Titan Machinery(TITN) - 2021 Q4 - Annual Report

Part I Business Titan Machinery Inc. is a full-service agricultural and construction equipment dealer with 109 stores across the United States and Europe, operating through three segments: Agriculture, Construction, and International Our Company Titan Machinery operates a network of 109 full-service agricultural and construction equipment stores (75 in the U.S. and 34 in Europe), serving as the world's largest retail dealer of Case IH Agriculture equipment and a major dealer for other CNH Industrial brands, with growth significantly driven by over 50 dealership acquisitions since 2003 - The company operates 109 stores, with 75 in the U.S. (across states like North Dakota, Minnesota, Iowa, and Nebraska) and 34 in Europe (Bulgaria, Germany, Romania, Serbia, and Ukraine)[12] - Titan Machinery is the largest retail dealer of Case IH Agriculture equipment in the world and one of the largest for Case Construction, New Holland Agriculture, and New Holland Construction in North America[10] - The business is divided into three reportable segments: Agriculture, Construction, and International[11] - Growth has been significantly driven by acquisitions, with over 50 dealerships acquired since January 1, 2003[13] Products and Services The company's revenue is derived from four main sources: equipment sales, parts sales, repair/maintenance services, and equipment rentals, with equipment sales constituting the largest portion of revenue at 72.0% in fiscal 2021, while parts and service provide stable, high-margin revenue streams Revenue Mix (Fiscal Years 2019-2021) | Revenue Source | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Equipment Sales | 72.0% | 70.3% | 72.1% | | Parts Sales | 17.3% | 17.9% | 16.7% | | Service | 7.6% | 7.6% | 6.9% | | Rental & Other | 3.1% | 4.2% | 4.3% | - Equipment sales, both new and used, are the primary revenue driver and create cross-selling opportunities for parts and service[15] - Parts and service revenues are considered relatively stable and less sensitive to economic cycles compared to equipment sales[16][17] Industry Overview The agricultural equipment industry is influenced by factors like net farm income, commodity prices, government policies, and trade policies, while construction equipment demand is driven by public infrastructure spending, energy sector expenditures, agricultural business conditions, and general economic trends in residential and commercial construction - Key demand drivers for agricultural equipment include net farm income, commodity markets, government subsidies, and trade policies. U.S. federal programs like the Farm Bill and CARES Act have provided financial support to customers[21] - Major global manufacturers in the agricultural sector are Deere & Company, CNH Industrial, and Agco Corporation[20] - Demand for construction equipment is driven by public spending on infrastructure, energy industry expenditures, agricultural conditions, and the overall health of the residential and commercial construction sectors[23] Business Strengths and Growth Strategy Titan Machinery's competitive strengths include centralized inventory and marketing management, superior local customer service supported by highly trained technicians, and a proven ability to execute acquisitions, with its growth strategy focusing on increasing same-store sales and pursuing strategic acquisitions - Key business strengths are centralized inventory management, superior local customer service, ability to act on acquisitions, centralized marketing, and an experienced management team[24][25][26][27][30] - The company's growth strategy focuses on increasing same-store sales and market share, and making strategic acquisitions in a fragmented industry[31][32] - Acquisitions require the consent of CNH Industrial and, in some cases, the company's bank syndicate[35] Suppliers and Customers CNH Industrial is the company's primary supplier, providing approximately 72% of new equipment revenue in fiscal 2021, along with parts, financing, and marketing support, while the highly diversified customer base, with no single customer accounting for more than 1.0% of total revenue in fiscal 2021, reduces market risk CNH Industrial's Share of New Equipment Sales (FY 2021) | Segment | CNH Industrial Share | | :--- | :--- | | Agriculture | ~74% | | Construction | ~71% | | International | ~68% | - The CNH Industrial Dealer Agreements for Case IH and Case Construction have fixed terms expiring Dec 31, 2027, with automatic 5-year renewals. The New Holland agreement has a 12-month term with automatic 1-year renewals[42] - The customer base is highly diversified. In fiscal 2021, no single customer accounted for more than 1.0% of total revenue[29][47][50] Human Capital As of January 31, 2021, the company employed 2,249 full-time staff and emphasizes attracting, developing, and retaining talent through competitive compensation, benefits, training programs, and partnerships with technical colleges, with a strong focus on employee engagement and health and safety - As of January 31, 2021, the company had 2,249 full-time employees and 134 part-time employees. None are covered by a collective bargaining agreement[77] - The company focuses on employee recruitment through relationships with trade schools and colleges, and offers competitive compensation and benefits, including a 401k plan and tuition assistance[68][69] - Employee health and safety is a top priority, with safety performance data tracked and reviewed monthly by the executive leadership team[73] Risk Factors The company faces significant risks, primarily its substantial dependence on CNH Industrial for equipment, parts, and financing, alongside market conditions, including fluctuations in net farm income and construction activity, and uncertainties related to the COVID-19 pandemic Risks related to our Reliance on CNH Industrial The company is highly dependent on CNH Industrial, which supplied over 70% of new equipment in its Agriculture and Construction segments in fiscal 2021, extending to floorplan and retail financing, warranty reimbursements, and incentive programs, with potential termination or unfavorable changes to dealer agreements posing significant risks - The company's financial performance is highly dependent on the brand reputation and success of CNH Industrial[84] - CNH Industrial can terminate dealer agreements under certain conditions, which would severely harm the business[85] - CNH Industrial's consent is required for acquisitions of other CNH dealerships and for certain changes in company control, potentially limiting growth and strategic options[89][90] Risks related to Economic and Market Conditions The company's sales are exposed to cyclical market conditions, with agricultural equipment demand tied to volatile net farm income and construction equipment demand influenced by commodity prices, public infrastructure spending, and general economic health, while the highly competitive market presents pricing pressure and potential negative impacts from e-commerce and right-to-repair legislation - Agricultural equipment sales are significantly affected by net farm income, which is subject to external factors like commodity prices, crop yields, and government programs[92] - Construction equipment sales are cyclical and influenced by commodity prices (oil, gas, minerals), public spending on infrastructure, and overall economic conditions[96][97] - The equipment distribution market is highly competitive. E-commerce parts sales and potential right-to-repair legislation could negatively impact parts and service business[99] Financial Risks Effective inventory management is critical, as equipment inventory represents over 50% of total assets, exposing the company to risks from over-supply and volatile used equipment values, while a substantial portion of debt at variable interest rates creates exposure to interest rate fluctuations, and the transition to a new ERP system presents operational risks - Equipment inventory has traditionally represented 50% or more of total assets, making effective inventory management crucial to financial performance[105] - A substantial portion of borrowings are at variable interest rates, exposing the company to interest rate risk. The transition away from LIBOR may also have unpredictable consequences[114][115] - The ongoing implementation of a new Enterprise Resource Planning (ERP) system carries risks of delays, cost overruns, and potential business disruption if not implemented successfully[116] - The business is highly seasonal, causing significant fluctuations in quarterly results and cash flow[117] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[138] Properties As of January 31, 2021, Titan Machinery operated 109 equipment stores across the U.S. and Europe, with 96 facilities leased and 15 owned, including its corporate headquarters in West Fargo, North Dakota Store Count by Segment and Location (as of Jan 31, 2021) | Location | Agriculture | Construction | International | Total | | :--- | :--- | :--- | :--- | :--- | | United States | | | | | | North Dakota | 10 | 5 | — | 15 | | Minnesota | 10 | 3 | — | 13 | | Iowa | 10 | 3 | — | 13 | | Nebraska | 13 | 2 | — | 15 | | South Dakota | 8 | 2 | — | 10 | | Other States | 1 | 8 | — | 9 | | European Countries | | | | | | Bulgaria | — | — | 7 | 7 | | Germany | — | — | 5 | 5 | | Romania | — | — | 12 | 12 | | Ukraine | — | — | 9 | 9 | | Serbia | — | — | 1 | 1 | | Total | 52 | 23 | 34 | 109 | - The company leases 96 store facilities and owns 15 (eleven in the U.S. and four in Germany)[139][141] Legal Proceedings The company is subject to various claims and lawsuits arising in the ordinary course of business, which management believes are generally covered by insurance and will not materially affect its financial condition, results of operations, or cash flow - The company is subject to claims and suits arising in the ordinary course of business, which are generally covered by insurance[143] Mine Safety Disclosures This item is not applicable to the company - Not applicable[144] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq under 'TITN', with approximately 646 record holders as of March 22, 2021, and has not historically paid dividends or repurchased common stock during the fiscal quarter ended January 31, 2021, while a $100 investment in TITN on January 31, 2016, would be worth $250.88 on January 31, 2021 - Common stock is listed on the Nasdaq Stock Market under the symbol 'TITN'[150] - The company has not historically paid dividends on its common stock[151] - No repurchases of common stock were made during the fiscal quarter ended January 31, 2021[153] Cumulative Total Return on $100 Investment | Date (Jan 31) | Titan Machinery Inc. | Russell 2000 Index | S&P 500 Retail Index | | :--- | :--- | :--- | :--- | | 2016 | $100.00 | $100.00 | $100.00 | | 2017 | $97.74 | $116.86 | $135.00 | | 2018 | $152.09 | $135.15 | $194.19 | | 2019 | $132.63 | $129.01 | $203.54 | | 2020 | $86.41 | $138.71 | $243.26 | | 2021 | $250.88 | $204.70 | $295.76 | Selected Financial Data This section presents a five-year summary of the company's audited consolidated financial data for fiscal years 2017 through 2021, showing revenue growth from $1.20 billion in FY2017 to $1.41 billion in FY2021, net income improvement from a loss of $14.2 million to a profit of $19.4 million, and total assets ending at $815.8 million in FY2021, with the store count varying to end at 109 stores Five-Year Selected Financial Data (in thousands, except per share data) | Metric | FY 2021 | FY 2020 | FY 2019 | FY 2018 | FY 2017 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $1,411,222 | $1,305,171 | $1,261,505 | $1,192,606 | $1,201,697 | | Gross Profit | $261,362 | $250,818 | $231,588 | $215,300 | $213,729 | | Income (Loss) from Operations | $37,408 | $21,332 | $27,481 | $925 | $(2,372) | | Net Income (Loss) | $19,356 | $13,953 | $12,182 | $(7,049) | $(14,179) | | Diluted EPS | $0.86 | $0.63 | $0.55 | $(0.32) | $(0.65) | | Total Assets | $815,789 | $975,343 | $792,438 | $760,308 | $771,422 | | Total Stockholders' Equity | $371,281 | $345,104 | $335,311 | $321,855 | $321,179 | Store Count Data (Year-End) | Metric | FY 2021 | FY 2020 | FY 2019 | FY 2018 | FY 2017 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net change in store count | 2 | 3 | 7 | (12) | 1 | | Store count at end of year | 109 | 107 | 104 | 97 | 109 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results for fiscal 2021, highlighting an 8.1% increase in total revenue to $1.41 billion, driven by strong performance in the Agriculture segment, with net income rising to $19.4 million from $14.0 million in the prior year, and strong liquidity with a record $173.0 million in cash from operations Results of Operations (FY2021 vs FY2020) For fiscal 2021 compared to 2020, total revenue increased by 8.1% to $1.41 billion, primarily due to a 10.8% rise in equipment sales driven by the Agriculture segment, while gross profit grew 4.2% to $261.4 million, operating expenses fell by 2.2%, and net income increased to $19.4 million Consolidated Revenue Comparison (FY2021 vs. FY2020) | Revenue Source | FY 2021 (in thousands) | FY 2020 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Equipment | $1,016,071 | $917,202 | 10.8% | | Parts | $244,676 | $234,217 | 4.5% | | Service | $107,229 | $99,165 | 8.1% | | Rental and other | $43,246 | $54,587 | (20.8)% | | Total Revenue | $1,411,222 | $1,305,171 | 8.1% | - Total gross profit increased by 4.2% to $261.4 million, but the overall gross profit margin decreased from 19.2% to 18.5% due to a higher proportion of equipment sales[220] - Operating expenses decreased by 2.2% to $220.8 million, and as a percentage of revenue, fell to 15.6% from 17.3% in the prior year, indicating improved operating leverage[222] - The company-wide absorption rate (the extent to which parts, service, and rental gross profit cover operating expenses) improved to 77.7% in FY2021 from 72.0% in FY2020[221] Segment Results (FY2021 vs FY2020) In fiscal 2021, the Agriculture segment's revenue increased 18.3% to $886.5 million and income before taxes surged 90.9% to $34.4 million, while the Construction segment saw a 4.5% revenue decline but improved its bottom line to a $0.2 million profit, and the International segment's revenue fell 7.2% to $219.0 million, resulting in a $6.0 million loss before taxes Segment Performance (FY2021 vs. FY2020) | Segment | Revenue FY2021 (M) | Revenue FY2020 (M) | % Change | Income (Loss) Before Taxes FY2021 (M) | Income (Loss) Before Taxes FY2020 (M) | | :--- | :--- | :--- | :--- | :--- | :--- | | Agriculture | $886.5 | $749.0 | 18.3% | $34.4 | $18.0 | | Construction | $305.7 | $320.0 | (4.5)% | $0.2 | $(2.3) | | International | $219.0 | $236.1 | (7.2)% | $(6.0) | $0.5 | - The Agriculture segment's strong performance was driven by a 14.4% increase in same-store sales and contributions from acquisitions[228] - The International segment's loss was primarily due to impairment charges of $2.3 million related to the Germany reporting unit and challenging market conditions[233] Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted Net Income, Adjusted Diluted EPS, and Adjusted EBITDA to provide a clearer view of ordinary business performance, with Adjusted Net Income at $28.2 million ($1.26 per diluted share) in fiscal 2021 and Adjusted EBITDA increasing to $65.4 million Reconciliation of Net Income to Adjusted EBITDA (in thousands) | | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Net Income | $19,356 | $13,953 | | Interest expense, net | $3,574 | $4,121 | | Provision for income taxes | $11,397 | $699 | | Depreciation and amortization | $23,701 | $28,067 | | EBITDA | $58,028 | $46,840 | | ERP transition costs | $2,990 | $2,497 | | Impairment charges | $3,180 | $3,764 | | Ukraine remeasurement (gain) / loss | $1,174 | $(616) | | Adjusted EBITDA | $65,372 | $52,485 | Reconciliation of GAAP to Adjusted Diluted EPS | | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Diluted EPS (GAAP) | $0.86 | $0.63 | | Total Adjustments | $0.40 | $0.21 | | Adjusted Diluted EPS (Non-GAAP) | $1.26 | $0.84 | Liquidity and Capital Resources The company's liquidity is strong, with primary sources being cash reserves, operating cash flow, and credit facilities totaling $773.0 million, and net cash from operations reaching a record $173.0 million in fiscal 2021, significantly increasing the equity in equipment inventory to 52.1% - Net cash provided by operating activities was a record $173.0 million in fiscal 2021, compared to $1.0 million in fiscal 2020[253] - Equity in equipment inventory (the portion not financed by floorplan payables) increased to 52.1% as of Jan 31, 2021, up from 27.9% a year prior, due to strong cash generation being applied against interest-bearing floorplan payables[246][258] - As of January 31, 2021, the company had total floorplan payable lines of credit of $773.0 million and was in compliance with all financial covenants[244][400] Contractual Obligations Summary (as of Jan 31, 2021) | Obligation Type | Total (in thousands) | Less Than 1 Year | 1 to 3 Years | 3 to 5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt obligations | $77,772 | $17,255 | $15,961 | $16,591 | $27,965 | | Operating lease | $105,518 | $16,521 | $29,757 | $25,987 | $33,253 | | Purchase obligations | $13,760 | $4,163 | $6,667 | $2,930 | — | | Total | $197,050 | $37,939 | $52,385 | $45,508 | $61,218 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from changes in interest rates and foreign currency exchange rates, with a hypothetical one percentage point increase in interest rates decreasing pre-tax earnings by approximately $0.6 million, and foreign currency risk from European operations managed through derivative financial instruments - A one percentage point increase in interest rates would decrease pre-tax earnings and cash flow by approximately $0.6 million over a 12-month period[273] - As of January 31, 2021, $63.0 million of the $161.8 million in floorplan payables was interest-bearing at variable rates[273] - The company is exposed to foreign currency risk from its operations in Europe. It uses derivative financial instruments, such as forward contracts, to manage transactional risk[274] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal years ended January 31, 2021, 2020, and 2019, with Deloitte & Touche LLP issuing an unqualified opinion on both the financial statements and internal control over financial reporting, identifying the valuation of used equipment inventories as a critical audit matter Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on Titan Machinery's consolidated financial statements for the three years ended January 31, 2021, and on the effectiveness of the company's internal control over financial reporting, identifying the valuation of used equipment inventories as a critical audit matter - The auditor, Deloitte & Touche LLP, issued an unqualified (clean) opinion on the financial statements and internal controls[282][293] - The critical audit matter identified was the valuation of used equipment inventories, which required a high degree of auditor judgment to evaluate[286][287] Consolidated Financial Statements The consolidated financial statements present the company's financial position and performance, with total assets at $815.8 million as of January 31, 2021, down from $975.3 million in 2020 primarily due to reduced inventories and floorplan payables, while total stockholders' equity increased to $371.3 million, and fiscal 2021 revenue was $1.41 billion with $19.4 million in net income Consolidated Balance Sheet Highlights (in thousands) | | Jan 31, 2021 | Jan 31, 2020 | | :--- | :--- | :--- | | Total Assets | $815,789 | $975,343 | | Cash | $78,990 | $43,721 | | Inventories | $418,458 | $597,394 | | Total Liabilities | $444,508 | $630,239 | | Floorplan payable | $161,835 | $371,772 | | Total Stockholders' Equity | $371,281 | $345,104 | Consolidated Statement of Operations Highlights (in thousands) | | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Total Revenue | $1,411,222 | $1,305,171 | $1,261,505 | | Gross Profit | $261,362 | $250,818 | $231,588 | | Income from Operations | $37,408 | $21,332 | $27,481 | | Net Income | $19,356 | $13,953 | $12,182 | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial figures, including revenue disaggregation, inventory composition, debt and floorplan facilities, lease obligations, and earnings per share calculation, highlighting the acquisition of HorizonWest Inc. and impairment charges totaling $3.2 million in fiscal 2021 - In FY2021, the company acquired HorizonWest Inc., a CaseIH dealership complex with three stores, for $6.8 million in cash[470] - The company recognized impairment charges of $1.5 million on goodwill and $0.9 million on distribution rights for its Germany reporting unit in fiscal 2021 due to lowered performance expectations[393][396] - As of Jan 31, 2021, the company had $773.0 million in total floorplan lines of credit, with facilities from CNH Industrial ($450M), a Bank Syndicate ($185M), and DLL Finance ($60M)[400] - In fiscal 2021, the company recorded a $3.8 million valuation allowance against deferred tax assets in its Ukraine and Germany businesses[446] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports that there have been no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - None[498] Controls and Procedures Based on an evaluation as of January 31, 2021, the company's Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective, and management also concluded that the company's internal control over financial reporting was effective, with no material changes reported in the last fiscal quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures are effective as of January 31, 2021[499] - Management concluded that internal control over financial reporting was effective as of January 31, 2021, based on the COSO framework[500] Other Information The company reports no other information for this item - None[503] Part III Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders, with executive officer information provided in Part I of this Form 10-K - Information required by this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[505] Executive Compensation Information regarding executive compensation, including the Compensation Discussion and Analysis and compensation tables, is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[506] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of principal stockholders and management, as well as details on equity compensation plans, is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[507] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[508] Principal Accounting Fees and Services Information regarding the fees paid to and services provided by the independent registered public accounting firm is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Stockholders[509] Part IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Form 10-K, including the financial statements, the financial statement schedule (Schedule II—Valuation and Qualifying Accounts and Reserves), and an index of all exhibits filed with the report - This section lists all financial statements, financial statement schedules, and exhibits filed with the Form 10-K[511] - Financial Statement Schedule II—Valuation and Qualifying Accounts and Reserves is included and should be read in conjunction with the financial statements[511] Form 10-K Summary This item is not applicable to the company's filing - Not applicable[518]