2005 Annual Report - Titan International

TITAN INTERNATIONAL, INC.ContentsMADE BY TITANGoodyear’s North American farm tire assets were acquired on December 28, 2005.Financial Highlights ................................................ iiA Message to our Stockholders .............................. ivAgricultural Market ................................................ viEarthmoving/Construction Market ......................viiiConsumer Market ................................................... xBoard of Directors ................................................ xiiForm 10-K .............................................................1Stockholder Information ...................................... xiii2005 Annual Report i

TITAN INTERNATIONAL, INC.Financial Highlights2005 Sales by MarketAgricultural 66%Earthmoving/Construction 28%Consumer 6%Net Sales (in millions)$510 $491$470 $462 $457 $470Pro Forma Net Sales withoutTitan Europe$461$347 $343 $343’05 ’04 ’03 ’02 ’01’05 ’04 ’03 ’02 ’01ii2005 Annual Report

TITAN INTERNATIONAL, INC.Selected Financial Data, Five Year Summary(Amounts in thousands, except per share data)2005 2004 2003 2002 2001Net Sales $ 470,133 $ 510,571 $ 491,672 $ 462,820 $ 457,475Gross Profit 64,210 79,500 29,703 29,741 18,664Income (loss) from operations 11,999 33,322 (16,220) (14,086) (33,465)(Loss) Income before income taxes (2,885) 15,215 (33,668) (44,293) (46,386)Net income (loss) 11,042 11,107 (36,657) (35,877) (34,789)Net income (loss) per share – basic $ .61 $ .62 $ (1.75) $ (1.73) $ (1.68)Net income (loss) per share – diluted .60 .61 (1.75) (1.73) (1.68)Dividends declared per common share .02 .02 .02 .02 .03Financial Position2005 2004 2003 2002 2001Working Capital $ 157,984 $ 114,898 $ 183,971 $ 170,263 $ 180,684Current Assets 206,167 154,668 286,946 254,569 262,723Total Assets 440,756 354,166 523,084 531,999 568,954Long-term Debt 190,464 169,688 248,397 249,119 256,622Stockholders’ Equity 167,813 106,881 111,956 144,027 185,9072005 Annual Report iii

TITAN INTERNATIONAL, INC.A Message to our StockholdersDear Stockholders:Anticipation and preparation were the key words forTitan International, Inc. in 2005. On February 28,2005, Titan announced an agreement to purchasethe North American farm tire assets of The GoodyearTire & Rubber Company, including a manufacturingfacility in Freeport, Illinois. The deal, valued atapproximately $100 million, wascontingent on reaching agreementwith the United Steelworkersmembership at the Freeportfacility, in addition to customarygovernment and regulatoryapprovals. Following muchdiligent effort on all sides, Local745 at Freeport ratified a fiveyearlabor contract on December21, and Titan Tire welcomedthe North American GoodyearMaurice M. Taylor Jr.farm tire brand into the familyon December 28. Also on December 21, UnitedSteelworkers Local 164 representing workers at theDes Moines, Iowa, tire manufacturing facility ratifieda four-year labor agreement extension, moving thetermination date of that contract from December2006 to November 2010.The combined strength of the Titan farm tire andNorth American Goodyear farm tire brands placesthe corporation in a dominant position within theindustry. Beginning January 3,2006, Titan manufactures bothtire brands for a wide range ofequipment including tractors,combines, implements, sprayers,backhoes and skid steers. Thereputation and name recognition ofthe North American Goodyear farmtire brand acknowledge a heritagethat Titan is proud to continuein the agricultural market. Titan’sErwin H. Billigexclusive focus on wheels and tiresfor the off-highway markets haspositioned the company as a leader in innovation. Thecompany will offer the broadest range of tires in theindustry, with tires designed to address the specificconcerns of equipment operators and readily availablethrough an extensive network of dealers. Obviously,gains in efficiency, buying power and economies ofscale should result as well. We are enthusiastic aboutenergizing our sales and have launched a televisionand radio advertising campaign to remind the farmingand industrial communities of the benefits of buyingthe company’s American-made and owned products.Leading to tenacityOptimizing the potential of Titan relies on theefforts of each employee. When undertaking sucha significant transition, strong leadership is crucial.iv2005 Annual Report

TITAN INTERNATIONAL, INC.At the May 2005 Board of Directors meeting,we assumed new positions: Erwin Billig becamevice chairman and Maurice Taylor Jr. was electedchairman and chief executive officer. On November1, 2005, Ernest Rodia joined Titan International asexecutive vice president and chief operating officer.He previously enjoyed an extensive career withGoodyear Tire & Rubber Company, excelling invarious engineering, manufacturing and leadershiproles with nearly 40 years of experience. We areextremely pleased that Ernie will oversee Titan’s dayto-dayoperations and guide the corporation’s futuregrowth. Titan entered 2006 with the appointment ofJeff Vasichek as Titan Tire’s vice president of sales andmarketing. Most recently serving as general managerof farm tires for Goodyear, Jeff will be responsible forintegrating the acquisition of Goodyear’s farm tiresales with Titan’s products.Implementing financial confidenceTitan’s leadership consistently strives to solidify andenhance the financial condition of the company. InJune 2005, Titan finalized a private transaction toexchange $33.8 million of 5.25% senior convertiblenotes due 2009 into Titan common stock asproposed by certain note holders. The exchangeresulted in 3,022,275 shares of Titan common stockissued for the retirement of $33.8 million of notes.This transaction was advantageous for Titan as itprovided an opportunity to exchange debt for equityshares in the company.In light of the pending North American Goodyearfarm tire acquisition, Titan International amended itsrevolving credit facility with LaSalle Bank in October2005. The amendment increased the credit facilityto $200 million from $100 million and extended thetermination date to October 2008, from the previousdate of July 2007.Titan International, Inc. received a cash merger offerof $18.00 per share of Titan common stock fromOne Equity Partners LLC, a private equity affiliate ofJPMorgan Chase & Co., in October 2005. A specialcommittee of Titan’s Board of Directors, consistingof Erwin Billig, Edward Campbell and Albert Febbo,was formed to pursue discussions with One Equity.The special committee has hired counsel and afinancial advisor to assist in evaluating the cash mergeroffer. The offer is subject to reaching a definitiveagreement with the customary conditions, duediligence, financing, board approvals from both Titanand One Equity, and Titan stockholder approval.Adapting to thriveFollowing a remarkable rebound performance in2004, Titan held its ground in 2005. Despite a yearmarked by less than ideal circumstances, overall salesrose year-over-year, when adjusted to allow for thesales of Titan Europe, which became a separate publiccompany in April 2004. Titan’s operating profitwas negatively impacted by the higher raw materialand energy costs. Steel and rubber prices did notmoderate as hoped during the year and Titan wasnot immune to the unprecedented natural gas and oilprices afflicting the U.S. economy. The dry weatherconditions and the natural disasters that occuredduring the year also had a negative impact on thecompany and our customers.The off-highway market shifted emphasis from bias toradial tires during 2005, and Titan’s tire productionfacility in Des Moines responded accordingly bymodifying equipment and production to meet thedemand. Scrap reduction programs and insulationand boiler modifications have been undertaken toincrease efficiencies and offset fuel costs. Aggressivestreamlining of processes and equipment are beingimplemented for further gains in 2006. A newpowder coat paint system was installed for wheelsproduced at the flagship Quincy, Illinois, facility. TheTitan facility in Saltville, Virginia, earned ISO 2000certification, joining the other Titan manufacturingfacilities in this validation of our commitment toquality. With Titan’s recognition as a leader in theindustry and the increased availability of our products,both original equipment and aftermarket sales wehope will remain strong as we enter 2006.As we embark on this new chapter of Titan’s story,we thank our employees, investors, customers andvendors for their commitment to this corporation andto the industry, and welcome the newest members ofthe Titan organization.Sincerely,Maurice (Morry) M. Taylor Jr.Chairman and CEOErwin (Bill) H. BilligVice Chairman2005 Annual Report v

TITAN INTERNATIONAL, INC.Agricultural MarketThe U.S. agricultural economy was healthy in2005, despite the perspective for the year beingskewed by the high standard of comparisonestablished in 2004. High land values andrelatively low debt-to-asset ratios were positivesfor U.S. farmers. Crop production was impactedby drought in the Midwest and excess moisturein the Northern Plains; yet record soybeanyields were recorded in 2005. Exports of U.S.-produced wheat continued a downward trendin the face of increasing worldwide production.Farmers felt the pinch of extraordinary energycosts through soaring fuel and fertilizerexpenditures. The Environmental ProtectionAgency (EPA) has established the RenewableFuels Standard Program to reduce vehicleemissions and significantly increase the use offuels produced by American farmers by the year2012. This emphasis on blending grain-basedethanol and soybean-derived biodiesel fuel intomotor vehicle fuel translates to a growing surgein demand for these products.This mixed collection of indicators culminatedin 2005 North American agricultural equipmentproduction remaining relatively stable overall.Compact and utility tractor productionadvanced yet again in 2005, counterbalancedby drops in four-wheel drive and combinemanufacture. During 2005, the market shiftedto favor radial tire construction over bias. Inbias tires, plies are applied in a diagonal patternfrom bead to bead, versus spanning in a radialdirection from one bead to another in radialconstruction. In addition, belts in the treadarea reinforce and stabilize the tire lugs ofradial tires, resulting in increased durability,vi2005 Annual Report

TITAN INTERNATIONAL, INC.enhanced performance and better fuel economydue to lower rolling-resistance. Titan was wellpositioned to respond to this trend and hasseized this opportunity to deliver the qualityproducts that customers desire.Numerous major equipment manufacturersrely on Titan’s expertise to provide innovativesolutions to the demands of specific applications.From relative newcomers such as Mahindraand Montana to the most established brands inthe industry such as Deere, Titan works withcustomers to enhance vehicle performancethrough custom-designed wheel and tireassemblies. Titan’s engineers are introducingwheel and tire assemblies designed for thebaler market to accommodate heavier loadswhile increasing durability. The demand forradial terra tires in the sprayer market hasgrown tremendously in the last year and Titanis addressing this trend. To complement thewheels already supplied by Titan, CNH Globalagreed in 2005 to also source radial R-1 and R-1W tires from the company. Increased exposuresuch as this also drives an increased demandfor Titan tires in the aftermarket. The additionof the Goodyear line will yield the broadestoffering of tires in the agricultural industry,combined with the ability to pair the tires withwheels produced by Titan.Market (percent of sales)Agricultural 66%Net Sales (in millions)$310 $292$209 $212$203Although equipment manufacture and sales areforecast to be down slightly in North Americain 2006, Titan remains optimistic in light ofan increased market share and the extensivenetwork of aftermarket dealers resulting fromthe acquisition of Goodyear’s North Americafarm tire assets.’05 ’04 ’03 ’02 ’01Pro Forma Net Sales without Titan Europe2005 Annual Report vii

TITAN INTERNATIONAL, INC.Earthmoving/ConstructionMarketThe worldwide earthmoving/constructionmarket was robust in 2005. Economicconditions in the United States werefavorable for spending in this sector,particularly in the nonresidential segment.Despite high steel costs, this atmosphereled to strong retail demand for constructionequipment as both contractors and rentalcompanies updated and expanded their fleets.In addition, Titan’s government and militarysales remained strong in 2005.Commodity and energy prices have climbeddramatically over the last couple of years asa result of a worldwide increase in demand.This has lead to a strong market for largeearthmoving equipment used in mining.The strong market for mining equipmentshould continue as commodity and energycompanies invest additional capital to takeadvantage of the favorable prices in theirindustries.Titan’s attention to designing and buildingwheel and tire assemblies to meet thestrenuous demands of construction worksitesis well respected and appreciated in theindustry. Equipment manufacturers andviii2005 Annual Report

TITAN INTERNATIONAL, INC.contractors rely on Titan products to enhanceefficiency, performance and comfort. During2005, CNH chose Titan’s L-2 loader tiresfor equipment built at its Fargo, NorthDakota, facility. Purchases of our products bythis global customer are advantageous bothupfront and through the resulting exposureand demand generated for replacement tires.Titan is already a major producer of wheels forCNH and many other global customers fortheir construction equipment needs.Titan’s wheel and tire engineers continueto collaborate with major construction andindustrial equipment manufacturers to respondto market requirements. The acquisition ofGoodyear’s North American farm tire businessalso included tires for backhoes and skidsteers, further expanding Titan’s already broadoffering in these categories.The earthmoving and construction market isexpected to remain strong through 2006 andTitan is prepared for the corresponding needfor durable, well-designed wheel, tire andassembly products.Market (percent of sales)Earthmoving/Construction 28%Net Sales (in millions)$132 $136$108 $104$95’05 ’04 ’03 ’02 ’01Pro Forma Net Sales without Titan Europe2005 Annual Report ix

TITAN INTERNATIONAL, INC.Consumer MarketThe consumer market is largely focused onrecreational pursuits, and as such is dependenton consumer confidence, discretionary spendingand weather conditions. The retail environmentfor the consumer market was not particularlystrong in 2005. Within the consumer category,Titan’s niche includes products for all terrainvehicles (ATVs), turf maintenance equipmentand trailers.Previously, Titan sold the assets of the OEATV and lawn and garden segments in2000, and since has participated in only theaftermarket for these products. As a portion ofTitan’s initiative to re-enter the ATV originalequipment (OE) market, the company plans todevelop a premium wheel and tire assembly. Thecorporation is exploring the future positioningof the Titan brand within the ATV market, aswell as the high end lawn and garden and golfcar markets.The brake and actuator group develops productsfor various utility and recreational trailers.Specialized options to the popular BrakeRitex2005 Annual Report

TITAN INTERNATIONAL, INC.electric over hydraulic actuator were introducedin 2005. Like the original BrakeRite, theBrakeRite II models are designed to be hardwired into the trailer’s electrical system with allcomponents self-contained under the BrakeRitecover. The BrakeRite II uses external controlmodules with plug-in weather-sealed connectorsfor specific applications.Built on the BrakeRite II platform, theBrakeRite SD (Severe Duty) utilizes thestandard control board, enclosed in a remotemounted control module to provide dependableservice under adverse conditions. The BrakeRiteII RF adds radio frequency and rental friendlyfunctionality to provide quality braking fortrailers to be towed by vehicles without thestandard, hard-wired in-cab brake controllers.The in-cab controller manual override istransmitted by radio frequency to the controlmodule mounted in the trailer.Titan also introduced the new generationAERO 7500 actuator. This streamlined actuatorfeatures a brake lockout mechanism to allowtrailers to reverse freely without the use offreebacking brakes. The AERO 7500 replacesTitan’s previous AERO 6000 model with ahigher rating of 7,500 pounds and an increasedtongue weight of 750 pounds, and is available inboth disc and drum brake models. In addition,Titan’s Model 6, 10 and 60 actuators wereenhanced with options for convenience andfunctionality.Market (percent of sales)Consumer 6%Net Sales (in millions)$35 $36$32$28$30’05 ’04 ’03 ’02 ’01Pro Forma Net Sales without Titan Europe2005 Annual Report xi

TITAN INTERNATIONAL, INC.Board of DirectorsMaurice M. Taylor Jr.Chairman of the BoardChief Executive OfficerMr. Taylor has been chief executiveofficer of Titan since the 1990acquisition, and before that had asignificant role in the developmentof the company.Erwin H. BilligVice Chairman of the BoardMr. Billig is director and chairmanof MSX International andpreviously served as vice chairmanof MascoTech. He is also a directorand vice chairman of RemyInternational.Corporate OfficersEdward J. CampbellMr. Campbell was employed for27 years by Tenneco. He spent13 of those years as presidentof Newport News ShipbuildingCompany, and 14 years at J.I.Case, three of those (1992-94) aspresident. (a,b,c)Albert J. FebboMr. Febbo retired from GE after 30years; 18 years in sales and marketingleadership roles in GE’s U.S.and Europe plastics business, and 12years as a corporate officer leadingthe GE automotive and corporatemarketing teams. He also serves asa director of Med Panel, Inc., headquarteredin Massachusetts. (a,b,c)Anthony L. SoaveMr. Soave is president, CEO andfounder of Soave Enterprises,LLC, a Detroit-based holdingcompany that owns and operatesbusinesses in distribution, environmentaland metals recycling, aswell as other diversified industries.(a,b,c)Richard M. CashinMr. Cashin is the managing partner of OneEquity Partners LLC, which manages $4.5billion of investments and commitmentsfor JP Morgan in direct private equitytransactions. He serves on the board ofQuintiles Transnational and is a Trusteeof Boys Club of New York, AmericanUniversity in Cairo and National RowingFoundation (Chairman). (b)Mitchell I. QuainMr. Quain is a senior directorof ACI Capital Corp., a privateequity firm. He is also a directorof Hardinge, Inc., MagneTek,Inc. and Strategic Distribution,Inc., as well as a number of privatecompanies. (a,b,c)a) Member of Audit Committeeb) Member of Compensation Committeec) Member of Nominating /Corporate Governance CommitteeMaurice M. Taylor Jr.Erwin H. BilligErnest J. RodiaKent W. HackamackCheri T. HolleyChairman of the Board and Chief Executive OfficerVice Chairman of the BoardExecutive Vice President and Chief Operating OfficerVice President of Finance and TreasurerVice President, Secretary and General Counselxii2005 Annual Report

Stockholder InformationCommon Stock DataTitan’s common stock is listed and traded on theNew York Stock Exchange under the symbol TWI.Independent RegisteredPublic Accounting FirmPricewaterhouseCoopers LLP800 Market StreetSt. Louis, MO 63101Transfer Agent andRegistrar for Common StockLaSalle Bank N.A.Attention: Stock Transfer135 S. LaSalle Street, Suite 1811Chicago, IL 60603Stockholder Information:(800) 246-5761, option 2CertificationsThe Company has filed as exhibits to its Annual Reporton Form 10-K for the fiscal year ended December31, 2005, the certifications of its Principal ExecutiveOfficer and Principal Financial Officer required bySection 302 of the Sarbanes-Oxley Act. During fiscal2005, the Company submitted to the New York StockExchange the Annual CEO Certification required bySection 303A.12(a) of the New York Stock ExchangeListed Company Manual.Annual Meeting of StockholdersThursday, May 18, 200611 a.m. Central TimeTo be held at the Company’sFreeport, Illinois, manufacturing facilityMain Conference Room3769 Route 20 EastFreeport, IllinoisInvestor InformationSecurities analysts, portfolio managers andrepresentatives of financial institutions seeking financialinformation may contact:Titan International, Inc.Attention: Investor Relations2701 Spruce StreetQuincy, IL 62301(217) 228-6011Investor and governance information is also availablethrough the company’s Web site, www.titan-intl.com.Board Contact InformationWritten correspondence for any member of Titan’sBoard of Directors may be sent to their attention:Titan International, Inc.c/o Corporate Secretary2701 Spruce StreetQuincy, IL 62301Concerning Forward-Looking StatementsThis Annual Report and Form 10-K contains forward-looking statements, including statements regarding, among otheritems, (i) anticipated trends in the Company’s business, (ii) future expenditures for capital projects, (iii) the Company’sability to continue to control costs and maintain quality, (iv) ability to meet financial covenants and conditions ofits loan agreements, (v) the Company’s business strategies, including its intention to introduce new products, (vi)expectations concerning the performance and commercial success of the Company’s existing and new products and (vii)the Company’s intention to consider and pursue acquisitions and divestitures. Readers of this Annual Report and Form10-K should understand that these forward-looking statements are based on the Company’s expectations and are subjectto a number of risks and uncertainties, certain of which are beyond the Company’s control.Actual results could differ materially from these forward-looking statements as a result of certain factors, including, (i)changes in the Company’s end-user markets as a result of world economic or regulatory influences, (ii) fluctuationsin currency translations, (iii) changes in the competitive marketplace, including new products and pricing changes bythe Company’s competitors, (iv) availability and price of raw materials, (v) levels of operating efficiencies, (vi) actionsof domestic and foreign governments, (vii) results of investments, and (viii) ability to secure financing at reasonableterms. Any changes in such factors could lead to significantly different results. The Company undertakes no obligationto publicly update or revise any forward-looking statements, whether as a result of new information, future events orotherwise. In light of these risks and uncertainties, there can be no assurance that the forward-looking informationcontained in this document will in fact transpire.2005 Annual Report xiii