Titan International, Inc. — Form 10-Q Summary
Business context and reporting period
Titan manufactures wheels, tires, wheel and tire assemblies, and undercarriage systems for agricultural, earthmoving/construction, and consumer markets. This unaudited report covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $593.3 million | $459.2 million | $1,171.7 million | $922.3 million |
| Gross profit | $86.7 million | $82.1 million | $183.4 million | $175.4 million |
| Gross margin | 14.6% | 17.9% | 15.7% | 19.0% |
| Income from operations | $36.9 million | $81.0 million | $84.8 million | $139.6 million |
| Operating margin | 6.2% | 17.6% | 7.2% | 15.1% |
| Net income attributable to Titan | $23.2 million | $44.1 million | $42.7 million | $79.5 million |
| Diluted EPS | $0.40 | $0.84 | $0.74 | $1.53 |
Six-month operating cash flow was $86.6 million versus $48.7 million in 2012. Capital expenditures were $36.1 million, and cash used in investing activities was $42.7 million. Financing activities provided $196.1 million, primarily from issuing $345.3 million of additional 7.875% senior secured notes, partially offset by $155.1 million of debt repayments and other financing costs.
Cash and cash equivalents were $424.4 million at June 30, 2013, compared with $189.1 million at December 31, 2012. Total debt was $743.956 million, including $105.110 million classified as current. No borrowings were outstanding under the $150 million revolving credit facility.
Total assets were $1.945 billion and total equity was $700.7 million at June 30, 2013. Accounts receivable were $335.9 million and inventories were $369.0 million. Days sales outstanding declined to 51 days from 54 days at year-end; days sales in inventory declined to 75 days from 86 days.
Material changes versus the prior comparable period
- Quarterly sales increased 29% and year-to-date sales increased 27%, primarily from the Planet Group and Titan Europe acquisitions and stronger agricultural demand. Reported volume was broadly flat overall, while price/mix and currency translation reduced sales.
- Gross margin declined because lower raw-material costs were passed to customers before Titan fully realized the benefit, acquired Titan Europe had lower margins, and warranty provisions for earthmoving tires increased.
- SG&A increased to $43.7 million in the quarter and $86.1 million year to date, largely because of recently acquired operations. SG&A as a percentage of sales rose to 7.4% from 5.1% for the quarter and to 7.3% from 5.9% year to date.
- Operating income and net income declined substantially despite higher sales. The 2012 comparison benefited from $26.1 million of supply-agreement termination income; 2013 benefited from a $22.5 million earthquake-insurance recovery gain.
- Interest expense increased to $13.1 million in the quarter and $23.5 million year to date, reflecting additional senior secured notes and Titan Europe debt.
- In the first quarter, Titan exchanged approximately $52.7 million of convertible notes for approximately 4.9 million common shares and $14.2 million in cash, recording a $7.3 million conversion charge.
- Earthmoving/construction sales increased sharply because of acquisitions, but operating income declined to $8.5 million in the quarter from $17.5 million, reflecting weaker demand and higher warranty provisions. Agricultural operating income also declined despite higher sales.
Outlook, commentary, risks, and unusual items
- Management expects earthmoving/construction demand to remain weak for the remainder of 2013. Agricultural demand was described as strong, while consumer sales were slightly lower year to date.
- Capital expenditures for the remainder of 2013 were forecast at approximately $36 million to $40 million. Remaining-2013 cash interest payments were forecast at approximately $26 million, including a $20.7 million semiannual payment on the senior secured notes.
- Management stated that cash on hand, anticipated operating cash flow, and available borrowings should support working capital, capital expenditures, and potential acquisitions. Approximately $98 million of cash was held outside the United States; repatriation could create additional taxes.
- Key risks include raw-material, energy, and petroleum-cost volatility; fixed operating expenses and seasonality; foreign-currency fluctuations; weaker end markets; customer and supplier conditions; warranty and product-liability claims; labor, environmental, regulatory, and legal matters; and covenant restrictions that may limit dividends, investments, acquisitions, or additional financing.
- The company recorded a $22.5 million gain after receiving a final $38.7 million insurance settlement related to earthquake damage at Titan Europe's Italian facility. The 2012 period included $26.1 million of nonrecurring supply-agreement termination income.
- Warranty liabilities increased to $34.5 million from $27.5 million at December 31, 2012. Unrecognized tax benefits increased to $17.9 million from $14.3 million.
- Routine legal proceedings were disclosed; management does not currently expect them to have a material adverse effect. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether acquired Titan Europe and Planet operations can improve margins as demand and integration develop.
- The sustainability of operating cash flow after adjusting for insurance proceeds, working-capital movements, and other unusual items.
- Debt maturities, refinancing requirements, interest burden, and compliance with credit-facility covenants.
- Trends in earthmoving demand, agricultural equipment demand, raw-material pricing, currency movements, and warranty claims.
- The potential effect of the increased share count from convertible-note exchanges on future diluted EPS.
- The realizability of deferred tax assets, changes in unrecognized tax benefits, and the tax consequences of foreign cash repatriation.