Titan International - 10-Q quarterly report FY

 

Commission File Number:  1-12936

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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 x  No o

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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

(Amounts in thousands, except earnings per share data)

See accompanying Notes to Consolidated Condensed Financial Statements.

(Amounts in thousands, except share data)

See accompanying Notes to Consolidated Condensed Financial Statements.

(All amounts in thousands, except share data)

See accompanying Notes to Consolidated Condensed Financial Statements.

(Amounts in thousands)

See accompanying Notes to Consolidated Condensed Financial Statements.

In the opinion of Titan International, Inc. (“Titan” or the “Company”), the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are normal and recurring in nature and necessary to present fairly the Company’s financial position as of September 30, 2007, the results of operations for the three and nine months ended September 30, 2007 and 2006, and cash flows for the nine months ended September 30, 2007 and 2006.

Accounting policies have continued without significant change and are described in the Summary of Significant Accounting Policies contained in the Company’s 2006 Annual Report on Form 10-K.  These interim financial statements have been prepared pursuant to the Securities and Exchange Commission’s rules for Form 10-Q’s and, therefore, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2006 Annual Report on Form 10-K.  Certain amounts from prior periods have been reclassified to conform to the current period financial presentation.

On July 31, 2006, Titan Tire Corporation of Bryan, a subsidiary of Titan International, Inc., acquired the off-the-road (OTR) tire assets of Continental Tire North America, Inc. (Continental) in Bryan, Ohio.  Titan Tire Corporation of Bryan purchased the assets of Continental’s OTR tire facility for approximately $53 million in cash proceeds.  Titan paid approximately $44 million at closing and the remaining amount due of approximately $9 million in the third quarter of 2007.  The assets purchased included Continental’s OTR plant, property and equipment located in Bryan, Ohio, inventory and other current assets.  The acquisition included an agreement with Continental to use the Continental and General trademarks on OTR tires.  As of August 1, 2007, Titan discontinued the Continental brand and is now concentrating on building market share with Titan and General branded OTR tires.  In addition, the Company recorded intangibles related to the acquisition as noncurrent assets and assumed warranty liabilities.  This acquisition expanded Titan’s product offering into larger earthmoving, construction and mining tires and added the manufacturing capacity of the Bryan facility.

Pro forma information for the three months and nine months ended is as follows (in thousands, except per share data):

 

The pro forma information is presented for illustrative purposes only and may not be indicative of the results that would have been obtained had the acquisition of assets actually occurred on January 1, 2006, nor is it necessarily indicative of Titan’s future consolidated results of operations or financial position.

The Company had net accounts receivable of $117.5 million at September 30, 2007, and $73.9 million at December 31, 2006.  These amounts are net of allowance for doubtful accounts of $5.7 million at September 30, 2007, and $4.8 million at December 31, 2006.

Inventories consisted of the following (in thousands):

Inventories were $132.6 million at September 30, 2007, and $154.6 million at December 31, 2006.  At September 30, 2007, cost is determined using the first-in, first-out (FIFO) method for approximately 70% of inventories and the last-in, first-out (LIFO) method for approximately 30% of the inventories.  At December 31, 2006, the FIFO method was used for approximately 74% of inventories LIFO was used for approximately 26% of the inventories.  Included in the inventory balances were reserves for slow-moving and obsolete inventory of $3.0 million at September 30, 2007, and $3.2 million at December 31, 2006.

Property, plant and equipment, net was $185.5 million at September 30, 2007, and $184.6 million at December 31, 2006.  Depreciation for the nine months ended September 30, 2007 and 2006, totaled $19.5 million and $17.6 million, respectively.

The Company owns a 17.3% ownership interest in Titan Europe Plc.  In accordance with SFAS No. 115, the Company records the Titan Europe Plc investment as an available-for-sale security and reports the investment at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders’ equity.  The Company’s investment in Titan Europe Plc was $63.1 million at September 30, 2007, and $65.9 million at December 31, 2006.  Titan Europe Plc is publicly traded on the AIM market in London, England.

The Company reviews goodwill to assess recoverability from future operations during the fourth quarter of each annual reporting period, and whenever events and circumstances indicate that the carrying values may not be recoverable.  No goodwill charges were recorded in the first nine months of 2007 or 2006.  There can be no assurance that future goodwill tests will not result in a charge to earnings.

Long-term debt consisted of the following (in thousands):

Aggregate maturities of long-term debt at September 30, 2007, were as follows (in thousands):

In December 2006, the Company closed its offering of $200 million 8% senior unsecured notes.  The notes were sold at par and are due January 2012.  Titan used the net proceeds from this offering to repay outstanding existing debt, excluding the 5.25% senior unsecured convertible notes, and for general corporate purposes.

The Company’s $125 million revolving credit facility with agent LaSalle Bank National Association has a 2009 termination date and is collateralized by a first priority security interest in certain assets of Titan and its domestic subsidiaries.  In February 2007, the Company amended the revolving credit facility.  The amendment extended the termination date to October 2009 (previously October 2008).  The amendment also lowered borrowing rates, which are now based on a pricing grid that varies with amount borrowed.  The borrowings under the facility bear interest at a floating rate of LIBOR plus 1% to 2% (previously 2.75%).  The amendment allows the Company the ability to request an increase from the current $125 million up to $250 million of availability.

At September 30, 2007, there were no cash borrowings on the revolver.  Outstanding letters of credit on the facility were $6.1 million at September 30, 2007, leaving $118.9 million of unused availability on the revolving credit facility.  The facility contains certain financial covenants, restrictions and other customary affirmative and negative covenants.  The Company was in compliance with these covenants and restrictions as of September 30, 2007.

In January 2007, the Company filed a registration statement relating to an offer to the holders of its 5.25% senior unsecured convertible notes due 2009 to convert their notes into Titan’s common stock at an increased conversion rate (the “Offer”).  Per the Offer, each $1,000 principal amount of notes was convertible into 81.0000 shares of common stock, which is equivalent to a conversion price of approximately $12.35 per share. Prior to the Offer, each $1,000 principal amount of notes was convertible into 74.0741 shares of common stock, which was equivalent to a conversion price of approximately $13.50 per share.

The registration statement relating to the shares of common stock to be offered was declared effective February 2007.  In March 2007, the Company announced 100% acceptance of the conversion offer and the $81.2 million of accepted notes were converted into 6,577,200 shares of Titan common stock.  Titan recognized a noncash charge of $13.4 million in connection with this exchange in accordance with SFAS No. 84, “Induced Conversions of Convertible Debt.”

Other debt primarily consisted of industrial revenue bonds, loans from local and state entities, and other long-term notes.  All industrial revenue bonds and other debt were fully paid off in the first quarter of 2007.

The Company provides limited warranties on workmanship on its products in all market segments.  The majority of the Company’s products have a limited warranty that ranges from zero to ten years, with certain products being prorated after the first year.  The Company calculates a provision for warranty expense based on past warranty experience.  The warranty amount increases in the first nine months of 2007 were related to the Company’s higher sales levels.  Warranty accruals are included as a component of other current liabilities on the Consolidated Condensed Balance Sheets.  Changes in the warranty liability consisted of the following(in thousands):

The Company has two frozen defined benefit pension plans and one defined benefit plan that purchased a final annuity settlement in 2002.  The Company currently sponsors five 401(k) retirement savings plans.

During the first nine months of 2007, the Company contributed cash funds of approximately $1 million to the frozen defined benefit pension plans.  In addition, in April 2007 the Company contributed Titan common stock with an approximate value of $5 million to the frozen defined benefit pension plans.  The Company anticipates making no further contributions to these plans during the remainder of 2007.

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 September 30, 2007, future minimum commitments under noncancellable operating leases with initial or remaining terms of at least one year were as follows(in thousands):

The table below presents information about certain revenues and income from operations used by the chief operating decision maker of the Company for the three and nine months ended September 30, 2007 and 2006 (in thousands):

 

Assets by segment were as follows (in thousands):

 

Royalty expense consisted of the following (in thousands):

The Goodyear North American farm tire asset acquisition included a license agreement with The Goodyear Tire & Rubber Company to manufacture and sell certain off-highway tires in North America under the Goodyear name.  Royalty expenses recorded were $1.5 million and $1.1 million for the three months ended September 30, 2007 and 2006, respectively.  Royalty expenses were $4.5 million and $4.0 million for the nine months ended September 30, 2007 and 2006, respectively.

In January 2007, the Company filed a registration statement relating to an offer to the holders of its 5.25% senior unsecured convertible notes due 2009 to convert their notes into Titan’s common stock at an increased conversion rate (the “Offer”).  Per the Offer, each $1,000 principal amount of notes was convertible into 81.0000 shares of common stock, which is equivalent to a conversion price of approximately $12.35 per share.

Prior to the Offer, each $1,000 principal amount of notes was convertible into 74.0741 shares of common stock, which was equivalent to a conversion price of approximately $13.50 per share.  The registration statement relating to the shares of common stock to be offered was declared effective February 2007.  In March 2007, the Company announced 100% acceptance of the conversion offer and the $81.2 million of accepted notes were converted into 6,577,200 shares of Titan common stock.

The Company recognized a noncash charge of $13.4 million in connection with this exchange in accordance with Statement of Financial Accounting Standards (SFAS) No. 84, “Induced Conversions of Convertible Debt.”  This charge does not reflect $1.0 million of interest previously accrued on the notes.  The shares issued for the conversion were issued out of treasury shares.  The exchange resulted in a decrease in treasury stock of $59.0 million and an increase to additional paid-in capital of approximately $35.2 million.  Stockholder’s equity increased by $94.3 million in total as a result of this exchange.

Other income consisted of the following (in thousands):

Debt termination expense of $0.7 million related to fees and expenses for the March 2007 conversion of 100% of the Company’s 5.25% senior unsecured convertible notes.  Interest income increased as a result of higher cash balances.

Income tax expense consisted of the following (in thousands):

The Company recorded income tax expense of $0.1 million for the three months ended September 30, 2007, as compared to $0.3 million in 2006.  Income tax expense was $3.1 million for nine months ended September 30, 2007, as compared to $9.8 million in 2006.  The Company’s effective income tax rate was 66% and 40% for the nine months ended September 30, 2007 and 2006, respectively.  The Company’s income tax expense and rate differs from the amount of income tax determined by applying the U.S. Federal income tax rate to pre-tax income primarily as a result of the $13.4 million noncash charge taken in connection with the 100% conversion of the Company’s convertible debt.  This noncash debt charge is not deductible for income tax purposes.

The Company has applied the provisions of FIN 48 for the period ended September 30, 2007.  Titan has identified its federal tax return and its Illinois state tax return as “major” tax jurisdictions.  The Company is subject to (i) federal tax examinations for periods 2003 to 2006 and (ii) Illinois state income tax examinations for years 2005 and 2006.

Earnings per share (EPS) are as follows (amounts in thousands, except per share data):

 

The effect of stock options has been excluded for the three months ended September 30, 2007, as the effect would have been antidilutive.  The weighted average share amount excluded was 427,000 shares.  The effect of convertible notes has been excluded for the three months ended September 30, 2006, and for the nine months ended September 30, 2007, as the effect would have been antidilutive.  The weighted average share amount excluded was 6,015,000 shares for the three months ended September 30, 2006, and 1,741,000 shares for the nine months ended September 30, 2007.

Comprehensive loss for the third quarter of 2007 totaled $(0.3) million, compared to $(1.5) million in the third quarter of 2006.  Comprehensive loss for the third quarter of 2007 included net loss of $(0.9) million, amortization of pension adjustments of $0.3 million and unrealized gain on the Titan Europe Plc investment of $0.3 million.  Comprehensive loss for the third quarter of 2006 included net income of $0.5 million and unrealized loss on the Titan Europe Plc investment of $(1.9) million.

Comprehensive income for the nine months ended September 30, 2007, was $0.6 million, compared to $15.2 million in 2006.  Comprehensive income for the nine months ended September 30, 2007, included net income of $1.6 million, amortization of pension adjustments of $0.8 million and unrealized loss on the Titan Europe Plc investment of $(1.8) million.  Comprehensive income for the nine months ended September 30, 2006, included net income of $14.7 million and unrealized gain on the Titan Europe Plc investment of $0.5 million.

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 financial condition, results of operations or cash flows of the Company.  However, due to the difficult nature of predicting future legal claims, the Company cannot anticipate or predict the material adverse effect on its financial condition, results of operations or cash flows as a result of efforts to comply with or its liabilities pertaining to legal judgments.

In September 2006, Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” was issued.  This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  This Statement applies under other accounting pronouncements that require or permit fair value measurements.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company is evaluating the effect the adoption of this standard will have on its consolidated financial position, results of operations and cash flows.

In February 2007, SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” was issued.  This statement permits entities to choose to measure many financial instruments and certain other items at fair value.  This statement is effective for fiscal years beginning after November 15, 2007.  The Company is evaluating the effect the adoption of this standard will have on its consolidated financial position, results of operations and cash flows.

On October 1, 2007, the Titan Tire Bryan pension plan, adopted at the date of the Continental OTR asset acquisition and frozen from its inception, received a cash transfer of approximately $24 million from Continental Tire North America’s frozen pension plan for the Bryan, Ohio, location.  The amount transferred into the frozen plan was actuarially approved to be a fully funded plan.

The Company’s $200 million 8% senior unsecured notes are guaranteed by each of Titan’s current and future wholly owned domestic subsidiaries other than its immaterial subsidiaries (subsidiaries with total assets less than $250,000 and total revenues less than $250,000). The note guarantees are joint and several obligations of the guarantors. Non-guarantors consist primarily of foreign subsidiaries of the Company, which are organized outside the United States of America. The following condensed consolidating financial statements are presented using the equity method of accounting.