10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

Commission File No. 1-4329

 

 

 

LOGO

COOPER TIRE & RUBBER COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   34-4297750

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification no.)

701 Lima Avenue, Findlay, Ohio 45840

(Address of principal executive offices)

(Zip code)

(419) 423-1321

(Registrant’s telephone number, including area code)

 

 

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, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares of common stock of registrant outstanding

at October 31, 2014: 58,108,285

 

 

 


Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

COOPER TIRE & RUBBER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except per-share amounts)

 

     December 31,     September 30,  
     2013     2014  
     (Note 1)     (Unaudited)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 397,731      $ 335,778   

Notes receivable

     86,965        90,098   

Accounts receivable, less allowances of $16,966 at 2013 and $14,289 at 2014

     360,405        538,790   

Inventories at lower of cost or market:

    

Finished goods

     360,686        437,816   

Work in process

     35,576        40,983   

Raw materials and supplies

     120,913        123,210   
  

 

 

   

 

 

 
     517,175        602,009   

Other current assets

     92,514        94,354   
  

 

 

   

 

 

 

Total current assets

     1,454,790        1,661,029   

Property, plant and equipment:

    

Land and land improvements

     51,186        51,195   

Buildings

     326,635        329,790   

Machinery and equipment

     1,847,576        1,895,692   

Molds, cores and rings

     246,760        258,282   
  

 

 

   

 

 

 
     2,472,157        2,534,959   

Less accumulated depreciation and amortization

     1,497,888        1,563,276   
  

 

 

   

 

 

 

Net property, plant and equipment

     974,269        971,683   

Goodwill

     18,851        18,851   

Intangibles, net of accumulated amortization of $63,354 at 2013 and $71,626 at 2014

     160,308        153,656   

Restricted cash

     2,759        640   

Deferred income taxes

     111,644        100,934   

Other assets

     15,526        16,586   
  

 

 

   

 

 

 

Total assets

   $ 2,738,147      $ 2,923,379   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Notes payable

   $ 22,105      $ 184,553   

Accounts payable

     302,422        358,320   

Accrued liabilities

     211,090        264,056   

Income taxes

     11,098        16,961   

Current portion of long-term debt

     17,868        15,559   
  

 

 

   

 

 

 

Total current liabilities

     564,583        839,449   

Long-term debt

     320,959        325,538   

Postretirement benefits other than pensions

     238,653        239,282   

Pension benefits

     291,808        249,529   

Other long-term liabilities

     157,918        159,692   

Deferred income tax liabilities

     6,601        6,131   

Redeemable noncontrolling shareholder interest

     —          168,435   

Equity:

    

Preferred stock, $1 par value; 5,000,000 shares authorized; none issued

     —          —     

Common stock, $1 par value; 300,000,000 shares authorized; 87,850,292 shares issued

     87,850        87,850   

Capital in excess of par value

     4,433        1,721   

Retained earnings

     1,741,611        1,790,969   

Cumulative other comprehensive loss

     (410,020     (399,678
  

 

 

   

 

 

 
     1,423,874        1,480,862   

Less: common shares in treasury at cost (24,464,264 at 2013 and 29,749,007 at 2014)

     (433,008     (587,332
  

 

 

   

 

 

 

Total parent stockholders’ equity

     990,866        893,530   

Noncontrolling shareholders’ interests in consolidated subsidiaries

     166,759        41,793   
  

 

 

   

 

 

 

Total equity

     1,157,625        935,323   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 2,738,147      $ 2,923,379   
  

 

 

   

 

 

 

See accompanying notes.

 

2


COOPER TIRE & RUBBER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014

(UNAUDITED)

(Dollar amounts in thousands except per-share amounts)

 

     2013     2014  

Net sales

   $ 832,419      $ 920,082   

Cost of products sold

     735,015        762,878   
  

 

 

   

 

 

 

Gross profit

     97,404        157,204   

Selling, general and administrative

     69,496        67,829   
  

 

 

   

 

 

 

Operating profit

     27,908        89,375   

Interest expense

     (6,684     (7,050

Interest income

     270        305   

Other—expense

     (348     (1,253
  

 

 

   

 

 

 

Income before income taxes

     21,146        81,377   

Income tax expense

     17,845        26,740   
  

 

 

   

 

 

 

Net income

     3,301        54,637   

Net income attributable to noncontrolling shareholders’ interests

     3,469        6,938   
  

 

 

   

 

 

 

Net income (loss) attributable to Cooper Tire & Rubber Company

   $ (168   $ 47,699   
  

 

 

   

 

 

 

Basic earnings (loss) per share:

    

Net income (loss) attributable to Cooper Tire & Rubber Company common stockholders

   $ (0.00   $ 0.79   
  

 

 

   

 

 

 

Diluted earnings (loss) per share:

    

Net income (loss) attributable to Cooper Tire & Rubber Company common stockholders

   $ (0.00   $ 0.77   
  

 

 

   

 

 

 

Dividends per share

   $ 0.105      $ 0.105   
  

 

 

   

 

 

 

See accompanying notes.

 

3


COOPER TIRE & RUBBER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014

(UNAUDITED)

(Dollar amounts in thousands)

 

     Three Months Ended September 30,  
     2013     2014  

Net income

   $ 3,301      $ 54,637   

Other comprehensive income

    

Cumulative currency translation adjustments

    

Foreign currency translation adjustments

     12,284        (13,537

Financial instruments

    

Change in the fair value of derivatives and marketable securities

     (3,205     4,923   

Income tax benefit (expense) on derivative instruments

     1,337        (1,942
  

 

 

   

 

 

 

Financial instruments, net of tax

     (1,868     2,981   

Postretirement benefit plans

    

Amortization of actuarial loss

     13,191        9,147   

Amortization of prior service credit

     (142     (141

Income tax expense on postretirement benefit plans

     (4,744     (3,075

Foreign currency translation effect

     (5,607     5,435   
  

 

 

   

 

 

 

Postretirement benefit plans, net of tax

     2,698        11,366   
  

 

 

   

 

 

 

Other comprehensive income

     13,114        810   
  

 

 

   

 

 

 

Comprehensive income

     16,415        55,447   

Less comprehensive income attributable to noncontrolling shareholders’ interests

     3,796        5,857   
  

 

 

   

 

 

 

Comprehensive income attributable to Cooper Tire & Rubber Company

   $ 12,619      $ 49,590   
  

 

 

   

 

 

 

See accompanying notes.

 

4


COOPER TIRE & RUBBER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014

(UNAUDITED)

(Dollar amounts in thousands except per-share amounts)

 

     2013     2014  

Net sales

   $ 2,578,226      $ 2,605,225   

Cost of products sold

     2,172,744        2,152,810   
  

 

 

   

 

 

 

Gross profit

     405,482        452,415   

Selling, general and administrative

     211,744        205,540   
  

 

 

   

 

 

 

Operating profit

     193,738        246,875   

Interest expense

     (21,016     (20,960

Interest income

     707        1,088   

Other—expense

     (587     (787
  

 

 

   

 

 

 

Income before income taxes

     172,842        226,216   

Income tax expense

     65,104        75,093   
  

 

 

   

 

 

 

Net income

     107,738        151,123   

Net income attributable to noncontrolling shareholders’ interests

     16,340        19,808   
  

 

 

   

 

 

 

Net income attributable to Cooper Tire & Rubber Company

   $ 91,398      $ 131,315   
  

 

 

   

 

 

 

Basic earnings per share:

    

Net income attributable to Cooper Tire & Rubber Company common stockholders

   $ 1.44      $ 2.10   
  

 

 

   

 

 

 

Diluted earnings per share:

    

Net income attributable to Cooper Tire & Rubber Company common stockholders

   $ 1.42      $ 2.07   
  

 

 

   

 

 

 

Dividends per share

   $ 0.315      $ 0.315   
  

 

 

   

 

 

 

See accompanying notes.

 

5


COOPER TIRE & RUBBER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014

(UNAUDITED)

(Dollar amounts in thousands)

 

     Nine Months Ended September 30,  
     2013     2014  

Net income

   $ 107,738      $ 151,123   

Other comprehensive income

    

Cumulative currency translation adjustments

    

Foreign currency translation adjustments

     9,349        (12,730

Financial instruments

    

Change in the fair value of derivatives and marketable securities

     1,588        1,934   

Income tax expense on derivative instruments

     (605     (856
  

 

 

   

 

 

 

Financial instruments, net of tax

     983        1,078   

Postretirement benefit plans

    

Amortization of actuarial loss

     39,558        27,438   

Amortization of prior service credit

     (425     (424

Income tax expense on postretirement benefit plans

     (14,236     (9,267

Foreign currency translation effect

     (918     2,193   
  

 

 

   

 

 

 

Postretirement benefit plans, net of tax

     23,979        19,940   
  

 

 

   

 

 

 

Other comprehensive income

     34,311        8,288   
  

 

 

   

 

 

 

Comprehensive income

     142,049        159,411   

Less comprehensive income attributable to noncontrolling shareholders’ interests

     18,418        17,754   
  

 

 

   

 

 

 

Comprehensive income attributable to Cooper Tire & Rubber Company

   $ 123,631      $ 141,657   
  

 

 

   

 

 

 

See accompanying notes.

 

6


COOPER TIRE & RUBBER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2014

(UNAUDITED)

(Dollar amounts in thousands)

 

     2013     2014  

Operating activities:

    

Net income

   $ 107,738      $ 151,123   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     99,222        105,319   

Deferred income taxes

     5,035        2,717   

Stock based compensation

     6,470        5,845   

Change in LIFO inventory reserve

     (37,033     (54,464

Amortization of unrecognized postretirement benefits

     39,133        27,014   

Changes in operating assets and liabilities:

    

Accounts and notes receivable

     (40,049     (187,541

Inventories

     15,210        (35,518

Other current assets

     (15,878     (2,681

Accounts payable

     (77,932     58,482   

Accrued liabilities

     53,053        52,519   

Other items

     (31,857     (24,825
  

 

 

   

 

 

 

Net cash provided by operating activities

     123,112        97,990   

Investing activities:

    

Additions to property, plant and equipment and capitalized software

     (135,412     (112,126

Proceeds from the sale of assets

     532        1,089   
  

 

 

   

 

 

 

Net cash used in investing activities

     (134,880     (111,037

Financing activities:

    

Net issuance of (payments on) short-term debt

     (6,864     163,473   

Additions to long-term debt

     24,527        15,634   

Repayments on long-term debt

     (18,657     (13,363

Accelerated share repurchase program

     —          (200,000

Payment of dividends to noncontrolling shareholders

     (9,790     (2,570

Payment of dividends

     (19,950     (19,432

Issuance of common shares and excess tax benefits on options

     1,869        3,890   
  

 

 

   

 

 

 

Net cash used in financing activities

     (28,865     (52,368

Effects of exchange rate changes on cash

     (1,379     3,462   
  

 

 

   

 

 

 

Changes in cash and cash equivalents

     (42,012     (61,953

Cash and cash equivalents at beginning of year

     351,817        397,731   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 309,805      $ 335,778   
  

 

 

   

 

 

 

See accompanying notes.

 

7


COOPER TIRE & RUBBER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands except per-share amounts)

 

1. Basis of Presentation and Consolidation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. There is a year-round demand for the Company’s passenger and truck replacement tires, but sales of light vehicle replacement tires are generally strongest during the third and fourth quarters of the year. Winter tires are sold principally during the months of June through November. Operating results for the nine-month period ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014.

The Company consolidates into its financial statements the accounts of the Company, all wholly-owned subsidiaries, and any partially-owned subsidiary that the Company has the ability to control. Control generally equates to ownership percentage, whereby investments that are more than 50% owned are consolidated, investments in affiliates of 50% or less but greater than 20% are accounted for using the equity method, and investments in affiliates of 20% or less are accounted for using the cost method. The Company does not consolidate any entity for which it has a variable interest based solely on power to direct the activities and significant participation in the entity’s expected results that would not otherwise be consolidated based on control through voting interests. Further, the Company’s joint ventures are businesses established and maintained in connection with the Company’s operating strategy. All intercompany transactions and balances have been eliminated.

Accounting Pronouncements

Changes to accounting principles generally accepted in the United States of America (“U.S. GAAP”) are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification.

The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial statements.

Accounting Pronouncements – Recently Adopted

Income Taxes – In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which clarifies treatment of unrecognized tax benefits based on surrounding circumstances. The amendments in this update are effective for the annual and interim periods beginning on or after December 15, 2013. Although the Company does not expect the adoption of ASU 2013-11 to have a material effect on its consolidated financial statements, it will modify presentation of its unrecognized tax benefit if the specific circumstances are met. The adoption of this accounting standards update did not have an impact on the Company’s consolidated financial statements.

 

8


Accounting Pronouncements – To be adopted

Discontinued Operations – In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which requires that a disposal representing a strategic shift that has or will have a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The guidance is effective for the interim and annual periods beginning on or after December 15, 2014 with early adoption permitted only for disposals that have not been previously reported. The Company has not yet selected a transition method and is currently evaluating the impact of the amended guidance on its consolidated financial statements and related disclosures.

Revenue Recognition – In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which will supersede most current revenue recognition guidance, including industry-specific guidance. The core principle is that an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step model to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2016 with early adoption not permitted. The guidance permits the use of either a retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the impact of the amended guidance on its consolidated financial statements and related disclosures.

Stock-Based Compensation – In June 2014, the FASB issued ASU 2014-12 “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” which requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The guidance is effective for the interim and annual periods beginning on or after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. The Company is evaluating the impact, if any, of adopting this new accounting guidance on its consolidated financial statements.

 

2. CCT Agreements

On January 29, 2014, the Company entered into an agreement (the “CCT Agreement”) with Chengshan Group Company Ltd. (“Chengshan”) and The Union of Cooper Chengshan (Shandong) Tire Company Co., Ltd. (the “Union”) regarding Cooper Chengshan (Shandong) Tire Company Ltd. (“CCT”) that, among other matters, provides Chengshan, with certain conditions and exceptions, a limited contractual right to either (i) purchase the Company’s 65 percent equity interest in CCT for 65 percent of the Option Price (as defined below) or (ii) sell its 35 percent equity interest in CCT to the Company for 35 percent of the Option Price. In the event Chengshan elects not to exercise its right to purchase the Company’s equity interest or sell its interest in CCT to the Company, the Company has the right to purchase Chengshan’s 35 percent equity interest in CCT for 35 percent of the Option Price subject to certain conditions. In the event neither Chengshan nor the Company exercises their respective options prior to their expiration, the agreement allows for continuation of the joint venture as currently structured.

The “Option Price” under the CCT Agreement is defined as the greater of (i) the fair market value of CCT on a stand-alone basis, which value will not take into consideration the value of the trademarks and technologies licensed by the Company to CCT, as determined by an internationally recognized valuation firm (the “CCT valuation”) and (ii) $435,000.

 

9


Under the terms of the CCT Agreement, once the Option Price is determined, the noncontrolling shareholder has 45 days to elect to either purchase the Company’s 65 percent ownership interest in CCT for 65 percent of the Option Price or sell to the Company its 35 percent ownership interest in CCT at 35 percent of the Option Price or do neither. If the noncontrolling shareholder does not exercise these options, the options shall expire and the Company shall have the right to purchase the noncontrolling shareholder’s 35 percent ownership interest in CCT at 35 percent of the Option Price. The CCT Agreement provides that, if the CCT valuation is not provided on or before August 11, 2014 (the “Option Commencement Deadline”), the options of both parties will terminate and be of no effect unless the Company, at its sole discretion, elects to extend the deadline for the CCT valuation. On August 11, 2014, the Company extended the Option Commencement Deadline from August 11, 2014 to August 14, 2014 to allow the parties to finalize the Option Agreement and related matters.

As contemplated by the CCT Agreement, on August 14, 2014, the Company, Cooper Tire Investment Holding (Barbados) Ltd., a wholly owned subsidiary of CTB, Chengshan and Prairie Investment Limited (“Prairie”), a wholly owned subsidiary of Chengshan, entered into an option agreement (the “Option Agreement”). The Option Agreement further extended the Option Commencement Deadline until August 24, 2014. Furthermore, the Option Agreement, among other matters, sets forth the details for exercising the options under the CCT Agreement and effecting the transactions pursuant thereto.

The CCT Agreement and the Option Agreement are separate and in addition to the purchase, sale, transfer, right of first refusal and other protective rights set forth in the existing joint venture agreement between the Company and Chengshan with respect to CCT, which continues to be in effect and fully operational.

The Company determined the CCT Agreement constitutes an accounting extinguishment and new issuance of the Chengshan Group’s equity interest in CCT. In accordance with Accounting Standard Codification (“ASC”) 810, “Consolidation”, changes in a parent’s interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions. Therefore, gains and losses are not recorded in the Condensed Consolidated Statement of Income as a result of the CCT Agreement. The Company is required to measure the noncontrolling shareholder interest at fair value as of January 29, 2014, the transaction date (the “Transaction Date Assessment”).

The measurement of the noncontrolling shareholder interest as of the transaction date was determined by assessing CCT as an ongoing component of the Company’s operations. The Transaction Date Assessment was not meant to be representative of the fair market value of CCT as a stand-alone entity as defined by the CCT Agreement. Further, the Transaction Date Assessment also considered specific discounts attributable to a noncontrolling shareholder interest, including discounts for lack of control of the entity and lack of marketability. Any adjustment to the noncontrolling shareholder interest as a result of the Transaction Date Assessment was offset by a reduction to Capital in excess of par value, to the extent available, with any remaining amount treated as a reduction in Retained earnings.

In addition, because the CCT Agreement provides put and call options to the noncontrolling shareholder interest owner, these options should be measured at fair value (the “Options Assessment”). Adjustments to the carrying value of the noncontrolling shareholder interest as a result of the Options Assessment were to be treated like a dividend to the noncontrolling shareholder interest owner. Any adjustment to the noncontrolling shareholder interest as a result of the Options Assessment is offset by a reduction to Retained earnings and reflected in the computation of earnings per share available to the Company’s common stockholders.

 

10


Further, as a result of the CCT Agreement, during the term of its put option rights, the noncontrolling shareholder interest in CCT has redemption features that are not within the control of the Company. Accordingly, the noncontrolling shareholder interest in CCT is recorded outside of total equity. If the Transaction Date Assessment and Options Assessment result in a noncontrolling shareholder interest that is less than 35 percent of the minimum Option Price, ASC 480, “Distinguishing Liabilities from Equity”, requires that the noncontrolling shareholder interest be adjusted to 35 percent of the minimum Option Price.

The Company’s Transaction Date Assessment, in accordance with the appropriate accounting guidance, resulted in an adjustment to the redeemable noncontrolling shareholder interest of $28,285, increasing the total noncontrolling shareholder interest to $152,250. The Options Assessment did not result in any further adjustment to the redeemable noncontrolling shareholder interest. The redeemable noncontrolling shareholder interest was classified outside of permanent equity on the Company’s Condensed Consolidated Balance Sheets, in accordance with the authoritative accounting guidance.

On August 24, 2014, the CCT valuation was completed by an internationally recognized valuation firm. The CCT valuation amount was approximately $437,700. As contemplated by the CCT Agreement, the CCT Valuation amount is to be used as the Option Price, as it is greater than $435,000. Subsequent to the Transaction Date Assessment, in accordance with ASC 480, the carrying value of the redeemable noncontrolling shareholder interest was evaluated to determine if the redemption value as of the reporting date exceeds the carrying value. At September 30, 2014, no adjustment to the redeemable noncontrolling shareholder interest was required as the carrying value of $168,435 is greater than the redemption value of $153,206, which is 35 percent of the CCT valuation amount of $437,700.

The Company has determined that the recurring fair value measurements related to CCT rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets and settlements of liabilities, as observable inputs are not available and, as such, reside within Level 3 of the fair value hierarchy as defined in Footnote 5. The Company utilized third parties to assist in the determination of the fair value of CCT based upon internal and external inputs considering various relevant market transactions, discounted cash flow valuation methods and probability weighting, among other factors.

In October 2014, the Company received the required documentation from the noncontrolling shareholder interest owner indicating its intent to exercise its call option under the CCT Agreement. After reviewing such documentation and working with the noncontrolling shareholder interest owner to confirm necessary steps to move forward, the Company and noncontrolling shareholder interest owner are proceeding with the proposed sale of the Company’s interest in CCT to the noncontrolling shareholder interest owner in accordance with the procedures set out in the Option Agreement, including seeking the required governmental approvals. Should the noncontrolling shareholder interest owner purchase Cooper’s stake in the joint venture, Cooper will continue to have offtake rights, with CCT agreeing to produce Cooper branded products until mid-2018. Based on the timeline of events and information known, the Company evaluated its accounting for CCT in accordance with U.S. GAAP and concluded that no change in the accounting for CCT is required as of September 30, 2014.

 

3. Share Repurchase Program

On August 6, 2014, the Company entered into a $200 million accelerated share repurchase program (the “ASR program”) with a major financial institution (the “ASR Counterparty”) to repurchase shares of the Company’s common stock. Under the ASR program, the Company paid $200 million to the ASR Counterparty and received 5,567,154 shares of its common stock from the ASR Counterparty, which represents approximately 80 percent of the shares expected to be purchased pursuant to the ASR program, based on the closing price on August 6, 2014. The total number of shares to be repurchased under the ASR program will be based generally on the volume-weighted average price of the Company’s common stock, less a discount, during the repurchase period, subject to provisions that set a minimum and maximum number of shares. The total number of shares to be repurchased will be determined on final settlement, which the Company expects to occur no later than the final repurchase date in February 2015, although settlement may be accelerated or delayed under certain circumstances. The ASR program is accounted for as treasury stock repurchase transactions, reducing the weighted average number of basic and diluted common shares outstanding by the 5,567,154 shares initially repurchased, and as a forward contract indexed to the Company’s own common stock for the future settlement provisions. The forward contract is accounted for as an equity instrument.

 

11


4. Earnings Per Share

Net income per share is computed on the basis of the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effect of stock options and other stock units. The following table sets forth the computation of basic and diluted earnings per share:

 

     Three months ended September 30      Nine months ended September 30  
     2013     2014      2013      2014  

Numerator

          

Numerator for basic and diluted earnings per share - Net income (loss) attributable to common stockholders

   $ (168   $ 47,699       $ 91,398       $ 131,315   
  

 

 

   

 

 

    

 

 

    

 

 

 

Denominator

          

Denominator for basic earnings per share - weighted average shares outstanding

     63,365        60,606         63,311         62,504   

Effect of dilutive securities - stock options and other stock units

     —          1,023         967         969   
  

 

 

   

 

 

    

 

 

    

 

 

 

Denominator for diluted earnings per share - adjusted weighted average shares outstanding

     63,365        61,629         64,278         63,473   
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic earnings (loss) per share:

          

Net income (loss) attributable to Cooper Tire & Rubber Company common stockholders

   $ (0.00   $ 0.79       $ 1.44       $ 2.10   
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted earnings (loss) per share:

          

Net income (loss) attributable to Cooper Tire & Rubber Company common stockholders

   $ (0.00   $ 0.77       $ 1.42       $ 2.07   
  

 

 

   

 

 

    

 

 

    

 

 

 

All options to purchase share of the Company’s common stock were included in the computation of diluted earnings per share as the options’ exercise prices were less than the average market price of the common shares at both September 30, 2013 and 2014.

The weighted-average number of shares outstanding used in the computation of basic and diluted earnings per share reflects the Company’s initial receipt of 5,567,154 shares pursuant to the ASR program during the quarter ended September 30, 2014. The weighted-average number of shares outstanding used in the computation of basic and diluted earnings per share does not include additional shares, if any, the Company may receive upon final settlement of the ASR program. The effect of these potential additional shares was not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2014 because the inclusion of these potential additional shares would have been anti-dilutive.

 

5. Fair Value Measurements

Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into financial instruments for trading or speculative purposes. The derivative financial instruments include fair value and cash flow hedges of foreign currency exposures. The change in values of the fair value foreign currency hedges offset exchange rate fluctuations on the foreign currency-denominated intercompany loans and obligations. The Company presently hedges exposures in the Euro, Canadian dollar, British pound sterling, Swiss franc, Swedish krona, Norwegian krone, Mexican peso and Chinese yuan generally for transactions expected to occur within the next 12 months. The notional amount of these foreign currency derivative instruments at December 31, 2013 and September 30, 2014 was $148,036 and $190,559, respectively. The counterparties to each of these agreements are major commercial banks.

 

12


The Company uses foreign currency forward contracts as hedges of the fair value of certain non-U.S. dollar denominated asset and liability positions, primarily accounts receivable and debt. Gains and losses resulting from the impact of currency exchange rate movements on these forward contracts are recognized in the accompanying Condensed Consolidated Statements of Operations in the period in which the exchange rates change and offset the foreign currency gains and losses on the underlying exposure being hedged.

Foreign currency forward contracts are also used to hedge variable cash flows associated with forecasted sales and purchases denominated in currencies that are not the functional currency of certain entities. The forward contracts have maturities of less than twelve months pursuant to the Company’s policies and hedging practices. These forward contracts meet the criteria for and have been designated as cash flow hedges. Accordingly, the effective portion of the change in fair value of such forward contracts (approximately $398 and $2,332 as of December 31, 2013 and September 30, 2014, respectively) are recorded as a separate component of stockholders’ equity in the accompanying Condensed Consolidated Balance Sheets and reclassified into earnings as the hedged transactions occur.

The Company assesses hedge ineffectiveness quarterly using the hypothetical derivative methodology. In doing so, the Company monitors the actual and forecasted foreign currency sales and purchases versus the amounts hedged to identify any hedge ineffectiveness. Any hedge ineffectiveness is recorded as an adjustment in the accompanying Condensed Consolidated Statements of Income in the period in which the ineffectiveness occurs. The Company also performs regression analysis comparing the change in value of the hedging contracts versus the underlying foreign currency sales and purchases, which confirms a high correlation and hedge effectiveness.

The derivative instruments are subject to master netting arrangements with the counterparties to the contracts. The following table presents the location and amounts of derivative instrument fair values in the Condensed Consolidated Balance Sheets:

 

     December 31, 2013     September 30, 2014  

Assets/(Liabilities)

          

Designated as hedging instruments:

          

Gross amounts recognized

      $ 2,702         $ 3,138   

Gross amounts offset

        (2,232        (689
     

 

 

      

 

 

 

Net amounts

        470           2,449   
     

 

 

      

 

 

 

Not designated as hedging instruments:

          

Gross amounts recognized

        (121        149   

Gross amounts offset

        —             —     
     

 

 

      

 

 

 

Net amounts

        (121        149   
     

 

 

      

 

 

 

Net amounts presented

     Other current assets       $ 349        Other current assets       $ 2,598   
     

 

 

      

 

 

 

 

13


The following table presents the location and amount of gains and losses on derivative instruments in the Condensed Consolidated Statements of Income:

 

Derivatives

Designated as

Cash Flow Hedges

   Amount of Gain (Loss)
Recognized in
Other Comprehensive
Income on Derivatives
(Effective Portion)
    Amount of Gain (Loss)
Reclassified
from Cumulative
Other Comprehensive
Loss into Income
(Effective Portion)
     Amount of Gain (Loss)
Recognized in
Income
on Derivatives
(Ineffective Portion)
 

Three Months Ended September 30, 2013

   $ (2,316   $ 889       $ 126   

Three Months Ended September 30, 2014

   $ 5,808      $ 885       $ 218   

Nine Months Ended September 30, 2013

   $ 2,926      $ 1,338       $ (84

Nine Months Ended September 30, 2014

   $ 4,119      $ 2,185       $ 45   

 

    

Location of

Gain (Loss)

    

Amount of Gain (Loss)

Recognized In Income on Derivatives

 

Derivatives not

Designated as

  

Recognized

in Income on

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 

Hedging Instruments

   Derivatives      2013      2014      2013     2014  

Foreign exchange contracts

     Other income       $ 274       $ 314       $ (359   $ 270   
     

 

 

    

 

 

    

 

 

   

 

 

 

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within the different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded on the Condensed Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.

Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

 

  a. Quoted prices for similar assets or liabilities in active markets;

 

  b. Quoted prices for identical or similar assets or liabilities in non-active markets;

 

  c. Pricing models whose inputs are observable for substantially the full term of the asset or liability; and

 

  d. Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.

Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

 

14


The valuation of foreign exchange forward contracts was determined using widely accepted valuation techniques. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including forward points. The Company incorporated credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as current credit ratings, to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2013 and September 30, 2014, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy.

The valuation of stock-based liabilities was determined using the Company’s stock price, and as a result, these liabilities are classified in Level 1 of the fair value hierarchy.

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and September 30, 2014:

 

     December 31, 2013  
     Total
Assets
(Liabilities)
    Quoted Prices
in Active Markets
for Identical
Assets
Level (1)
    Significant
Other
Observable
Inputs
Level (2)
     Significant
Unobservable
Inputs
Level (3)
 

Foreign Exchange Contracts

   $ 349      $ —        $ 349       $ —     

Stock-based Liabilities

   $ (12,462   $ (12,462   $ —         $ —     
     September 30, 2014  
     Total
Assets
(Liabilities)
    Quoted Prices
in Active Markets
for Identical
Assets

Level (1)
    Significant
Other
Observable
Inputs
Level (2)
     Significant
Unobservable
Inputs

Level (3)
 

Foreign Exchange Contracts

   $ 2,598      $ —        $ 2,598       $ —     

Stock-based Liabilities

   $ (15,820   $ (15,820   $ —         $ —     

Redeemable noncontrolling shareholder interest

   $ (153,206   $ —        $ —         $ (153,206

(see Footnote 2 - CCT Agreement)

         

The following table presents the movement in the Level 3 fair value measurements for both the three- and nine-month periods ended September 30, 2014.

 

     Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
     Redeemable noncontrolling shareholder interest  
     Three Months Ended
September 30, 2014
    Nine Months Ended
September 30, 2014
 

Beginning Balance

   $ (152,250   $ —     

Transfer into Level 3 - Redeemable noncontrolling shareholder interest

     —          (152,250

Adjustment for CCT valuation amount

     (956     (956
  

 

 

   

 

 

 

Ending Balance

   $ (153,206   $ (153,206
  

 

 

   

 

 

 

 

15


The Redeemable noncontrolling shareholder interest is recorded in the Condensed Consolidated Balance Sheets at its carrying value of $168,435. Since the carrying value is greater than the 35 percent of the CCT valuation agreement, no adjustment for the increase in fair value is required.

The following tables present the carrying amounts and fair values for the Company’s financial instruments carried at cost on the Condensed Consolidated Balance Sheets. The fair value of the Company’s debt is based upon the market price of the Company’s publicly-traded debt. The carrying amounts and fair values of the Company’s financial instruments are as follows:

 

     December 31, 2013  
           Fair Value Measurements Using  
     Carrying
Amount
    Quoted Prices
in Active Markets
for Identical
Instruments
Level (1)
    Significant
Other
Observable
Inputs
Level (2)
     Significant
Unobservable
Inputs
Level (3)
 

Cash and cash equivalents

   $ 397,731      $ 397,731      $ —         $ —     

Notes receivable

     86,965        86,965        —           —     

Restricted cash

     2,759        2,759        —           —     

Notes payable

     (22,105     (22,105     —           —     

Current portion of long-term debt

     (17,868     (17,868     —           —     

Long-term debt

     (320,959     (334,759     —           —     
     September 30, 2014  
           Fair Value Measurements Using  
     Carrying
Amount
    Quoted Prices
in Active Markets

for Identical
Instruments

Level (1)
    Significant
Other
Observable
Inputs

Level (2)
     Significant
Unobservable
Inputs

Level (3)
 

Cash and cash equivalents

   $ 335,778      $ 335,778      $ —         $ —     

Notes receivable

     90,098        90,098        —           —     

Restricted cash

     640        640        —           —     

Notes payable

     (184,553     (184,553     —           —     

Current portion of long-term debt

     (15,559     (15,559     —           —     

Long-term debt

     (325,538     (353,338     —           —     

 

16


6. Business Segments

The following table details information on the Company’s operating segments. The North American Tire segment has been renamed the Americas Tire segment to better reflect the Company’s expanding presence in Central and South America. This change did not impact the financial results previously reported by the segment.

 

     Three months ended September 30     Nine months ended September 30  
     2013     2014     2013     2014  

Revenues:

        

Americas Tire

        

External customers

   $ 618,840      $ 677,444      $ 1,812,791      $ 1,846,403   

Intercompany

     14,205        16,494        45,713        50,263   
  

 

 

   

 

 

   

 

 

   

 

 

 
     633,045        693,938        1,858,504        1,896,666   

International Tire

        

External customers

     213,579        242,638        765,435        758,822   

Intercompany

     50,871        70,777        193,316        191,359   
  

 

 

   

 

 

   

 

 

   

 

 

 
     264,450        313,415        958,751        950,181   

Eliminations

     (65,076     (87,271     (239,029     (241,622
  

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

   $ 832,419      $ 920,082      $ 2,578,226      $ 2,605,225   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit (loss):

        

Americas Tire

   $ 38,762      $ 75,618      $ 169,381      $ 209,080   

International Tire

     3,083        22,787        62,322        72,394   

Eliminations

     1,736        (1,118     2,900        (2,376

Unallocated corporate charges

     (15,673     (7,912     (40,865     (32,223
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     27,908        89,375        193,738        246,875   

Interest expense

     (6,684     (7,050     (21,016     (20,960

Interest income

     270        305        707        1,088   

Other - income (expense)

     (348     (1,253     (587     (787
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 21,146      $ 81,377      $ 172,842      $ 226,216   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

7. Inventories

Inventory costs are determined using the last-in, first-out (“LIFO”) method for substantially all U.S. inventories. The current cost of this inventory under the first-in, first-out (“FIFO”) method was $432,906 and $468,418 at December 31, 2013 and September 30, 2014, respectively. These FIFO values have been reduced by approximately $161,436 and $106,972 at December 31, 2013 and September 30, 2014, respectively, to arrive at the LIFO value reported on the Condensed Consolidated Balance Sheets. The remaining inventories have been valued under the FIFO or average cost method. All inventories are stated at the lower of cost or market.

 

8. Stock-Based Compensation

The Company’s incentive compensation plans allow the Company to grant awards to key employees in the form of stock options, stock awards, restricted stock units (“RSUs”), stock appreciation rights, performance stock units (“PSUs”), dividend equivalents and other awards. Compensation related to these awards is determined based on the fair value on the date of grant and is amortized to expense over the vesting period. For restricted stock units and performance stock units, the Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire. If awards can be settled in cash, these awards are recorded as liabilities and marked to market.

 

17


The following table discloses the amount of stock-based compensation expense for the three- and nine-month periods ended September 30, 2013 and 2014.

 

     Three months ended September 30      Nine months ended September 30  
     2013      2014      2013      2014  

Stock options

   $ 989       $ 1,058       $ 2,962       $ 3,147   

Restricted stock units

     280         749         839         1,058   

Performance stock units

     740         426         2,669         1,640   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock based compensation

   $ 2,009       $ 2,233       $ 6,470       $ 5,845   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock Options

In February 2012, executives participating in the 2012-2014 Long-Term Incentive Plan were granted 589,934 stock options which will vest one-third each year through February 2015. In February 2013, executives participating in the 2013-2015 Long-Term Incentive Plan were granted 330,639 stock options which will vest one-third each year through February 2016. In February 2014, executives participating in the 2014-2016 Long-Term Incentive Plan were granted 380,064 stock options which will vest one-third each year through February 2017. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

 

     2013     2014  

Risk-free interest rate

     1.17     2.00

Dividend yield

     1.7     1.8

Expected volatility of the Company’s common stock

     0.646        0.640   

Expected life in years

     6.0        6.0   

The weighted average fair value of options granted in 2013 and 2014 was $12.97 and $12.26, respectively.

The following table provides details of the stock option activity for the nine months ended September 30, 2014:

 

     Number of  
     Shares  

Outstanding at January 1, 2014

     1,710,244   

Granted

     380,064   

Exercised

     (195,631

Expired

     (53,000

Cancelled

     (24,641
  

 

 

 

Outstanding at September 30, 2014

     1,817,036   

Exercisable

     1,043,873   

 

18


Restricted Stock Units (RSUs)

The following table provides details of the nonvested RSU activity for the nine months ended September 30, 2014:

 

     Number of  
     Restricted  
     Units  

Nonvested at January 1, 2014

     60,686   

Granted

     166,500   

Vested

     (29,028

Accrued dividend equivalents

     1,132   
  

 

 

 

Nonvested at September 30, 2014

     199,290   
  

 

 

 

Performance Stock Units (PSUs)

Executives participating in the Company’s Long-Term Incentive Plan for the plan year 2012-2014 earn PSUs and cash. Any units and cash earned during 2012, 2013 and 2014 will vest at December 31, 2014.

Executives participating in the Company’s Long-Term Incentive Plan for the plan year 2013-2015 earn PSUs and cash. Any units and cash earned during 2013 and 2014 will vest at December 31, 2015.

Executives participating in the Company’s Long-Term Incentive Plan for the plan year 2014-2016 earn PSUs and cash. Any units and cash earned during 2014 will vest at December 31, 2016.

The following table provides details of the nonvested PSUs under the Company’s Long-Term Incentive Plans:

 

Performance stock units outstanding at January 1, 2014

     156,772   

Cancelled

     (3,128

Accrued dividend equivalents

     1,952   
  

 

 

 

Performance stock units outstanding at September 30, 2014

     155,596   
  

 

 

 

The Company’s RSUs and PSUs are not participating securities. These units will be converted into shares of Company common stock in accordance with the distribution date indicated in the agreements. RSUs earn dividend equivalents from the time of the award until distribution is made in common shares. PSUs earn dividend equivalents from the time the units have been earned based upon Company performance metrics, until distribution is made in common shares. Dividend equivalents are only earned subject to vesting of the underlying RSUs or PSUs, accordingly, such units do not represent participating securities.

 

19


9. Pensions and Postretirement Benefits Other than Pensions

The following tables disclose the amount of net periodic benefit costs for the Company’s defined benefit plans and other postretirement benefits relating to continuing operations:

 

     Pension Benefits - Domestic  
     Three months ended September 30     Nine months ended September 30  
     2013     2014     2013     2014  

Components of net periodic benefit cost:

        

Service cost

   $ 2,970      $ 2,440      $ 8,909      $ 7,320   

Interest cost

     9,657        10,711        28,972        32,132   

Expected return on plan assets

     (11,889     (13,136     (35,666     (39,407

Amortization of actuarial loss

     11,086        7,005        33,257        21,016   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 11,824      $ 7,020      $ 35,472      $ 21,061   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Pension Benefits - International  
     Three months ended September 30     Nine months ended September 30  
     2013     2014     2013     2014  

Components of net periodic benefit cost:

        

Service cost

   $ 3      $ 3      $ 9      $ 9   

Interest cost

     3,884        4,972        11,611        14,907   

Expected return on plan assets

     (3,716     (5,063     (11,108     (15,178

Amortization of actuarial loss

     1,627        2,142        4,865        6,422   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 1,798      $ 2,054      $ 5,377      $ 6,160   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Other Postretirement Benefits  
     Three months ended September 30     Nine months ended September 30  
     2013     2014     2013     2014  

Components of net periodic benefit cost:

        

Service cost

   $ 953      $ 601      $ 2,860      $ 1,803   

Interest cost

     2,698        2,827        8,094        8,479   

Amortization of prior service cost

     (142     (141     (425     (424

Amortization of actuarial loss

     478        —          1,436        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 3,987      $ 3,287      $ 11,965      $ 9,858   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

20


10. Stockholders’ Equity

The following table reconciles the beginning and end of the period equity accounts attributable to Cooper Tire & Rubber Company and to the noncontrolling shareholders’ interests:

 

           Total Equity  
                 Noncontrolling        
     Redeemable     Total     Shareholder        
     Noncontrolling     Parent     Interest in     Total  
     Shareholder     Stockholders’     Consolidated     Stockholders’  
     Interest     Equity     Subsidiary     Equity  

Balance at December 31, 2013

   $ —        $ 990,866      $ 166,759      $ 1,157,625   

Reclassification of redeemable noncontrolling shareholder interest

     152,250        (28,285     (123,965     (152,250

Net income

     17,173        131,315        2,635        133,950   

Other comprehensive income

     (988     10,342        (1,066     9,276   

Accelerated stock repurchase program

       (200,000       (200,000

Dividends payable to noncontrolling shareholders

     —          —          (2,570     (2,570

Stock compensation plans, including tax benefit of $234

     —          8,724        —          8,724   

Cash dividends—$.315 per share

     —          (19,432     —          (19,432
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 168,435      $ 893,530      $ 41,793      $ 935,323   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

11. Changes in Cumulative Other Comprehensive Loss by Component

The following tables present the changes in Cumulative Other Comprehensive Loss by Component for the three- and nine-month periods ended September 30, 2014. All amounts are presented net of tax. Amounts in parentheses indicate debits.

 

     Three Months Ended September 30, 2014  
     Cumulative     Changes     Unrecognized        
     Currency     in the Fair     Postretirement        
     Translation     Value of     Benefit        
     Adjustment     Derivatives     Plans     Total  

July 1, 2014

   $ 61,440      $ (288   $ (462,721   $ (401,569

Other comprehensive income (loss) before reclassifications

     (12,456     3,632 (a)      5,435 (c)      (3,389

Amount reclassifed from accumulated other comprehensive loss

     —          (651 )(b)      5,931 (d)      5,280   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

     (12,456     2,981        11,366        1,891   
  

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2014

   $ 48,984      $ 2,693      $ (451,355   $ (399,678
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) This amount represents $5,808 of unrealized gains on cash flow hedges, net of tax of $2,176, that were recognized in Other Comprehensive Loss (see Footnote 5 - Fair Value of Financial Instruments for additional details).
(b) This amount represents $885 of gains on cash flow hedges, net of tax of $234, that were reclassified out of Cumulative Other Comprehensive Loss and are included in Other income on the Condensed Consolidated Statements of Income (see Footnote 5 - Fair Value of Financial Instruments for additional details).
(c) This amount represents $6,880 of Other Comprehensive Income, net of $1,445, that was recognized in Other Compenhensive Loss.
(d) This amount represents amortization of prior service credit of $141 and amortization of actuarial losses of ($9,147), net of tax of $3,075, that were reclassified out of Cumulative Other Comprehensive Loss and are included in the computation of net periodic benefit cost (see Footnote 9 - Pension and Postretirement Benefits Other than Pensions for additional details).

 

21


     Nine Months Ended September 30, 2014  
     Cumulative
Currency
Translation
Adjustment
    Changes in
the Fair
Value of
Derivatives
    Unrecognized
Postretirement
Benefit

Plans
    Total  

December 31, 2013

   $ 59,660      $ 1,615      $ (471,295   $ (410,020

Other comprehensive income (loss) before reclassifications

     (10,676     2,591 (a)      2,193 (c)      (5,892

Amount reclassifed from accumulated other comprehensive loss

     —          (1,513 )(b)      17,747 (d)      16,234   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (10,676     1,078        19,940        10,342   
  

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2014

   $ 48,984      $ 2,693      $ (451,355   $ (399,678
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) This amount represents $4,119 of unrealized gains on cash flow hedges, net of tax of $1,528, that were recognized in Other Comprehensive Loss (see Footnote 5 - Fair Value of Financial Instruments for additional details).
(b) This amount represents $2,185 of gains on cash flow hedges, net of tax of $672, that were reclassified out of Cumulative Other Comprehensive Loss and are included in Other income on the Condensed Consolidated Statements of Income (see Footnote 5 - Fair Value of Financial Instruments for additional details).
(c) This amount represents $2,760 of Other Comprehensive Income, net of $567, that was recognized in Other Compenhensive Loss.
(d) This amount represents amortization of prior service credit of $424 and amortization of actuarial losses of ($27,438), net of tax of $9,267, that were reclassified out of Cumulative Other Comprehensive Loss and are included in the computation of net periodic benefit cost (see Footnote 9 - Pensions and Postretirement Benefits Other than Pensions for additional details).

 

12. Comprehensive Income Attributable to Noncontrolling Shareholders’ Interests

The following table provides the details of the comprehensive income attributable to noncontrolling shareholders’ interests:

 

     Three months ended September 30,     Nine months ended September 30,  
     2013      2014     2013      2014  

Net income attributable to noncontrolling shareholders’ interests

   $ 3,469       $ 6,938      $ 16,340       $ 19,808   

Other comprehensive income:

          

Currency translation adjustments

     327         (1,081     2,078         (2,054
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income attributable to noncontrolling shareholders’ interests

   $ 3,796       $ 5,857      $ 18,418       $ 17,754   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

22


13. Product Warranty Liabilities

The Company provides for the estimated cost of product warranties at the time revenue is recognized based primarily on historical return rates, estimates of the eligible tire population and the value of tires to be replaced. The following table summarizes the activity in the Company’s product warranty liabilities:

 

     2013     2014  

Reserve at January 1

   $ 30,139      $ 30,853   

Additions

     15,032        13,983   

Payments

     (13,350     (14,886
  

 

 

   

 

 

 

Reserve at September 30

   $ 31,821      $ 29,950   
  

 

 

   

 

 

 

 

14. Contingent Liabilities

Products Liability Claims

The Company is a defendant in various products liability claims brought in numerous jurisdictions in which individuals seek damages resulting from motor vehicle accidents allegedly caused by defective tires manufactured by the Company. Each of the products liability claims faced by the Company generally involve different types of tires, models and lines, different circumstances surrounding the accident such as different applications, vehicles, speeds, road conditions, weather conditions, driver error, tire repair and maintenance practices, service life conditions, as well as different jurisdictions and different injuries. In addition, in many of the Company’s products liability lawsuits the plaintiff alleges that his or her harm was caused by one or more co-defendants who acted independently of the Company. Accordingly, both the claims asserted and the resolutions of those claims have an enormous amount of variability. The aggregate amount of damages asserted at any point in time is not determinable since often times when claims are filed, the plaintiffs do not specify the amount of damages. Even when there is an amount alleged, at times the amount is wildly inflated and has no rational basis.

The fact that the Company is a defendant in products liability lawsuits is not surprising given the current litigation climate, which is largely confined to the United States. However, the fact that the Company is subject to claims does not indicate that there is a quality issue with the Company’s tires. The Company sells approximately 30 to 35 million passenger, light truck, SUV, radial medium truck and motorcycle tires per year in North America. The Company estimates that approximately 300 million Company-produced tires – made up of thousands of different specifications – are still on the road in North America. While tire disablements do occur, it is the Company’s and the tire industry’s experience that the vast majority of tire failures relate to service-related conditions, which are entirely out of the Company’s control – such as failure to maintain proper tire pressure, improper maintenance, road hazard and excessive speed.

The Company accrues costs for products liability at the time a loss is probable and the amount of loss can be estimated. The Company believes the probability of loss can be established and the amount of loss can be estimated only after certain minimum information is available, including verification that Company-produced products were involved in the incident giving rise to the claim, the condition of the product purported to be involved in the claim, the nature of the incident giving rise to the claim and the extent of the purported injury or damages. In cases where such information is known, each products liability claim is evaluated based on its specific facts and circumstances. A judgment is then made to determine the requirement for establishment or revision of an accrual for any potential liability. The liability often cannot be determined with precision until the claim is resolved.

 

23


Pursuant to applicable accounting rules, the Company accrues the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another. The Company uses a range of losses because an average cost would not be meaningful since the products liability claims faced by the Company are unique and widely variable, and accordingly, the resolutions of those claims have an enormous amount of variability. The costs have ranged from zero dollars to $33 million in one case with no “average” that is meaningful. No specific accrual is made for individual unasserted claims or for premature claims, asserted claims where the minimum information needed to evaluate the probability of a liability is not yet known. However, an accrual for such claims based, in part, on management’s expectations for future litigation activity and the settled claims history is maintained. Because of the speculative nature of litigation in the U.S., the Company does not believe a meaningful aggregate range of potential loss for asserted and unasserted claims can be determined. The Company’s experience has demonstrated that its estimates have been reasonably accurate and, on average, cases are settled at amounts close to the reserves established. However, it is possible an individual claim from time to time may result in an aberration from the norm and could have a material impact.

The Company determines its reserves using the number of incidents expected during a year. During the third quarter of 2014, the Company increased its products liability reserve by $14,037. The addition of another year of self-insured incidents accounted for $12,331 of this increase. Settlements and changes in the amount of reserves for cases where sufficient information is known to estimate a liability increased by $1,706.

During the first nine months of 2014, the Company increased its products liability reserve by $40,499. The addition of another year of self-insured incidents accounted for $36,993 of this increase. The Company revised its estimates of future settlements for unasserted and premature claims. These revisions decreased the reserve by $600. Finally, settlements and changes in the amount of reserves for cases where sufficient information is known to estimate a liability increased by $4,106.

The time frame for the payment of a products liability claim is too variable to be meaningful. From the time a claim is filed to its ultimate disposition depends on the unique nature of the case, how it is resolved – claim dismissed, negotiated settlement, trial verdict and appeals process – and is highly dependent on jurisdiction, specific facts, the plaintiff’s attorney, the court’s docket and other factors. Given that some claims may be resolved in weeks and others may take five years or more, it is impossible to predict with any reasonable reliability the time frame over which the accrued amounts may be paid.

The Company paid $5,701 during the third quarter of 2014 to resolve cases and claims and has paid $38,960 through the first nine months of 2014. The Company’s products liability reserve balance at December 31, 2013 totaled $189,513 (the current portion of $70,472 is included in Accrued liabilities and the long-term portion is included in Other long-term liabilities on the Condensed Consolidated Balance Sheets). The products liability reserve balance at September 30, 2014 totaled $191,052 (current portion of $70,314).

The products liability expense reported by the Company includes amortization of insurance premium costs, adjustments to settlement reserves and legal costs incurred in defending claims against the Company offset by recoveries of legal fees. Legal costs are expensed as incurred and products liability insurance premiums are amortized over coverage periods.

For the three-month periods ended September 30, 2013 and 2014, products liability expenses totaled $25,722 and $21,227, respectively. For the nine-month periods ended September 30, 2013 and 2014, products liability expenses totaled $67,924 and $62,039, respectively. Products liability expenses are included in cost of goods sold in the Condensed Consolidated Statements of Income.

 

24


Certain Litigation Related to the Apollo Merger

Following the announcement of the proposed acquisition of the Company by wholly owned subsidiaries of Apollo Tyres Ltd. (the “Apollo entities”) in June 2013, alleged stockholders of the Company filed putative class action lawsuits in state courts in Delaware and Ohio. These lawsuits, captioned In re Cooper Tire & Rubber Co. Stockholders Litigation, No. 9658 VCL and Auld v. Cooper Tire & Rubber Co., et al., No. 2013 CV 293, alleged that the directors of the Company breached their fiduciary duties to the Company’s stockholders by agreeing to enter into the proposed transaction for an allegedly unfair price and as the result of an allegedly unfair process. The lawsuits sought, among other things, declaratory and injunctive relief. As discussed below, on December 30, 2013, the Company terminated the merger agreement with the Apollo entities. Following the termination of the merger agreement, the plaintiffs voluntarily dismissed the Delaware and Ohio lawsuits in April 2014.

On October 4, 2013, the Company filed a complaint in the Court of Chancery of the State of Delaware, captioned Cooper Tire Co. v. Apollo (Mauritius) Holdings Pvt. Ltd., et al., No. 8980- VCG, asking that the Apollo entities be required to use their reasonable efforts to close the then pending merger transaction as expeditiously as possible and also seeking, among other things, declaratory relief and damages. On October 14, 2013, the Apollo entities filed counterclaims against the Company seeking declaratory and injunctive relief.

On November 8, 2013, after expedited proceedings, the court found that the Apollo entities had not materially breached the merger agreement. On December 19, 2013, the Apollo entities moved for an entry of declaratory judgment seeking a declaration that the conditions to closing the then pending transaction were not satisfied before the November 2013 trial. On December 30, 2013, the Company terminated the merger agreement with the Apollo entities, and requested payment of the reverse termination fee, which the Apollo entities have refused to do. On October 31, 2014, the court granted Apollo’s motion for declaratory judgment.

The Company regularly reviews the probable outcome of such legal proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and accrues for such legal proceedings at the time a loss is probable and the amount of the loss can be estimated.

An estimate of any such loss cannot be made at this time, as no claims for damages against the Company have been asserted and the outcome of these pending proceedings cannot be predicted with certainty. The Company believes that based upon information currently available, any liabilities that may result from these proceedings are not reasonably likely to have a material adverse effect on the Company’s liquidity, financial condition or results of operations.

Federal Securities Litigation

On January 17, 2014, alleged stockholders of the Company filed a putative class-action lawsuit against the Company and certain of its officers in the United States District Court for the District of Delaware relating to the terminated Apollo transaction. That lawsuit, captioned OFI Risk Arbitrages, et al. v. Cooper Tire & Rubber Co., et al., No. 1:14-cv-00068-LPS, generally alleges that the Company and certain officers violated the federal securities laws by issuing allegedly misleading disclosures in connection with the terminated transaction and seeks, among other things, damages. The Company and its officers believe that the allegations against them lack merit and intend to defend the lawsuit vigorously.

 

25


The Company regularly reviews the probable outcome of such legal proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and accrues for these proceedings at the time a loss is probable and the amount of the loss can be estimated.

This case has recently been filed and is at an early stage. As a result, the outcome of these pending proceedings cannot be predicted with certainty and an estimate of any such loss cannot be made at this time. The Company believes that based upon information currently available, any liabilities that may result from these proceedings are not reasonably likely to have a material adverse effect on the Company’s liquidity, financial condition or results of operations.

Stockholder Derivative Litigation

On February 24, March 6, and April 17, 2014, purported stockholders of the Company filed derivative actions on behalf of the Company in the U.S. District Court for the Northern District of Ohio and the U.S. District Court for the District of Delaware against certain current officers and employees and the then current members of the Company’s board of directors; the Ohio lawsuits were later consolidated into a single proceeding and were subsequently transferred to the U.S. District Court for the District of Delaware. The Company is named as a nominal defendant in the lawsuits, and the lawsuits seek recovery for the benefit of the Company. The lawsuits, captioned Bui, et al. v. Armes, et al., No.1:14-cv-1272 (D. Del.) and Fitzgerald v. Armes, et al., No. 1:14-cv-479 (D. Del.), allege that the defendants breached their fiduciary duties to the Company by issuing allegedly misleading disclosures in connection with the terminated merger transaction. The lawsuits also allege that the defendants violated Section 14(a) of the Securities Exchange Act of 1934 by means of the same allegedly misleading disclosures. The complaints also variously assert claims for waste of corporate assets, unjust enrichment, “gross mismanagement” and “abuse of control.” The complaints seek, among other things, unspecified money damages from the defendants, injunctive relief and an award of attorney’s fees. A purported shareholder of the Company has also submitted a demand to the Company’s board of directors that it cause the Company to bring claims against certain of the Company’s officers and directors for the matters alleged in the shareholder derivative lawsuits.

The Company regularly reviews the probable outcome of such legal proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and accrues for such legal proceedings at the time a loss is probable and the amount of the loss can be estimated.

These cases have recently been filed and are at an early stage and they do not assert claims against the Company. The outcome of these pending proceedings cannot be predicted with certainty and an estimate of any loss cannot be made at this time. The Company believes that based upon information currently available, any liabilities that may result from these proceedings are not reasonably likely to have a material adverse effect on the Company’s liquidity, financial condition or results of operations.

Other Litigation

In addition to the proceedings described above, the Company is involved in various other legal proceedings arising in the ordinary course of business. The Company regularly reviews the probable outcome of these proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and accrues for these proceedings at the time a loss is probable and the amount of the loss can be estimated. Although the outcome of these pending proceedings cannot be predicted with certainty and an estimate of any such loss cannot be made, the Company believes that any liabilities that may result from these proceedings are not reasonably likely to have a material adverse effect on the Company’s liquidity, financial condition or results of operations.

 

26


15. Income Taxes

For the quarter ended September 30, 2014, the Company recorded income tax expense of $26,740 (effective rate of 32.5 percent excluding discrete items) compared with $17,845 (effective rate of 44.7 percent excluding discrete items) for the comparable period in 2013. For the nine-month period ended September 30, 2014, the Company recorded income tax expense of $75,093 (effective rate of 33.0 percent excluding discrete items) compared with $65,104 (effective rate of 32.9 percent excluding discrete items) for the comparable period in 2013. The 2014 quarter and nine-month period income tax expense is calculated using the forecasted multi-jurisdictional annual effective tax rates to determine a blended annual effective tax rate. This rate differs from the U.S. federal statutory rate of 35 percent primarily because of the projected mix of earnings in international jurisdictions with lower tax rates, partially offset by losses in jurisdictions with no tax benefit due to valuation allowances. Income tax expense for the quarter and nine-month period is higher due primarily to increased earnings in both the U.S. and non-U.S. jurisdictions compared with the same periods of the prior year.

Tax expense for the quarter and nine-month periods ended September 30, 2014 included discrete tax expense of $298 and $400, respectively. This primarily includes amounts recorded for U.S. return to provision differences and additional expense for uncertain tax positions. For the quarter and nine-month periods ended September 30, 2013, income tax expense included a discrete tax expense of $8,389 and $8,292, respectively. This primarily includes amounts recorded for U.S. return to provision differences, the expiration of unused state tax credits, the unfavorable impact on deferred tax assets from a U.K. statutory tax rate reduction and additional expense for uncertain tax positions.

The Company continues to maintain a valuation allowance pursuant to ASC 740, “Accounting for Income Taxes,” against a portion of its U.S. and non-U.S. deferred tax asset position, as it cannot assure the utilization of these assets before they expire. In the U.S., the Company has offset a portion of its deferred tax asset relating primarily to a capital loss carryforward by a valuation allowance of $22,072. In addition, the Company has recorded valuation allowances of $9,907 relating to non-U.S. net operating losses for a total valuation allowance of $31,979. In conjunction with the Company’s ongoing review of its actual results and anticipated future earnings, the Company will continue to reassess the possibility of releasing all or part of the valuation allowances currently in place when they are deemed to be realizable.

The Company maintains an ASC 740-10, “Accounting for Uncertainty in Income Taxes,” liability for unrecognized tax benefits for permanent and temporary book/tax differences. At September 30, 2014, the Company’s liability, exclusive of interest, totals approximately $6,764. The Company accrued an immaterial amount of interest expense related to these unrecognized tax benefits during the quarter.

The Company and its subsidiaries are subject to income tax examination in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and foreign tax examinations by income and franchise tax authorities for years prior to 2007.

 

27


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) presents information related to the consolidated results of the operations of the Company, a discussion of past results for both of the Company’s segments, future outlook for the Company and information concerning the liquidity and capital resources of the Company. The Company’s future results may differ materially from those indicated herein, for reasons including those indicated under the forward-looking statements heading below.

Consolidated Results of Operations

 

     Three months ended September 30     Nine months ended September 30  
(Dollar amounts in millions except per share amounts)    2013     Change     2014     2013     Change     2014  

Revenues:

            

Americas Tire

            

External customers

   $ 618.8        9.5   $ 677.4      $ 1,812.8        1.9   $ 1,846.4   

Intercompany

     14.2        16.2     16.5        45.7        10.1     50.3   
  

 

 

     

 

 

   

 

 

     

 

 

 
     633.0        9.6     693.9        1,858.5        2.1     1,896.7   

International Tire

            

External customers

     213.6        13.6     242.6        765.4        -0.9     758.8   

Intercompany

     50.9        39.1     70.8        193.3        -1.0     191.3   
  

 

 

     

 

 

   

 

 

     

 

 

 
     264.5        18.5     313.4        958.7        -0.9     950.1   

Eliminations

     (65.1     33.9     (87.2     (239.0     1.1     (241.6
  

 

 

     

 

 

   

 

 

     

 

 

 

Net sales

   $ 832.4        10.5   $ 920.1      $ 2,578.2        1.0   $ 2,605.2   
  

 

 

     

 

 

   

 

 

     

 

 

 

Segment profit (loss)

            

Americas Tire

   $ 38.8        94.8   $ 75.6      $ 169.4        23.4   $ 209.1   

International Tire

     3.1        635.5     22.8        62.3        16.2     72.4   

Eliminations

     1.7        -164.7     (1.1     2.9        -182.8     (2.4

Unallocated corporate charges

     (15.7     -49.7     (7.9     (40.9     -21.3     (32.2
  

 

 

     

 

 

   

 

 

     

 

 

 

Operating profit

     27.9        220.4     89.4        193.7        27.5     246.9   

Interest expense

     (6.7     6.0     (7.1     (21.0     0.0     (21.0

Interest income

     0.3        0.0     0.3        0.7        57.1     1.1   

Other income (expense)

     (0.3     333.3     (1.3     (0.6     33.3     (0.8
  

 

 

     

 

 

   

 

 

     

 

 

 

Income before income taxes

     21.2        283.5     81.3        172.8        30.9     226.2   

Income tax expense

     17.8        50.0     26.7        65.1        15.4     75.1   
  

 

 

     

 

 

   

 

 

     

 

 

 

Net Income

     3.4        1505.9     54.6        107.7        40.3     151.1   

Noncontrolling shareholders’ interests

     (3.5     97.1     (6.9     (16.3     21.5     (19.8
  

 

 

     

 

 

   

 

 

     

 

 

 

Net income (loss) attributable to Cooper Tire & Rubber Company

   $ (0.1     n/m      $ 47.7      $ 91.4        43.7   $ 131.3   
  

 

 

     

 

 

   

 

 

     

 

 

 

Basic earnings per share

   $ —          $ 0.79      $ 1.44        $ 2.10   
  

 

 

     

 

 

   

 

 

     

 

 

 

Diluted earnings per share

   $ —          $ 0.77      $ 1.42        $ 2.07   
  

 

 

     

 

 

   

 

 

     

 

 

 

Consolidated net sales for the three-month period ended September 30, 2014 were $920 million, an increase of $88 million from the comparable period one year ago. The increase in net sales for the third quarter of 2014 compared with the third quarter of 2013 was primarily the result of increased unit volumes ($133 million), partially offset by less favorable pricing and mix ($49 million). The third quarter of 2013 included $122 million in reduced unit volumes across both segments associated with the labor issues at CCT. The International Tire Operations segment experienced favorable exchange rates in the third quarter of 2014 ($4 million).

 

28


The Company recorded operating profit in the third quarter of 2014 of $89 million, an increase of $61 million compared with the third quarter of 2013. Lower raw material costs ($86 million) were partially offset by unfavorable pricing and mix ($57 million). Unit volumes increased ($25 million) in the third quarter of 2014 compared with the third quarter of 2013, which included $22 million of reduced volume in 2013 as a result of the labor issues at CCT. Products liability charges ($5 million) and selling, general and administrative costs ($3 million) decreased compared with the same period in 2013. In the third quarter of 2013, the Company incurred $5 million of selling, general and administrative costs associated with the then-pending merger agreement which did not recur in 2014. Other operating costs were unfavorable ($3 million) compared with the same period in 2013.

Manufacturing costs were $2 million favorable when compared with the third quarter of 2013. The third quarter of 2013 included $13 million of costs associated with production curtailments in the Americas Tire Operations segment and $7 million in manufacturing inefficiencies in the International Tire Operations segment related to the CCT labor issues. The Americas Tire Operations segment incurred manufacturing inefficiencies in the third quarter of 2014 as it is in the process of reconfiguring its manufacturing plants to increase production of higher value, higher margin tires while reducing the volume of lower value, lower margin tires in response to accelerated demand for the higher value tires. It is expected to take until mid-2015 to better match production mix to demand. Until that is achieved, certain plants in North America will run at a sub-optimal capacity which will affect cost efficiency as it did in the third quarter.

Consolidated net sales for the nine-month period ended September 30, 2014 were $2,605 million, an increase of $27 million from the comparable period one year ago. The increase in net sales for the first nine months of 2014 compared with the first nine months of 2013 was primarily the result of increased unit volumes ($234 million), partially offset by less favorable pricing and mix ($228 million). The third quarter of 2013 included $122 million in reduced unit volumes across both segments associated with the labor issues at CCT. The International Tire Operations segment experienced favorable exchange rates in the first nine months of 2014 ($21 million).

The Company recorded operating profit in the first nine months of 2014 of $247 million, an increase of $53 million compared with the first nine months of 2013. Lower raw material costs ($220 million) were offset by unfavorable pricing and mix ($236 million). Unit volumes increased ($46 million) in the first nine months of 2014 compared with the first nine months of 2013, which included $22 million of reduced volume in 2013 as a result of the labor issues at CCT. Products liability charges ($6 million) and selling, general and administrative costs ($7 million) decreased compared with the same period in 2013. In the first nine months of 2013, the Company incurred $9 million of selling, general and administrative costs associated with the then-pending merger agreement which did not recur in 2014. Other operating costs, including increased distribution costs, were unfavorable ($10 million) compared with the same period in 2013.

Manufacturing costs were $20 million favorable when compared with the first nine months of 2013. The first nine months of 2013 included $23 million of costs associated with production curtailments in the Americas Tire Operations segment and $7 million in manufacturing inefficiencies in the International Tire Operations segment related to the CCT labor issues. The Americas Tire Operations segment incurred manufacturing inefficiencies through the first nine months of 2014 for the reason cited above.

The Company experienced decreases in the costs of certain of its principal raw materials during the first nine months of 2014 compared with the comparable period of 2013. The principal raw materials for the Company include natural rubber, synthetic rubber, carbon black, chemicals and steel reinforcement components. Approximately 65 percent of the Company’s raw materials are petroleum-based. Substantially all U.S. inventories have been valued using the LIFO method of inventory costing which accelerates the impact to cost of goods sold from changes to raw material prices.

The Company strives to assure raw material and energy supply and to obtain the most favorable pricing possible. For natural rubber and natural gas, procurement is managed through a combination of buying forward of production requirements and utilizing the spot market. For other principal materials, procurement arrangements include supply agreements that may contain formula-based pricing based on commodity indices, multi-year agreements or spot purchase contracts. While the Company uses these arrangements to satisfy normal manufacturing demands, the pricing volatility in these commodities contributes to the difficulty in managing the costs of raw materials.

 

29


Products liability expenses totaled $21 million and $26 million in the third quarter of 2014 and 2013, respectively. Products liability expenses totaled $62 million and $68 million in the first nine months of 2014 and 2013, respectively. The change in the liability results from claim settlements and adjustments to existing reserves based on the Company’s quarterly comprehensive review of outstanding claims. Additional information related to the Company’s accounting for products liability costs appears in the Notes to the Condensed Consolidated Financial Statements.

Selling, general, and administrative expenses were $68 million in the third quarter of 2014 (7.4 percent of net sales) and $69 million in the third quarter of 2013 (8.3 percent of net sales). For the nine-month period ended September 30, 2014, selling, general and administrative expenses were $206 million (7.9 percent of net sales) compared to $212 million (8.2 percent of net sales) for the comparable period of 2013. The Company’s continued investment in Cooper brands globally was offset by the absence of expenses relating to the then-pending merger agreement with a wholly-owned subsidiary of Apollo in the third quarter of 2013. The year-to-date decrease in selling, general and administrative expenses is primarily attributable to the absence of Apollo transaction-related costs, partially offset by the Company’s continued investment in Cooper brands globally.

Interest expense, interest income and other income remained consistent for both the three-month and nine-month periods of 2014 and 2013.

For the quarter ended September 30, 2014, the Company recorded income tax expense of $27 million (effective rate of 32.5 percent excluding discrete items) compared with $18 million (effective rate of 44.7 percent excluding discrete items) for the comparable period in 2013. For the nine-month period ended September 30, 2014, the Company recorded income tax expense of $75 million (effective rate of 33.0 percent excluding discrete items) compared with $65 million (effective rate of 32.9 percent excluding discrete items) for the comparable period in 2013. The 2014 quarter and nine-month period income tax expense is calculated using the forecasted multi-jurisdictional annual effective tax rates to determine a blended annual effective tax rate. This rate differs from the U.S. federal statutory rate of 35 percent primarily because of the projected mix of earnings in international jurisdictions with lower tax rates, partially offset by losses in jurisdictions with no tax benefit due to valuation allowances. Income tax expense for the quarter and nine-month period is higher due primarily to increased earnings in both the U.S. and non-U.S. jurisdictions compared with the same periods of the prior year.

Tax expense for the quarter and nine-month periods ended September 30, 2014 included discrete tax expense of $0.3 million and $0.4 million, respectively. This primarily includes amounts recorded for U.S. return to provision differences and additional expense for uncertain tax positions. Tax expense for both the quarter and nine-month periods ended September 30, 2013 included discrete tax expense of $8 million. This primarily includes amounts recorded for U.S. return to provision differences, the expiration of unused state tax credits, the unfavorable impact on deferred tax assets from a U.K. statutory tax rate reduction and additional expense for uncertain tax positions.

The Company continues to maintain a valuation allowance pursuant to ASC 740, “Accounting for Income Taxes,” against a portion of its U.S. and non-U.S. deferred tax asset position, as it cannot assure the utilization of these assets before they expire. In the U.S., the Company has offset a portion of its deferred tax asset relating primarily to a capital loss carryforward by a valuation allowance of $22 million. In addition, the Company has recorded valuation allowances of $10 million relating to non-U.S. net operating losses for a total valuation allowance of $32 million. In conjunction with the Company’s ongoing review of its actual results and anticipated future earnings, the Company will continue to reassess the possibility of releasing all or part of the valuation allowances currently in place when they are deemed to be realizable.

 

30


Americas Tire Operations Segment

 

     Three months ended September 30     Nine months ended Septmber 30  
(Dollar amounts in millions)    2013     Change     2014     2013     Change     2014  

Net sales

   $ 633.0        9.6   $ 693.9      $ 1,858.5        2.1   $ 1,896.7   

Operating profit

   $ 38.8        94.8   $ 75.6      $ 169.4        23.4   $ 209.1   

Operating margin

     6.1     4.8 points        10.9     9.1     1.9 points        11.0

United States unit shipments changes:

            

Passenger tires

            

Segment

       10.5         6.0  

RMA members

       0.2         1.3  

Total Industry

       3.1         4.5  

Light truck tires

            

Segment

       10.9         16.8  

RMA members

       1.1         4.2  

Total Industry

       0.0         3.6  

Total light vehicle tires

            

Segment

       10.6         8.1  

RMA members

       0.3         1.6  

Total Industry

       2.7         4.4  

Total segment unit sales change

       11.1         8.7  

The source of this information is the Rubber Manufacturers Association (“RMA”) and internal sources.

Overview

The North American Tire segment has been renamed the Americas Tire Operations segment to better reflect the Company’s expanding presence in Central and South America. The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in the U.S. replacement market. The segment has a joint venture manufacturing operation in Mexico, Corporacion de Occidente SA de CV (“COOCSA”) which supplies passenger car tires to the U.S., Central American and South American markets. The segment also distributes tires for racing, medium truck and motorcycles that are manufactured by the Company’s International Tire Operations segment. Major distribution channels and customers include independent tire dealers, wholesale distributors, regional and national retail tire chains, and large retail chains that sell tires as well as other automotive products. The segment does not currently sell its products directly to end users, except through three Company-owned retail stores. The segment sells a limited number of tires to original equipment manufacturers.

 

31


Sales

Net sales of the Americas Tire Operations segment for the third quarter of 2014 increased $61 million, or 9.6 percent, from the third quarter of 2013. The increase in sales was a result of higher unit volumes ($82 million), partially offset by unfavorable pricing and mix ($21 million). The third quarter of 2013 included $29 million in reduced unit volumes associated with the labor issues at CCT. Unit shipments for the segment increased 11.1 percent compared with the third quarter of 2013. In the U.S., the segment’s unit shipments of total light vehicle tires increased 10.6 percent in the third quarter of 2014 compared with the third quarter of 2013. This increase compares with a 0.3 percent increase in total light vehicle shipments experienced by the members of the Rubber Manufacturers Association (“RMA”), and a 2.7 percent increase in total light vehicle shipments experienced for the total industry (which includes an estimate for non-RMA members).

Net sales of the Americas Tire Operations segment for the first nine months of 2014 increased $38 million, or 2.1 percent, from the first nine months of 2013. The increase in sales was a result of higher unit volumes ($173 million), partially offset by unfavorable pricing and mix ($135 million). The first nine months of 2013 included $29 million in reduced unit volumes associated with the labor issues at CCT. Unit shipments for the segment increased 8.7 percent compared with the nine-month period ended September 30, 2013. In the U.S., the segment’s unit shipments of total light vehicle tires increased 8.1 percent in the first nine months of 2014 compared with the comparable period of 2013. This increase compares with a 1.6 percent increase in total light vehicle shipments experienced by the members of the RMA, and a 4.4 percent increase in total light vehicle shipments experienced for the total industry.

Operating Profit

Operating profit for the segment increased $37 million to $76 million in the third quarter of 2014 compared with the third quarter of 2013. Lower raw material costs ($55 million) were partially offset by unfavorable pricing and mix ($27 million). Unit volumes increased ($14 million) in the third quarter of 2014 compared with the third quarter of 2013, which included $6 million of reduced volume as a result of the labor issues at CCT. Products liability charges were lower ($5 million) compared with the same period in 2013. Selling, general and administrative costs increased ($6 million) compared with the third quarter of 2013, primarily as a result of increased investment in the Cooper brand. Other operating costs, including increased distribution costs, were unfavorable ($4 million) compared with the same period in 2013.

Manufacturing costs were comparable to the third quarter of 2013. The third quarter of 2013 included $13 million of costs associated with production curtailments. The segment incurred manufacturing inefficiencies in the third quarter of 2014 related to the ongoing reconfiguration of its plants as discussed above.

The segment recorded operating profit in the first nine months of 2014 of $209 million, an increase of $40 million compared with the first nine months of 2013. Lower raw material costs ($140 million) were offset by unfavorable pricing and mix ($139 million). Unit volumes increased ($33 million) in the first nine months of 2014 compared with the first nine months of 2013, which included $6 million of reduced volume as a result of the labor issues at CCT. Products liability charges were lower ($6 million) compared with the same period in 2013. Selling, general and administrative costs increased ($6 million) compared with the first nine months of 2013, primarily as a result of increased investment in the Cooper brand. Other operating costs, including increased distribution costs, were unfavorable ($11 million) compared with the same period in 2013.

Manufacturing costs were $17 million favorable when compared with the first nine months of 2013. The first nine months of 2013 included $23 million of costs associated with production curtailments. The segment incurred manufacturing inefficiencies through the first nine months of 2014 related to the ongoing reconfiguration of its plants as discussed above.

The segment’s internally calculated raw material index of 194 during the quarter was a decrease of 7.7 percent from the same period of 2013. The raw material index decreased 2.4 percent from the quarter ended June 30, 2014.

 

32


International Tire Operations Segment

 

     Three months ended September 30     Nine months ended September 30  
(Dollar amounts in millions)    2013     Change     2014     2013     Change     2014  

Net sales

   $ 264.5        18.5   $ 313.4      $ 958.8        -0.9   $ 950.2   

Operating profit

   $ 3.1        635.5   $ 22.8      $ 62.3        16.2   $ 72.4   

Operating margin

     1.2     6.1 points        7.3     6.5     3.0 points        9.5

Unit sales change

       28.3         9.2  

Overview

The International Tire Operations segment has affiliated operations in the U.K., the PRC and Serbia. The U.K. entity manufactures and markets passenger car, light truck, motorcycle and racing tires and tire retread material for domestic and global markets. In the PRC, CCT manufactures and markets radial and bias medium truck tires as well as passenger and light truck tires for domestic and global markets. Cooper Kunshan Tire manufactures light vehicle tires and, under an agreement with the government of the PRC, these tires were exported to markets outside of the PRC through 2012. Beginning in 2013, tires produced at the facility have also been sold in the domestic market. The Serbian entity manufactures light vehicle tires primarily for the European markets. The majority of the tires manufactured by the segment are sold in the replacement market, with a relatively small percentage currently sold to OEMs.

Sales

Net sales of the International Tire Operations segment for the third quarter of 2014 increased $49 million, or 18.5 percent from the third quarter of 2013. The increase in sales was a result of higher unit volumes ($90 million), partially offset by unfavorable pricing and mix ($45 million). The segment experienced favorable exchange rates in the third quarter of 2014 ($4 million). The third quarter of 2013 included $116 million in reduced unit volumes associated with the labor issues at CCT.

Net sales of the International Tire Operations segment for the first nine months of 2014 decreased $9 million, or 1.0 percent from the first nine months of 2013. The decrease in sales was a result of unfavorable pricing and mix ($131 million), partially offset by higher unit volumes ($101 million). The segment experienced favorable exchange rates in the first nine months of 2014 ($21 million). The first nine months of 2013 included $116 million in reduced unit volumes associated with the labor issues at CCT.

Operating Profit

Operating profit for the segment increased $20 million to $23 million in the third quarter of 2014 from the third quarter of 2013. Lower raw material costs ($39 million) were partially offset by unfavorable pricing and mix ($35 million). Unit volumes increased ($11 million) in the third quarter of 2014 compared with the third quarter of 2013, which included $15 million of reduced volume as a result of the labor issues at CCT. Manufacturing costs were favorable ($2 million) compared with the third quarter of 2013, which included $7 million in manufacturing inefficiencies related to the CCT labor issues. Selling, general and administrative costs ($1 million) and other operating costs ($2 million) decreased compared with the third quarter of 2013.

 

33


The segment recorded operating profit in the first nine months of 2014 of $72 million, an increase of $10 million compared with the first nine months of 2013. Lower raw material costs ($98 million) were offset by unfavorable pricing and mix ($111 million). Unit volumes increased ($13 million) in the first nine months of 2014 compared with the first nine months of 2013, which included $15 million of reduced volume as a result of the labor issues at CCT. Manufacturing costs were favorable ($3 million) compared with the comparable period of 2013, which included $7 million in manufacturing inefficiencies related to the CCT labor issues. Selling, general and administrative costs ($5 million) and other operating costs ($2 million) decreased compared with the first nine months of 2013.

Outlook for Company

The Company expects to determine the long-term ownership of the CCT Joint Venture pursuant to the process set out in the Option Agreement as described above. The Company will continue to pursue its strategic goals for growth, including in China, regardless of changes to the long-term ownership of CCT.

Third quarter raw material costs were down by approximately 2 percent from the second quarter of 2014. Management anticipates fourth quarter raw material costs will be down slightly compared to the third quarter. The long-term raw material outlook is for costs to generally trend higher with periods of volatility.

The Company continues to invest in the business and expects capital expenditures for 2014 to range from $175 million to $185 million.

The Company expects its effective tax rate for 2014 will most likely be between 30 percent and 35 percent.

The Company expects the global tire markets remain highly competitive, with economies in varying stages of recovery or growth. The Company remains confident that its transformed business model and continued solid execution of its strategic plan will position it to perform well in the future. The Company continues to expect to meet or exceed industry unit volume growth in its largest markets this year.

Liquidity and Capital Resources

Generation and uses of cash – Operating activities generated $98 million of cash during the first nine months of 2014 compared with a cash generation of $123 million during the first nine months of 2013. Net income adjusted for non-cash charges provided $220 million and $238 million during the first nine months of 2013 and 2014, respectively. Changes in operating assets and liabilities consumed $97 million and $140 million during the first nine months of 2013 and 2014, respectively. The labor disruptions at CCT in 2013 impacted inventory and accounts payable balances. During 2014, these balances have returned to more normal levels. The increase in accounts and notes receivable is the result of strong third quarter 2014 sales, the offering of extended terms to some customers and the change in payment pattern of one large customer.

Net cash used in investing activities during the first nine months of 2013 and 2014 reflect capital expenditures of $135 million and $112 million, respectively.

During the first nine months of 2013, the Company’s subsidiaries repaid $7 million of short-term notes and during the first nine months of 2014, the Company’s subsidiaries issued $13 million of short-term notes. During the third quarter of 2014, the Company also borrowed $150 million on its domestic credit lines to partially fund the Accelerated Share Repurchase program. In both 2013 and 2014, the Company’s subsidiaries borrowed additional funds using long-term debt and repaid $19 million and $13 million of maturing long-term debt, respectively.

Dividends paid on the Company’s common shares during the first nine months of 2013 and 2014 were $20 million and $19 million, respectively. During the first nine months of 2013 and 2014, the Company paid $10 million and $3 million in dividends to noncontrolling shareholders, respectively.

Available cash, credit facilities and contractual commitments – At September 30, 2014, the Company had cash and cash equivalents of $336 million.

 

34


Domestically, the Company has a revolving credit facility with a consortium of four banks that provides up to $200 million based on available collateral and expires in July 2016. The Company also has an accounts receivable securitization facility with a $175 million limit with a June 2015 maturity. These credit facilities have no significant financial covenants until available credit is less than specified amounts. During the third quarter, the Company borrowed $150 million on these credit lines to partially fund the Accelerated Share Repurchase program. The Company’s additional borrowing capacity based on eligible collateral through use of its credit facility with its bank group and its accounts receivable securitization facility at September 30, 2014 was $131 million.

The Company’s affiliated operations in Asia have renewable credit lines that provide up to $219 million of borrowings and do not contain significant financial covenants. The additional borrowing capacity on the Asian credit lines totaled $156 million at September 30, 2014.

The Company believes that its cash and cash equivalent balances along with available cash from operating cash flows and credit facilities will be adequate to fund its needs, including working capital requirements, projected capital expenditures, including its portion of capital expenditures in partially-owned subsidiaries, and dividend goals. The Company also believes it has access to additional funds from capital markets to fund potential strategic initiatives.

The Company expects capital expenditures for 2014 to be in the $175 to $185 million range.

The following table summarizes long-term debt at September 30, 2014:

 

Parent company

  

8% unsecured notes due December 2019

   $ 173.6   

7.625% unsecured notes due March 2027

     116.9   

Capitalized leases and other

     8.1   
  

 

 

 
     298.6   

Consolidated Subsidiaries

  

4.269% unsecured notes due in 2014

     4.9   

4.274% to 4.70% unsecured notes due in 2015

     8.4   

4.00% to 6.15% unsecured notes due in 2016

     13.3   

4.40% to 6.15% unsecured notes due in 2017

     12.7   

5.46% and 5.63% secured notes due in 2016

     3.2   
  

 

 

 
     42.5   
  

 

 

 

Total debt

     341.1   

Less current maturities

     15.6   
  

 

 

 
   $ 325.5   
  

 

 

 

 

35


Contingencies

The Company is a defendant in various products liability claims brought in numerous jurisdictions in which individuals seek damages resulting from automobile accidents allegedly caused by defective tires manufactured by the Company. Each of the products liability claims faced by the Company generally involve different types of tires, models and lines, different circumstances surrounding the accident such as different applications, vehicles, speeds, road conditions, weather conditions, driver error, tire repair and maintenance practices, service life conditions, as well as different jurisdictions and different injuries. In addition, in many of the Company’s products liability lawsuits the plaintiff alleges that his or her harm was caused by one or more co-defendants who acted independently of the Company. Accordingly, both the claims asserted and the resolutions of those claims have an enormous amount of variability. The aggregate amount of damages asserted at any point in time is not determinable since often times when claims are filed, the plaintiffs do not specify the amount of damages. Even when there is an amount alleged, at times the amount is wildly inflated and has no rational basis.

Pursuant to applicable accounting rules, the Company accrues the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another. The Company uses a range of losses because an average cost would not be meaningful since the products liability claims faced by the Company are unique and widely variable, and accordingly, the resolutions of those claims have an enormous amount of variability. The costs have ranged from zero dollars to $33 million in one case with no “average” that is meaningful. No specific accrual is made for individual unasserted claims or for premature claims, asserted claims where the minimum information needed to evaluate the probability of liability is not yet known. However, an accrual for such claims based, in part, on management’s expectations for future litigation activity and the settled claims history is maintained. Because of the speculative nature of litigation in the United States, the Company does not believe a meaningful aggregate range of potential loss for asserted and unasserted claims can be determined. The Company’s experience has demonstrated that its estimates have been reasonably accurate and, on average, cases are resolved for amounts close to the reserves established. However, it is possible an individual claim from time to time may result in an aberration from the norm and could have a material impact.

Forward-Looking Statements

This report contains what the Company believes are “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995, regarding projections, expectations or matters that the Company anticipates may happen with respect to the future performance of the industries in which the Company operates, the economies of the United States and other countries, or the performance of the Company itself, which involve uncertainty and risk. Such “forward-looking statements” are generally, though not always, preceded by words such as “anticipates,” “expects,” “will,” “should, “ “believes,” “projects,” “intends,” “plans,” “estimates,” and similar terms that connote a view to the future and are not merely recitations of historical fact. Such statements are made solely on the basis of the Company’s current views and perceptions of future events, and there can be no assurance that such statements will prove to be true.

It is possible that actual results may differ materially from those projections or expectations due to a variety of factors, including but not limited to:

 

    volatility in raw material and energy prices, including those of rubber, steel, petroleum based products and natural gas and the unavailability of such raw materials or energy sources;

 

    the failure of the Company’s suppliers to timely deliver products in accordance with contract specifications;

 

    changes in economic and business conditions in the world;

 

    failure to implement information technologies or related systems, including failure by the Company to successfully implement an ERP system;

 

    increased competitive activity including actions by larger competitors or lower-cost producers;

 

    the failure to achieve expected sales levels;

 

    changes in the Company’s customer relationships, including loss of particular business for competitive or other reasons;

 

36


    the ultimate outcome of litigation brought against the Company, including stockholders lawsuits relating to the Apollo merger as well as products liability claims, in each case which could result in commitment of significant resources and time to defend and possible material damages against the Company or other unfavorable outcomes;

 

    changes to tariffs or the imposition of new tariffs or trade restrictions;

 

    changes in pension expense and/or funding resulting from investment performance of the Company’s pension plan assets and changes in discount rate, salary increase rate, and expected return on plan assets assumptions, or changes to related accounting regulations;

 

    government regulatory and legislative initiatives including environmental and healthcare matters;

 

    volatility in the capital and financial markets or changes to the credit markets and/or access to those markets;

 

    changes in interest or foreign exchange rates;

 

    an adverse change in the Company’s credit ratings, which could increase borrowing costs and/or hamper access to the credit markets;

 

    the risks associated with doing business outside of the United States;

 

    the failure to develop technologies, processes or products needed to support consumer demand;

 

    technology advancements;

 

    the inability to recover the costs to develop and test new products or processes;

 

    a disruption in, or failure of, the Company’s information technology systems, including those related to cyber security, could adversely affect the Company’s business operations and financial performance;

 

    the impact of labor problems, including labor disruptions at the Company, its joint ventures, including CCT, or at one or more of its large customers or suppliers;

 

    failure to attract or retain key personnel;

 

    consolidation among the Company’s competitors or customers;

 

    inaccurate assumptions used in developing the Company’s strategic plan or operating plans or the inability or failure to successfully implement such plans;

 

    failure to successfully integrate acquisitions into operations or their related financings may impact liquidity and capital resources;

 

    the ability to sustain operations at CCT, including obtaining financial and other operational data of CCT;

 

    changes in the Company’s relationship with its joint-venture partners, or changes in the ownership structure of its joint ventures, including changes resulting from the previously announced agreements between the Company and the CCT joint-venture partner, and any changes with respect to CCT’s production of Cooper-branded products;

 

    uncertainties associated with any proposed acquisition of the Company’s interest in CCT by its joint-venture partner, including uncertainties relating to the anticipated timing of filings and approvals relating to the transaction, the expected timing of completion of the transaction and the ability to complete the transaction;

 

    in the event the acquisition of the Company’s interest in CCT by its joint-venture partner is completed, the ability to find an alternative source for products supplied by CCT;

 

    the inability to obtain and maintain price increases to offset higher production or material costs;

 

    inability to adequately protect the Company’s intellectual property rights;

 

    inability to use deferred tax assets; and

 

    the ultimate outcome of legal actions brought by the Company against wholly-owned subsidiaries of Apollo Tyres Ltd.

It is not possible to foresee or identify all such factors. Any forward-looking statements in this report are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances.

Prospective investors are cautioned that any such statements are not a guarantee of future performance and actual results or developments may differ materially from those projected.

 

37


The Company makes no commitment to update any forward-looking statement included herein or to disclose any facts, events or circumstances that may affect the accuracy of any forward-looking statement.

Further information covering issues that could materially affect financial performance is contained under Risk Factors below and in the Company’s other periodic filings with the U. S. Securities and Exchange Commission (“SEC”).

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk at September 30, 2014, from those detailed in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2013.

 

Item 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports the Company files or submits as defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) to allow timely decisions regarding required disclosures.

The Company, under the supervision and with the participation of management, including the CEO and CFO, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as of September 30, 2014 (“Evaluation Date”). Based on its initial evaluation, the Company’s CEO and CFO concluded that its disclosure controls and procedures were effective as of the Evaluation Date.

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Part II. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

The Company is a defendant in various judicial proceedings arising in the ordinary course of business. A significant portion of these proceedings are products liability cases in which individuals involved in vehicle accidents seek damages resulting from allegedly defective tires manufactured by the Company. After reviewing all of these proceedings, and taking into account all relevant factors concerning them, the Company does not believe that any liabilities resulting from these proceedings are reasonably likely to have a material adverse effect on its liquidity, financial condition or results of operations in excess of amounts recorded at September 30, 2014. In the future, such costs could have a materially greater impact on the consolidated results of operations and financial position of the Company than in the past.

Certain Litigation Related to the Apollo Merger

Following the announcement of the proposed acquisition of the Company by wholly owned subsidiaries of Apollo Tyres Ltd. (the “Apollo entities”) in June 2013, alleged stockholders of the Company filed putative class action lawsuits in state courts in Delaware and Ohio. These lawsuits, captioned In re Cooper Tire & Rubber Co. Stockholders Litigation, No. 9658 VCL and Auld v. Cooper Tire & Rubber Co., et al., No. 2013 CV 293, alleged that the directors of the Company breached their fiduciary duties to the Company’s stockholders by agreeing to enter into the proposed transaction for an allegedly unfair price and as the result of an allegedly unfair process. The lawsuits sought, among other things, declaratory and injunctive relief. As discussed below, on December 30, 2013, the Company terminated the merger agreement with the Apollo entities. Following the termination of the merger agreement, the plaintiffs voluntarily dismissed the Delaware and Ohio lawsuits in April 2014.

 

38


On October 4, 2013, the Company filed a complaint in the Court of Chancery of the State of Delaware, captioned Cooper Tire Co. v. Apollo (Mauritius) Holdings Pvt. Ltd., et al., No. 8980- VCG, asking that the Apollo entities be required to use their reasonable efforts to close the then pending merger transaction as expeditiously as possible and also seeking, among other things, declaratory relief and damages. On October 14, 2013, the Apollo entities filed counterclaims against the Company seeking declaratory and injunctive relief.

On November 8, 2013, after expedited proceedings, the court found that the Apollo entities had not materially breached the merger agreement. On December 19, 2013, the Apollo entities moved for an entry of declaratory judgment seeking a declaration that the conditions to closing the then pending transaction were not satisfied before the November 2013 trial. On December 30, 2013, the Company terminated the merger agreement with the Apollo entities, and requested payment of the reverse termination fee, which the Apollo entities have refused to do. On October 31, 2014, the court granted Apollo’s motion for declaratory judgment.

The Company regularly reviews the probable outcome of such legal proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and accrues for such legal proceedings at the time a loss is probable and the amount of the loss can be estimated.

An estimate of any such loss cannot be made at this time, as no claims for damages against the Company have been asserted and the outcome of these pending proceedings cannot be predicted with certainty. The Company believes that based upon information currently available, any liabilities that may result from these proceedings are not reasonably likely to have a material adverse effect on the Company’s liquidity, financial condition or results of operations.

Federal Securities Litigation

On January 17, 2014 alleged stockholders of the Company filed a putative class-action lawsuit against the Company and certain of its officers in the United States District Court for the District of Delaware relating to the terminated Apollo transaction. That lawsuit, captioned OFI Risk Arbitrages, et al. v. Cooper Tire & Rubber Co., et al., No. 1:14-cv-00068-LPS, generally alleges that the Company and certain officers violated the federal securities laws by issuing allegedly misleading disclosures in connection with the terminated transaction and seeks, among other things, damages. The Company and its officers believe that the allegations against them lack merit and intend to defend the lawsuit vigorously.

The Company regularly reviews the probable outcome of such legal proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and accrues for these proceedings at the time a loss is probable and the amount of the loss can be estimated.

This case has recently been filed and is at an early stage. As a result, the outcome of these pending proceedings cannot be predicted with certainty and an estimate of any such loss cannot be made at this time. The Company believes that based upon information currently available, any liabilities that may result from these proceedings are not reasonably likely to have a material adverse effect on the Company’s liquidity, financial condition or results of operations.

 

39


Stockholder Derivative Litigation

On February 24, March 6, and April 17, 2014, purported stockholders of the Company filed derivative actions on behalf of the Company in the U.S. District Court for the Northern District of Ohio and the U.S. District Court for the District of Delaware against certain current officers and employees and the then current members of the Company’s board of directors; the Ohio lawsuits were later consolidated into a single proceeding and were subsequently transferred to the U.S. District Court for the District of Delaware. The Company is named as a nominal defendant in the lawsuits, and the lawsuits seek recovery for the benefit of the Company. The lawsuits, captioned Bui, et al. v. Armes, et al., No.1:14-cv-1272 (D. Del.) and Fitzgerald v. Armes, et al., No. 1:14-cv-479 (D. Del.), allege that the defendants breached their fiduciary duties to the Company by issuing allegedly misleading disclosures in connection with the terminated merger transaction. The lawsuits also allege that the defendants violated Section 14(a) of the Securities Exchange Act of 1934 by means of the same allegedly misleading disclosures. The complaints also variously assert claims for waste of corporate assets, unjust enrichment, “gross mismanagement” and “abuse of control.” The complaints seek, among other things, unspecified money damages from the defendants, injunctive relief and an award of attorney’s fees. A purported shareholder of the Company has also submitted a demand to the Company’s board of directors that it cause the Company to bring claims against certain of the Company’s officers and directors for the matters alleged in the shareholder derivative lawsuits.

The Company regularly reviews the probable outcome of such legal proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and accrues for such legal proceedings at the time a loss is probable and the amount of the loss can be estimated.

These cases have recently been filed and are at an early stage and they do not assert claims against the Company. The outcome of these pending proceedings cannot be predicted with certainty and an estimate of any loss cannot be made at this time. The Company believes that based upon information currently available, any liabilities that may result from these proceedings are not reasonably likely to have a material adverse effect on the Company’s liquidity, financial condition or results of operations.

 

Item 1A. RISK FACTORS

Some of the more significant risk factors related to the Company and its subsidiaries follow:

Pricing volatility for raw materials or commodities or an inadequate supply of key raw materials could result in increased costs and may significantly affect the Company’s profitability.

The pricing volatility for natural rubber, petroleum-based materials and other raw materials contributes to the difficulty in managing the costs of raw materials. Costs for certain raw materials used in the Company’s operations, including natural rubber, chemicals, carbon black, steel reinforcements and synthetic rubber remain highly volatile. Increasing costs for raw material supplies will increase the Company’s production costs and affect its margins if the Company is unable to pass the higher production costs on to its customers in the form of price increases. Further, if the Company is unable to obtain adequate supplies of raw materials in a timely manner for any reason, its operations could be interrupted or otherwise adversely affected.

The Company is facing heightened risks due to the current business environment.

Current global economic conditions may affect demand for the Company’s products, create volatility in raw material costs and affect the availability and cost of credit. These conditions also affect the Company’s customers and suppliers as well as the ultimate consumer.

Deterioration in the global macroeconomic environment or in specific regions could impact the Company and, depending upon the severity and duration of these factors, the Company’s profitability and liquidity position could be negatively impacted.

The Company’s competitors may also change their actions as a result of changes to the business environment, which could result in increased price competition and discounts, resulting in lower margins for the business.

 

40


The Company is facing risks related to disruptions at its CCT joint venture, changes in the Company’s ownership interests in CCT and changes in its relationship with its joint venture partner.

The Company has experienced work stoppages and other labor disruptions at CCT related to concerns regarding the then-pending merger agreement between the Apollo entities and the Company, including denying access to certain representatives of the Company and withholding certain business and financial information. On December 30, 2013, the Company terminated the merger agreement with the Apollo entities. Since this date, representatives of the Company regained access to the CCT facilities, including its business and financial information, and operations have returned to normal. Were labor or other disruptions at CCT to resume, it could have a negative effect on the Company’s operations, financial position and cash flows, as well as its ability to report its results on a timely basis.

In January 2014, the Company entered into an agreement (the “CCT Agreement”) with Chengshan Group Company Ltd. (“Chengshan”) and The Union of Cooper Chengshan (Shandong) Tire Company Co., Ltd. (the “Union”) regarding CCT that provides, among other matters, that the Union and Chengshan will provide support to return CCT to normal operations. In addition, the CCT Agreement provides Chengshan a limited contractual right to either (i) purchase the Company’s equity interest in CCT or (ii) sell its equity interest in CCT to the Company. Chengshan has notified the Company of its intent to exercise its call option under the CCT Agreement. There can be no assurance that this transaction will be completed. The uncertainty regarding the ultimate ownership of CCT could have an adverse impact on our business and our strategic growth plans. In addition, the sale of the Company’s equity interests in CCT to Chengshan could have an adverse impact on the Company’s business, strategic growth plans, financial position, cash flows and results of operations. In addition, such sale, and any changes with respect to CCT’s production of Cooper-branded products, could require the Company to find an alternative source for CCT-produced tires and there can be no assurance that the Company will be able to do so in a timely manner.

The Company may fail to successfully develop or implement information technologies or related systems, resulting in a significant competitive disadvantage.

Successfully competing in the highly competitive tire industry can be impacted by the successful development of information technology. If the Company fails to successfully implement information technology systems, it may be at a disadvantage to its competitors resulting in lost sales and negative impacts on the Company’s earnings.

The Company is implementing an Enterprise Resource Planning (“ERP”) system that will require significant amounts of capital and human resources to deploy. These requirements may exceed the Company’s initial projections. If for any reason this implementation is not successful, the Company could be required to expense rather than capitalize related amounts. Throughout implementation of the system there are also risks created to the Company’s ability to successfully and efficiently operate.

The Company’s industry is highly competitive, and the Company may not be able to compete effectively with lower-cost producers and larger competitors.

The replacement tire industry is a highly competitive, global industry. Some of the Company’s competitors are larger companies with greater financial resources. Most of the Company’s competitors have operations in lower-cost countries. Intense competitive activity in the replacement tire industry has caused, and will continue to cause, pressures on the Company’s business. The Company’s ability to compete successfully will depend in part on its ability to balance capacity with demand, leverage global purchasing of raw materials, make required investments to improve productivity, eliminate redundancies and increase production at low-cost, high-quality supply sources. If the Company is unable to offset continued pressures with improved operating efficiencies, its sales, margins, operating results and market share would decline and the impact could become material on the Company’s earnings.

 

41


The Company may be adversely affected by legal actions, including products liability claims which, if successful, could have a negative impact on its financial position, cash flows and results of operations.

The Company’s operations expose it to legal actions, including potential liability for personal injury or death as an alleged result of the failure of or conditions in the products that it designs, manufactures and sells. Specifically, the Company is a party to a number of products liability cases in which individuals involved in motor vehicle accidents seek damages resulting from allegedly defective tires that it manufactured. Products liability claims and lawsuits, including possible class action, may result in material losses in the future and cause the Company to incur significant litigation defense costs. The Company is largely self-insured against these claims. These claims could have a negative effect on the Company’s financial position, cash flows and results of operations.

From time to time, the Company is also subject to litigation or other commercial disputes and other legal proceedings relating to its business, including purported class action lawsuits, derivative lawsuits and other litigation related to the now terminated merger agreement with the Apollo entities. Due to the inherent uncertainties of any litigation, commercial disputes or other legal proceedings, the Company cannot accurately predict their ultimate outcome, including the outcome of any related appeals. An unfavorable outcome could materially adversely impact the Company’s financial condition, cash flows and results of operations.

The Company’s results could be impacted by changes in tariffs imposed by the U.S. or other governments on imported tires.

The Company’s ability to competitively source and sell tires can be significantly impacted by changes in tariffs imposed by various governments. Other effects, including impacts on the price of tires, responsive actions from other governments and the opportunity for other competitors to establish a presence in markets where the Company participates could also have significant impacts on the Company’s results. In September 2012, a special tariff on light vehicle tires imported from the PRC to the U.S. expired, which has resulted in an increase in imported tires from the PRC which has impacted the Company’s sales, market share and profits.

Antidumping and countervailing duty investigations into certain passenger car and light truck tires imported from the PRC into the United States were initiated on July 14, 2014. It is too early to determine the outcome of these investigations and what impact, if any, they will have on the Company.

The Company’s expenditures for pension and other postretirement obligations could be materially higher than it has predicted if its underlying assumptions prove to be incorrect.

The Company provides defined benefit and hybrid pension plan coverage to union and non-union U.S. employees and a contributory defined benefit plan in the U.K. The Company’s pension expense and its required contributions to its pension plans are directly affected by the value of plan assets, the projected and actual rates of return on plan assets and the actuarial assumptions the Company uses to measure its defined benefit pension plan obligations, including the discount rate at which future projected and accumulated pension obligations are discounted to a present value and the inflation rate. The Company could experience increased pension expense due to a combination of factors, including the decreased investment performance of its pension plan assets, decreases in the discount rate and changes in its assumptions relating to the expected return on plan assets. The Company could also experience increased other postretirement expense due to decreases in the discount rate, increases in the health care trend rate and changes in the health care environment.

In the event of declines in the market value of the Company’s pension assets or lower discount rates to measure the present value of pension and other postretirement benefit obligations, the Company could experience changes to its Consolidated Balance Sheet or significant cash requirements.

 

42


Compliance with regulatory initiatives could increase the cost of operating the Company’s business.

The Company is subject to federal, state, local and foreign laws and regulations. Compliance with those laws now in effect, or that may be enacted, could require significant capital expenditures, increase the Company’s production costs and affect its earnings and results of operations.

Several countries have or may implement labeling requirements for tires. This legislation could cause the Company’s products to be at a disadvantage in the marketplace resulting in a loss of market share or could otherwise impact the Company’s ability to distribute and sell its tires.

In addition, while the Company believes that its tires are free from design and manufacturing defects, it is possible that a recall of the Company’s tires could occur in the future. A recall could harm the Company’s reputation, operating results and financial position.

The Company is also subject to legislation governing labor occupational safety and health both in the U.S. and other countries. The related legislation can change over time making it more expensive for the Company to produce its products. The Company could also, despite its best efforts to comply with these laws, be found liable and be subject to additional costs because of this legislation.

The Company has a risk due to volatility of the capital and financial markets.

The Company periodically requires access to the capital and financial markets as a significant source of liquidity for maturing debt payments or working capital needs that it cannot satisfy by cash on hand or operating cash flows. Substantial volatility in world capital markets and the banking industry may make it difficult for the Company to access credit markets and to obtain financing or refinancing, as the case may be, on satisfactory terms or at all. In addition, various additional factors, including a deterioration of the Company’s credit ratings or its business or financial condition, could further impair its access to the capital markets. Additionally, any inability to access the capital markets, including the ability to refinance existing debt when due, could require the Company to defer critical capital expenditures, reduce or not pay dividends, reduce spending in areas of strategic importance, sell important assets or, in extreme cases, seek protection from creditors. See also related comments under “There are risks associated with the Company’s global strategy which includes using joint ventures and partially-owned subsidiaries.”

The Company’s operations in the PRC have been financed in part using multiple loans from several lenders to finance facility construction, expansions and working capital needs. These loans are generally for terms of three years or less. Therefore, debt maturities occur frequently and access to the capital markets is crucial to their ability to maintain sufficient liquidity to support their operations.

The Company conducts its manufacturing, sales and distribution operations on a worldwide basis and is subject to risks associated with doing business outside the U.S.

The Company has affiliate, subsidiary and joint venture operations worldwide, including in the U.S., the U.K., Europe, Mexico and the PRC. The Company has two manufacturing entities, the Cooper Chengshan joint venture and Cooper Kunshan, in the PRC and has continued to expand operations in that country. The Company also is the majority owner of COOCSA, a manufacturing entity in Mexico, and has established an operation in Serbia. There are a number of risks in doing business abroad, including political and economic uncertainty, social unrest, sudden changes in laws and regulations, shortages of trained labor and the uncertainties associated with entering into joint ventures or similar arrangements in foreign countries. These risks may impact the Company’s ability to expand its operations in different regions and otherwise achieve its objectives relating to its foreign operations, including utilizing these locations as suppliers to other markets. In addition, compliance with multiple and potentially conflicting foreign laws and regulations, import and export limitations and exchange controls is burdensome and expensive. The Company’s foreign operations also subject it to the risks of international terrorism and hostilities and to foreign currency risks, including exchange rate fluctuations and limits on the repatriation of funds.

 

43


If the Company fails to develop technologies, processes or products needed to support consumer demand it may lose significant market share or be unable to recover associated costs.

The Company’s ability to sell tires may be significantly impacted if it does not develop or have available technologies, processes, or products that competitors may be developing and consumers demanding. This includes but is not limited to changes in the design of and materials used to manufacture tires.

Technologies may also be developed by competitors that better distribute tires to consumers, which could affect the Company’s customers.

Additionally, developing new products and technologies requires significant investment and capital expenditures, is technologically challenging and requires extensive testing and accurate anticipation of technological and market trends. If the Company fails to develop new products that are appealing to its customers, or fails to develop products on time and within budgeted amounts, the Company may be unable to recover its product development and testing costs. If the Company cannot successfully use new production or equipment methodologies it invests in, it may also not be able to recover those costs.

A disruption in, or failure of, the Company’s information technology systems, including those related to cybersecurity, could adversely affect the Company’s business operations and financial performance.

The Company relies on the accuracy, capacity and security of its information technology systems across all of its major business functions, including its research and development, manufacturing, sales, financial and administrative functions. Despite the security measures that the Company has implemented, including those related to cybersecurity, its systems could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. A system failure, accident or security breach could result in business disruption, theft of its intellectual property, trade secrets or customer information and unauthorized access to personnel information. To the extent that any system failure, accident or security breach results in disruptions to its operations or the theft, loss or disclosure of, or damage to, its data or confidential information, the Company’s reputation, business, results of operations, cash flows and financial condition could be materially adversely affected. In addition, the Company may be required to incur significant costs to protect against and, if required, remediate the damage caused by such disruptions or system failures in the future.

Any interruption in the Company’s skilled workforce, including labor disruptions, could impair its operations and harm its earnings and results of operations.

The Company’s operations depend on maintaining a skilled workforce and any interruption of its workforce due to shortages of skilled technical, production or professional workers, work disruptions, or other events could interrupt the Company’s operations and affect its operating results. Further, a significant number of the Company’s employees are currently represented by unions. If the Company is unable to resolve labor disputes or if there are work stoppages or other work disruptions, the Company’s business and operating results could suffer. See also related comments under “The Company is facing risks related to disruptions at its CCT joint venture, changes in the Company’s ownership interests in CCT and changes in its relationship with its joint venture partner.”

If the Company is unable to attract and retain key personnel, its business could be materially adversely affected.

The Company’s business depends on the continued service of key members of its management. The loss of the services of a significant number of members of its management team could have a material adverse effect on its business. The Company’s future success will also depend on its ability to attract, retain and develop highly skilled personnel, such as engineering, marketing and senior management professionals. Competition for these employees is intense, especially in the PRC, and the Company could experience difficulty from time to time in hiring and retaining the personnel necessary to support its business. If the Company does not succeed in retaining its current employees and attracting new high-quality employees, its business could be materially adversely affected.

 

44


If assumptions used in developing the Company’s strategic plan are inaccurate or the Company is unable to execute its strategic plan effectively, its profitability and financial position could be negatively impacted.

If the assumptions used in developing the Company’s strategic plan vary significantly from actual conditions, the Company’s sales, margins and profitability could be harmed. If the Company is unsuccessful in implementing the tactics necessary to execute its strategic plan it can also be negatively impacted.

The Company may not be successful in executing and integrating acquisitions into its operations, which could harm its results of operations and financial condition.

The Company routinely evaluates potential acquisitions and may pursue acquisition opportunities, some of which could be material to its business. The Company cannot provide assurance whether it will be successful in pursuing any acquisition opportunities or what the consequences of any acquisition would be. The Company may encounter various risks in any acquisitions, including:

 

    the possible inability to integrate an acquired business into its operations;

 

    diversion of management’s attention;

 

    loss of key management personnel;

 

    unanticipated problems or liabilities; and

 

    increased labor and regulatory compliance costs of acquired businesses.

Some or all of those risks could impair the Company’s results of operations and impact its financial condition. The Company may finance any future acquisitions from internally generated funds, bank borrowings, public offerings or private placements of equity or debt securities, or a combination of the foregoing. Acquisitions may involve the expenditure of significant funds and management time.

Acquisitions may also require the Company to increase its borrowings under its bank credit facilities or other debt instruments, or to seek new sources of liquidity. Increased borrowings would correspondingly increase the Company’s financial leverage, and could result in lower credit ratings and increased future borrowing costs. These risks could also reduce the Company’s flexibility to respond to changes in its industry or in general economic conditions.

There are risks associated with the Company’s global strategy which includes using joint ventures and partially-owned subsidiaries.

The Company’s strategy includes the use of joint ventures and other partially-owned subsidiaries. These entities operate in countries outside of the U.S., are generally less well capitalized than the Company and bear risks similar to the risks of the Company. In addition, there are specific risks applicable to these subsidiaries and these risks, in turn, add potential risks to the Company. Such risks include greater risk of joint venture partners or other investors failing to meet their obligations under related shareholders’ agreements; conflicts with joint venture partners; the possibility of a joint venture partner taking valuable knowledge from the Company; and risk of being denied access to the capital markets, which could lead to resource demands on the Company in order to maintain or advance its strategy. The Company’s outstanding notes and primary credit facility contain cross default provisions in the event of certain defaults by the Company under other agreements with third parties. For further discussion of access to the capital markets, see also related comments under “The Company has a risk due to volatility of the capital and financial markets.”

If the price of energy sources increases, the Company’s operating expenses could increase significantly or the demand for the Company’s products could be affected.

The Company’s manufacturing facilities rely principally on natural gas, as well as electrical power and other energy sources. High demand and limited availability of natural gas and other energy sources can result in significant increases in energy costs increasing the Company’s operating expenses and transportation costs. Higher energy costs would increase the Company’s production costs and adversely affect its margins and results of operations. If the Company is unable to obtain adequate sources of energy, its operations could be interrupted.

 

45


In addition, if the price of gasoline increases significantly for consumers, it can affect driving and purchasing habits and impact demand for tires.

The Company is required to comply with environmental laws and regulations that could cause it to incur significant costs.

The Company’s manufacturing facilities are subject to numerous federal, state, local and foreign laws and regulations designed to protect the environment, and the Company expects that additional requirements with respect to environmental matters will be imposed on it in the future. In addition, the Company has contractual indemnification obligations for environmental remediation costs and liabilities that may arise relating to certain divested operations. Material future expenditures may be necessary if compliance standards change, if material unknown conditions that require remediation are discovered, or if required remediation of known conditions becomes more extensive than expected. If the Company fails to comply with present and future environmental laws and regulations, it could be subject to future liabilities or the suspension of production, which could harm its business or results of operations. Environmental laws could also restrict the Company’s ability to expand its facilities or could require it to acquire costly equipment or to incur other significant expenses in connection with its manufacturing processes.

The Company may not be able to protect its intellectual property rights adequately.

The Company’s success depends in part upon its ability to use and protect its proprietary technology and other intellectual property, which generally covers various aspects in the design and manufacture of its products and processes. The Company owns and uses tradenames and trademarks worldwide. The Company relies upon a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements and patent, copyright and trademark laws to protect its intellectual property rights. The steps the Company takes in this regard may not be adequate to prevent or deter challenges, reverse engineering or infringement or other violations of its intellectual property, and the Company may not be able to detect unauthorized use or take appropriate and timely steps to enforce its intellectual property rights. In addition, the laws of some countries may not protect and enforce the Company’s intellectual property rights to the same extent as the laws of the U.S. Further, while we believe that we have rights to use all intellectual property in the Company’s use, if the Company is found to infringe on the rights of others it could be adversely impacted.

The Company is facing risks relating to enactment of healthcare legislation.

The Company is facing risks emanating from the enactment of legislation by the U.S. government including the Patient Protection and Affordable Care Act and the related Healthcare and Education Reconciliation Act, which are collectively referred to as healthcare legislation. This major legislation is being implemented over a period of several years and the ultimate cost and the potentially adverse impact to the Company and its employees cannot be quantified at this time.

The impact of proposed new accounting standards may have a negative impact on the Company’s financial statements.

The Financial Accounting Standards Board is considering several projects which may result in the modification of accounting standards affecting the Company, including standards relating to revenue recognition, financial instruments, leasing, and others. Any such changes could have a negative impact on the Company’s financial statements.

 

46


The realizability of deferred tax assets may affect the Company’s profitability and cash flows.

The Company has significant net deferred tax assets recorded on the balance sheet and determines at each reporting period whether or not a valuation allowance is necessary based upon the expected realizability of such deferred tax assets. In the U.S., the Company has recorded deferred tax assets, the largest of which relate to products liability, pension and other postretirement benefit obligations, partially offset by deferred tax liabilities, the most significant of which relates to accelerated depreciation. The Company’s non-U.S. deferred tax assets relate to pension, accrued expenses and net operating losses, and are partially offset by deferred tax liabilities related to accelerated depreciation. Based upon the Company’s assessment of the realizability of its net deferred tax assets, the Company maintains a small valuation allowance for the portion of its U.S. deferred tax assets primarily associated with a capital loss carryforward. In addition, the Company has recorded valuation allowances for deferred tax assets primarily associated with non-U.S. net operating losses. The Company’s assessment of the realizability of deferred tax assets is based on certain assumptions regarding future profitability, and potentially adverse business conditions that could have a negative impact on the realizability and therefore impact the Company’s operating results or financial position.

 

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth a summary of the Company’s purchases during the quarter ended September 30, 2014 of equity securities registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:

 

                   Total Number of      Maximum Dollar  
            Average      Shares Purchased as      Value of Shares that  
     Total Number      Price      Part of Public      May Yet Be Purchased  
     of Shares      Paid per      Announced Plans      Under the Plans or  

Period

   Purchased      Share (1)      or Programs (2)      Programs (2)(3)  

July 1, 2014 through July 31, 2014

     —         $ —           —         $ —     

August 1, 2014 through August 31, 2014

     5,567,154       $ —           5,567,154       $ 40,000,000   

September 1, 2014 through September 30, 2014

     —         $ —           —         $ 40,000,000   
  

 

 

       

 

 

    

Total

     5,567,154            5,567,154      

 

(1) The average purchase price of common stock purchases pursuant to the ASR program described below will not be determinable until the conclusion of the ASR program.
(2) Refer to Note 3 of Notes to Condensed Consolidated Financial Statements for information regarding the ASR.
(3) On August 6, 2014, the Board of Directors authorized the repurchase of up to $200 million of the Company’s outstanding common stock pursuant to an accelerated share repurchase program. In August 2014, the Company paid $200 million under the ASR Agreement and received an initial delivery of 5,567,154 shares of its common stock, representing approximately 80 percent of the shares expected to be repurchased in connection with the transaction. The repurchases under the ASR Agreement are expected to be completed no later than February 13, 2015. Shares purchased pursuant to the ASR Agreement are presented in the above table in the periods in which they were received. The original $200 million was reduced by $160 million representing the approximately 80 percent of the shares to be repurchased that have been delivered to the Company.

 

47


Item 6. EXHIBITS

(a) Exhibits

 

(10.1)    Option Agreement dated August 14, 2014, by and among Cooper Tire Investment Holding (Barbados) Ltd., Chengshan Group Company Ltd., the Company and Prairie Investment Limited.
(31.1)    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31.2)    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(32)    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(101.INS)    XBRL Instance Document
(101.SCH)    XBRL Taxonomy Extension Schema Document
(101.DEF)    XBRL Taxonomy Extension Definition Linkbase Document
(101.CAL)    XBRL Taxonomy Extension Calculation Linkbase Document
(101.LAB)    XBRL Taxonomy Extension Label Linkbase Document
(101.PRE)    XBRL Taxonomy Extension Presentation Linkbase Document

 

48


SIGNATURES

Pursuant to the requirements 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.

 

COOPER TIRE & RUBBER COMPANY

/s/ B. E. Hughes

B. E. Hughes

Senior Vice President And Chief Financial Officer

(Principal Financial Officer)

/s/ R. W. Huber

R. W. Huber

Director of External Reporting

(Principal Accounting Officer)

November 7, 2014

(Date)

 

49