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

titancolora33.jpg

FORM 10-Q
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2020
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12936

TITAN INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

2701 Spruce Street, Quincy, IL
(Address of principal executive offices)

36-3228472
(I.R.S. Employer Identification No.)

62301
(Zip Code)
(217) 228-6011
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol
Name of each exchange on which registered
Common stock, $0.0001 par value
TWI
New York Stock Exchange


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  ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☑  No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
 
Accelerated filer
☑
Non-accelerated filer
☐
 
Smaller reporting company
☐
 
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

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

Indicate the number of shares of Titan International, Inc. outstanding: 60,923,777 shares of common stock, $0.0001 par value, as of July 31, 2020.



TITAN INTERNATIONAL, INC.

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(All amounts in thousands, except per share data)
 
 
Three months ended

Six months ended
 
June 30,

June 30,
 
2020

2019

2020

2019
 
 
 
 
 
 
 
 
Net sales
$
286,133

 
$
390,597

 
$
627,633

 
$
800,971

Cost of sales
255,259

 
352,289

 
566,936

 
717,399

Asset impairment
1,007

 
—

 
3,586

 
—

Gross profit
29,867

 
38,308

 
57,111

 
83,572

Selling, general and administrative expenses
28,441

 
35,746

 
60,398

 
71,651

Research and development expenses
2,132

 
2,544

 
4,542

 
5,161

Royalty expense
2,395

 
2,448

 
4,875

 
5,054

(Loss) income from operations
(3,101
)
 
(2,430
)
 
(12,704
)
 
1,706

Interest expense
(8,008
)
 
(8,295
)
 
(16,043
)
 
(16,228
)
Foreign exchange gain (loss)
8,836

 
(1,239
)
 
(8,406
)
 
4,484

Other (loss) income
(390
)
 
2,069

 
7,046

 
3,065

Loss before income taxes
(2,663
)
 
(9,895
)
 
(30,107
)
 
(6,973
)
Provision (benefit) for income taxes
1,980

 
(3,218
)
 
2,035

 
(1,303
)
Net loss
(4,643
)
 
(6,677
)
 
(32,142
)
 
(5,670
)
Net income (loss) attributable to noncontrolling interests
402

 
(253
)
 
(1,611
)
 
(1,224
)
Net loss attributable to Titan
(5,045
)
 
(6,424
)
 
(30,531
)
 
(4,446
)
   Redemption value adjustment
—

 
(661
)
 
—

 
(1,437
)
Net loss applicable to common shareholders
$
(5,045
)
 
$
(7,085
)
 
$
(30,531
)
 
$
(5,883
)
 
 
 
 
 
 
 
 
Loss per common share:
 

 
 

 
 

 
 

Basic
$
(0.08
)
 
$
(0.12
)
 
$
(0.50
)
 
$
(0.10
)
Diluted
$
(0.08
)
 
$
(0.12
)
 
$
(0.50
)
 
$
(0.10
)
Average common shares and equivalents outstanding:
 
 
 

 
 
 
 

Basic
60,602

 
60,000

 
60,481

 
59,973

Diluted
60,602

 
60,000

 
60,481

 
59,973

 
 
 
 
 
 
 
 
Dividends declared per common share:
$
—

 
$
0.005

 
$
0.005

 
$
0.010

 
 







See accompanying Notes to Condensed Consolidated Financial Statements.

1


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

 
Three months ended
 
June 30,
 
2020
 
2019
Net loss
$
(4,643
)
 
$
(6,677
)
Derivative loss
(198
)
 
—

Currency translation adjustment
1,014

 
5,423

Pension liability adjustments, net of tax of $230 and $110, respectively
40

 
538

Comprehensive loss
(3,787
)
 
(716
)
Net comprehensive income attributable to redeemable and noncontrolling interests
893

 
385

Comprehensive loss attributable to Titan
$
(4,680
)
 
$
(1,101
)



 
Six months ended
 
June 30,
 
2020
 
2019
Net loss
$
(32,142
)
 
$
(5,670
)
Derivative loss
(198
)
 
—

Currency translation adjustment
(32,772
)
 
1,044

Pension liability adjustments, net of tax of $20 and $232, respectively
1,348

 
1,004

Comprehensive loss
(63,764
)
 
(3,622
)
Net comprehensive (loss) income attributable to redeemable and noncontrolling interests
(2,902
)
 
317

Comprehensive loss attributable to Titan
$
(60,862
)
 
$
(3,939
)























See accompanying Notes to Condensed Consolidated Financial Statements.

2


TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share data)
 
June 30, 2020
 
December 31, 2019
 
 
 
(unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
80,160

 
$
66,799

  Accounts receivable, net
192,410

 
185,238

Inventories
294,537

 
333,356

Prepaid and other current assets
74,094

 
58,869

Total current assets
641,201

 
644,262

Property, plant and equipment, net
337,646

 
374,798

Operating lease assets
21,480

 
23,914

Deferred income taxes
605

 
2,331

Other assets
30,362

 
69,002

Total assets
$
1,031,294

 
$
1,114,307

 
 
 
 
Liabilities
 

 
 

Current liabilities
 

 
 

Short-term debt
$
40,784

 
$
61,253

Accounts payable
136,802

 
158,647

Other current liabilities
120,985

 
107,253

Total current liabilities
298,571

 
327,153

Long-term debt
462,240

 
443,349

Deferred income taxes
2,820

 
6,672

Other long-term liabilities
66,006

 
73,145

Total liabilities
829,637

 
850,319

 
 
 
 
Redeemable noncontrolling interest
25,000

 
25,000

 
 
 
 
Equity
 

 
 

Titan shareholders' equity


 


  Common stock ($0.0001 par value, 120,000,000 shares authorized, 60,787,263 issued at June 30, 2020 and 60,710,983 at December 31, 2019)
—

 
—

Additional paid-in capital
531,577

 
532,070

Retained deficit
(105,167
)
 
(74,334
)
Treasury stock (at cost, 184,969 and 427,771 shares, respectively)
(2,055
)
 
(4,234
)
Accumulated other comprehensive loss
(248,982
)
 
(218,651
)
Total Titan shareholders’ equity
175,373

 
234,851

Noncontrolling interests
1,284

 
4,137

Total equity
176,657

 
238,988

Total liabilities and equity
$
1,031,294

 
$
1,114,307


 See accompanying Notes to Condensed Consolidated Financial Statements.

3


TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(All amounts in thousands, except share data)
 
 Number of
common shares
 
Additional
paid-in
capital
 
Retained (deficit) earnings
 
Treasury stock
 
Accumulated other comprehensive (loss) income
 
Total Titan Equity
 
 Noncontrolling interest
 
Total Equity
Balance January 1, 2019
59,916,973

 
$
519,498

 
$
(29,048
)
 
$
(7,831
)
 
$
(203,571
)
 
$
279,048

 
$
(8,951
)
 
$
270,097

Net income (loss) *
 
 
 
 
1,977

 
 
 
 
 
1,977

 
(636
)
 
1,341

Currency translation adjustment, net *
 
 
 
 
 
 
 
 
(5,281
)
 
(5,281
)
 
474

 
(4,807
)
Pension liability adjustments, net of tax
 
 
 
 
 
 
 
 
466

 
466

 
 
 
466

Dividends declared
 
 
 
 
(301
)
 
 
 
 
 
(301
)
 
 
 
(301
)
Accounting standards adoption
 
 
 
 
4,346

 
 
 
(4,933
)
 
(587
)
 
 
 
(587
)
Redeemable noncontrolling interest activity
 
 
9,437

 
 
 
 
 
 
 
9,437

 
15,445

 
24,882

Redemption value adjustment
 
 
(776
)
 
 
 
 
 
 
 
(776
)
 
 
 
(776
)
Stock-based compensation
 
 
269

 
 
 
 
 
 
 
269

 
 
 
269

VIE distributions
 
 
 
 
 
 
 
 
 
 
—

 
(1,054
)
 
(1,054
)
Issuance of treasury stock under 401(k) plan
29,414

 
(123
)
 
 
 
264

 
 
 
141

 
 
 
141

Balance March 31, 2019
59,946,387

 
$
528,305

 
$
(23,026
)
 
$
(7,567
)
 
$
(213,319
)
 
$
284,393

 
$
5,278

 
$
289,671

Net (loss) income *
 
 
 
 
(6,424
)
 
 
 
 
 
(6,424
)
 
12

 
(6,412
)
Currency translation adjustment, net *
 
 
 
 
 
 
 
 
4,785

 
4,785

 
317

 
5,102

Pension liability adjustments, net of tax
 
 
 
 
 
 
 
 
538

 
538

 
 
 
538

Dividends declared
 
 
 
 
(301
)
 
 
 
 
 
(301
)
 
 
 
(301
)
Redemption value adjustment
 
 
(661
)
 
 
 
 
 
 
 
(661
)
 
 
 
(661
)
Stock-based compensation
 
 
286

 
 
 
 
 
 
 
286

 
 
 
286

VIE distributions
 
 
 
 
 
 
 
 
 
 
—

 
(450
)
 
(450
)
Issuance of treasury stock under 401(k) plan
53,983

 
(167
)
 
 
 
485

 
 
 
318

 
 
 
318

Balance June 30, 2019
60,000,370

 
$
527,763

 
$
(29,751
)
 
$
(7,082
)
 
$
(207,996
)
 
$
282,934

 
$
5,157

 
$
288,091


* Net income (loss) excludes $(334) and $(265) of net loss attributable to redeemable noncontrolling interest for the three months ended March 31, 2019 and June 30, 2019, respectively. Currency translation adjustment excludes $428 and $321 of currency translation related to redeemable noncontrolling interest for the three months ended March 31, 2019 and June 30, 2019, respectively.


4


 
 Number of
common shares
 
Additional
paid-in
capital
 
Retained (deficit) earnings
 
Treasury stock
 
Accumulated other comprehensive (loss) income
 
Total Titan Equity
 
 Noncontrolling interest
 
Total Equity
Balance January 1, 2020
60,283,212

 
$
532,070

 
$
(74,334
)
 
$
(4,234
)
 
$
(218,651
)
 
$
234,851

 
$
4,137

 
$
238,988

Net income (loss)


 


 
(25,486
)
 


 


 
(25,486
)
 
(2,013
)
 
(27,499
)
Currency translation adjustment, net
 
 
 
 
 
 
 
 
(32,004
)
 
(32,004
)
 
(1,782
)
 
(33,786
)
Pension liability adjustments, net of tax


 


 


 


 
1,308

 
1,308

 
 
 
1,308

Dividends declared


 


 
(302
)
 


 


 
(302
)
 
 
 
(302
)
Stock-based compensation
2,500

 
468

 


 
22

 


 
490

 
 
 
490

VIE deconsolidation


 
 
 


 


 


 
—

 
(559
)
 
(559
)
Issuance of stock under 401(k) plan
76,280

 
282

 


 
 
 


 
282

 
 
 
282

Balance March 31, 2020
60,361,992

 
$
532,820

 
$
(100,122
)
 
$
(4,212
)
 
$
(249,347
)
 
$
179,139

 
$
(217
)
 
$
178,922

Net (loss) income
 
 
 
 
(5,045
)
 
 
 
 
 
(5,045
)
 
402

 
(4,643
)
Currency translation adjustment, net
 
 
 
 
 
 
 
 
523

 
523

 
491

 
1,014

Pension liability adjustments, net of tax
 
 
 
 
 
 
 
 
40

 
40

 
 
 
40

Unrealized loss on investment
 
 
 
 
 
 
 
 
(198
)
 
(198
)
 
 
 
(198
)
Stock-based compensation
2,500

 
559

 
 
 
22

 
 
 
581

 
 
 
581

Noncontrolling interest contributions
 
 
 
 
 
 
 
 
 
 
—

 
608

 
608

Issuance of treasury stock under 401(k) plan
237,802

 
(1,802
)
 
 
 
2,135

 
 
 
333

 
 
 
333

Balance June 30, 2020
60,602,294

 
$
531,577

 
$
(105,167
)
 
$
(2,055
)
 
$
(248,982
)
 
$
175,373

 
$
1,284

 
$
176,657

 


See accompanying Notes to Condensed Consolidated Financial Statements.

5


TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(All amounts in thousands)
 
Six months ended June 30,
Cash flows from operating activities:
2020
 
2019
Net loss
$
(32,142
)
 
(5,670
)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
 

 
 

Depreciation and amortization
27,119

 
27,809

Asset impairment
3,586

 
—

Deferred income tax provision
(2,111
)
 
156

Loss on sale of Wheels India Limited shares

703

 
—

Gain on property insurance settlement
(4,936
)
 
—

Stock-based compensation
1,071

 
555

Issuance of stock under 401(k) plan
615

 
459

Foreign currency translation (gain) loss
8,122

 
(1,789
)
(Increase) decrease in assets:
 

 
 

Accounts receivable
(22,383
)
 
(27,193
)
Inventories
23,051

 
14,258

Prepaid and other current assets
(2,491
)
 
(1,763
)
Other assets
844

 
1,305

Increase (decrease) in liabilities:
 

 
 

Accounts payable
(11,568
)
 
(3,863
)
Other current liabilities
19,180

 
(6,949
)
Other liabilities
(3,159
)
 
(7,316
)
Net cash provided by (used for) operating activities
5,501

 
(10,001
)
Cash flows from investing activities:
 

 
 

Capital expenditures
(8,402
)
 
(16,725
)
Payments related to redeemable noncontrolling interest
—

 
(41,000
)
Sale of Wheels India Limited shares
15,722

 
—

Proceeds from property insurance settlement
4,936

 
—

Other
(358
)
 
1,235

Net cash provided by (used for) investing activities
11,898

 
(56,490
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
76,798

 
92,723

Payment on debt
(74,011
)
 
(42,083
)
Dividends paid
(603
)
 
(599
)
Other financing activities
608

 
—

Net cash provided by financing activities
2,792

 
50,041

Effect of exchange rate changes on cash
(6,830
)
 
1,131

Net increase (decrease) in cash and cash equivalents
13,361

 
(15,319
)
Cash and cash equivalents, beginning of period
66,799

 
81,685

Cash and cash equivalents, end of period
$
80,160

 
$
66,366

 
 
 
 
Supplemental information:
 
 
 
Interest paid
$
15,188

 
$
16,416

Income taxes paid, net of refunds received
$
4,732

 
$
4,203





See accompanying Notes to Condensed Consolidated Financial Statements.

6


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


1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements include the accounts of Titan International, Inc. and its subsidiaries (Titan or the Company) and have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the SEC). Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. These unaudited condensed consolidated interim financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the Company's financial position as of June 30, 2020, and the results of operations and cash flows for the three months ended June 30, 2020 and 2019, and should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 4, 2020 (the 2019 Form 10-K). All significant intercompany transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements include estimates and assumptions of management that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.

COVID-19 Pandemic
COVID-19 continued to have an impact on the Company. Titan's workforce and operations have been significantly impacted as a result of government mandates in certain countries to work from home to minimize the spread of the virus. In some of the countries where the Company has operations and where COVID-19 has been widespread (such as the Company’s European and Latin America locations), the Company’s operations were significantly curtailed during March through May 2020. The Company’s operations have since resumed with additional sanitary and other protective health measures which have increased operating costs. The Company's operations may not return to historical levels in the near term, depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date and numerous other uncertainties.

The COVID-19 pandemic affected the Company’s operations in the second quarter, and may continue to do so indefinitely thereafter. All of these factors may have far reaching impacts on the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company’s management and employees, customer behaviors, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and the outcomes are uncertain.

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 6.50% senior secured notes due 2023 (senior secured notes) were carried at a cost of $396.4 million at June 30, 2020. The fair value of the senior secured notes at June 30, 2020, as obtained through an independent pricing source, was approximately $262.1 million.

Cash dividends
The Company declared cash dividends of $0.005 per share of common stock for the first quarter of 2020 and for each of the quarters ended June 30, 2019. The first quarter 2020 cash dividend of $0.005 per share of common stock was paid on April 15, 2020, to shareholders of record on March 31, 2020. On June 11, 2020, the Board of Directors unanimously approved the suspension of the Company’s quarterly common stock dividend until further notice.

New accounting standards

Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (the FASB) issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions and reasonable and

7


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

supportable forecasts. For trade receivables, loans, and other financial instruments, we are required to use a forward-looking expected loss model that reflects losses that are probable rather than the incurred loss model for recognizing credit losses. The standard became effective for interim and annual periods beginning after December 15, 2019. In addition, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, which provides clarity on certain aspects of the amendments in ASU 2016-13. The Company adopted this guidance prospectively on January 1, 2020 and it did not have a material effect on the Company's condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments in this update are effective for fiscal years beginning after December 15, 2019. We adopted this ASU on January 1, 2020 and it did not have a material effect on the Company's condensed consolidated financial statements.

Accounting standards issued but not yet adopted

In August 2018, the FASB issued ASU No. 2018-14, "Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this update are effective for fiscal years ending after December 15, 2020. The adoption of this guidance is not expected to have a material effect on the Company's condensed consolidated financial statements.

In March 2020, the SEC issued a final rule that amends the disclosure requirements related to certain registered securities under SEC Regulation S-X Rule 3-10 with respect to the disclosure requirements related to issuers and guarantors of guaranteed debt securities. The final rule allows registrants to provide alternative financial disclosures in either the registrant’s MD&A or financial statements, rather than the previous requirement under Rule 3-10, which required condensed consolidating financial information within the financial statements. It also simplifies the requirements in Rule 3-10 that currently must be met for a parent company to qualify for exceptions allowing it to provide alternative disclosures rather than full audited financial statements. The final rule also reduces the periods for which summarized financial information is required to be presented to the most recent (1) annual period and (2) year-to-date interim period. The final rule applies to annual reports on Form 10-K for fiscal years ending after January 4, 2021 and quarterly reports on Form 10-Q for quarterly periods ending after January 4, 2021 and registrants may voluntarily comply with the final rule before the effective date. The Company does not expect the future adoption, which is limited to disclosures only, to have a material effect on the Company’s consolidated financial statements.

2. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following (amounts in thousands):
 
June 30,
2020
 
December 31,
2019
Accounts receivable
$
195,786

 
$
188,952

Allowance for doubtful accounts
(3,376
)
 
(3,714
)
Accounts receivable, net
$
192,410

 
$
185,238


Accounts receivable are reduced by an allowance for doubtful accounts for estimated uncollectible accounts receivable, which is based upon historical experience and specific customer collection issues. Accounts are written off against the allowance account when they are determined to no longer be collectible.


8


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

3. INVENTORIES
 
Inventories consisted of the following (amounts in thousands):
 
June 30,
2020
 
December 31,
2019
Raw material
$
68,894

 
$
83,569

Work-in-process
42,243

 
48,369

Finished goods
183,400

 
201,418

 
$
294,537

 
$
333,356


 
Inventories are valued at the lower of cost or net realizable value. Net realizable value is estimated based on current selling prices. Inventory costs are calculated using the first-in, first-out (FIFO) method or average cost method. Estimated provisions are established for slow-moving and obsolete inventory.


4. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consisted of the following (amounts in thousands):
 
June 30,
2020
 
December 31,
2019
Land and improvements
$
41,026

 
$
44,386

Buildings and improvements
257,572

 
265,281

Machinery and equipment
591,561

 
605,743

Tools, dies and molds
112,307

 
113,603

Construction-in-process
11,360

 
16,237

 
1,013,826

 
1,045,250

Less accumulated depreciation
(676,180
)
 
(670,452
)
 
$
337,646

 
$
374,798


 
Depreciation on property, plant and equipment for the six months ended June 30, 2020 and 2019, totaled $25.1 million and $26.1 million, respectively.

The Company recorded a $2.6 million asset impairment charge during the six months ended June 30, 2020 related to certain machinery and equipment located at Titan Tire Reclamation Corporation (TTRC) in Canada as a result of market declines, which indicated the remaining book value of the equipment is more than the fair market value.

In the second quarter of 2020, the Company took steps towards the finalization of the closure of its wheel operations in Saltville, Virginia, with plans for completion by the end of the third quarter of 2020. As a part of this process, the Company expects to incur disposal costs related to the closure but an estimated amount or range of amounts has not yet been determined.  There are approximately $0.5 million of net property, plant and equipment at this location.


9


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

5. INTANGIBLE ASSETS, NET

The components of intangible assets consisted of the following (amounts in thousands):
 
Weighted Average Useful Lives (in years) June 30, 2020
 
June 30,
2020
 
December 31,
2019
Amortizable intangible assets:
 
 
 
 
 
     Customer relationships
7.2
 
$
12,420

 
$
12,629

     Patents, trademarks and other
8.6
 
10,507

 
11,598

          Total at cost
 
 
22,927

 
24,227

     Less accumulated amortization
 
 
(14,391
)
 
(14,461
)
 
 
 
$
8,536

 
$
9,766


   
Amortization related to intangible assets for the six months ended June 30, 2020 and 2019, totaled $1.2 million and $1.1 million, respectively. Intangible assets are included as a component of other assets in the Condensed Consolidated Balance Sheets.

The estimated aggregate amortization expense at June 30, 2020, for each of the years (or other periods) set forth below was as follows (amounts in thousands):
July 1 - December 31, 2020
$
972

2021
1,390

2022
972

2023
972

2024
971

Thereafter
3,259

 
$
8,536




6. WARRANTY

Changes in the warranty liability during the six months ended June 30, 2020 and 2019, respectively, consisted of the following (amounts in thousands):
 
2020
 
2019
Warranty liability, January 1
$
14,334

 
$
16,327

Provision for warranty liabilities
3,555

 
1,722

Warranty payments made
(3,784
)
 
(2,987
)
Warranty liability, June 30
$
14,105

 
$
15,062



The Company provides limited warranties on workmanship on its products in all market segments. The majority of the Company’s products are subject to a limited warranty that ranges between less than one year and ten years, with certain product warranties 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 Condensed Consolidated Balance Sheets.


10


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

7. DEBT
 
Long-term debt consisted of the following (amounts in thousands):
 
June 30, 2020
 
Principal Balance
 
Unamortized Debt Issuance
 
Net Carrying Amount
6.50% senior secured notes due 2023
$
400,000

 
$
(3,590
)
 
$
396,410

Titan Europe credit facilities
51,272

 
—

 
51,272

Revolving credit facility
28,000

 
—

 
28,000

Other debt
22,742

 
—

 
22,742

Capital leases
4,600

 
—

 
4,600

     Total debt
506,614

 
(3,590
)
 
503,024

Less amounts due within one year
40,784

 
—

 
40,784

     Total long-term debt
$
465,830

 
$
(3,590
)
 
$
462,240


 
 
December 31, 2019
 
Principal Balance
 
Unamortized Debt Issuance
 
Net Carrying Amount
6.50% senior secured notes due 2023
$
400,000

 
$
(4,040
)
 
$
395,960

Titan Europe credit facilities
43,591

 
—

 
43,591

Revolving credit facility
36,000

 
—

 
36,000

Other debt
24,171

 
—

 
24,171

Capital leases
4,880

 
—

 
4,880

     Total debt
508,642

 
(4,040
)
 
504,602

Less amounts due within one year
61,253

 
—

 
61,253

     Total long-term debt
$
447,389

 
$
(4,040
)
 
$
443,349



Aggregate principal maturities of long-term debt at June 30, 2020, for each of the years (or other periods) set forth below were as follows (amounts in thousands):
July 1 - December 31, 2020
$
25,822

2021
24,056

2022
38,612

2023
406,836

2024
5,545

Thereafter
5,743

 
$
506,614


 
6.50% senior secured notes due 2023
The senior secured notes are due November 2023. Including the impact of debt issuance costs, these notes had an effective yield of 6.79% at issuance. 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.

Titan Europe credit facilities
The Titan Europe credit facilities include borrowings from various institutions totaling $51.3 million in aggregate principal amount at June 30, 2020. Maturity dates on this debt range from less than one year to nine years. The Titan Europe facilities are secured by the assets of Titan's subsidiaries in Italy, Spain, Germany, and Brazil.


11


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

Revolving credit facility
The Company has a $125 million revolving credit facility (credit facility) with BMO Harris Bank N.A., as agent, and other financial institutions party thereto. The credit facility is collateralized by accounts receivable and inventory of certain of the Company’s domestic subsidiaries and is scheduled to mature in February 2022. From time to time Titan's availability under this credit facility may be less than $125 million as a result of outstanding letters of credit and eligible accounts receivable and inventory balances at certain of its domestic subsidiaries. At June 30, 2020, there were $28.0 million in borrowings under the credit facility and $19.7 million in outstanding letters of credit, and the amount available for borrowing totaled $37.9 million.

Other debt
The Company has working capital loans at Titan Pneus do Brasil Ltda and Voltyre-Prom at various interest rates, which totaled $11.5 million and $10.7 million at June 30, 2020, respectively. Maturity dates on this debt range from less than one year to three years.


8. REDEEMABLE NONCONTROLLING INTEREST

The Company, in partnership with One Equity Partners (OEP) and the Russian Direct Investment Fund (RDIF), owned all of the equity interests in Voltyre-Prom, a leading producer of agricultural and industrial tires in Volgograd, Russia. The Company is party to a shareholders' agreement with OEP and RDIF (Shareholders' Agreement) which was entered into in connection with the acquisition of Voltyre-Prom. The agreement contains a settlement put option which was exercisable during a six-month period beginning July 9, 2018. The settlement put option required Titan to purchase the equity interests from OEP and RDIF in Voltyre-Prom with cash or Titan common stock, at a value set by the agreement. The value set by the agreement was the greater of: the aggregate of the investment of the selling party and an amount representing an internal rate of return of 8%, or the last twelve months of EBITDA multiplied by 5.5 less net debt times the selling party's ownership percentage.

On November 14, 2018, the Company received notification of exercise of the put option from RDIF. On February 11, 2019, the Company entered into a definitive agreement (the "Agreement") with an affiliate of RDIF relating to the put option that was exercised by RDIF. The transactions contemplated by the Agreement closed on February 22, 2019. Under the terms of the Agreement, in full satisfaction of the settlement put option that was exercised by RDIF, Titan paid to RDIF $25 million in cash at the closing of the transaction, and agreed, subject to the completion of regulatory approval, to issue to RDIF in a private placement 4,032,259 shares of restricted Titan common stock. Due to pending regulatory approval, the issuance of the shares of restricted Titan common stock pursuant to the Agreement was not completed as of June 30, 2020. Immediately following the closing, RDIF continued to own the same interest in Voltyre-Prom, subject to the terms of the Agreement and the Shareholders’ Agreement. Titan has retained the right to buy back the Titan shares from RDIF for $25 million until February 12, 2022, the three-year anniversary of the signing of the Agreement, and, if the stock buyback is consummated within the first year, at the time of such buyback, RDIF would be required to convey to Titan, based on current ownership, a 10.71% interest in Voltyre-Prom, resulting in RDIF reducing its interest in Voltyre-Prom from 35.7% to 25%.

On January 8, 2019, the Company received notification of exercise of the put option from OEP. During the second quarter of 2019, the Company made a payment to OEP in the amount of $16.0 million representing the majority of the interest on the amount due to OEP with respect to the put option. On July 30, 2019, Titan Luxembourg S.à r.l. (the “Titan Purchaser”), a subsidiary of the Company, entered into a sale purchase agreement (the “OEP Agreement”) with subsidiaries of OEP, relating to the settlement put option under the Shareholders’ Agreement that was exercised by OEP. Pursuant to the terms of the OEP Agreement, on July 31, 2019, the Titan Purchaser paid to OEP $30.7 million in cash, which, together with the Titan Purchaser’s prior payment to OEP of $16.0 million during the second quarter of 2019, were made in full satisfaction of the settlement put option exercised by OEP under the Shareholders’ Agreement. Immediately following the closing, OEP ceased to have any ownership interests in, and the Titan Purchaser and RDIF owned 64.3% and 35.7%, respectively, of, Voltyre-Prom.

As of June 30, 2020, the value of the redeemable noncontrolling interest held by RDIF was recorded at $25 million, the value of the shares of restricted stock to be issued pursuant to the terms of the agreement.


12


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

The following is a reconciliation of redeemable noncontrolling interest as of June 30, 2020 and 2019 (amounts in thousands):
 
2020
 
2019
Balance at January 1
$
25,000

 
$
119,813

   Reclassification as a result of Agreement regarding put option
—

 
(49,883
)
   Payment of interest on redeemable noncontrolling interest
—

 
(16,000
)
   Loss attributable to redeemable noncontrolling interest
—

 
(599
)
   Currency translation
—

 
749

   Redemption value adjustment
—

 
1,437

Balance at June 30,
$
25,000

 
$
55,517



This obligation represents the value of the restricted common stock due to RDIF on June 30, 2020, and is presented in the Condensed Consolidated Balance Sheets in redeemable noncontrolling interest, which is treated as mezzanine equity.

9. LEASES

The Company leases certain buildings and equipment under both operating and finance leases.  Certain lease agreements provide for renewal options, fair value purchase options, and payment of property taxes, maintenance, and insurance by the Company. Under ASC 842, the Company made an accounting policy election, by class of underlying asset, not to separate non-lease components such as those previously stated from lease components and instead will treat the lease agreement as a single lease component for all asset classes. Operating right-of-use (ROU) assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent Titan's obligations to make lease payments arising from the lease. The majority of Titan's leases are operating leases. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of Titan's leases do not provide an implicit interest rate, the Company used its incremental borrowing rate (6.79%), based on the information available at the lease commencement date, in determining the present value of lease payments. Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales and selling, general and administrative expenses on the Condensed Consolidated Statement of Operations. Amortization expense associated with finance leases is included in cost of sales and selling, general and administrative expenses, and interest expense associated with finance leases is included in interest expense in the Condensed Consolidated Statement of Operations. Short-term operating leases, which have an initial term of twelve months or less, are not recorded on the Condensed Consolidated Balance Sheets.

13


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

 
Supplemental balance sheet information related to leases was as follows (amounts in thousands):
 
Balance Sheet Classification
 
June 30, 2020
December 31, 2019
Operating lease ROU assets
Operating lease assets
 
$
21,480

$
23,914

 
 
 
 
 
Operating lease current liabilities
Other current liabilities
 
$
6,226

$
6,729

Operating lease long-term liabilities
Other long-term liabilities
 
15,918

17,360

    Total operating lease liabilities
 
 
$
22,144

$
24,089

 
 
 
 
 
Finance lease, gross
Property, plant & equipment, net
 
$
6,471

$
6,684

Finance lease accumulated depreciation
Property, plant & equipment, net
 
(1,616
)
(2,194
)
   Finance lease, net
 
 
$
4,855

$
4,490

 
 
 
 
 
Finance lease current liabilities
Other current liabilities
 
$
1,391

$
1,110

Finance lease long-term liabilities
Long-term debt
 
3,209

3,770

   Total finance lease liabilities
 
 
$
4,600

$
4,880


 
At June 30, 2020, maturity of lease liabilities were as follows (amounts in thousands):
 
Operating Leases
 
Finance Leases
July 1 - December 31, 2020
$
3,960

 
$
820

2021
6,702

 
1,615

2022
5,344

 
1,528

2023
3,511

 
1,100

2024
2,006

 
411

Thereafter
3,577

 
191

Total lease payments
$
25,100

 
$
5,665

Less imputed interest
2,956

 
1,065

 
$
22,144

 
$
4,600

 
 
 
 
Weighted average remaining lease term (in years)
4.5

 
3.5


Supplemental cash flow information related to leases for the six months ended June 30, 2020 were as follows: operating cash flows from operating leases were $4.2 million and operating cash flows from finance leases were $0.2 million.

14


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

10. 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 a number of defined contribution plans in the U.S. and at foreign subsidiaries. The Company contributed approximately $0.9 million to the pension plans during the six months ended June 30, 2020, and expects to contribute approximately $1.1 million to the pension plans during the remainder of 2020.
 
The components of net periodic pension cost consisted of the following for the periods set forth below (amounts in thousands):
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Service cost
$
242

 
$
205

 
$
528

 
$
430

Interest cost
876

 
1,106

 
1,738

 
2,229

Expected return on assets
(1,358
)
 
(1,188
)
 
(2,718
)
 
(2,377
)
Amortization of unrecognized prior service cost
—

 
57

 
—

 
113

Amortization of net unrecognized loss
696

 
765

 
1,392

 
1,530

      Net periodic pension cost
$
456

 
$
945

 
$
940

 
$
1,925


Service cost is recorded as cost of sales in the Condensed Consolidated Statement of Operations while all other components are recorded in other income.


11. VARIABLE INTEREST ENTITIES
 
The Company holds a variable interest in two joint ventures for which the Company is the primary beneficiary. These joint ventures operate distribution facilities that primarily distribute mining products. Titan is the 50% owner of one of these distribution facilities, which is located in Canada, and the 40% owner of the other such facility, which is located in Australia. The Company’s variable interests in these two joint ventures relate to sales of Titan products to these entities, consigned inventory, and working capital loans. Titan also is party to a joint venture that is the consortium that owns Voltyre-Prom, of which Titan originally was a 43% owner. On July 31, 2019, however, Titan purchased additional shares resulting in a 64.3% ownership in the consortium and the joint venture became a majority owned entity and is no longer a variable interest entity (a VIE). See Note 8 for additional information.
 
The Company also held a variable interest in two other entities for which Titan was the primary beneficiary. Each of these entities provided specific manufacturing related services at the Company's Tennessee facility. Titan's variable interest in these entities relates to financial support to the entities through providing many of the assets used by these entities in their business. The Company owns no equity in these entities. In March 2020, the Company delivered a notice of termination of the supply agreement with these entities and the Company no longer holds a variable interest in them.
 
As the primary beneficiary of these VIEs', the VIEs’ assets, liabilities, and results of operations are included in the Company’s condensed consolidated financial statements. The other equity holders’ interests are reflected in “Net income (loss) attributable to noncontrolling interests” in the Condensed Consolidated Statements of Operations and “Noncontrolling interests” in the Condensed Consolidated Balance Sheets.
 

15


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

The following table summarizes the carrying amount of the VIEs’ assets and liabilities included in the Company’s Condensed Consolidated Balance Sheets:
 
June 30,
2020
 
December 31, 2019
Cash and cash equivalents
$
1,857

 
$
2,190

Inventory
1,038

 
1,070

Other current assets
786

 
1,027

Property, plant and equipment, net
1,236

 
1,327

   Total assets
$
4,917

 
$
5,614

 
 
 
 
Current liabilities
$
862

 
$
1,110

Other long-term liabilities
542

 
579

  Total liabilities
$
1,404

 
$
1,689


 
All assets in the above table can only be used to settle obligations of the consolidated VIE to which the respective assets relate. Liabilities are nonrecourse obligations. Amounts presented in the table above are adjusted for intercompany eliminations.
The Company holds variable interests in certain VIEs that are not consolidated because Titan is not the primary beneficiary. The Company's involvement with these entities is in the form of direct equity interests and prepayments related to purchases of materials. The maximum exposure to loss as reflected in the table below represents the loss of assets recognized by Titan relating to non-consolidated entities and amounts due to the non-consolidated assets. The assets and liabilities recognized in Titan's Condensed Consolidated Balance Sheets related to Titan's interest in these non-consolidated VIEs and the Company's maximum exposure to loss related to non-consolidated VIEs as of the dates set forth below were as follows (amounts in thousands):