Titan International, Inc., a leading global manufacturer of off-highway wheels, tires, assemblies, and undercarriage products, reports results for the second quarter ended June 30, 2017.
Net sales for the second quarter of 2017 were $364.4 million, an increase of 10% when compared to $330.2 million in the second quarter of 2016. Net loss applicable to common shareholders for the second quarter of 2017 was $10.3 million, versus $5.2 million in the second quarter of 2016.
Net sales for the first 6 months of 2017 were $721.9 million, an increase of 11% when compared to $652.0 million in the first 6 months of 2016. Net loss applicable to common shareholders for the first 6 months of 2017 was $20.8 million, versus $23.1 million for the first 6 months of 2016.
Paul Reitz, President and Chief Executive Officer, comments, "Our second quarter results mark the second consecutive quarter of significant year-over-year growth in net sales. Our top line growth of over 10% included an 18% improvement within our Agriculture (AG) segment. Following a protracted downturn of more than 4 years, these results continue to demonstrate early signs of a recovery and provide optimism moving into 2018. AG continues to be sluggish at the OEMs, but our moves in the North America aftermarket have benefited Titan thus far in 2017. Along with the AG gains this quarter, we continue to see market conditions improve in aftermarket mining and construction which fits well with our strategy that was launched almost two years ago to position ourselves to capture more of this business.
"The current quarter saw sequential gross margin improvement, up from 11.1% in the first quarter to 12.0% in the second. This improvement was in spite of significant raw material pricing headwinds that negatively impacted gross profit by approximately $11 million during the second quarter. Although we believe that raw material pricing has now stabilized, our OEM contracts in North America did not allow us to fully pass through these higher costs during the quarter. Because of these headwinds, we did not reach the gross margin level we experienced this quarter last year; however, with the increased pricing that has now taken place with the OEMs and the raw material price stabilization, we do not anticipate further negative impacts from raw material prices in the second half of this year.
"During the quarter, we had a number of positive events that planted seeds for a strong future. First, Titan finalized agreements with the United Steelworkers Union (USW) which represents our three North American tire plants. These new 5 year contracts provide added profit incentives for our union workforce while providing Titan with more economic flexibility. This will benefit all stakeholders and allow Titan to maintain our position as a leader in the North American tire market.
"We are excited that New Holland recently began offering our Low Sidewall Technology (LSW) tractor setup with LSW1000/40R32 fronts and super single LSW1100/45R46 rears. Last year, a study was conducted by Mark Stallings, a farmer and owner of the Delta New Holland dealership, which compared standard duals to LSWs. As we previously announced, the study demonstrated that LSWs deliver higher yields. Because of this successful study and the efforts of Mr. Stallings, we are now able to offer that same LSW tractor setup to all New Holland customers.
"We recently had a couple of good wins at ITM, our undercarriage business. We obtained 100% of the global forestry business with a major, global OEM. Also, we were named the preferred supplier on D10 and D11 tracks with another major, global mining operator."
James Froisland, Chief Financial Officer and Chief Information Officer comments, "We have previously stated that selling, general and administrative (SG&A) expenses and 'Profit Leaks' were going to be areas of focus. We are pleased to see that our efforts are paying off as SG&A costs during the quarter went down nearly $2 million on a year-over-year basis while our net sales increased. We still have work to do and our plan is to not only reduce variable SG&A, but also take a hard look at our fixed SG&A costs.
"We reported a foreign exchange loss of $5.3 million during the quarter primarily reflecting the translation of intercompany loans at certain foreign subsidiaries. Since such loans are expected to be settled in cash at some point in the future, these loans are adjusted each reporting period to reflect the current exchange rates. The primary portion of this loss was unrealized and therefore did not impact cash."
Reitz comments further, "As we've worked our way through the downturn over the past few years, the Titan team has consistently deployed a balanced, disciplined approach focused on the needed short-term actions to balance costs with net sales, while also looking to the future with our investment decisions. We see future opportunities to utilize our tire manufacturing and technical expertise to expand into other related products that don't require significant, additional investment."
Summary of Operations
Net sales for the second quarter ended June 30, 2017, were $364.4 million, up 10% from $330.2 million in the comparable prior year period. Overall sales volume was up 7% driven by higher volumes in both the agriculture and earthmoving/construction segments, partially offset by lower volume in the consumer segment. Favorable changes in price/mix contributed a 2% increase to sales and currency translation increased sales by another 1%.
Net sales for the 6 months ended June 30, 2017, were $721.9 million, up 11% from $652.0 million in the comparable prior year period. Overall sales volume was up 6% driven by higher volumes in both the agriculture and earthmoving/construction segments, partially offset by lower volume in the consumer segment. Favorable currency translation increased sales by 3% and a favorable change in price/mix contributed another 2% increase to sales.
Gross profit for the second quarter ended June 30, 2017, was $43.6 million, flat compared with $43.7 million in the comparable prior year period. Gross margin was 12.0% of net sales for the latest quarter, compared with 13.2% in the comparable prior year period. Increases in raw material costs across all markets and geographies negatively impacted gross margins during the second quarter of 2017 due to the timing of passing along increased costs to our end customers.
Gross profit for the 6 months ended June 30, 2017, was $83.3 million, up 16% from $72.0 million in the comparable prior year period. Gross margin was 11.5% of net sales for the first 6 months of 2017, compared with 11.0% in the comparable prior year period. The increase in gross profit percentage was primarily related to our Business Improvement Framework initiatives that focus on lowering costs and increasing efficiencies. These efforts more than offset the significant increases in raw material costs we experienced in both the first and second quarters of 2017.
SG&A expenses for the second quarter of 2017 were $34.5 million, 5% lower than the $36.3 million in the comparable prior year period. As a percentage of net sales, SG&A was 9.5%, compared to 11.0% for the comparable prior year period. The decrease in SG&A expenses was in line with management's efforts to reduce costs.
SG&A expenses for the first 6 months of 2017 were $75.8 million, 6% higher than the $71.4 million in the comparable prior year period. As a percentage of net sales, SG&A was 10.5%, compared to 10.9% for the prior year period. The increase in SG&A expenses was primarily due to the costs associated with the anti-dumping and countervailing duties litigation, marketing investments in LSW development, and non-recurring legal and professional fees in the first quarter of 2017.
For the second quarter of 2017, research and development (R&D) expenses were $2.6 million, or 0.7% of net sales, and royalty expense was $2.5 million, or 0.7% of net sales, which both remained flat as a percentage of net sales compared to the prior year period.
For the first 6 months of 2017, R&D expenses were $5.5 million, or 0.8% of net sales, and royalty expense was $5.1 million, or 0.7% of net sales, which both remained flat as a percentage of net sales compared to the prior year period.
Income from operations for the second quarter of 2017 was $4.0 million, or 1.1% of net sales, compared to income of $2.6 million, or 0.8% of net sales, for the second quarter of 2016, an improvement of 53%.
Loss from operations for the first 6 months of 2017 was $3.1 million, or 0.4% of net sales, compared to a loss of $8.9 million, or 1.4% of net sales, for the first 6 months of 2016, an improvement of 65%.
For the second quarter of 2017, interest expense was $7.3 million versus $8.0 million in the comparable prior year period. Foreign exchange loss was $5.3 million in the second quarter of 2017 versus a gain of $2.2 million in the comparable period in 2016. The primary portion of this current quarter loss was unrealized and therefore did not impact cash. Other income was $2.2 million in the second quarter of 2017 versus $3.0 million in the same quarter of 2016.
For the first 6 months of 2017, interest expense was $15.0 million versus $16.5 million in the prior year period. Foreign exchange loss was $0.8 million in the first 6 months of 2017 versus a gain of $7.0 million in the same period in 2016. Other income was $5.4 million in the first 6 months of 2017 versus $7.0 million in the same period in 2016.
The provision for income taxes was $0.1 million for the second quarter of 2017, compared to $3.6 million in the comparable prior year period. As a result, the second quarter net loss applicable to common shareholders was $10.3 million, equal to $(0.17) per basic and diluted share, compared to a loss of $5.2 million, equal to $(0.10) per basic and diluted share, in the prior year period.
The provision for income taxes was $3.6 million for the first 6 months of 2017, compared to $4.7 million in the prior year period. As a result, the first 6 months net loss applicable to common shareholders was $20.8 million, equal to $(0.35) per basic and diluted share, compared to a loss of $23.1 million, equal to $(0.43) per basic and diluted share, in the prior year period.
EBITDA was $15.9 million for the second quarter of 2017 versus $23.2 million in the prior year period, a 31% decrease. EBITDA was $31.0 million for the first 6 months of 2017 versus $35.6 million in the comparable prior year period, a 13% decrease. Adjusted EBITDA was $21.2 million for the second quarter of 2017 versus $21.0 million in the comparable prior year period. Adjusted EBITDA was $31.7 million for the first 6 months of 2017 versus $28.6 million in the comparable prior year period, an 11% increase. The company utilizes EBITDA as a means to measure its operating performance.
Financial Condition
Net cash used for operations for the 6 months ended June 30, 2017, was $30.6 million, compared to net cash provided by operations of $29.7 million for the prior year period. Capital expenditures were $15.2 million for the first 6 months of 2017 versus $18.1 million for the prior year period.
Principal and dividend payments of $29.6 million were paid during the first 6 months of 2017. The company ended the first 6 months of 2017 with total cash, cash equivalents, and certificates of deposit of $153.2 million. Long-term debt at June 30, 2017, was $408.8 million, unchanged from December 31, 2016. Short-term debt was $42.6 million at June 30, 2017, versus $97.4 million at December 31, 2016. Net debt (total debt less cash, cash equivalents, and certificates of deposit) was $298.1 million at June 30, 2017, versus $308.3 million at December 31, 2016.
