Titan International, Inc. — Form 10-Q Summary
Business context and reporting period
Titan manufactures wheels, tires and assemblies for off-highway vehicles serving agricultural, earthmoving/construction and consumer markets. This unaudited filing covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. The company had 42.3 million common shares outstanding as of July 23, 2012.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $459.2 million | $404.4 million | $922.3 million | $685.3 million |
| Gross profit | $82.1 million | $64.3 million | $175.4 million | $120.6 million |
| Gross margin | 17.9% | 15.9% | 19.0% | 17.6% |
| Income from operations | $81.0 million | $44.4 million | $139.6 million | $71.3 million |
| Operating margin | 17.6% | 11.0% | 15.1% | 10.4% |
| Net income attributable to Titan | $44.1 million | $25.6 million | $79.5 million | $22.5 million |
| Diluted EPS | $0.84 | $0.50 | $1.53 | $0.47 |
Six-month net income was $79.7 million, including noncontrolling interests. Income tax expense was $31.0 million in the quarter and $51.1 million year to date; the six-month effective tax rate was 39%, compared with 50% in 2011.
Operating cash flow was $48.7 million in the first six months of 2012, compared with cash usage of $30.6 million in 2011. Capital expenditures were $19.0 million, and investing cash usage was $18.6 million. Financing activities used $9.2 million, primarily reflecting $14.2 million of debt payments partially offset by $4.4 million of term-loan borrowings. Cash increased to $149.5 million from $129.2 million at December 31, 2011.
At June 30, 2012, total debt was $320.5 million, consisting primarily of $200.0 million of 7.875% senior secured notes due 2017 and $112.9 million of 5.625% convertible senior subordinated notes due 2017. Short-term debt was $7.6 million and long-term debt was $312.9 million. The company had no borrowings under its $100 million revolving credit facility and was in compliance with its covenants.
Material changes versus the prior comparable period
- Second-quarter sales increased 14%, while six-month sales increased 35%. Management attributed growth to stronger agricultural and earthmoving/construction demand, price/mix improvements and the Goodyear Latin American farm tire acquisition.
- Quarterly gross margin expanded to 17.9% from 15.9%; management cited operating leverage, productivity gains and price increases exceeding raw-material cost increases.
- A $26.1 million supply-agreement termination gain materially increased second-quarter and year-to-date operating income. Goodyear and Titan terminated a below-market supply agreement in May 2012, allowing Titan to sell the products directly and pay Goodyear a royalty.
- The prior-year six-month results included a $16.1 million noncash convertible-debt conversion charge; no comparable charge was recorded in 2012.
- Agricultural sales rose 12% in the quarter and 25% year to date. Earthmoving/construction sales rose 44% in the quarter and 50% year to date, aided by demand for larger mining products. Consumer sales fell 15% in the quarter because of reduced supply-agreement sales, although year-to-date consumer sales increased 64%.
- Accounts receivable increased to $237.4 million and inventories to $214.9 million from $189.5 million and $190.9 million, respectively, at December 31, 2011. Days sales outstanding increased to 47 days from 42 days, while inventory days remained broadly stable at 54 days versus 55 days.
Guidance, outlook, risks and unusual items
Management expected sales to remain strong for the remainder of 2012. It forecast approximately $30 million of capital expenditures and approximately $12 million of remaining 2012 cash interest payments. Management stated that cash on hand, operating cash flow and available borrowing capacity should fund working capital, capital expenditures and potential acquisitions.
In July 2012, Titan announced an agreement to acquire a majority interest in Planet Corporation Group of Companies, an Australian off-road tire and wheel specialist, in an all-cash transaction expected to close in the third quarter of 2012. Purchase price and expected financing were not provided in the filing.
- Energy, raw-material and petroleum-based costs remain volatile and could pressure margins.
- Drought conditions and lower expected U.S. farming yields could weaken agricultural demand during the remainder of 2012.
- Management expected strong earthmoving and mining demand but identified commodity prices, housing, infrastructure spending, government appropriations and credit conditions as significant variables.
- Employees at the Bryan, Ohio and Freeport, Illinois facilities, representing approximately 34% of employees, were working without contracts as of June 30, 2012; the unions retained rights to challenge company actions.
- Foreign-currency movements, labor relations, warranty and product-liability claims, environmental regulation, raw-material availability, legal proceedings and economic conditions could materially affect results.
- Warranty liability increased to $21.2 million from $14.2 million at June 30, 2011. Titan expected approximately $4.9 million of additional pension contributions during the remainder of 2012.
- Unrecognized tax benefits were $3.1 million at June 30, 2012, of which $2.0 million would affect tax expense if recognized.
- The company reported routine litigation and believed no pending matters were likely to have a material adverse effect, while noting that outcomes remain uncertain.
Most important facts for investors to verify
- Determine the sustainable earnings impact of the $26.1 million supply-agreement termination gain and the effect of ending related consumer-market sales.
- Assess whether agricultural and earthmoving/construction demand remained strong after the quarter, particularly given drought and broader economic risks.
- Monitor receivables, inventory levels and working-capital conversion as sales growth continues.
- Review debt maturities, refinancing requirements and covenant compliance, including the 2017 senior secured and convertible notes and the 2014 revolving-facility expiration.
- Verify the closing date, purchase price, financing and expected contribution of the Planet acquisition.
- Track raw-material costs, foreign-exchange exposure, labor negotiations, warranty claims and pension funding requirements.