TWI 12.31.2013 10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
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 or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
2701 Spruce Street, Quincy, IL 62301
(Address of principal executive offices)

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common stock, no par value
New York Stock Exchange (Symbol:  TWI)
Securities registered pursuant to Section 12(g) of the Act:   None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.  Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No þ
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  þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ  No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No þ

The aggregate market value of the shares of common stock of the registrant held by non-affiliates was approximately $857 million based upon the closing price of the common stock on the New York Stock Exchange on June 30, 2013.

As of February 12, 2014, a total of 53,570,206 shares of common stock of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the annual meeting of stockholders to be held on May 15, 2014, are incorporated by reference into Part III of this Form 10-K.



TITAN INTERNATIONAL, INC.
Index to Annual Report on Form 10-K
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I

ITEM 1 – BUSINESS

INTRODUCTION
Titan International, Inc. and its subsidiaries (Titan or the Company) hold the position of being a global wheel, tire and undercarriage industrial group servicing customers across its target markets.  As a leading manufacturer in the off-highway industry, Titan produces a broad range of specialty products to meet the specifications of original equipment manufacturers (OEMs) and aftermarket customers in the agricultural, earthmoving/construction and consumer markets.  Titan's agricultural market includes rims, wheels, tires and undercarriage systems and components manufactured for use on various agricultural and foresty equipment. Titan’s earthmoving/construction market includes wheels, tires and undercarriage systems and components supplied to the mining industry, while the consumer market includes bias truck tires in Latin America, products for all-terrain vehicles (ATVs) and recreational/utility trailers.

As one of the few companies dedicated to off-highway wheel and tire products, Titan’s engineering and manufacturing resources are focused on designing quality products that address the needs of our end-users.  Titan’s team of experienced engineers continually works on new and improved engineered products that evolve with today’s applications for the off-highway wheel and tire markets.

History
Titan traces its roots to the Electric Wheel Company in Quincy, Illinois, which was founded in 1890.  The Company was incorporated in 1983.  The Company has grown through six major acquisitions in recent years.  In 2005, Titan Tire Corporation, a subsidiary of the Company, acquired The Goodyear Tire & Rubber Company’s North American farm tire assets.  In 2006, Titan Tire Corporation of Bryan, a subsidiary of the Company, acquired the off-the-road (OTR) tire assets of Continental Tire North America, Inc.  In 2011, the Company acquired The Goodyear Tire & Rubber Company's Latin American farm tire business. In August 2012, the Company purchased a 56% controlling interest in Planet Corporation Group, now known as Titan National (Australia) Holdings PTY LTD (TNAH). In October 2012, the Company completed its acquisition of Titan Europe. In October 2013, the Company in partnership with One Equity Partners and the Russian Direct Investment Fund closed the acquisition of an 85% interest in Voltyre-Prom, a leading producer of agricultural and industrial tires in Volgograd, Russia. These acquisitions have allowed Titan to achieve higher sales levels and enhance product offering in the Company’s target markets.

Market Segments
In 2013, Titan’s agricultural segment sales represented 55% of net sales, the earthmoving/construction segment represented 34% and the consumer segment represented 11% of net sales.
 
COMPETITIVE STRENGTHS
Titan’s strong market position in the off-highway wheel, tire and undercarriage market, and its long-term core customer relationships contribute to the Company’s competitive strengths.  These strengths, along with Titan’s dedication to the off-highway wheel, tire and undercarriage market, continue to drive the Company forward.

Strong Market Position
Titan’s ability to offer a broad range of specialized wheels, tires, assemblies and undercarriage systems and components has resulted in the Company’s strong position in the global off-highway market.  Through a diverse dealer network, the Company is able to reach an increasing number of customers in the aftermarket and build Titan’s image and brand recognition.  The Company’s acquisition of the Goodyear Farm Tire brand in North America and Latin America contributes to overall visibility and customer confidence.  Titan gained a strong presence in Europe and other parts of the world through the 2012 acquisition of Titan Europe. The 2013 acquisition of Voltyre-Prom expands Titan's footprint into the Commonwealth of Independent States (CIS) region. Years of product design and engineering experience have enabled Titan to improve existing products and develop new ones that have been well received in the marketplace.  In addition, Titan believes it has benefited from significant barriers to entry, such as the substantial investment necessary to replicate the Company’s manufacturing equipment and numerous tools, dies and molds, many of which are used in custom processes.

Long-Term Core Customer Relationships
The Company’s top customers, including global leaders in agricultural and construction equipment manufacturing, have been purchasing products from Titan or its predecessors for numerous years.  Customers including AGCO Corporation, CNH Global N.V., Deere & Company, Hitachi Construction Machinery, Kubota Corporation and Liebherr Group have helped sustain Titan’s leadership in wheel, tire and assembly innovation.


3



BUSINESS STRATEGY
Titan’s business strategy is to increase its presence in the segments it serves through giant OTR, strategic worldwide acquisitions, and continuing to improve operating efficiencies.

Giant Mining Tire Product
The Company’s 2006 acquisition of the OTR tire assets of Continental Tire North America, Inc. in Bryan, Ohio, expanded Titan’s product offering into larger earthmoving, construction and mining tires.  The Company subsequently expanded the Bryan facility production capacity to include giant mining tires.  The mining tire market is expected to offer long-term opportunities.

Increase Aftermarket Tire Business
The Company has concentrated on increasing its presence in the tire aftermarket, which historically has tended to be somewhat less cyclical than the OEM market.  The aftermarket also offers the potential for higher profit margins and is a larger market in most cases.

Improve Operating Efficiencies
The Company constantly works to improve the operating efficiency of its assets and manufacturing facilities.  Titan integrates each facility’s strengths, which may include transferring equipment and business to the facilities that are best equipped to handle the work.  This provides capacity to increase utilization and spread operating costs over a greater volume of products.  Titan is also continuing a comprehensive program to refurbish, modernize and enhance the computer technology of its manufacturing equipment.

Enhance Design Capacity and New Product Development
Equipment manufacturers constantly face changing industry dynamics.  Titan directs its business and marketing strategy to understand and address the needs of its customers and demonstrate the advantages of its products.  In particular, the Company often collaborates with customers in the design of new and enhanced products.  Titan recommends modified products to its customers based on its own market information.  These value-added services enhance Titan’s relationships with its customers.  The Company tests new designs and technologies and develops methods of manufacturing to improve product quality and performance.  Titan’s engineers have introduced designs for giant mining wheels and tires, which employ an innovative steel radial construction technology.

Explore Additional Strategic Acquisitions
The Company’s expertise in the manufacture of off-highway wheels, tires and undercarriage systems and components has permitted it to take advantage of opportunities to acquire businesses that complement this product line.  In the future, Titan may make additional strategic acquisitions of businesses that have an off-highway focus. The Company is currently exploring worldwide opportunities to expand manufacturing and distribution into new geographies.

For additional information concerning the revenues, certain expenses, income from operations and assets attributable to each of the segments in which the Company operates, see Note 33 to the Company's consolidated financial statements, included in Item 8 of our 2013 Form 10-K.

AGRICULTURAL SEGMENT
Titan’s agricultural rims, wheels, tires and undercarriage systems and components are manufactured for use on various agricultural and forestry 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 own distribution centers.  The wheels and rims range in diameter from 9 to 54 inches, with the 54-inch diameter being the largest agricultural wheel manufactured in North America.  Basic configurations are combined with distinct variations (such as different centers and a wide range of material thickness) allowing the Company to offer a broad line of products to meet customer specifications.  Titan’s agricultural tires range from approximately 1 foot to approximately 7 feet in outside diameter and from 5 to 49 inches in width.  The Company offers the added value of delivering a complete wheel and tire assembly to customers.


4



EARTHMOVING/CONSTRUCTION SEGMENT
The Company manufactures rims, wheels, tires and undercarriage systems and components for various types of OTR earthmoving, mining, military and construction 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 earthmoving/construction market is often referred to as OTR, an acronym for off-the-road.  The Company provides OEM and aftermarket customers with a broad range of earthmoving/construction wheels ranging in diameter from 20 to 63 inches and in weight from 125 pounds to 7,000 pounds.  The 63-inch diameter wheel is the largest manufactured in North America for the earthmoving/construction market. Titan’s earthmoving/construction tires range from approximately 3 feet to approximately 13 feet in outside diameter and in weight from 50 pounds 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 in Latin America, provides wheels and tires and assembles brakes, actuators and components for the domestic boat, recreational and utility trailer markets.  Titan also offers select products for ATVs, turf, and golf cart applications.
 
SEGMENT SALES
 
Year ended December 31,
(Amounts in thousands)
2013
 
2012
 
2011
 
Net Sales
 
% of Total
Net Sales
 
Net Sales
 
% of Total
Net Sales
 
Net Sales
 
% of Total
Net Sales
Agricultural
$
1,182,187

 
55
%
 
$
1,080,412

 
59
%
 
$
960,693

 
64
%
Earthmoving/construction
749,115

 
34
%
 
501,617

 
28
%
 
306,821

 
21
%
Consumer
232,293

 
11
%
 
238,649

 
13
%
 
219,484

 
15
%
 
$
2,163,595

 
 

 
$
1,820,678

 
 

 
$
1,486,998

 
 


MARKET CONDITIONS OUTLOOK
In 2013, Titan experienced higher sales than 2012. The higher sales levels were primarily the result of recent acquisitions including the August 2012 acquisition of Planet Group based in Perth, Australia, the October 2012 acquisition of Titan Europe, and the October 2013 acquisition of Voltyre-Prom based in Volgograd, Russia. Increased demand in the Company's agricultural segment also contributed to the higher sales levels.

OPERATIONS
Titan’s operations include manufacturing wheels, manufacturing tires, combining these wheels and tires into assemblies, and manufacturing undercarriage systems and components for use in the agricultural, earthmoving/construction and consumer markets.  These operations entail many manufacturing processes in order to complete the finished products.

Wheel Manufacturing Process
Most agricultural wheels are produced using a rim and a center disc.  A rim is produced by first cutting large steel sheets to required width and length specifications.  These steel sections are rolled and welded to form a circular rim, which is flared and formed in the rollform operation.  The majority of discs are manufactured using presses that both blank and form the center to specifications in multiple stage operations.  The Company e-coats wheels using a multi-step process prior to the final paint top coating.
 
Large earthmoving/construction steel wheels are manufactured from hot and cold-rolled steel sections.  Hot-rolled sections are generally used to increase cross section thickness in high stress areas of large diameter wheels.  A special cold forming process for certain wheels is used to increase cross section thickness while reducing the number of wheel components.  Rims are built from a series of hoops that are welded together to form a rim base.  The complete rim base is made from either three or five separate parts that lock together after the rubber tire has been fitted to the wheel and inflated.
 
For most wheels in our consumer segment, the Company manufactures rims and center discs from steel sheets.  Rims are rolled and welded, and discs are stamped and formed from the sheets.  The manufacturing process then entails welding the rims to the centers and painting the assembled product.


5



Tire Manufacturing Process
The first stage in tire production is the mixing of rubber, carbon black and chemicals to form various rubber compounds.  These rubber compounds are then extruded and processed with textile or steel materials to make specific components.  These components – beads (wire bundles that anchor the tire with the wheel), plies (layers of fabric that give the tire strength), belts (fabric or steel fabric wrapped under the tread in some tires), tread and sidewall – are then assembled into an uncured tire carcass.  The uncured carcass is placed into a press that molds and vulcanizes the carcass under set time, temperature and pressure into a finished tire.

Wheel and Tire Assemblies
The Company’s position as a manufacturer of both wheels and tires allows Titan to mount and deliver one of the largest selections of off-highway assemblies in North America. Titan offers this value-added service of one-stop shopping for wheel and tire assemblies for the agricultural, earthmoving/construction and consumer segments.  Customer orders are entered into the Company’s system either through electronic data interchange or manually.  The appropriate wheel-tire assembly delivery schedule is established based on each customer’s requirements and products are received by the customer on a just-in-time basis.

Undercarriage Manufacturing Process
The undercarriage components (track groups, track and carrier rollers, idler assemblies and sprockets) are all manufactured from steel produced according to specifications.

All of the track groups produced by the Company are built from four major parts: shoes, right and left hand links, pins and bushings. Shoes are manufactured from steel cast in the Company foundry or obtained from different shapes of hot rolled profiles (depending on application), sheared to length, and then heat treated for high wear bending and breaking resistance. Right and left hand links are hot forged, trimmed, mass heat treated, machined and finally induction hardened on rail surface for optimal wear and fatigue resistance. Pins are made from round bars that are cut, machined, heat treated and surface finished. Bushings are generally cold extruded, machined, mass heat treated, and finally carburized or induction hardened for wear resistance and optimal toughness.

The lifetime lubricated and maintenance free track and carrier rollers are assembled with two major components: single or double flange roller shells (typically hot forged in halves, deep hardened, friction or arc welded and finish machined with metallurgical characteristics depending upon size and application) and shafts (generally cut from bars or forged, mass heat treated, rough machined, induction hardened and ground).

The idler assemblies are also lifetime lubricated, for virtually no maintenance. They are offered with cast (single web or hollow design) or fabricated shells, depending on size and application, and feature induction hardened tread surfaces for optimal wear resistance.

The sprockets, designed to transfer the machine driving loads from the final drive to the track, are produced cast or forged in several geometric options, depending upon size and application. They are also heat treated for wear resistance and cracking resistance.

The undercarriage systems, custom designed and produced by the Company, consist of a structured steel fabricated frame, all the undercarriage components mentioned above (track groups, track and carrier rollers, sprockets and idler assemblies) and a final drive. They are completely assembled in house, for consistent quality.

Quality Control
The Company is ISO certified at all five main domestic manufacturing facilities located in Bryan, Ohio; Des Moines, Iowa; Freeport, Illinois; Quincy, Illinois; and Saltville, Virginia, and at the majority of the foreign manufacturing facilities, as well.  The ISO series is a set of related and internationally recognized standards of management and quality assurance.  The standards specify guidelines for establishing, documenting and maintaining a system to ensure quality.  The ISO certifications are a testament to Titan’s dedication to providing quality products for its customers.


6



RAW MATERIALS
Steel and rubber are the primary raw materials used by the Company in all segments.  To ensure a consistent steel supply, Titan purchases raw steel from key steel mills and maintains relationships with steel processors for steel preparation.  The Company is not dependent on any single producer for its steel supply.  Rubber and other raw materials for tire manufacture represent some of the Company’s largest commodity expenses.  Titan buys rubber in markets where there are usually several sources of supply.  In addition to the development of key domestic suppliers, the Company’s strategic procurement plan includes international steel and rubber suppliers to assure competitive price and quality in the global marketplace.  As is customary in the industry, the Company does not have long-term contracts for the purchase of steel or rubber and, therefore, purchases are subject to price fluctuations.

CAPITAL EXPENDITURES
Capital expenditures for 2013, 2012 and 2011 were $80.1 million, $65.7 million and $35.7 million, respectively.  The capital expenditures in each year were used primarily for updating manufacturing equipment, expanding manufacturing capacity and for further automation at the Company’s facilities.  Capital expenditures for 2014 are forecasted to be approximately $50 million to $55 million.  These capital expenditures are anticipated to be used to expand capacity and enhance the Company’s existing facilities and manufacturing capabilities.

PATENTS, TRADEMARKS AND ROYALTIES
The Company owns various patents and trademarks and continues to apply for patent protection for new products.  While patents are considered significant to the operations of the business, at this time Titan does not consider any one of them to be of such importance that the patent’s expiration or invalidity could materially affect the Company’s business.  However, due to the difficult nature of predicting the interpretation of patent laws, the Company cannot anticipate or predict any material adverse effect on its operations, cash flows or financial condition as a result of associated liabilities created under such patent interpretations should the Company be unable to protect its patents or found to be infringing others' patents.

The Company has a trademark license agreement with The Goodyear Tire & Rubber Company to manufacture and sell certain tires in North America and Latin America under the Goodyear name. The North American and Latin American farm tire royalties were prepaid through March 2018 as a part of the 2011 Goodyear Latin American farm tire acquisition. In May 2012, the Company and Goodyear entered into an agreement under which Titan will sell certain non-farm tire products directly to third party customers and pay a royalty to Goodyear.

MARKETING AND DISTRIBUTION
The Company employs an internal sales force and utilizes several manufacturing representative firms for sales in North America, Europe, Latin America, the CIS region, and other worldwide locations.  Sales representatives are primarily organized within geographic regions.

Titan distributes wheels, tires, and undercarriage systems directly to OEMs. The distribution of aftermarket tires occurs primarily through a network of independent and OEM-affiliated dealers.  The Company distributes wheels, tires, wheel and tire assemblies, and undercarriage systems directly to OEMs and aftermarket customers through its distribution network consisting of facilities worldwide.

SEASONALITY
Agricultural equipment sales are seasonal by nature.  Farmers generally order equipment to be delivered before the growing season.  Shipments to OEMs in the U.S. and Europe usually peak during the Company’s first and second quarters for the spring planting period, while shipments in Latin America usually peak during the Company's second and third quarter for the fall planting period.  Earthmoving/construction and consumer segments also historically tend to experience higher demand in the first and second quarters.  These segments are affected by mining, building and economic conditions.

RESEARCH, DEVELOPMENT AND ENGINEERING
The Company’s research, development and engineering staff tests original designs and technologies and develops new manufacturing methods to improve product performance.  These services enhance the Company’s relationships with its customers. Titan’s engineers have introduced designs for giant OTR tires.  These giant tires employ an innovative steel radial construction technology.  Research and development (R&D) expenses are expensed as incurred.  R&D costs were $11.2 million, $7.1 million and $4.2 million for the years ending December 31, 2013, 2012 and 2011, respectively.


7



CUSTOMERS
Titan’s 10 largest customers accounted for approximately 41% of net sales for the year ended December 31, 2013, compared to approximately 50% for the year ended December 31, 2012.  Net sales to Deere & Company in Titan’s agricultural, earthmoving/construction and consumer segments combined represented approximately 13% and 19% of the Company’s consolidated revenues for the years ended December 31, 2013 and 2012, respectively.  Net sales to CNH Global N.V. in Titan’s three markets represented approximately 9% and 10% of the Company’s consolidated revenues for the years ended December 31, 2013 and 2012, respectively.  No other customer accounted for more than 10% of the Company’s net sales in 2013 or 2012.  Management believes the Company is not totally dependent on any single customer; however, certain products are dependent on a few customers.  While the loss of any substantial customer could impact Titan’s business, the Company believes that its diverse product mix and customer base may minimize a longer-term impact caused by any such loss.

ORDER BACKLOG
As of January 31, 2014, Titan estimates $514 million in firm orders compared to $753 million at January 31, 2013, for the Company’s operations.  Orders are considered firm if the customer would be obligated to accept the product if manufactured and delivered pursuant to the terms of such orders.  The January 31, 2014 firm order amount included $238 million in the agricultural segment, $257 million in the earthmoving/construction segment, and $19 million in the consumer segment. The January 31, 2013 firm order amount included $280 million in the agricultural segment, $465 million in the earthmoving/construction segment, and $8 million in the consumer segment. The Company believes that the current order backlog will be filled during the current year.

INTERNATIONAL OPERATIONS
In April of 2011, the Company closed on the acquisition of The Goodyear Tire & Rubber Company's Latin American farm tire business. As a result of this transaction, the Company operates a manufacturing facility in Sao Paulo, Brazil. The Latin American operations recorded approximately 16% and 18% of the Company's sales for the years ended December 31, 2013 and 2012, respectively.

In October of 2012, the Company closed on the acquisition of Titan Europe and, as a result, expanded its global footprint. The Titan Europe operations accounted for approximately 27% and 6% of the Company's sales for the years ended December 31, 2013 and 2012, respectively.

In October 2013, the Company closed on the acquisition of Voltyre-Prom. As a result of this transaction, the Company operates a manufacturing facility in Volgograd, Russia, expanding its presence to the CIS region. The Voltyre-Prom operations accounted for approximately 1% of the Company's 2013 sales.

EMPLOYEES
At December 31, 2013, the Company employed approximately 8,500 people worldwide, including approximately 5,900 located outside the United States.

In March 2013, the employees covered by their respective collective bargaining agreements at the Company's Bryan, Ohio, Freeport, Illinois, and Des Moines, Iowa facilities, which account for approximately 46% of the Company’s U.S. employees, voted to accept a new four year contract.

Outside the United States, the Company enters into employment contracts and agreements in those countries in which such relationships are mandatory or customary. The provisions of these agreements correspond in each case with the required or customary terms in the subject jurisdiction.

ENVIRONMENTAL LAWS AND REGULATIONS
In the ordinary course of business, like other industrial companies, Titan is subject to extensive and evolving federal, state and local environmental laws and regulations, and has made provisions for the estimated financial impact of environmental cleanup.  The Company’s policy is to accrue environmental cleanup related costs of a non-capital nature when those costs are believed to be probable and can be reasonably estimated.  Expenditures that extend the life of the related property, or mitigate or prevent future environmental contamination, are capitalized. The Company does not currently anticipate any material capital expenditures for environmental control facilities.  The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, advances in environmental technologies, the quality of information available related to specific sites, the assessment stage of the site investigation, preliminary findings and the length of time involved in remediation or settlement.  Due to the difficult nature of predicting future environmental costs, the Company cannot anticipate or predict the material adverse effect on its operations, cash flows or financial condition as a result of efforts to comply with, or its liabilities under, environmental laws.


8



COMPETITION
The Company competes with several domestic and international companies, some of which are larger and have greater financial and marketing resources than Titan.  The Company believes it is a primary source of steel wheels and rims to the majority of its North American customers.  Major competitors in the off-highway wheel market include Carlisle Companies Incorporated, GKN Wheels, Ltd., Topy Industries, Ltd. and certain other foreign competitors.  Significant competitors in the off-highway tire market include Bridgestone/Firestone, Carlisle Companies Incorporated, Michelin, Pirelli and certain other foreign competitors. Significant competitors in the undercarriage market include Berco and Caterpillar.

The Company competes primarily on the basis of price, quality, customer service, design capability and delivery time.  The Company’s ability to compete with international competitors may be adversely affected by currency fluctuations.  Titan owns the molds and dies used to produce its wheels and tires. However, certain of the Company’s OEM customers could, under individual circumstances, elect to manufacture the Company’s products to meet their requirements or to otherwise compete with the Company.  There can be no assurance that the Company will not be adversely affected by increased competition in the markets in which it operates, or that competitors will not develop products that are more effective, less expensive or otherwise render certain of Titan’s products less competitive.  From time to time, certain of the Company’s competitors have reduced their prices in particular product categories, which has prompted Titan to reduce prices as well.  There can be no assurance that competitors of the Company will not further reduce prices in the future or that any such reductions would not have a material adverse effect on the Company.

PURCHASE OF VOLTYRE- PROM
On October 4, 2013, Titan in partnership with One Equity Partners (OEP) and the Russian Direct Investment Fund (RDIF)closed the acquisition of an 85% interest in Voltyre-Prom, a leading producer of agricultural and industrial tires in Volgograd, Russia, for approximately $94.1 million, which includes the assumption of debt. Titan is acting as operating partner with responsibility for Voltyre-Prom's daily operations on behalf of the consortium of which Titan holds a 30% interest. The fair value of the consideration transferred and noncontrolling interests exceeded the fair value of the identified assets acquired less liabilities assumed. Therefore, goodwill of $21.0 million was recorded on the transaction, which is not expected to be deductible for tax purposes. An initial noncontrolling interest of $14.5 million, representing the 15% not owned by the partnership, was recorded at the acquisition date. In January 2014, the partnership of Titan, OEP, and RDIF purchased an additional 14% to bring total Voltyre-Prom ownership to 99%. The Company continues to evaluate the preliminary purchase price allocation, primarily the value of certain deferred taxes and goodwill, and may revise the purchase price allocation in future periods as these estimates are finalized.

PURCHASE OF TITAN EUROPE
On October 31, 2012, Titan acquired over 97% of the outstanding stock of Titan Europe and in December 2012, the remaining 3% interest was acquired. Titan Europe is an international engineering group which designs and manufactures wheels, undercarriage components and assemblies for tracked and wheeled "off-road vehicles." Prior to the acquisition, Titan held a 21.8% ownership percentage in Titan Europe. Titan Europe shareholders received one share of new Titan common stock for every 11 Titan Europe shares held. A total of 6,257,051 new shares of Titan common stock were issued with a value of $121.8 million. In addition, Titan paid cash of $5.6 million for option payouts and partial shares. Titan's previous investment in Titan Europe had a fair value on the acquisition date of $31.7 million. Total consideration including the value of stock issued, cash payments, and the fair value of previously held Titan Europe shares totaled $159.1 million. A gain of $26.7 million was recorded on Titan's previously held interest in Titan Europe which was recorded as Noncash Titan Europe gain in the consolidated statement of operations. This gain was previously recorded in other comprehensive income.

NEW YORK STOCK EXCHANGE CERTIFICATION
The Company submitted to the New York Stock Exchange during fiscal 2013 the Annual CEO Certification required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.


9



AVAILABLE INFORMATION
The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports are made available, without charge, through the Company’s website located at www.titan-intl.com as soon as reasonably practicable after they are filed with the Securities and Exchange Commission (SEC).  The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.  The following documents are also posted on the Company’s website:
 
Corporate Governance Policy
Business Conduct Policy
Audit Committee Charter
Compensation Committee Charter
Nominating/Corporate Governance Committee Charter
 
Printed copies of these documents are available, without charge, by writing to:  Titan International, Inc.,
c/o Corporate Secretary, 2701 Spruce Street, Quincy, IL 62301.

10




ITEM 1A – RISK FACTORS

The Company is subject to various risks and uncertainties relating to or arising out of the nature of its business and general business, economic, financing, legal and other factors or conditions that may affect the Company. Realization of any of the following risks could have a material adverse effect on Titan’s business, financial condition, cash flows and results of operations.

The Company is exposed to price fluctuations of key commodities.
The Company does not generally enter into long-term commodity contracts and does not use derivative commodity instruments to hedge exposures to commodity market price fluctuations.  Therefore, the Company is exposed to price fluctuations of key commodities, which consist primarily of steel and rubber.  Although the Company attempts to pass on certain material price increases to its customers, there is no assurance that the Company will be able to do so in the future.  Any increase in the price of steel and rubber that is not passed on to customers could have an adverse material effect on Titan’s results of operations.
 
The Company relies on a limited number of suppliers.
The Company currently relies on a limited number of suppliers for certain key commodities, which consist primarily of steel and rubber, in the manufacturing of Titan products.  The loss of key suppliers or their inability to meet price, quality, quantity and delivery requirements could have a significant adverse impact on the Company’s results of operations.

The Company’s revolving credit facility and other debt obligations contain covenants.
The Company’s revolving credit facility and other debt obligations contain covenants and restrictions.  These covenants and restrictions could limit Titan’s ability to respond to market conditions, to provide for unanticipated capital investments, to raise additional debt or equity capital, to pay dividends or to take advantage of business opportunities, including future acquisitions.  The failure to meet these items could result in the Company ultimately being in default.  Titan’s ability to comply with the covenants may be affected by events beyond its control, including prevailing economic, financial and industry conditions.
 
The Company operates in cyclical industries and is subject to numerous changes in the economy.
The Company's sales are substantially dependent on three major industries: agricultural equipment, earthmoving/construction equipment and consumer products.  The business activity levels in these industries are subject to specific industry and general economic cycles.  Any downturn in these industries or the general economy could have an adverse material effect on Titan’s business.
 
The agricultural equipment industry is affected by crop prices, farm income and farmland values, weather, export markets and government policies. The earthmoving/construction industry is affected by the levels of government and private construction spending and replacement demand. The consumer products industry is affected by consumer disposable income, weather, competitive pricing, energy prices and consumer attitudes. In addition, the performance of these industries is sensitive to interest rate and foreign exchange rate changes and varies with the overall level of economic activity.
 
The Company’s customer base is relatively concentrated.
The Company’s ten largest customers, which are primarily original equipment manufacturers (OEMs), accounted for approximately 41% of Titan’s net sales for 2013.  Net sales to Deere & Company represented 13% of total 2013 net sales.  No other customer accounted for more than 10% of net sales in 2013.  As a result, Titan’s business could be adversely affected if one of its larger customers reduces its purchases from Titan due to work stoppages or slow-downs, financial difficulties, as a result of termination provisions, competitive pricing or other reasons.  There is also continuing pressure from the OEMs to reduce costs, including the cost of products and services purchased from outside suppliers such as Titan.  The Company has had long-term relationships with major customers and expects to continue these relationships.  There can be no assurance that Titan will be able to maintain such ongoing relationships.  Any failure to maintain the Company’s relationship with a leading customer could have an adverse effect on results of operations.
 
The Company’s revenues are seasonal in nature due to Titan’s dependence on seasonal industries.
The agricultural, earthmoving/construction and recreational industries are seasonal, with typically lower sales during the second half of the year.  This seasonality in demand has resulted in fluctuations in the Company’s revenues and operating results.  Because much of Titan’s overhead expenses are fixed, seasonal trends can cause reductions in quarterly profit margins and financial condition, especially during slower periods.

11



 
The Company may be adversely affected by changes in government regulations and policies.
Domestic and foreign political developments and government regulations and policies directly affect the agricultural, earthmoving/construction and consumer products industries in the United States and abroad. Regulations and policies in the agricultural industry include those encouraging farm acreage reduction in the United States and granting ethanol subsidies. Regulations and policies relating to the earthmoving/construction industry include the construction of roads, bridges and other items of infrastructure. The modification of existing laws, regulations or policies or the adoption of new laws, regulations or policies could have an adverse effect on any one or more of these industries and therefore on Titan’s business.
 
The Company is subject to corporate governance requirements, and costs related to compliance with, or failure to comply with, existing and future requirements could adversely affect Titan’s business.
The Company is subject to corporate governance requirements under the Sarbanes-Oxley Act of 2002, as well as new rules and regulations subsequently adopted by the Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB) and the New York Stock Exchange (NYSE). These laws, rules and regulations continue to evolve and may become increasingly restrictive in the future. Failure to comply with these laws, rules and regulations may have an adverse material effect on Titan’s reputation, financial condition and the value of the Company’s securities.
 
The Company faces substantial competition from domestic and international companies.
The Company competes with several domestic and international competitors, some of which are larger and have greater financial and marketing resources than Titan.  Titan competes primarily on the basis of price, quality, customer service, design capability and delivery time.  The Company’s ability to compete with international competitors may be adversely affected by currency fluctuations.  In addition, certain OEM customers could, under certain circumstances, elect to manufacture certain products to meet their own requirements or to otherwise compete with Titan.

There can be no assurance that Titan’s businesses will not be adversely affected by increased competition in the Company’s markets or that competitors will not develop products that are more effective or less expensive than Titan products or which could render certain products less competitive.  From time to time certain competitors have reduced prices in particular product categories, which has caused Titan to reduce prices. There can be no assurance that in the future Titan’s competitors will not further reduce prices or that any such reductions would not have a material adverse effect on Titan’s business.

The Company could be negatively impacted if Titan fails to maintain satisfactory labor relations.
The Company is party to collective bargaining agreements. Upon the expiration of any of the collective bargaining agreements, however, Titan may be unable to negotiate new collective bargaining agreements on terms that are cost effective to the Company.  The business operations may be affected as a result of labor disputes or difficulties and delays in the process of renegotiating collective bargaining agreements.

In March 2013, the employees covered by their respective collective bargaining agreements at the Company's Bryan, Ohio, Freeport, Illinois, and Des Moines, Iowa facilities, which account for approximately 46% of the Company's U.S employees, voted to accept a new four year contract.

Unfavorable outcomes of legal proceedings could adversely affect results of operations.
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 consolidated financial condition, results of operations or cash flows of the Company.  However, due to the difficult nature of predicting unresolved and future legal claims, the Company cannot anticipate or predict any material adverse effect on its consolidated financial condition, results of operations or cash flows as a result of efforts to comply with or its liabilities pertaining to legal judgments.
 

12




Acquisitions may require significant resources and/or result in significant losses, costs or liabilities.
Any future acquisitions will depend on the ability to identify suitable acquisition candidates, to negotiate acceptable terms for their acquisition and to finance those acquisitions.  Titan will also face competition for suitable acquisition candidates that may increase costs.  In addition, acquisitions require significant managerial attention, which may be diverted from current operations.  Furthermore, acquisitions of businesses or facilities entail a number of additional risks, including:
 
-   problems with effective integration of operations;
 
-   the inability to maintain key pre-acquisition customer, supplier and employee relationships;
 
-   the potential that expected benefits or synergies are not realized and operating costs increase; and
 
-   exposure to unanticipated liabilities.

International acquisitions may be more complex and time consuming. Also, international acquisitions may include a number of additional risks including the integration of acquisitions operating under differing laws and regulations.
 
Subject to the terms of indebtedness, the Company may finance future acquisitions with cash from operations, additional indebtedness and/or by issuing additional equity securities.  These commitments may impair the operation of Titan’s businesses.  In addition, the Company could face financial risks associated with incurring additional indebtedness such as reducing liquidity and access to financing markets and increasing the amount of cash flow required to service such indebtedness.

The Company has international operations and purchases raw material from foreign suppliers.
The Company had total aggregate sales outside the United States of approximately $1,089.9 million, $635.2 million and $164.4 million, for the years ended December 31, 2013, 2012 and 2011, respectively. Sales outside the United States have grown substantially as Titan has acquired foreign subsidiaries and sales from these international operations are expected to continue to represent a significant portion of sales.
 
International Operations and Sales – International operations and sales are subject to a number of special risks, including but not limited to risks with respect to currency exchange rates, economic and political destabilization, other disruption of markets and restrictive actions by foreign governments (such as restrictions on transfer of funds, export duties and quotas and foreign customs).  Other risks include changes in foreign laws regarding trade and investment; difficulties in obtaining distribution and support; nationalization; reforms of United States laws and policies affecting trade, foreign investment and loans; and foreign tax laws.  There may also be restrictions on the Company's ability to repatriate earnings and investments from international operations. There can be no assurance that one, or a combination of these factors will not have a material adverse effect on the Company’s ability to increase or maintain its foreign sales.
 
Foreign Suppliers – The Company purchases raw materials from foreign suppliers.  The production costs, profit margins and competitive position of the Company are affected by the strength of the currencies in countries where Titan purchases goods, relative to the strength of the currencies in countries where the products are sold.  The Company’s results of operations, cash flows and financial position may be affected by fluctuations in foreign currencies.

The Company is subject to anti-corruption laws and regulations.
The Company has international operations and must comply with anti-corruption laws and regulations including the U.S. Foreign Corrupt Practices Act (FCPA). These anti-bribery laws generally prohibit companies and their intermediaries from making improper payments or providing anything of value for the purpose of obtaining or retaining business. The FCPA prohibits these payments regardless of local customs and practices. Although Titan has a compliance program in place to reduce the potential violations of corruption laws, violations of these laws could adversely affect the Company's business.
 

13



The Company may be subject to product liability and warranty claims.
The Company warrants its products to be free of certain defects and accordingly may be subject in the ordinary course of business to product liability or product warranty claims.  Losses may result or be alleged to result from defects in Titan products, which could subject the Company to claims for damages, including consequential damages.  There can be no assurance that Company insurance will be adequate for liabilities actually incurred or that adequate insurance will be available on terms acceptable to the Company. Any claims relating to defective products that result in liability exceeding Titan’s insurance coverage could have a material adverse effect on financial condition and results of operations. Further, claims of defects could result in negative publicity against Titan, which could adversely affect the Company’s business.
 
The Company has incurred, and may incur in the future, net losses.
Although the Company reported net income for the years ended December 31, 2011, 2012 and 2013 and the Company expects to generate future profitability, there is no guarantee the Company will be profitable in the future.

The Company may be adversely affected by a disruption in, or failure of, information technology systems.
The Company relies upon information technology systems, some of which are managed by third parties, to process, transmit and store electronic information. Technology systems are used in a variety of business processes and activities, including purchasing, manufacturing, distribution, invoicing and financial reporting. The Company utilizes security measures and business continuity plans to prevent, detect and remediate damage from computer viruses, natural disasters, unauthorized access, utility failures and other similar disruptions. Despite these measures, a security breach or information technology system failure may disrupt and adversely affect the Company's operations.

The Company is subject to risks associated with climate change and climate change regulations.
Governmental regulatory bodies in the United States and other countries have, or are, contemplating introducing regulatory changes in response to the potential impacts of climate change.  Laws and regulations regarding climate change and energy usage may impact the Company directly through higher costs for energy and raw materials.  The Company’s customers may also be affected by climate change regulations that may impact future purchases.  Physical climate change may potentially have a large impact on the Company’s two largest industry segments, agriculture and earthmoving/construction.  The potential impacts of climate change and climate change regulations are highly uncertain at this time, and the Company cannot anticipate or predict the material adverse effect on its consolidated financial condition, results of operations or cash flows as a result of climate change and climate change regulations.
 
The Company is subject to risks associated with environmental laws and regulations.
The Company’s operations are subject to federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials.  The Company’s operations entail risks in these areas, and there can be no assurance that Titan will not incur material costs or liabilities.  In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future.

The Company may incur additional tax expense or tax exposure.
The Company is subject to income taxes in the United States and numerous foreign jurisdictions, and has domestic and international tax liabilities which are dependent upon the distribution of income among these different jurisdictions. Titan's income tax provision and cash tax liability in the future could be adversely affected by numerous factors, including income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities and changes in tax laws and regulations. 

The Company is subject to foreign currency translation risk.
The Company continues to expand globally and now operates in many worldwide locations and transacts business in many foreign currencies. Titan's financial statements are reported in U.S. dollars with financial statements of international subsidiaries being initially recorded in foreign currencies and translated into U.S. dollars. Large fluctuations in currency exchange rates between the U.S. dollar and other world currencies may materially adversely affect the Company's financial condition, results of operations and liquidity.  


14



Concerns regarding the European debt crisis and market perceptions concerning the instability of the euro, the potential re-introduction of individual currencies within the Eurozone, or the potential dissolution of the euro entirely, could adversely affect Titan's business, results of operations and financing.
Concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations, the overall stability of the euro and the suitability of the euro as a single currency given the diverse economic and political circumstances in individual Eurozone countries. These concerns could lead to the re-introduction of individual currencies in one or more Eurozone countries, or, in more extreme circumstances, the possible dissolution of the euro currency entirely. Should the euro dissolve entirely, the legal and contractual consequences for holders of euro-denominated obligations would be determined by laws in effect at such time. These potential developments, or market perceptions concerning these and related issues, could adversely affect the value of the Company's euro- denominated assets and obligations. In addition, concerns over the effect of this financial crisis on financial institutions in Europe and globally could have an adverse impact on the capital markets generally, and more specifically on the ability of the Company and Titan's customers, suppliers and lenders to finance their respective businesses, to access liquidity at acceptable financing costs, if at all, on the availability of supplies and materials and on the demand for Titan's products.


ITEM 1B – UNRESOLVED STAFF COMMENTS

None.
 
ITEM 2 – PROPERTIES

The Company’s properties with total square footage above 1 million are detailed by the location, size and focus of each facility as provided in the table below:
 
 
Approximate square footage
 
 
 
 
Location
 
Owned
 
Leased
 
Use
 
Segment
Union City, Tennessee
 
2,149,000

 
 
 
Manufacturing, distribution
 
All segments
Des Moines, Iowa
 
2,047,000

 
 
 
Manufacturing, distribution
 
All segments
Sao Paulo, Brazil
 
1,282,000

 
 
 
Manufacturing, distribution
 
All segments
Quincy, Illinois
 
1,209,000

 
 
 
Manufacturing, distribution
 
All segments
Freeport, Illinois
 
1,202,000

 
 
 
Manufacturing, distribution
 
All segments
Natchez, Mississippi
 
 

 
1,203,000

 
Storage
 
See note (a)

(a)
The Natchez facility is currently being used for storage.  The Company’s facility in Natchez, Mississippi is not in operation.


The Company’s total properties by continent are detailed by the location, size and focus as provided in the table below:
 
 
Approximate square footage
 
 
 
 
Location
 
Owned
 
Leased
 
Use
 
Segment
North America
 
8,692,000

 
1,639,000

 
Manufacturing, distribution
 
All segments
South America
 
1,434,000

 
23,000

 
Manufacturing, distribution
 
All segments
Europe
 
2,040,000

 
54,000

 
Manufacturing, distribution
 
All segments
Australia
 
 
 
1,239,000

 
Manufacturing, distribution
 
All segments
Asia
 
646,000

 
137,000

 
Manufacturing, distribution
 
All segments
Africa
 
 
 
11,000

 
Manufacturing, distribution
 
All segments

The Company considers each of its facilities to be in good condition and adequate for present use.  Management believes that the Company has sufficient capacity to meet current market demand with the active facilities.  The Company has no current plans to restart manufacturing at the storage facility described in note (a) above.

15




 
ITEM 3 – LEGAL PROCEEDINGS

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 consolidated financial condition, results of operations or cash flows of the Company.  However, due to the difficult nature of predicting unresolved and future legal claims, the Company cannot anticipate or predict the material adverse effect on its consolidated financial condition, results of operations or cash flows as a result of efforts to comply with or its liabilities pertaining to legal judgments.


ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

16



PART II

ITEM 5
– MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is traded on the New York Stock Exchange (NYSE) under the symbol TWI.  On February 12, 2014, there were approximately 400 holders of record of Titan common stock and an estimated 20,300 beneficial stockholders.  The following table sets forth the high and low sales prices per share of common stock as reported on the NYSE, as well as information concerning per share dividends declared for the periods indicated. 
2013
 
High
 
Low
 
Dividends
Declared
First quarter
 
$
27.12

 
$
20.13

 
$
0.005

Second quarter
 
25.15

 
15.77

 
0.005

Third quarter
 
18.26

 
14.14

 
0.005

Fourth quarter
 
18.15

 
14.19

 
0.005

2012
 
 

 
 

 
 

First quarter
 
$
26.95

 
$
19.53

 
$
0.005

Second quarter
 
29.93

 
20.06

 
0.005

Third quarter
 
25.54

 
16.86

 
0.005

Fourth quarter
 
22.06

 
17.51

 
0.005


PERFORMANCE COMPARISON GRAPH
The performance graph compares cumulative total return for the Company’s common stockholders over the past five years against the cumulative total return of the Standard & Poor’s 600 Construction and Farm Machinery and Heavy Trucks Index, and against the Standard & Poor’s 500 Stock Index.  The graph depicts the value on December 31, 2013, of a $100 investment made on December 31, 2008, in Company common stock and each of the other two indices, with all dividends reinvested.  Titan’s common stock is traded on the NYSE under the symbol TWI. 

 
Fiscal Year Ended December 31,
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
Titan International, Inc.
$
100.00

 
$
98.58

 
$
237.93

 
$
237.19

 
$
264.98

 
$
219.60

S&P 500 Index
100.00

 
126.46

 
145.51

 
148.59

 
172.37

 
228.19

S&P 600 Construction. & Farm Machinery & Heavy Trucks Index
100.00

 
108.43

 
156.31

 
147.63

 
207.48

 
259.55


17




ITEM 6 – SELECTED FINANCIAL DATA

The selected financial data presented below, as of and for the years ended December 31, 2013, 2012, 2011, 2010, and 2009, are derived from the Company’s consolidated financial statements, as audited by Grant Thornton LLP, an independent registered public accounting firm for the years ended December 31, 2013, and 2012, and PricewaterhouseCoopers LLP, an independent registered public accounting firm for the years ended December 31, 2011, 2010, and 2009, and should be read in conjunction with the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations and our audited consolidated financial statements and notes thereto.

(All amounts in thousands, except per share data)
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
Net sales
$
2,163,595

 
$
1,820,678

 
$
1,486,998

 
$
881,591

 
$
727,599

Gross profit
295,190

 
294,139

 
232,108

 
104,090

 
55,965

Supply agreement termination income

 
(26,134
)
 

 

 

Noncash goodwill impairment charge

 

 

 

 
11,702

Income (loss) from operations
102,395

 
174,708

 
132,173

 
30,945

 
(18,894
)
Gain (loss) on senior note repurchase
(22,734
)
 

 

 
(14,573
)
 
1,398

Noncash Titan Europe gain

 
26,700

 

 

 

Gain on earthquake insurance recovery
22,451

 

 

 

 

Income (loss) before income taxes
54,734

 
192,251

 
95,895

 
(9,190
)
 
(32,002
)
Net income (loss)
29,687

 
105,638

 
58,136

 
(5,926
)
 
(24,645
)
Net income (loss) per share – basic
.66

 
2.47

 
1.40

 
(.17
)
 
(.71
)
Net income (loss) per share – diluted
.64

 
2.05

 
1.18

 
(.17
)
 
(.71
)
Dividends declared per common share
0.02

 
0.02

 
0.02

 
0.02

 
0.02


(All amounts in thousands)
As of December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
Working capital
$
621,307

 
$
529,043

 
$
388,827

 
$
388,997

 
$
375,144

Current assets
1,007,878

 
996,123

 
564,593

 
481,350

 
445,216

Total assets
1,821,231

 
1,710,235

 
1,010,286

 
780,880

 
736,463

Long-term debt (a)
497,694

 
441,438

 
317,881

 
373,564

 
366,300

Stockholders’ equity
798,036

 
632,362

 
396,879

 
272,031

 
261,953

(a)
Excludes amounts due within one year and classified as a current liability.

18




ITEM 7
– MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT’S DISCUSSION AND ANALYSIS
Management’s discussion and analysis of financial condition and results of operations (MD&A) is designed to provide a reader of these financial statements with a narrative from the perspective of the management of Titan International, Inc. (Titan or the Company) on Titan’s financial condition, results of operations, liquidity and other factors which may affect the Company’s future results.

FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements, including statements regarding, among other items:
Anticipated trends in the Company’s business
Future expenditures for capital projects
The Company’s ability to continue to control costs and maintain quality
Ability to meet conditions of loan agreements
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
The Company’s intention to consider and pursue acquisition and divestiture opportunities
Readers of this Form 10-K should understand that these forward-looking statements are based on the Company’s expectations and are subject to a number of risks and uncertainties, including those in Item 1A, Part I of this report, “Risk Factors,” 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 a recession on the Company and its customers and suppliers
Changes in the Company’s end-user markets as a result of world economic or regulatory influences
Changes in the marketplace, including new products and pricing changes by the Company’s competitors
Ability to maintain satisfactory labor relations
Unfavorable outcomes of legal proceedings
Availability and price of raw materials
Levels of operating efficiencies
Unfavorable product liability and warranty claims
Actions of domestic and foreign governments
Results of investments
Fluctuations in currency translations
Climate change and related laws and regulations
Risks associated with environmental laws and regulations
Any changes in such factors could lead to significantly different results.  The Company cannot provide any assurance that the assumptions referred to in the forward-looking statements or otherwise are accurate or will prove to transpire.  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 forward-looking statements.  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 contained in this document will in fact transpire.

19





OVERVIEW
Titan International, Inc. and its subsidiaries are leading manufacturers of wheels, tires, wheel and tire assemblies, and undercarriage systems and components for off-highway vehicles used in the agricultural, earthmoving/construction and consumer segments.  Titan manufactures both wheels and tires for the majority of these market applications, allowing the Company to provide the value-added service of delivering complete wheel and tire assemblies.  The Company offers a broad range of products that are manufactured in relatively short production runs to meet the specifications of original equipment manufacturers (OEMs) and/or the requirements of aftermarket customers.

The Company’s major OEM customers include large manufacturers of off-highway equipment such as AGCO Corporation, CNH Global N.V., Deere & Company, Hitachi Construction Machinery, Kubota Corporation and Liebherr Group, in addition to many other off-highway equipment manufacturers.  The Company distributes products to OEMs, independent and OEM-affiliated dealers, and through a network of distribution facilities.

The following table provides highlights for the year ended December 31, 2013, compared to 2012 (amounts in thousands):
 
2013
 
2012
Net sales
$
2,163,595

 
$
1,820,678

Income from operations
102,395

 
174,708

Net income
29,687

 
105,638


The Company recorded sales of $2,163.6 million for 2013, which were approximately 19% higher than the 2012 sales of $1,820.7 million.  The higher sales levels were primarily the result of recent acquisitions including the August 2012 acquisition of Planet Group based in Perth, Australia, the October 2012 acquisition of Titan Europe, and the October 2013 acquisition of Voltyre-Prom based in Volgograd, Russia. Increased demand in the Company's agricultural segment also contributed to the higher sales levels. The higher sales levels were offset by a price/mix reduction which resulted largely from decreased raw material prices that were generally passed on to customers, weakened demand in the Company's earthmoving/construction segment, and unfavorable currency translation.

The Company’s income from operations was $102.4 million for 2013 compared to $174.7 million for 2012.  Titan’s net income was $29.7 million for 2013 compared to net income of $105.6 million in 2012.  Diluted income per share was $0.64 in 2013, compared to $2.05 in 2012.  Lower raw material costs that were passed on to customers before being fully realized by the Company, increased warranty provisions relating to earthmoving tires, and increased SG&A expense from recently acquired entities contributed to a decline in income from operations. In addition to these items, higher interest expense from additional debt contributed to a decline in net income. 2012 income from operations, net income and earnings per share were positively affected by the supply agreement termination income of $26.1 million.


PURCHASE OF VOLTYRE-PROM
On October 4, 2013, Titan in partnership with One Equity Partners (OEP) and the Russian Direct Investment Fund (RDIF)closed the acquisition of an 85% interest in Voltyre-Prom, a leading producer of agricultural and industrial tires in Volgograd, Russia, for approximately $94.1 million, which includes the assumption of debt. Titan is acting as operating partner with responsibility for Voltyre-Prom's daily operations on behalf of the consortium of which Titan holds a 30% interest. The fair value of the consideration transferred and noncontrolling interests exceeded the fair value of the identified assets acquired less liabilities assumed. Therefore, goodwill of $21.0 million was recorded on the transaction, which is not expected to be deductible for tax purposes. An initial noncontrolling interest of $14.5 million, representing the 15% not owned by the partnership, was recorded at the acquisition date. In January 2014, the partnership of Titan, OEP, and RDIF purchased an additional 14% to bring total Voltyre-Prom ownership to 99%. The Company continues to evaluate the preliminary purchase price allocation, primarily the value of certain deferred taxes and goodwill, and may revise the purchase price allocation in future periods as these estimates are finalized.

SUBSEQUENT EVENTS
In January 2014, the partnership of Titan, OEP, and RDIF purchased an additional 14% of Voltyre-Prom for approximately $13 million bringing the partnership's ownership to 99%. Titan continues to hold a 30% interest in the partnership.


20



PURCHASE OF TITAN EUROPE
On October 31, 2012, Titan acquired over 97% of the outstanding stock of Titan Europe and in December 2012, the remaining 3% interest was acquired. Titan Europe is an international engineering group which designs and manufactures wheels, undercarriage components and assemblies for tracked and wheeled "off-road vehicles." Prior to the acquisition, Titan held a 21.8% ownership percentage in Titan Europe. Titan Europe shareholders received one share of new Titan common stock for every 11 Titan Europe shares held. A total of 6,257,051 new shares of Titan were issued with a value of $121.8 million. In addition, Titan paid cash of $5.6 million for option payouts and partial shares. Titan's previous investment in Titan Europe had a fair value on the acquisition date of $31.7 million. Total consideration including the value of stock issued, cash payments, and the fair value of previously held Titan Europe shares totaled $159.1 million. A gain of $26.7 million was recorded on Titan's previously held interest in Titan Europe which was recorded as Noncash Titan Europe gain in the consolidated statement of operations.

PURCHASE OF GOODYEAR'S LATIN AMERICAN FARM TIRE BUSINESS
On April 1, 2011, Titan closed on the acquisition of The Goodyear Tire & Rubber Company's Latin American farm tire business for approximately $98.6 million U.S. dollars. The transaction includes Goodyear's Sao Paulo, Brazil manufacturing plant, property, equipment; inventories; a licensing agreement that allows Titan to sell Goodyear-brand farm tires in Latin America until 2018; and extends the North American licensing agreement until 2018.

SUPPLY AGREEMENT TERMINATION INCOME
The Company's April 2011 acquisition of Goodyear's farm tire business included a three year supply agreement with Goodyear for certain non-farm tire products. A liability was recorded as the supply agreement was for sales at below market prices. In May 2012, the Company and Goodyear terminated this supply agreement and entered into an agreement under which Titan will sell these products directly to third party customers and pay a royalty to Goodyear. The remaining balance of the supply agreement liability of $26.1 million was recorded as income as the Company is no longer obligated to sell the products at below market prices.

RESULTS OF OPERATIONS
The following table sets forth the Company’s statement of operations expressed as a percentage of net sales for the periods indicated.  This table and subsequent discussions should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto.

 
As a Percentage of Net Sales
Year ended December 31,
 
2013
 
2012
 
2011
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
86.4

 
83.8

 
84.4

Gross profit
13.6

 
16.2

 
15.6

Selling, general and administrative expenses
7.7

 
6.9

 
5.8

Research and development
0.5

 
0.4

 
0.3

Royalty expense
0.7

 
0.7

 
0.7

Supply agreement termination income

 
(1.4
)
 

Income from operations
4.7

 
9.6

 
8.8

Interest expense
(2.2
)
 
(1.5
)
 
(1.7
)
Convertible debt conversion charge
(0.3
)
 

 
(1.1
)
Loss on senior note repurchase
(1.1
)
 

 

Noncash Titan Europe gain

 
1.5

 

Gain on earthquake insurance recovery
1.0

 

 

Gain on acquisition

 
0.6

 

Other income, net
0.3

 
0.4

 
0.3

Income before income taxes
2.4

 
10.6

 
6.3

Income tax provision
1.2

 
4.8

 
2.5

Net income
1.2
 %
 
5.8
 %
 
3.8
 %
 

21



In addition, the following table sets forth components of the Company’s net sales classified by segment for the years ended December 31, (amounts in thousands):

 
2013
 
2012
 
2011
Agricultural
$
1,182,187

 
$
1,080,412

 
$
960,693

Earthmoving/Construction
749,115

 
501,617

 
306,821

Consumer
232,293

 
238,649

 
219,484

Total
$
2,163,595

 
$
1,820,678

 
$
1,486,998

 
CRITICAL ACCOUNTING ESTIMATES
Preparation of the financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates.  The Company’s application of these policies involves assumptions that require difficult subjective judgments regarding many factors, which, in and of themselves, could materially impact the financial statements and disclosures.  A future change in the estimates, assumptions or judgments applied in determining the following matters, among others, could have a material impact on future financial statements and disclosures.

Asset and Business Acquisitions
The allocation of purchase price for asset and business acquisitions requires management estimates and judgment as to expectations for future cash flows of the acquired assets and business and the allocation of those cash flows to identifiable intangible assets in determining the estimated fair value for purchase price allocations. If the actual results differ from the estimates and judgments used in determining the purchase price allocations, impairment losses could occur. To aid in establishing the value of any intangible assets at the time of acquisition, the Company typically engages a professional appraisal firm.

Impairment of Goodwill
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. The carrying value of the Company's goodwill was $42.1 million at December 31, 2013 and $24.9 million at December 31, 2012. The Company sometimes elects to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. Significant assumptions relating to future operations must be made when estimating future cash flows in analyzing goodwill for impairment.
 
When the two-step goodwill impairment test is performed, the Company evaluates the recoverability of goodwill by estimating the future discounted cash flows of the reporting unit to which the goodwill relates and using an earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple approach.  In determining the estimated future cash flows, the Company considers current and projected future levels of income as well as business trends and economic conditions.  When the Company’s estimated fair value of the reporting unit is less than the carrying value, a second step of the impairment analysis is performed.  In this second step, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities.  If the implied fair value of goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment loss.
 
Inventories
Inventories are valued at the lower of cost or market.  At December 31, 2013, approximately 12% of the Company's inventories were valued under the last-in, first out (LIFO) method. The majority of steel material inventory and related work-in-process and finished goods are accounted for under the LIFO method.  The remaining inventories were valued under the first-in, first out (FIFO) method or average cost method. Market value is estimated based on current selling prices.  Estimated provisions are established for slow-moving and obsolete inventory.
 
Income Taxes
Deferred income tax provisions are determined using the liability method whereby deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and income tax basis of assets and liabilities.  The Company assesses the realizability of its deferred tax asset positions and recognizes and measures uncertain tax positions in accordance with accounting standards for income taxes.
 

22



Retirement Benefit Obligations
Pension benefit obligations are based on various assumptions used by third-party actuaries in calculating these amounts.  These assumptions include discount rates, expected return on plan assets, mortality rates and other factors.  Revisions in assumptions and actual results that differ from the assumptions affect future expenses, cash funding requirements and obligations.  The Company has three frozen defined benefit pension plans in the United States and pension plans in several foreign countries.  Titan expects to contribute approximately $7 million to these frozen defined pension plans in 2014.  For more information concerning these costs and obligations, see the discussion of the “Pensions” and Note 27 to the Company’s financial statements.
 
The effect of hypothetical changes to selected assumptions on the Company’s frozen pension benefit obligations would be as follows (amounts in thousands):
 
 
 
December 31, 2013
 
2014
Assumptions
Percentage
Change
 
Increase
(Decrease)
PBO (a)
 
Increase
(Decrease)
Equity
 
Increase
(Decrease)
Expense
Pension
 
 
 
 
 
 
 
   Discount rate
+/-5
 
$(5,817)/$6,273
 
$5,817/$(6,273)
 
$(348)/$361
   Expected return on assets
+/-5
 
 
 
 
 
$(400)/$400
 
(a)
Projected benefit obligation (PBO) for pension plans.
 
Product Warranties
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. Actual warranty experience may differ from historical experience. The Company's warranty accrual was $33.1 million at December 31, 2013, and $27.5 million at December 31, 2012.

23




FISCAL YEAR ENDED DECEMBER 31, 2013, COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2012

RESULTS OF OPERATIONS
 
Highlights for the year ended December 31, 2013, compared to 2012 (amounts in thousands):
 
2013
 
2012
 
% Increase
Net sales
$
2,163,595

 
$
1,820,678

 
19
%
Cost of sales
1,868,405

 
1,526,539

 
22
%
Gross profit
295,190

 
294,139

 
%
Gross profit percentage
13.6
%
 
16.2
%
 
 


Net Sales
Net sales for the year ended December 31, 2013, were $2,163.6 million compared to $1,820.7 million for the year ended December 31, 2012, an increase of 19%. Sales increased approximately 30% from the inclusion of recently acquired entities, including $484.3 million at Titan Europe. The increase in net sales was partially offset by a price/mix reduction which resulted largely from decreased raw material prices that were generally passed on to customers and decreased sales approximately 9%, and unfavorable currency translation which decreased sales by approximately 2%.

Cost of Sales and Gross Profit
Cost of sales was $1,868.4 million for the year ended December 31, 2013, as compared to $1,526.5 million in 2012.  The higher cost of sales resulted primarily from the increase in sales levels. The cost of sales increased 22%, compared to a 19% increase in net sales.

Gross profit for the year 2013 was $295.2 million, or 13.6% of net sales, compared to $294.1 million, or 16.2% of net sales for 2012.  Gross profit, as a percentage of net sales, decreased as a result of the Titan Europe acquisition and lower raw material costs that were passed on to customers before being fully realized by the Company. Increased warranty provisions relating to earthmoving tires also contributed to the decreased gross profit. Titan Europe provided gross profit of $65.4 million, or 11.4% of net sales. Titan Europe margins were negatively affected by decreased earthmoving/construction demand.

Selling, General and Administrative Expenses
Selling, general and administrative expenses were as follows (amounts in thousands):
 
2013
 
2012
 
% Increase
Selling, general and administrative
$
167,371

 
$
126,157

 
33
%
Percentage of net sales
7.7
%
 
6.9
%
 
 


Selling, general and administrative (SG&A) expenses were $167.4 million, or 7.7% of net sales, for the year ended December 31, 2013, as compared to $126.2 million, or 6.9% of net sales, for 2012.  The higher SG&A expenses were primarily the result of approximately $55 million of SG&A expenses at recently acquired facilities, partially offset by a decrease of incentive compensation of approximately $11 million. The increase in SG&A as a percentage of sales was primarily the result of higher SG&A percentages at recently acquired facilities.

Research and Development Expenses
Research and development expenses were as follows (amounts in thousands):
 
2013
 
2012
 
% Increase
Research and development
$
11,165

 
$
7,148

 
56
%
Percentage of net sales
0.5
%
 
0.4
%
 
 


Research and development (R&D) expenses were $11.2 million, or 0.5% of net sales, for the year ended December 31, 2013, as compared to $7.1 million, or 0.4% of net sales, for 2012. Approximately $5 million of R&D expenses of recently acquired facilities contributed to the increase.


24



Royalty Expense
Royalty expense was as follows (amounts in thousands):
 
2013
 
2012
 
% Increase
Royalty expense
$
14,259

 
$
12,260

 
16
%

The Company has a trademark license agreement with The Goodyear Tire & Rubber Company to manufacture and sell certain off-highway tires in North America and Latin America under the Goodyear name.  The North American and Latin American farm tire royalties were prepaid through March 2018 as a part of the 2011 Goodyear Latin American farm tire acquisition. In May 2012, the Company and Goodyear entered into an agreement under which Titan will sell certain non-farm tire products directly to third party customers and pay a royalty to Goodyear. Royalty expenses were $14.3 million for the year ended December 31, 2013, as compared to $12.3 million in 2012. As sales subject to the license agreement increased in 2013, the Company's royalty expense increased accordingly.  

Supply Agreement Termination Income
Supply agreement termination income was as follows (amounts in thousands):
 
2013
 
2012
 
% Decrease
Supply agreement termination income
$

 
$
26,134

 
(100
)%

The Company's April 2011 acquisition of Goodyear's farm tire business included a three year supply agreement with Goodyear for certain non-farm tire products. A liability was recorded as the supply agreement was for sales at below market prices. In May 2012, the Company and Goodyear terminated this supply agreement and entered into an agreement under which Titan will sell these products directly to third party customers and pay a royalty to Goodyear. The remaining balance of the supply agreement liability was recorded as income as the Company is no longer obligated to sell the products at below market prices.

Income from Operations
Income from operations was as follows (amounts in thousands):
 
2013
 
2012
 
% Decrease
Income from operations
$
102,395

 
$
174,708

 
(41
)%
Percentage of net sales
4.7
%
 
9.6
%
 
 


Income from operations for the year ended December 31, 2013, was $102.4 million, or 4.7% of net sales, compared to $174.7 million, or 9.6% of net sales, in 2012.  This decrease was the net result of the items previously discussed above.

Interest Expense
Interest expense was as follows (amounts in thousands):
 
2013
 
2012
 
% Increase
Interest expense
$
47,120

 
$
27,658

 
70
%

Interest expense for the year 2013 was $47.1 million compared to $27.7 million in 2012.  The Company’s interest expense for 2013 increased from the previous year primarily as a result of approximately $9 million of interest for the additional 7.875% senior secured notes issued in the first quarter of 2013 and approximately $6 million of interest for the 6.875% senior secured notes issued in the fourth quarter of 2013. Interest expense for the first ten months of 2013 at the recently acquired Titan Europe of approximately $8 million also contributed to the increase.


25



Convertible Debt Conversion Charge
Convertible debt conversion charge was as follows (amounts in thousands):
 
2013
 
2012
 
% Increase
Convertible debt conversion charge
$
7,273

 
$

 
n/a
 
In the first quarter of 2013, the Company closed an Exchange Agreement with a note holder of the convertible notes. The two parties privately negotiated an agreement to exchange approximately $52.7 million in aggregate principal amount of the convertible notes for approximately 4.9 million shares of the Company's common stock plus a cash payment totaling $14.2 million. In connection with this exchange, the Company recognized a charge of $7.3 million in accordance with accounting standards for debt conversion.

Loss on Senior Note Repurchase
Loss on senior note repurchase (amounts in thousands):
 
2013
 
2012
 
% Increase
Loss on senior note repurchase
$
22,734

 
$

 
n/a
 
In the fourth quarter of 2013, Titan satisfied and discharged the indenture relating to the 7.875% senior secured notes due October 2017 (senior secured notes due 2017) by completing a tender offer settlement and redemption of all of its outstanding $525 million principal amount of the notes, including $325 million issued in 2013. In connection with this tender offer and redemption, the Company recorded expenses of $22.7 million. These expenses were related to early tender premium of $25.0 million, redemption premium of $8.1 million, unamortized deferred financing fees of $7.3 million, and other fees of $0.2 million, offset by unamortized premium on the notes of $(17.9) million.

Noncash Titan Europe Gain
Noncash Titan Europe gain was as follows (amounts in thousands):
 
2013
 
2012
 
% Decrease
Noncash Titan Europe gain
$

 
$
26,700

 
(100
)%
 
In the fourth quarter of 2012, the Company acquired Titan Europe. Prior to the acquisition, Titan held a 21.8% ownership percentage in Titan Europe, which had a fair value on the acquisition date of $31.7 million. As a result of recording the fair value of the investment on the acquisition date, a gain of $26.7 million was recorded on Titan's previously held interest in Titan Europe.

Gain on Earthquake Insurance Recovery
Gain on earthquake insurance recovery (amounts in thousands):
 
2013
 
2012
 
% Increase
Gain on earthquake insurance recovery
$
22,451

 
$

 
n/a
 
Titan Europe's wheel manufacturing facility in Finale Emilia, Italy experienced damage from an earthquake in May of 2012 prior to Titan's acquisition of Titan Europe.  The plant was closed for production during initial remedial work. This resulted in a limited transfer of production to other facilities within Titan Europe as well as sourcing product from facilities in the U.S. owned by Titan and competitors.  In the second quarter of 2013, Titan received a final insurance settlement payment of $38.7 million, which offset the earthquake insurance receivable and resulted in a gain of $22.5 million.


26



Gain on acquisition
Gain on acquisition was as follows (amounts in thousands):
 
2013
 
2012
 
% Decrease
Gain on acquisition
$

 
$
11,678

 
(100
)%
 
In the second quarter of 2013, Titan received a final insurance settlement payment regarding an earthquake Titan Europe's wheel manufacturing facility in Finale Emilia, Italy experienced in May 2012, prior to Titan's acquisition of Titan Europe. As a result of this information, the purchase price allocation of the Titan Europe acquisition has changed from that reported in the Form 10-K for the year ended December 31, 2012, and the 10-Q for the quarter ended March 31, 2013, and Titan has recorded a bargain purchase gain of $11.7 million for the year ended December 31, 2012.

Other Income
Other income was as follows (amounts in thousands):
 
2013
 
2012
 
% Increase
Other income
$
7,015

 
$
6,823

 
3
%

Other income was $7.0 million for the year ended December 31, 2013, as compared to $6.8 million in 2012.  The major items included in 2013 were:  (i) discount amortization on prepaid royalty of $3.3 million; (ii) interest income of $3.4 million; (iii) Wheels India Limited equity gain of $1.4 million; (iv) investment gain related to contractual obligation of $1.3 million; and (iv) rental income of $0.8 million.

The major items included in 2012 were:  (i) discount amortization on prepaid royalty of $3.7 million; (ii) investment gain related to contractual obligation of $1.0 million; (iii) interest income of $0.9 million; and (iv) rental income of $0.7 million.

Provision for Income Taxes
Provision for income taxes was as follows (amounts in thousands):
 
2013
 
2012
 
% Decrease
Provision for income taxes
$
25,047

 
$
86,613

 
(71
)%

The Company recorded provision for income taxes of $25.0 million in 2013, as compared to $86.6 million in 2012.   The Company's effective tax rate was 46% in 2013 and 45% in 2012. The Company's 2013 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 a change in Italian law making the insurance proceeds from the earthquake non-taxable. In addition, as a result of the reassessment of the realizability of the deferred tax assets due to the Italian law change, a valuation allowance was established on the Italy net deferred tax assets. Other items contributing to the rate difference are state income tax expense, unrecognized tax benefits, foreign earnings, domestic production activities deduction, and tax deductible expenses related to the convertible bond repurchase. The Company's 2012 income tax expense and rate differs from the amount of income tax determined by applying the U.S. Federal rate to pre-tax income primarily as a result of incremental foreign taxes, state income tax, unrecognized tax benefits, the Domestic Production exemption and the write off of the deferred tax asset related to the Titan Europe investment.
 
Net Income
Net income was as follows (amounts in thousands):
 
2013
 
2012
 
% Decrease
Net income
$
29,687

 
$
105,638

 
(72
)%

Net income for the year ended December 31, 2013, was $29.7 million, compared to $105.6 million in 2012. Basic earnings per share was $.66 for the year ended December 31, 2013 as compared to $2.47 in 2012. Diluted earnings per share was $.64 for the year ended December 31, 2013 as compared to $2.05 in 2012. The Company's net income and earnings per share were lower due to the items previously discussed.


27



Agricultural Segment Results
Agricultural segment results were as follows (amounts in thousands):
 
2013
 
2012
 
% Increase (Decrease)
Net sales
$
1,182,187

 
$
1,080,412

 
9
 %
Gross profit
198,910

 
206,376

 
(4
)%
Income from operations
151,841

 
178,587

 
(15
)%

Net sales in the agricultural market were $1,182.2 million for the year ended December 31, 2013, as compared to $1,080.4 million in 2012, an increase of 9%. Sales increased approximately 15% from the inclusion of recently acquired entities. Sales volume was approximately 5% higher as the result of increased demand in the Company's agricultural segment. The increase in net sales was partially offset by a price/mix reduction which resulted largely from decreased raw material costs passed through to customers that decreased sales approximately 9%, and unfavorable currency translation which decreased sales by approximately 2%.

Gross profit in the agricultural market was $198.9 million for the year 2013, as compared to $206.4 million in 2012.  Income from operations in the agricultural market was $151.8 million for the year 2013, as compared to $178.6 million in 2012.  The Company's gross profit, as a percentage of net sales, and income from operations decreased as a result of the Titan Europe acquisition and lower raw material costs that were passed on to customers before being fully realized by the Company. Titan Europe provided gross profit of $19.0 million, or 11.2% of net sales.

Earthmoving/Construction Segment Results
Earthmoving/construction segment results were as follows (amounts in thousands):
 
2013
 
2012
 
% Increase (Decrease)
Net sales
$
749,115

 
$
501,617

 
49
 %
Gross profit
83,358

 
74,348

 
12
 %
Income from operations
22,008

 
47,310

 
(53
)%

The Company's earthmoving/construction market net sales were $749.1 million for the year ended December 31, 2013, as compared to $501.6 million in 2012, an increase of 49%. Sales increased approximately 73% from the inclusion of recently acquired entities, primarily Titan Europe which recorded earthmoving/construction sales of $332.3 million in the first ten months of 2013. The increase in net sales was partially offset by weakened demand which contributed to a 17% decrease in sales volume, and a price/mix reduction which resulted largely from decreased demand for larger products used in the mining industry that decreased sales approximately 7%.

Gross profit in the earthmoving/construction market was $83.4 million for the year 2013, as compared to gross profit of $74.3 million in 2012. The Company's earthmoving/construction market income from operations was $22.0 million for the year 2013, as compared to $47.3 million in 2012. Gross profit and income from operations were negatively affected by decreased demand in the earthmoving/construction segment and increased warranty provisions relating to super giant mining tires.


28



Consumer Segment Results
Consumer segment results were as follows (amounts in thousands):
 
2013
 
2012
 
% Decrease
Net sales
$
232,293

 
$
238,649

 
(3
)%
Gross profit
15,542

 
16,366

 
(5
)%
Income from operations
1,630

 
32,243

 
(95
)%

Consumer market net sales were $232.3 million for the year ended December 31, 2013, as compared to $238.6 million in 2012, a decrease of 3%.  

Gross profit from the consumer market was $15.5 million in 2013 as compared to $16.4 million in 2012.  Consumer market income from operations was $1.6 million for the year 2013, as compared to $32.2 million in 2012.  The Company's decrease in income from operations was primarily the result of the supply agreement termination income of $26.1 million recorded in the second quarter of 2012.

Segment Summary
(Amounts in thousands)
 
2013
 
Agricultural
 
Earthmoving/
Construction
 
Consumer
 
Corporate
 Expenses
 
Consolidated
 Totals
Net sales
 
$
1,182,187

 
$
749,115

 
$
232,293

 
$

 
$
2,163,595

Gross profit (loss)
 
198,910

 
83,358

 
15,542

 
(2,620
)
 
295,190

Income (loss) from operations
 
151,841

 
22,008

 
1,630

 
(73,084
)
 
102,395

2012
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
1,080,412

 
501,617

 
$
238,649

 
$

 
$
1,820,678

Gross profit (loss)
 
206,376

 
74,348

 
16,366

 
(2,951
)
 
294,139

Income (loss) from operations
 
178,587

 
47,310

 
32,243

 
(83,432
)
 
174,708


Corporate Expenses
Income from operations on a segment basis does not include corporate expenses totaling $73.1 million for the year ended December 31, 2013, as compared to $83.4 million in 2012.

Corporate expenses for the year ended December 31, 2013, were composed of selling and marketing expenses of approximately $32 million and administrative expenses of approximately $41 million.

Corporate expenses for the year ended December 31, 2012, were composed of selling and marketing expenses of approximately $31 million and administrative expenses of approximately $52 million.

Corporate selling & marketing expenses were approximately $1 million higher in 2013 primarily due to increased information technology expenses.  Corporate administrative expenses were approximately $11 million lower in 2013, when compared to 2012.  Corporate administrative expenses were lower primarily due to a decrease in incentive compensation of approximately $11 million.

29




FISCAL YEAR ENDED DECEMBER 31, 2012, COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2011

RESULTS OF OPERATIONS
 
Highlights for the year ended December 31, 2012, compared to 2011 (amounts in thousands):
 
2012
 
2011
 
% Increase
Net sales
$
1,820,678

 
$
1,486,998

 
22
%
Cost of sales
1,526,539

 
1,254,890

 
22
%
Gross profit
294,139

 
232,108

 
27
%
Gross profit percentage
16.2
%
 
15.6
%
 
 


Net Sales
Net sales for the year ended December 31, 2012, were $1,820.7 million compared to $1,487.0 million for the year ended December 31, 2011, an increase of 22%. Sales increased approximately 15% from the inclusion of recently acquired entities. Sales volume was approximately 3% higher as the result of strong market conditions in the Company's agricultural and earthmoving/construction segments. Sales increased approximately 7% from price/mix improvements which resulted largely from increased raw material prices that were passed on to customers. The increase in net sales was partially offset by unfavorable foreign currency translation which decreased sales by approximately 3%.

Cost of Sales and Gross Profit
Cost of sales was $1,526.5 million for the year ended December 31, 2012, as compared to $1,254.9 million in 2011.  The higher cost of sales resulted primarily from the increase in sales levels. The cost of sales increased 22%, compared to a 22% increase in net sales.

Gross profit for the year 2012 was $294.1 million, or 16.2% of net sales, compared to $232.1 million, or 15.6% of net sales for 2011.  The increase in gross profit margin was primarily due to productivity gains on the higher sales volumes and select price increases on certain products that exceeded the increase in raw material costs, as well as sales mix changes to larger products that generally carry higher margins.

Selling, General and Administrative Expenses
Selling, general and administrative expenses were as follows (amounts in thousands):
 
2012
 
2011
 
% Increase
Selling, general and administrative
$
126,157

 
$
85,917

 
47
%
Percentage of net sales
6.9
%
 
5.8
%
 
 


Selling, general and administrative (SG&A) expenses were $126.2 million, or 6.9% of net sales, for the year ended December 31, 2012, as compared to $85.9 million, or 5.8% of net sales, for 2011.  The higher SG&A expenses were primarily the result of an increase of selling and marketing expenses related to the increased sales levels and increased information technology expenses, an increase in incentive compensation, and acquisition related costs. Selling and marketing expenses were approximately $9 million higher, primarily due to increased sales levels and increased information technology expenses. Incentive compensation increased approximately $10 million. Acquisition related costs were approximately $4 million in 2012. Approximately $20 million of SG&A expenses of recently acquired facilities also contributed to the increase. The increase in SG&A expenses were offset by a decrease of legal related costs and fees of $3 million.


30



Research and Development Expenses
Research and development expenses were as follows (amounts in thousands):
 
2012
 
2011
 
% Increase
Research and development
$
7,148

 
$
4,228

 
69
%
Percentage of net sales
0.4
%
 
0.3
%
 
 


Research and development (R&D) expenses were $7.1 million, or 0.4% of net sales, for the year ended December 31, 2012, as compared to $4.2 million, or 0.3% of net sales, for 2011. The Company's higher R&D costs primarily resulted from increased R&D related to agricultural products. Approximately $1 million of R&D expenses of recently acquired facilities also contributed to the increase.

Royalty Expense
Royalty expense was as follows (amounts in thousands):
 
2012
 
2011
 
% Increase
Royalty expense
$
12,260

 
$
9,790

 
25
%

The Company has a trademark license agreement with The Goodyear Tire & Rubber Company to manufacture and sell certain off-highway tires in North America and Latin America under the Goodyear name.  The North American and Latin American royalties were prepaid through March 2018 as a part of the 2011 Goodyear Latin American farm tire acquisition. In May 2012, the Company and Goodyear entered into an agreement under which Titan will sell certain non-farm tire products directly to third party customers and pay a royalty to Goodyear. Royalty expenses were $12.3 million for the year ended December 31, 2012, as compared to $9.8 million in 2011. As sales subject to the license agreement increased in 2012, the Company's royalty expense increased accordingly.  

Supply Agreement Termination Income
Supply agreement termination income was as follows (amounts in thousands):
 
2012
 
2011
 
% Increase
Supply agreement termination income
$
26,134

 
$

 
n/a

The Company's April 2011 acquisition of Goodyear's farm tire business included a three year supply agreement with Goodyear for certain non-farm tire products. A liability was recorded as the supply agreement was for sales at below market prices. In May 2012, the Company and Goodyear terminated this supply agreement and entered into an agreement under which Titan will sell these products directly to third party customers and pay a royalty to Goodyear. The remaining balance of the supply agreement liability was recorded as income as the Company is no longer obligated to sell the products at below market prices.

Income from Operations
Income from operations was as follows (amounts in thousands):
 
2012
 
2011
 
% Increase
Income from operations
$
174,708

 
$
132,173

 
32
%
Percentage of net sales
9.6
%
 
8.8
%
 
 


Income from operations for the year ended December 31, 2012, was $174.7 million, or 9.6% of net sales, compared to $132.2 million, or 8.8% of net sales, in 2011.  This increase was the net result of the items previously discussed above.

Interest Expense
Interest expense was as follows (amounts in thousands):
 
2012
 
2011
 
% Increase
Interest expense
$
27,658

 
$
25,259

 
9
%

Interest expense for the year 2012 was $27.7 million compared to $25.3 million in 2011.  The Company’s interest expense for 2012 increased from the previous year primarily as a result of interest expense at the recently acquired Titan Europe.

31




Convertible Debt Conversion Charge
Convertible debt conversion charge was as follows (amounts in thousands):
 
2012
 
2011
 
% Decrease
Convertible debt conversion charge
$

 
$
16,135

 
(100
)%
 
In the first quarter of 2011, the Company closed an exchange agreement converting approximately $59.6 million of the 5.625% convertible senior subordinated notes into approximately 6.6 million shares of the Company's common stock. In connection with the exchange, the Company recognized a charge of $16.1 million in accordance with accounting standards for debt conversion.

Noncash Titan Europe Gain
Noncash Titan Europe gain was as follows (amounts in thousands):
 
2012
 
2011
 
% Increase
Noncash Titan Europe gain
$
26,700

 
$

 
n/a
 
In the fourth quarter of 2012, the Company acquired Titan Europe. Prior to the acquisition, Titan held a 21.8% ownership percentage in Titan Europe, which had a fair value on the acquisition date of $31.7 million. As a result of recording the fair value of the investment on the acquisition date, a gain of $26.7 million was recorded on Titan's previously held interest in Titan Europe.

Gain on acquisition
Gain on acquisition was as follows (amounts in thousands):
 
2012
 
2011
 
% Increase
Gain on acquisition
$
11,678

 
$
285

 
3,998
%
 
In the second quarter of 2013, Titan received a final insurance settlement payment regarding an earthquake Titan Europe's wheel manufacturing facility in Finale Emilia, Italy experienced in May 2012, prior to Titan's acquisition of Titan Europe. As a result of this information, the purchase price allocation of the Titan Europe acquisition has changed from that reported in the Form 10-K for the year ended December 31, 2012, and the 10-Q for the quarter ended March 31, 2013, and Titan has recorded a bargain purchase gain of $11.7 million for the year ended December 31, 2012.

Other Income
Other income was as follows (amounts in thousands):
 
2012
 
2011
 
% Increase
Other income
$
6,823

 
$
4,831

 
41
%

Other income was $6.8 million for the year ended December 31, 2012, as compared to $4.8 million in 2011.  The major items included in 2012 were:  (i) discount amortization on prepaid royalty of $3.7 million; (ii) investment gain related to contractual obligation of $1.0 million; (iii) interest income of $0.9 million: and (iv) rental income of $0.7 million.

The major items included in 2011 were:  (i) discount amortization on prepaid royalty of $3.1 million; and (ii) investment gain on marketable securities of $1.6 million.

Provision for Income Taxes
Provision for income taxes was as follows (amounts in thousands):
 
2012
 
2011
 
% Increase
Provision for income taxes
$
86,613

 
$
37,759

 
129
%


32



The Company recorded provision for income taxes of $86.6 million in 2012, as compared to $37.8 million in 2011.   The Company's effective tax rate was 45% in 2012 and 39% in 2011. The Company's 2012 income tax expense and rate differs from the amount of income tax determined by applying the U.S. Federal rate to pre-tax income primarily as a result of incremental foreign taxes, state income tax, unrecognized tax benefits, the Domestic Production exemption and the write off of the deferred tax asset related to the Titan Europe investment. The Company's 2011 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 $16.1 million noncash charge taken in connection with the exchange agreement on the Company's convertible debt. This noncash charge is not fully deductible for income tax purposes.
 
Net Income
Net income was as follows (amounts in thousands):
 
2012
 
2011
 
% Increase
Net income
$
105,638

 
$
58,136

 
82
%

Net income for the year ended December 31, 2012, was $105.6 million, compared to $58.1 million in 2011. Basic earnings per share was $2.47 for the year ended December 31, 2012 as compared to $1.40 in 2011. Diluted earnings per share was $2.05 for the year ended December 31, 2012 as compared to $1.18 in 2011. The Company's net income and earnings per share were higher due to the items previously discussed.

Agricultural Segment Results
Agricultural segment results were as follows (amounts in thousands):
 
2012
 
2011
 
% Increase
Net sales
$
1,080,412

 
$
960,693

 
12
%
Gross profit
206,376

 
177,055

 
17
%
Income from operations
178,587

 
158,295

 
13
%

Net sales in the agricultural market were $1,080.4 million for the year ended December 31, 2012, as compared to $960.7 million in 2011, an increase of 12%. Sales increased approximately 5% from the inclusion of recently acquired entities. Sales volume was approximately 5% higher as the result of increased demand in the Company's agricultural segment. Sales increased approximately 4% due to price/mix improvements which were offset by unfavorable currency translation which decreased sales by approximately 2%.

Gross profit in the agricultural market was $206.4 million for the year 2012, as compared to $177.1 million in 2011.  Income from operations in the agricultural market was $178.6 million for the year 2012, as compared to $158.3 million in 2011.  The Company's gross profit and income from operations increased primarily due to productivity gains on the higher sales volumes.

Earthmoving/Construction Segment Results
Earthmoving/construction segment results were as follows (amounts in thousands):
 
2012
 
2011
 
% Increase
Net sales
$
501,617

 
$
306,821

 
63
%
Gross profit
74,348

 
39,328

 
89
%
Income from operations
47,310

 
32,781

 
44
%

The Company's earthmoving/construction market net sales were $501.6 million for the year ended December 31, 2012, as compared to $306.8 million in 2011, an increase of 63%. Sales increased approximately 36% from the inclusion of recently acquired entities. Sales increased by approximately 26% as the result of price/mix improvements from stronger demand for larger products used in the mining industry. Sales volumes increased approximately 1% as a result of increased market demand.

Gross profit in the earthmoving/construction market was $74.3 million for the year 2012, as compared to gross profit of $39.3 million in 2011. The Company's earthmoving/construction market income from operations was $47.3 million for the year 2012, as compared to $32.8 million in 2011. The Company's gross profit and income from operations increased primarily due to productivity gains on the higher sales volumes and select price increases on certain products that exceeded the increase in raw material costs, as well as sales mix changes to larger products that generally carry higher margins.

33




Consumer Segment Results
Consumer segment results were as follows (amounts in thousands):
 
2012
 
2011
 
% Increase (Decrease)
Net sales
$
238,649

 
$
219,484

 
9
 %
Gross profit
16,366

 
18,900

 
(13
)%
Income from operations
32,243

 
11,104

 
190
 %

Consumer market net sales were $238.6 million for the year ended December 31, 2012, as compared to $219.5 million in 2011, an increase of 9%.  The increase in net sales was primarily the result of consumer product sales in Latin America. These sales were previously made under a supply agreement with Goodyear and are now being sold to the end customer after the May 2012 termination of the supply agreement with Goodyear. The twelve months ended December 31, 2012, included twelve months in sales for these products while the twelve months ended December 31, 2011, included only nine months due to the April 1, 2011 acquisition date.

Gross profit from the consumer market was $16.4 million in 2012 as compared to $18.9 million in 2011.  Consumer market income from operations was $32.2 million for the year 2012, as compared to $11.1 million in 2011.  The Company's increase in income from operations primarily resulted from the supply agreement termination income of $26.1 million.

Segment Summary
(Amounts in thousands)
 
2012
 
Agricultural
 
Earthmoving/
Construction
 
Consumer
 
Corporate
 Expenses
 
Consolidated
 Totals
Net sales
 
$
1,080,412

 
$
501,617

 
$
238,649

 
$

 
$
1,820,678

Gross profit (loss)
 
206,376

 
74,348

 
16,366

 
(2,951
)
 
294,139

Income (loss) from operations
 
178,587

 
47,310

 
32,243

 
(83,432
)
 
174,708

2011
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
960,693

 
306,821

 
$
219,484

 
$

 
$
1,486,998

Gross profit (loss)
 
177,055

 
39,328

 
18,900

 
(3,175
)
 
232,108

Income (loss) from operations
 
158,295

 
32,781

 
11,104

 
(70,007
)
 
132,173


Corporate Expenses
Income from operations on a segment basis does not include corporate expenses totaling $83.4 million for the year ended December 31, 2012, as compared to $70.0 million in 2011.

Corporate expenses for the year ended December 31, 2012, were composed of selling and marketing expenses of approximately $31 million and administrative expenses of approximately $52 million.

Corporate expenses for the year ended December 31, 2011, were composed of selling and marketing expenses of approximately $28 million and administrative expenses of approximately $42 million.

Corporate selling & marketing expenses were approximately $4 million higher in 2012 primarily due to increased information technology expenses.  Corporate administrative expenses were approximately $10 million higher in 2012, when compared to 2011.  Corporate administrative expenses were higher primarily due to an increase in incentive compensation of approximately $10 million and approximately $4 million of acquisition related costs, offset by a decrease of legal related costs and fees of $3 million.

34




LIQUIDITY AND CAPITAL RESOURCES

Cash Flows
As of December 31, 2013, the Company had $189.4 million of cash.  The cash balance increased by $0.2 million from December 31, 2012, due to the following items.
(amounts in thousands)
Year ended December 31,
 
 
 
2013
 
2012
 
Change
Cash
$
189,360

 
$
189,114

 
$
246


Operating Cash Flows
Summary of cash flows from operating activities:
(Amounts in thousands)
Year ended December 31,
 
 
 
2013
 
2012
 
Change
Net income
$
29,687

 
$
105,638

 
$
(75,951
)
Depreciation and amortization
80,622

 
54,095

 
26,527

Amortization of debt premium
(2,369
)
 

 
(2,369
)
Gain on acquisition

 
(11,678
)
 
11,678

Deferred income tax provision
(4,004
)
 
17,170

 
(21,174
)
Convertible debt conversion charge
7,273

 

 
7,273

Loss on note repurchase
22,734

 

 
22,734

Gain on earthquake insurance recovery
(22,451
)
 

 
(22,451
)
Insurance proceeds
35,808

 

 
35,808

Noncash Titan Europe gain

 
(26,700
)
 
26,700

Supply agreement termination income

 
(26,134
)
 
26,134

Accounts receivable
26,417

 
35,839

 
(9,422
)
Inventories
(30,280
)
 
23,917

 
(54,197
)
Accounts payable
9,479

 
(44,542
)
 
54,021

Other current liabilities
(556
)
 
7,839

 
(8,395
)
Other operating activities
(35,711
)
 
(5,276
)
 
(30,435
)
Cash provided by operating activities
$
116,649

 
$
130,168

 
$
(13,519
)
 
For the year ended December 31, 2013, operating activities provided cash of $116.6 million, which was $13.5 million less than the prior year, primarily due to changes in operational working capital. The major source of funds was net income of $29.7 million, adjusted for noncash provision of depreciation and amortization of $80.6 million. Insurance proceeds less gain on earthquake insurance recovery provided cash of $13.4 million. Positive cash inflows were offset by the loss on note repurchase of $22.7 million. The changes in operational working capital decreased cash flows by $34.8 million in 2013 compared to a decrease of $2.2 million in 2012. The 2013 working capital decrease was primarily due to an increase in prepaid and other current assets of $39.8 million. For additional details, see the Consolidated Statement of Cash Flows on page F-8.

For the year ended December 31, 2012, operating activities provided cash of $130.2 million, which was $125.7 million more than the prior year, primarily due to the net income increase of $47.5 million and changes in operational working capital. The major source of funds was net income of $105.6 million, adjusted for noncash provision of depreciation and amortization of $54.1 million. Positive cash inflows were offset by the noncash Titan Europe gain of $26.7 million, noncash supply agreement termination income of $26.1 million, and noncash gain on acquisition of $11.7 million. The changes in operational working capital decreased cash flows by $2.2 million in 2012 compared to a decrease of $109.3 million in 2011. The 2011 working capital decrease was primarily due to the acquisition of The Goodyear Tire & Rubber Company's Latin American farm tire business that did not include accounts receivable, and an increase in inventory due to sales growth in the business and increased raw material costs.


35



For the year ended December 31, 2011, operating activities provided cash of $4.4 million, which was $46.3 million less than the prior year, primarily due to changes in operational working capital. The major source of funds was net income of $58.1 million, adjusted for noncash provision of depreciation and amortization of $44.9 million, and the noncash convertible debt conversion charge of $16.1 million, all of which increased from the prior year. The changes in operational working capital decreased cash flows by $109.3 million in 2011 compared to an increase of $1.6 million in 2010, primarily due to the acquisition of The Goodyear Tire & Rubber Company's Latin American farm tire business that did not include accounts receivable, and an increase in inventory due to sales growth in the business and increased raw material costs.

The Company's inventory balance was higher at December 31, 2013, as compared to December 31, 2012. The Company's accounts receivable balance was lower at December 31, 2013, as compared to December 31, 2012. Days sales in inventory decreased to 74 days at December 31, 2013, compared to 86 days at December 31, 2012. Days sales outstanding decreased to 48 days at December 31, 2013, from 54 days at December 31, 2012.

Investing Cash Flows
Summary of cash flows from investing activities:
(Amounts in thousands)
Year ended December 31,
 
 
 
2013
 
2012
 
Change
Acquisitions
$
(95,681
)
 
$
780

 
$
(96,461
)
Additional equity investment in Wheels India
(8,017
)
 

 
(8,017
)
Increase in restricted cash deposits
(14,473
)
 

 
(14,473
)
Capital expenditures
(80,131
)
 
(65,740
)
 
(14,391
)
Other investing activities
5,223

 
1,066

 
4,157

Cash used for investing activities
$
(193,079
)
 
$
(63,894
)
 
$
(129,185
)
 
Net cash used for investing activities was $193.1 million in 2013, as compared to $63.9 million in 2012 and $130.8 million in 2011. The Company invested a total of $80.1 million in capital expenditures in 2013, compared to $65.7 million in 2012 and $35.7 million in 2011. In 2013, approximately $25 million of the capital expenditures related to recently acquired facilities, compared to $14 million in 2012. In 2011, approximately $9 million of the capital expenditures related to the purchase of land, buildings, and certain equipment at Goodyear's Union City, TN closed tire plant. The remaining capital expenditures of approximately $55 million in 2013, approximately $52 million in 2012, and approximately $27 million in 2011, represent various equipment purchases and improvements to enhance production capabilities of Titan’s existing business and maintaining existing equipment.

Cash used for investing increased $129.2 million from the year ended December 31, 2012, to December 31, 2013.  This increase in cash use was primarily the result of the acquisition of Voltyre-Prom for approximately $94 million. In 2012, common shares were issued to complete the Titan Europe acquisition.

Financing Cash Flows
Summary of cash flows from financing activities:
(Amounts in thousands)
Year ended December 31,
 
 
 
2013
 
2012
 
Change
Proceeds from borrowings
$
745,313

 
$
8,838

 
$
736,475

Repurchase of senior notes
(558,360
)
 

 
(558,360
)
Term loan borrowing
43,391

 
8,333

 
35,058

Convertible note conversion
(14,090
)
 

 
(14,090
)
Capital contribution from noncontrolling interest
79,592

 

 
79,592

Proceeds from exercise of stock options
1,001

 
934

 
67

Payment of financing fees
(12,332
)
 
(1,275
)
 
(11,057
)
Payment on debt
(200,721
)
 
(20,811
)
 
(179,910
)
Excess tax benefit from stock options exercised
(68
)
 
184

 
(252
)
Dividends paid
(1,046
)
 
(845
)
 
(201
)
Cash provided by (used for) financing activities
$
82,680

 
$
(4,642
)
 
$
87,322

 

36



Net cash provided by financing activities was $82.7 million in 2013.  This cash was primarily provided by proceeds from the issuance of $400.0 million of 6.875% senior secured notes due 2020 and $345.3 million of additional 7.875% senior secured notes due 2017, as well as capital contribution from noncontrolling interest of $79.6 million. These positive cash inflows were partially offset by the purchase and redemption of 7.875% senior secured notes due 2017 of $558.4 million, and payment on other debt of $200.7 million.

Net cash used for financing activities was $4.6 million in 2012.  The cash was primarily used for payment on term loan borrowings of $20.8 million, partially offset by proceeds from borrowings of $8.8 million and term loan borrowings of $8.3 million.

Net cash provided by financing activities was $16.4 million in 2011. The cash was primarily provided by term loan borrowings of $25.9 million used to provide working capital to Titan's Latin American operations. This was partially offset by payment of debt of $8.9 million.

Financing cash flows increased by $87.3 million when comparing 2013 to 2012.  Financing cash flows decreased by $21.0 million when comparing 2012 to 2011.  The changes from year to year are primarily the result of activity related to debt borrowings and payments.

Debt Restrictions
The Company’s revolving credit facility (credit facility) contains various restrictions, including:
Limits on dividends and repurchases of the Company’s stock.
Restrictions on the ability of the Company to make additional borrowings, or to consolidate, merge or otherwise fundamentally change the ownership of the Company.
Limitations on investments, dispositions of assets and guarantees of indebtedness.
Other customary affirmative and negative covenants.

These restrictions could limit the Company’s ability to respond to market conditions, to provide for unanticipated capital investments, to raise additional debt or equity capital, to pay dividends or to take advantage of business opportunities, including future acquisitions.  

Other Issues
The Company’s business is subject to seasonal variations in sales that affect inventory levels and accounts receivable balances.  Historically, Titan tends to have higher production levels in the first and second quarters.

LIQUIDITY OUTLOOK
At December 31, 2013, the Company had $189.4 million of cash and cash equivalents and no outstanding borrowings on the Company's $150 million credit facility. The cash and cash equivalents balance of $189.4 million includes $121.7 million held in foreign countries. The Company's current plans do not demonstrate a need to repatriate the foreign amounts to fund U.S. operations. However, if foreign funds were needed for U.S. operations, the Company would be required to accrue and pay taxes to repatriate the funds. Titan expects to contribute approximately $7 million to its defined benefit pension plans during 2014.

Capital expenditures for 2014 are forecasted to be approximately $50 million to $55 million. Cash payments for interest are currently forecasted to be approximately $31 million in 2014 based on the Company's year-end 2013 debt balances.

In the future, Titan may seek to grow by making acquisitions which will depend on the ability to identify suitable acquisition candidates, to negotiate acceptable terms for their acquisition and to finance those acquisitions.

Subject to the terms of indebtedness, the Company may finance future acquisitions with cash on hand, cash from operations, additional indebtedness and/or by issuing additional equity securities. Cash on hand, anticipated internal cash flows from operations and utilization of remaining available borrowings are expected to provide sufficient liquidity for working capital needs, capital expenditures and potential acquisitions.


37



INFLATION
The Company is subject to the effect of price fluctuations. While the cost outlook for commodities used in the Company’s production is not certain, management believes it can manage these inflationary pressures by introducing appropriate sales price adjustments and through contract provisions with OEMs.  However, these price adjustments may lag the inflationary pressures.

CONTRACTUAL OBLIGATIONS
The Company’s contractual obligations at December 31, 2013, consisted of the following (amounts in thousands):

 
 
Payments due by period
Contractual Obligations
 
Total
 
Less than  1 year
 
1-3 years
 
3-5 years
 
More than 5 years
6.875% senior secured notes due 2020
 
$
400,000

 
$

 
$

 
$

 
$
400,000

5.625% convertible senior subordinated notes due 2017
 
60,161

 

 

 
60,161

 

Other debt
 
110,241

 
74,043

 
30,170

 
3,421

 
2,607

Interest expense (a)
 
196,313

 
31,163

 
61,884

 
55,141

 
48,125

Operating leases
 
19,000

 
5,441

 
8,471

 
3,673

 
1,415

Capital leases
 
3,366

 
1,453

 
1,755

 
158

 

Purchase obligations
 
23,119

 
19,586

 
3,533

 

 

Other long-term liabilities (b)
 
39,200

 
9,000

 
17,900

 
12,300

 

Total
 
$
851,400

 
$
140,686

 
$
123,713

 
$
134,854

 
$
452,147

(a)
Interest expense is estimated based on the Company’s year-end 2013 debt balances, maturities and interest rates.  The estimates assume no credit facility borrowings.  The Company’s actual debt balances and interest rates may fluctuate in the future.  Therefore, actual interest payments may vary from those payments detailed in the above table.
(b)
Other long-term liabilities represent the Company’s estimated funding requirements for defined benefit pension plans. The Company’s liability for pensions is based on a number of assumptions, including discount rates, rates of return on investments, mortality rates and other factors.  Certain of these assumptions are determined with the assistance of outside actuaries.  Assumptions are based on past experience and anticipated future trends and are subject to a number of risks and uncertainties and may lead to significantly different pension liability funding requirements.

OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off-balance sheet arrangements.

MARKET RISK SENSITIVE INSTRUMENTS

Exchange Rate Sensitivity
The Company is exposed to fluctuations in the Australian dollar, Brazilian Real, British pound, Euro, Russian ruble and other world currencies.  Titan does not currently hedge foreign currency transaction or translation exposures.  The Company’s net investment in foreign entities translated into U.S. dollars was $476.4 million at December 31, 2013, and $290.3 million at December 31, 2012.  The hypothetical potential loss in value of the Company’s net investment in foreign entities resulting from a 10% adverse change in foreign currency exchange rates at December 31, 2013, would amount to approximately $47.6 million.

Commodity Price Sensitivity
The Company does not generally enter into long-term commodity contracts and does not use derivative commodity instruments to hedge its exposures to commodity market price fluctuations.  Therefore, the Company is exposed to price fluctuations of its key commodities, which consist primarily of steel, natural rubber, synthetic rubber and carbon black. The Company attempts to pass on certain material price increases and decreases to its customers, depending on market conditions.
 
Interest Rate Sensitivity
The Company has a $150 million credit facility that has a variable interest rate.  If the credit facility were fully drawn, a change in the interest rate of 100 basis points, or 1%, would change the Company’s interest expense by approximately $1.5 million.  At December 31, 2013, there were no borrowings under the credit facility.

38




MARKET CONDITIONS AND OUTLOOK
In 2013, Titan experienced higher sales when compared to 2012.  The higher sales levels were primarily the result of recent acquisitions including the August 2012 acquisition of Planet Group based in Perth, Australia, the October 2012 acquisition of Titan Europe, and the October 2013 acquisition of Voltyre-Prom based in Volgograd, Russia.

Energy, raw material and petroleum-based product costs have been volatile and may negatively impact the Company’s margins.  Many of Titan’s overhead expenses are fixed; therefore, lower seasonal trends may cause negative fluctuations in quarterly profit margins and affect the financial condition of the Company.

AGRICULTURAL MARKET OUTLOOK
Agricultural market sales were higher in 2013 when compared to 2012.  The Titan Europe and Voltyre-Prom acquisitions and continued strong demand contributed to the higher sales levels. The increase in the global population may help grow future demand.  The continued use of biofuels may help sustain future production.  Many variables, including weather, grain prices, export markets and future government policies and payments can greatly influence the overall health of the agricultural economy.
 
EARTHMOVING/CONSTRUCTION MARKET OUTLOOK
Earthmoving and mining sales were significantly higher in 2013 when compared to 2012. Recent acquisitions contributed to the higher sales. Although metals, oil and gas prices may fluctuate in the short-term, in the long-term, these prices are expected to remain at levels that are attractive for continued investment, which should help support future earthmoving and mining sales. The earthmoving/construction segment is affected by many variables, including commodity prices, road construction, infrastructure, government appropriations, housing starts and the on-going banking and credit issues.

CONSUMER MARKET OUTLOOK
Consumer market sales were slightly lower in 2013, when compared to 2012.  The decrease in net sales was primarily the result of unfavorable currency translation on consumer product sales in Latin America, partially offset by the inclusion of recently acquired entities.

PENSIONS
The Company has three frozen defined benefit pension plans covering certain employees or former employees of three U.S. subsidiaries. The Company also has pension plans covering certain employees of several foreign subsidiaries.  These plans are described in Note 27 of the Company’s Notes to Consolidated Financial Statements.

The Company’s recorded liability for pensions is based on a number of assumptions, including discount rates, rates of return on investments, mortality rates and other factors.  Certain of these assumptions are determined by the Company with the assistance of outside actuaries.  Assumptions are based on past experience and anticipated future trends.  These assumptions are reviewed on a regular basis and revised when appropriate.  Revisions in assumptions and actual results that differ from the assumptions affect future expenses, cash funding requirements and the carrying value of the related obligations.  During the year ended December 31, 2013, the Company contributed cash funds of $4.7 million to the pension plans.  Titan expects to contribute approximately $7 million to these pension plans during 2014.

Titan’s projected benefit obligation at December 31, 2013, was $123.2 million as compared to $139.1 million at December 31, 2012.  The Company’s defined benefit pension plans were underfunded by $39.2 million at December 31, 2013.  During 2013, the Company recorded net periodic pension expense of $6.1 million.  Accumulated other comprehensive loss recorded for defined benefit pension plans, net of tax, was $20.9 million and $35.7 million at December 31, 2013 and 2012, respectively.  Other comprehensive income (loss) is recorded as a direct charge to stockholders’ equity and does not affect net income.  Titan will be required to record net periodic pension cost in the future; these costs may fluctuate based upon revised assumptions and could negatively affect the Company’s financial position, cash flows and results of operations.


ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Reference is made to Item 7, Part II of this report.

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to Item 15, Part IV of this report, “Exhibits, Financial Statement Schedules.”
 

39



ITEM 9
– CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
The Company’s principal executive officer and principal financial officer have concluded the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective as of the end of the period covered by this Form 10-K based on an evaluation of the effectiveness of disclosure controls and procedures.


Management's Report on Internal Control Over Financial Reporting
Titan's management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed by, or under the supervision of, Titan's principal executive officer and principal financial officer, and effected by the Company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that:

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has performed an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2013, based on criteria described in the “1992 Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded the Company maintained effective internal control over financial reporting as of December 31, 2013. Management's evaluation of internal control over financial reporting does not include internal control over financial reporting of Voltyre-Prom, acquired October 4, 2013, whose financial statements reflect total assets and revenues constituting 8.8 and 0.6 percent, respectively of the related consolidated financial statement amounts as of and for the year ended December 31, 2013.

The effectiveness of the Company's internal control over financial reporting as of December 31, 2013, has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report which is presented in this Annual Report on Form 10-K.

Changes in Internal Controls Over Financial Reporting
There were no material changes in internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fourth quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
 

ITEM 9B – OTHER INFORMATION

None.


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PART III

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors
The information required by this item regarding the Company’s directors is incorporated by reference to the Company’s 2014 Proxy Statement under the captions “Election of Directors,” “Directors Continuing in Office,” “Committees and Meetings of the Board of Directors” and “Corporate Governance.”

Executive Officers
The names, ages and positions of all executive officers of the Company are listed below, followed by a brief account of their business experience during the past five years.  Officers are normally appointed annually by the Board of Directors at a meeting immediately following the Annual Meeting of Stockholders.  There is no arrangement or understanding between any officer and any other person pursuant to which an officer was selected.

Maurice M. Taylor Jr., 69, has been Chief Executive Officer and a Director of the Company since 1990, when Titan was acquired in a management-led buyout by investors, including Mr. Taylor.  Mr. Taylor served as President of the Company from 1990 to 2005 and was appointed Chairman in 2005.

Paul G. Reitz, 41, joined the Company in July 2010 as Chief Financial Officer.  Mr. Reitz was appointed President in February 2014. Before joining Titan, Mr. Reitz was chief accounting officer at Carmike Cinemas, Inc.

Michael G. Troyanovich, 56, joined the Company in August 2011 as Assistant General Counsel. Mr. Troyanovich was appointed Secretary in December 2012, and General Counsel in June 2013. Prior to joining Titan, Mr. Troyanovich was President of Kistner Troyanovich and Brady, P.C. from September 2001 until August 2011.

John R. Hrudicka, 50, joined the Company in February 2014 as Chief Financial Officer. Prior to joining Titan, Mr. Hrudicka had been at Elkay Manufacturing since 2006, joining as Vice President of Finance and becoming Chief Financial Officer in 2010.

Section 16(a) beneficial ownership reporting compliance
The information required by this item regarding beneficial ownership reporting compliance is incorporated by reference to the Company’s 2014 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”

Business conduct policy
The Company adopted a business conduct policy, which is applicable to directors, officers and employees.  The Company has also adopted corporate governance guidelines.  The business conduct policy and corporate governance guidelines are available under the investor information category of the Company’s website, www.titan-intl.com.  The Company intends to satisfy disclosure requirements regarding amendments to or waivers from its business conduct policy by posting such information on its website.  A printed copy of the business conduct policy and corporate governance guidelines are available, without charge, by writing to:  Titan International, Inc., c/o Corporate Secretary, 2701 Spruce Street, Quincy, IL 62301.
 

ITEM 11 – EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the Company’s 2014 Proxy Statement under the caption “Compensation of Executive Officers.”


41




ITEM 12– SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Except for the information concerning equity compensation plans, the information required by this item is incorporated by reference to the Company’s 2014 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.”

The following table provides information about shares of Titan common stock that may be issued under Titan’s equity compensation plans, as of December 31, 2013:

 
 
(i)
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
 
(ii)
Weighted-average exercise price of outstanding options, warrants and rights
 
(iii)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (i))
Equity compensation plans approved by security holders
 
1,154,069

(a)
 
18.18

 
1,770,734

Equity compensation plans not approved by security holders
 

 
 
   n/a

 

Total
 
1,154,069

 
 
18.18

 
1,770,734



(a)
Amount includes outstanding stock options under the Company’s 1994 Non-Employee Director Stock Option Plan and 2005 Equity Incentive Plan.
For additional information regarding the Company’s stock compensation plans, please see Note 28 of the Company’s Notes to Consolidated Financial Statements.
 

ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to the Company’s 2014 Proxy Statement under the caption “Related Party Transactions” and “Corporate Governance” and also appears in Note 32 of the Company’s Notes to Consolidated Financial Statements.
 

ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to the Company’s 2014 Proxy Statement under the caption “Audit and Other Fees.”


42



PART IV

ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)  1.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2

 
 
 
 
 
 
 
 
3

 

The accompanying Exhibit Index is incorporated herein by reference.

43



SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
TITAN INTERNATIONAL, INC.
 
(Registrant)