Titan International, Inc. — Form 10-Q Summary
Business context and reporting period
Titan manufactures wheels, tires, wheel-and-tire assemblies, and undercarriage systems for agricultural, earthmoving/construction, mining, and consumer markets. This filing covers the three and nine months ended September 30, 2015. The financial statements are unaudited. Prior-period earnings per share and the December 31, 2014 balance sheet were restated for the accounting treatment of redeemable noncontrolling interests related to Voltyre-Prom.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $308.8 million | $449.6 million | $1,087.0 million | $1,512.3 million |
| Gross profit | $26.2 million | $43.6 million | $120.0 million | $116.4 million |
| Gross margin | 8.5% | 9.7% | 11.0% | 7.7% |
| Operating loss | $(14.5) million | $(2.5) million | $(6.1) million | $(31.7) million |
| Net loss | $(37.6) million | $(17.0) million | $(34.4) million | $(47.0) million |
| Net loss attributable to Titan | $(31.5) million | $(9.1) million | $(24.5) million | $(27.4) million |
| Basic and diluted EPS | $(0.79) | $(0.47), restated | $(0.67) | $(0.85), restated |
- Operating cash flow for the first nine months was $30.5 million, down from $77.3 million in 2014. Capital expenditures were $35.2 million, producing negative free cash flow of approximately $4.7 million before other investing items.
- Cash and cash equivalents were $193.8 million at September 30, 2015, compared with $201.5 million at December 31, 2014. Total debt was $513.5 million, including $400.0 million of 6.875% senior secured notes due 2020 and $60.2 million of convertible notes due 2017.
- The company had no borrowings under its $150 million domestic revolving facility; borrowing availability was $81.7 million, reduced by lower eligible receivables and inventory.
- Total assets were $1.34 billion and Titan stockholders’ equity was $412.2 million at September 30, 2015. Redeemable noncontrolling interest was $75.6 million and was presented outside equity.
- Inventory declined to $287.1 million from $331.4 million at year-end, while accounts receivable declined to $183.8 million from $199.4 million. Management reported inventory days of 77 versus 68 at year-end and receivable days of 54 versus 47.
Material changes versus the prior comparable period
- Third-quarter sales declined 31%, primarily because of lower agricultural and mining demand, customer inventory reductions, unfavorable currency translation, and competitive pricing pressure. Volume declined 14% and price/mix declined 5%; currency translation reduced sales by approximately 12%.
- Nine-month sales declined 28%, with volume down 13%, price/mix down 5%, and unfavorable currency translation reducing sales by approximately 10%.
- Quarterly gross margin fell to 8.5% from 9.7% as production shutdowns reduced capacity utilization. Nine-month gross margin improved to 11.0% from 7.7%, largely because 2014 included $34.8 million of mining asset impairment and inventory write-down charges.
- Quarterly operating loss widened to $14.5 million from $2.5 million. Nine-month operating loss improved to $6.1 million from $31.7 million, but remained negative.
- Interest expense declined to $25.7 million for the nine months from $27.1 million. Foreign exchange loss was $5.7 million versus $11.3 million in the prior-year period, although third-quarter foreign exchange loss increased to $15.3 million from $13.3 million.
- The agricultural segment remained profitable but weakened: nine-month sales fell 32% and operating income fell to $54.4 million from $76.8 million. Earthmoving/construction sales fell 17%, but operating loss improved to $7.3 million from $52.3 million because the prior year included mining impairment and inventory charges. Consumer sales fell 38%, while its operating loss improved to $2.6 million from $4.3 million.
- The company continued cost-reduction initiatives under its Business Improvement Framework, including headcount reductions, expense rationalization, productivity improvements, lower raw-material and warranty costs, and pricing optimization.
Outlook, risks, contingencies, and unusual items
- No quantitative revenue or earnings guidance is provided. Management expects agricultural weakness to continue through the remainder of 2015 because of lower farm income, commodity prices, and reduced demand for large equipment. Mining demand is also expected to remain weak, while smaller construction equipment demand has improved.
- Management estimated approximately $10 million of capital expenditures and $14 million of interest payments for the remainder of 2015, including a $13.8 million semiannual payment on the senior secured notes.
- Key risks include cyclical agricultural and mining markets, commodity and raw-material price volatility, fixed overhead and capacity-utilization pressure, foreign exchange exposure, competition, customer and dealer inventory reductions, and geopolitical and economic uncertainty in Russia affecting Voltyre-Prom.
- The Voltyre-Prom shareholders’ agreement includes a settlement put option exercisable beginning in July 2018 that may require Titan to purchase other shareholders’ interests. The related redeemable noncontrolling interest was $75.6 million at September 30, 2015.
- Warranty liability was $25.6 million at September 30, 2015, down from $28.1 million at year-end. Routine litigation is not expected by management to have a material adverse effect, although outcomes cannot be predicted with certainty.
- Disclosure controls were not effective at quarter-end because of a previously reported material weakness involving accounting complexity, insufficient resources, and controller continuity at certain international locations. Management added resources, including a Chief Accounting Officer, and planned a final remediation assessment in the fourth quarter of 2015.
- The filing includes a restatement of 2014 EPS: third-quarter EPS changed from $(0.17) as reported to $(0.47), and nine-month EPS changed from $(0.51) to $(0.85). The restatement did not affect the prior-year statement of operations.
Investor verification checklist
- Verify the status and effectiveness of remediation for the material weakness in international financial reporting controls.
- Assess liquidity relative to the $60.2 million convertible notes due in 2017, other scheduled maturities, and the $400 million senior secured notes due in 2020.
- Monitor agricultural and mining demand, customer inventory levels, production shutdowns, and segment capacity utilization.
- Reconcile operating cash flow with capital expenditures and evaluate whether cash generation can support debt service, pensions, dividends, and planned investment.
- Review the Voltyre-Prom put option, redeemable noncontrolling interest, and any future potential cash requirement beginning in 2018.
- Evaluate foreign exchange exposure, particularly involving foreign subsidiaries and intercompany loans, and the effect of currency movements on reported sales and earnings.