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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

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

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 June 30, 2008, the results of operations for the three and six months ended June 30, 2008 and 2007, and cash flows for the six months ended June 30, 2008 and 2007.

Accounting policies have continued without significant change and are described in the Summary of Significant Accounting Policies contained in the Company’s 2007 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 2007 Annual Report on Form 10-K.  Certain amounts from prior periods have been reclassified to conform to the current period financial presentation.

 

The Company had net accounts receivable balance of $139.4 million at June 30, 2008, and $98.4 million at December 31, 2007.  These amounts are net of allowance for doubtful accounts of $5.8 million at June 30, 2008, and $5.3 million at December 31, 2007.

 

Inventories consisted of the following (in thousands):

Inventories were $118.1 million at June 30, 2008, and $128.0 million at December 31, 2007.  At June 30, 2008, cost is determined using the first-in, first-out (FIFO) method for approximately 66% of inventories and the last-in, first-out (LIFO) method for approximately 34% of the inventories.  At December 31, 2007, the FIFO method was used for approximately 67% of inventories and LIFO was used for approximately 33% of the inventories.  Included in the inventory balances were reserves for slow-moving and obsolete inventory of $4.5 million at June 30, 2008, and $4.7 million at December 31, 2007.

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, net of tax.

The Company’s investment in Titan Europe Plc was $40.8 million at June 30, 2008, and $34.5 million at December 31, 2007.  Titan Europe Plc is publicly traded on the AIM market in London, England.

In April 2008, Titan filed a preliminary proxy statement regarding a special meeting of Titan stockholders to approve the issuance of shares of the Company’s common stock in connection with a proposed offer to purchase up to all the outstanding ordinary shares of Titan Europe Plc.  See Note 21 for additional information.

 

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 six months of 2008 or 2007.  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):

The Company’s $200 million 8% senior unsecured notes are due 2012.

The Company’s $250 million revolving credit facility (Credit Facility) with agent LaSalle Bank National Association (a Bank of America company) has an October 2009 termination date and is collateralized by a first priority security interest in certain assets of Titan and its domestic subsidiaries.  At June 30, 2008, any borrowings under the Credit Facility would have borne interest at a floating rate of prime rate plus 0% to 1% or LIBOR plus 1% to 2%.

There were no cash borrowings under this Credit Facility at June 30, 2008.  Outstanding letters of credit on the facility were $6.1 million at June 30, 2008, leaving $243.9 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 is in compliance with these covenants and restrictions as of June 30, 2008.

 

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.  Warranty accruals are included as a component of other current liabilities on the Consolidated Condensed Balance Sheets.

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

During the first half of 2008, the Company contributed cash funds of $0.1 million to the frozen defined pension plans.  The Company expects to contribute approximately $0.1 million to the pension plans during the remainder of 2008.

 

The Company leases certain buildings and equipment under operating leases.  Certain lease agreements provide for renewal options and payment of property taxes, maintenance and insurance by the Company.

 

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 $2.3 million and $1.5 million for the three months ended June 30, 2008 and 2007, respectively.  Royalty expenses were $4.4 million and $3.0 million for the six months ended June 30, 2008 and 2007, 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.

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.  Stockholders’ equity increased by $80.9 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 the Company’s 5.25% senior unsecured convertible notes.

 

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

The Company recorded income tax expense of $8.9 million and $14.3 million for the three and six months ended June 30, 2008, respectively, as compared to $5.5 million and $3.0 million for the three and six months ended June 30, 2007.  The Company’s effective income tax rate was 40% and 55% for the six months ended June 30, 2008 and 2007, respectively.  The Company’s income tax expense and rate for the six months ended June 30, 2007, 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 charge is not deductible for income tax purposes.

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 six months ended June 30, 2008 and 2007 (in thousands):

Assets by segment were as follows (in thousands):

 

 

The effect of convertible notes has been excluded for the six months ended June 30, 2007, as the effect would have been antidilutive.  The weighted average share amount excluded was 2,625,000 shares.

 

The Company’s quarterly comprehensive income consisted of the following:  (i) for the quarter ended June 30, 2008, net income of $13.3 million, amortization of pension adjustments of $0.3 million and unrealized gain on the Titan Europe Plc investment of $5.2 million for a total comprehensive income of $18.8 million; (ii) for the quarter ended June 30, 2007, net income of $5.0 million, amortization of pension adjustments of $0.5 million and unrealized loss on the Titan Europe Plc investment of $(0.9) million for a total comprehensive income of $4.6 million.

The Company’s year-to-date comprehensive income consisted of the following:  (i) for the six months ended June 30, 2008, net income of $21.4 million, amortization of pension adjustments of $0.5 million and unrealized gain on the Titan Europe Plc investment of $4.1 million for a total comprehensive income of $26.0 million; (ii) for the six months ended June 30, 2007, net income of $2.5 million, amortization of pension adjustments of $0.5 million and unrealized loss on the Titan Europe Plc investment of $(2.1) million for a total comprehensive income of $0.9 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 affect on the consolidated financial condition, results of operations or cash flows of the Company.  However, due to the difficult nature of predicting unresolved and future legal claims, the Company cannot anticipate or predict the material adverse effect on its consolidated financial condition, results of operations or cash flows as a result of efforts to comply with or its liabilities pertaining to legal judgments.

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.  FASB Staff Position (FSP) 157-2 amended SFAS No. 157 to delay the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.

The adoption of SFAS No. 157 for financial assets and financial liabilities, effective January 1, 2008, did not have a material impact on Titan’s consolidated financial position, results of operations or cash flows.  The Company is evaluating the effect the adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities will have on its consolidated financial position, results of operations and cash flows.

SFAS No. 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include:  Level 1 – defined as quoted prices in active markets for identical instruments; Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

In December 2007, SFAS No. 141 (revised 2007), “Business Combinations,” was issued.  This statement requires an acquirer to recognize assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired.  This statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  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 December 2007, SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” was issued.  This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  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 March 2008, SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” was issued.  This statement requires enhanced disclosures about an entity’s derivative and hedging activities.  This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  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 April 2008, Titan filed a preliminary proxy statement regarding a special meeting of Titan stockholders.  The special meeting would be to approve the issuance of up to 9,000,000 shares of the Company’s common stock in connection with a proposed offer to purchase up to all the outstanding ordinary shares of Titan Europe Plc (Titan Europe).

Before the offer may be made, the Company’s stockholders would need to approve the issuance of up to 9,000,000 shares of the Company’s common stock to acquire Titan Europe.  The making of the proposed offer would also be subject to various approvals and pre-conditions.  There can be no assurance that all conditions would be met and that the proposed offer would be made, or that it would be successful if made.  The proxy statement is preliminary and is subject to approval by the Securities and Exchange Commission before a definitive proxy statement would be issued and the special Titan stockholder meeting arrangements would be made.

In June 2008, Titan’s Board of Directors approved a five-for-four stock split with a record date of July 31, 2008, and a payable date of August 15, 2008.  The Company will give five shares for every four shares held as of the record date.  Stockholders will receive one additional share for every four shares owned as of the record date and will receive cash in lieu of fractional shares.

The following unaudited pro forma earnings per share information gives effect to the five-for four stock split as if the split had taken place on January 1, 2007.  Pro forma earnings per share (EPS) are as follows (amounts in thousands, except per share data):

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 full and unconditional, 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.