Document
false--12-31Q120180000899751Accelerated FilerTITAN INTERNATIONAL INC00.00011200000001200000006071533659810770140005400010832121014517 0000899751 2018-01-01 2018-03-31 0000899751 2018-04-25 0000899751 2017-01-01 2017-03-31 0000899751 us-gaap:MaterialReconcilingItemsMember 2018-01-01 2018-03-31 0000899751 us-gaap:MaterialReconcilingItemsMember 2017-01-01 2017-03-31 0000899751 2017-12-31 0000899751 2018-03-31 0000899751 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-01-01 2018-03-31 0000899751 us-gaap:RetainedEarningsMember 2018-01-01 2018-03-31 0000899751 us-gaap:TreasuryStockMember 2017-12-31 0000899751 us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-03-31 0000899751 us-gaap:ParentMember 2018-01-01 2018-03-31 0000899751 us-gaap:TreasuryStockMember 2018-03-31 0000899751 us-gaap:DeferredCompensationShareBasedPaymentsMember 2017-12-31 0000899751 us-gaap:CommonStockMember 2018-03-31 0000899751 us-gaap:NoncontrollingInterestMember 2018-01-01 2018-03-31 0000899751 us-gaap:RetainedEarningsMember 2017-12-31 0000899751 us-gaap:CommonStockMember 2018-01-01 2018-03-31 0000899751 us-gaap:NoncontrollingInterestMember 2018-03-31 0000899751 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-03-31 0000899751 us-gaap:AdditionalPaidInCapitalMember 2017-12-31 0000899751 us-gaap:RetainedEarningsMember 2018-03-31 0000899751 us-gaap:ParentMember 2018-03-31 0000899751 us-gaap:TreasuryStockMember 2018-01-01 2018-03-31 0000899751 us-gaap:AdditionalPaidInCapitalMember 2018-03-31 0000899751 us-gaap:CommonStockMember 2017-12-31 0000899751 us-gaap:ParentMember 2017-12-31 0000899751 us-gaap:NoncontrollingInterestMember 2017-12-31 0000899751 us-gaap:DeferredCompensationShareBasedPaymentsMember 2018-03-31 0000899751 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-12-31 0000899751 2016-12-31 0000899751 2017-03-31 0000899751 us-gaap:OperatingSegmentsMember 2018-01-01 2018-03-31 0000899751 us-gaap:OperatingSegmentsMember twi:ConsumerMember 2017-01-01 2017-03-31 0000899751 us-gaap:OperatingSegmentsMember twi:EarthmovingconstructionMember 2018-01-01 2018-03-31 0000899751 us-gaap:OperatingSegmentsMember twi:AgriculturalMember 2018-01-01 2018-03-31 0000899751 us-gaap:OperatingSegmentsMember 2017-01-01 2017-03-31 0000899751 us-gaap:OperatingSegmentsMember twi:AgriculturalMember 2017-01-01 2017-03-31 0000899751 us-gaap:OperatingSegmentsMember twi:ConsumerMember 2018-01-01 2018-03-31 0000899751 us-gaap:OperatingSegmentsMember twi:EarthmovingconstructionMember 2017-01-01 2017-03-31 0000899751 us-gaap:AccountingStandardsUpdate201409Member 2017-12-31 0000899751 2018-01-01 0000899751 us-gaap:NewAccountingPronouncementMember 2018-01-01 2018-03-31 0000899751 twi:SeniorSecuredNotes6.50PercentMemberMember 2018-03-31 0000899751 us-gaap:BuildingAndBuildingImprovementsMember 2018-03-31 0000899751 us-gaap:MachineryAndEquipmentMember 2018-03-31 0000899751 us-gaap:LandAndLandImprovementsMember 2018-03-31 0000899751 us-gaap:ConstructionInProgressMember 2018-03-31 0000899751 us-gaap:LandAndLandImprovementsMember 2017-12-31 0000899751 us-gaap:MachineryAndEquipmentMember 2017-12-31 0000899751 us-gaap:ToolsDiesAndMoldsMember 2018-03-31 0000899751 us-gaap:ConstructionInProgressMember 2017-12-31 0000899751 us-gaap:ToolsDiesAndMoldsMember 2017-12-31 0000899751 us-gaap:BuildingAndBuildingImprovementsMember 2017-12-31 0000899751 us-gaap:LongTermDebtMember 2018-03-31 0000899751 twi:TitanEuropeMember 2018-03-31 0000899751 twi:SeniorSecuredNotes6.875PercentMember 2018-03-31 0000899751 us-gaap:OtherDebtSecuritiesMember 2018-03-31 0000899751 twi:TitanBrazilMember 2018-03-31 0000899751 twi:TitanEuropeMember us-gaap:MinimumMember 2018-03-31 0000899751 twi:TitanEuropeMember us-gaap:MaximumMember 2018-03-31 0000899751 twi:VoltyrePromMember 2018-03-31 0000899751 twi:SeniorSecuredNotes6.50PercentMemberMember 2017-12-31 0000899751 us-gaap:OtherDebtSecuritiesMember 2017-12-31 0000899751 us-gaap:LongTermDebtMember 2017-12-31 0000899751 twi:TitanEuropeMember 2017-12-31 0000899751 twi:SeniorSecuredNotes6.875PercentMember 2017-12-31 0000899751 us-gaap:AccountingStandardsUpdate201503Member 2017-12-31 0000899751 us-gaap:PensionPlansDefinedBenefitMember 2018-01-01 2018-03-31 0000899751 us-gaap:PensionPlansDefinedBenefitMember 2017-01-01 2017-03-31 0000899751 us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2017-12-31 0000899751 us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2018-03-31 0000899751 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2018-03-31 0000899751 us-gaap:VariableInterestEntityNotPrimaryBeneficiaryMember 2017-12-31 0000899751 2017-01-01 2017-12-31 0000899751 twi:ConvertibleSeniorSubordinatedNotes5625PercentMember 2018-01-01 2018-03-31 0000899751 us-gaap:JudicialRulingMember 2016-12-31 0000899751 us-gaap:UnfavorableRegulatoryActionMember 2018-03-31 0000899751 us-gaap:JudicialRulingMember 2018-01-01 2018-03-31 0000899751 us-gaap:OperatingSegmentsMember us-gaap:MaterialReconcilingItemsMember 2018-01-01 2018-03-31 0000899751 us-gaap:OperatingSegmentsMember us-gaap:MaterialReconcilingItemsMember 2017-01-01 2017-03-31 0000899751 us-gaap:MaterialReconcilingItemsMember 2018-03-31 0000899751 twi:AgriculturalMember 2018-03-31 0000899751 twi:EarthmovingconstructionMember 2017-12-31 0000899751 twi:AgriculturalMember 2017-12-31 0000899751 us-gaap:MaterialReconcilingItemsMember 2017-12-31 0000899751 twi:ConsumerMember 2018-03-31 0000899751 twi:ConsumerMember 2017-12-31 0000899751 twi:EarthmovingconstructionMember 2018-03-31 0000899751 us-gaap:FairValueMeasurementsRecurringMember 2018-03-31 0000899751 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2018-03-31 0000899751 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2017-12-31 0000899751 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2018-03-31 0000899751 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2017-12-31 0000899751 us-gaap:FairValueMeasurementsRecurringMember 2017-12-31 0000899751 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2018-03-31 0000899751 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2017-12-31 0000899751 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2018-01-01 2018-03-31 0000899751 twi:OTRGroupMember 2017-01-01 2017-03-31 0000899751 twi:ValuepartandTrackSolutionsPTYLtd.Member 2018-01-01 2018-03-31 0000899751 twi:OTRGroupMember 2018-01-01 2018-03-31 0000899751 us-gaap:NonGuarantorSubsidiariesMember 2018-01-01 2018-03-31 0000899751 us-gaap:GuarantorSubsidiariesMember 2018-01-01 2018-03-31 0000899751 us-gaap:ParentCompanyMember 2018-01-01 2018-03-31 0000899751 us-gaap:ParentCompanyMember 2017-12-31 0000899751 us-gaap:NonGuarantorSubsidiariesMember 2017-12-31 0000899751 us-gaap:NonGuarantorSubsidiariesMember 2018-03-31 0000899751 us-gaap:GuarantorSubsidiariesMember 2018-03-31 0000899751 us-gaap:GuarantorSubsidiariesMember 2017-12-31 0000899751 us-gaap:ParentCompanyMember 2018-03-31 0000899751 us-gaap:ParentCompanyMember 2017-03-31 0000899751 us-gaap:ParentCompanyMember 2017-01-01 2017-03-31 0000899751 us-gaap:GuarantorSubsidiariesMember 2016-12-31 0000899751 us-gaap:GuarantorSubsidiariesMember 2017-01-01 2017-03-31 0000899751 us-gaap:NonGuarantorSubsidiariesMember 2017-01-01 2017-03-31 0000899751 us-gaap:ParentCompanyMember 2016-12-31 0000899751 us-gaap:NonGuarantorSubsidiariesMember 2016-12-31 0000899751 us-gaap:GuarantorSubsidiariesMember 2017-03-31 0000899751 us-gaap:NonGuarantorSubsidiariesMember 2017-03-31 0000899751 us-gaap:ConsolidationEliminationsMember 2018-01-01 2018-03-31 0000899751 us-gaap:ConsolidationEliminationsMember 2017-01-01 2017-03-31 0000899751 us-gaap:ConsolidationEliminationsMember 2017-12-31 0000899751 us-gaap:ConsolidationEliminationsMember 2018-03-31 xbrli:shares xbrli:pure iso4217:USD xbrli:shares iso4217:USD


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

titancolora07.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: March 31, 2018
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: 59,822,781 shares common stock, $0.0001 par value, as of April 25, 2018.




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
 
March 31,
 
2018

2017
 
 
 
 
Net sales
$
425,382

 
$
357,501

Cost of sales
365,821

 
317,300

Gross profit
59,561

 
40,201

Selling, general and administrative expenses
35,921

 
41,338

Research and development expenses
2,877

 
2,843

Royalty expense
2,663

 
2,609

Income (loss) from operations
18,100

 
(6,589
)
Interest expense
(7,518
)
 
(7,721
)
Foreign exchange (loss) gain
(4,432
)
 
4,490

Other income
7,750

 
2,677

Income (loss) before income taxes
13,900

 
(7,143
)
(Benefit) provision for income taxes
(786
)
 
3,442

Net income (loss)
14,686

 
(10,585
)
Net (loss) income attributable to noncontrolling interests
(1,679
)
 
868

Net income (loss) attributable to Titan
16,365

 
(11,453
)
   Redemption value adjustment
(2,343
)
 
941

Net income (loss) applicable to common shareholders
$
14,022

 
$
(10,512
)
 
 
 
 
Earnings per common share:
 

 
 

Basic
$
0.23

 
$
(0.18
)
Diluted
$
0.23

 
$
(0.18
)
Average common shares and equivalents outstanding:
 
 
 

Basic
59,711

 
58,572

Diluted
59,876

 
58,572

 
 
 
 
Dividends declared per common share:
$
0.005

 
$
0.005

 
 








See accompanying Notes to Condensed Consolidated Financial Statements.

1



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

 
Three months ended
 
March 31,
 
2018
 
2017
Net income (loss)
$
14,686

 
$
(10,585
)
Currency translation adjustment
8,062

 
11,019

Pension liability adjustments, net of tax of $(54) and $(14), respectively
883

 
733

Comprehensive income
23,631

 
1,167

Net comprehensive (loss) income attributable to redeemable and noncontrolling interests
(1,040
)
 
2,783

Comprehensive income (loss) attributable to Titan
$
24,671

 
$
(1,616
)


 
 




































See accompanying Notes to Condensed Consolidated Financial Statements.

2



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

 
March 31, 2018
 
December 31, 2017
 
 
 
(unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
112,429

 
$
143,570

  Accounts receivable, net
294,505

 
226,703

Inventories
368,435

 
339,836

Prepaid and other current assets
75,561

 
73,084

Total current assets
850,930

 
783,193

Property, plant and equipment, net
417,426

 
421,248

Deferred income taxes
1,907

 
3,779

Other assets
82,792

 
81,892

Total assets
$
1,353,055

 
$
1,290,112

 
 
 
 
Liabilities
 

 
 

Current liabilities
 

 
 

Short-term debt
$
55,171

 
$
43,651

Accounts payable
227,954

 
195,497

Other current liabilities
130,284

 
133,774

Total current liabilities
413,409

 
372,922

Long-term debt
407,608

 
407,171

Deferred income taxes
14,376

 
13,545

Other long-term liabilities
70,248

 
73,197

Total liabilities
905,641

 
866,835

 
 
 
 
Redeemable noncontrolling interest
115,369

 
113,193

 
 
 
 
Equity
 

 
 

Titan shareholders' equity


 


  Common stock ($0.0001 par value, 120,000,000 shares authorized, 60,715,356 issued, 59,810,770 outstanding at March 2018 and 59,800,559 outstanding at December 2017)

 

Additional paid-in capital
529,480

 
531,708

Retained deficit
(27,868
)
 
(44,022
)
Treasury stock (at cost, 904,586 and 914,797 shares, respectively)
(8,515
)
 
(8,606
)
Stock reserved for deferred compensation
(1,075
)
 
(1,075
)
Accumulated other comprehensive loss
(148,770
)
 
(157,076
)
Total Titan shareholders’ equity
343,252

 
320,929

Noncontrolling interests
(11,207
)
 
(10,845
)
Total equity
332,045

 
310,084

Total liabilities and equity
$
1,353,055

 
$
1,290,112

 

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, 2018
59,800,559

 
$
531,708

 
$
(44,022
)
 
$
(8,606
)
 
$
(1,075
)
 
$
(157,076
)
 
$
320,929

 
$
(10,845
)
 
$
310,084

Net income (loss) *


 


 
16,365

 


 


 


 
16,365

 
(1,164
)
 
15,201

Currency translation adjustment, net *
 
 
 
 
 
 
 
 
 
 
7,423

 
7,423

 
291

 
7,714

Pension liability adjustments, net of tax


 


 


 


 


 
883

 
883

 
 
 
883

Dividends declared


 


 
(299
)
 


 


 


 
(299
)
 
 
 
(299
)
Accounting standards adoption


 


 
88

 
 
 
 
 
 
 
88

 
35

 
123

Redemption value adjustment


 
(2,343
)
 
 
 


 
 
 
 
 
(2,343
)
 
 
 
(2,343
)
Stock-based compensation


 
73

 


 


 


 


 
73

 
 
 
73

VIE contributions


 


 


 


 


 


 

 
476

 
476

Issuance of treasury stock under 401(k) plan
10,211

 
42

 


 
91

 


 


 
133

 
 
 
133

Balance March 31, 2018
59,810,770

 
$
529,480

 
$
(27,868
)
 
$
(8,515
)
 
$
(1,075
)
 
$
(148,770
)
 
$
343,252

 
$
(11,207
)
 
$
332,045

 
* Net income (loss) excludes $(515) of net loss attributable to redeemable noncontrolling interest. Currency translation adjustment excludes $348 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)
 
Three months ended March 31,
Cash flows from operating activities:
2018
 
2017
Net income (loss)
$
14,686

 
$
(10,585
)
Adjustments to reconcile net loss to net cash
used for operating activities:
 

 
 

Depreciation and amortization
15,330

 
14,466

Deferred income tax provision
2,510

 
715

Stock-based compensation
73

 
204

Issuance of treasury stock under 401(k) plan
133

 
131

Foreign currency translation loss (gain)
3,769

 
(1,342
)
(Increase) decrease in assets:
 

 
 

Accounts receivable
(65,854
)
 
(48,180
)
Inventories
(26,115
)
 
(14,547
)
Prepaid and other current assets
(2,142
)
 
2,641

Other assets
252

 
(251
)
Increase (decrease) in liabilities:
 

 
 

Accounts payable
29,793

 
34,313

Other current liabilities
(4,421
)
 
7,425

Other liabilities
(3,697
)
 
471

Net cash used for operating activities
(35,683
)
 
(14,539
)
Cash flows from investing activities:
 

 
 

Capital expenditures
(7,807
)
 
(8,389
)
Other
794

 
574

Net cash used for investing activities
(7,013
)
 
(7,815
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
16,480

 
14,635

Payment on debt
(5,720
)
 
(10,216
)
Dividends paid
(299
)
 
(271
)
Net cash provided by financing activities
10,461

 
4,148

Effect of exchange rate changes on cash
1,094

 
1,537

Net increase in cash and cash equivalents
(31,141
)
 
(16,669
)
Cash and cash equivalents, beginning of period
143,570

 
147,827

Cash and cash equivalents, end of period
$
112,429

 
$
131,158

 
 
 
 
Supplemental information:
 
 
 
Interest paid
$
792

 
$
2,458

Income taxes paid, net of refunds received
$
2,508

 
$
648

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.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
The accompanying unaudited condensed consolidated interim financial statements include the accounts of Titan International, Inc. and its subsidiaries (Titan or the Company) and have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the SEC). Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. These unaudited condensed consolidated interim financial statements reflect all normal, and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the Company's financial position as of March 31, 2018, and the results of operations and cash flows for the three months ended March 31, 2018 and 2017, and should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 23, 2018. All significant intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.

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 6.5% senior secured notes due 2023 (senior secured notes) were carried at cost of $394.5 million at March 31, 2018. The fair value of the senior secured notes at March 31, 2018, as obtained through an independent pricing source, was approximately $412.0 million.

Cash dividends
The Company declared cash dividends of $0.005 per share of common stock for each of the three months ended March 31, 2018 and 2017. The first quarter 2018 cash dividend of $0.005 per share of common stock was paid on April 16, 2018, to shareholders of record on March 29, 2018.

New accounting standards:

Adoption of new accounting standards
The Company adopted FASB Accounting Standards Codification (ASC) Topic 606, "Revenue from Contracts with Customers" (the New Revenue Standard), effective January 1, 2018, using the modified retrospective approach. ASC 606 prescribes 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. The guidance provides a five-step process to achieve that core principle:
Identify the contract(s) with a customer
Identify the performance obligations
Determine the transaction price
Allocate the transaction price
Recognize revenue when the performance obligations are met

The Company compared its current revenue recognition policies to the requirements of the New Revenue Standard. Titan recognizes revenue when the performance obligations specified in the Company's contracts have been satisfied. Titan's contracts typically contain a single performance obligation that is fulfilled on the date of delivery based on shipping terms stipulated in the contract. As of March 31, 2018, none of the Company's contracts contained a financing option and Titan did not have any contract assets or liabilities. The table below presents the cumulative effect of the adoption of the New Revenue Standard on select accounts of Titan's condensed consolidated balance sheet at March 31, 2018 (amounts in thousands):


6



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

 
Balance at December 31, 2017
 
New Revenue Standard Adjustments
 
Balance at January 1, 2018
Assets
 
 
 
 
 
   Inventories
$
339,836

 
$
(390
)
 
$
339,446

Liabilities
 
 
 
 
 
   Other current liabilities
133,774

 
(513
)
 
133,261

Equity
 
 
 
 
 
   Retained (deficit) earnings
(44,022
)
 
88

 
(43,934
)
   Noncontrolling interests
(10,845
)
 
35

 
(10,810
)


Disaggregated Revenues
The following table presents revenues disaggregated by the major markets Titan serves (amounts in thousands):
 
Three months ended
 
March 31,
 
2018
 
2017
Net sales
 
 
 
Agricultural
$
194,166

 
$
180,516

Earthmoving/construction
188,733

 
135,619

Consumer
42,483

 
41,366

 
$
425,382

 
$
357,501



The Company adopted Accounting Standards Update (ASU) No. 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" on January 1, 2018, using the retrospective transition method. This standard changed the presentation of net periodic pension and postretirement benefit cost (net benefit cost) within the Statement of Operations. Under the previous guidance, net benefit cost was reported as an employee cost within operating income. The amendment requires the bifurcation of net benefit cost, with the service cost component to be presented with other employee compensation costs in operating income while the other components will be reported separately outside of income from operations. The adoption of this accounting standard resulted in a change in certain previously reported amounts, whereby the Company reclassed $0.5 million of non-service cost from Cost of Sales to Other Income on the Condensed Consolidated Statement of Operations for the three months ended March 31, 2017. See Note 5 - Employee Benefit Plans in Part I, Item 1 of this Form 10-Q for further discussion.
 
In May 2017, the FASB issued ASU No. 2017-09, "Stock Compensation (Topic 718): 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. Disclosure requirements under Topic 718 remain unchanged. The Company adopted ASU 2017-09, effective as of January 1, 2018. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements; no changes were made to the terms or conditions of share-based payments.
 
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): 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 Company adopted this guidance effective January 1, 2018, with no resulting changes to the Company's consolidated financial statements.

Accounting standards issued but not yet adopted
 
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 primary effect of adopting the new standard will be to record assets and obligations for the Company's operating leases. 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 evaluating the impact of ASU 2016-02.

7



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


In February 2018, the FASB issued ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2018-02.



2. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following as of the dates set forth below (amounts in thousands):
 
March 31,
2018
 
December 31,
2017
Accounts receivable
$
297,106

 
$
229,677

Allowance for doubtful accounts
(2,601
)
 
(2,974
)
Accounts receivable, net
$
294,505

 
$
226,703


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):
 
March 31,
2018
 
December 31,
2017
Raw material
$
91,507

 
$
83,541

Work-in-process
42,326

 
40,525

Finished goods
234,602

 
215,770

 
$
368,435

 
$
339,836


 
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.



8



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

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consisted of the following as of the dates set forth below (amounts in thousands):
 
March 31,
2018
 
December 31,
2017
Land and improvements
$
47,548

 
$
46,998

Buildings and improvements
266,586

 
264,078

Machinery and equipment
605,747

 
598,411

Tools, dies and molds
110,675

 
108,649

Construction-in-process
10,745

 
15,349

 
1,041,301

 
1,033,485

Less accumulated depreciation
(623,875
)
 
(612,237
)
 
$
417,426

 
$
421,248


 
Depreciation on property, plant and equipment for the three months ended March 31, 2018 and 2017, totaled $14.4 million and $13.5 million, respectively.

Capital leases included in property, plant, and equipment consisted of the following as of the dates set forth below (amounts in thousands):
 
March 31,
2018
 
December 31,
2017
Buildings and improvements
$
4,170

 
$
4,056

Less accumulated amortization
(2,385
)
 
(2,294
)
 
$
1,785

 
$
1,762

 
 
 
 
Machinery and equipment
$
33,443

 
$
32,379

Less accumulated amortization
(28,039
)
 
(27,260
)
 
$
5,404

 
$
5,119




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) March 31, 2018
 
March 31,
2018
 
December 31,
2017
Amortizable intangible assets:
 
 
 
 
 
     Customer relationships
9.4
 
$
14,237

 
$
13,922

     Patents, trademarks and other
7.4
 
15,288

 
15,208

          Total at cost
 
 
29,525

 
29,130

     Less accumulated amortization
 
 
(15,006
)
 
(13,855
)
 
 
 
$
14,519

 
$
15,275


   
Amortization related to intangible assets for each of the three months ended March 31, 2018 and 2017, totaled $0.7 million. Intangible assets are included as a component of other assets in the Condensed Consolidated Balance Sheet.


9



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

The estimated aggregate amortization expense at March 31, 2018, for each of the years (or other periods) set forth below was as follows (amounts in thousands):
April 1 - December 31, 2018
$
1,775

2019
2,306

2020
2,285

2021
1,494

2022
1,067

Thereafter
5,592

 
$
14,519




6. WARRANTY

Changes in the warranty liability consisted of the following (amounts in thousands):
 
2018
 
2017
Warranty liability, January 1
$
18,612

 
$
17,926

Provision for warranty liabilities
1,898

 
1,864

Warranty payments made
(1,336
)
 
(1,589
)
Warranty liability, March 31
$
19,174

 
$
18,201



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):
 
March 31, 2018
 
Principal Balance
 
Unamortized Debt Issuance
 
Net Carrying Amount
6.50% senior secured notes due 2023
$
400,000

 
$
(5,509
)
 
$
394,491

Titan Europe credit facilities
32,485

 

 
32,485

Other debt
35,032

 

 
35,032

Capital leases
771

 

 
771

     Total debt
468,288

 
(5,509
)
 
462,779

Less amounts due within one year
55,171

 

 
55,171

     Total long-term debt
$
413,117

 
$
(5,509
)
 
$
407,608


 

10



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

 
December 31, 2017
 
Principal Balance
 
Unamortized Debt Issuance
 
Net Carrying Amount
6.50% senior secured notes due 2023
$
400,000

 
$
(5,716
)
 
$
394,284

Titan Europe credit facilities
33,485

 

 
33,485

Other debt
22,564

 

 
22,564

Capital leases
489

 

 
489

     Total debt
456,538

 
(5,716
)
 
450,822

Less amounts due within one year
43,651

 

 
43,651

     Total long-term debt
$
412,887

 
$
(5,716
)
 
$
407,171



Aggregate principal maturities of long-term debt at March 31, 2018, for each of the years (or other periods) set forth below were as follows (amounts in thousands):
April 1 - December 31, 2018
$
24,141

2019
39,371

2020
3,379

2021
715

2022
275

Thereafter
400,407

 
$
468,288


 
6.50% senior secured notes due 2023
The senior secured notes are due November 2023. Including the impact of debt issuance costs, these notes had an effective yield of 6.79% at issuance. These notes will be 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 outstanding principal balance for these notes was $400.0 million at March 31, 2018.

Titan Europe credit facilities
The Titan Europe credit facilities contain borrowings from various institutions totaling $32.5 million in aggregate principal amount at March 31, 2018. 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 Titan's subsidiaries in Italy, Spain, Germany, and Brazil.

Revolving credit facility
The Company has a $75 million revolving credit facility (credit facility) with agent BMO Harris Bank N.A. and other financial institutions party thereto. The credit facility is collateralized by accounts receivable and inventory of certain of the Company’s domestic subsidiaries and is scheduled to mature in February 2022. From time to time 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 March 31, 2018, an outstanding letter of credit under the credit facility totaled $12.5 million and the amount available under the facility totaled $62.5 million based upon eligible accounts receivable and inventory balances. During the first three months of 2018 and at March 31, 2018, 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 $5.8 million and $29.2 million at March 31, 2018, respectively.



11



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

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, 2018, the Company recorded currency exchange loss related to these derivatives of $0.3 million.


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 acquisition of Voltyre-Prom. The agreement contains a settlement put option which is exercisable during a six-month period beginning July 9, 2018, and may require Titan to purchase the indirect equity interests from OEP and RDIF in Voltyre-Prom with cash or Titan common stock, at a value set by the agreement. The value set by the agreement is the greater of: the aggregate of the investment of the selling party and an amount representing an internal rate of return of 8%; or the last twelve months of EBITDA multiplied by 5.5 less net debt times the selling party's ownership percentage. As of March 31, 2018, 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%.

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.
The following is a reconciliation of redeemable noncontrolling interest as of March 31, 2018 and 2017 (amounts in thousands):
 
2018
 
2017
Balance at January 1
$
113,193

 
$
104,809

   Income attributable to redeemable noncontrolling interest
(515
)
 
620

   Currency translation
348

 
2,337

   Redemption value adjustment
2,343

 
(941
)
Balance at March 31
$
115,369

 
$
106,825



This obligation approximates the cost to the Company if all remaining equity interests in the consortium were purchased by the Company on March 31, 2018, and is presented in the Condensed Consolidated Balance Sheet in redeemable noncontrolling interest, which is treated as mezzanine equity.



12



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 March 31, 2018, 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, 2018
$
5,896

2019
7,036

2020
4,649

2021
3,514

2022
2,782

Thereafter
6,099

Total future minimum lease payments
$
29,976


At March 31, 2018, the Company had assets held as capital leases with a net book value of $7.2 million included in property, plant and equipment. At March 31, 2018, total future capital lease obligations relating to these leases were as follows (amounts in thousands):
April 1 - December 31, 2018
$
192

2019
351

2020
67

2021
47

2022
50

Thereafter
61

Total future capital lease obligation payments
768

Less amount representing interest
(5
)
Present value of future capital lease obligation payments
$
763



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 $0.8 million to the pension plans during the three months ended March 31, 2018, and expects to contribute approximately $4.5 million to the pension plans during the remainder of 2018.
 
The components of net periodic pension cost consisted of the following for the periods set forth below (amounts in thousands):
 
Three months ended
 
March 31,
 
2018
 
2017
Service cost
$
137

 
$
225

Interest cost
1,083

 
1,171

Expected return on assets
(1,492
)
 
(1,369
)
Amortization of unrecognized prior service cost
50

 
34

Amortization of net unrecognized loss
676

 
674

      Net periodic pension cost
$
454

 
$
735


Service cost is recorded as cost of sales in the statement of operations while all other components are recorded in other income.

13



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 (loss) 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 March 31, 2018, and December 31, 2017 (amounts in thousands):
 
March 31,
2018
 
December 31, 2017
Cash and cash equivalents
$
7,652

 
$
10,621

Inventory
17,671

 
13,494

Other current assets
50,135

 
36,334

Property, plant and equipment, net
33,686

 
33,717

Other noncurrent assets
4,431

 
4,250

   Total assets
$
113,575

 
$
98,416

 
 
 
 
Current liabilities
$
47,390

 
$
32,172

Noncurrent liabilities
8,555

 
8,291

  Total liabilities
$
55,945

 
$
40,463


 
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 Condensed 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):
 
March 31,
2018
 
December 31, 2017
Investments
$
3,834

 
$
3,823

Other current assets
1,316

 
1,261

     Total VIE assets
5,150

 
5,084

Accounts payable
1,264

 
1,413

  Maximum exposure to loss
$
6,414

 
$
6,497





14



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. Each of these agreements expire in 2025. 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 which expires June 2019. Royalty expenses recorded were $2.7 million and $2.6 million for the three months ended March 31, 2018 and 2017, respectively.


14. OTHER INCOME

Other income consisted of the following for the periods set forth below (amounts in thousands):
 
Three months ended
 
March 31,
 
2018
 
2017
Equity investment income
$
1,116

 
$
810

Interest income
617

 
973

Building rental income
578

 
600

Gain (loss) on sale of assets
181

 
(262
)
Discount amortization on prepaid royalty
172

 
328

Investment gain related to investments for deferred compensation
121

 
850

Other income (expense)
4,965

 
(622
)
 
$
7,750

 
$
2,677




15. INCOME TAXES

The Company recorded income tax (benefit) expense of $(0.8) million and $3.4 million for the quarters ended March 31, 2018 and 2017, respectively. The Company's effective income tax rate was (6)% and (48)% for the three months ended March 31, 2018 and 2017, respectively.

The Company’s 2018 income tax expense and rate differed 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 reduction of the liability for unrecognized tax positions and 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 were non-deductible royalty expenses and statutorily required income adjustments made in certain foreign jurisdictions that negatively impacted the tax rate for the three months ended March 31, 2018.

The Company’s 2017 income tax expense and rate differed 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 were non-deductible royalty expenses and statutorily required income adjustments made in certain foreign jurisdictions that negatively impacted the tax rate for the period.

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 primarily includes the past three years' profit and loss positions. 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.

15



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

The 2017 Tax Cuts and Jobs Act (2017 TCJA) was enacted on December 22, 2017. The 2017 TCJA includes a number of changes to the Internal Revenue Code including a one-time transition tax on the mandatory deemed repatriation of cumulative undistributed foreign earnings and a permanent reduction in the U.S. federal statutory income tax rate from 35% to 21%, effective on January 1, 2018.  The 2017 TCJA also created a new requirement that certain income (i.e., GILTI - global intangible low taxed income) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder.  Consistent with guidance issued by SEC Staff Accounting Bulletin (SAB) No. 118, which provides for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 TCJA, the Company has provisionally recorded no additional income tax expense related to the one-time mandatory deemed repatriation provision of the 2017 TCJA. For 2018, the Company has estimated an amount of GILTI income which is included in the calculation of 2018 income tax expense. This GILTI income inclusion, however, is fully offset by a change in the valuation allowance. The remeasurement of the U.S. net deferred asset from the 2017 corporate income tax rate change was fully offset by a change in the valuation allowance in 2017.


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
 
March 31,
 
2018
 
2017
 
 
 
 
Net income (loss) attributable to Titan
$
16,365

 
$
(11,453
)
   Redemption value adjustment
(2,343
)
 
941

Net income (loss) applicable to common shareholders
$
14,022

 
$
(10,512
)
Determination of shares:
 
 
 
   Weighted average shares outstanding (basic)
59,711

 
58,572

   Effect of stock options/trusts
166

 

   Weighted average shares outstanding (diluted)
59,876

 
58,572

Earnings per share:
 
 
 
   Basic and diluted
0.23

 
(0.18
)

The effect of stock options, shares held by certain trusts, and convertible notes has been excluded from the calculation of EPS for the three months ended March 31, 2017, 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 months ended March 31, 2017. The weighted average share amount excluded for convertible notes totaled 1.0 million shares for the three months ended March 31, 2017.
 

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.


16



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

At March 31, 2018, two of Titan’s subsidiaries were involved in litigation concerning environmental laws and regulations.

In June 2015, Titan Tire and Dico, Inc. (Dico) appealed a U.S. District Court order granting the U.S. motion for summary judgment that found Dico liable for violating the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) and an Environmental Protection Agency (EPA) Administrative Order and awarded response costs, civil penalties and punitive damages.

In December 2015, the United States Court of Appeals reversed the District Court’s summary judgment order with respect to “arranger” liability for Titan Tire and Dico under CERCLA and the imposition of punitive damages against Dico for violating the EPA Administrative Order, but affirmed the summary judgment order imposing civil penalties in the amount of $1.62 million against Dico for violating the EPA Administrative Order. The case was remanded to the District Court for a new trial on the remaining issues.

The trial occurred in April 2017. On September 5, 2017, the District Court issued an order: (a) concluding Titan Tire and Dico arranged for the disposal of a hazardous substance in violation of 42 U.S.C. § 9607(a); (b) holding Titan Tire and Dico jointly and severally liable for $5.45 million in response costs previously incurred and reported by the United States relating to the alleged violation, including enforcement costs and attorney’s fees; and (c) awarding a declaratory judgment holding Titan Tire and Dico jointly and severally liable for all additional response costs previously incurred but not yet reported or to be incurred in the future, including enforcement costs and attorney’s fees. The District Court also held Dico liable for $5.45 million in punitive damages under 42 U.S.C. § 9607(c)(3) for violating a unilateral administrative order. The punitive damages award does not apply to Titan Tire. The Company accrued a contingent liability of $6.5 million, representing $5.45 million in costs incurred by the United States and $1.05 million of additional response costs, for this order in the quarter ended September 30, 2017.

Titan Tire and Dico are appealing the case to the United States Court of Appeals for the Eighth Circuit. The Notice of Appeal was filed on November 2, 2017, and the Appellants' brief was filed on February 26, 2018. While the Company believes it has meritorious arguments, the outcome of this appeal cannot be predicted. An appeal bond was secured to stay the execution of any collection actions underlying judgment pending the outcome of the appeal.



17



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

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.
 
The table below presents information about certain operating results, separated by market segments, for each of the three months ended March 31, 2018 and 2017 (amounts in thousands):

Three months ended

March 31,
 
2018
 
2017
Net sales
 
 
 
Agricultural
$
194,166

 
$
180,516

Earthmoving/construction
188,733

 
135,619

Consumer
42,483

 
41,366

 
$
425,382

 
$
357,501

Gross profit
 

 
 

Agricultural
$
29,961

 
$
21,879

Earthmoving/construction
22,462

 
12,898

Consumer
7,138

 
5,424

 
$
59,561

 
$
40,201

Income (loss) from operations
 

 
 

Agricultural
$
21,321

 
$
12,746

Earthmoving/construction
9,953

 
1,062

Consumer
3,947

 
1,514

Corporate & Unallocated
(17,121
)
 
(21,911
)
      Income (loss) from operations
18,100

 
(6,589
)
 
 
 
 
Interest expense
(7,518
)
 
(7,721
)
Foreign exchange (loss) gain
(4,432
)
 
4,490

Other income, net
7,750

 
2,677

      Income (loss) before income taxes
$
13,900

 
$
(7,143
)

Assets by segment were as follows as of the dates set forth below (amounts in thousands):
 
March 31,
2018
 
December 31,
2017
Total assets
 

 
 

Agricultural
$
514,093

 
$
444,783

Earthmoving/construction
561,926

 
537,855

Consumer
143,624

 
157,133

Corporate & Unallocated
133,412

 
150,341

 
$
1,353,055

 
$
1,290,112

 

18



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

19. 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 as of the dates set forth below (amounts in thousands):
 
March 31, 2018
 
December 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Contractual obligation investments
$
12,514


$
12,514


$


$

 
$
12,393

 
$
12,393

 
$

 
$

Derivative financial instruments asset
208

 

 
208

 

 
458

 

 
458

 

Preferred stock
124

 

 

 
124

 
154

 

 

 
154

Total
$
12,846

 
$
12,514

 
$
208

 
$
124

 
$
13,005

 
$
12,393

 
$
458

 
$
154


The following table presents the changes, during the three months ended March 31, 2018, 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, 2017
$
154

  Total unrealized losses
(30
)
Balance as of March 31, 2018
$
124


 
The preferred stock was valued based on the book value of the common stock into which it can be converted.

  
20. RELATED PARTY TRANSACTIONS
 
The Company sells products and pays commissions to companies controlled by persons related to the Chairman of the Board of Directors of the Company, Mr. Maurice Taylor. The related party is Mr. Fred Taylor, who is Mr. Maurice Taylor’s brother. The companies with which Mr. Fred Taylor is associated that do business with Titan include the following: Blackstone OTR, LLC; F.B.T. Enterprises, Inc.; Green Carbon, Inc.; Silverstone, Inc.; and OTR Wheel Engineering, Inc.  Sales of Titan products to these companies were approximately $0.3 million for the three months ended March 31, 2018, as compared to $0.5 million for the three months ended March 31, 2017. Titan had trade receivables due from these companies of approximately $0.2 million at March 31, 2018, and approximately $0.4 million at December 31, 2017.  Titan had product purchases from these companies of approximately $0.2 million for the three months ended March 31, 2018, as compared to purchases of approximately $0.1 million for the three months ended March 31, 2017. Sales commissions paid to the above companies were approximately $0.6 million for the three months ended March 31, 2018, as compared to $0.4 million for the three months ended March 31, 2017.
 
The Company sells products to Valuepart and Track Solutions Pty Ltd., which is controlled by relatives of a member of management of a Titan subsidiary. Sales of Titan products to this company were approximately $0.0 million for the three months ended March 31, 2018.
 
In July 2013, the Company entered into a Shareholders’ Agreement between OEP and RDIF to acquire Voltyre-Prom. Mr. Richard M. Cashin Jr., a director of the Company, is the President of OEP, which owns 21.4% of the joint venture.  The Shareholders’ Agreement contains a settlement put option which may require the Company to purchase equity interests in the joint venture from OEP and RDIF at a value set by the agreement. See Note 9 for additional information.

19



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

21. 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, 2018
$
(132,949
)
 
$
(24,127
)
 
$
(157,076
)
Currency translation adjustments
7,423

 

 
7,423

Defined benefit pension plan entries:
 

 
 

 
 

  Amortization of unrecognized losses and prior service cost,
  net of tax of $(54)

 
883

 
883

Balance at March 31, 2018
$
(125,526
)
 
$
(23,244
)
 
$
(148,770
)

 
22. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION

The senior secured notes are guaranteed by the following wholly-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. See the indenture incorporated by reference to the Company's most recent Form 10-K for additional information. The following condensed consolidating financial statements are presented using the equity method of accounting. Certain sales and marketing expenses recorded by non-guarantor subsidiaries have not been allocated to the guarantor subsidiaries.

(Amounts in thousands)
Condensed Consolidating Statements of Operations
For the Three Months Ended March 31, 2018
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
170,759

 
$
254,623

 
$

 
$
425,382

Cost of sales
108

 
141,530

 
224,183

 

 
365,821

Gross (loss) profit
(108
)
 
29,229

 
30,440

 

 
59,561

Selling, general and administrative expenses
1,196

 
15,275

 
19,450

 

 
35,921

Research and development expenses
240

 
986

 
1,651

 

 
2,877

Royalty expense
253

 
1,513

 
897

 

 
2,663

(Loss) income from operations
(1,797
)
 
11,455

 
8,442

 

 
18,100

Interest expense
(6,813
)
 

 
(705
)
 

 
(7,518
)
Intercompany interest income (expense)
624

 
1,013

 
(1,637
)
 

 

Foreign exchange loss

 
(8
)
 
(4,424
)
 

 
(4,432
)
Other income (expense)
5,669

 
(165
)
 
2,246

 

 
7,750

(Loss) income before income taxes
(2,317
)
 
12,295

 
3,922

 

 
13,900

(Benefit) provision for income taxes
(10,066
)
 
4,260

 
5,020

 

 
(786
)
Equity in earnings of subsidiaries
6,938

&#