TITAN INTERNATIONAL INC - Annual Report: 2006 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
|
FORM
10-K
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(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
fiscal year ended December 31, 2006
or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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Commission
file number 1-12936
TITAN
INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
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Illinois
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36-3228472
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|
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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2701
Spruce Street, Quincy, IL 62301
(Address
of principal executive offices)
(217)
228-6011
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
stock, no par value
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New
York Stock Exchange (Symbol: TWI)
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
by
Rule 405 of the Securities Act. Yes o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o
No
x
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
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o
No
x
The
aggregate market value of the shares of common stock of the registrant held
by
non-affiliates was $227,988,853 based upon the closing price of the common
stock
on the New York Stock Exchange on June 30, 2006.
As
of
February 15, 2007, 20,024,032 shares of common stock of the registrant were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Part
III
incorporates information by reference from the registrant's definitive proxy
statement for its annual meeting of stockholders to be held May 17,
2007.
TITAN
INTERNATIONAL, INC.
Index
to
Annual Report on Form 10-K
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Part
I.
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Page
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Item
1.
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Business
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3-9
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Item
1A.
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Risk
Factors
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9
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Item
1B.
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Unresolved
Staff Comments
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9
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Item
2.
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Properties
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10
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Item
3.
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Legal
Proceedings
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10
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Item
4.
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Submission
of Matters to a Vote of Security Holders.
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10
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Part
II.
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||
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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11
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Item
6.
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Selected
Financial Data
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12
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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13-32
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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33
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Item
8.
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Financial
Statements and Supplementary Data
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33
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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33
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Item
9A.
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Controls
and Procedures
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33
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Item
9B.
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Other
Information
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33
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Part
III.
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||
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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34
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Item
11.
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Executive
Compensation
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34
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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35
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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35
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Item
14.
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Principal
Accounting Fees and Services
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35
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Part
IV.
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||
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Item
15.
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Exhibits,
Financials Statement Schedules
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36
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Signatures
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37
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2
PART
I
ITEM
1 - BUSINESS
INTRODUCTION
Titan
International, Inc. and its subsidiaries (Titan or the Company) are leading
manufacturers of wheels, tires and assemblies for off-highway vehicles used
in
the agricultural, earthmoving/construction and consumer markets. Titan’s
earthmoving/construction market also includes products supplied to the U.S.
government, while the consumer market includes products for all-terrain vehicles
(ATVs) and recreational/utility trailer applications. Titan manufactures both
wheels and tires for the majority of these market 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.
As
one of
the few companies dedicated to the off-highway wheel and tire market, Titan’s
engineering and manufacturing resources are focused on addressing the real-life
concerns of the end-users of our products. Titan’s commitment to product
innovation is demonstrated by the development of the low sidewall (LSW) series
of wheel and tire assemblies, which considerably enhances the performance of
off-highway vehicles by pairing a larger diameter wheel with a shorter sidewall
tire.
In
2006,
Titan’s agricultural market sales represented 62% of net sales, the
earthmoving/construction market represented 27% and the consumer market
represented 11% of net sales. For information concerning the revenues, certain
expenses, income from operations and assets attributable to each of the segments
in which the Company operates, see Note 28 to the consolidated financial
statements of Titan, included in Item 8 herein.
COMPETITIVE
STRENGTHS
Titan’s
competitive strengths include the Company’s strong market position in the
off-highway wheel and tire market and the Company’s long-term core customer
relationships. These competitive strengths along with Titan’s dedication to the
off-highway tire and wheel market continue to drive the Company
forward.
Strong
Market Position
The
Company has achieved a strong position in the domestic market for off-highway
wheels, tires and assembly products. Titan’s ability to offer a broad range of
different products has increased the Company’s visibility and has enhanced its
ability to cross-sell products and consolidate market positions. Innovative
marketing programs have strengthened Titan’s image in the marketplace, and the
Company is reaching an increasing number of customers in the aftermarket. Years
of product design and engineering experience have enabled Titan to improve
existing products and develop new ones that have been well received in the
marketplace. In addition, Titan believes it has benefited from significant
barriers to entry, such as the substantial investment necessary to replicate
the
Company’s manufacturing equipment and numerous tools, dies and
molds.
Long-Term
Core Customer Relationships The
Company’s top customers, including global leaders in agricultural and
construction equipment manufacturing, have been purchasing wheels from Titan
or
its predecessors for many decades on average. Customers including AGCO
Corporation, Caterpillar Inc., CNH Global N.V., Deere & Company, Kubota
Corporation and the U.S. Government have helped sustain Titan’s leadership in
wheel, tire and assembly innovation.
BUSINESS
STRATEGY
Titan’s
business strategy is to increase its penetration of the aftermarket for tires
and the private branding business, to continue to improve operating
efficiencies, to maintain emphasis on new product development and to explore
possible additional strategic acquisitions.
Increase
Aftermarket Tire Business and Private Branding Business The
Company has concentrated on increasing its penetration of the tire aftermarket.
The aftermarket offers higher profit margins and the tire aftermarket is larger
and somewhat less cyclical than the OEM market. Additionally, Titan has
developed a unique and efficient method of private branding the sidewall of
its
tires for sale through OEM retail distribution networks.
3
Improve
Operating Efficiencies
The
Company continually works to improve the operating efficiency of its assets
and
manufacturing facilities. Titan integrates each facility’s strength, which may
include transferring equipment and business to the facilities that are best
equipped to handle the work. This provides capacity to increase utilization
and
spread operating costs over a greater volume of products. Titan is also
continuing a comprehensive program to refurbish, modernize and enhance the
computer technology of its manufacturing equipment. The Company has centralized
and streamlined inventory controls. These efforts have led to improved
management of order backlogs and have substantially improved Titan’s ability to
respond to customer orders on a timely basis.
Improve
Design Capacity and Increase New Product Development Equipment
manufacturers constantly face changing industry dynamics. Titan directs its
business and marketing strategy to understand and address the needs of its
customers and demonstrate the advantages of its products. In particular, the
Company often collaborates with customers in the design of new and upgraded
products. Titan will occasionally recommend modified products to its customers
based on its own market information. The Company tests new designs and
technologies and develops methods of manufacturing to improve product quality
and performance. These value-added services enhance Titan’s relationships with
its customers.
Explore
Additional Strategic Acquisitions The
Company’s expertise in the manufacture of off-highway steel wheels and tires has
permitted it to take advantage of opportunities to acquire businesses in the
United States that complement this product line, including companies engaged
in
the tire market and companies that have wheel and tire assembly capabilities.
In
the future, Titan may make additional strategic acquisitions of businesses
that
have an off-highway focus.
ACQUISITION
OF CONTINENTAL’S OTR ASSETS
On
July
31, 2006, Titan Tire Corporation of Bryan, a subsidiary of Titan International,
Inc., acquired the off-the-road (OTR) tire assets of Continental Tire North
America, Inc. (Continental) in Bryan, Ohio. Titan Tire Corporation of Bryan
purchased the assets of Continental’s OTR tire facility for approximately $53
million in cash proceeds. The assets purchased included Continental’s OTR plant,
property and equipment located in Bryan, Ohio, and inventory and other current
assets. The acquisition included an agreement with Continental to use the
Continental and General trademarks on OTR tires.
ACQUISITION
OF GOODYEAR’S NORTH AMERICAN FARM TIRE ASSETS
On
December 28, 2005, Titan Tire Corporation, a subsidiary of Titan International,
Inc., acquired The Goodyear Tire & Rubber Company’s North American farm tire
assets. Titan Tire purchased the assets of Goodyear’s North American farm tire
business for approximately $100 million in cash proceeds. The assets purchased
include Goodyear’s North American plant, property and equipment located in
Freeport, Illinois, and Goodyear’s North American farm tire inventory. The
acquisition included a long-term license agreement with The Goodyear Tire &
Rubber Company to manufacture and sell certain off-highway tires in North
America, which includes the right to use the Goodyear trademark.
AGRICULTURAL
MARKET
Titan’s
agricultural rims, wheels and tires are manufactured for use on various
agricultural and forestry equipment, including tractors, combines, skidders,
plows, planters and irrigation equipment, and are sold directly to OEMs and
to
the aftermarket through independent distributors, equipment dealers and Titan’s
own distribution centers. The wheels and rims range in diameter from 9” to 54”
with the 54” diameter being the largest agricultural wheel manufactured in North
America. Basic configurations are combined with distinct variations (such as
different centers and a wide range of material thickness) allowing the Company
to offer a broad line of product models to meet customer specifications. Titan’s
agricultural tires range from 8” to 85” in diameter and from 4.8” to 44” in
width. The Company offers the added value of delivering a complete wheel and
tire assembly to customers.
4
EARTHMOVING/CONSTRUCTION
MARKET
The
Company manufactures rims, wheels and tires for various types of earthmoving,
mining, military and construction equipment, including skid steers, aerial
lifts, cranes, graders and levelers, scrapers, self-propelled shovel loaders,
articulated dump trucks, load transporters, haul trucks and backhoe loaders.
The
Company provides customers with a broad range of earthmoving/construction wheels
ranging in diameter from 20” to 63” and in weight from 125 pounds to 7,000
pounds. The 63” diameter wheel is the largest manufactured in North America for
the earthmoving/construction market. The earthmoving/construction wheels and
tires produced by Titan are sold to OEMs and the aftermarket. Titan’s
earthmoving/construction tires range from 30” to 109” in diameter and in weight
from 50 pounds to 6,200 pounds. The Company offers the added value of wheel
and
tire assembly for certain applications in the earthmoving/construction
market.
CONSUMER
MARKET
Titan
builds a variety of products for all-terrain vehicles (ATV), turf, golf and
trailer applications. Consumer wheels and rims range from 8” to 16” in diameter.
Likewise, Titan produces a variety of tires for the consumer market. ATV tires
using the new stripwinding manufacturing process have been introduced to the
marketplace, which improves tread durability. Titan’s sales in the consumer
market include sales to Goodyear, which include an off-take/mixing agreement.
This agreement includes mixed stock, which is a prepared rubber compound used
in
tire production. For the domestic boat, recreational and utility trailer
markets, the Company provides wheels and tires and assembles brakes, actuators
and components. The Company also offers the value-added service of a wheel
and
tire assembly for the consumer market.
MARKET
CONDITIONS OUTLOOK
The
Company experienced a softening in demand from OEMs for the Company’s products
in 2006. The Company recorded an increase in sales as a result of the Goodyear
North American farm tire acquisition and the Continental OTR acquisition. Titan
is using the expanded agricultural product offering of Goodyear branded farm
tires and the expanded earthmoving/construction product offering supplied by
the
Bryan facility, along with added manufacturing capacity from the Freeport and
Bryan facilities to expand market share. Anticipated market conditions are
as
follows: (i) the agricultural market is expected to maintain current sales
levels in 2007, (ii) the earthmoving/ construction market is anticipated to
remain strong as a result of strong energy and mining markets, (iii) the
performance of the consumer market, Titan’s smallest market, is largely tied to
recreational spending habits and many other factors including weather,
competitive pricing, energy prices and consumer attitude. Consumer market sales
to Goodyear fluctuate significantly based upon their future product
requirements. However, the Company expects the remaining consumer market sales
to remain relatively stable in 2007.
OPERATIONS
Titan’s
operations include manufacturing wheels, manufacturing tires, and combining
these wheels and tires into assemblies for use in the agricultural,
earthmoving/construction and consumer markets. These operations entail many
manufacturing processes in order to complete the finished products.
Wheel
Manufacturing Process
Most
agricultural wheels are produced using a rim and a center disc. A rim is
produced by first cutting large steel sheets to required width and length
specifications. These steel sections are rolled and welded to form a circular
rim, which is flared and formed in the rollform operation. The majority of
discs
are manufactured using presses that both blank and form the center to
specifications in multiple stage operations. The Company e-coats wheels using
a
multi-step process prior to the final paint top coating.
Large
earthmoving/construction steel wheels are manufactured from hot and cold-rolled
steel sections. Hot-rolled sections are generally used to increase cross section
thickness in high stress areas of large diameter wheels. A special cold forming
process for certain wheels is used to increase cross section thickness while
reducing the number of wheel components. Rims are built from a series of hoops
that are welded together to form a rim base. The complete rim base is made
from
either three or five separate parts that lock together after the rubber tire
has
been fitted to the wheel and inflated.
For
most
consumer market wheels, the Company manufactures rims and center discs from
steel sheets. Rims are rolled and welded, and discs are stamped and formed
from
the sheets. The manufacturing process then entails welding the rims to the
centers and painting the assembled product.
5
Tire
Manufacturing Process The
first
stage in tire production is the mixing of rubber, carbon black and chemicals
to
form various rubber compounds. These rubber compounds are then extruded and
processed with textile or steel materials to make specific components. These
components - beads (wire bundles that anchor the tire with the wheel), plies
(layers of fabric that give the tire strength), belts (fabric or steel fabric
wrapped under the tread in some tires), tread and sidewall - are then assembled
into an uncured tire carcass. The uncured carcass is placed into a press that
molds and vulcanizes the carcass under set time, temperature and pressure into
a
finished tire.
Wheel
and Tire Assemblies The
Company’s position as a manufacturer of both wheels and tires allows Titan to
mount and deliver one of the largest selections of off-highway assemblies in
North America. Titan offers this value-added service of one-stop shopping for
wheel and tire assemblies for the agricultural, earthmoving/construction and
consumer markets. Customer orders are entered into the Company’s system either
through electronic data interchange or manually. The appropriate wheel-tire
assembly delivery schedule is formulated based on each customer’s requirements
and products are received by the customer on a just-in-time basis.
Quality
Control The
Company is ISO certified at all five main manufacturing facilities located
in
Bryan, Ohio; Des Moines, Iowa; Freeport, Illinois; Quincy, Illinois; and
Saltville, Virginia. The ISO series is a set of related and internationally
recognized standards of management and quality assurance. The standards specify
guidelines for establishing, documenting and maintaining a system to ensure
quality. The ISO certifications are a testament to Titan’s dedication to
providing quality products for its customers.
RAW
MATERIALS
Steel
and
rubber are the primary raw materials used by the Company in all segments. To
ensure a consistent steel supply, Titan purchases raw steel from key steel
mills
and maintains relationships with steel processors for steel preparation. The
Company is not dependent on any single producer for its steel supply. Rubber
and
other raw materials for tire manufacture represent some of the Company’s largest
commodity expenses. Titan buys rubber in markets where there are several sources
of supply. In addition to the development of key domestic suppliers, the
Company’s strategic procurement plan includes international steel and rubber
suppliers to assure competitive price and quality in the global marketplace.
As
is customary in the industry, the Company does not have long-term contracts
for
the purchase of steel or rubber and, therefore, purchases are subject to price
fluctuations.
CAPITAL
EXPENDITURES
Capital
expenditures for 2006, 2005 and 2004 were $8.3 million, $6.8 million and $4.3
million, respectively. Capital expenditures in 2006 were used primarily for
updating manufacturing equipment, expanding manufacturing capacity and for
further automation at the Company’s facilities. Capital expenditures for 2007
are forecasted to be approximately $16 million to $18 million and will be used
to enhance the Company’s existing facilities and manufacturing capabilities
including additional capacity for OTR tire production.
PATENTS
AND TRADEMARKS
The
Company owns various patents and trademarks and continues to apply for patent
protection for new products. While patents are considered significant to the
operations of the business, at this time Titan does not consider any one of
them
to be of such importance that the patent’s expiration or invalidity could
materially affect the Company’s business. However, due to the difficult nature
of predicting the interpretation of patent laws, the Company cannot anticipate
or predict the material adverse effect on its operations, cash flows or
financial condition as a result of associated liabilities created under such
patent interpretations.
MARKETING
AND DISTRIBUTION
The
Company employs an internal sales force and utilizes several manufacturing
representative firms for sales in North America. Sales representatives are
primarily organized within geographic regions.
Titan
distributes wheels and tires directly to OEMs. The distribution of aftermarket
tires occurs primarily through a network of independent and OEM-affiliated
dealers. The Company distributes wheel and tire assemblies directly to OEMs
and
aftermarket customers through its distribution network consisting of nine
facilities in the United States.
SEASONALITY
Agricultural
equipment sales are seasonal by nature. Farmers generally order equipment to
be
delivered before the growing season. Shipments to OEMs usually peak during
the
Company’s first and second quarters for the spring planting period.
Earthmoving/construction and consumer markets also historically tend to
experience higher demand in the first and second quarters. These markets are
affected by mining, building and economic conditions.
6
RESEARCH,
DEVELOPMENT AND ENGINEERING
The
Company’s research, development and engineering staff tests original designs and
technologies and develop new manufacturing methods to improve product
performance. These services enhance the Company’s relationships with customers.
The Company continues to develop and introduce new LSW wheel and tire assemblies
for the agricultural, earthmoving/construction and consumer markets. LSW wheel
and tire assemblies reduce bounce, power hop, road lope and heat build-up,
and
provide more stability and safety for operators, which in turn may lead to
greater productivity. The key to the success of the LSW is an increase in wheel
diameter while maintaining the original outside tire diameter. This is
accomplished by lowering the sidewall (LSW is an acronym for low sidewall)
and
increasing its strength. Maintaining the original outside diameter of the tire
allows the LSW to improve the performance of agricultural,
earthmoving/construction and consumer equipment without further
modification.
CUSTOMERS
The
Company’s 10 largest customers accounted for approximately 53% of net sales for
the year ended December 31, 2006, compared to 55% for the year ended December
31, 2005. Net sales to Deere & Company in Titan’s agricultural,
earthmoving/construction and consumer markets combined represented 17% of the
Company’s consolidated revenues for the year ended December 31, 2006, and 20%
for the year ended 2005. Net sales to CNH Global N.V. in Titan’s three markets
represented 11% of the Company’s consolidated revenues for both of the years
ended December 31, 2006 and 2005. No other customer accounted for more than
10%
of the Company’s net sales in 2006 or 2005. Management believes the Company is
not totally dependent on any single customer, however, certain products are
dependent on a few customers. While the loss of any substantial customer could
impact Titan’s business, the Company believes that its diverse product mix and
customer base minimizes a longer-term impact caused by any such
loss.
ORDER
BACKLOG
As
of
January 31, 2007, Titan estimates $171 million in firm orders compared to $122
million at January 31, 2006, for the Company’s operations. The large increase in
firm orders is primarily due to the Company’s recent acquisitions. Orders are
considered firm if the customer would be obligated to accept the product if
manufactured and delivered pursuant to the terms of such orders. The Company
believes that the majority of the current order backlog will be filled during
the present year.
INTERNATIONAL
OPERATIONS
The
Company accounted for its interest in Titan Europe Plc as an equity investment
subsequent to the sale of a majority interest in April 2004. In December 2005,
Titan Europe Plc issued additional shares of stock for an acquisition. As a
result of these additional shares, the Company’s interest in Titan Europe Plc
was diluted and decreased from 29.3% at December 31, 2004, to 15.4% at December
31, 2005. The Company recorded the gain resulting from the change in ownership
interest to equity in accordance with SAB 51. With the decreased ownership
percentage, effective December 2005, the Company no longer uses the equity
method to account for its interest in Titan Europe Plc.
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
the
Company records the Titan Europe Plc investment as an available-for-sale
security and reports the investment at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
comprehensive income in stockholders’ equity. The Company’s stock ownership
interest in Titan Europe Plc was 17.3% at December 31, 2006, and 15.4% at
December 31, 2005. The increase in ownership percentage resulted from a December
2006 transaction in which Titan Europe Plc issued additional shares to the
Company in payment of approximately $7.9 million U.S. dollars of debt,
representing the entire remaining long-term debt owed by Titan Europe Plc to
the
Company. The fair value of the Company’s investment in Titan Europe Plc was
$65.9 million and $48.5 million at December 31, 2006 and 2005. Titan Europe
Plc
is publicly traded on the AIM market in London, England.
For
the
year ended December 31, 2004, the Company generated $49.4 million, or
approximately 10% percent, of its net sales from foreign operations. All of
these sales were recorded in the first quarter, prior to the Titan Europe
sale.
EMPLOYEES
At
December 31, 2006, the Company employed approximately 2,700 people in the United
States. Approximately 48% of the Company’s employees in the United States were
covered by collective bargaining agreements. In December 2005, the workers
at
the Des Moines and Freeport facilities ratified new labor agreements through
November 2010. The workers at the Bryan facility ratified a new labor agreement
in July 2006 with the same November 2010 expiration date. The Company believes
employee relations are generally good.
7
EXPORT
SALES
The
Company had total aggregate export sales of approximately $57.4 million, $39.0
million and $56.2 million, for the years ended December 31, 2006, 2005 and
2004,
respectively.
Exports
to foreign markets are subject to a number of special risks, including but
not
limited to risks with respect to currency exchange rates, economic and political
destabilization, other disruption of markets and restrictive actions by foreign
governments (such as restrictions on transfer of funds, export duties and quotas
and foreign customs). Other risks include changes in foreign laws regarding
trade and investment, difficulties in obtaining distribution and support,
nationalization, reforms of laws and policies of the United States affecting
trade, foreign investment and loans and foreign tax laws. There can be no
assurance that one, or a combination, of these factors will not have a material
adverse effect on the Company’s ability to increase or maintain its export
sales.
The
Company purchases a portion of its raw materials from foreign suppliers. The
production costs, profit margins and competitive position of the Company are
affected by the strength of the currencies in countries where Titan purchases
goods, relative to the strength of the currencies in countries where the
products are sold. The Company’s results of operations, cash flows and financial
position may be affected by fluctuations in foreign currencies.
ENVIRONMENTAL
LAWS AND REGULATIONS
In
the
ordinary course of business, like other industrial companies, Titan is subject
to extensive and evolving federal, state and local environmental laws and
regulations, and has made provisions for the estimated financial impact of
environmental cleanup. The Company’s policy is to accrue environmental
cleanup-related costs of a non-capital nature when those costs are believed
to
be probable and can be reasonably estimated. Expenditures that extend the life
of the related property, or mitigate or prevent future environmental
contamination, are capitalized. The Company does not currently anticipate any
material capital expenditures for environmental control facilities. The
quantification of environmental exposures requires an assessment of many
factors, including changing laws and regulations, advances in environmental
technologies, the quality of information available related to specific sites,
the assessment stage of the site investigation, preliminary findings and the
length of time involved in remediation or settlement. Due to the difficult
nature of predicting future environmental costs, the Company cannot anticipate
or predict the material adverse effect on its operations, cash flows or
financial condition as a result of efforts to comply with, or its liabilities
under, environmental laws.
COMPETITION
The
Company competes with several domestic and international companies, some of
which are larger and have greater financial and marketing resources than Titan.
The Company believes it is a primary source of steel wheels and rims to the
majority of its North American customers. Major competitors in the off-highway
wheel market include Carlisle Companies Incorporated, GKN Wheels, Ltd., Topy
Industries, Ltd. and certain other foreign competitors. Significant competitors
in the off-highway tire market include Bridgestone/Firestone, Carlisle Companies
Incorporated, Michelin and certain other foreign competitors.
The
Company competes primarily on the basis of price, quality, customer service,
design capability and delivery time. The Company’s ability to compete with
international competitors may be adversely affected by currency fluctuations.
In
addition, certain of the Company’s OEM customers could, under individual
circumstances, elect to manufacture the Company’s products to meet their
requirements or to otherwise compete with the Company. There can be no assurance
that the Company will not be adversely affected by increased competition in
the
markets in which it operates, or that competitors will not develop products
that
are more effective, less expensive or otherwise render certain of Titan’s
products less competitive. From time to time, certain of the Company’s
competitors have reduced their prices in particular product categories, which
has prompted Titan to reduce prices as well. There can be no assurance that
competitors of the Company will not further reduce prices in the future or
that
any such reductions would not have a material adverse effect on the
Company.
NEW
YORK STOCK EXCHANGE CERTIFICATION
The
Company submitted to the New York Stock Exchange during fiscal 2006 the Annual
CEO Certification required by Section 303A.12(a) of the New York Stock Exchange
Listed Company Manual.
8
AVAILABLE
INFORMATION
The
Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports are made available,
without charge, through the Company’s website located at www.titan-intl.com
as soon
as reasonably practicable after they are filed with the Securities and Exchange
Commission (SEC). The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC at www.sec.gov
website.
The following documents are also posted on the Company’s website:
Audit
Committee Charter
Compensation
Committee Charter
Nominating/Corporate
Governance Committee Charter
Business
Conduct Policy
Printed
copies of these documents are available, without charge, by writing to:
Secretary of Titan International, Inc., 2701 Spruce Street, Quincy, IL
62301.
ITEM
1A - RISK FACTORS
The
Company is subject to various risks and uncertainties relating to or arising
out
of the nature of its business and general business, economic, financing, legal
and other factors or conditions that may affect the Company. Realization of
any
of the following risks could have a material adverse effect on Titan’s business,
financial condition, cash flows and results of operations.
| · |
The
Company operates in cyclical industries and, accordingly, its business
is
subject to the numerous and continuing changes in the
economy.
|
| · |
The
Company’s debt and related interest expense may limit Titan’s financial
and operating flexibility.
|
| · |
The
Company has incurred, and may incur in the future, net
losses.
|
| · |
The
Company is exposed to price fluctuations of key commodities, which
are
primarily steel and rubber.
|
| · |
The
Company relies on a limited number of suppliers for key commodities,
which
consist primarily of steel and
rubber.
|
| · |
The
Company’s revenues are seasonal due to Titan’s dependence on agricultural,
construction and recreational industries, which are seasonal and
typically
have lower sales in the second half of the
year.
|
| · |
The
Company may be adversely affected by changes in government regulations
and
policies, especially those related to farm and ethanol subsidies
and those
related to infrastructure
construction.
|
| · |
The
Company is subject to corporate governance requirements, and costs
related
to compliance with, or failure to comply with, existing and future
requirements could adversely affect Titan’s
business.
|
| · |
The
Company’s customer base is relatively concentrated with Titan’s ten
largest customers historically accounting for over 50% of
sales.
|
| · |
The
Company faces substantial competition from domestic and international
companies, some of which operate in low wage
markets.
|
| · |
The
Company’s business could be negatively impacted if Titan fails to maintain
satisfactory labor relations.
|
| · |
Unfavorable
outcomes of legal proceedings could adversely affect the Company’s
financial condition and results of
operations.
|
| · |
Acquisitions
may require significant resources and/or result in significant
unanticipated losses, costs or liabilities for the
Company.
|
| · |
The
Company may be subject to claims for damages for defective
products.
|
| · |
The
Company is subject to risks associated with environmental laws and
regulations.
|
ITEM
1B - UNRESOLVED STAFF COMMENTS
None.
9
ITEM
2 - PROPERTIES
The
Company’s properties are detailed by the location, size and focus of each
facility as provided in the table below:
|
Approximate
square footage
|
|||||||||||||
|
Location
|
Owned
|
Leased
|
Use
|
Segment
|
|||||||||
|
Des
Moines, Iowa
|
2,207,000
|
Manufacturing,
distribution
|
All
segments
|
||||||||||
|
Freeport,
Illinois
|
1,202,000
|
211,000
|
Manufacturing,
distribution
|
All
segments
|
|||||||||
|
Quincy,
Illinois
|
1,134,000
|
Manufacturing,
distribution
|
All
segments
|
||||||||||
|
Brownsville,
Texas
|
993,000
|
Storage
|
See
note(a)
|
|
|||||||||
|
Bryan,
Ohio
|
500,000
|
Manufacturing,
distribution
|
All
segments
|
||||||||||
|
Walcott,
Iowa
|
378,000
|
Storage
|
See
note(a)
|
|
|||||||||
|
Greenwood,
S. Carolina
|
110,000
|
Storage
|
See
note(a)
|
|
|||||||||
|
Dublin,
Georgia
|
20,000
|
Distribution
|
All
segments
|
||||||||||
|
Saltville,
Virginia
|
14,000
|
245,000
|
Manufacturing,
distribution
|
Earthmoving/Construction
|
|||||||||
|
Natchez,
Mississippi
|
1,203,000
|
Storage
|
See
note(a)
|
|
|||||||||
|
Cartersville,
Georgia
|
169,000
|
Distribution
|
All
segments
|
||||||||||
|
Pendergrass,
Georgia
|
120,000
|
Distribution
|
All
segments
|
||||||||||
|
Elko,
Nevada
|
4,000
|
Distribution
|
Earthmoving/Construction
|
||||||||||
| (a) |
The
Brownsville, Greenwood and Natchez facilities are currently being
used for
storage. The Company’s facilities in Brownsville, Texas, Greenwood, South
Carolina, Natchez, Mississippi, and Walcott, Iowa, are not in operation.
The Company has a contract for sale on the Walcott building.
|
The
Company considers each of its facilities to be in good condition and adequate
for present use. Management believes that the Company has sufficient capacity
to
meet current market demand with the active facilities. The Company has no
current plans to restart manufacturing at the storage facilities described
in
note (a) above.
ITEM
3 - LEGAL PROCEEDINGS
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 effect on the consolidated financial
condition, results of operations or cash flows of the Company. However, due
to
the difficult nature of predicting 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.
ITEM
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to the vote of security holders during the fourth quarter
of 2006.
10
PART
II
ITEM
5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The
Company’s common stock is traded on the New York Stock Exchange (NYSE) under the
symbol TWI. On February 15, 2007, there were approximately 800 holders of record
of Titan common stock and an estimated 2,800 beneficial stockholders. The
following table sets forth the high and low sales prices per share of common
stock as reported on the NYSE, as well as information concerning per share
dividends declared for the periods indicated.
|
2006
|
High
|
Low
|
Dividends
Declared
|
|||||||
|
First
quarter
|
$
|
17.64
|
$
|
16.55
|
$
|
0.005
|
||||
|
Second
quarter
|
19.76
|
16.20
|
0.005
|
|||||||
|
Third
quarter
|
19.40
|
16.65
|
0.005
|
|||||||
|
Fourth
quarter
|
20.85
|
17.52
|
0.005
|
|||||||
|
2005
|
||||||||||
|
First
quarter
|
$
|
15.45
|
$
|
12.30
|
$
|
0.005
|
||||
|
Second
quarter
|
15.85
|
13.12
|
0.005
|
|||||||
|
Third
quarter
|
14.58
|
12.64
|
0.005
|
|||||||
|
Fourth
quarter
|
18.17
|
13.15
|
0.005
|
|||||||
PERFORMANCE
COMPARISON GRAPH
The
following performance graph compares cumulative total return for the Company’s
common stockholders over the past five years against the cumulative total return
of the Standard & Poor’s 500 Stock Index, and against the Standard &
Poor’s 600 Construction and Farm Machinery and Heavy Trucks Index. The graph
depicts the value on December 31, 2006, of a $100 investment made on December
31, 2001, in Company common stock and each of the other two indices, with all
dividends reinvested. The Company’s common stock is currently traded on the New
York Stock Exchange under the symbol TWI.
Fiscal
Year Ended December 31,
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||||
|
Titan
International, Inc.
|
$
|
100.00
|
$
|
28.49
|
$
|
65.97
|
$
|
326.28
|
$
|
373.25
|
$
|
436.47
|
|||||||
|
S&P
500 Index
|
100.00
|
77.90
|
100.25
|
111.15
|
116.61
|
135.03
|
|||||||||||||
|
S&P
600 Const. & Farm Machinery Index
|
100.00
|
106.30
|
179.20
|
240.18
|
305.31
|
411.72
|
|||||||||||||
11
ITEM
6 - SELECTED FINANCIAL DATA
The
selected financial data presented below, as of and for the years ended December
31, 2006, 2005, 2004, 2003, and 2002, are derived from the Company’s
consolidated financial statements, as audited by PricewaterhouseCoopers LLP,
an
independent registered public accounting firm, and should be read in conjunction
with the Company’s audited consolidated financial statements and notes
thereto.
(All
amounts in thousands, except per share data)
|
Year
Ended December 31,
|
||||||||||||||||
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
||||||||
|
Net
sales
|
$
|
679,454
|
$
|
470,133
|
$
|
510,571
|
$
|
491,672
|
$
|
462,820
|
||||||
|
Gross
profit
|
72,778
|
64,210
|
79,500
|
29,703
|
29,741
|
|||||||||||
|
Income
(loss) from operations
|
22,011
|
11,999
|
33,322
|
(16,220
|
)
|
(14,086
|
)
|
|||||||||
|
Income
(loss) before income taxes
|
8,574
|
(2,885
|
)
|
15,215
|
(33,668
|
)
|
(44,293
|
)
|
||||||||
|
Net
income (loss)
|
5,144
|
11,042
|
11,107
|
(36,657
|
)
|
(35,877
|
)
|
|||||||||
|
Net
income (loss) per share - basic
|
.26
|
.61
|
.62
|
(1.75
|
)
|
(1.73
|
)
|
|||||||||
|
Net
income (loss) per share - diluted
|
.26
|
.60
|
.61
|
(1.75
|
)
|
(1.73
|
)
|
|||||||||
|
Dividends
declared per common share
|
.02
|
.02
|
.02
|
.02
|
.02
|
|||||||||||
|
(All
amounts in thousands)
|
As
of December 31,
|
|||||||||||||||
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
||||||||
|
Working
capital
|
$
|
247,009
|
$
|
157,984
|
$
|
114,898
|
(a)
|
$
|
183,971
|
$
|
170,263
|
|||||
|
Current
assets
|
309,933
|
206,167
|
154,668
|
(a)
|
286,946
|
254,569
|
||||||||||
|
Total
assets
|
585,126
|
440,756
|
354,166
|
(a)
|
523,084
|
531,999
|
||||||||||
|
Long-term
debt (b)
|
291,266
|
190,464
|
169,688
|
(a)
|
248,397
|
249,119
|
||||||||||
|
Stockholders’
equity
|
187,177
|
167,813
|
106,881
|
(a)
|
111,956
|
144,027
|
||||||||||
|
(a) Amounts
were affected by the April 2004 sale of a majority interest in Titan
Europe, which is no longer consolidated.
(b) Excludes
amounts due within one year and classified as a current
liability.
|
||||||||||||||||
12
ITEM
7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Management’s
discussion and analysis of financial condition and results of operations
(MD&A) is designed to provide readers of these financial statements with a
narrative from the perspective of the management of Titan International, Inc.
(Titan or the Company) on Titan’s financial condition, results of operations,
liquidity and other factors which may affect the Company’s future
results.
FORWARD-LOOKING
STATEMENTS
This
Form
10-K contains forward-looking statements, including statements regarding, among
other items:
| · |
Anticipated
trends in the Company’s business
|
| · |
Future
expenditures for capital projects
|
| · |
The
Company’s ability to continue to control costs and maintain
quality
|
| · |
Ability
to meet financial covenants and conditions of loan
agreements
|
| · |
The
Company’s business strategies, including its intention to introduce new
products
|
| · |
Expectations
concerning the performance and success of the Company’s existing and new
products
|
| · |
The
Company’s intention to consider and pursue acquisitions and divestitures
|
Readers
of this Form 10-K 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:
| · |
Changes
in the Company’s end-user markets as a result of world economic or
regulatory influences
|
| · |
Fluctuations
in currency translations
|
| · |
Changes
in the marketplace, including new products and pricing changes by
the
Company’s competitors
|
| · |
Availability
and price of raw materials
|
| · |
Levels
of operating efficiencies
|
| · |
Actions
of domestic and foreign governments
|
| · |
Results
of investments
|
| · |
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.
13
OVERVIEW
Titan
International, Inc. and its subsidiaries are leading manufacturers of wheels,
tires and assemblies for off-highway vehicles used in the agricultural,
earthmoving/construction and consumer markets. Titan’s earthmoving/construction
market also includes products supplied to the U.S. government, while the
consumer market includes products for all-terrain vehicles (ATVs) and
recreational/utility trailer applications. Titan manufactures both wheels and
tires for the majority of these market 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 AGCO Corporation, Caterpillar Inc., CNH Global N.V., Deere
& Company and Kubota Corporation, in addition to many other off-highway
equipment manufacturers. The Company distributes products to OEMs, independent
and OEM-affiliated dealers, and through a network of distribution
facilities.
The
following table provides highlights for the year ended December 31, 2006,
compared to 2005 (amounts
in thousands):
|
2006
|
|
2005
|
%
Increase
(Decrease)
|
|||||||
|
Net
sales
|
$
|
679,454
|
$
|
470,133
|
45
|
%
|
||||
|
Income
from operations
|
22,011
|
11,999
|
83
|
%
|
||||||
|
Net
income
|
5,144
|
11,042
|
(53
|
%)
|
||||||
The
Company recorded sales of $679.5 million for 2006, which were 45% higher than
2005 sales of $470.1 million. The significantly higher sales level was
attributed to the expanded agricultural product offering of Goodyear branded
farm tires and the expanded earthmoving, construction and mining product
offering of Continental & General branded off-the-road (OTR) tires. These
product offerings came with the added manufacturing capacity from the Freeport,
Illinois, facility, which was acquired in December 2005, and the Bryan, Ohio,
OTR facility, which was acquired in July 2006.
Income
from operations was $22.0 million for 2006 as compared to $12.0 million in
2005.
Titan’s net income was $5.1 million for 2006, compared to $11.0 million in 2005.
Basic earnings per share were $.26 in 2006, compared to $.61 in 2005. The
Company’s net income was lower in 2006 as compared to 2005 as the result of a
higher effective tax rate of 40% in 2006 as compared to a tax benefit recorded
in 2005, resulting in an increase in income tax expense of $17.4 million in
2006
when compared to 2005.
RECENT
DEVELOPMENTS
Convertible
Note Conversion Offer
In
January 2007, the Company filed a registration statement relating to an offer
to
the holders of its 5.25% senior unsecured convertible notes due 2009 to convert
their notes into Titan’s common stock at an increased conversion rate (the
“Conversion Offer”). Per the Offer, each $1,000 principal amount of notes is
convertible into 81.0000 shares of common stock, which is equivalent to a
conversion price of approximately $12.35 per share. The offering price set
forth
will not include accrued interest; therefore, no accrued interest will be paid
on the notes that accept this offering. Prior to the Offer, each $1,000
principal amount of notes was convertible into 74.0741 shares of common stock,
which was equivalent to a conversion price of approximately $13.50 per share.
The registration statement relating to the shares of common stock to be offered
was declared effective on February 21, 2007. The offer is scheduled to expire
on
March 20, 2007, unless extended or terminated.
Credit
Facility Amendment
On
February 8, 2007, the Company amended its revolving credit facility with LaSalle
Bank National Association. The amendment extended the termination date to
October 2009 (previously October 2008). The amendment also lowered borrowing
rates, which will be based on a pricing grid. The borrowings under the facility
will bear interest at a floating rate of LIBOR plus 1% to 2% (previously 2.75%).
The amendment lowered the revolving loan availability from $250 million to
$125
million with the ability to request an increase back to $250 million.
14
RESULTS
OF OPERATIONS
The
following table sets forth the Company’s statement of operations expressed as a
percentage of net sales for the periods indicated. This table and subsequent
discussions should be read in conjunction with the Company’s audited
consolidated financial statements and notes thereto.
As
a Percentage of Net Sales
Year
ended December 31,
|
2006
|
|
2005
|
|
2004
|
||||||
|
Net
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
Cost
of sales
|
89.3
|
86.3
|
84.4
|
|||||||
|
Gross
profit
|
10.7
|
13.7
|
15.6
|
|||||||
|
Selling,
general and administrative expenses
|
6.2
|
6.9
|
7.5
|
|||||||
|
Royalty
expense
|
0.7
|
0.0
|
0.0
|
|||||||
|
Idled
assets marketed for sale depreciation
|
0.5
|
1.0
|
1.0
|
|||||||
|
Dyneer
legal charge
|
0.0
|
3.2
|
0.0
|
|||||||
|
Goodwill
impairment on Titan Europe
|
0.0
|
0.0
|
0.6
|
|||||||
|
Income
from operations
|
3.3
|
2.6
|
6.5
|
|||||||
|
Interest
expense
|
(2.5
|
)
|
(1.8
|
)
|
(3.2
|
)
|
||||
|
Noncash
convertible debt conversion charge
|
0.0
|
(1.6
|
)
|
0.0
|
||||||
|
Debt
termination expense
|
0.0
|
0.0
|
(0.7
|
)
|
||||||
|
Other
income, net
|
0.5
|
0.2
|
0.4
|
|||||||
|
Income
(loss) before income taxes
|
1.3
|
(0.6
|
)
|
3.0
|
||||||
|
Provision
(benefit) for income taxes
|
0.5
|
(2.9
|
)
|
0.8
|
||||||
|
Net
income
|
0.8
|
%
|
2.3
|
%
|
2.2
|
%
|
||||
In
addition, the following table sets forth components of the Company’s net sales
classified by segment for the years ended December 31, (in
thousands):
|
2006
|
|
2005
|
|
2004
|
||||||
|
Agricultural
|
$
|
421,096
|
$
|
310,361
|
$
|
316,235
|
||||
|
Earthmoving/Construction
|
183,357
|
131,982
|
160,297
|
|||||||
|
Consumer
|
75,001
|
27,790
|
34,039
|
|||||||
|
Total
|
$
|
679,454
|
$
|
470,133
|
$
|
510,571
|
||||
The
following is a summary of the Titan Europe results included in the historical
results of the Company for the years ended December 31, (in
thousands):
|
2006
(a)
|
2005
(a)
|
2004
(a)
|
||||||||
|
Agricultural
|
$
|
0
|
$
|
0
|
$
|
24,264
|
||||
|
Earthmoving/Construction
|
0
|
0
|
23,460
|
|||||||
|
Consumer
|
0
|
0
|
1,722
|
|||||||
|
Total
|
$
|
0
|
$
|
0
|
$
|
49,446
|
||||
| (a) |
Majority
interest in Titan Europe sold in April
2004.
|
15
SENIOR
UNSECURED NOTES
In
December 2006, the Company closed its offering of $200 million 8% senior
unsecured notes. The notes were sold at par and are due January 2012. Titan
used
the net proceeds from this offering to repay outstanding existing debt at the
time of closing, excluding the 5.25 percent senior unsecured convertible notes.
The outstanding balance on the Company’s revolving credit facility was paid down
in December and had no cash borrowings at December 31, 2006. The Company
anticipates paying off approximately $10 million of industrial revenue bonds
in
the first quarter of 2007 and will use the remaining cash for general corporate
purposes.
ACQUISITION
OF CONTINENTAL’S OTR ASSETS
On
July
31, 2006, Titan Tire Corporation of Bryan, a subsidiary of Titan International,
Inc., acquired the off-the-road (OTR) tire assets of Continental Tire North
America, Inc. (Continental) in Bryan, Ohio. Titan Tire Corporation of Bryan
purchased the assets of Continental’s OTR tire facility for approximately $53
million in cash proceeds. The assets purchased included Continental’s OTR plant,
property and equipment located in Bryan, Ohio, inventory and other current
assets. The acquisition included an agreement with Continental to use the
Continental and General trademarks on OTR tires. In addition, the Company
recorded intangibles related to the acquisition as noncurrent assets and assumed
warranty liabilities. This acquisition expanded Titan’s product offering into
larger earthmoving, construction and mining tires and added the manufacturing
capacity of the Bryan, Ohio, facility.
The
productivity obtained since startup after the July 31 acquisition date
associated with the Bryan facility is meeting Titan’s current expectations. The
Bryan facility achieved a manufacturing output of approximately $41 million
since the July 31, 2006, acquisition date through year-end December 31,
2006.
ACQUISITION
OF GOODYEAR’S NORTH AMERICAN FARM TIRE ASSETS
On
December 28, 2005, Titan Tire Corporation, a subsidiary of Titan International,
Inc., acquired The Goodyear Tire & Rubber Company’s North American farm tire
assets. Titan Tire purchased the assets of Goodyear’s North American farm tire
business for approximately $100 million in cash proceeds. The assets purchased
include Goodyear’s North American plant, property and equipment located in
Freeport, Illinois, and Goodyear’s North American farm tire inventory. In
addition, the Company recorded intangibles related to the acquisition as
noncurrent assets. This acquisition expanded Titan’s product offering into
Goodyear branded farm tires and added the manufacturing capacity of the
Freeport, Illinois, facility.
The
productivity obtained during 2006 associated with the Freeport facility is
meeting Titan’s current expectations. The Freeport facility achieved a
manufacturing output of approximately $186 million during the year ended
December 31, 2006.
OTR
PRODUCTION REALIGNMENT
Due
to
capacity constraints at Titan’s Bryan, Ohio, OTR tire facility, the Company is
adding OTR tire capacity at its Freeport, Illinois, and Des Moines, Iowa,
facilities. Titan is aligning synergies, which includes retooling, retraining
personnel and movement of equipment at the Bryan, Freeport and Des Moines
facilities. This realignment decreased the Company’s gross margin for the fourth
quarter of 2006 as labor costs that are normally dedicated to making products
were instead used for retooling, retraining and movement of
equipment.
IDLED
ASSETS MARKETED FOR SALE
The
idled
assets marketed for sale had no balance at December 31, 2006, and a balance
of
$18.3 million at December 31, 2005. The idled assets marketed for sale were
being depreciated in accordance with SFAS No. 144. Depreciation on these idled
assets was $3.6 million, $4.7 million, and $5.3 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
As
a
result of the Goodyear North American farm tire asset acquisition and the
Continental OTR asset acquisition, the Company is placing these assets back
into
service primarily at the Des Moines, Iowa, Freeport, Illinois, and Bryan, Ohio
facilities. Therefore, the idled assets marketed for sale balance, of
approximately $14 million, at December 31, 2006, was reclassified to property,
plant and equipment.
16
TERMINATION
OF CASH MERGER OFFER
On
October 11, 2005, the Company received an offer from One Equity Partners LLC
(One Equity), a private equity affiliate of JPMorgan Chase & Co., indicating
One Equity’s interest in acquiring Titan International, Inc. in a cash merger
for $18.00 per share of Titan common stock. On April 12, 2006, Titan and One
Equity announced the termination of discussions regarding the proposed cash
merger. On April 17, 2006, the Company’s Board of Directors met and thanked the
Special Committee, which had been formed to pursue discussions regarding One
Equity’s proposed cash merger, for all their efforts expended and agreed that
their Special Committee responsibilities have been completed.
CONVERTIBLE
NOTE CONVERSION
In
June
of 2005, Titan finalized a private transaction in which the Company issued
3,022,275 shares of common stock in exchange for the cancellation of $33.8
million principal amount of the Company’s outstanding 5.25% senior convertible
notes due 2009, as proposed to the Company by certain note holders. Titan
recognized a noncash charge of $7.2 million in connection with this exchange
in
accordance with SFAS No. 84, “Induced Conversions of Convertible
Debt.”
SALE
OF A MAJORITY INTEREST IN TITAN EUROPE
In
April
2004, Titan Luxembourg Sarl, a wholly-owned European subsidiary of the Company,
sold 70% of the common stock of Titan Europe to the public on the AIM market
in
London. Titan Luxembourg was the largest single stockholder in Titan Europe
Plc,
retaining a 30% interest on the date of the transaction. In the first quarter
of
2004, the Company recognized a $3.0 million goodwill impairment charge on the
pending sale of a majority interest in Titan Europe in accordance with the
Company’s goodwill impairment process. The historical results of the Company for
the year ended December 31, 2004, included Titan Europe results of $49.4 million
in net sales, $8.3 million in gross profit and $0.4 million in income from
operations.
The
Company accounted for its interest in Titan Europe Plc as an equity investment
subsequent to the sale of a majority interest in April 2004. The Company
recognized equity income on its investment in Titan Europe Plc of $2.9 million
in 2005 and $1.3 million in 2004. In December 2005, Titan Europe Plc issued
additional shares of stock for an acquisition. As a result of these additional
shares, the Company’s interest in Titan Europe Plc was diluted and decreased
from 29.3% at December 31, 2004, to a 15.4% ownership position at December
31,
2005. The Company recorded the gain resulting from the change in ownership
interest to equity in accordance with SAB 51. With the decreased ownership
percentage, effective December 2005, the Company no longer uses the equity
method to account for its interest in Titan Europe Plc.
In
accordance with SFAS No. 115, the Company records the Titan Europe Plc
investment as an available-for-sale security and reports the investment at
fair
value, with unrealized gains and losses excluded from earnings and reported
as a
separate component of comprehensive income in stockholders’ equity. The
Company’s stock ownership interest in Titan Europe Plc was 17.3% at December 31,
2006, and 15.4% at December 31, 2005. The increase in ownership percentage
resulted from a December 2006 transaction in which Titan Europe Plc issued
additional shares to the Company in payment of approximately $7.9 million U.S.
dollars of debt, representing the entire remaining long-term debt owed by Titan
Europe Plc to the Company. The fair value of the Company’s investment in Titan
Europe Plc was $65.9 million and $48.5 million at December 31, 2006 and 2005,
respectively. Cash dividends received from Titan Europe Plc were $1.3 million,
$0.9 million and $0.3 million for the years ended December 31, 2006, 2005 and
2004, respectively. Titan Europe Plc is publicly traded on the AIM market in
London, England.
17
CRITICAL
ACCOUNTING ESTIMATES
Preparation
of the financial statements and related disclosures in compliance with
accounting principles generally accepted in the United States of America
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 assumptions that require difficult subjective judgments regarding
many
factors, which, in and of themselves, could materially impact the financial
statements and disclosures. A future change in the estimates, assumptions or
judgments applied in determining the following matters, among others, could
have
a material impact on future financial statements and disclosures.
Inventories
Inventories
are valued at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method in 2006 for approximately 74% of inventories
and the last-in, first-out (LIFO) method for approximately 26% of inventories.
The major rubber material inventory and related work-in-process and their
finished goods are accounted for under the FIFO method. The major steel material
inventory and related work-in-process and their finished goods are accounted
for
under the LIFO method. Market value 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 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. The
Company’s goodwill was $11.7 million at December 31, 2006 and 2005. Significant
assumptions relating to future operations must be made when estimating future
cash flows in analyzing goodwill for impairment. Should unforeseen events occur
or operating trends change significantly, impairment losses could
occur.
Valuation
of Investment Accounted for as Available-for-Sale Security
The
Company has an investment in Titan Europe Plc of $65.9 million as of December
31, 2006, representing a 17.3% ownership position. Titan Europe Plc is publicly
traded on the AIM market in London, England. This investment is recorded as
“Investment in Titan Europe Plc” on the consolidated balance sheet. In
accordance with SFAS No. 115, the Company records the Titan Europe Plc
investment as an available-for-sale security and reports this investment at
fair
value, with unrealized gains and losses excluded from earnings and reported
in a
separate component of stockholders’ equity. Should the fair value decline below
the cost basis, the Company would be required to determine if this decline
is
other than temporary. If the decline in fair value were judged to be other
than
temporary, an impairment charge would be recorded. Should unforeseen events
occur or investment trends change significantly, impairment losses could occur.
Declared dividends on this investment are recorded in income as a component
of
other income.
Income
taxes
Deferred
income tax provisions are determined using the liability method whereby deferred
tax assets and liabilities are recognized based upon temporary differences
between the financial statement and income tax basis of assets and liabilities.
The Company assesses the realizability of its deferred tax asset positions
to
determine if a valuation allowance is necessary.
18
Asset
and Business Acquisitions
The
allocation of purchase price for asset and business acquisitions requires
management estimates and judgment as to expectations for future cash flows
of
the acquired assets and business and the allocation of those cash flows to
identifiable intangible assets in determining the estimated fair value for
purchase price allocations. If the actual results differ from the estimates
and
judgments used in determining the purchase price allocations, impairment losses
could occur relating to any intangibles recorded in the acquisition. To aid
in
establishing the value of any intangible assets at the time of acquisition,
the
Company typically engages a professional appraisal firm.
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. The Company
has two frozen defined benefit pension plans and one defined benefit plan that
purchased a final annuity settlement in 2002. The Company expects to contribute
approximately $5 million to these frozen defined benefit pension plans in 2007.
For more information concerning these costs and obligations, see the discussion
of the “Pensions” and Note 21 to the Company’s financial
statements.
The
effect of hypothetical changes to selected assumptions on the Company’s frozen
pension benefit obligations would be as follows (in
thousands):
|
December
31, 2006
|
2007
|
|||||
|
Increase
|
Increase
|
Increase
|
||||
|
Percentage
|
(Decrease)
|
(Decrease)
|
(Decrease)
|
|||
|
Assumptions
|
Change
|
PBO
(a)
|
Equity
(b)
|
Expense
|
||
|
Pension
|
||||||
|
Discount
rate (c)
|
+/-.5
|
$(2,876)/$3,113
|
$2,876/$(3,113)
|
$(74)/$76
|
||
|
Expected
return on assets
|
+/-.5
|
$(296)/$296
|
||||
| (a) |
Projected
benefit obligation (PBO) for pension
plans.
|
| (b) |
Pretax
minimum pension liability
adjustment.
|
| (c) |
Pretax
impact on service cost, interest cost and amortization of gains or
losses.
|
19
FISCAL
YEAR ENDED DECEMBER 31, 2006, COMPARED TO FISCAL YEAR ENDED
DECEMBER
31, 2005
RESULTS
OF OPERATIONS
The
following tables and discussions provide highlights for the year ended December
31, 2006, compared to 2005 (amounts
in thousands):
|
2006
|
|
2005
|
%
Increase
|
|||||||
|
Net
sales
|
$
|
679,454
|
$
|
470,133
|
45
|
%
|
||||
|
Gross
profit
|
72,778
|
64,210
|
13
|
%
|
||||||
|
Gross
profit percentage
|
10.7
|
%
|
13.7
|
%
|
||||||
Net
Sales
Net
sales
for the year ended December 31, 2006, were $679.5 million compared to $470.1
million for the year ended December 31, 2005. The large sales improvement of
$209.4 million, or 45%, for the year ended December 31, 2006, was attributed
to
the expanded agricultural product offering of Goodyear branded farm tires and
the expanded earthmoving, construction and mining product offering of
Continental & General branded off-the-road (OTR) tires. These product
offerings came with the added manufacturing capacity from the Freeport,
Illinois, facility, which was approximately $186 million in 2006, and the Bryan,
Ohio, OTR facility, which was approximately $41 million since the acquisition
date of July 31, 2006.
Cost
of Sales and Gross Profit
Cost
of
sales was $606.7 million for the year ended December 31, 2006, as compared
to
$405.9 million in 2005. Gross profit for the year 2006 was $72.8 million or
10.7% of net sales, compared to $64.2 million, or 13.7% of net sales for 2005.
Due to capacity constraints at Titan’s Bryan, Ohio, OTR tire facility, the
Company is adding OTR tire capacity at its Freeport, Illinois, and Des Moines,
Iowa, tire facilities. Titan is aligning synergies, which includes retooling,
retraining personnel and movement of equipment at the Bryan, Freeport and Des
Moines facilities. These realignment costs of approximately $9 million to $11
million lowered the Company’s gross profit for the fourth quarter of 2006, as
labor costs that are normally dedicated to making products were instead used
for
retooling, retraining and movement of equipment. These costs resulted in an
approximate 2% reduction in the annual gross profit percentage.
Administrative
Expenses
Selling,
general and administrative expenses were as follows (amounts
in thousands):
|
2006
|
|
2005
|
%
Increase
|
|||||||
|
Selling,
general and administrative
|
$
|
42,142
|
$
|
32,270
|
31
|
%
|
||||
|
Percentage
of net sales
|
6.2
|
%
|
6.9
|
%
|
||||||
Selling,
general and administrative (SG&A) expenses were $42.1 million or 6.2% of net
sales for the year ended December 31, 2006, as compared to $32.3 million or
6.9%
of net sales for 2005. Research and development (R&D) expenses, which were
previously shown separately, have been combined with the SG&A expenses due
to the reduced level of R&D expenditures. R&D expenses were $1.3 million
and $0.8 million for the years ended December 31, 2006 and 2005, respectively.
SG&A expenses for the year ended December 31, 2006, were approximately $5
million higher as a result of the Freeport and Bryan acquisitions and their
associated selling expenses. However, as a result of the higher sales levels,
SG&A expenses decreased by approximately 1% when expressed as a percentage
of net sales.
Royalty
Expense
Royalty
expense was as follows (amounts
in thousands):
|
2006
|
|
2005
|
%
Increase
|
|||||||
|
Royalty
expense
|
$
|
5,001
|
$
|
0
|
n/a
|
|||||
The
December 2005 Goodyear North American farm tire asset acquisition included
a
license agreement with The Goodyear Tire & Rubber Company to manufacture and
sell certain off-highway tires in North America. Royalty expenses for the year
ended December 31, 2006, were $5.0 million. No royalty expense was recorded
in
the year ended December 31, 2005, as this license agreement was not yet in
place.
20
Idled
Assets Marketed for Sale
Idled
asset marketed for sale depreciation was as follows (amounts
in thousands):
|
2006
|
|
2005
|
%
Decrease
|
|||||||
|
Idled
assets depreciation
|
$
|
3,624
|
$
|
4,736
|
(23
|
%)
|
||||
The
Company’s profit margins have been negatively affected by the depreciation
associated with the idled assets marketed for sale. The Company incurred $3.6
million and $4.7 million in depreciation related to the idled assets for the
years ended December 31, 2006 and 2005, respectively. As a result of the
Goodyear North American farm tire asset acquisition and the Continental OTR
asset acquisition, the Company is placing these assets back into service
primarily at the Des Moines, Iowa, Freeport, Illinois, and Bryan, Ohio
facilities. Therefore, in December 2006, the idled assets balance of
approximately $14 million was reclassified to property, plant and equipment,
leaving no balance at December 31, 2006.
Dyneer
Legal Charge
The
State
Court of California in 2005 allowed the disbursement of restricted cash funds
held in the Vehicular Technologies case. In 2005, Titan recognized the Dyneer
legal charge of approximately $15.2 million for the judgment related to this
case, which is now closed.
Income
from Operations
Income
from operations was as follows (amounts
in thousands):
|
2006
|
|
2005
|
%
Increase
|
|||||||
|
Income
from operations
|
$
|
22,011
|
$
|
11,999
|
83
|
%
|
||||
|
Percentage
of net sales
|
3.2
|
%
|
2.6
|
%
|
||||||
Income
from operations for the year ended December 31, 2006, was $22.0 million or
3.2%
of net sales, compared to $12.0 million or 2.6% in 2005. Income from operations
was affected by the items previously discussed in the cost of sales,
administrative, royalty, idled assets, and legal charge line items.
Interest
Expense
Interest
expense was as follows (amounts
in thousands):
|
2006
|
|
2005
|
%
Increase
|
|||||||
|
Interest
expense
|
$
|
17,001
|
$
|
8,617
|
97
|
%
|
||||
Net
interest expense for the year 2006 was $17.0 million compared to $8.6 million
in
2005. The Company’s average debt balances in 2006 were substantially higher when
compared to 2005. The average 2006 debt balances were higher with the Goodyear
farm asset acquisition of approximately $100 million and the Continental OTR
asset acquisition of approximately $53 million. These higher average debt
balances in 2006 resulted in an increase in interest expense of approximately
$5
million when compared to 2005. The Company’s average interest rates were 7.7% in
2006, compared to 6.2% in 2005, resulting in an increase in interest expense
of
approximately $3 million.
Noncash
Convertible Debt Conversion Charge
In
June
2005, Titan finalized a private transaction in which the Company issued
3,022,275 shares of common stock in exchange for the cancellation of $33.8
million principal amount of the Company’s outstanding 5.25% senior convertible
notes due 2009, as proposed to the Company by certain note holders. The Company
recognized a noncash charge of $7.2 million in connection with this exchange
in
accordance with SFAS No. 84, “Induced Conversions of Convertible
Debt.”
Other
Income
Other
income was as follows (amounts
in thousands):
|
2006
|
|
2005
|
%
Increase
|
|||||||
|
Other
income
|
$
|
3,564
|
$
|
958
|
272
|
%
|
||||
Other
income of $3.6 million in 2006 included (i) interest income of $1.7 million,
(ii) dividend income from the Titan Europe Plc investment of $1.3 million,
(iii)
currency exchange gain of $1.0 million and (iv) other expense of $0.4 million.
The $3.6 million of other income in 2006 compares to $1.0 million in
2005.
21
Income
Tax Expense
The
Company recorded an income tax expense of $3.4 million in 2006 as compared
to an
income tax benefit of $13.9 million in 2005. As a result of several years
of previous losses, the Company recorded a valuation allowance against its
net
deferred tax asset, consistent with the Company’s accounting policies. As a
result of anticipated utilization of net operating loss carryforward in
connection with its future Federal income tax filings, the Company recorded
a
tax benefit of $13.9 million in 2005 as a result of the reversal of the
Company’s valuation allowance in accordance with SFAS 109. The Company’s net
operating loss carryforward of approximately $32 million expires in
2023.
Net
Income
Net
income was as follows (amounts
in thousands):
|
2006
|
|
2005
|
%
Decrease
|
|||||||
|
Net
income
|
$
|
5,144
|
$
|
11,042
|
(53
|
%)
|
||||
Net
income for the year ended December 31, 2006, was $5.1 million, compared to
$11.0
million in 2005. Basic earnings per share were $.26 for the year ended December
31, 2006, as compared to $.61 in 2005. Diluted earnings per share were $.26
for
the year ended December 31, 2006, as compared to $.60 in 2005.
Agricultural
Segment Results
Agricultural
segment results were as follows (amounts
in thousands):
|
2006
|
|
2005
|
%
Increase
(Decrease)
|
|||||||
|
Net
sales
|
$
|
421,096
|
$
|
310,361
|
36
|
%
|
||||
|
Income
from operations
|
27,351
|
31,750
|
(14
|
%)
|
||||||
Net
sales
in the agricultural market were $421.1 million for the year ended December
31,
2006, as compared to $310.4 million in 2005. The expanded product offering
of
Goodyear branded farm tires, along with the added manufacturing capacity from
the Freeport, Illinois, facility accounted for the agricultural market higher
sales levels.
Income
from operations in the agricultural market was $27.4 million for the year 2006
as compared to $31.8 million in 2005. The decrease in income from operations
in
the agricultural market was attributed to higher sales volumes in relation
to
higher fixed overhead costs including fourth quarter of 2006 costs normally
dedicated to making products were instead used for retooling, retraining and
movement of equipment.
Earthmoving/Construction
Segment Results
Earthmoving/construction
segment results were as follows (amounts
in thousands):
|
2006
|
|
2005
|
%
Increase
|
|||||||
|
Net
sales
|
$
|
183,357
|
$
|
131,982
|
39
|
%
|
||||
|
Income
from operations
|
21,837
|
17,664
|
24
|
%
|
||||||
The
Company’s earthmoving/construction market net sales were $183.4 million for the
year ended December 31, 2006, as compared to $132.0 million in 2005. The
expanded product offering of the Continental and General brands for OTR tires,
along with added manufacturing capacity from the Bryan, Ohio, facility accounted
for the earthmoving/construction market higher sales levels in 2006. These
sales
increases were offset by a decrease in sales to the United States government,
which were approximately $21 million lower in 2006 as compared to 2005. Sales
to
the United States government are dependent on government appropriations and
have
a tendency for significant fluctuations.
The
Company’s earthmoving/construction market income from operations was $21.8
million for the year 2006, up from $17.7 million in 2005. The Bryan, Ohio,
facility produces tires for earthmoving, construction, and mining machinery
in
sizes larger than the Company was able to produce before this facility was
acquired on July 31, 2006. The increase in income from operations in the
earthmoving/construction segment is the result of margins realized on these
larger earthmoving, construction and mining tires.
22
Consumer
Segment Results
Consumer
segment results were as follows (amounts
in thousands):
|
2006
|
|
2005
|
%
Increase (Decrease)
|
|||||||
|
Net
sales
|
$
|
75,001
|
$
|
27,790
|
170
|
%
|
||||
|
Income
from operations
|
1,655
|
1,825
|
(9
|
%)
|
||||||
Consumer
market net sales were $75.0 million for the year ended December 31, 2006, as
compared to $27.8 million in 2005. The Goodyear farm tire acquisition included
an off-take/mixing agreement for certain product sales to Goodyear, the majority
of which are included in the consumer segment. Sales to The Goodyear Tire and
Rubber Company under this agreement of approximately $48 million in 2006 were
the reason for the substantial increase in consumer market sales. Consumer
market income from operations remained stable at $1.7 million for the year
2006
as compared to $1.8 million in 2005.
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 $28.8 million for the year ended
December 31, 2006, as compared to $24.0 million in 2005. The increase in
corporate expenses related primarily to higher sales and marketing expenses
related to the acquisition of Freeport and Bryan of approximately $3 million
for
2006 as compared to 2005.
23
FISCAL
YEAR ENDED DECEMBER 31, 2005, COMPARED TO FISCAL YEAR ENDED
DECEMBER
31, 2004
RESULTS
OF OPERATIONS
The
following table provides highlights for the year ended December 31, 2005,
compared to 2004
(amounts
in thousands, except per share data):
|
2005
|
|
2004
|
|||||
|
Net
sales
|
$
|
470,133
|
$
|
510,571
|
|||
|
Gross
profit
|
64,210
|
79,500
|
|||||
|
Gross
profit percentage
|
13.7
|
%
|
15.6
|
%
|
|||
|
Income
from operations
|
11,999
|
33,322
|
|||||
|
Net
income
|
11,042
|
11,107
|
|||||
|
Earnings
per share - Basic
|
.61
|
.62
|
|||||
|
Earnings
per share - Diluted
|
.60
|
.61
|
|||||
The
following is a summary of the Titan Europe results included in the historical
results of the Company for the year ended December 31, 2005, compared to 2004
(amounts
in thousands, except per share data):
|
2005
(a)
|
|
2004
(a)
|
|||||
|
Net
sales
|
$
|
0
|
$
|
49,446
|
|||
|
Gross
profit
|
0
|
8,272
|
|||||
|
Gross
profit percentage
|
0.0
|
%
|
16.7
|
%
|
|||
|
Income
from operations
|
0
|
420
|
|||||
| (a) |
A
majority interest in Titan Europe sold in April
2004.
|
Net
Sales
Net
sales
for the year ended December 31, 2005, were $470.1 million compared to $510.6
million for the year ended December 31, 2004. Had the sale of the majority
interest in Titan Europe occurred on January 1, 2004, pro forma net sales would
have been $470.1 million and $461.1 million for the years ended December 31,
2005 and 2004, respectively. Sales on a comparative basis were higher by $9.0
million, a 2% increase.
Cost
of Sales and Gross Profit
Cost
of
sales was $405.9 million for the year ended December 31, 2005, as compared
to
$431.1 million in 2004. Gross profit for the year 2005 was $64.2 million or
13.7% of net sales, compared to $79.5 million, or 15.6% of net sales for 2004.
Had the sale of the majority interest in Titan Europe occurred on January 1,
2004, pro forma gross profit would have been $71.2 million, or 15.4% of net
sales for 2004. Gross profit was negatively impacted by higher raw material
and
energy costs. Raw material and energy costs increased by approximately $7
million in 2005 over 2004, accounting for a gross profit decrease of 1.7% of
net
sales.
Administrative
Expenses
Selling,
general and administrative (SG&A) and research and development (R&D)
expenses were $32.3 million or 6.9% of net sales for the year ended December
31,
2005, as compared to $37.9 million or 7.4% of net sales for 2004. Administrative
expenses as a percentage of net sales were positively impacted by the sale
of a
majority interest in Titan Europe, which had administrative expenses that
averaged 10% to 11% on a historical basis. Titan Europe administrative expenses
of $7.9 million were included in 2004.
Idled
Assets Marketed for Sale
The
Company’s profit margins have been negatively affected by the depreciation
associated with the idled assets marketed for sale. The idled assets balance
at
December 31, 2005, was $18.3 million. Included in the December 31, 2005, balance
is land and a building at the Company’s idled facility in Greenwood, South
Carolina, of $1.9 million. Machinery and equipment located at the Company’s
idled facilities in Brownsville, Texas, and Natchez, Mississippi, totaling
$16.4
million are also included in idled assets at December 31, 2005. With the sales
process extending more than 12 months, the idled assets were depreciated during
the fourth quarter of 2004 in accordance with SFAS No. 144, and the Company
incurred $4.7 million and $5.3 million in depreciation related to the idled
assets for the years ended December 31, 2005 and 2004,
respectively.
24
Dyneer
Legal Charge
The
State
Court of California in 2005 allowed the disbursement of the $24.5 million of
restricted cash funds held in the Vehicular Technologies case. In 2005, Titan
recognized the Dyneer legal charge of approximately $15.2 million for the
judgment related to this case, which is now closed. The Company received $4.3
million of the cash funds.
Income
from Operations
Income
from operations for the year ended December 31, 2005, was $12.0 million or
2.6%
of net sales, compared to $33.3 million or 6.5% in 2004. Excluding the Dyneer
legal charge, income from operations for the year ended December 31, 2005,
was
$27.2 million or 5.8% of net sales. The Company recognized a $3.0 million
goodwill impairment charge in the first quarter of 2004 on the pending sale
of a
majority interest in Titan Europe in accordance with the Company’s goodwill
impairment process. The decreased income from operations in 2005 as compared
to
2004 resulted primarily from the decreased gross profit of $15.3 million and
the
Dyneer legal charge of $15.2 million offset by the administrative expense
decrease of $5.6 million and the $3.0 million goodwill impairment charge in
2004.
Interest
Expense
Net
interest expense for the year 2005 was $8.6 million compared to $16.2 million
in
2004. The Company’s average debt balances were approximately $83 million lower
when compared to 2004, resulting in a reduction of interest expense of $6.1
million. The Company’s average interest rates were 6.2%, approximately one
percentage point lower in 2005 than the average 2004 interest rate resulting
in
an interest savings of $1.5 million.
Noncash
Convertible Debt Conversion Charge
In
June
2005, Titan finalized a private transaction in which the Company issued
3,022,275 shares of common stock in exchange for the cancellation of $33.8
million principal amount of the Company’s outstanding 5.25% senior convertible
notes due 2009, as proposed to the Company by certain note holders. The Company
recognized a noncash charge of $7.2 million in connection with this exchange
in
accordance with SFAS No. 84, “Induced Conversions of Convertible
Debt.”
Debt
Termination Expense
In
connection with the termination of the Company’s prior revolving loan agreement
and term loan and the redemption of the 8.75% senior subordinated notes, Titan
recorded expenses of $3.7 million in the third quarter of 2004. These expenses
were related to the (i) redemption premium on the subordinated notes of $2.0
million, (ii) unamortized deferred financing fees of $1.5 million, and (iii)
prepayment penalty of $0.2 million.
Other
Income
Other
income was $1.0 million in 2005 as compared to $1.7 million in 2004. Included
in
other income is equity income on the Titan Europe Plc investment of $2.9 million
in 2005 as compared to $1.3 million in 2004. Currency exchange, which is also
included in other income, was a loss of $1.3 million in 2005 as compared to
gain
of $0.5 million in 2004.
Income
Tax Expense
The
Company recorded an income tax benefit of $13.9 million and an income tax
expense of $4.1 million for the years ended December 31, 2005 and 2004,
respectively. As a result of several years of previous losses, the
Company recorded a valuation allowance against its net deferred tax asset,
consistent with the Company’s accounting policies. As a result of anticipated
utilization of net operating loss carryforward in connection with its future
Federal income tax filings, the Company recorded a tax benefit of $13.9 million
as a result of the reversal of the Company’s valuation allowance.
Net
Income
Net
income for the year ended December 31, 2005, was $11.0 million, compared to
$11.1 million in 2004. Basic earnings per share were $.61 for the year ended
December 31, 2005, as compared to $.62 in 2004. Diluted earnings per share
were
$.60 for the year ended December 31, 2005, as compared to $.61 in
2004.
25
Agricultural
Segment Results
Net
sales
in the agricultural market were $310.4 million for the year ended December
31,
2005, as compared to $316.2 million in 2004. Had the sale of the majority
interest in Titan Europe occurred on January 1, 2004, net sales in the
agricultural market for the year ended December 31, 2005, would have been $310.4
million, as compared to $292.0 million in 2004. Income from operations in the
agricultural market was $31.8 million for the year 2005 as compared to $38.6
million in 2004. Income from operations in the agricultural market was
negatively affected by higher raw material and energy costs of approximately
$5
million.
Earthmoving/Construction
Segment Results
The
Company’s earthmoving/construction market net sales were $132.0 million for the
year ended December 31, 2005, as compared to $160.3 million in 2004. Had the
sale of the majority interest in Titan Europe occurred on January 1, 2004,
net
sales in the earthmoving/construction market for years ended December 31, 2005
and 2004, would have been $132.0 million and $136.8 million, respectively.
The
Company’s earthmoving/construction market income from operations was $17.7
million for the year 2005, up from $16.6 million in 2004 due to higher margins
related to product mix that offset the higher raw material and energy costs
of
approximately $2 million.
Consumer
Segment Results
Consumer
market net sales were $27.8 million for the year ended December 31, 2005, as
compared to $34.0 million in 2004. Had the sale of the majority interest in
Titan Europe occurred on January 1, 2004, net sales in the consumer market
for
the years ended December 31, 2005 and 2004, would have been $27.8 million and
$32.3 million, respectively. Consumer market income from operations remained
relatively stable at $1.8 million for the year 2005 as compared to $1.9 million
in 2004.
Foreign
Subsidiaries Sales
Net
sales
at foreign subsidiaries were $0.0 million for the year ended December 31, 2005,
as compared to $49.4 million in 2004. The sales decrease at foreign subsidiaries
was due to the April 2004 sale of a majority interest in Titan Europe, which
comprised all of the Company’s foreign subsidiary sales. Titan retains a 15.4%
ownership in Titan Europe Plc at December 31, 2005. Titan Europe’s sales were no
longer consolidated with Titan beginning in the second quarter of 2004 as a
result of the ownership decrease to approximately 30% upon the April 2004
transaction.
Corporate
Expenses
Income
from operations on a segment basis does not include corporate expenses carried
at the corporate level totaling $24.0 million for the year ended December 31,
2005, as compared to $23.8 million in 2004. The Dyneer legal charge of $15.2
million is also not included in income from operations on a segment
basis.
TITAN
EUROPE SEGMENT RESULTS
The
following is a summary of the Titan Europe results included in the historical
results of the Company for the year ended December 31, 2004 (in
millions):
|
2004
|
Agricultural
|
|
Earthmoving/
Construction
|
|
Consumer
|
|
Reconciling
Items
|
|
Consolidated
Totals
|
|
||||||
|
Revenues
from external customers
|
$
|
24.3
|
$
|
23.4
|
$
|
1.7
|
$
|
0.0
|
$
|
49.4
|
||||||
|
Income
(loss) from operations
|
0.8
|
0.5
|
(0.1
|
)
|
(0.8
|
) (a)
|
0.4
|
|||||||||
| (a) |
Represents
corporate expenses.
|
26
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
As
of
December 31, 2006, the Company had $33.4 million of cash balances within various
bank accounts. This cash balance increased by $32.8 million from December 31,
2005, due to the following cash flow discussion items.
Operating
cash flows
For
the
year ended December 31, 2006, cash of $5.5 million was used for operating
activities. This usage was primarily the result of increases in accounts
receivable and inventories of $26.8 million and $19.5 million, respectively,
offset by an increase in other current liabilities of $13.4 million and noncash
charges included in net income of $26.9 million for depreciation and
amortization. Net income of $5.1 million was offset by other operating
activities.
In
comparison, for the year ended December 31, 2005, positive cash flows from
operating activities of $22.9 million resulted primarily from net income of
$11.0 million, noncash charges included in net income of $20.7 million for
depreciation and amortization and a $7.2 million noncash convertible debt
conversion charge offset by a noncash deferred income tax benefit of $14.5
million.
For
the
year ended December 31, 2004, positive cash flows from operating activities
of
$18.1 million resulted primarily from income of $11.1 million and noncash
depreciation and amortization charges included in net income of $24.9 million
offset by accounts receivable and inventories increases of $10.8 million and
$8.8 million.
Investing
cash flows
Net
cash
used for investing activities was $52.7 million in 2006, as compared to $76.7
million used in 2005 and $62.4 million positive cash flows in 2004. Titan
invested $44.6 million for the Continental OTR tire acquisition in 2006, while
the Company invested $100.0 million for the Goodyear North American farm tire
acquisition in 2005. In 2004, the Titan Europe Plc sale provided $40.8 million
in cash.
The
Company invested a total of $8.3 million in capital expenditures in 2006,
compared to $6.8 million in 2005 and $4.3 million in 2004. The Company estimates
that capital expenditures for 2007 could range between $16 million and $18
million. A decrease in restricted cash provided $24.5 million and asset sales
provided $5.5 million in 2005.
Financing
cash flows
Net
cash
provided by financing activities in 2006 was $91.1 million. This cash was
primarily provided by $88.9 million of net debt proceeds. In addition, the
exercise of stock options provided $5.4 million in cash and the payment of
financing fees used $3.7 million of cash. In 2005, cash of $53.3 million was
provided by financing activities, the result of net debt proceeds of $53.4
million. In 2004, $85.8 million in cash was used for financing activities,
primarily the result of net debt payments of $65.8 million.
Debt
Covenants
The
Company’s revolving credit facility contains various covenants and restrictions.
The financial covenants in this agreement require that:
| · |
Collateral
coverage be equal to or greater than 1.20 times the outstanding revolver
balance.
|
| · |
If
the 30-day average of the outstanding revolver balance exceeds $100
million, the fixed charge coverage ratio be equal to or greater than
a 1.0
to 1.0 ratio.
|
Restrictions
include:
| · |
Limits
on payments of dividends and repurchases of the Company’s
stock.
|
| · |
Restrictions
on the ability of the Company to make additional borrowings, or to
consolidate, merge or otherwise fundamentally change the ownership
of the
Company.
|
| · |
Limitations
on investments, dispositions of assets and guarantees of
indebtedness.
|
| · |
Other
customary affirmative and negative covenants.
|
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. The failure by Titan
to
meet these covenants could result in the Company ultimately being in default
on
these loan agreements.
27
The
Company is in compliance with these covenants and restrictions as of December
31, 2006. The collateral coverage was calculated to be 23.4 times the
outstanding revolver balance at December 31, 2006.
The
fixed
charge coverage ratio did not apply for the quarter ended December 31, 2006.
The
credit facility usage was $15.7 million at December 31, 2006, consisting
exclusively of letters of credit of $15.7 million with no cash
borrowings.
Other
Issues
The
Company’s business is subject to seasonal variations in sales that affect
inventory levels and accounts receivable balances. Historically, Titan tends
to
experience higher sales demand in the first and second quarters.
The
Company’s Board of Directors authorized Titan to repurchase up to 10.0 million
shares of its common stock. No Titan stock was repurchased in 2006 or 2005.
The
Company repurchased 7.5 million shares in prior years leaving Titan with
authorization to repurchase an additional 2.5 million common shares subject
to
debt agreement covenants.
LIQUIDITY
OUTLOOK
At
December 31, 2006, the Company had unrestricted cash and cash equivalents of
$33.4 million and $109.3 million of unused availability under the terms of
its
revolving credit facility. The availability under the Company’s $125 million
revolving credit facility was reduced by $15.7 million for outstanding letters
of credit. The Company estimates that capital expenditures for 2007 could range
between $16 million and $18 million.
The
Company has scheduled debt principal payments amounting to $0.1 million due
during 2007. However, the Company anticipates paying off approximately $10
million of industrial revenue bonds in the first quarter of 2007. The Company
expects to contribute approximately $5 million to its frozen defined benefit
pension plans during 2007. The Company has a net operating loss carryforward
of
approximately $32 million, expiring in 2023, which is expected to reduce the
Company’s income tax payments in the future.
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. 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’s ability to secure additional funding may be
negatively impacted.
INFLATION
The
Company is subject to the effect of price fluctuations. During 2006, 2005 and
2004, the Company realized price increases for purchases of steel and rubber
used in the manufacture of its products. While the cost outlook for commodities
used in the Company’s production is not certain, management believes it can
manage these inflationary pressures by introducing appropriate sales price
adjustments.
28
CONTRACTUAL
OBLIGATIONS
The
Company’s contractual obligations at December 31, 2006, consisted of the
following (in
thousands):
|
Payments
due by period
|
||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than 1
year
|
1-3
years
|
3-5
years
|
More
than 5
years
|
|||||||||||
|
Long-term
debt (a)
|
$
|
291,364
|
$
|
98
|
$
|
81,766
|
$
|
9,500
|
$
|
200,000
|
||||||
|
Interest
expense (b)
|
91,733
|
20,330
|
38,736
|
32,000
|
667
|
|||||||||||
|
Operating
leases
|
6,071
|
2,575
|
2,487
|
1,009
|
0
|
|||||||||||
|
Purchase
obligations
|
2,825
|
1,408
|
1,355
|
62
|
0
|
|||||||||||
|
Other
long-term liabilities (c)
|
8,200
|
5,000
|
3,200
|
0
|
0
|
|||||||||||
|
Total
|
$
|
400,193
|
$
|
29,411
|
$
|
127,544
|
$
|
42,571
|
$
|
200,667
|
||||||
| (a) |
Long-term
debt includes current maturities.
|
| (b) |
Interest
expense is estimated based on the Company’s year-end 2006 debt balances
and maturities including interest rates that are anticipated to remain
at
the current rates. The estimates assume no conversion of convertible
notes
and no revolver borrowings. The Company’s actual debt balances and
interest rates may fluctuate in the future. Therefore, actual interest
payments may vary from those payments detailed in the above
table.
|
| (c) |
Other
long-term liabilities represent the Company’s estimated funding
requirements for the frozen defined benefit pension plans. The Company’s
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 and are subject to a number of risks and
uncertainties and may lead to significantly different pension liability
funding requirements.
|
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company has no material off-balance sheet arrangements.
29
MARKET
RISK SENSITIVE INSTRUMENTS
Exchange
Rate Sensitivity
The
Company is exposed to fluctuations in the British pound and Euro 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 was $65.9 million at December 31, 2006, and $56.9 million at December
31, 2005. 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 December 31, 2006, would amount to approximately
$7
million.
Commodity
Price Sensitivity
The
Company does not generally enter into long-term commodity contracts and does
not
use derivative commodity instruments to hedge its exposures to commodity market
price fluctuations. Therefore, the Company is exposed to price fluctuations
of
its key commodities, which consist primarily of steel and rubber. The Company
attempts to pass on certain material price increases and decreases to its
customers, depending on market conditions.
Interest
Rate Sensitivity
The
Company has a revolving credit facility and an industrial revenue bond that
have
variable interest rates. If the revolving credit facility were fully drawn,
a 1%
change in the interest rate would change the Company’s interest expense by
approximately $1 million.
At
December 31, 2006, the fair value of the Company’s senior unsecured convertible
notes, based upon quoted market prices obtained through independent pricing
sources, was $130.8 million, compared to the carrying value of $81.2 million.
The Company believes the carrying value of its other debt reasonably
approximates fair value at December 31, 2006.
MARKET
CONDITIONS AND OUTLOOK
In
2006,
the Company experienced a softening in demand from OEMs for the Company’s
agricultural and military products. In December of 2005, the Company acquired
the Goodyear North American farm tire assets, which included a manufacturing
facility in Freeport, Illinois. The transaction also included a license
agreement with Goodyear for Titan to manufacture and sell Goodyear branded
farm
tires in North America. On July 31, 2006, Titan Tire Corporation of Bryan,
a
subsidiary of the Company, acquired the OTR tire facility of Continental Tire
North America, Inc. in Bryan, Ohio. The Bryan facility produces tires for
earthmoving, construction and mining equipment in larger sizes than Titan
previously produced.
Titan
is
using the expanded agricultural product offering of Goodyear branded farm tires
and the expanded earthmoving/construction product offering supplied by the
Bryan
facility, along with added manufacturing capacity from the Freeport and Bryan
facilities to expand market share. Due to capacity constraints at Titan’s Bryan,
Ohio, OTR tire facility, the Company is adding OTR tire capacity at its
Freeport, Illinois, and Des Moines, Iowa, tire facilities.
Higher
energy, raw material and petroleum-based product costs may continue to
negatively impact the Company’s margins. Many of Titan’s overhead expenses are
fixed; therefore, lower seasonal trends may cause negative fluctuations in
quarterly profit margins and affect the financial condition of the
Company.
AGRICULTURAL
MARKET OUTLOOK
Agricultural
market sales are forecasted to be stable for 2007. The farm economy is being
helped by strong commodity prices. However, the farm economy is also affected
by
high input costs for fuel and fertilizer. A continuing increase in the use
of
grain-based ethanol and soybean-based biodiesel fuel should support commodity
prices and farm income levels in the long-term. The Company believes the
increasing demand for biofuels may possibly result in a stronger market than
is
now being forecasted. The Company’s largest customer, Deere & Company,
extended its long-term wheel agreement with Titan from an expiration date of
October 31, 2007, to October 31, 2010. Many variables, including weather, grain
prices, export markets, and future government policies and payments can greatly
influence the overall health of the agricultural economy.
30
EARTHMOVING/CONSTRUCTION
MARKET OUTLOOK
Sales
for
the earthmoving/construction market are expected to remain strong in 2007.
Metals, oil and gas prices have declined from their 2006 highs. However, these
commodity prices remain at levels that are attractive for continued investment,
which will maintain support for earthmoving and mining sales. The Bryan facility
produces tires for large earthmoving, construction and mining machinery, which
Titan did not previously produce. Therefore, Titan’s 2007 sales in this segment
are expected to be higher than those in 2006. The Company’s OTR production
realignment will allow Titan to expand production in earthmoving/construction
tire sizes that are in short supply. The earthmoving/construction segment is
affected by many variables, including commodity prices, road construction,
infrastructure, government appropriations and housing starts. Many of these
items are very sensitive to interest rate fluctuations.
CONSUMER
MARKET OUTLOOK
Titan’s
sales in the consumer market include sales to Goodyear, which fluctuate
significantly based upon their future product requirements, including an
off-take/mixing agreement. This agreement includes mixed stock, which is a
prepared rubber compound used in tire production. The Company’s consumer market
sales will fluctuate significantly related to sales volumes under the
off-take/mixing agreement with Goodyear. However, the Company expects the
remaining consumer market sales to remain relatively stable in 2007. The
all-terrain vehicle (ATV) wheel and tire market is expected to offer future
long-term growth opportunities for Titan. Many factors affect the consumer
market including weather, competitive pricing, energy prices and consumer
attitude.
PENSIONS
The
Company has two frozen defined benefit pension plans and one defined benefit
plan that purchased a final annuity settlement in October 2002. These plans
are
described in Note 21 of the Company’s Notes to Consolidated Financial
Statements.
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 twelve months ended
December 31, 2006, the Company contributed $4.0 million to its pension plans.
The Company expects to contribute approximately $5 million to these frozen
defined benefit pension plans during 2007.
Titan’s
projected benefit obligation at December 31, 2006, was $68.8 million as compared
to $71.8 million at December 31, 2005. During 2006, the Company recorded net
periodic pension cost of $1.2 million. Accumulated other comprehensive income
recorded for defined benefit pension plans, net of tax, was $18.6 million and
$17.2 million at December 31, 2006 and 2005, respectively. Other comprehensive
income is recorded as a direct charge to stockholders’ equity and does not
affect net income. Titan will be required to record net periodic pension cost
in
the future; these costs may fluctuate based upon revised assumptions and could
negatively affect the Company’s financial position, cash flows and results of
operations.
31
RECENTLY
ISSUED ACCOUNTING STANDARDS
Financial
Accounting Standards Board Interpretation Number 48
In
July
2006, Financial Accounting Standards Board Interpretation (FIN) No. 48,
“Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement
No. 109,” was issued. FIN No. 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. This
interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, and disclosure requirements for
uncertain tax positions. FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. The Company is evaluating the effect the adoption
of
this interpretation will have on its consolidated financial position, results
of
operations and cash flows.
Statement
of Financial Accounting Standards Number 157
In
September 2006, Statement of Financial Accounting Standards (SFAS) No. 157,
“Fair Value Measurements,” was issued. This statement defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This Statement applies under other accounting pronouncements that require or
permit fair value measurements. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company is evaluating the effect
the adoption of this standard will have on its consolidated financial position,
results of operations and cash flows.
Statement
of Financial Accounting Standards Number 158
In
September 2006, SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans,” was issued. This statement requires an employer
to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which
the
changes occur through comprehensive income. An employer with publicly traded
equity securities is required to initially recognize the funded status of a
defined benefit postretirement plan and to provide the required disclosures
as
of the end of the fiscal year ending after December 15, 2006. The Company
adopted SFAS No. 158 as of December 31, 2006. The adoption of this statement
had
no material effect on the Company’s consolidated results of operations or cash
flows. See Note 21 to the consolidated financial statements of Titan
International, Inc., included in Item 8 herein for the effect this statement
had
on the Company’s consolidated financial position.
Staff
Accounting Bulletin Number 108
In
September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB 108 requires that
public companies utilize a “dual-approach” when assessing the quantitative
effects of financial misstatements. This dual approach includes both an income
statement focused assessment and a balance sheet focused assessment. The
guidance in SAB 108 is effective for annual financial statements for fiscal
years ending after November 15, 2006. The adoption of this guidance had no
material effect on the Company’s consolidated financial position, results of
operations and cash flows.
32
ITEM
7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Reference
is made to Item 7, Part II of this report.
ITEM
8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference
is made to Item 15, Part IV of this report, “Exhibits, Financial Statement
Schedules.”
ITEM
9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A - CONTROLS AND PROCEDURES
Evaluation
of Disclosure 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 as of the end of the period covered
by this Form 10-K based on an evaluation of the effectiveness of disclosure
controls and procedures.
Changes
in Internal Controls
There
were no material changes in internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during
the
fourth quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
Because
of its inherent limitations, internal controls over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluations of the
effectiveness to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
ITEM
9B - OTHER INFORMATION
None.
33
PART
III
ITEM
10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Directors
The
information required by this item regarding the Company’s directors is
incorporated by reference to the Company’s 2007 Proxy Statement under the
captions “Election of Mr. Campbell and Mr. Taylor as Directors”, “Election of
Mr. Akers as a Director Contingent upon Amendment to Bylaws”, “Directors
Continuing in Office”, “Committees and Meetings of the Board of Directors” and
“Corporate Governance.”
Executive
Officers
The
names, ages and positions of all executive officers of the Company are listed
below, followed by a brief account of their business experience during the
past
five years. Officers are normally appointed annually by the Board of Directors
at a meeting immediately following the Annual Meeting of Stockholders. The
Chief
Executive Officer and Secretary are brother and sister. There is no arrangement
or understanding between any officer and any other person pursuant to which
an
officer was selected.
Maurice
M. Taylor Jr., 62, has been Chief Executive Officer and a Director of the
Company since 1990, when Titan was acquired in a management-led buyout by
investors, including Mr. Taylor. Mr. Taylor served as President of the Company
from 1990 to 2005 and was appointed Chairman in 2005.
Ernest
J.
Rodia, 63, joined the Company in 2005 as Executive Vice President and Chief
Operating Officer. Prior to Titan, Mr. Rodia was employed for nearly 40 years
by
Goodyear Tire and Rubber Company, holding various engineering and manufacturing
positions.
Kent
W.
Hackamack, 48, served as Corporate Controller of the Company from 1994 to 1996.
Mr. Hackamack was appointed Vice President of Finance and Treasurer in
1996.
Cheri
T.
Holley, 59, joined the Company in 1994 as General Counsel and Secretary. Ms.
Holley was appointed Vice President in 1996.
Section
16(a) beneficial ownership reporting compliance
The
information required by this item regarding beneficial ownership reporting
compliance is incorporated by reference to the Company’s 2007 Proxy Statement
under the caption “Section 16(a) Beneficial Ownership Reporting
Compliance.”
Business
conduct policy
The
Company adopted a business conduct policy, which is applicable to directors,
officers and employees. The Company has also adopted corporate governance
guidelines. The business conduct policy and corporate governance guidelines
are
available under the investor information category of the Company’s website,
www.titan-intl.com.
The
Company intends to satisfy disclosure requirements regarding amendments to
or
waivers from its business conduct policy by posting such information on its
website. A printed copy of the business conduct policy and corporate governance
guidelines are available, without charge, by writing to: Secretary of Titan
International, Inc., 2701 Spruce Street, Quincy, IL 62301.
ITEM
11 - EXECUTIVE COMPENSATION
The
information required by this item is incorporated by reference to the Company’s
2007 Proxy Statement under the caption “Compensation of Executive
Officers.”
34
ITEM
12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Except
for the information concerning equity compensation plans, the information
required by this item is incorporated by reference to the Company’s 2007 Proxy
Statement under the caption “Security Ownership of Certain Beneficial Owners and
Management.”
The
following table provides information about shares of Titan common stock that
may
be issued under Titan’s equity compensation plans, as of December 31,
2006:
|
Plan
Category
|
(i)
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
|
(ii)
Weighted-average
exercise
price of outstanding options, warrants
and rights
|
(iii)
Number
of securities
remaining
available for
future
issuance under equity compensation plans (excluding securities
reflected
in column (i))
|
|||||||
|
Equity
compensation plans approved
by security holders
|
1,150,060
|
(a)
|
13.29
|
1,213,720
|
||||||
|
Equity
compensation plans not approved by security holders
|
0
|
n/a
|
0
|
|||||||
|
Total
|
1,150,060
|
13.29
|
1,213,720
|
|||||||
| (a) |
Amount
includes outstanding options under the Company’s 1993 Stock Incentive
Plan, 1994 Non-Employee Director Stock Option Plan and 2005 Equity
Incentive Plan.
|
For
additional information regarding the Company’s stock option plans, please see
Note 22 of the Company’s Notes to Consolidated Financial
Statements.
ITEM
13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information required by this item is incorporated by reference to the Company’s
2007 Proxy Statement under the caption “Related Party Transactions” and
“Corporate Governance” and also appears in Note 26 of the Company’s Notes to
Consolidated Financial Statements.
ITEM
14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
The
information required by this item is incorporated by reference to the Company’s
2007 Proxy Statement under the caption “Audit and Other Fees.”
35
PART
IV
|
ITEM
15 -
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
|
|
(a) 1.
|
Financial
Statements
|
|
|
Management’s
Responsibility for Financial Statements and Report on Internal Control
Over Financial Reporting
|
F-1
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
through F-3
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2006, 2005
and
2004
|
F-4
|
|
|
Consolidated
Balance Sheets at December 31, 2006 and 2005
|
F-5
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended December
31, 2006, 2005 and 2004
|
F-6
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2005
and
2004
|
F-7
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
through F-32
|
|
|
2.
|
Financial
Statement Schedule
|
|
|
Schedule
II - Valuation Reserves
|
S-1
|
|
|
3.
|
Exhibits
|
|
|
The
accompanying Exhibit Index is incorporated herein by
reference.
|
||
36
SIGNATURES
Pursuant
to the requirements of Sections 13 or 15(d) 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:
|
February
27, 2007
|
By:
|
/s/
MAURICE M. TAYLOR JR.
|
|
Maurice
M. Taylor Jr.
|
|||
|
Chairman
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has
been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on February 27, 2007.
|
Signatures
|
Capacity
|
|
/S/
MAURICE M. TAYLOR JR.
|
Chairman
and Chief Executive Officer
|
|
Maurice
M. Taylor Jr.
|
(Principal
Executive Officer)
|
|
/S/
KENT W. HACKAMACK
|
Vice
President of Finance and Treasurer
|
|
Kent
W. Hackamack
|
(Principal
Financial Officer and
|
|
Principal
Accounting Officer)
|
|
|
/S/
ERWIN H. BILLIG
|
Director
|
|
Erwin
H. Billig
|
|
|
/S/
EDWARD J. CAMPBELL
|
Director
|
|
Edward
J. Campbell
|
|
|
/S/
RICHARD M. CASHIN JR.
|
Director
|
|
Richard
M. Cashin Jr.
|
|
|
/S/
ALBERT J. FEBBO
|
Director
|
|
Albert
J. Febbo
|
|
|
/S/
MITCHELL I. QUAIN
|
Director
|
|
Mitchell
I. Quain
|
|
|
/S/
ANTHONY L. SOAVE
|
Director
|
|
Anthony
L. Soave
|
37
TITAN
INTERNATIONAL, INC.
Exhibit
Index
Annual
Report on Form 10-K
|
Exhibit
|
|
|
No.
|
DESCRIPTION
|
|
3.1
(a)
|
Amended
Restated Articles of Incorporation of the Company
|
|
3.2
(b)
|
Bylaws
of the Company
|
|
10.1
(c)
|
1994
Non-Employee Director Stock Option Plan
|
|
10.2
(c)
|
1993
Stock Incentive Plan
|
|
10.3
(d)
|
Credit
Agreement dated July 23, 2004, among the Company and LaSalle Bank
National
Association and General Electric Capital Corporation
|
|
10.4
(d)
|
Indenture
between the Company and U.S. Bank National Association dated July
26,
2004
|
|
10.5
(e)
|
First
Amendment to Credit Agreement among the Company and LaSalle Bank
National
Association
and General Electric Capital Corporation dated February 16,
2005
|
|
10.6
(f)
|
2005
Equity Incentive Plan
|
|
10.7
(g)
|
Second
Amendment to Credit Agreement among the Company and LaSalle Bank
National
Association dated October 21, 2005
|
|
10.8
(h)
|
Third
Amendment to Credit Agreement among the Company and LaSalle Bank
National
Association dated June 28, 2006
|
|
10.9
(i)
|
Fourth
Amendment to Credit Agreement among the Company and LaSalle Bank
National
Association dated February 8, 2007
|
|
21*
|
Subsidiaries
of the Registrant
|
|
23*
|
Consent
of Independent Registered Public Accounting Firm
|
|
31.1*
|
Certification
of the Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2*
|
Certification
of the Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32*
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
*Filed
herewith
| (a) |
Incorporated
by reference to the same numbered exhibit contained in the Company’s Form
10-Q for the quarterly period ended September 30, 1998 (No.
001-12936).
|
| (b) |
Incorporated
by reference to the same numbered exhibit contained in the Company’s
Registration Statement on Form S-4 (No.
33-69228).
|
| (c) |
Incorporated
by reference to the Company’s Registration Statement on Form S-3 (No.
333-61743).
|
| (d) |
Incorporated
by reference to the same numbered exhibit contained in the Company’s Form
10-Q for the quarterly period ended June 30, 2004 (No.
001-12936).
|
| (e) |
Incorporated
by reference to the same numbered exhibit contained in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2005 (No.
001-12936).
|
| (f) |
Incorporated
by reference to Appendix A of the Company’s Definitive Proxy Statement
filed on March 30, 2005.
|
| (g) |
Incorporated
by reference to the same numbered exhibit contained in the Company’s
Current Report on Form
8-K filed on October 24, 2005.
|
| (h) |
Incorporated
by reference to the same numbered exhibit contained in the Company’s
Current Report on Form
8-K filed on June 29, 2006.
|
| (i) |
Incorporated
by reference to the same numbered exhibit contained in the Company’s
Current Report on Form
8-K filed on February 8,
2007.
|
38
Management’s
Responsibility for Financial Statements
Management
is responsible for the preparation of the Company’s consolidated financial
statements included in this annual report on Form 10-K. Management believes
that
the consolidated financial statements fairly reflect the transactions and the
financial statements reasonably present the Company’s financial position and
results of operations in conformity with accounting principles generally
accepted in the United States of America.
The
Board
of Directors of the Company has an Audit Committee comprised entirely of outside
directors who are independent of management. The Committee meets periodically
with management, the internal auditors and the independent registered public
accounting firm to review accounting control, auditing and financial reporting
matters. The Audit Committee is responsible for the appointment of the
independent registered public accounting firm and approval of their fees.
The
independent registered public accounting firm audits the Company’s consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). The consolidated financial
statements as of December 31, 2006, have been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their
report, which is included herein.
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Because of its inherent limitations, internal control
over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management
has performed an evaluation of the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2006, based on criteria
for
effective internal control over financial reporting described in “Internal
Control-Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
concluded the Company maintained effective internal control over financial
reporting as of December 31, 2006. Management’s assessment of the effectiveness
of the Company’s internal controls over financial reporting as of December 31,
2006, has been audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which is included herein.
The
audited consolidated financial statements of the Company include the results
of
the Company’s facility in Bryan, Ohio, which was acquired on July 31, 2006. The
Bryan facility accounted for approximately 9% of the Company’s total assets at
December 31, 2006, and Bryan’s manufacturing output accounted for approximately
7% of the Company’s total cost of sales for the year ended December 31, 2006.
The Bryan facility was excluded from the management’s evaluation of the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2006.
F
- 1
Report
of Independent Registered Public Accounting Firm
To the
Board
of Directors
and
Stockholders of
Titan
International, Inc.:
We
have
completed integrated audits of
Titan
International Inc.’s consolidated
financial
statements and of its internal control over financial reporting as of
December
31, 2006,
in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our
opinions, based on our audits, are presented below.
Consolidated
financial statements
In
our
opinion, the accompanying consolidated
financial statements listed in the appendix under Item 15(a)(1) present
fairly, in all material respects, the financial position of Titan
International Inc. and its subsidiaries at December
31, 2006
and
2005,
and the
results of their
operations
and their
cash
flows for each of the three years in the period ended December
31, 2006 in
conformity with accounting principles generally accepted in the United States
of
America. In addition, in our opinion, the financial statement schedule listed
in
the index appearing under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit of financial
statements includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in Management's Report on
Internal Control Over Financial Reporting appearing on page F-1, that the
Company maintained effective internal control over financial reporting as of
December 31, 2006 based
on
criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal
Control - Integrated Framework
issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness of
the Company’s internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions.
F
- 2
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As
described in Management’s Report on Internal Control Over Financial Reporting,
management has excluded the Bryan, Ohio facility from its assessment of internal
control over financial reporting as of December 31, 2006 because it was acquired
by the Company in a purchase business combination during 2006. We have also
excluded the Bryan, Ohio facility from our audit of internal control over
financial reporting. The Bryan, Ohio facility is a wholly-owned subsidiary
whose
total assets and total output represent 9% and 7%, respectively, of the related
consolidated financial statement amounts as of and for the year ended
December 31, 2006.
PricewaterhouseCoopers
LLP
St.
Louis, Missouri
February
26, 2007
F
- 3
TITAN
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(All
amounts in thousands, except per share data)
|
Year
ended December 31,
|
||||||||||
|
2006
|
|
2005
|
|
2004
|
||||||
|
Net
sales
|
$
|
679,454
|
$
|
470,133
|
$
|
510,571
|
||||
|
Cost
of sales
|
606,676
|
405,923
|
431,071
|
|||||||
|
Gross
profit
|
72,778
|
64,210
|
79,500
|
|||||||
|
Selling,
general and administrative expenses
|
42,142
|
32,270
|
37,915
|
|||||||
|
Royalty
expense
|
5,001
|
0
|
0
|
|||||||
|
Idled
assets marketed for sale depreciation
|
3,624
|
4,736
|
5,275
|
|||||||
|
Dyneer
legal charge
|
0
|
15,205
|
0
|
|||||||
|
Goodwill
impairment on Titan Europe
|
0
|
0
|
2,988
|
|||||||
|
Income
from operations
|
22,011
|
11,999
|
33,322
|
|||||||
|
Interest
expense
|
(17,001
|
)
|
(8,617
|
)
|
(16,159
|
)
|
||||
|
Noncash
convertible debt conversion charge
|
0
|
(7,225
|
)
|
0
|
||||||
|
Debt
termination expense
|
0
|
0
|
(3,654
|
)
|
||||||
|
Other
income, net
|
3,564
|
958
|
1,706
|
|||||||
|
Income
(loss) before income taxes
|
8,574
|
(2,885
|
)
|
15,215
|
||||||
|
Provision
(benefit) for income taxes
|
3,430
|
(13,927
|
)
|
4,108
|
||||||
|
Net
income
|
$
|
5,144
|
$
|
11,042
|
$
|
11,107
|
||||
|
Income
per common share:
|
||||||||||
|
Basic
|
$
|
.26
|
$
|
.61
|
$
|
.62
|
||||
|
Diluted
|
.26
|
.60
|
.61
|
|||||||
|
Average
common shares and equivalents outstanding:
|
||||||||||
|
Basic
|
19,702
|
18,053
|
17,798
|
|||||||
|
Diluted
|
20,044
|
18,284
|
21,574
|
|||||||
See
accompanying Notes to Consolidated Financial Statements.
F
- 4
TITAN
INTERNATIONAL, INC.
CONSOLIDATED
BALANCE SHEETS
(All
amounts in thousands, except share data)
|
December
31,
|
|||||||
|
Assets
|
2006
|
2005
|
|||||
|
Current
assets
|
|||||||
|
Cash and cash equivalents
|
$
|
33,412
|
$
|
592
|
|||
|
Accounts receivable (net
of allowance of $4,818 and $5,654, respectively)
|
73,882
|
47,112
|
|||||
|
Inventories
|
154,604
|
122,692
|
|||||
|
Deferred income taxes
|
29,234
|
20,141
|
|||||
|
Prepaid and other current assets
|
18,801
|
15,630
|
|||||
|
Total current assets
|
309,933
|
206,167
|
|||||
|
Property, plant and equipment, net
|
184,616
|
140,382
|
|||||
|
Idled assets marketed for sale
|
0
|
18,267
|
|||||
|
Investment in Titan Europe Plc
|
65,881
|
48,467
|
|||||
|
Goodwill
|
11,702
|
11,702
|
|||||
|
Other assets
|
12,994
|
15,771
|
|||||
|
Total
assets
|
$
|
585,126
|
$
|
440,756
|
|||
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Current
liabilities
|
|||||||
|
Short-term debt (including
current portion of long-term debt)
|
$
|
98
|
$
|
11,995
|
|||
|
Accounts payable
|
25,884
|
24,435
|
|||||
|
Other current liabilities
|
36,942
|
11,753
|
|||||
|
Total current liabilities
|
62,924
|
48,183
|
|||||
|
Long-term debt
|
291,266
|
190,464
|
|||||
|
Deferred income taxes
|
27,924
|
13,581
|
|||||
|
Other long-term liabilities
|
15,835
|
20,715
|
|||||
|
Total
liabilities
|
397,949
|
272,943
|
|||||
|
Commitments
and contingencies: Notes
14, 23 and 24
|
|||||||
|
Stockholders’
equity
|
|||||||
|
Common stock (no
par, 60,000,000 shares authorized, 30,577,356
issued)
|
30
|
30
|
|||||
|
Additional paid-in capital
|
258,071
|
255,299
|
|||||
|
Retained earnings
|
36,802
|
32,053
|
|||||
|
Treasury stock (at
cost, 10,678,454 and 11,074,150 shares, respectively)
|
(96,264
|
)
|
(99,817
|
)
|
|||
|
Accumulated other comprehensive loss
|
(11,462
|
)
|
(19,752
|
)
|
|||
|
Total
stockholders’ equity
|
187,177
|
167,813
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
585,126
|
$
|
440,756
|
|||
See
accompanying Notes to Consolidated Financial Statements.
F
- 5
TITAN
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(All
amounts in thousands, except share data)
|
Number
of common shares
|
Common
Stock
|
Additional
paid-in
capital
|
Retained
earnings
|
Treasury
stock
|
Accumulated
other comprehensive income (loss)
|
Total
|
||||||||||||||||
|
Balance
January 1, 2004
|
#21,197,320
|
$
|
27
|
$
|
203,050
|
$
|
10,629
|
$
|
(81,204
|
)
|
$
|
(20,546
|
)
|
$
|
111,956
|
|||||||
|
Comprehensive
income (loss):
|
||||||||||||||||||||||
|
Net income
|
11,107
|
11,107
|
||||||||||||||||||||
|
Currency translation adjustment
|
(584
|
)
|
(584
|
)
|
||||||||||||||||||
|
Minimum pension liability, net
of tax
|
4,564
|
4,564
|
||||||||||||||||||||
|
Comprehensive
income
|
11,107
|
3,980
|
15,087
|
|||||||||||||||||||
|
Dividends
paid on common stock
|
(351
|
)
|
(351
|
)
|
||||||||||||||||||
|
Exercise
of stock options
|
23,570
|
189
|
189
|
|||||||||||||||||||
|
Treasury
stock purchases
|
(4,894,464
|
)
|
(20,000
|
)
|
(20,000
|
)
|
||||||||||||||||
|
Balance
December 31, 2004
|
16,326,426
|
27
|
203,239
|
21,385
|
(101,204
|
)
|
(16,566
|
)
|
106,881
|
|||||||||||||
|
Comprehensive
income (loss):
|
||||||||||||||||||||||
|
Net income
|
11,042
|
11,042
|
||||||||||||||||||||
|
Currency translation adjustment
|
(3,168
|
)
|
(3,168
|
)
|
||||||||||||||||||
|
Minimum pension liability, net
of tax
|
(18
|
)
|
(18
|
)
|
||||||||||||||||||
|
Comprehensive
income
|
11,042
|
(3,186
|
)
|
7,856
|
||||||||||||||||||
|
Dividends
paid on common stock
|
(374
|
)
|
(374
|
)
|
||||||||||||||||||
|
Gain
on investee transaction, net
of tax
|
10,471
|
10,471
|
||||||||||||||||||||
|
Bond
conversion
|
3,022,275
|
3
|
40,928
|
40,931
|
||||||||||||||||||
|
Exercise
of stock options
|
135,860
|
568
|
1,220
|
1,788
|
||||||||||||||||||
|
Issuance
of treasury stock under 401(k) plan
|
18,645
|
93
|
167
|
260
|
||||||||||||||||||
|
Balance
December 31, 2005
|
19,503,206
|
30
|
255,299
|
32,053
|
(99,817
|
)
|
(19,752
|
)
|
167,813
|
|||||||||||||
|
Comprehensive
income (loss):
|
||||||||||||||||||||||
|
Net income
|
5,144
|
5,144
|
||||||||||||||||||||
|
Unrealized gain on investment, net
of tax
|
6,126
|
6,126
|
||||||||||||||||||||
|
Minimum
pension liability, net
of tax
|
3,225
|
3,225
|
||||||||||||||||||||
|
Comprehensive
income
|
5,144
|
9,351
|
14,495
|
|||||||||||||||||||
|
Adjustment
to initially apply SFAS No. 158, net of tax
|
(1,061
|
)
|
(1,061
|
)
|
||||||||||||||||||
|
Dividends
paid on common stock
|
(395
|
)
|
(395
|
)
|
||||||||||||||||||
|
Exercise
of stock options
|
382,190
|
2,647
|
3,432
|
6,079
|
||||||||||||||||||
|
Issuance
of treasury stock under 401(k) plan
|
13,506
|
125
|
121
|
246
|
||||||||||||||||||
|
Balance
December 31, 2006
|
#19,898,902
|
$
|
30
|
$
|
258,071
|
$
|
36,802
|
$
|
(96,264
|
)
|
$
|
(11,462
|
)
|
$
|
187,177
|
|||||||
See
accompanying Notes to Consolidated Financial Statements.
F
- 6
TITAN
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(All
amounts in thousands)
|
Year
ended December 31,
|
||||||||||
|
Cash
flows from operating activities:
|
2006
|
2005
|
2004
|
|||||||
|
Net
income
|
$
|
5,144
|
$
|
11,042
|
$
|
11,107
|
||||
|
Adjustments
to reconcile net income to net cash provided
by operating activities:
|
||||||||||
|
Depreciation and amortization
|
26,850
|
20,746
|
24,907
|
|||||||
|
Deferred income tax provision (benefit)
|
2,597
|
(14,476
|
)
|
0
|
||||||
|
Noncash convertible debt conversion charge
|
0
|
7,225
|
0
|
|||||||
|
Goodwill impairment
|
0
|
0
|
2,988
|
|||||||
|
Noncash debt termination expense
|
0
|
0
|
1,486
|
|||||||
|
Undistributed earnings of unconsolidated affiliate
|
0
|
(2,024
|
)
|
(1,022
|
)
|
|||||
|
Excess tax benefit from stock options exercised
|
(646
|
)
|
0
|
0
|
||||||
|
(Increase)
decrease in current assets:
|
||||||||||
|
Accounts receivable
|
(26,770
|
)
|
5,669
|
(10,822
|
)
|
|||||
|
Inventories
|
(19,509
|
)
|
2,212
|
(8,804
|
)
|
|||||
|
Prepaid and other current assets
|
(3,675
|
)
|
1,938
|
(944
|
)
|
|||||
|
Increase
(decrease) in current liabilities:
|
||||||||||
|
Accounts payable
|
1,449
|
(2,298
|
)
|
4,689
|
||||||
|
Other current liabilities
|
13,443
|
(260
|
)
|
140
|
||||||
|
Other,
net
|
(4,423
|
)
|
(6,875
|
)
|
(5,576
|
)
|
||||
|
Net
cash (used for) provided by operating activities
|
(5,540
|
)
|
22,899
|
18,149
|
||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Continental
off-the-road (OTR) asset acquisition
|
(44,642
|
)
|
0
|
0
|
||||||
|
Goodyear
North American farm tire acquisition
|
0
|
(100,000
|
)
|
0
|
||||||
|
Capital
expenditures
|
(8,282
|
)
|
(6,752
|
)
|
(4,328
|
)
|
||||
|
Decrease
in restricted cash deposits
|
0
|
24,500
|
24,609
|
|||||||
|
Titan
Europe Plc sale
|
0
|
0
|
40,757
|
|||||||
|
Asset
disposals
|
0
|
5,509
|
1,354
|
|||||||
|
Other,
net
|
198
|
0
|
0
|
|||||||
|
Net cash (used for) provided by investing
activities
|
(52,726
|
)
|
(76,743
|
)
|
62,392
|
|||||
|
Cash
flows from financing activities:
|
||||||||||
|
Proceeds
from borrowings
|
200,000
|
0
|
115,348
|
|||||||
|
Payment
of debt
|
(11,995
|
)
|
(1,296
|
)
|
(225,525
|
)
|
||||
|
(Payment)
proceeds on revolving credit facility, net
|
(99,100
|
)
|
54,700
|
44,400
|
||||||
|
Proceeds
from exercise of stock options
|
5,407
|
1,500
|
0
|
|||||||
|
Excess
tax benefit from stock options exercised
|
646
|
0
|
0
|
|||||||
|
Repurchase
of common stock
|
0
|
0
|
(15,000
|
)
|
||||||
|
Payment
of financing fees
|
(3,725
|
)
|
(1,500
|
)
|
(4,788
|
)
|
||||
|
Dividends
paid
|
(393
|
)
|
(358
|
)
|
(375
|
)
|
||||
|
Other,
net
|
246
|
260
|
189
|
|||||||
|
Net cash provided by (used for) financing
activities
|
91,086
|
53,306
|
(85,751
|
)
|
||||||
|
Effect
of exchange rate changes on cash
|
0
|
0
|
(216
|
)
|
||||||
|
Net
increase (decrease) in cash and cash equivalents
|
32,820
|
(538
|
)
|
(5,426
|
)
|
|||||
|
Cash
and cash equivalents, beginning of year
|
592
|
1,130
|
6,556
|
|||||||
|
Cash
and cash equivalents, end of year
|
$
|
33,412
|
$
|
592
|
$
|
1,130
|
||||
See
accompanying Notes to Consolidated Financial Statements.
F
- 7
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. |
DESCRIPTION
OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
|
Business
Titan
International, Inc. and its subsidiaries (Titan or the Company) are leading
manufacturers of wheels, tires and assemblies for off-highway vehicles used
in
the agricultural, earthmoving/construction and consumer markets. Titan’s
earthmoving/construction market also includes products supplied to the U.S.
military and other government entities, while the consumer market includes
all-terrain vehicles (ATVs) and recreational/utility trailer applications.
Titan
manufactures both wheels and tires for the majority of these market
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.
Principles
of consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly- and majority-owned subsidiaries. Titan records its investment in each
unconsolidated affiliated company (20% to 49% ownership) at its related equity
in the net assets of such affiliate, as adjusted for equity earnings and losses.
Investments of less than 20% of non-publicly traded entities are carried at
cost. Investments of less than 20% of publicly traded entities are carried
at
fair value in accordance with Statement of Financial Accounting Standards (SFAS)
No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The
Company records change of interest gains and losses directly to equity. All
significant intercompany accounts and transactions have been
eliminated.
Inventories
Inventories
are valued at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method in 2006 for approximately 74% of inventories
and the last-in, first-out (LIFO) method for approximately 26% of inventories.
The major rubber material inventory and related work-in-process and their
finished goods are accounted for under the FIFO method. The major steel material
inventory and related work-in-process and their finished goods are accounted
for
under the LIFO method. Market value 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.
Fixed
assets
Property,
plant and equipment have been recorded at cost. Depreciation is provided using
the straight-line method over the following estimated useful lives of the
related assets:
|
Years
|
||||
|
Building
and improvements
|
25
|
|||
|
Machinery
and equipment
|
10
|
|||
|
Tools,
dies and molds
|
5
|
|||
Maintenance
and repairs are expensed as incurred. When property, plant and equipment are
retired or otherwise disposed of, the related cost and accumulated depreciation
are eliminated, and any gain or loss on disposition is included in the
accompanying consolidated statements of operations.
F
- 8
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred
financing costs
Deferred
financing costs are costs incurred in connection with the Company’s (i)
revolving credit facility, (ii) senior unsecured notes, (iii) senior unsecured
convertible notes and (iv) industrial revenue bonds. The costs associated with
the revolving credit facility are being amortized over the remaining term of
the
facility. The costs associated with the senior unsecured notes are amortized
straight line over five years, the term of the notes. The costs associated
with
the senior unsecured convertible notes are amortized straight line over five
years, the term of the notes. The costs associated with the industrial revenue
bonds are being amortized over the life of the bonds on a straight-line basis.
Amortization of deferred financing costs for the various debt facilities
approximates the effective interest rate method.
Fair
value of financial instruments
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 convertible notes due 2009
are
the only significant financial instrument of the Company with a fair value
different than the recorded value. At December 31, 2006, the fair value of
the
convertible notes, based on quoted market prices obtained through independent
pricing sources, was approximately $130.8 million, compared to a carrying value
of $81.2 million.
Available-for-sale
securities
The
Company has an investment in Titan Europe Plc of $65.9 million as of December
31, 2006, representing a 17.3% ownership position. Due to the dilution in the
Company’s ownership interest from 29.3% at December 31, 2004, the Company began
accounting for its investment in Titan Europe Plc as an available-for-sale
security during 2005. Accordingly, this investment is recorded as “Investment in
Titan Europe Plc” on the consolidated balance sheet. The Company reports this
investment at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of stockholders’ equity. If the
fair value declines below the amortized cost basis, the Company determines
if
this decline is other than temporary. If the decline in fair value is judged
to
be other than temporary, an impairment charge is recorded.
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 estimated fair value
of
the asset.
Foreign
currency translation
The
financial statements of the Company’s foreign subsidiaries are translated to
United States currency in accordance with SFAS No. 52, “Foreign Currency
Translation.” Assets and liabilities are translated to United States dollars at
period-end exchange rates. Income and expense items are translated at average
rates of exchange prevailing during the period. Translation adjustments are
included in “Accumulated other comprehensive loss” in stockholders’ equity. As
of December 2006, the Company’s investment in Titan Europe Plc was classified as
available-for-sale securities and this investment is recorded as “Investment in
Titan Europe Plc” on the consolidated balance sheet. Gains and losses that
result from foreign currency transactions are included in the accompanying
consolidated statements of operations.
Impairment
of goodwill
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, as
required by the adoption of SFAS No. 142, Goodwill and Other Intangible Assets.
The carrying amount of $11.7 million of goodwill by segment at December 31,
2006, was (i) agricultural of $6.9 million, (ii) earthmoving/construction of
$3.6 million and (iii) consumer of $1.2 million. Based on a discounted cash
flow
method at December 31, 2006, the Company’s computation showed no impairment. See
Notes 9 and 18 for additional information.
F
- 9
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue
recognition
The
Company records sales revenue 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 trends change, adjustments would be necessary to the
estimated provisions.
Cost
of sales
Cost
of
sales is comprised primarily of direct materials and supplies consumed in the
manufacturing of the Company’s products, as well as manufacturing labor,
depreciation expense and overhead expense necessary to acquire and convert
the
purchased materials and supplies into a finished product. Cost of sales also
includes all purchasing, receiving, inspection, internal transfers, and related
distribution costs.
Selling,
general and administrative expense
Selling,
general and administrative expense is comprised primarily of sales commissions,
marketing expense, selling and administrative wages, management information
system costs, legal fees, bank charges, audit fees, research and development,
depreciation and amortization expense on non-manufacturing assets, and other
administrative items.
Research
and development expense
Research
and development (R&D) expenses are expensed as incurred and included as part
of selling, general and administrative expense. R&D costs were $1.3 million,
$0.8 million and $1.9 million for the years of 2006, 2005 and 2004,
respectively.
Advertising
Advertising
expenses are included in selling, general and administrative expense and are
expensed as incurred. Advertising expenses were less than $1 million for each
of
the years ended December 31, 2006, 2005 and 2004.
Warranty
costs
The
Company provides limited warranties on workmanship on its products in all market
segments. The provision for estimated warranty costs is made in the period
when
such costs become probable and is based on past warranty experience. Warranty
costs were $5.5 million, $2.6 million and $2.4 million for the years of 2006,
2005 and 2004, respectively. The warranty costs in 2006 increased approximately
$3 million due to the acquisition of the Freeport and Bryan
facilities.
Income
taxes
Deferred
income tax provisions are determined using the liability method whereby deferred
tax assets and liabilities are recognized based upon temporary differences
between the financial statement and income tax basis of assets and liabilities.
The Company assesses the realizability of its deferred tax asset positions
to
determine if a valuation allowance is necessary.
Earnings
per share
Basic
earnings per share (EPS) is computed by dividing consolidated net earnings
by
the weighted average number of common shares outstanding. Diluted EPS is
computed by dividing adjusted consolidated net earnings by the sum of the
weighted average number of common shares outstanding and the weighted average
number of potential common shares outstanding. Potential common shares consist
of outstanding options under the Company’s stock option plans and the conversion
of the Company’s senior unsecured convertible notes.
Statement
of cash flows
For
purposes of the Consolidated Statements of Cash Flows, the Company considers
short-term debt securities with an original maturity of three months or less
to
be cash equivalents.
Interest
paid
The
Company paid $15.6 million, $7.5 million and $17.9 million for interest in
2006,
2005 and 2004, respectively. In 2006, the increase in interest paid of
approximately $8 million was due to borrowings related to acquisition of the
Freeport and Bryan facilities.
F
- 10
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Income
taxes paid
Titan
paid $0.2 million, $1.9 million and $0.7 million for income taxes in 2006,
2005
and 2004, respectively.
Global
market risk
The
Company manufactures and sells products and purchases goods in the United States
and foreign countries. The Company is potentially subject to foreign currency
exchange risk relating to receipts from customers and payments to suppliers
in
foreign currencies. As a result, the Company’s financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company conducts
business. Gains and losses arising from the settlement of foreign currency
transactions are charged to the Consolidated Statement of Operations for the
related period. Translation adjustments arising from the translation of foreign
subsidiary financial statements are recorded in accumulated other comprehensive
income in stockholders’ equity in the accompanying consolidated balance
sheets.
Environmental
liabilities
Environmental
expenditures that relate to current operations are expensed or capitalized
as
appropriate. Expenditures that relate to an existing condition caused by past
operations and that do not contribute to current or future revenue are expensed.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable and can be reasonably estimated.
Stock-based
compensation
At
December 31, 2006, the Company has three stock-based compensation plans, which
are described in Note 22. In 2005 and prior years, the Company applied the
recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
Interpretations in accounting for those plans. No stock-based compensation
expense was recorded in the consolidated financial statements under this method,
as any options granted had an exercise price equal to the market value of the
underlying common stock on the date of the grant. The following table
illustrates the effect on net income and income per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation,” to stock-based compensation (in
thousands, except share data):
|
2005
|
2004
|
||||||
|
Net
income - as reported
|
$
|
11,042
|
$
|
11,107
|
|||
|
Deduct:
Total stock-based compensation expense
|
|||||||
|
determined under fair value method for all awards,
|
|||||||
|
net of related tax effects
|
(5,255
|
)
|
0
|
||||
|
Pro
forma net income
|
$
|
5,787
|
$
|
11,107
|
|||
|
Income
per share:
|
|||||||
|
Basic - as reported
|
$
|
.61
|
$
|
.62
|
|||
|
Basic - pro forma
|
.32
|
.62
|
|||||
|
Diluted - as reported
|
$
|
.60
|
$
|
.61
|
|||
|
Diluted - pro forma
|
.32
|
.61
|
|||||
The
Company granted no stock options in 2006 or 2004. The weighted-average fair
value of options granted in 2005 was $9.56 and was calculated at the time of
issue using the Black-Scholes option-pricing model with the following
assumptions used for grants in 2005:
|
2006 (a)
|
|
2005
|
|
2004 (a)
|
|
|||||
|
Stock
price volatility
|
n/a
|
66
|
%
|
n/a
|
||||||
|
Risk-free
interest rate
|
n/a
|
3.7%
- 4.4
|
%
|
n/a
|
||||||
|
Expected
life of options
|
n/a
|
6
years
|
n/a
|
|||||||
|
Dividend
yield
|
n/a
|
.43%
- .62
|
%
|
n/a
|
||||||
| (a) |
The
Company granted no options during 2006 or 2004.
|
F
- 11
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassification
Certain
amounts from prior years have been reclassified to conform to the current year’s
presentation. The 2005 and 2004 Consolidated Statements of Operations have
been
revised to combine research and development (R&D) expenses, which were
previously shown separately, with the selling, general and administrative
expenses due to the reduced level of R&D expenditures.
Use
of estimates
The
policies utilized by the Company in the preparation of the financial statements
conform to accounting principles generally accepted in the United States of
America and require management to make estimates, assumptions and judgments
that
affect the reported amount of assets and liabilities, and disclosure of
contingent assets and liabilities, at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual amounts could differ from these estimates and assumptions.
Recently
issued accounting standards
Financial
Accounting Standards Board Interpretation Number 48
In
July
2006, Financial Accounting Standards Board Interpretation (FIN) No. 48,
“Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement
No. 109,” was issued. FIN No. 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. This
interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, and disclosure requirements for
uncertain tax positions. FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. The Company is evaluating the effect the adoption
of
this interpretation will have on its consolidated financial position, results
of
operations and cash flows.
Statement
of Financial Accounting Standards Number 157
In
September 2006, Statement of Financial Accounting Standards (SFAS) No. 157,
“Fair Value Measurements,” was issued. This statement defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
This Statement applies under other accounting pronouncements that require or
permit fair value measurements. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company is evaluating the effect
the adoption of this standard will have on its consolidated financial position,
results of operations and cash flows.
Statement
of Financial Accounting Standards Number 158
In
September 2006, SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans,” was issued. This statement requires an employer
to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which
the
changes occur through comprehensive income. An employer with publicly traded
equity securities is required to initially recognize the funded status of a
defined benefit postretirement plan and to provide the required disclosures
as
of the end of the fiscal year ending after December 15, 2006. The Company
adopted SFAS No. 158 as of December 31, 2006. The adoption of this statement
had
no material effect on the Company’s consolidated results of operations or cash
flows. See Note 21 for the effect this statement had on the Company’s
consolidated financial position.
Staff
Accounting Bulletin Number 108
In
September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB 108 requires that
public companies utilize a “dual-approach” when assessing the quantitative
effects of financial misstatements. This dual approach includes both an income
statement focused assessment and a balance sheet focused assessment. The
guidance in SAB 108 is effective for annual financial statements for fiscal
years ending after November 15, 2006. The adoption of this guidance had no
material effect on the Company’s consolidated financial position, results of
operations and cash flows.
F
- 12
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| 2. |
ACQUISITIONS
|
Acquisition
of Continental’s OTR Assets
On
July
31, 2006, Titan Tire Corporation of Bryan, a subsidiary of Titan International,
Inc., acquired the off-the-road (OTR) tire assets of Continental Tire North
America, Inc. (Continental) in Bryan, Ohio. Titan Tire Corporation of Bryan
purchased the assets of Continental’s OTR tire facility for approximately $53
million in cash proceeds, including an initial cash payment of approximately
$44
million and subsequent payment due of approximately $9 million. The assets
purchased included Continental’s OTR plant, property and equipment located in
Bryan, Ohio, inventory and other current assets. In addition, the Company
recorded intangibles related to the acquisition as noncurrent assets and assumed
warranty liabilities. This acquisition expanded Titan’s product offering into
larger earthmoving, construction and mining tires and added the manufacturing
capacity of the Bryan, Ohio, facility.
The
allocation of the Continental OTR asset acquisition was as follows (in
thousands):
|
Inventory
|
$
|
11,053
|
||
|
Prepaid
and other current assets
|
1,350
|
|||
|
Property,
plant and equipment
|
42,197
|
|||
|
Noncurrent
assets
|
742
|
|||
|
Liabilities
assumed
|
(1,800
|
)
|
||
|
$
|
53,542
|
The
allocation of the Continental OTR asset acquisition may be subsequently adjusted
to reflect additional information relating to the estimates and judgments used
in determining the purchase price allocation. Any changes to the acquisition
allocation will be made by July 2007.
Acquisition
of Goodyear’s North American Farm Tire Assets
On
December 28, 2005, Titan Tire Corporation, a subsidiary of Titan International,
Inc., acquired The Goodyear Tire & Rubber Company’s North American farm tire
assets. Titan Tire purchased the assets of Goodyear’s North American farm tire
business for approximately $100 million in cash proceeds. The assets purchased
include Goodyear’s North American plant, property and equipment located in
Freeport, Illinois, and Goodyear’s North American farm tire inventory. In
addition, the Company recorded intangibles related to the acquisition as
noncurrent assets. This acquisition expanded Titan’s product offering into
Goodyear branded farm tires and added the manufacturing capacity of the
Freeport, Illinois, facility.
The
allocation of the Goodyear North American farm tire acquisition was as follows
(in
thousands):
|
Inventory
|
$
|
40,246
|
||
|
Prepaid
and other current assets
|
4,680
|
|||
|
Property,
plant and equipment
|
55,074
|
|||
|
Noncurrent
assets
|
604
|
|||
|
$
|
100,604
|
F
- 13
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Pro
forma financial information
The
following unaudited pro forma financial information gives effect to the
acquisition of Continental’s OTR assets and the acquisition of Goodyear’s North
American farm tire assets as if the acquisitions had taken place on January
1,
2005. The pro forma information for the Bryan, Ohio, facility was derived from
a
carve-out of Continental’s OTR historical accounting records. The pro forma
information for the Freeport, Illinois, facility was derived from a carve-out
of
The Goodyear Tire & Rubber Company’s historical accounting records.
Pro
forma
information for the year (in
thousands, except per share data):
|
2006
|
2005
|
||||||
|
Net
sales
|
$
|
761,796
|
$
|
828,183
|
|||
|
Income
before income taxes
|
21,786
|
8,383
|
|||||
|
Net
income
|
13,072
|
17,803
|
|||||
|
Diluted
earnings per share
|
.61
|
.92
|
|||||
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 acquisitions
actually occurred on January 1, 2005, nor is it necessarily indicative of
Titan’s future consolidated results of operations or financial
position.
| 3. |
ACCOUNTS
RECEIVABLE
|
The
Company had net accounts receivable of $73.9 million and $47.1 million at
December 31, 2006 and 2005, respectively. These amounts are net of allowance
for
doubtful accounts of $4.8 million and $5.7 million for the years ended 2006
and
2005, respectively.
| 4. |
INVENTORIES
|
Inventories
at December 31, 2006 and 2005, consisted of the following (in
thousands):
|
2006
|
2005
|
||||||
|
Raw
material
|
$
|
57,814
|
$
|
42,511
|
|||
|
Work-in-process
|
16,738
|
10,939
|
|||||
|
Finished
goods
|
84,863
|
74,793
|
|||||
|
159,415
|
128,243
|
||||||
|
Adjustment
to LIFO basis
|
(4,811
|
)
|
(5,551
|
)
|
|||
|
$
|
154,604
|
$
|
122,692
|
||||
Included
in the above inventory balances at December 31, 2006, and December 31, 2005,
are
reserves for slow-moving and obsolete inventory of $3.2 million and $2.7 million
respectively.
F
- 14
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| 5. |
PREPAID
AND OTHER CURRENT ASSETS
|
Prepaid
and other current assets at December 31, 2006 and 2005, consisted of the
following (in
thousands):
|
2006
|
2005
|
||||||
|
Prepaid
supplies
|
$
|
9,227
|
$
|
8,051
|
|||
|
Other
|
9,574
|
7,579
|
|||||
|
$
|
18,801
|
$
|
15,630
|
||||
| 6. |
PROPERTY,
PLANT AND EQUIPMENT
|
Property,
plant and equipment at December 31, 2006 and 2005, consisted of the following
(in
thousands):
|
2006
|
2005
|
||||||
|
Land
and improvements
|
$
|
3,088
|
$
|
2,521
|
|||
|
Buildings
and improvements
|
78,230
|
63,572
|
|||||
|
Machinery
and equipment
|
269,730
|
202,598
|
|||||
|
Tools,
dies and molds
|
52,205
|
51,859
|
|||||
|
Construction-in-process
|
4,587
|
2,284
|
|||||
|
407,840
|
322,834
|
||||||
|
Less
accumulated depreciation
|
(223,224
|
)
|
(182,452
|
)
|
|||
|
$
|
184,616
|
$
|
140,382
|
||||
The
significant increase in property, plant and equipment resulted from the July
2006 purchase of Continental’s OTR assets. The property, plant and equipment
included in this purchase totaled $42.2 million. See Note 2 for additional
information. Depreciation on fixed assets for the years 2006, 2005 and 2004
totaled $20.7 million, $14.3 million, and $17.4 million, respectively. In
addition, $3.6 million, $4.7 million, and $5.3 million of depreciation was
recorded on idled assets marketed for sale in 2006, 2005, and 2004,
respectively.
| 7. |
IDLED
ASSETS MARKETED FOR SALE
|
The
idled
assets marketed for sale had no balance at December 31, 2006, and a balance
of
$18.3 million at December 31, 2005. The idled assets marketed for sale were
being depreciated in accordance with SFAS No. 144. Depreciation on these idled
assets was $3.6 million, $4.7 million and $5.3 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
As
a
result of the expectation that the Company can use these assets to refurbish
or
increase capacity at the plants associated with the Goodyear North American
farm
tire asset acquisition and the Continental OTR asset acquisition, the Company
is
placing these assets back into service primarily at the Des Moines, Iowa,
Freeport, Illinois, and Bryan, Ohio facilities. Therefore, in December 2006,
the
idled assets balance of approximately $14 million was reclassified to property,
plant and equipment leaving no remaining balance at December 31,
2006.
F
- 15
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| 8. |
INVESTMENT
IN TITAN EUROPE
|
Investment
in Titan Europe Plc consisted of the following (in
thousands):
|
2006
|
2005
|
||||||
|
Investment
in Titan Europe Plc
|
$
|
65,881
|
$
|
48,467
|
|||
In
April
2004, Titan Luxembourg Sarl, a wholly-owned European subsidiary of the Company,
sold 70% of the common stock of Titan Europe to the public on the AIM market
in
London, England. Titan Luxembourg was the largest single stockholder in Titan
Europe Plc, retaining a 30% interest on the date of the transaction. In the
first quarter of 2004, the Company recognized a $3.0 million goodwill impairment
charge on the pending sale of a majority interest in Titan Europe in accordance
with the Company’s goodwill impairment process. The historical results of the
Company for the year ended December 31, 2004, included Titan Europe results
of
$49.4 million in net sales, $8.3 million in gross profit and $0.4 million in
income from operations.
The
Company accounted for its interest in Titan Europe Plc as an equity investment
subsequent to the sale of a majority interest in April 2004. The Company
recognized equity income on its investment in Titan Europe Plc of $2.9 million
in 2005 and $1.3 million in 2004. In December 2005, Titan Europe Plc issued
additional shares of stock for an acquisition. As a result of these additional
shares, the Company’s interest in Titan Europe Plc was diluted and decreased
from 29.3% at December 31, 2004, to a 15.4% ownership position at December
31,
2005. The Company recorded the gain resulting from the change in ownership
interest to equity in accordance with SAB 51. With the decreased ownership
percentage, effective December 2005, the Company no longer uses the equity
method to account for its interest in Titan Europe Plc.
In
accordance with SFAS No. 115, the Company records the Titan Europe Plc
investment as an available-for-sale security and reports the investment at
fair
value, with unrealized gains and losses excluded from earnings and reported
as a
separate component of comprehensive income in stockholders’ equity. The
Company’s stock ownership interest in Titan Europe Plc was 17.3% at December 31,
2006, and 15.4% at December 31, 2005. The increase in ownership percentage
resulted from a December 2006 transaction in which Titan Europe Plc issued
additional shares to the Company in payment of approximately $7.9 million U.S.
dollars of debt, representing the entire remaining long-term debt owed by Titan
Europe Plc to the Company.
The
fair
value of the Company’s investment in Titan Europe Plc was $65.9 million and
$48.5 million at December 31, 2006 and 2005, respectively. Cash dividends
received from Titan Europe Plc were $1.3 million, $0.9 million and $0.3 million
for the years ended December 31, 2006, 2005 and 2004, respectively.
| 9. |
GOODWILL
|
The
carrying amount of goodwill by segment at December 31, 2006 and 2005, was (i)
agricultural of $6.9 million, (ii) earthmoving/construction of $3.6 million,
and
(iii) consumer of $1.2 million.
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 as
required by the adoption of SFAS No. 142, Goodwill and Other Intangible Assets.
Based on a discounted cash flow method at December 31, 2006, the Company’s
computation showed no impairment. There can be no assurance that future goodwill
tests will not result in an impairment charge.
F
- 16
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| 10. |
OTHER
ASSETS
|
Other
assets at December 31, 2006 and 2005, consisted of the following (in
thousands):
|
2006
|
2005
|
||||||
|
Deferred
financing
|
$
|
7,534
|
$
|
4,014
|
|||
|
Note
receivable from Titan Europe Plc
|
0
|
5,191
|
|||||
|
Other
|
5,460
|
6,566
|
|||||
|
$
|
12,994
|
$
|
15,771
|
||||
The
increase in deferred financing is the result of additional deferred financing
related to the December 2006 issuance of the Company’s $200 million senior
unsecured notes due 2012. The decrease in the note receivable is the result
of
Titan Europe Plc issuing additional shares to the Company in December 2006
in
satisfaction of the note.
| 11. |
OTHER
CURRENT LIABILITIES
|
Other
current liabilities at December 31, 2006 and 2005, consisted of the following
accruals (in
thousands):
|
2006
|
2005
|
||||||
|
Off-the-road
acquisition
|
$
|
8,900
|
$
|
0
|
|||
|
Wages
and commissions
|
8,800
|
3,381
|
|||||
|
Warranty
|
4,688
|
1,838
|
|||||
|
Insurance
|
4,458
|
2,430
|
|||||
|
Other
|
10,096
|
4,104
|
|||||
|
$
|
36,942
|
$
|
11,753
|
||||
The
off-the-road (OTR) acquisition liability is the remaining amount due on the
Continental OTR asset acquisition after final settlement. The increase in wages
and commissions results from the accrued wages for the Freeport and Bryan
facilities. The employees of these facilities became part of Titan in
2006.
| 12. |
WARRANTY
COSTS
|
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 Balance Sheets. Changes in the warranty
liability consisted of the following (in
thousands):
|
2006
|
2005
|
||||||
|
Warranty
liability, January 1
|
$
|
1,838
|
$
|
1,762
|
|||
|
Warranty assumed with asset purchase
|
1,800
|
0
|
|||||
|
Provision for warranty liabilities
|
5,534
|
2,622
|
|||||
|
Warranty payments made
|
(4,484
|
)
|
(2,546
|
)
|
|||
|
Warranty
liability, December 31
|
$
|
4,688
|
$
|
1,838
|
|||
| 13. |
OTHER
LONG-TERM LIABILITIES
|
Other
long-term liabilities at December 31, 2006 and 2005, consisted of the following
(in
thousands):
|
2006
|
2005
|
||||||
|
Accrued
pension liabilities
|
$
|
8,682
|
$
|
15,476
|
|||
|
Accrued
employment liabilities
|
4,741
|
2,775
|
|||||
|
Other
|
2,412
|
2,464
|
|||||
|
$
|
15,835
|
$
|
20,715
|
||||
See
Note
21 for additional information regarding the decrease in accrued pension
liabilities. Accrued employment liabilities at December 31, 2006, includes
approximately $2 million for contractual and performance obligations upon
retirement for certain executive officers.
F
- 17
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| 14. |
REVOLVING
CREDIT FACILITY AND LONG-TERM
DEBT
|
Long-term
debt at December 31, 2006 and 2005, consisted of the following (in
thousands):
|
2006
|
2005
|
||||||
|
Senior
unsecured notes
|
$
|
200,000
|
$
|
0
|
|||
|
Revolving
credit facility
|
0
|
99,100
|
|||||
|
Senior
unsecured convertible notes
|
81,200
|
81,200
|
|||||
|
Industrial
revenue bonds and other
|
10,164
|
22,159
|
|||||
|
291,364
|
202,459
|
||||||
|
Less
amounts due within one year
|
98
|
11,995
|
|||||
|
$
|
291,266
|
$
|
190,464
|
||||
Aggregate
maturities of long-term debt are as follows
(in
thousands):
|
2007
|
$
|
98
|
||
|
2008
|
566
|
|||
|
2009
|
81,200
|
|||
|
2010
|
9,500
|
|||
|
2011
|
0
|
|||
|
Thereafter
|
200,000
|
|||
|
$
|
291,364
|
Senior
unsecured notes
In
December 2006, the Company closed its offering of $200 million 8% senior
unsecured notes. The notes were sold at par and are due January 2012. Titan
used
the net proceeds from this offering to repay outstanding existing debt at the
time of closing, excluding the 5.25 percent senior unsecured convertible notes.
The outstanding balance on the Company’s revolving credit facility was paid down
in December and had no cash borrowings at December 31, 2006. The Company
anticipates paying off approximately $10 million of industrial revenue bonds
in
the first quarter of 2007 and will use the remaining cash for general corporate
purposes.
Revolving
credit facility
The
Company’s revolving credit facility with agent LaSalle Bank National Association
had a 2008 termination date and is collateralized by a first priority security
interest in certain assets of Titan and its domestic subsidiaries. At December
31, 2006, the borrowings under the facility bore interest at a floating rate
of
prime rate plus 1.25% or LIBOR plus 2.75%. There were no borrowings under this
facility at December 31, 2006. The facility contains certain financial
covenants, restrictions and other customary affirmative and negative covenants.
The Company is in compliance with these covenants and restrictions as of
December 31, 2006.
Credit
facility amendments
In
October 2005, the revolving credit facility was amended. The amendment increased
the revolving loan availability to $200 million from $100 million, extended
the
termination date to October 2008 from the previous termination date of July
2007
and removed General Electric Capital Corporation as a participant. In July
2006,
upon the closing of Titan’s acquisition of the Continental OTR assets, the
facility was amended increasing the loan availability from $200 million to
$250
million.
Recent
Development On
February 8, 2007, the Company amended its revolving credit facility with LaSalle
Bank National Association. The amendment extended the termination date to
October 2009 (previously October 2008). The amendment also lowered borrowing
rates, which will be based on a pricing grid. The borrowings under the facility
will bear interest at a floating rate of LIBOR plus 1% to 2% (previously 2.75%).
The amendment lowered the revolving loan availability from $250 million to
$125
million with the ability to request an increase back to $250
million.
F
- 18
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Senior
unsecured convertible notes
The
$81.2
million of 5.25% senior unsecured convertible notes are due 2009. These notes
are convertible into shares of the Company’s stock at any time on or before
maturity at a conversion rate of 74.0741 shares per $1,000 principal amount
of
notes ($13.50 per common share), subject to adjustment. This conversion rate
would convert all of the notes into approximately 6.0 million shares of the
Company’s common stock. In June of 2005, Titan finalized a private transaction
to exchange $33.8 million of the Company’s outstanding 5.25% senior unsecured
convertible notes due 2009 for 3,022,275 shares of common stock as proposed
to
the Company by certain note holders. The Company recognized a noncash charge
of
$7.2 million in connection with this exchange in accordance with SFAS No. 84,
“Induced Conversions of Convertible Debt,” during the second quarter of 2005.
Recent
Development
In
January 2007, Titan filed a Form S-4 registration statement relating to an
offer
to the holders of the senior unsecured convertible notes to convert their notes
into Titan’s common stock at an increased conversion rate. See Note 27 for
additional information.
Industrial
revenue bonds and other
Other
debt primarily consists of industrial revenue bonds, loans from local and state
entities, and other long-term notes. Maturity dates on this debt range from
one
to three years and interest rates ranged from 3% to 4% rate.
Recent
Development
In
January 2007, the Company issued a notice of redemption for $9.5 million in
industrial revenue bonds. These bonds, which were previously due February 2010,
are expected to be redeemed in the first quarter of 2007.
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. On August 26, 2004, the Company redeemed all
of
the outstanding principal amount ($136.8 million) of these notes at a redemption
price of 101.458% per note (expressed as a percentage of the principal
amount).
Debt
termination expenses
In
connection with the termination of the Company’s prior revolving loan agreement
and term loan, and in addition to the redemption of the 8.75% senior
subordinated notes, Titan recorded expenses of $3.7 million in the third quarter
of 2004. These expenses were related to the (i) redemption premium on the
subordinated notes of $2.0 million, (ii) unamortized deferred financing fees
of
$1.5 million and (iii) prepayment penalty of $0.2 million.
| 15. |
ACCUMULATED
OTHER COMPREHENSIVE INCOME
(LOSS)
|
Accumulated
other comprehensive income (loss) consisted of the following (in
thousands):
|
Currency
Translation
Adjustments
|
Unrealized
Gain
on
Investments
|
Minimum
Pension
Liability
Adjustment
|
Unrecognized
Losses
and
Prior
Service
Cost
|
Total
|
||||||||||||
|
Balance
at January 1, 2005
|
$
|
1,985
|
$
|
0
|
$
|
(18,551
|
)
|
$
|
0
|
$
|
(16,566
|
)
|
||||
|
Currency
translation adjustments
|
(3,168
|
)
|
0
|
0
|
0
|
(3,168
|
)
|
|||||||||
|
Minimum
pension liability adjustment, net of tax of
$10
|
0
|
0
|
(18
|
)
|
0
|
(18
|
)
|
|||||||||
|
Balance
at December 31, 2005
|
(1,183
|
)
|
0
|
(18,569
|
)
|
0
|
(19,752
|
)
|
||||||||
|
Unrealized
gain on investment, net of tax of $3,299
|
0
|
6,126
|
0
|
0
|
6,126
|
|||||||||||
|
Minimum
pension liability adjustment, net of tax of
$595
|
0
|
0
|
3,225
|
0
|
3,225
|
|||||||||||
|
Adoption
of SFAS No. 158, net of tax of $651
|
0
|
0
|
15,344
|
(16,405
|
)
|
(1,061
|
)
|
|||||||||
|
Balance
at December 31, 2006
|
$
|
(1,183
|
)
|
$
|
6,126
|
$
|
0
|
$
|
(16,405
|
)
|
$
|
(11,462
|
)
|
|||
F
- 19
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
16.
|
STOCKHOLDERS’
EQUITY
|
In
June
of 2005, Titan finalized a private transaction to exchange $33.8 million of
the
Company’s outstanding 5.25% senior unsecured convertible notes due 2009 for
3,022,275 shares of common stock as proposed to the Company by certain note
holders. The Company recognized a noncash charge of $7.2 million in connection
with this exchange in accordance with SFAS No. 84, “Induced Conversions of
Convertible Debt,” during the second quarter of 2005.
The
Company is authorized by the Board of Directors to repurchase an additional
2.5
million common shares subject to debt agreement covenants. The Company paid
cash
dividends of $.02 per share of common stock per year for 2006, 2005 and
2004.
| 17. |
ROYALTY
EXPENSE
|
The
December 2005 Goodyear North American farm tire asset acquisition included
a
license agreement with The Goodyear Tire & Rubber Company to manufacture and
sell certain off-highway tires in North America. Royalty expenses recorded
for
the year ended December 31, 2006, were $5.0 million. No royalty expense was
recorded in 2005 and 2004, as this license agreement was not yet in place during
those years.
| 18. |
GOODWILL
IMPAIRMENT ON TITAN EUROPE
|
On
April
7, 2004, Titan Luxembourg Sarl, a wholly-owned European subsidiary of the
Company, sold 70% of the common stock of Titan Europe to the public on the
AIM
market in London. In the first quarter of 2004, the Company recognized a $3.0
million goodwill impairment charge on the pending sale of a majority interest
in
Titan Europe based on the valuation of Titan Europe inherent in the April 2004
public offering in accordance with the Company’s goodwill impairment policy. The
April 2004 consideration for the entire Titan Europe offering was $89.5 million
as compared to a book value of $92.5 million, resulting in a goodwill impairment
charge of $3.0 million.
| 19. |
OTHER
INCOME, NET
|
Other
income consisted of the following (in
thousands):
|
2006
|
2005
|
2004
|
||||||||
|
Interest
income
|
$
|
1,681
|
$
|
367
|
$
|
669
|
||||
|
Dividend
income - Titan Europe Plc
|
1,281
|
0
|
0
|
|||||||
|
Foreign
exchange gain (loss)
|
975
|
(1,338
|
)
|
537
|
||||||
|
Equity
income - Titan Europe Plc
|
0
|
2,938
|
1,278
|
|||||||
|
Other
(expense)
|
(373
|
)
|
(1,009
|
)
|
(778
|
)
|
||||
|
$
|
3,564
|
$
|
958
|
$
|
1,706
|
|||||
Interest
income for the year ended December 31, 2006, includes $1.1 million of interest
income received in March 2006 regarding the final calculation of interest earned
associated with restricted cash previously on deposit. As a result of decreased
ownership percentage in Titan Europe Plc, effective December 2005, the Company
no longer uses the equity method to account for its interest in Titan Europe
Plc.
F
- 20
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| 20. |
INCOME
TAXES
|
Income
(loss) before income taxes, consisted of the following (in
thousands):
|
2006
|
2005
|
2004
|
||||||||
|
Domestic
|
$
|
5,310
|
$
|
(5,048
|
)
|
$
|
12,533
|
|||
|
Foreign
|
3,264
|
2,163
|
2,682
|
|||||||
|
$
|
8,574
|
$
|
(2,885
|
)
|
$
|
15,215
|
The
provision (benefit) for income taxes, was as follows (in
thousands):
|
2006
|
2005
|
2004
|
||||||||
|
Current
|
||||||||||
|
Federal
|
$
|
120
|
$
|
549
|
$
|
2,571
|
||||
|
State
|
475
|
0
|
0
|
|||||||
|
Foreign
|
183
|
87
|
1,537
|
|||||||
|
778
|
636
|
4,108
|
||||||||
|
Deferred
|
||||||||||
|
Federal
|
2,442
|
(13,413
|
)
|
0
|
||||||
|
State
|
210
|
(1,150
|
)
|
0
|
||||||
|
Foreign
|
0
|
0
|
0
|
|||||||
|
2,652
|
(14,563
|
)
|
0
|
|||||||
|
Provision
(benefit) for income taxes
|
$
|
3,430
|
$
|
(13,927
|
)
|
$
|
4,108
|
The
provision (benefit) for income taxes differs from the amount of income tax
determined by applying the statutory U.S. federal income tax rate to pre-tax
income (loss) as a result of the following:
|
2006
|
2005
|
2004
|
||||||||
|
Statutory
U.S. federal tax rate
|
35.0
|
%
|
(35.0
|
)%
|
35.0
|
%
|
||||
|
Valuation
allowance
|
0.0
|
(488.7
|
)
|
(47.3
|
)
|
|||||
|
Nondeductible
convertible debt conversion charge
|
0.0
|
87.7
|
0.0
|
|||||||
|
Dyneer
legal charge
|
0.0
|
(60.7
|
)
|
0.0
|
||||||
|
State
tax rate change
|
0.0
|
21.2
|
0.0
|
|||||||
|
Repatriation
of foreign earnings, net of American Jobs Creation Act
benefit
|
11.6
|
19.0
|
29.3
|
|||||||
|
Nondeductible
goodwill write-off
|
0.0
|
0.0
|
6.9
|
|||||||
|
Foreign
taxes, net
|
(12.0
|
)
|
(18.1
|
)
|
0.0
|
|||||
|
State
taxes, net
|
6.2
|
(2.9
|
)
|
0.0
|
||||||
|
Other,
net
|
(0.8
|
)
|
(5.2
|
)
|
3.1
|
|||||
|
Effective
tax rate
|
40.0
|
%
|
(482.7
|
)%
|
27.0
|
%
|
||||
Federal
income taxes are provided on earnings of foreign subsidiaries except to the
extent that such earnings are expected to be indefinitely reinvested
abroad.
F
- 21
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets and liabilities at December 31, 2006 and 2005, are
as follows (in
thousands):
|
2006
|
|
2005
|
|||||
|
Deferred
tax assets:
|
|||||||
|
Net operating loss carryforward
|
$
|
12,618
|
$
|
14,120
|
|||
|
Pension
|
4,501
|
5,619
|
|||||
|
Employee benefits and related costs
|
3,720
|
2,050
|
|||||
|
Allowance for bad debts
|
1,830
|
2,148
|
|||||
|
Inventory
|
1,351
|
459
|
|||||
|
EPA reserve
|
1,226
|
1,236
|
|||||
|
Warranty
|
1,112
|
699
|
|||||
|
Other
|
2,876
|
3,025
|
|||||
|
Deferred tax assets
|
29,234
|
29,356
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Fixed assets
|
(16,534
|
)
|
(14,705
|
)
|
|||
|
Unrealized gain on available-for-sale security
|
(8,937
|
)
|
(5,638
|
)
|
|||
|
Foreign deferred gain
|
(2,453
|
)
|
(2,453
|
)
|
|||
|
Deferred tax liabilities
|
(27,924
|
)
|
(22,796
|
)
|
|||
|
Net
deferred tax asset
|
$
|
1,310
|
$
|
6,560
|
|||
The
Company recorded an income tax expense of $3.4 million, an income tax benefit
of
$13.9 million and an income tax expense of $4.1 million for the years ended
December 31, 2006, 2005 and 2004, respectively. As a result of several
years of previous losses, the Company recorded a valuation allowance against
its
net deferred tax asset, consistent with the Company’s accounting policies. As a
result of anticipated utilization of net operating loss carryforward in
connection with its future Federal income tax filings, the Company recorded
a
tax benefit of $13.9 million in 2005 as a result of the reversal of the
Company’s valuation allowance in accordance with SFAS 109. The Company’s net
operating loss carryforward of approximately $32 million expires in 2023.
American
Jobs Creation Act of 2004
In
October 2004, the American Jobs Creation Act of 2004 was signed into law by
the
President of the United States of America. This legislation resulted in sweeping
revisions to the U.S. Internal Revenue Code and related regulations. The Act
provides for a number of changes, including providing taxpayers with an
opportunity to repatriate foreign-source income in the U.S. if such repatriated
income is invested in the U.S. under a properly approved domestic reinvestment
plan. The repatriation provisions of this Act benefited the Company by
preserving net operating loss carryforwards.
During
2004, prior to the passage of the Act, the Company had estimated a $15 million
reduction to the valuation allowance related to its net deferred tax asset
position. The $7.1 million reduction in this estimate at December 31, 2004,
was
due to the repatriation, under the provisions of the Act, of foreign earnings
associated with the sale of a majority interest in Titan Europe. This
repatriation under the Act allowed the Company to pay a current tax rate of
5.25% on the repatriated foreign earnings rather than utilizing net operating
loss carryforwards.
F
- 22
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| 21. |
EMPLOYEE
BENEFIT PLANS
|
Pension
plans
The
Company has a frozen defined benefit pension plan covering certain employees
of
Titan Tire Corporation. The Company also has a frozen contributory defined
benefit pension plan covering certain former eligible bargaining employees
of
its Walcott, Iowa, facility. Additionally, the Company maintains a contributory
defined benefit plan that covered former eligible bargaining employees of Dico,
Inc. This Dico plan purchased a final annuity settlement contract in October
2002. The Company’s policy is to fund pension costs as required by law, which is
consistent with the funding requirements of federal laws and
regulations.
The
Company’s defined benefit plans have been aggregated in the following table.
Included in the December 31, 2006, presentation are the Titan Tire and Walcott
plans, which have a projected benefit obligation and accumulated benefit
obligation of $68.8 million, exceeding the fair value of plan assets of $60.2
million at December 31, 2006. At December 31, 2005, these plans had a projected
benefit obligation and accumulated benefit obligation of $71.8 million,
exceeding the fair value of plan assets of $56.3 million. The projected benefit
obligation and the accumulated benefit obligation are the same amount since
the
Plans are frozen and there are no future compensation levels to factor into
the
obligations. The Company absolved itself from the liabilities associated with
the Dico plan with the purchase of a final annuity settlement contract in
October 2002. Therefore, the plan no longer maintains a projected or accumulated
benefit obligation. The fair value of the Dico plan assets was $0.5 million
at
December 31, 2006, 2005 and 2004.
The
following table provides the change in benefit obligation, change in plan
assets, funded status and amounts recognized in the consolidated balance
sheet
of the defined benefit pension plans as of December 31, 2006 and 2005
(in
thousands):
|
Change
in benefit obligation:
|
2006
|
|
2005
|
||||
|
Benefit
obligation at beginning of year
|
$
|
71,796
|
$
|
75,748
|
|||
|
Interest
cost
|
3,934
|
4,158
|
|||||
|
Actuarial
gain
|
(144
|
)
|
(1,342
|
)
|
|||
|
Benefits
paid
|
(6,742
|
)
|
(6,768
|
)
|
|||
|
Benefit
obligation at end of year
|
$
|
68,844
|
$
|
71,796
|
|||
|
Change
in plan assets:
|
|||||||
|
Fair
value of plan assets at beginning of year
|
$
|
56,802
|
$
|
57,985
|
|||
|
Actual
return on plan assets
|
6,578
|
1,753
|
|||||
|
Employer
contributions
|
4,028
|
3,832
|
|||||
|
Benefits
paid
|
(6,742
|
)
|
(6,768
|
)
|
|||
|
Fair
value of plan assets at end of year
|
$
|
60,666
|
$
|
56,802
|
|||
|
Unfunded
status at end of year
|
$
|
(8,178
|
)
|
$
|
(14,994
|
)
|
|
|
Unrecognized
prior service cost
|
1,848
|
||||||
|
Unrecognized
net loss
|
28,906
|
||||||
|
Unrecognized
deferred tax liability
|
(337
|
)
|
|||||
|
Net
amount recognized
|
$
|
15,423
|
|||||
|
Amounts
recognized in consolidated balance sheet:
|
|||||||
|
Current
assets
|
$
|
0
|
$
|
n/a
|
|||
|
Noncurrent
assets
|
504
|
n/a
|
|||||
|
Noncurrent
liabilities
|
(8,682
|
)
|
n/a
|
||||
|
Prepaid
benefit cost
|
n/a
|
483
|
|||||
|
Intangible
asset
|
n/a
|
1,848
|
|||||
|
Accrued
benefit costs
|
n/a
|
(15,476
|
)
|
||||
|
Accumulated
other comprehensive loss
|
n/a
|
28,568
|
|||||
|
Net
amount recognized in the consolidated balance sheet
|
$
|
(8,178
|
)
|
$
|
15,423
|
||
F
- 23
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Amounts
recognized in accumulated other comprehensive loss at December
31,
2006:
|
||||
|
Unrecognized
prior service cost
|
$
|
(1,711
|
)
|
|
|
Unrecognized
net loss
|
(25,030
|
)
|
||
|
Unrecognized
deferred tax liability
|
281
|
|||
|
Deferred
tax effect of unrecognized items
|
10,055
|
|||
|
Net
amount recognized in accumulated other comprehensive loss
|
$
|
(16,405
|
)
|
|
The
weighted-average assumptions used in the actuarial computation that derived
the
benefit obligations at December 31 were as follows:
|
2006
|
2005
|
||||||
|
Discount
rate
|
5.75
|
%
|
5.75
|
%
|
|||
|
Expected
long-term return on plan assets
|
8.50
|
%
|
8.50
|
%
|
|||
The
Company adopted SFAS No. 158 as of December 31, 2006. The incremental effect
of
applying SFAS No. 158 on individual line items in the consolidated balance
sheet
at December 31, 2006, is as follows (in
thousands):
|
Before
application of
SFAS
158
|
Adjustments
|
After
application of
SFAS
158
|
||||||||
|
Deferred
tax asset
|
$
|
28,583
|
$
|
651
|
$
|
29,234
|
||||
|
Other
assets
|
14,705
|
(1,711
|
)
|
12,994
|
||||||
|
Accumulated
other comprehensive loss, net of tax
|
(10,401
|
)
|
(1,061
|
)
|
(11,462
|
)
|
||||
|
Total
stockholders’ equity
|
188,238
|
(1,061
|
)
|
187,177
|
||||||
The
following table provides the components of net periodic pension cost for
the
plans, settlement cost and the assumptions used in the measurement of the
Company’s benefit obligation for the years ended December 31, 2006, 2005 and
2004 (in
thousands):
|
Components
of net periodic benefit cost and other
amounts
recognized in other comprehensive income
|
||||||||||
|
Net
periodic benefit cost:
|
2006
|
|
|
2005
|
|
|
2004
|
|||
|
Interest cost
|
$
|
3,934
|
$
|
4,158
|
$
|
4,465
|
||||
|
Assumed return on assets
|
(4,673
|
)
|
(4,809
|
)
|
(4,394
|
)
|
||||
|
Amortization of unrecognized prior service cost
|
137
|
137
|
136
|
|||||||
|
Amortization of unrecognized deferred taxes
|
(56
|
)
|
(56
|
)
|
(56
|
)
|
||||
|
Amortization of net unrecognized loss
|
1,848
|
1,754
|
1,609
|
|||||||
|
Net
periodic pension cost
|
$
|
1,190
|
$
|
1,184
|
$
|
1,760
|
||||
The
estimated net loss, prior service cost, and deferred taxes that will be
amortized from accumulated other comprehensive income into net periodic benefit
cost over the next fiscal year are $1.6 million, $0.1 and $(0.1) million,
respectively.
The
weighted-average assumptions used in the actuarial computation that derived
net
periodic pension cost for the years ended December 31, 2006, 2005 and
2004:
|
2006
|
|
2005
|
|
2004
|
||||||
|
Discount
rate
|
5.75
|
%
|
5.75
|
%
|
6.25
|
%
|
||||
|
Expected
long-term return on plan assets
|
8.50
|
%
|
8.50
|
%
|
8.50
|
%
|
||||
F
- 24
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
allocation of the fair value of plan assets was as follows:
|
Percentage
of Plan Assets
at
December 31,
|
Target
Allocation
|
|||||||||
|
Asset
Category
|
2006
|
2005
|
2007
|
|||||||
|
U.S.
equities (a)
|
65
|
%
|
64
|
%
|
44%
- 80
|
%
|
||||
|
Fixed
income
|
21
|
%
|
20
|
%
|
20%
- 40
|
%
|
||||
|
Cash
and cash equivalents
|
5
|
%
|
8
|
%
|
0%
- 20
|
%
|
||||
|
International
equities (a)
|
9
|
%
|
8
|
%
|
0%
- 16
|
%
|
||||
|
100
|
%
|
100
|
%
|
|||||||
| (a) |
Total
equities may not exceed 80% of total plan
assets.
|
The
Company invests in a diversified portfolio consisting of an array of asset
classes in an attempt to maximize returns while minimizing volatility. These
asset classes include U.S. equities, fixed income, cash and cash equivalents,
and international equities. The investment objectives are to provide for the
growth and preservation of plan assets on a long-term basis through investments
in: (i) investment grade securities that provide investment returns that meet
or
exceed the Standard & Poor’s 500 Index and (ii) investment grade fixed
income securities that provide investment returns that meet or exceed the Lehman
Government / Corporate Index. The U.S. equities asset category included the
Company’s common stock in the amount of $2.3 million (four percent of total plan
assets) and $2.7 million (five percent of total plan assets) at December 31,
2006 and 2005, respectively.
The
long-term rate of return for plan assets is determined using a weighted-average
of long-term historical returns on cash and cash equivalents, fixed income
securities, and equity securities considering the anticipated investment
allocation within the plans. The expected return on plan assets is anticipated
to be 8.5% over the long-term. This rate assumes historical returns of 10%
for
equities and 7% for fixed income securities using the plans’ target allocation
percentages. Professional investment firms, none of which are Titan employees,
manage the plan assets.
Although
the 2007 minimum pension funding calculations are not finalized, the Company
estimates those funding requirements will be approximately $5
million.
Projected
benefit payments from the plans as of December 31, 2006, are estimated as
follows (in thousands):
|
2007
|
$
|
6,170
|
||
|
2008
|
6,036
|
|||
|
2009
|
5,927
|
|||
|
2010
|
5,764
|
|||
|
2011
|
5,578
|
|||
|
2012-2016
|
26,460
|
401(k)
The
Company sponsors four 401(k) retirement savings plans. One plan is for the
benefit of substantially all employees who are not covered by a collective
bargaining arrangement. Beginning in July of 2004, Titan provides a 25% matching
contribution in the form of the Company’s common stock on the first 6% of the
employee’s contribution in this plan. The Company issued 13,506 shares and
18,645 shares of treasury stock in connection with this 401(k) plan during
2006
and 2005, respectively. Expenses to the Company related to this 401(k) plan
were
$0.3 million for each of 2006 and 2005. There was no treasury stock issued
or
expense recorded for the 401(k) plan in 2004 as the Company used forfeited
shares within the plan to satisfy matching contributions.
A
second
plan is for employees covered by a collective bargaining arrangement at Titan
Tire Corporation and does not include a Company matching contribution. Employees
are fully vested with respect to their contributions.
The
Company’s third plan received a 401(k) plan transfer in 2006 for the employees
covered by a collective bargaining agreement of Titan Tire Corporation of
Freeport. This plan does not include a Company matching contribution. Employees
are fully vested with respect to their contributions.
F
- 25
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Previously,
the Company adopted 401(k) plans for the employees of Titan Tire Corporation
of
Texas and the employees of Titan Tire Corporation of Natchez. These plans relate
to the non-operational facilities in Brownsville, Texas, and Natchez,
Mississippi. The matching contributions on these 401(k) plans were discontinued
in November 2003.
| 22. |
STOCK
OPTION PLANS
|
On
January 1, 2006, the Company adopted SFAS 123(R), “Share-Based Payment,” using
the modified prospective method of adoption, which does not require restatement
of prior periods. The Company previously applied the recognition and measurement
principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,”
and related Interpretations in accounting for share-based option awards. SFAS
123(R) requires companies to estimate the fair value of share-based option
awards on the date of the grant using an option-pricing model. The value of
the
portion of the award that is ultimately expected to vest is recognized as
expense over the vesting period. No stock-based compensation expense was
recorded during 2006, 2005 or 2004. See Note 1 for 2005 pro forma information
illustrating the effect on net income and income per share if the Company had
applied the provisions of SFAS 123(R). The Company granted no options during
2006 or 2004. All previously granted options were fully vested before January
1,
2006.
In
accordance with SFAS 123(R), cash flows from income tax benefits resulting
from
tax deductions in excess of compensation cost recognized for share-based option
awards have been classified as financing cash flows prospectively from January
1, 2006. Previously, these excess tax benefits were presented as operating
cash
flows.
Stock
Incentive Plan
The
Company adopted the 1993 Stock Incentive Plan (the Plan) to provide grants
of
stock options as a means of attracting and retaining qualified employees for
the
Company. There will be no additional issuance of stock options under this plan
as it has expired. Options previously granted were fully vested in 2005 and
expire 10 years from the grant date of the option.
Non-Employee
Director Stock Option Plan
The
Company adopted the 1994 Non-Employee Director Stock Option Plan (the Director
Plan) to provide for grants of stock options as a means of attracting and
retaining qualified independent directors for the Company. There will be no
additional issuance of stock options under this plan as it has expired. Options
previously granted were fully vested in 2005 and expire 10 years from the grant
date of the option.
2005
Equity Incentive Plan
The
Company adopted the 2005 Equity Incentive Plan to provide stock options as
a
means of attracting and retaining qualified independent directors and employees
for the Company. A total of 2.1 million shares are reserved for the plan. The
exercise price of stock options may not be less than the fair market value
of
the common stock on the date of the grant. The vesting and term of each option
is set by the Board of Directors. In 2006 no options were granted under this
plan. In 2005, a total of 890,380 options were granted under this plan. These
options were fully vested in 2005 and expire 10 years from the grant date of
the
option.
Stock
options outstanding and exercisable as of December 31, 2006, were as
follows:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Price
Range
|
Weighted
Average Contractual Life |
Number
of Options |
Weighted
Average Exercise Price |
Number
of Options |
Weighted
Average Exercise Price |
|||||||||||
|
$
4.54-$ 6.69
|
4.3
years
|
135,000
|
$
|
5.47
|
135,000
|
$
|
5.47
|
|||||||||
|
$
8.00-$ 9.50
|
2.2
years
|
169,870
|
$
|
8.40
|
169,870
|
$
|
8.40
|
|||||||||
|
$12.75-$14.45
|
6.6
years
|
389,215
|
$
|
13.35
|
389,215
|
$
|
13.35
|
|||||||||
|
$16.00-$18.00
|
7.1
years
|
455,975
|
$
|
17.37
|
455,975
|
$
|
17.37
|
|||||||||
|
1,150,060
|
$
|
13.29
|
1,150,060
|
$
|
13.29
|
|||||||||||
F
- 26
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is a summary of activity in the stock option plans for 2004, 2005
and
2006:
|
Shares
Subject
to
Option
|
Weighted-
Average
Exercise
Price
|
||||||
|
Outstanding,
January 1, 2004
|
948,650
|
$
|
11.29
|
||||
|
Granted
|
0
|
-
|
(a)
|
||||
|
Exercised
|
(23,570
|
)
|
8.00
|
||||
|
Canceled/Expired
|
(122,690
|
)
|
12.16
|
||||
|
Outstanding,
December 31, 2004
|
802,390
|
11.25
|
|||||
|
Granted
|
890,380
|
15.20
|
|||||
|
Exercised
|
(135,860
|
)
|
11.04
|
||||
|
Canceled/Expired
|
(9,400
|
)
|
13.47
|
||||
|
Outstanding,
December 31, 2005
|
1,547,510
|
13.53
|
|||||
|
Granted
|
0
|
-
|
(a)
|
||||
|
Exercised
|
(382,190
|
)
|
14.15
|
||||
|
Canceled/Expired
|
(15,260
|
)
|
16.00
|
||||
|
Outstanding,
December 31, 2006
|
1,150,060
|
$
|
13.29
|
||||
| (a) |
The
Company granted no options during 2004 or
2006.
|
The
total
intrinsic value of options exercised in 2006 was $1.7 million. Cash received
from the exercise of options was $5.4 million for 2006. The tax benefit realized
for the tax deductions from options exercised was $0.6 million for 2006.
The
Company currently uses treasury shares to satisfy any stock option exercises.
At
December 31, 2006, the Company had 10.7 million shares of treasury
stock.
| 23. |
LEASE
COMMITMENTS
|
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. Total
rental expense was $3.2 million, $3.2 million and $2.9 million for the years
ended December 31, 2006, 2005 and 2004, respectively.
At
December 31, 2006, future minimum rental commitments under noncancellable
operating leases with initial or remaining terms in excess of one year are
as
follows (in
thousands):
|
2007
|
$
|
2,575
|
||
|
2008
|
1,525
|
|||
|
2009
|
962
|
|||
|
2010
|
660
|
|||
|
2011
|
349
|
|||
|
Thereafter
|
0
|
|||
|
Total
future minimum lease payments
|
$
|
6,071
|
F
- 27
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| 24. |
LITIGATION
|
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 effect on the consolidated financial
condition, results of operations or cash flows of the Company. However, due
to
the difficult nature of predicting 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.
| 25. |
CONCENTRATION
OF CREDIT RISK
|
Net
sales
to Deere & Company in Titan’s agricultural, earthmoving/construction and
consumer markets represented 17%, 20% and 22% of the Company’s consolidated
revenues for the years ended December 31, 2006, 2005 and 2004, respectively.
Net
sales to CNH Global N.V. in Titan’s three markets represented 11% of the
Company’s consolidated revenues for each of the years ended December 31, 2006,
2005 and 2004. No other customer accounted for more than 10% of Titan’s net
sales in 2006, 2005 or 2004.
| 26. |
RELATED
PARTY TRANSACTIONS
|
The
Company sells products and pays commissions to companies controlled by persons
related to the chief executive officer of the Company. During 2006, 2005 and
2004, sales of Titan product to these companies were approximately $6.4 million,
$6.5 million and $4.6 million, respectively. On other sales referred to Titan
from these manufacturing representative companies, commissions were
approximately $2.0 million, $1.6 million and $1.5 million during 2006, 2005
and
2004, respectively. These sales and commissions were made in the ordinary course
of business and were made on terms no less favorable to Titan than comparable
sales and commissions to unaffiliated third parties. At December 31, 2006 and
2005, Titan had trade receivables of approximately $0.6 million and $0.9 million
due from these companies, respectively.
| 27. |
RECENT
DEVELOPMENTS
|
Convertible
Note Conversion Offer
In
January 2007, the Company filed a registration statement relating to an offer
to
the holders of its 5.25% senior unsecured convertible notes due 2009 to convert
their notes into Titan’s common stock at an increased conversion rate (the
“Conversion Offer”). Per the Offer, each $1,000 principal amount of notes is
convertible into 81.0000 shares of common stock, which is equivalent to a
conversion price of approximately $12.35 per share. The offering price set
forth
will not include accrued interest; therefore, no accrued interest will be paid
on the notes that accept this offering. Prior to the Offer, each $1,000
principal amount of notes was convertible into 74.0741 shares of common stock,
which was equivalent to a conversion price of approximately $13.50 per share.
The registration statement relating to the shares of common stock to be offered
was declared effective on February 21, 2007. The offer is scheduled to expire
on
March 20, 2007, unless extended or terminated.
Credit
Facility Amendment
On
February 8, 2007, the Company amended its revolving credit facility with LaSalle
Bank National Association. The amendment extended the termination date to
October 2009 (previously October 2008). The amendment also lowered borrowing
rates, which will be based on a pricing grid. The borrowings under the facility
will bear interest at a floating rate of LIBOR plus 1% to 2% (previously 2.75%).
The amendment lowered the revolving loan availability from $250 million to
$125
million with the ability to request an increase back to $250 million.
F
- 28
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| 28. |
SEGMENT
AND GEOGRAPHICAL
INFORMATION
|
The
Company has aggregated its operating units into reportable segments based on
its
three customer markets: agricultural, earthmoving/construction and consumer.
These segments are based on the information
used by the chief executive
officer and chief operating
officer to make certain
operating
decisions, allocate portions
of capital
expenditures
and
assess segment
performance.
The
accounting policies of the segments are the same as those described in Note
1,
“Description of Business and Significant Accounting Policies.” Segment external
revenues, expenses and income from operations are determined on the basis of
the
results of operations of operating units of manufacturing facilities. Segment
assets are generally determined on the basis of the tangible assets located
at
such operating units’ manufacturing facilities and the intangible assets
associated with the acquisitions of such operating units. However, certain
operating units’ goodwill and property, plant and equipment balances are carried
at the corporate level.
Titan
is
organized primarily on the basis of products being included in three marketing
segments, with each reportable segment including wheels, tires and wheel/tire
assemblies.
The
table
below presents information about certain revenues and expenses, income (loss)
from operations and segment assets used by the chief operating decision maker
of
the Company as of and for the years ended December 31, 2006, 2005 and 2004
(in
thousands):
|
2006
|
Agricultural
|
|
Earthmoving/
Construction
|
|
Consumer
|
|
Reconciling
Items
|
|
Consolidated
Totals
|
|
||||||
|
Revenues
from external customers
|
$
|
421,096
|
$
|
183,357
|
$
|
75,001
|
$
|
0
|
$
|
679,454
|
||||||
|
Depreciation
& amortization
|
15,324
|
7,402
|
1,409
|
2,715
|
(a)
|
26,850
|
||||||||||
|
Income
(loss) from operations
|
27,351
|
21,837
|
1,655
|
(28,832
|
)
(b)
|
22,011
|
||||||||||
|
Total
assets
|
273,787
|
145,964
|
22,678
|
142,697
|
(c)
|
585,126
|
||||||||||
|
Capital
expenditures
|
5,184
|
2,192
|
339
|
567
|
(d)
|
8,282
|
||||||||||
|
2005
|
||||||||||||||||
|
Revenues
from external customers
|
$
|
310,361
|
$
|
131,982
|
$
|
27,790
|
$
|
0
|
$
|
470,133
|
||||||
|
Depreciation
& amortization
|
11,738
|
5,183
|
1,447
|
2,378
|
(a)
|
20,746
|
||||||||||
|
Income
(loss) from operations
|
31,750
|
17,664
|
1,825
|
(39,240
|
)
(b)
|
11,999
|
||||||||||
|
Total
assets
|
239,581
|
89,241
|
22,963
|
88,971
|
(c)
|
440,756
|
||||||||||
|
Capital
expenditures
|
3,365
|
1,615
|
230
|
1,542
|
(d)
|
6,752
|
||||||||||
|
2004
|
||||||||||||||||
|
Revenues
from external customers
|
$
|
316,235
|
$
|
160,297
|
$
|
34,039
|
$
|
0
|
$
|
510,571
|
||||||
|
Depreciation
& amortization
|
12,084
|
6,980
|
1,585
|
4,258
|
(a)
|
24,907
|
||||||||||
|
Income
(loss) from operations
|
38,585
|
16,627
|
1,891
|
(23,781
|
)
(b)
|
33,322
|
||||||||||
|
Total
assets
|
173,335
|
78,116
|
17,211
|
85,504
|
(c)
|
354,166
|
||||||||||
|
Capital
expenditures
|
2,493
|
1,417
|
185
|
233
|
(d)
|
4,328
|
||||||||||
| (a) |
Represents
depreciation expense related to property, plant and equipment carried
at
the corporate level.
|
| (b) |
Represents
corporate expenses including those referred to in (a). Includes Dyneer
legal charge of $15.2 million in
2005.
|
| (c) |
Represents
property, plant and equipment and goodwill related to certain acquisitions
and other corporate assets. Approximately $37 million of the increase
in
2006 from 2005 related to the higher 2006 year-end cash
balance.
|
| (d) |
Represents
corporate capital expenditures.
|
F
- 29
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
table
below presents information by geographic area as of and for the years ended
December 31, 2006, 2005 and 2004 (in
thousands):
|
2006
|
United
States
|
Italy
|
Other
Countries
|
Consolidated
Totals
|
|||||||||
|
Revenues
from external customers
|
$
|
679,454
|
$
|
0
|
$
|
0
|
$
|
679,454
|
|||||
|
Long-lived
assets (a)
|
196,318
|
0
|
0
|
196,318
|
|||||||||
|
2005
|
|||||||||||||
|
Revenues
from external customers
|
$
|
470,133
|
$
|
0
|
$
|
0
|
$
|
470,133
|
|||||
|
Long-lived
assets (b)
|
152,084
|
0
|
0
|
152,084
|
|||||||||
|
2004
|
|||||||||||||
|
Revenues
from external customers
|
$
|
461,125
|
$
|
29,584
|
$
|
19,862
|
$
|
510,571
|
|||||
|
Long-lived
assets (c)
|
92,346
|
0
|
0
|
92,346
|
|||||||||
| (a) |
Idled
assets marketed for sale in the amount of $14 million reclassed/included
in the 2006 long-lived assets.
|
| (b) |
Idled
assets marketed for sale in the amount of $18 million are not included
in
the 2005 long-lived assets.
|
| (c) |
Idled
assets marketed for sale in the amount of $31 million are not included
in
the 2004 long-lived assets.
|
F
- 30
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| 29. |
EARNINGS
PER SHARE
|
Earnings
per share for 2006, 2005 and 2004, are (amounts
in thousands, except share and per share data):
|
2006
|
Net
income
|
|
|
Weighted-
average
shares
|
|
|
Per
share
amount
|
|||
|
Basic
earnings per share
|
$
|
5,144
|
19,701,614
|
$
|
.26
|
|||||
|
Effect
of stock options
|
0
|
342,685
|
||||||||
|
Diluted
earnings per share (a)
|
$
|
5,144
|
20,044,299
|
$
|
.26
|
|||||
|
2005
|
||||||||||
|
Basic
earnings per share
|
$
|
11,042
|
18,052,946
|
$
|
.61
|
|||||
|
Effect
of stock options
|
0
|
230,663
|
||||||||
|
Diluted
earnings per share (b)
|
$
|
11,042
|
18,283,609
|
$
|
.60
|
|||||
|
2004
|
||||||||||
|
Basic
earnings per share
|
$
|
11,107
|
17,798,483
|
$
|
.62
|
|||||
|
Effect
of stock options
|
0
|
75,247
|
||||||||
|
Effect
of convertible notes
|
2,137
|
3,700,669
|
||||||||
|
Diluted
earnings per share
|
$
|
13,244
|
21,574,399
|
$
|
.61
|
| (a) |
The
effect of convertible notes has not been included as they were
anti-dilutive. The weighted-average share amount excluded for convertible
notes totaled 6,014,815 shares.
|
| (b) |
The
effect of convertible notes has not been included as they were
anti-dilutive. The weighted-average share amount excluded for convertible
notes totaled 7,146,627 shares.
|
F
- 31
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| 30. |
SUPPLEMENTARY
DATA - QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
|
(All
amounts in thousands, except per share data)
|
Quarter
ended
|
March
31
|
June
30
|
September
30
|
December
31
|
Year
ended
December
31
|
|||||||||||
|
2006
|
|
|||||||||||||||
|
Net
sales
|
$
|
182,577
|
$
|
175,194
|
$
|
156,120
|
$
|
165,563
|
$
|
679,454
|
||||||
|
Gross
profit
|
31,114
|
22,442
|
17,080
|
2,142
|
72,778
|
|||||||||||
|
Net
income (loss)
|
8,593
|
5,603
|
488
|
(9,540
|
)
|
5,144
|
||||||||||
|
Per
share amounts:
|
|
|||||||||||||||
|
Basic
|
.44
|
.28
|
.02
|
(.48
|
)
|
.26
|
||||||||||
|
Diluted (a)
|
.36
|
.24
|
.02
|
(.48
|
)
|
.26
|
||||||||||
|
2005
|
|
|||||||||||||||
|
Net
sales
|
$
|
136,129
|
$
|
134,709
|
$
|
102,712
|
$
|
96,583
|
$
|
470,133
|
||||||
|
Gross
profit
|
24,081
|
22,502
|
10,973
|
6,654
|
64,210
|
|||||||||||
|
Net
income (loss)
|
11,201
|
4,200
|
(b)
|
1,182
|
(5,541
|
)
|
11,042
|
|||||||||
|
Per
share amounts: (a)
|
|
|||||||||||||||
|
Basic
|
.68
|
.25
|
(b)
|
.06
|
(.28
|
)
|
.61
|
|||||||||
|
Diluted
|
.51
|
.23
|
(b)
|
.06
|
(.28
|
)
|
.60
|
|||||||||
| (a) |
As
a result of the variances in the outstanding share balances, the
year-end
per share amounts do not agree to the sum of the
quarters.
|
| (b) |
Noncash
convertible debt conversion charge of $7.2 million was included in
the
quarter ended June 30, 2005.
|
F
- 32
TITAN
INTERNATIONAL, INC.
SCHEDULE
II - VALUATION RESERVES
|
Description
|
Balance
at beginning
of
year
|
Additions
to costs and
expenses
|
Deductions
|
Balance
at
end
of
year
|
|||||||||
|
Year
ended December 31, 2006
|
|||||||||||||
|
Reserve
deducted in the balance sheet from the assets to which it
applies
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
5,654,000
|
$
|
1,596,000
|
$
|
(2,432,000
|
)
|
$
|
4,818,000
|
||||
|
Year
ended December 31, 2005
|
|||||||||||||
|
Reserve
deducted in the balance sheet from the assets to which it
applies
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
4,259,000
|
$
|
1,455,000
|
$
|
(60,000
|
)
|
$
|
5,654,000
|
||||
|
Year
ended December 31, 2004
|
|||||||||||||
|
Reserve
deducted in the balance sheet from the assets to which it
applies
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
5,331,000
|
$
|
1,698,000
|
$
|
(2,770,000
|
)
|
$
|
4,259,000
|
||||
S-1