Under Armour Q1 Operational Cash Flow declines 100%

$UA Q1operational cash flow declined from Negative $74 mil to Negative $147 million. 100% decline. TTM OP CF is $50 mil. trading @ 200 X C/F
— tom renna (@GFNNstock) April 24, 2014

Apple Beats Earnings Estimates, Announces Stock Split

Titan Machinery's Inventory Reduction Guidance will Lower Future Sales Significantly

Creditors Forcing Titan To Switch Gears

report by Michael Markowski, www.OnlinefinancialSector.com

When Titan Machinery released its fiscal 2014 year end results on April 10, 2014, it forecasted or provided guidance for its operating cash flow.  Titan stated that it was going to generate $60 million to $80 million in positive non GAAP operating cash flow for its current fiscal year ending January 31, 2015.  It further stated that the method that it would utilize for the Company to generate positive operating cash flow in a fiscal year for the first time in at least six years was its liquidation or its reduction of its equipment inventories by $250 million.  Under Titan’s inventories reduction guidance total inventories would decline from $1.08 billion as of January 31, 2014 to $758 million by January 31, 2015. 

We are highly confident that the decision by Titan’s management to reduce its inventories to $758 million will result in a decline in the Company’s revenue and profits for fiscal 2016 as compared to fiscal 2015.  Fiscal 2016, would be the second consecutive year that Titan’s revenues decline.  Titan, based on its own guidance that it has already given, will depart fiscal 2015 by reporting its first annual revenue decline since it’s been a public company. 

Those who are invested in Titan’s shares are having a great time at the grand party that started as soon as its management concluded their conference call.  During the call, which included a 23 page presentation, Titan’s management provided details and highlights for its fiscal 2014 earnings report.  It also provided guidance for fiscal 2015. 

Every great party always ends with a hangover.  As Titan moves through fiscal 2015, the analysts making of and publishing their projections for its next fiscal year (2016) beginning on February 1, 2015, will become increasingly paramount.   As the analysts and Titan’s institutional investors begin to do their homework we have no doubt that they will come to the same conclusion that we have come to.  Doubts as to whether or not Titan can continue to be a growth company or even meet its EPS projections for 2015 will begin to surface.  During 2013, Titan’s management lowered it EPS guidance for its 2014 fiscal year three consecutive times.  . 

Titan Machinery’s EPS Guidance for Fiscal Year (FY) January 31, 2014

Date of Guidance EPS Estimate FY 2014 Final EPS  FY 2014 04/10/13 $2.00-$2.30 $0.78 05/23/13 $1.70-$2.00 $0.78 09/05/13 $1.20-$1.50 $0.78 12/05/13 $0.55-$0.75 $0.78

There was one highlight at the bottom of page 19 of the presentation which Titan’s management provided to analysts and investors on April 10, 2014 that raised our eyebrows.  It was that the company had “$410.7 Million Available on $1.2 Billion Floorplan lines of Credit”.  On November 14, 2013, Titan’s Credit Agreement with Wells Fargo had been amended.  Under the amended terms and conditions Titan’s Net Leverage Ratio (Total Liabilities/Tangible Equity) was permitted to be a maximum of 3.5 for any fiscal period on or after January 31, 2014.  

According to the Balance Sheet data which Titan published in its April 10^th press release its Total Liabilities were $1.15 billion on January 31, 2014.  Titan’s permitted Total Liabilities under the Credit Agreement that was amended on November 14, 2013 was $1.31 billion.  The maximum net amount that Titan could have increased its Total Liabilities by as of January 31^st was $160 million and not the $410.7 million that the company claimed was available via its unused portion of its Floorplan lines of Credit.  The difference between the two amounts is $250.7 million.  

On April 3, 2014, which was one week before Titan announced its earnings, the company’s Credit Agreement with Wells Fargo was again amended.  Under the new terms the Company’s Consolidated Net Leverage Ratio was decreased from 3.5 to 3.25 by October 31, 2014 and to 3.0 by January 31, 2015.  The Total Liabilities permitted under the amended terms was $1.22 billion for fiscal quarters ending July and October 31^st and $1.12 billion on January 31^st.  This assumes no change in Titan’s tangible book value.  In its guidance Titan indicated that the company would take a $4.2 million pre-tax charge associated with the company’s realignment that it expects to be realized in the first quarter of fiscal 2015.  This charge could lower Titan’s tangible book value and reduce it permitted Total Liabilities. 

Based on the recently amended Wells Fargo Credit Agreement, Titan’s Total Liabilities for its fiscal quarters ending on July 31, 2014 and October 31, 2014, can only increase by $70 million as compared to what its Total Liabilities were on January 31, 2014.  By January 31, 2015, Titan’s Total Liabilities will have to decline by $30 million as compared to January 31, 2014 for the company to remain under its ratio of 3.0.  The unused portion ($410.7 million) of its Floorplan line of credit will be un-utilizable.

Obviously, the decision that management made to reduce its inventories for the purpose of Titan to begin to generate positive operating cash flow was based on necessity.   However, Titan’s management overreacted in their including a $250 million reduction of inventories by January 31, 2015, in their guidance for Fiscal 2015.  Titan’s management did not do their homework.  They have not seriously considered the ramifications or repercussions from their reducing inventories by 25%. 

There are two issues that Titan’s management should have considered before they calculated the amount of that they were reducing their inventories by for their fiscal 2015 guidance.  If these issues had been considered we believe that they would have made the decision to reduce Titan Machinery’s Inventories by an amount that was much less than $250 million.   

The first issue that they did not address is that there is a strong historical correlation between Titan’s revenue and its Inventories growth rates.  The table below illustrates and compares the growth rates of Titan’s inventories and revenue for its fiscal years 2010 through 2014.  The decline in the growth rate of its inventories for 2014 to 8.5% from 24.2% resulted in a sharp decline in its revenue growth rate to 1.3% from 32.5%.  

Growth Rates for Titan Machinery’s Inventory and Revenue for Fiscal Years 2010 through 2014

Fiscal Year Inventories Growth Rate Revenue Growth Rate 2014 08.5% 01.3% 2013 24.2% 32.5% 2012 74.0% 52.3% 2011 23.5% 20.4% 2010 44.4% 21.4%

The second issue that Titan’s management failed to consider is the company’s historical Revenue/Inventories ratio.  The table below further illustrates the relationship or ratio between Titan’s revenue and its inventories.  The ratio or multiple of Revenue that Titan has generated has ranged between 2.06 and 2.53 times its inventories since 2010. 

Titan Machinery’s Revenue/Inventories Ratios, Fiscal Years 2010 through 2014

Fiscal Year Revenue Inventories Rev/Inv Ratio 2014 2.23B 1.08B 2.06 2013 2.20B 929M 2.37 2012 1.66B 748M 2.22 2011 1.09B 430M 2.53 2010 838M 348M 2.41

Titan has forecasted that it will reduce its inventories from $1.08 billion to $758 million by January 31, 2015.  It’s the one and only forecast in Titan’s guidance that will be easy for them to achieve.

Since Titan’s $250 million reduction in its Inventories is all but guaranteed it’s much easier for even a novice to project future revenue for the company.  Projecting the minimum and maximum ranges of future annual revenue for Titan is as simple as multiplying the projected amount of inventories by the company’s lowest and highest revenue/inventories ratios over its prior five years.  With the reduction in Titan’s inventories we are projecting its revenue range for fiscal 2016 to be $1.56 billion at the low end and $1.91 billion at the high end.  Our top end number for 2016 is below Titan’s low end revenue number of $1.95 billion for fiscal 2015. 

Titan’s management in providing guidance on its operating cash flows and reduction in inventories has painted itself into a corner.  Its due to them not considering the downside regarding the reduction of inventories by 25% in fiscal 2015 as compared to fiscal 2014.  Its extremely difficult for any company to make the argument that they can continue to increase revenue while significantly decreasing inventories.  We have no doubt that savvy investors and analysts will confront Titan’s management with the same mathematical argument that we are making.  Titan’s severe inventory reductions will result in its generating significantly lower revenue and EPS for both its 2015 and 2016 fiscal years.       

As soon as the stock market starts to price in or discount the increasing probability that Titan Machinery will have lower revenue in fiscal 2016 as compared to fiscal 2015, its share price will begin to head lower and go to a single digit price to earnings (PE) multiple or ratio.  Either actual or projected consecutive annual revenue declines will relegate Titan Machinery to being a cyclical tractor dealership play.  Based on Titan’s minimum non GAAP earning per share projection of $.70 and maximum of $1.00, and its history of guiding forecasts down during prior fiscal years we are projecting that its share price will be trading below $10 by the end of 2014.

10K FootNote: Wells Fargo Tightens Debt Agreement (again) on Titan Machinery

Friday morning Titan Machinery filed with the Securities & Exchange Commission its annual report (10K) for Fiscal year 2014 for the period ending January 31,2014.

•  FY 2014 Net Income declined 79% from $42 million in FY 2013 to $8.8 million for FY 2014.

• Titan's cash position declined to $74 million from $125 million in FY 2013.
  (Total Liabilities are over $1.1 billion)
  

 In the Footnote Exhibit 10.53 terms of Titan Machinery's $150 million convertible note with Wells Fargo is disclosed with Amendments that were made on April 3,2014.

 (Note Titan's 1st Quarter of FY 2015 ends in less than 3 weeks. Thursday April 10th announced that they would be closing 7 construction sore and 1 agriculture location and the company will be taking a $4.2 million pre-tax charge, or $0.12 per diluted share, associated with the Company’s realignment that it expects to be realized in the first quarter of fiscal 2015.)

  

10 K EX 10.53: THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT

dated as of April 3, 2014

1.1.6    Effective as of the Third Amendment Effective Date, Section 6.12(a) of the Credit Agreement is hereby deleted in its entirety and the following is substituted therefor:

(a)    Consolidated Net Leverage Ratio. Borrower shall maintain, (a) as at the end of each Fiscal Period ending April 30, 2014 through the Fiscal Period ending October 31, 2014, a Consolidated Net Leverage Ratio not greater than 3.25 : 1.00, and (b) as at the end of each Fiscal Period from and after the Fiscal Period ending January 31, 2015, a Consolidated Net Leverage Ratio not greater than 3.00 : 1.00.

1.1.7    Section 6.12(b) of the Credit Agreement is hereby deleted in its entirety and the following is substituted therefor:

(b)    Consolidated Fixed Charge Coverage Ratio. Borrower shall maintain, as at the end of each Fiscal Period, a Consolidated Fixed Charge Coverage Ratio not less than 1.25 : 1.00.

1.1.8    The following is hereby inserted in the Credit Agreement as Section 6.12(c):

(c)    Consolidated Net Income. Borrower shall maintain, (a) as at the end of each Fiscal Period ending January 31, 2014 through the Fiscal Period ending October 31, 2014, for the period consisting of the four consecutive Fiscal Periods ending on such date, a Consolidated Net Income of not less than $5,000,000.00, and (b) as at the end of each Fiscal Period from and after the Fiscal Period ending January 31, 2015, for the period consisting of the four consecutive Fiscal Periods ending on such date, a Consolidated Net Income of not less than $10,000,000.00. For purposes of this Section 6.12(c) only, (a) for all Fiscal Periods through the Fiscal Period ending October 31, 2014, the One-Time Impairment Charge (net of the tax benefit to the extent already included in the determination of Consolidated Net Income) shall be excluded from the calculation of Consolidated Net Income, and (b) for all Fiscal Periods through the Fiscal Period ending October 31, 2014 for that portion of the One-Time Restructuring Charge incurred in the Fiscal Period ending January 31, 2014, and through the Fiscal Period January 31, 2015 for that portion of the One-Time Restructuring Charge incurred in the Fiscal Period ending April 30, 2014, the One-Time Restructuring Charge (net of the tax benefit to the extent already included in the determination of Consolidated Net Income) shall be excluded from the calculation of Consolidated Net Income.

3rd Quarter 10Q Footnote 10.2 Wells Fargo

SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT

dated as of November 14, 2013

1.1.5       Effective as of October 31, 2013, Sections 6.12(a) and (b) of the Credit Agreement are hereby deleted in their entirety and the following are substituted therefor:

(a)           Consolidated Net Leverage Ratio.  Borrower shall maintain, (a) as at the end of the Fiscal Period ending October 31, 2013, a Consolidated Net Leverage Ratio not greater than 3.75 : 1.00, (b) as at the end of each Fiscal Period beginning with the Fiscal Period ending January 31, 2014 through the Fiscal Period ending October 31, 2014, a Consolidated Net Leverage Ratio not greater than 3.50 : 1.00, (c) as at the end of the Fiscal Period ending January 31, 2015, a Consolidated Net Leverage Ratio not greater than 3.25 : 1.00, and (d) as at the end of each Fiscal Period from and after the Fiscal Period ending April 30, 2015, a Consolidated Net Leverage Ratio not greater than 3.00 : 1.00.

(b)           Consolidated Fixed Charge Coverage Ratio.  Borrower shall maintain, (a) as at the end of each Fiscal Period beginning with the Fiscal Period ending October 31, 2013 through the Fiscal Period ending January 31, 2014, a Consolidated Fixed Charge Coverage Ratio not less than 1.15 : 1.00, (b) as at the end of each Fiscal Period beginning with the Fiscal Period ending April 30, 2014 through the Fiscal Period ending October 31, 2014, a Consolidated Fixed Charge Coverage Ratio not less than 1.20 : 1.00, and (c) as at the end of each Fiscal Period from and after the Fiscal Period ending January 31, 2015, a Consolidated Fixed Charge Coverage Ratio not less than 1.25 : 1.00.

FY 2012 10K Footnote 10.43 Original Convertible Indenture

FY 2012 10K Footnote 10.44 Convertible Indenture

• SECTION 6.12                            FINANCIAL COVENANTS.
  
  
  (a)           Consolidated Net Leverage Ratio.  Borrower shall maintain, (a) as at the end of each Fiscal Period beginning with the Fiscal Period ending January 31, 2012 through the Fiscal Period ending January 31, 2014, a Consolidated Net Leverage Ratio not greater than 3.00 : 1.00, and (b) as at the end of each Fiscal Period from and after the Fiscal Period ending April 30, 2014, a Consolidated Net Leverage Ratio not greater than 2.50 : 1.00.
  
  
  (b)           Consolidated Fixed Charge Coverage Ratio.  Borrower shall maintain, as at the end of each Fiscal Period ending after the Closing Date, a Consolidated Fixed Charge Coverage Ratio not less than 1.25 : 1.00 for the then trailing twelve month period.
  
  ******definitions from original indenture:
  
  
  

  “Consolidated Fixed Charge Coverage Ratio” means, as of the last day of a fiscal quarter, for the period consisting of the four consecutive Fiscal Periods ending on such date, subject to Section 1.02(h), the ratio of:  (a) the sum for such period of (without duplication):  (i) Consolidated EBITDAR; minus (ii) all payments in cash for taxes related to income made by Borrower and its Subsidiaries; minus (iii) Capital Expenditures actually made in cash by Borrower and its Subsidiaries (net of any insurance proceeds, condemnation awards or proceeds relating to any financing with respect to such expenditures); minus (iv) Restricted Payments paid in cash by Borrower; to (b) of:  (i) Consolidated Interest Expense; plus (ii) Consolidated Rent Expense; plus (iii) without duplication, all current maturities of long-term Debt (including with respect to Debt that is a capital lease).

  
  

  “Consolidated Interest Expense” means, for any period, for Borrower and its Subsidiaries on a consolidated basis, the sum of (without duplication):  (a) all interest, premium payments, debt discount, fees, charges and related expenses in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets during such period; plus (b) all payments made under interest rate Swap Contracts during such period to the extent not included in clause (a) of this definition; minus (c) all payments received under interest rate Swap Contracts during such period; plus (d) the portion of rent expense with respect to such period under capital leases that is treated as interest in accordance with GAAP.

  
  

  “Consolidated Leverage Ratio” means, as of any date of determination, the ratio of:  (a)  Consolidated Total Liabilities; to (b) Consolidated Tangible Net Worth.

  
  

  “Consolidated Net Income” means for any period, the sum of net income (or loss) for such period of the Borrower and its Subsidiaries on a consolidated basis determined in accordance with GAAP, but excluding any income of any Person if such Person is not a Subsidiary, except that the Borrower’s direct or indirect equity in the net income of any such person for such period shall be included in such Consolidated Net Income in accordance with GAAP.

  
  

  “Consolidated Net Leverage Ratio” means, as of any date of determination, the ratio of:  (a) the sum of (i) Consolidated Total Liabilities, minus (ii) the amount by which Cash Equivalents held by Borrower and its Subsidiaries as of such date of determination exceed $30,000,000; to (b) Consolidated Tangible Net Worth.

  
  

  “Consolidated Rent Expense” means for such period, total rental expenses attributable to operating leases of the Borrower and its Subsidiaries for real property on a consolidated basis.

Click to Wells Fargo $150 million Indenture disclosure with SEC  "The effective interest rate of the liability component for the period ended January 31,2013 was equal to 7.00%"

Date of Offering : April 18,2012 

Amount of Debt: $150 million Convertible

Warning: Don't Buy Titan Machinery Guidance

Warning: Don't Buy Titan Machinery Guidance

Titan Machinery has a history of making aggressive guidance and under delivering.  

Titan Machinery's guidance yesterday was laughable. Yesterday Titan Machinery shares went flying higher after the company announced they missed revenue guidance for the Q4 FY2014 quarter by 10%. It was just 8 weeks ago in December 2013 when the company lowered their 4th quarter guidance with only 8 weeks before the quarter ended and they still missed by a wide margin.  

 Titan has proven time and time again that their visibility is weak when they've given guidance in the past looking only 8 weeks out. Making a Bold Prediction 52 weeks out that they will generate $60million to $80 million is reckless. (Note the company will have 8 less locations in FY 2015 to accomplish this)

The guidance on sales and EPS for Fiscal year 2015 both have tight ranges, but the operational cash flow range is $20 million!!!! (that's $130 million improvement vs. FY2014 for a comapny that just reported negative operational cash flow 5 consecutive years.)That's Hype! 

* Excluding non-cash items, totaling $7.8 million (or $0.37 per share), adjusted net income attributable to common stockholders for fiscal 2014 was $0.41 per diluted share.

Last April 2013 the company made the following guidance:

• Income forecast of $2 to $2.30 per share. It reiterated its revenue forecast of $2.35 billion to $2.55 billion.

The Next month, May 2013 guidance was changed: 

•  The company now anticipates earning $1.70 to $2 per share, down from its prior forecast of $2 to $2.30 per share. It reiterated its revenue forecast of $2.35 billion to $2.55 billion. "  

The Next Month, June 2013, guidance:

•   For the full year ending January 31, 2014, the Company anticipates revenue in the range of $2.35 billion to $2.55 billion, net income attributable to common stockholders in the range of $36.4 million to $42.8 million, and earnings per diluted share in the range of $1.70 to $2.00

• For the full year ending January 31, 2014, the Company now expects revenue to be in the range of $2.25 billion to $2.45 billion compared to the previous range of $2.35 billion to $2.55 billion. The Company expects net income attributable to common stockholders to be in the range of $25.4 million to $31.8 million, and earnings per diluted share to be in the range of $1.20 to $1.50 based on estimated weighted average diluted common shares outstanding of 21.2 million, primarily reflecting the lower expected equipment margins. This compares to previous net income attributable to common stockholders guidance in the range of $36.4 million to $42.8 million, and earnings per diluted share in the range of $1.70 to $2.00 based on estimated weighted average diluted common shares outstanding of 21.4 million. 

December 2013 the following guidance

• The Company is adjusting its annual guidance based on increased visibility of market conditions. For the full year ending January 31, 2014, the Company now expects revenue to be in the range of $2.15 billion to $2.35 billion compared to the previous range of $2.25 billion to $2.45 billion. The Company expects net income attributable to common stockholders to be in the range of $11.6 million to $15.8 million, and earnings per diluted share to be in the range of $0.55 to $0.75 based on estimated weighted average diluted common shares outstanding of 21.1 million, primarily reflecting the lower expected equipment sales and margins. This compares to previous net income attributable to common stockholders guidance in the range of $25.4 million to $31.8 million, and earnings per diluted share in the range of $1.20 to $1.50 based on estimated weighted average diluted common shares outstanding of 21.2 million.

The Actual Results for FY2014 that the above guidance refered to 

 In June 2012: After giving a $2.55-$2.75 range guidance company reported $2.00 EPS for year ending January 31,2013. Instead of earning $53.8million to $58  million for year the company only reported $42million. But Management's Mission was accomplished by getting stock up to $30 so they could sell shares @ $30.

• The underwriter Cherry Tree (owned by director Tony Christianson, the brother of CEO, was compensated for the $150 million indenture offering in April of 2012. In June 2012 TITAN gave the following guidance in a press release:   

 7/13/2011

  INSIDER SELLING:

On June 9,2011 Chairman David Meyer appeared on Jim Cramer's MAD MONEY  and touted TITAN MACHINERY's future. 30 days later DAVID MEYER SOLD 300,000 shares @ $27.80 and received proceeds of $8,340.00.00 and CEO Peter Christianson sold 200,000 shares $27.80 for proceeds of $5.56 million.

  INSIDER SELLING:

On June 9,2011 Chairman David Meyer appeared on Jim Cramer's MAD MONEY  and touted TITAN MACHINERY's future. 30 days later DAVID MEYER SOLD 300,000 shares @ $27.80 and received proceeds of $8,340.00.00 and CEO Peter Christianson sold 200,000 shares $27.80 for proceeds of $5.56 million.

  INSIDER SELLING:On June 9,2011 Chairman David Meyer appeared on Jim Cramer's MAD MONEY  and touted TITAN MACHINERY's future. 30 days later DAVID MEYER SOLD 300,000 shares @ $27.80 and received proceeds of $8,340.00.00 and CEO Peter Christianson sold 200,000 shares $27.80 for proceeds of $5.56 million. 

TITAN Guides Operational Cash Flow of $60 million to $80 million for Fiscal Year 2015 is HYPE

How do Experts at generating negative cash flow, all of a sudden make such a statement? 

Titan Machinery yesterday announced Negative Operational Cash Flow for the 5th consecutive year. Over the past 5 years the company has generated a total of $431,000,000 in NEGATIVE Operational Cash Flow.  When the company announced yesterday that they were guiding for FISCAL Year 2015 Operational Cash Flow of Positive $60 million to $80 million, $3 to $4.00 per share in OPS, I couldn't believe they said it!!! 

September 2013 they made the following Guidance: 

•Fiscal 2014 Full Year Results 

For the full year ended January 31, 2014, revenue increased 1.3% to $2.23 billion from $2.20 billion last year. Gross profit margin for fiscal 2014 was 15.6%, compared to 15.4% 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%. This compares to pre-tax income of $70.7 million, or a pre-tax margin of 3.2%, 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. 

• "Net income attributable to common stockholders is expected to be in the range of $53.8 million to $58.0 million, resulting in earnings per diluted share range of $2.55 to $2.75". In July 2012 director Tony Christianson and director Irwin James both sold shares of TITAN (TITN) in the market place above $30 per share. 

 7/13/2011

  INSIDER SELLING:

On June 9,2011 Chairman David Meyer appeared on Jim Cramer's MAD MONEY  and touted TITAN MACHINERY's future. 30 days later DAVID MEYER SOLD 300,000 shares @ $27.80 and received proceeds of $8,340.00.00 and CEO Peter Christianson sold 200,000 shares $27.80 for proceeds of $5.56 million. 

Equities Research Bearish Report On Titan Machinery

Equities Research Remains Bearish on Titan Machinery.

Click here for Full Report

A Review of Securities & Exchange Commission's Comments regarding Titan Machinery Disclosure

• On April 10,2013, Titan Machinery Inc (NASDAQ: TITN) filed its Fiscal 2013 year end financials (10K) for the 12 month period ending January 31,2013 with the SEC. 
• On April 25,2013, Titan Machinery Inc filed its Proxy Statement for its Annual Shareholder meeting (DEF 14A) with the SEC.

This Thursday, April 10th, before the market opens, Titan will disclose Fiscal Year 2014 financials for the 12 month period ending January 31,2014.

Securities & Exchange Commission Division of Corporate Finance Comments December 9,2013

•  Titan Machinery Inc.
  Form 10-K for the Fiscal Year Ended January
  31, 2013 Filed April 10, 2013
  Definitive Proxy Statement on Schedule 14A
  Filed April 24, 2013
  File No. 001-33866
  
  
  Titan Machinery Responds to SEC Comments December 20,2013

  ◦ Filed with SEC 

  •  

  •  Securities & Exchange Commission Review of Comments on December 30,2013 

  
  

  Auditors

  •  Securities & Exchange Commission Comment Letter to Titan Machinery Regarding Dismissal of Auditor on July 8,2013

  • SEC response to amended 8-K regarding Auditor change 

  
  

  
  

  Prior to the 4th of July holiday (market closing), on July 2,2013 @ 16:56:12 est., Titan Machinery filed an 8-K with Securities & Exchange Commission announcing the dismissal of their auditor Eide Bailly LLP and replacing them with Deloitte & Touche LLP.

  The 8-K stated the dismissal took place on June 27,2013 but the disclosure wasn't made till July 2,2013. 

  The unusual volume on the morning of June 28,2013 looks like somebody saw this 8-K coming in my opinion.  

  
  

  
  

  
  

  This Thursday's 10-K will be 1st audit done by new auditor Deloitte & Touche LLP.

  
  

 Equities Research:
 It will be interesting to see if the new auditor allows the company to recognize revenue in Fiscal 2014 in this same manner as Fiscal 2013: (from Fiscal 2013 10K):
 " However, in certain circumstances, and upon the customer's written request, equipment revenue is recognized before delivery occurs"


I was very critical of the financials disclosed by in both filings and analyzed both documents in my blog post : "The Most Overpriced Stock in the Market Files Proxy Statement".
                                         My reports raised many red flags :

•  Following key words are what caught my eye, especially since these hats are worn by 4 or 5 execs:
  3 Brothers, A Son, A Brother-In-Law, COO, Chairman, Founder, Commission, Managing Director of Underwriter, Owner of Construction Company, Unsecured loans, LEASE Arrangements with Top 3 Execs outside Entities, Real Estate Sale between TITN and Top two Execs Outside Entity, Private Jet, Consulting fees, underwriting fees....(oh yeah, the time Chairman went on Mad Money and then sold shares ) 
•  
•  A. 10 K Highlights of Weak Fundamentals
  B. Roddy Boyd / Herb Greenberg Recognizes my Work
  C.Certain Related Party Transactions
  D.Insider Selling after Making Hyped Up Projections (missed by a mile)
  E.Increase Of Authorized Shares
  F.CNH AMERICA Floor Debt Plan
  G.Property sold to Entity owned by Top 2 Execs.without disclosure
  H.Property Ownership Company owned by Top 2 Execs outside entity.
  I.Brother-in-law Construction Company building multi-million dollars worth of buildings.
  J.OLD INVENTORY list (108 page document), not sure how if its obsolete yet.
  K.History of Negative Operational Cash Flow
  L.Private Jet
  M.$150 million convertible note disclosure. (using best scenario vs. worse scenario in disclosure)
  N.Immediate Family Members: commissions, raises, fees, consulting agreements
  O.Cash Advance Business offering loans to Bad Credit/No Credit borrowers
  P.Variable Interest on Debt
  Q.Interest Expense
  R.disclosure of former CFO, now Treasurer)
  S.Auditor's History
  T. CEO & chairman both increased salaries 48% in cash 

On Titan's last conference call in December 2013 the company lowered their year end guidance: 
For fiscal 2014 revenue range of $2.15billion to $2.35 billion and expect annual net income in the range of $11.6million to$15.8million.  Fiscal Year 2013 net income was $42 million. That is a 65% decline year over year decline. Note with shares trading at $15, the PE ratio is nearly 30.


Complaint 

"Its the Achilles heel of a long that produces a short".

If I'm right (most conviction in 25yrs in biz) being long puts $TITN will make investors biggest return of lifetime http://t.co/psn0YG4pwY

— tom renna (@GFNNstock) April 5, 2014

Top #Short Pick of a Lifetime #bear $titn Equities Research: "The Achilles heel of a long that produces a short... http://t.co/JlpONrkvf3

— tom renna (@GFNNstock) April 5, 2014

In my 25 years analyzing stocks I have never had more conviction in the direction of a Stock as I do in my bearish call on Titan Machinery (NASDAQ: TITN).  A year ago in my February 2013 monthly newsletter my subscribers were given Titan as my top short pick when shares were trading near $30 a share.

Over the past 14 months, while the market has rallied to all time highs the shares of Titan have declined 50%.

Titan Machinery will report Fiscal 2014 year end financials on Thursday, April 10th in the pre-market.

Although shares are difficult to borrow for a short sale, traders can make a bearish bet by getting long puts.

I have written extensively on the stock over the past 14 months and recently Michael Markowski, the founder of OnlineFinancialSector.com has also written reports.

Below are comments both Michael and I have made in the Seekingalpha comment section of an article Mike published this week regarding Titan Machinery.

• Thomas Renna
    This is no joking matter, be careful on long side. Here's a warning from last April when shares were in $30 neighborhood.
  
  
  http://bit.ly/15Mr0rE
  
  
  This is beyond a macro-view (Agriculture/Construct... its not simply about the space (sector) , you need to analyze management too.
  
  
  Note that the Management that put this company in the mess is still there  

•  It will be interesting to see if the new auditor allows the company to recognize revenue in Fiscal 2014 in this same manner as Fiscal 2013: (from Fiscal 2013 10K):
  " However, in certain circumstances, and upon the customer's written request, equipment revenue is recognized before delivery occurs" 

•  Markowski Comments:
•  Titan according to its 10/31/13 Balance sheet has $1.17 Billion in inventory and it has a tangible book value of $362 million. If it had to mark its inventory down by 10% it would result in $117 million in losses and its book value would also fall by $117 million or by approximately 30% to $245 million.
  
  
  The problem is that Titan's inventory consists of new and used tractors and they depreciate with each passing day. If Titan had to mark its inventory down by 30% to raise cash it could potentially wipe out practically all of the company's entire tangible book value. 
•  However, there is no such thing as a "perfect long". Its because its impossible for anyone including a company's management team to foresee the negative things that can affect a company. No company is immune to this.
  
  
  On the other hand a perfect short is much easier to predict due to the perils that not even the predictor would see for a company. Its the achilles heel of a long that produces a short.
  
  
  I am an eternal optimist and a long term investor. However, being long defies the law of gravity. Everything that goes up eventually comes down due to changes in consumer habits and technology. Blockbuster and Radio Shack are good examples. Being short coincides with the law of gravity.
•  Agriculture and seasonality has nothing to do with Titan Machinery's chronic negative cash flow. Titan has not had a single year of positive operating cash flow over its past five years. Almost a year ago the price of corn was a 100% higher. Titan still generated negative annualized operating cash flow.
  
  
  Titan's problem is that its increasing its sales or revenue is totally dependent on its ability to get access to an ever increasing supply of capital. At some point a company reaches the point at which they can not sell any more shares or increase their credit lines. I believe that Titan has reached that point and that is why its become a perfect short. 
•  Just remember that the credit worthiness of both an individual and a business goes down as the debt grows and accounts for a higher percentage of the total enterpise value (market cap plus all debt). The cost of credit increases and at some point there is no additional credit available. You don't want to be buying dips when that happens.

"Its the Achilles heel of a long that produces a short"

...Michael Markowski, founder of OnlineFinancialSector.com