þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
DELAWARE | 34-4297750 | |
(State or other jurisdiction of | (I.R.S. employer | |
incorporation or organization) | identification no.) |
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
December 31, | June 30, | |||||||
2007 | 2008 | |||||||
(Note 1) | (Unaudited) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 345,947 | $ | 252,316 | ||||
Short-term investments |
49,765 | | ||||||
Accounts receivable, less allowances
of $8,631 in 2007 and $9,670 in 2008 |
354,939 | 405,899 | ||||||
Inventories at lower of cost or market: |
||||||||
Finished goods |
185,658 | 269,854 | ||||||
Work in process |
30,730 | 44,437 | ||||||
Raw materials and supplies |
88,172 | 129,383 | ||||||
304,560 | 443,674 | |||||||
Other current assets |
134,713 | 144,404 | ||||||
Total current assets |
1,189,924 | 1,246,293 | ||||||
Property, plant and equipment: |
||||||||
Land and land improvements |
37,299 | 37,358 | ||||||
Buildings |
340,512 | 359,042 | ||||||
Machinery and equipment |
1,646,590 | 1,692,440 | ||||||
Molds, cores and rings |
273,032 | 281,083 | ||||||
2,297,433 | 2,369,923 | |||||||
Less accumulated depreciation and amortization |
1,305,657 | 1,362,769 | ||||||
Net property, plant and equipment |
991,776 | 1,007,154 | ||||||
Goodwill |
24,439 | 24,439 | ||||||
Intangibles, net of accumulated amortization of $22,893
in 2007 and $24,862 in 2008 |
28,014 | 26,045 | ||||||
Restricted cash |
2,791 | 2,730 | ||||||
Other assets |
59,924 | 60,664 | ||||||
$ | 2,296,868 | $ | 2,367,325 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Notes payable |
$ | 86,384 | $ | 154,816 | ||||
Payable to noncontrolling owner of subsidiary |
10,364 | 1,022 | ||||||
Accounts payable |
291,257 | 329,983 | ||||||
Accrued liabilities |
141,748 | 144,471 | ||||||
Income taxes |
1,450 | 4,060 | ||||||
Liabilities related to the sale of automotive operations |
1,332 | 1,317 | ||||||
Current portion of long term debt |
| 39,420 | ||||||
Total current liabilities |
532,535 | 675,089 | ||||||
Long-term debt |
464,608 | 419,060 | ||||||
Postretirement benefits other than pensions |
244,491 | 248,919 | ||||||
Other long-term liabilities |
163,723 | 151,196 | ||||||
Long-term liabilities related to the sale of automotive operations |
10,185 | 9,462 | ||||||
Noncontrolling shareholders interests in consolidated subsidiaries |
89,035 | 95,859 | ||||||
Stockholders equity: |
||||||||
Preferred stock, $1 par value; 5,000,000 shares
authorized; none issued |
| | ||||||
Common stock, $1 par value; 300,000,000 shares
authorized; 86,322,514 shares issued in 2007 and in 2008 |
86,323 | 86,323 | ||||||
Capital in excess of par value |
40,676 | 42,727 | ||||||
Retained earnings |
1,350,527 | 1,317,602 | ||||||
Cumulative other comprehensive loss |
(205,677 | ) | (186,411 | ) | ||||
1,271,849 | 1,260,241 | |||||||
Less: common shares in treasury at cost
(26,661,295 in 2007 and 27,424,709 in 2008) |
(479,558 | ) | (492,501 | ) | ||||
Total stockholders equity |
792,291 | 767,740 | ||||||
$ | 2,296,868 | $ | 2,367,325 | |||||
2
2007 | 2008 | |||||||
Net sales |
$ | 730,135 | $ | 772,907 | ||||
Cost of products sold |
654,773 | 743,078 | ||||||
Gross profit |
75,362 | 29,829 | ||||||
Selling, general and administrative |
44,168 | 45,246 | ||||||
Restructuring |
1,692 | | ||||||
Operating profit (loss) |
29,502 | (15,417 | ) | |||||
Interest expense |
(12,157 | ) | (12,742 | ) | ||||
Interest income |
4,259 | 3,669 | ||||||
Other net |
1,647 | 2,201 | ||||||
Income (loss) from continuing operations before income taxes
and noncontrolling shareholders interests |
23,251 | (22,289 | ) | |||||
Income tax benefit (expense) |
(4,708 | ) | 677 | |||||
Income (loss) from continuing operations before
noncontrolling shareholders interests |
18,543 | (21,612 | ) | |||||
Noncontrolling shareholders interests, net of income taxes |
(2,928 | ) | (488 | ) | ||||
Income (loss) from continuing operations |
15,615 | (22,100 | ) | |||||
Income (loss) from discontinued operations,
net of income taxes |
1,998 | (131 | ) | |||||
Net income (loss) |
$ | 17,613 | $ | (22,231 | ) | |||
Basic earnings (loss) per share: |
||||||||
Income (loss) from continuing operations |
$ | 0.25 | $ | (0.38 | ) | |||
Income from discontinued operations |
0.03 | | ||||||
Net income (loss) |
$ | 0.28 | $ | (0.38 | ) | |||
Diluted earnings (loss) per share: |
||||||||
Income (loss) from continuing operations |
$ | 0.25 | $ | (0.38 | ) | |||
Income from discontinued operations |
0.03 | | ||||||
Net income (loss) |
$ | 0.28 | $ | (0.38 | ) | |||
Weighted average number of shares outstanding (000s): |
||||||||
Basic |
61,980 | 58,897 | ||||||
Diluted |
62,913 | 58,897 | ||||||
Dividends per share |
$ | 0.105 | $ | 0.105 | ||||
3
2007 | 2008 | |||||||
Net sales |
$ | 1,399,735 | $ | 1,452,228 | ||||
Cost of products sold |
1,253,534 | 1,366,161 | ||||||
Gross profit |
146,201 | 86,067 | ||||||
Selling, general and administrative |
84,831 | 91,930 | ||||||
Restructuring |
2,739 | | ||||||
Operating profit (loss) |
58,631 | (5,863 | ) | |||||
Interest expense |
(24,676 | ) | (24,220 | ) | ||||
Interest income |
7,788 | 7,392 | ||||||
Debt extinguishment expense |
| (583 | ) | |||||
Dividend from unconsolidated subsidiary |
2,007 | 1,943 | ||||||
Other net |
6,253 | 3,518 | ||||||
Income (loss) from continuing operations before income taxes
and noncontrolling shareholders interests |
50,003 | (17,813 | ) | |||||
Income tax benefit (expense) |
(11,556 | ) | (371 | ) | ||||
Income (loss) from continuing operations before
noncontrolling shareholders interests |
38,447 | (18,184 | ) | |||||
Noncontrolling shareholders interests, net of income taxes |
(3,327 | ) | (2,574 | ) | ||||
Income (loss) from continuing operations |
35,120 | (20,758 | ) | |||||
Income from discontinued operations,
net of income taxes |
3,244 | 213 | ||||||
Net income (loss) |
$ | 38,364 | $ | (20,545 | ) | |||
Basic earnings (loss) per share: |
||||||||
Income (loss) from continuing operations |
$ | 0.57 | $ | (0.35 | ) | |||
Income from discontinued operations |
0.05 | | ||||||
Net income (loss) |
$ | 0.62 | $ | (0.35 | ) | |||
Diluted earnings (loss) per share: |
||||||||
Income (loss) from continuing operations |
$ | 0.56 | $ | (0.35 | ) | |||
Income from discontinued operations |
0.05 | | ||||||
Net income (loss) |
$ | 0.61 | $ | (0.35 | ) | |||
Weighted average number of shares outstanding (000s): |
||||||||
Basic |
61,729 | 59,191 | ||||||
Diluted |
62,445 | 59,191 | ||||||
Dividends per share |
$ | 0.210 | $ | 0.210 | ||||
4
2007 | 2008 | |||||||
Operating activities: |
||||||||
Net income (loss) |
$ | 38,364 | $ | (20,545 | ) | |||
Adjustments to reconcile net income (loss) to
net cash provided by (used in) continuing operations: |
||||||||
Income from discontinued operations, net of income taxes |
(3,244 | ) | (213 | ) | ||||
Depreciation |
64,534 | 69,155 | ||||||
Amortization |
3,271 | 2,508 | ||||||
Deferred income taxes |
1,739 | 990 | ||||||
Stock based compensation |
1,738 | 2,645 | ||||||
Amortization of unrecognized postretirement benefits |
9,222 | 6,538 | ||||||
Loss (gain) on sale of assets |
(4,935 | ) | 564 | |||||
Debt extinguishment costs |
| 583 | ||||||
Restructuring asset write-down |
197 | | ||||||
Noncontrolling shareholders income |
3,327 | 2,574 | ||||||
Changes in operating assets and liabilities of
continuing operations: |
||||||||
Accounts receivable |
(15,220 | ) | (45,444 | ) | ||||
Inventories |
6,954 | (130,623 | ) | |||||
Other current assets |
(755 | ) | (14,314 | ) | ||||
Accounts payable |
10,452 | 26,925 | ||||||
Accrued liabilities |
36,777 | (501 | ) | |||||
Other items |
5,494 | (941 | ) | |||||
Net cash provided by (used in) continuing operations |
157,915 | (100,099 | ) | |||||
Net cash used in discontinued operations |
(164 | ) | (525 | ) | ||||
Net cash provided by (used in) operating activities |
157,751 | (100,624 | ) | |||||
Investing activities: |
||||||||
Property, plant and equipment |
(77,582 | ) | (65,512 | ) | ||||
Proceeds from sale of (investments in)
available-for-sale debt securities |
(50,314 | ) | 49,765 | |||||
Acquisition of business, net of cash acquired |
| (5,956 | ) | |||||
Proceeds from the sale of assets |
9,118 | 317 | ||||||
Net cash used in investing activities |
(118,778 | ) | (21,386 | ) | ||||
Net cash used in discontinued operations |
(1,167 | ) | | |||||
Net cash used in investing activities |
(119,945 | ) | (21,386 | ) | ||||
Financing activities: |
||||||||
Issuance of debt |
8,624 | 67,725 | ||||||
Payments on long-term debt |
| (14,000 | ) | |||||
Premium paid on debt repurchases |
| (543 | ) | |||||
Contributions of joint venture partner |
8,500 | 4,250 | ||||||
Purchase of treasury shares |
| (13,853 | ) | |||||
Payment of dividends |
(13,000 | ) | (12,402 | ) | ||||
Issuance of common shares and excess tax benefits on options |
19,474 | 297 | ||||||
Net cash provided by financing activities |
23,598 | 31,474 | ||||||
Effects of exchange rate changes on cash of
continuing operations |
(1,920 | ) | (3,095 | ) | ||||
Changes in cash and cash equivalents |
59,484 | (93,631 | ) | |||||
Cash and cash equivalents at beginning of year |
221,655 | 345,947 | ||||||
Cash and cash equivalents at end of period |
$ | 281,139 | $ | 252,316 | ||||
Cash and cash equivalents at end of period continuing operations |
$ | 281,121 | $ | 252,316 | ||||
Cash and cash equivalents at end of period discontinued operations |
18 | | ||||||
Cash and cash equivalents at end of period |
$ | 281,139 | $ | 252,316 | ||||
5
1. | The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. There is a year-round demand for the Companys passenger and truck replacement tires, but passenger replacement tires are generally strongest during the third and fourth quarters of the year. Winter tires are sold principally during the months of August through November. Operating results for the three-month and six-month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. | |
The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. | ||
For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007. | ||
Certain amounts for the prior year have been reclassified to conform to 2008 presentations. | ||
2. | On July 31, 2007, the Company announced it had signed a definitive agreement to sell Oliver Rubber Company, a subsidiary which produces tread rubber and retreading equipment, to Michelin North America, Inc. The sale was completed on October 5, 2007. The sale does not meet the thresholds for the disposition of a significant subsidiary, and, therefore, no pro forma financial information is presented. | |
The operations of Oliver Rubber Company, previously included in the results of the North American Tire Operations segment, are considered to be discontinued operations as defined under Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and require specific accounting and reporting for the quarter which differs from the approach used to report the Companys results in prior quarters. The standard also requires restatement of comparable prior periods to conform to the required presentation. | ||
The Companys consolidated financial statements reflect the accounting and disclosure requirements of SFAS No. 144, which mandate the segregation of operating results for the current year and comparable prior year periods and the balance sheets related to the discontinued operations from those related to ongoing operations. Accordingly, the consolidated statements of income for the three-month and six-month periods ended June 30, 2007 and 2008 reflect this segregation as income from continuing operations and income from discontinued operations. | ||
In addition to the segregation of operating financial results, assets and liabilities, Emerging Issues Task Force (EITF) No. 87-24, Allocation of Interest to Discontinued Operations, mandates the reallocation to continuing operations of general corporate overhead previously allocated to discontinued operations. Corporate overhead that previously would have been allocated to these operations of $219 and $416 for the three-month and six-month periods ended June 30, 2007 is charged against continuing operations in the Companys consolidated statements of income. | ||
Operating results for the Oliver Rubber Company are included in income (loss) from discontinued operations, net of income taxes on the Companys consolidated statements of operations. Sales for this operation were $20,506 and $39,991 for the three-month and six-month periods ended June 30, 2007, respectively. For the three-month and six-month periods ended June 30, 2007, respectively, this operation generated a pretax profit of $2,778 and $4,066 and net income of $1,936 and $2,807. |
6
3. | On January 1, 2008, the Company adopted the provisions of SFAS No. 157. | |
SFAS No. 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. The Company accounts for certain financial assets and liabilities at fair value under various accounting literature. | ||
In accordance with SFAS No. 157, 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 Consolidated Balance Sheet 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 managements own assumptions about the assumptions a market participant would use in pricing the asset or liability. | ||
The following table presents the Companys fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2008: |
Fair Value Measurements at June 30, 2008 Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active Markets | Other | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
June 30, | Assets | Inputs | Inputs | |||||||||||||
Description | 2008 | Level (1) | Level (2) | Level (3) | ||||||||||||
Liabilities: |
||||||||||||||||
Accrued liabilities foreign
currency (gain) loss
on derivative financial instruments |
$ | 8,702 | $ | 8,702 |
7
4. | The following table details information on the Companys operating segments. |
Three months ended June 30 | Six months ended June 30 | |||||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Revenues from external customers: |
||||||||||||||||
North American Tire |
$ | 533,181 | $ | 547,513 | $ | 1,048,270 | $ | 1,045,185 | ||||||||
International Tire |
234,495 | 282,966 | 417,456 | 514,746 | ||||||||||||
Eliminations |
(37,541 | ) | (57,572 | ) | (65,991 | ) | (107,703 | ) | ||||||||
Net sales |
$ | 730,135 | $ | 772,907 | $ | 1,399,735 | $ | 1,452,228 | ||||||||
Segment profit (loss): |
||||||||||||||||
North American Tire |
$ | 20,692 | $ | (21,906 | ) | $ | 47,489 | $ | (13,762 | ) | ||||||
International Tire |
11,772 | 5,944 | 17,886 | 12,853 | ||||||||||||
Eliminations |
413 | 987 | (411 | ) | (282 | ) | ||||||||||
Unallocated corporate charges |
(3,375 | ) | (442 | ) | (6,333 | ) | (4,672 | ) | ||||||||
Operating profit (loss) |
29,502 | (15,417 | ) | 58,631 | (5,863 | ) | ||||||||||
Interest expense |
(12,157 | ) | (12,742 | ) | (24,676 | ) | (24,220 | ) | ||||||||
Interest income |
4,259 | 3,669 | 7,788 | 7,392 | ||||||||||||
Debt extinguishment |
| | | (583 | ) | |||||||||||
Dividend from unconsolidated
subsidiary |
| | 2,007 | 1,943 | ||||||||||||
Other net |
1,647 | 2,201 | 6,253 | 3,518 | ||||||||||||
Income (loss) from continuing
operations
before income taxes and
noncontrolling
shareholders interests |
$ | 23,251 | $ | (22,289 | ) | $ | 50,003 | $ | (17,813 | ) | ||||||
5. | As of January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. The Company adopted SFAS No. 123 (R) using the modified prospective method of transition. | |
Prior to the adoption of SFAS No. 123 (R), the Company presented all benefits of its tax deductions resulting from the exercise of share-based compensation as operating cash flows in its Statement of Cash Flows. SFAS No. 123(R) requires the benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. For the three-month periods ended June 30, 2007 and 2008, the Company recognized $1,860 and $0 of excess tax benefits, respectively, as a financing cash inflow. For the six-month periods ended June 30, 2007 and 2008, the Company recognized $2,317 and $14 respectively, as a financing cash inflow. | ||
The Company did not award stock options in the second quarter of 2008. In the second quarter of 2007, the Company awarded eight thousand two hundred eighty stock options. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: |
8
2007 | ||||
Risk-free interest rate |
4.6 | % | ||
Dividend yield |
2.2 | % | ||
Expected volatility of the
Companys common stock |
0.360 | |||
Expected life in years |
8.0 |
The weighted-average fair value of options granted in May of 2007 was $7.28. The estimated fair value of options is amortized to expense over the options vesting period. | ||
In the second quarter of 2007, the Company recorded $88 of stock compensation expense associated with the 2006 and 2007 stock option awards and had recorded $139 of stock compensation expense associated with these awards for the six months ended June 30, 2007. | ||
In the second quarter of 2008, the Company recorded $87 of stock compensation expense associated with the 2006 and 2007 stock option awards and has recorded $178 of stock compensation expense associated with these awards for the six months ended June 30, 2008. | ||
With the adoption of SFAS No. 123(R), the Company has recognized compensation expense associated with restricted stock units granted in 2007 based on the earlier of the vesting date or the date when the employee becomes eligible to retire. For the three-month and six-month periods ended June 30, 2007, the Company recognized $426 and $1,030 respectively, in compensation expense associated with restricted stock units and stock awards. For the three-month and six-month periods ended June 30, 2008, the Company has recognized $471 and $1,086, respectively, in compensation expense associated with restricted stock units and stock awards. | ||
The following table provides details of the restricted stock unit activity for the six months ended June 30, 2008: |
Restricted stock units outstanding at January 1, 2008 |
401,681 | |||
Accrued dividend equivalents |
7,915 | |||
Restricted stock units settled |
(20,694 | ) | ||
Restricted stock units cancelled |
(152 | ) | ||
Restricted stock units outstanding at June 30, 2008 |
388,750 | |||
The Company recorded compensation expense associated with performance based units of $376 and $569 for the three-month and six-month periods ended June 30, 2007, respectively. The Company recorded compensation expense associated with performance based units of ($183) and $1,381 for the three-month and six-month periods ended June 30, 2008, respectively. Amounts accrued in the first quarter for 2008 performance based units were reversed during the second quarter. Executives participating in the Companys Long-Term Incentive Plan earn performance based units based on the Companys financial performance. As part of the 2007 2009 plan, the units earned in 2007 and 2008 will vest in February 2010. As part of the 2008 2010 plan, the units earned in 2008 will vest in February 2011. |
9
6. | The following table discloses the amount of net periodic benefit costs for the three-month and six-month periods ended June 30, 2007 and 2008 for the Companys defined benefit plans and other postretirement benefits relating to continuing operations: |
Pension Benefits | ||||||||||||||||
Three months ended June 30 | Six months ended June 30 | |||||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Components of net periodic
benefit cost: |
||||||||||||||||
Service cost |
$ | 5,488 | $ | 5,527 | $ | 10,963 | $ | 11,051 | ||||||||
Interest cost |
15,460 | 16,279 | 30,866 | 32,548 | ||||||||||||
Expected return on plan assets |
(19,288 | ) | (20,519 | ) | (38,517 | ) | (41,027 | ) | ||||||||
Amortization of prior service
cost |
178 | 126 | 355 | 252 | ||||||||||||
Recognized actuarial loss |
3,806 | 2,921 | 7,603 | 5,842 | ||||||||||||
Net periodic benefit cost |
$ | 5,644 | $ | 4,334 | $ | 11,270 | $ | 8,666 | ||||||||
Other Postretirement Benefits | ||||||||||||||||
Three months ended June 30 | Six months ended June 30 | |||||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Components of net periodic
benefit cost: |
||||||||||||||||
Service cost |
$ | 1,392 | $ | 1,243 | $ | 2,785 | $ | 2,487 | ||||||||
Interest cost |
3,918 | 3,873 | 7,837 | 7,746 | ||||||||||||
Amortization of prior service cost |
(77 | ) | (77 | ) | (154 | ) | (154 | ) | ||||||||
Recognized actuarial loss |
709 | 299 | 1,418 | 598 | ||||||||||||
Net periodic benefit cost |
$ | 5,942 | $ | 5,338 | $ | 11,886 | $ | 10,677 | ||||||||
7. | On an annual basis, disclosure of comprehensive income (loss) is incorporated into the Statement of Shareholders Equity. This statement is not presented on a quarterly basis. Comprehensive income (loss) includes net income and components of other comprehensive income (loss), such as foreign currency translation adjustments, unrealized gains or losses on certain marketable securities and derivative instruments and unrecognized postretirement benefit plans amounts. | |
The Companys comprehensive income (loss) is as follows: |
Three months ended June 30 | Six months ended June 30 | |||||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Income (loss) from continuing operations |
$ | 15,615 | $ | (22,100 | ) | $ | 35,120 | $ | (20,758 | ) | ||||||
Other comprehensive income (loss): |
||||||||||||||||
Currency translation adjustments |
4,078 | 4,237 | 5,430 | 15,173 | ||||||||||||
Unrealized net gains (losses) on
derivative
instruments and marketable securities |
(3,582 | ) | 3,351 | (4,013 | ) | (2,000 | ) | |||||||||
Unrecognized postretirement benefit
plans |
3,344 | 3,104 | 7,661 | 6,093 | ||||||||||||
Comprehensive income (loss) from
continuing operations |
$ | 19,455 | $ | (11,408 | ) | $ | 44,198 | $ | (1,492 | ) | ||||||
10
8. | During 2007, the Company recorded restructuring expenses associated with four initiatives. | |
In September of 2006, the North American Tire Operations segment announced its plans to reconfigure its tire manufacturing facility in Texarkana, Arkansas so that production levels could flex to meet tire demand. This initiative was completed during the third quarter of 2007. During the second quarter of 2007, the Company recorded restructuring expense of $1,521 associated with this initiative and had recorded $2,000 of restructuring expense through the first six months of 2007. | ||
In November of 2006, a restructuring of salaried support positions was announced. The Company recorded $21 of restructuring expenses associated with this initiative during the second quarter of 2007 and through the first six months of 2007, $471 had been recorded as restructuring expense associated with this initiative. | ||
In December of 2006, the North American Tire Operations segment initiated a plan to reduce the number of stock-keeping units manufactured in its facilities and to take tire molds out of service. The Company did not record any restructuring expenses associated with this initiative during the second quarter of 2007 and through the first six months of 2007, $80 had been recorded as restructuring expense associated with this initiative. | ||
In Cooper Europe, a restructuring program to reduce 15 positions in operations was announced late in the first quarter of 2007. Of the 15 positions identified, 11 were achieved through attrition and the Company recorded $150 in severance costs associated with the remaining four positions during the second quarter of 2007. A warehouse was closed in March of 2007 resulting in the elimination of one position at a severance cost of $38 which was recorded in the first quarter. | ||
9. | The Company provides for the estimated cost of product warranties at the time revenue is recognized based primarily on historical return rates, estimates of the eligible tire population, and the value of tires to be replaced. The following table summarizes the activity in the Companys product warranty liabilities for 2007 and 2008: |
2007 | 2008 | |||||||
Reserve at January 1 |
$ | 15,967 | $ | 16,510 | ||||
Additions |
7,779 | 10,764 | ||||||
Payments |
(7,712 | ) | (8,707 | ) | ||||
Reserve at June 30 |
$ | 16,034 | $ | 18,567 | ||||
The increase in both Additions and Payments can be attributed primarily to the Companys increased operations in China. | ||
10. | The Companys other current assets are: |
December 31, | June 30, | |||||||
2007 | 2008 | |||||||
Investment in Kumho Tire Co., Inc. |
$ | 112,170 | $ | 106,950 | ||||
Other |
22,543 | 37,454 | ||||||
$ | 134,713 | $ | 144,404 | |||||
The Company exercised its put option associated with its investment in Kumho Tire Company, Inc. in March of 2008. In August of 2008, the Company received cash proceeds of $106,950 plus interest from the initial due date of May 31, 2008. |
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11. | The Companys accrued liabilities due within one year are: |
December 31, | June 30, | |||||||
2007 | 2008 | |||||||
Payroll and withhholdings |
$ | 46,140 | $ | 26,124 | ||||
Products liability |
16,864 | 29,306 | ||||||
Other |
78,744 | 89,041 | ||||||
$ | 141,748 | $ | 144,471 | |||||
12. | 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. | |
The fact that the Company is a defendant in products liability lawsuits is not surprising given the current litigation climate which is largely confined to the United States. However, the fact that the Company is subject to claims does not indicate that there is a quality issue with the Companys tires. The Company sells approximately 35 to 40 million passenger, light truck, SUV, high performance, ultra high performance and radial medium truck tires per year in North America. The Company estimates that approximately 300 million Cooper-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 Companys and the tire industrys experience that the vast majority of tire failures relate to service-related conditions which are entirely out of the Companys control such as failure to maintain proper tire pressure, improper maintenance, road hazard and excessive speed. | ||
The Companys exposure for each claim occurring prior to April 1, 2003 is limited by the coverage provided by its excess liability insurance program. The program for that period includes a relatively low per claim retention and a policy year aggregate retention limit on claims arising from occurrences which took place during a particular policy year. Effective April 1, 2003, the Company established a new excess liability insurance program. The new program covers the Companys products liability claims occurring on or after April 1, 2003 and is occurrence-based insurance coverage which includes an increased per claim retention limit, increased policy limits and the establishment of a captive insurance company. | ||
The Company accrues costs for products liability at the time a loss is probable and the amount of loss can be estimated. The Company believes the probability of loss can be established and the amount of loss can be estimated only after certain minimum information is available, including verification that Company-produced |
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products were involved in the incident giving rise to the claim, the condition of the product purported to be involved in the claim, the nature of the incident giving rise to the claim and the extent of the purported injury or damages. In cases where such information is known, each products liability claim is evaluated based on its specific facts and circumstances. A judgment is then made to determine the requirement for establishment or revision of an accrual for any potential liability. The liability often cannot be determined with precision until the claim is resolved. |
Pursuant to applicable accounting rules, the Company accrues the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another. The Company uses a range of settlements because an average settlement cost would not be meaningful since the products liability claims faced by the Company are unique and widely variable. The cases involve different types of tires, models and lines, different circumstances surrounding the accident such as different applications, vehicles, speeds, road conditions, weather conditions, driver error, tire repair and maintenance practices, service life conditions, as well as different jurisdictions and different injuries. In addition, in many of the 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 $12 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. | ||
The Company determines its reserves using the number of incidents expected during a year. During the second quarter of 2008, the Company increased its products liability reserve by $9,238. The addition of another quarter of self-insured incidents accounted for $8,835 of this increase. The Company revised its estimates of future settlements for unasserted and premature claims, which increased the reserve by $804. Finally, amounts on existing reserves decreased by $401. | ||
During the first six months of 2008, the Company increased its products liability reserve by $34,363. The addition of another six months of self-insured incidents accounted for $17,510 of this increase. The Company revised its estimates of future settlements for unasserted and premature claims, which increased the reserve by $2,794. Finally, amounts on existing reserves increased by $14,059. | ||
The time frame for the payment of a products liability claim is too variable to be meaningful. From the time a claim is filed to its ultimate disposition depends on the unique nature of the case, how it is resolved claim dismissed, negotiated settlement, trial verdict and appeals process and is highly dependent on jurisdiction, specific facts, the plaintiffs attorney, the courts docket and other factors. Given that some claims may be resolved in weeks and others may take five years or more, it is impossible to predict with any reasonable reliability the time frame over which the accrued amounts may be paid. | ||
The Company paid $7,455 during the second quarter of 2008 to resolve cases and claims and has paid $12,357 through the first six months of 2008. The Companys products liability reserve balance at December 31, 2007 totaled $107,304 (current portion of $16,864) and the balance at June 30, 2008 totaled $129,310 (current portion of $29,306). | ||
The products liability expense reported by the Company includes amortization of insurance premium costs, adjustments to settlement reserves and legal costs incurred in defending claims against the Company offset by recoveries of legal fees. Legal costs are expensed as incurred and products liability insurance premiums are amortized over coverage periods. The Company is entitled to reimbursement, under certain insurance contracts in place for periods ending prior to April 1, 2003, of legal fees expensed in prior periods based on events occurring in those periods. The Company records the reimbursements under such policies in the period the conditions for reimbursement are met. |
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For the three-month periods ended June 30, 2007 and 2008, products liability expenses totaled $15,142 and $17,979, respectively, and include recoveries of legal fees of $1,185 and $0 in the periods ended June 30, 2007 and 2008, respectively. For the six-month periods ended June 30, 2007 and 2008, products liability expenses totaled $29,224 and $45,825, respectively, and include recoveries of legal fees of $3,151 and $4,168 in the periods ended June 30, 2007 and 2008, respectively. Policies applicable to claims occurring on April 1, 2003 and thereafter do not provide for recovery of legal fees. | ||
13. | For the quarter ended June 30, 2008, the Company recorded an income tax benefit for continuing operations of $677, which included tax expense relating to discrete items of $110. Discrete items related to changes to audit contingencies for interest and state taxes. | |
The effective tax rate for the quarter and six-month period ended June 30, 2008 for continuing operations is 3.5 percent and 1.4 percent, respectively, exclusive of discrete items. For comparable periods in 2007, the effective tax rate for continuing operations, exclusive of discrete items, was 19.8 percent and 24.3 percent, respectively. The change in the tax rate, exclusive of discrete items, relates primarily to the impact of an accounting rule which limits the recording of a tax benefit on a loss in an interim period, an increase in net U.S. deferred tax assets and the mix of earnings or loss by jurisdiction as compared to 2007. | ||
The Company continues to maintain a valuation allowance pursuant to SFAS No. 109, 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 assets will 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 relates 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 an $84,306 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 $865 for deferred tax assets associated with initial start-up losses in foreign jurisdictions. | ||
The Company and its subsidiaries are subject to income taxes in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and foreign tax examinations by tax authorities for years prior to 2000. | ||
During the first quarter of 2008, the Company became aware of a potential favorable settlement of the pending bilateral Advance Pricing Agreement negotiations between the United States and Canada relating to pre-disposition years of a discontinued operation (2000-2004). The Company is responsible for pre-disposition tax obligations and is entitled to refunds applicable to that period under the related sales agreement. At this time the Company believes the settlement could be significant but is unable to quantify the potential impact from this settlement with certainty until the final settlement agreement is completed and signed and complex adjustments are made to the affected years income tax returns in the United States and Canada. At such time as a more definitive estimate of the impact from the resolution can be made, the Company will record what is expected to be a favorable adjustment to discontinued operations. | ||
14. | On June 18, 2008, the Company announced an agreement to invest in a tire manufacturing facility in Guadalajara, Mexico. The facility will be jointly owned by the Company, IBSA (a Mexican holding corporation) and Cooperativa TRADOC S.R.L. (employee owners of the Occidente facility). The Company ownership in this facility will be approximately 38 percent at an investment of $31 million. Corporacion de Occidente is the second largest tire plant in Mexico and is currently producing 2.4 million tires per year. This transaction is expected to close in the third quarter of 2008. |
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Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||||
2007 | Change | 2008 | 2007 | Change | 2008 | |||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
North American Tire |
$ | 533.2 | 2.7 | % | $ | 547.5 | $ | 1,048.3 | -0.3 | % | $ | 1,045.2 | ||||||||||||
International Tire |
234.5 | 20.6 | % | 282.9 | 417.4 | 23.3 | % | 514.7 | ||||||||||||||||
Eliminations |
(37.6 | ) | 52.9 | % | (57.5 | ) | (66.0 | ) | 63.2 | % | (107.7 | ) | ||||||||||||
Net sales |
$ | 730.1 | 5.9 | % | $ | 772.9 | $ | 1,399.7 | 3.8 | % | $ | 1,452.2 | ||||||||||||
Segment profit (loss): |
||||||||||||||||||||||||
North American Tire |
$ | 20.7 | n/m | $ | (21.9 | ) | $ | 47.4 | n/m | $ | (13.8 | ) | ||||||||||||
International Tire |
11.8 | -50.0 | % | 5.9 | 17.9 | -27.9 | % | 12.9 | ||||||||||||||||
Eliminations |
0.4 | 150.0 | % | 1.0 | (0.4 | ) | -25.0 | % | (0.3 | ) | ||||||||||||||
Unallocated corporate
charges |
(3.4 | ) | -88.2 | % | (0.4 | ) | (6.3 | ) | -25.4 | % | (4.7 | ) | ||||||||||||
Operating profit (loss) |
29.5 | n/m | (15.4 | ) | 58.6 | n/m | (5.9 | ) | ||||||||||||||||
Interest expense |
(12.2 | ) | 4.1 | % | (12.7 | ) | (24.7 | ) | -2.0 | % | (24.2 | ) | ||||||||||||
Interest income |
4.3 | -16.3 | % | 3.6 | 7.8 | -5.1 | % | 7.4 | ||||||||||||||||
Debt extinguishment expense |
| | | (0.6 | ) | |||||||||||||||||||
Dividend from unconsolidated
subsidiary |
| | 2.0 | -5.0 | % | 1.9 | ||||||||||||||||||
Other net |
1.6 | 37.5 | % | 2.2 | 6.3 | -42.9 | % | 3.6 | ||||||||||||||||
Income (loss) from continuing
operations
before income taxes and
noncontrolling
shareholders interests |
23.2 | (22.3 | ) | 50.0 | (17.8 | ) | ||||||||||||||||||
Income tax benefit (expense) |
(4.7 | ) | 0.7 | (11.6 | ) | (0.4 | ) | |||||||||||||||||
Income (loss) from continuing
operations
before noncontrolling
shareholders interests |
18.5 | (21.6 | ) | 38.4 | (18.2 | ) | ||||||||||||||||||
Noncontrolling shareholders
interests |
(2.9 | ) | (0.5 | ) | (3.3 | ) | (2.6 | ) | ||||||||||||||||
Income (loss) from continuing
operations |
$ | 15.6 | $ | (22.1 | ) | $ | 35.1 | $ | (20.8 | ) | ||||||||||||||
Basic earnings (loss) per share |
$ | 0.25 | $ | (0.38 | ) | $ | 0.57 | $ | (0.35 | ) | ||||||||||||||
Diluted earnings (loss) per share |
$ | 0.25 | $ | (0.38 | ) | $ | 0.56 | $ | (0.35 | ) | ||||||||||||||
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16
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Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||||
2007 | Change | 2008 | 2007 | Change | 2008 | |||||||||||||||||||
Net sales |
$ | 533.2 | 2.7 | % | $ | 547.5 | $ | 1,048.3 | -0.3 | % | $ | 1,045.2 | ||||||||||||
Operating profit (loss) |
$ | 20.7 | n/m | $ | (21.9 | ) | $ | 47.4 | n/m | $ | (13.8 | ) | ||||||||||||
United States unit shipments changes: |
||||||||||||||||||||||||
Passenger tires |
||||||||||||||||||||||||
Segment |
-15.6 | % | -14.1 | % | ||||||||||||||||||||
RMA members |
-4.5 | % | -4.4 | % | ||||||||||||||||||||
Total Industry |
-1.0 | % | -0.7 | % | ||||||||||||||||||||
Light truck tires |
||||||||||||||||||||||||
Segment |
-2.9 | % | -8.6 | % | ||||||||||||||||||||
RMA members |
-8.2 | % | -7.3 | % | ||||||||||||||||||||
Total Industry |
-12.0 | % | -9.1 | % | ||||||||||||||||||||
Total light vehicle tires |
||||||||||||||||||||||||
Segment |
-13.4 | % | -13.1 | % | ||||||||||||||||||||
RMA members |
-5.0 | % | -4.8 | % | ||||||||||||||||||||
Total Industry |
-2.6 | % | -1.9 | % | ||||||||||||||||||||
Total segment unit sales change |
-7.0 | % | -9.0 | % |
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19
Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||||
2007 | Change | 2008 | 2007 | Change | 2008 | |||||||||||||||||||
Net sales |
$ | 234.5 | 20.6 | % | $ | 282.9 | $ | 417.4 | 23.3 | % | $ | 514.7 | ||||||||||||
Operating profit |
$ | 11.8 | -50.0 | % | $ | 5.9 | $ | 17.9 | -27.9 | % | $ | 12.9 | ||||||||||||
Unit sales change |
28.1 | % | 23.8 | % |
20
21
22
| changes in economic and business conditions in the world, especially the continuation of the global tensions and risks of further terrorist incidents that currently exist; | |
| increased competitive activity, including the inability to obtain and maintain price increases to offset higher production or material costs; | |
| the failure to achieve expected sales levels; | |
| consolidation among the Companys competitors and customers; | |
| technology advancements; | |
| fluctuations in raw material and energy prices, including those of steel, crude petroleum and natural gas and the unavailability of such raw materials or energy sources; | |
| changes in interest and foreign exchange rates; | |
| increases in pension expense resulting from investment performance of the Companys pension plan assets and changes in discount rate, salary increase rate, and expected return on plan assets assumptions; | |
| government regulatory initiatives, including the proposed and final regulations under the TREAD Act; | |
| changes in the Companys customer relationships, including loss of particular business for competitive or other reasons; | |
| the impact of labor problems, including a strike brought against the Company or against one or more of its large customers; | |
| litigation brought against the Company; | |
| an adverse change in the Companys credit ratings, which could increase its borrowing costs and/or hamper its access to the credit markets; | |
| the inability of the Company to execute its cost reduction/Asian strategies; | |
| the failure of the Companys suppliers to timely deliver products in accordance with contract specifications; |
23
| the impact of reductions in the insurance program covering the principal risks to the Company, and other unanticipated events and conditions; | |
| the failure of the Company to achieve the full cost reduction and profit improvement targets; and | |
| the inability or failure to implement the Companys strategic plan. |
24
(31.1)
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
(31.2)
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
(32)
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
25
COOPER TIRE & RUBBER COMPANY |
||||
/s/ P. G. Weaver | ||||
P. G. Weaver Vice President and Chief |
||||
Financial Officer (Principal Financial Officer) |
||||
/s/ R. W. Huber | ||||
R. W. Huber | ||||
Director of External Reporting (Principal Accounting Officer) |
||||
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