TITAN INTERNATIONAL INC quarterly report, Q3 FY2022

Titan International, Inc. — Q3 2022 Form 10-Q Summary

Business context and reporting period

Titan manufactures off-highway wheels, tires, wheel/tire assemblies, and undercarriage products for agricultural, earthmoving/construction, and consumer markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.

Financial performance and liquidity

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Net sales	$530.7 million	$450.4 million	$1,659.6 million	$1,292.5 million
Gross profit	$87.6 million	$60.3 million	$284.0 million	$175.0 million
Gross margin	16.5%	13.4%	17.1%	13.5%
Income from operations	$50.5 million	$22.9 million	$164.9 million	$60.9 million
Net income attributable to Titan	$43.2 million	$11.2 million	$134.3 million	$22.0 million
Diluted EPS	$0.68	$0.18	$2.11	$0.35

Q3 sales increased 18%; nine-month sales increased 28%. Management attributed growth to higher pricing, favorable product mix, increased volume, and stronger demand across all segments. Foreign currency translation reduced sales by approximately 4.7% in Q3 and 3.9% year to date.
Q3 operating income more than doubled, increasing 120%; nine-month operating income increased 171%. Improvements reflected higher sales, better price realization, operating leverage, productivity initiatives, and cost containment.
Q3 effective tax rate was 21.1%, versus 33.1% in the prior-year quarter; the nine-month rate was 22.3%, versus 31.5%. The filing states that the lower rates were primarily associated with the increase in pre-tax income and foreign-jurisdiction profitability.
Operating cash flow was $102.2 million for the first nine months of 2022, compared with cash used of $2.3 million in the prior-year period. Working-capital investment included increases of $43.5 million in receivables and $44.2 million in inventories.
Capital expenditures were $32.8 million, compared with $24.3 million in the prior-year period. Investing cash outflow was $22.8 million, including $9.3 million of proceeds from the Australian wheel business sale.
Cash and cash equivalents were $116.6 million at September 30, 2022, including $88.1 million held outside the United States.
Total debt was $446.9 million net carrying value, including $395.2 million of 7.00% senior secured notes due 2028. The company had no borrowings under its $125 million revolving credit facility, $7.2 million of letters of credit, and $117.8 million of stated availability.
Total equity was $321.0 million, compared with $227.2 million at December 31, 2021. Accumulated other comprehensive loss increased to $273.6 million, primarily reflecting currency translation effects.

Material changes versus the prior comparable period

All segments improved. Nine-month sales increased 34% in Agriculture, 20% in Earthmoving/Construction, and 33% in Consumer.
Nine-month segment operating income increased to $106.1 million in Agriculture, $60.0 million in Earthmoving/Construction, and $19.0 million in Consumer, compared with $54.2 million, $21.0 million, and $7.1 million, respectively.
Brazilian indirect-tax credits contributed $9.5 million to other income in Q3 and $32.0 million for the first nine months. Associated tax expense was $1.6 million in Q3 and $9.4 million year to date. Approximately $10.0 million of credits had been utilized by September 30.
The company recorded a $10.9 million loss on the sale of its Australian wheel business, completed March 31, 2022. The loss primarily reflected release of approximately $10.0 million of cumulative translation adjustments and closing costs.
Interest expense declined to $7.2 million in Q3 and $22.8 million year to date, compared with $7.8 million and $23.9 million, respectively, due to lower borrowings and the absence of certain 2021 refinancing-related costs.
Titan repurchased $25.0 million of common stock in February 2022 in connection with the repurchase of 4,032,259 shares previously issued to Russian Direct Investment Fund equity holders.

Guidance, outlook, commentary, and risks

Management expected full-year 2022 capital expenditures of approximately $45 million to $50 million and forecast approximately $15 million of interest payments for the remainder of 2022.
Management expected cash, operating cash flow, and available credit facilities to provide sufficient liquidity for working capital, debt maturities, and capital expenditures. Potential divestitures and unencumbered assets were identified as additional liquidity sources.
Agricultural demand was supported by high commodity prices, improved farmer income, aging equipment fleets, and low dealer inventories. Customers were forecasting growth into 2023, although management noted risks from weather, commodity prices, exports, currencies, and government policies.
Earthmoving and construction markets showed growth, supported by low equipment inventories, infrastructure activity, mining capital budgets, and relatively high mineral prices; recession concerns could reduce demand.
COVID-19 effects were less severe than in 2021, but China and other locations continued to experience employee absenteeism and global supply-chain constraints involving raw materials, transportation, labor, and pricing.
Titan owns 64.3% of Voltyre-Prom in Russia. Russian operations represented approximately 5% of Q3 sales and 6% of nine-month sales, while the Russian entity represented approximately 8% of consolidated assets at September 30. Management cited risks from sanctions, logistics and banking disruptions, energy costs, currency and interest-rate volatility, cybersecurity, and possible loss of operational control or assets.
Management noted a reasonable possibility that U.S. deferred-tax valuation allowances could be reversed within the next twelve months if sufficient profitability continues, but the timing and amount remain uncertain.
The company remained in compliance with its debt covenants. Legal proceedings were described as routine, with no currently identified matter expected to have a material effect on financial position, results, or cash flows.

Important facts for investors to verify

Whether pricing actions continue to offset raw-material, freight, energy, labor, and other inflationary costs.
The sustainability of agricultural and earthmoving/construction demand amid recession, commodity-price, equipment-inventory, and interest-rate risks.
The recurring cash-flow impact of the Brazilian tax credits after the reported $32.0 million income benefit and related tax expense.
Exposure to Russia-related sanctions, supply-chain disruptions, currency movements, and restrictions on the Voltyre-Prom operations.
Execution of the $45 million to $50 million capital-expenditure plan and the company’s ability to maintain liquidity while servicing approximately $451.7 million of debt principal.
The potential timing and size of any U.S. deferred-tax valuation-allowance release.
Foreign-currency effects, particularly the euro and Turkish lira, which reduced reported sales and contributed to accumulated other comprehensive loss.