Titan International, Inc. — Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2017; comparative periods ended June 30, 2016. Financial statements are unaudited. Titan manufactures wheels, tires, wheel and tire assemblies, and undercarriage systems for agricultural, earthmoving/construction, and consumer markets.
Financial Performance and Position
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Net sales | $364.4 million | $330.2 million | $721.9 million | $652.0 million |
| Gross profit | $43.6 million | $43.7 million | $83.3 million | $72.0 million |
| Gross margin | 12.0% | 13.2% | 11.5% | 11.0% |
| Operating income (loss) | $4.0 million | $2.6 million | $(3.1) million | $(8.9) million |
| Net loss | $(6.5) million | $(3.8) million | $(17.1) million | $(16.1) million |
| Net loss applicable to common shareholders | $(10.3) million | $(5.2) million | $(20.8) million | $(23.1) million |
| Basic and diluted loss per share | $(0.17) | $(0.10) | $(0.35) | $(0.43) |
- Six-month operating cash flow was negative $30.6 million, versus positive $29.7 million in the prior-year period. Working-capital investment included $34.9 million of additional accounts receivable and $43.7 million of additional inventory, partly offset by a $33.1 million increase in accounts payable.
- Capital expenditures were $15.2 million, compared with $18.1 million in the prior-year period. Investing cash flow was positive $25.9 million, including $40.0 million from certificates of deposit that matured.
- Cash and cash equivalents were $143.2 million at June 30, 2017, compared with $147.8 million at December 31, 2016. Including $10.0 million of certificates of deposit, reported liquid funds totaled $153.2 million.
- Total debt was $451.4 million net carrying value, including $396.3 million of 6.875% senior secured notes due 2020. Short-term debt was $42.6 million and long-term debt was $408.8 million.
- The new $75 million revolving credit facility had no borrowings outstanding; availability was $63.4 million after considering eligible collateral and an $11.6 million letter of credit.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 10%, while six-month sales increased 11%. Management attributed the increases primarily to higher volume, with favorable price/mix and currency translation also contributing.
- Agricultural sales increased 18% in both the quarter and six-month period. Earthmoving/construction sales increased 7% in the quarter and 5% year to date. Consumer sales declined 5% in the quarter but increased 3% for the six-month period.
- Second-quarter gross margin declined to 12.0% from 13.2%, principally because raw-material cost increases were not fully passed through to customers. Six-month gross margin improved to 11.5% from 11.0%, reflecting cost and efficiency initiatives.
- Second-quarter operating income improved to $4.0 million from $2.6 million, but net loss increased because foreign exchange results shifted from a $2.2 million gain to a $5.3 million loss.
- Interest expense declined by $0.7 million in the quarter and $1.5 million year to date, primarily because 97.1% of the $60.2 million convertible notes due 2017 were converted into 5.46 million common shares in January 2017. The remaining $1.7 million was paid in cash.
- Common-shareholder results include redemption value adjustments of $4.0 million in the quarter and $3.1 million year to date related to redeemable noncontrolling interests.
- Effective January 1, 2017, Titan changed a subsidiary’s inventory method from LIFO to FIFO and retrospectively adjusted prior periods. The cumulative effect increased retained earnings by $6.6 million at January 1, 2016.
Guidance, Outlook, Risks, and Unusual Items
- Management expects 2017 capital expenditures of approximately $15 million to $20 million and forecast cash interest payments of approximately $16 million for the remainder of 2017.
- Management expects to contribute approximately $1.9 million to pension plans during the remainder of 2017.
- The agricultural market is expected to remain broadly flat, with replacement and aftermarket demand providing opportunity. New-equipment demand has been pressured by lower farm income, excess used-equipment inventories, and the shift toward lower-horsepower tractors.
- Earthmoving/construction demand is expected to improve slightly in mining and remain flat to modestly higher in smaller equipment markets. The consumer market is expected to remain highly competitive.
- Raw-material, energy, and petroleum-based input costs remain volatile and pressured margins. Other risks include cyclical end markets, foreign-exchange volatility, labor and supply conditions, commodity prices, interest rates, indebtedness and covenant compliance, warranty and product-liability claims, environmental and regulatory matters, geopolitical conditions, acquisitions, and litigation.
- The Voltyre-Prom settlement put option is exercisable from July through December 2018. Titan estimated the potential purchase obligation at approximately $117 million as of June 30, 2017, payable in cash or common stock under the shareholder agreement.
- Deferred tax assets in the United States and certain foreign jurisdictions remain subject to valuation allowances. The IRS audit for tax years 2010–2014 was settled during the quarter without a material change to income tax expense.
- Titan had not completed its evaluation of the expected impact or adoption method for the revenue-recognition standard effective in 2018, although management expected no material effect for most arrangements.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. Routine legal proceedings were not expected to have a material adverse effect, although outcomes cannot be assured.
Important Facts for Investors to Verify
- Whether increased agricultural and replacement demand can offset flat or declining new-equipment markets.
- The pace and effectiveness of customer price increases in recovering higher raw-material costs.
- Working-capital trends, particularly the significant increases in receivables and inventories and the resulting negative operating cash flow.
- Liquidity and covenant compliance given recurring net losses, debt maturities concentrated around the 2020 senior notes, and the 2018 Voltyre-Prom put option.
- The sustainability of cost reductions and the effect of corporate expenses on consolidated profitability.
- Foreign-exchange exposure, valuation allowances on deferred tax assets, warranty obligations, and any developments in litigation or anti-dumping and countervailing-duty matters.