Titan International, Inc. — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
Titan International is a global manufacturer of off-highway wheels, tires, assemblies, and undercarriage products serving agricultural, earthmoving/construction, and consumer markets. This report covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $403.5 million | $341.5 million | 18.2% increase |
| Gross profit / margin | $53.3 million / 13.2% | $27.2 million / 8.0% | Margin up 520 basis points |
| Income (loss) from operations | $14.2 million | $(9.6) million | Improved $23.8 million |
| Net income (loss) | $13.2 million | $(27.5) million | Improved $40.7 million |
| Net income attributable to Titan | $13.6 million | $(25.5) million | Returned to profitability |
| Basic and diluted EPS | $0.22 | $(0.42) | Improved $0.64 |
| Cash flow from operations | $(16.0) million | $4.0 million | Declined $19.9 million |
Sales growth was concentrated in agriculture, up 20.7% to $208.8 million, and earthmoving/construction, up 20.4% to $164.8 million. Consumer sales declined 5.3% to $30.0 million. Volume increased 15.1% company-wide and product price mix increased 4.8%, partly offset by a 1.7% unfavorable foreign-currency translation effect.
Operating margin was approximately 3.5%, compared with negative 2.8% in the prior-year quarter. Net margin was approximately 3.3%, compared with negative 8.1%. Gross profit benefited from higher volume, pricing, and cost-reduction initiatives, but was reduced by approximately $3.3 million from abnormal natural-gas prices during February 2021.
Cash, Debt, and Liquidity
- Cash and cash equivalents were $96.0 million at March 31, 2021, down from $117.4 million at December 31, 2020; $81.6 million was held outside the United States.
- Total debt principal was $474.5 million, including $400.0 million of 6.50% senior secured notes due 2023, $45.1 million of Titan Europe facilities, $9.0 million drawn on the revolving credit facility, and $20.5 million of other debt.
- The $100 million revolving credit facility had $72.7 million of borrowing availability after $9.0 million of borrowings and $9.4 million of letters of credit.
- Operating cash flow was negative because accounts receivable increased $63.8 million and inventories increased $27.3 million amid higher sales. Accounts payable increased $60.6 million.
- Capital expenditures were $8.9 million in the quarter. The cash conversion cycle improved to 82 days from 97 days at December 31, 2020.
Material Changes Versus the Prior Comparable Period
- The company moved from an operating loss and net loss in Q1 2020 to operating and net profitability in Q1 2021.
- The improvement reflected stronger agricultural and construction demand, the absence of COVID-19-related plant closures experienced in early 2020, higher pricing, and production cost reductions.
- Q1 2020 included a $2.6 million asset impairment charge, a $4.9 million property-insurance settlement gain, and a $1.3 million gain on the sale of Wheels India shares; these items did not recur in Q1 2021.
- Foreign exchange results improved substantially, from a $17.2 million loss in Q1 2020 to a $9.5 million gain in Q1 2021, primarily from realized gains related to legal-entity and intercompany-capital restructuring and favorable exchange-rate movements.
- Despite net income, comprehensive loss attributable to Titan was $12.2 million, primarily because of a $27.2 million unfavorable currency-translation adjustment.
Guidance, Outlook, Risks, and Unusual Items
Management expects agricultural demand to benefit from improving commodity prices, higher farmer income, aging equipment fleets, and low dealer inventories. Earthmoving and construction markets showed early recovery, supported by infrastructure activity, improving commodity prices, low equipment inventories, and expected mining capital spending. The consumer segment is expected to stabilize, but recovery is expected to be slower.
- Full-year 2021 capital expenditures are expected to be approximately $35 million to $40 million.
- Cash interest payments were forecast at approximately $27 million for the remainder of 2021 after the debt refinancing described below.
- On April 22, 2021, Titan issued $400 million of 7.00% senior secured notes due 2028 and called the $400 million of 6.50% notes due 2023 for redemption on May 7, 2021 at 103.25% of principal plus accrued interest. Management expected a second-quarter net cash outflow of approximately $19 million for the call premium and transaction costs.
- COVID-19 continued to affect Europe and Latin America, and additional health and safety measures increased operating costs. Management cautioned that quarterly results may not be indicative of future results.
- Raw-material and freight costs, foreign-currency movements, interest rates, tariffs, customer and supplier conditions, labor relations, product liability and warranty claims, environmental regulation, geopolitical conditions, and indebtedness remain significant risks.
- Titan paid $9.2 million in February 2021 under a consent decree relating to environmental litigation; $1.6 million of remaining obligations was classified in accrued liabilities and $1.2 million in long-term liabilities at March 31, 2021.
- A $25 million redeemable noncontrolling interest related to RDIF remains outstanding. If OFAC does not approve the release of 4,032,259 escrowed Titan shares by December 31, 2021, Titan and RDIF may pursue alternative settlement terms that could require a $25 million cash payment.
- Management stated that available cash, expected operating cash flow, and credit availability should provide sufficient liquidity for working capital, debt maturities, and capital expenditures, and that it does not anticipate violating debt covenants.
Investor Verification Checklist
- Verify the completion, pricing, and cash impact of the April 2021 refinancing and redemption of the 2023 notes.
- Monitor operating cash conversion, receivables, inventories, and borrowing levels as sales growth continues.
- Assess whether agricultural and earthmoving/construction demand and pricing remain strong after COVID-19 comparisons normalize.
- Track raw-material, freight, energy, labor, and foreign-exchange impacts on gross margins.
- Confirm the timing and amounts of the remaining environmental settlement payments.
- Monitor OFAC approval and the potential $25 million RDIF cash obligation.
- Compare actual 2021 capital expenditures and interest expense with management’s stated expectations.