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TWI > SEC Filings for TWI > Form 10-Q on 24-Jul-2013All Recent SEC Filings

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Form 10-Q for TITAN INTERNATIONAL INC


24-Jul-2013

Quarterly Report

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 these financial statements with a narrative from the perspective of the management of Titan International, Inc. (Titan or the Company) on Titan's financial condition, results of operations, liquidity and other factors which may affect the Company's future results. The MD&A in this quarterly report should be read in conjunction with the MD&A in Titan's 2012 annual report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2013.

FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements, including statements regarding, among other items:
Anticipated trends in the Company's business

Future expenditures for capital projects

The Company's ability to continue to control costs and maintain quality

Ability to meet conditions of loan agreements

The Company's business strategies, including its intention to introduce new products

Expectations concerning the performance and success of the Company's existing and new products

The Company's intention to consider and pursue acquisition and divestiture opportunities

Readers of this Form 10-Q should understand that these forward-looking statements are based on the Company's expectations and are subject to a number of risks and uncertainties (including, but not limited to, the factors discussed in Item 1A, Risk Factors of the Company's most recent annual report on Form 10-K), certain of which are beyond the Company's control.

Actual results could differ materially from these forward-looking statements as a result of certain factors, including:
The effect of a recession on the Company and its customers and suppliers

Changes in the Company's end-user markets as a result of world economic or regulatory influences

Changes in the marketplace, including new products and pricing changes by the Company's competitors

Ability to maintain satisfactory labor relations

Unfavorable outcomes of legal proceedings

Availability and price of raw materials

Levels of operating efficiencies

Unfavorable product liability and warranty claims

Actions of domestic and foreign governments

Results of investments

Fluctuations in currency translations

Climate change and related laws and regulations

Risks associated with environmental laws and regulations

Any changes in such factors could lead to significantly different results. The Company cannot provide any assurance that the assumptions referred to in the forward-looking statements or otherwise are accurate or will prove to transpire. Any assumptions that are inaccurate or do not prove to be correct could have a material adverse effect on the Company's ability to achieve the results as indicated in forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this document will in fact transpire.


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

OVERVIEW
Titan International, Inc. and its subsidiaries are leading manufacturers of wheels, tires, wheel and tire assemblies, and undercarriage systems and components for off-highway vehicles used in the agricultural, earthmoving/construction and consumer markets. Titan manufactures both wheels and tires for the majority of these market applications, allowing the Company to provide the value-added service of delivering complete wheel and tire assemblies. The Company offers a broad range of products that are manufactured in relatively short production runs to meet the specifications of original equipment manufacturers (OEMs) and/or the requirements of aftermarket customers.

Agricultural Market: Titan's agricultural rims, wheels, tires and undercarriage systems and components are manufactured for use on various agricultural and forestry equipment, including tractors, combines, skidders, plows, planters and irrigation equipment, and are sold directly to OEMs and to the aftermarket through independent distributors, equipment dealers and Titan's own distribution centers.

Earthmoving/Construction Market: The Company manufactures rims, wheels, tires and undercarriage systems and components for various types of off-the-road (OTR) earthmoving, mining, military and construction equipment, including skid steers, aerial lifts, cranes, graders and levelers, scrapers, self-propelled shovel loaders, articulated dump trucks, load transporters, haul trucks and backhoe loaders.

Consumer Market: Titan manufactures bias truck tires in Latin America, provides wheels and tires and assembles brakes, actuators and components for the domestic boat, recreational and utility trailer markets. Titan also offers select products for ATVs, turf, and golf cart applications. Likewise, Titan produces a variety of tires for the consumer market.

The Company's major OEM customers include large manufacturers of off-highway equipment such as AGCO Corporation, CNH Global N.V., Deere & Company, Hitachi Construction Machinery, Kubota Corporation and Liebherr Group, in addition to many other off-highway equipment manufacturers. The Company distributes products to OEMs, independent and OEM-affiliated dealers, and through a network of distribution facilities.

The table provides highlights for the quarter ended June 30, 2013, compared to 2012 (amounts in thousands):

                          2013         2012       % Increase (Decrease)
Net sales              $ 593,291    $ 459,233               29  %
Gross profit              86,655       82,086                6  %
Income from operations    36,906       80,969              (54 )%
Net income                22,856       44,325              (48 )%

Quarter: The Company recorded sales of $593.3 million for the second quarter of 2013, which were approximately 29% higher than the second quarter 2012 sales of $459.2 million. The higher sales levels were primarily the result of recent acquisitions including the August 2012 acquisition of the Planet Group of companies based in Perth, Australia, and the October 2012 acquisition of Titan Europe, as well as increased demand in the Company's agricultural segment.

The Company's gross profit was $86.7 million, or 14.6% of net sales, for the second quarter of 2013, compared to $82.1 million, or 17.9%, of net sales, in 2012. Income from operations was $36.9 million for the second quarter of 2013, compared to $81.0 million in 2012. Net income was $22.9 million for the second quarter of 2013, compared to net income of $44.3 million in 2012. Basic income per share was $.43 in the second quarter of 2013, compared to $1.05 in 2012. Net income and earnings per share for the second quarter of 2013 were positively affected by the gain on earthquake insurance recovery of $22.5 million. Income from operations, net income and earnings per share for the second quarter of 2012 were positively affected by the supply agreement termination income of $26.1 million.


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

The table provides highlights for the six months ended June 30, 2013, compared
to 2012 (amounts in thousands):
                           2013          2012       % Increase (Decrease)
Net sales              $ 1,171,678    $ 922,321               27  %
Gross profit               183,406      175,449                5  %
Income from operations      84,789      139,640              (39 )%
Net income                  42,245       79,719              (47 )%

Year-to-date: The Company recorded sales of $1,171.7 million for the six months ended June 30, 2013, which were approximately 27% higher than the six months ended June 30, 2012 sales of $922.3 million. The higher sales levels were primarily the result of recent acquisitions including the August 2012 acquisition of the Planet Group of companies based in Perth, Australia, and the October 2012 acquisition of Titan Europe, as well as increased demand in the Company's agricultural segment.

The Company's gross profit was $183.4 million, or 15.7% of net sales, for the six months ended June 30, 2013, compared to $175.4 million, or 19.0% of net sales, in 2012. Income from operations was $84.8 million for the six months ended June 30, 2013, compared to $139.6 million in 2012. Net income was $42.2 million for the six months June 30, 2013, compared to net income of $79.7 million in 2012. Basic income per share was $0.81 for the six months ended June 30, 2013, compared to $1.89 in 2012. Net income and earnings per share for the six months ended June 30, 2013 were positively affected by the gain on earthquake insurance recovery of $22.5 million. Income from operations, net income and earnings per share for the six months ended June 30, 2012 were positively affected by the supply agreement termination income of $26.1 million.

CRITICAL ACCOUNTING ESTIMATES
Preparation of the financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The Company's application of these policies involves assumptions that require difficult subjective judgments regarding many factors, which, in and of themselves, could materially impact the financial statements and disclosures. A future change in the estimates, assumptions or judgments applied in determining the following matters, among others, could have a material impact on future financial statements and disclosures.

Asset and Business Acquisitions
The allocation of purchase price for asset and business acquisitions requires management estimates and judgment as to expectations for future cash flows of the acquired assets and business and the allocation of those cash flows to identifiable intangible assets in determining the estimated fair value for purchase price allocations. If the actual results differ from the estimates and judgments used in determining the purchase price allocations, impairment losses could occur. To aid in establishing the value of any intangible assets at the time of acquisition, the Company typically engages a professional appraisal firm.

Inventories
Inventories are valued at lower of cost or market. At June 30, 2013, approximately 14% of the Company's inventories were valued under the last-in, first-out (LIFO) method. The majority of steel material inventory and related work-in-process and finished goods are accounted for under the LIFO method. The remaining inventories were valued under the first-in, first-out (FIFO) method or average cost method. Market value is estimated based on current selling prices. Estimated provisions are established for slow-moving and obsolete inventory.

Income Taxes
Deferred income tax provisions are determined using the liability method whereby deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and income tax basis of assets and liabilities. The Company assesses the realizability of its deferred tax asset positions and recognizes and measures uncertain tax positions in accordance with accounting standards for income taxes.


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

Retirement Benefit Obligations
Pension benefit obligations are based on various assumptions used by third-party actuaries in calculating these amounts. These assumptions include discount rates, expected return on plan assets, mortality rates and other factors. Revisions in assumptions and actual results that differ from the assumptions affect future expenses, cash funding requirements and obligations. The Company has three frozen defined benefit pension plans in the United States and pension plans in several foreign countries. During the first six months of 2013, the Company contributed cash funds of $3.2 million to its pension plans. Titan expects to contribute approximately $3.6 million to these pension plans during the remainder of 2013. For more information concerning these costs and obligations, see the discussion of the "Pensions" and Note 25 to the Company's financial statements on Form 10-K for the fiscal year ended December 31, 2012.

Product Warranties
The Company provides limited warranties on workmanship on its products in all market segments. The majority of the Company's products have a limited warranty that ranges from zero to ten years, with certain products being prorated after the first year. The Company calculates a provision for warranty expense based on past warranty experience. Actual warranty experience may differ from historical experience. The Company's warranty accrual was $34.5 million at June 30, 2013, and $27.5 million at December 31, 2012. The Company's warranty accrual increased primarily as a result of increased provisions related to earthmoving tires.

RESULTS OF OPERATIONS

Highlights for the three and six months ended June 30, 2013, compared to 2012
(amounts in thousands):
                           Three months ended            Six months ended
                                June 30,                     June 30,
                           2013          2012           2013           2012
Net sales               $ 593,291     $ 459,233     $ 1,171,678     $ 922,321
Cost of sales             506,636       377,147         988,272       746,872
Gross profit               86,655        82,086         183,406       175,449
Gross profit percentage      14.6 %        17.9 %          15.7 %        19.0 %

Net Sales
Quarter: Net sales for the quarter ended June 30, 2013, were $593.3 million compared to $459.2 million in 2012, an increase of 29%. Sales increased approximately 38% from the inclusion of recently acquired entities including $154.4 million at Titan Europe. Overall sales volume was flat compared to the prior year. The increase in net sales was partially offset by a price/mix reduction which resulted largely from decreased raw material prices that were primarily passed on to customers and decreased sales approximately 8%, and unfavorable currency translation which decreased sales by approximately 1%.

Year-to-date: Net sales for the six months ended June 30, 2013, were $1,171.7 million compared to $922.3 million in 2012, an increase of 27%. Sales increased approximately 36% from the inclusion of recently acquired entities including $303.1 million at Titan Europe. Overall sales volume was flat compared to the prior year. The increase in net sales was partially offset by a price/mix reduction which resulted largely from decreased raw material prices that were primarily passed on to customers and decreased sales approximately 8%, and unfavorable currency translation which decreased sales by approximately 1%.

Cost of Sales and Gross Profit
Quarter: Cost of sales was $506.6 million for the quarter ended June 30, 2013, compared to $377.1 million in 2012. The higher cost of sales resulted primarily from the increase in sales levels. The cost of sales increased by approximately 34%, as compared to an approximate 29% increase in net sales.


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

Gross profit for the second quarter of 2013 was $86.7 million, or 14.6% of net sales, compared to $82.1 million, or 17.9% of net sales for the second quarter of 2012. Gross profit, as a percentage of net sales, decreased as a result of the Titan Europe acquisition and lower raw material costs that were passed on to customers before being fully realized by the Company. Increased warranty provisions relating to earthmoving tires also contributed to the decreased gross profit. Titan Europe provided gross profit of $16.4 million, or 10.6% of net sales. Titan Europe margins were negatively affected by decreased earthmoving/construction demand.

Year-to-date: Cost of sales was $988.3 million for the six months ended June 30, 2013, compared to $746.9 million in 2012. The higher cost of sales resulted primarily from the increase in sales levels. The cost of sales increased by approximately 32%, as compared to an approximate 27% increase in net sales.

Gross profit for the six months ended June 30, 2013, was $183.4 million, or 15.7% of net sales, compared to $175.4 million, or 19.0% of net sales in 2012. Gross profit, as a percentage of net sales, decreased as a result of the Titan Europe acquisition and lower raw material costs that were passed on to customers before being fully realized by the Company. Increased warranty provisions relating to earthmoving tires also contributed to the decreased gross profit. Titan Europe provided gross profit of $34.3 million, or 11.3% of net sales. Titan Europe margins were negatively affected by decreased earthmoving/construction demand.

Selling, General and Administrative Expenses Selling, general and administrative expenses were as follows (amounts in thousands):

                                       Three months ended         Six months ended
                                            June 30,                  June 30,
                                       2013          2012         2013         2012
Selling, general and administrative $  43,653     $ 23,410     $ 86,096     $ 54,245
Percentage of net sales                   7.4 %        5.1 %        7.3 %        5.9 %

Quarter: Selling, general and administrative (SG&A) expenses for the second quarter of 2013 were $43.7 million, or 7.4% of net sales, compared to $23.4 million, or 5.1% of net sales, for 2012. The higher SG&A expenses were primarily the result of approximately $17 million of SG&A expenses at recently acquired facilities. The increase in SG&A as a percentage of sales was primarily the result of higher SG&A percentages at recently acquired facilities.

Year-to-date: Selling, general and administrative (SG&A) expenses for the six months ended June 30, 2013 were $86.1 million, or 7.3% of net sales, compared to $54.2 million, or 5.9% of net sales, for 2012. The higher SG&A expenses were primarily the result of approximately $35 million of SG&A expenses at recently acquired facilities. The increase in SG&A as a percentage of sales was primarily the result of higher SG&A percentages at recently acquired facilities.

Research and Development Expenses
Research and development expenses were as follows (amounts in thousands):
                            Three months ended         Six months ended
                                 June 30,                  June 30,
                             2013         2012         2013        2012
Research and development $   2,801      $ 1,189     $  5,503     $ 2,697
Percentage of net sales        0.5 %        0.3 %        0.5 %       0.3 %

Quarter: Research and development (R&D) expenses for the second quarter of 2013 were $2.8 million, or 0.5% of net sales, compared to $1.2 million, or 0.3% of net sales, for 2012. Approximately $1 million of R&D expenses of recently acquired facilities contributed to the increase.

Year-to-date: Expenses for R&D were $5.5 million, or 0.5% of net sales for the six months ended June 30, 2013, compared to $2.7 million, or 0.3% of net sales, for 2012. Approximately $3 million of R&D expenses of recently acquired facilities contributed to the increase.


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

Royalty Expense
Royalty expense was as follows (amounts in thousands):

Three months ended Six months ended
June 30, June 30,
2013 2012 2013 2012
Royalty expense $ 3,295 $ 2,652 $ 7,018 $ 5,001

The Company has a trademark license agreement with The Goodyear Tire & Rubber Company to manufacture and sell certain tires in North America and Latin America under the Goodyear name. The North American and Latin American farm tire royalties were prepaid through March 2018 as a part of the 2011 Goodyear Latin American farm tire acquisition. In May 2012, the Company and Goodyear entered into an agreement under which Titan will sell certain non-farm tire products directly to third party customers and pay a royalty to Goodyear.

Quarter: Royalty expenses were $3.3 million and $2.7 million for the quarters ended June 30, 2013 and 2012, respectively. As sales subject to the license agreement increased in the second quarter of 2013, the Company's royalty expense increased accordingly.

Year-to-date: Year-to-date royalty expenses recorded were $7.0 million and $5.0 million for the six months ended June 30, 2013 and 2012, respectively. As sales subject to the license agreement increased in the first six months of 2013, the Company's royalty expense increased accordingly.

Supply agreement termination income
Supply agreement termination income was as follows (amounts in thousands):

Three months ended Six months ended
June 30, June 30,
2013 2012 2013 2012
Supply agreement termination income $ - $ 26,134 $ - $ 26,134

The Company's April 2011 acquisition of Goodyear's farm tire business included a three year supply agreement with Goodyear for certain non-farm tire products. A liability was recorded as the supply agreement was for sales at below market prices. In May 2012, the Company and Goodyear terminated this supply agreement and entered into an agreement under which Titan will sell these products directly to third party customers and pay a royalty to Goodyear. The remaining balance of the supply agreement liability was recorded as income as the Company is no longer obligated to sell the products at below market prices.

Income from Operations
Income from operations was as follows (amounts in thousands):
                           Three months ended          Six months ended
                                June 30,                   June 30,
                           2013          2012         2013         2012
Income from operations  $  36,906     $ 80,969     $ 84,789     $ 139,640
Percentage of net sales       6.2 %       17.6 %        7.2 %        15.1 %

Quarter: Income from operations for the second quarter of 2013, was $36.9 million, or 6.2% of net sales, compared to $81.0 million, or 17.6% of net sales, in 2012. This decrease was the net result of the items previously discussed.

Year-to-date: Income from operations for the six months ended June 30, 2013, was $84.8 million, or 7.2% of net sales, compared to $139.6 million, or 15.1% of net sales, in 2012. This decrease was the net result of the items previously discussed.


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

Interest Expense
Interest expense was as follows (amounts in thousands):

Three months ended Six months ended
June 30, June 30,
2013 2012 2013 2012
Interest expense $ 13,069 $ 6,217 $ 23,510 $ 12,512

Quarter: Interest expense was $13.1 million and $6.2 million for the quarters ended June 30, 2013, and 2012, respectively. Interest expense for the second quarter of 2013 increased primarily as a result of approximately $5 million of interest recorded for the additional 7.875% senior secured notes issued in the first quarter of 2013. Interest expense at the recently acquired Titan Europe Plc of approximately $2 million also contributed to the increase.

Year-to-date: Year-to-date interest expense was $23.5 million and $12.5 million for the six months ended June 30, 2013, and 2012, respectively. Interest expense for the first half of 2013 increased primarily as a result of approximately $7 million of interest recorded for the additional 7.875% senior secured notes issued in the first quarter of 2013. Interest expense at the recently acquired Titan Europe Plc of approximately $5 million also contributed to the increase.

Convertible Debt Conversion Charge
Convertible debt conversion charge was as follows (amounts in thousands):

Three months ended Six months ended
June 30, June 30,
2013 2012 2013 2012
Convertible debt conversion charge $ - $ - 7,273 $ -

In the first quarter of 2013, the Company closed an Exchange Agreement with a note holder of the convertible notes. The two parties privately negotiated an agreement to exchange approximately $52.7 million in aggregate principal amount of the convertible notes for approximately 4.9 million shares of the Company's common stock plus a cash payment totaling $14.2 million. In connection with this exchange, the Company recognized a charge of $7.3 million in accordance with accounting standards for debt conversion.

Gain on Earthquake Insurance Recovery
Gain on earthquake insurance recovery (amounts in thousands):

Three months ended Six months ended
June 30, June 30,
2013 2012 2013 2012
Gain on earthquake insurance recovery $ 22,451 $ - 22,451 $ -

Titan Europe's wheel manufacturing facility in Finale Emilia, Italy experienced damage from an earthquake in May of 2012 prior to Titan's acquisition of Titan Europe. The plant was closed for production during initial remedial work. This resulted in a limited transfer of production to other facilities within Titan Europe as well as sourcing product from facilities in the US owned by Titan and competitors. In the second quarter of 2013, Titan received a final insurance settlement payment of $38.7 million, which offset the earthquake insurance receivable and resulted in a gain of $22.5 million.


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

Other Income (Expense) . . .

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