ITEM 1. BUSINESS
GENERAL
Titan International, Inc. ("Titan" or the "Company") is a global manufacturer of off-highway steel wheels and tires in the agricultural, earthmoving/construction and consumer markets. Titan generally manufactures both wheels and tires for these markets and provides the value-added service of assembling the completed wheel-tire system. The Company offers a broad range of different products that are manufactured in relatively short production runs to meet original equipment manufacturers' ("OEMs") specifications and/or aftermarket customer requirements.
During the mid-1990s Titan began a process to reengineer its wheel and tire operations. The Company established a new identity, creating the framework for continued well-managed growth. Titan continues a multi-year plan to focus on its core business and lay the groundwork for ongoing growth and strength in the off-highway wheel, tire and assembly business. Product innovation has demonstrated Titan's leadership with the development of the LSW series of wheels and tires, which is expected to considerably enhance the performance of off-highway vehicles.
In 2000, Titan's sales in the agricultural market represented 52% of net sales, the earthmoving/construction market represented 30% of net sales and the consumer market represented 18% of net sales. For information concerning the revenues, certain expenses, income from operations and assets attributable to each of the segments in which the Company operates, see Note 16 to the consolidated financial statements of Titan International, Inc. included in Item 8 herein.
AGRICULTURAL MARKET
Titan sells agricultural wheels, rims and tires to OEMs and aftermarket distributors. These wheels, rims and tires are manufactured by Titan for installation on various agricultural and forestry equipment, such as tractors, combines, skidders, plows, planters and irrigation equipment. The wheels and rims range in diameter from 4" to 54" with the 54" diameter being the largest agricultural wheel manufactured in North America. Basic configurations are combined with other features (such as various centers and a wide range of material thickness) allowing the Company to offer a broad line of different product models to meet customer specifications. The agricultural tires range in diameter from 8" to 85" and in width from 4.8" to 46.5". Titan introduced the world's largest agricultural tire in 1999. This tire features an 85-inch outside diameter. The Company offers the added value of a wheel and tire assembly to its customers. The Company's aftermarket tires are marketed through a network of independent distributors and Titan's own distribution centers.
EARTHMOVING/CONSTRUCTION MARKET
The Company manufactures wheels and rims for various types of earthmoving, mining and construction equipment, including skid steers, cranes, graders and levelers, scrapers, self-propelled shovel loaders, load transporters, haul trucks and back-hoe loaders. These wheels and rims range in diameter from 20" to 63", in width from 8" to 60" and in weight from 125 pounds to 7,000 pounds. The 63" diameter is the largest earthmoving/construction wheel manufactured in North America. The Company provides its customers with a broad range of earthmoving/construction wheels and rims. The majority of the earthmoving/construction wheels produced by Titan are sold directly to OEMs. Titan currently produces a wide range of tires for the earthmoving/construction market. The earthmoving/construction market is another area in which the Company can offer the added value of wheel and tire assembly.
CONSUMER MARKET
Titan manufactures a variety of products for all terrain vehicles ("ATV"), lawn and garden and trailer products. In April 2000, the Company exited the OEM business for lawn and garden equipment and ATVs, concentrating instead on the agricultural and earthmoving/construction businesses for both LSW and conventional wheel and tire assemblies to OEMs and the aftermarket. Titan currently produces a wide range of tires for the consumer market. These wheels and rims range in diameter from 4" to 16". ATV tire tread
patterns for the replacement market were introduced in 2000. The Company can also offer the value-added service of a wheel-tire system for the consumer market. The Company produces wheel and tire products for the domestic markets for boat, recreational, agricultural and utility trailers. Titan's goal for growth in 2001 will encompass the addition of new products in the ATV tire aftermarket and certain trailer products.
OPERATIONS
Wheel Manufacturing Process. Most agricultural wheels are produced using a rim and a wheel center. A rim is produced by first cutting large steel sheets to required width and length specifications. These steel sheets are rolled and welded to form a circular rim, which is flared and formed in the rollform operation. The majority of wheel centers are manufactured using presses that both blank and form the center to specifications in multiple stage operations. The Company has the capability to e-coat the wheel using a multi-step process prior to the final top coating.
Large earthmoving/construction steel wheels are manufactured principally from hot rolled steel sections. This process is used because the high load bearing capacity of these wheels requires rim thickness which is beyond the capability of cold-rolling. Rims are built from a series of hoops that are welded together to form a rim base. The complete rim is made from either three or five separate parts that then lock together after the rubber tire has been fitted to the wheel and inflated.
Smaller wheels (usually 12" or less in diameter), of which the majority are produced for consumer markets, are manufactured by a process in which half-wheels are press-formed, then two of these half-wheel stampings are welded together to form a complete wheel. Generally, for larger wheels (12" or more in diameter) produced for the consumer market, the Company manufactures rims and centers, welds the rims to the centers and then paints the assembled product.
Tire Manufacturing Process. Tires are produced by mixing rubber, carbon black and chemicals to form various rubber compounds. These rubber compounds are then extruded or processed with textile steel materials to make specific components. These components: beads (wire bundles that anchor the tire with the wheel), plies (layers of fabric that give the tire strength), belts (fabric or steel fabric wrapped under tread in some tires), tread and sidewall, are then assembled into an uncured tire. The uncured tire is placed in a press that molds the tire under set time, temperature and pressure into a finished tire.
Wheel and Tire Assemblies. The Company's position as a manufacturer of both wheels and tires allows Titan to mount and deliver one of the largest selections of off-road assemblies in the world. Backed by the resources of the Company's facilities, Titan provides the value-added service of one-stop shopping for wheel-tire assemblies for the agricultural, earthmoving/construction and consumer markets. Customer orders are entered into the Company's system either by electronic data interchange or manually. Based on each customer's requirements, the appropriate wheel-tire assembly and delivery schedule is formulated. The Company's just-in-time delivery program offers the product to the customer when requested.
Quality Control. The Company is ISO 9000 certified at six of its manufacturing facilities. The ISO 9000 series is a set of related and internationally recognized standards of management and quality assurance. The standards specify guidelines for establishing, documenting and maintaining a system to ensure quality. The ISO 9000 certifications are evidence of Titan's dedication to providing quality products to its customers.
RAW MATERIALS
The primary raw materials used by the Company in all segments are steel and rubber. To ensure a consistent steel supply, Titan purchases its basic steel from key steel mills and maintains relationships with steel processors for steel preparation. The Company is not dependent on any single producer for its supply of steel. Rubber and raw materials for tire manufacture are the Company's second largest commodity expense. Titan buys rubber in markets where there are numerous sources of supply. In addition to the development of key suppliers domestically, the Company's strategic procurement plan includes international suppliers to assure competitive price and quality in the global marketplace. As is customary in the industry, the Company
does not have long-term contracts for the purchase of steel or rubber and, therefore, its purchases are subject to fluctuation in price.
CUSTOMERS
The Company's ten largest customers accounted for approximately 48% of net sales for the year ended December 31, 2000, compared to 45% for the year ended December 31, 1999. Net sales to Deere & Company in Titan's agricultural, earthmoving/construction and consumer markets represent 17% of the Company's consolidated revenues for the year ended December 31, 2000. No other customers accounted for more than 10% of the Company's net sales in 2000.
MARKETING AND DISTRIBUTION
The Company has an internal sales force and utilizes several manufacturing representative firms for sales in the United States and Europe. In the United States sales representatives are organized within geographical regions. The international sales force includes employees in France, Germany, Italy and the United Kingdom. The Company believes international sales efforts are enhanced when sales representatives sell primarily within their native countries.
Titan distributes wheels and tires directly to OEMs. The distribution of aftermarket tires is done primarily through a network of independent dealers. The Company distributes wheel and tire assemblies through its own distribution centers directly to OEMs and to aftermarket customers. Titan's distribution network consists of fifteen facilities throughout the United States and Europe, which are strategically located near major OEMs and aftermarket customers for just-in-time delivery.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company's research, development and engineering staffs test new designs and technologies and develop new manufacturing methods to improve product quality and performance. These services enhance the Company's relationship with its customers. The Company has spent $4.7 million, $6.3 million, and $7.1 million, on research and development for the years ended December 31, 2000, 1999 and 1998, respectively. These costs are primarily due to the development of the LSW series of wheels and tires, which is expected to considerably enhance the performance of off-highway vehicles. Titan continues to introduce new designs of LSW wheel and tire assemblies for the agricultural, earthmoving/construction and consumer markets.
The LSW wheel and tire assemblies reduce bounce, hop, lope and heat build-up and provide more stability and safety for the operator, which in turn means greater productivity. The key to the success of the LSW is an increase in the diameter of the wheel while maintaining the original outside diameter of the tire. This is accomplished by lowering the sidewall (LSW is an acronym for low sidewall) and increasing its strength. Maintaining the original outside diameter of the tire allows the LSW to improve the performance of agricultural, earthmoving/construction and consumer equipment without further modification.
BACKLOG
As of February 28, 2001, Titan estimates that it had $124 million in firm orders compared to $167 million at February 29, 2000. Orders are considered firm if the customer would be obligated to accept the product if manufactured and delivered pursuant to the terms of such orders. The Company believes that the majority of its current backlog orders will be filled during the current year.
COMPETITION
The Company competes with several domestic and international competitors, some of which are larger and have greater financial and marketing resources than Titan. The Company believes it is the primary source of steel wheels and rims to the majority of its North American customers. Major competitors in the wheel market include GKN Wheels, Ltd., and Topy Industry, Ltd., and major competitors in the tire market include
Goodyear Tire & Rubber Co. and Bridgestone/Firestone. The Company competes primarily on the basis of price, quality, customer service, design capability and delivery time. The Company's ability to compete with international competitors may be adversely affected by currency fluctuations. In addition, certain of the Company's OEM customers could, under certain circumstances, elect to manufacture certain of the Company's products to meet their requirements or to otherwise compete with the Company. There can be no assurance that the businesses of the Company will not be adversely affected by increased competition in the markets in which it operates or that the Company's competitors will not develop products that are more effective or less expensive than the Company's products or which could render certain of the Company's products less competitive. From time to time, certain competitors of the Company have reduced their prices in particular product categories, which has prompted the Company to reduce its prices. There can be no assurance that in the future, competitors of the Company will not further reduce prices or that any such reductions would not have a material adverse effect on the Company.
EMPLOYEES
At January 31, 2001, the Company employed approximately 4,200 people in the United States and Europe. Approximately 19% of the Company's employees in the United States are covered by two collective bargaining agreements, which have expired or will expire before the year 2003. The majority of employees at Titan's foreign facilities are represented by collective bargaining agreements which are renewed from time to time depending on terms of the agreement and the laws of the foreign jurisdiction. Since the expiration of their collective bargaining agreement in April 1998, approximately 600 employees at the Company's Des Moines, Iowa facility have been on strike. Since September 1998, former Fidelity Tire union employees have been picketing the Natchez, Mississippi facility. The Company has hired and trained a new workforce at these two facilities. Although the Company believes that its relations with its employees are generally good, the labor disputes have had an adverse effect on the Company's 2000, 1999 and 1998 financial position, cash flows and results of operations and may continue to have an adverse effect on the Company's future financial position, cash flows and results of operations.
INTERNATIONAL OPERATIONS
In addition to the Company's facilities in the United States, Titan also operates facilities in Europe. For the year ended December 31, 2000, the Company generated 22% of its net sales from foreign operations. International operations and exports to foreign markets are subject to a number of special risks, including, but not limited to, risks with respect to currency exchange rates, economic and political destabilization, other disruption of markets, restrictive actions by foreign governments (such as restrictions on transfer of funds, export duties and quotas and foreign customs), changes in foreign laws regarding trade and investment, difficulty in obtaining distribution and support, nationalization, the laws and policies of the United States affecting trade, foreign investment and loans, and foreign tax laws. There can be no assurance that one or a combination of these factors will not have a material adverse effect on the Company's ability to increase or maintain its foreign sales or on its results of operations. The Company had total aggregate export sales of approximately $79.4 million, $90.9 million, and $103.4 million, for the years ended December 31, 2000, 1999 and 1998, respectively. For financial information regarding international operations, see Note 16 to the consolidated financial statements of Titan International, Inc. included in Item 8 herein.
In addition, the Company has significant manufacturing operations in foreign countries and purchases a portion of its raw materials from foreign suppliers. The production costs, profit margins and competitive position of the Company are affected by the strength of the currencies in countries where it manufactures or purchases goods relative to the strength of the currencies in countries where its products are sold. The Company's results of operations, cash flows and financial position may be adversely affected by fluctuations in foreign currencies and by translation of the financial statements of the Company's foreign subsidiaries from local currencies into U.S. dollars.
PATENTS AND TRADEMARKS
The Company owns numerous United States and foreign patents and trademarks and continues to apply for patent protection for many of its new products. While it considers that its patents are significant to the operations of the business, Titan does not consider any one of them to be of such importance that the patent's expiration or invalidity could materially affect the Company's business.
ENVIRONMENTAL COMPLIANCE
In the ordinary course of business, like most other industrial companies, the Company is subject to extensive and changing federal, state, local and foreign environmental laws and regulations, and has made provisions for the estimated financial impact of environmental cleanup costs. The Company's policy is to accrue environmental cleanup related costs of a noncapital nature when those costs are believed to be probable and can be reasonably estimated. Expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company does not currently anticipate any material capital expenditures for environmental control facilities. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, advancements in environmental technologies, the quality of information available related to specific sites, the assessment stage of the site investigation, preliminary findings and the length of time involved in remediation or settlement. The Company does not include anticipated recoveries from insurance carriers or other third parties in its accruals for environmental liabilities. Although it is difficult to predict future environmental costs, the Company does not currently anticipate any material adverse effect on its operations, cash flows or financial condition as a result of its efforts to comply with, or its liabilities under, environmental laws.
ITEM 2.
ITEM 2. PROPERTIES
The Company maintains twenty manufacturing and warehousing/distribution facilities in the United States with a collective floor space of approximately 8.2 million square feet. Of these facilities, one is used primarily for the manufacture of agricultural products, one is used primarily for the manufacture of earthmoving/construction products and four are used for the manufacture of agricultural, earthmoving/construction and consumer products. The remaining fourteen facilities are used for the warehousing/distribution of products in all of the Company's segments.
In Europe, Titan maintains six manufacturing and warehousing/distribution facilities with a collective floor space of approximately 1.5 million square feet. Of these facilities, one is used for the manufacture of earthmoving/construction products, four are used for the manufacture of agricultural and earthmoving/construction products and one is used for warehousing/distribution of products in all of the Company's segments.
Several of the Company's facilities are leased through operating lease agreements. For information on operating leases, see Note 13 to the consolidated financial statements of Titan International, Inc. included in Item 8 herein. The Company considers each of its facilities to be in good operating condition and adequate for its present use. Management believes that the Company has sufficient capacity to meet current market demand.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine legal proceedings arising out of the normal course of business. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, the Company believes that none of these actions, individually or in the aggregate, will have a material adverse affect on the financial condition or results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all executive officers of the Company are listed below, followed by a brief account of their business experience during the past five years. Officers are normally appointed annually by the Board of Directors at a meeting of the directors immediately following the Annual Meeting of Stockholders. The President and Secretary are brother and sister. There is no arrangement or understanding between any officer and any other person pursuant to which an officer was selected.
Maurice M. Taylor, Jr., 56, has been President, CEO and a Director of the Company since 1990, when Titan was acquired in a management-led buyout by investors, including Mr. Taylor.
J. Michael A. Akers, 57, began organizing the start-up of Titan's European Operations in 1990 and became a member of the management team in 1995. Mr. Akers was appointed Vice President in 1999.
Kent W. Hackamack, 42, served as Corporate Controller of the Company from 1994 to 1996. Mr. Hackamack was appointed Vice President of Finance and Treasurer in 1996.
Cheri T. Holley, 53, joined the Company in 1994 as General Counsel and Secretary. Ms. Holley was appointed Vice President in 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange ("NYSE") under the symbol TWI. The following table sets forth, for periods indicated, the high and low sales prices per share of the common stock as reported on the NYSE, and information concerning per share dividends declared.
On February 28, 2001, there were approximately 898 holders of record of Titan common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below, as of and for the years ended December 31, 2000, 1999, 1998, 1997, and 1996 are derived from the Company's consolidated financial statements, audited by PricewaterhouseCoopers LLP, independent accountants, and should be read in conjunction with the Company's audited consolidated financial statements and notes thereto.
- ------------------------- (a) Includes a gain of $38.7 million ($20.1 million after taxes) related to the sale of assets.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's statement of operations expressed as a percentage of sales. This table and subsequent discussions should be read in conjunction with the Company's audited consolidated financial statements and notes thereto.
In addition, the following table sets forth, for periods indicated, components of the Company's net sales classified by segment (in thousands):
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
SALE OF ASSETS
On April 14, 2000, the Company sold certain assets (primarily raw material inventory, work-in-process inventory, and property, plant and equipment) of two facilities located in Clinton, Tennessee, and Slinger, Wisconsin, to Carlisle Tire and Wheel Company, a subsidiary of Carlisle Companies Incorporated, for approximately $94.1 million in cash. In conjunction with this transaction, the Company eliminated goodwill related to these operations totaling $19.5 million. The Company recorded a pretax gain on this transaction of $38.7 million in the second quarter of 2000. This nonrecurring gain has not been included in the pro forma amounts described below. These two facilities were in the business of providing wheels and tires to the consumer market, primarily for OEM lawn and garden equipment and ATVs.
Had the transaction occurred on January 1, 1999, net sales for the year ended December 31, 2000, would have been $512.4 million, compared to $499.5 million in 1999. Loss from operations for the year ended December 31, 2000, would have been $(13.4) million, compared to $(11.0) million in 1999. Net loss for the year ended December 31, 2000, would have been $(21.2) million, compared to $(18.1) million in 1999. Loss per share for the year ended December 31, 2000, would have been $(1.02), compared to $(.87) in 1999.
RESULTS OF OPERATIONS
Net sales for the year ended December 31, 2000, were $543.1 million compared to $588.0 million in net sales for the year ended December 31, 1999. Net sales decreased primarily due to the transaction described above.
The Company generated 22% of its net sales from foreign subsidiaries during the year ended December 31, 2000, as compared to 25% during the year ended December 31, 1999. The decrease in foreign net sales during 2000 was primarily due to the exclusion of Fabrica Uruguaya de Neumaticos S.A. ("FUNSA") sales. Included in 1999 were foreign net sales for FUNSA of $16.9 million representing 3% of total net sales. The foreign net sales for the year ended December 31, 2000 do not include the sales from FUNSA because the Company reduced its ownership to 16% during 1999.
As a result of its foreign subsidiaries, the Company is subject to fluctuations in foreign currencies. The foreign currency fluctuations for the year ended December 31, 2000, had a minimal effect on results of operations.
Cost of sales was $502.9 million for the year ended December 31, 2000, as compared to $526.3 million in 1999. Gross profit for the year ended December 31, 2000, was $40.1 million or 7.4% of net sales, compared to $61.7 million, or 10.5% of net sales for 1999. Gross profit, as a percentage of net sales, was negatively impacted by the sale of assets.
Selling, general and administrative ("SG&A") and research and development ("R&D") expenses were $48.8 million or 9.0% of net sales for the year ended December 31, 2000, as compared to $57.9 million or 9.9% of net sales for 1999. The decrease in SG&A and R&D expenses, as a percentage of sales, is primarily attributed to the Company's efforts to streamline costs at each of its facilities.
Loss from operations for the year ended December 31, 2000, was $(8.6) million, compared to income from operations of $3.8 million in 1999. Income (loss) from operations was impacted by the items described in the preceding paragraphs.
Net interest expense for the year ended December 31, 2000, was $22.6 million compared to $23.6 million in 1999. The decreased interest expense was primarily due to a decrease in the average debt outstanding in 2000 as compared to 1999 due to the sale of assets as previously described.
Net income for the year ended December 31, 2000, was $4.5 million, compared to net loss of $(11.4) million in 1999. Earnings per share was $.22 for the year ended December 31, 2000, as compared to a loss per common share of $(.55) in 1999. Net income and earnings per share were impacted by the items described in the preceding paragraphs.
Net sales in the agricultural market were $283.1 million for the year ended December 31, 2000, as compared to $254.8 million in 1999. Sales in the agricultural market were positively impacted by strong demand for smaller diameter wheels and tires, which was partially offset by a decrease in demand for larger diameter wheels and tires. Income from operations in the agricultural market was $11.7 million for the year ended December 31, 2000, as compared to $8.1 million in 1999. The increase in income from operations in the agricultural market was primarily attributed to improved efficiencies due to increased sales volume.
The Company's earthmoving/construction market net sales were $162.6 million for the year ended December 31, 2000, as compared to $157.7 million in 1999. Sales in the earthmoving/construction market were positively impacted by strong demand for smaller diameter wheels and tires, which was partially offset by a decrease in demand for larger diameter wheels and tires. The Company's earthmoving/construction market income from operations was $8.9 million for the year ended December 31, 2000, as compared to $14.4 million in 1999. The decrease in income from operations in the earthmoving/construction market is primarily due to a change in product mix from larger to smaller diameter wheels and tires, which tend to receive lower margins.
Consumer market net sales were $97.4 million for the year ended December 31, 2000, as compared to $175.5 million in 1999. Sales in the consumer market decreased primarily due to the Company exiting the OEM business for lawn and garden equipment and ATVs. Consumer market loss from operations was $(0.6) million for the year ended December 31, 2000, as compared to income from operations of $6.1 million in 1999. The decrease in income from operations in the consumer market is primarily due to the Company exiting the OEM business for lawn and garden equipment and ATVs.
Income from operations on a segment basis does not include: corporate expenses; depreciation and amortization expense related to property, plant and equipment; and goodwill carried at the corporate level, for a total of $28.7 million for the year ended December 31, 2000, as compared to $24.8 million in 1999.
The Company is continually looking for ways to improve profitability and to reduce or streamline costs. As indicated previously, Titan has exited the OEM wheel and tire business for lawn and garden equipment and ATVs, concentrating instead on the agricultural and earthmoving/construction businesses for both LSW and conventional wheel and tire assemblies to OEMs and the aftermarket. Titan has made the decision to market the LSW technology directly to equipment dealers in an effort to increase sales and more effectively demonstrate the performance, safety and productivity features of the LSW. The Company's national sales force began actively introducing this program during the second quarter of 2000, and gaining the hands-on knowledge that will allow Titan to further enhance wheels and tires for ultimate equipment performance. The introduction of the LSW assemblies and this aggressive program is expected to drive aftermarket demand and should increase original equipment margins in the future.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
Net sales for the year ended December 31, 1999, were $588.0 compared to $660.8 million in net sales for the year ended December 31, 1998. Net sales decreased due to a decline in U.S. agricultural and earthmoving/construction equipment sales, which contributed to extended shutdowns of certain facilities at several of Titan's largest customers. Net sales were also impacted by the retraining of workforces at two of the Company's facilities.
The Company generated 25% of its net sales from foreign subsidiaries, therefore the Company is subject to fluctuations in those foreign currencies. Foreign currency fluctuations for the year ended December 31, 1999, had a minimal effect on results of operations.
Cost of sales was $526.3 million for the year ended December 31, 1999, as compared to $569.7 million in 1998. Gross profit for the year ended December 31, 1999, was $61.7 million or 10.5% of net sales, compared to $91.1 million, or 13.8% of net sales for 1998. Gross profit was negatively impacted primarily by inefficiencies
caused by extended shutdowns of certain facilities at several of Titan's largest customers and the costs associated with retraining the workforce at two facilities.
SG&A expenses were $51.6 million or 8.8% of net sales for the year ended December 31, 1999, as compared to $52.9 million or 8.0% of net sales for 1998. The rise in SG&A expenses, as a percentage of net sales, is primarily attributed to the decrease in net sales volume as discussed above. R&D expenses were $6.3 million or 1.1% of net sales for the year ended December 31, 1999, as compared to $7.1 million or 1.1% of net sales for 1998.
Income from operations for the year ended December 31, 1999, was $3.8 million or 0.6% of net sales, compared to $31.2 million, or 4.7% in 1998. Income from operations was impacted by the items described in the preceding paragraphs.
Net interest expense for the year ended December 31, 1999, was $23.6 million compared to $18.3 million in 1998. The increased interest expense was primarily due to an increase in the average debt outstanding in 1999 as compared to 1998.
In 1999, the Company sold a building, certain machinery and equipment and other assets for a non-recurring pretax gain of $4.9 million.
Net loss for the year ended December 31, 1999, was $(11.4) million compared to net income of $8.2 million in 1998. Loss per common share was $(.55) for the year ended December 31, 1999, as compared to earnings per share of $.38 in 1998. Due to the repurchase of the Company's common stock, the average number of common shares outstanding for the year ended December 31, 1999, decreased 4% as compared to the same period in 1998.
Net sales in the agricultural market were $254.8 million for the year ended December 31, 1999, as compared to $324.9 million in 1998. The Company's earthmoving/construction market net sales were $157.7 million for the year ended December 31, 1999, as compared to $174.4 million in 1998. Consumer market net sales were $175.5 million for the year ended December 31, 1999, as compared to $161.5 million in 1998. Net sales in the agricultural and earthmoving/construction markets were negatively impacted by the declining market sustained by low commodity prices and the retraining of workforces at two of the Company's facilities.
Income from operations in the agricultural market was $8.1 million for the year ended December 31, 1999, as compared to $25.5 million in 1998. The Company's earthmoving/construction market income from operations was $14.4 million for the year ended December 31, 1999, as compared to $25.8 million in 1998. Consumer market income from operations was $6.1 million for the year ended December 31, 1999, as compared to $4.7 million in 1998. The decrease in income from operations in the agricultural and earthmoving/construction markets was primarily due to a decline in U.S. agricultural and earthmoving/construction equipment sales and the retraining of workforces at two of the Company's facilities. Income from operations on a segment basis does not include: corporate expenses; depreciation and amortization expense related to property, plant and equipment; and goodwill carried at the corporate level, for a total of $24.8 million for the year ended December 31, 1999, as compared to $24.9 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2000, negative cash flows from operating activities of $25.8 million resulted from an increase in inventories partially offset by a decrease in accounts receivable and an increase in accounts payable. Accounts receivable decreased primarily as the result of the sale of assets as previously described. The Company has built inventory to meet expected production and sales demand in the next six months, which has also resulted in increased accounts payable.
Depreciation and amortization expenses were $37.2 million for the year ended December 31, 2000, compared to $38.6 million in 1999. The decrease is primarily attributable to the sale of assets partially offset by current year capital expenditures.
Net cash provided by investing activities was $66.3 million in 2000, as compared to cash used for investing activities of $36.0 million in 1999. The net cash provided in 2000 was primarily due to the sale of assets as previously described. Capital expenditures totaled $28.8 million in 2000, compared to $39.1 million in 1999. The Company has continued to dedicate funds to modernize and improve production efficiencies and increase production capacities. Included in 2000 capital expenditures is $7.2 million used for equipment and construction related to the Company's tire facility located in Brownsville, Texas. Capital expenditures at the Brownsville, Texas, facility were $12.1 million in 1999. Total capital expenditures in 2000 include purchases of $7.6 million through a like-kind exchange account established for tax purposes. The Company estimates that its capital expenditures for 2001 will range between $20 million and $30 million.
In 1999, Titan acquired 35.9 percent of the stock of Wheels India Limited for $12.2 million, which is being accounted for under the equity method of accounting. Equity earnings for 2000 and 1999 were not significant to Titan's results of operations. With facilities in Madras and Poona, India, Wheels India Limited is the largest manufacturer of steel wheels for all applications in the Indian sub-continent.
During 2000, the Company received proceeds of $94.1 million from the sale of assets. Titan utilized these proceeds to reduce its total debt to $233.4 million at December 31, 2000 from $303.7 million at March 31, 2000 ($275.7 million at December 31, 1999) and to fund a like-kind exchange account to be used for capital expenditures. In 1999, the Company received $15.2 million in proceeds related to its sale of a building, certain machinery and equipment and other assets.
In February 2000, the Company paid the subordinated note for $19.7 million to Pirelli Armstrong Tire Corporation.
The Company's Board of Directors has authorized Titan to repurchase up to ten million shares of its common stock. The Company repurchased 0.2 million and 0.4 million shares in 2000 and 1999, respectively. The Company repurchased 6.6 million shares in years prior to 1999.
The Company has a $6.0 million letter of credit outstanding relating to FUNSA. FUNSA's lender could draw on this letter of credit if FUNSA were to default on their line of credit.
At December 31, 2000, the Company had cash and cash equivalents of $5.7 million and debt outstanding of $60.0 million under its $175 million credit facility. Cash on hand, anticipated internal cash flows and utilization of available borrowing are expected to provide sufficient liquidity for working capital needs, capital expenditures and acquisitions for the foreseeable future.
MARKET RISK SENSITIVE INSTRUMENTS
Exchange Rate Sensitivity
The Company is exposed to fluctuations in the British pound, Italian lira, French franc, German deutschemark, and Euro. The Company views its investments in foreign subsidiaries as long-term commitments and does not hedge foreign currency transaction or translation exposures. The Company's net investment in foreign subsidiaries translated into U.S. dollars at December 31, 2000, is $53.0 million. The hypothetical potential loss in value of the Company's net investment in foreign subsidiaries resulting in a 10% adverse change in foreign currency exchange rates at December 31, 2000 would amount to $5.3 million.
Commodity Price Sensitivity
The Company does not generally enter into long-term commodity contracts and does not use derivative commodity instruments to hedge its exposures to commodity market price fluctuations. Therefore, the Company is exposed to fluctuations in the prices of its key commodities, which consist primarily of steel and rubber. The Company is, however, generally able to pass through material price increases and decreases to its customers.
Interest Rate Sensitivity
At December 31, 2000, the fair value of the Company's senior subordinated notes, based upon quoted market prices obtained through independent pricing sources for the same or similar types of borrowing arrangements was $84.7 million, compared to the carrying value of $150 million. The Company believes the carrying value of its other debt reasonably approximates fair value at December 31, 2000.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), was adopted on January 1, 2001. The Company does not utilize derivatives to manage the interest rate or currency risks, therefore, there was no material impact resulting from the adoption of SFAS 133 on its financial position, cash flows or results of operations.
Effective July 1, 2000, the Company adopted Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation," which clarifies the accounting for modifications to stock option plans. The adoption had no impact on the financial statements, cash flows and results of operations for the year ended December 31, 2000.
SEC Staff Accounting Bulletins No. 101 and No. 101A & B, "Revenue Recognition and Financial Statements," were adopted during the fourth quarter of 2000. The adoption had no material impact on the financial statements, cash flows or results of operations for the year ended December 31, 2000.
EURO CONVERSION
The Company is in the process of identification, implementation and testing of its systems to adopt the Euro currency in its operations affected by this change. The Company expects to have its systems ready to process the Euro conversion by January 1, 2002. The costs associated with the transition to the Euro are not anticipated to be material.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements, including statements regarding, among other items, (i) anticipated trends in the Company's business, (ii) future expenditures for capital projects, (iii) the Company's ability to continue to control costs and maintain quality, (iv) the Company's business strategies, including its intention to introduce new products, (v) expectations concerning the performance and commercial success of the Company's existing and new products and (vi) the Company's intention to consider and pursue acquisitions. These forward-looking statements are based partially on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from these forward-looking statements as a result of certain factors, including, (i) changes in the Company's end-user markets as a result of world economic or regulatory influences, (ii) changes in the competitive marketplace, including new products and pricing changes by the Company's competitors, or (iii) changes regarding implementation of the Euro. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this document will in fact transpire.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Item 7.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Item 14.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS
Reference is made to the section captioned "Election of Directors" in the Company's 2001 definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the Company's fiscal year, incorporated herein by reference. Reference is also made to the information under the heading "Executive Officers of the Registrant" included under Item 4a, Part I of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the section captioned "Executive Compensation" in the Company's 2001 definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the Company's fiscal year, incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the section captioned "Security Ownership of Certain Beneficial Owners and Management" in the Company's 2001 definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the Company's fiscal year, incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the section captioned "Related Party Transactions" in the Company's 2001 definitive Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the Company's fiscal year, incorporated herein by reference. Reference is also made to Note 14 to the consolidated financial statements of Titan International, Inc. included in Item 8 herein.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
The accompanying Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the quarter ended December 31, 2000.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. March 23, 2001 TITAN INTERNATIONAL, INC.
By: /s/ MAURICE M. TAYLOR, JR. ------------------------------------ Maurice M. Taylor, Jr. President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 23, 2001.
TITAN INTERNATIONAL, INC.
EXHIBIT INDEX FORM 10-K
- -------------------------
* Filed herewith.
(1) Incorporated by reference to the same numbered exhibit contained in the Company's Form 10-Q for its quarterly period ended September 30, 1998 (No. 001-12936).
(2) Incorporated by reference to the same numbered exhibit contained in the Company's Registration Statement on Form S-4 (No. 33-69228).
(3) Incorporated by reference to the same numbered exhibit contained in the Company's Annual Report on Form 10-K for its year ended December 31, 1993.
(4) Incorporated by reference to the exhibit filed with the Company's Registration Statement on Form S-1 (No. 333-22279).
(5) Incorporated by reference to the same numbered exhibit contained in the Company's Annual Report on Form 10-K for its year ended December 31, 1999.
(6) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 333-61743).
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The consolidated financial statements of Titan International, Inc. were prepared by management, which is responsible for their contents and integrity. They reflect amounts based upon management's best estimates and informed judgements in conforming with accounting principles generally accepted in the United States.
The Company maintains a system of internal accounting controls and procedures which is designed, consistent with reasonable cost to provide reasonable assurance, to safeguard assets against loss, that transactions are executed as authorized and that they are properly recorded to produce reliable financial records.
To further safeguard assets, the Company has established an Audit Committee, which is comprised entirely of outside directors. The Audit Committee meets with the independent accountants, with and without management present, to discuss audit and financial reporting matters and internal accounting controls.
The consolidated financial statements have been audited by PricewaterhouseCoopers LLP, independent accountants. They have evaluated the Company's internal accounting control structure and performed tests and other procedures necessary to express an opinion on the fairness of the consolidated financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Titan International, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 17 present fairly, in all material respects, the financial position of Titan International, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 17 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP St. Louis, Missouri February 26, 2001
TITAN INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying Notes to Consolidated Financial Statements.
TITAN INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying Notes to Consolidated Financial Statements.
TITAN INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying Notes to Consolidated Financial Statements.
TITAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (ALL AMOUNTS IN THOUSANDS)
See accompanying Notes to Consolidated Financial Statements.
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Titan International, Inc. ("Titan" or the "Company"), is a global manufacturer of off-highway steel wheels and tires in the agricultural, earthmoving/construction and consumer markets. The Company generally manufactures both wheels and tires for these markets and provides the value-added service of assembling the completed wheel-tire system. The Company's primary materials utilized in the manufacturing process are steel and rubber, which are obtained from a broad base of suppliers.
USE OF ESTIMATES
The policies utilized by the Company in the preparation of the financial statements conform to generally accepted accounting principles in the United States of America and require management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates and assumptions.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. Titan records its investment in each unconsolidated affiliated company (20% to 50% ownership) at its related equity in the net assets of such affiliate as adjusted for equity earnings. Investments of less than 20% in other companies are generally carried at cost. All significant intercompany accounts and transactions have been eliminated.
INVENTORIES
Inventories are valued at the lower of cost or market. For US operations, cost is determined using the last-in, first-out ("LIFO") method for approximately 50% of inventories and the first-in, first-out ("FIFO") method for the remainder of inventories. Inventory of foreign subsidiaries is valued using the FIFO method.
FIXED ASSETS
Property, plant and equipment have been recorded at cost. Depreciation is provided using the straight-line method over the following estimated useful lives of the related assets:
Maintenance and repairs are expensed as incurred. When property, plant and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are eliminated and any gain or loss on disposition is included in income.
DEFERRED FINANCING COSTS
Deferred financing costs are costs incurred in connection with the Company's credit facilities and senior subordinated notes. The costs associated with the credit facilities are being amortized over their respective terms. The discount and costs associated with the senior subordinated notes are being amortized over ten years, the term of the notes.
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL
Goodwill for foreign and domestic subsidiaries are amortized over 25 and 40 years, respectively, on a straight-line basis.
IMPAIRMENT OF ASSETS
The Company reviews long-lived assets, goodwill and other intangibles to assess recoverability from future operations whenever events and circumstances indicate that the carrying values may not be recoverable. Impairment losses are recognized in operating results when expected undiscounted future cash flows are less than the carrying value of the asset. Impairment losses are measured as the excess of the carrying value of the asset over the discounted expected future cash flows.
REVENUE RECOGNITION
Sales revenue and cost of sales are recorded by the Company when products are shipped to customers.
INCOME TAXES
Deferred income tax provisions are determined using the liability method whereby deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and income tax basis of assets and liabilities.
EARNINGS PER SHARE
Earnings per share (EPS) are computed in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic EPS is computed by dividing consolidated net earnings by the weighted average number of common shares outstanding. Diluted EPS is computed by dividing consolidated net earnings by the sum of the weighted average number of common shares outstanding and the weighted average number of potential common shares outstanding. Potential common shares consist solely of outstanding options under the Company's stock option plans.
STATEMENT OF CASH FLOWS
For purposes of the Consolidated Statements of Cash Flows, the Company considers financial investments with an original maturity of three months or less to be cash equivalents.
Investing activities during the year ended December 31, 2000, including certain non-cash transactions, related to the Company's sale of assets of two facilities located in Clinton, Tennessee, and Slinger, Wisconsin, involved the following (in thousands):
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS (CONTINUED)
Investing activities during the years ended December 31, 1999 and 1998, including certain non-cash transactions, related to the Company's acquisition of certain assets of Condere Corporation, Fabrica Uruguaya de Neumaticos S.A. ("FUNSA") and Wheels India Limited, involved the following (in thousands):
During 1999, Titan paid $12.2 million to acquire 35.9% of Wheels India Limited, which is being accounted for under the equity method of accounting. Equity earnings for 2000 and 1999 were not significant to Titan's results of operations.
During 1999, the Company sold 78% of its original interest in FUNSA, resulting in a remaining interest of 16% at December 31, 2000. The gain on this transaction was immaterial to operating results.
During 1998, the Company issued $10 million of notes to purchase certain property, plant and equipment of the Des Moines, Iowa facility.
The Company paid $20.9 million, $22.3 million, and $16.9 million for interest; and $6.2 million, $0.7 million, and $8.5 million for income taxes in 2000, 1999 and 1998, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company records all financial instruments, including cash and cash equivalents, accounts receivable, notes receivable, accounts payable, other accruals and notes payable at cost which approximates fair value. The senior subordinated notes are the only significant financial instrument of the Company with a fair value different than the recorded value. At December 31, 2000, the fair value of the senior subordinated notes, based on quoted market prices obtained through independent pricing sources for the same or similar types of borrowing arrangements, was approximately $84.7 million, compared to a recorded value of $150 million.
MARKET RISK EXPOSURE
The Company manufactures and sells its products in the United States and foreign countries. The Company is potentially subject to foreign currency exchange risk relating to receipts from customers and payments to suppliers in foreign currencies. As a result, the Company's financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company operates. Gains and losses arising from the settlement of foreign currency transactions are charged to the related period's Consolidated Statement of Operations. Translation adjustments arising from the translation of foreign subsidiary financial statements are recorded as a separate component of stockholders' equity.
ENVIRONMENTAL LIABILITIES
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and that do not contribute to
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENVIRONMENTAL LIABILITIES (CONTINUED)
current or future revenue are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and can be reasonably estimated.
STOCK-BASED COMPENSATION
The Company utilizes Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25) to account for employee stock options and related instruments. Pro forma fair value based disclosures required under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS 123), are reflected in Note 11.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), was adopted on January 1, 2001. The Company does not utilize derivatives to manage the interest rate or currency risks, therefore, there was no material impact resulting from the adoption of SFAS 133 on its financial position, cash flows or results of operations.
Effective July 1, 2000, the Company adopted Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation," which clarifies the accounting for modifications to stock option plans. The adoption had no impact on the financial statements, cash flows and results of operations for the year ended December 31, 2000.
SEC Staff Accounting Bulletins No. 101 and No. 101A & B, "Revenue Recognition and Financial Statements," were adopted during the fourth quarter of 2000. The adoption had no material impact on the financial statements, cash flows or results of operations for the year ended December 31, 2000.
RECLASSIFICATION
Certain amounts from prior years have been reclassified to conform with the current year's presentation.
2. SALE OF ASSETS
On April 14, 2000, the Company sold certain assets (primarily raw material inventory, work-in-process inventory, and property, plant and equipment) of two facilities located in Clinton, Tennessee, and Slinger, Wisconsin, to Carlisle Tire and Wheel Company, a subsidiary of Carlisle Companies Incorporated, for approximately $94.1 million in cash. In conjunction with this transaction, the Company eliminated $19.5 million of related goodwill. The Company recorded a pretax gain of $38.7 million in the second quarter of 2000. This nonrecurring gain has not been included in the pro forma amounts described below. These two facilities were in the business of providing wheels and tires to the consumer market, primarily for OEM lawn and garden equipment and ATVs.
Had the transaction occurred on January 1, 1999, net sales for the year ended December 31, 2000, would have been $512.4 million, compared to $499.5 million in 1999. Loss from operations for the year ended December 31, 2000, would have been $(13.4) million, compared to $(11.0) million in 1999. Net loss for the year ended December 31, 2000, would have been $(21.2) million, compared to $(18.1) million in 1999. Loss per share for the year ended December 31, 2000, would have been $(1.02), compared to $(.87) in 1999.
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVENTORIES
Inventories at December 31, 2000 and 1999, consisted of the following (in thousands):
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2000 and 1999, consisted of the following (in thousands):
Depreciation of fixed assets for the years 2000, 1999 and 1998 totaled $34.3 million, $34.4 million, and $30.9 million, respectively.
5. GOODWILL
Goodwill at December 31, 2000 and 1999, consisted of the following (in thousands):
Amortization of goodwill for the years 2000, 1999 and 1998 totaled $0.9 million, $1.3 million, and $1.4 million, respectively.
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. OTHER CURRENT LIABILITIES
Other current liabilities at December 31, 2000 and 1999, consisted of the following (in thousands):
7. LONG-TERM DEBT
Long-term debt at December 31, 2000 and 1999, consisted of the following (in thousands):
In December 1999, the Company decreased its availability under its credit facility ("Facility") from $250 million to $175 million, which is also available for documentary trade and/or standby letters of credit. The Facility is secured by certain receivables, inventory and fixed assets. Borrowings under the Facility may be made in U.S. dollars and major foreign currencies. Debt outstanding under this Facility at December 31, 2000 and 1999 totaled $60.0 million and $82.0 million, respectively. The Facility, which expires in December 2002, allows Titan to borrow funds under various interest rate options. The Company paid interest rates ranging from 6 7/8% to 10 1/2% on the outstanding balance under the Facility in 2000. The Facility contains restrictions related to dividends, investments, guarantees, certain financial ratios and other less restrictive covenants.
In March 1997, the Company issued $150 million principal amount of 8 3/4% senior subordinated notes, priced to the public at 99.5 percent, due 2007.
In August 1994, Titan Tire Corporation issued a subordinated note for $19.7 million with a fixed interest rate of 7% to Pirelli Armstrong Tire Corporation ("Pirelli"). The note was paid in February 2000. In December 1998, Titan Tire Corporation issued two $5.0 million subordinated notes with fixed interest rates of 6 1/2% to Pirelli LLC to acquire certain property, plant and equipment. The notes mature in June 2001, and December 2003, respectively.
Other debt primarily consists of industrial revenue bonds, loans from local and state entities and various other long-term notes.
The Company has a $6.0 million letter of credit outstanding relating to FUNSA. FUNSA's lender could draw on this letter of credit if FUNSA were to default on their line of credit.
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT (CONTINUED)
Aggregate maturities of long-term debt are as follows (in thousands):
8. OTHER INCOME (EXPENSE)
Other income (expense) consisted of the following (in thousands):
9. INCOME TAXES
Income (loss) before income taxes consisted of the following (in thousands):
The provision (benefit) for income taxes was as follows (in thousands):
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes differs from the amount of income tax determined by applying the statutory U.S. federal income tax rate to pretax income (loss) as a result of the following:
Federal income taxes are provided on earnings of foreign subsidiaries except to the extent that such earnings are expected to be indefinitely reinvested abroad. It is not practical to determine the amount of unrecognized deferred tax liabilities associated with such earnings.
Deferred tax assets (liabilities) at December 31, 2000 and 1999, respectively, consisted of the following (in thousands):
10. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a frozen contributory defined benefit pension plan covering certain hourly employees of its Walcott, Iowa, facility. The Company sponsors a contributory defined benefit plan that covered former eligible bargaining employees of Dico, Inc. The Company has a frozen defined benefit pension plan covering certain employees of Titan Tire Corporation ("Titan Tire"). The Company's policy is to fund pension costs as accrued, which is consistent with the funding requirements of federal laws and regulations.
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company's defined benefit plans have been aggregated below. Included in the December 31, 2000 amounts is one plan with a projected benefit obligation and accumulated benefit obligation of $1.2 million, which exceeds the fair value of plan assets of $0.8 million at December 31, 2000. Included in the December 31, 1999 amounts is one plan with a projected benefit obligation and accumulated benefit obligation of $1.5 million, which exceeds the fair value of plan assets of $1.0 million at December 31, 1999.
The following tables provide the change in benefit obligation, change in plan assets, funded status and amounts recognized in the consolidated balance sheet of the defined benefit pension plans as of December 31, 2000 and 1999 (in thousands):
Included in the consolidated balance sheet at December 31, 2000 and 1999, is the minimum pension liability for the unfunded pension plans of $0.5 million, net of tax.
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table provides the components of net periodic pension cost for the plans and the assumptions used in the measurement of the Company's benefit obligation for years ended December 31, 2000, 1999 and 1998 (in thousands):
401(k)
The Company sponsors four 401(k) retirement savings plans. One plan is for the benefit of substantially all employees who are not covered by a collective bargaining arrangement and a second plan is for the employees covered by a collective bargaining arrangement at Titan Tire. These plan participants may contribute up to 17% of their annual compensation, up to a maximum of $10,500 in 2000. Employees are fully vested with respect to their contributions. Titan provides a 50% match in the form of the Company's common stock on the first 6% of the employee's contribution. Titan issued 34,942 shares and 93,393 shares, of common stock in connection with these 401(k) plans during 1999 and 1998, respectively. In addition, Titan issued 193,017 shares and 80,483 shares of treasury stock in connection with these 401(k) plans during 2000 and 1999, respectively. Expenses related to these 401(k) plans were $1.1 million, $1.1 million, and $1.5 million for 2000, 1999 and 1998, respectively.
In 1999, the Company adopted 401(k) plans for the employees of Titan Tire Corporation of Texas and the employees of Titan Tire Corporation of Natchez. These plan participants may contribute up to 20% of their annual compensation, up to a maximum of $10,500 in 2000. Employees are fully vested with respect to their contributions. Each employee who elects to participate is eligible to receive Company matching contributions up to a maximum of $500 per year. Expenses for the Company matching contribution were $0.1 million in both 2000 and 1999.
11. STOCK OPTION PLANS
The Company adopted the 1993 Stock Incentive Plan (the "Plan") in which a total of 1,125,000 shares of common stock are reserved. Under the Plan, stock options (both incentive and non-qualified) restricted stock awards and performance awards may be granted to key employees or consultants at an exercise price not less than 85% of the fair market value of the common stock on the date of grant. Options under the Plan vest and become exercisable at a rate of 40% on December 31 of the year following the date of grant, and an additional 20% each year thereafter.
The Company adopted the 1994 Non-Employee Director Stock Option Plan (the "Director Plan") to provide for grants of stock options as a means of attracting and retaining highly qualified independent directors for the Company. The exercise price of stock options may not be less than the fair market value of the common stock on the date of grant. No more than 400,000 shares of Titan's common stock may be issued
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTION PLANS (CONTINUED)
under the Director Plan. Such options vest and become exercisable immediately. All options under both plans expire 10 years from date of grant.
The following is a summary of activity in the stock option plans for 1998, 1999 and 2000:
The exercise price for options outstanding at December 31, 2000 ranged from $6.69 to $18.00 per share and the weighted-average remaining contractual life of these options approximates six years. At December 31, 2000, a total of 786,852 options were exercisable at a weighted-average exercise price of $12.32.
The Company has recorded an insignificant amount of compensation expense under APB 25 as the exercise price on the date of grant generally approximates fair market value. Had compensation cost been determined based on the fair value at the grant date for awards in 2000, 1999 and 1998 consistent with the provisions of SFAS 123, the Company's pro forma net income and earnings per share would have been as presented below (in thousands, except per share data):
The fair value of each option is calculated using the Black-Scholes option-pricing model with the following assumptions used for grants in 2000, 1999 and 1998:
The weighted-average fair value of options granted during 2000, 1999 and 1998 was $3.19, $3.77 and $7.47 per option, respectively.
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCKHOLDERS' EQUITY
The Company repurchased 0.2 million, 0.4 million and 0.9 million shares of its common stock for a cost of $0.9 million, $3.6 million, and $9.2 million in 2000, 1999 and 1998, respectively. The Company is authorized to repurchase an additional 2.8 million common shares. The Company paid cash dividends of $.06 per share of common stock during each of 2000, 1999 and 1998.
13. LEASE COMMITMENTS
The Company leases certain of its buildings and equipment under operating leases including a lease for the building in Brownsville, Texas. Certain lease agreements provide for renewal options, fair value purchase options, and payment of property taxes, maintenance and insurance by the Company. Total rental expense was $5.6 million, $5.7 million and $3.7 million for the years ended December 31, 2000, 1999 and 1998, respectively.
At December 31, 2000, future minimum rental commitments under noncancellable operating leases with initial or remaining terms in excess of one year are as follows: $5.6 million in 2001; $4.9 million in 2002; $2.9 million in 2003; $1.7 million in 2004; and $0.6 million in 2005.
14. RELATED PARTY TRANSACTIONS
The Company sells products and pays commissions to companies controlled by persons related to the Chief Executive Officer of the Company. During 2000, 1999 and 1998, sales of Titan product to these companies were approximately $10.7 million, $12.5 million and, $11.5 million respectively. On sales referred to Titan from these manufacturing representative companies, commissions were paid in the amount of approximately $1.2 million for 2000 and approximately $1.1 million for each of 1999 and 1998. These sales and commissions were made in the ordinary course of business and were made on terms no less favorable to Titan than comparable sales and commissions to unaffiliated third parties.
15. LITIGATION
The Company is a party to routine legal proceedings arising out of the normal course of business. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, the Company believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition or results of operations of the Company.
16. SEGMENT AND GEOGRAPHICAL INFORMATION
The Company has aggregated its operating units into reportable segments based on its three customer markets: agricultural, earthmoving/construction and consumer. These segments are based on the management approach, which is the internal organization used by management in making operating decisions and assessing performance. The accounting policies of the segments are the same as those described in Note 1, "Summary of Significant Accounting Policies." Sales between segments are priced at certain margins over the cost to manufacture and all intersegment revenues are eliminated in consolidation. Segment external revenues, expenses and income from operations are determined on the basis of the results of operations of operating units' manufacturing facilities. Segment assets are generally determined on the basis of the tangible assets located at such operating units' manufacturing facilities and the intangible assets associated with the acquisitions of such operating units. However, certain operating units' goodwill and property, plant and equipment balances are carried at the corporate level.
Titan is organized primarily on the basis of products being included in three separate marketing units. The products for each reportable segment include wheels, tires and wheel-tire assemblies. The Company has manufacturing and distribution facilities worldwide.
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SEGMENT AND GEOGRAPHICAL INFORMATION (CONTINUED) Revenues from one customer of Titan's agricultural, earthmoving/construction and consumer segments represents approximately $94 million, $90 million and $107 million of the Company's consolidated revenues in 2000, 1999 and 1998, respectively.
The table below presents information about certain revenues and expenses, income (loss) from operations and segment assets used by the chief operating decision maker of the Company as of and for the years ended December 31, 2000, 1999 and 1998 (in thousands):
- ------------------------- (a) Represents depreciation and amortization expense related to property, plant and equipment and goodwill carried at the corporate level.
(b) Represents corporate expenses and depreciation and amortization expenses referred to in (a).
(c) Represents property, plant and equipment and goodwill related to certain acquisitions and other corporate assets.
(d) Represents corporate capital expenditures.
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SEGMENT AND GEOGRAPHICAL INFORMATION (CONTINUED)
The table below presents information by geographic area as of and for the years ended December 31, 2000, 1999 and 1998 (in thousands):
17. EARNINGS PER SHARE
Earnings (loss) per share for 2000, 1999 and 1998, are as follows (amounts in thousands, except share and per share data):
- ------------------------- (a) Outstanding options were excluded from the computation of diluted earnings per share because the option price exceeded the average market price during the year.
(b) Effect of stock options has not been included as they were anti-dilutive. Outstanding options excluded during 1999 amounted to 21,964 shares.
TITAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SUPPLEMENTARY DATA -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(All amounts in thousands, except per share data)
TITAN INTERNATIONAL, INC. SCHEDULE II - VALUATION RESERVES
- ------------------------- (a) Includes allowance reductions of $589,000 relating to sale of assets.
(b) Net of recoveries of $36,000 and a reduction relating to the acquisition of FUNSA of $219,000.
(c) Net of recoveries of $350,000 and an addition relating to the acquisition of FUNSA of $294,000.
S-1