Titan International, Inc. — Q3 2020 Form 10-Q Summary
Business Context and Reporting Period
Titan International is a global manufacturer of off-highway wheels, tires, assemblies, and undercarriage products serving agricultural, earthmoving/construction, and consumer markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Results were materially affected by the COVID-19 pandemic, including plant closures and market disruption in Europe, Asia, and Latin America, lower customer demand, increased health-related operating costs, and unfavorable foreign currency translation.
Financial Performance and Liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $304.8 million | $345.9 million | $932.4 million | $1,146.9 million |
| Gross profit | $31.3 million | $27.1 million | $88.4 million | $110.7 million |
| Gross margin | 10.3% | 7.8% | 9.5% | 9.6% |
| Loss from operations | $(6.8) million | $(12.6) million | $(19.5) million | $(10.9) million |
| Net loss attributable to Titan | $(12.6) million | $(19.1) million | $(43.2) million | $(23.6) million |
| Loss per diluted share | $(0.21) | $(0.33) | $(0.71) | $(0.43) |
| Operating cash flow | Not separately provided | Not separately provided | $47.4 million | $31.2 million |
Q3 sales declined 11.9%, while nine-month sales declined 18.7%. Gross margin improved in the quarter due to cost reductions, production efficiencies, and lower raw material costs, but nine-month gross profit declined because of lower volume and approximately $13 million of COVID-19-related gross-margin pressure.
At September 30, 2020, cash and cash equivalents were $98.8 million, compared with $66.8 million at December 31, 2019. Current assets were $638.4 million and current liabilities were $315.3 million. Inventories declined to $284.2 million from $333.4 million at year-end, while accounts receivable increased to $192.8 million from $185.2 million.
Total debt was $464.4 million net of debt issuance costs, consisting principally of $400.0 million of 6.50% senior secured notes due November 2023. Short-term debt was $32.6 million and long-term debt was $431.8 million. The $125 million revolving credit facility had no borrowings, $19.7 million of letters of credit, and $61.4 million of availability at quarter-end.
Nine-month investing cash flow was $25.4 million, including $32.9 million from the sale of Wheels India shares and $4.9 million of insurance proceeds. Capital expenditures were $13.4 million, compared with $26.3 million in 2019. Financing activities used $33.9 million, reflecting $116.6 million of debt repayments against $86.0 million of borrowings.
Material Changes Versus the Prior Comparable Period
- Q3 sales fell $41.1 million, primarily from lower volume in earthmoving/construction markets, COVID-19 disruption, and a $20.2 million unfavorable currency translation impact. Favorable price and mix contributed 3.6%.
- Nine-month sales fell $214.5 million. Management estimated approximately $53 million of lost sales from COVID-19-related plant closures and market disruption, with volume down 15.6% and unfavorable currency translation of 4.6%.
- Q3 gross margin increased to 10.3% from 7.8%, but nine-month gross margin was broadly stable at 9.5% versus 9.6%.
- Q3 operating loss improved to $6.8 million from $12.6 million, while the nine-month operating loss worsened to $19.5 million from $10.9 million.
- Agricultural Q3 operating results improved to $3.1 million of income from a $1.2 million loss, supported by cost reductions and lower raw material costs. Nine-month agricultural operating income declined to $5.4 million from $17.1 million.
- Earthmoving/construction Q3 returned to $0.7 million of operating income from a $2.9 million loss, but the nine-month period produced an $8.2 million operating loss versus $8.3 million of income in 2019.
- Consumer sales declined 15.3% in Q3 and 26.1% for the nine months; nine-month operating income decreased to $1.0 million from $3.1 million.
- Foreign exchange moved from a $2.2 million gain in the first nine months of 2019 to a $9.7 million loss in 2020.
- The quarterly common dividend was suspended in June 2020. Only the $0.005-per-share first-quarter 2020 dividend was declared for 2020.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal sales or earnings guidance. The outlook for the remainder of 2020 was described as uncertain and dependent on COVID-19 containment, customer and market recovery, global economic conditions, currency movements, commodity prices, trade policies, and supply-chain stability.
- Management expected full-year 2020 capital expenditures of approximately $20 million and approximately $15 million of interest payments during the remainder of the year.
- Management expected cash, operating cash flow, and available credit facilities to provide sufficient liquidity for working capital, debt maturities, and capital expenditures, and did not anticipate significant liquidity constraints or debt-covenant violations in the foreseeable future.
- The Saltville, Virginia wheel-operation closure was expected to be completed in the fourth quarter of 2020. Disposal costs were expected but had not been estimated.
- The Brownsville, Texas facility, with $6.6 million of assets, was classified as held for sale; management expected to enter a sale agreement during the fourth quarter.
- The company recorded $3.6 million of asset impairment for the nine months, including a $2.6 million impairment related to machinery at Titan Tire Reclamation Corporation and a $1.0 million inventory impairment related to Saltville.
- A $5.0 million incremental legal accrual was recorded for the anticipated settlement of the Dico environmental case. The outstanding contingent liability was $11.5 million at September 30, 2020. A proposed consent decree contemplated cash payments totaling $11.5 million, but court approval remained pending after quarter-end.
- Other income included a $4.9 million property-insurance settlement, COVID-19 government subsidies of $1.4 million year to date, and net gains and losses on sales of Wheels India shares.
- Key risks include prolonged COVID-19 disruption, recession, weak end markets, raw-material costs and availability, currency volatility, debt and covenant requirements, environmental and legal liabilities, warranty and product-liability claims, tariffs, and potential asset impairments.
Important Facts for Investors to Verify
- Whether the company can sustain positive operating cash flow while reporting significant net losses.
- Availability under the revolving credit facility, liquidity concentration outside the United States, and the timing of the $410.9 million of debt principal maturities scheduled for 2023.
- Progress and final cost of the Dico environmental settlement, including court approval and payment timing.
- The pace of recovery in agricultural, earthmoving/construction, and consumer markets after COVID-19 disruption.
- Whether cost reductions and improved gross margins can offset continued volume declines and foreign exchange losses.
- Completion and proceeds of the Brownsville facility sale and the Saltville closure.
- The status of the 4,032,259 restricted Titan shares potentially issuable to RDIF under the Voltyre-Prom agreement.