Titan International - 10-Q quarterly report FY2011 Q3

 

Commission File Number:  1-12936

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See accompanying Notes to Consolidated Condensed Financial Statements.

(Amounts in thousands, except share data)

 

See accompanying Notes to Consolidated Condensed Financial Statements.

 

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 for a fair statement of the Company’s financial position as of September 30, 2011, the results of operations for the three and nine months ended September 30, 2011 and 2010, and cash flows for the nine months ended September 30, 2011 and 2010.

Accounting policies have continued without significant change and are described in the Description of Business and Significant Accounting Policies contained in the Company’s 2010 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 2010 Annual Report on Form 10-K.

Sales and revenues are presented net of sales taxes and other related taxes.

The Company reports investments in marketable securities classified as available-for-sale at fair value.  Unrealized gains or losses on available-for-sale marketable securities are reported, net of tax, as a component of other comprehensive income.  For unrealized losses which are determined to be other-than-temporary, the loss is recorded as a component of other income (loss).  Realized gains and losses on marketable securities are recorded as a component of other income (loss).

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.  Investments in marketable equity securities are recorded at fair value.  The senior secured 7.875% notes due 2017 (senior secured notes) and convertible senior subordinated 5.625% notes due 2017 (convertible notes) are carried at cost of $200.0 million and $112.9 million at September 30, 2011, respectively.  The fair value of these notes at September 30, 2011, as obtained through independent pricing sources, was approximately $210.0 million for the senior secured notes and approximately $192.4 million for the convertible notes.  The increase in the fair value of the convertible notes is due primarily to the increased value of the underlying common stock.

 

The Company declared cash dividends of $.005 and $.015 per share of common stock for each of the three and nine months ended September 30, 2011 and 2010.  The third quarter 2011 cash dividend of $.005 per share of common stock was paid October 15, 2011, to stockholders of record on September 30, 2011.

 

The Company amended its 2010 Annual Report on Form 10-K on November 9, 2011 to restate its December 31, 2010 consolidated financial statements.  The December 31, 2010 condensed balance sheet in this Form 10-Q includes the effect of this restatement.  For additional information, see the Form 10-K/A filed on November 9, 2011.

On April 1, 2011, Titan purchased a 70% controlling interest in AII Holding, Inc. (AII) for $1.3 million of Titan stock and payment of $2.3 million for AII’s debt.  The fair value of the identified assets acquired less liabilities assumed exceeded the fair value of the consideration transferred and noncontrolling interest.  Therefore, a bargain purchase gain of $0.9 million was recorded on the transaction.  

On April 1, 2011, Titan closed on the acquisition of The Goodyear Tire & Rubber Company’s (Goodyear) Latin American farm tire business for approximately $98.6 million U.S. dollars, subject to post-closing conditions and adjustments.  In addition, there were approximately $1.3 million of acquisition related costs recorded as selling, general and administrative costs during the nine months ended September 30, 2011.  The transaction includes Goodyear’s Sao Paulo, Brazil manufacturing plant, property, equipment; inventories; a licensing agreement that allows Titan to sell Goodyear-brand farm tires in Latin America for seven years; and extends the North American licensing agreement for seven years.  Net sales and net income before taxes from the acquisition date included in the statement of operations was $185.9 million and $11.5 million, respectively.

The Company funded the acquisition with cash on hand.  The purchase price was allocated to the assets acquired and liabilities assumed based on their fair values.  Inventory was valued using the comparative sales method.  Real and personal property was valued at fair value.  The excess of the purchase price over the identifiable assets acquired and liabilities assumed was reflected as goodwill.  The goodwill was allocated to the agricultural segment.  The Company continues to evaluate the preliminary purchase price allocation, primarily the value of certain deferred taxes and goodwill, and may revise the purchase price allocation in future periods as these estimates are finalized.

The preliminary purchase price allocation includes $42.5 million for prepaid royalty.  The prepaid royalty is for a seven year period and was calculated using a 2% royalty discounted at a 10% rate.  The prepaid royalty and discount will be amortized over the seven year period of the agreement.  The current portion of the prepaid royalty was $3.9 million and is included in prepaid & other current assets.  The noncurrent portion of the prepaid royalty was $38.6 million and is included in other assets.  At September 30, 2011, the current balance of the prepaid royalty was $4.1 million and the noncurrent balance of the prepaid royalty was $35.0 million.

The preliminary purchase price allocation includes $53.9 million for supply agreement liability which was valued using the incremental income method.  The supply agreement liability was recorded as the supply agreements are for sales at below market prices.  The liability will be amortized with an offset to cost of sales over the three year life of the agreement.  The current portion of the supply agreement was $18.0 million and is included in other current liabilities.  The noncurrent portion of the supply agreement was $35.9 million and is included in other noncurrent liabilities.  At September 30, 2011, the current balance of the supply agreement liability was $15.8 million and the noncurrent balance of the supply agreement liability was $23.6 million.

The following unaudited pro forma financial information gives effect to the acquisition of Goodyear’s Latin American farm tire business as if the acquisition had taken place on January 1, 2010.  The pro forma financial information for the Sao Paulo, Brazil manufacturing facility was derived from The Goodyear Tire & Rubber Company’s historical accounting records.  These amounts have been calculated by adjusting the historical results of the Sao Paulo, Brazil facility to reflect the additional depreciation and the amortization of the prepaid royalty discount and supply agreement liability assuming the fair value adjustments had taken place.

Pro forma financial information for the three and nine months ended September 30, 2011 and 2010, is as follows :

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 actually occurred on January 1, 2010, nor is it necessarily indicative of Titan’s future consolidated results of operations or financial position.

 

 

 

Inventories consisted of the following (in thousands):

At September 30, 2011, approximately 32% of the Company’s inventories were valued under the last-in, first-out (LIFO) method.  At December 31, 2010, approximately 39% of the Company’s inventories were valued under the LIFO method.  The remaining inventories were valued under the first-in, first-out (FIFO) method or average cost method.  All inventories are valued at lower of cost or market.

 

Property, plant and equipment, net consisted of the following (in thousands):

Depreciation on fixed assets for the three months ended September 30, 2011 and 2010, totaled $11.1 million and $8.4 million, respectively.  Depreciation on fixed assets for the nine months ended September 30, 2011 and 2010, totaled $31.4 million and $25.7 million, respectively.

Titan Europe Plc is publicly traded on the AIM market in London, England.  The Company’s investment in Titan Europe represents a 21.8% ownership percentage.  The Company has considered the applicable guidance in Accounting Standards Codification (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 Plc is $5.0 million.  Titan’s accumulated other comprehensive income includes a gain on the Titan Europe Plc investment of $14.9 million, which is net of tax of $8.0 million.  The increased value in the Titan Europe Plc investment at September 30, 2011, was due primarily to a higher publicly quoted Titan Europe Plc market price.

The Company’s goodwill balance is related to the acquisition of Goodyear’s Latin American farm tire business which included the Sao Paulo, Brazil manufacturing facility.  The Company is in the process of finalizing the preliminary purchase price allocation for the acquisition.  The final amount of goodwill recorded on this transaction may be adjusted based on the finalized purchase price allocation.  Goodwill is included as a component of other assets in the Consolidated Condensed Balance Sheets.

 

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 7.875% senior secured notes (senior secured notes) are due October 2017.  These notes are secured by the land and buildings of the following subsidiaries of the Company:  Titan Tire Corporation, Titan Wheel Corporation of Illinois, Titan Tire Corporation of Freeport, and Titan Tire Corporation of Bryan.  The Company’s senior secured notes outstanding balance was $200.0 million at September 30, 2011.

The Company’s 5.625% convertible senior subordinated 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 notes balance was $112.9 million at September 30, 2011.

In the first quarter of 2011, the Company closed an Exchange Agreement with a note holder of the convertible notes, pursuant to which such holder converted approximately $59.6 million in aggregate principal amount of the Convertible Notes into approximately 6.6 million shares of the Company’s common stock, plus a payment for the accrued and unpaid interest.  In connection with the exchange, the Company recognized a noncash charge of $16.1 million in accordance with ASC 470-20 Debt – Debt with Conversion and Other Options.

In the first quarter of 2011, Titan satisfied and discharged the indenture relating to the 8% senior unsecured notes due January 2012 by depositing with the trustee $1.1 million cash representing the outstanding principal of such notes and interest payments due on July 15, 2011, and at maturity on January 15, 2012.  Titan irrevocably instructed the trustee to apply the deposited money toward the interest and principal of the notes.

The Company’s $100 million revolving credit facility (credit facility) with agent Bank of America, N.A. has a January 2014 termination date and is collateralized by the accounts receivable and inventory of Titan and certain of its domestic subsidiaries.  During the first nine months of 2011 and at September 30, 2011, there were no borrowings under the credit facility.  Outstanding letters of credit were $12.0 million at September 30, 2011, leaving $88.0 million of unused availability on the credit facility.  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 September 30, 2011.

In May 2011, the Company entered into a two-year, unsecured $10.0 million Term Loan with Bank of America, N.A. (BoA term loan) to provide working capital for the Sao Paolo, Brazil manufacturing facility.  Borrowings under the BoA term loan bear interest at a rate equal to LIBOR plus 200 basis points.  The BoA term loan shall be a minimum of $5.0 million with the option for an additional $5.0 million loan for a maximum of $10.0 million.  The BoA loan is due May 2013.  The Company entered into an interest rate swap agreement and cross currency swap transaction with Bank of America Merrill Lynch Banco Multiplo S.A. that is designed to convert the outstanding $5.0 million US Dollar based LIBOR loan to a Brazilian Real based CDI loan.    See Note 11 for additional information.  As of September 30, 2011, the Company had $5.0 million outstanding on this loan and the interest rate including the effect of the swap agreement was approximately 14%.

The Company’s wholly-owned Brazilian subsidiary, Titan Pneus Do Brasil Ltda (Titan Brazil), has a revolving line of credit (Brazil line of credit) established with Bank of America Merrill Lynch Banco Multiplo S.A. in May 2011 that is secured by a $12.0 million line of credit between the Company and Bank of America N.A. under the $100.0 million credit facility.  Titan Brazil could borrow up to 16.0 million Brazilian Reais, which equates to approximately $8.6 million dollars as of September 30, 2011, for working capital purposes.  Under the terms of the Brazil line of credit, borrowings, if any, bear interest at a rate of LIBOR plus 247 basis points.  At September 30, 2011 there was $7.8 million outstanding and the interest rate was approximately 3%.

 

The Company uses a financial derivative to mitigate its exposure to volatility in the interest rate and foreign currency exchange rate in Brazil.  The Company uses this derivate instrument to hedge exposure in the ordinary course of business and does not invest in derivative instruments for speculative purposes.  In order to reduce interest rate and foreign currency risk on the BoA Term Loan, the Company entered into an interest rate swap agreement and cross currency swap transaction with Bank of America Merrill Lynch Banco Multiplo S.A. that is designed to convert the outstanding $5.0 million US Dollar based LIBOR loan to a Brazilian Real based CDI loan.  The Company has not designated this agreement as a hedging instrument.  Changes in the fair value of the cross currency swap are recorded in other income (expense) and changes in the fair value of the interest rate swap agreement are recorded as interest expense (or gain as an offset to interest expense).  For the three months ended September 30, 2011, the Company recorded interest expense of $0.1 million related to this derivative.  For the nine months ended September 30, 2011, the Company recorded interest expense of $0.2 million related to this derivative.

 

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.

 

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 $0.6 million to the frozen pension plans during the remainder of 2011.

 

The Company has a trademark license agreement with Goodyear to manufacture and sell certain off-highway tires in North America and Latin America under the Goodyear name.  The North American and Latin American royalties were prepaid for seven years as a part of the Goodyear Latin American farm tire acquisition.  Royalty expenses recorded were $2.3 million and $2.3 million for the quarters ended September 30, 2011 and 2010, respectively.  Royalty expenses were $7.5 million and $6.8 million for the nine months ended September 30, 2011 and 2010, respectively.

Other income consisted of the following (in thousands):

 

The Company recorded income tax expense of $12.7 million and $35.3 million for the three and nine months ended September 30, 2011, respectively, as compared to $2.6 million and $6.8 million for the three and nine months ended September 30, 2010.  The Company’s effective income tax rate was 45% and 39% for the nine months ended September 30, 2011 and 2010, respectively.  The Company’s 2011 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 $16.1 million noncash charge taken in connection with the exchange agreement on the Company’s convertible debt.  This noncash charge is not fully deductible for income tax purposes.

 

Comprehensive income consisted of the following (in thousands):

Assets by segment were as follows (in thousands):

There were no stock options/trusts or convertible notes that were antidilutive for the periods presented.

 

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:

Business Combinations

In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-29, “Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations.”  This update addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations.  The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The amendments in this update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.  The amendments in this update were effective prospectively for business combinations for which the acquisition date was on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  The adoption of this guidance did not have a material effect on the Company’s financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  This update establishes common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS).  The amendments in this update are effective during interim and annual periods beginning after December 15, 2011.  The adoption of this update is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.”  The objective of this update is to improve the comparability, consistency, and transparency of financial reporting to increase the prominence of items reported in other comprehensive income.  This update requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of this update is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles–Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.”  The objective of this update is to simplify how entities test goodwill for impairment.  The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350.  The amendments in this update are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted.  The adoption of this update is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

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.

The Company’s 5.625% convertible senior subordinated notes are guaranteed by the following 100% owned subsidiaries of the Company:  Titan Tire Corporation, Titan Tire Corporation of Bryan, Titan Tire Corporation of Freeport, Titan Tire Corporation of Texas, Titan Wheel Corporation of Illinois, and Titan Wheel Corporation of Virginia.  The note guarantees are full and unconditional, joint and several obligations of the guarantors.  The guarantees of the guarantor subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions.  The following condensed consolidating financial statements are presented using the equity method of accounting for the parent and guarantor subsidiaries.  Certain sales & marketing expenses recorded by non-guarantor subsidiaries have not been allocated to the guarantor subsidiaries.