Titan International Inc., a leading global manufacturer of off-highway wheels, tires, assemblies, and undercarriage products, has reported results for the third quarter ended September 30, 2017.
Net sales for the third quarter of 2017 were $371.0 million. This is an increase of 21% when compared to net sales of $306.2 million for the third quarter of 2016 and the third consecutive quarter of year-over-year increases. Net loss applicable to common shareholders for the third quarter of 2017 was $12.9 million, versus $9.4 million in the third quarter of 2016.
Net sales for the first 9 months of 2017 were $1,092.9 million, an increase of 14% when compared to $958.2 million in the first 9 months of 2016. Net loss applicable to common shareholders for the first nine months of 2017 was $33.7 million, versus $32.5 million for the first 9 months of 2016.
Paul Reitz, President and Chief Executive Officer, comments, "Our third quarter results mark the third consecutive quarter of significant year-over-year growth in net sales. Our top line growth of over 21% includes improvements beyond this amount within both our agricultural (ag) and earthmoving/construction segments. All of our segments were up year-over-year for the quarter on higher volume. We continue to see the benefits of our strategic investments over the past couple years result in above-market growth in numerous facets of our business. Titan continues to win new business in our aftermarket channels and this share gain, along with the benefits of product innovations, such as LSW, led us to substantial sales gains in the third quarter and a 14% gain in our year-to-date sales.
"We saw raw material costs stabilize during the quarter which brought progressively improving monthly results that resulted in a 14% gross profit improvement over last year. Our adjusted EBITDA for the quarter increased significantly by 64% to $18.9 million. As a reminder this period historically includes plant shutdowns and summer holidays, so this level of adjusted EBITDA is encouraging. In general, the North American OEM market remains challenging with lower volumes and tougher pricing, but we are encouraged by signs of stronger end-markets that should provide some long-awaited tailwinds heading into 2018. We continue to have an ag product mix that is skewed towards smaller products as that segment has grown substantially, while sales of OEM large equipment remain at lower levels.
"During this quarter, we accrued a contingent liability of $6.5 million associated with the Dico Inc. (Dico) and Titan Tire Corporation legal judgment. We respectfully disagree with the court's ruling and will appeal. In addition, the former Dico manufacturing facility sits on property located in the heart of Des Moines and we believe it has considerable value for future development."
James Froisland, Chief Financial Officer and Chief Information Officer comments, "Excluding the accrued contingent liability of $6.5 million for a legal judgment recorded during the quarter, our selling, general and administrative (SG&A) expenses would have continued the downward trend during the quarter with our SG&A expenses declining approximately $3 million on a year-over-year basis despite a significant increase in net sales. On a percentage basis, this adjusted amount represented approximately 9 percent of net sales during the quarter compared to 12% of net sales during the comparable prior year quarter. Also during the quarter, we took another step to reduce SG&A expenses in the future and provide better information to run our global businesses by signing a contract for a new cloud-based global ERP system."
Business Outlook
Paul Reitz comments further, "As we look to the future, we believe that Titan is well positioned to continue on a positive trend with our 2018 net sales growing in the range of 7-12%. Along with the continuing net sales growth, we believe that gross profit improvement in 2018 will be between 25 and 40%. We've seen our SG&A/R&D costs increase and began initiatives in 2017 to reverse that trend. With the continuation of these initiatives in 2018, we expect to drive SG&A/R&D down to the range of 10.0-10.5% of net sales. The gross margin and SG&A/R&D improvements are expected to flow to EBITDA with an increase in the 50-100% range during 2018. We've been diligently managing our capital expenditures the past few years and believe we can continue to make prudent investments with capital spending in the $35 million to $45 million range next year."
Summary of Operations
Net sales for the third quarter ended September 30, 2017, were $371.0 million, up 21% from $306.2 million in the comparable prior year period. Overall sales volume was up 14% with higher volume across all segments and all geographies. Favorable changes in price/mix increased net sales by 5% and favorable currency translations contributed another two percent increase to net sales.
Net sales for the 9 months ended September 30, 2017, were $1,092.9 million, up 14% from $958.2 million in the comparable prior year period. Overall sales volume was up ten percent driven by higher volumes in the agricultural and earthmoving/construction segments. Favorable currency translation increased net sales by three percent and a favorable change in price/mix added an additional 1% to net sales.
Gross profit for the third quarter ended September 30, 2017, was $39.7 million compared with $34.9 million in the comparable prior year period. Gross margin was 10.7% of net sales for the latest quarter, compared with 11.4% of net sales in the comparable prior year period. The decrease in gross profit as a percent of sales was a result of pricing initiatives to selectively grow market share, primarily in the agricultural segment.
Gross profit for the nine months ended September 30, 2017, was $123.0 million, up 15% from $106.9 million in the comparable prior year period. Gross margin was 11.3% of net sales for the first nine months of 2017, compared with 11.2% of net sales for the comparable prior year period. The increase in gross profit was primarily related to continuous improvement from the implementation of initiatives that focus on lowering costs and increasing efficiencies.
SG&A expenses for the third quarter of 2017 were $39.8 million, compared to $36.3 million for the comparable prior year period. As a percentage of net sales, SG&A was 10.7%, compared to 11.9% for the comparable prior year period. After adjusting for the accrued contingent liability of $6.5 million for a legal judgment which we will appeal, SG&A for the third quarter of 2017 would have been 9.0% of net sales. The decrease in SG&A expenses was the result of management's continuing efforts to reduce costs.
SG&A expenses for the first 9 months of 2017 were $115.6 million, compared to $107.7 million for the comparable prior year period. As a percentage of net sales, SG&A was 10.6% for the first 9 months of 2017, compared to 11.2% for the comparable prior year period. The increase in SG&A expenses was primarily due to the costs associated with non-recurring legal and professional fees in the first quarter of 2017 and the aforementioned contingent liability accrual in the third quarter of 2017.
For the third quarter of 2017, research and development (R&D) expenses were $2.5 million, or 0.7% of net sales, and royalty expense was $2.6 million, or 0.8% of net sales, which both remained relatively flat as a percentage of net sales compared to the prior year period.
For the first 9 months of 2017, R&D expenses were $7.9 million, or 0.7% of net sales, and royalty expense was $7.7 million, or 0.7% of net sales, which both remained relatively flat as a percentage of net sales compared to the prior year period.
Loss from operations for the third quarter of 2017 was $5.1 million, or 1.4% of net sales, compared to a loss of $6.3 million, or 2.1% of net sales, for the third quarter of 2016, an improvement of 19%.
Loss from operations for the first 9 months of 2017 was $8.2 million, or 0.8% of net sales, compared to a loss of $15.3 million, or 1.6% of net sales, for the first 9 months of 2016, an improvement of 46%.
For the third quarter of 2017, interest expense was $7.5 million versus $8.7 million in the comparable prior year period. Foreign exchange gain was $0.8 million in the third quarter of 2017 versus a gain of $0.4 million in the comparable period in 2016. Other income was $3.0 million in the third quarter of 2017 versus $3.6 million in the same quarter of 2016.
For the first 9 months of 2017, interest expense was $22.6 million versus $25.2 million in the comparable prior year period. Foreign exchange gain was $0.0 million in the first nine months of 2017 versus a gain of $7.4 million in the same period in 2016. Other income was $8.4 million in the first 9 months of 2017 versus $10.5 million in the same period in 2016.
The provision for income taxes was $2.4 million for the third quarter of 2017, compared to a $2.1 million benefit in the comparable prior year period. As a result, the third quarter net loss applicable to common shareholders was $12.9 million, equal to $(0.22) per basic and diluted share, compared to a loss of $9.4 million, equal to $(0.17) per basic and diluted share, in the comparable prior year period. The third quarter 2017 adjusted net loss attributable to Titan was $5.5 million, equal to $(0.09) per basic and diluted share, compared to a loss of $8.0 million equal to $(0.15) per basic and diluted share, in the comparable prior year period.
The provision for income taxes was $6.0 million for the first 9 months of 2017, compared to $2.6 million in the comparable prior year period. As a result, the first 9 months net loss applicable to common shareholders was $33.7 million, equal to $(0.57) per basic and diluted share, compared to a loss of $32.5 million, equal to $(0.60) per basic and diluted share, in the comparable prior year period. The first nine months adjusted net loss attributable to Titan was $23.3 million, equal to $(0.39) per basic and diluted share, compared to a loss of $24.0 million, equal to $(0.45) per basic and diluted share, in the comparable prior year period. The company utilizes adjusted net loss attributable to Titan, a non-GAAP measure, as a means to measure its operating performance.
EBITDA was $13.3 million for the third quarter of 2017 versus $11.9 million in the comparable prior year period, an 11% increase. EBITDA was $44.2 million for the first 9 months of 2017 versus $47.6 million in the comparable prior year period, a 7% decrease. Adjusted EBITDA was $18.9 million for the third quarter of 2017 versus $11.5 million in the comparable prior year period, a 64% increase. Adjusted EBITDA was $50.7 million for the first nine months of 2017 versus $40.2 million in the comparable prior year period, a 26% increase. The company utilizes EBITDA, a non-GAAP measure, as a means to measure its operating performance.
Financial Condition
Net cash used for operations for the nine months ended September 30, 2017, was $15.2 million, compared to net cash provided by operations of $54.0 million for the comparable prior year period. Capital expenditures were $23.6 million for the first 9 months of 2017 versus $30.8 million for the comparable prior year period.
Principal and dividend payments of $41.9 million were paid during the first 9 months of 2017. The company ended the first 9 months of 2017 with total cash and cash equivalents of $155.7 million. Long-term debt at September 30, 2017, was $411.2 million, compared to $408.8 million at December 31, 2016. Short-term debt was $36.2 million at September 30, 2017, versus $97.4 million at December 31, 2016. Net debt (total debt less cash, cash equivalents, and certificates of deposit) was $291.7 million at September 30, 2017, versus $308.3 million at December 31, 2016.
