1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR QUARTERLY PERIOD ENDED: JUNE 30, 1998 Commission File Number: 1-12936 TITAN INTERNATIONAL, INC. (Exact name of Registrant as specified in its Charter) ILLINOIS 36-3228472 (State of Incorporation) (I.R.S. Employer Identification No.) 2701 SPRUCE STREET, QUINCY, IL 62301 (Address of principal executive offices, including Zip Code) (217) 228-6011 (Telephone Number) 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, and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. SHARES OUTSTANDING AT CLASS JULY 31, 1998 ----- ------------------ COMMON STOCK, NO PAR VALUE PER SHARE 21,750,813 ================================================================================
2 TITAN INTERNATIONAL, INC. TABLE OF CONTENTS <TABLE> <CAPTION> Page Number ----------- <S> <C> Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Condensed Balance Sheets - June 30, 1998 and December 31, 1997 1 Consolidated Condensed Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997 2 Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 3 Notes to Consolidated Condensed Financial Statements 4-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-10 Part II. Other Information and Signature 11-13 </TABLE>
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TITAN INTERNATIONAL, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (Amounts in thousands, except share data) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1998 1997 -------- -------- <S> <C> <C> ASSETS Current assets Cash and cash equivalents $ 20,063 $ 21,207 Accounts receivable (net of allowance of $5,783 and $4,598, respectively) 131,349 112,795 Inventories 156,401 138,432 Prepaid and other current assets 41,646 26,162 --------- --------- Total current assets 349,459 298,596 Property, plant and equipment, net 210,117 210,290 Other assets 54,212 33,768 Goodwill, net 41,884 42,488 --------- --------- Total assets $ 655,672 $ 585,142 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt $ 5,206 $ 1,065 Accounts payable 75,671 70,480 Other current liabilities 59,942 43,142 --------- --------- Total current liabilities 140,819 114,687 Deferred income taxes 21,156 21,021 Other long-term liabilities 24,070 19,600 Long-term debt 208,353 181,705 --------- --------- Total liabilities 394,398 337,013 --------- --------- Stockholders' equity Common stock, no par, 60,000,000 shares authorized, 27,468,801 and 27,380,620 issued, respectively 27 27 Additional paid-in capital 214,074 212,615 Retained earnings 134,353 121,934 Accumulated other comprehensive income (4,073) (3,340) Treasury stock at cost: 5,738,784 shares respectively (83,107) (83,107) --------- --------- Total stockholders' equity 261,274 248,129 --------- --------- Total liabilities and stockholders' equity $ 655,672 $ 585,142 ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated condensed financial statements. 1
4 TITAN INTERNATIONAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (Amounts in thousands, except earnings per share data) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 181,216 $ 187,360 $ 368,644 $ 367,568 Cost of sales 153,988 157,175 308,920 308,145 --------- --------- --------- --------- Gross profit 27,228 30,185 59,724 59,423 Selling, general & administrative expenses 13,601 11,451 26,307 23,162 Research and development expenses 1,738 1,685 3,966 2,352 --------- --------- --------- --------- Income from operations 11,889 17,049 29,451 33,909 Interest expense 4,580 4,286 8,719 6,746 Other income (382) (438) (349) (959) --------- --------- --------- --------- Income before income taxes 7,691 13,201 21,081 28,122 Provision for income taxes 2,923 5,016 8,011 10,686 --------- --------- --------- --------- Net income $ 4,768 $ 8,185 $ 13,070 $ 17,436 ========= ========= ========= ========= Earnings per share: Basic $.22 $.38 $.60 $.74 Diluted .22 .38 .60 .74 Average shares outstanding: Basic 21,729 21,627 21,702 23,552 Diluted 21,940 21,772 21,922 23,666 </TABLE> The accompanying notes are an integral part of the consolidated condensed financial statements. 2
5 TITAN INTERNATIONAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Amounts in thousands) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1998 1997 ------ ------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,070 $ 17,436 Depreciation and amortization 16,592 15,515 Increase in receivables (10,995) (24,749) (Increase)/decrease in inventories (11,681) 4,000 Increase in other current assets (14,427) (5,105) Decrease in accounts payable (1,673) (403) Increase in other accrued liabilities 7,634 9,860 Other, net (638) (8,704) -------- -------- Net cash provided by/(used for) operating activities (2,118) 7,850 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net (14,776) (21,080) Acquisitions, net of cash acquired (1,909) 0 Other (7,143) (3,321) -------- -------- Net cash used for investing activities (23,828) (24,401) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 25,231 149,250 Payment of debt (742) (66,604) Repurchase of common stock 0 (72,490) Payment of financing fees 0 (4,250) Dividends paid (651) (734) Other, net 964 827 -------- -------- Net cash provided by financing activities 24,802 5,999 Net decrease in cash and cash equivalents (1,144) (10,552) Cash and cash equivalents at beginning of period 21,207 27,406 -------- -------- Cash and cash equivalents at end of period $ 20,063 $ 16,854 ======== ======== </TABLE> The accompanying notes are an integral part of the consolidated condensed financial statements. 3
6 TITAN INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) A. ACCOUNTING POLICIES 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 its financial position as of June 30, 1998, the results of operations for the three and six months ended June 30, 1998 and 1997, and cash flows for the six months ended June 30, 1998 and 1997. Accounting policies have continued without change and are described in the Summary of Significant Accounting Policies contained in the Company's 1997 Annual Report on Form 10-K. For additional information regarding the Company's financial condition, refer to the footnotes accompanying the financial statements as of and for the year ended December 31, 1997 filed in conjunction with the Company's 1997 Annual Report on Form 10-K. Details in those notes have not changed significantly except as a result of normal interim transactions and certain matters discussed below. B. INVENTORIES Inventories consisted of the following (in thousands): <TABLE> <CAPTION> June 30, December 31, 1998 1997 -------- -------- <S> <C> <C> Raw materials $ 49,839 $ 41,486 Work-in-process 17,459 12,412 Finished goods 84,999 82,219 --------- --------- 152,297 136,117 LIFO reserve 4,104 2,315 --------- --------- $ 156,401 $ 138,432 ========= ========= </TABLE> 4
7 TITAN INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) C. FIXED ASSETS Property, plant and equipment, net reflects accumulated depreciation of $113.1 million and $100.4 million at June 30, 1998, and December 31, 1997, respectively. D. GOODWILL Goodwill, net reflects accumulated amortization of $5.0 million and $4.4 million at June 30, 1998, and December 31, 1997, respectively. E. LONG-TERM DEBT Long-term debt consisted of the following (in thousands): <TABLE> <CAPTION> June 30, December 31, 1998 1997 -------- -------- <S> <C> <C> Senior subordinated notes $ 150,000 $ 150,000 Credit facility 25,000 0 Note payable to Pirelli Armstrong Tire Corp. 19,743 19,743 Industrial revenue bonds & other 18,816 13,027 --------- --------- 213,559 182,770 Less: Amounts due within one year 5,206 1,065 --------- --------- $ 208,353 $ 181,705 ========= ========= </TABLE> Aggregate maturities of long-term debt at June 30, 1998 are as follows (in thousands): <TABLE> <S> <C> July 1 - December 31, 1998 $ 2,617 1999 3,632 2000 20,564 2001 733 2002 and thereafter 186,013 --------- $ 213,559 ========= </TABLE> 5
8 TITAN INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) F. NEW ACCOUNTING STANDARD On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income." Comprehensive income, which includes net income and the effect of currency translation, was $4.5 million for the second quarter of 1998, compared to $7.2 million in 1997. Comprehensive income for the six months ended June 30, 1998 was $12.3 million, compared to $14.2 million in 1997. 6
9 TITAN INTERNATIONAL, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net sales for the quarter ended June 30, 1998, were $181.2 million, compared to 1997 second quarter sales of $187.4 million. Sales for the six months ended June 30, 1998, were $368.6 million, compared to 1997 sales of $367.6 million. During the quarter, the Company experienced a labor strike at its Des Moines, Iowa tire facility, the largest of the Company's tire operations. As a result, tire production volumes decreased which caused decreases in sales and operating results, as discussed below. This decrease was partially offset by continued growth in the agricultural and earthmoving/ construction markets and the acquisition of Fabrica Uruguaya de Neumaticos S.A. ("FUNSA") in June 1998. Sales in the agricultural market were $92.0 and $190.2 million for the second quarter of 1998 and for the six months ended June 30, 1998 respectively, as compared to $98.3 and $190.1 million in 1997. Earthmoving/construction market sales were $46.5 and $94.4 million for the second quarter of 1998 and for the six months ended June 30, 1998 respectively, as compared to $44.1 and $86.7 million in 1997. The Company's consumer market sales were $42.7 and $84.0 million for the second quarter of 1998 and for the six months ended June 30, 1998 respectively, as compared to $45.0 and $90.8 million in 1997. The decrease in consumer market sales is primarily due to the Company's continued focus on its core products within this market. Sales in all markets were negatively impacted by a labor strike at the Company's Des Moines, Iowa facility. The decrease in sales was partially offset by continued growth in the agricultural and earthmoving/construction markets. Cost of sales was $154.0 and $308.9 million for the second quarter of 1998 and for the six months ended June 30, 1998 respectively, as compared to $157.2 and $308.1 million in 1997. Gross profit for the second quarter of 1998 was $27.2 million or 15.0% of net sales, compared to $30.2 million, or 16.1% of net sales for the second quarter of 1997. Gross profit for the six months ended June 30, 1998 was $59.7 million or 16.2% of net sales, compared to $59.4 or 16.2% of net sales for 1997. Gross profit for the second quarter of 1998 was negatively impacted by a labor strike at the Company's Des Moines, Iowa, facility. 7
10 TITAN INTERNATIONAL, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) Selling, general and administrative ("SG&A") expenses for the second quarter of 1998 were $13.6 million or 7.5% of net sales, compared to $11.5 million or 6.1% of sales for 1997. SG&A expenses for the six months ended June 30, 1998 were $26.3 million or 7.1% of sales, compared to $23.2 million or 6.3% of sales in 1997. The rise in SG&A expenses is primarily due to increased selling and other administrative costs. Research and development ("R&D") expenses for the second quarter of 1998 were $1.7 million or 0.9% of net sales, compared to $1.7 million or 0.9% of net sales for 1997. R&D expenses for the six months ended June 30, 1998 were $4.0 million or 1.1% of sales, compared to $2.4 million or 0.7% for 1997. R&D expenses were impacted by increased spending related to the development of the Grizz LSW series of wheel and tire assemblies. Income from operations for the second quarter of 1998 was $11.9 million or 6.6% of net sales, compared to $17.0 million or 9.1% in 1997. Income from operations for the six months ended June 30, 1998 was $29.5 million or 8.0% of net sales, compared to $33.9 million or 9.2% in 1997. Income from operations was negatively impacted by a labor strike at the Company's Des Moines, Iowa facility, increased advertising, administrative costs and research and development spending related to the Grizz LSW series of wheel and tire assemblies. Interest expense was $4.6 and $8.7 million for the second quarter of 1998 and for the six months ended June 30, 1998 respectively, compared to $4.3 and $6.7 million in 1997. Interest expense increased due to the Company's higher average debt during the second quarter of 1998 and for the six months ended June 30, 1998. Net income for the second quarter of 1998 and for the six months ended June 30, 1998 was $4.8 and $13.1 million respectively, compared to $8.2 and $17.4 million in 1997. Basic and diluted earnings per share were $.22 and $.60 for the second quarter of 1998 and the six months ended June 30, 1998 respectively, compared to $.38 and $.74 in 1997. 8
11 TITAN INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES In the first six months of 1998, negative cash flows from operating activities of $2.1 million resulted from increases in receivables, inventories and other current assets. These amounts were partially offset by increases in other accrued liabilities. The increase in receivables is primarily due to payment terms offered to certain European and tire customers and the increase in inventory is primarily due to higher production in the first six months of 1998. The increase in other current assets is primarily due to reimbursable costs related to the Company's new tire facility located in Brownsville, Texas. The Company has invested $14.8 million in capital expenditures in 1998, including $3.5 million for equipment and construction related to the Brownsville, Texas facility. The balance represents various equipment purchases and building improvements to enhance production capabilities. During the second quarter, Titan acquired 81 percent of the common stock of FUNSA. The facility produces car radial and specialty tires including agricultural tires. The Company's net sales, net income and earnings per share for the three and six months ended June 30, 1998, and 1997, would not have been significantly different had the acquisition occurred on January 1, 1997. The acquisition did not have a significant effect on the Company's financial position at June 30, 1998. The Company received $25.0 million in proceeds from its $200 million revolving credit facility. These proceeds have been used to fund operations and capital expenditures. At June 30, 1998, the Company had cash and cash equivalents of $20.1 million. Cash on hand, anticipated internal cash flows and utilization of available borrowing under the Company's credit facilities are expected to provide sufficient liquidity for working capital needs, capital expenditures and acquisitions for the foreseeable future. YEAR 2000 The Company's Year 2000 activities are progressing as planned and as described in the Company's 1997 Annual Report on Form 10-K. 9
12 TITAN INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Readers should note that in addition to the historical information contained herein, this Form 10-Q contains forward-looking statements which are inherently subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by such statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report, as well as in the Company's 1997 Annual Report on Form 10-K. 10
13 TITAN INTERNATIONAL, INC. PART II. OTHER INFORMATION ITEMS 1 THROUGH 3 ARE NOT APPLICABLE. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on May 21, 1998, for the purpose of electing two directors to serve for three year terms, amending the Company's 1994 Non-Employee Director Stock Option Plan and approving the appointment of independent auditors. All of management's nominees for directors as listed in the proxy statement were elected with the following vote: <TABLE> <CAPTION> Shares Shares Voted For Withheld --------- -------- <S> <C> <C> Edward J. Campbell 18,249,103 111,218 Maurice M. Taylor, Jr. 18,249,123 111,198 </TABLE> The amendment to the Company's 1994 Non-Employee Director Stock Option Plan was approved by the following vote: <TABLE> <CAPTION> Shares Shares Shares Voted For Against Withheld --------- -------- -------- <S> <C> <C> 17,049,430 1,272,018 38,873 </TABLE> The appointment of PricewaterhouseCoopers LLP as independent auditors was approved by the following vote: <TABLE> <CAPTION> Shares Shares Shares Voted For Against Withheld --------- -------- -------- <S> <C> <C> 18,338,391 7,401 14,529 </TABLE> 11
14 TITAN INTERNATIONAL, INC. PART II. OTHER INFORMATION ITEM 5. OTHER MATTERS The United Steelworkers Local 164 at Titan Tire Corporation, a subsidiary of Titan International, Inc., chose to go on strike at the Des Moines, Iowa, facility when their contract expired at midnight on April 30, 1998. Titan supervisors, salaried employees and replacement workers will continue production at the facility to minimize the effect to customers. Despite the strike action, Titan Tire Corporation is continuing negotiations with the representatives of the Steelworkers. ITEM 6 IS NOT APPLICABLE. 12
15 SIGNATURE 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. TITAN INTERNATIONAL, INC. (REGISTRANT) DATE: August 7, 1998 BY: /s/Kent W. Hackamack ------------------- ---------------------------------------- Kent W. Hackamack Vice President of Finance and Treasurer (Principal Financial Officer and Principal Accounting Officer) 13
16 Exhibit Index ------------- <TABLE> <CAPTION> Exhibit No. Description - ----------- ----------- <S> <C> 27 Financial Data Schedule </TABLE>