Titan International, Inc. 2018 Form 10-K Summary
Business context and reporting period
Titan International, Inc. is a global manufacturer of wheels, tires, wheel-and-tire assemblies, and undercarriage systems for agricultural, earthmoving/construction, mining, military, forestry, and consumer applications. Reported results cover the fiscal year ended December 31, 2018, with comparative fiscal years 2017 and 2016. The filing was dated March 6, 2019.
The company operates through Agricultural, Earthmoving/Construction, and Consumer segments. Titan completed its acquisition of the remaining 44% interest in Titan Australia during 2018. Approximately 6,300 employees worked worldwide at year-end, and international operations represented a significant portion of sales.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $1,602.4 million | $1,468.9 million | 9.1% increase |
| Gross profit | $198.3 million | $160.3 million | 23.7% increase |
| Gross margin | 12.4% | 10.9% | 150 basis-point increase |
| Income (loss) from operations | $42.2 million | $(11.2) million | Improved |
| Net income (loss) | $13.0 million | $(64.1) million | Improved |
| Net income (loss) attributable to Titan | $16.1 million | $(60.0) million | Improved |
| Basic and diluted EPS | $0.06 | $(1.12) | Improved |
| Cash flow from operations | $(36.2) million | $(1.3) million | Lower by $34.9 million |
| Capital expenditures | $39.0 million | $32.6 million | Higher by $6.4 million |
Sales volume increased 7.7%, favorable price/mix contributed 3.6%, and unfavorable currency translation reduced sales by 2.2%. Selling, general and administrative expense declined to $134.8 million, or 8.4% of sales, from $150.7 million, or 10.3%, primarily because of lower legal costs and the absence of a 2017 non-recurring legal contingent liability. Research and development expense was $11.1 million, or 0.7% of sales.
- Agricultural: Sales of $694.3 million, up 0.6%; operating income of $62.1 million versus $50.2 million. Margin improvement reflected higher North American volume, partly offset by weakness in Europe and Russia and currency pressure.
- Earthmoving/Construction: Sales of $741.7 million, up 21.8%; operating income of $31.1 million versus $2.0 million. Growth was driven by higher volume, market-share gains, and stronger undercarriage and mining demand.
- Consumer: Sales of $166.4 million, down 2.0%; operating income of $12.0 million versus $11.5 million. Currency translation more than offset volume and price/mix gains.
At December 31, 2018, cash and cash equivalents were $81.7 million, down from $143.6 million. Current assets were $779.5 million and current liabilities were $375.1 million. Inventory increased to $395.7 million from $339.8 million, reflecting planned inventory buildup and aftermarket requirements. The cash conversion cycle increased to 114 days from 97 days.
Total debt principal was $466.4 million, including $400.0 million of 6.50% senior secured notes due 2023. The balance sheet reported $51.9 million of current debt and $409.6 million of long-term debt, net of issuance costs. No borrowings were outstanding under the $75 million revolving credit facility; availability was $62.7 million after a $12.3 million letter of credit and borrowing-base limitations.
Total assets were $1.25 billion and total equity was $270.1 million at year-end. The company also reported $119.8 million of redeemable noncontrolling interest related to Voltyre-Prom. Comprehensive loss attributable to Titan was $26.1 million, primarily reflecting foreign currency translation and pension adjustments.
Material changes versus the prior comparable period
- Revenue increased 9.1%, led by a 21.8% increase in Earthmoving/Construction sales and stronger demand in agricultural markets.
- Gross margin expanded to 12.4% from 10.9% because of volume, production efficiencies, and improved capacity utilization, partly offset by higher material costs.
- Titan returned to operating and net profitability. The 2017 results included a $9.9 million asset impairment related to a facility fire and an $18.6 million loss on repurchase of senior notes; neither item recurred in 2018.
- Foreign exchange loss increased to $11.2 million from $2.0 million, reflecting currency volatility affecting intercompany loans and foreign operations.
- Other income increased to $19.2 million from $9.1 million, primarily due to approximately $9.9 million of non-recurring legal settlements.
- Operating cash flow deteriorated despite the return to profitability because inventories used $77.9 million of cash and accounts receivable used $36.1 million.
- Debt structure changed from the former 6.875% notes due 2020 to 6.50% senior secured notes due 2023 issued in 2017; 2018 interest expense was $30.5 million.
- Cash declined by $61.9 million, while investing activities used $36.9 million and financing activities provided $17.5 million.
Guidance, outlook, commentary, risks, and unusual items
Management expected modest agricultural equipment growth of approximately 0% to 5% in most regions during 2019, continued improvement in earthmoving/construction demand, and modest growth in the Consumer segment. Management forecast 2019 capital expenditures of $40 million to $50 million and cash interest payments of approximately $29 million.
Management expected inventory days to decline during 2019 and beyond as planning systems and demand forecasting improved. Management stated that cash on hand, anticipated operating cash flow, and available borrowings were expected to support working capital, debt maturities, capital expenditures, and potential acquisitions.
- Key risks include cyclical end markets, seasonal demand, commodity-price volatility, foreign exchange movements, tariffs, international political and economic conditions, and intense competition.
- Steel, rubber, carbon black, bead wire, and fabric are significant inputs. Titan generally lacks long-term commodity contracts and does not use commodity derivatives to hedge these exposures.
- The ten largest customers represented 35% of 2018 sales, although no individual customer represented 10% or more.
- Debt agreements restrict additional borrowings, dividends, share repurchases, investments, asset dispositions, guarantees, and other corporate actions. Covenant compliance may be affected by operating conditions.
- Titan had a $6.5 million environmental litigation accrual related to CERCLA proceedings; the matter remained under appeal, supported by a $6.0 million supersedeas bond.
- A Voltyre-Prom settlement put option was exercised. In February 2019, Titan paid RDIF $25 million in cash and agreed, subject to regulatory approval, to issue 4,032,259 restricted shares. A separate $25 million put obligation relating to OEP remained a significant contractual consideration.
- Titan’s Board began evaluating strategic alternatives for Italtractor ITM S.p.A.; the filing states that no transaction was assured.
- The company adopted ASC 606 with an immaterial effect and early adopted cloud-computing implementation-cost guidance, capitalizing $7.4 million of costs. Adoption of the new lease standard on January 1, 2019 was expected to add approximately $24.6 million of lease assets and $25.1 million of lease liabilities.
- The fourth quarter of 2018 was unprofitable: net loss was $14.1 million and net loss attributable to Titan was $12.3 million, despite full-year profitability.
Most important facts for investors to verify
- Whether the 2018 operating improvement and higher gross margin are sustainable after accounting for market cyclicality, raw-material costs, tariffs, and currency movements.
- Whether working-capital consumption, particularly the 17-day increase in inventory days, reverses as management expects.
- Liquidity available after the $25 million RDIF cash payment, potential OEP settlement, capital expenditures, debt maturities, and other contractual obligations.
- Compliance with the revolving-credit and senior-note covenants, especially during weaker seasonal periods.
- The ultimate outcome and cash exposure from the environmental litigation and other legal proceedings.
- The terms and financial effect of the Voltyre-Prom put-option settlements, including any required share issuance or additional cash payments.
- Progress and financial consequences of the ITM strategic-alternatives review.
- Whether the 2018 fourth-quarter loss indicates emerging weakness despite full-year earnings growth.