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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended: March 31, 2022
or
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☐ | 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)
1525 Kautz Road, Suite 600, West Chicago, IL
(Address of principal executive offices)
36-3228472
(I.R.S. Employer Identification No.)
60185
(Zip Code)
(217) 228-6011
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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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.
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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: 62,656,877 shares of common stock, $0.0001 par value, as of April 25, 2022.
TITAN INTERNATIONAL, INC.
TABLE OF CONTENTS
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)
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| Three months ended | | |
| March 31, | | |
| 2022 | | 2021 | | | | |
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Net sales | $ | 555,997 | | | $ | 403,518 | | | | | |
Cost of sales | 469,268 | | | 350,253 | | | | | |
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Gross profit | 86,729 | | | 53,265 | | | | | |
Selling, general and administrative expenses | 36,227 | | | 34,028 | | | | | |
Research and development expenses | 2,920 | | | 2,553 | | | | | |
Royalty expense | 2,874 | | | 2,453 | | | | | |
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Income from operations | 44,708 | | | 14,231 | | | | | |
Interest expense | (7,907) | | | (7,523) | | | | | |
Foreign exchange gain | 5,317 | | | 9,477 | | | | | |
Other expense | (8,859) | | | (368) | | | | | |
Income before income taxes | 33,259 | | | 15,817 | | | | | |
Provision for income taxes | 8,681 | | | 2,594 | | | | | |
Net income | 24,578 | | | 13,223 | | | | | |
Net income (loss) attributable to noncontrolling interests | 656 | | | (351) | | | | | |
Net income attributable to Titan and applicable to common shareholders | $ | 23,922 | | | $ | 13,574 | | | | | |
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Income per common share: | | | | | | | |
Basic | $ | 0.37 | | | $ | 0.22 | | | | | |
Diluted | $ | 0.37 | | | $ | 0.22 | | | | | |
Average common shares and equivalents outstanding: | | | | | | | |
Basic | 63,860 | | | 61,466 | | | | | |
Diluted | 64,350 | | | 62,414 | | | | | |
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See accompanying Notes to Condensed Consolidated Financial Statements.
TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(All amounts in thousands)
| | | | | | | | | | | |
| Three months ended |
| March 31, |
| 2022 | | 2021 |
Net income | $ | 24,578 | | | $ | 13,223 | |
Derivative gain | 303 | | | 40 | |
Currency translation adjustment, net | 17,275 | | | (27,178) | |
Pension liability adjustments, net of tax of $(182) and $(44), respectively | 544 | | | 873 | |
Comprehensive income (loss) | 42,700 | | | (13,042) | |
Net comprehensive loss attributable to noncontrolling interests | (526) | | | (864) | |
Comprehensive income (loss) attributable to Titan | $ | 43,226 | | | $ | (12,178) | |
See accompanying Notes to Condensed Consolidated Financial Statements.
TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share data)
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| March 31, 2022 | | December 31, 2021 |
| |
| (unaudited) | | |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 98,144 | | | $ | 98,108 | |
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Accounts receivable, net | 309,411 | | | 255,180 | |
Inventories | 424,200 | | | 392,615 | |
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Prepaid and other current assets | 79,715 | | | 67,401 | |
Total current assets | 911,470 | | | 813,304 | |
Property, plant and equipment, net | 298,285 | | | 301,109 | |
Operating lease assets | 12,526 | | | 20,945 | |
Deferred income taxes | 15,888 | | | 16,831 | |
Other long-term assets | 31,132 | | | 30,496 | |
Total assets | $ | 1,269,301 | | | $ | 1,182,685 | |
| | | |
Liabilities | | | |
Current liabilities | | | |
Short-term debt | $ | 37,853 | | | $ | 32,500 | |
Accounts payable | 302,382 | | | 278,099 | |
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Other current liabilities | 151,660 | | | 140,214 | |
Total current liabilities | 491,895 | | | 450,813 | |
Long-term debt | 484,600 | | | 452,451 | |
Deferred income taxes | 4,124 | | | 3,978 | |
Other long-term liabilities | 42,962 | | | 48,271 | |
Total liabilities | 1,023,581 | | | 955,513 | |
| | | |
Equity | | | |
Titan shareholders' equity | | | |
Common stock ($0.0001 par value, 120,000,000 shares authorized, 66,525,269 issued at March 31, 2022 and 66,492,660 at December 31, 2021) | — | | | — | |
Additional paid-in capital | 561,849 | | | 562,340 | |
Retained deficit | (61,517) | | | (85,439) | |
Treasury stock (at cost, 3,900,695 shares at March 31, 2022 and 80,876 shares at December 31, 2021) | (24,782) | | | (1,121) | |
| | | |
Accumulated other comprehensive loss | (227,176) | | | (246,480) | |
Total Titan shareholders’ equity | 248,374 | | | 229,300 | |
Noncontrolling interests | (2,654) | | | (2,128) | |
Total equity | 245,720 | | | 227,172 | |
Total liabilities and equity | $ | 1,269,301 | | | $ | 1,182,685 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(All amounts in thousands, except share data)
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| 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, 2021 | 61,376,981 | | | | | $ | 532,742 | | | $ | (135,025) | | | $ | (1,199) | | | | | $ | (217,254) | | | $ | 179,264 | | | $ | (2,999) | | | $ | 176,265 | |
Net income (loss) | | | | | | | 13,574 | | | | | | | | | 13,574 | | | (351) | | | 13,223 | |
Currency translation adjustment | | | | | | | | | | | | | (26,665) | | | (26,665) | | | (513) | | | (27,178) | |
Pension liability adjustments, net of tax | | | | | | | | | | | | | 873 | | | 873 | | | | | 873 | |
Derivative gain | | | | | | | | | | | | | 40 | | | 40 | | | | | 40 | |
Stock-based compensation | 146,322 | | | | | 487 | | | | | 82 | | | | | | | 569 | | | | | 569 | |
Issuance of common stock under 401(k) plan | 70,416 | | | | | 340 | | | | | | | | | | | 340 | | | | | 340 | |
Balance March 31, 2021 | 61,593,719 | | | | | $ | 533,569 | | | $ | (121,451) | | | $ | (1,117) | | | | | $ | (243,006) | | | $ | 167,995 | | | $ | (3,863) | | | $ | 164,132 | |
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| 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, 2022 | 66,411,784 | | | | | $ | 562,340 | | | $ | (85,439) | | | $ | (1,121) | | | | | $ | (246,480) | | | $ | 229,300 | | | $ | (2,128) | | | $ | 227,172 | |
Net income | | | | | | | 23,922 | | | | | | | | | 23,922 | | | 656 | | | 24,578 | |
Currency translation adjustment | | | | | | | | | | | | | 18,457 | | | 18,457 | | | (1,182) | | | 17,275 | |
Pension liability adjustments, net of tax | | | | | | | | | | | | | 544 | | | 544 | | | | | 544 | |
Derivative gain | | | | | | | | | | | | | 303 | | | 303 | | | | | 303 | |
Stock-based compensation | 212,440 | | | | | (851) | | | | | 1,339 | | | | | | | 488 | | | | | 488 | |
Issuance of common stock under 401(k) plan | 32,609 | | | | | 360 | | | | | | | | | | | 360 | | | | | 360 | |
Common stock repurchase | (4,032,259) | | | | | | | | | (25,000) | | | | | | | (25,000) | | | | | (25,000) | |
Balance March 31, 2022 | 62,624,574 | | | | | $ | 561,849 | | | $ | (61,517) | | | $ | (24,782) | | | | | $ | (227,176) | | | $ | 248,374 | | | $ | (2,654) | | | $ | 245,720 | |
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See accompanying Notes to Condensed Consolidated Financial Statements.
TITAN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(All amounts in thousands)
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| Three months ended March 31, |
Cash flows from operating activities: | 2022 | | 2021 |
Net income | $ | 24,578 | | | $ | 13,223 | |
Adjustments to reconcile net income to net cash used for operating activities: | | | |
Depreciation and amortization | 11,348 | | | 12,560 | |
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Loss on sale of the Australian wheel business | 10,890 | | | — | |
Deferred income tax provision (benefit) | 995 | | | (402) | |
Gain on fixed asset and investment sale | (110) | | | (485) | |
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Stock-based compensation | 488 | | | 570 | |
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Issuance of stock under 401(k) plan | 360 | | | 339 | |
Foreign currency gain | (5,448) | | | (9,571) | |
(Increase) decrease in assets: | | | |
Accounts receivable | (57,332) | | | (63,803) | |
Inventories | (34,240) | | | (27,313) | |
Prepaid and other current assets | (9,606) | | | (3,297) | |
Other assets | (330) | | | 337 | |
Increase (decrease) in liabilities: | | | |
Accounts payable | 23,918 | | | 60,581 | |
Other current liabilities | 13,728 | | | 401 | |
Other liabilities | 2,244 | | | 898 | |
Net cash used for operating activities | (18,517) | | | (15,962) | |
Cash flows from investing activities: | | | |
Capital expenditures | (7,637) | | | (8,861) | |
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Proceeds from the sale of the Australian wheel business | 9,293 | | | — | |
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Proceeds from sale of fixed assets | 756 | | | 545 | |
| | | |
Net cash provided by (used for) investing activities | 2,412 | | | (8,316) | |
Cash flows from financing activities: | | | |
Proceeds from borrowings | 76,782 | | | 21,881 | |
Repurchase of common stock | (25,000) | | | — | |
Payment on debt | (39,483) | | | (12,398) | |
| | | |
| | | |
| | | |
| | | |
| | | |
Other financing activities | (586) | | | (2,409) | |
Net cash provided by financing activities | 11,713 | | | 7,074 | |
Effect of exchange rate changes on cash | 4,428 | | | (4,273) | |
Net increase (decrease) in cash and cash equivalents | 36 | | | (21,477) | |
Cash and cash equivalents, beginning of period | 98,108 | | | 117,431 | |
Cash and cash equivalents, end of period | $ | 98,144 | | | $ | 95,954 | |
| | | |
Supplemental information: | | | |
Interest paid | $ | 869 | | | $ | 1,059 | |
Income taxes paid, net of refunds received | $ | 2,083 | | | $ | 3,703 | |
| | | |
| | | |
See accompanying Notes to Condensed Consolidated Financial Statements.
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 March 31, 2022, and the results of operations and cash flows for the three months ended March 31, 2022 and 2021, 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, 2021, filed with the SEC on March 3, 2022 (the 2021 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
The COVID-19 pandemic impact on the Company was less during the first quarter of 2022. The Company’s operations continued with additional sanitary and other protective health measures which have increased operating costs. While the Company's operations began to return to historical levels during 2021 and continuing into the first quarter of 2022, certain geographies (particularly China) continue to remain impacted by the COVID-19 pandemic due to new and emerging variants of COVID-19 resulting in higher employee absenteeism. Further, global supply chains are experiencing constraints as a result of the ongoing COVID-19 pandemic, including availability and pricing of raw materials, transportation and labor. The current constraints on the global supply chains are adding complexity to growth expectations in the near term. We expect that the pandemic will continue to have some impact on the Company's operations, though the nature and extent of the impact will depend on the duration and severity of the COVID-19 pandemic, the length of time it takes for more 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 other uncertainties.
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. Our 7.00% senior secured notes due 2028 (the senior secured notes due 2028) were carried at a cost of $394.7 million at March 31, 2022. The fair value of the senior secured notes due 2028 at March 31, 2022, as obtained through an independent pricing source, was approximately $402.0 million.
Russia-Ukraine Military Conflict
In February 2022, in response to the military conflict between Russia and Ukraine, the United States, other North Atlantic Treaty Organization member states, as well as non-member states, have announced targeted economic sanctions on Russia, certain Russian citizens and enterprises. The continuation of the conflict has triggered additional economic and other sanctions enacted by the United States, other North Atlantic Treaty Organization member states, and other countries. The Company currently owns 64.3% of the Russian entity, which represents approximately 6% and 7% of consolidated assets of Titan as of March 31, 2022 and December 31, 2021, respectively. The Russian operation represents approximately 5% of consolidated global sales for both the three months ended March 31, 2022 and March 31, 2021, respectively. The impact of the military conflict between Russia and Ukraine has not had a significant impact on global operations. The Company continues to monitor the potential impacts on the business and the ancillary impacts that the military conflict could have on other global operations.
Sale of Australian wheel business
On March 29, 2022, the Company entered into a definitive agreement (the Agreement) for the sale of its Australian wheel business, to OTR Tyres, a local leading national tire, wheel and service provider. The closing date of the transaction was March 31, 2022. The Agreement contains customary representations, warranties and covenants for transactions of this type. The sale includes gross proceeds and cash to be repatriated of approximately $17.5 million, and the assumption of all liabilities,
TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
including employee and lease obligations. Refer to footnote 13 for additional information on the loss on sale of the Australian wheel.
Adoption of new accounting standards
In November 2021, the FASB issued ASU No. 2021-10 Government Assistance (Topic 832), which requires annual disclosures
of transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy.
These required disclosures include information on the nature of transactions and related accounting policies used to account for
transactions, detail on the line items on the balance sheet and income statement affected by these transactions including
amounts applicable to each line, and significant terms and conditions of the transactions including commitments and
contingencies. The ASU is effective for fiscal years beginning after December 15, 2021. The Company receives various forms
of government assistance, primarily through grants associated with continued infrastructure development in certain foreign locations. The Company adopted the impact of this ASU effective January 1, 2022 and incorporated the required disclosures within the notes to condensed consolidated financial statements. The adoption did not have a material impact on our condensed consolidated financial statements.
2. ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following (amounts in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Accounts receivable | $ | 316,354 | | | $ | 259,730 | |
Allowance for doubtful accounts | (6,943) | | | (4,550) | |
Accounts receivable, net | $ | 309,411 | | | $ | 255,180 | |
3. INVENTORIES
Inventories consisted of the following (amounts in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Raw material | $ | 138,589 | | | $ | 135,241 | |
Work-in-process | 46,948 | | | 44,694 | |
Finished goods | 238,663 | | | 212,680 | |
| $ | 424,200 | | | $ | 392,615 | |
TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following (amounts in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Land and improvements | $ | 41,299 | | | $ | 41,010 | |
Buildings and improvements | 235,502 | | | 236,367 | |
Machinery and equipment | 579,072 | | | 578,816 | |
Tools, dies and molds | 110,732 | | | 111,169 | |
Construction-in-process | 24,059 | | | 20,288 | |
| 990,664 | | | 987,650 | |
Less accumulated depreciation | (692,379) | | | (686,541) | |
| $ | 298,285 | | | $ | 301,109 | |
Depreciation on property, plant and equipment for the three months ended March 31, 2022 and 2021 totaled $11.1 million and $11.9 million, respectively.
5. INTANGIBLE ASSETS, NET
The components of intangible assets, net consisted of the following (amounts in thousands):
| | | | | | | | | | | | | | | | | |
| Weighted Average Useful Lives (in years) March 31, 2022 | | March 31, 2022 | | December 31, 2021 |
Amortizable intangible assets: | | | | | |
Patents, trademarks and other | 11.20 | | $ | 9,457 | | | $ | 10,084 | |
Less accumulated amortization | | | (7,998) | | | (8,586) | |
| | | $ | 1,459 | | | $ | 1,498 | |
Amortization related to intangible assets for the three months ended March 31, 2022 and 2021 totaled $0.1 million and $0.3 million, respectively. Intangible assets are included as a component of other long-term assets in the Condensed Consolidated Balance Sheets.
The estimated aggregate amortization expense at March 31, 2022 for each of the years (or other periods) set forth below was as follows (amounts in thousands):
| | | | | |
April 1 - December 31, 2022 | $ | 106 | |
2023 | 145 | |
2024 | 132 | |
2025 | 123 | |
2026 | 123 | |
Thereafter | 830 | |
| $ | 1,459 | |
TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. WARRANTY
Changes in the warranty liability during the three months ended March 31, 2022 and 2021, respectively, consisted of the following (amounts in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Warranty liability, January 1 | $ | 16,628 | | | $ | 15,040 | |
Provision for warranty liabilities | 5,071 | | | 2,196 | |
Warranty payments made | (3,441) | | | (1,869) | |
Warranty liability, March 31 | $ | 18,258 | | | $ | 15,367 | |
Warranty accruals are included as a component of other current liabilities on the Condensed Consolidated Balance Sheets.
7. DEBT
Long-term debt consisted of the following (amounts in thousands):
| | | | | | | | | | | | | | | | | |
| March 31, 2022 |
| Principal Balance | | Unamortized Debt Issuance | | Net Carrying Amount |
7.00% senior secured notes due 2028 | $ | 400,000 | | | $ | (5,257) | | | $ | 394,743 | |
Titan Europe credit facilities | 50,215 | | | — | | | 50,215 | |
Revolving credit facility | 63,000 | | | — | | | 63,000 | |
Other debt | 14,495 | | | — | | | 14,495 | |
Total debt | 527,710 | | | (5,257) | | | 522,453 | |
Less amounts due within one year | 37,853 | | | — | | | 37,853 | |
Total long-term debt | $ | 489,857 | | | $ | (5,257) | | | $ | 484,600 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Principal Balance | | Unamortized Debt Issuance | | Net Carrying Amount |
7.00% senior secured notes due 2028 | $ | 400,000 | | | $ | (5,476) | | | $ | 394,524 | |
Titan Europe credit facilities | 44,993 | | | — | | | 44,993 | |
Revolving credit facility | 30,000 | | | — | | | 30,000 | |
Other debt | 15,434 | | | — | | | 15,434 | |
Total debt | 490,427 | | | (5,476) | | | 484,951 | |
Less amounts due within one year | 32,500 | | | — | | | 32,500 | |
Total long-term debt | $ | 457,927 | | | $ | (5,476) | | | $ | 452,451 | |
TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Aggregate principal maturities of long-term debt at March 31, 2022 for each of the years (or other periods) set forth below were as follows (amounts in thousands):
| | | | | |
April 1 - December 31, 2022 | $ | 34,085 | |
2023 | 12,172 | |
2024 | 7,584 | |
2025 | 3,927 | |
2026 | 65,523 | |
Thereafter | 404,419 | |
| $ | 527,710 | |
7.00% senior secured notes due 2028
On April 22, 2021, the Company issued $400.0 million aggregate principal amount of 7.00% senior secured notes due April 2028 (the senior secured notes due 2028), guaranteed by certain of the Company's subsidiaries. Including the impact of debt issuance costs, these notes had an effective yield of 7.27% at issuance. These notes are secured by the land and buildings of the following subsidiaries of the Company: Titan Wheel Corporation of Illinois, Titan Tire Corporation, Titan Tire Corporation of Freeport, and Titan Tire Corporation of Bryan.
Titan Europe credit facilities
The Titan Europe credit facilities include borrowings from various institutions totaling $50.2 million in aggregate principal amount at March 31, 2022. Maturity dates on this debt range from less than one year to five years.
Revolving credit facility
The Company has a $125 million revolving 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 October 28, 2026. The credit facility can be expanded by up to $50 million through an accordion provision within the agreement. 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 March 31, 2022, under the Company's $125 million credit facility there were $63.0 million in borrowings and $9.1 million in outstanding letters of credit, and the amount available for borrowing totaled $52.9 million.
Other debt
The Company has working capital loans at Titan Pneus do Brasil Ltda and Voltyre-Prom at various interest rates, which totaled $12.0 million and $2.5 million at March 31, 2022, respectively. Maturity dates on these loans are one year or less. The Company expects to negotiate an extension of the maturity dates on these loans with the respective financial institutions.
8. REDEEMABLE NONCONTROLLING INTEREST
The Company and the Russian Direct Investment Fund (RDIF) own all of the equity interests in Voltyre Prom, a leading producer of agricultural and industrial tires in Volgograd, Russia. On February 11, 2019, the Company entered into a definitive agreement (the Agreement) with an affiliate of the RDIF relating to the put option included in the Voltyre-Prom Shareholders' Agreement that was exercised by RDIF. Under the terms of the Agreement, in full satisfaction of the settlement put option that was exercised by RDIF, Titan paid $25 million in cash to RDIF at the closing of the transaction, and agreed, subject to the completion of regulatory approval, to issue 4,032,259 shares of restricted Titan common stock to RDIF in a private placement.
In November 2021, Titan received regulatory approval for the issuance of restricted stock to RDIF. On December 17, 2021, the Company issued 4,032,259 shares of restricted Titan common stock to the RDIF equity holders subject to the Company's right to repurchase the shares for $25 million until February 12, 2022.
On February 1, 2022, the Company entered into a Stock Purchase Agreement with the RDIF equity holders to buy back the restricted Titan common stock for the previously agreed amount of $25 million. The transaction was completed on February 1, 2022. Following the transaction, the Company and RDIF's ownership remained at 64.3% and 35.7%, respectively, of Voltyre-Prom.
TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 FASB Accounting Standards Codification Topic 842 "Leases," 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 (7.27%), 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 Statements 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 Statements of Operations.
Supplemental balance sheet information related to leases was as follows (amounts in thousands):
| | | | | | | | | | | | | | |
| Balance Sheet Classification | | March 31, 2022 | December 31, 2021 |
Operating lease ROU assets | Operating lease assets | | $ | 12,526 | | $ | 20,945 | |
| | | | |
Operating lease current liabilities | Other current liabilities | | $ | 4,968 | | $ | 6,180 | |
Operating lease long-term liabilities | Other long-term liabilities | | 4,866 | | 11,352 | |
Total operating lease liabilities | | | $ | 9,834 | | $ | 17,532 | |
| | | | |
Finance lease, gross | Property, plant & equipment, net | | $ | 5,724 | | $ | 5,305 | |
Finance lease accumulated depreciation | Property, plant & equipment, net | | (2,773) | | (2,801) | |
Finance lease, net | | | $ | 2,951 | | $ | 2,504 | |
| | | | |
Finance lease current liabilities | Other current liabilities | | $ | 2,476 | | $ | 2,384 | |
Finance lease long-term liabilities | Other long-term liabilities | | 3,655 | | 3,878 | |
Total finance lease liabilities | | | $ | 6,131 | | $ | 6,262 | |
At March 31, 2022, maturities of lease liabilities were as follows (amounts in thousands):
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
April 1 - December 31, 2022 | $ | 4,247 | | | $ | 2,166 | |
2023 | 4,375 | | | 2,179 | |
2024 | 1,472 | | | 892 | |
2025 | 369 | | | 737 | |
2026 | 152 | | | 559 | |
Thereafter | 345 | | | 6 | |
Total lease payments | $ | 10,960 | | | $ | 6,539 | |
Less imputed interest | 1,126 | | | 408 | |
| $ | 9,834 | | | $ | 6,131 | |
| | | |
Weighted average remaining lease term (in years) | 3.60 | | 2.95 |
Supplemental cash flow information related to leases for the three months ended March 31, 2022 were as follows: operating cash flows from operating leases were $2.2 million and operating cash flows from finance leases were $0.1 million.
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 $0.1 million to the pension plans during the three months ended March 31, 2022, and expects to contribute approximately $0.2 million to the pension plans during the remainder of 2022.
The components of net periodic pension (benefit) cost consisted of the following for the periods set forth below (amounts in thousands):
| | | | | | | | | | | | | | | |
| Three months ended | | |
| March 31, | | |
| 2022 | | 2021 | | | | |
Service cost | $ | 928 | | | $ | 157 | | | | | |
Interest cost | 717 | | | 700 | | | | | |
Expected return on assets | (1,518) | | | (1,506) | | | | | |
Amortization of unrecognized prior service cost | (16) | | | — | | | | | |
| | | | | | | |
Amortization of net unrecognized loss | (6) | | | 697 | | | | | |
Net periodic pension (benefit) cost | $ | 105 | | | $ | 48 | | | | | |
Service cost is recorded as cost of sales in the Condensed Consolidated Statements 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 Titan is the primary beneficiary. One of these joint ventures operate distribution facilities that primarily distribute mining products. Titan is the 50% owner of the distribution facility located in Canada. Titan is also a 50% owner of a manufacturer of undercarriage components and complete track systems for earthmoving machines in India. The Company’s variable interests in these joint ventures relate to sales of Titan products to these entities, consigned inventory, and working capital loans. As the primary beneficiary of these variable interest entities (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.
The following table summarizes the carrying amount of the VIEs’ assets and liabilities included in the Company’s Condensed Consolidated Balance Sheets (amounts in thousands): | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Cash and cash equivalents | $ | 1,963 | | | $ | 714 | |
Inventory | 3,366 | | | 2,459 | |
Other current assets | 5,607 | | | 5,135 | |
Property, plant and equipment, net | 3,299 | | | 3,414 | |
Other non-current assets | 624 | | | 626 | |
Total assets | $ | 14,859 | | | $ | 12,348 | |
| | | |
Current liabilities | $ | 2,616 | | | $ | 1,687 | |
Other long-term liabilities | 643 | | | 669 | |
Total liabilities | $ | 3,259 | | | $ | 2,356 | |
TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 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 relating to non-consolidated VIEs as of the dates set forth below were as follows (amounts in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Investments | $ | 6,818 | | | $ | 6,402 | |
Total VIE assets | 6,818 | | | 6,402 | |
Accounts payable | 3,078 | | | 4,296 | |
Maximum exposure to loss | $ | 9,896 | | | $ | 10,698 | |
12. ROYALTY EXPENSE
The Company has trademark license agreements with The Goodyear Tire & Rubber Company to manufacture and sell certain farm tires under the Goodyear brand. These agreements cover sales in North America, Latin America, Europe, the Middle East, Africa, Russia, and other Commonwealth of Independent States countries. Each of these agreements is scheduled to expire in 2025. Royalty expenses were $2.9 million and $2.5 million for the three months ended March 31, 2022 and 2021, respectively.
13. OTHER EXPENSE
Other expense consisted of the following (amounts in thousands):
| | | | | | | | | | | | | | | |
| Three months ended | | |
| March 31, | | |
| 2022 | | 2021 | | | | |
Loss on sale of Australian wheel business (1) | $ | (10,890) | | | $ | — | | | | | |
Proceeds from government grant (2) | 1,324 | | | — | | | | | |
Equity investment income | 248 | | | 64 | | | | | |
Gain on sale of assets | 110 | | | 791 | | | | | |
Other income (expense) | 349 | | | (1,223) | | | | | |
| $ | (8,859) | | | $ | (368) | | | | | |
(1) The loss on sale of the Australian wheel business is comprised primarily of the release of the cumulative translation adjustment of approximately $10.0 million and closing costs associated with the completion of the transaction of approximately $0.9 million. Refer to Footnote 1 for additional information.
(2) In August 2014, the Company received an approximately $17.0 million capital grant from the Italian government for asset damages related to the earthquake that occurred in May 2012 at one of our Italian subsidiaries. The grant was recorded as deferred income in non-current liabilities which is being amortized over the life of the reconstructed building. The Company received proceeds of an additional $1.9 million from the grant during the three months ended March 31, 2022 and recorded as other income of $1.3 million to match to the historical depreciation recorded on the underlying assets.
TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
14. INCOME TAXES
The Company recorded income tax expense of $8.7 million and $2.6 million for the three months ended March 31, 2022 and 2021, respectively. The Company's effective income tax rate was 26.1% and 16.4% for the three months ended March 31, 2022 and 2021, respectively.
The Company’s 2022 and 2021 income tax expense and rates differed 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 U.S. and certain foreign jurisdictions that incurred a full valuation allowance on deferred tax assets. In addition, there were non-deductible royalty expenses and statutorily required income adjustments made in certain foreign jurisdictions that negatively impacted the tax rate for the three months ended March 31, 2022 and 2021.
The Company continues to monitor the realization of its deferred tax assets and assesses the need for a valuation allowance. The Company analyzes available positive and negative evidence to determine if a valuation allowance is needed based on the weight of the evidence. This objectively verifiable evidence primarily includes the past three years' profit and loss positions. This process requires management to make estimates, assumptions, and judgments that are uncertain in nature. The Company has established valuation allowances with respect to deferred tax assets in the U.S. and certain foreign jurisdictions and continues to monitor and assess potential valuation allowances in all its jurisdictions.
Brazilian Tax Credits
In June 2021, the Company’s Brazilian subsidiaries received a notice that it had prevailed on an existing legal claim in regards to certain non-income (indirect) taxes that had been previously charged and paid. The matter specifically relates to companies’ rights to exclude the state tax on goods circulation (a value-added-tax or VAT equivalent, known in Brazil as “ICMS”) from the calculation of certain additional indirect taxes (specifically the program of social integration (“PIS”) and contribution for financing of social security (“COFINS”) levied by the Brazilian States on the sale of goods. The Company is in the process of submitting the related supporting documentation to the Brazilian tax authorities during the first half of 2022. After review by the Brazilian tax authorities, the Company could receive approximately $34 million of non-income tax credits to be applied as credits against future PIS/COFINS tax obligations. The Company plans to recognize the full benefit of the non-income tax credits, contingent upon successful approval and verification from the Brazilian tax authorities.
15. EARNINGS PER SHARE
Earnings per share (EPS) were as follows (amounts in thousands, except per share data):
| | | | | | | | | | | | | | | |
| Three months ended | | |
| March 31, | | |
| 2022 | | 2021 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net income attributable to Titan and applicable to common shareholders | $ | 23,922 | | | $ | 13,574 | | | | | |
| | | | | | | |
| | | | | | | |
Determination of shares: | | | | | | | |
Weighted average shares outstanding (basic) | 63,860 | | | 61,466 | | | | | |
Effect of equity awards | 490 | | | 948 | | | | | |
Weighted average shares outstanding (diluted) | 64,350 | | | 62,414 | | | | | |
Income per common share: | | | | | | | |
Basic | $ | 0.37 | | | $ | 0.22 | | | | | |
Diluted | $ | 0.37 | | | $ | 0.22 | | | | | |
16. LITIGATION
The Company is a party to routine legal proceedings arising out of the normal course of business. 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 liabilities pertaining to, legal judgments. In the opinion of management, the Company is not currently involved in any legal proceedings
TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
which, individually or in the aggregate, could have a material effect on its financial position, results of operations, or cash flows.
17. SEGMENT INFORMATION
The Company has aggregated its operating units into reportable segments based on its three customer markets: agricultural, earthmoving/construction, and consumer. Each reportable segment includes wheels, tires, wheel/tire assemblies, and undercarriage systems and components. These segments are based on the information used by the Chief Executive Officer to make certain operating decisions, allocate portions of capital expenditures, and assess segment performance. Segment external sales, expenses, and income from operations are determined based on the results of operations for the operating units of the Company's manufacturing facilities. Segment assets are generally determined on the basis of the tangible assets located at such operating units’ manufacturing facilities and the intangible assets associated with the acquisitions of such operating units. However, certain operating units’ property, plant and equipment balances are carried at the corporate level.
The table below presents information about certain operating results, separated by market segments, for the three months ended March 31, 2022 and 2021 (amounts in thousands):
| | | | | | | | | | | | | | | |
| Three months ended | | |
| March 31, | | |
| 2022 | | 2021 | | | | |
Net sales | | | | | | | |
Agricultural | $ | 309,600 | | | $ | 208,759 | | | | | |
Earthmoving/construction | 201,259 | | | 164,807 | | | | | |
Consumer | 45,138 | | | 29,952 | | | | | |
| $ | 555,997 | | | $ | 403,518 | | | | | |
Gross profit | | | | | | | |
Agricultural | $ | 47,924 | | | $ | 29,789 | | | | | |
Earthmoving/construction | 31,375 | | | 19,742 | | | | | |
Consumer | 7,430 | | | 3,734 | | | | | |
| | | | | | | |
| $ | 86,729 | | | $ | 53,265 | | | | | |
Income from operations | | | | | | | |
Agricultural | $ | 30,117 | | | $ | 15,283 | | | | | |
Earthmoving/construction | 15,840 | | | 5,575 | | | | | |
Consumer | 4,882 | | | 1,667 | | | | | |
Corporate & Unallocated | (6,131) | | | (8,294) | | | | | |
Income from operations | 44,708 | | | 14,231 | | | | | |
| | | | | | | |
Interest expense | (7,907) | | | (7,523) | | | | | |
| | | | | | | |
Foreign exchange gain | 5,317 | | | 9,477 | | | | | |
Other expense | (8,859) | | | (368) | | | | | |
Income before income taxes | $ | 33,259 | | | $ | 15,817 | | | | | |
TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Assets by segment were as follows as of the dates set forth below (amounts in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Total assets | | | |
Agricultural | $ | 555,528 | | | $ | 517,528 | |
Earthmoving/construction | 523,335 | | | 502,373 | |
Consumer | 142,407 | | | 133,906 | |
Corporate & Unallocated | 48,031 | | | 28,878 | |
| $ | 1,269,301 | | | $ | 1,182,685 | |
18. RELATED PARTY TRANSACTIONS
The Company sells products and pays commissions to companies controlled by persons related to the Chairman of the Board of Directors of the Company, Mr. Maurice Taylor. The related party is Mr. Fred Taylor, who is Mr. Maurice Taylor’s brother. Mr. Fred Taylor passed away on December 13, 2021. The companies with which Mr. Fred Taylor is associated that do business with Titan include the following: Blacksmith OTR, LLC; F.B.T. Enterprises, Inc.; Green Carbon, Inc.; Silverstone, Inc.; and OTR Wheel Engineering, Inc. Sales of Titan products to these companies were approximately $1.3 million for the three months ended March 31, 2022, and approximately $0.5 million for the three months ended March 31, 2021. Titan had purchases from these companies of approximately $0.3 million for the three months ended March 31, 2022, and had no purchases from these companies for the three months ended March 31, 2021. Titan had trade receivables due from these companies of approximately $0.5 million at March 31, 2022, and approximately $0.2 million at December 31, 2021. Sales commissions paid to the above companies were approximately $0.5 million for both the three months ended March 31, 2022 and March 31, 2021.
19. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consisted of the following (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Currency Translation Adjustments | | Gain (Loss) on Derivatives | | Unrecognized Losses and Prior Service Cost | | Total |
Balance at January 1, 2022 | $ | (236,059) | | | $ | (39) | | | $ | (10,382) | | | $ | (246,480) | |
Currency translation adjustments, net (1) | 18,457 | | | — | | | — | | | 18,457 | |
Defined benefit pension plans: | | | | | | | |
Amortization of unrecognized losses and prior service cost, net of tax of $(182) | — | | | — | | | 544 | | | 544 | |
Derivative gain | — | | | 303 | | | — | | | 303 | |
| | | | | | | |
Balance at March 31, 2022 | $ | (217,602) | | | $ | 264 | | | $ | (9,838) | | | $ | (227,176) | |
(1) The currency translation adjustments, net includes amounts reclassified into other expense within the Condensed Consolidated Statements of Operations of approximately $10 million for the three months ended March 31, 2022 related to the sale of the Australian wheel business. Refer to Note 1 for additional information.
TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Currency Translation Adjustments | | Gain (Loss) on Derivatives | | Unrecognized Losses and Prior Service Cost | | Total |
Balance at January 1, 2021 | $ | (194,151) | | | $ | (413) | | | $ | (22,690) | | | $ | (217,254) | |
Currency translation adjustments, net | (26,665) | | | — | | | — | | | (26,665) | |
Defined benefit pension plans: | | | | | | | |
Amortization of unrecognized losses and prior service cost, net of tax of $(44) | — | | | — | | | 873 | | | 873 | |
Derivative gain | — | | | 40 | | | — | | | 40 | |
| | | | | | | |
Balance at March 31, 2021 | $ | (220,816) | | | $ | (373) | | | $ | (21,817) | | | $ | (243,006) | |
The change in currency translation adjustments for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 was due to foreign currency rate fluctuations, the ongoing initiative to rationalize the Company's legal entity structure, and the ongoing management of the intercompany capital structure during the year.
TITAN INTERNATIONAL, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
20. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION
Our senior secured notes due 2028 are guaranteed by the following wholly-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 the full and unconditional, joint and several obligations of the guarantors. The guarantees of the guarantor subsidiaries are subject to release in limited circumstances upon the occurrence of certain customary conditions. The following condensed consolidating financial statements are presented using the equity method of accounting. Certain sales and marketing expenses recorded by non-guarantor subsidiaries have not been allocated to the guarantor subsidiaries.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | Condensed Consolidating Statements of Operations For the Three Months Ended March 31, 2022 |
| Titan Intl., Inc. (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Net sales | $ | — | | | $ | 85,799 | | | $ | 555,997 | | | $ | (85,799) | | | $ | 555,997 | |
Cost of sales | — | | | 46,816 | | | 508,251 | | | (85,799) | | | 469,268 | |
| | | | | | | | | |
Gross profit | — | | | 38,983 | | | 47,746 | | | — | | | |