Titan International(TWI) - 2019 Q3 - Quarterly Report

Part I. Financial Information This section presents the unaudited financial statements and management's discussion and analysis for the period ended September 30, 2019 Financial Statements (Unaudited) The unaudited financial statements for Q3 and YTD 2019 reveal a performance decline, shifting from net income to a net loss, with reduced assets and improved operating cash flow Condensed Consolidated Statements of Operations Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $345,905 | $384,719 | $1,146,876 | $1,239,005 | | Gross profit | $27,100 | $43,704 | $110,672 | $161,577 | | (Loss) income from operations | $(12,616) | $4,823 | $(10,910) | $43,169 | | Net (loss) income attributable to Titan | $(19,144) | $2,295 | $(23,590) | $28,378 | | Diluted EPS | $(0.33) | $(0.03) | $(0.43) | $0.29 | Condensed Consolidated Balance Sheets Balance Sheet Summary (in thousands) | Account | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total current assets | $732,394 | $779,481 | | Total assets | $1,189,602 | $1,251,256 | | Total current liabilities | $365,948 | $375,068 | | Long-term debt | $464,827 | $409,572 | | Total liabilities | $916,426 | $861,346 | | Total Titan shareholders' equity | $244,231 | $279,048 | Condensed Consolidated Statements of Cash Flows Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by (used for) operating activities | $31,212 | $(32,706) | | Net cash used for investing activities | $(96,622) | $(25,014) | | Net cash provided by financing activities | $63,956 | $17,069 | | Net decrease in cash and cash equivalents | $(3,082) | $(46,771) | | Cash and cash equivalents, end of period | $78,603 | $96,799 | Notes to Condensed Consolidated Financial Statements - The company adopted new accounting standards, including ASU No. 2016-02 for leases (Topic 842), which resulted in the recognition of operating lease right-of-use assets and corresponding liabilities on the balance sheet as of January 1, 2019[26] - The company settled put options exercised by partners OEP and RDIF related to the Voltyre-Prom joint venture. The OEP settlement involved cash payments totaling $46.7 million. The RDIF settlement involved a $25 million cash payment and an agreement to issue 4,032,259 shares of restricted Titan common stock[58][59] - A subsidiary, Titan Tire, is involved in environmental litigation and has a contingent liability of $6.5 million accrued as of September 30, 2019, related to a U.S. District Court order[91] - Subsequent to the quarter end, on October 3, 2019, the company sold a portion of its shares in Wheels India Limited, receiving net proceeds of approximately $19 million which were used to pay down debt. A gain of $4.7 million was recorded in Q3 2019 based on the trade date[126] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2019 net sales decline due to market challenges, a sharp gross profit drop from lower volume and inventory issues, and sufficient liquidity despite a net loss Market Conditions and Outlook - Agricultural Market: Low commodity prices, tariffs, and poor weather have reduced farmer investment in new equipment. OEMs forecast flat sales for the remainder of 2019[141] - Earthmoving/Construction Market: After a strong start to 2019, the market declined in Q2 and Q3 due to global economic uncertainty. Demand is expected to be flat for the rest of 2019, with potential slight decreases in small/medium equipment[142] - Consumer Market: The company expects flat to modest growth for the remainder of 2019 across its various consumer product lines[143] Results of Operations Q3 2019 vs Q3 2018 Performance (in thousands) | Metric | Q3 2019 | Q3 2018 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $345,905 | $384,719 | (10.1)% | | Gross profit | $27,100 | $43,704 | (38.0)% | | (Loss) income from operations | $(12,616) | $4,823 | (361.6)% | - Q3 net sales decreased 10.1% YoY, driven by a 6.9% decline in volume due to challenges in the North American agriculture economy and a slowing global construction market[146] - Q3 gross profit margin fell to 7.8% from 11.4% in Q3 2018. The decline was driven by lower sales volume, production inefficiencies, and a negative impact of approximately $7 million from reducing steel inventory purchased at higher prices[148] - SG&A expenses increased in Q3 2019, primarily due to $2.3 million in costs related to the postponed public listing of the ITM undercarriage business[150] Segment Information Net Sales by Segment - Q3 (in thousands) | Segment | Q3 2019 | Q3 2018 | % Change | | :--- | :--- | :--- | :--- | | Agricultural | $156,625 | $163,367 | (4.1)% | | Earthmoving/construction | $155,659 | $180,362 | (13.7)% | | Consumer | $33,621 | $40,990 | (18.0)% | - The Agricultural segment's gross profit was compressed by approximately $6 million in Q3 due to the reduction of high-cost steel inventory in North American Wheel operations[169] - The Earthmoving/Construction segment's 13.7% sales decrease was driven by a 9.3% drop in volume, primarily from a tightening in the undercarriage business across most geographies[172] Liquidity and Capital Resources - As of September 30, 2019, the company had $78.6 million in cash and $37.3 million available under its $125 million revolving credit facility[191] - Cash flow from operations was a source of $31.2 million in the first nine months of 2019, a significant improvement from a use of $32.7 million in the same period of 2018, primarily due to decreases in inventory ($36.9 million) and accounts receivable ($16.1 million)[183] - Investing activities used $96.6 million, largely due to a $71.7 million payment related to the settlement of the redeemable noncontrolling interest put option[187] - Total capital expenditures for 2019 are forecasted to be approximately $40 million[193] Quantitative and Qualitative Disclosures About Market Risk The company reports that there have been no material changes in its market risk exposures since the disclosures provided in its Annual Report on Form 10-K for the year ended December 31, 2018 - There have been no material changes in quantitative and qualitative disclosures about market risk from the company's 2018 Form 10-K[200] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of September 30, 2019, and concluded they were effective, with no material changes to internal control over financial reporting during the third quarter of 2019 - Management concluded that as of September 30, 2019, the company's disclosure controls and procedures were effective[201] - There were no changes in internal control over financial reporting during the third quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the company's internal controls[202] Part II. Other Information This section covers legal proceedings, risk factors, and a comprehensive list of exhibits filed with the report Legal Proceedings The company is involved in routine legal proceedings, with specific details regarding ongoing environmental litigation provided in Note 17 of the financial statements - The company is subject to routine legal proceedings. For details on significant litigation, refer to Note 17 in Part I, Item 1 of this report[207] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - There have been no material changes from the risk factors disclosed in the 2018 Form 10-K[208] Exhibits This section lists the exhibits filed with the Form 10-Q, including a Sale Purchase Agreement and certifications from the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act - Exhibits filed include the Sale Purchase Agreement with OEP dated July 30, 2019, and CEO/CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906[209][211] Signatures