Titan International, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Titan manufactures off-highway wheels, tires, assemblies, and undercarriage products for agricultural, earthmoving/construction, and consumer markets. The filing covers the three months ended March 31, 2020, with comparison to the three months ended March 31, 2019. Results were materially affected by the COVID-19 pandemic, global market weakness, unfavorable foreign exchange, and plant shutdowns in certain regions.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $341.5 million | $410.4 million | Down 16.8% |
| Gross profit | $27.2 million | $45.3 million | Down 39.8% |
| Gross margin | 8.0% | 11.0% | Down 3.0 percentage points |
| Operating income (loss) | $(9.6) million | $4.1 million | Declined $13.7 million |
| Net income (loss) | $(27.5) million | $1.0 million | Declined $28.5 million |
| Net loss attributable to Titan | $(25.5) million | $2.0 million | Declined $27.5 million |
| Basic and diluted EPS | $(0.42) | $0.02 | Declined $0.44 |
| Operating cash flow | $4.0 million | $(15.6) million | Improved $19.6 million |
| Capital expenditures | $6.4 million | $9.5 million | Down $3.0 million |
Interest expense was $8.0 million, compared with $7.9 million in the prior-year quarter. Foreign exchange produced a $17.2 million loss versus a $5.7 million gain in Q1 2019. Other income increased to $7.4 million, including a $4.9 million property insurance settlement and a $1.3 million gain on the sale of Wheels India Limited shares. The effective tax rate was negative 0.2%, compared with 66% in Q1 2019.
Segment performance
| Segment | Q1 2020 sales | Sales change | Q1 2020 operating result |
|---|---|---|---|
| Agricultural | $172.9 million | Down 9.8% | $(4.7) million |
| Earthmoving/construction | $136.9 million | Down 22.5% | $(7.0) million |
| Consumer | $31.6 million | Down 24.5% | $(0.3) million |
Sales volume declined 12.6% overall. Management attributed the reduction to construction-market weakness, lower agricultural OEM demand, global trade issues, COVID-19-related shutdowns, unfavorable price/mix, and currency translation. COVID-19 reduced European sales by more than $14 million, including approximately $11.9 million in the earthmoving/construction segment. Management estimated that COVID-19 reduced gross profit by approximately $3.8 million during the quarter.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $60.4 million at March 31, 2020, down $6.4 million from December 31, 2019. Approximately $55.4 million was held outside the United States.
- Total debt was $494.6 million in principal, consisting primarily of $400.0 million of 6.50% senior secured notes due 2023, $40.0 million of Titan Europe credit facilities, and $30.0 million drawn on the revolving credit facility.
- The $125 million revolving credit facility had $62.3 million of reported availability after borrowings and a $11.5 million letter of credit.
- Total assets were $1.06 billion and total equity was $178.9 million at March 31, 2020. Titan shareholders’ equity declined to $179.1 million from $234.9 million at year-end 2019, primarily reflecting the quarterly loss and a $32.0 million currency translation adjustment.
- Operating cash flow benefited from lower inventories and higher accounts payable, but accounts receivable increased by $45.3 million during the quarter.
- Management reduced capital spending as part of cash-preservation actions. Full-year 2020 capital expenditures were expected to be significantly below the original $35 million forecast, although a revised forecast was not provided.
Material changes, outlook, and unusual items
- COVID-19 significantly curtailed operations in Europe and Latin America and affected China operations. North American facilities remained open with health and safety protocols, while Australian and Russian operations experienced less disruption.
- Management expected the largest COVID-19 impact on consolidated results and cash flows to occur in Q2 2020 because of production shutdowns, customer disruptions, and supply-chain effects.
- Agricultural demand remained uncertain because of low commodity prices, trade concerns, lower OEM production, and volatile customer forecasts. Aftermarket demand was relatively stable in Q1.
- Earthmoving/construction demand was already declining before the pandemic. Management expected mining demand to be generally flat versus 2019 but stated that the broader market outlook remained uncertain.
- The company planned to finalize closure of its Saltville, Virginia wheel operations by July 2020. Disposal costs were expected, but no estimate was provided; assets at the location were approximately $5 million.
- Q1 included a $2.6 million impairment charge related to machinery and equipment at Titan Tire Reclamation Corporation in Canada.
- The company retained a $6.5 million environmental litigation liability. Titan Tire also maintained a $6.0 million supersedeas bond, and settlement discussions with the United States were ongoing.
- Management stated that available cash, expected operating cash flow, and remaining borrowing capacity were expected to support working capital, debt maturities, and capital expenditures. It also stated that COVID-19 was not expected to cause violations of financial covenants or liquidity constraints in the foreseeable future, although outcomes remained uncertain.
- The company declared a quarterly dividend of $0.005 per common share, paid April 15, 2020.
Investor verification points
- Verify the duration and financial effect of COVID-19-related shutdowns, especially on Q2 and subsequent production, sales, collections, and margins.
- Monitor available revolver capacity, covenant compliance, debt maturities, and refinancing needs, particularly the $400 million notes due in 2023.
- Assess whether cash preservation, working-capital improvements, asset monetizations, and cost reductions are sufficient if operating losses continue.
- Track the Saltville facility closure, expected disposal costs, and any additional impairment charges.
- Review foreign-exchange exposure and the effect of intercompany loan settlements on reported earnings and equity.
- Follow the environmental litigation, the $6.5 million accrued liability, the $6.0 million bond, and settlement developments.
- Evaluate the sustainability of the dividend and the company’s ability to maintain liquidity under prolonged market weakness.