THE GOODYEAR TIRE & RUBBER COMPANY All per share amounts are diluted and refer to
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 55 manufacturing facilities in 23 countries, includingthe United States . We operate our business through three operating segments representing our regional tire businesses:Americas ;Europe ,Middle East andAfrica ("EMEA"); andAsia Pacific . Cooper Tire Acquisition OnJune 7, 2021 (the "Closing Date"), we completed our previously announced acquisition ofCooper Tire & Rubber Company ("Cooper Tire ") pursuant to the terms of the Agreement and Plan of Merger, datedFebruary 22, 2021 (the "Merger Agreement"), by and amongGoodyear ,Vulcan Merger Sub Inc. , a direct, wholly owned subsidiary ofGoodyear ("Merger Sub"), andCooper Tire .Goodyear acquiredCooper Tire by way of the merger of Merger Sub with and intoCooper Tire (the "Merger"), withCooper Tire surviving the Merger as a wholly owned subsidiary ofGoodyear . In accordance with the terms of the Merger Agreement, upon closing of the transaction,Cooper Tire stockholders received$41.75 per share in cash and a fixed exchange ratio of 0.907 shares ofGoodyear common stock per share ofCooper Tire common stock (the "Merger Consideration"). The cash component of the Merger Consideration totaled$2,155 million and the stockholders ofCooper Tire received 46.1 million shares ofGoodyear common stock valued at$942 million , based on the closing market price ofGoodyear common stock on the last trading day prior to the Closing Date. For further information, refer to Note to the Consolidated Financial Statements No. 2, Cooper Tire Acquisition. The descriptions of, and references to, the Merger Agreement included in this Quarterly Report on Form 10-Q are qualified in their entirety by the full text of the Merger Agreement, which is attached as Exhibit 2.1 to our Current Report on Form 8-K filed onFebruary 25, 2021 . OnMay 18, 2021 , we issued$850 million in aggregate principal amount of 5% senior notes due 2029 and$600 million in aggregate principal amount of 5.25% senior notes dueJuly 2031 . The net proceeds from these notes, together with cash and cash equivalents and borrowings under our first lien revolving credit facility, were used to fund the cash component of the Merger Consideration and related transaction costs. OnJune 7, 2021 , we amended and restated our$2.0 billion first lien revolving credit facility. Changes to the facility include extending the maturity toJune 8, 2026 and increasing the amount of the facility to$2.75 billion . The interest rate for loans under the facility decreased by 50 basis points to LIBOR plus 125 basis points.
The results of
Transaction and other costs related to the acquisition ofCooper Tire totaled$55 million during the nine months endedSeptember 30, 2021 , of which$49 million ($41 million after-tax and minority) of these costs were included in Other (Income) Expense and$6 million ($4 million after-tax and minority) were included in Cost of Goods Sold ("CGS") and Selling, General and Administrative Expense ("SAG"). There were no transaction costs related to the acquisition ofCooper Tire during the third quarter of 2021. The Merger Consideration was allocated on a provisional basis to the estimated fair value of the assets acquired and liabilities assumed fromCooper Tire as of the Closing Date. Certain of these fair value estimates, including those related to Property, Plant and Equipment,Goodwill and Intangible Assets, are preliminary and subject to change as management completes further analyses and studies. For further information, refer to Note to the Consolidated Financial Statements No. 2, Cooper Tire Acquisition, and "Critical Accounting Policies".
Results of Operations
During the third quarter and first nine months of 2021, our operating results
significantly improved compared to 2020, as the overall negative impacts of the
COVID-19 pandemic on tire industry demand, auto production, miles driven and our
tire volume moderated and continued to improve, compared to the severe global
economic disruption experienced throughout much of 2020, particularly in the
first half of the year.
Nonetheless, our results for the third quarter and first nine months of 2021
continued to be negatively influenced by the direct and indirect macroeconomic
effects of the ongoing pandemic. Our global businesses are experiencing varying
stages of recovery, as national and local efforts in many countries to contain
the spread of COVID-19, including renewed stay-at-home orders, continue to
impact economic conditions. Increased demand for consumer products and supply
chain disruptions as a result of the pandemic and other global events, including
port congestion and container shortages, has led to inflationary cost pressures,
31--------------------------------------------------------------------------------
Table of contents
including higher costs for certain raw materials, higher transportation costs and higher energy costs, as well as shortages of certain automobile parts, such as semiconductors, which have affected OE manufacturers' ability to produce consumer and commercial vehicles consistently. Most of our global tire manufacturing facilities are operating at or near full capacity to meet current demand, as well as to increase the level of our finished goods inventory as we continue to restock in order to fulfill anticipated near-term demand. However, like many companies, we are experiencing shortages of qualified and reliable workers, particularly in theU.S. Absenteeism, a tight labor supply and elevated turnover are resulting in manufacturing inefficiencies, increased training costs and higher wages. To address this issue, we have accelerated hiring, increased training capacity and started to adjust future investment plans to consider not just the cost, but also the availability of qualified workers. Our decisions to change production levels in the future will be based on an evaluation of market demand signals and inventory and supply levels, as well as the availability of sufficient qualified labor and our ability to continue to safeguard the health of our associates. We continue to monitor the pandemic on a local basis, taking actions to protect the health and wellbeing of our associates, customers and communities, which remain our top priority. We also continue to follow guidance from theCenters for Disease Control and Prevention , which include preventative measures at our facilities as appropriate, including limiting visitor access and business travel, remote and hybrid working, masking and social distancing practices, and frequent disinfection. In addition, during the first quarter of 2021, a severe winter storm in theU.S. caused temporary shutdowns of three of our chemical facilities, limited production at three tire manufacturing facilities, and impacted more than 170 consumer and commercial retail locations. We estimate that the negative impact on our earnings, primarily inAmericas , for the three and nine months endedSeptember 30, 2021 was approximately$2 million ($2 million after-tax and minority) and$52 million ($42 million after-tax and minority), respectively. Our results for the third quarter of 2021 include a 31.6% increase in tire unit shipments compared to 2020, reflecting the addition ofCooper Tire's operating results, as well as the pandemic-related recovery noted above. Year-over-year cost savings, including the impact of temporary fixed cost reductions in 2020, were unfavorable by$65 million . Net sales in the third quarter of 2021 were$4,934 million , compared to$3,465 million in the third quarter of 2020. Net sales increased in the third quarter of 2021 primarily due to the addition ofCooper Tire's net sales of$907 million , improvements in price and product mix, primarily inAmericas and EMEA, higher sales in other tire-related businesses, driven by increased third-party chemical sales inAmericas and increased global aviation tire sales, and higher tire volume, primarily inAmericas and EMEA. In the third quarter of 2021,Goodyear net income was$132 million , or$0.46 per share, compared to a net loss of$2 million , or$0.01 per share, in the third quarter of 2020. The favorable change inGoodyear net income (loss) was primarily due to higher segment operating income, partially offset by higher income tax expense. Our total segment operating income for the third quarter of 2021 was$372 million , compared to$162 million in the third quarter of 2020. The$210 million increase was primarily due to improvements in price and product mix of$332 million , primarily inAmericas and EMEA, the addition ofCooper Tire's operating income of$48 million , lower conversion costs of$26 million , primarily reflecting favorable overhead absorption as a result of higher global factory utilization more than offsetting the nonrecurrence of pandemic-related temporary cost reductions in 2020, inflationary cost pressures and labor-related manufacturing inefficiencies, higher earnings in other tire-related businesses of$23 million , driven by increased global aviation tire sales and increased retail sales inAmericas , and higher tire volume of$22 million . These improvements in segment operating income were partially offset by higher raw material costs of$161 million and higher SAG of$49 million . Net sales in the first nine months of 2021 were$12,424 million , compared to$8,665 million in the first nine months of 2020. Net sales increased in the first nine months of 2021 primarily due to higher global tire volume, the addition ofCooper Tire's net sales since the Closing Date of$1,163 million , higher sales in other tire-related businesses, driven by increased third-party chemical, retread and retail sales inAmericas , increased Fleet Solutions sales in EMEA and increased global aviation tire sales, improvements in price and product mix, and favorable foreign currency translation, primarily in EMEA andAsia Pacific . In the first nine months of 2021,Goodyear net income was$211 million , or$0.82 per share, compared to a net loss of$1,317 million , or$5.62 per share, in the first nine months of 2020. The favorable change inGoodyear net income (loss) was primarily due to higher segment operating income, a decrease in goodwill and other asset impairment charges and lower rationalization expense, partially offset by higher income tax expense and higher interest expense. Our total segment operating income for the first nine months of 2021 was$897 million , compared to an operating loss of$316 million in the first nine months of 2020. The$1,213 million favorable change was primarily due to improvements in price and product mix of$583 million , primarily inAmericas and EMEA, lower conversion costs of$384 million , primarily due to favorable overhead absorption as a result of higher global factory utilization, higher global tire volume of$357 million , higher earnings in other tire-related businesses of$115 million , driven by increased third-party chemical and retail sales inAmericas , 32
--------------------------------------------------------------------------------
Table of contents
as well as increased global aviation sales, and a favorable indirect tax ruling inBrazil of$69 million . These improvements in segment operating income were partially offset by higher raw material costs of$176 million and higher SAG of$130 million . Total segment operating income for the first nine months of 2021 includes operating income of$32 million related toCooper Tire . Refer to "Results of Operations - Segment Information" for additional information.
Liquidity
AtSeptember 30, 2021 , we had$1,187 million of cash and cash equivalents as well as$4,195 million of unused availability under our various credit agreements, compared to$1,539 million and$3,881 million , respectively, atDecember 31, 2020 . Cash and cash equivalents decreased by$352 million fromDecember 31, 2020 primarily due to payment of the$1,856 million cash component of the Merger Consideration, net of cash and restricted cash acquired, and capital expenditures of$666 million , partially offset by net borrowings of$2,257 million , including$1,450 million of new senior notes used to fund theCooper Tire acquisition. In addition, cash used for operating activities was$2 million in the first nine months of 2021. Cash used for operating activities reflects cash used for working capital of$1,064 million and rationalization payments of$162 million , largely offset by net income for the period of$223 million , which includes non-cash charges for depreciation and amortization of$645 million and an inventory fair value step-up adjustment of$110 million related to theCooper Tire acquisition. Refer to "Liquidity and Capital Resources" for additional information. OnApril 6, 2021 , we completed a public offering of$550 million in aggregate principal amount of 5.25% senior notes dueApril 2031 and$450 million in aggregate principal amount of 5.625% senior notes due 2033. Net proceeds from these offerings, together with cash and cash equivalents, were used to redeem our$1.0 billion 5.125% senior notes due 2023 onMay 6, 2021 at a price of 100% of the principal amount, plus accrued and unpaid interest to the redemption date. OnSeptember 28, 2021 , we issued €400 million in aggregate principal amount ofGoodyear Europe B.V . ("GEBV") 2.75% senior notes due 2028. A portion of the net proceeds from these notes were used to redeem our existing €250 million 3.75% senior notes due 2023 onOctober 28, 2021 .
Outlook
While markets have recovered considerably, we continue to face uncertainty in many countries around the globe as governments continue to implement measures to slow the pandemic that have the potential to reduce economic activity and mobility. In addition, OE manufacturers have continued to be affected by shortages of components and materials, which have limited automobile production globally. Also, our ability to ship products, particularly to locations where we do not have manufacturing, will continue to be impacted by ongoing disruptions in global logistics. In this environment, we expect volume in the fourth quarter of 2021 to be below the fourth quarter of 2019, excluding the benefit of volume added from theCooper Tire acquisition. However, with the added volume ofCooper Tire , volume trends in the fourth quarter of 2021 are expected to be similar to the third quarter of 2021, when compared to 2019. For the full year of 2021, we expect our raw material costs to increase$450 million to$475 million , including the benefit of raw material cost saving measures. This expectation excludes raw material cost increases related toCooper Tire , which we acquired onJune 7, 2021 , as the incremental impact ofCooper Tire on our results will be reported separately through the second quarter of 2022. 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 and foreign exchange rates. 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. In the fourth quarter of 2021, we expect the benefits of price and product mix will continue to exceed the impact of higher raw material costs, which are anticipated to approach$300 million . In addition to the impact of higher raw material costs, we expect continued inflationary pressures from incremental wage, benefit, transportation and energy costs to negatively impact our fourth quarter 2021 results in excess of our ability to offset these costs with cost savings measures. We also expect higher manufacturing costs to negatively impact our fourth quarter 2021 results due to our facilities in theU.S. being affected by higher costs related to higher turnover and the need to train newly hired staff. Our manufacturing facilities inChina are being affected by rolling blackouts. As a result, we anticipate the need to focus on price and product mix to manage the impact of these cost pressures in addition to the impact of higher raw material costs. During 2021, including the impact ofCooper Tire , we expect to reinvest$300 million to$500 million in working capital. We expect to experience normal seasonality in working capital during the fourth quarter of 2021, resulting in positive cash flows from operating activities in excess of capital expenditures.
Our results for the fourth quarter of 2021 will also be impacted by the
amortization of purchase accounting adjustments of approximately
33--------------------------------------------------------------------------------
Table of contents
Refer to "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Form 10-K") and our Quarterly Report on Form 10-Q for the quarterly period endedMarch 31, 2021 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" in this Quarterly Report on Form 10-Q for a discussion of our use of forward-looking statements. RESULTS OF OPERATIONS CONSOLIDATED
Three months ended
Net sales in the third quarter of 2021 were$4,934 million , increasing$1,469 million , or 42.4%, from$3,465 million in the third quarter of 2020.Goodyear net income was$132 million , or$0.46 per share, in the third quarter of 2021, compared to a net loss of$2 million , or$0.01 per share, in the third quarter of 2020. Net sales increased in the third quarter of 2021 primarily due to the addition ofCooper Tire's net sales of$907 million , improvements in price and product mix of$297 million , primarily inAmericas and EMEA, higher sales in other tire-related businesses of$128 million , driven by increased third-party chemical sales inAmericas and increased global aviation tire sales, higher tire volume of$95 million , primarily inAmericas and EMEA, and favorable foreign currency translation of$40 million . Worldwide tire unit sales in the third quarter of 2021 were 48.2 million units, increasing 11.6 million units, or 31.6%, from 36.6 million units in the third quarter of 2020. Replacement tire volume increased globally by 12.1 million units, or 44.2%. OE tire volume decreased by 0.5 million units, or 7.3%, reflecting decreases inAmericas and EMEA, which were partially offset by an increase inAsia Pacific . CGS in the third quarter of 2021 was$3,894 million , increasing$1,119 million , or 40.3%, from$2,775 million in the third quarter of 2020. CGS increased primarily due to the addition ofCooper Tire's CGS of$771 million , which includes$72 million ($53 million after-tax and minority) of amortization related to a fair value adjustment to the Closing Date inventory that was acquired byGoodyear , higher raw material costs of$161 million , higher costs in other tire-related businesses of$105 million , driven by increased third-party chemical sales inAmericas , higher tire volume of$73 million , primarily inAmericas and EMEA, and foreign currency translation of$30 million . These increases were partially offset by lower costs related to product mix of$35 million , driven byAmericas , and lower conversion costs of$26 million , primarily reflecting favorable overhead absorption as a result of higher global factory utilization more than offsetting the nonrecurrence of pandemic-related temporary cost reductions in 2020, inflationary cost pressures and labor-related manufacturing inefficiencies. CGS in the third quarter of 2021 and 2020 included pension expense of$6 million and$4 million , respectively. CGS in the third quarter of 2020 included an unfavorable indirect tax settlement inMexico of$6 million ($5 million after-tax and minority). CGS in the third quarter of 2020 also included asset write-offs of$4 million ($3 million after-tax and minority), primarily related to the permanent closure of ourGadsden, Alabama manufacturing facility ("Gadsden"). CGS in the third quarter of 2021 included incremental savings from rationalization plans of$2 million , compared to$38 million in 2020. CGS was 78.9% of sales in the third quarter of 2021, compared to 80.1% in the third quarter of 2020. SAG in the third quarter of 2021 was$727 million , increasing$172 million , or 31.0%, from$555 million in the third quarter of 2020. SAG increased primarily due to the addition ofCooper Tire's SAG of$98 million , higher wages and benefits of$26 million , higher advertising expense of$9 million , higher third-party contracting costs of$8 million , and foreign currency translation of$7 million . SAG in the third quarter of 2021 and 2020 included pension expense of$4 million and$5 million , respectively. SAG in both the third quarter of 2021 and 2020 included incremental savings from rationalization plans of$2 million . SAG was 14.7% of sales in the third quarter of 2021, compared to 16.0% in the third quarter of 2020. We recorded net rationalization charges of$13 million ($11 million after-tax and minority) in the third quarter of 2021 and$25 million ($20 million after-tax and minority) in the third quarter of 2020. Net rationalization charges in the third quarter of 2021 primarily related to the permanent closure ofGadsden and the plan to modernize two of our tire manufacturing facilities inGermany . Net rationalization charges in the third quarter of 2020 primarily related to the permanent closure ofGadsden and additional termination benefits for associates at the closed Amiens,France manufacturing facility. For further information, refer to Note to the Consolidated Financial Statements No. 4, Costs Associated with Rationalization Programs. Interest expense in the third quarter of 2021 was$104 million , increasing$16 million , or 18.2%, from$88 million in the third quarter of 2020. The average interest rate was 5.11% in the third quarter of 2021 compared to 5.17% in the third quarter of 2020. The average debt balance was$8,137 million in the third quarter of 2021 compared to$6,815 million in the third quarter of 2020. 34
--------------------------------------------------------------------------------
Table of contents
Other (Income) Expense in the third quarter of 2021 was$9 million of expense, compared to$32 million of expense in the third quarter of 2020. Other (Income) Expense for the three months endedSeptember 30, 2021 includes pension settlement charges of$11 million ($8 million after-tax and minority) and net gains (losses) on asset and other sales of$10 million ($7 million after-tax and minority) and$(3) million ($(2) million after-tax and minority), respectively, primarily related to the sale of land in Hanau,Germany . Other (Income) Expense in the third quarter of 2020 included pension settlement charges of$16 million ($12 million after-tax and minority). The remainder of the change in Other (Income) Expense between the third quarter of 2021 and 2020 was driven by a decrease in the other components of non-service related pension and other postretirement benefits cost, primarily as a result of lower interest cost from decreases in discount rates. For the third quarter of 2021, we recorded income tax expense of$53 million on income before income taxes of$187 million . In the third quarter of 2020, we recorded a tax benefit of$13 million on a loss before income taxes of$10 million . The income tax benefit for the three months endedSeptember 30, 2020 includes discrete tax benefits of$14 million ($14 million after minority interest), primarily to adjust our deferred tax assets inEngland for an enacted change in the tax rate during 2020. For further information regarding income taxes, refer to Note to the Consolidated Financial Statements No. 6, Income Taxes.
Minority shareholders' net income in the third quarter of 2021 was
Nine Months Ended
Net sales in the first nine months of 2021 were$12,424 million , increasing$3,759 million , or 43.4%, from$8,665 million in the first nine months of 2020.Goodyear net income was$211 million , or$0.82 per share, in the first nine months of 2021, compared to a net loss of$1,317 million , or$5.62 per share, in the first nine months of 2020. Net sales increased in the first nine months of 2021, primarily due to higher global tire volume of$1,673 million , the addition ofCooper Tire's net sales of$1,163 million , higher sales in other tire-related businesses of$381 million , driven by increased third-party chemical and retail sales inAmericas and higher retread sales inAmericas and EMEA, improvements in price and product mix of$346 million , and favorable foreign currency translation of$194 million , primarily in EMEA andAsia Pacific . Worldwide tire unit sales in the first nine months of 2021 were 120.7 million units, increasing 32.4 million units, or 36.7%, from 88.3 million units in the first nine months of 2020. Replacement tire volume increased globally by 28.2 million units, or 42.2%. OE tire volume increased globally by 4.2 million units, or 19.5%. CGS in the first nine months of 2021 was$9,723 million , increasing$2,180 million , or 28.9%, from$7,543 million in the first nine months of 2020. CGS increased primarily due to higher global tire volume of$1,316 million , the addition ofCooper Tire's CGS of$1,006 million , which includes$110 million ($82 million after-tax and minority) of amortization related to a fair value adjustment to the Closing Date inventory that was acquired byGoodyear , higher costs in other tire-related businesses of$266 million , driven by higher third-party chemical and retread sales inAmericas , higher raw material costs of$176 million , and foreign currency translation of$143 million , primarily in EMEA andAsia Pacific . These increases were partially offset by lower conversion costs of$384 million , primarily due to favorable overhead absorption as a result of higher global factory utilization and savings from rationalization plans, lower costs related to product mix of$237 million , primarily inAmericas , a favorable indirect tax ruling inBrazil of$69 million , of which$66 million ($43 million after-tax and minority) related to prior years, and$26 million of pandemic-related work in process inventory write-offs in 2020, primarily inAmericas and EMEA. CGS in the first nine months of 2021 and 2020 included pension expense of$15 million and$12 million , respectively. CGS in the first nine months of 2020 included accelerated depreciation of$94 million ($72 million after-tax and minority), primarily related to the permanent closure ofGadsden . CGS in the first nine months of 2020 also included an unfavorable indirect tax settlement inMexico of$6 million ($5 million after-tax and minority). CGS in the first nine months of 2021 included incremental savings from rationalization plans of$60 million , primarily inAmericas , compared to$66 million in 2020. CGS was 78.3% of sales in the first nine months of 2021, compared to 87.1% in the first nine months of 2020. SAG in the first nine months of 2021 was$1,949 million , increasing$362 million , or 22.8%, from$1,587 million in the first nine months of 2020. SAG increased primarily due to the addition ofCooper Tire's SAG of$140 million , higher wages and benefits of$104 million and higher advertising expense of$34 million , both relating to pandemic-related actions taken in 2020, and foreign currency translation of$48 million , primarily in EMEA andAsia Pacific . SAG in the first nine months of 2021 and 2020 included pension expense of$13 million for each period. SAG in the first nine months of 2021 included incremental savings from rationalization plans of$7 million , compared to$4 million in 2020. SAG was 15.7% of sales in the first nine months of 2021, compared to 18.3% in the first nine months of 2020. In the first nine months of 2020, we recorded a non-cash impairment charge of$182 million ($178 million after-tax and minority) related to goodwill of our EMEA reporting unit and a$148 million non-cash impairment charge ($113 million after-tax and minority) related to our investment inTireHub . 35
--------------------------------------------------------------------------------
Table of contents
We recorded net rationalization charges of$81 million ($72 million after-tax and minority) in the first nine months of 2021 and$133 million ($104 million after-tax and minority) in the first nine months of 2020. Net rationalization charges in the first nine months of 2021 primarily related to the plan to modernize two of our manufacturing facilities inGermany , the permanent closure ofGadsden , and a plan to reduce SAG headcount in EMEA. Net rationalization charges in the first nine months of 2020 primarily related to the permanent closure ofGadsden and additional termination benefits for associates at the closed Amiens,France manufacturing facility. For further information, refer to Note to the Consolidated Financial Statements No. 4, Costs Associated with Rationalization Programs. Interest expense in the first nine months of 2021 was$280 million , increasing$34 million , or 13.8%, from$246 million in the first nine months of 2020. The average interest rate was 5.28% in the first nine months of 2021 compared to 5.00% in the first nine months of 2020. The average debt balance was$7,073 million in the first nine months of 2021 compared to$6,554 million in the first nine months of 2020. Interest expense in the first nine months of 2021 included a$5 million ($4 million after-tax and minority) charge related to the redemption of our existing$1.0 billion 5.125% senior notes due 2023. Other (Income) Expense in the first nine months of 2021 was$73 million of expense, compared to$93 million of expense in the first nine months of 2020. Other (Income) Expense for the nine months endedSeptember 30, 2021 includes$48 million ($32 million after-tax and minority) of interest income related to the favorable indirect tax ruling inBrazil , net gains (losses) on asset and other sales of$10 million ($7 million after-tax and minority) and$(3) million ($(2) million after-tax and minority), respectively, primarily related to the sale of land in Hanau,Germany ,$49 million of transaction and other costs related to the acquisition ofCooper Tire , and pension settlement charges of$30 million ($22 million after-tax and minority). Other (Income) Expense in the first nine months of 2021 also includes an out of period adjustment of$7 million ($7 million after-tax and minority) of expense related to foreign currency exchange inAmericas . Other (Income) Expense in the first nine months of 2020 included pension settlement charges of$19 million ($14 million after-tax and minority) and net losses on asset sales of$2 million ($2 million after-tax and minority). The remainder of the change in Other (Income) Expense between the first nine months of 2021 and 2020 was driven by a decrease in the other components of non-service related pension and other postretirement benefits cost, primarily as a result of lower interest cost from decreases in discount rates. For the first nine months of 2021, we recorded income tax expense of$95 million on income before income taxes of$318 million . Income tax expense for the nine months endedSeptember 30, 2021 includes a net discrete benefit of$30 million ($30 million after minority interest), primarily related to adjusting our deferred tax assets inEngland for a recently enacted increase in the tax rate, partially offset by net discrete charges for various items, including the settlement of a tax audit inPoland . In the first nine months of 2020, we recorded income tax expense of$50 million on a loss before income taxes of$1,267 million . Income tax expense for the nine months endedSeptember 30, 2020 includes net discrete charges of$278 million ($279 million after minority interest), including the establishment of a$295 million valuation allowance on certain deferred tax assets for foreign tax credits during the first quarter of 2020. We record taxes based on overall estimated annual effective tax rates. The difference between our effective tax rate and theU.S. statutory rate of 21% for the nine months endedSeptember 30, 2021 primarily relates to the tax on the favorable indirect tax ruling inBrazil during the second quarter, losses in foreign jurisdictions in which no tax benefits are recorded, and the discrete items noted above. The difference between our effective tax rate and theU.S. statutory rate of 21% for the nine months endedSeptember 30, 2020 primarily relates to the discrete items noted above, a first quarter non-cash goodwill impairment charge of$182 million , and forecasted losses for the full year in foreign jurisdictions in which no tax benefits are recorded, which were accentuated during 2020 by business interruptions resulting from the COVID-19 pandemic. AtSeptember 30, 2021 andDecember 31, 2020 , we had approximately$800 million and$1.2 billion ofU.S. federal, state and local net deferred tax assets, respectively, net of valuation allowances totaling$368 million primarily for foreign tax credits with limited lives. AtSeptember 30, 2021 , approximately$500 million of theseU.S. net deferred tax assets have unlimited lives and approximately$300 million have limited lives and expire between 2025 and 2041. The decrease in ourU.S. net deferred tax assets fromDecember 31, 2020 primarily reflects the establishment of deferred tax liabilities for the tax impacts of certain fair value and other purchase accounting adjustments related to theCooper Tire acquisition. In theU.S. , we have a cumulative loss for the three-year period endingSeptember 30, 2021 . However, as the three-year cumulative loss in theU.S. is driven by business disruptions created by the COVID-19 pandemic, primarily in 2020, we also considered other objectively verifiable information in assessing our ability to utilize our net deferred tax assets, including recent favorable recovery trends in the tire industry and our tire volume as well as expected continued improvement. In addition, theCooper Tire acquisition is expected to generate incremental domestic earnings and provide opportunities for cost and other operating synergies to further improve ourU.S. profitability. These favorable trends, together with tax planning strategies, may provide sufficient objectively verifiable information to reverse a portion or all of ourU.S. valuation allowance for foreign tax credits within the next twelve months. AtSeptember 30, 2021 andDecember 31, 2020 , ourU.S. net deferred tax assets included$160 million and$133 million , respectively, of foreign tax credits with limited lives, net of valuation allowances of$328 million , generated primarily from the 36
--------------------------------------------------------------------------------
Table of contents
receipt of foreign dividends. Our earnings and forecasts of future profitability, taking into consideration recent trends, along with three significant sources of foreign income provide us sufficient positive evidence that we will be able to utilize our remaining foreign tax credits that expire between 2025 and 2031. Our 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 transactions, including 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 consider our current forecasts of future profitability in assessing our ability to realize our deferred tax assets, including our foreign tax credits. As noted above, these forecasts include the impact of recent trends, including various macroeconomic factors such as the impact of the COVID-19 pandemic, on our profitability, as well as the impact of tax planning strategies. Macroeconomic factors, including the impact of the COVID-19 pandemic, possess a high degree of volatility and can significantly impact our profitability. As such, there is a risk that future earnings will not be sufficient to fully utilize ourU.S. net deferred tax assets, including our remaining 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, objectively verifiable evidence to conclude that it is more likely than not that, atSeptember 30, 2021 , ourU.S. net deferred tax assets, including our foreign tax credits, net of valuation allowances, will be fully utilized. AtSeptember 30, 2021 andDecember 31, 2020 , we had approximately$1.3 billion of foreign deferred tax assets and valuation allowances of$1.0 billion and$1.1 billion , respectively. 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 these net foreign deferred tax assets. Most notably, in Luxembourg, we maintain a valuation allowance of approximately$897 million on all of our net deferred tax assets. 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 regarding income taxes and the realizability of our deferred tax assets, including our foreign tax credits, refer to Note to the Consolidated Financial Statements No. 6, Income Taxes.
Minority shareholders' net income in the first nine months of 2021 was
SEGMENT INFORMATION
Segment information reflects our strategic business units ("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, goodwill and other asset impairment charges, and certain other items.
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 Note to the Consolidated Financial Statements No. 8, Business
Segments, for further information and for a reconciliation of total segment
operating income to Income (Loss) before Income Taxes.
Total segment operating income for the third quarter of 2021 was $372 million ,
increasing $210 million from $162 million in the third quarter of 2020. Total
segment operating margin (segment operating income divided by segment sales) in
the third quarter of 2021 was 7.5% compared to 4.7% in the third quarter of
2020. Total segment operating income for the first nine months of 2021 was $897
million , a favorable change of $1,213 million from total segment operating loss
of $316 million in the first nine months of 2020. Total segment operating margin
in the first nine months of 2021 was 7.2% compared to (3.6)% in the first nine
months of 2020.
37
--------------------------------------------------------------------------------
Table of contentsAmericas Three Months EndedSeptember 30 ,
Nine Months Ended
Percent Percent
(In millions) 2021 2020 Change Change 2021 2020 Change Change
Tire Units 25.9 16.2 9.7 59.3 % 60.4 39.2 21.2 54.1 %
Net Sales $ 2,967 $ 1,823 $ 1,144 62.8 % $ 7,010 $ 4,630 $ 2,380 51.4 %
Operating
Income (Loss) 259 106 153 144.3 % 606 (181 ) 787 NM
Operating
Margin 8.7 % 5.8 % 8.6 % (3.9 )%
Three months ended
Americas unit sales in the third quarter of 2021 increased 9.7 million units, or 59.3%, to 25.9 million units. Replacement tire volume increased 10.2 million units, or 82.7%, primarily due to the addition ofCooper Tire's units and an increase in our consumer business inthe United States , driven by continued recovery from the economic impacts of the COVID-19 pandemic. OE tire volume decreased 0.5 million units, or 15.8%, primarily in our consumer business inthe United States . Consumer OE tire volume continued to be negatively affected by impacts to vehicle production driven by global supply chain disruptions, including shortages of key manufacturing components, such as semiconductors. Net sales in the third quarter of 2021 were$2,967 million , increasing$1,144 million , or 62.8%, from$1,823 million in the third quarter of 2020. The increase in net sales was driven by the addition ofCooper Tire's net sales of$795 million , improvements in price and product mix of$137 million , higher sales in other tire-related businesses of$105 million , primarily due to an increase in third-party sales of chemical products and higher retread and aviation sales, higher tire volume of$87 million , and favorable foreign currency translation of$21 million , primarily related to the strengthening of the Brazilian real, Canadian dollar and Mexican peso. Operating income in the third quarter of 2021 was$259 million , increasing$153 million , or 144.3%, from$106 million in the third quarter of 2020. The increase in operating income was due to improvements in price and product mix of$186 million , which more than offset higher raw material costs of$77 million , the addition ofCooper Tire's operating income of$44 million , higher tire volume of$20 million , higher earnings in other tire-related businesses of$13 million , primarily due to higher retail and aviation sales and an increase in third-party sales of chemical products, and lower conversion costs of$11 million , primarily reflecting favorable overhead absorption as a result of higher factory utilization more than offsetting the nonrecurrence of pandemic-related temporary cost reductions in 2020, inflationary cost pressures and labor-related manufacturing inefficiencies. These increases were partially offset by higher SAG of$25 million , primarily related to higher wages and benefits, inflation and warehousing costs, and increased transportation costs of$22 million . SAG and conversion costs include incremental savings from rationalization plans of$2 million and$1 million , respectively. Price and product mix includesTireHub equity income of$1 million in 2021, while 2020 includes losses of$4 million . We estimate that the national strike inColombia and the severe winter storm in theU.S. that occurred in the first half of 2021 negatively impactedAmericas operating income for the third quarter of 2021 by approximately$5 million ($5 million after-tax and minority) and$1 million , respectively. Operating income in the third quarter of 2021 excluded rationalization charges of$11 million , primarily related to the permanent closure ofGadsden . Operating income in the third quarter of 2020 excluded rationalization charges of$9 million and asset write-offs of$4 million , primarily related toGadsden .
Nine Months Ended
Americas unit sales in the first nine months of 2021 increased 21.2 million units, or 54.1%, to 60.4 million units. Replacement tire volume increased 20.0 million units, or 65.8%, and OE tire volume increased 1.2 million units, or 13.5%, primarily due to the addition ofCooper Tire's units and an increase in our consumer business inthe United States ,Brazil andMexico , driven by continued recovery from the economic impacts of the COVID-19 pandemic. Consumer OE tire volume continued to be negatively affected by impacts to vehicle production driven by global supply chain disruptions, including shortages of key manufacturing components, such as semiconductors. Net sales in the first nine months of 2021 were$7,010 million , increasing$2,380 million , or 51.4%, from$4,630 million in the first nine months of 2020. The increase in net sales was driven by the addition ofCooper Tire's net sales of$1,018 million , higher tire volume of$966 million , higher sales in other tire-related businesses of$307 million , primarily due to an increase in third-party sales of chemical products and higher retail, retread and aviation sales, and favorable price and product mix of$87 million . We estimate that the severe winter storm in theU.S. negatively impactedAmericas net sales for the first nine months of 2021 by approximately$35 million . 38
--------------------------------------------------------------------------------
Table of contents
Operating income in the first nine months of 2021 was$606 million , a change of$787 million , from an operating loss of$181 million in the first nine months of 2020. The increase in operating income was due to improvements in price and product mix of$356 million , which more than offset higher raw material costs of$99 million , lower conversion costs of$218 million , primarily due to favorable overhead absorption as a result of higher factory utilization, higher tire volume of$174 million , higher earnings in other tire-related businesses of$90 million , primarily due to an increase in third-party sales of chemical products and higher retail and aviation sales, the favorable indirect tax ruling inBrazil of$69 million ,Cooper Tire's operating income of$30 million , and$13 million of pandemic-related work in process inventory write-offs in 2020. These increases were partially offset by higher SAG of$54 million , primarily due to higher wages and benefits relating to pandemic-related actions taken in 2020, inflation and higher warehousing costs, and the net impact of out of period adjustments totaling$6 million ($6 million after-tax and minority) of expense primarily related to inventory and accrued freight charges. Conversion costs and SAG include incremental savings from rationalization plans of$55 million and$6 million , respectively, primarily related toGadsden . Price and product mix includesTireHub equity income of$2 million in the first nine months of 2021 compared to a loss of$30 million in the first nine months of 2020. We estimate that the severe winter storm in theU.S. and the national strike inColombia that occurred in the first half of 2021 negatively impactedAmericas operating income for the first nine months of 2021 by approximately$42 million and$9 million ($9 million after-tax and minority), respectively. Operating income in the first nine months of 2021 excluded rationalization charges of$29 million , primarily related to the permanent closure ofGadsden . Operating income in the first nine months of 2020 excluded theTireHub non-cash impairment charge of$148 million , as well as asset write-offs and accelerated depreciation of$93 million and rationalization charges of$81 million , primarily related toGadsden .
Three Months Ended September 30 ,
Nine Months Ended
Percent Percent
(In millions) 2021 2020 Change Change 2021 2020 Change Change
Tire Units 14.2 13.2 1.0 7.7 % 38.9 32.1 6.8 21.2 %
Net Sales $ 1,397 $ 1,156 $ 241 20.8 % $ 3,858 $ 2,827 $ 1,031 36.5 %
Operating
Income (Loss) 81 22 59 268.2 % 198 (141 ) 339 NM
Operating
Margin 5.8 % 1.9 % 5.1 % (5.0 )%
Three months ended
Europe ,Middle East andAfrica unit sales in the third quarter of 2021 increased 1.0 million units, or 7.7%, to 14.2 million units. Replacement tire volume increased 1.5 million units, or 14.2%, primarily in our consumer business, reflecting increased industry demand due to continued recovery from the economic impacts of the COVID-19 pandemic, the recovery of some tire volume lost in 2020 as a result of our ongoing initiative to align distribution inEurope , and the addition ofCooper Tire's units. OE tire volume decreased 0.5 million units, or 17.8%, reflecting the negative impact on vehicle production of global supply chain disruptions, including shortages of key manufacturing components, such as semiconductors. Net sales in the third quarter of 2021 were$1,397 million , increasing$241 million , or 20.8%, from$1,156 million in the third quarter of 2020. Net sales increased primarily due to improvements in price and product mix of$128 million , the addition ofCooper Tire's net sales of$65 million , higher sales in other tire-related businesses of$23 million , driven by growth in our Fleet Solutions business and increased aviation sales, higher tire volume of$16 million , and favorable foreign currency translation of$7 million , driven by a stronger euro, South African rand and British pound partially offset by a weaker Turkish lira. Operating income in the third quarter of 2021 was$81 million , an increase of$59 million , from$22 million in the third quarter of 2020. The increase in operating income was primarily due to improvements in price and product mix of$118 million , which more than offset higher raw material costs of$53 million , lower conversion costs of$12 million , primarily due to favorable overhead absorption as a result of higher factory utilization, higher earnings in other tire-related businesses of$6 million , primarily due to increases in aviation and racing sales, and higher tire volume of$4 million . These increases were partially offset by higher SAG of$16 million , primarily related to higher advertising expenses and higher wages and benefits, both relating to pandemic-related actions taken in 2020 as well as inflation, higher transportation costs of$8 million , and higher plant industrialization costs of$5 million . Conversion costs include incremental savings from rationalization plans of$1 million .
Operating income in the third quarter of 2021 excluded a net gain on asset sales
of
39--------------------------------------------------------------------------------
Table of contents
Nine Months Ended
Europe ,Middle East andAfrica unit sales in the first nine months of 2021 increased 6.8 million units, or 21.2%, to 38.9 million units. Replacement tire volume increased 5.6 million units, or 22.2%, primarily in our consumer business, reflecting increased industry demand due to continued recovery from the economic impacts of the COVID-19 pandemic and the recovery of some tire volume lost in 2020 as a result of our ongoing initiative to align distribution inEurope . OE tire volume increased 1.2 million units, or 17.6%, reflecting share gains driven by new consumer fitments, partially offset by the negative impact on vehicle production of global supply chain disruptions, including shortages of key manufacturing components, such as semiconductors. Net sales in the first nine months of 2021 were$3,858 million , increasing$1,031 million , or 36.5%, from$2,827 million in the first nine months of 2020. Net sales increased primarily due to higher tire volume of$509 million , improvements in price and product mix of$237 million , favorable foreign currency translation of$126 million , driven by a stronger euro, South African rand and British pound partially offset by a weaker Turkish lira, the addition ofCooper Tire's net sales of$83 million , and higher sales in other tire-related businesses of$75 million , primarily due to growth in our Fleet Solutions business and increased motorcycle, retread and racing tire sales. Operating income in the first nine months of 2021 was$198 million , a change of$339 million , from an operating loss of$141 million in the first nine months of 2020. The increase in operating income was primarily due to improvements in price and product mix of$189 million , which more than offset higher raw material costs of$50 million , higher tire volume of$134 million , lower conversion costs of$120 million , primarily due to favorable overhead absorption as a result of higher factory utilization, and$12 million of pandemic-related work in process inventory write-offs in 2020. These increases were partially offset by higher SAG of$48 million , primarily related to higher wages and benefits and higher advertising expenses, both relating to pandemic-related actions taken in 2020 as well as higher warehousing costs and inflation, higher transportation costs of$11 million , and higher plant industrialization costs of$10 million . Conversion costs and SAG include incremental savings from rationalization plans of$5 million and$1 million , respectively. Operating income in the first nine months of 2021 excluded net rationalization charges of$46 million , a net gain on asset sales of$8 million and accelerated depreciation of$1 million . Operating income in the first nine months of 2020 excluded a non-cash goodwill impairment charge of$182 million , net rationalization charges of$48 million , net losses on asset sales of$2 million and accelerated depreciation of$1 million .
Three Months Ended September 30 ,
Nine Months Ended
Percent Percent
(In millions) 2021 2020 Change Change 2021 2020 Change Change
Tire Units 8.1 7.2 0.9 12.6 % 21.4 17.0 4.4 25.9 %
Net Sales $ 570 $ 486 $ 84 17.3 % $ 1,556 $ 1,208 $ 348 28.8 %
Operating Income 32 34 (2 ) (5.9 )% 93 6 87 NM
Operating Margin 5.6 % 7.0 % 6.0 % 0.5 %
Three months ended
Asia Pacific unit sales in the third quarter of 2021 increased 0.9 million units, or 12.6%, to 8.1 million units. Replacement tire volume increased 0.4 million units, or 10.0%. OE tire volume increased 0.5 million units, or 17.7%. These increases were primarily due to the addition ofCooper Tire's units. Net sales in the third quarter of 2021 were$570 million , increasing$84 million , or 17.3%, from$486 million in the third quarter of 2020. Net sales increased due to the addition ofCooper Tire's net sales of$47 million , favorable price and product mix of$32 million , and favorable foreign currency translation of$12 million , primarily related to a stronger Chinese yuan and Australian dollar. Operating income in the third quarter of 2021 was$32 million , a decrease of$2 million , or 5.9%, from$34 million in the third quarter of 2020. The decrease in operating income was primarily due to higher raw material costs of$31 million and higher SAG of$8 million , primarily related to higher advertising expenses and higher wages and benefits, both relating to pandemic-related actions taken in 2020. These decreases were partially offset by improvements in price and product mix of$28 million , higher earnings in other tire-related businesses of$4 million , primarily due to higher aviation sales, the addition ofCooper Tire's operating income of$3 million , and lower conversion costs of$3 million , primarily due to favorable overhead absorption as a result of higher factory utilization.
Operating income in the third quarter of 2020 excluded net rationalization
charges of
40--------------------------------------------------------------------------------
Table of contents
Nine Months Ended
Asia Pacific unit sales in the first nine months of 2021 increased 4.4 million units, or 25.9%, to 21.4 million units. Replacement tire volume increased 2.6 million units, or 23.3%. OE tire volume increased 1.8 million units, or 31.3%. These increases were primarily due to continued recovery from the economic impacts of the COVID-19 pandemic and the addition ofCooper Tire's units, partially offset by the impact on vehicle production of global supply chain disruptions, including shortages of key manufacturing components, such as semiconductors. Net sales in the first nine months of 2021 were$1,556 million , increasing$348 million , or 28.8%, from$1,208 million in the first nine months of 2020. Net sales increased due to higher tire volume of$198 million , favorable foreign currency translation of$66 million , primarily related to a stronger Australian dollar and Chinese yuan, the addition ofCooper Tire's net sales of$62 million , and favorable price and product mix of$22 million . Operating income in the first nine months of 2021 was$93 million , an increase of$87 million , from$6 million in the first nine months of 2020. The increase in operating income was primarily due to higher tire volume of$49 million , lower conversion costs of$46 million , primarily due to favorable overhead absorption as a result of higher factory utilization, favorable price and product mix of$38 million , higher earnings in other tire-related businesses of$9 million , primarily due to higher aviation sales, and the addition ofCooper Tire's operating income of$3 million . These increases were partially offset by higher SAG of$28 million , primarily related to higher advertising expenses and higher wages and benefits, both relating to pandemic-related actions taken in 2020, and higher raw material costs of$27 million .
Operating income in the first nine months of 2020 excluded net rationalization
charges of
LIQUIDITY AND CAPITAL RESOURCESOur 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 2021, we completed several financing actions to provide funding for the
acquisition of
OnApril 6, 2021 , we issued$550 million of 5.25% senior notes dueApril 2031 and$450 million of 5.625% senior notes due 2033. The net proceeds from these notes, together with cash and cash equivalents, were used to redeem our existing$1.0 billion 5.125% senior notes due 2023 onMay 6, 2021 at a redemption price of 100% of the principal amount, plus accrued and unpaid interest to the redemption date. OnMay 18, 2021 , we issued$850 million of 5% senior notes due 2029 and$600 million of 5.25% senior notes dueJuly 2031 . The net proceeds from these notes, together with cash and cash equivalents and borrowings under our first lien revolving credit facility, were used to fund the cash component of the Merger Consideration and related transaction costs. OnJune 7, 2021 , we amended and restated our$2.0 billion first lien revolving credit facility. Changes to the facility include extending the maturity toJune 8, 2026 , increasing the amount of the facility to$2.75 billion , and includingCooper Tire's accounts receivable and inventory in the borrowing base for the facility. The interest rate for loans under the facility decreased by 50 basis points to LIBOR plus 125 basis points. Following theCooper Tire acquisition,$117 million in aggregate principal amount ofCooper Tire's 7.625% senior notes due 2027 remain outstanding. These notes also included a$19 million fair value step-up, which is being amortized against interest expense over the remaining life of the notes. Amortization during the third quarter of 2021 was approximately$1 million . OnSeptember 28, 2021 , we issued €400 million in aggregate principal amount of GEBV's 2.75% senior notes due 2028. A portion of the net proceeds from these notes was used to redeem our existing €250 million 3.75% senior notes due 2023 onOctober 28, 2021 at a redemption price of 100% of the principal amount, plus accrued and unpaid interest to the redemption date. The remaining net proceeds will be used for general corporate purposes, which may include repayment of outstanding borrowings under revolving credit facilities. AtSeptember 30, 2021 , we had$1,187 million in cash and cash equivalents, compared to$1,539 million atDecember 31, 2020 . For the nine months endedSeptember 30, 2021 , net cash used by operating activities was$2 million , reflecting cash used for working capital of$1,064 million and rationalization payments of$162 million , largely offset by net income for the period of$223 million , which includes non-cash charges for depreciation and amortization of$645 million and an inventory fair value step-up adjustment related to theCooper Tire acquisition of$110 million . Net cash used by investing activities was$2,491 million , primarily representing the$1,856 million cash component of the Merger Consideration, net of cash and restricted cash acquired, and capital expenditures of$666 million . Cash provided by financing activities was$2,155 million , primarily due to net borrowings of$2,257 million . 41
--------------------------------------------------------------------------------
Table of contents
AtSeptember 30, 2021 , we had$4,195 million of unused availability under our various credit agreements, compared to$3,881 million atDecember 31, 2020 . The table below presents unused availability under our credit facilities at those dates: September 30, December 31, (In millions) 2021 2020
First lien revolving credit facility $ 2,336
927 982
Chinese credit facilities 326 297
Mexican credit facility - 48
Other foreign and domestic debt 141 380
Short term credit arrangements 465 639
$ 4,195 $ 3,881
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 2021 cash flow needs to include capital expenditures of
approximately $1.0 billion . We also expect interest expense to be approximately
$400 million ; rationalization payments to be approximately $225 million ; income
tax payments to be approximately $150 million , excluding one-time items; and
contributions to our funded pension plans to be $50 million to $75 million . We
expect working capital to be a use of cash for the full year of 2021 of $300
million to $500 million .
We are continuing to actively monitor our liquidity and intend to operate our
business in a way that allows us to address our cash flow needs with our
existing cash and available credit if they cannot be funded by cash generated
from operating or other financing activities. We believe that our liquidity
position is adequate to fund our operating and investing needs and debt
maturities for the next twelve months and to provide us with the ability 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 as
China , South Africa , Serbia and Argentina , 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 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, South African, Serbian and Argentinian 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. At September 30,
2021 , approximately $1,010 million of net assets, including approximately $180
million of cash and cash equivalents, were subject to such requirements. The
requirements we must comply with to transfer funds out of China , South Africa ,
Serbia and Argentina have not adversely impacted our ability to make transfers
out of those countries.
42
--------------------------------------------------------------------------------
Table of contents
Operating Activities
Net cash used by operating activities was$2 million in the first nine months of 2021, compared to net cash used by operating activities of$239 million in the first nine months of 2020. The$237 million improvement in net cash used by operating activities was primarily due to an increase in operating income from our SBUs of$1,213 million , which includes a non-cash charge of$110 million for an inventory fair value step-up adjustment related to theCooper Tire acquisition. This improvement to cash flows from operating activities was partially offset by (i) a net increase in cash used for working capital of$792 million , (ii) an increase in cash income tax payments of$132 million , primarily as a result of higher earnings in 2021 and the receipt of certain tax refunds in 2020, (iii) year-over-year changes in balance sheet accounts for Compensation and Benefits, Other Current Liabilities and Other Assets and Liabilities totaling$97 million , driven by prior year cost actions, payroll tax deferrals and other pandemic-related impacts to our 2020 balance sheet, (iv) cash paid for transaction and other costs related to theCooper Tire acquisition of$41 million , (v) higher pension contributions and direct payments of$31 million , and (vi) an$18 million increase in cash used for rationalization payments. The net increase in cash used for working capital reflects increases in cash used for Inventory of$1,452 million and Accounts Receivable of$461 million , partially offset by an increase in cash provided by Accounts Payable - Trade of$1,121 million . These changes were driven by our continued recovery from the impacts of the COVID-19 pandemic, which include higher sales volume and an increase in finished goods inventory as we continue to restock in order to meet anticipated near-term demand. Investing Activities Net cash used by investing activities was$2,491 million in the first nine months of 2021, compared to$515 million in the first nine months of 2020. Net cash used by investing activities in the first nine months of 2021 includes the payment of the$1,856 million cash component of the Merger Consideration, net of cash and restricted cash acquired. Capital expenditures were$666 million in the first nine months of 2021, including$119 million related toCooper Tire since the Closing Date, compared to$487 million in the first nine months of 2020. Beyond expenditures required to sustain our facilities, capital expenditures in 2021 and 2020 primarily related to investments in additional 17-inch and above capacity around the world. Financing Activities Net cash provided by financing activities was$2,155 million in the first nine months of 2021, compared to net cash provided by financing activities of$955 million in the first nine months of 2020. Financing activities in the first nine months of 2021 included net borrowings of$2,257 million , which were partially offset by debt-related costs and other financing transactions of$98 million . Financing activities in 2020 included net borrowings of$1,009 million , which were partially offset by dividends on our common stock of$37 million .
Credit Sources
In aggregate, we had total credit arrangements of$12,377 million available atSeptember 30, 2021 , of which$4,195 million were unused, compared to$9,707 million available atDecember 31, 2020 , of which$3,881 million were unused. AtSeptember 30, 2021 , we had long term credit arrangements totaling$11,382 million , of which$3,730 million were unused, compared to$8,632 million and$3,242 million , respectively, atDecember 31, 2020 . AtSeptember 30, 2021 , we had short term committed and uncommitted credit arrangements totaling$995 million , of which$465 million were unused, compared to$1,075 million and$639 million , respectively, atDecember 31, 2020 . 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
AtSeptember 30, 2021 , we had$5,892 million of outstanding notes compared to$3,860 million atDecember 31, 2020 . The increase fromDecember 31, 2020 was primarily due to the issuance of$1.45 billion of senior notes to fund a portion of the acquisition ofCooper Tire , the issuance of €400 million of GEBV senior notes, and$135 million ofCooper Tire senior notes.
OnJune 7, 2021 , we amended and restated our$2.0 billion first lien revolving credit facility. Changes to the facility include extending the maturity toJune 8, 2026 , increasing the amount of the facility to$2.75 billion , and includingCooper Tire's accounts receivable and inventory in the borrowing base for the facility. The interest rate for loans under the facility decreased by 50 basis points to LIBOR plus 125 basis points, based on our current liquidity as described below. Our amended and restated first lien revolving credit facility is available in the form of loans or letters of credit. Up to$800 million in letters of credit and$50 million of swingline loans are available for issuance under the facility. Subject to the consent of the lenders whose commitments are to be increased, we may request that the facility be increased by up to$250 million . 43
--------------------------------------------------------------------------------
Table of contents
Availability under the facility is subject to a borrowing base, which is based on (i) 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 in an amount not to exceed$400 million , (iii) the value of eligible machinery and equipment, and (iv) certain cash in an amount not to exceed$275 million . To the extent that our eligible accounts receivable, 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$2.75 billion . As ofSeptember 30, 2021 , our borrowing base, and therefore our availability, under this facility was$395 million below the facility's stated amount of$2.75 billion . If Available Cash (as defined in the facility) plus the availability under the facility is greater than$750 million , amounts drawn under the facility will bear interest, at our option, at (i) 125 basis points over LIBOR or (ii) 25 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). If Available Cash plus the availability under the facility is equal to or less than$750 million , then amounts drawn under the facility will bear interest, at our option, at (i) 150 basis points over LIBOR or (ii) 50 basis points over an alternative base rate. Undrawn amounts under the facility will be subject to an annual commitment fee of 25 basis points.
At
At
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.
At both
€800 million Amended and Restated Senior Secured European Revolving Credit Facility due 2024
Our amended and restated 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 to GEBV,GDTG and Goodyear 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. Amounts drawn under this facility will 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, and undrawn amounts under the facility are subject to an annual commitment fee of 25 basis points. 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.
At both
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, 2020 under the first lien facility andDecember 31, 2018 under the European facility.
Accounts Receivable Securitization Facilities (On-Balance Sheet)
OnOctober 11, 2021 , GEBV and certain other of our European subsidiaries amended and restated the definitive agreements for our pan-European accounts receivable securitization facility, extending the term through 2027. 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 16, 2020 throughOctober 18, 2021 , the designated maximum amount for the facility was €280 million. For the period fromOctober 19, 2021 throughOctober 19, 2022 , the designated maximum amount of the facility was increased to €300 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)October 19, 2027 , (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 44
--------------------------------------------------------------------------------
Table of contents
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 on
AtSeptember 30, 2021 , the amounts available and utilized under this program totaled$308 million (€266 million). AtDecember 31, 2020 , the amounts available and utilized under this program totaled$291 million (€237 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. AtSeptember 30, 2021 , the gross amount of receivables sold was$523 million , compared to$451 million atDecember 31, 2020 . The increase fromDecember 31, 2020 is primarily due to the addition ofCooper Tire's off-balance sheet factoring programs.
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 programs. Agreements for such financing programs totaled up to$520 million and$500 million atSeptember 30, 2021 andDecember 31, 2020 , respectively.
Further Information
OnMarch 5, 2021 , theICE Benchmark Administration , the administrator of LIBOR ("IBA"), confirmed its previously announced plans to cease publication of USD LIBOR onDecember 31, 2021 for the one week and two month USD LIBOR tenors, and onJune 30, 2023 for all other USD LIBOR tenors. In addition, the IBA will also cease publication of all tenors of euro, Swiss franc, Japanese yen and British pound LIBOR onDecember 31, 2021 . Inthe United States , efforts to identify a set of alternativeU.S. dollar reference interest rates include the recommendation by the Alternative Reference Rates Committee that has been convened by theFederal Reserve Board and theFederal Reserve Bank of New York to use the Secured Overnight Financing Rate, known as SOFR. Additionally, theInternational Swaps and Derivatives Association, Inc. launched consultations on technical issues related to new benchmark fallbacks for derivative contracts that reference certain interbank offered rates, including LIBOR, and has developed documentation to incorporate fallback provisions into relevant derivative contracts. 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 , theUnited Kingdom , 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 have identified and evaluated our financing obligations and other contracts that refer to LIBOR and expect to be able to transition those obligations and contracts to an alternative reference rate upon the discontinuation of LIBOR. Our amended and restated first lien revolving credit facility, our second lien term loan facility and our European revolving credit facility, which constitute the most significant of our LIBOR-based debt obligations, contain fallback provisions that address the potential discontinuation of LIBOR and facilitate the adoption of an alternate rate of interest. We have not issued any long term floating rate notes. Our amended and restated 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 our 2020 Form 10K and Note to the Consolidated Financial Statements No. 9, Financing Arrangements and Derivative Financial Instruments, in this Form 10-Q.
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
45--------------------------------------------------------------------------------
Table of contents
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 of
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$275 million . If this were to 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 ofSeptember 30, 2021 , our unused availability under this facility of$2,336 million , plus our Available Cash of$247 million , totaled$2,583 million , which is in excess of$275 million . ? 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. AtSeptember 30, 2021 , 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.
At
The terms "Available Cash," "EBITDA," "Consolidated Interest Expense," "Consolidated Net Secured Indebtedness," "Pro Forma Senior Secured Leverage Ratio," "Consolidated Net GEBV Indebtedness" and "Consolidated GEBV EBITDA" have the meanings given them in the respective credit facilities.
Potential Future Financings
In addition to the financing activities described above, 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 will 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.
46
--------------------------------------------------------------------------------
Table of contents
Dividends and Common Stock Repurchases
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. In the first nine months of 2020, we paid cash dividends of$37 million on our common stock, all of which was paid in the first quarter of 2020. This amount excludes dividends earned on stock-based compensation plans of approximately$1 million . OnApril 16, 2020 , we announced that we have suspended the quarterly dividend on our common stock. We may repurchase shares delivered to us by employees as payment for the exercise price of stock options and the withholding taxes due upon the exercise of stock options or the vesting or payment of stock awards. During the first nine months of 2021, we did not repurchase any shares from employees.
The restrictions imposed by our credit facilities and indentures are not expected to affect our ability to pay dividends or repurchase our capital stock 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.
Supplemental Guarantor Financial Information
Certain of our subsidiaries, which are listed on Exhibit 22.1 to this Quarterly Report on Form 10-Q and are generally holding or operating companies, have guaranteed our obligations under the$800 million outstanding principal amount of 9.5% senior notes due 2025, the$900 million outstanding principal amount of 5% senior notes due 2026, the$700 million outstanding principal amount of 4.875% senior notes due 2027, the$850 million outstanding principal amount of 5% senior notes due 2029, the$550 million outstanding principal amount of 5.25% senior notes dueApril 2031 , the$600 million outstanding principal amount of 5.25% senior notes dueJuly 2031 and the$450 million outstanding principal amount of 5.625% senior notes due 2033 (collectively, the "Notes"). The Notes have been issued byThe Goodyear Tire & Rubber Company (the "Parent Company") and are its senior unsecured obligations. The Notes rank equally in right of payment with all of our existing and future senior unsecured obligations and senior to any of our future subordinated indebtedness. The Notes are effectively subordinated to our existing and future secured indebtedness to the extent of the assets securing that indebtedness. The Notes are fully and unconditionally guaranteed on a joint and several basis by each of our wholly-ownedU.S. and Canadian subsidiaries that also guarantee our obligations under certain of our senior secured credit facilities (such guarantees, the "Guarantees"; and, such guaranteeing subsidiaries, the "Subsidiary Guarantors"). The Guarantees are senior unsecured obligations of the Subsidiary Guarantors and rank equally in right of payment with all existing and future senior unsecured obligations of our Subsidiary Guarantors. The Guarantees are effectively subordinated to existing and future secured indebtedness of the Subsidiary Guarantors to the extent of the assets securing that indebtedness. The Notes are structurally subordinated to all of the existing and future debt and other liabilities, including trade payables, of our subsidiaries that do not guarantee the Notes (the "Non-Guarantor Subsidiaries"). The Non-Guarantor Subsidiaries will have no obligation, contingent or otherwise, to pay amounts due under the Notes or to make funds available to pay those amounts. Certain Non-Guarantor Subsidiaries are limited in their ability to remit funds to us by means of dividends, advances or loans due to required foreign government and/or currency exchange board approvals or limitations in credit agreements or other debt instruments of those subsidiaries. The Subsidiary Guarantors, as primary obligors and not merely as sureties, jointly and severally irrevocably and unconditionally guarantee on a senior unsecured basis the performance and full and punctual payment when due of all obligations of the Parent Company under the Notes and the related indentures, whether for payment of principal of or interest on the Notes, expenses, indemnification or otherwise. The Guarantees of the Subsidiary Guarantors are subject to release in limited circumstances only upon the occurrence of certain customary conditions. Although the Guarantees provide the holders of Notes with a direct unsecured claim against the assets of the Subsidiary Guarantors, underU.S. federal bankruptcy law and comparable provisions ofU.S. state fraudulent transfer laws, in certain circumstances a court could cancel a Guarantee and order the return of any payments made thereunder to the Subsidiary Guarantor or to a fund for the benefit of its creditors. 47
--------------------------------------------------------------------------------
Table of contents
A court might take these actions if it found, among other things, that when the Subsidiary Guarantors incurred the debt evidenced by their Guarantee (i) they received less than reasonably equivalent value or fair consideration for the incurrence of the debt and (ii) any one of the following conditions was satisfied: ? the Subsidiary Guarantor was insolvent or rendered insolvent by reason of the incurrence; ? the Subsidiary Guarantor was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital; or ? the Subsidiary Guarantor intended to incur, or believed (or reasonably should have believed) that it would incur, debts beyond its ability to pay as those debts matured. In applying the above factors, a court would likely find that a Subsidiary Guarantor did not receive fair consideration or reasonably equivalent value for its Guarantee, except to the extent that it benefited directly or indirectly from the issuance of the Notes. The determination of whether a guarantor was or was not rendered "insolvent" when it entered into its guarantee will vary depending on the law of the jurisdiction being applied. Generally, an entity would be considered insolvent if the sum of its debts (including contingent or unliquidated debts) is greater than all of its assets at a fair valuation or if the present fair salable value of its assets is less than the amount that will be required to pay its probable liability on its existing debts, including contingent or unliquidated debts, as they mature. Under Canadian federal bankruptcy and insolvency laws and comparable provincial laws on preferences, fraudulent conveyances or other challengeable or voidable transactions, the Guarantees could be challenged as a preference, fraudulent conveyance, transfer at undervalue or other challengeable or voidable transaction. The test to be applied varies among the different pieces of legislation, but as a general matter these types of challenges may arise in circumstances where: ? such action was intended to defeat, hinder, delay, defraud or prejudice creditors or others; ? such action was taken within a specified period of time prior to the commencement of proceedings under Canadian bankruptcy, insolvency or restructuring legislation in respect of a Subsidiary Guarantor, the consideration received by the Subsidiary Guarantor was conspicuously less than the fair market value of the consideration given, and the Subsidiary Guarantor was insolvent or rendered insolvent by such action and (in some circumstances, or) such action was intended to defraud, defeat or delay a creditor; ? such action was taken within a specified period of time prior to the commencement of proceedings under Canadian bankruptcy, insolvency or restructuring legislation in respect of a Subsidiary Guarantor and such action was taken, or is deemed to have been taken, with a view to giving a creditor a preference over other creditors or, in some circumstances, had the effect of giving a creditor a preference over other creditors; or ? a Subsidiary Guarantor is found to have acted in a manner that was oppressive, unfairly prejudicial to or unfairly disregarded the interests of any shareholder, creditor, director, officer or other interested party. In addition, in certain insolvency proceedings a Canadian court may subordinate claims in respect of the Guarantees to other claims against a Subsidiary Guarantor under the principle of equitable subordination if the court determines that (1) the holder of Notes engaged in some type of inequitable or improper conduct, (2) the inequitable or improper conduct resulted in injury to other creditors or conferred an unfair advantage upon the holder of Notes and (3) equitable subordination is not inconsistent with the provisions of the relevant solvency statute.
If a court canceled a Guarantee, the holders of Notes would no longer have a claim against that Subsidiary Guarantor or its assets.
Each Guarantee is limited, by its terms, to an amount not to exceed the maximum
amount that can be guaranteed by the applicable Subsidiary Guarantor without
rendering the Guarantee, as it relates to that Subsidiary Guarantor, voidable
under applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
48--------------------------------------------------------------------------------
Table of contents
Each Subsidiary Guarantor is a consolidated subsidiary of the Parent Company at the date of each balance sheet presented. The following tables present summarized financial information for the Parent Company and the Subsidiary Guarantors on a combined basis after elimination of (i) intercompany transactions and balances among the Parent Company and the Subsidiary Guarantors and (ii) equity in earnings from and investments in any Non-Guarantor Subsidiary. OnJuly 2, 2021 ,Cooper Tire and certain of its subsidiaries were added as Subsidiary Guarantors.
© Edgar Online, source
