Business Context and Reporting Period
Titan International, Inc. 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, 2019, compared with the corresponding 2018 periods.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $345.9 million | $384.7 million | $1,146.9 million | $1,239.0 million |
| Gross profit | $27.1 million | $43.7 million | $110.7 million | $161.6 million |
| Gross margin | 7.8% | 11.4% | 9.6% | 13.0% |
| Operating income (loss) | $(12.6) million | $4.8 million | $(10.9) million | $43.2 million |
| Net income (loss) | $(20.0) million | $2.7 million | $(25.7) million | $27.1 million |
| Net income (loss) attributable to Titan | $(19.1) million | $2.3 million | $(23.6) million | $28.4 million |
| EPS, basic and diluted | $(0.33) | $(0.03) | $(0.43) | $0.29 |
| Operating cash flow | Not separately provided | Not separately provided | $31.2 million | $(32.7) million |
At September 30, 2019, cash and cash equivalents were $78.6 million, compared with $81.7 million at December 31, 2018. Total debt was $533.3 million in principal amount, including $64.2 million due within one year and $464.8 million in long-term debt net of issuance costs. The $125 million revolving facility had $59.0 million drawn, a $10.3 million letter of credit, and $37.3 million of reported availability.
Total assets were $1.19 billion and total equity was $248.2 million at September 30, 2019. Accounts receivable declined to $221.2 million from $241.8 million at year-end, while inventories declined to $351.9 million from $395.7 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales decreased 10.1%, and nine-month sales decreased 7.4%, with declines in all three segments.
- Gross margin declined 360 basis points in the quarter and 340 basis points year to date, reflecting lower volumes, production inefficiencies, unfavorable currency effects, and unfavorable steel inventory costs in North American Wheel operations.
- North American Wheel operations reduced gross profit by approximately $7 million in the quarter and $15 million in the first nine months because higher-cost steel inventory was consumed.
- Operating results moved from profit to loss: quarterly operating income declined from $4.8 million to a $12.6 million loss, and nine-month operating income declined from $43.2 million to a $10.9 million loss.
- SG&A increased 3.7% in the quarter and 4.2% year to date, including $2.3 million of costs related to the postponed proposed ITM undercarriage business listing and additional North American information-technology investments.
- Operating cash flow improved by $63.9 million year over year, primarily from reductions in receivables and inventories, despite the reported net loss.
- Investing cash outflows increased to $96.6 million, principally because of $71.7 million paid to settle redeemable noncontrolling-interest obligations related to Voltyre-Prom.
- Debt increased from $466.4 million of principal at December 31, 2018 to $533.3 million at September 30, 2019, with increased revolving-facility and European borrowings.
Segment Performance
| Segment | Q3 2019 Sales | Q3 Sales Change | Q3 Operating Result | 9M 2019 Operating Result |
|---|---|---|---|---|
| Agricultural | $156.6 million | (4.1%) | $(1.2) million | $17.1 million |
| Earthmoving/construction | $155.7 million | (13.7%) | $(2.9) million | $8.3 million |
| Consumer | $33.6 million | (18.0%) | $(0.2) million | $3.1 million |
Guidance, Outlook, Risks, and Unusual Items
- Management expected agricultural equipment sales to remain generally flat for the remainder of 2019, with continued pressure from low commodity prices, tariffs, trade concerns, weather, and reduced aftermarket spending.
- Earthmoving/construction demand was expected to remain flat through the rest of 2019, although global economic uncertainty, softer mining demand, and weakening construction indicators presented downside risk.
- Consumer-market demand was expected to be flat to modestly growing.
- Management forecast approximately $40 million of 2019 capital expenditures and approximately $15 million of interest payments during the final three months of 2019. It expected approximately $1 million of remaining 2019 pension contributions.
- On October 3, 2019, Titan sold part of its Wheels India investment, reducing ownership from approximately 34.2% to 23.8%. The company received approximately $19 million of net proceeds and used them to reduce debt; a $4.7 million gain was recorded in the third quarter.
- Titan completed payments totaling $71.7 million related to Voltyre-Prom put-option settlements. As of September 30, 2019, a $25 million redeemable noncontrolling interest remained, represented by restricted shares to be issued to RDIF subject to regulatory approval.
- The company retained a $6.5 million environmental contingent liability. An appellate judgment was affirmed, a $6.0 million supersedeas bond remained outstanding, and settlement discussions with the United States continued.
- Principal risks include recession and end-market weakness, raw-material prices, tariffs and trade restrictions, foreign-exchange volatility, interest costs and debt covenant compliance, labor and manufacturing disruptions, warranty and product-liability claims, environmental proceedings, tax valuation allowances, and acquisition or divestiture execution.
- Management stated that cash, expected operating cash flow, available borrowings, potential divestitures, and unencumbered assets were expected to provide sufficient liquidity for working capital, debt maturities, and capital expenditures. No specific long-term earnings guidance was provided.
Most Important Facts for Investors to Verify
- Whether weak agricultural and construction markets continue to pressure volume, pricing, and production efficiency.
- Whether North American Wheel inventory-cost effects and other operational issues normalize.
- Actual availability under the revolving credit facility and compliance with fixed-charge coverage and other debt covenants.
- Debt reduction achieved from the Wheels India sale and any subsequent asset sales or working-capital improvements.
- Completion and final terms of the RDIF restricted-share issuance and any remaining Voltyre-Prom obligations.
- Resolution, settlement cost, and potential enforcement of the environmental judgment and related lien.
- Realization of deferred tax assets and the sustainability of reported tax rates, which were affected by valuation allowances and jurisdictional adjustments.