Titan International, Inc. — 2017 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Titan manufactures wheels, tires, wheel and tire assemblies, and undercarriage systems for off-highway vehicles in the agricultural, earthmoving/construction, and consumer markets. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $357.5 million | $321.8 million | 11% increase |
| Gross profit | $39.7 million | $28.3 million | 40% increase |
| Gross margin | 11.1% | 8.8% | 230 basis-point expansion |
| Operating loss | $7.1 million | $11.5 million | Improved by $4.5 million |
| Net loss | $10.6 million | $12.3 million | Improved by $1.7 million |
| Net loss attributable to Titan | $11.5 million | $12.7 million | Improved by $1.3 million |
| Loss applicable to common shareholders | $10.5 million | $18.0 million | Improved by $7.4 million |
| Basic and diluted loss per share | $0.18 loss | $0.33 loss | Improved by $0.15 |
| Operating cash flow | $14.5 million use | $2.3 million provided | Declined by $16.9 million |
| Capital expenditures | $8.4 million | $7.1 million | Increased by $1.2 million |
Sales growth reflected a 4% increase in volume, a 4% favorable currency effect, and a 3% favorable price/mix effect. Gross-profit improvement was attributed primarily to Business Improvement Framework initiatives focused on cost reduction and operating efficiency.
- Agricultural: Sales increased 18% to $180.5 million; operating income increased to $12.6 million from $8.2 million.
- Earthmoving/construction: Sales increased 3% to $135.6 million; operating results improved to $0.8 million of income from a $1.0 million loss.
- Consumer: Sales increased approximately 11% to $41.4 million; operating results improved to $1.5 million of income from a $0.9 million loss.
SG&A increased to $41.3 million from $35.1 million, principally because of anti-dumping and countervailing-duty litigation, marketing investments related to LSW development, and non-recurring legal and professional fees. Interest expense declined to $7.7 million from $8.5 million. Foreign-exchange gain was $4.5 million, compared with $4.8 million.
At March 31, 2017, cash and cash equivalents were $131.2 million, certificates of deposit were $50.0 million, and total assets were $1.326 billion. Accounts receivable increased to $232.2 million and inventories to $292.4 million from $179.4 million and $272.2 million, respectively, at December 31, 2016.
Total debt was $456.0 million net of discount, consisting principally of $400.0 million of 6.875% senior secured notes due 2020. Current debt was $46.2 million and long-term debt was $409.7 million. The new $75 million revolving credit facility had no borrowings and $63.4 million of reported availability at quarter-end, subject to borrowing-base limitations and an $11.6 million outstanding letter of credit.
Material Changes Versus the Prior Comparable Period
- Revenue, gross profit, and gross margin improved materially, while the operating and net losses narrowed.
- All three operating segments reported higher sales and improved operating results.
- Operating cash flow turned negative, primarily because of increases in accounts receivable and inventory, partly offset by higher accounts payable.
- Cash declined $16.7 million from year-end 2016 to $131.2 million.
- In January 2017, holders converted 97.1% of the $60.2 million convertible notes due 2017 into 5.46 million common shares. The remaining $1.7 million was paid at maturity. This reduced short-term debt and increased shares outstanding.
- Effective January 1, 2017, Titan changed the inventory method at Titan Wheel Corporation of Illinois from LIFO to FIFO and retrospectively adjusted prior periods. The change increased January 1, 2016 retained earnings by $6.6 million and reduced reported Q1 2016 net income by $3.6 million versus originally reported results.
Guidance, Outlook, Risks, and Unusual Items
Management expects 2017 capital expenditures of approximately $25 million to $30 million and interest payments of approximately $31 million for the remainder of 2017. Pension contributions are expected to be approximately $2.7 million during the remainder of 2017.
Management reported signs of recovery in new agricultural equipment demand and expects agricultural equipment sales to be generally flat in 2017, with replacement and aftermarket demand providing opportunity. Earthmoving/construction demand is expected to improve modestly, while the consumer market is expected to remain highly competitive. Energy, raw material, and petroleum-based input costs were volatile and negatively affected margins.
- The Voltyre-Prom redeemable noncontrolling interest includes a settlement put option exercisable from July through December 2018. The estimated purchase obligation was approximately $117 million at March 31, 2017, payable in cash or common stock under the agreement.
- Warranty liability was $18.2 million at quarter-end. Warranty claims, product liability, and actual experience could differ from estimates.
- Management recorded a $3.4 million income-tax expense despite a pre-tax loss, primarily because valuation allowances prevented recognition of tax benefits in the United States and certain foreign jurisdictions. The effective tax rate was negative 48%.
- The company remains exposed to agricultural, construction, mining, commodity, currency, interest-rate, raw-material, labor, regulatory, geopolitical, environmental, litigation, and indebtedness risks.
- The company stated that routine legal proceedings are not currently expected to have a material adverse effect, but outcomes cannot be predicted with certainty.
- Titan had not completed its evaluation of the future impact or adoption method for ASC 606 revenue recognition, although no material impact was expected for most arrangements.
Investor Verification Items
- Verify whether improved segment profitability and the 11.1% gross margin are sustainable after volatile input costs and increased corporate expenses.
- Monitor working-capital conversion, particularly the sharp increase in receivables and inventories and the $14.5 million operating cash outflow.
- Review refinancing and covenant capacity for the $400 million senior secured notes due in 2020 and the $75 million revolving facility.
- Assess the potential funding, dilution, and valuation effects of the approximately $117 million Voltyre-Prom put obligation in 2018.
- Evaluate the effect of the FIFO inventory-method change when comparing 2017 results with previously reported 2016 periods.
- Track the company’s valuation allowances, tax cash payments, warranty exposure, litigation costs, and anti-dumping or countervailing-duty matters.