TITAN INTERNATIONAL INC (TWI) FY 2021 MD&A

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 the financial statements included in this annual report with a narrative from the perspective of the management of Titan

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International, Inc. (together with its subsidiaries, Titan, or the Company) on Titan’s financial condition, results of operations, liquidity, and other factors which may affect the Company’s future results. You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes in "Item 8. Financial Statements and Supplementary Data." The following discussion includes forward-looking statements about our business, financial condition, and results of operations, including discussions about management’s expectations for our business. These statements represent projections, beliefs, and expectations based on current circumstances and conditions and in light of recent events and trends, and you should not construe these statements either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. See “Forward-Looking Statements” and "Item 1A. Risk Factors" in Part 1 of this Form 10-K.

COVID-19 Pandemic

In December 2019, a novel strain of coronavirus ("COVID-19") was reported in Wuhan, China. During March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic. The emergence of COVID-19 and its global spread presents significant risks to the Company, some of which the Company is unable to fully evaluate or even foresee. The COVID-19 pandemic adversely affected the Company’s financial results and business operations for the years ended December 31, 2020 and December 31, 2021 and economic and health conditions in the United States and across most of the globe have continued to change since then. In some of the countries where the Company has operations and where COVID-19 has been widespread (such as the Company’s European and Latin America locations), the Company’s operations were curtailed during portions of 2020. The Company’s operations resumed with additional sanitary and other protective health measures, which have increased operating costs. We expect these additional measures to continue into the foreseeable future as we seek to ensure the safety and welfare of Titan’s employees.

While the Company's operations began to return to historical levels beginning in the second half of 2020 and continued throughout 2021, certain geographies (particularly Australia, Europe and Latin America) continue to remain impacted by the COVID-19 pandemic due to new and emerging variants of COVID-19 resulting in higher employee absenteeism. Further, global supply chains are experiencing constraints as a result of the ongoing COVID-19 pandemic, including availability and pricing of raw materials, transportation and labor. The current constraints on the global supply chains have added complexity to growth expectations in the near term.

Due to the above circumstances and as described generally in this Form 10-K, the Company’s results of operations for the year ended December 31, 2021 are not necessarily indicative of the results to be expected in the future. Management cannot predict the full impact of the COVID-19 pandemic on the economic conditions generally, on the Company’s customers and, ultimately, on the Company. The nature, extent and duration of the effects of the COVID-19 pandemic on the Company are highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic might end.

BUSINESS

For a description of the Company’s business and segments see Part 1, Item 1 of this Form 10-K.

MARKET CONDITIONS AND OUTLOOK

AGRICULTURAL MARKET OUTLOOK

Agriculture-related commodity prices continued to remain at historically high levels during 2021 and favorable market conditions across the globe are expected to continue the momentum into 2022. Improved farmer income, replacement of an aging large equipment fleet and replenishment of lower equipment inventory levels are all factors which are anticipated to support improved demand for our products. Many of our customers are forecasting growth, providing further optimism of sustained stability in the market over the next few years. Many more variables, including weather, volatility in the price of commodities, grain prices, export markets, foreign currency exchange rates, government policies, subsidies, and the demand for used equipment can greatly affect the Company's performance in the agricultural market in a given period.

EARTHMOVING/CONSTRUCTION MARKET OUTLOOK

The earthmoving/construction segment is affected by many variables, including commodity prices, road construction, infrastructure, government appropriations, housing starts, and other macroeconomic drivers. The construction market is primarily driven by GDP by country and the need for infrastructure developments. The earthmoving/construction markets experienced declines in 2020 due in large part to global economic uncertainty and the impacts of the COVID-19 pandemic. The market experienced strong signs of growth in 2021 as economies emerged from the pandemic and the momentum is expected to continue into 2022. There are historically low equipment inventory levels throughout the global construction industry and

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mining capital budgets continued to rise during 2021, and we expect that trend to continue into 2022. Improvements in mineral commodity prices also currently support growth.

CONSUMER MARKET OUTLOOK

The consumer market consists of several distinct product lines within different regions. These products include light truck tires, turf equipment, specialty products, and train brakes. Overall, the markets stabilized during 2021 due to pent up demand from historically lower sales volume during 2020. This pace of growth is anticipated to be slower during 2022 than what is currently being experienced in the Agriculture and Earthmoving/Construction segments. The consumer segment is affected by many variables including consumer spending, interest rates, government policies, and other macroeconomic drivers.

SUMMARY OF 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 included elsewhere in this annual report.

In addition, the following table sets forth components of the Company’s net sales classified by segment:

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FISCAL YEAR ENDED DECEMBER 31, 2021, COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2020

RESULTS OF OPERATIONS

Highlights for the year ended December 31, 2021, compared to 2020 (amounts in thousands):

Net Sales

Net sales for the year ended December 31, 2021 were $1.78 billion, compared to $1.26 billion for the year ended December 31, 2020, an increase of 41.4%, driven by sales increases in all segments. Overall, net sales volume and price/mix was up 23.4% and 18.0%, respectively, from 2020. Net sales volume and product price/mix improved due to market growth in all segments. Pricing increases have been implemented because of rising raw material costs and other inflationary impacts in the markets, including freight. The contributing factors to the increase in demand in 2021 were increased agriculture commodity prices, lower equipment inventory levels and pent up demand following the economic impacts of the COVID-19 pandemic during 2020. Lower sales volumes during 2020 were primarily caused by continued weakness in the commodity markets and the effect of the COVID-19 pandemic which caused significant uncertainty for customers in most geographies, most notably OEM customers.

Global supply chains are experiencing constraints, including availability and pricing of raw materials, transportation and labor. The current constraints on global supply chains are adding complexity to the market environment and growth expectations in the near term. Titan is experiencing similar supply chain challenges, and has been able to manage the situation effectively to date.

Cost of Sales and Gross Profit

Cost of sales was $1.54 billion for the year ended December 31, 2021, compared to $1.13 billion for 2020. The increase in cost of sales was driven by the impact of increases in sales volume. Gross profit for 2021 was $237.5 million, or 13.3% of net sales, compared to $114.3 million, or 9.1% of net sales, for 2020. The increase in gross profit and margin was driven by the impact of increases in sales volume, as described previously, favorably impacting overhead absorption. In addition, cost reduction initiatives were executed across global production facilities before and throughout the COVID-19 pandemic.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses for the year ended December 31, 2021, were $131.8 million, or 7.4% of net sales, up only 0.6%, compared to $130.9 million, or 10.4% of net sales, for 2020.  The increase in SG&A was primarily due to investments to improve our supply chain and logistics processes and an increase in variable costs associated with improved operating performance and growth in sales. SG&A expenses for the year ended December 31, 2020 included a $5.0 million legal accrual related to the settlement of the Dico case and an impairment charge of $6.0 million related to certain customer relationships in Australia as a result of attrition of several customers since the business was initially acquired in 2012.

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Research and Development Expenses

Research and development (R&D) expenses for the year ended December 31, 2021, were $10.1 million, or 0.6% of net sales, compared to $9.0 million, or 0.7% of net sales, for 2020. R&D spending reflects initiatives to improve product designs and an ongoing focus on quality.

Royalty Expense

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. Each of these agreements is scheduled to expire in 2025. Royalty expenses for the year ended December 31, 2021 were $10.5 million compared to $9.7 million for 2020. The increase in royalty expenses are due to the increase in sales, as described previously, resulting in an increase in the amount of royalty expense incurred.

Income (Loss) from Operations

Income from operations for the year ended December 31, 2021 was $85.2 million, or 4.7% of net sales, compared to loss of $35.4 million, or 2.8% of net sales, for 2020.  The increase in income was primarily due to the higher sales and improvements in gross profit margins.

OTHER PROFIT/LOSS ITEMS

Interest Expense

Interest expense for 2021 and 2020 was $32.2 million and $30.6 million, respectively. Interest expense increased due to the refinancing of the senior secured notes during the second quarter of 2021 resulting in an increase in the interest rate from 6.50% to 7.00%.

Loss on Senior Note Repurchase

Loss on senior note repurchase was $16.0 million for 2021. The loss was in connection to the Company completing a call and redemption of all of its outstanding $400.0 million principal amount of Titan's 6.50% senior secured notes due 2023 during the second quarter of 2021.

Foreign Exchange Gain (Loss)

Foreign currency gain was $12.0 million for the year ended December 31, 2021, compared to a loss of $11.0 million for the year ended December 31, 2020. The foreign exchange gain in 2021 is primarily the result of the closeout of certain legal entities as part of the ongoing initiative to rationalize Titan's legal entity structure and ongoing management of the intercompany capital structure as well as a favorable impact of the movement of exchange rates. The foreign currency exchange loss in 2020 is the result of the significant movements in foreign currency exchange rates in many of the geographies in which we conduct business and translation of intercompany loans at certain foreign subsidiaries, which are denominated in local currencies rather than the reporting currency, which is the United States dollar. Since such loans are expected to be settled at some point in the future, these loans are adjusted each reporting period to reflect the current exchange rates.

Other Income

Other income was $2.1 million for the year ended December 31, 2021, compared to other income of $18.8 million for 2020, a decrease of $16.7 million. The decrease in other income was primarily attributable to the proceeds of $8.6 million related to a property insurance settlement at Titan Tire Reclamation Corporation, a $4.9 million gain on the sale of our Brownsville, Texas facility (Texas Facility), and $2.3 million of building rental income from the Texas facility, all in 2020. The sale of the Texas facility occurred in November 2020, and no further rental income was realized in 2021.

Provision for Income Taxes

The Company recorded tax expense for income taxes of $1.1 million and $6.9 million for the years ended December 31, 2021 and 2020, respectively. The Company's effective tax rate was 2.3% in 2021 and (11.9)% in 2020.

The Company’s 2021 and 2020 income tax expense and rates differed from the amount of income tax determined by applying the U.S. Federal income tax rate to pre-tax income primarily as a result of U.S. and certain foreign jurisdictions that incurred a full valuation allowance on deferred tax assets created by current year projected losses and a reduction of the liability for unrecognized tax positions. In addition, there were non-deductible royalty expenses and statutorily required income adjustments made in certain foreign jurisdictions that negatively impacted the tax rate for the years ended December 31, 2021 and 2020. In 2021, the Company released the valuation allowance on its deferred tax assets related to its subsidiary, Titan Luxembourg, resulting in the increase in the effective tax rate as compared to 2020. The Company expects to generate positive

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taxable income in Titan Luxembourg in future periods as a result of the legal entity and loan rationalization completed during 2021, allowing for the realization of future tax benefits from the carryforward of past net operating losses.

Net Income (Loss)

Net Income for the year ended December 31, 2021, was $49.9 million, compared to net loss of $65.1 million for 2020. Basic earnings per share was $0.80 for the year ended December 31, 2021, compared to a loss of $0.99 for 2020. Diluted earnings per share was $0.79 for the year ended December 31, 2021, compared to a loss of $0.99 for 2020. The Company's higher net income and earnings per share were due to the items previously discussed.

SEGMENT INFORMATION

Segment Summary (Amounts in thousands)

Agricultural Segment Results

Agricultural segment results were as follows:

Net sales in the agricultural market were $949.4 million for the year ended December 31, 2021, compared to $634.7 million for 2020, an increase of 49.6%. Net sales volume and product price/mix was up 28.0% and 23.4%, respectively, from 2020. The sales volume increase was driven by demand in the global agricultural markets, reflective of improved farmer income, the need for replacement of an aging large equipment fleet and the need to replenish equipment inventory levels within the equipment dealer channels. Pricing is primarily reflective of increases in raw material and other inflationary cost increases in the markets, including freight. The overall increase in net sales was partially offset by unfavorable currency translation, primarily in Latin America and Europe of 1.8%.

Gross profit in the agricultural market was $135.8 million, or 14.3% of net sales, for 2021, compared to $65.4 million, or 10.3% of net sales, for 2020.   The increase in gross profit and margin is primarily attributable to the impact of increases in sales volume as described previously and cost reduction initiatives executed across global production facilities before and throughout the COVID-19 pandemic. The Company balanced the increases of related raw materials and other inflationary cost impacts throughout 2021 with corresponding price increases to protect profitability.

Income from operations in the agricultural market was $77.7 million for the year 2021, compared to $9.8 million for 2020. The overall increase in income from operations is attributable to higher gross profit from significant demand improvements, and the overall cost reduction initiatives.

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Earthmoving/Construction Segment Results

Earthmoving/construction segment results were as follows:

The Company's earthmoving/construction market net sales were $693.4 million for the year ended December 31, 2021, compared to $510.2 million for the year ended December 31, 2020, an increase of 35.9%. The increase in earthmoving/construction net sales was driven by increased volume and product price/mix of 21.5% and 11.9%, respectively, which was primarily due to improvements in global economic conditions and recovery in construction markets, including the return to normalized supply and demand levels after the initial effects of the COVID-19 pandemic in 2020. Net sales was also favorably impacted by foreign currency translation in Europe and Australia, which increased net sales by 2.5%.

Gross profit in the earthmoving/construction market was $83.7 million, or 12.1% of net sales, for the year ended December 31, 2021, compared to $37.9 million, or 7.4% of net sales, for the year ended December 31, 2020. The increase in gross profit and margin was primarily driven by the increased sales volume and continued improved production efficiencies stemming from the strong management actions taken to improve profitability for the long-term. Again, the Company balanced the increases related to raw materials and other inflationary cost impacts throughout 2021 with corresponding price increases to protect profitability.

The Company's earthmoving/construction segment income from operations was $27.8 million for the year ended December 31, 2021, as compared to a loss of $21.6 million for 2020. This improvement was due to increases in sales volume and the sustained benefit of cost containment measures taken to manage profitability in response to the prior market declines and the impact of the COVID-19 pandemic.

Consumer Segment Results

Consumer segment results were as follows:

Consumer market net sales were $137.5 million for the year ended December 31, 2021, compared to $114.5 million for 2020, an increase of 20.0%.  The increase in consumer net sales was primarily due to increased volume and product price/mix of 7.1% and 14.5%, respectively. The increase in net sales was partially offset by unfavorable foreign currency translation, primarily in Latin America and Russia, which negatively impacted net sales by 1.6%.

Gross profit from the consumer market was $18.0 million for 2021, or 13.1% of net sales, compared to $11.0 million, or 9.6% of net sales, for 2020. The increase was primarily caused by increased product price/mix and the impact of sales volume increase.

Consumer segment income from operations was $9.6 million for 2021, compared to $1.1 million for 2020. The increase was due to increase in gross profit as mentioned previously.

Corporate & Unallocated Expenses

Income from operations on a segment basis does not include corporate expenses of approximately $29.9 million and $24.7 million for the year ended December 31, 2021 and 2020, respectively. Unallocated expenses are primarily comprised of corporate selling, general and administrative expenses. The year-over-year change was due to an increase in certain unallocated SG&A expenses at the corporate level including an increase in costs associated with investments to improve our supply chain and logistics processes, increase in R&D expenses as previously mentioned and other variable operating costs associated with improved operating performance and growth in sales.

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FISCAL YEAR ENDED DECEMBER 31, 2020, COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2019

The comparison of the 2020 results to 2019 has been omitted from this Form 10-K and can be found in the Company's Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on March 4, 2021.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

As of December 31, 2021, the Company had $98.1 million of cash, a decrease of $19.3 million from December 31, 2020, due to the following items:

Operating Cash Flows

Summary of cash flows from operating activities:

For the year ended December 31, 2021, operating activities provided cash of $10.7 million, driven by the increase in accounts payable of $121.2 million, the net income of $49.9 million, and partially offset by increases in inventories of $112.9 million and increases in accounts receivable of $74.7 million, which was driven by the increase in sales activity during the year. Included in net income of $49.9 million was a non-cash charge for depreciation and amortization of $48.0 million. Cash flows provided by operating activities also includes $16.0 million loss on senior note repurchase.

Cash provided by operating activities decreased by $46.5 million when comparing 2021 to 2020. This decrease was due to managed investments in working capital to support significant business growth, along with the $9.2 million legal settlement paid in February 2021 in a previously settled litigation matter (see Note 25 of the Notes to Consolidated Financial Statements for additional information), and partially offset by the impact of higher profitability in 2021, which resulted in an increase of $115.0 million in net income year over year.

Summary of the components of cash conversion cycle:

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Cash conversion cycle decreased by 24 days during 2021 from 2020 due to strategic improvement in working capital management, including more accurate demand forecasting and strategic sourcing of raw materials. Further, the decrease is also due to continued focus on customer cash collections and favorable management of supplier payment cycles and terms.

Investing Cash Flows

Summary of cash flows from investing activities:

Net cash used for investing activities was $37.6 million in 2021, compared to cash provided by $33.2 million in 2020. The Company invested a total of $38.8 million in capital expenditures in 2021, compared to $21.7 million in 2020. Capital expenditures represent plant equipment replacement and improvements, along with new tools, dies and molds related to new product development. The overall capital outlay for 2021 increased as the Company seeks to enhance the Company's existing facilities and manufacturing capabilities and drive productivity gains following suppression of capital outlay in 2020 as a result of the COVID-19 pandemic and reduction of business activity.

Cash provided by investing activities for 2020 included $8.7 million from the proceeds of a property insurance settlement and $32.9 million from proceeds for the sales of Wheels India Limited shares. Other investing activities during 2020 includes $11.4 million from the sale of our Brownsville, Texas facility.

Financing Cash Flows

Summary of cash flows from financing activities:

Net cash provided by financing activities was $13.9 million in 2021 primarily due to the premium of $13 million paid on the repurchasing of the senior security notes. Proceeds from borrowings of $497.1 million were partially offset by the repurchase of the senior secured notes and debt payments of $69.2 million. Borrowing on the domestic revolving credit facility occurred during 2021 to support costs of refinancing the Company's senior secured notes, along with the settlement of the legal matter (See Note 25 of the Notes to Consolidated Financial Statements), resulting in an outstanding balance on the revolving credit facility of $30.0 million at December 31, 2021 as compared to no borrowings as of December 31, 2020.

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Debt Restrictions

The Company’s revolving credit facility (credit facility) and indenture relating to the 7.00% senior secured notes due 2028 contain various restrictions which include:

•When remaining availability under the credit facility is less than 10% of the total commitment under the credit facility ($12.5 million as of December 31, 2021), the Company is required to maintain a minimum fixed charge coverage ratio of not less than 1.0 to 1.0 (calculated quarterly on a trailing four quarter basis);

•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; and

•Other customary affirmative and negative covenants.

These restrictions could limit the Company’s ability to respond to market conditions, provide for unanticipated capital investments, raise additional debt or equity capital, pay dividends, or take advantage of business opportunities, including future acquisitions.

LIQUIDITY OUTLOOK

The Company does not anticipate significant liquidity constraints during the foreseeable future. At December 31, 2021, the Company had $98.1 million of cash and cash equivalents. At December 31, 2021, under the Company's $125 million credit facility, there were $30.0 million of outstanding borrowings, $10.7 million in outstanding letters of credit, and the amount available to borrow totaled $75.4 million. Titan’s availability under this domestic facility may be less than $125 million, from time to time, as a result of any outstanding letters of credit and eligible accounts receivable and inventory balances at certain of its domestic subsidiaries. The cash and cash equivalents balance of $98.1 million includes $86.4 million held in foreign countries.

Capital expenditures for 2022 are forecasted to be approximately $45 million to $50 million. These capital expenditures are anticipated to be used primarily to continue to enhance the Company’s existing facilities and manufacturing capabilities and drive productivity gains, along with the purchase of new tools, dies and molds related to new product development.

Cash payments for interest are currently forecasted to be approximately $32 million in 2022, based on the Company's year-end 2021 debt balances and debt maturities. The forecasted interest payments are comprised primarily of the semi-annual interest payments totaling approximately $28 million (paid in April and October) for the 7.00% senior secured notes.

On February 1, 2022, the Company entered into a Stock Purchase Agreement with the Russian Direct Investment Fund (RDIF) equity holders to buy back the restricted Titan common stock for the previously agreed amount of $25 million. The Company funded the buy-back of restricted Titan common stock from the RDIF equity holders through a draw down on the credit facility.

Subject to the terms of the agreements governing Titan's outstanding indebtedness, the Company may finance future acquisitions or joint ventures with cash on hand, cash from operations, additional indebtedness, issuing additional equity securities, and divestitures.

Cash and cash equivalents, totaling $98.1 million at December 31, 2021, along with anticipated internal cash flows from operations and utilization of availability on global credit facilities, are expected to provide sufficient liquidity for working capital needs, debt maturities, and capital expenditures. Potential divestitures and unencumbered assets are also a means to provide for future liquidity needs.

Titan has continued to take actions to ensure financial flexibility and credit capabilities from our banking partners and other sources throughout our global operations during 2021, to gain flexibility to respond to market dynamics in the future. On October 28, 2021, the Company amended and extended the credit and security agreement with respect to the $100 million revolving credit facility (credit facility) with agent BMO Harris Bank N.A. and other financial institutions party thereto. The credit facility was increased to $125 million with the amount available under the credit facility determined based upon eligible accounts receivable and inventory balances at certain of the Company's domestic subsidiaries. The amended credit facility can be expanded by up to $50 million through an accordion provision within the agreement. The amended credit facility has a five-year term with the new maturity occurring on October 28, 2026.

As previously mentioned, the Company refinanced its $400 million senior secured notes during the second quarter of 2021 resulting in extension of the due date from 2023 to 2028. During 2021, Moody’s Investors Service and S&P Global both upgraded the Company’s credit rating for its senior secured notes due to the Company's improved financial position and favorable demand recovery in its end markets, specifically agricultural equipment. We are managing the business cycle and the current impact of the COVID-19 pandemic; however, we do not anticipate that this impact will cause the Company to violate any financial covenants with respect to its debt agreements.

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As a result of the measures undertaken by management, the Company does not anticipate significant liquidity constraints during the foreseeable future.

CONTRACTUAL OBLIGATIONS

The Company’s contractual obligations at December 31, 2021, consisted of the following (amounts in thousands):

(a)Interest expense is estimated based on the Company’s year-end 2021 debt balances, maturities, and interest rates.  The estimates assume the credit facility borrowings are paid off during 2022.  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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies are described in Note 1. Description of Business and Significant Accounting Policies to the consolidated financial statements. Preparation of financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America requires the application of technical accounting rules and guidance, as well as the use of estimates.  The Company’s application of such rules and guidance 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.

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. See Note 22 to the consolidated financial statements for additional information on the composition of valuation allowances.

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 obligations, see Note 23 of the Notes to Consolidated Financial Statements for additional information.

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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):

(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 are subject to a limited warranty that ranges between less than one year and ten years, with certain product warranties being prorated after the first year. Actual warranty experience may differ from historical experience. The Company calculates an estimated warranty liability based on past warranty experience and the sales of products subject to that experience. The Company records warranty expense based on warranty payments made and changes to the estimated warranty liability. The Company's warranty liability was $16.6 million at December 31, 2021, and $15.0 million at December 31, 2020. The Company recorded warranty expense of $9.8 million for the year ended December 31, 2021, and $6.9 million for the year ended December 31, 2020. The Company's estimated warranty liability and expense increased primarily as the result of higher net sales of product with historical warranty experience.

MARKET RISK

Foreign Currency Risk

The Company is exposed to the impact of foreign currency fluctuations in certain countries in which it operates. The exposure to foreign currency movements is limited in many countries because the operating revenues and expenses of the Company's various subsidiaries and business units are substantially in the local currency of the country in which they operate. To the extent that borrowings, sales, purchases, revenues, expenses or other transactions are not in the local currency of the subsidiary, the Company is exposed to currency risk and may enter into foreign exchange derivative contracts to mitigate the currency risk. The Company is exposed to fluctuations in the Australian dollar, Brazilian real, British pound, euro, Russian ruble and other global currencies.   The Company’s net investment in foreign entities translated into U.S. dollars was $255.6 million at December 31, 2021, and $283.0 million at December 31, 2020.  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, 2021, would have been approximately $25.6 million.

Commodity Price Risk

The Company does not generally enter into long-term commodity pricing 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 Risk

The Company is exposed to interest rate risk on its variable debt. The Company has a $125 million credit facility that has a variable interest rate.  As of December 31, 2021, the amount available under the credit facility was $75.4 million. If the credit facility were fully drawn to available funds, a change in the interest rate of 100 basis points, or 1%, would have changed the Company’s interest expense by approximately $0.8 million.  At December 31, 2021, there were borrowings of $30.0 million under the credit facility.