Titan International, Inc. — 2019 First-Quarter Form 10-Q
Business Context and Reporting Period
Titan manufactures off-highway wheels, tires, assemblies, and undercarriage products for agricultural, earthmoving/construction, and consumer markets. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $410.4 million | $425.4 million | Down 3.5% |
| Gross profit | $45.3 million | $59.6 million | Down 24.0% |
| Gross margin | 11.0% | 14.0% | Down 3.0 percentage points |
| Income from operations | $4.1 million | $19.4 million | Down 78.7% |
| Operating margin | 1.0% | 4.6% | Lower |
| Net income | $1.0 million | $16.0 million | Down 93.7% |
| Net income applicable to common shareholders | $1.2 million | $15.3 million | Down 92.2% |
| Basic and diluted EPS | $0.02 | $0.26 | Down $0.24 |
| Net cash used in operating activities | $15.6 million | $35.7 million | Improved by $20.1 million |
Interest expense increased to $7.9 million from $7.5 million. A $5.7 million foreign exchange gain compared with a $4.4 million loss in the prior-year quarter partially offset operating deterioration. Other income fell to $1.0 million from $7.8 million, primarily because the 2018 period included a non-recurring legal settlement.
Segment Performance
- Agricultural: Sales declined 1.3% to $191.7 million; operating income declined 34.7% to $13.9 million. Lower volumes, currency effects, sales incentives, and higher inventory costs pressured margins.
- Earthmoving/construction: Sales declined 6.4% to $176.7 million; operating income declined 44.5% to $5.5 million. Lower volume, production inefficiencies, and currency translation were adverse.
- Consumer: Sales declined 1.4% to $41.9 million; operating income declined 46.3% to $2.1 million. Lower Latin American light-truck sales and currency effects outweighed favorable price/mix.
- Corporate/unallocated: Expenses increased to $17.4 million from $15.8 million, primarily due to information-technology investments and ERP-system upgrades.
Financial Position, Debt, and Liquidity
- Cash and cash equivalents were $68.3 million at March 31, 2019, down from $81.7 million at December 31, 2018; $52.6 million was held outside the United States.
- Accounts receivable increased to $295.3 million and inventories to $412.2 million from $241.8 million and $395.7 million, respectively, at year-end.
- Total debt was approximately $503.8 million of principal, including $400.0 million of 6.50% senior secured notes due 2023. Net carrying value of total debt was $499.1 million.
- Under the $75 million revolving credit facility, borrowings were $25.0 million, letters of credit were $10.3 million, and availability was $39.7 million.
- Operating activities used $15.6 million of cash. Capital expenditures were $9.5 million, and the company paid $25.0 million under the Voltyre-Prom redeemable noncontrolling-interest agreement.
- Financing activities provided $36.7 million, including $52.4 million of borrowings less $15.4 million of debt repayments.
- The cash conversion cycle improved to 108 days from 114 days at December 31, 2018, but remained above the 100 days reported at March 31, 2018.
Material Changes Versus the Prior Comparable Period
- Profitability weakened substantially despite only a 3.5% sales decline. Management attributed the margin contraction to lower volumes in Russia and Europe, currency devaluation, North American sales incentives, and higher production costs from fourth-quarter inventory.
- Price/mix increased sales by 5.8%, but this benefit was offset by an equal unfavorable currency-translation impact.
- SG&A increased 3.7% to $35.9 million, while research and development expense decreased 9.0% to $2.6 million.
- The company adopted the new lease standard on January 1, 2019, recognizing $23.7 million of operating lease assets and a corresponding lease liability; management stated that the adoption did not materially affect operating results or liquidity.
- Redeemable noncontrolling interest decreased to $70.8 million from $119.8 million, reflecting the February 2019 settlement agreement with RDIF and related reclassification.
Guidance, Outlook, Risks, and Unusual Items
- Management expected modest 2019 agricultural-equipment growth of approximately 0% to 5% in most regions, continued improvement in earthmoving/construction demand, and modest consumer-market growth.
- 2019 capital expenditures were forecast at approximately $40 million to $50 million. Interest payments for the final nine months of 2019 were forecast at approximately $30 million.
- Management stated that cash, expected operating cash flow, and available borrowings should provide sufficient liquidity for working capital, debt maturities, and capital expenditures.
- Both Voltyre-Prom shareholders exercised put options. Titan paid RDIF $25 million in cash and agreed, subject to regulatory approval, to issue 4,032,259 restricted shares valued at $25 million. The OEP obligation remained unsettled at March 31, 2019; the filing does not provide a clear final cash or share settlement amount for OEP.
- Titan had accrued a $6.5 million environmental liability. On April 11, 2019, the Eighth Circuit affirmed the related judgment; Titan planned to seek rehearing. A $6.0 million supersedeas bond stayed enforcement pending further proceedings.
- Key risks include agricultural and construction-market cyclicality, commodity prices, tariffs and trade conditions, raw-material costs, currency movements, leverage and covenant compliance, interest rates, warranty and product-liability claims, environmental matters, geopolitical conditions, and manufacturing disruptions.
Important Facts for Investors to Verify
- Whether operating volumes and margins recover after the Q1 pressure from Russia, Europe, production inefficiencies, and North American sales incentives.
- The final settlement terms and timing for OEP’s Voltyre-Prom put option, including any required cash payment or share issuance.
- Availability under the revolving credit facility and compliance with the minimum fixed-charge coverage covenant if availability falls below the specified threshold.
- Progress and outcome of the environmental litigation, including potential response costs beyond the $6.5 million accrued liability.
- Whether the $40 million to $50 million capital-expenditure forecast and expected cash-flow assumptions remain achievable.
- The effect of foreign exchange, tariffs, commodity prices, agricultural equipment demand, and construction/mining demand on sales and gross margins.