By Sonya Colberg
As it struggles to steer around revenue and cash flow icebergs, Titan Machinery Inc. (NASDAQ:TITN) is beginning to look less like a league of strong mythical Greek gods… and more like the “unsinkable” Titanic.
North Dakota-based Titan operates a dealership network focusing on agriculture and construction equipment. The stock has bounced around like a seasick landlubber, with shares rallying from ~$10 per share in early September to the recent $12.33 to $14.40.
That stock rally is despite Titan turning in two quarters of the lowest sales numbers the company has seen in three years.
Indeed, second quarter revenue of $334 million represented a 25.9% year-over-year plunge – the worst revenue drop within the entire industry, according to Thomson Reuters.
The mighty decline – which hit all four revenue segments – resulted in earnings of zero. That $0.00 in earnings caps off eight straight periods of negative earnings.
The recently trumpeted deal with money-losing, 98-cents-per-share Intellinetics is just more evidence of Titan’s desperation.
Here are highlights of the choppy water Titan is trying to navigate:
*Extreme misstated losses, but no amended 10-Q
*Related-party connections potentially draining $100 million-plus from Titan, while benefiting certain insiders.
*Industry’s worst inventory buildup
*Struggles to pay off floor plan debt; lay-offs and store closings likely to continue
*History of providing guidance; revising guidance and then missing numbers significantly
*Low analyst ratings
*Among the industry’s worst performers
The company has not responded to a request for comment but investors may find other viewpoints here. Meanwhile, let’s look more closely at why this is a good time for Titan investors to start looking for lifeboats.
* Losses Misstated: Titan Calls 50% Understatement “Immaterial”
Among all Titan’s reported losses, two instances stand out above all the rest.
First, in April 2014, Titan managers quietly disclosed that the company had released a quarterly report containing drastically inflated assets and understated losses.
Astute investors had to dig up that news – not in a standard amended quarterly report – but in a note near the bottom of a financial report issued five months later in September.
The net loss turned out to be far worse than the stated $4.2 million. The loss was actually $6.5 million.
On a per share basis, the newer filing revealed the loss was actually 31 cents per share, not 20 cents:
The incorrect classification of the VAT asset as a non-monetary asset coupled with the significant devaluation of the UAH resulted in an overstatement of the Company’s assets (Prepaid expenses and other) as of April 30, 2014 and an understatement of the Company’s loss (Interest income and other income (expense)) for the three months ended April 30, 2014. This correction increased the Company’s Net Loss Attributable to Titan Machinery Inc. by$2.3 million (from the previously reported $4.2 million to $6.5 million) and increased the diluted loss per share by $0.11 (from the previously reported $0.20 loss per share to a $0.31 loss per share). This correction is reflected in the accompanying unaudited Consolidated Statements of Operations for the six-month period ended July 31, 2014.
Never mind that investors were treated in June 2014 to a press release containing the wrong loss numbers; apparently propping up the stock price for weeks afterward before falling several bucks to the ~$12-$13 trading range about the time of the financial note disclosure in September.
Titan’s filing actually stated that the misreported losses ultimately 50 percent higher than stated were immaterial, thus unworthy of an amended filing.
*Another Loss; More Rewards For Executives
A second, more recent spectacular loss is noteworthy because of the timing.
On June 9, 2015, Titan reported a quarterly net loss attributable to common stockholders of $-6.2 million:
And Titan reported a yearly loss before income taxes of $-38.3 million:
(Source: SEC filings)
What happened to executives who oversaw these losses? Why, just a few days earlier, filings show officers and directors were awarded a total of more than 87,000 shares of stock.
Here is one example, showing then-president Peter Christianson received an award of 16,160 shares:
(Source: SEC filings)
*President/Cofounder Quietly Exits
June 9 was not only the day Titan reported that $38 million loss. It was also the day of the annual meeting, a meeting punctuated by Mr. Christianson’s formal departure. Surprisingly, he was still referred to as president in proxy statements prior to the meeting.
Investors have to dig into Mr. Christianson’s service agreement to find that the cofounder “elected to resign as President.” Regardless, Mr. Christianson now works as the Chairman of International Operations and will become a Titan consultant in February at his current salary of $500,000 per year.
His resignation precedes that of another director, Theodore Wright, whose September 21 departure was more clearly announced in an 8-K about three months after Mr. Wright received 4,525 shares of Titan stock, apparently for helping the other leaders deliver a loss.
And leadership activity just gets more interesting …
*Related-Party Connections Worth Hundreds of Millions
Company officers and their relatives have benefited for years – and will continue to benefit for years to come if Titan continues to operate – from the company’s construction deals and stock offerings. These deals include:
*C.I. Construction: Let’s consider brothers Peter Christianson – the president-and-director-turned-consultant – and Tony Christianson, a director.
Their brother-in-law owns C.I. Construction, which manages construction for Titan buildings and leasehold improvement projects. C.I. Construction received $16.4 million in total cost reimbursements from 2011 to 2015.
*Cherry Tree & Associates: For the year ended Jan. 31, 2013, Titan paid $0.2 million to Tony Christianson-founded Cherry Tree & Associates primarily for the senior convertible notes offering of 2012 that produced $145 million for Titan operations.
*Dealer Sites: Titan leases many stores – 48 in 2013 – from Dealer Sites, a company linked to CEO David Meyer, and Christianson brothers Peter and Tony.
In just one year, this lucrative deal handed Dealer Sites more than $6 million and the potential through 2028 for $109 million.
The payments to C.I. Farm Power, in which Peter Christianson is controlling stockholder, may pale in comparison but is still interesting. See the snapshot from the SEC filing below.
(Source: SEC filings)
Titan’s deal with Dealer Sites is also fascinating because of a piece of land the property ownership company bought from the city of Sioux City, South Dakota upon which to locate a 250,000-square-foot dealership.
Curiously, Dealer Sites paid $1 for the property for Titan’s use … and apparently folded the resulting dealership into that comfy multi-million-dollar lease payment deal benefiting Dealer Sites guys.
*Layoffs, Store Closings
Just how long the Sioux City dealership – or any other one – will stay open is anybody’s guess.
Leaders have already closed four dealerships this year and laid off 14 percent of the staff at a cost of $2 million.
Last year, Titan fired 12 percent of its employees and closed eight stores at a cost of $3.4 million.
Considering Titan’s condition, we expect continued layoffs and store closings.
* More Bad News Expected
In fact, Titan captains recently told analysts that business probably won’t get any better anytime soon. They said same store sales will hurt the business through fiscal 2016. They expect agriculture same store sales to decline 20% to 25% and a flat to 5% drop in international and construction. Furthermore, they expect more customers will stop trading in their equipment fleets every year.
“You’ll probably go back to customers owning their equipment for two, three years and getting that trade cycle more backlog to a normal situation,” said CEO David Meyer.
Titan has made efforts to stabilize the ship but …
*Inventory: Buildup Dragging Down Titan, Contributes To Over Half-A-Billion In Debt
Titan is struggling with a massive inventory issue, too.
Titan is finding itself parking more and more big, new tractors, caterpillars and other equipment in its warehouses. This inventory is gathering dust right alongside used equipment.
Consequently, Titan is saddled with 228.7 days sales in inventory. With Titan’s equipment sitting around for about two-thirds of a year, Thomson Reuters reports that figure as the industry’s worst.
That massive stash of inventory alone is enough to sink a ship.
Titan has to pay on the debt for this equipment.
The company depends on “floor plan” financing to buy big equipment that its dealers can sell. As such, equipment manufacturers and their subsidiaries buy the equipment and Titan pays on the loan when the equipment is sold.
Now Titan’s debt bill is well over half-a-billion. A staggering $619.6 million.
And in six months, Titan has been able to pay off only 1.2 percent of that debt.
So at the current rate, it would take Titan nearly eight full years to get the debt down to half-a-billion dollars!
Titan has to manage this debt even as its recently amended shrinking credit facility has become more expensive and company revenue deteriorates:
(Source: Titan SEC filings)
*Trading Halted: Downside Guidance, Non-Compliance With Terms Of Debt Facility
As with other issues, Titan can’t seem to get away from the ragged edge when it comes to debt.
The company unveiled its anticipated 4th quarter FY 2015 pre-tax loss of about $37 million and downside guidance in a preliminary results announcement issued March 9, 2015.
That disastrous announcement includes a statement indicating debt covenant noncompliance issues:
“The Company is working with the lenders in its bank syndicate with respect to its expected noncompliance with the current minimum income before income tax covenant as of the end of its January 31, 2015 fiscal year. The Company anticipates amending this covenant associated with this credit facility effective as of the end of its January 31, 2015 fiscal year and for future periods, and therefore does not anticipate being in violation of any covenants as of January 31, 2015.”
Trading of Titan stock was halted with this announcement.
Titan did manage to squeeze out another amendment. In fact, if it weren’t for multiple amendments – with the reductions in available borrowings – we wonder if the company would still be in operation.
Read about recent credit amendments with Wells Fargo and Agricredit here, plus the new Oct. 28, 2015 Wells Fargo amendment.
Interestingly, the credit and trading-halt excitement occurred a few weeks after Equities Research’s extensive work on Titan included this warning about apparently suspicious trading.
*Guidance Updates; Then Misery
The chart below indicates some of Titan’s guidance changes – and the ultimate miss:
(Source: SEC filings here, here, here )
Though Titan repeatedly trumpeted buoyant guidance, the company ultimately failed to deliver millions in net income. Instead, it reported a massive net loss.
Hmmm… Today, Titan leaders say they expect the company will return to non-GAAP profitability this fiscal year.
*Executives Enjoy Lifestyles Of The Rich And Famous
Credit amendments, busted guidance, losses, layoffs, store closings and revenue deterioration aside, executives are enjoying a lifestyle of champagne wishes and caviar dreams.
Indeed, the top trio knock down compensation of $2.5 million.
(Source: SEC filing)
Whenever Mr. Christianson jets off to Europe to check out operations, the company covers part of his spouse’s travel expenses, too. A commercial ticket isn’t even needed because Mr. Christianson can always jump on the company’s private aircraft.
And, while compensation jumped 55 percent, return of equity and revenue turned upside down! See the chart below.
*One Of The Industry’s Worst Performers
Though insiders undoubtedly enjoy Titan benefits, in the eyes of the construction and agricultural machinery industry, the company is one of the worst performers.
The company falls short in key performance metrics ranging from gross margins to management effectiveness.
(Sources: E-trade, Reuters)
*Earnings Misses In 8 Of The Last 9 Quarters
Earnings misses play heavily into Titan’s bad-performance equation. With the exception of last quarter – when zero earnings beat negative consensus – Titan has missed analysts’ expectations each time since September 2013, according to Reuters. The arrows below denote earnings misses.
Indeed, of the dozen announcements since December 2012, the three beats offered no comfort to investors: Dec. 6, 2012 $0.66 beat $0.65 consensus; June 6, 2013 $–0.02 beat consensus by a fraction of a point; Sept. 9, 2015 $0.00 beat $–0.03 consensus.Yet Titan commands a confounding forward price-to-earnings ratio of 39.94.
Titan’s pitiful performance has gone on so long, so consistently, that normally optimistic analysts are beginning to show a loss of faith … as TheStreetSweeper demonstrates below.
*Poor Peer Comparison; Analysts say “Hold”
Analysts have been able to muster only about a “Hold” rating on Titan, indicates Thomson Reuters. All industry peers except one received a “Buy” or “Strong Buy” rating.
Compared with its peers, Titan shares the lowest score of “2” and a “Hold” ranking with Lindsay Corp. (LNN). The fundamental rating of “2” is much more bearish than the industry average of “6.4.”
(Source: Thomson Reuters)
So Titan receives just about the worst ranking of all companies in the entire heavy machinery and vehicles industry.
Titan has commanded a ~$265 million market valuation despite the fact that its business recently created a cash flow of just $171,000. Indeed, the cash in its fraying pocket declined about 25 percent to $95 million in just six months. And those cash concerns merely top off the inventory disaster, executive enrichment, misstated losses and other issues we’ve described for investors.
Titan is vainly trying to bail and still navigate overwhelmingly frigid, treacherous waters. Indeed, we think a very generous near-term valuation for Titan would be $4 per share.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in TITN and stand to profit on any future declines in the stock price.