Titan International(TWI) - 2021 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) This section presents unaudited condensed consolidated financial statements, showing significant improvements in net sales and a shift to net income Condensed Consolidated Statements of Operations The company reported substantial increases in net sales and gross profit, turning prior-year operating and net losses into positive income | Metric | 3 Months Ended Sep 30, 2021 (in thousands) | 3 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net sales | $450,382 | $304,772 | $1,292,539 | $932,405 | | Gross profit | $60,292 | $31,317 | $175,027 | $88,428 | | Income (loss) from operations | $22,900 | $(6,808) | $60,850 | $(19,512) | | Net income (loss) | $10,804 | $(13,454) | $21,601 | $(45,596) | | Net income (loss) attributable to Titan | $11,187 | $(12,643) | $21,988 | $(43,174) | | Basic EPS | $0.18 | $(0.21) | $0.36 | $(0.71) | | Diluted EPS | $0.18 | $(0.21) | $0.35 | $(0.71) | Condensed Consolidated Statements of Comprehensive Loss The company reported an improved comprehensive loss, primarily influenced by currency translation adjustments | Metric | 3 Months Ended Sep 30, 2021 (in thousands) | 3 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net income (loss) | $10,804 | $(13,454) | $21,601 | $(45,596) | | Currency translation adjustment, net | $(16,243) | $4,275 | $(28,991) | $(28,498) | | Comprehensive loss attributable to Titan | $(4,639) | $(6,709) | $(4,386) | $(67,572) | Condensed Consolidated Balance Sheets Total assets increased due to higher current assets, while total liabilities rose, leading to a slight decrease in total equity | Metric | September 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------- | :-------------------------------- | :------------------------------- | | Cash and cash equivalents | $94,640 | $117,431 | | Accounts receivable, net | $261,447 | $193,014 | | Inventories | $373,012 | $293,679 | | Total current assets | $796,243 | $658,599 | | Property, plant and equipment, net | $302,590 | $319,854 | | Total assets | $1,144,259 | $1,031,884 | | Total current liabilities | $436,912 | $329,711 | | Long-term debt | $450,999 | $433,584 | | Total liabilities | $944,665 | $830,619 | | Total equity | $174,594 | $176,265 | Condensed Consolidated Statements of Changes in Equity Equity statements detail changes from net income, currency adjustments, and stock compensation, resulting in a slight decrease in total equity | Metric | Balance January 1, 2021 (in thousands) | Balance September 30, 2021 (in thousands) | | :--------------------------------------- | :------------------------------------- | :-------------------------------------- | | Total Titan shareholders' equity | $179,264 | $177,916 | | Total equity | $176,265 | $174,594 | - Net income contributed $13.6 million and $11.2 million to retained earnings for the periods ended March 31, 2021, and September 30, 2021, respectively[16] - Currency translation adjustments resulted in a net decrease of $26.7 million and $16.7 million for the periods ended March 31, 2021, and September 30, 2021, respectively[16] Condensed Consolidated Statements of Cash Flows Net cash and cash equivalents decreased due to cash used in operating and investing activities, partially offset by financing activities | Cash Flow Activity | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net cash (used for) provided by operating activities | $(2,290) | $47,431 | | Net cash (used for) provided by investing activities | $(23,111) | $25,364 | | Net cash provided by (used for) financing activities | $7,275 | $(33,936) | | Net (decrease) increase in cash and cash equivalents | $(22,791) | $31,973 | | Cash and cash equivalents, end of period | $94,640 | $98,772 | Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, financial instrument fair values, and specific balance sheet and income statement items, including COVID-19 impacts and debt refinancing 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis of interim financial statements, US GAAP adherence, COVID-19 impacts, and new accounting standard adoption - The COVID-19 pandemic continued to impact the Company in Q3 2021, leading to increased operating costs due to sanitary measures and significant global supply chain constraints (raw materials, transportation, labor), particularly affecting Australia, Europe, and Latin America[21] - The fair value of the 7.00% senior secured notes due 2028 was approximately $421.5 million at September 30, 2021, compared to a cost of $394.3 million[22] - The Company adopted ASU 2019-12, Simplifying the Accounting for Income Taxes, on January 1, 2021, which did not have a material impact on the condensed consolidated financial statements[24] 2. ACCOUNTS RECEIVABLE, NET Net accounts receivable increased significantly due to higher sales, while the allowance for doubtful accounts slightly decreased | Metric | September 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------- | :-------------------------------- | :------------------------------- | | Accounts receivable | $265,015 | $196,796 | | Allowance for doubtful accounts | $(3,568) | $(3,782) | | Accounts receivable, net | $261,447 | $193,014 | 3. INVENTORIES Total inventories increased substantially across all categories, indicating higher production or anticipated future demand | Metric | September 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :---------------- | :-------------------------------- | :------------------------------- | | Raw material | $116,572 | $78,733 | | Work-in-process | $46,297 | $36,485 | | Finished goods | $210,143 | $178,461 | | Total Inventories | $373,012 | $293,679 | 4. PROPERTY, PLANT AND EQUIPMENT, NET Net property, plant, and equipment decreased slightly due to depreciation, despite increased construction-in-process, with a prior-year asset impairment charge | Metric | September 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :-------------------------------- | :------------------------------- | | Land and improvements | $41,680 | $43,943 | | Buildings and improvements | $240,276 | $245,619 | | Machinery and equipment | $582,457 | $583,847 | | Tools, dies and molds | $112,015 | $111,189 | | Construction-in-process | $16,444 | $11,282 | | Less accumulated depreciation | $(690,282) | $(676,026) | | Property, plant and equipment, net | $302,590 | $319,854 | - Depreciation on property, plant and equipment for the nine months ended September 30, 2021, was $35.1 million, down from $37.7 million in the comparable 2020 period[28] - A $2.6 million asset impairment charge was recorded during the nine months ended September 30, 2020, related to machinery and equipment at Titan Tire Reclamation Corporation (TTRC) due to market declines[29] 5. INTANGIBLE ASSETS, NET Net amortizable intangible assets decreased, with amortization expense totaling $0.6 million for the nine months ended September 30, 2021 | Metric | September 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------- | :-------------------------------- | :------------------------------- | | Patents, trademarks and other | $10,062 | $10,181 | | Less accumulated amortization | $(8,527) | $(8,206) | | Intangible assets, net | $1,535 | $1,975 | - Amortization related to intangible assets for the nine months ended September 30, 2021, totaled $0.6 million, a decrease from $1.6 million in the comparable 2020 period[31] | Period | Estimated Amortization Expense (in thousands) | | :-------------------------- | :-------------------------------------------- | | October 1 - December 31, 2021 | $37 | | 2022 | $145 | | 2023 | $145 | | 2024 | $134 | | 2025 | $123 | | Thereafter | $951 | | Total | $1,535 | 6. WARRANTY Warranty liability increased due to higher provisions compared to payments made during the period | Metric | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | | Warranty liability, January 1 | $15,040 | $14,334 | | Provision for warranty liabilities | $7,397 | $4,060 | | Warranty payments made | $(6,039) | $(4,346) | | Warranty liability, September 30 | $16,398 | $14,048 | 7. DEBT Debt refinancing led to a $16.0 million loss on repurchase, increased long-term debt, and $30.0 million outstanding on the revolving credit facility | Debt Type | September 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :-------------------------------- | :------------------------------- | | 7.00% senior secured notes due 2028 | $394,305 | — | | 6.50% senior secured notes due 2023 | — | $396,876 | | Titan Europe credit facilities | $40,690 | $49,583 | | Revolving credit facility | $30,000 | — | | Other debt | $16,871 | $18,244 | | Total long-term debt | $450,999 | $433,584 | - On April 22, 2021, the Company issued $400.0 million aggregate principal amount of 7.00% senior secured notes due April 2028, with an effective yield of 7.27% at issuance[36] - In connection with the new notes, the Company repurchased its $400.0 million principal amount of 6.50% senior secured notes due 2023, incurring a $16.0 million loss on senior note repurchase[39] - At September 30, 2021, the Company had $30.0 million in borrowings and $10.7 million in outstanding letters of credit under its $100 million revolving credit facility, with $59.3 million available for borrowing[41] 8. REDEEMABLE NONCONTROLLING INTEREST Redeemable noncontrolling interest of $25 million relates to an RDIF put option, with potential $25 million cash settlement if shares are not issued - The redeemable noncontrolling interest held by RDIF was recorded at $25 million as of September 30, 2021, representing the value of restricted common stock to be issued[47] - The issuance of 4,032,259 shares of restricted Titan common stock to RDIF is pending regulatory approval, and if not released by December 31, 2021, alternative settlement terms, including a $25 million cash payment, may be sought[44] 9. LEASES The company leases buildings and equipment, with operating lease assets and liabilities decreasing, and finance lease assets and liabilities increasing | Metric | September 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :-------------------------------- | :------------------------------- | | Operating lease ROU assets | $20,709 | $24,356 | | Total operating lease liabilities | $19,840 | $24,670 | | Finance lease, net | $3,597 | $3,506 | | Total finance lease liabilities | $4,995 | $2,680 | - The weighted average remaining lease term for operating leases is 4.16 years, and for finance leases, it is 2.68 years[50] - Operating cash flows from operating leases were $2.4 million and from finance leases were $0.2 million for the nine months ended September 30, 2021[50] 10. EMPLOYEE BENEFIT PLANS Net periodic pension cost significantly decreased, with the company contributing $0.8 million to pension plans during the period | Metric | 3 Months Ended Sep 30, 2021 (in thousands) | 3 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net periodic pension cost | $48 | $393 | $146 | $1,333 | - The Company contributed approximately $0.8 million to pension plans during the nine months ended September 30, 2021, and expects to contribute approximately $0.4 million for the remainder of 2021[51] 11. VARIABLE INTEREST ENTITIES Consolidated VIE assets and liabilities remained stable, while maximum exposure to loss from non-consolidated VIEs slightly increased | Metric | September 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------- | :-------------------------------- | :------------------------------- | | Consolidated VIE Total assets | $12,211 | $11,939 | | Consolidated VIE Total liabilities | $2,336 | $3,743 | | Non-consolidated VIE Investments | $6,002 | $5,623 | | Maximum exposure to loss (non-consolidated VIEs) | $9,235 | $9,000 | 12. ASSET IMPAIRMENT No asset impairment charges were recorded in 2021, contrasting with a $3.6 million charge in the prior year - No asset impairment charge was recorded for the three and nine months ended September 30, 2021[60] - For the nine months ended September 30, 2020, the Company recorded a $3.6 million asset impairment charge, including $1.0 million for inventory at Saltville, Virginia, and $2.6 million for TTRC machinery and equipment[60] 13. ROYALTY EXPENSE Royalty expenses increased, reflecting higher sales under trademark license agreements | Metric | 3 Months Ended Sep 30, 2021 (in thousands) | 3 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :---------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Royalty expenses | $2,805 | $2,434 | $7,915 | $7,309 | 14. OTHER INCOME Other income significantly decreased due to the absence of prior-year government subsidies, insurance settlements, and rental income | Metric | 3 Months Ended Sep 30, 2021 (in thousands) | 3 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Other income | $648 | $2,283 | $1,512 | $9,111 | - The decrease in other income for the three months ended September 30, 2021, was primarily due to the absence of $0.9 million in government subsidies and $0.5 million in building rental income from the Brownsville, Texas facility (sold in November 2020) present in the comparable 2020 period[63] - The decrease for the nine months ended September 30, 2021, was mainly due to the absence of $4.9 million from a property insurance settlement, $1.4 million in government subsidies, and $1.2 million in building rental income from the Brownsville, Texas facility in the comparable 2020 period[63] 15. INCOME TAXES Income tax expense and effective tax rate significantly increased due to improved foreign profitability and valuation allowances on deferred tax assets | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Provision for income taxes | $5,342 (in thousands) | $342 (in thousands) | $9,927 (in thousands) | $2,377 (in thousands) | | Effective income tax rate | 33.1% | (2.6)% | 31.5% | (5.5)% | - The year-to-date increase in income tax expense for the nine months ended September 30, 2021, is attributed to improved profitability in foreign jurisdictions[64] - The effective tax rates differed from the U.S. Federal income tax rate primarily due to full valuation allowances on deferred tax assets in the U.S. and certain foreign jurisdictions, partially offset by a reduction of unrecognized tax positions[65] 16. EARNINGS PER SHARE Basic and diluted EPS significantly improved, reflecting the company's return to profitability from prior-year losses | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) attributable to Titan | $11,187 (in thousands) | $(12,643) (in thousands) | $21,988 (in thousands) | $(43,174) (in thousands) | | Basic EPS | $0.18 | $(0.21) | $0.36 | $(0.71) | | Diluted EPS | $0.18 | $(0.21) | $0.35 | $(0.71) | | Weighted average shares outstanding (basic) | 62,340 (in thousands) | 60,926 (in thousands) | 61,844 (in thousands) | 60,630 (in thousands) | | Weighted average shares outstanding (diluted) | 62,601 (in thousands) | 60,926 (in thousands) | 62,523 (in thousands) | 60,630 (in thousands) | 17. LITIGATION The company settled a CERCLA legal proceeding for $11.5 million, with $9.0 million paid and the remainder accounted for as liabilities - In September 2020, an agreement was reached to settle the CERCLA legal proceeding, formalized in a Consent Decree on February 1, 2021[79] - The settlement prescribed total cash payments of $11.5 million to the federal government, with $9.0 million paid on February 25, 2021[79] - Remaining amounts of $1.6 million and $1.2 million (including accrued interest) are accounted for within other accrued liabilities and other long-term liabilities, respectively, as of September 30, 2021[79] 18. SEGMENT INFORMATION All three segments showed significant increases in net sales, gross profit, and income from operations, reflecting broad market recovery | Segment | 3 Months Ended Sep 30, 2021 (Net Sales in thousands) | 3 Months Ended Sep 30, 2020 (Net Sales in thousands) | 9 Months Ended Sep 30, 2021 (Net Sales in thousands) | 9 Months Ended Sep 30, 2020 (Net Sales in thousands) | | :------------------------ | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Agricultural | $244,373 | $153,067 | $684,636 | $473,272 | | Earthmoving/construction | $168,408 | $123,227 | $509,930 | $372,606 | | Consumer | $37,601 | $28,478 | $97,973 | $86,527 | | Total Net Sales | $450,382 | $304,772 | $1,292,539 | $932,405 | | | 3 Months Ended Sep 30, 2021 (Gross Profit in thousands) | 3 Months Ended Sep 30, 2020 (Gross Profit in thousands) | 9 Months Ended Sep 30, 2021 (Gross Profit in thousands) | 9 Months Ended Sep 30, 2020 (Gross Profit in thousands) | | Agricultural | $33,214 | $16,191 | $98,294 | $45,830 | | Earthmoving/construction | $21,263 | $12,409 | $63,333 | $34,777 | | Consumer | $5,815 | $2,717 | $13,400 | $7,821 | | Total Gross Profit | $60,292 | $31,317 | $175,027 | $88,428 | | | 3 Months Ended Sep 30, 2021 (Income (Loss) from Operations in thousands) | 3 Months Ended Sep 30, 2020 (Income (Loss) from Operations in thousands) | 9 Months Ended Sep 30, 2021 (Income (Loss) from Operations in thousands) | 9 Months Ended Sep 30, 2020 (Income (Loss) from Operations in thousands) | | Agricultural | $18,156 | $3,091 | $54,228 | $11,958 | | Earthmoving/construction | $7,913 | $656 | $20,950 | $(5,161) | | Consumer | $3,519 | $(88) | $7,067 | $912 | | Corporate & Unallocated | $(6,688) | $(10,467) | $(21,395) | $(27,221) | | Total Income (Loss) from Operations | $22,900 | $(6,808) | $60,850 | $(19,512) | | Segment | September 30, 2021 (Total Assets in thousands) | December 31, 2020 (Total Assets in thousands) | | :------------------------ | :-------------------------------- | :------------------------------- | | Agricultural | $494,117 | $420,993 | | Earthmoving/construction | $489,076 | $473,873 | | Consumer | $142,093 | $114,993 | | Corporate & Unallocated | $18,973 | $22,025 | | Total Assets | $1,144,259 | $1,031,884 | 19. RELATED PARTY TRANSACTIONS Related party transactions significantly increased in sales, purchases, and commissions paid compared to the prior year | Metric | 3 Months Ended Sep 30, 2021 (in thousands) | 3 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Sales to related parties | $700 | $100 | $2,000 | $600 | | Purchases from related parties | $100 | $0 | $1,000 | $0 | | Sales commissions paid | $500 | $300 | $1,500 | $1,000 | - Trade receivables due from related parties were approximately $0.3 million at September 30, 2021, compared to $0.1 million at December 31, 2020[85] 20. ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated other comprehensive loss increased due to negative currency translation adjustments, partially offset by pension and derivative gains | Metric | Balance January 1, 2021 (in thousands) | Balance September 30, 2021 (in thousands) | | :--------------------------------------- | :------------------------------------- | :-------------------------------------- | | Currency Translation Adjustments | $(194,151) | $(223,206) | | Gain (Loss) on Derivatives | $(413) | $(94) | | Unrecognized Losses and Prior Service Cost | $(22,690) | $(20,328) | | Total Accumulated Other Comprehensive Loss | $(217,254) | $(243,628) | - The increase in currency translation adjustments for the nine months ended September 30, 2021, was due to foreign currency rate fluctuations, legal entity rationalization, and intercompany capital structure management[88] 21. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION This note provides condensed consolidating financial statements for entities guaranteeing the 7.00% senior secured notes due 2028 - The 7.00% senior secured notes due 2028 are fully and unconditionally guaranteed, jointly and severally, by Titan Tire Corporation, Titan Tire Corporation of Bryan, Titan Tire Corporation of Freeport, and Titan Wheel Corporation of Illinois[91] 22. SUBSEQUENT EVENTS The company amended and extended its revolving credit facility, increasing it to $125 million and extending its maturity to October 2026 - On October 28, 2021, the $100 million revolving credit facility was amended and extended, increasing to $125 million and maturing on October 28, 2026[100] - The amended credit facility includes an accordion provision allowing for expansion by up to an additional $50 million[100] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operations, and liquidity, highlighting significant improvements in sales and profitability across segments, while addressing COVID-19 impacts COVID-19 Pandemic The COVID-19 pandemic continued to impact operations, increasing costs and causing significant global supply chain constraints, creating ongoing uncertainty - The COVID-19 pandemic continued to have an impact on the Company in the third quarter of 2021, with increased operating costs due to additional sanitary and protective health measures[21][103] - Global supply chains are experiencing significant constraints, including availability and pricing of raw materials, transportation, and labor, adding complexity to recovery and growth expectations[21][125] - Certain geographies (Australia, Europe, Latin America) remain significantly impacted by the pandemic, and the full impact on economic conditions, customers, and the Company remains highly uncertain[21][103][104] FORWARD-LOOKING STATEMENTS This section provides a cautionary statement on forward-looking statements, outlining risks from the COVID-19 pandemic, economic conditions, and operational factors - Forward-looking statements are based on current expectations and assumptions but are subject to risks and uncertainties, including the effect of the COVID-19 pandemic, a recession, changes in end-user markets, competitor actions, labor relations, regulatory compliance, raw material availability and price, and geopolitical uncertainties[106][109] - Key areas of forward-looking statements include financial performance, anticipated business trends, end-user market expectations, capital expenditures, cost control, loan agreement compliance, business strategies, new product introductions, and acquisition/divestiture opportunities[106] OVERVIEW Titan International, Inc. is a global manufacturer of off-highway wheels, tires, and undercarriage products for agricultural, earthmoving, and consumer markets - Titan is a global manufacturer of off-highway wheels, tires, assemblies, and undercarriage products[111] - The company serves agricultural, earthmoving/construction, and consumer markets, offering products under brands like Goodyear Farm Tire and Titan Tire[111][112][113][114] - Top customers include global leaders such as AGCO Corporation, Caterpillar Inc., CNH Global N.V., Deere & Company, Hitachi, Ltd., Kubota Corporation, Liebherr, and Volvo[115] MARKET CONDITIONS AND OUTLOOK Market conditions show positive trends across all segments, with strong growth in agricultural and earthmoving/construction, and a stabilized consumer market AGRICULTURAL MARKET OUTLOOK The agricultural market outlook is positive, driven by improved commodity prices, higher farmer income, and the need to replace aging equipment and replenish inventory - Agriculture-related commodity prices improved in 2020 and continued to rise in the first three quarters of 2021, remaining at historically high levels[116] - Improved farmer income, replacement of aging large equipment, and replenishment of lower equipment inventory levels are expected to support increased demand for products[116] - Many customers are forecasting growth, indicating sustained market stability over the next few years[116] EARTHMOVING/CONSTRUCTION MARKET OUTLOOK The earthmoving/construction market shows strong growth, recovering from 2020 declines, driven by global economic emergence and low equipment inventory - The market is experiencing strong signs of continued growth as economies emerge from the pandemic[117] - Historically low equipment inventory levels throughout the global construction industry and rising mining capital budgets are supporting recovery and growth in 2021[117][119] - Improvements in mineral commodity prices also currently support recovery and growth[119] CONSUMER MARKET OUTLOOK The consumer market stabilized in 2021 due to pent-up demand, with a slower recovery pace anticipated compared to other segments - The consumer market has stabilized through 2021 due to pent-up demand from historically lower sales volume achieved during 2020[120] - The pace of recovery in the consumer segment is anticipated to be slower than in the Agriculture and Earthmoving/Construction segments[120] RESULTS OF OPERATIONS The company achieved substantial improvements in net sales, gross profit, and operating income, driven by increased volume, favorable price/mix, and cost reduction initiatives Net Sales Net sales significantly increased due to higher volume, favorable price/mix, positive foreign currency translation, and pricing increases to offset rising raw material costs | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Increase | | :---------------- | :-------------------------- | :-------------------------- | :--------- | | Net sales | $450.4 million | $304.8 million | 47.8% | | Volume increase | 25.3% | N/A | N/A | | Price/mix increase | 21.3% | N/A | N/A | | FX impact | 1.2% ($3.7 million) | N/A | N/A | | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Increase | | :---------------- | :-------------------------- | :-------------------------- | :--------- | | Net sales | $1,292.5 million | $932.4 million | 38.6% | | Volume increase | 23.9% | N/A | N/A | | Price/mix increase | 14.0% | N/A | N/A | | FX impact | 0.7% ($6.2 million) | N/A | N/A | - The increase in net sales was driven by market growth in the agricultural and earthmoving/construction segments, pricing increases due to rising raw material and freight costs, and pent-up demand following the COVID-19 pandemic[124] Gross Profit Gross profit and margin substantially increased due to higher sales volume impacting overhead absorption and successful cost reduction initiatives | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Increase | | :---------------- | :-------------------------- | :-------------------------- | :--------- | | Gross profit | $60.3 million | $31.3 million | 92.5% | | Gross profit % | 13.4% | 10.3% | 3.1 pp | | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Increase | | :---------------- | :-------------------------- | :-------------------------- | :--------- | | Gross profit | $175.0 million | $88.4 million | 97.9% | | Gross profit % | 13.5% | 9.5% | 4.0 pp | - The increase in gross profit and margin was driven by the impact of increases in sales volume, favorably impacting overhead absorption, and cost reduction initiatives executed across global production facilities[128][129] Selling, General and Administrative Expenses SG&A expenses decreased for three months due to a legal accrual, but increased for nine months due to supply chain investments and variable costs | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | | :---------------- | :-------------------------- | :-------------------------- | :------- | | SG&A expenses | $32.2 million | $33.5 million | (3.7)% | | SG&A % of net sales | 7.2% | 11.0% | (3.8) pp | | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | | :---------------- | :-------------------------- | :-------------------------- | :------- | | SG&A expenses | $98.8 million | $93.8 million | 5.3% | | SG&A % of net sales | 7.6% | 10.1% | (2.5) pp | - The decrease in SG&A for the three months was primarily due to a $5.0 million contingent legal accrual recorded in the comparable prior-year period for the Dico case[130] - The increase in SG&A for the nine months was driven by investments to improve supply chain and logistics processes and an increase in variable costs associated with improved operating performance and sales growth[131] Research and Development Expenses R&D expenses slightly increased, reflecting product design improvements and quality focus, following prior-year pandemic-related reductions | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | | :---------------- | :-------------------------- | :-------------------------- | :------- | | R&D expenses | $2.4 million | $2.2 million | 5.8% | | R&D % of net sales | 0.5% | 0.7% | (0.2) pp | | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | | :---------------- | :-------------------------- | :-------------------------- | :------- | | R&D expenses | $7.5 million | $6.8 million | 9.9% | | R&D % of net sales | 0.6% | 0.7% | (0.1) pp | - R&D spending reflects initiatives to improve product designs and an ongoing focus on quality, following reductions during the onset of the COVID-19 pandemic in the comparable periods of 2020[132] Royalty Expense Royalty expenses increased, directly correlating with higher sales under trademark license agreements | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | | :---------------- | :-------------------------- | :-------------------------- | :------- | | Royalty expenses | $2.8 million | $2.4 million | 15.2% | | Royalty % of net sales | 0.6% | 0.8% | (0.2) pp | | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | | :---------------- | :-------------------------- | :-------------------------- | :------- | | Royalty expenses | $7.9 million | $7.3 million | 8.3% | | Royalty % of net sales | 0.6% | 0.8% | (0.2) pp | - The increase in royalty expenses is due to the increase in sales, resulting in an incremental increase in the amount of royalty expense incurred[134] Income (Loss) from Operations The company achieved a significant turnaround from prior-year operating losses to substantial operating income, driven by higher sales and improved gross profit | Metric | 3 Months Ended Sep 30, 2021 (in millions) | 3 Months Ended Sep 30, 2020 (in millions) | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------- | | Income (loss) from operations | $22.9 | $(6.8) | 436.4% | | Metric | 9 Months Ended Sep 30, 2021 (in millions) | 9 Months Ended Sep 30, 2020 (in millions) | % Change | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------- | | Income (loss) from operations | $60.9 | $(19.5) | 411.9% | - The increase in income from operations was primarily due to higher sales and improvements in gross profit margins[135] OTHER PROFIT/LOSS ITEMS This section details changes in non-operating items, including increased interest expense, a loss on senior note repurchase, foreign exchange gain, and decreased other income Interest Expense Interest expense slightly increased due to refinancing senior secured notes at a higher interest rate | Metric | 3 Months Ended Sep 30, 2021 (in thousands) | 3 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :---------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Interest expense | $7,818 | $7,251 | $23,939 | $23,076 | - Interest expense increased due to the refinancing of the senior secured notes during the second quarter of 2021, resulting in an increase in the interest rate from 6.50% to 7.00%[136] Loss on Senior Note Repurchase A $16.0 million loss on senior note repurchase was recorded from the redemption of $400.0 million principal of 6.50% senior secured notes - A loss on senior note repurchase of $16.0 million was recorded for the nine months ended September 30, 2021[138] - This loss was incurred in connection with the Company's call and redemption of its outstanding $400.0 million principal amount of 6.50% senior secured notes due 2023 during the second quarter of 2021[138] Foreign Exchange Gain (Loss) The company experienced a foreign exchange gain, a significant improvement from prior-year losses, driven by legal entity rationalization and favorable exchange rates | Metric | 3 Months Ended Sep 30, 2021 (in thousands) | 3 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Foreign exchange gain (loss) | $416 | $(1,336) | $9,125 | $(9,742) | - The foreign exchange gain in 2021 was primarily the result of the closeout of certain legal entities as part of an ongoing initiative to rationalize Titan's legal entity structure, ongoing management of the intercompany capital structure, and favorable exchange rate movements[140] Other Income Other income decreased due to the absence of prior-year government subsidies, insurance settlement proceeds, and rental income | Metric | 3 Months Ended Sep 30, 2021 (in thousands) | 3 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :---------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Other income | $648 | $2,283 | $1,512 | $9,111 | - The decrease in other income for the three months ended September 30, 2021, was primarily attributable to $0.9 million of government subsidies and $0.5 million of building rental income in the comparable 2020 period[142] - The decrease for the nine months ended September 30, 2021, was primarily due to $4.9 million from a property insurance settlement, $1.4 million of government subsidies, and $1.2 million of building rental income in the comparable 2020 period[143] Provision for Income Taxes Income tax expense and effective tax rate significantly increased due to improved foreign profitability and valuation allowances on deferred tax assets | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Income tax expense | $5,342 (in thousands) | $342 (in thousands) | $9,927 (in thousands) | $2,377 (in thousands) | | Effective income tax rate | 33.1% | (2.6)% | 31.5% | (5.5)% | - The year-to-date increase in income tax expense for the nine months ended September 30, 2021, is due to improved profitability in foreign jurisdictions[144] - The effective tax rates differed from the U.S. Federal income tax rate primarily due to full valuation allowances on deferred tax assets in the U.S. and certain foreign jurisdictions, and non-deductible royalty expenses[145] Net Income (Loss) and Income (Loss) per Share The company achieved a significant turnaround from prior-year net losses to net income, resulting in positive basic and diluted earnings per share | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net income (loss) | $10,804 (in thousands) | $(13,454) (in thousands) | $21,601 (in thousands) | $(45,596) (in thousands) | | Basic income (loss) per share | $0.18 | $(0.21) | $0.36 | $(0.71) | | Diluted income (loss) per share | $0.18 | $(0.21) | $0.35 | $(0.71) | Segment Summary This table provides a consolidated view of net sales, gross profit, and operating income across all segments, demonstrating overall improved performance | Segment | 3 Months Ended Sep 30, 2021 (Net Sales in thousands) | 3 Months Ended Sep 30, 2020 (Net Sales in thousands) | 9 Months Ended Sep 30, 2021 (Net Sales in thousands) | 9 Months Ended Sep 30, 2020 (Net Sales in thousands) | | :------------------------ | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Agricultural | $244,373 | $153,067 | $684,636 | $473,272 | | Earthmoving/construction | $168,408 | $123,227 | $509,930 | $372,606 | | Consumer | $37,601 | $28,478 | $97,973 | $86,527 | | Total Net Sales | $450,382 | $304,772 | $1,292,539 | $932,405 | | | 3 Months Ended Sep 30, 2021 (Income (Loss) from Operations in thousands) | 3 Months Ended Sep 30, 2020 (Income (Loss) from Operations in thousands) | 9 Months Ended Sep 30, 2021 (Income (Loss) from Operations in thousands) | 9 Months Ended Sep 30, 2020 (Income (Loss) from Operations in thousands) | | Agricultural | $18,156 | $3,091 | $54,228 | $11,958 | | Earthmoving/construction | $7,913 | $656 | $20,950 | $(5,161) | | Consumer | $3,519 | $(88) | $7,067 | $912 | | Corporate & Unallocated | $(6,688) | $(10,467) | $(21,395) | $(27,221) | | Total Income (Loss) from Operations | $22,900 | $(6,808) | $60,850 | $(19,512) | Agricultural Segment Results The Agricultural segment experienced robust growth in net sales, gross profit, and operating income, driven by strong market demand, increased volume, and favorable price/mix | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Increase | | :-------------------------- | :-------------------------- | :-------------------------- | :--------- | | Net sales | $244.4 million | $153.1 million | 59.7% | | Gross profit | $33.2 million | $16.2 million | 105.1% | | Profit margin | 13.6% | 10.6% | 28.3% | | Income from operations | $18.2 million | $3.1 million | 487.4% | | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Increase | | :-------------------------- | :-------------------------- | :-------------------------- | :--------- | | Net sales | $684.6 million | $473.3 million | 44.7% | | Gross profit | $98.3 million | $45.8 million | 114.5% | | Profit margin | 14.4% | 9.7% | 48.5% | | Income from operations | $54.2 million | $12.0 million | 353.5% | - Net sales volume and product price/mix were up 36.4% and 23.0% respectively for the three months, and 28.4% and 17.9% respectively for the nine months, driven by improved farmer income, equipment replacement, and lower equipment inventory levels[152][155] - Pricing increases reflect rising raw material and other inflationary costs, including freight[152][155] Earthmoving/Construction Segment Results The Earthmoving/Construction segment showed strong recovery with significant increases in net sales, gross profit, and operating income, driven by improved economic conditions and efficiencies | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Increase | | :-------------------------- | :-------------------------- | :-------------------------- | :--------- | | Net sales | $168.4 million | $123.2 million | 36.7% | | Gross profit | $21.3 million | $12.4 million | 71.4% | | Profit margin | 12.6% | 10.1% | 24.8% | | Income (loss) from operations | $7.9 million | $0.7 million | 1106.3% | | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Increase | | :-------------------------- | :-------------------------- | :-------------------------- | :--------- | | Net sales | $509.9 million | $372.6 million | 36.9% | | Gross profit | $63.3 million | $34.8 million | 82.1% | | Profit margin | 12.4% | 9.3% | 33.3% | | Income (loss) from operations | $21.0 million | $(5.2) million | 505.9% | - Sales increases were driven by increased volume and product price/mix (15.8% and 18.8% for three months; 23.8% and 8.9% for nine months), reflecting improvements in global economic conditions and construction markets[160][163] - The segment also benefited from improved production efficiencies and cost containment measures[161][162][164][165] Consumer Segment Results The Consumer segment reported increased net sales, gross profit, and operating income, primarily due to favorable product price/mix and volume | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Increase | | :-------------------------- | :-------------------------- | :-------------------------- | :--------- | | Net sales | $37.6 million | $28.5 million | 32.0% | | Gross profit | $5.8 million | $2.7 million | 114.0% | | Profit margin | 15.5% | 9.5% | 63.2% | | Income (loss) from operations | $3.5 million | $(0.1) million | (4098.9)% | | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Increase | | :-------------------------- | :-------------------------- | :-------------------------- | :--------- | | Net sales | $98.0 million | $86.5 million | 13.2% | | Gross profit | $13.4 million | $7.8 million | 71.3% | | Profit margin | 13.7% | 9.0% | 52.2% | | Income (loss) from operations | $7.1 million | $0.9 million | 674.9% | - The increase in net sales was driven by favorable product price/mix (22.5% for three months; 13.1% for nine months) and volume impact (6.8% for three months; 0.7% for nine months)[169][171] - The nine-month net sales increase was partially offset by unfavorable foreign currency impacts of 1.6%, primarily due to the devaluation of Latin American currencies against the US Dollar[171] Corporate & Unallocated Expenses Corporate & Unallocated expenses decreased due to changes in certain corporate SG&A expenses | Metric | 3 Months Ended Sep 30, 2021 (in thousands) | 3 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Corporate & Unallocated loss | $(6,688) | $(10,467) | $(21,395) | $(27,221) | - The year-over-year change is related to the increase in certain corporate SG&A expenses, which were not allocated[173] LIQUIDITY AND CAPITAL RESOURCES Liquidity decreased due to cash used in operating and investing activities, offset by financing, but management anticipates sufficient liquidity from cash and credit facilities Cash Flows Cash and cash equivalents decreased by $22.8 million, reflecting the net impact of operating, investing, and finan