TITAN INTERNATIONAL INC quarterly report, Q2 FY2023

Titan International, Inc. — Q2 2023 Form 10-Q Summary

Business context and reporting period

Titan International, Inc. is a global manufacturer of wheels, tires, wheel and tire assemblies, and undercarriage systems serving agricultural, earthmoving/construction, and consumer markets. This Form 10-Q reports unaudited results for the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.

Key financial metrics

Metric	Q2 2023	Q2 2022	Year-to-date 2023	Year-to-date 2022
Net sales	$481.2 million	$572.9 million	$1,029.8 million	$1,128.9 million
Gross profit	$85.9 million	$109.7 million	$181.5 million	$196.4 million
Gross margin	17.9%	19.1%	17.6%	17.4%
Income from operations	$45.9 million	$69.7 million	$101.0 million	$114.4 million
Net income	$31.9 million	$68.9 million	$65.3 million	$93.5 million
Net income attributable to Titan	$30.2 million	$67.2 million	$62.0 million	$91.1 million
Diluted EPS	$0.48	$1.06	$0.98	$1.43

Q2 sales declined 16.0%, gross profit declined 21.7%, operating income declined 34.2%, and net income attributable to Titan declined 55.0% from the prior-year quarter. Six-month sales declined 8.8%, operating income declined 11.7%, and net income attributable to Titan declined 31.9%.

Segment Q2 sales were $269.1 million in agriculture, $174.7 million in earthmoving/construction, and $37.3 million in consumer. All three segments reported lower sales and operating income.
Q2 segment operating margins were 18.1% for agriculture, 16.7% for earthmoving/construction, and 21.6% for consumer.
Interest expense declined to $5.8 million in Q2 and $12.3 million year to date, compared with $7.7 million and $15.6 million, respectively, primarily because of lower borrowings and higher interest income.
Q2 effective tax rate was 22.8%; the six-month rate was 26.6%, compared with 22.8% in the 2022 six-month period.
Net cash provided by operating activities was $88.9 million for the first six months, compared with $48.9 million in 2022.
Capital expenditures were $27.6 million year to date, compared with $19.5 million in 2022.
Cash and cash equivalents were $196.5 million at June 30, 2023, compared with $159.6 million at December 31, 2022.

Debt and liquidity

Total debt principal was $434.4 million at June 30, 2023, including $400.0 million of 7.00% senior secured notes due April 2028. Net carrying value of total debt was $430.2 million.
Short-term debt was $18.5 million and long-term debt was $411.7 million on the balance sheet.
There were no borrowings under the $125.0 million revolving credit facility. Gross availability was $117.9 million and net availability after $6.2 million of letters of credit was $111.7 million.
Titan remained in compliance with its debt covenants at June 30, 2023.
Cash and anticipated operating cash flow, together with available credit facilities, are expected by management to fund working capital, debt maturities, and capital expenditures.
Management expects 2023 capital expenditures of approximately $55 million to $60 million and forecasts approximately $15 million of interest payments during the remainder of 2023.

Material changes versus the prior comparable period

Lower customer demand, particularly among Americas OEM customers with elevated inventories, reduced volumes across all segments.
Negative price and product mix, reflecting lower steel prices, and unfavorable currency translation further reduced sales. Currency translation negatively affected Q2 sales by 2.3% and six-month sales by 1.9%.
Gross margin declined in Q2 because of lower volume and reduced overhead absorption, along with a timing lag between higher material costs and contractual customer price reductions in the North American wheel business.
Research and development expense increased 43.8% in Q2 and 20.8% year to date as Titan continued product design, quality, and innovation initiatives.
Other income was only $1.2 million in Q2 and $1.9 million year to date, compared with $23.7 million and $14.8 million in the respective 2022 periods. The prior-year amounts included $22.5 million of Brazilian indirect tax credits, a $1.3 million Italian government grant benefit, and the effects of the Australian wheel business divestiture.
The company sold its Australian wheel business in March 2022; the divestiture reduced six-month 2023 sales by approximately 0.9%, or $10.0 million, compared with the prior-year period.
Working capital management improved operating cash flow, particularly through a $24.1 million reduction in inventories. However, the cash conversion cycle increased to 88 days at June 30, 2023 from 76 days at June 30, 2022.
Titan repurchased 493,279 shares for $5.1 million during Q2 and 603,068 shares for $6.4 million year to date. Approximately $43.6 million remained available under the $50.0 million authorization.

Outlook, commentary, risks, and unusual items

Management expects medium- to long-term agricultural demand to remain healthy because of elevated commodity prices, farmer income, and replacement needs for aging equipment. Near-term demand is uncertain because of elevated OEM inventories.
Earthmoving/construction demand slowed in Q2, particularly in the Americas, but management expects medium- to long-term stability or recovery based on mining capital budgets, infrastructure needs, commodity prices, and forecast GDP growth.
Consumer markets also slowed in Q2, primarily because of elevated Latin American inventories. Management cited initiatives to expand specialty-product opportunities.
Titan owns 64.3% of Voltyre-Prom in Russia. Russian operations represented approximately 7% of Q2 sales and 6% of six-month sales. Management stated that the conflict in Ukraine had not materially affected global operations as of the filing date, but identified risks from sanctions, logistics and banking disruptions, currency and interest-rate volatility, energy and raw-material inflation, asset loss, and cybersecurity threats.
Brazilian tax-related matters produced $0.5 million of other income and $2.6 million of tax benefit in Q2 2023. The company expects to use most related credits against future Brazilian tax obligations over the next twelve months.
Other principal risks include cyclical end markets, recession, raw-material and freight costs, labor relations, product liability and warranty claims, litigation, regulatory and environmental requirements, foreign exchange, interest rates, manufacturing disruptions, acquisitions, and compliance with debt covenants.
The company reported no material changes to previously disclosed risk factors, no material litigation proceedings in management’s view, and no subsequent events requiring adjustment or disclosure.

Important facts for investors to verify

Whether elevated OEM inventories and weaker Americas demand persist into the second half of 2023.
Whether lower steel prices and contractual price resets continue to pressure North American wheel margins.
Progress toward the $55 million to $60 million full-year capital expenditure plan and the resulting free cash flow.
Liquidity after the October 2023 interest payment and scheduled debt maturities, including the $400 million notes due in 2028.
Utilization, expiration, and potential accounting or cash-flow effects of the Brazilian tax credits.
Effects of Russia-related sanctions, banking restrictions, currency movements, energy costs, and operational risks on Voltyre-Prom and consolidated results.
Inventory levels, receivables, payables, and the 88-day cash conversion cycle.
Future use of the remaining $43.6 million share repurchase authorization while demand and margins remain pressured.