Titan International, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2013. Financial statements are unaudited and presented in thousands, except per-share data.
Business Context
Titan manufactures wheels, tires, wheel and tire assemblies, and undercarriage systems for agricultural, earthmoving/construction, mining, and consumer markets. Results include the August 2012 Planet Group acquisition and the October 2012 acquisition of Titan Europe, which expanded the company’s international operations and product portfolio.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $578.4 million | $463.1 million | +25% |
| Gross profit | $96.8 million | $93.4 million | +4% |
| Gross margin | 16.7% | 20.2% | Down 350 bps |
| Operating income | $47.9 million | $58.7 million | −18% |
| Operating margin | 8.3% | 12.7% | Down 440 bps |
| Net income attributable to Titan | $19.5 million | $35.4 million | −45% |
| Basic EPS | $0.38 | $0.84 | −55% |
| Diluted EPS | $0.30 | $0.68 | −56% |
| Operating cash flow | $21.3 million | $20.6 million | +$0.6 million |
| Capital expenditures | $21.2 million | $8.2 million | +$13.0 million |
Segment sales were $310.6 million in agricultural, $209.6 million in earthmoving/construction, and $58.2 million in consumer. Agricultural operating income declined to $41.6 million from $60.7 million, while earthmoving/construction operating income was $20.7 million versus $20.4 million and consumer operating income was $3.1 million versus $3.1 million.
At March 31, 2013, cash and cash equivalents were $508.4 million, compared with $189.1 million at December 31, 2012. Total debt was $864.8 million, including $230.7 million classified as current and $634.2 million as long-term; reported debt less cash was approximately $356.4 million. No borrowings were outstanding under the $150 million revolving credit facility.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the Planet Group and Titan Europe acquisitions and stronger agricultural demand. Management stated that acquired entities contributed approximately 35% additional sales, while volume was generally consistent with the prior year.
- Lower raw-material prices were passed through to customers before the related cost benefits were fully realized, reducing price/mix and compressing gross margin.
- Operating expenses increased with the acquired businesses, including approximately $18 million of acquired SG&A and approximately $1 million of acquired R&D. The increase was partly offset by an approximately $8 million decline in incentive compensation.
- Interest expense increased to $10.4 million from $6.3 million, primarily due to Titan Europe debt.
- The company recorded a $7.3 million convertible-debt conversion charge after exchanging approximately $52.7 million of convertible notes for approximately 4.9 million shares plus $14.2 million of cash.
- Financing activities generated $319.4 million, primarily from issuing $325 million of additional 7.875% senior secured notes due 2017. Cash increased by $319.3 million during the quarter.
Liquidity, Debt, Outlook, and Risks
Operating cash flow was substantially offset by capital expenditures, while financing proceeds drove the increase in cash. Accounts receivable and inventories increased during the quarter, although days sales outstanding improved to 51 days from 54 days at December 31, 2012, and days sales in inventory improved to 83 days from 86 days.
Management expected 2013 sales to continue at similar levels. Capital expenditures for the remainder of 2013 were forecast at approximately $50 million, and remaining 2013 interest payments were forecast at approximately $30 million. Management expected cash on hand, operating cash flow, and available borrowings to support working capital, capital expenditures, and potential acquisitions.
In April 2013, Titan used approximately $110 million of cash to repay certain Titan Europe credit facilities and settle related derivative instruments. The company had failed certain European debt covenants at December 31, 2012 but was compliant at March 31, 2013 because the covenant tests required failure in two successive six-month periods. The affected facilities were repaid in the second quarter.
Titan Europe’s earthmoving/construction demand was weaker in Europe, and management expected that market to remain weaker for the remainder of 2013. Key risks include raw-material, energy, petroleum, currency, and interest-rate volatility; seasonal demand; fixed overhead; customer and end-market weakness; labor relations; warranty and product-liability claims; environmental and regulatory matters; acquisition integration; and debt covenant compliance.
A Titan Europe wheel facility damaged by an earthquake in Italy remained under restoration, expected to continue through 2014. In April 2013, Titan reached a preliminary, approval-dependent agreement for a net insurance settlement of €35 million.
The company declared a quarterly dividend of $0.005 per common share. It reported no material change in previously disclosed risk factors, and management concluded that disclosure controls and procedures were effective as of March 31, 2013.
Investor Verification Checklist
- Verify the final approval, timing, and accounting treatment of the proposed €35 million earthquake insurance settlement.
- Confirm the April 2013 repayment of approximately $110 million of Titan Europe debt and related derivatives, including its effect on liquidity and leverage.
- Assess whether gross-margin pressure from raw-material pass-through and weaker European demand persisted after the quarter.
- Reconcile reported debt maturities, including approximately $227.1 million due during the remainder of 2013 and approximately $590.3 million due in 2017.
- Evaluate integration, profitability, and cash generation from the Planet Group and Titan Europe acquisitions.
- Monitor unrecognized tax benefits of $15.3 million, warranty liabilities of $27.8 million, pension contributions, and routine litigation exposures.