Titan International, Inc., a leading global manufacturer of off-highway wheels, tires, assemblies, and undercarriage products, today reported results for the second quarter ended June 30, 2022.
"The positive momentum we have seen in our business kept on rolling this quarter and when combined with the continuing strong execution of our team, it resulted in excellent financial performance. As indicated by the updated full year 2022 guidance we released in June, we feel good about our business and our end-markets," stated Paul Reitz, President and Chief Executive Officer. "We experienced sales growth of 31% from the second quarter last year and sales grew sequentially 3% from the first quarter to the second quarter. More importantly, our margins were good, and we delivered adjusted EBITDA of $82 million in the second quarter. This performance was buoyed by strong financial performance across all parts of the business as our Titan team keeps running hard like a good, long-distance marathoner.
"Perhaps the most important aspect of our performance is that we are generating significant cash flow and we have strengthened our financial position considerably. We generated $56 million in free cash flow in Q2, and our debt leverage fell below 2 times adjusted EBITDA, with expected further improvements in the second half of the year. The strong financial performance over the past couple years, combined with significant improvements in our balance sheet and solid free cash flow now coming through means we are driving increased shareholder value.
"Nearly everywhere you turn these days you will get hit with noise and our end-markets of Agriculture, Construction and Mining are no exception. However, like everything, you need to spend some time sifting through the noise to get a clear picture as a quick look at the headlines likely does not tell the complete, accurate story. We believe that the complete picture is farmers are going to still make a high level of income in 2022 and they are sitting on strong balance sheets as well. The large Ag equipment fleet is aged with low levels of available used equipment. Demand and order books are in a solid position in Ag and should continue on that path well into the future as supply chain and labor disruptions at OEM's have extended the duration of retail demand, not destroyed it. The overall, bigger picture view is that Ag fundamentals remain in a strong position and we expect the future to remain bright in the sector. This view is also true for our global construction and mining markets, where we continue to see demand holding at a good level through 2022 that should carry to 2023 as public infrastructure spending picks up.
Outlook
"Our expectations for financial performance remain strong and during the second half of the year we anticipate continued top-line and bottom-line expansion relative to prior year performance. Given our performance in Q2 and our current visibility in the second half of the year, we now expect full year sales in 2022 to be $2.2 billion, with an increased adjusted EBITDA target between $240 million and $250 million. Based on this latest outlook, current cash flow expectations have improved accordingly, and we now believe we can deliver an increased level of free cash flow between $90 million and $100 million for the full year. By almost all standards, we expect this year to be the strongest in Titan's history, and we continue to see positive signs for demand to remain robust into 2023."
Results of Operations
Net sales for the second quarter ended June 30, 2022, were $572.9 million, compared to $438.6 million in the comparable quarter of 2021, an increase of 30.6%. The net sales increase was across all segments and driven by a variety of factors, most notably healthier market conditions, while there was an unfavorable impact from foreign currency translation of 2.7%or $11.9 million, primarily due to the weakening euro currency.
Gross profit for the second quarter ended June 30, 2022 was $109.7 million, compared to $61.5 million in the comparable prior year period. Gross margin was 19.1% of net sales for the quarter, compared to 14% of net sales in the comparable prior year period. The solid growth in gross profit and margin during the second quarter as compared to the prior year period was across all segments and was driven by the impact of increases in net sales, as described previously, and better overhead absorption in our production facilities. In addition, cost reduction and productivity initiatives continue to be executed across global production facilities.
Selling, general, administrative, research and development (SGARD) expenses for the second quarter of 2022 were $36.9 million, compared to $35.1 million for the comparable prior year period. As a percentage of net sales, SGARD was 6.4%, compared to 8% for the comparable prior year period. The increase in SG&A was driven primarily by an increase in variable costs associated with improved operating performance and growth in sales.
Income from operations for the second quarter of 2022 was $69.7 million, or 12.2% of net sales, compared to income of $23.7 million, or 5.4% of net sales, for the second quarter of 2021. The increase in income from operations was primarily due to the higher sales and improvements in gross profit margins.
Brazilian Tax Credits
In June 2021, the Company's Brazilian subsidiaries received a notice that they had prevailed on an existing legal claim in regard to certain non-income (indirect) taxes that had been previously charged and paid. The matter specifically relates to companies' rights to exclude the state tax on goods circulation (a value-added-tax or VAT equivalent, known in Brazil as "ICMS") from the calculation of certain additional indirect taxes (specifically the program of social integration ("PIS") and contribution for financing of social security ("COFINS")) levied by the Brazilian States on the sale of goods.
During the second quarter of 2022, the Company submitted the related supporting documentation and received the approval from the Brazilian tax authorities for one of its Brazilian subsidiaries. For the three months ended June 30, 2022, the Company recorded $22.5 million within other income in the condensed consolidated statements of operations. The Company also recorded $7.8 million of income tax expense associated with the recognition of these indirect tax credits. The Company excluded the impacts from these tax credits within both adjusted net income applicable to common shareholders and adjusted EBITDA. A reconciliation of each of these measures can be found at the end of this release. The Company expects to be able to apply the tax credits received to settle the income tax liability that was incurred as a result of the credit. The Company also expects to utilize the majority of the credit against future PIS/COFINS and income tax obligations over the next twelve months.
During the third quarter of 2022, the Company plans to submit the related supporting documentation to the Brazilian tax authorities for its other Brazilian subsidiary. After review by the Brazilian tax authorities, the Company could receive approximately $10 million of additional indirect tax credits to be applied as credits against future PIS/COFINS and income tax obligations. The Company plans to recognize the full benefit of the indirect tax credits, contingent upon successful approval and verification from the Brazilian tax authorities.
Segment Information
During the quarter ended June 30, 2022, net sales increased 38% driven by increased market activity through all of our global operations. Volume increased from healthy demand in the global agricultural market, reflective of high farm commodity prices and increased farmer income, the need for replacement of an aging large equipment fleet and the need to replenish equipment inventory levels within the equipment dealer channels.
The increase in gross profit and margin is primarily attributable to the impact of increases in net sales as described previously and cost reduction and productivity initiatives executed across global production facilities. The Company balanced the increases of related raw materials and other inflationary cost impacts with corresponding price increases to protect profitability.
During the quarter ended June 30, 2022, the 19% increase in earthmoving/construction net sales was driven by increased demand across all aspects of the construction and mining markets.
The increase in gross profit and margin was primarily driven by better price and mix of products produced and continued improved production efficiencies stemming from the strong management actions taken to improve profitability for the long-term. The Company balanced the increases related to raw materials and other inflationary cost impacts with corresponding price increases to maintain profitability.
During the quarter ended June 30, 2022, the 44% increase in net sales was driven by increased market activity, similar to agriculture and construction markets, with growth coming from product growth initiatives. A portion of the increase in demand related to specialty products in the United States, primarily custom mixing of rubber stock to third parties.
The increase in gross profit and margin was due primarily to sales growth, increased price/product mix and the positive impact of sales volume increase on overhead absorption. Margins related to the growth initiatives in specialty products in the United States are stronger than the average margins for other products in the segment.
