Titan International, Inc. — FY2015 Form 10-K Summary
Business Context and Reporting Period
Titan manufactures off-highway wheels, tires, wheel-and-tire assemblies, and undercarriage systems for agricultural, earthmoving/construction, and consumer markets. This Form 10-K covers the fiscal year ended December 31, 2015, with quarterly information included. Agricultural sales represented 52% of revenue, earthmoving/construction 36%, and consumer 12%.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $1,394.8 million | $1,895.5 million | Down 26% |
| Gross profit | $137.8 million | $140.6 million | Down 2% |
| Gross margin | 9.9% | 7.4% | Improved |
| Loss from operations | $24.3 million | $97.6 million | Improved |
| Net loss | $90.3 million | $130.4 million | Improved |
| Net loss attributable to Titan | $75.6 million | $80.5 million | Improved |
| Loss per diluted share | $1.74 | $2.43 | Improved |
| Cash flow from operations | $63.9 million | $117.8 million | Down $53.9 million |
| Capital expenditures | $48.4 million | $58.4 million | Down $10.0 million |
Sales declined because of an 11% volume reduction, approximately 10% unfavorable currency translation, and a 5% price/mix decline. SG&A decreased to $140.4 million from $173.6 million, although SG&A increased to 10.1% of sales from 9.2% because of lower revenue. Interest expense was $34.0 million, compared with $36.6 million.
At December 31, 2015, cash and cash equivalents were $200.2 million, working capital was $439.9 million, and total assets were $1.275 billion. Debt included $400.0 million of 6.875% senior secured notes due 2020, $60.2 million of convertible notes due 2017, and other debt; long-term debt was $480.4 million excluding current maturities. No borrowings were outstanding under the $150 million revolving credit facility, although availability was $67.7 million after borrowing-base and letter-of-credit limitations.
Material Changes Versus the Prior Comparable Period
- Agricultural sales fell 29% to $723.7 million, primarily because of lower demand for high-horsepower equipment, lower volume, pricing pressure, and currency effects. Segment operating income declined modestly to $61.8 million from $63.8 million.
- Earthmoving/construction sales fell 17% to $505.9 million. Segment operating loss improved to $13.7 million from $80.6 million, aided by the absence of the 2014 mining asset impairment and inventory write-downs.
- Consumer sales fell 38% to $165.1 million because of currency effects, economic stress in Brazil, competitive pricing, and the exit from low-margin supply agreements. Segment operating loss improved to $5.5 million from $8.8 million.
- 2014 included $23.2 million of mining asset impairment, $16.7 million of mining inventory write-downs, and a $36.6 million non-cash goodwill impairment charge. No comparable charges were recorded in 2015.
- The Business Improvement Framework contributed to productivity gains, lower material and warranty costs, expenditure rationalization, headcount reductions, and pricing optimization. Reported gross margin improved to 9.9%; management stated that 2014 gross margin excluding the mining charges was 9.5%.
- Comprehensive loss attributable to Titan was $150.8 million, including a $79.2 million currency translation loss, compared with a $130.1 million comprehensive loss in 2014.
- The North America brake business was divested in November 2015. Titan also disclosed a February 2016 purchase that increased its interest in Titan Tire Russia BV from 30% to 43%.
Guidance, Outlook, Risks, and Unusual Items
- Management expects agricultural equipment demand to remain weak in 2016, with large-equipment sales under pressure from lower farm income, lower grain prices, high used-equipment inventories, and a continuing shift toward lower-horsepower equipment.
- Mining demand is expected to remain depressed, while small and medium earthmoving/construction demand is expected to be flat or slightly lower. The consumer segment is expected to remain highly competitive.
- Management forecast 2016 capital expenditures of approximately $30 million to $35 million, interest payments of approximately $34 million, and pension contributions of approximately $5 million.
- Key risks include cyclical end markets, commodity price volatility for steel and rubber, customer concentration, foreign exchange exposure, international political and economic conditions in Russia and Brazil, competition and pricing pressure, labor relations, environmental liabilities, product warranty claims, and debt covenant restrictions.
- Titan and a labor union filed trade petitions regarding alleged dumping or subsidization of off-the-road tires from India and Sri Lanka and wheel-and-tire assemblies from China. Investigations involving India and Sri Lanka were initiated; the China investigation was not pursued by the ITC. Potential relief was expected no earlier than 2016, with investigations likely continuing into early 2017.
- The EPA environmental litigation involving Dico and Titan Tire remained unresolved. The appellate court affirmed $1.62 million of civil penalties against Dico but remanded other CERCLA and punitive-damages issues for trial.
- Management and Grant Thornton reported a material weakness in internal control over financial reporting related to entity-level controls and complex accounting infrastructure. The weakness was not remediated at year-end, and the company restated financial statements for errors involving the Voltyre-Prom shareholders’ agreement and redeemable noncontrolling interest. Grant Thornton issued an adverse opinion on internal control, while providing an unqualified opinion on the consolidated financial statements.
- The Voltyre-Prom shareholders’ agreement includes a settlement put option exercisable beginning in July 2018 that could require Titan to purchase shares. Redeemable noncontrolling interest was $77.2 million at year-end.
- Defined benefit pension plans were underfunded by $37.2 million, and warranty liabilities were $23.1 million. The company reported no material off-balance-sheet arrangements.
Most Important Facts for Investors to Verify
- Whether the agricultural and mining downturns stabilize or deepen and whether the expected 2016 demand trends occur.
- Whether the Business Improvement Framework can offset continued volume, pricing, and currency pressure.
- Liquidity relative to debt maturities, particularly the $60.2 million convertible notes due in 2017 and $400.0 million senior secured notes due in 2020.
- Progress in remediating the material weakness and whether further restatements or control deficiencies arise.
- Potential cash or operating effects from the EPA environmental litigation, trade investigations, pension funding, tax examinations, and the Voltyre-Prom put option.
- Foreign exchange sensitivity, including the disclosed approximately $29.1 million potential loss from a 10% adverse movement in foreign currency rates against Titan’s foreign net investment.
- Backlog trends: open orders were $284 million at January 31, 2016, down from $371 million a year earlier.