10-Q 1 twi0930201310-q.htm 10-Q TWI 09.30.2013 10-Q


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: September 30, 2013
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  þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No þ

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
 
October 21, 2013
 
 
 
Common stock, no par value per share
 
53,550,422




TITAN INTERNATIONAL, INC.

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(All amounts in thousands, except per share data)
 
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net sales
$
497,510

 
$
404,719

 
$
1,669,188

 
$
1,327,040

Cost of sales
435,004

 
337,558

 
1,423,276

 
1,084,430

Gross profit
62,506

 
67,161

 
245,912

 
242,610

Selling, general and administrative expenses
38,731

 
25,497

 
124,827

 
79,742

Research and development expenses
2,778

 
1,759

 
8,281

 
4,456

Royalty expense
3,942

 
3,739

 
10,960

 
8,740

Supply agreement termination income

 

 

 
(26,134
)
Income from operations
17,055

 
36,166

 
101,844

 
175,806

Interest expense
(12,414
)
 
(6,187
)
 
(35,924
)
 
(18,699
)
Convertible debt conversion charge

 

 
(7,273
)
 

Gain on earthquake insurance recovery

 

 
22,451

 

Other income
8,722

 
2,439

 
7,712

 
6,163

Income before income taxes
13,363

 
32,418

 
88,810

 
163,270

Provision for income taxes
5,711

 
13,589

 
38,913

 
64,722

Net income
7,652

 
18,829

 
49,897

 
98,548

Net loss attributable to noncontrolling interests
(441
)
 
(750
)
 
(888
)
 
(506
)
Net income attributable to Titan
$
8,093

 
$
19,579

 
$
50,785

 
$
99,054

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
$
.15

 
$
.46

 
$
.96

 
$
2.35

Diluted
$
.15

 
$
.39

 
$
.89

 
$
1.92

Average common shares and equivalents outstanding:
 
 
 

 
 
 
 

Basic
53,440

 
42,180

 
52,900

 
42,148

Diluted
59,391

 
53,326

 
59,444

 
53,315

 
 
 
 
 
 
 
 
Dividends declared per common share:
$
.005

 
$
.005

 
$
.015

 
$
.015

 










See accompanying Notes to Consolidated Financial Statements.

1



TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(All amounts in thousands)

 
Three months ended
 
September 30,
 
2013
 
2012
Net income
$
7,652

 
$
18,829

Unrealized loss on investments, net of tax of $0 and $208, respectively

 
(353
)
Currency translation adjustment, net
854

 
(1,247
)
Pension liability adjustments, net of tax of $557 and $491, respectively
969

 
836

Comprehensive income
9,475

 
18,065

Net comprehensive loss attributable to noncontrolling interests
(85
)
 
(1,104
)
Comprehensive income attributable to Titan
$
9,560

 
$
19,169



 
 
 
 
 
Nine months ended
 
September 30,
 
2013
 
2012
Net income
$
49,897

 
$
98,548

Unrealized loss on investments, net of tax of $0 and $9, respectively
(3
)
 
(16
)
Currency translation adjustment, net
(24,513
)
 
(5,816
)
Pension liability adjustments, net of tax of $1,670 and $1,473, respectively
2,990

 
2,508

Comprehensive income
28,371

 
95,224

Net comprehensive loss attributable to noncontrolling interests
(3,243
)
 
(859
)
Comprehensive income attributable to Titan
$
31,614

 
$
96,083






















See accompanying Notes to Consolidated Financial Statements.

2



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

 
September 30,

December 31,
Assets
2013

2012
Current assets
 

 
Cash and cash equivalents
$
447,456


$
189,114

  Accounts receivable, net
290,247


297,798

Inventories
375,893


366,385

Deferred income taxes
33,133


50,558

Prepaid and other current assets
97,292


92,268

Total current assets
1,244,021


996,123

Property, plant and equipment, net
561,706


568,344

Goodwill
22,534


24,941

Deferred income taxes
7,241


8,383

Other assets
112,259


112,444

Total assets
$
1,947,761


$
1,710,235

Liabilities and Equity
 


 

Current liabilities
 


 

Short-term debt
$
104,884


$
145,801

Accounts payable
195,123


180,065

Other current liabilities
153,476


141,214

Total current liabilities
453,483


467,080

Long-term debt
637,388


441,438

Deferred income taxes
47,216


62,259

Other long-term liabilities
98,632


107,096

Total liabilities
1,236,719


1,077,873

Equity
 


 

Titan stockholders' equity





  Common stock (no par, 120,000,000 shares authorized, 55,253,092 and 50,350,048 issued,
  respectively)



Additional paid-in capital
557,467


507,199

Retained earnings
223,389


173,407

Treasury stock (at cost, 1,712,557 and 1,787,844 shares, respectively)
(15,769
)

(16,445
)
Treasury stock reserved for deferred compensation
(1,075
)

(1,075
)
Accumulated other comprehensive loss
(75,640
)

(56,469
)
Total Titan stockholders’ equity
688,372


606,617

Noncontrolling interests
22,670


25,745

Total equity
711,042


632,362

Total liabilities and equity
$
1,947,761


$
1,710,235

 





See accompanying Notes to Consolidated Financial Statements.

3



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


 
 Number of
common shares
 
Additional
paid-in
capital
 
Retained earnings
 
Treasury stock
 
Treasury stock
 reserved for
deferred compensation
 
Accumulated other comprehensive income (loss)
 
Total Titan Equity
 
Noncontrolling interest
 
Total Equity
Balance January 1, 2013
48,562,204

 
$
507,199

 
$
173,407

 
$
(16,445
)
 
$
(1,075
)
 
$
(56,469
)
 
$
606,617

 
$
25,745

 
$
632,362

Net income


 


 
50,785

 


 


 


 
50,785

 
(888
)
 
49,897

Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
(22,158
)
 
(22,158
)
 
(2,355
)
 
(24,513
)
Pension liability adjustments, net of tax


 


 


 


 


 
2,990

 
2,990

 
 
 
2,990

Unrealized loss on investment


 


 


 


 


 
(3
)
 
(3
)
 
 
 
(3
)
Dividends on common stock


 


 
(803
)
 


 


 


 
(803
)
 
 
 
(803
)
Note conversion
4,903,044

 
45,903

 
 
 
 
 
 
 
 
 
45,903

 
 
 
45,903

Exercise of stock options
49,967

 
414

 


 
449

 


 


 
863

 
 
 
863

Acquisition


 


 


 


 


 


 

 
168

 
168

Stock-based compensation


 
3,727

 


 


 


 


 
3,727

 
 
 
3,727

Tax benefit related to stock-based compensation


 
(46
)
 


 


 


 


 
(46
)
 
 
 
(46
)
Issuance of treasury stock under 401(k) plan
25,320

 
270

 


 
227

 


 


 
497

 
 
 
497

Balance September 30, 2013
53,540,535

 
$
557,467

 
$
223,389

 
$
(15,769
)
 
$
(1,075
)
 
$
(75,640
)
 
$
688,372

 
$
22,670

 
$
711,042

 
















See accompanying Notes to Consolidated Financial Statements.

4



TITAN INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(All amounts in thousands)
 
Nine months ended September 30,
Cash flows from operating activities:
2013
 
2012
Net income
$
49,897

 
$
98,548

Adjustments to reconcile net income to net cash
 

 
 

provided by operating activities:
 

 
 

Depreciation and amortization
56,333

 
35,865

Amortization of debt premium
(2,185
)
 

Deferred income tax provision
(6,860
)
 
6,906

Convertible debt conversion charge
7,273

 

Gain on earthquake insurance recovery
(22,451
)
 

Supply agreement termination income

 
(26,134
)
Stock-based compensation
3,727

 
2,959

Excess tax benefit from stock options exercised
46

 
(185
)
Insurance proceeds
35,808

 

Issuance of treasury stock under 401(k) plan
497

 
453

(Increase) decrease in assets:
 

 
 

Accounts receivable
(1,022
)
 
(24,099
)
Inventories
(18,599
)
 
(36,921
)
Prepaid and other current assets
(24,687
)
 
(17,619
)
Other assets
5,924

 
3,699

Increase (decrease) in liabilities:
 

 
 

Accounts payable
23,302

 
25,893

Other current liabilities
23,218

 
4,786

Other liabilities
1,968

 
10,937

Net cash provided by operating activities
132,189

 
85,088

Cash flows from investing activities:
 

 
 

Capital expenditures
(54,956
)
 
(36,319
)
Acquisitions, net of cash acquired
(1,670
)
 
(32,760
)
Additional equity investment in Wheels India
(8,017
)
 

Insurance proceeds
2,879

 

Other
1,342

 
636

Net cash used for investing activities
(60,422
)
 
(68,443
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
345,313

 

Payment on debt
(162,040
)
 
(14,434
)
Term loan borrowing
25,880

 
4,378

Convertible note conversion
(14,090
)
 

Proceeds from exercise of stock options
863

 
925

Excess tax benefit from stock options exercised
(46
)
 
185

Payment of financing fees
(5,520
)
 

Dividends paid
(778
)
 
(634
)
Net cash provided by (used for) financing activities
189,582

 
(9,580
)
Effect of exchange rate changes on cash
(3,007
)
 
(1,345
)
Net increase in cash and cash equivalents
258,342

 
5,720

Cash and cash equivalents, beginning of period
189,114

 
129,170

Cash and cash equivalents, end of period
$
447,456

 
$
134,890

 
 
 
 
Supplemental information:
 
 
 
Interest paid
$
18,484

 
$
15,330

Income taxes paid
$
56,523

 
$
63,669

Noncash investing and financing information:
 
 
 
Issuance of common stock for convertible debt payment
$
45,903

 
$


 See accompanying Notes to Consolidated Financial Statements.

5



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 for a fair statement of the Company's financial position as of September 30, 2013, and the results of operations and cash flows for the three and nine months ended September 30, 2013 and 2012.

Accounting policies have continued without significant change and are described in the Description of Business and Significant Accounting Policies contained in the Company's 2012 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 2012 Annual Report on Form 10-K.

Sales
Sales and revenues are presented net of sales taxes and other related taxes.

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 due to their short term or stated rates.  Investments in marketable equity securities are recorded at fair value.  The 7.875% senior secured notes due 2017 (senior secured notes) and 5.625% convertible senior subordinated notes due 2017 (convertible notes) are carried at cost of $543.1 million and $60.2 million at September 30, 2013, respectively. The fair value of the senior secured notes at September 30, 2013, as obtained through an independent pricing source, was approximately $577.1 million.

Cash dividends
The Company declared cash dividends of $.005 and $.015 per share of common stock for each of the three and nine months ended September 30, 2013, and 2012. The third quarter 2013 cash dividend of $.005 per share of common stock was paid October 15, 2013, to stockholders of record on September 30, 2013.

Interest paid
Titan paid $2.1 million and $3.5 million for interest for the quarters ended September 30, 2013 and 2012, respectively, and $18.5 million and $15.3 million for interest for the nine months ended September 30, 2013 and 2012, respectively.
 
Income taxes paid
Titan paid $18.5 million and $16.7 million for income taxes for the quarters ended September 30, 2013 and 2012, respectively, and $56.5 million and $63.7 million for income taxes for the nine months ended September 30, 2013 and 2012, respectively.
 
Use of estimates
The policies utilized by the Company in the preparation of the financial statements conform to accounting principles generally accepted in the United States of America and require management to make estimates, assumptions and judgments 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.

Reclassification
Certain amounts from prior years have been reclassified to conform to the current year's presentation.

Subsequent Events
The Company has evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the date of issuance of the financial statements.

6



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


2. ACQUISITIONS

Acquisition of Titan Europe Plc.
On October 31, 2012, Titan acquired over 97% of the outstanding stock of Titan Europe Plc (Titan Europe) and in December 2012, the remaining 3% interest was acquired. Titan Europe is an international engineering group which designs and manufactures wheels, undercarriage components and assemblies for tracked and wheeled "off-road vehicles". The Titan Europe acquisition allowed the Company to expand its global presence and expand its product line. Prior to the acquisition, Titan held a 21.8% ownership percentage in Titan Europe. Titan Europe shareholders received one share of new Titan common stock for every 11 Titan Europe shares held. A total of 6,257,051 new shares of Titan were issued with a value of $121.8 million. In addition, Titan paid cash of $5.6 million for option payouts and partial shares. Titan's previous investment in Titan Europe had a fair value on the acquisition date of $31.7 million based on Titan Europe's stock price on the AIM market in London. Total consideration including the value of stock issued, cash payments, and the fair value of previously held Titan Europe shares totaled $159.1 million. A gain of $26.7 million was recorded on Titan's previously held interest in Titan Europe which was recorded as Noncash Titan Europe Plc gain in the consolidated statement of operations. This gain was previously recorded in other comprehensive income.

The purchase price was allocated to the assets acquired and liabilities assumed based on their fair values. Inventory was valued using the comparative sales method. Real and personal property was valued at fair value. The Company continues to evaluate the preliminary purchase price allocation, primarily the value of certain deferred taxes and property, plant & equipment, and may revise the purchase price allocation in future periods as these estimates are finalized.

The purchase price allocation of the Titan Europe acquisition consisted of the following (amounts in thousands):
Cash
$
39,122

Accounts receivable
128,585

Inventories
178,407

Deferred income taxes - current asset
22,068

Prepaid & other current assets
21,745

Earthquake insurance receivable
17,024

Property, plant & equipment
217,309

Investment in Wheels India Limited
36,804

Other assets
8,414

Short term debt
(96,822
)
Accounts payable
(142,752
)
Other current liabilities
(56,391
)
Long term debt
(158,183
)
Deferred income taxes - noncurrent liability
(12,636
)
Other noncurrent liabilities
(31,874
)
Net assets acquired
$
170,820


The purchase price allocation has changed from that reported in the Form 10-K for the year ended December 31, 2012, and the 10-Q for the quarter ended March 31, 2013. Titan Europe's wheel manufacturing facility in Finale Emilia, Italy experienced damage from an earthquake in May 2012, prior to Titan's acquisition of Titan Europe.  The plant was closed for production during initial remedial work. This resulted in a limited transfer of production to other facilities within Titan Europe as well as sourcing product from facilities in the US owned by Titan and competitors.  In the second quarter of 2013, Titan received a final insurance settlement payment of $38.7 million. As a result of this information, Titan has recorded an earthquake insurance receivable of $17.0 million, decreased the current deferred income taxes by $5.3 million, and recorded a bargain purchase gain of $11.7 million for the year ended December 31, 2012.


7



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

Pro forma financial information
The following unaudited pro forma financial information gives effect to the acquisition of Titan Europe Plc as if the acquisition had taken place on January 1, 2012. The pro forma financial information for Titan Europe Plc was derived from the historical accounting records of Titan Europe. The Titan Europe results were adjusted to reflect additional depreciation.
 
Pro forma financial information is as follows (in thousands, except per share data):
 
 
Nine Months ended September 30, 2012
Net sales
 
$
1,876,691

Net income
 
101,801

Net income attributable to Titan
 
102,307

Basic earnings per share
 
$
2.11

Diluted earnings per share
 
1.77


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 actually occurred on January 1, 2012, nor is it necessarily indicative of Titan's future consolidated results of operations or financial position.


3. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following (amounts in thousands):
 
September 30,
2013
 
December 31,
2012
Accounts receivable
$
299,063

 
$
302,928

Allowance for doubtful accounts
(8,816
)
 
(5,130
)
Accounts receivable, net
$
290,247

 
$
297,798

 
Accounts receivable are reduced by an allowance for doubtful accounts which is based on historical losses.


4. INVENTORIES

Inventories consisted of the following (amounts in thousands):
 
September 30,
2013
 
December 31,
2012
Raw material
$
134,229

 
$
153,308

Work-in-process
59,214

 
69,030

Finished goods
189,566

 
154,785

 
383,009

 
377,123

Adjustment to LIFO basis
(7,116
)
 
(10,738
)
 
$
375,893

 
$
366,385

 
At September 30, 2013, approximately 12% of the Company's inventories were valued under the last-in, first-out (LIFO) method. At December 31, 2012, approximately 16% of the Company's inventories were valued under the LIFO method. The remaining inventories were valued under the first-in, first-out (FIFO) method or average cost method. All inventories are valued at lower of cost or market. The LIFO reserve decreased primarily as a result of the composition of inventory. An overall increase in raw material relative to total inventory resulted in a greater decrease in the FIFO cost versus the LIFO cost.



8



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

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consisted of the following (amounts in thousands):
 
September 30,
2013
 
December 31, 2012
Land and improvements
$
66,511

 
$
66,012

Buildings and improvements
193,393

 
192,135

Machinery and equipment
581,591

 
555,261

Tools, dies and molds
106,094

 
117,341

Construction-in-process
47,776

 
49,136

 
995,365

 
979,885

Less accumulated depreciation
(433,659
)
 
(411,541
)
 
$
561,706

 
$
568,344

 
Depreciation on fixed assets for the nine months ended September 30, 2013 and 2012, totaled $53.0 million and $34.1 million, respectively.

Included in the total building and improvements are capital leases of $4.6 million and $4.5 million at September 30, 2013, and December 31, 2012, respectively. Included in the total of machinery and equipment are capital leases of $39.7 million and $36.0 million at September 30, 2013, and December 31, 2012, respectively.


6. GOODWILL AND INTANGIBLE ASSETS

Changes in goodwill consisted of the following (amounts in thousands):
 
2013
 
2012
 
 
 
Earthmoving/
 
 
 
 
 
Earthmoving/
 
 
 
Agricultural
 
Construction
 
 
 
Agricultural
 
Construction
 
 
 
Segment
 
Segment
 
Total
 
Segment
 
Segment
 
Total
Goodwill balance, January 1
$
11,522

 
$
13,419

 
$
24,941

 
$
19,841

 
$

 
$
19,841

   Acquisitions

 

 

 

 
13,982

 
13,982

   Acquisition adjustment

 

 

 
(7,289
)
 

 
(7,289
)
   Foreign currency translation
(1,040
)
 
(1,367
)
 
(2,407
)
 
(957
)
 
(193
)
 
(1,150
)
Goodwill balance, September 30
$
10,482

 
$
12,052

 
$
22,534

 
$
11,595

 
$
13,789

 
$
25,384

 
The Company's agricultural segment goodwill balance is related to the acquisition of Goodyear's Latin American farm tire business which included the Sao Paulo, Brazil manufacturing facility. The Company's earthmoving/construction goodwill balance is related to the acquisition of Planet Group in August 2012. The Company reviews goodwill for impairment during the fourth quarter of each annual reporting period, and whenever events and circumstances indicate that the carrying values may not be recoverable. The Company's consumer segment does not have any recorded goodwill.


9



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

The components of intangible assets consisted of the following (amounts in thousands):
 
Weighted- Average Useful Lives (in Years)
 
September 30,
2013
 
December 31, 2012
Amortizable intangible assets:
 
 
 
 
 
     Customer relationships
13.8
 
17,457

 
19,357

     Patents, trademarks and other
2.0
 
3,466

 
3,658

          Total at cost
 
 
20,923

 
23,015

     Less accumulated amortization
 
 
(3,470
)
 
(1,807
)
 
 
 
17,453

 
21,208

 
Amortization related to intangible assets for the nine months ended September 30, 2013 and 2012, totaled $1.7 million and $0.5 million, respectively. Intangible assets are included as a component of other assets in the consolidated condensed balance sheet.

The estimated aggregate amortization expense at September 30, 2013, is as follows (amounts in thousands):
October 1 - December 31, 2013
$
534

2014
2,143

2015
1,764

2016
1,180

2017
1,118

Thereafter
10,714

 
$
17,453



7. WARRANTY

Changes in the warranty liability consisted of the following (amounts in thousands):
 
2013
 
2012
Warranty liability, January 1
$
27,482

 
$
17,659

Provision for warranty liabilities
35,134

 
23,036

Warranty payments made
(28,049
)
 
(18,282
)
Warranty liability, September 30
$
34,567

 
$
22,413


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.  Warranty accruals are included as a component of other current liabilities on the Consolidated Condensed Balance Sheets.












10



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

8. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
 
Long-term debt consisted of the following (amounts in thousands):
 
September 30,
2013
 
December 31,
2012
7.875% senior secured notes due 2017 - Issued 2013
$
325,000

 
$

Unamortized premium based on 7.875% senior secured notes issued 2013
18,128

 

7.875% senior secured notes due 2017 - Issued 2010
200,000

 
200,000

European credit facilities
78,301

 
202,097

5.625% convertible senior subordinated notes due 2017
60,161

 
112,881

Other debt
58,082

 
69,151

Capital leases
2,600

 
3,110

 
742,272

 
587,239

Less amounts due within one year
104,884

 
145,801

 
$
637,388

 
$
441,438

 
Aggregate maturities of long-term debt at September 30, 2013, were as follows (amounts in thousands):
September 1 - December 31, 2013
$
101,397

2014
19,753

2015
10,041

2016
18,963

2017
589,621

Thereafter
2,497

 
$
742,272

 
7.875% senior secured notes due 2017
The Company’s 7.875% senior secured notes (senior secured notes) are due October 2017.  These notes are secured by the land and buildings of the following subsidiaries of the Company:  Titan Tire Corporation, Titan Tire Corporation of Bryan, Titan Tire Corporation of Freeport and Titan Wheel Corporation of Illinois.  The Company’s senior secured notes outstanding balance was $525.0 million at September 30, 2013 including $200.0 million issued in 2010 and $325.0 million issued in 2013. The 2013 amount was issued at a premium. Otherwise, all the notes have the same terms. The senior secured notes issued in 2013 have an imputed interest rate of 6.277% and an unamortized premium balance of $18.1 million at September 30, 2013. See Note 23 for additional information.

Titan Europe credit facilities
The Titan Europe credit facilities contain borrowings from various institutions totaling $78.3 million at September 30, 2013. Maturity dates on this debt range from less than one year to eleven years and interest rates range from 2% to 6.9%. The European facilities are secured by the assets of select European subsidiaries.



11



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

5.625% convertible senior subordinated notes due 2017
The Company’s 5.625% convertible senior subordinated notes (convertible notes) are due January 2017.   The initial base conversion rate for the convertible notes is 93.0016 shares of Titan common stock per $1,000 principal amount of convertible notes, equivalent to an initial base conversion price of approximately $10.75 per share of Titan common stock.  If the price of Titan common stock at the time of determination exceeds the base conversion price, the base conversion rate will be increased by an additional number of shares (up to 9.3002 shares of Titan common stock per $1,000 principal amount of convertible notes) as determined pursuant to a formula described in the indenture.  The base conversion rate will be subject to adjustment in certain events.  The Company’s convertible notes balance was $60.2 million at September 30, 2013.

In the first quarter of 2013, the Company closed an Exchange Agreement with a note holder of the convertible notes. The two parties privately negotiated an agreement to exchange approximately $52.7 million in aggregate principal amount of the convertible notes for approximately 4.9 million shares of the Company's common stock plus a cash payment totaling $14.2 million. In connection with this exchange, the Company recognized a charge of $7.3 million in accordance with accounting standards related to debt conversions.

Revolving credit facility
The Company’s $150 million revolving credit facility (credit facility) with agent Bank of America, N.A. has a December 2017 termination date and is collateralized by the accounts receivable and inventory of certain Titan domestic subsidiaries.  During the first nine months of 2013 and at September 30, 2013, there were no borrowings under the credit facility.

Other debt
Brazil Revolving Line of Credit
The Company's wholly-owned Brazilian subsidiary, Titan Pneus Do Brasil Ltda (Titan Brazil), has a revolving line of credit (Brazil line of credit) established with Bank of America Merrill Lynch Banco Multiplo S.A. in May 2011. Titan Brazil could borrow up to 16.0 million Brazilian Reais, which equates to approximately $7.1 million dollars as of September 30, 2013, for working capital purposes. Under the terms of the Brazil line of credit, borrowings, if any, bear interest at a rate of 1 month LIBOR plus 247 basis points. During the first nine months of 2013 and at September 30, 2013 there were no borrowings outstanding on this line of credit.

Brazil Other Debt
Titan Brazil has working capital loans for the Sao Paulo, Brazil manufacturing facility totaling $9.2 million at September 30, 2013.

Australia Other Debt
Titan National Australia Holdings has capital leases totaling $1.1 million at September 30, 2013.

Titan Europe Other Debt
Titan Europe has overdraft facilities totaling $47.7 million at September 30, 2013.

Titan Europe Capital Leases
Titan Europe has capital lease obligations totaling $2.6 million at September 30, 2013.



12



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

9. DERIVATIVE FINANCIAL INSTRUMENTS

Prior to the April 2013 payoff of the Brazil Term Loan with Bank of America, N.A. (BoA Term Loan), the Company used financial derivatives to mitigate its exposure to volatility in the interest rate and foreign currency exchange rate in Brazil. The Company used these derivative instruments to hedge exposure in the ordinary course of business and did not invest in derivative instruments for speculative purposes. In order to reduce interest rate and foreign currency risk on the BoA Term Loan, the Company entered into an interest rate swap agreement and cross currency swap transactions with Bank of America Merrill Lynch Banco Multiplo S.A. that was designed to convert the outstanding $5.0 million US Dollar based LIBOR loan to a Brazilian Reais based CDI loan. The Company did not designate these agreements as a hedging instrument. Changes in the fair value of the cross currency swap were recorded in other income/expense and changes in the fair value of the interest rate swap agreement were recorded as interest expense (or gain as an offset to interest expense). For the nine months ended September 30, 2013, the Company recorded $0.6 million of other expense and $0.1 million of interest expense related to these derivatives.

The Company also used derivative financial instruments to manage its exposure to market risks from changes in interest rates in Europe. These derivative financial instruments are recognized at fair value. The Company has not designated these financial instruments as hedging instruments. Any gain or loss on the re-measurement of the fair value is taken to interest expense. For the three months ended September 30, 2013, the Company recorded interest expense of $0.1 million related to these derivatives. For the nine months ended September 30, 2013, the Company recorded an offset to interest expense of $1.0 million related to these derivatives.


10. LEASE COMMITMENTS

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

At September 30, 2013, future minimum rental commitments under noncancellable operating leases with initial terms of at least one year were as follows (amounts in thousands):
October 1 - December 31, 2013
$
1,302

2014
7,429

2015
4,801

2016
3,814

2017
2,368

Thereafter
3,943

Total future minimum lease payments
$
23,657


At September 30, 2013, the Company had assets held as capital leases with a net book value of $9.1 million included in property, plant and equipment. Total future capital lease obligations relating to these leases are as follows (amounts in thousands):
October 1 - December 31, 2013
$
679

2014
1,374

2015
892

2016
480

2017
200

Thereafter
103

Total future capital lease obligation payments
3,728

Less amount representing interest
(174
)
Present value of future capital lease obligation payments
$
3,554


13



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



11. EMPLOYEE BENEFIT PLANS

The Company has three frozen defined benefit pension plans covering certain employees or former employees of three U.S. subsidiaries. The Company also has pension plans covering certain employees of several foreign subsidiaries. The Company also sponsors four 401(k) retirement savings plans in the U.S. and a number of defined contribution plans at foreign subsidiaries. The Company contributed approximately $3.8 million to the pension plans during the nine months ended September 30, 2013 and expects to contribute approximately $1.7 million to the pension plans during the remainder of 2013.

The components of net periodic pension cost consisted of the following (amounts in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Service cost
$
275

 
$

 
$
665

 
$

Interest cost
1,352

 
1,133

 
4,031

 
3,399

Expected return on assets
(1,381
)
 
(1,252
)
 
(4,143
)
 
(3,756
)
Amortization of unrecognized prior service cost
34

 
34

 
103

 
102

Amortization of net unrecognized loss
1,314

 
1,293

 
3,942

 
3,879

      Net periodic pension cost
$
1,594

 
$
1,208

 
$
4,598

 
$
3,624



12. ROYALTY EXPENSE

The Company has a trademark license agreement with Goodyear to manufacture and sell certain tires in North America and Latin America under the Goodyear name.  The North American and Latin American farm tire royalties were prepaid for seven years as part of the 2011 Goodyear Latin American farm tire acquisition. In May 2012, the Company and Goodyear entered into an agreement under which Titan will sell certain non-farm tire products directly to third party customers and pay a royalty to Goodyear. Royalty expenses recorded were $3.9 million and $3.7 million for the quarters ended September 30, 2013 and 2012, respectively. Royalty expenses were $11.0 million and $8.7 million for the nine months ended September 30, 2013 and 2012, respectively.


13. SUPPLY AGREEMENT TERMINATION INCOME

Supply agreement termination income consisted of the following (amounts in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Supply agreement termination income
$

 
$

 
$

 
$
26,134


The Company's April 2011 acquisition of Goodyear's farm tire business included a three year supply agreement with Goodyear for certain non-farm tire products. A liability was recorded as the supply agreement was for sales at below market prices. In May 2012, the Company and Goodyear terminated this supply agreement and entered into an agreement under which Titan will sell these products directly to third party customers and pay a royalty to Goodyear. The remaining balance of the supply agreement liability was recorded as income as the Company is no longer obligated to sell the products at below market prices.



14



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

14. GAIN ON EARTHQUAKE INSURANCE RECOVERY

Gain on earthquake insurance recovery consisted of the following (amounts in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Gain on earthquake insurance recovery
$

 
$

 
$
22,451

 
$


Titan Europe's wheel manufacturing facility in Finale Emilia, Italy experienced damage from an earthquake in May 2012, prior to Titan's acquisition of Titan Europe.  The plant was closed for production during initial remedial work. This resulted in a limited transfer of production to other facilities within Titan Europe as well as sourcing product from facilities in the US owned by Titan and competitors.  In the second quarter of 2013, Titan received a final insurance settlement payment of $38.7 million, which offset the earthquake insurance receivable and resulted in a gain of $22.5 million.


15. OTHER INCOME

Other income consisted of the following (amounts in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Currency exchange gain (loss)
$
5,678

 
$
250

 
$
(976
)
 
$
(206
)
Wheels India Limited equity gain
826

 

 
1,101

 

Discount amortization on prepaid royalty
780

 
910

 
2,483

 
2,882

Interest income
594

 
372

 
2,525

 
757

Investment gain (loss) related to contractual obligation investments
497

 
492

 
590

 
1,287

Other income
180

 
224

 
1,418

 
889

Building rental income
167

 
191

 
571

 
554

 
$
8,722

 
$
2,439

 
$
7,712

 
$
6,163


The Company's investment in Wheels India Limited increased from 35.9% to 41.7% during the second quarter of 2013.


16. INCOME TAXES

The Company recorded income tax expense of $5.7 million and $38.9 million for the three and nine months ended September 30, 2013, respectively, as compared to $13.6 million and $64.7 million for the three and nine months ended September 30, 2012. The Company's effective income tax rate was 44% and 40% for the nine months ended September 30, 2013 and 2012, respectively.

The Company's 2013 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 a change in Italian law making the insurance proceeds from the earthquake non-taxable. In addition, as a result of the reassessment of the realizability of the deferred tax assets due to the Italian law change, a valuation allowance was established on the Italy net deferred tax assets. Other items contributing to the rate difference are state income tax expense, unrecognized tax benefits, foreign earnings, domestic production activities deduction, and tax deductible expenses related to the convertible bond repurchase.


15



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

Accounting standards for income taxes provide that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination. The Company's unrecognized tax benefits were $20.0 million and $14.3 million as of September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013, $16.0 million would affect income tax expense if recognized. The majority of the increase in unrecognized tax benefits relates to potential state tax exposures. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest and penalties included in the unrecognized tax benefits at September 30, 2013 and December 31, 2012 was $3.3 million and $2.4 million, respectively.


17. EARNINGS PER SHARE

Earnings per share (EPS) were as follows (amounts in thousands, except per share data):
 
Three months ended
 
September 30, 2013
 
September 30, 2012
 
Titan Net income
 
Weighted-
average shares
 
Per share
 amount
 
Titan Net income
 
Weighted-
average shares
 
Per share
 amount
Basic earnings per share
$
8,093

 
53,440

 
$
0.15

 
$
19,579

 
42,180

 
$
0.46

   Effect of stock options/trusts

 
207

 
 

 

 
237

 
 

   Effect of convertible notes
610

 
5,744

 
 
 
1,143

 
10,909

 
 
Diluted earnings per share
$
8,703

 
59,391

 
$
0.15

 
$
20,722

 
53,326

 
$
0.39


 
Nine months ended
 
September 30, 2013
 
September 30, 2012
 
Titan Net income
 
Weighted-
average shares
 
Per share
 amount
 
Titan Net income
 
Weighted-
average shares
 
Per share
 amount
Basic earnings per share
$
50,785

 
52,900

 
$
0.96

 
$
99,054

 
42,148

 
$
2.35

   Effect of stock options/trusts

 
265

 
 

 

 
258

 
 

   Effect of convertible notes
1,991

 
6,279

 
 
 
3,429

 
10,909

 
 
Diluted earnings per share
$
52,776

 
59,444

 
$
0.89

 
$
102,483

 
53,315

 
$
1.92


There were no stock options/trusts or convertible notes that were antidilutive for the periods presented.


18. 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 effect on the consolidated financial condition, results of operations or cash flows of the Company.  However, due to the difficult nature of predicting unresolved and future legal claims, the Company cannot anticipate or predict the material adverse effect on its consolidated financial condition, results of operations or cash flows as a result of efforts to comply with or its liabilities pertaining to legal judgments.



16



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

19. SEGMENT INFORMATION

The table below presents information about certain revenues and income from operations used by the chief executive officer of the Company for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

Three months ended
 
Nine months ended

September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Revenues from external customers
 
 
 
 

 

Agricultural
$
273,301

 
$
246,578

 
$
907,797

 
$
831,376

Earthmoving/construction
168,964

 
103,135

 
586,806

 
318,244

Consumer
55,245

 
55,006

 
174,585

 
177,420

 
$
497,510

 
$
404,719

 
$
1,669,188

 
$
1,327,040

Gross profit
 

 
 

 
 
 
 
Agricultural
$
48,346

 
$
48,091

 
$
158,566

 
$
173,684

Earthmoving/construction
11,283

 
18,689

 
75,598

 
60,598

Consumer
3,363

 
1,016

 
13,841

 
10,488

Unallocated corporate
(486
)
 
(635
)
 
(2,093
)
 
(2,160
)
 
$
62,506

 
$
67,161

 
$
245,912

 
$
242,610

Income from operations
 

 
 

 
 
 
 
Agricultural
$
37,762

 
$
41,740

 
$
125,063

 
$
156,965

Earthmoving/construction
(1,833
)
 
13,468

 
27,365

 
51,385

Consumer
55

 
(234
)
 
4,224

 
30,284

Unallocated corporate
(18,929
)
 
(18,808
)
 
(54,808
)
 
(62,828
)
      Income from operations
17,055

 
36,166

 
101,844

 
175,806

 
 
 
 
 
 
 
 
Interest expense
(12,414
)
 
(6,187
)
 
(35,924
)
 
(18,699
)
Convertible debt conversion charge

 

 
(7,273
)
 

Gain on earthquake insurance recovery

 

 
22,451

 

Other income, net
8,722

 
2,439

 
7,712

 
6,163

      Income before income taxes
$
13,363

 
$
32,418

 
$
88,810

 
$
163,270


Assets by segment were as follows (amounts in thousands):
 
September 30,
2013
 
December 31,
2012
Total assets
 

 
 

Agricultural
$
698,905

 
$
630,222

Earthmoving/construction
788,578

 
851,995

Consumer
143,559

 
142,341

Unallocated corporate
316,719

 
85,677

 
$
1,947,761

 
$
1,710,235

 

17



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


20. FAIR VALUE MEASUREMENTS

Accounting standards for fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers are defined as:
 
Level 1 – Quoted prices in active markets for identical instruments.
Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Assets and liabilities measured at fair value on a recurring basis consisted of the following (amounts in thousands):
 
September 30, 2013
 
December 31, 2012
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Contractual obligation investments
$
7,998


$
7,998


$


$

 
$
7,408

 
$
7,408

 
$

 
$

Interest rate swap

 

 

 

 
1,048

 

 
1,048

 

Preferred stock
250

 

 

 
250

 
250

 

 

 
250

Derivative financial instruments liability
(135
)
 

 
(135
)
 

 
(7,376
)
 

 
(7,376
)
 

Total
$
8,113

 
$
7,998

 
$
(135
)
 
$
250

 
$
1,330

 
$
7,408

 
$
(6,328
)
 
$
250



The following table presents the changes during the periods presented in Titan's Level 3 investments that are measured at fair value on a recurring basis (amounts in thousands):
 
Preferred stock
Balance at December 31, 2012
$
250

  Total realized and unrealized gains and losses

Balance as of September 30, 2013
$
250



21. RELATED PARTY TRANSACTIONS

The Company sells products and pays commissions to companies controlled by persons related to the chief executive officer of the Company.  The related party is Mr. Fred Taylor and is Mr. Maurice Taylor’s brother.  The companies which Mr. Fred Taylor is associated with that do business with Titan include the following:  Blackstone OTR, LLC; FBT Enterprises; and OTR Wheel Engineering.  Sales of Titan products to these companies were approximately $0.9 million and $2.2 million for the three and nine months ended September 30, 2013, respectively, as compared to $0.6 million and $1.7 million for the three and nine months ended September 30, 2012. Titan had trade receivables due from these companies of approximately $0.4 million at September 30, 2013, and approximately $0.2 million at December 31, 2012.  On other sales referred to Titan from the above manufacturing representative companies, commissions were approximately $0.6 million and $1.9 million for the three and nine months ended September 30, 2013, respectively as compared to $0.6 million and $2.1 million for the three and nine months ended September 30, 2012.

The Company has a 41.7% equity stake in Wheels India Limited, a company incorporated in India and listed on the National Stock Exchange in India. The Company had trade payables due to Wheels India of approximately $0.4 million at December 31, 2012.


18



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

In the second quarter of 2013, the Company sold Titan Wheels Australia, a 100% owned subsidiary, to Titan National Australia Holdings, a 56% owned subsidiary operating as the Planet Corporation Group. The Company maintained financial control over Titan Wheels Australia and no gain or loss was recognized for the transaction.


22. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) consisted of the following (amounts in thousands):

 
Currency
Translation
Adjustments
 
Unrealized
Gain (Loss) on
Investments
 
Unrecognized
Losses and
Prior Service
Cost
 
 
 
Total
Balance at July 1, 2013
$
(43,449
)
 
$

 
$
(33,658
)
 
$
(77,107
)
Other comprehensive income (loss) before
 
 
 
 
 
 
 
reclassifications
498

 

 

 
498

Reclassification adjustments:
 

 
 

 
 

 
 

Amortization of unrecognized losses and prior
 
 
 
 
 
 
 
  service cost, net of tax of $(557)

 

 
969

 
969

Balance at September 30, 2013
$
(42,951
)
 
$

 
$
(32,689
)
 
$
(75,640
)

 
Currency
Translation
Adjustments
 
Unrealized
Gain (Loss) on
Investments
 
Unrecognized
Losses and
Prior Service
Cost
 
 
 
Total
Balance at January 1, 2013
$
(20,793
)
 
$
3

 
$
(35,679
)
 
$
(56,469
)
Other comprehensive income (loss) before
 
 
 
 
 
 
 
reclassifications
(22,158
)
 
(3
)
 

 
(22,161
)
Reclassification adjustments:
 

 
 

 
 

 
 

Amortization of unrecognized losses and prior
 
 
 
 
 
 
 
  service cost, net of tax of $(1,670)

 

 
2,990

 
2,990

Balance at September 30, 2013
$
(42,951
)
 
$

 
$
(32,689
)
 
$
(75,640
)


23. SUBSEQUENT EVENTS

Voltyre-Prom Purchase
On October 4, 2013, Titan in partnership with One Equity Partners and the Russian Direct Investment Fund closed the acquisition of an 85% interest in Voltyre-Prom, a leading producer of agricultural and industrial tires in Volgograd, Russia, for approximately $94.0 million. Titan will act as operating partner with responsibility for Voltyre-Prom's daily operations on behalf of the consortium of which Titan holds a 30% interest.

6.875% Senior Secured Notes due 2020
On October 7, 2013, the Company closed on an offering of $400.0 million 6.875% senior secured notes due 2020. Titan used the net proceeds from the offering towards financing the repurchase of the Company's 7.875% senior secured notes due 2017 including tender and consent payments, accrued interest and expenses associated therewith.


19



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

7.875% Senior Secured Notes due 2017 Tender Offer Settlement
On October 7, 2013, the Company elected to exercise its early settlement election in connection with a tender offer to purchase all of its 7.875% senior secured notes due 2017, and purchased $387.3 million, or approximately 73.8% of such notes. In connection with this transaction, Titan will record expenses of approximately $18 million in the fourth quarter of 2013. These expenses relate primarily to a tender and consent premium of $64.50 per $1,000 principal amount of the notes and unamortized deferred financing fees offset by unamortized premium on the notes. The tender offer expired October 21, 2013, with no additional notes tendered.

7.875% Senior Secured Notes due 2017 Redemption Call
On October 7, 2013, the Company announced a call for redemption for all 7.875% senior secured notes due 2017 that were not validly tendered by the expiration of the tender offer on October 21, 2013. The remaining notes will be redeemed on November 6, 2013. In connection with this transaction, Titan will record expenses of approximately $4 million in the fourth quarter of 2013. These expenses relate primarily to a redemption premium of $59.06 per $1,000 principal amount of the notes and unamortized deferred financing fees offset by unamortized premium on the notes.


24. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION

The Company's 7.875% senior secured notes and 5.625% convertible senior subordinated notes are guaranteed by the following 100% owned subsidiaries of the Company: Titan Tire Corporation, Titan Tire Corporation of Bryan, Titan Tire Corporation of Freeport, and Titan Wheel Corporation of Illinois. The note guarantees are full and unconditional, joint and several obligations of the guarantors. The guarantees of the guarantor subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The following condensed consolidating financial statements are presented using the equity method of accounting. Certain sales & marketing expenses recorded by non-guarantor subsidiaries have not been allocated to the guarantor subsidiaries.

(Amounts in thousands)
Consolidating Condensed Statements of Operations
For the Three Months Ended September 30, 2013
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
256,252

 
$
241,258

 
$

 
$
497,510

Cost of sales
241

 
216,445

 
218,318

 

 
435,004

Gross profit (loss)
(241
)
 
39,807

 
22,940

 

 
62,506

Selling, general and administrative expenses
3,561

 
16,513

 
18,657

 

 
38,731

Research and development expenses
(17
)
 
1,423

 
1,372

 

 
2,778

Royalty expense

 
1,850

 
2,092

 

 
3,942

Income (loss) from operations
(3,785
)
 
20,021

 
819

 

 
17,055

Interest expense
(10,945
)
 

 
(1,469
)
 

 
(12,414
)
Intercompany interest income (expense)
2,469

 

 
(2,469
)
 

 

Other income
1,182

 
(117
)
 
7,657

 

 
8,722

Income (loss) before income taxes
(11,079
)
 
19,904

 
4,538

 

 
13,363

Provision for income taxes
(4,717
)
 
7,435

 
2,993

 

 
5,711

Equity in earnings of subsidiaries
14,014

 

 
4,827

 
(18,841
)
 

Net income (loss)
7,652

 
12,469

 
6,372

 
(18,841
)
 
7,652

Net loss noncontrolling interests

 

 
(441
)
 

 
(441
)
Net income (loss) attributable to Titan
$
7,652

 
$
12,469

 
$
6,813

 
$
(18,841
)
 
$
8,093

 

20



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

(Amounts in thousands)
Consolidating Condensed Statements of Operations
For the Three Months Ended September 30, 2012
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
311,422

 
$
93,297

 
$

 
$
404,719

Cost of sales
253

 
246,275

 
91,030

 

 
337,558

Gross profit (loss)
(253
)
 
65,147

 
2,267

 

 
67,161

Selling, general and administrative expenses
(9,013
)
 
40,635

 
(6,125
)
 

 
25,497

Research and development expenses
155

 
1,604

 

 

 
1,759

Royalty expense

 
1,778

 
1,961

 

 
3,739

Income (loss) from operations
8,605

 
21,130

 
6,431

 

 
36,166

Interest expense
(6,012
)
 

 
(175
)
 

 
(6,187
)
Other income
1,163

 
364

 
912

 

 
2,439

Income (loss) before income taxes
3,756

 
21,494

 
7,168

 

 
32,418

Provision for income taxes
6,329

 
7,398

 
(138
)
 

 
13,589

Equity in earnings of subsidiaries
21,402

 

 
5,420

 
(26,822
)
 

Net income (loss)
18,829

 
14,096

 
12,726

 
(26,822
)
 
18,829

Net loss noncontrolling interests

 

 
(750
)
 

 
(750
)
Net income (loss) attributable to Titan
$
18,829

 
$
14,096

 
$
13,476

 
$
(26,822
)
 
$
19,579


(Amounts in thousands)
Consolidating Condensed Statements of Operations
For the Nine Months Ended September 30, 2013
 
Titan
 Intl., Inc. (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
903,628

 
$
765,560

 
$

 
$
1,669,188

Cost of sales
908

 
734,460

 
687,908

 

 
1,423,276

Gross profit (loss)
(908
)
 
169,168

 
77,652

 

 
245,912

Selling, general and administrative expenses
8,008

 
54,637

 
62,182

 

 
124,827

Research and development expenses
(35
)
 
4,136

 
4,180

 

 
8,281

Royalty expense

 
5,478

 
5,482

 

 
10,960

Income (loss) from operations
(8,881