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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: MARCH 31, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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 APRIL 29, 2003
----- ---------------------
COMMON STOCK, NO PAR VALUE PER SHARE 20,913,442
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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 Months Ended March 31, 2003 and 2002 1
Consolidated Condensed Balance Sheets as of
March 31, 2003, and December 31, 2002 2
Consolidated Condensed Statements of Cash Flows
for the Three Months Ended March 31, 2003 and 2002 3
Notes to Consolidated Condensed Financial Statements 4-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
Part II. Other Information 22
Signatures & Certification 23
Certification 24-25
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
MARCH 31,
2003 2002
---- ----
Net sales $ 128,984 $ 123,716
Cost of sales 118,589 111,577
--------- ---------
Gross profit 10,395 12,139
Selling, general & administrative expenses 11,417 10,298
Research and development expenses 668 786
--------- ---------
(Loss) income from operations (1,690) 1,055
Interest expense (4,975) (5,203)
Other income 478 328
--------- ---------
Loss before income taxes (6,187) (3,820)
Benefit for income taxes (309) (955)
--------- ---------
Net loss $ (5,878) $ (2,865)
========= =========
Loss per share:
Basic $ (.28) $ (.14)
Diluted $ (.28) $ (.14)
Average shares outstanding:
Basic 20,789 20,727
Diluted 20,789 20,727
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)
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 11,472 $ 22,049
Accounts receivable (net allowance of $3,615 and $3,172, respectively) 110,016 82,588
Inventories 114,466 109,142
Deferred income taxes 12,009 12,009
Prepaid and other current assets 30,274 28,781
----------- -----------
Total current assets 278,237 254,569
Property, plant and equipment, net 181,301 186,540
Restricted cash deposits 26,803 26,803
Other assets 45,721 46,248
Goodwill, net 17,702 17,839
----------- -----------
Total assets $ 549,764 $ 531,999
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt (including current portion of long-term debt) $ 18,660 $ 10,615
Accounts payable 59,154 49,007
Other current liabilities 30,985 24,684
----------- -----------
Total current liabilities 108,799 84,306
Deferred income taxes 12,009 12,009
Other long-term liabilities 43,150 42,538
Long-term debt 247,789 249,119
----------- -----------
Total liabilities 411,747 387,972
----------- -----------
Stockholders' equity
Common stock (no par, 60,000,000 shares authorized; 27,555,081 issued) 27 27
Additional paid-in capital 208,566 210,231
Retained earnings 41,723 47,705
Treasury stock (at cost: 6,840,553 and 6,764,199 shares, respectively) (87,354) (88,963)
Accumulated other comprehensive loss (24,945) (24,973)
---------- ----------
Total stockholders' equity 138,017 144,027
----------- -----------
Total liabilities and stockholders' equity $ 549,764 $ 531,999
=========== ===========
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)
THREE MONTHS ENDED MARCH 31,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,878) $ (2,865)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 7,867 8,877
(Increase) decrease in current assets:
Accounts receivable (26,835) (20,213)
Inventories (5,102) 12,216
Prepaid and other current assets (1,421) 812
Increase (decrease) in current liabilities:
Accounts payable 9,692 (3,109)
Other current liabilities 6,147 4,305
Other, net 496 (268)
-------- --------
Net cash used for operating activities (15,034) (245)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (1,800) (2,331)
Other, net 58 29
-------- --------
Net cash used for investing activities (1,742) (2,302)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 7,299 0
Payment of debt (1,057) (134)
Proceeds from revolving loan agreement, net 0 1,500
Decrease in restricted cash deposits 0 886
Repurchase of common stock (244) 0
Dividends paid (104) (104)
Other, net 188 177
-------- --------
Net cash provided by financing activities 6,082 2,325
-------- --------
Effect of exchange rate changes on cash 117 (376)
Net decrease in cash and cash equivalents (10,577) (598)
Cash and cash equivalents at beginning of period 22,049 9,214
-------- --------
Cash and cash equivalents at end of period $ 11,472 $ 8,616
======== ========
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 March 31,
2003, the results of operations and cash flows for the three months
ended March 31, 2003 and 2002.
Accounting policies have continued without change and are described in
the Summary of Significant Accounting Policies contained in the
Company's 2002 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 2002 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.
Stock-based compensation
At March 31, 2003, the Company has two stock-based compensation plans,
which are described in Note 22 to the Company's financial statements on
Form 10-K for the fiscal year ended December 31, 2002. The Company
applies the recognition and measurement principles of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for those plans.
The Company granted no stock options during the first quarter of 2003
and no stock-based compensation expense was required to be recorded.
The total stock-based compensation expense determined under the fair
value method for all awards, net of related tax effects, for the first
quarter of 2003 is computed to be an immaterial amount.
4
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
B. INVENTORIES
Inventories consisted of the following (in thousands):
March 31, December 31,
2003 2002
-------- -----------
Raw materials $ 34,579 $ 32,927
Work-in-process 18,536 18,209
Finished goods 58,451 56,218
-------- --------
111,566 107,354
LIFO reserve 2,900 1,788
-------- --------
$114,466 $109,142
======== ========
The LIFO reserve changed primarily as a result of price fluctuations
within the composition of LIFO inventory layers.
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net reflects accumulated depreciation of
$226.8 million and $220.7 million at March 31, 2003, and December 31,
2002, respectively.
D. GOODWILL
Goodwill, net reflects accumulated amortization of $5.6 million at
March 31, 2003, and December 31, 2002. Goodwill amortization was ceased
in January 2002, pursuant to the adoption of Statement of Financial
Accounting Standards (SFAS) No. 142.
The carrying amount of goodwill by segment at March 31, 2003 was (i)
agricultural of $9.7 million, (ii) earthmoving/construction of $6.3
million, and (iii) consumer of $1.7 million. The decrease in net
goodwill to $17.7 million at March 31, 2003, from $17.8 million at
December 31, 2002, is the result of currency exchange fluctuations.
5
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
E. WARRANTY COSTS
The Company provides limited warranties on workmanship on its products
in all market segments. 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. Warranty accruals
are included as a component of other current liabilities on the
Consolidated Condensed Balance Sheets. Changes in the warranty
liability consisted of the following (in thousands):
Warranty liability, January 1, 2003 $ 1,617
Provision for warranty liabilities for 2003 sales 577
Warranty payments made in 2003 (543)
----------
Warranty liability, March 31, 2003 $ 1,651
==========
F. INCOME TAXES
The Company's effective income tax benefit on the net loss for the
first quarter of 2003 was 5%, compared to 25% for the first quarter of
2002. The Company's income tax benefit differs from the amount of
income tax determined by applying the statutory U.S. federal income tax
rate to pretax loss primarily as a result of income tax expense to be
paid in foreign jurisdictions and the application of a valuation
allowance on the domestic net deferred tax asset balance. As a result
of several periods of recurring losses, the Company began reserving its
net deferred tax asset position at December 31, 2002, consistent with
the Company's accounting policies. The Company continues to monitor its
income tax position and will review the necessity of the valuation
allowance at the end of each reporting period. To the extent it is
determined deferred tax assets will be realized in excess of deferred
tax liabilities, some or all of the valuation allowance will be
recorded as income.
6
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
G. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
March 31, December 31,
2003 2002
------------ ------------
Senior subordinated notes $ 136,750 $ 136,750
Term loan 95,700 96,525
Revolving loan agreement 0 0
Industrial revenue bonds and other (a) 33,999 26,459
----------- -----------
266,449 259,734
Less: Amounts due within one year 18,660 10,615
----------- -----------
$ 247,789 $ 249,119
=========== ===========
(a) The increase in other debt resulted primarily from an increase in
short-term debt of $7.3 million at the Company's foreign
subsidiaries.
Aggregate maturities of long-term debt at March 31, 2003, were as
follows (in thousands):
April 1 - December 31, 2003 $ 16,862
2004 13,151
2005 16,375
2006 71,678
2007 137,413
Thereafter 10,970
-----------
$ 266,449
===========
H. COMPREHENSIVE LOSS
Comprehensive loss, which includes net loss of $(5.9) million and no
net effects of foreign currency translation adjustments, totaled $(5.9)
million for the first quarter of 2003, compared to $(3.9) million in
the first quarter of 2002.
7
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
I. SEGMENT INFORMATION
The table below presents information about certain revenues and income
from operations used by the chief operating decision maker of the
Company for the three months ended March 31, 2003 and 2002 (in
thousands):
Revenues Income (loss)
from external Intersegment from
2003 customers revenues (a) operations
---- --------------- ------------- ------------
Agricultural $ 78,102 $ 24,946 $ 3,387
Earthmoving/construction 41,044 11,195 1,547
Consumer 9,838 2,754 208
Reconciling items (b) 0 0 (6,832)
---------- ---------- ----------
Consolidated totals $ 128,984 $ 38,895 $ (1,690)
========== ========== ==========
2002
----
Agricultural $ 75,245 $ 43,025 $ 5,105
Earthmoving/construction 36,934 14,559 1,886
Consumer 11,537 6,387 481
Reconciling items (b) 0 0 (6,417)
---------- ---------- ----------
Consolidated totals $ 123,716 $ 63,971 $ 1,055
========== ========== ==========
(a) Intersegment revenues have declined due to the closure of certain
Company distribution facilities in 2002.
(b) Represents corporate expenses and depreciation and amortization expense
related to property, plant and equipment carried at the corporate
level.
8
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
I. SEGMENT INFORMATION (CONTINUED)
March 31, December 31,
Total assets 2003 2002
------------ ---------- -----------
Agricultural $ 280,386 $ 258,704
Earthmoving/construction 151,429 138,811
Consumer 32,332 37,199
Reconciling items (a) 85,617 97,285
---------- ----------
Consolidated totals $ 549,764 $ 531,999
========== ==========
(a) Represents property, plant and equipment and goodwill related to
certain acquisitions and other corporate assets.
J. LEASE COMMITMENTS
The Company leases certain buildings and equipment under operating
leases, including a lease for the building in Brownsville, Texas.
Certain lease agreements provide for renewal options, fair value
purchase options, and payment of property taxes, maintenance and
insurance by the Company.
At March 31, 2003, future minimum commitments under noncancellable
operating leases with initial or remaining terms of one year were as
follows (in thousands):
April 1 - December 31, 2003 $ 4,218
2004 3,214
2005 1,022
2006 774
2007 648
Thereafter 149
-----------
$ 10,025
===========
9
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
K. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards Number 146
In June 2002, Statement of Financial Accounting Standards (SFAS) No.
146, "Accounting for Exit or Disposal Costs," was issued. This
statement requires companies to recognize certain liabilities and costs
associated with exit or disposal activities when incurred rather than
when management commits to an exit plan. Adoption of this standard was
required for any exit or disposal activities initiated subsequent to
December 31, 2002. SFAS No. 146 was adopted in the first quarter of
2003 with no material effect on the Company's financial position, cash
flows or results of operations.
Financial Accounting Standards Board Interpretation Number 45
In November 2002, Financial Accounting Standards Board Interpretation
(FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
was issued. FIN No. 45 requires a guarantor to recognize a liability,
at the inception of the guarantee, for the fair value of obligations
undertaken in issuing the guarantee and also include more detailed
disclosures with respect to guarantees. FIN No. 45 is effective for
guarantees issued or modified starting January 1, 2003. The additional
disclosures required by FIN No. 45 are required for periods ending
December 31, 2002, and after. The Company has provided additional
disclosure with respect to warranties in accordance with FIN No. 45.
The Company does not expect the adoption of this interpretation to have
a material effect on its financial position, cash flows or results of
operations.
Financial Accounting Standards Board Interpretation Number 46
In January 2003, FIN No. 46, "Consolidation of Variable Interest
Entities," was issued. FIN No. 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a
majority of the risk of loss from the activities of the variable
interest entity or is entitled to receive a majority of the entity's
residual returns. The consolidation requirements of FIN No. 46 apply
immediately to variable interest entities created after January 31,
2003. For older entities, the requirements apply in the first fiscal
year or interim period beginning after June 15, 2003. Certain
disclosure requirements apply in all financial statements issued after
January 1, 2003. The Company does not expect the adoption of this
interpretation to have a material effect on its financial position,
cash flows or results of operations.
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 based on
historical experience. Should these experience trends change, adjustments to the
estimated provisions would be necessary.
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 41% 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. Market is estimated based on current selling prices. Estimated
provisions are established for excess and obsolete inventory, as well as
inventory carried above market price, based on historical experience. Should
this experience change, adjustments to the estimated provisions would be
necessary.
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.
Significant assumptions relating to future operations must be made when
estimating future cash flows. Should unforeseen events occur or should operating
trends change significantly, impairment losses could occur.
11
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES (CONTINUED)
Valuation of Investments Accounted for Under the Equity Method
The Company assesses the carrying value of its equity investments whenever
events and circumstances indicate that the carrying value 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. Any such write-downs 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. Significant assumptions relating to future
investment results must be made when estimating the future cash flows associated
with these investments. Should unforeseen events occur or should investment
trends change significantly, impairment losses could occur.
Impairment of Goodwill
The Company reviews goodwill to assess recoverability from future operations
during the fourth quarter of each annual reporting period, and whenever events
and circumstances indicate that the carrying values may not be recoverable.
Significant assumptions relating to future operations must be made when
estimating future cash flows in analyzing goodwill for impairment. Should
unforeseen events occur or should operating trends change significantly,
impairment losses could occur.
Retirement Benefit Obligations
Pension benefit obligations are based on various assumptions used by the
Company's 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.
For more information concerning these costs and obligations, see the additional
discussion of the "Pensions" and Note 21 to the Company's financial statements
on Form 10-K for the fiscal year ended December 31, 2002.
12
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales for the quarter ended March 31, 2003, were $129.0 million, compared to
2002 first quarter net sales of $123.7 million. The increase was attributed to
the Company's foreign subsidiaries, which recorded a $7.7 million increase in
net sales. The majority of the increase in sales at the foreign subsidiaries was
primarily due to a favorable currency exchange rate.
Cost of Sales
Cost of sales was $118.6 million for the first quarter of 2003, compared to
$111.6 million in 2002. Gross profit for the first quarter of 2003 was $10.4
million or 8.1% of net sales, compared to $12.1 million or 9.8% of net sales for
the first quarter of 2002. Gross profit, as a percentage of net sales, was
negatively impacted by increases of approximately $4.3 million in higher raw
material prices, increased employee benefits, and insurance costs.
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 and minimal operating costs continue to be incurred. A third party
appraisal indicates the fair value of the fixed assets of this facility is in
excess of the carrying value of $19.3 million. The Company continually assesses
its capacity requirements and makes necessary changes as dictated by customer
demand.
Administrative Expenses
Selling, general and administrative (SG&A) and research and development (R&D)
expenses for the first quarter of 2003 were $12.1 million or 9.4% of net sales,
compared to $11.1 million or 9.0% of net sales for 2002. The Company had
increased SG&A and R&D costs of approximately $1.1 million in the areas of
employee benefits, professional fees, and insurances.
Operating Results and Other
Loss from operations for the first quarter of 2003 was $(1.7) million or (1.3)%
of net sales, compared to income from operations of $1.1 million or 0.9% in
2002. Operating results were primarily impacted by the increased costs as
previously discussed in the "Cost of Sales" and "Administrative Expenses"
sections.
Net interest expense was $5.0 million for the first quarter of 2003, compared to
$5.2 million in 2002. The decreased interest expense for the first quarter of
2003 was primarily due to an average interest rate that was approximately
one-half percent lower as compared to the first quarter of 2002.
13
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
The Company's effective income tax benefit on the net loss for the first quarter
of 2003 was 5%, compared to 25% for the first quarter of 2002. The Company's
income tax benefit differs from the amount of income tax determined by applying
the statutory U.S. federal income tax rate to pretax loss primarily as a result
of income tax expense to be paid in foreign jurisdictions and the application of
a valuation allowance on the domestic net deferred tax asset balance. As a
result of several periods of recurring losses, the Company began reserving its
net deferred tax asset position at December 31, 2002, consistent with the
Company's accounting policies. The Company continues to monitor its income tax
position and will review the necessity of the valuation allowance at the end of
each reporting period. To the extent it is determined deferred tax assets will
be realized in excess of deferred tax liabilities, some or all of the valuation
allowance will be recorded as income.
Net Loss
Net loss for the first quarter of 2003 was $(5.9) million compared to $(2.9)
million in 2002. Basic and diluted loss per share was $(.28) for the first
quarter of 2003 compared to $(.14) in 2002. Net loss and loss per share
increased primarily due to increased raw material prices, employee benefits,
professional fees, and insurance costs as previously discussed.
Agricultural Segment Results
Net sales in the agricultural market were $78.1 million for the first quarter of
2003 as compared to $75.2 million in 2002. Agricultural market net sales
increased primarily as a result of currency exchange fluctuations. Income from
operations in the agricultural market was $3.4 million for the first quarter of
2003 as compared to $5.1 million for the first quarter of 2002. The decrease in
income from operations in the agricultural market was primarily attributed to
increased raw material prices, employee benefits, professional fees, and
insurance costs as previously discussed.
Earthmoving/Construction Segment Results
The Company's earthmoving/construction market net sales were $41.0 million for
the first quarter of 2003 as compared to $36.9 million for the first quarter of
2002. Currency exchange fluctuations accounted for a large part of this sales
increase, and sales to new customers also contributed. Income from operations in
the earthmoving/construction market was $1.5 million for the first quarter of
2003 versus $1.9 million in 2002. The decrease in income from operations in the
earthmoving/construction market was primarily due to increased raw material
prices, employee benefits, professional fees, and insurance costs as previously
discussed.
14
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Consumer Segment Results
Consumer market net sales were $9.8 million for the first quarter of 2003 as
compared to $11.5 million for the first quarter of 2002. Consumer market sales
decreased primarily as a result of lower sales to boat trailer manufacturers.
Consumer market income from operations was $0.2 million for the first quarter of
2003 as compared to $0.5 million for 2002. The decrease in income from
operations in the consumer market was primarily attributed to the lower sales
levels and increased costs as previously discussed.
Corporate Expenses
Income from operations on a segment basis does not include corporate expenses
and depreciation and amortization expense related to property, plant and
equipment carried at the corporate level totaling $6.8 million for the first
quarter of 2003 as compared to $6.4 million for the first quarter of 2002.
Foreign Subsidiaries Sales
Net sales at foreign subsidiaries for the quarter ended March 31, 2003, were
$35.7 million, compared to 2002 first quarter sales of $28.0 million. The
increase in sales at foreign subsidiaries of $7.7 million was primarily due to a
favorable currency exchange rate of approximately $5.9 million. In addition, the
foreign subsidiaries have been successful in obtaining new customer sales.
MARKET RISK SENSITIVE INSTRUMENTS
The Company's risks related to foreign currencies, commodity prices and interest
rates are consistent with those for 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
As of March 31, 2003, the Company had $11.5 million of unrestricted cash
deposited within various bank accounts. The unrestricted cash balance decreased
by $10.6 million from December 31, 2002, due to the cash flow items discussed in
the following paragraphs.
15
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
In the first quarter of 2003, negative cash flows from operating activities of
$15.0 million resulted primarily from a $26.8 million increase in accounts
receivable and a net loss of $5.9 million, offset by accounts payable increases
of $9.7 million and depreciation and amortization of $7.9 million. The increase
in receivables is primarily due to a seasonal increase in sales volume in the
first quarter of 2003 when compared to the fourth quarter of 2002. The increase
in accounts payable results from this same seasonal increase.
The Company invested $1.8 million in capital expenditures in the first quarter
of 2003. The expenditures represent various equipment purchases and building
improvements to enhance production capabilities. The Company estimates that its
total capital expenditures for 2003 could range between $10 million and $15
million.
In the three months ended March 31, 2003, positive cash flows from financing
activities of $6.1 million resulted primarily from an increase of $6.2 million
in total debt.
Debt Funding
The Company's term loan and revolving loan agreements contain various covenants
and restrictions. The financial covenants in these loan agreements require that
the (i) Company's adjusted minimum tangible net worth be equal to or greater
than $150 million, (ii) value of equipment, accounts receivable, and inventory
be equal to or greater than three times the outstanding principal balance of the
term loan, and (iii) value of accounts receivable and inventory be equal to or
greater than $100 million. Restrictions include (i) limits on payments of
dividends and repurchases of the Company's stock, (ii) restrictions on the
ability of the Company to make additional borrowings, or to consolidate, merge
or otherwise fundamentally change the ownership of the Company, and (iii)
limitations on investments, dispositions of assets and guarantees of
indebtedness. These covenants and restrictions could limit the Company's ability
to respond to market conditions, to provide for unanticipated capital
investments, to raise additional debt or equity capital, to pay dividends or to
take advantage of business opportunities, including future acquisitions. If the
Company were unable to meet these covenants, the Company would be in default on
these loan agreements.
The Company is in compliance with these covenants and restrictions as of March
31, 2003. The Company's adjusted minimum tangible net worth is required to be
equal to or greater than $150 million and the Company computed it to be $170.4
million at March 31, 2003. The value of the equipment, accounts receivable and
inventory are required to be equal to or greater than 3.00 times the outstanding
principal balance of the term loan and is calculated to be 4.45 times this
balance at March 31, 2003. The value of the accounts receivable and inventory
must be equal to or greater than $100 million and is computed to be $224.5
million at March 31, 2003.
16
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Other Issues
The Company's business is subject to seasonal variations in sales 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 three months of 2003.
The Company had restricted cash of $26.8 million at March 31, 2003. Restricted
cash of $15.0 million is held as collateral on the revolving loan agreement,
under which the Company had no borrowings outstanding at March 31, 2003. The
remaining $11.8 million is collateral on outstanding letters of credit for an
industrial revenue bond of $9.6 million and another letter of credit for $2.2
million.
Liquidity Outlook
At March 31, 2003, the Company had unrestricted cash and cash equivalents of
$11.5 million and no amounts had been drawn on the $20 million revolving loan
agreement. Due to losses sustained by the Company, loss carryback tax returns
were filed to obtain domestic tax refunds. In April of 2003, the Company
received domestic tax refunds totaling $7.7 million.
Increased raw material prices, employee benefits, professional fees, and
insurance costs are having a negative impact on the profitability and the
financial ratios of the Company. Economic uncertainty makes it difficult to
determine precisely when the Company will see significant sales increases and
lower operating costs. Because of changes in the equity markets, interest rates
and actuarial fluctuations, the Company may be required to fund the Company's
pension plans in amounts estimated to be approximately $6 million in the year
2003.
Cash on hand, including tax refunds received in April 2003, 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.
17
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK
Economic uncertainty makes it difficult to determine precisely when the Company
will see significant sales increases and lower operating costs. If current
economic conditions and higher operating costs persist, these issues will
continue to have a negative impact on the Company's margins. To combat these
obstacles, the Company continues to seek opportunities to lower costs and pursue
new channels for increasing sales. The Company is working with equipment dealers
to offer Titan wheels and tires directly through their dealerships. Also, Titan
is cultivating relationships with many smaller companies that can benefit from
the Company's engineering expertise and commitment to the off-highway sector.
Titan is attempting to institute price increases to help offset higher operating
costs for raw materials, employee benefits, professional fees, and insurance.
These planned price increases and further efficiencies should result in improved
margins for our products. These measures will help Titan withstand the economic
pressure expected to persist throughout 2003 in the Company's three market
segments: agricultural, earthmoving/construction, and consumer.
Agricultural Segment
Agricultural market sales are expected to remain stable for the rest of 2003.
The expected upturn in the agricultural market is being hampered by economic
uncertainties and concerns about dry weather. Signups for assistance under the
new Farm Bill have been slow and, therefore, payments have been delayed. Many
variables, including weather, export markets, and future government policies and
payments can greatly influence the overall health of the agricultural economy.
Earthmoving/Construction Segment
A number of negative pressures continue to impact in the
earthmoving/construction segment. Housing construction has remained resilient
through the economic downturn, but is expected to incur a minor slowdown in
2003. Capital investment at private companies is still depressed. Governmental
entities continue to curtail construction spending as they work to balance their
budgets. Despite these negative pressures, recent sales figures in the
earthmoving/construction segment indicate that the market may be bottoming out.
Construction machinery sales increased in the first quarter of 2003 after more
than a year of declines. Therefore, the Company believes that sales in the
earthmoving/construction segment may be stable to slightly higher for the rest
of 2003.
Consumer Segment
Sales in the consumer market are expected to be lower for the remainder of 2003.
The all-terrain vehicle (ATV) tire aftermarket is expected to continue to offer
future growth opportunities. Many items affect the consumer market including
weather, competitive pricing, energy prices, and consumer attitude, which
remains cautious.
18
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards Number 146
In June 2002, Statement of Financial Accounting Standards (SFAS) No. 146,
"Accounting for Exit or Disposal Costs," was issued. This statement requires
companies to recognize certain liabilities and costs associated with exit or
disposal activities when incurred rather than when management commits to an exit
plan. Adoption of this standard was required for any exit or disposal activities
initiated subsequent to December 31, 2002. SFAS No. 146 was adopted in the first
quarter of 2003 with no material effect on the Company's financial position,
cash flows or results of operations.
Financial Accounting Standards Board Interpretation Number 45
In November 2002, Financial Accounting Standards Board Interpretation (FIN) No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," was issued. FIN No. 45
requires a guarantor to recognize a liability, at the inception of the
guarantee, for the fair value of obligations undertaken in issuing the guarantee
and also include more detailed disclosures with respect to guarantees. FIN No.
45 is effective for guarantees issued or modified starting January 1, 2003. The
additional disclosures required by FIN No. 45 are required for periods ending
December 31, 2002, and after. The Company has provided additional disclosure
with respect to warranties in accordance with FIN No. 45. The Company does not
expect the adoption of this interpretation to have a material effect on its
financial position, cash flows or results of operations.
Financial Accounting Standards Board Interpretation Number 46
In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities," was
issued. FIN No. 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
activities of the variable interest entity or is entitled to receive a majority
of the entity's residual returns. The consolidation requirements of FIN No. 46
apply immediately to variable interest entities created after January 31, 2003.
For older entities, the requirements apply in the first fiscal year or interim
period beginning after June 15, 2003. Certain disclosure requirements apply in
all financial statements issued after January 1, 2003. The Company does not
expect the adoption of this interpretation to have a material effect on its
financial position, cash flows or results of operations.
19
TITAN INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PENSIONS
The Company has three defined benefit pension plans. These plans are described
in Note 21 of the Company's Notes to Consolidated Financial Statements in the
2002 Form 10-K. The Company's recorded liability for pensions is based on a
number of assumptions, including discount rates, rates of return on investments,
mortality rates and other factors. Certain of these assumptions are determined
with the assistance of outside actuaries. Assumptions are based on past
experience and anticipated future trends. These assumptions are reviewed on a
regular basis and revised when appropriate. Revisions in assumptions and actual
results that differ from the assumptions affect future expenses, cash funding
requirements and the carrying value of the related obligations. Because of
changes in the equity markets, interest rates and actuarial fluctuations, the
Company may be required to fund the Company's pension plans in amounts estimated
to be approximately $6 million in the year 2003.
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 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, and (vii) 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.
20
TITAN INTERNATIONAL, INC.
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the Company's 2002 Annual Report filed on Form 10-K (Item 7A). There has
been no material change in this information.
ITEM 4. CONTROLS AND PROCEDURES
The Company's principal executive officer and principal financial officer
believe the Company's disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) are effective based on their most recent
evaluation, which was completed within 90 days of the filing of this Form 10-Q.
There were no significant changes in internal controls or other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
21
TITAN INTERNATIONAL, INC.
PART II. OTHER INFORMATION
ITEMS 1 THROUGH 4 ARE NOT APPLICABLE.
ITEM 5. OTHER INFORMATION
In a press release dated April 25, 2003, the Company stated it received
notification from the New York Stock Exchange (NYSE) that its common stock had
fallen below the NYSE's continued listing criteria relating to minimum share
price. The NYSE requires that a company's common stock trade at a minimum
average share price of $1.00 over a 30-day trading period.
Under NYSE guidelines, Titan must return to compliance with the continued
listing criteria within six months following receipt of the NYSE's notification,
subject to certain NYSE conditions. Should Titan's shares cease being traded on
the NYSE, the Company believes that an alternative trading venue will be
available.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended March
31, 2003.
22
TITAN INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TITAN INTERNATIONAL, INC.
(REGISTRANT)
DATE: April 29, 2003 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)
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: April 29, 2003 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)
23
TITAN INTERNATIONAL, INC.
CERTIFICATION
I, Maurice M. Taylor Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Titan International,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DATE: April 29, 2003 BY: /s/ Maurice M. Taylor Jr.
------------------------ ---------------------------------
Maurice M. Taylor Jr.
President and Chief Executive Officer
24
TITAN INTERNATIONAL, INC.
CERTIFICATION
I, Kent W. Hackamack, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Titan International,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
d) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DATE: April 29, 2003 BY: /s/ Kent W. Hackamack
------------------- -----------------------------------------------
Kent W. Hackamack
Vice President of Finance and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
25