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: SEPTEMBER 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 OCTOBER 30, 1998 ----- --------------------- COMMON STOCK, NO PAR VALUE PER SHARE 20,920,613
2 <TABLE> <CAPTION> TITAN INTERNATIONAL, INC. TABLE OF CONTENTS Page Number ----------- <S> <C> Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Condensed Balance Sheets - September 30, 1998 and December 31, 1997 1 Consolidated Condensed Statements of Operations For the Three and Nine Months Ended September 30, 1998 and 1997 2 Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 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 7-9 Part II. Other Information and Signature 10-11 </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> SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------- <S> <C> <C> ASSETS Current assets Cash and cash equivalents $ 18,397 $ 21,207 Accounts receivable (net of allowance of $5,970 and $4,598, respectively) 117,273 112,795 Inventories 168,573 138,432 Prepaid and other current assets 28,652 26,162 -------- -------- Total current assets 332,895 298,596 Property, plant and equipment, net 246,659 210,290 Other assets 46,197 33,768 Goodwill, net 41,831 42,488 -------- -------- Total assets $667,582 $585,142 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt $ 4,945 $ 1,065 Accounts payable 71,091 70,480 Other current liabilities 74,548 43,142 -------- -------- Total current liabilities 150,584 114,687 Deferred income taxes 21,156 21,021 Other long-term liabilities 23,739 19,600 Long-term debt 213,171 181,705 -------- -------- Total liabilities 408,650 337,013 -------- -------- Stockholders' equity Common stock, no par, 60,000,000 shares authorized, 27,489,597 and 27,380,620, respectively 27 27 Additional paid-in capital 214,443 212,615 Retained earnings 134,451 121,934 Accumulated other comprehensive income (591) (3,340) Treasury stock at cost: 6,316,784 and 5,738,784 shares, Respectively (89,398) (83,107) -------- -------- Total stockholders' equity 258,932 248,129 -------- -------- Total liabilities and stockholders' equity $667,582 $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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 149,186 $ 156,679 $ 517,830 $ 524,247 Cost of sales 130,166 133,991 439,086 442,136 --------- --------- --------- --------- Gross profit 19,020 22,688 78,744 82,111 Selling, general & administrative expenses 12,538 11,044 38,845 34,206 Research and development expenses 1,465 2,453 5,431 4,805 --------- --------- --------- --------- Income from operations 5,017 9,191 34,468 43,100 Interest expense 4,678 4,202 13,397 10,948 Other income (334) (862) (683) (1,821) --------- --------- --------- --------- Income before income taxes 673 5,851 21,754 33,973 Provision for income taxes 256 2,224 8,267 12,910 --------- --------- --------- --------- Net income $ 417 $ 3,627 $ 13,487 $ 21,063 ========= ========= ========= ========= Earnings per share: Basic $ .02 $ .17 $ .62 $ .91 Diluted $ .02 $ .17 $ .62 $ .91 Average shares outstanding: Basic 21,657 21,615 21,687 22,899 Diluted 21,725 21,831 21,856 23,047 </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> NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 ---- ---- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,487 $ 21,063 Depreciation and amortization 25,322 23,755 (Increase)/decrease in receivables 6,387 (12,043) (Increase)/decrease in inventories (18,860) 8,448 Increase in other current assets (1,176) (8,646) Decrease in accounts payable (6,878) (4,587) Increase in other accrued liabilities 6,769 7,504 Other, net (512) (6,028) --------- --------- Net cash provided by operating activities 24,539 29,466 Cash flows from investing activities: Capital expenditures, net (28,462) (29,981) Acquisitions, net of cash acquired (14,686) 0 Other (7,143) (3,321) --------- --------- Net cash used for investing activities (50,291) (33,302) CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 30,000 149,250 Payment of debt (954) (75,690) Repurchase of common stock (5,850) (72,816) Payment of financing fees (610) (4,300) Dividends paid (977) (1,059) Other, net 1,333 1,464 --------- --------- Net cash provided by/(used for) financing activities 22,942 (3,151) Net decrease in cash and cash equivalents (2,810) (6,987) Cash and cash equivalents at beginning of period 21,207 27,406 --------- --------- Can and cash equivalents at end of period $ 18,397 $ 20,419 ========= ========= </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 September 30, 1998, the results of operations for the three and nine months ended September 30, 1998 and 1997, and cash flows for the nine months ended September 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> September 30, December 31, 1998 1997 ------------ ------------ <S> <C> <C> Raw materials $ 58,350 $ 41,486 Work-in-process 18,068 12,412 Finished goods 87,361 82,219 -------- -------- 163,779 136,117 LIFO reserve 4,794 2,315 -------- -------- $168,573 $138,432 ======== ======== </TABLE> C. FIXED ASSETS Property, plant and equipment, net reflects accumulated depreciation of $120.5 million and $100.4 million at September 30, 1998, and December 31, 1997, respectively. The Company acquired certain assets of Condere Corporation from the United States Bankruptcy Court for the Southern District of Mississippi for a total estimated purchase price of $28 million, which included a cash payment of $13 million. 4
7 TITAN INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) D. GOODWILL Goodwill, net reflects accumulated amortization of $5.4 million and $4.4 million at September 30, 1998, and December 31, 1997, respectively. E. LONG-TERM DEBT Long-term debt consisted of the following (in thousands): <TABLE> <CAPTION> September 30, December 31, 1998 1997 ---- ---- <S> <C> <C> Senior subordinated notes $ 150,000 $ 150,000 Credit facility 30,000 0 Note payable to Pirelli Armstrong Tire Corp. 19,743 19,743 Industrial revenue bonds and other 18,373 13,027 ---------- ---------- 218,116 182,770 Less: Amounts due within one year 4,945 1,065 ---------- ---------- $ 213,171 $ 181,705 ========== ========== </TABLE> Aggregate maturities of long-term debt at September 30, 1998 are as follows (in thousands): October 1 - December 31, 1998 $ 1,306 1999 4,504 2000 20,560 2001 733 2002 and thereafter 191,013 --------- $ 218,116 In September 1998, the Company increased its availability under its credit facility from $200 million to $250 million. Interest rate and foreign currency borrowing options and covenants under the new facility remain similar to those under the prior facility. 5
8 TITAN INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) F. STOCK REPURCHASE PROGRAM The Company's Board of Directors has authorized the Company to repurchase up to ten million shares of its common stock. During the quarter ended September 30, 1998, the Company repurchased 0.6 million shares of common stock in the open market. The Company is authorized to repurchase an additional 3.7 million common shares. G. 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 $3.9 million for the third quarter of 1998, compared to $3.7 million in 1997. Comprehensive income for the nine months ended September 30, 1998 was $16.2 million, compared to $23.3 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 September 30, 1998, were $149.2 million compared to 1997 third quarter sales of $156.7 million. Sales for the nine months ended September 30, 1998, were $517.8 million, compared to 1997 sales of $524.2 million. During the quarter, the Company continued to experience a labor strike at its Des Moines, Iowa tire facility, the largest of the Company's tire operations. Production capacity at the Des Moines, Iowa tire facility has decreased to approximately half of full capacity resulting in a decrease in tire production volume and therefore a decrease in sales and operating results, as discussed below. The decrease in sales was partially offset by the acquisition of Fabrica Uruguaya de Neumaticos S.A. ("FUNSA") in June 1998. Sales in the agricultural market were $69.7 and $259.9 million for the third quarter of 1998 and for the nine months ended September 30, 1998 respectively, as compared to $78.9 and $269.0 million in 1997. Earthmoving/construction market sales were $40.8 and $135.2 million for the third quarter of 1998 and for the nine months ended September 30, 1998 respectively, as compared to $40.7 and 127.3 million in 1997. The Company's consumer market sales were $38.7 and $122.7 million for the third quarter of 1998 and for the nine months ended September 30, 1998 respectively, as compared to $37.1 and $127.9 million in 1997. Sales in all markets were negatively impacted by a labor strike at the Company's Des Moines, Iowa facility. Cost of sales was $130.2 and $439.1 million for the third quarter of 1998 and for the nine months ended September 30, 1998 respectively, as compared to $134.0 and $442.1 million in 1997. Gross profit for the third quarter of 1998 was $19.0 million or 12.7% of net sales, compared to $22.7 million or 14.5% of net sales for the third quarter of 1997. Gross profit for the nine months ended September 30, 1998 was $78.7 million or 15.2% of net sales, compared to $82.1 million or 15.7% for 1997. Gross profit for the third quarter of 1998 and for the nine months ended September 30, 1998, was negatively impacted by inefficiencies caused by the labor strike at the Company's Des Moines, Iowa facility. Selling, general and administrative ("SG&A") expenses for the third quarter of 1998 were $12.5 million or 8.4% of net sales, compared to $11.0 million or 7.0% of sales for 1997. SG&A expenses for the nine months ended September 30, 1998 were $38.8 million or 7.5% of sales, compared to $34.2 million or 6.5% of sales in 1997. The rise in SG&A expenses is primarily due to acquisitions coupled with increased administrative and systems staffing. Research and development ("R&D") expenses for the third quarter of 1998 were $1.5 million or 1.0% of net sales, compared to $2.5 million or 1.6% of sales for 1997. R&D expenses for the nine months ended September 30, 1998 were $5.4 million or 1.0% of sales, compared to $4.8 million or 0.9% for 1997. 7
10 TITAN INTERNATIONAL, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) Income from operations for the third quarter of 1998 was $5.0 million or 3.4% of net sales, compared to $9.2 million or 5.9% in 1997. Income from operations for the nine months ended September 30, 1998 was $34.5 million or 6.7% of net sales, compared to $43.1 million or 8.2% in 1997. Income from operations was impacted by the items described in the preceding paragraphs. Interest expense was $4.7 and $13.4 for the third quarter of 1998 and for the nine months ended September 30, 1998 respectively, compared to $4.2 million and $10.9 million in 1997. Interest expense increased due the Company's higher average debt during the third quarter of 1998 and for the nine months ended September 30, 1998. Net income for the third quarter of 1998 and for the nine months ended September 30, 1998 was $0.4 and $3.6 million respectively, compared to $3.6 and $21.1 million in 1997. Basic and diluted earnings per share were $.02 and $.62 for the third quarter and nine months ended September 30, 1998 respectively compared to $.17 and $.91 in 1997. LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities of $24.5 million for the nine months ended September 30, 1998 were attributed to net income, decreases in receivables and increases in other accrued liabilities. These amounts were partially offset by increases in inventories and decreases in accounts payable. The Company has built inventory to meet expected production and sales demand in the next six months. The Company has invested $28.5 million in capital expenditures in 1998, including $4.1 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. In September 1998, the Company acquired certain assets of Condere Corporation from the United States Bankruptcy Court for the Southern District of Mississippi for a total estimated purchase price of $28 million, which included a cash payment of $13 million. 8
11 TITAN INTERNATIONAL, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) In September 1998, the Company increased its availability under its credit facility from $200 million to $250 million. The Company received $30.0 million in proceeds from its $250 million revolving credit facility. These proceeds have been used to fund operations and capital expenditures. During the quarter ended September 30, 1998, the Company repurchased 0.6 million shares of common stock in the open market. The Company is authorized to repurchase an additional 3.7 million common shares. At September 30, 1998, the Company had cash and cash equivalents of $18.4 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 objective is to become Year 2000 compliant, and develop a contingency plan, by mid-1999. The Company believes it is on schedule to accomplish this objective. The Company is in process of requesting information from its significant suppliers and customers that they are addressing this issue to ensure there will be no major disruptions. The total cost to become Year 2000 compliant has not been material and the Company does not expect future costs to have a material impact on the Company's financial position or results of operations. No assurances can be given regarding the Company's compliance, especially as it relates to third parties. The Company is in process of developing contingency plans should any Year 2000 failures occur. SAFE HARBOR 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. 9
12 TITAN INTERNATIONAL, INC. PART II. OTHER INFORMATION ITEMS 1 THROUGH 4 ARE NOT APPLICABLE. ITEM 5. OTHER MATTERS Discretionary Proxy Voting Authority/Stockholder Proposals The Securities and Exchange Commission recently amended Rule 14a-4 under the Securities Exchange Act of 1934, which governs the use by the Company of discretionary voting authority with respect to stockholder proposals. Rule 14a-4(c) (1) provides that, if the proponent of a stockholder proposal fails to notify the Company at least 45 days prior to the month and day of mailing the prior year's proxy statement, the proxies of the Company's management would be permitted to use their discretionary authority at the Company's next annual meeting of stockholders if the proposal were raised at the meeting without any discussion of the matter in the proxy statement. For purposes of the Company's 1999 Annual Meeting of Stockholders, this deadline is February 22, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See the index to exhibits immediately preceding the exhibits filed with this report. (b) Reports on Form 8-K The Company did not file any Current Reports on Form 8-K during the quarter ended September 30, 1998. 10
13 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: November 6, 1998 By: /s/ Kent W. Hackamack -------------------------- --------------------------------------- Kent W. Hackamack Vice President of Finance and Treasurer (Principal Financial Officer and Principal Accounting Officer) 11
14 TITAN INTERNATIONAL, INC. EXHIBIT INDEX Exhibit Number Description - ------ ----------- 3 Restated Articles of Incorporation of Titan 4 Multicurrency Credit Agreement dated September 17, 1998 among the Company, Harris Trust and Savings Bank and the banks named therein 27 Financial Data Schedule 12