Titan International, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing was dated March 3, 2020. Although the request references 2019 Q4, this is an annual Form 10-K; fourth-quarter information is included in unaudited supplemental data.
Business context
Titan manufactures wheels, tires, wheel-and-tire assemblies, and undercarriage systems for off-highway equipment. Its reportable segments are agricultural, earthmoving/construction, and consumer. Titan operates globally, with approximately 6,200 employees and 54% of 2019 net sales generated outside the United States.
In 2019, Titan increased its ownership of Voltyre-Prom in Russia from 42.9% to 64.3%. The company serves OEM and aftermarket customers, including Deere, AGCO, Caterpillar, CNH, Kubota, and Volvo.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $1.449 billion | $1.602 billion | Down 9.6% |
| Gross profit | $129.0 million | $198.3 million | Down 34.9% |
| Gross margin | 8.9% | 12.4% | Down 350 basis points |
| Operating income (loss) | $(28.4) million | $42.2 million | Declined $70.7 million |
| Operating margin | (2.0)% | 2.6% | Down 460 basis points |
| Net income (loss) | $(51.5) million | $13.0 million | Turned to a loss |
| Net loss attributable to Titan | $(48.4) million | $16.1 million | Turned to a loss |
| Basic and diluted EPS | $(0.84) | $0.06 | Declined $0.90 |
| Cash flow from operations | $45.4 million | $(36.2) million | Improved $81.6 million |
| Capital expenditures | $36.4 million | $39.0 million | Down $2.6 million |
| Cash and cash equivalents | $66.8 million | $81.7 million | Down $14.9 million |
| Total debt, net of issuance costs | $504.6 million | $461.5 million | Increased $43.1 million |
| Total equity | $239.0 million | $270.1 million | Down $31.1 million |
Segment performance
| Segment | 2019 sales | Sales change | 2019 operating income (loss) | 2018 operating income |
|---|---|---|---|---|
| Agricultural | $652.6 million | Down 6.0% | $11.0 million | $62.1 million |
| Earthmoving/construction | $648.8 million | Down 12.5% | $(1.9) million | $31.1 million |
| Consumer | $147.4 million | Down 11.4% | $1.8 million | $12.0 million |
Material changes versus the prior period
- Sales declined in all segments. Management attributed the decline to lower volumes, global trade issues, agricultural weakness, adverse weather, tightening construction markets, and unfavorable currency translation.
- Overall volume decreased approximately 10.0%, while unfavorable currency translation reduced sales by approximately 3.4%; favorable price/mix contributed approximately 3.8%.
- Gross margin contracted because of lower volumes, production inefficiencies, and higher material costs. North American wheel operations incurred approximately $15 million of adverse cost impact versus 2018, including elevated steel inventory costs.
- SG&A increased 2.2% to $137.7 million, primarily because of technology and enterprise resource planning costs. Titan also incurred approximately $2.7 million related to a postponed public listing of its ITM undercarriage subsidiary.
- Interest expense increased to $33.1 million from $30.5 million because of higher borrowings and borrowing rates.
- Foreign exchange results improved from an $11.2 million loss in 2018 to a $4.0 million gain in 2019.
- Operating cash flow improved materially as inventories declined $63.7 million and accounts receivable declined $56.8 million, partially offset by a $53.2 million decrease in accounts payable.
- Investing cash flow included $71.7 million of payments related to redeemable noncontrolling interests and $19.0 million of proceeds from the sale of Wheels India shares.
- Titan paid approximately $71.7 million to settle Voltyre-Prom put-option obligations, including $25.0 million paid to RDIF and $46.7 million paid to OEP. At year-end, $25.0 million remained recorded as redeemable noncontrolling interest related to shares to be issued to RDIF, subject to regulatory approval.
Debt, liquidity, and cash flow
Total debt was approximately $508.6 million of principal at December 31, 2019, including $400.0 million of 6.50% senior secured notes due 2023, $43.6 million of Titan Europe facilities, $36.0 million drawn under the revolving credit facility, and other debt and capital leases. Net debt carrying value was approximately $504.6 million.
Titan had $66.8 million of cash, including $60.6 million held outside the United States. Under its $125 million revolving credit facility, $36.0 million was drawn, an $11.5 million letter of credit was outstanding, and reported availability was $30.8 million based on eligible receivables and inventory.
Contractual obligations totaled approximately $699.1 million, including $400.0 million of senior notes due in 2023, $108.6 million of other debt and capital leases, $107.0 million of estimated interest, $28.5 million of operating leases, $22.7 million of purchase obligations, and $32.2 million of other long-term liabilities.
Management forecast approximately $35 million of 2020 capital expenditures and approximately $30 million of 2020 interest payments. Management stated that cash, expected operating cash flow, available borrowings, and potential non-core asset sales were expected to provide liquidity for working capital, debt maturities, capital expenditures, and potential acquisitions.
Outlook, commentary, risks, and unusual items
- Management expected North American and European agricultural markets to remain soft in 2020, with modest growth in Russia and Latin America. North American agricultural OEM sales were expected to be generally flat.
- Management anticipated modest declines in small and medium earthmoving/construction equipment, generally flat mining demand, and modest consumer-market growth.
- Principal risks include cyclical end markets, customer concentration, commodity price volatility, limited suppliers, tariffs and trade disputes, foreign currency movements, interest rates, debt covenants, competition, labor relations, product liability and warranty claims, environmental liabilities, cybersecurity and ERP-system disruptions, and international political and economic uncertainty.
- The ten largest customers represented 38% of 2019 sales; Deere represented 11%. No other customer represented at least 10% of sales.
- The company had a $6.5 million accrued environmental liability related to CERCLA litigation. An appellate court affirmed the judgment in 2019, and settlement discussions were ongoing; Titan also maintained a $6.0 million supersedeas bond.
- Warranty liability was $14.3 million at year-end 2019, compared with $16.3 million in 2018; 2019 warranty expense was $5.0 million.
- Management reported effective disclosure controls and effective internal control over financial reporting. Grant Thornton issued unqualified opinions on the financial statements and internal controls.
- After year-end, Titan completed additional sales of Wheels India shares and received approximately $6.9 million of net proceeds on February 25, 2020, which were used to reduce indebtedness.
- The company adopted the new lease standard in 2019, recognizing operating lease assets and liabilities; management stated that adoption did not materially affect operating results or liquidity.
Investor verification priorities
- Verify the company’s ability to restore gross margins and operating profitability after the 2019 volume, steel-cost, and production-efficiency pressures.
- Review 2020 demand trends in agricultural and earthmoving/construction markets, particularly OEM volumes and undercarriage demand.
- Confirm compliance with revolving-credit and senior-note covenants, available borrowing capacity, and the 2023 senior-note maturity.
- Assess whether working-capital reductions are sustainable or primarily a one-time source of operating cash flow.
- Track the remaining RDIF redeemable noncontrolling interest and the regulatory status of the contemplated restricted-share issuance.
- Monitor the CERCLA environmental judgment, settlement discussions, judgment lien, and potential additional remediation costs.
- Evaluate exposure to steel, rubber, tariffs, foreign exchange, and customer concentration.
- Confirm the effect of the COVID-19 outbreak and other subsequent events on demand, supply chains, manufacturing operations, and liquidity; the filing only identifies the coronavirus as an international-operation risk as of its filing date.