UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
For Quarterly Period Ended: June 30, 2004
OR
Commission File Number: 1-12936
TITAN INTERNATIONAL, INC.
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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying notes are an integral part of theconsolidated condensed financial statements.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(UNAUDITED)
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MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Titan is a manufacturer of off-highway wheels and tires for agricultural, earthmoving/construction and consumer equipment. Titan manufactures both wheels and tires for the majority of these applications, allowing the Company to provide the value-added service of delivering complete wheel and tire assemblies. The Company offers a broad range of products that are manufactured in relatively short production runs to meet the specifications of original equipment manufacturers (OEMs) and/or the requirements of aftermarket customers.
The Company’s major OEM customers include large manufacturers of off-highway equipment such as Deere & Company, CNH Global N.V., Caterpillar Inc., AGCO Corporation, and Kubota Corporation, in addition to many other off-highway equipment manufacturers. The Company distributes products directly to OEMs, independent and OEM affiliated dealers, and through a network of Titan distribution facilities.
The Company recorded sales of $121.2 million for the second quarter of 2004. Pro forma second quarter 2003 sales were $94.0 million, after removing the sales of Titan Europe. (See Recent Developments.) The sales increase is mainly the result of agricultural market sales, which increased by approximately 44% as compared to second quarter 2003.
Titan’s net income was $5.6 million for the second quarter, compared to the second quarter 2003 net loss of $(8.2) million. Earnings per share was $.32 for the quarter versus loss per share of $(.39) for the same quarter of the previous year.
Recent Developments
Sale of Titan Europe
On April 7, 2004, Titan Luxembourg, a wholly-owned European subsidiary, sold 70% of the common stock of Titan Europe, to the public on the AIM market in London. Titan Luxembourg is the largest single stockholder in Titan Europe Plc, retaining a 30% interest. Titan Luxembourg’s proceeds from the sale of Titan Europe shares were approximately $62.0 million, before fees and expenses of approximately $2.8 million. The Company recorded cash receipts of $50.0 million and a note receivable from the newly created public company, Titan Europe Plc, of $9.2 million.
In the first quarter of 2004, Titan recognized a $3.0 million goodwill impairment on the pending sale of Titan Europe in accordance with the Company’s goodwill impairment policy. Approximately $26.4 million of the cash receipts from the sale of Titan Europe were used to reduce the Company’s debt balances in April 2004. An additional $15.0 million of the cash receipts were used to purchase the shares of Titan International stock (approximately 4.9 million shares) held by Citicorp Venture Capital, Ltd.
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The Company is accounting for its 30% interest in Titan Europe as an equity investment. Titan recognized equity income on its investment in Titan Europe of $0.8 million in the second quarter of 2004. The carrying value of the Company’s equity investment in Titan Europe was $28.0 million at June 30, 2004.
Had the transaction occurred on January 1, 2003, net sales for the three and six months ended June 30, 2004, would have been $121.2 and $238.7 million respectively, compared to $94.0 and $187.3 million in 2003. Income from operations for the three and six months ended June 30, 2004, would have been $12.7 and $24.0 million respectively, compared to loss from operations of $(7.1) and $(10.3) million in 2003. Net income for the three and six months ended June 30, 2004, would have been $5.6 and $12.8 million respectively compared to loss of $(8.4) and $(14.7) million in 2003. Income per share for the three and six months ended June 30, 2004, would have been $0.32 and $0.66 respectively, compared to loss per share of $(0.40) and $(0.71) in 2003.
Stock Repurchase
On April 20, 2004, the Company purchased the shares of Titan International stock held by Citicorp Venture Capital, Ltd. (CVC) (approximately 4.9 million shares) for $15.0 million. CVC was formerly the largest single stockholder of Titan. In connection with this purchase of Titan’s common stock, the Company recorded an accrued contingent liability of $5.0 million for contingent obligations under the stock purchase agreement. These treasury shares were valued at $20.0 million. For further information, see the Company’s Form 8-K filed on April 22, 2004.
Debt Restructuring
New $100 Million Revolving Credit Facility – On July 23, 2004, the Company secured a new $100 million revolving credit agreement with agents LaSalle Bank National Association and General Electric Capital Corporation. This new facility replaces the Company’s former $20 million revolving loan agreement and term loan. Both of these former facilities were terminated on July 23, 2004. Restricted cash of $15.0 million relating to the old revolving loan agreement was released on the date of the transaction. The new revolving credit facility will be secured by a first priority security interest in certain assets of Titan’s domestic subsidiaries. The borrowings under the facility will bear interest at a floating rate of either prime rate plus 1.5% or at LIBOR plus 3.0%. The facility contains certain financial covenants and other customary affirmative and negative covenants.
New 5.25% Senior Unsecured Convertible Notes – On July 26, 2004, the Company sold $115 million of 5.25% senior unsecured convertible notes due 2009. These notes are convertible into shares of the Company’s stock at any time on or before maturity at a conversion price of $13.50 per common share. The net proceeds from the sale of $111.3 million will be applied to the outstanding principal of the Company’s 8.75% senior subordinated notes.
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Redemption of 8.75% Senior Subordinated Notes – On July 26, 2004, the Company notified the trustee to redeem all of Titan’s outstanding 8.75% senior subordinated notes. The redemption date will be August 26, 2004, for the total $136.8 million of notes outstanding at a redemption price of 101.458% per note (expressed as a percentage of the principal amount).
Termination Expenses – In connection with the termination of the Company’s $20 million revolving loan agreement and term loan and the redemption of the 8.75% senior subordinated notes, Titan expects to record expenses of approximately $3.8 million in the third quarter of 2004. These expenses are related to unamortized deferred financing, redemption costs, and prepayment penalty.
Critical Accounting Policies
Preparation of the financial statements and related disclosures in compliance with generally accepted accounting principles requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The Company’s application of these policies involves judgments regarding many factors, which, in and of themselves, could materially impact the financial statements and disclosures. A future change in the assumptions or judgments applied in determining the following matters, among others, could have a material impact on future financial results.
Revenue Recognition
The Company records sales revenue and cost of sales when products are shipped to customers and both title and the risks and rewards of ownership are transferred. Provisions are established for sales returns and uncollectible accounts based on historical experience. Should these experience trends change, adjustments to the estimated provisions would be necessary.
Impairment of Fixed Assets
The Company reviews fixed assets to assess recoverability from future operations whenever events and circumstances indicate that the carrying values may not be recoverable. Impairment losses are recognized in operating results when expected undiscounted future cash flows are less than the carrying value of the asset. Impairment losses are measured as the excess of the carrying value of the asset over the discounted expected future cash flows, or the fair value of the asset. The Company had assets held for sale of $37.4 million at June 30, 2004. Depreciation is not recorded on assets held for sale in accordance with SFAS No. 144. Appraisals from third-party valuation firms support the fair market value of the machinery and equipment at these facilities to be in excess of the carrying value. Significant assumptions relating to future operations must be made when estimating future cash flows. Should unforeseen events occur or should operating trends change significantly, impairment losses could occur.
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Product Costing
Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for approximately 54% of inventories and the first-in, first-out (FIFO) method for the remainder of inventories at June 30, 2004. Market is estimated based on current selling prices. Estimated provisions are established for excess and obsolete inventory, as well as inventory carried above market price, based on historical experience. Should this experience change, adjustments to the estimated provisions would be necessary.
Impairment of Goodwill
The Company’s goodwill was $11.7 million at June 30, 2004, as compared to $18.8 million at December 31, 2003. This $7.1 million reduction was due to the sale of Titan Europe. 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. Significant assumptions relating to future operations must be made when estimating future cash flows in analyzing goodwill for impairment. Should unforeseen events occur or should operating trends change significantly, impairment losses could occur.
Valuation of Investments Accounted for Under the Equity Method
The Company had an equity investment in Titan Europe Plc of $28.0 million at June 30, 2004. The Company assesses the carrying value of its equity investments whenever events and circumstances indicate that the carrying value may not be recoverable. Should unforeseen events occur or should investment trends change significantly, impairment losses could occur.
Retirement Benefit Obligations
Pension benefit obligations are based on various assumptions used by third-party actuaries in calculating these amounts. These assumptions include discount rates, expected return on plan assets, mortality rates and other factors. Revisions in assumptions and actual results that differ from the assumptions affect future expenses, cash funding requirements and obligations. During the six months ended June 30, 2004, the Company contributed $2.9 million to its pension plans. The Company presently anticipates contributing approximately $5.5 million to its pension plans in the remainder of 2004. For more information concerning these costs and obligations, see the discussion of the “Pensions” and Note 20 to the Company’s financial statements on Form 10-K for the fiscal year ended December 31, 2003.
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Results of Operations
Net Sales
Net sales for the quarter ended June 30, 2004, were $121.2 million, compared to 2003 second quarter net sales of $131.0 million. Net sales for the six months ended June 30, 2004, were $288.2 million, compared to 2003 net sales of $260.0 million. The second quarter net sales decrease is attributed to the sale of Titan Europe on April 7, 2004. Had the transaction occurred on January 1, 2003, net sales for the quarter ended June 30, 2003, would have been $94.0 million. The increase in net sales on a comparable basis was $27.2 million. Of this amount, approximately one-third was due to price increases related to higher raw material costs. The remaining two-thirds was attributed to higher demand, primarily from the Company’s agricultural segment, which increased 44% when compared to the previous year’s quarter.
Cost of Sales and Gross Profit
Cost of sales were $99.9 and $239.6 million for the second quarter and for the six months ended June 30, 2004, as compared to $124.9 and $243.5 million in 2003. Gross profit for the second quarter of 2004 was $21.3 million or 17.6% of net sales, compared to $6.1 million or 4.6% of net sales for the second quarter of 2003. Gross profit for the six months ended June 30, 2004, was $48.6 million or 16.9% of net sales, compared to $16.5 million or 6.3% of net sales for 2003. Gross profit was positively impacted by higher sales levels, which allowed the Company to operate more efficiently. Also, the Company has been able to institute certain price increases required due to higher raw material costs.
The Company’s profit margins continue to be affected by the excess capacity at the idle Brownsville, Texas, and Natchez, Mississippi, facilities. The Brownsville location continues as a tire, distribution and warehouse center for the Company. In December 2003, certain machinery and equipment at the Brownsville and Natchez facilities, with a net book value of $15.6 million and $17.3 million, respectively, were reclassified to assets held for sale. Depreciation is not being recorded on assets held for sale in 2004 in accordance with SFAS No. 144. Certain operating costs continue to be incurred at the Brownsville and Natchez facilities. For the quarter and six months ended June 30, 2004, these costs totaled approximately $1.1 and $2.3 million. In the second quarter of 2003, these facilities incurred costs associated with excess capacity of approximately $4.7 million. The $3.6 million reduction in costs at the Brownsville and Natchez facilities in second quarter 2004 as compared to second quarter 2003 positively impacted gross profit.
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Administrative Expenses
Selling, general and administrative (SG&A) and research and development (R&D) expenses for the second quarter of 2004 were $8.6 million or 7.1% of net sales, compared to $11.7 million or 8.9% of net sales for 2003. Expenses for SG&A and R&D, combined with goodwill impairment charges for the six months ended June 30, 2004 were $24.2 million or 8.4% of net sales, compared to $23.7 million or 9.1% of net sales in 2003. Despite the significant increase in sales, the Company was able to maintain administrative expenses near the previous year’s level. Also, administrative expenses as a percentage of net sales were positively impacted by the sale of Titan Europe, which had administrative expenses that averaged 10% to 11% on a historical basis.
Operating Results and Other
Income from operations for the second quarter of 2004 was $12.7 million or 10.5% of net sales, compared to loss from operations of $(5.6) million or (4.3)% in 2003. Income from operations for the six months ended June 30, 2004 was $24.4 million or 8.5% of net sales, compared to loss of $(7.3) million or (2.8)% for 2003. Operating results were primarily impacted by efficiency related to higher sales as discussed in the “Cost of Sales” section. This efficiency was partially offset by the $3.0 million goodwill impairment on Titan Europe.
Interest expense was $4.6 million and $9.8 million for the second quarter and for the six months ended June 30, 2004, respectively, compared to $5.0 million and $10.0 million in 2003. The decreased interest expense in 2004 was primarily due to lower debt balances partially offset by a slightly higher average interest rate.
Income tax expense recorded was $3.3 and $4.7 million for the second quarter and for the six months ended June 30, 2004, as compared to an income tax benefit of $(0.4) and $(0.7) million in 2003. The Company’s income tax expense differs from the amount of income tax determined by applying the statutory U.S. federal income tax rate to pre-tax income (loss) primarily as a result of income tax expense to be paid in foreign jurisdictions and the application of a valuation allowance on the domestic net deferred tax asset balance. As a result of several years of previous losses, the Company had reserved its net deferred tax asset position, consistent with the Company’s accounting policies. As a result of the sale of Titan Europe, the Company will reverse a $15.0 million valuation allowance and use the deferred tax asset to offset the taxable proceeds from the sale. At June 30, 2004, the Company had no remaining valuation allowance.
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Net Income (Loss)
Net income for the second quarter and for the six months ended June 30, 2004, was $5.6 and $10.9 million, respectively, compared to loss of $(8.2) and $(14.1) million in 2003. Basic and diluted earnings per share were $.32 and $.57 for the second quarter and for the six months ended June 30, 2004, compared to (loss) per share of $(.39) and $(.67) in 2003. Net income and earnings per share increased primarily due to higher sales levels and certain price increases required due to raw material costs.
Agricultural Segment Results
Net sales in the agricultural market were $79.8 and $183.1 million for the second quarter and the six months ended June 30, 2004, as compared to $75.8 and $153.9 million in 2003. Had the Titan Europe sale occurred on January 1, 2003, net sales in the agricultural market for the quarter ended June 30, 2003, would have been $55.4 million. Agricultural market net sales increased as a result of increased demand from the Company’s customers. Income from operations in the agricultural market was $13.0 and $25.7 million for the second quarter and the six months ended June 30, 2004, as compared to $0.2 and $3.6 million in 2003. Income from operations in the agricultural market was positively affected by efficiencies gained from higher production levels and certain price increases.
Earthmoving/Construction Segment Results
The Company’s earthmoving/construction market net sales were $33.7 and $87.1 million for the second quarter and the six months ended June 30, 2004, as compared to $45.1 and $86.2 million for 2003. Had the Titan Europe sale occurred on January 1, 2003, net sales in the earthmoving/ construction market for the quarter ended June 30, 2003, would have been $29.8 million. Income from operations in the earthmoving/construction market was $4.9 and $8.8 million for the second quarter and the six months ended June 30, 2004, versus $1.1 and $2.7 million in 2003. Income from operations in the earthmoving/construction market was positively affected by efficiencies gained from higher production levels and certain price increases.
Consumer Segment Results
Consumer market net sales were $7.7 and $18.0 million for the second quarter of 2004 and the six months ended June 30, 2004, as compared to $10.0 and $19.9 million for 2003. Had the Titan Europe sale occurred on January 1, 2003, net sales in the consumer market for the quarter ended June 30, 2003, would have been $8.8 million. Consumer market income from operations was $0.6 and $1.5 million for the second quarter of 2004 and the six months ended June 30, 2004, as compared to loss from operations of $(0.3) and $(0.1) million for 2003. The increase in income from operations in the consumer market was primarily attributed to a change in sales mix to higher margin products.
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Corporate Expenses
Income from operations on a segment basis does not include corporate expenses or depreciation and amortization expense related to property, plant and equipment carried at the corporate level totaling $5.8 and $11.6 million for the second quarter and the six months ended June 30, 2004, respectively, as compared to $6.6 and $13.4 million for comparable periods in 2003. The reduction in corporate expenses is primarily attributed to the sale of Titan Europe.
Segment Results without Europe
The following results are computed as if the Titan Europe sale transaction occurred on January 1, 2003. Overall, net sales for the three and six months ended June 30, 2004, would have been $121.2 and $238.7 million respectively, compared to $94.0 and $187.3 million in 2003. Income from operations for the three and six months ended June 30, 2004, would have been $12.7 and $24.0 million respectively, compared to loss from operations of $(7.1) and $(10.3) million in 2003. Net income for the three and six months ended June 30, 2004, would have been $5.6 and $12.8 million respectively compared to loss of $(8.4) and $(14.7) million in 2003. Income per share for the three and six months ended June 30, 2004, would have been $0.32 and $0.66 respectively, compared to loss per share of $(0.40) and $(0.71) in 2003.
Agricultural Segment without Europe – If the Europe sale transaction occurred on January 1, 2003, the net sales and income (loss) from operations would have been as follows for the agricultural segment. Net sales would have been $79.8 and $158.9 million for the three and six months ended June 30, 2004, as compared to $55.4 and $113.4 million for 2003. Income (loss) from operations would have been $13.0 and $24.8 million for the three and six months ended June 30, 2004, as compared to $(1.1) and $0.9 million in 2003.
Earthmoving/Construction Segment without Europe – If the Europe sale transaction occurred on January 1, 2003, the net sales and income from operations would have been as follows for the earthmoving/construction segment. Net sales would have been $33.7 and $63.6 million for the three and six months ended June 30, 2004, as compared to $29.8 and $56.2 million for 2003. Income from operations would have been $4.9 and $8.4 million for the three and six months ended June 30, 2004, as compared to $0.3 and $1.1 million in 2003.
Consumer Segment without Europe – If the Europe sale transaction occurred on January 1, 2003, the net sales and income (loss) from operations would have been as follows for the consumer segment. Net sales would have been $7.7 and $16.3 million for the three and six months ended June 30, 2004, as compared to $8.8 and $17.7 million for 2003. Income (loss) from operations would have been $0.6 and $1.6 million for the three and six months ended June 30, 2004, as compared to $(0.3) and $(0.2) million in 2003.
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Foreign Subsidiaries Sales
The Company recorded no net sales from foreign subsidiaries in the second quarter ended June 30, 2004, as compared to $37.0 million in 2003. For the six months ended June 30, 2004, foreign sales of $49.5 were recorded, as compared to $72.7 million in 2003. The sales decrease at foreign subsidiaries was due to the sale of Titan Europe. Titan retains a 30% ownership in Titan Europe. This 30% interest in Titan Europe is accounted for as an equity investment, and, therefore, their sales are no longer consolidated with Titan beginning in the second quarter of 2004.
Liquidity and Capital Resources
Cash Flows
As of June 30, 2004, the Company had $21.0 million of unrestricted cash deposited within various bank accounts. The unrestricted cash balance increased by $14.4 million from December 31, 2003, due to the cash flow items discussed in the following paragraphs.
In the first six months of 2004, positive cash flows from operating activities of $20.7 million resulted primarily from net income of $10.9 million and depreciation and amortization of $11.3 million. In comparison, in the first six months of 2003, positive cash flows from operating activities of $0.2 million resulted primarily from depreciation and amortization of $15.8 million, an income tax refund of $7.7 million and an inventory decrease of $3.7 million. These items were offset by the net loss of $(14.1) million and an increase in accounts receivable of $12.6 million.
The Company invested $3.4 million in capital expenditures in the first six months of 2004, as compared to $3.6 million in the first six months of 2003. The expenditures represent various equipment purchases and building improvements to enhance production capabilities. The Company estimates that its total capital expenditures for 2004 could range between $8 million and $10 million. The Company received net proceeds of $50.0 million on the sale of Titan Europe. The Company recorded a $9.2 million note receivable from the newly created public company, Titan Europe Plc.
In the first six months of 2004, $43.6 million was used for financing activities. This use of cash is primarily the result of net debt payment of $28.3 million and repurchase of common stock of $15.0 million. In the first six months of 2003, net cash received from debt borrowing was $5.5 million.
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Debt Funding
The Company’s term loan and revolving loan agreements contain various covenants and restrictions. The financial covenants in these loan agreements require that the (i) Company’s adjusted minimum tangible net worth be equal to or greater than $150 million, (ii) value of equipment, accounts receivable, and inventory be equal to or greater than 3.00 times the outstanding principal balance of the term loan, and (iii) value of accounts receivable and inventory be equal to or greater than $100 million. Restrictions include (i) limits on payments of dividends and repurchases of the Company’s stock, (ii) restrictions on the ability of the Company to make additional borrowings, or to consolidate, merge or otherwise fundamentally change the ownership of the Company, and (iii) limitations on investments, dispositions of assets and guarantees of indebtedness. These covenants and restrictions could limit the Company’s ability to respond to market conditions, to provide for unanticipated capital investments, to raise additional debt or equity capital, to pay dividends or to take advantage of business opportunities, including future acquisitions. If the Company were unable to meet these covenants, the Company would be in default on these loan agreements.
The Company is in compliance with these covenants and restrictions as of June 30, 2004. The Company’s adjusted minimum tangible net worth is required to be equal to or greater than $150 million and the Company computed it to be $175.7 million at June 30, 2004. The value of the equipment, accounts receivable and inventory are required to be equal to or greater than 3.00 times the outstanding principal balance of the term loan and was calculated to be 5.63 times this balance at June 30, 2004. The value of the accounts receivable and inventory must be equal to or greater than $100 million and was computed to be $135.1 million at June 30, 2004.
Other Issues
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The Company’s business is subject to seasonal sales variations that affect inventory levels and accounts receivable balances.
The Company had restricted cash of $51.0 million at June 30, 2004, and December 31, 2003. Restricted cash of $24.5 million is on deposit for a court appeal. Additionally, restricted cash of $15.0 million is collateral on a revolving loan agreement. The $15.0 million cash collateral on the revolving loan agreement was classified as a current asset at June 30, 2004, and released on July 23, 2004, when the revolving loan agreement was terminated. The remaining $11.5 million is collateral on outstanding letters of credit for an industrial revenue bond of $9.6 million and another letter of credit for $1.9 million.
Liquidity Outlook
At June 30, 2004, the Company had unrestricted cash and cash equivalents of $21.0 million and no amount was drawn on the $20 million revolving loan agreement. After the previously described July 2004 debt restructuring, the Company had additional scheduled debt principal payments due amounting to $0.1 million for the remainder of 2004 and $0.2 million in the next twelve months ending June 30, 2005. The Company presently anticipates contributing approximately $5.5 million to its pension plans in the remainder of 2004.
Cash on hand, anticipated internal cash flows from operations and utilization of remaining available borrowings are expected to provide sufficient liquidity for working capital needs, capital expenditures, and payments required on short-term debt for the near term. However, if the Company were to exhaust all currently available working capital sources or were not to meet the financial covenants and conditions of its loan agreements, the Company might find it difficult to secure additional funding in order to meet working capital requirements.
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Outlook
In the first half of 2004, the Company benefited from increased demand for its products. This demand was driven by the increase in sales of new agricultural and earthmoving/construction vehicles that use the Company’s products. Many of the Company’s customers continue to have positive outlooks for the remainder of 2004. During the first half of 2004, the Company was able to offset higher raw material costs with certain price increases. The higher sales levels have allowed the Company to manufacture its products in a more efficient operating environment. Given these facts, the Company is optimistic that it will continue to show improved results as compared to the last several years. However, if the increased demand seen in the first half of 2004 subsides, the Company’s operating results may deteriorate. The Company’s customers generally operate in businesses that have cyclical demand. Historically, the Company sees higher sales levels in the first half of the year because of seasonal demand. As a result, sales in the third and fourth quarters will decline. Because much of our overhead expenses are fixed, seasonal trends can cause reductions in our quarterly profit margins and financial conditions. However, the Company believes third and fourth quarter sales may be stronger than customary for those respective quarters.
Agricultural Segment
Agricultural market sales are expected to remain at an elevated level for the remainder of 2004. Crop and livestock prices have remained high, lifting farm income. The healthy farm economy combined with favorable tax depreciation provisions in the United States is supporting an upturn in the sale of agricultural equipment. Many variables, including weather, export markets, and future government policies and payments can greatly influence the overall health of the agricultural economy.
Earthmoving/Construction Segment
Sales for the earthmoving/construction market are expected to remain higher for the rest of 2004. Rental firms and contractors are replenishing stocks of construction equipment. Military sales, which are included in this segment, are also expected to remain strong. The earthmoving/construction segment is sensitive to interest rate changes, and, therefore, sales in the earthmoving/construction segment may decrease as interest rates increase.
Consumer Segment
Sales in the consumer market are expected to be stable for the duration of 2004. The all terrain vehicle (ATV) wheel and tire market is expected to continue to offer future growth opportunities for Titan. Many items affect the consumer market including weather, competitive pricing, energy prices, and consumer attitude, which has improved but remains cautious.
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Market Risk Sensitive Instruments
The Company’s risks related to commodity prices and interest rates are consistent with those for 2003. For more information, see the “Market Risk Sensitive Instruments” discussion in the Company’s Form 10-K for the fiscal year ended December 31, 2003.
Exchange Rate Sensitivity
The Company is exposed to fluctuations in the Euro, British pound and other world currencies. Titan does not hedge foreign currency transaction or translation exposures. The Company’s net investment in foreign entities translated into U.S. dollars at June 30, 2004, was $40.0 million. This amount changed significantly from the December 31, 2003, amount of $67.5 million as a result of the sale of 70% of Titan Europe. The hypothetical potential loss in value of the Company’s net investment in foreign entities resulting from a 10% adverse change in foreign currency exchange rates at June 30, 2004, would amount to $4.0 million.
Pensions
The Company has two frozen defined benefit pension plans. These plans are described in Note 20 of the Company’s Notes to Consolidated Financial Statements in the 2003 Form 10-K. The Company’s recorded liability for pensions is based on a number of assumptions, including discount rates, rates of return on investments, mortality rates and other factors. Certain of these assumptions are determined with the assistance of outside actuaries. Assumptions are based on past experience and anticipated future trends. These assumptions are reviewed on a regular basis and revised when appropriate. Revisions in assumptions and actual results that differ from the assumptions affect future expenses, cash funding requirements and the carrying value of the related obligations. During the six months ended June 30, 2004, the Company contributed $2.9 million to the pension plans. The Company presently anticipates contributing approximately $5.5 million to the pension plans in the remainder of 2004.
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New Accounting Standards
Financial Accounting Standards Board Interpretation Number 46
In December 2003, Financial Accounting Standards Board Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities,” was revised. FIN No. 46 was originally issued in January 2003 and requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the activities of the variable interest entity or is entitled to receive a majority of the entity’s residual returns. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. For entities created prior to this date, adoption of the statement and interpretations is required to be applied in the first interim period ending after March 15, 2004. Certain disclosure requirements were required for all financial statements issued after January 1, 2003. The adoption of this interpretation had no material effect on the Company’s financial position, cash flows or results of operations.
Statement of Financial Accounting Standards Number 132
In December 2003, Statement of Financial Accounting Standards (SFAS) No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” was revised. The new Statement does not change the measurement or recognition of those plans that is required by previously issued standards. The Statement retains the disclosure requirements contained in SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” which it replaces, and also requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The additional disclosures required by SFAS No. 132 (revised 2003) are effective for fiscal years ending after December 15, 2003. The Company has disclosed the additional information required by this statement. The adoption of SFAS No. 132 (revised 2003) had no material effect on the Company’s financial position, cash flows or results of operations.
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Safe Harbor under The Private Securities Litigation Reform Act of 1995
This Form 10-Q contains forward-looking statements, including statements regarding, among other items, (i) anticipated trends in the Company’s business, (ii) future expenditures for capital projects, (iii) the Company’s ability to continue to control costs and maintain quality, (iv) meeting financial covenants and conditions of its loan agreements, (v) the Company’s business strategies, including its intention to introduce new products, (vi) expectations concerning the performance and commercial success of the Company’s existing and new products and (vii) the Company’s intention to consider and pursue acquisitions and divestitures. Readers of this Form 10-Q should understand that these forward-looking statements are based on the Company’s expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company’s control.
Actual results could differ materially from these forward-looking statements as a result of certain factors, including, (i) changes in the Company’s end-user markets as a result of world economic or regulatory influences, (ii) fluctuations in currency translations, (iii) changes in the competitive marketplace, including new products and pricing changes by the Company’s competitors, (iv) availability and price of raw materials, (v) levels of operating efficiencies, (vi) actions of domestic and foreign governments, (vii) results of investments, and (vii) ability to secure financing at reasonable terms. Any changes in such factors could lead to significantly different results. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this document will in fact transpire.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to Item 2, Part I of this report.
Item 4. Controls and Procedures
The Company’s principal executive officer and principal financial officer believe the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective based on their most recent evaluation, which was completed as of June 30, 2004. During the quarter ended June 30, 2004, there were no significant changes in internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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PART II. FINANCIAL INFORMATION
Item 2. Changes in Securities and use of Proceeds
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Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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EXHIBIT INDEX
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