Titan International, Inc. — 2019 Q2 Form 10-Q Summary
Business Context and Reporting Period
Titan International is a global manufacturer of off-highway wheels, tires, assemblies, and undercarriage products serving agricultural, earthmoving/construction, and consumer markets. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Financial Performance and Key Metrics
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Net sales | $390.6 million | $428.9 million | $801.0 million | $854.3 million |
| Gross profit | $38.3 million | $58.3 million | $83.6 million | $117.9 million |
| Gross margin | 9.8% | 13.6% | 10.4% | 13.8% |
| Operating income (loss) | $(2.4) million | $19.0 million | $1.7 million | $38.3 million |
| Net income (loss) attributable to Titan | $(6.4) million | $8.4 million | $(4.4) million | $26.1 million |
| Net income (loss) applicable to common shareholders | $(7.1) million | $3.8 million | $(5.9) million | $19.1 million |
| Basic and diluted EPS | $(0.12) | $0.06 | $(0.10) | $0.32 |
Second-quarter sales declined 8.9%, with volume down 4.3%, unfavorable price/mix reducing sales by 0.8%, and unfavorable currency translation reducing sales by 3.8%. Six-month sales declined 6.2%; volume fell 3.9% and currency translation reduced sales by 4.8%, partly offset by favorable price/mix of 2.5%.
SG&A increased 5.3% in Q2 and 4.4% year to date, primarily due to North American information-technology investments and higher legal fees. Interest expense rose to $8.3 million in Q2 and $16.2 million for the six months, reflecting increased borrowings and higher rates. Foreign exchange results improved year to date, producing a $4.5 million gain versus an $8.0 million loss in 2018. Other income declined to $2.1 million in Q2 and $3.1 million year to date, partly because 2018 included a nonrecurring legal settlement.
Segment Results
- Agricultural: Q2 sales declined 12.1% to $164.3 million; operating income declined 77.0% to $4.4 million. Six-month sales fell 6.6% to $356.0 million and operating income fell 54.6% to $18.3 million.
- Earthmoving/construction: Q2 sales declined 7.1% to $184.8 million; operating income declined 50.8% to $5.7 million. Six-month sales fell 6.7% to $361.5 million and operating income fell 47.9% to $11.2 million.
- Consumer: Q2 sales declined 3.6% to $41.5 million; operating income declined 66.4% to $1.2 million. Six-month sales fell 2.5% to $83.4 million and operating income fell 55.9% to $3.3 million.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $66.4 million at June 30, 2019, down $15.3 million from December 31, 2018. Approximately $54.0 million was held outside the United States.
- Operating activities used $10.0 million during the first six months, an improvement from $29.9 million used in 2018. Accounts receivable consumed $27.2 million of cash, partly offset by a $14.3 million inventory reduction.
- Investing activities used $56.5 million, including $16.7 million of capital expenditures and $41.0 million of payments related to the Voltyre-Prom redeemable noncontrolling interest.
- Financing activities provided $50.0 million, including $92.7 million of borrowings and $42.1 million of debt repayments.
- Total debt was $521.2 million at June 30, 2019, consisting primarily of $400.0 million of 6.50% senior secured notes due 2023, $44.1 million of Titan Europe facilities, $41.0 million drawn on the revolving facility, and other debt. Short-term debt was $71.4 million and long-term debt was $445.4 million net of issuance costs.
- The $125 million revolving credit facility had $41.0 million borrowed, a $10.3 million letter of credit, and $57.3 million of availability at quarter-end.
- Total assets were $1.270 billion and total liabilities were $925.9 million. Redeemable noncontrolling interest declined to $55.5 million from $119.8 million at year-end 2018.
Material Changes, Outlook, Risks, and Unusual Items
- Management attributed weaker results to wet weather and delayed North American agricultural planting, trade and tariff uncertainty, lower agricultural aftermarket demand, challenging conditions in Russia and Europe, currency devaluation, lower volumes, and production inefficiencies.
- Management expected agricultural equipment sales to show flat to modest growth of 0% to 5% in most regions during 2019, with continued market uncertainty. Earthmoving/construction demand was expected to remain steady and modestly improve, while consumer markets were expected to show flat to modest growth.
- Management forecast approximately $40 million of capital expenditures for 2019 and approximately $20 million of interest payments during the second half of 2019. It expected cash, operating cash flow, and available borrowings to fund working capital, debt maturities, and capital expenditures.
- Both partners exercised put options relating to Voltyre-Prom. Titan paid OEP $16.0 million during Q2 and, on July 31, 2019, paid an additional $30.7 million to fully settle OEP’s put option. Following the settlement, Titan and RDIF owned 64.3% and 35.7% of Voltyre-Prom, respectively.
- The Company adopted the new lease standard on January 1, 2019, recognizing $24.4 million of operating lease assets and $24.6 million of operating lease liabilities at June 30. Management stated that adoption did not materially affect operating results or liquidity.
- Titan maintained a $6.5 million contingent liability related to an environmental matter involving Titan Tire and Dico. The Eighth Circuit affirmed the underlying order in April 2019; a petition for rehearing remained pending. A $6.0 million supersedeas bond stayed enforcement.
- Other risks include raw-material costs and availability, tariffs, foreign exchange, interest rates, indebtedness and covenant compliance, customer and end-market weakness, product liability and warranty claims, environmental matters, manufacturing disruptions, acquisitions, and information-system and internal-control risks.
Important Facts for Investors to Verify
- Whether agricultural and earthmoving/construction demand improves as projected and whether weather and trade-related disruptions continue.
- Progress in restoring gross margins after lower volumes, higher production costs, elevated-cost inventory, and currency effects.
- Liquidity after the July 31, 2019 OEP payment, ongoing debt maturities, interest payments, capital expenditures, and potential working-capital requirements.
- Compliance with revolving-credit and senior-note covenants, including the minimum fixed-charge coverage requirement if revolver availability falls below the specified threshold.
- The outcome of the environmental litigation and pending rehearing petition, including potential response costs and enforcement of the judgment lien.
- The effect of the Voltyre-Prom settlement, including the pending or completed issuance and repurchase rights relating to RDIF’s restricted Titan shares.