TITAN INTERNATIONAL INC annual report, FY2012

Titan International, Inc. — FY2012 Form 10-K Summary

Business context and reporting period

Titan manufactures wheels, tires, wheel-and-tire assemblies, and undercarriage systems for off-highway agricultural, earthmoving/construction, mining, and consumer markets. The filing covers the fiscal year ended December 31, 2012; quarterly data are included, but this is an annual Form 10-K rather than a standalone Q4 filing.

Agricultural sales were 59% of total revenue, earthmoving/construction 28%, and consumer 13%.
Titan acquired a 56% controlling interest in Planet Corporation Group, now Titan National Australia Holdings, in August 2012, and acquired 100% of Titan Europe Plc in October–December 2012.
The company employed approximately 6,300 people worldwide at year-end.

Financial performance and key metrics

Metric	2012	2011	Change
Net sales	$1,820.7 million	$1,487.0 million	+22%
Gross profit	$294.1 million	$232.1 million	+27%
Gross margin	16.2%	15.6%	+0.6 percentage points
Income from operations	$174.7 million	$132.2 million	+32%
Operating margin	9.6%	8.8%	+0.8 percentage points
Net income	$94.0 million	$58.1 million	+62%
Net income attributable to Titan	$95.6 million	$58.2 million	+64%
Diluted EPS	$1.83	$1.18	+55%
Cash from operating activities	$130.2 million	$4.4 million	+$125.7 million
Capital expenditures	$65.7 million	$35.7 million	+$30.0 million

Revenue growth reflected approximately 15% from acquired entities, 3% from higher volume, and 7% from price and mix improvements, partially offset by approximately 3% unfavorable foreign-currency translation. Productivity gains, selective pricing, and a shift toward larger products supported margin expansion.

Agricultural revenue increased 12% to $1,080.4 million; operating income increased 13% to $178.6 million.
Earthmoving/construction revenue increased 63% to $501.6 million; operating income increased 44% to $47.3 million.
Consumer revenue increased 9% to $238.6 million. Operating income increased to $32.2 million, substantially benefiting from $26.1 million of supply-agreement termination income.
SG&A increased 47% to $126.2 million, or 6.9% of sales, due to higher selling and marketing costs, information technology, incentive compensation, acquisition-related costs, and acquired facilities.
Interest expense increased to $27.7 million from $25.3 million, primarily due to debt assumed or incurred by Titan Europe.
The effective tax rate increased to 48% from 39%, affected by foreign and state taxes, unrecognized tax benefits, and the write-off of a deferred tax asset related to Titan Europe.

Liquidity, debt, and financial position

Cash and cash equivalents were $189.1 million at December 31, 2012, including $84.8 million held outside the United States.
Working capital was $517.3 million; current assets were $979.0 million and current liabilities were $461.7 million.
Total debt was approximately $587.2 million, including $145.8 million classified as current and $441.4 million classified as long term.
Major debt included $200.0 million of 7.875% senior secured notes due 2017, $112.9 million of 5.625% convertible notes due 2017, and $202.1 million of European credit facilities.
No borrowings were outstanding under the $150 million revolving credit facility at year-end. The facility was amended in December 2012, extending its maturity to December 2017 and increasing the commitment from $100 million.
Stockholders’ equity increased to $620.6 million from $396.9 million, primarily reflecting earnings, the issuance of 6.26 million shares for the Titan Europe acquisition, and increased noncontrolling interests.
2013 planned capital expenditures were approximately $70 million to $75 million, expected pension contributions were approximately $5 million, and forecast cash interest payments were approximately $33 million.

Material changes versus the prior comparable period

Sales, operating income, net income, operating cash flow, and margins all improved materially from 2011.
Titan Europe added substantial assets, debt, operations, and international exposure. The acquisition was funded primarily with newly issued Titan shares; a $26.7 million noncash gain was recognized on Titan’s previously held 21.8% interest.
Termination of the Goodyear supply agreement generated $26.1 million of income and allowed Titan to sell certain non-farm tire products directly to third-party customers while paying royalties to Goodyear.
Operating cash flow improved sharply as accounts receivable and inventory generated cash in 2012, reversing the substantial working-capital use reported in 2011.
Inventory days increased to 86 from 55, and days sales outstanding increased to 54 from 42, principally due to Titan Europe and larger mining products with longer shipping terms.
Quarterly Titan-attributable results were uneven: net income was $35.4 million in Q1, $44.1 million in Q2, $19.6 million in Q3, and a $3.5 million loss in Q4. Q2 included the supply-agreement income and Q4 included the Titan Europe gain.

Guidance, outlook, risks, and unusual items

Management expected 2013 sales to remain at broadly similar or strong levels, with continued agricultural and earthmoving/construction demand. The principal offset identified was potentially weaker European earthmoving/construction demand.

Order backlog was estimated at $753 million as of January 31, 2013, compared with $542 million one year earlier; management expected most of the backlog to ship during 2013.
Key risks include steel and rubber price volatility, limited suppliers, cyclical end markets, customer concentration, foreign exchange exposure, competition, seasonality, labor relations, environmental and product-liability claims, and integration of acquisitions.
The ten largest customers represented approximately 50% of 2012 sales. Deere represented 19% and CNH Global 10%.
Labor agreements at the Bryan, Freeport, and Des Moines facilities had expired; employees representing approximately 46% of U.S. employees were working under the terms of the company’s latest offer without new contracts.
Titan did not meet certain European credit-facility financial covenants at December 31, 2012, but remained in compliance because this was the first noncompliant testing period; a second successive failure could create a default risk.
The defined-benefit pension plans were underfunded by $60.9 million, compared with $42.9 million in 2011. The projected benefit obligation was $139.1 million.
A January 2013 agreement exchanged approximately $52.7 million of convertible notes for approximately 4.9 million shares plus $14.2 million in cash. Titan expected to record an approximately $7.3 million conversion charge in Q1 2013.
Routine legal proceedings were not expected by management to have a material adverse effect. The company reported no material off-balance-sheet arrangements.
Management and Grant Thornton concluded that internal control over financial reporting was effective as of December 31, 2012, although controls at the recently acquired Titan National and Titan Europe entities were excluded from the assessment.

Most important facts for investors to verify

Whether 2013 demand and backlog conversion offset weaker European construction activity and normal seasonality.
The company’s ability to satisfy European debt covenants in subsequent testing periods and manage $145.8 million of debt due within one year.
Whether operating cash flow remains strong after the favorable 2012 working-capital movement.
The sustainability of margins excluding the $26.1 million supply-agreement termination income and $26.7 million Titan Europe remeasurement gain.
Integration performance, leverage, and cash generation from the Titan Europe and Planet acquisitions.
Progress on labor agreements at the three U.S. facilities.
Exposure to commodity prices, foreign exchange movements, customer concentration, pension funding requirements, and the approximately $7.3 million Q1 2013 conversion charge.