Titan International, Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020; filed August 5, 2020. Titan manufactures off-highway wheels, tires, assemblies, and undercarriage products for agricultural, earthmoving/construction, and consumer markets. Results were materially affected by the COVID-19 pandemic.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $286.1 million | $390.6 million | $627.6 million | $801.0 million |
| Gross profit | $29.9 million | $38.3 million | $57.1 million | $83.6 million |
| Gross margin | 10.4% | 9.8% | 9.1% | 10.4% |
| Operating income (loss) | $(3.1) million | $(2.4) million | $(12.7) million | $1.7 million |
| Net loss attributable to Titan | $(5.0) million | $(6.4) million | $(30.5) million | $(4.4) million |
| Loss per share | $(0.08) | $(0.12) | $(0.50) | $(0.10) |
- Q2 sales declined 26.7%; six-month sales declined 21.6%. Volume decreased 24.0% in Q2 and 18.1% year to date, while unfavorable currency translation reduced sales by 5.1% and 4.1%, respectively.
- Q2 gross margin improved because of labor and overhead reductions and lower raw-material costs, despite lower volume and a $1.0 million inventory impairment related to the planned Saltville, Virginia closure.
- SG&A declined 20.4% in Q2 and 15.7% year to date, reflecting lower professional fees, payroll, marketing, and travel costs.
- Foreign exchange produced an $8.8 million gain in Q2 but an $8.4 million loss for the first six months, primarily reflecting currency movements and intercompany loan remeasurement.
- Other income for the six months included a $4.9 million property-insurance settlement; Q2 included a $2.0 million loss on the sale of remaining Wheels India shares.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Operating cash flow was $5.5 million for the six months ended June 30, 2020, compared with $(10.0) million in the prior-year period.
- Investing cash flow was $11.9 million, including $15.7 million from the sale of Wheels India shares and $4.9 million of insurance proceeds. Capital expenditures were $8.4 million versus $16.7 million in the prior-year period.
- Financing cash flow was $2.8 million, reflecting $76.8 million of borrowings and $74.0 million of debt repayments.
- Cash and cash equivalents were $80.2 million at June 30, 2020, up from $66.8 million at December 31, 2019; approximately $76.5 million was held outside the United States.
- Total debt had principal outstanding of $506.6 million, including $400.0 million of 6.50% senior secured notes due November 2023. Carrying value was $503.0 million, comprising $40.8 million due within one year and $462.2 million classified as long-term debt.
- The $125 million revolving credit facility had $28.0 million drawn, $19.7 million of letters of credit outstanding, and $37.9 million available at June 30, 2020.
- Total assets were $1.03 billion and total equity was $176.7 million. Titan shareholders’ equity declined to $175.4 million from $234.9 million at year-end, primarily due to losses and currency translation adjustments.
- The cash conversion cycle increased to 121 days from 114 days at December 31, 2019.
Material Changes Versus the Prior Comparable Period
- COVID-19-related shutdowns and market disruptions reduced sales by approximately $31 million in Q2 and $45 million for the first six months, primarily in Europe, Asia, and Latin America.
- Earthmoving/construction was the most severely affected segment: Q2 sales decreased 39.1% and the segment moved from $5.7 million of operating income to a $1.9 million loss. Six-month sales decreased 31.0% and the segment moved from $11.2 million of operating income to an $8.9 million loss.
- Agricultural Q2 operating income increased to $7.0 million from $4.4 million despite a 10.4% sales decline, supported by cost reductions and lower raw-material costs. Six-month agricultural operating income fell to $2.3 million from $18.3 million.
- Consumer Q2 operating income increased modestly to $1.4 million from $1.2 million, while six-month operating income declined to $1.1 million from $3.3 million.
- The quarterly common-stock dividend was suspended on June 11, 2020, until further notice. A $0.005 per-share dividend had been declared for the first quarter of 2020.
- Management approved North American and corporate restructuring activities, including workforce reductions. The Company recorded $0.4 million of severance costs and expects additional disposal costs from the Saltville closure, although no estimate was provided.
Outlook, Risks, and Unusual Items
- Management stated that the outlook for the remainder of 2020 was highly uncertain and dependent on COVID-19 containment, customer recovery, and the normalization of supply and demand. No quantitative revenue or earnings guidance was provided.
- Management forecast full-year 2020 capital expenditures of approximately $20 million and approximately $15 million of interest payments for the remainder of 2020.
- Management expected cash, operating cash flows, and available credit to support working capital, debt maturities, and capital expenditures, and did not anticipate covenant violations or significant liquidity constraints in the foreseeable future. These expectations remain subject to pandemic-related disruption.
- Principal risks include prolonged COVID-19 effects, recession and end-market weakness, raw-material availability and pricing, foreign exchange volatility, indebtedness and covenant compliance, customer demand, tariffs, environmental and product-liability matters, and potential asset impairments.
- The Company retained a $6.5 million environmental contingent liability related to CERCLA litigation. Titan Tire also maintained a $6.0 million supersedeas bond, while settlement discussions continued.
- Redeemable noncontrolling interest remained $25.0 million, representing restricted Titan shares issuable to RDIF subject to regulatory approval. The shares had not been issued as of June 30, 2020.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter.
Investor Verification Items
- Verify the pace and geographic breadth of post-pandemic production and customer-demand recovery, particularly in earthmoving/construction.
- Monitor availability under the revolving credit facility, fixed-charge coverage requirements, and the concentration of cash held overseas.
- Assess the November 2023 maturity of the $400 million senior secured notes and refinancing requirements.
- Track the impact of the Saltville closure, restructuring charges, asset impairments, and any additional disposal costs.
- Review the environmental litigation liability, supersedeas bond, and potential settlement outcomes.
- Confirm whether the dividend suspension continues and whether future cash preservation measures affect capital spending or shareholder returns.