Titan International, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021. Titan manufactures off-highway wheels, tires, assemblies, and undercarriage products for agricultural, earthmoving/construction, and consumer markets. The filing is unaudited and should be read with the 2020 Form 10-K.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $438.6 million | $286.1 million | $842.2 million | $627.6 million |
| Gross profit | $61.5 million | $29.9 million | $114.7 million | $57.1 million |
| Gross margin | 14.0% | 10.4% | 13.6% | 9.1% |
| Income (loss) from operations | $23.7 million | $(3.1) million | $38.0 million | $(12.7) million |
| Net income (loss) attributable to Titan | $(2.8) million | $(5.0) million | $10.8 million | $(30.5) million |
| Basic EPS | $(0.04) | $(0.08) | $0.18 | $(0.50) |
- Q2 sales increased 53.3%; six-month sales increased 34.2%. Management attributed the improvement primarily to higher agricultural and earthmoving/construction volumes, favorable pricing and mix, and foreign currency translation in the quarter.
- Q2 operating income improved to $23.7 million from an operating loss of $3.1 million. Six-month operating income was $38.0 million versus a loss of $12.7 million.
- SG&A was $32.6 million in Q2 and $66.6 million for the six months, while research and development expense was $2.5 million and $5.1 million, respectively.
- Q2 included $16.0 million of expense related to the repurchase and redemption of the former 6.50% senior secured notes due 2023. Interest expense was $8.6 million in Q2 and $16.1 million for the six months.
- Six-month foreign exchange results included an $8.7 million gain, compared with an $8.4 million loss in the prior-year period. Q2 included a $0.8 million foreign exchange loss.
- The six-month effective tax rate was 29.8%, compared with a negative 6.8% in the prior-year period. Tax expense was $4.6 million versus $2.0 million.
Segment performance
| Segment | Q2 2021 sales | Q2 sales change | Q2 operating income | Six-month sales change |
|---|---|---|---|---|
| Agricultural | $231.5 million | 57.2% | $20.8 million | 37.5% |
| Earthmoving/construction | $176.7 million | 57.1% | $7.5 million | 36.9% |
| Consumer | $30.4 million | 15.2% | $1.9 million | 4.0% |
Agricultural, earthmoving/construction, and consumer segment gross margins were 15.2%, 12.6%, and 12.7%, respectively, in Q2 2021, compared with 10.6%, 10.3%, and 10.0% in Q2 2020. Corporate and unallocated operating expense was $6.4 million in Q2 and $14.7 million for the six months.
Cash flow, balance sheet, debt, and liquidity
- Cash and cash equivalents were $95.8 million at June 30, 2021, down from $117.4 million at December 31, 2020. Approximately $84.8 million of the June 30 cash balance was held outside the United States.
- Operating cash flow was $(17.5) million for the six months, compared with $5.5 million in the prior-year period. The use of cash primarily reflected increases in accounts receivable of $72.8 million and inventories of $53.1 million, partly offset by a $71.1 million increase in accounts payable.
- Investing cash flow was $(13.9) million, including $14.6 million of capital expenditures, versus $11.9 million of investing cash inflow in the prior-year period.
- Financing cash flow was $10.8 million. The company borrowed $459.9 million, repurchased $413.0 million of senior notes, and made $34.0 million of debt payments.
- Total debt was $487.0 million net of debt issuance costs at June 30, 2021, consisting principally of $400.0 million of 7.00% senior secured notes due 2028. Short-term debt was $34.3 million and long-term debt was $452.7 million.
- The $100 million revolving credit facility had $29.0 million drawn, $10.1 million of outstanding letters of credit, and $59.0 million available at June 30, 2021. The facility matures in February 2023.
- Accounts receivable increased to $265.7 million and inventories to $345.3 million from $193.0 million and $293.7 million, respectively, at December 31, 2020. Total assets were $1.13 billion and total equity was $178.2 million.
Material changes versus the prior comparable period
- Demand and production conditions improved substantially from the COVID-19-affected 2020 period, particularly in agriculture and earthmoving/construction.
- Pricing and product mix increased as Titan responded to higher raw material, freight, and other inflationary costs. Volume and price/mix increased 33.2% and 17.2%, respectively, in Q2, and 23.3% and 10.5% for the six months.
- Gross margin expanded by 3.6 percentage points in both Q2 and the first six months, supported by higher volume, overhead absorption, production efficiencies, and cost-reduction initiatives.
- The company refinanced its $400 million of 6.50% senior secured notes due 2023 with 7.00% notes due 2028. The refinancing resulted in a $16.0 million reported loss, including call and related costs, and increased the interest rate.
- No asset impairment charges were recorded in 2021, compared with $1.0 million in Q2 2020 and $3.6 million for the first six months of 2020.
- The company paid $9.2 million in February 2021, including accrued interest, under a CERCLA-related environmental settlement. Remaining settlement amounts of approximately $1.6 million and $1.2 million were accrued as of June 30, 2021.
Outlook, commentary, risks, and unusual items
- Management expects agricultural demand to benefit from high commodity prices, improved farmer income, an aging equipment fleet, and low equipment inventories. North America and Latin America are expected to experience the largest agricultural growth in 2021.
- Earthmoving/construction markets showed recovery in the first half of 2021, supported by improving economic conditions, infrastructure stimulus, low equipment inventories, and stronger mineral commodity prices.
- Consumer markets are expected to stabilize through 2021, but recovery is expected to be slower than in agriculture and earthmoving/construction.
- Management expects full-year capital expenditures of approximately $35 million to $40 million and approximately $15 million of cash interest payments during the remainder of 2021.
- Management states that cash, expected operating cash flow, and available credit facilities should provide sufficient liquidity for working capital, debt maturities, and capital expenditures, and does not anticipate significant liquidity constraints or covenant violations in the foreseeable future.
- COVID-19 continued to affect operations, particularly in Australia, Europe, and Latin America. Additional health measures increased operating costs, and the duration and severity of the pandemic remain uncertain.
- Key risks include raw material and freight inflation, supply-chain constraints, foreign currency movements, interest rates, customer and supplier conditions, labor relations, product liability and warranty claims, environmental matters, regulatory changes, tariffs, facility disruptions, and compliance with debt covenants.
- As of June 30, 2021, OFAC had not approved release of 4,032,259 Titan shares held in escrow for RDIF. If the shares are not released by December 31, 2021, alternative settlement terms could require approximately $25 million of cash payment to RDIF.
Most important facts for investors to verify
- Whether improved agricultural and construction demand, pricing, and product mix persist after the COVID-19 recovery comparison becomes less favorable.
- Whether higher raw material, freight, energy, and supply-chain costs can continue to be passed through without compressing margins.
- Cash conversion and working-capital requirements, particularly the growth in receivables and inventories and the negative six-month operating cash flow.
- Debt-service capacity under the 7.00% notes due 2028, the revolving facility, and other international borrowings, including covenant compliance.
- The timing and ultimate cost of resolving the RDIF escrowed-share matter and the remaining environmental settlement obligations.
- COVID-19 developments and their effect on Titan’s foreign operations, production continuity, customer demand, and operating costs.