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TITAN INTERNATIONAL INC - Quarter Report: 2020 June (Form 10-Q)



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

titancolora33.jpg

FORM 10-Q
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2020
or
☐
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
(State or other jurisdiction of incorporation or organization)

2701 Spruce Street, Quincy, IL
(Address of principal executive offices)

36-3228472
(I.R.S. Employer Identification No.)

62301
(Zip Code)
(217) 228-6011
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol
Name of each exchange on which registered
Common stock, $0.0001 par value
TWI
New York Stock Exchange


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  ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☑  No ☐
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
☑
Non-accelerated filer
☐
 
Smaller reporting company
☐
 
 
 
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. ☐ 

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

Indicate the number of shares of Titan International, Inc. outstanding: 60,923,777 shares of common stock, $0.0001 par value, as of July 31, 2020.



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

Six months ended
 
June 30,

June 30,
 
2020

2019

2020

2019
 
 
 
 
 
 
 
 
Net sales
$
286,133

 
$
390,597

 
$
627,633

 
$
800,971

Cost of sales
255,259

 
352,289

 
566,936

 
717,399

Asset impairment
1,007

 
—

 
3,586

 
—

Gross profit
29,867

 
38,308

 
57,111

 
83,572

Selling, general and administrative expenses
28,441

 
35,746

 
60,398

 
71,651

Research and development expenses
2,132

 
2,544

 
4,542

 
5,161

Royalty expense
2,395

 
2,448

 
4,875

 
5,054

(Loss) income from operations
(3,101
)
 
(2,430
)
 
(12,704
)
 
1,706

Interest expense
(8,008
)
 
(8,295
)
 
(16,043
)
 
(16,228
)
Foreign exchange gain (loss)
8,836

 
(1,239
)
 
(8,406
)
 
4,484

Other (loss) income
(390
)
 
2,069

 
7,046

 
3,065

Loss before income taxes
(2,663
)
 
(9,895
)
 
(30,107
)
 
(6,973
)
Provision (benefit) for income taxes
1,980

 
(3,218
)
 
2,035

 
(1,303
)
Net loss
(4,643
)
 
(6,677
)
 
(32,142
)
 
(5,670
)
Net income (loss) attributable to noncontrolling interests
402

 
(253
)
 
(1,611
)
 
(1,224
)
Net loss attributable to Titan
(5,045
)
 
(6,424
)
 
(30,531
)
 
(4,446
)
   Redemption value adjustment
—

 
(661
)
 
—

 
(1,437
)
Net loss applicable to common shareholders
$
(5,045
)
 
$
(7,085
)
 
$
(30,531
)
 
$
(5,883
)
 
 
 
 
 
 
 
 
Loss per common share:
 

 
 

 
 

 
 

Basic
$
(0.08
)
 
$
(0.12
)
 
$
(0.50
)
 
$
(0.10
)
Diluted
$
(0.08
)
 
$
(0.12
)
 
$
(0.50
)
 
$
(0.10
)
Average common shares and equivalents outstanding:
 
 
 

 
 
 
 

Basic
60,602

 
60,000

 
60,481

 
59,973

Diluted
60,602

 
60,000

 
60,481

 
59,973

 
 
 
 
 
 
 
 
Dividends declared per common share:
$
—

 
$
0.005

 
$
0.005

 
$
0.010

 
 







See accompanying Notes to Condensed Consolidated Financial Statements.

1


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

 
Three months ended
 
June 30,
 
2020
 
2019
Net loss
$
(4,643
)
 
$
(6,677
)
Derivative loss
(198
)
 
—

Currency translation adjustment
1,014

 
5,423

Pension liability adjustments, net of tax of $230 and $110, respectively
40

 
538

Comprehensive loss
(3,787
)
 
(716
)
Net comprehensive income attributable to redeemable and noncontrolling interests
893

 
385

Comprehensive loss attributable to Titan
$
(4,680
)
 
$
(1,101
)



 
Six months ended
 
June 30,
 
2020
 
2019
Net loss
$
(32,142
)
 
$
(5,670
)
Derivative loss
(198
)
 
—

Currency translation adjustment
(32,772
)
 
1,044

Pension liability adjustments, net of tax of $20 and $232, respectively
1,348

 
1,004

Comprehensive loss
(63,764
)
 
(3,622
)
Net comprehensive (loss) income attributable to redeemable and noncontrolling interests
(2,902
)
 
317

Comprehensive loss attributable to Titan
$
(60,862
)
 
$
(3,939
)























See accompanying Notes to Condensed Consolidated Financial Statements.

2


TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share data)
 
June 30, 2020
 
December 31, 2019
 
 
 
(unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
80,160

 
$
66,799

  Accounts receivable, net
192,410

 
185,238

Inventories
294,537

 
333,356

Prepaid and other current assets
74,094

 
58,869

Total current assets
641,201

 
644,262

Property, plant and equipment, net
337,646

 
374,798

Operating lease assets
21,480

 
23,914

Deferred income taxes
605

 
2,331

Other assets
30,362

 
69,002

Total assets
$
1,031,294

 
$
1,114,307

 
 
 
 
Liabilities
 

 
 

Current liabilities
 

 
 

Short-term debt
$
40,784

 
$
61,253

Accounts payable
136,802

 
158,647

Other current liabilities
120,985

 
107,253

Total current liabilities
298,571

 
327,153

Long-term debt
462,240

 
443,349

Deferred income taxes
2,820

 
6,672

Other long-term liabilities
66,006

 
73,145

Total liabilities
829,637

 
850,319

 
 
 
 
Redeemable noncontrolling interest
25,000

 
25,000

 
 
 
 
Equity
 

 
 

Titan shareholders' equity


 


  Common stock ($0.0001 par value, 120,000,000 shares authorized, 60,787,263 issued at June 30, 2020 and 60,710,983 at December 31, 2019)
—

 
—

Additional paid-in capital
531,577

 
532,070

Retained deficit
(105,167
)
 
(74,334
)
Treasury stock (at cost, 184,969 and 427,771 shares, respectively)
(2,055
)
 
(4,234
)
Accumulated other comprehensive loss
(248,982
)
 
(218,651
)
Total Titan shareholders’ equity
175,373

 
234,851

Noncontrolling interests
1,284

 
4,137

Total equity
176,657

 
238,988

Total liabilities and equity
$
1,031,294

 
$
1,114,307


 See accompanying Notes to Condensed Consolidated Financial Statements.

3


TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(All amounts in thousands, except share data)
 
 Number of
common shares
 
Additional
paid-in
capital
 
Retained (deficit) earnings
 
Treasury stock
 
Accumulated other comprehensive (loss) income
 
Total Titan Equity
 
 Noncontrolling interest
 
Total Equity
Balance January 1, 2019
59,916,973

 
$
519,498

 
$
(29,048
)
 
$
(7,831
)
 
$
(203,571
)
 
$
279,048

 
$
(8,951
)
 
$
270,097

Net income (loss) *
 
 
 
 
1,977

 
 
 
 
 
1,977

 
(636
)
 
1,341

Currency translation adjustment, net *
 
 
 
 
 
 
 
 
(5,281
)
 
(5,281
)
 
474

 
(4,807
)
Pension liability adjustments, net of tax
 
 
 
 
 
 
 
 
466

 
466

 
 
 
466

Dividends declared
 
 
 
 
(301
)
 
 
 
 
 
(301
)
 
 
 
(301
)
Accounting standards adoption
 
 
 
 
4,346

 
 
 
(4,933
)
 
(587
)
 
 
 
(587
)
Redeemable noncontrolling interest activity
 
 
9,437

 
 
 
 
 
 
 
9,437

 
15,445

 
24,882

Redemption value adjustment
 
 
(776
)
 
 
 
 
 
 
 
(776
)
 
 
 
(776
)
Stock-based compensation
 
 
269

 
 
 
 
 
 
 
269

 
 
 
269

VIE distributions
 
 
 
 
 
 
 
 
 
 
—

 
(1,054
)
 
(1,054
)
Issuance of treasury stock under 401(k) plan
29,414

 
(123
)
 
 
 
264

 
 
 
141

 
 
 
141

Balance March 31, 2019
59,946,387

 
$
528,305

 
$
(23,026
)
 
$
(7,567
)
 
$
(213,319
)
 
$
284,393

 
$
5,278

 
$
289,671

Net (loss) income *
 
 
 
 
(6,424
)
 
 
 
 
 
(6,424
)
 
12

 
(6,412
)
Currency translation adjustment, net *
 
 
 
 
 
 
 
 
4,785

 
4,785

 
317

 
5,102

Pension liability adjustments, net of tax
 
 
 
 
 
 
 
 
538

 
538

 
 
 
538

Dividends declared
 
 
 
 
(301
)
 
 
 
 
 
(301
)
 
 
 
(301
)
Redemption value adjustment
 
 
(661
)
 
 
 
 
 
 
 
(661
)
 
 
 
(661
)
Stock-based compensation
 
 
286

 
 
 
 
 
 
 
286

 
 
 
286

VIE distributions
 
 
 
 
 
 
 
 
 
 
—

 
(450
)
 
(450
)
Issuance of treasury stock under 401(k) plan
53,983

 
(167
)
 
 
 
485

 
 
 
318

 
 
 
318

Balance June 30, 2019
60,000,370

 
$
527,763

 
$
(29,751
)
 
$
(7,082
)
 
$
(207,996
)
 
$
282,934

 
$
5,157

 
$
288,091


* Net income (loss) excludes $(334) and $(265) of net loss attributable to redeemable noncontrolling interest for the three months ended March 31, 2019 and June 30, 2019, respectively. Currency translation adjustment excludes $428 and $321 of currency translation related to redeemable noncontrolling interest for the three months ended March 31, 2019 and June 30, 2019, respectively.


4


 
 Number of
common shares
 
Additional
paid-in
capital
 
Retained (deficit) earnings
 
Treasury stock
 
Accumulated other comprehensive (loss) income
 
Total Titan Equity
 
 Noncontrolling interest
 
Total Equity
Balance January 1, 2020
60,283,212

 
$
532,070

 
$
(74,334
)
 
$
(4,234
)
 
$
(218,651
)
 
$
234,851

 
$
4,137

 
$
238,988

Net income (loss)


 


 
(25,486
)
 


 


 
(25,486
)
 
(2,013
)
 
(27,499
)
Currency translation adjustment, net
 
 
 
 
 
 
 
 
(32,004
)
 
(32,004
)
 
(1,782
)
 
(33,786
)
Pension liability adjustments, net of tax


 


 


 


 
1,308

 
1,308

 
 
 
1,308

Dividends declared


 


 
(302
)
 


 


 
(302
)
 
 
 
(302
)
Stock-based compensation
2,500

 
468

 


 
22

 


 
490

 
 
 
490

VIE deconsolidation


 
 
 


 


 


 
—

 
(559
)
 
(559
)
Issuance of stock under 401(k) plan
76,280

 
282

 


 
 
 


 
282

 
 
 
282

Balance March 31, 2020
60,361,992

 
$
532,820

 
$
(100,122
)
 
$
(4,212
)
 
$
(249,347
)
 
$
179,139

 
$
(217
)
 
$
178,922

Net (loss) income
 
 
 
 
(5,045
)
 
 
 
 
 
(5,045
)
 
402

 
(4,643
)
Currency translation adjustment, net
 
 
 
 
 
 
 
 
523

 
523

 
491

 
1,014

Pension liability adjustments, net of tax
 
 
 
 
 
 
 
 
40

 
40

 
 
 
40

Unrealized loss on investment
 
 
 
 
 
 
 
 
(198
)
 
(198
)
 
 
 
(198
)
Stock-based compensation
2,500

 
559

 
 
 
22

 
 
 
581

 
 
 
581

Noncontrolling interest contributions
 
 
 
 
 
 
 
 
 
 
—

 
608

 
608

Issuance of treasury stock under 401(k) plan
237,802

 
(1,802
)
 
 
 
2,135

 
 
 
333

 
 
 
333

Balance June 30, 2020
60,602,294

 
$
531,577

 
$
(105,167
)
 
$
(2,055
)
 
$
(248,982
)
 
$
175,373

 
$
1,284

 
$
176,657

 


See accompanying Notes to Condensed Consolidated Financial Statements.

5


TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(All amounts in thousands)
 
Six months ended June 30,
Cash flows from operating activities:
2020
 
2019
Net loss
$
(32,142
)
 
(5,670
)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
 

 
 

Depreciation and amortization
27,119

 
27,809

Asset impairment
3,586

 
—

Deferred income tax provision
(2,111
)
 
156

Loss on sale of Wheels India Limited shares

703

 
—

Gain on property insurance settlement
(4,936
)
 
—

Stock-based compensation
1,071

 
555

Issuance of stock under 401(k) plan
615

 
459

Foreign currency translation (gain) loss
8,122

 
(1,789
)
(Increase) decrease in assets:
 

 
 

Accounts receivable
(22,383
)
 
(27,193
)
Inventories
23,051

 
14,258

Prepaid and other current assets
(2,491
)
 
(1,763
)
Other assets
844

 
1,305

Increase (decrease) in liabilities:
 

 
 

Accounts payable
(11,568
)
 
(3,863
)
Other current liabilities
19,180

 
(6,949
)
Other liabilities
(3,159
)
 
(7,316
)
Net cash provided by (used for) operating activities
5,501

 
(10,001
)
Cash flows from investing activities:
 

 
 

Capital expenditures
(8,402
)
 
(16,725
)
Payments related to redeemable noncontrolling interest
—

 
(41,000
)
Sale of Wheels India Limited shares
15,722

 
—

Proceeds from property insurance settlement
4,936

 
—

Other
(358
)
 
1,235

Net cash provided by (used for) investing activities
11,898

 
(56,490
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
76,798

 
92,723

Payment on debt
(74,011
)
 
(42,083
)
Dividends paid
(603
)
 
(599
)
Other financing activities
608

 
—

Net cash provided by financing activities
2,792

 
50,041

Effect of exchange rate changes on cash
(6,830
)
 
1,131

Net increase (decrease) in cash and cash equivalents
13,361

 
(15,319
)
Cash and cash equivalents, beginning of period
66,799

 
81,685

Cash and cash equivalents, end of period
$
80,160

 
$
66,366

 
 
 
 
Supplemental information:
 
 
 
Interest paid
$
15,188

 
$
16,416

Income taxes paid, net of refunds received
$
4,732

 
$
4,203





See accompanying Notes to Condensed Consolidated Financial Statements.

6


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


1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements include the accounts of Titan International, Inc. and its subsidiaries (Titan or the Company) and have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the SEC). Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. These unaudited condensed consolidated interim financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the Company's financial position as of June 30, 2020, and the results of operations and cash flows for the three months ended June 30, 2020 and 2019, and should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 4, 2020 (the 2019 Form 10-K). All significant intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.

COVID-19 Pandemic
COVID-19 continued to have an impact on the Company. Titan's workforce and operations have been significantly impacted as a result of government mandates in certain countries to work from home to minimize the spread of the virus. In some of the countries where the Company has operations and where COVID-19 has been widespread (such as the Company’s European and Latin America locations), the Company’s operations were significantly curtailed during March through May 2020. The Company’s operations have since resumed with additional sanitary and other protective health measures which have increased operating costs. The Company's operations may not return to historical levels in the near term, depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date and numerous other uncertainties.

The COVID-19 pandemic affected the Company’s operations in the second quarter, and may continue to do so indefinitely thereafter. All of these factors may have far reaching impacts on the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company’s management and employees, customer behaviors, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and the outcomes are uncertain.

Fair value of financial instruments
The Company records all financial instruments, including cash and cash equivalents, accounts receivable, notes receivable, accounts payable, other accruals, and notes payable at cost, which approximates fair value due to their short term or stated rates.  Investments in marketable equity securities are recorded at fair value.  The 6.50% senior secured notes due 2023 (senior secured notes) were carried at a cost of $396.4 million at June 30, 2020. The fair value of the senior secured notes at June 30, 2020, as obtained through an independent pricing source, was approximately $262.1 million.

Cash dividends
The Company declared cash dividends of $0.005 per share of common stock for the first quarter of 2020 and for each of the quarters ended June 30, 2019. The first quarter 2020 cash dividend of $0.005 per share of common stock was paid on April 15, 2020, to shareholders of record on March 31, 2020. On June 11, 2020, the Board of Directors unanimously approved the suspension of the Company’s quarterly common stock dividend until further notice.

New accounting standards

Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (the FASB) issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions and reasonable and

7


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

supportable forecasts. For trade receivables, loans, and other financial instruments, we are required to use a forward-looking expected loss model that reflects losses that are probable rather than the incurred loss model for recognizing credit losses. The standard became effective for interim and annual periods beginning after December 15, 2019. In addition, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, which provides clarity on certain aspects of the amendments in ASU 2016-13. The Company adopted this guidance prospectively on January 1, 2020 and it did not have a material effect on the Company's condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments in this update are effective for fiscal years beginning after December 15, 2019. We adopted this ASU on January 1, 2020 and it did not have a material effect on the Company's condensed consolidated financial statements.

Accounting standards issued but not yet adopted

In August 2018, the FASB issued ASU No. 2018-14, "Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this update are effective for fiscal years ending after December 15, 2020. The adoption of this guidance is not expected to have a material effect on the Company's condensed consolidated financial statements.

In March 2020, the SEC issued a final rule that amends the disclosure requirements related to certain registered securities under SEC Regulation S-X Rule 3-10 with respect to the disclosure requirements related to issuers and guarantors of guaranteed debt securities. The final rule allows registrants to provide alternative financial disclosures in either the registrant’s MD&A or financial statements, rather than the previous requirement under Rule 3-10, which required condensed consolidating financial information within the financial statements. It also simplifies the requirements in Rule 3-10 that currently must be met for a parent company to qualify for exceptions allowing it to provide alternative disclosures rather than full audited financial statements. The final rule also reduces the periods for which summarized financial information is required to be presented to the most recent (1) annual period and (2) year-to-date interim period. The final rule applies to annual reports on Form 10-K for fiscal years ending after January 4, 2021 and quarterly reports on Form 10-Q for quarterly periods ending after January 4, 2021 and registrants may voluntarily comply with the final rule before the effective date. The Company does not expect the future adoption, which is limited to disclosures only, to have a material effect on the Company’s consolidated financial statements.

2. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following (amounts in thousands):
 
June 30,
2020
 
December 31,
2019
Accounts receivable
$
195,786

 
$
188,952

Allowance for doubtful accounts
(3,376
)
 
(3,714
)
Accounts receivable, net
$
192,410

 
$
185,238


Accounts receivable are reduced by an allowance for doubtful accounts for estimated uncollectible accounts receivable, which is based upon historical experience and specific customer collection issues. Accounts are written off against the allowance account when they are determined to no longer be collectible.


8


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

3. INVENTORIES
 
Inventories consisted of the following (amounts in thousands):
 
June 30,
2020
 
December 31,
2019
Raw material
$
68,894

 
$
83,569

Work-in-process
42,243

 
48,369

Finished goods
183,400

 
201,418

 
$
294,537

 
$
333,356


 
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, NET

Property, plant and equipment, net consisted of the following (amounts in thousands):
 
June 30,
2020
 
December 31,
2019
Land and improvements
$
41,026

 
$
44,386

Buildings and improvements
257,572

 
265,281

Machinery and equipment
591,561

 
605,743

Tools, dies and molds
112,307

 
113,603

Construction-in-process
11,360

 
16,237

 
1,013,826

 
1,045,250

Less accumulated depreciation
(676,180
)
 
(670,452
)
 
$
337,646

 
$
374,798


 
Depreciation on property, plant and equipment for the six months ended June 30, 2020 and 2019, totaled $25.1 million and $26.1 million, respectively.

The Company recorded a $2.6 million asset impairment charge during the six months ended June 30, 2020 related to certain machinery and equipment located at Titan Tire Reclamation Corporation (TTRC) in Canada as a result of market declines, which indicated the remaining book value of the equipment is more than the fair market value.

In the second quarter of 2020, the Company took steps towards the finalization of the closure of its wheel operations in Saltville, Virginia, with plans for completion by the end of the third quarter of 2020. As a part of this process, the Company expects to incur disposal costs related to the closure but an estimated amount or range of amounts has not yet been determined.  There are approximately $0.5 million of net property, plant and equipment at this location.


9


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

5. INTANGIBLE ASSETS, NET

The components of intangible assets consisted of the following (amounts in thousands):
 
Weighted Average Useful Lives (in years) June 30, 2020
 
June 30,
2020
 
December 31,
2019
Amortizable intangible assets:
 
 
 
 
 
     Customer relationships
7.2
 
$
12,420

 
$
12,629

     Patents, trademarks and other
8.6
 
10,507

 
11,598

          Total at cost
 
 
22,927

 
24,227

     Less accumulated amortization
 
 
(14,391
)
 
(14,461
)
 
 
 
$
8,536

 
$
9,766


   
Amortization related to intangible assets for the six months ended June 30, 2020 and 2019, totaled $1.2 million and $1.1 million, respectively. Intangible assets are included as a component of other assets in the Condensed Consolidated Balance Sheets.

The estimated aggregate amortization expense at June 30, 2020, for each of the years (or other periods) set forth below was as follows (amounts in thousands):
July 1 - December 31, 2020
$
972

2021
1,390

2022
972

2023
972

2024
971

Thereafter
3,259

 
$
8,536




6. WARRANTY

Changes in the warranty liability during the six months ended June 30, 2020 and 2019, respectively, consisted of the following (amounts in thousands):
 
2020
 
2019
Warranty liability, January 1
$
14,334

 
$
16,327

Provision for warranty liabilities
3,555

 
1,722

Warranty payments made
(3,784
)
 
(2,987
)
Warranty liability, June 30
$
14,105

 
$
15,062



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 Sheets.


10


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

7. DEBT
 
Long-term debt consisted of the following (amounts in thousands):
 
June 30, 2020
 
Principal Balance
 
Unamortized Debt Issuance
 
Net Carrying Amount
6.50% senior secured notes due 2023
$
400,000

 
$
(3,590
)
 
$
396,410

Titan Europe credit facilities
51,272

 
—

 
51,272

Revolving credit facility
28,000

 
—

 
28,000

Other debt
22,742

 
—

 
22,742

Capital leases
4,600

 
—

 
4,600

     Total debt
506,614

 
(3,590
)
 
503,024

Less amounts due within one year
40,784

 
—

 
40,784

     Total long-term debt
$
465,830

 
$
(3,590
)
 
$
462,240


 
 
December 31, 2019
 
Principal Balance
 
Unamortized Debt Issuance
 
Net Carrying Amount
6.50% senior secured notes due 2023
$
400,000

 
$
(4,040
)
 
$
395,960

Titan Europe credit facilities
43,591

 
—

 
43,591

Revolving credit facility
36,000

 
—

 
36,000

Other debt
24,171

 
—

 
24,171

Capital leases
4,880

 
—

 
4,880

     Total debt
508,642

 
(4,040
)
 
504,602

Less amounts due within one year
61,253

 
—

 
61,253

     Total long-term debt
$
447,389

 
$
(4,040
)
 
$
443,349



Aggregate principal maturities of long-term debt at June 30, 2020, for each of the years (or other periods) set forth below were as follows (amounts in thousands):
July 1 - December 31, 2020
$
25,822

2021
24,056

2022
38,612

2023
406,836

2024
5,545

Thereafter
5,743

 
$
506,614


 
6.50% senior secured notes due 2023
The senior secured notes are due November 2023. Including the impact of debt issuance costs, these notes had an effective yield of 6.79% at issuance. 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.

Titan Europe credit facilities
The Titan Europe credit facilities include borrowings from various institutions totaling $51.3 million in aggregate principal amount at June 30, 2020. Maturity dates on this debt range from less than one year to nine years. The Titan Europe facilities are secured by the assets of Titan's subsidiaries in Italy, Spain, Germany, and Brazil.


11


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

Revolving credit facility
The Company has a $125 million revolving credit facility (credit facility) with BMO Harris Bank N.A., as agent, and other financial institutions party thereto. The credit facility is collateralized by accounts receivable and inventory of certain of the Company’s domestic subsidiaries and is scheduled to mature in February 2022. From time to time Titan's availability under this credit facility may be less than $125 million as a result of outstanding letters of credit and eligible accounts receivable and inventory balances at certain of its domestic subsidiaries. At June 30, 2020, there were $28.0 million in borrowings under the credit facility and $19.7 million in outstanding letters of credit, and the amount available for borrowing totaled $37.9 million.

Other debt
The Company has working capital loans at Titan Pneus do Brasil Ltda and Voltyre-Prom at various interest rates, which totaled $11.5 million and $10.7 million at June 30, 2020, respectively. Maturity dates on this debt range from less than one year to three years.


8. REDEEMABLE NONCONTROLLING INTEREST

The Company, in partnership with One Equity Partners (OEP) and the Russian Direct Investment Fund (RDIF), owned 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 (Shareholders' Agreement) which was entered into in connection with the acquisition of Voltyre-Prom. The agreement contains a settlement put option which was exercisable during a six-month period beginning July 9, 2018. The settlement put option required Titan to purchase the equity interests from OEP and RDIF in Voltyre-Prom with cash or Titan common stock, at a value set by the agreement. The value set by the agreement was the greater of: the aggregate of the investment of the selling party and an amount representing an internal rate of return of 8%, or the last twelve months of EBITDA multiplied by 5.5 less net debt times the selling party's ownership percentage.

On November 14, 2018, the Company received notification of exercise of the put option from RDIF. On February 11, 2019, the Company entered into a definitive agreement (the "Agreement") with an affiliate of RDIF relating to the put option that was exercised by RDIF. The transactions contemplated by the Agreement closed on February 22, 2019. Under the terms of the Agreement, in full satisfaction of the settlement put option that was exercised by RDIF, Titan paid to RDIF $25 million in cash at the closing of the transaction, and agreed, subject to the completion of regulatory approval, to issue to RDIF in a private placement 4,032,259 shares of restricted Titan common stock. Due to pending regulatory approval, the issuance of the shares of restricted Titan common stock pursuant to the Agreement was not completed as of June 30, 2020. Immediately following the closing, RDIF continued to own the same interest in Voltyre-Prom, subject to the terms of the Agreement and the Shareholders’ Agreement. Titan has retained the right to buy back the Titan shares from RDIF for $25 million until February 12, 2022, the three-year anniversary of the signing of the Agreement, and, if the stock buyback is consummated within the first year, at the time of such buyback, RDIF would be required to convey to Titan, based on current ownership, a 10.71% interest in Voltyre-Prom, resulting in RDIF reducing its interest in Voltyre-Prom from 35.7% to 25%.

On January 8, 2019, the Company received notification of exercise of the put option from OEP. During the second quarter of 2019, the Company made a payment to OEP in the amount of $16.0 million representing the majority of the interest on the amount due to OEP with respect to the put option. On July 30, 2019, Titan Luxembourg S.à r.l. (the “Titan Purchaser”), a subsidiary of the Company, entered into a sale purchase agreement (the “OEP Agreement”) with subsidiaries of OEP, relating to the settlement put option under the Shareholders’ Agreement that was exercised by OEP. Pursuant to the terms of the OEP Agreement, on July 31, 2019, the Titan Purchaser paid to OEP $30.7 million in cash, which, together with the Titan Purchaser’s prior payment to OEP of $16.0 million during the second quarter of 2019, were made in full satisfaction of the settlement put option exercised by OEP under the Shareholders’ Agreement. Immediately following the closing, OEP ceased to have any ownership interests in, and the Titan Purchaser and RDIF owned 64.3% and 35.7%, respectively, of, Voltyre-Prom.

As of June 30, 2020, the value of the redeemable noncontrolling interest held by RDIF was recorded at $25 million, the value of the shares of restricted stock to be issued pursuant to the terms of the agreement.


12


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

The following is a reconciliation of redeemable noncontrolling interest as of June 30, 2020 and 2019 (amounts in thousands):
 
2020
 
2019
Balance at January 1
$
25,000

 
$
119,813

   Reclassification as a result of Agreement regarding put option
—

 
(49,883
)
   Payment of interest on redeemable noncontrolling interest
—

 
(16,000
)
   Loss attributable to redeemable noncontrolling interest
—

 
(599
)
   Currency translation
—

 
749

   Redemption value adjustment
—

 
1,437

Balance at June 30,
$
25,000

 
$
55,517



This obligation represents the value of the restricted common stock due to RDIF on June 30, 2020, and is presented in the Condensed Consolidated Balance Sheets in redeemable noncontrolling interest, which is treated as mezzanine equity.

9. LEASES

The Company leases certain buildings and equipment under both operating and finance leases.  Certain lease agreements provide for renewal options, fair value purchase options, and payment of property taxes, maintenance, and insurance by the Company. Under ASC 842, the Company made an accounting policy election, by class of underlying asset, not to separate non-lease components such as those previously stated from lease components and instead will treat the lease agreement as a single lease component for all asset classes. Operating right-of-use (ROU) assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent Titan's obligations to make lease payments arising from the lease. The majority of Titan's leases are operating leases. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of Titan's leases do not provide an implicit interest rate, the Company used its incremental borrowing rate (6.79%), based on the information available at the lease commencement date, in determining the present value of lease payments. Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales and selling, general and administrative expenses on the Condensed Consolidated Statement of Operations. Amortization expense associated with finance leases is included in cost of sales and selling, general and administrative expenses, and interest expense associated with finance leases is included in interest expense in the Condensed Consolidated Statement of Operations. Short-term operating leases, which have an initial term of twelve months or less, are not recorded on the Condensed Consolidated Balance Sheets.

13


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

 
Supplemental balance sheet information related to leases was as follows (amounts in thousands):
 
Balance Sheet Classification
 
June 30, 2020
December 31, 2019
Operating lease ROU assets
Operating lease assets
 
$
21,480

$
23,914

 
 
 
 
 
Operating lease current liabilities
Other current liabilities
 
$
6,226

$
6,729

Operating lease long-term liabilities
Other long-term liabilities
 
15,918

17,360

    Total operating lease liabilities
 
 
$
22,144

$
24,089

 
 
 
 
 
Finance lease, gross
Property, plant & equipment, net
 
$
6,471

$
6,684

Finance lease accumulated depreciation
Property, plant & equipment, net
 
(1,616
)
(2,194
)
   Finance lease, net
 
 
$
4,855

$
4,490

 
 
 
 
 
Finance lease current liabilities
Other current liabilities
 
$
1,391

$
1,110

Finance lease long-term liabilities
Long-term debt
 
3,209

3,770

   Total finance lease liabilities
 
 
$
4,600

$
4,880


 
At June 30, 2020, maturity of lease liabilities were as follows (amounts in thousands):
 
Operating Leases
 
Finance Leases
July 1 - December 31, 2020
$
3,960

 
$
820

2021
6,702

 
1,615

2022
5,344

 
1,528

2023
3,511

 
1,100

2024
2,006

 
411

Thereafter
3,577

 
191

Total lease payments
$
25,100

 
$
5,665

Less imputed interest
2,956

 
1,065

 
$
22,144

 
$
4,600

 
 
 
 
Weighted average remaining lease term (in years)
4.5

 
3.5


Supplemental cash flow information related to leases for the six months ended June 30, 2020 were as follows: operating cash flows from operating leases were $4.2 million and operating cash flows from finance leases were $0.2 million.

14


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

10. 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 $0.9 million to the pension plans during the six months ended June 30, 2020, and expects to contribute approximately $1.1 million to the pension plans during the remainder of 2020.
 
The components of net periodic pension cost consisted of the following for the periods set forth below (amounts in thousands):
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Service cost
$
242

 
$
205

 
$
528

 
$
430

Interest cost
876

 
1,106

 
1,738

 
2,229

Expected return on assets
(1,358
)
 
(1,188
)
 
(2,718
)
 
(2,377
)
Amortization of unrecognized prior service cost
—

 
57

 
—

 
113

Amortization of net unrecognized loss
696

 
765

 
1,392

 
1,530

      Net periodic pension cost
$
456

 
$
945

 
$
940

 
$
1,925


Service cost is recorded as cost of sales in the Condensed Consolidated Statement of Operations while all other components are recorded in other income.


11. VARIABLE INTEREST ENTITIES
 
The Company holds a variable interest in two joint ventures for which the Company is the primary beneficiary. These joint ventures operate distribution facilities that primarily distribute mining products. Titan is the 50% owner of one of these distribution facilities, which is located in Canada, and the 40% owner of the other such facility, which is located in Australia. The Company’s variable interests in these two joint ventures relate to sales of Titan products to these entities, consigned inventory, and working capital loans. Titan also is party to a joint venture that is the consortium that owns Voltyre-Prom, of which Titan originally was a 43% owner. On July 31, 2019, however, Titan purchased additional shares resulting in a 64.3% ownership in the consortium and the joint venture became a majority owned entity and is no longer a variable interest entity (a VIE). See Note 8 for additional information.
 
The Company also held a variable interest in two other entities for which Titan was the primary beneficiary. Each of these entities provided specific manufacturing related services at the Company's Tennessee facility. Titan's variable interest in these entities relates to financial support to the entities through providing many of the assets used by these entities in their business. The Company owns no equity in these entities. In March 2020, the Company delivered a notice of termination of the supply agreement with these entities and the Company no longer holds a variable interest in them.
 
As the primary beneficiary of these VIEs', the VIEs’ assets, liabilities, and results of operations are included in the Company’s condensed 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.
 

15


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

The following table summarizes the carrying amount of the VIEs’ assets and liabilities included in the Company’s Condensed Consolidated Balance Sheets:
 
June 30,
2020
 
December 31, 2019
Cash and cash equivalents
$
1,857

 
$
2,190

Inventory
1,038

 
1,070

Other current assets
786

 
1,027

Property, plant and equipment, net
1,236

 
1,327

   Total assets
$
4,917

 
$
5,614

 
 
 
 
Current liabilities
$
862

 
$
1,110

Other long-term liabilities
542

 
579

  Total liabilities
$
1,404

 
$
1,689


 
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 variable interests in certain VIEs that 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 related to purchases of materials. The maximum exposure to loss as reflected in the table below 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 Condensed Consolidated Balance Sheets related to Titan's interest in these non-consolidated VIEs and the Company's maximum exposure to loss related to non-consolidated VIEs as of the dates set forth below were as follows (amounts in thousands):
 
June 30,
2020
 
December 31, 2019
Investments
$
4,786

 
$
4,973

Other current assets
6

 
—

     Total VIE assets
4,792

 
4,973

Accounts payable
1,231

 
2,006

  Maximum exposure to loss
$
6,023

 
$
6,979




12. RESTRUCTURING ACTIVITIES

As part of the North American and Corporate Restructuring plan, which was approved in the second quarter of 2020, certain positions have been eliminated to continue ongoing operational improvement initiatives designed to prioritize resource allocation, reduce costs and drive profitability for the Company on a global basis.

The Company has incurred $0.4 million and $0 during the three and six months ended June 30, 2020 and 2019 for severance costs related to the rationalization of certain Corporate positions.

As part of the closure of the Saltville, Virginia wheel operations, expected to be completed during the third quarter of 2020, the Company recorded an inventory impairment charge of $1.0 million for the three and six months ended June 30, 2020.

The accrual for the workforce reduction of $0.4 million is included within the "Other current liabilities" line of the Condensed Consolidated Balance Sheets for the three and six months ended June 30, 2020. There were no amounts accrued for the workforce reduction for the three and six months ended June 30, 2019.


16


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 brand. These agreements cover sales in North America, Latin America, Europe, the Middle East, Africa, Russia, and other Commonwealth of Independent States countries. Each of these agreements is scheduled to expire in 2025. Royalty expenses were $2.4 million and $2.4 million for the three months ended June 30, 2020 and 2019, respectively, and $4.9 million and $5.1 million for the six months ended June 30, 2020 and 2019, respectively.
 

14. OTHER INCOME

Other income consisted of the following (amounts in thousands):
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Gain on property insurance settlement (1)
$
—

 
$
—

 
$
4,936

 
$
—

Loss on sale of Wheels India Limited shares
(2,005
)
 
—

 
(703
)
 
—

Equity investment income
(236
)
 
974

 
369

 
1,849

Gain on sale of assets
544

 
397

 
892

 
767

Building rental income
398

 
479

 
714

 
734

Interest income
102

 
301

 
217

 
641

Other (expense)
807

 
(82
)
 
621

 
(926
)
 
$
(390
)
 
$
2,069

 
$
7,046

 
$
3,065



(1) The gain on property insurance settlement relates to the receipt of insurance proceeds during the three months ended March 31, 2020 for a 2017 fire that occurred at a facility of TTRC, a subsidiary of the Company, located in Fort McMurray in Alberta, Canada.


15. INCOME TAXES

The Company recorded income tax expense of $2.0 million and income tax benefit of $3.2 million for the three months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019, the Company recorded income tax expense of $2.0 million and income tax benefit of $1.3 million, respectively. The Company's effective income tax rate was (74)% and 33% for the three months ended June 30, 2020 and 2019, respectively, and (7)% and 19% for the six months ended June 30, 2020 and 2019, respectively.

The Company’s 2020 and 2019 income tax expense and rates 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 and partially offset by a reduction of the liability for unrecognized tax positions. 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 six months ended June 30, 2020 and 2019.

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 primarily includes the past three years' profit and loss positions. 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 the U.S. and certain foreign jurisdictions and continues to monitor and assess potential valuation allowances in all its jurisdictions.


17


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

The 2017 Tax Cuts and Jobs Act was enacted on December 22, 2017 and created a new requirement that certain income (i.e., global intangible low taxed income, hereinafter referred to as GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. For 2020 and 2019, the Company has estimated an amount of GILTI income that is to be included in the calculation of 2020 and 2019 income tax expense. This GILTI income inclusion; however, is fully offset by a change in the valuation allowance.

On March 27, 2020, the U.S. government passed the CARES Act (the "CARES Act"), which provides tax relief to assist companies dealing with the effects of COVID-19. The Company does not expect the impact of the CARES Act to be material to the Company’s financial position or results of operations, except for the deferral of Social Security payroll taxes, which will benefit the Company's operating cash flows through the end of calendar year 2020.

 
16. EARNINGS PER SHARE
 
Earnings per share (EPS) were as follows (amounts in thousands, except per share data):
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
Net loss attributable to Titan
$
(5,045
)
 
$
(6,424
)
 
$
(30,531
)
 
$
(4,446
)
   Redemption value adjustment
—

 
(661
)
 
—

 
(1,437
)
Net loss applicable to common shareholders
$
(5,045
)
 
$
(7,085
)
 
$
(30,531
)
 
$
(5,883
)
Determination of shares:
 
 
 
 
 
 
 
   Weighted average shares outstanding (basic)
60,602

 
60,000

 
60,481

 
59,973

   Effect of equity awards
—

 
—

 
—

 
—

   Weighted average shares outstanding (diluted)
60,602

 
60,000

 
60,481

 
59,973

Earnings per share:
 
 
 
 
 
 
 
   Basic and diluted
(0.08
)
 
(0.12
)
 
(0.50
)
 
(0.10
)

The effect of equity awards has been excluded for the three and six months ended June 30, 2020, as the effect would have been antidilutive. The weighted average share amount excluded for equity awards for the three and six months ended June 30, 2020, was 73 thousand and 130 thousand, respectively.


18


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

17. LITIGATION
 
The Company is a party to routine legal proceedings arising out of the normal course of business. 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.

At June 30, 2020, two of Titan’s subsidiaries were involved in litigation concerning environmental laws and regulations.

In June 2015, Titan Tire Corporation (Titan Tire) and Dico, Inc. (Dico) appealed a U.S. District Court order granting the U.S. motion for summary judgment that found Dico liable for violating the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) and an Environmental Protection Agency (EPA) Administrative Order and awarded response costs, civil penalties, and punitive damages.

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 occurred 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. As of June 30, 2020, the $6.5 million contingent liability remains outstanding.

Titan Tire and Dico appealed the case to the United States Court of Appeals for the Eighth Circuit. On April 11, 2019, the U.S. Court of Appeals for the Eighth Circuit affirmed the District Court’s September 5, 2017, order. Thereafter, Dico and Titan Tire filed a petition for rehearing with the U.S. Court of Appeals for the Eighth Circuit, which was denied in August 2019. As a result of the current judgment in favor of the United States, and pursuant to Iowa Code § 624.23, a judgment lien exists over Titan Tire’s real property in the State of Iowa. Titan Tire maintains a supersedeas bond in the amount of $6.0 million relating to the judgment. The United States has indicated that it does not currently intend to take steps to execute on this judgment lien in light of ongoing settlement discussions between the parties. However, there can be no assurance that the parties will settle this matter on terms acceptable to the parties.






19


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

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. 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.
The table below presents information about certain operating results, separated by market segments, for each of the three and six months ended June 30, 2020 and 2019 (amounts in thousands):

Three months ended
 
Six months ended

June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Net sales
 
 
 
 

 

Agricultural
$
147,267

 
$
164,284

 
$
320,206

 
$
356,014

Earthmoving/construction
112,457

 
184,782

 
249,379

 
361,527

Consumer
26,409

 
41,531

 
58,048

 
83,430

 
$
286,133

 
$
390,597

 
$
627,633

 
$
800,971

Gross profit
 

 
 

 
 
 
 
Agricultural
$
15,613

 
$
14,247

 
$
29,640

 
$
36,372

Earthmoving/construction
11,614

 
19,701

 
22,368

 
37,871

Consumer
2,640

 
4,360

 
5,103

 
9,329

 
$
29,867

 
$
38,308

 
$
57,111

 
$
83,572

(Loss) income from operations
 

 
 

 
 
 
 
Agricultural
$
6,992

 
$
4,365

 
$
2,298

 
$
18,293

Earthmoving/construction
(1,902
)
 
5,697

 
(8,897
)
 
11,225

Consumer
1,425

 
1,228

 
1,131

 
3,349

Corporate & Unallocated
(9,616
)
 
(13,720
)
 
(7,236
)
 
(31,161
)
      (Loss) income from operations
(3,101
)
 
(2,430
)
 
(12,704
)
 
1,706

 
 
 
 
 
 
 
 
Interest expense
(8,008
)
 
(8,295
)
 
(16,043
)
 
(16,228
)
Foreign exchange (loss) gain
8,836

 
(1,239
)
 
(8,406
)
 
4,484

Other income, net
(390
)
 
2,069

 
7,046

 
3,065

      (Loss) income before income taxes
$
(2,663
)
 
$
(9,895
)
 
$
(30,107
)
 
$
(6,973
)

Assets by segment were as follows as of the dates set forth below (amounts in thousands):
 
June 30,
2020
 
December 31,
2019
Total assets
 

 
 

Agricultural
$
430,894

 
$
423,955

Earthmoving/construction
447,867

 
496,988

Consumer
107,028

 
123,320

Corporate & Unallocated
45,505

 
70,044

 
$
1,031,294

 
$
1,114,307

 

20


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

19. 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 with which Mr. Fred Taylor is associated that do business with Titan include the following: Blacksmith 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 $0.2 million and $0.5 million for the three and six months ended June 30, 2020, respectively, and approximately $0.2 million and $0.5 million for the three and six months ended June 30, 2019, respectively. Titan had trade receivables due from these companies of approximately $0.2 million at June 30, 2020, and approximately $0.1 million at December 31, 2019.  Sales commissions paid to the above companies were approximately $0.4 million and $0.7 million for the three and six months ended June 30, 2020 as compared to $0.3 million and $0.8 million for the three and six months ended June 30, 2019.
 


20. ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss consisted of the following (amounts in thousands):
 
Currency
Translation
Adjustments
 
Gain (Loss) on
Derivatives
 
Unrecognized
Losses and
Prior Service
Cost
 
 
 
Total
Balance at April 1, 2020
$
(224,511
)
 
$
—

 
$
(24,836
)
 
$
(249,347
)
Currency translation adjustments
523

 
—

 
—

 
523

Defined benefit pension plans: Amortization of unrecognized losses and prior service cost, net of tax of $230
—

 
—

 
40

 
40

Derivative gain (loss)
—

 
(198
)
 
—

 
(198
)
Balance at June 30, 2020
$
(223,988
)
 
$
(198
)
 
$
(24,796
)
 
$
(248,982
)

 
Currency
Translation
Adjustments
 
Gain (Loss) on
Derivatives
 
Unrecognized
Losses and
Prior Service
Cost
 
 
 
Total
Balance at January 1, 2020
$
(192,507
)
 
$
—

 
$
(26,144
)
 
$
(218,651
)
Currency translation adjustments (1)
(31,481
)
 
—

 
—

 
(31,481
)
Defined benefit pension plans: Amortization of unrecognized losses and prior service cost, net of tax of $20
—

 
—

 
1,348

 
1,348

Derivative gain (loss)
—

 
(198
)
 
—

 
(198
)
Balance at June 30, 2020
$
(223,988
)
 
$
(198
)
 
$
(24,796
)
 
$
(248,982
)

(1) The increase in currency translation adjustments for the six months ended June 30, 2020 was due to foreign currency rate fluctuations and also due to the settlement of certain intercompany loans during the quarter.


21


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


21. 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 governing the senior secured notes incorporated by reference to the 2019 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.
(Amounts in thousands)
Condensed Consolidating Statements of Operations
For the Three Months Ended June 30, 2020
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$
—

 
$
126,992

 
$
286,874

 
$
(127,733
)
 
$
286,133

Cost of sales
156

 
113,292

 
269,544

 
(127,733
)
 
255,259

Asset impairment
1,007

 
—

 
—

 
—

 
1,007

Gross (loss) profit
(1,163
)
 
13,700

 
17,330

 
—

 
29,867

Selling, general and administrative expenses
5,698

 
2,178

 
20,565

 
—

 
28,441

Research and development expenses
214

 
761

 
1,157

 
—

 
2,132

Royalty expense
927

 
774

 
694

 
—

 
2,395

(Loss) income from operations
(8,002
)
 
9,987

 
(5,086
)
 
—

 
(3,101
)
Interest expense
(7,103
)
 
(9
)
 
(896
)
 
—

 
(8,008
)
Intercompany interest income (expense)
529

 
528

 
(1,057
)
 
—

 
—

Foreign exchange loss
—

 
(136
)
 
8,972

 
—

 
8,836

Other income (expense)
395

 
(111
)
 
(674
)
 
—

 
(390
)
(Loss) income before income taxes
(14,181
)
 
10,259

 
1,259

 
—

 
(2,663
)
Provision for income taxes
(1,447
)
 
79

 
3,348

 
—

 
1,980

Equity in earnings of subsidiaries
8,091

 
—

 
6,557

 
(14,648
)
 
—

Net (loss) income
(4,643
)
 
10,180

 
4,468

 
(14,648
)
 
(4,643
)
Net loss attributable to noncontrolling interests
—

 
—

 
402

 
—

 
402

Net (loss) income attributable to Titan
$
(4,643
)
 
$
10,180

 
$
4,066

 
$
(14,648
)
 
$
(5,045
)



22


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

(Amounts in thousands)
Condensed Consolidating Statements of Operations
For the Three Months Ended June 30, 2019
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$
—

 
$
111,162

 
$
391,301

 
$
(111,866
)
 
$
390,597

Cost of sales
(11
)
 
99,275

 
364,891

 
(111,866
)
 
352,289

Gross profit
11

 
11,887

 
26,410

 
—

 
38,308

Selling, general and administrative expenses
2,030

 
11,596

 
22,120

 
—

 
35,746

Research and development expenses
228

 
756

 
1,560

 
—

 
2,544

Royalty expense
401

 
1,073

 
974

 
—

 
2,448

(Loss) income from operations
(2,648
)
 
(1,538
)
 
1,756

 
—

 
(2,430
)
Interest expense
(7,243
)
 
—

 
(1,052
)
 
—

 
(8,295
)
Intercompany interest income (expense)
644

 
880

 
(1,524
)
 
—

 
—

Foreign exchange (loss) gain
16

 
55

 
(1,310
)
 
—

 
(1,239
)
Other income (expense)
612

 
(798
)
 
2,255

 
—

 
2,069

(Loss) income before income taxes
(8,619
)
 
(1,401
)
 
125

 
—

 
(9,895
)
Provision for income taxes
(7,676
)
 
132

 
4,326

 
—

 
(3,218
)
Equity in earnings of subsidiaries
(5,734
)
 
—

 
(205
)
 
5,939

 
—

Net income (loss)
(6,677
)
 
(1,533
)
 
(4,406
)
 
5,939

 
(6,677
)
Net loss attributable to noncontrolling interests
—

 
—

 
(253
)
 
—

 
(253
)
Net income (loss) attributable to Titan
$
(6,677
)
 
$
(1,533
)
 
$
(4,153
)
 
$
5,939

 
$
(6,424
)



23


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

(Amounts in thousands)
 Condensed Consolidating Statements of Operations
For the Six Months Ended June 30, 2020
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$
—

 
$
286,960

 
$
628,560

 
$
(287,887
)
 
$
627,633

Cost of sales
322

 
258,842

 
595,659

 
(287,887
)
 
566,936

Asset impairment
1,007

 
—

 
2,579

 
—

 
3,586

Gross (loss) profit
(1,329
)
 
28,118

 
30,322

 
—

 
57,111

Selling, general and administrative expenses
11,339

 
4,144

 
44,915

 
—

 
60,398

Research and development expenses
454

 
1,470

 
2,618

 
—

 
4,542

Royalty expense
1,493

 
1,839

 
1,543

 
—

 
4,875

(Loss) income from operations
(14,615
)
 
20,665

 
(18,754
)
 
—

 
(12,704
)
Interest expense
(14,264
)
 
(15
)
 
(1,764
)
 
—

 
(16,043
)
Intercompany interest income (expense)
1,060

 
1,179

 
(2,239
)
 
—

 
—

Foreign exchange loss
—

 
(882
)
 
(7,524
)
 
—

 
(8,406
)
Other income (expense)
1,017

 
(261
)
 
6,290

 
—

 
7,046

(Loss) income before income taxes
(26,802
)
 
20,686

 
(23,991
)
 
—

 
(30,107
)
Provision for income taxes
(1,912
)
 
177

 
3,770

 
—

 
2,035

Equity in earnings of subsidiaries
(7,252
)
 
—

 
14,070

 
(6,818
)
 
—

Net (loss) income
(32,142
)
 
20,509

 
(13,691
)
 
(6,818
)
 
(32,142
)
Net loss attributable to noncontrolling interests
—

 
—

 
(1,611
)
 
—

 
(1,611
)
Net (loss) income attributable to Titan
$
(32,142
)
 
$
20,509

 
$
(12,080
)
 
$
(6,818
)
 
$
(30,531
)


(Amounts in thousands)
 Condensed Consolidating Statements of Operations
For the Six Months Ended June 30, 2019
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$
—

 
$
235,943

 
$
801,576

 
$
(236,548
)
 
$
800,971

Cost of sales
141

 
205,791

 
748,015

 
(236,548
)
 
717,399

Gross (loss) profit
(141
)
 
30,152

 
53,561

 
—

 
83,572

Selling, general and administrative expenses
3,181

 
23,204

 
45,266

 
—

 
71,651

Research and development expenses
492

 
1,585

 
3,084

 
—

 
5,161

Royalty expense
1,064

 
2,145

 
1,845

 
—

 
5,054

(Loss) income from operations
(4,878
)
 
3,218

 
3,366

 
—

 
1,706

Interest expense
(14,170
)
 
—

 
(2,058
)
 
—

 
(16,228
)
Intercompany interest income (expense)
1,274

 
1,890

 
(3,164
)
 
—

 
—

Foreign exchange loss
(22
)
 
(4
)
 
4,510

 
—

 
4,484

Other income (expense)
943

 
(1,077
)
 
3,199

 
—

 
3,065

(Loss) income before income taxes
(16,853
)
 
4,027

 
5,853

 
—

 
(6,973
)
Provision for income taxes
(7,026
)
 
283

 
5,440

 
—

 
(1,303
)
Equity in earnings of subsidiaries
4,157

 
—

 
531

 
(4,688
)
 
—

Net (loss) income
(5,670
)
 
3,744

 
944

 
(4,688
)
 
(5,670
)
Net loss attributable to noncontrolling interests
—

 
—

 
(1,224
)
 
—

 
(1,224
)
Net (loss) income attributable to Titan
$
(5,670
)
 
$
3,744

 
$
2,168

 
$
(4,688
)
 
$
(4,446
)

24


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


(Amounts in thousands)
Condensed Consolidating Statements of Comprehensive Loss
For the Three Months Ended June 30, 2020
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net (loss) income
$
(4,643
)
 
$
10,180

 
$
4,468

 
$
(14,648
)
 
$
(4,643
)
Derivative loss
(198
)
 
—

 
(198
)
 
198

 
(198
)
Currency translation adjustment
1,014

 
—

 
1,014

 
(1,014
)
 
1,014

Pension liability adjustments, net of tax
40

 
667

 
(627
)
 
(40
)
 
40

Comprehensive (loss) income
(3,787
)
 
10,847

 
4,657

 
(15,504
)
 
(3,787
)
Net comprehensive loss attributable to redeemable and noncontrolling interests
—

 
—

 
893

 
—

 
893

Comprehensive (loss) income attributable to Titan
$
(3,787
)
 
$
10,847

 
$
3,764

 
$
(15,504
)
 
$
(4,680
)



(Amounts in thousands)
Condensed Consolidating Statements of Comprehensive Loss
For the Three Months Ended June 30, 2019
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
(6,677
)
 
$
(1,533
)
 
$
(4,406
)
 
$
5,939

 
$
(6,677
)
Currency translation adjustment
5,423

 
—

 
5,423

 
(5,423
)
 
5,423

Pension liability adjustments, net of tax
538

 
753

 
(215
)
 
(538
)
 
538

Comprehensive (loss) income
(716
)
 
(780
)
 
802

 
(22
)
 
(716
)
Net comprehensive loss attributable to redeemable and noncontrolling interests
—

 
—

 
385

 
—

 
385

Comprehensive (loss) income attributable to Titan
$
(716
)
 
$
(780
)
 
$
417

 
$
(22
)
 
$
(1,101
)


(Amounts in thousands)
Condensed Consolidating Statements of Comprehensive Loss
For the Six Months Ended June 30, 2020
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
(32,142
)
 
$
20,509

 
$
(13,691
)
 
$
(6,818
)
 
$
(32,142
)
Derivative loss
(198
)
 
—

 
(198
)
 
198

 
(198
)
Currency translation adjustment
(32,772
)
 
—

 
(32,772
)
 
32,772

 
(32,772
)
Pension liability adjustments, net of tax
1,348

 
1,334

 
14

 
(1,348
)
 
1,348

Comprehensive (loss) income
(63,764
)
 
21,843

 
(46,647
)
 
24,804

 
(63,764
)
Net comprehensive loss attributable to redeemable and noncontrolling interests
—

 
—

 
(2,902
)
 
—

 
(2,902
)
Comprehensive (loss) income attributable to Titan
$
(63,764
)
 
$
21,843

 
$
(43,745
)
 
$
24,804

 
$
(60,862
)


25


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

(Amounts in thousands)
Condensed Consolidating Statements of Comprehensive Loss
For the Six Months Ended June 30, 2019
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
$
(5,670
)
 
$
3,744

 
$
944

 
$
(4,688
)
 
$
(5,670
)
Currency translation adjustment
1,044

 
—

 
1,044

 
(1,044
)
 
1,044

Pension liability adjustments, net of tax
1,004

 
1,506

 
(502
)
 
(1,004
)
 
1,004

Comprehensive (loss) income
(3,622
)
 
5,250

 
1,486

 
(6,736
)
 
(3,622
)
Net comprehensive loss attributable to redeemable and noncontrolling interests
—

 
—

 
317

 
—

 
317

Comprehensive (loss) income attributable to Titan
$
(3,622
)
 
$
5,250

 
$
1,169

 
$
(6,736
)
 
$
(3,939
)




(Amounts in thousands)
Condensed Consolidating Balance Sheets
June 30, 2020
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
911

 
$
4

 
$
79,245

 
$
—

 
$
80,160

Accounts receivable, net
—

 
—

 
192,410

 
—

 
192,410

Inventories
(1,007
)
 
30,040

 
265,504

 
—

 
294,537

Prepaid and other current assets
3,247

 
16,724

 
54,123

 
—

 
74,094

Total current assets
3,151

 
46,768

 
591,282

 
—

 
641,201

Property, plant and equipment, net
9,675

 
86,733

 
241,238

 
—

 
337,646

Investment in subsidiaries
727,559

 
—

 
76,936

 
(804,495
)
 
—

Other assets
2,015

 
4,863

 
45,569

 
—

 
52,447

Total assets
$
742,400

 
$
138,364

 
$
955,025

 
$
(804,495
)
 
$
1,031,294

Liabilities and Equity
 

 
 

 
 

 
 

 
 

Short-term debt
$
617

 
$
174

 
$
39,993

 
$
—

 
$
40,784

Accounts payable
2,044

 
20,995

 
113,763

 
—

 
136,802

Other current liabilities
24,387

 
21,226

 
75,372

 
—

 
120,985

Total current liabilities
27,048

 
42,395

 
229,128

 
—

 
298,571

Long-term debt
425,576

 
384

 
36,280

 
—

 
462,240

Other long-term liabilities
1,453

 
14,583

 
52,790

 
—

 
68,826

Intercompany accounts
71,986

 
(441,171
)
 
369,185

 
—

 
—

Redeemable noncontrolling interest
—

 
—

 
25,000

 
—

 
25,000

Titan shareholders' equity
216,337

 
522,173

 
241,358

 
(804,495
)
 
175,373

Noncontrolling interests
—

 
—

 
1,284

 
—

 
1,284

Total liabilities and equity
$
742,400

 
$
138,364

 
$
955,025

 
$
(804,495
)
 
$
1,031,294


26


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

(Amounts in thousands)
Condensed Consolidating Balance Sheets
December 31, 2019
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
2,843

 
$
4

 
$
63,952

 
$
—

 
$
66,799

Accounts receivable, net
—

 
2

 
185,236

 
—

 
185,238

Inventories
—

 
41,088

 
292,268

 
—

 
333,356

Prepaid and other current assets
3,217

 
17,352

 
38,300

 
—

 
58,869

Total current assets
6,060

 
58,446

 
579,756

 
—

 
644,262

Property, plant and equipment, net
10,646

 
91,734

 
272,418

 
—

 
374,798

Investment in subsidiaries
763,336

 
—

 
61,019

 
(824,355
)
 
—

Other assets
3,405

 
4,211

 
87,631

 
—

 
95,247

Total assets
$
783,447

 
$
154,391

 
$
1,000,824

 
$
(824,355
)
 
$
1,114,307

Liabilities and Equity
 

 
 

 
 

 
 

 
 

Short-term debt
$
514

 
$
69

 
$
60,670

 
$
—

 
$
61,253

Accounts payable
4,951

 
18,455

 
135,241

 
—

 
158,647

Other current liabilities
20,912

 
17,941

 
68,400

 
—

 
107,253

Total current liabilities
26,377

 
36,465

 
264,311

 
—

 
327,153

Long-term debt
433,242

 
201

 
9,906

 
—

 
443,349

Other long-term liabilities
5,211

 
15,242

 
59,364

 
—

 
79,817

Intercompany accounts
42,798

 
(397,847
)
 
355,049

 
—

 
—

Redeemable noncontrolling interest
—

 
—

 
25,000

 
—

 
25,000

Titan shareholders' equity
275,819

 
500,330

 
283,057

 
(824,355
)
 
234,851

Noncontrolling interests
—

 
—

 
4,137

 
—

 
4,137

Total liabilities and equity
$
783,447

 
$
154,391

 
$
1,000,824

 
$
(824,355
)
 
$
1,114,307






27


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

(Amounts in thousands)
Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2020
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated
Net cash provided by (used for) operating activities
$
6,494

 
$
2,112

 
$
(3,105
)
 
$
5,501

Cash flows from investing activities:
 

 
 

 
 

 
 

Capital expenditures
—

 
(2,400
)
 
(6,002
)
 
(8,402
)
Sale of Wheels India Limited shares
—

 
—

 
15,722

 
15,722

Insurance proceeds
—

 
—

 
4,936

 
4,936

Other, net
191

 
—

 
(549
)
 
(358
)
Net cash (used for) provided by investing activities
191

 
(2,400
)
 
14,107

 
11,898

Cash flows from financing activities:
 

 
 

 
 

 
 

Proceeds from borrowings
31,264

 
333

 
45,201

 
76,798

Payment on debt
(39,278
)
 
(45
)
 
(34,688
)
 
(74,011
)
Dividends paid
(603
)
 
—

 
—

 
(603
)
Other financing activities
—

 
—

 
608

 
608

Net cash (used for) provided by financing activities
(8,617
)
 
288

 
11,121

 
2,792

Effect of exchange rate change on cash
—

 
—

 
(6,830
)
 
(6,830
)
Net increase (decrease) in cash and cash equivalents
(1,932
)
 
—

 
15,293

 
13,361

Cash and cash equivalents, beginning of period
2,843

 
4

 
63,952

 
66,799

Cash and cash equivalents, end of period
$
911

 
$
4

 
$
79,245

 
$
80,160

 

(Amounts in thousands)
Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2019
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated
Net cash (used for) provided by operating activities
$
(16,658
)
 
$
4,213

 
$
2,444

 
$
(10,001
)
Cash flows from investing activities:
 

 
 

 
 

 
 

Capital expenditures
(21
)
 
(4,396
)
 
(12,308
)
 
(16,725
)
Payment related to redeemable noncontrolling interest agreement
(41,000
)
 
—

 
—

 
(41,000
)
Other, net
—

 
182

 
1,053

 
1,235

Net cash used for investing activities
(41,021
)
 
(4,214
)
 
(11,255
)
 
(56,490
)
Cash flows from financing activities:
 

 
 

 
 

 
 

Proceeds from borrowings
50,000

 
—

 
42,723

 
92,723

Payment on debt
(9,000
)
 
—

 
(33,083
)
 
(42,083
)
Dividends paid
(599
)
 
—

 
—

 
(599
)
Net cash provided by financing activities
40,401


—


9,640


50,041

Effect of exchange rate change on cash
—

 
—

 
1,131

 
1,131

Net increase (decrease) in cash and cash equivalents
(17,278
)
 
(1
)
 
1,960

 
(15,319
)
Cash and cash equivalents, beginning of period
23,630

 
4

 
58,051

 
81,685

Cash and cash equivalents, end of period
$
6,352

 
$
3

 
$
60,011

 
$
66,366


28


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 that 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 4, 2020 (the 2019 Form 10-K).

COVID-19 Pandemic
 
In December 2019, a novel strain of coronavirus ("COVID-19") was reported in Wuhan, China. During March 2020, the World Health Organization declared that COVID-19 is a pandemic. The emergence of COVID-19 and its global spread presents significant risks to the Company, some of which the Company is unable to fully evaluate or even foresee. The COVID-19 pandemic adversely affected the Company’s financial results and business operations for the six months ended June 30, 2020 and economic and health conditions in the United States and across most of the globe have continued to change since then. In some of the countries where the Company has operations and where COVID-19 has been widespread (such as the Company’s European and Latin America locations), the Company’s operations were significantly curtailed during March through May 2020. The Company’s operations have since resumed with additional sanitary and other protective health measures, which have increased operating costs. The Company's operations may not return to historical levels in the near term, depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date and numerous other uncertainties.

The COVID-19 pandemic affected the Company’s operations in the second quarter, and may continue to do so indefinitely thereafter. All of these factors may have far-reaching impacts on the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company’s management and employees, customer behaviors, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and the outcomes are uncertain.
 
Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the three and six month periods ended June 30, 2020 are not necessarily indicative of the results to be expected for the full fiscal year.  Management cannot predict the full impact of the COVID-19 pandemic on the economic conditions generally, on the Company’s customers and, ultimately, on the Company. The nature, extent and duration of the effects of the COVID-19 pandemic on the Company are highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic might end.

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 quarterly 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, information concerning:
•
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;
•
The Company's ability to meet conditions of loan agreements, indentures and other financing documents;

29


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

•
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 Part I, Item 1A, Risk Factors, of the 2019 Form 10-K and Part II, Item 1A, Risk Factors, of this quarterly report on Form 10-Q, certain of which are beyond the Company’s control.

Actual results could differ materially from these forward-looking statements as a result of certain factors, including:
•
The effect of the COVID-19 pandemic on our operations and financial performance;
•
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;
•
The Company's 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;
•
Unfavorable product liability and warranty claims;
•
Actions of domestic and foreign governments, including the imposition of additional tariffs;
•
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 potential 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 the 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

30


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

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., together with its subsidiaries, is a global manufacturer of off-highway wheels, tires, assemblies and undercarriage products. As a leading manufacturer in the off-highway industry, Titan produces a broad range of products to meet the specifications of original equipment manufacturers (OEMs) and aftermarket customers in the agricultural, earthmoving/construction, and consumer markets. Titan manufactures and sells certain tires under the Goodyear Farm Tire and Titan Tire brands and has complete research and development test facilities to validate wheel and rim designs.
 
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 distribution centers. The wheels and rims range in diameter from nine inches to 54 inches, with the 54-inch diameter being the largest agricultural wheel manufactured in North America. Titan’s agricultural tires range from approximately one foot to approximately seven feet in outside diameter and from five inches to 55 inches in width.  The Company offers the added value of delivering a complete wheel and tire assembly to OEM and aftermarket customers.
 
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. The Company provides a broad range of earthmoving/construction wheels and tires with the wheels ranging in diameter from 15 to 63 inches and in weight from 125 to 7,000 pounds, while the tires range from approximately three to 13 feet in outside diameter and weigh between 50 to 12,500 pounds. The Company offers the added value of wheel and tire assembly for certain applications in the earthmoving/construction segment.
 
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. This segment also includes sales that do not readily fall into the Company's other segments.
 
The Company’s top customers include global leaders in agricultural and construction equipment manufacturing and include AGCO Corporation, Caterpillar Inc., CNH Global N.V., Deere & Company, Hitachi, Ltd., 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.

MARKET CONDITIONS AND OUTLOOK

COVID-19 IMPACT ON OUTLOOK
As a result of the global COVID-19 pandemic, the Company curtailed and suspended operations in certain geographies in which we conduct business. As COVID-19 progressed globally, the impact was felt initially in China with the government mandated lock-down and curtailment of operations from late January through February 2020. The impact continued in Europe through travel restrictions, social distancing, mandatory stay-at-home orders and sanitization of our facilities. Due to these restrictions as well as the impact COVID-19 had on our critical customers, we had loss of production in the last week of the first quarter, which continued through the second quarter of 2020. The impact in South America occurred during the latter part of March and continued through the second quarter of 2020 due to similar restrictions in place as Europe.  Since May 2020, operations have resumed in our international locations with increased sanitization of our facilities and enhanced health safety measures including social distancing, temperature screenings and COVID-19 testing. Within North America, except for brief shutdowns to prepare our facilities as recommended by the Centers for Disease Control and Prevention, World Health Organization and the government, we have remained operational, following social distancing and sanitization protocols. Our Australian and Russian operations have experienced a lessor impact than the other geographies other than enhanced sanitization of our facilities. The outlook for the remainder of 2020 remains uncertain and will be predicated upon the ability to contain COVID-19 globally and for the markets and customers in which we serve return to normal operating levels in the geographies in which conduct business.


31


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

AGRICULTURAL MARKET OUTLOOK
Agriculture-related commodity prices remain low as a result of ongoing tariffs and trade concerns. For the balance of 2020, market conditions across the globe remain uncertain due to the ongoing effects of the COVID-19 pandemic, volatility created by supply dislocation in certain markets, and uneven demand in select market geographies and sectors. Major OEMs are pulling back production, affecting demand for our products in the near-term. In addition, many of our customers are not forecasting significantly into the future, awaiting more certainty as to stability in the market. Demand in the aftermarket has stabilized through the second quarter of 2020 and the outlook for the remainder of the year will depend on the continued stabilization of market conditions including normalized supply and demand levels in light of the COVID-19 pandemic. Small agriculture equipment sales are rebounding somewhat faster than the large agriculture equipment sales, notwithstanding the average age of equipment has increased over the last several years. Many more variables, including weather, volatility in the price of commodities, grain prices, export markets, foreign currency exchange rates, government policies, subsidies, and the demand for used equipment can greatly affect the Company's performance in the agricultural market in a given period.

EARTHMOVING/CONSTRUCTION MARKET OUTLOOK
The earthmoving/construction market is continuing to experience declines in 2020 due in large part to global economic uncertainty and has been hampered further by the impact of COVID-19. Demand for larger construction equipment used for highways and infrastructure began to tighten in 2019. Mining industry equipment demand also began to soften within certain regions in the second half of 2019. Construction is mainly driven by GDP by country and the need for infrastructure developments. The market outlook for the second half of the year remains relatively uncertain and will depend on the pace of improvement to global economic conditions including the return to normalized supply and demand levels in light of the COVID-19 pandemic. Mining is primarily driven by both the demand for and pricing of commodities. Demand for Titan's products in the mining industry for the remainder of 2020 is expected to be generally down somewhat compared to 2019, as markets remain clouded from the impact of the COVID-19 pandemic. The earthmoving/construction segment is affected by many variables, including commodity prices, road construction, infrastructure, government appropriations, housing starts, and other macroeconomic drivers, in addition to the impact of COVID-19.

CONSUMER MARKET OUTLOOK
The consumer market consists of several distinct product lines within different regions. These products include light truck tires, turf equipment, specialty products, and train brakes. Overall, the Company expects the markets to remain highly uncertain through the remainder of 2020, and sales will likely continue to be suppressed relative to the prior year, similar to the first half of 2020. The consumer segment is affected by many variables including consumer spending, interest rates, government policies, and other macroeconomic drivers.



RESULTS OF OPERATIONS

Titan International, Inc.
Three months ended
 
Six months ended
(amounts in thousands)
June 30,
 
June 30,
 
2020
 
2019
 
% Increase/(Decrease)
 
2020
 
2019
 
% Increase/(Decrease)
Net sales
$
286,133

 
$
390,597

 
(26.7
)%
 
$
627,633

 
$
800,971

 
(21.6
)%
Gross profit
29,867

 
38,308

 
(22.0
)%
 
57,111

 
83,572

 
(31.7
)%
  Gross profit %
10.4
%
 
9.8
%
 
 
 
9.1
%
 
10.4
%
 
 
Selling, general and administrative expenses
28,441

 
35,746

 
(20.4
)%
 
60,398

 
71,651

 
(15.7
)%
Research and development expenses
2,132

 
2,544

 
(16.2
)%
 
4,542

 
5,161

 
(12.0
)%
Royalty expense
2,395

 
2,448

 
(2.2
)%
 
4,875

 
5,054

 
(3.5
)%
(Loss) income from operations
(3,101
)
 
(2,430
)
 
27.6
 %
 
(12,704
)
 
1,706

 
(844.7
)%



32


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

Net Sales
Net sales for the three months ended June 30, 2020 were $286.1 million, compared to $390.6 million in the comparable period of 2019, a decrease of 26.7% driven by sales decreases in all segments. Overall net sales volume was down 24.0% from the comparable prior year quarter, due primarily to challenges in the earthmoving/construction market as a result of a slowdown of the global construction market, particularly in Europe. Approximately $31 million in reduced sales, in comparison to the same period of 2019, was attributable to plant closures and disruptive markets in Europe, Asia and Latin America resulting from the COVID-19 pandemic. Global trade issues, as well as the impact of COVID-19, were contributing factors in the sales decrease in the Agriculture market, which resulted in lower volume from OEM customers. Unfavorable currency translation negatively impacted net sales by 5.1%. Favorable price/mix partially offset these declines and contributed to a 2.4% increase in net sales.

Net sales for the six months ended June 30, 2020 were $627.6 million, compared to $801.0 million in the comparable period of 2019, a decrease of 21.6% driven by sales decreases in all segments. Overall net sales volume was down 18.1% from the comparable period in the prior year, due primarily to the aforementioned economic factors. The overall net sales volume was also impacted by approximately $45 million in reduced sales in comparison to the same period of 2019 due to COVID-19 related plant closures in Europe, Asia and Latin America. Unfavorable currency translation negatively impacted net sales by 4.1%. Favorable price/mix partially offset these declines and contributed to a 0.6% increase in net sales.

Gross Profit
Gross profit for the three months ended June 30, 2020 was $29.9 million, or 10.4% of net sales, down $8.4 million compared to $38.3 million, or 9.8% of net sales, for the three months ended June 30, 2019. The decrease in gross profit was driven by the impact of lower sales volume across most geographic regions. The decrease in gross profit was also impacted by a $1.0 million reserve for impairment of inventory for the closure of our Saltville, Virginia wheel operations. The unfavorable gross profit impact from the COVID-19 pandemic mentioned above was approximately $7 million. The increase in gross profit as a percentage of sales for the quarter ended June 30, 2020 as compared to the comparable period in 2019 was primarily due to strong initiatives to reduce labor and overhead costs across global production facilities. In addition, raw material prices are down relative to the prior year.

Gross profit for the six months ended June 30, 2020 was $57.1 million or 9.1% of net sales, down $26.5 million compared to $83.6 million, or 10.4% of net sales, for the six months ended June 30, 2019. The decrease in gross profit was driven by the impact of lower sales volume across most geographic regions. The decrease in gross profit was also impacted by the aforementioned factors experienced in the second quarter. The unfavorable gross margin impact from the COVID-19 pandemic mentioned above was approximately $11 million.

Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses for the three months ended June 30, 2020 were $28.4 million, or 9.9% of net sales, compared to $35.7 million, or 9.2% of net sales, for the three months ended June 30, 2019.  The decrease in SG&A was driven primarily by lower professional fees related to investments in information technology for ongoing stabilization of an enterprise resource planning (ERP) software implementation within North America during 2019, lower payroll related costs, lower marketing costs and reduced travel expenses, resulting from company-wide initiatives to lower costs.

SG&A expenses for the six months ended June 30, 2020 were $60.4 million, or 9.6% of net sales, compared to $71.7 million, or 8.9% of net sales, for the six months ended June 30, 2019. The decrease in SG&A was also primarily due to lower professional fees related to investments in information technology related to ongoing stabilization of an enterprise resource planning (ERP) software implementation within North America during 2019, as well as, lower payroll related costs, lower marketing costs, and reduced travel expenses, again, resulting from company-wide initiatives to lower costs.
 
Research and Development Expenses
Research and development (R&D) expenses for the three months ended June 30, 2020 were $2.1 million, or 0.7% of net sales, compared to $2.5 million, or 0.7% of net sales, for the comparable period in 2019. R&D expenses for the six months ended June 30, 2020 were $4.5 million, or 0.7% of net sales, compared to $5.2 million, or 0.6% of net sales, for the comparable period in 2019. R&D spending reflects initiatives to improve product designs and an ongoing focus on quality. The decrease in R&D expenses for both the quarter and the six months ended June 30, 2020 as compared to the same periods in 2019 were due to lower payroll related costs and other professional fees, as a result of management initiatives to decrease costs to manage through the downturn in sales.
 

33


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 brand. These agreements cover sales in North America, Latin America, Europe, the Middle East, Africa, Russia, and other Commonwealth of Independent States countries.

Royalty expenses for the three months ended June 30, 2020 were $2.4 million, or 0.8% of net sales, compared to $2.4 million, or 0.6% of net sales, for the three months ended June 30, 2019. Royalty expenses for the six months ended June 30, 2020 were $4.9 million, or 0.8% of net sales, compared to $5.1 million, or 0.6% of net sales, for the six months ended June 30, 2019.

(Loss) Income from Operations
Loss from operations for the second quarter of 2020 was $3.1 million, compared to loss from operations of $2.4 million for the second quarter of 2019.  Loss from operations for the six months ended June 30, 2020 was $12.7 million, compared to income from operations of $1.7 million for the six months ended June 30, 2019. Changes in (loss) income from operations for the quarter and six months ended June 30, 2020 as compared to the same periods in 2019 were primarily driven by lower net sales and the net result of the items previously discussed. 

OTHER PROFIT/LOSS ITEMS

Interest Expense
Interest expense was $8.0 million and $8.3 million for the three months ended June 30, 2020 and 2019, respectively, and $16.0 million and $16.2 million for the six months ended June 30, 2020 and 2019. Interest expense remained comparable due to similar levels of long-term debt in the respective periods.
  
Foreign Exchange Gain (Loss)
Foreign exchange gain was $8.8 million for the three months ended June 30, 2020, compared to a loss of $1.2 million for the three months ended June 30, 2019. Foreign exchange loss was $8.4 million for the six months ended June 30, 2020, compared to a gain of $4.5 million for the six months ended June 30, 2019. Foreign currency exchange gain or loss is the result of the significant movements in foreign currency exchange rates in many of the geographies in which we conduct business and translation of intercompany loans at certain foreign subsidiaries, which are denominated in local currencies rather than the reporting currency, which is the United States dollar. Since such loans are expected to be settled at some point in the future, these loans are adjusted each reporting period to reflect the current exchange rates. During the first quarter of 2020, we settled a number of intercompany loans as part of an ongoing loan restructuring initiative with a resulting foreign exchange loss, which is reflected in the total foreign exchange loss recognized for the first six months of 2020.

Other (Loss) Income
Other loss was $0.4 million for the three months ended June 30, 2020, as compared to other income of $2.1 million in the comparable quarter of 2019.  The decrease in other income for the three months ended June 30, 2020, as compared to the same period in 2019 was primarily attributable to a $2.0 million loss on the sale of remaining shares of our investment in Wheels India Limited in June 2020.

Other income was $7.0 million for the six months ended June 30, 2020, as compared to $3.1 million in the comparable period of 2019. The increase in other income for the six months ended June 30, 2020 as compared to the same period in 2019 was primarily attributable to proceeds of $4.9 million related to a property insurance settlement at Titan Tire Reclamation Corporation (TTRC) and a $1.3 million gain on the sale of shares of our investment in Wheels India Limited during February 2020 offset by a $2.0 million loss on the sale of remaining shares of our investment in Wheels India Limited in June 2020.

Provision (Benefit) for Income Taxes
The Company recorded income tax expense of $2.0 million and income tax benefit of $3.2 million for the three months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019, the Company recorded income tax expense of $2.0 million and income tax benefit of $1.3 million, respectively. The Company's effective income tax rate was (74)% and 33% for the three months ended June 30, 2020 and 2019, respectively, and (7)% and 19% for the six months ended June 30, 2020 and 2019, respectively.

The Company’s 2020 and 2019 income tax expense and rates 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

34


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

full valuation allowance on deferred tax assets created by current year projected losses and partially offset by a reduction of the liability for unrecognized tax positions. 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 six months ended June 30, 2020 and 2019.

Net Loss and Loss per Share
Net loss for the second quarter of 2020 was $4.6 million, compared to net loss of $6.7 million in the comparable quarter of 2019. For the quarters ended June 30, 2020 and 2019, basic and diluted loss per share were $(0.08) and $(0.12), respectively. The Company's net loss and loss per share were due to the items previously discussed.

Net loss for the six months ended June 30, 2020 was $32.1 million, compared to net loss of $5.7 million in the comparable period of 2019. For the six months ended June 30, 2020 and 2019, basic and diluted loss per share was $(0.50) and$(0.10), respectively. The Company's net loss and loss per share were due to the items previously discussed.

SEGMENT INFORMATION

Segment Summary (amounts in thousands):
Three months ended June 30, 2020
 
Agricultural
 
Earthmoving/
Construction
 
Consumer
 
Corporate/ Unallocated
 Expenses
 
Consolidated
 Totals
Net sales
 
$
147,267

 
$
112,457

 
$
26,409

 
$
—

 
$
286,133

Gross profit
 
15,613

 
11,614

 
2,640

 
—

 
29,867

Income (loss) from operations
 
6,992

 
(1,902
)
 
1,425

 
(9,616
)
 
(3,101
)
Three months ended June 30, 2019
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
164,284

 
$
184,782

 
$
41,531

 
$
—

 
$
390,597

Gross profit
 
14,247

 
19,701

 
4,360

 
—

 
38,308

Income (loss) from operations
 
4,365

 
5,697

 
1,228

 
(13,720
)
 
(2,430
)

Six months ended June 30, 2020
 
Agricultural
 
Earthmoving/
Construction
 
Consumer
 
Corporate/ Unallocated
 Expenses
 
Consolidated
 Totals
Net sales
 
$
320,206

 
$
249,379

 
$
58,048

 
$
—

 
$
627,633

Gross profit
 
29,640

 
22,368

 
5,103

 
—

 
57,111

Income (loss) from operations
 
2,298

 
(8,897
)
 
1,131

 
(7,236
)
 
(12,704
)
Six months ended June 30, 2019
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
356,014

 
$
361,527

 
$
83,430

 
$
—

 
$
800,971

Gross profit
 
36,372

 
37,871

 
9,329

 
—

 
83,572

Income (loss) from operations
 
18,293

 
11,225

 
3,349

 
(31,161
)
 
1,706



35


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
 
Six months ended
 
June 30,
 
June 30,
 
2020
 
2019
 
% Increase/(Decrease)
 
2020
 
2019
 
% Increase/(Decrease)
Net sales
$
147,267

 
$
164,284

 
(10.4
)%
 
$
320,206

 
$
356,014

 
(10.1
)%
Gross profit
15,613

 
14,247

 
9.6
 %
 
29,640

 
36,372

 
(18.5
)%
Income from operations
6,992

 
4,365

 
60.2
 %
 
2,298

 
18,293

 
(87.4
)%
    
Net sales in the agricultural segment were $147.3 million for the three months ended June 30, 2020, as compared to $164.3 million for the comparable period in 2019, a decrease of 10.4%. Lower sales volume in North America, Europe and Latin America contributed 8.4% of this decrease while unfavorable currency translation, primarily in Latin America, Europe and Russia, decreased net sales by 6.8%. Favorable price/mix increased net sales by 4.9%. Lower sales volumes were primarily caused by continued weakness in the commodity markets and the effect of the COVID-19 pandemic which continues to cause significant uncertainty for customers in most geographies, most notably OEM customers.

Gross profit in the agricultural segment was $15.6 million for the three months ended June 30, 2020, as compared to $14.2 million in the comparable quarter of 2019.  The increase in gross profit is primarily attributable to production efficiencies from company-wide cost reduction initiatives and lower raw material costs.

Income from operations in Titan's agricultural segment was $7.0 million for the three months ended June 30, 2020, as compared to $4.4 million for the three months ended June 30, 2019. The overall increase in income from operations is attributable to higher gross profit and overall cost reduction initiatives.

Net sales in the agricultural segment were $320.2 million for the six months ended June 30, 2020, as compared to $356.0 million for the comparable period in 2019, a decrease of 10.1%. Lower sales volume in North America, Europe and Latin America contributed 4.8% of this decrease while unfavorable currency translation, primarily in Latin America, Europe and Russia, decreased net sales by 4.9%. Unfavorable price/mix further decreased net sales by 0.3%. Lower sales volumes were primarily caused by continued weakness in the commodity markets and the effect of the COVID-19 pandemic which continues to cause significant uncertainty for customers in most geographies, most notably OEM customers.

Gross profit in the agricultural segment was $29.6 million for the six months ended June 30, 2020, as compared to $36.4 million in the comparable quarter of 2019.  The decrease in gross profit is primarily attributable to the impact of lower sales volume and unfavorable foreign currency translation.

Income from operations in Titan's agricultural segment was $2.3 million for the six months ended June 30, 2020, as compared to $18.3 million for the six months ended June 30, 2019.

Earthmoving/Construction Segment Results
Earthmoving/construction segment results for the periods presented below were as follows:
(Amounts in thousands)
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2020
 
2019
 
% Increase/(Decrease)
 
2020
 
2019
 
% Increase/(Decrease)
Net sales
$
112,457

 
$
184,782

 
(39.1
)%
 
$
249,379

 
$
361,527

 
(31.0
)%
Gross profit
11,614

 
19,701

 
(41.0
)%

22,368

 
37,871

 
(40.9
)%
(Loss) income from operations
(1,902
)
 
5,697

 
(133.4
)%

(8,897
)
 
11,225

 
(179.3
)%

36


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


The Company's earthmoving/construction segment net sales were $112.5 million for the three months ended June 30, 2020, as compared to $184.8 million in the comparable quarter of 2019, a decrease of 39.1%. The decrease in earthmoving/construction sales was driven by decreased volume, which negatively impacted net sales by 37.5%. This decrease was primarily due to a tightening within the construction market in our undercarriage business in all geographies. The direct impact of COVID-19 accounted for approximately $26 million of the sales decrease due to plant shutdowns and market disruptions in Europe, Asia and Latin America. Unfavorable currency translation across most non-US geographies decreased net sales by 3.1% but was partially offset by favorable price mix, which increased net sales by 1.5%.

Gross profit in the earthmoving/construction segment was $11.6 million for the three months ended June 30, 2020, as compared to $19.7 million for the three months ended June 30, 2019. The decrease in gross profit was primarily driven by the lower sales volume, which created certain production inefficiencies, the impact of COVID-19 and unfavorable foreign currency translation. The Company's earthmoving/construction segment loss from operations was $1.9 million for the three months ended June 30, 2020, as compared to income of $5.7 million for the three months ended June 30, 2019.

The Company's earthmoving/construction segment net sales were $249.4 million for the six months ended June 30, 2020, as compared to $361.5 million for the six months ended June 30, 2019, a decrease of 31.0%. The decrease in earthmoving/construction sales was driven by decreased volume, which negatively impacted net sales by 30.4%. This decrease was primarily due to a tightening within the construction market in all geographies, especially in our undercarriage business. The direct impact of COVID-19 accounted for approximately $40 million of the sales decrease due to plant shutdowns and market disruptions in Europe, Asia and Latin America. Unfavorable currency translation across most non-US geographies decreased net sales by 2.7% but was partially offset by favorable price mix, which increased net sales by 2.1%.

Gross profit in the earthmoving/construction segment was $22.4 million for the six months ended June 30, 2020, as compared to $37.9 million for the six months ended June 30, 2019. The decrease in gross profit was primarily driven by the lower sales volume, which created certain production inefficiencies, the impact of COVID-19 and unfavorable foreign currency translation. The Company's earthmoving/construction segment loss from operations was $8.9 million for the six months ended June 30, 2020, as compared to income of $11.2 million for the six months ended June 30, 2019.


Consumer Segment Results
Consumer segment results for the periods presented below were as follows:
(Amounts in thousands)
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2020
 
2019
 
% Increase/(Decrease)
 
2020
 
2019
 
% Increase/(Decrease)
Net sales
$
26,409

 
$
41,531

 
(36.4
)%
 
$
58,048

 
$
83,430

 
(30.4
)%
Gross profit
2,640

 
4,360

 
(39.4
)%

5,103

 
9,329

 
(45.3
)%
Income from operations
1,425

 
1,228

 
16.0
 %

1,131

 
3,349

 
(66.2
)%

Consumer segment net sales were $26.4 million for the three months ended June 30, 2020, as compared to $41.5 million for the three months ended June 30, 2019, a decrease of approximately 36.4%. This decrease was driven by lower sales volume, especially in North America, Latin America and Australia, which negatively impacted net sales by 25.7%; unfavorable currency translation, primarily in Latin America and unfavorable price mix, which decreased net sales by 6.9% and 3.8%, respectively. The decline in Latin America continued to be driven by lower demand for light utility truck tires and the impact of COVID-19.

Gross profit from the consumer segment was $2.6 million for the three months ended June 30, 2020, as compared to $4.4 million for the three months ended June 30, 2019 due primarily to lower sales in the light utility truck markets. Consumer segment income from operations was $1.4 million for the three months ended June 30, 2020, as compared to income of $1.2 million for the three months ended June 30, 2019.


37


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

Consumer segment net sales were $58.0 million for the six months ended June 30, 2020, as compared to $83.4 million for the six months ended June 30, 2019, a decrease of approximately 30.4%. This decrease was driven by lower sales volume, especially in North America, Latin America and Australia, which negatively impacted net sales by 21.9%; unfavorable currency translation, primarily in Latin America and unfavorable price mix, which decreased net sales by 6.1% and 2.4%, respectively. The decline in Latin America continued to be driven by lower demand for light utility truck tires and the impact of COVID-19, while declines in other geographies related to a shift in focus to agriculture and earthmoving/construction products.

Gross profit from the consumer segment was $5.1 million for the six months ended June 30, 2020, as compared to $9.3 million for the six months ended June 30, 2019 due primarily to lower sales in the light utility truck markets. Consumer segment income from operations was $1.1 million for the six months ended June 30, 2020, as compared to income of $3.3 million for the six months ended June 30, 2019.

Corporate & Unallocated Expenses
Income from operations on a segment basis did not include unallocated loss of $9.6 million for the three months ended June 30, 2020, and $7.2 million for the six months ended June 30, 2020, as compared to $13.7 million for the three months ended June 30, 2019 and $31.2 million for the six months ended June 30, 2019. The year over year difference is related to a refinement of the allocation process, which enabled the Company to identify previously unallocated expenses that belonged in the other segments.



38


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

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows
As of June 30, 2020, the Company had $80.2 million of cash, an increase of $13.4 million from December 31, 2019, due to the following items:

Operating Cash Flows
Summary of cash flows from operating activities:
(Amounts in thousands)
Six months ended June 30,
 
 
 
2020
 
2019
 
Change
Net loss
(32,142
)
 
(5,670
)
 
$
(26,472
)
Depreciation and amortization
27,119

 
27,809

 
(690
)
Deferred income tax provision
(2,111
)
 
156

 
(2,267
)
Foreign currency translation (gain) loss
8,122

 
(1,789
)
 
9,911

Accounts receivable
(22,383
)
 
(27,193
)
 
4,810

Inventories
23,051

 
14,258

 
8,793

Prepaid and other current assets
(2,491
)
 
(1,763
)
 
(728
)
Accounts payable
(11,568
)
 
(3,863
)
 
(7,705
)
Other current liabilities
19,180

 
(6,949
)
 
26,129

Other liabilities
(3,159
)
 
(7,316
)
 
4,157

Other operating activities
1,883

 
2,319

 
(436
)
Cash provided by (used for) operating activities
$
5,501

 
$
(10,001
)
 
$
15,502


In the first six months of 2020, operating activities provided $5.5 million of cash primarily due to reduction of inventories by $23.1 million and increase in other current liabilities by $19.2 million. Cash flows provided by operating activities were negatively impacted by increases in accounts receivable of $22.4 million and decrease in accounts payable of $11.6 million. Included in the net loss of $32.1 million were non-cash charges for depreciation and amortization of $27.1 million, foreign currency translation loss of $8.1 million, $4.9 million property insurance settlement, $3.6 million asset impairment, and a $0.7 million loss on the sale of shares of Wheels India Limited.

Operating cash flows increased $15.5 million when comparing the first six months of 2020 to the comparable period in 2019. Net income in the first six months of 2020 decreased $26.5 million from income in the first six months of 2019. When comparing the first six months of 2020 to the comparable period in 2019, cash flows from operating activities increased due to favorable comparability of inventories, accounts receivable and other current liabilities by $8.8 million, $4.8 million and $26.1 million, respectively.

Summary of the components of cash conversion cycle:
 
June 30,
 
December 31,
 
June 30,
 
2020
 
2019
 
2019
Days sales outstanding
61

 
56

 
63

Days inventory outstanding
111

 
111

 
105

Days payable outstanding
(51
)
 
(53
)
 
(57
)
Cash conversion cycle
121

 
114

 
111


39


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

Investing Cash Flows
Summary of cash flows from investing activities:
(Amounts in thousands)
Six months ended June 30,
 
 
 
2020
 
2019
 
Change
Capital expenditures
$
(8,402
)
 
$
(16,725
)
 
$
8,323

Payments related to redeemable noncontrolling interest

—

 
(41,000
)
 
41,000

Sale of Wheels India Limited shares
15,722

 
—

 
15,722

Other investing activities
4,578

 
1,235

 
3,343

Cash provided by (used for) investing activities
$
11,898

 
$
(56,490
)
 
$
68,388

 
Net cash provided by investing activities was $11.9 million in the first six months of 2020, as compared to net cash used of $56.5 million in the first six months of 2019. Other investing activities for the six months ended June 30, 2020 includes $4.9 million from the proceeds of a property insurance settlement. The Company made payments of $41.0 million related to satisfaction of obligations relating to the settlement put option under the Shareholders’ Agreement in the first six months of 2019. The Company invested a total of $8.4 million in capital expenditures in the first six months of 2020, compared to $16.7 million in the comparable period of 2019. Capital expenditures during the first six months of 2020 and 2019 represent critical equipment replacement and improvements, along with new tools, dies and molds related to new product development. The overall capital outlay for 2020 is being suppressed as a direct response to cash preservation activities as a result of COVID-19 impacts on the business.
 
Financing Cash Flows
Summary of cash flows from financing activities:
(Amounts in thousands)
Six months ended June 30,
 
 
 
2020
 
2019
 
Change
Proceeds from borrowings
$
76,798

 
$
92,723

 
$
(15,925
)
Payment on debt
(74,011
)
 
(42,083
)
 
(31,928
)
Dividends paid
(603
)
 
(599
)
 
(4
)
Other financing activities
608

 
—

 
608

Cash provided by financing activities
$
2,792

 
$
50,041

 
$
(47,249
)
 
In the first six months of 2020, $2.8 million of cash was provided by financing activities. Proceeds from borrowings provided $76.8 million, which was offset by payments on debt of $74.0 million. Repayment of the domestic revolving crediting facility occurred during the first six months of 2020 reducing the outstanding balance from $36.0 million at December 31, 2019 to $28.0 million at June 30, 2020. In the first six months of 2019, $50.0 million of cash was provided by financing activities. This cash was primarily provided through debt financing, with borrowing providing $92.7 million, offset by payments on debt of $42.1 million.


40


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) and indenture relating to the 6.50% senior secured notes due 2023 contain various restrictions, including:
•
When remaining availability under the credit facility is less than 10% of the total commitment under the credit facility ($12.5 million as of June 30, 2020), 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 June 30, 2020, the Company had $80.2 million of cash and cash equivalents. At June 30, 2020, under the Company's $125 million credit facility, there were $28 million in borrowings, $19.7 million in outstanding letters of credit, and the amount available totaled $37.9 million. Titan's availability under this credit facility may be less than $125 million as a result of outstanding letters of credit and eligible accounts receivable and inventory balances at certain domestic subsidiaries. The cash and cash equivalents balance of $80.2 million included $76.5 million held in foreign countries.

We have taken measures to limit our capital expenditures for the remainder of 2020 and are expecting forecasted full year capital expenditures to be approximately $20 million. Cash payments for interest are currently forecasted to be approximately $15 million for the remainder of 2020 based on June 30, 2020 debt balances. The forecasted interest payments are comprised primarily of the semi-annual payment of approximately $13 million (paid in May and November) for the 6.50% senior secured notes.

Cash and cash equivalents, totaling $80.2 million at June 30, 2020, along with anticipated internal cash flows from operations and utilization of remaining available credit facilities, are expected to provide sufficient liquidity for working capital needs, debt maturities, and capital expenditures. Potential divestitures and unencumbered assets are also a means to provide for future liquidity needs.

Titan has taken actions to obtain additional financial flexibility and credit capabilities from our banking partners and other sources throughout our global operations over the course of the first half of 2020. Additionally, we are focused on reducing discretionary spending and improving profitability through various measures, which include working capital improvements and monetization of non-core assets. During the quarter ended June 30, 2020 and continuing into the third quarter of 2020, we are experiencing business disruption due to the impact of COVID-19; however, we do not anticipate that this impact will cause the Company to violate any financial covenants with respect to its debt agreements. In addition, as a result of the measures that are currently being undertaken by management, the Company does not anticipate any significant liquidity constraints during the foreseeable future.

CRITICAL ACCOUNTING ESTIMATES
There were no material changes in the Company’s Critical Accounting Estimates since the filing of the 2019 Form 10-K. As discussed in the 2019 Form 10-K, the preparation of the condensed consolidated financial statements in conformity with US GAAP requires 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates and assumptions.  Refer to Note 1. Basis of Presentation and Significant Accounting Policies in Part I, Item 1, Notes to Condensed Consolidated Financial Statements of this Form 10-Q for a discussion of the Company’s updated accounting policies.



41


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 2019 Form 10-K. There have been no material changes 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 (the Exchange Act)) as of June 30, 2020. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2020, 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 Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the second quarter of fiscal year 2020 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.


42


TITAN INTERNATIONAL, INC.



PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is subject, from time to time, to certain legal proceedings and claims arising out of the normal course of its business, which cover a wide range of matters, including environmental issues, product liability, contracts, and labor and employment matters. See Note 17. Litigation in Part I, Item 1, Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further discussion, which is incorporated herein by reference.

Item 1A. Risk Factors

Except for the additional risk factor set forth below, there have been no material changes from the risk factors disclosed in Item 1A. Risk Factors to the 2019 Form 10-K.

The COVID-19 pandemic has adversely impacted, and will likely continue to adversely affect, the Company's business, operating results and financial condition.

COVID-19 has spread to the majority of the countries in which we operate. This has significantly impacted our workforce and our operations, including as a result of government mandates in certain countries to work from home to minimize the spread of the virus. The Company’s operations were significantly curtailed in March 2020 and the second quarter of 2020 and may continue to be curtailed until the widespread outbreak is contained. COVID-19 has had a significant impact on our ability to conduct business and has affected the Company's operational and financial performance. We have experienced and expect to continue to experience unpredictable disruption in the demand for our products in our end-markets.

If the pandemic continues and conditions worsen, we may experience additional adverse impacts on our operational and commercial activities, costs, customer orders, and collections of accounts receivable, which may be material, and the extent and nature of these adverse impacts on our future operational and commercial activities, costs, customer orders and our collections remains uncertain even if conditions begin to improve. Furthermore, the pandemic has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, foreign currency exchange rates and interest rates. Due to the speed with which the situation is developing, the global breadth of its spread and the range of governmental and community reactions thereto, there is uncertainty around its duration, ultimate impact and the timing of recovery. Therefore, the pandemic could lead to an extended disruption of economic activity and could materially impact our business, our consolidated results of operations, financial position, cash flows and/or market capitalization, and result in asset impairment charges, including long-lived assets.

To the extent COVID-19 or any worsening of the global business and economic environment as a result thereof adversely affects our business, operating results and financial condition, it may also have the effect of heightening many of the other risks described in Item 1A. Risk Factors in the 2019 Form 10-K.


43


TITAN INTERNATIONAL, INC.



Item 6. Exhibits

31.1
 
 
31.2
 
 
32
 
 
101.SCH
Inline XBRL Taxonomy Extension Schema Document
 
 
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
 
 
104
The cover page from this Current Report on Form 10-Q formatted as inline XBRL




44


TITAN INTERNATIONAL, INC.



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:
August 5, 2020
By:
/s/  PAUL G. REITZ
 
 
 
Paul G. Reitz
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)

 
By:
/s/ DAVID A. MARTIN
 
 
David A. Martin
 
 
SVP and Chief Financial Officer
 
 
(Principal Financial Officer)



45