10-Q 1 form10q.htm TITAN INTERNATIONAL, INC. FORM 10-Q 3-31-07 TITAN INTERNATIONAL, INC. FORM 10-Q 3-31-07




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
 
FORM 10-Q
 

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended: March 31, 2007

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-12936

TITAN INTERNATIONAL, INC.

(Exact name of Registrant as specified in its Charter)
Illinois
 
36-3228472
(State of Incorporation)
 
(I.R.S. Employer Identification No.)

2701 Spruce Street, Quincy, IL 62301
(Address of principal executive offices, including Zip Code)

(217) 228-6011
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer o   Accelerated filer x    Non-accelerated filer o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

   
Shares Outstanding at
Class
 
April 25, 2007
     
Common stock, no par value per share
 
26,939,769





TITAN INTERNATIONAL, INC.

TABLE OF CONTENTS



   
Page
Part I.
Financial Information
 
     
Item 1.
Financial Statements (Unaudited)
 
     
 
Consolidated Condensed Statements of Operations
for the Three Months Ended March 31, 2007 and 2006
1
     
 
Consolidated Condensed Balance Sheets as of
March 31, 2007, and December 31, 2006
2
     
 
Consolidated Condensed Statement of Changes in Stockholder’s
Equity for the Three Months Ended March 31, 2007
3
     
 
Consolidated Condensed Statements of Cash Flows
for the Three Months Ended March 31, 2007 and 2006
4
     
 
Notes to Consolidated Condensed Financial Statements
5-15
     
Item 2.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
16-26
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
26
     
Item 4.
Controls and Procedures
26
     
Part II.
Other Information
 
     
Item 1.
Legal Proceedings
27
     
Item 6.
Exhibits
27
     
 
Signatures
27


 






PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except earnings per share data)


   
Three months ended
 
   
March 31,
 
   
2007
 
2006
 
Net sales
 
$
226,278
 
$
182,577
 
Cost of sales
   
199,087
   
151,463
 
Gross profit
   
27,191
   
31,114
 
Selling, general & administrative expenses
   
11,284
   
12,281
 
Royalty expense
   
1,564
   
1,625
 
Income from operations
   
14,343
   
17,208
 
Interest expense
   
(5,749
)
 
(3,723
)
Noncash convertible debt conversion charge
   
(13,376
)
 
0
 
Other (expense) income
   
(185
)
 
836
 
(Loss) income before income taxes
   
(4,967
)
 
14,321
 
(Benefit) provision for income taxes
   
(2,484
)
 
5,728
 
Net (loss) income
 
$
(2,483
)
$
8,593
 
 
(Loss) earnings per common share:
             
Basic
 
$
(.12
)
$
.44
 
Diluted
   
(.12
)
 
.36
 
 
Average common shares outstanding:
             
Basic
   
20,814
   
19,584
 
Diluted
   
20,814
   
25,925
 
 

 
 
See accompanying Notes to Consolidated Condensed Financial Statements.

1


TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share data)



   
March 31,
 
December 31,
 
Assets
 
 2007
 
2006
 
Current assets
         
Cash and cash equivalents
 
$
38,970
 
$
33,412
 
Accounts receivable
   
121,313
   
73,882
 
Inventories
   
143,958
   
154,604
 
Deferred income taxes
   
32,928
   
29,234
 
Prepaid and other current assets
   
17,551
   
18,801
 
Total current assets
   
354,720
   
309,933
 
               
Property, plant and equipment, net
   
181,978
   
184,616
 
Investment in Titan Europe Plc
   
63,988
   
65,881
 
Goodwill
   
11,702
   
11,702
 
Other assets
   
10,746
   
12,994
 
Total assets
 
$
623,134
 
$
585,126
 
               
Liabilities and Stockholders’ Equity
             
Current liabilities
             
Short-term debt
 
$
0
 
$
98
 
Accounts payable
   
50,158
   
25,884
 
Other current liabilities
   
47,909
   
36,942
 
Total current liabilities
   
98,067
   
62,924
 
Long-term debt
   
200,000
   
291,266
 
Deferred income taxes
   
27,261
   
27,924
 
Other long-term liabilities
   
15,700
   
15,835
 
Total liabilities
   
341,028
   
397,949
 
               
Stockholders’ equity
             
Common stock (no par, 60,000,000 shares authorized, 30,577,356 issued)
   
30
   
30
 
Additional paid-in capital
   
295,580
   
258,071
 
Retained earnings
   
34,185
   
36,802
 
Treasury stock (at cost, 3,854,244 and 10,678,454 shares, respectively)
   
(34,997
)
 
(96,264
)
Accumulated other comprehensive loss
   
(12,692
)
 
(11,462
)
Total stockholders’ equity
   
282,106
   
187,177
 
Total liabilities and stockholders’ equity
 
$
623,134
 
$
585,126
 


 

See accompanying Notes to Consolidated Condensed Financial Statements.

2


TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Amounts in thousands, except share data)



   
 
Number of common shares
 
 
 
Common Stock
 
 
Additional
paid-in
capital
 
 
 
Retained earnings
 
 
 
Treasury
stock
 
Accumulated other comprehensive income (loss)
 
 
 
 
Total
 
                               
Balance January 1, 2007
   
19,898,902
 
$
30
 
$
258,071
 
$
36,802
 
$
(96,264
)
$
(11,462
)
$
187,177
 
Comprehensive income:
                                           
Net loss
                     
(2,483
)
             
(2,483
)
Unrealized loss on investment, net of tax
                                 
(1,230
)
 
(1,230
)
Comprehensive income
                     
(2,483
)
       
(1,230
)
 
(3,713
)
Dividends paid on common stock
                     
(134
)
             
(134
)
Note conversion
   
6,577,200
         
35,240
         
59,049
         
94,289
 
Exercise of stock options
   
242,810
         
2,222
         
2,180
         
4,402
 
Issuance of treasury stock under 401(k) plan
   
4,200
         
47
         
38
         
85
 
Balance March 31, 2007
   
26,723,112
 
$
30
 
$
295,580
 
$
34,185
 
$
(34,997
)
$
(12,692
)
$
282,106
 


 


See accompanying Notes to Consolidated Condensed Financial Statements.

3


TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)


   
Three months ended
 
   
March 31,
 
   
2007
 
2006
 
Cash flows from operating activities:
             
Net (loss) income
 
$
(2,483
)
$
8,593
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   
7,465
   
6,243
 
Deferred income tax provision
   
(2,845
)
 
5,620
 
Noncash convertible debt conversion charge
   
13,376
   
0
 
Excess tax benefit from stock options exercised
   
(849
)
 
0
 
(Increase) decrease in current assets:
             
Accounts receivable
   
(47,431
)
 
(49,214
)
Inventories
   
10,646
   
(16,986
)
Prepaid and other current assets
   
1,250
   
(1,605
)
Increase (decrease) in current liabilities:
             
Accounts payable
   
24,274
   
36,954
 
Other current liabilities
   
11,891
   
16,397
 
Other, net
   
365
   
(718
)
Net cash provided by operating activities
   
15,659
   
5,284
 
               
Cash flows from investing activities:
             
Capital expenditures, net
   
(4,064
)
 
(1,515
)
Other
   
52
   
36
 
Net cash used for investing activities
   
(4,012
)
 
(1,479
)
               
Cash flows from financing activities:
             
Payment on revolving credit facility, net
   
0
   
(2,200
)
Payment on debt
   
(10,164
)
 
(3,279
)
Proceeds from exercise of stock options
   
3,553
   
1,745
 
Excess tax benefit from stock options exercised
   
849
   
0
 
Payment of financing fees
   
(313
)
 
0
 
Dividends paid
   
(99
)
 
(98
)
Other
   
85
   
6
 
Net cash used for financing activities
   
(6,089
)
 
(3,826
)
               
Net increase (decrease) in cash and cash equivalents
   
5,558
   
(21
)
               
Cash and cash equivalents at beginning of period
   
33,412
   
592
 
               
Cash and cash equivalents at end of period
 
$
38,970
 
$
571
 



 
See accompanying Notes to Consolidated Condensed Financial Statements.



 
4

TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)


1. ACCOUNTING POLICIES
 
In the opinion of Titan International, Inc. (“Titan” or the “Company”), the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are normal and recurring in nature and necessary to present fairly the Company’s financial position as of March 31, 2007, and the results of operations and cash flows for the three months ended March 31, 2007 and 2006.

Accounting policies have continued without significant change and are described in the Summary of Significant Accounting Policies contained in the Company’s 2006 Annual Report on Form 10-K. These interim financial statements have been prepared pursuant to the Securities and Exchange Commission’s rules for Form 10-Q’s and, therefore, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2006 Annual Report on Form 10-K.

Reclassification
Certain amounts from prior years have been reclassified to conform to the current year’s presentation.
 
2. ACQUISITION OF CONTINENTAL’S OTR ASSETS
 
On July 31, 2006, Titan Tire Corporation of Bryan, a subsidiary of Titan International, Inc., acquired the off-the-road (OTR) tire assets of Continental Tire North America, Inc. (Continental) in Bryan, Ohio. Titan Tire Corporation of Bryan purchased the assets of Continental’s OTR tire facility for approximately $53 million in cash proceeds. The assets purchased included Continental’s OTR plant, property and equipment located in Bryan, Ohio, inventory and other current assets. The acquisition included an agreement with Continental to use the Continental and General trademarks on OTR tires. In addition, the Company recorded intangibles related to the acquisition as noncurrent assets and assumed warranty liabilities. This acquisition expanded Titan’s product offering into larger earthmoving, construction and mining tires and added the manufacturing capacity of the Bryan facility.

The following unaudited pro forma financial information gives effect to the acquisition of the Continental OTR assets as if the acquisition had taken place on January 1, 2006. The pro forma information for the Bryan, Ohio, facility was derived from a carve-out of Continental’s OTR historical accounting records.

Pro forma information for three months ended (in thousands, except per share data):
   
March 31,
2007 (Actual)
 
March 31,
2006 (Pro forma)
 
Net sales
 
$
226,278
 
$
217,867
 
Net (loss) income
   
(2,483
)
 
11,990
 
Diluted earnings per share
   
(.12
)
 
.49
 

The pro forma information is presented for illustrative purposes only and may not be indicative of the results that would have been obtained had the acquisition of assets actually occurred on January 1, 2006, nor is it necessarily indicative of Titan’s future consolidated results of operations or financial position.

5

TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
 

3. ACCOUNTS RECEIVABLE
 
The Company had net accounts receivable of $121.3 million and $73.9 million at March 31, 2007, and December 31, 2006, respectively. These amounts are net of allowance for doubtful accounts of $5.4 million at March 31, 2007, and $4.8 million at December 31, 2006.
 
4. INVENTORIES

Inventories consisted of the following (in thousands):
   
March 31,
 
December 31,
 
   
2007
 
2006
 
Raw materials
 
$
54,859
 
$
57,814
 
Work-in-process
   
17,127
   
16,738
 
Finished goods
   
76,176
   
84,863
 
     
148,162
   
159,415
 
Reduction to LIFO basis
   
(4,204
)
 
(4,811
)
   
$
143,958
 
$
154,604
 

Inventories were $144.0 million and $154.6 million at March 31, 2007, and December 31, 2006, respectively. Cost is determined using the first-in, first-out (FIFO) method for approximately 74% of inventories and the last-in, first-out (LIFO) method for approximately 26% of the inventories at both March 31, 2007, and December 31, 2006. Included in the inventory balances were reserves for slow-moving and obsolete inventory of $3.3 million and $3.2 million at March 31, 2007, and December 31, 2006, respectively.
 
5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):

   
March 31,
 
December 31,
 
   
2007
 
2006
 
Land and improvements
 
$
3,088
 
$
3,088
 
Buildings and improvements
   
78,261
   
78,230
 
Machinery and equipment
   
270,786
   
269,730
 
Tools, dies and molds
   
52,251
   
52,205
 
Construction-in-process
   
7,184
   
4,587
 
     
411,570
   
407,840
 
Less accumulated depreciation
   
(229,592
)
 
(223,224
)
   
$
181,978
 
$
184,616
 

Property, plant and equipment, net were $182.0 million and $184.6 million at March 31, 2007, and December 31, 2006, respectively. Depreciation for the three months ended March 31, 2007 and 2006, totaled $6.6 million and $5.7 million, respectively.

6

TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
 

6. INVESTMENT IN TITAN EUROPE PLC

Investment in unconsolidated affiliate consisted of the following (in thousands):
   
March 31,
 
December 31,
 
   
2007
 
2006
 
Investment in Titan Europe Plc
 
$
63,988
 
$
65,881
 

The Company owns a 17.3% ownership interest in Titan Europe Plc. In accordance with SFAS No. 115, the Company records the Titan Europe Plc investment as an available-for-sale security and reports the investment at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders’ equity. The fair value of the Company’s investment in Titan Europe Plc was $64.0 million at March 31, 2007, and $65.9 million at December 31, 2006. Titan Europe Plc is publicly traded on the AIM market in London, England.
 
7. GOODWILL

The carrying amount of goodwill by segment consisted of the following (in thousands):
   
March 31,
 
December 31,
 
   
2007
 
2006
 
Agricultural segment
 
$
6,912
 
$
6,912
 
Earthmoving/construction segment
   
3,552
   
3,552
 
Consumer segment
   
1,238
   
1,238
 
   
$
11,702
 
$
11,702
 

The Company reviews goodwill to assess recoverability from future operations during the fourth quarter of each annual reporting period, and whenever events and circumstances indicate that the carrying values may not be recoverable. No goodwill charges were recorded in the first quarter of 2007 or 2006. There can be no assurance that future goodwill tests will not result in a charge to earnings.
 
8. LONG-TERM DEBT

Long-term debt consisted of the following (in thousands):
   
March 31,
 
December 31,
 
   
2007
 
2006
 
Senior unsecured notes
 
$
200,000
 
$
200,000
 
Senior unsecured convertible notes
   
0
   
81,200
 
Industrial revenue bonds and other
   
0
   
10,164
 
     
200,000
   
291,364
 
Less: Amounts due within one year
   
0
   
98
 
   
$
200,000
 
$
291,266
 

Aggregate maturities of long-term debt at March 31, 2007, were as follows (in thousands):
 
April 1 - December 31, 2007
 
$
0
 
2008
   
0
 
2009
   
0
 
2010
   
0
 
2011
   
0
 
Thereafter
   
200,000
 
   
$
200,000
 

7

TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
 

Senior unsecured notes
In December 2006, the Company closed its offering of $200 million 8% senior unsecured notes. The notes were sold at par and are due January 2012. Titan used the net proceeds from this offering to repay outstanding existing debt, excluding the 5.25 percent senior unsecured convertible notes, and for general corporate purposes.

Revolving credit facility
The Company’s $125 million revolving credit facility with agent LaSalle Bank National Association has a 2009 termination date and is collateralized by a first priority security interest in certain assets of Titan and its domestic subsidiaries. In February 2007, the Company amended the revolving credit facility. The amendment extended the termination date to October 2009 (previously October 2008). The amendment also lowered borrowing rates, which will be based on a pricing grid that varies with amount borrowed. The borrowings under the facility will bear interest at a floating rate of LIBOR plus 1% to 2% (previously 2.75%). The amendment allows the Company the ability to request an increase from the current $125 million up to $250 million of availability. The facility contains certain financial covenants, restrictions and other customary affirmative and negative covenants. The Company was in compliance with these covenants and restrictions as of March 31, 2007.

Senior unsecured convertible notes conversion
In January 2007, the Company filed a registration statement relating to an offer to the holders of its 5.25% senior unsecured convertible notes due 2009 to convert their notes into Titan’s common stock at an increased conversion rate (the “Offer”). Per the Offer, each $1,000 principal amount of notes was convertible into 81.0000 shares of common stock, which is equivalent to a conversion price of approximately $12.35 per share. Prior to the Offer, each $1,000 principal amount of notes was convertible into 74.0741 shares of common stock, which was equivalent to a conversion price of approximately $13.50 per share.

The registration statement relating to the shares of common stock to be offered was declared effective on February 21, 2007. On March 21, 2007, the Company announced 100% acceptance of the conversion offer and the $81,200,000 of accepted notes were converted into 6,577,200 shares of Titan common stock. Titan recognized a noncash charge of $13.4 million in connection with this exchange in accordance with SFAS No. 84, “Induced Conversions of Convertible Debt.”

Industrial revenue bonds and other
Other debt primarily consisted of industrial revenue bonds, loans from local and state entities, and other long-term notes. All industrial revenue bonds and other debt were fully paid off in the first quarter of 2007.
 
9. WARRANTY

The Company provides limited warranties on workmanship on its products in all market segments. The majority of the Company’s products have a limited warranty that ranges from zero to ten years, with certain products being prorated after the first year. The Company calculates a provision for warranty expense based on past warranty experience. The warranty amount increases in the first quarter of 2007 were related to the Company’s higher sales levels. Warranty accruals are included as a component of other current liabilities on the Consolidated Condensed Balance Sheets. Changes in the warranty liability consisted of the following (in thousands):

   
2007
 
2006
 
Warranty liability, January 1
 
$
4,688
 
$
1,838
 
Provision for warranty liabilities
   
2,129
   
1,604
 
Warranty payments made
   
(1,619
)
 
(1,003
)
Warranty liability, March 31
 
$
5,198
 
$
2,439
 


8

TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
 

10. EMPLOYEE BENEFIT PLANS

The Company has two frozen defined benefit pension plans and one defined benefit plan that purchased a final annuity settlement in 2002. The Company also sponsors four 401(k) retirement savings plans.

The components of net periodic pension cost consisted of the following (in thousands):
   
Three months ended March 31,
 
   
2007
 
2006
 
Interest cost
 
$
941
 
$
983
 
Expected return on assets
   
(1,256
)
 
(1,168
)
Amortization of unrecognized prior service cost
   
34
   
34
 
Amortization of unrecognized deferred taxes
   
(14
)
 
(14
)
Amortization of net unrecognized loss
   
398
   
462
 
Net periodic pension cost
 
$
103
 
$
297
 

During the first quarter of 2007, the Company contributed $0.9 million to the frozen defined benefit pension plans. In April 2007, the Company contributed Titan common stock with an approximate value of $5 million to the pension plans. The Company anticipates making no further contributions to these plans during the remainder of 2007.
 
11. LEASE COMMITMENTS

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

At March 31, 2007, future minimum commitments under noncancellable operating leases with initial or remaining terms in excess of one year were as follows (in thousands):
April 1 - December 31, 2007
 
$
2,125
 
2008
   
1,554
 
2009
   
960
 
2010
   
658
 
2011
   
347
 
Thereafter
   
0
 
Total future minimum lease payments
 
$
5,644
 


9

TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
 

12. SEGMENT INFORMATION

The table below presents information about certain revenues and income from operations used by the chief operating decision maker of the Company for the three months ended March 31, 2007 and 2006 (in thousands):

   
Three months ended March 31,
 
   
2007
 
2006
 
Revenues from external customers
             
Agricultural
 
$
135,296
 
$
124,427
 
Earthmoving/construction
   
75,118
   
31,801
 
Consumer
   
15,864
   
26,349
 
Consolidated totals
 
$
226,278
 
$
182,577
 
               
Income from Operations
             
Agricultural
 
$
8,038
 
$
19,307
 
Earthmoving/construction
   
13,875
   
5,227
 
Consumer
   
848
   
1,020
 
Reconciling items (a)
   
(8,418
)
 
(8,346
)
Consolidated totals
 
$
14,343
 
$
17,208
 

 
Assets by segment were as follows (in thousands):
   
March 31,
 
December 31,
 
Total Assets
 
2007
 
2006
 
Agricultural segment
 
$
280,535
 
$
273,787
 
Earthmoving/construction segment
   
187,028
   
145,964
 
Consumer segment
   
26,155
   
22,678
 
Reconciling items (b)
   
129,416
   
142,697
 
Consolidated totals
 
$
623,134
 
$
585,126
 
               

(a)  
Represents corporate expenses and depreciation and amortization expense related to property, plant and equipment carried at the corporate level.

(b)  
Represents property, plant and equipment and other corporate assets.
 
13. ROYALTY EXPENSE

The December 2005 Goodyear North American farm tire asset acquisition included a license agreement with The Goodyear Tire & Rubber Company to manufacture and sell certain off-highway tires in North America. Royalty expenses recorded were $1.6 million for the first quarter of both 2007 and 2006.

10

TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
 

14. NONCASH CONVERTIBLE DEBT CONVERSION CHARGE

In January 2007, the Company filed a registration statement relating to an offer to the holders of its 5.25% senior unsecured convertible notes due 2009 to convert their notes into Titan’s common stock at an increased conversion rate (the “Offer”). Per the Offer, each $1,000 principal amount of notes was convertible into 81.0000 shares of common stock, which is equivalent to a conversion price of approximately $12.35 per share. Prior to the Offer, each $1,000 principal amount of notes was convertible into 74.0741 shares of common stock, which was equivalent to a conversion price of approximately $13.50 per share. The registration statement relating to the shares of common stock to be offered was declared effective on February 21, 2007. On March 21, 2007, the Company announced 100% acceptance of the conversion offer and the $81,200,000 of accepted notes were converted into 6,577,200 shares of Titan common stock.

The Company recognized a noncash charge of $13.4 million in connection with this exchange in accordance with Statement of Financial Accounting Standards (SFAS) No. 84, “Induced Conversions of Convertible Debt.” This charge does not reflect $1.0 million of interest previously accrued on the notes. The shares issued for the conversion were issued out of treasury shares. The exchange resulted in a decrease in treasury stock of $59.0 million and an increase to additional paid-in capital of approximately $35.2 million. Stockholder’s equity increased by $94.3 million in total as a result of this exchange.
 
15. OTHER INCOME

Other income consisted of the following (in thousands):
   
Three months ended March 31,
 
   
2007
 
2006
 
Interest income
 
$
518
 
$
1,133
 
Debt termination expense
   
(675
)
 
0
 
Other expense
   
(28
)
 
(297
)
   
$
(185
)
$
836
 

Debt termination expense of $0.7 million related to fees and expenses for the conversion of the Company’s 5.25% senior unsecured convertible notes.
 
16. INCOME TAXES

The Company recorded income tax benefit of $2.5 million and income tax expense of $5.7 million for the quarters ended March 31, 2007 and 2006, respectively. The Company’s effective income tax rate was 50% and 40% for the three months ended March 31, 2007 and 2006, respectively. The Company’s income tax expense and rate differs from the amount of income tax determined by applying the U.S. Federal income tax rate to pre-tax income primarily as a result of the $13.4 million noncash charge taken in connection with the Company’s convertible debt. This noncash charge is not deductible for income tax purposes.

The Company has applied the provisions of FIN 48 for the period ending March 31, 2007. Titan has identified its federal tax return and its Illinois state tax return as “major” tax jurisdictions. The Company is subject to (i) federal tax examinations for periods 2003 to 2006 and (ii) Illinois state income tax examinations for years 2005 and 2006.
 
17. COMPREHENSIVE INCOME

Comprehensive loss for the first quarter of 2007 totaled $(3.7) million, which included net loss of $(2.5) million and unrealized loss on investments of $(1.2) million, compared to comprehensive income of $11.8 million for the first quarter of 2006, which included net income of $8.6 million and unrealized gain on investments of $3.2 million.

11

TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
 

18. EARNINGS PER SHARE

Earnings per share (EPS) are as follows (amounts in thousands, except per share data):
   
Three months ended,
 
   
March 31, 2007
 
March 31, 2006
 
   
 Net Loss 
 
 Weighted average shares
 
 
Per share amount
 
 
Net  Income
 
 Weighted average shares
 
 
Per share amount
 
Basic EPS
 
$
(2,483
)
 
20,814
 
$
(.12
 
)
$
8,593
   
19,584
 
$
.44
 
Effect of stock options
   
0
   
0
         
0
   
326
       
Effect of convertible notes
   
0
   
0
         
719
   
6,015
       
Diluted EPS
 
$
(2,483
)
 
20,814
 
$
 
(.12
 
)
$
9,312
   
25,925
 
$
 
.36
 
 
As a result of the net loss for the three months ended March 31, 2007, the effect of stock options and convertible notes has been excluded, as the effect would have been antidilutive. The weighted average share amount excluded was 399,000 shares for stock options and 5,280,000 shares for convertible notes. For the three months ended March 31, 2006, the impact of stock options with exercise prices greater than the average market price of the Company’s common shares has been excluded, as the effect would have been antidilutive.
 
19. 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 at this time that none of these actions, individually or in the aggregate, will have a material adverse affect on the financial condition, results of operations or cash flows of the Company. However, due to the difficult nature of predicting future legal claims, the Company cannot anticipate or predict the material adverse effect on its financial condition, results of operations or cash flows as a result of efforts to comply with or its liabilities pertaining to legal judgments.
 
20. RECENTLY ISSUED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards Number 157
In September 2006, Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” was issued. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is evaluating the effect the adoption of this standard will have on its consolidated financial position, results of operations and cash flows.

Statement of Financial Accounting Standards Number 159
In February 2007, SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” was issued. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective for fiscal years beginning after November 15, 2007. The Company is evaluating the effect the adoption of this standard will have on its consolidated financial position, results of operations and cash flows.

12

TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
 

21. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION

The Company’s $200 million 8% senior unsecured notes are guaranteed by each of Titan’s current and future wholly owned domestic subsidiaries other than its immaterial subsidiaries (subsidiaries with total assets less than $250,000 and total revenues less than $250,000.) The note guarantees are joint and several obligations of the guarantors. Non-guarantors consist primarily of foreign subsidiaries of the Company, which are organized outside the United States of America. The following condensed consolidating financial statements are presented using the equity method of accounting.

   
Consolidating Condensed Statements of Operations
 
(Amounts in thousands)
     
   
For the Three Months Ended March 31, 2007
 
   
 
Titan
     
 
Non-
         
   
Intl., Inc.
 
Guarantor
 
Guarantor
         
   
(Parent)
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Consolidated
 
Net sales
 
$
0
 
$
226,278
 
$
0
 
$
0
 
$
226,278
 
Cost of sales
   
384
   
198,703
   
0
   
0
   
199,087
 
Gross (loss) profit
   
(384
)
 
27,575
   
0
   
0
   
27,191
 
Selling, general and administrative expenses
   
3,506
   
7,703
   
75
   
0
   
11,284
 
Royalty expense
   
0
   
1,564
   
0
   
0
   
1,564
 
(Loss) income from operations
   
(3,890
)
 
18,308
   
(75
)
 
0
   
14,343
 
Interest expense
   
(5,746
)
 
(3
)
 
0
   
0
   
(5,749
)
Intercompany interest income (expense)
   
1,134
   
(1,406
)
 
272
   
0
   
0
 
Noncash convertible debt conversion charge
   
(13,376
)
 
0
   
0
   
0
   
(13,376
)
Other (expense) income
   
(226
)
 
42
   
(1
)
 
0
   
(185
)
(Loss) income before income taxes
   
(22,104
)
 
16,941
   
196
   
0
   
(4,967
)
(Benefit) provision for income taxes
   
(11,052
)
 
8,470
   
98
   
0
   
(2,484
)
Equity in earnings of subsidiaries
   
8,569
   
0
   
0
   
(8,569
)
 
0
 
Net (loss) income
 
$
(2,483
)
$
8,471
 
$
98
 
$
(8,569
)
$
(2,483
)


   
For the Three Months Ended March 31, 2006
 
   
 
Titan
     
 
Non-
         
   
Intl., Inc.
 
Guarantor
 
Guarantor
         
   
(Parent)
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Consolidated
 
Net sales
 
$
0
 
$
182,577
 
$
0
 
$
0
 
$
182,577
 
Cost of sales
   
18
   
151,445
   
0
   
0
   
151,463
 
Gross (loss) profit
   
(18
)
 
31,132
   
0
   
0
   
31,114
 
Selling, general and administrative expenses
   
4,826
   
7,409
   
46
   
0
   
12,281
 
Royalty expense
   
0
   
1,625
   
0
   
0
   
1,625
 
(Loss) income from operations
   
(4,844
)
 
22,098
   
(46
)
 
0
   
17,208
 
Interest expense
   
(3,516
)
 
(207
)
 
0
   
0
   
(3,723
)
Intercompany interest income (expense)
   
1,116
   
(1,309
)
 
193
   
0
   
0
 
Other income
   
691
   
22
   
123
   
0
   
836
 
(Loss) income before income taxes
   
(6,553
)
 
20,604
   
270
   
0
   
14,321
 
(Benefit) provision for income taxes
   
(2,621
)
 
8,240
   
109
   
0
   
5,728
 
Equity in earnings of subsidiaries
   
12,525
   
0
   
0
   
(12,525
)
 
0
 
Net income
 
$
8,593
 
$
12,364
 
$
161
 
$
(12,525
)
$
8,593
 


13

TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
 


   
Consolidating Condensed Balance Sheets
 
(Amounts in thousands)
                     
   
March 31, 2007
 
 
   
Titan
 
 
 
 
 
Non-
 
 
 
 
 
 
 
 
 
Intl., Inc.
 
 
Guarantor
 
 
Guarantor
 
 
 
 
 
 
 
 
 
(Parent)
 
 
Subsidiaries
 
 
Subsidiaries
 
 
Eliminations
 
 
Consolidated
 
Assets
                               
Cash and cash equivalents
 
$
38,433
 
$
35
 
$
502
 
$
0
 
$
38,970
 
Accounts receivable
   
(454
)
 
121,767
   
0
   
0
   
121,313
 
Inventories
   
0
   
143,958
   
0
   
0
   
143,958
 
Prepaid and other current assets
   
33,659
   
16,794
   
26
   
0
   
50,479
 
   Total current assets
   
71,638
   
282,554
   
528
   
0
   
354,720
 
Property, plant and equipment, net
   
1,405
   
180,573
   
0
   
0
   
181,978
 
Investment in Titan Europe Plc
   
23,641
   
0
   
40,347
   
0
   
63,988
 
Investment in subsidiaries
   
20,876
   
0
   
0
   
(20,876
)
 
0
 
Other assets
   
7,181
   
15,267
   
0
   
0
   
22,448
 
 Total assets
 
$
124,741
 
$
478,394
 
$
40,875
 
$
(20,876
)
$
623,134
 
                                 
Liabilities and Stockholders’ Equity
                               
Accounts payable
 
$
1,451
 
$
48,707
 
$
0
 
$
0
 
$
50,158
 
Other current liabilities
   
453
   
47,404
   
52
   
0
   
47,909
 
   Total current liabilities
   
1,904
   
96,111
   
52
   
0
   
98,067
 
Long-term debt
   
200,000
   
0
   
0
   
0
   
200,000
 
Other long-term liabilities
   
29,968
   
12,976
   
17
   
0
   
42,961
 
Intercompany accounts
   
(389,237
)
 
379,486
   
9,751
   
0
   
0
 
Stockholders’ equity
   
282,106
   
(10,179
)
 
31,055
   
(20,876
)
 
282,106
 
Total liabilities and stockholders’ equity
 
$
124,741
 
$
478,394
 
$
40,875
 
$
(20,876
)
$
623,134
 


   
December 31, 2006
 
   
Titan
     
Non-
         
   
Intl., Inc.
 
Guarantor
 
Guarantor
         
   
(Parent)
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Consolidated
 
Assets
                               
Cash and cash equivalents
 
$
33,220
 
$
69
 
$
123
 
$
0
 
$
33,412
 
Accounts receivable
   
(38
)
 
73,920
   
0
   
0
   
73,882
 
Inventories
   
0
   
154,604
   
0
   
0
   
154,604
 
Prepaid and other current assets
   
3,937
   
44,036
   
62
   
0
   
48,035
 
  Total current assets
   
37,119
   
272,629
   
185
   
0
   
309,933
 
Property, plant and equipment, net
   
1,279
   
183,337
   
0
   
0
   
184,616
 
Investment in Titan Europe Plc
   
25,534
   
0
   
40,347
   
0
   
65,881
 
Investment in subsidiaries
   
14,517
   
0
   
0
   
(14,517
)
 
0
 
Other assets
   
8,802
   
15,894
   
0
   
0
   
24,696
 
Total assets
 
$
87,251
 
$
471,860
 
$
40,532
 
$
(14,517
)
$
585,126
 
                                 
Liabilities and Stockholders’ Equity
                               
Accounts payable
 
$
1,058
 
$
24,826
 
$
0
 
$
0
 
$
25,884
 
Other current liabilities
   
3,437
   
33,607
   
(11
)
 
7
   
37,040
 
  Total current liabilities
   
4,495
   
58,433
   
(11
)
 
7
   
62,924
 
Long-term debt
   
290,700
   
566
   
0
   
0
   
291,266
 
Other long-term liabilities
   
10,896
   
30,393
   
2,470
   
0
   
43,759
 
Intercompany accounts
   
(406,017
)
 
398,856
   
7,168
   
(7
)
 
0
 
Stockholders’ equity
   
187,177
   
(16,388
)
 
30,905
   
(14,517
)
 
187,177
 
Total liabilities and stockholders’ equity
 
$
87,251
 
$
471,860
 
$
40,532
 
$
(14,517
)
$
585,126
 


14

TITAN INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
 


   
Consolidating Condensed Statements of Cash Flows
 
(Amounts in thousands)
                 
   
For the Three Months Ended March 31, 2007
 
   
 
Titan
     
 
Non-
     
   
Intl., Inc.
 
Guarantor
 
Guarantor
     
   
(Parent)
 
Subsidiaries
 
Subsidiaries
 
Consolidated
 
Net cash provided by (used for) operating activities
 
$
16,050
 
$
(640
)
$
249
 
$
15,659
 
                           
Cash flows from investing activities:
                         
Capital expenditures
   
(212
)
 
(3,852
)
 
0
   
(4,064
)
Other, net
   
0
   
52
   
0
   
52
 
 Net cash used for investing activities
   
(212
)
 
(3,800
)
 
0
   
(4,012
)
                           
Cash flows from financing activities:
                         
Payment of debt
   
(9,500
)
 
(664
)
 
0
   
(10,164
)
Proceeds from exercise of stock options
   
3,553
   
0
   
0
   
3,553
 
Excess tax benefit from stock options exercised
   
849
   
0
   
0
   
849
 
Payment of financing fees
   
(313
)
 
0
   
0
   
(313
)
Intercompany activities
   
(5,200
)
 
5,070
   
130
   
0
 
Other, net
   
(14
)
 
0
   
0
   
(14
)
 Net cash (used for) provided by financing activities
   
(10,625
)
 
4,406
   
130
   
(6,089
)
                           
Net increase (decrease) in cash and cash equivalents
   
5,213
   
(34
)
 
379
   
5,558
 
Cash and cash equivalents, beginning of period
   
33,220
   
69
   
123
   
33,412
 
Cash and cash equivalents, end of period
 
$
38,433
 
$
35
 
$
502
 
$
38,970
 


   
For the Three Months Ended March 31, 2006
 
   
Titan
     
Non-
     
   
Intl., Inc.
 
Guarantor
 
Guarantor
     
   
(Parent)
 
Subsidiaries
 
Subsidiaries
 
Consolidated
 
Net cash provided by operating activities
 
$
14,265
 
$
(9,331
)
$
350
 
$
5,284
 
                           
Cash flows from investing activities:
                         
Capital expenditures
   
0
   
(1,515
)
 
0
   
(1,515
)
Other, net
   
0
   
36
   
0
   
36
 
 Net cash used for investing activities
   
0
   
(1,479
)
 
0
   
(1,479
)
                           
Cash flows from financing activities:
                         
Payment of debt
   
0
   
(3,279
)
 
0
   
(3,279
)
Proceeds on revolving credit facility, net
   
(2,200
)
 
0
   
0
   
(2,200
)
Proceeds from exercise of stock options
   
1,745
   
0
   
0
   
1,745
 
Intercompany activities
   
(13,751
)
 
14,072
   
(321
)
 
0
 
Other, net
   
(92
)
 
0
   
0
   
(92
)
 Net cash (used for) provided by financing activities
   
(14,298
)
 
10,793
   
(321
)
 
(3,826
)
                           
Net (decrease) increase in cash and cash equivalents
   
(33
)