Titan International, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018; filed August 2, 2018. Titan manufactures wheels, tires, wheel-and-tire assemblies, and undercarriage systems for agricultural, earthmoving/construction, and consumer markets.
Financial performance and condition
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $428.9 million | $364.4 million | $854.3 million | $721.9 million |
| Gross profit | $58.3 million | $44.0 million | $117.9 million | $84.2 million |
| Gross margin | 13.6% | 12.1% | 13.8% | 11.7% |
| Income from operations | $16.2 million | $4.4 million | $34.3 million | $(2.2) million |
| Net income | $5.7 million | $(6.5) million | $20.4 million | $(17.1) million |
| Net income attributable to Titan | $5.7 million | $(6.3) million | $22.1 million | $(17.7) million |
| EPS, basic and diluted | $0.02 | $(0.17) | $0.25 | $(0.35) |
- Q2 sales increased 17.7%; six-month sales increased 18.3%. Growth reflected higher volumes across all segments, favorable price/mix, and improved market conditions, particularly in earthmoving/construction.
- Operating margin was approximately 3.8% in Q2 and 4.0% for the first half, compared with approximately 1.2% and negative 0.3%, respectively, in the prior-year periods.
- Earthmoving/construction sales rose 31.8% in Q2 and 35.3% for the first half; segment operating income increased to $11.6 million and $21.5 million, respectively.
- Agricultural sales increased 8.1% in Q2 and 7.8% for the first half. Consumer sales increased approximately 6.3% and 4.5%, respectively.
- Foreign exchange losses were $3.6 million in Q2 and $8.0 million for the first half, primarily reflecting Latin American currency devaluation.
- Cash and cash equivalents were $106.5 million at June 30, 2018, down $37.1 million from December 31, 2017. Operating activities used $29.9 million, investing activities used $17.5 million, and financing activities provided $15.0 million during the first half.
- Working-capital investment was significant: accounts receivable increased $70.6 million and inventories increased $47.6 million in the first-half cash-flow reconciliation. The cash conversion cycle was 98 days versus 97 days at December 31, 2017.
- Total debt was $462.0 million net of debt issuance costs, including $400.0 million of 6.50% senior secured notes due 2023. The company had no borrowings under its $75 million revolving facility and reported $62.7 million of availability, subject to eligibility limits and a $12.3 million outstanding letter of credit.
- Total assets were $1.31 billion and total equity was $298.0 million at June 30, 2018. Redeemable noncontrolling interest was $117.5 million.
Material changes versus the prior comparable period
- Profitability improved materially, with Q2 net income replacing the prior-year loss and first-half operating income improving from a $2.2 million loss to $34.3 million of income.
- Gross margin expanded by 150 basis points in Q2 and 210 basis points for the first half, primarily from production efficiencies and higher volume, partly offset by higher material costs, particularly steel.
- SG&A increased 6.5% in Q2 due mainly to information technology and consulting costs, but declined 4.2% for the first half because of lower legal and nonrecurring fees.
- Interest expense increased modestly due to higher international working-capital borrowings, partly offset by the lower rate on refinanced senior secured notes.
- Comprehensive income attributable to Titan was a loss of $29.7 million in Q2 and $5.1 million for the first half, primarily because of currency translation losses of $38.3 million and $30.3 million, respectively.
- Titan adopted ASC 606 revenue recognition using the modified retrospective method. The adoption had a limited opening balance-sheet effect, including an $88,000 increase to retained earnings.
Guidance, outlook, risks, and unusual items
- Management expects generally improved market conditions to continue in the second half of 2018, with earthmoving/construction demand anticipated to improve further. Agricultural demand remains subject to crop prices, farm income, tariffs, trade policy, weather, and equipment replacement cycles. The consumer market is expected to remain highly competitive.
- 2018 capital expenditures are forecast at approximately $35 million to $45 million. Interest payments for the last six months of 2018 are forecast at approximately $16 million, and remaining 2018 pension contributions at approximately $3.7 million.
- Management stated that cash, expected operating cash flows, and available borrowing capacity should provide sufficient liquidity for working capital, debt maturities, and capital expenditures.
- The Voltyre-Prom settlement put option became exercisable for a six-month period beginning July 9, 2018. If exercised in full, the estimated purchase obligation was approximately $117 million to $122 million, payable in cash or Titan common stock. No exercise notice had been received as of the filing date.
- Titan had accrued a $6.5 million environmental litigation liability. The company is appealing a judgment involving response costs and related environmental claims; the appeal outcome cannot be predicted.
- Key risks include raw-material and energy-cost volatility, tariffs and duties, foreign-exchange movements, indebtedness and covenant compliance, warranty and product-liability claims, environmental matters, geopolitical conditions, manufacturing disruptions, and cyclical end markets.
- The company reported that disclosure controls were effective as of June 30, 2018 and that no material changes in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the Voltyre-Prom put option is exercised and the resulting funding source and effect on leverage, liquidity, ownership, and EPS.
- Conversion of reported earnings into cash, particularly the continued growth in receivables and inventories and the 98-day cash conversion cycle.
- Execution against the $35 million to $45 million capital-expenditure forecast and compliance with debt covenants.
- Whether earthmoving/construction demand remains strong and whether agricultural demand is affected by tariffs, crop prices, farm income, or equipment replacement trends.
- Exposure to Latin American currency devaluation, raw-material inflation, tariffs, and other factors affecting gross margin.
- Developments in the environmental litigation appeal, warranty liabilities, and the company’s valuation allowances and uncertain tax positions.