Titan International, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Titan International is a global manufacturer of wheels, tires, wheel/tire assemblies, and undercarriage systems serving agricultural, earthmoving/construction, and consumer markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $384.7 million | $371.0 million | $1.239 billion | $1.093 billion |
| Gross profit | $43.7 million | $40.1 million | $161.6 million | $124.4 million |
| Gross margin | 11.4% | 10.8% | 13.0% | 11.4% |
| Income (loss) from operations | $4.8 million | $(4.7) million | $43.2 million | $(6.8) million |
| Net income (loss) | $2.7 million | $(11.2) million | $27.1 million | $(28.3) million |
| Net income (loss) applicable to common shareholders | $(1.8) million | $(12.9) million | $17.3 million | $(33.7) million |
| Basic and diluted EPS | $(0.03) | $(0.22) | $0.29 | $(0.57) |
Q3 sales increased 3.7%, while nine-month sales increased 13.4%. Management attributed the nine-month growth primarily to higher volume, particularly in earthmoving/construction, supplemented by favorable price/mix.
Q3 selling, general and administrative expense declined to $33.7 million from $39.8 million, and nine-month SG&A declined to $102.3 million from $115.6 million. The reductions were primarily associated with the absence of the $6.5 million environmental legal accrual and related non-recurring legal costs recorded in 2017. The company also capitalized $6.1 million of cloud-computing ERP implementation costs in 2018.
Q3 income before taxes was $5.5 million, including $7.4 million of other income and $0.9 million of foreign-exchange gain. The nine-month period included a $7.2 million foreign-exchange loss, primarily related to Latin American currency devaluations, and $17.7 million of other income. Effective tax rates were 51% for Q3 and 12% for the nine-month period.
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash and cash equivalents were $96.8 million at September 30, 2018, down $46.8 million from December 31, 2017.
- Operating activities used $32.7 million of cash in the first nine months, compared with $15.2 million used in the prior-year period. Working-capital investment included $52.8 million used for receivables and $62.6 million used for inventories.
- Capital expenditures were $26.5 million, compared with $23.6 million in the prior-year period.
- Financing activities provided $17.1 million, including $48.1 million of borrowings and $30.1 million of debt repayments.
- Total debt principal was $466.4 million, consisting primarily of $400.0 million of 6.50% senior secured notes due 2023. Net debt carrying value was $461.3 million.
- The $75 million revolving credit facility had no borrowings outstanding; availability was $62.7 million after a $12.3 million letter of credit and eligibility adjustments.
- Current assets were $804.7 million versus current liabilities of $381.7 million. The company reported total equity of $288.6 million and redeemable noncontrolling interest of $119.9 million.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially: the company moved from operating and net losses in Q3 2017 to operating income of $4.8 million and net income of $2.7 million in Q3 2018.
- Nine-month operating income improved by $50.0 million to $43.2 million, and nine-month net income improved by $55.5 million to $27.1 million.
- Earthmoving/construction was the primary growth driver. Q3 sales rose 15.3% and nine-month sales rose 28.2%; nine-month operating income increased to $27.6 million from $6.6 million.
- Agricultural Q3 sales declined 4.4% because of lower volume and unfavorable currency translation, although nine-month sales increased 3.8% and operating income improved to $51.9 million from $37.2 million.
- Consumer Q3 sales declined 6.1% because of currency effects, while nine-month sales increased 0.8% and operating income improved to $10.8 million from $8.2 million.
- Comprehensive income attributable to Titan turned negative at $(9.4) million in Q3 and $(10.4) million for nine months, primarily because of currency translation losses of $13.6 million and $43.9 million, respectively.
- The cash conversion cycle increased to 110 days at September 30, 2018, from 97 days at December 31, 2017.
Guidance, Outlook, Risks, and Unusual Items
- Management forecast 2018 capital expenditures of approximately $35 million to $40 million and fourth-quarter pension contributions of approximately $1.8 million.
- Management expected approximately $14 million of fourth-quarter interest payments, primarily reflecting the semiannual senior-notes payment.
- Management stated that available cash, anticipated operating cash flow, and unused borrowing capacity were expected to provide sufficient liquidity for working capital, debt maturities, and capital expenditures.
- Earthmoving/construction demand was expected to continue improving through the remainder of 2018. Agricultural demand remained exposed to crop prices, farm income, tariffs, trade policy, interest rates, weather, and currency movements. Consumer markets were expected to remain highly competitive.
- Key risks include raw-material, energy, petroleum-based product, tariff, currency, interest-rate, and geopolitical volatility; fixed-cost operating leverage; customer and end-market weakness; warranty and product-liability claims; environmental regulation; manufacturing interruptions; and debt covenant compliance.
- The Voltyre-Prom settlement put option was exercisable during a six-month period beginning July 9, 2018. If exercised in full, the estimated purchase obligation was approximately $117 million to $122 million, payable in cash or Titan common stock. The filing stated that no exercise notice had been received as of the filing date.
- Titan accrued a $6.5 million contingent environmental liability in Q3 2017. The related litigation remained on appeal, and the outcome could not be predicted.
- The company expects adoption of the new lease standard in 2019 to have a material effect on its financial position and disclosures because of its significant operating leases.
Most Important Facts to Verify
- Whether operating cash flow improves as receivables and inventories normalize, given the $32.7 million operating cash use and 110-day cash conversion cycle.
- Whether earthmoving/construction demand and production efficiencies continue to offset agricultural softness and consumer-market competition.
- The timing and funding method for any exercise of the Voltyre-Prom put option, which could require approximately $117 million to $122 million.
- Compliance with debt covenants and the availability of the revolving facility, including the impact of the $12.3 million letter of credit.
- The sustainability of reported margins after excluding favorable comparisons from 2017 legal accruals and considering higher raw-material costs, currency losses, and the $6.1 million ERP capitalization.
- The ultimate outcome of the environmental litigation and any additional response-cost exposure.