Titan Machinery Inc. Reports 2013 Results, Announces Construction Consolidation

Titan Machinery reported financial results for the fiscal fourth quarter and full year ended Jan. 31, 2014 and announced it will be reducing its headcount 11.7 percent, primarily though consolidation of seven construction stores and one agriculture store.

Fiscal 2014 Fourth Quarter Results

For the fourth quarter of fiscal 2014, revenue was $708.6 million, compared to $784.5 million in the fourth quarter last year. Equipment sales were $587.9 million for the fourth quarter of fiscal 2014, compared to $679.0 million in the fourth quarter last year. Parts sales were $61.4 million for the fourth quarter of fiscal 2014, compared to $53.5 million in the fourth quarter last year. Revenue generated from service was $36.6 million for the fourth quarter of fiscal 2014, compared to $34.2 million in the fourth quarter last year. Revenue from rental and other increased to $22.8 million for the fourth quarter of fiscal 2014 from $17.8 million in the fourth quarter last year.

Gross profit for the fourth quarter of fiscal 2014 was $97.0 million, compared to $104.5 million in the fourth quarter last year. The company’s gross profit margin was 13.7 percent in the fourth quarter of fiscal 2014, compared to 13.3 percent in the fourth quarter last year. Gross profit from parts and service for the fourth quarter of fiscal 2014 was 41 percent of overall gross profit and increased to $39.5 million from $35.5 million in the fourth quarter last year. Solid performance from parts and service was offset by lower equipment sales and margins.

Operating expenses were 10.9 percent of revenue or $77.1 million for the fourth quarter of fiscal 2014, compared to 9.2 percent of revenue or $72.2 million for the fourth quarter of last year. The increase in operating expenses as a percentage of revenue reflects higher operating expenses related to expanding the distribution network in the company’s Construction and International footprint as well as negative operating leverage resulting from decreased same-store sales.

In the fourth quarter of fiscal 2014, the company is recognizing a non-cash impairment charge of $10.0 million (or $6.1 million after-tax), primarily related to goodwill and other intangible assets associated with certain of the company’s underperforming dealerships in the Construction and International segments.

Floorplan interest expense increased to $4.8 million for the fourth quarter of 2014 compared to $4.3 million for the same period last year due to increased levels of interest-bearing equipment inventory.

Pre-tax income for the fourth quarter of fiscal 2014 was $2.8 million. Excluding the aforementioned non-cash impairment charge, adjusted pre-tax income for the fourth quarter of fiscal 2014 was $12.8 million, for a pre-tax margin of 1.8 percent. This compares to pre-tax income of $25.8 million, for a pre-tax margin of 3.3 percent, in the fourth quarter last year. Pre-tax Agriculture segment income was $25.1 million for the fourth quarter of fiscal 2014, compared to pre-tax income of $33.7 million in the fourth quarter last year. Adjusted pre-tax Construction segment loss was $8.2 million for the fourth quarter of fiscal 2014, compared to a loss of $5.5 million in the fourth quarter last year. In the fourth quarter of fiscal 2014, adjusted pre-tax International segment loss was $2.3 million, compared to a loss of $0.9 million in the fourth quarter last year.

Net loss attributable to common stockholders for the fourth quarter of fiscal 2014 was $0.4 million, or a loss per diluted share of $0.02. This net loss includes the after-tax impairment charge of $6.1 million and tax valuation allowance on certain deferred tax assets of its International dealerships of $1.7 million. Excluding these non-cash items, totaling $7.8 million (or $0.37 per share), adjusted net income attributable to common stockholders for the fourth quarter of fiscal 2014 was $7.4 million, or $0.35 per diluted share. This compares to net income attributable to common stockholders of $15.4 million, or $0.73 per diluted share, in the fourth quarter last year.

Fiscal 2014 Full Year Results

For the full year ended Jan. 31, 2014, revenue increased 1.3 percent to $2.23 billion from $2.20 billion last year. Gross profit margin for fiscal 2014 was 15.6 percent, compared to 15.4 percent last year. Pre-tax income for the fiscal 2014 was $18.4 million. Excluding the aforementioned non-cash impairment charge of $10.0 million, adjusted pre-tax income was $28.4 million, for a pre-tax margin of 1.3 percent. This compares to pre-tax income of $70.7 million, or a pre-tax margin of 3.2 percent, last year. GAAP net income attributable to common stockholders for fiscal 2014 was $8.7 million, or $0.41 per diluted share. Adjusted net income attributable to common stockholders for fiscal 2014 was $16.5 million, or $0.78 per diluted share. This compares to $42.0 million, or $2.00 per diluted share, last year.

Balance Sheet

The company ended fiscal 2014 with cash of $74.2 million. During the fourth quarter of fiscal 2014, the company’s equipment inventory level was reduced by $102 million, which is in line with expectations stated on the December earnings call. The company’s inventory level was $1.08 billion as of Jan. 31, 2014, compared to $1.18 billion as of Oct. 31, 2013, and $0.93 billion at Jan. 31, 2013. This decrease in inventory since the third quarter of fiscal 2013 reflects reduced levels of new equipment due to the seasonal nature of inventory stocking and end of year sales cycle, as well as the results of management’s efforts to reduce the overall level of equipment inventory. The company had available $410.7 million of its $1.2 billion total discretionary floorplan lines of credit as of Jan. 31, 2014.

First Quarter Fiscal 2015 Construction Segment Realignment and Consolidation

To better align its Construction and rental businesses in certain markets, the company will be reducing its Construction related headcount by approximately 11.7 percent primarily through the consolidation and closing of seven Construction stores in Bozeman, Big Sky and Helena, Mont.; Cheyenne, Wyo.; Clear Lake, Iowa; Flagstaff, Ariz. ; and Rosemount, Minn.. The company is also consolidating one Agriculture store in Oskaloosa, Iowa, into an existing Titan agriculture dealership. The company will also have staff reductions at other dealerships and reductions in support staff at its Shared Resource Center. Overall, the realignment, combined with other staff reductions, will amount to a total of 4.5 percent of the company’s total headcount. The closing and severance costs related to this realignment will be realized in the first quarter of fiscal 2015 and are anticipated to be approximately $4.2 million pre-tax or $0.12 per share. The pro forma benefit to fiscal 2015 earnings per share of this realignment, not including the aforementioned first quarter charge, is estimated to be approximately $0.12 per share.

Management Comments

David Meyer, Titan Machinery’s chairman and chief executive officer, stated, “Our top line results for fiscal 2014 were within our expectations and our adjusted net income and earnings per share exceeded our guidance range. In the fourth quarter, our parts and service business performed well, while our equipment sales and margins continued to experience challenges due to industry headwinds across our segments. We achieved our equipment inventory reduction targets in the fourth quarter, which is an important step in enabling us to improve our cash flow in coming quarters.”

Meyer continued, “We are confident the realignment we are implementing during the first quarter of fiscal 2015 will position our Construction segment for improved pre-tax profits and enable us to better serve our Construction and rental customer base going forward. While we are not satisfied with the recent overall performance of our Construction business, the changes we are making will enhance the overall performance of this segment.

“As we begin fiscal 2015, we continue to believe that our Construction and International segments are important parts of our long-term growth opportunities. We remain focused on managing the controllable aspects of our business, including taking steps to further reduce our inventory levels. We are confident that these improvements, combined with our proven operational strength, will help drive strong cash flow from operations in fiscal 2015 and enable us to navigate macroeconomic conditions and better position our business for future opportunities.”

Fiscal 2015 Outlook

The company evaluates its financial performance based on its customers’ annual production cycles as opposed to a quarterly basis, due to weather fluctuations and the seasonal nature of each customer’s business. For the full year ending Jan. 31, 2015, the company expects revenue to be in the range of $1.95 billion to $2.15 billion. The company expects adjusted net income attributable to common stockholders to be in the range of $14.8 million to $21.1 million, and adjusted earnings per diluted share to be in the range of $0.70 to $1.00 based on estimated weighted average diluted common shares outstanding of 21.1 million.

The company expects GAAP net income attributable to common stockholders to be in the range of $12.2 million to $18.6 million, and GAAP earnings per diluted share to be in the range of $0.58 to $0.88 based on estimated weighted average diluted common shares outstanding of 21.1 million. GAAP net income and earnings per diluted share guidance includes the impact of the $4.2 million pre-tax charge, or $0.12 per diluted share, associated with the company’s realignment that it expects to realized in the first quarter of fiscal 2015.

The company expects to generate Non-GAAP cash flow from operations in the range of $60.0 million to $80.0 million for fiscal 2015. This reflects an improvement of $110.8 million to $130.8 million compared to Non-GAAP cash flow from operations of $(50.8) million in fiscal 2014. The primary driver of the improved cash flow is the company’s anticipated reduction in equipment inventory level of approximately $250 million in fiscal 2015.

About Titan Machinery Inc.

Titan Machinery Inc., founded in 1980 and headquartered in West Fargo, N.D., is a multiunit business with mature locations and newly-acquired locations. The company owns and operates a network of full service agricultural and construction equipment stores in the United States and Europe. The Titan Machinery network consists of 96 North American dealerships in North Dakota, South Dakota, Iowa, Minnesota, Montana, Nebraska, Wyoming, Wisconsin, Colorado, Arizona, and New Mexico, including three outlet stores, and 16 European dealerships in Romania, Bulgaria, Serbia, and Ukraine. The Titan Machinery dealerships represent one or more of the CNH Industrial Brands ( CNHI ), including CaseIH, New Holland Agriculture, Case Construction, New Holland Construction, and CNH Capital. Additional information about Titan Machinery Inc. can be found at www.titanmachinery.com .