10-Q 1 k71047e10vq.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2002 ================================================================================ 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 =============================================================================== 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) ====== ====== ===== ======
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