UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Indicate the number of shares of Titan International, Inc. outstanding: 59,713,18459,897,619 shares common stock, $0.0001 par value, as of October 24, 2017.July 25, 2018.

TITAN INTERNATIONAL, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

TITAN INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(All amounts in thousands, except per share data)

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

TITAN INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(All amounts in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

TITAN INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(All amounts in thousands, except share data)

See accompanying Notes to Condensed Consolidated Financial Statements.

TITAN INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

(All amounts in thousands, except share data)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

TITAN INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying Notes to Condensed Consolidated Financial Statements.

InThe accompanying unaudited condensed consolidated interim financial statements include the opinionaccounts of Titan International, Inc. and its subsidiaries (Titan or the Company), the accompanying unaudited condensed consolidated financial statements contain all adjustments which are normal, recurring, and necessary for a fair statement of the Company's financial position as of September 30, 2017, and the results of operations and cash flows for the three and nine months ended September 30, 2017 and 2016.

The Company records all financial instruments, including cash and cash equivalents, certificates of deposit, accounts receivable, notes receivable, accounts payable, other accruals, and notes payable at cost, which approximates fair value due to their short term or stated rates.  Investments in marketable equity securities are recorded at fair value.  The 6.875%6.50% senior secured notes due 20202023 (senior secured notes) were carried at cost of $396.6$394.7 million at SeptemberJune 30, 2017.2018. The fair value of the senior secured notes at SeptemberJune 30, 2017,2018, as obtained through an independent pricing source, was approximately $410.5$397.0 million.

The Company declared cash dividends of $0.005 and $0.015$0.010 per share of common stock for each of the three and ninesix months ended SeptemberJune 30, 20172018 and 2016, respectively.2017. The thirdsecond quarter 20172018 cash dividend of $0.005 per share of common stock was paid October 13, 2017,on July 16, 2018, to shareholders of record on SeptemberJune 29, 2017.2018.

In May 2014,The Company adopted the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09,Accounting Standards Codification (ASC) Topic 606, "Revenue from Contracts with Customers (Topic 606)." This update supersedesCustomers" (the New Revenue Standard), effective January 1, 2018, using the revenue recognition requirements in Topic 605, Revenue Recognition. The core principle of this guidance ismodified retrospective approach. ASC 606 prescribes that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ThisThe guidance also requires disclosure aboutprovides a five-step process to achieve that core principle:

The Company is in the process of comparingcompared its current revenue recognition policies to the requirements of ASU No. 2014-09. For the majority of Titan’sNew Revenue Standard. Titan recognizes revenue arrangements, no significant impacts are expected as these transactions are not accounted for under industry-specific guidance that will be superseded by ASU No. 2014-09 and generally consist ofwhen the performance obligations specified in the Company's contracts have been satisfied. Titan's contracts typically contain a single performance obligation to transfer promised goods or services. While the Company has not identified any material differences in the amount and timing of revenue recognition related to ASU No. 2014-09, the evaluationthat is not complete and, accordingly, Titan has not yet reached a conclusionfulfilled on the overall impacts of adopting ASU No. 2014-09. The guidance provides for adoption either retrospectively to each prior reporting period or as a cumulative-effect adjustment as of the date of adoption. The Company has determined that it will adoptdelivery based on shipping terms stipulated in the guidance using a cumulative-effect adjustment ascontract. As of January 1, 2018, none of the dateCompany's contracts contained a financing option and Titan did not have any contract assets or liabilities. The table below presents the cumulative effect of adoption. The Company believes it is following an appropriate timeline to allow for proper recognition, presentation, and disclosure uponthe adoption inof the year beginningNew Revenue Standard on select accounts of Titan's Condensed Consolidated Balance Sheet at January 1, 2018.2018 (amounts in thousands):

In April 2016,March 2018, the FASB issued ASU No. 2016-10, "Identifying Performance Obligations and Licensing.2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118." This ASU clarifiesupdates the following aspectsincome tax accounting in US GAAP to reflect the SEC's interpretive guidance released on December 22, 2017, when the 2017 Tax Cuts and Jobs Act (2017 TCJA) was enacted. See Note 15 for more information regarding the impact of Topic 606: identifying performance obligations and the licensing implementation guidance. 2017 TCJA.

In May 2016,2017, the FASB issued ASU No. 2016-12, "Narrow-Scope Improvements and Practical Expedients." This ASU affects only narrow aspects2017-09, "Stock Compensation (Topic 718): Scope of Topic 606 related to assessing the collectability criterion; presentation of sales tax; noncash consideration; and contract modifications and completed contracts at transition. The amendments in these updates affect the guidance in ASU No. 2014-09, as previously discussed above, and the effective dates are the same as those for ASU No. 2014-09.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The Company adopted this guidance effective January 1, 2018, with no resulting changes to the Company's consolidated financial statements.

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

In August 2016,February 2018, the FASB issued ASU No. 2016-15, "Classification2018-02, "Reclassification of Certain Cash ReceiptsTax Effects from Accumulated Other Comprehensive Income." The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 TCJA. Consequently, the amendments eliminate the stranded tax effects resulting from the 2017 TCJA and Cash Payments." This update addresses eight specific cash flow issues withwill improve the objectiveusefulness of reducing the existing diversity in practice.information reported to financial statement users. The amendments in this update are effective for fiscal years beginning after December 15, 2017,2018, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual reporting period. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

2. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following as of the dates set forth below (amounts in thousands):

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

3. INVENTORIES

Inventories consisted of the following as of the dates set forth below (amounts in thousands):

 

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 as of the dates set forth below (amounts in thousands):

 

Depreciation on fixed assetsproperty, plant and equipment for the ninesix months ended SeptemberJune 30, 2018 and 2017, and 2016, totaled $41.0$28.3 million and $42.1$27.4 million, respectively.

Capital leases included in property, plant, and equipment consisted of the following as of the dates set forth below (amounts in thousands):

5. INTANGIBLE ASSETS

The components of intangible assets consisted of the following as of the dates set forth below (amounts in thousands):

Amortization related to intangible assets for the ninesix months ended SeptemberJune 30, 2018 and 2017, and 2016, totaled $2.2$1.3 million and $2.1$1.5 million, respectively. Intangible assets are included as a component of other assets in the Condensed Consolidated Balance Sheet.

The estimated aggregate amortization expense at SeptemberJune 30, 2017,2018, for each of the years (or other periods) set forth below was as follows (amounts in thousands):

Changes in the warranty liability consisted of the following (amounts in thousands):

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

7. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT

Long-term debt consisted of the following as of the dates set forth below (amounts in thousands):

Aggregate principal maturities of long-term debt at SeptemberJune 30, 2017,2018, for each of the years (or other periods) set forth below were as follows (amounts in thousands):

The senior secured notes are due October 2020.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.

The Titan Europe credit facilities contain borrowings from various institutions totaling $33.5$34.2 million in aggregate principal amount at SeptemberJune 30, 2017.2018. Maturity dates on this debt range from less than one year to nine years and interest rates range from 5% to 6.9%. The Titan Europe facilities are secured by the assets of itsTitan's subsidiaries in Italy, Spain, Germany, and Brazil.

In February 2017, theThe Company entered intohas a credit and security agreement with respect to a new $75 million revolving credit facility (credit facility) with agent BMO Harris Bank N.A. and other financial institutions party thereto. This credit facility replaced the Company's $150 million revolving credit facility which was previously scheduled to terminate in December 2017. The credit facility is collateralized by accounts receivable and inventory of certain of the Company’s domestic subsidiaries and includes a maturity of the earlier of five years or six months prioris scheduled to the scheduled maturity of the Company’s senior secured notes.mature in February 2022. From time to time Titan's availability under this credit facility may be less than $75 million as a result of outstanding letters of credit and eligible accounts receivable and inventory balances at certain of its domestic subsidiaries. At SeptemberJune 30, 2017,2018, an outstanding letter of credit under the credit facility totaled $12.5$12.3 million and the amount available under the facility totaled $62.5$62.7 million based upon eligible accounts receivable and inventory balances. During the first ninesix months of 20172018 and at SeptemberJune 30, 2017,2018, there were no borrowings under the credit facility.

The Company has working capital loans at Titan Pneus do Brasil Ltda and Voltyre-Prom at various interest rates, which totaled $8.9$8.7 million and $7.4$23.8 million at SeptemberJune 30, 2017,2018, respectively. Maturity dates on this debt range from less than one year to three years.

The Company uses financial derivatives to mitigate its exposure to volatility in foreign currency exchange rates. These derivative financial instruments are recognized at fair value. The Company has not designated these financial instruments as hedging instruments. Any gain or loss on the re-measurement of the fair value is recorded as an offset to currency exchange gain/loss. For the three and ninesix months ended SeptemberJune 30, 2017,2018, the Company recorded currency exchange lossgain related to these derivatives of $0.2$0.4 million and $0.5$0.2 million, respectively.

9. REDEEMABLE NONCONTROLLING INTEREST

The Company, in partnership with One Equity Partners (OEP) and the Russian Direct Investment Fund (RDIF), owns all of the equity interests in Voltyre-Prom, a leading producer of agricultural and industrial tires in Volgograd, Russia. The Company is party to a shareholders' agreement with OEP and RDIF which was entered into in connection with the acquisition of Voltyre-Prom. The agreement contains a settlement put option which is exercisable during a six-month period beginning in July 2018 through December of9, 2018, and may require Titan to purchase the indirect equity interests in Voltyre-Prom offrom 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 is the greater of: (i) the aggregate of the investment of the selling party and an amount representing an internal rate of return of 8%; or (ii) the last twelve months of EBITDA timesmultiplied by 5.5 less net debt times the selling party's ownership percentage. TheAs of June 30, 2018, the value of the redeemable noncontrolling interest held by OEP and RDIF has beenwas recorded at the aggregate of the investment of the selling party and an amount representing an internal rate of return of 8%, which was greater than the result of the calculation in clause (ii) above at September 30, 2017..

This obligation with respect to the settlement put option approximates the cost to the Company if all remaining sharesequity interests in the consortium owning Voltyre-Prom were purchased by the Company on SeptemberJune 30, 2017,2018, and is presented in the Condensed Consolidated Balance Sheet in redeemable noncontrolling interest, which is treated as mezzanine equity.

The Company leases certain buildings and equipment under operating leases.  Certain lease agreements provide for renewal options, fair value purchase options, and payment of property taxes, maintenance, and insurance by the Company. 

At SeptemberJune 30, 2017,2018, future minimum rental commitments under noncancellable operating leases with initial terms of at least one year were as follows (amounts in thousands):

At SeptemberJune 30, 2017,2018, the Company had assets held as capital leases with a net book value of $6.9$6.6 million included in property, plant and equipment. At SeptemberJune 30, 2017,2018, total future capital lease obligations relating to these leases were as follows (amounts in thousands):

The Company has three frozen defined benefit pension plans covering certain employees or former employees of three U.S. subsidiaries. The Company also has pension plans covering certain employees of several foreign subsidiaries. The Company also sponsors a number of defined contribution plans in the U.S. and at foreign subsidiaries. The Company contributed approximately $2.1$1.7 million to the pension plans during the ninesix months ended SeptemberJune 30, 2017,2018, and expects to contribute approximately $1.2$3.7 million to the pension plans during the remainder of 2017.2018.

 

The components of net periodic pension cost consisted of the following for the periods set forth below (amounts in thousands):

The Company holds a variable interest in three joint ventures for which the Company is the primary beneficiary. Two of the joint ventures operate distribution facilities which primarily distribute mining products. OneTitan 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 interest in these joint ventures relates to sales of Titan product to these entities, consigned inventory, and working capital loans. The third joint venture is the consortium which owns Voltyre-Prom. (SeeTitan owns 43% of the consortium owning Voltyre-Prom, which is subject to a shareholder agreement containing a settlement put option which may require Titan to purchase the remaining equity interests in the consortium. See Note 9 for additional information.)

The Company also holds a variable interest in five other entities for which Titan is acting as operating partner with responsibility for Voltyre-Prom’s daily operations.the primary beneficiary. Each of these entities provides 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 has also provided working capital loans to Voltyre-Prom.owns no equity in these entities.

As the primary beneficiary of these variable interest entities (VIEs), the entities’ assets, liabilities, and results of operations are included in the Company’s consolidated financial statements. The other equity holders’ interests are reflected in “Net income (loss) attributable to noncontrolling interests” in the Condensed Consolidated Statements of Operations and “Noncontrolling interests” in the Condensed Consolidated Balance Sheets.

 

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

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

The Company has trademark license agreements with The Goodyear Tire & Rubber Company to manufacture and sell certain farm tires under the Goodyear name. These agreements cover sales in North America, Latin America, Europe, the Middle East, Africa, Russia, and other Commonwealth of Independent States countries. The North American and Latin American farm tire royalties were prepaid through March 2018 as a partEach of the 2011 Goodyear Latin American farm tire acquisition.these agreements expire in 2025. The Company also has a trademark license agreement with Goodyear to manufacture and sell certain non-farm tire products in Latin America.America which expires in June 2019. Royalty expenses recorded were $2.6 million and $2.3$2.5 million for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. Royalty expenses recorded were $7.7$5.3 million and $6.7$5.1 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively.

Other income consisted of the following for the periods set forth below (amounts in thousands):

The Company recorded income tax expense (benefit) of $2.4$1.7 million and $(2.1)$0.1 million for the quarters ended SeptemberJune 30, 20172018 and 2016,2017, respectively. For the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, the Company recorded income tax expense of $6.0$0.9 million and $2.6$3.6 million, respectively. The Company's effective income tax rate was (27)%23% and 16%(2)% for the quarters ended SeptemberJune 30, 2018 and 2017, and 2016,4% and (27)% and (13)(26)% for the ninesix months ended SeptemberJune 30, 2018 and 2017, respectively.

The Company’s 2018 income tax expense and 2016, respectively.rate differed from the amount of income tax determined by applying the U.S. Federal income tax rate to pre-tax income primarily as a result of a reduction of the liability for unrecognized tax positions and U.S. and certain foreign jurisdictions that incurred a full valuation allowance on deferred tax assets created by current year projected losses. In addition, there were non-deductible royalty expenses and statutorily required income adjustments made in certain foreign jurisdictions that negatively impacted the tax rate for the six months ended June 30, 2018.

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

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 and the Company weighs this evidence to determine if a valuation allowance is needed.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 U.S. and certain foreign jurisdictions and continues to monitor and assess potential valuation allowances in all its jurisdictions.

16. EARNINGS PER SHARE

Earnings per share (EPS) were as follows for the periods presented below (amounts in thousands, except per share data):