Titan International, Inc. 2016 Second-Quarter 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 and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Financial Results and Key Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net sales | $330.2 million | $376.1 million | $652.0 million | $778.1 million |
| Gross profit | $45.1 million | $51.1 million | $77.0 million | $93.8 million |
| Gross margin | 13.7% | 13.6% | 11.8% | 12.1% |
| Operating income (loss) | $4.0 million | $7.5 million | $(4.0) million | $8.3 million |
| Net income (loss) | $(2.4) million | $4.3 million | $(11.2) million | $3.2 million |
| Net income (loss) applicable to common shareholders | $(3.8) million | $9.4 million | $(18.2) million | $6.7 million |
| Basic EPS | $(0.07) | $0.17 | $(0.34) | $0.12 |
Q2 sales declined 12%; six-month sales declined 16%. Interest expense was $8.0 million in Q2 and $16.5 million year to date. Foreign-exchange gains were $2.2 million in Q2 and $7.0 million year to date. The six-month effective tax rate was negative 71%, reflecting tax expense despite a pretax loss, primarily because valuation allowances were recorded on deferred tax assets in the United States and certain foreign jurisdictions.
At June 30, 2016, cash and cash equivalents were $207.2 million, compared with $200.2 million at December 31, 2015. Total debt was $503.6 million net carrying value, including $89.0 million classified as current and $414.6 million long term. The $60.2 million of convertible notes mature in January 2017. The $150 million revolving credit facility had no borrowings, but only $47.4 million was available because of letters of credit and lower eligible receivables and inventory.
Six-month operating cash flow was $29.7 million, compared with $7.8 million in 2015. Capital expenditures were $18.1 million, producing negative investing cash flow of $16.8 million. Financing activities used $9.2 million, principally for $10.2 million of debt repayments. Management estimated $12 million to $15 million of additional 2016 capital expenditures and approximately $16 million of interest payments for the remainder of the year.
Material Changes Versus the Prior Comparable Period
- Agricultural sales fell 16% in Q2 and 19% year to date, driven by lower equipment demand, reduced volume, unfavorable currency translation, and adverse price/mix.
- Earthmoving/construction sales fell 8% in Q2 and 13% year to date. Q2 operating income improved modestly, but year-to-date operating income declined.
- Consumer sales fell 11% in Q2 and 18% year to date, primarily because of economic stress in Brazil, currency effects, competitive pricing, and lower high-speed brake sales to China.
- Management stated that productivity, cost rationalization, lower raw-material costs, quality improvements, and pricing initiatives helped preserve gross margins despite lower revenue.
- Titan acquired an additional interest in the Voltyre-Prom consortium during the first quarter, increasing ownership from 30% to 43%. Redeemable noncontrolling interest increased to $100.8 million from $77.2 million at year-end.
- Corporate operating expenses were $17.9 million in Q2 and $35.8 million year to date, including advertising investments and legal expenses related to anti-dumping litigation.
- The company identified no impairment from its review of certain Bryan, Ohio fixed assets, but stated that future impairment charges could be material if operating conditions or cash-flow estimates deteriorate.
Guidance, Outlook, Risks, and Unusual Items
Management expected agricultural equipment demand to remain weak through 2016, with large-equipment sales continuing to decline. Earthmoving/construction demand was expected to remain depressed in mining and flat to slightly down in smaller equipment. The consumer market was expected to remain highly competitive, with Brazil continuing to pose a risk.
- Key risks include cyclical end markets, recessionary conditions, currency volatility, raw-material and energy costs, competitive pricing, fixed overhead, geopolitical and economic conditions in Russia and Brazil, warranty and product-liability claims, environmental requirements, and legal proceedings.
- The IRS issued a proposed adjustment related to tax years 2010 through 2014. The filing contains inconsistent estimates of the potential liability: one disclosure states that a 10% settlement would result in approximately $0.6 million of additional tax, while MD&A states approximately $0.9 million.
- A settlement put option related to Voltyre-Prom is exercisable from July through December 2018. If exercised in July 2018, management estimated a potential purchase obligation of approximately $117.5 million, payable in cash or Titan common stock.
- Disclosure controls were deemed ineffective because of a previously disclosed material weakness in internal control over financial reporting. Remediation efforts involve additional personnel, strengthened processes, management review, and system improvements; the filing does not state that the weakness had been fully remediated.
- The company expects to contribute approximately $2.3 million to pension plans during the remainder of 2016.
Important Facts for Investors to Verify
- Liquidity available for the January 2017 convertible-note maturity, including the $47.4 million revolver availability and cash held outside the United States.
- Progress toward restoring profitability amid continued agricultural, mining, and construction market weakness.
- Whether the material weakness in internal controls has been remediated and whether further reporting adjustments are required.
- The final outcome and potential liability from the IRS audit and proposed adjustment.
- The valuation and potential funding requirements of the Voltyre-Prom redeemable noncontrolling interest.
- Whether currency movements, raw-material costs, competitive pricing, and Brazil/Russia conditions materially change segment margins or cash generation.