Titan International, Inc. — Q3 2016 Form 10-Q Summary
Business Context and Reporting Period
Titan manufactures wheels, tires, wheel and tire assemblies, and undercarriage systems for off-highway agricultural, earthmoving/construction, mining, industrial, and consumer applications. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $306.2 million | $308.8 million | $958.2 million | $1,087.0 million |
| Gross profit | $33.0 million | $26.2 million | $109.9 million | $120.0 million |
| Gross margin | 10.8% | 8.5% | 11.5% | 11.0% |
| Loss from operations | $(8.3) million | $(14.5) million | $(12.3) million | $(6.1) million |
| Net loss | $(10.9) million | $(37.6) million | $(22.1) million | $(34.4) million |
| Net loss applicable to common shareholders | $(11.3) million | $(42.5) million | $(29.5) million | $(35.9) million |
| Basic and diluted EPS | $(0.21) | $(0.79) | $(0.55) | $(0.67) |
| Operating cash flow | Not separately provided | Not separately provided | $54.0 million | $30.5 million |
At September 30, 2016, cash and cash equivalents were $215.5 million, including approximately $70.3 million held outside the United States. Total debt was $501.1 million net of unamortized discount, consisting of $91.0 million classified as current and $410.1 million as long-term. The company had no borrowings under its $150 million revolving credit facility; availability was $43.4 million after considering eligible collateral and an $11.6 million letter of credit.
Capital expenditures were $30.8 million during the first nine months, compared with $35.2 million in 2015. Cash flow was also affected by $14.0 million of debt repayments and $0.8 million of dividends. Inventories increased to $278.1 million, and inventory days increased to 93 from 77 at December 31, 2015.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 1%, while nine-month sales declined 12%, reflecting lower agricultural and consumer volumes, unfavorable price/mix, and nine-month currency translation effects.
- Gross margin improved to 10.8% in the quarter and 11.5% year to date, supported by production-efficiency initiatives, cost reductions, lower material costs, quality improvements, and pricing actions.
- Third-quarter operating loss narrowed to $8.3 million from $14.5 million, but the nine-month operating loss widened to $12.3 million from $6.1 million because of the lower sales base and continuing corporate costs.
- Net loss improved substantially in both periods, aided by favorable foreign-exchange results and higher other income. Foreign-exchange results changed from a $15.3 million loss in Q3 2015 to a $0.4 million gain in Q3 2016, and from a $5.7 million loss to a $7.4 million gain for the nine months.
- Agricultural sales decreased 14% year to date and operating income decreased to $35.3 million from $38.4 million. Earthmoving/construction sales declined 8%, but operating income improved to $4.4 million from $1.8 million. Consumer sales declined 16% and operating income fell to $2.2 million from $6.7 million.
- In the first quarter, Titan increased its ownership of Voltyre-Prom from 30% to 43% through conversion of an intercompany note. Redeemable noncontrolling interest increased to $102.8 million from $77.2 million, including an $8.5 million redemption-value adjustment.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal revenue or earnings guidance. It expects agricultural demand to remain pressured through 2016, particularly for large equipment; mining demand to remain depressed; and the consumer market to remain highly competitive, with Brazil-related economic uncertainty continuing. Small and medium earthmoving/construction demand improved during 2016, while larger mining-related demand remained weak.
- Estimated remaining 2016 capital expenditures: approximately $3 million to $5 million.
- Forecast remaining 2016 interest payments: approximately $15 million, including a $13.8 million semiannual payment on the senior secured notes.
- The $60.2 million convertible notes mature in January 2017 and were classified as short-term debt.
- The company was discussing renewal of its revolving credit facility and anticipated completion by early 2017.
- The Voltyre-Prom settlement put option is exercisable from July through December 2018 and could require payment in cash or common stock. Management estimated the obligation at approximately $117 million if exercised in July 2018.
- An IRS audit for 2010–2014 resulted in a proposed adjustment of $6.5 million. Titan disputed certain adjustments, filed a protest with the IRS Appeals Office, and stated that it believes adequate tax reserves have been recorded.
- Management reported that disclosure controls and procedures were not effective because of a previously disclosed material weakness in internal control over financial reporting. Remediation involving personnel, processes, systems, and control testing was in progress.
- Key risks include cyclical agricultural and mining markets, raw-material and energy-price volatility, foreign-exchange movements, Brazil and Russia exposure, customer and competitor pricing, warranty and product-liability claims, tax matters, debt covenants, and potential asset impairment.
Important Facts for Investors to Verify
- How Titan will refinance or repay the $60.2 million convertible notes due January 2017.
- Progress and final terms of the revolving credit facility renewal, including actual borrowing availability.
- Whether operating improvements can offset continued agricultural and mining-market weakness and corporate/unallocated expenses of $54.1 million year to date.
- The status and potential cash or equity impact of the Voltyre-Prom settlement put option.
- Resolution of the IRS proposed adjustment and the adequacy of related tax reserves.
- Remediation and testing of the material weakness in internal control over financial reporting.
- Inventory growth, working-capital requirements, foreign cash restrictions, and the company’s ability to sustain positive operating cash flow while remaining loss-making.