Attached files
| file | filename |
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| EX-31.2 - EXHIBIT 31.2 - TITAN INTERNATIONAL INC | twi12312015ex312.htm |
| EX-21 - EXHIBIT 21 - TITAN INTERNATIONAL INC | twi12312015ex21.htm |
| EX-32 - EXHIBIT 32 - TITAN INTERNATIONAL INC | twi12312015ex32.htm |
| EX-31.1 - EXHIBIT 31.1 - TITAN INTERNATIONAL INC | twi12312015ex311.htm |
| XML - IDEA: XBRL DOCUMENT - TITAN INTERNATIONAL INC | R9999.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K |
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-12936
TITAN INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 36-3228472 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
2701 Spruce Street, Quincy, IL 62301
(Address of principal executive offices)
(217) 228-6011
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common stock, $0.00001 par value | New York Stock Exchange (Symbol: TWI) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the shares of common stock of the registrant held by non-affiliates was approximately $463 million based upon the closing price of the common stock on the New York Stock Exchange on June 30, 2015.
Indicate the number of shares of Titan International, Inc. outstanding: 53,957,160 shares of common stock, $0.00001 par value, as of February 15, 2016
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the annual meeting of stockholders to be held on June 2, 2016, are incorporated by reference into Part III of this Form 10-K.
TITAN INTERNATIONAL, INC.
Index to Annual Report on Form 10-K
Page | ||
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PART I
ITEM 1 – BUSINESS
INTRODUCTION
Titan International, Inc. and its subsidiaries (Titan or the Company) hold the position of being a global wheel, tire and undercarriage industrial group servicing customers across its target markets. As a leading manufacturer in the off-highway industry, Titan produces a broad range of specialty products to meet the specifications of original equipment manufacturers (OEMs) and aftermarket customers in the agricultural, earthmoving/construction and consumer markets. As a manufacturer of both wheels and tires, the Company is uniquely positioned to offer customers added value through complete wheel and tire assemblies. Titan's agricultural market includes rims, wheels, tires and undercarriage systems and components manufactured for use on various agricultural and forestry equipment. Titan’s earthmoving/construction market includes rims, wheels, tires and undercarriage systems and components for various types of off-the-road (OTR) earthmoving, mining, military and construction equipment. The Company's consumer market includes bias truck tires in Latin America and light truck tires in Russia, as well as products for all-terrain vehicles (ATVs).
As one of the few companies dedicated to off-highway wheels, tires and assemblies, Titan’s engineering and manufacturing resources are focused on designing quality products that address the needs of our end-users. Titan’s team of experienced engineers continually work on new and improved engineered solutions that evolve with today’s applications for the off-highway wheel, tire and assembly markets.
• | History |
The Company traces its roots to the Electric Wheel Company in Quincy, Illinois, which was founded in 1890. Titan was incorporated in 1983. The Company has grown through six major acquisitions in recent years. In 2005, Titan Tire Corporation, a subsidiary of the Company, acquired The Goodyear Tire & Rubber Company’s North American farm tire assets. In 2006, Titan Tire Corporation of Bryan, a subsidiary of the Company, acquired the off-the-road (OTR) tire assets of Continental Tire North America, Inc. In 2011, the Company acquired The Goodyear Tire & Rubber Company's Latin American farm tire business. In August 2012, the Company purchased a 56% controlling interest in Planet Corporation Group, now known as Titan National (Australia) Holdings PTY LTD (TNAH). In October 2012, the Company completed its acquisition of Titan Europe. In October 2013, the Company in partnership with One Equity Partners (OEP) and the Russian Direct Investment Fund (RDIF) closed the acquisition of an 85% interest in Voltyre-Prom, a leading producer of agricultural and industrial tires in Volgograd, Russia. In the first half of 2014, the partnership of Titan, OEP, and RDIF purchased an additional 15% to bring the total Voltyre-Prom ownership to 100% for the partnership. These acquisitions have allowed Titan to expand its global footprint and enhance product offering in the Company’s target markets.
• | Market Segments |
In 2015, Titan’s agricultural segment sales represented 52% of net sales, the earthmoving/construction segment represented 36% and the consumer segment represented 12% of net sales.
COMPETITIVE STRENGTHS
Titan’s strong market position in the off-highway wheel, tire and undercarriage market, and its long-term core customer relationships contribute to the Company’s competitive strengths. Titan produces both wheels and tires which uniquely allows the Company to provide a one-stop solution for its customers' wheel and tire assembly needs. These strengths, along with Titan’s dedication to the off-highway equipment market, continue to drive the Company forward.
• | Strong Market Position |
Titan’s ability to offer a broad range of specialized wheels, tires, assemblies and undercarriage systems and components has resulted in the Company’s strong position in the global off-highway market. Through a diverse dealer network, the Company is able to reach an increasing number of customers in the aftermarket and build Titan’s image and brand recognition. The Company’s acquisition of the Goodyear Farm Tire brand in North America and Latin America contributes to overall visibility and customer confidence. Titan gained a strong presence in Europe and other parts of the world through the 2012 acquisition of Titan Europe. The 2013 acquisition of Voltyre-Prom expanded Titan's footprint into the Commonwealth of Independent States (CIS) region. Years of product design and engineering experience have enabled Titan to improve existing products and develop new ones that have been well received in the marketplace. In addition, Titan believes it has benefited from significant barriers to entry, such as the substantial investment necessary to replicate the Company’s manufacturing equipment and numerous tools, dies and molds, many of which are used in custom processes.
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• | Wheel and Tire Manufacturing Capabilities |
The Company’s unique position as a manufacturer of both wheels and tires allows Titan to mount and deliver one of the largest selections of off-highway assemblies in North America. Titan offers this value-added service of one-stop shopping for wheel and tire assemblies for the agricultural, earthmoving/construction and consumer segments. Both standard and Low Sidewall (LSW) assemblies are delivered as a single, complete unit based on each customer’s unique requirements.
• | Long-Term Core Customer Relationships |
The Company’s top customers, including global leaders in agricultural and construction equipment manufacturing, have been purchasing products from Titan or its predecessors for numerous years. Customers including AGCO Corporation, Caterpillar Inc., CNH Global N.V., Deere & Company and Kubota Corporation have helped sustain Titan’s leadership in wheel, tire and assembly innovation.
BUSINESS STRATEGY
Titan’s business strategy is to increase its presence in the segments it serves through its one-stop assembly solutions, including LSW technology. The Company continues to seek global expansion of this complete wheel and tire assembly product offering within the geographies it competes. This may be through strategic worldwide acquisitions or through expanded manufacturing capabilities in regions where the Company lacks either the wheel or the tire production. In addition, Titan continually seeks to improve operating efficiencies and gain additional synergies from more recent acquisitions.
• | Low Sidewall (LSW) Technology |
The Company has developed a LSW tire technology, featuring a larger rim diameter and a smaller sidewall than standard tires. As a cornerstone of the Company's strategy, Titan continues to expand the LSW product offering in both the agricultural and construction segments. Titan’s unique capabilities as both a wheel and tire manufacturer allow the Company to drive further adoption within these markets. Titan seeks to be at the forefront of off-road equipment advancement through the innovation of its LSW solution with the belief that it will become the industry standard.
The Company follows an adoption strategy whereby LSW assemblies are placed with certain end users in order to demonstrate the superior performance of this innovative solution. With LSW, these end users experience reduced power hop, road lope, soil compaction, and fuel consumption as well as improved safety and performance. Both power hop and road lope can disturb ride and impede equipment performance. Low sidewall technology has been widely adopted within the automotive industry for many years. The benefits translate to Titan's markets through superior comfort, ride and fuel economy.
• | OTR and Earthmoving Product |
The Company’s 2006 acquisition of the OTR tire assets of Continental Tire North America, Inc. in Bryan, Ohio, expanded Titan’s product offering into larger earthmoving, construction and mining tires. In 2008, the Company expanded the Bryan facility production capacity to include giant mining tires. The mining tire market is expected to offer long-term opportunities.
• | Increase Aftermarket Tire Business |
The Company has concentrated on increasing its presence in the tire aftermarket, which historically has tended to be somewhat less cyclical than the OEM market. The aftermarket also offers the potential for higher profit margins and is a larger market in most cases.
• | Improve Operating Efficiencies |
The Company constantly works to improve the operating efficiency of its assets and manufacturing facilities. Titan integrates each facility’s strengths, which may include transferring equipment and business to the facilities that are best equipped to handle the work. This provides capability to increase utilization and spread operating costs over a greater volume of products. Titan is also continuing a comprehensive program to refurbish, modernize and enhance the technology of its equipment.
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• | Enhance Design Capacity and New Product Development |
Equipment manufacturers constantly face changing industry dynamics. Titan directs its business and marketing strategy to understand and address the needs of its customers and demonstrate the advantages of its products. In particular, the Company often collaborates with customers in the design of new and enhanced products. Titan recommends modified products to its customers based on its own market information. These value-added services enhance Titan’s relationships with its customers. The Company tests new designs and technologies and develops methods of manufacturing to improve product quality and performance. Titan’s engineers have introduced designs for giant mining wheels and tires, which employ an innovative steel radial construction technology. Titan has also developed a Low Sidewall (LSW) tire technology, featuring a larger rim diameter and smaller sidewall than standard tires, which helps reduce power hop, road lope, soil compaction, and provides improved safety and performance.
• | Explore Additional Strategic Acquisitions |
The Company’s expertise in the manufacture of off-highway wheels, tires and undercarriage systems and components has permitted it to take advantage of opportunities to acquire businesses that complement this product line. In the future, Titan may make additional strategic acquisitions of businesses that have an off-highway focus. The Company continually explores worldwide opportunities to expand manufacturing and distribution in order to serve new and existing geographies.
For additional information concerning the revenues, certain expenses, income from operations and assets attributable to each of the segments in which the Company operates, see Note 32 to the Company's consolidated financial statements, included in Item 8 of our 2015 Form 10-K.
AGRICULTURAL SEGMENT
Titan’s agricultural rims, wheels, tires and undercarriage systems and components are manufactured for use on various agricultural equipment, including tractors, combines, skidders, plows, planters and irrigation equipment, and are sold directly to OEMs and to the aftermarket through independent distributors, equipment dealers and Titan’s own distribution centers. The wheels and rims range in diameter from 9 inches to 54 inches, with the 54-inch diameter being the largest agricultural wheel manufactured in North America. Basic configurations are combined with distinct variations (such as different centers and a wide range of material thickness) allowing the Company to offer a broad line of products to meet customer specifications. Titan’s agricultural tires range from approximately 1 foot to approximately 7 feet in outside diameter and from 5 inches to 55 inches in width. The Company offers the added value of delivering a complete wheel and tire assembly to customers.
EARTHMOVING/CONSTRUCTION SEGMENT
The Company manufactures rims, wheels, tires and undercarriage systems and components for various types of OTR earthmoving, mining, military, construction and forestry equipment, including skid steers, aerial lifts, cranes, graders and levelers, scrapers, self-propelled shovel loaders, articulated dump trucks, load transporters, haul trucks, backhoe loaders, crawler tractors, lattice cranes, shovels and hydraulic excavators. The earthmoving/construction market is often referred to as OTR, an acronym for off-the-road. The Company provides OEM and aftermarket customers with a broad range of earthmoving/construction wheels ranging in diameter from 20 inches to 63 inches and in weight from 125 pounds to 7,000 pounds. The 63-inch diameter wheel is the largest manufactured in North America for the earthmoving/construction market. Titan’s earthmoving/construction tires range from approximately 3 feet to approximately 13 feet in outside diameter and in weight from 50 pounds to 12,500 pounds. The Company offers the added value of wheel and tire assembly for certain applications in the earthmoving/construction segment.
CONSUMER SEGMENT
Titan manufactures bias truck tires in Latin America and light truck tires in Russia. Titan also offers select products for ATVs, turf, and golf cart applications. This segment also includes sales that do not readily fall into the Company's other segments including brakes and materials sold under various supply agreements. The North America brake business was divested in November 2015.
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SEGMENT SALES
Year ended December 31, | |||||||||||||||||
(Amounts in thousands) | 2015 | 2014 | 2013 | ||||||||||||||
Net Sales | % of Total Net Sales | Net Sales | % of Total Net Sales | Net Sales | % of Total Net Sales | ||||||||||||
Agricultural | $ | 723,715 | 52% | $ | 1,016,882 | 54% | $ | 1,182,187 | 55% | ||||||||
Earthmoving/construction | 505,927 | 36% | 610,596 | 32% | 749,115 | 34% | |||||||||||
Consumer | 165,129 | 12% | 268,049 | 14% | 232,293 | 11% | |||||||||||
$ | 1,394,771 | $ | 1,895,527 | $ | 2,163,595 | ||||||||||||
OPERATIONS
Titan’s operations include manufacturing wheels, manufacturing tires, combining these wheels and tires into assemblies, and manufacturing undercarriage systems and components for use in the agricultural, earthmoving/construction and consumer markets. These operations entail many manufacturing processes in order to complete the finished products.
• | Wheel Manufacturing Process |
Most agricultural wheels are produced using a rim and a center disc. A rim is produced by first cutting large steel sheets to required width and length specifications. These steel sections are rolled and welded to form a circular rim, which is flared and formed in the rollform operation. The majority of discs are manufactured using presses that both blank and form the center to specifications in multiple stage operations. The Company e-coats wheels using a multi-step process prior to the final paint top coating.
Large earthmoving/construction steel wheels are manufactured from hot and cold-rolled steel sections. Hot-rolled sections are generally used to increase cross section thickness in high stress areas of large diameter wheels. A special cold forming process for certain wheels is used to increase cross section thickness while reducing the number of wheel components. Rims are built from a series of hoops that are welded together to form a rim base. The complete rim base is made from either three or five separate parts that lock together after the rubber tire has been fitted to the wheel and inflated.
For most wheels in our consumer segment, the Company manufactures rims and center discs from steel sheets. Rims are rolled and welded, and discs are stamped and formed from the sheets. The manufacturing process then entails welding the rims to the centers and painting the assembled product.
• | Tire Manufacturing Process |
The first stage in tire production is the mixing of rubber, carbon black and chemicals to form various rubber compounds. These rubber compounds are then extruded and processed with textile or 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 the tread in some tires), tread and sidewall – are then assembled into an uncured tire carcass. The uncured carcass is placed into a press that molds and vulcanizes the carcass 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-highway assemblies in North America. Titan offers this value-added service of one-stop shopping for wheel and tire assemblies for the agricultural, earthmoving/construction and consumer segments. Both standard and LSW assemblies are delivered as a single, complete unit based on each customer’s unique requirements.
• | Undercarriage Manufacturing Process |
The undercarriage components (track groups, track and carrier rollers, idler assemblies and sprockets) are all manufactured from steel and produced according to specifications.
All of the track groups produced by the Company are built from four major parts: shoes, right and left hand links, pins and bushings. Shoes are manufactured from steel cast in the Company foundry or obtained from different shapes of hot rolled profiles (depending on application), sheared to length, and then heat treated for high wear bending and breaking resistance. Right and left hand links are hot forged, trimmed, mass heat treated, machined and finally induction hardened on rail surface for optimal wear and fatigue resistance. Pins are made from round bars that are cut, machined, heat treated and surface finished. Bushings are generally cold extruded, machined, mass heat treated, and finally carburized or induction hardened for wear resistance and optimal toughness.
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The lifetime lubricated and maintenance free track and carrier rollers are assembled with two major components: single or double flange roller shells (typically hot forged in halves, deep hardened, friction or arc welded and finish machined with metallurgical characteristics depending upon size and application) and shafts (generally cut from bars or forged, mass heat treated, rough machined, induction hardened and ground).
The idler assemblies are also lifetime lubricated, for virtually no maintenance. They are offered with cast (single web or hollow design) or fabricated shells, depending on size and application, and feature induction hardened tread surfaces for optimal wear resistance.
The sprockets, designed to transfer the machine driving loads from the final drive to the track, are produced cast or forged in several geometric options, depending upon size and application. They are also heat treated for wear resistance and cracking resistance.
The undercarriage systems, custom designed and produced by the Company, consist of a structured steel fabricated frame, all the undercarriage components mentioned above (track groups, track and carrier rollers, idler assemblies and sprockets) and a final drive. They are completely assembled in house, for consistent quality.
• | Quality Control |
The Company is ISO certified at all five main domestic manufacturing facilities located in Bryan, Ohio; Des Moines, Iowa; Freeport, Illinois; Quincy, Illinois; and Saltville, Virginia, as well as the majority of the foreign manufacturing facilities. The ISO 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 certifications are a testament to Titan’s dedication to providing quality products for its customers.
RAW MATERIALS
Steel and rubber are the primary raw materials used by the Company in all segments. To ensure a consistent steel supply, Titan purchases raw 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 steel supply; however, some components do have limited suppliers. Rubber and other raw materials for tire manufacture represent some of the Company’s largest commodity expenses. Titan buys rubber in markets where there are usually several sources of supply. In addition to the development of key domestic suppliers, the Company’s strategic procurement plan includes international steel and rubber 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, purchases are subject to price fluctuations. Titan has developed a procurement strategy and practice that will mitigate price risk and lower cost.
CAPITAL EXPENDITURES
Capital expenditures for 2015, 2014 and 2013 were $48.4 million, $58.4 million and $80.1 million, respectively. The capital expenditures in each year were used primarily for expanding capabilities, updating manufacturing equipment, and for further automation at the Company’s facilities. These capital expenditures are anticipated to be used to primarily enhance the Company’s existing facilities and manufacturing capabilities, and drive productivity gains.
PATENTS, TRADEMARKS AND ROYALTIES
The Company owns various patents and trademarks and continues to apply for patent protection for new products. Due to the difficult nature of predicting the interpretation of patent laws, the Company cannot anticipate or predict any material adverse effect on its operations, cash flows or financial condition as a result of associated liabilities created under such patent interpretations should the Company be unable to protect its patents or found to be infringing others' patents.
The Company has trademark license agreements with The Goodyear Tire & Rubber Company to manufacture and sell certain farm tires under the Goodyear name. These agreements cover sales in North America, Latin America, Europe, the Middle East, Africa, Russia and other Commonwealth of Independent States countries. The North American and Latin American farm tire royalties were prepaid through March 2018 as a part of the 2011 Goodyear Latin American farm tire acquisition. The Company also has a trademark license agreement with Goodyear to manufacture and sell certain non-farm tire products in Latin America.
MARKETING AND DISTRIBUTION
The Company employs an internal sales force and utilizes several manufacturing representative firms for sales in North America, Europe, Latin America, the CIS region, and other worldwide locations. Sales representatives are primarily organized within geographic regions.
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Titan distributes wheels, tires, assemblies, and undercarriage systems directly to OEMs. The distribution of aftermarket tires occurs primarily through a network of independent and OEM-affiliated dealers. The Company distributes wheels, tires, wheel and tire assemblies, and undercarriage systems directly to OEMs and aftermarket customers through its distribution network consisting of facilities worldwide.
SEASONALITY
Agricultural equipment sales are seasonal by nature. Farmers generally order equipment to be delivered before the growing season. Shipments to OEMs in the U.S. and Europe usually peak during the Company’s first and second quarters for the spring planting period, while shipments in Latin America usually peak during the Company's second and third quarter for the fall planting period. Earthmoving/construction and consumer segments also historically tend to experience higher demand in the first and second quarters. These segments are affected by mining, building and economic conditions.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company’s research, development and engineering staff tests original designs and technologies and develops new manufacturing methods to improve product performance. These services enhance the Company’s relationships with its customers. Titan's unique advantage as both a wheel and tire manufacturer allow the Company to design, test, and bring to market innovative solutions to meet the specific needs of its customers. Titan has also developed a Low Sidewall (LSW) tire technology, featuring a larger rim diameter and a smaller sidewall than standard tires, which helps reduce power hop, road lope, soil compaction, and provides improved safety and performance. Research and development (R&D) expenses are expensed as incurred. R&D costs were $11.2 million, $14.0 million and $11.2 million for the years ending December 31, 2015, 2014 and 2013, respectively.
CUSTOMERS
Titan’s 10 largest customers accounted for 31% of net sales for the year ended December 31, 2015, and 41% for the year ended December 31, 2014. Net sales to Deere & Company in Titan’s agricultural, earthmoving/construction and consumer segments combined represented 10% and 12% of the Company’s consolidated revenues for the years ended December 31, 2015 and 2014, respectively. No other customer accounted for more than 10% of the Company’s net sales in 2015 or 2014. Management believes the Company is not totally dependent on any single customer; however, certain products are dependent on a few customers. While the loss of any substantial customer could impact Titan’s business, the Company believes that its diverse product mix and customer base may minimize a longer-term impact caused by any such loss.
ORDER BACKLOG
As of January 31, 2016, Titan estimates $284 million in open orders compared to $371 million at January 31, 2015, for the Company’s operations. The January 31, 2016 open order amount included $126 million in the agricultural segment, $147 million in the earthmoving/construction segment, and $11 million in the consumer segment. The January 31, 2015 open order amount included $160 million in the agricultural segment, $189 million in the earthmoving/construction segment, and $22 million in the consumer segment. The Company believes that current open orders will be filled during the current year. The Company's backlog of open orders is not considered material to, or a significant factor in, evaluating and understanding any of its business segments or its businesses considered as a whole.
INTERNATIONAL OPERATIONS
In April of 2011, the Company closed on the acquisition of The Goodyear Tire & Rubber Company's Latin American farm tire business. As a result of this transaction, the Company operates a manufacturing facility in Sao Paulo, Brazil. The Latin American operations recorded 12% and 16% of the Company's sales for the years ended December 31, 2015 and 2014, respectively.
In October of 2012, the Company closed on the acquisition of Titan Europe and, as a result, expanded its global footprint. The Titan Europe operations accounted for 31% and 27% of the Company's sales for the years ended December 31, 2015 and 2014, respectively.
In October 2013, the Company closed on the acquisition of Voltyre-Prom. As a result of this transaction, the Company operates a manufacturing facility in Volgograd, Russia, expanding its presence to the CIS region. The Voltyre-Prom operations accounted for 5% of the Company's sales for both of the years ended December 31, 2015 and 2014.
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EMPLOYEES
At December 31, 2015, the Company employed approximately 6,000 people worldwide, including approximately 4,000 located outside the United States.
The collective bargaining agreements at the Company's Bryan, Ohio; Freeport, Illinois; and Des Moines, Iowa facilities, which account for approximately 43% of the Company’s U.S. employees, expire in March 2017.
Outside the United States, the Company enters into employment contracts and agreements in those countries in which such relationships are mandatory or customary. The provisions of these agreements correspond in each case with the required or customary terms in the subject jurisdiction.
ENVIRONMENTAL LAWS AND REGULATIONS
In the ordinary course of business, like other industrial companies, Titan is subject to extensive and evolving federal, state and local environmental laws and regulations, and has made provisions for the estimated financial impact of environmental cleanup. The Company’s policy is to accrue environmental cleanup-related costs of a non-capital 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, advances 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. Due to the difficult nature of predicting future environmental costs, the Company cannot anticipate or predict the material adverse effect on its operations, cash flows or financial condition as a result of efforts to comply with, or its liabilities under, environmental laws.
Presently, two of Titan’s subsidiaries are currently involved in litigation concerning environmental laws and regulations;
On October 26, 2010, the United States of America, on behalf of the Environmental Protection Agency (“EPA”), filed a complaint against Dico, Inc. (“Dico”) and Titan Tire Corporation (“Titan Tire”) in the U.S. District Court for the Southern District of Iowa, wherein the EPA sought civil penalties, punitive damages and response costs against Dico and Titan Tire pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”).
On June 11, 2015, Titan Tire and Dico, Inc. appealed the U.S. District Court’s order granting the EPA’s motion for summary judgment that found Dico and Titan Tire liable for civil penalties and response costs for violating CERCLA and Dico liable for civil penalties and punitive damages for violating an EPA Administrative Order.
On December 10, 2015, the United States Court of Appeals reversed the District Court’s summary judgment order with respect to “arranger” liability for Titan Tire and Dico under CERCLA and the imposition of punitive damages against Dico for violating the EPA Administrative Order, but affirmed the summary judgment order imposing civil penalties in the amount of $1.62 million against Dico for violating the EPA Administrative Order violation.
The case has been remanded to the District Court for trial on the issues of “arranger” liability under CERCLA as to Titan Tire and Dico and whether punitive damages should be imposed upon Dico for alleged violations of the EPA Administrative Order.
COMPETITION
The Company competes with several domestic and international companies, some of which are larger and have greater financial and marketing resources than Titan. The Company believes it is a primary source of steel wheels and rims to the majority of its North American customers. Major competitors in the off-highway wheel market include GKN Wheels, Ltd., Trelleborg Group, and Topy Industries, Ltd. Significant competitors in the off-highway tire market include Alliance Tire Company Ltd., Balkrishna Industries Limited (BKT), Bridgestone/Firestone, Michelin, Mitas a.s., and Pirelli. Significant competitors in the undercarriage market include Berco and Caterpillar.
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. Titan owns the molds and dies used to produce its wheels and tires. However, certain of the Company’s OEM customers could elect to manufacture the Company’s products to meet their requirements or to otherwise compete with the Company. There can be no assurance that the Company will not be adversely affected by increased competition in the markets in which it operates, or that competitors will not develop products that are more effective, less expensive or otherwise render certain of Titan’s products less competitive. From time to time, certain of the Company’s competitors have reduced their prices in particular product categories, which has prompted Titan to reduce prices as well. There can be no assurance that competitors of the Company will not further reduce prices in the future or that any such reductions would not have a material adverse effect on the Company.
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NEW YORK STOCK EXCHANGE CERTIFICATION
The Company submitted to the New York Stock Exchange during fiscal 2015 the Annual CEO Certification required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.
AVAILABLE INFORMATION
The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports are made available, without charge, through the Company’s website located at www.titan-intl.com as soon as reasonably practicable after they are filed with the Securities and Exchange Commission (SEC). The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The following documents are also posted on the Company’s website:
• | Corporate Governance Policy |
• | Business Conduct Policy |
• | Audit Committee Charter |
• | Compensation Committee Charter |
• | Nominating Committee Charter |
• | Corporate Governance Committee Charter |
Printed copies of these documents are available, without charge, by writing to: Titan International, Inc.,
c/o Corporate Secretary, 2701 Spruce Street, Quincy, IL 62301.
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ITEM 1A – RISK FACTORS
The Company is subject to various risks and uncertainties relating to or arising out of the nature of its business and general business, economic, financing, legal and other factors or conditions that may affect the Company. Realization of any of the following risks could have a material adverse effect on Titan’s business, financial condition, cash flows and results of operations.
• | The Company is exposed to price fluctuations of key commodities. |
The Company does not generally enter into long-term commodity contracts and does not use derivative commodity instruments to hedge exposures to commodity market price fluctuations. Therefore, the Company is exposed to price fluctuations of key commodities, which consist primarily of steel and rubber. Although the Company attempts to pass on certain material price increases to its customers, there is no assurance that the Company will be able to do so in the future. Any increase in the price of steel and rubber that is not passed on to customers could have a material adverse effect on Titan’s results of operations.
• | The Company relies on a limited number of suppliers. |
The Company currently relies on a limited number of suppliers for certain key commodities, which consist primarily of steel and rubber, in the manufacturing of Titan products. The loss of key suppliers or their inability to meet price, quality, quantity and delivery requirements could have a significant adverse impact on the Company’s results of operations.
• | The Company’s revolving credit facility and other debt obligations contain covenants. |
The Company’s revolving credit facility and other debt obligations contain covenants and restrictions. These covenants and restrictions could limit Titan’s ability to respond to market conditions, to provide for unanticipated capital investments, to raise additional debt or equity capital, to pay dividends or to take advantage of business opportunities, including future acquisitions. Titan’s ability to comply with the covenants may be affected by events beyond its control, including prevailing economic, financial and industry conditions.
• | The Company operates in cyclical industries and is subject to numerous changes in the economy. |
The Company's sales are substantially dependent on three major industries: agricultural equipment, earthmoving/construction equipment and consumer products. The business activity levels in these industries are subject to specific industry and general economic cycles. Any downturn in these industries or the general economy could have a material adverse effect on Titan’s business.
The agricultural equipment industry is affected by crop prices, farm income and farmland values, weather, export markets and government policies. The earthmoving/construction industry is affected by the levels of government and private construction spending and replacement demand. The mining industry, which is within the earthmoving/construction industry, is affected by raw material commodity prices. The consumer products industry is affected by consumer disposable income, weather, competitive pricing, energy prices and consumer attitudes. In addition, the performance of these industries is sensitive to interest rate and foreign exchange rate changes and varies with the overall level of economic activity.
• | The Company’s customer base is relatively concentrated. |
The Company’s ten largest customers, which are primarily original equipment manufacturers (OEMs), accounted for 31% of Titan’s net sales for 2015. Net sales to Deere & Company represented 10% of total 2015 net sales. No other customer accounted for more than 10% of net sales in 2015. As a result, Titan’s business could be adversely affected if one of its larger customers reduces its purchases from Titan due to work stoppages or slow-downs, financial difficulties, as a result of termination provisions, competitive pricing or other reasons. There is also continuing pressure from the OEMs to reduce costs, including the cost of products and services purchased from outside suppliers such as Titan. The Company has had long-term relationships with major customers and expects to continue these relationships. There can be no assurance that Titan will be able to maintain such ongoing relationships. Any failure to maintain the Company’s relationship with a leading customer could have an adverse effect on results of operations.
• | The Company’s revenues are seasonal in nature due to Titan’s dependence on seasonal industries. |
The agricultural, earthmoving/construction and recreational industries are seasonal, with typically lower sales during the second half of the year. This seasonality in demand has resulted in fluctuations in the Company’s revenues and operating results. Because much of Titan’s overhead expenses are fixed, seasonal trends can cause reductions in quarterly profit margins and financial condition, especially during slower periods.
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• | The Company may be adversely affected by changes in government regulations and policies. |
Domestic and foreign political developments and government regulations and policies directly affect the agricultural, earthmoving/construction and consumer products industries in the United States and abroad. Regulations and policies in the agricultural industry include those encouraging farm acreage reduction in the United States and granting ethanol subsidies. Regulations and policies relating to the earthmoving/construction industry include the construction of roads, bridges and other items of infrastructure. The modification of existing laws, regulations or policies or the adoption of new laws, regulations or policies could have an adverse effect on any one or more of these industries and, therefore, on Titan’s business.
• | The Company is subject to corporate governance requirements, and costs related to compliance with, or failure to comply with, existing and future requirements could adversely affect Titan’s business. |
The Company is subject to corporate governance requirements under the Sarbanes-Oxley Act of 2002, as well as new rules and regulations subsequently adopted by the Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB) and the New York Stock Exchange (NYSE). These laws, rules and regulations continue to evolve and may become increasingly restrictive in the future. Failure to comply with these laws, rules and regulations may have an adverse material effect on Titan’s reputation, financial condition and the value of the Company’s securities.
• | The Company faces substantial competition from domestic and international companies. |
The Company competes with several domestic and international competitors, some of which are larger and have greater financial and marketing resources than Titan. Titan 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 OEM customers could elect to manufacture certain products to meet their own requirements or to otherwise compete with Titan.
There can be no assurance that Titan’s businesses will not be adversely affected by increased competition in the Company’s markets or that competitors will not develop products that are more effective or less expensive than Titan products or which could render certain products less competitive. From time to time certain competitors have reduced prices in particular product categories, which has caused Titan to reduce prices. There can be no assurance that in the future Titan’s competitors will not further reduce prices or that any such reductions would not have a material adverse effect on Titan’s business.
• | The Company may be affected by unfair trade. |
Titan faces intense competition from producers both in the United States and around the world. In early January 2016, Titan, along with the United Steel Workers, filed petitions with the U.S. Department of Commerce (“Dept. of Commerce”) and the U.S. International Trade Commission (“ITC”) alleging that imported off-the-road tires from India and Sri Lanka and wheel and tire assemblies from China were being dumped and/or subsidized and were a cause of material injury to the domestic industry. Both the Dept. of Commerce and the ITC have initiated investigations against India and Sri Lanka; but, the ITC did not recommend pursuing the investigation into wheel and tire assemblies from China. If the Dept. of Commerce determines that imports are a cause of material injury (or threat of material injury) to the domestic industry and the Dept. of Commerce finds that imported goods are dumped and/or subsidized, imports will be subject to offsetting duties to neutralize such internationally recognized unfair trade practices. The investigations will likely run through early 2017, although preliminary relief could be provided during the summer of 2016.
Unfair trade from other countries may have a material adverse effect on Titan's business.
• | The Company could be negatively impacted if Titan fails to maintain satisfactory labor relations. |
The Company is party to collective bargaining agreements. Upon the expiration of any of the collective bargaining agreements, however, Titan may be unable to negotiate new collective bargaining agreements on terms that are cost effective to the Company. The business operations may be affected as a result of labor disputes or difficulties and delays in the process of renegotiating collective bargaining agreements.
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• | Unfavorable outcomes of legal proceedings could adversely affect results of operations. |
The Company is a party to routine legal proceedings arising out of the normal course of business. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, the Company believes at this time that none of these actions, individually or in the aggregate, will have a material adverse effect on the consolidated financial condition, results of operations or cash flows of the Company. However, due to the difficult nature of predicting unresolved and future legal claims, the Company cannot anticipate or predict any material adverse effect on its consolidated financial condition, results of operations or cash flows as a result of efforts to comply with, or its liabilities pertaining to, legal judgments.
• | Acquisitions may require significant resources and/or result in significant losses, costs or liabilities. |
Any future acquisitions will depend on the ability to identify suitable acquisition candidates, to negotiate acceptable terms for their acquisition and to finance those acquisitions. Titan will also face competition for suitable acquisition candidates that may increase costs. In addition, acquisitions require significant managerial attention, which may be diverted from current operations. Furthermore, acquisitions of businesses or facilities entail a number of additional risks, including:
- problems with effective integration of operations;
- the inability to maintain key pre-acquisition customer, supplier and employee relationships;
- the potential that expected benefits or synergies are not realized and operating costs increase; and
- exposure to unanticipated liabilities.
International acquisitions may be more complex and time consuming. Also, international acquisitions may include a number of additional risks including the integration of acquisitions operating under differing laws and regulations.
Subject to the terms of indebtedness, the Company may finance future acquisitions with cash from operations, additional indebtedness and/or by issuing additional equity securities. These commitments may impair the operation of Titan’s businesses. In addition, the Company could face financial risks associated with incurring additional indebtedness such as reducing liquidity and access to financing markets and increasing the amount of cash flow required to service such indebtedness.
• | The Company has international operations and purchases raw material from foreign suppliers. |
The Company had total aggregate sales outside the United States of approximately $750.2 million, $1,028.0 million and $1,089.9 million, for the years ended December 31, 2015, 2014 and 2013, respectively. Sales outside the United States have become a significant proportion of total sales, accounting for 54%, 54% and 50% for the years ending December 31, 2015, 2014 and 2013, respectively. Sales from these international operations are expected to continue to represent a similar portion of total sales.
International Operations and Sales – International operations and sales 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 and restrictive actions by foreign governments (such as restrictions on transfer of funds, export duties and quotas and foreign customs). Other risks include changes in foreign laws regarding trade and investment; difficulties in obtaining distribution and support; nationalization; reforms of United States laws and policies affecting trade, foreign investment and loans; and foreign tax laws. There may also be restrictions on the Company's ability to repatriate earnings and investments from international operations. 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.
Foreign Suppliers – The Company purchases 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 Titan purchases goods, relative to the strength of the currencies in countries where the products are sold. The Company’s results of operations, cash flows and financial position may be affected by fluctuations in foreign currencies.
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• | The Company is subject to anti-corruption laws and regulations. |
The Company has international operations and must comply with anti-corruption laws and regulations including the U.S. Foreign Corrupt Practices Act (FCPA). These anti-bribery laws generally prohibit companies and their intermediaries from making improper payments or providing anything of value for the purpose of obtaining or retaining business. The FCPA prohibits these payments regardless of local customs and practices. Although Titan has a compliance program in place to reduce the potential violations of corruption laws, violations of these laws could adversely affect the Company's business.
• | The Company may be subject to product liability and warranty claims. |
The Company warrants its products to be free of certain defects and, accordingly, may be subject to product liability or product warranty claims in the ordinary course of business. Losses may result or be alleged to result from defects in Titan products, which could subject the Company to claims for damages, including consequential damages. There can be no assurance that Company insurance will be adequate for liabilities actually incurred or that adequate insurance will be available on terms acceptable to the Company. Any claims relating to defective products that result in liability exceeding Titan’s insurance coverage could have a material adverse effect on financial condition and results of operations. Further, claims of defects could result in negative publicity against Titan, which could adversely affect the Company’s business.
• | The Company has incurred, and may incur in the future, net losses. |
The Company reported loss before income taxes of $52.0 million and $152.2 million for the years ended December 31, 2015 and 2014, respectively, and may incur losses in the future. Although the Company reported net income for the year ended December 31, 2013, and the Company expects to generate future profitability, there is no guarantee the Company will be profitable in the future.
• | The Company may be adversely affected by a disruption in, or failure of, information technology systems. |
The Company relies upon information technology systems, some of which are managed by third parties, to process, transmit and store electronic information. Technology systems are used in a variety of business processes and activities, including purchasing, manufacturing, distribution, invoicing and financial reporting. The Company utilizes security measures and business continuity plans to prevent, detect and remediate damage from computer viruses, natural disasters, unauthorized access, utility failures and other similar disruptions. Despite these measures, a security breach or information technology system failure may disrupt and adversely affect the Company's operations.
• | The Company is subject to risks associated with climate change and climate change regulations. |
Governmental regulatory bodies in the United States and other countries have, or are, contemplating introducing regulatory changes in response to the potential impacts of climate change. Laws and regulations regarding climate change and energy usage may impact the Company directly through higher costs for energy and raw materials. The Company’s customers may also be affected by climate change regulations that may impact future purchases. Physical climate change may potentially have a large impact on the Company’s two largest industry segments, agriculture and earthmoving/construction. The potential impacts of climate change and climate change regulations are highly uncertain at this time, and 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 climate change and climate change regulations.
• | The Company is subject to risks associated with environmental laws and regulations. |
The Company’s operations are subject to federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. The Company’s operations entail risks in these areas, and there can be no assurance that Titan will not incur material costs or liabilities. In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future.
• | The Company may incur additional tax expense or tax exposure. |
The Company is subject to income taxes in the United States and numerous foreign jurisdictions, and has domestic and international tax liabilities which are dependent upon the distribution of income among these different jurisdictions. Titan's income tax provision and cash tax liability in the future could be adversely affected by numerous factors, including income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities and changes in tax laws and regulations.
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• | The Company is subject to foreign currency translation risk. |
The Company continues to expand globally and now operates in many worldwide locations and transacts business in many foreign currencies. Titan's financial statements are reported in U.S. dollars with financial statements of international subsidiaries being initially recorded in foreign currencies and translated into U.S. dollars. Large fluctuations in currency exchange rates between the U.S. dollar and other world currencies may materially adversely affect the Company's financial condition, results of operations and liquidity.
• | The Company is subject to risks associated with uncertainties related to social, political and economic conditions in Russia and Brazil. |
Geopolitical and economic uncertainties relating to Russia and Brazil have and could continue to have a negative impact on the Company's sales and results of operations at the Company's Russian and Brazilian operations.
• | The Company has identified a material weakness in internal control over financial reporting which resulted in a restatement of its financial statements which, if not remediated, could result in additional material mistatements in the Company's financial statements. |
Titan’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. As disclosed in Item 9A, management identified a material weakness in internal control over financial reporting related to entity level controls. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this material weakness, management concluded that Titan's internal control over financial reporting was not effective based on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control - An Integrated Framework. Management is actively engaged in developing a remediation plan designed to address this material weakness. If the remediation measures are insufficient to address the material weakness or if additional material weaknesses or significant deficiencies in Titan's internal control over financial reporting are discovered or occur in the future, the Company's consolidated financial statements may contain material misstatements and Titan could be required to restate financial results.
ITEM 1B – UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2 – PROPERTIES
The Company’s properties with total square footage above 1 million are detailed by the location, size and focus of each facility as provided in the table below (Amounts in thousands):
Approximate square footage | ||||||||||
Location | Owned | Leased | Use | Segment | ||||||
Union City, Tennessee | 2,149 | Manufacturing, distribution | All segments | |||||||
Des Moines, Iowa | 2,047 | Manufacturing, distribution | All segments | |||||||
Sao Paulo, Brazil | 1,282 | Manufacturing, distribution | All segments | |||||||
Quincy, Illinois | 1,209 | Manufacturing, distribution | All segments | |||||||
Freeport, Illinois | 1,202 | Manufacturing, distribution | All segments | |||||||
Natchez, Mississippi | 1,203 | Storage | See note (a) | |||||||
(a) | The Company’s facility in Natchez, Mississippi, is not in operation and is currently being used for storage. |
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The Company’s total properties by continent are detailed by the location, size and focus as provided in the table below (Amounts in thousands):
Approximate square footage | ||||||||||
Location | Owned | Leased | Use | Segment | ||||||
North America | 8,660 | 1,629 | Manufacturing, distribution | All segments | ||||||
South America | 1,434 | 23 | Manufacturing, distribution | All segments | ||||||
Europe | 1,487 | 54 | Manufacturing, distribution | All segments | ||||||
Australia | 526 | Manufacturing, distribution | All segments | |||||||
Asia | 646 | 137 | Manufacturing, distribution | All segments | ||||||
Africa | 11 | Manufacturing, distribution | All segments | |||||||
The Company considers each of its facilities to be in good condition and adequate for present use. Management believes that the Company has sufficient capacity to meet current market demand with the active facilities. The Company has no current plans to restart manufacturing at the storage facility described in note (a) above.
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 at this time that none of these actions, individually or in the aggregate, will have a material adverse effect on the consolidated financial condition, results of operations or cash flows of the Company. However, due to the difficult nature of predicting unresolved and future legal claims, the Company cannot anticipate or predict the material adverse effect on its consolidated financial condition, results of operations or cash flows as a result of efforts to comply with or its liabilities pertaining to legal judgments.
Presently, Titan is engaged in the following material legal proceeding:
In early January 2016, Titan, along with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Worker International Union, AFL-CIO, CLC of Pittsburgh, Pennsylvania, filed petitions with the U.S. Department of Commerce (“Dept. of Commerce”) and the U.S. International Trade Commission (“ITC”) alleging that imported off-the-road tires from India and Sri Lanka and wheel and tire assemblies from China were being dumped and/or subsidized and were a cause of material injury to the domestic industry. Both the Dept. of Commerce and the ITC have initiated investigations against India and Sri Lanka; but, the ITC did not recommend pursuing the investigation into wheel and tire assemblies from China. If the Dept. of Commerce determines that imports are a cause of material injury (or threat of material injury) to the domestic industry and the Dept. of Commerce finds that imported goods are dumped and/or subsidized, imports will be subject to offsetting duties to neutralize such internationally recognized unfair trade practices. The investigations will likely run through early 2017, although preliminary relief could be provided during the summer of 2016.
Two of Titan’s subsidiaries, Dico, Inc. and Titan Tire Corporation, are currently involved in litigation concerning environmental laws and regulations. See "Environmental Laws and Regulations" in Item 1 for additional information.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5 | – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Company’s common stock is traded on the New York Stock Exchange (NYSE) under the symbol TWI. On February 17, 2016, there were approximately 400 holders of record of Titan common stock and an estimated 12,900 beneficial stockholders. The following table sets forth the high and low sales prices per share of common stock as reported on the NYSE, as well as information concerning per share dividends declared for the periods indicated.
2015 | High | Low | Dividends Declared | |||||||||
First quarter | $ | 10.79 | $ | 8.77 | $ | 0.005 | ||||||
Second quarter | 12.50 | 9.00 | 0.005 | |||||||||
Third quarter | 10.85 | 6.34 | 0.005 | |||||||||
Fourth quarter | 7.91 | 3.53 | 0.005 | |||||||||
2014 | ||||||||||||
First quarter | $ | 19.89 | $ | 16.22 | $ | 0.005 | ||||||
Second quarter | 19.28 | 15.29 | 0.005 | |||||||||
Third quarter | 17.20 | 11.76 | 0.005 | |||||||||
Fourth quarter | 11.83 | 9.14 | 0.005 | |||||||||
PERFORMANCE COMPARISON GRAPH
The performance graph compares cumulative total return for the Company’s common stockholders over the past five years against the cumulative total return of the Standard & Poor’s 600 Agricultural & Farm Machinery Index, and against the Standard & Poor’s 500 Stock Index. The graph depicts the value on December 31, 2015, of a $100 investment made on December 31, 2010, in Company common stock and each of the other two indices, with all dividends reinvested. Titan’s common stock is traded on the NYSE under the symbol TWI.
Fiscal Year Ended December 31, | |||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||||
Titan International, Inc. | $ | 100.00 | $ | 99.69 | $ | 111.37 | $ | 92.30 | $ | 54.65 | $ | 20.32 | |||||||||||
S&P 500 Index | 100.00 | 102.11 | 118.45 | 156.82 | 178.29 | 180.75 | |||||||||||||||||
S&P 600 Agricultural & Farm Machinery Index (a) | 100.00 | 94.45 | 132.74 | 166.05 | 154.52 | 145.84 | |||||||||||||||||
(a) The S&P 600 Agricultural & Farm Machinery index was created March 2014. The index data above reflects the old S&P 600 Construction & Farm Machinery & Heavy Trucks index from 12/31/10 - 2/28/14 and the new S&P 600 Agricultural & Farm Machinery index from 3/31/14 - forward.
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ITEM 6 – SELECTED FINANCIAL DATA
The selected financial data presented below, as of and for the years ended December 31, 2015, 2014, 2013, 2012, and 2011, are derived from the Company’s consolidated financial statements, as audited by Grant Thornton LLP, an independent registered public accounting firm for the years ended December 31, 2015, 2014, 2013, and 2012, and PricewaterhouseCoopers LLP, an independent registered public accounting firm for the year ended December 31, 2011, and should be read in conjunction with the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations and our audited consolidated financial statements and notes thereto.
(All amounts in thousands, except per share data)
Year Ended December 31, | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Net sales | $ | 1,394,771 | $ | 1,895,527 | $ | 2,163,595 | $ | 1,820,678 | $ | 1,486,998 | |||||||||
Mining asset impairment and inventory write-down | — | 39,932 | — | — | — | ||||||||||||||
Gross profit | 137,809 | 140,643 | 295,190 | 294,139 | 232,108 | ||||||||||||||
Non-cash goodwill impairment charge | — | 36,571 | — | — | — | ||||||||||||||
Supply agreement termination income | — | — | — | (26,134 | ) | — | |||||||||||||
Income (loss) from operations | (24,279 | ) | (97,625 | ) | 102,395 | 174,708 | 132,173 | ||||||||||||
Gain (loss) on senior note repurchase | — | — | (22,734 | ) | — | — | |||||||||||||
Non-cash Titan Europe gain | — | — | — | 26,700 | — | ||||||||||||||
Gain on earthquake insurance recovery | — | — | 22,451 | — | — | ||||||||||||||
Income (loss) before income taxes | (52,006 | ) | (152,244 | ) | 54,734 | 192,251 | 95,895 | ||||||||||||
Net income (loss) | (90,287 | ) | (130,425 | ) | 29,687 | 105,638 | 58,136 | ||||||||||||
Net loss attributable to noncontrolling interests | (14,654 | ) | (49,964 | ) | (5,518 | ) | (1,593 | ) | (16 | ) | |||||||||
Net income (loss) attributable to Titan | (75,633 | ) | (80,461 | ) | 35,205 | 107,231 | 58,152 | ||||||||||||
Net income (loss) per share – basic | (1.74 | ) | (2.43 | ) | .66 | 2.47 | 1.40 | ||||||||||||
Net income (loss) per share – diluted | (1.74 | ) | (2.43 | ) | .64 | 2.05 | 1.18 | ||||||||||||
Dividends declared per common share | 0.02 | 0.02 | 0.02 | 0.02 | 0.02 | ||||||||||||||
(All amounts in thousands) | As of December 31, | ||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Working capital | $ | 439,904 | $ | 534,374 | $ | 621,307 | $ | 529,043 | $ | 388,827 | |||||||||
Current assets | 710,001 | 835,930 | 1,007,878 | 996,123 | 564,593 | ||||||||||||||
Total assets | 1,275,191 | 1,495,724 | 1,821,231 | 1,710,235 | 1,010,286 | ||||||||||||||
Long-term debt (a) | 480,404 | 496,503 | 497,694 | 441,438 | 317,881 | ||||||||||||||
Stockholders’ equity | 344,683 | 518,866 | 708,881 | 632,362 | 396,879 | ||||||||||||||
(a) | Excludes amounts due within one year and classified as a current liability. |
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ITEM 7– MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS
Management’s discussion and analysis of financial condition and results of operations (MD&A) is designed to provide a reader of these financial statements with a narrative from the perspective of the management of Titan International, Inc. (Titan or the Company) on Titan’s financial condition, results of operations, liquidity and other factors which may affect the Company’s future results.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements, including statements regarding, among other items:
• | Anticipated trends in the Company’s business |
• | Future expenditures for capital projects |
• | The Company’s ability to continue to control costs and maintain quality |
• | Ability to meet conditions of loan agreements and other agreements governing indebtedness |
• | The Company’s business strategies, including its intention to introduce new products |
• | Expectations concerning the performance and success of the Company’s existing and new products |
• | The Company’s intention to consider and pursue acquisition and divestiture opportunities |
Readers of this Form 10-K should understand that these forward-looking statements are based on the Company’s expectations and are subject to a number of risks and uncertainties, including those in Item 1A, Part I of this report, “Risk Factors,” 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:
• | The effect of a recession on the Company and its customers and suppliers |
• | Changes in the Company’s end-user markets as a result of world economic or regulatory influences |
• | Changes in the marketplace, including new products and pricing changes by the Company’s competitors |
• | Ability to maintain satisfactory labor relations |
• | Unfavorable outcomes of legal proceedings |
• | Availability and price of raw materials |
• | Levels of operating efficiencies |
• | Unfavorable product liability and warranty claims |
• | Actions of domestic and foreign governments |
• | Geopolitical and economic uncertainties relating to Russia and Brazil could have a negative impact on the Company's sales and results of operations at the Company's Russian and Brazilian operations |
• | Results of investments |
• | Fluctuations in currency translations |
• | Climate change and related laws and regulations |
• | Risks associated with environmental laws and regulations |
Any changes in such factors could lead to significantly different results. The Company cannot provide any assurance that the assumptions referred to in the forward-looking statements or otherwise are accurate or will prove to transpire. Any assumptions that are inaccurate or do not prove to be correct could have a material adverse effect on the Company’s ability to achieve the results as indicated in forward-looking statements. 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.
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OVERVIEW
Titan International, Inc. and its subsidiaries are leading manufacturers of wheels, tires, wheel and tire assemblies, and undercarriage systems and components for off-highway vehicles used in the agricultural, earthmoving/construction and consumer segments. Titan manufactures both wheels and tires for the majority of these market applications, allowing the Company to provide the value-added service of delivering complete wheel and tire assemblies. The Company offers a broad range of products that are manufactured in relatively short production runs to meet the specifications of original equipment manufacturers (OEMs) and/or the requirements of aftermarket customers.
The Company’s major OEM customers include large manufacturers of off-highway equipment such as AGCO Corporation, Caterpillar Inc., CNH Global N.V., Deere & Company and Kubota Corporation, in addition to many other off-highway equipment manufacturers. The Company distributes products to OEMs, independent and OEM-affiliated dealers, and through a network of distribution facilities.
The following table provides highlights for the year ended December 31, 2015, compared to 2014 (amounts in thousands):
2015 | 2014 | ||||||
Net sales | $ | 1,394,771 | $ | 1,895,527 | |||
Loss from operations | (24,279 | ) | (97,625 | ) | |||
Net loss | (90,287 | ) | (130,425 | ) | |||
The Company recorded sales of $1,394.8 million for 2015, which were 26% lower than the 2014 sales of $1,895.5 million. Sales declined across all reported segments. Sales volume was down 11% as both the agriculture and earthmoving/construction segments remained in cyclical downturns. The consumer segment was affected by the Company's exit from various low-margin supply agreements and economic stress in Brazil. Unfavorable currency translation affected sales by 10% and a reduction in price/mix of 5% further eroded sales due to competitive pricing.
The Company’s loss from operations was $24.3 million for 2015, compared to loss of $97.6 million for 2014. Titan’s net loss was $90.3 million for 2015, compared to loss of $130.4 million in 2014. Diluted earnings per share was $(1.74) in 2015, compared to diluted earnings per share of $(2.43) in 2014.
Loss from operations and net loss improved from the absence of impairments and write-downs in 2015. In the second quarter of 2014, the Company recorded an asset impairment of $23.2 million on machinery, equipment and molds used to produce giant mining tires. In addition, the Company recorded inventory write-downs of $16.7 million in 2014 to adjust the value of mining product inventory to estimated market value. In the fourth quarter of 2014, the Company recorded a non-cash charge for the impairment of goodwill of $36.6 million.
Even as sales declined in 2015, adjusted gross margin improved as the Company continued to reap benefits from the Business Improvement Framework which began in 2014. After adjusting out the aforementioned impairments and write-downs, gross margin in 2014 was 9.5%. Gross margin in 2015 was 9.9% as initiatives born from the framework helped to drive increased productivity, expenditure rationalization, lower material costs, improved quality, lower warranty costs, and pricing optimization.
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MINING ASSET IMPAIRMENT AND INVENTORY WRITE-DOWN
In 2014, the Company recorded an asset impairment and inventory write-downs of $23.2 million and $16.7 million, respectively. The impairment was recorded on machinery, equipment and molds used to produce giant mining tires. Mining products are included in the Company's earthmoving/construction segment. In the second quarter of 2014, several large mining equipment manufacturers significantly decreased their sales forecast for mining equipment. The Company's sales of mining product were deteriorating at an accelerated pace. Therefore, the company tested mining related assets for impairment in the second quarter of 2014. The fair value of the mining equipment was determined using a cost and market approach. The inventory write-downs were to adjust the value of mining product inventory to estimated market value.
PURCHASE OF VOLTYRE-PROM
On October 4, 2013, Titan in partnership with One Equity Partners (OEP) and the Russian Direct Investment Fund (RDIF)closed the acquisition of an 85% interest in Voltyre-Prom, a leading producer of agricultural and industrial tires in Volgograd, Russia, for approximately $94.1 million, which includes the assumption of debt. Titan is acting as operating partner with responsibility for Voltyre-Prom's daily operations on behalf of the consortium of which Titan holds a 30% interest. The fair value of the consideration transferred and noncontrolling interests exceeded the fair value of the identified assets acquired less liabilities assumed. Therefore, goodwill of $21.0 million was recorded on the transaction at the time of acquisition. In the fourth quarter of 2014, the Company recorded a non-cash goodwill impairment charge of $15.6 million for Voltyre-Prom which removed all goodwill related to this acquisition. The difference from the amount originally recorded was due to foreign currency translation. An initial noncontrolling interest of $14.5 million, representing the 15% not owned by the partnership, was recorded at the acquisition date. In the first half of 2014, the partnership of Titan, OEP, and RDIF purchased an additional 15% to bring total Voltyre-Prom ownership to 100% for the partnership.
RESULTS OF OPERATIONS
The following table sets forth the Company’s statement of operations expressed as a percentage of net sales for the periods indicated. This table and subsequent discussions should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto.
As a Percentage of Net Sales Year ended December 31, | ||||||||
2015 | 2014 | 2013 | ||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
Cost of sales | 90.1 | 90.5 | 86.4 | |||||
Mining asset impairment and inventory write-down | — | 2.1 | — | |||||
Gross profit | 9.9 | 7.4 | 13.6 | |||||
Selling, general and administrative expenses | 10.1 | 9.2 | 7.7 | |||||
Research and development | 0.8 | 0.7 | 0.5 | |||||
Royalty expense | 0.8 | 0.7 | 0.7 | |||||
Non-cash goodwill impairment charge | — | 1.9 | — | |||||
Income (loss) from operations | (1.8 | ) | (5.1 | ) | 4.7 | |||
Interest expense | (2.4 | ) | (1.9 | ) | (2.2 | ) | ||
Convertible debt conversion charge | — | — | (0.3 | ) | ||||
Loss on senior note repurchase | — | — | (1.1 | ) | ||||
Gain on earthquake insurance recovery | — | — | 1.0 | |||||
Foreign exchange loss | (0.3 | ) | (1.7 | ) | (0.2 | ) | ||
Other income (expense) | 0.8 | 0.7 | 0.6 | |||||
Income (loss) before income taxes | (3.7 | ) | (8.0 | ) | 2.5 | |||
Income tax provision (benefit) | 2.7 | (1.2 | ) | 1.2 | ||||
Net income (loss) | (6.4 | )% | (6.8 | )% | 1.3 | % | ||
Net loss attributable to noncontrolling interests | (1.1 | ) | (2.6 | ) | (0.3 | ) | ||
Net income (loss) attributable to Titan | (5.3 | )% | (4.2 | )% | 1.6 | % | ||
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In addition, the following table sets forth components of the Company’s net sales classified by segment, (amounts in thousands):
2015 | 2014 | 2013 | |||||||||
Agricultural | $ | 723,715 | $ | 1,016,882 | $ | 1,182,187 | |||||
Earthmoving/Construction | 505,927 | 610,596 | 749,115 | ||||||||
Consumer | 165,129 | 268,049 | 232,293 | ||||||||
Total | $ | 1,394,771 | $ | 1,895,527 | $ | 2,163,595 | |||||
CRITICAL ACCOUNTING ESTIMATES
Preparation of the financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The Company’s application of these policies involves assumptions that require difficult subjective judgments regarding many factors, which, in and of themselves, could materially impact the financial statements and disclosures. A future change in the estimates, assumptions or judgments applied in determining the following matters, among others, could have a material impact on future financial statements and disclosures.
Asset and Business Acquisitions
The allocation of purchase price for asset and business acquisitions requires management estimates and judgment as to expectations for future cash flows of the acquired assets and business and the allocation of those cash flows to identifiable intangible assets in determining the estimated fair value for purchase price allocations. If the actual results differ from the estimates and judgments used in determining the purchase price allocations, impairment losses could occur. To aid in establishing the value of any intangible assets at the time of acquisition, the Company typically engages a professional appraisal firm.
Inventories
Inventories are valued at the lower of cost or market. The majority of inventories are valued under the first in, first out (FIFO) method or average cost method. Approximately 8% of the Company's December 31, 2015 inventories were valued using the last in, first out (LIFO) method. The majority of steel material inventory in North America is accounted for under the LIFO method. Market value is estimated based on current selling prices. Estimated provisions are established for slow-moving and obsolete inventory.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the respective tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply in the years the temporary differences are expected to be settled or realized. A valuation allowance is recorded for the portion of the deferred tax assets for which it is more likely than not that a tax benefit will not be realized. Management’s judgment is required to determine the provision for income taxes, deferred tax assets and liabilities, and valuation allowances against deferred tax assets.
Retirement Benefit Obligations
Pension benefit obligations are based on various assumptions used by third-party actuaries in calculating these amounts. These assumptions include discount rates, expected return on plan assets, mortality rates and other factors. Revisions in assumptions and actual results that differ from the assumptions affect future expenses, cash funding requirements and obligations. The Company has three frozen defined benefit pension plans in the United States and pension plans in several foreign countries. For more information concerning these costs and obligations, see the discussion of the “Pensions” and Note 26 to the Company’s financial statements.
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The effect of hypothetical changes to selected assumptions on the Company’s frozen pension benefit obligations would be as follows (amounts in thousands):
December 31, 2015 | 2016 | ||||||
Assumptions | Percentage Change | Increase (Decrease) PBO (a) | Increase (Decrease) Equity | Increase (Decrease) Expense | |||
Pension | |||||||
Discount rate | +/-5 | $(5,182)/$5,762 | $5,182/$(5,762) | $(158)/$238 | |||
Expected return on assets | +/-5 | $(374)/$374 | |||||
(a) | Projected benefit obligation (PBO) for pension plans. |
Product Warranties
The Company provides limited warranties on workmanship on its products in all market segments. The majority of the Company's products have a limited warranty that ranges from zero to ten years, with certain products being prorated after the first year. The Company calculates a provision for warranty expense based on past warranty experience. Actual warranty experience may differ from historical experience. The Company's warranty accrual was $23.1 million at December 31, 2015, and $28.1 million at December 31, 2014.
Impairment of Long-Lived Assets
The Company reviews fixed assets to assess recoverability from future operations whenever events and circumstances indicate that the carrying values may not be recoverable. Factors that could result in an impairment review include, but are not limited to, a current period cash flow loss combined with a history of cash flow losses, current cash flows that may be insufficient to recover the investment in the property over the remaining useful life, or a projection that demonstrates continuing losses associated with the use of a long-lived asset, significant changes in the manner of use of the assets or significant changes in business strategies. Impairment losses are recognized in operating results when expected undiscounted 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 or the estimated fair value of the asset.
As a result of the continued downturns in the Company's markets and overall operating loss, the Company determined in the fourth quarter of 2015 that events and circumstances indicated that the carrying value of fixed assets may not be recoverable. Certain long-lived assets were reviewed for recoverability. No impairment was identified. The Company's impairment testing includes uncertainty because it requires management to make assumptions and to apply judgment to estimated future cash flows and asset fair values. If actual results are not consistent with estimates and assumptions used in estimating future cash flows and asset fair values, the Titan may be exposed to impairment charges in the future, which could be material to the Company's results of operations.
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FISCAL YEAR ENDED DECEMBER 31, 2015, COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2014
RESULTS OF OPERATIONS
Highlights for the year ended December 31, 2015, compared to 2014 (amounts in thousands):
2015 | 2014 | % Decrease | ||||||||
Net sales | $ | 1,394,771 | $ | 1,895,527 | (26 | )% | ||||
Cost of sales | 1,256,962 | 1,714,952 | (27 | )% | ||||||
Mining asset impairment and inventory write-down | — | 39,932 | n/a | |||||||
Gross profit | 137,809 | 140,643 | (2 | )% | ||||||
Gross profit percentage | 9.9 | % | 7.4 | % | ||||||
Net Sales
Net sales for the year ended December 31, 2015, were $1,394.8 million, compared to $1,895.5 million for the year ended December 31, 2014, a decrease of 26%. Sales declined across all reported segments. Sales volume was down 11% as both the Agriculture and Earthmoving/Construction segments remained in cyclical downturns. The Consumer segment was affected by the Company's exit from various low-margin supply agreements and economic stress in Brazil. Unfavorable currency translation affected sales by 10% and a reduction in price/mix of 5% further eroded sales due to competitive pricing and lower raw material costs passed along to customers.
Cost of Sales, Mining Asset Impairment, Mining Inventory Write-down and Gross Profit
Cost of sales was $1,257.0 million for the year ended December 31, 2015, as compared to $1,715.0 million in 2014. Gross profit for the year 2015 was $137.8 million, or 9.9% of net sales, compared to $140.6 million, or 7.4% of net sales for 2014. In the second quarter of 2014, the Company recorded an asset impairment of $23.2 million on machinery, equipment and molds used to produce giant mining tires. In addition, the Company recorded inventory write-downs of $16.7 million in 2014 to adjust the value of mining product inventory to estimated market value. After adjusting for the aforementioned impairments and write-downs, gross profit for 2014 was $180.5 million or 9.5% of net sales.
Even as sales declined in 2015, adjusted gross margin improved as the Company continued to reap benefits from the Business Improvement Framework which began in 2014. After adjusting for the aforementioned impairments and write-downs, gross margin in 2014 was 9.5%. Gross margin in 2015 was 9.9% as initiatives born from the framework helped to drive increased productivity, expenditure rationalization, lower material costs, improved quality, lower warranty costs, and pricing optimization.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses were $140.4 million, or 10.1% of net sales, for the year ended December 31, 2015, as compared to $173.6 million, or 9.2% of net sales, for 2014. The decrease in SG&A expenses was driven from our Business Improvement Framework and currency.
Research and Development Expenses
Research and development (R&D) expenses were $11.2 million, or 0.8% of net sales, for the year ended December 31, 2015, as compared to $14.0 million, or 0.7% of net sales, for 2014.
Royalty Expense
The Company has a trademark license agreement with The Goodyear Tire & Rubber Company to manufacture and sell certain tires in North America and Latin America under the Goodyear name. The North American and Latin American farm tire royalties were prepaid through March 2018 as a part of the 2011 Goodyear Latin American farm tire acquisition. In May 2012, the Company and Goodyear entered into an agreement under which Titan will sell certain non-farm tire products directly to third party customers and pay a royalty to Goodyear. Royalty expenses were $10.5 million for the year ended December 31, 2015, as compared to $14.1 million in 2014.
Non-cash Goodwill Impairment Charge
In the fourth quarter of 2014, the Company recorded a non-cash charge for the impairment of goodwill of $36.6 million on both a pre-tax and after-tax basis. The charge included $11.4 million of earthmoving/construction goodwill related to the acquisition of Titan Australia; $9.6 million of agricultural goodwill related to the acquisition of the Latin America farm tire business; and
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$15.6 million of goodwill related to the acquisition of Voltyre-Prom. The Voltyre-Prom goodwill included $11.0 million in the agricultural segment, $2.6 million in the earthmoving/construction segment, and $2.0 million in the consumer segment.
The key factor leading to the impairment of the Australian goodwill was the continued downturn in the mining industry. During 2014, the price of iron ore declined over 40%. The extended downturn led to changes in assumptions regarding future cash flows which culminated in the goodwill impairment. The key factors leading to the impairment of the Voltyre-Prom goodwill were the changes in the political and economic factors which occurred in Russia during 2014. The changes, including devaluation of the Russian ruble and increases in interest rates, accelerated in the fourth quarter of 2014 which led to changes in assumptions regarding future cash flows which resulted in goodwill impairment. The key factors leading to the impairment of the Latin American goodwill were a softening of the agricultural tire market and the Brazilian economy as a whole. The slowdown, which began in the third quarter, accelerated in the fourth quarter. As a result of the slowdown, there was competitive pricing pressure impacting both sales and profits. These changes led to changes in assumptions regarding future cash flows which resulted in goodwill impairment.
Loss from Operations
Loss from operations for the year ended December 31, 2015, was $24.3 million, or (1.8)% of net sales, compared to loss of $97.6 million, or (5.1)% of net sales, in 2014. This decrease was the net result of the items previously discussed.
Interest Expense
Interest expense for the year 2015 was $34.0 million, compared to $36.6 million in 2014. The Company’s interest expense for 2015 decreased from the previous year primarily from decreased debt balances at Titan Europe.
Other Income
Other income was $11.1 million for the year ended December 31, 2015, as compared to other income of $13.7 million in 2014. The major items included in 2015 were: (i) interest income of $2.7 million; (ii) gain on sale of assets of $2.4 million; (iii) discount amortization on prepaid royalty of $2.0 million; and (iv) Wheels India Limited equity income of $1.8 million.
The major items included in 2014 were: (i) gain on sale of assets of $3.4 million; (ii) interest income of $3.0 million; (iii)discount amortization on prepaid royalty of $2.7 million; and (iv) Wheels India Limited equity income of $2.1 million.
Foreign Exchange Loss
Foreign currency loss was $4.8 million and $31.7 million for the years ended December 31, 2015 and 2014, respectively. Foreign currency losses in 2015 and 2014 primarily reflect the translation of intercompany loans at certain foreign subsidiaries denominated in currencies other than their functional currencies. Since such loans are expected to be settled in cash at some point in the future, these loans are adjusted each reporting period to reflect the current exchange rates. During 2014, the translation of these intercompany loan balances was significant due to the relative strength of the U.S. dollar in relation to the functional currencies of the loans. Although the U.S. dollar remained strong throughout 2015, foreign currency losses were minimized through offsetting gains relating to derivative financial instruments on such intercompany loans as well as other actions taken to reduce exposures.
The Company's investment in Wheels India Limited decreased from 41.7% to 34.2% during the first quarter of 2014 due to an equity offering by Wheels India Limited.
Provision (Benefit) for Income Taxes
The Company recorded tax expense for income taxes of $38.3 million in 2015, as compared to income tax benefit of $21.8 million in 2014. The Company's effective tax rate was (74%) in 2015 and 14% in 2014. The Company's 2015 income tax expense and rate differ from the amount of income tax determined by applying the U.S. Federal income tax rate to pre-tax income primarily as a result of a foreign exchange loss upon the outbound transfer of Brazil assets for U.S. tax purposes (check the box election) offset by an increase in the valuation allowance against deferred tax assets. The Company's 2014 income tax expense and rate differ 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 non-deductible goodwill and the recording of a valuation allowance. Other items contributing to the rate difference are state income tax expense, debt forgiveness, foreign earnings, and non-deductible expenses.
Net Loss
Net loss for the year ended December 31, 2015, was $90.3 million, compared to net loss of $130.4 million in 2014. Basic earnings per share was $(1.74) for the year ended December 31, 2015, as compared to $(2.43) in 2014. Diluted earnings per share was $(1.74) for the year ended December 31, 2015, as compared to $(2.43) in 2014. The Company's net income and earnings per share were higher due to the items previously discussed.
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SEGMENT INFORMATION
Agricultural Segment Results
Agricultural segment results were as follows (amounts in thousands):
2015 | 2014 | % Decrease | ||||||||
Net sales | $ | 723,715 | $ | 1,016,882 | (29 | )% | ||||
Gross profit | 97,341 | 134,688 | (28 | )% | ||||||
Income from operations | 61,786 | 63,838 | (3 | )% | ||||||
Net sales in the agricultural market were $723.7 million for the year ended December 31, 2015, as compared to $1,016.9 million in 2014, a decrease of 29%. Agriculture sales experienced reductions in volume of 17% and price/mix of 4% as a consequence of decreased demand for high horsepower agricultural equipment. Unfavorable currency translation decreased sales by 8%.
Gross profit in the agricultural market was $97.3 million for the year 2015, as compared to $134.7 million in 2014. Income from operations in the agricultural market was $61.8 million for the year 2015, as compared to $63.8 million in 2014. In response to lower demand from customers, the Company extended production shut-downs reducing manufacturing output which negatively impacted production leverage and gross profit. Despite the large overall sales erosion resulting from the agricultural cyclical downturn, the Business Improvement Framework instituted in 2014 has helped to soften the margin impact. Initiatives born from the framework helped to drive headcount reductions, expenditure rationalization, increased productivity, lower raw material costs, lower warranty costs, and pricing optimization.
Earthmoving/Construction Segment Results
Earthmoving/construction segment results were as follows (amounts in thousands):
2015 | 2014 | % Decrease | ||||||||
Net sales | $ | 505,927 | $ | 610,596 | (17 | )% | ||||
Gross profit (loss) | 33,526 | (7,609 | ) | n/a | ||||||
Loss from operations | (13,707 | ) | (80,600 | ) | (83 | )% | ||||
The Company's earthmoving/construction market net sales were $505.9 million for the year ended December 31, 2015, as compared to $610.6 million in 2014, a decrease of 17%. Segment sales experienced unfavorable currency translation resulting in a decrease of 11%. The major volume drops that were seen in 2014 have leveled out with only a 1% sales volume decrease for 2015. Price/mix reductions of 5% make up the remainder of the total sales decrease.
Gross profit in the earthmoving/construction market was $33.5 million for the year 2015, as compared to gross loss of $7.6 million in 2014. The Company's earthmoving/construction market loss from operations was $13.7 million for the year 2015, as compared to loss from operations of $80.6 million in 2014. In the second quarter of 2014, the Company recorded an asset impairment of $23.2 million on machinery, equipment and molds used to produce giant mining tires. In addition, the Company recorded inventory write-downs of $16.7 million to adjust the value of mining product inventory to estimated market value. When adjusted to remove these items, the gross profit in 2014 would have been $32.3 million and loss from operations for 2014 would have been $40.7 million.
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Consumer Segment Results
Consumer segment results were as follows (amounts in thousands):
2015 | 2014 | % Decrease | ||||||||
Net sales | $ | 165,129 | $ | 268,049 | (38 | )% | ||||
Gross profit | 11,084 | 16,250 | (32 | )% | ||||||
Loss from operations | (5,458 | ) | (8,766 | ) | (38 | )% | ||||
Consumer market net sales were $165.1 million for the year ended December 31, 2015, as compared to $268.0 million in 2014, a decrease of 38%. Unfavorable currency translation accounted for $47.0 million of this decline. The Company's exit from several low-margin supply agreements contributed an additional $25.9 million. The economic stress in Brazil had a negative impact on sales volume of $17.1 million. Lower prices from competitive pressures and lower raw material costs accounted for the remaining declines.
Gross profit from the consumer market was $11.1 million in 2015, or 6.7% of net sales, as compared to $16.3 million, or 6.1% of net sales in 2014. Consumer market loss from operations was $5.5 million for the year 2015, as compared to $8.8 million in 2014. Although sales were lower in 2015 versus 2014, the Company was successful in reducing costs related to the production of consumer segment products.
Segment Summary
(Amounts in thousands)
2015 | Agricultural | Earthmoving/ Construction | Consumer | Corporate Expenses | Consolidated Totals | |||||||||||||||
Net sales | $ | 723,715 | $ | 505,927 | $ | 165,129 | $ | — | $ | 1,394,771 | ||||||||||
Gross profit (loss) | 97,341 | 33,526 | 11,084 | (4,142 | ) | 137,809 | ||||||||||||||
Income (loss) from operations | 61,786 | (13,707 | ) | (5,458 | ) | (66,900 | ) | (24,279 | ) | |||||||||||
2014 | ||||||||||||||||||||
Net sales | $ | 1,016,882 | 610,596 | $ | 268,049 | $ | — | $ | 1,895,527 | |||||||||||
Gross profit (loss) | 134,688 | (7,609 | ) | 16,250 | (2,686 | ) | 140,643 | |||||||||||||
Income (loss) from operations | 63,838 | (80,600 | ) | (8,766 | ) | (72,097 | ) | (97,625 | ) | |||||||||||
Corporate Expenses
Income from operations on a segment basis does not include corporate expenses totaling $66.9 million for the year ended December 31, 2015, as compared to $72.1 million in 2014. Corporate expenses were composed of selling and marketing expenses of approximately $28 million and $33 million for the years ended December 31, 2015, and 2014, respectively; and administrative expenses of approximately $36 million and $39 million for the years ended December 31, 2015, and 2014, respectively.
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FISCAL YEAR ENDED DECEMBER 31, 2014, COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2013
RESULTS OF OPERATIONS
Highlights for the year ended December 31, 2014, compared to 2013 (amounts in thousands):
2014 | 2013 | % Decrease | ||||||||
Net sales | $ | 1,895,527 | $ | 2,163,595 | (12 | )% | ||||
Cost of sales | 1,714,952 | 1,868,405 | (8 | )% | ||||||
Mining asset impairment and inventory write-down | 39,932 | — | n/a | |||||||
Gross profit | 140,643 | 295,190 | (52 | )% | ||||||
Gross profit percentage | 7.4 | % | 13.6 | % | ||||||
Net Sales
Net sales for the year ended December 31, 2014, were $1,895.5 million, compared to $2,163.6 million for the year ended December 31, 2013, a decrease of 12%. Sales decreased 10% as the result of price/mix reductions driven by decreased demand for high horsepower agricultural equipment and decreased demand in the earthmoving/construction segment, primarily for products used in the mining industry. These decreases were partially offset by increased demand for products used in the construction industry. In addition, competitive pressures resulting in price erosion negatively impacted sales. Overall volume decreased 4%, and unfavorable currency translation decreased sales by 2%. The decrease in net sales was partially offset by the inclusion of the recently acquired Voltyre-Prom business, which increased sales 4%.
Cost of Sales, Mining Asset Impairment, Mining Inventory Write-down and Gross Profit
Cost of sales was $1,715.0 million for the year ended December 31, 2014, as compared to $1,868.4 million in 2013. Gross profit for the year 2014 was $140.6 million, or 7.4% of net sales, compared to $295.2 million, or 13.6% of net sales, for 2013. Decreased demand for high horsepower agricultural equipment and products used in the mining industry negatively impacted gross profit. Generally, there are higher margins associated with these product categories. The lower market demand also drove competitive pressures resulting in price erosion that further deteriorated both sales and gross margins. Lost leverage and reduced productivity in the plants are also consequences of lower sales. In the second quarter of 2014, the Company recorded an asset impairment of $23.2 million on machinery, equipment and molds used to produce giant mining tires. In addition, the Company recorded inventory write-downs of $16.7 million in 2014 to adjust the value of mining product inventory to estimated market value.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses were $173.6 million, or 9.2% of net sales, for the year ended December 31, 2014, as compared to $167.4 million, or 7.7% of net sales, for 2013. The higher SG&A expenses were primarily the result of approximately $5 million of costs relating to the closing of a facility in Crespellano, Italy, and approximately $3 million of SG&A expenses at recently acquired facilities, offset by a decrease in incentive compensation and a reduction of bad debt expense. The increase in SG&A as a percentage of sales was primarily the result of decreased sales levels.
Research and Development Expenses
Research and development (R&D) expenses were $14.0 million, or 0.7% of net sales, for the year ended December 31, 2014, as compared to $11.2 million, or 0.5% of net sales, for 2013. Increased R&D is primarily attributable to the investment in LSW as a cornerstone of the Company's strategy.
Royalty Expense
The Company has a trademark license agreement with The Goodyear Tire & Rubber Company to manufacture and sell certain tires in North America and Latin America under the Goodyear name. The North American and Latin American farm tire royalties were prepaid through March 2018 as a part of the 2011 Goodyear Latin American farm tire acquisition. In May 2012, the Company and Goodyear entered into an agreement under which Titan will sell certain non-farm tire products directly to third party customers and pay a royalty to Goodyear. Royalty expenses were $14.1 million for the year ended December 31, 2014, as compared to $14.3 million in 2013.
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Non-cash Goodwill Impairment Charge
In the fourth quarter of 2014, the Company recorded a non-cash charge for the impairment of goodwill of $36.6 million on both a pre-tax and after-tax basis. The charge included $11.4 million of earthmoving/construction goodwill related to the acquisition of Titan Australia; $9.6 million of agricultural goodwill related to the acquisition of the Latin America farm tire business; and $15.6 million of goodwill related to the acquisition of Voltyre-Prom. The Voltyre-Prom goodwill included $11.0 million in the agricultural segment, $2.6 million in the earthmoving/construction segment, and $2.0 million in the consumer segment.
The key factor leading to the impairment of the Australian goodwill was the continued downturn in the mining industry. During 2014, the price of iron ore declined over 40%. The extended downturn led to changes in assumptions regarding future cash flows which culminated in the goodwill impairment. The key factors leading to the impairment of the Voltyre-Prom goodwill were the changes in the political and economic factors which occurred in Russia during 2014. The changes, including devaluation of the Russian ruble and increases in interest rates, accelerated in the fourth quarter of 2014 which led to changes in assumptions regarding future cash flows which resulted in goodwill impairment. The key factors leading to the impairment of the Latin American goodwill were a softening of the agricultural tire market and the Brazilian economy as a whole. The slowdown, which began in the third quarter, accelerated in the fourth quarter. As a result of the slowdown, there was competitive pricing pressure impacting both sales and profits. These changes led to changes in assumptions regarding future cash flows which resulted in goodwill impairment.
Income (Loss) from Operations
Loss from operations for the year ended December 31, 2014, was $97.6 million, or (5.1)% of net sales, compared to income of $102.4 million, or 4.7% of net sales, in 2013. This decrease was the net result of the items previously discussed.
Interest Expense
Interest expense for the year 2014 was $36.6 million compared to $47.1 million in 2013. The Company’s interest expense for 2014 decreased from the previous year primarily as a result of the repurchase of the 7.875% senior secured notes due October 2017 (senior secured notes due 2017) in the fourth quarter of 2013, and decreased debt balances at Titan Europe.
Convertible Debt Conversion Charge
In the first quarter of 2013, the Company closed an Exchange Agreement with a note holder of the 5.625% convertible senior subordinated notes due January 2017 (convertible notes). The two parties privately negotiated an agreement to exchange approximately $52.7 million in aggregate principal amount of the convertible notes for approximately 4.9 million shares of the Company's common stock plus a cash payment totaling $14.2 million. In connection with this exchange, the Company recognized a charge of $7.3 million in accordance with accounting standards for debt conversion.
Loss on Senior Note Repurchase
In the fourth quarter of 2013, Titan satisfied and discharged the indenture relating to the senior secured notes due 2017 by completing a tender offer settlement and redemption of all of its outstanding $525 million principal amount of the notes, including $325 million issued in 2013. In connection with this tender offer and redemption, the Company recorded expenses of $22.7 million. These expenses were related to early tender premium of $25.0 million, redemption premium of $8.1 million, unamortized deferred financing fees of $7.3 million, and other fees of $0.2 million, offset by unamortized premium on the notes of $17.9 million.
Gain on Earthquake Insurance Recovery
Titan Europe's wheel manufacturing facility in Finale Emilia, Italy, experienced damage from an earthquake in May of 2012, prior to Titan's acquisition of Titan Europe. The plant was closed for production during initial remedial work. This resulted in a limited transfer of production to other facilities within Titan Europe as well as sourcing product from facilities in the U.S. owned by Titan and competitors. In the second quarter of 2013, Titan received a final insurance settlement payment of $38.7 million, which offset the earthquake insurance receivable and resulted in a gain of $22.5 million.
Other Income (Expense) / Foreign Currency Translation
Other expense was $18.1 million for the year ended December 31, 2014, as compared to other income of $7.0 million in 2013. The major items included in 2014 were: (i) currency exchange loss of $31.7 million; (ii) gain on sale of assets of $3.4 million; (iii) interest income of $3.0 million; (iv) discount amortization on prepaid royalty of $2.7 million; (v) Wheels India Limited equity income of $2.1 million; and (vi) investment gain related to contractual obligation of $1.1 million.
The major items included in 2013 were: (i) currency exchange loss of $4.9 million; (ii) discount amortization on prepaid royalty of $3.3 million; (iii) interest income of $3.4 million; (iv) Wheels India Limited equity income of $1.4 million; and (v) investment gain related to contractual obligation of $1.3 million.
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Foreign currency gain (losses) in 2014 and 2013, primarily reflect the translation of intercompany loans at certain foreign subsidiaries denominated in currencies other than their functional currencies. Since such loans are expected to be settled in cash at some point in the future, these loans are adjusted each reporting period to reflect the current exchange rates. During 2014, the translation of these intercompany loan balances was significant due to the relative strength of the U.S. dollar in relation to the functional currencies of the loans.
The Company's investment in Wheels India Limited decreased from 41.7% to 34.2% during the first quarter of 2014 due to an equity offering by Wheels India Limited.
Provision (Benefit) for Income Taxes
The Company recorded benefit for income taxes of $21.8 million in 2014, as compared to income tax expense of $25.0 million in 2013. The Company's effective tax rate was 14% in 2014 and 46% in 2013. The Company's 2014 income tax expense and rate differ 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 non-deductible goodwill impairment recorded in 2014 and the increase in the valuation allowance against deferred tax assets. The Company's 2013 income tax expense and rate differ from the amount of income tax determined by applying the U.S. Federal income tax rate to pre-tax income primarily as a result of a change in Italian law making the insurance proceeds from the earthquake non-taxable. In addition, as a result of the reassessment of the realizability of the deferred tax assets due to the Italian law change, a valuation allowance was established on the Italy net deferred tax assets. Other items contributing to the rate difference are state income tax expense, unrecognized tax benefits, foreign earnings, domestic production activities deduction, and tax deductible expenses related to the convertible notes repurchase.
Net Income (Loss)
Net loss for the year ended December 31, 2014, was $130.4 million, compared to net income of $29.7 million in 2013. Basic earnings per share was $(2.43) for the year ended December 31, 2014, as compared to $0.66 in 2013. Diluted earnings per share was $(2.43) for the year ended December 31, 2014 as compared to $0.64 in 2013. The Company's net income and earnings per share were lower due to the items previously discussed.
SEGMENT INFORMATION
Agricultural Segment Results
Agricultural segment results were as follows (amounts in thousands):
2014 | 2013 | % Decrease | ||||||||
Net sales | $ | 1,016,882 | $ | 1,182,187 | (14 | )% | ||||
Gross profit | 134,688 | 198,910 | (32 | )% | ||||||
Income from operations | 63,838 | 151,841 | (58 | )% | ||||||
Net sales in the agricultural market were $1,016.9 million for the year ended December 31, 2014, as compared to $1,182.2 million in 2013, a decrease of 14%. The inclusion of the recently acquired Voltyre-Prom business increased sales 5%.
Overall sales experienced reductions in volume of 12% and price/mix of 6% as a consequence of decreased demand for high horsepower agricultural equipment. Unfavorable currency translation decreased sales by 1%.
Gross profit in the agricultural market was $134.7 million for the year 2014, as compared to $198.9 million in 2013. Income from operations in the agricultural market was $63.8 million for the year 2014, as compared to $151.8 million in 2013. Decreased demand for high horsepower agricultural equipment, which generally has a higher margin, negatively impacted gross profit. The lower market demand also drove competitive pressures resulting in price erosion that further deteriorated both sales and gross margins. In addition, the Company's gross profit, as a percentage of net sales, and income from operations decreased as a result of the addition of the recently acquired Voltyre-Prom business at lower margins. The income from operations was also decreased by a non-cash goodwill impairment charge of $20.6 million.
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Earthmoving/Construction Segment Results
Earthmoving/construction segment results were as follows (amounts in thousands):
2014 | 2013 | % Decrease | ||||||||
Net sales | $ | 610,596 | $ | 749,115 | (18 | )% | ||||
Gross profit (loss) | (7,609 | ) | 83,358 | n/a | ||||||
Income (loss) from operations | (80,600 | ) | 22,008 | n/a | ||||||
The Company's earthmoving/construction market net sales were $610.6 million for the year ended December 31, 2014, as compared to $749.1 million in 2013, a decrease of 18%. Segment sales experienced price/mix reductions of 20% as a consequence of reduced demand for Titan products used in the mining industry, including giant OTR tires. This decrease was partially offset by increased demand for products used in the construction industry. The inclusion of the recently acquired Voltyre-Prom business increased sales 2%. Overall unit volume was consistent with prior year, considering the growth in smaller construction units was offset by the decline in the higher priced mining units.
Gross loss in the earthmoving/construction market was $7.6 million for the year 2014, as compared to profit of $83.4 million in 2013. The Company's earthmoving/construction market loss from operations was $80.6 million for the year 2014, as compared to income from operations of $22.0 million in 2013. Gross profit and income from operations decreased primarily as a result of a significant decrease in demand for Titan products used in the mining industry. Generally, there are higher margins associated with the larger, more complex mining products. The lower market demand also drove competitive pressures resulting in price erosion that further deteriorated both sales and gross margin. Lost leverage and reduced productivity in the plants are also consequences of lower sales. In the second quarter of 2014, the Company recorded an asset impairment of $23.2 million on machinery, equipment and molds used to produce giant mining tires. In addition, the Company recorded inventory write-downs of $16.7 million to adjust the value of mining product inventory to estimated market value. The income from operations was also decreased by a non-cash goodwill impairment charge of $14.0 million.
Consumer Segment Results
Consumer segment results were as follows (amounts in thousands):
2014 | 2013 | % Increase | ||||||||
Net sales | $ | 268,049 | $ | 232,293 | 15 | % | ||||
Gross profit | 16,250 | 15,542 | 5 | % | ||||||
Income (loss) from operations | (8,766 | ) | 1,630 | n/a | ||||||
Consumer market net sales were $268.0 million for the year ended December 31, 2014, as compared to $232.3 million in 2013, an increase of 15%.
Gross profit from the consumer market was $16.3 million in 2014, as compared to $15.5 million in 2013. Consumer market loss from operations was $8.8 million for the year 2014, as compared to income from operations of $1.6 million in 2013. The Company's gross profit as a percentage of net sales and income from operations decreased as a result of competitive pricing on bias truck tires in Latin America. In addition, the Company's gross profit as a percentage of net sales and income from operations decreased as a result of the addition of the recently acquired Voltyre-Prom business at lower margins. The income from operations was also decreased by a non-cash goodwill impairment charge of $2.0 million.
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Segment Summary
(Amounts in thousands)
2014 | Agricultural | Earthmoving/ Construction | Consumer | Corporate Expenses | Consolidated Totals | |||||||||||||||
Net sales | $ | 1,016,882 | $ | 610,596 | $ | 268,049 | $ | — | $ | 1,895,527 | ||||||||||
Gross profit (loss) | 134,688 | (7,609 | ) | 16,250 | (2,686 | ) | 140,643 | |||||||||||||
Income (loss) from operations | 63,838 | (80,600 | ) | (8,766 | ) | (72,097 | ) | (97,625 | ) | |||||||||||
2013 | ||||||||||||||||||||
Net sales | $ | 1,182,187 | 749,115 | $ | 232,293 | $ | — | $ | 2,163,595 | |||||||||||
Gross profit (loss) | 198,910 | 83,358 | 15,542 | (2,620 | ) | 295,190 | ||||||||||||||
Income (loss) from operations | 151,841 | 22,008 | 1,630 | (73,084 | ) | 102,395 | ||||||||||||||
Corporate Expenses
Income from operations on a segment basis does not include corporate expenses totaling $72.1 million for the year ended December 31, 2014, as compared to $73.1 million in 2013. Corporate expenses were composed of selling and marketing expenses of approximately $33 million and $32 million for the years ended December 31, 2014, and 2013, respectively; and administrative expenses of approximately $39 million and $41 million for the years ended December 31, 2014, and 2013, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
As of December 31, 2015, the Company had $200.2 million of cash.
(amounts in thousands) | Year ended December 31, | ||||||||||
2015 | 2014 | Change | |||||||||
Cash | $ | 200,188 | $ | 201,451 | $ | (1,263 | ) | ||||
The cash balance decreased by $1.3 million from December 31, 2014, due to the following items.
Operating Cash Flows
Summary of cash flows from operating activities:
(Amounts in thousands) | Year ended December 31, | ||||||||||
2015 | 2014 | Change | |||||||||
Net loss | $ | (90,287 | ) | $ | (130,425 | ) | $ | 40,138 | |||
Depreciation and amortization | 69,618 | 88,704 | (19,086 | ) | |||||||
Mining asset impairment | — | 23,242 | (23,242 | ) | |||||||
Mining inventory write-down | — | 16,690 | (16,690 | ) | |||||||
Deferred income tax provision | 27,969 | (24,800 | ) | 52,769 | |||||||
Non-cash goodwill impairment charge | — | 36,571 | (36,571 | ) | |||||||
Accounts receivable | 497 | 54,686 | (54,189 | ) | |||||||
Inventories | 31,333 | 20,933 | 10,400 | ||||||||
Prepaid and other current assets | 9,946 | 30,324 | (20,378 | ) | |||||||
Accounts payable | 1,402 | (26,135 | ) | 27,537 | |||||||
Other current liabilities | (172 | ) | (2,089 | ) | 1,917 | ||||||
Other liabilities | 3,428 | 15,764 | (12,336 | ) | |||||||
Other operating activities | 10,196 | 14,355 | (4,159 | ) | |||||||
Net cash provided by operating activities | $ | 63,930 | $ | 117,820 | $ | (53,890 | ) | ||||
For the year ended December 31, 2015, operating activities provided cash of $63.9 million, which was $53.9 million less than the prior year. Included in net loss of $90.3 million were non-cash charges for depreciation and amortization of $69.6 million. The changes in operational working capital increased cash flows by $43.0 million in 2015 compared to an increase of $77.7 million in 2014. The 2015 working capital increase was primarily due to a decrease in inventories of $31.3 million. For additional details, see the Consolidated Statements of Cash Flows on page F-8.
For the year ended December 31, 2014, operating activities provided cash of $117.8 million, which was $0.9 million more than the prior year. Included in the net loss of $130.4 million were non-cash charges for depreciation and amortization of $88.7 million, non-cash goodwill impairment charge of $36.6 million, mining asset impairment charge of $23.2 million, and mining inventory write-down of $16.7 million. The changes in operational working capital increased cash flows by $80.1 million in 2014 compared to a decrease of $34.8 million in 2013. The 2014 working capital increase was primarily due to a decrease in accounts receivable of $54.7 million.
The Company's inventory and accounts receivable balances were lower at December 31, 2015, as compared to December 31, 2014. Days sales in inventory increased to 77 days at December 31, 2015, compared to 68 days at December 31, 2014. Days sales outstanding increased to 52 days at December 31, 2015, from 47 days at December 31, 2014.
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Investing Cash Flows
Summary of cash flows from investing activities:
(Amounts in thousands) | Year ended December 31, | ||||||||||
2015 | 2014 | Change | |||||||||
Acquisitions | $ | — | $ | (13,395 | ) | $ | 13,395 | ||||
Decrease in restricted cash deposits | — | 14,268 | (14,268 | ) | |||||||
Capital expenditures | (48,429 | ) | (58,439 | ) | 10,010 | ||||||
Other investing activities | (1,508 | ) | 1,296 | (2,804 | ) | ||||||
Cash used for investing activities | $ | (49,937 | ) | $ | (56,270 | ) | $ | 6,333 | |||
Net cash used for investing activities was $49.9 million in 2015, as compared to $56.3 million in 2014. The Company invested a total of $48.4 million in capital expenditures in 2015, compared to $58.4 million in 2014. Capital expenditures represent various equipment purchases and improvements to enhance production capabilities of Titan’s existing business and maintain existing equipment.
Financing Cash Flows
Summary of cash flows from financing activities:
(Amounts in thousands) | Year ended December 31, | ||||||||||
2015 | 2014 | Change | |||||||||
Proceeds from borrowings | $ | 5,727 | $ | 15,708 | $ | (9,981 | ) | ||||
Proceeds from exercise of stock options | 145 | 141 | 4 | ||||||||
Payment of financing fees | — | (33 | ) | 33 | |||||||
Payment on debt | (5,521 | ) | (60,345 | ) | 54,824 | ||||||
Excess tax benefit from stock options exercised | — | (672 | ) | 672 | |||||||
Dividends paid | (1,077 | ) | (1,073 | ) | (4 | ) | |||||
Cash used for financing activities | $ | (726 | ) | $ | (46,274 | ) | $ | 45,548 | |||
Net cash used for financing activities was $0.7 million in 2015. This cash was primarily used for payment of quarterly dividends of $1.1 million. Payments of debt and debt borrowing for 2015 had little net impact on cash from financing activities.
Net cash used by financing activities was $46.3 million in 2014. This cash was primarily used for payment of debt of $60.3 million partially offset by proceeds from borrowings of $15.7 million.
Financing cash flows decreased by $45.5 million when comparing 2015 to 2014. The changes from year to year are primarily the result of activity related to debt borrowings and payments.
Debt Restrictions
The Company’s senior secured notes and revolving credit facility (credit facility) contains various restrictions, including:
•Limits on dividends and repurchases of the Company’s stock.
• | Restrictions on the ability of the Company to make additional borrowings, or to consolidate, merge or otherwise fundamentally change the ownership of the Company. |
•Limitations on investments, dispositions of assets and guarantees of indebtedness.
•Other customary affirmative and negative covenants.
These restrictions could limit the Company’s ability to respond to market conditions, to provide for unanticipated capital investments, to raise additional debt or equity capital, to pay dividends or to take advantage of business opportunities, including future acquisitions.
Other Issues
The Company’s business is subject to seasonal variations in sales that affect inventory levels and accounts receivable balances. Historically, Titan tends to have higher production levels in the first and second quarters.
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LIQUIDITY OUTLOOK
At December 31, 2015, the Company had $200.2 million of cash and cash equivalents and no outstanding borrowings on the Company's $150 million revolving credit facility. Titan’s availability under this domestic facility may be less than $150 million as a result of eligible accounts receivable and inventory balances at certain of its domestic subsidiaries. At December 31, 2015, the amount available was $67.7 million as a result of the Company’s decrease in sales which impacted both accounts receivable and inventory balances at year end. The cash and cash equivalents balance of $200.2 million includes $57.8 million held in foreign countries. The Company's current plans do not demonstrate a need to repatriate the foreign amounts to fund U.S. operations. However, if foreign funds were needed for U.S. operations, the Company would be required to accrue taxes to repatriate the funds. Currently the Company would anticipate utilizing net operating loss carry forwards to reduce any U.S. cash tax liability associated with such repatriation. Titan expects to contribute approximately $5 million to its defined benefit pension plans during 2016.
Capital expenditures for 2016 are forecasted to be approximately $30-35 million. Cash payments for interest are currently forecasted to be approximately $34 million in 2016 based on the Company's year-end 2015 debt balances.
In the future, Titan may seek to grow by making acquisitions which will depend on the ability to identify suitable acquisition candidates, to negotiate acceptable terms for their acquisition and to finance those acquisitions.
Subject to the terms of indebtedness, the Company may finance future acquisitions with cash on hand, cash from operations, additional indebtedness, issuing additional equity securities and divestitures.
Cash on hand, anticipated internal cash flows from operations and utilization of remaining available borrowings are expected to provide sufficient liquidity for working capital needs, debt maturities, capital expenditures and potential acquisitions. Potential divestitures are also a means to provide for future liquidity needs.
INFLATION
The Company is subject to the effect of price fluctuations. While the cost outlook for commodities used in the Company’s production is not certain, management believes it can manage these inflationary pressures by introducing appropriate sales price adjustments and through contract provisions with OEMs. However, these price adjustments may lag the inflationary pressures.
CONTRACTUAL OBLIGATIONS
The Company’s contractual obligations at December 31, 2015, consisted of the following (amounts in thousands):
Payments due by period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
6.875% senior secured notes due 2020 | $ | 400,000 | $ | — | $ | — | $ | 400,000 | $ | — | ||||||||||
5.625% convertible senior subordinated notes due 2017 | 60,161 | — | 60,161 | — | — | |||||||||||||||
Other debt | 51,465 | 31,222 | 19,258 | 985 | — | |||||||||||||||
Interest expense (a) | 137,107 | 33,728 | 55,254 | 48,125 | — | |||||||||||||||
Operating leases | 13,202 | 5,681 | 5,146 | 2,010 | 365 | |||||||||||||||
Capital leases | 1,875 | 1,200 | 604 | 71 | — | |||||||||||||||
Purchase obligations | 20,140 | 14,406 | 4,119 | 1,615 | — | |||||||||||||||
Other long-term liabilities (b) | 37,200 | 4,600 | 16,800 | 15,800 | — | |||||||||||||||
Total | $ | 721,150 | $ | 90,837 | $ | 161,342 | $ | 468,606 | $ | 365 | ||||||||||
(a) | Interest expense is estimated based on the Company’s year-end 2015 debt balances, maturities and interest rates. The estimates assume no credit facility borrowings. The Company’s actual debt balances and interest rates may fluctuate in the future. Therefore, actual interest payments may vary from those payments detailed in the above table. |
(b) | Other long-term liabilities represent the Company’s estimated funding requirements for defined benefit pension plans. The Company’s liability for pensions is based on a number of assumptions, including discount rates, rates of return on investments, mortality rates and other factors. Certain of these assumptions are determined with the assistance of outside actuaries. Assumptions are based on past experience and anticipated future trends and are subject to a number of risks and uncertainties and may lead to significantly different pension liability funding requirements. |
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OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off-balance sheet arrangements.
MARKET RISK SENSITIVE INSTRUMENTS
Exchange Rate Sensitivity
The Company is exposed to fluctuations in the Australian dollar, Brazilian real, British pound, euro, Russian ruble and other world currencies. The Company uses financial derivatives to mitigate its exposure to volatility in foreign currency exchange rates. The Company’s net investment in foreign entities translated into U.S. dollars was $291.4 million at December 31, 2015, and $382.5 million at December 31, 2014. The hypothetical potential loss in value of the Company’s net investment in foreign entities resulting from a 10% adverse change in foreign currency exchange rates at December 31, 2015, would amount to approximately $29.1 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 price fluctuations of its key commodities, which consist primarily of steel, natural rubber, synthetic rubber and carbon black. The Company attempts to pass on certain material price increases and decreases to its customers, depending on market conditions.
Interest Rate Sensitivity
The Company has a $150 million credit facility that has a variable interest rate. As of December 31, 2015, the amount available was $67.7 million based on current accounts receivable and inventory values at certain domestic facilities. If the credit facility were fully drawn to available funds, a change in the interest rate of 100 basis points, or 1%, would change the Company’s interest expense by approximately $0.7 million. At December 31, 2015, there were no borrowings under the credit facility.
MARKET CONDITIONS
In 2015 Titan experienced lower sales when compared to 2014. The lower sales levels were primarily the result of decreased demand for high horsepower equipment used in the agricultural market, which remains in a cyclical downturn, and unfavorable currency translation. In addition, competitive pressures and lower raw material prices, passed to customers in some instances, negatively impacted sales.
Energy, raw material and petroleum-based product costs have been volatile and may negatively impact the Company’s margins. Many of Titan’s overhead expenses are fixed; therefore, lower seasonal trends may cause negative fluctuations in quarterly profit margins and affect the financial condition of the Company.
AGRICULTURAL MARKET OUTLOOK
Agricultural market sales were lower in 2015 when compared to 2014 due to decreased demand for high horsepower equipment used in the agricultural market. Farm net income was lower in 2015 due to lower grain prices. Farm net income is generally expected to decline moderately in 2016 based upon lower forecasted cash receipts offset somewhat by lower production costs (fuel, oil, chemical, feed, etc.). Lower income levels are putting pressure on the demand for large farm equipment. More specifically, large equipment sales deteriorated significantly in 2015 after a robust cycle in recent years. The mix shift to lower horsepower tractors has a negative impact on revenue and margin performance. This trend is expected to continue during 2016. Most major OEMs are forecasting 2016 equipment sales to be below 2015 within most regions. North American used equipment levels remain relatively high with some decreases recently from peak levels. Excess used equipment inventory and values can also negatively impact the new equipment market. Many variables, including weather, grain prices, export markets, currency and government policies and subsidies can greatly influence the overall health of the agricultural economy.
EARTHMOVING/CONSTRUCTION MARKET OUTLOOK
Earthmoving/construction market sales were lower in 2015 when compared to 2014 due to unfavorable currency translation and weak market conditions. Demand for larger products used in the mining industry is expected to remain depressed in 2016, with demand for our products in this market expected to remain similar to 2015. Demand for small and medium sized earthmoving/construction equipment used in the housing and commercial construction sectors is expected to be flat or down slightly. The earthmoving/construction segment is affected by many variables, including commodity prices, road construction, infrastructure, government appropriations, housing starts and other macroeconomic drivers.
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CONSUMER MARKET OUTLOOK
Consumer market sales were lower in 2015, when compared to 2014. Sales in the consumer market decreased primarily as the result of unfavorable currency translation, the Company's exit of several supply agreements, and price/mix from competitive pressures. The consumer market is expected to remain highly competitive in 2016. The consumer segment is affected by many variables including consumer spending, interest rates, government policies and other macroeconomic drivers.
PENSIONS
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. These plans are described in Note 26 of the Company’s Notes to Consolidated Financial Statements.
The Company’s recorded liability for pensions is based on a number of assumptions, including discount rates, rates of return on investments, mortality rates and other factors. Certain of these assumptions are determined by the Company with the assistance of outside actuaries. Assumptions are based on past experience and anticipated future trends. These assumptions are reviewed on a regular basis and revised when appropriate. Revisions in assumptions and actual results that differ from the assumptions affect future expenses, cash funding requirements and the carrying value of the related obligations. During the year ended December 31, 2015, the Company contributed cash funds of $3.6 million to the pension plans. Titan expects to contribute approximately $5 million to these pension plans during 2016.
Titan’s projected benefit obligation at December 31, 2015, was $115.6 million, as compared to $126.8 million at December 31, 2014. The Company’s defined benefit pension plans were underfunded by $37.2 million at December 31, 2015. During 2015, the Company recorded net periodic pension expense of $2.2 million. Accumulated other comprehensive loss recorded for defined benefit pension plans, net of tax, was $26.7 million and $26.1 million at December 31, 2015, and 2014, respectively. Other comprehensive income (loss) is recorded as a direct charge to stockholders’ equity and does not affect net income. Titan will be required to record net periodic pension cost in the future; these costs may fluctuate based upon revised assumptions and could negatively affect the Company’s financial position, cash flows and results of operations.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." This update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires disclosure about the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update were deferred by ASU No. 2015-14, "Revenue form Contracts with Customers (Topic 606) Deferral of Effective Date", and are now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company will adopt the guidance in the year beginning on January 1, 2018, and is currently assessing the impact that adopting this new accounting guidance will have on the Company's consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs." This update amends existing guidance to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new accounting guidance will have on the Company's consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory." This update provides that an entity should measure inventory within the scope of the update at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The Company is currently assessing the impact that adopting this new accounting guidance will have on the Company's consolidated financial statements.
In August 2015, the FASB issued ASU No. 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements." This update clarifies the presentation and subsequent measurement of debt issuance cost associated with lines of credit. These costs may be presented as an asset and amortized ratably over the term of the line of credit arrangement, regardless of whether there are outstanding borrowings on the arrangement. The effective date of the guidance will be for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this guidance will not have a material effect on the Company's consolidated financial statements.
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In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes." This update amends the guidance requiring companies to separate deferred income tax liabilities and assets into current and non-current amounts in a classified statement of financial position. The update simplifies the presentation of deferred income taxes, requiring that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has elected to adopt this guidance prospectively as of December 31, 2015. As a result, the Company has classified all deferred tax liabilities and assets as non-current in the Consolidated Balance Sheet at December 31, 2015.
In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This update addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new accounting guidance will have on the Company's consolidated financial statements.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Item 7, Part II of this report.
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Item 15, Part IV of this report, “Exhibits and Financial Statement Schedules.”
ITEM 9 | – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
ITEM 9A – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Titan management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the period covered by this Form 10-K and concluded that, because of a material weakness in Titan's internal control over financial reporting of the Company’s entity level controls described below, disclosure controls and procedures were not effective as of the period covered by this Form 10-K. Notwithstanding the material weakness described below, the Company's management, including the Chief Executive Officer and Chief Financial Officer, has concluded that the consolidated financial statements included in the Annual Report and in this Form 10-K are fairly stated, in all material respects, in accordance with generally accepted accounting principles in the United States for each of the periods presented herein.
Management's Report on Internal Control Over Financial Reporting
Titan management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Internal control over financial reporting includes those policies, procedures and activities that:
• | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; |
• | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
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• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Titan management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the "1992 Internal Control-Integrated Framework". A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based on this evaluation, including consideration of the control deficiencies discussed below, management has concluded that internal control over financial reporting was not effective as of December 31, 2015, due to the fact that there was a material weakness in internal control over financial reporting. Specifically, through assessment and evaluation, as discussed above, management identified the following points amplified the potential for deficiency: (i) rapid global growth, (ii) increased complexity in accounting and reporting infrastructure and (iii) economic and market downturn. The material weakness was previously identified and reported in the Form 10-K for the year ended December 31, 2014, and is further defined below.
Titan has experienced significant business changes over the past three years, including rapid global growth from a U.S. based company to a large, multinational organization, operating in more than 16 countries, resulting in unique and discrete complex accounting matters. This growth has introduced a significant increase in the complexity of Titan’s accounting and reporting infrastructure for collecting and analyzing financial information. Additionally, Titan has been experiencing an economic and market downturn, adding to the complexity of assessing goodwill and fixed asset impairments, valuation of inventory and other complex accounting transactions from a global perspective. Titan’s current accounting and reporting infrastructure does not possess the proper resources, processes and systems to effectively address the complex accounting transactions, resulting from its recent international growth and economic/market decline.
During the year ended December 31, 2015, the Company embarked on a remediation plan. The design and enhancements to the control structure is in process and the material weakness is not remediated at year end. In addition, the Company restated its financial statements for errors in accounting for the shareholders' agreement related to redeemable noncontrolling interest in the Company's investment in Voltyre Prom.
The effectiveness of Titan's internal control over financial reporting as of December 31, 2015. has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report within this Form 10-K.
Remediation Plan
Management has been actively engaged in developing remediation plans to address the above control deficiencies. The remediation efforts expected to be implemented include the following:
• | People - enhance Titan's current accounting and reporting infrastructure by augmenting the team with professionals who possess the commensurate accounting skillsets. |
• | Processes - strengthen Titan's current control environment and overall business processes to ensure risk mitigation and materially accurate financial statement reporting, including increased levels of management review and updated financial policies. |
• | Systems - augment Titan's current system infrastructure to ensure accurate, timely data is reported. |
Management has developed a detailed plan and time table for implementing the foregoing remediation efforts and will monitor the implementation closely. Additionally, under the direction of the Chief Financial Officer, management will continue reviewing and making the necessary changes to the overall design and operation of the Company's internal control environment, as well as to policies and procedures to improve the overall effectiveness of internal control over financial reporting.
Management believes the aforementioned efforts will effectively remediate the material weakness. As the Company continues evaluating and improving internal control over financial reporting, Titan may determine additional measures are necessary to address control deficiencies and will modify the remediation plan described above, as required.
39
Changes in Internal Control over Financial Reporting
Other than the remediation steps described above, there were no material changes in internal control over financial reporting (as defined by Rules 13a-15(f) and 15(f)) that occurred during the fourth quarter ended December 31, 2015, that have materially affected, or are likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B – OTHER INFORMATION
Not applicable.
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PART III
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The information required by this item regarding the Company’s directors is incorporated by reference to the Company’s 2016 Proxy Statement under the captions “Election of Directors,” “Directors Continuing in Office,” “Committees and Meetings of the Board of Directors” and “Corporate Governance.”
Executive Officers
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 immediately following the Annual Meeting of Stockholders. There is no arrangement or understanding between any officer and any other person pursuant to which an officer was selected.
Maurice M. Taylor Jr., 71, has been Chief Executive Officer and a Director of the Company since 1990, when Titan was acquired in a management-led buyout by investors, including Mr. Taylor. Mr. Taylor served as President of the Company from 1990 to 2005 and was appointed Chairman in 2005.
Paul G. Reitz, 43, joined the Company in July 2010 as Chief Financial Officer. Mr. Reitz was appointed President in February 2014. Before joining Titan, Mr. Reitz was chief accounting officer at Carmike Cinemas, Inc.
Michael G. Troyanovich, 58, joined the Company in August 2011 as Assistant General Counsel. Mr. Troyanovich was appointed Secretary in December 2012, and General Counsel in June 2013. Prior to joining Titan, Mr. Troyanovich was President of Kistner Troyanovich and Brady, P.C. from September 2001 until August 2011.
John R. Hrudicka, 52, joined the Company in February 2014 as Chief Financial Officer. Prior to joining Titan, Mr. Hrudicka had been at Elkay Manufacturing since 2006, joining as Vice President of Finance and becoming Chief Financial Officer in 2010.
Section 16(a) Beneficial Ownership Reporting Compliance
The information required by this item regarding beneficial ownership reporting compliance is incorporated by reference to the Company’s 2016 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Business Conduct Policy
The Company adopted a business conduct policy, which is applicable to directors, officers and employees. The Company has also adopted corporate governance guidelines. The business conduct policy and corporate governance guidelines are available under the investor information category of the Company’s website, www.titan-intl.com. The Company intends to satisfy disclosure requirements regarding amendments to or waivers from its business conduct policy by posting such information on its website. A printed copy of the business conduct policy and corporate governance guidelines are available, without charge, by writing to: Titan International, Inc., c/o Corporate Secretary, 2701 Spruce Street, Quincy, IL 62301.
ITEM 11 – EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the Company’s 2016 Proxy Statement under the caption “Compensation of Executive Officers.”
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ITEM 12– SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information concerning equity compensation plans, the information required by this item is incorporated by reference to the Company’s 2016 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.”
The following table provides information about shares of Titan common stock that may be issued under Titan’s equity compensation plans, as of December 31, 2015:
(i) Number of securities to be issued upon exercise of outstanding options, warrants and rights | (ii) Weighted-average exercise price of outstanding options, warrants and rights | (iii) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (i)) | ||||||||
Equity compensation plans approved by security holders | 795,782 | (a) | 19.13 | 1,523,634 | ||||||
Equity compensation plans not approved by security holders | — | n/a | — | |||||||
Total | 795,782 | 19.13 | 1,523,634 | |||||||
(a) | Amount includes outstanding stock options under the Company’s 2005 Equity Incentive Plan. |
For additional information regarding the Company’s stock compensation plans, please see Note 27 of the Company’s Notes to Consolidated Financial Statements.
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the Company’s 2016 Proxy Statement under the caption “Related Party Transactions” and “Corporate Governance” and also appears in Note 31 of the Company’s Notes to Consolidated Financial Statements.
ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to the Company’s 2016 Proxy Statement under the caption “Audit and Other Fees.”
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PART IV
ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. | ||
2. | ||
3. | ||
The accompanying Exhibit Index is incorporated herein by reference.
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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.
TITAN INTERNATIONAL, INC. | |
(Registrant) | |
Date: | February 24, 2016 | By: | /s/ MAURICE M. TAYLOR JR. |
Maurice M. Taylor Jr. | |||
Chairman 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 February 24, 2016.
Signatures | Capacity | |
/s/ MAURICE M. TAYLOR JR. | Chairman and Chief Executive Officer | |
Maurice M. Taylor Jr. | (Principal Executive Officer) | |
/s/ JOHN HRUDICKA | Chief Financial Officer | |
John Hrudicka | (Principal Financial Officer) | |
/s/ CHRIS BOHNERT | Chief Accounting Officer | |
Chris Bohnert | (Principal Accounting Officer) | |
/s/ RICHARD M. CASHIN JR. | Director | |
Richard M. Cashin Jr. | ||
/s/ GARY L. COWGER | Director | |
Gary L. Cowger | ||
/s/ ALBERT J. FEBBO | Director | |
Albert J. Febbo | ||
/s/ PETER MCNITT | Director | |
Peter McNitt | ||
/s/ ANTHONY L. SOAVE | Director | |
Anthony L. Soave | ||
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TITAN INTERNATIONAL, INC.
Exhibit Index
Annual Report on Form 10-K
Exhibit No. | DESCRIPTION |
3.1 (a) | Titan International, Inc. Amended and Restated Certificate of Incorporation |
3.2 (a) | Bylaws of the Company |
4.1 (b) | Indenture between the Company and U.S. Bank National Association dated December 21, 2009 |
4.2 (c) | Indenture between the Company and U.S. Bank National Association dated October 7, 2013 |
10.1 (a) | First Supplemental Indenture dated as of June 26, 2015 to the Indenture dated as of December 21, 2009 between Titan International, Inc., U.S. Bank National Association, as Trustee, and the Subsidiary Guarantors party thereto, relating to the 5.625% Convertible Senior Subordinated Notes due 2017 |
10.2 (d) | 2005 Equity Incentive Plan as Amended |
10.3 (e) | Maurice M. Taylor, Jr. Employment Agreement |
10.4 (f) | Maurice M. Taylor, Jr. Employment Agreement Amendment |
10.5 (g) | Maurice M. Taylor, Jr. Employment Agreement Amendment |
10.6 (h) | Paul G. Reitz Employment Agreement |
10.7 (h) | John Hrudicka Employment Agreement |
10.8 (h) | Michael G. Troyanovich Employment Agreement |
10.9 (i) | Trademark License Agreement with The Goodyear Tire & Rubber Company ** |
10.10 (j) | Second Amended and Restated Credit Agreement among the Company and Bank of America, N.A. dated as of December 21, 2012 |
21* | Subsidiaries of the Registrant |
31.1* | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2* | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32* | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Filed herewith
** Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
(a) | Incorporated by reference to the same numbered exhibit contained in the Company’s Current Report on Form 8-K filed on June 29, 2015 (No. 1-12936). |
(b) | Incorporated by reference to the same numbered exhibit contained in the Company’s Current Report on Form 8-K filed on December 21, 2009 (No. 1-12936). |
(c) | Incorporated by reference to the same numbered exhibit contained in the Company’s Current Report on Form 8-K filed on October 7, 2013. (No. 1-12936). |
(d) | Incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement filed on March 28, 2011. |
(e) | Incorporated by reference to the same numbered exhibit contained in the Company’s Form 10-Q for the quarterly period ended June 30, 2006 (No. 1-12936). |
(f) | Incorporated by reference to the same numbered exhibit contained in the Company's Form 10-K for the year ended December 31, 2010 (No 1-12936). |
(g) | Incorporated by reference to the same numbered exhibit contained in the Company's Current Report on Form 8-K filed on February 15, 2012 (No 1-12936). |
(h) | Incorporated by reference to the same numbered exhibit contained in the Company's Current Report on Form 8-K filed on February 15, 2012 (No 1-12936). |
(i) | Incorporated by reference to the same numbered exhibit contained in the Company's Form 10-Q for the quarterly period ended March 31, 2015 (No 1-12936). |
(j) | Incorporated by reference to the same numbered exhibit contained in the Company's Form 10-Q for the quarterly period ended June 30, 2013 (No. 1-12936). |
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Management’s Responsibility for Financial Statements
Management is responsible for the preparation of the Company’s consolidated financial statements included in this annual report on Form 10-K. Management believes that the consolidated financial statements fairly reflect the Company’s financial transactions and the financial statements reasonably present the Company’s financial position and results of operations in conformity with accounting principles generally accepted in the United States of America.
The Board of Directors of the Company has an Audit Committee comprised entirely of outside directors who are independent of management. The Committee meets periodically with management, the internal auditors and the independent registered public accounting firm to review accounting control, auditing and financial reporting matters. The Audit Committee is responsible for the appointment of the independent registered public accounting firm and approval of their fees.
The independent registered public accounting firm audits the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). The consolidated financial statements as of December 31, 2015, have been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
F- 1
Report of Independent Registered Public Accounting Firm
Board of Directors and
Shareholders of Titan International, Inc.
We have audited the accompanying consolidated balance sheets of Titan International, Inc. (an Illinois corporation) and its subsidiaries (together, the Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). 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 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Titan International, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company adopted new accounting guidance in 2015, related to the presentation of deferred income taxes.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24, 2016, expressed an adverse opinion thereon.
/s/ Grant Thornton LLP
Chicago, Illinois
February 24, 2016
F- 2
Report of Independent Registered Public Accounting Firm
Board of Directors and
Shareholders of Titan International, Inc.
We have audited the internal control over financial reporting of Titan International, Inc. (an Illinois corporation) and its subsidiaries (the Company) as of December 31, 2015, based on criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (Management’s Report). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
During the year ended December 31, 2014, Titan’s management determined that entity level controls were not designed appropriately and may not always operate at the appropriate level of precision to prevent or detect material misstatements of the Company’s annual financial statements on a timely basis. Specifically, the Company’s accounting and reporting infrastructure was not able to effectively address complex accounting transactions. The material weakness previously reported has not been remediated as of December 31, 2015. In addition, the Company restated its financial statements for errors in accounting for the shareholders’ agreement and related redeemable non-controlling interest in the Company’s investment in Voltyre-Prom, which provides more evidence that the previously reported material weakness exists as of December 31, 2015.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2015, based on criteria established in the 1992 Internal Control-Integrated Framework issued by COSO.
We do not express an opinion or any other form of assurance on management’s statement referring to their remediation plan and the related benefits of implementing new controls.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2015. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2015 consolidated financial statements, and this report does not affect our report dated February 24, 2016, which expressed an unqualified opinion on those financial statements.
/s/ Grant Thornton LLP
Chicago, Illinois
February 24, 2016
F- 3
TITAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
Year ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Net sales | $ | 1,394,771 | $ | 1,895,527 | $ | 2,163,595 | |||||
Cost of sales | 1,256,962 | 1,714,952 | 1,868,405 | ||||||||
Mining asset impairment and inventory write-down | — | 39,932 | — | ||||||||
Gross profit | 137,809 | 140,643 | 295,190 | ||||||||
Selling, general and administrative expenses | 140,393 | 173,614 | 167,371 | ||||||||
Research and development expenses | 11,162 | 14,005 | 11,165 | ||||||||
Royalty expense | 10,533 | 14,078 | 14,259 | ||||||||
Non-cash goodwill impairment charge | — | 36,571 | — | ||||||||
Income (loss) from operations | (24,279 | ) | (97,625 | ) | 102,395 | ||||||
Interest expense | (34,032 | ) | (36,564 | ) | (47,120 | ) | |||||
Convertible debt conversion charge | — | — | (7,273 | ) | |||||||
Loss on senior note repurchase | — | — | (22,734 | ) | |||||||
Gain on earthquake insurance recovery | — | — | 22,451 | ||||||||
Foreign exchange loss | (4,758 | ) | (31,713 | ) | (4,920 | ) | |||||
Other income | 11,063 | 13,658 | 11,935 | ||||||||
Income (loss) before income taxes | (52,006 | ) | (152,244 | ) | 54,734 | ||||||
Provision (benefit) for income taxes | 38,281 | ||||||||||