 million, up from $491.1 million at fiscal year-end. Floorplan payable was $451.9 million versus $273.8 million. The $45.6 million senior convertible notes were repaid at maturity on May 1, 2019. Long-term debt was $37.9 million, including current maturities; operating and finance lease liabilities totaled $111.6 million. The company reported $640 million of floorplan credit lines and compliance with applicable credit-facility covenants.
Material changes and management commentary
- Agriculture quarterly revenue rose 9.1% and pretax income was $6.2 million. Construction revenue rose 8.4%, with pretax income of $1.3 million versus approximately breakeven. International revenue fell 3.8%, and pretax income declined to $0.5 million from $3.7 million; same-store sales fell 19.8% in that segment.
- For the six months, Agriculture and Construction revenue increased 8.7% and 11.7%, respectively. Construction remained loss-making, with a pretax loss of $0.9 million, improved from $2.9 million. International revenue rose 9.7% including AGRAM, but same-store sales fell 7.3% and pretax income declined to $0.7 million from $3.6 million.
- The company acquired German dealership ESB Agrartechnik for $3.0 million in cash in January 2019; AGRAM, acquired in July 2018, also contributed to current-period International results.
- Following adoption of ASC 842 on February 1, 2019, Titan recognized operating lease assets and liabilities on its balance sheet and recorded a $5.5 million cumulative reduction to opening retained earnings. Management said adoption did not affect the income statement or cash flows.
- Titan is preparing to replace its ERP system, with implementation anticipated in the first half of fiscal 2021. ERP transition costs were $1.7 million for the quarter and $2.7 million for the six months; management expected approximately $4.0 million of additional costs during the remainder of fiscal 2020.
Outlook, risks, and contingencies
Management said cash, operating cash generation, and available credit were expected to meet liquidity needs for at least the next 12 months. It cited USDA estimates of net farm income rising approximately 5% in calendar 2019, while also describing challenging equipment-market conditions in certain International markets. Results are seasonal and affected by weather, farm economics, customer demand, inventory levels, and foreign exchange rates; interim results are not necessarily indicative of the full year.
- A one-percentage-point change in interest rates was estimated to change next-12-month pretax earnings and cash flow by approximately $1.8 million. A hypothetical 10% foreign-exchange movement was not expected to have a material impact overall, but Ukraine currency devaluation could materially affect results and cash flows.
- The Wells Fargo facility matures October 28, 2020, following satisfaction of its February 2019 maturity tests. Availability and liquidity remain dependent on borrowing capacity and covenant compliance.
- A Romanian Competition Council investigation involving Titan Machinery Romania and other association members remained preliminary; the company said it could not predict the outcome or reasonably estimate a potential loss. Other ordinary-course legal matters were not expected by management to have a material financial impact.
- Prior-year revenue and cost-of-revenue figures were corrected for an immaterial internal-transaction elimination error. The correction reduced both revenue and cost of revenue but did not affect gross profit, operating or net income, EPS, balance sheets, or cash flows.
Important facts for investors to verify
- Whether inventory growth and floorplan borrowing unwind seasonally, and how much they affect cash generation and liquidity.
- Whether operating expenses, including ERP transition costs and acquisition-related costs, can be controlled as revenue grows.
- Whether International segment demand and profitability recover, particularly in markets described as challenging.
- Progress, total costs, and timing of the ERP replacement, including the expected additional fiscal 2020 costs.
- Current borrowing availability, covenant headroom, and refinancing or repayment plans ahead of the Wells Fargo facility’s October 2020 maturity.
- Developments in the Romanian competition investigation and foreign-exchange exposure, including Ukraine.