Titan International, Inc. — Fiscal 2016 Form 10-K Summary
Business Context and Reporting Period
Titan manufactures wheels, tires, wheel-and-tire assemblies, and undercarriage systems for off-highway agricultural, earthmoving/construction, and consumer markets. The filing covers the fiscal year ended December 31, 2016; it is an annual report rather than a quarterly filing.
- Agricultural represented 46% of sales, earthmoving/construction 41%, and consumer 13%.
- Approximately 56% of sales were outside the United States. Titan employed approximately 6,100 people worldwide.
- The company’s strategy emphasizes complete wheel-and-tire assemblies, Low Sidewall technology, aftermarket expansion, operating efficiencies, product development, and potential strategic acquisitions.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $1,265.5 million | $1,394.8 million | Down 9% |
| Gross profit | $142.5 million | $137.8 million | Up 3% |
| Gross margin | 11.3% | 9.9% | Up 140 basis points |
| Loss from operations | $21.3 million | $24.3 million | Improved $2.9 million |
| Net loss | $36.1 million | $90.3 million | Improved $54.2 million |
| Net loss attributable to Titan | $34.0 million | $75.6 million | Improved $41.6 million |
| Basic and diluted EPS | $(0.81) | $(1.74) | Improved |
| Operating cash flow | $43.5 million | $63.9 million | Down $20.4 million |
| Capital expenditures | $41.9 million | $48.4 million | Down $6.5 million |
Interest expense was $32.5 million, compared with $34.0 million in 2015. Foreign exchange produced an $8.6 million gain versus a $4.8 million loss in 2015. The effective tax rate was negative 10.0%, reflecting tax expense despite a pretax loss and continued valuation allowances on deferred tax assets.
At December 31, 2016, cash and cash equivalents were $147.8 million, certificates of deposit were $50.0 million, working capital was $360.1 million, total assets were $1.263 billion, and total equity was $289.9 million. Total debt had a principal balance of approximately $510.3 million, including $400.0 million of 6.875% senior secured notes due 2020 and $60.2 million of convertible notes due January 2017.
The company had no borrowings under its $150 million revolving credit facility at year-end. Reported remaining availability was $33.1 million, after consideration of borrowing-base limitations and an $11.6 million letter of credit.
Material Changes Versus the Prior Comparable Period
- Sales declined across all segments. Volume decreased 5%, unfavorable currency translation reduced sales by 2%, and price/mix reduced sales by an additional 2%.
- Agricultural sales fell 11% to $583.3 million, but operating income increased 10% to $44.3 million.
- Earthmoving/construction sales fell 8% to $524.3 million, while the segment moved from a $2.0 million operating loss to $3.6 million of operating income.
- Consumer sales declined 10% to $157.9 million and operating income fell 39% to $2.9 million, primarily due to lower high-speed brake sales to China and reduced Brazilian supply-agreement sales.
- Gross margin improved through productivity, cost reduction, lower material and warranty costs, quality improvements, and pricing optimization under the Business Improvement Framework.
- SG&A increased 3% to $145.0 million, driven partly by anti-dumping litigation costs, LSW marketing investment, and higher incentive compensation.
- Cash declined $52.4 million during the year, primarily because operating cash flow and financing activities did not offset capital expenditures and the $50.0 million certificate-of-deposit investment.
- Warranty liability decreased to $17.9 million from $23.1 million, and warranty expense decreased to $7.4 million from $9.7 million.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expected agricultural demand to bottom sometime in 2017, with major OEMs forecasting largely flat 2017 agricultural equipment sales. Farm income was expected to remain approximately flat.
- Mining-related demand was expected to improve slightly in 2017, while small and medium earthmoving/construction demand was expected to be flat or modestly higher. Consumer markets were expected to remain highly competitive.
- 2017 capital expenditures were forecast at approximately $35 million, interest payments at approximately $30 million, and pension contributions at approximately $3 million.
- Order backlog was approximately $240 million at January 31, 2017, compared with $203 million at January 31, 2016; management expected the orders to be filled during 2017.
- In January 2017, holders converted $58.5 million, or 97.1%, of the convertible notes into 5.46 million common shares, representing approximately 10% of pre-conversion shares. The remaining $1.7 million was paid in cash.
- In February 2017, Titan replaced its $150 million revolving facility with a new $75 million asset-based revolving facility.
- Titan and the United Steelworkers pursued trade cases involving off-the-road tires from India and Sri Lanka. Subsequent to year-end, affirmative countervailing and anti-dumping orders were issued for specified imports.
- Three U.S. collective bargaining agreements expired after extensions into January 2017. Employees continued working while negotiations proceeded, creating potential strike, slowdown, and cost risks.
- Environmental litigation involving Dico and Titan Tire remained unresolved. A $1.62 million civil penalty against Dico had been affirmed, while arranger-liability and potential punitive-damages issues were remanded for trial.
- Key risks include cyclical agricultural and construction markets, commodity prices, customer concentration, foreign exchange, Russia and Brazil exposure, debt covenants, labor relations, environmental and product-liability claims, tax matters, and potential impairment charges.
- Management stated that the material weakness in internal control over financial reporting identified at December 31, 2015 was remediated, and management and the auditor concluded that internal control was effective at December 31, 2016.
Most Important Facts for Investors to Verify
- Whether margin improvements can persist despite continued weak agricultural and earthmoving/construction demand.
- Post-conversion diluted share count and the resulting effect on per-share value and leverage.
- Actual availability, borrowing-base limitations, and covenant compliance under the new $75 million revolving facility.
- Timing and outcome of the environmental litigation, labor negotiations, tax disputes, and trade-remedy proceedings.
- Commodity-cost pass-through, foreign-currency exposure, and the ability to use deferred tax assets subject to substantial valuation allowances.
- Potential cash requirements related to the Voltyre-Prom redeemable noncontrolling interest, whose balance was $104.8 million and whose put option becomes exercisable beginning in July 2018.
- Progress toward the stated 2017 capital-expenditure, pension-funding, productivity, and market-recovery expectations.