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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal Year ended December 31, 2002

or

[   ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                to                

Commission File Number 1-4329

[COOPER LOGO]

COOPER TIRE & RUBBER COMPANY
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (419) 423-1321

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [   ]

The aggregate market value of the voting common stock held by non-affiliates of the registrant at June 28, 2002 was $1,508,945,379.

The number of shares outstanding of the registrant’s common stock as of February 28, 2003 was 73,557,611.

Proxy statement dated March 26, 2003 — Part III, Items 10 – 13

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COOPER TIRE & RUBBER COMPANY – FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

PART I

Item 1. BUSINESS

Cooper Tire & Rubber Company (“Cooper” or the “Company”) is a leading manufacturer of replacement tires and original equipment automotive components. It is organized into two separate business segments, Cooper Tire and Cooper-Standard Automotive, each of which is a separate reportable segment. Each segment is managed separately because it offers different products requiring different marketing and distribution strategies. Additional information on the Company’s segments, including their financial results, total assets, products, markets and presence in particular geographic areas, appears in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Business Segments” note to the financial statements.

Cooper Tire, the segment which comprises Cooper’s tire and related businesses, is the fourth largest tire manufacturer in North America and, according to a recognized trade source, is the eighth largest tire company in the world based on sales. It focuses on the sale of passenger and light truck replacement tires. It also manufactures radial medium truck tires and materials and equipment for the truck tire retread industry. Cooper-Standard Automotive, the segment which includes all of Cooper’s automotive components business, is one of the world’s leaders in the design and manufacture of automotive body sealing products and ranks among the top producers of noise, vibration and harshness (NVH) control products and fluid handling systems for the automotive industry.

Cooper was incorporated in the State of Delaware in 1930 as the successor to a business originally founded in 1914. Based in Findlay, Ohio, Cooper currently operates 52 manufacturing facilities in 13 countries. As of December 31, 2002, the Company employed 23,024 persons worldwide.

Business Segments

The Company has two reportable segments – Cooper Tire and Cooper-Standard Automotive.

Cooper Tire

The Tire segment produces passenger car, light truck and motorcycle tires, and inner tubes, primarily for sale in the United States replacement market to independent tire dealers, wholesale distributors, regional and national retail tire chains, and large retail chains

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which sell tires as well as other automotive products. The segment does not sell its products directly to end users, and does not manufacture tires for sale to the automobile original equipment manufacturers (“OEMs”). A small percentage of the products manufactured by the segment in the United States are exported throughout the world. The Cooper-Avon subsidiary in the United Kingdom manufactures passenger car, light truck and motorcycle tires for sale to dealers in the United Kingdom and continental Europe. Approximately 93 percent of the tires produced by the segment are manufactured at plants located in the United States. The remainder are produced in the United Kingdom. The segment also manufactures radial medium truck tires and produces equipment and materials for sale to truck tire retread dealers, primarily in North America.

The Tire segment operates in a highly competitive industry, which includes three competitors which are substantially larger than the Company. All three of those competitors serve the OEM as well as the replacement portion of the tire market. The segment also faces competition from low-cost producers in Asia and South America. Some of those producers are the foreign subsidiaries of the segment’s competitors in North America. The segment had a market share in 2002 of approximately 17 percent of all light vehicle replacement tire sales in the United States, a higher percentage than the previous year.

In the tread rubber industry, which supplies retread equipment and materials to the commercial truck tire industry, there are numerous suppliers, one of which has a market share that is believed to approach 50 percent. The remaining significant competitors include the retread business of the segment and the retread businesses of other major tire manufacturers.

Success in competing for the sale of replacement tires is dependent upon many factors, the most important of which are price, quality, and availability through appropriate distribution channels. Other factors of importance are warranty and credit terms and the quality of the segment’s relationships with its dealers. The segment has built close working relationships through the years with its independent dealers and believes those relationships have enabled it to obtain a competitive advantage in the replacement market. As a steadily increasing percentage of replacement tires are sold by large regional and national tire retailers, the segment has increased its penetration of those distribution channels, while maintaining a focus on its traditionally strong network of independent dealers.

Both the replacement tire and retread products businesses of the segment have broad customer bases. No customer accounted for ten percent or more of the consolidated net sales of the Company in 2002. Overall, a balanced mix of customers and the offering of both proprietary brand and private label tires help to protect the segment from the adverse effects that could result from the loss of a major customer.

Cooper-Standard Automotive

The Automotive segment produces components, systems, subsystems and modules for incorporation into the passenger vehicles and light trucks manufactured by the global automotive OEMs. Replacement parts for current production vehicles are also produced. The segment’s main products include the following:

•		Total sealing systems products, which consist primarily of extruded rubber parts and TPV (“thermal plastic vulcanizer”) plastic parts, which serve to seal the doors, windows and other parts of the vehicle from water leakage and wind noise. These products include weatherstrip assemblies to seal vehicle windows, window channel assemblies, window gaskets, and vehicle body and door dynamic seals. In addition, encapsulated glass products are provided in combination with, and independent of, glass sealing systems.
•		NVH control systems products, which consist primarily of molded rubber chemically bonded to metal engine mounting systems, body mounts, bushings and a full line of other suspension and powertrain components. These products are designed to minimize the noise, vibration and harshness experienced in vehicles. Services include full ride and handling vehicle analysis resulting in optimal design and placement of components to ensure superior ride and sound characteristics.
•		Fluid systems products, which include tubing, valves, quick connects, hoses, couplings, coolers and similar products that comprise the modules and subsystems for transmission and engine oil cooling, fuel, brake, and vapor lines, emissions, and power steering, all of which serve to transport fluids and vapors throughout a vehicle.

The segment also produces extruded plastic body side moldings, which serve as protective barriers preventing damage to the vehicle’s sheet metal and can be an integral part of the vehicle’s overall styling and appearance. The segment does not intend to maintain its presence in this lower margin, commodity business and is continuing its efforts to dispose of it.

Since nearly all of the segment’s products are sold as original equipment directly to the OEMs for installation on new vehicles, or in a lesser number of cases, to Tier 1 suppliers who do the same, sales of such products are directly affected by the annual vehicle production of OEMs, and in particular, the production levels of the vehicles for which specific parts are being provided. In most cases, the segment’s products are designed and engineered for a specific vehicle platform and cannot be used on other vehicles. The segment’s sales and product development personnel work directly with the engineering and styling departments of the OEMs in the engineering and development of its various products. The segment maintains sales offices in strategic locations throughout the world to provide support and service to its OEM customers. The segment does not have a backlog of orders at any point in time. Instead,

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original equipment sales are generally based upon purchase orders issued periodically by the OEMs for the components, systems, subsystems or modules produced by the segment. The purchase orders are for all or a percentage of the customers’ estimated requirements and are subject to production levels of the vehicles for which specific parts are being provided. The OEMs issue releases under those purchase orders from time to time, specifying quantities of the components which the manufacturing plants require, based upon planned production levels.

Although each OEM may emphasize different requirements as the primary criteria for judging its suppliers, success as an automotive supplier generally requires outstanding performance with respect to quality, cost and time. The product quality requirement is a given, and the segment places an intense focus on insuring that its products are of a consistently high and reliable quality. Cost refers not only to product pricing, but also to a lean cost structure, efficient supply chain management and flexible manufacturing capabilities. Time relates to three separate elements: on-time delivery of products; time to bring new products to market; and manufacturing cycle time. A trend toward shortening new product cycle times to meet the intense competitive demands faced by the OEMs requires that the segment have in place the infrastructure to support these demands. As part of this trend, suppliers must have in place state-of-the-art engineering and design capabilities. Suppliers are increasingly expected to collaborate on or assume the product design and development of key automotive components, and to do so with sophisticated expertise and increased speed.

Management believes the segment’s commitment to continued investment in its engineering and design capability, including enhanced computerized software design capabilities, is crucial to achieving future business, and many of its present initiatives are intended to enhance these capabilities. The changes being sought by the OEMs are occurring in an environment in which pricing for automotive components is declining. To remain competitive, the segment must successfully apply continuous improvement methodologies to its engineering, design and manufacturing processes and implement lean initiatives to achieve cost savings commitments to its customers.

The segment has been successful in meeting the requirements described above. The segment has also had success in providing product on light trucks, sport utility vehicles, and the other types of vehicles that have been especially popular in recent years. However, competition is intense and the segment faces numerous competitors in each of the product lines it serves. In general, there are three or more significant competitors for most of the products offered by the segment, and numerous smaller competitors. The Company believes, however, that it is one of the three largest global producers of body sealing systems, is a significant global competitor for most of its fluid systems products, where the market is highly fragmented, and is one of the two largest competitors in the NVH business in North America.

The segment is facing increased competition for certain of its products, especially for its NVH products, from suppliers producing in lower cost countries such as China and Korea. The segment is examining how to deal with this competitive threat, including consideration of expanding its manufacturing presence to those countries.

Nearly three-fourths of the segment’s sales are to Ford Motor Company, DaimlerChrysler AG and General Motors Corporation. Sales to each of these customers in 2002 exceeded 10 percent of the consolidated net sales of the Company. The loss of any of these customers would have a material adverse effect on the financial results of the segment and the Company, unless replacement business could be quickly obtained. The Company’s sales in 2002 to these significant customers are listed below:

Consolidation among the OEMs in recent years has resulted in the creation of a relatively small number of very large global customers which are increasingly requiring their suppliers to serve them on a global basis. Management believes its past acquisitions have given the segment the size, the geographic breadth and the resources to meet the requirements of customers who increasingly demand uniformly high levels of quality, service and design and engineering support at all locations in the world where their vehicles are manufactured. As the industry continues to consolidate, the segment may become even more dependent on each of its customers. As the Company expands its global position, however, it spreads the risk over additional regions and the OEMs in those regions.

Raw Materials

The primary raw materials used by the Company include synthetic and natural rubbers and rubber chemicals, polyester and nylon fabrics, steel tire cord, wire carriers and metals, carbon black and adhesives, and thermal plastic vulcanizers, which the Company acquires from multiple sources both within and outside the United States to provide greater assurance of continuing supplies for its manufacturing operations. Because of the similarity of raw materials used in the processes of both the Tire and Automotive segments, the Company’s purchasing efforts for the two segments are substantially centralized, which has resulted in efficiencies and reduced administrative costs.

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The Company did not experience any significant raw material shortages in 2002, nor have any shortages been experienced in the opening months of 2003. The Company did not experience serious fuel shortages in 2002 and has not experienced any in 2003. However, supplies of petroleum generally have tightened in recent months. Whether this tightening of supply will impact the Company during 2003 is uncertain. In addition, the price of natural gas, the principal fuel used in the Company’s manufacturing plants, has increased significantly thus far in 2003.

The Company has a purchasing office in Singapore to acquire natural rubber and various raw materials directly from producers in the Far East. This purchasing operation enables the Company to work directly with producers to improve the consistency of quality and to reduce the costs of materials, delivery and transactions. In addition, control over packaging methods enhances the Company’s goal of using recyclable materials in the packaging of these raw materials.

The Company’s contractual relationships with its raw material suppliers are generally based on purchase order arrangements. Certain materials are purchased pursuant to supply contracts which incorporate normal purchase order terms and establish minimum purchase amounts.

The Company is an equity investor in RubberNetwork.com LLC, which was established by a group of manufacturers in the tire and rubber industry to achieve cost savings in the procurement of raw materials and indirect materials and supplies through the application of e-business technology. The Company has realized savings in purchasing certain raw materials through the use of this procurement method.

Working Capital

The Company maintains a strong working capital position. Inventories turn regularly and accounts receivable are well managed. The Company engages in a rigorous credit analysis of its independent tire dealers and monitors their financial positions. The Company does not generally experience difficulties in collecting its accounts receivable in the Automotive segment because most of its customers are large, well-capitalized automobile manufacturers.

Research, Development and Product Improvement

The Company directs its research activities toward product development, improvements in quality, and operating efficiency. Examples of these activities are:

•		The Automotive segment’s engineering and marketing personnel work closely with their customers to assist in the design and development of products to meet their changing requirements. Product development and design are important to the success of the Automotive segment and are one way in which the Company believes it differentiates itself from its competitors.
•		In the Tire segment, the Company continues to actively develop new passenger and truck tires. The Company conducts extensive testing of current tire lines, as well as new concepts in tire design, construction and materials. During 2002, approximately 73 million miles of tests were performed on indoor test wheels and in monitored road tests. The Company has a tire and vehicle test track in Texas which assists the Company’s testing effects. Uniformity equipment is used to physically monitor radial passenger, light truck and medium truck tires for high standards of ride quality. The Company continues to design and develop specialized equipment to fit the precise needs of its manufacturing and quality control requirements.

Research and development expenditures for the last three years are shown below:

Patents, Intellectual Property and Trademarks

The Company owns and/or has licenses to use patents and intellectual property covering various aspects in the design and manufacture of its products and in processes and equipment for the manufacture of its products. While the Company believes these assets as a group are of material importance, it does not consider any one asset or group of these assets to be of such importance that the loss or expiration thereof would materially affect its business considered as a whole or the business of either of its segments.

The Company owns and uses trademarks worldwide. While the Company believes such trademarks as a group are of material importance, the trademarks the Company considers most significant to its business are those using the words “Cooper”, “Cooper-Standard”, “Mastercraft” and “Avon”. The Company believes all of its significant trademarks are valid and will have unlimited duration as long as they are adequately protected and appropriately used.

The Company has license and technology sharing agreements with Nishikawa Rubber Company, Ltd. (“Nishikawa”) for sales, marketing and engineering services on certain body sealing products sold by the Company. Under those agreements, the Company pays for services provided by Nishikawa and a royalty to Nishikawa on certain products for which Nishikawa provides design or

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development services. The segment’s joint venture with Nishikawa has additionally provided the segment with the ability to provide body sealing components to the Japanese OEMs.

Seasonal Trends

There is a year-round demand for passenger and truck replacement tires, but passenger replacement tire sales are generally strongest during the second and third quarters of the year. Winter tires are sold principally during the months of August through November. Sales to automotive customers are lowest during the months prior to model changeovers and during assembly plant shutdowns. These typically result in slower volume during July, August and December.

Environmental Matters

The Company recognizes the importance of compliance in environmental matters and has an organizational structure to supervise environmental activities, planning and programs. The Company also participates in activities concerning general industry environmental matters.

The Company’s manufacturing facilities, in common with those of the industry generally, are subject to numerous laws and regulations designed to protect the environment. In general, the Company has not experienced difficulty in complying with these requirements and believes they have not had a material adverse effect on its financial condition or the results of its operations. The Company expects additional requirements with respect to environmental matters will be imposed in the future. The Company’s 2002 expense and capital expenditures for environmental matters at its facilities were not material, nor is it expected that expenditures in 2003 for such uses will be material.

Foreign Operations

The company has manufacturing facilities located in the following foreign countries:

		• Canada
		• Mexico
		• Brazil
		• Australia
		• Republic of Korea
		• India
		• Czech Republic
		• France
		• Germany
		• Poland
		• Spain
		• United Kingdom

The experience of the Company has been that its foreign operations in Canada and Western Europe do not present materially different risks or problems from those encountered in its United States markets, although the cost and complexity of rationalizing automotive operations in certain European countries is greater than would be the case in the United States. This is due primarily to labor laws in those countries that can make reducing employment levels more time-consuming and expensive than in the United States.

The Company anticipates the risks of conducting business in less developed markets, including Brazil, Mexico, Poland and the Czech Republic, will be greater than in the United States, Canadian and Western European markets. This is because of the currency volatility, potential high interest and inflation rates, and the general political and economic stability that are associated with emerging markets.

The Company’s 2002 net sales attributable to its foreign subsidiaries, and shipments of exports from the United States, approximated $1.2 billion, or nearly 37 percent of consolidated net sales. Additional information on the Company’s foreign operations can be found in the “Business Segments” note to the financial statements.

Available Information

The Company makes available free of charge on or through its internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Our Internet address is http://www.coopertire.com. The information contained on the Company’s website is not incorporated by reference in this annual report on Form 10-K and should not be considered a part of this report.

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Item 2. PROPERTIES

The Company owns its corporate headquarters facility in Findlay, OH.

The Tire segment has its headquarters at the Findlay, OH location. The segment operates eight manufacturing facilities in the United States and one manufacturing facility in the United Kingdom. Of these facilities, seven are owned and two are leased. The segment has two technical centers in Findlay, OH and one in San Antonio, TX, which are owned. There are six tire distribution centers in the United States not connected to a manufacturing facility. Four of these facilities are leased and two are owned. The segment operates distribution facilities in Germany, France, Switzerland and Italy. These facilities are all leased.

The Automotive segment has its headquarters in a leased facility in Novi, MI. The segment also has leased offices in Auburn Hills, MI and Banbury, United Kingdom. It owns offices in Auburn, IN. In the United States, the segment operates 12 manufacturing facilities, 11 of which are owned and one is leased. There are three technical centers and one distribution facility in the United States. Two of the technical centers are owned and the other technical center and the distribution center are leased.

The Automotive segment operates several international locations. In Canada, there are six manufacturing facilities and two technical centers. All of these facilities are owned. In Mexico, the segment operates three owned manufacturing facilities. The segment has two manufacturing facilities in Brazil, one is owned and the other is leased. A manufacturing facility in Australia is owned and a facility in India is leased. In Europe, the manufacturing facilities in Spain, the Czech Republic and Poland are all owned. There are two manufacturing facilities in Germany, one owned and one leased. In France, the segment owns one technical center and two manufacturing facilities. In addition, there is one leased manufacturing facility in France. In the United Kingdom, the segment has one owned technical center, two owned manufacturing facilities and one leased manufacturing facility.

The Automotive segment is involved in joint ventures in the United States, Mexico and Korea. There are three manufacturing facilities in the United States, one in Mexico and three in Korea.

The Company believes its properties have been adequately maintained, generally are in good condition, and are suitable and adequate to meet the demands of each segment’s business.

Item 3. LEGAL PROCEEDINGS

The Company is a defendant in various judicial proceedings arising in the ordinary course of business. A significant portion of these proceedings are product liability cases, in which individuals involved in vehicle accidents allege damages resulting from allegedly defective tires manufactured by the Company. Litigation of this type has increased significantly throughout the tire industry following the Firestone tire recall announced in 2000. After reviewing all of these proceedings, and taking into account all relevant factors concerning them, the Company does not believe that any liabilities resulting from these proceedings are reasonably likely to have a material adverse effect on its liquidity, financial condition or results of operations.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the last quarter of the fiscal year ended December 31, 2002.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a)		Market information
		Cooper Tire & Rubber Company common stock is traded on the New York Stock Exchange under the symbol CTB. The following table sets forth, for the periods indicated, the high and low sales prices of the common stock as reported in the consolidated reporting system for the New York Stock Exchange Composite Transactions:

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(b)		Holders
		The number of record holders at December 31, 2002 was 4,120.
(c)		Dividends
		The Company has paid consecutive quarterly dividends on its common stock since 1973. Future dividends will depend upon the Company’s earnings, financial condition, and other factors. Additional information on the Company’s liquidity and capital resources can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. The credit facilities, described in the “Debt” note to the financial statements, restrict the amount of retained earnings available for the payment of cash dividends and purchases of the Company’s common shares. At December 31, 2002, retained earnings of $360 million are available for these purposes. Quarterly dividends per common share for the most recent two years are as follows:

(d)		Securities authorized for issuance under equity compensation plans
		The following table provides information as of December 31, 2002 regarding the Company’s equity compensation plans, all of which have been approved by the Company’s security holders:

Additional information on equity compensation plans is contained in the “Stock-Based Compensation” note to the consolidated financial statements.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business of the Company

The Company has two reportable segments – Cooper Tire and Cooper-Standard Automotive. The Company’s reportable segments are each managed separately because they offer different products requiring different marketing and distribution strategies.

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Cooper Tire produces light vehicle, truck and motorcycle tires, and inner tubes, which are sold nationally and internationally in the replacement tire market to independent dealers, wholesale distributors, regional and national retail tire chains, and large retail chains that sell other products in addition to tires, and supplies equipment and materials to the truck tire retread industry.

Cooper-Standard Automotive produces body sealing systems, active and passive vibration control systems, and fluid handling systems, primarily for the global automotive original equipment manufacturing and replacement markets.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations presents information related to the consolidated results of operations of the Company, including the impact of restructuring costs on the Company’s results, a discussion of the past results and future outlook of each of the Company’s segments, and information concerning both the liquidity and capital resources and critical accounting policies of the Company. An important qualification regarding the “forward-looking statements” made in this discussion is then presented.

Consolidated Results of Operations

Consolidated net sales in 2002 were $3.3 billion, an increase of $100 million, or 5.6 percent, from $3.2 billion in 2001. Of this increase, $14 million was the result of favorable foreign currency translation. Net sales in 2001 were nine percent lower than the record sales level of $3.5 billion recorded in 2000, due to a significant reduction in light vehicle production in 2001, lower tire sales, due primarily to the fact that sales in 2000 benefited from the impact of the Firestone recall which took place that year, and the absence in 2001 of sales of two plastics businesses that were divested in the second quarter of 2000.

Operating profit, net income and earnings per share were $248 million, $112 million, and $1.53 ($1.51 on a diluted basis) in 2002, $106 million, $18 million and 25 cents in 2001, and $253 million, $97 million and $1.31 in 2000. Operating profit in 2002 benefited from the Company’s adoption of Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” the accounting pronouncement which requires that the carrying amount of goodwill and other intangible assets with indefinite lives no longer be amortized but instead be tested annually for impairment. In response to this accounting pronouncement, the Company tested for goodwill impairment, and determined that the valuation of its reporting units, based on discounted future cashflows, exceeded the values recorded on the balance sheets of the reporting units. Goodwill is tested for impairment more frequently if there is reason to believe a significant negative change in estimated future cashflows has occurred due to a specific event or set of events. The amortization of goodwill in 2001 was $15.8 million. Results in 2002 also improved due to higher sales in both the tire and automotive segments and the benefits of the restructuring and other cost reduction initiatives in the automotive segment. Reductions from 2001 of $15 million in interest expense and $6 million in products liability costs also benefited operating profit in 2002.

Operating profit in 2001 was adversely affected by a charge for a class action settlement and related defense costs of $72.2 million ($45 million after income taxes, 62 cents per share), and in 2000 by a charge for restructuring of $38.7 million ($24.3 million after income taxes, 33 cents per share) and losses at facilities that were closed or sold of $19 million ($12.1 million after tax, 17 cents per share). In addition, operating profit in 2001 was adversely affected by a $20 million increase in product liability costs (17 cents per share) over 2000. Results in 2001 were also adversely impacted by lower sales in both the tire and automotive segments than in 2000, resulting from a weakened economy. A reduction in year-over-year interest expense in 2001 of $6 million, resulting from the repayment of debt and lower interest rates, mitigated the 2001 decline in net income.

Selling, general, and administrative expenses were $237 million (7.1 percent of net sales) in 2002, $227 million (7.2 percent of net sales) in 2001, and $226 million (6.5 percent of net sales) in 2000. The increase in 2002 is largely attributable to the cost of employee incentive programs which provide for compensation based on profitability. Spending levels in 2001 and 2000 were unchanged, with the percentage increase in 2001 due almost entirely to the lower sales level.

Interest expense was $76 million in 2002, a decrease of $15 million from $91 million in 2001. This decrease reflects the impact of the repayment of debt of approximately $12 million and the impact of interest rate swaps of approximately $3 million. Interest expense decreased $6 million in 2001 from $97 million in 2000, reflecting a reduction in debt levels and lower interest rates.

Other income decreased to $4 million in 2002 from $14 million in 2001. In 2000, other income was $5 million. Gains resulting from the sale of two tire warehouses and an aircraft in 2001 were responsible for $8 million of income, while in 2002 the sale of an aircraft contributed $2 million of income. The decrease in 2002 is also partially attributable to premium costs of $3 million incurred in connection with the repurchase of portions of the Company’s public notes during 2002.

The Company’s effective income tax rate was 36.9 percent in 2002, which was lower than the 37.7 percent rate in 2001. This decrease was primarily due to the elimination of the amortization of non-deductible goodwill in accordance with SFAS No.142, which became effective January 1, 2002, and global tax planning, which was offset by increases in valuation reserves. The effective tax rate decreased in 2001 from 39.6 percent in 2000, due largely to the impact of global tax planning and the mix of earnings by entity across state and local jurisdictions.

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At December 31, 2002, the Company has future tax benefits of $72 million related to various foreign and state net operating losses and other tax credit carryforwards for which valuation reserves of $34 million have been recorded. The Company recorded valuation allowances for certain net operating loss and tax credit carryforwards because it believes it is more likely than not that such carryforwards cannot be utilized. The remaining $38 million of future tax benefits primarily result from net operating loss carryforwards incurred by the Company’s subsidiaries in the United Kingdom and France and a United States foreign tax credit carryforward. Some of these can be utilized indefinitely while others expire from 2003 through 2023. The amounts expiring in the next five years, for which no valuation allowance has been recorded, approximate $11 million. It is more likely than not the carryforwards for which no valuation allowance has been established will be realized based upon forecasted future earnings, which are anticipated to result in future taxable income, and the implementation of certain tax strategies.

The Company maintains defined benefit pension plans for most of its employees in the United States and certain of its foreign employees. The methodology used to determine the expense and the funding requirements of those plans is described in the section of this Management’s Discussion and Analysis entitled “Critical Accounting Policies – Pension and postretirement benefits.” Most of the assets of the pension plans are invested in a diversified portfolio of equity and fixed income investments. Because of the declines in the financial markets over the past three years, the plans have incurred investment losses over that period. As a result, pension expense has increased from $24 million in 2000 to $28 million in 2001 and $33 million in 2002. The increase in 2002 was $8 million lower than it would have otherwise been, because of the introduction of a lower-cost cash balance pension plan in 2002 for new salaried and non-bargained hourly employees and certain other salaried and non-bargained hourly employees who did not meet specified age and service criteria. Pension expense is expected to increase to approximately $55 million in 2003, due to the investment losses incurred in 2002, a lowering of the expected long-term investment return on domestic plan assets from 9.5 percent to 9 percent, and a lowering of the discount rate used to measure domestic pension liabilities from 7.25 percent at December 31, 2001 to 6.75 percent at December 31, 2002. Over one-half of the expected increase in 2003 is attributable to the amortization of the actuarial losses incurred by the plans in 2002, resulting primarily from the investment losses incurred in 2002.

Growth in the plans’ assets sufficient to meet the Company’s long-term pension obligations is provided by both the investment returns on assets of the plans and additional funds added to the plans by the Company. Pension funding increased to $57 million in 2002 from $42 million in 2001 and $16 million in 2000. The increase in 2002 was the result of the Company’s decisions to accelerate the timing of a funding commitment that would otherwise have been due in 2003 and to fund certain plans at the maximum amount deductible for United States income tax purposes. The increase in 2001 from 2000 reflected the Company’s inability to fund certain of its pension plans in 2000 due to the limits established for their deductibility under United States income tax regulations. The funding level of the Company’s pension plans during 2003 is anticipated to approximate $55 million.

The Company currently provides retiree medical and life insurance benefits to a significant percentage of its domestic salaried and hourly employees. Expense recorded for this item was $34 million in 2002, $29 million in 2001, and $25 million in 2000. Because of this rate of increase, the Company has determined that it is necessary to take steps to mitigate the impact of medical cost inflation. As a result, domestic salaried and non-bargained hourly employees hired on or after January 1, 2003 will not be eligible for retiree medical or life insurance coverage. In addition, the Company intends to implement increased cost sharing in 2004 in the medical coverage provided to current retirees. These changes will apply as well to current employees as they retire. As a result of these measures, expense for these benefits in 2003 is expected to remain at approximately $34 million.

The effects of inflation did not have a material effect on the results of operations of the Company in 2002, 2001, and 2000.

Restructuring

Year 2000: In 2000, the Company recognized a restructuring charge of $34 million related to decisions to close or consolidate 22 manufacturing plants and administrative facilities, downsize the workforce at those and other locations, and relocate assets and ongoing business from locations for which closure decisions had been made prior to 2000. Of this charge, almost $26 million consisted of employee separation costs, $4 million consisted of related exit costs, and an asset impairment charge of $4 million was taken, relating to long-lived assets at the locations affected by the downsizing decisions. The charge was taken in part to take advantage of the synergies available following completion of the Standard Products and Siebe acquisitions in 1999 and 2000, respectively, and, in part to a more generalized need to enhance future profitability through better utilization of existing capacity and the creation of greater operational efficiencies. During 2001, 19 facilities were closed or downsized and 801 employment reductions were made. An additional 188 employees were terminated and two more facilities were downsized in 2002. The Company also incurred additional restructuring expense of $4 million in 2000, consisting of employee separation costs at a tire production facility in the United Kingdom and the costs of relocating employees, physical assets and ongoing business from closed manufacturing facilities in Europe and the United States.

In 2001 and 2002, reversals of the charge for these initiatives of $9.7 million and $2.7 million, respectively, were recorded, due primarily to lower-than-anticipated headcount reductions in the European facilities affected by consolidation, and by severance costs that were lower than anticipated for those employees who were terminated. The restructuring initiatives associated with this charge were completed in 2002.

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The restructuring initiative positively impacted the Company’s operating profit by $31.4 million in 2002. Approximately 73 percent of the impact in 2002 benefited the Automotive segment. The positive impact of this restructuring on operating profit in 2003 is expected to be $32.1 million.

Year 2001: In 2001, the Company recognized restructuring charges of $9 million, of which $5 million related to headcount reductions at four manufacturing and administrative facilities in the Automotive segment, and $4 million was attributable to asset impairment charges related to long-lived assets in the Automotive segment. These charges were taken as part of the Automotive segment’s decision to reorganize and rationalize certain of its non-manufacturing operations to reduce overall overhead costs. A total of 333 employees were terminated as a result of these restructuring efforts. The Company completed these reductions during 2002. Additional restructuring expenses of $9 million were recorded in 2001, of which $6 million was associated with the relocation of assets from closed manufacturing facilities in the Automotive segment, and $3 million was attributable to additional employee separation costs. These amounts were offset by the reversal of $9.7 million of the charge taken in 2000.

The restructuring costs incurred in 2001 positively impacted the operating profit of the Automotive segment by $6.6 million in 2002, and is expected to have a favorable impact of $8.2 million in 2003.

Year 2002: In 2002, the Company recorded additional restructuring expenses of $8 million. Of this amount, $3 million related to the consolidation of the Company’s fluid systems manufacturing operations in Sao Paulo, Brazil to the Company’s manufacturing plant in Varginha, Brazil, the consolidation of the Company’s rubber mixing operations in Europe to its mixing facility in France, and a small consolidation of facilities in the United Kingdom. This entire amount related to headcount reductions of approximately 230 employees associated with these consolidations, and was taken because of the need to reduce ongoing costs in the Company’s international operations, where profitability has lagged due in part to overhead costs resulting from excess production capacity. The Company expects to complete these initiatives in 2003. Additional restructuring expenses of $5 million were recorded in 2002, related to asset write-downs at North American facilities in excess of the amounts established in the restructuring reserves (almost $3 million), additional severance costs (almost $1 million), and costs of transferring assets and ongoing production from closed facilities in Europe and North America (almost $2 million). These restructuring amounts were offset by the reversal of $2.7 million of the charge taken in 2002, and $.5 million of the charge taken in 2001. The reversal of a portion of the 2001 charge was due to the fact that fewer employees were terminated than had originally been anticipated. A part of the benefit of these initiatives will occur in 2003, but the full impact, approximately $1.6 million, will occur in 2004. All of the savings will benefit the Automotive segment.

Additional information related to these restructuring initiatives appears in the “Restructuring” note to the financial statements.

Tire Segment

Overview

Sales of passenger car and light truck tire replacement units in the United States market by members of the Rubber Manufacturers Association (“RMA”), which comprises virtually all of the largest tire companies in the world and includes the segment, and which accounted for over 90 percent of the total United States tire market in both 2001 and 2002, decreased by approximately three percent in 2002 from levels in 2001. In 2001, RMA member replacement unit sales decreased by approximately 4.5 percent from 2000 sales levels. Sales of replacement tire units in the United States by non-RMA members, which consist primarily of smaller manufacturers located outside the United States, increased by approximately 66 percent during 2002.

The year 2000 was a record high sales year, due largely to the well-publicized recall of certain Firestone tires. Consumer demand softened in early 2001 due primarily to a weakened United States economy and the end of the Firestone recall. This softening continued generally throughout the year, although a second recall by Ford Motor Company of certain Firestone tires in mid-2001 provided a boost to the market during that period. The Company believes that the terrorist incidents of September 11, 2001 contributed to a significant weakening of the economy during the latter part of 2001. With the exception of a rebound in the first quarter of 2002, the market remained weak during 2002.

Sales

Sales of the Tire segment were $1.8 billion in 2002, an increase of $64 million, or four percent, from $1.7 billion in 2001. Tire unit sales for 2002 were up nearly five percent from 2001. The segment significantly increased its sales volumes to the growing regional tire retail business and also reported higher sales of its proprietary, brand name tires. Despite product pricing that was higher in 2002 than in 2001, the segment’s overall dollar sales increase was slightly lower than its unit sales improvement, due principally to the sale of a large number of opening price point tires to a large retail customer.

Sales for 2001 were five percent, or $98 million, lower than the $1.8 billion recorded in 2000. Tire unit sales were down eight percent from 2000. The segment’s sales decrease resulted primarily from a significant softening in consumer demand in 2001 due to generally weak economic conditions, the abnormally high demand for certain tires generated by the Firestone recall announced in 2000, and

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increased purchases in the fourth quarter of 2000 ahead of a January 1, 2001 price increase. Improvements in pricing and product mix partially offset these factors.

Sales of the segment’s operations in North America increased by more than four percent in 2002. Most of the increase occurred during the first quarter when industry sales were strong. Sales over the last nine months of the year were essentially flat as general industry demand softened. Sales increased somewhat late in the fourth quarter following the announcement of a price increase effective January 1, 2003.

The segment’s unit sales of passenger tires increased by nearly four percent in 2002, versus a very slight industrywide sales decrease. Passenger tires account for over 80 percent of the combined passenger and light and medium truck replacement tire market. The segment was able to increase market penetration in this area in spite of a continued increase in imported, low-priced passenger tires. The segment’s unit sales of light truck replacement tires increased by more than six percent in 2002, just slightly less than the industrywide sales improvement. Significant increases in imports of light truck tires in 2002 were a major factor in preventing the segment from increasing its share of the market for those tires.

The segment’s unit sales of passenger tires declined by 11 percent in 2001 versus an industrywide sales decrease of four percent. This was partly due to the fact that the Company did not participate in the 2001 Ford recall of Firestone tire recall to the same extent as certain other manufacturers who reached agreements with Ford Motor Company regarding replacement of Firestone tires. Continued imports of low-priced passenger tires were also a factor in the decline relative to the industry. In the light truck tire portion of the market, industrywide sales declined eight percent in 2001 from 2000 while the segment’s sales of light truck tires decreased by approximately four percent.

Sales of the segment’s international operations increased by nearly $14 million, or seven percent, in 2002 from 2001, following an increase of three percent in 2001 from 2000. Almost one-half of the increase in 2002 was attributable to the foreign exchange impact of a weakened United States dollar in relation to the British pound. The remaining sales growth resulted primarily from strong winter tire sales in Europe and increased penetration of two major retail chains in Europe. Sales of the segment’s commercial products operations decreased two percent in 2002 compared to 2001. Sales of radial medium truck tires increased by 22 percent in 2002, as the segment continued to successfully focus on increasing its penetration of that market. This increase was more than offset by declines in custom rubber mixing and inner tube sales. Sales of the commercial products operations declined in 2001 from 2000 due to the loss of a large retread products customer and extreme weakness in the commercial trucking industry.

Operating Profit

Operating profit in 2002 was $137.4 million, an improvement from the $73.2 million reported in 2001. Operating margins in 2002 were 7.8 percent compared to 4.3 percent in 2001. The segment’s performance in 2001 reflects the adverse impact of the class action settlement and related defense costs of $72.2 million, or 4.2 percent in operating margin. Operating profit in 2000 was $183.9 million with an operating margin of 10.2 percent.

Operating performance in North America in 2002 was adversely impacted by several factors – 1) a less favorable product and customer mix, which impacted operating profit by $31 million, 2) inefficiencies resulting from operating the segment’s manufacturing facilities at less than full capacity as it implemented inventory reductions, which negatively affected operating profit by about $11 million, and 3) higher employee incentive-based compensation and benefit costs of approximately $8 million. The less favorable product and customer mix occurred because a greater percentage of the segment’s sales resulted from shipments of opening price point tires to lower-margin customers. Offsetting these negative factors were an increase in sales, which favorably impacted operating profit by almost $22 million, and lower raw material costs of $19 million.

Operating profit during 2001 was helped by a more favorable product mix, price increases implemented in North America during the first and third quarters, and moderation during the year in the cost of energy and certain raw materials derived from petroleum. By the end of the year, many raw materials used by the segment were priced lower than in recent years. These improvements were not sufficient to offset the impacts of lower sales, product liability provisions (which impacted the segment by $30 million in 2001, an increase of $20 million from 2000), and production curtailments which took place in response to the weak market conditions experienced during the year. The cost of these production curtailments totaled $40 million in 2001.

Outlook

The outlook for the Tire segment for 2003 is dependent on many factors, including total vehicle miles driven, which in turn is affected by factors such as general economic conditions and fuel prices. If the economy continues the gradual recovery which has occurred generally through 2002, the segment anticipates that the replacement tire market in the United States will grow in 2003. However, industry volume for the first two months of 2003 has declined significantly, which the segment believes is largely due to the negative impact of worldwide political and economic uncertainty on consumer demand. The segment cannot predict how long this weakness will continue, but is reviewing the performance of the segment over the short term and the possible impact of the weakness on the

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segment performance for the balance of the year. The segment anticipates demand will rebound once current global tensions abate as it believes pent-up demand for replacement tires is beginning to build. Any growth in the market in 2003 will reverse industrywide sales declines that occurred in both 2001 and 2002. The segment believes these declines have resulted from a combination of weak economic conditions and the impacts of the Firestone recall in 2000 and the Ford recall of Firestone tires in 2001, which caused the replacement in those years of a large number of tires that would otherwise not have been replaced until later years. As time goes by, the disruptive impact of those recalls on the market will begin to dissipate and will result in a return to a more typical replacement market. The tire industry’s leading trade association anticipates that the return to normalcy will begin to manifest itself in 2003, and the segment’s outlook for the year similarly anticipates such an occurrence.

Regardless of the extent of any growth in the replacement tire industry, the segment expects, although it cannot assure, its sales performance will outpace that of the industry as a whole, due largely to the expectation that it will continue to increase its market share with retail customers as well as increase its presence in the high-performance sector of the market, which it has targeted for future growth.

Improvements in the segment’s profitability are dependent not only on higher sales levels, which will increase capacity utilization at its facilities, but also on its ability to realize price increases. The segment announced price increases on most of its product lines, effective January 1, 2003. The combination of higher sales and higher prices are important to the segment’s profitability because of raw material costs that are expected to be higher than in 2002, increased pension and medical costs, and greater product liability insurance costs. Lower than expected sales would increase pressure on the segment’s continuing effort to reduce inventories, and could require the segment to consider temporary production curtailments which would likely have an adverse impact on profitability.

The segment’s profitability improvement in 2003 is also dependent on continuing success in its efforts to implement its ongoing supply chain management initiative and its ability to integrate lean manufacturing concepts and other cost saving efforts into all of its processes. This is important because of the continued pressure on the industry caused by the importation of competing products from China and other countries where the cost of tire production is substantially lower than in the United States. Unlike certain of its competitors, the segment does not presently maintain production facilities in such countries. The segment has an agreement under which its subsidiary in the United Kingdom purchases Chinese-produced tires, and it is considering opportunities to expand that relationship.

The segment anticipates that the relative weakness of the British pound versus the euro will allow its subsidiary in the United Kingdom to increase its sales and profitability levels over the improved levels shown in 2002. A shift to higher-margin products over the past two years paid off in improved performance in 2002 and the segment anticipates that those improvements will continue in 2003.

In the wake of the Firestone recall announced in 2000, the tire industry and the Company have experienced a significantly higher level of product liability litigation. It is likely that the cost of this litigation and the number of lawsuits brought against the Company will remain at the current high levels during 2003. In addition, while the products liability insurance program which will take effect beginning on April 1, 2003 is not yet in place, it is likely the self-insured retention contained in any replacement program will be higher, it is possible the aggregate retention limit will be eliminated, and insurance premium costs will increase. This change in insurance coverage is expected to result in significant increases in product liability costs over 2002 levels, which are likely to impact the profits of the Tire segment. The Company is exploring options, including but not limited to the formation of a captive insurance company, to mitigate the impact of these changes.

The segment will begin to be impacted in 2003 by the Transportation Recall Enhancement Accountability and Documentation Act (“TREAD Act”) which became law on November 1, 2000, and which will directly impact the tire industry. The TREAD Act and any rules promulgated under the Act are applicable to all tire manufacturers and importers of tires who sell tires in the United States, regardless of where such tires are manufactured. Pursuant to the statute, the National Highway Transportation Safety Administration (“NHTSA”), the federal agency which oversees certain aspects of the tire industry, has proposed rules relating to test standards, tire labeling, tire pressure monitoring, early warning reporting, tire recalls and record retention. Rules for certain of these issues have been finalized and others are expected to be finalized in 2003. However, petitions for reconsideration of certain of the finalized rules have been filed with NHTSA and the outcome of those petitions cannot be predicted with any certainty. The segment does not presently expect that any additional costs associated with implementing these rules will be material in 2003.

Automotive Segment

Overview

The Company’s Automotive segment provides parts to automotive OEMs throughout the world. Light vehicle production in North America increased in 2002 to 16.4 million vehicles from 15.5 million vehicles in 2001. Production in 2000 was 17.1 million vehicles, the highest level ever recorded. Production in Europe was down approximately two percent in 2002 at 19.1 million vehicles from 19.5 million vehicles in 2001. Production in 2001 was unchanged from 2000 levels. In Brazil, the vehicle build in 2002 was 1.9 million vehicles, down more than nine percent from the 2.1 million vehicle level in 2001. As in Europe, the 2001 vehicle level was unchanged from the 2000 level.

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The business environment for the automotive industry is extremely challenging at the present time. Pricing pressure on the OEMs, as evidenced by the zero percent financing and record high rebates offered throughout 2002, increased pension and other retirement-related costs, and the impact of continued global overcapacity, have reduced the overall profitability of the industry, and have caused the OEMs to continue to pursue price concessions from their suppliers.

Notwithstanding the difficulties faced by the industry, and especially by suppliers, the segment’s emphasis on continuous improvement, lean manufacturing and other cost reduction initiatives, and the completion of earlier restructuring plans allowed the segment to substantially improve its profitability in 2002. The segment will continue its sharp focus on cost containment and similar measures to assure its continued competitiveness in the automotive supply environment.

Sales

Sales for the Automotive segment were $1.6 billion in 2002, an increase of more than seven percent from $1.5 billion in 2001. Sales increases in North America of $82 million were the result of the increases in light vehicle production and the impact of net new business that has launched during the past year. These increases were partially offset by price concessions. Sales in North America were adversely impacted by approximately $5 million due to foreign currency fluctuations. In the segment’s international operations, a sales increase of $29 million was equally attributable to the impact of new business and the favorable impact of foreign currency adjustments.

Sales for the Automotive segment in 2001 were $1.5 billion, a decrease of 13 percent from $1.7 billion in 2000. Approximately 41 percent, or $90 million, of the decline is attributable to the absence of the sales of two plastics businesses that were sold during the second quarter of 2000. The remainder of the sales decrease was primarily the result of the decrease in light vehicle production in North America from the levels of 2000, and to a lesser extent, the impact of lower prices for many of the segment’s products and the discontinuance of certain programs for which the segment provided products. New business commencing in 2001 was not sufficient to offset this volume decline.

Approximately 75 percent of the segment’s sales in 2002 were in North America, 23 percent in Europe, and two percent in Brazil, Australia and India. Comparable percentages in 2001 and 2000 were approximately 74 percent in North America, 22 percent in Europe and four percent in Brazil, Australia and India. Although the segment does business with all of the world’s major automakers, approximately 79 percent of its global sales in 2002 were to Ford, DaimlerChrysler, and General Motors. In 2001 and 2000, approximately 76 percent of the segment’s sales were to these three OEMs. Nearly all of the segment’s foreign sales were of body sealing components and fluid handling systems. Approximately 30 percent of the total sales of each of these product lines were derived from foreign operations in 2002, 2001 and 2000.

Operating Profit

Operating profit in 2002 was $117.5 million, an improvement from the $39 million reported in 2001. Operating margins in 2002 were 7.4 per cent compared to 2.6 per cent in 2001. The segment’s operating profit in 2002 was favorably impacted by the absence of amortization of goodwill, which amounted to $14 million in 2001, the increase in light vehicle production from 2001, which was responsible for approximately $40 million of the improvement, the impact of the restructuring initiatives undertaken in 2000 and 2001 and, to a lesser extent, increased volume resulting from new business. In addition, the segment was able to operate its facilities more efficiently in 2002 as a result of more stable OEM production levels than was the case in 2001. The segment’s results reflect its successful efforts to overcome the adverse impacts of price concessions granted to the segment’s customers and increases in pension and medical costs.

The segment’s operating profit in 2001 declined from $69 million in 2000 to $39 million. The reduction in North American light vehicle production levels in 2001 and disruption due to restructuring activities in the segment’s manufacturing facilities, including inefficiencies resulting from the redeployment of the business of the closed Rocky Mount, North Carolina sealing production plant to two other facilities, were primarily responsible for the lower operating profits reported by the segment. Other factors were the inefficiencies created by erratic scheduling resulting from the short lead times given by the OEMs in advance of the frequent production curtailments that occurred during the year and price concessions granted in 2001.

The segment reported operating profit of $69 million in 2000, an operating margin of 4 percent. Operating profits and margins were adversely impacted in 2000 by restructuring costs of $33 million related to achieving synergies available following the acquisitions of Standard Products and Siebe, $19 million in operating losses at facilities that were closed or sold following the Standard Products acquisition and $14 million of goodwill amortization.

The segment’s business outside of North America was profitable in 2002, whereas losses were recorded in 2001. The improvement was due to more efficient operations in both the sealing and fluid systems units in Europe, as efforts to reduce the cost structure of the segment’s European operations through the restructuring initiatives implemented over the past two years favorably impacted results.

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These improvements more than offset the continued effects of weak economic conditions affecting the segment’s Brazilian operations. The segment’s business outside of North America was not profitable in 2001, due to costs associated with significant product launches in both the sealing and fluid systems units in the United Kingdom, the inefficiencies associated with the substantial restructuring that the segment has undertaken in Europe, and the effects of a weakened economy in Brazil, due largely to an energy crisis.

Outlook

Sales for the Automotive segment are expected to be approximately the same in 2003 as in 2002. An increase in volume from new business that will be launched during the year is expected to be offset by price concessions and slightly lower light vehicle production in 2003. The performance of the segment in 2003 may also differ substantially from the segment’s present expectations if light vehicle production is significantly higher or lower than is presently forecasted. The segment projected at the beginning of the year that light vehicle production in 2003 in North America, where nearly 75 percent of the segment’s sales are made, will be 16.2 million vehicles, down from 16.4 million in 2002. European and South American production levels are expected to be approximately the same in 2003 as in 2002. Given uncertainty over the prognosis for the United States and global economies in 2003, the segment is prepared to make rapid adjustments in its plans for the year if it becomes apparent that production levels will vary significantly from current predicted levels.

Several factors are expected to impact the segment in 2003. First, the segment is involved in numerous significant product launches in 2003, especially in its sealing systems operations in North America, where launches can be complex and costly. The segment’s ability to meet its profit forecasts for 2003 is dependent upon its ability to successfully implement its planned product launches. The largest of these launches is the body sealing package for the new Ford F-series truck. The launch of this vehicle, in which all of the North American divisions of the Automotive segment will participate, is expected to result in total sales on this platform of approximately $140 million by 2004, when the new truck is at full production.

Second, while not expected to be material in 2003, certain divisions of the segment are being affected by competition from imports from lower-cost production facilities, principally in Korea and China. The segment plans to meet this challenge by a combination of North American cost reductions and its own Asian sourcing.

Third, the competitive conditions in the global automotive industry continue to result in significant pressure on the segment to reduce the pricing for its products. The continued ability of the segment to maintain or improve its financial returns is dependent upon increasing its sales and reducing its costs to a level sufficient to offset the impact of price concessions.

In Europe, the segment continues to place additional business at its lower-cost facilities in Poland and the Czech Republic. Doing so is part of the segment’s plan to continue the profitability improvements manifested by the segment’s European operations in 2002. The limited number of new product launches in Europe in 2003 will allow the segment to concentrate on further restructuring and other cost reduction initiatives during the year.

In Brazil, the segment has been adversely affected by very poor economic conditions, unfavorable pricing for its products and the impact of a weak Brazilian currency. The impact of these factors has been softened by the cost savings associated with combining the segment’s sealing and fluid systems business into the segment’s plant in Varginha, Brazil, but additional business and better pricing will be required for the segment to earn an adequate return on its investment there in 2003 and beyond.

The segment has a 49 per cent equity position in Jin Young Standard, Inc. in Korea and is working closely with its Korean partner to expand Jin Young’s business with the Korean OEMs, who have increased their share of the global automobile market in recent years.

The segment has been successful in significantly improving its financial performance through increased market share and aggressive cost reduction measures. The segment expects that it will again be able to achieve significant efficiencies in 2003. The launch of significant new business beginning later in 2003 is expected to result in increased sales and operating profit in 2004 even if industry production levels remain unchanged.

Liquidity and Capital Resources

Generation and uses of cash - Net cash provided by operating activities was $341 million in 2002, $72 million higher than the $269 million generated in 2001, due primarily to a $94 million increase in net income from 2001. Net cash provided by operating activities of $269 million in 2001 was $38 million higher than the $231 million generated in 2000. This improvement was due in part to a change in the payment pattern of a significant tire customer, offset by a reduction in net income, adjusted for noncash charges, of $48 million. Changes in operating assets and liabilities resulted in the availability of $18 million in cash in 2002 compared to $36 million in 2001. In 2000, changes in operating assets and liabilities resulted in the consumption of $48 million of cash.

Net cash used in investing activities during 2002 reflects capital expenditures of $143 million, compared to $136 million in 2001 and $201 million in 2000. Capital expenditures in 2003 are expected to approximate $180 million, primarily to support new business launching in 2003 and 2004, and advances in manufacturing technology and process improvements throughout the Company’s

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operations. The Company’s capital expenditure commitments at December 31, 2002 are not material to its consolidated financial position or cash flows.

Net cash used in investing activities during 2001 includes the acquisition of certain assets of the tire retread business of The Hercules Tire & Rubber Company for $6 million and the purchase of certain assets of Siebe’s subsidiary in India. The Company sold several facilities related to restructuring initiatives and a corporate aircraft in 2002 for $12 million. Proceeds from the sales of assets in 2001 of $16 million included two tire distribution facilities and an aircraft. During 2000, the Company acquired Siebe for $223 million. In 2000, pretax proceeds from the sale of two plastics businesses acquired as part of the acquisition of Standard Products provided $110 million.

Through its financing activities in 2002 and 2001, the Company reduced its total debt by $217 million and $86 million, respectively. In 2002, the Company met scheduled debt maturities of $130 million and repurchased $97 million of its public notes. During December 2002, the Company borrowed $10 million of commercial paper notes under its credit facility with eleven banks. This short-term borrowing was repaid in January 2003. In 2001, the Company paid commercial paper borrowings of $127 million, repurchased $24 million of its public notes, met scheduled maturities of long-term debt of $15 million, and reduced its bank line borrowings. Offsetting this reduction in 2001 was the placement of $90 million of debt in Canada under a five-year note.

In 2000, the Company’s total debt increased by $129 million, due substantially to the issuance of commercial paper to fund the Siebe acquisition. This increase in debt was largely offset by proceeds received from the sale of two plastics businesses for cash of $110 million and by a purchase price adjustment related to the Siebe acquisition. The Company also used $42 million to repurchase 3,314,800 shares of its common shares in 2000.

Dividends paid on the Company’s common shares were $31 million, $30 million and $31 million in 2002, 2001 and 2000, respectively, as the Company maintained a quarterly dividend of 10.5 cents per share through the entire period.

Available credit facilities - On December 21, 2001, the Company amended and restated its revolving credit facility with a group of eight banks. Pursuant to the amendment, the ratio of income before fixed charges and income taxes to fixed charges (the “fixed charge coverage ratio”) required to be maintained by the Company under the agreement was reduced from 2.0 times to 1.5 times through September 30, 2002, 1.75 times at December 31, 2002 and 2.0 times thereafter. The amendment provided for the exclusion of certain charges in calculating the ratio. The amendment also allowed the Company to maintain a total debt to total capitalization ratio of 60 percent through December 31, 2002 and 55 percent thereafter, and permitted the exclusion of the impact of the cumulative currency translation adjustment recorded in equity from the total debt to total capitalization measurement. Further, the amendment provided that any adverse impact from any potential impairment of goodwill and other intangibles upon adoption in 2002 of SFAS No. 142, the new accounting standard for goodwill impairment, would be excluded from the calculation of both the fixed charge coverage and total debt to total capitalization ratios. The same amendments were made to the Company’s 6.55 percent notes placed with insurance companies. The Company was in compliance with these covenants at December 31, 2002. At that date, the ratio of total indebtedness to total capitalization was 48.5 percent under the definitions contained in the agreement. For the twelve months ended December 31, 2002, the fixed charge coverage ratio was 2.62 times. The Company anticipates that it will remain in compliance with these covenants in 2003, based upon its business forecast for the year.

On August 29, 2002, the Company increased its revolving credit facility from $250 million to $350 million, upon substantially the same terms and conditions as applied to the previous facility, and added three banks to the consortium that provides the facility. Of this amount, $175 million may be borrowed, repayable through a date as late as August 31, 2007. The remaining $175 million commitment expires on August 28, 2003. The Company has the option to convert any outstanding loans under the short-term commitment at that date into a one-year term loan. The Company generally renegotiates the short-term portion of its credit facility each year, and expects to do so again in 2003. The Company does not presently expect to experience difficulty in renegotiating this facility with its bank group. The credit facilities support issuance of commercial paper. At December 31, 2002, $10 million of commercial paper was outstanding. There were no borrowings under the credit facility at December 31, 2001.

In August 2001, a Canadian subsidiary of the Company entered into a $125 million loan agreement, which expires in August 2006, with Market Street Funding Corporation, an affiliated company of PNC Bank NA, which is secured by certain trade accounts receivable. These accounts receivable were not sold pursuant to this arrangement. At the time of the transaction, $90 million was advanced under the loan agreement, with a maturity date of August 2006 and interest at an average commercial paper floating rate plus a spread of .675 percent. No payments are due under this loan agreement prior to the August 2006 maturity date. At December 31, 2002, $90 million was outstanding under this agreement.

The Company established a $1.2 billion universal shelf registration in 1999 in connection with the acquisition of Standard Products. Fixed rate debt of $800 million was issued pursuant to the shelf registration in December 1999 to fund the acquisition. The remaining $400 million available under the shelf registration continues to be available at December 31, 2002. Securities that may be issued under this shelf registration include debt securities, preferred stock, fractional interests in preferred stock represented by depositary shares, common stock, and warrants to purchase debt securities, common stock or preferred stock.

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Available cash and contractual commitments - At December 31, 2002, the Company had cash of $45 million. The Company’s additional borrowing capacity through use of its credit agreement with its bank group and other bank lines at December 31, 2002 is $371 million, with another $400 million available under the shelf registration.

The Company anticipates that cash flows from operations in 2003 will be positive after the Company’s projected capital expenditures, dividend and debt reduction goals are met, even if business levels for the year are lower than presently forecast. As noted below, long-term debt repayment obligations total only $12.5 million in 2003.

In addition, the Company has its entire $350 million revolving credit facility available, and is also attempting to sell assets valued at over $20 million, consisting of closed facilities and one of its ongoing plastics parts manufacturing plants.

The Company’s cash requirements relating to contractual obligations at December 31, 2002 are summarized in the following table:

(a)

Noncancellable purchase order commitments for raw materials, principally natural rubber, made in the ordinary course of business.

In addition, the Company has provided a guarantee on a loan for its joint venture with a subsidiary of Nishikawa Rubber Company, Ltd. The Company’s maximum exposure under this arrangement at December 31, 2002 was approximately $1.1 million.

Credit agency ratings - In November 2001, Moody’s Investors Service reduced the Company’s long-term debt rating from A3 to Baa2, with a stable outlook. In January 2002, Standard & Poor’s reduced the Company’s long-term corporate credit, senior unsecured debt and senior unsecured shelf registration ratings from BBB+ to BBB, with a stable outlook. These ratings are “investment grade.” Both Moody’s and Standard & Poor’s attributed the change in rating to the difficult industry conditions which they judge could prevent the Company from achieving the improvement in financial measures factored into the previous ratings. The ratings on the Company’s short-term credit and commercial paper ratings were affirmed at P-2 by Moody’s and at A-2 by Standard & Poor’s. The Company does not presently anticipate any downgrade in its credit ratings. However, if that were to occur, the Company believes it would continue to have access to the credit markets, although at higher borrowing costs than is presently the case.

New Accounting Standards

For a discussion of recent accounting pronouncements and their impact on the Company, see the “Significant Accounting Policies — Accounting pronouncements” note to the financial statements.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, the Company selects the principle or method that is appropriate in its specific circumstances. The Company’s accounting policies are more fully described in the “Significant Accounting Policies” note to the financial statements. Application of these accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment or estimation than other accounting policies.

Products liability – The Company is subject from time to time to products liability claims and lawsuits with respect to its tire products. The Company’s current policy is to conduct a quarterly evaluation of each individual products liability claim or lawsuit based on the specific facts and circumstances of each claim or lawsuit, historical trends and an assessment of the litigation environment. A

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judgment is then made, taking into account the views of counsel, past experience and other relevant factors, to determine the Company’s requirement to establish or revise an accrual for the aggregate liability. The Company’s exposure for each claim or lawsuit is limited by the coverage provided by its current products liability insurance program which will remain in effect through March 31, 2003. That program includes a relatively low per claim deductible and a cap on the total deductible on claims arising from occurrences which took place during a particular year. Legal costs are expensed as incurred. The disclosure of products liability costs in the Company’s financial statements includes the legal costs incurred in defending cases brought against the Company and accruals recorded pursuant to the forgoing policy. Products liability insurance premiums are not included as part of products liability costs, but are recorded as an insurance expense.

While the products liability insurance program which will take effect beginning on April 1, 2003 is not yet in place, it is likely the self-insured retention contained in any replacement program will be higher, it is possible the aggregate retention limit will be eliminated, and insurance premium costs will increase. This change in insurance coverage is expected to result in significant increases in product liability costs over 2002 levels, which are likely to impact the profits of the Tire segment. The Company is exploring options, including but not limited to the formation of a captive insurance company, to mitigate the impact of these changes. Such changes may also require the formulation of a different policy to account for products liability exposures. Whether a change is made, and if made, the nature of the change, cannot be determined until the new insurance program is in place.

Deferred tax assets – Deferred taxes are recognized at currently enacted tax rates for temporary differences between the financial reporting and income tax bases of assets and liabilities and operating loss and tax credit carryforwards. In assessing the realizability of deferred tax assets, the Company establishes a valuation allowance to record its deferred tax assets at an amount that is more likely than not to be realized. While future projections for taxable income and ongoing prudent and feasible tax planning strategies have been considered in assessing the need for the valuation allowance, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. At December 31, 2002, a valuation allowance of $10.3 million was recorded on purchased net operating loss carryforwards of $13.8 million and, to the extent such benefits are realized, the benefits will be recorded as an adjustment to goodwill.

At December 31, 2002, the Company has future tax benefits of $72 million related to various foreign and state net operating losses and other tax credit carryforwards for which valuation reserves of $34 million have been recorded. The Company recorded valuation allowances for certain net operating loss and tax credit carryforwards because it believes it is more likely than not that such carryforwards cannot be utilized. The remaining $38 million of future tax benefits primarily result from net operating loss carryforwards incurred by the Company’s subsidiaries in the United Kingdom and France and a United States foreign tax credit carryforward. Some of these can be utilized indefinitely while others expire from 2003 through 2023. The amounts expiring in the next five years, for which no valuation allowance has been recorded, approximate $11 million. It is more likely than not the carryforwards for which no valuation allowance has been established will be realized based upon forecasted future earnings, which are anticipated to result in future taxable income, and the implementation of certain tax strategies.

Impairment of long-lived assets – The Company’s long-lived assets include property, plant and equipment, long-term investments, goodwill and other intangible assets. If an indicator of impairment exists, the Company will compare the undiscounted cash flows generated by the business units to the carrying value of the long-lived assets. Based on current facts, the Company believes there is no impairment. The Company cannot predict the occurrence of future impairment-triggering events. Such events may include, but are not limited to, significant industry or economic trends and strategic decisions made in response to changes in the economic and competitive conditions impacting the Company’s businesses. As discussed in the notes to the financial statements, the Company assessed the impact of SFAS No. 142 at January 1, 2002 and again at December 1, 2002 and no impairment of goodwill and indefinite lived intangible assets was indicated.

Pension and postretirement benefits – The Company has recorded significant pension and other postretirement benefit liabilities which are developed from actuarial valuations, primarily for plans in the United States. Inherent in the determination of the Company’s pension liabilities are key assumptions regarding discount rates used to determine the present value of future benefits payments, expected returns on plan assets, and the rates of future compensation increases. The discount rate is also significant to the development of other postretirement benefit liabilities. The Company determines these assumptions in consultation with, and after input from, its actuaries.

The discount rate is used to determine the present value of future benefit payments and reflects the current rate at which the pension and other postretirement liabilities could be settled at the end of the year. The Company considers the prevailing interest rates on ten-year Moody’s Aa Corporate bonds when determining the discount rate. Based upon this analysis, the Company reduced the discount rate used to measure its United States pension and postretirement benefit liabilities to 6.75 percent at December 31, 2002 from 7.25 percent at December 31, 2001. The effect of this one-half percent reduction in the discount rate assumption will be increases of approximately $5 million in pension expense and approximately $1 million in other postretirement benefits expense.

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The rate of future compensation increases is used to determine the future benefits to be paid for salaried and non-bargained employees, because the amount of a participant’s pension is partially attributable to the compensation earned during his or her career. The rate reflects the Company’s expectations over time for salary and wage inflation and the impacts of promotions and incentive compensation, which is based on profitability. The Company reduced the rate of future compensation increases used to measure its United States pension liabilities to 3.75 percent at December 31, 2002 from 4.75 percent at December 31, 2001, primarily due to its outlook for the economy and the industries in which it competes. The effect of this one percent decrease in the assumption for compensation increases in 2003 will be a decrease of approximately $3 million in pension expense.

The assumed long-term rate of return on pension plan assets is applied to the market value of plan assets to derive a reduction to pension expense which approximates the expected average rate of asset investment return over ten or more years. Any shortfall in the actual return on plan assets from the expected return will increase pension expense in future years due to the amortization of the shortfall. A decrease in the expected long-term rate of return will increase pension expense. Decreases in the level of actual plan assets will also serve to increase the amount of pension expense. During 2002, the value of the Company’s plan assets declined due to the general market conditions. Based on recent and projected market and economic conditions, the Company decreased the expected long-term return on its United States plan assets to 9 percent from the 9.5 percent assumed in 2002. This assumption change will result in an increase in pension expense for 2003 of approximately $3 million.

The Company instituted per participant caps on the amounts of retiree medical benefits it will provide to future retirees at the time it adopted SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” to mitigate the impact of medical cost inflation on the Company’s retiree medical obligation. 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 believes these caps will be exceeded by the end of 2003.

During 2002, the Company announced it would implement increased cost sharing in 2004 in the retiree medical coverage provided to current retirees and also announced changes to the retiree health and life insurance benefits it provides to its domestic salaried and non-bargained hourly employees. The Company also determined such employees hired on or after January 1, 2003 are not eligible for these benefits. Subject to specific provisions contained in certain of its labor agreements, the Company has reserved the right to modify or terminate such benefits at any time.

Forward-Looking Statements

This report contains what the Company believes are “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995, regarding projections, expectations or matters which the Company anticipates may happen with respect to the future performance of the industries in which the Company operates, the economies of the United States and other countries, or the performance of the Company itself, which involve uncertainty and risk. Such “forward-looking statements” are generally, though not always, preceded by words such as “anticipates,” “expects,” “believes,” “projects,” “intends,” “plans,” “estimates,” and similar terms that connote a view to the future and are not merely recitations of historical fact. Such statements are made solely on the basis of the Company’s current views and perceptions of future events, and there can be no assurance that such statements will prove to be true. While such statements appear throughout this report, particular attention should be paid to the forward-looking statements contained in the sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations entitled “Liquidity and Capital Resources” and the “Outlook” sections for both the Tire and Automotive segments. It is possible that actual results may differ materially from those projections or expectations due to a variety of factors, including but not limited to:

	•		changes in economic and business conditions in the world, especially the continuation or escalation of the global tensions which currently exist,
	•		increased competitive activity, including the inability of the Tire segment to obtain price increases to offset higher production or material costs,
	•		the failure to achieve expected sales levels,
	•		consolidation among the Company’s competitors and customers,
	•		technology advancements,
	•		unexpected costs and charges,
	•		fluctuations in raw material and energy prices, including those of both crude petroleum and natural gas and the unavailability of such raw materials or energy sources,
	•		changes in interest and foreign exchange rates,
	•		increased pension expense resulting from continued poor investment performance of the Company’s pension plan assets and changes in discount rate and expected return on plan assets assumptions,
	•		government regulatory initiatives, including the proposed and final regulations under the TREAD Act,
	•		the cyclical nature and overall health of the global automotive industry, and the impact of the inability of the Company’s customers to meet their sales and production goals,
	•		changes in the Company’s customer relationships, including loss of particular business for competitive or other reasons,
	•		the impact of labor problems, including a strike brought against the Company or against one or more of its large customers,
	•		risks associated with new vehicle launches,

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	•		risks to the economy associated with external events, including those resulting from the events of September 11, 2001 and the impact on the economy of similar or related events which may occur in the future,
	•		litigation brought against the Company,
	•		an adverse change in the Company’s credit ratings, which could increase its borrowing costs and/or hamper its access to the credit markets,
	•		the inability of either segment to execute the cost reduction strategies outlined by each for the coming year,
	•		the inability to obtain or reductions in insurance coverage sufficient to cover the principal risks to the Company, and
	•		other unanticipated events and conditions.

It is not possible to foresee or identify all such factors. Any forward-looking statements in this report are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Prospective investors are cautioned that any such statements are not a guarantee of future performance and actual results or developments may differ materially from those projected. The Company makes no commitment to update any forward-looking statement included herein or to disclose any facts, events or circumstances that may affect the accuracy of any forward-looking statement.

Further information covering issues that could materially affect financial performance is contained in the Company’s periodic filings with the U. S. Securities and Exchange Commission.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to fluctuations in interest rates and currency exchange rates from its financial instruments. The Company actively monitors its exposure to risk from changes in foreign currency exchange rates and interest rates. Derivative financial instruments are used to reduce the impact of these risks. See the “Significant Accounting Policies — Derivative financial instruments” and “Fair Value of Financial Instruments” notes to the financial statements for additional information.

The Company has estimated its market risk exposures using sensitivity analysis. These analyses measure the potential loss in future earnings, cash flows or fair values of market sensitive instruments resulting from a hypothetical ten percent change in interest rates or foreign currency exchange rates.

A ten percent decrease in interest rates would have adversely affected the fair value of the Company’s fixed-rate, long-term debt by approximately $46.1 million at December 31, 2002 and approximately $52.7 million at December 31, 2001. A ten percent increase in the interest rates for the Company’s floating rate long-term debt obligations would not have been material to the Company’s results of operations and cash flows.

The Company uses interest rate swap agreements to manage its exposure to interest rate risk. In October 2001, the Company entered into $100 million of interest rate swap agreements to convert a portion of its 7.75 percent fixed-rate, 2009 senior notes to a floating rate based on LIBOR. The Company’s exposure to changes in interest rates from its short-term notes payable issuances is not significant as such notes, which are not material to its financial position at December 31, 2002 and 2001, are issued at current market rates.

At December 31, 2002, the Company has derivative financial instruments that hedge foreign currency denominated intercompany loans. Gains or losses on the foreign currency denominated loans are offset by changes in the values of derivative financial instruments. To manage the volatility related to currency exchange exposures related to future sales and purchases, the Company nets the exposures on a consolidated basis to take advantage of natural offsets. For the residual portion, the Company enters into forward exchange contracts and purchased options with maturities of less than 12 months pursuant to the Company’s policies and hedging practices. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value of cash flows of the underlying exposures being hedged. The Company’s unprotected exposures to earnings and cash flow fluctuations due to changes in foreign currency exchange rates were not significant at December 31, 2002 and 2001.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Notes to Financial Statements, pages 27 to 44.

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See Notes to Financial Statements, pages 27 to 44.

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December 31

See Notes to Financial Statements, pages 27 to 44.

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