Titan International, Inc. 2017 Form 10-K Summary
Business context and reporting period
Titan International, Inc. 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, 2017, including fourth-quarter results. The filing was dated February 22, 2018.
Net sales were generated across the agricultural segment, earthmoving/construction segment, and consumer segment. International sales represented 56% of total sales, with approximately 6,300 employees worldwide.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $1.469 billion | $1.265 billion |
| Gross profit | $158.3 million | $138.9 million |
| Gross margin | 10.8% | 11.0% |
| Loss from operations | $(13.2) million | $(25.0) million |
| Net loss | $(64.1) million | $(39.8) million |
| Net loss attributable to Titan | $(60.0) million | $(37.6) million |
| Basic and diluted loss per share | $(1.12) | $(0.87) |
| Cash flow from operations | $(1.3) million | $43.5 million |
| Capital expenditures | $32.6 million | $41.9 million |
| Cash and cash equivalents | $143.6 million | $147.8 million |
Segment sales increased in all markets: agriculture rose 18% to $690.2 million, earthmoving/construction rose 16% to $608.9 million, and consumer rose 8% to $169.8 million. Segment operating income was $49.6 million for agriculture, $0.8 million for earthmoving/construction, and $11.2 million for consumer, before corporate and unallocated expenses of $74.8 million.
At December 31, 2017, total debt was approximately $450.8 million net of debt issuance costs, including $400.0 million of 6.50% senior secured notes due 2023. Current liabilities included $43.7 million of short-term debt. No borrowings were outstanding under the $75 million revolving credit facility; availability was $62.5 million after a $12.5 million letter of credit.
Material changes versus the prior comparable period
- Sales increased 16%, driven primarily by a 12% increase in volume across segments and geographies, favorable currency translation of 3%, and favorable price/mix of 1%.
- Operating loss improved by $11.8 million, supported by higher volume, manufacturing efficiencies, and improved plant utilization. However, reported gross margin declined modestly because of a $9.9 million asset impairment.
- Net loss worsened despite improved operating results because of an $18.6 million loss on repurchase of the former 6.875% senior secured notes due 2020, a $10.5 million unfavorable foreign-currency change, and a $7.9 million increase in income tax expense.
- Operating cash flow declined from $43.5 million provided in 2016 to $1.3 million used in 2017. Accounts receivable increased by $38.5 million and inventories increased by $55.6 million, partially offset by a $37.6 million increase in accounts payable.
- Titan issued $400 million of 6.50% senior secured notes due 2023 and redeemed all $400 million of the prior senior secured notes due 2020. Separately, 97.1% of the $60.2 million convertible notes due 2017 converted into 5.46 million common shares, with $1.7 million paid in cash.
- The company changed one subsidiary’s inventory accounting from LIFO to FIFO, retrospectively increasing retained earnings as of January 1, 2016 by $6.6 million.
Outlook, commentary, risks, contingencies, and unusual items
- Management expected agricultural demand to increase in 2018, although farm income was expected to remain generally flat and demand for large equipment remained constrained. Most major OEMs were forecasting higher 2018 agricultural equipment sales.
- Earthmoving/construction demand was expected to continue improving in 2018, including larger mining products and small- to medium-sized equipment used in housing and commercial construction.
- The consumer segment was expected to remain highly competitive.
- Capital expenditures for 2018 were forecast at $35 million to $45 million, with approximately $30 million of interest payments and approximately $5 million of pension contributions expected.
- Management stated that cash on hand, anticipated operating cash flow, and available borrowings were expected to fund working capital, debt maturities, capital expenditures, and potential acquisitions. However, 2017 operating cash flow was negative and working capital requirements increased.
- A September 2017 fire at a Canadian subsidiary resulted in a $9.9 million asset impairment. Titan received a $1.6 million insurance advance and expected additional proceeds, but the amount and timing were not known and no additional proceeds were accrued.
- Titan accrued a $6.5 million environmental litigation liability. Titan Tire and Dico were held jointly and severally liable for $5.45 million of response costs and potentially additional future costs; Dico separately faced $5.45 million of punitive damages. Titan and Dico appealed, and an appeal bond stayed collection actions pending the appeal.
- A put option relating to the Voltyre-Prom redeemable noncontrolling interest could require settlement in cash or common stock beginning July 9, 2018. The estimated full settlement value was approximately $117 million to $122 million.
- Principal risks include cyclical end markets, commodity price volatility for steel and rubber, customer concentration, competition, foreign exchange exposure, international political and economic conditions, labor relations, environmental and product-liability claims, debt covenants, cybersecurity, and possible facility disruptions.
- The company had an underfunded defined benefit pension position of $36.7 million at year-end 2017 and reported a $18.6 million warranty liability.
Most important facts for an investor to verify
- Whether higher sales volumes and expected 2018 market recovery can offset commodity inflation and restore positive consolidated operating income.
- The sustainability of liquidity given negative 2017 operating cash flow, approximately $43.7 million of current debt, and the $400 million notes due 2023.
- The ultimate outcome and cost of the environmental litigation, including any additional response costs beyond the $6.5 million accrued liability.
- The timing and amount of insurance proceeds related to the Canadian facility fire.
- Whether the Voltyre-Prom put option is exercised and whether settlement is funded with cash, debt, or equity issuance.
- The effect of customer concentration, particularly Deere, which represented 9% of 2017 revenue, and the 32% share of revenue from the ten largest customers.
- The company’s ability to convert substantial inventory and receivables into cash while maintaining service levels and margins.
- The impact of foreign exchange movements, tax valuation allowances, pension assumptions, and the adoption of new accounting standards.