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TITAN INTERNATIONAL INC - Quarter Report: 2017 September (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
titancolora07.jpg

FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended: September 30, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12936

TITAN INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
36-3228472
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
2701 Spruce Street, Quincy, IL 62301
(Address of principal executive offices, including Zip Code)

(217) 228-6011
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer þ
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No þ

Indicate the number of shares of Titan International, Inc. outstanding: 59,713,184 shares common stock, $0.0001 par value, as of October 24, 2017.




TITAN INTERNATIONAL, INC.

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(All amounts in thousands, except per share data)
 
 
Three months ended

Nine months ended
 
September 30,

September 30,
 
2017

2016

2017

2016
 
 
 
 
 
 
 
 
Net sales
$
370,988

 
$
306,195

 
$
1,092,888

 
$
958,203

Cost of sales
331,323

 
271,275

 
969,932

 
851,268

Gross profit
39,665

 
34,920

 
122,956

 
106,935

Selling, general and administrative expenses
39,753

 
36,348

 
115,553

 
107,712

Research and development expenses
2,457

 
2,597

 
7,908

 
7,790

Royalty expense
2,596

 
2,285

 
7,739

 
6,688

Loss from operations
(5,141
)
 
(6,310
)
 
(8,244
)
 
(15,255
)
Interest expense
(7,537
)
 
(8,714
)
 
(22,578
)
 
(25,208
)
Foreign exchange gain
815

 
398

 
48

 
7,403

Other income
3,041

 
3,578

 
8,398

 
10,532

Loss before income taxes
(8,822
)
 
(11,048
)
 
(22,376
)
 
(22,528
)
Provision (benefit) for income taxes
2,396

 
(2,074
)
 
5,964

 
2,578

Net loss
(11,218
)
 
(8,974
)
 
(28,340
)
 
(25,106
)
Net income (loss) attributable to noncontrolling interests
800

 
(966
)
 
1,424

 
(1,099
)
Net loss attributable to Titan
(12,018
)
 
(8,008
)
 
(29,764
)
 
(24,007
)
   Redemption value adjustment
(882
)
 
(1,367
)
 
(3,981
)
 
(8,475
)
Net loss applicable to common shareholders
$
(12,900
)
 
$
(9,375
)
 
$
(33,745
)
 
$
(32,482
)
 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
$
(0.22
)
 
$
(0.17
)
 
$
(0.57
)
 
$
(0.60
)
Diluted
$
(0.22
)
 
$
(0.17
)
 
$
(0.57
)
 
$
(0.60
)
Average common shares and equivalents outstanding:
 
 
 

 
 
 
 

Basic
59,600

 
53,946

 
59,247

 
53,895

Diluted
59,600

 
53,946

 
59,247

 
53,895

 
 
 
 
 
 
 
 
Dividends declared per common share:
$
0.005

 
$
0.005

 
$
0.015

 
$
0.015

 
 








See accompanying Notes to Condensed Consolidated Financial Statements.

1



TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(All amounts in thousands)

 
Three months ended
 
September 30,
 
2017
 
2016
Net loss
$
(11,218
)
 
$
(8,974
)
Currency translation adjustment
14,015

 
(386
)
Pension liability adjustments, net of tax of $166 and $(126), respectively
180

 
465

Comprehensive income (loss)
2,977

 
(8,895
)
Net comprehensive income (loss) attributable to redeemable and noncontrolling interests
1,436

 
(679
)
Comprehensive income (loss) attributable to Titan
$
1,541

 
$
(8,216
)


 
Nine months ended
 
September 30,
 
2017
 
2016
Net loss
$
(28,340
)
 
$
(25,106
)
Currency translation adjustment
33,040

 
21,545

Pension liability adjustments, net of tax of $55 and $(430), respectively
1,902

 
1,200

Comprehensive income (loss)
6,602

 
(2,361
)
Net comprehensive income attributable to redeemable and noncontrolling interests
2,657

 
5,427

Comprehensive income (loss) attributable to Titan
$
3,945

 
$
(7,788
)


























See accompanying Notes to Condensed Consolidated Financial Statements.

2



TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share data)

 
September 30, 2017
 
December 31, 2016
 
 
 
(unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
155,675

 
$
147,827

  Certificates of deposit

 
50,000

  Accounts receivable, net
236,216

 
179,384

Inventories
331,378

 
272,236

Prepaid and other current assets
62,632

 
79,734

Total current assets
785,901

 
729,181

Property, plant and equipment, net
440,078

 
437,201

Deferred income taxes
9,259

 
4,663

Other assets
94,672

 
94,851

Total assets
$
1,329,910

 
$
1,265,896

 
 
 
 
Liabilities
 

 
 

Current liabilities
 

 
 

Short-term debt
$
36,174

 
$
97,412

Accounts payable
184,330

 
148,255

Other current liabilities
133,631

 
120,437

Total current liabilities
354,135

 
366,104

Long-term debt
411,230

 
408,760

Deferred income taxes
17,807

 
13,183

Other long-term liabilities
84,611

 
80,161

Total liabilities
867,783

 
868,208

 
 
 
 
Redeemable noncontrolling interest
111,016

 
104,809

 
 
 
 
Equity
 

 
 

Titan shareholders' equity


 


  Common stock ($0.0001 par value, 120,000,000 shares authorized, 60,715,356 issued, 59,700,839 outstanding)

 

Additional paid-in capital
534,522

 
479,075

Retained earnings (deficit)
(13,445
)
 
17,214

Treasury stock (at cost, 1,014,517 and 1,083,212 shares, respectively)
(9,502
)
 
(10,119
)
Stock reserved for deferred compensation
(1,075
)
 
(1,075
)
Accumulated other comprehensive loss
(154,569
)
 
(188,278
)
Total Titan shareholders’ equity
355,931

 
296,817

Noncontrolling interests
(4,820
)
 
(3,938
)
Total equity
351,111

 
292,879

Total liabilities and equity
$
1,329,910

 
$
1,265,896

 

See accompanying Notes to Condensed Consolidated Financial Statements.

3



TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
(All amounts in thousands, except share data)


 
 Number of
common shares
 
Additional
paid-in
capital
 
Retained earnings (deficit)
 
Treasury stock
 
Treasury stock
 reserved for
deferred compensation
 
Accumulated other comprehensive income (loss)
 
Total Titan Equity
 
 Noncontrolling interest
 
Total Equity
Balance January 1, 2017
54,169,880

 
$
479,075

 
$
17,214

 
$
(10,119
)
 
$
(1,075
)
 
$
(188,278
)
 
$
296,817

 
$
(3,938
)
 
$
292,879

Net income (loss) *


 


 
(29,764
)
 


 


 


 
(29,764
)
 
1,153

 
(28,611
)
Currency translation adjustment, net *
 
 
 
 
 
 
 
 
 
 
31,807

 
31,807

 
(722
)
 
31,085

Pension liability adjustments, net of tax


 


 


 


 


 
1,902

 
1,902

 
 
 
1,902

Dividends declared


 


 
(895
)
 


 


 


 
(895
)
 
 
 
(895
)
Note conversion
5,462,264

 
58,460

 
 
 
 
 
 
 
 
 
58,460

 
 
 
58,460

Restricted stock awards
31,798

 
(286
)
 
 
 
286

 
 
 
 
 

 
 
 

Redemption value adjustment


 
(3,981
)
 
 
 


 
 
 
 
 
(3,981
)
 
 
 
(3,981
)
Stock-based compensation


 
1,173

 


 


 


 


 
1,173

 
 
 
1,173

VIE distributions


 


 


 


 


 


 

 
(1,313
)
 
(1,313
)
Issuance of treasury stock under 401(k) plan
36,897

 
81

 


 
331

 


 


 
412

 
 
 
412

Balance September 30, 2017
59,700,839

 
$
534,522

 
$
(13,445
)
 
$
(9,502
)
 
$
(1,075
)
 
$
(154,569
)
 
$
355,931

 
$
(4,820
)
 
$
351,111

 
* Net income (loss) excludes $271 of net loss attributable to redeemable noncontrolling interest. Currency translation adjustment excludes $1,955 of currency translation related to redeemable noncontrolling interest.















See accompanying Notes to Condensed Consolidated Financial Statements.

4



TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(All amounts in thousands)
 
Nine months ended September 30,
Cash flows from operating activities:
2017
 
2016
Net loss
$
(28,340
)
 
$
(25,106
)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
 

 
 

Depreciation and amortization
44,029

 
44,889

Deferred income tax provision
(476
)
 
172

Stock-based compensation
1,173

 
1,164

Issuance of treasury stock under 401(k) plan
413

 
422

Foreign currency translation loss
1,061

 
9,822

(Increase) decrease in assets:
 

 
 

Accounts receivable
(46,715
)
 
2,788

Inventories
(46,083
)
 
4,805

Prepaid and other current assets
20,046

 
(12,314
)
Other assets
2,948

 
25

Increase (decrease) in liabilities:
 

 
 

Accounts payable
26,372

 
21,344

Other current liabilities
8,821

 
11,315

Other liabilities
1,539

 
(5,342
)
Net cash provided by (used for) operating activities
(15,212
)
 
53,984

Cash flows from investing activities:
 

 
 

Capital expenditures
(23,580
)
 
(30,846
)
Certificates of deposit
50,000

 

Other
1,293

 
1,687

Net cash provided by (used for) investing activities
27,713

 
(29,159
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
33,540

 
2,390

Payment on debt
(41,003
)
 
(14,042
)
Dividends paid
(868
)
 
(810
)
Net cash used for financing activities
(8,331
)
 
(12,462
)
Effect of exchange rate changes on cash
3,678

 
2,958

Net increase in cash and cash equivalents
7,848

 
15,321

Cash and cash equivalents, beginning of period
147,827

 
200,188

Cash and cash equivalents, end of period
$
155,675

 
$
215,509

 
 
 
 
Supplemental information:
 
 
 
Interest paid
$
18,360

 
$
19,827

Income taxes paid, net of refunds received
$
550

 
$
4,316

Noncash investing and financing information:
 
 
 
Issuance of common stock for convertible debt payment
$
58,460

 
$










See accompanying Notes to Condensed Consolidated Financial Statements.

5



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


1.
ACCOUNTING POLICIES
 
In the opinion of Titan International, Inc. (Titan or the Company), the accompanying unaudited condensed consolidated financial statements contain all adjustments which are normal, recurring, and necessary for a fair statement of the Company's financial position as of September 30, 2017, and the results of operations and cash flows for the three and nine months ended September 30, 2017 and 2016.
Accounting policies have continued without significant change and are described in Note 1: Description of Business and Significant Accounting Policies contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. These interim financial statements have been prepared pursuant to the Securities and Exchange Commission's rules applicable to Form 10-Q and, therefore, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.
 
Inventories
Inventories are valued at the lower of cost or net realizable value. The Company’s inventories are valued under the first in, first out (FIFO) method or average cost method. Net realizable value is estimated based on current selling prices. Estimated provisions are established for slow-moving and obsolete inventory.

Prior to 2017, the Company used the last in, first out (LIFO) inventory cost method at its Titan Wheel Corporation of Illinois subsidiary. Effective January 1, 2017, the Company elected to change its method of inventory accounting at this subsidiary to the FIFO method. The Company believes that the FIFO method is preferable as it results in increased uniformity across the Company’s global operations with respect to the method of inventory accounting, as no other subsidiaries were using the LIFO method. The Company also believes that the switch to FIFO at Titan Wheel Corporation of Illinois will improve financial reporting by better reflecting the current value of inventory, more closely aligning the flow of physical inventory with the accounting for the inventory, and providing better matching of revenues and expenses. The Company applied this change in method of inventory accounting by retrospectively adjusting the prior period financial statements. The cumulative effect of this accounting change resulted in a $6.6 million increase in retained earnings as of January 1, 2016.

As a result of the retrospective adjustment of the change in accounting principle, certain amounts in the Company's Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016, were adjusted as follows:
 
Three Months Ended September 30, 2016
 
As originally reported
 
Effect of change
 
As adjusted
Cost of sales
$
273,219

 
$
(1,944
)
 
$
271,275

Income (loss) from operations
(8,254
)
 
1,944

 
(6,310
)
Net income (loss)
(10,918
)
 
1,944

 
(8,974
)
 
 
 
 
 
 
Basic and diluted loss per share
$
(0.21
)
 
$
0.04

 
$
(0.17
)

 
Nine Months Ended September 30, 2016
 
As originally reported
 
Effect of change
 
As adjusted
Cost of sales
$
848,264

 
$
3,004

 
$
851,268

Loss from operations
(12,251
)
 
(3,004
)
 
(15,255
)
Net loss
(22,102
)
 
(3,004
)
 
(25,106
)
 
 
 
 
 
 
Basic and diluted loss per share
$
(0.55
)
 
$
(0.05
)
 
$
(0.60
)

6



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The Consolidated Balance Sheet at December 31, 2016, was adjusted as follows:
 
December 31, 2016
 
As originally reported
 
Effect of change
 
As adjusted
Inventories
$
269,291

 
$
2,945

 
$
272,236

Retained earnings
14,269

 
2,945

 
17,214



Net sales
Sales are presented net of allowances, discounts, and sales and other related taxes.

Fair value of financial instruments
The Company records all financial instruments, including cash and cash equivalents, certificates of deposit, accounts receivable, notes receivable, accounts payable, other accruals, and notes payable at cost, which approximates fair value due to their short term or stated rates.  Investments in marketable equity securities are recorded at fair value.  The 6.875% senior secured notes due 2020 (senior secured notes) were carried at cost of $396.6 million at September 30, 2017. The fair value of the senior secured notes at September 30, 2017, as obtained through an independent pricing source, was approximately $410.5 million.

Cash dividends
The Company declared cash dividends of $0.005 and $0.015 per share of common stock for each of the three and nine months ended September 30, 2017 and 2016, respectively. The third quarter 2017 cash dividend of $0.005 per share of common stock was paid October 13, 2017, to shareholders of record on September 29, 2017.

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
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." This update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires disclosure about the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update were deferred by ASU No. 2015-14, "Revenue form Contracts with Customers (Topic 606) Deferral of Effective Date," and are now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is in the process of comparing its current revenue recognition policies to the requirements of ASU No. 2014-09. For the majority of Titan’s revenue arrangements, no significant impacts are expected as these transactions are not accounted for under industry-specific guidance that will be superseded by ASU No. 2014-09 and generally consist of a single performance obligation to transfer promised goods or services. While the Company has not identified any material differences in the amount and timing of revenue recognition related to ASU No. 2014-09, the evaluation is not complete and, accordingly, Titan has not yet reached a conclusion on the overall impacts of adopting ASU No. 2014-09. The guidance provides for adoption either retrospectively to each prior reporting period or as a cumulative-effect adjustment as of the date of adoption. The Company has determined that it will adopt the guidance using a cumulative-effect adjustment as of the date of adoption. The Company believes it is following an appropriate timeline to allow for proper recognition, presentation, and disclosure upon adoption in the year beginning on January 1, 2018.


7



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

In April 2016, the FASB issued ASU No. 2016-10, "Identifying Performance Obligations and Licensing." This ASU clarifies the following aspects of Topic 606: identifying performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, "Narrow-Scope Improvements and Practical Expedients." This ASU affects only narrow aspects of Topic 606 related to assessing the collectability criterion; presentation of sales tax; noncash consideration; and contract modifications and completed contracts at transition. The amendments in these updates affect the guidance in ASU No. 2014-09, as previously discussed above, and the effective dates are the same as those for ASU No. 2014-09.

In December 2016, the FASB issued ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers." The amendments in this update affect narrow aspects of the guidance issued in ASU No. 2014-09, as discussed above, and the effective dates are the same as those for ASU No. 2014-09.

In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This update addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This update was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new accounting guidance will have on the Company's consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments." This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual reporting period. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets other than Inventory." This update requires the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company adopted this guidance early, effective January 1, 2017. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." This update requires an employer to report the service cost component of defined benefit pension cost and postretirement benefit cost in the same line item of the income statement as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, "Scope of Modification Accounting." This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in accordance with Topic 718, Compensation-Stock Compensation. The amendments in this update are effective for annual reporting periods, and interim periods within those annual reporting periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.



8



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

2. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following as of the dates set forth below (amounts in thousands):
 
September 30,
2017
 
December 31,
2016
Accounts receivable
$
239,095

 
$
182,728

Allowance for doubtful accounts
(2,879
)
 
(3,344
)
Accounts receivable, net
$
236,216

 
$
179,384


Accounts receivable are reduced by an estimated allowance for doubtful accounts which is based on known risks and historical losses.


3. INVENTORIES
 
Inventories consisted of the following as of the dates set forth below (amounts in thousands):
 
September 30,
2017
 
December 31,
2016
Raw material
$
88,036

 
$
76,380

Work-in-process
41,960

 
32,395

Finished goods
201,382

 
163,461

 
$
331,378

 
$
272,236


 
Inventories are valued at the lower of cost or net realizable value. Net realizable value is estimated based on current selling prices. Inventory costs are calculated using the first-in, first-out (FIFO) method or average cost method. Estimated provisions are established for slow-moving and obsolete inventory.


4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consisted of the following as of the dates set forth below (amounts in thousands):
 
September 30,
2017
 
December 31,
2016
Land and improvements
$
47,215

 
$
43,871

Buildings and improvements
259,087

 
239,036

Machinery and equipment
604,617

 
573,717

Tools, dies and molds
112,650

 
106,695

Construction-in-process
16,956

 
43,080

 
1,040,525

 
1,006,399

Less accumulated depreciation
(600,447
)
 
(569,198
)
 
$
440,078

 
$
437,201


 
Depreciation on fixed assets for the nine months ended September 30, 2017 and 2016, totaled $41.0 million and $42.1 million, respectively.


9



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Capital leases included in property, plant, and equipment consisted of the following as of the dates set forth below (amounts in thousands):
 
September 30,
2017
 
December 31,
2016
Buildings and improvements
$
4,002

 
$
3,565

Less accumulated amortization
(2,213
)
 
(1,923
)
 
$
1,789

 
$
1,642

 
 
 
 
Machinery and equipment
$
34,230

 
$
31,331

Less accumulated amortization
(29,091
)
 
(26,502
)
 
$
5,139

 
$
4,829




5. INTANGIBLE ASSETS

The components of intangible assets consisted of the following as of the dates set forth below (amounts in thousands):
 
Weighted Average Useful Lives (in Years) September 30, 2017
 
September 30,
2017
 
December 31,
2016
Amortizable intangible assets:
 
 
 
 
 
     Customer relationships
9.9
 
$
13,956

 
$
13,171

     Patents, trademarks and other
7.5
 
15,180

 
14,629

          Total at cost
 
 
29,136

 
27,800

     Less accumulated amortization
 
 
(13,338
)
 
(11,399
)
 
 
 
$
15,798

 
$
16,401


   
Amortization related to intangible assets for the nine months ended September 30, 2017 and 2016, totaled $2.2 million and $2.1 million, respectively. Intangible assets are included as a component of other assets in the Condensed Consolidated Balance Sheet.

The estimated aggregate amortization expense at September 30, 2017, for each of the years (or other periods) set forth below was as follows (amounts in thousands):
October 1 - December 31, 2017
$
604

2018
2,257

2019
2,237

2020
2,237

2021
1,563

Thereafter
6,900

 
$
15,798





10



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

6. WARRANTY

Changes in the warranty liability consisted of the following (amounts in thousands):
 
2017
 
2016
Warranty liability, January 1
$
17,926

 
$
23,120

Provision for warranty liabilities
5,377

 
4,950

Warranty payments made
(5,693
)
 
(8,882
)
Warranty liability, September 30
$
17,610

 
$
19,188



The Company provides limited warranties on workmanship on its products in all market segments. The majority of the Company’s products are subject to a limited warranty that ranges between less than one year and ten years, with certain product warranties being prorated after the first year. The Company calculates a provision for warranty expense based on past warranty experience. Warranty accruals are included as a component of other current liabilities on the Condensed Consolidated Balance Sheet.


7. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
 
Long-term debt consisted of the following as of the dates set forth below (amounts in thousands):
 
September 30, 2017
 
Principal Balance
 
Unamortized Discount
 
Net Carrying Amount
6.875% senior secured notes due 2020
$
400,000

 
$
(3,406
)
 
$
396,594

Titan Europe credit facilities
33,541

 

 
33,541

Other debt
16,296

 

 
16,296

Capital leases
973

 

 
973

     Total debt
450,810

 
(3,406
)
 
447,404

Less amounts due within one year
36,174

 

 
36,174

     Total long-term debt
$
414,636

 
$
(3,406
)
 
$
411,230


 
 
December 31, 2016
 
Principal Balance
 
Unamortized Discount
 
Net Carrying Amount
6.875% senior secured notes due 2020
$
400,000

 
$
(4,148
)
 
$
395,852

5.625% convertible senior subordinated notes due 2017
60,161

 
(13
)
 
60,148

Titan Europe credit facilities
33,710

 

 
33,710

Other debt
15,560

 

 
15,560

Capital leases
902

 

 
902

     Total debt
510,333

 
(4,161
)
 
506,172

Less amounts due within one year
97,425

 
(13
)
 
97,412

     Total long-term debt
$
412,908

 
$
(4,148
)
 
$
408,760




11



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Aggregate principal maturities of long-term debt at September 30, 2017, for each of the years (or other periods) set forth below were as follows (amounts in thousands):
October 1 - December 31, 2017
$
22,169

2018
11,704

2019
14,082

2020
402,259

2021
455

Thereafter
141

 
$
450,810


 
6.875% senior secured notes due 2020
The senior secured notes are due October 2020. These notes are secured by the land and buildings of the following subsidiaries of the Company:  Titan Tire Corporation, Titan Tire Corporation of Bryan, Titan Tire Corporation of Freeport, and Titan Wheel Corporation of Illinois.

5.625% convertible senior subordinated notes due 2017
In January 2017, the Company converted 97.1% of the principal balance of its 5.625% convertible senior subordinated notes (2017 Notes), which matured on January 15, 2017, into shares of Titan common stock. Immediately prior to maturity, $60.2 million in aggregate principal amount of the 2017 Notes was outstanding, of which holders of $58.5 million in aggregate principal amount of the 2017 Notes, or 97.1%, converted their 2017 Notes into shares of Titan common stock pursuant to the terms of the indenture governing the 2017 Notes. The $58.5 million in principal amount of converted 2017 Notes was converted into 5,462,264 shares of Titan common stock, representing approximately 10% of Titan’s common stock outstanding prior to conversion. Each $1,000 principal amount of the 2017 Notes was convertible into 93.436 shares of Titan common stock. The remaining $1.7 million principal amount of the 2017 Notes that was not converted was paid in cash at maturity.

Titan Europe credit facilities
The Titan Europe credit facilities contain borrowings from various institutions totaling $33.5 million at September 30, 2017. Maturity dates on this debt range from less than one year to nine years and interest rates range from 5% to 6.9%. The Titan Europe facilities are secured by the assets of its subsidiaries in Italy, Spain, Germany, and Brazil.

Revolving credit facility
In February 2017, the Company entered into a credit and security agreement with respect to a new $75 million revolving credit facility (credit facility) with agent BMO Harris Bank N.A. and other financial institutions party thereto. This credit facility replaced the Company's $150 million revolving credit facility which was previously scheduled to terminate in December 2017. The credit facility is collateralized by accounts receivable and inventory of certain of the Company’s domestic subsidiaries and includes a maturity of the earlier of five years or six months prior to the scheduled maturity of the Company’s senior secured notes. From time to time Titan's availability under this credit facility may be less than $75 million as a result of outstanding letters of credit and eligible accounts receivable and inventory balances at certain of its domestic subsidiaries. At September 30, 2017, an outstanding letter of credit under the credit facility totaled $12.5 million and the amount available under the facility totaled $62.5 million based upon eligible accounts receivable and inventory balances. During the first nine months of 2017 and at September 30, 2017, there were no borrowings under the credit facility.

Other debt
The Company has working capital loans at Titan Pneus do Brasil Ltda and Voltyre-Prom at various interest rates, which totaled $8.9 million and $7.4 million at September 30, 2017, respectively.



12



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

8. DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses financial derivatives to mitigate its exposure to volatility in foreign currency exchange rates. These derivative financial instruments are recognized at fair value. The Company has not designated these financial instruments as hedging instruments. Any gain or loss on the re-measurement of the fair value is recorded as an offset to currency exchange gain/loss. For the three and nine months ended September 30, 2017, the Company recorded currency exchange loss related to these derivatives of $0.2 million and $0.5 million, respectively.


9. REDEEMABLE NONCONTROLLING INTEREST

The Company, in partnership with One Equity Partners (OEP) and the Russian Direct Investment Fund (RDIF), owns all of the equity interests in Voltyre-Prom, a leading producer of agricultural and industrial tires in Volgograd, Russia. The Company is party to a shareholders' agreement with OEP and RDIF which was entered into in connection with the acquisition of Voltyre-Prom. The agreement contains a settlement put option which is exercisable beginning in July 2018 through December of 2018 and may require Titan to purchase the indirect equity interests in Voltyre-Prom of OEP and RDIF with cash or Titan common stock, at a value set by the agreement. The value set by the agreement is the greater of: (i) the aggregate of the investment of the selling party and an amount representing an internal rate of return of 8%; or (ii) the last twelve months of EBITDA times 5.5 less net debt times the ownership percentage. The value of the redeemable noncontrolling interest held by OEP and RDIF has been recorded at the aggregate of the investment of the selling party and an amount representing an internal rate of return of 8%, which was greater than the result of the calculation in clause (ii) above at September 30, 2017.

The redemption features of the settlement put option are not solely within the Company’s control and the noncontrolling interest is presented as a redeemable noncontrolling interest separately from total equity in the Condensed Consolidated Balance Sheet at the redemption value of the settlement put option. If the redemption value is greater than the carrying value of the noncontrolling interest, the increase in the redemption value is adjusted directly to retained earnings of the affected entity, or additional paid-in capital if there are no available retained earnings applicable to the redeemable noncontrolling interest.

In the first quarter of 2016, the Company acquired $25 million of additional shares in the consortium owning Voltyre-Prom, increasing Titan's ownership to 43% from 30%. The acquisition of shares was transacted through the conversion of an intercompany note previously held by Titan. As a result of the ownership change, the balance of the redeemable noncontrolling interest increased by $12 million at the time of such conversion of the intercompany note, which is comprised of a $3.5 million reclassification of currency translation and an $8.5 million reclassification of other equity.

The following is a reconciliation of redeemable noncontrolling interest as of September 30, 2017 and 2016 (amounts in thousands):
 
2017
 
2016
Balance at January 1
$
104,809

 
$
77,174

   Reclassification as a result of ownership change

 
12,039

   Income attributable to redeemable noncontrolling interest
271

 
1,775

   Currency translation
1,955

 
3,330

   Redemption value adjustment
3,981

 
8,475

Balance at September 30
$
111,016

 
$
102,793



This obligation with respect to the settlement put option approximates the cost if all remaining shares in the consortium owning Voltyre-Prom were purchased by the Company on September 30, 2017, and is presented in the Condensed Consolidated Balance Sheet in redeemable noncontrolling interest, which is treated as mezzanine equity.



13



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

10. 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. 

At September 30, 2017, future minimum rental commitments under noncancellable operating leases with initial terms of at least one year were as follows (amounts in thousands):
October 1 - December 31, 2017
$
1,960

2018
5,489

2019
4,478

2020
2,599

2021
1,908

Thereafter
1,952

Total future minimum lease payments
$
18,386



At September 30, 2017, the Company had assets held as capital leases with a net book value of $6.9 million included in property, plant and equipment. At September 30, 2017, total future capital lease obligations relating to these leases were as follows (amounts in thousands):
October 1 - December 31, 2017
$
139

2018
662

2019
150

2020
20

2021
2

Total future capital lease obligation payments
973

Less amount representing interest
(12
)
Present value of future capital lease obligation payments
$
961




11. EMPLOYEE BENEFIT PLANS
The Company has three frozen defined benefit pension plans covering certain employees or former employees of three U.S. subsidiaries. The Company also has pension plans covering certain employees of several foreign subsidiaries. The Company also sponsors a number of defined contribution plans in the U.S. and at foreign subsidiaries. The Company contributed approximately $2.1 million to the pension plans during the nine months ended September 30, 2017, and expects to contribute approximately $1.2 million to the pension plans during the remainder of 2017.
 
The components of net periodic pension cost consisted of the following for the periods set forth below (amounts in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
129

 
$
74

 
$
482

 
$
386

Interest cost
1,197

 
1,230

 
3,531

 
3,700

Expected return on assets
(1,372
)
 
(1,396
)
 
(4,109
)
 
(4,184
)
Amortization of unrecognized prior service cost
34

 
35

 
102

 
103

Amortization of net unrecognized loss
663

 
762

 
1,992

 
2,289

      Net periodic pension cost
$
651

 
$
705

 
$
1,998

 
$
2,294





14



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

12. VARIABLE INTEREST ENTITIES
 
The Company holds a variable interest in three joint ventures for which the Company is the primary beneficiary. Two of the joint ventures operate distribution facilities which primarily distribute mining products. One of these facilities is located in Canada and the other is located in Australia. The Company’s variable interest in these joint ventures relates to sales of Titan product to these entities, consigned inventory, and working capital loans. The third joint venture is the consortium which owns Voltyre-Prom. (See Note 9 for additional information.) Titan is acting as operating partner with responsibility for Voltyre-Prom’s daily operations. The Company has also provided working capital loans to Voltyre-Prom.
 
As the primary beneficiary of these variable interest entities (VIEs), the entities’ assets, liabilities, and results of operations are included in the Company’s consolidated financial statements. The other equity holders’ interests are reflected in “Net income (loss) attributable to noncontrolling interests” in the Condensed Consolidated Statements of Operations and “Noncontrolling interests” in the Condensed Consolidated Balance Sheets.
 
The following table summarizes the carrying amount of the entities’ assets and liabilities included in the Company’s Condensed Consolidated Balance Sheets at September 30, 2017, and December 31, 2016 (amounts in thousands):
 
September 30,
2017
 
December 31, 2016
Cash and cash equivalents
$
12,251

 
$
9,396

Inventory
13,862

 
11,445

Other current assets
22,099

 
23,301

Property, plant and equipment, net
34,131

 
30,448

Other noncurrent assets
8,431

 
4,955

   Total assets
$
90,774

 
$
79,545

 
 
 
 
Current liabilities
$
23,744

 
$
22,068

Noncurrent liabilities
9,759

 
5,350

  Total liabilities
$
33,503

 
$
27,418


 
All assets in the above table can only be used to settle obligations of the consolidated VIE to which the respective assets relate. Liabilities are nonrecourse obligations. Amounts presented in the table above are adjusted for intercompany eliminations.

The Company holds a variable interest in certain VIEs which are not consolidated because Titan is not the primary beneficiary. The Company's involvement with these entities is in the form of direct equity interests and prepayments and purchases of materials. The maximum exposure to loss represents the loss of assets recognized by Titan relating to non-consolidated entities and amounts due to the non-consolidated assets. The assets and liabilities recognized in Titan's Consolidated Balance Sheets related to Titan's interest in these non-consolidated VIEs and the Company's maximum exposure to loss relating to non-consolidated VIEs as of the dates set forth below were as follows (amounts in thousands):
 
September 30,
2017
 
December 31, 2016
Investments
$
3,505

 
$
4,738

Other current assets
1,224

 
1,039

     Total VIE assets
4,729

 
5,777

Accounts payable
1,706

 
932

  Maximum exposure to loss
$
6,435

 
$
6,709





15



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

13. ROYALTY EXPENSE

The Company has trademark license agreements with The Goodyear Tire & Rubber Company to manufacture and sell certain farm tires under the Goodyear name. These agreements cover sales in North America, Latin America, Europe, the Middle East, Africa, Russia, and other Commonwealth of Independent States countries. The North American and Latin American farm tire royalties were prepaid through March 2018 as a part of the 2011 Goodyear Latin American farm tire acquisition. The Company also has a trademark license agreement with Goodyear to manufacture and sell certain non-farm tire products in Latin America. Royalty expenses recorded were $2.6 million and $2.3 million for the three months ended September 30, 2017 and 2016, respectively. Royalty expenses recorded were $7.7 million and $6.7 million for the nine months ended September 30, 2017 and 2016, respectively.


14. OTHER INCOME

Other income consisted of the following for the periods set forth below (amounts in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Equity investment income
$
1,391

 
$
840

 
$
2,741

 
$
2,423

Interest income
872

 
929

 
2,646

 
2,182

Investment gain related to investments for deferred compensation
480

 
560

 
1,827

 
52

Building rental income
594

 
557

 
1,789

 
1,528

Discount amortization on prepaid royalty
180

 
389

 
689

 
1,168

Gain (loss) on sale of assets
(542
)
 
(71
)
 
(734
)
 
2,271

Other income (expense)
66

 
374

 
(560
)
 
908

 
$
3,041

 
$
3,578

 
$
8,398

 
$
10,532




15. INCOME TAXES

The Company recorded income tax expense (benefit) of $2.4 million and $(2.1) million for the quarters ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded income tax expense of $6.0 million and $2.6 million, respectively. The Company's effective income tax rate was (27)% and 16% for the quarters ended September 30, 2017 and 2016, and (27)% and (13)% for the nine months ended September 30, 2017 and 2016, respectively.

The Company’s 2017 income tax expense and rate differed 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 U.S. and certain foreign jurisdictions that incurred a full valuation allowance on deferred tax assets created by current year projected losses. In addition, there were non-deductible royalty expenses and statutorily required income adjustments made in certain foreign jurisdictions that negatively impacted the tax rate for the three and nine months ended September 30, 2017. During the second quarter of 2017, the IRS income tax audit for tax years 2010 through 2014 was settled, which did not result in any material change to income tax expense.

The Company’s 2016 income tax expense and rate differed 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 U.S. and certain foreign jurisdictions that incurred a full valuation allowance on deferred tax assets created by current year projected losses. In addition, the Company adjusted its net uncertain tax positions which resulted in a tax benefit of $2.5 million.


16



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The Company continues to monitor the realization of its deferred tax assets and assesses the need for a valuation allowance. The Company analyzes available positive and negative evidence to determine if a valuation allowance is needed based on the weight of the evidence. This objectively verifiable evidence includes profit and loss positions and the Company weighs this evidence to determine if a valuation allowance is needed. This process requires management to make estimates, assumptions, and judgments that are uncertain in nature. The Company has established valuation allowances with respect to deferred tax assets in U.S. and certain foreign jurisdictions and continues to monitor and assess potential valuation allowances in all its jurisdictions.


16. EARNINGS PER SHARE
 
Earnings per share (EPS) were as follows for the periods presented below (amounts in thousands, except per share data):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net loss attributable to Titan
$
(12,018
)
 
$
(8,008
)
 
$
(29,764
)
 
$
(24,007
)
   Redemption value adjustment
(882
)
 
(1,367
)
 
(3,981
)
 
(8,475
)
Net loss applicable to common shareholders
$
(12,900
)
 
$
(9,375
)
 
$
(33,745
)
 
$
(32,482
)
Determination of shares:
 
 
 
 
 
 
 
   Weighted average shares outstanding (basic and diluted)
59,600

 
53,946

 
59,247

 
53,895

Earnings per share:
 
 
 
 
 
 
 
   Basic and diluted
(0.22
)
 
(0.17
)
 
(0.57
)
 
(0.60
)

The effect of stock options, shares held by certain trusts, and convertible notes has been excluded for the nine months ended September 30, 2017 and 2016, as the effect would have been antidilutive. The weighted average share amount excluded for stock options and shares held by certain trusts was 0.2 million for each of the three and nine months ended September 30, 2017, and 0.3 million and 0.2 million for the three and nine months ended September 30, 2016, respectively. The weighted average share amount excluded for convertible notes totaled 0.3 million shares for the nine months ended September 30, 2017, and 5.6 million shares for each of the three and nine months ended and September 30, 2016.
 

17. 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 liabilities pertaining to, legal judgments.

Two of Titan’s subsidiaries are currently involved in litigation concerning environmental laws and regulations.

In October 2010, the United States of America, on behalf of the Environmental Protection Agency (EPA), filed a complaint against Dico, Inc. (Dico) and Titan Tire Corporation (Titan Tire) in the U.S. District Court for the Southern District of Iowa, wherein the EPA sought civil penalties, punitive damages, and response costs against Dico and Titan Tire pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA).

In June 2015, Titan Tire and Dico, Inc. appealed the U.S. District Court’s order granting the EPA’s motion for summary judgment that found Dico and Titan Tire liable for civil penalties and response costs for violating CERCLA and Dico liable for civil penalties and punitive damages for violating an EPA Administrative Order.


17



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

In December 2015, the United States Court of Appeals for the Eighth Circuit reversed the District Court’s summary judgment order with respect to “arranger” liability for Titan Tire and Dico under CERCLA and the imposition of punitive damages against Dico for violating the EPA Administrative Order, but affirmed the summary judgment order imposing civil penalties in the amount of $1.62 million against Dico for violating the EPA Administrative Order. The case was remanded to the District Court for a new trial on the remaining issues.

The trial was held in April 2017. On September 5, 2017, the District Court issued an order: (a) concluding Titan Tire and Dico arranged for the disposal of a hazardous substance in violation of 42 U.S.C. § 9607(a); (b) holding Titan Tire and Dico jointly and severally liable for $5.45 million in response costs previously incurred and reported by the United States relating to the alleged violation, including enforcement costs and attorney’s fees; and (c) awarding a declaratory judgment holding Titan Tire and Dico jointly and severally liable for all additional response costs previously incurred but not yet reported or to be incurred in the future, including enforcement costs and attorney’s fees. The District Court also held Dico liable for $5.45 million in punitive damages under 42 U.S.C. § 9607(c)(3) for violating a unilateral administrative order. The punitive damages award does not apply to Titan Tire. The Company accrued a contingent liability of $6.5 million, representing $5.45 million in costs incurred by the United States and $1.05 million of additional response costs, for this order in the quarter ended September 30, 2017. Titan Tire and Dico will appeal to the United States Court of Appeals for the Eighth Circuit.


18. SEGMENT 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. Segment external sales, expenses, and income from operations are determined based on the results of operations for the operating units of the Company's manufacturing facilities. Expenses and income from operations are allocated to appropriate segments based on the sales 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’ property, plant and equipment balances are carried at the corporate level. Titan is organized primarily on the basis of products being included in three market segments, with each reportable segment including wheels, tires, wheel/tire assemblies, and undercarriage systems and components.
 

18



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The table below presents information about certain operating results, separated by market segments, for the three and nine months ended September 30, 2017 and 2016 (amounts in thousands):

Three months ended
 
Nine months ended

September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Net sales
 
 
 
 

 

Agricultural
$
170,895

 
$
138,568

 
$
524,335

 
$
438,108

Earthmoving/construction
156,442

 
128,917

 
443,030

 
401,649

Consumer
43,651

 
38,710

 
125,523

 
118,446

 
$
370,988

 
$
306,195

 
$
1,092,888

 
$
958,203

Gross profit
 

 
 

 
 
 
 
Agricultural
$
18,930

 
$
18,592

 
$
63,542

 
$
57,684

Earthmoving/construction
14,534

 
11,553

 
41,170

 
36,354

Consumer
6,201

 
4,775

 
18,244

 
12,897

 
$
39,665

 
$
34,920

 
$
122,956

 
$
106,935

Income (loss) from operations
 

 
 

 
 
 
 
Agricultural
$
10,056

 
$
9,891

 
$
36,721

 
$
32,718

Earthmoving/construction
2,985

 
807

 
5,853

 
4,060

Consumer
3,060

 
1,331

 
8,001

 
2,072

Corporate & Unallocated
(21,242
)
 
(18,339
)
 
(58,819
)
 
(54,105
)
      Loss from operations
(5,141
)
 
(6,310
)
 
(8,244
)
 
(15,255
)
 
 
 
 
 
 
 
 
Interest expense
(7,537
)
 
(8,714
)
 
(22,578
)
 
(25,208
)
Foreign exchange gain
815

 
398

 
48

 
7,403

Other income, net
3,041

 
3,578

 
8,398

 
10,532

      Loss before income taxes
$
(8,822
)
 
$
(11,048
)
 
$
(22,376
)
 
$
(22,528
)


Assets by segment were as follows as of the dates set forth below (amounts in thousands):
 
September 30,
2017
 
December 31,
2016
Total assets
 

 
 

Agricultural
$
482,958

 
$
439,371

Earthmoving/construction
533,112

 
443,879

Consumer
141,496

 
140,293

Corporate & Unallocated
172,344

 
242,353

 
$
1,329,910

 
$
1,265,896

 


19. FAIR VALUE MEASUREMENTS
 
Accounting standards for fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers are defined as:
 
Level 1 – Quoted prices in active markets for identical instruments.
Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 

19



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Assets and liabilities measured at fair value on a recurring basis consisted of the following as of the dates set forth below (amounts in thousands):
 
September 30, 2017
 
December 31, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Contractual obligation investments
$
11,494


$
11,494


$


$

 
$
9,668

 
$
9,668

 
$

 
$

Derivative financial instruments asset
566

 

 
566

 

 
988

 

 
988

 

Preferred stock
145

 

 

 
145

 
181

 

 

 
181

Total
$
12,205

 
$
11,494

 
$
566

 
$
145

 
$
10,837

 
$
9,668

 
$
988

 
$
181


The following table presents the changes, during the periods presented, in Titan's Level 3 investments that are measured at fair value on a recurring basis (amounts in thousands):
 
Preferred stock
Balance at December 31, 2016
$
181

  Total unrealized losses
(36
)
Balance as of September 30, 2017
$
145



The preferred stock was valued based on the book value of the common stock into which it can be converted.


20. RELATED PARTY TRANSACTIONS
 
The Company sells products and pays commissions to companies controlled by persons related to the Chairman of the Board of Directors of the Company, Mr. Maurice Taylor. The related party is Mr. Fred Taylor, who is Mr. Maurice Taylor’s brother. The companies which Mr. Fred Taylor is associated with that do business with Titan include the following: Blackstone OTR, LLC; F.B.T. Enterprises, Inc.; Green Carbon, Inc.; Silverstone, Inc.; and OTR Wheel Engineering, Inc.  Sales of Titan products to these companies were approximately $0.3 million and $1.3 million for the three and nine months ended September 30, 2017, respectively, as compared to $0.2 million and $0.6 million for the three and nine months ended September 30, 2016, respectively. Titan had trade receivables due from these companies of approximately $0.2 million at September 30, 2017, and approximately $0.1 million at December 31, 2016.  Titan had product purchases from these companies of approximately $0.2 million and $0.4 million for the three and nine months ended September 30, 2017, respectively, as compared to purchases of approximately $0.1 million and $0.3 million for the three and nine months ended September 30, 2016, respectively. Sales commissions paid to the above companies were approximately $0.7 million and $1.4 million for the three and nine months ended September 30, 2017, respectively, as compared to $0.4 million and $1.4 million for the three and nine months ended September 30, 2016, respectively.

The Company sells products to Valuepart and Track Solutions Pty Ltd., which is controlled by relatives of a member of management of a Titan subsidiary. Sales of Titan products to this company were approximately $0.1 million and $0.2 million for the three and nine months ended September 30, 2017, respectively.

In July 2013, the Company entered into a Shareholders’ Agreement between OEP and RDIF to acquire Voltyre-Prom. Mr. Richard M. Cashin Jr., a director of the Company, is the President of OEP, which owns 21.4% of the joint venture.  The Shareholders’ Agreement contains a settlement put option which may require the Company to purchase equity interests in the joint venture from OEP and RDIF at a value set by the agreement. See Note 9 for additional information.
 
The Company has a 34.2% equity stake in Wheels India Limited, a company incorporated in India and listed on the National Stock Exchange in India. The Company had trade payables due to Wheels India Limited of approximately $0.1 million at September 30, 2017, and approximately $0.1 million at December 31, 2016.


20



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The Company has a 19.5% equity stake in Titan-Yuxiang Wheel (Liuzhou) Co., Ltd, a company incorporated in China. The Company had trade payables due to Titan-Yuxiang Wheel (Liuzhou) Co., Ltd of approximately $1.7 million at September 30, 2017, and approximately $0.9 million at December 31, 2016.
 
The Company has a 49.0% equity stake in Central Iowa Training and Enrichment Center, LLC, an entity that owns a commercial building located in Boone, IA.
 
21. ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Accumulated other comprehensive loss consisted of the following (amounts in thousands):
 
Currency
Translation
Adjustments
 
Unrecognized
Losses and
Prior Service
Cost
 
 
 
Total
Balance at July 1, 2017
$
(144,200
)
 
$
(23,928
)
 
$
(168,128
)
Currency translation adjustments
13,379

 

 
13,379

Defined benefit pension plan entries:
 

 
 

 
 

  Amortization of unrecognized losses and prior service cost,
  net of tax of $166

 
180

 
180

Balance at September 30, 2017
$
(130,821
)
 
$
(23,748
)
 
$
(154,569
)
 
Currency
Translation
Adjustments
 
Unrecognized
Losses and
Prior Service
Cost
 
 
 
Total
Balance at January 1, 2017
$
(162,628
)
 
$
(25,650
)
 
$
(188,278
)
Currency translation adjustments
31,807

 

 
31,807

Defined benefit pension plan entries:
 

 
 

 
 

  Amortization of unrecognized losses and prior service cost,
  net of tax of $55

 
1,902

 
1,902

Balance at September 30, 2017
$
(130,821
)
 
$
(23,748
)
 
$
(154,569
)

 
22. OTHER EVENTS
 
On September 21, 2017, a fire occurred at a facility of Titan Tire Reclamation Corporation (TTRC), a subsidiary of the Company, located in Fort McMurray, AB.  The TTRC facility contains six thermal vacuum recovery (TVR) units, which are large, contained capsules used to recycle large mining tires.  The fire started within one of the TVR units and was contained to a building housing three of the TVR units. The TTRC staff is working with affected customers to minimize the impact to their respective businesses. Three other TVR units located in another building at the TTRC facility were not affected. Titan carries both casualty and property insurance for its facilities and equipment, as well as business interruption insurance, and is reviewing the extent and scope of this coverage with its insurance carriers. The Company has insufficient information to determine if a contingent loss has occurred; therefore, no accrual was recorded.


23. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION

The senior secured notes are guaranteed by the following wholly-owned subsidiaries of the Company: Titan Tire Corporation, Titan Tire Corporation of Bryan, Titan Tire Corporation of Freeport, and Titan Wheel Corporation of Illinois. The note guarantees are full and unconditional, joint and several obligations of the guarantors. The guarantees of the guarantor subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. See the indenture incorporated by reference to the Company's most recent Form 10-K for additional information. The following condensed consolidating financial statements are presented using the equity method of accounting. Certain sales and marketing expenses recorded by non-guarantor subsidiaries have not been allocated to the guarantor subsidiaries.

21



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)



(Amounts in thousands)
Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2017
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
138,557

 
$
232,431

 
$

 
$
370,988

Cost of sales
99

 
122,129

 
209,095

 

 
331,323

Gross profit (loss)
(99
)
 
16,428

 
23,336

 

 
39,665

Selling, general and administrative expenses
2,100

 
12,594

 
25,059

 

 
39,753

Research and development expenses

 
972

 
1,485

 

 
2,457

Royalty expense
217

 
1,435

 
944

 

 
2,596

Income (loss) from operations
(2,416
)
 
1,427

 
(4,152
)
 

 
(5,141
)
Interest expense
(7,231
)
 

 
(306
)
 

 
(7,537
)
Intercompany interest income (expense)
606

 
983

 
(1,589
)
 

 

Foreign exchange gain (loss)
(2
)
 
71

 
746

 

 
815

Other income (expense)
968

 
(33
)
 
2,106

 

 
3,041

Income (loss) before income taxes
(8,075
)
 
2,448

 
(3,195
)
 

 
(8,822
)
Provision for income taxes
889

 
994

 
513

 

 
2,396

Equity in earnings of subsidiaries
(2,252
)
 

 
(2,306
)
 
4,558

 

Net income (loss)
(11,216
)
 
1,454

 
(6,014
)
 
4,558

 
(11,218
)
Net income noncontrolling interests

 

 
800

 

 
800

Net income (loss) attributable to Titan
$
(11,216
)
 
$
1,454

 
$
(6,814
)
 
$
4,558

 
$
(12,018
)


(Amounts in thousands)
Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2016
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
114,743

 
$
191,452

 
$

 
$
306,195

Cost of sales
87

 
99,573

 
171,615

 

 
271,275

Gross profit (loss)
(87
)
 
15,170

 
19,837

 

 
34,920

Selling, general and administrative expenses
2,556

 
15,407

 
18,385

 

 
36,348

Research and development expenses

 
776

 
1,821

 

 
2,597

Royalty expense
125

 
1,296

 
864

 

 
2,285

Loss from operations
(2,768
)
 
(2,309
)
 
(1,233
)
 

 
(6,310
)
Interest expense
(8,288
)
 

 
(426
)
 

 
(8,714
)
Intercompany interest income (expense)
470

 

 
(470
)
 

 

Foreign exchange gain

 

 
398

 


 
398

Other income
1,256

 
62

 
2,260

 

 
3,578

Income (loss) before income taxes
(9,330
)
 
(2,247
)
 
529

 

 
(11,048
)
Provision (benefit) for income taxes
(1,935
)
 
(1,448
)
 
1,309

 

 
(2,074
)
Equity in earnings of subsidiaries
(3,523
)
 

 
(4,037
)
 
7,560

 

Net income (loss)
(10,918
)
 
(799
)
 
(4,817
)
 
7,560

 
(8,974
)
Net loss noncontrolling interests

 

 
(966
)
 

 
(966
)
Net income (loss) attributable to Titan
$
(10,918
)
 
$
(799
)
 
$
(3,851
)
 
$
7,560

 
$
(8,008
)

22



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(Amounts in thousands)
Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2017
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
429,636

 
$
663,252

 
$

 
$
1,092,888

Cost of sales
256

 
378,875

 
590,801

 

 
969,932

Gross profit (loss)
(256
)
 
50,761

 
72,451

 

 
122,956

Selling, general and administrative expenses
10,038

 
43,906

 
61,609

 

 
115,553

Research and development expenses

 
2,825

 
5,083

 

 
7,908

Royalty expense
883

 
4,140

 
2,716

 

 
7,739

Income (loss) from operations
(11,177
)
 
(110
)
 
3,043

 

 
(8,244
)
Interest expense
(21,909
)
 

 
(669
)
 

 
(22,578
)
Intercompany interest income (expense)
1,775

 
2,930

 
(4,705
)
 

 

Foreign exchange gain (loss)
(2
)
 
30

 
20

 

 
48

Other income (expense)
3,179

 
(203
)
 
5,422

 

 
8,398

Income (loss) before income taxes
(28,134
)
 
2,647

 
3,111

 

 
(22,376
)
Provision (benefit) for income taxes
(620
)
 
2,489

 
4,095

 

 
5,964

Equity in earnings of subsidiaries
2,120

 

 
(10,715
)
 
8,595

 

Net income (loss)
(25,394
)
 
158

 
(11,699
)
 
8,595

 
(28,340
)
Net income noncontrolling interests

 

 
1,424

 

 
1,424

Net income (loss) attributable to Titan
$
(25,394
)
 
$
158

 
$
(13,123
)
 
$
8,595

 
$
(29,764
)



(Amounts in thousands)
Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2016
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
384,917

 
$
573,286

 
$

 
$
958,203

Cost of sales
659

 
334,044

 
516,565

 

 
851,268

Gross profit (loss)
(659
)
 
50,873

 
56,721

 

 
106,935

Selling, general and administrative expenses
7,907

 
47,879

 
51,926

 

 
107,712

Research and development expenses

 
2,221

 
5,569

 

 
7,790

Royalty expense
542

 
3,573

 
2,573

 

 
6,688

Loss from operations
(9,108
)
 
(2,800
)
 
(3,347
)
 

 
(15,255
)
Interest expense
(24,382
)
 

 
(826
)
 

 
(25,208
)
Intercompany interest income (expense)
1,122

 

 
(1,122
)
 

 

Foreign exchange gain

 
202

 
7,201

 


 
7,403

Other income
1,864

 
220

 
8,448

 

 
10,532

Income (loss) before income taxes
(30,504
)
 
(2,378
)
 
10,354

 

 
(22,528
)
Provision (benefit) for income taxes
(2,205
)
 
417

 
4,366

 

 
2,578

Equity in earnings of subsidiaries
6,197

 

 
(6,243
)
 
46

 

Net income (loss)
(22,102
)
 
(2,795
)
 
(255
)
 
46

 
(25,106
)
Net loss noncontrolling interests

 

 
(1,099
)
 

 
(1,099
)
Net income (loss) attributable to Titan
$
(22,102
)
 
$
(2,795
)
 
$
844

 
$
46

 
$
(24,007
)



23



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(Amounts in thousands)
Condensed Consolidating Statements of Comprehensive Income (Loss)
For the Three Months Ended September 30, 2017
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
(11,216
)
 
$
1,454

 
$
(6,014
)
 
$
4,558

 
$
(11,218
)
Currency translation adjustment
14,015

 

 
14,015

 
(14,015
)
 
14,015

Pension liability adjustments, net of tax
180

 
625

 
(445
)
 
(180
)
 
180

Comprehensive income (loss)
2,979

 
2,079

 
7,556

 
(9,637
)
 
2,977

Net comprehensive income attributable to redeemable and noncontrolling interests

 

 
1,436

 

 
1,436

Comprehensive income (loss) attributable to Titan
$
2,979

 
$
2,079

 
$
6,120

 
$
(9,637
)
 
$
1,541



(Amounts in thousands)
Condensed Consolidating Statements of Comprehensive Income (Loss)
For the Three Months Ended September 30, 2016
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
(10,918
)
 
$
(799
)
 
$
(4,817
)
 
$
7,560

 
$
(8,974
)
Currency translation adjustment
(386
)
 

 
(386
)
 
386

 
(386
)
Pension liability adjustments, net of tax
465

 
734

 
(269
)
 
(465
)
 
465

Comprehensive income (loss)
(10,839
)
 
(65
)
 
(5,472
)
 
7,481

 
(8,895
)
Net comprehensive loss attributable to redeemable and noncontrolling interests

 

 
(679
)
 

 
(679
)
Comprehensive income (loss) attributable to Titan
$
(10,839
)
 
$
(65
)
 
$
(4,793
)
 
$
7,481

 
$
(8,216
)



(Amounts in thousands)
Condensed Consolidating Statements of Comprehensive Income (Loss)
For the Nine Months Ended September 30, 2017
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
(25,394
)
 
$
158

 
$
(11,699
)
 
$
8,595

 
$
(28,340
)
Currency translation adjustment
33,040

 

 
33,040

 
(33,040
)
 
33,040

Pension liability adjustments, net of tax
1,902

 
1,875

 
27

 
(1,902
)
 
1,902

Comprehensive income (loss)
9,548

 
2,033

 
21,368

 
(26,347
)
 
6,602

Net comprehensive income attributable to redeemable and noncontrolling interests

 

 
2,657

 

 
2,657

Comprehensive income (loss) attributable to Titan
$
9,548

 
$
2,033

 
$
18,711

 
$
(26,347
)
 
$
3,945

 
 
 
 
 
 
 
 
 
 


24



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(Amounts in thousands)
Condensed Consolidating Statements of Comprehensive Income (Loss)
For the Nine Months Ended September 30, 2016
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
(22,102
)
 
$
(2,795
)
 
$
(255
)
 
$
46

 
$
(25,106
)
Currency translation adjustment
21,545

 

 
(21,545
)
 
21,545

 
21,545

Pension liability adjustments, net of tax
1,200

 
2,202

 
(1,002
)
 
(1,200
)
 
1,200

Comprehensive income (loss)
643

 
(593
)
 
(22,802
)
 
20,391

 
(2,361
)
Net comprehensive income attributable to redeemable and noncontrolling interests

 

 
5,427

 

 
5,427

Comprehensive income (loss) attributable to Titan
$
643

 
$
(593
)
 
$
(28,229
)
 
$
20,391

 
$
(7,788
)
 
 
 
 
 
 
 
 
 
 



(Amounts in thousands)
Condensed Consolidating Balance Sheets
September 30, 2017
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
77,903

 
$
10

 
$
77,762

 
$

 
$
155,675

Accounts receivable, net

 
65,141

 
171,075

 

 
236,216

Inventories

 
90,857

 
240,521

 

 
331,378

Prepaid and other current assets
6,652

 
21,131

 
34,849

 

 
62,632

Total current assets
84,555

 
177,139

 
524,207

 

 
785,901

Property, plant and equipment, net
2,771

 
112,878

 
324,429

 

 
440,078

Investment in subsidiaries
772,243

 

 
75,145

 
(847,388
)
 

Other assets
19,155

 
969

 
83,807

 

 
103,931

Total assets
$
878,724

 
$
290,986

 
$
1,007,588

 
$
(847,388
)
 
$
1,329,910

Liabilities and Equity
 

 
 

 
 

 
 

 
 

Short-term debt
$

 
$

 
$
36,174

 
$

 
$
36,174

Accounts payable
(973
)
 
21,547

 
163,756

 

 
184,330

Other current liabilities
33,431

 
31,579

 
68,621

 

 
133,631

Total current liabilities
32,458

 
53,126

 
268,551

 

 
354,135

Long-term debt
396,594

 

 
14,636

 

 
411,230

Other long-term liabilities
23,524

 
16,516

 
62,378

 

 
102,418

Intercompany accounts
61,666

 
(278,187
)
 
216,521

 

 

Redeemable noncontrolling interest

 

 
111,016

 

 
111,016

Titan shareholders' equity
364,482

 
499,531

 
339,306

 
(847,388
)
 
355,931

Noncontrolling interests

 

 
(4,820
)
 

 
(4,820
)
Total liabilities and equity
$
878,724

 
$
290,986

 
$
1,007,588

 
$
(847,388
)
 
$
1,329,910


25



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(Amounts in thousands)
Condensed Consolidating Balance Sheets
December 31, 2016
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
86,190

 
$
9

 
$
61,628

 
$

 
$
147,827

Certificates of deposit
50,000

 

 

 

 
50,000

Accounts receivable, net

 
43,485

 
135,899

 

 
179,384

Inventories

 
76,823

 
195,413

 

 
272,236

Prepaid and other current assets
11,965

 
21,901

 
45,868

 

 
79,734

Total current assets
148,155

 
142,218

 
438,808

 

 
729,181

Property, plant and equipment, net
4,898

 
124,049

 
308,254

 

 
437,201

Investment in subsidiaries
742,679

 

 
87,385

 
(830,064
)
 

Other assets
23,627

 
1,118

 
74,769

 

 
99,514

Total assets
$
919,359

 
$
267,385

 
$
909,216

 
$
(830,064
)
 
$
1,265,896

Liabilities and Equity
 

 
 

 
 

 
 

 
 

Short-term debt
$
60,148

 
$

 
$
37,264

 
$

 
$
97,412

Accounts payable
4,187

 
14,398

 
129,670

 

 
148,255

Other current liabilities
34,140

 
34,475

 
51,822

 

 
120,437

Total current liabilities
98,475

 
48,873

 
218,756

 

 
366,104

Long-term debt
395,852

 

 
12,908

 

 
408,760

Other long-term liabilities
27,636

 
18,473

 
47,235

 

 
93,344

Intercompany accounts
94,977

 
(300,823
)
 
205,846

 

 

Redeemable noncontrolling interest

 

 
104,809

 

 
104,809

Titan shareholders' equity
302,419

 
500,862

 
323,600

 
(830,064
)
 
296,817

Noncontrolling interests

 

 
(3,938
)
 

 
(3,938
)
Total liabilities and equity
$
919,359

 
$
267,385

 
$
909,216

 
$
(830,064
)
 
$
1,265,896






26



TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(Amounts in thousands)
Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2017
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated
Net cash provided by (used for) operating activities
$
(53,211
)
 
$
4,107

 
$
33,892

 
$
(15,212
)
Cash flows from investing activities:
 

 
 

 
 

 
 

Capital expenditures
(815
)
 
(4,472
)
 
(18,293
)
 
(23,580
)
Certificates of deposit
50,000

 

 

 
50,000

Other, net

 
366

 
927

 
1,293

Net cash provided by (used for) investing activities
49,185

 
(4,106
)
 
(17,366
)
 
27,713

Cash flows from financing activities:
 

 
 

 
 

 
 

Proceeds from borrowings

 

 
33,540

 
33,540

Payment on debt
(3,393
)
 

 
(37,610
)
 
(41,003
)
Dividends paid
(868
)
 

 

 
(868
)
Net cash used for financing activities
(4,261
)
 

 
(4,070
)
 
(8,331
)
Effect of exchange rate change on cash

 

 
3,678

 
3,678

Net increase (decrease) in cash and cash equivalents
(8,287
)
 
1

 
16,134

 
7,848

Cash and cash equivalents, beginning of period
86,190

 
9

 
61,628

 
147,827

Cash and cash equivalents, end of period
$
77,903

 
$
10

 
$
77,762

 
$
155,675

 

(Amounts in thousands)
Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2016
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated
Net cash provided by operating activities
$
4,154

 
$
5,553

 
$
44,277

 
$
53,984

Cash flows from investing activities:
 

 
 

 
 

 
 

Capital expenditures
(657
)
 
(5,616
)
 
(24,573
)
 
(30,846
)
Other, net

 
73

 
1,614

 
1,687

Net cash used for investing activities
(657
)
 
(5,543
)
 
(22,959
)
 
(29,159
)
Cash flows from financing activities:
 

 
 

 
 

 
 

Proceeds from borrowings

 

 
2,390

 
2,390

Payment on debt

 

 
(14,042
)
 
(14,042
)
Dividends paid
(810
)
 

 

 
(810
)
Net cash used for financing activities
(810
)



(11,652
)

(12,462
)
Effect of exchange rate change on cash

 

 
2,958

 
2,958

Net increase in cash and cash equivalents
2,687

 
10

 
12,624

 
15,321

Cash and cash equivalents, beginning of period
142,401

 
4

 
57,783

 
200,188

Cash and cash equivalents, end of period
$
145,088

 
$
14

 
$
70,407

 
$
215,509


27



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis of financial condition and results of operations (MD&A) is designed to provide a reader of the financial statements included in this quarterly report 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. The MD&A in this quarterly report should be read in conjunction with the condensed consolidated financial statements and other financial information included elsewhere in this quarterly report and the MD&A and audited consolidated financial statements and related notes in Titan's annual report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 15, 2017.
 
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements, which are covered by the "Safe Harbor for Forward-Looking Statements" provided by the Private Securities Litigation Reform Act of 1995. Readers can identify these statements by the fact that they do not relate strictly to historical or current facts. The Company tried to identify forward-looking statements in this report by using words such as “anticipates,” “estimates,” “expects,” “intends,” “plans,” and “believes,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may,” and “could.” These forward-looking statements include, among other items:
The Company's financial performance;
Anticipated trends in the Company’s business;
Expectations with respect to the end-user markets into which the Company sells its products (including agricultural equipment, earthmoving/construction equipment, and consumer products);
Future expenditures for capital projects;
The Company’s ability to continue to control costs and maintain quality;
Ability to meet 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; and
The Company’s intention to consider and pursue acquisition and divestiture opportunities.
Readers of this Form 10-Q should understand that these forward-looking statements are based on the Company’s current expectations and assumptions about future events and are subject to a number of risks, uncertainties, and changes in circumstances that are difficult to predict, including, but not limited to, the factors discussed in Item 1A, Risk Factors, of the Company's most recent annual report on Form 10-K, 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 a recession on the Company and its customers and suppliers;
Changes in the Company’s end-user markets into which the Company sells its products as a result of world economic or regulatory influences or otherwise;
Changes in the marketplace, including new products and pricing changes by the Company’s competitors;
Ability to maintain satisfactory labor relations;
Unfavorable outcomes of legal proceedings;
The Company's ability to comply with current or future regulations applicable to the Company's business and the industry in which it competes or any actions taken or orders issued by regulatory authorities;
Availability and price of raw materials;
Levels of operating efficiencies;
The effects of the Company's indebtedness and its compliance with the terms thereof;
Changes in the interest rate environment and their effects on the Company's outstanding indebtedness;

28



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Unfavorable product liability and warranty claims;
Actions of domestic and foreign governments;
Geopolitical and economic uncertainties relating to the countries in which the Company operates or does business;
Risks associated with acquisitions, including difficulty in integrating operations and personnel, disruption of ongoing business, and increased expenses:
Results of investments;
The effects of previously announced processes to explore various strategic transactions, including potential dispositions;
Fluctuations in currency translations;
Climate change and related laws and regulations;
Risks associated with environmental laws and regulations;
Risks relating to our manufacturing facilities, including that any of our material facilities may become inoperable, and
Risks related to financial reporting, internal controls, tax accounting, and information systems.
Any changes in such factors could lead to significantly different results.  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.  Forward-looking statements included in this report speak only as of the date of this report. 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 and assumptions contained in this report will, in fact, transpire. The reader should not place undue reliance on the forward-looking statements included in this report or that may be made elsewhere from time to time by the Company or on its behalf. All forward-looking statements attributable to Titan are expressly qualified by these cautionary statements.

OVERVIEW
Titan International, Inc. and its subsidiaries are leading manufacturers of wheels, tires, wheel and tire assemblies, and undercarriage systems and components for off-highway vehicles used in the agricultural, earthmoving/construction, and consumer segments.  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.
 
Agricultural Segment: Titan's agricultural rims, wheels, tires, and undercarriage systems and components are manufactured for use on various agricultural 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.
 
Earthmoving/Construction Segment: The Company manufactures rims, wheels, tires, and undercarriage systems and components for various types of off-the-road (OTR) earthmoving, mining, military, construction, and forestry equipment, including skid steers, aerial lifts, cranes, graders and levelers, scrapers, self-propelled shovel loaders, articulated dump trucks, load transporters, haul trucks, backhoe loaders, crawler tractors, lattice cranes, shovels, and hydraulic excavators.
 
Consumer Segment: Titan manufactures bias truck tires in Latin America and light truck tires in Russia. Titan also offers select products for ATVs, turf, and golf cart applications.
 
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, Hitachi, Kubota Corporation, Liebherr, and Volvo, 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.


29



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

The table below provides highlights for the three and nine months ended September 30, 2017, compared to the same respective periods of 2016 (amounts in thousands, except earnings per share):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2016
 
% Increase (Decrease)
 
2017
 
2016
 
% Increase (Decrease)
Net sales
$
370,988

 
$
306,195

 
21
 %
 
$
1,092,888

 
$
958,203

 
14
 %
Gross profit
39,665

 
34,920

 
14
 %
 
122,956

 
106,935

 
15
 %
Loss from operations
(5,141
)
 
(6,310
)
 
19
 %
 
(8,244
)
 
(15,255
)
 
46
 %
Net loss
(11,218
)
 
(8,974
)
 
(25
)%
 
(28,340
)
 
(25,106
)
 
(13
)%
Basic earnings per share
(0.22
)
 
(0.17
)
 
(29
)%
 
(0.57
)
 
(0.60
)
 
5
 %

The Company recorded net sales of $371.0 million for the third quarter of 2017, which were 21% higher than third quarter 2016 net sales of $306.2 million, primarily as a result of an increase in sales volume in all segments. Overall sales volume was up 14% with higher volume across all segments and all geographies. Favorable changes in price/mix increased net sales by 5% and favorable currency translations contributed another 2% increase to net sales.

The Company's gross profit was $39.7 million, or 10.7% of net sales, for the third quarter of 2017, compared to $34.9 million, or 11.4% of net sales, in the comparable period of 2016. The decrease in gross profit as a percent of sales was a result of pricing initiatives to selectively grow market share, primarily in the agricultural segment. Loss from operations was $5.1 million for the third quarter of 2017, compared to loss of $6.3 million in the comparable quarter of 2016. Net loss was $11.2 million for the third quarter of 2017, compared to loss of $9.0 million in the comparable quarter of 2016. Basic earnings per share was $(0.22) in the third quarter of 2017, compared to $(0.17) in the comparable quarter of 2016.

The Company recorded net sales of $1,092.9 million for the first nine months of 2017, which were 14% higher than the 2016 comparable period net sales of $958.2 million, primarily as a result of an increase in sales volume. Overall sales volume was up 10% driven by higher volumes in the agricultural and earthmoving/construction segments. Favorable currency translation increased net sales by 3% and a favorable change in price/mix added an additional 1% to net sales.

The Company's gross profit was $123.0 million, or 11.3% of net sales, for the first nine months of 2017, compared to $106.9 million, or 11.2% of net sales, in the comparable period of 2016. Loss from operations was $8.2 million for the first nine months of 2017, compared to loss of $15.3 million in the comparable period of 2016. Net loss was $28.3 million for the first nine months of 2017, compared to loss of $25.1 million in 2016. Basic earnings per share was $(0.57) in the first nine months of 2017, compared to $(0.60) in 2016.


CRITICAL ACCOUNTING ESTIMATES
Preparation of financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America requires the application of technical accounting rules and guidance, as well as the use of estimates.  The Company’s application of such rules and guidance 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.
 
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. To aid in establishing the value of any intangible assets at the time of acquisition, the Company typically engages a professional appraisal firm.


30



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Inventories
Inventories are valued at the lower of cost or net realizable value. Net realizable value is estimated based on current selling prices. Inventory costs are calculated using the first-in, first-out (FIFO) method or average cost method. Estimated provisions are established for slow-moving and obsolete inventory.

Impairment of Long-Lived 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. Circumstances that could result in an impairment review include, but are not limited to, a current period cash flow loss combined with a history of cash flow losses, current cash flows that may be insufficient to recover the investment in the property over the remaining useful life, or a projection that demonstrates continuing losses associated with the use of a long-lived asset, significant changes in the manner of use of the assets, or significant changes in business strategies. Impairment losses are recognized in operating results when expected undiscounted 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.

Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the respective tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply in the years the temporary differences are expected to be settled or realized. A valuation allowance is recorded for the portion of the deferred tax assets for which it is more likely than not that a tax benefit will not be realized. Management’s judgment is required to determine the provision for income taxes, deferred tax assets and liabilities, and valuation allowances against deferred tax assets.

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 in the United States and pension plans in several foreign countries. During the first nine months of 2017, the Company contributed cash funds of $2.1 million to its pension plans. Titan expects to contribute approximately $1.2 million to these pension plans during the fourth quarter of 2017. For more information concerning these costs and obligations, see the discussion of “Pensions” in Item 7 and Note 23 to the Company's financial statements included in the Company's Form 10-K for the fiscal year ended December 31, 2016.
 
Product Warranties
The Company provides limited warranties on workmanship on its products in all market segments. The majority of the Company's products are subject to a limited warranty that ranges between less than one year and ten years, with certain product warranties being prorated after the first year. Actual warranty experience may differ from historical experience. The Company calculates an estimated warranty liability based on past warranty experience and the sales of products subject to that experience. The Company records warranty expense based on warranty payments made during the applicable period and changes to the estimated warranty liability. The Company's warranty accrual was $17.6 million at September 30, 2017, and $17.9 million at December 31, 2016.
 


31



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

RESULTS OF OPERATIONS
Highlights for the three and nine months ended September 30, 2017, compared to 2016 (amounts in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2017

2016
% Increase
 
2017
 
2016
% Increase
Net sales
$
370,988

 
$
306,195

21
%
 
$
1,092,888

 
$
958,203

14
%
Cost of sales
331,323

 
271,275

22
%
 
969,932

 
851,268

14
%
Gross profit
$
39,665

 
$
34,920

14
%
 
$
122,956

 
$
106,935

15
%
Gross profit as percentage of net sales
10.7
%
 
11.4
%
 
 
11.3
%
 
11.2
%
 

 
Net Sales
Net sales for the quarter ended September 30, 2017, were $371.0 million, compared to $306.2 million in the comparable quarter of 2016, an increase of 21%, primarily as a result of an increase in sales volume in all segments. Overall sales volume was up 14% with higher volume across all segments and all geographies. Favorable changes in price/mix increased net sales by 5% and favorable currency translations contributed another 2% increase to net sales.

Net sales for the nine months ended September 30, 2017, were $1,092.9 million, compared to $958.2 million in the comparable period of 2016, an increase of 14%, primarily as a result of an increase in sales volume. Overall sales volume was up 10% driven by higher volumes in the agriculture and earthmoving/construction segments. Favorable currency translation increased net sales by 3% and a favorable change in price/mix added an additional 1% to net sales.

Cost of Sales and Gross Profit
Cost of sales was $331.3 million for the quarter ended September 30, 2017, compared to $271.3 million for the comparable quarter in 2016. Gross profit for the third quarter of 2017 was $39.7 million, or 10.7% of net sales, compared to $34.9 million, or 11.4% of net sales, for the third quarter of 2016.

Cost of sales was $969.9 million for the nine months ended September 30, 2017, compared to $851.3 million for the comparable period in 2016. Gross profit for the first nine months of 2017 was $123.0 million, or 11.3% of net sales, compared to $106.9 million, or 11.2% of net sales, for the comparable period of 2016. The increase in gross profit was primarily related to continuous improvement from the implementation of initiatives that focus on lowering costs and increasing efficiencies.

Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses for the third quarter of 2017 were $39.8 million, or 10.7% of net sales, compared to $36.3 million, or 11.9% of net sales, for the third quarter of 2016.  After adjusting for the accrued contingent liability of $6.5 million for a legal judgment (see Note 17 to the Company's condensed consolidated financial statements), SG&A for the third quarter of 2017 would have been 9.0% of net sales.

SG&A expenses for the first nine months of 2017 were $115.6 million, or 10.6% of net sales, compared to $107.7 million, or 11.2% of net sales, for the first nine months of 2016.  The increase in SG&A expenses was primarily due to the cost associated with non-recurring legal and professional fees in the first quarter of 2017 and the aforementioned contingent liability accrual in the third quarter of 2017.

Research and Development Expenses
Research and development (R&D) expenses for the third quarter of 2017 were $2.5 million, or 0.7% of net sales, compared to $2.6 million, or 0.8% of net sales, for the third quarter of 2016.

R&D expenses for the first nine months of 2017 were $7.9 million, or 0.7% of net sales, compared to $7.8 million, or 0.8% of net sales, for the first nine months of 2016.


32



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Royalty Expense
The Company has trademark license agreements with The Goodyear Tire & Rubber Company to manufacture and sell certain farm tires under the Goodyear name. These agreements cover sales in North America, Latin America, Europe, the Middle East, Africa, Russia, and other Commonwealth of Independent States countries. Royalties attributable to sales of farm tires in North America and Latin America were prepaid through March 2018 as a part of the 2011 Goodyear Latin American farm tire acquisition. The Company also has a trademark license agreement with Goodyear to manufacture and sell certain non-farm tire products in Latin America.

Royalty expenses for the third quarter of 2017 were $2.6 million, or 0.7% of net sales, compared to $2.3 million, or 0.7% of net sales, for the third quarter of 2016.

Royalty expenses for the first nine months of 2017 were $7.7 million, or 0.7% of net sales, compared to $6.7 million, or 0.7% of net sales, for the first nine months of 2016. The increase was driven by higher international sales subject to royalty.

Loss from Operations
Loss from operations for the third quarter of 2017 was $5.1 million, compared to $6.3 million for the third quarter of 2016.  This change was the net result of the items previously discussed.

Loss from operations for the first nine months of 2017 was $8.2 million, compared to $15.3 million for the first nine months of 2016.  This change was the net result of the items previously discussed.

Interest Expense
Interest expense was $7.5 million and $8.7 million for the quarters ended September 30, 2017 and 2016, respectively. The decrease in interest expense was primarily due to the January 2017 conversion of the Company's 5.625% convertible senior subordinated notes.

Interest expense was $22.6 million and $25.2 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease in interest expense was primarily due to the January 2017 conversion of the Company's 5.625% convertible senior subordinated notes.

Foreign Exchange Gain
Foreign exchange gain was $0.8 million for the third quarter of 2017, compared to gain of $0.4 million for the third quarter of 2016.

Foreign exchange gain was $0.0 million for the first nine months of 2017, compared to gain of $7.4 million for the first nine months of 2016.

Other Income
Other income was $3.0 million for the quarter ended September 30, 2017, as compared to $3.6 million in the comparable quarter of 2016.  For the quarter ended September 30, 2017, the Company recorded equity investment income of $1.4 million, interest income of $0.9 million, rental income of $0.6 million, a gain related to investments for deferred compensation of $0.5 million, and loss on sale of assets of $0.5 million. For the quarter ended September 30, 2016, the Company recorded interest income of $0.9 million, equity investment income of $0.8 million, rental income of $0.6 million, and a gain related to contractual obligation investments of $0.6 million.

Other income was $8.4 million for the nine months ended September 30, 2017, as compared to $10.5 million in the comparable period of 2016.  For the nine months ended September 30, 2017, the Company recorded equity investment income of $2.7 million, interest income of $2.6 million, a gain related to investments for deferred compensation of $1.8 million, and rental income of $1.8 million. For the nine months ended September 30, 2016, the Company recorded equity investment income of $2.4 million, a gain on sale of assets of $2.3 million, interest income of $2.2 million and rental income of $1.5 million.



33



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Provision for Income Taxes
The Company recorded income tax expense (benefit) of $2.4 million and $(2.1) million for the quarters ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded income tax expense of $6.0 million and $2.6 million, respectively. The Company's effective income tax rate was (27)% and 16% for the quarters ended September 30, 2017 and 2016, and (27)% and (13)% for the nine months ended September 30, 2017 and 2016, respectively.

The Company’s 2017 effective income tax rate is different from the U.S. Federal income tax rate mainly due to losses in the U.S. and certain foreign jurisdictions where the Company could not record a tax benefit due to a valuation allowance. The increased negative effective tax rate is also due to non-deductible expenses and income adjustments in taxable jurisdictions that had the effect of increasing the tax rate for the three and nine months ended September 30, 2017. During the second quarter of 2017, the IRS income tax audit for tax years 2010 through 2014 was settled, which did not result in any material change to income tax expense.
    
The Company’s 2016 income tax expense and rate differed 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 U.S. and certain foreign jurisdictions that incurred a full valuation allowance on deferred tax assets created by current year projected losses. In addition, the Company adjusted its net uncertain tax positions which resulted in a tax benefit of $2.5 million.

The Company continues to monitor the realization of its deferred tax assets and assess the need for a valuation allowance. This process requires management to make estimates, assumptions, and judgments that are uncertain in nature. The Company has established valuation allowances on U.S. and certain foreign jurisdictions and continues to monitor and assess potential valuation allowances in all its jurisdictions.

Net Loss
Net loss for the third quarter of 2017 was $11.2 million, compared to $9.0 million in the comparable quarter of 2016. For the quarters ended September 30, 2017 and 2016, basic and diluted earnings per share were $(.22) and $(.17), respectively. The Company's higher net loss and lower earnings per share were due to the items previously discussed.

Net loss for the first nine months of 2017 was $28.3 million, compared to $25.1 million in the comparable period of 2016. For the nine months ended September 30, 2017 and 2016, basic and diluted earnings per share were $(.57) and $(.60), respectively. The Company's higher net loss and higher earnings per share were due to the items previously discussed.


34



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Agricultural Segment Results
Agricultural segment results for the periods presented below were as follows (amounts in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2016
% Increase
 
2017
 
2016
% Increase
Net sales
$
170,895

 
$
138,568

23
%
 
$
524,335

 
$
438,108

20
%
Gross profit
18,930

 
18,592

2
%
 
63,542

 
57,684

10
%
Income from operations
10,056

 
9,891

2
%
 
36,721

 
32,718

12
%

Net sales in the agricultural market were $170.9 million for the quarter ended September 30, 2017, as compared to $138.6 million in 2016, an increase of 23%. Higher agricultural sales volumes contributed 16% of the increase in net sales with favorable price/mix increasing net sales by 6% and favorable currency translation contributing an additional 1%.

Gross profit in the agricultural market was $18.9 million for the quarter ended September 30, 2017, as compared to $18.6 million in the comparable quarter of 2016.  The decrease in gross profit as a percent of sales was a result of pricing initiatives to selectively grow market share. Income from operations in the agricultural market was $10.1 million for the quarter ended September 30, 2017, as compared to $9.9 million in 2016.

Net sales in the agricultural market were $524.3 million for the nine months ended September 30, 2017, as compared to $438.1 million in 2016, an increase of 20%. Higher agriculture sales volumes contributed 14% of the increase in net sales, while favorable currency translation and price/mix each contributed an additional 3% of the increase.
 
Gross profit in the agricultural market was $63.5 million for the nine months ended September 30, 2017, as compared to $57.7 million in the comparable period of 2016.  Income from operations in the agricultural market was $36.7 million for the nine months ended September 30, 2017, as compared to $32.7 million in 2016. The Company's gross profit in the agricultural segment was negatively affected by increased raw material prices in the first and second quarters of 2017.

Earthmoving/Construction Segment Results
Earthmoving/construction segment results for the periods presented below were as follows (amounts in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2016
% Increase
 
2017
 
2016
% Increase
Net sales
$
156,442

 
$
128,917

21
%
 
$
443,030

 
$
401,649

10
%
Gross profit
14,534

 
11,553

26
%
 
41,170

 
36,354

13
%
Income from operations
2,985

 
807

270
%
 
5,853

 
4,060

44
%

The Company's earthmoving/construction market net sales were $156.4 million for the quarter ended September 30, 2017, as compared to $128.9 million in 2016, an increase of 21%. The increase in earthmoving/construction sales was driven by increased volume which increased net sales by 14% and favorable price/mix which increased sales an additional 5%. Favorable currency translation contributed an additional 2% to net sales.
 
Gross profit in the earthmoving/construction market was $14.5 million for the quarter ended September 30, 2017, as compared to $11.6 million in 2016. The Company's earthmoving/construction market income from operations was $3.0 million for the quarter ended September 30, 2017, as compared to $0.8 million in for the comparable quarter in 2016.

The Company's earthmoving/construction market net sales were $443.0 million for the nine months ended September 30, 2017, as compared to $401.6 million in 2016, an increase of 10%. The increased earthmoving/construction sales were primarily driven by an increase in volume with price/mix and currency remaining flat.

Gross profit in the earthmoving/construction market was $41.2 million for the nine months ended September 30, 2017, as compared to $36.4 million in 2016. The Company's earthmoving/construction market income from operations was $5.9 million for the nine months ended September 30, 2017, as compared to $4.1 million in 2016.

35



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Consumer Segment Results
Consumer segment results for the periods presented below were as follows (amounts in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2016
% Increase
 
2017
 
2016
% Increase
Net sales
$
43,651

 
$
38,710

13
%

$
125,523

 
$
118,446

6
%
Gross profit
6,201

 
4,775

30
%

18,244

 
12,897

41
%
Income from operations
3,060

 
1,331

130
%

8,001

 
2,072

286
%

Consumer market net sales were $43.7 million for the quarter ended September 30, 2017, as compared to $38.7 million in the comparable quarter of 2016, an increase of approximately 13%.

Gross profit from the consumer market was $6.2 million for the quarter ended September 30, 2017, as compared to $4.8 million for the comparable quarter of 2016. Consumer market income from operations was $3.1 million for the quarter ended September 30, 2017, as compared to $1.3 million in 2016.

Consumer market net sales were $125.5 million for the nine months ended September 30, 2017, as compared to $118.4 million in the comparable period of 2016, an increase of approximately 6%.

Gross profit from the consumer market was $18.2 million for the nine months ended September 30, 2017, as compared to $12.9 million for the comparable period of 2016. Consumer market income from operations was $8.0 million for the nine months ended September 30, 2017, as compared to $2.1 million in 2016.

Consumer segment sales for the quarter and nine months ended September 30, 2017, were up primarily due to higher sales of other products as well as higher prices passed through to end customers as a result of higher raw material costs. Margins improved overall due to both geographic and product mix.


36



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Segment Summary (amounts in thousands)
Three months ended
September 30, 2017
 
Agricultural
 
Earthmoving/
Construction
 
Consumer
 
Corporate/ Unallocated
 Expenses
 
Consolidated
 Totals
Net sales
 
$
170,895

 
$
156,442

 
$
43,651

 
$

 
$
370,988

Gross profit
 
18,930

 
14,534

 
6,201

 

 
39,665

Income (loss) from operations
 
10,056

 
2,985

 
3,060

 
(21,242
)
 
(5,141
)
Three months ended
September 30, 2016
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
138,568

 
$
128,917

 
$
38,710

 
$

 
$
306,195

Gross profit
 
18,592

 
11,553

 
4,775

 

 
34,920

Income (loss) from operations
 
9,891

 
807

 
1,331

 
(18,339
)
 
(6,310
)

Nine months ended
September 30, 2017
 
Agricultural
 
Earthmoving/
Construction
 
Consumer
 
Corporate/ Unallocated
 Expenses
 
Consolidated
 Totals
Net sales
 
$
524,335

 
$
443,030

 
$
125,523

 
$

 
$
1,092,888

Gross profit
 
63,542

 
41,170

 
18,244

 

 
122,956

Income (loss) from operations
 
36,721

 
5,853

 
8,001

 
(58,819
)
 
(8,244
)
Nine months ended
September 30, 2016
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
438,108

 
$
401,649

 
$
118,446

 
$

 
$
958,203

Gross profit
 
57,684

 
36,354

 
12,897

 

 
106,935

Income (loss) from operations
 
32,718

 
4,060

 
2,072

 
(54,105
)
 
(15,255
)
 
 
 
 
 
 
 
 
 
 
 

Corporate & Unallocated Expenses
Income from operations on a segment basis does not include corporate expenses totaling $21.2 million for the quarter ended September 30, 2017, as compared to $18.3 million for the comparable quarter of 2016. Corporate expenses were composed of selling and marketing expenses of approximately $6 million and $7 million for the quarters ended September 30, 2017 and 2016, respectively; and administrative expenses of approximately $15 million and $11 million for the quarters ended September 30, 2017 and 2016, respectively. Administrative expenses in the third quarter of 2017 included a non-cash accrual of $6.5 million relating to a court order. See Note 17 to the Company's condensed consolidated financial statements.

Income from operations on a segment basis does not include corporate expenses totaling $58.8 million for the nine months ended September 30, 2017, as compared to $54.1 million for the comparable period of 2016. Corporate expenses were composed of selling and marketing expenses of approximately $21 million and $22 million for the nine months ended September 30, 2017 and 2016, respectively; and administrative expenses of approximately $38 million and $32 million for the nine months ended September 30, 2017 and 2016, respectively. The increase is due to non-recurring legal and professional fees in the first quarter of 2017 and a contingent liability accrual in the third quarter of 2017.



37



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

MARKET RISK SENSITIVE INSTRUMENTS
The Company's risks related to foreign currencies, commodity prices, and interest rates at September 30, 2017, were consistent with those for 2016. For more information, see the “Market Risk Sensitive Instruments” discussion in the Company's Form 10-K for the fiscal year ended December 31, 2016.

PENSIONS
The Company has three frozen defined benefit pension plans covering certain employees or former employees of three U.S. subsidiaries. The Company also has pension plans covering certain employees of several foreign subsidiaries. These plans are described in Note 23 of the Company's Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2016.

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. Titan expects to contribute approximately $1.2 million to these pension plans during the fourth quarter of 2017.


LIQUIDITY AND CAPITAL RESOURCES

Cash Flows
As of September 30, 2017, the Company had $155.7 million of cash.
(Amounts in thousands)
September 30,
 
December 31,
 
 
 
2017
 
2016
 
Change
Cash
$
155,675

 
$
147,827

 
$
7,848


The cash balance increased by $7.8 million from December 31, 2016, due to the following items:

Operating Cash Flows
Summary of cash flows from operating activities:
(Amounts in thousands)
Nine months ended September 30,
 
 
 
2017
 
2016
 
Change
Net loss
$
(28,340
)
 
$
(25,106
)
 
$
(3,234
)
Depreciation and amortization
44,029

 
44,889

 
(860
)
Deferred income tax provision
(476
)
 
172

 
(648
)
Foreign currency translation loss
1,061

 
9,822

 
(8,761
)
Accounts receivable
(46,715
)
 
2,788

 
(49,503
)
Inventories
(46,083
)
 
4,805

 
(50,888
)
Prepaid and other current assets
20,046

 
(12,314
)
 
32,360

Accounts payable
26,372

 
21,344

 
5,028

Other current liabilities
8,821

 
11,315

 
(2,494
)
Other liabilities
1,539

 
(5,342
)
 
6,881

Other operating activities
4,534

 
1,611

 
2,923

Cash provided by (used for) operating activities
$
(15,212
)
 
$
53,984

 
$
(69,196
)


38



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

In the first nine months of 2017, operating activities used $15.2 million of cash, including decreases from accounts receivable of $46.7 million and inventories of $46.1 million, offset by increases from accounts payable of $26.4 million and prepaid and other current assets of $20.0 million. Included in the net loss of $28.3 million were noncash charges for depreciation and amortization of $44.0 million and foreign currency translation loss of $1.1 million.

Operating cash flows decreased $69.2 million when comparing the first nine months of 2017 to the first nine months of 2016. The net loss in the first nine months of 2017 increased $3.2 million from the loss in the first nine months of 2016. When comparing the first nine months of 2017 to the first nine months of 2016, cash flows from operating activities decreased in inventories and accounts receivable by $50.9 million and $49.5 million, respectively, offset by an increases of $32.4 million in prepaid and other current assets.

Summary of the components of cash conversion cycle:
 
September 30,
 
December 31,
 
September 30,
 
2017
 
2016
 
2016
Days sales outstanding
58

 
53

 
55

Days inventory outstanding
95

 
95

 
100

Days payable outstanding
(53
)
 
(52
)
 
(54
)
Cash conversion cycle
100

 
96

 
101


Investing Cash Flows
Summary of cash flows from investing activities:
(Amounts in thousands)
Nine months ended September 30,
 
 
 
2017
 
2016
 
Change
Capital expenditures
$
(23,580
)
 
$
(30,846
)
 
$
7,266

Certificates of deposit
50,000

 

 
50,000

Other investing activities
1,293

 
1,687

 
(394
)
Cash provided by (used for) investing activities
$
27,713

 
$
(29,159
)
 
$
56,872

 
Net cash provided by investing activities was $27.7 million in the first nine months of 2017, as compared to net cash used for investing activities of $29.2 million in the first nine months of 2016. The Company had cash provided by investing activities of $50.0 million from certificates of deposit that matured and were not reinvested in the first nine months of 2017. The Company invested a total of $23.6 million in capital expenditures in the first nine months of 2017, compared to $30.8 million in 2016. The 2017 and 2016 expenditures represent various equipment purchases and improvements to enhance production capabilities of Titan's existing business and maintain existing equipment.
 
Financing Cash Flows
Summary of cash flows from financing activities:
(Amounts in thousands)
Nine months ended September 30,
 
 
 
2017
 
2016
 
Change
Proceeds from borrowings
$
33,540

 
$
2,390

 
$
31,150

Payment on debt
(41,003
)
 
(14,042
)
 
(26,961
)
Dividends paid
(868
)
 
(810
)
 
(58
)
Cash used for financing activities
$
(8,331
)
 
$
(12,462
)
 
$
4,131

 
In the first nine months of 2017, $8.3 million of cash was used for financing activities. This cash was primarily used for debt financing activities, with debt payments of $41.0 million offset in part by borrowings of $33.5 million.


39



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Debt Restrictions
The Company’s revolving credit facility (credit facility) contains various restrictions, including:
When remaining availability under the credit facility is less than 10% of the total commitment under the credit facility ($7.5 million as of September 30, 2017), the Company is required to maintain a minimum fixed charge coverage ratio of not less than 1.0 to 1.0 (calculated quarterly on a trailing four quarter basis);
Limits on 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; and
Other customary affirmative and negative covenants.
  
These restrictions could limit the Company’s ability to respond to market conditions, provide for unanticipated capital investments, raise additional debt or equity capital, pay dividends, or take advantage of business opportunities, including future acquisitions.

Liquidity Outlook
At September 30, 2017, the Company had $155.7 million of cash and cash equivalents. At September 30, 2017, there were no outstanding borrowings on the Company's $75 million credit facility. Titan's availability under this credit facility may be less than $75 million as a result of outstanding letters of credit and eligible accounts receivable and inventory balances at certain domestic subsidiaries. At September 30, 2017, an outstanding letter of credit under this credit facility totaled $12.5 million and the amount available under the facility totaled $62.5 million, based upon eligible accounts receivable and inventory balances. The cash and cash equivalents balance of $155.7 million included $73.8 million held in foreign countries. The Company does not believe that its current plans demonstrate a need to repatriate the foreign amounts to fund U.S. operations; however, if foreign funds were needed for U.S. operations, the Company would be required to accrue and pay taxes to repatriate the funds. The Company does have U.S. net operating losses that may be available to offset a portion of the potential cash tax outlay from the repatriation of such foreign funds.

Capital expenditures for the fourth quarter of 2017 are estimated to be approximately $10 million to $12 million.  Cash payments for interest are currently forecasted to be approximately $15 million for the fourth quarter of 2017 based on September 30, 2017, debt balances. The forecasted interest payments are comprised primarily of the semi-annual payment of $13.8 million (paid in October) for the 6.875% senior secured notes.

The Company's redeemable noncontrolling interest in Voltyre-Prom includes a settlement put option which is exercisable July through December of 2018. If exercised in July 2018, the redeemable noncontrolling interest may be purchased, with cash or Titan common stock, at an amount set by the Shareholder's Agreement, which is estimated to be approximately $117 million. See Note 9 to the Company's condensed consolidated financial statements regarding the Company's redeemable noncontrolling interest and the settlement put option.

In the future, Titan may seek to grow by making acquisitions, which will depend in large part on its ability to identify suitable acquisition candidates, negotiate acceptable terms for their acquisition, finance those acquisitions, and successfully integrate the acquired assets or business.

Subject to the terms of the agreements governing Titan's outstanding indebtedness, the Company may finance future acquisitions with cash on hand, cash from operations, additional indebtedness, issuing additional equity securities, and divestitures.

Cash and cash equivalents, totaling $155.7 million at September 30, 2017, along with anticipated internal cash flows from operations and utilization of remaining available borrowings, are expected to provide sufficient liquidity for working capital needs, debt maturities, capital expenditures, and potential acquisitions. Potential divestitures are also a means to provide for future liquidity needs.



40



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

OTHER EVENTS
On September 21, 2017, a fire occurred at a facility of Titan Tire Reclamation Corporation (TTRC), a subsidiary of the Company, located in Fort McMurray, AB.  The TTRC facility contains six thermal vacuum recovery (TVR) units, which are large, contained capsules used to recycle large mining tires.  The fire started within one of the TVR units and was contained to a building housing three of the TVR units. The TTRC staff is working with affected customers to minimize the impact to their respective businesses. Three other TVR units located in another building at the TTRC facility were not affected. Titan carries both casualty and property insurance for its facilities and equipment, as well as business interruption insurance, and is reviewing the extent and scope of this coverage with its insurance carriers. The Company has insufficient information to determine if a contingent loss has occurred; therefore, no accrual was recorded.


RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." This update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires disclosure about the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update were deferred by ASU No. 2015-14, "Revenue form Contracts with Customers (Topic 606) Deferral of Effective Date," and are now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is in the process of comparing its current revenue recognition policies to the requirements of ASU No. 2014-09. For the majority of Titan’s revenue arrangements, no significant impacts are expected, as these transactions are not accounted for under industry-specific guidance that will be superseded by ASU No. 2014-09 and generally consist of a single performance obligation to transfer promised goods or services. While the Company has not identified any material differences in the amount and timing of revenue recognition related to ASU No. 2014-09, the evaluation is not complete and, accordingly, Titan has not yet reached a conclusion on the overall impacts of adopting ASU No. 2014-09, if any. The guidance provides for adoption either retrospectively to each prior reporting period or as a cumulative-effect adjustment as of the date of adoption. The Company has determined that it will adopt the guidance using a cumulative-effect adjustment as of the date of adoption. The Company believes it is following an appropriate timeline to allow for proper recognition, presentation, and disclosure upon adoption in the year beginning on January 1, 2018.

In April 2016, the FASB issued ASU No. 2016-10, "Identifying Performance Obligations and Licensing." This ASU clarifies the following aspects of Topic 606: identifying performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, "Narrow-Scope Improvements and Practical Expedients." This ASU affects only narrow aspects of Topic 606 related to assessing the collectability criterion; presentation of sales tax; noncash consideration; and contract modifications and completed contracts at transition. The amendments in these updates affect the guidance in ASU No. 2014-09, as previously discussed above, and the effective dates are the same as those for ASU No. 2014-09.

In December 2016, the FASB issued ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers." The amendments in this update affect narrow aspects of the guidance issued in ASU No. 2014-09, as discussed above, and the effective dates are the same as those for ASU No. 2014-09.

In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This update addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This update was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new accounting guidance will have on the Company's consolidated financial statements.


41



TITAN INTERNATIONAL, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments." This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual reporting period. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets other than Inventory." This update requires the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company adopted this guidance early, effective January 1, 2017. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." This update requires an employer to report the service cost component of defined benefit pension cost and postretirement benefit cost in the same line item of the income statement as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, "Scope of Modification Accounting." This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in accordance with Topic 718, Compensation-Stock Compensation. The amendments in this update are effective for annual reporting periods, and interim periods within those annual reporting periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

MARKET CONDITIONS AND OUTLOOK
The market for new equipment, which has been in a cyclical downturn, is beginning to show signs of recovery. In the first nine months of 2017, Titan experienced higher sales when compared to the same period of 2016.  The higher sales levels were primarily the result of increased demand for replacement equipment used in the agricultural market. In addition, currency translation positively impacted sales.

Energy, natural raw material, and petroleum-based product costs were volatile and negatively affected the Company’s margins in the first and second quarters of 2017.  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
Reduced income levels have lowered demand for large farm equipment over the last business cycle. More specifically, large equipment sales have deteriorated significantly since 2013 after a robust cycle in prior years. The shift to lower horsepower tractors has had a negative impact on revenue and margin performance. Most major OEMs are forecasting 2017 agricultural equipment sales to begin increasing on a year-over-year basis within most regions. North American used equipment levels remain relatively high with some decreases recently from peak levels. Excess used equipment inventory and values can also negatively impact the new equipment market; however, with the extended equipment replacement cycle, opportunity exists for higher aftermarket replacement sales. Many variables, including weather, grain prices, export markets, currency, and government policies and subsidies can greatly influence the overall health of the agricultural economy.

EARTHMOVING/CONSTRUCTION MARKET OUTLOOK
Demand for larger products used in the mining industry is expected to improve slightly in 2017, with demand for our products in this market expected to improve nominally as compared to 2016. Demand for small and medium sized earthmoving/construction equipment used in the housing and commercial construction sectors is expected to be up slightly in 2017 relative to 2016. The earthmoving/construction segment is affected by many variables, including commodity prices, road construction, infrastructure, government appropriations, housing starts, and other macroeconomic drivers.

CONSUMER MARKET OUTLOOK
The consumer market is expected to remain highly competitive for 2017. The consumer segment is affected by many variables including consumer spending, interest rates, government policies, and other macroeconomic drivers.

42



TITAN INTERNATIONAL, INC.



Item 3. Quantitative and Qualitative Disclosures About Market Risk

See Item 7A - Quantitative and Qualitative Disclosures About Market Risk included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. There has been no material change in this information.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
Titan management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Form 10-Q, Titan's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by Titan in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported accurately and within the time frames specified in the SEC's rules and forms and accumulated and communicated to Titan management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls
There were no changes in internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the third quarter of fiscal 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls
Because of its inherent limitations, the Company's disclosure controls and procedures or internal control over financial reporting may not prevent or detect all misstatements or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur due to simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. 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.


43



TITAN INTERNATIONAL, INC.



PART II. OTHER INFORMATION

Item 1. 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 liabilities pertaining to, legal judgments.

Two of Titan’s subsidiaries are currently involved in litigation concerning environmental laws and regulations.

In October 2010, the United States of America, on behalf of the Environmental Protection Agency (EPA), filed a complaint against Dico, Inc. (Dico) and Titan Tire Corporation (Titan Tire) in the U.S. District Court for the Southern District of Iowa, wherein the EPA sought civil penalties, punitive damages, and response costs against Dico and Titan Tire pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA).

In June 2015, Titan Tire and Dico, Inc. appealed the U.S. District Court’s order granting the EPA’s motion for summary judgment that found Dico and Titan Tire liable for civil penalties and response costs for violating CERCLA and Dico liable for civil penalties and punitive damages for violating an EPA Administrative Order.

In December 2015, the United States Court of Appeals for the Eighth Circuit reversed the District Court’s summary judgment order with respect to “arranger” liability for Titan Tire and Dico under CERCLA and the imposition of punitive damages against Dico for violating the EPA Administrative Order, but affirmed the summary judgment order imposing civil penalties in the amount of $1.62 million against Dico for violating the EPA Administrative Order. The case was remanded to the District Court for a new trial on the remaining issues.

The trial was held in April 2017. On September 5, 2017, the District Court issued an order: (a) concluding Titan Tire and Dico arranged for the disposal of a hazardous substance in violation of 42 U.S.C. § 9607(a); (b) holding Titan Tire and Dico jointly and severally liable for $5.45 million in response costs previously incurred and reported by the United States relating to the alleged violation, including enforcement costs and attorney’s fees; and (c) awarding a declaratory judgment holding Titan Tire and Dico jointly and severally liable for all additional response costs previously incurred but not yet reported or to be incurred in the future, including enforcement costs and attorney’s fees. The District Court also held Dico liable for $5.45 million in punitive damages under 42 U.S.C. § 9607(c)(3) for violating a unilateral administrative order. The punitive damages award does not apply to Titan Tire. The Company accrued a contingent liability of $6.5 million, representing $5.45 million in costs incurred by the United States and $1.05 million of additional response costs, for this order in the quarter ended September 30, 2017. Titan Tire and Dico will appeal to the United States Court of Appeals for the Eighth Circuit.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in Item 1A. Risk Factors to the Company's Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 15, 2017.



44



TITAN INTERNATIONAL, INC.



Item 6. Exhibits

31.1
 
 
31.2
 
 
32
 
 
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
TITAN INTERNATIONAL, INC.
 
(Registrant)

Date:
November 1, 2017
By:
/s/  PAUL G. REITZ
 
 
Paul G. Reitz
 
 
President and Chief Executive Officer
(Principal Executive Officer)

 
By:
/s/ JAMES M. FROISLAND
 
 
James M. Froisland
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)



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