Titan International, Inc. — Form 10-Q Summary
Business context and reporting period
Titan manufactures wheels, tires, wheel and tire assemblies, and undercarriage systems for off-highway vehicles in the agricultural, earthmoving/construction, and consumer markets. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $321.8 million | $402.1 million | Down 20% |
| Gross profit | $31.9 million | $42.8 million | Down 25% |
| Gross margin | 9.9% | 10.6% | Down 70 basis points |
| Operating income (loss) | $(7.9) million | $0.8 million | Declined to a loss |
| Net income (loss) | $(8.7) million | $(1.1) million | Greater loss |
| Net loss applicable to common shareholders | $(14.4) million | $(2.7) million | Greater loss |
| Basic and diluted EPS | $(0.27) | $(0.05) | Declined |
| Cash flow from operations | $2.3 million | $(7.0) million | Improved $9.3 million |
| Capital expenditures | $7.1 million | $11.4 million | Down $4.3 million |
Segment revenue was $152.8 million in Agricultural, $131.7 million in Earthmoving/Construction, and $37.3 million in Consumer. Segment operating income was $11.4 million, $(0.7) million, and $(0.7) million, respectively. Corporate expenses were $17.9 million, compared with $16.5 million in the prior-year quarter.
At March 31, 2016, cash and cash equivalents were $191.1 million, compared with $200.2 million at December 31, 2015. Accounts receivable increased to $216.4 million from $177.4 million, while inventories declined to $265.2 million from $269.8 million.
Total debt was $508.3 million, including $88.8 million classified as current and $419.5 million classified as long-term. The $60.2 million of convertible notes due January 2017 were reclassified to short-term debt. Titan had no borrowings under its $150 million revolving credit facility; reported availability was $53.4 million after considering eligible collateral and outstanding letters of credit. The fair value of the $400.0 million senior secured notes due 2020 was approximately $324.0 million.
Material changes versus the prior comparable period
- Sales declined 20%, reflecting an 11% volume reduction, 6% unfavorable currency translation, and a 3% adverse price/mix effect.
- Agricultural revenue fell 21%, primarily from lower demand for new agricultural equipment, while operating income declined to $11.4 million from $13.2 million.
- Earthmoving/Construction revenue fell 17%, and the segment moved from $0.7 million of operating income to a $0.7 million operating loss.
- Consumer revenue fell 25%, principally because of unfavorable currency translation, economic stress in Brazil, and lower high-speed brake sales to China. The segment moved from $3.4 million of operating income to a $0.7 million operating loss.
- SG&A declined modestly in absolute dollars to $35.1 million but increased to 10.9% of sales from 8.9% because of lower revenue. Corporate costs increased partly due to advertising for the LSW program and legal expenses related to anti-dumping litigation.
- Other income included a $2.3 million gain on sale of assets and $0.5 million of equity income from Wheels India Limited.
- Titan acquired an additional $25 million of shares in the consortium owning Voltyre-Prom, increasing its ownership from 30% to 43%. The transaction increased redeemable noncontrolling interest to $96.8 million, including a $5.2 million redemption value adjustment.
- Comprehensive income attributable to Titan was $3.7 million, compared with a $43.4 million comprehensive loss in Q1 2015, primarily because currency translation changed from a $45.4 million loss to a $17.6 million gain.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects agricultural demand and large agricultural equipment sales to remain under pressure through 2016. The earthmoving/construction market is expected to remain weak, particularly for mining products, while small and medium construction equipment demand may be flat or modestly lower.
- The consumer market is expected to remain highly competitive, with continuing exposure to Brazil's economic conditions and currency movements.
- Management estimates $20 million to $25 million of capital expenditures for the remainder of 2016 and approximately $30 million of interest payments during that period.
- Management states that cash on hand, anticipated operating cash flow, and available borrowing capacity are expected to support working capital, debt maturities, capital expenditures, and potential acquisitions. However, the company faces the January 2017 maturity of its convertible notes and limited revolving-credit availability.
- Key risks include cyclical end markets, raw-material and energy-cost volatility, foreign exchange movements, geopolitical and economic conditions in Russia and Brazil, customer and supplier conditions, warranty and product liability claims, environmental matters, litigation, and potential impairment of long-lived assets.
- The company disclosed a previously reported material weakness in internal control over financial reporting. Disclosure controls and procedures were not effective as of March 31, 2016. Management's remediation plan focuses on personnel, processes, and systems, although management concluded that the financial statements were fairly stated in all material respects.
- The company had approximately $22.1 million of accrued warranty liability at March 31, 2016, compared with $23.1 million at December 31, 2015. It expects to contribute approximately $3.7 million to pension plans during the remainder of 2016.
- Routine legal proceedings are ongoing; management does not currently expect them to have a material adverse effect, but outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Verify the company's ability to address the $60.2 million convertible-note maturity in January 2017 and the availability of refinancing or other funding sources.
- Monitor whether agricultural and mining-related demand stabilizes and whether volume, price/mix, and currency headwinds continue.
- Assess progress in reducing corporate expenses and restoring profitability in the Earthmoving/Construction and Consumer segments.
- Track cash conversion, particularly the increase in days sales outstanding to 60 days and days sales in inventory to 80 days.
- Review remediation of the material weakness in internal controls and any subsequent changes to management's assessment.
- Evaluate the potential financial effect of the Voltyre-Prom settlement put option, which becomes exercisable beginning in July 2018.
- Confirm the effect of future accounting standards, including revenue recognition, leases, equity-method transition, and share-based payment accounting.