COOPER TIRE & RUBBER COMPANY Business of the Company
The Company specializes in the design, manufacture, marketing and sales of passenger car, light truck, TBR, motorcycle and racing tires. The Company's products are sold globally, primarily in the replacement tire market to independent tire dealers, wholesale distributors, regional and national retail tire chains, large retail chains that sell tires as well as other automotive products, mass merchandisers and digital channels. The Company faces both general industry and Company-specific challenges. These include volatile raw material costs, increasing product complexity and pressure from competitors who, in some cases, are larger companies with greater financial resources. To address these challenges and position the Company for future success, the Company continues to execute towards strategic imperatives, namely building a sustainable cost competitive position, driving top-line profitable growth and building organizational capabilities and enablers to support strategic goals. The Company has operations in what are considered lower-cost countries. This includes theCooper Kunshan Tire manufacturing operation, as well as a joint venture TBR manufacturing operation, in the PRC, the COOCSA manufacturing facility inMexico and a manufacturing facility inSerbia . OnJanuary 24, 2020 , the Company acquired the remaining 42 percent noncontrolling ownership interest in its Mexican joint venture manufacturing operations, making it a wholly-owned subsidiary. Products from these operations provide a lower-cost source of tires for global markets. Through a variety of other projects, the Company also has improved the competitiveness of its manufacturing operations inthe United States . OnApril 5, 2019 , Cooper Vietnam and Sailun Vietnam established a joint venture inVietnam , ACTR, which began commercially producing TBR tires in 2020. OnJanuary 17, 2019 , Cooper Tire Europe committed to a plan to cease substantially all light vehicle tire production at its Melksham,U.K facility. The phasing out of light vehicle tire production was substantially completed in the third quarter of 2019. Approximately 300 roles were eliminated at the site. Cooper Tire Europe now obtains light vehicle tires to meet customer needs from other production sites within the Company's global production network. Approximately 400 roles remain in Melksham to support the functions that continue there, including motorsports and motorcycle tire production, the materials business, Cooper Tire Europe headquarters, sales and marketing, and theEurope Technical Center .
The following discussion of financial condition and results of operations should be read together with "Selected Financial Data," the Company's consolidated financial statements and the notes to those statements and other financial information included elsewhere in this report.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") presents information related to the consolidated results of
the operations of the Company, a discussion of past results of the Company's
segments, future outlook for the Company and information concerning the
liquidity, capital resources and critical accounting policies of the Company.
The Company's future results may differ materially from those indicated in the
forward-looking statements, including for the reasons noted in the Risk Factors
in Item 1A.
The MD&A generally discusses 2020 and 2019 items and year-to-year comparisons
between 2020 and 2019. Discussion of 2018 items and the results of December 31,
2019 as compared to December 31, 2018 can be found in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in the Company's annual report on Form 10-K for the year ended December
31, 2019 as filed with the SEC .
The Merger
OnFebruary 22, 2021 , the Company entered into the Merger Agreement, pursuant to which, subject to the satisfaction or (to the extent permissible) waiver of the conditions set forth therein, Goodyear will acquire the Company by way of the merger of Merger Sub with and into the Company, with the Company surviving such Merger as a wholly owned subsidiary of Goodyear. Under the terms of the Merger Agreement, at the effective time of the Merger, the Company's stockholders will be entitled to receive$41.75 per share in cash and a fixed exchange ratio of 0.907 shares of Goodyear common stock per share of the Company's common stock they own at the effective time. Upon completion of the proposed Merger, it is expected that the Company's stockholders will own approximately 16 percent and Goodyear stockholders will own approximately 84 percent of the combined company on a fully diluted basis. -27- -------------------------------------------------------------------------------- The completion of the Merger is subject to the receipt of antitrust clearance inthe United States . Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act"), and the rules promulgated thereunder, the Merger may not be completed until the Company and Goodyear have each filed notification and report forms with theUnited States Federal Trade Commission ("FTC"), and theAntitrust Division of theUnited States Department of Justice ("DOJ"), and the applicable waiting period (or any extension thereof) has expired or been terminated. The completion of the Merger is also subject to a number of foreign regulatory filings that will need to be completed.
The Company expects to complete the Merger in the second half of 2021, subject to the satisfaction of customary closing conditions, including receipt of required regulatory approvals and the approval of the Company's stockholders.
Consolidated Statements of Income
(Dollar amounts in thousands except per
share amounts)
Twelve Months Ended December 31,
2020 Change 2019 Change 2018
Net Sales
Americas Tire $ 2,170,889 $ (182,837) $ 2,353,726 $ (8,920) $ 2,362,646
International Tire 481,655 (52,348) 534,003 (106,973) 640,976
Eliminations (131,470) 3,620 (135,090) 60,470 (195,560)
Net sales 2,521,074 (231,565) 2,752,639 (55,423) 2,808,062
Operating profit (loss):
Americas Tire 280,349 42,596 237,753 8,253 229,500
International Tire 3,167 16,557 (13,390) 654 (14,044)
Unallocated corporate charges (54,690) (4,722) (49,968) 1,596 (51,564)
Eliminations 2,055 1,995 60 (1,293) 1,353
Operating profit 230,881 56,426 174,455 9,210 165,245
Interest expense (22,707) 8,482 (31,189) 992 (32,181)
Interest income 3,569 (5,889) 9,458 (758) 10,216
Other pension and postretirement
benefit expense (25,419) 16,148 (41,567) (13,761) (27,806)
Other non-operating income (expense) 4,579 6,064 (1,485) (69) (1,416) Income before income taxes 190,903 81,231 109,672 (4,386) 114,058 Income tax provision 46,999 35,644 11,355 (22,140) 33,495 Net income 143,904 45,587 98,317 17,754 80,563 Net income attributable to noncontrolling shareholders' interests 1,115 (798) 1,913 (2,064) 3,977 Net income attributable to Cooper Tire & Rubber Company$ 142,789 $ 46,385 $ 96,404 $ 19,818 $ 76,586 0 Basic earnings per share$ 2.84 $ 0.92 $ 1.92 $ 0.40 $ 1.52 Diluted earnings per share$ 2.83 $ 0.92 $ 1.91 $ 0.40 $ 1.51 COVID-19 Update With the global outbreak of COVID-19 and the declaration of a pandemic by theWorld Health Organization onMarch 11, 2020 , the Company temporarily shut down itsChina ,U.S. ,Europe , andMexico manufacturing plants for various periods of time through the first half of 2020. By the end of the second quarter, each of the Company's facilities were reopened. The Company's priorities during the COVID-19 pandemic have been protecting the health and safety of its employees, responsibilities to its broader communities, and commitments to its customers and other key stakeholders. The Company has taken a variety of measures to protect the health and safety of employees, including prohibiting non-essential travel for all employees, modifying workspaces with acrylic dividers and touchless faucets, providing additional personal protective equipment and cleaning supplies, increasing cleaning protocols across all locations, transitioning to remote working arrangements for certain -28- -------------------------------------------------------------------------------- employees, emphasizing the importance of staying home when employees feel sick, implementing protocols to address actual and suspected COVID-19 cases and potential exposure, and enacting policies on face mask usage and appropriate social distancing at the Company's locations The fundamentals of the Company remain strong, and the Company believes it has sufficient liquidity on hand to continue business operations during this volatile period. As disclosed in the Liquidity and Capital Resources section, the Company has total available liquidity of$1,234 million as ofDecember 31, 2020 , consisting of cash on hand and credit facilities. As a reaction to COVID-19, the Company took actions to preserve liquidity, including capital expenditure reductions, actions to improve working capital, reductions in discretionary spending and additional temporary cost actions. Based upon the Company's results and the effectiveness of these actions, such actions were gradually reversed throughout the second half of 2020. COVID-19 negatively impacted the Company's business in 2020 and also presented potential new risks to it. The Company began to see the impacts of COVID-19 on its Asian operations early in the first quarter, and in customer demand in late March in theAmericas andEurope , which continued into the second quarter of 2020. The situation surrounding COVID-19 remains fluid and the potential for a continued material impact on the Company increases the longer the virus impacts the level of economic activity inthe United States and globally. In the future, the COVID-19 pandemic may cause additional reduced demand for the Company's products, including if it results in a recessionary global economic environment. It could also lead to volatility in consumer demand for or access to Company products, including due to government actions impacting the ability to produce and ship products or impacting consumers' movements and access to the Company's products. The Company believes that over the long term, there will continue to be strong demand for the Company's products. However, the timing and extent of demand recovery in specific markets, the resumption of travel, and product demand trends caused by future economic trends are unclear. Accordingly, there may be heightened volatility in net sales and earnings during and subsequent to the duration of the COVID-19 pandemic. The Company's customers are also being impacted by the pandemic. The success of customers in addressing the issues and maintaining their operations, including their ability to remit timely payment, could impact consumer access to, and as a result, sales of the Company's products. In addition, the COVID-19 pandemic and the Company's and government responses to it have disrupted the Company's operations, and increased its costs, and may continue to do so. The Company's ability to continue to operate and to mitigate the negative impacts of the pandemic will in part depend on the ability to protect its employees and supply chain. The Company has endeavored to follow recommended actions of government and health authorities to protect employees world-wide, with particular measures in place for those working in the Company's plants and distribution facilities. The Company intends to continue to work with government authorities and implement employee safety measures to ensure that it is able to continue manufacturing and distributing products during the COVID-19 pandemic. However, uncertainty resulting from the pandemic could result in an unforeseen disruption that could impact the results of operations. For additional information on risk factors that could impact the Company's results, refer to "Risk Factors" in Part I, Item 1A of this Form 10-K. 2020 versus 2019 Consolidated net sales for the year endedDecember 31, 2020 were$2,521 million compared with$2,753 million in 2019, a decrease of$232 million . In 2020, the Company experienced lower unit volume ($355 million ) primarily as a result of the market slowdown caused by the COVID-19 pandemic during the first half of 2020, as well as unfavorable foreign currency impact ($6 million ). These unfavorable items were partially offset by favorable price and mix ($129 million ). The Company recorded an operating profit of$231 million in 2020, compared to operating profit of$174 million in 2019. The Company's 2020 operating profit benefited from$78 million of favorable price and mix,$67 million of lower raw material costs and$44 million of lower net product liability expense compared to 2019. This was partially offset by$61 million of increased manufacturing costs, primarily related to production days lost due to plant shut downs, and$73 million of lower unit volume, both attributable to the COVID-19 pandemic. Additionally, the Company experienced$5 million of lower selling, general and administrative expenses, while restructuring costs increased by$4 million . The principal raw materials for the Company include natural rubber, synthetic rubber, carbon black, chemicals and steel reinforcement components. Approximately 70 percent of the Company's raw materials are petroleum-based. Substantially allU.S. inventories have been valued using the LIFO method of inventory costing, which accelerates the impact to cost of goods sold from changes to raw material prices. The Company strives to assure raw material and energy supply and to obtain the most favorable pricing possible. For natural rubber, natural gas and certain principal materials, procurement is managed through a combination of buying forward of production requirements and utilizing the spot market. For other principal materials, procurement arrangements include supply agreements that may contain formula-based pricing based on commodity indices, multi-year agreements or spot purchase contracts. While the Company uses these arrangements to satisfy normal manufacturing demands, the pricing volatility in these commodities contributes to the difficulty in managing the costs of raw materials. -29- -------------------------------------------------------------------------------- As part of its regular review of product liability, the Company monitors trends that may affect its ultimate liability and analyzes developments and variables likely to affect pending and anticipated claims against the Company and the reserves for such claims. The Company utilizes claims experience, as well as trends and developments in the litigation climate, in estimating its required accrual. Based on the Company's review completed in 2020, the Company recorded a benefit of$49 million . This benefit reflects a reduction in the Company's estimate of the volume of anticipated product liability claims, as well as adjustments to existing reserves based upon settled claims history. In 2019, a similar review was performed, and the Company recognized a benefit of$4 million . Aside from the regular review, product liability expense related to normal claim activity increased$1 million in 2020 compared to 2019, while insurance premium costs increased$1 million in 2020 compared to 2019. Legal costs related to product liability claims decreased$1 million in 2020 compared to 2019. Additional information related to the Company's accounting for product liability costs appears in the Notes to the Consolidated Financial Statements. Selling, general, and administrative expenses were$245 million in 2020 (9.7 percent of net sales) and$250 million in 2019 (9.1 percent of net sales). This decrease in selling, general and administrative expenses was driven primarily by reduced advertising and promotional spending and lower administrative costs as a result of actions implemented in response to COVID-19, partially offset by an increase in mark to market costs of stock-based liabilities and higher incentive compensation costs. During 2020, the Company recorded$11 million of restructuring expense in the Americas Tire Operations segment related to the Company's acquisition of the remaining noncontrolling ownership interest in COOCSA, and$1 million related to aU.S. reduction in force. In 2019, the Company recorded restructuring expense associated with the cessation of substantially all light vehicle tire production at the Melksham facility of$9 million . Additional information related to the Company's accounting for restructuring costs appears in the Notes to the Consolidated Financial Statements. Interest expense was$23 million in 2020 as compared to$31 million in 2019. The decreased expense is the result of a lower interest rate on the Company's Term Loan A outstanding in 2020, which replaced higher interest rate unsecured notes inDecember 2019 . Additional borrowings on the Company's revolving Credit Facility and accounts receivable securitization for a portion of 2020 partially offset this decrease. Interest income of$4 million in 2020 was a decrease from$9 million during 2019. The decrease is due to interest rate declines in 2020 compared to 2019, which offset the impact of the Company's higher cash balance in 2020. For the year ended 2020, other pension and postretirement benefit expense was$25 million as compared to$42 million in 2019. This decrease is primarily the result of the Company's improved funded status atDecember 31, 2019 , as a result of favorable returns on plan assets in 2019, which improved the Company's funding position and lowered the actuarially determined expense for 2020 as compared to 2019. The Company incurred non-cash settlement charges of$4 million in both 2020 and 2019 as a result of the volume of the lump-sum distributions out ofCooper Tire Europe's U.K. pension plan in 2020 and 2019, respectively. Other non-operating income improved$6 million in 2020 as compared to 2019. This improvement was primarily due to equity earnings from the Company's investment in ACTR, which began commercially producing tires in 2020. For the year endedDecember 31, 2020 , the Company recorded income tax expense of$47 million (effective tax rate of 24.6 percent) compared to$11 million (effective tax rate of 10.4 percent) for 2019. The 2020 effective tax rate is driven primarily by the mix of earnings in international jurisdictions with differing tax rates and earnings in theU.S. . The 2019 effective tax rate included the benefit of$19 million from planning actions involving the Company's European tax structure which were executed in the fourth quarter of 2019. The effects of inflation did not have a material effect on the results of operations of the Company in 2020. Segment Operating Results The Company has four segments under ASC 280: •North America, composed of the Company's operations in theU.S. andCanada ; •Latin America, composed of the Company's operations inMexico ,Central America andSouth America ; •Europe; and •Asia.North America andLatin America meet the criteria for aggregation in accordance with ASC 280, as they are similar in their production and distribution processes and exhibit similar economic characteristics. The aggregatedNorth America andLatin America segments are presented as "Americas Tire Operations" in the segment disclosure. Both theEurope andAsia segments have been determined to be individually immaterial, as they do not meet the quantitative requirements for segment disclosure under ASC 280. In accordance with ASC 280, information about operating segments that are not reportable shall be combined and disclosed in an all other category separate from other reconciling items. As a result, these -30- -------------------------------------------------------------------------------- two segments have been combined in the segment operating results discussion. The results of the combinedEurope andAsia segments are presented as "International Tire Operations" in the segment disclosure. Americas Tire Operations Segment (Dollar amounts in thousands) Twelve Months Ended December 31, 2020 Change 2019 Change 2018 Sales$ 2,170,889 (7.8)%$ 2,353,726 (0.4)%$ 2,362,646 Operating profit$ 280,349 17.9%$ 237,753 3.6%$ 229,500 Operating margin 12.9 % 2.8 points 10.1 % 0.4 points 9.7% Total unit sales change (14.0)% (3.8)%United States replacement market unit shipment changes: Passenger tires Segment (11.2)% (2.7)% USTMA members (13.8)% 0.1% Total Industry (8.3)% 2.2% Light truck tires Segment (3.1)% (3.2)% USTMA members (3.6)% 1.4% Total Industry 0.8% 2.7% Total light vehicle tires Segment (9.4)% (2.8)% USTMA members (12.4)% 0.3% Total Industry (7.1)% 2.3% The source of this information is theUnited States Tire Manufactures Association ("USTMA") and internal sources. Overview The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in theU.S. replacement market. The segment also has a manufacturing operation inMexico , COOCSA, which supplies passenger car and light truck tires to the Mexican, North American, Central American and South American markets. OnJanuary 24, 2020 , the Company acquired the remaining noncontrolling ownership interest in COOCSA, making COOCSA a wholly-owned subsidiary. The segment also markets and distributes racing, TBR and motorcycle tires. The racing and motorcycle tires are manufactured by the Company's European segment and by others. TBR tires are sourced from GRT and ACTR and through off-take agreements with PCT and Sailun Vietnam throughDecember 31, 2020 . Major distribution channels and customers include independent tire dealers, wholesale distributors, regional and national retail tire chains, large retail chains that sell tires as well as other automotive products, mass merchandisers and digital channels. The segment does not currently sell its products directly to end users, except through three Company-owned retail stores. The segment sells a limited number of tires to OEMs. Sales Net sales of the Americas Tire Operations segment decreased from$2,354 million in 2019 to$2,171 million in 2020. In 2020, the segment experienced lower unit volume of$326 million and unfavorable foreign currency impact of$8 million , partially offset by favorable pricing and mix of$151 million . Unit shipments for the segment decreased 14.0 percent in 2020 compared with 2019. In theU.S. , the segment's unit shipments of total light vehicle tires decreased 9.4 percent in 2020 compared with the same period in 2019. This decrease compares with a 12.4 percent decrease in total light vehicle tire shipments experienced by USTMA members, and a 7.1 percent decrease in total light vehicle tire shipments experienced for the total industry. Americas Tire Operations volume, as well as that of the USTMA and total industry, has been negatively impacted by reduced demand as a result of the COVID-19 pandemic, especially in the first half of 2020. Operating Profit Operating profit for the segment increased from$238 million in 2019 to$280 million in 2020. Operating profit in 2020 included$82 million of favorable price and mix and$48 million of lower raw material costs. 2020 also included$44 million of lower net product liability expense compared to 2019. These were partially offset by$55 million of unfavorable manufacturing costs, -31- -------------------------------------------------------------------------------- primarily related to production days lost due to plant shut downs in the second quarter, and$69 million of lower unit volume, both due to the COVID-19 pandemic. Operating profit in 2020 also included$11 million of higher restructuring costs related to the Company's acquisition of the remaining noncontrolling ownership interest in COOCSA. The segment benefited from$2 million of lower selling, general and administrative expenses and 1 million of lower other costs compared to 2019. The segment utilizes an internal raw material index which is calculated based upon the underlying costs of the segment's key raw materials for the period and is utilized in comparing the cost of raw materials from period to period. The segment's internally calculated raw material index of 142.2 for the year endedDecember 31, 2020 was a decrease of 9.6 percent from 2019. International Tire Operations Segment (Dollar amounts in thousands) Twelve
Months Ended
2020 Change 2019 Change 2018
Sales $ 481,655 (9.8)% $ 534,003 (16.7)% $ 640,976
Operating profit $ 3,167 (123.7)% $ (13,390) 4.7% $ (14,044)
Operating margin 0.7 % 3.2 points (2.5) % (0.3) points (2.2)%
Total unit sales change (6.1)% (14.4)%
Overview
The International Tire Operations segment is the combination of the Europe and
Asia operating segments. The European operations include manufacturing
operations in the U.K. and Serbia . The U.K. entity primarily manufactures and
markets motorcycle and racing tires and tire retread material for domestic and
global markets. The Serbian entity manufactures passenger car and light truck
tires primarily for the European markets and for export to the North American
segment. The Asian operations are located in the PRC and Vietnam . Cooper Kunshan
Tire , in the PRC, manufactures passenger car and light truck tires both for the
Chinese domestic market and for export to markets outside of the PRC. GRT, a
joint venture manufacturing facility located in the PRC, and ACTR, a joint
venture manufacturing facility located in Vietnam , serve as global sources of
TBR tire production for the Company. The segment also procured certain TBR tires
under off-take agreements with PCT and Sailun Vietnam. The segment sells a
majority of its tires in the replacement market, with a portion also sold to
OEMs.
On January 17, 2019 , Cooper Tire Europe, a wholly-owned subsidiary of the
Company, committed to a plan to cease substantially all light vehicle tire
production at its Melksham, U.K. facility. The phasing out of light vehicle tire
production was substantially completed in the third quarter of 2019.
Approximately 300 roles were eliminated at the site. Cooper Tire Europe now
obtains light vehicle tires to meet customer needs from other production sites
within the Company's global production network. Approximately 400 roles remain
in Melksham to support the functions that continue there, including motorsports
and motorcycle tire production, a materials business, Cooper Tire Europe
headquarters, sales and marketing, and the Europe Technical Center .
Sales
Net sales of the International Tire Operations segment were $482 million for the
year ended December 31, 2020 , compared to $534 million in 2019. The segment
experienced $37 million of lower unit volume and $18 million of unfavorable
price and mix, partially offset by $3 million of favorable foreign currency
impact. Segment unit volume was down 6.1 percent, primarily as a result of the
impact of the COVID-19 pandemic.
Operating Profit (Loss)
In 2020, the segment's operating profit of $3 million compared to an operating
loss of $13 million in 2019. The segment experienced $20 million of lower raw
material costs and $7 million of lower selling, general and administrative costs
in 2020 as compared to 2019. These improvements were partially offset by $6
million of unfavorable manufacturing efficiencies, primarily related to
production days lost due to plant shut downs in the second quarter, and $4
million of lower unit volume, both primarily due to the COVID-19 pandemic.
Additionally, the segment experienced $7 million of unfavorable price and mix.
2019 included $8 million of restructuring costs related to Cooper Tire Europe's
decision to cease light vehicle tire production at its Melksham facility. Other
costs were $2 million higher in 2020 compared to 2019.
Liquidity and Capital Resources
Sources and uses of cash in operating activities
Net cash provided by operating activities was $459 million in 2020 compared to
$291 million of net cash provided by operating activities in 2019. The
improvement in operating cash flows was partially driven by the Company's
increased net income in 2020 of $144 million , as compared to net income of $98
million in 2019. Changes in operating assets and liabilities in 2020 provided
$127 million of net cash, as compared to the usage of $1 million in 2019. Lower
sales volume and decreased production activity in the first half of 2020 as a
result of the COVID-19 pandemic resulted in favorable movement in accounts and
notes receivable
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and inventory in 2020, as compared to 2019. This favorable movement continued
into the second half of 2020 as improved unit sales volume kept the Company's
inventory on hand at lower levels than 2019. Non-cash items contributed $188
million of favorable cash flow movement in 2020, compared to $193 million
contributed in 2019, with the decrease in the Company's LIFO reserve in 2020 as
a result of the Company's declining inventory balance the primary change.
Sources and uses of cash in investing activities
Net cash used in investing activities reflects capital expenditures of $151
million and $203 million in 2020 and 2019, respectively. The reduced capital
expenditures in 2020 reflect reductions enacted by the Company in response to
COVID-19. Additionally, investing activities in 2019 also includes the Company's
$49 million investment in the Sailun Vietnam equity joint venture.
Sources and uses of cash in financing activities
In 2020, the Company repaid $9 million of net short-term debt at its Asian
operations. In the first half of 2020, the Company utilized its revolving credit
facility and accounts receivable securitization facility to increase cash on
hand for working capital and general corporate purposes as it managed the
impacts of the COVID-19 pandemic prior to repaying the borrowings in the third
quarter. In 2019, the Company repaid $3 million of net short-term debt at its
Asian operations. In 2020, the Company also borrowed $32 million as part of
equipment financing arrangements.
In 2020, the Company paid $62 million for the acquisition of the remaining
noncontrolling ownership interest in COOCSA, as well as for services rendered by
members of the joint venture workforce that were also shareholders of the
non-controlling interest.
Dividends paid on the Company's common shares were $21 million in both 2020 and
2019.
Available cash, credit facilities and contractual commitments
At December 31, 2020 , the Company had cash and cash equivalents of $626 million .
Domestically, the Company's revolving credit facility ("Credit Facility") with a
consortium of several banks provides up to $700 million and expires in June
2024 . Of this borrowing capacity, $200 million is allocated to the Term Loan A,
while the remaining $500 million is allocated to a revolving credit facility.
The Term Loan A was drawn in December 2019 primarily to pay for maturing
unsecured notes. The Credit Facility also includes a $110 million letter of
credit sub-facility.
The Company also has an accounts receivable securitization facility with a
borrowing limit of up to $100 million , based on eligible receivables, which
expires in December 2022 .
At December 31, 2020 , the Company has no borrowing drawn on its revolving credit
facility or accounts receivable securitization facility. These credit facilities
have been used to secure letters of credit of $38 million at December 31, 2020 .
The Company's additional borrowing capacity under these facilities, net of
amounts used to back letters of credit and based on available collateral at
December 31, 2020 , was $545 million . The Company's revolving credit facilities
contain restrictive covenants which limit or preclude certain actions based upon
the measurement of certain financial covenant metrics. However, the covenants
are structured such that the Company expects to have sufficient flexibility to
conduct its operations. The Company was in compliance with all of its debt
covenants as of December 31, 2020 .
The Company's operations in Asia have annual renewable unsecured credit lines
that provide up to $68 million of borrowings and do not contain significant
financial covenants. The additional borrowing capacity on the Asian credit lines
totaled $64 million at December 31, 2020 .
The Company believes that its cash and cash equivalent balances, along with
available cash from operating cash flows and credit facilities, will be adequate
to fund its typical needs, including working capital requirements, projected
capital expenditures, and dividend goals as it navigates the COVID-19 pandemic.
The Company also believes it has access to additional funds from capital markets
to fund potential strategic initiatives. Short-term borrowings at December 31,
2020 include an $11 million promissory note, in addition to short-term notes of
consolidated subsidiaries. The promissory note will be reclassified to an
operating lease liability upon lease commencement of the related airplane lease.
The Company expects to refinance or pay the short-term notes within the next
twelve months.
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The Company's cash requirements relating to contractual obligations at December
31, 2020 are summarized in the following table:
(Dollar amounts in
thousands) Payment Due by Period
Contractual Obligations Total 2021 2022 2023 2024 2025 After 2025
Principal on debt (a) $ 332,475 $ 18,537 $ 21,223 $ 23,915 $ 149,113 $ 2,807 $ 116,880
Interest on debt and bond
obligations 76,874 15,980 15,074 14,355 11,391 8,934 11,140
Operating leases, including
interest 102,204 24,947 21,143 16,677 13,315 10,201 15,921
Financing leases and other 7,172 5,840 729 391 206 6 -
Notes payable (b) 15,614 15,614 - - - - -
Purchase obligations (c) 210,231 210,231 - - - - -
Postretirement benefits
other than pensions (d) 233,661 12,266 12,676 12,801 12,889 12,987 170,042
Pensions (e) 152,110 50,000 40,000 25,000 20,000 15,000 2,110
Income taxes payable (f) 20,434 - 3,528 7,514 9,392 - -
Other obligations (g) 39,392 11,480 3,103 3,025 1,021 516 20,247
Total contractual cash
obligations $ 1,113,370 $ 348,931 $ 102,417 $ 89,337 $ 205,947 $ 41,526 $ 325,211
(a)Includes the Term Loan A, unsecured notes, and the equipment financing
agreements.
(b)Includes promissory note relating to an aircraft lease agreement and
financing obtained from financial institutions in the PRC to support the
Company's operations there.
(c)Purchase commitments for capital expenditures and raw materials, principally
natural rubber, made in the ordinary course of business.
(d)Represents benefit payments for postretirement benefits other than pension
liabilities.
(e)Represents Company contributions to retirement trusts based on current
assumptions.
(f)Represents income taxes payable related to the deemed repatriation tax on
undistributed earnings of foreign subsidiaries under the Tax Act, as based on
the Company's most recently filed tax returns.
(g)Includes stock-based liabilities, warranty reserve, deferred compensation,
nonqualified benefit plans and other non-current liabilities.
Credit agency ratings
Standard & Poor's has rated the Company's long-term corporate credit and senior
unsecured debt at BB- with a stable outlook. Moody's Investors Service has
assigned a Ba3 corporate family rating and a B1 rating to senior unsecured debt
with a stable outlook.
New Accounting Standards
For a discussion of recent accounting pronouncements and their impact on the
Company, see the "Significant Accounting Policies - Accounting Pronouncements"
in the Notes to the Consolidated Financial Statements.
Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the U.S. When more than one accounting principle, or the method of its
application, is generally accepted, the Company selects the principle or method
that is appropriate in its specific circumstances. The Company's accounting
policies are more fully described in the "Significant Accounting Policies" Note
to the Consolidated Financial Statements. Application of these accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported amounts of revenues and expenses during the
reporting period. Management bases its estimates and judgments on historical
experience and on other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company believes that of its significant
accounting policies, the following may involve a higher degree of judgment or
estimation than other accounting policies.
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--------------------------------------------------------------------------------Product liability
The Company is a defendant in various product liability claims brought in numerous jurisdictions in which individuals seek damages resulting from motor vehicle accidents allegedly caused by defective tires manufactured by the Company. Each of the product liability claims faced by the Company generally involves different types of tires and circumstances surrounding the accident such as different applications, vehicles, speeds, road conditions, weather conditions, driver error, tire repair and maintenance practices, service life conditions, as well as different jurisdictions and different injuries. In addition, in many of the Company's product liability lawsuits the plaintiff alleges that his or her harm was caused by one or more co-defendants who acted independently of the Company. Accordingly, both the claims asserted and the resolutions of those claims have an enormous amount of variability. The aggregate amount of damages asserted at any point in time is not determinable since often times when claims are filed, the plaintiffs do not specify the amount of damages. Even when there is an amount alleged, at times the amount is wildly inflated and has no rational basis. The fact that the Company is a defendant in product liability lawsuits is not surprising given the current litigation climate, which is largely confined tothe United States . However, the fact that the Company is subject to claims does not indicate that there is a quality issue with the Company's tires. The Company sells approximately 30 to 35 million passenger car, light truck, sport utility vehicle, TBR and motorcycle tires per year inNorth America . The Company estimates that approximately 300 million Company-produced tires made up of thousands of different specifications are still on the road inNorth America . While tire disablements do occur, it is the Company's and the tire industry's experience that the vast majority of tire failures relate to service-related conditions, which are entirely out of the Company's control, such as failure to maintain proper tire pressure, improper maintenance, improper repairs, road hazard, and excessive speed. The Company accrues costs for asserted product liability claims at the time a loss is probable and the amount of loss can be estimated. The Company believes the probability of loss can be established and the amount of loss can be estimated only after certain minimum information is available, including verification that Company-produced product was involved in the incident giving rise to the claim, the condition of the product purported to be involved in the claim, the nature of the incident giving rise to the claim and the extent of the purported injury or damages. In cases where such information is known, each product liability claim is evaluated based on its specific facts and circumstances. A judgment is then made to determine the requirement for establishment or revision of an accrual for any potential liability. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. The liability often cannot be determined with precision until the claim is resolved. Pursuant to ASC 450 "Contingencies," the Company accrues the minimum liability for each known claim when the estimated outcome is a range of probable loss and no one amount within that range is more likely than another. For such known claims, the Company accrues the minimum liability because the product liability claims faced by the Company are unique and widely variable, and accordingly, the resolutions of those claims have an enormous amount of variability. The costs have ranged from zero dollars to$33 million in one case with no average that is meaningful. No specific accrual is made for individual unasserted claims or for premature claims, asserted claims where the minimum information needed to evaluate the probability of a liability is not yet known. However, an accrual is maintained for such claims based, in part, on management's expectations for future litigation activity and the settled claims history maintained, including the historical number of claims and amount of settlements. The Company periodically reviews its estimates and any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. Because of the speculative nature of litigation in theU.S. , the Company does not believe a meaningful aggregate range of reasonably possible loss for asserted and unasserted claims can be determined. While the Company believes its reserves are reasonably stated, it is possible an individual claim from time to time may result in an aberration from the norm and could have a material impact. The time frame for the payment of a product liability claim is too variable to be meaningful. From the time a claim is filed to its ultimate disposition depends on the unique nature of the case, how it is resolved - claim dismissed, negotiated settlement, trial verdict or appeals process - and is highly dependent on jurisdiction, specific facts, the plaintiff's attorney, the court's docket and other factors. Given that some claims may be resolved in weeks and others may take five years or more, it is impossible to predict with any reasonable reliability the time frame over which the accrued amounts may be paid. However, the time frame from occurrence of the loss incident to reporting of the claim is monitored by the Company on an ongoing basis. The Company regularly reviews the probable outcome of outstanding legal proceedings and the availability and limits of insurance coverage, and accrues for such legal proceedings at the time a loss is probable and the amount of the loss can be -35- -------------------------------------------------------------------------------- estimated. As part of its regular review, the Company monitors trends that may affect its ultimate liability and analyzes developments and variables likely to affect pending and anticipated claims against the Company and the reserves for such claims. The Company utilizes claims experience, as well as trends and developments in the litigation climate, in estimating its required accrual. Based on the Company's review completed in the third quarter of 2020, the Company recorded a benefit of$49 million . This benefit reflects a reduction in the Company's estimate of the volume of anticipated product liability claims, as well as adjustments to existing reserves based upon settled claims history. As a result of the Company's review, coupled with normal activity, including the addition of another year of self-insured incidents, settlements and changes in the amount of reserves, the Company decreased its accrual to$95 million atDecember 31, 2020 from$117 million atDecember 31, 2019 . The addition of another year of self-insured incidents accounted for an increase of$35 million in the Company's product liability reserve in 2020. Settlements, changes in the amount of reserves for cases where sufficient information is known to estimate a liability, and changes in assumptions, including the estimate of anticipated claims and settlement values, decreased the liability by$49 million . During 2020, the Company paid$8 million and during 2019, the Company paid$24 million to resolve cases and claims, respectively. The Company's product liability reserve balance atDecember 31, 2020 totaled$95 million (the current portion of$18 million is included in Accrued liabilities and the long-term portion is included in Other long-term liabilities on the Consolidated Balance Sheets), and the balance atDecember 31, 2019 totaled$117 million (current portion of$25 million ). The product liability expense reported by the Company includes amortization of insurance premium costs, adjustments to settlement reserves and legal costs incurred in defending claims against the Company. Legal costs are expensed as incurred and product liability insurance premiums are amortized over coverage periods. Product liability activity reduced the Company's Cost of products sold by$4 million in 2020, a decrease of$44 million from product liability expense in 2019. Product liability expenses are included in Cost of products sold in the Consolidated Statements of Income.
Income taxes
The Company is required to make certain estimates and judgments to determine income tax expense for financial statement purposes. The more critical estimates and judgments include assessing uncertain tax positions and measuring unrecognized tax benefits. Changes to these estimates may result in an increase or decrease to tax expense in subsequent periods. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company's global operations. The Company applies the rules under ASC 740-10 "Accounting for Uncertainty in Income Taxes" for uncertain tax positions using a "more likely than not" recognition threshold. Pursuant to these rules, the Company will initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the "more likely than not" threshold, the measurement of the tax benefit will be based on the Company's estimate of the ultimate amount to be sustained if audited by the taxing authority. The Company recognizes tax liabilities in accordance with ASC 740-10 and adjusts these liabilities when judgment changes as a result of the evaluation of new information not previously available. Based upon the outcome of tax examinations, judicial proceedings, or expiration of statutes of limitations, it is reasonably possible that the ultimate resolution of these unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. The Company's liability for unrecognized tax benefits, exclusive of interest, totaled approximately$13 million atDecember 31, 2020 . The unrecognized tax benefits atDecember 31, 2020 relate to uncertain tax positions in tax years 2012 through 2020.
Pension and postretirement benefits
The Company has recorded significant pension liabilities in theU.S. and theU.K. and other postretirement benefit ("OPEB") liabilities in theU.S. that are developed from actuarial valuations. The determination of the Company's pension liabilities requires key assumptions regarding discount rates used to determine the present value of future benefit payments and expected returns on plan assets. The discount rate is also significant to the development of OPEB liabilities. The Company determines these assumptions in consultation with its investment advisers and actuaries. -36- -------------------------------------------------------------------------------- The discount rate reflects the rate used to estimate the value of the Company's pension and OPEB liabilities for which they could be settled at the end of the year. When determining the discount rate, the Company discounted the expected pension disbursements over the next one hundred years using spot rates from a high quality corporate bond yield curve and computed a single equivalent rate. Based upon this analysis, the Company used a discount rate of 2.28 percent to measure itsU.S. pension liabilities atDecember 31, 2020 , which is lower than the 3.09 percent used atDecember 31, 2019 . Similarly, the Company discounted the expected disbursements of its OPEB liabilities and, based upon this analysis, the Company used a discount rate of 2.36 percent to measure its OPEB liabilities atDecember 31, 2020 , which is lower than the 3.12 percent used atDecember 31, 2019 . A similar analysis was completed in theU.K. and the Company decreased the discount rate used to measure itsU.K. pension liabilities to 1.30 percent atDecember 31, 2020 from 2.00 percent atDecember 31, 2019 . The effects of a hypothetical change in discount rate may be nonlinear and asymmetrical for future years as the change in discount rate and the corresponding accounting are applied. Holding all other assumptions constant, an increase or decrease of 25 basis points in theDecember 31, 2020 , discount rate assumption would have the following estimated effects on theDecember 31, 2020 pension and other post-retirement benefit obligations and 2021 expected pension and other post-retirement expense: 25 Basis Point 25 Basis Point Decrease in Discount Increase in Discount $ increase (decrease) in thousands Rate Rate Pension expense $ 3,036 $ (2,918) Other post-retirement benefit expense 849 (810) Pension obligation 36,697 (34,864) Other post-retirement benefit obligation 7,528 (7,139) The assumed long-term rate of return on pension plan assets is applied to the market value of plan assets to derive a reduction to pension expense that approximates the expected average rate of asset investment return over ten or more years. A decrease in the expected long-term rate of return will increase pension expense, whereas an increase in the expected long-term rate will reduce pension expense. Decreases in the level of actual plan assets will serve to increase the amount of pension expense, whereas increases in the level of actual plan assets will serve to decrease the amount of pension expense. Any shortfall in the actual return on plan assets from the expected return will increase pension expense in future years due to the amortization of the shortfall, whereas any excess in the actual return on plan assets from the expected return will reduce pension expense in future periods due to the amortization of the excess. The Company's investment strategy is to manage the plans' asset allocation relative to the liability profile and funded status of the plans. It is expected that as the plan's funded status improves, the portfolio will take less risk as to preserve the funded status of the plan framework. The plans follow a glide path whereby a target return-seeking allocation is followed based upon a given funded ratio level. The plans' position with respect to the glide path is monitored and asset allocation and strategy changes to the plans' portfolio are made as appropriate. The plans' strategy is also monitored in relation to the capital markets, interest rates, and the regulatory environment. The Company's current asset allocation forU.S. plans' assets is 64 percent in fixed income collective trust funds, 29 percent in equity collective trust funds, 3 percent in other investment collective trust funds and 4 percent in cash. The Company's current asset allocation forU.K. plan assets is 70 percent in fixed income securities, 18 percent in equity securities, 11 percent in other investments, and 1 percent in cash. The Company determines the annual rate of return on pension assets by first analyzing the composition of its asset portfolio. Expected long-term rates of return are applied to the portfolio and may be adjusted based on a review by the Company's investment advisers and actuaries. Historical rates of return, industry comparables, and other outside guidance are also considered in the annual selection of the expected rates of return on pension assets. The actual return onU.S. pension plans' assets was a return of approximately 12.62 percent in 2020 compared to an asset return of approximately 17.54 percent in 2019. The actual return onU.K. pension plan assets was a return of approximately 10.00 percent in 2020 compared to an asset return of 10.93 percent in 2019. The Company's estimate for the expected long-term return on itsU.S. plan assets used to derive 2020 and 2019 pension expense was 5.68 percent and 5.66 percent, respectively. The expected long-term return onU.K. plan assets used to derive the 2020 and 2019 pension expense was 2.45 percent and 3.35 percent, respectively. Holding all other assumptions constant, an increase or decrease of 25 basis points in the Company'sDecember 31, 2020 expected return on assets assumption would increase or decrease the net periodic benefit cost by$3 million . The Company has accumulated net deferred losses resulting from the shortfalls and excesses in actual returns on pension plan assets from expected returns and, in the measurement of pensions and OPEB liabilities, decreases and increases in the discount rate and differences between actuarial assumptions and actual experience totaling$418 million atDecember 31, 2020 . These -37- --------------------------------------------------------------------------------
amounts are being amortized in accordance with the corridor amortization
requirements of
The Company has implemented household caps on the amounts of retiree medical benefits it will provide to certain retirees in theU.S. The caps do not apply to individuals who retired prior to certain specified dates. Costs in excess of these caps will be paid by plan participants. The Company implemented increased cost sharing in 2004 in the retiree medical coverage provided to certain eligible current and future retirees. Since then, cost sharing has expanded such that nearly all covered retirees pay a charge to be enrolled. In accordance withU.S. GAAP, the Company recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of its pension and OPEB plans and the net unrecognized actuarial losses and unrecognized prior service costs in the consolidated balance sheets. The unrecognized actuarial losses and unrecognized prior service costs (components of Accumulated other comprehensive loss in the Equity section of the balance sheet) will be subsequently recognized as net periodic benefit costs pursuant to the Company's historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit costs in the same periods will be recognized as a component of other comprehensive income.
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