Titan International, Inc. — FY2011 Form 10-K Summary
Business context and reporting period
Titan manufactures wheels, tires and wheel/tire assemblies for agricultural, earthmoving/construction and consumer markets. This Form 10-K covers the fiscal year ended December 31, 2011; quarterly information is unaudited. Titan acquired Goodyear’s Latin American farm tire business on April 1, 2011, including a Sao Paulo, Brazil manufacturing facility, a seven-year Goodyear trademark license and related supply agreements.
2011 sales mix was 64% agricultural, 21% earthmoving/construction and 15% consumer. The acquired Latin American operations generated approximately $276.5 million of 2011 sales and represented approximately 19% of consolidated sales.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $1,487.0 million | $881.6 million | +69% |
| Gross profit | $232.1 million | $104.1 million | +123% |
| Gross margin | 15.6% | 11.8% | +3.8 percentage points |
| Income from operations | $132.2 million | $30.9 million | +327% |
| Operating margin | 8.8% | 3.5% | +5.3 percentage points |
| Net income attributable to Titan | $58.2 million | $(5.9) million | Improved |
| Diluted EPS | $1.18 | $(0.17) | Improved |
| Cash flow from operations | $4.4 million | $50.7 million | Down $46.3 million |
| Capital expenditures | $35.7 million | $28.9 million | +24% |
Net sales benefited from stronger demand, price increases and mix improvements, including recovery of higher steel and rubber costs through customer pricing. Higher volumes improved plant utilization and margins. SG&A increased 49% to $85.9 million but declined to 5.8% of sales from 6.5%. Interest expense was $25.3 million, compared with $26.7 million in 2010. The effective tax rate was approximately 39.4%.
Liquidity, balance sheet and debt
- Cash and cash equivalents were $129.2 million at December 31, 2011, down from $239.5 million.
- Working capital was $388.8 million, compared with $389.0 million in 2010.
- Total assets increased to $1.010 billion from $780.9 million, largely reflecting the Brazil acquisition and higher receivables and inventories.
- Total debt was approximately $329.6 million, including $200.0 million of 7.875% senior secured notes due 2017, $112.9 million of 5.625% convertible senior subordinated notes due 2017 and $16.7 million of other debt. Long-term debt reported on the balance sheet was $317.9 million.
- The $100 million revolving credit facility had no borrowings and $88.0 million of unused availability at year-end, after $12.0 million of outstanding letters of credit.
- 2011 operating cash flow was constrained by a $105.6 million increase in accounts receivable and a $55.6 million increase in inventories. Investing cash outflows were $130.8 million, including $99.1 million for acquisitions and $35.7 million for capital expenditures.
- Management forecast approximately $50 million of 2012 capital expenditures, approximately $24 million of 2012 interest payments and approximately $7 million of pension contributions.
Material changes versus the prior comparable period
- Agricultural sales increased 42% to $960.7 million; operating income increased 72% to $158.3 million.
- Earthmoving/construction sales increased 61% to $306.8 million, and the segment moved from a $11.3 million operating loss to $32.8 million of operating income.
- Consumer sales increased to $219.5 million from $15.4 million, primarily due to the acquired Latin American business and supply agreements.
- The company recognized a $16.1 million noncash charge when approximately $59.6 million of convertible notes were exchanged for approximately 6.6 million common shares.
- The acquisition added $19.8 million of goodwill at year-end after foreign-currency translation; management’s qualitative impairment review did not require a quantitative impairment test.
- Debt declined from $373.6 million at year-end 2010. Titan discharged the remaining $1.1 million of 8% senior unsecured notes due January 2012 and borrowed $25.9 million through Brazil-related term and revolving facilities.
- Accounts receivable increased to $189.5 million from $89.0 million and inventories increased to $190.9 million from $118.1 million.
- The previously reported material weakness related to Gen 1 inventory accounting was remediated, and management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2011.
Guidance, outlook, risks and unusual items
Management expects overall 2012 sales to remain at strong levels and expects strong demand in the agricultural and earthmoving/construction markets. January 31, 2012 firm order backlog was estimated at $542 million, compared with $227 million a year earlier. Backlog is expected to be substantially filled during 2012.
- Commodity exposure is significant: Titan generally has no long-term steel or rubber purchase contracts and does not use commodity derivatives. Price increases may not fully offset cost inflation or may lag cost changes.
- The business is cyclical and seasonal, with agriculture, construction, mining and consumer demand affected by economic conditions, commodity prices, crop prices, weather, interest rates, foreign exchange and government policies.
- The ten largest customers represented approximately 55% of 2011 sales. Deere represented 18% and CNH Global 11%; loss or reduced purchases by a major OEM could materially affect results.
- Approximately 34% of employees were covered by collective bargaining agreements. Agreements at the Des Moines and Brazil facilities were scheduled to expire in 2012, while employees at Bryan and Freeport were working without renewed contracts under the company’s latest offer.
- The defined benefit pension plans were underfunded by approximately $42.9 million at year-end, with a projected benefit obligation of $112.0 million and plan assets of $69.1 million.
- The company has routine litigation, environmental obligations, product warranty exposure and risks related to foreign operations, currency movements, information technology, climate regulation and competition. Management did not believe pending legal proceedings were materially adverse, but future outcomes remain uncertain.
- 2011 results included the $16.1 million noncash convertible-debt conversion charge, acquisition-related costs of approximately $1.3 million, a $3.1 million discount amortization benefit from prepaid royalties and a $1.6 million investment gain.
Important facts for investors to verify
- Whether strong demand, pricing and the $542 million backlog persist after accounting for cyclical and seasonal patterns.
- Whether cash conversion improves as receivables and inventories normalize; 2011 earnings were strong but operating cash flow was only $4.4 million.
- The sustainability and margin contribution of the acquired Brazil operations and the related below-market supply agreements.
- Compliance with debt covenants and the timing of $329.6 million of debt maturities, including the 2017 senior secured and convertible notes.
- Exposure to steel, rubber, energy and petroleum-based costs, and Titan’s ability to pass future increases to customers.
- Potential labor disruptions or settlement costs at facilities with expired or soon-to-expire collective bargaining agreements.
- Future pension funding requirements, warranty claims and any impairment risk affecting the $19.8 million goodwill balance.