Management's discussion and analysis of financial condition and results of operations (MD&A) is designed to provide a reader of the financial statements included in this quarterly report with a narrative from the perspective of the management ofTitan International, Inc. (Titan or the Company) on Titan's financial condition, results of operations, liquidity, and other factors that may affect the Company's future results. The MD&A in this quarterly report should be read in conjunction with the condensed consolidated financial statements and other financial information included elsewhere in this quarterly report and the MD&A and audited consolidated financial statements and related notes in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onMarch 4, 2020 (the 2019 Form 10-K).
COVID-19 Pandemic
InDecember 2019 , a novel strain of coronavirus ("COVID-19") was reported inWuhan, China . DuringMarch 2020 , theWorld Health Organization declared that COVID-19 is a pandemic. The emergence of COVID-19 and its global spread presents significant risks to the Company, some of which the Company is unable to fully evaluate or even foresee. The COVID-19 pandemic adversely affected the Company's financial results and business operations for the nine months endedSeptember 30, 2020 and economic and health conditions inthe United States and across most of the globe have continued to change since then. In some of the countries where the Company has operations and where COVID-19 has been widespread (such as the Company's European andLatin America locations), the Company's operations were significantly curtailed during March throughMay 2020 . The Company's operations have since resumed with additional sanitary and other protective health measures, which have increased operating costs. The Company's operations may not return to historical levels in the near term, depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date and numerous other uncertainties. The COVID-19 pandemic affected the Company's operations in the third quarter, and may continue to do so indefinitely thereafter. All of these factors may have far-reaching impacts on the Company's business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company's management and employees, customer behaviors, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company's control, continue to evolve and the outcomes are uncertain. Due to the above circumstances and as described generally in this Form 10-Q, the Company's results of operations for the three and nine month periods endedSeptember 30, 2020 are not necessarily indicative of the results to be expected for the full fiscal year. Management cannot predict the full impact of the COVID-19 pandemic on the economic conditions generally, on the Company's customers and, ultimately, on the Company. The nature, extent and duration of the effects of the COVID-19 pandemic on the Company are highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic might end. FORWARD-LOOKING STATEMENTS This Form 10-Q contains forward-looking statements, which are covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. Readers can identify these statements by the fact that they do not relate strictly to historical or current facts. The Company tried to identify forward-looking statements in this quarterly report by using words such as "anticipates," "estimates," "expects," "intends," "plans," and "believes," and similar expressions or future or conditional verbs such as "will," "should," "would," "may," and "could." These forward-looking statements include, among other items, information concerning: •The Company's financial performance; •Anticipated trends in the Company's business; •Expectations with respect to the end-user markets into which the Company sells its products (including agricultural equipment, earthmoving/construction equipment, and consumer products); •Future expenditures for capital projects; •The Company's ability to continue to control costs and maintain quality; •The Company's ability to meet conditions of loan agreements, indentures and other financing documents; 29 --------------------------------------------------------------------------------TITAN INTERNATIONAL, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations •The Company's business strategies, including its intention to introduce new products; •Expectations concerning the performance and success of the Company's existing and new products; and •The Company's intention to consider and pursue acquisition and divestiture opportunities. Readers of this Form 10-Q should understand that these forward-looking statements are based on the Company's current expectations and assumptions about future events and are subject to a number of risks, uncertainties, and changes in circumstances that are difficult to predict, including, but not limited to, the factors discussed in Part I, Item 1A, Risk Factors, of the 2019 Form 10-K and Part II, Item 1A, Risk Factors, of this quarterly report on Form 10-Q, certain of which are beyond the Company's control. Actual results could differ materially from these forward-looking statements as a result of certain factors, including: •The effect of the COVID-19 pandemic on our operations and financial performance; •The effect of a recession on the Company and its customers and suppliers; •Changes in the Company's end-user markets into which the Company sells its products as a result of world economic or regulatory influences or otherwise; •Changes in the marketplace, including new products and pricing changes by the Company's competitors; •The Company's ability to maintain satisfactory labor relations; •Unfavorable outcomes of legal proceedings; •The Company's ability to comply with current or future regulations applicable to the Company's business and the industry in which it competes or any actions taken or orders issued by regulatory authorities; •Availability and price of raw materials; •Levels of operating efficiencies; •The effects of the Company's indebtedness and its compliance with the terms thereof; •Changes in the interest rate environment and their effects on the Company's outstanding indebtedness; •Unfavorable product liability and warranty claims; •Actions of domestic and foreign governments, including the imposition of additional tariffs; •Geopolitical and economic uncertainties relating to the countries in which the Company operates or does business; •Risks associated with acquisitions, including difficulty in integrating operations and personnel, disruption of ongoing business, and increased expenses; •Results of investments; •The effects of potential processes to explore various strategic transactions, including potential dispositions; •Fluctuations in currency translations; •Climate change and related laws and regulations; •Risks associated with environmental laws and regulations; •Risks relating to our manufacturing facilities, including that any of our material facilities may become inoperable; and •Risks related to financial reporting, internal controls, tax accounting, and information systems. Any changes in such factors could lead to significantly different results. Any assumptions that are inaccurate or do not prove to be correct could have a material adverse effect on the Company's ability to achieve the results as indicated in the forward-looking statements. Forward-looking statements included in this report speak only as of the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In light of these risks and uncertainties, there can be no assurance that the forward-looking information and assumptions contained in this report will in fact transpire. The reader should not place undue reliance on the 30 --------------------------------------------------------------------------------TITAN INTERNATIONAL, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations forward-looking statements included in this report or that may be made elsewhere from time to time by the Company, or on its behalf. All forward-looking statements attributable to Titan are expressly qualified by these cautionary statements.
OVERVIEW
Titan International, Inc. , together with its subsidiaries, is a global manufacturer of off-highway wheels, tires, assemblies and undercarriage products. As a leading manufacturer in the off-highway industry, Titan produces a broad range of products to meet the specifications of original equipment manufacturers (OEMs) and aftermarket customers in the agricultural, earthmoving/construction, and consumer markets. Titan manufactures and sells certain tires under theGoodyear Farm Tire and Titan Tire brands and has complete research and development test facilities to validate wheel and rim designs. Agricultural Segment: Titan's agricultural rims, wheels, tires, and undercarriage systems and components are manufactured for use on various agricultural equipment, including tractors, combines, skidders, plows, planters, and irrigation equipment, and are sold directly to OEMs and to the aftermarket through independent distributors, equipment dealers, and Titan's distribution centers. The wheels and rims range in diameter from nine inches to 54 inches, with the 54-inch diameter being the largest agricultural wheel manufactured inNorth America . Titan's agricultural tires range from approximately one foot to approximately seven feet in outside diameter and from five inches to 55 inches in width. The Company offers the added value of delivering a complete wheel and tire assembly to OEM and aftermarket customers. Earthmoving/Construction Segment: The Company manufactures rims, wheels, tires, and undercarriage systems and components for various types of off-the-road (OTR) earthmoving, mining, military, construction, and forestry equipment, including skid steers, aerial lifts, cranes, graders and levelers, scrapers, self-propelled shovel loaders, articulated dump trucks, load transporters, haul trucks, backhoe loaders, crawler tractors, lattice cranes, shovels, and hydraulic excavators. The Company provides a broad range of earthmoving/construction wheels and tires with the wheels ranging in diameter from 15 to 63 inches and in weight from 125 to 7,000 pounds, while the tires range from approximately three to 13 feet in outside diameter and weigh between 50 to 12,500 pounds. The Company offers the added value of wheel and tire assembly for certain applications in the earthmoving/construction segment. Consumer Segment: Titan manufactures bias truck tires inLatin America and light truck tires inRussia . Titan also offers select products for ATVs, turf, and golf cart applications. This segment also includes sales that do not readily fall into the Company's other segments.
The Company's top customers include global leaders in agricultural and
construction equipment manufacturing and include AGCO Corporation, Caterpillar
Inc.,
MARKET CONDITIONS AND OUTLOOK
COVID-19 IMPACT ON OUTLOOK As a result of the global COVID-19 pandemic, the Company curtailed and suspended operations in certain geographies in which we conduct business. As COVID-19 progressed globally, the impact was felt initially inChina with the government mandated lock-down and curtailment of operations from late January throughFebruary 2020 . The impact continued inEurope through travel restrictions, social distancing, mandatory stay-at-home orders and sanitization of our facilities. Due to these restrictions as well as the impact COVID-19 had on our critical customers, we had loss of production in the last week of the first quarter, which continued through the second quarter of 2020. SinceMay 2020 , operations have resumed in our international locations with increased sanitization of our facilities and enhanced health safety measures including social distancing, temperature screenings and COVID-19 testing. WithinNorth America , except for brief shutdowns to prepare our facilities as recommended by theCenters for Disease Control and Prevention ,World Health Organization and the government, we have remained operational, following social distancing and sanitization protocols. The outlook for the remainder of 2020 remains uncertain and will be predicated upon the ability to contain COVID-19 globally and for the markets and customers in which we serve return to normal operating levels in the geographies in which conduct business. 31 --------------------------------------------------------------------------------TITAN INTERNATIONAL, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations AGRICULTURAL MARKET OUTLOOK Agriculture-related commodity prices have improved in recent months, but remain lower, relative to historic averages, as a result of ongoing tariffs and trade concerns, coupled with recent COVID-19 impacts. For the balance of 2020, market conditions across the globe remain uncertain due to the ongoing effects of the COVID-19 pandemic, volatility created by supply dislocation in certain markets, and uneven demand in select market geographies and sectors. Major OEMs pulled back production through much of the year, affecting demand for our products in the near-term. Demand has increased somewhat over the last several months.Many of our customers are still not forecasting significantly into the future, awaiting more certainty as to sustained stability in the market. Demand in the aftermarket has stabilized through the third quarter of 2020 and the outlook for the remainder of the year will depend on the continued stabilization of market conditions including normalized supply and demand levels in light of the COVID-19 pandemic. Small agriculture equipment sales are rebounding somewhat faster than the large agriculture equipment sales, notwithstanding the average age of equipment has increased over the last several years. Many more variables, including weather, volatility in the price of commodities, grain prices, export markets, foreign currency exchange rates, government policies, subsidies, and the demand for used equipment can greatly affect the Company's performance in the agricultural market in a given period. EARTHMOVING/CONSTRUCTION MARKET OUTLOOK The earthmoving/construction market is continuing to experience declines in 2020 due in large part to global economic uncertainty and has been hampered further by the impact of COVID-19. Demand for larger construction equipment used for highways and infrastructure began to tighten in 2019. Mining industry equipment demand also began to soften within certain regions in the second half of 2019. Construction is mainly driven by GDP by country and the need for infrastructure developments. The market outlook for the remainder of the year has improved slightly in recent months, but remains relatively uncertain and will depend on the pace of improvement to global economic conditions including the return to normalized supply and demand levels in light of the COVID-19 pandemic. Mining is primarily driven by both the demand for and pricing of commodities. Demand for Titan's products in the mining industry for the remainder of 2020 is expected to be generally down somewhat compared to 2019 for the full year, as customers have been cautious in spending on capital and replacement parts due to the COVID-19 pandemic and concerns regarding near-term global economic stability. The earthmoving/construction segment is affected by many variables, including commodity prices, road construction, infrastructure, government appropriations, housing starts, and other macroeconomic drivers, in addition to the impact of COVID-19. CONSUMER MARKET OUTLOOK The consumer market consists of several distinct product lines within different regions. These products include light truck tires, turf equipment, specialty products, and train brakes. Overall, the Company expects the markets to remain highly uncertain through the remainder of 2020, and sales will likely continue to be suppressed relative to the prior year, similar to the first nine months of 2020. The consumer segment is affected by many variables including consumer spending, interest rates, government policies, and other macroeconomic drivers. 32
--------------------------------------------------------------------------------TITAN INTERNATIONAL, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Titan International, Inc. Three months ended Nine months ended (amounts in thousands) September 30, September 30, 2020 2019 % Increase/(Decrease) 2020 2019 % Increase/(Decrease) Net sales$ 304,772 $ 345,905 (11.9) %$ 932,405 $ 1,146,876 (18.7) % Gross profit 31,317 27,100 15.6 % 88,428 110,672 (20.1) % Gross profit % 10.3 % 7.8 % 9.5 % 9.6 % Selling, general and administrative expenses 33,451 34,954 (4.3) % 93,849 106,605 (12.0) % Research and development expenses 2,240 2,309 (3.0) % 6,782 7,470 (9.2) % Royalty expense 2,434 2,453 (0.8) % 7,309 7,507 (2.6) % Loss from operations (6,808) (12,616) (46.0) % (19,512) (10,910) 78.8 % Net Sales Net sales for the three months endedSeptember 30, 2020 were$304.8 million , compared to$345.9 million in the comparable period of 2019, a decrease of 11.9% driven by sales decreases in all segments. Overall net sales volume was down 9.7% from the comparable prior year quarter, due primarily to challenges in the earthmoving/construction market as a result of a slowdown of the global construction market, particularly inEurope . Approximately$8 million in reduced sales, in comparison to the same period of 2019, was attributable to disrupted markets inEurope andAsia resulting from the COVID-19 pandemic. Contributing factors in the sales decrease in the Agriculture market included global trade issues and the impact of COVID-19 which resulted in lower volume from OEM customers as well as the negative effect of foreign currency translation. Overall, unfavorable currency translation negatively impacted net sales by 5.8% or$20.2 million . Favorable price mix partially offset these declines and contributed to a 3.6% increase in net sales. Net sales for the nine months endedSeptember 30, 2020 were$932.4 million , compared to$1,146.9 million in the comparable period of 2019, a decrease of 18.7% driven by sales decreases in all segments. Overall net sales volume was down 15.6% from the comparable period in the prior year, due primarily to the aforementioned economic factors. The overall net sales volume was also impacted by approximately$53 million in reduced sales in comparison to the same period of 2019 due to COVID-19 related plant closures and market disruption inEurope ,Asia andLatin America . Unfavorable currency translation negatively impacted net sales by 4.6%. Favorable price/mix partially offset these declines and contributed to a 1.5% increase in net sales. Gross Profit Gross profit for the three months endedSeptember 30, 2020 was$31.3 million , or 10.3% of net sales, an increase of$4.2 million compared to$27.1 million , or 7.8% of net sales, for the three months endedSeptember 30, 2019 . The increase in gross profit was driven by initiatives to reduce labor and overhead costs across global production facilities as well as lower raw material prices relative to the prior year. Lower sales volume and a$2.5 million unfavorable gross profit impact from the COVID-19 pandemic mentioned above partially offset the year over year gross profit margin increase. Gross profit for the nine months endedSeptember 30, 2020 was$88.4 million or 9.5% of net sales, down$22.2 million compared to$110.7 million , or 9.6% of net sales, for the nine months endedSeptember 30, 2019 . The decrease in gross profit was driven by the impact of lower sales volume across most geographic regions. The unfavorable gross margin impact from the COVID-19 pandemic mentioned above was approximately$13 million . 33 -------------------------------------------------------------------------------- TITAN INTERNATIONAL, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses for the three months endedSeptember 30, 2020 were$33.5 million , or 11.0% of net sales, compared to$35.0 million , or 10.1% of net sales, for the three months endedSeptember 30, 2019 . The decrease in SG&A was driven primarily by lower payroll, marketing and travel related expenses, resulting from company-wide initiatives to lower costs, as well as$2.3 million in costs related to the Company's proposed ITM undercarriage public listing in 2019. These reductions were partially offset by a$5.0 million contingent legal accrual related to the anticipated settlement of the Dico case (refer to Note 17. Litigation in Part I, Item 1, Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further discussion). SG&A expenses for the nine months endedSeptember 30, 2020 were$93.8 million , or 10.1% of net sales, compared to$106.6 million , or 9.3% of net sales, for the nine months endedSeptember 30, 2019 . The decrease in SG&A was primarily due to lower professional fees related to investments in information technology related to ongoing stabilization of an enterprise resource planning (ERP) software implementation withinNorth America during 2019, lower payroll, marketing and travel related expenses, again, resulting from company-wide initiatives to lower costs, as well as,$2.3 million in costs related to the Company's proposed ITM undercarriage public listing in 2019 These reductions were partially offset by a$5.0 million contingent legal accrual related to the settlement of the Dico case, as mentioned above. Research and Development Expenses Research and development (R&D) expenses for the three months endedSeptember 30, 2020 were$2.2 million , or 0.7% of net sales, compared to$2.3 million , or 0.7% of net sales, for the comparable period in 2019. R&D expenses for the nine months endedSeptember 30, 2020 were$6.8 million , or 0.7% of net sales, compared to$7.5 million , or 0.7% of net sales, for the comparable period in 2019. R&D spending reflects initiatives to improve product designs and an ongoing focus on quality. The decrease in R&D expenses for both the quarter and the nine months endedSeptember 30, 2020 as compared to the same periods in 2019 were due to lower payroll related costs and other professional fees, as a result of management initiatives to decrease costs to manage through the downturn in sales. Royalty Expense The Company has trademark license agreements with The Goodyear Tire & Rubber Company to manufacture and sell certain farm tires under the Goodyear brand. These agreements cover sales inNorth America ,Latin America ,Europe , theMiddle East ,Africa ,Russia , and other Commonwealth of Independent States countries. Royalty expenses for the three months endedSeptember 30, 2020 were$2.4 million , or 0.8% of net sales, compared to$2.5 million , or 0.7% of net sales, for the three months endedSeptember 30, 2019 . Royalty expenses for the nine months endedSeptember 30, 2020 were$7.3 million , or 0.8% of net sales, compared to$7.5 million , or 0.7% of net sales, for the nine months endedSeptember 30, 2019 . Loss from Operations Loss from operations for the third quarter of 2020 was$6.8 million , compared to loss from operations of$12.6 million for the third quarter of 2019. Loss from operations for the nine months endedSeptember 30, 2020 was$19.5 million , compared to loss from operations of$10.9 million for the nine months endedSeptember 30, 2019 . Changes in loss from operations for the quarter and nine months endedSeptember 30, 2020 as compared to the same periods in 2019 were primarily driven by lower net sales offset by improvements in gross profit margins and reduced SG&A expenses during the period.
OTHER PROFIT/LOSS ITEMS
Interest Expense Interest expense was$7.3 million and$8.2 million for the three months endedSeptember 30, 2020 and 2019, respectively, and$23.1 million and$23.8 million for the nine months endedSeptember 30, 2020 and 2019. Interest expense decreased due to reduction in the levels of long-term debt in the respective periods. 34
--------------------------------------------------------------------------------TITAN INTERNATIONAL, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations Foreign Exchange Gain (Loss) Foreign exchange loss was$1.3 million for the three months endedSeptember 30, 2020 , compared to a loss of$2.3 million for the three months endedSeptember 30, 2019 . Foreign exchange loss was$9.7 million for the nine months endedSeptember 30, 2020 , compared to a gain of$2.2 million for the nine months endedSeptember 30, 2019 . Foreign currency exchange gain or loss is the result of the significant movements in foreign currency exchange rates in many of the geographies in which we conduct business and translation of intercompany loans at certain foreign subsidiaries, which are denominated in local currencies rather than the reporting currency, which isthe United States dollar. Since such loans are expected to be settled at some point in the future, these loans are adjusted each reporting period to reflect the current exchange rates. Other Income Other income was$2.3 million for the three months endedSeptember 30, 2020 , as compared to other income of$5.1 million in the comparable quarter of 2019. The decrease in other income for the three months endedSeptember 30, 2020 , as compared to the same period in 2019 was primarily attributable to a$4.7 million gain on the sale of shares of our investment in Wheels India Limited inSeptember 2019 . Other income was$9.1 million for the nine months endedSeptember 30, 2020 , as compared to$7.5 million in the comparable period of 2019. The increase in other income for the nine months endedSeptember 30, 2020 as compared to the same period in 2019 was primarily attributable to proceeds of$4.9 million related to a property insurance settlement atTitan Tire Reclamation Corporation (TTRC) and a$1.3 million gain on the sale of shares of our investment in Wheels India Limited duringFebruary 2020 partially offset by a$2.0 million loss on the sale of remaining shares of our investment in Wheels India Limited inJune 2020 and a$4.7 million gain on the sale of shares of our investment in Wheels India Limited inSeptember 2019 . Provision (Benefit) for Income Taxes The Company recorded income tax expense of$0.3 million and$2.1 million for the three months endedSeptember 30, 2020 and 2019, respectively. For the nine months endedSeptember 30, 2020 and 2019, the Company recorded income tax expense of$2.4 million and$0.8 million , respectively. The Company's effective income tax rate was (3)% and (11)% for the three months endedSeptember 30, 2020 and 2019, respectively, and (5)% and (3)% for the nine months endedSeptember 30, 2020 and 2019, respectively. The Company's 2020 and 2019 income tax expense and rates differed from the amount of income tax determined by applying theU.S. Federal income tax rate to pre-tax income primarily as a result ofU.S. and certain foreign jurisdictions that incurred a full valuation allowance on deferred tax assets created by current year projected losses and partially offset by a reduction of the liability for unrecognized tax positions. In addition, there were non-deductible royalty expenses and statutorily required income adjustments made in certain foreign jurisdictions that negatively impacted the tax rate for the nine months endedSeptember 30, 2020 and 2019. Net Loss and Loss per Share Net loss for the third quarter of 2020 was$13.5 million , compared to net loss of$20.0 million in the comparable quarter of 2019. For the quarters endedSeptember 30, 2020 and 2019, basic and diluted loss per share were$(0.21) and$(0.33) , respectively. The Company's net loss and loss per share were due to the items previously discussed. Net loss for the nine months endedSeptember 30, 2020 was$45.6 million , compared to net loss of$25.7 million in the comparable period of 2019. For the nine months endedSeptember 30, 2020 and 2019, basic and diluted loss per share was$(0.71) and$(0.43), respectively. The Company's net loss and loss per share were due to the items previously discussed. 35
--------------------------------------------------------------------------------
© Edgar Online, source