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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED: JUNE 30, 2002
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)
ILLINOIS 36-3228472
(State of Incorporation) (I.R.S. Employer Identification No.)
2701 SPRUCE STREET, QUINCY, IL 62301
(Address of principal executive offices, including Zip Code)
(217) 228-6011
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
SHARES OUTSTANDING AT
CLASS JULY 31, 2002
---- ---------------------
COMMON STOCK, NO PAR VALUE PER SHARE 20,815,674
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TITAN INTERNATIONAL, INC.
TABLE OF CONTENTS
Page Number
-----------
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Statements of Operations
for the Three and Six Months Ended June 30, 2002 and 2001 1
Consolidated Condensed Balance Sheets as of
June 30, 2002, and December 31, 2001 2
Consolidated Condensed Statements of Cash Flows
for the Six Months Ended June 30, 2002 and 2001 3
Notes to Consolidated Condensed Financial Statements 4-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-19
Part II. Other Information and Signature 20-21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS(UNAUDITED)
(Amounts in thousands, except earnings per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 125,837 $ 120,349 $ 249,553 $ 256,396
Cost of sales 110,953 113,473 222,530 234,072
----------- ----------- ---------- ----------
Gross profit 14,884 6,876 27,023 22,324
Selling, general & administrative expenses 10,013 10,678 20,311 21,500
Research and development expenses 864 761 1,650 1,562
----------- ----------- ---------- ----------
Income (loss) from operations 4,007 (4,563) 5,062 (738)
Interest expense 5,177 5,396 10,380 11,035
Gain on sale of assets 0 0 0 (1,619)
Gain on early retirement of debt 0 (4,356) 0 (4,356)
Other income (1,680) (470) (2,008) (1,103)
----------- ----------- ----------- -----------
Income (loss) before income taxes 510 (5,133) (3,310) (4,695)
Provision (benefit) for income taxes 127 (1,149) (828) (939)
----------- ----------- ----------- -----------
Net income (loss) $ 383 $ (3,984) $ (2,482) $ (3,756)
=========== =========== =========== ===========
Earnings (loss) per common share:
- ---------------------------------
Basic $.02 $(.19) $(.12) $(.18)
Diluted $.02 $(.19) $(.12) $(.18)
Average common shares outstanding:
- ----------------------------------
Basic 20,769 20,630 20,748 20,628
Diluted 20,774 20,630 20,748 20,628
The accompanying notes are an integral part of the
consolidated condensed financial statements.
1
TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share data)
JUNE 30, DECEMBER 31,
2002 2001
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 15,928 $ 9,214
Accounts receivable (net of allowance of $3,548 and $3,523, respectively) 90,554 78,144
Inventories 102,634 116,801
Deferred income taxes 13,008 21,175
Prepaid and other current assets 41,035 37,389
----------- -----------
Total current assets 263,159 262,723
Property, plant and equipment, net 195,221 205,047
Restricted cash deposits 27,675 34,661
Other assets 57,918 49,538
Goodwill, net 17,423 16,985
----------- -----------
Total assets $ 561,396 $ 568,954
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt (including current portion of long-term debt) $ 6,140 $ 4,304
Accounts payable 42,198 54,658
Other current liabilities 26,068 23,077
----------- -----------
Total current liabilities 74,406 82,039
Deferred income taxes 24,161 24,161
Other long-term liabilities 20,026 20,225
Long-term debt 255,393 256,622
----------- -----------
Total liabilities 373,986 383,047
----------- -----------
Stockholders' equity
Common stock (no par, 60,000,000 shares authorized; 27,555,081 issued) 27 27
Additional paid-in capital 211,257 211,905
Retained earnings 81,309 83,998
Treasury stock (at cost: 6,786,063 and 6,864,947 shares, respectively) (90,223) (91,270)
Accumulated other comprehensive loss (14,960) (18,753)
---------- ----------
Total stockholders' equity 187,410 185,907
----------- -----------
Total liabilities and stockholders' equity $ 561,396 $ 568,954
=========== ===========
The accompanying notes are an integral part of the
consolidated condensed financial statements.
2
TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
SIX MONTHS ENDED JUNE 30,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,482) $ (3,756)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 17,795 18,478
Gain on sale of assets 0 (1,619)
Gain on early retirement of debt 0 (4,356)
(Increase) decrease in current assets:
Accounts receivable (10,604) 4,464
Inventories 15,076 30,592
Prepaid and other current assets 4,885 (2,771)
Increase (decrease) in current liabilities:
Accounts payable (13,745) (14,330)
Other current liabilities 2,630 (9,520)
Other, net (8,531) 5,058
---------- ----------
Net cash provided by operating activities 5,024 22,240
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (4,696) (7,751)
Proceeds from sale of assets 0 5,200
Other 79 (4,489)
---------- ----------
Net cash used for investing activities (4,617) (7,040)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 0 16,463
Payment of debt/repurchase of bonds (1,131) (9,143)
Payments on credit facility, net 0 (5,000)
Decrease in restricted cash deposits 6,986 0
Repurchase of common stock 0 (277)
Dividends paid (207) (618)
Other, net 399 (91)
---------- ----------
Net cash provided by financing activities 6,047 1,334
Effect of exchange rate changes on cash 260 (554)
Net increase in cash and cash equivalents 6,714 15,980
Cash and cash equivalents at beginning of period 9,214 5,668
---------- ----------
Cash and cash equivalents at end of period $ 15,928 $ 21,648
========== ==========
The accompanying notes are an integral part of the
consolidated condensed financial statements.
3
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED )
A. ACCOUNTING POLICIES
In the opinion of Titan International, Inc. ("Titan" or the "Company"),
the accompanying unaudited consolidated condensed financial statements
contain all adjustments, which are normal and recurring in nature,
necessary to present fairly its financial position as of June 30, 2002,
the results of operations for the three and six months ended June 30,
2002 and 2001, and cash flows for the six months ended June 30, 2002
and 2001.
Except for the discontinuance of goodwill amortization as required by
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets" and the reclassification of gain on early
retirement of debt under SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections", accounting policies have continued without change and are
described in the Summary of Significant Accounting Policies contained
in the Company's 2001 Annual Report on Form 10-K.
These interim financial statements have been prepared pursuant to the
Securities and Exchange Commission's rules for Form 10-Q's and,
therefore, certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's 2001 Annual Report on Form 10-K. Details in those notes have
not changed significantly, except as a result of normal interim
transactions and certain matters discussed hereafter.
B. INVENTORIES
Inventories consisted of the following (in thousands):
June 30, December 31,
2002 2001
----------- -----------
Raw materials $ 30,195 $ 34,771
Work-in-process 16,357 11,549
Finished goods 52,443 67,647
----------- -----------
98,995 113,967
LIFO reserve 3,639 2,834
----------- -----------
$ 102,634 $ 116,801
=========== ===========
The LIFO reserve changed primarily as a result of price fluctuations within the
composition of LIFO inventory layers.
4
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED )
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net reflects accumulated depreciation of
$207.1 million and $189.6 million at June 30, 2002, and December 31,
2001, respectively.
D. GOODWILL
Goodwill, net reflects accumulated amortization of $5.5 million at June
30, 2002, and December 31, 2001. No goodwill amortization has been
recorded in 2002, pursuant to the adoption of SFAS No. 142 as described
in note H.
The carrying amount of goodwill by segment at June 30, 2002 was (i)
agricultural of $9.6 million, (ii) earthmoving/construction of $6.1
million, and (iii) consumer of $1.7 million. The increase in goodwill,
net from $17.0 million at December 31, 2001 to $17.4 million at June
30, 2002 is the result of currency exchange fluctuations.
The table below provides comparative net earnings and earnings per
share information had the non-amortization provisions of SFAS No. 142
been adopted for all periods presented:
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---------- ----------- ---------- ----------
Net income (loss) (in thousands)
-----------------
As reported $ 383 $ (3,984) $ (2,482) $ (3,756)
Goodwill amortization, net of tax 0 211 0 313
---------- ---------- --------- ----------
Adjusted net earnings (loss) $ 383 $ (3,773) $ (2,482) $ (3,443)
========== ========== ========= ==========
Basic & diluted earnings (loss) per share
-----------------------------------------
As reported $ .02 $ (.19) $(.12) $ (.18)
Goodwill amortization, net of tax 0 .01 0 .01
------ ------ ----- ------
Adjusted net earnings (loss) per share $ .02 $ (.18) $(.12) $ (.17)
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5
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED )
E. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
June 30, December 31,
2002 2001
------------ ------------
Senior subordinated notes $ 136,750 $ 136,750
Term loan 98,175 99,000
Industrial revenue bonds and other 26,608 25,176
----------- -----------
261,533 260,926
Less: Amounts due within one year 6,140 4,304
----------- -----------
$ 255,393 $ 256,622
=========== ===========
Aggregate maturities of long-term debt at June 30, 2002, were as
follows (in thousands):
July 1 -- December 31, 2002 $ 3,410
2003 10,231
2004 12,612
2005 15,879
2006 71,309
Thereafter 148,092
-----------
$ 261,533
===========
F. COMPREHENSIVE INCOME (LOSS)
Comprehensive income, which includes net income of $0.4 million and the
effect of foreign currency translation adjustments of $4.8 million,
totaled $5.2 million for the second quarter of 2002, compared to a
comprehensive loss of $(4.6) million in the second quarter of 2001.
Comprehensive income for the six months ended June 30, 2002 was $1.3
million, compared to a comprehensive loss of $(7.5) million in 2001.
6
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
G. SEGMENT INFORMATION
The table below presents information about certain revenues and income
from operations for the three and six months ended June 30, 2002 and
2001 used by the chief operating decision maker of the Company (in
thousands):
Revenues Income (loss)
Three months ended from external Intersegment from
June 30, 2002 customers revenues operations
------------- --------------- --------------- ------------
Agricultural $ 75,257 $ 39,109 $ 7,049
Earthmoving/construction 39,482 15,415 2,866
Consumer 11,098 7,166 590
Reconciling items (a) 0 0 (6,498)
---------- ---------- ----------
Consolidated totals $ 125,837 $ 61,690 $ 4,007
========== ========== ==========
Three months ended
June 30, 2001
-------------
Agricultural $ 67,096 $ 26,431 $ 1,676
Earthmoving/construction 42,134 11,223 1,709
Consumer 11,119 4,262 (1,027)
Reconciling items (a) 0 0 (6,921)
---------- ---------- ----------
Consolidated totals $ 120,349 $ 41,916 $ (4,563)
========== ========== ==========
(a) Represents corporate expenses and depreciation expense related to
property, plant and equipment carried at the corporate level. The 2001
amounts also include amortization expense for goodwill carried at the
corporate level. No goodwill amortization has been recorded in 2002,
pursuant to the adoption of SFAS No. 142 as described in note H.
7
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
G. SEGMENT INFORMATION (CONTINUED)
Revenues Income (loss)
Six months ended from external Intersegment from
June 30, 2002 customers revenues operations
------------- --------------- --------------- ------------
Agricultural $ 150,502 $ 82,134 $ 12,154
Earthmoving/construction 76,416 29,974 4,752
Consumer 22,635 13,553 1,071
Reconciling items (a) 0 0 (12,915)
----------- ------------ --------
Consolidated totals $ 249,553 $ 125,661 $ 5,062
========== ========== ==========
Six months ended
June 30, 2001
----------------
Agricultural $ 143,924 $ 71,786 $ 8,745
Earthmoving/construction 85,133 29,204 5,265
Consumer 27,339 11,852 (937)
Reconciling items (a) 0 0 (13,811)
----------- ------------ --------
Consolidated totals $ 256,396 $ 112,842 $ (738)
========== ========== ==========
(a) Represents corporate expenses and depreciation expense related to
property, plant and equipment carried at the corporate level. The 2001
amounts also include amortization expense for goodwill carried at the
corporate level. No goodwill amortization has been recorded in 2002,
pursuant to the adoption of SFAS No. 142 as described in note H.
8
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
G. SEGMENT INFORMATION (CONTINUED)
June 30, December 31,
Total assets 2002 2001
------------ ---------- -----------
Agricultural $ 259,536 $ 252,213
Earthmoving/construction 140,017 151,823
Consumer 37,364 46,783
Reconciling items (b) 124,479 118,135
---------- ----------
Consolidated totals $ 561,396 $ 568,954
========== ==========
(b) Represents property, plant and equipment and goodwill related to
certain acquisitions and other corporate assets.
H. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards Number 142
On January 1, 2002, the Company adopted the non-amortization provisions
of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 eliminates the
amortization of goodwill and requires goodwill to be tested for
impairment at least annually. The Company has determined the reporting
units and has conducted transitional tests of goodwill impairment of
these units using the discounted cash flow method. The Company's
transitional tests showed no impairment of goodwill.
Statement of Financial Accounting Standards Number 144
In July 2001, SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-lived Assets", was issued. This statement retains the previous
cash flow test for impairment and broadens the presentation of
discontinued operations. SFAS No. 144 was adopted by the Company in the
first quarter of 2002 and had no material effect on the Company's
financial position, cash flows or results of operations.
9
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
H. NEW ACCOUNTING STANDARDS (CONTINUED)
Statement of Financial Accounting Standards Number 145
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections",
was issued. This statement eliminates the requirement that gains and
losses on the extinguishment of debt be classified as extraordinary
items on the statement of operations. The Company has elected to adopt
SFAS No. 145 early. Therefore, the gain on early retirement of debt
recorded in the second quarter of 2001 has been reclassified. See Note
I for additional information.
I. GAIN ON EARLY RETIREMENT OF DEBT
The Company recorded a gain on early retirement of debt of $4.4 million
in the second quarter of 2001. This gain was previously classified as
an extraordinary item in accordance with Financial Accounting Standards
Board (FASB) Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt". In accordance with FASB Statement No. 4, the
gain was shown net of taxes of $1.8 million for a net amount of $2.6
million. In April 2002, SFAS No. 145 was issued rescinding FASB
Statement No. 4. The Company has elected to adopt SFAS No. 145 early
and has therefore reclassified the gain on early retirement of debt in
accordance with SFAS No. 145.
J. INVESTMENTS
The Company continues to maintain financial interests in Fabrica
Uraguaya de Neumaticos S.A. (FUNSA). In the second quarter of 2002,
FUNSA ceased production of tires due to financial difficulties and
union issues. As a result of these events, FUNSA's lending institution
exercised its right to draw on the $6.0 million letter of credit posted
by Titan securing FUNSA's borrowings. This cash outflow has been
presented within the "Other, net" line within cash flows provided by
operations in the accompanying Statement of Cash Flows for the six
months ended June 30, 2002. Currently, FUNSA is working with the
government of Uruguay, the union and its investors to complete a
reorganization plan and resume the manufacturing of tires. The Company
is closely monitoring this situation and will further adjust the
carrying value of its FUNSA investments as necessary. Management of the
Company believes it holds a security interest in the assets of FUNSA
which are believed to be in excess of the Company's exposure. The
Company's investment exposures presently associated with FUNSA include
the $6.0 million drawn on the letter of credit, preferred stock carried
at $3.6 million, and common stock ownership of 16% carried at zero.
10
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Preparation of the financial statements and related disclosures in compliance
with generally accepted accounting principles 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 judgments
regarding many factors, which, in and of themselves, could materially impact the
financial statements and disclosures. A future change in the assumptions or
judgments applied in determining the following matters, among others, could have
a material impact on future financial results.
Revenue Recognition
The Company records sales revenue and cost of sales when products are shipped to
customers and both title and the risks and rewards of ownership are transferred.
Provisions are established for sales returns and uncollectible accounts.
Product Costing
Inventories are valued at the lower of cost or market. For operations in the
United States, cost is determined using the last-in, first-out (LIFO) method for
approximately 53% of inventories and the first-in, first-out (FIFO) method for
the remainder of inventories. Inventory of foreign subsidiaries is valued using
the FIFO method.
Impairment of Fixed Assets
The Company reviews fixed assets to assess recoverability from future operations
whenever events and circumstances indicate that the carrying values may not be
recoverable. Impairment losses are recognized in operating results when expected
undiscounted future cash flows are less than the carrying value of the asset.
Impairment losses are measured as the excess of the carrying value of the asset
over the discounted expected future cash flows or the fair value of the asset.
Valuation of Equity Investments
The Company assesses the carrying value of its equity investments whenever
events and circumstances indicate that the carrying values may not be
recoverable. Investment write-downs, if necessary, are recognized in operating
results when expected undiscounted future cash flows are less than the carrying
value of the asset. These write-downs, if any, are measured as the excess of the
carrying value of the asset over the discounted expected future cash flows or
the fair value of the asset.
11
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES (CONTINUED)
Impairment of Goodwill
The Company will review goodwill to assess recoverability from future operations
during the fourth quarter of each annual reporting period, or whenever events
and circumstances indicate that the carrying values may not be recoverable.
RESULTS OF OPERATIONS
Net Sales
Net sales for the quarter ended June 30, 2002, were $125.8 million, compared to
2001 second quarter net sales of $120.3 million. Net sales for the six months
ended June 30, 2002 were $249.6 million, compared to 2001 net sales of $256.4
million. Net sales for the quarter ended June 30, 2002 increased as the result
of a small rebound in agricultural segment sales. Net sales for the six months
ended June 30, 2002 decreased primarily due to reduced production by the
Company's major customers and the continued negative economic global conditions
in the earthmoving/construction and consumer markets.
Cost of Sales and Gross Profit
Cost of sales was $111.0 and $222.5 million for the second quarter and for the
six months ended June 30, 2002, as compared to $113.5 and $234.1 million in
2001. Gross profit for the second quarter of 2002 was $14.9 million or 11.8% of
net sales, compared to $6.9 million or 5.7% of net sales for the second quarter
of 2001. Gross profit for the six months ended June 30, 2002, was $27.0 million
or 10.8% of net sales, compared to $22.3 million or 8.7% of net sales for 2001.
The Company continues to see positive implications from the union strike
settlement, which occurred in late 2001. These strikes at the Company's Des
Moines, Iowa and Natchez, Mississippi facilities lasted over three years.
Furthermore, gross profit, as a percentage of net sales, was positively impacted
by the Company's efforts to control costs. Cost reduction measures have included
the closing of several distribution facilities as part of the Company's
reorganization of its domestic distribution network. The Company's profit
margins continue to be affected by the excess capacity at the idle Natchez,
Mississippi facility. Depreciation on the fixed assets at this facility, along
with minimal operating costs, continue to be incurred. A recent third party
appraisal indicates the fair value of the fixed assets of this facility is in
excess of the carrying value of $22.0 million. The Company continually assesses
its capacity requirements and makes necessary changes as dictated by customer
demand.
12
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Administrative Expenses
Selling, general and administrative (SG&A) and research and development (R&D)
expenses for the second quarter of 2002 were $10.9 million or 8.6% of net sales,
compared to $11.4 million or 9.5% of net sales for 2001. SG&A and R&D expenses
for the six months ended June 30, 2002 were $22.0 million or 8.8% of net sales,
compared to $23.1 million or 9.0% of net sales in 2001. The SG&A and R&D
percentage was lower due to the Company's efforts to streamline total SG&A
expenditures as well as the ceasing of the amortization of goodwill as discussed
in footnote D of the accompanying financial statements.
Operating Results and Other
Income from operations for the second quarter of 2002 was $4.0 million or 3.2%
of net sales, compared to a loss from operations of $(4.6) million or (3.8)% in
2001. Income from operations for the six months ended June 30, 2002 was $5.1
million or 2.0% of net sales, compared to a loss of $(0.7) million or (0.3)% for
2001. Operating results were primarily impacted by the Company's effort to
reduce costs as discussed above.
Net interest expense was $5.2 million and $10.4 million for the second quarter
and for the six months ended June 30, 2002, respectively, compared to $5.4
million and $11.0 million in 2001. The decreased interest expense in 2002 was
primarily due to lower interest rates as compared to 2001.
The $1.6 million gain on sale of assets in 2001 was attributed to the sale of an
airplane during the first quarter of that year. A gain on early retirement of
debt of $4.4 million in the second quarter of 2001 resulted from the early
retirement of $13.3 million of the senior subordinated notes.
During the quarter and the six months ended June 30, 2002, the strength of
foreign currencies against the dollar benefited Titan by $1.4 million and $1.2
million, respectively.
The Company's effective tax benefit on the net loss for the first six months of
2002 was 25%, compared to 20% effective tax benefit on the net loss for the
first six months of 2001. The change in the effective tax benefit rate is due to
improved operating results for 2002 compared to 2001 as well as anticipated
changes in the allocation of that income among geographic locations with various
income tax rates.
13
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Net Income (Loss)
Net income (loss) for the second quarter and for the six months ended June 30,
2002, was $0.4 and $(2.5) million, respectively, compared to $(4.0) and $(3.8)
million in 2001. Basic and diluted earnings (loss) per share were $.02 and
$(.12) for the second quarter and for the six months ended June 30, 2002,
compared to $(.19) and $(.18) in 2001. Net income increased as a result of
favorable foreign currency rates and the Company's efforts to enhance
efficiencies and reduce costs as previously discussed.
Agricultural Segment Results
Net sales in the agricultural market were $75.3 and $150.5 million for the
second quarter and the six months ended June 30, 2002, as compared to $67.1 and
$143.9 million in 2001. Income from operations in the agricultural market was
$7.0 and $12.2 million for the second quarter and the six months ended June 30,
2002, as compared to $1.7 and $8.7 million in 2001. The increase in income from
operations in the agricultural market was primarily attributed to higher sales
volumes resulting from an increase in customer demand. Additionally, the
increase in operating income was a result of the increased cost controlling
efforts previously discussed.
Earthmoving/Construction Segment Results
The Company's earthmoving/construction market net sales were $39.5 and $76.4
million for the second quarter and the six months ended June 30, 2002, as
compared to $42.1 and $85.1 million for 2001. Income from operations in the
earthmoving/construction market was $2.9 and $4.8 million for the second quarter
and the six months ended June 30, 2002, versus $1.7 and $5.3 million in 2001.
The year to date decrease in income from operations in the
earthmoving/construction market was primarily due to operating inefficiencies
resulting from a significant decrease in the sales volume. However, in the
second quarter of 2002, these inefficiencies were partially offset by the
increased cost controlling efforts previously discussed.
Consumer Segment Results
Consumer market net sales were $11.1 and $22.6 million for the second quarter of
2002 and the six months ended June 30, 2002, as compared to $11.1 and $27.3
million for 2001. Consumer market income from operations was $0.6 and $1.1
million for the second quarter of 2002 and the six months ended June 30, 2002,
as compared to loss from operations of $(1.0) and $(0.9) for 2001. Although
consumer market net sales decreased year-to-date, income from operations
increased as the result of the Company's previously discussed efforts to enhance
efficiencies.
14
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Corporate Expenses
Income from operations on a segment basis does not include corporate expenses or
depreciation and amortization expense related to property, plant and equipment
carried at the corporate level totaling $6.5 and $12.9 million for the second
quarter and the six months ended June 30, 2002, respectively, as compared to
$6.9 and $13.8 million for comparable periods in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
In the first half of 2002, positive cash flows from operating activities of $5.0
million resulted primarily from inventory decreases of $15.1 million and
depreciation and amortization of $17.8 million, offset partially by accounts
receivable increases of $10.6 million and accounts payable decreases of $13.7
million. The decrease in inventory occurred primarily in the first quarter and
was the result of concerted efforts to reduce inventory levels. The Company
intends to continue this effort to reduce inventory balances during fiscal 2002.
The Company invested $4.7 million in capital expenditures in the first half of
2002. The expenditures represent various equipment purchases and building
improvements to enhance production capabilities. The Company estimates that its
total capital expenditures will not exceed $10 million to $12 million in 2002.
Other Issues
The Company's business is subject to seasonal sales variations that affect
inventory levels and accounts receivable balances.
There have been no significant changes in interest rates, debt borrowings, or
related covenants during the first six months of 2002.
The Company had restricted cash of $27.7 million at June 30, 2002. Restricted
cash of $15.0 million was collateral on the revolving loan agreement. The
remaining $12.7 million is collateral on outstanding letters of credit for an
industrial revenue bond of $9.6 million and others totaling $3.1 million.
Letters of credit were previously issued under the Company's credit facility,
which was replaced in December 2001.
15
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company maintains financial interests in Fabrica Uraguaya de Neumaticos S.A.
(FUNSA), a tire manufacturer located in Uruguay. In April of 2002, the $6.0
million FUNSA letter of credit was paid, thus reducing Titan's restricted cash
balance related to this letter of credit. FUNSA has incurred operating losses
and is currently in the process of reorganization. As such, the Company will
continue to evaluate its investments in FUNSA. See further discussion in
footnote J of the accompanying financial statements.
Liquidity Outlook
At June 30, 2002, the Company had unrestricted cash and cash equivalents of
$15.9 million and no amount was drawn on the $20 million revolving loan
agreement. Due to losses sustained by the Company and a recent change in
domestic tax law, Titan filed loss carryback tax returns to obtain domestic tax
refunds. In July of 2002, the Company received tax refunds totaling $16.3
million. Cash on hand, including the tax refunds received in July 2002,
anticipated internal cash flows from operations and utilization of remaining
available borrowings are expected to provide sufficient liquidity for working
capital needs, capital expenditures, and payments required on short-term debt
for the near term. However, if the Company were to exhaust all currently
available working capital sources, or were not to meet the financial covenants
and conditions of its loan agreements, the Company might find it extremely
difficult to secure additional funding in order to meet working capital
requirements.
16
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK
Agricultural Segment
Given current economic conditions, the agricultural market sales for the
remainder of 2002 are expected to fall slightly below 2001 levels. Commodity
farm prices remain at depressed levels. However, low interest rates and
government payments have helped support the financial condition of farmers. Many
variables, including weather, export markets and future government policies and
payments can greatly influence the overall health of the agricultural economy.
Many of the Company's customers in the agricultural market schedule extended
plant shutdowns during the second half of the year. Therefore, sales for the
second half of 2002 are expected to decline from those in the first half of the
year. The sales decline will lower profitability in the second half of 2002.
However, the Company believes enhanced efficiencies will allow the operating
results to continue to outperform those of 2001.
Earthmoving/Construction Segment
Sales in the earthmoving/construction market for the balance of 2002 are
expected to remain lower than 2001. A continued general uncertainty in the
earthmoving/construction market has slowed spending on new equipment.
Governmental entities have cut construction spending due to lower government
receipts. Also, weakness persists at equipment rental agencies, thereby
decreasing their demand to purchase new equipment. Many of the Company's
earthmoving/construction customers also schedule extended plant shutdowns during
the second half of the year. Therefore, sales and profitability for the second
half of 2002 will likely decline from the results of the first half.
Consumer Segment
Consumer market sales are anticipated to run slightly lower for the rest of 2002
when compared to 2001. Many items affect the consumer market including weather,
competitive pricing, energy prices, and consumer attitude, which remains
cautious. If the enhanced efficiencies and favorable sales mix continues, the
consumer market will show improved margins when compared to 2001.
MARKET RISK SENSITIVE INSTRUMENTS
The Company's risks related to foreign currencies, commodity prices and interest
rates are consistent with those for 2001.
17
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards Number 142
On January 1, 2002, the Company adopted the non-amortization provisions of
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 eliminates the amortization of goodwill and
requires goodwill to be tested for impairment at least annually. The Company has
determined the reporting units and has conducted transitional tests of goodwill
impairment of these units using the discounted cash flow method. The Company's
transitional tests showed no impairment of goodwill.
Statement of Financial Accounting Standards Number 144
In July 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-lived Assets", was issued. This statement retains the previous cash flow
test for impairment and broadens the presentation of discontinued operations.
SFAS No. 144 was adopted by the Company in the first quarter of 2002 and had no
material effect on the Company's financial position, cash flows or results of
operations.
Statement of Financial Accounting Standards Number 145
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections", was issued. This
statement eliminates the requirement that gains and losses on the extinguishment
of debt be classified as extraordinary items on the statement of operations. The
Company has elected to adopt SFAS No. 145 early. Therefore, the gain on early
retirement of debt recorded in the second quarter of 2001 has been reclassified.
See Note I in the Notes to Consolidated Condensed Financial Statements for
additional information.
18
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q contains forward-looking statements, including statements
regarding, among other items, (i) anticipated trends in the Company's business,
(ii) future expenditures for capital projects, (iii) the Company's ability to
continue to control costs and maintain quality, (iv) meeting financial covenants
and conditions of its loan agreements, (v) the Company's business strategies,
including its intention to introduce new products, (vi) expectations concerning
the performance and commercial success of the Company's existing and new
products and (vii) the Company's intention to consider and pursue acquisitions.
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, 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, (i) changes in the Company's end-user
markets as a result of world economic or regulatory influences, (ii) changes in
the competitive marketplace, including new products and pricing changes by the
Company's competitors, (iii) availability and price of raw materials, (iv)
levels of operating efficiencies, (v) actions of domestic and foreign
governments, (vi) results of investments, (vii) impairment of goodwill or fixed
assets, and (viii) ability to secure financing at reasonable terms. Any changes
in such factors could lead to significantly different results. 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.
19
TITAN INTERNATIONAL, INC.
PART II. OTHER INFORMATION
ITEMS 1 THROUGH 3 ARE NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 16,
2002, for the purposes of electing three directors to serve
for three-year terms and approving the appointment of
independent auditors.
All the nominees for directors as listed in the proxy
statement were elected with the following vote:
Shares Shares
Voted For Withheld
--------- --------
Richard M. Cashin, Jr 16,739,230 3,426,944
Albert J. Febbo 20,020,318 145,856
Mitchell I. Quain 20,020,509 145,665
The appointment of PricewaterhouseCoopers LLP as independent
auditors was approved by the following vote:
Shares Shares Shares
Voted For Against Abstaining
--------- ------- ----------
19,777,102 384,004 5,068
ITEMS 5 AND 6 ARE NOT APPLICABLE.
20
TITAN INTERNATIONAL, INC.
PART II. OTHER INFORMATION
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 9, 2002 BY: /s/ Maurice M. Taylor Jr.
------------------ --------------------------------------
Maurice M. Taylor Jr.
resident and Chief Executive Officer
BY: /s/ Kent W. Hackamack
--------------------------------------
Kent W. Hackamack
Vice President of Finance and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
CERTIFICATION
Each of the undersigned hereby certifies that, to the best of their knowledge,
this report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 and that information contained in this report
fairly presents, in all material respects, the financial condition and results
of operations of the Registrant.
TITAN INTERNATIONAL, INC.
(REGISTRANT)
DATE: August 9, 2002 BY: /s/ Maurice M. Taylor Jr.
------------------- --------------------------------------
Maurice M. Taylor Jr.
President and Chief Executive Officer
BY: /s/ Kent W. Hackamack
--------------------------------------
Kent W. Hackamack
Vice President of Finance and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
21