TITAN INTERNATIONAL INC - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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FORM
10-K
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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,
2008
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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
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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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(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.
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Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o (Do
not check if a smaller reporting company)
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Smaller
reporting company o
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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 approximately $636 million based upon the closing
price of the common stock on the New York Stock Exchange on June 30,
2008.
As of
February 23, 2009, a total of 35,171,524 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 14,
2009.
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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10
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Item 1B.
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Unresolved
Staff Comments
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10
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Item 2.
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Properties
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11
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Item 3.
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Legal
Proceedings
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11
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Item 4.
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Submission
of Matters to a Vote of Security Holders.
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11
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Part
II.
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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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12
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Item 6.
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Selected
Financial Data
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14
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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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15-35
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Item 7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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36
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Item 8.
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Financial
Statements and Supplementary Data
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36
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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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36
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Item 9A.
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Controls
and Procedures
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36
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Item 9B.
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Other
Information
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36
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Part
III.
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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37
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Item 11.
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Executive
Compensation
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37
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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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38
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Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence
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38
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Item 14.
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Principal
Accounting Fees and Services
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38
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Part
IV.
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Item 15.
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Exhibits,
Financial Statement Schedules
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39
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Signatures
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40
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Exhibit
Index
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41
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2
PART I
ITEM
1 – BUSINESS
INTRODUCTION
Titan
International, Inc. and its subsidiaries (Titan or the Company) hold the unique
position of manufacturing both wheels and tires for its target
markets. As a leading manufacturer in the off-highway industry, Titan
produces a broad range of specialty products to meet the specifications of
original equipment manufacturers (OEMs) and aftermarket customers in the
agricultural, earthmoving/construction and consumer markets. Titan’s
earthmoving/ construction market includes wheels and tires supplied to the U.S.
government, while the consumer market includes products for all-terrain vehicles
(ATVs) and recreational/utility trailers.
As one of
the few companies dedicated to off-highway wheel and tire products, Titan’s
engineering and manufacturing resources are focused on designing quality
products that address the real-life concerns of our end-users. Titan’s
team of experienced and up-and-coming engineers continually work on new and
improved engineered products that evolve with today’s applications for the
off-highway wheel and tire markets.
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·
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Giant
Mining Products
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In 2008,
Titan entered the giant off-the-road (OTR) earthmoving market in a big way with
the introduction of its giant mining tires and wheels, the largest in the
world. Titan’s giant mining products include the “Big Daddy” giant
mining tire, which is approximately 13 feet tall and weighs in at approximately
12,500 pounds. To enter the giant OTR arena, the Company invested in
a large capital expansion project at its Bryan, Ohio, location. Titan
continues to add giant OTR capacity as the Company brings new equipment
online.
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·
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Market
Sales
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In 2008,
Titan’s agricultural market sales represented 70% of net sales, the
earthmoving/construction market represented 27% and the consumer market
represented 3% 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 27 to the consolidated
financial statements of Titan, included in Item 8 herein.
COMPETITIVE
STRENGTHS
Titan’s
strong market position in the off-highway wheel and tire market and its
long-term core customer relationships contribute to the Company’s competitive
strengths. These strengths, along with Titan’s dedication to the
off-highway wheel and tire market, continue to drive the Company
forward.
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Strong
Market Position
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Titan’s
ability to offer a broad range of specialized wheels, tires and assemblies has
resulted in the Company’s strong position in the domestic off-highway
market. Through a diverse dealer network, the Company is able to
reach an increasing number of customers in the aftermarket and build Titan’s
image and brand recognition. The Company’s acquisition of the
Goodyear Farm Tire brand in North America contributes to overall visibility and
customer confidence. 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, many of which are used in custom
processes.
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Long-Term
Core Customer Relationships
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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.
3
BUSINESS
STRATEGY
Titan’s
business strategy is to continue its growth into the giant OTR market, increase
its presence in the tire aftermarket, continue to improve operating
efficiencies, maintain emphasis on new product development and explore possible
additional strategic acquisitions.
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Giant
Mining Tire Product
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In May
2007, Titan’s Board of Directors approved funding for the Company to increase
OTR mining tire production capacity to include giant mining
tires. These giant tires are in short supply in the mining industry
and offer an opportunity for improved margins and greater demand. The
“Big Daddy” giant tire is approximately 13 feet tall and weighs in at
approximately 12,500 pounds. The Company began start-up production of
these giant mining tires in July 2008. Titan continues to add giant
OTR tire capacity as the Company brings new equipment online.
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Increase
Aftermarket Tire Business
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The
Company has concentrated on increasing its presence in the tire aftermarket,
which tends to be somewhat less cyclical than the OEM market. The
aftermarket also offers the potential for higher profit margins and is larger in
most cases.
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Improve
Operating Efficiencies
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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.
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Improve
Design Capacity and Increase New Product
Development
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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. These
value-added services enhance Titan’s relationships with its
customers. The Company tests new designs and technologies and
develops methods of manufacturing to improve product quality and
performance. Titan’s engineers recently introduced designs for giant
mining wheels and tires, which went into start-up production in second quarter
2008. These giant tires employ an innovative steel radial
construction technology, new to the OTR tire industry, to enhance performance
and durability. Titan’s engineers are also working on a new 15-degree
tire and wheel design for OTR and farm radial assemblies to improve tire and
wheel life.
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Explore
Additional Strategic Acquisitions
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The
Company’s expertise in the manufacture of off-highway 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 OTR ASSETS
On July
31, 2006, Titan Tire Corporation of Bryan, a subsidiary of the Company, acquired
the OTR tire assets of Continental Tire North America, Inc. (Continental) in
Bryan, Ohio. Titan Tire Corporation of Bryan purchased the assets of
Continental’s tire facility for approximately $53 million in cash
proceeds. The assets purchased included plant, property and equipment
located in Bryan, Ohio, inventory and other current assets. The
acquisition included an agreement to use the General trademark on OTR
tires.
4
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 inches with the 54-inch 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
approximately 1 foot to approximately 7 foot in outside diameter and from 5 to
44 inches in width. The Company offers the added value of delivering
a complete wheel and tire assembly to customers.
EARTHMOVING/CONSTRUCTION
MARKET
The
Company manufactures rims, wheels and tires for various types of OTR
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 earthmoving/construction market is often referred to as
OTR, an acronym for off-the-road. The Company provides OEM and
aftermarket customers with a broad range of earthmoving/construction wheels
ranging in diameter from 20 to 63 inches and in weight from 125 pounds to 7,000
pounds. The 63-inch diameter wheel is the largest manufactured in
North America for the earthmoving/construction market. Titan’s
earthmoving/construction tires range from approximately 3 feet to approximately
13 feet in outside diameter and in weight from 50 pounds to 12,500
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 ATVs, turf, golf car and trailer
applications. Consumer wheels and rims range from 8 to 16 inches 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.
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MARKET
SALES
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||||||||||||||||||||||||
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Year
ended December 31,
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||||||||||||||||||||||||
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(Amounts
in thousands)
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2008
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2007
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2006
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|||||||||||||||||||||
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%
of Total
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%
of Total
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%
of Total
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||||||||||||||||||||||
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Net Sales
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Net Sales
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Net Sales
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Net Sales
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Net Sales
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Net Sales
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Agricultural
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$ | 729,895 | 70 | % | $ | 515,642 | 62 | % | $ | 421,096 | 62 | % | ||||||||||||
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Earthmoving/construction
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281,008 | 27 | % | 277,206 | 33 | % | 183,357 | 27 | % | |||||||||||||||
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Consumer
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25,797 | 3 | % | 44,173 | 5 | % | 75,001 | 11 | % | |||||||||||||||
| $ | 1,036,700 | $ | 837,021 | $ | 679,454 | |||||||||||||||||||
MARKET
CONDITIONS OUTLOOK
Titan
experienced strong demand for its agricultural and earthmoving/construction
products throughout 2008. The continued strength of the agricultural
market, resulting from high commodity prices and a gradual increase in the use
of biofuels, contributed to the increase in sales. Tire shortages and
strong demand in mining products such as oil, iron ore and aggregates
contributed to the rise in earthmoving/construction product
demand. These trends are expected to continue through the first part
of 2009. However, the housing market decline, recession, and banking
and credit crisis are affecting Titan’s customers. The degree to
which these items will affect Titan’s customers in 2009 and the future is
difficult to estimate because of the uncertainty in the resolution of these
financial conditions.
In May
2007, Titan’s Board of Directors approved funding for the Company to increase
giant OTR mining tire production capacity to include 57-inch and 63-inch giant
(“Big Daddy”) OTR radial tires. These tires have an outside diameter
of approximately 12 feet and 13 feet, respectively. The Company began
start-up production of these giant mining tires in July 2008. Titan
continues to add giant OTR tire capacity at the Bryan, Ohio, facility as the
Company brings new equipment online.
5
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.
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·
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Wheel
Manufacturing Process
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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.
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Tire
Manufacturing Process
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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.
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·
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Wheel
and Tire Assemblies
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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
established based on each customer’s requirements and products are received by
the customer on a just-in-time basis.
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·
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Quality
Control
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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.
6
CAPITAL
EXPENDITURES
Capital
expenditures for 2008, 2007 and 2006 were $80.0 million, $38.0 million and $8.3
million, respectively. The 2008 capital expenditures include
approximately $60 million for the giant OTR project and the 2007 capital
expenditures include approximately $22 million for the giant OTR
project. The remaining capital expenditures in 2008 and 2007 were
used primarily for updating manufacturing equipment, expanding manufacturing
capacity and for further automation at the Company’s
facilities. Capital expenditures for 2009 are forecasted to be
approximately $25 million to $35 million. Approximately $15 million
to $20 million of this amount may be spent on the giant OTR project and the
remainder is anticipated to be used to enhance the Company’s existing facilities
and manufacturing capabilities.
PATENTS,
TRADEMARKS AND ROYALTIES
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.
The
Company pays a royalty relating to a license agreement with The Goodyear Tire
& Rubber Company to manufacture and sell certain off-highway tires in North
America. Under this agreement, royalty trademark payments would cease
immediately if Titan discontinued using the Goodyear trademark. Titan
currently plans to continue using the Goodyear trademark until circumstances
require a change. The current term of the agreement with Goodyear is
for the next four years.
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
eight 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.
RESEARCH,
DEVELOPMENT AND ENGINEERING
The
Company’s research, development and engineering staff tests original designs and
technologies and develops new manufacturing methods to improve product
performance. These services enhance the Company’s relationships with
customers. Titan’s engineers recently introduced designs for giant OTR tires,
which went into start-up production in second quarter 2008. These
giant tires employ an innovative steel radial construction technology, new to
the OTR tire industry, to enhance performance and durability. Titan’s
engineers are also working on a new 15-degree tire and wheel design for OTR and
farm radial assemblies. This revolutionary technology will simplify
maintenance to minimize downtime, provide better air retention, simplify
mounting and increase service life. The Company continues to work on
sidewall improvements including the LSW (low sidewall) tire design.
7
CUSTOMERS
Titan’s
10 largest customers accounted for approximately 51% of net sales for the year
ended December 31, 2008, compared to approximately 47% for the year ended
December 31, 2007. Net sales to Deere & Company in Titan’s
agricultural, earthmoving/construction and consumer markets combined represented
approximately 22% and 17% of the Company’s consolidated revenues for the years
ended December 31, 2008 and 2007, respectively. Net sales to CNH
Global N.V. in Titan’s three markets represented approximately 12% and 11% of
the Company’s consolidated revenues for the years ended December 31, 2008 and
2007, respectively. No other customer accounted for more than 10% of
the Company’s net sales in 2008 or 2007. 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 may minimize a longer-term impact
caused by any such loss.
ORDER
BACKLOG
As of
January 31, 2009, Titan estimates $201 million in firm orders compared to $208
million at January 31, 2008, for the Company’s operations. 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
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. 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. The Company’s stock ownership interest in Titan Europe Plc
was 17.2% at December 31, 2008 and 17.3% at December 31, 2007. The
fair value of the Company’s investment in Titan Europe Plc was $2.6 million and
$34.5 million at December 31, 2008 and 2007. Titan Europe Plc is
publicly traded on the AIM market in London, England.
EMPLOYEES
At
December 31, 2008, the Company employed approximately 2,900 people in the United
States. Approximately 49% of the Company’s employees in the United
States were covered by collective bargaining agreements. In December
2005, the workers at the Des Moines, Iowa, and Freeport, Illinois, facilities
ratified new labor agreements through November 2010. The workers at
the Bryan, Ohio, facility ratified a new labor agreement in July 2006 with the
same November 2010 expiration date. The Company believes employee
relations are generally good.
EXPORT
SALES
The
Company had total aggregate export sales of approximately $128.8 million, $77.0
million and $57.4 million, for the years ended December 31, 2008, 2007 and 2006,
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.
8
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 2008 the Annual
CEO Certification required by Section 303A.12(a) of the New York Stock Exchange
Listed Company Manual.
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:
|
·
|
Corporate
Governance Policy
|
|
·
|
Business
Conduct Policy
|
|
·
|
Audit
Committee Charter
|
|
·
|
Compensation
Committee Charter
|
|
·
|
Nominating/Corporate
Governance Committee Charter
|
Printed
copies of these documents are available, without charge, by writing
to: Titan International, Inc., c/o
Corporate Secretary, 2701 Spruce Street, Quincy, IL 62301.
9
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 raw materials,
which consist primarily of steel and
rubber.
|
|
·
|
Fluctuations
in energy and transportation costs may affect Titan’s operating costs and
the demand for the Company’s
products.
|
|
·
|
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 approximately 50% of
sales.
|
|
·
|
The
Company’s giant OTR project may experience unforeseen obstacles, which may
delay the project, increase costs and adversely affect Titan’s financial
results.
|
|
·
|
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 product liability
claims.
|
|
·
|
The
Company is subject to risks associated with environmental laws and
regulations.
|
|
·
|
The
Company along with its customers and suppliers may be affected by the
current banking and credit crisis.
|
ITEM
1B – UNRESOLVED STAFF COMMENTS
None.
10
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
|
2,047,000 |
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
|
740,000 |
Manufacturing,
distribution
|
Earthmoving/Construction
|
|||||||
|
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)
|
|||||||
|
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
unresolved and future legal claims, the Company cannot anticipate or predict the
material adverse effect on its consolidated financial condition, results of
operations or cash flows as a result of efforts to comply with or its
liabilities pertaining to legal judgments.
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 2008.
11
PART II
|
ITEM
5 – MARKET FOR 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. Titan executed a five-for-four stock split effective
August 15, 2008, for stockholders of record on July 31, 2008. All
share and per share data, except shares authorized, have been adjusted to
reflect the effect of the stock split for all periods presented. On
February 23, 2009, there were approximately 600 holders of record of
Titan common stock and an estimated 2,400 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.
|
2008
|
High
|
Low
|
Dividends
Declared
|
|||||||||
|
First
quarter *
|
$ | 27.86 | $ | 19.36 | $ | 0.004 | ||||||
|
Second
quarter *
|
36.31 | 24.53 | 0.004 | |||||||||
|
Third
quarter *
|
37.77 | 19.78 | 0.005 | |||||||||
|
Fourth
quarter
|
21.10 | 5.40 | 0.005 | |||||||||
|
2007
|
||||||||||||
|
First
quarter *
|
$ | 20.96 | $ | 15.92 | $ | 0.004 | ||||||
|
Second
quarter *
|
27.88 | 20.26 | 0.004 | |||||||||
|
Third
quarter *
|
26.60 | 18.96 | 0.004 | |||||||||
|
Fourth
quarter *
|
28.23 | 19.30 | 0.004 | |||||||||
*
Adjusted to reflect the five-for-four stock split that took place in
2008.
12
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 600 Construction and Farm Machinery and Heavy
Trucks Index, and against the Standard & Poor’s 500 Stock
Index. The graph depicts the value on December 31, 2008, of a $100
investment made on December 31, 2003, 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 NYSE under the symbol TWI.
|
Fiscal
Year Ended December 31,
|
||||||||||||||||||||||||
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||||||||
|
Titan
International, Inc.
|
$ | 100.00 | $ | 494.59 | $ | 565.78 | $ | 661.61 | $ | 1,027.09 | $ | 339.22 | ||||||||||||
|
S&P
600 Const. & Farm Machinery Index
|
100.00 | 134.03 | 170.38 | 229.76 | 289.55 | 182.43 | ||||||||||||||||||
|
S&P
500 Index
|
100.00 | 110.88 | 116.33 | 134.70 | 142.10 | 89.53 | ||||||||||||||||||
13
ITEM
6 – SELECTED FINANCIAL DATA
The
selected financial data presented below, as of and for the years ended December
31, 2008, 2007, 2006, 2005, and 2004, 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 Management’s Discussion and Analysis of Financial Condition
and Results of Operations and our audited consolidated financial statements and
notes thereto.
(All
amounts in thousands, except per share data)
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Net
sales
|
$ | 1,036,700 | $ | 837,021 | $ | 679,454 | $ | 470,133 | $ | 510,571 | ||||||||||
|
Gross
profit
|
139,714 | 84,131 | 72,778 | 64,210 | 79,500 | |||||||||||||||
|
Income
from operations
|
73,321 | 24,838 | 22,011 | 11,999 | 33,322 | |||||||||||||||
|
Noncash
Titan Europe Plc charge
|
(37,698 | ) | 0 | 0 | 0 | 0 | ||||||||||||||
|
Noncash
debt conversion charge
|
0 | (13,376 | ) | 0 | (7,225 | ) | 0 | |||||||||||||
|
Income
(loss) before income taxes
|
23,010 | (3,884 | ) | 8,574 | (2,885 | ) | 15,215 | |||||||||||||
|
Net
income (loss)
|
13,337 | (7,247 | ) | 5,144 | 11,042 | 11,107 | ||||||||||||||
|
Net
income (loss) per share – basic *
|
.39 | (.23 | ) | .21 | .49 | .50 | ||||||||||||||
|
Net
income (loss) per share – diluted *
|
.38 | (.23 | ) | .21 | .48 | .49 | ||||||||||||||
|
Dividends
declared per common share *
|
.018 | .016 | .016 | .016 | .016 | |||||||||||||||
|
* Adjusted to reflect the
five-for-four stock split that took place in 2008.
|
||||||||||||||||||||
|
(All
amounts in thousands)
|
As
of December 31,
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Working
capital
|
$ | 232,564 | $ | 239,985 | $ | 247,009 | $ | 157,984 | $ | 114,898 | ||||||||||
|
Current
assets
|
369,199 | 327,765 | 309,933 | 206,167 | 154,668 | |||||||||||||||
|
Total
assets
|
654,782 | 590,495 | 585,126 | 440,756 | 354,166 | |||||||||||||||
|
Long-term
debt (a)
|
200,000 | 200,000 | 291,266 | 190,464 | 169,688 | |||||||||||||||
|
Stockholders’
equity
|
279,188 | 272,522 | 187,177 | 167,813 | 106,881 | |||||||||||||||
|
(a) Excludes
amounts due within one year and classified as a current
liability.
|
||||||||||||||||||||
14
|
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:
|
·
|
The
effect of the current banking and credit crisis on the Company and its
customers and suppliers
|
|
·
|
Changes
in the Company’s end-user markets as a result of world economic or
regulatory influences
|
|
·
|
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
|
|
·
|
Fluctuations
in currency translations
|
|
·
|
Ability
to secure financing at reasonable
terms
|
Any
changes in such factors could lead to significantly different
results. The Company cannot provide any assurance that the
assumptions referred to in the forward-looking statements or otherwise are
accurate or will prove to transpire. Any assumptions that are
inaccurate or do not prove to be correct could have a material adverse effect on
the Company’s ability to achieve the results as indicated in forward-looking
statements. 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.
15
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, 2008,
compared to 2007 (amounts
in thousands):
|
2008
|
2007
|
% Increase
|
||||||||||
|
Net
sales
|
$ | 1,036,700 | $ | 837,021 | 24 | % | ||||||
|
Income
from operations
|
73,321 | 24,838 | 195 | % | ||||||||
|
Net
income (loss)
|
13,337 | (7,247 | ) |
─
|
||||||||
The
Company recorded sales of $1,036.7 million for 2008, which were 24% higher than
the previous year sales of $837.0 million. The record sales level was
attributed to exceptionally strong demand in the Company’s agricultural market,
which reported higher sales of approximately 42% for 2008 when compared to the
previous year.
Income
from operations was $73.3 million for 2008, compared to $24.8 million for
previous year. The income from operations reflected a significant
improvement, as the Company continues its efforts to improve efficiencies and
align sale prices with production cost. Titan’s net income was $13.3
million for 2008 as compared to a net loss of $(7.2) million in
2007. Basic earnings per share were $.39 in 2008, compared to loss
per share of $(.23) in 2007.
RECENT
DEVELOPMENTS
Titan
Europe Plc additional share purchase
In
January 2009, the Company purchased additional shares of Titan Europe Plc,
resulting in a 22.9% ownership position. As a result of this higher
ownership position, the Company will account for its interest in Titan Europe
Plc as an equity method investment in accordance with APB 18, “The Equity Method
of Accounting for Investments in Common Stock,” going forward.
Revolving
credit facility amendment & restatement
On
January 30, 2009, Titan International, Inc. amended and restated its revolving
credit facility (credit facility) with Bank of America, N.A. The
amendment included a multi-year extension that extended the credit facility
termination date to January 2012 from the previous October 2009
date. The amendment created an accordion feature within the credit
facility that set the initial loan availability at $150 million with the ability
to request increases up to a maximum availability of $250
million. The amendment adjusted the borrowing rates within a pricing
grid that includes a minimum 1½% LIBOR rate.
16
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,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of sales
|
86.5 | 89.9 | 89.3 | |||||||||
|
Gross
profit
|
13.5 | 10.1 | 10.7 | |||||||||
|
Selling,
general and administrative expenses
|
5.5 | 6.4 | 6.7 | |||||||||
|
Royalty
expense
|
0.9 | 0.7 | 0.7 | |||||||||
|
Income
from operations
|
7.1 | 3.0 | 3.3 | |||||||||
|
Interest
expense
|
(1.5 | ) | (2.3 | ) | (2.5 | ) | ||||||
|
Noncash
Titan Europe Plc charge
|
(3.6 | ) | 0.0 | 0.0 | ||||||||
|
Noncash
convertible debt conversion charge
|
0.0 | (1.6 | ) | 0.0 | ||||||||
|
Other
income, net
|
0.2 | 0.4 | 0.5 | |||||||||
|
Income
(loss) before income taxes
|
2.2 | (0.5 | ) | 1.3 | ||||||||
|
Provision
for income taxes
|
0.9 | 0.4 | 0.5 | |||||||||
|
Net
income (loss)
|
1.3 | % | (0.9 | )% | 0.8 | % | ||||||
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):
|
2008
|
2007
|
2006
|
||||||||||
|
Agricultural
|
$ | 729,895 | $ | 515,642 | $ | 421,096 | ||||||
|
Earthmoving/Construction
|
281,008 | 277,206 | 183,357 | |||||||||
|
Consumer
|
25,797 | 44,173 | 75,001 | |||||||||
|
Total
|
$ | 1,036,700 | $ | 837,021 | $ | 679,454 | ||||||
17
STOCK
SPLIT
In June
2008, Titan’s Board of Directors approved a five-for-four stock split with a
record date of July 31, 2008, and a payable date of August 15,
2008. The Company gave five shares for every four shares held as of
the record date. Stockholders received one additional share for every
four shares owned as of the record date and received cash in lieu of fractional
shares. All share and per share data, except shares authorized, have
been adjusted to reflect the effect of the stock split for all periods
presented.
GIANT
OTR PROJECT
In May
2007, Titan’s Board of Directors approved funding for the Company to increase
giant OTR mining tire production capacity to include 57-inch and 63-inch giant
radial tires (the “Giant OTR Project”). The Company began start-up
production of these giant mining tires in July 2008.
ACQUISITION
OF OTR ASSETS
On July
31, 2006, Titan Tire Corporation of Bryan, a subsidiary of the Company, 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 tire facility for approximately $53
million in cash proceeds. The assets purchased included plant,
property and equipment located in Bryan, Ohio, inventory and other current
assets. The acquisition included an agreement to use the General
trademark 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.
SENIOR
UNSECURED CONVERTIBLE NOTES CONVERSION
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
“Offer”). Per the Offer, each $1,000 principal amount of notes was
convertible into 81.0000 shares of common stock, which is equivalent to a
conversion price of approximately $12.35 per share. 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 February 2007. In March 2007, the Company
announced 100% acceptance of the conversion offer and the $81,200,000 of
accepted notes were converted into 6,577,200 shares of Titan common
stock. Titan recognized a noncash charge of $13.4 million in
connection with this exchange in accordance with SFAS No. 84, “Induced
Conversions of Convertible Debt.”
18
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 2008 for approximately 78% of
inventories and the last-in, first-out (LIFO) method for approximately 22% 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 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,
2008 and 2007. Based on a discounted cash flow method, the Company’s
computation showed no impairment at December 31, 2008. See Note 8 for
additional information. 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 that was valued at $2.6 million as
of December 31, 2008, representing a 17.2% ownership position, at that
time. 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, “Accounting for Certain Investments in Debt and Equity
Securities,” 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, net of tax. 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. Declared dividends on this investment are recorded in
income as a component of other income.
The
December 31, 2008, fair value of $2.6 million was below the Company’s cost basis
of $40.3 million. The Company recorded an other than temporary
impairment charge of $37.7 million at year end 2008. The impairment
charge was due to a substantial decline in Titan Europe Plc’s publicly quoted
price on the AIM market in London, England at year end 2008.
Recent
Development
In
January 2009, the Company purchased additional shares of Titan Europe Plc,
resulting in a 22.9% ownership position. As a result of this higher
ownership position, the Company will account for its interest in Titan Europe
Plc as an equity method investment accordance with APB 18, “The Equity Method of
Accounting for Investments in Common Stock,” going forward.
19
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 in accordance with SFAS No. 109, “Accounting for Income
Taxes.”
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 three frozen defined benefit pension
plans and one defined benefit plan that purchased a final annuity settlement in
2002. Titan expects to contribute approximately $1 million to these
frozen defined benefit pension plans in 2009. 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, 2008
|
2009
|
|||||||||||||||
|
Increase
|
Increase
|
Increase
|
||||||||||||||
|
Percentage
|
(Decrease)
|
(Decrease)
|
(Decrease)
|
|||||||||||||
|
Assumptions
|
Change
|
PBO
(a)
|
Equity
|
Expense
|
||||||||||||
|
Pension
|
||||||||||||||||
|
Discount rate
|
+/-.5 | $ | (4,244)/$4,617 | $ | 4,244/$(4,617) | $ | (242)/$256 | |||||||||
|
Expected return on
assets
|
+/-.5 | $ | (290)/$290 | |||||||||||||
|
(a)
|
Projected
benefit obligation (PBO) for pension
plans.
|
20
FISCAL
YEAR ENDED DECEMBER 31, 2008, COMPARED TO FISCAL YEAR ENDED
DECEMBER
31, 2007
RESULTS
OF OPERATIONS
Highlights for the year
ended December 31, 2008, compared to 2007 (amounts in
thousands):
|
2008
|
2007
|
% Increase
|
||||||||||
|
Net
sales
|
$ | 1,036,700 | $ | 837,021 | 24 | % | ||||||
|
Cost
of sales
|
896,986 | 752,890 | 19 | % | ||||||||
|
Gross
profit
|
139,714 | 84,131 | 66 | % | ||||||||
|
Gross
profit percentage
|
13.5 | % | 10.1 | % | ||||||||
Net
Sales
Net sales
for the year ended December 31, 2008, were $1,036.7 million compared to $837.0
million for the year ended December 31, 2007. The large sales
improvement of $199.7 million, or 24%, for the year ended December 31, 2008, was
attributed to strong demand in the Company’s agricultural market, which reported
higher sales of approximately 42% for 2008 as compared to the previous
year. Titan believes it has benefited in 2008 from a preliminary
ruling from the U.S. Department of Commerce, affirming that exporters of
Chinese-manufactured tires have been selling certain off-the-road tires in the
U.S.A. at less than normal value and received subsidies, resulting in duties
being imposed on certain imported tires.
Cost
of Sales and Gross Profit
Cost of
sales was $897.0 million for the year ended December 31, 2008, as compared to
$752.9 million in 2007. The higher cost of sales resulted from the
record sales levels achieved in 2008. Additional costs recorded
during the year related to expenses associated with hiring and training workers
to be utilized in giant OTR production, which were estimated to be approximately
$6 million for 2008.
Gross
profit for the year 2008 was $139.7 million, or 13.5% of net sales, compared to
$84.1 million, or 10.1% of net sales, for 2007. The gross profit
margin for 2008 showed a significant improvement of over three percentage points
compared to the previous year, as the Company continues its efforts to improve
efficiencies and align sale prices with production cost.
Selling,
General and Administrative Expenses
Selling, general and
administrative expenses were as follows (amounts in
thousands):
|
2008
|
2007
|
% Increase
|
||||||||||
|
Selling,
general and administrative
|
$ | 57,151 | $ | 53,138 | 8 | % | ||||||
|
Percentage
of net sales
|
5.5 | % | 6.3 | % | ||||||||
Selling,
general and administrative (SG&A) expenses were $57.2 million, or 5.5% of
net sales, for the year ended December 31, 2008, as compared to $53.1 million,
or 6.3% of net sales, for 2007. Research and development (R&D)
expenses, which are included in SG&A expenses, were $3.5 million and $1.7
million for the years ended December 31, 2008 and 2007,
respectively. SG&A expense rose primarily as the result of higher
selling costs of approximately $3 million year over year. SG&A
percentage of net sales improved nearly one percentage point due to the
Company’s SG&A expenses remaining relatively unchanged while sales achieved
record levels.
Royalty
Expense
Royalty expense was as
follows (amounts in
thousands):
|
2008
|
2007
|
% Increase
|
||||||||||
|
Royalty
expense
|
$ | 9,242 | $ | 6,155 | 50 | % | ||||||
The
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 under the Goodyear name. Royalty
expenses were $9.2 million for the year ended December 31, 2008, as compared to
$6.2 million in 2007. The higher royalty expense was the result of
the strong sales in the agricultural segment.
21
Income
from Operations
Income from operations was
as follows (amounts in
thousands):
|
2008
|
2007
|
% Increase
|
||||||||||
|
Income
from operations
|
$ | 73,321 | $ | 24,838 | 195 | % | ||||||
|
Percentage
of net sales
|
7.1 | % | 3.0 | % | ||||||||
Income
from operations for the year ended December 31, 2008, was $73.3 million, or 7.1%
of net sales, compared to $24.8 million, or 3.0% of net sales, in
2007. Income from operations was affected by the items previously
discussed in the sales, cost of sales, SG&A and royalty line
items.
Interest
Expense
Interest expense was as
follows (amounts in
thousands):
|
2008
|
2007
|
% Decrease
|
||||||||||
|
Interest
expense
|
$ | 15,122 | $ | 18,710 | (19 | )% | ||||||
Interest
expense for the year 2008 was $15.1 million compared to $18.7 million in
2007. The reduction in interest costs was primarily the result of
capitalization of interest of $3.2 million related to the giant OTR project in
2008. In 2007, the Company capitalized $0.4 million of interest costs
for the giant OTR project.
Noncash
Titan Europe Plc charge
Noncash Titan Europe Plc
charge was as follows (amounts in
thousands):
|
2008
|
2007
|
% Increase
|
||||||||||
|
Noncash
Titan Europe Plc charge
|
$ | (37,698 | ) | $ | 0 | n/a | ||||||
The
unrealized loss on the Titan Europe Plc investment was $37.7
million. The unrealized loss was due to a substantial decline in
Titan Europe Plc’s publicly quoted price on the AIM market in London, England at
year end 2008. A noncash charge of $37.7 million was recorded at year
end December 31, 2008.
Noncash
Convertible Debt Conversion Charge
Noncash convertible debt
conversion charge was as follows (amounts in
thousands):
|
2008
|
2007
|
% Decrease
|
||||||||||
|
Noncash
debt conversion charge
|
$ | 0 | $ | 13,376 | (100 | )% | ||||||
In March
2007, the Company converted $81.2 million of 5.25% senior convertible notes into
6,577,200 shares of Titan common stock. Titan recognized a noncash
charge of $13.4 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):
|
2008
|
2007
|
% Decrease
|
||||||||||
|
Other
income
|
$ | 2,509 | $ | 3,364 | (25 | )% | ||||||
Other
income was $2.5 million for the year ended December 31, 2008, as compared to
$3.4 million in 2007. The major items included in other income
are: (i) dividend income from the Titan Europe Plc investment was
$1.7 million and $1.8 million in 2008 and 2007, respectively, (ii) interest
income was $1.4 million and $2.7 million for the years ended December 31, 2008
and 2007, respectively, and (iii) other expense of $(0.6) million and $(1.1)
million in 2008 and 2007, respectively. The reduction in interest
income was primarily the result of lower interest rates.
22
Income
Tax Expense
Income taxes were as follows
(amounts in
thousands):
|
2008
|
2007
|
% Increase
|
||||||||||
|
Income
taxes
|
$ | 9,673 | $ | 3,363 | 188 | % | ||||||
The
Company recorded an income tax expense of $9.7 million in 2008 and $3.4 million
in 2007. The Company’s effective tax rate was 42.0% in 2008 and (87)% in
2007. The Company’s 2007 income tax expense and rate differs from the
amount of income tax determined by applying the U.S. Federal income tax rate to
pre-tax income primarily as a result of the $13.4 million noncash charge taken
in connection with the Company’s convertible debt. This noncash
charge was not deductible for income tax purposes.
Net
Income (Loss)
Net income (loss) was as
follows (amounts in
thousands):
|
2008
|
2007
|
% Increase
|
||||||||||
|
Net
income (loss)
|
$ | 13,337 | $ | (7,247 | ) | n/a | ||||||
Net
income for the year ended December 31, 2008, was $13.3 million, compared to net
loss of $(7.2) million in 2007. Basic income per share was $.39 for
the year ended December 31, 2008, as compared to basic loss per share of $(.23)
in 2007. Diluted income per share was $.38 for the year ended
December 31, 2008, as compared to basic loss per share of $(.23) in
2008. The Company’s net income and earnings per share improvements
were due to the items detailed above.
Agricultural
Segment Results
Agricultural segment results
were as follows (amounts in
thousands):
|
2008
|
2007
|
% Increase
|
||||||||||
|
Net
sales
|
$ | 729,895 | $ | 515,642 | 42 | % | ||||||
|
Gross
profit
|
89,782 | 35,742 | 151 | % | ||||||||
|
Income
from operations
|
74,241 | 25,324 | 193 | % | ||||||||
Net sales
in the agricultural market were $729.9 million for the year ended December 31,
2008, as compared to $515.6 million in 2007. The robust agricultural
segment sales were the result of significantly higher demand from the Company’s
customers, an effect of record farm income and crop prices.
Gross
profit in the agricultural market was $89.8 million for the year 2008, as
compared to $35.7 million in 2007. Income from operations in the
agricultural market was $74.2 million for the year 2008, as compared to $25.3
million in 2007. The significant improvement in gross profit and income
from operations in the agricultural market was attributed to robust farm
equipment sales and the Company continuing to align sales prices with production
costs.
Earthmoving/Construction
Segment Results
Earthmoving/construction
segment results were as follows (amounts in
thousands):
|
2008
|
2007
|
%
Increase
(Decrease)
|
||||||||||
|
Net
sales
|
$ | 281,008 | $ | 277,206 | 1 | % | ||||||
|
Gross
profit
|
46,047 | 47,848 | (4 | )% | ||||||||
|
Income
from operations
|
38,422 | 40,833 | (6 | )% | ||||||||
The
Company’s earthmoving/construction market net sales were $281.0 million for the
year ended December 31, 2008, as compared to $277.2 million in
2007. The increase of $3.8 million primarily resulted from the
continued strong earthmoving and mining sales.
Gross
profit in the earthmoving/construction market was $46.0 million for the year
2008, as compared to $47.8 million in 2007. The Company’s
earthmoving/construction market income from operations was $38.4 million for the
year 2008, as compared to $40.8 million in 2007. The Company’s gross
profit was negatively impacted by costs associated with hiring and training
workers to be utilized in giant OTR production, estimated to be approximately $6
million for 2008.
23
Consumer
Segment Results
Consumer segment results
were as follows (amounts in
thousands):
|
2008
|
2007
|
%
(Decrease)
Increase
|
||||||||||
|
Net
sales
|
$ | 25,797 | $ | 44,173 | (42 | )% | ||||||
|
Gross
profit
|
3,938 | 3,431 | 15 | % | ||||||||
|
Income
from operations
|
3,303 | 2,546 | 30 | % | ||||||||
Consumer
market net sales were $25.8 million for the year ended December 31, 2008, as
compared to $44.2 million in 2007. The Goodyear farm tire acquisition
agreement included an off-take/mixing agreement for certain product sales to
Goodyear. The reduction in consumer market sales was primarily
related to lower sales to The Goodyear Tire and Rubber Company of approximately
$15 million for the twelve months ended December 31, 2008, as compared to the
previous year.
Gross
profit from the consumer market was $3.9 million in 2008 as compared to $3.4
million in 2007. Consumer market income from operations was $3.3
million for the year 2008 as compared to $2.5 million in 2007. The
improvement in gross profit and income from operations in the consumer segment
was the result of a shift to higher margin products.
Segment
Summary
(Amounts
in thousands)
|
2008
|
Agricultural
|
Earthmoving/
Construction
|
Consumer
|
Corporate
Expenses
|
Consolidated
Totals
|
|||||||||||||||
|
Net sales
|
$ | 729,895 | $ | 281,008 | $ | 25,797 | $ | 0 | $ | 1,036,700 | ||||||||||
|
Gross profit
(loss)
|
89,782 | 46,047 | 3,938 | (53 | ) | 139,714 | ||||||||||||||
|
Income (loss) from
operations
|
74,241 | 38,422 | 3,303 | (42,645 | ) | 73,321 | ||||||||||||||
|
2007
|
||||||||||||||||||||
|
Net sales
|
$ | 515,642 | $ | 277,206 | $ | 44,173 | $ | 0 | $ | 837,021 | ||||||||||
|
Gross profit
(loss)
|
35,742 | 47,848 | 3,431 | (2,890 | ) | 84,131 | ||||||||||||||
|
Income (loss) from
operations
|
25,324 | 40,833 | 2,546 | (43,865 | ) | 24,838 | ||||||||||||||
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 $42.6 million for the year ended
December 31, 2008, as compared to $43.9 million in 2007.
Corporate
expenses for the year ended December 31, 2008, were composed of selling and
marketing expenses of approximately $20 million and administrative expenses of
approximately $23 million.
Corporate
expenses for the year ended December 31, 2007, were composed of selling and
marketing expenses of approximately $17 million and administrative expenses of
approximately $27 million.
The
higher selling and marketing expenses for 2008 as compared to the previous year
resulted from the record sales levels and the associated selling
costs. The lower administrative costs resulted primarily from a
reduction in management incentives.
24
FISCAL
YEAR ENDED DECEMBER 31, 2007, COMPARED TO FISCAL YEAR ENDED
DECEMBER
31, 2006
RESULTS
OF OPERATIONS
Highlights for the year
ended December 31, 2007, compared to 2006 (amounts in
thousands):
|
2007
|
2006
|
% Increase
|
||||||||||
|
Net
sales
|
$ | 837,021 | $ | 679,454 | 23 | % | ||||||
|
Cost
of sales
|
752,890 | 606,676 | 24 | % | ||||||||
|
Gross
profit
|
84,131 | 72,778 | 16 | % | ||||||||
|
Gross
profit percentage
|
10.1 | % | 10.7 | % | ||||||||
Net
Sales
Net sales
for the year ended December 31, 2007, were $837.0 million compared to $679.5
million for the year ended December 31, 2006. The large sales
improvement of $157.6 million, or 23%, for the year ended December 31, 2007, was
attributed to the expanded agricultural product offering of Goodyear branded
farm tires and the expanded earthmoving, construction and mining product
offering of General branded OTR tires, along with added manufacturing capacity
from the Bryan, Ohio, facility, which was acquired on July 31,
2006. In addition, the Company has experienced strong demand in the
agricultural segment.
Cost
of Sales and Gross Profit
Cost of
sales was $752.9 million for the year ended December 31, 2007, as compared to
$606.7 million in 2006. Gross profit for the year 2007 was $84.1
million, or 10.1% of net sales, compared to $72.8 million, or 10.7% of net
sales, for 2006. 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 OTR
realignment costs lowered the Company’s gross profit for 2007 and 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. The Company estimates realignment costs to be
approximately $22 million to $24 million for 2007 and approximately $9 million
to $11 million in 2006.
Selling,
General and Administrative Expenses
Selling, general and
administrative expenses were as follows (amounts in
thousands):
|
2007
|
2006
|
% Increase
|
||||||||||
|
Selling,
general and administrative
|
$ | 53,138 | $ | 45,766 | 16 | % | ||||||
|
Percentage
of net sales
|
6.3 | % | 6.7 | % | ||||||||
SG&A
expenses were $53.1 million, or 6.3% of net sales, for the year ended December
31, 2007, as compared to $45.8 million, or 6.7% of net sales, for
2006. R&D expenses, which are included in SG&A expenses, were
$1.7 million and $1.3 million for the years ended December 31, 2007 and 2006,
respectively. The higher SG&A expenses for 2007 are primarily the
result of the higher selling and marketing expenses related to higher sales and
the CEO and executive incentives. Selling and marketing expenses were
approximately $5 million higher in 2007, when compared to
2006. Expenses recorded for CEO and executive incentives were
approximately $4 million higher in 2007, when compared to 2006.
Royalty
Expense
Royalty expense was as
follows (amounts in
thousands):
|
2007
|
2006
|
% Increase
|
||||||||||
|
Royalty
expense
|
$ | 6,155 | $ | 5,001 | 23 | % | ||||||
The
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 under the Goodyear name. Royalty
expenses were $6.2 million for the year ended December 31, 2007, as compared to
$5.0 million in 2006. The increase in royalty expenses is directly
attributable to higher sales levels.
25
Income
from Operations
Income from operations was
as follows (amounts in
thousands):
|
2007
|
2006
|
% Increase
|
||||||||||
|
Income
from operations
|
$ | 24,838 | $ | 22,011 | 13 | % | ||||||
|
Percentage
of net sales
|
3.0 | % | 3.2 | % | ||||||||
Income
from operations for the year ended December 31, 2007, was $24.8 million, or 3.0%
of net sales, compared to $22.0 million, or 3.2% of net sales, in
2006. Income from operations was affected by the items previously
discussed in the cost of sales, administrative and royalty line
items.
Interest
Expense
Interest expense was as
follows (amounts in
thousands):
|
2007
|
2006
|
% Increase
|
||||||||||
|
Interest
expense
|
$ | 18,710 | $ | 17,001 | 10 | % | ||||||
Interest
expense for the year 2007 was $18.7 million compared to $17.0 million in
2006. The increase in interest expense in 2007 as compared to 2006
was the result of a higher average interest rate of approximately 1% in
2007. In 2007, the Company capitalized $0.4 million of interest costs
for the giant OTR project.
Noncash
Convertible Debt Conversion Charge
Noncash convertible debt
conversion charge was as follows (amounts in
thousands):
|
2007
|
2006
|
% Increase
|
||||||||||
|
Noncash
debt conversion charge
|
$ | 13,376 | $ | 0 | n/a | |||||||
In March
2007, the Company converted $81.2 million of 5.25% senior convertible notes into
6,577,200 shares of Titan common stock. Titan recognized a noncash
charge of $13.4 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):
|
2007
|
2006
|
% Decrease
|
||||||||||
|
Other
income
|
$ | 3,364 | $ | 3,564 | (6 | %) | ||||||
Other
income was $3.4 million for the year ended December 31, 2007, as compared to
$3.6 million in 2006. Interest income included in other income was
$2.7 million and $1.7 million for the years ended December 31, 2007 and 2006,
respectively. In addition, dividend income from the Titan Europe
investment of $1.8 million in 2007 and $1.3 million in 2006 was recorded in
other income. The year ended December 31, 2007, also included a loss
of approximately $(1.1) million on foreign exchange and other expense
items.
Income
Tax Expense
Income taxes were as follows
(amounts in
thousands):
|
2007
|
2006
|
% Decrease
|
||||||||||
|
Income
taxes
|
$ | 3,363 | $ | 3,430 | (2 | %) | ||||||
The
Company recorded an income tax expense of $3.4 million in 2007 and 2006.
The Company’s effective tax rate was (87%) in 2007 and 40% in
2006. The Company’s 2007 income tax expense and rate differs from the
amount of income tax determined by applying the U.S. Federal income tax rate to
pre-tax income primarily as a result of the $13.4 million noncash charge taken
in connection with the Company’s convertible debt. This noncash
charge is not deductible for income tax purposes.
26
Net
(Loss) Income
Net (loss) income was as
follows (amounts in
thousands):
|
2007
|
2006
|
% Decrease
|
||||||||||
|
Net
(loss) income
|
$ | (7,247 | ) | $ | 5,144 | n/a | ||||||
Net loss
for the year ended December 31, 2007, was $(7.2) million, compared to net income
of $5.1 million in 2006. Basic and diluted loss per share was $(.23)
for the year ended December 31, 2007, as compared to basic and diluted income
per share of $.21 in 2006. The Company’s net income and earnings per
share decreased due to the items detailed above and as a result of the $13.4
million noncash convertible debt conversion charge.
Agricultural
Segment Results
Agricultural segment results
were as follows (amounts in
thousands):
|
2007
|
2006
|
%
Increase (Decrease)
|
||||||||||
|
Net
sales
|
$ | 515,642 | $ | 421,096 | 22 | % | ||||||
|
Gross
profit
|
35,742 | 42,511 | (16 | %) | ||||||||
|
Income
from operations
|
25,324 | 27,351 | (7 | %) | ||||||||
Net sales
in the agricultural market were $515.6 million for the year ended December 31,
2007, as compared to $421.1 million in 2006. The increase in
agricultural segment sales was the result of increased demand from the Company’s
customers, which resulted from record farm income in 2007.
Gross
profit in the agricultural market was $35.7 million for the year 2007, as
compared to $42.5 million in 2006. Income from operations in the
agricultural market was $25.3 million for the year 2007, as compared to $27.4
million in 2006. The decrease in gross profit and income from operations
in the agricultural market was primarily attributed to the related disruption to
production in Titan’s agricultural products resulting from the OTR realignment
initiative.
Earthmoving/Construction
Segment Results
Earthmoving/construction
segment results were as follows (amounts in
thousands):
|
2007
|
2006
|
% Increase
|
||||||||||
|
Net
sales
|
$ | 277,206 | $ | 183,357 | 51 | % | ||||||
|
Gross
profit
|
47,848 | 28,099 | 70 | % | ||||||||
|
Income
from operations
|
40,833 | 21,837 | 87 | % | ||||||||
The
Company’s earthmoving/construction market net sales were $277.2 million for the
year ended December 31, 2007, as compared to $183.4 million in
2006. The expanded product offering of the General brand for OTR
tires, along with added manufacturing capacity from the Bryan, Ohio, facility
and the OTR realignment initiative accounted for the higher sales levels in the
earthmoving/construction market in 2007.
Gross
profit in the earthmoving/construction market was $47.8 million, as compared to
$28.1 million in 2006. The Company’s earthmoving/construction market
income from operations was $40.8 million for the year 2007, up from $21.8
million in 2006. The Bryan, Ohio, facility produces OTR 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 gross profit and income from operations in the
earthmoving/construction segment is the result of margins realized on these
larger earthmoving, construction and mining tires and additional OTR
capacity.
27
Consumer
Segment Results
Consumer segment results
were as follows (amounts in
thousands):
|
2007
|
2006
|
%
(Decrease)
Increase
|
||||||||||
|
Net
sales
|
$ | 44,173 | $ | 75,001 | (41 | %) | ||||||
|
Gross
profit
|
3,431 | 2,771 | 24 | % | ||||||||
|
Income
from operations
|
2,546 | 1,655 | 54 | % | ||||||||
Consumer
market net sales were $44.2 million for the year ended December 31, 2007, as
compared to $75.0 million in 2006. The Goodyear farm tire acquisition
agreement included an off-take/mixing agreement for certain product sales to
Goodyear. The decrease in consumer market sales was primarily related
to a reduction in sales to The Goodyear Tire and Rubber Company of approximately
$24 million for the twelve months ended December 31, 2007, as compared to
2006.
Gross
profit from the consumer market was $3.4 million as compared to $2.8 million in
2006. Consumer market income from operations was $2.5 million for the
year 2007 as compared to $1.7 million in 2006. The increase in gross
profit and income from operations in the consumer segment was the result of a
shift to higher margin products.
Segment
Summary
(Amounts
in thousands)
|
2007
|
Agricultural
|
Earthmoving/
Construction
|
Consumer
|
Corporate
Expenses
|
Consolidated
Totals
|
|||||||||||||||
|
Net sales
|
$ | 515,642 | $ | 277,206 | $ | 44,173 | $ | 0 | $ | 837,021 | ||||||||||
|
Gross profit
(loss)
|
35,742 | 47,848 | 3,431 | (2,890 | ) | 84,131 | ||||||||||||||
|
Income (loss) from
operations
|
25,324 | 40,833 | 2,546 | (43,865 | ) | 24,838 | ||||||||||||||
|
2006
|
||||||||||||||||||||
|
Net sales
|
$ | 421,096 | $ | 183,357 | $ | 75,001 | $ | 0 | $ | 679,454 | ||||||||||
|
Gross profit
(loss)
|
42,511 | 28,099 | 2,771 | (603 | ) | 72,778 | ||||||||||||||
|
Income (loss) from
operations
|
27,351 | 21,837 | 1,655 | (28,832 | ) | 22,011 | ||||||||||||||
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 $43.9 million for the year ended
December 31, 2007, as compared to $28.8 million in 2006.
Corporate
expenses for the year ended December 31, 2007, were composed of the
following: (i) selling and marketing expenses of approximately $17
million; (ii) CEO and executive incentives of approximately $7 million; and
(iii) administrative expenses of approximately $20 million.
Corporate
expenses for the year ended December 31, 2006, were composed of the
following: (i) selling and marketing expenses of approximately $12
million; (ii) CEO and executive incentives of approximately $3 million; and
(iii) administrative expenses of approximately $14 million.
The
increase of approximately $5 million in selling and marketing expenses in 2007
as compared to 2006 resulted primarily from the higher sales
levels. The increase of approximately $4 million in the CEO and
executive incentives is primarily related to the substantial appreciation in
Titan’s stock price during 2007. The increase of approximately $6
million in administrative costs in 2007 was primarily related to higher
professional fees.
28
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
As of
December 31, 2008, the Company had $61.7 million of cash balances within various
bank accounts. This cash balance increased by $3.3 million from
December 31, 2007, due to the following cash flow discussion items.
|
(amounts
in thousands)
|
Year
ended December 31,
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Cash
|
$ | 61,658 | $ | 58,325 | $ | 3,333 | ||||||
Operating
Cash Flows
Summary
of cash flows from operating activities:
|
(amounts
in thousands)
|
Year
ended December 31,
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Net
income (loss)
|
$ | 13,337 | $ | (7,247 | ) | $ | 20,584 | |||||
|
Depreciation
and amortization
|
30,368 | 28,620 | 1,748 | |||||||||
|
Deferred
income tax provision
|
13,987 | 1,995 | 11,992 | |||||||||
|
Noncash
Titan Europe Plc charge
|
24,504 | 0 | 24,504 | |||||||||
|
Noncash
debt charge
|
0 | 13,376 | (13,376 | ) | ||||||||
|
Accounts
receivable
|
(28,137 | ) | (24,512 | ) | (3,625 | ) | ||||||
|
Inventories
|
(19,258 | ) | 26,556 | (45,814 | ) | |||||||
|
Accounts
payable
|
21,555 | 18,108 | 3,447 | |||||||||
|
Other
current liabilities
|
6,393 | 16,668 | (10,275 | ) | ||||||||
|
Other
operating activities
|
(11,579 | ) | 2,429 | (14,008 | ) | |||||||
|
Cash
provided by operating activities
|
$ | 51,170 | $ | 75,993 | $ | (24,823 | ) | |||||
For the
year ended December 31, 2008, operating activities provided cash of $51.2
million. This cash was primarily provided by net income of $13.3
million and increases of $21.6 million in accounts payable. Positive
cash flows were offset by increases in accounts receivable of $28.1 million and
inventories of $19.3 million. Included as a reduction to net income
were noncash charges of $30.4 million for depreciation and amortization and
$24.5 million for the noncash Titan Europe Plc charge.
In
comparison, for the year ended December 31, 2007, operating activities provided
cash of $76.0 million. This cash was primarily provided by a decrease
in inventories of $26.6 million and increases of $18.1 million in accounts
payable and $16.7 million in other current liabilities. Positive cash
flows were offset by net loss of $(7.2) million and an increase in accounts
receivable of $24.5 million. Included as a reduction to net income
were noncash charges of $28.6 million for depreciation and amortization and
$13.4 million for a debt conversion charge.
Operating
cash flows decreased $24.8 million from the year ended December 31, 2007, to
December 31, 2008. This reduction was largely the result of cash
flows from inventories decreasing $45.8 million and 2008 including a reduction
to net income for the noncash Titan Europe Plc charge, while 2007 included a
reduction to income for a noncash debt conversion charge of $13.4
million. The decreases were offset by a rise in net income of $20.6
million. The higher inventory balances in 2008 were primarily due to
raw materials. Raw materials inventories were increased in 2008 to
support Titan’s all-time record sales levels.
For the
year ended December 31, 2006, cash of $5.3 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 net income of $5.1 million. Included as a reduction to
net income were noncash charges for depreciation and amortization of $26.9
million.
Operating
cash flows increased $81.3 million from the year ended December 31, 2006, to
December 31, 2007. This increase was largely the result of cash flows
from inventories increasing $46.1 million and cash flows from accounts payable
increasing by $16.7 million. In 2007, the Company was successful in
lowering the finished goods inventory at the recently acquired facilities in
Freeport, Illinois, and Bryan, Ohio. Accounts payable increased in
2007 as a result of higher purchases resulting from higher sales
levels.
29
Investing
Cash Flows
Summary
of cash flows from investing activities:
|
(amounts
in thousands)
|
Year
ended December 31,
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Capital
expenditures
|
$ | (79,953 | ) | $ | (38,048 | ) | $ | (41,905 | ) | |||
|
Acquisition
of off-the-road (OTR) assets
|
0 | (8,900 | ) | 8,900 | ||||||||
|
Other
investing activities
|
104 | 532 | (428 | ) | ||||||||
|
Cash
used for investing activities
|
$ | (79,849 | ) | $ | (46,416 | ) | $ | (33,433 | ) | |||
Net cash
used for investing activities was $79.8 million in 2008, as compared to $46.4
million in 2007 and $52.7 million in 2006. The Company invested a
total of $80.0 million in capital expenditures in 2008, compared to $38.0
million in 2007 and $8.3 million in 2006. The 2008 capital
expenditures include approximately $60 million for the giant OTR project and the
2007 capital expenditures include approximately $22 million for the Giant OTR
project. The remaining capital expenditures in 2008 and 2007 were
used primarily for updating manufacturing equipment, expanding manufacturing
capacity and for further automation at the Company’s
facilities. Titan invested $44.6 million for the Continental OTR tire
acquisition in 2006.
The
Company estimates that costs related to the Giant OTR Project at this time are
approximately $100 million, of which approximately $82 million was disbursed
from inception of the Giant OTR Project through December 31, 2008. Capital
expenditures for 2009 are forecasted to be approximately $25 million to $35
million. Approximately $15 million to $20 million of this amount may
be spent on the giant OTR project and the remainder is anticipated to be used to
enhance the Company’s existing facilities and manufacturing
capabilities.
Investing
cash flows decreased $33.4 million from the year ended December 31, 2007, to
December 31, 2008. This decrease was primarily the result of
additional cash being used for capital expenditures related to the Giant OTR
project.
Financing
Cash Flows
Summary
of cash flows from financing activities:
|
(amounts
in thousands)
|
Year
ended December 31,
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Proceeds
on revolving credit facility
|
$ | 25,000 | $ | 0 | $ | 25,000 | ||||||
|
Proceeds
from exercise of stock options
|
3,536 | 6,631 | (3,095 | ) | ||||||||
|
Excess
tax benefit from stock options
|
4,131 | 0 | 4,131 | |||||||||
|
Payment
on debt
|
0 | (10,164 | ) | 10,164 | ||||||||
|
Other
financing activities
|
(655 | ) | (1,131 | ) | 476 | |||||||
|
Cash
provided by (used for) activities
|
$ | 32,012 | $ | (4,664 | ) | $ | 36,676 | |||||
Net cash
provided by financing activities was $32.0 million in 2008. This cash
was provided primarily by revolving credit facility proceeds of $25.0
million. Also, the exercise of stock options provided $3.5 million
and excess tax benefit from stock options exercised provided $4.1
million. Net cash used by financing activities was $4.7 million in
2007. This cash use was primarily used for payment of debt of $10.2
million offset by proceeds of $6.6 million from the exercise of stock
options. Net cash provided by financing activities in 2006 was $90.8
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.
Financing
cash flows increased $36.7 million from the year ended December 31, 2007, to the
year ended December 31, 2008. Also, financing cash flows decreased
$95.5 million from the year ended December 31, 2006, to December 31,
2007. The large changes from year to year are primarily the result of
changes in total debt borrowings.
30
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 1.2 times the outstanding revolver
balance.
|
|
·
|
If
the 30-day average of the outstanding revolver balance exceeds $225
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.
The
Company is in compliance with these covenants and restrictions as of December
31, 2008. The collateral coverage was calculated to be approximately
15 times the outstanding revolver balance at December 31, 2008.
The fixed
charge coverage ratio did not apply for the quarter ended December 31,
2008. The credit facility usage was $30.0 million at December 31,
2008, consisting of cash borrowings of $25.0 million and outstanding letters of
credit of $5.0 million.
Other
Items
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.
LIQUIDITY
OUTLOOK
At
December 31, 2008, the Company had $61.7 million of cash and cash equivalents
and $220.0 million of unused availability under the terms of its revolving
credit facility (credit facility). The availability under the
Company’s $250 million credit facility was reduced by $25.0 million for cash
borrowings and $5.0 million for outstanding letters of credit. The
Company expects to contribute approximately $1 million to its frozen defined
benefit pension plans during 2009.
In May
2007, Titan’s Board of Directors approved funding for the Company to increase
giant OTR mining tire production capacity to include 57-inch and 63-inch giant
radial tires (the “Giant OTR Project”). The Company estimates that
current commitments related to the Giant OTR Project at this time are
approximately $100 million, of which approximately $82 million was disbursed
from inception of the Giant OTR Project through December 31,
2008. Additional capital expenditure commitments will be incurred
through 2009 as the Giant OTR Project moves to completion. The final
cost of these additional OTR capital items have not been finalized at this
time.
The
Company currently anticipates that cash on hand and anticipated internal cash
flows from operations will allow the Company sufficient funds for completion of
the Giant OTR Project. Capital expenditures for 2009 are forecasted
to be approximately $25 million to $35 million. Approximately $15
million to $20 million of this amount may be spent on the giant OTR project and
the remainder is anticipated to be used to enhance the Company’s existing
facilities and manufacturing capabilities.
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 and capital expenditures. If the Company were
to exhaust all currently available working capital sources or not meet the
financial covenants and conditions of its loan agreements, the Company’s ability
to secure additional funding may be negatively impacted.
31
INFLATION
The
Company is subject to the effect of price fluctuations. During 2008,
2007 and 2006, 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. However, these price adjustments
usually lag the inflationary pressures.
CONTRACTUAL
OBLIGATIONS
The
Company’s contractual obligations at December 31, 2008, 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
|
|||||||||||||||
|
Debt
|
$ | 225,000 | $ | 25,000 | $ | 0 | $ | 200,000 | $ | 0 | ||||||||||
|
Interest
expense (a)
|
49,322 | 16,655 | 32,000 | 667 | 0 | |||||||||||||||
|
Operating
leases
|
2,816 | 1,267 | 1,510 | 39 | 0 | |||||||||||||||
|
Purchase
obligations
|
4,690 | 1,860 | 2,677 | 153 | 0 | |||||||||||||||
|
Other
long-term liabilities (b)
|
28,700 | 1,000 | 12,000 | 11,200 | 4,500 | |||||||||||||||
|
Royalty
payment (c)
|
36,000 | 9,000 | 18,000 | 9,000 | 0 | |||||||||||||||
|
Total
|
$ | 346,528 | $ | 54,782 | $ | 66,187 | $ | 221,059 | $ | 4,500 | ||||||||||
|
(a)
|
Interest
expense is estimated based on the Company’s year-end 2008 debt balances,
maturities and interest rates. The estimates assume no
additional revolver borrowings or repayments. 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.
|
|
(b)
|
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.
|
|
(c)
|
The
Company pays a royalty relating to a license agreement with The Goodyear
Tire & Rubber Company to manufacture and sell certain off-highway
tires in North America. Under this agreement, royalty trademark
payments would cease immediately if Titan discontinued using the Goodyear
trademark. Titan currently plans to continue using the Goodyear
trademark until circumstances require a change. Titan’s royalty
payment to Goodyear for the next four years, the current term of the
agreement, using the annual 2008 royalty payment of approximately $9
million as an estimate would total approximately $36
million. The actual royalty amount paid to Goodyear in the
future will vary based on the sales of certain off-highway tires in North
America and the continuation of the license
agreement.
|
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company has no material off-balance sheet arrangements.
32
MARKET
RISK SENSITIVE INSTRUMENTS
Exchange Rate Sensitivity
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 $2.6 million at December 31, 2008, and
$34.5 million at December 31, 2007. 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, 2008,
would amount to approximately $0.3 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 $250 million credit facility that has a variable interest
rate. If the credit facility were fully drawn, a change in the
interest rate of 100 basis points, or 1%, would change the Company’s interest
expense by approximately $2.5 million. At December 31, 2008, the
Company had $25.0 million of cash borrowings on the credit
facility.
At
December 31, 2008, the fair value of the 8% senior unsecured notes, based on
market prices obtained through independent pricing sources, was approximately
$147 million, compared to a carrying value of $200 million.
MARKET
CONDITIONS AND OUTLOOK
Titan
experienced strong demand for its agricultural and earthmoving/construction
products throughout 2008. The continued strength of the agricultural
market, resulting from high commodity prices and a gradual increase in the use
of biofuels, contributed to the increase in sales. Tire shortages and
strong demand in mining products such as oil, iron ore and aggregates
contributed to the rise in earthmoving/construction product
demand. These trends are expected to continue through the first part
of 2009. However, the housing market decline, recession, and banking
and credit crisis are affecting Titan’s customers. The degree to
which these items will affect Titan’s customers in 2009 and the future is
difficult to estimate because of the uncertainty in the resolution of these
financial conditions.
In May
2007, Titan’s Board of Directors approved funding for the Company to increase
giant OTR mining tire production capacity to include 57-inch and 63-inch giant
radial tires. The Company began start-up production of these giant
mining tires in July 2008. Titan continues to add giant OTR tire
capacity at the Bryan, Ohio, facility as the Company brings new equipment
online.
Energy,
raw material and petroleum-based product costs have been volatile and increases
in these costs may 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 remain strong for 2009. Commodity
prices have declined from recent highs, but remain at healthy
levels. If oil prices remain lower, farmers will benefit from lower
input costs for fuel and fertilizer. The available stock of many farm
crops is at low levels, which should sustain future production. The
gradual increase in the use of biofuels should also sustain future
production. In April 2008, Titan signed a three-year agreement to
supply farm tires to various John Deere affiliates. Many variables,
including weather, grain prices, export markets and future government policies
and payments can greatly influence the overall health of the agricultural
economy.
33
EARTHMOVING/CONSTRUCTION
MARKET OUTLOOK
Sales for
the earthmoving/construction market are expected to remain stable in
2009. Metals, oil and gas prices have retreated from recent highs as
a result of the worldwide economic downturn. However, in the
long-term, these prices are expected to remain at levels that are attractive for
continued investment, which will maintain support for earthmoving and mining
sales. The significant decline in the United States housing market
continues to cause a decline in equipment used for housing
construction. The giant OTR project will add significant capacity for
giant mining tires in 2009. The additional sales of these giant OTR
tires are expected to more than offset any softness in other areas of the
earthmoving/construction market. The earthmoving/construction market
is affected by many variables, including commodity prices, road construction,
infrastructure, government appropriations, housing starts and the current
banking and credit crisis.
CONSUMER
MARKET OUTLOOK
The
current overall uncertainty in consumer spending resulting from the current
banking and credit crisis, housing market decline, and high energy and food
costs has affected the Company’s consumer market sales. Titan’s sales
in the consumer market include sales to Goodyear, which includes 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. The Company
expects challenging conditions for the consumer market for 2009. Many
factors affect the consumer market including weather, competitive pricing,
energy prices and consumer attitude.
PENSIONS
The
Company has three frozen defined benefit pension plans and one defined benefit
plan that purchased a final annuity settlement in 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 by the
Company 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, 2008, the Company contributed cash funds of $0.2 million to
the frozen defined benefit pension plans. Titan expects to contribute
approximately $1 million to these frozen defined benefit pension plans during
2009.
In
October 2007, the Titan Tire Bryan pension plan, adopted at the date of the
Continental OTR asset acquisition and frozen from its inception, received cash
transfers of approximately $25 million from Continental Tire North America’s
frozen pension plan for the Bryan, Ohio, location. The amount
transferred into the frozen plan was actuarially approved to be a fully funded
plan.
Titan’s
projected benefit obligation at December 31, 2008, was $90.5 million as compared
to $95.4 million at December 31, 2007. The Company’s defined benefit
pension plans were underfunded by $28.7 million at December 31, 2008.
During 2008, the Company recorded net periodic pension income of $0.9
million. Accumulated other comprehensive loss recorded for defined
benefit pension plans, net of tax, was $33.6 million and $15.6 million at
December 31, 2008 and 2007, 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.
34
RECENTLY
ISSUED ACCOUNTING STANDARDS
Statement
of Financial Accounting Standards Number 141 (revised 2007)
In
December 2007, SFAS No. 141 (revised 2007), “Business Combinations,” was
issued. This statement requires an acquirer to recognize assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. This
statement is effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The Company does not expect the adoption
of this statement to have a material impact on its consolidated financial
position, results of operations and cash flows.
Statement
of Financial Accounting Standards Number 160
In
December 2007, SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements,” was issued. This statement establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008. The Company does not expect the adoption of this statement to
have a material impact on its consolidated financial position, results of
operations and cash flows.
35
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 have
concluded 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.
36
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 2009 Proxy Statement under the
captions “Election of Mr. Billig and Mr. Soave as Directors,” “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., 64, 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.
Kent W.
Hackamack, 50, 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, 61, 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 2009 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: Titan International, Inc., c/o Corporate Secretary, 2701 Spruce
Street, Quincy, IL 62301.
ITEM
11 – EXECUTIVE COMPENSATION
The
information required by this item is incorporated by reference to the Company’s
2009 Proxy Statement under the caption “Compensation of Executive
Officers.”
37
|
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 2009 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,
2008:
|
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
|
560,536 | (a) | 8.98 | 1,217,720 | ||||||||
|
Equity
compensation plans not approved by security holders
|
0 | n/a | 0 | |||||||||
|
Total
|
560,536 | 8.98 | 1,217,720 | |||||||||
|
(a)
|
Amount
includes outstanding stock 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
2009 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
2009 Proxy Statement under the caption “Audit and Other Fees.”
38
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
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2008, 2007 and
2006
|
F-3
|
|
|
Consolidated
Balance Sheets at December 31, 2008 and 2007
|
F-4
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended December
31, 2006, 2007 and 2008
|
F-5
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
through F-33
|
|
|
2.
|
Financial
Statement Schedule
|
|
|
Schedule
II – Valuation Reserves
|
S-1
|
|
|
3.
|
Exhibits
|
|
|
The
accompanying Exhibit Index is incorporated herein by
reference.
|
39
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
26, 2009
|
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 26, 2009.
|
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/ J. MICHAEL A.
AKERS
|
Director
|
|
J.
Michael A. Akers
|
|
|
/s/ ERWIN H.
BILLIG
|
Director
|
|
Erwin
H. Billig
|
|
|
/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
|
40
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
|
|
4.1
(c)
|
Indenture
between the Company and U.S. Bank National Association dated December 28,
2006
|
|
10.1
(d)
|
1994
Non-Employee Director Stock Option Plan
|
|
10.2
(d)
|
1993
Stock Incentive Plan
|
|
10.3
(e)
|
Credit
Agreement dated July 23, 2004, among the Company and LaSalle Bank National
Association and General Electric Capital Corporation
|
|
10.4
(f)
|
First
Amendment to Credit Agreement among the Company and LaSalle Bank National
Association
and General Electric Capital Corporation dated February 16,
2005
|
|
10.5
(g)
|
2005
Equity Incentive Plan
|
|
10.6
(h)
|
Second
Amendment to Credit Agreement among the Company and LaSalle Bank National
Association dated October 21, 2005
|
|
10.7
(i)
|
Third
Amendment to Credit Agreement among the Company and LaSalle Bank National
Association dated June 28, 2006
|
|
10.8
(j)
|
Fourth
Amendment to Credit Agreement among the Company and LaSalle Bank National
Association dated February 8, 2007
|
|
10.9
(k)
|
Fifth
Amendment to Credit Agreement among the Company and LaSalle Bank National
Association dated December 12, 2007
|
|
10.10
(l)
|
Amended
and Restated Credit Agreement among the Company and Bank of America, N.A.
dated as of January 30, 2009
|
|
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 same numbered exhibit contained in the Company’s Form
S-4 (No. 333-141865).
|
|
(d)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-3 (No.
333-61743).
|
|
(e)
|
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).
|
|
(f)
|
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).
|
|
(g)
|
Incorporated
by reference to Appendix A of the Company’s Definitive Proxy Statement
filed on March 30, 2005.
|
|
(h)
|
Incorporated
by reference to the same numbered exhibit contained in the Company’s
Current Report on Form 8-K filed on October 24,
2005.
|
|
(i)
|
Incorporated
by reference to the same numbered exhibit contained in the Company’s
Current Report on Form 8-K filed on June 29,
2006.
|
|
(j)
|
Incorporated
by reference to the same numbered exhibit contained in the Company’s
Current Report on Form 8-K filed on February 8,
2007.
|
|
(k)
|
Incorporated
by reference to the same numbered exhibit contained in the Company’s
Current Report on Form 8-K filed on December 13,
2007.
|
|
(l)
|
Incorporated
by reference to the same numbered exhibit contained in the Company’s
Current Report on Form 8-K filed on February 2,
2009.
|
41
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, 2008, 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, 2008, 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 evaluation,
management concluded the Company maintained effective internal control over
financial reporting as of December 31, 2008.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008, has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
is presented in this Annual Report on Form 10-K.
F-1
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors
and
Stockholders of
Titan
International, Inc.:
In our
opinion, the consolidated financial statements listed in the accompanying index
under item 15(a)(1) present fairly, in all material respects, the financial
position of Titan International Inc. and its subsidiaries at December 31, 2008
and 2007, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2008 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. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008 based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control Over Financial Reporting appearing on
page F-1. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and on the Company's
internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included 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. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.
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.
/s/
PricewaterhouseCoopers LLP
St.
Louis, MO
February
26, 2009
F-2
TITAN
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(All
amounts in thousands, except per share data)
|
Year ended December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales
|
$ | 1,036,700 | $ | 837,021 | $ | 679,454 | ||||||
|
Cost
of sales
|
896,986 | 752,890 | 606,676 | |||||||||
|
Gross
profit
|
139,714 | 84,131 | 72,778 | |||||||||
|
Selling,
general and administrative expenses
|
57,151 | 53,138 | 45,766 | |||||||||
|
Royalty
expense
|
9,242 | 6,155 | 5,001 | |||||||||
|
Income
from operations
|
73,321 | 24,838 | 22,011 | |||||||||
|
Interest
expense
|
(15,122 | ) | (18,710 | ) | (17,001 | ) | ||||||
|
Noncash
Titan Europe Plc charge
|
(37,698 | ) | 0 | 0 | ||||||||
|
Noncash
convertible debt conversion charge
|
0 | (13,376 | ) | 0 | ||||||||
|
Other
income, net
|
2,509 | 3,364 | 3,564 | |||||||||
|
Income
(loss) before income taxes
|
23,010 | (3,884 | ) | 8,574 | ||||||||
|
Provision
for income taxes
|
9,673 | 3,363 | 3,430 | |||||||||
|
Net
income (loss)
|
$ | 13,337 | $ | (7,247 | ) | $ | 5,144 | |||||
|
Earnings
(loss) per common share *:
|
||||||||||||
|
Basic
|
$ | .39 | $ | (.23 | ) | $ | .21 | |||||
|
Diluted
|
.38 | (.23 | ) | .21 | ||||||||
|
Average
common shares and equivalents outstanding *:
|
||||||||||||
|
Basic
|
34,410 | 32,081 | 24,627 | |||||||||
|
Diluted
|
34,838 | 32,081 | 25,055 | |||||||||
*
Adjusted to reflect the five-for-four stock split that took place in
2008.
See
accompanying Notes to Consolidated Financial Statements.
F-3
TITAN
INTERNATIONAL, INC.
CONSOLIDATED
BALANCE SHEETS
(All
amounts in thousands, except share data)
|
December
31,
|
||||||||
|
Assets
|
2008
|
2007
|
||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 61,658 | $ | 58,325 | ||||
|
Accounts
receivable (net of
allowance of $6,639 and $5,258, respectively)
|
126,531 | 98,394 | ||||||
|
Inventories
|
147,306 | 128,048 | ||||||
|
Deferred
income taxes
|
12,042 | 25,159 | ||||||
|
Prepaid
and other current assets
|
21,662 | 17,839 | ||||||
|
Total
current assets
|
369,199 | 327,765 | ||||||
|
Property,
plant and equipment, net
|
248,442 | 196,078 | ||||||
|
Investment
in Titan Europe Plc
|
2,649 | 34,535 | ||||||
|
Goodwill
|
11,702 | 11,702 | ||||||
|
Deferred
income taxes
|
7,256 | 0 | ||||||
|
Other
assets
|
15,534 | 20,415 | ||||||
|
Total
assets
|
$ | 654,782 | $ | 590,495 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
liabilities
|
||||||||
|
Short-term
debt
|
$ | 25,000 | $ | 0 | ||||
|
Accounts
payable
|
65,547 | 43,992 | ||||||
|
Other
current liabilities
|
46,088 | 43,788 | ||||||
|
Total
current liabilities
|
136,635 | 87,780 | ||||||
|
Long-term
debt
|
200,000 | 200,000 | ||||||
|
Deferred
income taxes
|
0 | 14,044 | ||||||
|
Other
long-term liabilities
|
38,959 | 16,149 | ||||||
|
Total
liabilities
|
375,594 | 317,973 | ||||||
|
Commitments
and contingencies: Notes
13, 23 and 24
|
||||||||
|
Stockholders’
equity
|
||||||||
|
Common stock
(no par, 60,000,000
shares authorized, 37,475,288 issued)
|
30 | 30 | ||||||
|
Additional
paid-in capital
|
300,024 | 303,908 | ||||||
|
Retained
earnings
|
41,726 | 29,012 | ||||||
|
Treasury
stock (at cost, 2,443,604
and 3,229,055 shares, respectively)
|
(22,332 | ) | (29,384 | ) | ||||
|
Treasury
stock reserved for contractual obligations
|
(5,501 | ) | 0 | |||||
|
Accumulated
other comprehensive loss
|
(34,759 | ) | (31,044 | ) | ||||
|
Total
stockholders’ equity
|
279,188 | 272,522 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 654,782 | $ | 590,495 | ||||
See
accompanying Notes to Consolidated Financial Statements.
F-4
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
|
Treasury
stock reserved for contractual obligations
|
Accumulated
other comprehensive income (loss)
|
Total
|
|||||||||||||||||||||||||
|
Balance
January 1, 2006
|
#24,377,115 | $ | 30 | $ | 255,299 | $ | 32,053 | $ | (99,817 | ) | $ | 0 | $ | (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
|
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
|
477,738 | 2,647 | 3,432 | 6,079 | ||||||||||||||||||||||||||||
|
Issuance
of treasury stock under 401(k) plan
|
16,882 | 125 | 121 | 246 | ||||||||||||||||||||||||||||
|
Balance
December 31, 2006
|
24,871,735 | 30 | 258,071 | 36,802 | (96,264 | ) | 0 | (11,462 | ) | 187,177 | ||||||||||||||||||||||
|
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||||||
|
Net
loss
|
(7,247 | ) | (7,247 | ) | ||||||||||||||||||||||||||||
|
Unrealized
loss on investment, net of tax
|
(20,375 | ) | (20,375 | ) | ||||||||||||||||||||||||||||
|
Pension
liability adjustments, net of tax
|
793 | 793 | ||||||||||||||||||||||||||||||
|
Comprehensive
loss
|
(26,829 | ) | ||||||||||||||||||||||||||||||
|
Dividends
paid on common stock
|
(543 | ) | (543 | ) | ||||||||||||||||||||||||||||
|
Note
conversion
|
8,221,500 | 35,240 | 59,049 | 94,289 | ||||||||||||||||||||||||||||
|
Exercise
of stock options
|
555,663 | 2,640 | 3,991 | 6,631 | ||||||||||||||||||||||||||||
|
Issuance
of treasury stock for funding contractual obligations on employee
contracts
|
267,500 | 4,184 | 1,921 | 6,105 | ||||||||||||||||||||||||||||
|
Issuance
of treasury stock for pension plans
|
250,000 | 3,536 | 1,796 | 5,332 | ||||||||||||||||||||||||||||
|
Issuance
of treasury stock under 401(k) plan
|
17,086 | 237 | 123 | 360 | ||||||||||||||||||||||||||||
|
Balance
December 31, 2007
|
34,183,484 | 30 | 303,908 | 29,012 | (29,384 | ) | 0 | (31,044 | ) | 272,522 | ||||||||||||||||||||||
|
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||||||
|
Net
income
|
13,337 | 13,337 | ||||||||||||||||||||||||||||||
|
Noncash
Titan Europe Plc charge
|
14,249 | 14,249 | ||||||||||||||||||||||||||||||
|
Pension
liability adjustments, net of tax
|
(17,964 | ) | (17,964 | ) | ||||||||||||||||||||||||||||
|
Comprehensive
income
|
9,622 | |||||||||||||||||||||||||||||||
|
Dividends
paid on common stock
|
(623 | ) | (623 | ) | ||||||||||||||||||||||||||||
|
Noncash
Titan Europe Plc charge
|
(10,471 | ) | (10,471 | ) | ||||||||||||||||||||||||||||
|
Cash
paid for fractional shares resulting from stock split
|
(70 | ) | (70 | ) | ||||||||||||||||||||||||||||
|
Exercise
of stock options
|
313,463 | 5,389 | 2,278 | 7,667 | ||||||||||||||||||||||||||||
|
Issuance
of treasury stock for funding contractual obligations on employee
contracts
|
512,640 | 898 | 4,603 | (5,501 | ) | 0 | ||||||||||||||||||||||||||
|
Issuance
of treasury stock under 401(k) plan
|
22,097 | 370 | 171 | 541 | ||||||||||||||||||||||||||||
|
Balance
December 31, 2008
|
#35,031,684 | $ | 30 | $ | 300,024 | $ | 41,726 | $ | (22,332 | ) | $ | (5,501 | ) | $ | (34,759 | ) | $ | 279,188 | ||||||||||||||
See
accompanying Notes to Consolidated Financial Statements.
F-5
TITAN
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(All
amounts in thousands)
|
Year
ended December 31,
|
||||||||||||
|
Cash
flows from operating activities:
|
2008
|
2007
|
2006
|
|||||||||
|
Net
income (loss)
|
$ | 13,337 | $ | (7,247 | ) | $ | 5,144 | |||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||||
|
provided
by operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
30,368 | 28,620 | 26,850 | |||||||||
|
Deferred
income tax provision
|
13,987 | 1,995 | 2,597 | |||||||||
|
Noncash
Titan Europe Plc charge
|
24,504 | 0 | 0 | |||||||||
|
Noncash
convertible debt conversion charge
|
0 | 13,376 | 0 | |||||||||
|
Excess
tax benefit from stock options exercised
|
(4,131 | ) | 0 | (646 | ) | |||||||
|
Issuance
of treasury stock under 401(k) plan
|
541 | 360 | 246 | |||||||||
|
(Increase)
decrease in assets:
|
||||||||||||
|
Accounts
receivable
|
(28,137 | ) | (24,512 | ) | (26,770 | ) | ||||||
|
Inventories
|
(19,258 | ) | 26,556 | (19,509 | ) | |||||||
|
Prepaid
and other current assets
|
(3,823 | ) | (1,738 | ) | (3,675 | ) | ||||||
|
Other
assets
|
575 | (1,566 | ) | (3,525 | ) | |||||||
|
Increase
(decrease) in liabilities:
|
||||||||||||
|
Accounts
payable
|
21,555 | 18,108 | 1,449 | |||||||||
|
Other
current liabilities
|
6,393 | 16,668 | 13,443 | |||||||||
|
Other
liabilities
|
(4,741 | ) | 5,373 | (898 | ) | |||||||
|
Net
cash provided by (used for) operating activities
|
51,170 | 75,993 | (5,294 | ) | ||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital
expenditures
|
(79,953 | ) | (38,048 | ) | (8,282 | ) | ||||||
|
Acquisition
of off-the-road (OTR) assets
|
0 | (8,900 | ) | (44,642 | ) | |||||||
|
Other
|
104 | 532 | 198 | |||||||||
|
Net
cash used for investing activities
|
(79,849 | ) | (46,416 | ) | (52,726 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from borrowings
|
0 | 0 | 200,000 | |||||||||
|
Payment
on debt
|
0 | (10,164 | ) | (11,995 | ) | |||||||
|
Proceeds
(payment) on revolving credit facility, net
|
25,000 | 0 | (99,100 | ) | ||||||||
|
Proceeds
from exercise of stock options
|
3,536 | 6,631 | 5,407 | |||||||||
|
Excess
tax benefit from stock options exercised
|
4,131 | 0 | 646 | |||||||||
|
Payment
of financing fees
|
(70 | ) | (625 | ) | (3,725 | ) | ||||||
|
Dividends
paid
|
(585 | ) | (506 | ) | (393 | ) | ||||||
|
Net
cash provided by (used for) financing activities
|
32,012 | (4,664 | ) | 90,840 | ||||||||
|
Net
increase in cash and cash equivalents
|
3,333 | 24,913 | 32,820 | |||||||||
|
Cash
and cash equivalents, beginning of year
|
58,325 | 33,412 | 592 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 61,658 | $ | 58,325 | $ | 33,412 | ||||||
See
accompanying Notes to Consolidated Financial Statements.
F-6
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.
Stock
split
In June
2008, Titan’s Board of Directors approved a five-for-four stock split. Titan
executed a five-for-four stock split that became effective August 15, 2008, for
stockholders of record on July 31, 2008. The Company gave five shares
for every four shares held as of the record date. Stockholders
received one additional share for every four shares owned as of the record date
and received cash in lieu of fractional shares. All share and per
share data, except shares authorized, have been adjusted to reflect the effect
of the stock split for all periods presented.
Inventories
Inventories
are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method in 2008 for approximately 78% of
inventories and the last-in, first-out (LIFO) method for approximately 22% 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.
Interest
is capitalized on fixed asset projects which are constructed over a period of
time. The amount of interest capitalized is determined by applying a
weighted average interest rate to the average amount of accumulated expenditures
for the asset during the period. The interest rate used is based on
the rates applicable to borrowings outstanding during the
period.
F-7
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred
financing costs
Deferred
financing costs are costs incurred in connection with the Company’s revolving
credit facility and senior unsecured notes. 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. Amortization of deferred financing costs for the 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 senior
unsecured notes are the only significant financial instrument of the Company
with a fair value different from the recorded value. At December 31,
2008, the fair value of the senior unsecured notes, based on market prices
obtained through independent pricing sources, was approximately $147 million,
compared to a carrying value of $200 million.
Available-for-sale
securities
The
Company has an investment in Titan Europe Plc that was valued at $2.6 million as
of December 31, 2008, representing a 17.2% ownership position, at that
time. 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. Declared dividends on this investment are recorded in
income as a component of other income. See Note 7 for additional
information.
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 2008, 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, 2008, 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, the Company’s
computation showed no impairment at December 31, 2008. See Note 8 for
additional information.
F-8
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 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 (SG&A) expense is comprised primarily of sales
commissions, marketing expense, selling and administrative wages, 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
$3.5 million, $1.7 million and $1.3 million for the years of 2008, 2007 and
2006, respectively.
Advertising
Advertising
expenses are included in SG&A expense and are expensed as
incurred. Advertising costs were approximately $2 million for each of
the years ended December 31, 2008 and 2007, and less than $1 million for the
year ended December 31, 2006.
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. See Note 11.
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.
Cash
equivalents
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 $16.6 million, $10.2 million and $15.6 million for interest in
2008, 2007 and 2006, respectively.
F-9
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Income
taxes paid
Titan
paid $8.0 million, $2.4 million and $0.2 million for income taxes in 2008, 2007
and 2006, 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, 2008, the Company has three stock-based compensation plans, which
are described in Note 22. The
Company granted no stock options in 2008, 2007 or 2006.
Reclassification
Certain
amounts from prior years have been reclassified to conform to the current year’s
presentation.
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
Statement
of Financial Accounting Standards Number 141 (revised 2007)
In
December 2007, SFAS No. 141 (revised 2007), “Business Combinations,” was
issued. This statement requires an acquirer to recognize assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. This
statement is effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The Company does not expect the adoption
of this statement to have a material impact on its consolidated financial
position, results of operations and cash flows.
Statement
of Financial Accounting Standards Number 160
In
December 2007, SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements,” was issued. This statement establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008. The Company does not expect the adoption of this statement to
have a material impact on its consolidated financial position, results of
operations and cash flows.
F-10
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
2.
|
ACQUISITION
OF 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, made in the third quarter of 2007, 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 certain 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 |
Pro
forma financial information
The
following unaudited pro forma financial information gives effect to the
acquisition of Continental’s OTR assets as if the acquisition had taken place on
January 1, 2006. The pro forma information for the Bryan, Ohio,
facility was derived from a carve-out of Continental’s OTR historical accounting
records.
Pro forma
information for the year (in
thousands, except per share data):
|
2006
|
||||
|
Net
sales
|
$ | 761,796 | ||
|
Income
before income taxes
|
21,786 | |||
|
Net
income
|
13,072 | |||
|
Diluted
earnings per share *
|
.49 | |||
*
Adjusted to reflect the five-for-four stock split that took place in
2008.
The pro
forma information is presented for illustrative purposes only and may not be
indicative of the results that would have been obtained had the acquisition
actually occurred on January 1, 2006, nor is it necessarily indicative of
Titan’s future consolidated results of operations or financial
position. No pro forma information is presented for 2008 or 2007 as
the acquisition was included in the consolidated results for the full
year.
F-11
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
3.
|
ACCOUNTS
RECEIVABLE
|
Accounts
receivable at December 31, 2008 and 2007, consisted of the following (in thousands):
|
2008
|
2007
|
|||||||
|
Accounts
receivable
|
$ | 133,170 | $ | 103,652 | ||||
|
Allowance
for doubtful accounts
|
(6,639 | ) | (5,258 | ) | ||||
|
Accounts
receivable, net
|
$ | 126,531 | $ | 98,394 | ||||
The
Company had net accounts receivable of $126.5 million and $98.4 million at
December 31, 2008 and 2007, respectively. These amounts are net of
allowance for doubtful accounts of $6.6 million and $5.3 million for the years
ended 2008 and 2007, respectively.
|
4.
|
INVENTORIES
|
Inventories
at December 31, 2008 and 2007, consisted of the following (in thousands):
|
2008
|
2007
|
|||||||
|
Raw
material
|
$ | 73,927 | $ | 50,368 | ||||
|
Work-in-process
|
26,820 | 21,533 | ||||||
|
Finished
goods
|
56,488 | 61,880 | ||||||
| 157,235 | 133,781 | |||||||
|
Adjustment
to LIFO basis
|
(9,929 | ) | (5,733 | ) | ||||
| $ | 147,306 | $ | 128,048 | |||||
The
Company had inventories of $147.3 million and $128.0 million at December 31,
2008 and 2007, respectively. Included in the above inventory balances
at year-end 2008 and 2007 are reserves for slow-moving and obsolete inventory of
$3.8 million and $4.7 million, respectively.
|
5.
|
PREPAID
AND OTHER CURRENT ASSETS
|
Prepaid
and other current assets at December 31, 2008 and 2007, consisted of the
following (in
thousands):
|
2008
|
2007
|
|||||||
|
Prepaid
supplies
|
$ | 12,436 | $ | 10,023 | ||||
|
Other
|
9,226 | 7,816 | ||||||
| $ | 21,662 | $ | 17,839 | |||||
Prepaid
and other current assets consist primarily of prepaid supplies, which were $12.4
million and $10.0 million at December 31, 2008 and 2007,
respectively.
F-12
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
6.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property,
plant and equipment at December 31, 2008 and 2007, consisted of the following
(in
thousands):
|
2008
|
2007
|
|||||||
|
Land
and improvements
|
$ | 3,343 | $ | 3,098 | ||||
|
Buildings
and improvements
|
99,650 | 78,462 | ||||||
|
Machinery
and equipment
|
318,327 | 276,326 | ||||||
|
Tools,
dies and molds
|
62,856 | 53,873 | ||||||
|
Construction-in-process
|
37,536 | 31,801 | ||||||
| 521,712 | 443,560 | |||||||
|
Less
accumulated depreciation
|
(273,270 | ) | (247,482 | ) | ||||
| $ | 248,442 | $ | 196,078 | |||||
Depreciation
on fixed assets for the years 2008, 2007 and 2006 totaled $27.5 million, $26.1
million, and $24.3 million, respectively.
|
7.
|
INVESTMENT
IN TITAN EUROPE
|
Investment
in Titan Europe Plc at December 31, 2008 and 2007, consisted of the following
(in
thousands):
|
2008
|
2007
|
|||||||
|
Investment
in Titan Europe Plc
|
$ | 2,649 | $ | 34,535 | ||||
The
Company owned a 17.2% ownership 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.
The fair
value of the Company’s investment in Titan Europe Plc was $2.6 million and $34.5
million at December 31, 2008 and 2007, respectively. Titan Europe is
publicly traded on the AIM market in London, England. The December
31, 2008, fair value of $2.6 million was below the Company’s cost basis of $40.3
million. The Company recorded an other than temporary impairment
charge of $37.7 million at year end 2008. The impairment charge was
due to a substantial decline in Titan Europe Plc’s publicly quoted price on the
AIM market in London, England at year end 2008.
Cash dividends received from Titan Europe Plc were $1.7 million, $1.8 million and $1.3 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Subsequent
Event
In
January 2009, the Company purchased additional shares of Titan Europe Plc,
resulting in a 22.9% ownership position. As a result of this higher
ownership position, the Company will account for its interest in Titan Europe
Plc as an equity method investment in accordance with APB 18, “The Equity Method
of Accounting for Investments in Common Stock,” going forward.
F-13
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
8.
|
GOODWILL
|
The
carrying amount of goodwill at December 31, 2008 and 2007, consisted of the
following (in
thousands):
|
2008
|
2007
|
|||||||
|
Agricultural
segment
|
$ | 6,912 | $ | 6,912 | ||||
|
Earthmoving/construction
segment
|
3,552 | 3,552 | ||||||
|
Consumer
segment
|
1,238 | 1,238 | ||||||
| $ | 11,702 | $ | 11,702 | |||||
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, the Company’s
computation showed no impairment at December 31, 2008. There can be
no assurance that future goodwill tests will not result in an impairment
charge.
|
9.
|
OTHER
ASSETS
|
Other
assets at December 31, 2008 and 2007, consisted of the following (in thousands):
|
2008
|
2007
|
|||||||
|
Contractual
obligations
|
$ | 4,426 | $ | 6,277 | ||||
|
Deferred
financing
|
3,260 | 4,897 | ||||||
|
Other
receivable
|
2,400 | 2,700 | ||||||
|
Other
|
5,448 | 6,541 | ||||||
| $ | 15,534 | $ | 20,415 | |||||
The
contractual obligations asset of $4.4 million and $6.3 million at December 31,
2008 and 2007, respectively, represents assets held in trusts to provide
contractual obligations to certain executive officers that are due upon
retirement or voluntary termination of employment.
|
10.
|
OTHER
CURRENT LIABILITIES
|
Other
current liabilities at December 31, 2008 and 2007, consisted of the following
(in
thousands):
|
2008
|
2007
|
|||||||
|
Wages
and commissions
|
$ | 11,765 | $ | 10,850 | ||||
|
Accrued
interest
|
7,554 | 7,487 | ||||||
|
Warranty
|
7,488 | 5,854 | ||||||
|
Insurance
|
6,161 | 4,250 | ||||||
|
Utilities
|
3,103 | 3,599 | ||||||
|
Other
|
10,017 | 11,748 | ||||||
| $ | 46,088 | $ | 43,788 | |||||
Other
current liabilities were $46.1 million and $43.8 million at December 31, 2008
and 2007, respectively.
F-14
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
11.
|
WARRANTY
COSTS
|
Changes
in the warranty liability consisted of the following (in thousands):
|
2008
|
2007
|
|||||||
|
Warranty
liability, January 1
|
$ | 5,854 | $ | 4,688 | ||||
|
Provision
for warranty liabilities
|
13,567 | 8,901 | ||||||
|
Warranty
payments made
|
(11,933 | ) | (7,735 | ) | ||||
|
Warranty
liability, December 31
|
$ | 7,488 | $ | 5,854 | ||||
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. The higher warranty
provision in 2008 was partially due to the record sales
levels. Warranty accruals are included as a component of other
current liabilities on the Consolidated Balance Sheets.
|
12.
|
OTHER
LONG-TERM LIABILITIES
|
Other
long-term liabilities at December 31, 2008 and 2007, consisted of the following
(in
thousands):
|
2008
|
2007
|
|||||||
|
Accrued
pension liabilities
|
$ | 29,291 | $ | 2,092 | ||||
|
Accrued
employment liabilities
|
7,218 | 11,726 | ||||||
|
Other
|
2,450 | 2,331 | ||||||
| $ | 38,959 | $ | 16,149 | |||||
Accrued
employment liabilities includes liabilities for contractual and performance
obligations for certain executive officers of approximately $4 million and
approximately $8 million for December 31, 2008 and 2007,
respectively.
|
13.
|
REVOLVING
CREDIT FACILITY AND LONG-TERM DEBT
|
Long-term
debt at December 31, 2008 and 2007, consisted of the following (in thousands):
|
2008
|
2007
|
|||||||
|
Senior
unsecured notes
|
$ | 200,000 | $ | 200,000 | ||||
|
Revolving
credit facility
|
25,000 | 0 | ||||||
| 225,000 | 200,000 | |||||||
|
Less
amounts due within one year
|
25,000 | 0 | ||||||
| $ | 200,000 | $ | 200,000 | |||||
Aggregate maturities of long-term debt
are as follows (in
thousands):
|
2009
|
$ | 25,000 | ||
|
2010
|
0 | |||
|
2011
|
0 | |||
|
2012
|
200,000 | |||
|
Thereafter
|
0 | |||
| $ | 225,000 |
F-15
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Senior
unsecured notes
The
Company’s $200 million 8% senior unsecured notes are due January
2012.
Revolving
credit facility
The
Company’s $250 million revolving credit facility (credit facility) with agent
Bank of America has an October 2009 termination date and is collateralized by a
first priority security interest in certain assets of Titan and its domestic
subsidiaries. At December 31, 2008, any borrowings under the credit
facility would have borne interest at a floating rate of prime rate plus 0% to
1% or LIBOR plus 1% to 2%.
Cash
borrowings under this credit facility were $25.0 million and outstanding letters
of credit on the facility were $5.0 million at December 31, 2008, leaving $220.0
million of unused availability on the credit facility. The weighted
average interest rate on the Company’s borrowings outstanding under the credit
facility was approximately 3¼% as of December 31, 2008.
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, 2008.
Recent
development - Revolving credit facility amendment & restatement
On
January 30, 2009, Titan International, Inc. amended and restated its credit
facility with Bank of America, N.A. The amendment included a
multi-year extension that extended the credit facility termination date to
January 2012 from the previous October 2009 date. The amendment created an
accordion feature within the credit facility that set the initial loan
availability at $150 million with the ability to request increases up to a
maximum availability of $250 million. The amendment adjusted the borrowing
rates within a pricing grid that includes a minimum 1½% LIBOR rate.
|
14.
|
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
|
Accumulated
other comprehensive income (loss) consisted of the following (in thousands):
|
Currency
Translation
Adjustments
|
Unrealized
Gain
(Loss) on
Investments
|
Unrecognized
Losses
and
Prior
Service
Cost
|
Total
|
|||||||||||||
|
Balance
at January 1, 2007
|
$ | (1,183 | ) | $ | 6,126 | $ | (16,405 | ) | $ | (11,462 | ) | |||||
|
Unrealized
loss on investment, net of tax of $10,971
|
0 | (20,375 | ) | 0 | (20,375 | ) | ||||||||||
|
Defined
benefit pension plan entries:
|
||||||||||||||||
|
Plan
acquisition, net of tax of $481
|
0 | 0 | 785 | 785 | ||||||||||||
|
Unrecognized
prior service cost, net of tax of $53
|
0 | 0 | 84 | 84 | ||||||||||||
|
Unrecognized
net loss, net of tax of $26
|
0 | 0 | (42 | ) | (42 | ) | ||||||||||
|
Unrecognized
deferred tax liability, net of tax of $22
|
0 | 0 | (34 | ) | (34 | ) | ||||||||||
|
Balance
at December 31, 2007
|
(1,183 | ) | (14,249 | ) | (15,612 | ) | (31,044 | ) | ||||||||
|
Noncash
Titan Europe Plc charge
|
0 | 14,249 | 0 | 14,249 | ||||||||||||
|
Defined
benefit pension plan entries:
|
||||||||||||||||
|
Unrecognized
prior service cost, net of tax of $52
|
0 | 0 | 85 | 85 | ||||||||||||
|
Unrecognized
net loss, net of tax of $11,041
|
0 | 0 | (18,014 | ) | (18,014 | ) | ||||||||||
|
Unrecognized
deferred tax liability, net of tax of $21
|
0 | 0 | (35 | ) | (35 | ) | ||||||||||
|
Balance
at December 31, 2008
|
$ | (1,183 | ) | $ | 0 | $ | (33,576 | ) | $ | (34,759 | ) | |||||
F-16
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
15.
|
STOCKHOLDERS’
EQUITY
|
The
Company is authorized by the Board of Directors to repurchase up to 2.5 million
common shares subject to debt agreement covenants. The Company
repurchased no Titan common shares in 2008, 2007, or 2006. The
Company has no plans at this time to repurchase any Titan common
stock. Titan paid cash dividends of $.018 per share of common stock
for 2008 and $.016 per share for common stock for 2007 and
2006. Dividends paid totaled $0.6 million, $0.5 million and $0.4
million for 2008, 2007 and 2006, respectively.
In March
2007, the Company converted 100% of the 5.25% senior unsecured convertible notes
due 2009 into Titan common stock at an increased conversion
rate. The exchange resulted in a decrease in treasury stock of
$59.0 million and an increase to additional paid-in-capital of approximately
$35.2 million. Stockholder’s equity increased by $80.9 million in
total as a result of this exchange. See Note 18 for additional
information.
|
16.
|
FAIR
VALUE MEASUREMENTS
|
In
September 2006, 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. FASB Staff Position (FSP) 157-2 amended SFAS No. 157 to
delay the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except for items that are measured at fair value on a
recurring basis, to fiscal years beginning after November 15, 2008.
The
adoption of SFAS No. 157 for financial assets and financial liabilities,
effective January 1, 2008, did not have a material impact on Titan’s
consolidated financial position, results of operations or cash
flows. The Company is evaluating the effect the adoption of SFAS No.
157 for nonfinancial assets and nonfinancial liabilities will have on its
consolidated financial position, results of operations and cash
flows.
SFAS No.
157 establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: Level 1
– defined as quoted prices in active markets for identical instruments; Level 2
– defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and Level 3 – defined as unobservable inputs
in which little or no market data exists, therefore requiring an entity to
develop its own assumptions.
Assets and liabilities measured at fair
value on a recurring basis consisted of the following (in thousands):
|
Fair Value Measurements as of December 31,
2008
|
||||||||||||||||
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
|
Investments
for contractual obligations
|
$ | 4,426 | $ | 4,426 | $ | 0 | $ | 0 | ||||||||
|
Investment
in Titan Europe Plc
|
2,649 | 2,649 | 0 | 0 | ||||||||||||
|
Total
|
$ | 7,075 | $ | 7,075 | $ | 0 | $ | 0 | ||||||||
|
17.
|
ROYALTY
EXPENSE
|
Royalty
expense consisted of the following (in thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Royalty
expense
|
$ | 9,242 | $ | 6,155 | $ | 5,001 | ||||||
The
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 under the Goodyear name. Royalty
expenses recorded for the years ended December 31, 2008, 2007 and 2006, were
$9.2 million, $6.2 million and $5.0 million, respectively.
F-17
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
18.
|
NONCASH
CONVERTIBLE DEBT CONVERSION CHARGE
|
Noncash
convertible debt conversion charge consisted of the following (in thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Noncash
convertible debt charge
|
$ | 0 | $ | 13,376 | $ | 0 | ||||||
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
“Offer”). Per the Offer, each $1,000 principal amount of notes was
convertible into 81.0000 shares of common stock, which is equivalent to a
conversion price of approximately $12.35 per share.
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 February
2007. In March 2007, the Company announced 100% acceptance of the
conversion offer and the $81.2 million of accepted notes were converted into
6,577,200 shares of Titan common stock.
The
Company recognized a noncash charge of $13.4 million in connection with this
exchange in accordance with SFAS No. 84, “Induced Conversions of Convertible
Debt.” This charge does not reflect $1.0 million of interest
previously accrued on the notes. The shares issued for the conversion
were issued out of treasury shares. The exchange resulted in a
decrease in treasury stock of $59.0 million and an increase to additional
paid-in capital of approximately $35.2 million. Stockholder’s equity
increased by $80.9 million in total as a result of this exchange.
|
19.
|
OTHER
INCOME, NET
|
Other
income consisted of the following (in thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Dividend
income – Titan Europe Plc
|
$ | 1,711 | $ | 1,768 | $ | 1,281 | ||||||
|
Interest
income
|
1,352 | 2,717 | 1,681 | |||||||||
|
Other
(expense) income
|
(554 | ) | (1,121 | ) | 602 | |||||||
| $ | 2,509 | $ | 3,364 | $ | 3,564 | |||||||
Other
income recorded for the years ended December 31, 2008, 2007 and 2006, was $2.5
million, $3.4 million and $3.6 million, respectively.
F-18
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
20.
|
INCOME
TAXES
|
Income
(loss) before income taxes, consisted of the following (in thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Domestic
|
$ | 21,727 | $ | (6,306 | ) | $ | 5,310 | |||||
|
Foreign
|
1,283 | 2,422 | 3,264 | |||||||||
| $ | 23,010 | $ | (3,884 | ) | $ | 8,574 | ||||||
The
provision (benefit) for income taxes, was as follows (in thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | 7,814 | $ | 562 | $ | 120 | ||||||
|
State
|
34 | 547 | 475 | |||||||||
|
Foreign
|
1,031 | 1,574 | 183 | |||||||||
| 8,879 | 2,683 | 778 | ||||||||||
|
Deferred
|
||||||||||||
|
Federal
|
811 | 2,725 | 2,442 | |||||||||
|
State
|
(17 | ) | 408 | 210 | ||||||||
|
Foreign
|
0 | (2,453 | ) | 0 | ||||||||
| 794 | 680 | 2,652 | ||||||||||
|
Provision
for income taxes
|
$ | 9,673 | $ | 3,363 | $ | 3,430 | ||||||
The
provision 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:
|
2008
|
2007
|
2006
|
||||||||||
|
Statutory
U.S. federal tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Nondeductible
debt conversion charge
|
0.0 | (120.6 | ) | 0.0 | ||||||||
|
Irish
capital gains tax
|
0.0 | 29.3 | 0.0 | |||||||||
|
Repatriation
of foreign earnings
|
1.9 | (29.2 | ) | 11.6 | ||||||||
|
Foreign
taxes, net
|
(1.9 | ) | 18.8 | (12.0 | ) | |||||||
|
State
taxes, net
|
4.8 | (16.0 | ) | 6.2 | ||||||||
|
Other,
net
|
2.2 | (3.9 | ) | (0.8 | ) | |||||||
|
Effective
tax rate
|
42.0 | % | (86.6 | )% | 40.0 | % | ||||||
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-19
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, 2008 and 2007,
are as follows (in thousands):
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Unrealized
loss on available-for-sale security
|
$ | 13,194 | $ | 2,034 | ||||
|
Pension
|
11,130 | 529 | ||||||
|
Employee
benefits and related costs
|
4,044 | 4,197 | ||||||
|
Warranty
|
2,862 | 2,224 | ||||||
|
Allowance
for bad debts
|
2,523 | 1,998 | ||||||
|
Net
operating loss carryforwards
|
2,004 | 7,062 | ||||||
|
Inventory
|
1,970 | 1,417 | ||||||
|
EPA
reserve
|
1,121 | 1,201 | ||||||
|
Other
|
5,396 | 7,043 | ||||||
|
Deferred
tax assets
|
44,244 | 27,705 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Fixed
assets
|
(24,946 | ) | (16,590 | ) | ||||
|
Deferred
tax liabilities
|
(24,946 | ) | (16,590 | ) | ||||
|
Net
deferred tax asset
|
$ | 19,298 | $ | 11,115 | ||||
The
Company recorded an income tax expense of $9.7 million, $3.4 million and $3.4
million for the years ended December 31, 2008, 2007 and 2006,
respectively. The Company’s 2007 income tax expense and rate differs
from the amount of income tax determined by applying the U.S. Federal income tax
rate to pre-tax income primarily as a result of the $13.4 million noncash charge
taken in connection with the 100% conversion of the Company’s convertible
debt. This noncash debt charge is not deductible for income tax
purposes. The Company has various state net operating loss
carryforwards which are subject to expiration from 2019 to 2026.
The
Company has applied the provisions of FIN 48, “Accounting for Uncertainty in
Income Taxes”, for the year ended December 31, 2008. No adjustment
was made to retained earnings in adopting FIN 48 in 2007 and at this time the
Company does not expect any significant increases or decreases to its
unrecognized tax benefits within 12 months of this reporting
date. Titan has identified its federal tax return and its Illinois
state tax return as “major” tax jurisdictions. The Company is subject
to (i) federal tax examinations for periods 2004 to 2008 and (ii) Illinois state
income tax examinations for years 2005 to 2008.
F-20
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 (Titan Tire) and has a frozen defined benefit pension
plan covering certain employees of Titan Tire Corporation of Bryan
(Bryan). In October 2007, the Bryan pension plan, adopted at the date
of the Continental OTR asset acquisition and frozen from its inception, received
cash transfers of approximately $25 million from Continental Tire North
America’s frozen pension plan for the Bryan, Ohio, location. The
amount transferred into the frozen plan was actuarially approved to be a fully
funded plan. The Company also has a frozen contributory defined
benefit pension plan covering certain former eligible bargaining employees of
its Walcott, Iowa, facility (Walcott). Additionally, the Company maintains
a contributory defined benefit plan that covered former eligible bargaining
employees of Dico, Inc (Dico). 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, 2008, presentation are the Titan
Tire, Bryan and Walcott plans which have a projected benefit obligation of $90.5
million, exceeding the fair value of plan assets of $61.3 million at December
31, 2008. Included in the December 31, 2007, presentation are the
Titan Tire and Walcott plans which have a projected benefit obligation of $71.2
million, exceeding the fair value of plan assets of $69.1 million at December
31, 2007.
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, 2008, 2007 and
2006.
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, 2008 and 2007 (in thousands):
|
Change
in benefit obligation:
|
2008
|
2007
|
||||||
|
Benefit
obligation at beginning of year
|
$ | 95,362 | $ | 68,844 | ||||
|
Acquisition
|
0 | 23,948 | ||||||
|
Interest
cost
|
5,295 | 4,109 | ||||||
|
Actuarial
(gain) loss
|
(3,507 | ) | 4,898 | |||||
|
Benefits
paid
|
(6,605 | ) | (6,437 | ) | ||||
|
Benefit
obligation at end of year
|
$ | 90,545 | $ | 95,362 | ||||
|
Change
in plan assets:
|
||||||||
|
Fair
value of plan assets at beginning of year
|
$ | 94,499 | $ | 60,666 | ||||
|
Acquisition
|
0 | 25,214 | ||||||
|
Actual
return on plan assets
|
(26,323 | ) | 8,822 | |||||
|
Employer
contributions
|
225 | 6,234 | ||||||
|
Benefits
paid
|
(6,605 | ) | (6,437 | ) | ||||
|
Fair
value of plan assets at end of year
|
$ | 61,796 | $ | 94,499 | ||||
|
Unfunded
status at end of year
|
$ | (28,749 | ) | $ | (863 | ) | ||
|
Amounts
recognized in consolidated balance sheet:
|
||||||||
|
Noncurrent
assets
|
$ | 542 | $ | 1,229 | ||||
|
Noncurrent
liabilities
|
(29,291 | ) | (2,092 | ) | ||||
|
Net
amount recognized in the consolidated balance sheet
|
$ | (28,749 | ) | $ | (863 | ) | ||
F-21
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Amounts
recognized in accumulated other comprehensive loss:
|
||||||||
|
2008
|
2007
|
|||||||
|
Plan
acquisition
|
$ | 0 | $ | 1,266 | ||||
|
Unrecognized
prior service cost
|
(1,438 | ) | (1,574 | ) | ||||
|
Unrecognized
net loss
|
(52,886 | ) | (25,098 | ) | ||||
|
Deferred
tax effect of unrecognized items
|
20,748 | 9,794 | ||||||
|
Net
amount recognized in accumulated other comprehensive loss
|
$ | (33,576 | ) | $ | (15,612 | ) | ||
|
The
weighted-average assumptions used in the actuarial computation that
derived the benefit obligations at December 31 were as
follows:
|
2008
|
2007
|
||||||
|
Discount
rate
|
6.25 | % | 5.75 | % | ||||
|
Expected
long-term return on plan assets
|
8.50 | % | 8.50 | % | ||||
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, 2008, 2007 and
2006 (in
thousands):
|
Components
of net periodic benefit cost and other amounts
recognized in other comprehensive income
|
||||||||||||
|
Net
periodic benefit cost:
|
2008
|
2007
|
2006
|
|||||||||
|
Interest
cost
|
$ | 5,295 | $ | 4,109 | $ | 3,934 | ||||||
|
Assumed
return on assets
|
(7,828 | ) | (5,561 | ) | (4,673 | ) | ||||||
|
Amortization
of unrecognized prior service cost
|
137 | 137 | 137 | |||||||||
|
Amortization
of unrecognized deferred taxes
|
(56 | ) | (56 | ) | (56 | ) | ||||||
|
Amortization
of net unrecognized loss
|
1,588 | 1,593 | 1,848 | |||||||||
|
Net
periodic pension (income) cost
|
$ | (864 | ) | $ | 222 | $ | 1,190 | |||||
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 $4.3 million, $0.1 million 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, 2008, 2007 and
2006:
|
2008
|
2007
|
2006
|
||||||||||
|
Discount
rate
|
5.75 | % | 5.75 | % | 5.75 | % | ||||||
|
Expected
long-term return on plan assets
|
8.50 | % | 8.50 | % | 8.50 | % | ||||||
F-22
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
|
2008
|
2007
|
2009
|
|||||||||
|
U.S.
equities (a)
|
53 | % | 56 | % |
40%
- 80
|
% | ||||||
|
Fixed
income
|
34 | % | 27 | % | 20% - 50 | % | ||||||
|
Cash
and cash equivalents
|
8 | % | 6 | % | 0% - 20 | % | ||||||
|
International
equities (a)
|
5 | % | 11 | % | 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
risk. 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 Barclays Capital Aggregate Bond
Index. The U.S. equities asset category included the Company’s common
stock in the amount of $1.5 million (approximately two percent of total plan
assets) and $5.1 million (approximately five percent of total plan assets) at
December 31, 2008 and 2007, 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 2009 minimum pension funding calculations are not finalized, the Company
estimates those funding requirements will be approximately $1
million.
Projected
benefit payments from the plans as of December 31, 2008, are estimated as
follows (in thousands):
|
2009
|
$ | 6,490 | ||
|
2010
|
6,528 | |||
|
2011
|
6,597 | |||
|
2012
|
6,746 | |||
|
2013
|
6,872 | |||
|
2014-2018
|
35,936 |
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. 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 22,097
shares, 17,086 shares and 16,883 shares of treasury stock in connection with
this 401(k) plan during 2008, 2007 and 2006, respectively. Expenses
to the Company related to this common stock matching contribution were $0.6
million, $0.4 million and $0.3 million for 2008, 2007 and 2006.
The other
three 401(k) plans are for employees covered by collective bargaining
arrangements at (i) Titan Tire Corporation; (ii) Titan Tire Corporation of
Freeport; and (iii) Titan Tire Corporation of Bryan. These plans do
not include a Company matching contribution. Employees are fully vested
with respect to their contributions.
F-23
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
22.
|
STOCK
OPTION PLANS
|
The
Company accounts for stock options using SFAS 123(R), “Share-Based
Payment.” No stock-based compensation expense was recorded during
2008, 2007, or 2006. The Company granted no stock options during
2008, 2007 or 2006. All previously granted stock options were fully
vested before January 1, 2006.
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
2008, 2007 and 2006 no stock options were granted under this plan.
Stock
options outstanding and exercisable as of December 31, 2008, were as
follows:
|
Options Outstanding
|
Options Exercisable
|
||||||||||||||||||
|
Weighted
Average
|
Number
of
|
Weighted
Average
|
Number
of
|
Weighted
Average
|
|||||||||||||||
|
Price Range
|
Contractual Life
|
Options
|
Exercise Price
|
Options
|
Exercise Price
|
||||||||||||||
|
$
3.63 - $ 5.35
|
2.2
years
|
112,500 | $ | 4.45 | 112,500 | $ | 4.45 | ||||||||||||
| $ 6.40 - $ 7.60 |
0.2
years
|
170,000 | $ | 6.72 | 170,000 | $ | 6.72 | ||||||||||||
| $10.68 - $13.74 |
6.7
years
|
278,036 | $ | 12.20 | 278,036 | $ | 12.20 | ||||||||||||
| 560,536 | $ | 8.98 | 560,536 | $ | 8.98 | ||||||||||||||
F-24
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is a summary of activity in the stock option plans for 2006, 2007 and
2008:
|
Shares
Subject
to Option
|
Weighted-
Average
Exercise Price
|
|||||||
|
Outstanding,
January 1, 2006
|
1,934,388 | $ | 10.82 | |||||
|
Granted
|
0 | - | (a) | |||||
|
Exercised
|
(477,738 | ) | 11.32 | |||||
|
Canceled/Expired
|
(19,075 | ) | 12.80 | |||||
|
Outstanding,
December 31, 2006
|
1,437,575 | 10.63 | ||||||
|
Granted
|
0 | - | (a) | |||||
|
Exercised
|
(555,663 | ) | 11.94 | |||||
|
Canceled/Expired
|
(7,913 | ) | 10.50 | |||||
|
Outstanding,
December 31, 2007
|
873,999 | 9.81 | ||||||
|
Granted
|
0 | - | (a) | |||||
|
Exercised
|
(313,463 | ) | 11.29 | |||||
|
Canceled/Expired
|
0 | - | ||||||
|
Outstanding,
December 31, 2008
|
560,536 | $ | 8.98 | |||||
|
(a)
|
The
Company granted no stock options during 2006, 2007 or
2008.
|
The total
intrinsic value of options exercised in 2008 was $5.1 million. Cash
received from the exercise of stock options was $3.5 million for
2008. The tax benefit realized for the tax deductions from stock
options exercised was $4.1 million for 2008.
The total
intrinsic value of stock options exercised in 2007 was $5.2
million. Cash received from the exercise of options was $6.6 million
for 2007. There was no tax benefit realized for the tax deductions
from stock options exercised for 2007.
The total
intrinsic value of options exercised in 2006 was $1.7 million. Cash
received from the exercise of stock options was $5.4 million for
2006. The tax benefit realized for the tax deductions from stock
options exercised was $0.6 million for 2006.
The
Company currently uses treasury shares to satisfy any stock option
exercises. At December 31, 2008, the Company had 2.4 million shares
of treasury stock.
|
23.
|
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
unresolved and future legal claims, the Company cannot anticipate or predict the
material adverse effect on its consolidated financial condition, results of
operations or cash flows as a result of efforts to comply with or its
liabilities pertaining to legal judgments.
F-25
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
24.
|
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 $2.9 million, $3.0 million
and $3.2 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
At
December 31, 2008, future minimum rental commitments under noncancellable
operating leases with initial or remaining terms in excess of one year are as
follows (in
thousands):
|
2009
|
$ | 1,267 | ||
|
2010
|
930 | |||
|
2011
|
580 | |||
|
2012
|
39 | |||
|
Thereafter
|
0 | |||
|
Total
future minimum lease payments
|
$ | 2,816 |
|
25.
|
CONCENTRATION
OF CREDIT RISK
|
Net sales
to Deere & Company in Titan’s agricultural, earthmoving/construction and
consumer markets represented 22% of the Company’s consolidated revenues for
the year ended December 31, 2008, and 17% of the Company’s consolidated revenues
for the years ended December 31, 2007 and 2006. Net sales to CNH
Global N.V. in Titan’s three markets represented 12% of the Company’s
consolidated revenues for the year ended December 31, 2008, and 11% of the
Company’s consolidated revenues for the years ended December 31, 2007 and
2006. No other customer accounted for more than 10% of Titan’s net
sales in 2008, 2007 or 2006.
|
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 2008,
2007 and 2006, sales of Titan product to these companies were approximately $6.2
million, $5.1 million and $6.4 million, respectively. On other sales
referred to Titan from these manufacturing representative companies, commissions
were approximately $2.0 million, $1.8 million and $2.0 million during 2008, 2007
and 2006, 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 both December 31, 2008 and 2007, Titan had trade
receivables of approximately $0.2
million due from these companies.
|
27.
|
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 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.
F-26
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2008, 2007 and 2006 (in thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Revenues from external
customers
|
||||||||||||
|
Agricultural
|
$ | 729,895 | $ | 515,642 | $ | 421,096 | ||||||
|
Earthmoving/construction
|
281,008 | 277,206 | 183,357 | |||||||||
|
Consumer
|
25,797 | 44,173 | 75,001 | |||||||||
| $ | 1,036,700 | $ | 837,021 | $ | 679,454 | |||||||
|
Gross profit
|
||||||||||||
|
Agricultural
|
$ | 89,782 | $ | 35,742 | $ | 42,511 | ||||||
|
Earthmoving/construction
|
46,047 | 47,848 | 28,099 | |||||||||
|
Consumer
|
3,938 | 3,431 | 2,771 | |||||||||
|
Unallocated
corporate
|
(53 | ) | (2,890 | ) | (603 | ) | ||||||
| $ | 139,714 | $ | 84,131 | $ | 72,778 | |||||||
|
Income (loss) from
operations
|
||||||||||||
|
Agricultural
|
$ | 74,241 | $ | 25,324 | $ | 27,351 | ||||||
|
Earthmoving/construction
|
38,422 | 40,833 | 21,837 | |||||||||
|
Consumer
|
3,303 | 2,546 | 1,655 | |||||||||
|
Unallocated
corporate
|
(42,645 | ) | (43,865 | ) | (28,832 | ) | ||||||
|
Consolidated
income from operations
|
73,321 | 24,838 | 22,011 | |||||||||
|
Interest
expense
|
(15,122 | ) | (18,710 | ) | (17,001 | ) | ||||||
|
Noncash
Titan Europe Plc charge
|
(37,698 | ) | 0 | 0 | ||||||||
|
Noncash
convertible debt conversion charge
|
0 | (13,376 | ) | 0 | ||||||||
|
Other
income, net
|
2,509 | 3,364 | 3,564 | |||||||||
|
Income
(loss) before income taxes
|
$ | 23,010 | $ | (3,884 | ) | $ | 8,574 | |||||
|
Capital expenditures
|
||||||||||||
|
Agricultural
|
$ | 10,946 | $ | 11,267 | $ | 5,184 | ||||||
|
Earthmoving/construction
|
67,203 | 22,950 | 2,192 | |||||||||
|
Consumer
|
406 | 1,654 | 339 | |||||||||
|
Unallocated
corporate
|
1,398 | 2,177 | 567 | |||||||||
| $ | 79,953 | $ | 38,048 | $ | 8,282 | |||||||
|
Depreciation &
amortization
|
||||||||||||
|
Agricultural
|
$ | 16,004 | $ | 14,255 | $ | 15,324 | ||||||
|
Earthmoving/construction
|
10,831 | 10,330 | 7,402 | |||||||||
|
Consumer
|
594 | 1,320 | 1,409 | |||||||||
|
Unallocated
corporate
|
2,939 | 2,715 | 2,715 | |||||||||
| $ | 30,368 | $ | 28,620 | $ | 26,850 | |||||||
|
Total assets
|
||||||||||||
|
Agricultural
|
$ | 360,030 | $ | 257,005 | $ | 273,787 | ||||||
|
Earthmoving/construction
|
188,486 | 176,144 | 145,964 | |||||||||
|
Consumer
|
9,401 | 22,515 | 22,678 | |||||||||
|
Unallocated
corporate
|
96,865 | 134,831 | 142,697 | |||||||||
| $ | 654,782 | $ | 590,495 | $ | 585,126 | |||||||
F-27
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The table
below presents information by geographic area. Revenues from external
customers were determined based on the location of the selling
subsidiary. Geographic information as of and for the years ended
December 31, 2008, 2007 and 2006 was as follows (in thousands):
|
2008
|
United
States
|
Other
Countries
|
Consolidated
Totals
|
|||||||||
|
Revenues
from external customers
|
$ | 1,036,700 | $ | 0 | $ | 1,036,700 | ||||||
|
Long-lived
assets
|
260,144 | 0 | 260,144 | |||||||||
|
2007
|
||||||||||||
|
Revenues
from external customers
|
$ | 837,021 | $ | 0 | $ | 837,021 | ||||||
|
Long-lived
assets
|
207,780 | 0 | 207,780 | |||||||||
|
2006
|
||||||||||||
|
Revenues
from external customers
|
$ | 679,454 | $ | 0 | $ | 679,454 | ||||||
|
Long-lived
assets
|
196,318 | 0 | 196,318 | |||||||||
|
28.
|
RECENT
DEVELOPMENTS
|
Titan
Europe Plc additional share purchase
In
January 2009, the Company purchased additional shares of Titan Europe Plc,
resulting in a 22.9% ownership position. As a result of this higher
ownership position, the Company will account for its interest in Titan Europe
Plc as an equity method investment in accordance with APB 18, “The Equity Method
of Accounting for Investments in Common Stock,” going forward.
Revolving
credit facility amendment & restatement
On
January 30, 2009, Titan International, Inc. amended and restated its credit
facility with Bank of America, N.A. The amendment included a
multi-year extension that extended the credit facility termination date to
January 2012 from the previous October 2009 date. The amendment
created an accordion feature within the credit facility that set the initial
loan availability at $150 million with the ability to request increases up to a
maximum availability of $250 million. The amendment adjusted the
borrowing rates within a pricing grid that includes a minimum 1½% LIBOR
rate.
F-28
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
29.
|
EARNINGS
PER SHARE
|
Earnings
per share for 2008, 2007 and 2006, are (amounts in thousands, except share and
per share data):
|
2008
|
Net
income (loss)
|
Weighted-
average shares
|
Per
share
amount
|
|||||||||
|
Basic
earnings per share
|
$ | 13,337 | 34,409,754 | $ | .39 | |||||||
|
Effect
of stock options/trusts
|
0 | 428,474 | ||||||||||
|
Diluted
earnings per share
|
$ | 13,337 | 34,838,228 | $ | .38 | |||||||
|
2007
|
||||||||||||
|
Basic
and diluted loss per share (a)
|
$ | (7,247 | ) | 32,081,268 | $ | (.23 | ) | |||||
|
2006
|
||||||||||||
|
Basic
earnings per share
|
$ | 5,144 | 24,627,017 | $ | .21 | |||||||
|
Effect
of stock options
|
0 | 428,357 | ||||||||||
|
Diluted
earnings per share (b)
|
$ | 5,144 | 25,055,374 | $ | .21 | |||||||
|
(a)
|
The
effect of stock options has been excluded as they were
anti-dilutive. The weighted-average share amount excluded for
stock options totaled 555,162 shares. The effect of convertible
notes has not been included as they were anti-dilutive. The
weighted-average share amount excluded for convertible notes totaled
1,627,296 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 7,518,519
shares.
|
|
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
|
|||||||||||||||
|
2008
|
||||||||||||||||||||
|
Net
sales
|
$ | 253,525 | $ | 269,114 | $ | 255,463 | $ | 258,598 | $ | 1,036,700 | ||||||||||
|
Gross
profit
|
32,344 | 41,946 | 37,423 | 28,001 | 139,714 | |||||||||||||||
|
Net
income (loss)
|
8,134 | 13,306 | 10,303 | (18,406 | ) (c) | 13,337 | ||||||||||||||
|
Per
share amounts: (a)
|
||||||||||||||||||||
|
Basic
|
.24 | .39 | .30 | (.53 | ) (c) | .39 | ||||||||||||||
|
Diluted
|
.23 | .38 | .30 | (.53 | ) (c) | .38 | ||||||||||||||
|
2007
|
||||||||||||||||||||
|
Net
sales
|
$ | 226,278 | $ | 210,333 | $ | 195,472 | $ | 204,938 | $ | 837,021 | ||||||||||
|
Gross
profit
|
27,191 | 27,311 | 18,294 | 11,335 | 84,131 | |||||||||||||||
|
Net
(loss) income
|
(2,483 | ) (b) | 4,962 | (878 | ) | (8,848 | ) | (7,247 | ) | |||||||||||
|
Per
share amounts: (a)
|
||||||||||||||||||||
|
Basic
|
(.10 | ) (b) | .15 | (.03 | ) | (.26 | ) | (.23 | ) | |||||||||||
|
Diluted
|
(.10 | ) (b) | .14 | (.03 | ) | (.26 | ) | (.23 | ) | |||||||||||
|
(a)
|
As
a result of changes in outstanding share balances, year-end per share
amounts do not agree to the sum of the
quarters.
|
Adjusted
to reflect the five-for-four stock split that took place in 2008.
|
(b)
|
Noncash
convertible debt conversion charge of $13.4 million was included in the
quarter ended March 31, 2007.
|
|
(c)
|
Noncash
Titan Europe Plc charge of $24.5 million, net of tax, was included in the
quarter ended December 31,
2008.
|
F-29
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
31.
|
SUBSIDIARY
GUARANTOR FINANCIAL INFORMATION
|
The
Company’s $200 million 8% senior unsecured notes are guaranteed by each of
Titan’s current and future wholly owned domestic subsidiaries other than its
immaterial subsidiaries (subsidiaries with total assets less than $250,000 and
total revenues less than $250,000). The note guarantees are full and
unconditional, joint and several obligations of the guarantors. Non-guarantors
consist primarily of foreign subsidiaries of the Company, which are organized
outside the United States of America. The following condensed consolidating
financial statements are presented using the equity method of
accounting.
|
Consolidating
Condensed Statements of Operations
|
||||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||
|
Year Ended December 31,
2008
|
||||||||||||||||||||
|
Titan
|
Non-
|
|||||||||||||||||||
|
Intl.,
Inc.
|
Guarantor
|
Guarantor
|
||||||||||||||||||
|
(Parent)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
Net
sales
|
$ | 0 | $ | 1,036,700 | $ | 0 | $ | 0 | $ | 1,036,700 | ||||||||||
|
Cost
of sales
|
(922 | ) | 897,908 | 0 | 0 | 896,986 | ||||||||||||||
|
Gross
profit
|
922 | 138,792 | 0 | 0 | 139,714 | |||||||||||||||
|
Selling,
general and administrative expenses
|
20,349 | 36,724 | 78 | 0 | 57,151 | |||||||||||||||
|
Royalty
expense
|
0 | 9,242 | 0 | 0 | 9,242 | |||||||||||||||
|
(Loss)
income from operations
|
(19,427 | ) | 92,826 | (78 | ) | 0 | 73,321 | |||||||||||||
|
Interest
expense
|
(15,122 | ) | 0 | 0 | 0 | (15,122 | ) | |||||||||||||
|
Noncash
Titan Europe Plc charge
|
(37,698 | ) | 0 | 0 | 0 | (37,698 | ) | |||||||||||||
|
Other
income (expense)
|
832 | (33 | ) | 1,710 | 0 | 2,509 | ||||||||||||||
|
(Loss)
income before income taxes
|
(71,415 | ) | 92,793 | 1,632 | 0 | 23,010 | ||||||||||||||
|
(Benefit)
provision for income taxes
|
(30,024 | ) | 39,011 | 686 | 0 | 9,673 | ||||||||||||||
|
Equity
in earnings of subsidiaries
|
54,728 | 0 | 0 | (54,728 | ) | 0 | ||||||||||||||
|
Net
income
|
$ | 13,337 | $ | 53,782 | $ | 946 | $ | (54,728 | ) | $ | 13,337 | |||||||||
|
Year Ended December 31,
2007
|
||||||||||||||||||||
|
Titan
|
Non-
|
|||||||||||||||||||
|
Intl.,
Inc.
|
Guarantor
|
Guarantor
|
||||||||||||||||||
|
(Parent)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
Net
sales
|
$ | 0 | $ | 837,021 | $ | 0 | $ | 0 | $ | 837,021 | ||||||||||
|
Cost
of sales
|
1,905 | 750,985 | 0 | 0 | 752,890 | |||||||||||||||
|
Gross
(loss) profit
|
(1,905 | ) | 86,036 | 0 | 0 | 84,131 | ||||||||||||||
|
Selling,
general and administrative expenses
|
19,572 | 33,364 | 202 | 0 | 53,138 | |||||||||||||||
|
Royalty
expense
|
0 | 6,155 | 0 | 0 | 6,155 | |||||||||||||||
|
(Loss)
income from operations
|
(21,477 | ) | 46,517 | (202 | ) | 0 | 24,838 | |||||||||||||
|
Interest
expense
|
(18,707 | ) | (3 | ) | 0 | 0 | (18,710 | ) | ||||||||||||
|
Intercompany
interest income (expense)
|
11,472 | (12,324 | ) | 852 | 0 | 0 | ||||||||||||||
|
Noncash
convertible debt conversion charge
|
(13,376 | ) | 0 | 0 | 0 | (13,376 | ) | |||||||||||||
|
Other
income (expense)
|
1,925 | (333 | ) | 1,772 | 0 | 3,364 | ||||||||||||||
|
(Loss)
income before income taxes
|
(40,163 | ) | 33,857 | 2,422 | 0 | (3,884 | ) | |||||||||||||
|
(Benefit)
provision for income taxes
|
(10,423 | ) | 12,866 | 920 | 0 | 3,363 | ||||||||||||||
|
Equity
in earnings of subsidiaries
|
22,493 | 0 | 0 | (22,493 | ) | 0 | ||||||||||||||
|
Net
(loss) income
|
$ | (7,247 | ) | $ | 20,991 | $ | 1,502 | $ | (22,493 | ) | $ | (7,247 | ) | |||||||
F-30
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Consolidating
Condensed Statements of Operations
|
||||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||
|
Year Ended December 31,
2008
|
||||||||||||||||||||
|
Titan
|
Non-
|
|||||||||||||||||||
|
Intl.,
Inc.
|
Guarantor
|
Guarantor
|
||||||||||||||||||
|
(Parent)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
Net
sales
|
$ | 0 | $ | 1,036,700 | $ | 0 | $ | 0 | $ | 1,036,700 | ||||||||||
|
Cost
of sales
|
(922 | ) | 897,908 | 0 | 0 | 896,986 | ||||||||||||||
|
Gross
profit
|
922 | 138,792 | 0 | 0 | 139,714 | |||||||||||||||
|
Selling,
general and administrative expenses
|
20,349 | 36,724 | 78 | 0 | 57,151 | |||||||||||||||
|
Royalty
expense
|
0 | 9,242 | 0 | 0 | 9,242 | |||||||||||||||
|
(Loss)
income from operations
|
(19,427 | ) | 92,826 | (78 | ) | 0 | 73,321 | |||||||||||||
|
Interest
expense
|
(15,122 | ) | 0 | 0 | 0 | (15,122 | ) | |||||||||||||
|
Noncash
Titan Europe Plc charge
|
(37,698 | ) | 0 | 0 | 0 | (37,698 | ) | |||||||||||||
|
Other
income (expense)
|
832 | (33 | ) | 1,710 | 0 | 2,509 | ||||||||||||||
|
(Loss)
income before income taxes
|
(71,415 | ) | 92,793 | 1,632 | 0 | 23,010 | ||||||||||||||
|
(Benefit)
provision for income taxes
|
(30,024 | ) | 39,011 | 686 | 0 | 9,673 | ||||||||||||||
|
Equity
in earnings of subsidiaries
|
54,728 | 0 | 0 | (54,728 | ) | 0 | ||||||||||||||
|
Net
income
|
$ | 13,337 | $ | 53,782 | $ | 946 | $ | (54,728 | ) | $ | 13,337 | |||||||||
|
Consolidating
Condensed Balance Sheets
|
||||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||
|
December 31, 2008
|
||||||||||||||||||||
|
Titan
|
Non-
|
|||||||||||||||||||
|
Intl.,
Inc.
|
Guarantor
|
Guarantor
|
||||||||||||||||||
|
(Parent)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 59,011 | $ | 60 | $ | 2,587 | $ | 0 | $ | 61,658 | ||||||||||
|
Accounts
receivable
|
(127 | ) | 126,658 | 0 | 0 | 126,531 | ||||||||||||||
|
Inventories
|
0 | 147,306 | 0 | 0 | 147,306 | |||||||||||||||
|
Prepaid
and other current assets
|
17,117 | 16,573 | 14 | 0 | 33,704 | |||||||||||||||
|
Total current
assets
|
76,001 | 290,597 | 2,601 | 0 | 369,199 | |||||||||||||||
|
Property,
plant and equipment, net
|
6,160 | 242,282 | 0 | 0 | 248,442 | |||||||||||||||
|
Investment
in Titan Europe Plc
|
(37,698 | ) | 0 | 40,347 | 0 | 2,649 | ||||||||||||||
|
Investment
in subsidiaries
|
31,474 | 0 | 0 | (31,474 | ) | 0 | ||||||||||||||
|
Other
assets
|
15,842 | 18,650 | 0 | 0 | 34,492 | |||||||||||||||
|
Total
assets
|
$ | 91,779 | $ | 551,529 | $ | 42,948 | $ | (31,474 | ) | $ | 654,782 | |||||||||
|
Liabilities
and Stockholders’ Equity
|
||||||||||||||||||||
|
Short-term
debt
|
$ | 25,000 | $ | 0 | $ | 0 | $ | 0 | $ | 25,000 | ||||||||||
|
Accounts
payable
|
3,106 | 62,441 | 0 | 0 | 65,547 | |||||||||||||||
|
Other
current liabilities
|
10,548 | 34,540 | 1,000 | 0 | 46,088 | |||||||||||||||
|
Total current
liabilities
|
38,654 | 96,981 | 1,000 | 0 | 136,635 | |||||||||||||||
|
Long-term
debt
|
200,000 | 0 | 0 | 0 | 200,000 | |||||||||||||||
|
Other
long-term liabilities
|
3,943 | 35,016 | 0 | 0 | 38,959 | |||||||||||||||
|
Intercompany
accounts
|
(430,006 | ) | 419,738 | 10,268 | 0 | 0 | ||||||||||||||
|
Stockholders’
equity
|
279,188 | (206 | ) | 31,680 | (31,474 | ) | 279,188 | |||||||||||||
|
Total
liabilities and stockholders’ equity
|
$ | 91,779 | $ | 551,529 | $ | 42,948 | $ | (31,474 | ) | $ | 654,782 | |||||||||
F-31
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Consolidating
Condensed Balance Sheets
|
||||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||
|
December 31, 2007
|
||||||||||||||||||||
|
Titan
|
Non-
|
|||||||||||||||||||
|
Intl.,
Inc.
|
Guarantor
|
Guarantor
|
||||||||||||||||||
|
(Parent)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 57,285 | $ | 63 | $ | 977 | $ | 0 | $ | 58,325 | ||||||||||
|
Accounts
receivable
|
(458 | ) | 98,852 | 0 | 0 | 98,394 | ||||||||||||||
|
Inventories
|
0 | 128,048 | 0 | 0 | 128,048 | |||||||||||||||
|
Prepaid
and other current assets
|
26,898 | 16,100 | 0 | 0 | 42,998 | |||||||||||||||
|
Total current
assets
|
83,725 | 243,063 | 977 | 0 | 327,765 | |||||||||||||||
|
Property,
plant and equipment, net
|
2,291 | 193,787 | 0 | 0 | 196,078 | |||||||||||||||
|
Investment
in Titan Europe Plc
|
(5,812 | ) | 0 | 40,347 | 0 | 34,535 | ||||||||||||||
|
Investment
in subsidiaries
|
18,714 | 0 | 0 | (18,714 | ) | 0 | ||||||||||||||
|
Other
assets
|
12,256 | 19,861 | 0 | 0 | 32,117 | |||||||||||||||
|
Total
assets
|
$ | 111,174 | $ | 456,711 | $ | 41,324 | $ | (18,714 | ) | $ | 590,495 | |||||||||
|
Liabilities
and Stockholders’ Equity
|
||||||||||||||||||||
|
Accounts
payable
|
$ | 2,059 | $ | 41,933 | $ | 0 | $ | 0 | $ | 43,992 | ||||||||||
|
Other
current liabilities
|
10,456 | 33,347 | (15 | ) | 0 | 43,788 | ||||||||||||||
|
Total current
liabilities
|
12,515 | 75,280 | (15 | ) | 0 | 87,780 | ||||||||||||||
|
Long-term
debt
|
200,000 | 0 | 0 | 0 | 200,000 | |||||||||||||||
|
Other
long-term liabilities
|
22,931 | 7,262 | 0 | 0 | 30,193 | |||||||||||||||
|
Intercompany
accounts
|
(396,794 | ) | 386,883 | 9,911 | 0 | 0 | ||||||||||||||
|
Stockholders’
equity
|
272,522 | (12,714 | ) | 31,428 | (18,714 | ) | 272,522 | |||||||||||||
|
Total
liabilities and stockholders’ equity
|
$ | 111,174 | $ | 456,711 | $ | 41,324 | $ | (18,714 | ) | $ | 590,495 | |||||||||
|
Consolidating
Condensed Statements of Cash Flows
|
||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||
|
Year Ended December 31,
2008
|
||||||||||||||||
|
Titan
|
Non-
|
|||||||||||||||
|
Intl.,
Inc.
|
Guarantor
|
Guarantor
|
||||||||||||||
|
(Parent)
|
Subsidiaries
|
Subsidiaries
|
Consolidated
|
|||||||||||||
|
Net
cash (used for) provided by operating activities
|
$ | (25,759 | ) | $ | 75,319 | $ | 1,610 | $ | 51,170 | |||||||
|
Cash
flows from investing activities:
|
||||||||||||||||
|
Capital
expenditures
|
(4,534 | ) | (75,419 | ) | 0 | (79,953 | ) | |||||||||
|
Other, net
|
7 | 97 | 0 | 104 | ||||||||||||
|
Net cash used for investing
activities
|
(4,527 | ) | (75,322 | ) | 0 | (79,849 | ) | |||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||
|
Proceeds on revolving credit
facility
|
25,000 | 0 | 0 | 25,000 | ||||||||||||
|
Proceeds from exercise of stock
options
|
3,536 | 0 | 0 | 3,536 | ||||||||||||
|
Excess tax benefit from stock
options exercised
|
4,131 | 0 | 0 | 4,131 | ||||||||||||
|
Other, net
|
(655 | ) | 0 | 0 | (655 | ) | ||||||||||
|
Net cash provided by financing
activities
|
32,012 | 0 | 0 | 32,012 | ||||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
1,726 | (3 | ) | 1,610 | 3,333 | |||||||||||
|
Cash
and cash equivalents, beginning of year
|
57,285 | 63 | 977 | 58,325 | ||||||||||||
|
Cash
and cash equivalents, end of year
|
$ | 59,011 | $ | 60 | $ | 2,587 | $ | 61,658 | ||||||||
F-32
TITAN
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Consolidating
Condensed Statements of Cash Flows
|
||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||
|
Year Ended December 31,
2007
|
||||||||||||||||
|
Titan
|
Non-
|
|||||||||||||||
|
Intl.,
Inc.
|
Guarantor
|
Guarantor
|
||||||||||||||
|
(Parent)
|
Subsidiaries
|
Subsidiaries
|
Consolidated
|
|||||||||||||
|
Net
cash provided by operating activities
|
$ | 38,364 | $ | 36,775 | $ | 854 | $ | 75,993 | ||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||
|
Capital
expenditures
|
(1,402 | ) | (36,646 | ) | 0 | (38,048 | ) | |||||||||
|
Acquisition off-the-road (OTR)
assets
|
(8,900 | ) | 0 | 0 | (8,900 | ) | ||||||||||
|
Asset disposals
|
3 | 529 | 0 | 532 | ||||||||||||
|
Net cash used for investing
activities
|
(10,299 | ) | (36,117 | ) | 0 | (46,416 | ) | |||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||
|
Payment of debt
|
(9,500 | ) | (664 | ) | 0 | (10,164 | ) | |||||||||
|
Proceeds from exercise of stock
options
|
6,631 | 0 | 0 | 6,631 | ||||||||||||
|
Other, net
|
(1,131 | ) | 0 | 0 | (1,131 | ) | ||||||||||
|
Net cash used for financing
activities
|
(4,000 | ) | (664 | ) | 0 | (4,664 | ) | |||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
24,065 | (6 | ) | 854 | 24,913 | |||||||||||
|
Cash
and cash equivalents, beginning of year
|
33,220 | 69 | 123 | 33,412 | ||||||||||||
|
Cash
and cash equivalents, end of year
|
$ | 57,285 | $ | 63 | $ | 977 | $ | 58,325 | ||||||||
|
Year Ended December 31,
2006
|
||||||||||||||||
|
Titan
|
Non-
|
|||||||||||||||
|
Intl.,
Inc.
|
Guarantor
|
Guarantor
|
||||||||||||||
|
(Parent)
|
Subsidiaries
|
Subsidiaries
|
Consolidated
|
|||||||||||||
|
Net
cash (used for) provided by operating activities
|
$ | (69,433 | ) | $ | 64,500 | $ | (361 | ) | $ | (5,294 | ) | |||||
|
Cash
flows from investing activities:
|
||||||||||||||||
|
Acquisition off-the-road (OTR)
assets
|
0 | (44,642 | ) | 0 | (44,642 | ) | ||||||||||
|
Capital
expenditures
|
(390 | ) | (7,892 | ) | 0 | (8,282 | ) | |||||||||
|
Other, net
|
149 | 49 | 0 | 198 | ||||||||||||
|
Net cash used for investing
activities
|
(241 | ) | (52,485 | ) | 0 | (52,726 | ) | |||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||
|
Proceeds from
borrowings
|
200,000 | 0 | 0 | 200,000 | ||||||||||||
|
Payment of debt
|
0 | (11,995 | ) | 0 | (11,995 | ) | ||||||||||
|
Payment on revolving credit
facility, net
|
(99,100 | ) | 0 | 0 | (99,100 | ) | ||||||||||
|
Proceeds from exercise of stock
options
|
5,407 | 0 | 0 | 5,407 | ||||||||||||
|
Excess tax benefits from stock
options exercised
|
646 | 0 | 0 | 646 | ||||||||||||
|
Payment of financing
fees
|
(3,725 | ) | 0 | 0 | (3,725 | ) | ||||||||||
|
Dividends paid
|
(393 | ) | 0 | 0 | (393 | ) | ||||||||||
|
Net cash provided by (used for)
financing activities
|
102,835 | (11,995 | ) | 0 | 90,840 | |||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
33,161 | 20 | (361 | ) | 32,820 | |||||||||||
|
Cash
and cash equivalents, beginning of year
|
59 | 49 | 484 | 592 | ||||||||||||
|
Cash
and cash equivalents, end of year
|
$ | 33,220 | $ | 69 | $ | 123 | $ | 33,412 | ||||||||
F-33
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, 2008
|
||||||||||||||||
|
Reserve
deducted in the balance sheet from the assets to which it
applies
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 5,258,000 | $ | 1,489,000 | $ | (108,000 | ) | $ | 6,639,000 | |||||||
|
Year
ended December 31, 2007
|
||||||||||||||||
|
Reserve
deducted in the balance sheet from the assets to which it
applies
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 4,818,000 | $ | 461,000 | $ | (21,000 | ) | $ | 5,258,000 | |||||||
|
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 | |||||||
S-1