Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_______________________________________________ 
FORM 10-Q
_______________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File No. 1-4329
_______________________________________________ 
 COOPER TIRE & RUBBER COMPANY
(Exact name of registrant as specified in its charter)
_______________________________________________ 
DELAWARE
 
34-4297750
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
701 Lima Avenue, Findlay, Ohio 45840
(Address of principal executive offices)
(Zip code)
(419) 423-1321
(Registrant’s 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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No x
Number of shares of common stock of registrant outstanding as of October 26, 2018: 50,071,371



Part I. FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS

COOPER TIRE & RUBBER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollar amounts in thousands except per share amounts)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net sales
$
737,671

 
$
733,843

 
$
2,037,575

 
$
2,097,621

Cost of products sold
597,724

 
560,371

 
1,718,920

 
1,666,013

Gross profit
139,947

 
173,472

 
318,655

 
431,608

Selling, general and administrative expense
58,746

 
62,692

 
178,236

 
178,632

Operating profit
81,201

 
110,780

 
140,419

 
252,976

Interest expense
(7,930
)
 
(7,591
)
 
(24,038
)
 
(23,629
)
Interest income
2,399

 
1,776

 
6,702

 
5,333

Other pension and postretirement benefit expense
(6,932
)
 
(9,403
)
 
(20,885
)
 
(28,097
)
Other non-operating income (expense)
2,922

 
(978
)
 
(129
)
 
(1,468
)
Income before income taxes
71,660

 
94,584

 
102,069

 
205,115

Provision for income taxes
16,227

 
31,924

 
21,944

 
67,250

Net income
55,433

 
62,660

 
80,125

 
137,865

Net income attributable to noncontrolling shareholders' interests
1,720

 
973

 
3,120

 
307

Net income attributable to Cooper Tire & Rubber Company
$
53,713

 
$
61,687

 
$
77,005

 
$
137,558

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.07

 
$
1.19

 
$
1.53

 
$
2.62

Diluted
$
1.07

 
$
1.18

 
$
1.52

 
$
2.59

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.105

 
$
0.105

 
$
0.315

 
$
0.315

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2


COOPER TIRE & RUBBER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(Dollar amounts in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
55,433

 
$
62,660

 
$
80,125

 
$
137,865

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(5,500
)
 
8,675

 
(16,481
)
 
38,247

Financial instruments:
 
 
 
 
 
 
 
Change in the fair value of derivatives
(1,747
)
 
(290
)
 
863

 
(3,367
)
Income tax benefit (provision) on derivative instruments
429

 
95

 
(318
)
 
1,206

Financial instruments, net of tax
(1,318
)
 
(195
)
 
545

 
(2,161
)
Postretirement benefit plans:
 
 
 
 
 
 
 
Amortization of actuarial loss
9,275

 
10,665

 
27,941

 
31,887

Amortization of prior service credit
(135
)
 
(141
)
 
(406
)
 
(424
)
Income tax provision on postretirement benefit plans
(2,021
)
 
(3,731
)
 
(6,062
)
 
(11,175
)
Foreign currency translation effect
559

 
(2,437
)
 
1,365

 
(7,004
)
Postretirement benefit plans, net of tax
7,678

 
4,356

 
22,838

 
13,284

Other comprehensive income
860

 
12,836

 
6,902

 
49,370

Comprehensive income
56,293

 
75,496

 
87,027

 
187,235

Less: comprehensive income attributable to noncontrolling shareholders' interests
2,043

 
1,467

 
2,305

 
4,980

Comprehensive income attributable to Cooper Tire & Rubber Company
$
54,250

 
$
74,029

 
$
84,722

 
$
182,255

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3


COOPER TIRE & RUBBER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per-share amounts)
 
 
September 30,
2018
(Unaudited)
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
208,616

 
$
371,684

Notes receivable
7,819

 
13,753

Accounts receivable, less allowances of $6,013 at 2018 and $7,570 at 2017
616,200

 
528,250

Inventories:
 
 
 
Finished goods
385,324

 
365,672

Work in process
33,425

 
31,000

Raw materials and supplies
112,613

 
115,085

 
531,362

 
511,757

Other current assets
53,897

 
63,063

Total current assets
1,417,894

 
1,488,507

Property, plant and equipment:
 
 
 
Land and land improvements
54,069

 
52,683

Buildings
309,076

 
311,199

Machinery and equipment
1,941,867

 
1,890,210

Molds, cores and rings
237,044

 
220,528

 
2,542,056

 
2,474,620

Less: accumulated depreciation
1,577,652

 
1,507,873

Property, plant and equipment, net
964,404

 
966,747

Goodwill
52,725

 
54,613

Intangibles, net of accumulated amortization of $108,173 at 2018 and $93,353 at 2017
122,875

 
133,256

Deferred income tax assets
47,043

 
58,665

Other assets
7,946

 
6,137

Total assets
$
2,612,887

 
$
2,707,925

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Notes payable
$
14,831

 
$
39,450

Accounts payable
252,551

 
277,060

Accrued liabilities
269,862

 
280,666

Income taxes payable
17,407

 
6,954

Current portion of long-term debt
1,376

 
1,413

Total current liabilities
556,027

 
605,543

Long-term debt
294,841

 
295,987

Postretirement benefits other than pensions
255,980

 
256,888

Pension benefits
146,198

 
219,534

Other long-term liabilities
131,332

 
144,217

Equity:
 
 
 
Preferred stock, $1 par value; 5,000,000 shares authorized; none issued
—

 
—

Common stock, $1 par value; 300,000,000 shares authorized; 87,850,292 shares issued
87,850

 
87,850

Capital in excess of par value
20,161

 
20,740

Retained earnings
2,455,391

 
2,394,372

Accumulated other comprehensive loss
(470,761
)
 
(478,478
)
 
2,092,641

 
2,024,484

Less: common shares in treasury at cost (37,778,926 at 2018 and 36,908,553 at 2017)
(925,097
)
 
(897,388
)
Total parent stockholders’ equity
1,167,544

 
1,127,096

Noncontrolling shareholders' interests in consolidated subsidiaries
60,965

 
58,660

Total equity
1,228,509

 
1,185,756

Total liabilities and equity
$
2,612,887

 
$
2,707,925

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4


COOPER TIRE & RUBBER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollar amounts in thousands)
 
Nine Months Ended
September 30,
 
2018
 
2017
Operating activities:
 
 
 
Net income
$
80,125

 
$
137,865

Adjustments to reconcile net income to net cash from (used in) operating activities:
 
 
 
Depreciation and amortization
110,210

 
106,652

Stock-based compensation
3,867

 
3,711

Change in LIFO inventory reserve
1,134

 
(14,413
)
Amortization of unrecognized postretirement benefits
27,535

 
31,463

Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
(88,942
)
 
(94,150
)
Inventories
(24,957
)
 
(75,628
)
Other current assets
(9,190
)
 
(25,121
)
Accounts payable
6,500

 
(25,621
)
Accrued liabilities
(6,832
)
 
(19,133
)
Other items
(65,928
)
 
(58,202
)
Net cash from (used in) operating activities
33,522

 
(32,577
)
Investing activities:
 
 
 
Additions to property, plant and equipment and capitalized software
(143,974
)
 
(143,067
)
Proceeds from the sale of assets
160

 
42

Net cash used in investing activities
(143,814
)
 
(143,025
)
Financing activities:
 
 
 
Net payments on short-term debt
(22,152
)
 
(6,393
)
Repayments of long-term debt
(1,203
)
 
(600
)
Payment of financing fees
(1,230
)
 
—

Repurchase of common stock
(30,183
)
 
(70,198
)
Payments of employee taxes withheld from shared-based awards
(2,107
)
 
(6,669
)
Payment of dividends to noncontrolling shareholder
—

 
(282
)
Payment of dividends to Cooper Tire & Rubber Company stockholders
(15,880
)
 
(16,548
)
Issuance of common shares related to stock-based compensation
275

 
4,091

Net cash used in financing activities
(72,480
)
 
(96,599
)
Effects of exchange rate changes on cash
2,812

 
7,788

Net change in cash, cash equivalents and restricted cash
(179,960
)
 
(264,413
)
Cash, cash equivalents and restricted cash at beginning of year
392,306

 
524,249

Cash, cash equivalents and restricted cash at end of period
$
212,346

 
$
259,836

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5


COOPER TIRE & RUBBER COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per-share amounts)
Note 1.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation.
There is a year-round demand for passenger car and truck replacement tires, but passenger car replacement tire sales are generally strongest during the third and fourth quarters of the year. Winter tires are sold principally during the months of June through November. Operating results for the nine month period ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018.
The Company consolidates into its financial statements the accounts of the Company, all wholly-owned subsidiaries, and any partially-owned subsidiary that the Company has the ability to control. Control generally equates to ownership percentage, whereby investments that are more than 50 percent owned are consolidated, investments in affiliates of 50 percent or less but greater than 20 percent are accounted for using the equity method, and investments in affiliates of 20 percent or less are accounted for using the cost method. The Company does not consolidate any entity for which it has a variable interest based solely on power to direct the activities and significant participation in the entity’s expected results that would not otherwise be consolidated based on control through voting interests. Further, the Company’s joint ventures are businesses established and maintained in connection with the Company’s operating strategy. All intercompany transactions and balances have been eliminated.
Truck and Bus Tire Tariffs
Antidumping and countervailing duty investigations into certain truck and bus tires imported from the People's Republic of China ("PRC") into the United States were initiated on January 29, 2016. The preliminary determinations announced in both investigations were affirmative and resulted in the imposition of significant additional duties from each. The Company incurred expense of $22,042 over the final seven months of the year ended December 31, 2016 related to these additional duties. On February 22, 2017, the United States ("U.S.") International Trade Commission determined the U.S. market had not suffered material injury because of imports of truck and bus tires from China. As a result of this decision, preliminary antidumping and countervailing duties from Chinese truck and bus tires imported subsequent to the preliminary determination were not to be collected and any amounts previously paid were refunded by U.S. Customs and Border Protection. Further, prospective imports of truck and bus tires from the PRC are not subject to these additional duties. In the first quarter of 2017, the Company reversed the previously expensed preliminary duties of $22,042 due to the decision by the U.S. International Trade Commission. This amount was recorded as a reduction of Cost of products sold in the Condensed Consolidated Statement of Income for the nine month period ended September 30, 2017.
North American Distribution Center
On January 22, 2017, a tornado hit the Company’s leased Albany, Georgia distribution center, causing damage to the Company's assets and disrupting certain operations. Insurance, less applicable deductibles, covered the repair or replacement of the Company's assets that suffered loss or damage, and the Company worked closely with its insurance carriers and claims adjusters to ascertain the full amount of insurance proceeds due to the Company as a result of the damages and the losses the Company suffered. The Company's insurance policies also provide coverage for interruption to its business, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses suffered. In the third quarter of 2017, the Company recorded insurance recoveries of $1,000 for direct costs caused by the tornado, while incurring direct costs of $1,887 related to the disposal of damaged tires, freight to move product to other warehouses and professional fees to secure and maintain the site. For the nine months ended September 30, 2017, the Company incurred direct expenses of $10,687 related to damages caused by the tornado, less proceeds of $6,500 recovered from insurance. For the full year 2017, the Company incurred direct expenses of $12,583, less proceeds of $7,000 recovered from insurance. Values reported here are reflective of actual amounts incurred and received during 2017, as updated from previously estimate-based values. In the third quarter of 2018, the Company recorded insurance recoveries of $504, while incurring direct costs of $17. For the nine months ended September 30, 2018, the Company recorded insurance recoveries of $7,300, while incurring direct costs of $1,569. These amounts were recorded as a component of Cost of products sold in the Condensed Consolidated Statements of Income for the three and nine month periods ended September 30, 2018 and 2017, respectively, and the year

6


ended December 31, 2017. In total, the Company incurred direct expenses of $14,152 related to the tornado, offset by insurance recoveries of $14,300. The Company's insurance claim related to the tornado has been closed, with no further direct expenses or insurance recoveries anticipated.
Accounting Pronouncements
Each change to U.S. GAAP is established by the Financial Accounting Standards Board (“FASB”) in the form of an accounting standards update (“ASU”) to the FASB’s Accounting Standards Codification (“ASC”).
The Company considers the applicability and impact of all accounting standards updates. Accounting standards updates not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s condensed consolidated financial statements.
Accounting Pronouncements – Recently Adopted
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" (the “new revenue standard”), which supersedes previous revenue recognition guidance, including industry-specific guidance, and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. The Company adopted the new revenue standard as of January 1, 2018 using the modified retrospective transition method. See Note 2 for additional details.
Pensions and Postretirement Benefits Other than Pensions
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires changes to the income statement presentation of net periodic benefit cost. The service cost component of net periodic benefit cost will continue to be classified in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside of operating profit. In addition, the new standard will allow only the service cost component to be eligible for capitalization, when applicable. The Company adopted the new standard as of January 1, 2018 and revised prior periods in accordance with the standard. See Note 9 for additional details.
Statement of Cash Flows
In November 2016, the FASB issued ASU 2016-18, "Restricted Cash," which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash. As a result, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. The new standard also requires companies to disclose the nature of the restriction on restricted cash. The Company adopted the new standard as of January 1, 2018 and revised prior periods in accordance with the standard. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the total of the same such amounts reported within the Condensed Consolidated Statements of Cash Flows:
 
September 30,
2018
(Unaudited)
 
September 30,
2017
(Unaudited)
 
December 31, 2017
 
December 31, 2016
Cash and cash equivalents
$
208,616

 
$
258,362

 
$
371,684

 
$
504,423

Restricted cash included in Other current assets
1,311

 
98

 
19,200

 
18,499

Restricted cash included in Other assets
2,419

 
1,376

 
1,422

 
1,327

Total cash, cash equivalents and restricted cash
$
212,346

 
$
259,836

 
$
392,306

 
$
524,249

Restricted cash is comprised primarily of funds within a voluntary employees' beneficiary trust restricted to the future payment of employee benefit obligations and amounts on deposit to collateralize certain credit arrangements in the PRC.

7



Accounting Pronouncements – To Be Adopted

Leases
In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires balance sheet recognition of lease liabilities and right-of-use assets for most leases having terms of twelve months or longer. The Company plans to adopt the new standard on its effective date of January 1, 2019. The FASB issued multiple amendments to the standard which provided clarification, additional guidance, practical expedients and other improvements to ASU 2016-02. The Company expects the most significant impact of the standard will be the recognition of right of use assets and lease liabilities as part of its condensed consolidated balance sheets. The Company is currently evaluating the impact of the new standard, including optional practical expedients and subsequent standard updates, and assessing its existing lease portfolio to determine the impact of adoption on its condensed consolidated financial statements and the related disclosures. The Company is also evaluating new controls and processes designed to meet the requirements of the topic.

Goodwill
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment," which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The standard requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of its goodwill. Application of the standard, which should be applied prospectively, is required for the annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements.

Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. Adoption of the new standard is required for the annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements.

Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which provides for an election to reclassify stranded tax effects within accumulated other comprehensive income (loss) to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements and has not yet determined whether it will make the election to reclassify its stranded tax effects.

Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820)," which removes, modifies and adds various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. For example, disclosures around transfers between fair value hierarchy Levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs determining Level 3 fair value measurements will be added. This standard is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements.

Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, "Compensation  – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20)," which removes, modifies and adds various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. For example, disclosures around the effect of a one-percentage-point change in assumed health care costs will be removed and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period will be added. This standard is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. These amendments must be applied on a retrospective basis for all periods presented. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements.


8


Internal-Use Software
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)," which aligns the requirements for capitalizing implementation costs incurred in a service contract hosting arrangement with those of developing or obtaining internal-use software. This standard is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements.
Note 2.
Revenue from Contracts with Customers
Accounting policy
On January 1, 2018, the Company adopted the new revenue standard using the modified retrospective transition method applied to contracts which were not completed as of January 1, 2018. Results from reporting periods beginning after January 1, 2018 are presented under the new revenue standard while prior period amounts are not adjusted and continue to be reported under previous revenue recognition guidance. The new revenue standard requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
In accordance with the new revenue standard, revenue is measured based on the consideration specified in a contract with a customer, and excludes any sales incentives or rebates. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. This occurs with shipment or delivery, depending on the terms of the underlying contract. The transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, the Company estimates provisions for different forms of variable consideration (discounts and rebates) based on historical experience, current conditions and contractual obligations, as applicable. Payment terms with customers vary by region and customer, but are generally 30-90 days. The Company does not have significant financing components or significant payment terms. Incidental items that are immaterial in the context of the contract are expensed as incurred.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost and not as a separate performance obligation. Therefore, such items are accrued upon recognition of revenue.
Nature of goods and services
The following is a description of principal activities, separated by reportable segments, from which the Company generates its revenue. See Note 16 - Business Segments for additional details on the Company's reportable segments.
The Company’s reportable segments have the following revenue characteristics:
•
Americas Tire Operations - The Americas Tire Operations segment manufactures and markets passenger car and light truck tires. The segment also markets and distributes wheels and racing, motorcycle and truck and bus radial ("TBR") tires.
•
International Tire Operations - The International Tire Operations segment manufactures and markets passenger car, light truck, motorcycle, racing, and TBR tires and tire retread material for global markets.


9


Disaggregation of revenue
In the following tables, revenue is disaggregated by major market channel for the three and nine month periods ended September 30, 2018:
 
Three Months Ended September 30, 2018

Americas
 
International
 
Eliminations
 
Total
Light vehicle(1)
$
556,253

 
$
126,161

 
$
(34,252
)
 
$
648,162

Truck and bus radial
56,459

 
22,833

 
(19,182
)
 
60,110

Other(2)
15,992

 
13,407

 
—

 
29,399

Net sales
$
628,704

 
$
162,401

 
$
(53,434
)
 
$
737,671


 
Nine Months Ended September 30, 2018
 
Americas
 
International
 
Eliminations
 
Total
Light vehicle(1)
$
1,516,921

 
$
370,374

 
$
(90,624
)
 
$
1,796,671

Truck and bus radial
141,492

 
75,949

 
(61,792
)
 
155,649

Other(2)
40,094

 
45,161

 
—

 
85,255

Net sales
$
1,698,507

 
$
491,484

 
$
(152,416
)
 
$
2,037,575


(1) 
Light vehicle includes passenger car and light truck tires
(2) 
Other includes motorcycle and racing tires, wheels, tire retread material, and other items
Contract balances
Contract liabilities relate to customer payments received in advance of shipment. As the Company does not generally have rights to consideration for work completed but not billed at the reporting date, the Company does not have any contract assets. Accounts receivable are not considered contract assets under the new revenue standard as contract assets are conditioned upon the Company's future satisfaction of a performance obligation. Accounts receivable, in contrast, are unconditional rights to consideration.
Significant changes in the contract liabilities balance during the nine months ended September 30, 2018 are as follows:
 
Contract Liabilities
Contract liabilities at beginning of year
$
1,111

Increases to deferred revenue for cash received in advance
7,911

Decreases due to recognition of deferred revenue
(8,879
)
Contract liabilities at September 30, 2018
$
143

Transaction price allocated to remaining performance obligations
For the three and nine month periods ended September 30, 2018, revenue recognized from performance obligations related to prior periods was not material.
Revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, contracts where revenue is recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, is not material.
The Company applies the practical expedient in ASC 606 "Revenue from Contracts with Customers" and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Changes in accounting policies
The Company adopted ASC 606 with a date of initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below. The guidance has been applied to all contracts at the date of initial application. There were no significant changes to the Company's accounting for revenue following the adoption of the new revenue standard.

10


Impacts on financial statements
Aside from the enhanced disclosures, adoption of the new revenue standard had no impact on the Company's Condensed Consolidated Statement of Income.
The Company has reclassified its volume and customer rebate programs from a contra-asset included within Accounts receivable to a liability within Accrued liabilities on the Condensed Consolidated Balance Sheets. The table below summarizes the impact to the balance sheet as of December 31, 2017:
 
As Adjusted
 
Effect of Change
 
Previously Reported
Accounts receivable, less allowances
$
528,250

 
$
100,190

 
$
428,060

Accrued liabilities
280,666

 
100,190

 
180,476

Note 3.
GRT Acquisition
On January 4, 2016, the Company announced that it had entered into an agreement to purchase a majority of China-based Qingdao Ge Rui Da Rubber Co., Ltd. ("GRT"). In the first quarter of 2016, the Company made a down payment in the amount of $5,929 for this transaction in accordance with the purchase agreement. The down payment was fully refundable in the event that the transaction did not close and did not provide the Company with any power to direct the activities of the existing GRT entity prior to the transaction closing. After the transaction closed on December 1, 2016, the Company owned 65 percent of GRT. Based on the Company's ownership percentage and corresponding control of voting rights, the results of GRT and 100 percent of its assets and liabilities are consolidated from the date of the closing. GRT serves as a global source of truck and bus radial tire production for the Company. Passenger car radial tires may also be manufactured at the facility in the future.
The down payment of $5,929, as well as an additional $8,090 at the time of closing, were paid to the non-controlling shareholder of GRT. In December 2016, the Company contributed an additional $35,842 to GRT to purchase additional shares issued by GRT, as well as to fund working capital requirements. The Company contributed $14,570 in the first quarter of 2017, and an additional $22,125 to GRT in the second quarter of 2017 to fund working capital requirements. In total, the Company has invested $86,556 related to GRT, with $14,019 paid directly to a third party and the remainder invested in GRT.
The GRT acquisition has been accounted for as a purchase transaction. The total consideration has been allocated to the assets acquired, liabilities assumed and noncontrolling shareholder interest based on their estimated fair values at December 1, 2016. The excess purchase price over the estimated fair value of the net assets acquired has been allocated to goodwill. Goodwill consists of anticipated growth opportunities for GRT and is recorded in the Asia segment, which is included in the International Tire Operations Segment. Goodwill is not deductible for federal income tax purposes.

11


The following table summarizes the allocations of the fair values of the assets acquired and liabilities assumed, as adjusted. The originally reported amounts were provisional and were based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed on December 1, 2016, translated into U.S. dollars at the exchange rate on that date. Subsequent to December 1, 2016, the valuation was completed and adjustments were made to the allocations of the fair value of the assets acquired and liabilities assumed from the GRT acquisition.
 
 
As Originally
 
 
 
 
Assets
 
Reported
 
Adjustments
 
As Adjusted
Cash
 
$
8,091

 
$
—

 
$
8,091

Accounts receivable
 
2,844

 
—

 
2,844

Notes receivable
 
3,050

 
—

 
3,050

Inventories
 
7,983

 
485

 
8,468

Other current assets
 
981

 
—

 
981

Property, plant and equipment
 
46,712

 
829

 
47,541

Intangible assets
 
7,412

 
16

 
7,428

Other long-term assets
 
289

 
—

 
289

Goodwill
 
33,861

 
(611
)
 
33,250

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Accounts payable
 
(61,570
)
 
(719
)
 
(62,289
)
Notes payable
 
(10,122
)
 
—

 
(10,122
)
Accrued liabilities
 
(2,866
)
 
—

 
(2,866
)
Long-term debt
 
(3,383
)
 
—

 
(3,383
)
Other long-term liabilities
 
(940
)
 
—

 
(940
)
 
 
$
32,342

 
$
—

 
$
32,342

Noncontrolling shareholder interest
 
(18,323
)
 
—

 
(18,323
)
 
 
 
 
 
 
 
Cooper Tire & Rubber Company consideration
 
$
14,019

 
$
—

 
$
14,019

The Company has determined that the nonrecurring fair value measurements related to each of these assets and liabilities rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets and settlement of liabilities, as observable inputs are not available and, as such, reside within Level 3 of the fair value hierarchy as defined in Note 6. The Company utilized a third party to assist in the fair value determination of certain components of the purchase price allocation, namely Property, plant and equipment and the Noncontrolling shareholder interest. The valuation of Property, plant and equipment was developed using primarily the cost approach. The fair value of the Noncontrolling shareholder interest was determined based upon internal and external inputs considering various relevant market transactions and discounted cash flow valuation methods, among other factors.
During the third quarter of 2018, the noncontrolling shareholder of GRT signed a share transfer agreement to transfer its 35 percent ownership to Sailun Jinyu Group Co., Ltd. The transfer of ownership, which is subject to governmental approval, has no financial impact on the Company.



12


Note 4.
Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effect of stock options and other stock units. The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Numerator
 
 
 
 
 
 
 
Numerator for basic and diluted earnings per share - Net income attributable to Cooper Tire & Rubber Company
$
53,713

 
$
61,687

 
$
77,005

 
$
137,558

Denominator
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted average shares outstanding
50,065

 
52,042

 
50,443

 
52,555

Effect of dilutive securities - stock options and other stock units
214

 
393

 
235

 
491

Denominator for diluted earnings per share - adjusted weighted average shares outstanding
50,279

 
52,435

 
50,678

 
53,046

Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.07

 
$
1.19

 
$
1.53

 
$
2.62

Diluted
$
1.07

 
$
1.18

 
$
1.52

 
$
2.59

All options to purchase shares of the Company’s common stock were included in the computation of diluted earnings per share as the options’ exercise prices were less than the average market price of the common shares at both September 30, 2018 and 2017.
Note 5.
Inventories
Inventory costs are determined using the last-in, first-out (“LIFO”) method for substantially all U.S. inventories. The current cost of the U.S. inventories under the first-in, first-out (“FIFO”) method was $437,810 and $415,640 at September 30, 2018 and December 31, 2017, respectively. These FIFO values have been reduced by approximately $89,228 and $88,094 at September 30, 2018 and December 31, 2017, respectively, to arrive at the LIFO value reported on the Condensed Consolidated Balance Sheets. The remaining inventories have been valued under the FIFO method. All LIFO inventories are stated at the lower of cost or market. All other inventories are stated at the lower of cost or net realizable value.

13


Note 6.
Fair Value Measurements
Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into financial instruments for trading or speculative purposes. The derivative financial instruments include non-designated and cash flow hedges of foreign currency exposures. The change in values of the non-designated foreign currency hedges offset the exchange rate fluctuations related to assets and liabilities recorded on the consolidated balance sheets. The cash flow hedges offset exchange rate fluctuations on the foreign currency-denominated intercompany loans and forecasted cash flows. The Company presently hedges exposures in various currencies generally for transactions expected to occur within the next 12 months. Additionally, the Company utilizes cash flow hedges that hedge already recognized intercompany loans with maturities of up to three years. The notional amount of these foreign currency derivative instruments at September 30, 2018 and December 31, 2017 was $120,150 and $134,530, respectively. The counterparties to each of these agreements are major commercial banks.
The Company uses non-designated foreign currency forward contracts to hedge its net foreign currency monetary assets and liabilities primarily resulting from non-functional currency denominated receivables and payables of certain U.S. and foreign entities.
Foreign currency forward contracts are also used to hedge variable cash flows associated with forecasted sales and purchases denominated in currencies that are not the functional currency of certain entities. The forward contracts have maturities of less than twelve months pursuant to the Company’s policies and hedging practices. These forward contracts meet the criteria for and have been designated as cash flow hedges. Accordingly, the effective portion of the change in fair value of such forward contracts (approximately $(942) and $(2,640) as of September 30, 2018 and December 31, 2017, respectively) are recorded as a separate component of stockholders’ equity in the accompanying Condensed Consolidated Balance Sheets and reclassified into earnings as the hedged transactions occur.
The Company utilizes cross-currency interest rate swaps to hedge the principal and interest repayment of some intercompany loans. These contracts have maturities of up to three years and meet the criteria for and have been designated as cash flow hedges. Spot to spot changes are recorded in income and all other effective changes are recorded as a separate component of stockholders' equity.
The Company assesses hedge effectiveness, prospectively and retrospectively, based on regression of the change in foreign currency exchange rates. Time value of money is included in effectiveness testing. The Company measures ineffectiveness on a trade by trade basis, using the hypothetical derivative method. Any hedge ineffectiveness is recorded in the Condensed Consolidated Statements of Income in the period in which the ineffectiveness occurs.
The derivative instruments are subject to master netting arrangements with the counterparties to the contracts. The following table presents the location and amounts of derivative instrument fair values in the Condensed Consolidated Balance Sheets:
 
September 30, 2018
 
December 31, 2017
Assets/(liabilities)
 
 
 
Designated as hedging instruments:
 
 
 
Gross amounts recognized
$
(1,397
)
 
$
(2,808
)
Gross amounts offset
455

 
168

Net amounts
$
(942
)
 
$
(2,640
)
Not designated as hedging instruments:
 
 
 
Gross amounts recognized
(147
)
 
(684
)
Gross amounts offset
86

 
97

Net amounts
$
(61
)
 
$
(587
)
Net amounts presented:
 
 
 
Accrued liabilities
$
(4
)
 
$
(1,893
)
Other long-term liabilities
$
(999
)
 
$
(1,334
)

14


The following table presents the location and amount of gains and losses on derivative instruments in the Condensed Consolidated Statements of Income:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Derivatives Designated as Cash Flow Hedges
2018
 
2017
 
2018
 
2017
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives (Effective Portion)
$
45

 
$
(3,010
)
 
$
2,753

 
$
(5,734
)
Amount of Gain (Loss) Reclassified from Cumulative Other Comprehensive Loss into Income (Effective Portion)
1,792

 
(2,720
)
 
1,890

 
(2,367
)
 
 
Location of Gain (Loss) Recognized in Income on Derivatives
Amount of Gain (Loss)
 
Recognized in Income on Derivatives
 
Three Months Ended
 
Nine months ended
 
September 30,
 
September 30,
Derivatives not Designated as Hedging Instruments
2018
 
2017
 
2018
 
2017
Foreign exchange contracts
Other non-operating income (expense)
$
741

 
$
(1,448
)
 
$
784

 
$
(2,853
)
For foreign exchange hedges of forecasted sales and purchases designated as effective, the Company reclassifies the gain (loss) from Other comprehensive (loss) income into Net sales and the ineffective portion is recorded directly into Other non-operating income (expense).
The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within the different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded on the Condensed Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.
Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
a.
Quoted prices for similar assets or liabilities in active markets;
b.
Quoted prices for identical or similar assets or liabilities in non-active markets;
c.
Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
d.
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.
Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
The valuation of foreign currency derivative instruments was determined using widely accepted valuation techniques. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including forward points. The Company incorporated credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as current credit ratings, to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2018 and December 31, 2017, the

15


Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety were to be classified in Level 2 of the fair value hierarchy.
The valuation of stock-based liabilities was determined using the Company’s stock price, and as a result, these liabilities are classified in Level 1 of the fair value hierarchy.
The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
Total
Assets
(Liabilities)
 
Quoted Prices
in Active Markets
for Identical
Assets
Level (1)
 
Significant
Other
Observable
Inputs
Level (2)
 
Significant
Unobservable
Inputs
Level (3)
Foreign Currency Derivative Instruments
$
(1,003
)
 
$
—

 
$
(1,003
)
 
$
—

Stock-based Liabilities
$
(12,984
)
 
$
(12,984
)
 
$
—

 
$
—

 
December 31, 2017
 
Total
Assets
(Liabilities)
 
Quoted Prices
in Active Markets
for Identical
Assets
Level (1)
 
Significant
Other
Observable
Inputs
Level (2)
 
Significant
Unobservable
Inputs
Level (3)
Foreign Currency Derivative Instruments
$
(3,227
)
 
$
—

 
$
(3,227
)
 
$
—

Stock-based Liabilities
$
(16,713
)
 
$
(16,713
)
 
$
—

 
$
—

The fair market value of Cash and cash equivalents, Notes receivable, Restricted cash included in Other current assets, Restricted cash included in Other assets, Notes payable and Current portion of long-term debt at September 30, 2018 and December 31, 2017 are equal to their corresponding carrying values as reported on the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, respectively. Each of these classes of assets and liabilities is classified within Level 1 of the fair value hierarchy.
The fair market value of Long-term debt is $317,321 and $329,329 at September 30, 2018 and December 31, 2017, respectively, and is classified within Level 1 of the fair value hierarchy. The carrying value of Long-term debt is $294,841 and $295,987 as reported on the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, respectively.
Note 7.
Income Taxes
For the three month period ended September 30, 2018, the Company recorded a provision for income taxes of $16,227 (effective tax rate of 22.6 percent) compared to $31,924 (effective tax rate of 33.8 percent) for the same period in 2017. For the nine month period ended September 30, 2018, the Company recorded a provision for income taxes of $21,944 (effective tax rate of 21.5 percent) compared to $67,250 (effective tax rate of 32.8 percent) for the same period in 2017. The 2018 and 2017 three and nine month period provisions for income taxes are calculated using a forecasted multi-jurisdictional annual effective tax rate to determine a blended annual effective tax rate. The effective tax rate for the three month period ended September 30, 2018 differs from the U.S. federal statutory rate of 21 percent primarily due to net discrete tax expense of $1,104 recorded during the quarter, the projected mix of earnings in international jurisdictions with differing tax rates, and jurisdictions where valuation allowances are recorded. The discrete items include a benefit of approximately $3,576 related to a discretionary pension contribution for the 2017 tax year as re-measured to the lower U.S. statutory rate, which was more than offset by approximately $5,026 of tax expense related to an adjustment of the 2017 Transition Tax and related state income tax effects. The effective tax rate for the nine month period ended September 30, 2018 differs from the U.S. federal statutory rate of 21 percent due to net discrete tax expense of $812 recorded during the period, consisting primarily of the items previously noted, the projected mix of earnings in international jurisdictions with differing tax rates, and jurisdictions where valuation allowances are recorded.

16


At December 31, 2017, as a result of the U.S. Tax Cuts and Jobs Act (the “Tax Act”) enacted on December 22, 2017 and in conjunction with guidance set forth under SAB 118, the Company recorded provisional amounts both for the impact of remeasurement on its U.S. deferred tax assets to the new U.S. statutory rate of 21% and for the mandatory Transition Tax on unrepatriated foreign earnings. The Company has not yet completed its accounting for the tax effect of these elements of the Tax Act; however, the Company has updated its SAB 118 provisional estimate based upon the latest information available. SAB 118 adjustments were recorded with respect to remeasurement of U.S. deferred tax assets and the Transition Tax on unrepatriated foreign earnings as a tax benefit of $3,576 and tax expense of $5,026, respectively, during the quarter ended September 30, 2018. The Company continues to carefully evaluate the remaining implications of the Tax Act and will conclude its accounting for the enactment-date effects within the remaining prescribed SAB 118 measurement period.

The Tax Act also subjects a U.S. parent shareholder to current tax on its global intangible low-taxed income (“GILTI”). At December 31, 2017, a provisional estimate under SAB 118 could not be made and the Company had not yet elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as a period cost when incurred. Due to the complexity of the GILTI provisions, the Company continues to evaluate the impact of GILTI and has not yet determined its accounting policy; however, at September 30, 2018, a reasonable estimate of GILTI related to current year operations has been made and included in the annual effective tax rate as a period cost. The Company did not record additional GILTI related to basis differences.

The Company continues to maintain a valuation allowance pursuant to ASC 740, “Accounting for Income Taxes,” against portions of its U.S. and non-U.S. deferred tax assets at September 30, 2018, as it cannot assure the future realization of the associated tax benefits prior to their reversal or expiration. In the U.S., the Company has offset a portion of its deferred tax asset relating primarily to a loss carryforward by a valuation allowance of $1,413. In addition, the Company has recorded valuation allowances of $27,362 relating to non-U.S. net operating losses and other deferred tax assets for a total valuation allowance of $28,775. In conjunction with the Company’s ongoing review of its actual results and anticipated future earnings, the Company will continue to reassess the possibility of releasing all or part of the valuation allowances currently in place when the associated deferred tax assets are deemed to be realizable.
The Company maintains an ASC 740-10, “Accounting for Uncertainty in Income Taxes,” liability for unrecognized tax benefits related to permanent differences. At September 30, 2018, the Company’s liability, exclusive of penalty and interest, totals approximately $4,000. The Company accrued an additional net $1,719 liability for unrecognized tax benefits and an immaterial amount of interest expense during the quarter and nine month periods ended September 30, 2018. Based upon the outcome of tax examinations, judicial proceedings, or expiration of statutes of limitations, it is possible that the ultimate resolution of the Company's unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities.
The Company and its subsidiaries are subject to income tax examinations in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company has effectively settled U.S. federal tax examinations for years before 2014 and state and local examinations for years before 2013, with limited exceptions. Non-U.S. subsidiaries of the Company are no longer subject to income tax examinations in major foreign taxing jurisdictions for years prior to 2014. The income tax returns of various subsidiaries in various jurisdictions are currently under examination and it is possible that these examinations will conclude within the next twelve months. However, it is not possible to estimate net increases or decreases to the Company’s unrecognized tax benefits during the next twelve months.
Note 8. Debt
On February 15, 2018, the Company amended its revolving credit facility with a consortium of banks that provides up to $400,000 based on available collateral, including a $110,000 letter of credit subfacility, and expires in February 2023. The Company may elect to increase the commitments under the revolving credit facility or incur one or more tranches of term loans in an aggregate amount of up to $100,000, subject to the satisfaction of certain conditions. The Company may elect to add certain foreign subsidiaries as additional borrowers under the Credit Agreement (the “Foreign Subsidiary Borrowers”), subject to the satisfaction of certain conditions.
On February 15, 2018, the Company amended its accounts receivable securitization facility that provides up to $150,000 based on available collateral and expires in February 2021. Pursuant to the terms of the facility, the Company is permitted to sell certain of its domestic trade receivables on a continuous basis to its wholly-owned, bankruptcy-remote subsidiary, Cooper Receivables LLC (“CRLLC”). In turn, CRLLC may sell from time to time an undivided ownership interest in the purchased trade receivables, without recourse, to a PNC Bank administered, asset-backed commercial paper conduit. The accounts receivable securitization facility has no significant financial covenants until available credit is less than specified amounts.
The Company had no borrowings under the revolving credit facility or the accounts receivable securitization facility at September 30, 2018 and December 31, 2017, respectively. Amounts used to secure letters of credit totaled $16,800 and $17,600

17


at September 30, 2018 and December 31, 2017, respectively. The Company’s additional borrowing capacity, net of borrowings and amounts used to back letters of credit, and based on eligible collateral through use of its credit facility with its bank group and its accounts receivable securitization facility at September 30, 2018, was $524,600.
The Company’s consolidated operations in Asia have renewable unsecured credit lines that provide up to $64,732 of borrowings and do not contain financial covenants. The additional borrowing capacity on the Asian credit lines, based on eligible collateral and the short-term notes payable, totaled $49,901 at September 30, 2018.
The following table summarizes the long-term debt of the Company at September 30, 2018 and December 31, 2017. Except for the capitalized leases and other, the long-term debt is due in an aggregate principal payment on the due date:
 
 
September 30, 2018
 
December 31, 2017
Parent company
 
 
 
 
8% unsecured notes due December 2019
 
$
173,578

 
$
173,578

7.625% unsecured notes due March 2027
 
116,880

 
116,880

Capitalized leases and other
 
6,439

 
7,684

 
 
296,897

 
298,142

Less: unamortized debt issuance costs
 
680

 
742

 
 
296,217

 
297,400

Less: current maturities
 
1,376

 
1,413

 
 
$
294,841

 
$
295,987

At September 30, 2018 and December 31, 2017, the Company had short-term notes payable of $14,831 and $39,450, respectively, due within twelve months, consisting of funds borrowed by the Company’s operations in the PRC. The weighted average interest rate of the short-term notes payable at September 30, 2018 and December 31, 2017 was 4.73 percent and 4.46 percent, respectively.

Note 9.
Pensions and Postretirement Benefits Other than Pensions
The following tables disclose the amount of net periodic benefit costs for the three and nine month periods ended September 30, 2018 and 2017, respectively, for the Company’s defined benefit plans and other postretirement benefits:
 
Pension Benefits - Domestic
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
2,590

 
$
2,465

 
$
7,770

 
$
7,395

Interest cost
9,210

 
9,813

 
27,629

 
29,439

Expected return on plan assets
(13,508
)
 
(13,516
)
 
(40,525
)
 
(40,547
)
Amortization of actuarial loss
8,235

 
9,281

 
24,706

 
27,842

Net periodic benefit cost
$
6,527

 
$
8,043

 
$
19,580

 
$
24,129

 
Pension Benefits - International
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
—

 
$
—

 
$
—

 
$
—

Interest cost
2,722

 
2,927

 
8,469

 
8,557

Expected return on plan assets
(2,945
)
 
(2,860
)
 
(9,161
)
 
(8,362
)
Amortization of actuarial loss
1,040

 
1,384

 
3,235

 
4,045

Net periodic benefit cost
$
817

 
$
1,451

 
$
2,543

 
$
4,240



18


 
Other Postretirement Benefits
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
487

 
$
501

 
$
1,461

 
$
1,502

Interest cost
2,313

 
2,515

 
6,938

 
7,547

Amortization of prior service credit
(135
)
 
(141
)
 
(406
)
 
(424
)
Net periodic benefit cost
$
2,665

 
$
2,875

 
$
7,993

 
$
8,625


As discussed in Note 1, the Company retrospectively applied the adoption of ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” as of January 1, 2018. The effect of the retrospective presentation change related to the net periodic cost of the Company's defined benefit plans and other postretirement benefits on the Company's Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2017 is shown in the following tables:

Three Months Ended September 30, 2017
 
 
 
Effect of change
 
 
 
As Adjusted
 
Americas
 
International
 
Corporate
 
Previously Reported
Cost of products sold
$
560,371

 
$
7,295

 
$
1,450

 
$
—

 
$
569,116

Selling, general and administrative expense
62,692

 
296

 
—

 
362

 
63,350

Other pension and postretirement benefit expense
(9,403
)
 
(7,591
)
 
(1,450
)
 
(362
)
 
—


Nine Months Ended September 30, 2017
 
 
 
Effect of change
 
 
 
As Adjusted
 
Americas
 
International
 
Corporate
 
Previously Reported
Cost of products sold
$
1,666,013

 
$
21,885

 
$
4,239

 
$
—

 
$
1,692,137

Selling, general and administrative expense
178,632

 
889

 
—

 
1,084

 
180,605

Other pension and postretirement benefit expense
(28,097
)
 
(22,774
)
 
(4,239
)
 
(1,084
)
 
—




Note 10.
Product Warranty Liabilities
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 Company’s product warranty liabilities:
 
2018
 
2017
Reserve at beginning of year
$
12,093

 
$
10,634

Additions
9,523

 
6,285

Payments
(9,492
)
 
(6,538
)
Reserve at September 30
$
12,124

 
$
10,381





19


Note 11.     Stockholders’ Equity
The following table reconciles the beginning and end of the period equity accounts attributable to Cooper Tire & Rubber Company and to the noncontrolling shareholders' interests:
 
Total Equity
 
Total Parent Stockholders’ Equity
 
Noncontrolling Shareholders’ Interests in Consolidated Subsidiary
 
Total Stockholders’ Equity
Balance at December 31, 2017
$
1,127,096

 
$
58,660

 
$
1,185,756

Net income
77,005

 
3,120

 
80,125

Other comprehensive income
7,717

 
(815
)
 
6,902

Share repurchase program
(30,183
)
 
—

 
(30,183
)
Stock compensation plans
1,789

 
—

 
1,789

Cash dividends - $0.315 per share
(15,880
)
 
—

 
(15,880
)
Balance at September 30, 2018
$
1,167,544

 
$
60,965

 
$
1,228,509

Note 12. Share Repurchase Programs
Share repurchase programs require the approval of the Company's Board of Directors. The following table summarizes the Company’s Board authorized share repurchase programs and related information for the nine months ended September 30, 2018 and for the full year 2017:
Program(1)
 
Date Authorized by Board of Directors
 
Expiration Date
 
Amount Authorized (excluding commissions)
 
Amount Spent as of September 30, 2018
(excluding commissions)
 
Status
2017 Repurchase Program
 
February 16, 2017
 
December 31, 2019
 
$
300,000

 
$
106,877

 
Active
2016 Repurchase Program
 
February 19, 2016
 
December 31, 2017
 
200,000

 
104,366

 
Superseded(2)
(1)
The repurchase programs listed above do not obligate the Company to acquire any specific number of shares and can be suspended or discontinued at any time without notice. Shares can be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. All repurchases under the programs listed above have been made using cash resources.
(2)
The approximately $95,634 remaining authorization under the 2016 Repurchase Program as of February 16, 2017 was included in the $300,000 maximum amount authorized by the 2017 Repurchase Program.
The following table summarizes the Company’s open market and 10b5-1 plan share repurchase activity and related information during the nine months ended September 30, 2018 and for the full year 2017:
 
 
Number of Shares
 
Average Repurchase Price Per Share
 
Amount
(including commissions)
2018 share repurchase activity:
 
 
 
 
 
 
2017 Repurchase Program
 
1,018,089

 
$
29.65

 
$
30,183

Total 2018 share repurchases
 
1,018,089

 
$
29.65

 
$
30,183

2017 share repurchase activity:
 
 
 
 
 
 
2017 Repurchase Program
 
2,136,237

 
$
35.95

 
$
76,788

2016 Repurchase Program
 
383,690

 
$
36.70

 
14,080

Total 2017 share repurchases
 
2,519,927

 
$
36.06

 
$
90,868

Since the share repurchases began in August 2014 through September 30, 2018, the Company has repurchased 15,768,845 shares of the Company’s common stock at an average cost of $34.11 per share.

20


Note 13.
Changes in Accumulated Other Comprehensive Loss by Component
The following tables present the changes in Accumulated Other Comprehensive Loss by Component for the three and nine month periods ended September 30, 2018 and 2017, respectively.
 
Cumulative Translation Adjustment
 
Derivative Instruments
 
Post-retirement Benefits
 
Total
Beginning balance, June 30, 2018
$
(49,783
)
 
$
2,212

 
$
(423,727
)
 
$
(471,298
)
Other comprehensive (loss) income before reclassifications
(5,823
)
 
45

 
—

 
(5,778
)
Foreign currency translation effect
—

 
—

 
559

 
559

Income tax effect
—

 
140

 
—

 
140

Amount reclassified from accumulated other comprehensive loss
 
 
 
 
 
 
 
Cash flow hedges
—

 
(1,792
)
 
—

 
(1,792
)
Amortization of prior service credit
—

 
—

 
(135
)
 
(135
)
Amortization of actuarial losses
—

 
—

 
9,275

 
9,275

Income tax effect
—

 
289

 
(2,021
)
 
(1,732
)
Other comprehensive (loss) income
(5,823
)
 
(1,318
)
 
7,678

 
537

Ending balance, September 30, 2018
$
(55,606
)
 
$
894

 
$
(416,049
)
 
$
(470,761
)
 
Cumulative Translation Adjustment
 
Derivative Instruments
 
Post-retirement Benefits
 
Total
Beginning balance, June 30, 2017
$
(50,022
)
 
$
1

 
$
(462,775
)
 
$
(512,796
)
Other comprehensive income (loss) before reclassifications
8,181

 
(3,010
)
 
—

 
5,171

Foreign currency translation effect
—

 
—

 
(2,437
)
 
(2,437
)
Income tax effect
—

 
985

 
—

 
985

Amount reclassified from accumulated other comprehensive loss
 
 
 
 
 
 
 
Cash flow hedges
—

 
2,720

 
—

 
2,720

Amortization of prior service credit
—

 
—

 
(141
)
 
(141
)
Amortization of actuarial losses
—

 
—

 
10,665

 
10,665

Income tax effect
—

 
(890
)
 
(3,731
)
 
(4,621
)
Other comprehensive income (loss)
8,181

 
(195
)
 
4,356

 
12,342

Ending balance, September 30, 2017
$
(41,841
)
 
$
(194
)
 
$
(458,419
)
 
$
(500,454
)

21


 
 
 
 
 
 
 
 
 
Cumulative
Translation
Adjustment
 
Derivative
Instruments
 
Post-
retirement
Benefits
 
Total
Beginning balance, December 31, 2017
(39,940
)
 
349

 
(438,887
)
 
(478,478
)
Other comprehensive (loss) income before reclassifications
(15,666
)
 
2,753

 
—

 
(12,913
)
Foreign currency translation effect
—

 
—

 
1,365

 
1,365

Income tax effect
—

 
(561
)
 
—

 
(561
)
Amount reclassified from accumulated other comprehensive loss
 
 
 
 
 
 
 
Cash flow hedges
—

 
(1,890
)
 
—

 
(1,890
)
Amortization of prior service credit
—

 
—

 
(406
)
 
(406
)
Amortization of actuarial losses
—

 
—

 
27,941

 
27,941

Income tax effect
—

 
243

 
(6,062
)
 
(5,819
)
Other comprehensive (loss) income
(15,666
)
 
545

 
22,838

 
7,717

Ending balance, September 30, 2018
(55,606
)
 
894

 
(416,049
)
 
(470,761
)
 
 
 
 
 
 
 
 
 
Cumulative
Translation
Adjustment
 
Derivative
Instruments
 
Post-
retirement
Benefits
 
Total
Beginning balance, December 31, 2016
(75,415
)
 
1,967

 
(471,703
)
 
(545,151
)
Other comprehensive income (loss) before reclassifications
33,574

 
(5,734
)
 
—

 
27,840

Foreign currency translation effect
—

 
—

 
(7,004
)
 
(7,004
)
Income tax effect
—

 
1,893

 
—

 
1,893

Amount reclassified from accumulated other comprehensive loss
 
 
 
 
 
 
 
Cash flow hedges
—

 
2,367

 
—

 
2,367

Amortization of prior service credit
—

 
—

 
(424
)
 
(424
)
Amortization of actuarial losses
—

 
—

 
31,887

 
31,887

Income tax effect
—

 
(687
)
 
(11,175
)
 
(11,862
)
Other comprehensive income (loss)
33,574

 
(2,161
)
 
13,284

 
44,697

Ending balance, September 30, 2017
(41,841
)
 
(194
)
 
(458,419
)
 
(500,454
)

22


Note 14. Comprehensive Income Attributable to Noncontrolling Shareholders' Interests
The following table provides the details of the comprehensive income attributable to noncontrolling shareholders' interests:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income attributable to noncontrolling shareholders' interests
$
1,720

 
$
973

 
$
3,120

 
$
307

Other comprehensive income (loss):
 
 
 
 
 
 
 
Currency translation adjustments
323

 
494

 
(815
)
 
4,673

Comprehensive income attributable to noncontrolling shareholders' interests
$
2,043

 
$
1,467

 
$
2,305

 
$
4,980

Note 15.
Contingent Liabilities
Product Liability Claims
The Company is a defendant in various product liability claims brought in numerous jurisdictions in which individuals seek damages resulting from motor vehicle accidents allegedly caused by defective tires manufactured by the Company. Each of the product liability claims faced by the Company generally involves different types of tires and circumstances surrounding the accident such as different applications, vehicles, speeds, road conditions, weather conditions, driver error, tire repair and maintenance practices, service life conditions, as well as different jurisdictions and different injuries. In addition, in many of the Company’s product liability lawsuits, the plaintiff alleges that his or her harm was caused by one or more co-defendants who acted independently of the Company. Accordingly, both the claims asserted and the resolutions of those claims have an enormous amount of variability. The aggregate amount of damages asserted at any point in time is not determinable since often times when claims are filed, the plaintiffs do not specify the amount of damages. Even when there is an amount alleged, at times the amount is wildly inflated and has no rational basis.
The fact that the Company is a defendant in product liability lawsuits is not surprising given the current litigation climate, which is largely confined to the United States. However, the fact that the Company is subject to claims does not indicate that there is a quality issue with the Company’s tires. The Company sells approximately 30 to 35 million passenger car, light truck, SUV, TBR and motorcycle tires per year in North America. The Company estimates that approximately 300 million Company-produced tires made up of thousands of different specifications are still on the road in North America. While tire disablements do occur, it is the Company’s and the tire industry’s experience that the vast majority of tire failures relate to service-related conditions, which are entirely out of the Company’s control, such as failure to maintain proper tire pressure, improper maintenance, improper repairs, road hazard and excessive speed.
The Company accrues costs for product liability at the time a loss is probable and the amount of loss can be estimated. The Company believes the probability of loss can be established and the amount of loss can be estimated only after certain minimum information is available, including verification that Company-produced product were involved in the incident giving rise to the claim, the condition of the product purported to be involved in the claim, the nature of the incident giving rise to the claim and the extent of the purported injury or damages. In cases where such information is known, each product liability claim is evaluated based on its specific facts and circumstances. A judgment is then made to determine the requirement for establishment or revision of an accrual for any potential liability. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. The liability often cannot be determined with precision until the claim is resolved.
Pursuant to ASU 450 "Contingencies," the Company accrues the minimum liability for each known claim when the estimated outcome is a range of probable loss and no one amount within that range is more likely than another. The Company uses a range of losses because an average cost would not be meaningful since the product liability claims faced by the Company are unique and widely variable and, accordingly, the resolutions of those claims have an enormous amount of variability. The costs have ranged from zero dollars to $33 million in one case with no “average” that is meaningful. No specific accrual is made for individual unasserted claims or for premature claims, asserted claims where the minimum information needed to evaluate the probability of a liability is not yet known. However, an accrual for such claims based, in part, on management’s expectations for future litigation activity and the settled claims history is maintained. The Company periodically reviews such estimates and any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. Because of the speculative nature of litigation in the U.S., the Company does not believe a meaningful aggregate range of potential loss for asserted and unasserted claims can be determined. While the Company believes its reserves are reasonably stated, it is possible an individual claim from time to time may result in an aberration from the norm and could have a material impact.

23


The time frame for the payment of a product liability claim is too variable to be meaningful. From the time a claim is filed to its ultimate disposition depends on the unique nature of the case, how it is resolved - claim dismissed, negotiated settlement, trial verdict or appeals process - and is highly dependent on jurisdiction, specific facts, the plaintiff’s attorney, the court’s docket and other factors. Given that some claims may be resolved in weeks and others may take five years or more, it is impossible to predict with any reasonable reliability the time frame over which the accrued amounts may be paid.
The Company regularly reviews the probable outcome of outstanding legal proceedings and the availability and limits of the insurance coverage, and accrues for such legal proceedings at the time a loss is probable and the amount of the loss can be estimated. As part of its regular review, the Company monitors trends that may affect its ultimate liability and analyzes the developments and variables likely to affect pending and anticipated claims against the Company and the reserves for such claims. The Company utilizes claims experience, as well as trends and developments in the litigation climate, in estimating its required accrual. Based on the Company’s quarterly review completed in the third quarter of 2018, the Company reduced its estimate of pending and anticipated product liability claims, which resulted in a benefit of $31 million in the quarter. In the third quarter of 2017, a similar review was performed and the Company recognized a benefit of $41 million in the third quarter of 2017. The reduced estimate of pending and anticipated product liability claims, coupled with normal activity, including the addition of another quarter of self-insured incidents, settlements and changes in the amount of reserves, the Company decreased its accrual from $137,794 at June 30, 2018 to $113,324 at September 30, 2018.
For the nine months ended September 30, 2018, the addition of another nine months of self-insured incidents accounted for an increase of $33,048 in the Company's product liability reserve. Settlements, changes in the amount of reserves for cases where sufficient information is known to estimate a liability, and changes in assumptions decreased the liability by $34,676 for the nine month period ended September 30, 2018. The Company paid $14,940 through the first nine months of 2018 to resolve cases and claims.
The Company’s product liability reserve balance at September 30, 2018 totaled $113,324 (the current portion of $31,045 is included in Accrued liabilities and the long-term portion is included in Other long-term liabilities on the Condensed Consolidated Balance Sheets), and the balance at December 31, 2017 totaled $129,892 (current portion of $44,700).
The product liability expense reported by the Company includes amortization of insurance premium costs, adjustments to settlement reserves and legal costs incurred in defending claims against the Company. Legal costs are expensed as incurred and product liability insurance premiums are amortized over coverage periods.
For the three month periods ended September 30, 2018 and 2017, product liability costs reduced Cost of products sold $18,389 and $20,989, respectively. For the nine month periods ended September 30, 2018 and 2017, product liability expense totaled $8,834 and $11,458, respectively. Product liability expenses are included in Cost of products sold in the Condensed Consolidated Statements of Income.
Note 16.     Business Segments
The Company has four segments under ASC 280, “Segments”:
•
North America, composed of the Company’s operations in the United States and Canada;
•
Latin America, composed of the Company’s operations in Mexico, Central America and South America;
•
Europe; and
•
Asia.
North America and Latin America meet the criteria for aggregation in accordance with ASC 280, as they are similar in their production and distribution processes and exhibit similar economic characteristics. The aggregated North America and Latin America segments are presented as “Americas Tire Operations” in the segment disclosure. The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in the U.S. replacement market. The segment also has a joint venture manufacturing operation in Mexico, Corporacion de Occidente SA de CV ("COOCSA"), which supplies passenger car tires to the North American, Mexican, Central American and South American markets. The segment also distributes racing, TBR and motorcycle tires. The racing and motorcycle tires are manufactured by the Company’s European operations and by others. TBR tires are sourced from GRT and through an off-take agreement that was entered with Prinx Chengshan (Shandong) Tire Company Ltd. ("PCT"), the Company’s former joint venture. In December 2017, the Company signed an off-take agreement with Sailun Vietnam Co. Ltd. ("Sailun"), effective from January 1, 2018 through December 31, 2020, as an additional source of TBR tires. Major distribution channels and customers include independent tire dealers, wholesale distributors, regional and national retail tire chains, and large retail chains that sell tires as well as other automotive products. The segment does not currently sell its products directly to end users, except through three Company-owned retail stores. The segment sells a limited number of tires to original equipment manufacturers ("OEMs").

24


Both the Asia and Europe segments have been determined to be individually immaterial, as they do not meet the quantitative requirements for segment disclosure under ASC 280. In accordance with ASC 280, information about operating segments that are not reportable shall be combined and disclosed in an all other category separate from other reconciling items. As a result, these two segments have been combined in the segment operating results discussion. The results of the combined Asia and Europe segments are presented as “International Tire Operations.” The European operations include manufacturing operations in the United Kingdom ("U.K.") and Serbia. The U.K. entity manufactures and markets passenger car, light truck, motorcycle and racing tires and tire retread material for domestic and global markets. The Serbian entity manufactures passenger car and light truck tires primarily for the European markets and for export to the North American segment. The Asian operations are located in the PRC. Cooper Kunshan Tire manufactures passenger car and light truck tires both for the Chinese domestic market and for export to markets outside of the PRC. On December 1, 2016, the Company acquired 65 percent ownership of China-based GRT, a joint venture manufacturing facility located in the PRC. GRT serves as a global source of TBR tire production for the Company. The segment also had another joint venture in the PRC, PCT, which manufactured and marketed truck and bus radial and bias tires, as well as passenger car and light truck tires for domestic and global markets. The Company sold its ownership interest in this joint venture in November 2014, and the Company began procuring certain TBR and passenger car tires under off-take agreements with PCT through mid-2018, which were subsequently extended and now expire in mid-2019. In December 2017, the Company signed an off-take agreement with Sailun as an additional source of TBR tires. The segment sells a majority of its tires in the replacement market, with a growing portion also sold to OEMs.
On October 10, 2018, Cooper Tire Europe announced that it will enter a consultation period to explore ceasing light vehicle tire production at its U.K. manufacturing location. If Cooper Tire Europe goes forward with such a plan after consultation, light vehicle tires currently produced in the U.K. could be obtained by Cooper Tire Europe from other sites within Cooper’s global manufacturing footprint. The goal of the proposed change is to ensure Cooper Tire Europe is best placed for future success in a cost-competitive, globalized environment. No decision has been reached regarding the production of light vehicle tires in the U.K. and, as such, the Company has not incurred any restructuring, severance or impairment charges related to this announcement.
The following table details information on the Company’s operating segments.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net sales
 
 
 
 
 
 
 
Americas Tire
 
 
 
 
 
 
 
External customers
$
619,763

 
$
615,261

 
$
1,672,396

 
$
1,742,863

Intercompany
8,941

 
10,162

 
26,111

 
29,275

 
628,704

 
625,423

 
1,698,507

 
1,772,138

International Tire
 
 
 
 
 
 
 
External customers
117,908

 
118,582

 
365,179

 
354,758

Intercompany
44,493

 
44,763

 
126,305

 
101,922

 
162,401

 
163,345

 
491,484

 
456,680

Eliminations
(53,434
)
 
(54,925
)
 
(152,416
)
 
(131,197
)
Consolidated net sales
$
737,671

 
$
733,843

 
$
2,037,575

 
$
2,097,621

Operating profit (loss):
 
 
 
 
 
 
 
Americas Tire
$
87,353

 
$
125,056

 
$
159,068

 
$
286,725

International Tire
5,994

 
2,042

 
19,080

 
7,757

Unallocated corporate charges
(12,518
)
 
(15,431
)
 
(38,188
)
 
(40,093
)
Eliminations
372

 
(887
)
 
459

 
(1,413
)
Operating profit
81,201

 
110,780

 
140,419

 
252,976

Interest expense
(7,930
)
 
(7,591
)
 
(24,038
)
 
(23,629
)
Interest income
2,399

 
1,776

 
6,702

 
5,333

Other pension and postretirement benefit expense
(6,932
)
 
(9,403
)
 
(20,885
)
 
(28,097
)
Other non-operating income (expense)
2,922

 
(978
)
 
(129
)
 
(1,468
)
Income before income taxes
$
71,660

 
$
94,584

 
$
102,069

 
$
205,115


25


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) presents information related to the consolidated results of the operations of the Company, a discussion of past results of the Company’s segments, future outlook for the Company and information concerning the liquidity and capital resources of the Company. The Company’s future results may differ materially from those indicated herein, for reasons including those indicated under the forward-looking statements heading below.
Consolidated Results of Operations
(Dollar amounts in thousands except per share amounts)
Three Months Ended September 30,
 
Nine Months Ended September 30,
2018
 
% Change
 
2017
 
2018
 
% Change
 
2017
Net sales
 
 
 
 
 
 
 
 
 
 
 
Americas Tire
 
 
 
 
 
 
 
 
 
 
 
External customers
$
619,763

 
0.7

 
$
615,261

 
$
1,672,396

 
(4.0
)
 
$
1,742,863

Intercompany
8,941

 
(12.0
)
 
10,162

 
26,111

 
(10.8
)
 
29,275

 
628,704

 
0.5

 
625,423

 
1,698,507

 
(4.2
)
 
1,772,138

International Tire
 
 
 
 
 
 
 
 
 
 
 
External customers
117,908

 
(0.6
)
 
118,582

 
365,179

 
2.9

 
354,758

Intercompany
44,493

 
(0.6
)
 
44,763

 
126,305

 
23.9

 
101,922

 
162,401

 
(0.6
)
 
163,345

 
491,484

 
7.6

 
456,680

Eliminations
(53,434
)
 
2.7

 
(54,925
)
 
(152,416
)
 
(16.2
)
 
(131,197
)
Consolidated net sales
$
737,671

 
0.5

 
$
733,843

 
$
2,037,575

 
(2.9
)
 
$
2,097,621

Operating profit (loss):
 
 
 
 
 
 
 
 
 
 
 
Americas Tire
$
87,353

 
(30.1
)
 
$
125,056

 
$
159,068

 
(44.5
)
 
$
286,725

International Tire
5,994

 
193.5

 
2,042

 
19,080

 
146.0

 
7,757

Unallocated corporate charges
(12,518
)
 
18.9

 
(15,431
)
 
(38,188
)
 
4.8

 
(40,093
)
Eliminations
372

 
n/m

 
(887
)
 
459

 
n/m

 
(1,413
)
Operating profit
81,201

 
(26.7
)
 
110,780

 
140,419

 
(44.5
)
 
252,976

Interest expense
(7,930
)
 
4.5

 
(7,591
)
 
(24,038
)
 
(1.7
)
 
(23,629
)
Interest income
2,399

 
35.1

 
1,776

 
6,702

 
25.7

 
5,333

Other pension and postretirement benefit expense
(6,932
)
 
(26.3
)
 
(9,403
)
 
(20,885
)
 
(25.7
)
 
(28,097
)
Other non-operating income (expense)
2,922

 
n/m

 
(978
)
 
(129
)
 
(91.2
)
 
(1,468
)
Income before income taxes
71,660

 
(24.2
)
 
94,584

 
102,069

 
(50.2
)
 
205,115

Provision for income taxes
16,227

 
(49.2
)
 
31,924

 
21,944

 
(67.4
)
 
67,250

Net income
55,433

 
(11.5
)
 
62,660

 
80,125

 
(41.9
)
 
137,865

Net income attributable to noncontrolling shareholders' interests
1,720

 
76.8

 
973

 
3,120

 
916.3

 
307

Net income attributable to Cooper Tire & Rubber Company
$
53,713

 
(12.9
)
 
$
61,687

 
$
77,005

 
(44.0
)
 
$
137,558

 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.07

 
(10.1
)
 
$
1.19

 
$
1.53

 
(41.6
)
 
$
2.62

Diluted
$
1.07

 
(9.3
)
 
$
1.18

 
$
1.52

 
(41.3
)
 
$
2.59

n/m – not meaningful
Consolidated net sales for the third quarter of 2018 were $738 million compared with $734 million in the comparable period one year ago. In the third quarter of 2018, the Company experienced favorable price and mix ($5 million), partially offset by an unfavorable foreign currency impact ($1 million).

26


The Company recorded operating profit in the third quarter of 2018 of $81 million, a decrease of $30 million compared with the third quarter of 2017. Operating profit included higher raw material costs ($15 million) and higher manufacturing costs ($12 million), which reflect unabsorbed fixed overhead due to managing production to reduce the number of tires in inventory, as well as lower demand in Latin America. Price and mix ($1 million) was favorable in the third quarte rof 2018 compared to 2017. In addition, operating profit included the benefit of decreased selling, general and administrative costs ($4 million), fully offset by higher product liability costs ($3 million) and increased other costs ($5 million), including higher distribution costs related to the Company's new West Coast warehouse, as well as higher freight costs.

As part of its regular review of product liability reserves, Cooper monitors trends and analyzes developments and variables likely to impact pending and anticipated product liability claims against the Company. Based on the review completed in the third quarter, the Company reduced its estimate of pending and anticipated product liability claims, which resulted in a benefit of $31 million during the third quarter of 2018. In 2017, a similar review was performed and the Company recognized a benefit of $41 million in the third quarter of 2017. This adjustment, as well as normal activity in product liability expenses, including current case activity and legal fees, resulted in product liability expense in the third quarter of 2018 that was $3 million higher than the same quarter of 2017.
Product liability costs reduced Cost of products sold in the Condensed Consolidated Statements of Income by $18 million in the third quarter of 2018, compared to a reduction of $21 million in the third quarter of 2017. Product liability expenses totaled $9 million in the first nine months of 2018, compared to $11 million in the first nine months of 2017. Based on the Company’s review completed in the third quarter, coupled with normal activity, including the addition of estimated incurred but not reported self-insured incidents, settlements and changes in the amount of reserves, the Company reduced its accrual. Additional information related to the Company’s accounting for product liability costs appears in the Notes to the Unaudited Condensed Consolidated Financial Statements.
Consolidated net sales for the first nine months of 2018 were $2,038 million, a decrease of $60 million from the comparable period one year ago. In the first nine months of 2018, the Company experienced lower unit volume ($53 million) and unfavorable price and mix ($29 million), partially offset by favorable foreign currency impact ($22 million).
The Company recorded operating profit in the first nine months of 2018 of $140 million, a decrease of $113 million compared with the first nine months of 2017. Operating profit included unfavorable price and mix, net of lower raw material costs ($28 million), lower unit volume ($15 million) and higher manufacturing costs ($45 million). The higher manufacturing costs primarily reflect the alignment of production to demand and actions to control inventory levels. Product liability costs ($3 million) and selling, general and administrative costs ($2 million) decreased compared to the same period in 2017.
The first nine months of 2017 benefited from the reversal of $22 million related to preliminary truck and bus tire duties expensed in 2016. The first nine months of 2018 benefited by $11 million related to the timing of costs and related insurance recoveries resulting from tornado damage at a North American distribution center in 2017. Other operating costs increased from the first nine months of 2017 ($19 million), including costs related to workforce actions in the U.S. and Latin America, as well as start-up costs related to two new U.S. distribution warehouses and increased freight costs.
The principal raw materials for the Company include natural rubber, synthetic rubber, carbon black, chemicals and steel reinforcement components. Substantially all U.S. inventories have been valued using the LIFO method of inventory costing which accelerates the impact to cost of products sold from changes to raw material prices.
The Company strives to assure raw material and energy supply and to obtain the most favorable pricing possible. For natural rubber and natural gas, procurement is managed through a combination of buying forward of production requirements and utilizing the spot market. For other principal materials, procurement arrangements include supply agreements that may contain formula-based pricing based on commodity indices, multi-year agreements or spot purchase contracts. While the Company uses these arrangements to satisfy normal manufacturing demands, the pricing volatility in these commodities contributes to the difficulty in managing the costs of raw materials.
Selling, general and administrative expenses were $59 million in the third quarter of 2018 (8.0 percent of net sales) and $63 million in the third quarter of 2017 (8.5 percent of net sales). The decrease in selling, general, and administrative expenses was driven by a decrease in professional fees primarily within unallocated corporate charges and lower incentive based compensation in the Americas and International Tire Operations Segments. Selling, general and administrative expenses were $178 million in the first nine months of 2018 (8.7 percent of net sales) compared to $179 million in the first nine months of 2017 (8.5 percent of net sales). Selling, general, and administrative expenses in the first nine months of 2018 included decreased mark to market costs of stock-based liabilities and reduced incentive compensation, offset by an increase in professional fees and costs related to workforce actions in the U.S. and Latin America, all included primarily within unallocated corporate charges. 2017 unallocated corporate charges also included the write-off of assets related to the Company's global ERP system implementation, which did not recur in 2018.

27


Interest expense and interest income for the three and nine month periods ended September 30, 2018 and 2017, respectively, were comparable.
As a result of the adoption of ASU 2017-07, the income statement presentation of net periodic benefit cost was changed in the first quarter of 2018. The service cost component of net periodic benefit cost continues to be classified in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are presented in the income statement separately from the service cost component as Other pension and postretirement benefit expense, outside of operating profit. Application of the standard has been applied retrospectively for all periods presented. Other pension and postretirement benefit expense decreased to $7 million in the third quarter of 2018 from $9 million in the third quarter of 2017. For the nine months ended September 30, 2018, other pension and postretirement benefit expense decreased to $21 million from $28 million in the comparable period of 2017. The decrease in both periods is primarily the result of decreased amortization of actuarial loss in 2018 as a result of improved funding levels at the last actuarial valuation date of December 31, 2017.
Other income increased $4 million in the third quarter of 2018 and $1 million in the first nine months of 2018 due primarily to the impact of foreign currency forward contracts.
For the three month period ended September 30, 2018, the Company recorded income tax expense of $16 million (effective rate of 22.6 percent) compared to $32 million (effective rate of 33.8 percent) for the same period in 2017. For the nine month period ended September 30, 2018, the Company recorded a provision for income taxes of $22 million (effective tax rate of 21.5 percent) compared to $67 million (effective tax rate of 32.8 percent) for the same period in 2017. The effective tax rate for the three month period ended September 30, 2018 differs from the U.S. federal statutory rate of 21 percent primarily due to net discrete tax expense of $1 million recorded during the quarter, the projected mix of earnings in international jurisdictions with differing tax rates, and jurisdictions where valuation allowances are recorded. The discrete items include a benefit of approximately $4 million related to a discretionary pension contribution for the 2017 tax year as re-measured to the lower U.S. statutory rate which was more than offset by approximately $5 million of tax expense related to an adjustment of the 2017 Transition Tax and related state income tax effects. The effective tax rate for the nine month period ended September 30, 2018 differs from the U.S. federal statutory rate of 21 percent primarily due to net discrete tax expense as noted for the quarter, the projected mix of earnings in international jurisdictions with differing tax rates, and jurisdictions where valuation allowances are recorded. The lower statutory rate in 2018 reflects the impact of the 2017 comprehensive U.S. tax legislation.
The Company continues to maintain a valuation allowance pursuant to ASC 740, “Accounting for Income Taxes,” against a portion of its U.S. and non-U.S. deferred tax asset position, as it cannot assure the utilization of these assets before they expire. In the U.S., the Company has offset a portion of its deferred tax asset relating primarily to a loss carryforward by a valuation allowance of $1 million. In addition, the Company has recorded valuation allowances of $27 million relating to non-U.S. net operating losses. In conjunction with the Company’s ongoing review of its actual results and anticipated future earnings, the Company will continue to reassess the possibility of releasing all or part of the valuation allowances currently in place when they are deemed to be realizable.
Segment Operating Results
The Company has four segments under ASC 280:
•
North America, composed of the Company’s operations in the United States and Canada;
•
Latin America, composed of the Company’s operations in Mexico, Central America and South America;
•
Europe; and
•
Asia.
North America and Latin America meet the criteria for aggregation in accordance with ASC 280, as they are similar in their production and distribution processes and exhibit similar economic characteristics. The aggregated North America and Latin America segments are presented as “Americas Tire Operations” in the segment operating results discussion.
Both the Asia and Europe segments have been determined to be individually immaterial, as they do not meet the quantitative requirements for segment disclosure under ASC 280. In accordance with ASC 280, information about operating segments that are not reportable shall be combined and disclosed in an all other category separate from other reconciling items. As a result, these two segments have been combined in the segment operating results discussion. The results of the combined Asia and Europe segments are presented as “International Tire Operations.”

28


Americas Tire Operations Segment
(Dollar amounts in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
Change
 
2017
 
2018
 
Change
 
2017
Net sales
$
628,704

 
0.5
 %
 
$
625,423

 
$
1,698,507

 
(4.2
)%
 
$
1,772,138

Operating profit
$
87,353

 
(30.1
)%
 
$
125,056

 
$
159,068

 
(44.5
)%
 
$
286,725

Operating margin
13.9
%
 
(6.1) points

 
20.0
%
 
9.4
%
 
(6.8) points

 
16.2
%
Total unit sales change
 
 
(0.3
)%
 
 
 
 
 
(3.1
)%
 
 
United States replacement market unit shipment changes:
 
 
 
 
 
 
 
 
 
 
 
Total light vehicle tires
 
 
 
 
 
 
 
 
 
 
 
Segment
 
 
1.5
 %
 
 
 
 
 
(2.5
)%
 
 
USTMA members
 
 
0.4
 %
 
 
 
 
 
(1.8
)%
 
 
Total Industry
 
 
4.9
 %
 
 
 
 
 
2.8
 %
 
 
Overview
The Americas Tire Operations segment is the aggregation of the Company’s North America and Latin America operating segments. The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in the U.S. replacement market. The segment also has a joint venture manufacturing operation in Mexico, COOCSA, which supplies passenger car tires to the North American, Mexican, Central American and South American markets. The segment also distributes racing, TBR and motorcycle tires. The racing and motorcycle tires are manufactured by the Company’s European operations and by others. The TBR tires are sourced from GRT and through an off-take agreement that was entered with PCT, the Company's former joint venture. In December 2017, the Company signed an off-take agreement with Sailun, effective from January 1, 2018 through December 31, 2020, as an additional source of TBR tires. Major distribution channels and customers include independent tire dealers, wholesale distributors, regional and national retail tire chains, and large retail chains that sell tires as well as other automotive products. The segment does not currently sell its products directly to end users, except through three Company-owned retail stores. The segment sells a limited number of tires to OEMs.
Sales
Net sales of the Americas Tire Operations segment for the third quarter of 2018 increased $4 million, or 0.5 percent, from the third quarter of 2017. The increase in sales was a result of favorable pricing and mix ($8 million), partially offset by lower unit volume ($2 million), and unfavorable foreign currency impact ($2 million). Unit shipments for the segment decreased 0.3 percent compared with the third quarter of 2017. In the U.S., the segment’s unit shipments of total light vehicle tires increased 1.5 percent in the third quarter of 2018 compared with the third quarter of 2017. This increase compares with a 0.4 percent increase in total light vehicle tire shipments experienced by the members of the U.S. Tire Manufacturing Association (“USTMA”), and a 4.9 percent increase in total light vehicle tire shipments experienced for the total industry (which includes an estimate for non-USTMA members).
Net sales of the Americas Tire Operations segment for the first nine months of 2018 decreased $73 million, or 4.2 percent, from the first nine months of 2017. The decrease in sales was a result of lower unit volume ($54 million), unfavorable price and mix ($18 million) and unfavorable foreign currency impact ($1 million). Unit shipments for the segment decreased 3.1 percent compared with the first nine months of 2017. In the U.S., the segment’s unit shipments of total light vehicle tires decreased 2.5 percent in the first nine months of 2018 compared with 2017. This decrease compares with a 1.8 percent decrease in total light vehicle tire shipments experienced by the members of the USTMA, and a 2.8 percent increase in total light vehicle tire shipments experienced for the total industry.
Operating Profit
Operating profit for the segment decreased $38 million to $87 million in the third quarter of 2018. The segment experienced higher raw material costs ($21 million), unfavorable price and mix ($2 million) and higher manufacturing costs ($9 million) in the third quarter of 2018, which reflect unabsorbed fixed overhead due to managing production to reduce the number of tires in inventory, as well as lower demand in Latin America. Additionally, in the third quarter of 2018, the segment experienced higher product liability costs ($3 million) and increased other costs ($3 million), including higher distribution costs related to the Company's new West Coast warehouse, as well as higher freight costs.
Operating profit for the segment decreased $128 million to $159 million in the first nine months of 2018. The segment experienced higher raw material costs ($10 million), unfavorable price and mix ($41 million) and lower unit volumes ($15

29


million) compared to the first nine months of 2017. The segment also experienced increased manufacturing costs ($37 million), primarily as a result of decisions to lower production volume and actions to control inventory levels due to the decline in unit shipments in the first nine months of 2018. In the first quarter of 2017, the Company had a reversal of $22 million related to preliminary truck and bus tire duties expensed in 2016. This was partially offset by $11 million of benefit in the first nine months of 2018 related to the timing of costs and insurance recoveries resulting from tornado damage at a North American distribution center in 2017. Other costs increased ($14 million) in the first nine months of 2018, including costs related to workforce actions in Latin America, as well as start-up costs related to two new U.S. distribution warehouses and increased freight costs.
The segment’s internally calculated raw material index of 168.8 during the quarter was an increase of 12.4 percent from the third quarter of 2017. The raw material index increased 3.1 percent from the quarter ended June 30, 2018.
International Tire Operations Segment
(Dollar amounts in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
Change
 
2017
 
2018
 
Change
 
2017
Net sales
$
162,401

 
(0.6
)%
 
$
163,345

 
$
491,484

 
7.6
 %
 
$
456,680

Operating profit
$
5,994

 
193.5
 %
 
$
2,042

 
$
19,080

 
146.0
 %
 
$
7,757

Operating margin
3.7
%
 
2.4 points

 
1.3
%
 
3.9
%
 
2.2 points

 
1.7
%
Total unit sales change
 
 
(4.1
)%
 
 
 
 
 
(3.0
)%
 
 
Overview
The International Tire Operations segment is the combination of the Asia and Europe operating segments. The European operations include manufacturing operations in the U.K. and Serbia. The U.K. entity manufactures and markets passenger car, light truck, motorcycle and racing tires and tire retread material for domestic and global markets. The Serbian entity manufactures passenger car and light truck tires primarily for the European markets and for export to the U.S. The Asian operations are located in the PRC. Cooper Kunshan Tire manufactures passenger car and light truck tires both for the Chinese domestic market and for export to markets outside of the PRC. On December 1, 2016, the Company acquired 65 percent of China-based GRT, a joint venture manufacturing facility located in the PRC. GRT serves as a global source of truck and bus radial tire production for the Company. The segment also had another joint venture in the PRC, PCT, which manufactured and marketed truck and bus radial and bias tires as well as passenger car and light truck tires for domestic and global markets. The Company sold its ownership interest in this joint venture in November 2014, and the Company began procuring certain TBR and passenger car tires under off-take agreements with PCT through mid-2018, which were subsequently extended and now expire in mid-2019. In December 2017, the Company signed an off-take agreement with Sailun as an additional source of TBR tires. The segment sells a majority of its tires in the replacement market, with a growing portion also sold to OEMs.
On October 10, 2018, Cooper Tire Europe announced that it will enter a consultation period to explore ceasing light vehicle tire production at its U.K. manufacturing location. If Cooper Tire Europe goes forward with such a plan after consultation, light vehicle tires currently produced in the U.K. could be obtained by Cooper Tire Europe from other sites within Cooper’s global manufacturing footprint . The goal of the proposed change is to ensure Cooper Tire Europe is best placed for future success in a cost-competitive, globalized environment. No decision has been reached regarding the production of light vehicle tires in the U.K. and, as such, the Company has not incurred any restructuring, severance or impairment charges related to this announcement.
Sales
Net sales of the International Tire Operations segment decreased from $163 million in the third quarter of 2017 to $162 million in the third quarter of 2018, a decrease of 0.6 percent. The segment experienced decreased unit volume ($7 million), partially offset by favorable price and mix ($5 million) and favorable foreign currency impact ($1 million). Net segment unit exports to the U.S. decreased 15.6 percent compared with the third quarter of 2017.
Net sales of the International Tire Operations segment for the first nine months of 2018 increased $34 million, or 7.6 percent, from the first nine months of 2017. The segment experienced favorable price and mix ($22 million) and foreign currency impact ($26 million), partially offset by decreased unit volume ($14 million) compared with the first nine months of 2017. Net segment exports to the U.S. decreased 7.4 percent compared with the first nine months of 2017.



30


Operating Profit
Operating profit for the segment increased $4 million from the third quarter of 2017 to an operating profit of $6 million in the third quarter of 2018. The segment benefited from favorable raw materials, net of price and mix ($9 million), partially offset by increased manufacturing costs ($3 million) due to lower production levels. Other costs ($2 million) increased compared to the third quarter of 2017.
Operating profit for the segment increased $11 million from the first nine months of 2017 to an operating profit of $19 million in the first nine months of 2018. The segment experienced lower raw material costs ($16 million) and favorable price and mix ($6 million), partially offset by increased manufacturing costs ($7 million) due to lower production levels, decreased volume ($2 million) and increased other costs ($2 million) in the first nine months of 2018.
Outlook for Company
The Company anticipates unit volume growth in the U.S. in the fourth quarter, offset by continued volume declines in other regions. In the fourth quarter, the raw material index is projected to be flat sequentially compared to the third quarter. Operating profit margin is expected to be close to the third quarter of 2018, excluding the benefit from lower product liability costs in the third quarter.
The Company expects its full year 2018 effective tax rate will be in a range between 23 and 26 percent.
The Company expects capital expenditures for 2018 will be in a range of $200 million to $220 million.

Cooper Tire Europe recently announced its decision to enter an employee consultation period to explore ceasing light vehicle tire production at its Melksham, England facility and obtaining such tires from other locations in the broader, global Cooper production network. The fourth quarter outlook does not include any one-time charges related to actions resulting from potential outcomes of this process.
Liquidity and Capital Resources
Uses of cash in operating activities - Net cash provided by operating activities was $34 million in the first nine months of 2018 compared to net cash consumed of $33 million in the first nine months of 2017. In the first nine months of 2018, net income provided $80 million and other non-cash charges contributed $143 million, partially offset by changes in working capital accounts, which consumed $190 million. In the first nine months of 2017, net income provided $138 million and other non-cash charges contributed $127 million, which were more than offset by changes in working capital accounts, which consumed $298 million. The change to cash provided in operating activities in 2018 as compared to cash consumed in 2017 is primarily the result of management of inventory levels in 2018 to minimize growth compared to the increased inventory levels in 2017, coupled with favorable movement in accounts payable in the first nine months of 2018, partially offset by lower net income in 2018.
Uses of cash in investing activities - Net cash used in investing activities during the first nine months of 2018 and 2017 reflect capital expenditures of $144 million and $143 million, respectively.
Uses of cash in financing activities - The Company repurchased $30 million and $70 million of its common stock in the first nine months of 2018 and 2017, respectively. During the first nine months of 2018, the Company repaid $16 million more on short-term debt compared with the first nine months of 2017 in order to meet working capital requirements. Dividends paid on the Company’s common shares were comparable over the first nine months of both 2018 and 2017. During the first nine months of 2018, stock options were exercised to acquire 14,111 shares of common stock with a cash impact of $0.3 million. During the first nine months of 2017, stock options were exercised to acquire 208,268 shares of common stock with a cash impact of $4 million.
Available cash, credit facilities and contractual commitments - At September 30, 2018, the Company had cash and cash equivalents of $209 million.
Domestically, the Company has a revolving credit facility with a consortium of banks that provides up to $400 million based on available collateral, including a $110 million letter of credit subfacility. The revolving credit facility was amended in the first quarter of 2018, which extended the maturity date to February 2023. The Company also has an accounts receivable securitization facility with a borrowing limit of up to $150 million, based on available collateral. The accounts receivable securitization facility was also amended in the first quarter of 2018, which extended the maturity date to February 2021.

31


At September 30, 2018, the Company had no outstanding borrowing on the accounts receivable securitization facility. The Company’s additional borrowing capacity, net of amounts used to back letters of credit and based on available collateral at September 30, 2018, was $525 million.
The Company’s operations in Asia have annual renewable unsecured credit lines that provide up to $65 million of borrowings and do not contain significant financial covenants. The additional borrowing capacity on the Asian credit lines totaled $50 million at September 30, 2018.
The Company believes that its cash and cash equivalent balances along with available cash from operating cash flows and credit facilities will be adequate to fund its typical needs, including working capital requirements, projected capital expenditures, including its portion of capital expenditures in its partially-owned subsidiaries, and dividend and share repurchase goals. The Company also believes it has access to additional funds from capital markets to fund potential strategic initiatives. The entire amount of short-term notes payable outstanding at September 30, 2018 is debt of consolidated subsidiaries. The Company expects its subsidiaries to refinance or pay these amounts within the next twelve months.
The following table summarizes long-term debt at September 30, 2018:
Parent company
 
8% unsecured notes due December 2019
$
173,578

7.625% unsecured notes due March 2027
116,880

Capitalized leases and other
6,439

 
296,897

Less: unamortized debt issuance costs
680

 
296,217

Less: current maturities
1,376

 
$
294,841

Contingencies
The Company is a defendant in various product liability claims brought in numerous jurisdictions in which individuals seek damages resulting from motor vehicle accidents allegedly caused by defective tires manufactured by the Company. Each of the product liability claims faced by the Company generally involves different types of tires and circumstances surrounding the accident such as different applications, vehicles, speeds, road conditions, weather conditions, driver error, tire repair and maintenance practices, service life conditions, as well as different jurisdictions and different injuries. In addition, in many of the Company’s product liability lawsuits the plaintiff alleges that his or her harm was caused by one or more co-defendants who acted independently of the Company. Accordingly, both the claims asserted and the resolutions of those claims have an enormous amount of variability. The aggregate amount of damages asserted at any point in time is not determinable since often times when claims are filed, the plaintiffs do not specify the amount of damages. Even when there is an amount alleged, at times the amount is wildly inflated and has no rational basis.
Pursuant to ASC 450, the Company accrues the minimum liability for each known claim when the estimated outcome is a range of probable loss and no one amount within that range is more likely than another. The Company uses a range of losses because an average cost would not be meaningful since the product liability claims faced by the Company are unique and widely variable, and accordingly, the resolutions of those claims have an enormous amount of variability. The costs have ranged from zero dollars to $33 million in one case with no “average” that is meaningful. No specific accrual is made for individual unasserted claims or for premature claims, asserted claims where the minimum information needed to evaluate the probability of a liability is not yet known.
However, an accrual for such claims based, in part, on management’s expectations for future litigation activity and the settled claims history is maintained. The Company periodically reviews such estimates and any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. Because of the speculative nature of litigation in the U.S., the Company does not believe a meaningful aggregate range of potential loss for asserted and unasserted claims can be determined. While the Company believes its reserves are reasonably stated, it is possible an individual claim from time to time may result in an aberration from the norm and could have a material impact.
In addition to the product liability cases described above, the Company is involved in various other legal proceedings arising in the ordinary course of business. The Company regularly reviews the probable outcome of these proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and accrues for these proceedings at the time a loss is probable and the amount of the loss can be estimated. Although the outcome of these pending proceedings cannot be predicted with certainty and an estimate of any such loss cannot be made, the Company believes that any liabilities that may

32


result from these proceedings are not reasonably likely to have a material adverse effect on the Company’s liquidity, financial condition or results of operations. Additional information regarding the Company’s legal proceedings is included in Item 1 of Part II of this Form 10-Q titled, “Legal Proceedings.”
Forward Looking Statements
This report contains what the Company believes are “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995, regarding projections, expectations or matters that the Company anticipates may happen with respect to the future performance of the industries in which the Company operates, the economies of the United States and other countries, or the performance of the Company itself, which involve uncertainty and risk. Such “forward-looking statements” are generally, though not always, preceded by words such as “anticipates,” “expects,” “will,” “should,” “believes,” “projects,” “intends,” “plans,” “estimates,” and similar terms that connote a view to the future and are not merely recitations of historical fact. Such statements are made solely on the basis of the Company’s current views and perceptions of future events, and there can be no assurance that such statements will prove to be true.
It is possible that actual results may differ materially from projections or expectations due to a variety of factors, including but not limited to:
•
volatility in raw material and energy prices, including those of rubber, steel, petroleum-based products and natural gas or the unavailability of such raw materials or energy sources;
•
the failure of the Company’s suppliers to timely deliver products or services in accordance with contract specifications;
•
changes to tariffs or trade agreements, or the imposition of new tariffs or trade restrictions, imposed on tires or materials or manufacturing equipment which the Company uses, including changes related to tariffs on automotive imports, as well as on tires, raw materials and tire-manufacturing equipment imported into the U.S. from China;
•
changes in economic and business conditions in the world, including changes related to the United Kingdom’s decision to withdraw from the European Union;
•
the impact of the recently enacted tax reform legislation;
•
increased competitive activity including actions by larger competitors or lower-cost producers;
•
the failure to achieve expected sales levels;
•
changes in the Company’s customer or supplier relationships or distribution channels, including the write-off of outstanding accounts receivable or loss of particular business for competitive, credit, liquidity, bankruptcy, restructuring or other reasons;
•
the costs and timing of restructuring actions and impairments or other charges resulting from such actions, including the possible outcome of the recently announced consultation period in the U.K., or from adverse industry, market or other developments;
•
consolidation or other cooperation by and among the Company’s competitors or customers;
•
inaccurate assumptions used in developing the Company’s strategic plan or operating plans, including impairment of goodwill supported by such plans, or the inability or failure to successfully implement such plans or to realize the anticipated savings or benefits from strategic actions;
•
the ultimate outcome of litigation brought against the Company, including product liability claims, which could result in commitment of significant resources and time to defend and possible material damages against the Company or other unfavorable outcomes;
•
a disruption in, or failure of, the Company’s information technology systems, including those related to cybersecurity, could adversely affect the Company’s business operations and financial performance;
•
changes in pension expense and/or funding resulting from the Company’s pension strategy, investment performance of the Company’s pension plan assets and changes in discount rate or expected return on plan assets assumptions, or changes to related accounting regulations;
•
government regulatory and legislative initiatives including environmental, healthcare, privacy and tax matters;
•
volatility in the capital and financial markets or changes to the credit markets and/or access to those markets;
•
a variety of factors, including market conditions, may affect the actual amount expended on stock repurchases; the Company’s ability to consummate stock repurchases; changes in the Company’s results of operations or financial conditions or strategic priorities may lead to a modification, suspension or cancellation of stock repurchases, which may occur at any time;
•
changes in interest or foreign exchange rates;
•
an adverse change in the Company’s credit ratings, which could increase borrowing costs and/or hamper access to the credit markets;
•
failure to implement information technologies or related systems, including failure by the Company to successfully implement ERP systems;
•
the risks associated with doing business outside of the U.S.;
•
the failure to develop technologies, processes or products needed to support consumer demand or changes in consumer behavior, including changes in sales channels;

33


•
technology advancements;
•
the inability to recover the costs to develop and test new products or processes;
•
the impact of labor problems, including labor disruptions at the Company, its joint ventures, or at one or more of its large customers or suppliers;
•
failure to attract or retain key personnel;
•
risks relating to acquisitions, including the failure to successfully integrate them into operations or their related financings may impact liquidity and capital resources;
•
changes in the Company’s relationship with its joint-venture partners or suppliers, including any changes with respect to its former PCT joint venture’s production of Cooper-branded products;
•
the ability to find alternative sources for products supplied by PCT;
•
the inability to obtain and maintain price increases to offset higher production or material costs;
•
inability to adequately protect the Company’s intellectual property rights; and
•
inability to use deferred tax assets.
It is not possible to foresee or identify all such factors. Any forward-looking statements in this report are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Prospective investors are cautioned that any such statements are not a guarantee of future performance and actual results or developments may differ materially from those projected.
The Company makes no commitment to update any forward-looking statement included herein or to disclose any facts, events or circumstances that may affect the accuracy of any forward-looking statement. Further information covering issues that could materially affect financial performance is contained under Risk Factors below and in the Company’s other filings with the U. S. Securities and Exchange Commission (“SEC”).
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk at September 30, 2018 from those detailed in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2017.
Item 4.
CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports the Company files or submits as defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) to allow timely decisions regarding required disclosures.

The Company, under the supervision and with the participation of management, including the CEO and CFO, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as of September 30, 2018 (“Evaluation Date”)). Based on its initial evaluation, the Company’s CEO and CFO concluded that its disclosure controls and procedures were effective as of the Evaluation Date.

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.


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Part II.
OTHER INFORMATION
 
Item 1.
LEGAL PROCEEDINGS
The Company is a defendant in various judicial proceedings arising in the ordinary course of business. A significant portion of these proceedings are product liability cases in which individuals involved in motor vehicle accidents seek damages resulting from allegedly defective tires manufactured by the Company. After reviewing all of these proceedings, and taking into account all relevant factors concerning them, the Company does not believe that any liabilities resulting from these proceedings are reasonably likely to have a material adverse effect on its liquidity, financial condition or results of operations in excess of amounts recorded at September 30, 2018. In the future, such costs could have a materially greater impact on the consolidated results of operations and financial position of the Company than in the past.
Item 1A.
RISK FACTORS
Some of the more significant risk factors related to the Company follow:
Pricing volatility for raw materials or commodities or an inadequate supply of key raw materials could result in increased costs and may significantly affect the Company’s profitability.
The pricing volatility for natural rubber, petroleum-based materials and other raw materials contributes to the difficulty in managing the costs of raw materials. Costs for certain raw materials used in the Company’s operations, including natural rubber, chemicals, carbon black, steel reinforcements and synthetic rubber remain highly volatile. Increasing costs for raw material supplies will increase the Company’s production costs and affect its margins if the Company is unable to pass the higher production costs on to its customers in the form of price increases. Even if the Company is able to pass along these higher costs, its profitability may be adversely affected until it is able to do so. Decreasing costs for raw materials could also affect margins if the Company is unable to maintain its pricing structure due to the need to offer price reductions to remain competitive. Further, if the Company is unable to obtain adequate supplies of raw materials in a timely manner for any reason, its operations could be interrupted or otherwise adversely affected.
The Company is facing heightened risks due to the uncertain business environment.
Current global economic conditions may affect demand for the Company’s products, create volatility in raw material costs and affect the availability and cost of credit. These conditions also affect the Company’s customers and suppliers as well as the ultimate consumer.
Deterioration in the global macroeconomic environment or in specific regions could impact the Company and, depending upon the severity and duration of these factors, the Company’s profitability and liquidity position could be negatively impacted.
The Company’s competitors may also change their actions as a result of changes to the business environment, which could result in increased price competition and discounts, resulting in lower margins or reduced sales volumes for the business.
In addition, the bankruptcy, restructuring, consolidation or other cooperation of one or more of the Company’s major customers or suppliers, as well as the strategic actions of competitors, could result in the write-off of accounts receivable, a reduction in purchases of the Company’s products or a supply disruption to its facilities, which could harm the Company’s results of operations, financial condition and liquidity.
The Company’s results could be impacted by changes in tariffs, trade agreements or other trade restrictions imposed by the U.S. or other governments on imported tires, raw materials or equipment used in tire manufacturing.
The Company’s ability to competitively source and sell tires can be significantly impacted by changes in tariffs, changes or repeals of trade agreements, including withdrawal from or material modifications to NAFTA, including the implementation of the USMCA, or certain other international trade agreements, or other trade restrictions or retaliatory actions imposed by various governments. Other effects, including impacts on the price of tires, responsive actions from governments and the opportunity for competitors to establish a presence in markets where the Company participates, could also have significant impacts on the Company’s results.
For example, antidumping and countervailing duty investigations into certain passenger car and light truck tires imported from the PRC into the United States were initiated on July 14, 2014. The determinations announced in both investigations were affirmative and resulted in the imposition of significant additional duties from each.
Antidumping and countervailing duty investigations into certain truck and bus tires imported from the PRC into the U.S. were initiated on January 29, 2016. The preliminary determinations announced in both investigations were affirmative and resulted in the imposition of significant additional duties from each. On February 22, 2017, the International Trade Commission ("ITC")

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made a final determination that the U.S. market had not suffered material injury because of imports of truck and bus tires from China. As a result of this decision, preliminary antidumping and countervailing duties from Chinese truck and bus tires imported subsequent to the preliminary determination were not collected and any amounts previously paid were refunded. On April 14, 2017, the United Steelworkers Union filed a civil action challenging the ITC's decision not to impose duties on truck and bus tires from China imported into the U.S. and that case is still pending.
Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation (“July 301 Investigation”), passenger, light truck and truck and bus tires, raw materials and tire-manufacturing equipment from the PRC imported into the U.S. became subject to additional 10 percent duties effective September 24, 2018. These duties are scheduled to increase to 25 percent effective January 1, 2019. Retaliatory duties on U.S. products have been implemented in response to these additional duties by China. In addition, depending on the outcome of the Section 232 National Security Investigation of Automobiles, Including Cars, SUVs, Vans and Light Trucks, and Automotive Parts (“Automobile 232 Investigation”), passenger car and light truck tires imported into the U.S. may be subject to an additional duty.
The imposition of additional duties or other trade restrictions in the U.S. or elsewhere on raw materials or tire-manufacturing equipment used by the Company or on certain tires imported from the PRC or other countries will result in higher costs and potentially lower margins, or in the case of finished goods, in those tires being diverted to other regions of the world, such as Europe, Latin America or elsewhere in Asia, which could materially harm the Company’s results of operations, financial condition and liquidity.
The Company’s industry is highly competitive, and the Company may not be able to compete effectively with lower-cost producers and larger competitors.
The tire industry is a highly competitive, global industry. Some of the Company’s competitors are larger companies with greater financial resources. Intense competitive activity in the replacement tire industry, including consolidation or other cooperation by and among the Company's competitors, has caused, and will continue to cause, pressures on the Company’s business, as well as pressure on certain of the Company's customers, suppliers or distribution network. As the Company increases its presence in the original equipment market, the demand for products by the OEM's will be impacted by automotive vehicle production. The Company’s ability to compete successfully will depend in part on its ability to balance capacity with demand, leverage global purchasing of raw materials, make required investments to improve productivity, eliminate redundancies and increase production at low-cost, high-quality supply sources. If the Company is unable to offset continued pressures with improved operating efficiencies, its sales, margins, operating results and market share would decline and the impact could become material on the Company’s earnings.
The Company is facing supply risks related to certain tires it purchases from PCT.
In 2014, the Company sold its ownership interest in PCT and entered into off-take agreements with PCT to provide the continuous supply of certain TBR and passenger car tires for the Company through mid-2018. The agreements have been extended and now expire in mid-2019. If there are any disruptions in or quality issues with the supply of Cooper-branded products from PCT, it could have a material negative impact on the Company’s business. The Company is actively pursuing options to ensure the uninterrupted supply of these tires to meet the demands of the business beyond the terms of the PCT off-take agreements, including sourcing through GRT and an off-take agreement with Sailun, but there can be no assurance that the Company will be able to do so in a timely manner.
If the Company fails to develop technologies, processes or products needed to support consumer demand or, changes in consumer behavior, it may lose significant market share or be unable to recover associated costs.
The Company’s ability to sell tires may be significantly impacted if it does not develop or have available technologies, processes, or products that competitors may be developing and consumers demanding. This includes, but is not limited to, changes in the design of and materials used to manufacture tires, changes in the types of tires consumers desire, changes in the vehicles consumers are purchasing and failure to effectively compete in various sales channels, including digital channels and others in which the Company has been less active in the past.
Technologies or processes may also be developed by competitors that better distribute tires to consumers, which could affect the Company’s customers and implementation of its strategic plan.
An increase in consumer preference for car- and ride-sharing services, as opposed to automobile ownership, may result in a long term reduction in the number of vehicles per capita. Additionally, developing new products and technologies requires significant investment and capital expenditures, is technologically challenging and requires extensive testing and accurate anticipation of technological and market trends. If the Company fails to develop new products that are appealing to its customers, or fails to develop products on time and within budgeted amounts, the Company may be unable to recover its

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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.
If assumptions used in developing the Company’s strategic plan are inaccurate or the Company is unable to execute its strategic plan effectively, its profitability and financial position could be negatively impacted.
The Company faces both general industry and company-specific challenges. These include volatile raw material costs, increasing product complexity and pressure from competitors with greater resources or manufacturing in lower-cost regions. To address these challenges and position the Company for future success, the Company continues to execute towards strategic imperatives outlined in its Strategic Plan. The three strategic imperatives are building a sustainable cost competitive position, driving top-line profitable growth and building organizational capabilities and enablers to support strategic goals.
The Company continually reviews and updates its business plans to achieve these imperatives. If the assumptions used in developing the Company’s business plans vary significantly from actual conditions, the Company’s sales, margins and profitability could be harmed. If the Company is unsuccessful in implementing the tactics necessary to execute its business plans, it may not be able to achieve or sustain future profitability, which could impair its ability to meet debt and other obligations and could otherwise negatively affect its operating results, financial condition and liquidity.
Any interruption in the Company’s skilled workforce, or that of its suppliers or customers, including labor disruptions, could impair its operations and harm its earnings and results of operations.
The Company’s operations depend on maintaining a skilled workforce and any interruption of its workforce due to shortages of skilled technical, production or professional workers, work disruptions, or other events could interrupt the Company’s operations and affect its operating results. Further, a significant number of the Company’s employees are currently represented by unions. If the Company is unable to resolve any labor disputes or if there are work stoppages or other work disruptions at the Company or any of its suppliers or customers, the Company’s business and operating results could suffer. See also related comments under “The Company is facing supply risks related to certain tires it purchases from PCT.”
If the Company is unable to attract and retain key personnel, its business could be materially adversely affected.
The Company’s business depends on the continued service of key members of its management. The loss of the services of a significant number of members of its management team could have a material adverse effect on its business. The Company’s future success will also depend on its ability to attract, retain and develop highly skilled personnel, such as engineering, marketing and senior management professionals. Competition for these employees is intense and the Company could experience difficulty in hiring and retaining the personnel necessary to support its business. If the Company does not succeed in retaining its current employees and attracting new high-quality employees, its business could be materially adversely affected.
A disruption in, or failure of, the Company’s information technology systems, including those related to cybersecurity, could adversely affect the Company’s business operations and financial performance.
The Company relies on the accuracy, capacity and security of its information technology systems across all of its major business functions, including its research and development, manufacturing, sales, financial and administrative functions. While the Company maintains some of its critical information technology systems, it is also dependent on third parties to provide important information technology services relating to, among other things, human resources, electronic communications and certain finance functions. Additionally, the Company collects and stores sensitive data, including intellectual property, proprietary business information and the proprietary business information of its customers and suppliers, as well as personally identifiable information of the Company’s customers and employees, in data centers and on information technology networks. Despite the security measures that the Company has implemented, including those related to cybersecurity, its systems could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. Furthermore, the Company may have little or no oversight with respect to security measures employed by third-party service providers, which may ultimately prove to be ineffective at countering threats. A system failure, accident or security breach could result in business disruption, theft of its intellectual property, trade secrets or customer information and unauthorized access to personnel information. To the extent that any system failure, accident or security breach results in disruptions to its operations or the theft, loss or disclosure of, or damage to, its data or confidential information, the Company’s reputation, business, results of operations, cash flows and financial condition could be materially adversely affected. In addition, the Company may be required to incur significant costs to protect against and, if required, remediate the damage caused by such disruptions or system failures in the future.

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The Company may be adversely affected by legal actions, including product liability claims which, if successful, could have a negative impact on its financial position, cash flows and results of operations.
The Company’s operations expose it to legal actions, including potential liability for personal injury or death as an alleged result of the failure of or conditions in the products that it designs, manufactures and sells. Specifically, the Company is a party to a number of product liability cases in which individuals involved in motor vehicle accidents seek damages resulting from allegedly defective tires that it manufactured. Product liability claims and lawsuits, including possible class action, may result in material losses in the future and cause the Company to incur significant litigation defense costs. The Company is largely self-insured against these claims. These claims could have a negative effect on the Company’s financial position, cash flows and results of operations.
From time to time, the Company is also subject to litigation or other commercial disputes and other legal proceedings relating to its business. Due to the inherent uncertainties of any litigation, commercial disputes or other legal proceedings, the Company cannot accurately predict their ultimate outcome, including the outcome of any related appeals. An unfavorable outcome could materially adversely impact the Company’s financial condition, cash flows and results of operations.
The Company conducts its manufacturing, sales and distribution operations on a worldwide basis and is subject to risks associated with doing business outside the U.S.
The Company has affiliate, subsidiary and joint venture operations worldwide, including in the U.S., Europe, Mexico and the PRC. The Company has a wholly-owned manufacturing entity, Cooper Kunshan Tire, and is the majority owner of GRT, both in the PRC. The Company also is the majority owner of COOCSA, a manufacturing entity in Mexico, and has established operations in Serbia and the U.K. PCT, located in the PRC, is currently a supplier of TBR tires for the Company and the Company recently entered into an off-take agreement with Sailun, located in Vietnam, for the supply of TBR tires. There are a number of risks in doing business abroad, including political and economic uncertainty, social unrest, sudden changes in laws and regulations, ability to enforce existing or future contracts, shortages of trained labor and the uncertainties associated with entering into joint ventures or similar arrangements in foreign countries. These risks may impact the Company’s ability to expand its operations in different regions and otherwise achieve its objectives relating to its foreign operations, including utilizing these locations as suppliers to other markets. In addition, compliance with multiple and potentially conflicting foreign laws and regulations, import and export limitations and exchange controls is burdensome and expensive. For example, the Company could be adversely affected by violations of the Foreign Corrupt Practices Act (“FCPA”) and similar worldwide anti-bribery laws as well as export controls and economic sanction laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials and, in some cases, other persons, for the purpose of obtaining or retaining business. Violations of these laws and regulations could result in civil and criminal fines, penalties and sanctions against the Company, its officers or its employees, prohibitions on the conduct of the Company’s business and on its ability to offer products and services in one or more countries, and could also harm the Company’s reputation, business and results of operations. The Company’s foreign operations also subject it to the risks of international terrorism and hostilities and to foreign currency risks, including exchange rate fluctuations and limits on the repatriation of funds. See also related comments under "The Company’s results could be impacted by changes in tariffs, trade agreements or other trade restrictions imposed by the U.S. or other governments on imported tires or raw materials."
The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets or the Company’s business.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The terms of the withdrawal are subject to a negotiation period that could last until or beyond March 2019, two years after the government of the United Kingdom formally initiated the withdrawal process. Nevertheless, the referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate as part of the withdrawal. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal.
These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, including volatility in the value of the British pound sterling and Euro. These developments may also significantly reduce global market liquidity or restrict the ability of key market participants to operate in certain financial markets. The effects of the United Kingdom’s withdrawal from the European Union will also depend on terms of new trade agreements between the United Kingdom and other countries, as well as any other agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. Any of these factors could depress economic activity and restrict the Company’s access to capital, which could have a material adverse effect on the Company’s business, financial condition and results of operations. These

38


developments may also have other direct or indirect effects which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Compliance with legal and regulatory initiatives could increase the cost of operating the Company’s business.
The Company is subject to federal, state, local and foreign laws and regulations. Compliance with those laws now in effect, or that may be enacted, could require significant capital expenditures, increase the Company’s production costs and affect its earnings and results of operations. Periodic changes as the result of elections in the U.S. and worldwide make it difficult to predict the legislative and regulatory changes that may occur.
Several countries have or may implement labeling requirements for tires. This legislation could cause the Company’s products to be at a disadvantage in the marketplace resulting in a loss of market share or could otherwise impact the Company’s ability to distribute and sell its tires.
In addition, while the Company believes that its tires are free from design and manufacturing defects and comply with all applicable regulations and standards, it is possible that a recall of the Company’s tires could occur in the future. A recall could harm the Company’s reputation, operating results and financial position.
The Company is also subject to legislation governing labor, environmental, privacy and data protection, occupational safety and health both in the U.S. and other countries. The related legislation can change over time making it more expensive for the Company to produce its products.
The Company could also, despite its best efforts to comply with these laws and regulations, be found liable and be subject to additional costs because of these laws and regulations.
The Company may fail to successfully develop or implement information technologies or related systems, resulting in a significant competitive disadvantage.
Successfully competing in the highly competitive tire industry can be impacted by the successful development of information technology. If the Company fails to successfully develop or implement information technology systems, it may be at a disadvantage to its competitors resulting in lost sales and negative impacts on the Company’s earnings.
The Company has implemented an Enterprise Resource Planning system in the United States. The Company is evaluating its available options for information technology solutions outside of the United States, which will require significant amounts of capital and human resources to deploy. These requirements may exceed the Company’s projections. Throughout implementation of the systems, there are also risks created to the Company’s ability to successfully and efficiently operate.
The Company’s expenditures for pension and other postretirement obligations could be materially higher than it has predicted if its underlying assumptions prove to be incorrect.
The Company provides defined benefit and hybrid pension plan coverage to union and non-union U.S. employees and a contributory defined benefit plan in the U.K. The Company’s pension expense and its required contributions to its pension plans are directly affected by the value of plan assets, the projected and actual rates of return on plan assets and the actuarial assumptions the Company uses to measure its defined benefit pension plan obligations, including the discount rate at which future projected and accumulated pension obligations are discounted to a present value and the inflation rate. The Company could experience increased pension expense due to a combination of factors, including the decreased investment performance of its pension plan assets, decreases in the discount rate, changes in its assumptions relating to the expected return on plan assets, updates to mortality tables and the impact of changes to the Company’s pension strategy. The Company could also experience increased other postretirement expense due to decreases in the discount rate, increases in the health care trend rate and changes in the health care environment.
In the event of declines in the market value of the Company’s pension assets or lower discount rates to measure the present value of pension and other postretirement benefit obligations, the Company could experience changes to its Condensed Consolidated Balance Sheet or significant cash requirements.
The Company has a risk due to volatility of the capital and financial markets.
The Company periodically requires access to the capital and financial markets as a significant source of liquidity for maturing debt payments or working capital needs that it cannot satisfy by cash on hand or operating cash flows. Substantial volatility in world capital markets and the banking industry may make it difficult for the Company to access credit markets and to obtain financing or refinancing, as the case may be, on satisfactory terms or at all. In addition, various additional factors, including a deterioration of the Company’s credit ratings or its business or financial condition, could further impair its access to the capital markets and bank financings. Additionally, any inability to access the capital markets or bank financings, including the ability to refinance existing debt when due, could require the Company to defer critical capital expenditures, reduce or not pay

39


dividends, reduce spending in areas of strategic importance, sell important assets or, in extreme cases, seek protection from creditors. See also related comments under “There are risks associated with the Company’s global strategy, which includes using joint ventures and partially-owned subsidiaries.”
The Company’s operations in the PRC have been financed in part using multiple loans from several lenders to finance working capital needs. These loans are generally for terms of one year or less. Therefore, debt maturities occur frequently and access to the capital markets and bank financings is crucial to the Company’s ability to maintain sufficient liquidity to support its operations in the PRC.
There are risks associated with the Company’s global strategy, which includes using joint ventures and partially-owned subsidiaries.
The Company’s strategy includes the use of joint ventures and other partially-owned subsidiaries. These entities operate in countries outside of the U.S., are generally less well capitalized than the Company and bear risks similar to the risks of the Company. In addition, there are specific risks applicable to these subsidiaries and these risks, in turn, add potential risks to the Company. Such risks include greater risk of joint venture partners or other investors failing to meet their obligations under related stockholders’ agreements; conflicts with joint venture partners; the possibility of a joint venture partner taking valuable knowledge from the Company; and risk of being denied access to the capital markets, which could lead to resource demands on the Company in order to maintain or advance its strategy. The Company’s outstanding notes and primary credit facility contain cross default provisions in the event of certain defaults by the Company under other agreements with third parties. For further discussion of access to the capital markets, see also related comments under “The Company has a risk due to volatility of the capital and financial markets.”
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 additional acquisition opportunities, some of which could be material to its business. The Company cannot provide assurance whether it will be successful in pursuing and integrating any acquisition opportunities or what the consequences of any acquisition would be. The Company may encounter various risks in any acquisitions, including:
•
the possible inability to integrate an acquired business into its operations;
•
diversion of management’s attention;
•
loss of key management personnel;
•
unanticipated problems or liabilities;
•
potential impairment of goodwill due to inability to meet operating plans; and
•
increased labor and regulatory compliance costs of acquired businesses.
Some or all of those risks could impair the Company’s results of operations and impact its financial condition. The Company may finance any future acquisitions from internally generated funds, bank borrowings, public offerings or private placements of equity or debt securities, or a combination of the foregoing. Acquisitions may involve the expenditure of significant funds and management time.
Acquisitions may also require the Company to increase its borrowings under its bank credit facilities or other debt instruments, or to seek new sources of liquidity. Increased borrowings would correspondingly increase the Company’s financial leverage, and could result in lower credit ratings and increased future borrowing costs. These risks could also reduce the Company’s flexibility to respond to changes in its industry or in general economic conditions.
In addition, the Company’s business plans call for growth. If the Company is unable to identify or execute on appropriate opportunities for acquisition, investment or growth, its business could be materially adversely affected.
If the price of energy sources increases, the Company’s operating expenses could increase significantly or the demand for the Company’s products could be affected.
The Company’s manufacturing facilities rely principally on natural gas, as well as electrical power and other energy sources. High demand and limited availability of natural gas and other energy sources can result in significant increases in energy costs increasing the Company’s operating expenses and transportation costs. Higher energy costs would increase the Company’s production costs and adversely affect its margins and results of operations. If the Company is unable to obtain adequate sources of energy, its operations could be interrupted.
In addition, if the price of gasoline increases significantly for consumers, it can affect driving and purchasing habits and impact demand for tires.

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The Company has and could in the future incur restructuring charges and other costs as it continues to execute actions in an effort to improve future profitability and competitiveness and may not achieve the anticipated savings and benefits from these actions.
The Company has and may in the future initiate restructuring actions designed to improve future profitability and competitiveness, and enhance the Company’s flexibility, including the possible outcome of the recently announced consultation period in the U.K. The Company may not realize anticipated savings or benefits from future actions in full or in part or within the time periods it expects. The Company is also subject to the risks of labor unrest, negative publicity and business disruption in connection with these actions. Failure to realize anticipated savings or benefits from the Company’s actions could have an adverse effect on the business and could result in potential unexpected costs or other impacts. Such restructuring actions and impairments or other charges could have a significant negative effect on the Company’s earnings or cash flows in the short-term.
The realizability of deferred tax assets may affect the Company’s profitability and cash flows.
The Company has significant net deferred tax assets recorded on the balance sheet and determines at each reporting period whether or not a valuation allowance is necessary based upon the expected realizability of such deferred tax assets. In the U.S., the Company has recorded deferred tax assets, the largest of which relate to product liability, pension and other postretirement benefit obligations, partially offset by deferred tax liabilities, the most significant of which relates to accelerated depreciation. The Company’s non-U.S. deferred tax assets relate to pension, accrued expenses and net operating losses, and are partially offset by deferred tax liabilities related to accelerated depreciation. Based upon the Company’s assessment of the realizability of its net deferred tax assets, the Company maintains a valuation allowance in the U.K., as well as a small valuation allowance for the portion of its U.S. deferred tax assets primarily associated with a loss carryforward. In addition, the Company has recorded valuation allowances for deferred tax assets primarily associated with other non-U.S. net operating losses.
The Company’s assessment of the realizability of deferred tax assets is based in part on certain assumptions regarding future profitability, and potentially adverse business conditions could have a negative impact on the future realizability of the deferred tax assets and therefore impact the Company’s future operating results or financial position.
Compliance with and changes in tax laws, including recently enacted tax reform legislation in the United States, could materially and adversely impact our financial condition, results of operations and cash flows.
The Company is subject to extensive tax liabilities, including federal and state income taxes and transactional taxes such as excise, sales and use, payroll, franchise, withholding and property taxes. New tax laws and regulations and changes in existing tax laws and regulations could result in increased expenditures by the Company for tax liabilities in the future and could materially and adversely impact the Company's financial condition, results of operations and cash flows.
Recently enacted tax reform legislation has made substantial changes to U.S. tax law, including a reduction in the corporate tax rate, a limitation on deductibility of interest expense, a limitation on the use of net operating losses to offset future taxable income, the allowance of immediate expensing of capital expenditures and deemed repatriation of foreign earnings. The Company expects this legislation to have significant effects, some of which may be adverse. For example, the reduction in the corporate tax rate has resulted in a reduction in the value of the Company's existing deferred tax assets, and consequently was a charge to earnings in 2017.
Additionally, the Company’s income tax returns are subject to examination by federal, state and local tax authorities in the U.S. and tax authorities outside the U.S. Based upon the outcome of tax examinations, judicial proceedings, or expiration of statutes of limitations, it is possible that the ultimate resolution of these unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities. Such factors could have an adverse effect on the Company’s provision for income taxes and the cash outlays required to satisfy income tax obligations.
The Company is required to comply with environmental laws and regulations that could cause it to incur significant costs.
The Company’s manufacturing facilities are subject to numerous federal, state, local and foreign laws and regulations designed to protect the environment, including increased government regulations to limit carbon dioxide and other greenhouse gas emissions as a result of concern over climate change, and the Company expects that additional requirements with respect to environmental matters will be imposed on it in the future. In addition, the Company has contractual indemnification obligations for environmental remediation costs and liabilities that may arise relating to certain divested operations. Material future expenditures may be necessary if compliance standards change, if material unknown conditions that require remediation are discovered, or if required remediation of known conditions becomes more extensive than expected. If the Company fails to comply with present and future environmental laws and regulations, it could be subject to future liabilities or the suspension of production, which could harm its business or results of operations. Environmental laws could also restrict the Company’s ability to expand its facilities or could require it to acquire costly equipment or to incur other significant expenses in connection with its manufacturing processes.

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The Company has been and may continue to be impacted by currency fluctuations, which may reduce reported results for the Company’s international operations and otherwise adversely affect the business.
Because the Company conducts transactions in various non-U.S. currencies, including the Euro, Canadian dollar, British pound sterling, Swiss franc, Swedish kronar, Norwegian krone, Mexican peso, Chinese yuan, Serbian dinar and Brazilian real, fluctuations in foreign currency exchange rates may impact the Company’s financial condition, results of operations and cash flows, despite currency hedging actions by the Company. The Company’s operating results are subject to the effects of fluctuations in the value of these currencies and fluctuations in the related currency exchange rates. As a result, the Company’s sales have historically been affected by, and may continue to be affected by, these fluctuations. Exchange rate movements between currencies in which the Company sells its products have been affected by and may continue to result in exchange losses that could materially affect results. During times of strength of the U.S. dollar, the reported revenues of the Company’s international operations will be reduced because local currencies will translate into fewer dollars. In addition, a strong U.S. dollar may increase the competitiveness of competitors based outside of the United States. As a result, continued strengthening of the U.S. dollar may have a material adverse effect on the Company’s financial condition, results of operations and cash flows.
The Company may not be able to protect its intellectual property rights adequately.
The Company’s success depends in part upon its ability to use and protect its proprietary technology and other intellectual property, which generally covers various aspects in the design and manufacture of its products and processes. The Company owns and uses tradenames and trademarks worldwide. The Company relies upon a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements and patent, copyright and trademark laws to protect its intellectual property rights. The steps the Company takes in this regard may not be adequate to protect its intellectual property or to prevent or deter challenges or infringement or other violations of its intellectual property, and the Company may not be able to detect unauthorized use or take appropriate and timely steps to enforce its intellectual property rights.
In addition, the laws of some countries may not protect and enforce the Company’s intellectual property rights to the same extent as the laws of the U.S. Further, while the Company believes it has rights to use all intellectual property in the Company’s use, if the Company is found to infringe on the rights of others it could be adversely impacted.
The impact of proposed new accounting standards may have a negative impact on the Company’s financial statements.
The Financial Accounting Standards Board is considering or has issued for future adoption several projects which may result in the modification of accounting standards affecting the Company, including standards relating to leasing and others. Any such changes could have a negative impact on the Company’s financial statements.
The Company is facing risks relating to healthcare legislation.
The Company is facing risks emanating from legislation in the U.S., including the Patient Protection and Affordable Care Act and the related Healthcare and Education Reconciliation Act, which are collectively referred to as healthcare legislation. The future of this major legislation and any replacement is now in question and the ultimate cost and the potentially adverse impact to the Company and its employees cannot be quantified at this time.


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Item 2.    ISSUER PURCHASES OF EQUITY SECURITIES

The following table sets forth a summary of the Company’s purchases during the quarter ended September 30, 2018 of equity securities registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (in thousands, except number of shares and per share amounts):
Period (1)
 
Total
Number of
Shares
Purchased
 
Average
Price
Paid per
Share
 
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
 
Maximum Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs
July 1, 2018 through July 31, 2018
 
31,154

 
$
26.59

 
31,154

 
$
193,123

August 1, 2018 through August 31, 2018
 
—

 
$
—

 
—

 
$
193,123

September 1, 2018 through September 30, 2018
 
—

 
$
—

 
—

 
$
193,123

Total
 
31,154

 

 
31,154

 
 

(1)
On February 16, 2017, the Board of Directors increased the amount under and expanded the duration of the Company's existing share repurchase program (as amended, the "2017 Repurchase Program"). The 2017 Repurchase Program allows the Company to repurchase up to $300,000, excluding commissions, of the Company’s common stock through December 31, 2019. The approximately $95,634 remaining authorization under the Company's existing share repurchase program as of February 16, 2017 was included in the $300,000 maximum amount authorized by the 2017 Repurchase Program. No other changes were made. The 2017 Repurchase Program does not obligate the Company to acquire any specific number of shares and can be suspended or discontinued at any time without notice. Under the 2017 Repurchase Program, shares can be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.


43


Item 6.
EXHIBITS
(a) Exhibits
 
(31.1)
(31.2)
(32)
(101.INS)
XBRL Instance Document
(101.SCH)
XBRL Taxonomy Extension Schema Document
(101.DEF)
XBRL Taxonomy Extension Definition Linkbase Document
(101.CAL)
XBRL Taxonomy Extension Calculation Linkbase Document
(101.LAB)
XBRL Taxonomy Extension Label Linkbase Document
(101.PRE)
XBRL Taxonomy Extension Presentation Linkbase Document


44


SIGNATURES
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.
 
COOPER TIRE & RUBBER COMPANY
 
/s/ Ginger M. Jones
Ginger M. Jones
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
 
/s/ Mark A. Young
Mark A. Young
Director of External Reporting
(Principal Accounting Officer)
 

October 29, 2018
(Date)


45