10-K 1 d115787d10k.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, 2015

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 or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

701 Lima Avenue, Findlay, Ohio   45840
(Address of Principal Executive Offices)   (Zip Code)

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

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

 

Common Stock, $1 par value per share   New York Stock Exchange
(Title of Each Class)   (Name of Each Exchange on which Registered)

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 (or for such shorter period that the registrant was required to submit and post such files).    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.  x

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   ¨    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, 2015 was $1,847,848,239.

The number of shares outstanding of the registrant’s common stock as of February 19, 2016 was 55,376,328.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information from the registrant’s definitive proxy statement for its 2016 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, 2015

 

     Page  

Cover

     1   

Table of Contents

     2   

Part I

  

Item 1 – Business

     2-7   

Item 1A – Risk Factors

     8-14   

Item 1B – Unresolved Staff Comments

     14   

Item 2 – Properties

     15   

Item 3 – Legal Proceedings

     15-16   

Item 4 – Mine Safety Disclosures

     16   

Part II

  

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

     17-19   

Item 6 – Selected Financial Data

     20   

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

     21-35   

Item 7A – Quantitative and Qualitative Disclosures About Market Risk

     35   

Item 8 – Financial Statements and Supplementary Data

     36-77   

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

     81   

Item 9A – Controls and Procedures

     81-82   

Item 9B – Other Information

     82   

Part III

  

Item 10 – Directors and Corporate Governance

     83   

Item 11 – Executive Compensation

     83   

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

     84   

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

     84   

Item 14 – Principal Accountant Fees and Services

     84   

Part IV

  

Item 15 – Exhibits and Financial Statement Schedules

     85   

Signatures

     86   

Exhibit Index

     87-89   

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 fifth largest tire manufacturer in North America and, according to a recognized trade source, the Cooper family of companies is the twelfth largest tire company in the world based on sales. Cooper specializes in the design, manufacture, marketing and sales of passenger car and light truck tires. Cooper and its subsidiaries also sell medium truck, motorcycle and racing tires.

The Company is organized into four business segments: North America, Latin America, Europe and Asia. 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 8 manufacturing facilities and 20 distribution centers in 10 countries. As of December 31, 2015, it employed 9,119 persons worldwide.

 

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Business Segments

In the first quarter of 2015, the Company announced the creation of a Chief Operating Officer position with responsibility for Cooper’s worldwide operations throughout North America, Latin America, Europe and Asia. The Company made this organizational change to provide a more cohesive global approach to the Company’s business and to better leverage the Company’s brands, products and manufacturing footprint around the world. As a result of these organizational changes, the Company evaluated its segment reporting under Accounting Standards Codification (“ASC”) 280, “Segments.”

Based on this evaluation, it was determined that the Company has four segments:

 

    North America, composed of the Company’s operations in the United States (“U.S.”) and Canada;

 

    Latin America, composed of the Company’s operations in Mexico, Central America and South America;

 

    Europe; and

 

    Asia.

North America and Latin America meet the criteria for aggregation in accordance with ASC 280, as they are similar in their production and distribution processes and exhibit similar economic characteristics. The aggregated North America and Latin America segments are presented as “Americas Tire Operations” in the segment disclosure.

Both the Asia and Europe segments have been determined to be individually immaterial, as they do not meet the quantitative requirements for segment disclosure under ASC 280. In accordance with ASC 280, information about operating segments that are not reportable shall be combined and disclosed in an all other category separate from other reconciling items. As a result, these two segments have been combined in the segment operating results discussion. The results of the combined Asia and Europe segments are presented as “International Tire Operations.”

The presentation of the aggregated Americas Tire Operations segment under the Company’s new organizational structure is consistent with the segment reported as Americas Tire Operations in prior years. Similarly, the International Tire Operations disclosure is consistent with the Company’s previously reported International Tire Operations segment. As a result, the Company has not restated its prior year reportable segments as the composition of reportable segments did not change.

Americas Tire Operations Segment

The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in the U.S. replacement market. The segment also has a joint venture manufacturing operation in Mexico, Corporacion de Occidente SA de CV (“COOCSA”), which supplies passenger car tires to the U.S., Mexican, Central American and South American markets. The segment also distributes tires for racing, medium trucks and motorcycles. The racing and motorcycle tires are manufactured in the Company’s European Operations and by others. The medium truck tires are sourced through an off-take agreement with the Company’s former Cooper Chengshan (Shandong) Tire Company Ltd. (“CCT”) joint venture, which is now known as Prinx Chengshan (Shandong) Tire Company Ltd. 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 2015 of approximately 13 percent of all light vehicle replacement tire sales in the U.S. The segment also participates in the U.S. medium truck tire market. 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.

 

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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 first and second quarters.

International Tire Operations Segment

The International Tire Operations segment is the combination of the Asia and Europe operating segments. The European operations have manufacturing facilities in the United Kingdom (“U.K.”) and the Republic of Serbia (“Serbia”). The U.K. entity manufactures and markets passenger car, light truck, motorcycle and racing tires and tire retread material for the domestic and global markets. The Serbian entity manufactures light vehicle tires primarily for the European markets and for export to the U.S. The Asian operations are located in the People’s Republic of China (“PRC”). In the PRC, Cooper Kunshan Tire manufactures light vehicle tires and, under an agreement with the government of the PRC, these tires were exported to markets outside of the PRC through 2012. Beginning in 2013, tires produced at the facility have also been sold in the domestic market. The segment also had a joint venture in the PRC, CCT, which manufactured and marketed radial and bias medium truck tires as well as passenger car and light truck tires for the global markets. The Company sold its ownership interest in this joint venture in November 2014, and the Company now procures these tires under off-take agreements through mid-2018 from this entity, now known as Prinx Chengshan (Shandong) Tire Company Ltd. The majority of the tires manufactured by the International Tire Operations segment are sold in the replacement market. A growing percentage of tires in the Asian operations are sold to OEMs as part of that region’s strategy.

On January 4, 2016, the Company announced that it had entered into an agreement to purchase a majority of China-based Qingdao Ge Rui Da Rubber Co., Ltd. The transaction is expected to close during the first half of 2016 pending certain permits and approvals by the Chinese government. After the acquisition, the entity is expected to serve as a global source of truck and bus radial tire production for Cooper. Passenger car radial tires may also be manufactured at the facility in the future.

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

As in the Americas Tire Operations segment, the International Tire Operations 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.

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 to mitigate the risk of potential supply disruptions.

During 2015, the Company experienced lower raw material costs compared with 2014. 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 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.

 

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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 in the U.S. and under the first-in, first-out (“FIFO”) or average cost method in the rest of the world. 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. The Company’s inventory levels are generally kept within a targeted range to meet projected demand. The mix of inventory is critical to inventory turnover and meeting customer demand. 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, 2015, the Company held cash and cash equivalents of $505 million.

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 2015, over 120 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 $52 million, $57 million and $51 million during 2015, 2014 and 2013, respectively.

Patents, Intellectual Property and Trademarks

The Company owns 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. 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 three to thirteen years.

Seasonal Trends

There is year-round demand for passenger car 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 2015 expense and capital expenditures for environmental matters at its facilities were not material, nor is it expected that expenditures in 2016 for such uses will be material.

 

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Foreign Operations

The Company has a manufacturing facility, a technical center, a distribution center and its European headquarters office located in the U.K. The Company has a manufacturing facility and two distribution centers in Serbia. In total, there are seven distribution centers and five sales offices in Europe. The Company has a manufacturing facility, two distribution centers, a technical center, a sales office and an administrative office in the PRC. The Company also has a purchasing office in Singapore. In Latin America, the Company has a joint venture manufacturing facility, three sales offices 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 or accessible through 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.

 

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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    63    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    64    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.
Bradley E. Hughes    54    Senior Vice President and Chief Operating Officer    Senior Vice President and Chief Operating Officer since January 2015. Senior Vice President and President-International Tire Operations from July 2014 to January 2015. Senior Vice President and Chief Financial Officer from September 2014 to December 2014. Senior Vice President, Chief Financial Officer and Treasurer from July 2014 to September 2014. Vice President, Chief Financial Officer and Treasurer from November 2013 to July 2014. Vice President and Chief Financial Officer from November 2009 to November 2013.
Ginger M. Jones    51    Vice President and Chief Financial Officer    Vice President and Chief Financial Officer since December 2014. Previously Senior Vice President and Chief Financial Officer of Plexus Corporation, an electronics manufacturing services company, from 2011 to May 2014; Vice President and Chief Finance Officer of Plexus Corporation from 2007 to 2011.
Stephen Zamansky    45    Senior Vice President, General Counsel and Secretary    Senior Vice President, General Counsel and Secretary since July 2014. Vice President, General Counsel and Secretary from April 2011 to July 2014. Previously Senior Vice President, General Counsel & Secretary of Trinity Coal Corporation, a privately held mining company, from 2008 to March 2011. Trinity was acquired by the Essar Group in 2010 and commenced bankruptcy proceedings in March 2013.

 

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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. Decreasing costs for raw materials could also affect margins if the Company is unable to maintain its pricing structure by offering price reductions to remain competitive. Further, if the Company is unable to obtain adequate supplies of raw materials in a timely manner for any reason, its operations could be interrupted or otherwise adversely affected.

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

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

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

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

In addition, the bankruptcy, restructuring or consolidation of one or more of the Company’s major customers due to current global economic conditions could result in the write-off of accounts receivable, a reduction in purchases of the Company’s products or a supply disruption to its facilities, which could harm the Company’s results of operations, financial condition and liquidity.

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 competitors to establish a presence in markets where the Company participates, could also have significant impacts on the Company’s results.

 

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For example, antidumping and countervailing duty investigations into certain passenger car and light truck tires imported from the PRC into the United States were initiated on July 14, 2014. The preliminary determinations announced in both investigations were affirmative and resulted in the imposition of additional duties from each. The preliminary determinations were upheld and became permanent on August 10, 2015.

In addition, antidumping and countervailing duty investigations into certain truck and bus tires imported from the PRC into the U.S. were initiated January 29, 2016. The Company is not yet able to determine the outcome of these investigations and what impact, if any, they will have on the Company. The imposition of additional duties in the U.S. on certain tires imported from the PRC could result in those tires being diverted to other regions of the world, such as Europe, Latin America or elsewhere in Asia, which could materially harm the Company’s results of operations, financial condition and liquidity.

The Company is facing supply risks related to certain tires it purchases from CCT.

In 2014, the Company sold its ownership interest in CCT and entered into off-take agreements with CCT to provide the continuous supply of certain tires for the Company. If there are any disruptions in or quality issues with the supply of Cooper-branded products from CCT, it could have a material negative impact on the Company’s business. In addition, the Company could be required to find an alternative source for CCT-produced tires and there can be no assurance that the Company will be able to do so in a timely manner. CCT is currently the sole supplier of medium truck tires for the Company.

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. 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.

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, such as the proposed purchase of a majority of China based Qingdao Ge Rui Da Rubber Co., Ltd. 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.

In addition, the Company’s business plans call for growth, particularly in Asia. If the Company is unable to identify or execute on appropriate opportunities for acquisition, investment or growth, its business could be materially adversely affected.

 

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

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

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

The Company 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 one manufacturing entity, Cooper Kunshan, in the PRC. The Company also is the majority owner of COOCSA, a manufacturing entity in Mexico, and has established an operation in Serbia. In 2014, the Company entered into off-take agreements with CCT, subsequent to the Company’s sale of its ownership interest in this former joint venture, to continue supplying tires to the Company. CCT is currently the sole supplier of medium truck tires for the Company. There are a number of risks in doing business abroad, including political and economic uncertainty, social unrest, sudden changes in laws and regulations, ability to enforce existing or future contracts, 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. For example, the Company could be adversely affected by violations of the Foreign Corrupt Practices Act (“FCPA”) and similar worldwide anti-bribery laws as well as export controls and economic sanction laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials and, in some cases, other persons, for the purpose of obtaining or retaining business. Violations of these laws and regulations could result in civil and criminal fines, penalties and sanctions against the Company, its officers or its employees, prohibitions on the conduct of the Company’s business and on its ability to offer products and services in one or more countries, and could also harm the Company’s reputation, business and results of operations. 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.

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

The Company relies on the accuracy, capacity and security of its information technology systems across all of its major business functions, including its research and development, manufacturing, sales, financial and administrative functions. While the Company maintains some of its critical information technology systems, it is also dependent on third parties to provide important information technology services relating to, among other things, human resources, electronic communications and certain finance functions. Despite the security measures that the Company has implemented, including those related to cybersecurity, its systems could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. Furthermore, the Company may have little or no oversight with respect to security measures employed by third-party service providers, which may ultimately prove to be ineffective at countering threats. A system failure, accident or security breach could result in business disruption, theft of its intellectual property, trade secrets or customer information and unauthorized access to personnel information. To the extent that any system failure, accident or security breach results in disruptions to its operations or the theft, loss or disclosure of, or damage to, its data or confidential information, the Company’s reputation, business, results of operations, cash flows and financial condition could be materially adversely affected. In addition, the Company may be required to incur significant costs to protect against and, if required, remediate the damage caused by such disruptions or system failures in the future.

 

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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, changes in its assumptions relating to the expected return on plan assets and updates to mortality tables. 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 and regulations, be found liable and be subject to additional costs because of these laws and regulations.

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 and bank financings. Additionally, any inability to access the capital markets or bank financings, including the ability to refinance existing debt when due, could require the Company to defer critical capital expenditures, reduce or not pay dividends, reduce spending in areas of strategic importance, sell important assets or, in extreme cases, seek protection from creditors. See also related comments under “There are risks associated with the Company’s global strategy which includes using joint ventures and partially-owned subsidiaries.”

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

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

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

 

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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.

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 develop or 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 has implemented an Enterprise Resource Planning system in the United States and is continuing to enhance the system and implement it globally, which will require significant amounts of capital and human resources to deploy. These requirements may exceed the Company’s 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.

Any interruption in the Company’s skilled workforce, or that of its suppliers or customers, 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 any labor disputes or if there are work stoppages or other work disruptions at the Company or any of its suppliers or customers, the Company’s business and operating results could suffer. See also related comments under “The Company is facing supply risks related to certain tires it purchases from CCT.”

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 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.

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.

The Company faces both general industry and company-specific challenges. These include volatile raw material costs, increasing product complexity and pressure from competitors with greater resources or 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 are building a sustainable cost competitive position, driving top-line profitable growth and building organizational capabilities and enablers to support strategic goals.

The Company continually reviews and updates its business plans to achieve these imperatives. If the assumptions used in developing the Company’s business plans 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 business plans, it may not be able to achieve or sustain future profitability, which could impair its ability to meet debt and other obligations and could otherwise negatively affect its operating results, financial condition and liquidity.

 

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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.

The Company could incur restructuring charges as it continues to execute actions in an effort to improve future profitability and competitiveness and may not achieve the anticipated savings and benefits from these actions.

The Company may initiate restructuring actions designed to improve future profitability and competitiveness, and enhance the Company’s flexibility. The Company may not realize anticipated savings or benefits from future actions in full or in part or within the time periods we expect. The Company is also subject to the risks of labor unrest, negative publicity and business disruption in connection with these actions. Failure to realize anticipated savings or benefits from our actions could have an adverse effect on the business.

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 product 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 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 could have a negative impact on the future realizability and therefore impact the Company’s future operating results or financial position.

The Company may incur additional tax expense or become subject to additional tax exposure.

The Company’s provision for income taxes and the cash outlays required to satisfy its income tax obligations in the future could be adversely affected by numerous factors. These factors include changes in the level of earnings in the tax jurisdictions in which the Company operates, changes in plans to repatriate the earnings of the Company’s foreign operations to the U.S. and changes in tax laws and regulations. The Company’s income tax returns are subject to examination by federal, state and local tax authorities in the U.S. and tax authorities outside the U.S. The results of these examinations and the ongoing assessments of the Company’s tax exposures could also have an adverse effect on the Company’s provision for income taxes and the cash outlays required to satisfy income tax obligations.

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

 

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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 has been and may continue to be impacted by currency fluctuations, which may reduce reported results for our international operations and otherwise adversely affect our business.

Because the Company conducts transactions in various non-U.S. currencies, including the Euro, Canadian dollar, British pound sterling, Swiss franc, Swedish kronar, Mexican peso, Chinese yuan and Brazilian real, fluctuations in foreign currency exchange rates may impact the Company’s financial condition, results of operations and cash flows. Our operating results are subject to the effects of fluctuations in the value of these currencies and fluctuations in the related currency exchange rates. As a result, the Company’s sales have historically been affected by, and may continue to be affected by, these fluctuations. Exchange rate movements between currencies in which the Company sells its products have been affected by and may continue to result in exchange losses that could materially affect results. During times of strength of the U.S. dollar, the reported revenues of the Company’s international operations will be reduced because local currencies will translate into fewer dollars. In addition, a strong U.S. dollar may increase the competitiveness of competitors based outside of the United States. As a result, continued strengthening of the U.S. dollar may have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

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

The Financial Accounting Standards Board is considering or has issued for future adoption 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 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.

 

Item 1B. UNRESOLVED STAFF COMMENTS

None.

 

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Item 2. PROPERTIES

As shown in the following table, at December 31, 2015, the Company maintained 52 manufacturing, distribution, retail stores and office facilities worldwide. The Company is sole owner of a majority of the manufacturing facilities. Some manufacturing, distribution and office facilities are leased.

 

     Americas Tire Operations     International Tire Operations         

Type of Facility

   North America      Latin America     Europe      Asia      Total  

Manufacturing

     4         1  *      2         1         8   

Distribution

     10         1        7         2         20   

Retail Stores

     3         —          —           —           3   

Technical centers and offices

     7         3        7         4         21   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     24         5        16         7         52   

 

* 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 product 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, 2015. In the future, such costs could have a materially greater impact on the consolidated results of operations and financial position of the Company than in the past.

Certain Litigation Related to the Apollo Merger

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

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

On October 31, 2014, the court granted Apollo’s motion for declaratory judgment that the conditions to closing the then pending transaction were not satisfied before the November 2013 trial. On November 26, 2014, the Company appealed the Chancery Court’s decision to the Delaware Supreme Court. On December 3, 2014, the parties reached an agreement to dismiss the appeal and the underlying action, acknowledge the termination of the Merger Agreement, and to release all claims relating to the Merger Agreement, subject to the dismissal of the action. On December 17, 2014, the Company dismissed the appeal and the parties filed a stipulation of dismissal of the underlying action.

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 merger agreement with subsidiaries of Apollo Tyres Ltd. 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. On July 1, 2015, the court dismissed the plaintiffs’ amended complaint and closed the case. The plaintiffs have filed an appeal of the dismissal order.

 

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

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

Stockholder Derivative Litigation

On February 24, March 6, and April 17, 2014, purported stockholders of the Company filed derivative actions on behalf of the Company in the U.S. District Court for the Northern District of Ohio and the U.S. District Court for the District of Delaware against certain officers and employees and the then current members of the Company’s board of directors. The lawsuits have been transferred to the U.S. District Court for the District of Delaware and consolidated under the caption Fitzgerald v. Armes, et al., No. 1:14-cv-479 (D. Del.). The Company is named as a nominal defendant in the lawsuits, and the lawsuits seek recovery for the benefit of the Company. The plaintiffs allege that the defendants breached their fiduciary duties to the Company by issuing allegedly misleading disclosures in connection with the terminated merger transaction and that the defendants violated Section 14(a) of the Securities Exchange Act of 1934 by means of the same allegedly misleading disclosures. The plaintiffs also assert claims for waste of corporate assets, unjust enrichment, “gross mismanagement” and “abuse of control.” The complaints seek, among other things, unspecified money damages from the defendants, injunctive relief and an award of attorney’s fees. A purported shareholder of the Company has also submitted a demand to the Company’s board of directors that it cause the Company to bring claims against certain of the Company’s officers and directors for the matters alleged in the shareholder derivative lawsuits; following an investigation, the board of directors determined that the actions requested in the demand were not in the Company’s interests and accordingly rejected the demand.

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

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

 

Item 4. MINE SAFETY DISCLOSURES

None.

 

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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:

 

     High      Low  

Year Ended December 31, 2015

     

First Quarter

   $ 42.86       $ 32.51   

Second Quarter

     43.94         33.52   

Third Quarter

     41.74         31.18   

Fourth Quarter

     43.40         37.59   

 

     High      Low  

Year Ended December 31, 2014

     

First Quarter

   $ 26.74       $ 21.95   

Second Quarter

     30.10         23.40   

Third Quarter

     31.34         27.50   

Fourth Quarter

     35.31         27.24   

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, 2010, 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  
     Year Ended December 31,  

Company / Index

   2011     2012      2013     2014      2015  

Cooper Tire & Rubber Company

     (39.09     85.24         (3.70     46.24         10.41   

S&P 500 Index

     2.11        16.00         32.39        13.69         1.38   

S&P 500 Auto Parts & Equipment

     (17.74     4.45         64.76        3.68         (5.65

 

           

INDEXED RETURNS

Year Ended December 31,

 
     Base     
     Period     

Company / Index

   2010      2011      2012      2013      2014      2015  

Cooper Tire & Rubber Company

   $ 100.00       $ 60.91       $ 112.83       $ 108.66       $ 158.90       $ 175.45   

S&P 500 Index

     100.00         102.11         118.45         156.82         178.29         180.75   

S&P 500 Auto Parts & Equipment

     100.00         82.26         85.92         141.57         146.77         138.48   

 

LOGO

 

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(b) Holders

The number of holders of record at December 31, 2015 was 1,873.

 

(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:

 

     2015           2014  

March 27

   $ 0.105       March 28    $ 0.105   

June 29

     0.105       June 27      0.105   

September 28

     0.105       September 26      0.105   

December 29

     0.105       December 30      0.105   
  

 

 

       

 

 

 

Total:

   $ 0.420      

Total:

   $ 0.420   
  

 

 

       

 

 

 

 

(d) Issuer purchases of equity securities

The following table sets forth a summary of the Company’s purchases during the quarter ended December 31, 2015 of equity securities registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934:

 

Period

   Total Number
of Shares
Purchased
     Average
Price
Paid per
Share
     Total Number of
Shares Purchased as
Part of Public
Announced Plans
or  Programs (1)
     Maximum Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs (1)(2)
 

October 1, 2015 through October 31, 2015

     253,720       $ 40.90         253,720       $ 106,893   

November 1, 2015 through November 30, 2015

     154,939       $ 41.07         154,939       $ 100,535   

December 1, 2015 through December 31, 2015

     232,162       $ 39.98         232,162       $ 91,261   
  

 

 

       

 

 

    

Total

     640,821            640,821      

 

(1) On February 20, 2015, the Board of Directors authorized a program to repurchase up to $200,000, excluding commissions, of the Company’s common stock through December 31, 2016 (the “Repurchase Program”). The Repurchase Program does not obligate the Company to acquire any specific number of shares and may be suspended or discontinued at any time without notice. Under the Repurchase Program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934.

During the three months ended December 31, 2015, the Company repurchased 640,821 shares of the Company’s common stock under the Repurchase Program for $26,021, including applicable commissions. Since the Repurchase Program commencement, the Company has repurchased 2,751,454 shares of the Company’s common stock for $108,821, including applicable commissions. As of December 31, 2015, approximately $91,261 remained of the $200,000 Repurchase Program. All repurchases under the Repurchase Program were made using cash resources.

 

(2) On February 19, 2016, the Board of Directors increased the amount authorized under and extended the duration of the Repurchase Program (as amended, the “Amended Repurchase Program”). The Amended Repurchase Program amended and superseded the Repurchase Program and allows the Company to repurchase up to $200,000, excluding commissions, of the Company’s common stock from February 22, 2016 through December 31, 2017. The approximately $73,654 remaining under the Repurchase Program as of February 19, 2016 is included in the $200,000 maximum amount authorized by the Amended Repurchase Program. No other changes were made.

 

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Item 6. SELECTED FINANCIAL DATA

 

(Dollar amounts in thousands except per share amounts)                                   
     2015      2014 (b)      2013      2012      2011  

Net sales

   $ 2,972,901       $ 3,424,809       $ 3,439,233       $ 4,200,836       $ 3,907,820   

Operating profit

   $ 354,480       $ 300,458       $ 240,714       $ 396,962       $ 163,301   

Income before income taxes

   $ 334,028       $ 348,519       $ 212,971       $ 368,450       $ 134,146   

Net income attributable to Cooper Tire & Rubber Company

   $ 212,766       $ 213,578       $ 111,013       $ 220,371       $ 253,503  (a) 

Basic earnings per share:

              

Net income attributable to Cooper Tire & Rubber Company common stockholders

   $ 3.73       $ 3.48       $ 1.75       $ 3.52       $ 4.08  (a) 

Diluted earnings per share:

              

Net income attributable to Cooper Tire & Rubber Company common stockholders

   $ 3.69       $ 3.42       $ 1.73       $ 3.49       $ 4.02  (a) 

Dividends per share

   $ 0.42       $ 0.42       $ 0.42       $ 0.42       $ 0.42   

Weighted average shares outstanding (000s):

              

Basic

     57,012         61,402         63,327         62,561         62,150   

Diluted

     57,623         62,401         64,282         63,224         63,012   

Property, plant and equipment, net

   $ 795,198       $ 740,203       $ 974,269       $ 929,255       $ 899,044   

Total assets (c)

   $ 2,436,176       $ 2,488,937       $ 2,737,070       $ 2,799,999       $ 2,508,673  (a) 

Long-term debt (c)

   $ 296,412       $ 297,937       $ 319,882       $ 334,981       $ 328,251   

Total equity

   $ 1,017,611       $ 884,261       $ 1,157,625       $ 908,416       $ 697,890  (a) 

Capital expenditures

   $ 182,544       $ 145,041       $ 180,448       $ 187,336       $ 155,406   

Depreciation and amortization

   $ 121,408       $ 139,166       $ 134,751       $ 128,916       $ 122,899   

Number of employees

     9,119         8,881         13,280         13,550         12,890   

 

(a) The Company recorded the partial release of a valuation allowance on deferred tax assets of $167,224 during 2011.
(b) The Company sold its ownership interest in CCT during the fourth quarter of 2014. Results include a gain on sale of interest in subsidiary of $77,471. Income tax expense on the gain on sale of interest in subsidiary was $21,767.
(c) Unamortized debt issuance costs associated with long-term debt have been reclassified from a noncurrent asset to a reduction of the carrying value of the debt liability with the adoption of Accounting Standards Update 2015-03.

 

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

Business of the Company

The Company specializes in the design, manufacture, marketing and sales of passenger car and light truck tires. The Company and its subsidiaries also sell medium truck, motorcycle and racing tires. The Company’s products 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 volatile raw material costs, increasing product complexity and pressure from competitors who, in some cases, are larger companies with greater financial resources. 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 outlined in the Strategic Plan 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 former CCT joint venture in the PRC (in which the Company sold its ownership interest in November 2014), 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 the Apollo entities announced the execution of an Agreement and Plan of Merger under which a wholly-owned subsidiary of the Apollo entities 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 then-pending merger between the Apollo entities 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. Subsequent to the merger agreement termination, representatives of the Company regained access to the CCT facilities, including business and financial information, and the operation resumed production of Cooper-branded products. On January 29, 2014, the Company entered into an agreement with Chengshan Group Company Ltd. (“Chengshan”) and The Union of Cooper Chengshan (Shandong) Tire Company Co., Ltd. regarding CCT that, among other matters, provided Chengshan, with certain conditions and exceptions, a limited contractual right to either (i) purchase the Company’s 65 percent equity interest in CCT or (ii) sell its 35 percent equity interest in CCT to the Company. In October 2014, the Company received the required documentation from Chengshan indicating its intent to exercise its call option under the CCT Agreement. On November 26, 2014, the Chinese State Administration for Industry & Commerce issued a new business license for CCT and on November 30, 2014, the Company completed the sale of its 65 percent ownership interest in CCT to Prairie Investment Limited, a wholly owned subsidiary of Chengshan. In connection with the sale, the Company signed off-take agreements under which CCT will continue to produce Cooper-branded products, including medium truck tires, through mid-2018.

On January 4, 2016, the Company announced that it had entered into an agreement to purchase a majority of China-based Qingdao Ge Rui Da Rubber Co., Ltd. After closing, Cooper will own 65 percent of the entity. The transaction is expected to close during the first half of 2016 pending certain permits and approvals by the Chinese government. After the acquisition, the entity is expected to serve as a global source of truck and bus radial tire production for Cooper. Passenger car radial tires may also be manufactured at the facility in the future.

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 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 thousands except per share amounts)                               
           %           %        
     2015     Change     2014     Change     2013  

Net Sales:

          

Americas Tire

   $ 2,684,754        3.8   $ 2,585,484        4.0   $ 2,486,586   

International Tire

     451,879        -60.4     1,140,826        -8.1     1,241,529   

Eliminations

     (163,732     -45.7     (301,501     4.4     (288,882
  

 

 

     

 

 

     

 

 

 

Net sales

     2,972,901        -13.2     3,424,809        -0.4     3,439,233   
  

 

 

     

 

 

     

 

 

 

Operating profit (loss):

          

Americas Tire

     422,929        53.9     274,837        34.6     204,239   

International Tire

     (19,133     -125.7     74,566        -11.2     83,990   

Unallocated corporate charges

     (52,342     7.0     (48,930     -6.9     (52,578

Eliminations

     3,026        n/m        (15     n/m        5,063   
  

 

 

     

 

 

     

 

 

 

Operating profit

     354,480        18.0     300,458        24.8     240,714   

Interest expense

     (23,820     -15.3     (28,138     0.8     (27,906

Interest income

     2,211        47.4     1,500        85.2     810   

Gain on sale of interest in subsidiary

     —          n/m        77,471        n/m        —     

Other non-operating income (expense)

     1,157        -141.7     (2,772     328.4     (647
  

 

 

     

 

 

     

 

 

 

Income before income taxes

     334,028        -4.2     348,519        63.6     212,971   

Provision for income taxes

     118,224        5.8     111,697        n/m        79,406   
  

 

 

     

 

 

     

 

 

 

Net income

     215,804        -8.9     236,822        77.3     133,565   

Net income attributable to noncontrolling shareholders’ interests

     3,038        -86.9     23,244        3.1     22,552   
  

 

 

     

 

 

     

 

 

 

Net income attributable to Cooper Tire & Rubber Company

   $ 212,766        -0.4   $ 213,578        92.4   $ 111,013   
  

 

 

     

 

 

     

 

 

 

Basic earnings per share

   $ 3.73        7.2   $ 3.48        98.9   $ 1.75   
  

 

 

     

 

 

     

 

 

 

Diluted earnings per share

   $ 3.69        8.0   $ 3.42        97.7   $ 1.73   
  

 

 

     

 

 

     

 

 

 

n/m – not meaningful

 

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2015 versus 2014

Consolidated net sales for the year ended 2015 were $2,973 million, a decrease of $452 million from 2014. The absence of CCT resulted in decreased sales during 2015 ($546 million). Excluding CCT, unit volumes increased ($194 million), which was partially offset by less favorable pricing and mix ($73 million) and unfavorable exchange rates ($27 million) compared with 2014.

The Company recorded operating profit of $354 million in 2015, an increase of $54 million compared with 2014. The absence of CCT reduced operating profit by $78 million. Excluding CCT, lower raw material costs ($244 million), and higher unit volumes ($32 million) were partially offset by unfavorable pricing and mix ($61 million) and higher product liability charges ($2 million). Excluding CCT, manufacturing costs increased ($44 million) compared to 2014, primarily as a result of the previously announced reconfiguration of the Company’s U.S. manufacturing plants to increase production of higher value, higher margin products, coupled with higher costs related to pension, incentive based compensation and technical spending. Excluding CCT, selling, general and administrative costs increased ($20 million) and other operating costs increased ($17 million), including unfavorable currency impacts compared with 2014.

The Company experienced decreases in the costs of certain of its principal raw materials in 2015 compared with 2014. 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.

Product liability expenses totaled $79 million and $77 million in 2015 and 2014, respectively. The increase in the expense compared to the prior year is the result of 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 product liability costs appears in the Notes to the Consolidated Financial Statements.

Selling, general, and administrative expenses were $263 million in 2015 (8.8 percent of net sales) and $272 million in 2014 (8.0 percent of net sales). The absence of CCT reduced selling, general and administrative expenses by $29 million in of 2015. Excluding CCT, the increase in selling, general and administrative expenses was driven primarily by increased incentive based compensation, partially offset by decreases in the accruals for stock-based liabilities.

Interest expense decreased $4 million compared with 2014 due primarily to the absence of CCT. Interest income has remained comparable to 2014.

In 2014, the Company recorded income of $77 million as a result of the gain on the sale of the CCT operations. The gain represents the net of the cash received for the sale of CCT compared to the net asset carrying value of CCT in the Company’s books as of the sale date.

Other income increased $4 million compared with 2014, primarily due to foreign currency forward contracts.

For the year ended December 31, 2015, the Company recorded an income tax expense of $118 million on income from continuing operations before income taxes of $334 million, prior to the deduction of noncontrolling shareholders’ interests of $3 million. Comparable amounts for 2014 were an income tax expense of $112 million on income from continuing operations before income taxes of $349 million. The 2014 amounts include tax expense of $22 million on the gain on the sale of the CCT operation of $77 million.

Worldwide tax expense is impacted significantly by the mix of earnings between US and international jurisdictions with lower tax rates, partially offset by losses in jurisdictions with no tax benefit due to valuation allowances. Tax expense for 2015 has increased from the prior year primarily due to increased pretax earnings in the United States.

Net income attributable to noncontrolling shareholders’ interests decreased $20 million as a result of the absence of CCT in 2015.

The effects of inflation did not have a material effect on the results of operations of the Company in 2015.

2014 versus 2013

Consolidated net sales for 2014 were $3,425 million, a decrease of $14 million from 2013. The decrease in net sales was the result of less favorable pricing and mix ($260 million), offset by increased unit volumes ($288 million), which includes the recovery of $132 million in unit volumes across both segments associated with 2013 labor issues at CCT. This volume recovery was partially offset by the reduction in unit volumes resulting from the sale of CCT in the fourth quarter of 2014 ($61 million). The International Tire Operations segment experienced favorable exchange rates in 2014 ($19 million).

 

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The Company recorded operating profit in 2014 of $300 million, an increase of $60 million compared with 2013. Lower raw material costs ($256 million) were offset by unfavorable pricing and mix ($268 million). Unit volumes increased ($59 million) in 2014 compared with 2013, including the recovery of $28 million of reduced volume resulting from the 2013 labor issues at CCT. The absence of CCT subsequent to its sale resulted in a reduction in operating profit ($6 million) in the 2014 International Tire Operations compared with 2013. Product liability charges ($12 million) and selling, general and administrative costs ($1 million) decreased compared with 2013. In 2013, the Company incurred $18 million of selling, general and administrative costs associated with a then-pending merger agreement which did not recur in 2014. Other operating costs, including increased distribution costs, were unfavorable ($10 million) compared with 2013.

Manufacturing costs were $16 million favorable when compared with 2013, which included $34 million of costs associated with production curtailments in the Americas Tire Operations segment and $9 million in manufacturing inefficiencies in the International Tire Operations segment related to the CCT labor issues. The Americas Tire Operations segment incurred manufacturing inefficiencies in 2014 as it was in the process of reconfiguring its manufacturing plants to increase production of higher value, higher margin tires while reducing the volume of lower value, lower margin tires in response to accelerated demand for the higher value tires.

Product liability expenses totaled $77 million and $89 million in 2014 and 2013, respectively. The decrease in the expense compared to the prior year is the result of claim settlements and adjustments to existing reserves based on the Company’s quarterly comprehensive review of outstanding claims.

Selling, general, and administrative expenses were $272 million in 2014 (8.0 percent of net sales) and $275 million in 2013 (8.0 percent of net sales). The decrease in selling, general and administrative expenses is primarily attributable to the absence of Apollo transaction-related costs, partially offset by the Company’s continued investment in Cooper brands globally, increases in the accruals for stock-based liabilities and higher incentive related expenses.

Interest expense and interest income in 2014 were comparable to 2013.

In 2014, the Company recorded income of $77 million as a result of the gain on the sale of the CCT operations. The gain represents the net of the cash received for the sale of CCT compared to the net asset carrying value of CCT in the Company’s books as of the sale date.

Other income decreased $2 million in 2014 from 2013, primarily as the result of foreign currency losses.

For the year ended December 31, 2014, the Company recorded an income tax expense of $112 million on income from continuing operations before income taxes of $349 million, prior to the deduction of noncontrolling shareholders’ interests of $23 million. These amounts include tax expense of $22 million on the gain on the sale of the CCT operations of $77 million. Comparable amounts for 2013 were an income tax expense of $79 million on income from continuing operations before income taxes of $213 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 2014 has increased from prior year primarily due to increased pretax earnings and the tax associated with the gain on the sale of the CCT operations.

The effects of inflation did not have a material effect on the results of operations of the Company in 2014.

Segment Operating Results

In the first quarter of 2015, the Company announced the creation of a Chief Operating Officer position with responsibility for Cooper’s worldwide operations throughout North America, Latin America, Europe and Asia. The Company made this organizational change to provide a more cohesive global approach to the Company’s business and to better leverage the Company’s brands, products and manufacturing footprint around the world. As a result of these organizational changes, the Company evaluated its segment reporting under ASC 280, “Segments.”

Based on this evaluation, it was determined that the Company has four segments:

 

    North America, composed of the Company’s operations in the U.S. and Canada;

 

    Latin America, composed of the Company’s operations in Mexico, Central America and South America;

 

    Europe; and

 

    Asia.

 

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North America and Latin America meet the criteria for aggregation in accordance with ASC 280, as they are similar in their production and distribution processes and exhibit similar economic characteristics. The aggregated North America and Latin America segments are presented as “Americas Tire Operations” in the segment disclosure.

Both the Asia and Europe segments have been determined to be individually immaterial, as they do not meet the quantitative requirements for segment disclosure under ASC 280. In accordance with ASC 280, information about operating segments that are not reportable shall be combined and disclosed in an all other category separate from other reconciling items. As a result, these two segments have been combined in the segment operating results discussion. The results of the combined Asia and Europe segments are presented as “International Tire Operations.”

The presentation of the aggregated Americas Tire Operations segment under the Company’s new organizational structure is consistent with the segment reported as Americas Tire Operations in prior years. Similarly, the International Tire Operations disclosure is consistent with the Company’s previously reported International Tire Operations segment. As a result, the Company has not restated its prior year reportable segments as the composition of reportable segments did not change.

 

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Americas Tire Operations Segment

 

(Dollar amounts in thousands)                               
     2015     Change
%
    2014     Change
%
    2013  

Sales

   $ 2,684,754        3.8   $ 2,585,484        4.0   $ 2,486,586   

Operating profit

   $ 422,929        53.9   $ 274,837        34.6   $ 204,239   

Operating margin

     15.8     5.2 points        10.6     2.4 points        8.2

Total unit sales change

       4.3       8.6  

United States replacement market unit shipment changes:

          

Passenger tires

          

Segment

       2.0       4.7  

RMA members

       4.0       1.6  

Total Industry

       -0.2       5.2  

Light truck tires

          

Segment

       10.6       15.5  

RMA members

       7.9       3.4  

Total Industry

       1.6       2.6  

Total light vehicle tires

          

Segment

       3.9       6.9  

RMA members

       4.5       1.9  

Total Industry

       0.1       4.9  

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

Overview

The Americas Tire Operations segment is the aggregation of the Company’s North America and Latin America operating segments. The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in the U.S. replacement market. The segment also has a joint venture manufacturing operation in Mexico, COOCSA, which supplies passenger car tires to the U.S., Mexican, Central American and South American markets. The segment also distributes tires for racing, medium trucks and motorcycles. The racing and motorcycle tires are manufactured in the Company’s European Operations segment and by others. The medium truck tires are sourced through an off-take agreement that was entered into with CCT subsequent to the Company’s sale of its ownership interest in this former joint venture. 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.

2015 versus 2014

Sales

Net sales of the Americas Tire Operations segment increased $99 million, or 3.8 percent, from 2014. The increase in sales was a result of increased unit volumes ($110 million), partially offset by unfavorable pricing and mix ($11 million). Unit shipments for the segment increased 4.3 percent in 2015 compared with 2014. In the U.S., the segment’s unit shipments of total light vehicle tires increased 3.9 percent in 2015 compared with 2014. This increase compares with a 4.5 percent increase in total light vehicle tire shipments experienced by the RMA, and a 0.1 percent increase in total light vehicle tire shipments experienced for the total industry, which includes an estimate for non-RMA members. The increased volume in 2015 was driven by higher unit sales of light truck and SUV tires, as well as passenger car tires.

 

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Operating Profit

Operating profit for the segment increased $148 million to $423 million in 2015. Lower raw material costs ($217 million) and higher unit volumes ($23 million) were partially offset by unfavorable pricing and mix ($27 million) and higher product liability expense ($2 million). Manufacturing costs increased ($37 million) compared with 2014 primarily as a result of the previously announced reconfiguration of the Company’s U.S. manufacturing plants to increase production of higher value, higher margin products, coupled with higher costs related to pension, incentive based compensation and technical spending. Selling, general and administrative costs increased ($19 million) compared with 2014, primarily due to increased incentive based compensation. Other operating costs were unfavorable ($7 million) compared with 2014.

The segment’s internally calculated raw material index of 154 during the year was a decrease of 21.0 percent from 2014.

2014 versus 2013

Sales

Net sales of the Americas Tire Operations segment increased $99 million, or 4.0 percent, from 2013. The increase in sales was a result of higher unit volumes ($237 million), partially offset by unfavorable pricing and mix ($138 million). The higher unit volumes in 2014 include the recovery of $55 million in unit volumes associated with the 2013 labor issues at CCT. Unit shipments for the segment increased 8.6 percent compared with 2013. In the U.S., the segment’s unit shipments of total light vehicle tires increased 6.9 percent in 2014 compared with 2013. This increase compares with a 1.9 percent increase in total light vehicle shipments experienced by the RMA, and a 4.9 percent increase in total light vehicle shipments experienced for the total industry (which includes an estimate for non-RMA members).

Operating Profit

Operating profit for the segment increased $71 million to $275 million in 2014. Lower raw material costs ($163 million) were partially offset by unfavorable pricing and mix ($148 million). Unit volumes increased ($47 million) in 2014 compared with 2013, including the recovery of $13 million of reduced volume resulting from the 2013 labor issues at CCT. Product liability charges were lower ($12 million) compared with the same period in 2013. Selling, general and administrative costs increased ($4 million) compared with 2013, primarily as a result of increased investment in the Cooper brand and higher incentive related compensation. Other operating costs, including increased distribution costs, were unfavorable ($10 million) compared with 2013.

Manufacturing costs were $11 million favorable compared with 2013, which included $34 million of costs associated with production curtailments. The segment incurred manufacturing inefficiencies in the second half of 2014 related to the ongoing reconfiguration of its plants.

The segment’s internally calculated raw material index of 195 during the year was a decrease of 10.1 percent from 2013.

International Tire Operations Segment

 

(Dollar amounts in thousands)                               
     2015     Change
%
    2014     Change
%
    2013  

Sales

   $ 451,879        -60.4   $ 1,140,826        -8.1   $ 1,241,529   

Operating profit (loss)

   $ (19,133     -125.7   $ 74,566        -11.2   $ 83,990   

Operating margin

     -4.2     (10.7) points        6.5     (0.3) points        6.8

Total unit sales change

       -43.1       2.1  

Overview

The International Tire Operations segment is the combination of the Asia and Europe operating segments. The European operations have manufacturing facilities in the U.K. 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. The Serbian entity manufactures light vehicle tires primarily for

 

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the European markets and for export to the U.S. The Asian operations are located in the PRC. In the PRC, Cooper Kunshan Tire manufactures light vehicle tires and, under an agreement with the government of the PRC, these tires were exported to markets outside of the PRC through 2012. Beginning in 2013, tires produced at the facility have also been sold in the Chinese domestic market. The segment also had a joint venture in the PRC, CCT, which manufactured and marketed radial and bias medium truck tires, as well as passenger car and light truck tires for domestic and global markets. The Company sold its ownership interest in this joint venture in November 2014, and the Company now procures these tires under off-take agreements through mid-2018 from this entity, now known as CCT. The majority of the tires manufactured by the International Tire Operations segment are sold in the replacement market, with a portion also sold to original equipment manufacturers.

2015 versus 2014

Sales

Net sales of the International Tire Operations segment decreased $689 million, or 60.4 percent, from 2014. The absence of CCT for the entire year resulted in decreased unit volumes in 2015 ($642 million). Excluding CCT, the segment experienced increased unit volumes in both Asia and Europe ($32 million), which were more than offset by less favorable price and mix ($52 million) and unfavorable exchange rates ($27 million) compared with 2014. Unit volume was higher in China due to increased sales in the domestic market, including original equipment tires, which offset the decline in exports to the United States. Unit volume increased in Europe based on higher year over year sales of winter tires along, with an increase of exports to the United States.

Operating Profit

Operating profit for the segment decreased $94 million to an operating loss of $19 million in 2015. The absence of CCT reduced operating profit by $78 million. Excluding CCT, unfavorable pricing and mix ($45 million) and higher manufacturing costs ($7 million) were partially offset by lower raw material costs ($36 million), higher unit volumes in both Asia and Europe ($7 million) and reduced selling, general and administrative expenses ($2 million). Excluding CCT, other costs ($9 million), including unfavorable currency impacts, increased compared with 2014.

2014 versus 2013

Sales

Net sales of the International Tire Operations segment decreased $101 million, or 8.1 percent, from 2013. The decrease in sales was a result of unfavorable pricing and mix ($149 million), partially offset by higher unit volumes ($90 million), which includes the recovery of $116 million in unit volumes associated with the 2013 labor issues at CCT. This recovery was partially offset by the reduction in unit volumes resulting from the sale of CCT in the fourth quarter of 2014 ($61 million). The segment experienced favorable exchange rates in 2014 ($19 million).

Operating Profit

Operating profit for the segment decreased $9 million to $75 million in 2014. Lower raw material costs ($115 million) were offset by unfavorable pricing and mix ($137 million). Unit volumes increased ($11 million) in 2014 compared with 2013, including the recovery of $15 million of reduced volume resulting from the 2013 labor issues at CCT. Manufacturing costs were favorable ($5 million) compared with 2013, which included $9 million in manufacturing inefficiencies related to the CCT labor issues. Selling, general and administrative costs decreased ($3 million) compared with 2013. The absence of CCT subsequent to its sale resulted in a reduction in operating profit ($6 million) compared with 2013.

 

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Outlook for the Company

In 2016, the Company expects unit volume growth in each of its segments. In the United States, the Company expects unit volume growth at or above the industry.

Raw material costs continue to be favorable, and the Company is expecting further declines in the first quarter of 2016. The Company closely monitors raw material costs, with the goal to maintain or improve margins, while recognizing the need to remain competitive in the market.

The Company expects full Company operating margin, excluding the impact of any acquisitions, to be above the high end of the Company’s mid-term target of 8 to 10 percent, but not likely to exceed 2015 results of 11.9 percent of net sales. The Company also expects the International Operations segment to substantially improve operating profit in 2016 and approach break-even operating profit by the fourth quarter of 2016, excluding the impact of any acquisitions.

The Company expects 2016 capital expenditures to range between $240 million and $260 million.

The full year 2016 effective tax rate is expected to be in a range of 34 to 36 percent.

Liquidity and Capital Resources

Sources and uses of cash in operating activities – Net cash provided by operating activities of continuing operations was $300 million in 2015. During 2015, net income provided $216 million and other non-cash charges totaled $154 million. Changes in working capital accounts consumed $70 million.

Net cash provided by operating activities of continuing operations was $319 million in 2014. During 2014, net income provided $237 million and other non-cash charges totaled $97 million, including $56 million related to the gain on the sale of the Company’s ownership interest in CCT, net of tax. Changes in working capital accounts consumed $15 million.

Net cash provided by operating activities of continuing operations was $272 million in 2013. During 2013, net income provided $134 million and other non-cash charges totaled $217 million. Changes in working capital accounts consumed $78 million.

Use of cash in investing activities – Net cash used in investing activities during 2015 and 2014 reflect capital expenditures of $183 million and $145 million, respectively. The Company’s higher spending in 2015 supports its strategic goals of achieving top line growth and lower cost structure. The Company received $171 million from the sale of its ownership interest in CCT in 2014.

The Company’s capital expenditure commitments at December 31, 2015 were $26 million and are included in the “Unconditional purchase” line of the Contractual Obligations table, which appears later in this section.

Sources and uses of cash in financing activities –The Company repurchased $109 million of its common stock in 2015 as part of the Company’s share repurchase program authorized by the Board of Directors in February 2015. In 2014, the Company entered into a $200 million accelerated share repurchase program (the “ASR program”) with a major financial institution to repurchase shares of the Company’s common stock. During 2014, the Company borrowed funds on its domestic credit lines to partially fund the ASR program and $40 million remained outstanding at December 31, 2014. In 2015, the Company repaid $41million of short-term debt, including the repayment of $40 million of borrowings on its domestic credit lines in 2014. In 2014 and 2013, the Company borrowed additional funds using long-term debt and the Company repaid $3 million, $36 million and $24 million of maturing long-term debt in 2015, 2014 and 2013.

Dividends paid on the Company’s common shares were $24 million, $26 million and $27 million in 2015, 2014 and 2013, respectively. The Company has maintained a quarterly dividend of 10.5 cents per share in each quarter during the three years ended December 31, 2015. The Company also paid $8 million and $10 million in dividends to noncontrolling shareholders in CCT and COOCSA joint ventures in 2014 and 2013, respectively. Dividends paid to the noncontrolling shareholder in COOCSA were $1 million in 2015.

During 2015, stock options were exercised to acquire 1,025,699 shares of common stock with a cash impact of $24 million, including $4 million of excess tax benefits on equity instruments. During 2014, stock options were exercised to acquire 245,745 shares of common stock with a cash impact of $3 million, including $1million of excess tax benefits on equity instruments. During 2013, stock options were exercised to acquire 93,845 shares of common stock with a cash impact of $1 million, including less than $1million of excess tax benefits on equity instruments.

 

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Available cash, credit facilities and contractual commitments – At December 31, 2015, the Company had cash and cash equivalents of $505 million.

Domestically, in May 2015, the Company entered into a revolving credit facility with a consortium of banks that provides up to $400 million based on available collateral, including a $110 million letter of credit subfacility, and expires in May 2020.

In connection with entering into the revolving credit facility, the Company terminated its former $200 million credit facility.

The Company amended its accounts receivable securitization facility in May 2015, reducing the borrowing limit from $175 million to $150 million and extending the maturity until May 2018.

These credit facilities are undrawn, other than to secure letters of credit, at December 31, 2015. The Company’s additional borrowing capacity under these facilities, net of amounts used to back letters of credit and based on available collateral at December 31, 2015, was $505 million.

The Company’s operations in Asia have annual renewable unsecured credit lines that provide up to $109 million of borrowings and do not contain significant financial covenants. The additional borrowing capacity on the Asian credit lines totaled $98 million at December 31, 2015.

The Company believes that its cash and cash equivalent balances along with available cash from operating cash flows and credit facilities will be adequate to fund its typical needs, including working capital requirements, projected capital expenditures, including its portion of capital expenditures in its partially-owned subsidiary, and dividend and share repurchase goals. The Company also believes it has access to additional funds from capital markets to fund potential strategic initiatives. The entire amount of short-term notes payable outstanding at December 31, 2015 is debt of consolidated subsidiaries. The Company expects its subsidiaries to refinance or pay these amounts within the next twelve months.

 

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The Company’s cash requirements relating to contractual obligations at December 31, 2015 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

   $ 290,458       $ —         $ —         $ 173,578       $ 116,880   

Capital lease obligations and other

     7,463         600         1,200         600         5,063   

Interest on debt and capital lease obligations

     157,534         23,127         46,255         32,369         55,783   

Operating leases

     83,203         23,056         30,181         22,575         7,391   

Notes payable (a)

     12,437         12,437         —           —           —     

Unconditional purchase (b)

     67,987         67,987         —           —           —     

Postretirement benefits other than pensions (c)

     265,579         15,929         32,725         33,971         182,954   

Pensions (d)

     304,921         45,000         90,000         90,000         79,921   

Other obligations (e)

     41,962         9,130         9,292         1,233         22,307   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 1,231,544       $ 197,266       $ 209,653       $ 354,326       $ 470,299   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 benefit payments for postretirement benefits other than pension liabilities.
(d) Represents Company contributions to retirement trusts based on current assumptions.
(e) Includes stock-based liabilities, warranty reserve, deferred compensation, 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 positive outlook. Moody’s Investors Service has assigned a B1 corporate family rating and a B2 rating to senior unsecured debt with a stable 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 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.

 

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

The Company accrues costs for product 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 product 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 losses because an average cost would not be meaningful since the product 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 2015, the Company increased its product liability reserve by $56 million. The addition of another year of self-insured incidents accounted for $49 million of this increase. Settlements and changes in the amount of reserves for cases where sufficient information is known to estimate a liability increased by $7 million.

During 2014, the Company increased its product liability reserve by $48 million. The addition of another year of self-insured incidents accounted for $49 million of this increase. Settlements and changes in the amount of reserves for cases where sufficient information is known to estimate a liability decreased by $1 million.

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 2015, the Company paid $71 million and during 2014, the Company paid $58 million to resolve cases and claims. The Company’s product liability reserve balance at December 31, 2015 totaled $164 million (current portion of $74 million). At December 31, 2014 the Company’s product liability reserve balance totaled $179 million (current portion of $70 million).

 

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The product 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.

Product liability expenses totaled $79 million, $77 million and $89 million in 2015, 2014 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 the Company’s global operations. 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 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. Based upon the outcome of tax examinations, judicial proceedings, or expiration of statutes of limitations, it is reasonably possible that the ultimate resolution of these unrecognized tax benefits may result in a payment that is materially different from the 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, 2015. In accordance with Company policy, the liability relating to 2011 was released following the lapse of statutes for both U.S. federal and state jurisdictions. The unrecognized tax benefits at December 31, 2015 relate to uncertain tax positions in tax years 2012 through 2014.

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).

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, 2015, 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 loss carryforward by a valuation allowance of $2 million. In addition, the Company has recorded valuation allowances of $13 million relating primarily to non-U.S. net operating losses for a total valuation allowance of $15 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.

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 2016, the Company plans to remit dividends from one of its non-U.S. subsidiaries. As a result of this decision made in 2015, the Company assessed the need for incremental U.S. income and foreign withholding tax on the anticipated amount. This assessment resulted in no additional tax expense being recorded. 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 $538 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.

 

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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. If the carrying values of the assets 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, an impairment charge equal to that excess is 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 benefit 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 4.20 percent to measure its U.S. pension liabilities at December 31, 2015, which is higher than the 3.75 percent used at December 31, 2014. 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 4.20 percent to measure its other postretirement liabilities at December 31, 2015, which is higher than the 3.80 percent used at December 31, 2014. 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 3.85 percent at December 31, 2015 from 3.60 percent at December 31, 2014.

The rate of future compensation increases is used to determine the future benefits to be paid for 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) Pension Plan in the U.S., so the future compensation assumption is not applicable to valuing this liability. Effective April 6, 2012, the Company amended the Cooper Avon Pension Plan to freeze all future pension benefits, so the future compensation assumption is not applicable to valuing this 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 59 percent in equity securities and 41 percent in debt securities. The Company’s current asset allocation for U.K. plan assets is 21 percent in equity securities, 70 percent in bonds and 9 percent in other investments. 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 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 0.10 percent in 2015 compared to an asset gain of approximately 7.10 percent in 2014. The actual return on U.K. pension plan assets was a loss of 0.26 percent in 2015 compared to an asset gain of 22.80 percent in 2014. The Company’s estimate for the expected long-term return on its U.S. plan assets used to derive 2015 and 2014 pension expense was 7.00 percent. The expected long-term return on U.K. plan assets used to derive the 2015 and 2014 pension expense was 3.85 percent and 6.70 percent, respectively.

 

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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 $568 million at December 31, 2015. These amounts are being amortized in accordance with the corridor amortization requirements of U.S. GAAP over periods ranging from 8 years to 10 years. Amortization of these net deferred losses was $46 million in 2015 and $36 million in 2014.

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 benefit 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 $10 million and $11 million at December 31, 2015 and December 31, 2014, 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, 2015 and 2014.

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

(Dollar amounts in thousands except per share amounts)

 

     Year Ended December 31,  
     2015     2014     2013  

Net sales

   $ 2,972,901      $ 3,424,809      $ 3,439,233   

Cost of products sold

     2,355,451        2,852,051        2,923,042   
  

 

 

   

 

 

   

 

 

 

Gross profit

     617,450        572,758        516,191   

Selling, general and administrative expense

     262,970        272,300        275,477   
  

 

 

   

 

 

   

 

 

 

Operating profit

     354,480        300,458        240,714   

Interest expense

     (23,820     (28,138     (27,906

Interest income

     2,211        1,500        810   

Gain on sale of interest in subsidiary

     —          77,471        —     

Other non-operating income (expense)

     1,157        (2,772     (647
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     334,028        348,519        212,971   

Provision for income taxes

     118,224        111,697        79,406   
  

 

 

   

 

 

   

 

 

 

Net income

     215,804        236,822        133,565   

Net income attributable to noncontrolling shareholders’ interests

     3,038        23,244        22,552   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Cooper Tire & Rubber Company

   $ 212,766      $ 213,578      $ 111,013   
  

 

 

   

 

 

   

 

 

 

Basic earnings per share:

      

Net income attributable to Cooper Tire & Rubber Company common stockholders

   $ 3.73      $ 3.48      $ 1.75   
  

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

      

Net income attributable to Cooper Tire & Rubber Company common stockholders

   $ 3.69      $ 3.42      $ 1.73   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements, pages 42 to 77.

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands except per share amounts)

 

     Year Ended December 31,  
     2015     2014     2013  

Net income

   $ 215,804      $ 236,822      $ 133,565   

Other comprehensive income (loss)

      

Cumulative currency translation adjustments

     (35,320     (54,896     18,730   

Financial instruments

      

Change in the fair value of derivatives and marketable securities

     (2,319     5,321        1,858   

Income tax benefit (provision) on derivative instruments

     1,011        (2,174     (670
  

 

 

   

 

 

   

 

 

 

Financial instruments, net of tax

     (1,308     3,147        1,188   

Postretirement benefit plans

      

Amortization of actuarial loss

     46,736        36,473        52,849   

Amortization of prior service credit

     (566     (566     (566

Actuarial gain (loss)

     23,597        (165,357     158,589   

Income tax (provision) benefit on postretirement benefit plans

     (23,410     50,317        (84,713

Foreign currency translation effect

     6,879        6,005        (1,366
  

 

 

   

 

 

   

 

 

 

Postretirement benefit plans, net of tax

     53,236        (73,128     124,793   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     16,608        (124,877     144,711   
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     232,412        111,945        278,276   

Less comprehensive income (loss) attributable to noncontrolling shareholders’ interests

     (1,189     18,949        25,757   
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Cooper Tire & Rubber Company

   $ 233,601      $ 92,996      $ 252,519   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements, pages 42 to 77.

 

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CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

 

     December 31,  
     2015      2014  

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 505,157       $ 551,652   

Notes receivable

     8,750         4,546   

Accounts receivable, less allowances of $7,533 at 2015 and $8,792 at 2014

     371,757         368,393   

Inventories at lower of cost or market:

     

Finished goods

     297,967         302,032   

Work in process

     26,666         28,611   

Raw materials and supplies

     87,928         91,208   
  

 

 

    

 

 

 
     412,561         421,851   

Other current assets

     36,405         40,114   
  

 

 

    

 

 

 

Total current assets

     1,334,630         1,386,556   

Property, plant and equipment:

     

Land and land improvements

     49,782         49,760   

Buildings

     277,034         277,602   

Machinery and equipment

     1,637,637         1,552,140   

Molds, cores and rings

     236,370         218,827   
  

 

 

    

 

 

 
     2,200,823         2,098,329   

Less: Accumulated depreciation

     1,405,625         1,358,126   
  

 

 

    

 

 

 

Property, plant and equipment, net

     795,198         740,203   

Goodwill

     18,851         18,851   

Intangibles, net of accumulated amortization of $62,274 at 2015 and $49,010 at 2014

     133,490         137,784   

Restricted cash

     802         653   

Deferred income tax assets

     136,310         189,179   

Other assets

     16,895         15,711   
  

 

 

    

 

 

 

Total assets

   $ 2,436,176       $ 2,488,937   
  

 

 

    

 

 

 

See Notes to Consolidated Financial Statements, pages 42 to 77.

 

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CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except par value amounts)

(Continued)

 

     December 31,  
     2015     2014  

Liabilities and Equity

    

Current liabilities:

    

Notes payable

   $ 12,437      $ 64,551   

Accounts payable

     215,850        258,373   

Accrued liabilities

     199,368        184,332   

Income taxes payable

     4,748        1,994   

Current portion of long-term debt

     600        2,115   
  

 

 

   

 

 

 

Total current liabilities

     433,003        511,365   

Long-term debt

     296,412        297,937   

Postretirement benefits other than pensions

     249,650        264,305   

Pension benefits

     304,621        373,360   

Other long-term liabilities

     132,594        152,775   

Deferred income tax liabilities

     2,285        4,934   

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 2015 and at 2014

     87,850        87,850   

Capital in excess of par value

     16,306        5,742   

Retained earnings

     2,095,923        1,867,126   

Cumulative other comprehensive loss

     (509,767     (530,602
  

 

 

   

 

 

 
     1,690,312        1,430,116   

Less: common shares in treasury at cost (32,017,754 at 2015 and 29,698,893 at 2014)

     (711,064     (586,324
  

 

 

   

 

 

 

Total parent stockholders’ equity

     979,248        843,792   

Noncontrolling shareholders’ interests in consolidated subsidiaries

     38,363        40,469   
  

 

 

   

 

 

 

Total equity

     1,017,611        884,261   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 2,436,176      $ 2,488,937   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements, pages 42 to 77.

 

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CONSOLIDATED STATEMENTS OF EQUITY

(Dollar amounts in thousands except per share amounts)

 

          Total Equity  
    Redeemable
Noncontrolling
Shareholder’s
Interest
    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 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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    —          —          —          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 - $0.42 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   

Reclassification of redeemable noncontrolling shareholder interest

    152,250        —          (3,838     (24,447     —          —          (28,285     (123,965     (152,250

Net income

    19,266        —          —          213,578        —          —          213,578        3,978        217,556   

Other comprehensive loss

    (562     —          —          —          (120,582     —          (120,582     (3,733     (124,315
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

    18,704        —          —          213,578        (120,582     —          92,996        245        93,241   

Dividends payable to noncontrolling shareholder

    (5,243     —          —          —          —          —          —          (2,570     (2,570

Sale of interest in subsidiary

    (165,711     —          —          —          —          —          —          —          —     

Accelerated share repurchase program

    —          —          (2,010     (37,990     —          (160,000     (200,000     —          (200,000

Stock compensation plans, including tax benefit of $1,268

    —          —          7,157        (88     —          6,684        13,753        —          13,753   

Cash dividends - $0.42 per share

    —          —          —          (25,538     —          —          (25,538     —          (25,538
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

    —          87,850        5,742        1,867,126        (530,602     (586,324     843,792        40,469        884,261   

Net income

    —          —          —          212,766        —          —          212,766        3,038        215,804   

Other comprehensive income (loss)

    —          —          —          —          20,835        —          20,835        (4,227     16,608   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

    —          —          —          212,766        20,835        —          233,601        (1,189     232,412   

Dividends payable to noncontrolling shareholder

    —          —          —          —          —          —          —          (917     (917

Accelerated share repurchase program

    —          —          2,010        37,990        —          (40,000     —          —          —     

Share repurchase program

    —          —          —          —          —          (108,821     (108,821     —          (108,821

Stock compensation plans, including tax benefit of $4,323

    —          —          8,554        1,921        —          24,081        34,556        —          34,556   

Cash dividends - $0.42 per share

    —          —          —          (23,880     —          —          (23,880     —          (23,880
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

  $ —        $ 87,850      $ 16,306      $ 2,095,923      $ (509,767   $ (711,064   $ 979,248      $ 38,363      $ 1,017,611   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements, pages 42 to 77.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

 

     Year Ended December 31,  
     2015     2014     2013  

Operating activities:

      

Net income

   $ 215,804      $ 236,822      $ 133,565   

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

      

Depreciation and amortization

     121,408        139,166        134,751   

Deferred income taxes

     25,034        3,629        34,029   

Stock-based compensation

     14,919        9,047        6,973   

Change in LIFO reserve

     (53,108     (35,205     (11,411

Amortization of unrecognized postretirement benefits

     46,170        35,907        52,283   

Gain on sale of interest in subsidiary, net of tax

     —          (55,704     —     

Changes in operating assets and liabilities of continuing operations, net of effect of sale of interest in subsidiary:

      

Accounts and notes receivable

     (15,155     (64,636     25,361   

Inventories

     51,864        (524     62,620   

Other current assets

     (931     (2,162     (28,851

Accounts payable

     (42,068     67,734        (81,603

Accrued liabilities

     21,719        25,943        4,639   

Other items

     (85,342     (40,933     (59,981
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     300,314        319,084        272,375   

Investing activities:

      

Additions to property, plant and equipment and capitalized software

     (182,544     (145,041     (180,448

Proceeds from sale of interest in subsidiary, net of cash sold

     —          170,711        —     

Proceeds from the sale of assets

     1,651        1,248        723   
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (180,893     26,918        (179,725

Financing activities:

      

Net (payments on) issuances of short-term debt

     (41,303     55,447        (11,915

Additions to long-term debt

     —          15,634        24,527   

Repayments of long-term debt

     (3,125     (35,715     (24,162

Payment of financing fees

     (2,586     —          —     

Repurchase of common stock

     (108,821     (200,000     —     

Payment of dividends to noncontrolling shareholders

     (917     (7,813     (9,790

Payment of dividends

     (23,880     (25,538     (26,604

Issuance of common shares and excess tax benefits on options

     23,965        3,230        1,438   
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (156,667     (194,755     (46,506

Effects of exchange rate changes on cash of continuing operations

     (9,249     2,674        (230
  

 

 

   

 

 

   

 

 

 

Changes in cash and cash equivalents

     (46,495     153,921        45,914   

Cash and cash equivalents at beginning of year

     551,652        397,731        351,817   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 505,157      $ 551,652      $ 397,731   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements, pages 42 to 77.

 

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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 – 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 $505,157 and $551,652 at December 31, 2015 and December 31, 2014, 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 remote.

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 FIFO and average cost methods. Inventories 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 method 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

   2 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 three years to 40 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)                  
    2015     2014     2013  

Numerator

     

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

  $ 212,766      $ 213,578      $ 111,013   

Denominator

     

Denominator for basic earnings per share - weighted average shares outstanding

    57,012        61,402        63,327   

Effect of dilutive securities - stock options and other stock units

    611        999        955   
 

 

 

   

 

 

   

 

 

 

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

    57,623        62,401        64,282   
 

 

 

   

 

 

   

 

 

 

Basic earnings per share:

     

Net income attributable to Cooper Tire & Rubber Company common stockholders

  $ 3.73      $ 3.48      $ 1.75   
 

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

     

Net income attributable to Cooper Tire & Rubber Company common stockholders

  $ 3.69      $ 3.42      $ 1.73   
 

 

 

   

 

 

   

 

 

 

At December 31, 2015 and 2014, all options to purchase shares of the Company’s common stock were included in the computation of diluted earnings per share as the options’ exercise prices were less than the average market price of the common shares. 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 342,413 in 2013.

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

 

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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.

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 of undistributed earnings of international subsidiaries based on the Company’s intention that these earnings will continue to be reinvested. The Company measures for the current tax impact of the earnings of international subsidiaries it intends to distribute in a future period and records the tax impact if the amount is material.

Product liability – The Company accrues costs for product 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 product 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 product 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 product 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 product 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 product 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 2015, 2014 and 2013 was $53,007, $57,439 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, stock appreciation rights, performance stock units, dividend equivalents and

 

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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. If awards can be settled in cash, these awards are recorded as liabilities and marked to market. See Note 14 – Stock-Based Compensation for additional information.

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:

 

     Product
Warranty
 

Reserve at December 31, 2012

   $ 30,139   

Additions

     19,677   

Payments

     (18,963
  

 

 

 

Reserve at December 31, 2013

     30,853   

Additions

     17,413   

Payments

     (19,112

Decrease due to sale of interest in subsidiary

     (15,149
  

 

 

 

Reserve at December 31, 2014

     14,005   

Additions

     9,122   

Payments

     (10,788
  

 

 

 

Reserve at December 31, 2015

   $ 12,339   
  

 

 

 

The CCT portion of the warranty accrual consisted of a reserve of $19,452 and $16,807 at December 31, 2012 and 2013, respectively; additions to the reserve of $4,642 and $6,813 for 2013 and 2014, through the date of sale, respectively, and payments of $7,287 and $8,471 for 2013 and 2014, through the date of sale, respectively.

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 $51,793, $56,848 and $51,127 during 2015, 2014 and 2013, respectively.

Related Party Transactions – The Company’s CCT joint venture paid $15 and $648 of interest to the noncontrolling shareholder in 2014 and 2013, respectively. The CCT joint venture also paid $32,918 and $36,865 to the noncontrolling shareholder primarily for the purchase of utilities during 2014 and 2013, respectively. The Company’s COOCSA joint venture paid $26,598, $27,573 and $26,674 in 2015, 2014 and 2013, respectively, to an employment services company in Mexico owned in part by members of the joint venture workforce. COOCSA also recorded sales of $6,555, $6,159 and $5,954 to the noncontrolling shareholder in 2015, 2014 and 2013, respectively.

Apollo related expenses – The Company incurred approximately $18,049 of expenses in 2013 related to the Apollo merger agreement. These expenses are recorded in selling, general and administrative expenses in the Consolidated Statements of Income.

 

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Accounting Pronouncements

Each change to U.S. GAAP is established by the Financial Accounting Standards Board (“FASB”) in the form of an accounting standards update (“ASU”) to the FASB’s Accounting Standards Codification (“ASC”).

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

Accounting Pronouncements – Recently Adopted

Discontinued Operations – In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which requires that a disposal representing a strategic shift that has or will have a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The standard is effective for the annual and interim periods beginning after December 15, 2014. Accordingly, the Company has formally adopted the new standard; however, the adoption did not have an impact on the Company’s consolidated financial statements.

Debt Issuance Costs – In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset. Application of the standard, which is required to be applied retrospectively, is required for the annual and interim periods beginning after December 15, 2015 with early application permitted. The early adoption of this standard in the fourth quarter of 2015 resulted in a reclassification of debt issuance costs associated with the Company’s long-term debt from other assets to long-term debt in the consolidated financial statements. In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which allows the presentation of debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. This is consistent with the Company’s accounting policy for debt issuance costs associated with the Company’s revolving credit and accounts receivable securitization facilities. See Note 9 – Debt for a summary of the impact of the adoption of the ASU on the periods presented.

Deferred Taxes – In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires all deferred tax assets and deferred tax liabilities to be classified as noncurrent on the Company’s Consolidated Balance Sheets. Application of the standard, which permits either prospective or retrospective application, is required for the annual and interim periods beginning after December 15, 2016 with early application permitted. The Company early adopted the new standard in the fourth quarter of 2015 and applied it retrospectively. See Note 8 – Income Taxes for a summary of the impact of the adoption of the ASU on the periods presented.

Accounting Pronouncements – To be adopted

Revenue Recognition – In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which will supersede most current revenue recognition guidance, including industry-specific guidance. The core principle is that an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that the entity expects to be entitled to in exchange for those goods or services. The standard provides a five-step model to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The standard also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The standard was proposed to be effective for annual and interim periods beginning after December 15, 2016. On August 12, 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date,” which defers the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. The standard permits the use of either a retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the impact the new standard will have on its consolidated financial statements and related disclosures.

Consolidation – In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis,” which modifies the existing consolidation model, particularly for those entities with a variable interest in other legal entities. The standard is effective for the annual and interim periods beginning after December 15, 2015 and can be applied using either a retrospective or modified retrospective approach. Early adoption is permitted. The Company has concluded that the adoption of this standard will not have a material impact on its consolidated financial statements. The Company will apply ASU 2015-02 in evaluating any new ownership agreements entered into subsequent to December 31, 2015.

 

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Fair Value Measurements – In May 2015, the FASB issued ASU 2015-07, “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendment also limits disclosure to investments for which the practical expedient has been elected instead of all investments eligible for the practical expedient. Application of the standard, which must be applied retrospectively, is required for the annual and interim periods beginning after December 15, 2015. The Company is currently evaluating the impact the new standard will have on the footnote disclosures to its consolidated financial statements.

Inventory – In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which is intended to simplify the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. Application of the standard, which should be applied prospectively, is required for the annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its consolidated financial statements.

Business Combinations – In September 2015, the FASB issued ASU 2015-16, “Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments,” which requires acquirers to recognize adjustments to provisional amounts identified during the reporting period in which the adjustment amounts are determined. Acquirers should record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Application of the standard, which should be applied prospectively, is required for the annual and interim periods beginning after December 15, 2015. Early adoption is permitted. The new standard may have an impact on the Company’s consolidated financial statements in the event of a business combination and will be considered in the evaluation of any new ownership agreements entered into subsequent to December 31, 2015.

Note 2 – CCT Agreements

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

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

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

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

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

The Company determined the CCT Agreement constituted an accounting extinguishment and new issuance of the Chengshan Group’s equity interest in CCT. In accordance with ASC 810, “Consolidation”, changes in a parent’s interest while the parent retains its

 

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controlling financial interest in its subsidiary shall be accounted for as equity transactions. Therefore, gains and losses were not recorded in the Consolidated Statement of Income as a result of the CCT Agreement. The Company was required to measure the noncontrolling shareholder interest at fair value as of January 29, 2014, the transaction date (the “Transaction Date Assessment”).

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

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

Further, as a result of the CCT Agreement, during the term of its put option rights, the noncontrolling shareholder interest in CCT had redemption features that were not within the control of the Company. Accordingly, the noncontrolling shareholder interest in CCT was recorded outside of total equity during the interim period between the CCT Agreement and eventual date of sale as described below. If the Transaction Date Assessment and Options Assessment resulted in a noncontrolling shareholder interest that was less than 35 percent of the minimum Option Price, ASC 480, “Distinguishing Liabilities from Equity”, required that the noncontrolling shareholder interest be adjusted to 35 percent of the minimum Option Price.

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

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

The Company determined that the recurring fair value measurements related to CCT relied primarily on Company-specific inputs and the Company’s assumptions about the use of the assets and settlements of liabilities, as observable inputs were not available and, as such, resided within Level 3 of the fair value hierarchy as defined in Note 10 – Fair Value of Financial Instruments. The Company utilized third parties to assist in the determination of the fair value of CCT based upon internal and external inputs considering various relevant market transactions, discounted cash flow valuation methods and probability weighting, among other factors.

In October 2014, the Company received the required documentation from the noncontrolling shareholder interest owner indicating its intent to exercise its call option under the CCT Agreement. On November 26, 2014, the Chinese State Administration for Industry & Commerce issued a new business license for CCT and on November 30, 2014, the Company completed the sale of its 65 percent ownership interest in CCT to Prairie, all in accordance with the previously described Option Agreement between the Company and Chengshan, referred to as the “Sale.” In connection with the Sale, the name of CCT was changed to Prinx Chengshan (Shandong) Tire Company Ltd. Under the terms of the CCT Agreement, the Company received approximately $262,000, in cash, net of taxes and including dividends. The sale of CCT resulted in a gain on sale, net of tax, of $55,704. Subsequent to the Sale, the Company continues to have off-take rights, with CCT agreeing to produce Cooper branded products until mid-2018.

The Company evaluated the Sale to determine if it met the discontinued operations criteria in accordance with ASC 205 “Presentation of Financial Statements”. Based upon the Company’s significant continuing involvement in the operations of CCT through the off-take agreements, the Sale is not deemed to meet the discontinued operations criteria. CCT was presented in the Consolidated Financial Statements of the Company through the Sale date.

 

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The following table reflects the results of CCT included in the Company’s Consolidated Statements of Income for the years ended December 31:

 

     2014      2013  

Net Sales

     

External Customers

   $ 545,850       $ 639,888   

Intercompany

     121,142         126,643   
  

 

 

    

 

 

 
   $ 666,992       $ 766,531   

Operating Profit

   $ 77,529       $ 74,786   

Net income attributable to Cooper Tire & Rubber Company

   $ 38,037       $ 33,124   

Note 3 – Inventories

Inventory costs are determined using the LIFO method for substantially all U.S. inventories. The current cost of the U.S. inventories under the FIFO method was $361,779 and $419,977 at December 31, 2015 and 2014, respectively. These FIFO values have been reduced by approximately $73,123 and $126,231 at December 31, 2015 and 2014, 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 methods. All inventories are stated at the lower of cost or market.

Note 4 – Other Current Assets

Other current assets at December 31 were as follows:

 

     2015      2014  

Value added tax recoverable

   $ 17,377       $ 11,962   

Income tax recoverable

     1,447         9,613   

Other

     17,581         18,539   
  

 

 

    

 

 

 

Other current assets

   $ 36,405       $ 40,114   
  

 

 

    

 

 

 

In accordance with the adoption of ASU 2015-17, deferred income tax assets of $40,996 in 2014 have been reclassified from Other current assets to Deferred income tax assets in the noncurrent section of the Consolidated Balance Sheet.

 

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Note 5 - 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. 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 quarter of 2014, the Company wrote off the intangible assets of CCT in connection with the sale of its interest in the subsidiary. In 2014, the Company also wrote off approximately $13,636 of fully amortized intangible assets determined to no longer hold value at the time. During the fourth quarter of 2015, 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, 2014 and 2015:

 

     December 31, 2015      December 31, 2014  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 
               
               

Definite-lived:

               

Capitalized software costs

   $ 170,764       $ (52,375   $ 118,389       $ 161,589       $ (39,831   $ 121,758   

Land use rights

     3,266         (578     2,688         3,465         (540     2,925   

Trademarks and tradenames

     8,800         (6,641     2,159         8,800         (6,188     2,612   

Other

     3,117         (2,680     437         3,123         (2,451     672   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     185,947         (62,274     123,673         176,977         (49,010     127,967   

Indefinite-lived:

               

Trademarks

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 195,764       $ (62,274 )    $ 133,490       $ 186,794       $ (49,010   $ 137,784   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Estimated amortization expense over the next five years is as follows: 2016 - $13,882, 2017 - $13,680, 2018 - $13,334, 2019 - $12,926 and 2020 - $12,821.

Note 6 - Other Assets

Other assets at December 31 were as follows:

 

     2015      2014  

Value added tax recoverable

   $ 10,387       $ 12,509   

Other

     6,508         3,202   
  

 

 

    

 

 

 

Other assets

   $ 16,895       $ 15,711   
  

 

 

    

 

 

 

In accordance with the adoption of ASU 2015-03, unamortized debt issuance costs of $994 in 2014 have been reclassified from Other assets to a reduction of the carrying value of the debt liability.

Note 7 - Accrued Liabilities

Accrued liabilities at December 31 were as follows:

 

     2015      2014  

Payroll and employee related

   $ 80,633       $ 62,669   

Product liability

     74,018         69,892   

Other postretirement benefits

     15,929         14,562   

Advertising

     12,351         11,428   

Warranty

     6,311         8,331   

Other

     10,126         17,450   
  

 

 

    

 

 

 

Accrued liabilities

   $ 199,368       $ 184,332   
  

 

 

    

 

 

 

 

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Note 8 - Income Taxes

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

 

     2015      2014      2013  

United States

   $ 314,263       $ 165,888       $ 107,918   

Foreign

     19,765         182,631         105,053   
  

 

 

    

 

 

    

 

 

 

Total

   $ 334,028       $ 348,519       $ 212,971   
  

 

 

    

 

 

    

 

 

 

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

 

     2015      2014      2013  

Current:

        

Federal

   $ 67,405       $ 46,270       $ 7,879   

State and local

     12,837         8,678         2,576   

Foreign

     12,948         53,120         34,922   
  

 

 

    

 

 

    

 

 

 
     93,190         108,068         45,377   

Deferred:

        

Federal

     23,466         5,282         26,647   

State and local

     5,157         82         7,255   

Foreign

     (3,589      (1,735      127   
  

 

 

    

 

 

    

 

 

 
     25,034         3,629         34,029   
  

 

 

    

 

 

    

 

 

 
   $ 118,224       $ 111,697       $ 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:

 

     2015      2014      2013  

Income tax provision at 35%

   $ 116,910       $ 121,982       $ 74,540   

Expiration of capital loss carryforward

     18,376         —           —     

Valuation allowance

     (18,200      1,382         4,001   

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

     12,321         7,123         4,414   

Domestic manufacturing deduction

     (6,580      (3,745      (1,925

U.S. tax credits

     (3,186      (1,455      (2,334

Tax law or rate change

     2,383         —           3,702   

Difference in effective tax rates of international operations

     (932      (35,095      (9,633

Other - net

     (2,868      (262      6,641   

Tax on gain from sale of CCT

     —           21,767         —     
  

 

 

    

 

 

    

 

 

 

Provision for income taxes

   $ 118,224       $ 111,697       $ 79,406   
  

 

 

    

 

 

    

 

 

 

Payments for income taxes in 2015, 2014 and 2013, net of refunds, were $76,206, $63,390 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:

 

     2015      2014  

Deferred tax assets:

     

Postretirement and other employee benefits

   $ 197,657       $ 224,123   

Product liability

     61,456         68,355   

Net operating loss, capital loss, and tax credit carryforwards

     11,187         28,812   

All other items

     45,747         48,087   
  

 

 

    

 

 

 

Total deferred tax assets

     316,047         369,377   

Deferred tax liabilities:

     

Property, plant and equipment

     (156,520 )       (141,374

All other items

     (10,399 )       (10,455
  

 

 

    

 

 

 

Total deferred tax liabilities

     (166,919 )       (151,829
  

 

 

    

 

 

 
     149,128         217,548   

Valuation allowances

     (15,103 )       (33,303
  

 

 

    

 

 

 

Net deferred tax asset

   $ 134,025       $ 184,245   
  

 

 

    

 

 

 

At December 31, 2015, the Company has apportioned state tax losses of $4,906 and foreign tax losses of $48,905 available for carryforward. The Company has $741 of U.S. federal tax credits and $262 of state tax credits 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 2016 through 2026. A portion of the foreign tax losses expired in 2015, with additional losses expected to expire in 2016. The U.S. capital loss carryforward expired in 2015.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires all deferred tax assets and deferred tax liabilities to be classified as noncurrent on the Company’s Consolidated Balance Sheets. The Company adopted the provisions of this update in 2015. Accordingly, deferred income tax assets of $40,996 in 2014 have been reclassified from Other current assets to Deferred income tax assets in the noncurrent section of the Consolidated Balance Sheet.

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 $5,843 at December 31, 2015, as itemized in the tabular roll forward below. The unrecognized tax benefits at December 31, 2015 relate to uncertain tax positions in tax years 2012 through 2014. Based upon the outcome of tax examinations, judicial proceedings, or expiration of statutes of limitations, it is reasonably possible that the ultimate resolution of these unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities.

 

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     Unrecognized
Tax Benefits
 

Balance at December 31, 2012

   $ 5,138   

Settlements for tax positions of prior years

     (409

Additions for tax positions of the current year

     566   

Additions for tax positions of prior years

     1,054   

Reductions for tax positions of prior years

     (471
  

 

 

 

Balance at December 31, 2013

     5,878   

Additions for tax positions of the current year

     230   

Additions for tax positions of prior years

     2,206   
  

 

 

 

Balance at December 31, 2014

     8,314   

Settlements for tax positions of prior years

     (367

Additions for tax positions of prior years

     1,151   

Reductions for tax positions of prior years

     (942

Statute Lapses

     (2,313
  

 

 

 

Balance at December 31, 2015

   $ 5,843   
  

 

 

 

Of this amount, the effective rate would change upon the recognition of approximately $5,843 of these unrecognized tax benefits. The Company accrued, through the tax provision, approximately $63, $261 and $138 of interest expense for 2015, 2014 and 2013, respectively. At December 31, 2015, the Company has $488 of interest accrued as an ASC 740-10 reserve.

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 2016, the Company plans to remit dividends from one of its non-U.S. subsidiaries. As a result of this decision made in 2015, the Company assessed the need for incremental U.S. income and foreign withholding tax on the anticipated amount. This assessment resulted in no additional tax expense being recorded. 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 $538,435 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 operates in multiple jurisdictions throughout the world. The Company has effectively settled U.S. federal tax examinations for years before 2012 and state and local examinations for years before 2011, 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 2008. 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 9 – Debt

On May 27, 2015, the Company entered into a revolving credit facility with a consortium of banks that provides up to $400,000 based on available collateral, including a $110,000 letter of credit subfacility, and expires in May 2020. The Company may elect to increase the commitments under the revolving credit facility or incur one or more tranches of term loans in an aggregate amount of up to $100,000, subject to the satisfaction of certain conditions. The Company may elect to add certain foreign subsidiaries as additional borrowers under the Credit Agreement (the “Foreign Borrowers”), subject to the satisfaction of certain conditions.

All of the indebtedness of the Company and any Foreign Borrowers under the revolving credit facility is guaranteed by certain of the Company’s domestic subsidiaries and secured by substantially all of the assets of the Company and the domestic guarantors, subject to certain limitations. All of the indebtedness of any Foreign Borrower will be guaranteed by the Company and the material foreign subsidiaries and direct parent companies of such Foreign Borrower, subject to certain exceptions, and secured by substantially all of the assets of the Company, the Foreign Borrowers and the guarantors.

Borrowings under the revolving credit facility bear interest at a rate per annum equal to, at the Company’s option, either (i) the base rate plus the applicable margin or (ii) the relevant adjusted LIBOR for an interest period of one, two, three or six months (as selected by the Company), or such other period of time approved by the Lenders, plus the applicable margin.

 

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The revolving credit facility contains certain customary non-financial covenants. In addition, the revolving credit facility contains financial covenants that require the Company to maintain a net leverage ratio and interest coverage ratio in accordance with the limits set forth therein.

In connection with entering into the revolving credit facility, the Company terminated its former $200,000 credit facility that had been entered into on November 9, 2007 by the Company and its subsidiary, Max-Trac Tire Co., Inc. with a consortium of four banks. This agreement provided a $200,000 credit facility to the Company and Max-Trac Tire Co., Inc. The agreement was a revolving credit facility and was secured by the Company’s U.S. inventory, certain North American accounts receivable that had not been previously pledged and general intangibles related to the foregoing. Borrowings under the agreement bore a margin based on LIBOR.

On May 27, 2015, the Company amended its accounts receivable securitization facility, reducing the borrowing limit from $175,000 to $150,000 and extending the maturity until May 2018. 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. The accounts receivable securitization facility has no significant financial covenants until available credit is less than specified amounts.

There were no borrowings under the revolving credit facility or the accounts receivable securitization facility at December 31, 2015. There were no borrowings under the former credit facility at December 31, 2014. Borrowing under the accounts receivable securitization facility was $40,000 at December 31, 2014. Amounts used to secure letters of credit totaled $37,400 and $39,200 at December 31, 2015 and 2014, 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, 2015, was $504,500.

The Company’s consolidated operations in Asia have renewable unsecured credit lines that provide up to $108,800 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 $98,200 at December 31, 2015.

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, 2014 and 2015, the assets and liabilities associated with these City of Texarkana IRBs were $20,000.

The following table summarizes the long-term debt of the Company at December 31, 2015 and 2014. There were no secured notes outstanding as of December 31, 2015. Except for the capitalized leases and other, the long-term debt is due in an aggregate principal payment on the due date:

 

     2015      2014  

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

     7,463         8,062   
  

 

 

    

 

 

 
     297,921         298,520   

Subsidiaries

     

5.46% and 5.63% secured notes due in 2016

     —           2,526   
  

 

 

    

 

 

 
     297,921         301,046   

Less: unamortized debt issuance costs(1)

     909         994   
  

 

 

    

 

 

 
     297,012         300,052   

Less: current maturities

     600         2,115   
  

 

 

    

 

 

 
   $ 296,412       $ 297,937   
  

 

 

    

 

 

 

 

(1) Unamortized debt issuance costs associated with long-term debt have been reclassified from a noncurrent asset to a reduction of the carrying value of the debt liability with the adoption of ASU 2015-03.

 

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Over the next five years, the Company has payments related to the above debt of: 2016 - $600, 2017 - $600, 2018 - $600, 2019 - $174,178 and 2020 - $0. In addition, at December 31, 2015, the Company had short-term notes payable of $12,437 due in 2016 consisting of funds borrowed by the Company’s operations in the PRC and Mexico. At December 31, 2014, the Company had short-term notes payable of $64,551 due in 2015 consisting of $40,000 borrowed under the accounts receivable securitization facility and $24,551 borrowed by the Company’s operations in the PRC and Mexico. The weighted average interest rate of the short-term notes payable at December 31, 2015 and 2014 was 2.18 percent and 1.67 percent, respectively.

Interest paid on debt during 2015, 2014 and 2013 was $27,560, $30,346 and $30,694, respectively. The amount of interest capitalized was $4,473, $1,878 and $3,068 during 2015, 2014 and 2013, respectively.

Note 10 - Fair Value Measurements

Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into financial instruments for trading or speculative purposes. The derivative financial instruments include fair value and cash flow hedges of foreign currency exposures. Exchange rate fluctuations on 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, 2015 and 2014 was $68,732 and $170,750, 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 $3,400 and $5,719 as of December 31, 2015 and 2014, 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.

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.

 

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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:

 

     Year Ended December 31,  
Assets/(Liabilities)    2015      2014  

Designated as hedging instruments:

     

Gross amounts recognized

   $ 3,559       $ 6,483   

Gross amounts offset

     (35 )       (504
  

 

 

    

 

 

 

Net amounts

     3,524         5,979   

Not designated as hedging instruments:

     

Gross amounts recognized

     174         —     

Gross amounts offset

     —           —     
  

 

 

    

 

 

 

Net amounts

     174         —     
  

 

 

    

 

 

 

Other current assets

   $ 3,698       $ 5,979   
  

 

 

    

 

 

 

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

 

     Year Ended December 31,  

Derivatives Designated as Cash Flow Hedges

   2015      2014      2013  

Amount of Gain Recognized in Other Comprehensive Income on Derivatives (Effective Portion)

   $ 11,127       $ 9,020       $ 2,943   

Amount of Gain Reclassified from Cumulative Other Comprehensive Loss into Income (Effective Portion)

     13,446         3,699         1,085   

Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)

     (136 )       (188      (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 December 31,
 
      2015      2014      2013  

Foreign exchange contracts

  

Other non-operating

income) (expense)

   $ 174       $ 121       $ (366
     

 

 

    

 

 

    

 

 

 

For effective designated foreign exchange hedges of forecasted sales and purchases, the Company reclassifies the gain (loss) from Other Comprehensive Income into Net Sales and the ineffective portion is recorded directly into Other non-operating income (expense).

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, 2015 and December 31, 2014, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety were to be 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, 2014 and 2015:

 

     December 31, 2015  
     Total
Assets
(Liabilities)
     Quoted Prices
in Active Markets
for Identical
Assets
Level (1)
     Significant
Other
Observable
Inputs
Level (2)
     Significant
Unobservable
Inputs
Level (3)
 
           
           
           
           

Foreign Exchange Contracts

   $ 3,698       $ —         $ 3,698       $ —     

Stock-based Liabilities

   $ (18,057    $ (18,057    $ —         $ —     
     December 31, 2014  
     Total
Assets
(Liabilities)
     Quoted Prices
in Active Markets
for Identical
Assets
Level (1)
     Significant
Other
Observable
Inputs
Level (2)
     Significant
Unobservable
Inputs
Level (3)
 
           
           
           

Foreign Exchange Contracts

   $ 5,979       $ —         $ 5,979       $ —     

Stock-based Liabilities

   $ (19,079    $ (19,079    $ —         $ —     

 

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The following table presents the movement in the Level 3 fair value measurements for the year ended December 31, 2014. There were no assets or liabilities classified as Level 3 in 2015.

 

    Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)

Redeemable noncontrolling shareholder interest
 

Balance at December 31, 2013

  $ —     

Transfer into Level 3 - Redeemable noncontrolling shareholder interest

    (152,250 )

Adjustment for CCT valuation amount

    (956 )

Sale of interest in subsidiary

    153,206  
 

 

 

 

Balance at December 31, 2014

  $ —     
 

 

 

 

The following table presents the carrying amounts and fair values of the Company’s financial instruments. The fair value of the Company’s debt was based upon prices of similar instruments in the marketplace.

 

     December 31, 2015      December 31, 2014  
     Carrying
Amount
     Fair Value
Measurements
Using Quoted
Prices in Active
Markets for
Identical
Instruments
Level (1)
     Carrying
Amount
     Fair Value
Measurements
Using Quoted
Prices in Active
Markets for
Identical
Instruments
Level (1)
 

Cash and cash equivalents

   $ 505,157       $ 505,157       $ 551,652       $ 551,652   

Notes receivable

     8,750         8,750         4,546         4,546   

Restricted cash

     802         802         653         653   

Notes payable

     (12,437      (12,437      (64,551      (64,551

Current portion of long-term debt

     (600      (600      (2,115      (2,115

Long-term debt

     (296,412      (323,522      (297,937      (325,431

Note 11 - 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 in the U.K. and Germany 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 $14,236, $12,510 and $12,522 for 2015, 2014 and 2013, respectively.

 

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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 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.

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:

 

    2015
Pension Benefits
    2014
Pension Benefits
    Other Postretirement Benefits  
    Domestic     International     Total     Domestic     International     Total     2015     2014  

Change in benefit obligation:

               

Projected Benefit Obligation at January 1

  $ 1,105,100      $ 457,233      $ 1,562,333      $ 973,276      $ 431,146      $ 1,404,422      $ 278,867      $ 252,866   

Service cost - employer

    11,037        9        11,046        9,760        8        9,768        2,513        2,404   

Interest cost

    40,202        15,853        56,055        42,842        19,620        62,462        10,320        11,305   

Actuarial (gain)/loss

    (52,663     (27,763     (80,426     137,217        47,015        184,232        (13,726     24,294   

Benefits paid

    (58,209     (14,321     (72,530     (57,995     (14,631     (72,626     (12,395     (12,002

Foreign currency translation effect

    —          (25,127     (25,127     —          (25,925     (25,925     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Projected Benefit Obligation at December 31

  $ 1,045,467      $ 405,884      $ 1,451,351      $ 1,105,100      $ 457,233      $ 1,562,333      $ 265,579      $ 278,867   

Change in plans’ assets:

               

Fair value of plans’ assets at January 1

  $ 857,825      $ 330,848      $ 1,188,673      $ 823,790      $ 288,524      $ 1,112,314      $ —        $ —     

Actual return on plans’ assets

    1,095        (746     349        56,284        65,128        121,412        —          —     

Employer contribution

    35,803        12,027        47,830        35,746        12,454        48,200        —          —     

Benefits paid

    (58,209     (14,321     (72,530     (57,995     (14,631     (72,626     —          —     

Foreign currency translation effect

    —          (17,892     (17,892     —          (20,627     (20,627     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plans’ assets at December 31

  $ 836,514      $ 309,916      $ 1,146,430      $ 857,825      $ 330,848      $ 1,188,673      $ —        $ —     

Funded status

  $ (208,953   $ (95,968   $ (304,921   $ (247,275   $ (126,385   $ (373,660   $ (265,579   $ (278,867

Amounts recognized in the balance sheets:

               

Accrued liabilities

  $ (300   $ —        $ (300   $ (300   $ —        $ (300   $ (15,929   $ (14,562

Postretirement benefits other than pensions

    —          —          —          —          —          —          (249,650     (264,305

Pension benefits

    (208,653     (95,968   $ (304,621     (246,975     (126,385   $ (373,360     —          —     

Included in cumulative other comprehensive loss at December 31, 2015 are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service credits of ($1,905) (($1,565) net of tax) and unrecognized actuarial losses of $569,639 ($492,752 net of tax).

Included in cumulative other comprehensive loss at December 31, 2014 are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service credits of ($2,736) (($2,078) net of tax) and unrecognized actuarial losses of $647,115 ($546,502 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, 2016 are ($566) and $43,882, respectively.

The accumulated benefit obligation for all defined benefit pension plans was $1,448,277 and $1,558,908 at December 31, 2015 and 2014, respectively.

 

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

 

     Pension
Benefits
    Other Postretirement Benefits  
     2015     2014     2015     2014  

All plans

        

Discount rate

     4.10     3.70     4.20     3.80

Domestic plans

        

Discount rate

     4.20     3.75     4.20     3.80

Foreign plans

        

Discount rate

     3.84     3.59     —          —     

At December 31, 2015, the weighted average assumed annual rate of increase in the cost of medical benefits was 7.00 percent for 2016 trending linearly to 4.50 percent per annum in 2023.

 

     Pension Benefits - Domestic     Pension Benefits - International  
     2015     2014     2013     2015     2014     2013  

Components of net periodic benefit cost:

            

Service cost

   $ 11,037      $ 9,760      $ 11,879      $ 9      $ 8      $ 8   

Interest cost

     40,202        42,842        38,751        15,853        19,620        15,661   

Expected return on plan assets

     (55,299     (52,543     (47,555     (12,421     (19,977     (14,981

Amortization of actuarial loss

     39,514        28,021        44,370        7,222        8,452        6,564   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 35,454      $ 28,080      $ 47,445      $ 10,663      $ 8,103      $ 7,252   

 

     Other Post Retirement Benefits  
     2015      2014      2013  

Components of net periodic benefit cost:

        

Service cost

   $ 2,513       $ 2,404       $ 3,813   

Interest cost

     10,320         11,305         10,791   

Amortization of prior service cost

     (566      (566      (566

Amortization of actuarial loss

     —           —           1,915   
  

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 12,267       $ 13,143       $ 15,953   

 

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

 

     Pension Benefits     Other Postretirement Benefits  
     2015     2014     2013     2015     2014     2013  

All plans

            

Discount rate

     3.70     4.53     3.92     3.80     4.60     3.60

Expected return on plan assets

     6.12     6.91     6.75     —          —          —     

Rate of compensation increase

     0.00     0.00     0.00     —          —          —     

Domestic plans

            

Discount rate

     3.75     4.55     3.75     3.80     4.60     3.60

Expected return on plan assets

     7.00     7.00     7.00     —          —          —     

Foreign plans

            

Discount rate

     3.59     4.49     4.39     —          —          —     

Expected return on plan assets

     3.84     6.66     6.01     —          —          —     

Rate of compensation increase

     0.00     0.00     0.00     —          —          —     

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, 2015 and 2014:

 

     2015      2014  
     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

   $ 1,451,351       $ 1,451,351       $ 1,562,333       $ 1,562,333   

Accumulated benefit obligation

     1,448,277         1,448,277         1,558,908         1,558,908   

Fair value of plan assets

     1,146,430         1,146,430         1,188,673         1,188,673   

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

   $ 67       $ (60

Increase (decrease) in the postretirement benefit obligation

     1,602         (1,426

 

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The table below presents the Company’s weighted average asset allocations for its domestic and U.K. pension plans’ assets at December 31, 2015 and December 31, 2014 by asset category.

 

     U.S. Plans     U.K. Plan  

Asset Category

   2015     2014     2015     2014  

Equity securities

     59     53     21     20

Debt securities

     41        47        70        72   

Other investments

     0        0        9        8   

Cash

     0        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 assets of the Company’s pension plan in Germany consist of investments in German insurance contracts.

The fair market value of U.S. plan assets was $836,514 and $857,825 at December 31, 2015 and 2014, respectively. The fair market value of the U.K. plan assets was $308,132 and $328,802 at December 31, 2015 and 2014, respectively. The fair market value of the German pension plan assets was $1,784 and $2,046 at December 31, 2015 and 2014, 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. Certain amounts for 2014 have been reclassified to conform to the current year presentation including reclassifying $12,775 from Level 2 Other investments to Level 3 Other investments in the United Kingdom plan.

 

            Fair Value Hierarchy  
     Total      Level 1      Level 2      Level 3  

December 31, 2015

           

United States plans

           

Cash & Cash Equivalents

   $ 724       $ 724       $ —         $ —     

Equity securities

     495,933         149,894         346,039         —     

Fixed income securities

     339,857         133,420         206,437         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 836,514       $ 284,038       $ 552,476       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

United Kingdom plan

           

Cash & Cash Equivalents

   $ 917       $ 917       $ —         $ —     

Equity securities

     65,391         65,391         —           —     

Fixed income securities

     214,762         214,762         —           —     

Other investments

     27,062         —           —           27,062   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 308,132       $ 281,070       $ —         $ 27,062   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

United States plans

           

Cash & Cash Equivalents

   $ 770       $ 770       $ —         $ —     

Equity securities

     451,893         153,129         298,764         —     

Fixed income securities

     405,162         137,693         267,469         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 857,825       $ 291,592       $ 566,233       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

United Kingdom plan

           

Cash & Cash Equivalents

   $ 935       $ 935       $ —         $ —     

Equity securities

     67,280         67,280         —           —     

Fixed income securities

     234,775         234,775         —           —     

Other investments

     25,812         —           —           25,812   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 328,802       $ 302,990       $ —         $ 25,812   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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The Level 3 assets in the U.K. plan are investments in a European infrastructure fund and property 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 funds and made available to investors are estimated and then discounted back to the valuation date. The discount rate is derived by adding a risk premium to the risk-free interest rate applicable to the country in which the assets are located.

The following table details the activity in this investment for the years ended December 31, 2014 and 2015:

 

     Infrastructure and
Property Funds
 

Balance at December 31, 2013

   $ 13,915   

Transfer into level 3 - property fund

     12,719   

Disbursements

     —     

Change in fair value

     —     

Foreign currency translation effect

     (822
  

 

 

 

Balance at December 31, 2014

     25,812   

Transfer into level 3

     —     

Disbursements

     —     

Change in fair value

     2,798   

Foreign currency translation effect

     (1,548
  

 

 

 

Balance at December 31, 2015

   $ 27,062   
  

 

 

 

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 2015, the Company contributed $47,830 to its domestic and foreign pension plans, and during 2016, the Company expects to contribute between $42,000 and $52,000 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:

 

     Pension
Benefits
     Other
Postretirement
Benefits
 

2016

   $ 82,900       $ 15,929   

2017

     78,612         16,233   

2018

     80,936         16,492   

2019

     81,072         16,773   

2020

     82,220         17,198   

Note 12 - Other Long-Term Liabilities

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

 

     2015      2014  

Product liability

   $ 89,872       $ 108,999   

Stock-based liabilities

     18,057         19,079   

Other

     24,665         24,697   
  

 

 

    

 

 

 

Other long-term liabilities

   $ 132,594       $ 152,775   
  

 

 

    

 

 

 

 

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Note 13 - Common Stock

Share Repurchase Programs

On August 6, 2014, the Board of Directors authorized the repurchase of up to $200,000 of the Company’s outstanding common stock pursuant to an accelerated share repurchase program, and the Company entered into a $200,000 accelerated share repurchase program (the “ASR program”) with J.P. Morgan Chase Bank (the “ASR Counterparty”). The Company paid $200,000 to the ASR Counterparty in August 2014 and received 5,567,154 shares of its common stock, which represented approximately 80 percent of the shares expected to be purchased pursuant to the ASR program, based on the closing price on August 6, 2014. Under the terms of the ASR program, the ASR Counterparty was permitted, in accordance with the applicable requirements of the federal securities laws, to separately trade in the Company’s shares in connection with the hedging activities related to the ASR program and as part of other aspects of the ASR Counterparty’s business.

On February 13, 2015, the Company completed the ASR program. Based on the terms of the ASR program, the total number of shares repurchased under the ASR program was based on the volume-weighted average price of the Company’s common stock, less a discount, during the repurchase period, which resulted in the Company receiving an additional 784,694 shares of its common stock from the ASR Counterparty at maturity. As a result, under the ASR program, the Company paid a total of $200,000 to the ASR Counterparty and received a total of 6,351,848 shares (5,567,154 shares initially received, plus 784,694 shares received at maturity) of its common stock, which represents a volume weighted average price, as adjusted pursuant to the terms of the ASR program, of $31.49 over the duration of the ASR program.

On February 20, 2015, the Board of Directors authorized a new program to repurchase up to $200,000, excluding commissions, of the Company’s common stock through December 31, 2016 (the “Repurchase Program”). The Repurchase Program does not obligate the Company to acquire any specific number of shares and may be suspended or discontinued at any time without notice. Under the Repurchase Program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.

During 2015, subsequent to the Board of Directors’ February 20, 2015 authorization, the Company repurchased 2,751,454 shares of the Company’s common stock under the Repurchase Program for $108,821, including applicable commissions, which represents an average price of $39.55 per share. As of December 31, 2015, approximately $91,261 remained of the $200,000 Repurchase Program. All repurchases under the Repurchase Program were made using cash resources.

Since the share repurchases began in August 2014 through December 31, 2015, the Company to date has repurchased 9,103,302 shares of the Company’s common stock at an average cost of $33.92 per share.

Reserved Shares

There were 9,445,948 common shares reserved for grants under compensation plans at December 31, 2015. The Company eliminated the option for plan participants in the Company’s Spectrum Investment Savings Plan and Pre-Tax Savings plans to invest in the Company’s common stock in March 2014.

Note 14 - Stock-Based Compensation

The Company’s incentive compensation plans allow the Company to grant awards to certain employees in the form of stock options, stock awards, restricted stock units, stock appreciation rights, performance stock units, dividend equivalents and other awards. 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.

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

 

     Stock-Based Compensation  
     2015      2014      2013  

Stock options

   $ 3,986       $ 4,218       $ 3,934   

Restricted stock units

     4,879         2,206         1,092   

Performance stock units

     6,054         2,623         1,947   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 14,919       $ 9,047       $ 6,973   
  

 

 

    

 

 

    

 

 

 

 

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Stock Options

The 2001, 2006, 2010 and 2014 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 March 2010, executives participating in the 2010 – 2012 Long-Term Incentive Plan were granted 303,120 stock options which vested one third each year through March 2013. During February 2011, executives participating in the 2011 – 2013 Long-Term Incentive Plan were granted 311,670 stock options, which vested one-third each year through February 2014. In February 2012, executives participating in the 2012 – 2014 Long-Term Incentive Plan were granted 589,934 stock options which vested one-third each year through February 2015. In February 2013, executives participating in the 2013-2015 Long-Term Incentive Plan were granted 330,639 stock options, which will vest one-third each year through February 2016. In February 2014, executives participating in the 2014-2016 Long-Term Incentive Plan were granted 380,064 stock options, which will vest one-third each year through February 2017. No stock options were granted in 2015. These options do not contain any performance-based criteria. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire.

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:

 

     2014     2013  

Risk-free interest rate

     2.0     1.2

Dividend yield

     1.8     1.7

Expected volatility of the Company’s common stock

     0.640       0.646  

Expected life in years

     6.0       6.0  

The weighted average fair value of options granted in 2014 and 2013 was $12.26 and $12.97, respectively. Compensation expense for these options is recorded over the vesting period.

Summarized information for the plans follows:

 

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

Outstanding at December 31, 2014

     1,765,922       $ 20.20      

Granted

     —           —        

Exercised

     (1,025,699      19.11      

Expired

     (18,459      19.55      

Canceled

     (53,632      22.53      
  

 

 

       

Outstanding at December 31, 2015

     668,132         21.71       $ 10,784   
  

 

 

       

Exercisable at December 31, 2015

     339,773         19.11         6,367   
  

 

 

       

 

     Year ended December 31,  
     2015      2014      2013  

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

   $          $ 12.26       $ 12.97   

Aggregate intrinsic value of options exercised (thousands)

   $ 20,100       $ 2,711       $ 877   

Weighted average grant-date fair value of shares vested (thousands)

   $ 4,602       $ 3,905       $ 3,407   

 

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The weighted average remaining contractual life of options outstanding at December 31, 2015 is 6.7 years. Approximately 202,787 stock options will become exercisable over the next twelve months.

Segregated disclosure of options outstanding at December 31, 2015 was as follows:

 

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

Options outstanding

     131,623         536,509   

Weighted average exercise price

   $ 12.67       $ 23.93   

Remaining contractual life

     4.9         7.2   

Options exercisable

     131,623         208,150   

Weighted average exercise price

   $ 12.67       $ 23.18   

At December 31, 2015, the Company had $548 of unvested compensation cost related to stock options, and this cost will be recognized as expense over a weighted average period of 13 months.

Restricted Stock Units

Under the 1998, 2001, 2006, 2010 and 2014 Incentive Compensation Plans, restricted stock units may be granted to officers and certain other employees. Compensation related to the restricted stock units is determined based on the fair value of the Company’s stock on the date of grant. The restricted stock units granted in 2012, 2013, 2014 and 2015 have vesting periods ranging from two to four years. In February 2015, employees participating in the 2015-2017 Long-Term Incentive Plan were granted 105,102 restricted stock units which vest one-third each year through February 2018. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire, but not less than six months. The following table provides details of the nonvested restricted stock units for 2015:

 

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

Nonvested at December 31, 2014

     197,838       $ 26.48   

Granted

     111,652         36.35   

Vested

     (94,840      27.72   

Canceled

     (19,988      31.52   

Accrued dividend equivalents

     2,726         32.59   
  

 

 

    

Nonvested at December 31, 2015

     197,388       $ 33.50   
  

 

 

    

 

     Year ended December 31,  
     2015      2014      2013  

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

   $ 36.35       $ 27.53       $ 25.72   

Weighted average grant-date fair value of shares vested (thousands)

   $ 2,629       $ 1,185       $ 1,122   

The number of vested restricted stock units at December 31, 2015 and 2014 was 93,017 and 111,790, respectively. At December 31, 2015, the Company has $2,551 of unvested compensation cost related to restricted stock units and this cost will be recognized as expense over a weighted average period of 22 months.

 

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Performance Stock Units

Compensation related to the performance stock units is determined based on the fair value of the Company’s stock on the date of grant combined with performance metrics. During 2012, executives participating in the Company’s Long-Term Incentive Plan earned 309,890 performance stock units based on the Company’s financial performance in 2012. Of these units, 91,190 vested in 2012, 86,170 vested in 2013 and 131,488 vested in 2014. During 2013, executives participating in the Company’s Long-Term Incentive Plan earned 33,405 performance stock units based on the Company’s financial performance in 2013. Of these units, 9,821 vested in 2013, 13,373 vested in 2014 and 8,701 vested in 2015. During 2014, executives participating in the Company’s Long-Term Incentive Plan earned 123,788 performance stock units based on the Company’s financial performance in 2014. Of these units, 49,248 vested in 2014, 32,074 vested in 2015 and 38,356 will vest in 2016. During 2015, executives participating in the Company’s Long-Term Incentive Plan earned 231,543 performance stock units based on the Company’s financial performance in 2015. Of these units, 69,912 vested in 2015, and 84,007 and 68,682 will vest in 2016 and 2017, respectively. 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 performance stock units earned under the Company’s Long-Term Incentive Plan:

 

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

Nonvested at December 31, 2014

     83,515       $ 24.11   

Earned

     231,543         36.62   

Vested

     (111,448      32.12   

Canceled

     (13,144      31.22   

Accrued dividend equivalents

     1,070         24.18   
  

 

 

    

Nonvested at December 31, 2015

     191,536       $ 34.18   
  

 

 

    

The weighted average fair value of performance stock units granted in 2015, 2014 and 2013 was $36.62, $23.96 and $25.43, respectively.

At December 31, 2015, the Company had $3,093 of unvested compensation cost related to performance stock units and this cost will be recognized as expense over a weighted average period of 18 months.

The Company’s nonvested restricted stock units and performance stock units 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. Restricted stock units earn dividend equivalents from the time of the award until distribution is made in common shares. Performance stock units 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 restricted stock units or performance stock units. Accordingly, such units do not represent participating securities.

At December 31, 2015, the company had 1,825,402 shares available for future issuance under equity compensation plans.

The Company recognized $4,323, $1,268 and $494 of excess tax benefits on stock based compensation transactions as a financing cash inflow for the years ended December 31, 2015, 2014 and 2013, respectively.

 

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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, 2015  
     Cumulative
Currency
Translation
Adjustment
     Changes
in the Fair
Value of
Derivatives
    Unrecognized
Postretirement
Benefit

Plans
    Total  

December 31, 2014

   $ 9,059      $ 4,762     $ (544,423 )   $ (530,602

Other comprehensive income (loss) before reclassifications

     (31,093 )      6,971  (a)     23,263  (c)     (18,482

Amount reclassified from accumulated other comprehensive loss

     —           (8,279 )(b)      29,973  (d)      39,317   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (31,093 )      (1,308 )     53,236       20,835   
  

 

 

    

 

 

   

 

 

   

 

 

 

December 31, 2015

   $ (22,034 )    $ 3,454     $ (491,187 )   $ (509,767
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(a) This amount represents $11,127 of unrealized gains on cash flow hedges, net of tax of $4,156, that were recognized in Other Comprehensive Loss (see Footnote 10 for additional details).
(b) This amount represents $13,446 of gains on cash flow hedges, net of tax of $5,167, that were reclassified out of Cumulative Other Comprehensive Loss and are included in Other income on the Condensed Consolidated Statements of Income (see Footnote 10 for additional details).
(c) This amount represents $30,476 of other comprehensive gain, net of tax of $7,213 that was recognized in Other Comprehensive Loss.
(d) This amount represents amortization of prior service credit of $566 and amortization of actuarial losses of ($46,736), net of tax of $16,197, that were reclassified out of Cumulative Other Comprehensive Loss and are included in the computation of net periodic benefit cost (see Footnote 11 for additional details).

 

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     Year Ended December 31, 2014  
     Cumulative
Currency
Translation
Adjustment
     Changes
in the Fair
Value of
Derivatives
    Unrecognized
Postretirement
Benefit

Plans
    Total  

December 31, 2013

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

Other comprehensive income (loss) before reclassifications

     (50,601 )      5,626  (a)     (96,737 )(c)     (141,712

Amount reclassified from accumulated other comprehensive loss

     —           (2,479 )(b)      23,609  (d)      21,130   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (50,601 )      3,147       (73,128 )     (120,582
  

 

 

    

 

 

   

 

 

   

 

 

 

December 31, 2014

   $ 9,059      $ 4,762     $ (544,423 )   $ (530,602
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(a) This amount represents $9,020 of unrealized gains on cash flow hedges, net of tax of $3,394, that were recognized in Other Comprehensive Loss (see Footnote 10 for additional details).
(b) This amount represents $3,699 of gains on cash flow hedges, net of tax of $1,220, that were reclassified out of Cumulative Other Comprehensive Loss and are included in Other income on the Condensed Consolidated Statements of Income (see Footnote 10 for additional details).
(c) This amount represents $157,087 of other comprehensive loss, net of tax of $60,350 that was recognized in Other Comprehensive Loss.
(d) This amount represents amortization of prior service credit of $566 and amortization of actuarial losses of ($36,473), net of tax of $12,298, that were reclassified out of Cumulative Other Comprehensive Loss and are included in the computation of net periodic benefit cost (see Footnote 11 for additional details).

Note 16 - Comprehensive Income Attributable to Noncontrolling Shareholders’ Interests

 

     2015      2014      2013  

Net income attributable to noncontrolling shareholders’ interests

   $ 3,038       $ 23,244       $ 22,552   

Other comprehensive income (loss):

        

Currency translation adjustments

     (4,227 )       (4,295      3,205   
  

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to noncontrolling shareholders’ interests

   $ (1,189 )     $ 18,949       $ 25,757   
  

 

 

    

 

 

    

 

 

 

 

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Note 17 - 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 $39,290, $40,934 and $33,199 for 2015, 2014 and 2013, respectively.

Future minimum payments for all non-cancelable operating leases through the end of their terms, which in aggregate total $83,203, are listed below. Certain of these leases contain provisions for optional renewal at the end of the lease terms.

 

2016

   $ 23,056   

2017

     17,474   

2018

     12,707   

2019

     11,924   

2020

     10,651   

Thereafter

     7,391   

Note 18 - Contingent Liabilities

Litigation

Product Liability Litigation

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

The Company accrues costs for product 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 product 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 product 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 losses because an average cost would not be meaningful since the product 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.

 

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During 2015, the Company increased its product liability reserve by $56,037. The addition of another year of self-insured incidents accounted for $48,791 million of this increase. Settlements and changes in the amount of reserves for cases where sufficient information is known to estimate a liability increased by $7,246.

During 2014, the Company increased its product liability reserve by $47,609. The addition of another year of self-insured incidents accounted for $49,324 of this increase. Settlements and changes in the amount of reserves for cases where sufficient information is known to estimate a liability decreased by $1,715.

The time frame for the payment of a product 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 2015, the Company paid $71,164 to resolve cases and claims. The Company’s product liability reserve balance at December 31, 2015 totaled $163,890 million (current portion of $74,018).

During 2014, the Company paid $58,231 to resolve cases and claims. The Company’s product liability reserve balance at December 31, 2014 totaled $178,891 (current portion of $69,892).

Product liability expenses totaled $78,800, $76,612 and $89,044 in 2015, 2014 and 2013, respectively.

Product liability expenses are included in cost of goods sold in the Consolidated Statements of Income.

Certain Litigation Related to the Apollo Merger

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

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

On October 31, 2014, the court granted Apollo’s motion for declaratory judgment that the conditions to closing the then pending transaction were not satisfied before the November 2013 trial. On November 26, 2014, the Company appealed the Chancery Court’s decision to the Delaware Supreme Court. On December 3, 2014, the parties reached an agreement to dismiss the appeal and the underlying action, acknowledge the termination of the Merger Agreement, and to release all claims relating to the Merger Agreement, subject to the dismissal of the action. On December 17, 2014, the Company dismissed the appeal and the parties filed a stipulation of dismissal of the underlying action.

 

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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 merger agreement with subsidiaries of Apollo Tyres Ltd. 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. On July 1, 2015, the court dismissed the plaintiffs’ amended complaint and closed the case. The plaintiffs have filed an appeal of the dismissal order.

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

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

Stockholder Derivative Litigation

On February 24, March 6, and April 17, 2014, purported stockholders of the Company filed derivative actions on behalf of the Company in the U.S. District Court for the Northern District of Ohio and the U.S. District Court for the District of Delaware against certain officers and employees and the then current members of the Company’s board of directors. The lawsuits have been transferred to the U.S. District Court for the District of Delaware and consolidated under the caption Fitzgerald v. Armes, et al., No. 1:14-cv-479 (D. Del.). The Company is named as a nominal defendant in the lawsuits, and the lawsuits seek recovery for the benefit of the Company. The plaintiffs allege that the defendants breached their fiduciary duties to the Company by issuing allegedly misleading disclosures in connection with the terminated merger transaction and that the defendants violated Section 14(a) of the Securities Exchange Act of 1934 by means of the same allegedly misleading disclosures. The plaintiffs also assert claims for waste of corporate assets, unjust enrichment, “gross mismanagement” and “abuse of control.” The complaints seek, among other things, unspecified money damages from the defendants, injunctive relief and an award of attorney’s fees. A purported shareholder of the Company has also submitted a demand to the Company’s board of directors that it cause the Company to bring claims against certain of the Company’s officers and directors for the matters alleged in the shareholder derivative lawsuits; following an investigation, the board of directors determined that the actions requested in the demand were not in the Company’s interests and accordingly rejected the demand.

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

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

Other Litigation

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

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, 2015, approximately 39% of the Company’s workforce was represented by collective bargaining units.

 

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Note 19 - Business Segments

In the first quarter of 2015, the Company announced the creation of a Chief Operating Officer position with responsibility for Cooper’s worldwide operations throughout North America, Latin America, Europe and Asia. The Company made this organizational change to provide a more cohesive global approach to the Company’s business and to better leverage the Company’s brands, products and manufacturing footprint around the world. As a result of these organizational changes, the Company evaluated its segment reporting under ASC 280, “Segments.”

Based on this evaluation, it was determined that the Company has four segments:

 

    North America, composed of the Company’s operations in the United States and Canada;

 

    Latin America, composed of the Company’s operations in Mexico, Central America and South America;

 

    Europe; and

 

    Asia.

North America and Latin America meet the criteria for aggregation in accordance with ASC 280, as they are similar in their production and distribution processes and exhibit similar economic characteristics. The aggregated North America and Latin America segments are presented as “Americas Tire Operations” in the segment disclosure. The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in the U.S. replacement market. The segment also has a joint venture manufacturing operation in Mexico, COOCSA, which supplies passenger car tires to the U.S., Mexican, Central American and South American markets. The segment also distributes tires for racing, medium truck and motorcycles. The racing and motorcycle tires are manufactured in the Company’s European Operations segment and by others. The medium truck tires are sourced through an off-take agreement subsequent to the Company’s sale of its ownership interest in its former CCT joint venture, which is now known as Prinx Chengshan (Shandong) Tire Company Ltd. 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.

Both the Asia and Europe segments have been determined to be individually immaterial, as they do not meet the quantitative requirements for segment disclosure under ASC 280. In accordance with ASC 280, information about operating segments that are not reportable shall be combined and disclosed in an all other category separate from other reconciling items. As a result, these two segments have been combined in the segment operating results discussion. The results of the combined Asia and Europe segments are presented as “International Tire Operations”. The European operations have operations in the U.K. 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. The Serbian entity manufactures light vehicle tires primarily for the European markets and for export to the U.S. The Asian operations are located in the PRC. In the PRC, Cooper Kunshan Tire manufactures light vehicle tires and, under an agreement with the government of the PRC, these tires were exported to markets outside of the PRC through 2012. Beginning in 2013, tires produced at the facility have also been sold in the Chinese domestic market. The segment also had a joint venture in the PRC, CCT, which manufactured and marketed radial and bias medium truck tires, as well as passenger and light truck tires for domestic and global markets. The Company sold its ownership interest in this joint venture in November 2014, and the Company now procures these tires under off-take agreements through mid-2018 from this entity, now known as Prinx Chengshan (Shandong) Tire Company Ltd. The majority of the tires manufactured by the segments are sold in the replacement market, with a portion also sold to original equipment manufacturers.

The presentation of the aggregated Americas Tire Operations segment under the Company’s new organizational structure is consistent with the segment reported as Americas Tire Operations in prior years. Similarly, the International Tire Operations disclosure is consistent with the Company’s previously reported International Tire Operations segment. As a result, the Company has not restated its prior year reportable segments as the composition of reportable segments did not change.

 

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The following customer of the Americas Tire Operations segment contributed ten percent or more of the Company’s total consolidated net sales in 2015, 2014 and 2013. Prior year amounts have been updated to include subsidiaries which the customer has acquired. Net sales and percentage of consolidated Company sales for this customer in 2015, 2014 and 2013 were as follows:

 

     2015     2014     2013  

Customer

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

TBC/Treadways

   $ 485,257         16   $ 440,820         13   $ 432,011         13

 

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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:

 

     2015     2014     2013  

Net sales:

      

Americas Tire

      

External customers

   $ 2,627,619      $ 2,524,554      $ 2,429,808   

Intercompany

     57,135        60,930        56,778   
  

 

 

   

 

 

   

 

 

 
     2,684,754        2,585,484        2,486,586   

International Tire

      

External customers

     345,282        900,255        1,009,425   

Intercompany

     106,597        240,571        232,104   
  

 

 

   

 

 

   

 

 

 
     451,879        1,140,826        1,241,529   

Eliminations

     (163,732     (301,501     (288,882
  

 

 

   

 

 

   

 

 

 

Consolidated net sales

     2,972,901        3,424,809        3,439,233   

Operating profit (loss):

      

Americas Tire

     422,929        274,837        204,239   

International Tire

     (19,133     74,566        83,990   

Unallocated corporate charges

     (52,342     (48,930     (52,578

Eliminations

     3,026        (15     5,063   
  

 

 

   

 

 

   

 

 

 

Consolidated operating profit

     354,480        300,458        240,714   

Interest expense

     (23,820     (28,138     (27,906

Interest income

     2,211        1,500        810   

Gain on sale of interest in subsidiary

     —          77,471        —     

Other non-operating income (expense)

     1,157        (2,772     (647
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     334,028        348,519        212,971   

Depreciation and amortization expense

      

Americas Tire

     92,377        82,457        75,132   

International Tire

     28,577        54,400        54,825   

Corporate

     454        2,309        4,794   
  

 

 

   

 

 

   

 

 

 

Consolidated depreciation and amortization expense

     121,408        139,166        134,751   

Segment assets

      

Americas Tire

     1,386,361        1,284,302        1,171,478   

International Tire

     414,051        423,059        958,914   

Corporate and other

     635,764        781,576        606,678   
  

 

 

   

 

 

   

 

 

 

Consolidated assets

     2,436,176        2,488,937        2,737,070   

Expenditures for long-lived assets

      

Americas Tire

     145,813        95,539        87,655   

International Tire

     33,839        44,741        61,973   

Corporate

     2,892        4,761        30,820   
  

 

 

   

 

 

   

 

 

 

Consolidated expenditures for long-lived assets

     182,544        145,041        180,448   

 

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