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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
titancolora05.jpg

FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended: June 30, 2017
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)
Delaware
 
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, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer þ
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 

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

Indicate the number of shares of Titan International, Inc. outstanding: 59,700,839 shares common stock, $0.0001 par value, as of July 25, 2017.




TITAN INTERNATIONAL, INC.

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(All amounts in thousands, except per share data)
 
 
Three months ended

Six months ended
 
June 30,

June 30,
 
2017

2016

2017

2016
 
 
 
 
 
 
 
 
Net sales
$
364,399

 
$
330,214

 
$
721,900

 
$
652,008

Cost of sales
320,837

 
286,496

 
638,609

 
579,993

Gross profit
43,562

 
43,718

 
83,291

 
72,015

Selling, general and administrative expenses
34,463

 
36,302

 
75,801

 
71,364

Research and development expenses
2,608

 
2,714

 
5,451

 
5,193

Royalty expense
2,533

 
2,109

 
5,142

 
4,403

Income (loss) from operations
3,958

 
2,593

 
(3,103
)
 
(8,945
)
Interest expense
(7,320
)
 
(7,982
)
 
(15,041
)
 
(16,494
)
Foreign exchange gain (loss)
(5,257
)
 
2,182

 
(767
)
 
7,005

Other income
2,208

 
3,049

 
5,357

 
6,954

Loss before income taxes
(6,411
)
 
(158
)
 
(13,554
)
 
(11,480
)
Provision for income taxes
126

 
3,648

 
3,568

 
4,652

Net loss
(6,537
)
 
(3,806
)
 
(17,122
)
 
(16,132
)
Net income (loss) attributable to noncontrolling interests
(244
)
 
(550
)
 
624

 
(133
)
Net loss attributable to Titan
(6,293
)
 
(3,256
)
 
(17,746
)
 
(15,999
)
   Redemption value adjustment
(4,040
)
 
(1,900
)
 
(3,099
)
 
(7,108
)
Net loss applicable to common shareholders
$
(10,333
)
 
$
(5,156
)
 
$
(20,845
)
 
$
(23,107
)
 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
$
(0.17
)
 
$
(0.10
)
 
$
(0.35
)
 
$
(0.43
)
Diluted
$
(0.17
)
 
$
(0.10
)
 
$
(0.35
)
 
$
(0.43
)
Average common shares and equivalents outstanding:
 
 
 

 
 
 
 

Basic
59,557

 
53,884

 
59,067

 
53,869

Diluted
59,557

 
53,884

 
59,067

 
53,869

 
 
 
 
 
 
 
 
Dividends declared per common share:
$
0.005

 
$
0.005

 
$
0.010

 
$
0.010

 
 








See accompanying Notes to Condensed Consolidated Financial Statements.

1



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

 
Three months ended
 
June 30,
 
2017
 
2016
Net loss
$
(6,537
)
 
$
(3,806
)
Currency translation adjustment
8,006

 
4,346

Pension liability adjustments, net of tax of $(97) and $(133), respectively
989

 
448

Comprehensive income
2,458

 
988

Net comprehensive income (loss) attributable to redeemable and noncontrolling interests
(1,562
)
 
706

Comprehensive income attributable to Titan
$
4,020

 
$
282



 
Six months ended
 
June 30,
 
2017
 
2016
Net loss
$
(17,122
)
 
$
(16,132
)
Currency translation adjustment
19,025

 
21,931

Pension liability adjustments, net of tax of $(111) and $(304), respectively
1,722

 
735

Comprehensive income
3,625

 
6,534

Net comprehensive income attributable to redeemable and noncontrolling interests
1,221

 
6,106

Comprehensive income attributable to Titan
$
2,404

 
$
428



























See accompanying Notes to Condensed Consolidated Financial Statements.

2



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

 
June 30, 2017
 
December 31, 2016
 
 
 
(unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
143,236

 
$
147,827

  Certificates of deposit
10,000

 
50,000

  Accounts receivable, net
219,924

 
179,384

Inventories
323,491

 
272,236

Prepaid and other current assets
78,413

 
79,734

Total current assets
775,064

 
729,181

Property, plant and equipment, net
435,731

 
437,201

Deferred income taxes
8,265

 
4,663

Other assets
92,891

 
94,851

Total assets
$
1,311,951

 
$
1,265,896

 
 
 
 
Liabilities
 

 
 

Current liabilities
 

 
 

Short-term debt
$
42,563

 
$
97,412

Accounts payable
187,077

 
148,255

Other current liabilities
118,024

 
120,437

Total current liabilities
347,664

 
366,104

Long-term debt
408,789

 
408,760

Deferred income taxes
18,248

 
13,183

Other long-term liabilities
77,826

 
80,161

Total liabilities
852,527

 
868,208

 
 
 
 
Redeemable noncontrolling interest
108,839

 
104,809

 
 
 
 
Equity
 

 
 

Titan shareholders' equity


 


  Common stock ($0.0001 par value, 120,000,000 shares authorized, 60,715,356 issued, 59,657,340 outstanding)

 

Additional paid-in capital
535,436

 
479,075

Retained earnings (deficit)
(1,128
)
 
17,214

Treasury stock (at cost, 1,058,016 and 1,083,212 shares, respectively)
(9,893
)
 
(10,119
)
Stock reserved for deferred compensation
(1,075
)
 
(1,075
)
Accumulated other comprehensive loss
(168,128
)
 
(188,278
)
Total Titan shareholders’ equity
355,212

 
296,817

Noncontrolling interests
(4,627
)
 
(3,938
)
Total equity
350,585

 
292,879

Total liabilities and equity
$
1,311,951

 
$
1,265,896

 

See accompanying Notes to Condensed Consolidated Financial Statements.

3



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


 
 Number of
common shares
 
Additional
paid-in
capital
 
Retained earnings (deficit)
 
Treasury stock
 
Treasury stock
 reserved for
deferred compensation
 
Accumulated other comprehensive income (loss)
 
Total Titan Equity
 
 Noncontrolling interest
 
Total Equity
Balance January 1, 2017
54,169,880

 
$
479,075

 
$
17,214

 
$
(10,119
)
 
$
(1,075
)
 
$
(188,278
)
 
$
296,817

 
$
(3,938
)
 
$
292,879

Net income (loss) *


 


 
(17,746
)
 


 


 


 
(17,746
)
 
814

 
(16,932
)
Currency translation adjustment, net *
 
 
 
 
 
 
 
 
 
 
18,428

 
18,428

 
(524
)
 
17,904

Pension liability adjustments, net of tax


 


 


 


 


 
1,722

 
1,722

 
 
 
1,722

Dividends declared


 


 
(596
)
 


 


 


 
(596
)
 
 
 
(596
)
Note conversion
5,462,264

 
58,460

 
 
 
 
 
 
 
 
 
58,460

 
 
 
58,460

Redemption value adjustment


 
(3,099
)
 
 
 


 
 
 
 
 
(3,099
)
 
 
 
(3,099
)
Stock-based compensation


 
956

 


 


 


 


 
956

 
 
 
956

VIE distributions


 


 


 


 


 


 

 
(979
)
 
(979
)
Issuance of treasury stock under 401(k) plan
25,196

 
44

 


 
226

 


 


 
270

 
 
 
270

Balance June 30, 2017
59,657,340

 
$
535,436

 
$
(1,128
)
 
$
(9,893
)
 
$
(1,075
)
 
$
(168,128
)
 
$
355,212

 
$
(4,627
)
 
$
350,585

 
* Net income (loss) excludes $(190) of net loss attributable to redeemable noncontrolling interest. Currency translation adjustment excludes $1,121 of currency translation related to redeemable noncontrolling interest.
















See accompanying Notes to Condensed Consolidated Financial Statements.

4



TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(All amounts in thousands)
 
Six months ended June 30,
Cash flows from operating activities:
2017
 
2016
Net loss
$
(17,122
)
 
$
(16,132
)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
 

 
 

Depreciation and amortization
29,486

 
30,615

Deferred income tax provision
1,324

 
600

Stock-based compensation
956

 
931

Issuance of treasury stock under 401(k) plan
270

 
283

Foreign currency translation loss
2,467

 
6,740

(Increase) decrease in assets:
 

 
 

Accounts receivable
(34,879
)
 
(9,789
)
Inventories
(43,722
)
 
10,206

Prepaid and other current assets
2,877

 
(7,583
)
Other assets
3,620

 
(1,318
)
Increase (decrease) in liabilities:
 

 
 

Accounts payable
33,149

 
15,007

Other current liabilities
(4,922
)
 
3,523

Other liabilities
(4,057
)
 
(3,411
)
Net cash provided by (used for) operating activities
(30,553
)
 
29,672

Cash flows from investing activities:
 

 
 

Capital expenditures
(15,152
)
 
(18,050
)
Certificates of deposit
40,000

 

Other
1,038

 
1,294

Net cash provided by (used for) investing activities
25,886

 
(16,756
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
27,742

 
1,559

Payment on debt
(29,077
)
 
(10,248
)
Dividends paid
(570
)
 
(540
)
Net cash used for financing activities
(1,905
)
 
(9,229
)
Effect of exchange rate changes on cash
1,981

 
3,363

Net increase (decrease) in cash and cash equivalents
(4,591
)
 
7,050

Cash and cash equivalents, beginning of period
147,827

 
200,188

Cash and cash equivalents, end of period
$
143,236

 
$
207,238

 
 
 
 
Supplemental information:
 
 
 
Interest paid
$
17,916

 
$
16,510

Income taxes paid, net of refunds received
$
3,221

 
$
3,367

Noncash investing and financing information:
 
 
 
Issuance of common stock for convertible debt payment
$
58,460

 
$










See accompanying Notes to Condensed Consolidated Financial Statements.

5



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


1.
ACCOUNTING POLICIES
 
In the opinion of Titan International, Inc. (Titan or the Company), the accompanying unaudited condensed consolidated financial statements contain all adjustments which are normal, recurring, and necessary for a fair statement of the Company's financial position as of June 30, 2017, and the results of operations and cash flows for the three and six months ended June 30, 2017 and 2016.
Accounting policies have continued without significant change and are described in Note 1: Description of Business and Significant Accounting Policies contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. These interim financial statements have been prepared pursuant to the Securities and Exchange Commission's rules applicable to Form 10-Q 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 Annual Report on Form 10-K for the year ended December 31, 2016.
 
Inventories
Inventories are valued at the lower of cost or net realizable value. The Company’s inventories are valued under the first in, first out (FIFO) method or average cost method. Net realizable value is estimated based on current selling prices. Estimated provisions are established for slow-moving and obsolete inventory.

Prior to 2017, the Company used the last in, first out (LIFO) inventory cost method at its Titan Wheel Corporation of Illinois subsidiary. Effective January 1, 2017, the Company elected to change its method of inventory accounting at this subsidiary to the FIFO method. The Company believes that the FIFO method is preferable as it results in increased uniformity across the Company’s global operations with respect to the method of inventory accounting, as no other subsidiaries were using the LIFO method. The Company also believes that the switch to FIFO at Titan Wheel Corporation of Illinois will improve financial reporting by better reflecting the current value of inventory, more closely aligning the flow of physical inventory with the accounting for the inventory, and providing better matching of revenues and expenses. The Company applied this change in method of inventory accounting by retrospectively adjusting the prior period financial statements. The cumulative effect of this accounting change resulted in a $6.6 million increase in retained earnings as of January 1, 2016.

As a result of the retrospective adjustment of the change in accounting principle, certain amounts in the Company's Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016, were adjusted as follows:
 
Three Months Ended June 30, 2016
 
As originally reported
 
Effect of change
 
As adjusted
Cost of sales
$
285,139

 
$
1,357

 
$
286,496

Income (loss) from operations
3,950

 
(1,357
)
 
2,593

Net Loss
(2,449
)
 
(1,357
)
 
(3,806
)
 
 
 
 
 
 
Basic and diluted loss per share
$
(0.07
)
 
$
(0.03
)
 
$
(0.10
)

 
Six Months Ended June 30, 2016
 
As originally reported
 
Effect of change
 
As adjusted
Cost of sales
$
575,045

 
$
4,948

 
$
579,993

Loss from operations
(3,997
)
 
(4,948
)
 
(8,945
)
Net Loss
(11,184
)
 
(4,948
)
 
(16,132
)
 
 
 
 
 
 
Basic and diluted loss per share
$
(0.34
)
 
$
(0.09
)
 
$
(0.43
)

6



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

The Consolidated Balance Sheet at December 31, 2016, was adjusted as follows:
 
December 31, 2016
 
As originally reported
 
Effect of change
 
As adjusted
Inventories
$
269,291

 
$
2,945

 
$
272,236

Retained Earnings
14,269

 
2,945

 
17,214



Net sales
Sales are presented net of allowances, discounts, and sales and other related taxes.

Fair value of financial instruments
The Company records all financial instruments, including cash and cash equivalents, certificates of deposit, 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) were carried at cost of $396.3 million at June 30, 2017. The fair value of the senior secured notes at June 30, 2017, as obtained through an independent pricing source, was approximately $412.0 million.

Cash dividends
The Company declared cash dividends of $0.005 and $0.010 per share of common stock for each of the three and six months ended June 30, 2017 and 2016, respectively. The second quarter 2017 cash dividend of $0.005 per share of common stock was paid July 14, 2017, to shareholders of record on June 30, 2017.

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.

Recently issued accounting standards
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." This update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires disclosure about the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update were deferred by ASU No. 2015-14, "Revenue form Contracts with Customers (Topic 606) Deferral of Effective Date," and are now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is in the process of comparing its current revenue recognition policies to the requirements of ASU No. 2014-09. For the majority of Titan’s revenue arrangements, no significant impacts are expected as these transactions are not accounted for under industry-specific guidance that will be superseded by ASU No. 2014-09 and generally consist of a single performance obligation to transfer promised goods or services. While the Company has not identified any material differences in the amount and timing of revenue recognition related to ASU No. 2014-09, the evaluation is not complete and, accordingly, Titan has not yet reached a conclusion on the overall impacts of adopting ASU No. 2014-09. The guidance provides for adoption either retrospectively to each prior reporting period or as a cumulative-effect adjustment as of the date of adoption. The Company plans to make a determination as to its method of adoption once it more fully completes its evaluation of the impacts of the standard on its revenue recognition and it is better able to evaluate the cost-benefit of each method. The Company believes it is following an appropriate timeline to allow for proper recognition, presentation, and disclosure upon adoption in the year beginning on January 1, 2018.


7



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

In April 2016, the FASB issued ASU No. 2016-10, "Identifying Performance Obligations and Licensing." This ASU clarifies the following aspects of Topic 606: identifying performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, "Narrow-Scope Improvements and Practical Expedients." This ASU affects only narrow aspects of Topic 606 related to assessing the collectability criterion; presentation of sales tax; noncash consideration; and contract modifications and completed contracts at transition. The amendments in these updates affect the guidance in ASU No. 2014-09, as previously discussed above, and the effective dates are the same as those for ASU No. 2014-09.

In December 2016, the FASB issued ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers." The amendments in this update affect narrow aspects of the guidance issued in ASU No. 2014-09, as discussed above, and the effective dates are the same as those for ASU No. 2014-09.

In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This update addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This update was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including 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.

In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments." This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets other than Inventory." This update requires the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company adopted this guidance early, effective January 1, 2017. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." This update requires an employer to report the service cost component of defined benefit pension cost and postretirement benefit cost in the same line item of the income statement as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments in this update are effective for annual periods beginning after December 15, 2017, including interim periods within those years. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, "Scope of Modification Accounting." This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in accordance with Topic 718, Compensation-Stock Compensation. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.



8



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

2. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following as of the dates set forth below (amounts in thousands):
 
June 30,
2017
 
December 31,
2016
Accounts receivable
$
223,005

 
$
182,728

Allowance for doubtful accounts
(3,081
)
 
(3,344
)
Accounts receivable, net
$
219,924

 
$
179,384


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


3. INVENTORIES
 
Inventories consisted of the following as of the dates set forth below (amounts in thousands):
 
June 30,
2017
 
December 31,
2016
Raw material
$
85,667

 
$
76,380

Work-in-process
41,342

 
32,395

Finished goods
196,482

 
163,461

 
$
323,491

 
$
272,236


 
Inventories are valued at the lower of cost or net realizable value. Net realizable value is estimated based on current selling prices. Inventory costs are calculated using the first-in, first-out (FIFO) method or average cost method. Estimated provisions are established for slow-moving and obsolete inventory.


4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consisted of the following as of the dates set forth below (amounts in thousands):
 
June 30,
2017
 
December 31,
2016
Land and improvements
$
45,738

 
$
43,871

Buildings and improvements
255,002

 
239,036

Machinery and equipment
602,797

 
573,717

Tools, dies and molds
110,051

 
106,695

Construction-in-process
16,573

 
43,080

 
1,030,161

 
1,006,399

Less accumulated depreciation
(594,430
)
 
(569,198
)
 
$
435,731

 
$
437,201


 
Depreciation on fixed assets for the six months ended June 30, 2017 and 2016, totaled $27.4 million and $28.9 million, respectively.


9



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

Capital leases included in property, plant, and equipment consisted of the following as of the dates set forth below (amounts in thousands):
 
June 30,
2017
 
December 31,
2016
Buildings and improvements
$
3,870

 
$
3,565

Less accumulated amortization
(2,138
)
 
(1,923
)
 
$
1,732

 
$
1,642

 
 
 
 
Machinery and equipment
$
33,303

 
$
31,331

Less accumulated amortization
(27,957
)
 
(26,502
)
 
$
5,346

 
$
4,829




5. INTANGIBLE ASSETS

The components of intangible assets consisted of the following as of the dates set forth below (amounts in thousands):
 
Weighted Average Useful Lives (in Years) June 30, 2017
 
June 30,
2017
 
December 31,
2016
Amortizable intangible assets:
 
 
 
 
 
     Customer relationships
10.2
 
$
14,006

 
$
13,171

     Patents, trademarks and other
7.5
 
15,327

 
14,629

          Total at cost
 
 
29,333

 
27,800

     Less accumulated amortization
 
 
(13,090
)
 
(11,399
)
 
 
 
$
16,243

 
$
16,401


   
Amortization related to intangible assets for the six months ended June 30, 2017 and 2016, totaled $1.5 million and $1.1 million, respectively. Intangible assets are included as a component of other assets in the Condensed Consolidated Balance Sheet.

The estimated aggregate amortization expense at June 30, 2017, for each of the years (or other periods) set forth below is as follows (amounts in thousands):
July 1 - December 31, 2017
$
1,399

2018
2,237

2019
2,237

2020
2,237

2021
1,438

Thereafter
6,695

 
$
16,243





10



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

6. WARRANTY

Changes in the warranty liability consisted of the following (amounts in thousands):
 
2017
 
2016
Warranty liability, January 1
$
17,926

 
$
23,120

Provision for warranty liabilities
3,112

 
3,373

Warranty payments made
(3,378
)
 
(6,205
)
Warranty liability, June 30
$
17,660

 
$
20,288



The Company provides limited warranties on workmanship on its products in all market segments. The majority of the Company’s products are subject to a limited warranty that ranges between less than one year and ten years, with certain product warranties 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 Condensed Consolidated Balance Sheet.


7. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
 
Long-term debt consisted of the following as of the dates set forth below (amounts in thousands):
 
June 30, 2017
 
Principal Balance
 
Unamortized Discount
 
Net Carrying Amount
6.875% senior secured notes due 2020
$
400,000

 
$
(3,656
)
 
$
396,344

Titan Europe credit facilities
35,128

 

 
35,128

Other debt
19,248

 

 
19,248

Capital leases
632

 

 
632

     Total debt
455,008

 
(3,656
)
 
451,352

Less amounts due within one year
42,563

 

 
42,563

     Total long-term debt
$
412,445

 
$
(3,656
)
 
$
408,789


 
 
December 31, 2016
 
Principal Balance
 
Unamortized Discount
 
Net Carrying Amount
6.875% senior secured notes due 2020
$
400,000

 
$
(4,148
)
 
$
395,852

5.625% convertible senior subordinated notes due 2017
60,161

 
(13
)
 
60,148

Titan Europe credit facilities
33,710

 

 
33,710

Other debt
15,560

 

 
15,560

Capital leases
902

 

 
902

     Total debt
510,333

 
(4,161
)
 
506,172

Less amounts due within one year
97,425

 
(13
)
 
97,412

     Total long-term debt
$
412,908

 
$
(4,148
)
 
$
408,760




11



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

Aggregate principal maturities of long-term debt at June 30, 2017, were as follows (amounts in thousands):
July 1 - December 31, 2017
$
35,397

2018
9,791

2019
6,795

2020
402,327

2021
557

Thereafter
141

 
$
455,008


 
6.875% senior secured notes due 2020
The senior secured notes 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.

5.625% convertible senior subordinated notes due 2017
In January 2017, the Company converted 97.1% of the principal balance of its 5.625% convertible senior subordinated notes (2017 Notes), which matured on January 15, 2017, into shares of Titan common stock. Prior to maturity, $60.2 million in aggregate principal amount of the 2017 Notes was outstanding, of which holders of $58.5 million in aggregate principal amount of the 2017 Notes, or 97.1%, converted their 2017 Notes into shares of Titan common stock pursuant to the terms of the indenture governing the 2017 Notes. The $58.5 million in principal amount of converted 2017 Notes was converted into 5,462,264 shares of Titan common stock, representing approximately 10% of Titan’s outstanding common stock prior to conversion. Each $1,000 principal amount of the 2017 Notes was convertible into 93.436 shares of Titan common stock. The remaining $1.7 million principal amount of the 2017 Notes that was not converted was paid in cash at maturity.

Titan Europe credit facilities
The Titan Europe credit facilities contain borrowings from various institutions totaling $35.1 million at June 30, 2017. 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
In February 2017, the Company entered into a credit and security agreement with respect to a new $75 million revolving credit facility (credit facility) with agent BMO Harris Bank N.A. and other financial institutions party thereto. This credit facility replaced the Company's $150 million revolving credit facility which was previously scheduled to terminate in December 2017. The credit facility is collateralized by accounts receivable and inventory of certain of the Company’s domestic subsidiaries and includes a maturity of the earlier of five years or six months prior to maturity of the Company’s senior secured notes. Titan's availability under this credit facility may be less than $75 million as a result of outstanding letters of credit and eligible accounts receivable and inventory balances at certain of its domestic subsidiaries. At June 30, 2017, an outstanding letter of credit under the credit facility totaled $11.6 million and the amount available under the facility totaled $63.4 million based upon eligible accounts receivable and inventory balances. During the first six months of 2017 and at June 30, 2017, there were no borrowings under the credit facility.

Other debt
The Company has working capital loans at Titan Pneus do Brasil Ltda and Voltyre-Prom at various interest rates, which totaled $12.2 million and $7.1 million at June 30, 2017, respectively.


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 and six months ended June 30, 2017, the Company recorded currency exchange loss related to these derivatives of $0.2 million and $0.3 million, respectively.

12



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

9. REDEEMABLE NONCONTROLLING INTEREST

The Company, in partnership with One Equity Partners (OEP) and the Russian Direct Investment Fund (RDIF), owns all of the equity interests in Voltyre-Prom, a leading producer of agricultural and industrial tires in Volgograd, Russia. The Company is party to a shareholders' agreement with OEP and RDIF which was entered into in connection with the acquisition of Voltyre-Prom. The agreement contains a settlement put option which is exercisable beginning in July 2018 through December of 2018 and may require Titan to purchase the indirect equity interests in Voltyre-Prom of OEP and RDIF with cash or Titan common stock, at a value set by the agreement. The value set by the agreement is the greater of: (i) the aggregate of the investment of the selling party and an amount representing an internal rate of return of 8%; or (ii) the last twelve months of EBITDA times 5.5 less net debt times the ownership percentage. The value of the redeemable noncontrolling interest held by OEP and RDIF has been recorded at the aggregate of the investment of the selling party and an amount representing an internal rate of return of 8%, which was greater than the result of the calculation in clause (ii) above at June 30, 2017.

The redemption features of the settlement put option are not solely within the Company’s control and the noncontrolling interest is presented as redeemable noncontrolling interest separately from total equity in the Condensed Consolidated Balance Sheet at the redemption value of the settlement put option. If the redemption value is greater than the carrying value of the noncontrolling interest, the increase in the redemption value is adjusted directly to retained earnings of the affected entity, or additional paid-in capital if there are no available retained earnings applicable to the redeemable noncontrolling interest.

In the first quarter of 2016, the Company acquired $25 million of additional shares in the consortium owning Voltyre-Prom, increasing Titan's ownership to 43% from 30%. The acquisition of shares was transacted through the conversion of an intercompany note previously held by Titan. As a result of the ownership change, the balance of the redeemable noncontrolling interest increased by $12 million at the time of such conversion of the intercompany note, which is comprised of a $3.5 million reclassification of currency translation and an $8.5 million reclassification of other equity.

The following is a reconciliation of redeemable noncontrolling interest as of June 30, 2017 and 2016 (amounts in thousands):
 
2017
 
2016
Balance at January 1
$
104,809

 
$
77,174

   Reclassification as a result of ownership change

 
12,039

   Income (loss) attributable to redeemable noncontrolling interest
(190
)
 
1,532

   Currency translation
1,121

 
2,924

   Redemption value adjustment
3,099

 
7,108

Balance at June 30
$
108,839

 
$
100,777



This obligation with respect to the settlement put option approximates the cost if all remaining shares were purchased by the Company on June 30, 2017, and is presented in the Condensed Consolidated Balance Sheet in redeemable noncontrolling interest, which is treated as mezzanine equity.



13



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated 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 June 30, 2017, future minimum rental commitments under noncancellable operating leases with initial terms of at least one year were as follows (amounts in thousands):
July 1 - December 31, 2017
$
3,842

2018
5,767

2019
4,610

2020
2,527

2021
2,201

Thereafter
1,697

Total future minimum lease payments
$
20,644



At June 30, 2017, the Company had assets held as capital leases with a net book value of $7.1 million included in property, plant and equipment. At June 30, 2017, total future capital lease obligations relating to these leases were as follows (amounts in thousands):
July 1 - December 31, 2017
$
254

2018
203

2019
154

2020
18

2021
3

Total future capital lease obligation payments
632

Less amount representing interest
(12
)
Present value of future capital lease obligation payments
$
620




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 a number of defined contribution plans in the U.S. and at foreign subsidiaries. The Company contributed approximately $1.4 million to the pension plans during the six months ended June 30, 2017, and expects to contribute approximately $1.9 million to the pension plans during the remainder of 2017.
 
The components of net periodic pension cost consisted of the following for the periods set forth below (amounts in thousands):
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
128

 
$
206

 
$
353

 
$
312

Interest cost
1,163

 
1,233

 
2,334

 
2,470

Expected return on assets
(1,368
)
 
(1,395
)
 
(2,737
)
 
(2,788
)
Amortization of unrecognized prior service cost
34

 
34

 
68

 
68

Amortization of net unrecognized loss
655

 
762

 
1,329

 
1,527

      Net periodic pension cost
$
612

 
$
840

 
$
1,347

 
$
1,589





14



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

12. 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. (See Note 9 for additional information.) 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 income attributable to noncontrolling interests” in the Condensed Consolidated Statements of Operations and “Noncontrolling interests” in the Condensed Consolidated Balance Sheets.
 
The following table summarizes the carrying amount of the entities’ assets and liabilities included in the Company’s Condensed Consolidated Balance Sheets at June 30, 2017, and December 31, 2016 (amounts in thousands):
 
June 30,
2017
 
December 31, 2016
Cash and cash equivalents
$
12,123

 
$
9,396

Inventory
17,340

 
11,445

Other current assets
15,980

 
23,301

Property, plant and equipment, net
32,731

 
30,448

Other noncurrent assets
6,838

 
4,955

   Total assets
$
85,012

 
$
79,545

 
 
 
 
Current liabilities
$
20,909

 
$
22,068

Noncurrent liabilities
9,199

 
5,350

  Total liabilities
$
30,108

 
$
27,418


 
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.

The Company holds a variable interest in certain VIEs which are not consolidated because Titan is not the primary beneficiary. The Company's involvement with these entities is in the form of direct equity interests and prepayments and purchases of materials. The maximum exposure to loss represents the loss of assets recognized by Titan relating to non-consolidated entities and amounts due to the non-consolidated assets. The assets and liabilities recognized in Titan's Consolidated Balance Sheets related to Titan's interest in these non-consolidated VIEs and the Company's maximum exposure to loss relating to non-consolidated VIEs as of the dates set forth below were as follows (amounts in thousands):
 
June 30,
2017
 
December 31, 2016
Investments
$
3,626

 
$
4,738

Other current assets
1,165

 
1,039

     Total VIE assets
4,791

 
5,777

Accounts payable
1,804

 
932

  Maximum exposure to loss
$
6,595

 
$
6,709





15



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

13. ROYALTY EXPENSE

The Company has trademark license agreements with The Goodyear Tire & Rubber Company to manufacture and sell certain farm tires under the Goodyear name. These agreements cover sales in North America, Latin America, Europe, the Middle East, Africa, Russia, and other Commonwealth of Independent States countries. 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. The Company also has a trademark license agreement with Goodyear to manufacture and sell certain non-farm tire products in Latin America. Royalty expenses recorded were $2.5 million and $2.1 million for the three months ended June 30, 2017 and 2016, respectively. Royalty expenses recorded were $5.1 million and $4.4 million for the six months ended June 30, 2017 and 2016, respectively.


14. OTHER INCOME

Other income consisted of the following for the periods set forth below (amounts in thousands):
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Interest income
$
801

 
$
842

 
$
1,774

 
$
1,253

Equity investment income
530

 
1,086

 
1,350

 
1,583

Investment gain (loss) related to investments for deferred compensation
497

 
(291
)
 
1,347

 
(508
)
Building rental income
595

 
609

 
1,195

 
971

Discount amortization on prepaid royalty
181

 
320

 
509

 
779

Gain (loss) on sale of assets
70

 

 
(192
)
 
2,342

Other income (expense)
(466
)
 
483

 
(626
)
 
534

 
$
2,208

 
$
3,049

 
$
5,357

 
$
6,954




15. INCOME TAXES

The Company recorded income tax expense of $0.1 million and $3.6 million for the quarters ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, the Company recorded income tax expense of $3.6 million and $4.7 million, respectively. The Company's effective income tax rate was (2)% and 304% for the quarters ended June 30, 2017 and 2016, and (26)% and (71)% for the six months ended June 30, 2017 and 2016, respectively.

The Company’s 2017 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 U.S. and certain foreign jurisdictions that incurred a full valuation allowance on deferred tax assets created by current year projected losses. In addition, there are non-deductible royalty expenses and statutory required income adjustments made in certain foreign jurisdictions that negatively impacted the tax rate for the period. During the second quarter of 2017, the IRS income tax audit for tax years 2010 through 2014 was settled, which did not result in any material change to income tax expense.

The Company’s 2016 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 U.S. and certain foreign jurisdictions that incurred a full valuation allowance on deferred tax assets created by current year projected losses. In addition, certain profitable foreign jurisdictions have lower statutory rates as compared to the U.S. tax rate.


16



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

The Company continues to monitor the realization of its deferred tax assets and assesses the need for a valuation allowance. The Company analyzes available positive and negative evidence to determine if a valuation allowance is needed based on the weight of the evidence. This objectively verifiable evidence includes profit and loss positions and the Company weighs this evidence to determine if a valuation allowance is needed. This process requires management to make estimates, assumptions, and judgments that are uncertain in nature. The Company has established valuation allowances with respect to deferred tax assets in U.S. and certain foreign jurisdictions and continues to monitor and assess potential valuation allowances in all its jurisdictions.
 

16. EARNINGS PER SHARE
 
Earnings per share (EPS) were as follows for the periods presented below (amounts in thousands, except per share data):
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net loss attributable to Titan
$
(6,293
)
 
$
(3,256
)
 
$
(17,746
)
 
$
(15,999
)
   Redemption value adjustment
(4,040
)
 
(1,900
)
 
(3,099
)
 
(7,108
)
Net loss applicable to common shareholders
$
(10,333
)
 
$
(5,156
)
 
$
(20,845
)
 
$
(23,107
)
Determination of shares:
 
 
 
 
 
 
 
   Weighted average shares outstanding (basic and diluted)
59,557

 
53,884

 
59,067

 
53,869

Earnings per share:
 
 
 
 
 
 
 
   Basic and diluted
(0.17
)
 
(0.10
)
 
(0.35
)
 
(0.43
)

The effect of stock options, shares held by certain trusts, and convertible notes has been excluded for the six months ended June 30, 2017 and 2016, as the effect would have been antidilutive. The weighted average share amount excluded for stock options and shares held by certain trusts was 0.2 million for the three and six months ended June 30, 2017, and 0.3 million and 0.2 million for the three and six months ended June 30, 2016, respectively. The weighted average share amount excluded for convertible notes totaled 0.5 million shares for the six months ended June 30, 2017, and 5.6 million shares for each of the three and six months ended and June 30, 2016.
 

17. 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 liabilities pertaining to, legal judgments.


18. SEGMENT INFORMATION
 
The Company has aggregated its operating units into reportable segments based on its three customer markets: agricultural, earthmoving/construction, and consumer. These segments are based on the information used by the chief executive officer to make certain operating decisions, allocate portions of capital expenditures, and assess segment performance. Segment external sales, expenses, and income from operations are determined based on the results of operations for the operating units of the Company's manufacturing facilities. Expenses and income from operations are allocated to appropriate segments based on the sales of operating units of manufacturing facilities. Segment assets are generally determined on the basis of the tangible assets located at such operating units’ manufacturing facilities and the intangible assets associated with the acquisitions of such operating units. However, certain operating units’ property, plant and equipment balances are carried at the corporate level. Titan is organized primarily on the basis of products being included in three market segments, with each reportable segment including wheels, tires, wheel/tire assemblies, and undercarriage systems and components.

17



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

 
The table below presents information about certain operating results, separated by market segments, for the three and six months ended June 30, 2017 and 2016 (amounts in thousands):

Three months ended
 
Six months ended

June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Net sales
 
 
 
 

 

Agricultural
$
172,923

 
$
146,715

 
$
353,439

 
$
299,540

Earthmoving/construction
150,970

 
141,028

 
286,589

 
272,733

Consumer
40,506

 
42,471

 
81,872

 
79,735

 
$
364,399

 
$
330,214

 
$
721,900

 
$
652,008

Gross profit
 

 
 

 
 
 
 
Agricultural
$
22,894

 
$
22,952

 
$
44,611

 
$
39,092

Earthmoving/construction
13,988

 
15,371

 
26,637

 
24,800

Consumer
6,680

 
5,395

 
12,043

 
8,123

 
$
43,562

 
$
43,718

 
$
83,291

 
$
72,015

Income (loss) from operations
 

 
 

 
 
 
 
Agricultural
$
14,081

 
$
14,607

 
$
26,664

 
$
22,827

Earthmoving/construction
2,056

 
4,268

 
2,868

 
3,253

Consumer
3,487

 
1,591

 
4,941

 
741

Corporate & Unallocated
(15,666
)
 
(17,873
)
 
(37,576
)
 
(35,766
)
      Income (loss) from operations
3,958

 
2,593

 
(3,103
)
 
(8,945
)
 
 
 
 
 
 
 
 
Interest expense
(7,320
)
 
(7,982
)
 
(15,041
)
 
(16,494
)
Foreign exchange gain (loss)
(5,257
)
 
2,182

 
(767