Titan Machinery Inc. — Q2 FY2017 Form 10-Q
Reporting period: Three and six months ended July 31, 2016; fiscal year ends January 31. Unless noted otherwise, amounts are in millions of dollars. Comparisons are with the corresponding 2015 periods.
Business context and results
Titan operates agricultural and construction equipment dealerships, rental, parts and service businesses in the United States and Europe. Its reportable segments are Agriculture, Construction and International. Results are seasonal and can vary with weather.
- Q2 revenue: $278.3, down 16.7%. Equipment revenue fell 21.6%; parts fell 6.0%, service 4.7%, and rental and other 15.6%. Same-store sales declined 16.5%, including a 26.4% decline in Agriculture.
- Q2 earnings: Gross profit was $52.9, down 14.7%; gross margin increased to 19.0% from 18.6%, reflecting a higher mix of parts and service, despite weaker equipment margins. Operating expenses were $51.5, down 7.0%, but rose to 18.5% of revenue from 16.6%. Operating income was $1.4 versus $6.8; net loss attributable to common stockholders was $2.5, or $0.12 per diluted share, versus approximately break-even earnings.
- First-half revenue and earnings: Revenue was $563.2, down 18.1%; gross profit was $106.5, down 13.1%, with margin up to 18.9% from 17.8%. Operating income was $0.2 versus $8.5. Net loss attributable to common stockholders was $6.1, or $0.29 per diluted share, versus a $6.2 loss, also $0.29 per share.
- Segments, Q2: Agriculture revenue fell 26.6% and pre-tax loss widened to $4.3. Construction revenue rose 2.1% and reported $0.6 pre-tax income versus a $0.9 loss. International revenue fell 4.3% and shifted to a $0.2 pre-tax loss from $0.9 income.
Financial position, cash flow and debt
- At July 31, cash was $51.1, down from $89.5 at January 31; inventory was $682.0, and total assets were $984.8 versus $1,047.9. Current assets were $803.7 and current liabilities $507.3.
- Floorplan payable was $430.8, compared with $444.8 at January 31. Senior convertible notes had a $109.0 carrying value and $119.9 principal value; long-term debt was $41.2, including current maturities. The $75 million Wells Fargo working-capital revolver was undrawn at quarter-end.
- First-half operating cash flow was $60.4 versus $185.6. Management attributed much of the reported cash-flow movement to shifts between manufacturer and non-manufacturer floorplan financing; its non-GAAP operating cash-flow measure, adjusted for floorplan activity and inventory equity, was $1.1 versus $4.7. Investing used $3.6 and financing used $95.4; cash declined $38.4.
- In April, Titan repurchased $30.1 of convertible-note face value for $25.0 cash, recording a $2.1 pre-tax gain. The notes mature May 1, 2019. In June, Titan acquired the remaining interest in its Bulgarian subsidiary for $4.3 through satisfaction of receivables; subsidiaries are now wholly owned.
Changes, outlook and risks
- Management linked weak demand chiefly to lower agricultural commodity prices and farm income, which reduced equipment purchases and contributed to excess industry inventory. It cited USDA projections of farm-income declines of 12.9% in 2015 and a further 11.5% in 2016. Lower oil prices and reduced production and infrastructure activity also hurt demand in some Construction markets.
- Cost reductions and lower average interest-bearing inventory reduced operating and floorplan costs, but declining sales left fixed costs less well absorbed. Equipment inventory turnover was 1.2 for the four quarters ended July 31, versus 1.3 a year earlier; equipment inventory, including amounts held for sale, was down 24.7% year over year.
- Management said cash, operating cash flow and available facilities should meet needs for at least the next 12 months, subject to covenant compliance. Titan reported covenant compliance at July 31 and was not then subject to the Wells Fargo fixed-charge coverage covenant. No quantified earnings or revenue guidance is provided.
- After quarter-end, Titan elected to reduce its Wells Fargo floorplan line from $275 million to $210 million and working-capital line from $75 million to $65 million, and its DLL Finance facility from $110 million to $90 million. Total discretionary floorplan capacity fell from approximately $1.0 billion to $915 million, reflecting reduced inventory financing needs.
- Key exposures include continued agricultural and construction downturns, excess inventory, weather-related seasonality, Ukrainian hryvnia volatility, and interest rates. A 1 percentage-point interest-rate increase was estimated to reduce pre-tax earnings and cash flow by approximately $2.0 million over 12 months. Management said a hypothetical 10% currency-rate move would not materially affect results or cash flow, but noted significant UAH devaluation could have a material impact. A $1.3 million pre-tax swap loss was expected to be reclassified into income over the next 12 months.
- Q2 realignment costs were $0.02 million; first-half costs were $0.3 million versus $1.5 million a year earlier. The filing reports no material litigation, no defaults, and effective disclosure controls.
Important facts for investors to verify
- Whether Agriculture demand, same-store sales and equipment margins stabilize, and whether inventory levels and turnover improve.
- Whether reported cash generation remains adequate after separating floorplan financing changes from underlying operations.
- Available borrowing capacity and covenant headroom following the post-quarter facility reductions.
- Debt repayment and interest costs, including the convertible notes due in 2019 and exposure to floating rates.
- Effects of farm-income, commodity-price, oil-market, weather and foreign-exchange changes on the segments and liquidity.
- Tax benefits and valuation allowances: foreign deferred tax assets are subject to full valuation allowances in most foreign operations.