Titan International(TWI) - 2022 Q4 - Annual Report

Part I Business Titan International is a global manufacturer of wheels, tires, and undercarriage systems for off-highway vehicles, serving agricultural, earthmoving, and consumer sectors - The company is a global manufacturer and supplier of wheels, tires, and undercarriage systems for the agricultural, earthmoving/construction, and consumer markets[18][19] - A key competitive strength is the ability to produce both wheels and tires, enabling the company to provide complete assembly solutions to customers like AGCO, Caterpillar, CNH, and Deere & Company[24][26][27] - Strategic priorities include promoting its proprietary LSW® tire technology, growing its higher-margin aftermarket business, and improving operational efficiencies[28][29][30] - In March 2022, the company sold its Australian wheel business to OTR Tyres for approximately $17.5 million in gross proceeds and repatriated cash as part of its strategy to divest non-core assets[33] Customer Concentration (FY 2022 vs 2021) | Customer Group | % of Net Sales (2022) | % of Net Sales (2021) | | :--- | :--- | :--- | | Top 10 Customers | 43% | 40% | | Deere & Company | 15% | 12% | International Operations Net Sales Contribution | Region | % of Net Sales (2022) | % of Net Sales (2021) | | :--- | :--- | :--- | | Latin America | 19% | 18% | | Europe | 21% | 22% | | Russia | 6% | 6% | Research & Development Expenses (2020-2022) | Year | R&D Expense (in millions) | | :--- | :--- | | 2022 | $10.4 | | 2021 | $10.1 | | 2020 | $9.0 | Risk Factors The company faces significant risks from commodity price volatility, concentrated customer base, cyclical end-markets, international operations, and potential IT system disruptions - The company is exposed to price fluctuations of key commodities like steel and rubber, as it does not typically enter into long-term contracts or use derivative instruments to hedge these risks[73] - Operations are subject to risks from cyclical industries (agriculture, construction) and a concentrated customer base, with the ten largest customers accounting for 43% of 2022 net sales[79][83] - The military conflict between Russia and Ukraine poses a risk to the company's Russian operations (Voltyre-Prom), which represent approximately 7% of consolidated assets and 6% of global sales in 2022[93][95] - Debt obligations contain covenants that could limit financial and operational flexibility, including restrictions on dividends, stock repurchases, and additional borrowings[88] - The company faces risks from potential IT system failures or cybersecurity attacks, especially as it upgrades to cloud-based ERP systems, and must comply with evolving data privacy laws like GDPR[103][104] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None Properties Titan owns several large manufacturing and distribution facilities, with its most significant properties located in Sao Paulo, Brazil, and various locations in the United States and Russia Major Owned Properties (>1M sq ft) | Location | Approx. Square Footage | | :--- | :--- | | Sao Paulo, Brazil | 2,917,000 | | Union City, Tennessee | 2,212,000 | | Volzhsky, Russia | 2,153,000 | | Des Moines, Iowa | 1,930,000 | | Quincy, Illinois | 1,205,000 | | Freeport, Illinois | 1,202,000 | Legal Proceedings The company is involved in routine legal proceedings typical for its business, which are not anticipated to have a material effect on its financial position or results - The company is subject to routine legal proceedings and claims arising from the normal course of business. See Note 24 for further details[116] Mine Safety Disclosures This item is not applicable to the company - Not applicable Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Titan's common stock trades on the NYSE under the symbol TWI, with quarterly cash dividends suspended since June 2020 and no dividends paid in 2022 or 2021 - The company's common stock trades on the New York Stock Exchange (NYSE) under the symbol TWI[120] - The quarterly common stock dividend was suspended on June 11, 2020, and remained suspended through 2022. No dividends were declared in 2022 or 2021[120] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, net sales grew 22% to $2.17 billion and net income surged to $179.2 million, driven by strong demand, favorable pricing, and tax benefits, with robust operating cash flow of $160.7 million Financial Highlights (FY 2022 vs. FY 2021) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,169.4 M | $1,780.2 M | +22% | | Gross Profit | $360.7 M | $237.5 M | +52% | | Gross Margin | 17% | 13% | +31% | | Income from Operations | $205.8 M | $85.2 M | +142% | | Net Income | $179.2 M | $49.9 M | +259% | | Diluted EPS | $2.77 | $0.79 | +251% | - The company's Russian operations (Voltyre-Prom) account for approximately 6% of consolidated global sales and 7% of consolidated assets as of year-end 2022. The Russia-Ukraine conflict has not had a significant impact on global operations to date[129] - In 2022, the company recorded $32.0 million in other income from the approval of Brazilian indirect tax credits, which also resulted in $16.1 million of associated income tax expense[134] - The company released a significant portion of its U.S. valuation allowance on deferred tax assets, resulting in a tax benefit of $47.4 million in 2022, due to achieving a three-year cumulative income position[156][157] - Net cash provided by operating activities was $160.7 million in 2022, a substantial increase from $10.7 million in 2021, primarily driven by higher net income[170][171] - Capital expenditures for 2023 are forecasted to be between $55 million and $60 million, intended to enhance manufacturing capabilities and drive productivity[182] Market Conditions and Outlook The 2023 outlook is positive, with sustained stability in agriculture, modest growth in earthmoving/construction, and stability in the consumer market - Agricultural Market: Favorable conditions are expected to continue into 2023, supported by strong farmer income, replacement of aging equipment, and low dealer inventories[137] - Earthmoving/Construction Market: Modest growth is expected in 2023, driven by infrastructure development and healthy mining capital budgets, though rising interest rates may soften housing starts[138] - Consumer Market: Markets remained stable in 2022. This segment is influenced by consumer spending, interest rates, and other macroeconomic factors[139][140] Results of Operations (FY 2022 vs. FY 2021) Net sales increased 22% to $2.17 billion in 2022, with gross margin expanding to 17% and net income significantly boosted by tax credits and valuation allowance release - The 22% increase in net sales was primarily driven by price increases in response to inflation, with a lesser impact from increased volume. Sales were unfavorably impacted by foreign currency translation (3.6%) and the sale of the Australian wheel business (1.8%)[144] - Gross profit margin improved from 13% in 2021 to 17% in 2022, attributed to higher sales, better operating leverage, and cost reduction initiatives[145] - Other income increased to $25.4 million, mainly due to a $32.0 million gain on indirect tax credits in Brazil, partially offset by a $10.9 million loss on the sale of the Australian wheel business[154] - The effective tax rate was 11.4% in 2022, compared to 2.3% in 2021. The 2022 rate was favorably impacted by a $47.4 million valuation allowance release[155][156] Segment Information All three segments, Agricultural, Earthmoving/Construction, and Consumer, reported strong sales and operating income growth in 2022, driven by price/mix and volume increases Agricultural Segment Performance (FY 2022 vs. FY 2021) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,192.2 M | $949.4 M | +26% | | Gross Profit | $193.6 M | $135.8 M | +43% | | Income from Operations | $130.5 M | $77.7 M | +68% | Earthmoving/Construction Segment Performance (FY 2022 vs. FY 2021) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $807.4 M | $693.4 M | +16% | | Gross Profit | $135.8 M | $83.7 M | +62% | | Income from Operations | $79.8 M | $27.8 M | +187% | Consumer Segment Performance (FY 2022 vs. FY 2021) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $169.8 M | $137.5 M | +24% | | Gross Profit | $31.3 M | $18.0 M | +74% | | Income from Operations | $22.8 M | $9.6 M | +139% | Liquidity and Capital Resources Liquidity significantly improved in 2022 with $159.6 million in cash and $160.7 million in operating cash flow, supporting capital expenditures and stock repurchases, with sufficient liquidity anticipated for 2023 - Cash and cash equivalents increased by $61.5 million to $159.6 million at year-end 2022[170] - Net cash from operating activities was $160.7 million, driven by strong net income, which more than offset increased working capital needs in receivables and inventory[170] - Investing activities used $36.8 million, including $47.0 million in capital expenditures, partially offset by $9.3 million in proceeds from the sale of the Australian wheel business[173] - Financing activities used $61.3 million, primarily for debt payments ($124.7 million) and a $25.0 million common stock repurchase[175] - At December 31, 2022, the company had no outstanding borrowings under its $125 million revolving credit facility, with $117.8 million available[181] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks including foreign currency fluctuations, commodity price volatility for raw materials, and interest rate changes on its variable-rate debt - The company is exposed to foreign currency risk, with a net investment in foreign entities of $249.0 million at year-end 2022. A hypothetical 10% adverse change in exchange rates would result in a loss of value of approximately $25.0 million[192] - Titan is exposed to commodity price risk for materials like steel and rubber and does not use derivative instruments to hedge these fluctuations[193] - Interest rate risk is tied to the variable-rate $125 million credit facility. A 100 basis point (1%) increase in interest rates would change annual interest expense by about $1.2 million if the facility were fully drawn[194] Financial Statements and Supplementary Data This section refers to the detailed financial statements and schedules located in Part IV, Item 15 of the report - Reference is made to Part IV, Item 15 of this report for the full financial statements and supplementary data[196] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - None Controls and Procedures As of December 31, 2022, management concluded that the company's disclosure controls and internal control over financial reporting were effective, with no material changes during the fourth quarter of 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[198] - Management assessed internal control over financial reporting using the COSO 2013 framework and concluded it was effective as of December 31, 2022[201] - No changes in internal control over financial reporting occurred during the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, these controls[199] Other Information The company reports no other information for this item - None Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable Part III Directors, Executive Officers and Corporate Governance Information on the company's directors and executive officers, including Paul G. Reitz and David A. Martin, is incorporated by reference from the 2023 Proxy Statement - Information regarding directors and corporate governance is incorporated by reference from the Company's 2023 Proxy Statement[206] - Key executive officers include Paul G. Reitz, President and CEO, and David A. Martin, SVP and CFO[207][208] Executive Compensation Detailed information regarding executive officer compensation is incorporated by reference from the company's 2023 Proxy Statement - Information required by this item is incorporated by reference from the Company's 2023 Proxy Statement[212] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of beneficial owners, management, and related stockholder matters is incorporated by reference from the company's 2023 Proxy Statement - Information required by this item is incorporated by reference from the Company's 2023 Proxy Statement[212] Certain Relationships, Related Transactions, and Director Independence Details concerning certain relationships, related party transactions, and director independence are incorporated by reference from the 2023 Proxy Statement and Note 27 of the Consolidated Financial Statements - Information required by this item is incorporated by reference from the Company's 2023 Proxy Statement and also appears in Note 27 of the Notes to Consolidated Financial Statements[213] Principal Accounting Fees and Services Information regarding fees paid to the principal accountant for audit and other services is incorporated by reference from the company's 2023 Proxy Statement - Information required by this item is incorporated by reference from the Company's 2023 Proxy Statement[214] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed with the Form 10-K, with full financial statements beginning on page F-1 - This item lists the financial statements, financial statement schedules, and exhibits included in or incorporated by reference into the Form 10-K[217] Form 10-K Summary The company reports no summary for this item - None