Titan International - 10-Q quarterly report FY

 

Commission File Number:  1-12936

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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, necessary to present fairly the Company’s financial position as of June 30, 2010, the results of operations for the three and six months ended June 30, 2010 and 2009, and cash flows for the six months ended June 30, 2010 and 2009.

Accounting policies have continued without significant change and are described in the Description of Business and Significant Accounting Policies contained in the Company’s 2009 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 2009 Annual Report on Form 10-K.  Certain amount s from prior periods have been reclassified to conform to the current period financial presentation.

The Company records financial instruments, including cash and cash equivalents, accounts receivable, notes receivable, accounts payable and other accruals at cost, which approximates fair value.  Investments in marketable equity securities are recorded at fair value.  The senior unsecured 8% notes due January 2012 (senior notes) and convertible senior subordinated 5.625% notes due 2017 (convertible notes) are carried at cost of $146.4 million and $172.5 million at June 30, 2010, respectively.  The fair value of these notes at June 30, 2010, as obtained through independent pricing sources, was approximately $143.5 million for the senior notes and approximately $203.9 million for the convertible notes.

 

The Company declared cash dividends of $.005 and $.010 per share of common stock for each of the three and six months ended June 30, 2010 and 2009.  The second quarter 2010 cash dividend of $.005 per share of common stock was paid July 15, 2010, to stockholders of record on June 30, 2010.

 

The Company had net accounts receivable balance of $117.9 million at June 30, 2010, and $67.5 million at December 31, 2009.  These amounts are net of allowance for doubtful accounts of $4.2 million at June 30, 2010, and $4.0 million at December 31, 2009.

Inventories consisted of the following (in thousands):

Inventories were $138.4 million at June 30, 2010, and $110.1 million at December 31, 2009.  At June 30, 2010, cost is determined using the first-in, first-out (FIFO) method for approximately 69% of inventories and the last-in, first-out (LIFO) method for approximately 31% of the inventories.  At December 31, 2009, the FIFO method was used for approximately 74% of inventories and LIFO was used for approximately 26% of the inventories.  Included in the inventory balances were reserves for slow-moving and obsolete inventory of $2.3 million at both June 30, 2010, and December 31, 2009.

 

The Company had property, plant and equipment of $248.8 million and $254.5 million at June 30, 2010, and December 31, 2009, respectively.  Depreciation on fixed assets for the six months ended June 30, 2010 and 2009, totaled $17.3 million and $15.0 million, respectively.

Titan Europe Plc is publicly traded on the AIM market in London, England.  The Company’s investment in Titan Europe represents a 22.9% ownership percentage.  The Company has considered the applicable guidance in ASC 323 Investments – Equity Method and Joint Ventures and has concluded that the Company’s investment in Titan Europe Plc should be accounted for as an available-for-sale security and recorded at fair value in accordance with ASC 320 Investments – Debt and Equity Securities as the Company does not have significant influence over Titan Europe Plc.  The investment in Titan Europe Plc is included as a component of other assets on the Consolidated Condensed Balance Sheets.  Titan’s cost basis in Titan Europe is $5.0 million.  Titan’s other comprehen sive income includes a gain on the Titan Europe Plc investment of $4.2 million, which is net of tax of $2.3 million.  The increased value in the Titan Europe Plc investment at June 30, 2010, was due primarily to a higher publicly quoted Titan Europe Plc market price.

 

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.

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

The Company’s senior unsecured 8% notes (senior notes) are due January 2012.  In the second quarter of 2010, the Company repurchased $47.4 million of principal value of senior notes resulting in a loss on senior note repurchase of $2.7 million.  In the first quarter of 2009, the Company repurchased $6.2 million of principal value of senior notes for approximately $4.8 million resulting in a $1.4 million gain on the senior note repurchases.  The Company’s senior notes outstanding balance was $146.4 million at June 30, 2010.

In May 2010, the Company commenced a tender offer to purchase its issued and outstanding senior unsecured 8% notes due January 2012.  As of the expiration of the tender offer on June 10, 2010, there were $47.4 million of the notes tendered and accepted for payment which represented 24.4% of the principal amount of notes outstanding.  In connection with the tender offer, Titan recorded expenses of $2.7 million in the second quarter of 2010.  These expenses were related to: (i) early tender premium of $2.3 million, (ii) unamortized deferred financing fees of $0.3 million and (iii) other fees of $0.1 million.

The Company’s convertible senior subordinated 5.625% notes (convertible notes) are due January 2017.   The initial base conversion rate for the convertible notes is 93.0016 shares of Titan common stock per $1,000 principal amount of convertible notes, equivalent to an initial base conversion price of approximately $10.75 per share of Titan common stock.  If the price of Titan common stock at the time of determination exceeds the base conversion price, the base conversion rate will be increased by an additional number of shares (up to 9.3002 shares of Titan common stock per $1,000 principal amount of convertible notes) as determined pursuant to a formula described in the indenture.  The base conversion rate will be subject to adjustment in certain events.  The Company’s convertible n otes balance was $172.5 million at June 30, 2010.

The Company’s $150 million revolving credit facility (credit facility) with agent Bank of America, N.A. has a January 2012 termination date and is collateralized by a first priority security interest in certain assets of Titan and its domestic subsidiaries.  During the first six months of 2010 and at June 30, 2010, there were no borrowings under the credit facility.

 

The credit facility has an accordion feature that sets the initial loan availability at $150 million with the ability to request increases up to a maximum availability of $250 million.  The credit facility contains certain financial covenants, restrictions and other customary affirmative and negative covenants.   Titan is in compliance with these covenants and restrictions as of June 30, 2010.

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.

9.  EMPLOYEE BENEFIT PLANS

The Company has three frozen defined benefit pension plans and one defined benefit plan that previously purchased a final annuity settlement.  The Company also sponsors four 401(k) retirement savings plans.  The Company expects to contribute approximately $1 million to the pension plans during the remainder of 2010.

The Company has a trademark 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 $2.4 million and $2.2 million for the quarters ended June 30, 2010 and 2009, respectively.  Royalty expenses were $4.5 million and $4.7 million for the six months ended June 30, 2010 and 2009, respectively.

 

Other income consisted of the following (in thousands):

 

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

The Company recorded income tax expense of $2.9 million and $4.2 million for the three and six months ended June 30, 2010, respectively, as compared to $3.8 million and $8.3 million for the three and six months ended June 30, 2009.  The Company’s effective income tax rate was 39% for both of the six months ended June 30, 2010 and 2009.

 

 

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, 2010 and 2009 (in thousands):

Assets by segment were as follows (in thousands):

 

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

 

The effect of convertible notes has been excluded for the six months ended June 30, 2010, as the effect would have been antidilutive.  The weighted average share amount excluded for convertible notes totaled 16.0 million shares.

 

ASC 820 Fair Value Measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers are defined as:

 

Assets and liabilities measured at fair value on a recurring basis consisted of the following (in thousands):

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.

18.  RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements.”  This guidance requires new disclosures for transfers in and out of Level 1 and Level 2 fair value measurements.  This guidance requires separate presentation about purchases, sales, issuances, and settlements for activity in Level 3 fair value measurements.   ASU 2010-06 also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value.  The guidance for new disclosures and clarifications of existing disclosures was effective for interim and annual reporting periods beg inning after December 15, 2009.  The adoption of this part of the guidance had no material effect on the Company’s financial position, results of operations or cash flows.  The guidance related to presentation of Level 3 fair value measurements is effective for fiscal years beginning after December 15, 2010.  The adoption of this part of the guidance is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

 

 

On July 2, 2010, the Company closed on a transaction to purchase $6.5 million of its issued and outstanding senior unsecured 8% notes due January 2012.  In connection with this transaction, Titan will record expenses of approximately $0.3 million in the third quarter of 2010.  These expenses relate primarily to a tender premium of $45 per $1,000 principal amount of the notes.  After this transaction, Titan’s senior note outstanding balance was $139.9 million as of July 2, 2010, compared to a balance of $146.4 million at June 30, 2010.

On July 21, 2010, Titan Tire Corporation, a subsidiary of the Company, purchased the Denman Tire machinery & equipment, including other inventory items, for $3.0 million.  The purchase did not include any land or buildings.  The Company plans to move the machinery and equipment to existing Titan facilities.

 

The Company’s 8% senior unsecured notes and 5.625% convertible senior subordinated 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.