Titan International, Inc. — Form 10-Q Summary
Business context and reporting period
Titan manufactures wheels, tires and assemblies for off-highway vehicles in the agricultural, earthmoving/construction and consumer markets. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $404.4 million | $229.7 million | $685.3 million | $426.1 million |
| Gross profit | $63.9 million | $33.9 million | $120.2 million | $60.0 million |
| Gross margin | 15.8% | 14.8% | 17.5% | 14.1% |
| Income from operations | $44.0 million | $17.4 million | $70.8 million | $27.6 million |
| Operating margin | 10.9% | 7.6% | 10.3% | 6.5% |
| Net income attributable to Titan | $25.3 million | $4.6 million | $22.2 million | $6.6 million |
| Diluted EPS | $0.49 | $0.12 | $0.46 | $0.19 |
- Six-month operating cash flow was negative $30.6 million, compared with negative $9.2 million in 2010. Working-capital use included a $152.5 million increase in accounts receivable and a $34.5 million increase in inventories, partly offset by a $77.7 million increase in accounts payable.
- Investing cash flow was negative $107.9 million, including $99.1 million for acquisitions and $10.2 million of capital expenditures.
- Financing cash flow was positive $13.2 million, primarily from $14.1 million of term-loan borrowings.
- Cash and cash equivalents declined to $114.2 million from $239.5 million at December 31, 2010.
- At June 30, 2011, total debt was $328.2 million, consisting primarily of $200.0 million of 7.875% senior secured notes, $112.9 million of convertible notes and $15.3 million of other debt. The $100 million revolving facility had no borrowings, $12.0 million of letters of credit and $88.0 million of unused availability.
Material changes versus the prior comparable period
- Second-quarter sales increased 76%, gross profit increased 88%, operating income increased 152% and net income increased 453% versus Q2 2010. Six-month sales increased 61%, gross profit 100%, operating income 157% and net income 235%.
- Management attributed the improvement to stronger demand across all segments, pricing and mix improvements, higher plant utilization and the April 1, 2011 acquisition of Goodyear’s Latin American farm tire business.
- The Goodyear business contributed $92.3 million of sales and $4.5 million of net income from the acquisition date through June 30, 2011. The acquisition included a Sao Paulo, Brazil manufacturing facility, inventories and seven-year licensing arrangements.
- Consumer sales increased substantially, principally because of Goodyear-related supply agreements. These agreements generated $63.3 million of sales in both the second quarter and first half of 2011, and included below-market pricing that resulted in a $4.6 million reduction of second-quarter cost of sales from supply-agreement liability amortization.
- First-quarter conversion of approximately $59.6 million of convertible notes into approximately 6.6 million common shares reduced debt but produced a $16.1 million noncash charge. The charge was nondeductible for tax purposes and contributed to the 50% six-month effective tax rate.
- The company discharged its remaining 8% senior unsecured notes due January 2012 by depositing approximately $1.1 million with the trustee.
Guidance, outlook, commentary and risks
- Management expected sales to remain strong during the second half of 2011 and anticipated continued improvement in earthmoving/construction sales.
- Remaining 2011 capital expenditures were forecast at approximately $9 million to $11 million, and remaining 2011 interest payments at approximately $12 million.
- Management expected cash on hand, operating cash flow and available borrowing capacity to fund working capital, capital expenditures and potential acquisitions.
- Energy, raw-material and petroleum-based input costs remained volatile and could pressure margins. Seasonal demand changes could also affect inventory, receivables and profitability.
- Labor agreements at the Bryan, Ohio and Freeport, Illinois facilities had expired; employees were working under the company’s latest offer, and the unions retained rights to challenge the company’s actions. These facilities represented approximately 30% of Titan’s U.S. employees.
- Other stated risks include recessionary conditions, end-market and commodity-price changes, competition and pricing, labor relations, warranty and product-liability claims, legal proceedings, currency movements, environmental regulation and the ability to maintain debt covenants.
- The company reported compliance with its revolving-credit covenants at June 30, 2011. Routine legal proceedings were not expected to have a material adverse effect, although outcomes could not be predicted with certainty.
Important facts for investors to verify
- Whether the strong reported growth is sustainable after separating organic demand, pricing and mix effects from the Goodyear acquisition and supply agreements.
- The conversion of working-capital growth into operating cash flow, particularly collections of the substantially higher accounts receivable balance.
- Final purchase-price allocations for the Goodyear and AII acquisitions, including goodwill, deferred taxes, prepaid royalty and supply-agreement liabilities.
- The effect of volatile raw-material costs, seasonal demand and the expiration of the Bryan and Freeport labor agreements on future margins and operations.
- Debt maturities, interest-rate and foreign-exchange exposure, covenant compliance and the availability of the revolving facility.
- The extent to which reported earnings benefited from unusual or nonrecurring items, including the acquisition gain, prepaid-royalty amortization, supply-agreement liability amortization and the prior-period debt-related charges.