10-K 1 d648605d10k.htm 10-K 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-K

 

 

For Annual and Transition Reports Pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934

(Mark One)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2013

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                      to                     

Commission File Number 001-04329

 

 

 

 

LOGO

COOPER TIRE & RUBBER COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   34-4297750
(State of incorporation)  

(I.R.S. employer

identification no.)

701 Lima Avenue, Findlay, Ohio   45840
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (419) 423-1321

Securities registered pursuant to Section 12(b) of the Act:

 

(Title of each class)

 

(Name of each exchange on which registered)

Common Stock, $1 par value per share   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  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 during the preceding 12 months.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-Accelerated Filer   ¨  (Do not check if a small 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

The aggregate market value of the voting common stock held by non-affiliates of the registrant at June 30, 2013 was $2,099,912,950.

The number of shares outstanding of the registrant’s common stock as of February 28, 2014 was 65,292,278.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information from the registrant’s definitive proxy statement for its 2014 Annual Meeting of Stockholders will be herein incorporated by reference into Part III, Items 10 – 14, of this report.

 

 

 


Table of Contents

TABLE OF CONTENTS

COOPER TIRE & RUBBER COMPANY – FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

 

     Page  

Cover

     1   

Table of Contents

     2   

Part I

  

Item 1 – Business

     2   

Item 1A – Risk Factors

     5  

Item 1B – Unresolved Staff Comments

     10   

Item 2 – Properties

     11   

Item 3 – Legal Proceedings

     11   

Item 4 – Reserved

     12   

Part II

  

Item  5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     14   

Item 6 – Selected Financial Data

     17   

Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   

Item 7A – Quantitative and Qualitative Disclosures About Market Risk

     30   

Item 8 – Financial Statements and Supplementary Data

     31   

Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     70   

Item 9A – Controls and Procedures

     70   

Item 9B – Other Information

     72   

Part III

  

Item 10 – Directors and Corporate Governance

     72   

Item 11 – Executive Compensation

     72   

Item  12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     73   

Item 13 – Certain Relationships and Related Transactions, and Director Independence

     73   

Item 14 – Principal Accountant Fees and Services

     73   

Part IV

  

Item 15 – Exhibits and Financial Statement Schedules

     74   

Signatures

     75   

Exhibit Index

     76   

PART I

 

Item 1. BUSINESS

Cooper Tire & Rubber Company with its subsidiaries (“Cooper” or the “Company”) is a leading manufacturer and marketer of replacement tires. It is the fourth largest tire manufacturer in North America and, according to a recognized trade source, the Cooper family of companies is the eleventh largest tire company in the world based on sales. Cooper focuses on the manufacture and sale of passenger and light and medium truck replacement tires.

The Company is organized into two separate, reportable business segments: North American Tire Operations and International Tire Operations. Each segment is managed separately. Additional information on the Company’s segments, including their financial results, total assets, products, markets and presence in particular geographic areas, appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Business Segments” note to the consolidated financial statements.

Cooper Tire & Rubber Company was incorporated in the state of Delaware in 1930 as the successor to a business originally founded in 1914. Based in Findlay, Ohio, Cooper and its family of companies currently operate 9 manufacturing facilities and 40 distribution centers in 11 countries. As of December 31, 2013, it employed 13,280 persons worldwide.

 

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Business Segments

North American Tire Operations Segment

The North American Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in the United States (“U.S.”) replacement market. The segment also distributes tires for racing, medium truck and motorcycles that are manufactured in 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 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 (“OEMs”).

The segment operates in a highly competitive industry, which includes Bridgestone Corporation, Goodyear Tire & Rubber Company and Groupe Michelin. These competitors are substantially larger than the Company and serve OEMs as well as the replacement tire market. The segment also faces competition from low-cost producers in Asia, Mexico, South America and Central Europe. Some of those producers are foreign affiliates of the segment’s competitors in North America. The segment had a market share in 2013 of approximately 12 percent of all light vehicle replacement tire sales in the U.S. The segment also participates in the U.S. medium truck replacement market. In addition to manufacturing tires in the U.S., the segment has a joint venture manufacturing operation in Mexico, Corporacion de Occidente SA de CV (“COOCSA”). A portion of the products manufactured by the segment are exported throughout the world.

Success in competing for the sale of replacement tires is dependent upon many factors, the most important of which are price, quality, performance, line coverage, availability through appropriate distribution channels and relationships with dealers and retailers. Other factors include warranty, credit terms and other value-added programs. The segment has built close working relationships through the years with independent dealers. It believes those relationships have enabled it to obtain a competitive advantage in that channel of the market. As a steadily increasing percentage of replacement tires are sold by large regional and national tire retailers, the segment has increased its penetration of those distribution channels, while maintaining a focus on its traditionally strong network of independent dealers.

The segment’s replacement tire business has a broad customer base that includes purchasers of proprietary brand tires that are marketed and distributed by the Company and private label tires which are manufactured by the Company but marketed and distributed by the Company’s customers. The segment is a leading supplier of private label tires in the U.S.

Customers generally place orders on a month-to-month basis and the segment adjusts production and inventory to meet those orders which results in varying backlogs of orders at different times of the year. Tire sales are subject to a seasonal demand pattern. This usually results in the sales volumes being strongest in the third and fourth quarters and weaker in the second and first quarters.

International Tire Operations Segment

The International Tire Operations segment has manufacturing operations in the United Kingdom (“U.K.”), the Republic of Serbia (“Serbia”) and the People’s Republic of China (“PRC”). The U.K. entity manufactures and markets passenger car, light truck, motorcycle and racing tires and tire retread material for the global market. On January 17, 2012, the segment acquired certain assets of a light vehicle tire manufacturing facility in Serbia. This entity manufactures light vehicle tires for the European markets. The segment’s Cooper Kunshan entity in the PRC currently manufactures light vehicle tires. Under an agreement with the government of the PRC, all of the tires produced at this facility through 2012 had been exported. Beginning in 2013, tires produced at this facility are also sold in the domestic market. The segment also has a joint venture in the PRC, Cooper Chengshan (Shandong) Tire Company Ltd. (“CCT”), which manufactures and markets radial and bias medium truck tires as well as passenger and light truck tires for the global market. A small percentage of the tires manufactured by the segment are sold to OEMs.

The segment has also established sales, marketing, distribution and research and development capabilities to support the Company’s objectives.

As in North America, the segment operates in a highly competitive industry, which includes Bridgestone Corporation, Goodyear Tire & Rubber Company and Groupe Michelin. These competitors are substantially larger than the Company and serve OEMs as well as the replacement tire market. The segment also faces competition from low-cost producers in certain markets.

 

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Raw Materials

The Company’s principal raw materials include natural rubber, synthetic rubber, carbon black, chemicals and steel reinforcement components. The Company acquires its raw materials from various sources around the world to assure continuing supplies for its manufacturing operations and mitigate the risk of potential supply disruptions.

During 2013, the Company experienced lower raw material costs compared to levels of 2012. The pricing volatility of natural rubber and certain other raw materials contributes to the difficulty in accurately predicting and managing these costs.

The Company has a purchasing office in Singapore to acquire natural rubber directly from producers in Southeast Asia. This purchasing operation enables the Company to work directly with producers to continually improve consistency and quality while reducing the costs of materials, transportation and transactions.

The Company’s contractual relationships with its raw material suppliers are generally based on long-term agreements and/or purchase order arrangements. For natural rubber and natural gas, procurement is managed through a combination of buying forward 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 purchases. These arrangements only cover quantities needed to satisfy normal manufacturing demands.

Working Capital

The Company’s working capital consists mainly of inventory, accounts receivable and accounts payable. These working capital accounts are closely managed by the Company. Inventory balances are primarily valued at a Last In First Out (LIFO) basis for the North American entities and under the first-in first-out (“FIFO”) or average cost method for entities in the International Tire Operations segment. Inventories turn regularly, but balances typically increase during the first half of the year before declining as a result of increased sales in the second half. Accounts receivable and accounts payable are also affected by this business cycle, typically requiring the Company to have greater working capital needs during the second and third quarters. The Company engages in a rigorous credit analysis of its customers and monitors their financial positions. The Company offers incentives to certain customers to encourage the payment of account balances prior to their scheduled due dates.

At December 31, 2013, the Company held cash and cash equivalents of $398 million. The Company’s inventory levels are within the targeted range to meet projected demand. The mix of inventory is critical to inventory turnover and meeting customer demand.

Research, Development and Product Improvement

The Company directs its research activities toward product development, performance and operating efficiency. The Company conducts extensive testing of current tire lines, as well as new concepts in tire design, construction and materials. During 2013, approximately 81 million miles of tests were performed on indoor test wheels and in monitored road tests. The Company has a tire and vehicle test track in Texas that assists with the Company’s testing activities. Uniformity equipment is used to physically monitor manufactured tires for high standards of ride quality. The Company continues to design and develop specialized equipment to fit the precise needs of its manufacturing and quality control requirements. Research and development expenditures were $44.6 million, $50.8 million and $51.1 million during 2011, 2012 and 2013, respectively.

Patents, Intellectual Property and Trademarks

The Company owns and/or has licenses to use patents and intellectual property covering various aspects in the design and manufacture of its products and processes, and equipment for the manufacture of its products that will continue to be amortized over the next two years. While the Company believes these assets as a group are of material importance, it does not consider any one asset or group of these assets to be of such importance that the loss or expiration thereof would materially affect its business.

The Company owns and uses tradenames and trademarks worldwide. While the Company believes such tradenames and trademarks as a group are of material importance, the trademarks the Company considers most significant to its business are those using the words “Cooper,” “Mastercraft” and “Avon.” The Company believes all of these significant trademarks are valid and will have unlimited duration as long as they are adequately protected and appropriately used. Certain other tradenames and trademarks are being amortized over the next four to fifteen years.

 

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Seasonal Trends

There is year-round demand for passenger and truck replacement tires, but passenger replacement tire sales are generally strongest during the third and fourth quarters of the year. Winter tires are sold principally during the months of June through November.

Environmental Matters

The Company recognizes the importance of compliance in environmental matters and has an organizational structure to supervise environmental activities, planning and programs. The Company also participates in activities concerning general industry environmental matters. The Company’s operations have been recognized with several awards for efforts to improve energy efficiency.

The Company’s manufacturing facilities, like those of the industry generally, are subject to numerous laws and regulations designed to protect the environment. In general, the Company has not experienced difficulty in complying with these requirements and believes they have not had a material adverse effect on its financial condition or the results of its operations. The Company expects additional requirements with respect to environmental matters will be imposed in the future. The Company’s 2013 expense and capital expenditures for environmental matters at its facilities were not material, nor is it expected that expenditures in 2014 for such uses will be material.

Foreign Operations

The Company has a manufacturing facility, a technical center, a distribution center and its European headquarters office located in the U.K. There are seven distribution centers and six sales offices in Europe. The Company has a manufacturing facility in the Republic of Serbia. The Company has a manufacturing facility and a joint venture manufacturing facility, 21 distribution centers, a technical center, two sales offices and an administrative office in the PRC. The Company also has a purchasing office in Singapore. In Mexico, the Company has a joint venture manufacturing facility, a sales office and a distribution center.

Additional information on the Company’s foreign operations can be found in the “Business Segments” note to the consolidated financial statements.

Available Information

The Company makes available free of charge, on or through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the U.S. Securities and Exchange Commission (“SEC”). The Company’s internet address is http://www.coopertire.com. The Company has adopted charters for each of its Audit, Compensation and Nominating and Governance Committees, corporate governance guidelines and a code of business ethics and conduct, which are available on the Company’s website and will be available to any stockholder who requests them from the Company’s Director of Investor Relations. The information contained on the Company’s website is not incorporated by reference in this annual report on Form 10-K and should not be considered a part of this report.

 

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.

 

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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.

The Company is facing risks related to the impact of labor 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 Apollo 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 Apollo. 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. The uncertainty regarding the ultimate ownership of CCT during the term of the purchase and sale rights set forth in the CCT Agreement could have an adverse impact on our business and our strategic growth plans. In addition, the forced sale of the Company’s equity interests in CCT to Chengshan or forced purchase of Chengshan’s equity interest in CCT by the Company pursuant to the CCT Agreement could have an adverse impact on the Company’s business, strategic growth plans, financial position, cash flows and results of operations.

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 also can be at risk of legal action, loss of business or other loss if it fails to protect sensitive data or technology systems that help it to operate.

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.

 

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The Company has a risk of exposure to 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 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.

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.

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.

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 of using joint ventures and partially owned subsidiaries.

 

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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.

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 make 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.

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 the impact of labor disruptions and changes in the Company’s relationship with, or ownership interests in, its Cooper Chengshan (Shandong) Tire Company Ltd. joint venture.”

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.

 

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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.

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

 

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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.

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 1B. UNRESOLVED STAFF COMMENTS

None.

 

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Item 2. PROPERTIES

As shown in the following table, at December 31, 2013, the Company maintained 72 manufacturing, distribution, retail stores and office facilities worldwide. The Company owns a majority of the manufacturing facilities while some manufacturing, distribution and office facilities are leased.

 

     North American Tire Operations     International Tire Operations        

Type of Facility

   United States      Mexico     Europe      Asia     Total  

Manufacturing

     4         1     2         2     9   

Distribution

     10         1        8         21        40   

Retail Stores

     3         —          —           —          3   

Technical centers and offices

     6         1        8         5        20   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     23         3        18         28        72   

 

* This includes a manufacturing facility that is a joint venture.

The Company believes its properties have been adequately maintained, generally are in good condition and are suitable and adequate to meet the demands of each segment’s business.

 

Item 3. 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 December 31, 2013. 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

On June 17, 2013, an alleged stockholder of the Company filed a putative class-action lawsuit in the Court of Common Pleas of Hancock County, Ohio relating to the proposed acquisition of the Company (the “Apollo transaction”) by wholly owned subsidiaries of Apollo Tyres Ltd. (“Apollo”). That lawsuit, captioned Auld v. Cooper Tire & Rubber Co., et al., No. 2013-CV-293, generally alleges that the directors of the Company breached their fiduciary duties to the Company’s stockholders by agreeing to enter into the transaction for an allegedly unfair price and as the result of an allegedly unfair process. As discussed below, on December 30, 2013, the Company terminated the merger agreement with the Apollo entities.

Between June 18 and June 27, 2013, alleged stockholders of the Company filed four other putative class-action lawsuits in the Court of Chancery of the State of Delaware relating to the proposed Apollo transaction. Those lawsuits, which were consolidated under the caption In re Cooper Tire & Rubber Co. Stockholders Litigation, No. 8658-VCL, generally allege that the directors of the Company breached their fiduciary duties to the Company’s stockholders by agreeing to enter into the then-pending transaction for an allegedly unfair price and as the result of an allegedly unfair process and by failing to disclose material information to stockholders regarding the proposed transaction.

The Company, Apollo and certain affiliates of Apollo are also defendants in the Ohio and Delaware lawsuits, and are alleged to have aided and abetted the directors’ breaches of fiduciary duties. All of these Ohio and Delaware lawsuits seek, among other things, declaratory and injunctive relief. The Company and its directors believe that the allegations against them lack merit and intend to defend the lawsuits vigorously.

On October 4, 2013, the Company filed a complaint in the Court of Chancery of the State of Delaware, captioned Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd. et al., No. 8980-VCG, asking that certain affiliates of Apollo be required to use their reasonable best 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.

 

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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 January 27, 2014, the court determined that it would proceed with a decision on the Apollo entities’ motion for declaratory judgment, once briefing on that motion is complete.

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.

Stockholder Derivative Litigation

On February 24 and March 6, 2014, purported stockholders of the Company filed two derivative actions on behalf of the Company in the U.S. District Court for the Northern District of Ohio against certain current officers and the current members of the Company’s board of directors. The Company is named as a nominal defendant in both lawsuits, and the lawsuits both seek recovery for the benefit of the Company. The lawsuits, captioned Bui v. Armes, et al.,No 3:14-cv-00428, and Zwang v. Armes, et al., 3:14-cv-00511, allege that the defendants breached their fiduciary duties to the Company by issuing allegedly misleading disclosures in connection with the terminated merger transaction. The Zwang lawsuit also alleges that the defendants violated Section 14(a) of the Securities Exchange Act of 1934 by means of the same allegedly misleading disclosures. Both complaints also assert claims for waste of corporate assets and unjust enrichment. The complaints seek, among other things, unspecified money damages from the defendants, injunctive relief, and an award of attorney’s fees.

Certain Litigation Related to Joint Venture in China

On July 29, 2013, the Company’s Cooper Chengshan Tire joint venture in China was named as a defendant and a subsidiary of the Company was named as a third party in a complaint filed in the Weihai Intermediate People’s Court, Weihai, China, by the Company’s joint venture partner. In connection with the execution of the CCT Agreement (See Footnote 22 - Subsequent Events, below), this complaint was dismissed.

 

Item 4. RESERVED

 

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EXECUTIVE OFFICERS OF THE REGISTRANT

The names, ages and all positions and offices held by all executive officers of the Company are as follows:

 

Name

   Age   

Executive Office Held

  

Business Experience

Roy V. Armes    61   

Chairman of the Board,

Chief Executive Officer,

President and Director

   Chairman of the Board since December 2007, Chief Executive Officer, President and Director since January 2007.
Brenda S. Harmon    62    Senior Vice President and Chief Human Resources Officer    Senior Vice President, Chief Human Resources Officer since December 2009. Previously Owner of Harmon Consulting Services since November 2008. Vice President – Human Resources of Contech Construction Products, Inc., a privately held construction products and environmental solutions company from 2004 to 2008.
Bradley E. Hughes    52    Vice President, Chief Financial Officer and Treasurer    Vice President and Chief Financial Officer since November 2009. Previously Global Product Development Controller with Ford Motor Corporation, an automobile manufacturer, since 2008; Finance Director, Ford South America Operations from 2005 to 2008.
Harold C. Miller    61    Vice President and President International Tire Operations    Vice President since March 2002.
Christopher E. Ostrander    45    Vice President and President, North American Tire Operations    Vice President since January 2011. Previously Vice President and General Manager of the Torque Control Products Division at Eaton Corporation from 2008 to 2010; General Manager from 2007 to 2008; Multi-Business Unit Manager from 2006 to 2007.
Stephen Zamansky    43   

Vice President,

General Counsel and Secretary

   Vice President, General Counsel & Secretary since April 2011. Previously Senior Vice President, General Counsel & Secretary of Trinity Coal Corporation, a privately held mining company, from 2008 to 2011. Trinity was acquired by the Essar Group in 2010 and commenced bankruptcy proceedings in March 2013.

 

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PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

(a) Market information

Cooper Tire & Rubber Company common stock is traded on the New York Stock Exchange under the symbol CTB. The following table sets forth, for the periods indicated, the high and low sales prices of the common stock as reported in the consolidated reporting system for the New York Stock Exchange Composite Transactions:

 

Year Ended December 31, 2012    High      Low  

First Quarter

   $ 17.99       $ 13.89   

Second Quarter

     17.99         13.82   

Third Quarter

     23.40         15.74   

Fourth Quarter

     25.65         18.38   
Year Ended December 31, 2013    High      Low  

First Quarter

   $ 28.24       $ 24.09   

Second Quarter

     34.79         23.04   

Third Quarter

     33.26         28.61   

Fourth Quarter

     31.49         20.55   

Five-Year Stockholder Return Comparison

The SEC requires that the Company include in its annual report to stockholders a line graph presentation comparing cumulative five-year stockholder returns on an indexed basis with the Standard & Poor’s (“S&P”) Stock Index and either a published industry or line-of-business index or an index of peer companies selected by the Company. The Company in 1993 chose what is now the S&P 500 Auto Parts & Equipment Index as the most appropriate of the nationally recognized industry standards and has used that index for its stockholder return comparisons in all of its annual reports since that time.

The following chart assumes three hypothetical $100 investments on December 31, 2008, and shows the cumulative values at the end of each succeeding year resulting from appreciation or depreciation in the stock market price, assuming dividend reinvestment.

 

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Total Return To Shareholders

(Includes reinvestment of dividends)

 

            ANNUAL RETURN PERCENTAGE  
            Years Ending  

Company / Index

          Dec09      Dec10      Dec11      Dec12      Dec13  

Cooper Tire & Rubber Company

        241.72         20.34         -39.09         85.24         -3.70   

S&P 500 Index

        26.46         15.06         2.11         16.00         32.39   

S&P 500 Auto Parts & Equipment

        54.68         42.78         -17.74         4.45         64.76   
            INDEXED RETURNS  
            Years Ending  
     Base         
     Period                                     

Company / Index

   Dec08      Dec09      Dec10      Dec11      Dec12      Dec13  

Cooper Tire & Rubber Company

     100         341.72         411.23         250.48         463.98         446.83   

S&P 500 Index

     100         126.46         145.51         148.59         172.37         228.19   

S&P 500 Auto Parts & Equipment

     100         154.68         220.85         181.68         189.76         312.65   

 

 

LOGO

 

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(b) Holders

The number of holders of record at December 31, 2013 was 2,117.

 

(c) Dividends

The Company has paid consecutive quarterly dividends on its common stock since 1973. Future dividends will depend upon the Company’s earnings, financial condition and other factors. Additional information on the Company’s liquidity and capital resources can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Company’s retained earnings are available for the payment of cash dividends and the purchases of the Company’s shares. Quarterly dividends per common share for the most recent two years were as follows:

 

     2012           2013  

March 31

   $ 0.105      

March 29

   $ 0.105   

June 30

     0.105      

June 28

     0.105   

September 30

     0.105      

September 30

     0.105   

December 30

     0.105      

December 31

     0.105   
  

 

 

       

 

 

 

Total:

   $ 0.420      

Total:

   $ 0.420   
  

 

 

       

 

 

 

 

(d) Issuer purchases of equity securities

There were no repurchases of Company stock during the fourth quarter of the year ended December 31, 2013.

 

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Item 6. SELECTED FINANCIAL DATA

 

(Dollar amounts in thousands except for per share amounts)         
     Net
Sales
     Operating
Profit (Loss)
     Income
from Continuing
Operations Before
Income taxes
     Income from
Continuing Operations
available to
Cooper Tire &
Rubber Company
common stockholders
     Earnings Per Share
from Continuing Operations
available to
Cooper Tire & Rubber Company
common stockholders
 
               Basic      Diluted  

2009 (a)

     2,763,942         156,269         115,523         93,359         1.57         1.54   

2010 (a)

     3,342,708         188,374         159,826         116,331         1.90         1.86   

2011 (b)

     3,907,820         163,301         134,146         253,503         4.08         4.02   

2012

     4,200,836         396,962         368,450         220,371         3.52         3.49   

2013

     3,437,524         240,714         212,971         109,198         1.75         1.73   

 

 

 

     Stockholders’
Equity
     Redeemable
Noncontrolling
Shareholders’
Interests
     Long-term
Debt
     Total
Assets
     Net Property,
Plant &
Equipment
 

2009

     380,524         83,528         330,971         2,100,340         839,402   

2010

     523,050         71,442         320,724         2,305,537         824,735   

2011

     697,890         —           329,496         2,509,918         899,044   

2012

     908,416         —           336,142         2,801,160         929,255   

2013

     1,156,810         —           320,959         2,737,552         974,269   

 

 

 

     Capital
Expenditures
     Depreciation and
Amortization
     Dividends
Per Share
     Average
Common Shares
(000s)
     Number of
Employees
 

2009

     79,333         123,511         0.42         59,439         12,568   

2010

     119,738         123,721         0.42         61,299         12,898   

2011

     155,406         122,899         0.42         62,150         12,890   

2012

     187,336         128,916         0.42         62,561         13,550   

2013

     180,448         134,751         0.42         63,327         13,280   

 

 

 

(a) The Company’s continuing operations recorded $48,718 and $20,649 of restructuring charges in 2009 and 2010, respectively, associated with the closures of its Albany, Georgia manufacturing facility and other initiatives.
(b) The Company’s continuing operations recorded the partial release of a valuation allowance on deferred tax assets of $167,224 during 2011. The Redeemable noncontrolling shareholders’ interests were moved to Noncontrolling shareholders’ interests in consolidated subsidiaries within Equity at December 31, 2011 when the put option held by the Company’s joint venture partner in Cooper Chengshan Tire expired unexercised.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Business of the Company

The Company manufactures and markets passenger car, light and medium truck, motorsport and motorcycle tires which are sold globally, primarily in the replacement tire market to 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 Company faces both general industry and company-specific challenges. These include highly volatile raw material costs, increasing product complexity and pressure from competitors with manufacturing in lower-cost regions. To address these challenges and position the Company for future success, the Company continues to execute towards strategic imperatives outlined in its Strategic Plan. The three strategic imperatives, originally communicated in February 2008, are building a sustainable cost competitive position, driving top-line profitable growth and building organizational capabilities and enablers to support strategic goals.

In recent years, the Company expanded operations in what are considered lower-cost countries. These initiatives include the Cooper Kunshan Tire manufacturing operation in the PRC, the Cooper Chengshan joint venture in the PRC, a joint venture manufacturing operation in Mexico and a manufacturing facility in Serbia. Products from these operations provide a lower-cost source of tires for existing markets and have been used to expand the Company’s market share in Mexico, Eastern Europe and the PRC. Through a variety of other projects, the Company also has improved the competitiveness of its manufacturing operations in the United States.

On June 12, 2013, the Company and Apollo announced the execution of the Agreement and Plan of Merger under which a wholly-owned subsidiary of Apollo was to acquire the Company in an all-cash transaction valued at approximately $2.5 billion. On December 30, 2013, the Company terminated the Agreement and Plan of Merger.

On July 13, 2013, workers at CCT began a temporary work stoppage related to concerns regarding the pending merger between Apollo and the Company. On August 17, 2013, those workers returned to work on a limited basis to manufacture only non-Cooper-branded products, but took other disruptive actions, 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. Since this date, representatives of the Company regained access to the CCT facilities, including its business and financial information and the operation has resumed production of Cooper-branded products.

The following discussion of financial condition and results of operations should be read together with “Selected Financial Data,” the Company’s consolidated financial statements and the notes to those statements and other financial information included elsewhere in this report.

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, capital resources and critical accounting policies of the Company. The Company’s future results may differ materially from those indicated in the forward-looking statements. See Risk Factors in Item 1A for information regarding forward-looking statements.

 

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Consolidated Results of Operations

 

(Dollar amounts in millions except per share amounts)                          
      %           %        
     2011     Change     2012     Change     2013  

Revenues:

          

North American Tire

   $ 2,837.6        9.1   $ 3,095.6        -19.7   $ 2,486.6   

International Tire

     1,557.1        1.2     1,576.0        -21.2     1,241.5   

Eliminations

     (486.9     -3.3     (470.8     -38.6     (288.9
  

 

 

     

 

 

     

 

 

 

Net sales

   $ 3,907.8        7.5   $ 4,200.8        -18.1   $ 3,439.2   
  

 

 

     

 

 

     

 

 

 

Operating profit (loss):

          

North American Tire

   $ 77.4        282.3   $ 295.9        -31.0   $ 204.2   

International Tire

     102.7        39.8     143.6        -41.5     84.0   

Eliminations

     (1.4     307.1     (5.7     -159.6     3.4   

Unallocated corporate charges

     (15.4     139.0     (36.8     38.3     (50.9
  

 

 

     

 

 

     

 

 

 

Operating profit

     163.3        143.1     397.0        -39.4     240.7   

Interest expense

     (36.2     -18.5     (29.5     -5.4     (27.9

Interest income

     3.2        -21.9     2.5        -68.0     0.8   

Other - net

     3.8        -139.5     (1.5     -60.0     (0.6
  

 

 

     

 

 

     

 

 

 

Income before income taxes

     134.1        174.8     368.5        -42.2     213.0   

Provision (benefit) for income taxes

     (135.5     n/m        116.0        -31.6     79.4   
  

 

 

     

 

 

     

 

 

 

Net income

     269.6        -6.3     252.5        -47.1     133.6   

Noncontrolling shareholders’ interests

     (16.1     99.4     (32.1     -29.6     (22.6
  

 

 

     

 

 

     

 

 

 

Net income attributable to

          

Cooper Tire & Rubber Company

   $ 253.5        -13.1   $ 220.4        -49.6   $ 111.0   
  

 

 

     

 

 

     

 

 

 

Basic earnings per share

   $ 4.08        -13.7   $ 3.52        -50.3   $ 1.75   
  

 

 

     

 

 

     

 

 

 

Diluted earnings per share

   $ 4.02        -13.2   $ 3.49        -50.4   $ 1.73   
  

 

 

     

 

 

     

 

 

 

 

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2013 versus 2012

Consolidated net sales for 2013 were $3,439 million, a decrease of $762 million from 2012. The decrease in net sales was the result of reduced unit volumes ($505 million) and less favorable pricing and mix ($276 million). The International Tire Operations segment experienced favorable exchange rates ($19 million). The labor issues at CCT accounted for $226 million of the reduction in unit volumes across both segments.

The Company recorded operating profit in 2013 of $241 million, a decrease of $156 million compared with 2012. The negative impact of the labor issues at CCT on operating profit was $56 million in 2013. The labor issues resulted in reduced volume ($47 million) across both segments and manufacturing inefficiencies ($9 million) in the International Tire Operations segment. Additionally, the Company incurred $18 million of selling, general and administrative costs associated with the Agreement and Plan of Merger. The International Tire Operations segment operating profit included start-up costs related to the Company’s operations in Serbia ($6 million) and a pension curtailment gain ($7 million) in 2012, neither of which recurred in 2013. The 2012 results also include $29 million of costs incurred related to labor issues at the Findlay, Ohio manufacturing facility within the North American Tire Operations segment.

In addition to the items described above, operating profit in 2013 included lower raw material costs ($277 million) and lower products liability charges ($15 million), which were offset by unfavorable pricing and mix ($268 million) and lower unit volumes ($81 million). Manufacturing cost efficiencies were $40 million unfavorable when compared with 2012, which includes the costs associated with production curtailments ($34 million) incurred in the North American Tire Operations segment in 2013. Other operating costs, including increased distribution costs associated with carrying higher inventories, were unfavorable ($13 million) compared with 2012.

The Company experienced decreases in the costs of certain of its principal raw materials during 2013 compared with 2012. 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.

Products liability expenses totaled $89 million and $104 million in 2013 and 2012, respectively. The change in the expense 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 “Critical Accounting Policies” portion of the MD&A.

Selling, general and administrative expenses were $275 million (8.0 percent of net sales) in 2013 and $257 million (6.1 percent of net sales) in 2012. Selling, general and administrative expenses included costs incurred relating to the Agreement and Plan of Merger ($18 million) and increased capitalized software amortization expense and professional service support fees related to the Company’s new ERP system. The Company’s continued investment in Cooper brands globally also contributed to higher costs in 2013. These increases were partially offset by lower incentive related expenses. Lower net revenue also contributed to the increase in selling, general and administrative expenses as a percent of sales.

Interest expense decreased $2 million in 2013 from 2012, primarily as the result of lower debt levels.

Interest income and other income have remained relatively constant compared to 2012.

For the year ended December 31, 2013, the Company recorded an income tax expense of $79 million on income from continuing operations before income taxes of $213 million, prior to the deduction of noncontrolling shareholders’ interests of $23 million. Comparable amounts for 2012 were an income tax expense of $116 million on income from continuing operations before income taxes of $368 million.

Worldwide tax expense is impacted significantly by the mix of earnings in international jurisdictions with lower tax rates, partially offset by losses in jurisdictions with no tax benefit due to valuation allowances. Tax expense for 2013 has decreased from prior year primarily due to decreased pretax earnings.

The effects of inflation in areas other than raw materials and utilities did not have a material effect on the results of operations of the Company in 2013.

 

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2012 versus 2011

Consolidated net sales for 2012 were $4,201 million, $293 million higher than 2011. The increase in net sales was the result of higher unit volumes ($227 million), favorable pricing and mix ($41 million) and favorable currency translation ($25 million).

The Company recorded operating profit in 2012 of $397 million, an increase of $234 million compared with 2011. Lower raw material costs ($303 million), higher unit volumes ($32 million) and favorable pricing and mix ($7 million) contributed to the higher operating profit in 2012. Increased selling, general and administrative costs ($76 million), higher manufacturing costs ($7 million) and high products liability charges ($6 million) partially offset the increases to the Company’s operating profit. Other operating costs were unfavorable ($28 million), including increased pension expenses and start-up costs related to the Company’s operations in Serbia. Higher incentive compensation costs, resulting from higher profits, affected selling, general and administrative costs and other costs. The International Tire Operations segment had a $7 million pension curtailment gain in the second quarter of 2012.

Manufacturing cost efficiencies were $7 million unfavorable when compared with 2011. The 2012 results include $29 million of cost incurred in the first quarter related to labor issues at the Findlay, Ohio manufacturing facility. In 2011, $11 million of costs were incurred during the fourth quarter related to these labor issues.

The Company experienced decreases in the costs of certain of its principal raw materials in 2012 compared with 2011.

Products liability expenses totaled $104 million and $98 million in 2012 and 2011, respectively. The change in the expense resulted from adjustments to existing reserves based on the Company’s quarterly comprehensive review of outstanding claims.

Selling, general and administrative expenses were $257 million (6.1 percent of net sales) in 2012 compared with $182 million (4.6 percent of net sales) in 2011. The change in selling, general and administrative expenses was due primarily to increased costs related to brand investments, including selling expenses, incentive based compensation and increases in accruals for stock-based liabilities.

Interest expense decreased $7 million in 2012 from 2011. The decrease is primarily a result of lower debt levels. Interest income remained consistent with 2011.

Other income decreased $5 million in 2012 compared to 2011, primarily as a result of the change in accounting for COOCSA in 2011. COOCSA was treated as an unconsolidated subsidiary prior to the acquisition of an additional 20 percent ownership in the first quarter of 2011. In connection with its increased investment in COOCSA, the Company recorded a gain of $5 million in 2011 on its original investment, which represented the excess of the fair value over the carrying value of the investment as of the transaction date.

For the year ended December 31, 2012, the Company recorded an income tax expense of $116 million on income from continuing operations before income taxes of $368 million, prior to the deduction of noncontrolling shareholders’ interests of $32 million. Comparable amounts for 2011 were an income tax benefit of $135 million on income from continuing operations before income taxes of $134 million. The income tax benefit in 2011 included $167 million as a result the release of the majority of its U.S. valuation allowance described below.

Worldwide tax expense is impacted significantly by the mix of earnings in international jurisdictions with lower tax rates, partially offset by losses in jurisdictions with no tax benefit due to valuation allowances. Tax expense for 2012 has increased significantly over prior year primarily due to increased pretax earnings and the benefit of the release of the majority of its U.S. valuation allowance included in 2011.

The effects of inflation in areas other than raw materials and utilities did not have a material effect on the results of operations of the Company in 2012.

 

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North American Tire Operations Segment

 

     2011     Change
%
    2012     Change
%
    2013  
(Dollar amounts in millions)                               

Sales

   $ 2,837.6        9.1   $ 3,095.6        -19.7   $ 2,486.6   

Operating profit (loss)

   $ 77.4        282.3   $ 295.9        -31.0   $ 204.2   

Operating margin

     2.7     6.9  points      9.6     (1.4)  points      8.2

United States unit shipments changes:

          

Passenger tires

          

Segment

       -1.0       -13.4  

RMA members

       -1.7       -1.7  

Total Industry

       -2.5       4.4  

Light truck tires

          

Segment

       7.5       -11.9  

RMA members

       1.8       -0.2  

Total Industry

       -0.1       1.3  

Total light vehicle tires

          

Segment

       0.4       -13.1  

RMA members

       -1.3       -1.5  

Total Industry

       -2.2       4.0  

Total segment unit shipment changes

       1.3       -14.5  

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

Overview

The North American Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in the U.S. replacement market. In addition to manufacturing tires in the U.S., the segment has a joint venture manufacturing operation in Mexico, COOCSA. The segment also distributes tires for racing, medium truck and motorcycles that are manufactured at the Company’s subsidiaries. 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.

2013 versus 2012

Sales

Net sales of the North American Tire Operations segment decreased $609 million, or 19.7 percent from 2012. The decrease in sales was a result of lower unit volumes ($450 million) and unfavorable pricing and mix ($159 million). Unit shipments for the segment decreased 14.5 percent from 2012. In the U.S., the segment’s unit shipments of total light vehicle tires decreased 13.1 percent in 2013 compared with 2012. This decrease compares with a 1.5 percent decrease in total light vehicle shipments experienced by the members of the RMA, and a 4.0 percent increase in total light vehicle shipments experienced for the total industry (which includes an estimate for non-RMA members). The reduced volume in the North American segment is a result of increased competition from imports, primarily on private label and lower value entry level consumer tires. Additionally, volumes were impacted by the effects on shipping efficiency resulting from the continued implementation of an ERP system in the U.S. while the labor issues at CCT accounted for $88 million of the reduction in unit volumes for the year.

 

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Operating Profit

Operating profit for the segment decreased $92 million to $204 million in 2013. Lower raw material costs ($176 million) and lower products liability charges ($15 million) were offset by unfavorable pricing and mix ($161 million) and lower unit volumes ($95 million), including $19 million as a result of the labor issues at CCT. Selling, general and administrative costs ($7 million) were higher in 2013 due to investments in driving brand awareness and increased capitalized software amortization expense, partially offset by lower incentive related compensation expense. Other operating costs, including increased distribution costs associated with carrying higher inventories, were unfavorable ($14 million) compared with the same period in 2012.

Manufacturing cost efficiencies for 2013 were $6 million unfavorable, which includes the costs associated with production curtailments ($34 million) incurred in 2013. 2012 results include $29 million of costs incurred related to labor issues at the Findlay, Ohio manufacturing facility.

The segment’s internally calculated raw material index of 216 during the year was a decrease of 10.5 percent from 2012.

2012 versus 2011

Sales

Net sales of the North American Tire Operations segment increased by $258 million, or 9.1 percent from 2011. The increase in sales was the result of favorable pricing and mix ($140 million) and increased unit volumes ($118 million). Unit shipments for the segment increased 4.2 percent compared with 2011. In the U.S., the segment’s unit shipments of total light vehicle tires increased 3.4 percent in 2012 compared with 2011. This increase compared to a 4.7 percent decrease in total light vehicle shipments experienced by all members of the RMA and a 1.9 percent decrease for the total industry (which includes an estimate for non-RMA members). In 2012, the segment outperformed the industry in the unit shipments of broadline tires, as well as ultra-high performance, light truck and SUV tires. Shipments of the Roadmaster brand commercial tires, which are excluded from light vehicle shipments, were up 8.2 percent from 2011, also outperforming the industry.

Operating Profit

Operating profit for the segment increased $218 million to $296 million in 2012. The increase in operating profit was driven by lower raw material costs ($169 million), favorable price and mix ($94 million) and increased unit volumes ($18 million). Increased selling, general and administrative costs ($32 million), higher products liability charges ($6 million) and higher manufacturing costs ($3 million) partially offset the increases to the Company’s operating profit. Other operating costs were unfavorable ($22 million), including increased pension expenses. Higher incentive compensation costs, resulting from higher profits, affected selling, general and administrative costs and other costs.

Manufacturing efficiencies were $3 million unfavorable when compared with 2011. The 2012 results include $29 million of cost incurred in the first quarter related to labor issues at the Findlay, Ohio manufacturing facility. In 2011, $11 million of costs were incurred during the fourth quarter related to these labor issues.

The segment’s internally calculated raw material index of 242 during the year was a decrease of 6.5 percent from 2011.

International Tire Operations Segment

 

           Change           Change        
     2011     %     2012     %     2013  
(Dollar amounts in millions)                               

Sales

   $ 1,557.1        1.2   $ 1,576.0        -21.2   $ 1,241.5   

Operating profit

   $ 102.7        39.8   $ 143.6        -41.5   $ 84.0   

Operating margin

     6.6     0.1 point        9.1     (2.3) points        6.8

Unit sales change

       -5.8       -11.5  

 

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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. 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 also have 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.

2013 versus 2012

Sales

Net sales of the International Tire Operations segment for 2013 decreased $334 million, or 21.2 percent from 2012. The decrease in sales was a result of lower unit volumes ($206 million) and unfavorable pricing and mix ($147 million). The segment experienced favorable exchange rates in 2013 ($19 million). Domestic shipments in the PRC were negatively impacted by the work stoppage and other labor disruptions at CCT. In addition, intercompany shipments to North America were lower primarily due to the work stoppage and other labor disruptions at CCT. The labor issues at CCT accounted for $208 million of the reduction in unit volumes in 2013.

Operating Profit

Operating profit for the segment decreased $60 million to $84 million in 2013. The negative impact of the labor issues at CCT on operating profit was $36 million in 2013. The labor issues resulted in reduced volume ($27 million) and manufacturing inefficiencies ($9 million). The International Tire Operations segment operating profit included start-up costs related to the Company’s operations in Serbia ($6 million) and a pension curtailment gain ($7 million) in 2012, neither of which recurred in 2013.

Lower raw material costs ($128 million) and decreased selling, general and administrative costs ($4 million) were offset by unfavorable pricing and mix ($140 million), lower unit volumes in addition to the effects of CCT ($11 million) and unfavorable manufacturing efficiencies ($5 million). Other cost changes were favorable ($1 million) compared with 2012.

2012 versus 2011

Sales

Net sales of the International Tire Operations segment in 2012 increased by $19 million, or 1.2 percent, from the sales levels achieved in 2011. The segment increase reflects higher unit volumes ($170 million) and favorable currency translation ($25 million), which were partially offset by lower pricing and mix ($176 million). The segment’s increase in volume was the result of higher unit sales of truck and bus radial tires, as well as increased sales of light vehicle tires as the segment continued its efforts to expand distribution and supply of these tires in the market.

Operating Profit

Operating profit for the segment in 2012 was $41 million higher than 2011. The increase in operating profit was due to lower raw material costs ($193 million) and increased unit volumes ($14 million). These improvements were partially offset by lower pricing and mix ($142 million) and unfavorable manufacturing efficiencies ($4 million). Selling, general and administrative charges were higher ($22 million) as a result of higher selling costs associated with increased sales volume, higher advertising spend and additional investments in the distribution network in the Chinese market. Start-up costs related to the Company’s operations in Serbia ($6 million) reduced operating profit in 2012. The segment had a $7 million pension curtailment gain in the second quarter of 2012.

Outlook for the Company

The Company is viewing 2014 with cautious optimism as the year looks to be another period of continuing and new challenges. Demand for tires will vary by region and likely remain sluggish compared to historical growth rates in some key markets.

The Company believes that the most significant effects from issues at the CCT Joint Venture and ERP system deployments during 2013 will diminish during the first quarter of 2014. As a result, the Company expects unit volumes to begin to recover in key markets during the first half of 2014 and the Company believes it will meet or exceed industry unit volume growth rates in its key markets for the full year. This includes the impacts from increased competition for private label and lower price point tires in the United States.

 

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As discussed above, the Company expects to determine the long-term ownership of the CCT Joint Venture in 2014. The Company will continue to pursue its strategic goals for growth, including in China, regardless of changes to the long-term ownership of CCT.

The Company expects raw material prices to remain volatile. First quarter 2014 raw material prices are expected to be approximately 3 percent lower compared to the fourth quarter of 2013. On a longer term basis the Company expects raw material prices to generally increase, with periods of volatility. The industry has demonstrated an ability to price to help offset raw material cost volatility, but these price changes typically lag the raw material price changes.

The Company will be investing in the business and expects capital expenditures for 2014 to total $165 million to $175 million. While expenditures are higher than depreciation and amortization, the investments are in line with its strategic goals to enhance the capability of global assets and resources.

The Company expects its effective tax rate for 2014 will most likely be between 29 percent and 35 percent.

The Company’s record of achievements gives it confidence that it can successfully compete in a volatile economy and industry. The Company’s focus in 2014 will continue to be guided by its Strategic Plan which calls for achieving profitable top line growth, improving its global cost structure and improving organizational capabilities. The Company believes it will respond and manage the business accordingly to deliver value to its stakeholders.

Liquidity and Capital Resources

Generation and uses of cash - Net cash provided by operating activities of continuing operations was $272 million in 2013, a decrease from $454 million cash provided in 2012. During 2013, net income provided $134 million and other non-cash charges totaled $217 million. Changes in working capital accounts consumed $79 million. Inventory balances decreased as a result of lower raw material purchases and lower finished goods inventory due to the situation at CCT and production curtailments in North America. Accounts payable balances have decreased as a result of lower raw material purchases. The use of cash in Other items is due primarily to the reduction in accrued products liability as payments exceeded the provision and funding of the pension retirement trusts.

Net cash used in investing activities during 2013 reflects capital expenditures of $180 million, a decrease of $7 million from 2012. The Company spent $50 million and $18 million in 2012 and 2013, respectively, related to the implementation of its global ERP system. During the first quarter of 2012, the Company acquired assets in Serbia for approximately $19 million. During the first quarter of 2011, the Company invested $17 million to increase its ownership percentage in COOCSA to approximately 58 percent, and because of the increase in voting rights, now consolidates the results of those operations.

The Company’s capital expenditure commitments at December 31, 2013 were $17 million and are included in the “Unconditional purchase” line of the Contractual Obligations table which appears later in this section.

During 2011, 2012 and 2013, the Company repaid $23 million, $100 million and $12 million of short-term notes, respectively. During this same period, the Company borrowed additional funds using long-term debt and the Company repaid $1 million, $22 million and $24 million of maturing long-term debt in 2011, 2012 and 2013, respectively. In 2011, the Company paid $117 million to purchase the remaining 50-percent ownership interest in Cooper Kunshan.

Dividends paid on the Company’s common shares were $26 million in 2011 and 2012 and $27 million in 2013. The Company has maintained a quarterly dividend of 10.5 cents per share in each quarter during the three years ending December 31, 2013. The Company also paid $6 million, $3 million and $10 million in dividends to noncontrolling shareholders in the Cooper Chengshan and COOCSA joint ventures in 2011, 2012 and 2013, respectively.

During 2013, stock options were exercised to acquire 93,845 shares of common stock and the Company recorded $0.5 million of excess tax benefits on equity instruments. During 2012, stock options were exercised to acquire 798,967 shares of common stock and the Company recorded $2.5 million of excess tax benefits on equity instruments. During 2011, stock options were exercised to acquire 315,785 shares of common stock and the Company recorded $0.4 million of excess tax benefits on equity instruments.

Available cash, credit facilities and contractual commitments - At December 31, 2013, the Company had cash and cash equivalents totaling $398 million.

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 has a July 2016 maturity date. The Company also has an accounts receivable securitization facility with a $175 million limit which was amended in August 2012 to extend the maturity until June 2015. These credit facilities have no significant financial covenants until available credit is less than specified amounts. At December 31, 2013, the Company was not in compliance with the covenants requiring the Company to furnish financial statements, as the third quarter Form 10-Q had not been filed. The Company filed the third quarter Form 10-Q on February 28, 2014 and is now in compliance with these covenants. The credit facilities

 

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were undrawn at December 31, 2013, except for amounts used to back letters of credit. The Company’s additional borrowing capacity, net of amounts used to back letters of credit and based on eligible collateral through use of its credit facility with its bank group and its accounts receivable securitization facility at December 31, 2013, would have been $242 million.

The Company’s consolidated operations in Asia have annual renewable unsecured credit lines that provide up to $453 million of borrowings and do not contain financial covenants. The additional borrowing capacity on the Asian credit lines, based on eligible collateral and the short-term notes payable, totaled $407 million at December 31, 2013.

The Company believes that its cash and cash equivalents 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 entire amount of short-term notes payable outstanding at December 31, 2013 is primarily debt of consolidated subsidiaries. The Company expects its subsidiaries to refinance or pay these amounts during 2014.

In connection with the Company’s acquisition of its initial interest in Cooper Chengshan, beginning January 1, 2009 and continuing through December 31, 2011, the noncontrolling shareholders had the right to sell and, if exercised, the Company had the obligation to purchase, the remaining 49 percent noncontrolling interest share at a minimum price of $63 million. In 2009, the Company received notification from a noncontrolling shareholder of its intention to exercise its put option and after receiving governmental approvals in 2010, the Company purchased the 14 percent share for $18 million. The remaining noncontrolling shareholder had the right to sell its 35 percent share to the Company at a minimum price of $45 million. This right expired on December 31, 2011.

The Company’s cash requirements relating to contractual obligations at December 31, 2013 are summarized in the following table:

 

(Dollar amounts in thousands)    Payment Due by Period  
            Less than                    After  

Contractual Obligations

   Total      1 year      1-3 years      3-5 years      5 years  

Long-term debt

   $ 330,165       $ 17,268       $ 22,439       $ —         $ 290,458   

Capital lease obligations and other

     8,662         600         1,200         1,200         5,662   

Interest on debt and capital lease obligations

     207,314         25,195         47,713         46,255         88,151   

Operating leases

     91,103         23,692         30,698         18,050         18,663   

Notes payable (a)

     22,105         22,105         —           —           —     

Unconditional purchase (b)

     141,963         141,963         —           —           —     

Postretirement benefits other than pensions (c)

     252,866         14,213         30,000         30,000         178,653   

Pensions (d)

     292,108         45,000         100,000         100,000         47,108   

Other long-term liabilities (e)

     33,214         1,058         12,247         802         19,107   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 1,379,500       $ 291,094       $ 244,297       $ 196,307       $ 647,802   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Financing obtained from financial institutions in the PRC and Mexico to support the Company’s operations there.
(b) Noncancelable purchase order commitments for capital expenditures and raw materials, principally natural rubber, made in the ordinary course of business.
(c) Represents benefits payments for postretirement benefits other than pensions liability.
(d) Represents Company contributions to the retirement trusts based on current assumptions.
(e) Deferred compensation, warranty reserve, nonqualified benefit plans and other non-current liabilities.

Credit agency ratings – Standard & Poor’s has rated the Company’s long-term corporate credit and senior unsecured debt at BB- with a negative outlook. Moody’s Investors Service has assigned a B1 corporate family rating and a B2 rating to senior unsecured debt – also with a negative outlook.

New Accounting Standards

For a discussion of recent accounting pronouncements and their impact on the Company, see the “Significant Accounting Policies - Accounting pronouncements” note to the consolidated financial statements.

Critical Accounting Policies

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. When more

 

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than one accounting principle, or the method of its application, is generally accepted, the Company selects the principle or method that is appropriate in its specific circumstances. The Company’s accounting policies are more fully described in the “Significant Accounting Policies” note to the consolidated financial statements. Application of these accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment or estimation than other accounting policies.

Products liability – 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 U.S. 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 40 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.

Effective April 1, 2003, the Company established a new excess liability insurance program. The new program covers the Company’s products liability claims occurring on or after April 1, 2003 and is occurrence-based insurance coverage which includes a relatively high per claim retention limit.

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.

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 settlements because an average settlement cost would not be meaningful since the products liability claims faced by the Company are unique and widely variable and accordingly, the claims asserted and 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.

During 2012, the Company increased its products liability reserve by $72 million. The addition of another year of self-insured incidents accounted for $49 million of this increase. The Company revised its estimates of future settlements for unasserted and premature claims. These revisions increased the reserve by $9 million. Finally, changes in the amount of reserves for cases where sufficient information is known to estimate a liability increased by $14 million.

During 2013, the Company increased its products liability reserve by $60 million. The addition of another year of self-insured incidents accounted for $51 million of this increase. The Company revised its estimates of future settlements for unasserted and premature claims. These revisions increased the reserve by $8 million. Finally, changes in the amount of reserves for cases where sufficient information is known to estimate a liability increased by $1 million.

 

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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.

During 2012, the Company paid $73 million and during 2013, the Company paid $77 million to resolve cases and claims. The Company’s products liability reserve balance at December 31, 2012 totaled $206 million (current portion of $70 million). At December 31, 2013, the products liability reserve balance totaled $189 million (current portion of $70 million).

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.

Products liability costs totaled $98 million, $104 million and $89 million in 2011, 2012 and 2013, respectively.

Income Taxes – The Company is required to make certain estimates and judgments to determine income tax expense for financial statement purposes. The more critical estimates and judgments include assessing uncertain tax positions and measuring unrecognized tax benefits, determining whether deferred tax assets will be realized and whether foreign earnings will be indefinitely reinvested. Changes to these estimates may result in an increase or decrease to tax expense in subsequent periods.

The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. The Company applies the rules under Accounting Standards Codification (“ASC”) 740-10 in its Accounting for Uncertainty in Income Taxes for uncertain tax positions using a “more likely than not” recognition threshold. Pursuant to these rules, the Company will initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the “more likely than not” threshold, the measurement of the tax benefit will be based on the Company’s estimate of the ultimate amount to be sustained if audited by the taxing authority. The Company recognizes tax liabilities in accordance with ASC 740-10 and adjusts these liabilities when judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

The Company’s liability for unrecognized tax benefits, exclusive of interest, totaled approximately $6 million at December 31, 2013. In accordance with Company policy, the liability relating to pre-2011 years was released or reclassified following the effective settlement of a U.S. federal income tax examination for years prior to 2011. The unrecognized tax benefits at December 31, 2013 relate to uncertain tax positions in tax years 2011 through 2013.

The Company must assess the likelihood that it will be able to recover its deferred tax asset. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating the Company’s ability to recover deferred tax assets within the jurisdiction from which they arise, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of recent operations. In projecting future taxable income, the Company begins with historical results adjusted for the results of discontinued operations and changes in accounting policies, and incorporates assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income (loss).

During 2011, the Company released the valuation allowance that was previously established related to most of its deferred tax assets in the United States, based upon its assessment of realizability of those assets. The Company continues to maintain a valuation allowance against a portion of its U.S. and non-U.S. deferred tax asset position at December 31, 2013, 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 and state tax credits by a valuation allowance of $22 million. In addition, the Company has recorded valuation allowances of $10 million relating primarily 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.

 

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The Company generally considers the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs. In the event that the Company plans to repatriate foreign earnings, the income tax provision would be adjusted in the period it is determined that the earnings will no longer be indefinitely invested outside the United States. During 2014, the Company plans to remit dividends from two of its non-U.S. subsidiaries. As a result of this decision made in 2013, the Company provided incremental U.S. income and foreign withholding tax on these amounts. In the Company’s judgment, the remaining portion of the Company’s foreign earnings is considered to be indefinitely reinvested outside the United States. The Company has not recorded a deferred tax liability related to the U.S. federal and state income taxes and foreign withholding taxes on approximately $419 million of these undistributed earnings. It is not practicable to determine the amount of additional U.S. income taxes that could be payable upon remittance of these earnings since taxes payable would be reduced by foreign tax credits based upon income tax laws and circumstances at the time of distribution, plus the uncertainty in estimating the impacts of future exchange rates.

Impairment of long-lived assets – The Company’s long-lived assets include property, plant and equipment and other assets that are intangible. If an indicator of impairment exists for certain groups of property, plant and equipment or definite-lived intangible assets, the Company will compare the forecasted undiscounted cash flows attributable to the assets to their carrying values. If the carrying values exceed the undiscounted cash flows, the Company then determines the fair values of the assets. Then if the carrying values exceed the fair values of the assets, an impairment charge is recognized for the difference.

The Company assesses the potential impairment of its indefinite-lived assets at least annually or when events or circumstances indicate impairment may have occurred. The carrying value of these assets is compared to their fair value. If the carrying values exceed the fair values, then a hypothetical purchase price allocation is computed and the impairment charge, if any, is then recorded.

The Company cannot predict the occurrence of future impairment-triggering events. Such events may include, but are not limited to, significant industry or economic trends and strategic decisions made in response to changes in the economic and competitive conditions impacting the Company’s businesses.

Pension and postretirement benefits – The Company has recorded significant pension liabilities in the U.S. and the U.K. and other postretirement benefit liabilities in the U.S. that are developed from actuarial valuations. The determination of the Company’s pension liabilities requires key assumptions regarding discount rates used to determine the present value of future benefits payments, expected returns on plan assets and the rates of future compensation increases. The discount rate is also significant to the development of other postretirement benefit liabilities. The Company determines these assumptions in consultation with its investment advisors and actuaries.

The discount rate reflects the rate used to estimate the value of the Company’s pension and other postretirement liabilities for which they could be settled at the end of the year. When determining the discount rate, the Company discounted the expected pension disbursements over the next fifty years and based upon this analysis, the Company used a discount rate of 4.55 percent to measure its U.S. pension liabilities at December 31, 2013, which is higher than the 3.75 percent used at December 31, 2012. Similarly, the Company discounted the expected disbursements of its other postretirement benefit liabilities and based upon this analysis, the Company used a discount rate of 4.60 percent to measure it other postretirement liabilities at December 31, 2013, which is higher than the 3.60 percent used at December 31, 2012. A similar analysis was completed in the U.K. and the Company increased the discount rate used to measure its U.K. pension liabilities to 4.50 percent at December 31, 2013 from 4.40 percent at December 31, 2012.

The rate of future compensation increases is used to determine the future benefits to be paid for salaried and non-bargained employees, since the amount of a participant’s pension is partially attributable to the compensation earned during his or her career. The rate reflects the Company’s expectations over time for salary and wage inflation and the impacts of promotions and incentive compensation, which is typically tied to profitability. Effective July 1, 2009, the Company froze the Spectrum (salaried employees) Plan in the U.S. so this assumption is not applicable to valuing the pension liability. Effective April 6, 2012, the Company amended the Cooper Avon Pension Plan to freeze all future pension benefits so this assumption is not applicable to valuing the pension liability.

The assumed long-term rate of return on pension plan assets is applied to the market value of plan assets to derive a reduction to pension expense that approximates the expected average rate of asset investment return over ten or more years. A decrease in the expected long-term rate of return will increase pension expense, whereas an increase in the expected long-term rate will reduce pension expense. Decreases in the level of actual plan assets will serve to increase the amount of pension expense, whereas increases in the level of actual plan assets will serve to decrease the amount of pension expense. Any shortfall in the actual return on plan assets from the expected return will increase pension expense in future years due to the amortization of the shortfall, whereas any excess in the actual return on plan assets from the expected return will reduce pension expense in future periods due to the amortization of the excess.

The Company’s investment strategy is to match assets to the cash flows of the pension obligations. The Company’s current asset allocation for U.S. plans’ assets is 66 percent in equity securities, 30 percent in debt securities and 4 percent in cash. The Company’s current asset allocation for U.K. plan assets is 51 percent in equity securities, 40 percent in bonds and 5 percent in property and infrastructure funds and 4 percent in cash. Equity security investments are structured to achieve a balance between growth and value stocks. The Company determines the annual rate of return on pension assets by first analyzing the composition

 

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of its asset portfolio. Historical rates of return are applied to the portfolio and may be adjusted based on a review by the Company’s investment advisors and actuaries. Industry comparables and other outside guidance is also considered in the annual selection of the expected rates of return on pension assets.

The actual return on U.S. pension plans’ assets was approximately 14.00 percent in 2013 compared to an asset gain of approximately 12.00 percent in 2012. The actual return on U.K. pension plan assets approximated 11.40 percent in 2013 compared to an asset gain of 11.30 percent in 2012. The Company’s estimate for the expected long-term return on its U.S. plan assets used to derive 2012 and 2013 pension expense was 7.00 percent. The expected long-term return on U.K. plan assets used to derive the 2012 and 2013 pension expense was 6.48 percent and 6.05 percent, respectively.

The Company has accumulated net deferred losses resulting from the shortfalls and excesses in actual returns on pension plan assets from expected returns and, in the measurement of pensions and other postretirement liabilities, decreases and increases in the discount rate and the rate of future compensation increases and differences between actuarial assumptions and actual experience totaling $523.2 million at December 31, 2013. These amounts are being amortized in accordance with the corridor amortization requirements of U.S. GAAP over periods ranging from 10 years to 14 years. Amortization of these net deferred losses was $46 million in 2012 and $53 million in 2013.

The Company has implemented household caps on the amounts of retiree medical benefits it will provide to certain retirees. The caps do not apply to individuals who retired prior to certain specified dates. Costs in excess of these caps will be paid by plan participants. The Company implemented increased cost sharing in 2004 in the retiree medical coverage provided to certain eligible current and future retirees. Since then cost sharing has expanded such that nearly all covered retirees pay a charge to be enrolled. See Item 1A. Risk Factors – “The Company’s expenditures for pension and postretirement obligations could be materially higher than it has predicted if its underlying assumptions prove to be incorrect.”

In accordance with U.S. GAAP, the Company recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of its pension and other postretirement benefit (“OPEB”) plans and the net unrecognized actuarial losses and unrecognized prior service costs in the consolidated balance sheets. The unrecognized actuarial losses and unrecognized prior service costs (components of cumulative other comprehensive loss in the stockholders’ equity section of the balance sheet) will be subsequently recognized as net periodic pension cost pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit costs in the same periods will be recognized as a component of other comprehensive income.

 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to fluctuations in interest rates and currency exchange rates from its financial instruments. The Company actively monitors its exposure to risk from changes in foreign currency exchange rates and interest rates. Derivative financial instruments are used to reduce the impact of these risks. See the “Significant Accounting Policies - Derivative financial instruments” and “Fair Value of Financial Instruments” notes to the consolidated financial statements for additional information.

The Company has estimated its market risk exposures using sensitivity analysis. These analyses measure the potential loss in future earnings, cash flows or fair values of market sensitive instruments resulting from a hypothetical ten percent change in interest rates or foreign currency exchange rates.

A decrease in interest rates by ten percent of the actual rates would have adversely affected the fair value of the Company’s fixed-rate, long-term debt by approximately $14 million and $13 million at December 31, 2012 and December 31, 2013, respectively. An increase in interest rates by ten percent of the actual rates for the Company’s floating rate long-term debt obligations would not have been material to the Company’s results of operations and cash flows.

To manage the volatility of currency exchange exposures related to future sales and purchases, the Company first nets the exposures on a consolidated basis to take advantage of natural offsets. Then, for the residual portion, the Company enters into forward exchange contracts and purchases options with maturities of less than 12 months pursuant to the Company’s policies and hedging practices. The changes in fair value of these hedging instruments are offset, in part or in whole, by corresponding changes in the fair value of cash flows of the underlying exposures being hedged. The Company’s unprotected exposures to earnings and cash flow fluctuations due to changes in foreign currency exchange rates were not significant at December 31, 2012 and 2013.

The Company enters into foreign exchange contracts to manage its exposure to foreign currency denominated receivables and payables. The impact from a ten percent change in foreign currency exchange rates on the Company’s foreign currency denominated obligations and related foreign exchange contracts would not have been material to the Company’s results of operations and cash flows.

 

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31

(Dollar amounts in thousands except per share amounts)

 

     2011     2012     2013  

Net sales

   $ 3,907,820      $ 4,200,836      $ 3,439,233   

Cost of products sold

     3,562,813        3,546,568        2,923,042   
  

 

 

   

 

 

   

 

 

 

Gross profit

     345,007        654,268        516,191   

Selling, general and administrative

     181,706        257,306        275,477   
  

 

 

   

 

 

   

 

 

 

Operating profit

     163,301        396,962        240,714   

Interest expense

     (36,191     (29,546     (27,906

Interest income

     3,190        2,560        810   

Other - income (expense)

     3,846        (1,526     (647
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     134,146        368,450        212,971   

Provision (benefit) for income taxes

     (135,457     116,024        79,406   
  

 

 

   

 

 

   

 

 

 

Net income

     269,603        252,426        133,565   

Net income attributable to noncontrolling shareholders’ interests

     16,100        32,055        22,552   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Cooper Tire & Rubber Company

   $ 253,503      $ 220,371      $ 111,013   
  

 

 

   

 

 

   

 

 

 

Basic earnings per share:

      

Net income attributable to Cooper Tire & Rubber Company common stockholders

   $ 4.08      $ 3.52      $ 1.75   
  

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

      

Net income attributable to Cooper Tire & Rubber Company common stockholders

   $ 4.02      $ 3.49      $ 1.73   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements, pages 37 to 66.

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31

(Dollar amounts in thousands except per share amounts)

 

     2011     2012     2013  

Net income

   $ 269,603      $ 252,426      $ 133,565   

Other comprehensive income (loss)

      

Cumulative currency translation adjustments

      

Foreign currency translation adjustments

     7,487        13,720        18,730   

Currency loss recognized as part of acquisition of noncontrolling shareholder interest

     4,893        —          —     
  

 

 

   

 

 

   

 

 

 

Cumulative currency translation adjustments

     12,380        13,720        18,730   

Financial instruments

      

Change in the fair value of derivatives and marketable securities

     9,189        (7,469     1,727   

Income tax benefit (expense) on derivative instruments

     (899     2,555        (539
  

 

 

   

 

 

   

 

 

 

Financial instruments, net of tax

     8,290        (4,914     1,188   

Postretirement benefit plans

      

Amortization of actuarial loss

     37,333        46,712        52,849   

Amortization of prior service credit

     (1,435     (873     (566

Pension curtailment gain

     —          (7,460     —     

Actuarial gain (loss)

     (162,065     (97,972     158,589   

Income tax (expense) benefit on postretirement benefit plans

     45,283        22,083        (84,713

Foreign currency translation effect

     169        199        (1,366
  

 

 

   

 

 

   

 

 

 

Postretirement benefit plans, net of tax

     (80,715     (37,311     124,793   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (60,045     (28,505     144,711   
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     209,558        223,921        278,276   

Less comprehensive income attributable to noncontrolling shareholders’ interests

     16,525        34,198        25,757   
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Cooper Tire & Rubber Company

   $ 193,033      $ 189,723      $ 252,519   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements, pages 37 to 66.

 

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CONSOLIDATED BALANCE SHEETS

December 31

(Dollar amounts in thousands)

 

     2012      2013  

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 351,817       $ 397,731   

Notes receivable

     47,646         86,965   

Accounts receivable, less allowances of $13,267 at 2012 and $16,996 at 2013

     415,460         360,405   

Inventories at lower of cost or market:

     

Finished goods

     380,839         360,686   

Work in process

     40,953         35,576   

Raw materials and supplies

     140,076         120,913   
  

 

 

    

 

 

 
     561,868         517,175   

Other current assets

     72,904         92,514   
  

 

 

    

 

 

 

Total current assets

     1,449,695         1,454,790   

Property, plant and equipment:

     

Land and land improvements

     48,677         51,186   

Buildings

     315,307         326,635   

Machinery and equipment

     1,740,748         1,847,576   

Molds, cores and rings

     224,456         246,760   
  

 

 

    

 

 

 
     2,329,188         2,472,157   

Less accumulated depreciation and amortization

     1,399,933         1,497,888   
  

 

 

    

 

 

 

Net property, plant and equipment

     929,255         974,269   

Goodwill

     18,851         18,851   

Intangibles, net of accumulated amortization of $48,340 at 2012 and $63,354 at 2013

     150,017         160,308   

Restricted cash

     7,741         2,759   

Deferred income tax assets

     228,849         111,644   

Other assets

     16,752         15,526   
  

 

 

    

 

 

 

Total assets

   $ 2,801,160       $ 2,738,147   
  

 

 

    

 

 

 

See Notes to Consolidated Financial Statements, pages 37 to 66.

 

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CONSOLIDATED BALANCE SHEETS

December 31

(Dollar amounts in thousands, except par value amounts)

(Continued)

 

     2012     2013  

LIABILITIES AND EQUITY

    

Current liabilities:

    

Notes payable

   $ 32,836      $ 22,105   

Accounts payable

     379,867        302,422   

Accrued liabilities

     221,822        211,090   

Income taxes payable

     18,297        11,098   

Current portion of long-term debt

     2,319        17,868   
  

 

 

   

 

 

 

Total current liabilities

     655,141        564,583   

Long-term debt

     336,142        320,959   

Postretirement benefits other than pensions

     291,546        238,653   

Pension benefits

     432,922        291,808   

Other long-term liabilities

     168,967        157,918   

Deferred income tax liabilities

     8,026        6,601   

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 at 2012 and at 2013

     87,850        87,850   

Capital in excess of par value

     919        4,433   

Retained earnings

     1,657,936        1,741,611   

Cumulative other comprehensive loss

     (551,526     (410,020
  

 

 

   

 

 

 
     1,195,179        1,423,874   

Less: common shares in treasury at cost (24,691,431 at 2012 and 24,464,264 at 2013)

     (437,555     (433,008
  

 

 

   

 

 

 

Total parent stockholders’ equity

     757,624        990,866   

Noncontrolling shareholders’ interests in consolidated subsidiaries

     150,792        166,759   
  

 

 

   

 

 

 

Total equity

     908,416        1,157,625   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 2,801,160      $ 2,738,147   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements, pages 37 to 66.

 

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CONSOLIDATED STATEMENTS OF EQUITY

(Dollar amounts in thousands except per share amounts)

 

          Total Equity  
    Redeemable
Noncontrolling
Shareholders’
Interests
    Common
Stock
$1 Par Value
    Capital In
Excess of
Par Value
    Retained
Earnings
    Cumulative
Other
Comprehensive
Income (Loss)
    Common
Shares in
Treasury
    Total
Parent
Stockholders’
Equity
    Noncontrolling
Shareholders’
Interests in
Consolidated
Subsidiaries
    Total  

Balance at January 1, 2011

    71,442        87,850        61,444        1,247,265        (468,063     (467,707     460,789        62,261        523,050   

Net income

    13,628            253,503            253,503        2,472        255,975   

Other comprehensive income (loss)

    3,594              (60,470       (60,470     (3,169     (63,639
 

 

 

       

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

    17,222            253,503        (60,470       193,033        (697     192,336   

Dividends payable to noncontrolling shareholder

    (5,731                

Acquisition of business

                  37,853        37,853   

Acquisition of noncontrolling shareholders’ interests

        (51,812     (10,082     7,655          (54,239     (62,261     (116,500

Expiration of put option

    (82,933                 82,933        82,933   

Stock compensation plans, including tax benefit of $412

        (8,590     (167       13,102        4,345          4,345   

Cash dividends - $.42 per share

          (26,127         (26,127       (26,127
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

    —          87,850        1,042        1,464,392        (520,878     (454,605     577,801        120,089        697,890   

Net income

          220,371            220,371        32,055        252,426   

Other comprehensive income (loss)

            (30,648       (30,648     2,143        (28,505
       

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

          220,371        (30,648       189,723        34,198        223,921   

Dividends payable to noncontrolling shareholder

                  (3,495     (3,495

Acquisition of business

                 

Acquisition of noncontrolling shareholders’ interests

        (71           (71       (71

Stock compensation plans, including tax benefit of $2,469

        (52     (554       17,050        16,444          16,444   

Cash dividends - $.42 per share

          (26,273         (26,273       (26,273
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

    —          87,850        919        1,657,936        (551,526     (437,555     757,624        150,792        908,416   

Net income

          111,013            111,013        22,552        133,565   

Other comprehensive income (loss)

            141,506          141,506        3,205        144,711   
       

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

          111,013        141,506          252,519        25,757        278,276   

Dividends payable to noncontrolling shareholder

                  (9,790     (9,790

Stock compensation plans, including tax benefit of $494

        3,514        (734       4,547        7,327          7,327   

Cash dividends - $.42 per share

          (26,604         (26,604       (26,604
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

  $ —        $ 87,850      $ 4,433      $ 1,741,611      $ (410,020   $ (433,008   $ 990,866      $ 166,759      $ 1,157,625   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements, pages 37 to 66.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31

(Dollar amounts in thousands)

 

     2011     2012     2013  

Operating activities:

      

Net income

   $ 269,603      $ 252,426      $ 133,565   

Adjustments to reconcile net income to net cash provided by operations:

      

Depreciation and amortization

     122,899        128,916        134,751   

Deferred income taxes

     (168,690     209        34,029   

Stock based compensation

     4,133        8,036        6,973   

Change in LIFO reserve

     45,352        (63,685     (11,411

Amortization of unrecognized postretirement benefits

     35,325        45,839        52,283   

Loss on sale of assets

     2,838        —          —     

Changes in operating assets and liabilities of continuing operations:

      

Accounts and notes receivable

     (27,131     38,180        25,361   

Inventories

     (105,583     (28,201     62,620   

Other current assets

     6,629        (8,936     (28,851

Accounts payable

     (58,048     37,939        (81,603

Accrued liabilities

     773        60,318        4,639   

Other items

     (2,583     (16,821     (59,981
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     125,517        454,220        272,375   

Investing activities:

      

Additions to property, plant and equipment and capitalized software

     (155,406     (187,336     (180,448

Acquisition of businesses, net of cash acquired

     (17,380     —          —     

Acquisition of assets in Serbia

     —          (18,534     —     

Proceeds from the sale of assets

     3,450        798        723   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (169,336     (205,072     (179,725

Financing activities:

      

Net payments on short-term debt

     (23,590     (99,805     (11,915

Additions to long-term debt

     30,017        10,089        24,527   

Repayments of long-term debt

     (600     (22,013     (24,162

Acquisition of noncontrolling shareholder interest

     (116,500     (71     —     

Payment of dividends to noncontrolling shareholders

     (5,731     (3,495     (9,790

Payment of dividends

     (26,127     (26,273     (26,604

Issuance of common shares and excess tax benefits on options

     4,470        8,963        1,438   
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (138,061     (132,605     (46,506

Effects of exchange rate changes on cash of continuing operations

     2,231        1,564        (230
  

 

 

   

 

 

   

 

 

 

Changes in cash and cash equivalents

     (179,649     118,107        45,914   

Cash and cash equivalents at beginning of year

     413,359        233,710        351,817   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 233,710      $ 351,817      $ 397,731   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements, pages 37 to 66.

 

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Notes to Consolidated Financial Statements

(Dollar amounts in thousands except per share amounts)

Note 1 - Significant Accounting Policies

Principles of consolidation - The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Acquired businesses are included in the consolidated financial statements from the dates of acquisition. All intercompany accounts and transactions have been eliminated.

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-percent owned are consolidated, investments in subsidiaries of 50 percent or less but greater than 20-percent are accounted for using the equity method, and investments in subsidiaries of 20 percent 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.

Cash and cash equivalents and Short-term investments - The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents.

The Company’s objectives related to the investment of cash not required for operations is to preserve capital, meet the Company’s liquidity needs and earn a return consistent with these guidelines and market conditions. Investments deemed eligible for the investment of the Company’s cash include: 1) U.S. Treasury securities and general obligations fully guaranteed with respect to principal and interest by the government; 2) obligations of U.S. government agencies; 3) commercial paper or other corporate notes of prime quality purchased directly from the issuer or through recognized money market dealers; 4) time deposits, certificates of deposit or bankers’ acceptances of banks rated “A-” by Standard & Poor’s or “A3” by Moody’s; 5) collateralized mortgage obligations rated “AAA” by Standard & Poor’s and “Aaa” by Moody’s; 6) tax-exempt and taxable obligations of state and local governments of prime quality; and 7) mutual funds or outside managed portfolios that invest in the above investments. The Company had cash and cash equivalents totaling $351,817 and $397,731 at December 31, 2012 and December 31, 2013, respectively. The majority of the cash and cash equivalents were invested in eligible financial instruments in excess of amounts insured by the Federal Deposit Insurance Corporation and, therefore, subject to credit risk. Management believes that the probability of losses related to credit risk on investments classified as cash and cash equivalents is unlikely.

Notes receivable – The Company has received bank secured notes from certain of its customers in the PRC to settle trade accounts receivable. These notes generally have maturities of six months or less and are redeemable at the bank of issuance. The Company evaluates the credit risk of the issuing bank prior to accepting a bank secured note from a customer. Management believes that the probability of material losses related to credit risk on notes receivable is remote.

Accounts receivable – The Company records trade accounts receivable when revenue is recorded in accordance with its revenue recognition policy and relieves accounts receivable when payments are received from customers.

Allowance for doubtful accounts - The allowance for doubtful accounts is established through charges to the provision for bad debts. The Company evaluates the adequacy of the allowance for doubtful accounts throughout the year. The evaluation includes historical trends in collections and write-offs, management’s judgment of the probability of collecting specific accounts and management’s evaluation of business risk. This evaluation is inherently subjective, as it requires estimates that are susceptible to revision as more information becomes available. Accounts are determined to be uncollectible when the debt is deemed to be worthless or only recoverable in part, and are written off at that time through a charge against the allowance for doubtful accounts.

Inventories - Inventories are valued at cost, which is not in excess of market. Inventory costs have been determined by the LIFO method for substantially all U.S. inventories. Costs of other inventories have been determined by the first-in, first-out (“FIFO”) and average cost methods which include direct material, direct labor, and applicable manufacturing and engineering overhead costs.

Long-lived assets - Property, plant and equipment are recorded at cost and depreciated or amortized using the straight-line or accelerated methods over the following expected useful lives:

 

Buildings and improvements

   10 to 40 years

Machinery and equipment

   5 to 14 years

Furniture and fixtures

   5 to 10 years

Molds, cores and rings

   4 to 10 years

 

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The Company capitalizes certain internal and external costs incurred to acquire or develop internal-use software. Capitalized software costs are amortized over the estimated useful life of the software.

Intangibles with definite lives include trademarks, technology and intellectual property which are amortized over their useful lives, which range from five years to 30 years. The Company evaluates the recoverability of long-lived assets based on undiscounted projected cash flows excluding interest and taxes when any impairment is indicated. Goodwill and indefinite-lived intangibles are assessed for potential impairment at least annually or when events or circumstances indicate impairment may have occurred.

Earnings per common share – Net income per share is computed on the basis of the weighted average number of common shares outstanding each year. 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:

(Number of shares and dollar amounts in thousands except per share amounts)

 

     2011      2012      2013  

Numerator

        

Numerator for basic and diluted earnings per share - income from continuing operations available to common stockholders

   $ 253,503       $ 220,371       $ 111,013   

Denominator

        

Denominator for basic earnings per share - weighted average shares outstanding

     62,150         62,561         63,327   

Effect of dilutive securities - stock options and other stock units

     862         663         955   
  

 

 

    

 

 

    

 

 

 

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

     63,012         63,224         64,282   
  

 

 

    

 

 

    

 

 

 

Basic earnings per share:

        

Net income attributable to Cooper Tire & Rubber Company common stockholders

   $ 4.08       $ 3.52       $ 1.75   
  

 

 

    

 

 

    

 

 

 

Diluted earnings per share:

        

Net income attributable to Cooper Tire & Rubber Company common stockholders

   $ 4.02       $ 3.49       $ 1.73   
  

 

 

    

 

 

    

 

 

 

Options to purchase shares of the Company’s common stock not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares were 1,045,709, 13,100 and 342,413 in 2011, 2012 and 2013, respectively. These options could be dilutive in the future depending on the performance of the Company’s stock.

Derivative financial instruments – 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 Company offsets fair value amounts recognized on the Consolidated Balance Sheets for derivative financial instruments executed with the same counter-party.

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. Gains and losses resulting from the impact of currency exchange rate movements on these forward contracts are recognized in the accompanying Consolidated Statements of Income 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 unrealized gains and losses on such forward contracts are recorded as a separate component of stockholders’ equity in the accompanying Consolidated Balance Sheets and reclassified into earnings as the hedged transaction affects earnings.

 

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The Company assesses hedge effectiveness quarterly. In doing so, the Company monitors the actual and forecasted foreign currency sales and purchases versus the amounts hedged to identify any hedge ineffectiveness. 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. Any hedge ineffectiveness is recorded as an adjustment in the accompanying Consolidated Statements of Income in the period in which the ineffectiveness occurs.

The Company is exposed to price risk related to forecasted purchases of certain commodities that are used as raw materials, principally natural rubber. Accordingly, it uses commodity contracts with forward pricing. These contracts generally qualify for the normal purchase exception under guidance for derivative instruments and hedging activities, and therefore are not subject to its provisions.

Income taxes - Income tax expense is based on reported earnings (loss) before income taxes in accordance with the tax rules and regulations of the specific legal entities within the various specific taxing jurisdictions where the Company’s income is earned. Taxable income may differ from earnings before income taxes for financial accounting purposes. To the extent that differences are due to revenue or expense items reported in one period for tax purposes and in another period for financial accounting purposes, a provision for deferred income taxes is made using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset may not be realized. Deferred income taxes generally are not recorded on the majority undistributed earnings of international subsidiaries based on the Company’s intention that these earnings will continue to be reinvested. The Company provides for the current tax impact of the earnings of international subsidiaries it intends to distribute in a future period.

Products liability – 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.

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 settlements because an average settlement cost would not be meaningful since the products liability claims faced by the Company are unique and widely variable. The cases 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, the claims asserted and 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 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. Legal costs are expensed as incurred and products liability insurance premiums are amortized over coverage periods.

Advertising expense – Expenses incurred for advertising include production and media and are generally expensed when incurred. Costs associated with dealer-earned cooperative advertising are recorded as a reduction of revenue component of Net sales at the time of sale. Advertising expense for 2011, 2012 and 2013 was $34,401, $49,756 and $48,976, respectively.

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 RSUs and PSUs, 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. See Note 17 – Stock-Based Compensation for additional information.

 

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Warranties – Warranties are provided on the sale of certain of the Company’s products and an accrual for estimated future claims is recorded at the time revenue is recognized. Tire replacement under most of the warranties the Company offers is on a prorated basis. The Company provides for the estimated cost of product warranties 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 which are recorded in Accrued liabilities and Other long-term liabilities on the Company’s Consolidated Balance Sheets:

 

     2011     2012     2013  

Reserve at January 1

   $ 24,924      $ 27,400      $ 30,139   

Additions

     34,288        23,184        19,677   

Payments

     (31,812     (20,445     (18,963
  

 

 

   

 

 

   

 

 

 

Reserve at December 31

   $ 27,400      $ 30,139      $ 30,853   
  

 

 

   

 

 

   

 

 

 

Use of estimates – The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of: (1) revenues and expenses during the reporting period; and (2) assets and liabilities, as well as disclosure of contingent assets and liabilities, at the date of the consolidated financial statements. Actual results could differ from those estimates.

Revenue recognition – Revenues are recognized when title to the product passes to customers. Shipping and handling costs are recorded in cost of products sold. Allowance programs such as volume rebates and cash discounts are recorded at the time of sale as a reduction to revenue based on anticipated accrual rates for the year.

Research and development – Costs are charged to cost of products sold as incurred and amounted to approximately $44,586, $50,801 and $51,127 during 2011, 2012 and 2013, respectively.

Related Party Transactions – The Company’s CCT joint venture had notes payable to the noncontrolling shareholder of $14,319 and $3,280 as of December 31, 2012 and 2013, respectively and paid $859, $900 and $648 of interest in 2011, 2012 and 2013, respectively. The CCT joint venture also paid $41,595, $46,235 and $36,865 to the noncontrolling shareholder primarily for the purchase of utilities during 2011, 2012 and 2013, respectively. The Company’s COOCSA joint venture paid $27,745, $29,865 and $26,674 in 2011, 2102 and 2013, respectively, to an employment services company in Mexico owned in part by members of the joint venture workforce. The Company believes the payment for services to related parties are consistent with market rate for comparable services from third parties.

Accounting Pronouncements – Recently Adopted

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income by component. The Company has included the disclosures required by this ASU in Footnote 15 – Cumulative Other Comprehensive Loss.

In December 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which requires an entity to disclose information about offsetting and related arrangements. The amendments in this update are effective for annual and interim periods beginning on or after January 1, 2013, with retrospective application. In January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The Company has adopted these ASUs and has included the expanded disclosures in Footnote 11 – Fair Value of Financial Instruments.

Accounting Pronouncements – To be 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 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.

 

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Reclassification – certain amounts for prior years have been reclassified to conform to the current year presentation. On the 2012 Consolidated Balance Sheet, fixed asset balances at the Company’s Mexican manufacturing operations have been reclassified to more appropriately reflect the underlying nature of the assets.

Note 2 – Merger Agreement

On June 12, 2013, the Company and Apollo Tyres Ltd. (“Apollo”) announced the execution of a definitive merger agreement (the “Agreement and Plan of Merger”) under which a wholly-owned subsidiary of Apollo was to acquire the Company in an all-cash transaction valued at approximately $2.5 billion. On December 30, 2013, the Company terminated the Agreement and Plan of Merger. See also Footnote 22 - Subsequent Events.

The Company is a party to a trust agreement which is intended to provide funding for benefits payable and other potential payments to directors, executive officers and certain other employees under various plans and agreements of the Company. The execution of the Agreement and Plan of Merger constituted a “potential change in control” under such plans and agreements and as a result, the Company was required to fund the estimated value of the payments to be made to the beneficiaries under the trust agreement. The Company has deposited 1,906,183 of common shares with the trustee in connection with this funding. These shares are treated as treasury shares on these financial statements and in accordance with Accounting Standards Codification 260, “Earnings Per Share,” are not included in the earnings per share calculations.

During 2013, the Company incurred approximately $18,049 of expenses associated with the Agreement and Plan of Merger. These expenses are recorded in Selling, general & administrative expenses on the Consolidated Statements of Income.

Note 3 – Acquisitions

On January 14, 2011, the Company invested $21,775 and acquired an additional 21-percent ownership in COOCSA, a Mexican tire manufacturing entity in which the Company had previously been an equity investor. The Company’s ownership share increased to approximately 58 percent and, because of the increase in voting rights, the results of the entity and 100 percent of its assets and liabilities were consolidated from the date of this transaction. The Company made this additional investment as part of its strategic plan to build a sustainable, competitive cost position.

The COOCSA acquisition has been accounted for as a purchase transaction. The total consideration (including the $21,775 paid and the fair value of the original 38-percent ownership interest) has been allocated to the assets acquired, liabilities assumed and noncontrolling shareholder interest based on their respective fair values at January 14, 2011. The excess purchase price over the estimated fair value of the net assets acquired has been allocated to goodwill. Goodwill consists of anticipated growth opportunities for COOCSA and is recorded in the North American Tire Operations segment. Goodwill is not deductible for federal income tax purposes. The operating results of COOCSA have been included in the consolidated financial statements of the Company since the date of the transaction.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on January 14, 2011, translated into U.S. dollars at the exchange rate on that date.

 

Assets

  

Cash

   $ 4,395   

Inventory

     14,105   

Other current assets

     3,645   

Property, plant & equipment

     84,069   

Goodwill

     18,851   

Liabilities

  

Payable to Cooper Tire & Rubber Company

     (4,185

Accounts payable

     (4,990

Accrued liabilities

     (2,817

Deferred income taxes

     (7,896

Notes payable to Cooper Tire & Rubber Company

     (11,269
  

 

 

 
     93,908   

Noncontrolling shareholder interest

     (37,853
  

 

 

 

Cooper Tire & Rubber Company consideration

   $ 56,055   
  

 

 

 

 

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The Company has determined that the nonrecurring fair value measurements related to each of these assets and liabilities rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets and settlement of liabilities, as observable inputs are not available and, as such, reside within Level 3 of the fair value hierarchy as defined in Footnote 11. The Company utilized a third party to assist in the fair value determination of certain components of the purchase price allocation, namely Property, plant and equipment. The valuation of Property, plant and equipment was developed using primarily the cost approach. The fair value of the Company’s investment was determined based upon internal and external inputs considering various relevant market transactions and discounted cash flow valuation methods, among other factors. The fair value of noncontrolling shareholder interest was valued using the same method used to value the investment.

In connection with its increased investment in COOCSA, the Company recorded a gain of $4,989 on its original investment, which represents the excess of the fair value of approximately $34,280 over the January 14, 2011 carrying value and previously unrecognized currency losses. The gain was recorded in Other income in the financial statements.

The Cooper Tire & Rubber Company consideration from the table above of $56,055 represents the $21,775 additional investment made by the Company plus the fair value of the original investment of $34,280.

The acquisition does not meet the thresholds for a significant acquisition and therefore no pro forma financial information is presented.

On January 17, 2012, the Company acquired certain assets of Trayal Korporacija in Krusevac, Serbia for approximately $18,500, including transaction costs. The assets purchased include land, building and certain machinery and equipment. In conjunction with the asset acquisition, the Company established Cooper Tire & Rubber Company Serbia d.o.o. (“Cooper Serbia”). Cooper Serbia is comprised of the assets acquired from Trayal Korporacija, coupled with those assets acquired through additional capital spending. Cooper Serbia’s tire-making operations will complement the Company’s operations and product offerings in Europe. The newly formed Serbian entity is included in the International Tire Operations segment. This transaction was accounted for as an asset acquisition by the Company.

During the first quarter of 2012, the Company received approximately $10,600 of grants from the government of Serbia to be used to fund capital expenditures. The Company does not have to re-pay the grants contingent upon the Company investing approximately $63,700 (including the original purchase price) over the next three years and maintaining a minimum employment level during the period. The Company intends to satisfy the criteria listed so management does not anticipate that any funds will need to be re-paid. At December 31, 2013, the Company has recorded $1,268 of restricted cash on the Consolidated Balance Sheets representing the proportionate share of the capital expenditures yet to be made. Should the Company fail to meet these criteria, the Company will be required to repay the entire amount of the government grants.

Note 4 – 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 $481,967 and $432,906 at December 31, 2012 and 2013, respectively. These FIFO values have been reduced by approximately $172,847 and $161,436 at December 31, 2012 and 2013, respectively, to arrive at the LIFO value reported on the 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.

Note 5 – Other Current Assets

Other current assets at December 31 were as follows:

 

     2012      2013  

Deferred tax assets

   $ 46,654       $ 44,168   

Income tax recoverable

     5,294         29,590   

Other

     20,956         18,756   
  

 

 

    

 

 

 
   $ 72,904       $ 92,514   
  

 

 

    

 

 

 

 

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Note 6 - Goodwill and Intangibles

Goodwill is recorded in the segment where it was generated by acquisitions. Goodwill in the amount of $18,851 was recorded in 2011 as a result of an acquisition. There have been no changes to the value of goodwill since 2011. Goodwill prior to 2011 was zero. See Note 3 – Acquisitions for a discussion of the goodwill acquired. Purchased goodwill and indefinite-lived intangible assets are tested annually for impairment unless indicators are present that would require an earlier test.

During the fourth quarters of 2012 and 2013, the Company completed its annual goodwill and intangible assets impairment tests and no impairment was indicated.

The following table presents intangible assets and accumulated amortization balances as of December 31, 2012 and 2013:

 

     December 31, 2012      December 31, 2013  
     Gross            Net      Gross            Net  
     Carrying      Accumulated     Carrying      Carrying      Accumulated     Carrying  
     Amount      Amortization     Amount      Amount      Amortization     Amount  

Definite-lived:

               

Capitalized software costs

   $ 137,983       $ (17,543   $ 120,440       $ 160,979       $ (31,771   $ 129,208   

Land use rights

     17,263         (3,572     13,691         20,041         (3,802     16,239   

Trademarks and tradenames

     10,891         (6,245     4,646         10,973         (6,850     4,123   

Patents and technology

     15,038         (14,996     42         14,637         (14,634     3   

Other

     7,365         (5,984     1,381         7,215         (6,297     918   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     188,540         (48,340     140,200         213,845         (63,354     150,491   

Indefinite-lived:

               

Trademarks

     9,817         —          9,817         9,817         —          9,817   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 198,357       $ (48,340   $ 150,017       $ 223,662       $ (63,354   $ 160,308   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Estimated amortization expense over the next five years is as follows: 2014 - $10,922, 2015 - $10,902, 2016 - $11,621, 2017 - $16,264 and 2018 - $18,301.

Note 7 - Other Assets

Other assets at December 31 were as follows:

 

     2012      2013  

Tax incentives

   $ 14,506       $ 12,622   

Other

     2,246         2,904   
  

 

 

    

 

 

 
   $ 16,752       $ 15,526   
  

 

 

    

 

 

 

Note 8 - Accrued Liabilities

Accrued liabilities at December 31 were as follows:

 

     2012      2013  

Products liability

   $ 70,267       $ 70,472   

Payroll and withholdings

     71,054         59,158   

Warranty

     24,285         20,917   

Other postretirement benefits

     16,680         14,213   

Advertising

     13,991         12,146   

Foreign currency derivative instruments

     1,265         —     

Other

     24,280         34,184   
  

 

 

    

 

 

 
   $ 221,822       $ 211,090   
  

 

 

    

 

 

 

 

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Note 9 - Income Taxes

Components of income from continuing operations before income taxes and noncontrolling shareholders’ interests were as follows:

 

     2011      2012      2013  

United States

   $ 21,763       $ 206,853       $ 107,918   

Foreign

     112,383         161,597         105,053   
  

 

 

    

 

 

    

 

 

 

Total

   $ 134,146       $ 368,450       $ 212,971   
  

 

 

    

 

 

    

 

 

 

The provision (benefit) for income tax for continuing operations consisted of the following:

 

     2011     2012     2013  

Current:

      

Federal

   $ 6,694      $ 67,921      $ 7,879   

State and local

     2,053        9,812        2,576   

Foreign

     24,486        38,082        34,922   
  

 

 

   

 

 

   

 

 

 
     33,233        115,815        45,377   

Deferred:

      

Federal

     (139,697     (4,225     26,647   

State and local

     (28,893     (573     7,255   

Foreign

     (100     5,007        127   
  

 

 

   

 

 

   

 

 

 
     (168,690     209        34,029   
  

 

 

   

 

 

   

 

 

 
   $ (135,457   $ 116,024      $ 79,406   
  

 

 

   

 

 

   

 

 

 

A reconciliation of income tax expense (benefit) for continuing operations to the tax based on the U.S. statutory rate is as follows:

 

     2011     2012     2013  

Income tax provision at 35%

   $ 46,951      $ 128,958      $ 74,540   

State and local income tax, net of federal income tax effect

     1,879        4,391        4,414   

U.S. tax credits

     (1,732     —          (2,334

Difference in effective tax rates of international operations

     (15,828     (16,545     (9,633

Tax law or rate change

     434        2,016        3,702   

Valuation allowance

     1,225        (181     4,001   

Valuation allowance - US release

     (167,224     —          —     

Other - net

     (1,162     (2,615     4,716   
  

 

 

   

 

 

   

 

 

 

Income tax expense

   $ (135,457   $ 116,024      $ 79,406   
  

 

 

   

 

 

   

 

 

 

In 2011, the Company released most of the valuation allowance recorded against U.S. deferred tax assets in the amount of $167,224 based upon the Company’s sustained positive operating performance, taxable income in carryback periods and the availability of expected future taxable income.

Payments for income taxes in 2011, 2012 and 2013, net of refunds, were $6,988, $97,093 and $76,782, respectively.

 

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Deferred tax assets and liabilities result from differences in the basis of assets and liabilities for tax and financial reporting purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31 were as follows:

 

     2012     2013  

Deferred tax assets:

    

Postretirement and other employee benefits

   $ 269,471      $ 175,643   

Products liability

     71,759        67,587   

Net operating loss, capital loss, and tax credits carryforwards

     30,043        28,947   

All other items

     49,103        51,213   
  

 

 

   

 

 

 

Total deferred tax assets

     420,376        323,390   

Deferred tax liabilities:

    

Property, plant and equipment

     (116,879     (134,075

All other items

     (7,348     (7,736
  

 

 

   

 

 

 

Total deferred tax liabilities

     (124,227     (141,811
  

 

 

   

 

 

 
     296,149        181,579   

Valuation allowances

     (27,993     (32,370
  

 

 

   

 

 

 

Net deferred tax asset

   $ 268,156      $ 149,209   
  

 

 

   

 

 

 

At December 31, 2013, the Company has apportioned state tax losses of $17,594 and foreign tax losses of $36,247 available for carryforward. The Company has used all of the U.S. federal tax credits available, and has state tax credits of $3,567 in addition to a U.S. capital loss of $52,505 available for carryforward. Valuation allowances have been provided for those items for which, based upon an assessment, it is more likely than not that some portion may not be realized. The U.S. federal and state tax attributes and state loss carryforwards will expire from 2014 through 2023. A portion of the foreign tax losses expired in 2013, with additional losses expected to expire in 2014. A portion of the U.S. capital loss carryforward expired in 2013, and the remaining carryforward will expire in 2015.

The Company applies the rules under ASC 740-10 in its Accounting for Uncertainty in Income Taxes for uncertain tax positions using a “more likely than not” recognition threshold. Pursuant to these rules, the Company will initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the “more likely than not” threshold, the measurement of the tax benefit will be based on the Company’s estimate of the largest amount that meets the more likely than not recognition threshold. The Company’s unrecognized tax benefits, exclusive of interest, totaled approximately $5,878 at December 31, 2013, as itemized in the tabular roll forward below. In accordance with Company policy, the liability relating to pre-2011 years was released or reclassified following the effective settlement of a U.S. federal income tax examination for years prior to 2011. The unrecognized tax benefits at December 31, 2013 relate to uncertain tax positions in tax years 2011 through 2013.

 

     2011     2012     2013  

Balance at January 1

   $ 9,237      $ 987      $ 5,138   

Settlements for tax positions of prior years

     (15,969     —          (409

Additions for tax positions of the current year

     987        4,195        566   

Additions for tax positions of prior years

     7,837        181        1,054   

Reductions for tax positions of prior years

     (572     (225     (471

Reductions for lapse of statute of limitations

     (533     —          —     
  

 

 

   

 

 

   

 

 

 

Balance at December 31

   $ 987      $ 5,138      $ 5,878   
  

 

 

   

 

 

   

 

 

 

Of this amount, the effective rate would change upon the recognition of approximately $5,878 of these unrecognized tax benefits. The Company accrued, through the tax provision, approximately $226, $27 and $138 of interest expense for 2011, 2012 and 2013, respectively. At December 31, 2013, the Company has $165 interest accrued as an ASC 740-10 reserve.

 

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The Company generally considers the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States. In the event that the Company plans to repatriate foreign earnings, the income tax provision would be adjusted in the period it is determined that the earnings will no longer be indefinitely invested outside the United States. During 2014, the Company plans to remit dividends from two of its non-U.S. subsidiaries. As a result of this decision made in 2013, the Company provided incremental U.S. income and foreign withholding tax on these amounts. The remaining portion of the Company’s foreign earnings is considered to be indefinitely reinvested outside the United States. The Company has not recorded a deferred tax liability related to the U.S. federal and state income taxes and foreign withholding taxes on approximately $419,375 of these undistributed earnings. It is not practicable to determine the amount of additional U.S. income taxes that could be payable upon remittance of these earnings since taxes payable would be reduced by foreign tax credits based upon income tax laws and circumstances at the time of distribution, plus the uncertainty in estimating the impacts of future exchange rates.

The Company has ventures in the PRC that had been granted full and partial income tax holidays. This resulted in a $1,965 favorable impact to the Company in 2011. All remaining PRC tax holidays expired in 2011.

The Company operates in multiple jurisdictions throughout the world. The Company has effectively settled U.S. federal tax examinations for years before 2011 and state and local examinations for years before 2009, with limited exceptions. Furthermore, the Company’s non-U.S. subsidiaries are no longer subject to income tax examinations in major foreign taxing jurisdictions for years prior to 2007. The income tax returns of various subsidiaries in various jurisdictions are currently under examination and it is possible that these examinations will conclude within the next twelve months. However, it is not possible to estimate net increases or decreases to the Company’s unrecognized tax benefits during the next twelve months.

Note 10 – Debt

The Company has an accounts receivable securitization facility of up to $175,000. Pursuant to the terms of the facility, the Company is permitted to sell certain of its domestic trade receivables on a continuous basis to its wholly-owned, bankruptcy-remote subsidiary, Cooper Receivables LLC (“CRLLC”). In turn, CRLLC may sell from time to time an undivided ownership interest in the purchased trade receivables, without recourse, to a PNC Bank administered, asset-backed commercial paper conduit. During 2012, the maturity of this facility was extended until June 2015.

The Company and its subsidiary, Max-Trac Tire Co., Inc., have entered into a Loan and Security Agreement (the “New Credit Agreement”) with a consortium of four banks. This New Credit Agreement provides a $200,000 credit facility to the Company and Max-Trac Tire Co., Inc. The New Credit Agreement is a revolving credit facility and is secured by the Company’s U.S. inventory, certain North American accounts receivable that have not been previously pledged and general intangibles related to the foregoing. The New Credit Agreement has a maturity date of July 2016. Borrowings under the New Credit Agreement bear a margin based on the London Interbank Offered Rate.

The New Credit Agreement and the accounts receivable securitization facility have no significant financial covenants until availability is reduced to specified levels. At December 31, 2013, the Company was not in compliance with the covenants requiring the Company to furnish financial statements, as the third quarter Form 10-Q had not been filed. The Company filed the third quarter Form 10-Q on February 28, 2014 and is now in compliance with these covenants. There were no borrowings under the New Credit Agreement or the accounts receivable securitization facility at December 31, 2012 or December 31, 2013, except amounts used to secure letters of credit totaling $81,900 and $45,100 at December 31, 2012 and 2013, respectively. The Company’s additional borrowing capacity, net of amounts used to back letters of credit and based on eligible collateral through use of its credit facility with its bank group and its accounts receivable securitization facility at December 31, 2013, would have been $241,800.

The Company’s consolidated operations in Asia have renewable unsecured credit lines that provide up to $452,000 of borrowings and do not contain financial covenants. The additional borrowing capacity on the Asian credit lines, based on eligible collateral and the short-term notes payable, totaled $407,000 at December 31, 2013.

In 2010, Industrial Revenue Bonds (IRBs) were issued by the City of Texarkana to finance the design, equipping, construction and start-up of the expansion of the Texarkana manufacturing facility in return for real estate and equipment located at the Company’s Texarkana tire manufacturing plant. Because the assets related to the expansion provide security for the bonds issued by the City of Texarkana, the City retains title to the assets which in turn provides a 100 percent property tax exemption to the Company. However, the Company has recorded the property in its Consolidated Balance Sheets, along with a capital lease obligation to repay the proceeds of the IRB because the arrangement is cancelable at any time at the Company’s request. The Company has also purchased the IRBs and therefore is the bondholder as well as the borrower/lessee of the property purchased with the IRB proceeds. The capital lease obligation and IRB asset are recorded net in the Consolidated Balance Sheets. At December 31, 2012 and 2013, the assets and liabilities associated with these City of Texarkana IRBs were $20,000.

 

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The following table summarizes the long-term debt of the Company at December 31, 2012 and 2013. The secured notes due in 2016 are guaranteed by certain plant assets of the Company’s COOCSA subsidiary. Except for these secured notes and capitalized leases and other, the long-term debt is due in an aggregate principal payment on the due date:

 

     2012      2013  
Parent company      

8% unsecured notes due December 2019

   $ 173,578       $ 173,578   

7.625% unsecured notes due March 2027

     116,880         116,880   

Capitalized leases and other

     9,262         8,662   
  

 

 

    

 

 

 
     299,720         299,120   
Subsidiaries      

4.27% to 6.15% unsecured notes due in 2014

     29,321         15,560   

4.27% to 4.70% unsecured notes due in 2015

     3,118         8,554   

4.00% to 6.15% unsecured notes due in 2016

     —           11,036   

5.42% and 5.61% secured notes due in 2016

     6,302         4,557   
  

 

 

    

 

 

 
     38,741         39,707   
  

 

 

    

 

 

 
     338,461         338,827   

Less current maturities

     2,319         17,868   
  

 

 

    

 

 

 
   $ 336,142       $ 320,959   
  

 

 

    

 

 

 

Over the next five years, the Company has payments related to the above debt of: 2014 - $17,868, 2015 - $10,862, 2016 - $12,777, 2017 - $600 and 2018 - $600. In addition, the Company’s partially-owned, consolidated subsidiary operations in the PRC and Mexico have short-term notes payable of $22,105 due in 2014. The weighted average interest rate of the short-term notes payable at December 31, 2012 and 2013 was 5.34 percent and 5.15 percent, respectively.

Interest paid on debt during 2011, 2012 and 2013 was $38,853, $38,727 and $30,694, respectively. The amount of interest capitalized was $3,527, $7,649 and $3,068 during 2011, 2012 and 2013, respectively. The increase in capitalized interest in 2012 is related to the Company’s global ERP project.

Note 11 - Fair Value of Financial Instruments

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. Exchange rate fluctuations on the foreign currency-denominated intercompany loans and obligations are offset by the change in values of the fair value foreign currency hedges. The Company presently hedges exposures in the Euro, Canadian dollar, British pound sterling, Swiss franc, Swedish kronar, 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, 2012 and 2013 was $186,217 and $148,036, respectively. The counterparties to each of these agreements are major commercial banks. Management believes that the probability of losses related to credit risk on derivative financial instruments is unlikely.

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 Consolidated Statements of Income 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 ($1,461) and $398 as of December 31, 2012 and 2013, respectively) are recorded as a separate component of stockholders’ equity in the accompanying consolidated balance sheets and reclassified into earnings as the hedged transaction affects earnings.

 

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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 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 Consolidated Balance Sheets:

 

Assets/(Liabilities)    December 31, 2012     December 31, 2013  

Designated as hedging instruments:

          

Gross amounts recognized

      $ (2,610      $ 2,702   

Gross amounts offset

        1,100           (2,232
     

 

 

      

 

 

 

Net amounts

        (1,510        470   

Not designated as hedging instruments:

          

Gross amounts recognized

        245           (121

Gross amounts offset

        —             —     
     

 

 

      

 

 

 

Net amounts

        245           (121
     

 

 

      

 

 

 

Net amounts presented

     Accrued liabilities       $ (1,265     Other current assets       $ 349   
     

 

 

      

 

 

 

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

 

Derivatives

Designated as

Cash Flow

Hedges

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

Year ended Dec. 31, 2011

   $ 4,563      $ (4,626   $ (367

Year ended Dec. 31, 2012

   $ (1,770   $ 5,699      $ 256   

Year ended Dec. 31, 2013

   $ 2,943      $ 1,085      $ (122

 

Derivatives not

Designated as

Hedging Instruments

  

Location of Gain (Loss)
Recognized in Income

on Derivatives

   Amount of Gain (Loss)
Recognized in Income
on Derivatives
 

Year ended Dec. 31, 2011

   Other income (expense)    $ 212   

Year ended Dec. 31, 2012

   Other income (expense)    $ 590   

Year ended Dec. 31, 2013

   Other income (expense)    $ (366 ) 

For effective designated foreign exchange hedges, the Company reclassifies the gain (loss) from Other Comprehensive Income into Net Sales and the ineffective portion is recorded directly into Other – net.

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.

 

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Financial assets and liabilities recorded on the 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.

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, 2012 and December 31, 2013, 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 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, 2012 and 2013:

 

     December 31, 2012  
     Total
Derivative
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

   $ (1,265   $ —        $ (1,265   $ —     

Stock-based Liabilities

   $ (11,934   $ (11,934   $ —        $ —     
     December 31, 2013  
     Total
Derivative
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   $ —        $ —     

 

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The fair value of the Company’s debt was based upon prices of similar instruments in the marketplace. The carrying amounts and fair values of the Company’s financial instruments were as follows:

 

     December 31, 2012     December 31, 2013  
           Fair Value           Fair Value  
           Measurements           Measurements  
           Using Quoted           Using Quoted  
           Prices in Active           Prices in Active  
           Markets for           Markets for  
           Identical           Identical  
     Carrying     Instruments     Carrying     Instruments  
     Amount     Level (1)     Amount     Level (1)  

Cash and cash equivalents

   $ 351,817      $ 351,817      $ 397,731      $ 397,731   

Notes receivable

     47,646        47,646        86,965        86,965   

Restricted cash

     7,741        7,741        2,759        2,759   

Notes payable

     (32,836     (32,836     (22,105     (22,105

Current portion of long-term debt

     (2,319     (2,319     (17,868     (17,868

Long-term debt

     (336,142     (360,142     (320,959     (334,759

Note 12 - Pensions and Postretirement Benefits Other than Pensions

The Company and its subsidiaries have a number of plans providing pension, retirement or profit-sharing benefits. These plans include defined benefit and defined contribution plans. The plans cover substantially all U.S. domestic employees. There are also plans that cover a significant number of employees in the U.K. and Germany. The Company has an unfunded, nonqualified supplemental retirement benefit plan in the U.S. covering certain employees whose participation in the qualified plan is limited by provisions of the Internal Revenue Code.

For defined benefit plans, benefits are generally based on compensation and length of service for salaried employees and length of service for hourly employees. In the U.S., the Company froze the pension benefits in its Spectrum (salaried employees) Plan in 2009. In 2012, the Company closed the U.S. pension plans for the bargaining units to new participants. Certain grandfathered participants in the bargaining unit plans continue to accrue pension benefits. Employees of certain of the Company’s foreign operations are covered by either contributory or non-contributory trusteed pension plans. In 2012, the Company froze the benefits in the U.K. pension plan.

Participation in the Company’s defined contribution plans is voluntary. The Company matches certain plan participants’ contributions up to various limits. Participants’ contributions are limited based on their compensation and, for certain supplemental contributions which are not eligible for company matching, based on their age. Expense for those plans was $14,311, $12,003 and $12,522 for 2011, 2012 and 2013, respectively.

The Company currently provides retiree health care and life insurance benefits to a significant percentage of its U.S. salaried and hourly employees. U.S. salaried and non-bargained hourly employees hired on or after January 1, 2003 are not eligible for retiree health care or life insurance coverage. The Company has reserved the right to modify or terminate certain of these salaried benefits at any time.

The Company has implemented household caps on the amounts of retiree medical benefits it will provide to certain retirees. The caps do not apply to individuals who retired prior to certain specified dates. Costs in excess of these caps will be paid by plan participants. The Company implemented increased cost sharing in 2004 in the retiree medical coverage provided to certain eligible current and future retirees. Since then cost sharing has expanded such that nearly all covered retirees pay a charge to be enrolled.

In accordance with U.S. GAAP, the Company recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of its pension and other postretirement benefit (“OPEB”) plans and the net unrecognized actuarial losses and unrecognized prior service costs in the Consolidated Balance Sheets. The unrecognized actuarial losses and unrecognized prior service costs (components of cumulative other comprehensive loss in the stockholders’ equity section of the balance sheet) will be subsequently recognized as net periodic pension cost pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit costs in the same periods will be recognized as a component of other comprehensive income.

 

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The following table reflects changes in the projected obligations and fair market values of assets in all defined benefit pension and other postretirement benefit plans of the Company:

 

    2012     2013        
    Pension Benefits     Pension Benefits     Other Postretirement Benefits  
    Domestic     International     Total     Domestic     International     Total     2012     2013  

Change in benefit obligation:

               

Projected Benefit Obligation at January 1

  $ 924,544      $ 343,219      $ 1,267,763      $ 1,064,070      $ 374,925      $ 1,438,995      $ 311,069      $ 308,226   

Service cost - employer

    9,415        725        10,140        11,879        8        11,887        4,161        3,813   

Service cost - employee

    —          533        533        —          —          —          —          —     

Interest cost

    43,005        17,106        60,111        38,751        15,661        54,412        12,532        10,791   

Plan curtailment

    —          (9,933     (9,933     —          —          —          —          —     

Actuarial (gain)/loss

    137,141        20,331        157,472        (82,219     47,613        (34,606     (10,945     (59,898

Benefits paid

    (50,035     (12,700     (62,735     (59,205     (14,362     (73,567     (8,591     (10,066

Foreign currency translation effect

    —          15,644        15,644        —          7,301        7,301        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Projected Benefit Obligation at December 31

  $ 1,064,070      $ 374,925      $ 1,438,995      $ 973,276      $ 431,146      $ 1,404,422      $ 308,226      $ 252,866   

Change in plans’ assets:

               

Fair value of plans’ assets at January 1

  $ 680,217      $ 226,914      $ 907,131      $ 745,871      $ 259,703      $ 1,005,574      $ —        $ —     

Actual return on plans’ assets

    80,339        25,960        106,299        101,400        28,371        129,771        —          —     

Employer contribution

    35,350        8,215        43,565        35,724        8,485        44,209        —          —     

Employee contribution

    —          533        533        —          —          —          —          —     

Benefits paid

    (50,035     (12,700     (62,735     (59,205     (14,362     (73,567     —          —     

Foreign currency translation effect

    —          10,781        10,781        —          6,327        6,327        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plans’ assets at December 31

  $ 745,871      $ 259,703      $ 1,005,574      $ 823,790      $ 288,524      $ 1,112,314      $ —        $ —     

Funded status

  $ (318,199   $ (115,222   $ (433,421   $ (149,486   $ (142,622   $ (292,108   $ (308,226   $ (252,866

Amounts recognized in the balance sheets:

               

Accrued liabilities

  $ (500   $ —        $ (500   $ (300   $ —        $ (300   $ (16,680   $ (14,213

Postretirement benefits other than pensions

    —          —          —          —          —          —          (291,546     (238,653

Pension benefits

    (317,699     (115,222     (432,921     (149,186     (142,622     (291,808     —          —     

Included in cumulative other comprehensive loss at December 31, 2012 are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service credits of ($3,867) (($2,777) net of tax) and unrecognized actuarial losses of $735,976 ($598,865 net of tax).

Included in cumulative other comprehensive loss at December 31, 2013 are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service credits of ($3,301) (($2,427) net of tax) and unrecognized actuarial losses of $526,501 ($473,723 net of tax). The prior service credit and actuarial loss included in cumulative other comprehensive loss that are expected to be recognized in net periodic benefit cost during the fiscal year-ended December 31, 2014 are ($566) and $36,513, respectively.

The accumulated benefit obligation for all defined benefit pension plans was $1,435,193 and $1,401,109 at December 31, 2012 and 2013, respectively.

Weighted average assumptions used to determine benefit obligations at December 31:

 

                 Other  
     Pension Benefits     Postretirement Benefits  
     2012     2013     2012     2013  

All plans

        

Discount rate

     3.92     4.53     3.60     4.60

Rate of compensation increase

     0.75     0.00     —          —     

Domestic plans

        

Discount rate

     3.75     4.55     3.60     4.60

Foreign plans

        

Discount rate

     4.39     4.49     —          —     

Rate of compensation increase

     2.89     0.00     —          —     

 

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At December 31, 2013, the weighted average assumed annual rate of increase in the cost of medical benefits was 7.00 percent for 2014 trending linearly to 5.00 percent per annum in 2020.

 

     Pension Benefits - Domestic     Pension Benefits - International  
     2011     2012     2013     2011     2012     2013  

Components of net periodic benefit cost:

            

Service cost

   $ 7,700      $ 9,415      $ 11,879      $ 2,497      $ 725      $ 8   

Interest cost

     45,260        43,005        38,751        18,009        17,106        15,661   

Expected return on plan assets

     (50,206     (43,269     (51,284     (16,646     (15,323     (14,981

Amortization of prior service cost

     —          —          —          (747     (185     —     

Amortization of actuarial loss

     30,300        36,818        44,370        5,772        6,818        6,564   

Cooper Avon curtailment gain

     —          —          —          —          (7,460     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 33,054      $ 45,969      $ 43,716      $ 8,885      $ 1,681      $ 7,252   

 

     Other Post Retirement Benefits  
     2011     2012     2013  

Components of net periodic benefit cost:

      

Service cost

   $ 3,103      $ 4,161      $ 3,813   

Interest cost

     13,846        12,532        10,791   

Amortization of prior service cost

     (688     (688     (566

Amortization of actuarial loss

     1,261        3,076        1,915   
  

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 17,522      $ 19,081      $ 15,953   

Effective April 6, 2012, the Company amended the Cooper Avon Pension Plan to freeze all future pension benefits. As a result of this amendment, the Company recognized a pre-tax pension curtailment gain of $7,460 which was credited to cost of goods sold in the second quarter of 2012. This curtailment gain represents the prior service credit from a previous plan amendment.

Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31:

 

                             Other        
     Pension Benefits     Postretirement Benefits  
     2011     2012     2013     2011     2012     2013  

All plans

            

Discount rate

     5.39     4.83     3.92     5.20     4.15     3.60

Expected return on plan assets

     7.58     6.86     6.75     —          —          —     

Rate of compensation increase

     0.92     0.86     0.00     —          —          —     

Domestic plans

            

Discount rate

     5.35     4.80     3.75     5.20     4.15     3.60

Expected return on plan assets

     7.75     7.00     7.00     —          —          —     

Foreign plans

            

Discount rate

     5.50     4.92     4.39     —          —          —     

Expected return on plan assets

     7.05     6.43     6.01     —          —          —     

Rate of compensation increase

     3.39     3.17     0.00     —          —          —     

 

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The following table lists the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets at December 31, 2012 and 2013:

 

     2012      2013  
     Projected
benefit
obligation
exceeds plan
assets
     Accumulated
benefit
obligation
exceeds plan
assets
     Projected
benefit
obligation
exceeds plan
assets
     Accumulated
benefit
obligation
exceeds plan
assets
 

Projected benefit obligation

   $ 1,438,995       $ 1,438,995       $ 1,404,422       $ 1,404,422   

Accumulated benefit obligation

     1,435,193         1,435,193         1,401,109         1,401,109   

Fair value of plan assets

     1,005,574         1,005,574         1,112,314         1,112,314   

Assumed health care cost trend rates for other postretirement benefits have a significant effect on the amounts reported. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

 

     Percentage Point  
     Increase      Decrease  

Increase (decrease) in total service and interest cost components

   $ 66       $ (58

Increase (decrease) in the postretirement benefit obligation

     1,430         (1,263

The Company’s weighted average asset allocations for its domestic and U.K. pension plans’ assets at December 31, 2012 and December 31, 2013 by asset category were as follows:

 

     U.S. Plans     U.K. Plan  

Asset Category

   2012     2013     2012     2013  

Equity securities

     58     66     59     51

Debt securities

     40        30        28        40   

Other investments

     0        0        12        5   

Cash

     2        4        1        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s asset allocation strategy is based on a combination of factors, including the profile of the pension liability, the timing of future cash requirements, and the level of invested assets available to meet plan obligations. The goal is to manage the assets in such a way that the cost and risk are managed through portfolio diversification which is designed to maximize returns consistent with levels of liquidity and investment risk that are prudent and reasonable. Rebalancing of asset portfolios occurs periodically if the mix differs from the target allocation. Equity security investments are structured to achieve a balance between growth and value stocks. The Company also has a pension plan in Germany and the assets of that plan consist of investments in German insurance contracts.

The fair market value of U.S. plan assets was $745,871 and $823,790 at December 31, 2012 and 2013, respectively. The fair market value of the U.K. plan assets was $257,398 and $286,158 at December 31, 2012 and 2013, respectively. The fair market value of the German pension plan assets was $2,305 and $2,366 at December 31, 2012 and 2013, respectively.

 

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The table below classifies the assets of the U.S. and U.K. plans using the Fair Value Hierarchy described in Note 10 – Fair Value of Financial Instruments:

 

            Fair Value Heirarchy  
     Total      Level 1      Level 2      Level 3  

December 31, 2012

           

United States plans

           

Cash & Cash Equivalents

   $ 18,487       $ 18,487       $ —         $ —     

Equity securities

     431,383         147,397         283,986         —     

Fixed income securities

     296,001         97,974         198,027         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 745,871       $ 263,858       $ 482,013       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

United Kingdom plan

           

Cash & Cash Equivalents

   $ 2,231       $ 2,231       $ —         $ —     

Equity securities

     152,434         152,434         —           —     

Fixed income securities

     72,251         72,251         —           —     

Other investments

     30,482         16,660         —           13,822   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 257,398       $ 243,576       $ —         $ 13,822   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

United States plans

           

Cash & Cash Equivalents

   $ 32,233       $ 32,233       $ —         $ —     

Equity securities

     543,267         187,685         355,582         —     

Fixed income securities

     248,290         123,776         124,514         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 823,790       $ 343,694       $ 480,096       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

United Kingdom plan

           

Cash & Cash Equivalents

   $ 12,418       $ 12,418       $ —         $ —     

Equity securities

     146,575         146,575         —           —     

Fixed income securities

     113,250         113,250         —           —     

Other investments

     13,915         —           —           13,915   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 286,158       $ 272,243       $ —         $ 13,915   
  

 

 

    

 

 

    

 

 

    

 

 

 

Plan assets are measured at fair value. While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The Company’s valuation methodologies used for the plan assets measured at fair value are as follows:

Cash and cash equivalents – Cash and cash equivalents include cash on deposit and investments in money market mutual funds that invest mainly in short-term instruments and cash, both of which are valued using a market approach.

Equity securities – Common, preferred, and foreign stocks are valued using a market approach at the closing price on their principal exchange and are included in Level 1 of the fair value hierarchy.

Fixed Income Securities – Corporate and foreign bonds are valued using a market approach at the closing price reported on the active market on which the individual securities are traded and are included in Level 1 of the fair value hierarchy.

Common/Commingled Trust Funds – Common/Commingled trust funds are valued at the net asset value of units held at year end and are included in Level 2 of the fair value hierarchy. The various funds consist of either equity or fixed income investment portfolios with underlying investments held in U.S. and non-U.S. securities.

The Level 3 asset in the U.K. plan is an investment in a European Infrastructure fund. The fair market value is determined by the fund manager using a discounted cash flow methodology. The future cash flows expected to be generated by the assets of the fund and made available to investors are estimated and then discounted back to the valuation data. The discount rate is derived by adding a risk premium to the risk-free interest rate applicable to the country in which the asset is located.

 

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The following table details the activity in this investment for the year ended December 31, 2012 and 2013:

 

     2012     2013  

Balance at January 1

   $ 12,834      $ 13,822   

Contributions

     175        642   

Disbursements

     (175     (642

Change in fair value

     473        (170

Foreign currency translation effect

     515        263   
  

 

 

   

 

 

 

Balance at December 31

   $ 13,822      $ 13,915   
  

 

 

   

 

 

 

The Company determines the annual expected rates of return on pension assets by first analyzing the composition of its asset portfolio. Historical rates of return are applied to the portfolio. These computed rates of return are reviewed by the Company’s investment advisors and actuaries. Industry comparables and other outside guidance are also considered in the annual selection of the expected rates of return on pension assets.

During 2013, the Company contributed $44,000 to its domestic and foreign pension plans, and during 2014, the Company expects to contribute between $40,000 and $50,000 to its domestic and foreign pension plans.

The Company estimates its benefit payments for its domestic and foreign pension plans and other postretirement benefit plans during the next ten years to be as follows:

 

            Other  
     Pension      Postretirement  
     Benefits      Benefits  

2014

   $ 79,000       $ 14,000   

2015

     76,700         15,000   

2016

     78,400         15,000   

2017

     78,700         15,000   

2018

     79,900         15,000   

2019 through 2023

     416,300         81,000   

Note 13 - Other Long-Term Liabilities

Other long-term liabilities at December 31 were as follows:

 

     2012      2013  

Products liability

   $ 136,082       $ 119,041   

Deferred compensation

     11,934         12,462   

Other

     20,951         26,415   
  

 

 

    

 

 

 
   $ 168,967       $ 157,918   
  

 

 

    

 

 

 

Note 14 - Common Stock

There were 9.3 million common shares reserved for grants under compensation plans and contributions to the Company’s Spectrum Investment Savings Plan and Pre-Tax Savings plans at December 31, 2013. The Company matches contributions made by participants to these plans and these contributions are directed to the investment funds selected by the employees.

 

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Note 15 - Cumulative Other Comprehensive Loss

The balances of each component of cumulative other comprehensive loss in the accompanying Consolidated Statements of Equity were as follows:

 

     Year Ended December 31, 2012  
     Cumulative      Changes          Unrecognized             
     Currency      in the Fair          Postretirement             
     Translation      Value of          Benefit             
     Adjustment      Derivatives          Plans          Total  

January 1, 2012

   $ 32,558       $ 5,341         $ (558,777      $ (520,878

Other comprehensive income (loss) before reclassifications

     11,577         (1,266   (a)      (66,863   (c)      (56,552

Amount reclassifed from accumulated other comprehensive loss

     —           (3,648   (b)      29,552      (d)      25,904   
  

 

 

    

 

 

      

 

 

      

 

 

 

Net current-period other comprehensive income

     11,577         (4,914        (37,311        (30,648
  

 

 

    

 

 

      

 

 

      

 

 

 

December 31, 2012

   $ 44,135       $ 427         $ (596,088      $ (551,526
  

 

 

    

 

 

      

 

 

      

 

 

 

 

(a) This amount represents $1,770 of unrealized losses on cash flow hedges, net of tax of $504, that were recognized in Other Comprehensive Loss (see Footnote 11 for additional details).
(b) This amount represents $5,699 of gains on cash flow hedges, net of tax of $2,051, that were reclassified out of Cumulative Other Comprehensive Loss and are included in Other income on the Condensed Consolidated Statements of Income (see Footnote 11 for additional details).
(c) This amount represents $105,233 of other comprehensive loss, net of tax of $38,370 that was recognized in Other Comprehensive Loss.
(d) This amount represents amortization of prior service credit of $873 and amortization of actuarial losses of ($46,712), net of tax of $16,287, that were reclassified out of Cumulative Other Comprehensive Loss and are included in the computation of net periodic benefit cost (see Footnote 12 for additional details).

 

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     Year Ended December 31, 2013  
     Cumulative      Changes          Unrecognized             
     Currency      in the Fair          Postretirement             
     Translation      Value of          Benefit             
     Adjustment      Derivatives          Plans          Total  

January 1, 2013

   $ 44,135       $ 427         $ (596,088      $ (551,526

Other comprehensive income (loss) before reclassifications

     15,525         1,727      (a)      91,506      (c)      108,758   

Amount reclassifed from accumulated other comprehensive loss

     —           (539   (b)      33,287      (d)      32,748   
  

 

 

    

 

 

      

 

 

      

 

 

 

Net current-period other comprehensive income (loss)

     15,525         1,188           124,793           141,506   
  

 

 

    

 

 

      

 

 

      

 

 

 

December 31, 2013

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

 

 

    

 

 

      

 

 

      

 

 

 

 

(a) This amount represents $2,943 of unrealized gains on cash flow hedges, net of tax of $1,216, that were recognized in Other Comprehensive Loss (see Footnote 11 for additional details).
(b) This amount represents $1,085 of gains on cash flow hedges, net of tax of $546, that were reclassified out of Cumulative Other Comprehensive Loss and are included in Other income on the Condensed Consolidated Statements of Income (see Footnote 11 for additional details).
(c) This amount represents $156,627 of other comprehensive gain, net of tax of $65,121 that was recognized in Other Comprehensive Loss.
(d) This amount represents amortization of prior service credit of $566 and amortization of actuarial losses of ($52,849), net of tax of $18,996, that were reclassified out of Cumulative Other Comprehensive Loss and are included in the computation of net periodic benefit cost (see Footnote 12 for additional details).

Note 16 – Comprehensive Income Attributable to Noncontrolling Shareholders’ Interests

 

     2011      2012      2013  

Net income attributable to noncontrolling shareholders’ interests

   $ 16,100       $ 32,055       $ 22,552   

Other comprehensive income:

        

Currency translation adjustments

     425         2,143         3,205   
  

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to noncontrolling shareholders’ interests

   $ 16,525       $ 34,198       $ 25,757   
  

 

 

    

 

 

    

 

 

 

Note 17 - 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, RSUs, stock appreciation rights, 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 RSUs and PSUs, the Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire. Awards settled in common shares have been settled with treasury shares. If awards can be settled in cash, these awards are recorded as liabilities and marked to market.

 

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The following table discloses the amount of stock-based compensation expense:

 

     Stock Based Compensation  
     2011      2012      2013  

Stock options

   $ 2,533       $ 3,388       $ 3,934   

Stock awards

     —           67         —     

Restricted stock units

     1,214         1,169         1,092   

Performance stock units

     366         3,412         1,947   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 4,113       $ 8,036       $ 6,973   
  

 

 

    

 

 

    

 

 

 

Stock Options

The 2001, 2006 and 2010 incentive compensation plans provide for granting options to key employees to purchase common shares at prices not less than market at the date of grant. Options under these plans may have terms of up to ten years becoming exercisable in whole or in consecutive installments, cumulative or otherwise. The plans allow the granting of nonqualified stock options which are not intended to qualify for the tax treatment applicable to incentive stock options under provisions of the Internal Revenue Code.

The Company’s 2002 nonqualified stock option plan provides for granting options to directors who are not current or former employees of the Company to purchase common shares at prices not less than market at the date of grant. Options granted under this plan have a term of ten years and become exercisable one year after the date of grant.

In April 2009, executives participating in the 2009 – 2011 Long-Term Incentive Plan were granted 1,155,000 stock options which vested one third each year through April 2012. This plan does not contain any performance-based criteria. In March 2010, executives participating in the 2010 – 2012 Long-Term Incentive Plan were granted 303,120 stock options which will vest one third each year through March 2013. During 2011, executives participating in the 2011 – 2013 Long-Term Incentive Plan were granted 311,670 stock options, which will vest one-third each year through 2014. 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. 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:

 

     2011     2012     2013  

Risk-free interest rate

     2.7     1.2     1.2

Dividend yield

     1.8     2.7     1.7

Expected volatility of the Company’s common stock

     0.615        0.644        0.646   

Expected life in years

     6.0        6.0        6.0   

The weighted average fair value of options granted in 2011, 2012 and 2013 was $11.57, $7.33 and $12.97, respectively. Compensation expense for these options is recorded over the vesting period.

 

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Summarized information for the plans follows:

 

           Weighted      Aggregate  
           Average      Intrinsic  
     Number of     Exercise      Value  
     Shares     Price (per share)      (thousands)  

Outstanding at January 1, 2013

     1,486,351      $ 17.63      

Granted

     330,639        25.43      

Exercised

     (93,845     18.24      

Cancelled

     (12,901     18.63      
  

 

 

      

Outstanding at December 31, 2013

     1,710,244        19.09       $ 8,941   
  

 

 

      

Exercisable at December 31, 2013

     899,616        17.81         5,619   
  

 

 

      

Available for Grant at December 31, 2013

     1,766,818        
  

 

 

      

 

     Year ended December 31  
     2011      2012      2013  

Weighted average grant-date fair value of options granted (per share)

   $ 11.57       $ 7.33       $ 12.97   
  

 

 

    

 

 

    

 

 

 

Aggregate intrinsic value of options exercised (thousands)

   $ 3,515       $ 10,256       $ 877   
  

 

 

    

 

 

    

 

 

 

Total fair value of shares vested (thousands)

   $ 1,655       $ 2,641       $ 3,407   
  

 

 

    

 

 

    

 

 

 

The weighted average remaining contractual life of options outstanding at December 31, 2013 is 6.9 years. Approximately 331,915 stock options will become exercisable over the next twelve months.

Segregated disclosure of options outstanding at December 31, 2013 was as follows:

 

     Range of Exercise Prices  
     Less than or
equal to $15.63
     Greater than $15.63  

Options outstanding

     704,163         1,006,081   

Weighted average exercise price

   $ 14.28       $ 22.46   

Remaining contractual life

     7.4         6.6   

Options exercisable

     321,285         578,331   

Weighted average exercise price

   $ 12.68       $ 20.66   

At December 31, 2013, the Company had $4,907 of unvested compensation cost related to stock options, and this cost will be recognized as expense over a weighted average period of 21 months.

 

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Restricted Stock Units

Under the 1998, 2001, 2006 and 2010 Incentive Compensation Plans, RSUs may be granted to officers and other key employees. Compensation related to the RSUs is determined based on the fair value of the Company’s stock on the date of grant and is amortized to expense over the vesting period. The RSUs granted in 2011, 2012 and 2013 have vesting periods ranging from three to four years. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire. The following table provides details of the nonvested RSUs for 2013:

 

           Weighted  
           Average  
     Number of     Grant-Date  
     Restricted     Fair Value  
     Units     (per share)  

Nonvested at January 1, 2013

     110,871      $ 21.93   

Granted

     1,000        25.72   

Vested

     (52,509     21.38   

Accrued dividend equivalents

     1,324        28.57   
  

 

 

   

Nonvested at December 31, 2013

     60,686      $ 22.61   
  

 

 

   

 

     Year ended December 31  
     2011      2012      2013  

Weighted average grant-date fair value of restricted shares granted (per share)

   $ 23.68       $ 15.54       $ 25.72   
  

 

 

    

 

 

    

 

 

 

Total fair value of shares vested (thousands)

   $ 811       $ 1,495       $ 1,122   
  

 

 

    

 

 

    

 

 

 

The number of vested RSUs at December 31, 2012 and 2013 was 96,500 and 97,059, respectively. At December 31, 2013, the Company has $672 of unvested compensation cost related to RSUs and this cost will be recognized as expense over a weighted average period of 14 months.

Performance Stock Units

Compensation related to the PSUs is determined based on the fair value of the Company’s stock on the date of grant combined with performance metrics and is amortized to expense over the vesting period. During 2010, executives participating in the Company’s Long-Term Incentive Plan earned 244,043 PSUs based on the Company’s financial performance in 2010. Of these units, 183,961 vested in 2010 and 60,082 vested in 2012. No PSUs were earned in 2011. During 2012, executives participating in the Company’s Long-Term Incentive Plan earned 307,813 PSUs based on the Company’s financial performance in 2012. Of these units, 91,190 vested in 2012 and 84,401 vested in 2013 and 132,222 will vest in 2014. During 2013, executives participating in the Company’s Long-Term Incentive Plan earned 33,405 PSUs based on the Company’s financial performance in 2013. Of these units, 9,821 vested in 2013 and 13,959 and 9,625 will vest in 2014 and 2015, respectively. Similar to RSUs, the Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire.

 

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

 

           Weighted  
           Average  
     Number of     Grant-Date  
     Restricted     Fair Value  
     Units     (per share)  

Nonvested at January 1, 2013

     216,623      $ 15.63   

Earned

     33,405        25.43   

Vested

     (97,367     16.77   

Cancelled

     (1,384     15.63   

Adjustment to outstanding units

     2,077        15.63   

Accrued dividend equivalents

     3,418        26.86   
  

 

 

   

Nonvested at December 31, 2013

     156,772      $ 17.25   
  

 

 

   

The weighted average fair value of PSUs granted in 2011, 2012 and 2013 was $22.97, $15.63 and $25.43, respectively.

At December 31, 2013, the Company has $729 of unvested compensation cost related to PSUs and this cost will be recognized as expense over a weighted average period of 13 months.

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.

The Company recognized $349, $2,469 and $494 of excess tax benefits as a financing cash inflow for the years ended December 31, 2011, 2012 and 2013, respectively.

Note 18 - Lease Commitments

The Company rents certain distribution and other facilities and equipment under long-term leases expiring at various dates. The total rental expense for the Company, including these long-term leases and all other rentals, was $29,239, $29,275 and $33,199 for 2011, 2012 and 2013, respectively.

Future minimum payments for all non-cancelable operating leases through the end of their terms, which in aggregate total $91,103, are listed below. Certain of these leases contain provisions for optional renewal at the end of the lease terms.

 

2014

   $ 23,692   

2015

     17,569   

2016

     13,129   

2017

     9,800   

2018

     8,250   

Thereafter

     18,663   

Note 19 - Other – Net

Other income decreased by $5,372 in 2012 compared with 2011, primarily due to the COOCSA gain of $4,989 recorded in 2011 not present in the 2012 results.

Other income decreased by $879 in 2013 compared with 2012, primarily due to foreign currency losses.

 

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Note 20 - Contingent Liabilities

Litigation

Products Liability Litigation

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.

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.

During 2012, the Company increased its products liability reserve by $72,478. The addition of another year of self-insured incidents accounted for $49,312 of this increase. The Company revised its estimates of future settlements for unasserted and premature claims. These revisions increased the reserve by $9,503. Finally, changes in the amount of reserves for cases where sufficient information is known to estimate a liability increased by $13,663.

During 2013, the Company increased its products liability reserve by $60,091. The addition of another year of self-insured incidents accounted for $50,436 of this increase. The Company revised its estimates of future settlements for unasserted and premature claims. These revisions increased the reserve by $8,298. Finally, changes in the amount of reserves for cases where sufficient information is known to estimate a liability increased by $1,357.

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.

During 2012, the Company paid $73,482 to resolve cases and claims. The Company’s products liability reserve balance at December 31, 2012 totaled $206,349 (current portion of $70,267).

During 2013, the Company paid $76,927 to resolve cases and claims. The Company’s products liability reserve balance at December 31, 2013 totaled $189,513 (current portion of $70,472).

Products liability expenses totaled $97,504, $103,610 and $89,044 in 2011, 2012 and 2013, respectively.

Certain Litigation Related to the Apollo Merger

On June 17, 2013, an alleged stockholder of the Company filed a putative class-action lawsuit in the Court of Common Pleas of Hancock County, Ohio relating to the proposed acquisition of the Company (the “Apollo transaction”) by wholly owned subsidiaries of Apollo Tyres Ltd. (“Apollo”). That lawsuit, captioned Auld v. Cooper Tire & Rubber Co., et al., No. 2013-CV-293, generally alleges that the directors of the Company breached their fiduciary duties to the Company’s stockholders by agreeing to enter into the transaction for an allegedly unfair price and as the result of an allegedly unfair process.

 

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Between June 18 and June 27, 2013, alleged stockholders of the Company filed four other putative class-action lawsuits in the Court of Chancery of the State of Delaware relating to the proposed Apollo transaction. Those lawsuits, which were consolidated under the caption In re Cooper Tire & Rubber Co. Stockholders Litigation, No. 8658-VCL, generally allege that the directors of the Company breached their fiduciary duties to the Company’s stockholders by agreeing to enter into the then-pending transaction for an allegedly unfair price and as the result of an allegedly unfair process and by failing to disclose material information to stockholders regarding the proposed transaction.

The Company, Apollo and certain affiliates of Apollo are also defendants in the Ohio and Delaware lawsuits, and are alleged to have aided and abetted the directors’ breaches of fiduciary duties. All of these Ohio and Delaware lawsuits seek, among other things, declaratory and injunctive relief. The Company and its directors believe that the allegations against them lack merit and intend to defend the lawsuits vigorously.

On October 4, 2013, the Company filed a complaint in the Court of Chancery of the State of Delaware, captioned Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd. et al., No. 8980-VCG, asking that certain affiliates of Apollo be required to use their reasonable best 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 January 27, 2014, the court determined that it would proceed with a decision on the Apollo entities’ motion for declaratory judgment, once briefing on that motion is complete.

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 lawsuits vigorously.

Stockholder Derivative Litigation

On February 24 and March 6, 2014, purported stockholders of the Company filed two derivative actions on behalf of the Company in the U.S. District Court for the Northern District of Ohio against certain current officers and the current members of the Company’s board of directors. The Company is named as a nominal defendant in both lawsuits, and the lawsuits both seek recovery for the benefit of the Company. The lawsuits, captioned Bui v. Armes, et al.,No 3:14-cv-00428, and Zwang v. Armes, et al., 3:14-cv-00511, allege that the defendants breached their fiduciary duties to the Company by issuing allegedly misleading disclosures in connection with the terminated merger transaction. The Zwang lawsuit also alleges that the defendants violated Section 14(a) of the Securities Exchange Act of 1934 by means of the same allegedly misleading disclosures. Both complaints also assert claims for waste of corporate assets and unjust enrichment. The complaints seek, among other things, unspecified money damages from the defendants, injunctive relief, and an award of attorney’s fees.

The outcome of the above litigation cannot be predicted with certainty and resolution costs are not estimable.

Certain Litigation Related to Joint Venture in China

On July 29, 2013, the Company’s Cooper Chengshan Tire joint venture in China was named as a defendant and a subsidiary of the Company was named as a third party in a complaint filed in the Weihai Intermediate People’s Court, Weihai, China, by the Company’s joint venture partner. In connection with the execution of the CCT Agreement (See Footnote 22 - Subsequent Events, below), this complaint was dismissed.

 

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Cooper Chengshan Acquisition

In connection with this acquisition of CCT, beginning January 1, 2009 and continuing through December 31, 2011, the noncontrolling shareholders had the right to sell and, if exercised, the Company had the obligation to purchase, the remaining 49 percent noncontrolling share at a minimum price of $63,000. In 2009, the Company received notification from a noncontrolling shareholder of its intention to exercise a portion of its put option and in 2010, after receiving governmental approvals; the Company purchased the 14 percent share for $18,000. The remaining noncontrolling shareholder had the right to sell its 35 percent share to the Company at a minimum price of $45,000. At December 31, 2011, this right expired without being exercised. Accordingly, the Company recorded the $82,933 of noncontrolling shareholders’ interests associated with Cooper Chengshan in the equity section of its Consolidated Balance Sheets at December 31, 2011.

Employment Contracts and Agreements

The Company has an employment agreement with Mr. Armes. No other executives have employment agreements. The other Named Executive Officers are covered by the Cooper Tire & Rubber Company Change in Control Severance Pay Plan.

At December 31, 2013, approximately 25% of the Company’s workforce was represented by collective bargaining units.

Unconditional Purchase Orders

Noncancelable purchase order commitments for capital expenditures and raw materials, principally natural rubber, made in the ordinary course of business were $141,963 at December 31, 2013.

Note 21 - Business Segments

The Company has two reportable segments – North American Tire Operations and International Tire Operations. The Company’s reportable segments are each managed separately. The reportable segments are based on components of the Company that engage in business activities that earn revenue and incur expenses and (a) whose operating results are regularly reviewed by the Company’s chief operating decision maker to make decisions about resource allocation and performance and (b) for which discrete financial information is available.

The North American Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in the U.S. replacement market. The segment also distributes tires for racing, medium truck and motorcycles that are manufactured at the Company’s affiliated operations. 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 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

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

The following customer of the North American Tire Operations segment contributed ten percent or more of the Company’s total consolidated net sales in 2011, 2012 and 2013. Net sales and percentage of consolidated Company sales for this customer in 2011, 2012 and 2013 were as follows:

 

     2011     2012     2013  

Customer

   Net Sales      Consolidated
Net Sales
    Net Sales      Consolidated
Net Sales
    Net Sales      Consolidated
Net Sales
 

TBC/Treadways

   $ 475,586         12   $ 549,685         13   $ 364,493         11

 

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The accounting policies of the reportable segments are consistent with those described in the Significant Accounting Policies note to the consolidated financial statements. Corporate administrative expenses are allocated to segments based principally on assets, employees and sales. The following table details segment financial information:

 

     2011     2012     2013  

Revenues

      

North American Tire

      

External Customers

   $ 2,744,124      $ 3,011,314      $ 2,429,808   

Intercompany

     93,464        84,244        56,778   
  

 

 

   

 

 

   

 

 

 
     2,837,588        3,095,558        2,486,586   

International Tire

      

External Customers

     1,163,696        1,189,522        1,009,425   

Intercompany

     393,384        386,476        232,104   
  

 

 

   

 

 

   

 

 

 
     1,557,080        1,575,998        1,241,529   

Eliminations and other

     (486,848     (470,720     (288,882
  

 

 

   

 

 

   

 

 

 

Consolidated

     3,907,820        4,200,836        3,439,233   

Segment profit

      

North American Tire

     77,432        295,900        204,239   

International Tire

     102,720        143,589        83,990   

Unallocated corporate charges and eliminations

     (16,851     (42,527     (47,515
  

 

 

   

 

 

   

 

 

 

Operating profit

     163,301        396,962        240,714   

Interest expense

     (36,191     (29,546     (27,906

Interest income

     3,190        2,560        810   

Other - income (expense)

     3,846        (1,526     (647
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     134,146        368,450        212,971   

Depreciation and amortization expense

      

North American Tire

     72,787        76,035        75,132   

International Tire

     49,778        51,846        54,825   

Corporate

     334        1,035        4,794   
  

 

 

   

 

 

   

 

 

 

Consolidated

     122,899        128,916        134,751   

Segment assets

      

North American Tire

     1,096,083        1,181,500        1,172,555   

International Tire

     884,337        893,390        958,914   

Corporate and other

     529,498        726,270        606,678   
  

 

 

   

 

 

   

 

 

 

Consolidated

     2,509,918        2,801,160        2,738,147   

Expenditures for long-lived assets

      

North American Tire

     69,168        68,655        87,655   

International Tire

     32,849        79,286        61,973   

Corporate

     53,389        57,929        30,820   
  

 

 

   

 

 

   

 

 

 

Consolidated

     155,406        205,870        180,448   

 

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Geographic information for revenues, based on country of origin, and long-lived assets follows:

 

     2011      2012      2013  

Revenues

        

United States

   $ 2,675,532       $ 2,914,721       $ 2,332,526   

PRC

     833,146         879,424         745,444   

Rest of world

     399,142         406,691         361,263   
  

 

 

    

 

 

    

 

 

 

Consolidated

     3,907,820         4,200,836         3,439,233   

Long-lived assets

        

Unit