Titan International, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Titan is a global manufacturer of wheels, tires, wheel/tire assemblies, and undercarriage systems serving agricultural, earthmoving/construction, and consumer markets. This unaudited filing covers the three months ended March 31, 2018, compared with the same period of 2017.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $425.4 million | $357.5 million |
| Gross profit / margin | $59.6 million / 14.0% | $40.2 million / 11.2% |
| Operating income (loss) / margin | $18.1 million / 4.3% | $(6.6) million / (1.8)% |
| Net income (loss) | $14.7 million | $(10.6) million |
| Net income (loss) attributable to Titan | $16.4 million | $(11.5) million |
| Net income applicable to common shareholders | $14.0 million | $(10.5) million |
| Basic and diluted EPS | $0.23 | $(0.18) |
| Cash flow from operations | $(35.7) million | $(14.5) million |
| Capital expenditures | $7.8 million | $8.4 million |
Sales increased 19%, consisting of approximately 12% volume growth, 4% favorable price/mix, and 3% favorable currency translation. SG&A declined to $35.9 million from $41.3 million, reflecting lower legal and non-recurring costs and cost-control efforts. Interest expense was $7.5 million versus $7.7 million.
- Agricultural sales increased 8% to $194.2 million; operating income increased 67% to $21.3 million.
- Earthmoving/construction sales increased 39% to $188.7 million; operating income increased to $10.0 million from $1.1 million.
- Consumer sales increased 3% to $42.5 million; operating income increased to $3.9 million from $1.5 million.
Cash and cash equivalents were $112.4 million at March 31, 2018, down from $143.6 million at December 31, 2017. Operating cash usage was driven principally by increases in accounts receivable of $65.9 million and inventories of $26.1 million. The cash conversion cycle increased to 100 days from 97 days at year-end 2017 and 91 days at March 31, 2017.
Total debt was $462.8 million, including $400.0 million of 6.5% senior secured notes due 2023. The company had no borrowings under its $75.0 million revolving credit facility; availability was $62.5 million after a $12.5 million letter of credit. The company reported total liabilities of $905.6 million and redeemable noncontrolling interest of $115.4 million.
Material changes versus the prior comparable period
- Revenue, gross profit, operating income, and net income improved substantially year over year, led by earthmoving/construction demand and improved manufacturing capacity utilization.
- Gross margin expanded 280 basis points to 14.0%.
- SG&A fell by $5.4 million, while corporate and unallocated expenses declined to $17.1 million from $21.9 million.
- Foreign exchange results changed from a $4.5 million gain in Q1 2017 to a $4.4 million loss in Q1 2018.
- Other income increased to $7.8 million from $2.7 million, including $5.0 million of “other income” not further clearly characterized in the filing’s summary table.
- Operating cash flow deteriorated by $21.1 million despite the return to profitability because of working-capital investment.
- The company adopted ASC 606 using the modified retrospective method. The recorded opening retained-earnings adjustment was $88,000, and management reported no contract assets or liabilities at March 31, 2018.
Guidance, outlook, risks, and unusual items
Management expects agricultural equipment demand to be supported by replacement cycles and generally higher OEM forecasts, although farm income is expected to be flat. Earthmoving/construction demand is expected to continue improving, particularly in larger mining products and international markets. The consumer market is expected to remain highly competitive.
- 2018 capital expenditures are forecast at approximately $35 million to $45 million.
- Interest payments are forecast at approximately $30 million for the last nine months of 2018.
- Remaining 2018 pension contributions are expected to be approximately $4.5 million.
- The Voltyre-Prom settlement put option becomes exercisable during a six-month period beginning July 9, 2018. If exercised in full, the estimated purchase obligation was approximately $117 million to $122 million, payable in cash or Titan common stock.
- Titan accrued a $6.5 million environmental liability in 2017 relating to CERCLA litigation. Appeals were pending, and the outcome could not be predicted.
- Key operating risks include raw-material, energy, and petroleum-cost volatility; tariffs and duties; foreign-currency movements; customer and end-market cyclicality; debt covenant compliance; warranty and product-liability claims; environmental matters; and geopolitical conditions.
- Net income benefited from a $(0.8) million income-tax benefit and a negative 6% effective tax rate. The tax rate was affected by reductions in unrecognized tax positions and valuation allowances, making the quarter’s tax result potentially nonrepresentative.
Management stated that cash, expected operating cash flow, and available borrowing capacity should provide sufficient liquidity for working capital, debt maturities, and capital expenditures. Disclosure controls and procedures were determined to be effective, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the strong earthmoving/construction demand and improved margins persist after the first quarter.
- Whether the substantial accounts-receivable and inventory build converts into cash and whether the 100-day cash conversion cycle improves.
- The company’s ability to fund the potential $117 million to $122 million Voltyre-Prom put-option obligation beginning July 9, 2018.
- The outcome and ultimate cost of the environmental CERCLA appeal and any additional response costs.
- Compliance with debt covenants, particularly the fixed-charge coverage requirement if revolving-credit availability falls below the specified threshold.
- The impact of raw-material costs, tariffs, currency volatility, and seasonal demand on future margins.
- The sustainability of the unusually favorable quarterly tax rate and the realization of deferred tax assets subject to valuation allowances.