Titan International, Inc. — Form 10-Q Summary
Business context and reporting period
Titan manufactures wheels, tires and assemblies for off-highway agricultural, earthmoving/construction and consumer markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $398.8 million | $222.8 million | $1,084.1 million | $648.9 million |
| Gross profit | $53.0 million | $27.9 million | $173.6 million | $87.9 million |
| Gross margin | 13.3% | 12.5% | 16.0% | 13.6% |
| Income from operations | $41.4 million | $12.5 million | $112.7 million | $40.1 million |
| Operating margin | 10.4% | 5.6% | 10.4% | 6.2% |
| Net income | $21.5 million | $4.0 million | $44.0 million | $10.7 million |
| Net income attributable to Titan | $21.2 million | $4.0 million | $43.7 million | $10.7 million |
| Basic diluted EPS | $0.50 / $0.42 | $0.12 / $0.11 | $1.05 / $0.89 | $0.31 / $0.30 |
- Q3 sales increased 79%, gross profit increased 90%, operating income increased 231% and net income increased 436% year over year.
- Nine-month sales increased 67%, gross profit increased 97%, operating income increased 181% and net income increased 313%.
- Segment revenue for Q3 was $246.5 million in agricultural, $81.1 million in earthmoving/construction and $71.3 million in consumer. Nine-month revenue was $713.7 million, $224.5 million and $145.9 million, respectively.
- Nine-month operating cash flow was negative $11.7 million, compared with positive $7.6 million in 2010. Working-capital investment included $132.3 million of additional receivables and $47.4 million of additional inventory, partly offset by a $69.5 million increase in accounts payable.
- Investing cash outflows were $145.1 million, including $99.1 million for acquisitions, $30.0 million for marketable securities and $17.9 million for capital expenditures.
- Cash and cash equivalents declined to $94.3 million at September 30, 2011, from $239.5 million at December 31, 2010. Marketable securities were $28.1 million.
- Total debt was $326.1 million, consisting primarily of $200.0 million of 7.875% senior secured notes, $112.9 million of 5.625% convertible notes and $13.2 million of other debt. Debt due within one year was $8.2 million.
- Titan had no borrowings under its $100 million revolving credit facility, $12.0 million of outstanding letters of credit and $88.0 million of unused availability. The company stated that it was in compliance with applicable covenants.
Material changes versus the prior comparable period
- The April 1, 2011 acquisition of Goodyear’s Latin American farm tire business added the Sao Paulo, Brazil manufacturing facility, licensing rights and supply agreements. The acquired business contributed $93.6 million of Q3 sales, $185.9 million of nine-month sales, $8.3 million of Q3 gross profit and $17.0 million of nine-month gross profit.
- Consumer revenue increased substantially because of Goodyear-related supply agreements. These agreements generated $61.2 million of Q3 sales and $124.5 million of nine-month sales. The related purchase-accounting liability reduced cost of sales by $4.5 million in Q3 and $9.1 million year to date.
- Higher demand, pricing and product mix, including recovery of increased raw-material costs through customer pricing, and improved plant utilization drove the improvement in margins.
- Q3 SG&A declined to $8.5 million from $12.0 million, primarily because CEO special performance award expense decreased by approximately $11 million. Nine-month SG&A increased to $50.4 million from $36.0 million because of higher selling and marketing expenses and acquired operations.
- Nine-month results included a $16.1 million noncash convertible-debt conversion charge related to the exchange of approximately $59.6 million of convertible notes for approximately 6.6 million shares. The charge was not fully deductible for tax purposes and contributed to the 45% nine-month effective tax rate.
- Approximately $1.1 million of 8% senior unsecured notes were discharged in 2011, and approximately $59.6 million of convertible notes were converted, reducing the convertible-note balance from $172.5 million at year-end 2010 to $112.9 million.
- The company amended its 2010 Form 10-K on November 9, 2011. The restatement related to valuation of certain Gen 1 tire inventory and is reflected in the December 31, 2010 balance sheet.
Guidance, outlook, commentary and risks
- Management expected sales to remain at strong levels for the remainder of 2011 and expected continued strong demand in agricultural and earthmoving/construction markets. No specific revenue or earnings guidance range was provided.
- Remaining 2011 capital expenditures were forecast at approximately $4 million to $5 million, and remaining 2011 interest payments were forecast at approximately $1 million.
- Management expected cash on hand, operating cash flows and available borrowing capacity to support working capital, capital expenditures and potential acquisitions.
- Energy, raw-material and petroleum-based costs remained volatile and could pressure margins. Seasonal demand and the company’s fixed-cost structure could also cause quarterly profit fluctuations.
- Labor agreements at the Bryan, Ohio and Freeport, Illinois facilities had expired; employees representing approximately 31% of U.S. employees were working under the company’s latest offer, while unions retained rights to challenge the company’s actions.
- The company disclosed routine litigation that it did not believe would have a material adverse effect, but noted that outcomes and potential losses cannot be predicted with certainty.
- Disclosure controls and procedures were not effective as of September 30, 2011 because of a material weakness related to Gen 1 inventory valuation. Management described a remediation plan involving revised valuation methodology and broader management, accounting, sales and external inputs.
- Other risks include foreign-currency movements, commodity prices, customer and end-market conditions, product liability and warranty claims, environmental and climate-related regulation, labor relations, and covenant compliance.
Important facts for investors to verify
- Verify the impact, final purchase-price allocation and performance sustainability of the Goodyear Latin American acquisition, including goodwill, prepaid royalties and supply-agreement liabilities.
- Assess whether negative operating cash flow and significant receivables and inventory growth normalize as sales and working capital mature.
- Review debt maturities, interest rates, conversion terms, collateral and covenant requirements, particularly the 2017 senior and convertible notes.
- Follow remediation of the Gen 1 inventory valuation material weakness and any subsequent restatements or control deficiencies.
- Monitor labor negotiations at Bryan and Freeport and potential operational or legal consequences.
- Evaluate the durability of reported margins after considering raw-material pricing, plant utilization, supply-agreement accounting benefits and reduced CEO award expense.