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Item 1
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FINANCIAL STATEMENTS
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COOPER TIRE & RUBBER COMPANY
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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(UNAUDITED)
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(Dollar amounts in thousands except per share amounts)
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Three Months Ended June 30,
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Six Months Ended June 30,
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2019
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2018
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2019
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2018
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Net sales
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$
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679,130
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$
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698,408
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$
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1,298,293
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$
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1,299,904
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Cost of products sold
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579,989
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604,185
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1,110,894
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1,121,196
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Gross profit
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99,141
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94,223
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187,399
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178,708
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Selling, general and administrative expense
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65,811
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61,460
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122,665
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119,490
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Restructuring expense
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1,659
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|
—
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6,632
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|
—
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Operating profit
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31,671
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32,763
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58,102
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59,218
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Interest expense
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(7,810
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)
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(8,417
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)
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(16,123
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)
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(16,108
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)
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Interest income
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|
1,999
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|
1,988
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|
5,379
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|
4,303
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Other pension and postretirement benefit expense
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|
(9,288
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)
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(6,967
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)
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(18,650
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)
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(13,953
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)
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Other non-operating expense
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|
(1,463
|
)
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(1,391
|
)
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(84
|
)
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|
(3,050
|
)
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Income before income taxes
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15,109
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17,976
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28,624
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30,410
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Provision for income taxes
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5,851
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2,267
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12,186
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5,718
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Net income
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9,258
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15,709
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16,438
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24,692
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Net income attributable to noncontrolling shareholders' interests
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437
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701
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637
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1,400
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Net income attributable to Cooper Tire & Rubber Company
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$
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8,821
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$
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15,008
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$
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15,801
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$
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23,292
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Earnings per share:
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Basic
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$
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0.18
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$
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0.30
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$
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0.32
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$
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0.46
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Diluted
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$
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0.18
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$
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0.30
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$
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0.31
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$
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0.46
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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COOPER TIRE & RUBBER COMPANY
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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(UNAUDITED)
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(Dollar amounts in thousands except per share amounts)
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Three Months Ended June 30,
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Six Months Ended June 30,
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2019
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2018
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2019
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2018
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Net income
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$
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9,258
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$
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15,709
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$
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16,438
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$
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24,692
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Other comprehensive income (loss):
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Cumulative currency translation adjustments
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(7,334
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)
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(35,851
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)
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1,974
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(10,982
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)
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Financial instruments:
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Change in the fair value of derivatives
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(1,220
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)
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470
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(2,341
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)
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2,610
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Income tax benefit (provision) on derivative instruments
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350
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(159
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)
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683
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(747
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)
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Financial instruments, net of tax
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(870
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)
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311
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(1,658
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)
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1,863
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Postretirement benefit plans:
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Amortization of actuarial loss
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9,215
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9,320
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18,448
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18,666
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Amortization of prior service credit
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(102
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)
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(135
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)
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(204
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)
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(270
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)
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Income tax provision on postretirement benefit plans
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(2,041
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)
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(2,206
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)
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(4,082
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)
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(4,416
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)
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Foreign currency translation effect
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1,429
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4,082
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(31
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)
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1,180
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Postretirement benefit plans, net of tax
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8,501
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11,061
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14,131
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15,160
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Other comprehensive income (loss)
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297
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(24,479
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)
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14,447
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6,041
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Comprehensive income (loss)
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9,555
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(8,770
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)
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30,885
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30,733
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Less comprehensive income attributable to noncontrolling shareholders' interests
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97
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(4,382
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)
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1,277
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|
261
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Comprehensive income attributable to Cooper Tire & Rubber Company
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$
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9,458
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$
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(4,388
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)
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$
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29,608
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$
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30,472
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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COOPER TIRE & RUBBER COMPANY
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CONDENSED CONSOLIDATED BALANCE SHEETS
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(Dollar amounts in thousands except per share amounts)
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June 30, 2019 (Unaudited)
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December 31, 2018
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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111,681
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$
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356,254
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Notes receivable
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4,175
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5,737
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Accounts receivable, less allowances of $7,922 at 2019 and $5,836 at 2018
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616,974
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546,905
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Inventories:
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Finished goods
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438,848
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338,133
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Work in process
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30,149
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27,265
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Raw materials and supplies
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120,413
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114,582
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Total inventories
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589,410
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479,980
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Other current assets
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48,863
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67,856
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Total current assets
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1,371,103
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1,456,732
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Property, plant and equipment:
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Land and land improvements
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52,979
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52,668
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Buildings
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330,942
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314,555
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Machinery and equipment
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2,024,852
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1,981,857
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Molds, cores and rings
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254,596
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238,911
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Total property, plant and equipment
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2,663,369
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2,587,991
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Less: Accumulated depreciation
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1,646,013
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1,586,070
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Property, plant and equipment, net
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1,017,356
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1,001,921
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Operating lease right-of-use assets, net of accumulated amortization of $13,620 at 2019 and $0 at 2018
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93,183
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—
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Goodwill
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18,851
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18,851
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Intangibles, net of accumulated amortization of $115,905 at 2019 and $106,871 at 2018
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115,937
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120,321
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Deferred income tax assets
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27,246
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|
28,146
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Investment in joint venture
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49,001
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—
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Other assets
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|
11,396
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|
|
8,234
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Total assets
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$
|
2,704,073
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|
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$
|
2,634,205
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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COOPER TIRE & RUBBER COMPANY
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CONDENSED CONSOLIDATED BALANCE SHEETS
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(Dollar amounts in thousands except per share amounts)
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|
|
|
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(Continued)
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|
June 30, 2019 (Unaudited)
|
|
December 31, 2018
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LIABILITIES AND EQUITY
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Current liabilities:
|
|
|
|
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Notes payable
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|
$
|
19,656
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|
|
$
|
15,288
|
|
Accounts payable
|
|
267,851
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|
|
286,671
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Accrued liabilities
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|
280,933
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|
|
282,650
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Income taxes payable
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|
8,881
|
|
|
975
|
|
Current portion of long-term debt and finance leases
|
|
173,766
|
|
|
174,760
|
|
Total current liabilities
|
|
751,087
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|
|
760,344
|
|
Long-term debt and finance leases
|
|
120,624
|
|
|
121,284
|
|
Noncurrent operating leases
|
|
67,214
|
|
|
—
|
|
Postretirement benefits other than pensions
|
|
234,782
|
|
|
236,454
|
|
Pension benefits
|
|
132,024
|
|
|
147,950
|
|
Other long-term liabilities
|
|
144,316
|
|
|
135,730
|
|
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 2019 and 2018
|
|
87,850
|
|
|
87,850
|
|
Capital in excess of par value
|
|
20,837
|
|
|
21,124
|
|
Retained earnings
|
|
2,454,811
|
|
|
2,449,714
|
|
Accumulated other comprehensive loss
|
|
(447,782
|
)
|
|
(461,589
|
)
|
Parent stockholders' equity before treasury stock
|
|
2,115,716
|
|
|
2,097,099
|
|
Less: Common shares in treasury at cost (37,680,647 at 2019 and 37,776,659 at 2018)
|
|
(923,367
|
)
|
|
(925,056
|
)
|
Total parent stockholders' equity
|
|
1,192,349
|
|
|
1,172,043
|
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Noncontrolling shareholders' interests in consolidated subsidiaries
|
|
61,677
|
|
|
60,400
|
|
Total equity
|
|
1,254,026
|
|
|
1,232,443
|
|
Total liabilities and equity
|
|
$
|
2,704,073
|
|
|
$
|
2,634,205
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|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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|
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|
|
|
|
|
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COOPER TIRE & RUBBER COMPANY
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
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(Dollar amounts in thousands except per share amounts)
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|
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|
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Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
Operating activities:
|
|
|
|
|
Net income
|
|
$
|
16,438
|
|
|
$
|
24,692
|
|
Adjustments to reconcile net income to net cash from operations:
|
|
|
|
|
Depreciation and amortization
|
|
74,347
|
|
|
73,587
|
|
Stock-based compensation
|
|
2,319
|
|
|
2,627
|
|
Change in LIFO inventory reserve
|
|
9,797
|
|
|
2,411
|
|
Amortization of unrecognized postretirement benefits
|
|
18,240
|
|
|
18,396
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts and notes receivable
|
|
(68,786
|
)
|
|
(68,485
|
)
|
Inventories
|
|
(119,118
|
)
|
|
(74,104
|
)
|
Other current assets
|
|
(958
|
)
|
|
(12,572
|
)
|
Accounts payable
|
|
2,599
|
|
|
(12,622
|
)
|
Accrued liabilities
|
|
(30,482
|
)
|
|
(13,970
|
)
|
Other items
|
|
(3,560
|
)
|
|
(18,599
|
)
|
Net cash used in operating activities
|
|
(99,164
|
)
|
|
(78,639
|
)
|
Investing activities:
|
|
|
|
|
Additions to property, plant and equipment and capitalized software
|
|
(105,354
|
)
|
|
(97,759
|
)
|
Investment in joint venture
|
|
(49,001
|
)
|
|
—
|
|
Proceeds from the sale of assets
|
|
49
|
|
|
160
|
|
Net cash used in investing activities
|
|
(154,306
|
)
|
|
(97,599
|
)
|
Financing activities:
|
|
|
|
|
Net issuances of short-term debt
|
|
4,721
|
|
|
10,718
|
|
Repayments of long-term debt and finance lease obligations
|
|
(989
|
)
|
|
(1,013
|
)
|
Payment of financing fees
|
|
(2,207
|
)
|
|
(1,230
|
)
|
Repurchase of common stock
|
|
—
|
|
|
(29,355
|
)
|
Payments of employee taxes withheld from share-based awards
|
|
(1,158
|
)
|
|
(1,894
|
)
|
Payment of dividends to Cooper Tire & Rubber Company stockholders
|
|
(10,529
|
)
|
|
(10,623
|
)
|
Issuance of common shares related to stock-based compensation
|
|
177
|
|
|
—
|
|
Excess tax benefits on stock-based compensation
|
|
—
|
|
|
270
|
|
Net cash used in financing activities
|
|
(9,985
|
)
|
|
(33,127
|
)
|
Effects of exchange rate changes on cash
|
|
601
|
|
|
1,344
|
|
Net change in cash, cash equivalents and restricted cash
|
|
(262,854
|
)
|
|
(208,021
|
)
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
378,246
|
|
|
392,306
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
115,392
|
|
|
$
|
184,285
|
|
|
|
|
|
|
Unrestricted Cash and cash equivalents
|
|
$
|
111,681
|
|
|
$
|
180,493
|
|
Restricted cash included in Other current assets
|
|
2,211
|
|
|
1,702
|
|
Restricted cash included in Other assets
|
|
1,500
|
|
|
2,090
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
115,392
|
|
|
$
|
184,285
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
|
|
|
|
|
|
COOPER TIRE & RUBBER COMPANY
|
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(Dollar amounts in thousands except per share amounts)
|
|
|
Note 1
.
|
Basis of Presentation and Consolidation
|
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation.
There is a year-round demand for passenger car and truck replacement tires, but passenger car 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. Operating results for the
six
month period ended
June 30, 2019
are not necessarily indicative of the results that may be expected for the year ended
December 31, 2019
.
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 affiliates of
50 percent
or less but greater than
20 percent
are accounted for using the equity method, and investments in affiliates 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. All intercompany transactions and balances have been eliminated.
On April 5, 2019, Cooper Tire & Rubber Company Vietnam Holding, LLC ("Cooper Vietnam"), a wholly owned subsidiary of the Company, and Sailun (Vietnam) Co., Ltd. ("Sailun Vietnam") established a joint venture in Vietnam which will produce and sell truck and bus radial ("TBR") tires. The Company’s investment in the joint venture represents a
35 percent
ownership interest and is accounted for under the equity method. Total investment in the facility and equipment in the joint venture is expected to be in the range of
$190,000
to
$210,000
, funded through capital contributions and debt, with Cooper being responsible for its pro rata share. As of June 30, 2019, the Company has invested
$49,001
into the joint venture. Construction of the facility began in 2019, with tire production expected to commence in the first half of 2020.
The capacity created by the planned Vietnam joint venture will decrease expected production requirements for Cooper's China-based Qingdao Ge Rui Da Rubber Co., Ltd. ("GRT") joint venture. The Company included the expected impact of the new Vietnam joint venture on projected future cash flows in performing its annual goodwill impairment assessment on GRT in the fourth quarter of 2018. Based on the assessment performed, the goodwill balance was deemed to be fully impaired and resulted in a non-cash fourth quarter 2018 impairment charge of
$33,827
.
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)
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share - income from continuing operations available to common stockholders
|
|
$
|
8,821
|
|
|
$
|
15,008
|
|
|
$
|
15,801
|
|
|
$
|
23,292
|
|
Denominator
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted average shares outstanding
|
|
50,165
|
|
|
50,436
|
|
|
50,133
|
|
|
50,636
|
|
Effect of dilutive securities - stock options and other stock units
|
|
197
|
|
|
154
|
|
|
237
|
|
|
247
|
|
Denominator for diluted earnings per share - adjusted weighted average shares outstanding
|
|
50,362
|
|
|
50,590
|
|
|
50,370
|
|
|
50,883
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
|
$
|
0.30
|
|
|
$
|
0.32
|
|
|
$
|
0.46
|
|
Diluted
|
|
$
|
0.18
|
|
|
$
|
0.30
|
|
|
$
|
0.31
|
|
|
$
|
0.46
|
|
At
June 30, 2019
and
2018
, 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.
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 Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
Reserve at beginning of year
|
|
$
|
12,431
|
|
|
$
|
12,093
|
|
Additions
|
|
5,412
|
|
|
7,398
|
|
Payments
|
|
(5,989
|
)
|
|
(6,963
|
)
|
Reserve at period end
|
|
$
|
11,854
|
|
|
$
|
12,528
|
|
Truck and Bus Tire Tariffs
– Antidumping and countervailing duty investigations into certain TBR tires imported from the People’s Republic of China ("PRC") into the United States ("U.S.") were initiated on January 29, 2016. The preliminary determinations announced in both investigations were affirmative and resulted in the imposition of significant additional duties from each. On February 22, 2017, the U.S. International Trade Commission ("ITC") made a final determination that the U.S. market had not suffered material injury because of imports of TBR tires from the PRC. As a result of this decision, preliminary antidumping and countervailing duties from Chinese TBR tires imported subsequent to the preliminary determination were not collected and any amounts previously paid were refunded by U.S. Customs and Border Protection. On April 14, 2017, the United Steelworkers Union filed a civil action challenging the ITC's decision not to impose duties on TBR tires from China imported into the U.S. and that case is still pending. On November 1, 2018, the Court of International Trade (“CIT”) remanded the case back to the ITC for reconsideration. On January 30, 2019, the ITC reversed its earlier decision and made an affirmative determination of material injury. On February 15, 2019, the determination was published in the Federal Register and countervailing duties of
42.16 percent
were imposed on the Company's TBR tire imports into the U.S. from China. The ITC’s re-determination, along with comments from the parties regarding the re-determination, were filed with the CIT. The CIT will make a final determination. Since the publication of the determination in the Federal Register, the Company incurred duties of
$7,888
and
$17,936
for the three and
six
month periods ended
June 30, 2019
. These amounts were recorded as a component of Cost of products sold in the
Condensed Consolidated Statements of Income
.
Section 301 Tariffs -
Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, passenger, light truck and truck and bus tires, raw materials and tire-manufacturing equipment from
the PRC imported into the U.S. became subject to additional
10 percent
duties effective September 24, 2018. These tariffs increased to
25 percent
effective May 10, 2019. The Company has incurred duties of
$5,450
and
$9,430
for the three and
six
month periods ended
June 30, 2019
related to these Section 301 tariffs. These amounts were recorded as a component of Cost of products sold in the
Condensed Consolidated Statements of Income
.
North American Distribution Center
– On January 22, 2017, a tornado hit the Company’s leased Albany, Georgia distribution center, causing damage to the Company's assets and disrupting certain operations. Insurance, less applicable deductibles, covered the repair or replacement of the Company's assets that suffered loss or damage, and the Company worked closely with its insurance carriers and claims adjusters to ascertain the full amount of insurance proceeds due to the Company as a result of the damages and the loss the Company suffered. The Company's insurance policies also provided coverage for interruption to its business, including lost profits, and reimbursement for other expenses and costs that were incurred relating to the damages and losses suffered. For the year ended December 31, 2017, the Company incurred direct expenses of
$12,583
, less proceeds of
$7,000
recovered from insurance. For the year ended December 31, 2018, the Company recorded insurance recoveries of
$7,300
, less direct costs of
$1,569
. In the
second
quarter of 2018, the Company recorded insurance recoveries of
$2,987
, while incurring direct costs of
$325
. For the
six
months ended
June 30, 2018
, the Company recorded insurance recoveries of
$6,796
, while incurring direct costs of
$1,539
. These amounts were recorded as a component of Cost of products sold in the
Condensed Consolidated Statements of Income
for the respective periods. The Company's insurance claim related to the tornado was closed in the year ended December 31, 2018, with no further direct expenses or insurance recoveries anticipated.
Recent 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
condensed consolidated financial statements
.
Accounting Pronouncements – Recently adopted
SEC Disclosure Regulation Simplifications
During the fourth quarter of 2018, the U.S. Securities and Exchange Commission (“SEC”) published Final Rule Release No. 33-10532, "Disclosure Update and Simplification." This standard, effective for quarterly and annual reports submitted after November 5, 2018, streamlines disclosure requirements by removing certain redundant topics. For the Company, the most notable simplification implemented in 2019 was the expansion of the shareholders' equity reconciliation to display quarter-to-quarter details beginning in the first quarter of 2019.
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires balance sheet recognition of lease liabilities and right-of-use assets for most leases having terms of twelve months or longer. The Company adopted the standard on the required effective date of January 1, 2019 using the transition option, “Comparatives Under 840 Option,” established by ASU 2018-11, Leases (Topic 842), Targeted Improvements (ASU 2018-11). The FASB issued multiple amendments to the standard which provided clarification, additional guidance, practical expedients and other improvements to ASU 2016-02. The new guidance requires recognition of lease assets and liabilities for operating leases with terms of more than 12 months, in addition to those currently recorded, on the Company's
Condensed Consolidated Balance Sheets
. See
Note 9
for additional details.
Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The Company adopted this standard effective January 1, 2019. The adoption of this standard did not materially impact the Company's condensed consolidated financial statements.
Additionally, in October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815)." The Federal Reserve and Alternative Reference Rates Committee expressed the importance of including the Overnight Index Swap ("OIS") rate based on Secured Overnight Financing Rate ("SOFR") as a benchmark rate for hedge accounting purposes in facilitating broader use of the underlying SOFR rate in the marketplace to facilitate the market's move away from the London Interbank Offered Rate ("LIBOR"). This update, effective on January 1, 2019, provides the option to use the OIS rate based on SOFR as a benchmark for hedge accounting. The Company does not currently hold any SOFR-based instruments, but will continue to evaluate its use as the markets transition away from LIBOR.
Accounting Pronouncements – To be adopted
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820)," which removes, modifies and adds various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. For example, disclosures around transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs determining level 3 fair value measurements will be added. This standard is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements.
Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, "Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20)," which removes, modifies and adds various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. For example, disclosures around the effect of a one-percentage-point change in assumed health care costs will be removed and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period will be added. This standard is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. These amendments must be applied on a retrospective basis for all periods presented. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements.
Internal-Use Software
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)," which aligns the requirements for capitalizing implementation costs incurred in a service contract hosting arrangement with those of developing or obtaining internal-use software. This standard is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements.
Related Parties
In October 2018, the FASB issued ASU 2018-17 "Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for VIEs." When determining if fees paid to decision makers and service providers are variable interests, entities must now also consider indirect interests of those decision makers and service providers held through related parties under common control. This standard is effective January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements.
On January 17, 2019, Cooper Tire Europe, a wholly owned subsidiary of the Company, committed to the planned cessation of passenger car and light truck tire production ("light vehicle tire production") at its Melksham, U.K. facility, which is included in the International Segment. This initiative is expected to result in charges to
2019
pre-tax earnings of approximately
$8
to
$11 million
, of which
5
to
10 percent
are expected to be non-cash charges. An estimated
300
roles will be eliminated at the site. Cooper Tire Europe will obtain light vehicle tires to meet customer needs from other production sites within the Company’s global production network. Approximately
400
roles will remain in Melksham to support the functions that continue there, including motorsports and motorcycle tire production, the materials business, Cooper Tire Europe headquarters, sales and marketing, and the Europe Technical Center. Phasing out of light vehicle tire production is expected to be completed in the third quarter of 2019.
For the
three and six months
periods ended
June 30, 2019
, the Company recorded restructuring expense of
$1,659
and
$6,632
, made up of employee severance, asset write-downs and other costs. At
June 30, 2019
, the Company's accrued restructuring balance is
$4,609
, related largely to employee severance costs.
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2019
|
Employee severance costs
|
$
|
1,556
|
|
|
$
|
5,719
|
|
Asset write-downs & other costs
|
103
|
|
|
913
|
|
Total restructuring expense
|
$
|
1,659
|
|
|
$
|
6,632
|
|
|
|
|
|
Beginning balance of accrued restructuring - severance
|
$
|
4,163
|
|
|
$
|
—
|
|
Additional severance accrual
|
1,556
|
|
|
5,719
|
|
Payment of severance costs
|
(1,235
|
)
|
|
(1,235
|
)
|
|
|
|
|
Beginning balance of accrued restructuring - other
|
125
|
|
|
—
|
|
Additional other accrual
|
103
|
|
|
303
|
|
Payment of other costs
|
(103
|
)
|
|
(178
|
)
|
Ending balance of total accrued restructuring
|
$
|
4,609
|
|
|
$
|
4,609
|
|
In addition to the costs classified as restructuring expense, the Company incurred additional costs of
$314
in the
second
quarter of
2019
as a result of Cooper Tire Europe's decision to cease light vehicle tire production at the Melksham facility. These additional costs relate to professional fees associated with the Company's evaluation of its legal entity structure moving forward and are included within selling, general and administrative expense for the
three and six months
periods ended
June 30, 2019
. These costs, as well as estimates for similar types of costs in future periods, are included in the
$8
to
$11 million
overall estimate of costs related to the Melksham decision.
|
|
Note 3
.
|
Revenue from Contracts with Customers
|
Accounting policy
On January 1, 2018, the Company adopted the new U.S. GAAP revenue standard using the modified retrospective transition method applied to contracts which were not completed as of January 1, 2018. The new revenue standard requires revenue to be recognized when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services.
In accordance with the new revenue standard, revenue is measured based on the consideration specified in a contract with a customer and excludes any sales incentives or rebates. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer. This occurs with shipment or delivery, depending on the underlying terms with the customer. The transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, the Company estimates provisions for different forms of variable consideration (discounts and rebates) based on historical experience, current conditions and contractual obligations, as applicable. Payment terms with customers vary by region and customer, but are generally 30-90 days. The Company does not have significant financing components or significant payment terms. Incidental items that are immaterial in the context of the contract are expensed as incurred.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost and not as a separate performance obligation. Therefore, such items are accrued upon recognition of revenue.
Nature of goods and services
The following is a description of principal activities, separated by reportable segments, from which the Company generates its revenue. See
Note 14
- Business Segments for additional details on the Company's reportable segments.
The Company’s reportable segments have the following revenue characteristics:
|
|
•
|
Americas Tire Operations - The Americas Tire Operations segment manufactures and markets passenger car and light truck tires. The segment also markets and distributes wheels and racing, motorcycle and TBR tires.
|
|
|
•
|
International Tire Operations - The International Tire Operations segment manufactures and markets passenger car, light truck, motorcycle, racing and TBR tires and tire retread material for global markets.
|
Disaggregation of revenue
In the following tables, revenue is disaggregated by major market channel for the
three and six months
ended
June 30, 2019
and
2018
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Americas
|
|
International
|
|
Eliminations
|
|
Total
|
Light vehicle
(1)
|
$
|
516,648
|
|
|
$
|
100,265
|
|
|
$
|
(21,621
|
)
|
|
$
|
595,292
|
|
Truck and bus radial
|
49,772
|
|
|
23,892
|
|
|
(20,070
|
)
|
|
53,594
|
|
Other
(2)
|
15,887
|
|
|
14,357
|
|
|
—
|
|
|
30,244
|
|
Net sales
|
$
|
582,307
|
|
|
$
|
138,514
|
|
|
$
|
(41,691
|
)
|
|
$
|
679,130
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Americas
|
|
International
|
|
Eliminations
|
|
Total
|
Light vehicle
(1)
|
$
|
970,663
|
|
|
$
|
205,585
|
|
|
$
|
(40,943
|
)
|
|
$
|
1,135,305
|
|
Truck and bus radial
|
99,858
|
|
|
47,588
|
|
|
(40,306
|
)
|
|
107,140
|
|
Other
(2)
|
26,722
|
|
|
29,126
|
|
|
—
|
|
|
55,848
|
|
Net sales
|
$
|
1,097,243
|
|
|
$
|
282,299
|
|
|
$
|
(81,249
|
)
|
|
$
|
1,298,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Americas
|
|
International
|
|
Eliminations
|
|
Total
|
Light vehicle
(1)
|
$
|
527,284
|
|
|
$
|
122,872
|
|
|
$
|
(31,423
|
)
|
|
$
|
618,733
|
|
Truck and bus radial
|
43,573
|
|
|
26,527
|
|
|
(22,420
|
)
|
|
47,680
|
|
Other
(2)
|
13,555
|
|
|
18,440
|
|
|
—
|
|
|
31,995
|
|
Net sales
|
$
|
584,412
|
|
|
$
|
167,839
|
|
|
$
|
(53,843
|
)
|
|
$
|
698,408
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
Americas
|
|
International
|
|
Eliminations
|
|
Total
|
Light vehicle
(1)
|
$
|
960,668
|
|
|
$
|
244,213
|
|
|
$
|
(56,373
|
)
|
|
$
|
1,148,508
|
|
Truck and bus radial
|
$
|
85,034
|
|
|
$
|
53,116
|
|
|
$
|
(42,610
|
)
|
|
95,540
|
|
Other
(2)
|
$
|
24,102
|
|
|
$
|
31,754
|
|
|
$
|
—
|
|
|
55,856
|
|
Net sales
|
$
|
1,069,804
|
|
|
$
|
329,083
|
|
|
$
|
(98,983
|
)
|
|
$
|
1,299,904
|
|
|
|
(1)
|
Light vehicle includes passenger car and light truck tires
|
|
|
(2)
|
Other includes motorcycle and racing tires, wheels, tire retread material, and other items
|
Contract balances
Contract liabilities relate to customer payments received in advance of shipment. As the Company does not generally have rights to consideration for work completed but not billed at the reporting date, the Company does not have any contract assets. Accounts receivable are not considered contract assets under the new revenue standard as contract assets are conditioned upon the Company's future satisfaction of a performance obligation. Accounts receivable, in contrast, are unconditional rights to consideration.
Significant changes in the contract liabilities balance during the
six
months ended
June 30, 2019
are as follows:
|
|
|
|
|
|
Contract Liabilities
|
Contract liabilities at beginning of year
|
$
|
947
|
|
Increases to deferred revenue for cash received in advance from customers
|
4,776
|
|
Decreases due to recognition of deferred revenue
|
(4,142
|
)
|
Contract liabilities at June 30, 2019
|
$
|
1,581
|
|
Transaction price allocated to remaining performance obligations
For the
three and six months
ended
June 30, 2019
and
2018
, respectively, revenue recognized from performance obligations related to prior periods was
not material
.
Revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, contracts where revenue is recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, is
not material
.
The Company applies the practical expedient in ASC 606 "Revenue from Contracts with Customers" and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Inventory costs are determined using the last-in, first-out ("LIFO") method for substantially all U.S. inventories. The current cost of the U.S. inventories under the FIFO method was
$484,351
and
$380,990
at
June 30, 2019
and
December 31, 2018
, respectively. These FIFO values have been reduced by approximately
$94,865
and
$85,068
at
June 30, 2019
and
December 31, 2018
, respectively, to arrive at the LIFO value reported on the
Condensed Consolidated Balance Sheets
. The remaining inventories have been valued under the FIFO method. All LIFO inventories are valued at the lower of cost or market. All other inventories are stated at the lower of cost or net realizable value.
For the
three
month period ended
June 30, 2019
, the Company recorded a provision for income taxes of
$5,851
(effective tax rate of
38.7 percent
) compared to
$2,267
(effective tax rate of
12.6 percent
) for the same period in
2018
. For the
six
month period ended
June 30, 2019
, the Company recorded a provision for income taxes of
$12,186
(effective tax rate of
42.6 percent
) compared to
$5,718
(effective tax rate of
18.8 percent
) for the same period in
2018
. The
2019
and
2018
three
and
six
month period provisions for income taxes are calculated using a forecasted multi-jurisdictional annual effective tax rate to determine a blended annual effective tax rate. The effective tax rate for the
three
and six month periods ended
June 30, 2019
differs from the U.S. federal statutory rate of 21 percent primarily due to net discrete tax expense of
$1,968
and
$4,385
recorded during the three and six month periods, respectively, as well as due to the projected mix of earnings in international jurisdictions with differing tax rates and jurisdictions where valuation allowances are recorded. The discrete tax items in the second quarter primarily consist of state reserves for additional uncertain tax positions of
$4,710
partially offset by expected refunds and deferred tax benefits related to other state filings of
$2,958
. For the six month period ended June 30, 2019, the discrete items also include 2017 transition tax and unrecognized tax benefits accrued of
$1,655
and
$670
, respectively, as a result of final U.S. federal tax guidance issued during the first quarter pertaining to the one-time mandatory deemed repatriation under the 2017 Tax Act.
The Company continues to maintain valuation allowances pursuant to ASC 740, “Accounting for Income Taxes,” against portions of its U.S. and non-U.S. deferred tax assets at
June 30, 2019
as it cannot assure the future realization of the associated tax benefits prior to their reversal or expiration. 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
$1,402
. In addition, the Company has recorded valuation allowances of
$23,065
relating to non-U.S. net operating losses and other deferred tax assets for a total valuation allowance of
$24,467
. 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 the associated deferred tax assets are deemed to be realizable.
The Company maintains an ASC 740-10, “Accounting for Uncertainty in Income Taxes,” liability for unrecognized tax benefits. At
June 30, 2019
, the Company’s liability, exclusive of penalty and interest, totals approximately
$11,663
. The Company accrued an additional
$5,138
for gross unrecognized tax benefits and
$946
of interest expense during the
six
month
period ended
June 30, 2019
. Based upon the outcome of tax examinations, judicial proceedings, or expiration of statutes of limitations, it is possible that the ultimate resolution of the Company's unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities.
The Company operates in multiple jurisdictions throughout the world. The Company has effectively settled U.S. federal tax examinations for tax years before
2015
and state and local examinations for tax years before
2013
, with limited exceptions. Furthermore, the Company’s non-U.S. subsidiaries are generally no longer subject to income tax examinations in major foreign taxing jurisdictions for tax years prior to
2015
. Certain of the Company's state income tax returns 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 in the Company’s unrecognized tax benefits during the next twelve months.
On February 15, 2018, the Company amended its revolving credit facility ("Credit Facility") with a consortium of banks that provided up to
$400,000
based on available collateral, including an
$110,000
letter of credit subfacility, set to expire in
February 2023
. As of June 27, 2019, the Company amended this Credit Facility with a consortium of several banks that provides up to
$700,000
and is set to expire in
June 2024
. Of this amended borrowing capacity,
$200,000
is allocated to a Delayed Draw Term Loan A ("Term Loan A"), which is scheduled to be drawn in December 2019, while the remaining
$500,000
is allocated to the Credit Facility. The Credit Facility still includes the
$110,000
letter of credit sub-facility. The Company may elect, with lender consent, to increase the commitments under the Credit Facility or incur one or more tranches of term loans in an aggregate amount of up to
$300,000
(or an unlimited increase if the Proforma Net Secured Leverage Ratio is less than
1.75
x). The proceeds of the Credit Facility will be used to pay the Company's unsecured notes which expire in December 2019, and to provide working capital and funds for general corporate purposes. Debt issuance costs related to the Credit Facility amendment totaled
$1,507
while those related to the Term Loan A totaled
$700
, for a combined
$2,207
in debt issuance costs. These costs, along with the remaining debt issuance costs from the February 2018 credit facility amendment, will be amortized over the life of the underlying debt instruments and are included in the Other assets classification in the
Condensed Consolidated Balance Sheets
. The Company may elect to add certain foreign subsidiaries as additional borrowers under the Credit Facility, subject to the satisfaction of certain conditions.
The Term Loan A will be drawn in December 2019. These funds will be used to pay for the unsecured notes maturing at that time. The Company will incur a ticking fee of
20 basis points
beginning 30 days after the facility begins. The estimated amount of ticking fees to be incurred from June 2019 through the draw date in December 2019 is
$150
.
The Company amended its accounts receivable securitization facility that provides up to
$150,000
based on available collateral and expires in
February 2021
. 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.
The Company had
no
borrowings under the revolving credit facility or the accounts receivable securitization facility at
June 30, 2019
or
December 31, 2018
, other than amounts used to secure letters of credit. Amounts used to secure letters of credit totaled
$16,800
at
June 30, 2019
and
December 31, 2018
. The Company’s additional borrowing capacity, net of borrowings and 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
June 30, 2019
, was
$807,900
, including the capacity of the Term Loan A.
The Company’s consolidated operations in Asia have renewable unsecured credit lines that provide up to
$47,100
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
$27,400
at
June 30, 2019
.
The following table summarizes the long-term debt and finance leases of the Company at
June 30, 2019
and
December 31, 2018
. Except for the finance leases and other, the remaining long-term debt is due in an aggregate principal payment on the due date:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Parent company
|
|
|
|
|
8% unsecured notes due December 2019
|
|
$
|
173,578
|
|
|
$
|
173,578
|
|
7.625% unsecured notes due March 2027
|
|
116,880
|
|
|
116,880
|
|
Finance leases and other
|
|
5,250
|
|
|
6,245
|
|
|
|
295,708
|
|
|
296,703
|
|
Less: unamortized debt issuance costs
|
|
1,318
|
|
|
659
|
|
|
|
294,390
|
|
|
296,044
|
|
Less: current maturities
|
|
173,766
|
|
|
174,760
|
|
|
|
$
|
120,624
|
|
|
$
|
121,284
|
|
In addition, at
June 30, 2019
and
December 31, 2018
, the Company had short-term notes payable of
$19,656
and
$15,288
, respectively, due within twelve months, consisting of funds borrowed by the Company’s operations in the PRC. The weighted average interest rate of the short-term notes payable at
June 30, 2019
and
December 31, 2018
was
4.76 percent
and
4.82 percent
, respectively.
|
|
Note 7
.
|
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 non-designated and cash flow hedges of foreign currency exposures. The change in values of the non-designated foreign currency hedges offset the exchange rate fluctuations related to assets and liabilities recorded on the condensed consolidated balance sheets. The cash flow hedges offset exchange rate fluctuations on the foreign currency-denominated intercompany loans and forecasted cash flows. The Company presently hedges exposures in various currencies generally for transactions expected to occur within the next
12
months. Additionally, the Company utilizes cash flow hedges that hedge already recognized intercompany loans with maturities of up to
three years
. The notional amount of these foreign currency derivative instruments at
June 30, 2019
and
December 31, 2018
was
$181,319
and
$129,542
, respectively. The counterparties to each of these agreements are major commercial banks.
The Company uses non-designated foreign currency forward contracts to hedge its net foreign currency monetary assets and liabilities primarily resulting from non-functional currency denominated receivables and payables of certain U.S. and foreign entities.
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 (
$(1,821)
and
$713
as of
June 30, 2019
and
December 31, 2018
, respectively) are recorded as a separate component of stockholders’ equity in the accompanying
Condensed Consolidated Balance Sheets
and reclassified into earnings as the hedged transactions occur.
The Company utilizes cross-currency interest rate swaps to hedge the principal and interest repayment of some intercompany loans. These contracts have maturities of up to three years and meet the criteria for and have been designated as cash flow hedges. Spot to spot changes are recorded in income and all other effective changes are recorded as a separate component of stockholders' equity.
The Company assesses hedge effectiveness prospectively and retrospectively, based on regression of the change in foreign currency exchange rates. Time value of money is included in effectiveness testing.
The derivative instruments are subject to master netting arrangements with the counterparties to the contracts. The following table presents the location and amounts of derivative instrument fair values in the
Condensed Consolidated Balance Sheets
:
|
|
|
|
|
|
|
|
|
|
Assets/(liabilities)
|
|
June 30, 2019
|
|
December 31, 2018
|
Designated as hedging instruments:
|
|
|
|
|
Gross amounts recognized
|
|
$
|
(2,059
|
)
|
|
$
|
(1,524
|
)
|
Gross amounts offset
|
|
238
|
|
|
2,237
|
|
Net amounts
|
|
(1,821
|
)
|
|
713
|
|
Not designated as hedging instruments:
|
|
|
|
|
Gross amounts recognized
|
|
$
|
(185
|
)
|
|
$
|
(544
|
)
|
Gross amounts offset
|
|
53
|
|
|
201
|
|
Net amounts
|
|
(132
|
)
|
|
(343
|
)
|
Net amounts presented:
|
|
|
|
|
Other current assets
|
|
$
|
(818
|
)
|
|
$
|
1,750
|
|
Other long-term liabilities
|
|
$
|
(1,135
|
)
|
|
$
|
(1,380
|
)
|
The following table presents the location and amount of gains and losses on derivative instruments designated as cash flow hedges in the
Condensed Consolidated Statements of Income
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Amount of (Loss)/Gain Recognized in Other Comprehensive Income on Derivatives
|
|
$
|
(367
|
)
|
|
$
|
2,062
|
|
|
$
|
(1,550
|
)
|
|
$
|
2,708
|
|
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
455
|
|
|
$
|
382
|
|
|
$
|
854
|
|
|
$
|
(218
|
)
|
Interest expense
|
|
(31
|
)
|
|
(36
|
)
|
|
(63
|
)
|
|
(71
|
)
|
Other non-operating expense
|
|
429
|
|
|
1,246
|
|
|
—
|
|
|
387
|
|
|
|
$
|
853
|
|
|
$
|
1,592
|
|
|
$
|
791
|
|
|
$
|
98
|
|
The following table presents the location and amount of gains and losses on foreign exchange contract derivatives not designated as hedging instruments in the
Condensed Consolidated Statements of Income
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Other non-operating expense
|
|
$
|
376
|
|
|
$
|
2,324
|
|
|
$
|
(630
|
)
|
|
$
|
43
|
|
The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within the different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded on the Condensed Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.
Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following.
a.
Quoted prices for similar assets or liabilities in active markets;
b.
Quoted prices for identical or similar assets or liabilities in non-active markets;
c.
Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
|
|
d.
|
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.
|
Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
The valuation of foreign currency derivative instruments 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
June 30, 2019
and
December 31, 2018
, 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 valuation of stock-based liabilities was determined using the Company's stock price, and as a result, these liabilities are classified in Level 1 of the fair value hierarchy.
The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
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 Currency Derivative
|
|
$
|
(1,953
|
)
|
|
$
|
—
|
|
|
$
|
(1,953
|
)
|
|
$
|
—
|
|
Stock-based Liabilities
|
|
(15,880
|
)
|
|
(15,880
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
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 Currency Derivative
|
|
$
|
370
|
|
|
$
|
—
|
|
|
$
|
370
|
|
|
$
|
—
|
|
|
Stock-based Liabilities
|
|
(14,644
|
)
|
|
(14,644
|
)
|
|
—
|
|
|
—
|
|
The fair market value of
Cash and cash equivalents
,
Notes receivable
,
Restricted cash
included in
Other current assets
, Restricted cash included in Other assets,
Notes payable
and
Current portion of long-term debt and finance leases
at
June 30, 2019
and
December 31, 2018
are equal to their corresponding carrying values as reported on the
Condensed Consolidated Balance Sheets
as of
June 30, 2019
and
December 31, 2018
, respectively. Each of these classes of assets and liabilities is classified within Level 1 of the fair value hierarchy.
The fair market value of
Long-term debt and finance leases
is
$140,142
and
$137,343
at
June 30, 2019
and
December 31, 2018
, respectively, and is classified within Level 1 of the fair value hierarchy. The carrying value of Long-term debt is
$120,624
and
$121,284
as reported on the
Condensed Consolidated Balance Sheets
as of
June 30, 2019
and
December 31, 2018
, respectively.
|
|
Note 8
.
|
Pensions and Postretirement Benefits Other than Pensions
|
The following tables disclose the amount of net periodic benefit costs for the
three and six months
ended
June 30, 2019
and
2018
, respectively, for the Company’s defined benefit plans and other postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits - Domestic
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2,244
|
|
|
$
|
2,580
|
|
|
$
|
4,488
|
|
|
$
|
5,160
|
|
Interest cost
|
|
9,875
|
|
|
9,210
|
|
|
19,749
|
|
|
18,419
|
|
Expected return on plan assets
|
|
(12,042
|
)
|
|
(13,508
|
)
|
|
(24,022
|
)
|
|
(27,017
|
)
|
Amortization of actuarial loss
|
|
8,284
|
|
|
8,235
|
|
|
16,568
|
|
|
16,471
|
|
Net periodic benefit cost
|
|
$
|
8,361
|
|
|
$
|
6,517
|
|
|
$
|
16,783
|
|
|
$
|
13,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits - International
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
2,768
|
|
|
2,840
|
|
|
5,575
|
|
|
5,746
|
|
Expected return on plan assets
|
|
(2,898
|
)
|
|
(3,073
|
)
|
|
(5,836
|
)
|
|
(6,216
|
)
|
Amortization of actuarial loss
|
|
931
|
|
|
1,085
|
|
|
1,876
|
|
|
2,195
|
|
Net periodic benefit cost
|
|
$
|
801
|
|
|
$
|
852
|
|
|
$
|
1,615
|
|
|
$
|
1,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Post Retirement Benefits
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
393
|
|
|
$
|
487
|
|
|
$
|
787
|
|
|
$
|
974
|
|
Interest cost
|
|
2,472
|
|
|
2,313
|
|
|
4,944
|
|
|
4,625
|
|
Amortization of prior service cost
|
|
(102
|
)
|
|
(135
|
)
|
|
(204
|
)
|
|
(270
|
)
|
Net periodic benefit cost
|
|
$
|
2,763
|
|
|
$
|
2,665
|
|
|
$
|
5,527
|
|
|
$
|
5,329
|
|
|
|
Note 9
.
|
Lease Commitments
|
The Company leases certain warehouses, distribution centers, office space, material handling equipment, office equipment, cars and information technology hardware. The Company determines if an arrangement is a lease or contains an embedded lease at contract inception.
Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from
one
to
10 years
or more. The exercise of lease renewal options is at our sole discretion. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Certain of our lease agreements include rental payments based on the use of the leased property over contractual levels. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company has lease agreements with lease and non-lease components, which are accounted for separately. Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would account for each lease component and the related non-lease component together as a single component. For certain building leases, including the lease of warehouses, distribution centers and office space, the Company accounts for the lease and non-lease components as a single lease component. For all other asset types, the Company accounts for lease and non-lease components separately.
For operating leases, the right-of-use asset is subsequently measured throughout the lease term at the carrying amount of the lease liability. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
For finance leases, the right-of-use asset is subsequently amortized using the straight-line method from the lease commencement date to the earlier of the end of its useful life or the end of the lease term. In those cases, the right-of-use asset is amortized over the useful life of the underlying asset. Amortization of the right-of-use asset is recognized and presented separately from interest expense on the lease liability.
Right-of-use assets for operating and finance leases are periodically reviewed for impairment losses. The Company uses the long-lived assets impairment guidance in ASC Subtopic 360-10, "Property, Plant, and Equipment - Overall", to determine whether a right-of-use asset is impaired, and if so, the amount of the impairment loss to recognize. No impairment losses have been recognized to date.
The following table presents the location and amount of lease assets and liabilities in the
Condensed Consolidated Balance Sheets
:
|
|
|
|
|
|
|
|
Assets
|
|
Location
|
|
June 30, 2019
|
Operating lease assets
|
|
Operating lease right-of-use assets
|
|
$
|
93,183
|
|
Finance lease assets
|
|
Property, plant and equipment
|
|
3,217
|
|
Total leased assets
|
|
|
|
$
|
96,400
|
|
Liabilities
|
|
Location
|
|
|
Current:
|
|
|
|
|
Operating
|
|
Accrued liabilities
|
|
$
|
28,793
|
|
Finance
|
|
Current portion of long-term debt and finance leases
|
|
187
|
|
Noncurrent:
|
|
|
|
|
Operating
|
|
Noncurrent operating leases
|
|
67,214
|
|
Finance
|
|
Long-term debt and finance leases
|
|
5,063
|
|
Total lease liabilities
|
|
|
|
$
|
101,257
|
|
The following table presents the location and amount of lease expense in the Condensed Consolidated Income Statement:
|
|
|
|
|
|
|
|
|
|
|
Lease cost
|
|
Location
|
|
Three Months Ended June 30, 2019
|
Six Months Ended June 30, 2019
|
Operating lease cost
(a)
|
|
Cost of Sales
|
|
$
|
8,787
|
|
$
|
18,022
|
|
Operating lease cost
|
|
Selling General & Administrative Expenses
|
|
1,515
|
|
2,898
|
|
Total operating lease cost
|
|
|
|
10,302
|
|
20,920
|
|
|
|
|
|
|
|
Amortization of finance lease assets
|
|
Cost of sales
|
|
$
|
55
|
|
$
|
109
|
|
Interest on finance lease liabilities
|
|
Interest expense
|
|
1
|
|
2
|
|
Total finance lease cost
|
|
|
|
56
|
|
111
|
|
Net lease cost
|
|
|
|
$
|
10,358
|
|
$
|
21,031
|
|
(a)
- Includes short-term lease costs of
$1,515
and
$3,401
and variable lease costs of
$844
and
$1,680
for the three and
six
month periods ended
June 30, 2019
, respectively.
The following table presents the future maturities of the Company's lease obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
Operating
Leases
|
|
Finance
Leases
|
|
Total
|
2019
|
|
$
|
16,424
|
|
|
$
|
187
|
|
|
$
|
16,611
|
|
2020
|
|
31,079
|
|
|
—
|
|
|
31,079
|
|
2021
|
|
17,776
|
|
|
5,063
|
|
|
22,839
|
|
2022
|
|
13,539
|
|
|
—
|
|
|
13,539
|
|
2023
|
|
9,590
|
|
|
—
|
|
|
9,590
|
|
After 2024
|
|
24,009
|
|
|
—
|
|
|
24,009
|
|
Total lease payments
|
|
112,417
|
|
|
5,250
|
|
|
117,667
|
|
Less: Interest
|
|
16,410
|
|
|
—
|
|
|
16,410
|
|
Present value of lease liabilities
|
|
$
|
96,007
|
|
|
$
|
5,250
|
|
|
$
|
101,257
|
|
The following table presents the weighted-average lease term and discount rates of the Company's lease obligations:
|
|
|
|
|
Weighted-average remaining lease term (years)
|
|
June 30, 2019
|
Operating leases
|
|
5.06
|
|
Finance leases
|
|
0.17
|
|
Weighted-average discount rate
|
|
|
Operating leases
|
|
5.76
|
%
|
Finance leases
|
|
1.31
|
%
|
The following table presents the cash flow amounts related to lease liabilities included in the Company's Condensed Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
Six Months Ended June 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
9,098
|
|
$
|
17,181
|
|
Operating cash flows from finance leases
|
|
55
|
|
109
|
|
Financing cash flows from finance leases
|
|
(193
|
)
|
(389
|
)
|
Leased assets obtained in exchange for new operating lease liabilities
|
|
20
|
|
72
|
|
|
|
Note 10
.
|
Stockholders’ Equity
|
The following tables provide a quarterly reconciliation of the equity accounts attributable to Cooper Tire & Rubber Company and to the noncontrolling shareholders' interests for the year to date as of
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
Total Parent Stockholders’ Equity
|
|
Noncontrolling Shareholders’ Interests in Consolidated Subsidiary
|
|
Total Stockholders’ Equity
|
Balance at December 31, 2018
|
$
|
1,172,043
|
|
|
$
|
60,400
|
|
|
$
|
1,232,443
|
|
Net income
|
6,980
|
|
|
200
|
|
|
7,180
|
|
Other comprehensive income
|
13,170
|
|
|
980
|
|
|
14,150
|
|
Stock compensation plans
|
(290
|
)
|
|
—
|
|
|
(290
|
)
|
Cash dividends - 0.105 per share
|
(5,262
|
)
|
|
—
|
|
|
(5,262
|
)
|
Balance at March 31, 2019
|
$
|
1,186,641
|
|
|
$
|
61,580
|
|
|
$
|
1,248,221
|
|
Net income
|
8,821
|
|
|
437
|
|
|
9,258
|
|
Other comprehensive income
|
637
|
|
|
(340
|
)
|
|
297
|
|
Stock compensation plans
|
1,517
|
|
|
—
|
|
|
1,517
|
|
Cash dividends - 0.105 per share
|
(5,267
|
)
|
|
—
|
|
|
(5,267
|
)
|
Balance at June 30, 2019
|
$
|
1,192,349
|
|
|
$
|
61,677
|
|
|
$
|
1,254,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
Total Parent Stockholders’ Equity
|
|
Noncontrolling Shareholders’ Interests in Consolidated Subsidiary
|
|
Total Stockholders’ Equity
|
Balance at December 31, 2017
|
$
|
1,127,096
|
|
|
$
|
58,660
|
|
|
$
|
1,185,756
|
|
Net income
|
8,284
|
|
|
699
|
|
|
8,983
|
|
Other comprehensive income
|
26,575
|
|
|
3,945
|
|
|
30,520
|
|
Share repurchase program
|
(15,565
|
)
|
|
—
|
|
|
(15,565
|
)
|
Stock compensation plans
|
(335
|
)
|
|
—
|
|
|
(335
|
)
|
Cash dividends - 0.105 per share
|
(5,334
|
)
|
|
—
|
|
|
(5,334
|
)
|
Balance at March 31, 2018
|
$
|
1,140,721
|
|
|
$
|
63,304
|
|
|
$
|
1,204,025
|
|
Net income
|
15,008
|
|
|
701
|
|
|
15,709
|
|
Other comprehensive income
|
(19,395
|
)
|
|
(5,084
|
)
|
|
(24,479
|
)
|
Share repurchase program
|
(13,790
|
)
|
|
—
|
|
|
—
|
|
Stock compensation plans
|
1,092
|
|
|
—
|
|
|
1,092
|
|
Cash dividends - 0.105 per share
|
(5,289
|
)
|
|
—
|
|
|
(5,289
|
)
|
Balance at June 30, 2018
|
$
|
1,118,347
|
|
|
$
|
58,921
|
|
|
$
|
1,177,268
|
|
|
|
Note 11
.
|
Changes in Accumulated Other Comprehensive Income (Loss) by Component
|
The balances of each component of accumulated other comprehensive income (loss) in the accompanying Consolidated Statements of Equity were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Translation Adjustment
|
|
Derivative Instruments
|
|
Post- retirement Benefits
|
|
Total
|
Ending Balance, December 31, 2018
|
$
|
(62,133
|
)
|
|
$
|
2,150
|
|
|
$
|
(401,606
|
)
|
|
$
|
(461,589
|
)
|
Other comprehensive income (loss) before reclassifications
|
8,328
|
|
|
(1,183
|
)
|
|
—
|
|
|
7,145
|
|
Foreign currency translation effect
|
—
|
|
|
—
|
|
|
(1,460
|
)
|
|
(1,460
|
)
|
Income tax effect
|
—
|
|
|
245
|
|
|
—
|
|
|
245
|
|
Amount reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
Cash flow hedges
|
—
|
|
|
62
|
|
|
—
|
|
|
62
|
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
(102
|
)
|
|
(102
|
)
|
Amortization of actuarial losses
|
—
|
|
|
—
|
|
|
9,233
|
|
|
9,233
|
|
Income tax effect
|
—
|
|
|
88
|
|
|
(2,041
|
)
|
|
(1,953
|
)
|
Other comprehensive income (loss)
|
8,328
|
|
|
(788
|
)
|
|
5,630
|
|
|
13,170
|
|
Ending Balance, March 31, 2019
|
$
|
(53,805
|
)
|
|
$
|
1,362
|
|
|
$
|
(395,976
|
)
|
|
$
|
(448,419
|
)
|
Other comprehensive (loss) income before reclassifications
|
(6,994
|
)
|
|
(367
|
)
|
|
—
|
|
|
(7,361
|
)
|
Foreign currency translation effect
|
—
|
|
|
—
|
|
|
1,429
|
|
|
1,429
|
|
Income tax effect
|
—
|
|
|
226
|
|
|
—
|
|
|
226
|
|
Amount reclassified from accumulated other comprehensive (loss) income
|
|
|
|
|
|
|
|
Cash flow hedges
|
—
|
|
|
(853
|
)
|
|
—
|
|
|
(853
|
)
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
(102
|
)
|
|
(102
|
)
|
Amortization of actuarial losses
|
—
|
|
|
—
|
|
|
9,215
|
|
|
9,215
|
|
Income tax effect
|
—
|
|
|
124
|
|
|
(2,041
|
)
|
|
(1,917
|
)
|
Other comprehensive (loss) income
|
(6,994
|
)
|
|
(870
|
)
|
|
8,501
|
|
|
637
|
|
Ending Balance, June 30, 2019
|
$
|
(60,799
|
)
|
|
$
|
492
|
|
|
$
|
(387,475
|
)
|
|
$
|
(447,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Translation Adjustment
|
|
Derivative Instruments
|
|
Post- retirement Benefits
|
|
Total
|
Ending Balance, December 31, 2017
|
$
|
(39,940
|
)
|
|
$
|
349
|
|
|
$
|
(438,887
|
)
|
|
$
|
(478,478
|
)
|
Other comprehensive income before reclassifications
|
20,925
|
|
|
646
|
|
|
—
|
|
|
21,571
|
|
Foreign currency translation effect
|
—
|
|
|
—
|
|
|
(2,900
|
)
|
|
(2,900
|
)
|
Income tax effect
|
—
|
|
|
(416
|
)
|
|
—
|
|
|
(416
|
)
|
Amount reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
Cash flow hedges
|
—
|
|
|
1,493
|
|
|
—
|
|
|
1,493
|
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
(135
|
)
|
|
(135
|
)
|
Amortization of actuarial losses
|
—
|
|
|
—
|
|
|
9,345
|
|
|
9,345
|
|
Income tax effect
|
—
|
|
|
(172
|
)
|
|
(2,210
|
)
|
|
(2,382
|
)
|
Other comprehensive income
|
20,925
|
|
|
1,551
|
|
|
4,100
|
|
|
26,576
|
|
Ending Balance, March 31, 2018
|
$
|
(19,015
|
)
|
|
$
|
1,900
|
|
|
$
|
(434,787
|
)
|
|
$
|
(451,902
|
)
|
Other comprehensive (loss) income before reclassifications
|
(30,768
|
)
|
|
2,062
|
|
|
—
|
|
|
(28,706
|
)
|
Foreign currency translation effect
|
—
|
|
|
—
|
|
|
4,082
|
|
|
4,082
|
|
Income tax effect
|
—
|
|
|
(285
|
)
|
|
—
|
|
|
(285
|
)
|
Amount reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
Cash flow hedges
|
—
|
|
|
(1,592
|
)
|
|
—
|
|
|
(1,592
|
)
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
(135
|
)
|
|
(135
|
)
|
Amortization of actuarial losses
|
—
|
|
|
—
|
|
|
9,320
|
|
|
9,320
|
|
Income tax effect
|
—
|
|
|
126
|
|
|
(2,206
|
)
|
|
(2,080
|
)
|
Other comprehensive income (loss)
|
(30,768
|
)
|
|
311
|
|
|
11,061
|
|
|
(19,396
|
)
|
Ending Balance, June 30, 2018
|
$
|
(49,783
|
)
|
|
$
|
2,211
|
|
|
$
|
(423,726
|
)
|
|
$
|
(471,298
|
)
|
|
|
Note 12
.
|
Comprehensive Income (Loss) Attributable to Noncontrolling Shareholders’ Interests
|
The following table provides the details of the comprehensive income (loss) attributable to noncontrolling shareholders' interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income attributable to noncontrolling shareholders’ interests
|
|
$
|
437
|
|
|
$
|
701
|
|
|
$
|
637
|
|
|
$
|
1,400
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
(340
|
)
|
|
(5,083
|
)
|
|
640
|
|
|
(1,139
|
)
|
Comprehensive income (loss) attributable to noncontrolling shareholders’ interests
|
|
$
|
97
|
|
|
$
|
(4,382
|
)
|
|
$
|
1,277
|
|
|
$
|
261
|
|
|
|
Note 13
.
|
Contingent Liabilities
|
Product Liability Claims
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 involves different types of tires and 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, CUV, SUV, TBR 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, improper repairs, 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. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. The liability often cannot be determined with precision until the claim is resolved.
Pursuant to ASU 450 "Contingencies," the Company accrues the minimum liability for each known claim when the estimated outcome is a range of probable 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. The Company periodically reviews such estimates and any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. 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. While the Company believes its reserves are reasonably stated, 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 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 or appeals process - and is highly dependent on jurisdiction, specific facts, the plaintiff’s attorney, the court’s docket and other factors. Given that some claims may be resolved in weeks and others may take five years or more, it is impossible to predict with any reasonable reliability the time frame over which the accrued amounts may be paid.
The Company regularly reviews the probable outcome of outstanding legal proceedings and 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. As part of its regular review, the Company monitors trends that may affect its ultimate liability and analyzes the developments and variables likely to affect pending and anticipated claims against the Company and the reserves for such claims. The Company utilizes claims experience, as well as trends and developments in the litigation climate, in estimating its required accrual. Based on the Company's quarterly reviews, coupled with normal activity, including the addition of two quarters of self-insured incidents, settlements and changes in the amount of reserves, the Company increased its accrual to
$114,636
at
June 30, 2019
from
$112,124
at
December 31, 2018
.
The addition of another
six
months of self-insured incidents accounted for an
increase
of
$18,593
in the Company's product liability reserve. Settlements, changes in the amount of reserves for cases where sufficient information is known to estimate a liability, and changes in assumptions
decreased
the liability by
$956
. The Company paid
$15,125
during the first
six
months of 2019 to resolve cases and claims.
The Company’s product liability reserve balance at
June 30, 2019
totaled
$114,636
(the current portion of
$30,690
is included in Accrued liabilities and the long-term portion is included in Other long-term liabilities on the
Condensed Consolidated Balance Sheets
), and the balance at
December 31, 2018
totaled
$112,124
(current portion of
$30,550
).
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.
Product liability expenses are included in Cost of products sold in the
Condensed Consolidated Statements of Income
. For the
three and six months
ended
June 30, 2019
and
2018
, product liability expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Product liability expense
|
|
$
|
12,714
|
|
|
$
|
12,155
|
|
|
$
|
23,532
|
|
|
$
|
27,223
|
|
|
|
Note 14
.
|
Business Segments
|
The Company has
four
segments under ASC 280, "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;
|
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,
Corporacion de Occidente SA de CV ("COOCSA"),
which supplies passenger car tires to the North American, Mexican, Central American and South American markets. The segment also markets and distributes racing, TBR and motorcycle tires. The racing and motorcycle tires are manufactured by the Company’s European Operations segment and by others. TBR tires are sourced from
GRT
and through an off-take agreement that was entered with
Prinx Chengshan (Shandong) Tire Company Ltd. ("PCT")
, the Company's former joint venture. In December 2017, the Company signed an off-take agreement with
Sailun Vietnam, effective from January 1, 2018 through December 31, 2020, as an additional source of TBR tires. On April 5, 2019, Cooper Vietnam, a wholly owned subsidiary of Cooper,
and Sailun Vietnam established a joint venture in Vietnam which will produce and sell TBR tires. The new joint venture is expected to begin producing tires in 2020. Major distribution channels and customers include independent tire dealers, wholesale distributors, regional and national retail tire chains, large retail chains that sell tires as well as other automotive products, mass merchandisers and digital channels. 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 OEMs.
Both the Europe and Asia 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 Europe and Asia segments are presented as “International Tire Operations.” The European operations include manufacturing 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 passenger car and light truck tires primarily for the European markets and for export to the North American segment.
The Asian operations are located in the PRC and Vietnam.
Cooper Kunshan Tire manufactures passenger car and light truck tires both for the Chinese domestic market and for export to markets outside of the PRC. GRT, a joint venture manufacturing facility located in the PRC, serves as a global source of TBR tire production for the Company. The segment also procures certain TBR and passenger car tires under off-take agreements with PCT through mid-2021 and, in December 2017, the Company signed an off-take agreement with Sailun Vietnam, as a source of TBR tires through December 31, 2020.
On April 5, 2019, Cooper Vietnam
and Sailun Vietnam established a joint venture in Vietnam which will produce and sell TBR tires in addition to the off-take agreement. The new joint venture is expected to begin producing tires in 2020.
The segment sells a majority of its tires in the replacement market, with a portion also sold to OEMs.
On January 17, 2019, Cooper Tire Europe, a wholly owned subsidiary of the Company, committed to a plan to cease light vehicle tire production at its Melksham, U.K. facility. Phasing out of light vehicle tire production is expected to be completed in the third quarter of 2019. An estimated
300
roles will be eliminated at the site. Cooper Tire Europe will obtain light vehicle tires to meet customer needs from other production sites within the Company’s global production network. Approximately
400
roles will remain in Melksham to support the functions that continue there, including motorsports and motorcycle tire production, the materials business, Cooper Tire Europe headquarters, sales and marketing, and the Europe Technical Center.
The following table details segment financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net sales:
|
|
|
|
|
|
|
|
|
Americas Tire
|
|
|
|
|
|
|
|
|
External customers
|
|
$
|
570,537
|
|
|
$
|
573,807
|
|
|
$
|
1,075,295
|
|
|
$
|
1,052,634
|
|
Intercompany
|
|
11,770
|
|
|
10,605
|
|
|
21,948
|
|
|
17,170
|
|
|
|
582,307
|
|
|
584,412
|
|
|
1,097,243
|
|
|
1,069,804
|
|
International Tire
|
|
|
|
|
|
|
|
|
External customers
|
|
108,593
|
|
|
124,601
|
|
|
222,999
|
|
|
247,270
|
|
Intercompany
|
|
29,921
|
|
|
43,238
|
|
|
59,300
|
|
|
81,813
|
|
|
|
138,514
|
|
|
167,839
|
|
|
282,299
|
|
|
329,083
|
|
Eliminations
|
|
(41,691
|
)
|
|
(53,843
|
)
|
|
(81,249
|
)
|
|
(98,983
|
)
|
Consolidated net sales
|
|
679,130
|
|
|
698,408
|
|
|
1,298,293
|
|
|
1,299,904
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
Americas Tire
|
|
46,814
|
|
|
40,480
|
|
|
85,603
|
|
|
71,715
|
|
International Tire
|
|
(1,296
|
)
|
|
5,652
|
|
|
(2,635
|
)
|
|
13,086
|
|
Unallocated corporate charges
|
|
(13,278
|
)
|
|
(13,705
|
)
|
|
(23,730
|
)
|
|
(25,670
|
)
|
Eliminations
|
|
(569
|
)
|
|
336
|
|
|
(1,136
|
)
|
|
87
|
|
Consolidated operating profit
|
|
31,671
|
|
|
32,763
|
|
|
58,102
|
|
|
59,218
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(7,810
|
)
|
|
(8,417
|
)
|
|
(16,123
|
)
|
|
(16,108
|
)
|
Interest income
|
|
1,999
|
|
|
1,988
|
|
|
5,379
|
|
|
4,303
|
|
Other pension and postretirement benefit expense
|
|
(9,288
|
)
|
|
(6,967
|
)
|
|
(18,650
|
)
|
|
(13,953
|
)
|
Other non-operating expense
|
|
(1,463
|
)
|
|
(1,391
|
)
|
|
(84
|
)
|
|
(3,050
|
)
|
Income before income taxes
|
|
$
|
15,109
|
|
|
$
|
17,976
|
|
|
$
|
28,624
|
|
|
$
|
30,410
|
|
|
|
Item 2
.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) presents information related to the consolidated results of the operations of the Company, a discussion of past results of the Company’s segments, future outlook for the Company and information concerning the liquidity and capital resources of the Company. The Company's future results may differ materially from those indicated herein, for reasons including those indicated under the forward-looking statements heading below.
Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
Change
|
|
2018
|
|
2019
|
|
Change
|
|
2018
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Tire
|
|
$
|
582,307
|
|
|
(0.4
|
)%
|
|
$
|
584,412
|
|
|
$
|
1,097,243
|
|
|
2.6
|
%
|
|
$
|
1,069,804
|
|
International Tire
|
|
138,514
|
|
|
(17.5
|
)%
|
|
167,839
|
|
|
282,299
|
|
|
(14.2
|
)%
|
|
329,083
|
|
Eliminations
|
|
(41,691
|
)
|
|
22.6
|
%
|
|
(53,843
|
)
|
|
(81,249
|
)
|
|
17.9
|
%
|
|
(98,983
|
)
|
Net sales
|
|
679,130
|
|
|
(2.8
|
)%
|
|
698,408
|
|
|
1,298,293
|
|
|
(0.1
|
)%
|
|
1,299,904
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Tire
|
|
46,814
|
|
|
15.6
|
%
|
|
40,480
|
|
|
85,603
|
|
|
19.4
|
%
|
|
71,715
|
|
International Tire
|
|
(1,296
|
)
|
|
n/m
|
|
|
5,652
|
|
|
(2,635
|
)
|
|
n/m
|
|
|
13,086
|
|
Unallocated corporate charges
|
|
(13,278
|
)
|
|
(3.1
|
)%
|
|
(13,705
|
)
|
|
(23,730
|
)
|
|
(7.6
|
)%
|
|
(25,670
|
)
|
Eliminations
|
|
(569
|
)
|
|
n/m
|
|
|
336
|
|
|
(1,136
|
)
|
|
n/m
|
|
|
87
|
|
Operating profit
|
|
31,671
|
|
|
(3.3
|
)%
|
|
32,763
|
|
|
58,102
|
|
|
(1.9
|
)%
|
|
59,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(7,810
|
)
|
|
(7.2
|
)%
|
|
(8,417
|
)
|
|
(16,123
|
)
|
|
0.1
|
%
|
|
(16,108
|
)
|
Interest income
|
|
1,999
|
|
|
0.6
|
%
|
|
1,988
|
|
|
5,379
|
|
|
25.0
|
%
|
|
4,303
|
|
Other pension and postretirement benefit expense
|
|
(9,288
|
)
|
|
33.3
|
%
|
|
(6,967
|
)
|
|
(18,650
|
)
|
|
33.7
|
%
|
|
(13,953
|
)
|
Other non-operating expense
|
|
(1,463
|
)
|
|
5.2
|
%
|
|
(1,391
|
)
|
|
(84
|
)
|
|
(97.2
|
)%
|
|
(3,050
|
)
|
Income before income taxes
|
|
15,109
|
|
|
(15.9
|
)%
|
|
17,976
|
|
|
28,624
|
|
|
(5.9
|
)%
|
|
30,410
|
|
Provision for income taxes
|
|
5,851
|
|
|
158.1
|
%
|
|
2,267
|
|
|
12,186
|
|
|
113.1
|
%
|
|
5,718
|
|
Net income
|
|
9,258
|
|
|
(41.1
|
)%
|
|
15,709
|
|
|
16,438
|
|
|
(33.4
|
)%
|
|
24,692
|
|
Net income attributable to noncontrolling shareholders’ interests
|
|
437
|
|
|
(37.7
|
)%
|
|
701
|
|
|
637
|
|
|
(54.5
|
)%
|
|
1,400
|
|
Net income attributable to Cooper Tire & Rubber Company
|
|
$
|
8,821
|
|
|
(41.2
|
)%
|
|
$
|
15,008
|
|
|
$
|
15,801
|
|
|
(32.2
|
)%
|
|
$
|
23,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.18
|
|
|
(40.0
|
)%
|
|
$
|
0.30
|
|
|
$
|
0.32
|
|
|
(30.4
|
)%
|
|
$
|
0.46
|
|
Diluted earnings per share
|
|
$
|
0.18
|
|
|
(40.0
|
)%
|
|
$
|
0.30
|
|
|
$
|
0.31
|
|
|
(32.6
|
)%
|
|
$
|
0.46
|
|
n/m – not meaningful
2019
versus
2018
Consolidated net sales for the quarter ended
June 30, 2019
were
$679 million
, a decrease of $
19 million
from
2018
. Lower unit volumes (
$34 million
) and unfavorable foreign currency impact (
$6 million
) were partially offset by favorable price and mix (
$21 million
).
Consolidated net sales for the first
six
months of
2019
were
$1,298 million
, a decrease of
$2 million
from the comparable period one year ago. In the first
six
months of
2019
, the Company experienced favorable price and mix (
$45 million
), offset by lower unit volume (
$39 million
) and unfavorable foreign currency impact (
$8 million
).
The Company recorded operating profit of $
32 million
in the
second
quarter of
2019
, compared to operating profit of
$33 million
in the
second
quarter of
2018
. Operating profit for
2019
was negatively affected by
$13 million
of new tariffs on products imported into the U.S. from China compared to the same period a year ago, as well as
$2 million
of restructuring costs related to the decision to cease light vehicle tire production at the Melksham, U.K. facility in the first quarter of 2019. In addition, the quarter included
$17 million
of favorable price and mix and
$15 million
of favorable raw material costs (excluding the new tariffs). The quarter also included lower unit volume of
$6 million
, increased selling, general and administrative expenses of
$4 million
and
$1 million
of increased product liability expense. Other costs increased
$7 million
compared to the second quarter of 2018 as a result of increased distribution costs, as well as the nonrecurrence of insurance recoveries net of direct costs of $3 million recorded in 2018 relating to tornado damage at a North American distribution center in 2017.
The Company recorded operating profit of $
58 million
in the first
six
months of
2019
, compared to operating profit of
$59 million
in the first
six
months of
2018
. Operating profit for the first half of
2019
was negatively affected by
$27 million
of new tariffs on products imported into the U.S. from China, as well as
$7 million
of restructuring costs related to the decision to cease light vehicle tire production at the Melksham, U.K. The first six months of 2019 also included
$31 million
of favorable price and mix,
$16 million
of favorable raw material costs (excluding the new tariffs), lower manufacturing costs of
$5 million
and reduced product liability expense of
$4 million
. The first half of 2019 also included lower unit volume of
$8 million
and additional selling, general and administrative costs of
$5 million
. Other costs increased
$10 million
in 2019, including higher distribution costs and the nonrecurrence of $5 million of insurance recoveries recorded in the first half of 2018.
On February 15, 2019, countervailing duties of
42.16 percent
were imposed on the Company's TBR tire imports into the U.S. from the PRC. The Company incurred duties of $8 million and $18 million for the three and
six
month periods ended
June 30, 2019
related to countervailing duties on TBR tire imports. Additionally, pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, passenger, light truck and truck and bus tires, raw materials and tire-manufacturing equipment from the PRC imported into the U.S. became subject to additional
10 percent
duties effective September 24, 2018. These tariffs increased to
25 percent
effective May 10, 2019. The Company has incurred duties of $5 million and $9 million for the three and
six
month periods ended
June 30, 2019
related to these Section 301 tariffs.
The principal raw materials for the Company include natural rubber, synthetic rubber, carbon black, chemicals and steel reinforcement components. Approximately
70
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, natural gas and certain principal materials, 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 expense totaled
$13 million
in the
second
quarter of
2019
as compared to
$12 million
in the
second
quarter of
2018
. Product liability expense totaled
$24 million
in the first
six
months of
2019
as compared to
$27 million
in the first
six
months of
2018
. The change in expense from period to period is based on the Company's quarterly review of its reserves, coupled with normal activity, including the addition of another period of self-insured incidents, settlements and changes in the amount of reserves. Additional information related to the Company’s accounting for product liability costs appears in the Notes to the
condensed consolidated financial statements
.
Selling, general, and administrative expenses were $
66 million
in the
second
quarter of
2019
(
9.7 percent
of net sales) and $
61 million
in
2018
(
8.8 percent
of net sales). Selling, general, and administrative expenses were $
123 million
in the first
six
months of
2019
(
9.4 percent
of net sales) and $
119 million
in the first six months of
2018
(
9.2 percent
of net sales). In both periods, the increase in selling, general and administrative expenses was driven primarily by an increase in mark to market costs of stock-based liabilities and increased incentive compensation.
During the first six months of
2019
, the Company recorded restructuring expense associated with the planned cessation of light vehicle tire production at the Melksham, U.K. facility. This initiative, which was committed to on January 17, 2019 by Cooper Tire Europe, a wholly owned subsidiary of the Company, is expected to result in charges to
2019
pre-tax earnings of approximately
$8
to
$11 million
, of which
5
to
10 percent
are expected to be non-cash charges. The Company recorded restructuring expense of
$2 million
for the quarter ended
June 30, 2019
, consisting primarily of employee severance costs. The Company recorded restructuring expense of
$7 million
for the
six
months ended
June 30, 2019
, consisting of
$6 million
of employee severance costs and
$1 million
in asset write-downs and other costs. Additional information related to the Company’s accounting for restructuring costs appears in the Notes to the
condensed consolidated financial statements
.
Interest expense and interest income in the
second
quarter of
2019
and for the first
six
months of
2019
were comparable to the similar periods in
2018
.
For the quarter ended
June 30, 2019
, other pension and postretirement benefit expense was
$9 million
as compared to
$7 million
for the quarter ended
June 30, 2018
. For the
six
months ended
June 30, 2019
, other pension and postretirement benefit expense was
$19 million
as compared to
$14 million
for the
six
months ended
June 30, 2018
. The increase is primarily the result of lower estimated returns on plan assets compared to
2018
, reflective of an improved pension funded status resulting in the portfolio taking less risk in order to preserve the funded status.
Other expense was comparable for the second quarter of 2019 compared to the second quarter of 2018. Other expense decreased $
3 million
for the six month period ended June 30, 2019 compared to the comparable period of 2018, primarily due to the impact of foreign currency exchange rates.
For the three month period ended
June 30, 2019
, the Company recorded income tax expense of
$6 million
(effective tax rate of
38.7 percent
) compared to
$2 million
(effective tax rate of
12.6 percent
) for the same period in
2018
. For the
six
month period ended
June 30, 2019
, the Company recorded income tax expense of
$12 million
(effective tax rate of
42.6 percent
) compared to
$6 million
(effective tax rate of
18.8 percent
) for the same period in
2018
. The effective tax rate for the three and six month periods ended
June 30, 2019
differs from the U.S. federal statutory rate of 21 percent primarily due to net discrete tax expense of
$2 million
and $4 million recorded during the three and six month periods, respectively, as well as the projected mix of earnings in international jurisdictions with differing tax rates and jurisdictions where valuation allowances are recorded.
The Company continues to maintain valuation allowances pursuant to ASC 740, “Accounting for Income Taxes,” against portions of its U.S. and non-U.S. deferred tax assets at
June 30, 2019
as it cannot assure the future realization of the associated tax benefits prior to their reversal or expiration. 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
$1 million
. In addition, the Company has recorded valuation allowances of
$23 million
relating to non-U.S. net operating losses and other deferred tax assets for a total valuation allowance of
$24 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 the associated deferred tax assets are deemed to be realizable.
Segment Operating Results
The Company has four segments under ASC 280:
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•
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North America, composed of the Company’s operations in the U.S. and Canada;
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|
|
•
|
Latin America, composed of the Company’s operations in Mexico, Central America and South America;
|
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 Europe and Asia 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 Europe and Asia segments are presented as “International Tire Operations” in the segment disclosure.
Americas Tire Operations Segment
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|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
Change
|
|
2018
|
|
2019
|
|
Change
|
|
2018
|
Sales
|
|
$
|
582,307
|
|
|
(0.4)%
|
|
$
|
584,412
|
|
|
$
|
1,097,243
|
|
|
2.6%
|
|
$
|
1,069,804
|
|
Operating profit
|
|
$
|
46,814
|
|
|
15.6%
|
|
$
|
40,480
|
|
|
$
|
85,603
|
|
|
19.4%
|
|
$
|
71,715
|
|
Operating margin
|
|
8.0%
|
|
1.1 points
|
|
6.9%
|
|
7.8%
|
|
1.1 points
|
|
6.7%
|
Total unit sales change
|
|
|
|
(3.8)%
|
|
|
|
|
|
(2.1)%
|
|
|
United States replacement market unit shipment changes:
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|
|
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|
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Total light vehicle tires
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|
|
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Segment
|
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(4.0)%
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|
|
|
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(1.7)%
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USTMA members
|
|
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|
(1.5)%
|
|
|
|
|
|
0.3%
|
|
|
Total Industry
|
|
|
|
0.7%
|
|
|
|
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|
3.9%
|
|
|
The source of this information is the United States Tire Manufactures Association ("USTMA") and internal sources.
Overview
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 North American, Mexican, Central American and South American markets. The segment also markets and distributes racing, TBR and motorcycle tires. The racing and motorcycle tires are manufactured by the Company’s European Operations segment and by others. TBR tires are sourced from
GRT
and through an off-take agreement that was entered with
PCT
, the Company's former joint venture. In December 2017, the Company signed an off-take agreement with
Sailun Vietnam, effective from January 1, 2018 through December 31, 2020, as an additional source of TBR tires. On April 5, 2019, Cooper Vietnam and Sailun Vietnam established a joint venture in Vietnam which will produce and sell TBR tires. The new joint venture is expected to begin producing tires in 2020. Major distribution channels and customers include independent tire dealers, wholesale distributors, regional and national retail tire chains, large retail chains that sell tires as well as other automotive products, mass merchandisers and digital channels. 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 OEMs.
Sales
Net sales of the Americas Tire Operations segment decreased from
$584 million
in the
second
quarter of
2018
to
$582 million
in the
second
quarter of
2019
. The decrease in sales was a result lower unit volume (
$22 million
), partially offset by favorable pricing and mix (
$20 million
). Unit shipments for the segment decreased
3.8 percent
in the
second
quarter of
2019
compared with the
second
quarter of
2018
. In the U.S., the segment’s unit shipments of total light vehicle tires decreased
4.0 percent
in the
second
quarter of
2019
compared with the same period in
2018
. This decrease compares with a
1.5 percent
decrease in total light vehicle tire shipments experienced by the USTMA, and a
0.7 percent
increase in total light vehicle tire shipments experienced for the total industry, which includes an estimate for non-USTMA members.
Net sales of the Americas Tire Operations segment increased from
$1,070 million
in the first
six
months of
2018
to
$1,097 million
in the first
six
months of
2019
. The increase in sales was a result of favorable pricing and mix (
$50 million
), partially offset by unfavorable volume impact (
$23 million
). Unit shipments for the segment decreased
2.1 percent
in the first
six
months of
2019
compared with the first
six
months of
2018
. In the U.S., the segment’s unit shipments of total light vehicle tires decreased
1.7 percent
in the first
six
months of
2019
compared with the same period in
2018
. This decrease compares with a
0.3 percent
increase in total light vehicle tire shipments experienced by the USTMA, and a
3.9 percent
increase in total light vehicle tire shipments experienced for the total industry.
Operating Profit
Operating profit for the segment for the
second
quarter of
2019
increased
$7 million
to
$47 million
over the same period in
2018
. Operating profit for
2019
was negatively affected by
$13 million
of new tariffs on products imported into the U.S. from China compared to the same period a year ago. In addition, the quarter included
$22 million
of favorable price and mix and
$12 million
of favorable raw material costs (excluding the new tariffs). The second quarter of 2019 also included
$3 million
of favorable manufacturing costs. The segment experienced
$6 million
of unfavorable selling, general and administrative costs,
$5 million
as a result of lower unit volume and
$1 million
of higher product liability costs in the second quarter of 2019. Other costs increased
$5 million
, including increased distribution costs, as well as the nonrecurrence of insurance recoveries net of direct costs of $3 million recorded in 2018 relating to tornado damage at a North American distribution center in 2017.
Operating profit for the segment for the first
six
months of
2019
increased
$14 million
compared to the first six months of 2018 to
$86 million
. Operating profit for the first half of
2019
was negatively affected by
$27 million
of new tariffs on products imported into the U.S. from China. In addition, operating profit for the first
six
months of
2019
included
$39 million
of favorable price and mix and
$11 million
of favorable raw material costs (excluding the new tariffs). The first six months of 2019 also included
$9 million
of favorable manufacturing costs, and
$4 million
of lower product liability costs. The segment experienced
$8 million
of unfavorable selling, general and administrative costs and
$5 million
of lower unit volume. The first
six
months of
2019
also included increased other costs of
$9 million
, including higher distribution costs and the nonrecurrence of $5 million of insurance recoveries net of direct costs recorded in the first half of 2018.
The segment’s internally calculated raw material index of
161.8
for the quarter ended
June 30, 2019
was a decrease of
1.2 percent
from the
second
quarter of
2018
. The raw material index increased
0.9 percent
over the quarter ended
March 31, 2019
.
International Tire Operations Segment
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
Change
|
|
2018
|
|
2019
|
|
Change
|
|
2018
|
Sales
|
|
$
|
138,514
|
|
|
(17.5)%
|
|
$
|
167,839
|
|
|
$
|
282,299
|
|
|
(14.2)%
|
|
$
|
329,083
|
|
Operating (loss) profit
|
|
$
|
(1,296
|
)
|
|
n/m
|
|
$
|
5,652
|
|
|
$
|
(2,635
|
)
|
|
n/m
|
|
$
|
13,086
|
|
Operating margin
|
|
(0.9)%
|
|
(4.3) points
|
|
3.4%
|
|
(0.9)%
|
|
(4.9) points
|
|
4.0%
|
Total unit sales change
|
|
|
|
(15.1)%
|
|
|
|
|
|
(12.1)%
|
|
|
Overview
The International Tire Operations segment is the combination of the Europe and Asia operating segments. The European operations include manufacturing 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 passenger car and light truck tires primarily for the European markets and for export to the North American segment.
The Asian operations are located in the PRC and Vietnam.
Cooper Kunshan Tire manufactures passenger car and light truck tires both for the Chinese domestic market and for export to markets outside of the PRC. GRT, a joint venture manufacturing facility located in the PRC, serves as a global source of TBR tire production for the Company. The segment also procures certain TBR and passenger car tires under off-take agreements with PCT through mid-2021 and, in December 2017, the Company signed an off-take agreement with Sailun Vietnam, as a source of TBR tires through December 31, 2020.
On April 5, 2019, Cooper Vietnam and Sailun Vietnam established a joint venture in Vietnam which will produce and sell TBR tires in addition to the off-take agreement. The new joint venture is expected to begin producing tires in 2020.
The segment sells a majority of its tires in the replacement market, with a portion also sold to OEMs.
On January 17, 2019, Cooper Tire Europe, a wholly owned subsidiary of the Company, committed to a plan to cease light vehicle tire production at its Melksham, England facility. Light vehicle tire production is expected to be phased out and an estimated
300
roles will be eliminated at the site. Cooper Tire Europe will obtain light vehicle tires to meet customer needs from other production sites within the Company’s global production network. Approximately
400
roles will remain in Melksham to support the functions that continue there, including motorsports and motorcycle tire production, the materials business, Cooper Tire Europe headquarters, sales and marketing, and the Europe Technical Center.
Sales
Net sales of the International Tire Operations segment decreased
$29 million
, or
17.5 percent
, from the
second
quarter of
2018
. The segment experienced
$25 million
of lower unit volume and
$6 million
of unfavorable foreign currency impact, partially offset by
$2 million
of favorable price and mix. Segment unit volume was down
15.1 percent
, with unit volume decreases in Asia and Europe.
Net sales of the International Tire Operations segment decreased $
47 million
, or
14.2 percent
, from the first
six
months of
2018
. The segment experienced
$40 million
of lower unit volume and
$8 million
of unfavorable foreign currency impact, partially offset by
$1 million
of favorable price and mix. Segment unit volume was down
12.1 percent
, with unit volume decreases in Asia and Europe.
Operating Profit
Operating profit for the segment decreased
$7 million
to an operating loss of
$1 million
in the
second
quarter of
2019
. The decrease was driven by
$3 million
of lower unit volume,
$2 million
of unfavorable price and mix,
$3 million
of higher manufacturing costs, Melksham restructuring charges of
$2 million
and
$1 million
of increased other costs. These decreases were partially offset by
$3 million
of decreased raw material costs and
$1 million
of decreased selling, general and administrative costs in the
second
quarter of
2019
.
Operating profit for the segment decreased
$16 million
to an operating loss of
$3 million
in the first
six
months of
2019
. The decrease was driven by Melksham restructuring charges of
$7 million
,
$5 million
of lower unit volume,
$5 million
of unfavorable price and mix,
$4 million
of higher manufacturing costs and
$1 million
of increased other expenses. These were partially offset by
$6 million
of decreased raw material costs in the first half of
2019
.
Outlook for the Company
Given the Company's first half unit volume performance, and the lack of clarity regarding the China new vehicle market, the Company no longer expects full year global unit volume growth compared to
2018
.
Consolidated operating profit margin is expected to improve throughout the year, with the full year 2019 operating profit margin in line with
2018
reported operating profit margin of 5.9 percent.
The Company expects capital expenditures to range between $180 and $200 million. This does not include capital contributions related to the Company's pro rata share of its joint venture with Sailun Vietnam or other potential manufacturing footprint investments.
The Company expects its full year
2019
effective tax rate, excluding significant discrete items, to range between
23
and
26
percent.
The Company expects total restructuring charges related to the Melksham, U.K. manufacturing facility to be in a range of
$8
to
$11 million
, including
$7 million
already incurred for the
six
month period ended
June 30, 2019
.
The
2019
expectations include tariffs already in place, but do not include rate changes or additional tariffs that continue to be considered, but have not yet been imposed.
Liquidity and Capital Resources
Sources and uses of cash in operating activities
Net cash used by operating activities of continuing operations was
$99 million
in the first
six
months of
2019
compared to
$79 million
in the first
six
months of
2018
. Net income provided
$16 million
in
2019
as compared to net income of
$25 million
in
2018
. In the first
six
months of
2019
, non-cash items contributed
$105 million
, including a favorable increase in the Company's LIFO reserve of
$10 million
, compared to
$97 million
contributed in the first
six
months of
2018
. In the first
six
months of
2019
, changes in working capital used
$220 million
, as compared to the usage of
$200 million
in the first
six
months of
2018
. The increased
2019
usage was driven primarily by higher growth in inventory as a result of normal seasonal volume growth and increased cost, including the impact of tariffs on tires imported from China to the U.S., and a decrease in the Company's customer reserve accruals in 2019 as a result of reduced unit volumes.
Sources and uses of cash in investing activities
Net cash used in investing activities reflect capital expenditures of
$105 million
in the first
six
months of
2019
and
$98 million
in the same period of
2018
. Additionally, investing activities in the first six months of 2019 also include the Company's
$49 million
investment in the Sailun Vietnam equity joint venture.
Sources and uses of cash in financing activities
In the first
six
months of
2019
and 2018, the Company added
$5 million
and
$11 million
, respectively, of short-term debt at its Asian operations.
The Company paid
$2 million
and
$1 million
in fees associated with amendments to its domestic credit facilities in the first six months of 2019 and 2018, respectively.
The Company repurchased
$29 million
of its common stock in the first
six
months of
2018
as part of the Company’s share repurchase program authorized by the Board of Directors. No share repurchases occurred in the first
six
months of
2019
.
Dividends paid on the Company’s common shares were
$11 million
in the first
six
months of both
2019
and
2018
.
Available cash, credit facilities and contractual commitments
At
June 30, 2019
, the Company had cash and cash equivalents of
$112
million.
Domestically, the Company's recently amended Credit Facility with a consortium of banks provides up to
$700 million
and is set to expire in
June 2024
. Of this amended borrowing capacity,
$200 million
is allocated to the Term Loan A, while the remaining
$500 million
is allocated to the Revolving Credit Facility. The Term Loan A is scheduled to be drawn in December 2019 primarily to pay for the maturing unsecured notes of
$174 million
that are classified within the current portion of long-term debt at June 30, 2019. The Credit Facility also includes a
$110 million
letter of credit subfacility.
The Company also has an accounts receivable securitization facility with a borrowing limit of up to
$150 million
, based on available collateral, which expires in
February 2021
.
These credit facilities are undrawn, other than to secure letters of credit, at
June 30, 2019
. The Company’s additional borrowing capacity under these facilities, net of amounts used to back letters of credit and based on available collateral at
June 30, 2019
, was
$808 million
, including the capacity of the Term Loan A.
The Company’s operations in Asia have annual renewable unsecured credit lines that provide up to
$47 million
of borrowings and do not contain significant financial covenants. The additional borrowing capacity on the Asian credit lines totaled
$27 million
at
June 30, 2019
.
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 subsidiaries, dividend and share repurchase goals and maturing long-term debt. The Company also believes it has access to additional funds from capital markets to fund potential strategic initiatives and to finance maturing long-term debt. The entire amount of short-term notes payable outstanding at
June 30, 2019
is debt of consolidated subsidiaries. The Company expects its subsidiaries to refinance or pay these amounts within the next twelve months.
The following table summarizes long-term debt at
June 30, 2019
:
|
|
|
|
|
|
|
|
June 30, 2019
|
Parent company
|
|
|
8% unsecured notes due December 2019
|
|
$
|
173,578
|
|
7.625% unsecured notes due March 2027
|
|
116,880
|
|
Finance leases and other
|
|
5,250
|
|
|
|
295,708
|
|
Less: unamortized debt issuance costs
|
|
1,318
|
|
|
|
294,390
|
|
Less: current maturities
|
|
173,766
|
|
|
|
$
|
120,624
|
|
Forward Looking Statements
This report contains what the Company believes are “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995, regarding projections, expectations or matters that the Company anticipates may happen with respect to the future performance of the industries in which the Company operates, the economies of the United States and other countries, or the performance of the Company itself, which involve uncertainty and risk. Such “forward-looking statements” are generally, though not always, preceded by words such as “anticipates,” “expects,” “will,” “should,” “believes,” “projects,” “intends,” “plans,” “estimates,” and similar terms that connote a view to the future and are not merely recitations of historical fact. Such statements are made solely on the basis of the Company’s current views and perceptions of future events, and there can be no assurance that such statements will prove to be true.
It is possible that actual results may differ materially from projections or expectations due to a variety of factors, including, but not limited to:
|
|
•
|
volatility in raw material and energy prices, including those of rubber, steel, petroleum-based products and natural gas or the unavailability of such raw materials or energy sources;
|
|
|
•
|
the failure of the Company’s suppliers to timely deliver products or services in accordance with contract specifications;
|
|
|
•
|
changes to tariffs or trade agreements, or the imposition of new or increased tariffs or trade restrictions, imposed on tires or materials or manufacturing equipment which the Company uses, including changes related to tariffs on tires, raw materials and tire-manufacturing equipment imported into the U.S. from China or other countries;
|
|
|
•
|
changes in economic and business conditions in the world, including changes related to the United Kingdom’s decision to withdraw from the European Union;
|
|
|
•
|
the inability to obtain and maintain price increases to offset higher production, tariffs or material costs;
|
|
|
•
|
the impact of the recently enacted tax reform legislation;
|
|
|
•
|
increased competitive activity including actions by larger competitors or lower-cost producers;
|
|
|
•
|
the failure to achieve expected sales levels;
|
|
|
•
|
changes in the Company’s customer or supplier relationships or distribution channels, including the write-off of outstanding accounts receivable or loss of particular business for competitive, credit, liquidity, bankruptcy, restructuring or other reasons;
|
|
|
•
|
the failure to develop technologies, processes or products needed to support consumer demand or changes in consumer behavior, including changes in sales channels;
|
|
|
•
|
the costs and timing of restructuring actions and impairments or other charges resulting from such actions, including the possible outcome of the recently announced decision to cease light vehicle tire production in the U.K., or from adverse industry, market or other developments;
|
|
|
•
|
consolidation or other cooperation by and among the Company’s competitors or customers;
|
|
|
•
|
inaccurate assumptions used in developing the Company’s strategic plan or operating plans, or the inability or failure to successfully implement such plans or to realize the anticipated savings or benefits from strategic actions;
|
|
|
•
|
risks relating to investments and acquisitions, including the failure to successfully integrate them into operations or their related financings may impact liquidity and capital resources;
|
|
|
•
|
the ultimate outcome of litigation brought against the Company, including product liability claims, which could result in commitment of significant resources and time to defend and possible material damages against the Company or other unfavorable outcomes;
|
|
|
•
|
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;
|
|
|
•
|
government regulatory and legislative initiatives including environmental, healthcare, privacy and tax matters;
|
|
|
•
|
volatility in the capital and financial markets or changes to the credit markets and/or access to those markets;
|
|
|
•
|
changes in interest or foreign exchange rates or the benchmarks used for establishing the rates;
|
|
|
•
|
an adverse change in the Company’s credit ratings, which could increase borrowing costs and/or hamper access to the credit markets;
|
|
|
•
|
failure to implement information technologies or related systems, including failure by the Company to successfully implement ERP systems;
|
|
|
•
|
the risks associated with doing business outside of the U.S.;
|
|
|
•
|
technology advancements;
|
|
|
•
|
the inability to recover the costs to refresh existing products or develop and test new products or processes;
|
|
|
•
|
the impact of labor problems, including labor disruptions at the Company, its joint ventures, or at one or more of its large customers or suppliers;
|
|
|
•
|
failure to attract or retain key personnel;
|
|
|
•
|
changes in pension expense and/or funding resulting from the Company’s pension strategy, investment performance of the Company’s pension plan assets and changes in discount rate or expected return on plan assets assumptions, or changes to related accounting regulations;
|
|
|
•
|
changes in the Company’s relationship with its joint venture partners or suppliers, including any changes with respect to its former PCT joint venture’s production of TBR products;
|
|
|
•
|
the ability to find and develop alternative sources for products supplied by PCT;
|
|
|
•
|
a variety of factors, including market conditions, may affect the actual amount expended on stock repurchases; the Company’s ability to consummate stock repurchases; changes in the Company’s results of operations or financial conditions or strategic priorities may lead to a modification, suspension or cancellation of stock repurchases, which may occur at any time;
|
|
|
•
|
the inability to adequately protect the Company’s intellectual property rights; and
|
|
|
•
|
the inability to use deferred tax assets.
|
It is not possible to foresee or identify all such factors. Any forward-looking statements in this report are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Prospective investors are cautioned that any such statements are not a guarantee of future performance and actual results or developments may differ materially from those projected.
The Company makes no commitment to update any forward-looking statement included herein or to disclose any facts, events or circumstances that may affect the accuracy of any forward-looking statement. Further information covering issues that could materially affect financial performance is contained under Risk Factors below and in the Company’s other filings with the U. S. Securities and Exchange Commission (“SEC”).
|
|
Item 3
.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
There have been no material changes in market risk at
June 30, 2019
from those detailed in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended
December 31, 2018
.
|
|
Item 4
.
|
CONTROLS AND PROCEDURES
|
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports the Company files or submits as defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934 (“Exchange Act”), as amended is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) to allow timely decisions regarding required disclosures.
The Company, under the supervision and with the participation of management, including the CEO and CFO, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as of
June 30, 2019
(“Evaluation Date”)). Based on its initial evaluation, the Company's CEO and CFO concluded that its disclosure controls and procedures were effective as of the Evaluation Date.
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended
June 30, 2019
that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.