form10q.htm

 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

 

 
FORM 10-Q
 

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended: September 30, 2007

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number:  1-12936

TITAN INTERNATIONAL, INC.

(Exact name of Registrant as specified in its Charter)
Illinois
 
36-3228472
(State of Incorporation)
 
(I.R.S. Employer Identification No.)

2701 Spruce Street, Quincy, IL 62301
(Address of principal executive offices, including Zip Code)

(217) 228-6011
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer o                                                      Accelerated filer x                                                      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

   
Shares Outstanding at
Class
 
October 26, 2007
     
Common stock, no par value per share
 
27,339,301



TITAN INTERNATIONAL, INC.

TABLE OF CONTENTS
 
   
Page
Part I.
Financial Information
 
     
Item 1.
Financial Statements (Unaudited)
 
     
 
Consolidated Condensed Statements of Operations
for the Three and Nine Months Ended September 30, 2007 and 2006
1
     
 
Consolidated Condensed Balance Sheets as of
September 30, 2007, and December 31, 2006
2
     
 
Consolidated Condensed Statement of Changes in Stockholders’
Equity for the Nine Months Ended September 30, 2007
3
     
 
Consolidated Condensed Statements of Cash Flows
for the Nine Months Ended September 30, 2007 and 2006
4
     
 
Notes to Consolidated Condensed Financial Statements
5-17
     
Item 2.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
18-30
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
31
     
Item 4.
Controls and Procedures
31
     
Part II.
Other Information
 
     
Item 1.
Legal Proceedings
31
     
Item 6.
Exhibits
31
     
 
Signatures
32
 



PART I.  FINANCIAL INFORMATION
 
Item 1.                      Financial Statements
TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except earnings per share data)

 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Net sales
  $
195,472
    $
156,120
    $
632,083
    $
513,891
 
Cost of sales
   
177,178
     
139,040
     
559,287
     
443,255
 
Gross profit
   
18,294
     
17,080
     
72,796
     
70,636
 
Selling, general & administrative expenses
   
14,123
     
11,260
     
38,090
     
33,034
 
Royalty expense
   
1,474
     
1,113
     
4,490
     
3,952
 
Income from operations
   
2,697
     
4,707
     
30,216
     
33,650
 
Interest expense
    (4,472 )     (4,565 )     (14,651 )     (11,997 )
Noncash convertible debt conversion charge
   
0
     
0
      (13,376 )    
0
 
Other income
   
975
     
671
     
2,521
     
2,820
 
(Loss) income before income taxes
    (800 )    
813
     
4,710
     
24,473
 
Provision for income taxes
   
78
     
325
     
3,109
     
9,789
 
Net (loss) income
  $ (878 )   $
488
    $
1,601
    $
14,684
 
Earnings per common share:
                               
Basic
  $ (.03 )   $
.02
    $
.06
    $
.75
 
Diluted
    (.03 )    
.02
     
.06
     
.65
 
Average common shares outstanding:
                               
Basic
   
27,311
     
19,731
     
25,137
     
19,670
 
Diluted
   
27,311
     
20,060
     
25,591
     
26,027
 
 


See accompanying Notes to Consolidated Condensed Financial Statements.

1


TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share data)

 
   
September 30,
   
December 31,
 
Assets
 
2007
   
2006
 
Current assets
           
Cash and cash equivalents
  $
55,337
    $
33,412
 
Accounts receivable
   
117,459
     
73,882
 
Inventories
   
132,553
     
154,604
 
Deferred income taxes
   
27,699
     
29,234
 
Prepaid and other current assets
   
20,684
     
18,801
 
Total current assets
   
353,732
     
309,933
 
                 
Property, plant and equipment, net
   
185,490
     
184,616
 
Investment in Titan Europe Plc
   
63,140
     
65,881
 
Goodwill
   
11,702
     
11,702
 
Other assets
   
16,598
     
12,994
 
                 
Total assets
  $
630,662
    $
585,126
 
                 
Liabilities and Stockholders’ Equity
               
Current liabilities
               
Short-term debt
  $
0
    $
98
 
Accounts payable
   
54,646
     
25,884
 
Other current liabilities
   
36,858
     
36,942
 
Total current liabilities
   
91,504
     
62,924
 
                 
Long-term debt
   
200,000
     
291,266
 
Deferred income taxes
   
25,650
     
27,924
 
Other long-term liabilities
   
13,068
     
15,835
 
Total liabilities
   
330,222
     
397,949
 
                 
Stockholders’ equity
               
Common stock (no par, 60,000,000 shares authorized, 30,577,356 issued)
   
30
     
30
 
Additional paid-in capital
   
304,588
     
258,071
 
Retained earnings
   
37,996
     
36,802
 
Treasury stock (at cost, 3,265,015 and 10,678,454 shares, respectively)
    (29,707 )     (96,264 )
Accumulated other comprehensive loss
    (12,467 )     (11,462 )
Total stockholders’ equity
   
300,440
     
187,177
 
                 
Total liabilities and stockholders’ equity
  $
630,662
    $
585,126
 


 
See accompanying Notes to Consolidated Condensed Financial Statements.

2


TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(All amounts in thousands, except share data)

 
   
Number of common shares
   
Common Stock
   
Additional
paid-in
capital
   
Retained earnings
   
Treasury
stock
   
Accumulated other comprehensive income (loss)
   
Total
 
                                           
Balance January 1, 2007
   
#19,898,902
    $
30
    $
258,071
    $
36,802
    $ (96,264 )   $ (11,462 )   $
187,177
 
                                                         
Comprehensive income:
                                                       
Net income
                           
1,601
                     
1,601
 
Amortization of pension adjustments, net of tax
                                           
777
     
777
 
Unrealized loss on investment, net of tax
                                            (1,782 )     (1,782 )
Comprehensive income
                           
1,601
              (1,005 )    
596
 
Dividends paid on common stock
                            (407 )                     (407 )
Note conversion
   
6,577,200
             
35,240
             
59,049
             
94,289
 
Exercise of stock options
   
409,120
             
3,279
             
3,673
             
6,952
 
Issuance of treasury stock for funding contractual obligations on employee contracts
   
214,000
             
4,184
             
1,921
             
6,105
 
Issuance of treasury stock for pension plans
   
200,000
             
3,590
             
1,796
             
5,386
 
Issuance of treasury stock under 401(k) plan
   
13,119
             
224
             
118
             
342
 
                                                         
Balance September 30, 2007
   
#27,312,341
    $
30
    $
304,588
    $
37,996
    $ (29,707 )   $ (12,467 )   $
300,440
 

 



See accompanying Notes to Consolidated Condensed Financial Statements.

3


TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
 
   
Nine months ended
 
   
September 30,
 
   
2007
   
2006
 
Cash flows from operating activities:
           
Net income
  $
1,601
    $
14,684
 
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Depreciation and amortization
   
21,467
     
19,460
 
Deferred income tax provision
   
1,907
     
8,745
 
Noncash convertible debt conversion charge
   
13,376
     
0
 
Excess tax benefit from stock options exercised
    (849 )     (379 )
Issuance of treasury stock under 401(k) plan
   
342
     
161
 
(Increase) decrease in current assets:
               
Accounts receivable
    (43,577 )     (50,314 )
Inventories
   
22,051
      (38,390 )
Prepaid and other current assets
    (1,883 )     (3,016 )
Increase in current liabilities:
               
Accounts payable
   
28,762
     
25,145
 
Other current liabilities
   
9,737
     
15,739
 
Other, net
   
2,201
      (5,036 )
Net cash provided by (used for) operating activities
   
55,135
      (13,201 )
                 
Cash flows from investing activities:
               
Capital expenditures
    (20,869 )     (4,844 )
Acquisition off-the-road (OTR) assets
    (8,900 )     (44,000 )
Other
   
453
     
36
 
Net cash used for investing activities
    (29,316 )     (48,808 )
                 
Cash flows from financing activities:
               
Proceeds on revolving credit facility, net
   
0
     
68,200
 
Payment on debt
    (10,164 )     (9,814 )
Proceeds from exercise of stock options
   
6,103
     
3,453
 
Excess tax benefit from stock options exercised
   
849
     
379
 
Payment of financing fees
    (313 )     (225 )
Dividends paid
    (369 )     (295 )
Net cash (used for) provided by financing activities
    (3,894 )    
61,698
 
                 
Net increase (decrease) in cash and cash equivalents
   
21,925
      (311 )
                 
Cash and cash equivalents at beginning of period
   
33,412
     
592
 
                 
Cash and cash equivalents at end of period
  $
55,337
    $
281
 
                 

 

See accompanying Notes to Consolidated Condensed Financial Statements.

4

       
TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
 

1.  ACCOUNTING POLICIES

In the opinion of Titan International, Inc. (“Titan” or the “Company”), the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are normal and recurring in nature and necessary to present fairly the Company’s financial position as of September 30, 2007, the results of operations for the three and nine months ended September 30, 2007 and 2006, and cash flows for the nine months ended September 30, 2007 and 2006.

Accounting policies have continued without significant change and are described in the Summary of Significant Accounting Policies contained in the Company’s 2006 Annual Report on Form 10-K.  These interim financial statements have been prepared pursuant to the Securities and Exchange Commission’s rules for Form 10-Q’s and, therefore, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2006 Annual Report on Form 10-K.  Certain amounts from prior periods have been reclassified to conform to the current period financial presentation.
 
2.  ACQUISITION OF CONTINENTAL’S OTR ASSETS

On July 31, 2006, Titan Tire Corporation of Bryan, a subsidiary of Titan International, Inc., acquired the off-the-road (OTR) tire assets of Continental Tire North America, Inc. (Continental) in Bryan, Ohio.  Titan Tire Corporation of Bryan purchased the assets of Continental’s OTR tire facility for approximately $53 million in cash proceeds.  Titan paid approximately $44 million at closing and the remaining amount due of approximately $9 million in the third quarter of 2007.  The assets purchased included Continental’s OTR plant, property and equipment located in Bryan, Ohio, inventory and other current assets.  The acquisition included an agreement with Continental to use the Continental and General trademarks on OTR tires.  As of August 1, 2007, Titan discontinued the Continental brand and is now concentrating on building market share with Titan and General branded OTR tires.  In addition, the Company recorded intangibles related to the acquisition as noncurrent assets and assumed warranty liabilities.  This acquisition expanded Titan’s product offering into larger earthmoving, construction and mining tires and added the manufacturing capacity of the Bryan facility.

Pro forma information for the three months and nine months ended is as follows (in thousands, except per share data):
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
Actual
   
Actual
   
Pro forma
   
Actual
   
Actual
   
Pro forma
 
   
2007
   
2006
   
2006 (a)
   
2007
   
2006
   
2006 (a)
 
Net sales
  $
195,472
    $
156,120
    $
167,883
    $
632,083
    $
513,891
    $
596,233
 
Net (loss) income
    (878 )    
488
     
1,620
     
1,601
     
14,684
     
22,611
 
Diluted earnings per share
    (.03 )    
.02
     
.08
     
.06
     
.65
     
.95
 

(a)  
The unaudited pro forma financial information gives effect to the acquisition of the Continental OTR assets as if the acquisition had taken place on January 1, 2006, versus the actual acquisition date of July 31, 2006.  The pro forma information for the Bryan, Ohio, facility was derived from a carve-out of Continental’s OTR historical accounting records.

The pro forma information is presented for illustrative purposes only and may not be indicative of the results that would have been obtained had the acquisition of assets actually occurred on January 1, 2006, nor is it necessarily indicative of Titan’s future consolidated results of operations or financial position.


5

      
TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
    

3.  ACCOUNTS RECEIVABLE

Accounts receivable net of allowance for doubtful accounts consisted of the following (in thousands):
   
September 30,
   
December 31,
 
   
2007
   
2006
 
Accounts receivable, net
  $
117,459
    $
73,882
 

The Company had net accounts receivable of $117.5 million at September 30, 2007, and $73.9 million at December 31, 2006.  These amounts are net of allowance for doubtful accounts of $5.7 million at September 30, 2007, and $4.8 million at December 31, 2006.
 
4.  INVENTORIES

Inventories consisted of the following (in thousands):
   
September 30,
   
December 31,
 
   
2007
   
2006
 
Raw materials
  $
48,855
    $
57,814
 
Work-in-process
   
20,309
     
16,738
 
Finished goods
   
67,468
     
84,863
 
     
136,632
     
159,415
 
Reduction to LIFO basis
    (4,079 )     (4,811 )
    $
132,553
    $
154,604
 

Inventories were $132.6 million at September 30, 2007, and $154.6 million at December 31, 2006.  At September 30, 2007, cost is determined using the first-in, first-out (FIFO) method for approximately 70% of inventories and the last-in, first-out (LIFO) method for approximately 30% of the inventories.  At December 31, 2006, the FIFO method was used for approximately 74% of inventories LIFO was used for approximately 26% of the inventories.  Included in the inventory balances were reserves for slow-moving and obsolete inventory of $3.0 million at September 30, 2007, and $3.2 million at December 31, 2006.
 
5.  PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consisted of the following (in thousands):
   
September 30,
   
December 31,
 
   
2007
   
2006
 
Land and improvements
  $
3,088
    $
3,088
 
Buildings and improvements
   
78,258
     
78,230
 
Machinery and equipment
   
272,360
     
269,730
 
Tools, dies and molds
   
53,078
     
52,205
 
Construction-in-process
   
20,005
     
4,587
 
     
426,789
     
407,840
 
Less accumulated depreciation
    (241,299 )     (223,224 )
    $
185,490
    $
184,616
 

Property, plant and equipment, net was $185.5 million at September 30, 2007, and $184.6 million at December 31, 2006.  Depreciation for the nine months ended September 30, 2007 and 2006, totaled $19.5 million and $17.6 million, respectively.

6

              
TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
    

6.  INVESTMENT IN TITAN EUROPE PLC

Investment in unconsolidated affiliate consisted of the following (in thousands):
   
September 30,
   
December 31,
 
   
2007
   
2006
 
Investment in Titan Europe Plc
  $
63,140
    $
65,881
 

The Company owns a 17.3% ownership interest in Titan Europe Plc.  In accordance with SFAS No. 115, the Company records the Titan Europe Plc investment as an available-for-sale security and reports the investment at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders’ equity.  The Company’s investment in Titan Europe Plc was $63.1 million at September 30, 2007, and $65.9 million at December 31, 2006.  Titan Europe Plc is publicly traded on the AIM market in London, England.
 
7.  GOODWILL

The carrying amount of goodwill by segment consisted of the following (in thousands):
   
September 30,
   
December 31,
 
   
2007
   
2006
 
Agricultural segment
  $
6,912
    $
6,912
 
Earthmoving/construction segment
   
3,552
     
3,552
 
Consumer segment
   
1,238
     
1,238
 
    $
11,702
    $
11,702
 

The Company reviews goodwill to assess recoverability from future operations during the fourth quarter of each annual reporting period, and whenever events and circumstances indicate that the carrying values may not be recoverable.  No goodwill charges were recorded in the first nine months of 2007 or 2006.  There can be no assurance that future goodwill tests will not result in a charge to earnings.
 
8.  REVOLVING CREDIT FACILITY AND LONG-TERM DEBT

Long-term debt consisted of the following (in thousands):
   
September 30,
   
December 31,
 
   
2007
   
2006
 
Senior unsecured notes
  $
200,000
    $
200,000
 
Senior unsecured convertible notes
   
0
     
81,200
 
Industrial revenue bonds and other
   
0
     
10,164
 
     
200,000
     
291,364
 
Less:  Amounts due within one year
   
0
     
98
 
    $
200,000
    $
291,266
 

Aggregate maturities of long-term debt at September 30, 2007, were as follows (in thousands):

October 1 – December 31, 2007
  $
0
 
2008
   
0
 
2009
   
0
 
2010
   
0
 
2011
   
0
 
Thereafter
   
200,000
 
    $
200,000
 

7

      
TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
    

Senior unsecured notes
In December 2006, the Company closed its offering of $200 million 8% senior unsecured notes.  The notes were sold at par and are due January 2012.  Titan used the net proceeds from this offering to repay outstanding existing debt, excluding the 5.25% senior unsecured convertible notes, and for general corporate purposes.

Revolving credit facility
The Company’s $125 million revolving credit facility with agent LaSalle Bank National Association has a 2009 termination date and is collateralized by a first priority security interest in certain assets of Titan and its domestic subsidiaries.  In February 2007, the Company amended the revolving credit facility.  The amendment extended the termination date to October 2009 (previously October 2008).  The amendment also lowered borrowing rates, which are now based on a pricing grid that varies with amount borrowed.  The borrowings under the facility bear interest at a floating rate of LIBOR plus 1% to 2% (previously 2.75%).  The amendment allows the Company the ability to request an increase from the current $125 million up to $250 million of availability.

At September 30, 2007, there were no cash borrowings on the revolver.  Outstanding letters of credit on the facility were $6.1 million at September 30, 2007, leaving $118.9 million of unused availability on the revolving credit facility.  The facility contains certain financial covenants, restrictions and other customary affirmative and negative covenants.  The Company was in compliance with these covenants and restrictions as of September 30, 2007.

Senior unsecured convertible notes conversion
In January 2007, the Company filed a registration statement relating to an offer to the holders of its 5.25% senior unsecured convertible notes due 2009 to convert their notes into Titan’s common stock at an increased conversion rate (the “Offer”).  Per the Offer, each $1,000 principal amount of notes was convertible into 81.0000 shares of common stock, which is equivalent to a conversion price of approximately $12.35 per share. Prior to the Offer, each $1,000 principal amount of notes was convertible into 74.0741 shares of common stock, which was equivalent to a conversion price of approximately $13.50 per share.

The registration statement relating to the shares of common stock to be offered was declared effective February 2007.  In March 2007, the Company announced 100% acceptance of the conversion offer and the $81.2 million of accepted notes were converted into 6,577,200 shares of Titan common stock.  Titan recognized a noncash charge of $13.4 million in connection with this exchange in accordance with SFAS No. 84, “Induced Conversions of Convertible Debt.”

Industrial revenue bonds and other
Other debt primarily consisted of industrial revenue bonds, loans from local and state entities, and other long-term notes.  All industrial revenue bonds and other debt were fully paid off in the first quarter of 2007.

8

    
TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
    

9.  WARRANTY

The Company provides limited warranties on workmanship on its products in all market segments.  The majority of the Company’s products have a limited warranty that ranges from zero to ten years, with certain products being prorated after the first year.  The Company calculates a provision for warranty expense based on past warranty experience.  The warranty amount increases in the first nine months of 2007 were related to the Company’s higher sales levels.  Warranty accruals are included as a component of other current liabilities on the Consolidated Condensed Balance Sheets.  Changes in the warranty liability consisted of the following (in thousands):

   
2007
   
2006
 
Warranty liability, January 1
  $
4,688
    $
1,838
 
Provision for and assumption of warranty liabilities
   
5,803
     
4,851
 
Warranty payments made
    (4,756 )     (2,759 )
Warranty liability, September 30
  $
5,735
    $
3,930
 
 
10.  EMPLOYEE BENEFIT PLANS

The Company has two frozen defined benefit pension plans and one defined benefit plan that purchased a final annuity settlement in 2002.  The Company currently sponsors five 401(k) retirement savings plans.

The components of net periodic pension cost consisted of the following (in thousands):
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Interest cost
  $
941
    $
983
    $
2,823
    $
2,949
 
Expected return on assets
    (1,256 )     (1,168 )     (3,768 )     (3,504 )
Amortization of unrecognized prior service cost
   
34
     
34
     
102
     
102
 
Amortization of unrecognized deferred taxes
    (14 )     (14 )     (42 )     (42 )
Amortization of net unrecognized loss
   
398
     
462
     
1,194
     
1,386
 
Net periodic pension cost
  $
103
    $
297
    $
309
    $
891
 

During the first nine months of 2007, the Company contributed cash funds of approximately $1 million to the frozen defined benefit pension plans.  In addition, in April 2007 the Company contributed Titan common stock with an approximate value of $5 million to the frozen defined benefit pension plans.  The Company anticipates making no further contributions to these plans during the remainder of 2007.
 
11.  LEASE COMMITMENTS

The Company leases certain buildings and equipment under operating leases.  Certain lease agreements provide for renewal options, fair value purchase options, and payment of property taxes, maintenance and insurance by the Company.

At September 30, 2007, future minimum commitments under noncancellable operating leases with initial or remaining terms of at least one year were as follows (in thousands):

October 1 – December 31, 2007
  $
661
 
2008
   
1,605
 
2009
   
1,176
 
2010
   
874
 
2011
   
527
 
Thereafter
   
0
 
Total future minimum lease payments
  $
4,843
 

9

    
TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
    

12.  SEGMENT INFORMATION

The table below presents information about certain revenues and income from operations used by the chief operating decision maker of the Company for the three and nine months ended September 30, 2007 and 2006 (in thousands):

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Revenues from external customers
                       
Agricultural
  $
118,530
    $
89,014
    $
377,930
    $
329,708
 
Earthmoving/construction
   
69,431
     
56,683
     
216,891
     
117,489
 
Consumer
   
7,511
     
10,423
     
37,262
     
66,694
 
Consolidated totals
  $
195,472
    $
156,120
    $
632,083
    $
513,891
 
                                 
                                 
Income from operations
                               
Agricultural
  $
4,242
    $
2,445
    $
22,338
    $
34,412
 
Earthmoving/construction
   
8,955
     
8,643
     
35,694
     
18,344
 
Consumer
   
371
     
401
     
2,201
     
2,076
 
Reconciling items (a)
    (10,871 )     (6,782 )     (30,017 )     (21,182 )
Consolidated totals
  $
2,697
    $
4,707
    $
30,216
    $
33,650
 
 
Assets by segment were as follows (in thousands):
   
September 30,
   
December 31,
 
Total assets
 
2007
   
2006
 
Agricultural segment
  $
267,079
    $
273,787
 
Earthmoving/construction segment
   
193,978
     
145,964
 
Consumer segment
   
21,155
     
22,678
 
Reconciling items (b)
   
148,450
     
142,697
 
Consolidated totals
  $
630,662
    $
585,126
 
                 
 
(a)  
Represents corporate expenses and depreciation and amortization expense related to property, plant and equipment
 
carried at the corporate level.

(b)  
Represents property, plant and equipment and other corporate assets.
 
13.  ROYALTY EXPENSE

Royalty expense consisted of the following (in thousands):
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Royalty expense
  $
1,474
    $
1,113
    $
4,490
    $
3,952
 

The Goodyear North American farm tire asset acquisition included a license agreement with The Goodyear Tire & Rubber Company to manufacture and sell certain off-highway tires in North America under the Goodyear name.  Royalty expenses recorded were $1.5 million and $1.1 million for the three months ended September 30, 2007 and 2006, respectively.  Royalty expenses were $4.5 million and $4.0 million for the nine months ended September 30, 2007 and 2006, respectively.

10

 
TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
    

14.  NONCASH CONVERTIBLE DEBT CONVERSION CHARGE

Noncash convertible debt conversion charge consisted of the following (in thousands):
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Noncash convertible debt conversion charge
  $
0
    $
0
    $
13,376
    $
0
 

In January 2007, the Company filed a registration statement relating to an offer to the holders of its 5.25% senior unsecured convertible notes due 2009 to convert their notes into Titan’s common stock at an increased conversion rate (the “Offer”).  Per the Offer, each $1,000 principal amount of notes was convertible into 81.0000 shares of common stock, which is equivalent to a conversion price of approximately $12.35 per share.

Prior to the Offer, each $1,000 principal amount of notes was convertible into 74.0741 shares of common stock, which was equivalent to a conversion price of approximately $13.50 per share.  The registration statement relating to the shares of common stock to be offered was declared effective February 2007.  In March 2007, the Company announced 100% acceptance of the conversion offer and the $81.2 million of accepted notes were converted into 6,577,200 shares of Titan common stock.

The Company recognized a noncash charge of $13.4 million in connection with this exchange in accordance with Statement of Financial Accounting Standards (SFAS) No. 84, “Induced Conversions of Convertible Debt.”  This charge does not reflect $1.0 million of interest previously accrued on the notes.  The shares issued for the conversion were issued out of treasury shares.  The exchange resulted in a decrease in treasury stock of $59.0 million and an increase to additional paid-in capital of approximately $35.2 million.  Stockholder’s equity increased by $94.3 million in total as a result of this exchange.
 
15.  OTHER INCOME

Other income consisted of the following (in thousands):
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Interest income
  $
835
    $
162
    $
2,040
    $
1,518
 
Dividend income – Titan Europe Plc
   
0
     
470
     
1,132
     
1,281
 
Debt termination expense
   
0
     
0
      (688 )    
0
 
Other income
   
140
     
39
     
37
     
21
 
    $
975
    $
671
    $
2,521
    $
2,820
 

Debt termination expense of $0.7 million related to fees and expenses for the March 2007 conversion of 100% of the Company’s 5.25% senior unsecured convertible notes.  Interest income increased as a result of higher cash balances.

11

   
TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
    

16.  INCOME TAXES

Income tax expense consisted of the following (in thousands):
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Income tax expense
  $
78
    $
325
    $
3,109
    $
9,789
 

The Company recorded income tax expense of $0.1 million for the three months ended September 30, 2007, as compared to $0.3 million in 2006.  Income tax expense was $3.1 million for nine months ended September 30, 2007, as compared to $9.8 million in 2006.  The Company’s effective income tax rate was 66% and 40% for the nine months ended September 30, 2007 and 2006, respectively.  The Company’s income tax expense and rate differs from the amount of income tax determined by applying the U.S. Federal income tax rate to pre-tax income primarily as a result of the $13.4 million noncash charge taken in connection with the 100% conversion of the Company’s convertible debt.  This noncash debt charge is not deductible for income tax purposes.

The Company has applied the provisions of FIN 48 for the period ended September 30, 2007.  Titan has identified its federal tax return and its Illinois state tax return as “major” tax jurisdictions.  The Company is subject to (i) federal tax examinations for periods 2003 to 2006 and (ii) Illinois state income tax examinations for years 2005 and 2006.
 
17.  EARNINGS PER SHARE

Earnings per share (EPS) are as follows (amounts in thousands, except per share data):

   
Three months ended,
 
   
September 30, 2007
   
September 30, 2006
 
   
Net Loss
   
Weighted average shares
   
Per share amount
   
Net
Income
   
Weighted average shares
   
Per share amount
 
Basic EPS
  $ (878 )    
27,311
    $ (.03 )   $
488
     
19,731
    $
.02
 
Effect of stock options
   
0
     
0
             
0
     
329
         
Diluted EPS
  $ (878 )    
27,311
    $ (.03 )   $
488
     
20,060
    $
.02
 
 
   
Nine months ended,
 
   
September 30, 2007
   
September 30, 2006
 
   
Net Income
   
Weighted average shares
   
Per share amount
   
Net
Income
   
Weighted average shares
   
Per share amount
 
Basic EPS
  $
1,601
     
25,137
    $
.06
    $
14,684
     
19,670
    $
.75
 
Effect of stock options/trusts
   
0
     
454
             
0
     
342
         
Effect of convertible notes
   
0
     
0
             
2,156
     
6,015
         
Diluted EPS
  $
1,601
     
25,591
    $
.06
    $
16,840
     
26,027
    $
.65
 

The effect of stock options has been excluded for the three months ended September 30, 2007, as the effect would have been antidilutive.  The weighted average share amount excluded was 427,000 shares.  The effect of convertible notes has been excluded for the three months ended September 30, 2006, and for the nine months ended September 30, 2007, as the effect would have been antidilutive.  The weighted average share amount excluded was 6,015,000 shares for the three months ended September 30, 2006, and 1,741,000 shares for the nine months ended September 30, 2007.

12

     
TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
    

18.  COMPREHENSIVE INCOME (LOSS)

Comprehensive loss for the third quarter of 2007 totaled $(0.3) million, compared to $(1.5) million in the third quarter of 2006.  Comprehensive loss for the third quarter of 2007 included net loss of $(0.9) million, amortization of pension adjustments of $0.3 million and unrealized gain on the Titan Europe Plc investment of $0.3 million.  Comprehensive loss for the third quarter of 2006 included net income of $0.5 million and unrealized loss on the Titan Europe Plc investment of $(1.9) million.

Comprehensive income for the nine months ended September 30, 2007, was $0.6 million, compared to $15.2 million in 2006.  Comprehensive income for the nine months ended September 30, 2007, included net income of $1.6 million, amortization of pension adjustments of $0.8 million and unrealized loss on the Titan Europe Plc investment of $(1.8) million.  Comprehensive income for the nine months ended September 30, 2006, included net income of $14.7 million and unrealized gain on the Titan Europe Plc investment of $0.5 million.
 
19.  LITIGATION

The Company is a party to routine legal proceedings arising out of the normal course of business.  Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, the Company believes at this time that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition, results of operations or cash flows of the Company.  However, due to the difficult nature of predicting future legal claims, the Company cannot anticipate or predict the material adverse effect on its financial condition, results of operations or cash flows as a result of efforts to comply with or its liabilities pertaining to legal judgments.
 
20.  RECENTLY ISSUED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards Number 157
In September 2006, Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” was issued.  This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  This Statement applies under other accounting pronouncements that require or permit fair value measurements.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company is evaluating the effect the adoption of this standard will have on its consolidated financial position, results of operations and cash flows.

Statement of Financial Accounting Standards Number 159
In February 2007, SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” was issued.  This statement permits entities to choose to measure many financial instruments and certain other items at fair value.  This statement is effective for fiscal years beginning after November 15, 2007.  The Company is evaluating the effect the adoption of this standard will have on its consolidated financial position, results of operations and cash flows.
 
21.  RECENT DEVELOPMENT

On October 1, 2007, the Titan Tire Bryan pension plan, adopted at the date of the Continental OTR asset acquisition and frozen from its inception, received a cash transfer of approximately $24 million from Continental Tire North America’s frozen pension plan for the Bryan, Ohio, location.  The amount transferred into the frozen plan was actuarially approved to be a fully funded plan.

13

    
TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
    

22.  SUBSIDIARY GUARANTOR FINANCIAL INFORMATION

The Company’s $200 million 8% senior unsecured notes are guaranteed by each of Titan’s current and future wholly owned domestic subsidiaries other than its immaterial subsidiaries (subsidiaries with total assets less than $250,000 and total revenues less than $250,000). The note guarantees are joint and several obligations of the guarantors. Non-guarantors consist primarily of foreign subsidiaries of the Company, which are organized outside the United States of America. The following condensed consolidating financial statements are presented using the equity method of accounting.

   
Consolidating Condensed Statements of Operations
 
(Amounts in thousands)
     
   
For the Three Months Ended September 30, 2007
 
   
Titan
         
Non-
             
   
Intl., Inc.
   
Guarantor
   
Guarantor
             
   
(Parent)
   
Subsidiaries
   
Subsidiaries
   
Eliminations
   
Consolidated
 
Net sales
  $
0
    $
195,472
    $
0
    $
0
    $
195,472
 
Cost of sales
   
12
     
177,166
     
0
     
0
     
177,178
 
Gross (loss) profit
    (12 )    
18,306
     
0
     
0
     
18,294
 
Selling, general and administrative expenses
   
3,672
     
10,412
     
39
     
0
     
14,123
 
Royalty expense
   
0
     
1,474
     
0
     
0
     
1,474
 
(Loss) income from operations
    (3,684 )    
6,420
      (39 )    
0
     
2,697
 
Interest expense
    (4,473 )    
1
     
0
     
0
      (4,472 )
Intercompany interest income (expense)
   
2,371
      (2,666 )    
295
     
0
     
0
 
Other income (expense)
   
1,178
      (204 )    
1
     
0
     
975
 
(Loss) income before income taxes
    (4,608 )    
3,551
     
257
     
0
      (800 )
(Benefit) provision for income taxes
    (7,209 )    
6,903
     
384
     
0
     
78
 
Equity in earnings of subsidiaries
    (3,479 )    
0
     
0
     
3,479
     
0
 
Net loss
  $ (878 )   $ (3,352 )   $ (127 )   $
3,479
    $ (878 )
 
 
   
For the Three Months Ended September 30, 2006
 
   
Titan
         
Non-
             
   
Intl., Inc.
   
Guarantor
   
Guarantor
             
   
(Parent)
   
Subsidiaries
   
Subsidiaries
   
Eliminations
   
Consolidated
 
Net sales
  $
0
    $
156,120
    $
0
    $
0
    $
156,120
 
Cost of sales
   
80
     
138,960
     
0
     
0
     
139,040
 
Gross (loss) profit
    (80 )    
17,160
     
0
     
0
     
17,080
 
Selling, general and administrative expenses
   
3,348
     
7,872
     
40
     
0
     
11,260
 
Royalty expense
   
0
     
1,113
     
0
     
0
     
1,113
 
(Loss) income from operations
    (3,428 )    
8,175
      (40 )    
0
     
4,707
 
Interest expense
    (4,483 )     (82 )    
0
     
0
      (4,565 )
Intercompany interest income (expense)
   
1,121
      (1,387 )    
266
     
0
     
0
 
Other (expense) income
    (177 )    
84
     
764
     
0
     
671
 
(Loss) income before income taxes
    (6,967 )    
6,790
     
990
     
0
     
813
 
(Benefit) provision for income taxes
    (2,787 )    
2,716
     
396
     
0
     
325
 
Equity in earnings of subsidiaries
   
4,668
     
0
     
0
      (4,668 )    
0
 
Net income
  $
488
    $
4,074
    $
594
    $ (4,668 )   $
488
 
 
14

   
TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
    

   
Consolidating Condensed Statements of Operations
 
(Amounts in thousands)
     
   
For the Nine Months Ended September 30, 2007
 
   
Titan
         
Non-
             
   
Intl., Inc.
   
Guarantor
   
Guarantor
             
   
(Parent)
   
Subsidiaries
   
Subsidiaries
   
Eliminations
   
Consolidated
 
Net sales
  $
0
    $
632,083
    $
0
    $
0
    $
632,083
 
Cost of sales
   
545
     
558,742
     
0
     
0
     
559,287
 
Gross (loss) profit
    (545 )    
73,341
     
0
     
0
     
72,796
 
Selling, general and administrative expenses
   
13,193
     
24,739
     
158
     
0
     
38,090
 
Royalty expense
   
0
     
4,490
     
0
     
0
     
4,490
 
(Loss) income from operations
    (13,738 )    
44,112
      (158 )    
0
     
30,216
 
Interest expense
    (14,648 )     (3 )    
0
     
0
      (14,651 )
Intercompany interest income (expense)
   
8,767
      (9,607 )    
840
     
0
     
0
 
Noncash convertible debt conversion charge
    (13,376 )    
0
     
0
     
0
      (13,376 )
Other income (expense)
   
1,560
      (176 )    
1,137
     
0
     
2,521
 
(Loss) income before income taxes
    (31,435 )    
34,326
     
1,819
     
0
     
4,710
 
(Benefit) provision for income taxes
    (20,747 )    
22,655
     
1,201
     
0
     
3,109
 
Equity in earnings of subsidiaries
   
12,289
     
0
     
0
      (12,289 )    
0
 
Net income
  $
1,601
    $
11,671
    $
618
    $ (12,289 )   $
1,601
 
 
 
   
For the Nine Months Ended September 30, 2006
 
   
Titan
         
Non-
             
   
Intl., Inc.
   
Guarantor
   
Guarantor
             
   
(Parent)
   
Subsidiaries
   
Subsidiaries
   
Eliminations
   
Consolidated
 
Net sales
  $
0
    $
513,891
    $
0
    $
0
    $
513,891
 
Cost of sales
   
239
     
443,016
     
0
     
0
     
443,255
 
Gross (loss) profit
    (239 )    
70,875
     
0
     
0
     
70,636
 
Selling, general and administrative expenses
   
10,998
     
21,905
     
131
     
0
     
33,034
 
Royalty expense
   
0
     
3,952
     
0
     
0
     
3,952
 
(Loss) income from operations
    (11,237 )    
45,018
      (131 )    
0
     
33,650
 
Interest expense
    (11,564 )     (433 )    
0
     
0
      (11,997 )
Intercompany interest income (expense)
   
3,359
      (4,044 )    
685
     
0
     
0
 
Other income
   
482
     
282
     
2,056
     
0
     
2,820
 
(Loss) income before income taxes
    (18,960 )    
40,823
     
2,610
     
0
     
24,473
 
(Benefit) provision for income taxes
    (7,584 )    
16,328
     
1,045
     
0
     
9,789
 
Equity in earnings of subsidiaries
   
26,060
     
0
     
0
      (26,060 )    
0
 
Net income
  $
14,684
    $
24,495
    $
1,565
    $ (26,060 )   $
14,684
 


15

     
TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
    
 
   
Consolidating Condensed Balance Sheets
 
(Amounts in thousands)
                             
   
September 30, 2007
 
   
Titan
         
Non-
             
   
Intl., Inc.
   
Guarantor
   
Guarantor
             
   
(Parent)
   
Subsidiaries
   
Subsidiaries
   
Eliminations
   
Consolidated
 
Assets
                             
Cash and cash equivalents
  $
55,111
    $
21
    $
205
    $
0
    $
55,337
 
Accounts receivable
   
0
     
117,459
     
0
     
0
     
117,459
 
Inventories
   
0
     
132,553
     
0
     
0
     
132,553
 
Prepaid and other current assets
   
30,419
     
17,964
     
0
     
0
     
48,383
 
Total current assets
   
85,530
     
267,997
     
205
     
0
     
353,732
 
Property, plant and equipment, net
   
1,731
     
183,759