Titan International, Inc. — Fiscal 2021 Form 10-K Summary
Business context and reporting period
Titan is a global manufacturer of wheels, tires, wheel-and-tire assemblies, and undercarriage systems for agricultural, earthmoving/construction, and consumer markets. This Form 10-K covers the fiscal year ended December 31, 2021; it does not provide a separate fourth-quarter financial statement.
The company employed approximately 7,500 people worldwide and generated 53% of net sales outside the United States. Its 10 largest customers represented 40% of 2021 net sales, while Deere represented 12%.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $1,780.2 million | $1,259.3 million | Up 41.4% |
| Gross profit / margin | $237.5 million / 13.3% | $114.3 million / 9.1% | Margin up 420 bps |
| Operating income (loss) | $85.2 million / 4.7% | $(35.4) million / (2.8%) | Returned to profitability |
| Net income (loss) | $49.9 million | $(65.1) million | Improved $115.0 million |
| Net income attributable to Titan | $49.6 million | $(60.4) million | Returned to profitability |
| Diluted EPS | $0.79 | $(0.99) | Improved |
| Operating cash flow | $10.7 million | $57.2 million | Down $46.5 million |
| Capital expenditures | $38.8 million | $21.7 million | Up $17.1 million |
Segment sales were $949.4 million in agriculture, $693.4 million in earthmoving/construction, and $137.5 million in consumer. Segment operating income was $77.7 million, $27.8 million, and $9.6 million, respectively, before corporate and unallocated expenses of $29.9 million.
At December 31, 2021, cash and cash equivalents were $98.1 million, accounts receivable were $255.2 million, inventories were $392.6 million, and total assets were $1.18 billion. Total debt principal was $490.4 million, including $400.0 million of 7.00% senior secured notes due 2028. Total liabilities were $955.5 million and total equity was $227.2 million.
Material changes versus the prior comparable period
- Sales increased across all segments, reflecting higher volume, favorable product price/mix, recovering end markets, and pricing actions intended to offset raw-material and freight inflation.
- Gross margin improved substantially because of higher volume and overhead absorption, cost-reduction initiatives, and improved production efficiency.
- SG&A increased only 0.6% to $131.8 million, reducing SG&A as a percentage of sales from 10.4% to 7.4%.
- The 2020 results included $14.8 million of asset impairment charges, including machinery, equipment, inventory, and Australian customer relationships; no asset impairment or restructuring charge was recorded in 2021.
- Titan refinanced its $400.0 million of 6.50% notes due 2023 with 7.00% notes due 2028, recording a $16.0 million loss on repurchase. Interest expense increased to $32.2 million from $30.6 million.
- Foreign exchange results shifted from an $11.0 million loss in 2020 to a $12.0 million gain in 2021, while other income declined to $2.1 million from $18.8 million because 2020 included insurance proceeds and gains related to the sale of the Brownsville facility.
- Operating cash flow declined despite improved earnings because accounts receivable increased $74.7 million and inventories increased $112.9 million to support growth. The cash conversion cycle improved from 97 days to 73 days.
- The company suspended its quarterly dividend throughout 2021 and declared no dividends for the year.
Liquidity, debt, and outlook
Titan reported $75.4 million of availability under its $125 million revolving credit facility at year-end, after $30.0 million of borrowings and $10.7 million of letters of credit. The facility matures October 28, 2026 and may be expanded by up to $50 million under an accordion provision. Management stated that it did not anticipate significant liquidity constraints.
Management forecast 2022 capital expenditures of approximately $45 million to $50 million and cash interest payments of approximately $32 million. The company expects agricultural demand to benefit from high commodity prices, improved farmer income, aging equipment fleets, and low equipment inventories. Earthmoving/construction demand was expected to continue improving, while consumer-market growth was expected to be slower.
On February 1, 2022, Titan repurchased 4,032,259 restricted shares held by Russian Direct Investment Fund equity holders for $25 million, funded through a draw on the credit facility. The company also disclosed that Russia-related sanctions and the Russia-Ukraine conflict could affect its operations; Russian operations represented approximately 6% of 2021 global sales and 7% of consolidated assets at year-end.
Risks, contingencies, and unusual items
- COVID-19 continued to affect employee absenteeism, operating costs, demand visibility, and global supply chains.
- Steel, rubber, energy, freight, labor, and logistics costs remain significant risks. Titan generally does not use long-term commodity contracts or commodity derivatives to hedge these exposures.
- The business is cyclical and seasonal, with exposure to agricultural income, crop and commodity prices, construction and mining activity, infrastructure spending, interest rates, foreign exchange, and general economic conditions.
- Debt agreements contain financial and operational covenants, including a minimum fixed-charge coverage ratio when revolver availability falls below specified levels. Breaches could restrict borrowing, dividends, acquisitions, and other corporate actions.
- Goodyear trademark licenses covering certain products generally expire in 2025; the Latin American bias-truck-tire license was extended through December 31, 2022.
- Titan paid $9.2 million in February 2021 and $1.6 million in February 2022 under the Dico environmental settlement. Approximately $1.2 million remained recorded in long-term liabilities at December 31, 2021.
- Brazilian subsidiaries may receive approximately $29 million of indirect-tax credits, subject to review and approval by Brazilian tax authorities; the filing states that recognition is contingent on successful verification.
- Warranty liability increased to $16.6 million from $15.0 million, and 2021 warranty expense was $9.8 million.
- Foreign currency exposure is material: management estimated that a 10% adverse change in exchange rates would reduce the value of its foreign net investment by approximately $25.6 million.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Whether 2021 revenue growth and margin expansion are sustained after pricing benefits, supply-chain normalization, and post-pandemic recovery effects moderate.
- Whether working-capital investment, particularly inventory and receivables, converts into operating cash flow.
- Compliance with debt covenants and the effect of the 7.00% refinancing, the $25 million share repurchase, and forecast capital expenditures on liquidity.
- The effect of raw-material, freight, labor, foreign-exchange, and interest-rate changes on margins and cash flow.
- The outcome and timing of the potential $29 million Brazilian tax credit.
- The operational, financial, and sanction-related consequences of Titan’s Russian operations and the Russia-Ukraine conflict.
- Customer concentration, labor agreements expiring in 2024, Goodyear license renewals, environmental obligations, and warranty claims.