Cooper Tire & Rubber Company 10-Q 2011
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
For the quarterly period ended March 31, 2011
Commission File No. 1-4329
COOPER TIRE & RUBBER COMPANY
(Exact name of registrant as specified in its charter)
701 Lima Avenue, Findlay, Ohio 45840
(Address of principal executive offices)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check One):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Number of shares of common stock of registrant outstanding
at March 31, 2011: 62,097,159
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
COOPER TIRE & RUBBER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per-share amounts)
See accompanying notes.
COOPER TIRE & RUBBER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2010 AND 2011
(Dollar amounts in thousands except per-share amounts)
See accompanying notes.
COOPER TIRE & RUBBER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2010 AND 2011
(Dollar amounts in thousands)
See accompanying notes.
COOPER TIRE & RUBBER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per-share amounts)
1. Organization, Consolidation and Summary of Principal Accounting Policies
3. Earnings Per Share
4. Derivative Instruments and Hedging Activities Disclosure
5. Segment Reporting Information
6. Inventory Disclosure
7. Disclosure of Incentive Compensation Plan
8. Defined Benefit Plans and Other Postretirement Benefits Disclosure
9. Shareholders Equity
10. Product Warranty Liabilities
11. Commitments and Contingencies Disclosure
12. Income Tax Related Disclosure
13. Noncontrolling Interest Disclosure
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Managements 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 and future outlook of each of the Companys segments, and information concerning both the liquidity and capital resources of the Company. The Companys actual results may differ materially from those indicated under the forward-looking statements heading below.
Consolidated Results of Operations
(Dollar amounts in millions except per share amounts)
Consolidated net sales for the three-month period ended March 31, 2011 were $152 million higher than the comparable period one year ago. The increase in net sales for the first quarter of 2011 compared with the first quarter of 2010 was primarily the result of favorable pricing and mix ($145 million) in both the North American and International Tire Operations segments. Also contributing to the increase in net sales in the first quarter of 2011 were favorable exchange rates in the International Tire Operations segment ($7 million).
Operating profit in the first quarter of 2011 decreased by $1 million from the first quarter of 2010. Higher raw material costs in the North American and International Tire Operations segments ($164 million) were partially offset by improved pricing and mix ($128 million) and manufacturing efficiencies ($5 million) in both segments. Additionally, higher unit volumes ($11 million), decreased products liability expenses ($19 million) and the non-recurrence of restructuring costs ($8 million) in the North American Tire Operations segment contributed favorably to the Companys operating profit. Selling, general and administrative costs, including costs associated with the Companys aircraft and increases in accruals for stock-based liabilities, were unfavorable ($8 million).
In the first quarter of 2011, the Company acquired an additional 20 percent ownership in COOCSA, a Mexican tire manufacturing entity in which it had previously been an equity investor. The Companys ownership share is now approximately 58 percent and, because of the increase in voting rights, the results of the entity will be consolidated from the date of the transaction. The Company made this additional investment as part of its strategic plan to build a sustainable, competitive cost position. The inclusion of the operating profit of COOCSA was incremental to the operating profit of the North American Tire Operations segment in the first quarter of 2011 ($1 million).
The Company continued to experience significant increases in the costs of certain of its principal raw materials in the first quarter of 2011 compared with the first quarter 2010 levels. The principal raw materials for the Company include natural rubber, synthetic rubber, carbon black, chemicals and steel reinforcement components. Approximately 65 percent of the Companys raw materials are petroleum-based. The increases in the cost of natural rubber and petroleum-based materials were the most significant drivers of higher raw material costs during the first quarter of 2011, which were $164 million higher than the same period in 2010.
The Company strives to assure raw material supply and to obtain the most favorable pricing possible. For natural rubber and natural gas, procurement is managed through a combination of buying forward of production requirements and utilizing the spot market. For other principal materials, procurement arrangements include supply agreements that may contain formula-based pricing based on commodity indices, multi-year agreements or spot purchase contracts. While the Company uses these arrangements to satisfy normal manufacturing demands, the pricing volatility in these commodities contributes to the difficulty in managing the costs of raw materials.
Products liability expenses totaled $25 million and $44 million in the first quarter of 2011 and 2010, respectively. The majority of the decrease is due to the Company recording an additional $22 million of charges for its self-insured portion of an adverse jury verdict in one case during the first quarter of 2010. The Company intends to appeal this case. The remaining change in the liability primarily results from adjustments to existing reserves based on a comprehensive review of outstanding claims. Additional information related to the Companys accounting for products liability costs appears in the Notes to the Condensed Consolidated Financial Statements.
Selling, general and administrative expenses were $53 million in the first quarter of 2011 (5.8 percent of net sales) and $45 million in the first quarter of 2010 (5.9 percent of net sales). The increase in selling, general and administrative expenses in total was due primarily to costs associated with the Companys aircraft, liabilities tied to the Companys stock price and increased advertising and selling costs associated with the higher sales levels.
During the first quarter of 2010, the Company recorded $8 million in restructuring costs related to the closure of its Albany, Georgia manufacturing facility.
Interest expense increased $1 million in the first quarter of 2011 from the first quarter of 2010, primarily due to higher borrowing rates incurred at the Companys subsidiaries.
Interest income was $1 million in both the first quarter of 2011 and the first quarter of 2010.
Other income increased $5 million in the first quarter of 2011 compared to 2010. In connection with its increased investment in COOCSA, the Company recorded a gain of $5 million on its original investment, which represents the excess of the fair value of approximately $34 million over the carrying value of the investment as of the transaction date.
For the quarter ended March 31, 2011, the Company recorded an income tax expense for continuing operations of $10.5 million as compared to $7.7 million for the comparable period in 2010. The provision includes a tax expense for discrete items of $2.7 million relating primarily to increased deferred taxes resulting from consolidation of the increased investment in Mexico of $1.7 million and the impact on deferred taxes from the 1% reduction in the United Kingdom statutory rate of $0.8 million. The effective tax rate for the three-month period for continuing operations is 26.9 percent, exclusive of discrete items, using the applicable effective tax rate determined using the forecasted multi-jurisdictional annual effective tax rates. For comparable periods in 2010, the effective tax rate for continuing operations, exclusive of discrete items, was 18.9 percent.
The $2.7 million increase in tax expense for the quarter relates primarily to the reduction in the impact of the release of U.S. valuation allowances of $0.2 million; differences in the effective tax rates of international operations and the impact of the changes in the mix of earnings or loss by jurisdiction of $1.6 million; increased earnings impact of $1.1 million; and decreased discrete tax expense of $(0.2) million.
The Company maintains a valuation allowance on its net U.S. deferred tax asset position. A valuation allowance is required pursuant to ASC 740 relating to Accounting for Income Taxes, when, based upon an assessment which is largely dependent upon objectively verifiable evidence including recent operating loss history, expected reversal of existing deferred tax liabilities and tax loss carry back capacity, it is more likely than not that some portion of the deferred tax assets will not be realized. The valuation allowance will be maintained as long as it is more likely than not that some portion of the deferred tax asset may not be realized. Deferred tax assets and liabilities are determined separately for each taxing jurisdiction in which the Company conducts its operations or otherwise generates taxable income or losses. In the U.S., the Company has recorded significant deferred tax assets, the largest of which relate to products liability, pension and other postretirement benefit obligations. These deferred tax assets are partially offset by deferred tax liabilities, the most significant of which relates to accelerated depreciation. Based upon this assessment, the Company maintains a $172.7 million valuation allowance for the portion of U.S. deferred tax assets exceeding its U.S. deferred tax liabilities. In addition, the Company has recorded valuation allowances of $6.9 million for deferred tax assets associated with the portion of non-U.S. deferred tax assets exceeding the non-U.S. deferred tax liabilities for a total valuation allowance of $179.7 million.
North American Tire Operations Segment
The source of this information is the Rubber Manufacturers Association and internal sources.
The North American Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in the U.S. replacement market. The segment also distributes tires for racing, medium truck and motorcycles that are manufactured at the Companys subsidiaries. Major distribution channels and customers include independent tire dealers, wholesale distributors, regional and national retail tire chains, and large retail chains that sell tires as well as other automotive products. The segment does not sell its products directly to end users, except through three Company-owned retail stores, and does not manufacture tires for sale to the automobile OEMs.
Sales of the North American Tire Operations segment increased $116 million, or 21.9 percent from the sales levels achieved in the first quarter of 2010. The increase in sales was a result of favorable pricing and mix ($71 million) and higher unit volumes ($46 million). In the U.S., the segments unit shipments of total light vehicle tires increased 9.2 percent in 2011 from 2010. The increase exceeded the 6.8 percent increase in total light vehicle shipments experienced by the members of the Rubber Manufacturers Association (RMA), and also exceeded the 8.8 percent increase in total light vehicle shipments experienced for the total industry (which includes an estimate for non-RMA members). The segment saw increases in market share for passenger and commercial vehicles, and a decline in its market share of light truck tires in the United States.
North American Tire Operations segment operating profit increased $8 million in the first quarter of 2011 compared to the first quarter of 2010. Operating profit increased as a result of favorable pricing and mix ($57 million), decreased products liability charges ($19 million), higher unit volumes ($12 million), the non-recurrence of restructuring costs ($8 million) and improved manufacturing efficiencies ($4 million). The inclusion of the operating profit of COOCSA was incremental to the operating profit of the segment in the first quarter of 2011 ($1 million). These improvements were partially offset by higher raw material costs ($90 million) and increased selling, general and administrative expenses ($2 million).
The North American Tire Operations segment continued to experience significant increases in the costs of certain of its principal raw materials in the first quarter of 2011 compared with the first quarter 2010 levels. The segments internally calculated raw material index of 238 during the quarter was an increase of 31 percent for the three months ended March 31, 2011 from the same period of 2010. The raw material index increased 16 percent from the fourth quarter of 2010.
International Tire Operations Segment
The International Tire Operations segment has affiliated operations in the U.K. and the PRC. The U.K. entity manufactures and markets passenger car, light truck, motorcycle and racing tires and tire retread material for the global market. The Cooper Chengshan Tire joint venture manufactures and markets radial and bias medium truck tires as well as passenger and light truck tires for the global market. Cooper Kunshan Tire currently manufactures light vehicle tires to be exported to markets outside of the PRC until May 2012. Only a small percentage of the tires manufactured by the segment are sold to OEMs.
Sales of the International Tire Operations segment increased $70 million, or 23.1 percent, in the first quarter of 2011 compared with the first quarter of 2010. Contributing to the increase in sales were favorable pricing and mix ($75 million) and favorable foreign exchange rates ($7 million). Partially offsetting these increases were lower unit volumes ($12 million). The segment implemented a variety of price increases in the regions it operates in during the quarter.
The International Tire Operations segment operating profit in the first quarter of 2011 was $20 million, $3 million lower than in the same period of 2010. The decrease in operating profit was due primarily to higher raw material costs ($73 million), lower unit volumes ($1 million) and higher other costs ($1 million). This decrease was partially offset by favorable pricing and mix ($72 million).
Outlook for Company
The Company expects industry demand for tires will continue to vary by region. Demand in developing markets, including the PRC, should remain robust while more mature tire markets should grow in a range similar to normal historical rates of 2 to 3 percent. The Company intends to manufacture ten percent more tires in 2011 than in 2010 to meet the strong demand for its products, and to rebuild inventory levels to improve customer service. The increase will occur across the supply network. Capital investments are expected to be between $150 million and $170 million in 2011. The Company will also continue to search for alternative tire sources that are a good fit for its long term strategic direction while providing necessary short term economic benefits.
Raw material costs are forecasted to remain at elevated levels in the future, but persistent volatility can make it difficult to accurately predict these movements in raw material prices. The Companys raw material index is likely to be sequentially higher between 10 percent and 15 percent during the second quarter from the first quarter of 2011. The increases in the raw material index are expected to decelerate beginning in the third quarter of 2011. The industry recently has shown an ability to demonstrate pricing discipline, but these changes in sales prices typically lag the changes in raw material costs, and there is no guarantee the ability to maintain pricing discipline will continue.
The Company expects its effective tax rate for 2011 will most likely be between 20 percent and30 percent.
The Companys focus is on efforts that will continue to better position the Company to improve shareholder returns. The Company remains optimistic about opportunities to further improve results as it successfully implements tactics that will profitably grow the top line, improve its global cost structure and improve organizational capabilities.
Liquidity and Capital Resources
Generation and uses of cash Net cash used in operating activities of continuing operations was $42 million during the first three months of 2011 compared to $29 million in the first three months of 2010. Accounts receivable balances have increased as a result of strong sales while the notes receivable balance has decreased as the Company has redeemed the notes to satisfy cash needs in the PRC. Inventory balances continue to increase as a result of higher raw material costs. The increase in accrued liabilities is the result of increased balances for taxes and products liability. The increase in current portion of products liability is offset by a decrease in the long-term portion which is a component of Other items. The Companys pension contributions are also included as part of Other items.
Net cash used in investing activities during the first quarters of 2010 and 2011 reflect capital expenditures of $15 million and $36 million, respectively. During the first quarter of 2011, the Company invested $17 million in COOCSA, increasing its ownership percentage to approximately 58 percent, and because of the increase in voting rights, now consolidates the results of those operations.
During the first quarters of 2010 and 2011, the Company repaid $25 million and $21 million of debt, respectively. In 2011, the Company issued $8 million of long-term notes in the PRC. In 2010, the Companys Cooper Kenda Tire joint venture received $5 million of capital contributions from its joint venture partner. In 2011, the Company paid $117 million to purchase the remaining 50 percent ownership interest in this joint venture. In 2010, the Companys Cooper Kunshan Tire joint venture received $5 million of capital contributions from its joint venture partner. Also in the first quarter of 2010, the Company paid $18 million to purchase an additional 14 percent interest in its Cooper Chengshan joint venture increasing its ownership share to 65 percent.
Dividends paid on the Companys common shares in the first quarter of 2010 were $6 million and in the first quarter of 2011 were $7 million.
Available credit facilities Domestically, the Company has a revolving credit facility with a consortium of six banks that provides up to $200 million based on available collateral and expires November 9, 2012. The Company also has an accounts receivable securitization facility with a $125 million limit with an August 2011 maturity. These credit facilities remain undrawn, other than to secure letters of credit, and have no significant financial covenants until available credit is less than specified amounts.
The Companys affiliated operations in Asia have annual renewable unsecured credit lines that provide up to $350 million of borrowings and do not contain financial covenants.
Available cash and contractual commitments At March 31, 2011, the Company had cash and cash equivalents of $188 million. The Companys additional borrowing capacity based on eligible collateral through use of its credit facility with its bank group and its accounts receivable securitization facility at March 31, 2011 was $260 million. The additional borrowing capacity on the Asian credit lines totaled $187 million.
The Company expects capital expenditures for 2011 to be in the $150 to $170 million range of which approximately $40 million will be in consolidated entities where the Companys ownership is between 50 and 100 percent.
The following table summarizes long-term debt at March 31, 2011:
The Company is a defendant in various products liability claims brought in numerous jurisdictions in which individuals seek damages resulting from automobile accidents allegedly caused by defective tires manufactured by the Company. Each of the products liability claims faced by the Company generally involve different types of tires, models and lines, different circumstances surrounding the accident such as different applications, vehicles, speeds, road conditions, weather conditions, driver error, tire repair and maintenance practices, service life conditions, as well as different jurisdictions and different injuries. In addition, in many of the Companys products liability lawsuits the plaintiff alleges that his or her harm was caused by one or more co-defendants who acted independently of the Company. Accordingly, both the claims asserted and the resolutions of those claims have an enormous amount of variability. The aggregate amount of damages asserted at any point in time is not determinable since often times when claims are filed, the plaintiffs do not specify the amount of damages. Even when there is an amount alleged, at times the amount is wildly inflated and has no rational basis.
Pursuant to applicable accounting rules, the Company accrues the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another. The Company uses a range of settlements because an average settlement cost would not be meaningful since the products liability claims faced by the Company are unique and widely variable. The cases involve different types of tires, models and lines, different circumstances surrounding the accident such as different applications, vehicles, speeds, road conditions, weather conditions, driver error, tire repair and maintenance practices, service life conditions, as well as different jurisdictions and different injuries. In addition, in many of the Companys products liability lawsuits the plaintiff alleges that his or her harm was caused by one or more co-defendants who acted independently of the Company. Accordingly, the claims asserted and the resolutions of those claims have an enormous amount of variability. The costs have ranged from zero dollars to $33 million in one case with no average that is meaningful. No specific accrual is made for individual unasserted claims or for premature claims, asserted claims where the minimum information needed to evaluate the probability of a liability is not yet known. However, an accrual for such claims based, in part, on managements expectations for future litigation activity and the settled claims history is maintained. Because of the speculative nature of litigation in the United States, the Company does not believe a meaningful aggregate range of potential loss for asserted and unasserted claims can be determined. The Companys experience has demonstrated that its estimates have been reasonably accurate and, on average, cases are settled at amounts close to the reserves established. However, it is possible an individual claim from time to time may result in an aberration from the norm and could have a material impact.
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 Companys current views and perceptions of future events, and there can be no assurance that such statements will prove to be true. It is possible that actual results may differ materially from those projections or expectations due to a variety of factors, including but not limited to:
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 in the Companys other periodic filings with the U. S. Securities and Exchange Commission (SEC).
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 Rules 13a-15(e) of the Securities and Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (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 March 31, 2011 (Evaluation Date)). Based on its initial evaluation, the Companys CEO and CFO concluded that its disclosure controls and procedures were effective as of the Evaluation Date.
There were no changes in the Companys internal control over financial reporting that occurred during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1A. RISK FACTORS
Some of the more significant risk factors related to the Company and its subsidiaries follow:
The Company is facing heightened risks due to the current business environment.
Current global economic conditions may affect demand for the Companys products, create volatility in raw material costs and affect the availability and cost of credit. These conditions also affect the Companys customers and suppliers as well as the ultimate consumer.
A deterioration in the global macroeconomic environment or in specific regions could impact the Company and, depending upon the severity and duration of these factors, the Companys profitability and liquidity position could be negatively impacted.
This may also be the result of increased price competition and product discounts, resulting in lower margins in the business.
Pricing volatility for raw materials and an inadequate supply of key raw materials could result in increased costs and may affect the Companys profitability.
The pricing volatility for natural rubber, petroleum-based materials and other raw materials contributes to the difficulty in managing the costs of raw materials. Costs for certain raw materials used in the Companys operations, including natural rubber, chemicals, carbon black, steel reinforcements and synthetic rubber remain volatile. Increasing costs for raw material supplies will increase the Companys production costs and affect its margins if the Company is unable to pass the higher production costs on to its customers in the form of price increases. Further, if the Company is unable to obtain adequate supplies of raw materials in a timely manner for any reason, its operations could be interrupted.
If the price of natural gas or other energy sources increases, the Companys operating expenses could increase significantly.
The Companys manufacturing facilities rely principally on natural gas, as well as electrical power and other energy sources. High demand and limited availability of natural gas and other energy sources can result in significant increases in energy costs increasing the Companys operating expenses and transportation costs. Higher energy costs would increase the Companys production costs and adversely affect its margins and results of operations. If the Company is unable to obtain adequate sources of energy, its operations could be interrupted.
Further, if the price of gasoline increases significantly for consumers, it can affect driving and purchasing habits and impact demand for tires.
The Companys industry is highly competitive, and it may not be able to compete effectively with low-cost producers and larger competitors.
The replacement tire industry is a highly competitive, global industry. Some of the Companys competitors are large companies with relatively greater financial resources. Most of the Companys competitors have operations in lower-cost countries. Intense competitive activity in the replacement tire industry has caused, and will continue to cause, pressures on the Companys business. The Companys ability to compete successfully will depend in part on its ability to balance capacity with demand, leverage global purchasing of raw materials, make required investments to improve productivity, eliminate redundancies and increase production at low-cost, high-quality supply sources. If the Company is unable to offset continued pressures with improved operating efficiencies, its sales, margins, operating results and market share would decline and the impact could become material on the Companys earnings.
The Company may be unable to recover new product and process development and testing costs, which could increase the cost of operating its business.
The Companys business strategy emphasizes the development of new equipment and new products and using new technology to improve quality, performance and operating efficiency. Developing new products and technologies requires significant investment and capital expenditures, is technologically challenging and requires extensive testing and accurate anticipation of technological and market trends. If the Company fails to develop new products that are appealing to its customers, or fails to develop products on time and within budgeted amounts, the Company may be unable to recover its product development and testing costs. If the Company cannot successfully use new production or equipment methodologies it invests in, it may also not be able to recover those costs.
The Company is implementing an Enterprise Resource Planning (ERP) system that will require significant amounts of capital and human resources to deploy. If for any reason this implementation is not successful, the Company could be required to expense rather than capitalize related amounts. Throughout implementation of the system there are also risks created to the Companys ability to successfully and efficiently operate.
The Company conducts its manufacturing, sales and distribution operations on a worldwide basis and is subject to risks associated with doing business outside the U.S.
The Company has affiliate, subsidiary and joint venture operations worldwide, including in the U.S., the U.K., Europe, Mexico and the PRC. The Company has two manufacturing entities, the Cooper Chengshan joint venture and Cooper Kunshan, in the PRC and has continued to expand operations in that country. The Company has also recently increased its investment in COOCSA, a tire manufacturing entity in Mexico. There are a number of risks in doing business abroad, including political and economic uncertainty, social unrest, shortages of trained labor and the uncertainties associated with entering into joint ventures or similar arrangements in foreign countries. These risks may impact the Companys ability to expand its operations in the PRC and elsewhere and otherwise achieve its objectives relating to its foreign operations including utilizing these locations as suppliers to other markets. In addition, compliance with multiple and potentially conflicting foreign laws and regulations, import and export limitations and exchange controls is burdensome and expensive. The Companys foreign operations also subject it to the risks of international terrorism and hostilities and to foreign currency risks, including exchange rate fluctuations and limits on the repatriation of funds.
The Companys results could be impacted by tariffs imposed by the U.S. or other governments on imported tires.
The Companys ability to competitively source tires can be significantly impacted by changes in tariffs imposed by various governments. Other effects, including impacts on the price of tires, responsive actions from other governments and the opportunity for other low cost competitors to establish a presence in markets where the Company participates could also have significant impacts on the Companys results.
The Companys expenditures for pension and other postretirement obligations could be materially higher than it has predicted if its underlying assumptions prove to be incorrect.
The Company provides defined benefit and hybrid pension plan coverage to union and non-union U.S. employees and a contributory defined benefit plan in the U.K. The Companys pension expense and its required contributions to its pension plans are directly affected by the value of plan assets, the projected and actual rates of return on plan assets and the actuarial assumptions the Company uses to measure its defined benefit pension plan obligations, including the discount rate at which future projected and accumulated pension obligations are discounted to a present value and the inflation rate. The Company could experience increased pension expense due to a combination of factors, including the decreased investment performance of its pension plan assets, decreases in the discount rate and changes in its assumptions relating to the expected return on plan assets. The Company could also experience increased other postretirement expense due to decreases in the discount rate, increases in the health care trend rate and changes in the health care environment.
In the event of declines in the market value of the Companys pension assets or lower discount rates to measure the present value of pension and other postretirement benefit obligations, the Company could experience changes to its Consolidated Balance Sheet.
The Company is facing risks relating to enactment of healthcare legislation.
The Company is facing risks emanating from the enactment of legislation by the U.S. government including the Patient Protection and Affordable Care Act and the related Healthcare and Education Reconciliation Act which are collectively referred to as healthcare legislation. This major legislation is being enacted over a period of several years and the ultimate cost and the potentially adverse impact to the Company and its employees cannot be quantified at this time.
Compliance with regulatory initiatives could increase the cost of operating the Companys business.
The Company is subject to federal, state, local and foreign laws and regulations. Compliance with those laws now in effect, or that may be enacted, could require significant capital expenditures, increase the Companys production costs and affect its earnings and results of operations.
Clean oil directive number 2005/69/EC in the European Union (EU) was effective January 1, 2010, and requires all tires manufactured after this date and sold in the EU to use non-aromatic oils. The Company is in compliance with this directive. Additional countries may legislate similar clean oil requirements which could increase the cost of manufacturing the Companys products.
In addition, while the Company believes that its tires are free from design and manufacturing defects, it is possible that a recall of the Companys tires could occur in the future. A recall could harm the Companys reputation, operating results and financial position.
The Company is also subject to legislation governing occupational safety and health both in the U.S. and other countries. The related legislation can change over time making it more expensive for the Company to produce its products. The Company could also, despite its best efforts to comply with these laws, be found liable and be subject to additional costs because of this legislation.
Any interruption in the Companys skilled workforce could impair its operations and harm its earnings and results of operations.
The Companys operations depend on maintaining a skilled workforce and any interruption of its workforce due to shortages of skilled technical, production and professional workers could interrupt the Companys operations and affect its operating results. Further, a significant number of the Companys U.S. and U.K. employees are currently represented by unions. The labor agreement at the Findlay, Ohio operation expires October 2011 and the labor agreement at the Texarkana, Arkansas operations expires January 2012. The labor agreement in Melksham, England expires March 2012. Although the Company believes that its relations with its employees are generally good, the Company cannot provide assurance that it will be able to successfully maintain its relations with its employees. If the Company fails to extend or renegotiate its collective bargaining agreements with the labor unions on satisfactory terms, or if its unionized employees were to engage in a strike or other work disruptions, the Companys business and operating results could suffer.
If the Company is unable to attract and retain key personnel, its business could be materially adversely affected.
The Companys business depends on the continued service of key members of its management. The loss of the services of a significant number of members of its management team could have a material adverse effect on its business. The Companys future success will also depend on its ability to attract, retain and develop highly skilled personnel, such as engineering, marketing and senior management professionals. Competition for these employees is intense and the Company could experience difficulty from time to time in hiring and retaining the personnel necessary to support its business. If the Company does not succeed in retaining its current employees and attracting new high quality employees, its business could be materially adversely affected.
The Company has a risk of exposure to products liability claims which, if successful, could have a negative impact on its financial position, cash flows and results of operations.
The Companys operations expose it to potential liability for personal injury or death as an alleged result of the failure of or conditions in the products that it designs and manufactures. Specifically, the Company is a party to a number of products liability cases in which individuals involved in motor vehicle accidents seek damages resulting from allegedly defective tires that it manufactured. Products liability claims and lawsuits, including possible class action, may result in material losses in the future and cause the Company to incur significant litigation defense costs. Those claims could have a negative effect on the Companys financial position, cash flows and results of operations.
The Company is largely self insured against these claims.
The Company has a risk due to volatility of the capital and financial markets.
The Company periodically requires access to the capital and financial markets as a significant source of liquidity for maturing debt payments or working capital needs that it cannot satisfy by cash on hand or operating cash flows. Substantial volatility in world capital markets and the banking industry may make it difficult for the Company to access credit markets and to obtain financing or refinancing, as the case may be, on satisfactory terms or at all. In addition, various additional factors, including a deterioration of the Companys credit ratings or its business or financial condition, could further impair its access to the capital markets. See also related comments under There are risks associated with the Companys global strategy of using joint ventures and partially owned subsidiaries.
Additionally, any inability to access the capital markets, including the ability to refinance existing debt when due, could require the Company to defer critical capital expenditures, reduce or not pay dividends, reduce spending in areas of strategic importance, sell important assets or, in extreme cases, seek protection from creditors.
If assumptions used in developing the Companys strategic plan are inaccurate or the Company is unable to execute its strategic plan effectively, its profitability and financial position could be negatively impacted.
In February 2008, the Company announced its strategic plan which contains three imperatives:
Build a sustainable, competitive cost position,
Drive profitable top line growth, and
Build bold organizational capabilities and enablers to support strategic goals.
If the assumptions used in developing the strategic plan vary significantly from actual conditions, the Companys sales, margins and profitability could be harmed. If the Company is unsuccessful in implementing the tactics necessary to execute its strategic plan it can also be negatively impacted.
The Company may not be able to protect its intellectual property rights adequately.
The Companys success depends in part upon its ability to use and protect its proprietary technology and other intellectual property, which generally covers various aspects in the design and manufacture of its products and processes. The Company owns and uses tradenames and trademarks worldwide. The Company relies upon a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements and patent, copyright and trademark laws to protect its intellectual property rights. The steps the Company takes in this regard may not be adequate to prevent or deter challenges, reverse engineering or infringement or other violations of its intellectual property, and the Company may not be able to detect unauthorized use or take appropriate and timely steps to enforce its intellectual property rights. In addition, the laws of some countries may not protect and enforce the Companys intellectual property rights to the same extent as the laws of the U.S.
The Company may not be successful in executing and integrating acquisitions into its operations, which could harm its results of operations and financial condition.
The Company routinely evaluates potential acquisitions and may pursue acquisition opportunities, some of which could be material to its business. The Company cannot provide assurance whether it will be successful in pursuing any acquisition opportunities or what the consequences of any acquisition would be. Additionally, in any future acquisitions, the Company may encounter various risks, including:
Some or all of those risks could impair the Companys results of operations and impact its financial condition. The Company may finance any future acquisitions from internally generated funds, bank borrowings, public offerings or private placements of equity or debt securities, or a combination of the foregoing. Future acquisitions may involve the expenditure of significant funds and management time. Future acquisitions may also require the Company to increase its borrowings under its bank credit facilities or other debt instruments, or to seek new sources of liquidity. Increased borrowings would correspondingly increase the Companys financial leverage, and could result in lower credit ratings and increased future borrowing costs. These risks could also reduce the Companys flexibility to respond to changes in its industry or in general economic conditions.
The Company is required to comply with environmental laws and regulations that could cause it to incur significant costs.
The Companys manufacturing facilities are subject to numerous laws and regulations designed to protect the environment, and the Company expects that additional requirements with respect to environmental matters will be imposed on it in the future. Material future expenditures may be necessary if compliance standards change or material unknown conditions that require remediation are discovered. If the Company fails to comply with present and future environmental laws and regulations, it could be subject to future liabilities or the suspension of production, which could harm its business or results of operations. Environmental laws could also restrict the Companys ability to expand its facilities or could require it to acquire costly equipment or to incur other significant expenses in connection with its manufacturing processes.
The realizability of deferred tax assets may affect the Companys profitability and cash flows.
The Company maintains a valuation allowance pursuant to ASC 740, Accounting for Income Taxes, on its net U.S. deferred tax asset position. The valuation allowance will be maintained as long as it is more likely than not that some portion of the deferred tax asset may not be realized. Deferred tax assets and liabilities are determined separately for each taxing jurisdiction in which the Company conducts its operations or otherwise generates taxable income or losses. In the U.S., the Company has recorded significant deferred tax assets, the largest of which relate to products liability, pension and other postretirement benefit obligations. These deferred tax assets are partially offset by deferred tax liabilities, the most significant of which relates to accelerated depreciation. Based upon this assessment, the Company maintains a valuation allowance for the portion of U.S. deferred tax assets exceeding its U.S. deferred tax liabilities. In addition, the Company has recorded valuation allowances for deferred tax assets associated with losses in certain foreign jurisdictions.
The impact of proposed new accounting standards may have a negative impact on the Companys financial statements.
The Financial Accounting Standards Board is considering several projects which may result in the modification of accounting standards affecting the Company, including standards relating to revenue recognition, financial instruments, leasing, and others. Any such changes could have a negative impact on the Companys financial statements.
There are risks associated with the Companys global strategy of using joint ventures and partially owned subsidiaries.
The Companys strategy includes expanding its global footprint through the use of joint ventures and other partially owned subsidiaries. These entities operate in countries outside of the U.S., are generally less well capitalized than the Company and bear risks similar to the risks of the Company. However, there are specific additional risks applicable to these subsidiaries and these risks, in turn, add potential risks to the Company. Such risks include: greater risk of sudden changes in laws and regulations which could impact their competitiveness, risk of joint venture partners or other investors failing to meet their obligations under related shareholders agreements and risk of being denied access to the capital markets which could lead to resource demands on the Company in order to maintain or advance its strategy. The Companys outstanding notes and primary credit facility contain cross default provisions in the event of certain defaults by the Company under other agreements with third parties, including certain of the agreements with the Companys joint venture partners or other investors. In the event joint venture partners or other investors do not satisfy their funding or other obligations and the Company does not or cannot satisfy such obligations, the Company could be in default under its outstanding notes and primary credit facility and, accordingly, be required to repay or refinance such obligations. There is no assurance that the Company would be able to repay such obligations or that the current noteholders or creditors would agree to refinance or to modify the existing arrangements on acceptable terms or at all. For further discussion of access to the capital markets, see also related comments under The Company has a risk due to volatility of the capital and financial markets.
The affiliated operations in the PRC have been financed in part using multiple loans from several lenders to finance facility construction, expansions and working capital needs. These loans are generally for terms of three years or less. Therefore, debt maturities occur frequently and access to the capital markets is crucial to their ability to maintain sufficient liquidity to support their operations.
In connection with its acquisition of a controlling interest in Cooper Chengshan, beginning January 1, 2009, and continuing through December 31, 2011, the noncontrolling shareholders have the right to sell and, if exercised, the Company has the obligation to purchase, the remaining 49 percent at a minimum price of $63 million. In 2009, the Company received notification from one of its noncontrolling shareholders of its intention to exercise its put option and after receiving governmental approvals, the Company purchased the 14 percent share for $18 million on March 31, 2010. The remaining shares may be sold to the Company under the put option through December 31, 2011.
Item 6. EXHIBITS
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.