| COOPER TIRE & RUBBER CO Item 1A RISK FACTORS From time to time, information provided by our employees, or information included in our filings with the Securities and Exchange Commission may contain forward-looking statements that are not historical facts |
| Those statements are “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 |
| Forward-looking statements, and our future performance, operating results, financial position and liquidity, are subject to a variety of factors that could materially affect results, including those described below |
| Any forward-looking statements made in this report or otherwise speak only as of the date of the statement and, except as otherwise required by law, we undertake no obligation to update those statements |
| Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data |
| You should carefully consider the risks described below and other information contained in this Annual Report on Form 10-K when considering an investment decision with respect to our securities |
| Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations |
| Any of the events discussed in the risk factors below may occur |
| If they do, our business, results of operations or financial condition could be materially adversely affected |
| In such an instance, the trading price of our securities could decline, and you might lose all or part of your investment |
| Increases in the costs of certain raw materials, including steel, rubber and carbon black may affect our profitability |
| Costs for certain raw materials used in our operations, including natural rubber, chemicals, carbon black, steel reinforcements and synthetic rubber and other crude-oil based products remain at unprecedented high levels |
| Increasing costs for raw materials supplies will increase our production costs and harm our margins and results of operations if we are unable to pass the higher production costs on to our customers in the form of price increases |
| Further, if we are unable to obtain adequate supplies of raw materials in a timely manner, our operations could be interrupted |
| If the price of natural gas or other energy sources increases, our operating expenses could increase significantly |
| Our nine manufacturing facilities rely principally on natural gas, as well as electrical power and other energy sources |
| High demand and limited availability of natural gas and other energy sources have resulted in significant increases in energy costs in the past several years, which have increased our operating expenses and transportation costs |
| For example, the average cost of natural gas during 2005 increased approximately 20prca from the average cost in 2004 |
| Overall, our energy costs were at historically high levels on average during 2005, and those costs may increase further |
| Increasing energy costs would increase our production costs and adversely affect our margins and results of operations |
| Our industry is highly competitive, and we may not be able to compete effectively with low-cost producers and larger competitors |
| The replacement tire industry is a highly competitive, global industry |
| Some of our competitors are large overseas companies with greater financial resources |
| In recent years, the replacement tire industry has experienced significant consolidation which has increased the capital base and geographic reach of some of our competitors |
| We also compete against low-cost producers in Asia and South America |
| Increased competitive activity in the replacement tire industry has caused and will continue to cause pricing pressures on our business |
| Our ability to compete successfully will depend in part on our ability to reduce costs by reducing excess capacity, leveraging global purchasing of raw materials, improving productivity, eliminating redundancies and increasing production at low-cost supply sources |
| If we are unable to offset continued pricing pressures with improved operating efficiencies and reduced spending, our sales, margins, operating results and market share would decline |
| - 6 - _________________________________________________________________ [46]Table of Contents We may be unable to recover new product development and testing costs, which could increase the cost of operating our business |
| Our business strategy emphasizes the development of new equipment and new products and using new technology to improve quality and operating efficiency |
| Developing new products and technologies requires significant investment and capital expenditures, is technologically challenging and requires extensive testing and accurate anticipation of technological and market trends |
| If we fail to develop new products that are appealing to our customers, or fail to develop products on time and within budgeted amounts, we may be unable to recover our product development and testing costs |
| We conduct our manufacturing, sales and distribution operations on a worldwide basis and are subject to risks associated with doing business outside the United States |
| We have operations worldwide, including in the US, the United Kingdom, continental Europe, and Asia (primarily in China) |
| Recently, we have expanded our operations in Asia and are building a manufacturing plant in China |
| There are a number of risks in doing business abroad, including political and economic uncertainty, social unrest, shortages of trained labor and the uncertainties associated with entering into joint ventures or similar arrangements in foreign countries |
| These risks may impact our ability to expand our operations in Asia and elsewhere and otherwise achieve our objectives relating to our foreign operations |
| In addition, compliance with multiple and potentially conflicting foreign laws and regulations, import and export limitations and exchange controls is burdensome and expensive |
| Our foreign operations also subject us to the risks of international terrorism and hostilities and to foreign currency risks, including exchange rate fluctuations and limits on the repatriation of funds |
| Our expenditures for pension and other post-retirement obligations could be materially higher than we have predicted if our underlying assumptions prove to be incorrect |
| We provide defined benefit and hybrid pension plan coverage to union and non-union employees in the U S and a contributory defined benefit plan in the U K Our pension expense and our required contributions to our pension plans are directly affected by the value of plan assets, the projected and actual rates of return on plan assets and the actuarial assumptions we use to measure our defined benefit pension plan obligations, including the discount rate at which future projected and accumulated pension obligations are discounted to a present value |
| We could experience increased pension expense due to a combination of factors, including the decreased investment performance of our pension plan assets, decreases in the discount rate, increases in the salary increase rate and changes in our assumptions relating to the expected return on plan assets |
| We could also experience increased other post retirement expense due to decreases in the discount rate and/or increases in the health care trend rate |
| Increases in our pension expense could have a significant negative impact on our profitability |
| Based on current guidelines, assumptions and estimates, including stock market prices and interest rates, we anticipate that we may be required to make a cash contribution of approximately dlra30-33 million to our defined benefit and hybrid pension plans in 2006 |
| If our current assumptions and estimates are not correct, a contribution in years beyond 2006 may be greater than the projected 2006 contribution |
| We cannot predict whether changing market or economic conditions, regulatory changes or other factors will increase our pension expenses or our pension funding obligations, thereby diverting funds we would otherwise apply to other uses |
| The Financial Accounting Standards Board may propose changes to the current accounting principles used to report our pension and other post retirement plans’ funding status and the manner in which related costs are expensed |
| These changes could result in reflecting additional liabilities on our balance sheet, reduction of shareholders’ equity and higher pension and other post-retirement costs |
| Compliance with the TREAD Act and similar regulatory initiatives could increase the cost of operating our business |
| We are subject to the Transportation Recall Enhancement Accountability and Documentation Act, or TREAD Act, which was adopted in 2000 |
| Proposed and final rules issued under the TREAD Act regulate test standards, tire labeling, tire pressure monitoring, early warning reporting, tire recalls and record retention |
| Compliance with TREAD Act regulations has increased, and will continue to increase, the cost of producing and distributing tires in the US Compliance with the TREAD Act and other federal, state and local laws and regulations now in effect or that may be enacted could require significant capital expenditures, increase our production costs and affect our earnings and results of operations |
| In addition, while we believe that our tires are free from design and manufacturing defects, it is possible that a recall of our tires, under the TREAD Act or otherwise, could occur in the future |
| A substantial recall could harm our reputation, operating results and financial position |
| Any interruption in our skilled workforce could impair our operations and harm our earnings and results of operations |
| Our operations depend on maintaining a skilled workforce and any interruption of our workforce due to shortages of skilled technical, production and professional workers could interrupt our operations and affect our operating results |
| Further, a significant number of our US employees are currently represented by unions |
| The labor agreement at Findlay does not expire until 2009 and the labor agreement at Texarkana does not expire until 2011 |
| Although we believe that our relations with our employees are generally good, we cannot assure you that we will be able to successfully maintain our relations with our employees or our collective bargaining agreements with those unions |
| - 7 - _________________________________________________________________ [47]Table of Contents If we fail to extend or renegotiate our agreements with the labor unions on satisfactory terms, or if our unionized employees were to engage in a strike or other work stoppages, our business and operating results could suffer |
| For example, we experienced a work stoppage in March and April 2005 at our Texarkana, Arkansas manufacturing facility during contract negotiations with the United Steelworkers of America, which resulted in lost volume of approximately 936cmam000 tires in 2005 and reduced our 2005 operating profit by dlra26 million |
| Certain of the North American Tire Operations segment’s products remain in short supply as a result of that work stoppage |
| We have a risk of exposure to product liability claims, which if successful could have a negative impact on our financial position, cash flows and results of operations |
| Our operations expose us to potential liability for personal injury or death as a result of the failure of or defects in the products that we design and manufacture |
| Specifically, we are a party to a number of products liability cases in which individuals involved in motor vehicle accidents seek damages resulting from allegedly defective tires that we manufactured |
| This type of litigation has increased substantially for all tire manufacturers following the Firestone tire recall announced in 2000 |
| Products liability claims and lawsuits, including possible class action litigation, could have a negative effect on our financial position, cash flows and results of operations |
| While we believe that our liability insurance is adequate to protect us from future products liability claims, those claims may result in material losses in the future and cause us to incur significant litigation defense costs |
| Further, we cannot assure you that our insurance coverage will be adequate to address any claims that may arise |
| A successful claim brought against us in excess of our available insurance coverage may have a significant negative impact on our business and financial condition |
| Further, we cannot assure you that we will be able to maintain adequate insurance coverage in the future at an acceptable cost or at all |
| In 2003, we established a new excess liability insurance program, which covers our products liability claims occurring on or after April 1, 2003 |
| This new occurrence-based insurance coverage has higher premium costs for coverage in excess of the self-insured amounts, an increased per claim retention limit, no aggregate retention limit, and increased excess liability coverage |
| As a result of these changes to our insurance program, if the cost of our litigation and the number of claims brought against us remain at current levels, our products liability costs could have a much greater impact on our results of operations and financial position than in the past |
| We may be unable to access the financial markets on favorable terms if our credit ratings or our financial condition deteriorates |
| We rely on access to financial markets as a significant source of liquidity for capital requirements that we cannot satisfy by cash on hand or operating cash flows |
| Various factors, including a deterioration of our credit ratings or our business or financial condition, could impair our access to the financial markets |
| Further downgrades in our credit ratings would require us to pay a higher interest rate for future borrowing needs and any new borrowing facilities that we enter into may have stricter terms |
| Additionally, any inability to access the capital markets or incur additional debt in the future on favorable terms could impair our liquidity and operations, and could require us to consider deferring planned capital expenditures, reducing discretionary spending, selling assets or restructuring existing debt |
| If we are unable to execute our Asian strategy effectively, our profitability and financial condition could decline |
| In the replacement tire industry, an increasing percentage of replacement tires are sold in the high performance and ultra-high performance categories |
| We have increased our production capacity in the United States for these types of premium tires to keep up with increasing customer demand |
| We have also outsourced our manufacturing of certain economy-type tires to contract manufacturers in Asia |
| This outsourcing strategy, a component of our Asian strategy, is intended to free up essential production capacity within our North American facilities to manufacture additional high performance and ultra-high performance tires |
| Our Asian strategy also calls for us to align with strategic partners we believe will provide access to the local market and position us to take advantage of the significant anticipated growth within Asia over the next five to ten years |
| For example, we have made an investment in Kumho Tire Co, Inc |
| of South Korea, are building a plant in the Peoples Republic of China with Kenda Tire of Taiwan, and have acquired 51prca of Cooper Chengshan (Shandong) Passenger Tire Company Ltd |
| and continue to evaluate opportunities for acquisitions or strategic alliances that will provide us with an adequate competitive position, immediate market recognition, and a platform on which to build as the Asian market develops |
| Our Asian strategy is subject to the risks of operating abroad and other operational and logistical challenges |
| Our failure to execute our Asian strategy effectively would harm our sales, margins and profitability |
| We may not be able to successfully implement our cost savings initiatives |
| We have numerous initiatives to improve manufacturing efficiencies and implement other cost reductions in an effort to offset increased raw material costs and other costs |
| If these cost reduction initiatives are not successful, our margins and profitability would decline |
| - 8 - _________________________________________________________________ [48]Table of Contents We may not be able to protect our intellectual property rights adequately |
| Our success depends in part upon our ability to use and protect our proprietary technology and other intellectual property, which generally covers various aspects in the design and manufacture of our products and processes |
| We own and use tradenames and trademarks worldwide |
| We rely upon a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements and patent, copyright and trademark laws to protect our intellectual property rights |
| The steps we take in this regard may not be adequate to prevent or deter challenges, reverse engineering or infringement or other violation of our intellectual property, and we may not be able to detect unauthorized use or take appropriate and timely steps to enforce our intellectual property rights |
| In addition, the laws of some countries may not protect and enforce our intellectual property rights to the same extent as the laws of the United States |
| We may not be successful in integrating future acquisitions into our operations, which could harm our results of operations and financial condition |
| We routinely evaluate potential acquisitions and may pursue acquisition opportunities, some of which could be material to our business |
| While we believe there are a number of potential acquisition candidates available that would complement our business, we currently have no agreements to acquire any specific business or material assets other than as disclosed elsewhere in this report |
| We cannot predict whether we will be successful in pursuing any acquisition opportunities or what the consequences of any acquisition would be |
| Additionally, in any future acquisitions, we may encounter various risks, including: • the possible inability to integrate an acquired business into our operations; • increased goodwill amortization; • diversion of management’s attention; • loss of key management personnel; • unanticipated problems or liabilities; and • increased labor and regulatory compliance costs of acquired businesses |
| Some or all of those risks could impair our results of operations and impact our financial condition |
| These risks could also reduce our flexibility to respond to changes in our industry or in general economic conditions |
| Future acquisitions and their related financings may adversely affect our liquidity and capital resources |
| We may finance any future acquisitions, including those that are part of our Asian strategy, from internally generated funds, bank borrowings, public offerings or private placements of equity or debt securities, or a combination of the foregoing |
| Future acquisitions may involve the expenditure of significant funds and management time |
| Future acquisitions may also require us to increase our borrowings under our bank credit facilities or other debt instruments, or to seek new sources of liquidity |
| Increased borrowings would correspondingly increase our financial leverage, and could result in lower credit ratings and increased future borrowing costs |
| We may be required to comply with environmental laws and regulations that cause us to incur significant costs |
| Our manufacturing facilities are subject to numerous laws and regulations designed to protect the environment, and we expect that additional requirements with respect to environmental matters will be imposed on us in the future |
| Material future expenditures may be necessary if compliance standards change or material unknown conditions that require remediation are discovered |
| If we fail to comply with present and future environmental laws and regulations, we could be subject to future liabilities or the suspension of production, which could harm our business or results of operations |
| Environmental laws could also restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses in connection with our manufacturing processes |
| A portion of our business is seasonal, which may affect our period to period results |
| Although there is year-round demand for replacement tires, demand for passenger replacement tires is typically strongest during the third and fourth quarters of the year in the northern hemisphere where the majority of our business is conducted, principally due to higher demand for winter tires during the months of August through November |
| The seasonability of this portion of our business may affect our operating results from quarter to quarter |