Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share amounts)
Note 1 – Significant Accounting Policies
Principles of consolidation
– The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Acquired businesses are included in the consolidated financial statements from the dates of acquisition. All intercompany accounts and transactions have been eliminated.
The Company consolidates into its financial statements the accounts of the Company, all wholly-owned subsidiaries, and any partially-owned subsidiary that the Company has the ability to control. Control generally equates to ownership percentage, whereby investments that are more than
50
-percent owned are consolidated, investments in subsidiaries of
50 percent
or less but greater than
20
-percent are accounted for using the equity method, and investments in subsidiaries of
20 percent
or less are accounted for using the cost method. The Company does not consolidate any entity for which it has a variable interest based solely on power to direct the activities and significant participation in the entity’s expected results that would not otherwise be consolidated based on control through voting interests. Further, the Company’s joint ventures are businesses established and maintained in connection with the Company’s operating strategy.
Cash and cash equivalents
– The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents.
The Company’s objectives related to the investment of cash not required for operations is to preserve capital, meet the Company’s liquidity needs and earn a return consistent with these guidelines and market conditions. Investments deemed eligible for the investment of the Company’s cash include: 1) U.S. Treasury securities and general obligations fully guaranteed with respect to principal and interest by the government; 2) obligations of U.S. government agencies; 3) commercial paper or other corporate notes of prime quality purchased directly from the issuer or through recognized money market dealers; 4) time deposits, certificates of deposit or bankers’ acceptances of banks rated “A-” by Standard & Poor’s or “A3” by Moody’s; 5) collateralized mortgage obligations rated “AAA” by Standard & Poor’s and “Aaa” by Moody’s; 6) tax-exempt and taxable obligations of state and local governments of prime quality; and 7) mutual funds or outside managed portfolios that invest in the above investments. The Company had cash and cash equivalents totaling
$371,684
and
$504,423
at
December 31, 2017
and
December 31, 2016
, respectively. The majority of the cash and cash equivalents were invested in eligible financial instruments in excess of amounts insured by the Federal Deposit Insurance Corporation and, therefore, subject to credit risk. Management believes that the probability of losses related to credit risk on investments classified as cash and cash equivalents is remote.
Notes receivable
– The Company has received bank secured notes from certain of its customers in the PRC to settle trade accounts receivable. These notes generally have maturities of six months or less and are redeemable at the bank of issuance. The Company evaluates the credit risk of the issuing bank prior to accepting a bank secured note from a customer. Management believes that the probability of material losses related to credit risk on notes receivable is remote.
Accounts receivable
– The Company records trade accounts receivable when revenue is recorded in accordance with its revenue recognition policy and relieves accounts receivable when payments are received from customers.
Allowance for doubtful accounts
– The allowance for doubtful accounts is established through charges to the provision for bad debts. The Company evaluates the adequacy of the allowance for doubtful accounts throughout the year. The evaluation includes historical trends in collections and write-offs, management’s judgment of the probability of collecting specific accounts and management’s evaluation of business risk. This evaluation is inherently subjective, as it requires estimates that are susceptible to revision as more information becomes available. Accounts are determined to be uncollectible when the debt is deemed to be worthless or only recoverable in part, and are written off at that time through a charge against the allowance for doubtful accounts.
Inventories
– In 2017, the Company adopted Accounting Standard Update (ASU) 2015-11, "Inventory-Simplifying the Measurement of Inventory," which changed how inventory is valued. Inventories are valued at cost, which is not in excess of the net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventory costs have been determined by the LIFO method for substantially all U.S. inventories. Costs of other inventories have been determined by the FIFO method. Inventories include direct material, direct labor, and applicable manufacturing and engineering overhead costs.
Long-lived assets
– Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the following expected useful lives:
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Land improvements
|
|
10 to 20 years
|
Buildings
|
|
10 to 40 years
|
Machinery and equipment
|
|
5 to 14 years
|
Molds, cores and rings
|
|
2 to 10 years
|
The Company capitalizes certain internal and external costs incurred to acquire or develop internal-use software. Capitalized software costs are amortized over the estimated useful life of the software, which ranges from
three years
to
nine years
.
Intangibles with definite lives include trademarks, technology and intellectual property which are amortized over their remaining useful lives, which range from
one
to
three years
. Land use rights are amortized over their remaining useful lives, which range from
38 years
to
45 years
. The Company evaluates the recoverability of long-lived assets based on undiscounted projected cash flows, excluding interest and taxes, when any impairment is indicated. Goodwill and indefinite-lived intangibles are assessed for potential impairment at least annually or when events or circumstances indicate impairment may have occurred.
Earnings per common share
– Net income per share is computed on the basis of the weighted average number of common shares outstanding each year. Diluted earnings per share includes the dilutive effect of stock options and other stock units. The following table sets forth the computation of basic and diluted earnings per share:
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(Number of shares and dollar amounts in thousands except per share amounts)
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2017
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2016
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2015
|
Numerator
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|
Numerator for basic and diluted earnings per share - income from continuing operations available to common stockholders
|
|
$
|
95,400
|
|
|
$
|
248,381
|
|
|
$
|
212,766
|
|
Denominator
|
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Denominator for basic earnings per share - weighted average shares outstanding
|
|
52,206
|
|
|
54,480
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|
|
57,012
|
|
Effect of dilutive securities - stock options and other stock units
|
|
467
|
|
|
610
|
|
|
611
|
|
Denominator for diluted earnings per share - adjusted weighted average shares outstanding
|
|
52,673
|
|
|
55,090
|
|
|
57,623
|
|
Earnings per share:
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Basic
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$
|
1.83
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|
|
$
|
4.56
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|
|
$
|
3.73
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Diluted
|
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$
|
1.81
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|
|
$
|
4.51
|
|
|
$
|
3.69
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|
At
December 31, 2017
,
2016
and
2015
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.
Derivative financial instruments
– Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into financial instruments for trading or speculative purposes. The Company offsets fair value amounts recognized on the Consolidated Balance Sheets for derivative financial instruments executed with the same counter-party.
The Company uses foreign currency forward contracts as hedges of the fair value of certain non-U.S. dollar denominated net asset and liability positions. Gains and losses resulting from the impact of currency exchange rate movements on these forward contracts are recognized in the accompanying Consolidated Statements of Income in the period in which the exchange rates change and offset the foreign currency gains and losses on the underlying exposure being hedged.
Foreign currency forward contracts are also used to hedge variable cash flows associated with forecasted sales and purchases denominated in currencies that are not the functional currency of certain entities. The forward contracts have maturities of less than twelve months pursuant to the Company’s policies and hedging practices. These forward contracts meet the criteria for and have been designated as cash flow hedges. Accordingly, the effective portion of the change in fair value of unrealized gains and losses on such forward contracts are recorded as a separate component of stockholders’ equity in the accompanying Consolidated Balance Sheets and reclassified into earnings as the hedged transaction affects earnings.
The Company assesses hedge effectiveness quarterly. In doing so, the Company monitors the actual and forecasted foreign currency sales and purchases versus the amounts hedged to identify any hedge ineffectiveness. The Company also performs regression analysis comparing the change in value of the hedging contracts versus the underlying foreign currency sales and purchases, which confirms a high correlation and hedge effectiveness. Any hedge ineffectiveness is recorded as an adjustment in the accompanying Consolidated Statements of Income in the period in which the ineffectiveness occurs.
The Company is exposed to price risk related to forecasted purchases of certain commodities that are used as raw materials, principally natural rubber. Accordingly, it uses commodity contracts with forward pricing for a portion its production requirements. These contracts generally qualify for the normal purchase exception under guidance for derivative instruments and hedging activities, and therefore are not subject to its provisions.
Income taxes
– Income tax expense is based on reported earnings or losses before income taxes in accordance with the tax rules and regulations of the specific legal entities within the various specific taxing jurisdictions where the Company’s income is earned. Taxable income may differ from earnings before income taxes for financial accounting purposes. To the extent that differences are due to revenue or expense items reported in one period for tax purposes and in another period for financial accounting purposes, a provision for deferred income taxes is made using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset may not be realized. Deferred income taxes generally are not recorded on the majority of undistributed earnings of international subsidiaries based on the Company’s intention that these earnings will continue to be reinvested. Upon enactment of the Tax Act, the Transition Tax was recorded based on approximately
$495 million
of unremitted foreign earnings. While the Company has accrued Transition Tax payable on the deemed repatriation of earnings that were previously indefinitely reinvested, it was unable to determine a reasonable estimate of the remaining tax liability, if any, under the Tax Act for its remaining outside basis differences or assess how the Tax Act will impact the Company's existing assertion of indefinite reinvestment. As such, no change has been made with respect to that assertion for the year ended December 31, 2017.
Product liability
– The Company accrues costs for product liability at the time a loss is probable and the amount of loss can be estimated. The Company believes the probability of loss can be established and the amount of loss can be estimated only after certain minimum information is available, including verification that Company-produced products were involved in the incident giving rise to the claim, the condition of the product purported to be involved in the claim, the nature of the incident giving rise to the claim and the extent of the purported injury or damages. In cases where such information is known, each product liability claim is evaluated based on its specific facts and circumstances. A judgment is then made to determine the requirement for establishment or revision of an accrual for any potential liability. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. The liability often cannot be determined with precision until the claim is resolved.
Pursuant to ASU 450 "Contingencies", the Company accrues the minimum liability for each known claim when the estimated outcome is a range of probable loss and no one amount within that range is more likely than another. The Company uses a range of losses because an average cost would not be meaningful since the product liability claims faced by the Company are unique and widely variable, and accordingly, the resolutions of those claims have an enormous amount of variability. The costs have ranged from
zero
dollars to
$33 million
in one case with no “average” that is meaningful. No specific accrual is made for individual unasserted claims or for premature claims, asserted claims where the minimum information needed to evaluate the probability of a liability is not yet known. However, an accrual for such claims based, in part, on management’s expectations for future litigation activity and the settled claims history is maintained. The Company periodically reviews such estimates and any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. Because of the speculative nature of litigation in the U.S., the Company does not believe a meaningful aggregate range of potential loss for asserted and unasserted claims can be determined. While the Company believes its reserves are reasonably stated, it is possible an individual claim from time to time may result in an aberration from the norm and could have a material impact.
The product liability expense reported by the Company includes amortization of insurance premium costs, adjustments to liability reserves and legal costs incurred in defending claims against the Company. Legal costs are expensed as incurred and product liability insurance premiums are amortized over coverage periods.
Advertising expense
– Expenses incurred for advertising include production and media and are generally expensed when incurred. Costs associated with dealer-earned cooperative advertising are recorded as a reduction of the revenue component of Net sales at the time of sale. Advertising expense for
2017
,
2016
and
2015
was
$52,798
,
$53,715
and
$53,007
, respectively.
Stock-based compensation
– The Company’s incentive compensation plans allow the Company to grant awards to employees in the form of stock options, stock awards, restricted stock units, stock appreciation rights, performance stock units, dividend equivalents and other awards. Compensation related to these awards is determined based on the fair value on the date of grant and is amortized to expense over the vesting period. If awards can be settled in cash, these awards are recorded as liabilities and marked to market. See Note 12 – Stock-Based Compensation for additional information.
Warranties
– Warranties are provided on the sale of certain of the Company’s products, and an accrual for estimated future claims is recorded at the time revenue is recognized. Tire replacement under most of the warranties the Company offers is on a prorated basis. The Company provides for the estimated cost of product warranties based primarily on historical return rates, estimates of the eligible tire population and the value of tires to be replaced. The following table summarizes the activity in the Company’s product warranty liabilities which are recorded in Accrued liabilities and Other long-term liabilities on the Company’s Consolidated Balance Sheets:
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2017
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2016
|
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2015
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Reserve at beginning of year
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10,634
|
|
|
12,339
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|
|
14,005
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Additions
|
|
10,310
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|
|
8,349
|
|
|
9,122
|
|
Payments
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|
(8,851
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)
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(10,054
|
)
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(10,788
|
)
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Reserve at December 31
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12,093
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10,634
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12,339
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Use of estimates
– The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of: (1) revenues and expenses during the reporting period; and (2) assets and liabilities, as well as disclosure of contingent assets and liabilities, at the date of the consolidated financial statements. Actual results could differ from those estimates.
Revenue recognition
– Revenues are recognized when title to the product passes to customers. Shipping and handling costs are recorded in cost of products sold. Allowance programs such as volume rebates and cash discounts are recorded at the time of sale as a reduction to revenue based on anticipated accrual rates for the year.
Research and development
– Costs are charged to cost of products sold as incurred and amounted to approximately
$59,869
,
$55,534
and
$51,793
during
2017
,
2016
and
2015
, respectively.
Related Party Transactions
– The Company’s COOCSA joint venture paid
$40,279
,
$33,774
and
$26,598
in
2017
,
2016
and
2015
, respectively, to an employment services company in Mexico owned by members of the joint venture workforce. COOCSA also recorded sales of
$8,209
,
$6,335
and
$6,555
to the noncontrolling shareholder in
2017
,
2016
and
2015
, respectively.
Truck and Bus Tire Tariffs
– Antidumping and countervailing duty investigations into certain truck and bus tires imported from the 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 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 are not to be collected and any amounts previously paid have been 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 Consolidated Statement of Income for the year ended
December 31, 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, covers the repair or replacement of the Company's assets that suffered loss or damage, and the Company is working closely with its insurance carriers and claims adjusters to ascertain the full amount of insurance proceeds due to the Company as a result of the damages and the loss the Company suffered. The Company's insurance policies also 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. For the year ended
December 31, 2017
, the Company incurred direct expenses of
$12,569
related to the disposal of damaged tires, freight to move product to other warehouses, professional fees to secure and maintain the site and for the rental of additional storage facilities, less proceeds of
$7,000
recovered from insurance. These amounts were recorded as a component of Cost of products sold in the Consolidated Statement of Income for the year ended
December 31, 2017
. At this time, the full amount of combined property damage and business interruption costs and recoveries cannot be estimated, and accordingly, no additional amounts, including amounts for insurance recoveries, have been recorded as of
December 31, 2017
.
Recent Accounting Pronouncements
Each change to U.S. GAAP is established by the Financial Accounting Standards Board (“FASB”) in the form of an accounting standards update (“ASU”) to the FASB’s Accounting Standards Codification (“ASC”).
The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial statements.
Accounting Pronouncements – Recently adopted
Stock Compensation
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which
simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the Consolidated Statements of Cash Flows.
Application of the standard is required for the annual and interim periods beginning after December 15, 2016. The Company adopted the standard in the first quarter of 2017.
As a result of the adoption, on a prospective basis,
$1,877
of excess tax benefits from stock-based compensation was recognized as discrete items in the provision for income taxes for the year ended December 31
, 2017
.
Additionally, the cash flow benefit of the excess tax benefits is included as an operating activity in the Consolidated Statement of Cash Flows for the year ended December 31, 2017. In accordance with the standard, the prior year Consolidated Statement of Income and Consolidated Statement of Cash Flows presentation of the Company's excess tax benefits have not been restated. The new standard also requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the Consolidated Statements of Cash Flows on a retrospective basis. Previously, this activity was included in operating activities. The impact of this change in the years ended 2017, 2016 and 2015 was
$7,002
,
$2,948
and
$3,993
, respectively, reported as Payments of employee taxes withheld from share-based awards in the Consolidated statement of cash flows. Finally, as permitted by the standard, the Company will account for forfeitures of share-based payments when they occur.
Inventory
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which is intended to simplify the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost or net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in, first-out and the retail inventory method. Application of the standard, which should be applied prospectively, is required for the annual and interim periods beginning after December 15, 2016. The Company adopted the new standard in the first quarter of 2017. The new standard did not have a material impact on the Company's condensed consolidated financial statements.
Accounting Pronouncements – To be adopted
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which will supersede most current revenue recognition guidance, including industry-specific guidance. The core principle is that an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that the entity expects to be entitled to in exchange for those goods or services. The standard provides a five-step model to determine when and how revenue is recognized. Other major provisions of the standard include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The standard also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In July 2015, the FASB approved the deferral of the new standard's effective date by one year. The new standard is effective for annual reporting periods beginning after December 15, 2017. In 2016, the FASB issued several amendments to the standard, which provide clarification, additional guidance, practical expedients, technical corrections and other improvements to ASU 2014-09.
The guidance permits two methods of adoption: the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application.
The Company has substantially completed its evaluation of significant contracts and the review of its current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to the Company’s revenue contracts. The Company has also identified, and is in the process of implementing, appropriate changes to business processes, systems and controls to support recognition and disclosure under the new standard. In addition, the Company has drafted its accounting policy for the new standard based on a detailed review of its business and contracts.
While the Company continues to assess all potential impacts of the new standard, the Company expects to adopt the new revenue standard in the first quarter of 2018 applying the modified retrospective transition method. The Company does not expect the adoption of the new revenue standard to have a material impact on the amount and timing of revenue recognized in the Company's consolidated financial statements.
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. Application of the standard, which should be applied using a modified retrospective approach, is required for the annual and interim periods beginning after December 15, 2018. Early adoption is permitted. In 2017, the FASB issued multiple amendments to the standard which provided clarification, additional guidance, practical expedients, and other improvements to ASU 2016-02.
The Company is currently evaluating the impact the new standard, including optional practical expedients, and assessing our existing lease portfolio in order to assess the impact
on its consolidated financial statements.
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 consolidated financial statements.
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. Application of the standard, which should be applied retrospectively for the income statement presentation changes and prospectively for the capitalization changes, is required for the annual and interim periods beginning after December 15, 2017. As reported in Note 9 - Pensions and Postretirement Benefits Other than Pensions, the 2017, 2016 and 2015 net periodic benefit costs were
$49,386
,
$64,842
and
$58,384
, respectively. The service cost component of these amounts in 2017, 2016 and 2015, which will remain as a component of operating profit, were
$11,863
,
$11,771
and
$13,559
, respectively. Net income will not change as a result of the adoption of this standard. The Company adopted the standard in the first quarter of 2018.
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 consolidated financial statements.
Note 2 – GRT Acquisition
On January 4, 2016, the Company announced that it had entered into an agreement to purchase a majority of China-based 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 is expected to serve 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 Operations segment, which is included in the International Tire Segment. Goodwill is not deductible for federal income tax purposes.
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 preliminary allocations of the fair value of the assets acquired and liabilities assumed from the GRT acquisition.
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As Originally
|
|
|
|
|
Assets
|
|
Reported
|
|
Adjustments
|
|
As Adjusted
|
Cash
|
|
$
|
8,091
|
|
|
$
|
—
|
|
|
$
|
8,091
|
|
Accounts receivable
|
|
2,844
|
|
|
—
|
|
|
$
|
2,844
|
|
Notes receivable
|
|
3,050
|
|
|
—
|
|
|
$
|
3,050
|
|
Inventory
|
|
7,983
|
|
|
485
|
|
|
$
|
8,468
|
|
Other current assets
|
|
981
|
|
|
—
|
|
|
$
|
981
|
|
Property, plant & 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 Footnote 8. The Company utilized a third party to assist in the fair value determination of certain components of the preliminary purchase price allocation, namely property, plant and equipment and the non-controlling shareholder interest. The valuation of property,
plant and equipment was developed using primarily the cost approach. The fair value of the non-controlling shareholder interest was determined based upon internal and external inputs considering various relevant market transactions and discounted cash flow valuation methods, among other factors.
Note 3 – Inventories
Inventory costs are determined using the LIFO method for substantially all U.S. inventories. The current cost of the U.S. inventories under the FIFO method was
$415,640
and
$409,034
at
December 31, 2017
and
2016
, respectively. These FIFO values have been reduced by approximately
$88,094
and
$85,113
at
December 31, 2017
and
2016
, respectively, to arrive at the LIFO value reported on the 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.
Note 4 - Goodwill and Intangibles
Goodwill is recorded in the segment where it was generated by acquisitions. The Company has recorded goodwill in the amount of
$33,250
related to the acquisition of GRT in 2016 and
$18,851
related to the acquisition of additional ownership of COOCSA in 2011. See Note 2 - GRT Acquisition for a discussion of the goodwill recorded during 2016 and 2017. There have been
no
other changes to the value of goodwill since 2011. Goodwill prior to 2011 was
zero
.
Purchased goodwill and indefinite-lived intangible assets are tested annually for impairment unless indicators are present that would require an earlier test. During the fourth quarter of
2017
, the Company completed its annual goodwill and intangible asset impairment tests and
no
impairment was indicated.
The following table presents intangible assets and accumulated amortization balances as of
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
|
|
Definite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software costs
|
|
192,474
|
|
|
(81,908
|
)
|
|
110,566
|
|
|
185,539
|
|
|
(65,719
|
)
|
|
119,820
|
|
|
Land use rights
|
|
12,850
|
|
|
(1,230
|
)
|
|
11,620
|
|
|
10,386
|
|
|
(1,642
|
)
|
|
8,744
|
|
|
Trademarks and tradenames
|
|
8,800
|
|
|
(7,547
|
)
|
|
1,253
|
|
|
8,800
|
|
|
(7,094
|
)
|
|
1,706
|
|
|
Other
|
|
2,668
|
|
|
(2,668
|
)
|
|
—
|
|
|
3,530
|
|
|
(2,866
|
)
|
|
664
|
|
|
|
|
216,792
|
|
|
(93,353
|
)
|
|
123,439
|
|
|
208,255
|
|
|
(77,321
|
)
|
|
130,934
|
|
|
Indefinite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
9,817
|
|
|
—
|
|
|
9,817
|
|
|
9,817
|
|
|
—
|
|
|
9,817
|
|
|
|
|
$
|
226,609
|
|
|
$
|
(93,353
|
)
|
|
$
|
133,256
|
|
|
$
|
218,072
|
|
|
$
|
(77,321
|
)
|
|
$
|
140,751
|
|
Estimated amortization expense over the next five years is as follows:
2018
-
$16,821
,
2019
-
$16,331
,
2020
-
$16,151
,
2021
-
$15,534
and
2022
-
$13,865
.
Note 5 - Accrued Liabilities
Accrued liabilities at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Payroll and employee benefits, excluding postemployment benefits
|
|
$
|
59,593
|
|
|
$
|
67,274
|
|
Product liability
|
|
44,700
|
|
|
58,054
|
|
Other postretirement benefits
|
|
14,838
|
|
|
15,048
|
|
Advertising
|
|
17,476
|
|
|
14,281
|
|
Taxes other than income taxes
|
|
9,770
|
|
|
11,414
|
|
Warranty
|
|
8,304
|
|
|
5,699
|
|
Other
|
|
25,795
|
|
|
12,034
|
|
Accrued liabilities
|
|
$
|
180,476
|
|
|
$
|
183,804
|
|
Note 6 - Income Taxes
Components of income from continuing operations before income taxes and noncontrolling shareholders’ interests were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
United States
|
|
$
|
211,225
|
|
|
$
|
319,156
|
|
|
$
|
314,263
|
|
Foreign
|
|
32,700
|
|
|
47,937
|
|
|
19,765
|
|
Total
|
|
$
|
243,925
|
|
|
$
|
367,093
|
|
|
$
|
334,028
|
|
The provision (benefit) for income tax for continuing operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
69,463
|
|
|
$
|
100,714
|
|
|
$
|
67,405
|
|
State and local
|
|
6,304
|
|
|
12,445
|
|
|
12,837
|
|
Foreign
|
|
9,842
|
|
|
14,990
|
|
|
12,948
|
|
|
|
85,609
|
|
|
128,149
|
|
|
93,190
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
48,866
|
|
|
(6,730
|
)
|
|
23,466
|
|
State and local
|
|
4,915
|
|
|
(763
|
)
|
|
5,157
|
|
Foreign
|
|
7,790
|
|
|
(4,857
|
)
|
|
(3,589
|
)
|
|
|
61,571
|
|
|
(12,350
|
)
|
|
25,034
|
|
|
|
$
|
147,180
|
|
|
$
|
115,799
|
|
|
$
|
118,224
|
|
On December 22, 2017, the U.S. enacted comprehensive tax legislation, commonly referred to as the "Tax Act", which made broad and complex changes to the tax code. In conjunction with that enactment, the SEC staff issued SAB 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act," which provides guidance on accounting for the impact of the Tax Act over a measurement period. In accordance with the guidance set forth under SAB 118, the Company recognizes that it has not yet completed its accounting for certain income tax effects of the Tax Act.
Where the Company has been able to make reasonable estimates of the effects for which its analyses are still being completed, it has recorded provisional amounts for those effects based on all information available as of December 31, 2017. These amounts will then be adjusted during the measurement period as the Company finalizes its analyses. Provisional amounts based on reasonable estimates were recorded for the following elements of the Tax Act as of December 31, 2017:
Remeasurement of deferred tax assets and liabilities:
The Tax Act reduces the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The rate change resulted in a reduction to our net deferred tax asset of
$20,413
with a corresponding increase to deferred tax expense. The Company is still completing its analysis of the impact of this change and certain other specific changes related to 100 percent expensing of qualified fixed assets and new limitations on the deductibility of executive compensation.
Transition Tax on Unrepatriated Foreign Earnings:
Upon enactment, the Tax Act also provides for a mandatory, one-time deemed repatriation of previously untaxed accumulated earnings and profits of the Company's foreign subsidiaries. The Company has recorded a provisional tax liability, commonly referred to as the "Transition Tax," of
$35,378
. The Transition Tax payable, net of foreign tax credit carryforwards of
$1,707
, will be paid over
eight
years in installments of
$2,694
each year from 2018 through 2022 and the remaining liability of
$20,201
in 2023 - 2025.
Where the Company has not been able to make reasonable estimates of the effects for which its analyses are still being completed, it has not recorded provisional amounts. Beginning in the first reporting period during the SAB 118 measurement period in which the Company obtains necessary information and is able to analyze and prepare reasonable estimates, it will record amounts as needed. Provisional amounts were not recorded for the following elements of the Tax Act as of December 31, 2017:
Indefinite Reinvestment Assertion:
Prior to enactment of the Tax Act, the Company did not recognize a deferred tax liability related to the U.S. federal and state income taxes and foreign withholding taxes on unremitted foreign earnings because it overcame the presumption of the repatriation of those earnings. Upon enactment of the Tax Act, the Transition Tax was recorded based on approximately
$495 million
of unremitted foreign earnings. While the Company has accrued Transition Tax payable on the deemed repatriation of earnings that were previously indefinitely reinvested, it was unable to determine a reasonable estimate of the remaining tax liability, if any, under the Tax Act for
its remaining outside basis differences or assess how the Tax Act will impact the Company's existing assertion of indefinite reinvestment. As such, no change has been made with respect to that assertion for the year ended December 31, 2017.
Global intangible low-taxed income:
The Tax Act subjects a U.S. parent shareholder to current tax on its “global intangible low-taxed income” (GILTI). For the GILTI provisions of the Tax Act, a provisional estimate could not be made as the Company has not yet completed its assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred.
A reconciliation of income tax expense (benefit) for continuing operations to the tax based on the U.S. statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Income tax provision at 35%
|
|
$
|
85,375
|
|
|
$
|
128,483
|
|
|
$
|
116,910
|
|
Expiration of capital loss carryforward
|
|
—
|
|
|
—
|
|
|
18,376
|
|
Valuation allowance - China
|
|
(6,671
|
)
|
|
(2,441
|
)
|
|
(18,200
|
)
|
Valuation allowance - U.K.
|
|
18,915
|
|
|
—
|
|
|
—
|
|
State and local income tax, net of federal income tax effect
|
|
7,867
|
|
|
8,693
|
|
|
12,321
|
|
Domestic manufacturing deduction
|
|
(2,940
|
)
|
|
(9,870
|
)
|
|
(6,580
|
)
|
U.S. tax credits
|
|
(2,474
|
)
|
|
(3,013
|
)
|
|
(3,186
|
)
|
Tax law or rate change excluding U.S. tax act
|
|
—
|
|
|
794
|
|
|
2,383
|
|
U.S. tax act - transition tax
|
|
35,378
|
|
|
—
|
|
|
—
|
|
U.S. tax act - remeasurement of deferred taxes
|
|
20,413
|
|
|
—
|
|
|
—
|
|
Difference in effective tax rates of international operations
|
|
(4,667
|
)
|
|
(4,900
|
)
|
|
(932
|
)
|
Other - net
|
|
(4,016
|
)
|
|
(1,947
|
)
|
|
(2,868
|
)
|
Provision for income taxes
|
|
$
|
147,180
|
|
|
$
|
115,799
|
|
|
$
|
118,224
|
|
Payments for income taxes in
2017
,
2016
and
2015
, net of refunds, were
$67,782
,
$131,001
and
$76,206
, respectively.
Deferred tax assets and liabilities result from differences in the basis of assets and liabilities for tax and financial reporting purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
Postretirement and other employee benefits
|
|
$
|
116,321
|
|
|
$
|
191,099
|
|
Product liability
|
|
32,668
|
|
|
67,528
|
|
Net operating loss, capital loss, and tax credit carryforwards
|
|
14,174
|
|
|
15,274
|
|
All other items
|
|
33,423
|
|
|
48,718
|
|
Total deferred tax assets
|
|
196,586
|
|
|
322,619
|
|
Deferred tax liabilities:
|
|
|
|
|
Property, plant and equipment
|
|
(101,720
|
)
|
|
(160,075
|
)
|
All other items
|
|
(6,099
|
)
|
|
(9,685
|
)
|
Total deferred tax liabilities
|
|
(107,819
|
)
|
|
(169,760
|
)
|
|
|
88,767
|
|
|
152,859
|
|
Valuation allowances
|
|
(30,102
|
)
|
|
(20,228
|
)
|
Net deferred tax asset
|
|
$
|
58,665
|
|
|
$
|
132,631
|
|
At
December 31, 2017
, the Company has gross U.S. federal and foreign tax losses available for carryforward of
$6,731
and
$64,972
, respectively. The Company has
$240
of state tax credits available for carryforward. The state tax attributes will expire from 2018 through 2027. Valuation allowances have been provided for those items for which, based upon an assessment, it is more likely than not that some portion may not be realized.
The Company assesses the available positive and negative evidence to estimate if future taxable income will be generated to realize existing deferred tax assets in their respective jurisdictions. In the United Kingdom, a significant piece of objective negative evidence evaluated was the cumulative losses that have now been incurred over the three-year period ended December 31, 2017. This significant piece of objective negative evidence limits the ability to consider other subjective evidence such as
projections for future growth. On the basis of this evaluation, a full valuation allowance was recorded for the year ended December 31, 2017 which resulted in incremental deferred tax expense of
$18,915
.
In China, the Company achieved three years of cumulative pretax income through the period ended December 31, 2017 with Cooper Tire (China) Investment Co., Ltd. Based in part on that achievement, the Company determined that sufficient positive evidence exists as of December 31, 2017 to conclude that it is more likely than not that additional deferred taxes of
$6,671
are now realizable and therefore released the valuation allowance accordingly.
The Company applies the rules under ASC 740-10 in its
Accounting for Uncertainty in Income Taxes
for uncertain tax positions using a “more likely than not” recognition threshold. Pursuant to these rules, the Company will initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the “more likely than not” threshold, the measurement of the tax benefit will be based on the Company’s estimate of the largest amount that meets the more likely than not recognition threshold. The Company’s unrecognized tax benefits, exclusive of interest, totaled approximately
$2,283
at
December 31, 2017
, as itemized in the tabular roll forward below. The unrecognized tax benefits at
December 31, 2017
relate to uncertain tax positions in tax years 2013 through 2017. Based upon the outcome of tax examinations, judicial proceedings, or expiration of statutes of limitations, it is reasonably possible that the ultimate resolution of these unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities.
|
|
|
|
|
|
Unrecognized
Tax Benefits
|
Balance at December 31, 2014
|
$
|
8,314
|
|
Settlements for tax positions of prior years
|
(367
|
)
|
Additions for tax positions of prior years
|
1,151
|
|
Reductions for tax positions of prior years
|
(942
|
)
|
Statute lapses
|
(2,313
|
)
|
Balance at December 31, 2015
|
5,843
|
|
Settlements for tax positions of prior years
|
(518
|
)
|
Additions for tax positions of the current year
|
714
|
|
Additions for tax positions of prior years
|
1,518
|
|
Statute lapses
|
(4,360
|
)
|
Balance at December 31, 2016
|
3,197
|
|
Settlements for tax positions of prior years
|
(139
|
)
|
Additions for tax positions of the current year
|
47
|
|
Additions for tax positions of prior years
|
438
|
|
Statute lapses
|
(1,260
|
)
|
Balance at December 31, 2017
|
$
|
2,283
|
|
Of this amount, the effective rate would change upon the recognition of approximately
$2,283
of these unrecognized tax benefits. The Company recorded, through the tax provision, approximately
$17
of benefit on interest reduction for
2017
,
$347
of benefit on interest reduction for
2016
, and
$63
of interest expense for
2015
. At
December 31, 2017
, the Company has
$124
of interest accrued as an ASC 740-10 reserve.
The Company operates in multiple jurisdictions throughout the world. 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. Furthermore, the Company’s non-U.S. subsidiaries are generally no longer subject to income tax examinations in major foreign taxing jurisdictions for years prior to 2008. The income tax returns of certain of our 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 7 – Debt
On May 27, 2015, the Company entered into a revolving credit facility with a consortium of banks that provides up to
$400,000
based on available collateral, including a
$110,000
letter of credit subfacility, and expires in May 2020. The Company may elect to increase the commitments under the revolving credit facility or incur one or more tranches of term loans in an aggregate amount of up to
$100,000
, subject to the satisfaction of certain conditions. The Company may elect to add certain
foreign subsidiaries as additional borrowers under the Credit Agreement (the “Foreign Subsidiary Borrowers”), subject to the satisfaction of certain conditions.
All of the indebtedness of the Company and any Foreign Subsidiary Borrowers under the
$400,000
revolving credit facility is guaranteed by certain of the Company’s domestic subsidiaries and secured by substantially all of the assets of the Company and the domestic guarantors, subject to certain limitations. All of the indebtedness of any Foreign Subsidiary Borrower under the
$400,000
revolving credit facility will be guaranteed by the Company and all wholly-owned foreign subsidiaries of the Foreign Subsidiary Borrower that reside in the same jurisdiction, subject to certain limitations, and secured by substantially all of the assets of the Company, the Foreign Subsidiary Borrowers and the guarantors.
Borrowings under the revolving credit facility bear interest at a rate per annum equal to, at the Company’s option, either (i) the base rate plus the applicable margin or (ii) the relevant adjusted LIBOR for an interest period of one, two, three or six months (as selected by the Company), or such other period of time approved by the lenders, plus the applicable margin.
The revolving credit facility contains certain customary non-financial covenants. In addition, the revolving credit facility contains financial covenants that require the Company to maintain a net leverage ratio and interest coverage ratio in accordance with the limits set forth therein.
On May 27, 2015, the Company amended its accounts receivable securitization facility, reducing the borrowing limit from
$175,000
to
$150,000
and extending the maturity until May 2018. Pursuant to the terms of the facility, the Company is permitted to sell certain of its domestic trade receivables on a continuous basis to its wholly-owned, bankruptcy-remote subsidiary, Cooper Receivables LLC (“CRLLC”). In turn, CRLLC may sell from time to time an undivided ownership interest in the purchased trade receivables, without recourse, to a PNC Bank administered, asset-backed commercial paper conduit. The accounts receivable securitization facility has no significant financial covenants until available credit is less than specified amounts.
On February 15, 2018, the Company signed amendments to extend the maturity of both the revolving credit facility and the accounts receivable securitization facility. The revolving credit facility maturity was extended to February 15, 2023, while the accounts receivable securitization facility was extended until February 12, 2021. There were no material changes to the terms and conditions of the revolving credit facility or the accounts receivable securitization facility as a result of the respective amendments.
There were
no
borrowings under the revolving credit facility or the accounts receivable securitization facility at
December 31, 2017
and
2016
, respectively. Amounts used to secure letters of credit totaled
$17,600
and
$21,800
at
December 31, 2017
and
2016
, respectively. The Company’s additional borrowing capacity, net of amounts used to back letters of credit and based on eligible collateral through use of its credit facility with its bank group and its accounts receivable securitization facility at
December 31, 2017
, was
$527,600
.
The Company’s consolidated operations in Asia have renewable unsecured credit lines that provide up to
$63,600
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
$24,200
at
December 31, 2017
.
In 2010 and 2017, Industrial Revenue Bonds (IRBs) were issued by the City of Texarkana to finance the design, equipping and construction of expansions, as well as the on-going operations of the Texarkana manufacturing facility, in return for real estate and equipment located at the Company’s Texarkana tire manufacturing plant. The assets related to the expansion and on-going plant operations provide security for the bonds issued by the City of Texarkana. As a result, the City retains title to the assets and, in turn, provides a
100 percent
property tax exemption to the Company. However, the Company has recorded the property in its Consolidated Balance Sheets, along with a capital lease obligation to repay the proceeds of the IRBs, because the arrangements are cancelable at any time at the Company’s request. The Company has also purchased the IRBs and therefore is the bondholder, as well as the borrower/lessee of the property purchased with the IRB proceeds. The capital lease obligations and IRB assets are recorded net in the Consolidated Balance Sheets. At December 31,
2017
and 2016, the assets and liabilities associated with these City of Texarkana IRBs were
$24,100
and
$20,000
, respectively.
The following table summarizes the long-term debt of the Company at
December 31, 2017
and
2016
. There were
no
secured notes outstanding as of
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:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Parent company
|
|
|
|
|
8% unsecured notes due December 2019
|
|
$
|
173,578
|
|
|
$
|
173,578
|
|
7.625% unsecured notes due March 2027
|
|
116,880
|
|
|
116,880
|
|
Capitalized leases and other
|
|
7,684
|
|
|
9,883
|
|
|
|
298,142
|
|
|
300,341
|
|
Less: unamortized debt issuance costs
|
|
742
|
|
|
826
|
|
|
|
297,400
|
|
|
299,515
|
|
Less: current maturities
|
|
1,413
|
|
|
2,421
|
|
|
|
$
|
295,987
|
|
|
$
|
297,094
|
|
Over the next five years, the Company has payments related to the above debt of:
|
|
|
|
|
|
|
|
Future Debt Payments
|
2018
|
|
$
|
1,413
|
|
2019
|
|
174,786
|
|
2020
|
|
—
|
|
2021
|
|
5,063
|
|
2022 through 2026
|
|
—
|
|
In addition, at
December 31, 2017
and
2016
, the Company had short-term notes payable of
$39,450
and
$26,286
, 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
December 31, 2017
and
2016
was
4.46 percent
and
4.26 percent
, respectively.
Interest paid on debt during
2017
,
2016
and
2015
was
$34,085
,
$28,842
and
$27,560
, respectively. The amount of interest capitalized was
$2,706
,
$3,016
and
$4,473
during
2017
,
2016
and
2015
, respectively.
Note 8 - 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 the Euro, Canadian dollar, British pound sterling, Swiss franc, Swedish krona, Norwegian krone, Mexican peso, Chinese yuan and Serbian dinar 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 four years. The notional amount of these foreign currency derivative instruments at
December 31, 2017
and
2016
was
$134,530
and
$89,414
, 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
$(2,640)
and
$1,029
as of
December 31, 2017
and
2016
, respectively) are recorded as a separate component of stockholders’ equity in the accompanying 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
four
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 stockholder's 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 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 Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Assets/(Liabilities)
|
|
2017
|
|
2016
|
Designated as hedging instruments:
|
|
|
|
|
Gross amounts recognized
|
|
$
|
(2,808
|
)
|
|
$
|
1,029
|
|
Gross amounts offset
|
|
168
|
|
|
—
|
|
Net amounts
|
|
(2,640
|
)
|
|
1,029
|
|
Not designated as hedging instruments:
|
|
|
|
|
Gross amounts recognized
|
|
(684
|
)
|
|
109
|
|
Gross amounts offset
|
|
97
|
|
|
(76
|
)
|
Net amounts
|
|
(587
|
)
|
|
33
|
|
Net Amounts Presented:
|
|
|
|
|
Accrued current liabilities
|
|
$
|
(1,893
|
)
|
|
$
|
—
|
|
Other long-term liabilities
|
|
$
|
(1,334
|
)
|
|
$
|
—
|
|
Other current assets
|
|
$
|
—
|
|
|
$
|
1,062
|
|
The following table presents the location and amount of gains and losses on derivative instruments in the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Derivatives Designated as Cash Flow Hedges
|
|
2017
|
|
2016
|
|
2015
|
Amount of (loss) gain recognized in Other comprehensive income on derivatives (Effective Portion)
|
|
$
|
(6,092
|
)
|
|
$
|
(2,471
|
)
|
|
$
|
11,127
|
|
Amount of gain (loss) reclassified from Accumulated other comprehensive loss into Income (Effective Portion)
|
|
3,619
|
|
|
100
|
|
|
(13,446
|
)
|
Amount of loss recognized in income on derivatives (Ineffective Portion)
|
|
—
|
|
|
—
|
|
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not Designated as Hedging Instruments
|
|
Location of (Loss) Gain
Recognized in Income
on Derivatives
|
|
Amount of (Loss) Gain Recognized in Income on Derivatives
Year Ended December 31,
|
2017
|
|
2016
|
|
2015
|
Foreign exchange contracts
|
|
Other non-operating (expense) income
|
|
$
|
(3,464
|
)
|
|
$
|
(156
|
)
|
|
$
|
174
|
|
For foreign exchange hedges of forecasted sales and purchases designated as effective, the Company reclassifies the gain (loss) from Other comprehensive income into Net sales and the ineffective portion is recorded directly into Other non-operating income (expense).
The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within the different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded on the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.
Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following.
a.
Quoted prices for similar assets or liabilities in active markets;
b.
Quoted prices for identical or similar assets or liabilities in non-active markets;
c.
Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
|
|
d.
|
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.
|
Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
The valuation of foreign 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
December 31, 2017
and
December 31, 2016
, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety were to be classified in Level 2 of the fair value hierarchy.
The valuation of stock-based liabilities was determined using the Company's stock price, and as a result, these liabilities are classified in the 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
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Exchange Contracts
|
|
$
|
(3,227
|
)
|
|
$
|
—
|
|
|
$
|
(3,227
|
)
|
|
$
|
—
|
|
Stock-based Liabilities
|
|
$
|
(16,713
|
)
|
|
$
|
(16,713
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Total
Assets
(Liabilities)
|
|
Quoted Prices
in Active Markets
for Identical
Assets
Level (1)
|
|
Significant
Other
Observable
Inputs
Level (2)
|
|
Significant
Unobservable
Inputs
Level (3)
|
|
|
|
Foreign Exchange Contracts
|
|
$
|
1,062
|
|
|
$
|
—
|
|
|
$
|
1,062
|
|
|
$
|
—
|
|
|
Stock-based Liabilities
|
|
$
|
(20,336
|
)
|
|
$
|
(20,336
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
There were no assets or liabilities classified as Level 3 in
2017
or
2016
.
The fair market value of
Cash and cash equivalents
,
Notes receivable
,
Restricted cash
,
Notes payable
and
Current portion of long-term debt
at
December 31, 2017
and
2016
are equal to their corresponding carrying values as reported on the Consolidated Balance Sheets as of
December 31, 2017
and
2016
, respectively. Each of these classes of assets and liabilities is classified as Level 1 within the fair value hierarchy.
The fair market value of
Long-term debt
is
$329,329
and
$331,941
at
December 31, 2017
and
2016
, respectively, and is classified within Level 1 of the fair value hierarchy. The carrying value of Long-term debt is
$295,987
and
$297,094
as reported on the Consolidated Balance Sheets as of
December 31, 2017
and
2016
, respectively.
Note 9 - Pensions and Postretirement Benefits Other than Pensions
The Company has a number of plans providing pension, retirement or profit-sharing benefits. These plans include defined benefit and defined contribution plans. The plans cover substantially all U.S. domestic employees. There are also plans that cover employees in the U.K. and Germany. The Company has an unfunded, nonqualified supplemental retirement benefit plan in the U.S. covering certain employees whose participation in the qualified plan is limited by provisions of the Internal Revenue Code.
For defined benefit plans, benefits are generally based on compensation and length of service for salaried employees and length of service for hourly employees. In the U.S., the Company froze the pension benefits in its Spectrum (salaried employees) Plan in 2009. In 2012, the Company closed the U.S. pension plans for the bargaining units to new participants. Certain grandfathered participants in the bargaining unit plans continue to accrue pension benefits. Employees of certain of the Company’s foreign operations in the U.K. and Germany are covered by either contributory or non-contributory trusteed pension plans. In 2012, the Company froze the benefits in the U.K. pension plan.
Participation in the Company’s defined contribution plans is voluntary. The Company matches plan participants’ contributions up to various limits. Participants’ contributions are limited based on their compensation and, for certain supplemental contributions which are not eligible for Company matching, based on their age. Expense for those plans was
$13,931
,
$13,260
and
$14,236
for
2017
,
2016
and
2015
, respectively.
The Company currently provides retiree health care and life insurance benefits to a portion of its U.S. salaried and hourly employees. U.S. salaried and non-bargained hourly employees hired on or after January 1, 2003 are not eligible for retiree health care or life insurance coverage. The Company has reserved the right to modify or terminate certain of these salaried benefits at any time.
The Company has implemented household caps on the amounts of retiree medical benefits it will provide to certain retirees. The caps do not apply to individuals who retired prior to certain specified dates. Costs in excess of these caps will be paid by plan participants. The Company implemented increased cost sharing in 2004 in the retiree medical coverage provided to certain eligible current and future retirees. Since then, cost sharing has expanded such that nearly all covered retirees pay a charge to be enrolled.
In accordance with U.S. GAAP, the Company recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of its pension and OPEB plans and the net unrecognized actuarial losses and unrecognized prior service costs in the Consolidated Balance Sheets. The unrecognized actuarial losses and unrecognized prior service costs (components of Accumulated other comprehensive loss in the Equity section of the balance sheet) will be subsequently recognized as net periodic pension cost pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit costs in the same periods will be recognized as a component of other comprehensive income.
The following table reflects changes in the projected obligations and fair market values of assets in all defined benefit pension and other postretirement benefit plans of the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Pension Benefits
|
|
2016 Pension Benefits
|
|
Other Postretirement Benefits
|
|
Domestic
|
|
International
|
|
Total
|
|
Domestic
|
|
International
|
|
Total
|
|
2017
|
|
2016
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation at beginning of year
|
$
|
1,040,498
|
|
|
$
|
422,528
|
|
|
$
|
1,463,026
|
|
|
$
|
1,045,467
|
|
|
$
|
405,884
|
|
|
$
|
1,451,351
|
|
|
$
|
262,275
|
|
|
$
|
265,579
|
|
Service cost - employer
|
9,860
|
|
|
—
|
|
|
9,860
|
|
|
9,613
|
|
|
9
|
|
|
9,622
|
|
|
2,003
|
|
|
2,149
|
|
Interest cost
|
39,251
|
|
|
11,525
|
|
|
50,776
|
|
|
41,595
|
|
|
14,097
|
|
|
55,692
|
|
|
10,063
|
|
|
10,819
|
|
Actuarial (gain)/loss
|
59,137
|
|
|
2,567
|
|
|
61,704
|
|
|
26,618
|
|
|
81,180
|
|
|
107,798
|
|
|
8,190
|
|
|
(5,760
|
)
|
Benefits paid
|
(60,113
|
)
|
|
(15,959
|
)
|
|
(76,072
|
)
|
|
(53,405
|
)
|
|
(12,846
|
)
|
|
(66,251
|
)
|
|
(10,805
|
)
|
|
(10,512
|
)
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
(29,390
|
)
|
|
—
|
|
|
(29,390
|
)
|
|
—
|
|
|
—
|
|
Foreign currency translation effect
|
—
|
|
|
40,765
|
|
|
40,765
|
|
|
—
|
|
|
(65,796
|
)
|
|
(65,796
|
)
|
|
—
|
|
|
—
|
|
Projected Benefit Obligation at December 31
|
$
|
1,088,633
|
|
|
$
|
461,426
|
|
|
$
|
1,550,059
|
|
|
$
|
1,040,498
|
|
|
$
|
422,528
|
|
|
$
|
1,463,026
|
|
|
$
|
271,726
|
|
|
$
|
262,275
|
|
Change in plans’ assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plans’ assets at beginning of year
|
$
|
848,341
|
|
|
$
|
328,533
|
|
|
$
|
1,176,874
|
|
|
$
|
836,514
|
|
|
$
|
309,916
|
|
|
$
|
1,146,430
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plans’ assets
|
120,620
|
|
|
27,199
|
|
|
147,819
|
|
|
59,310
|
|
|
77,711
|
|
|
137,021
|
|
|
—
|
|
|
—
|
|
Employer contribution
|
35,498
|
|
|
13,080
|
|
|
48,578
|
|
|
35,312
|
|
|
10,763
|
|
|
46,075
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(60,113
|
)
|
|
(15,959
|
)
|
|
(76,072
|
)
|
|
(53,405
|
)
|
|
(12,846
|
)
|
|
(66,251
|
)
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
(29,390
|
)
|
|
—
|
|
|
(29,390
|
)
|
|
—
|
|
|
—
|
|
Foreign currency translation effect
|
—
|
|
|
33,026
|
|
|
33,026
|
|
|
—
|
|
|
(57,011
|
)
|
|
(57,011
|
)
|
|
—
|
|
|
—
|
|
Fair value of plans’ assets at December 31
|
$
|
944,346
|
|
|
$
|
385,879
|
|
|
$
|
1,330,225
|
|
|
$
|
848,341
|
|
|
$
|
328,533
|
|
|
$
|
1,176,874
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status
|
$
|
(144,287
|
)
|
|
$
|
(75,547
|
)
|
|
$
|
(219,834
|
)
|
|
$
|
(192,157
|
)
|
|
$
|
(93,995
|
)
|
|
$
|
(286,152
|
)
|
|
$
|
(271,726
|
)
|
|
$
|
(262,275
|
)
|
Amounts recognized in the balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
$
|
(300
|
)
|
|
$
|
—
|
|
|
$
|
(300
|
)
|
|
$
|
(300
|
)
|
|
$
|
—
|
|
|
$
|
(300
|
)
|
|
$
|
(14,838
|
)
|
|
$
|
(15,048
|
)
|
Postretirement benefits other than pensions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
(256,888
|
)
|
|
$
|
(247,227
|
)
|
Pension benefits
|
$
|
(143,987
|
)
|
|
$
|
(75,547
|
)
|
|
$
|
(219,534
|
)
|
|
$
|
(191,857
|
)
|
|
$
|
(93,995
|
)
|
|
$
|
(285,852
|
)
|
|
—
|
|
|
—
|
|
Included in Accumulated other comprehensive loss at
December 31, 2017
are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service credits of
($1,038)
(
($779)
net of tax) and unrecognized actuarial losses of
$489,008
(
$439,666
net of tax).
Included in Accumulated other comprehensive loss at
December 31, 2016
are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service credits of
($1,604)
(
($990)
net of tax) and unrecognized actuarial losses of
$534,060
(
$472,693
net of tax).
The prior service credit and actuarial loss included in accumulated other comprehensive loss that are expected to be recognized in net periodic benefit cost during the fiscal year-ended December 31,
2018
are
($541)
and
$37,258
, respectively.
The accumulated benefit obligation for all defined benefit pension plans was
$1,546,705
and
$1,459,809
at
December 31, 2017
and
2016
, respectively.
In 2016, in order to reduce the size and potential future volatility of the Company’s domestic defined benefit pension plan obligations, the Company commenced an offer to approximately
1,200
former employees with deferred vested pension plan benefits. These former employees had the opportunity to make a one-time election to receive a lump-sum distribution of their benefits by the end of the third quarter of 2016. The vested benefit obligation associated with these former employees was approximately
$42,000
, equivalent to about
four percent
of the Company’s benefit obligation for the domestic plans. Cash payments of
$22,701
were made from plan assets in September 2016 to the former employees electing the lump-sum distribution. These payments represented a reduction of approximately
two percent
of the Company’s benefit obligation for the domestic plans.
Due to the size of the lump-sum distribution, in accordance with U.S. GAAP, the Company was required to recognize non-cash settlement charges for all 2016 settlements. Based on the lump-sum distributions that were paid through the third quarter, the Company incurred a non-cash settlement charge of
$11,462
in the third quarter of 2016. Additionally, based on the lump-sum distributions that were paid in the fourth quarter, the Company incurred a non-cash settlement charge of
$800
in the fourth quarter. In total, cash payments of
$29,390
were made from plan assets as part of settlement activity in 2016.
Weighted average assumptions used to determine benefit obligations at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
All plans
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.20
|
%
|
|
3.54
|
%
|
|
3.50
|
%
|
|
3.95
|
%
|
Domestic plans
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.50
|
%
|
|
3.90
|
%
|
|
3.50
|
%
|
|
3.95
|
%
|
Foreign plans
|
|
|
|
|
|
|
|
|
Discount rate
|
|
2.50
|
%
|
|
2.65
|
%
|
|
—
|
|
|
—
|
|
At
December 31, 2017
, the weighted average assumed annual rate of increase in the cost of medical benefits was
7.00
percent for 2017 trending linearly to
4.50
percent per annum in 2025.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits - Domestic
|
|
Pension Benefits - International
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
9,860
|
|
|
$
|
9,613
|
|
|
$
|
11,037
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
9
|
|
Interest cost
|
|
39,251
|
|
|
41,595
|
|
|
40,202
|
|
|
11,525
|
|
|
14,097
|
|
|
15,853
|
|
Expected return on plan assets
|
|
(54,058
|
)
|
|
(57,438
|
)
|
|
(55,299
|
)
|
|
(11,262
|
)
|
|
(11,322
|
)
|
|
(12,421
|
)
|
Amortization of actuarial loss
|
|
37,122
|
|
|
38,490
|
|
|
39,514
|
|
|
5,448
|
|
|
5,134
|
|
|
7,222
|
|
Effect of settlements
|
|
—
|
|
|
12,262
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
32,175
|
|
|
$
|
44,522
|
|
|
$
|
35,454
|
|
|
$
|
5,711
|
|
|
$
|
7,918
|
|
|
$
|
10,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Post Retirement Benefits
|
|
|
2017
|
|
2016
|
|
2015
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
Service cost
|
|
$
|
2,003
|
|
|
$
|
2,149
|
|
|
$
|
2,513
|
|
Interest cost
|
|
10,063
|
|
|
10,819
|
|
|
10,320
|
|
Amortization of prior service cost
|
|
(566
|
)
|
|
(566
|
)
|
|
(566
|
)
|
Net periodic benefit cost
|
|
$
|
11,500
|
|
|
$
|
12,402
|
|
|
$
|
12,267
|
|
Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
All plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.54
|
%
|
|
4.10
|
%
|
|
3.70
|
%
|
|
3.95
|
%
|
|
4.20
|
%
|
|
3.80
|
%
|
Expected return on plan assets
|
|
5.57
|
%
|
|
6.16
|
%
|
|
6.12
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Domestic plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.90
|
%
|
|
4.20
|
%
|
|
3.75
|
%
|
|
3.95
|
%
|
|
4.20
|
%
|
|
3.80
|
%
|
Expected return on plan assets
|
|
6.50
|
%
|
|
7.00
|
%
|
|
7.00
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Foreign plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
2.65
|
%
|
|
3.84
|
%
|
|
3.59
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected return on plan assets
|
|
3.29
|
%
|
|
3.99
|
%
|
|
3.84
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
The following table lists the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets at
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
Projected
benefit
obligation
exceeds plan
assets
|
|
Accumulated
benefit
obligation
exceeds plan
assets
|
|
Projected
benefit
obligation
exceeds plan
assets
|
|
Accumulated
benefit
obligation
exceeds plan
assets
|
Projected benefit obligation
|
|
$
|
1,550,059
|
|
|
$
|
1,550,059
|
|
|
$
|
1,463,026
|
|
|
$
|
1,463,026
|
|
Accumulated benefit obligation
|
|
1,546,705
|
|
|
1,546,705
|
|
|
1,459,809
|
|
|
1,459,809
|
|
Fair value of plan assets
|
|
1,330,225
|
|
|
1,330,225
|
|
|
1,176,874
|
|
|
1,176,874
|
|
Assumed health care cost trend rates for other postretirement benefits have a significant effect on the amounts reported. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Point
|
|
|
Increase
|
|
Decrease
|
Increase (decrease) in total service and interest cost components
|
|
$
|
50
|
|
|
$
|
(43
|
)
|
Increase (decrease) in the other postretirement benefit obligation
|
|
1,419
|
|
|
(1,222
|
)
|
The table below presents the Company’s weighted average asset allocations for its domestic and U.K. pension plans’ assets at
December 31, 2017
and
December 31, 2016
by asset category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
U.K. Plan
|
Asset Category
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Debt securities
|
|
52
|
%
|
|
36
|
%
|
|
68
|
%
|
|
68
|
%
|
Equity securities
|
|
40
|
|
|
63
|
|
|
18
|
|
|
18
|
|
Other investments
|
|
6
|
|
|
0
|
|
|
13
|
|
|
14
|
|
Cash
|
|
2
|
|
|
1
|
|
|
1
|
|
|
0
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The Company manages the plans' asset allocation relative to the liability profile and funded status of the plans. It is expected that as the plan’s funded status improves, the portfolio will take less risk as to preserve the funded status of the plan framework. The plans follow a glide path whereby a target return-seeking allocation is followed based upon a given funded ratio level. The plans' position with respect to the glide path is monitored, and asset allocation and strategy changes to the plans' portfolio are made as appropriate. The plans' strategy is also monitored in relation to the capital markets, interest rates, and the regulatory environment. The assets of the Company’s pension plan in Germany consist of investments in German insurance contracts.
The fair market value of U.S. plan assets was
$944,346
and
$848,341
at
December 31, 2017
and
2016
, respectively. The fair market value of the U.K. plan assets was
$383,831
and
$326,833
at
December 31, 2017
and
2016
, respectively. The fair market value of the German pension plan assets was
$2,048
and
$1,700
at
December 31, 2017
and
2016
, respectively.
The table below classifies the assets of the U.S. and U.K. plans using the Fair Value Hierarchy described in Note 8 – Fair Value Measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
December 31, 2017
|
|
|
|
|
|
|
|
|
United States plans
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,819
|
|
|
$
|
18,819
|
|
|
|
|
|
$
|
—
|
|
Collective Trust Funds - Equity
|
|
381,696
|
|
|
—
|
|
|
381,696
|
|
|
—
|
|
Collective Trust Funds - Fixed income
|
|
490,955
|
|
|
—
|
|
|
490,955
|
|
|
—
|
|
Collective Trust Funds - Real Estate
|
|
52,876
|
|
|
$
|
—
|
|
|
$
|
52,876
|
|
|
$
|
—
|
|
|
|
$
|
944,346
|
|
|
$
|
18,819
|
|
|
$
|
925,527
|
|
|
$
|
—
|
|
United Kingdom plan
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,578
|
|
|
$
|
1,578
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
|
|
69,547
|
|
|
69,547
|
|
|
—
|
|
|
—
|
|
Fixed income securities
|
|
261,260
|
|
|
261,260
|
|
|
—
|
|
|
—
|
|
Other investments
|
|
51,446
|
|
|
—
|
|
|
13,376
|
|
|
38,070
|
|
|
|
$
|
383,831
|
|
|
$
|
332,385
|
|
|
$
|
13,376
|
|
|
$
|
38,070
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
United States plans
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,491
|
|
|
$
|
8,491
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
|
|
184,690
|
|
|
184,690
|
|
|
—
|
|
|
—
|
|
Fixed income securities
|
|
138,988
|
|
|
138,988
|
|
|
—
|
|
|
—
|
|
Collective Trust Funds - Equity
|
|
347,249
|
|
|
—
|
|
|
347,249
|
|
|
—
|
|
Collective Trust Funds - Fixed income
|
|
168,923
|
|
|
—
|
|
|
168,923
|
|
|
—
|
|
|
|
$
|
848,341
|
|
|
$
|
332,169
|
|
|
$
|
516,172
|
|
|
$
|
—
|
|
United Kingdom plan
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,078
|
|
|
$
|
1,078
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
|
|
60,185
|
|
|
60,185
|
|
|
—
|
|
|
—
|
|
Fixed income securities
|
|
220,974
|
|
|
220,974
|
|
|
—
|
|
|
—
|
|
Other investments
|
|
44,596
|
|
|
—
|
|
|
10,800
|
|
|
33,796
|
|
|
|
$
|
326,833
|
|
|
$
|
282,237
|
|
|
$
|
10,800
|
|
|
$
|
33,796
|
|
Plan assets are measured at fair value. While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The Company’s valuation methodologies used for the plan assets measured at fair value are as follows:
Cash and cash equivalents –
Cash and cash equivalents include cash on deposit and investments in money market mutual funds that invest mainly in short-term instruments and cash, both of which are valued using a market approach.
Equity securities
– Common, preferred, and foreign stocks are valued using a market approach at the closing price on their principal exchange and are included in Level 1 of the fair value hierarchy.
Fixed income securities –
Corporate and foreign bonds are valued using a market approach at the closing price reported on the active market on which the individual securities are traded and are included in Level 1 of the fair value hierarchy.
Collective trust funds –
Collective trust funds are valued at the net asset value of units held at year end and are included in Level 2 of the fair value hierarchy based on their underlying investment strategy.
Equity Funds –
Collective trust funds classified as Equity primarily invest in U.S. and non-U.S. securities in both small and large capitalization markets.
Fixed Income Funds –
Collective trust funds classified as Fixed Income primarily invest in debt securities, U.S. treasury securities, and fixed income securities.
Real Estate Funds -
Collective trust funds classified as Real Estate Funds are invested in global real estate securities.
The fair market values of the Level 3 assets in the U.K. plan are determined by the fund manager using a discounted cash flow methodology. The future cash flows expected to be generated by the assets of the funds and made available to investors are estimated and then discounted back to the valuation date. The discount rate is derived by adding a risk premium to the risk-free interest rate applicable to the country in which the assets are located.
The following table details the activity in these investments for the years ended
December 31, 2016
and
2017
:
|
|
|
|
|
|
U.K. Plan
Level 3 Assets
|
Balance at December 31, 2014
|
$
|
25,812
|
|
Transfer into level 3
|
—
|
|
Disbursements
|
—
|
|
Change in fair value
|
2,798
|
|
Foreign currency translation effect
|
(1,548
|
)
|
Balance at December 31, 2015
|
27,062
|
|
Transfer into level 3
|
9,489
|
|
Disbursements
|
—
|
|
Change in fair value
|
3,545
|
|
Foreign currency translation effect
|
(6,300
|
)
|
Balance at December 31, 2016
|
33,796
|
|
Transfer into level 3
|
—
|
|
Disbursements
|
—
|
|
Change in fair value
|
969
|
|
Foreign currency translation effect
|
3,305
|
|
Balance at December 31, 2017
|
$
|
38,070
|
|
The Company determines the annual expected rates of return on pension assets by first analyzing the composition of its asset portfolio. Historical rates of return are applied to the portfolio. These computed rates of return are reviewed by the Company’s investment advisors and actuaries. Industry comparables and other outside guidance are also considered in the annual selection of the expected rates of return on pension assets.
During
2017
, the Company contributed
$48,578
to its domestic and foreign pension plans, and during
2018
, the Company expects to contribute between
$45,000
and
$55,000
to its domestic and foreign pension plans.
The Company estimates its benefit payments for its domestic and foreign pension plans and other postretirement benefit plans during the next ten years to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
2018
|
|
$
|
89,433
|
|
|
$
|
14,838
|
|
2019
|
|
84,648
|
|
|
15,261
|
|
2020
|
|
86,980
|
|
|
15,919
|
|
2021
|
|
87,027
|
|
|
16,225
|
|
2022
|
|
88,491
|
|
|
16,462
|
|
2022 through 2026
|
|
446,996
|
|
|
82,126
|
|
Note 10 - Other Long-Term Liabilities
Other long-term liabilities at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Product liability
|
|
$
|
85,192
|
|
|
$
|
118,941
|
|
Long-term income taxes payable
|
|
29,463
|
|
|
—
|
|
Stock-based liabilities
|
|
14,365
|
|
|
20,336
|
|
Other
|
|
15,197
|
|
|
17,647
|
|
Other long-term liabilities
|
|
$
|
144,217
|
|
|
$
|
156,924
|
|
Note 11 - Common Stock
Share Repurchase Programs
On August 6, 2014, the Board of Directors authorized the repurchase of up to
$200,000
of the Company’s outstanding common stock pursuant to an accelerated share repurchase program, and the Company entered into a
$200,000
accelerated share repurchase program (the “ASR program”) with J.P. Morgan Chase Bank (the “ASR Counterparty”). The Company paid
$200,000
to the ASR Counterparty in August 2014 and received
5,567,154
shares of its common stock, which represented approximately
80 percent
of the shares expected to be purchased pursuant to the ASR program, based on the closing price on August 6, 2014. Under the terms of the ASR program, the ASR Counterparty was permitted, in accordance with the applicable requirements of the federal securities laws, to separately trade in the Company’s shares in connection with the hedging activities related to the ASR program and as part of other aspects of the ASR Counterparty’s business.
On February 13, 2015, the Company completed the ASR program. Based on the terms of the ASR program, the total number of shares repurchased under the ASR program was based on the volume-weighted average price of the Company’s common stock, less a discount, during the repurchase period, which resulted in the Company receiving an additional
784,694
shares of its common stock from the ASR Counterparty at maturity. As a result, under the ASR program, the Company paid a total of
$200,000
to the ASR Counterparty and received a total of
6,351,848
shares (
5,567,154
shares initially received, plus
784,694
shares received at maturity) of its common stock, which represents a volume weighted average price, as adjusted pursuant to the terms of the ASR program, of
$31.49
over the duration of the ASR program.
Subsequent to the completion of the ASR program, the Board of Directors has authorized new share repurchase programs. The following table summarizes the Company’s Board authorized share repurchase programs and related information for the years ended December 31, 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program
(1)
|
|
Date Authorized by Board of Directors
|
|
Expiration Date
|
|
Amount Authorized
(excluding commissions)
|
|
Amount Spent as of December 31, 2017
(excluding commissions)
|
|
Status
|
2017 Repurchase Program
|
|
February 16, 2017
|
|
December 31, 2019
|
|
$
|
300,000
|
|
|
$
|
76,724
|
|
|
Active
|
2016 Repurchase Program
|
|
February 19, 2016
|
|
December 31, 2017
|
|
200,000
|
|
|
104,366
|
|
|
Superseded
(2)
|
2015 Repurchase Program
|
|
February 20, 2015
|
|
December 31, 2016
|
|
200,000
|
|
|
126,346
|
|
|
Superseded
(3)
|
ASR program
|
|
August 6, 2014
|
|
February 13, 2015
|
|
200,000
|
|
|
200,000
|
|
|
Completed
|
|
|
(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 is included in the
$300,000
maximum amount authorized by the 2017 Repurchase Program.
|
|
|
(3)
|
The approximately
$73,654
remaining under the 2015 Repurchase Program as of February 19, 2016 was included in the
$200,000
maximum amount authorized by the 2016 Repurchase Program.
|
The following table summarizes the Company’s open market and 10b5-1 plan share repurchase activity and related information during the years ended December 31, 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Average Repurchase Price Per Share
|
|
Amount
(including commissions)
|
2017 share repurchase activity:
|
|
|
|
|
|
|
2017 Repurchase Program
|
|
2,136,237
|
|
|
$
|
35.95
|
|
|
$
|
76,788
|
|
2016 Repurchase Program
|
|
383,690
|
|
|
36.70
|
|
|
14,080
|
|
Total share repurchases
|
|
2,519,927
|
|
|
36.06
|
|
|
$
|
90,868
|
|
2016 share repurchase activity:
|
|
|
|
|
|
|
2016 Repurchase Program
|
|
2,630,433
|
|
|
$
|
34.36
|
|
|
$
|
90,377
|
|
2015 Repurchase Program
|
|
497,094
|
|
|
35.45
|
|
|
17,622
|
|
Total share repurchases
|
|
3,127,527
|
|
|
34.53
|
|
|
$
|
107,999
|
|
2015 share repurchase activity:
|
|
|
|
|
|
|
2015 Repurchase Program
|
|
2,751,454
|
|
|
39.55
|
|
|
$
|
108,821
|
|
ASR program
|
|
784,694
|
|
|
(1)
|
|
(1)
|
Total share repurchases
|
|
3,536,148
|
|
|
|
|
108,821
|
|
|
|
(1)
|
On February 13, 2015, the Company completed the ASR program. Based on the terms of the ASR program, the total number of shares repurchased under the ASR program was based on the volume-weighted average price of the Company’s common stock, less a discount, during the repurchase period, which resulted in the Company receiving an additional
784,694
shares of its common stock from the ASR Counterparty at maturity. As a result, under the ASR program, the Company paid a total of
$200,000
to the ASR Counterparty and received a total of
6,351,848
shares (
5,567,154
shares initially received, plus
784,694
shares received at maturity) of its common stock, which represents a volume weighted average price, as adjusted pursuant to the terms of the ASR program, of
$31.49
over the duration of the ASR program.
|
Since August 2014 through
December 31, 2017
, the Company has repurchased
14,750,756
shares of the Company’s common stock at an average cost of
$34.42
per share.
Reserved Shares
There were
7,954,701
common shares reserved for grants under compensation plans at
December 31, 2017
. The Company eliminated the option for plan participants in the Company’s Spectrum Investment Savings Plan and Pre-Tax Savings plans to purchase additional shares of the Company’s common stock in March 2014.
Note 12 - Stock-Based Compensation
The Company’s incentive compensation plans allow the Company to grant awards to employees in the form of stock options, stock awards, restricted stock units, stock appreciation rights, performance stock units, dividend equivalents and other awards. Compensation related to these awards is determined based on the grant-date fair value and is amortized to expense over the vesting period. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire without forfeiture of the award. If awards can be settled in cash, these awards are recorded as liabilities and marked to market.
The following table discloses the amount of stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation
|
|
|
2017
|
|
2016
|
|
2015
|
Stock options
|
|
$
|
14
|
|
|
$
|
506
|
|
|
$
|
3,986
|
|
Restricted stock units
|
|
3,302
|
|
|
5,595
|
|
|
4,879
|
|
Performance stock units
|
|
693
|
|
|
7,469
|
|
|
6,054
|
|
Total stock-based compensation
|
|
$
|
4,009
|
|
|
$
|
13,570
|
|
|
$
|
14,919
|
|
Stock Options
The 2006, 2010 and 2014 incentive compensation plans provide for granting options to key employees to purchase common shares at prices not less than market at the date of grant. Options under these plans may have terms of up to
ten years
becoming exercisable in whole or in consecutive installments, cumulative or otherwise. The plans allow the granting of nonqualified stock options which are not intended to qualify for the tax treatment applicable to incentive stock options under provisions of the Internal Revenue Code.
In February 2012, executives participating in the 2012 – 2014 Long-Term Incentive Plan were granted
589,934
stock options which vested one-third each year through February 2015. In February 2013, executives participating in the 2013-2015 Long-Term Incentive Plan were granted
330,639
stock options, which vested one-third each year through February 2016. In February 2014, executives participating in the 2014-2016 Long-Term Incentive Plan were granted
380,064
stock options, which will vest one-third each year through February 2017.
No
stock options were granted in 2015, 2016 or 2017 to executives participating in the Long-Term Incentive Plan. Outstanding options do not contain any performance-based criteria. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire.
Summarized information for the plans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price (per share)
|
|
Aggregate
Intrinsic
Value
(thousands)
|
Outstanding at December 31, 2016
|
|
495,704
|
|
|
$
|
21.24
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
Exercised
|
|
(210,125
|
)
|
|
20.10
|
|
|
|
Expired
|
|
—
|
|
|
—
|
|
|
|
Canceled
|
|
—
|
|
|
—
|
|
|
|
Outstanding at December 31, 2017
|
|
285,579
|
|
|
22.08
|
|
|
$
|
3,790
|
|
Exercisable at December 31, 2017
|
|
285,579
|
|
|
22.08
|
|
|
3,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Weighted average grant-date fair value of options granted (per share)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Aggregate intrinsic value of options exercised (thousands)
|
|
$
|
4,194
|
|
|
$
|
2,640
|
|
|
$
|
20,100
|
|
Weighted average grant-date fair value of shares vested (thousands)
|
|
$
|
1,400
|
|
|
$
|
2,633
|
|
|
$
|
4,602
|
|
The weighted average remaining contractual life of options outstanding at
December 31, 2017
is
4.8 years
. All outstanding stock options are exercisable.
Segregated disclosure of options outstanding at
December 31, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
|
Less than or
equal to $15.63
|
|
Greater than
$15.63
|
Options outstanding
|
|
47,501
|
|
|
238,078
|
|
Weighted average exercise price
|
|
$
|
12.86
|
|
|
$
|
23.72
|
|
Remaining contractual life
|
|
3.3
|
|
|
5.1
|
|
Options exercisable
|
|
47,501
|
|
|
238,078
|
|
Weighted average exercise price
|
|
$
|
12.44
|
|
|
$
|
24.00
|
|
At
December 31, 2017
, the Company had fully amortized all expense related to its stock option awards.
Restricted Stock Units
Under the 1998, 2001, and 2014 Incentive Compensation Plans, restricted stock units may be granted to officers and certain other employees as awards for exceptional performance, as a hiring or retention incentive or as part of the Long-Term Incentive Plan. The restricted stock units granted in 2015, 2016 and 2017 have vesting periods of
three
to
four years
. In February 2015, employees participating in the 2015-2017 Long-Term Incentive Plan were granted
105,102
restricted stock units which vest
one-third each year through February 2018. In February 2016, employees participating in the 2016-2018 Long-Term Incentive Plan were granted
106,287
restricted stock units which vest one-third each year through February 2019. In February 2017, employees participating in the 2017-2019 Long-Term Incentive Plan were granted
82,563
restricted stock units which vest one-third each year through February 2020. Compensation expense related to the restricted stock units granted is determined based on the fair value of the Company’s stock on the date of grant. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire. Employees must remain employed for at least six months to vest in the restricted stock units, even if retirement eligible.
The following table provides details of the nonvested restricted stock units for
2017
:
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted Units
|
|
Weighted Average
Grant-Date Fair
Value (per share)
|
Nonvested at December 31, 2016
|
|
240,574
|
|
|
$
|
35.75
|
|
Granted
|
|
103,207
|
|
|
38.33
|
|
Vested
|
|
(157,344
|
)
|
|
35.76
|
|
Canceled
|
|
(8,479
|
)
|
|
37.76
|
|
Accrued dividend equivalents
|
|
2,430
|
|
|
36.70
|
|
Nonvested at December 31, 2017
|
|
180,388
|
|
|
$
|
37.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Weighted average grant-date fair value of restricted shares granted (per share)
|
|
$
|
38.33
|
|
|
$
|
36.02
|
|
|
$
|
36.35
|
|
Weighted average grant-date fair value of shares vested (thousands)
|
|
$
|
5,627
|
|
|
$
|
3,195
|
|
|
$
|
2,629
|
|
The number of vested restricted stock units at
December 31, 2017
and
2016
was
2,499
and
93,440
, respectively. At
December 31, 2017
, the Company has
$2,021
of unvested compensation cost related to restricted stock units and this cost will be recognized as expense over a weighted average period of
24 months
.
Performance Stock Units
Compensation related to the performance stock units is determined based on the fair value of the Company’s stock on the date of grant combined with performance metrics. During 2013, executives participating in the Company’s Long-Term Incentive Plan earned
33,405
performance stock units based on the Company’s financial performance in 2013. Of these units,
9,821
vested in 2013,
13,373
vested in 2014 and
8,701
vested in 2015. During 2014, executives participating in the Company’s Long-Term Incentive Plan earned
123,788
performance stock units based on the Company’s financial performance in 2014. Of these units,
49,248
vested in 2014,
32,074
vested in 2015 and
38,091
vested in 2016. During 2015, executives participating in the Company’s Long-Term Incentive Plan earned
231,543
performance stock units based on the Company’s financial performance in 2015. Of these units,
69,912
vested in 2015,
83,371
vested in 2016 and
66,909
vested in 2017. During 2016, executives participating in the Company’s Long-Term Incentive Plan earned
179,865
performance stock units based on the Company’s financial performance in 2016. Of these units,
55,570
vested in 2016,
45,435
vested in 2017 and
48,459
will vest in 2018, respectively. During 2017, executives participating in the Company’s Long-Term Incentive Plan did not earn
any
performance stock units based on the Company’s financial performance in 2017. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire.
The following table provides details of the nonvested performance stock units earned under the Company’s Long-Term Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
Number of
Performance Units
|
|
Weighted
Average Grant-
Date Fair Value
(per share)
|
Nonvested at December 31, 2016
|
|
163,967
|
|
|
$
|
36.77
|
|
Earned
|
|
—
|
|
|
—
|
|
Vested
|
|
(114,569
|
)
|
|
36.77
|
|
Canceled
|
|
(2,309
|
)
|
|
36.77
|
|
Accrued dividend equivalents
|
|
1,962
|
|
|
36.77
|
|
Nonvested at December 31, 2017
|
|
49,051
|
|
|
$
|
36.76
|
|
The weighted average fair value of performance stock units granted in
2017
,
2016
and
2015
was
$38.23
,
$36.76
and
$36.62
, respectively.
At
December 31, 2017
, the Company had
$221
of unvested compensation cost related to performance stock units and this cost will be recognized as expense over a weighted average period of
12 months
.
The Company’s nonvested restricted stock units and performance stock units are not participating securities. These units will be converted into shares of Company common stock in accordance with the distribution date indicated in the agreements. Restricted stock units earn dividend equivalents from the time of the award until distribution is made in common shares. Performance stock units earn dividend equivalents from the time the units have been earned based upon Company performance metrics until distribution is made in common shares. Dividend equivalents are only earned subject to vesting of the underlying restricted stock units or performance stock units. Accordingly, such units do not represent participating securities.
At
December 31, 2017
, the company had
2,332,604
shares available for future issuance under equity compensation plans.
The Company recognized
$274
and
$4,323
of excess tax benefits on stock based compensation transactions as a financing cash inflow for the years ended
December 31, 2016
and
2015
, respectively. In 2017,
$1,877
of excess tax benefits was recognized as a discrete item in the provision for income taxes and included as an operating activity in the Consolidated Statement of Cash Flows as a result of the adoption of ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” Refer to the "Recent Accounting Pronouncements" section in Footnote 1 for details regarding the adoption of ASU 2016-09.
Note 13 - Changes in Accumulated Other Comprehensive Loss by Component
The balances of each component of accumulated other comprehensive loss in the accompanying Consolidated Statements of Equity were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
Translation
Adjustment
|
|
Derivative
Instruments
|
|
Post-
retirement
Benefits
|
|
Total
|
Ending balance, December 31, 2015
|
(22,034
|
)
|
|
3,454
|
|
|
(491,187
|
)
|
|
(509,767
|
)
|
Other comprehensive (loss) income before reclassifications
|
(53,381
|
)
|
|
(2,471
|
)
|
|
(39,689
|
)
|
|
(95,541
|
)
|
Foreign currency translation effect
|
—
|
|
|
—
|
|
|
13,152
|
|
|
13,152
|
|
Income tax effect
|
—
|
|
|
941
|
|
|
10,770
|
|
|
11,711
|
|
Amount reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
Cash flow hedges
|
—
|
|
|
100
|
|
|
—
|
|
|
100
|
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
(566
|
)
|
|
(566
|
)
|
Amortization of actuarial losses
|
—
|
|
|
—
|
|
|
43,624
|
|
|
43,624
|
|
Pension settlement charges
|
—
|
|
|
—
|
|
|
12,262
|
|
|
12,262
|
|
Income tax effect
|
—
|
|
|
(57
|
)
|
|
(20,069
|
)
|
|
(20,126
|
)
|
Other comprehensive (loss) income
|
(53,381
|
)
|
|
(1,487
|
)
|
|
19,484
|
|
|
(35,384
|
)
|
Ending balance, December 31, 2016
|
(75,415
|
)
|
|
1,967
|
|
|
(471,703
|
)
|
|
(545,151
|
)
|
Other comprehensive (loss) income before reclassifications
|
35,475
|
|
|
(6,092
|
)
|
|
13,385
|
|
|
42,768
|
|
Foreign currency translation effect
|
—
|
|
|
—
|
|
|
(7,855
|
)
|
|
(7,855
|
)
|
Income tax effect
|
—
|
|
|
1,823
|
|
|
191
|
|
|
2,014
|
|
Amount reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
Cash flow hedges
|
—
|
|
|
3,619
|
|
|
—
|
|
|
3,619
|
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
(566
|
)
|
|
(566
|
)
|
Amortization of actuarial losses
|
—
|
|
|
—
|
|
|
42,570
|
|
|
42,570
|
|
Income tax effect
|
—
|
|
|
(968
|
)
|
|
(14,909
|
)
|
|
(15,877
|
)
|
Other comprehensive (loss) income
|
35,475
|
|
|
(1,618
|
)
|
|
32,816
|
|
|
66,673
|
|
Ending balance, December 31, 2017
|
(39,940
|
)
|
|
349
|
|
|
(438,887
|
)
|
|
(478,478
|
)
|
Note 14 - Comprehensive Income Attributable to Noncontrolling Shareholders’ Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Net income attributable to noncontrolling shareholders’ interests
|
|
$
|
1,345
|
|
|
$
|
2,913
|
|
|
$
|
3,038
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
Currency translation adjustments
|
|
3,375
|
|
|
(4,573
|
)
|
|
(4,227
|
)
|
Comprehensive income (loss) attributable to noncontrolling shareholders’ interests
|
|
$
|
4,720
|
|
|
$
|
(1,660
|
)
|
|
$
|
(1,189
|
)
|
Note 15 - Lease Commitments
The Company rents certain distribution and other facilities and equipment under long-term leases expiring at various dates. The total rental expense for the Company, including these long-term leases and all other rentals, was
$53,532
,
$41,397
and
$39,290
for
2017
,
2016
and
2015
, respectively.
Future minimum payments for all non-cancelable operating leases through the end of their terms, which in aggregate total
$132,744
, are listed below. Certain of these leases contain provisions for optional renewal at the end of the lease terms.
|
|
|
|
|
2018
|
$
|
26,895
|
|
2019
|
24,664
|
|
2020
|
22,218
|
|
2021
|
14,791
|
|
2022
|
10,863
|
|
Thereafter
|
33,313
|
|
Note 16 - Contingent Liabilities
Litigation
Product Liability Litigation
The Company is a defendant in various product liability claims brought in numerous jurisdictions in which individuals seek damages resulting from motor vehicle accidents allegedly caused by defective tires manufactured by the Company. Each of the product liability claims faced by the Company generally 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, radial medium truck and motorcycle tires per year in North America. The Company estimates that approximately
300 million
Company-produced tires – made up of thousands of different specifications – are still on the road in North America. While tire disablements do occur, it is the Company’s and the tire industry’s experience that the vast majority of tire failures relate to service-related conditions, which are entirely out of the Company’s control – such as failure to maintain proper tire pressure, improper maintenance, improper repairs, road hazard and excessive speed.
The Company accrues costs for product liability at the time a loss is probable and the amount of loss can be estimated. The Company believes the probability of loss can be established and the amount of loss can be estimated only after certain minimum information is available, including verification that Company-produced product were involved in the incident giving rise to the claim, the condition of the product purported to be involved in the claim, the nature of the incident giving rise to the claim and the extent of the purported injury or damages. In cases where such information is known, each product liability claim is evaluated based on its specific facts and circumstances. A judgment is then made to determine the requirement for establishment or revision of an accrual for any potential liability. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. The liability often cannot be determined with precision until the claim is resolved.
Pursuant to ASU 450 "Contingencies", the Company accrues the minimum liability for each known claim when the estimated outcome is a range of probable loss and no one amount within that range is more likely than another. The Company uses a range of losses because an average cost would not be meaningful since the product liability claims faced by the Company are unique and widely variable, and accordingly, the resolutions of those claims have an enormous amount of variability. The costs have ranged from
zero
dollars to
$33 million
in one case with no “average” that is meaningful. No specific accrual is made for individual unasserted claims or for premature claims, asserted claims where the minimum information needed to evaluate the probability of a liability is not yet known. However, an accrual for such claims based, in part, on management’s expectations for future litigation activity and the settled claims history is maintained. The Company periodically reviews such estimates and any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. Because of the speculative nature of litigation in the U.S., the Company does not believe a meaningful aggregate range of potential loss for
asserted and unasserted claims can be determined. While the Company believes its reserves are reasonably stated, it is possible an individual claim from time to time may result in an aberration from the norm and could have a material impact.
The time frame for the payment of a product liability claim is too variable to be meaningful. From the time a claim is filed to its ultimate disposition depends on the unique nature of the case, how it is resolved - claim dismissed, negotiated settlement, trial verdict or appeals process - and is highly dependent on jurisdiction, specific facts, the plaintiff’s attorney, the court’s docket and other factors. Given that some claims may be resolved in weeks and others may take five years or more, it is impossible to predict with any reasonable reliability the time frame over which the accrued amounts may be paid.
The Company regularly reviews the probable outcome of outstanding legal proceedings and the availability and limits of the insurance coverage, and accrues for such legal proceedings at the time a loss is probable and the amount of the loss can be estimated. As part of its regular review, the Company monitors trends that may affect its ultimate liability and analyzes the developments and variables likely to affect pending and anticipated claims against the Company and the reserves for such claims. The Company utilizes claims experience, as well as trends and developments in the litigation climate, in estimating its required accrual. Based on the Company’s review completed in 2017, coupled with normal activity, including the addition of another year of self-insured incidents, settlements and changes in the amount of reserves, the Company reduced its accrual from
$176,995
at December 31, 2016 to
$129,892
at December 31, 2017. This change in estimate in 2017 is primarily the result of recent favorable claims experience and trends.
The addition of another year of self-insured incidents accounted for an increase of
$48,039
in the Company's product liability reserve in 2017. 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
$38,938
.
During 2017 the Company paid
$55,671
and during 2016, the Company paid
$31,697
to resolve cases and claims. The Company’s product liability reserve balance at December 31, 2017 totaled
$129,892
(the current portion of
$44,700
is included in Accrued liabilities and the long-term portion is included in Other long-term liabilities on the Consolidated Balance Sheets), and the balance at December 31, 2016 totaled
$176,995
(current portion of
$58,054
).
The product liability expense reported by the Company includes amortization of insurance premium costs, adjustments to liability reserves and legal costs incurred in defending claims against the Company. Legal costs are expensed as incurred and product liability insurance premiums are amortized over coverage periods.
Product liability expense totaled
$25,970
,
$65,448
and
$78,800
in 2017, 2016 and 2015. Product liability expenses are included in Cost of products sold in the Consolidated Statements of Income.
Other Litigation
In addition to the proceedings described above, the Company is involved in various other legal proceedings arising in the ordinary course of business. The Company regularly reviews the probable outcome of these proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and accrues for these proceedings at the time a loss is probable and the amount of the loss can be estimated. Although the outcome of these pending proceedings cannot be predicted with certainty and an estimate of any such loss cannot be made, the Company believes that any liabilities that may result from these proceedings are not reasonably likely to have a material adverse effect on the Company’s liquidity, financial condition or results of operations.
Employment Contracts and Agreements
No executives have employment agreements as of December 31, 2017. The Executive Officers are covered by the Cooper Tire & Rubber Company Change in Control Severance Pay Plan.
At
December 31, 2017
, approximately
40%
of the Company’s workforce was represented by collective bargaining units.
Note 17 - Business Segments
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;
|
North America and Latin America meet the criteria for aggregation in accordance with ASC 280, as they are similar in their production and distribution processes and exhibit similar economic characteristics. The aggregated North America and Latin America segments are presented as “Americas Tire Operations” in the segment disclosure. The Americas Tire Operations
segment manufactures and markets passenger car and light truck tires, primarily for sale in the U.S. replacement market. The segment also has a joint venture manufacturing operation in Mexico, COOCSA, which supplies passenger car tires to the North American, Mexican, Central American and South American markets. The segment also distributes tires for racing, medium trucks and motorcycles. The racing and motorcycle tires are manufactured in the Company’s European Operations segment and by others. The medium truck tires are sourced 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 medium truck 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.
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 U.K. and Serbia. The U.K. entity manufactures and markets passenger car, light truck, motorcycle and racing tires and tire retread material for domestic and global markets. The Serbian entity manufactures light vehicle tires primarily for the European markets and for export to the U.S. The Asian operations are located in the PRC. Cooper Kunshan Tire manufactures light vehicle 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 radial and bias medium truck tires, as well as passenger car and light truck tires for domestic and global markets. The Company sold its ownership interest in this joint venture in November 2014, and the Company began procuring certain medium truck and passenger car tires under off-take agreements with PCT through mid-2018. The medium truck tire agreement has been extended and now expires in mid-2019. 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 medium truck tires. The segment sells a majority of its tires in the replacement market, with a growing portion also sold to OEMs.
The following customer of the Americas Tire Operations segment contributed ten percent or more of the Company’s total consolidated net sales in
2017
,
2016
and
2015
. Net sales and percentage of consolidated Company sales for this customer in
2017
,
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Customer
|
|
Net Sales
|
|
Consolidated
Net Sales
|
|
Net Sales
|
|
Consolidated
Net Sales
|
|
Net Sales
|
|
Consolidated
Net Sales
|
TBC/Treadways
|
|
$
|
304,840
|
|
|
11
|
%
|
|
$
|
414,556
|
|
|
14
|
%
|
|
$
|
485,257
|
|
|
16
|
%
|
The accounting policies of the reportable segments are consistent with those described in the Significant Accounting Policies note to the consolidated financial statements. Corporate administrative expenses are allocated to segments based principally on assets, employees and sales. The following table details segment financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Net sales:
|
|
|
|
|
|
|
Americas Tire
|
|
|
|
|
|
|
External customers
|
|
$
|
2,376,808
|
|
|
$
|
2,549,743
|
|
|
$
|
2,627,619
|
|
Intercompany
|
|
39,970
|
|
|
50,580
|
|
|
57,135
|
|
|
|
2,416,778
|
|
|
2,600,323
|
|
|
2,684,754
|
|
International Tire
|
|
|
|
|
|
|
External customers
|
|
477,848
|
|
|
375,126
|
|
|
345,282
|
|
Intercompany
|
|
141,021
|
|
|
88,877
|
|
|
106,597
|
|
|
|
618,869
|
|
|
464,003
|
|
|
451,879
|
|
Eliminations
|
|
(180,991
|
)
|
|
(139,457
|
)
|
|
(163,732
|
)
|
Consolidated net sales
|
|
2,854,656
|
|
|
2,924,869
|
|
|
2,972,901
|
|
Operating profit (loss):
|
|
|
|
|
|
|
Americas Tire
|
|
324,693
|
|
|
439,941
|
|
|
422,929
|
|
International Tire
|
|
9,457
|
|
|
5,998
|
|
|
(19,133
|
)
|
Unallocated corporate charges
|
|
(60,599
|
)
|
|
(60,308
|
)
|
|
(52,342
|
)
|
Eliminations
|
|
(1,827
|
)
|
|
(1,244
|
)
|
|
3,026
|
|
Consolidated operating profit
|
|
271,724
|
|
|
384,387
|
|
|
354,480
|
|
Interest expense
|
|
(32,048
|
)
|
|
(26,604
|
)
|
|
(23,820
|
)
|
Interest income
|
|
7,362
|
|
|
4,378
|
|
|
2,211
|
|
Other non-operating (expense) income
|
|
(3,113
|
)
|
|
4,932
|
|
|
1,157
|
|
Income before income taxes
|
|
243,925
|
|
|
367,093
|
|
|
334,028
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
Americas Tire
|
|
91,324
|
|
|
85,842
|
|
|
92,377
|
|
International Tire
|
|
33,303
|
|
|
30,470
|
|
|
28,577
|
|
Corporate
|
|
15,601
|
|
|
13,945
|
|
|
454
|
|
Consolidated depreciation and amortization expense
|
|
140,228
|
|
|
130,257
|
|
|
121,408
|
|
Segment assets
|
|
|
|
|
|
|
Americas Tire
|
|
1,462,757
|
|
|
1,438,802
|
|
|
1,386,361
|
|
International Tire
|
|
690,572
|
|
|
547,178
|
|
|
414,051
|
|
Corporate and other
|
|
454,406
|
|
|
633,415
|
|
|
635,764
|
|
Consolidated assets
|
|
2,607,735
|
|
|
2,619,395
|
|
|
2,436,176
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
Americas Tire
|
|
109,175
|
|
|
112,975
|
|
|
145,813
|
|
International Tire
|
|
89,008
|
|
|
60,359
|
|
|
33,839
|
|
Corporate
|
|
(997
|
)
|
|
2,103
|
|
|
2,892
|
|
Consolidated expenditures for long-lived assets
|
|
197,186
|
|
|
175,437
|
|
|
182,544
|
|
Geographic information for revenues, based on country of origin, and long-lived assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Net sales
|
|
|
|
|
|
|
United States
|
|
$
|
2,240,882
|
|
|
$
|
2,423,932
|
|
|
$
|
2,518,089
|
|
PRC
|
|
263,540
|
|
|
166,289
|
|
|
126,674
|
|
Rest of world
|
|
350,234
|
|
|
334,648
|
|
|
328,138
|
|
Consolidated net sales
|
|
2,854,656
|
|
|
2,924,869
|
|
|
2,972,901
|
|
Long-lived assets
|
|
|
|
|
|
|
United States
|
|
568,215
|
|
|
547,599
|
|
|
537,173
|
|
PRC
|
|
219,289
|
|
|
157,858
|
|
|
105,237
|
|
Rest of world
|
|
180,488
|
|
|
158,770
|
|
|
152,788
|
|
Consolidated long-lived assets
|
|
967,992
|
|
|
864,227
|
|
|
795,198
|
|