TWI 03.31.2014 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended: March 31, 2014
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12936

TITAN INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Illinois
 
36-3228472
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
2701 Spruce Street, Quincy, IL 62301
(Address of principal executive offices, including Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes  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 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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
 
Shares Outstanding at
Class
 
April 21, 2014
 
 
 
Common stock, no par value per share
 
53,586,904




TITAN INTERNATIONAL, INC.

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(All amounts in thousands, except per share data)
 
 
Three months ended
 
March 31,
 
2014
 
2013
Net sales
$
538,940

 
$
578,387

Cost of sales
484,390

 
481,636

Gross profit
54,550

 
96,751

Selling, general and administrative expenses
46,835

 
42,443

Research and development expenses
3,710

 
2,702

Royalty expense
3,741

 
3,723

Income from operations
264

 
47,883

Interest expense
(9,259
)
 
(10,441
)
Convertible debt conversion charge

 
(7,273
)
Other income
516

 
1,419

Income (loss) before income taxes
(8,479
)
 
31,588

Provision (benefit) for income taxes
(3,351
)
 
12,199

Net income (loss)
(5,128
)
 
19,389

Net loss attributable to noncontrolling interests
(7,291
)
 
(86
)
Net income attributable to Titan
$
2,163

 
$
19,475

 
 
 
 
Earnings per common share:
 

 
 

Basic
$
.04

 
$
.38

Diluted
$
.04

 
$
.34

Average common shares and equivalents outstanding:
 
 
 

Basic
53,470

 
51,816

Diluted
53,774

 
59,642

 
 
 
 
Dividends declared per common share:
$
.005

 
$
.005

 

 








See accompanying Notes to Consolidated Financial Statements.

1



TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(All amounts in thousands)

 
Three months ended
 
March 31,
 
2014
 
2013
Net income (loss)
$
(5,128
)
 
$
19,389

Unrealized loss on investments, net of tax of $0 and $0, respectively

 
(3
)
Currency translation adjustment, net
388

 
(196
)
Pension liability adjustments, net of tax of $383 and $527, respectively
717

 
951

Comprehensive income (loss)
(4,023
)
 
20,141

Net comprehensive gain (loss) attributable to noncontrolling interests
(12,183
)
 
9

Comprehensive income attributable to Titan
$
8,160

 
$
20,132



 
 
 
 
































See accompanying Notes to Consolidated Financial Statements.

2



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

 
March 31,
 
December 31,
Assets
2014
 
2013
Current assets
 
 
 
Cash and cash equivalents
$
200,094

 
$
189,360

  Restricted cash

 
14,268

  Accounts receivable, net
328,027

 
263,053

Inventories
394,550

 
384,920

Deferred income taxes
43,849

 
41,931

Prepaid and other current assets
86,346

 
114,346

Total current assets
1,052,866

 
1,007,878

Property, plant and equipment, net
628,807

 
638,807

Goodwill
41,269

 
42,075

Deferred income taxes
1,985

 
2,772

Other assets
133,571

 
129,699

Total assets
$
1,858,498

 
$
1,821,231

Liabilities and Equity
 

 
 

Current liabilities
 

 
 

Short-term debt
$
78,022

 
$
75,061

Accounts payable
213,464

 
176,719

Deferred income taxes
3,280

 
3,525

Other current liabilities
148,570

 
131,266

Total current liabilities
443,336

 
386,571

Long-term debt
498,774

 
497,694

Deferred income taxes
57,406

 
60,985

Other long-term liabilities
76,858

 
77,945

Total liabilities
1,076,374

 
1,023,195

Equity
 

 
 

Titan stockholders' equity


 


  Common stock (no par, 120,000,000 shares authorized, 55,253,092 issued)

 

Additional paid-in capital
559,575

 
558,637

Retained earnings
209,436

 
207,541

Treasury stock (at cost, 1,681,886 and 1,692,220 shares, respectively)
(15,494
)
 
(15,586
)
Treasury stock reserved for deferred compensation
(1,075
)
 
(1,075
)
Accumulated other comprehensive loss
(56,891
)
 
(61,794
)
Total Titan stockholders’ equity
695,551

 
687,723

Noncontrolling interests
86,573

 
110,313

Total equity
782,124

 
798,036

Total liabilities and equity
$
1,858,498

 
$
1,821,231

 





See accompanying Notes to Consolidated Financial Statements.

3



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


 
 Number of
common shares
 
Additional
paid-in
capital
 
Retained earnings
 
Treasury stock
 
Treasury stock
 reserved for
deferred compensation
 
Accumulated other comprehensive income (loss)
 
Total Titan Equity
 
Noncontrolling interest
 
Total Equity
Balance January 1, 2014
53,560,872

 
$
558,637

 
$
207,541

 
$
(15,586
)
 
$
(1,075
)
 
$
(61,794
)
 
$
687,723

 
$
110,313

 
$
798,036

Net income (loss)


 


 
2,163

 


 


 


 
2,163

 
(7,291
)
 
(5,128
)
Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
5,280

 
5,280

 
(4,892
)
 
388

Pension liability adjustments, net of tax


 


 


 


 


 
717

 
717

 
 
 
717

Dividends on common stock


 


 
(268
)
 


 


 


 
(268
)
 
 
 
(268
)
Exercise of stock options
1,300

 
9

 


 
11

 


 


 
20

 
 
 
20

Acquisition of additional interest


 
(25
)
 


 


 


 
(1,094
)
 
(1,119
)
 
(11,557
)
 
(12,676
)
Stock-based compensation


 
877

 


 


 


 


 
877

 
 
 
877

Tax benefit related to stock-based compensation


 
(2
)
 


 


 


 


 
(2
)
 
 
 
(2
)
Issuance of treasury stock under 401(k) plan
9,034

 
79

 


 
81

 


 


 
160

 
 
 
160

Balance March 31, 2014
53,571,206

 
$
559,575

 
$
209,436

 
$
(15,494
)
 
$
(1,075
)
 
$
(56,891
)
 
$
695,551

 
$
86,573

 
$
782,124

 
















See accompanying Notes to Consolidated Financial Statements.

4



TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(All amounts in thousands)
 
Three months ended March 31,
Cash flows from operating activities:
2014
 
2013
Net income (loss)
$
(5,128
)
 
$
19,389

Adjustments to reconcile net income to net cash
 

 
 

provided by operating activities:
 

 
 

Depreciation and amortization
23,275

 
19,984

Amortization of debt premium

 
(218
)
Deferred income tax provision
(4,912
)
 
37

Convertible debt conversion charge

 
7,273

Stock-based compensation
877

 
963

Excess tax benefit from stock options exercised
2

 
29

Issuance of treasury stock under 401(k) plan
160

 
154

(Increase) decrease in assets:
 

 
 

Accounts receivable
(61,482
)
 
(34,978
)
Inventories
(7,009
)
 
(16,310
)
Prepaid and other current assets
28,601

 
(870
)
Other assets
(4,856
)
 
1,330

Increase (decrease) in liabilities:
 

 
 

Accounts payable
34,038

 
33,902

Other current liabilities
16,141

 
(4,266
)
Other liabilities
(1,716
)
 
(5,139
)
Net cash provided by operating activities
17,991

 
21,280

Cash flows from investing activities:
 

 
 

Capital expenditures
(16,754
)
 
(21,174
)
Acquisition of additional interest
(12,676
)
 

Decrease in restricted cash deposits
14,188

 

Other
3,278

 
(219
)
Net cash used for investing activities
(11,964
)
 
(21,393
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings

 
345,313

Payment on debt
(4,248
)
 
(18,059
)
Term loan borrowing
6,945

 
10,818

Convertible note conversion

 
(14,090
)
Proceeds from exercise of stock options
20

 
739

Excess tax benefit from stock options exercised
(2
)
 
(29
)
Payment of financing fees
(33
)
 
(5,064
)
Dividends paid
(268
)
 
(243
)
Net cash provided by financing activities
2,414

 
319,385

Effect of exchange rate changes on cash
2,293

 
61

Net increase in cash and cash equivalents
10,734

 
319,333

Cash and cash equivalents, beginning of period
189,360

 
189,114

Cash and cash equivalents, end of period
$
200,094

 
$
508,447

 
 
 
 
Supplemental information:
 
 
 
Interest paid
$
2,553

 
$
15,535

Income taxes paid
$
4,508

 
$
10,003

Noncash investing and financing information:
 
 
 
Issuance of common stock for convertible debt payment
$

 
$
45,903


 See accompanying Notes to Consolidated Financial Statements.

1.
ACCOUNTING POLICIES

In the opinion of Titan International, Inc. (Titan or the Company), the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are normal and recurring in nature and necessary for a fair statement of the Company's financial position as of March 31, 2014, and the results of operations and cash flows for the three months ended March 31, 2014 and 2013.

Accounting policies have continued without significant change and are described in the Description of Business and Significant Accounting Policies contained in the Company's 2013 Annual Report on Form 10-K. These interim financial statements have been prepared pursuant to the Securities and Exchange Commission's rules for Form 10-Q's and, therefore, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2013 Annual Report on Form 10-K.

Sales
Sales and revenues are presented net of sales taxes and other related taxes.

Fair value of financial instruments
The Company records all financial instruments, including cash and cash equivalents, accounts receivable, notes receivable, accounts payable, other accruals and notes payable at cost, which approximates fair value due to their short term or stated rates.  Investments in marketable equity securities are recorded at fair value.  The 6.875% senior secured notes due 2020 (senior secured notes due 2020) and 5.625% convertible senior subordinated notes due 2017 (convertible notes) are carried at cost of $400.0 million and $60.2 million at March 31, 2014, respectively. The fair value of the senior secured notes due 2020 at March 31, 2014, as obtained through an independent pricing source, was approximately $424.0 million.

Cash dividends
The Company declared cash dividends of $.005 per share of common stock for each of the three months ended March 31, 2014, and 2013. The first quarter 2014 cash dividend of $.005 per share of common stock was paid April 15, 2014, to stockholders of record on March 31, 2014.

Use of estimates
The policies utilized by the Company in the preparation of the financial statements conform to accounting principles generally accepted in the United States of America and require management to make estimates, assumptions and judgments that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual amounts could differ from these estimates and assumptions.

Reclassification
Certain amounts from prior years have been reclassified to conform to the current year's presentation.

Subsequent Events
The Company has evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the date of issuance of the financial statements.

5



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


2. ACQUISITIONS

Acquisition 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. This acquisition expands Titan's footprint into the Commonwealth of Independent States (CIS) region. 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 the first quarter of 2014, the partnership of Titan, OEP, and RDIF purchased an additional 14% to bring the 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.

The purchase price allocation of the Voltyre-Prom acquisition consisted of the following (amounts in thousands):
 
Acquisition
 
Additional
 
 
 
Date
 
Purchases
 
Total
Cash
$
80

 
$

 
$
80

Accounts receivable
5,596

 

 
5,596

Inventories
3,807

 

 
3,807

Deferred income taxes - current asset
253

 

 
253

Prepaid & other current assets
1,881

 

 
1,881

Goodwill
21,002

 

 
21,002

Property, plant & equipment
79,255

 

 
79,255

Other assets
17,615

 

 
17,615

Accounts payable
(715
)
 

 
(715
)
Other current liabilities
(4,152
)
 

 
(4,152
)
Deferred income taxes - noncurrent liability
(15,989
)
 

 
(15,989
)
Noncontrolling interests
(14,542
)
 
12,676

 
(1,866
)
Net assets acquired
$
94,091

 
$
12,676

 
$
106,767



3. RESTRICTED CASH

Restricted cash consisted of the following (amounts in thousands):
 
March 31, 2014
 
December 31, 2013
Restricted cash
$

 
$
14,268


At December 31, 2013, the Company had restricted cash of $14.3 million. This restricted cash was on deposit for the purchase of the remaining 15% of Voltyre-Prom. In the first quarter of 2014, the partnership of Titan, OEP, and RDIF purchased an additional 14% to bring the total Voltyre-Prom ownership to 99%. See note 2 for additional information.



6



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

4. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following (amounts in thousands):
 
March 31,
2014
 
December 31,
2013
Accounts receivable
$
334,073

 
$
268,340

Allowance for doubtful accounts
(6,046
)
 
(5,287
)
Accounts receivable, net
$
328,027

 
$
263,053

 
Accounts receivable are reduced by an allowance for doubtful accounts which is based on historical losses.


5. INVENTORIES

Inventories consisted of the following (amounts in thousands):
 
March 31,
2014
 
December 31,
2013
Raw material
$
134,140

 
$
130,403

Work-in-process
53,465

 
54,190

Finished goods
214,530

 
208,821

 
402,135

 
393,414

Adjustment to LIFO basis
(7,585
)
 
(8,494
)
 
$
394,550

 
$
384,920

 
At March 31, 2014, approximately 13% of the Company's inventories were valued under the last-in, first-out (LIFO) method. At December 31, 2013, approximately 12% of the Company's inventories were valued under the LIFO method. The remaining inventories were valued under the first-in, first-out (FIFO) method or average cost method. All inventories are valued at lower of cost or market.


6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consisted of the following (amounts in thousands):
 
March 31,
2014
 
December 31, 2013
Land and improvements
$
67,953

 
$
67,243

Buildings and improvements
241,294

 
242,261

Machinery and equipment
614,014

 
617,709

Tools, dies and molds
113,882

 
112,997

Construction-in-process
49,735

 
42,539

 
1,086,878

 
1,082,749

Less accumulated depreciation
(458,071
)
 
(443,942
)
 
$
628,807

 
$
638,807

 
Depreciation on fixed assets for the three months ended March 31, 2014 and 2013, totaled $21.8 million and $19.0 million, respectively.


7



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

Included in the total building and improvements are capital leases of $4.7 million and $4.6 million at March 31, 2014, and December 31, 2013, respectively. Included in the total of machinery and equipment are capital leases of $40.0 million and $40.6 million at March 31, 2014, and December 31, 2013, respectively.


7. GOODWILL AND INTANGIBLE ASSETS

Changes in goodwill consisted of the following (amounts in thousands):
 
2014
 
2013
 
 
 
Earthmoving/
 
 
 
 
 
 
 
Earthmoving/
 
 
 
 
 
Agricultural
 
Construction
 
Consumer
 
 
 
Agricultural
 
Construction
 
Consumer
 
 
 
Segment
 
Segment
 
Segment
 
Total
 
Segment
 
Segment
 
Segment
 
Total
Goodwill, January 1
$
24,540

 
$
14,898

 
$
2,637

 
$
42,075

 
$
11,522

 
$
13,419

 
$

 
$
24,941

Foreign currency translation
(983
)
 
314

 
(137
)
 
(806
)
 
105

 
55

 

 
160

Goodwill, March 31
$
23,557

 
$
15,212

 
$
2,500

 
$
41,269

 
$
11,627

 
$
13,474

 
$

 
$
25,101

 
The Company reviews goodwill for impairment during the fourth quarter of each annual reporting period, and whenever events and circumstances indicate that the carrying values may not be recoverable.

The components of intangible assets consisted of the following (amounts in thousands):
 
Weighted- Average Useful Lives (in Years)
 
March 31,
2014
 
December 31, 2013
Amortizable intangible assets:
 
 
 
 
 
     Customer relationships
13.3
 
16,924

 
16,659

     Patents, trademarks and other
6.5
 
19,163

 
20,561

          Total at cost
 
 
36,087

 
37,220

     Less accumulated amortization
 
 
(5,253
)
 
(4,607
)
 
 
 
30,834

 
32,613

 
Amortization related to intangible assets for the three months ended March 31, 2014 and 2013, totaled $1.1 million and $0.6 million, respectively. Intangible assets are included as a component of other assets in the consolidated condensed balance sheet.

The estimated aggregate amortization expense at March 31, 2014, is as follows (amounts in thousands):
April 1 - December 31, 2014
$
3,329

2015
4,060

2016
3,243

2017
3,059

2018
3,059

Thereafter
14,084

 
$
30,834




8



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

8. WARRANTY

Changes in the warranty liability consisted of the following (amounts in thousands):
 
2014
 
2013
Warranty liability, January 1
$
33,134

 
$
27,482

Provision for warranty liabilities
5,320

 
7,946

Warranty payments made
(5,604
)
 
(7,625
)
Warranty liability, March 31
$
32,850

 
$
27,803


The Company provides limited warranties on workmanship of 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.  Warranty accruals are included as a component of other current liabilities on the Consolidated Condensed Balance Sheets.


9. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
 
Long-term debt consisted of the following (amounts in thousands):
 
March 31,
2014
 
December 31,
2013
6.875% senior secured notes due 2020
$
400,000

 
$
400,000

Other debt
73,393

 
67,541

5.625% convertible senior subordinated notes due 2017
60,161

 
60,161

European credit facilities
39,924

 
41,687

Capital leases
3,318

 
3,366

 
576,796

 
572,755

Less amounts due within one year
78,022

 
75,061

 
$
498,774

 
$
497,694

 
Aggregate maturities of long-term debt at March 31, 2014, were as follows (amounts in thousands):
April 1 - December 31, 2014
$
77,748

2015
13,917

2016
20,467

2017
1,560

2018
60,813

Thereafter
402,291

 
$
576,796

 
6.875% senior secured notes due 2020
The Company’s 6.875% senior secured notes (senior secured notes due 2020) are due October 2020. These notes are secured by the land and buildings of the following subsidiaries of the Company:  Titan Tire Corporation, Titan Tire Corporation of Bryan, Titan Tire Corporation of Freeport and Titan Wheel Corporation of Illinois. The Company's senior secured notes due 2020 outstanding balance was $400.0 million at March 31, 2014.


9



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

5.625% convertible senior subordinated notes due 2017
The Company’s 5.625% convertible senior subordinated notes (convertible notes) are due January 2017.   The initial base conversion rate for the convertible notes is 93.0016 shares of Titan common stock per $1,000 principal amount of convertible notes, equivalent to an initial base conversion price of approximately $10.75 per share of Titan common stock.  If the price of Titan common stock at the time of determination exceeds the base conversion price, the base conversion rate will be increased by an additional number of shares (up to 9.3002 shares of Titan common stock per $1,000 principal amount of convertible notes) as determined pursuant to a formula described in the indenture.  The base conversion rate will be subject to adjustment in certain events.  The Company’s convertible notes balance was $60.2 million at March 31, 2014.

Titan Europe credit facilities
The Titan Europe credit facilities contain borrowings from various institutions totaling $39.9 million at March 31, 2014. Maturity dates on this debt range from less than one year to eleven years and interest rates range from 5% to 6.9%. The European facilities are secured by the assets of select European subsidiaries.

Revolving credit facility
The Company’s $150 million revolving credit facility (credit facility) with agent Bank of America, N.A. has a December 2017 termination date and is collateralized by the accounts receivable and inventory of certain Titan domestic subsidiaries.  During the first three months of 2014 and at March 31, 2014, there were no borrowings under the credit facility.

Other debt
Brazil Revolving Line of Credit
The Company's wholly-owned Brazilian subsidiary, Titan Pneus Do Brasil Ltda (Titan Brazil), has a revolving line of credit (Brazil line of credit) established with Bank of America Merrill Lynch Banco Multiplo S.A. in May 2011. Titan Brazil could borrow up to 16.0 million Brazilian Reais, which equates to approximately $7.1 million dollars as of March 31, 2014, for working capital purposes. Under the terms of the Brazil line of credit, borrowings, if any, bear interest at a rate of 1 month LIBOR plus 247 basis points. During the first three months of 2014 and at March 31, 2014 there were no borrowings outstanding on this line of credit.

Brazil Other Debt
Titan Brazil has working capital loans for the Sao Paulo, Brazil manufacturing facility totaling $15.3 million at March 31, 2014.

Australia Capital Leases
Titan National Australia Holdings has capital leases totaling $1.3 million at March 31, 2014.

Titan Europe Other Debt
Titan Europe has overdraft facilities totaling $52.8 million at March 31, 2014.

Titan Europe Capital Leases
Titan Europe has capital lease obligations totaling $2.0 million at March 31, 2014.

Russia Other Debt
Voltyre-Prom has working capital loans for the Volgograd, Russia manufacturing facility totaling $5.3 million at March 31, 2014.



10



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

10. LEASE COMMITMENTS

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

At March 31, 2014, future minimum rental commitments under noncancellable operating leases with initial terms of at least one year were as follows (amounts in thousands):
April 1 - December 31, 2014
$
6,119

2015
6,043

2016
5,466

2017
3,602

2018
2,093

Thereafter
2,880

Total future minimum lease payments
$
26,203


At March 31, 2014, the Company had assets held as capital leases with a net book value of $8.1 million included in property, plant and equipment. Total future capital lease obligations relating to these leases are as follows (amounts in thousands):
April 1 - December 31, 2014
$
1,174

2015
1,091

2016
610

2017
302

2018
82

Thereafter
59

Total future capital lease obligation payments
3,318

Less amount representing interest
(108
)
Present value of future capital lease obligation payments
$
3,210



11. EMPLOYEE BENEFIT PLANS

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. The Company also sponsors four 401(k) retirement savings plans in the U.S. and a number of defined contribution plans at foreign subsidiaries. The Company contributed approximately $1.0 million to the pension plans during the three months ended March 31, 2014 and expects to contribute approximately $4.8 million to the pension plans during the remainder of 2014.

The components of net periodic pension cost consisted of the following (amounts in thousands):
 
Three months ended
 
March 31,
 
2014
 
2013
Service cost
$
197

 
$
172

Interest cost
1,408

 
1,355

Expected return on assets
(1,517
)
 
(1,396
)
Amortization of unrecognized prior service cost
34

 
34

Amortization of net unrecognized loss
758

 
1,318

      Net periodic pension cost
$
880

 
$
1,483



11



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


12. ROYALTY EXPENSE

The Company has a trademark license agreement with Goodyear 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 for seven years as 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 recorded were $3.7 million for each of the three months ended March 31, 2014 and 2013.


13. OTHER INCOME

Other income consisted of the following (amounts in thousands):
 
Three months ended
 
March 31,
 
2014
 
2013
Discount amortization on prepaid royalty
$
774

 
$
916

Other income
463

 
650

Wheels India Limited equity gain (loss)
418

 
(185
)
Interest income
352

 
401

Building rental income
206

 
180

Currency exchange loss
(1,697
)
 
(543
)
 
$
516

 
$
1,419


The Company's investment in Wheels India Limited decreased from 41.7% to 34.2% during the first quarter of 2014.


14. INCOME TAXES

The Company recorded income tax expense (benefit) of $(3.4) million and $12.2 million for the quarters ended March 31, 2014 and March 31, 2013, respectively. The Company's effective income tax rate was 40% and 39% for the three months ended March 31, 2014 and 2013, respectively.

The Company's 2014 income tax benefit 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 state income tax expense, unrecognized tax benefits, foreign earnings, and domestic production activities deduction.

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 state income tax expense, expense for unrecognized tax benefits, foreign earnings, domestic production activities deduction, and tax deductible expenses related to the convertible bond repurchase.



12



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

15. EARNINGS PER SHARE

Earnings per share (EPS) were as follows (amounts in thousands, except per share data):
 
Three months ended
 
March 31, 2014
 
March 31, 2013
 
Titan Net income
 
Weighted-
average shares
 
Per share
 amount
 
Titan Net income
 
Weighted-
average shares
 
Per share
 amount
Basic earnings per share
$
2,163

 
53,470

 
$
0.04

 
$
19,475

 
51,816

 
$
0.38

   Effect of stock options/trusts

 
304

 
 

 

 
299

 
 

   Effect of convertible notes

 

 
 
 
772

 
7,527

 
 
Diluted earnings per share
$
2,163

 
53,774

 
$
0.04

 
$
20,247

 
59,642

 
$
0.34

 
 
 
 
 
 
 
 
 
 
 
 
There were no stock options/trusts that were antidilutive for the periods presented.

The effect of convertible notes has been excluded for the three months ended March 31, 2014, as the effect would have been antidilutive. The weighted average share amount excluded was 5.8 million shares.


16. LITIGATION
 
The Company is a party to routine legal proceedings arising out of the normal course of business.  Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, the Company believes at this time that none of these actions, individually or in the aggregate, will have a material adverse effect on the 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.



13



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

17. SEGMENT INFORMATION

The table below presents information about certain revenues and income from operations used by the chief executive officer of the Company for the three months ended March 31, 2014 and 2013 (amounts in thousands):

Three months ended

March 31,
 
2014
 
2013
Revenues from external customers

 

Agricultural
$
317,166

 
$
310,553

Earthmoving/construction
152,940

 
209,616

Consumer
68,834

 
58,218

 
$
538,940

 
$
578,387

Gross profit
 
 
 
Agricultural
$
47,265

 
$
54,070

Earthmoving/construction
3,798

 
37,495

Consumer
4,082

 
6,147

Unallocated corporate
(595
)
 
(961
)
 
$
54,550

 
$
96,751

Income from operations
 
 
 
Agricultural
$
30,541

 
$
41,615

Earthmoving/construction
(11,094
)
 
20,679

Consumer
(1,560
)
 
3,142

Unallocated corporate
(17,623
)
 
(17,553
)
      Income from operations
264

 
47,883

 
 
 
 
Interest expense
(9,259
)
 
(10,441
)
Convertible debt conversion charge

 
(7,273
)
Other income, net
516

 
1,419

      Income (loss) before income taxes
$
(8,479
)
 
$
31,588


Assets by segment were as follows (amounts in thousands):
 
March 31,
2014
 
December 31,
2013
Total assets
 

 
 

Agricultural
$
790,842

 
$
725,032

Earthmoving/construction
703,131

 
749,564

Consumer
212,971

 
172,320

Unallocated corporate
151,554

 
174,315

 
$
1,858,498

 
$
1,821,231

 


14



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


18. FAIR VALUE MEASUREMENTS

Accounting standards for fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers are defined as:
 
Level 1 – Quoted prices in active markets for identical instruments.
Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Assets and liabilities measured at fair value on a recurring basis consisted of the following (amounts in thousands):
 
March 31, 2014
 
December 31, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Contractual obligation investments
$
8,686


$
8,686


$


$

 
$
8,723

 
$
8,723

 
$

 
$

Preferred stock
250

 

 

 
250

 
250

 

 

 
250

Derivative financial instruments liability
(90
)
 

 
(90
)
 

 
(126
)
 

 
(126
)
 

Total
$
8,846

 
$
8,686

 
$
(90
)
 
$
250

 
$
8,847

 
$
8,723

 
$
(126
)
 
$
250



The following table presents the changes during the periods presented in Titan's Level 3 investments that are measured at fair value on a recurring basis (amounts in thousands):
 
Preferred stock
Balance at December 31, 2013
$
250

  Total realized and unrealized gains and losses

Balance as of March 31, 2014
$
250



19. RELATED PARTY TRANSACTIONS

The Company sells products and pays commissions to companies controlled by persons related to the chief executive officer of the Company.  The related party is Mr. Fred Taylor and is Mr. Maurice Taylor’s brother.  The companies which Mr. Fred Taylor is associated with that do business with Titan include the following:  Blackstone OTR, LLC; FBT Enterprises; Green Carbon, INC; and OTR Wheel Engineering.  Sales of Titan products to these companies were approximately $0.6 million for each of the three months ended March 31, 2014 and 2013. Titan had trade receivables due from these companies of approximately $0.2 million at March 31, 2014, and December 31, 2013, respectively.  On other sales referred to Titan from the above manufacturing representative companies, commissions were approximately $0.7 million for each of the three months ended March 31, 2014 and 2013. Titan had purchases from these companies of approximately $0.7 million in the first quarter of 2014.

The Company has a 34.2% equity stake in Wheels India Limited, a company incorporated in India and listed on the National Stock Exchange in India. The Company had trade receivables due from Wheels India of approximately $0.6 million at March 31, 2014. The Company had trade payables due to Wheels India of approximately $0.3 million at December 31, 2013.



15



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

20. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) consisted of the following (amounts in thousands):

 
Currency
Translation
Adjustments
 
Unrecognized
Losses and
Prior Service
Cost
 
 
 
Total
Balance at January 1, 2014
$
(40,864
)
 
$
(20,930
)
 
$
(61,794
)
Other comprehensive income (loss) before
 
 
 
 
 
reclassifications
4,186

 

 
4,186

Reclassification adjustments:
 

 
 

 
 

Amortization of unrecognized losses and prior
 
 
 
 
 
  service cost, net of tax of $(383)

 
717

 
717

Balance at March 31, 2014
$
(36,678
)
 
$
(20,213
)
 
$
(56,891
)
 
 
 
 
 
 
 
 

21. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION

The Company's 6.875% senior secured notes due 2020 and 5.625% convertible senior subordinated notes are guaranteed by the following 100% owned subsidiaries of the Company: Titan Tire Corporation, Titan Tire Corporation of Bryan, Titan Tire Corporation of Freeport, and Titan Wheel Corporation of Illinois. The note guarantees are full and unconditional, joint and several obligations of the guarantors. The guarantees of the guarantor subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The following condensed consolidating financial statements are presented using the equity method of accounting. Certain sales & marketing expenses recorded by non-guarantor subsidiaries have not been allocated to the guarantor subsidiaries.

(Amounts in thousands)
Consolidating Condensed Statements of Operations
For the Three Months Ended March 31, 2014
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
263,958

 
$
274,982

 
$

 
$
538,940

Cost of sales
210

 
228,239

 
255,941

 

 
484,390

Gross profit (loss)
(210
)
 
35,719

 
19,041

 

 
54,550

Selling, general and administrative expenses
1,644

 
18,990

 
26,201

 

 
46,835

Research and development expenses

 
2,153

 
1,557

 

 
3,710

Royalty expense

 
1,848

 
1,893

 

 
3,741

Income (loss) from operations
(1,854
)
 
12,728

 
(10,610
)
 

 
264

Interest expense
(8,262
)
 

 
(997
)
 

 
(9,259
)
Intercompany interest income (expense)
1,684

 

 
(1,684
)
 

 

Other income (loss)
342

 
(55
)
 
229

 

 
516

Income (loss) before income taxes
(8,090
)
 
12,673

 
(13,062
)
 

 
(8,479
)
Provision (benefit) for income taxes
(6,040
)
 
4,810

 
(2,121
)
 

 
(3,351
)
Equity in earnings of subsidiaries
(3,078
)
 

 
(877
)
 
3,955

 

Net income (loss)
(5,128
)
 
7,863

 
(11,818
)
 
3,955

 
(5,128
)
Net loss noncontrolling interests

 

 
(7,291
)
 

 
(7,291
)
Net income (loss) attributable to Titan
$
(5,128
)
 
$
7,863

 
$
(4,527
)
 
$
3,955

 
$
2,163

 

16



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

(Amounts in thousands)
Consolidating Condensed Statements of Operations
For the Three Months Ended March 31, 2013
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
323,894

 
$
254,493

 
$

 
$
578,387

Cost of sales
390

 
256,226

 
225,020

 

 
481,636

Gross profit (loss)
(390
)
 
67,668

 
29,473

 

 
96,751

Selling, general and administrative expenses
2,317

 
17,824

 
22,302

 

 
42,443

Research and development expenses
10

 
1,313

 
1,379

 

 
2,702

Royalty expense

 
1,778

 
1,945

 

 
3,723

Income (loss) from operations
(2,717
)
 
46,753

 
3,847

 

 
47,883

Interest expense
(7,731
)
 

 
(2,710
)
 

 
(10,441
)
Convertible debt conversion charge
(7,273
)
 

 

 

 
(7,273
)
Intercompany interest income (expense)
497

 

 
(497
)
 

 

Other income
644

 
24

 
751

 

 
1,419

Income (loss) before income taxes
(16,580
)
 
46,777

 
1,391

 

 
31,588

Provision (benefit) for income taxes
(8,335
)
 
16,953

 
3,581

 

 
12,199

Equity in earnings of subsidiaries
27,634

 

 
18,632

 
(46,266
)
 

Net income (loss)
19,389

 
29,824

 
16,442

 
(46,266
)
 
19,389

Net loss noncontrolling interests

 

 
(86
)
 

 
(86
)
Net income (loss) attributable to Titan
$
19,389

 
$
29,824

 
$
16,528

 
$
(46,266
)
 
$
19,475


 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 

(Amounts in thousands)
Consolidating Condensed Statements of Comprehensive Income
For the Three Months Ended March 31, 2014
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
(5,128
)
 
$
7,863

 
$
(11,818
)
 
$
3,955

 
$
(5,128
)
Currency translation adjustment, net
388

 

 
388

 
(388
)
 
388

Pension liability adjustments, net of tax
717

 
450

 
267

 
(717
)
 
717

Comprehensive income (loss)
(4,023
)
 
8,313

 
(11,163
)
 
2,850

 
(4,023
)
Net comprehensive loss attributable to noncontrolling interests

 

 
(12,183
)
 

 
(12,183
)
Comprehensive income (loss) attributable to Titan
$
(4,023
)
 
$
8,313

 
$
1,020

 
$
2,850

 
$
8,160




17



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

(Amounts in thousands)
Consolidating Condensed Statements of Comprehensive Income
For the Three Months Ended March 31, 2013
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
19,389

 
$
29,824

 
$
16,442

 
$
(46,266
)
 
$
19,389

Unrealized gain (loss) on investments, net of tax
(3
)
 

 
(3
)
 
3

 
(3
)
Currency translation adjustment, net
(196
)
 

 
(196
)
 
196

 
(196
)
Pension liability adjustments, net of tax
951

 
781

 
170

 
(951
)
 
951

Comprehensive income (loss)
20,141

 
30,605

 
16,413

 
(47,018
)
 
20,141

Net comprehensive income attributable to noncontrolling interests

 

 
9

 

 
9

Comprehensive income (loss) attributable to Titan
$
20,141

 
$
30,605

 
$
16,404

 
$
(47,018
)
 
$
20,132


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(Amounts in thousands)
Consolidating Condensed Balance Sheets
March 31, 2014
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
90,826

 
$
9

 
$
109,259

 
$

 
$
200,094

Accounts receivable, net

 
126,645

 
201,382

 

 
328,027

Inventories

 
135,189

 
259,361

 

 
394,550

Prepaid and other current assets
49,175

 
15,830

 
65,190

 

 
130,195

Total current assets
140,001

 
277,673

 
635,192

 

 
1,052,866

Property, plant and equipment, net
9,968

 
201,228

 
417,611

 

 
628,807

Investment in subsidiaries
893,313

 

 
140,695

 
(1,034,008
)
 

Other assets
37,695

 
372

 
138,758

 

 
176,825

Total assets
$
1,080,977

 
$
479,273

 
$
1,332,256

 
$
(1,034,008
)
 
$
1,858,498

Liabilities and Stockholders’ Equity
 

 
 

 
 

 
 

 
 

Short-term debt
$

 
$

 
$
78,022

 
$

 
$
78,022

Accounts payable
820

 
19,182

 
193,462

 

 
213,464

Other current liabilities
28,117

 
56,925

 
66,808

 

 
151,850

Total current liabilities
28,937

 
76,107

 
338,292

 

 
443,336

Long-term debt
460,161

 

 
38,613

 

 
498,774

Other long-term liabilities
40,330

 
14,787

 
79,147

 

 
134,264

Intercompany accounts
(144,002
)
 
(126,832
)
 
270,834

 

 

Titan stockholders' equity
695,551

 
515,211

 
518,797

 
(1,034,008
)
 
695,551

Noncontrolling interests

 

 
86,573

 

 
86,573

Total liabilities and stockholders’ equity
$
1,080,977

 
$
479,273

 
$
1,332,256

 
$
(1,034,008
)
 
$
1,858,498




18



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

(Amounts in thousands)
Consolidating Condensed Balance Sheets
December 31, 2013
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
81,472

 
$
4

 
$
107,884

 
$

 
$
189,360

Restricted cash

 

 
14,268

 

 
14,268

Accounts receivable, net

 
89,259

 
173,794

 

 
263,053

Inventories

 
129,113

 
255,807

 

 
384,920

Prepaid and other current assets
80,876

 
20,416

 
54,985

 

 
156,277

Total current assets
162,348

 
238,792

 
606,738

 

 
1,007,878

Property, plant and equipment, net
9,885

 
206,928

 
421,994

 

 
638,807

Investment in subsidiaries
884,222

 

 
141,752

 
(1,025,974
)
 

Other assets
34,259

 
387

 
139,900

 

 
174,546

Total assets
$
1,090,714

 
$
446,107

 
$
1,310,384

 
$
(1,025,974
)
 
$
1,821,231

Liabilities and Stockholders’ Equity
 

 
 

 
 

 
 

 
 

Short-term debt
$


$


$
75,061


$

 
$
75,061

Accounts payable
368

 
12,525

 
163,826

 

 
176,719

Other current liabilities
15,278

 
58,001

 
61,512

 

 
134,791

Total current liabilities
15,646

 
70,526

 
300,399

 

 
386,571

Long-term debt
460,161

 

 
37,533

 

 
497,694

Other long-term liabilities
40,658

 
15,571

 
82,701

 

 
138,930

Intercompany accounts
(113,474
)
 
(147,529
)
 
261,003

 

 

Titan stockholders' equity
687,723

 
507,539

 
518,435

 
(1,025,974
)
 
687,723

Noncontrolling interests

 

 
110,313

 

 
110,313

Total liabilities and stockholders’ equity
$
1,090,714

 
$
446,107

 
$
1,310,384

 
$
(1,025,974
)
 
$
1,821,231


19