OVERVIEW
The Goodyear Tire & Rubber Company is one of the world's leading manufacturers of tires, with one of the most recognizable brand names in the world and operations in most regions of the world. We have a broad global footprint with 47 manufacturing facilities in 21 countries, includingthe United States . We operate our business through three operating segments representing our regional tire businesses:Americas ;Europe ,Middle East andAfrica ; andAsia Pacific . This management's discussion and analysis provides comparisons of material changes in the consolidated financial statements for the years endedDecember 31, 2019 and 2018. For a comparison of the years endedDecember 31, 2018 and 2017, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year endedDecember 31, 2018 . Results of Operations In 2019, challenging macro-economic industry conditions persisted throughout much of the year, including higher raw material costs, foreign currency headwinds due to a strongU.S. dollar, lower OE industry volumes, softening demand inEurope , weak market conditions inChina , and economic volatility inLatin America , particularly inBrazil . These headwinds were partially offset by continued strength inU.S. consumer replacement sales. In order to continue to drive growth in our business and address the challenging economic environment, we remain focused on our key strategies by: • Developing great products and services that anticipate and respond to the
needs of consumers;
• Building the value of our brand, helping our customers win in their
markets, and becoming consumers' preferred choice; and
• Improving our manufacturing efficiency and creating an advantaged supply
chain focused on reducing our total delivered costs, optimizing working
capital levels and delivering best in industry customer service.
Our 2019 results reflect a 2.4% decrease in tire unit shipments compared to 2018. In 2019, we realized approximately$199 million of cost savings, including raw material cost saving measures of approximately$93 million , which exceeded the impact of general inflation. Our raw material costs, including cost saving measures, increased by approximately 4% in 2019 compared to 2018. Net sales were$14,745 million in 2019, compared to$15,475 million in 2018. Net sales decreased in 2019 primarily due to unfavorable foreign currency translation, primarily in EMEA, lower volume, primarily in EMEA, and lower sales in other tire-related businesses, primarily due to a decrease in third-party sales of chemical products inAmericas , partially offset by improvements in price and product mix, primarily in EMEA andAmericas .Goodyear net loss in 2019 was$311 million , or$1.33 per diluted share, compared toGoodyear net income of$693 million , or$2.89 per diluted share, in 2018. The decrease inGoodyear net income in 2019 was primarily driven by lower segment operating income, the net gain recognized on theTireHub transaction in 2018, higher income tax expense and higher rationalization expense. Our total segment operating income for 2019 was$945 million , compared to$1,274 million in 2018. The$329 million , or 25.8%, decrease in segment operating income was primarily due to the impact of higher raw material costs of$185 million , primarily inAmericas and EMEA, lower volume of$81 million , primarily in EMEA, higher selling, administrative and general expense ("SAG") of$47 million , primarily due to higher wages and benefits driven by higher incentive compensation, lower income in other tire-related businesses of$38 million , driven by lower third-party chemical sales inAmericas , the impact of unfavorable foreign currency translation of$38 million , and higher conversion costs of$36 million , primarily in EMEA andAsia Pacific . These decreases more than offset improvements in price and product mix of$120 million , primarily inAmericas and EMEA. Refer to "Results of Operations - Segment Information" for additional information. Liquidity AtDecember 31, 2019 , we had$908 million in Cash and cash equivalents as well as$3,578 million of unused availability under our various credit agreements, compared to$801 million and$3,151 million , respectively, atDecember 31, 2018 . Cash flows from operating activities of$1,207 million , which are driven by the profitability of our strategic business units ("SBUs") and changes in working capital, were used to fund capital expenditures of$770 million , dividends paid on our common stock of$148 million , and net debt repayments of$119 million . Refer to "Liquidity and Capital Resources" for additional information. Outlook We expect to continue to experience challenging global industry conditions in 2020, including lower global OE industry demand, particularly inEurope andAsia , foreign currency headwinds, weak consumer replacement demand inEurope , and volatility in emerging markets. We anticipate our consumer OE tire unit volume to decline by about 2.0 million units in 2020, primarily in 20
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Asia Pacific . We also expect that the changes we plan to pursue to our distribution network inEurope could reduce our consumer replacement tire unit volume by up to 1.5 million units in 2020. In 2020, we expect to continue to see benefits from pricing actions that we implemented to recover raw material cost increases and continued strong performance in our sales of 17-inch and above consumer replacement tires. For the full year of 2020, we expect our raw material costs will be essentially flat compared to 2019, excluding transactional foreign currency and raw material cost saving measures. Natural and synthetic rubber prices and other commodity prices historically have been volatile, and this estimate could change significantly based on fluctuations in the cost of these and other key raw materials. We are continuing to focus on price and product mix, to substitute lower cost materials where possible, to work to identify additional substitution opportunities, to reduce the amount of material required in each tire, and to pursue alternative raw materials. The recent coronavirus outbreak inChina has caused the temporary closure of many businesses inChina , including our Pulandian manufacturing facility, which has limited business activity and automotive production. Given the dynamic nature of this situation, our outlook does not currently include any impact from the coronavirus since that impact cannot be reasonably estimated at this time. Refer to "Item 1A. Risk Factors" for a discussion of the factors that may impact our business, results of operations, financial condition or liquidity and "Forward-Looking Information - Safe Harbor Statement" for a discussion of our use of forward-looking statements. 21
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RESULTS OF OPERATIONS - CONSOLIDATED All per share amounts are diluted and refer toGoodyear net income (loss).Goodyear net loss in 2019 was$311 million , or$1.33 per share, compared toGoodyear net income of$693 million , or$2.89 per share, in 2018. The decrease inGoodyear net income in 2019 was driven by lower segment operating income, the net gain recognized on theTireHub transaction in 2018, higher income tax expense and higher rationalization expense.Net Sales Net sales in 2019 of$14,745 million decreased$730 million , or 4.7%, compared to$15,475 million in 2018, primarily due to unfavorable foreign currency translation of$451 million , primarily in EMEA, lower volume of$307 million , primarily in EMEA, and lower sales in other tire-related businesses of$168 million , primarily due to a decrease in third-party sales of chemical products inAmericas , partially offset by improvements in price and product mix of$196 million , primarily in EMEA andAmericas .Goodyear worldwide tire unit net sales were$12,524 million and$13,060 million in 2019 and 2018, respectively. Consumer and commercial net sales were$8,835 million and$2,953 million , respectively, in 2019. Consumer and commercial net sales were$9,167 million and$3,002 million , respectively, in 2018. The following table presents our tire unit sales for the periods indicated: Year Ended December 31, (In millions of tires) 2019 2018 % Change Replacement Units United States 40.3 38.9 3.6 % International 74.7 76.2 (2.0 ) Total 115.0 115.1 (0.1 ) OE Units United States 11.2 13.2 (15.2 ) International 29.1 30.9 (5.8 ) Total 40.3 44.1 (8.5 )
The decrease in worldwide tire unit sales of 3.9 million units, or 2.4%, compared to 2018, included a decrease of 0.1 million replacement tire units, or 0.1%, comprised primarily of a decrease in EMEA partially offset by an increase inAmericas . OE tire units decreased by 3.8 million units, or 8.5%, primarily due to lower vehicle production globally. Consumer and commercial unit sales in 2019 were 141.9 million and 11.7 million, respectively. Consumer and commercial unit sales in 2018 were 145.5 million and 11.8 million, respectively. Cost of Goods Sold Cost of goods sold ("CGS") was$11,602 million in 2019, decreasing$359 million , or 3.0%, from$11,961 million in 2018. CGS was 78.7% of sales in 2019 compared to 77.3% of sales in 2018. CGS in 2019 decreased due to foreign currency translation of$345 million , primarily in EMEA andAmericas , lower volume of$226 million , primarily in EMEA, lower costs in other tire-related businesses of$130 million , driven by lower third-party chemical sales inAmericas , and lower start-up costs of$36 million associated with our new plant inSan Luis Potosi, Mexico . These decreases were partially offset by higher raw material costs of$185 million , primarily inAmericas and EMEA, higher costs related to product mix of$76 million , primarily in EMEA andAsia Pacific , the year-over-year impact of favorable indirect tax settlements inBrazil of$42 million , and higher conversion costs of$36 million , primarily in EMEA andAsia Pacific . CGS in 2019 included pension expense of$14 million compared to$15 million in 2018. CGS in 2019 and 2018 also included incremental savings from rationalization plans of$20 million and$41 million , respectively. CGS in 2019 included accelerated depreciation and asset write-offs of$15 million ($12 million after-tax and minority) and favorable indirect tax settlements inBrazil of$11 million ($7 million after-tax and minority) and in theU.S. of$6 million ($5 million after-tax and minority). CGS in 2018 included accelerated depreciation and asset write-offs of$4 million ($3 million after-tax and minority) and favorable indirect tax settlements inBrazil of$53 million , of which$51 million ($39 million after-tax and minority) related to years prior to 2018, and in theU.S. of$4 million ($3 million after-tax and minority). 22
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Selling, Administrative and General Expense SAG was$2,323 million in 2019, increasing$11 million , or 0.5%, from$2,312 million in 2018. SAG was 15.8% of sales in 2019 compared to 14.9% of sales in 2018. The increase in SAG was primarily due to higher wages and benefits of$65 million , primarily due to higher incentive compensation, and higher information technology expense of$11 million , partially offset by foreign currency translation of$68 million . SAG in 2019 included pension expense of$15 million compared to$17 million in 2018. SAG in 2019 and 2018 also included incremental savings from rationalization plans of$17 million and$34 million , respectively. Rationalizations We recorded net rationalization charges of$205 million ($165 million after-tax and minority) in 2019. Net rationalization charges include$115 million in EMEA, primarily related to a plan to modernize two of our manufacturing facilities inGermany , and$90 million inAmericas , primarily related to a plan to curtail production of tires for declining, less profitable segments of the tire market at ourGadsden, Alabama manufacturing facility. We recorded net rationalization charges of$44 million ($32 million after-tax and minority) in 2018. Net rationalization charges included charges of$31 million related to global plans to reduce SAG headcount,$16 million related to plans to reduce manufacturing headcount and improve operating efficiency in EMEA, and$15 million related to the closure of our tire manufacturing facility in Philippsburg,Germany . Net rationalization charges in 2018 also included reversals of$19 million for actions no longer needed for their originally intended purposes. Upon completion of the 2019 plans, we estimate that annual segment operating income will benefit from an improvement in CGS of approximately$140 million . The savings realized in 2019 from rationalization plans totaled$37 million ($20 million CGS and$17 million SAG). For further information, refer to the Note to the Consolidated Financial Statements No. 3, Costs Associated with Rationalization Programs, in this Form 10-K. Interest Expense Interest expense was$340 million in 2019, increasing$19 million from$321 million in 2018. The increase was primarily due to higher average debt balances of$6,408 million in 2019 compared to$6,218 million in 2018 and a higher average interest rate of 5.31% in 2019 compared to 5.16% in 2018. Other (Income) Expense Other (Income) Expense in 2019 was expense of$98 million , compared to income of$174 million in 2018. The$272 million change in Other (Income) Expense was primarily driven by the gain, net of transaction costs, of$272 million ($207 million after-tax and minority) recognized on theTireHub transaction in 2018, a decrease in interest income on favorable indirect tax settlements inBrazil of$30 million , and charges of$25 million ($25 million after-tax and minority) related to flooding at ourBeaumont, Texas chemical facility in 2019. These increases in expense were partially offset by an increase in net gains on asset sales of$15 million ,$12 million ($12 million after-tax and minority) in expenses related to hurricanes Harvey and Irma in 2018, and a net gain on insurance recoveries of$4 million ($3 million after-tax and minority) in 2019. Non-service related pension and other postretirement benefits expense of$118 million in 2019 includes pension settlement charges of$5 million ($4 million after-tax and minority). Non-service related pension and other postretirement benefits expense of$121 million in 2018 includes pension settlement charges of$22 million ($17 million after-tax and minority) and a one-time charge of$9 million ($7 million after-tax and minority) related to the adoption of the new accounting standards update which no longer allows non-service related pension and other postretirement benefits cost to be capitalized in inventory. Net (gains) losses on asset sales were a gain of$16 million ($15 million after-tax and minority) in 2019 as compared to a gain of$1 million ($1 million after-tax and minority) in 2018. Other (Income) Expense in 2019 included interest income on favorable indirect tax settlements inBrazil of$8 million ($5 million after-tax and minority), compared to interest income on favorable indirect tax settlements inBrazil of$38 million ($29 million after-tax and minority) in 2018. Other (Income) Expense in 2019 included charges of$5 million ($4 million after-tax and minority), compared to charges of$4 million ($3 million after-tax and minority) in 2018, for non-asbestos legal claims related to discontinued products. Other (Income) Expense in 2019 also included a net gain of$2 million ($2 million after-tax and minority) related to an acquisition and$2 million ($2 million after-tax and minority) of favorable foreign currency translation on indirect tax items. For further information, refer to the Note to the Consolidated Financial Statements No. 5, Other (Income) Expense, in this Form 10-K. 23
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Income Taxes Income tax expense in 2019 was$474 million on income before income taxes of$177 million . In 2019, income tax expense was unfavorably impacted by net discrete adjustments totaling$386 million ($386 million after minority interest). Discrete adjustments were due to non-cash charges of$334 million related to an acceleration of royalty income in theU.S. from the sale of certain European royalty payments to Luxembourg and$150 million related to an increase in our valuation allowance on tax losses in Luxembourg, which were partially offset by a non-cash tax benefit of$98 million related to a reduction of ourU.S. valuation allowance for foreign tax credits. AtDecember 31, 2019 , our valuation allowance on certain of ourU.S. federal, state and local deferred tax assets was$13 million , primarily related to state tax loss and credit carryforwards, and our valuation allowance on our foreign deferred tax assets was$969 million . AtDecember 31, 2018 , our valuation allowance on certainU.S. federal, state and local deferred tax assets was$113 million and our valuation allowance on our foreign deferred tax assets was$204 million . Foreign source taxable income for the fourth quarter of 2019 includes accelerated royalty income in theU.S. of$2.1 billion received from Luxembourg as payment for the purchase of the right to receive technology royalties from our European operations for a period of 12 years. External specialists assisted management with this transaction. The royalty sale transaction resulted in aU.S. tax charge of$334 million and a deferred tax asset and offsetting valuation allowance of$576 million in Luxembourg. Foreign source taxable income for the fourth quarter of 2019 also includes$320 million of accelerated cross-border sales of inventory from theU.S. toCanada , resulting in aU.S. tax charge of approximately$70 million that was offset by the establishment of a deferred tax asset. The federal portion of the tax charges related to both the royalty acceleration and Canadian prepayment transactions was fully offset by the utilization of foreign tax credits of approximately$310 million . In addition, as a result of these transactions, we released an existingU.S. valuation allowance on foreign tax credits of$98 million . We considered our current forecasts of future profitability in assessing our ability to realize our remaining net foreign tax credits of$403 million . These forecasts include the impact of recent trends, including various macroeconomic factors such as raw material prices, on our profitability, as well as the impact of tax planning strategies. Macroeconomic factors, including raw material prices, possess a high degree of volatility and can significantly impact our profitability. As such, there is a risk that future foreign source income will not be sufficient to fully utilize these foreign tax credits. However, we believe our forecasts of future profitability along with three significant sources of foreign income as described in "Critical Accounting Policies" provide us sufficient positive evidence to conclude that it is more likely than not that our foreign tax credits, net of remaining valuation allowances, will be fully utilized prior to their various expiration dates. Income tax expense in 2018 was$303 million on income before income taxes of$1,011 million . In 2018, income tax expense was unfavorably impacted by net discrete adjustments of$65 million ($65 million after minority interest). Discrete adjustments were primarily due to charges totaling$135 million related to deferred tax assets for foreign tax credits, including the establishment of a valuation allowance on foreign tax credits of$98 million , partially offset by a tax benefit of$88 million related to a worthless stock deduction created by permanently ceasing operations of our Venezuelan subsidiary during the fourth quarter of 2018. Income tax expense in 2018 also included net charges of$18 million for various other discrete tax adjustments, including those related to finalizing our accounting for certain provisional items related to the Tax Cuts and Jobs Act that was enacted onDecember 22, 2017 (the "Tax Act"). Our losses in various foreign taxing jurisdictions in recent periods represented sufficient negative evidence to require us to maintain a full valuation allowance against certain of our net deferred tax assets. In Luxembourg, we maintained a valuation allowance on all deferred tax assets with limited lives. As a result of recent negative evidence, including cumulative losses in the most recent three-year period and a forecast of continued losses for 2020, we increased our valuation allowance on our net deferred tax assets in Luxembourg to now include losses with unlimited lives, resulting in a non-cash tax charge of$150 million . Each reporting period we assess available positive and negative evidence and estimate if sufficient future taxable income will be generated to utilize these existing deferred tax assets. We do not believe that sufficient positive evidence required to release valuation allowances having a significant impact on our financial position or results of operations will exist within the next twelve months. For further information, refer to "Critical Accounting Policies" and Note to the Consolidated Financial Statements No. 6, Income Taxes, in this Form 10-K. Minority Shareholders' Net Income Minority shareholders' net income was$14 million in 2019, compared to$15 million in 2018. Minority shareholders' net income in 2019 includes$7 million ($7 million after-tax and minority) of expense related to an indirect tax settlement inTurkey . 24
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RESULTS OF OPERATIONS - SEGMENT INFORMATION Segment information reflects our SBUs, which are organized to meet customer requirements and global competition and are segmented on a regional basis. Results of operations are measured based on net sales to unaffiliated customers and segment operating income. Each segment exports tires to other segments. The financial results of each segment exclude sales of tires exported to other segments, but include operating income derived from such transactions. Segment operating income is computed as follows:Net Sales less CGS (excluding asset write-off and accelerated depreciation charges) and SAG (including certain allocated corporate administrative expenses). Segment operating income also includes certain royalties and equity in earnings of most affiliates. Segment operating income does not include net rationalization charges (credits), asset sales and certain other items. Total segment operating income was$945 million in 2019, and$1,274 million in 2018. Total segment operating margin (segment operating income divided by segment sales) in 2019 was 6.4%, compared to 8.2% in 2018. Management believes that total segment operating income is useful because it represents the aggregate value of income created by our SBUs and excludes items not directly related to the SBUs for performance evaluation purposes. Total segment operating income is the sum of the individual SBUs' segment operating income. Refer to the Note to the Consolidated Financial Statements No. 8, Business Segments, for further information and for a reconciliation of total segment operating income to Income before Income Taxes.Americas Year Ended December 31, (In millions) 2019 2018 2017 Tire Units 70.4 70.9 70.9 Net Sales$ 7,922 $ 8,168 $ 8,212 Operating Income 550 654 847 Operating Margin 6.9 % 8.0 % 10.3 %Americas unit sales in 2019 decreased 0.5 million units, or 0.7%, to 70.4 million units. Replacement tire volume increased 1.3 million units, or 2.5%, primarily in our consumer business inthe United States driven by growth in 17-inch and above rim size tires. OE tire volume decreased 1.8 million units, or 10.6%, primarily in our consumer business inthe United States , driven by lower vehicle production, including the impact resulting from a strike at a major OE customer, and our OE selectivity strategy. Net sales in 2019 were$7,922 million , decreasing$246 million , or 3.0%, compared to$8,168 million in 2018. The decrease in net sales was driven by a decrease in other tire-related businesses of$160 million , primarily due to a decrease in third-party sales of chemical products, unfavorable foreign currency translation of$105 million , primarily related to the Argentine peso and the Brazilian real, and a decrease in volume of$41 million . These decreases were partially offset by improvements in price and product mix of$58 million , driven by an increase in pricing. Operating income in 2019 was$550 million , decreasing$104 million , or 15.9%, from$654 million in 2018. The decrease in operating income was due to increased raw material costs of$108 million , which more than offset favorable price and product mix of$70 million , a decrease in favorable indirect tax settlements inBrazil of$42 million , higher SAG of$35 million , primarily due to higher wages and benefits driven by higher incentive compensation, lower income in other tire-related businesses of$33 million , primarily due to lower third-party chemical sales driven by lower global demand by tire manufacturers, unfavorable foreign currency translation of$11 million , and lower volume of$8 million . Income in other tire-related businesses included a$7 million negative impact related to flooding at ourBeaumont, Texas chemical facility. These decreases were partially offset by lower start-up costs of$36 million associated with our new plant inSan Luis Potosi, Mexico and lower conversion costs of$29 million , reflecting a benefit from overhead absorption. Conversion costs included incremental savings from rationalization plans of$14 million . Operating income in 2019 excluded rationalization charges of$90 million and accelerated depreciation and asset write-offs of$13 million . Operating income in 2018 excluded the net gain recognized on theTireHub transaction of$272 million , rationalization charges of$3 million and net gains on asset sales of$3 million . Price and product mix improvements includeTireHub equity losses of$33 million and$15 million in 2019 and 2018, respectively. These losses reflect higher than expected start-up expenses and additional costs incurred to build outTireHub's distribution footprint for future growth. We expect to continue to incur our share of these losses asTireHub transitions through its start-up phase, however these losses are expected to moderate in 2020. 25
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Americas' results are highly dependent uponthe United States , which accounted for 81% ofAmericas' net sales in both 2019 and 2018. Results of operations inthe United States are expected to continue to have a significant impact onAmericas' future performance.Europe ,Middle East andAfrica Year Ended December 31, (In millions) 2019 2018 2017 Tire Units 55.1 57.8 57.1 Net Sales$ 4,708 $ 5,090 $ 4,928 Operating Income 202 363 367 Operating Margin 4.3 % 7.1 % 7.4 %Europe ,Middle East andAfrica unit sales in 2019 decreased 2.7 million units, or 4.6%, to 55.1 million units. Replacement tire volume decreased 1.4 million units, or 3.3%, primarily in our consumer business, driven by increased competition and decreased industry demand. OE tire volume decreased 1.3 million units, or 8.5%, primarily in our consumer business, driven by lower vehicle production and our exit of declining, less profitable market segments. Net sales in 2019 were$4,708 million , decreasing$382 million , or 7.5%, compared to$5,090 million in 2018. Net sales decreased primarily due to unfavorable foreign currency translation of$287 million , driven by the weakening of the euro, Turkish lira, South African rand and Polish zloty, and lower volume of$217 million . These decreases were partially offset by improvements in price and product mix of$117 million , driven by our continued focus on 17-inch and above rim size consumer tires and price increases on commercial replacement tire sales. Operating income in 2019 was$202 million , decreasing$161 million , or 44.4%, compared to$363 million in 2018. Operating income decreased due to lower volume of$59 million , higher raw material costs of$57 million , higher conversion costs of$43 million , driven by inflation, unfavorable foreign currency translation of$19 million , higher SAG of$15 million , primarily due to inflation, higher research and development costs of$6 million ,$5 million of start-up costs, primarily at our new plant in Luxembourg, and higher transportation costs of$5 million . These decreases in operating income were partially offset by improvements in price and product mix of$64 million . SAG and conversion costs included incremental savings from rationalization plans of$15 million and$6 million , respectively. Operating income in 2019 excluded net rationalization charges of$115 million , net gains on asset sales of$16 million , and accelerated depreciation and asset write-offs of$2 million . Operating income in 2018 excluded net rationalization charges of$36 million , accelerated depreciation and asset write-offs of$4 million , and net losses on asset sales of$2 million . EMEA's results are highly dependent uponGermany , which accounted for 21% and 33% of EMEA's net sales in 2019 and 2018, respectively. The decline in sales reported inGermany is primarily related to a business reorganization that centralized our OE sales for EMEA in Luxembourg. Results of operations inGermany are expected to continue to have a significant impact on EMEA's future performance. Asia Pacific Year Ended December 31, (In millions) 2019 2018 2017 Tire Units 29.8 30.5 31.2 Net Sales$ 2,115 $ 2,217 $ 2,237 Operating Income 193 257 342 Operating Margin 9.1 % 11.6 % 15.3 %Asia Pacific unit sales in 2019 decreased 0.7 million units, or 2.3%, to 29.8 million units. OE tire volume decreased 0.7 million units, or 5.5%, primarily in our consumer business inIndia andChina as a result of lower vehicle production. Replacement tire volume remained consistent. Net sales in 2019 were$2,115 million , decreasing$102 million , or 4.6%, from$2,217 million in 2018. Net sales decreased due to unfavorable foreign currency translation of$59 million , primarily related to the weakening of the Australian dollar, Chinese yuan and Indian rupee, lower volume of$49 million , and lower sales in other tire-related businesses of$15 million , primarily in the retail business. These decreases were partially offset by improvements in price and product mix of$21 million . 26
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Operating income in 2019 was$193 million , decreasing$64 million , or 24.9%, from$257 million in 2018. Operating income decreased due to higher conversion costs of$22 million , primarily due to the impact of lower tire production on overhead absorption, higher raw material costs of$20 million , lower volume of$14 million , and unfavorable price and product mix of$14 million . Operating income in 2018 excluded net rationalization charges of$3 million .Asia Pacific's results are highly dependent uponChina andAustralia .China accounted for 26% and 27% ofAsia Pacific's net sales in 2019 and 2018, respectively.Australia accounted for 27% ofAsia Pacific's net sales in both 2019 and 2018. Results of operations inChina andAustralia are expected to continue to have a significant impact onAsia Pacific's future performance. 27
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CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to the financial statements. On an ongoing basis, management reviews its estimates, based on currently available information. Changes in facts and circumstances may alter such estimates and affect our results of operations and financial position in future periods. Our critical accounting policies relate to: • general and product liability and other litigation,
• workers' compensation,
• recoverability of goodwill,
• deferred tax asset valuation allowances and uncertain income tax positions, and
• pensions and other postretirement benefits.
General and Product Liability and Other Litigation. We have recorded liabilities totaling$293 million , including related legal fees expected to be incurred, for potential product liability and other tort claims, including asbestos claims, atDecember 31, 2019 . General and product liability and other litigation liabilities are recorded based on management's assessment that a loss arising from these matters is probable. If the loss can be reasonably estimated, we record the amount of the estimated loss. If the loss is estimated within a range and no point within the range is more probable than another, we record the minimum amount in the range. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Loss ranges are based upon the specific facts of each claim or class of claims and are determined after review by counsel. Court rulings on our cases or similar cases may impact our assessment of the probability and our estimate of the loss, which may have an impact on our reported results of operations, financial position and liquidity. We record receivables for insurance recoveries related to our litigation claims when it is probable that we will receive reimbursement from the insurer. Specifically, we are a defendant in numerous lawsuits alleging various asbestos-related personal injuries purported to result from alleged exposure to asbestos in certain products previously manufactured by us or present in certain of our facilities. Typically, these lawsuits have been brought against multiple defendants in federal and state courts. We periodically, and at least annually, update, using actuarial analyses, our existing reserves for pending claims, including a reasonable estimate of the liability associated with unasserted asbestos claims, and estimate our receivables from probable insurance recoveries. In determining the estimate of our asbestos liability, we evaluated claims over the next ten-year period. Due to the difficulties in making these estimates, analysis based on new data and/or changed circumstances arising in the future may result in an increase in the recorded obligation, and that increase may be significant. We had recorded gross liabilities for both asserted and unasserted asbestos claims, inclusive of defense costs, totaling$153 million atDecember 31, 2019 . We maintain certain primary and excess insurance coverage under coverage-in-place agreements, and also have additional excess liability insurance with respect to asbestos liabilities. We record a receivable with respect to such policies when we determine that recovery is probable and we can reasonably estimate the amount of a particular recovery. This determination is based on consultation with our outside legal counsel and takes into consideration agreements with certain of our insurance carriers, the financial viability and legal obligations of our insurance carriers, and other relevant factors. As ofDecember 31, 2019 , we recorded a receivable related to asbestos claims of$95 million , and we expect that approximately 60% of asbestos claim related losses would be recoverable through insurance through the period covered by the estimated liability. Of this amount,$13 million was included in Current Assets as part of Accounts Receivable atDecember 31, 2019 . The recorded receivable consists of an amount we expect to collect under coverage-in-place agreements with certain primary and excess insurance carriers as well as an amount we believe is probable of recovery from certain of our other excess insurance carriers. Although we believe these amounts are collectible under primary and certain excess policies today, future disputes with insurers could result in significant charges to operations. Workers' Compensation. We had recorded liabilities, on a discounted basis, of$198 million for anticipated costs related toU.S. workers' compensation claims atDecember 31, 2019 . The costs include an estimate of expected settlements on pending claims, defense costs and a provision for claims incurred but not reported. These estimates are based on our assessment of potential liability using an analysis of available information with respect to pending claims, historical experience and current cost trends. The amount of our ultimate liability in respect of these matters may differ from these estimates. We periodically, and at least annually, update our loss development factors based on actuarial analyses. The liability is discounted using the risk-free rate of return. For further information on general and product liability and other litigation, and workers' compensation, refer to Note to the Consolidated Financial Statements No. 19, Commitments and Contingent Liabilities, in this Form 10-K. 28
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Recoverability ofGoodwill .Goodwill is tested for impairment annually or more frequently if an indicator of impairment is present.Goodwill totaled$565 million atDecember 31, 2019 . We test goodwill for impairment on at least an annual basis, with the option to perform a qualitative assessment to determine whether further impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not (defined as a likelihood of more than 50%) that its fair value is less than its carrying amount. If under the quantitative assessment the fair value of a reporting unit is less than its carrying amount, then an impairment charge is recorded for that difference, not to exceed the total goodwill allocated to that reporting unit. Our policy is to perform a quantitative assessment at least once every five years. As a result of industry conditions, the decrease in our market capitalization and the length of time since the last quantitative assessment was performed for all reporting units, management performed a quantitative assessment as ofOctober 31, 2019 , the date of our annual goodwill impairment testing. Based upon the results of our assessment, there were no impairments of the Company's goodwill. Fair values substantially exceeded the carrying amounts for each reporting unit tested, except for the EMEA reporting unit discussed below. In addition, we assessed the period fromOctober 31, 2019 toDecember 31, 2019 and determined there were no factors that caused us to change our conclusions as ofOctober 31, 2019 . We determine the estimated fair value for each reporting unit based on discounted cash flow projections and market values for comparable businesses. Our estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Under the discounted cash flow approach, fair value is calculated as the sum of the projected discounted cash flows of the reporting unit over the next five years and the terminal value at the end of those five years and is dependent on estimates for future revenue, operating margin, capital expenditures, rationalization activities and working capital changes, as well as expected long-term growth rates for cash flows and an appropriate discount rate. The risk adjusted discount rate used is consistent with the weighted average cost of capital for companies in the tire industry and is intended to represent a rate of return that would be expected by a market participant. Under the market value approach, market multiples are derived from market prices of stocks of companies that are in the tire industry. The appropriate multiple is applied to the forecasted revenues and earnings before interest, taxes, depreciation and amortization of the reporting unit to obtain an estimated fair value. As ofDecember 31, 2019 , goodwill of$411 million is allocated to the EMEA reporting unit. As of theOctober 31, 2019 measurement date, EMEA had an estimated fair value that exceeded its carrying value, including goodwill, by approximately 10%. The most critical assumptions used in the calculation of the fair value of the EMEA reporting unit are the projected long term operating margin, discount rate, and the selection of market multiples. The projected long term operating margin utilized in our fair value estimates is consistent with the reporting unit operating plan and is dependent on the successful execution of our business plan, overall industry growth rates and the competitive environment. As a result, the long term operating margin could be adversely impacted by our ability to execute our business plan as well as by volatile macroeconomic factors such as raw material prices, industry conditions or competition. Our business plan includes rationalization programs, aligned distribution actions, and recovering past raw material cost increases by improving price and product mix, including through continued focus on higher margin tires. The discount rate could be adversely impacted by changes in the macroeconomic environment and volatility in the equity and debt markets. Although management believes its estimate of fair value is reasonable, if the EMEA reporting unit's future financial performance falls below our expectations or there are negative revisions to significant assumptions, or if our market capitalization declines further, and if such a decline becomes indicative that the fair value of our reporting units has declined below their carrying values, we may need to record a material, non-cash goodwill impairment charge in a future period. Deferred Tax Asset Valuation Allowances and Uncertain Income Tax Positions. AtDecember 31, 2019 , our valuation allowance on certain of ourU.S. federal, state and local deferred tax assets was$13 million , primarily related to state tax loss and credit carryforwards, and our valuation allowance on our foreign deferred tax assets was$969 million . AtDecember 31, 2018 , our valuation allowance on certainU.S. federal, state and local deferred tax assets was$113 million and our valuation allowance on our foreign deferred tax assets was$204 million . We record a reduction to the carrying amounts of deferred tax assets by recording a valuation allowance if, based on the available evidence, it is more likely than not such assets will not be realized. The valuation of deferred tax assets requires judgment in assessing future profitability and the tax consequences of events that have been recognized in either our financial statements or tax returns. We consider both positive and negative evidence when measuring the need for a valuation allowance. The weight given to the evidence is commensurate with the extent to which it may be objectively verified. Current and cumulative financial reporting results are a source of objectively verifiable evidence. We give operating results during the most recent three-year period a significant weight in our analysis. We typically only consider forecasts of future profitability when positive cumulative operating results exist in the most recent three-year period. We perform scheduling exercises to determine if sufficient taxable income of the appropriate character exists in the periods required in order to realize our deferred tax assets with limited lives (such as tax 29
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loss carryforwards and tax credits) prior to their expiration. We consider tax planning strategies available to accelerate taxable amounts if required to utilize expiring deferred tax assets. A valuation allowance is not required to the extent that, in our judgment, positive evidence exists with a magnitude and duration sufficient to result in a conclusion that it is more likely than not that our deferred tax assets will be realized. AtDecember 31, 2019 , our net deferred tax assets include$403 million of foreign tax credits, net of a valuation allowance of$3 million , as compared to$637 million , net of a valuation allowance of$103 million , atDecember 31, 2018 . If not utilized, these foreign tax credits will expire from 2022 to 2028. These credits were generated primarily from the receipt of foreign dividends. Our earnings and forecasts of future profitability along with three significant sources of foreign income provide us sufficient positive evidence to utilize these credits, despite the negative evidence of their limited carryforward periods. Those sources of foreign income are (1) 100% of our domestic profitability can be re-characterized as foreign source income under currentU.S. tax law to the extent domestic losses have offset foreign source income in prior years, (2) annual net foreign source income, exclusive of dividends, primarily from royalties, and (3) tax planning strategies, including capitalizing research and development costs, accelerating income on cross border sales of inventory or raw materials to our subsidiaries and reducingU.S. interest expense by, for example, reducing intercompany loans through repatriating current year earnings of foreign subsidiaries, all of which would increase our domestic profitability. We considered our current forecasts of future profitability in assessing our ability to realize our remaining net foreign tax credits. These forecasts include the impact of recent trends, including various macroeconomic factors such as raw material prices, on our profitability, as well as the impact of tax planning strategies. Macroeconomic factors, including raw material prices, possess a high degree of volatility and can significantly impact our profitability. As such, there is a risk that future foreign source income will not be sufficient to fully utilize these foreign tax credits. However, we believe our forecasts of future profitability along with the three significant sources of foreign income described above provide us sufficient positive evidence to conclude that it is more likely than not that our foreign tax credits, net of remaining valuation allowances, will be fully utilized prior to their various expiration dates. We recognize the effects of changes in tax rates and laws on deferred tax balances in the period in which legislation is enacted. We remeasure existing deferred tax assets and liabilities considering the tax rates at which they will be realized. We also consider the effects of enacted tax laws in our analysis of the need for valuation allowances. EffectiveJanuary 1, 2018 , the Tax Act subjects aU.S. parent to current tax on its "global intangible low-taxed income" ("GILTI"). To the extent that we incur expense under the GILTI provisions, we will treat it as a component of income tax expense in the period incurred. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations, including those for transfer pricing. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize income tax benefits to the extent that it is more likely than not that our positions will be sustained when challenged by the taxing authorities. We derecognize income tax benefits when, based on new information, we determine that it is no longer more likely than not that our position will be sustained. To the extent we prevail in matters for which liabilities have been established, or determine we need to derecognize tax benefits recorded in prior periods, our results of operations and effective tax rate in a given period could be materially affected. An unfavorable tax settlement would require use of our cash, and lead to recognition of expense to the extent the settlement amount exceeds recorded liabilities, resulting in an increase in our effective tax rate in the period of resolution. To reduce our risk of an unfavorable transfer price settlement, the Company applies consistent transfer pricing policies and practices globally, supports pricing with economic studies and seeks advance pricing agreements and joint audits to the extent possible. A favorable tax settlement would be recognized as a reduction of expense to the extent the settlement amount is lower than recorded liabilities and, in the case of an income tax settlement, would result in a reduction in our effective tax rate in the period of resolution. We report interest and penalties related to uncertain income tax positions as income tax expense. For additional information regarding uncertain income tax positions and valuation allowances, refer to Note to the Consolidated Financial Statements No. 6, Income Taxes, in this Form 10-K. 30
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Pensions and Other Postretirement Benefits. We have recorded liabilities for pension and other postretirement benefits of$684 million and$241 million , respectively, atDecember 31, 2019 . Our recorded liabilities and net periodic costs for pensions and other postretirement benefits are based on a number of assumptions, including: • life expectancies, • retirement rates, • discount rates,
• long term rates of return on plan assets,
• inflation rates,
• future compensation levels,
• future health care costs, and
• maximum company-covered benefit costs.
Certain of these assumptions are determined with the assistance of independent actuaries. Assumptions about life expectancies, retirement rates, future compensation levels and future health care costs are based on past experience and anticipated future trends. The discount rate for ourU.S. plans is based on a yield curve derived from a portfolio of corporate bonds from issuers rated AA or higher as ofDecember 31 and is reviewed annually. Our expected benefit payment cash flows are discounted based on spot rates developed from the yield curve. The mortality assumption for ourU.S. plans is based on actual historical experience, an assumed long term rate of future improvement based on published actuarial tables, and current government regulations related to lump sum payment factors. The long term rate of return onU.S. plan assets is based on estimates of future long term rates of return similar to the target allocation of substantially all fixed income securities. ActualU.S. pension fund asset allocations are reviewed on a monthly basis and the pension fund is rebalanced to target ranges on an as-needed basis. These assumptions are reviewed regularly and revised when appropriate. Changes in one or more of them may affect the amount of our recorded liabilities and net periodic costs for these benefits. Other assumptions involving demographic factors such as retirement age and turnover are evaluated periodically and are updated to reflect our experience and expectations for the future. If actual experience differs from expectations, our financial position, results of operations and liquidity in future periods may be affected. The weighted average discount rate used in estimating the total liability for ourU.S. pension and other postretirement benefit plans was 3.22% and 3.14%, respectively, atDecember 31, 2019 , compared to 4.24% and 4.16%, respectively, atDecember 31, 2018 . The decrease in the discount rate atDecember 31, 2019 was due primarily to lower yields on highly rated corporate bonds. Interest cost included in ourU.S. net periodic pension cost was$173 million in 2019, compared to$157 million in 2018 and$160 million in 2017. Interest cost included in our worldwide net periodic other postretirement benefits cost was$11 million in 2019, compared to$12 million in 2018 and$13 million in 2017. The following table presents the sensitivity of ourU.S. projected pension benefit obligation, accumulated other postretirement benefits obligation, and annual expense to the indicated increase/decrease in key assumptions: + / - Change at December 31, 2019 (Dollars in millions) Change PBO/ABO Annual Expense Pensions: Assumption: Discount rate +/- 0.5% $ 267 $ 4 Other Postretirement Benefits: Assumption: Discount rate +/- 0.5% $ 4 $ - Health care cost trends - total cost +/- 1.0% 1 - Changes in general interest rates and corporate (AA or better) credit spreads impact our discount rate and thereby ourU.S. pension benefit obligation. OurU.S. pension plans are invested in a portfolio of substantially all fixed income securities designed to offset the impact of future discount rate movements on liabilities for these plans. If corporate (AA or better) interest rates increase or decrease in parallel (i.e., across all maturities), the investment portfolio described above is designed to mitigate a substantial portion of the expected change in ourU.S. pension benefit obligation. For example, if corporate (AA or better) interest rates increased or decreased by 0.5%, the investment portfolio described above would be expected to mitigate more than 85% of the expected change in ourU.S. pension benefit obligation. AtDecember 31, 2019 , our net actuarial loss included in Accumulated Other Comprehensive Loss ("AOCL") related to global pension plans was$3,162 million ,$2,380 million of which related to ourU.S. pension plans. The net actuarial loss included in AOCL related to ourU.S. pension plans is a result of declines inU.S. discount rates and plan asset losses that occurred prior to 2015, plus the impact of prior increases in estimated life expectancies. For purposes of determining our 2019 U.S. pension total 31
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benefits cost, we recognized$112 million of the net actuarial losses in 2019. We will recognize approximately$110 million of net actuarial losses in 2020U.S. net periodic pension cost. If our future experience is consistent with our assumptions as ofDecember 31, 2019 , actuarial loss recognition over the next few years will remain at an amount near that to be recognized in 2020 before it begins to gradually decline. In addition, if annual lump sum payments from a pension plan exceed annual service and interest cost for that plan, accelerated recognition of net actuarial losses will be required through a settlement in total benefits cost. The actual rate of return on ourU.S. pension fund was 15.90%, (1.90%) and 8.70% in 2019, 2018 and 2017, respectively, as compared to the expected rate of 5.25%, 4.58% and 5.08% in 2019, 2018 and 2017, respectively. We use the fair value of our pension assets in the calculation of pension expense for all of ourU.S. pension plans. The weighted average amortization period for ourU.S. pension plans is approximately 17 years. Service cost of pension plans was recorded in CGS, as part of the cost of inventory sold during the period, or SAG in our Consolidated Statements of Operations, based on the specific roles (i.e., manufacturing vs. non-manufacturing) of employee groups covered by each of our pension plans.
In
2019, 2018 and 2017, approximately 45% and 55% of service cost was included in CGS and SAG, respectively. Non-service related net periodic pension costs were recorded in Other (Income) Expense. Globally, we expect our 2020 net periodic pension cost to be approximately$110 million to$130 million , including approximately$35 million of service cost, compared to$132 million in 2019, which included$29 million of service cost. The decrease in expected net periodic pension cost is primarily due to lower interest cost for ourU.S. pension plans from decreases in interest rates. We experienced a decrease in ourU.S. discount rate at the end of 2019 and a large portion of the$30 million net actuarial loss included in AOCL for our worldwide other postretirement benefit plans as ofDecember 31, 2019 is a result of the overall decline inU.S. discount rates over time. For purposes of determining 2019 worldwide net periodic other postretirement benefits cost, we recognized$3 million of net actuarial losses in 2019. We will recognize approximately$4 million of net actuarial losses in 2020. If our future experience is consistent with our assumptions as ofDecember 31, 2019 , actuarial loss recognition over the next few years will remain at an amount near that to be recognized in 2020 before it begins to gradually decline. For further information on pensions and other postretirement benefits, refer to Note to the Consolidated Financial Statements No. 17, Pension, Other Postretirement Benefits and Savings Plans, in this Form 10-K. 32
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LIQUIDITY AND CAPITAL RESOURCES OVERVIEW Our primary sources of liquidity are cash generated from our operating and financing activities. Our cash flows from operating activities are driven primarily by our operating results and changes in our working capital requirements and our cash flows from financing activities are dependent upon our ability to access credit or other capital. In the first quarter of 2019, we amended and restated our European revolving credit facility. Significant changes include extending the maturity toMarch 27, 2024 , increasing the available commitments from €550 million to €800 million, decreasing the interest rate margin by 25 basis points and decreasing the annual commitment fee by 5 basis points. For further information on the other strategic initiatives we pursued in 2019, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview." AtDecember 31, 2019 , we had$908 million of Cash and Cash Equivalents, compared to$801 million atDecember 31, 2018 . The increase in cash and cash equivalents of$107 million was primarily due to cash flows from operating activities of$1,207 million , driven by segment operating income of$945 million and cash from working capital of$82 million . These sources of cash were partially offset by cash used in investing activities of$800 million , primarily reflecting capital expenditures of$770 million , and cash used in financing activities of$307 million , primarily due to cash used for dividends of$148 million and net debt repayments of$119 million . AtDecember 31, 2019 and 2018, we had$3,578 million and$3,151 million , respectively, of unused availability under our various credit agreements. The table below provides unused availability by our significant credit facilities as ofDecember 31 : (In millions) 2019 2018
First lien revolving credit facility
290 199 Mexican credit facilities - 140
Other domestic and international debt 338 221 Notes payable and overdrafts
389 329$ 3,578 $ 3,151 We have deposited our cash and cash equivalents and entered into various credit agreements and derivative contracts with financial institutions that we considered to be substantial and creditworthy at the time of such transactions. We seek to control our exposure to these financial institutions by diversifying our deposits, credit agreements and derivative contracts across multiple financial institutions, by setting deposit and counterparty credit limits based on long term credit ratings and other indicators of credit risk such as credit default swap spreads, and by monitoring the financial strength of these financial institutions on a regular basis. We also enter into master netting agreements with counterparties when possible. By controlling and monitoring exposure to financial institutions in this manner, we believe that we effectively manage the risk of loss due to nonperformance by a financial institution. However, we cannot provide assurance that we will not experience losses or delays in accessing our deposits or lines of credit due to the nonperformance of a financial institution. Our inability to access our cash deposits or make draws on our lines of credit, or the inability of a counterparty to fulfill its contractual obligations to us, could have a material adverse effect on our liquidity, financial condition or results of operations in the period in which it occurs. We expect our 2020 cash flow needs to include capital expenditures of approximately$800 million . We also expect interest expense to range between$350 million and$375 million , restructuring payments to be$125 million to$150 million , dividends on our common stock to be approximately$150 million , and contributions to our funded non-U.S. pension plans to be$25 million to$50 million . We expect working capital to be a use of cash of$50 million to$100 million in 2020. We intend to operate the business in a way that allows us to address these needs with our existing cash and available credit if they cannot be funded by cash generated from operations. We believe that our liquidity position is adequate to fund our operating and investing needs and debt maturities in 2020 and to provide us with flexibility to respond to further changes in the business environment. Our ability to service debt and operational requirements is also dependent, in part, on the ability of our subsidiaries to make distributions of cash to various other entities in our consolidated group, whether in the form of dividends, loans or otherwise. In certain countries where we operate, such asChina andSouth Africa , transfers of funds into or out of such countries by way of dividends, loans, advances or payments to third-party or affiliated suppliers are generally or periodically subject to certain requirements, such as obtaining approval from the foreign government and/or currency exchange board before net assets can be transferred out of the country. In addition, certain of our credit agreements and other debt instruments limit the ability of foreign 33
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subsidiaries to make distributions of cash. Thus, we would have to repay and/or amend these credit agreements and other debt instruments in order to use this cash to service our consolidated debt. Because of the inherent uncertainty of satisfactorily meeting these requirements or limitations, we do not consider the net assets of our subsidiaries, including our Chinese and South African subsidiaries, which are subject to such requirements or limitations, to be integral to our liquidity or our ability to service our debt and operational requirements. AtDecember 31, 2019 , approximately$711 million of net assets, including$102 million of cash and cash equivalents, were subject to such requirements. The requirements we must comply with to transfer funds out ofChina andSouth Africa have not adversely impacted our ability to make transfers out of those countries. Cash Position AtDecember 31, 2019 , significant concentrations of cash and cash equivalents held by our international subsidiaries included the following amounts: •$337 million or 37% inAsia Pacific , primarilyChina ,India andJapan
(
•
•
million or 17% at
Operating Activities Net cash provided by operating activities was$1,207 million in 2019, increasing$291 million compared to net cash provided by operating activities of$916 million in 2018. The increase in net cash provided by operating activities was driven by an increase in cash provided by working capital of$202 million and lower cash payments for rationalizations of$115 million , reflecting cash payments made during 2018 related to the closure of our tire manufacturing facility in Philippsburg,Germany . Also, cash flows from operating activities were favorably impacted by an increase in Balance Sheet accruals for Compensation and Benefits of$210 million , primarily due to higher wages and benefits, including higher incentive compensation, and a lower decrease in Other Current Liabilities in 2019 as compared to 2018 providing a net benefit of$131 million , primarily due to changes in indirect taxes. These impacts were partially offset by a decrease in operating income from our SBUs of$329 million . Working capital was a source of cash of$82 million in 2019 as compared to a use of cash of$120 million in 2018, reflecting the Company's continued focus on reducing working capital, including actions taken with our vendors and customers related to accounts payable and accounts receivable and managing production levels, as well as the impact of moderating raw material prices during 2019. Investing Activities Net cash used by investing activities was$800 million in 2019, compared to$867 million in 2018. Capital expenditures were$770 million in 2019, compared to$811 million in 2018. Beyond expenditures required to sustain our facilities, capital expenditures in 2019 and 2018 primarily related to investments in additional 17-inch and above capacity around the world. Financing Activities Net cash used by financing activities was$307 million in 2019, compared to$243 million in 2018. Financing activities in 2019 included net debt repayments of$119 million . Financing activities in 2018 included net borrowings of$135 million . We paid dividends on our common stock of$148 million and$138 million in 2019 and 2018, respectively. We repurchased$220 million of our common stock in 2018 and did not repurchase any shares in 2019. Credit Sources In aggregate, we had total credit arrangements of$9,078 million available atDecember 31, 2019 , of which$3,578 million were unused, compared to$8,971 million available atDecember 31, 2018 , of which$3,151 million were unused. AtDecember 31, 2019 , we had long term credit arrangements totaling$8,320 million , of which$3,189 million were unused, compared to$8,212 million and$2,822 million , respectively, atDecember 31, 2018 . AtDecember 31, 2019 , we had short term committed and uncommitted credit arrangements totaling$758 million , of which$389 million were unused, compared to$759 million and$329 million , respectively, atDecember 31, 2018 . The continued availability of the short term uncommitted arrangements is at the discretion of the relevant lender and may be terminated at any time. Outstanding Notes AtDecember 31, 2019 , we had$3,311 million of outstanding notes, compared to$3,314 million atDecember 31, 2018 .$2.0 Billion Amended and Restated First Lien Revolving Credit Facility due 2021 Our amended and restated first lien revolving credit facility is available in the form of loans or letters of credit, with letter of credit availability limited to$800 million . Availability under the facility is subject to a borrowing base, which is based primarily on (i) 34
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eligible accounts receivable and inventory ofThe Goodyear Tire & Rubber Company and certain of itsU.S. and Canadian subsidiaries, (ii) the value of our principal trademarks, and (iii) certain cash in an amount not to exceed$200 million . To the extent that our eligible accounts receivable and inventory and other components of the borrowing base decline in value, our borrowing base will decrease and the availability under the facility may decrease below$2.0 billion . In addition, if the amount of outstanding borrowings and letters of credit under the facility exceeds the borrowing base, we are required to prepay borrowings and/or cash collateralize letters of credit sufficient to eliminate the excess. As ofDecember 31, 2019 , our borrowing base, and therefore our availability, under the facility was$301 million below the facility's stated amount of$2.0 billion . Based on our current liquidity, amounts drawn under this facility bear interest at LIBOR plus 125 basis points, and undrawn amounts under the facility will be subject to an annual commitment fee of 30 basis points. AtDecember 31, 2019 and 2018, we had no borrowings and$37 million of letters of credit issued under the revolving credit facility. During 2016, we began entering into bilateral letter of credit agreements. AtDecember 31, 2019 , we had$351 million in letters of credit issued under bilateral credit agreements. Amended and Restated Second Lien Term Loan Facility due 2025 Our amended and restated second lien term loan facility matures onMarch 7, 2025 . The term loan bears interest, at our option, at (i) 200 basis points over LIBOR or (ii) 100 basis points over an alternative base rate (the higher of (a) the prime rate, (b) the federal funds effective rate or the overnight bank funding rate plus 50 basis points or (c) LIBOR plus 100 basis points). In addition, if the Total Leverage Ratio is equal to or less than 1.25 to 1.00, we have the option to further reduce the spreads described above by 25 basis points. "Total Leverage Ratio" has the meaning given it in the facility. AtDecember 31, 2019 and 2018, the amounts outstanding under this facility were$400 million . €800 Million Amended and Restated Senior Secured European Revolving Credit Facility due 2024 OnMarch 27, 2019 , we amended and restated our European revolving credit facility. Significant changes to the European revolving credit facility include extending the maturity toMarch 27, 2024 , increasing the available commitments thereunder from €550 million to €800 million, decreasing the interest rate margin by 25 basis points and decreasing the annual commitment fee by 5 basis points to 25 basis points. Loans will now bear interest at LIBOR plus 150 basis points for loans denominated inU.S. dollars or pounds sterling and EURIBOR plus 150 basis points for loans denominated in euros. The European revolving credit facility consists of (i) a €180 million German tranche that is available only toGoodyear Dunlop Tires Germany GmbH ("GDTG") and (ii) a €620 million all-borrower tranche that is available toGoodyear Europe B.V. ("GEBV"),GDTG and Goodyear Dunlop Tires Operations S.A. Up to €175 million of swingline loans and €75 million in letters of credit are available for issuance under the all-borrower tranche. Subject to the consent of the lenders whose commitments are to be increased, we may request that the facility be increased by up to €200 million. AtDecember 31, 2019 and 2018, there were no borrowings and no letters of credit outstanding under the European revolving credit facility. Each of our first lien revolving credit facility and our European revolving credit facility have customary representations and warranties including, as a condition to borrowing, that all such representations and warranties are true and correct, in all material respects, on the date of the borrowing, including representations as to no material adverse change in our business or financial condition sinceDecember 31, 2015 under the first lien facility andDecember 31, 2018 under the European facility. Accounts Receivable Securitization Facilities (On-Balance Sheet) GEBV and certain other of our European subsidiaries are parties to a pan-European accounts receivable securitization facility that expires in 2023. The terms of the facility provide the flexibility to designate annually the maximum amount of funding available under the facility in an amount of not less than €30 million and not more than €450 million. For the period fromOctober 18, 2018 throughOctober 15, 2020 , the designated maximum amount of the facility is €320 million. The facility involves the ongoing daily sale of substantially all of the trade accounts receivable of certain GEBV subsidiaries. These subsidiaries retain servicing responsibilities. Utilization under this facility is based on eligible receivable balances. The funding commitments under the facility will expire upon the earliest to occur of: (a)September 26, 2023 , (b) the non-renewal and expiration (without substitution) of all of the back-up liquidity commitments, (c) the early termination of the facility according to its terms (generally upon an Early Amortisation Event (as defined in the facility), which includes, among other things, events similar to the events of default under our senior secured credit facilities; certain tax law changes; or certain changes to law, regulation or accounting standards), or (d) our request for early termination of the facility. The facility's current back-up liquidity commitments will expire onOctober 15, 2020 . 35
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AtDecember 31, 2019 , the amounts available and utilized under this program totaled$327 million (€291 million). AtDecember 31, 2018 , the amounts available and utilized under this program totaled$335 million (€293 million). The program does not qualify for sale accounting, and accordingly, these amounts are included in Long Term Debt and Finance Leases. Accounts Receivable Factoring Facilities (Off-Balance Sheet) We have sold certain of our trade receivables under off-balance sheet programs. For these programs, we have concluded that there is generally no risk of loss to us from non-payment of the sold receivables. AtDecember 31, 2019 and 2018, the amount of receivables sold was$548 million and$568 million , respectively. Supplier Financing We have entered into payment processing agreements with several financial institutions. Under these agreements, the financial institution acts as our paying agent with respect to accounts payable due to our suppliers. These agreements also allow our suppliers to sell their receivables to the financial institutions at the sole discretion of both the supplier and the financial institution on terms that are negotiated between them. We are not always notified when our suppliers sell receivables under these programs. Our obligations to our suppliers, including the amounts due and scheduled payment dates, are not impacted by our suppliers' decisions to sell their receivables under the program. Agreements for such supplier financing programs totaled up to$500 million atDecember 31, 2019 and 2018. Further Information After 2021, it is unclear whether banks will continue to provide LIBOR submissions to the administrator of LIBOR, and no consensus currently exists as to what benchmark rate or rates may become accepted alternatives to LIBOR. Inthe United States , efforts to identify a set of alternativeU.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee that has been convened by theFederal Reserve Board and theFederal Reserve Bank of New York . Additionally, theInternational Swaps and Derivatives Association, Inc. launched a consultation on technical issues related to new benchmark fallbacks for derivative contracts that reference certain interbank offered rates, including LIBOR. We cannot currently predict the effect of the discontinuation of, or other changes to, LIBOR or any establishment of alternative reference rates inthe United States , theEuropean Union or elsewhere on the global capital markets. The uncertainty regarding the future of LIBOR, as well as the transition from LIBOR to any alternative reference rate or rates, could have adverse impacts on floating rate obligations, loans, deposits, derivatives and other financial instruments that currently use LIBOR as a benchmark rate. We are in the process of evaluating our financing obligations and other contracts that refer to LIBOR. Our second lien term loan facility and our European revolving credit facility, which constitute the most significant of our LIBOR-based debt obligations that mature after 2021, contain "fallback" provisions that address the potential discontinuation of LIBOR and facilitate the adoption of an alternate rate of interest. Our first lien revolving credit facility matures in 2021 and we have not issued any long term floating rate notes. Our first lien revolving credit facility and second lien term loan facility also contain express provisions for the use, at our option, of an alternative base rate (the higher of (a) the prime rate, (b) the federal funds effective rate or the overnight bank funding rate plus 50 basis points or (c) LIBOR plus 100 basis points). We do not believe that the discontinuation of LIBOR, or its replacement with an alternative reference rate or rates, will have a material impact on our results of operations, financial position or liquidity. For a further description of the terms of our outstanding notes, first lien revolving credit facility, second lien term loan facility, European revolving credit facility and pan-European accounts receivable securitization facility, refer to Note to the Consolidated Financial Statements No. 15, Financing Arrangements and Derivative Financial Instruments, in this Form 10-K. Covenant Compliance Our first and second lien credit facilities and some of the indentures governing our notes contain certain covenants that, among other things, limit our ability to incur additional debt or issue redeemable preferred stock, pay dividends, repurchase shares or make certain other restricted payments or investments, incur liens, sell assets, incur restrictions on the ability of our subsidiaries to pay dividends or to make other payments to us, enter into affiliate transactions, engage in sale and leaseback transactions, and consolidate, merge, sell or otherwise dispose of all or substantially all of our assets. These covenants are subject to significant exceptions and qualifications. Our first and second lien credit facilities and the indentures governing our notes also have customary defaults, including cross-defaults to material indebtedness ofGoodyear and its subsidiaries. We have additional financial covenants in our first and second lien credit facilities that are currently not applicable. We only become subject to these financial covenants when certain events occur. These financial covenants and related events are as follows: • We become subject to the financial covenant contained in our first lien
revolving credit facility when the aggregate amount of our Parent Company
(The Goodyear Tire & Rubber Company ) and guarantor subsidiaries cash and cash equivalents ("Available Cash") plus our availability under our first
lien revolving credit facility is less than
occur, our ratio of EBITDA to Consolidated Interest Expense may not be
less than 2.0 to 1.0 for the most recent period of four consecutive fiscal
quarters. As of
million, which is in excess of$200 million . 36
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• We become subject to a covenant contained in our second lien credit
facility upon certain asset sales. The covenant provides that, before we
use cash proceeds from certain asset sales to repay any junior lien,
senior unsecured or subordinated indebtedness, we must first offer to use
such cash proceeds to prepay borrowings under the second lien credit facility unless our ratio of Consolidated Net Secured Indebtedness to EBITDA (Pro Forma Senior Secured Leverage Ratio) for any period of four consecutive fiscal quarters is equal to or less than 3.0 to 1.0. In addition, our European revolving credit facility contains non-financial covenants similar to the non-financial covenants in our first and second lien credit facilities that are described above and a financial covenant applicable only to GEBV and its subsidiaries. This financial covenant provides that we are not permitted to allow GEBV's ratio of Consolidated Net GEBV Indebtedness to Consolidated GEBV EBITDA for a period of four consecutive fiscal quarters to be greater than 3.0 to 1.0 at the end of any fiscal quarter. Consolidated Net GEBV Indebtedness is determined net of the sum of cash and cash equivalents in excess of$100 million held by GEBV and its subsidiaries, cash and cash equivalents in excess of$150 million held by the Parent Company and itsU.S. subsidiaries, and availability under our first lien revolving credit facility if the ratio of EBITDA to Consolidated Interest Expense described above is not applicable and the conditions to borrowing under the first lien revolving credit facility are met. Consolidated Net GEBV Indebtedness also excludes loans from other consolidatedGoodyear entities. This financial covenant is also included in our pan-European accounts receivable securitization facility. AtDecember 31, 2019 , we were in compliance with this financial covenant. Our credit facilities also state that we may only incur additional debt or make restricted payments that are not otherwise expressly permitted if, after giving effect to the debt incurrence or the restricted payment, our ratio of EBITDA to Consolidated Interest Expense for the prior four fiscal quarters would exceed 2.0 to 1.0. Certain of our senior note indentures have substantially similar limitations on incurring debt and making restricted payments. Our credit facilities and indentures also permit the incurrence of additional debt through other provisions in those agreements without regard to our ability to satisfy the ratio-based incurrence test described above. We believe that these other provisions provide us with sufficient flexibility to incur additional debt necessary to meet our operating, investing and financing needs without regard to our ability to satisfy the ratio-based incurrence test. Covenants could change based upon a refinancing or amendment of an existing facility, or additional covenants may be added in connection with the incurrence of new debt. As ofDecember 31, 2019 , we were in compliance with the currently applicable material covenants imposed by our principal credit facilities and indentures. The terms "Available Cash," "EBITDA," "Consolidated Interest Expense," "Consolidated Net Secured Indebtedness," "Pro Forma Senior Secured LeverageRatio ," "Consolidated Net GEBV Indebtedness" and "Consolidated GEBV EBITDA" have the meanings given them in the respective credit facilities. Potential Future Financings In addition to our previous financing activities, we may seek to undertake additional financing actions which could include restructuring bank debt or capital markets transactions, possibly including the issuance of additional debt or equity. Given the inherent uncertainty of market conditions, access to the capital markets cannot be assured. Our future liquidity requirements may make it necessary for us to incur additional debt. However, a substantial portion of our assets are already subject to liens securing our indebtedness. As a result, we are limited in our ability to pledge our remaining assets as security for additional secured indebtedness. In addition, no assurance can be given as to our ability to raise additional unsecured debt. Dividends and Common Stock Repurchase Program Under our primary credit facilities and some of our note indentures, we are permitted to pay dividends on and repurchase our capital stock (which constitute restricted payments) as long as no default will have occurred and be continuing, additional indebtedness can be incurred under the credit facilities or indentures following the payment, and certain financial tests are satisfied. During 2019, 2018 and 2017 we paid cash dividends of$148 million ,$138 million and$110 million , respectively, on our common stock. OnJanuary 14, 2020 , the Company's Board of Directors (or a duly authorized committee thereof) declared cash dividends of$0.16 per share of our common stock, or approximately$37 million in the aggregate. The cash dividend will be paid onMarch 2, 2020 to stockholders of record as of the close of business onFebruary 3, 2020 . Future quarterly dividends are subject to Board approval. OnSeptember 18, 2013 , the Board of Directors approved our common stock repurchase program and, from time to time, approved increases in the amount authorized to be purchased under that program. The program expired onDecember 31, 2019 . During 2019, we did not repurchase any shares under this program. Since 2013, we repurchased 52,905,959 shares at an average price, including commissions, of$28.99 per share, or$1,534 million in the aggregate. 37
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The restrictions imposed by our credit facilities and indentures did not affect our ability to pay the dividends on or repurchase our capital stock as described above, and are not expected to affect our ability to pay similar dividends or make similar repurchases in the future. Asset Dispositions The restrictions on asset sales imposed by our material indebtedness have not affected our ability to divest non-core businesses, and those divestitures have not affected our ability to comply with those restrictions. 38
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COMMITMENTS AND CONTINGENT LIABILITIES Contractual Obligations The following table presents our contractual obligations and commitments to make future payments as ofDecember 31, 2019 : (In millions) Total 2020 2021 2022 2023 2024 Beyond 2024 Debt Obligations(1)$ 5,444 $ 907 $ 250 $ 391 $ 1,648 $ 85 $ 2,163 Finance Lease Obligations(2) 249 4 15 2 1 2 225 Interest Payments(3) 1,670 270 218 205 190 129 658
Operating Lease Obligations(4) 1,124 242 192 141 109 81
359 Pension Benefits(5) 310 62 62 62 62 62 NA Other Postretirement Benefits(6) 153 17 17 16 16 15 72 Workers' Compensation(7) 261 39 23 18 14 11 156 Binding Commitments(8) 2,405 1,310 390 181 152 130 242 Uncertain Income Tax Positions(9) 8 2 4 - - - 2$ 11,624 $ 2,853 $ 1,171 $ 1,016 $ 2,192 $ 515 $ 3,877 (1) Debt obligations include Notes Payable and Overdrafts, and excludes the impact of deferred financing fees and unamortized discounts.
(2) The minimum lease payments for finance lease obligations are
(3) These amounts represent future interest payments related to our existing
debt obligations and finance leases based on fixed and variable interest
rates specified in the associated debt and lease agreements. The amounts
provided relate only to existing debt obligations and do not assume the
refinancing or replacement of such debt or future changes in variable
interest rates.
(4) Operating lease obligations have not been reduced by minimum sublease
rentals of
including sublease rentals, is
to, among other things, real estate, vehicles, data processing equipment
and miscellaneous other assets. No asset is leased from any related party.
(5) The obligation related to pension benefits is actuarially determined and
is reflective of obligations as of
change, the amounts set forth in the table represent the mid-point of the
range of our expected contributions for funded
plans, plus expected cash funding of direct participant payments to ourU.S. and non-U.S. pension plans. We made significant contributions to fully fund ourU.S. pension plans in 2013 and 2014. We have no minimum funding requirements for our fundedU.S. pension plans under current ERISA law or the provisions of our USW collective bargaining agreement, which requires us to maintain an annual ERISA funded status for the hourlyU.S. pension plan of at least 97%. FutureU.S. pension contributions will be affected by our ability to offset changes in future interest rates with asset returns from our fixed income portfolio and any changes to ERISA law. For further information on theU.S. pension investment strategy, refer to Note to the Consolidated Financial Statements No. 17, Pension, Other Postretirement Benefits and Savings Plans, in this Form 10-K. Future non-U.S. contributions are affected by factors such as: • future interest rate levels,
• the amount and timing of asset returns, and
• how contributions in excess of the minimum requirements could impact the amount and timing of future contributions.
(6) The payments presented above are expected payments for the next 10 years.
The payments for other postretirement benefits reflect the estimated
benefit payments of the plans using the provisions currently in effect.
Under the relevant summary plan descriptions or plan documents we have the
right to modify or terminate the plans. The obligation related to other
postretirement benefits is actuarially determined on an annual basis.
(7) The payments for workers' compensation obligations are based upon recent
historical payment patterns on claims. The present value of anticipated
claims payments for workers' compensation is$198 million . 39
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(8) Binding commitments are for raw materials, capital expenditures,
utilities, and various other types of contracts. The obligations to
purchase raw materials include supply contracts at both fixed and variable
prices. Those with variable prices are based on index rates for those commodities atDecember 31, 2019 . (9) These amounts primarily represent expected payments with interest for
uncertain income tax positions as of
them in the period in which we believe they will be ultimately settled
based upon our experience with these matters.
Additional other long term liabilities include items such as general and product liabilities, environmental liabilities and miscellaneous other long term liabilities. These other liabilities are not contractual obligations by nature. We cannot, with any degree of reliability, determine the years in which these liabilities might ultimately be settled. Accordingly, these other long term liabilities are not included in the above table. In addition, pursuant to certain long term agreements, we will purchase varying amounts of certain raw materials and finished goods at agreed upon base prices that may be subject to periodic adjustments for changes in raw material costs and market price adjustments, or in quantities that may be subject to periodic adjustments for changes in our or our suppliers' production levels. These contingent contractual obligations, the amounts of which cannot be estimated, are not included in the table above. We do not engage in the trading of commodity contracts or any related derivative contracts. We generally purchase raw materials and energy through short term, intermediate and long term supply contracts at fixed prices or at formula prices related to market prices or negotiated prices. We may, however, from time to time, enter into contracts to hedge our energy costs. AtDecember 31, 2019 , we had an agreement to provide a revolving loan commitment toTireHub of$50 million . No amounts were drawn on that commitment as ofDecember 31, 2019 . Off-Balance Sheet Arrangements An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has: • made guarantees,
• retained or held a contingent interest in transferred assets,
• undertaken an obligation under certain derivative instruments, or
• undertaken any obligation arising out of a material variable interest in
an unconsolidated entity that provides financing, liquidity, market risk
or credit risk support to the company, or that engages in leasing, hedging
or research and development arrangements with the company.
We have entered into certain arrangements under which we have provided guarantees that are off-balance sheet arrangements. Those guarantees totaled approximately$74 million atDecember 31, 2019 . For further information about our guarantees, refer to Note to the Consolidated Financial Statements No. 19, Commitments and Contingent Liabilities, in this Form 10-K. 40
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FORWARD-LOOKING INFORMATION - SAFE HARBOR STATEMENT Certain information in this Annual Report on Form 10-K (other than historical data and information) may constitute forward-looking statements regarding events and trends that may affect our future operating results and financial position. The words "estimate," "expect," "intend" and "project," as well as other words or expressions of similar meaning, are intended to identify forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Such statements are based on current expectations and assumptions, are inherently uncertain, are subject to risks and should be viewed with caution. Actual results and experience may differ materially from the forward-looking statements as a result of many factors, including: • if we do not successfully implement our strategic initiatives, our
operating results, financial condition and liquidity may be materially
adversely affected;
• we face significant global competition and our market share could decline;
• deteriorating economic conditions in any of our major markets, or an inability to access capital markets or third-party financing when necessary, may materially adversely affect our operating results, financial condition and liquidity; • raw material and energy costs may materially adversely affect our operating results and financial condition;
• if we experience a labor strike, work stoppage or other similar event our
business, results of operations, financial condition and liquidity could
be materially adversely affected;
• our international operations have certain risks that may materially
adversely affect our operating results, financial condition and liquidity;
• we have foreign currency translation and transaction risks that may
materially adversely affect our operating results, financial condition and
liquidity; • our long term ability to meet our obligations, to repay maturing
indebtedness or to implement strategic initiatives may be dependent on our
ability to access capital markets in the future and to improve our operating results;
• financial difficulties, work stoppages, supply disruptions or economic
conditions affecting our major OE customers, dealers or suppliers could harm our business;
• our capital expenditures may not be adequate to maintain our competitive
position and may not be implemented in a timely or cost-effective manner; • we have a substantial amount of debt, which could restrict our growth,
place us at a competitive disadvantage or otherwise materially adversely
affect our financial health;
• any failure to be in compliance with any material provision or covenant of
our debt instruments, or a material reduction in the borrowing base under
our revolving credit facility, could have a material adverse effect on our
liquidity and operations;
• our variable rate indebtedness subjects us to interest rate risk, which
could cause our debt service obligations to increase significantly;
• we have substantial fixed costs and, as a result, our operating income
fluctuates disproportionately with changes in our net sales; • we may incur significant costs in connection with our contingent liabilities and tax matters;
• our reserves for contingent liabilities and our recorded insurance assets
are subject to various uncertainties, the outcome of which may result in
our actual costs being significantly higher than the amounts recorded;
• we are subject to extensive government regulations that may materially
adversely affect our operating results; • we may be adversely affected by any disruption in, or failure of, our information technology systems due to computer viruses, unauthorized
access, cyber-attack, natural disasters or other similar disruptions;
•if we are unable to attract and retain key personnel, our business could be materially adversely affected; and • we may be impacted by economic and supply disruptions associated with
events beyond our control, such as war, acts of terror, political unrest,
public health concerns, labor disputes or natural disasters.
It is not possible to foresee or identify all such factors. We will not revise or update any forward-looking statement or disclose any facts, events or circumstances that occur after the date hereof that may affect the accuracy of any forward-looking statement. 41
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