Wednesday, December 11, 2013

Reseller Can't Compete with Manufacturers

The business model of Titan Machinery (NASDAQ: TITN) can't be compared to John Deere (NYSE: DE) , CNH Inc (NYSE: CNH) or Caterpillar (NYSE: CAT).
DE,CNH and Cat are manufacturers with their own financing arms, while TITN is nothing more than a reseller. The space is under pressure and competition is fierce which is squeezing margins, more so on a reseller who is at a major disadvantage against behemoth manufacturers.

Titan's bigger problem is that their management has signed ridiculously high lease contracts with outside entities that they personally have interest in (over $100million). Just in the past 12 months alone they increased these contracts from $50 million to over $100million.) Top execs make money with these outside entities even if titan doesn't do well.

The top two execs have each increased their annual salaries by 48% this year.

All the new construction TITN has been spending money on is bleeding the company and is only profiting the top exec's brother-in-law who owns the construction company doing the building.

Tthe high debt is another obstacle. Its hard enough to earn a profit, paying nearly $6 million annually in interest, "just" on the Convertible Note alone is a major drain on the stockholders (profits).

If you read the new Q3 10Q you'll see some last minute (desperate type) debt restructuring (extensions) they created.
check out:
NOTE 9.
Item 2.
Item 5.
Exhibit 10.1
Exhibit 10.2

On the inventory front, the tractors building up in inventory are depreciating assets (and with the new technologies, GPS, Fuel friendly machines etc ) and favorable terms being offered by manufacturers to buy new equipment, the used equipment is becoming obsolete.

Just look at the statement of cash flow and you'll see the results of a poor business model.



NOTE 6 -      DERIVATIVE INSTRUMENTS
 
The Company holds derivative instruments for the purpose of minimizing exposure to fluctuations in foreign currency exchange rates to which the Company is exposed in the normal course of its operations.
 
Cash Flow Hedges
 
On October 9, 2013, the Company entered into a forward-starting interest rate swap instrument which has a notional amount of $100.0 million dollars, an effective date of September 30, 2014 and a maturity date of September 30, 2018. The objective of the instrument is to, beginning on September 30, 2014, protect the Company from changes in benchmark interest rates to which the Company is exposed through certain of its variable interest rate credit facilities. The instrument provides for a fixed interest rate of 1.901% up to the maturity date.
 
The instrument has been designated as a cash flow hedging instrument and accordingly changes in the effective portion of the fair value of the instrument are recorded in other comprehensive income and only reclassified into earnings in the period in which the related hedged item affects earnings or the anticipated underlying hedged transactions are no longer probable of occurring. Any hedge ineffectiveness is recognized in earnings immediately.
 
Net Investment Hedges
 
To protect the value of the Company’s investments in its foreign operations against adverse changes in foreign currency exchange rates, the Company may, from time to time, hedge a portion of its net investment in one or more of its foreign subsidiaries. Gains and losses on derivative instruments that are designated and effective as a net investment hedge are
 
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included in other comprehensive income and only reclassified into earnings in the period during which the hedged net investment is sold or liquidated. Any hedge ineffectiveness is recognized in earnings immediately.
 
The notional amount of outstanding foreign currency forward contracts designated as net investment hedges was approximately $23.4 million as of October 31, 2013. There were no foreign currency forward contracts designated as net investment hedges outstanding as of January 31, 2013.





NOTE 9 -      SUBSEQUENT EVENTS
 
In November 2013, the Company modified its credit facility with Wells Fargo to increase its working capital line of credit from $75.0 million to $112.5 million, decrease its floorplan line of credit from $375.0 million to $350.0 million, extend the expiration date of the agreement from March 30, 2016 to August 31, 2018, and adjust certain financial covenants. Other terms of the agreement did not materially change.
 
The Company plans to close two Construction stores prior to January 31, 2014. The store in Big Sky, Montana and one of the stores in Billings, Montana will be merged with the Company’s nearby Construction stores. The Company expects the primary cost of closing these locations to be estimated lease termination costs, and will record a liability for the net present value of any remaining lease obligations, net of estimated sublease income, at the date we cease using the property, in accordance with Accounting Standards Codification 420, Exit or Disposal Cost Obligations . We expect the accrual of these costs to be approximately $0.5 million.
 
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Page 30
We do not distinguish relocated or newly-expanded stores in this same-store analysis. Closed stores are excluded from the same-store analysis. Stores that do not meet the criteria for same-store classification are described as acquisition stores throughout the Results of Operations section in this Quarterly Report on Form 10-Q.

The increase in revenue for the third quarter of fiscal 2014, as compared to the same period last year, was due to acquisitions contributing $32.2 million, offset by a decrease in same-store sales of $26.4 million. This decrease in same-store sales reflected a 4.5% decrease over the prior year period and was primarily driven by lower equipment revenue.



Based upon balances and interest rates as of October 31, 2013, holding other variables constant, a one percentage point increase in interest rates for the next 12-month period would decrease pre-tax earnings and cash flow by approximately $5.5 million



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ITEM 2.                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
On September 6, 2013, the Company issued 22,321 shares of its common stock in exchange for the purchase of 20% ownership interest in Titan Machinery Romania SRL and Titan Machinery Austria GmbH. We believe that this transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof and Regulation S promulgated thereunder, based on the limited number of offerees in such offering and certain representations and warranties made by such offeree in the transaction.
 
ITEM 5.                OTHER INFORMATION
 
Effective October 31, 2013, the Company entered into an amended and restated wholesale financing plan with Agricredit Acceptance LLC, which increased the size of the floorplan credit facility by $75.0 million, from $150.0 million to $225.0 million. Other terms of the agreement did not materially change.
 
Effective November 14, 2013, the Company entered into a Second Amendment to its amended and restated credit agreement, dated March 30, 2012, by and among the Company, Wells Fargo Bank, National Association, and the other lenders party thereto. The amendment increased the aggregate working capital commitments by $37.5 million to $112.5 million, extended the maturity dates of the working capital line of credit and floorplan line of credit from March 30, 2016 to August 31, 2018, and changed certain financial covenants.
 


Exhibit 10.1
 
AMENDED AND RESTATED WHOLESALE FINANCING PLAN
Agricredit Acceptance LLC
8001 Birchwood Court | PO Box 2000 | Johnston, IA 50131-0020
PH: 800 873 2474 FAX: 515-334-5862
www.agricredit.com
 
Debtor Name:
Titan Machinery, Inc.
(the “Debtor”)
 
 
Date of this Wholesale Financing Plan:
October 31, 2013
 
 
Address of Principal Place of Business and Chief Executive Office:
644 East Beaton Drive
West Fargo, ND 58078-2648
 
 
Additional approved locations where the Collateral will be kept and stored:
See Exhibit A to the Amended and Restated Inventory Security Agreement






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