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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2701 SPRUCE STREET, QUINCY, IL 62301 (217) 228-6011
(Address of principal executive offices, including Zip Code) (Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common stock, no par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 for 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 28, 2002, 20,726,995 shares of common stock of the
registrant were outstanding. The aggregate market value of the shares of common
stock of the registrant held by non-affiliates was $81,288,372 based upon the
closing price of the common stock on the New York Stock Exchange on February 28,
2002.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the registrant's definitive
proxy statement for its annual meeting of stockholders to be held May 16, 2002.
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ITEM 1. BUSINESS
GENERAL
Titan International, Inc. (Titan or the Company) is a global manufacturer of
off-highway steel wheels and tires for the agricultural,
earthmoving/construction and consumer markets. Titan generally manufactures both
wheels and tires for these markets and provides the value-added service of
assembling the complete wheel-tire system. The Company offers a broad range of
different products that are manufactured in relatively short production runs to
meet original equipment manufacturers' (OEMs) specifications and/or aftermarket
customer requirements.
During the mid-1990s, Titan began a process to reengineer its wheel and tire
operations. The Company established a new identity, creating the framework for
continued well-managed growth. Titan continues a multi-year plan to focus on its
core business and to lay the groundwork for ongoing growth and strength in the
off-highway wheel, tire and assembly business. Titan's commitment to product
innovation is demonstrated by the development of the LSW series of wheels and
tires, which considerably enhances the performance of off-highway vehicles.
In 2001, Titan's sales in the agricultural market represented 56% of net sales,
the earthmoving/construction market represented 34% of net sales and the
consumer market represented 10% of net sales. For information concerning the
revenues, certain expenses, income from operations and assets attributable to
each of the segments in which the Company operates, see Note 20 to the
consolidated financial statements of Titan International, Inc. included in Item
8 herein.
AGRICULTURAL MARKET
Titan sells agricultural wheels, rims and tires to OEMs and aftermarket
distributors. These wheels, rims and tires are manufactured by Titan for
installation on various agricultural and forestry equipment, such as tractors,
combines, skidders, plows, planters and irrigation equipment. The wheels and
rims range in diameter from 9" to 54" with the 54" diameter being the largest
agricultural wheel manufactured in North America. Basic configurations are
combined with other features (such as various centers and a wide range of
material thickness) allowing the Company to offer a broad line of different
product models to meet customer specifications. The agricultural tires range in
diameter from 8" to 85" and in width from 4.8" to 44". The Company offers the
added value of a complete wheel and tire assembly to its customers. The
Company's aftermarket tires are marketed through a network of independent
distributors, equipment dealers, and Titan's own distribution centers.
EARTHMOVING/CONSTRUCTION MARKET
The Company manufactures wheels and rims for various types of earthmoving,
mining and construction equipment, including skid steers, cranes, graders and
levelers, scrapers, self-propelled shovel loaders, load transporters, haul
trucks and backhoe loaders. These wheels and rims range in diameter from 20" to
63", in width from 8" to 60" and in weight from 125 pounds to 7,000 pounds. The
63" diameter is the largest earthmoving/construction wheel manufactured in North
America. The Company provides its customers with a broad range of
earthmoving/construction wheels and rims. The majority of the earthmoving/
construction wheels produced by Titan are sold directly to OEMs. Titan currently
produces a wide range of tires for the earthmoving/construction market. The
Company also manufactures various wheels, tires and components for the United
States Government, primarily for certain military vehicles (i.e., trucks,
trailers, tanks and personnel carriers). The earthmoving/construction market is
another area in which the Company can offer the added value of wheel and tire
assembly.
2
CONSUMER MARKET
Titan manufactures a variety of products for all terrain vehicles (ATV), turf,
golf, and trailer applications. In April 2000, the Company exited the OEM
business for lawn and garden equipment and ATVs, concentrating instead on the
agricultural and earthmoving/construction businesses for both LSW and
conventional wheel and tire assemblies to OEMs and the aftermarket for ATV and
turf products. Consumer wheels and rims range in diameter from 4" to 16". Titan
currently produces a wide range of tires for the consumer market. New ATV tire
tread patterns for the replacement market were introduced in 2001 and 2000. The
Company produces wheels, tires, and assembles other products for the domestic
markets for boat, recreational and utility trailers. The Company also offers the
value-added service of a wheel-tire system for the consumer market.
OPERATIONS
Wheel Manufacturing Process
Most agricultural wheels are produced using a rim and a center disc. A rim is
produced by first cutting large steel sheets to required width and length
specifications. These steel sheets are rolled and welded to form a circular rim,
which is flared and formed in the rollform operation. The majority of discs are
manufactured using presses that both blank and form the center to specifications
in multiple stage operations. The Company has the capability to e-coat the wheel
using a multi-step process prior to the final top coating.
Large earthmoving/construction steel wheels are manufactured principally from
hot rolled steel sections. This process is used because the high load bearing
capacity of these wheels requires rim thickness that is beyond the capability of
cold-rolling. Rims are built from a series of hoops that are welded together to
form a rim base. The complete rim is made from either three or five separate
parts that then lock together after the rubber tire has been fitted to the wheel
and inflated.
Smaller wheels (usually 12" or less in diameter), the majority of which are
produced for consumer markets, are manufactured by a process in which
half-wheels are press-formed, then two of these half-wheel stampings are welded
together to form a complete wheel. Generally, for larger wheels (12" or more in
diameter) produced for the consumer market, the Company manufactures rims and
centers, welds the rims to the centers and then paints the assembled product.
Tire Manufacturing Process
Tires are produced by mixing rubber, carbon black and chemicals to form various
rubber compounds. These rubber compounds are then extruded and processed with
textile or steel materials to make specific components. These components: beads
(wire bundles that anchor the tire with the wheel), plies (layers of fabric that
give the tire strength), belts (fabric or steel fabric wrapped under the tread
in some tires), tread and sidewall, are then assembled into an uncured tire. The
uncured tire is placed in a press that molds and vulcanizes the tire under set
time, temperature and pressure into a finished tire.
3
OPERATIONS (CONTINUED)
Wheel and Tire Assemblies
The Company's position as a manufacturer of both wheels and tires allows Titan
to mount and deliver one of the largest selections of off-road assemblies in the
world. Backed by the resources of the Company's facilities, Titan provides the
value-added service of one-stop shopping for wheel-tire assemblies for the
agricultural, earthmoving/construction and consumer markets. Customer orders are
entered into the Company's system by either electronic data interchange or
manually. Based on each customer's requirements, the appropriate wheel-tire
assembly delivery schedule is formulated. The Company's just-in-time delivery
program offers the product to the customer when requested.
Quality Control
The Company is ISO 9000 certified at seven of its manufacturing facilities. The
ISO 9000 series is a set of related and internationally recognized standards of
management and quality assurance. The standards specify guidelines for
establishing, documenting and maintaining a system to ensure quality. The ISO
9000 certifications are evidence of Titan's dedication to providing quality
products to its customers.
RAW MATERIALS
The primary raw materials used by the Company in all segments are steel and
rubber. To ensure a consistent steel supply, Titan purchases its basic steel
from key steel mills and maintains relationships with steel processors for steel
preparation. The Company is not dependent on any single producer for its supply
of steel. Rubber and raw materials for tire manufacture are one of the Company's
largest commodity expenses. Titan buys rubber in markets where there are
numerous sources of supply. In addition to the development of key suppliers
domestically, the Company's strategic procurement plan includes international
suppliers to assure competitive price and quality in the global marketplace. As
is customary in the industry, the Company does not have long-term contracts for
the purchase of steel or rubber and, therefore, purchases are subject to
fluctuation in price.
CUSTOMERS
The Company's 10 largest customers accounted for approximately 51% of net sales
for the year ended December 31, 2001, compared to 48% for the year ended
December 31, 2000. Net sales to Deere & Company in Titan's agricultural,
earthmoving/construction, and consumer markets represented 15% of the Company's
consolidated revenues for the year ended December 31, 2001. Net sales to CNH
Global N.V. in Titan's three markets represented 13% of the Company's
consolidated revenues for the year ended December 31, 2001. No other customer
accounted for more than 10% of the Company's net sales in 2001.
ORDER BACKLOG
As of February 28, 2002, Titan estimates that it had $110 million in firm orders
compared to $124 million at February 28, 2001. Orders are considered firm if the
customer would be obligated to accept the product if manufactured and delivered
pursuant to the terms of such orders. The Company believes that the majority of
its current order backlog will be filled during the current year.
4
MARKETING AND DISTRIBUTION
The Company has an internal sales force and utilizes several manufacturing
representative firms for sales in the United States and Europe. In the United
States, sales representatives are organized within geographical regions. The
international sales force includes employees in France, Germany, Italy and the
United Kingdom. Titan believes international sales efforts are enhanced when
sales representatives sell primarily within their native countries.
Titan distributes wheels and tires directly to OEMs. The distribution of
aftermarket tires is done primarily through a network of independent and OEM
dealers. The Company distributes wheel and tire assemblies through its own
distribution centers directly to OEMs and to aftermarket customers. Titan's
distribution network consists of 12 facilities throughout the United States and
Europe, which are strategically located near major OEMs and aftermarket
customers for just-in-time delivery.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company's research, development and engineering staffs test new designs and
technologies and develop new manufacturing methods to improve product
performance. These services enhance the Company's relationships with customers.
The Company has spent $3.1 million, $4.7 million, and $6.3 million, on research
and development for the years ended December 31, 2001, 2000 and 1999,
respectively. These costs were primarily incurred in developing the LSW series
of wheels and tires, which considerably enhances the performance of off-highway
vehicles. The ongoing cost of research and development for the LSW has declined,
although Titan continues to introduce new LSW wheel and tire assemblies for the
agricultural, earthmoving/construction, and consumer markets.
The LSW wheel and tire assemblies reduce bounce, hop, lope and heat build-up and
provide more stability and safety for the operator, which in turn means greater
productivity. The key to the success of the LSW is an increase in the diameter
of the wheel while maintaining the original outside diameter of the tire. This
is accomplished by lowering the sidewall (LSW is an acronym for low sidewall)
and increasing its strength. Maintaining the original outside diameter of the
tire allows the LSW to improve the performance of agricultural,
earthmoving/construction and consumer equipment without further modification.
EMPLOYEES
At February 28, 2002, the Company employed approximately 3,100 people in the
United States and Europe. Approximately 30% of the Company's employees in the
United States are covered by three collective bargaining agreements. The
majority of employees at Titan's foreign facilities are represented by
collective bargaining agreements that are renewed from time to time depending on
terms of the agreement and the laws of the foreign jurisdiction. The labor
agreement with employees of the Company's Walcott, Iowa, facility is set to
expire in July 2002. In September of 2001, employees of the Company's Des
Moines, Iowa, facility approved a new labor agreement effective through the year
2006. In December of 2001, former workers at the Company's Natchez, Mississippi,
facility approved a new labor agreement also effective through the year 2006.
The employees or former workers at these facilities had been on strike for 40
and 39 months, respectively. The Natchez, Mississippi, facility is not currently
in operation. The strikes at these facilities have had an adverse effect on the
Company's 2001, 2000 and 1999 financial position, cash flows and results of
operations. The Company believes the resolution of these two strikes has
improved employee relations at these facilities and that employee relations at
the other facilities are generally good.
5
COMPETITION
The Company competes with several domestic and international companies, some of
which are larger and have greater financial and marketing resources than Titan.
The Company believes it is the primary source of steel wheels and rims to the
majority of its North American customers. Major competitors in the wheel market
include GKN Wheels, Ltd. and Topy Industry, Ltd. Major competitors in the tire
market include Goodyear Tire & Rubber Co. and Bridgestone/Firestone. The Company
competes primarily on the basis of price, quality, customer service, design
capability and delivery time. The Company's ability to compete with
international competitors may be adversely affected by currency fluctuations. In
addition, certain of the Company's OEM customers could, under individual
circumstances, elect to manufacture the Company's products to meet their
requirements or to otherwise compete with the Company. There can be no assurance
that the Company will not be adversely affected by increased competition in the
markets in which it operates, or that competitors will not develop products that
are more effective, less expensive, or otherwise render certain of Titan's
products less competitive. From time to time, certain competitors of the Company
have reduced their prices in particular product categories, which has prompted
the Company to reduce prices as well. There can be no assurance that in the
future, competitors of the Company will not further reduce prices or that any
such reductions would not have a material adverse effect on the Company.
INTERNATIONAL OPERATIONS
In addition to the Company's facilities in the United States, Titan also
operates distribution and wheel manufacturing facilities in Europe. For the year
ended December 31, 2001, the Company generated $113.7 million, or 25% percent,
of its net sales from foreign operations. International operations and exports
to foreign markets are subject to a number of special risks, including, but not
limited to, risks with respect to currency exchange rates, economic and
political destabilization, other disruption of markets, and restrictive actions
by foreign governments (such as restrictions on transfer of funds, export duties
and quotas and foreign customs). Other risks include changes in foreign laws
regarding trade and investment, difficulty in obtaining distribution and
support, nationalization, the laws and policies of the United States affecting
trade, foreign investment and loans, and foreign tax laws. There can be no
assurance that one or a combination of these factors will not have a material
adverse effect on the Company's ability to increase or maintain its foreign
sales or on its results of operations. The Company had total aggregate export
sales of approximately $70.8 million, $79.4 million, and $90.9 million, for the
years ended December 31, 2001, 2000 and 1999, respectively. For financial
information regarding international operations, see Note 20 to the consolidated
financial statements of Titan International, Inc. included in Item 8 herein.
The Company has significant manufacturing operations in foreign countries and
purchases a portion of its raw materials from foreign suppliers. The production
costs, profit margins and competitive position of the Company are affected by
the strength of the currencies in countries where Titan manufactures or
purchases goods relative to the strength of the currencies in countries where
its products are sold. The Company's results of operations, cash flows and
financial position may be adversely affected by fluctuations in foreign
currencies and by translation of the financial statements of the Company's
foreign subsidiaries from local currencies into U.S. dollars.
PATENTS AND TRADEMARKS
The Company owns various United States and foreign patents and trademarks and
continues to apply for patent protection for many new products. While it
considers patents significant to the operations of the business, Titan does not
consider any one of them to be of such importance that the patent's expiration
or invalidity could materially affect the Company's business.
6
ENVIRONMENTAL COMPLIANCE
In the ordinary course of business, like other industrial companies, the Company
is subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, and has made provisions for the estimated
financial impact of environmental cleanup costs. The Company's policy is to
accrue environmental cleanup-related costs of a noncapital nature when those
costs are believed to be probable and can be reasonably estimated. Expenditures
that extend the life of the related property or mitigate or prevent future
environmental contamination are capitalized. The Company does not currently
anticipate any material capital expenditures for environmental control
facilities. The quantification of environmental exposures requires an assessment
of many factors, including changing laws and regulations, advancements in
environmental technologies, the quality of information available related to
specific sites, the assessment stage of the site investigation, preliminary
findings and the length of time involved in remediation or settlement. The
Company does not include anticipated recoveries from insurance carriers or other
third parties in its accruals for environmental liabilities. Due to the
difficult nature of predicting future environmental costs, the Company can not
anticipate or predict the material adverse effect on its operations, cash flows
or financial condition as a result of its efforts to comply with, or its
liabilities under, environmental laws.
ITEM 2. PROPERTIES
The Company maintains 17 manufacturing and warehousing/distribution facilities
in the United States with a collective floor space of approximately 8.2 million
square feet. Of these facilities, one is used primarily for the manufacture of
agricultural products, one is used primarily for the manufacture of
earthmoving/construction products and four are used for the manufacture of
agricultural, earthmoving/construction and consumer products. The remaining 11
facilities are used for the warehousing/distribution of products in all of the
Company's segments.
The Company's facility in Natchez, Mississippi, is currently not in operation.
This facility can be used for the manufacture of agricultural,
earthmoving/construction and consumer products and has approximately 1.2 million
square feet. There are no short-term plans to reopen this facility, although
this facility may be reopened in the future if the Company requires additional
production capacity to meet demand. The Company's facility in Greenwood, South
Carolina, is currently not in operation. This facility has approximately 0.1
million square feet. The Company is currently assessing strategies for this
facility. The Company is in the process of reorganizing its distribution
facilities and as a part of this reorganization, some distribution facilities
may be closed.
In Europe, Titan maintains six manufacturing and warehousing/distribution
facilities with a collective floor space of approximately 1.5 million square
feet. These facilities are located in Italy, United Kingdom, France, and
Germany. Of these facilities, one is used for the manufacture of earthmoving/
construction products, four are used for the manufacture of agricultural,
earthmoving/construction, and consumer products, and one is used for
warehousing/distribution of products in all of the Company's segments.
Several of the Company's facilities are leased through operating lease
agreements. For information on operating leases, see Note 17 to the consolidated
financial statements of Titan International, Inc. included in Item 8 herein. The
Company considers each of its facilities to be in good operating condition and
adequate for its present use. Management believes that the Company has
sufficient capacity to meet current market demand.
7
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine legal proceedings arising out of the normal
course of business. Although it is not possible to predict with certainty the
outcome of these unresolved legal actions or the range of possible loss, the
Company believes that none of these actions, individually or in the aggregate,
will have a material adverse affect on the financial condition or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all executive officers of the Company are
listed below, followed by a brief account of their business experience during
the past five years. Officers are normally appointed annually by the Board of
Directors at a meeting of the directors immediately following the Annual Meeting
of Stockholders. The President and Secretary are brother and sister. There is no
arrangement or understanding between any officer and any other person pursuant
to which an officer was selected.
Maurice M. Taylor Jr., 57, has been President, Chief Executive Officer and a
Director of the Company since 1990, when Titan was acquired in a management-led
buyout by investors, including Mr. Taylor.
J. Michael A. Akers, 58, began organizing the start-up of Titan's European
Operations in 1990 and became a member of the management team in 1995. Mr. Akers
was appointed Vice President in 1999.
Kent W. Hackamack, 43, served as Corporate Controller of the Company from 1994
to 1996. Mr. Hackamack was appointed Vice President of Finance and Treasurer in
1996.
Cheri T. Holley, 54, joined the Company in 1994 as General Counsel and
Secretary. Ms. Holley was appointed Vice President in 1996.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange (NYSE) under
the symbol TWI. The following table sets forth, for periods indicated, the high
and low sales prices per share of the common stock as reported on the NYSE, and
information concerning per share dividends declared.
DIVIDENDS
2001 HIGH LOW DECLARED
---- ---- --- --------
First quarter $ 5.10 $ 3.50 $ 0.015
Second quarter 5.60 3.00 0.005
Third quarter 6.10 3.99 0.005
Fourth quarter 5.25 4.40 0.005
2000
----
First quarter $ 8.19 $ 5.75 $ 0.015
Second quarter 7.75 5.19 0.015
Third quarter 6.75 4.75 0.015
Fourth quarter 5.75 3.31 0.015
On February 28, 2002, there were 964 holders of record of Titan common stock.
9
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below, as of and for the years ended
December 31, 2001, 2000, 1999, 1998, and 1997, are derived from the Company's
consolidated financial statements, audited by PricewaterhouseCoopers LLP,
independent accountants, and should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto.
YEAR ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net sales $ 457,475 $ 543,069 $ 588,023 $ 660,781 $ 690,131
Gross profit 20,551 40,145 61,694 91,129 105,982
(Loss) income from operations (33,465) (8,646) 3,770 31,163 53,626
(Loss) income before income taxes (50,742) 8,702 (a) (18,445) 13,146 40,542
(Loss) income before extraordinary item (37,403) 4,525 (a) (11,436) 8,151 25,136
Net (loss) income (34,789) 4,525 (a) (11,436) 8,151 25,136
Net (loss) income per share before
extraordinary item -- basic $ (1.81) $ .22 (a) $ (.55) $ .38 $ 1.11
Net (loss) income per share before
extraordinary item -- diluted (1.81) .22 (a) (.55) .38 1.10
Net (loss) income per share -- basic (1.68) .22 (a) (.55) .38 1.11
Net (loss) income per share -- diluted (1.68) .22 (a) (.55) .38 1.10
Dividends declared per common share .03 .06 .06 .06 .06
(a) Includes a gain of $38.7 million ($20.1 million after taxes) related to the
sale of certain assets in April 2000.
AS OF DECEMBER 31,
(IN THOUSANDS)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Working capital $ 180,684 $ 186,116 $ 170,783 $ 170,465 $ 183,909
Current assets 262,723 285,556 279,078 312,195 298,596
Total assets 568,954 591,641 637,181 678,274 585,142
Long-term debt 256,622 227,975 255,521 247,584 181,705
Stockholders' equity 185,907 228,705 228,866 247,037 248,129
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
statement of operations expressed as a percentage of net sales. This table and
subsequent discussions should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto.
AS A PERCENTAGE OF NET SALES
YEAR ENDED DECEMBER 31,
2001 2000 1999
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 95.5 92.6 89.5
------ ------ ------
Gross profit 4.5 7.4 10.5
Selling, general and administrative expenses 9.6 8.1 8.8
Union strike settlement and other costs 1.5 0.0 0.0
Research and development expenses 0.7 0.9 1.1
------ ------ ------
(Loss) income from operations (7.3) (1.6) 0.6
Interest expense (4.6) (4.1) (4.0)
Gain on sale of assets 0.4 7.1 0.8
Other income (expense) 0.4 0.2 (0.5)
------ ------ ------
(Loss) income before income taxes (11.1) 1.6 (3.1)
(Benefit) provision for income taxes (2.9) 0.8 (1.2)
------ ------ ------
(Loss) income before extraordinary item (8.2) 0.8 (1.9)
Extraordinary gain, net of taxes 0.6 0.0 0.0
------ ------ ------
Net (loss) income (7.6)% 0.8% (1.9)%
====== ====== ======
In addition, the following table sets forth, for periods indicated, components
of the Company's net sales classified by segment (in thousands):
2001 2000 1999
---- ---- ----
Agricultural $ 256,140 $ 283,058 $ 254,754
Earthmoving/Construction 156,033 162,591 157,736
Consumer 45,302 (a) 97,420 (a) 175,533
--------- --------- ----------
Total $ 457,475 $ 543,069 $ 588,023
========= ========= ==========
(a) Consumer market sales decreased as result of the sale of certain assets in
April 2000.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
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 United States
operations, cost is determined using the last-in, first-out (LIFO) method for
approximately 58% 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 Long-Lived Assets
The Company reviews long-lived assets, goodwill and other intangibles 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.
SALE OF ASSETS
On April 14, 2000, the Company sold certain assets (primarily raw material
inventory, work-in-process inventory, and property, plant and equipment) of two
facilities located in Clinton, Tennessee, and Slinger, Wisconsin, to Carlisle
Tire and Wheel Company, a subsidiary of Carlisle Companies Incorporated, for
approximately $94.1 million in cash. In conjunction with this transaction, the
Company eliminated goodwill related to these operations totaling $19.5 million.
The Company recorded a pretax gain on this transaction of $38.7 million in the
second quarter of 2000. This nonrecurring gain has not been included in the pro
forma amounts described below. These two facilities were in the business of
providing wheels and tires to the consumer market, primarily for original
equipment manufacturers' (OEM) lawn and garden equipment and all terrain
vehicles (ATVs).
Had the transaction occurred on January 1, 2000, net sales for the year ended
December 31, 2000, would have been $512.4 million. Loss from operations for the
year ended December 31, 2000, would have been $(13.4) million. Net loss for the
year ended December 31, 2000, would have been $(21.2) million. Loss per share
for the year ended December 31, 2000, would have been $(1.02). There was no
effect on net sales, net income and earnings per share for the year ended
December 31, 2001, as a result of this transaction.
12
STRIKE SETTLEMENT
The cumulative impact of the strikes at the Company's Des Moines, Iowa, and
Natchez, Mississippi, facilities, combined with a general downturn in the
Company's markets, resulted in costly and disruptive consequences for Titan. The
employees and/or former workers at these facilities were on strike for 40 and 39
months, respectively. The strikes at these facilities had an adverse effect on
the Company's 2001, 2000 and 1999 financial position, cash flows and results of
operations.
The Company recorded union strike settlement and other costs of $6.8 million for
the year ended December 31, 2001. This amount is attributed to the union
settlement with the Company's Des Moines, Iowa, and Natchez, Mississippi,
facilities as well as other costs to which the strike contributed. Included in
these costs were (i) union settlement payments and retraining costs of $2.9
million, (ii) goodwill and prepaid write-downs of $2.0 million, and (iii)
inventory write-downs of $1.9 million.
In September of 2001, employees of the Company's Des Moines, Iowa, facility
approved a new labor agreement effective through the year 2006. In December of
2001, former workers at the Company's Natchez, Mississippi, facility approved a
new labor agreement also effective through the year 2006. Titan believes that
the terms of the strike settlement are favorable and that competitive ongoing
labor rates have been established. With the strikes settled, the Company is now
concentrating its resources on accommodating an increased demand for the Titan
product line as the markets recover.
INVESTMENT EXPOSURES
The Company maintains financial interests in Wheels India Limited (WIL), a wheel
manufacturer located in India. This investment is accounted for using the equity
method. At December 31, 2001, the carrying value of this investment was $11.9
million. Equity income has been received on this investment. Minority income of
$0.7 million and $0.5 million was recorded in 2001 and 2000, respectively. WIL
is publicly traded on the Indian stock exchange. The Company is evaluating the
effect new accounting rules will have on this investment in the first quarter of
2002.
The Company maintains financial interests in Polymer Enterprises, Inc. in the
amount of $7.3 million or 14% of common stock. Polymer is a privately held
company in Greensburg, Pennsylvania, which manufactures specialty tires and
various rubber-related products for industrial applications. Dividends recorded
were $0.8 million and $0.6 million for 2001 and 2000, respectively.
The Company also maintains financial interests in Fabrica Uraguaya de Neumaticos
S.A. (FUNSA), a tire manufacturer located in Uruguay. This investment is
accounted for using the equity method. The investment includes preferred stock
carried at $4.0 million and common stock ownership of 16% carried at zero. FUNSA
is publicly traded on the Uruguayan stock exchange. FUNSA has incurred operating
losses in 2001 and 2000. Titan has recorded its share of equity loss and may be
required to record additional loss in the future based on FUNSA's operating
results. Titan's share of equity losses in 2001 was $0.5 million. The Company
also has a $6.0 million letter of credit outstanding related to FUNSA. If FUNSA
were to default on their line of credit, their lender could draw on this cash
collateralized letter of credit.
In addition, the Company maintains financial interests in AII Holding, Inc. in
the amount of $2.8 million of preferred stock. AII Holding, Inc. is a specialist
in welding and technology equipment. The privately held company is located in
Danville, Illinois.
13
FISCAL YEAR ENDED DECEMBER 31, 2001, COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2000
RESULTS OF OPERATIONS
Net Sales
Net sales for the year ended December 31, 2001, were $457.5 million compared to
$543.1 million for the year ended December 31, 2000. Net sales decreased
primarily due to a decrease in production by the Company's major customers, as
well as the sale of assets transaction as previously described. Many of the
Company's customers decreased production to reduce inventory as a result of
decreased sales.
The Company generated 25% of its net sales from foreign subsidiaries during the
year ended December 31, 2001, as compared to 22% during the year ended December
31, 2000. The increase in the foreign net sales percentage during 2001 was
primarily due to the fact that while foreign sales decreased in 2001, domestic
sales decreased more significantly.
Currency Fluctuation
As a result of operating foreign subsidiaries, the Company is subject to
fluctuations in foreign currencies. The foreign currency fluctuations for the
year ended December 31, 2001, had a minimal effect on the Company's results of
operations.
Cost of Sales and Gross Profit
Cost of sales was $436.9 million for the year ended December 31, 2001, as
compared to $502.9 million in 2000. Gross profit for the year ended December 31,
2001, was $20.6 million or 4.5% of net sales, compared to $40.1 million, or 7.4%
of net sales for 2000. Gross profit, as a percentage of net sales, was
negatively impacted by inefficiencies related to operating at a lower capacity
utilization and to merging the returning union workforce with the current
workers at the Company's Des Moines, Iowa, facility.
Administrative Expenses
Selling, general and administrative (SG&A) and research and development (R&D)
expenses were $54.0 million or 11.8% of net sales for the year ended December
31, 2001, as compared to $48.8 million or 9.0% of net sales for 2000. The
increase in SG&A and R&D expenses is primarily attributed to one-time expenses
of $6.8 million incurred in 2001 related to the union settlement. This amount is
attributed to the union settlement with the Company's Des Moines, Iowa, and
Natchez, Mississippi, facilities as well as other costs to which the strike
contributed. Included in these costs were (i) union settlement payments and
retraining costs of $2.9 million, (ii) goodwill and prepaid write-downs of $2.0
million, and (iii) inventory write-downs of $1.9 million. The Company continues
to streamline operations to reduce costs at each of its facilities.
14
FISCAL YEAR ENDED DECEMBER 31, 2001, COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2000 (CONTINUED)
Operating Results and Other
Loss from operations for the year ended December 31, 2001, was $(33.5) million,
compared to $(8.6) million in 2000. Loss from operations was impacted by the
items described in the preceding paragraphs.
Net interest expense for the year ended December 31, 2001, was $20.9 million
compared to $22.6 million in 2000. The decreased interest expense was primarily
due to a reduction in interest rates. Lower interest rates were partially offset
by an increase in the average debt outstanding in 2001 as compared to 2000.
Gain on sale of assets in 2001 of $1.6 million was attributed to the sale of an
airplane during the first quarter of 2001. The gain on sale of assets in 2000 of
$38.7 million resulted from the sale of certain assets in April 2000 as
previously described.
Other income (expense) was $2.0 million for the year ended December 31, 2001, as
compared to $1.2 million in 2000. Interest income accounted for $2.4 million and
$2.5 million of other income for the year ended December 31, 2001, and 2000,
respectively. The increase in other income (expense) is primarily attributed to
a decrease in currency exchange loss, which was $(1.1) million and $(1.7)
million for the years ended December 31, 2001, and 2000, respectively.
For the year ended December 31, 2001, the Company's effective tax benefit on its
net loss was 25%, compared to 48% effective tax rate on net earnings for the
year ended December 31, 2000. The lower rate is primarily due to the inability
of the Company to realize an income tax benefit from certain nondeductible items
including goodwill amortization, as well as the amount of income generated in
various state and foreign jurisdictions.
Extraordinary Item
An extraordinary after-tax gain in the second quarter of 2001 of $2.6 million
resulted from the early retirement of $13.3 million of the Company's senior
subordinated notes due 2007. The pretax gain of $4.4 million was offset by taxes
of $1.8 million.
Net (Loss) Income
Net (loss) for the year ended December 31, 2001, was $(34.8) million, compared
to net income of $4.5 million in 2000. Loss per share was $(1.68) for the year
ended December 31, 2001, as compared to earnings per common share of $.22 in
2000. Net (loss) income and (loss) earnings per share were impacted by the items
described in the preceding paragraphs.
Agricultural Segment Results
Net sales in the agricultural market were $256.2 million for the year ended
December 31, 2001, as compared to $283.1 million in 2000. Sales in the
agricultural market were negatively impacted by decreased sales volume that
resulted from a decrease in overall agricultural equipment sales and plant
shutdowns by the major OEMs in this industry. Loss from operations in the
agricultural market was $(2.2) million for the year ended December 31, 2001, as
compared to income from operations of $11.7 million in 2000. The decrease in
income from operations in the agricultural market was primarily attributed to
decreased efficiencies due to decreased sales volume.
15
FISCAL YEAR ENDED DECEMBER 31, 2001, COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2000 (CONTINUED)
Earthmoving/Construction Segment Results
The Company's earthmoving/construction market net sales were $156.0 million for
the year ended December 31, 2001, as compared to $162.6 million in 2000. Sales
in the earthmoving/construction market were negatively impacted by a decrease in
sales caused by economic uncertainty in 2001. Also, equipment rental agencies
delayed purchases of new equipment as a result of decreased demand. The
Company's earthmoving/construction market income from operations was $1.2
million for the year ended December 31, 2001, as compared to $8.9 million in
2000. The decrease in income from operations in the earthmoving/construction
market was primarily due to a change in product mix from larger to smaller
diameter wheels and tires, which tend to command lower margins, and to a lesser
extent the lower sales volumes in this market.
Consumer Segment Results
Consumer market net sales were $45.3 million for the year ended December 31,
2001, as compared to $97.4 million in 2000. Sales in the consumer market
decreased primarily due to the Company exiting the OEM business for lawn and
garden equipment and ATVs in April 2000. Also, the market for trailers has
undergone a downturn during this period. Consumer market loss from operations
was $(5.5) million for the year ended December 31, 2001, as compared to $(0.6)
million in 2000. The decrease in income from operations in the consumer market
was primarily due to the Company exiting the OEM business for lawn and garden
equipment and ATVs and to a lesser degree the downturn in the trailer market.
Corporate Expenses
Income from operations on a segment basis does not include: corporate expenses;
depreciation and amortization expense related to property, plant and equipment;
and goodwill carried at the corporate level, for a total of $27.0 million for
the year ended December 31, 2001, as compared to $28.7 million in 2000.
16
FISCAL YEAR ENDED DECEMBER 31, 2000, COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1999
RESULTS OF OPERATIONS
Net Sales
Net sales for the year ended December 31, 2000, were $543.1 million compared to
$588.0 million in net sales for the year ended December 31, 1999. Net sales
decreased primarily due to the sale of certain assets in April of 2000.
The Company generated 22% of its net sales from foreign subsidiaries during the
year ended December 31, 2000, as compared to 25% during the year ended December
31, 1999. The decrease in foreign net sales during 2000 was primarily due to the
exclusion of Fabrica Uruguaya de Neumaticos S.A. (FUNSA) sales. Included in 1999
were foreign net sales for FUNSA of $16.9 million representing 3% of total net
sales. The foreign net sales for the year ended December 31, 2000, do not
include the sales from FUNSA because the Company reduced its ownership to 16%
during 1999.
Currency Fluctuation
As a result of operating foreign subsidiaries, the Company is subject to
fluctuations in foreign currencies. The foreign currency fluctuations for the
year ended December 31, 2000, had a minimal effect on results of operations.
Cost of Sales and Gross Profit
Cost of sales was $502.9 million for the year ended December 31, 2000, as
compared to $526.3 million in 1999. Gross profit for the year ended December 31,
2000, was $40.1 million or 7.4% of net sales, compared to $61.7 million, or
10.5% of net sales for 1999. Gross profit, as a percentage of net sales, was
negatively impacted by the sale of assets.
Administrative Expenses
Selling, general and administrative (SG&A) and research and development (R&D)
expenses were $48.8 million or 9.0% of net sales for the year ended December 31,
2000, as compared to $57.9 million or 9.9% of net sales for 1999. The decrease
in SG&A and R&D expenses, as a percentage of sales, is primarily attributed to
the Company's efforts to streamline costs at each of its facilities.
Operating Results
Loss from operations for the year ended December 31, 2000, was $(8.6) million,
compared to income from operations of $3.8 million in 1999. Income (loss) from
operations was impacted by the items described in the preceding paragraphs.
Net interest expense for the year ended December 31, 2000, was $22.6 million
compared to $23.6 million in 1999. The decreased interest expense was primarily
due to a decrease in the average debt outstanding in 2000 as compared to 1999
due to the sale of assets as previously described.
17
FISCAL YEAR ENDED DECEMBER 31, 2000, COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1999 (CONTINUED)
Net Income (Loss)
Net income for the year ended December 31, 2000, was $4.5 million, compared to
net loss of $(11.4) million in 1999. Earnings per share was $.22 for the year
ended December 31, 2000, as compared to a loss per common share of $(.55) in
1999. Net income and earnings per share were impacted by the items described in
the preceding paragraphs.
Agricultural Segment Results
Net sales in the agricultural market were $283.1 million for the year ended
December 31, 2000, as compared to $254.8 million in 1999. Sales in the
agricultural market were positively impacted by strong demand for smaller
diameter wheels and tires, which was partially offset by a decrease in demand
for larger diameter wheels and tires. Income from operations in the agricultural
market was $11.7 million for the year ended December 31, 2000, as compared to
$8.1 million in 1999. The increase in income from operations in the agricultural
market was primarily attributed to improved efficiencies due to increased sales
volume.
Earthmoving/Construction Segment Results
The Company's earthmoving/construction market net sales were $162.6 million for
the year ended December 31, 2000, as compared to $157.7 million in 1999. Sales
in the earthmoving/construction market were positively impacted by strong demand
for smaller diameter wheels and tires, which was partially offset by a decrease
in demand for larger diameter wheels and tires. The Company's
earthmoving/construction market income from operations was $8.9 million for the
year ended December 31, 2000, as compared to $14.4 million in 1999. The decrease
in income from operations in the earthmoving/construction market was primarily
due to a change in product mix from larger to smaller diameter wheels and tires,
which tend to command lower margins.
Consumer Segment Results
Consumer market net sales were $97.4 million for the year ended December 31,
2000, as compared to $175.5 million in 1999. Sales in the consumer market
decreased primarily due to the Company exiting the OEM business for lawn and
garden equipment and ATVs. Consumer market loss from operations was $(0.6)
million for the year ended December 31, 2000, as compared to income from
operations of $6.1 million in 1999. The decrease in income from operations in
the consumer market was primarily due to the Company exiting the OEM business
for lawn and garden equipment and ATVs.
Corporate Expenses
Income from operations on a segment basis does not include: corporate expenses;
depreciation and amortization expense related to property, plant and equipment;
and goodwill carried at the corporate level, for a total of $28.7 million for
the year ended December 31, 2000, as compared to $24.8 million in 1999.
18
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
For the year ended December 31, 2001, positive cash flows from operating
activities of $25.8 million primarily resulted from a decrease in inventories
partially offset by a decrease in other current liabilities. The decrease in
inventory is the result of a concerted effort by management to reduce
inventories.
Depreciation and amortization expenses were $37.3 million for the year ended
December 31, 2001, compared to $37.2 million in 2000. During 2001, the Company
recorded a pretax gain on early retirement of debt of $4.4 million on the
Company's senior subordinated notes due 2007.
Net cash used by investing activities was $16.5 million in 2001, as compared to
cash provided by investing activities of $66.3 million in 2000. The net cash
provided in 2000 was primarily due to the sale of certain assets as previously
described. Capital expenditures totaled $11.9 million in 2001, compared to $28.8
million in 2000. Although reduced sales have led the Company to scale back
capital expenditures, the Company has continued to dedicate funds to modernize
and improve production efficiencies. Included in 2001 capital expenditures is
$3.2 million used for equipment and installation related to the Company's tire
facility located in Brownsville, Texas. Capital expenditures at the Brownsville,
Texas, facility were $7.2 million in 2000. The Company estimates that capital
expenditures for 2002 could range between $10 million and $18 million.
The Company received proceeds of $5.2 million from the sale of an airplane in
2001. During 2000, the Company received proceeds of $94.1 million from the sale
of assets. Titan utilized the majority of these proceeds to reduce its total
debt to $233.4 million at December 31, 2000, from $303.7 million at March 31,
2000.
In 2001, the Company's two $5.0 million subordinated notes to Pirelli Armstrong
Tire Corporation were paid. The first $5.0 million subordinated note was paid in
June 2001 and the second was paid in December 2001. In February 2000, the
subordinated note for $19.7 million to Pirelli Armstrong Tire Corporation was
paid.
Debt Funding
The Company amended its credit facility in August 2001, decreasing the
availability under this credit facility from $175 million to $115 million and
changing the expiration date to December 31, 2001. In December 2001, the Company
replaced this credit facility with a $99 million five-year term loan and a $20
million five-year revolving loan agreement. The term loan has an interest rate
of LIBOR plus a margin which ranges from 4% to 4 1/2% and the loan agreement
allows Titan to borrow funds at an interest rate of LIBOR plus 2%, or at the
prime rate. At December 31, 2001, $99.0 million was outstanding on the term loan
and no amounts were drawn on the $20 million revolving loan agreement.
The Company's term loan and revolving loan agreement contain various
restrictions and covenants including (i) requirements that the Company maintain
certain financial ratios at prescribed levels, (ii) limits on payments of
dividends and repurchases of the Company's stock, (iii) 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 (iv)
limitations on investments, dispositions of assets and guarantees of
indebtedness. These restrictions and covenants 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.
19
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. During 2001, Titan altered
operating schedules as a means of reducing inventory and lowering costs.
The Company had restricted cash of $34.7 million at December 31, 2001.
Restricted cash of $15.0 million was collateral on the revolving loan agreement.
The remaining $19.7 million is collateral on outstanding letters of credit for
(i) industrial revenue bond of $9.7 million, (ii) FUNSA of $6.0 million, and
(iii) other letters of credit of $4.0 million. Letters of credit were previously
issued under the Company's credit facility, which was replaced in December 2001.
The Company's Board of Directors has authorized Titan to repurchase up to 10.0
million shares of its common stock. The Company repurchased 0.1 million and 0.2
million shares in 2001 and 2000, respectively. The Company repurchased 7.0
million shares in years prior to 2000 leaving the Company with authorization to
repurchase an additional 2.7 million common shares.
Liquidity Outlook
The continued three-year slump in the large agricultural equipment market,
sustained pricing pressure, and the three and one half-year labor strikes all
took their toll on Titan's profitability and the financial ratios of the
Company. These events, combined with the faltering economy, have created a
difficult operating environment for Titan. The Company is now concentrating on
further developing a streamlined infrastructure to accommodate an anticipated
increase in demand for Titan product.
At December 31, 2001, the Company had unrestricted cash and cash equivalents of
$9.2 million and no amounts were drawn on the $20 million revolving loan
agreement. Due to losses the Company has sustained, Titan expects a domestic tax
refund between $7 and $9 million. Cash on hand, anticipated internal cash flows
and utilization of available borrowing are expected to provide sufficient
liquidity for working capital needs, capital expenditures, the current portion
of long-term debt, and acquisitions for the near term. However, if the Company
exhausted all currently available working capital sources or were not to meet
the financial covenants and conditions of its loan agreements, the Company may
find it extremely difficult to secure additional funding and to meet its working
capital requirements.
OUTLOOK
Economic uncertainty makes it difficult to determine when the Company will see
significant increases in sales. To combat this uncertainty, the Company is
concentrating on lowering costs and developing unique products and
relationships. The Company is developing relationships to supply custom branded
tires to OEMs in the agricultural, earthmoving/construction, and consumer
markets. As these relationships develop, Titan would expect an increase in
market share in these segments. The Company expects sales of LSW assemblies to
increase as development efforts continue with OEM and aftermarket customers.
Titan is focusing on LSW assemblies that will provide benefits to the customers
and increased margins for the Company. Titan has made the decision to market its
products directly to equipment dealers in an effort to increase sales and more
effectively demonstrate the performance, safety and productivity features of
Titan products. The Company's national sales force introduced this program
during the second quarter of 2000, and the program was expanded during 2001. The
introduction of LSW assemblies and the equipment dealer program are expected to
drive aftermarket demand and should increase original equipment margins in the
future.
20
OUTLOOK (CONTINUED)
Agricultural Segment
Agricultural market sales are expected to be flat in 2002 due to a continuation
of relatively low grain prices. In November 2001, Titan secured approval to sell
Titan wheels and tires through the CNH Global N.V. dealer network. As Titan
wheels and tires are made available through hundreds of Case IH and New Holland
agricultural equipment dealers in North America, the demand for Titan products
from farmers should increase. Titan secured a long-term exclusive agreement with
Mahindra U.S.A., the American branch of India's largest tractor manufacturer
Mahindra & Mahindra Ltd., to supply wheels and tires for compact and utility
tractors imported for sale in the United States. Mahindra is the fourth largest
tractor manufacturer in the world in terms of units, and is experiencing
double-digit growth in U.S. demand as they execute their managed growth
strategy. The European agricultural market anticipates a double-digit downturn
in 2002. However, Titan's European facilities anticipate that the slowdown will
be partially offset by new business. Predictions for the agricultural market in
2002 are tenuous due to the current unprecedented events and conditions. 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
Sales for the earthmoving/construction market are expected to be flat to
slightly lower in 2002 as a result of the economic slowdown in the United
States. Equipment rental agencies are enduring difficult conditions as projects
are halted and the market is deluged with excessive used equipment, decreasing
the demand for new equipment. Titan continues to introduce new products to meet
the varied demands of construction equipment manufacturers. Titan is in the
final stage of testing a three-piece wheel design intended to replace the
standard five-piece design. Several customers are interested in this design
because the wheel weighs less without a sacrifice in strength. Titan's program
with CNH will enable the Company to sell the extensive line of construction and
industrial wheels and tires through Case and New Holland construction equipment
dealers throughout the United States.
Consumer Segment
Sales in the consumer market are expected to be flat in 2002. The Company is
introducing tires to capitalize on the success of the ATV market while
developing new trailer component products to target specific opportunities for
expanded market share. The ATV wheel and tire aftermarket is expected to
continue to grow. The trailer market has undergone a downturn, therefore, Titan
is diversifying the product mix of trailer components to take advantage of
various trends within the trailer industry.
MARKET RISK SENSITIVE INSTRUMENTS
Exchange Rate Sensitivity
The Company is exposed to fluctuations in the Euro, British pound and other
world currencies. Titan views its investments in foreign subsidiaries as
long-term commitments and does not hedge foreign currency transaction or
translation exposures. The Company's net investment in foreign subsidiaries
translated into U.S. dollars at December 31, 2001, is $51.3 million. The
hypothetical potential loss in value of the Company's net investment in foreign
subsidiaries resulting from a 10% adverse change in foreign currency exchange
rates at December 31, 2001, would amount to $5.1 million.
21
MARKET RISK SENSITIVE INSTRUMENTS (CONTINUED)
Commodity Price Sensitivity
The Company does not generally enter into long-term commodity contracts and does
not use derivative commodity instruments to hedge its exposures to commodity
market price fluctuations. Therefore, the Company is exposed to price
fluctuations of its key commodities, which consist primarily of steel and
rubber. The Company attempts and, depending on market conditions, is able to
pass on material price increases and decreases to its customers.
Interest Rate Sensitivity
At December 31, 2001, the fair value of the Company's senior subordinated notes,
based upon quoted market prices obtained through independent pricing sources for
the same or similar types of borrowing arrangements, was $78.6 million, compared
to the carrying value of $136.8 million. The Company believes the carrying value
of its other debt reasonably approximates fair value at December 31, 2001.
EURO CONVERSION
The Company adopted the Euro currency in operations affected by this change on
January 1, 2002. The costs associated with the transition to the Euro were not
material.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", was adopted on January 1, 2001.
The Company does not utilize derivatives to manage the interest rate or currency
risks, therefore, there was no material impact resulting from the adoption of
SFAS No. 133 on its financial position, cash flows or results of operations.
In July 2001, SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill
and Other Intangible Assets", were issued. Statement 141 requires the purchase
method of accounting for all business combinations and eliminates the pooling of
interests method effective June 30, 2001. Statement 142 requires goodwill
related to acquisitions after June 30, 2001, not to be amortized and written
down only for impairments. Upon adoption of this statement, the same accounting
will apply to goodwill acquisitions prior to June 30, 2001. The Company must
adopt these statements in 2002. The Company's amortization of goodwill during
the year ended December 31, 2001, was $0.8 million. The Company is evaluating
the effect Statements 141 and 142 will have on its financial position, cash
flows, and results of operations.
In August 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations", was
issued. Statement 143 requires legal obligations associated with the retirement
of long-lived assets to be recorded as increases in costs of the related assets.
This statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company does not expect the adoption of this
standard to have a material effect on its financial position, cash flows or
results of operations.
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 will be adopted in the first quarter of 2002. The Company does not
expect the adoption of this standard to have a material effect on its financial
position, cash flows or results of operations.
22
SAFE HARBOR STATEMENT
This Form 10-K 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-K 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Item 7, Part II of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Item 14, Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
23
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS
The information required by Item 10 regarding the Company's directors is
incorporated by reference to the Company's 2002 Proxy Statement under the
captions "Elections of Directors" and "Directors Continuing in Office". The
information required by Item 10 regarding the Company's executive officers
appears as Item 4a, Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
Company's 2002 Proxy Statement under the caption "Executive Officers
Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
Company's 2002 Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
Company's 2002 Proxy Statement under the caption "Related Party Transactions"
and also appears in Note 19 of the Company's Notes to Consolidated Financial
Statements.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Management's Responsibility for Financial Statements F-1
Report of PricewaterhouseCoopers LLP F-2
Consolidated Statements of Operations
for the years ended December 31, 2001, 2000 and 1999 F-3
Consolidated Balance Sheets
at December 31, 2001 and 2000 F-4
Consolidated Statements of Changes in
Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7 through F-24
2. Financial Statement Schedule
Schedule II -- Valuation Reserves S-1
3. Exhibits
The accompanying Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the
quarter ended December 31, 2001.
25
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
March 22, 2002 TITAN INTERNATIONAL, INC.
By: /S/ MAURICE M. TAYLOR JR.
-------------------------
Maurice M. Taylor Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 22, 2002.
Signatures Capacity
---------- --------
/S/ MAURICE M. TAYLOR JR. President, Chief Executive Officer
----------------------------------- and Director
Maurice M. Taylor Jr. (Principal Executive Officer)
/S/ KENT W. HACKAMACK Vice President of Finance and Treasurer
----------------------------------- (Principal Financial Officer and
Kent W. Hackamack Principal Accounting Officer)
/S/ ERWIN H. BILLIG Director
-----------------------------------
Erwin H. Billig
/S/ EDWARD J. CAMPBELL Director
-----------------------------------
Edward J. Campbell
/S/ RICHARD M. CASHIN JR. Director
-----------------------------------
Richard M. Cashin Jr.
/S/ ALBERT J. FEBBO Director
-----------------------------------
Albert J. Febbo
/S/ MITCHELL I. QUAIN Director
-----------------------------------
Mitchell I. Quain
/S/ ANTHONY L. SOAVE Director
-----------------------------------
Anthony L. Soave
26
TITAN INTERNATIONAL, INC.
EXHIBIT INDEX
FORM 10-K
2001
Exhibit
No. DESCRIPTION
------- -----------
3(a)(1) Amended Restated Articles of Incorporation of the Company
3(b)(2) Bylaws of the Company
10(a)(3) Registration Rights Agreement dated November 12, 1993, between the Company and 399
Venture Partners, Inc.
10(b)(4) Indenture between the Company and The First National Bank of Chicago dated
March 21, 1997
10(b)(1) Multicurrency Credit Agreement dated September 17, 1998, among the Company, Harris
Trust and Savings Bank and the banks named therein
10(c)(5) The December 22, 1999, Amendment to Multicurrency Credit Agreement dated
September 17, 1998, among the Company, Harris Trust and Savings Bank and the banks
named therein
10(d)(6) The August 20, 2001, Amendment to Multicurrency Credit Agreement dated September
17, 1998, among the Company, Harris Trust and Savings Bank and the banks named
therein
10(e)(7) Credit Agreement dated December 21, 2001, among the Company and General Electric
Capital Corporation serving as agent for a group of lenders
10(f)(7) Loan Agreement dated December 21, 2001, among the Company and LaSalle Bank
National Association
10(g)(8) 1994 Non-Employee Director Stock Option Plan
10(h)(8) 1993 Stock Incentive Plan
21* Subsidiaries of the Registrant
23.1* Consent of PricewaterhouseCoopers LLP
-----------------------------
*Filed herewith
(1) Incorporated by reference to the same numbered exhibit contained in the
Company's Form 10-Q for its quarterly period ended September 30, 1998 (No.
001-12936).
(2) Incorporated by reference to the same numbered exhibit contained in the
Company's Registration Statement on Form S-4 (No. 33-69228).
(3) Incorporated by reference to the same numbered exhibit contained in the
Company's Annual Report on Form 10-K for its year ended December 31, 1993.
(4) Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (No. 333-22279).
(5) Incorporated by reference to the same numbered exhibit contained in the
Company's Annual Report on Form 10-K for its year ended December 31, 1999.
(6) Incorporated by reference to the same numbered exhibit filed with the
Company's Form 8-K filed on August 31, 2001.
(7) Incorporated by reference to the same numbered exhibit filed with the
Company's Form 8-K filed on January 18, 2002.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-61743).
27
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The consolidated financial statements of Titan International, Inc. were prepared
by management, which is responsible for their contents and integrity. They
reflect amounts based upon management's best estimates and informed judgements
in conforming to accounting principles generally accepted in the United States
of America.
The Company maintains a system of internal accounting controls and procedures
which is designed, consistent with reasonable cost, to provide reasonable
assurance that transactions are executed as authorized and that they are
properly recorded to produce reliable financial records and to safeguard assets
against loss.
To further safeguard assets, the Company has established an Audit Committee,
which is comprised entirely of outside directors. The Audit Committee meets with
the independent accountants, with and without management present, to discuss
audit and financial reporting matters and internal accounting controls.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants. They have evaluated the
Company's internal accounting control structure and performed tests and other
procedures necessary to express an opinion on the fairness of the consolidated
financial statements.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Titan International, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 25 present fairly, in all material
respects, the financial position of Titan International, Inc. and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2) on page 25 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 19, 2002
F-2
TITAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
2001 2000 1999
---- ---- ----
Net sales $ 457,475 $ 543,069 $ 588,023
Cost of sales 436,924 502,924 526,329
---------- ---------- ----------
Gross profit 20,551 40,145 61,694
Selling, general and administrative expenses 44,162 44,087 51,614
Union strike settlement and other costs 6,765 0 0
Research and development expenses 3,089 4,704 6,310
---------- ---------- ----------
(Loss) income from operations (33,465) (8,646) 3,770
Interest expense (20,919) (22,558) (23,603)
Gain on sale of assets 1,619 38,727 4,933
Other income (expense) 2,023 1,179 (3,545)
---------- ---------- ----------
(Loss) income before income taxes (50,742) 8,702 (18,445)
(Benefit) provision for income taxes (13,339) 4,177 (7,009)
---------- ---------- ----------
(Loss) income before extraordinary item (37,403) 4,525 (11,436)
Extraordinary gain on early retirement of debt,
net of taxes of $1,742 2,614 0 0
---------- ---------- ----------
Net (loss) income $ (34,789) $ 4,525 $ (11,436)
========== ========== ==========
(Loss) earnings per common share before extraordinary item:
Basic $(1.81) $.22 $(.55)
Diluted (1.81) .22 (.55)
Extraordinary gain per common share:
Basic $.13 $.00 $.00
Diluted .13 .00 .00
(Loss) earnings per common share:
Basic $(1.68) $.22 $(.55)
Diluted (1.68) .22 (.55)
Average common shares and equivalents outstanding:
Basic 20,656 20,694 20,752
Diluted 20,656 20,694 20,752
See accompanying Notes to Consolidated Financial Statements.
F-3
TITAN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
ASSETS 2001 2000
---- ----
Current assets
Cash and cash equivalents $ 9,214 $ 5,668
Accounts receivable (net allowance of $3,523 and $3,764, respectively) 78,144 83,689
Inventories 116,801 160,309
Deferred income taxes 21,175 8,022
Prepaid and other current assets 37,389 27,868
----------- ----------
Total current assets 262,723 285,556
Property, plant and equipment, net 205,047 232,335
Restricted cash deposits 34,661 0
Other assets 49,538 54,829
Goodwill, net 16,985 18,921
----------- ----------
Total assets $ 568,954 $ 591,641
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt (including current portion of long-term debt) $ 4,304 $ 5,377
Accounts payable 54,658 53,524
Other current liabilities 23,077 40,539
----------- ----------
Total current liabilities 82,039 99,440
Deferred income taxes 24,161 20,754
Other long-term liabilities 20,225 14,767
Long-term debt 256,622 227,975
----------- ----------
Total liabilities 383,047 362,936
----------- ----------
Commitments and contingencies: Notes 9, 15 and 17
Stockholders' equity
Common stock (no par, 60,000,000 shares authorized, 27,555,081 issued) 27 27
Additional paid-in capital 211,905 213,423
Retained earnings 83,998 119,405
Treasury stock (at cost, 6,864,947 and 6,928,684 shares, respectively) (91,270) (93,041)
Accumulated other comprehensive loss (18,753) (11,109)
---------- ----------
Total stockholders' equity 185,907 228,705
----------- ----------
Total liabilities and stockholders' equity $ 568,954 $ 591,641
=========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-4
TITAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
NUMBER OF ADDITIONAL OTHER
COMMON SHARES COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) TOTAL
--------------------------------------------------------------------------------------
BALANCE JANUARY 1, 1999 20,928,655 $27 $214,807 $ 128,801 $(92,304) $ (4,294) $247,037
--------- -------- --------
Comprehensive Income (Loss):
Net loss (11,436) (11,436)
Currency translation adjustment (5,341) (5,341)
Minimum pension liability 2,306 2,306
--------- -------- --------
Comprehensive Income (Loss) (11,436) (3,035) (14,471)
Dividends paid on common stock (1,242) (1,242)
Issuance of common stock
under 401(k) plans 34,942 336 336
Issuance of treasury stock
under 401(k) plans 80,483 (297) 1,107 810
Treasury stock transactions (428,100) (3,604) (3,604)
---------- ---- --------- --------- -------- -------- --------
BALANCE DECEMBER 31, 1999 20,615,980 27 214,846 116,123 (94,801) (7,329) 228,866
--------- -------- --------
Comprehensive Income (Loss):
Net income 4,525 4,525
Currency translation adjustment (3,759) (3,759)
Minimum pension liability (21) (21)
--------- -------- --------
Comprehensive Income (Loss) 4,525 (3,780) 745
Dividends paid on common stock (1,243) (1,243)
Issuance of treasury stock
under 401(k) plans 193,017 (1,423) 2,624 1,201
Treasury stock transactions (182,600) (864) (864)
---------- ---- --------- --------- -------- -------- --------
BALANCE DECEMBER 31, 2000 20,626,397 27 213,423 119,405 (93,041) (11,109) 228,705
--------- -------- --------
Comprehensive Income (Loss):
Net loss (34,789) (34,789)
Currency translation adjustment (1,977) (1,977)
Minimum pension liability (5,667) (5,667)
--------- -------- --------
Comprehensive Income (Loss) (34,789) (7,644) (42,433)
Dividends paid on common stock (618) (618)
Issuance of treasury stock
under 401(k) plans 160,937 (1,518) 2,146 628
Treasury stock transactions (97,200) (375) (375)
---------- ---- --------- --------- -------- -------- --------
BALANCE DECEMBER 31, 2001 20,690,134 $27 $211,905 $ 83,998 $(91,270) $(18,753) $185,907
========== === ========= ========= ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
F-5
TITAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (34,789) $ 4,525 $ (11,436)
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization 37,263 37,221 38,615
Gain on sale of assets (1,619) (38,727) (4,933)
Gain on early retirement of debt (4,356) 0 0
Deferred income tax (benefit) provision (9,746) (2,747) 6,283
Noncash portion of union settlement and other costs 3,846 0 0
(Increase) decrease in current assets:
Accounts receivable 4,303 7,909 1,481
Inventories 41,140 (36,751) 10,631
Prepaid and other current assets 2,377 3,732 (6,255)
Increase (decrease) in current liabilities:
Accounts payable 1,956 3,889 (5,662)
Other current liabilities (19,702) 2,415 (26,151)
Other, net 5,090 (7,273) 507
--------- -------- ----------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 25,763 (25,807) 3,080
--------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11,865) (28,769) (39,098)
Proceeds from sale of assets 5,200 94,063 15,226
Acquisitions, net of cash acquired 0 0 (12,165)
Purchase of preferred stock (4,500) 0 0
Other (5,321) 963 0
--------- -------- ----------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (16,486) 66,257 (36,037)
--------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 116,565 0 6,967
Repayments on debt/repurchase of bonds (24,660) (20,167) (668)
(Repayments) proceeds on credit facility, net (60,000) (22,000) 27,000
Increase in restricted cash deposits (34,661) 0 0
Repurchase of common stock (375) (640) (3,604)
Payment of financing fees (2,279) 0 (1,343)
Dividends paid (827) (1,240) (1,247)
Other 627 1,201 1,146
--------- -------- ----------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (5,610) (42,846) 28,251
--------- -------- ----------
Effect of exchange rate changes on cash (121) (542) (804)
Net increase (decrease) in cash and cash equivalents 3,546 (2,938) (5,510)
Cash and cash equivalents, beginning of year 5,668 8,606 14,116
--------- -------- ---------
Cash and cash equivalents, end of year $ 9,214 $ 5,668 $ 8,606
========= ======== ==========
See accompanying Notes to Consolidated Financial Statements.
F-6
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Titan International, Inc. (Titan or the Company), is a global manufacturer of
off-highway wheels and tires for the agricultural, earthmoving/construction and
consumer markets. The Company generally manufactures both wheels and tires for
these markets and provides the value-added service of assembling the complete
wheel-tire system. The primary materials utilized in the manufacturing process
are steel and rubber, which are obtained from a broad base of suppliers.
USE OF ESTIMATES
The policies utilized by the Company in the preparation of the financial
statements conform to generally accepted accounting principles in the United
States of America and require management to make estimates and assumptions that
affect the reported amount of assets and liabilities, and disclosure of
contingent assets and liabilities, at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual amounts could differ from these estimates and assumptions.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly and majority-owned subsidiaries. Titan records its investment in each
unconsolidated affiliated company (20% to 50% ownership) at its related equity
in the net assets of such affiliate as adjusted for equity earnings and losses.
Investments of less than 20% in other companies are generally carried at cost.
All significant intercompany accounts and transactions have been eliminated.
INVENTORIES
Inventories are valued at the lower of cost or market. For United States
operations, cost is determined using the last-in, first-out (LIFO) method for
approximately 58% 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.
FIXED ASSETS
Property, plant and equipment have been recorded at cost. Depreciation is
provided using the straight-line method over the following estimated useful
lives of the related assets:
YEARS
-----
Building and improvements 25
Machinery and equipment 10
Tools, dies and molds 5
Maintenance and repairs are expensed as incurred. When property, plant and
equipment are retired or otherwise disposed of, the related cost and accumulated
depreciation are eliminated and any gain or loss on disposition is included in
income.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired. The Company's goodwill for foreign and domestic subsidiaries is
amortized over 25 and 40 years, respectively, on a straight-line basis.
F-7
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs are costs incurred in connection with the Company's
term loan, senior subordinated notes, and industrial revenue bonds. The costs
associated with the term loan are being amortized over five years, the term of
the loan. The discount and costs associated with the senior subordinated notes
are being amortized over ten years, the term of the notes. The costs associated
with the industrial revenue bonds are being amortized over thirteen years, the
term of the bonds.
IMPAIRMENT OF ASSETS
The Company reviews long-lived assets, goodwill and other intangibles 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.
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, warranties and uncollectible
accounts.
INCOME TAXES
Deferred income tax provisions are determined using the liability method whereby
deferred tax assets and liabilities are recognized based upon temporary
differences between the financial statement and income tax basis of assets and
liabilities.
EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing consolidated net earnings
by the weighted average number of common shares outstanding. Diluted EPS is
computed by dividing consolidated net earnings by the sum of the weighted
average number of common shares outstanding and the weighted average number of
potential common shares outstanding. Potential common shares consist solely of
outstanding options under the Company's stock option plans.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company records all financial instruments, including cash and cash
equivalents, accounts receivable, notes receivable, accounts payable, other
accruals and notes payable at cost, which approximates fair value. The senior
subordinated notes due 2007 are the only significant financial instrument of the
Company with a fair value different than the recorded value. At December 31,
2001, the fair value of the senior subordinated notes, based on quoted market
prices obtained through independent pricing sources for the same or similar
types of borrowing arrangements, was approximately $78.6 million, compared to a
carrying value of $136.8 million.
ENVIRONMENTAL LIABILITIES
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations and that do not contribute to current or future
revenue are expensed. Liabilities are recorded when environmental assessments
and/or remedial efforts are probable and can be reasonably estimated.
F-8
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN MARKET RISK
The Company manufactures and sells its products in the United States and foreign
countries. The Company is potentially subject to foreign currency exchange risk
relating to receipts from customers and payments to suppliers in foreign
currencies. As a result, the Company's financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in the foreign markets in which the Company operates. Gains and
losses arising from the settlement of foreign currency transactions are charged
to the related period's Consolidated Statement of Operations. Translation
adjustments arising from the translation of foreign subsidiary financial
statements are recorded as a part of accumulated other comprehensive loss in
stockholders' equity.
STATEMENT OF CASH FLOWS
For purposes of the Consolidated Statements of Cash Flows, the Company considers
financial investments with an original maturity of three months or less to be
cash equivalents.
Investing activities during the year ended December 31, 2000, including certain
non-cash transactions, related to the Company's sale of assets of two facilities
located in Clinton, Tennessee, and Slinger, Wisconsin, involved the following
(in thousands):
Fair value of assets sold, other than cash and cash equivalents:
Current assets $ 9,394
Property, plant and equipment 25,611
Goodwill 19,479
Liabilities sold 852
Gain on sale 38,727
----------
Cash received $ 94,063
----------
Investing activities during the year ended December 31, 1999, included certain
non-cash transactions related to the Company's acquisition of certain assets of
Wheels India Limited. During 1999, Titan paid $12.2 million to acquire 35.9% of
Wheels India Limited, which is being accounted for under the equity method of
accounting. Equity earnings for 2001 and 2000 were not significant to Titan's
results of operations.
The Company paid $19.7 million, $20.9 million, and $22.3 million for interest;
and $5.9 million, $6.2 million, and $0.7 million for income taxes in 2001, 2000
and 1999, respectively.
STOCK-BASED COMPENSATION
The Company utilizes Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" (APB 25) to account for employee stock options and
related instruments. Pro forma fair value based disclosures required under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" (SFAS 123), are reflected in Note 16.
F-9
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), was adopted on January 1, 2001.
The Company does not utilize derivatives to manage the interest rate or currency
risks, therefore, there was no material impact resulting from the adoption of
SFAS 133 on its financial position, cash flows or results of operations.
In July 2001, SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill
and Other Intangible Assets", were issued. Statement 141 requires the purchase
method of accounting for all business combinations and eliminates the pooling of
interests method effective June 30, 2001. Statement 142 requires goodwill
related to acquisitions after June 30, 2001, not to be amortized and written
down only for impairments. Upon adoption of this statement, the same accounting
will apply to goodwill acquisitions prior to June 30, 2001. The Company must
adopt these statements in 2002. The Company's amortization of goodwill during
the year ended December 31, 2001, was $0.8 million. The Company is evaluating
the effect Statements 141 and 142 will have on its financial position, cash
flows, and results of operations.
In August 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations", was
issued. Statement 143 requires legal obligations associated with the retirement
of long-lived assets to be recorded as increases in costs of the related assets.
This statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company does not expect the adoption of this
standard to have a material effect on its financial position, cash flows or
results of operations.
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 will be adopted in the first quarter of 2002. The Company does not
expect the adoption of this standard to have a material effect on its financial
position, cash flows or results of operations.
RECLASSIFICATION
Certain amounts from prior years have been reclassified to conform to the
current year's presentation.
2. UNION STRIKE SETTLEMENT AND OTHER COSTS
In September of 2001, employees of the Company's Des Moines, Iowa, facility
approved a new labor agreement effective through the year 2006. In December of
2001, former workers at the Company's Natchez, Mississippi, facility approved a
new labor agreement effective through the year 2006. The employees or former
workers at these facilities had been on strike for 40 and 39 months,
respectively. The Company recorded union strike settlement and other costs of
$6.8 million for the year ended December 31, 2001. This amount is attributed to
the union settlement with the Company's Des Moines, Iowa, and Natchez,
Mississippi, facilities as well as other costs to which the strike contributed.
Included in these costs were (i) union settlement payments and retraining costs
of $2.9 million, (ii) goodwill and prepaid write-downs of $2.0 million, and
(iii) inventory write-downs of $1.9 million.
F-10
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVENTORIES
Inventories at December 31, 2001 and 2000, consisted of the following (in
thousands):
2001 2000
---- ----
Raw material $ 34,771 $ 41,284
Work-in-process 11,549 15,919
Finished goods 67,647 100,622
----------- -----------
113,967 157,825
LIFO reserve 2,834 2,484
----------- -----------
$ 116,801 $ 160,309
=========== ===========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2001 and 2000, consisted of the
following (in thousands):
2001 2000
---- ----
Land and improvements $ 3,207 $ 3,212
Buildings and improvements 64,350 62,511
Machinery and equipment 250,650 252,583
Tools, dies and molds 57,849 55,122
Construction in process 18,623 19,919
----------- -----------
394,679 393,347
Less accumulated depreciation (189,632) (161,012)
----------- -----------
$ 205,047 $ 232,335
=========== ===========
Depreciation of fixed assets for the years 2001, 2000 and 1999 totaled $33.7
million, $34.3 million, and $34.4 million, respectively. Company facilities
located in Natchez, Mississippi, and Greenwood, South Carolina, not currently in
operation have net fixed assets of $24.2 million and $6.1 million, respectively.
The Company continues to depreciate these fixed assets.
5. RESTRICTED CASH DEPOSITS
The Company had restricted cash of $34.7 million at December 31, 2001.
Restricted cash of $15.0 million was collateral on the revolving loan agreement.
The remaining $19.7 million is collateral on outstanding letters of credit for
(i) industrial revenue bond of $9.7 million, (ii) FUNSA of $6.0 million, and
(iii) other letters of credit of $4.0 million. Letters of credit were previously
issued under the Company's credit facility, which was replaced in December 2001.
6. OTHER ASSETS
Other assets at December 31, 2001 and 2000, consisted of the following (in
thousands):
2001 2000
---- ----
Investments - common and preferred stock $ 25,928 $ 21,782
Notes receivable 13,349 19,704
Deferred financing 4,605 4,434
Other 5,656 8,909
----------- -----------
$ 49,538 $ 54,829
=========== ===========
F-11
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. GOODWILL
Goodwill at December 31, 2001 and 2000, consisted of the following (in
thousands):
2001 2000
---- ----
Goodwill $ 22,442 $ 23,617
Less accumulated amortization (5,457) (4,696)
----------- -----------
$ 16,985 $ 18,921
=========== ===========
Amortization of goodwill for the years 2001, 2000 and 1999 totaled $0.8 million,
$0.9 million, and $1.3 million.
8. OTHER CURRENT LIABILITIES
Other current liabilities at December 31, 2001 and 2000, consisted of the
following (in thousands):
2001 2000
---- ----
Accrued wages and commissions $ 7,093 $ 7,489
Accrued interest 3,006 3,665
Acquisition payable 0 5,446 (a)
Income taxes payable 0 5,264
Other 12,978 18,675
----------- -----------
$ 23,077 $ 40,539
=========== ===========
(a) Amount was paid in 2001 and has been included within the consolidated
statements of cash flows under other investing activities.
9. LONG-TERM DEBT
Long-term debt at December 31, 2001 and 2000, consisted of the following (in
thousands):
2001 2000
---- ----
Senior subordinated notes $ 136,750 $ 150,000
Credit facility (Expiration December 2001) 0 60,000
Term loan (Effective December 2001) 99,000 0
Revolving loan agreement (Effective December 2001) 0 0
Notes payable to Pirelli 0 10,000
Industrial revenue bonds and other 25,176 13,352
---------- -----------
260,926 233,352
Less amounts due within one year 4,304 5,377
----------- -----------
$ 256,622 $ 227,975
=========== ===========
In March 1997, the Company issued $150 million principal amount of 8 3/4% senior
subordinated notes, priced to the public at 99.5 percent, due 2007. During the
second quarter of 2001, the Company retired $13.3 million of these notes. A
pretax gain of $4.4 million was recognized on this early retirement of debt.
In December 1998, Titan Tire Corporation issued two $5.0 million subordinated
notes with fixed interest rates of 6 1/2% to Pirelli LLC to acquire certain
property, plant and equipment. The notes were paid in July and December of 2001,
respectively.
F-12
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LONG-TERM DEBT (CONTINUED)
On August 20, 2001, the Company amended its multicurrency credit agreement,
decreasing its availability under this credit facility from $175 million to $115
million and changing the expiration date to December 31, 2001. The Company paid
interest rates ranging from 3.35% to 10.50% on the outstanding balance under the
Facility in 2001. In December 2001, the Company replaced this credit facility
with a $99 million five-year term loan and a $20 million five-year revolving
loan agreement.
At December 31, 2001, $99.0 million was outstanding on the five-year term loan.
The term loan is secured by certain receivables, inventory and fixed assets. The
term loan, which expires in December 2006, has an interest rate of LIBOR plus a
margin that ranges from 4% to 4 1/2%. The term loan contains restrictions
related to dividends, investments, guarantees, certain financial ratios and
other customary affirmative and negative covenants. Principal payments of $2.5
million are due in 2002 on this term loan.
At December 31, 2001, no amounts were drawn on the $20 million revolving loan
agreement. The loan agreement is secured by $15 million in cash as well as
certain receivables, inventory, and fixed assets. The loan agreement, which
expires in December 2006, allows Titan to borrow funds at an interest rate of
LIBOR plus 2%, or at the prime rate. The revolving loan agreement contains
restrictions related to dividends, investments, guarantees, certain financial
ratios and other customary affirmative and negative covenants.
Other debt primarily consists of industrial revenue bonds, loans from local and
state entities and various other long-term notes. The increase in other debt
consists primarily of the addition of a $10.7 million term loan at the Company's
Italian facility. This term loan has a five-year term and interest rates paid on
this loan ranged from 5% to 6% in 2001.
Aggregate maturities of long-term debt are as follows (in thousands):
2002 $ 4,304
2003 9,849
2004 12,231
2005 15,524
2006 71,118
Thereafter 147,900
-----------
$ 260,926
===========
10. OTHER INCOME (EXPENSE)
Other income (expense) consisted of the following (in thousands):
2001 2000 1999
---- ---- ----
Interest income $ 2,380 $ 2,516 $ 1,293
Foreign exchange losses (1,101) (1,710) (2,752)
All other income (expense) 744 373 (2,086)
----------- ----------- ------------
$ 2,023 $ 1,179 $ (3,545)
=========== =========== ===========
F-13
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
Income (loss) before income taxes, including the extraordinary gain on early
retirement of debt, consisted of the following (in thousands):
2001 2000 1999
---- ---- ----
Domestic $ (46,013) $ 5,026 $ (20,779)
Foreign (373) 3,676 2,334
----------- ------------ -----------
$ (46,386) $ 8,702 $ (18,445)
=========== ============ ===========
The provision (benefit) for income taxes, including taxes related to the
extraordinary gain on early retirement of debt, was as follows (in thousands):
2001 2000 1999
---- ---- ----
Current
Federal $ (1,382) $ 3,177 $ (11,929)
State (1,258) 487 (2,609)
Foreign 790 3,260 1,246
----------- ------------ -----------
(1,850) 6,924 (13,292)
----------- ------------ -----------
Deferred
Federal (9,280) (1,862) 5,826
State (1,184) (401) 1,253
Foreign 717 (484) (796)
----------- ------------ -----------
(9,747) (2,747) 6,283
----------- ------------ -----------
Provision (benefit) for income taxes $ (11,597) $ 4,177 $ (7,009)
=========== ============ ===========
The provision (benefit) for income taxes differs from the amount of income tax
determined by applying the statutory U.S. federal income tax rate to pretax
income (loss) as a result of the following:
2001 2000 1999
---- ---- ----
Statutory U.S. federal tax rate (35.0)% 35.0% (35.0)%
State taxes, net (4.5) 4.6 (4.8)
Foreign taxes, net 1.4 0.0 (1.8)
Nondeductible goodwill amortization 2.6 3.1 2.2
Other, net 10.5 5.3 1.4
----- ----- -----
Effective tax rate (25.0)% 48.0% (38.0)%
===== ===== =====
Federal income taxes are provided on earnings of foreign subsidiaries except to
the extent that such earnings are expected to be indefinitely reinvested abroad.
F-14
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) at December 31, 2001 and 2000, respectively,
consisted of the following (in thousands):
2001 2000
---- ----
Minimum pension $ 3,778 $ 0
Employee benefits and related costs 2,097 3,285
EPA reserve 1,699 1,524
Allowance for bad debts 1,031 1,264
Inventory 0 539
Other 2,150 2,934
---------- ----------
Gross deferred tax assets 10,755 9,546
---------- ----------
Fixed assets (20,455) (20,542)
Deferred gain (2,453) (1,736)
Other 9,167 0
---------- ----------
Gross deferred tax liabilities (13,741) (22,278)
---------- ----------
Net deferred tax liabilities $ (2,986) $ (12,732)
========== ==========
12. STOCKHOLDERS' EQUITY
The Company repurchased 0.1 million, 0.2 million and 0.4 million shares of its
common stock at a cost of $0.4 million, $0.9 million, and $3.6 million in 2001,
2000 and 1999, respectively. The Company is authorized to repurchase an
additional 2.7 million common shares. The Company paid cash dividends of $.03
per share of common stock during 2001 and $.06 per share of common stock during
each of 2000 and 1999.
13. SALE OF ASSETS
On April 14, 2000, the Company sold certain assets (primarily raw material
inventory, work-in-process inventory, and property, plant and equipment) of two
facilities located in Clinton, Tennessee, and Slinger, Wisconsin, to Carlisle
Tire and Wheel Company, a subsidiary of Carlisle Companies Incorporated, for
approximately $94.1 million in cash. In conjunction with this transaction, the
Company eliminated goodwill related to these operations totaling $19.5 million.
The Company recorded a pretax gain on this transaction of $38.7 million in the
second quarter of 2000. This nonrecurring gain has not been included in the pro
forma amounts described below. These two facilities were in the business of
providing wheels and tires to the consumer market, primarily for original
equipment manufacturers' lawn and garden equipment and all terrain vehicles.
Had the transaction occurred on January 1, 2000, net sales for the year ended
December 31, 2000, would have been $512.4 million. Net loss for the year ended
December 31, 2000, would have been $(21.2) million. Loss per share for the year
ended December 31, 2000, would have been $(1.02). There was no effect on net
sales, net income or earnings per share for the year ended December 31, 2001, as
a result of this transaction.
F-15
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a frozen defined benefit pension plan covering certain employees
of Titan Tire Corporation. The Company has a frozen contributory defined benefit
pension plan covering certain hourly employees of its Walcott, Iowa, facility.
The Company sponsors a contributory defined benefit plan that covers former
eligible bargaining employees of Dico, Inc. The Company's policy is to fund
pension costs as accrued, which is consistent with the funding requirements of
federal laws and regulations.
The Company's defined benefit plans have been aggregated in the following table.
Included in the December 31, 2001, amounts are two plans with a projected
benefit obligation and accumulated benefit obligation of $67.1 million, which
exceeds the fair value of plan assets of $60.0 million at December 31, 2001.
Included in the December 31, 2000, amounts is one plan with a projected benefit
obligation and accumulated benefit obligation of $1.2 million, which exceeds the
fair value of plan assets of $0.8 million at December 31, 2000.
The following table provides the change in benefit obligation, change in plan
assets, funded status and amounts recognized in the consolidated balance sheet
of the defined benefit pension plans as of December 31, 2001, and 2000 (in
thousands):
2001 2000
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 66,868 $ 67,998
Interest cost 4,989 5,043
Actuarial losses 3,405 415
Benefits paid (7,000) (6,588)
--------- ---------
Benefit obligation at end of year $ 68,262 $ 66,868
========= =========
Change in plan assets:
Fair value of plan assets at beginning of year $ 71,219 $ 74,712
Actual return on plan assets (2,876) 2,446
Employer contributions 318 649
Benefits paid (7,000) (6,588)
--------- ---------
Fair value of plan assets at end of year $ 61,661 $ 71,219
========= =========
Funded status $ (6,601) $ 4,351
Unrecognized net loss (gain) 11,201 74
Unrecognized deferred tax liability (573) (636)
--------- ---------
Net amount recognized $ 4,027 $ 3,789
========= =========
Amounts recognized in consolidated balance sheet:
Prepaid benefit cost $ 698 $ 3,368
Accrued benefit liability (6,966) (429)
Accumulated other comprehensive income 10,295 850
--------- ---------
Net amount recognized $ 4,027 $ 3,789
========= =========
Included in the consolidated balance sheets at December 31, 2001, and 2000 are
the after tax minimum pension liabilities for the unfunded pension plans of $6.2
million and $0.5 million, respectively.
F-16
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table provides the components of net periodic pension costs for
the plans and the assumptions used in the measurement of the Company's benefit
obligation for years ended December 31, 2001, 2000 and 1999 (in thousands):
2001 2000 1999
---- ---- ----
Components of net periodic pension cost:
Interest cost $ 4,989 $ 5,043 $ 5,077
Assumed return on assets (4,871) (5,139) (4,553)
Amortization of unrecognized deferred taxes (63) (63) (63)
Amortization of net unrecognized loss 25 19 17
-------- -------- --------
Net periodic pension cost (income) $ 80 $ (140) $ 478
======== ======== ========
Major assumptions:
Discount rate 7 1/4% 7 1/4-7 3/4% 7 1/4-7 3/4%
Rate of return on plan assets 7-8 1/2% 7-8 1/2% 7-8 1/2%
401(k)
The Company sponsors four 401(k) retirement savings plans. One plan is for the
benefit of substantially all employees who are not covered by a collective
bargaining arrangement. Titan provides a 50% matching contribution in the form
of the Company's common stock on the first 6% of the employee's contribution in
this plan. A second plan is for the employees covered by a collective bargaining
arrangement at Titan Tire Corporation and, as of September 2001, does not
include a Company matching contribution. Participants of both of these plans may
contribute up to 17% of their annual compensation, up to a maximum of $10,500 in
2001. Employees are fully vested with respect to their contributions. The
Company issued 160,937 shares, 193,017 shares, and 80,483 shares of treasury
stock in connection with these 401(k) plans during 2001, 2000 and 1999,
respectively. Titan also issued 34,942 shares of common stock in connection with
these 401(k) plans during 1999. Expenses related to these 401(k) plans were $0.8
million, $1.1 million, and $1.1 million for 2001, 2000 and 1999, respectively.
In 1999, the Company adopted 401(k) plans for the employees of Titan Tire
Corporation of Texas and the employees of Titan Tire Corporation of Natchez.
These plan participants may contribute up to 20% of their annual compensation,
up to a maximum of $10,500 in 2001. Employees are fully vested with respect to
their contributions. The Company provides a 50% match in the form of cash
contributions on the first 6% of the employee's contribution in these plans up
to a maximum of $500 per year. Expenses for the Company matching contribution
were $0.1 million for each of 2001, 2000 and 1999.
15. LITIGATION
The Company is a party to routine legal proceedings arising out of the normal
course of business. Although it is not possible to predict with certainty the
outcome of these unresolved legal actions or the range of possible loss, the
Company believes that none of these actions, individually or in the aggregate,
will have a material adverse affect on the financial condition or results of
operations of the Company.
F-17
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. STOCK OPTION PLANS
The Company adopted the 1993 Stock Incentive Plan (the Plan) in which a total of
1,125,000 shares of common stock are reserved. Under the Plan, stock options
(both incentive and non-qualified), restricted stock awards and performance
awards may be granted to key employees or consultants at an exercise price not
less than 85% of the fair market value of the common stock on the date of grant.
Options under the Plan vest and become exercisable at a rate of 40% on December
31 of the year following the date of grant, and an additional 20% each year
thereafter.
The Company adopted the 1994 Non-Employee Director Stock Option Plan (the
Director Plan) to provide for grants of stock options as a means of attracting
and retaining highly qualified independent directors for the Company. The
exercise price of stock options may not be less than the fair market value of
the common stock on the date of grant. No more than 400,000 shares of Titan's
common stock may be issued under the Director Plan. Such options vest and become
exercisable immediately. All options under both plans expire 10 years from date
of grant.
The following is a summary of activity in the stock option plans for 1999, 2000
and 2001:
SHARES SUBJECT WEIGHTED-AVERAGE
TO OPTION EXERCISE PRICE
--------- --------------
OUTSTANDING, JANUARY 1, 1999 783,718 $ 13.96
Granted 313,050 $ 8.26
Canceled (107,650) 13.37
--------- --------
OUTSTANDING, DECEMBER 31, 1999 989,118 $ 12.22
Granted 54,000 $ 6.69
Canceled (83,588) 11.58
--------- --------
OUTSTANDING, DECEMBER 31, 2000 959,530 $ 11.96
Granted 54,000 $ 4.54
Canceled (3,000) 8.00
--------- --------
OUTSTANDING, DECEMBER 31, 2001 1,010,530 $ 11.58
========= ========
The exercise price for options outstanding at December 31, 2001, ranged from
$4.54 to $18.00 per share and the weighted-average remaining contractual life of
these options approximates six years. At December 31, 2001, a total of 905,716
options were exercisable at a weighted-average exercise price of $11.78.
F-18
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. STOCK OPTION PLANS (CONTINUED)
The Company has recorded an insignificant amount of compensation expense under
APB 25 as the exercise price on the date of grant generally approximates fair
market value. Had compensation cost been determined based on the fair value at
the grant date for awards in 2001, 2000 and 1999 consistent with the provisions
of SFAS 123, the Company's pro forma net income and earnings per share would
have been as presented below (in thousands, except per share data):
2001 2000 1999
---- ---- ----
Net income (loss) - as reported $(34,789) $4,525 $(11,436)
Net income (loss) - pro forma (35,026) 4,152 (11,989)
Net income (loss) per share - as reported $(1.68) $.22 $(.55)
Net income (loss) per share - pro forma (1.69) .20 (.58)
The fair value of each option is calculated using the Black-Scholes
option-pricing model with the following assumptions used for grants in 2001,
2000 and 1999:
2001 2000 1999
---- ---- ----
Stock price volatility 51% 40% 38%
Risk-free interest rate 5.2% 6.8% 4.7%
Expected life of options 6 years 6 years 6 years
Dividend yield .49% .44% .37%
The weighted-average fair value of options granted during 2001, 2000 and 1999
was $2.38, $3.19 and $3.77 per option, respectively.
17. 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. Total rental
expense was $5.5 million, $5.6 million and $5.7 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
At December 31, 2001, future minimum rental commitments under noncancellable
operating leases with initial or remaining terms in excess of one year are as
follows (in thousands):
2002 $ 5,869
2003 4,482
2004 2,038
2005 754
2006 742
F-19
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. CONCENTRATION OF CREDIT RISK
Net sales to Deere & Company in Titan's agricultural, earthmoving/construction,
and consumer markets represented 15% of the Company's consolidated revenues for
the year ended December 31, 2001. Net sales to CNH Global N.V. in Titan's three
markets represented 13% of the Company's consolidated revenues for the year
ended December 31, 2001. No other customer accounted for more than 10% of the
Company's net sales in 2001.
19. RELATED PARTY TRANSACTIONS
The Company sells products and pays commissions to companies controlled by
persons related to the Chief Executive Officer of the Company. During 2001, 2000
and 1999, sales of Titan product to these companies were approximately $7.7
million, $10.7 million and, $12.5 million, respectively. On sales referred to
Titan from these manufacturing representative companies, commissions were paid
in the amounts of approximately $0.9 million, $1.2 million, and $1.1 million
during 2001, 2000 and 1999, respectively. These sales and commissions were made
in the ordinary course of business and were made on terms no less favorable to
Titan than comparable sales and commissions to unaffiliated third parties. At
December 31, 2001, Titan had trade receivables of $4.4 million due from these
companies, as compared to $5.0 million at December 31, 2000. Titan had notes
receivable due from these companies of $7.4 million and $7.1 million at December
31, 2001, and 2000, respectively.
20. SEGMENT AND GEOGRAPHICAL INFORMATION
The Company has aggregated its operating units into reportable segments based on
its three customer markets: agricultural, earthmoving/construction and consumer.
These segments are based on the management approach, which is the internal
organization used by management in making operating decisions and assessing
performance. The accounting policies of the segments are the same as those
described in Note 1, "Summary of Significant Accounting Policies." Sales between
segments are priced at certain margins over the cost to manufacture and all
intersegment revenues are eliminated in consolidation. Segment external
revenues, expenses and income from operations are determined on the basis of the
results of operations of operating units' manufacturing facilities. Segment
assets are generally determined on the basis of the tangible assets located at
such operating units' manufacturing facilities and the intangible assets
associated with the acquisitions of such operating units. However, certain
operating units' goodwill and property, plant and equipment balances are carried
at the corporate level.
Titan is organized primarily on the basis of products being included in three
separate marketing units. The products within each reportable segment include
wheels, tires and wheel-tire assemblies. The Company has manufacturing and
distribution facilities worldwide.
F-20
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SEGMENT AND GEOGRAPHICAL INFORMATION (CONTINUED)
The table below presents information about certain revenues and expenses, income
(loss) from operations and segment assets used by the chief operating decision
maker of the Company as of and for the years ended December 31, 2001, 2000 and
1999 (in thousands):
EARTHMOVING/ RECONCILING CONSOLIDATED
2001 AGRICULTURAL CONSTRUCTION CONSUMER ITEMS TOTALS
---- ------------ ------------ -------- ----- ------
Revenues from external
customers $ 256,140 $ 156,033 $ 45,302 $ 0 $ 457,475
Intersegment revenues 140,013 56,269 21,440 0 217,722
Depreciation & amortization 17,206 10,706 3,048 6,303 (a) 37,263
(Loss) income from operations (2,168) 1,181 (5,486) (26,992)(b) (33,465)
Total assets 252,213 151,823 46,783 118,135 (c) 568,954
Capital expenditures 6,271 4,564 733 297 (d) 11,865
2000
----
Revenues from external
customers $ 283,058 $ 162,591 $ 97,420 $ 0 $ 543,069
Intersegment revenues 150,778 62,278 68,987 0 282,043
Depreciation & amortization 16,214 10,016 6,042 4,949 (a) 37,221
Income (loss) from operations 11,698 8,891 (565) (28,670)(b) (8,646)
Total assets 280,925 154,159 87,309 69,248 (c) 591,641
Capital expenditures 10,774 6,514 11,069 412 (d) 28,769
1999
----
Revenues from external
customers $ 254,754 $ 157,736 $ 175,533 $ 0 $ 588,023
Intersegment revenues 92,808 42,167 50,030 0 185,005
Depreciation & amortization 15,838 10,904 6,252 5,621 (a) 38,615
Income from operations 8,061 14,415 6,091 (24,797)(b) 3,770
Total assets 275,748 154,034 114,576 92,823 (c) 637,181
Capital expenditures 13,372 6,722 17,272 1,732 (d) 39,098
(a) Represents depreciation and amortization expense related to property, plant
and equipment and goodwill carried at the corporate level.
(b) Represents corporate expenses including those expenses referred to in (a).
(c) Represents property, plant and equipment and goodwill related to certain
acquisitions and other corporate assets.
(d) Represents corporate capital expenditures.
F-21
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SEGMENT AND GEOGRAPHICAL INFORMATION (CONTINUED)
The table below presents information by geographic area as of and for the years
ended December 31, 2001, 2000 and 1999 (in thousands):
UNITED OTHER CONSOLIDATED
2001 STATES ITALY COUNTRIES TOTALS
---- ------ ----- --------- ------
Revenues from external
customers $343,727 $60,023 $53,725 $457,475
Intersegment revenues 210,096 1,725 5,901 217,722
Long-lived assets 172,140 26,932 22,960 222,032
2000
----
Revenues from external
customers $425,233 $61,523 $56,313 $543,069
Intersegment revenues 276,012 1,525 4,706 282,243
Long-lived assets 197,700 29,223 24,333 251,256
1999
----
Revenues from external
customers $438,315 $66,829 $82,879 $588,023
Intersegment revenues 175,703 3,425 5,877 185,005
Long-lived assets 246,638 31,355 28,183 306,176
F-22
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. EARNINGS PER SHARE
(Loss) earnings per share for 2001, 2000 and 1999, are as follows (amounts in
thousands, except share and per share data):
NET WEIGHTED- PER SHARE
2001 INCOME (LOSS) AVERAGE SHARES AMOUNT
---- ------------- -------------- --------
Basic and diluted loss per share $ (34,789) 20,655,620 (a) $ (1.68)
========= ========== =======
2000
----
Basic and diluted earnings per share $ 4,525 20,693,534 (b) $ .22
========= ========== =======
1999
----
Basic and diluted loss per share $ (11,436) 20,751,776 (c) $ (.55)
========= ========== =======
(a) Effect of stock options has not been included as they were
anti-dilutive. Outstanding options excluded during 2001 amounted to
2,472 shares.
(b) Outstanding options were excluded from the computation of diluted
earnings per share because the option price exceeded the average
market price during the year.
(c) Effect of stock options has not been included as they were
anti-dilutive. Outstanding options excluded during 1999 amounted to
21,964 shares.
F-23
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. SUPPLEMENTARY DATA - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(All amounts in thousands, except per share data)
YEAR ENDED
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 DECEMBER 31
------------- -------- ------- ------------ ----------- -----------
2001
----
Net sales $136,047 $120,349 $100,519 $100,560 $457,475
Gross profit (loss) 15,448 6,876 2,841 (4,614) 20,551
Income (loss) before
extraordinary item 228 (6,598) (9,502) (21,531) (a) (37,403)
Net income (loss) 228 (3,984) (9,502) (21,531) (a) (34,789)
Per share amounts before
extraordinary item:
Basic $.01 $(.32) $(.46) $(1.04) (a) $(1.81)
Diluted .01 (.32) (.46) (1.04) (a) (1.81)
Per share amounts:
Basic .01 (.19) (.46) (1.04) (a) (1.68)
Diluted .01 (.19) (.46) (1.04) (a) (1.68)
2000
----
Net sales $164,327 $145,576 $119,798 $113,368 $543,069
Gross profit 20,896 10,434 4,326 4,489 40,145
Net income (loss) 1,062 18,875 (7,445) (7,967) 4,525
Per share amounts:
Basic $.05 $.91 $(.36) $(.38) $.22
Diluted .05 .91 (.36) (.38) .22
(a) Union strike settlement and other costs of $6.8 million included in the
quarter ended December 31, 2001.
F-24
TITAN INTERNATIONAL, INC.
SCHEDULE II - VALUATION RESERVES
BALANCE AT ADDITIONS TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
----------- ------- -------- ---------- -------
YEAR ENDED DECEMBER 31, 2001
Reserve deducted in the balance sheet
from the assets to which it applies
Allowance for doubtful accounts $3,764,000 $ 38,000 $ (279,000)(a) $3,523,000
========== ========== ============ ==========
YEAR ENDED DECEMBER 31, 2000
Reserve deducted in the balance sheet
from the assets to which it applies
Allowance for doubtful accounts $5,863,000 $ 97,000 $ (2,196,000)(b) $3,764,000
========== ========== ============ ==========
YEAR ENDED DECEMBER 31, 1999
Reserve deducted in the balance sheet
from the assets to which it applies
Allowance for doubtful accounts $6,200,000 $ 517,000 $ (854,000)(c) $5,863,000
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(a) Net of recoveries of $14,000.
(b) Includes allowance reductions of $589,000 relating to sale of assets.
(c) Net of recoveries of $36,000 and a reduction of $219,000 relating to the
acquisition of FUNSA.
S-1