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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: June 30, 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: 59,897,619 shares common stock, $0.0001 par value, as of July 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

Six months ended
 
June 30,

June 30,
 
2018

2017

2018

2017
 
 
 
 
 
 
 
 
Net sales
$
428,904

 
$
364,399

 
$
854,286

 
$
721,900

Cost of sales
370,592

 
320,379

 
736,413

 
637,679

Gross profit
58,312

 
44,020

 
117,873

 
84,221

Selling, general and administrative expenses
36,699

 
34,463

 
72,620

 
75,801

Research and development expenses
2,754

 
2,608

 
5,631

 
5,451

Royalty expense
2,634

 
2,533

 
5,297

 
5,142

Income (loss) from operations
16,225

 
4,416

 
34,325

 
(2,173
)
Interest expense
(7,672
)
 
(7,320
)
 
(15,190
)
 
(15,041
)
Foreign exchange loss
(3,610
)
 
(5,257
)
 
(8,042
)
 
(767
)
Other income
2,477

 
1,750

 
10,227

 
4,427

Income (loss) before income taxes
7,420

 
(6,411
)
 
21,320

 
(13,554
)
Provision for income taxes
1,683

 
126

 
897

 
3,568

Net income (loss)
5,737

 
(6,537
)
 
20,423

 
(17,122
)
Net income (loss) attributable to noncontrolling interests
40

 
(244
)
 
(1,639
)
 
624

Net income (loss) attributable to Titan
5,697

 
(6,293
)
 
22,062

 
(17,746
)
   Redemption value adjustment
(4,678
)
 
(4,040
)
 
(7,021
)
 
(3,099
)
Net income (loss) applicable to common shareholders
$
1,019

 
$
(10,333
)
 
$
15,041

 
$
(20,845
)
 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.02

 
$
(0.17
)
 
$
0.25

 
$
(0.35
)
Diluted
$
0.02

 
$
(0.17
)
 
$
0.25

 
$
(0.35
)
Average common shares and equivalents outstanding:
 
 
 

 
 
 
 

Basic
59,750

 
59,577

 
59,731

 
59,067

Diluted
59,878

 
59,577

 
59,877

 
59,067

 
 
 
 
 
 
 
 
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 (LOSS) (UNAUDITED)
(All amounts in thousands)

 
Three months ended
 
June 30,
 
2018
 
2017
Net income (loss)
$
5,737

 
$
(6,537
)
Currency translation adjustment
(38,338
)
 
8,006

Pension liability adjustments, net of tax of $10 and $(97), respectively
690

 
989

Comprehensive (loss) income
(31,911
)
 
2,458

Net comprehensive loss attributable to redeemable and noncontrolling interests
(2,185
)
 
(1,562
)
Comprehensive (loss) income attributable to Titan
$
(29,726
)
 
$
4,020



 
Six months ended
 
June 30,
 
2018
 
2017
Net income (loss)
$
20,423

 
$
(17,122
)
Currency translation adjustment
(30,276
)
 
19,025

Pension liability adjustments, net of tax of $(44) and $(111), respectively
1,573

 
1,722

Comprehensive (loss) income
(8,280
)
 
3,625

Net comprehensive (loss) income attributable to redeemable and noncontrolling interests
(3,225
)
 
1,221

Comprehensive (loss) income attributable to Titan
$
(5,055
)
 
$
2,404



























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, 2018
 
December 31, 2017
 
 
 
(unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
106,491

 
$
143,570

  Accounts receivable, net
282,400

 
226,703

Inventories
372,732

 
339,836

Prepaid and other current assets
74,629

 
73,084

Total current assets
836,252

 
783,193

Property, plant and equipment, net
393,264

 
421,248

Deferred income taxes
2,325

 
3,779

Other assets
78,529

 
81,892

Total assets
$
1,310,370

 
$
1,290,112

 
 
 
 
Liabilities
 

 
 

Current liabilities
 

 
 

Short-term debt
$
52,358

 
$
43,651

Accounts payable
226,041

 
195,497

Other current liabilities
129,057

 
133,774

Total current liabilities
407,456

 
372,922

Long-term debt
409,613

 
407,171

Deferred income taxes
11,765

 
13,545

Other long-term liabilities
66,032

 
73,197

Total liabilities
894,866

 
866,835

 
 
 
 
Redeemable noncontrolling interest
117,546

 
113,193

 
 
 
 
Equity
 

 
 

Titan shareholders' equity


 


  Common stock ($0.0001 par value, 120,000,000 shares authorized, 60,715,356 issued, 59,852,781 outstanding at June 30, 2018 and 59,800,559 outstanding at December 31, 2017)

 

Additional paid-in capital
524,466

 
531,708

Retained deficit
(22,471
)
 
(44,022
)
Treasury stock (at cost, 862,575 and 914,797 shares, respectively)
(8,407
)
 
(8,606
)
Stock reserved for deferred compensation

 
(1,075
)
Accumulated other comprehensive loss
(188,518
)
 
(157,076
)
Total Titan shareholders’ equity
305,070

 
320,929

Noncontrolling interests
(7,112
)
 
(10,845
)
Total equity
297,958

 
310,084

Total liabilities and equity
$
1,310,370

 
$
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
 
Stock
 reserved for
deferred compensation
 
Accumulated other comprehensive (loss) income
 
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) *


 


 
22,062

 


 


 


 
22,062

 
(1,178
)
 
20,884

Currency translation adjustment, net *
 
 
 
 
 
 
 
 
 
 
(28,690
)
 
(28,690
)
 
621

 
(28,069
)
Pension liability adjustments, net of tax


 


 


 


 


 
1,573

 
1,573

 
 
 
1,573

Dividends declared


 


 
(599
)
 


 


 


 
(599
)
 
 
 
(599
)
Accounting standards adoption


 


 
88

 
 
 
 
 
 
 
88

 
35

 
123

Restricted stock awards
30,000

 


 
 
 


 
 
 
 
 

 
 
 

Acquisition of additional interest


 
(1,032
)
 


 


 


 
(4,325
)
 
(5,357
)
 
5,208

 
(149
)
Redemption value adjustment


 
(7,021
)
 
 
 


 
 
 
 
 
(7,021
)
 
 
 
(7,021
)
Stock-based compensation


 
618

 


 


 


 


 
618

 
 
 
618

VIE distributions


 


 


 


 


 


 

 
(953
)
 
(953
)
Deferred compensation transactions


 
113

 


 


 
1,075

 


 
1,188

 
 
 
1,188

Issuance of treasury stock under 401(k) plan
22,222

 
80

 


 
199

 


 


 
279

 
 
 
279

Balance June 30, 2018
59,852,781

 
$
524,466

 
$
(22,471
)
 
$
(8,407
)
 
$

 
$
(188,518
)
 
$
305,070

 
$
(7,112
)
 
$
297,958

 
* Net income (loss) excludes $(461) of net loss attributable to redeemable noncontrolling interest. Currency translation adjustment excludes $(2,207) 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:
2018
 
2017
Net income (loss)
$
20,423

 
$
(17,122
)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
 

 
 

Depreciation and amortization
30,175

 
29,486

Deferred income tax provision
287

 
1,324

Stock-based compensation
618

 
956

Issuance of treasury stock under 401(k) plan
279

 
270

Foreign currency translation loss
8,034

 
2,467

(Increase) decrease in assets:
 

 
 

Accounts receivable
(70,633
)
 
(34,879
)
Inventories
(47,612
)
 
(43,722
)
Prepaid and other current assets
(4,555
)
 
2,877

Other assets
(621
)
 
3,620

Increase (decrease) in liabilities:
 

 
 

Accounts payable
39,550

 
33,149

Other current liabilities
(660
)
 
(4,922
)
Other liabilities
(5,212
)
 
(4,057
)
Net cash used for operating activities
(29,927
)
 
(30,553
)
Cash flows from investing activities:
 

 
 

Capital expenditures
(18,416
)
 
(15,152
)
Certificates of deposit

 
40,000

Other
884

 
1,038

Net cash (used for) provided by investing activities
(17,532
)
 
25,886

Cash flows from financing activities:
 

 
 

Proceeds from borrowings
40,078

 
27,742

Payment on debt
(24,527
)
 
(29,077
)
Dividends paid
(598
)
 
(570
)
Net cash provided by (used for) financing activities
14,953

 
(1,905
)
Effect of exchange rate changes on cash
(4,573
)
 
1,981

Net decrease in cash and cash equivalents
(37,079
)
 
(4,591
)
Cash and cash equivalents, beginning of period
143,570

 
147,827

Cash and cash equivalents, end of period
$
106,491

 
$
143,236

 
 
 
 
Supplemental information:
 
 
 
Interest paid
$
15,801

 
$
17,916

Income taxes paid, net of refunds received
$
5,025

 
$
3,221

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 June 30, 2018, and the results of operations and cash flows for the three and six months ended June 30, 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 6.50% senior secured notes due 2023 (senior secured notes) were carried at cost of $394.7 million at June 30, 2018. The fair value of the senior secured notes at June 30, 2018, as obtained through an independent pricing source, was approximately $397.0 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, 2018 and 2017. The second quarter 2018 cash dividend of $0.005 per share of common stock was paid on July 16, 2018, to shareholders of record on June 29, 2018.

New accounting standards:

Adoption of new accounting standards
The Company adopted the Financial Accounting Standards Board (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 January 1, 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 January 1, 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
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net sales
 

 
 
 
 

 
 
Agricultural
$
186,870

 
$
172,923

 
$
381,037

 
$
353,439

Earthmoving/construction
198,963

 
150,970

 
387,696

 
286,589

Consumer
43,071

 
40,506

 
85,553

 
81,872

 
$
428,904

 
$
364,399

 
$
854,286

 
$
721,900



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 $0.4 million and $0.9 million of non-service cost from cost of sales to other income on the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2017, respectively. See Note 11 - Employee Benefit Plans in Part I, Item 1 of this Form 10-Q for further discussion.
 
In March 2018, the FASB issued ASU No. 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118." This ASU updates the income tax accounting in US GAAP to reflect the SEC's interpretive guidance released on December 22, 2017, when the 2017 Tax Cuts and Jobs Act (2017 TCJA) was enacted. See Note 15 for more information regarding the impact of the 2017 TCJA.

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 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.

7



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


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.

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 2017 TCJA. Consequently, the amendments eliminate the stranded tax effects resulting from the 2017 TCJA 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):
 
June 30,
2018
 
December 31,
2017
Accounts receivable
$
285,712

 
$
229,677

Allowance for doubtful accounts
(3,312
)
 
(2,974
)
Accounts receivable, net
$
282,400

 
$
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):
 
June 30,
2018
 
December 31,
2017
Raw material
$
99,198

 
$
83,541

Work-in-process
45,069

 
40,525

Finished goods
228,465

 
215,770

 
$
372,732

 
$
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, NET

Property, plant and equipment, net consisted of the following as of the dates set forth below (amounts in thousands):
 
June 30,
2018
 
December 31,
2017
Land and improvements
$
44,145

 
$
46,998

Buildings and improvements
255,716

 
264,078

Machinery and equipment
592,557

 
598,411

Tools, dies and molds
108,987

 
108,649

Construction-in-process
15,179

 
15,349

 
1,016,584

 
1,033,485

Less accumulated depreciation
(623,320
)
 
(612,237
)
 
$
393,264

 
$
421,248


 
Depreciation on property, plant and equipment for the six months ended June 30, 2018 and 2017, totaled $28.3 million and $27.4 million, respectively.

Capital leases included in property, plant, and equipment consisted of the following as of the dates set forth below (amounts in thousands):
 
June 30,
2018
 
December 31,
2017
Buildings and improvements
$
3,897

 
$
4,056

Less accumulated amortization
(2,257
)
 
(2,294
)
 
$
1,640

 
$
1,762

 
 
 
 
Machinery and equipment
$
31,633

 
$
32,379

Less accumulated amortization
(26,694
)
 
(27,260
)
 
$
4,939

 
$
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) June 30, 2018
 
June 30,
2018
 
December 31,
2017
Amortizable intangible assets:
 
 
 
 
 
     Customer relationships
9.2
 
$
13,609

 
$
13,922

     Patents, trademarks and other
7.6
 
14,328

 
15,208

          Total at cost
 
 
27,937

 
29,130

     Less accumulated amortization
 
 
(14,614
)
 
(13,855
)
 
 
 
$
13,323

 
$
15,275


   
Amortization related to intangible assets for the six months ended June 30, 2018 and 2017, totaled $1.3 million and $1.5 million, respectively. 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 June 30, 2018, for each of the years (or other periods) set forth below was as follows (amounts in thousands):
July 1 - December 31, 2018
$
1,203

2019
2,306

2020
2,285

2021
1,164

2022
1,067

Thereafter
5,298

 
$
13,323




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
4,213

 
3,112

Warranty payments made
(3,818
)
 
(3,378
)
Warranty liability, June 30
$
19,007

 
$
17,660



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

 
$
(5,304
)
 
$
394,696

Titan Europe credit facilities
34,186

 

 
34,186

Other debt
32,569

 

 
32,569

Capital leases
520

 

 
520

     Total debt
467,275

 
(5,304
)
 
461,971

Less amounts due within one year
52,358

 

 
52,358

     Total long-term debt
$
414,917

 
$
(5,304
)
 
$
409,613


 

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 June 30, 2018, for each of the years (or other periods) set forth below were as follows (amounts in thousands):
July 1 - December 31, 2018
$
25,358

2019
29,832

2020
8,535

2021
2,921

2022
254

Thereafter
400,375

 
$
467,275


 
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 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.

Titan Europe credit facilities
The Titan Europe credit facilities contain borrowings from various institutions totaling $34.2 million in aggregate principal amount at June 30, 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 June 30, 2018, an outstanding letter of credit under the credit facility totaled $12.3 million and the amount available under the facility totaled $62.7 million based upon eligible accounts receivable and inventory balances. During the first six months of 2018 and at June 30, 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 $8.7 million and $23.8 million at June 30, 2018, respectively. Maturity dates on this debt range from less than one year to three years.



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 and six months ended June 30, 2018, the Company recorded currency exchange gain related to these derivatives of $0.4 million and $0.2 million, respectively.


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 during a six-month period beginning July 9, 2018, and may require Titan to purchase the 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 June 30, 2018, the value of the redeemable noncontrolling interest held by OEP and RDIF was 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 a 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 June 30, 2018 and 2017 (amounts in thousands):
 
2018
 
2017
Balance at January 1
$
113,193

 
$
104,809

   Loss attributable to redeemable noncontrolling interest
(461
)
 
(190
)
   Currency translation
(2,207
)
 
1,121

   Redemption value adjustment
7,021

 
3,099

Balance at June 30
$
117,546

 
$
108,839



This obligation approximates the cost to the Company if all remaining equity interests in the consortium were purchased by the Company on June 30, 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 June 30, 2018, 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, 2018
$
4,177

2019
7,185

2020
5,050

2021
4,006

2022
3,034

Thereafter
6,831

Total future minimum lease payments
$
30,283


At June 30, 2018, the Company had assets held as capital leases with a net book value of $6.6 million included in property, plant and equipment. At June 30, 2018, total future capital lease obligations relating to these leases were as follows (amounts in thousands):
July 1 - December 31, 2018
$
168

2019
159

2020
55

2021
41

2022
43

Thereafter
53

Total future capital lease obligation payments
519

Less amount representing interest
(4
)
Present value of future capital lease obligation payments
$
515


 
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 $1.7 million to the pension plans during the six months ended June 30, 2018, and expects to contribute approximately $3.7 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
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
141

 
$
128

 
$
278

 
$
353

Interest cost
1,098

 
1,163

 
2,181

 
2,334

Expected return on assets
(1,491
)
 
(1,368
)
 
(2,983
)
 
(2,737
)
Amortization of unrecognized prior service cost
50

 
34

 
100

 
68

Amortization of net unrecognized loss
690

 
655

 
1,366

 
1,329

      Net periodic pension cost
$
488

 
$
612

 
$
942

 
$
1,347


Service cost is recorded as cost of sales in the Condensed Consolidated 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. Titan is the 50% owner of one of these distribution facilities, which is located in Canada, and the 40% owner of the other such facility, which 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. Titan owns 43% of the consortium owning Voltyre-Prom, which is subject to a shareholder agreement containing a settlement put option which may require Titan to purchase the remaining equity interests in the consortium. See Note 9 for additional information.
 
The Company also holds a variable interest in five other entities for which Titan is the primary beneficiary. Each of these entities provides specific manufacturing related services at the Company's Tennessee facility. Titan's variable interest in these entities relates to financial support to the entities through providing many of the assets used by these entities in their business. The Company owns no equity in these entities.
 
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 (loss) 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, 2018, and December 31, 2017 (amounts in thousands):
 
June 30,
2018
 
December 31, 2017
Cash and cash equivalents
$
8,911

 
$
10,621

Inventory
12,599

 
13,494

Other current assets
39,244

 
36,334

Property, plant and equipment, net
31,262

 
33,717

Other noncurrent assets
3,880

 
4,250

   Total assets
$
95,896

 
$
98,416

 
 
 
 
Current liabilities
$
36,749

 
$
32,172

Noncurrent liabilities
7,613

 
8,291

  Total liabilities
$
44,362

 
$
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 variable interests 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):
 
June 30,
2018
 
December 31, 2017
Investments
$
4,034

 
$
3,823

Other current assets
1,267

 
1,261

     Total VIE assets
5,301

 
5,084

Accounts payable
1,972

 
1,413

  Maximum exposure to loss
$
7,273

 
$
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 Company also has a trademark license agreement with Goodyear to manufacture and sell certain non-farm tire products in Latin America which expires in June 2019. Royalty expenses recorded were $2.6 million and $2.5 million for the three months ended June 30, 2018 and 2017, respectively. Royalty expenses recorded were $5.3 million and $5.1 million for the six months ended June 30, 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
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Equity investment income
$
1,067

 
$
530

 
$
2,183

 
$
1,350

Interest income
532

 
801

 
1,149

 
1,774

Building rental income
410

 
595

 
988

 
1,195

Investment gain related to investments for deferred compensation
567

 
497

 
688

 
1,347

Other (expense) income
(99
)
 
(673
)
 
5,219

 
(1,239
)
 
$
2,477

 
$
1,750

 
$
10,227

 
$
4,427




15. INCOME TAXES

The Company recorded income tax expense of $1.7 million and $0.1 million for the quarters ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, the Company recorded income tax expense of $0.9 million and $3.6 million, respectively. The Company's effective income tax rate was 23% and (2)% for the quarters ended June 30, 2018 and 2017, and 4% and (26)% for the six months ended June 30, 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 a 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 six months ended June 30, 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. 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 the Company's income tax expense.

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 TCJA was enacted on December 22, 2017, and 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., global intangible low taxed income, or GILTI) 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
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income (loss) attributable to Titan
$
5,697

 
$
(6,293
)
 
$
22,062

 
$
(17,746
)
   Redemption value adjustment
(4,678
)
 
(4,040
)
 
(7,021
)
 
(3,099
)
Net income (loss) applicable to common shareholders
$
1,019

 
$
(10,333
)
 
$
15,041

 
$
(20,845
)
Determination of shares:
 
 
 
 
 
 
 
   Weighted average shares outstanding (basic)
59,750

 
59,577

 
59,731

 
59,067

   Effect of stock options/trusts
128

 

 
146

 

   Weighted average shares outstanding (diluted)
59,878

 
59,577

 
59,877

 
59,067

Earnings per share:
 
 
 
 
 
 
 
   Basic and diluted
0.02

 
(0.17
)
 
0.25

 
(0.35
)

The effect of stock options, shares held by certain trusts, and convertible notes has been excluded from the calculation of EPS for the three and six months ended June 30, 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 each of the three and six months ended June 30, 2017. The weighted average share amount excluded for convertible notes totaled 0.5 million shares for the six months ended June 30, 2017.
 



16



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

17. LITIGATION
 
The Company is a party to routine legal proceedings arising out of the normal course of business. 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.

At June 30, 2018, two of Titan’s subsidiaries were involved in litigation concerning environmental laws and regulations.

In June 2015, Titan Tire Corporation (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 for the Eighth Circuit 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. The Appellee’s brief was filed on May 30, 2018, and the Appellants’ reply was filed on July 9, 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 and six months ended June 30, 2018 and 2017 (amounts in thousands):

Three months ended
 
Six months ended

June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net sales
 
 
 
 

 

Agricultural
$
186,870

 
$
172,923

 
$
381,037

 
$
353,439

Earthmoving/construction
198,963

 
150,970

 
387,696

 
286,589

Consumer
43,071

 
40,506

 
85,553

 
81,872

 
$
428,904

 
$
364,399

 
$
854,286

 
$
721,900

Gross profit
 

 
 

 
 
 
 
Agricultural
$
27,270

 
$
23,037

 
$
57,231

 
$
44,916

Earthmoving/construction
24,260

 
14,254

 
46,722

 
27,152

Consumer
6,782

 
6,729

 
13,920

 
12,153

 
$
58,312

 
$
44,020

 
$
117,873

 
$
84,221

Income (loss) from operations