Titan International Inc., a leading global manufacturer of off-highway wheels, tires, assemblies, and undercarriage products, has reported results for the second quarter ended June 30, 2018.
Net sales for the second quarter of 2018 were $428.9 million, representing an increase of 17.7% when compared to net sales of $364.4 million for the second quarter of 2017. Net income applicable to common shareholders for the second quarter of 2018 was $1.0 million, as compared to a loss of $10.3 million in the second quarter of 2017.
Net sales for the first six months of 2018 were $854.3 million, representing an increase of 18.3% when compared to net sales of $721.9 million for the first six months of 2017. Net income applicable to common shareholders for the first six months of 2018 was $15.0 million, as compared to a loss of $20.8 million in the first six months of 2017.
"Titan experienced another strong quarter of double-digit, year-over-year quarterly revenue growth, along with delivering improved operational performance," states Paul Reitz, President and Chief Executive Officer. "It's great to continue our positive EPS trend and the momentum in our net sales as we reported our sixth consecutive quarter of double-digit sales gains with our top line growth improving an average of nearly 20% in each of the last four quarters when compared to the prior year quarter. Operating income improved by almost $12 million when compared with this quarter last year and has bettered the comparable six-month period of 2017 by $36 million. Our ITM undercarriage business continues to have an impressive 2018 and outperform our expectations for this year. The fiscal stimulus-led growth in the U.S. economy keeps pushing the strength of the dollar, which for us has created currency headwinds, primarily in Latin America and Russia, which have negatively impacted our reported EPS. We've stated before that our currency movements are not cash-based and the currency impact does not take away from the positive execution across many of our business units during the quarter.
"We continue to believe that Titan's global operations are on a positive track overall. We, like many U.S. based manufacturers, face the challenges of a rise in global trade protectionism and a constantly evolving business landscape. Many of the OEMs and dealers that I've spoken with across our businesses continue to view future demand in a positive light, but are watchful of the issues resulting from global tariffs and a decline in grain prices. The tariffs have brought steel costs to their highest level in more than 10 years. While natural rubber prices remain at lower levels, we have experienced rising raw material costs within our tire business from many inputs including synthetic rubber, carbon black, bead wire and chemicals.
"We have worked hard the past few years to build a strong, global team with the capabilities to lead our businesses during these times. David Martin recently joined Titan as Chief Financial Officer and brings additional strengths to our team through his experiences over the past 25 years at a global, publicly-traded company. The Titan team is proud of our recent operational and financial performance and we remain resolute and committed to making the decisions to benefit Titan and our stakeholders well into the future.
"We reiterate the previously specified outlook for 2018 and narrow our range of expectations. We expect to grow net sales in the range of 9-12%, while continuing to anticipate gross profit improvement between 25 and 40% when compared to 2017. We currently expect SG&A/R&D to be at or slightly lower than 10.0% of net sales. EBITDA during 2018 is currently expected to be within the range of $98 million to $109 million, which reflects an 80-100% improvement as compared to the previous year. Finally, we expect full-year 2018 capital expenditures to be between $35 million and $45 million, reflecting no change from our earlier outlook."
Summary of Operations
Net sales for the second quarter ended June 30, 2018, were $428.9 million, an increase of 17.7% from $364.4 million in the comparable prior year period, due to increases in net sales across all segments, particularly the earthmoving/construction segment, which experienced growth of 31.8% from the second quarter of 2017 and reflected general improvements in most geographies. Overall net sales volume was up 16.1% over the comparable prior year quarter. Favorable changes in price/mix positively impacted net sales by 2.1%, while unfavorable currency translation, particularly in Latin America, negatively impacted net sales by 0.6%.
Net sales for the six months ended June 30, 2018, were $854.3 million, an increase of 18.3% from $721.9 million in the comparable prior year period, primarily as a result of an increase in net sales in the earthmoving/construction segment, which experienced sales growth of 35.3% as compared to the first six months of 2017. Overall net sales volume increased 13.8% over the comparable period of 2017, with higher volume across all segments, particularly in the earthmoving/construction segment. Favorable changes in price/mix contributed a 3.1% increase to net sales and favorable currency translation increased net sales by an additional 1.5%.
Gross profit for the second quarter ended June 30, 2018, was $58.3 million, compared to $44.0 million in the comparable prior year period. Gross margin was 13.6% of net sales for the latest quarter, compared to 12.1% of net sales in the comparable prior year period. The increase in gross profit was driven by increased sales volume partially offset by higher material costs, especially steel. The increase in gross profit margin was primarily the result of production efficiencies driven by increased volume.
Gross profit for the six months ended June 30, 2018, was $117.9 million compared to $84.2 million in the comparable prior year period. Gross margin was 13.8% of net sales for the first six months of 2018, compared to 11.7% of net sales in the comparable prior year period. The increase in gross profit was driven by the same factors impacting the second quarter results.
Selling, general and administrative (SG&A) expenses for the second quarter of 2018 were $36.7 million, compared to $34.5 million for the comparable prior year period. As a percentage of net sales, SG&A was 8.6%, compared to 9.5% for the comparable prior year period. The increase in SG&A expenses primarily related to information technology costs related to company-wide initiatives in the second quarter of 2018 that were not present in the comparable period of the prior year.
SG&A expenses for the first six months of 2018 were $72.6 million, compared to $75.8 million for the comparable prior year period. As a percentage of net sales, SG&A was 8.5%, compared to 10.5% for the comparable prior year period. The decrease in SG&A resulted from lower legal and non-recurring fees as compared to the comparable period in 2017, offset partially by increased information technology costs in 2018 related to company-wide initiatives.
For the second quarter of 2018, research and development (R&D) expenses were $2.8 million, or 0.6% of net sales, compared to $2.6 million, or 0.7% of net sales, for the comparable prior year period. For the first six months of 2018, R&D expenses were $5.6 million, or 0.7% of net sales, compared to $5.5 million, or 0.8% of net sales for the comparable prior year period. This R&D spending with respect to both 2018 and 2017 reflects initiatives to improve product designs and ongoing focus on quality.
Royalty expenses for the second quarter of 2018 were $2.6 million, or 0.6% of net sales, compared to $2.5 million, or 0.7% of net sales, for the second quarter of 2017. Royalty expenses for the first six months of 2018 were $5.3 million, or 0.6% of net sales, compared to $5.1 million, or 0.7% of net sales, for the first six months of 2017. The increased royalty expenses are the result of increased sales volume.
Income from operations for the second quarter of 2018 was $16.2 million, or 3.8% of net sales, compared to $4.4 million, or 1.2% of net sales, for the second quarter of 2017. Income from operations for the first six months of 2018 was $34.3 million, or 4.0% of net sales, compared to a loss from operations of $2.2 million, or 0.3% of net sales, for the first six months of 2017.
For the second quarter of 2018, interest expense was $7.7 million, compared to $7.3 million in the comparable prior year period. For the first six months of 2018, interest expense was $15.2 million, compared to $15.0 million in the comparable prior year period. The increase in interest expense was primarily due to increased borrowings under international working capital facilities partially offset by the reduced interest rate on Titan's senior secured notes, which were refinanced on November 20, 2017.
Foreign exchange loss was $3.6 million in the second quarter of 2018, compared to a loss of $5.3 million in the comparable period in 2017. Foreign exchange loss was $8.0 million in the first six months of 2018, compared to a loss of $0.8 million in the comparable period in 2017. The foreign currency loss in the three and six months ended June 30, 2018, primarily reflects the devaluation of Latin American currencies.
Other income was $2.5 million in the second quarter of 2018, compared to $1.8 million in the same quarter of 2017. Other income was $10.2 million in the first six months of 2018, compared to $4.4 million in the same period of 2017.
Income tax expense of $1.7 million was recorded for the second quarter of 2018, compared to a $0.1 million expense in the comparable prior year period. Income tax expense of $0.9 million was recorded for the first six months of 2018, compared to a $3.6 million expense in the comparable prior year period.
As a result, 2018 second quarter net income applicable to common shareholders was $1.0 million, equal to $0.02 per basic and diluted share, compared to a loss of $10.3 million, equal to $(0.17) per basic and diluted share, in the comparable prior year period. Net income applicable to common shareholders for the first six months of 2018 was $15.0 million, equal to $0.25 per basic and diluted share, compared to a loss of $20.8 million, equal to $(0.35) per basic and diluted share, in the comparable prior year period.
EBITDA was $29.9 million for the second quarter of 2018, compared to $15.9 million in the comparable prior year period, an 88 percent increase. Adjusted EBITDA was $33.5 million for the second quarter of 2018, compared to $21.2 million in the comparable prior year period, a 58 percent increase. The company utilizes EBITDA and adjusted EBITDA, non-GAAP measures, as a means to measure its operating performance. A reconciliation of net income (loss) to EBITDA and adjusted EBITDA can be found at the end of this release.
EBITDA was $66.7 million for the first six months of 2018, compared to $31.0 million in the comparable prior year period, a 115 percent increase. Adjusted EBITDA was $74.7 million for the first six months of 2018, compared to $31.7 million in the comparable prior year period, a 135% increase.
Financial Condition
Net cash used for operations for the six months ended June 30, 2018, was $29.9 million, compared to $30.6 million for the comparable prior year period. While net income has improved in the current year, net sales growth required additional working capital. Capital expenditures were $18.4 million for the first six months of 2018, compared to $15.2 million for the comparable prior year period.
The company ended the second quarter of 2018 with total cash and cash equivalents of $106.5 million. Long-term debt at June 30, 2018, was $409.6 million, compared to $407.2 million at December 31, 2017. Short-term debt was $52.4 million at June 30, 2018, compared to $43.7 million at December 31, 2017. Net debt (total debt less cash and cash equivalents) was $355.5 million at June 30, 2018, compared to $307.3 million at December 31, 2017, as cash decreased during the first six months of 2018.
