TWI 03.31.2015 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, 2015
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 20, 2015
 
 
 
Common stock, no par value per share
 
53,779,842




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,
 
2015

2014
Net sales
$
402,059

 
$
538,940

Cost of sales
359,265

 
484,390

Gross profit
42,794

 
54,550

Selling, general and administrative expenses
35,674

 
46,835

Research and development expenses
3,086

 
3,710

Royalty expense
3,225

 
3,741

Income from operations
809

 
264

Interest expense
(8,756
)
 
(9,259
)
Other income
8,283

 
516

Income (loss) before income taxes
336

 
(8,479
)
Provision (benefit) for income taxes
1,396

 
(3,351
)
Net loss
(1,060
)
 
(5,128
)
Net loss attributable to noncontrolling interests
(1,292
)
 
(7,291
)
Net income attributable to Titan
$
232

 
$
2,163

 
 
 
 
Earnings per common share:
 

 
 

Basic
$
.00

 
$
.04

Diluted
$
.00

 
$
.04

Average common shares and equivalents outstanding:
 
 
 

Basic
53,663

 
53,470

Diluted
53,817

 
53,774

 
 
 
 
Dividends declared per common share:
$
.005

 
$
.005

 

 











See accompanying Notes to Consolidated Financial Statements.

1



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

 
Three months ended
 
March 31,
 
2015
 
2014
Net loss
$
(1,060
)
 
$
(5,128
)
Currency translation adjustment, net
(45,386
)
 
388

Pension liability adjustments, net of tax of $(100) and $(383), respectively
9

 
717

Comprehensive loss
(46,437
)
 
(4,023
)
Net comprehensive loss attributable to noncontrolling interests
(3,013
)
 
(12,183
)
Comprehensive income (loss) attributable to Titan
$
(43,424
)
 
$
8,160



 
 
 
 



































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
2015
 
2014
Current assets
 
 
 
Cash and cash equivalents
$
190,551

 
$
201,451

  Accounts receivable, net
239,468

 
199,378

Inventories
307,318

 
331,432

Deferred income taxes
22,175

 
23,435

Prepaid and other current assets
74,092

 
80,234

Total current assets
833,604

 
835,930

Property, plant and equipment, net
482,593

 
527,414

Deferred income taxes
14,497

 
15,623

Other assets
111,781

 
116,757

Total assets
$
1,442,475

 
$
1,495,724

Liabilities and Equity
 

 
 

Current liabilities
 

 
 

Short-term debt
$
29,753

 
$
26,233

Accounts payable
152,923

 
146,305

Other current liabilities
134,409

 
129,018

Total current liabilities
317,085

 
301,556

Long-term debt
493,768

 
496,503

Deferred income taxes
5,148

 
18,582

Other long-term liabilities
83,089

 
89,025

Total liabilities
899,090

 
905,666

Equity
 

 
 

Titan stockholders' equity


 


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

 

Additional paid-in capital
562,317

 
562,367

Retained earnings
125,970

 
126,007

Treasury stock (at cost, 1,490,076 and 1,504,064 shares, respectively)
(13,772
)
 
(13,897
)
Treasury stock reserved for deferred compensation
(1,075
)
 
(1,075
)
Accumulated other comprehensive loss
(156,260
)
 
(112,630
)
Total Titan stockholders’ equity
517,180

 
560,772

Noncontrolling interests
26,205

 
29,286

Total equity
543,385

 
590,058

Total liabilities and equity
$
1,442,475

 
$
1,495,724

 








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, 2015
53,749,028

 
$
562,367

 
$
126,007

 
$
(13,897
)
 
$
(1,075
)
 
$
(112,630
)
 
$
560,772

 
$
29,286

 
$
590,058

Net income (loss)


 


 
232

 


 


 


 
232

 
(1,292
)
 
(1,060
)
Currency translation adjustment, net of tax
 
 
 
 
 
 
 
 
 
 
(43,665
)
 
(43,665
)
 
(1,721
)
 
(45,386
)
Pension liability adjustments, net of tax


 


 


 


 


 
9

 
9

 
 
 
9

Dividends on common stock


 


 
(269
)
 


 


 


 
(269
)
 
 
 
(269
)
Dissolution of subsidiary
 
 
 
 
 
 
 
 
 
 
26

 
26

 
(68
)
 
(42
)
Stock-based compensation


 
312

 


 


 


 


 
312

 
 
 
312

Tax benefit related to stock-based compensation


 
(388
)
 


 


 


 


 
(388
)
 
 
 
(388
)
Issuance of treasury stock under 401(k) plan
13,988

 
26

 


 
125

 


 


 
151

 
 
 
151

Balance March 31, 2015
53,763,016

 
$
562,317

 
$
125,970

 
$
(13,772
)
 
$
(1,075
)
 
$
(156,260
)
 
$
517,180

 
$
26,205

 
$
543,385

 



















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:
2015
 
2014
Net loss
$
(1,060
)
 
$
(5,128
)
Adjustments to reconcile net income (loss) to net cash
 

 
 

provided by operating activities:
 

 
 

Depreciation and amortization
18,480

 
23,275

Deferred income tax provision
(3,901
)
 
(4,912
)
Stock-based compensation
312

 
877

Excess tax benefit from stock-based compensation
388

 
2

Issuance of treasury stock under 401(k) plan
151

 
160

(Increase) decrease in assets:
 

 
 

Accounts receivable
(56,153
)
 
(61,482
)
Inventories
5,958

 
(7,009
)
Prepaid and other current assets
4,374

 
28,601

Other assets
2,516

 
(4,856
)
Increase (decrease) in liabilities:
 

 
 

Accounts payable
24,066

 
34,038

Other current liabilities
5,736

 
16,141

Other liabilities
(7,834
)
 
(1,716
)
Net cash provided by (used for) operating activities
(6,967
)
 
17,991

Cash flows from investing activities:
 

 
 

Capital expenditures
(11,419
)
 
(16,754
)
Acquisition of additional interest

 
(12,676
)
Decrease in restricted cash deposits

 
14,188

Other
2,334

 
3,278

Net cash used for investing activities
(9,085
)
 
(11,964
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
11,102

 
6,945

Payment on debt
(1,456
)
 
(4,248
)
Proceeds from exercise of stock options

 
20

Excess tax benefit from stock-based compensation
(388
)
 
(2
)
Payment of financing fees

 
(33
)
Dividends paid
(269
)
 
(268
)
Net cash provided by financing activities
8,989

 
2,414

Effect of exchange rate changes on cash
(3,837
)
 
2,293

Net increase (decrease) in cash and cash equivalents
(10,900
)
 
10,734

Cash and cash equivalents, beginning of period
201,451

 
189,360

Cash and cash equivalents, end of period
$
190,551

 
$
200,094

 
 
 
 
Supplemental information:
 
 
 
Interest paid
$
4,589

 
$
2,553

Income taxes paid, net of refunds received
$
(3,763
)
 
$
4,508













See accompanying Notes to Consolidated Financial Statements.

5



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


1.
ACCOUNTING POLICIES

In the opinion of Titan International, Inc. (Titan or the Company), the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are normal and recurring in nature and necessary for a fair statement of the Company's financial position as of March 31, 2015, and the results of operations and cash flows for the three months ended March 31, 2015 and 2014.

Accounting policies have continued without significant change and are described in the Description of Business and Significant Accounting Policies contained in the Company's 2014 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 2014 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, 2015, respectively. The fair value of the senior secured notes due 2020 at March 31, 2015, as obtained through an independent pricing source, was approximately $340.0 million.

Cash dividends
The Company declared cash dividends of $.005 per share of common stock for each of the three months ended March 31, 2015, and 2014. The first quarter 2015 cash dividend of $.005 per share of common stock was paid April 15, 2015, to stockholders of record on March 31, 2015.

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.

Recently Issued Accounting Standards
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs." This update amends existing guidance to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new accounting guidance will have on the Company's consolidated financial statements.


6



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


2. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following (amounts in thousands):
 
March 31,
2015
 
December 31,
2014
Accounts receivable
$
243,467

 
$
205,084

Allowance for doubtful accounts
(3,999
)
 
(5,706
)
Accounts receivable, net
$
239,468

 
$
199,378

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


3. INVENTORIES

Inventories consisted of the following (amounts in thousands):
 
March 31,
2015
 
December 31,
2014
Raw material
$
98,833

 
$
119,989

Work-in-process
41,218

 
41,073

Finished goods
177,563

 
179,998

 
317,614

 
341,060

Adjustment to LIFO basis
(10,296
)
 
(9,628
)
 
$
307,318

 
$
331,432

 
At March 31, 2015, approximately 10% of the Company's inventories were valued under the last-in, first-out (LIFO) method. At December 31, 2014, approximately 11% 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.


4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consisted of the following (amounts in thousands):
 
March 31,
2015
 
December 31, 2014
Land and improvements
$
52,382

 
$
60,012

Buildings and improvements
214,929

 
223,989

Machinery and equipment
575,342

 
585,318

Tools, dies and molds
98,022

 
103,353

Construction-in-process
33,299

 
38,653

 
973,974

 
1,011,325

Less accumulated depreciation
(491,381
)
 
(483,911
)
 
$
482,593

 
$
527,414

 
Depreciation on fixed assets for the three months ended March 31, 2015 and 2014, totaled $17.2 million and $21.8 million, respectively.


7



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

Included in the total building and improvements are capital leases of $3.7 million and $4.1 million at March 31, 2015, and December 31, 2014, respectively. Included in the total of machinery and equipment are capital leases of $33.7 million and $37.7 million at March 31, 2015, and December 31, 2014, respectively.


5. GOODWILL AND INTANGIBLE ASSETS

Changes in goodwill consisted of the following (amounts in thousands):
 
2015
 
2014
 
 
 
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

Foreign currency translation

 

 

 

 
(983
)
 
314

 
(137
)
 
(806
)
Goodwill, March 31
$

 
$

 
$

 
$

 
$
23,557

 
$
15,212

 
$
2,500

 
$
41,269

 
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. In the fourth quarter of 2014, the recoverability of all goodwill was evaluated by estimating future discounted cash flows. The Company recorded a noncash charge for the impairment of goodwill in the amount of $36.6 million on both a pre-tax and after-tax basis. The charge included $11.4 million of earthmoving/construction goodwill related to the acquisition of Titan Australia; $9.6 million of agricultural goodwill related to the acquisition of the Latin America farm tire business; and $15.6 million of goodwill related to the acquisition of Voltyre-Prom. The Voltyre-Prom goodwill included $11.0 million in the agricultural segment, $2.6 million in the earthmoving/construction segment, and $2.0 million in the consumer segment.

The components of intangible assets consisted of the following (amounts in thousands):
 
Weighted- Average Useful Lives (in Years)
 
March 31,
2015
 
December 31, 2014
Amortizable intangible assets:
 
 
 
 
 
     Customer relationships
12.3
 
14,118

 
14,958

     Patents, trademarks and other
8.6
 
15,580

 
15,907

          Total at cost
 
 
29,698

 
30,865

     Less accumulated amortization
 
 
(7,776
)
 
(7,176
)
 
 
 
21,922

 
23,689

 
Amortization related to intangible assets for the three months ended March 31, 2015 and 2014, totaled $0.9 million and $1.1 million, respectively. Intangible assets are included as a component of other assets in the consolidated condensed balance sheet.


8



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

The estimated aggregate amortization expense at March 31, 2015, is as follows (amounts in thousands):
April 1 - December 31, 2015
$
2,242

2016
2,411

2017
2,284

2018
2,272

2019
2,272

Thereafter
10,441

 
$
21,922



6. WARRANTY

Changes in the warranty liability consisted of the following (amounts in thousands):
 
2015
 
2014
Warranty liability, January 1
$
28,144

 
$
33,134

Provision for warranty liabilities
2,526

 
5,320

Warranty payments made
(3,914
)
 
(5,604
)
Warranty liability, March 31
$
26,756

 
$
32,850


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.


7. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
 
Long-term debt consisted of the following (amounts in thousands):
 
March 31,
2015
 
December 31,
2014
6.875% senior secured notes due 2020
$
400,000

 
$
400,000

5.625% convertible senior subordinated notes due 2017
60,161

 
60,161

Titan Europe credit facilities
46,697

 
42,291

Other debt
14,015

 
17,013

Capital leases
2,648

 
3,271

 
523,521

 
522,736

Less amounts due within one year
29,753

 
26,233

 
$
493,768

 
$
496,503

 
Aggregate maturities of long-term debt at March 31, 2015, were as follows (amounts in thousands):
April 1 - December 31, 2015
$
29,702

2016
27,361

2017
62,115

2018
1,070

2019
1,037

Thereafter
402,236

 
$
523,521


9



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

 
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, 2015.

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, 2015.

Titan Europe credit facilities
The Titan Europe credit facilities contain borrowings from various institutions totaling $46.7 million at March 31, 2015. Maturity dates on this debt range from less than one year to nine years and interest rates range from 5% to 6.9%. The Titan Europe facilities are secured by the assets of its subsidiaries in Italy, Spain, Germany and Brazil.

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.  Titan's availability under this domestic facility may be less than $150 million as a result of eligible accounts receivable and inventory balances at certain of its domestic subsidiaries. At March 31, 2015, the amount available was $106.0 million as a result of the Company's decrease in sales which impacted both accounts receivable and inventory balances. During the first three months of 2015 and at March 31, 2015, there were no borrowings under the credit facility.

Other Debt
Other debt is comprised of working capital loans for the Sao Paulo, Brazil manufacturing facility totaling $14.0 million at March 31, 2015.


8. DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses financial derivatives to mitigate its exposure to volatility in foreign currency exchange rates. These derivative financial instruments are recognized at fair value. The Company has not designated these financial instruments as hedging instruments. Any gain or loss on the re-measurement of the fair value is recorded as an offset to currency exchange gain/loss. For the three months ended March 31, 2015, the Company recorded currency exchange gain of $4.5 million related to these derivatives.



10



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

9. 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, 2015, 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, 2015
$
5,079

2016
5,863

2017
2,846

2018
2,108

2019
1,513

Thereafter
926

Total future minimum lease payments
$
18,335


At March 31, 2015, the Company had assets held as capital leases with a net book value of $9.5 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, 2015
$
1,094

2016
878

2017
436

2018
135

2019
101

Thereafter
4

Total future capital lease obligation payments
2,648

Less amount representing interest
(49
)
Present value of future capital lease obligation payments
$
2,599



10. 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 $1.1 million to the pension plans during the three months ended March 31, 2015 and expects to contribute approximately $3.6 million to the pension plans during the remainder of 2015.

The components of net periodic pension cost consisted of the following (amounts in thousands):
 
Three months ended
 
March 31,
 
2015
 
2014
Service cost
$
172

 
$
197

Interest cost
1,224

 
1,408

Expected return on assets
(1,519
)
 
(1,517
)
Amortization of unrecognized prior service cost
34

 
34

Amortization of net unrecognized loss
729

 
758

      Net periodic pension cost
$
640

 
$
880


11



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



11. VARIABLE INTEREST ENTITIES

The Company holds a variable interest in three joint ventures for which the Company is the primary beneficiary. Two of the joint ventures operate distribution facilities which primarily distribute mining products. One of these facilities is located in Canada and the other is located in Australia. The Company’s variable interest in these joint ventures relates to sales of Titan product to these entities, consigned inventory and working capital loans. The third joint venture is the consortium which owns Voltyre-Prom, a leading producer of agricultural and industrial tires in Volgograd, Russia. Titan is acting as operating partner with responsibility for Voltyre-Prom’s daily operations. The Company has also provided working capital loans to Voltyre-Prom.

As the primary beneficiary of these variable interest entities (VIEs), the entities’ assets, liabilities and results of operations are included in the Company’s consolidated financial statements. The other equity holders’ interests are reflected in “Net loss attributable to noncontrolling interests” in the consolidated condensed statements of operations and “Noncontrolling interests” in the consolidated condensed balance sheets.

The following table summarizes the carrying amount of the entities’ assets and liabilities included in the Company’s consolidated condensed balance sheets at March 31, 2015 and December 31, 2014 (amounts in thousands):
 
March 31,
2015
 
December 31, 2014
Cash and cash equivalents
$
1,100

 
$
8,861

Inventory
9,064

 
9,645

Other current assets
25,376

 
18,115

Property, plant and equipment, net
33,660

 
36,353

Other noncurrent assets
7,513

 
8,016

   Total assets
76,713

 
80,990

 
 
 
 
Current liabilities
13,365

 
11,659

Noncurrent liabilities
2,518

 
7,448

  Total liabilities
15,883

 
19,107


All assets in the above table can only be used to settle obligations of the consolidated VIE, to which the respective assets relate. Liabilities are nonrecourse obligations. Amounts presented in the table above are adjusted for intercompany eliminations.


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 $3.2 million and $3.7 million for the three months ended March 31, 2015 and 2014, respectively.



12



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

13. OTHER INCOME

Other income consisted of the following (amounts in thousands):
 
Three months ended
 
March 31,
 
2015
 
2014
Currency exchange gain (loss)
$
5,966

 
$
(1,697
)
Other income
865

 
463

Discount amortization on prepaid royalty
611

 
774

Interest income
608

 
352

Building rental income
240

 
206

Wheels India Limited equity income (loss)
(7
)
 
418

 
$
8,283

 
$
516



14. INCOME TAXES

The Company recorded income tax expense / (benefit) of $1.4 million and $(3.4) million for the quarters ended March 31, 2015 and March 31, 2014. The Company's effective income tax rate was 415% and 40% for the three months ended March 31, 2015 and 2014, respectively.

The Company's 2015 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 certain foreign jurisdictions that incurred a full valuation allowance on deferred tax assets created by current year projected losses and foreign income taxed in the U.S. offset by net discrete benefits related to a U.S. check the box election and tax law enactments. In addition, the Company's high effective tax rate is driven by a modest or almost break even consolidated pre-tax accounting income for the period.

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.


15. EARNINGS PER SHARE

Earnings per share (EPS) were as follows (amounts in thousands, except per share data):
 
Three months ended
 
March 31, 2015
 
March 31, 2014
 
Titan Net income
 
Weighted-
average shares
 
Per share
 amount
 
Titan Net income
 
Weighted-
average shares
 
Per share
 amount
Basic earnings per share
$
232

 
53,663

 
$
0.00

 
$
2,163

 
53,470

 
$
0.04

   Effect of stock options/trusts

 
154

 
 

 

 
304

 
 

Diluted earnings per share
$
232

 
53,817

 
$
0.00

 
$
2,163

 
53,774

 
$
0.04

 
 
 
 
 
 
 
 
 
 
 
 
The effect of convertible notes has been excluded for both of the three months ended March 31, 2015 and 2014, as the effect would have been antidilutive. The weighted average share amount excluded for convertible notes totaled 5.6 million shares and 5.8 million shares for the three months ended March 31, 2015 and 2014, respectively.



13



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

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.

17. SEGMENT INFORMATION

The table below presents information about certain operating results of segments as reviewed by the chief executive officer of the Company for the three months ended March 31, 2015 and 2014 (amounts in thousands):

Three months ended

March 31,
 
2015
 
2014
Revenues from external customers

 

Agricultural
$
213,001

 
$
317,166

Earthmoving/construction
142,484

 
152,940

Consumer
46,574

 
68,834

 
$
402,059

 
$
538,940

Gross profit
 
 
 
Agricultural
$
28,274

 
$
47,265

Earthmoving/construction
10,645

 
3,798

Consumer
4,148

 
4,082

Unallocated corporate
(273
)
 
(595
)
 
$
42,794

 
$
54,550

Income (loss) from operations
 
 
 
Agricultural
$
18,904

 
$
30,541

Earthmoving/construction
(1,862
)
 
(11,094
)
Consumer
(244
)
 
(1,560
)
Unallocated corporate
(15,989
)
 
(17,623
)
      Income from operations
809

 
264

 
 
 
 
Interest expense
(8,756
)
 
(9,259
)
Other income, net
8,283

 
516

      Income (loss) before income taxes
$
336

 
$
(8,479
)

Assets by segment were as follows (amounts in thousands):
 
March 31,
2015
 
December 31,
2014
Total assets
 

 
 

Agricultural
$
524,287

 
$
508,741

Earthmoving/construction
564,017

 
591,553

Consumer
147,619

 
175,475

Unallocated corporate
206,552

 
219,955

 
$
1,442,475

 
$
1,495,724

 

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, 2015
 
December 31, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Contractual obligation investments
$
10,087


$
10,087


$


$

 
$
9,840

 
$
9,840

 
$

 
$

Derivative financial instruments asset
5,583

 

 
5,583

 

 
1,068

 

 
1,068

 

Preferred stock
250

 

 

 
250

 
250

 

 

 
250

Derivative financial instruments liability
(30
)
 

 
(30
)
 

 
(43
)
 

 
(43
)
 

Total
$
15,890

 
$
10,087

 
$
5,553

 
$
250

 
$
11,115

 
$
9,840

 
$
1,025

 
$
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, 2014
$
250

  Total realized and unrealized gains and losses

Balance as of March 31, 2015
$
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, 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 $0.7 million and $0.6 million for the first quarter of 2015 and 2014, respectively. Titan had trade receivables due from these companies of approximately $0.4 million at March 31, 2015, and approximately $0.2 million at December 31, 2014.  On other sales referred to Titan from the above manufacturing representative companies, commissions were approximately $0.6 million and $0.7 million during the first quarter of 2015 and 2014, respectively. Titan had purchases from these companies of approximately $0.7 million for the three months ended March 31 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 payables due to Wheels India of approximately $0.0 million and $0.1 million at March 31, 2015, and December 31, 2014, respectively.



15



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

20. ACCUMULATED OTHER COMPREHENSIVE LOSS

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

 
Currency
Translation
Adjustments
 
Unrecognized
Losses and
Prior Service
Cost
 
 
 
Total
Balance at January 1, 2015
$
(86,571
)
 
$
(26,059
)
 
$
(112,630
)
Currency translation adjustments
(43,639
)
 

 
(43,639
)
Defined benefit pension plan entries:
 

 
 

 
 

Amortization of unrecognized losses and prior
 
 
 
 
 
  service cost, net of tax of $(100)

 
9

 
9

Balance at March 31, 2015
$
(130,210
)
 
$
(26,050
)
 
$
(156,260
)
 
 
 
 
 
 

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, 2015
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
193,973

 
$
208,086

 
$

 
$
402,059

Cost of sales
231

 
167,951

 
191,083

 

 
359,265

Gross profit (loss)
(231
)
 
26,022

 
17,003

 

 
42,794

Selling, general and administrative expenses
2,634

 
15,379

 
17,661

 

 
35,674

Research and development expenses

 
1,000

 
2,086

 

 
3,086

Royalty expense

 
1,924

 
1,301

 

 
3,225

Income (loss) from operations
(2,865
)
 
7,719

 
(4,045
)
 

 
809

Interest expense
(8,115
)
 

 
(641
)
 

 
(8,756
)
Intercompany interest income (expense)
142

 

 
(142
)
 

 

Other income (expense)
5,397

 
(379
)
 
3,265

 

 
8,283

Income (loss) before income taxes
(5,441
)
 
7,340

 
(1,563
)
 

 
336

Provision (benefit) for income taxes
2,389

 
2,693

 
(3,686
)
 

 
1,396

Equity in earnings of subsidiaries
6,770

 

 
(163
)
 
(6,607
)
 

Net income (loss)
(1,060
)
 
4,647

 
1,960

 
(6,607
)
 
(1,060
)
Net loss noncontrolling interests

 

 
(1,292
)
 

 
(1,292
)
Net income (loss) attributable to Titan
$
(1,060
)
 
$
4,647

 
$
3,252

 
$
(6,607
)
 
$
232

 


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, 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 (expense)
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Consolidating Condensed Statements of Comprehensive Income (Loss)
For the Three Months Ended March 31, 2015
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
(1,060
)
 
$
4,647

 
$
1,960

 
$
(6,607
)
 
$
(1,060
)
Currency translation adjustment, net
(45,386
)
 

 
(45,386
)
 
45,386

 
(45,386
)
Pension liability adjustments, net of tax
9

 
427

 
(418
)
 
(9
)
 
9

Comprehensive income (loss)
(46,437
)
 
5,074

 
(43,844
)
 
38,770

 
(46,437
)
Net comprehensive loss attributable to noncontrolling interests

 

 
(3,013
)
 

 
(3,013
)
Comprehensive income (loss) attributable to Titan
$
(46,437
)
 
$
5,074

 
$
(40,831
)
 
$
38,770

 
$
(43,424
)



17



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

(Amounts in thousands)
Consolidating Condensed Statements of Comprehensive Income (Loss)
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
Consolidating Condensed Balance Sheets
March 31, 2015
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
138,935

 
$
45

 
$
51,571

 
$

 
$
190,551

Accounts receivable, net

 
87,364

 
152,104

 

 
239,468

Inventories

 
102,542

 
204,776

 

 
307,318

Prepaid and other current assets
22,889

 
18,082

 
55,296

 

 
96,267

Total current assets
161,824

 
208,033

 
463,747

 

 
833,604

Property, plant and equipment, net
7,403

 
153,916

 
321,274

 

 
482,593

Investment in subsidiaries
705,156

 

 
110,226

 
(815,382
)
 

Other assets
50,522

 
1,227

 
74,529

 

 
126,278

Total assets
$
924,905

 
$
363,176

 
$
969,776

 
$
(815,382
)
 
$
1,442,475

Liabilities and Stockholders’ Equity
 

 
 

 
 

 
 

 
 

Short-term debt
$

 
$

 
$
29,753

 
$

 
$
29,753

Accounts payable
1,381

 
18,674

 
132,868

 

 
152,923

Other current liabilities
35,622

 
45,250

 
53,537

 

 
134,409

Total current liabilities
37,003

 
63,924

 
216,158

 

 
317,085

Long-term debt
460,161

 

 
33,607

 

 
493,768

Other long-term liabilities
11,765

 
19,892

 
56,580

 

 
88,237

Intercompany accounts
(101,204
)
 
(226,046
)
 
327,250

 

 

Titan stockholders' equity
517,180

 
505,406

 
309,976

 
(815,382
)
 
517,180

Noncontrolling interests

 

 
26,205

 

 
26,205

Total liabilities and stockholders’ equity
$
924,905

 
$
363,176

 
$
969,776

 
$
(815,382
)
 
$
1,442,475


18



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

(Amounts in thousands)
Consolidating Condensed Balance Sheets
December 31, 2014
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
129,985

 
$
4

 
$
71,462

 
$

 
$
201,451

Accounts receivable, net
(55
)
 
63,645

 
135,788

 

 
199,378

Inventories

 
103,230

 
228,202

 

 
331,432

Prepaid and other current assets
26,803

 
21,105

 
55,761

 

 
103,669

Total current assets
156,733

 
187,984

 
491,213

 

 
835,930

Property, plant and equipment, net
7,590

 
160,318

 
359,506

 

 
527,414

Investment in subsidiaries
745,084

 

 
109,768

 
(854,852
)
 

Other assets
51,381

 
827

 
80,172

 

 
132,380

Total assets
$
960,788

 
$
349,129

 
$
1,040,659

 
$
(854,852
)
 
$
1,495,724

Liabilities and Stockholders’ Equity
 

 
 

 
 

 
 

 
 

Short-term debt
$


$


$
26,233


$

 
$
26,233

Accounts payable
1,795

 
10,876

 
133,634

 

 
146,305

Other current liabilities
28,519

 
45,291

 
55,208

 

 
129,018

Total current liabilities
30,314

 
56,167

 
215,075

 

 
301,556

Long-term debt
460,161

 

 
36,342

 

 
496,503

Other long-term liabilities
15,244

 
20,867

 
71,496

 

 
107,607

Intercompany accounts
(105,703
)
 
(228,307
)
 
334,010

 

 

Titan stockholders' equity
560,772

 
500,402

 
354,450

 
(854,852
)
 
560,772

Noncontrolling interests

 

 
29,286

 

 
29,286

Total liabilities and stockholders’ equity
$
960,788

 
$
349,129

 
$
1,040,659

 
$
(854,852
)
 
$
1,495,724



(Amounts in thousands)
Consolidating Condensed Statements of Cash Flows
For the Three Months Ended March 31, 2015
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated
Net cash provided by (used for) operating activities
$
9,788

 
$
1,481

 
$
(18,236
)
 
$
(6,967
)
Cash flows from investing activities:
 

 
 

 
 

 
 

Capital expenditures
(181
)
 
(1,456
)
 
(9,782
)
 
(11,419
)
Other, net

 
16

 
2,318

 
2,334

Net cash used for investing activities
(181
)
 
(1,440
)
 
(7,464
)
 
(9,085
)
Cash flows from financing activities:
 

 
 

 
 

 
 

Proceeds from borrowings

 

 
11,102

 
11,102

Payment on debt

 

 
(1,456
)
 
(1,456
)
Excess tax benefit from stock-based compensation
(388
)
 

 

 
(388
)
Dividends paid
(269
)
 

 

 
(269
)
Net cash provided by (used for) financing activities
(657
)
 

 
9,646

 
8,989

Effect of exchange rate change on cash

 

 
(3,837
)
 
(3,837
)
Net increase (decrease) in cash and cash equivalents
8,950

 
41

 
(19,891
)
 
(10,900
)
Cash and cash equivalents, beginning of period
129,985

 
4

 
71,462

 
201,451

Cash and cash equivalents, end of period
$
138,935

 
$
45

 
$
51,571

 
$
190,551


19



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

 
(Amounts in thousands)
Consolidating Condensed Statements of Cash Flows
For the Three Months Ended March 31, 2014
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated
Net cash provided by operating activities
$
9,782

 
$
737

 
$
7,472

 
$
17,991

Cash flows from investing activities:
 

 
 

 
 

 
 

Capital expenditures
(120
)
 
(3,486
)
 
(13,148
)