EDGAR 10-K Filing

Company CIK: 24491
Filing Year: 2021
Filename: 24491_10-K_2021_0000024491-21-000011.json

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ITEM 1. BUSINESS
Item 1.BUSINESS
Cooper Tire & Rubber Company, with its subsidiaries (“Cooper” or the “Company”), is a leading manufacturer and marketer of replacement tires. It is the fifth largest tire manufacturer in North America and, according to a recognized trade source, the Cooper family of companies is the thirteenth largest tire company in the world based on sales. Cooper specializes in the design, manufacture, marketing and sales of passenger car, light truck, truck and bus radial ("TBR"), motorcycle and racing tires.
The Company is organized into four business segments: North America, Latin America, Europe and Asia. Each segment is managed separately. Additional information on the Company’s segments as reported, including their financial results, total assets, products, markets and presence in particular geographic areas, appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Business Segments” note to the consolidated financial statements.
Cooper Tire & Rubber Company was incorporated in the state of Delaware in 1930 as the successor to a business originally founded in 1914. Based in Findlay, Ohio, Cooper and its family of companies currently operate in 15 countries, including 10 manufacturing facilities and 19 distribution centers.
On February 22, 2021, the Company entered into an Agreement and Plan of Merger (as it may be amended from time to time, the “Merger Agreement”) by and among the Company, The Goodyear Tire & Rubber Company (“Goodyear”) and Vulcan Merger Sub Inc., a direct, wholly owned subsidiary of Goodyear (“Merger Sub”), pursuant to which, subject to the satisfaction or (to the extent permissible) waiver of the conditions set forth therein, Goodyear will acquire the Company by way of the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving such Merger as a wholly owned subsidiary of Goodyear. Under the terms of the Merger Agreement, at the effective time of the Merger, the Company’s stockholders will be entitled to receive $41.75 per share in cash and a fixed exchange ratio of 0.907 shares of Goodyear common stock per share of the Company’s common stock they own at the effective time. Upon completion of the proposed Merger, it is expected that the Company’s stockholders will own approximately 16 percent and Goodyear stockholders will own approximately 84 percent of the combined company on a fully diluted basis. The Company expects to complete the Merger in the second half of 2021, subject to the satisfaction of customary closing conditions, including receipt of required regulatory approvals and the approval of the Company’s stockholders. See the discussion under “The Merger” in Item 7 for additional information.
Business Segments
The Company has four segments under Accounting Standards Codification (“ASC”) 280, “Segments”:
•North America, composed of the Company’s operations in the United States (“U.S.”) and Canada;
•Latin America, composed of the Company’s operations in Mexico, Central America and South America;
•Europe; and
•Asia.
North America and Latin America meet the criteria for aggregation in accordance with ASC 280, as they are similar in their production and distribution processes and exhibit similar economic characteristics. The aggregated North America and Latin America segments are presented as “Americas Tire Operations” in the segment disclosure.
Both the Europe and Asia segments have been determined to be individually immaterial, as they do not meet the quantitative requirements for segment disclosure under ASC 280. In accordance with ASC 280, information about operating segments that are not reportable shall be combined and disclosed in an all other category separate from other reconciling items. As a result, these two segments have been combined in the segment operating results discussion. The results of the combined Europe and Asia segments are presented as “International Tire Operations” in the segment disclosure.
Americas Tire Operations Segment
The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in the U.S. replacement market. The segment also has a manufacturing operation in Mexico, Corporacion de Occidente SA de CV (“COOCSA”), which supplies passenger car and light truck tires to the Mexican, North American, Central American and South American markets. On January 24, 2020, the Company acquired the remaining noncontrolling ownership interest in COOCSA, making COOCSA a wholly-owned subsidiary. The segment also markets and distributes racing, TBR and motorcycle tires. The racing and motorcycle tires are manufactured by the Company’s European segment and by others. TBR tires are sourced from China-based Qingdao Ge Rui Da Rubber Co., Ltd. ("GRT"), a majority-owned joint venture manufacturing facility, and ACTR Company Limited ("ACTR"), a 35 percent owned joint venture in Vietnam, and through off-take agreements with Prinx Chengshan (Shandong) Tire Company Ltd. ("PCT") and Sailun Vietnam.
Major distribution channels and customers include independent tire dealers, wholesale distributors, regional and national retail tire chains, large retail chains that sell tires as well as other automotive products, mass merchandisers and digital channels. The
segment does not currently sell its products directly to end users, except through three Company-owned retail stores. The segment sells a limited number of tires to original equipment manufacturers ("OEMs").
The segment operates in a highly competitive industry, which includes Bridgestone Corporation, Goodyear Tire & Rubber Company, Groupe Michelin and other domestic and international companies. These competitors are substantially larger than the Company and serve OEMs as well as the replacement tire market. The segment also faces competition from low-cost producers in Asia, Mexico, South America and Central Europe. Some of those producers are foreign affiliates of the segment’s competitors in North America. The segment had a market share in 2020 of approximately 10 percent of all passenger car and light truck replacement tire sales in the U.S. The segment also participates in the U.S. TBR tire market. A portion of the products manufactured by the segment are exported throughout the world.
Success in competing for the sale of replacement tires is dependent upon many factors, the most important of which are price, quality, performance, brand, line coverage, availability through appropriate distribution channels and relationships with dealers and retailers. Other factors include warranty, credit terms and other value-added programs. The segment has built close working relationships through the years with independent dealers. It believes those relationships have enabled it to obtain a competitive advantage in that channel of the market. As a steadily increasing percentage of replacement tires are sold by large regional and national tire retailers, as well as mass merchandisers, the segment has increased focus on its penetration of those distribution channels, while maintaining its traditionally strong network of independent dealers. The segment is also active in various other sales channels, including digital channels and others.
The segment’s replacement tire business has a broad customer base that includes purchasers of proprietary brand tires that are marketed and distributed by the Company and private label tires which are manufactured by the Company but marketed and distributed by the Company’s customers.
International Tire Operations Segment
The International Tire Operations segment is the combination of the Europe and Asia operating segments. The European operations include manufacturing operations in the United Kingdom (“U.K.”) and the Republic of Serbia (“Serbia”). The U.K. entity primarily manufactures and markets motorcycle and racing tires and tire retread material for domestic and global markets. The Serbian entity manufactures passenger car and light truck tires primarily for the European markets and for export to the North American segment. The Asian operations are located in the People’s Republic of China (“PRC”) and Vietnam. Cooper Kunshan Tire, in the PRC, manufactures passenger car and light truck tires both for the Chinese domestic market and for export to markets outside of the PRC. GRT, a joint venture manufacturing facility located in the PRC, and ACTR, a joint venture manufacturing facility located in Vietnam, serve as global sources of TBR tire production for the Company. The segment also procured certain TBR tires under off-take agreements with PCT and Sailun Vietnam. The segment sells a majority of its tires in the replacement market, with a portion also sold to OEMs.
On January 17, 2019, Cooper Tire & Rubber Company Europe Ltd. (“Cooper Tire Europe”), a wholly-owned subsidiary of the Company, committed to a plan to cease substantially all passenger car and light truck tire production ("light vehicle tire production") at its Melksham, U.K. facility. The phasing out of light vehicle tire production was substantially completed in the third quarter of 2019. Approximately 300 roles were eliminated at the site. Cooper Tire Europe now obtains light vehicle tires to meet customer needs from other production sites within the Company’s global production network. Approximately 400 roles remain in Melksham to support the functions that continue there, including motorsports and motorcycle tire production, the materials business, Cooper Tire Europe headquarters, sales and marketing, and the Europe Technical Center.
As in the Americas Tire Operations segment, the International Tire Operations segment operates in a highly competitive industry, which includes Bridgestone Corporation, Goodyear Tire & Rubber Company, Groupe Michelin and other domestic and international companies. These competitors are substantially larger than the Company and serve OEMs as well as the replacement tire market. The segment also faces competition from low-cost producers.
Strategy
The Company continues to execute towards strategic imperatives, namely building a sustainable cost competitive position, driving top-line profitable growth and building organizational capabilities and enablers to support strategic goals. The Company’s current strategic initiatives include increasing the Company’s retail presence by making Cooper products available at a greater number of retail points, in order to better align the availability of the Company's products with where consumers shop for tires. This effort includes not only entering into relationships with new retailers, but expanding and continuing to grow with existing customers. The Company is continuously finding ways to provide consumers with improved access to the Company’s brands and products, and cultivating increased demand for the Company's products.
The Company is also evaluating and upgrading its global manufacturing footprint to align its technology, capabilities and production capacity in the right locations, to ensure a competitive cost structure and to best meet customer needs. On January 24,
2020, the Company acquired the remaining noncontrolling ownership interest in COOCSA, making COOCSA a wholly-owned subsidiary in the Americas Segment and allowing the Company to better leverage the low-cost facility. In addition, on April 5, 2019, Cooper Vietnam and Sailun Vietnam established a joint venture in Vietnam, ACTR, which began commercially producing TBR tires in 2020.
Improvement of the Company's product mix also continues to be a strategic imperative. 2020 reflected improved mix as a result of the continued transition to larger rim diameter tires. Additionally, the Company has expanded its TBR tire lineup with six new products in 2020.
Raw Materials
The Company’s principal raw materials include natural rubber, synthetic rubber, carbon black, chemicals and steel reinforcement components. The Company acquires its raw materials from various sources around the world to assure continuing supplies for its manufacturing operations and to mitigate the risk of potential supply disruptions.
During 2020, the Company experienced decreases in the costs of certain of its principal raw materials in comparison to 2019. The pricing volatility of natural rubber and certain other raw materials contributes to the difficulty in accurately predicting and managing these costs.
The Company has a purchasing office in Singapore to acquire natural rubber directly from producers in Southeast Asia. This purchasing operation enables the Company to work directly with producers to continually improve consistency and quality, while reducing the costs of materials, transportation and transactions.
The Company’s contractual relationships with its raw material suppliers are generally based on long-term agreements or purchase order arrangements. For natural rubber, natural gas and certain principal materials, procurement is managed through a combination of buying forward production requirements and utilizing the spot market. For other principal materials, procurement arrangements include supply agreements that may contain formula-based pricing based on commodity indices, multi-year agreements or spot purchases. These arrangements only cover quantities needed to satisfy normal manufacturing demands.
Research, Development and Product Improvement
The Company directs its research activities toward product development, performance and operating efficiency. The Company conducts extensive testing of current tire lines, as well as new concepts in tire design, construction and materials. During 2020, almost 86 million miles of tests were performed on indoor test wheels and in monitored road tests. The Company has a tire and vehicle test track in Texas that assists with the Company’s testing activities. Uniformity equipment is used to physically monitor manufactured tires for high standards of ride quality. The Company continues to design and develop specialized equipment to fit the precise needs of its manufacturing and quality control requirements.
Patents, Intellectual Property and Trademarks
The Company owns or has licenses to use patents and intellectual property covering various aspects in the design and manufacture of its products and processes and equipment for the manufacture of its products. While the Company believes these assets as a group are of material importance, it does not consider any one asset or group of these assets to be of such importance that the loss or expiration thereof would materially affect its business.
The Company owns and uses tradenames and trademarks worldwide. While the Company believes such tradenames and trademarks as a group are of material importance, the trademarks the Company considers most significant to its business are those using the words "Cooper," "Mastercraft," "Roadmaster," "Starfire," “Avon" and "Mickey Thompson.” The Company believes all of these significant trademarks are valid and will have unlimited duration as long as they are adequately protected and appropriately used.
Seasonal Trends
Customers generally place orders on a month-to-month basis and the company adjusts production and inventory to meet those orders, which results in varying backlogs of orders at different times of the year. Tire sales are subject to a seasonal demand pattern. This usually results in the sales volumes being strongest in the third and fourth quarters and weaker in the first and second quarters. There is year-round demand for the Company's products, however, light vehicle replacement tire sales are generally strongest during the third and fourth quarters of the year. Winter tires are sold principally during the months of May through November.
Environmental Matters
The Company recognizes the importance of compliance in environmental matters and has programs in place to comply with local, state, federal and foreign requirements and regulations. The Company has an organizational structure which allows it to supervise environmental activities, planning and programs to ensure compliance and improve environmental performance. The Company also participates in activities concerning general industry environmental matters, and the Company is committed to achieving a baseline of key environmental sustainability metrics and targets. A number of the Company’s operations are certified to the ISO 14001 standard and the Company has been recognized with several awards for efforts to improve energy efficiency.
The Company’s manufacturing facilities, like those of the industry generally, are subject to numerous laws and regulations designed to protect the environment. In general, the Company has not experienced difficulty in complying with these requirements and believes they have not had a material adverse effect on its financial condition or the results of its operations. The Company expects additional requirements with respect to environmental matters will be imposed in the future. The Company’s 2020 expense and capital expenditures for environmental matters at its facilities were not material, nor is it expected that expenditures in 2021 for such matters will be material.
Governmental Regulations
The Company is subject to a wide variety of local, state, and federal laws and regulations in the countries where it conducts business. Compliance with these laws and regulations often requires the dedication of time and effort of employees, as well as financial resources. During 2020, aside from the Company's response to the COVID-19 pandemic, compliance with the regulations applicable to the Company did not have a material effect on its capital expenditures, earnings, or competitive position.
Additional information about the impact of government regulations on the Company’s business is included in Item 1A. “Risk Factors.”
Global Social Impact
The Company is committed to environmental responsibility and the health and safety of its employees, contractors and the community, as well as the long-term, sustainable health and growth of the Company. The Company believes that work-related illnesses, injuries, security and environmental incidents are preventable. It is the Company’s vision to have all employees and contractors working safely and in an environmentally responsible manner at all times. The Company's organizational structure allows it to supervise and audit, using a combination of internal and external resources, environmental activities, planning and programs to ensure compliance with applicable environmental, health and safety ("EHS") requirements and Company standards. Additionally, the Company has implemented a global EHS management system to predictably and sustainably manage EHS and to hold management accountable for non-compliance. The Company also participates in activities concerning general industry environmental matters, including being a founding member of the Tire Industry Project and the Global Platform for Sustainable Natural Rubber. For an overview of the Company's EHS and sustainability strategy and commitments, please visit http://www.coopertire.com/Corporate-Responsibility/Sustainability.aspx. The information contained on or accessible through the Company's website is not incorporated by reference in this annual report on Form 10-K and should not be considered a part of this report.
The Company’s response to the COVID-19 pandemic around the globe reflects its focus on the health and safety of its employees, contractors and communities. The Company prohibited non-essential travel for all employees, modified workspaces with acrylic dividers and touchless faucets, provided additional personal protective equipment and cleaning supplies, increased cleaning protocols across all locations, transitioned to remote working arrangements for certain employees, emphasized the importance of staying home when employees feel sick, implemented protocols to address actual and suspected COVID-19 cases and potential exposure, and enacted policies on face mask usage and appropriate social distancing at the Company's locations.
Human Capital Management
As of December 31, 2020, the Company employed 9,839 persons worldwide, of which 5,779 were employed in the Americas Tire Operations segment, 3,407 were employed in the International Tire Operations segment, and 653 were employed in corporate positions. At December 31, 2020, approximately 42 percent of the Company’s workforce was represented by collective bargaining units. The Company believes that its relations with labor unions and work councils globally are generally positive.
The Company believes that success of its mission is realized by the engagement of its employees to partner with customers and other key stakeholders. This mission is supported by the Company's values, which are embodied in the Cooper Way:
•Engaging people by helping each other succeed and doing the right thing;
•Relentless improvement by being results focused and having engaged communication; and
•Excellence in all the Company does by being agile and providing world class service.
Governance
The Company’s Board of Directors sets the Company’s human capital management strategy, and the Compensation Committee of the Board oversees compensation matters. The Executive Leadership Team, which includes the Chief Human Resources Officer ("CHRO"), is responsible for executing that strategy and communicating the operation and status of human capital trends and Company activities back to the Board of Directors. The Company’s human capital management includes the ability of the Company to attract, develop and retain talent, as well as the design of employee compensation and benefit programs. Key priorities for the Company include the following:
Talent
The Company’s talent strategy is focused on attracting, developing, and retaining the best talent in a way that will make them want to recommend Cooper as a great place to work. The Company prioritizes a positive and inclusive employment experience, a workplace based on the employment experience needs of employees, and ever evolving inclusion and diversity initiatives throughout the Company. The Company believes a foundation of engaged employees and a vibrant appealing culture will allow the Company to achieve its talent strategy. To support talent development, the Company encourages employees to continually learn and grow in order to achieve personal objectives. The Company offers rotational assignments, participation in cross functional projects, sponsors professional development activities, educational tuition reimbursement, and participation in professional associations to foster the development goals of its employees.
Total Rewards
The total rewards philosophy of the Company is to be competitive in the markets in which it competes for talent, to be effective at attracting and retaining a qualified workforce, and to reward employees for good performance and exceptional business results. The programs that are designed and administered to achieve these goals include employee base compensation, short and long-term incentive programs for eligible employees, healthcare, employee well-being, relocation support, and retirement savings programs. Employee participation in specific programs may vary based on eligibility and local country practice.
Diversity and Inclusion
The Company celebrates the diversity of its employees, including their unique experiences, backgrounds, beliefs, and contributions. The Company works to ensure that each employee is valued and appreciated for their distinct contributions to the growth and success of the Company.
The Company strives to attract, engage and retain talented and high-performing employees. The Company seeks to provide an environment where outstanding people feel welcome, respected and valued for who they are and for their unique contributions. The Company is passionate about helping to raise the level of respect and inclusion in the communities that employees live and work in. The Company embraces employees’ differences in age, sex, color, ability, ethnicity, family or marital status, gender identity or expression, sexual orientation, socio-economic status, veteran status and other characteristics that make each employee unique.
In 2020, the Company was recognized by Forbes as one of the World’s Best Employers. The Company was also recognized by a leading U.S. benchmarking report measuring corporate policies and practices related to LGBTQ equality in the workplace and has been named one of the Best Places to Work for LGBTQ Equality. Additionally, the Company has been honored by multiple sources for raising the bar for gender-diverse boards. At December 31, 2020, the Board of Directors included greater than 30 percent female representation, exceeding the national average. The Company supports employee resource groups, which include groups dedicated to networking, professional development, and community service, and the Company's senior leadership actively supports and is involved in these programs.
Foreign Operations
The Company has a manufacturing facility, a technical center, a distribution center and its European headquarters office located in the U.K. The Company has a manufacturing facility, a distribution center, and an administrative office in Serbia. In total, there are five distribution centers and one sales offices in Europe. The number of foreign operations in Europe was not impacted by the January 17, 2019 decision to cease light vehicle tire production at the Melksham, U.K. manufacturing facility. The Company has a manufacturing facility and a joint venture manufacturing facility, a distribution center, a technical center, a sales office and an administrative office in the PRC. The Company also has a purchasing office in Singapore. The Company has a joint venture manufacturing facility in Vietnam that became commercially operational in 2020. In Latin America, the Company has a manufacturing facility, an administrative office, three sales offices and a distribution center.
Additional information on the Company’s foreign operations can be found in the “Business Segments” note to the consolidated financial statements.
Available Information
The Company makes available free of charge, on or through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the U.S. Securities and Exchange Commission ("SEC") (https://www.sec.gov). The Company’s website is http://www.coopertire.com. The Company has adopted charters for each of its Audit, Compensation and Nominating and Governance Committees, corporate governance guidelines and a code of conduct, which are available on the Company’s website and will be available to any stockholder who requests them from the Company’s Investor Relations department. The information contained on or accessible through the Company’s website is not incorporated by reference in this annual report on Form 10-K and should not be considered a part of this report.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The names, ages and all positions and offices held by all executive officers of the Company as of December 31, 2020 are as follows:
Name Age Executive Office Held Business Experience
Gerald C. Bialek 54 Interim Chief Financial Officer, Vice President, International Finance and Treasurer Interim Chief Financial Officer and Vice President, International Finance and Treasurer since August 2020. Vice President, International Finance and Treasurer from October 2019 to August 2020. Vice President and Treasurer from February 2018 to October 2019. Vice President, Finance and Strategy, Asia Region from October 2017 to February 2018. Director, Investor Relations and Strategic Planning from September 2015 to September 2017.
Bradley E. Hughes 59 President, Chief Executive Officer and Director President, Chief Executive Officer and Director since September 2016. Senior Vice President and Chief Operating Officer from January 2015 to September 2016. Senior Vice President and President International Tire Operations from July 2014 to January 2015. Senior Vice President and Chief Financial Officer from July 2014 to December 2014. Vice President and Chief Financial Officer from November 2009 to July 2014.
Paula S. Whitesell 51 Senior Vice President, Chief Human Resources Officer Senior Vice President, Chief Human Resources Officer since July 2020. Previously Vice President, Human Resources, Communications and Customer Care from January 2019 to July 2020 and Vice President, Human Resources from January 2017 to January 2019 of Peapod Digital Labs, an e-commerce services company. Previously Senior Director, Human Resources from April 2015 to December 2016 of Whirlpool Corporation, a manufacturer of kitchen and laundry appliances.
Stephen Zamansky 50 Senior Vice President, General Counsel and Secretary Senior Vice President, General Counsel and Secretary since July 2014. Vice President, General Counsel and Secretary from April 2011 to July 2014.

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ITEM 1A. RISK FACTORS
Item 1A. RISK FACTORS
Some of the material risk factors related to the Company follow:
Risks related to the Merger
The consideration the Company’s stockholders will receive in the Merger is uncertain because the market price of Goodyear common stock will fluctuate.
Subject to the terms and conditions set forth in the Merger Agreement, upon consummation of the Merger, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger (other than dissenting shares, stock options, restricted stock units, performance stock units, treasury shares held by the Company and shares of the Company’s common stock owned directly or indirectly by the Company, Goodyear or Merger Sub) will be converted into the right to receive $41.75 per share in cash and 0.907 shares of Goodyear common stock (as well as cash in lieu of any fractional shares of Goodyear common stock and any dividends or distributions on the Goodyear common stock with a record date on or after the effective time of the Merger). The exchange ratio in the Merger is fixed, and there will be no adjustment to the consideration to be received by the Company’s stockholders in the Merger for changes in the market price of Goodyear common stock or the Company’s common stock prior to the completion of the Merger. The market value of Goodyear common stock may fluctuate prior to the closing of the transaction as a result of a variety of factors, including reactions from the financial markets to the Merger, general market and economic conditions, changes in Goodyear’s business, operations and prospects and regulatory considerations. Such factors are difficult to predict and in many cases may be beyond the Company’s control or Goodyear’s control. The actual value of the consideration to be received by the Company’s stockholders at the completion of the Merger will depend on the market value of the Goodyear common stock at that time. This market value may differ, possibly materially, from the market value of the Company’s shares of common stock at the time the Merger Agreement was entered into or at any other time.
The Merger Agreement may be terminated in accordance with its terms and the Merger may not be completed.
The Merger Agreement contains a number of conditions that must be satisfied or waived in order to complete the Merger. Those conditions include, among others:
•the adoption of the Merger Agreement by the Company’s stockholders;
•the approval to list the shares of Goodyear common stock issuable in connection with the Merger on Nasdaq;
•the expiration or termination of the antitrust waiting period or the approval of regulatory agencies applicable to the Merger;
•the absence of any governmental order or law prohibiting the consummation of the Merger;
•the accuracy of Goodyear’s and the Company’s respective representations and warranties under the Merger Agreement (subject to the materiality standards set forth in the Merger Agreement);
•Goodyear’s and the Company’s performance of their respective obligations under the Merger Agreement in all material respects; and
•the absence of a material adverse effect on the Company or Goodyear (as described in the Merger Agreement).
These conditions to the closing of the Merger may not be fulfilled in a timely manner or at all, and, accordingly, the Merger may be delayed or may not be completed. In addition, if the Merger is not completed by November 22, 2021 (subject to the Company’s and Goodyear’s ability to extend the date to May 23, 2022, either Goodyear or the Company may choose not to proceed with the Merger. The parties can mutually decide to terminate the Merger Agreement at any time. In addition, Goodyear could determine that it is unwilling or unable to close the Merger.
The price of the Company’s common stock and the Company’s debt securities, as well as the Company’s financial results, may be negatively impacted if the Merger is not completed.
If the Merger is not completed for any reason, including the failure of the Company’s stockholders to approve the requisite transactions, the Company’s business and financial results may be adversely affected, including as follows:
•the Company may experience negative reactions from the financial markets, including negative impacts on the market price of its common stock and debt securities;
•the manner in which customers, vendors, business partners and other third parties perceive the Company may be negatively impacted, which in turn could affect the Company’s ability to compete for new business or maintain existing business in the marketplace more broadly;
•the Company may experience negative reactions from employees and its joint venture partners, which may adversely affect, among other things, availability of TBR tires, productivity, employee turnover and occupational safety; and
•the Company have and will continue to expend significant time and resources that could otherwise have been spent on its existing businesses and the pursuit of other opportunities that could have been beneficial to the Company, and its ongoing business and financial results may be adversely affected.
In addition to the above risks, if the Merger Agreement is terminated and the Company’s Board of Directors seeks an alternative transaction, the Company’s stockholders cannot be certain that the Company will be able to find a party willing to engage in a transaction on more attractive terms than the Merger. If the Merger Agreement is terminated under specified circumstances, the Company also may be required to pay Goodyear a termination fee.
The Merger Agreement limits the Company’s ability to pursue alternatives to the Merger.
The Merger Agreement contains provisions that may discourage a third party from submitting an acquisition proposal to the Company that might result in greater value to the Company’s stockholders than the Merger, or may result in a potential competing acquirer proposing to pay a lower per share price to acquire the Company than it might otherwise have proposed to pay. These provisions include a general prohibition on the Company’s soliciting or, subject to certain exceptions relating to the exercise of fiduciary duties by the Company’s Board of Directors, entering into discussions with any third party regarding any acquisition proposal or offer for a competing transaction, and a termination fee that is payable to Goodyear if the Company terminates the Merger Agreement to accept a superior acquisition proposal.
While the Merger is pending, the Company may be exposed to a number of business uncertainties and related adverse effects on the Company’s business.
Uncertainty about the effect of the Merger on employees, suppliers and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s relationships with collectively bargained employees and the Company’s ability to attract, retain and motivate key personnel until the Merger is completed, and could cause suppliers, customers, partners and others that deal with the Company to seek to change the Company’s existing business relationships. In addition, the Merger Agreement restricts the Company from entering into certain corporate transactions and taking other specified actions without the consent of Goodyear, and generally requires the Company to continue its operations in the ordinary course, until completion of the Merger. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the Merger.
The Merger-related costs may exceed the Company’s expectations.
The Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement, including, among others, fees paid to financial, legal and accounting advisors, employee retention costs, severance and benefit costs and filing fees. Many of these costs will be borne by the Company even if the Merger is not completed and could have an adverse effect on the Company’s financial condition and operating results.
In connection with the Merger, the Company may lose management personnel and other employees, which could adversely impact the Company’s future business and operations.
The Company is dependent on the experience and industry knowledge of its officers and other employees to execute the Company’s business plans. The Company’s success depends in part upon its ability to retain management personnel and other employees. The Company’s current and prospective employees may experience uncertainty about their roles within the combined company following the Merger, which may have an adverse effect on the Company’s ability to attract or retain management and other personnel while the Merger is pending.
The Company and its directors may be targets of securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the Merger from being completed.
Securities class action lawsuits and derivative lawsuits are often brought against public companies and their directors when companies enter into agreements for transactions similar to those contemplated by the Merger Agreement, and such lawsuits may be brought against the Company and its directors in connection with the Merger Agreement. Even if the lawsuits are without merit, these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on the Company’s liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Merger, then that injunction may delay or prevent the Merger from being completed, which may adversely affect the Company’s business, financial position and results of operations.
The Merger may be less accretive than expected, or may be dilutive, and the combined company may fail to realize all of the anticipated benefits of the proposed Merger.
The success of the proposed Merger will depend, in part, on the combined company’s ability to realize the anticipated benefits and cost savings from combining the Company’s and Goodyear’s businesses. The anticipated benefits and cost savings of the proposed Merger may not be realized fully or at all, may take longer to realize than expected, may require more non-recurring costs and expenditures to realize than expected or could have other adverse effects that the Company and Goodyear do not currently foresee. Some of the assumptions that the companies have made, such as with respect to anticipated operating synergies or the costs associated with realizing such synergies; significant long-term cash flow generation; and the benefits of the combined enterprise, may not be realized. The integration process may result in the loss of key employees, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies. There could also be potential unknown liabilities and unforeseen expenses associated with the Merger that were not discovered in the course of performing due diligence. Any of the foregoing factors could adversely affect the combined company’s business, financial position and results of operations.
Risks related to the Company's Operations
Impact of the ongoing COVID-19 pandemic, or similar public health crises, on the Company's operations, distribution channels, customers and suppliers.
From time to time, the Company may face risks related to public health threats or outbreaks of communicable diseases, such as COVID-19. The Company has global manufacturing facilities, distribution channels, suppliers and customers, and if a disease spreads sufficiently to cause a pandemic (or to cause the fear of a pandemic to rise) or governments regulate or restrict the flow of people, labor or products, the Company's financial condition, operations, suppliers, customers and distribution channels could be severely impacted. Such a pandemic could also have an adverse impact on consumer demand and commodity prices. Any material changes in the Company's production supply or demand for products could materially and adversely affect the Company's results of operations and liquidity.
The ongoing COVID-19 pandemic has negatively impacted the global economy, disrupted financial markets and international trade, resulted in increased unemployment levels and significantly impacted global supply chains. The tire industry has been negatively impacted by the COVID-19 pandemic, characterized by a decline in tire demand in 2020. . The Company’s results have been, and may continue to be, adversely impacted by this economic disruption, including impacting tire unit volumes, sales, income and cash flow. In addition, the Company’s ability to continue implementing important strategic initiatives and capital expenditures may be affected as it devotes time and other resources to responding to the impacts of the COVID-19 pandemic. In response to government mandates and health care advisories, the Company altered certain aspects of its operations, including the temporary idling of manufacturing facilities for various lengths of time. A portion of the Company's workforce has had to spend a significant amount of time working remotely, which may increase cybersecurity and data security risks, and disrupt internal controls and procedures.
Federal, state, local and foreign governments have implemented various mitigation measures, including travel restrictions, border closings, restrictions on public gatherings, shelter-in-place restrictions and limitations on business, and these measures change from time to time. Some of these actions could adversely impact the ability of Company employees, contractors, suppliers, customers, and other business partners to conduct business activities, and could ultimately do so for an indefinite period of time. This could have a material adverse effect on the Company’s results of operations, financial condition, and liquidity. In particular, the continued prevalence of COVID-19 and efforts to contain the virus could:
•continue to impact customers and customer demand for the Company's products;
•cause disruptions of the Company's workforce or operations;
•cause the Company to experience an increase in costs and credit risk as a result of the Company’s emergency measures, delayed payments from customers and uncollectable accounts;
•cause delays and disruptions in the supply chain resulting in disruptions in operations;
•result in temporary idling of facilities and the resulting costs to resume full operations;
•result in asset impairments or other charges;
•negatively impact the Company's liquidity position;
•limit the Company's access to funds under its existing credit facility and the capital markets;
•impact availability of qualified personnel; and
•cause other unpredictable events.
The situation surrounding COVID-19 remains fluid. In late 2020, vaccines for COVID-19 were approved by health agencies in certain countries in which the Company operates (including the U.S., U.K., Canada and Mexico) and began to be administered. However, initial quantities of vaccines are limited and vaccine distributions, controlled by local authorities, are being allocated, generally first to health care and other essential workers and next to those members of individual populations believed most susceptible to severe effects from COVID-19. Full administration of the COVID-19 vaccines is unlikely to occur in most jurisdictions until mid- to late- 2021.For this reason, the Company cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on the Company’s results of operations, financial position, and liquidity. The extent to which the COVID-19 pandemic may impact the Company’s business, operating results, financial condition, or liquidity will depend on future developments, including the duration of the outbreak, travel restrictions, government mandated restrictions and regulations, business and workforce disruptions, impact on demand for Company products, and the effectiveness of actions taken to contain and treat the disease, including the efficacy of and ability to widely distribute vaccinations.
The impact of COVID-19 may also exacerbate other risks discussed herein, any of which could have a material effect on the Company. This situation is changing rapidly and additional impacts may arise that the Company is not aware of currently.
Pricing volatility for raw materials or commodities or an inadequate supply of key raw materials could result in increased costs and may significantly affect the Company’s profitability.
The pricing volatility for natural rubber, petroleum-based materials and other raw materials contributes to the difficulty in managing the costs of raw materials. Costs for certain raw materials used in the Company’s operations, including natural rubber, chemicals, carbon black, steel reinforcements and synthetic rubber remain highly volatile. Increasing costs for raw material will increase the Company’s production costs and affect its margins if the Company is unable to pass the higher production costs on to its customers in the form of price increases. Even if the Company is able to pass along these higher costs, its profitability may be adversely affected until it is able to do so. Decreasing costs for raw materials could also affect margins if the Company is unable to maintain its pricing structure due to the need to offer price reductions to remain competitive. Further, if the Company is unable to obtain adequate supplies of raw materials in a timely manner for any reason, including supply chain disruption, its operations could be interrupted or otherwise adversely affected.
Any interruption in the Company’s skilled workforce, or that of its suppliers or customers, including labor disruptions, could impair its operations and harm its earnings and results of operations.
The Company’s operations depend on maintaining a skilled workforce, including the use of third party labor outsourcing, and any interruption of its workforce due to shortages of skilled technical, production or professional workers, work disruptions, lost time due to illness, temporary idling of facilities, short-term furloughs, or other events could interrupt the Company’s operations and affect its operating results. Competition for these employees is intense and the Company could experience difficulty in hiring and retaining the personnel necessary to support its business. Further, a significant number of the Company’s employees are currently represented by unions. If the Company is unable to resolve any labor disputes or if there are work stoppages or other work disruptions at the Company or any of its suppliers or customers, the Company’s business and operating results could suffer.
If the Company is unable to attract and retain key personnel, its business could be materially adversely affected.
The Company’s business depends on the continued service of key members of its management. The loss of the services of a significant number of members of its management team could have a material adverse effect on its business. The Company’s future success will also depend on its ability to attract, retain and develop highly skilled personnel, such as engineering, marketing, information technology and senior management professionals. Competition for these employees is intense and the Company could experience difficulty in hiring and retaining the personnel necessary to support its business. If the Company does not succeed in retaining its current employees and attracting new high-quality employees, its business could be materially adversely affected.
The Company’s industry is highly competitive, and the Company may not be able to compete effectively with lower-cost producers and larger competitors.
The tire industry is a highly competitive, global industry. Some of the Company’s competitors are larger companies with greater financial resources. Intense competitive activity in the replacement tire industry, including consolidation or other cooperation by and among the Company's competitors, has caused, and will continue to cause, pressures on the Company’s business, as well as pressure on certain of the Company's customers, suppliers or distribution network. As the Company increases its presence in the original equipment market, the demand for products by the OEM's will be impacted by automotive vehicle production. The Company’s ability to compete successfully will depend in part on its ability to balance capacity with demand, leverage global purchasing of raw materials, make required investments to improve productivity, eliminate redundancies and increase production at low-cost, high-quality supply sources. If the Company is unable to offset continued pressures, its sales, margins, operating results and market share could decline and the impact could become material on the Company’s earnings.
The Company has and could in the future incur restructuring charges and other costs as it continues to execute actions in an effort to improve future profitability and competitiveness and may not achieve the anticipated savings and benefits from these actions.
The Company has and may in the future initiate restructuring actions designed to improve future profitability and competitiveness, and enhance the Company’s flexibility, including the outcome of the restructurings and related actions in Europe, the U.S. and at the Company's manufacturing facility in Mexico, after the recent purchase of the remaining noncontrolling interest in the facility, as well as other current and potential future outcomes from the Company's ongoing region by region global footprint assessment. The Company may not realize anticipated savings or benefits from the Mexico purchase and restructuring, or other actions, in full or in part or within the time periods it expects. The Company is also subject to the risks of labor unrest, negative publicity and business disruption in connection with these actions. Failure to realize anticipated savings or benefits from the Company’s actions could have an adverse effect on the business and could result in potential unexpected costs or other impacts. Such restructuring actions and impairments or other charges, including pension obligations, could have a significant negative effect on the Company’s earnings or cash flows in the short-term.
If the price of energy sources increases, the Company’s operating expenses could increase significantly or the demand for the Company’s products could be affected.
The Company’s manufacturing facilities rely principally on natural gas, as well as electrical power and other energy sources. High demand and limited availability of natural gas and other energy sources can result in significant increases in energy costs increasing the Company’s operating expenses and transportation costs. Higher energy costs would increase the Company’s production costs and adversely affect its margins and results of operations. If the Company is unable to obtain adequate sources of energy, its operations could be interrupted.
In addition, fluctuations in the price of gasoline for consumers can affect driving and purchasing habits and impact demand for tires.
If assumptions used in developing the Company’s strategic plan are inaccurate or the Company is unable to execute its strategic plan effectively, its profitability and financial position could be negatively impacted.
The Company faces both general industry and Company-specific challenges. These include volatile raw material costs, increasing product complexity and pressure from competitors with greater resources or manufacturing in lower-cost regions. To address these challenges and position the Company for future success, the Company continues to execute towards its strategic plan.
The Company continually reviews and updates its business plans to achieve its goals and imperatives. There can be no assurance that the Company's strategic business plans will be successful. If the assumptions used in developing the Company’s business plans vary significantly from actual conditions, and the Company is not able to adapt in a timely manner, the Company’s sales, margins and profitability could be harmed. If the Company is unsuccessful in implementing the tactics necessary to execute its business plans, it may not be able to achieve or sustain future profitability, which could impair its ability to meet debt and other obligations and could otherwise negatively affect its operating results, financial condition and liquidity.
The Company may not be successful in executing and integrating investments and acquisitions into its operations, which could harm its results of operations and financial condition.
The Company routinely evaluates potential investments and acquisitions and may pursue additional investment and acquisition opportunities, some of which could be material to its business. These investments include the formation of the ACTR joint venture in Vietnam, the purchase of the remaining noncontrolling interest in the Company's Mexican manufacturing facility and investment in the Company's Serbian manufacturing facility. The Company cannot provide assurance whether it will be successful in pursuing, integrating, ramping up and operating any investment or acquisition opportunities or what the consequences of any investment or acquisition would be. The Company may encounter various risks in any investment or acquisition, including:
•the possible inability to integrate an acquired business into its operations;
•the possible failure to successfully ramp up and operate the business;
•diversion of management’s attention;
•loss of key management personnel;
•labor disruption, including as a result of the Company's purchase or restructuring activities;
•unanticipated problems or liabilities, including delays in completion of required capital expenditures and/or construction;
•potential asset impairment charges, due to inability to meet operating plans; and
•increased labor and regulatory compliance costs of acquired businesses.
Some or all of those risks could impair the Company’s results of operations and impact its financial condition. The Company may finance any future investments or acquisitions from internally generated funds, bank borrowings, public offerings or private placements of equity or debt securities, or a combination of the foregoing. Investments and acquisitions may involve the expenditure of significant funds and management time.
Investments and acquisitions may also require the Company to increase its borrowings under its bank credit facilities or other debt instruments, or to seek new sources of liquidity. Increased borrowings would correspondingly increase the Company’s financial leverage, and could result in lower credit ratings and increased future borrowing costs. These risks could also reduce the Company’s flexibility to respond to changes in its industry or in general economic conditions.
In addition, the Company’s business plans call for growth. If the Company is unable to identify or execute on appropriate opportunities for acquisition, investment or growth, its business could be materially adversely affected.
There are risks associated with the Company’s global strategy, which includes using joint ventures and partially-owned subsidiaries.
The Company’s strategy includes the use of joint ventures, both as the majority and minority stockholder, and other partially-owned subsidiaries. These entities operate in countries outside of the U.S., are generally less well capitalized than the Company and bear risks similar to the risks of the Company. In addition, there are specific risks applicable to these subsidiaries and these risks, in turn, add potential risks to the Company. Such risks include greater risk of joint venture partners or other investors failing to meet their obligations under related stockholders’ agreements; conflicts with joint venture partners; the possibility of a joint venture partner taking valuable knowledge from the Company; and risk of being denied access to the capital markets, which could lead to resource demands on the Company in order to maintain or advance its strategy. The Company’s outstanding notes and primary credit facility contain cross default provisions in the event of certain defaults by the Company under other agreements with third parties. For further discussion of access to the capital markets, see also related comments under “The Company has a risk due to volatility of the capital and financial markets.”
The Company’s expenditures for pension and other postretirement obligations could be materially higher than it has predicted if its underlying assumptions prove to be incorrect.
The Company provides defined benefit and hybrid pension plan coverage to union and non-union U.S. employees and a contributory defined benefit plan in the U.K. The Company’s pension expense and its required contributions to its pension plans are directly affected by the value of plan assets, the projected and actual rates of return on plan assets and the actuarial assumptions the Company uses to measure its defined benefit pension plan obligations, including the discount rate at which future projected and accumulated pension obligations are discounted to a present value and the inflation rate. The Company could experience increased pension expense due to a combination of factors, including the decreased investment performance of its pension plan assets, decreases in the discount rate, changes in its assumptions relating to the expected return on plan assets, including changes necessitated by movements in the glide path whereby a target return-seeking allocation is followed based upon a given funded ratio level, updates to mortality tables, changes to participant behaviors, including an increase in the volume of lump-sum distributions out of the plans, and the impact of changes to the Company’s pension strategy. The Company could also experience increased other postretirement expense due to decreases in the discount rate, increases in the health care trend rate and changes in the health care environment.
In the event of declines in the market value of the Company’s pension assets or lower discount rates to measure the present value of pension and other postretirement benefit obligations, the Company could experience changes to its Condensed Consolidated Balance Sheet or significant cash requirements.
The realizability of deferred tax assets may affect the Company’s profitability and cash flows.
The Company has significant net deferred tax assets recorded on the balance sheet and determines at each reporting period whether or not a valuation allowance is necessary based upon the expected realizability of such deferred tax assets. In the U.S., the Company has recorded deferred tax assets, the largest of which relate to product liability, pension and other postretirement benefit obligations, partially offset by deferred tax liabilities, the most significant of which relates to accelerated depreciation. The Company’s non-U.S. deferred tax assets relate to pension, accrued expenses and net operating losses, and are partially offset by deferred tax liabilities related to accelerated depreciation. Based upon the Company’s assessment of the realizability of its net deferred tax assets, the Company maintains valuation allowances in the U.K. and China, as well as a small valuation allowance for the portion of its U.S. deferred tax assets primarily associated with a loss carryforward. In addition, the Company has recorded valuation allowances for deferred tax assets primarily associated with other non-U.S. net operating losses.
The Company’s assessment of the realizability of deferred tax assets is based in part on certain assumptions regarding future profitability, and potentially adverse business conditions could have a negative impact on the future realizability of the deferred tax assets and therefore impact the Company’s future operating results or financial position.
Risks related to Information Technology, Research & Development and Intellectual Property
A disruption in, or failure of, the Company’s information technology systems, including those related to cybersecurity, could adversely affect the Company’s business operations and financial performance.
The Company relies on the accuracy, capacity and security of its information technology systems across all of its major business functions, including its research and development, manufacturing, sales, financial and administrative functions. While the Company maintains some of its critical information technology systems, it is also dependent on third parties to provide important information technology services relating to, among other things, human resources, electronic communications and certain finance functions. Additionally, the Company collects and stores sensitive data, including intellectual property, proprietary business information and the proprietary business information of its customers and suppliers, as well as personally identifiable information of the Company’s customers and employees, in data centers and on information technology networks.
In addition, the European Union’s General Data Protection Regulation (“GDPR”), which came into effect in May 2018, creates a range of new compliance obligations for companies that process personal data of European Union residents, and increases financial penalties for non-compliance. As a company that processes personal data of European Union residents, the Company bears the costs of compliance with the GDPR and is subject to the potential for fines and penalties in the event of a breach of the GDPR.
Aside from the European Union, other jurisdictions have enacted, or are considering, regulations regarding data privacy. The California Consumer Privacy Act ("CCPA"), which became effective in January 2020, and others that may be passed, introduce requirements with respect to personal information, and non-compliance with CCPA may result in liability through private actions and enforcement. Failure to comply with these current and future laws could result in significant penalties and could have a material adverse effect on the Company and results of operations.
Despite the security measures that the Company has implemented, including those related to cybersecurity, its systems could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. Additionally, digital technologies may become more vulnerable and experience a higher rate of rapidly evolving cyberattacks in the environment of remote connectivity, which will continue to be an important aspect of the Company's operations. Furthermore, the Company may have little or no oversight with respect to security measures employed by third-party service providers, which may ultimately prove to be ineffective at countering threats. A system failure, accident or security breach could result in business disruption, theft of intellectual property, trade secrets or customer information and unauthorized access to personnel information. To the extent that any system failure, accident or security breach results in disruptions to the Company's operations or the theft, loss or disclosure of, or damage to, the Company's data or confidential information, the Company’s reputation, business, results of operations, cash flows and financial condition could be materially adversely affected. In addition, the Company may be required to incur significant costs to protect against and, if required, remediate the damage caused by such disruptions or system failures in the future.
If the Company fails to develop technologies, processes or products needed to keep up with rapidly evolving distribution channels and to support consumer and customer demand or, changes in consumer or customer behavior, it may lose significant market share or be unable to recover associated costs.
The Company’s tire sales, margins and profitability may be significantly impacted if it does not develop or have available technologies, processes, including distribution methods, or products that competitors may be developing and consumers or dealers or distributors are demanding. This includes, but is not limited to, changes in the design of and materials used to manufacture tires, changes in the types of tires consumers prefer and changes in the vehicles consumers are purchasing. Additionally, the Company is also impacted by changes in consumer brand perceptions and the way consumers buy tires and failure to effectively compete in various sales and marketing channels, including digital channels and mass merchandising outlets, could result in lost sales and negative impacts on the Company's earnings.
Technologies or processes may also be developed by competitors that better distribute tires to consumers, including through wholly-owned distributors, which could affect the Company’s customers, as well as impact the Company's implementation of its strategic plan.
An increase in consumer preference for car- and ride-sharing services, as opposed to automobile ownership, or other changes in consumer driving practices, including reduced driving caused by increases in remote working arrangements or a rise in consumer e-commerce activity levels, may result in a long term reduction in the number of vehicles per capita or in miles driven. Additionally, refreshing existing products and developing new products and technologies requires significant investment and capital expenditures, is technologically challenging and requires extensive testing and accurate anticipation of technological and market trends. If the Company fails to develop new products that are appealing to the Company's customers and consumers, or fails to develop products on time and within budgeted amounts, the Company may be unable to recover its product development and testing costs. If the Company cannot successfully use new production or equipment methodologies it invests in, it may also not be able to recover those costs.
The Company may fail to successfully develop or implement information technologies or related systems, resulting in a significant competitive disadvantage.
Competing in the highly competitive tire industry can be impacted by the successful development of information technology. If the Company fails to successfully develop or implement information technology systems, it may be at a disadvantage to its competitors resulting in lost sales and negative impacts on the Company’s earnings.
The Company has implemented Enterprise Resource Planning systems in the United States and other locations. The Company has begun to invest in, and will also continue to evaluate. available options for integrating information technology solutions outside of the United States, which will require significant amounts of capital and human resources to deploy. These requirements may exceed Company projections. Throughout integration of the systems, there are also risks created to the Company’s ability to successfully and efficiently operate.
The Company may not be able to protect its intellectual property rights adequately.
The Company’s success depends in part upon its ability to use and protect its proprietary technology and other intellectual property, which generally covers various aspects in the design and manufacture of its products and processes. The Company owns and uses tradenames and trademarks worldwide. The Company relies upon a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements and patent, copyright and trademark laws to protect its intellectual property rights. The steps the Company takes in this regard may not be adequate to protect its intellectual property or to prevent or deter challenges or infringement or other violations of its intellectual property, and the Company may not be able to detect unauthorized use or take appropriate and timely steps to enforce its intellectual property rights.
In addition, the laws of some countries may not protect and enforce the Company’s intellectual property rights to the same extent as the laws of the U.S. Further, while the Company believes it has rights to use all intellectual property in the Company’s use, if the Company is found to infringe on the rights of others it could be adversely impacted.
Risks related to Litigation, Laws and Regulations
The Company’s results could be impacted by changes in tariffs, trade agreements or other trade restrictions imposed by the U.S. or other governments on imported tires, raw materials or equipment used in tire manufacturing.
The Company’s ability to competitively source and sell tires can be significantly impacted by changes in tariffs, changes or repeals of trade agreements, including the USMCA, as well as the U.K.'s exit from the European Union, or certain other international trade agreements, or other trade restrictions or retaliatory actions imposed by various governments. Other effects, including impacts on the price of tires, responsive actions from governments and the opportunity for competitors to establish a presence in markets where the Company participates, could also have significant impacts on the Company’s results.
Antidumping and countervailing duty investigations into certain passenger car and light truck tires imported from the PRC into the United States were initiated on July 14, 2014. The determinations announced in both investigations were affirmative and resulted in the imposition of significant additional duties from each. The rates are subject to review annually and a material change in the new rates could have a significant impact on the Company's results.
Antidumping and countervailing duty investigations into certain truck and bus tires imported from the PRC into the U.S. were initiated on January 29, 2016. On February 22, 2017, the International Trade Commission ("ITC") made a final determination that the U.S. market had not suffered material injury because of imports of truck and bus tires from the PRC. However, on November 1, 2018, the Court of International Trade ("CIT") remanded the case back to the ITC for reconsideration. On January 30, 2019, the ITC reversed its earlier decision and made an affirmative determination of material injury. On February 15, 2019, the determination was published in the Federal Register and significant duties were imposed on Chinese truck and bus tire imports. The ITC’s re-determination, along with comments from the parties regarding the re-determination were filed with the CIT. The CIT affirmed the ITC re-determination on February 18, 2020.
Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, passenger, light truck and truck and bus tires, raw materials and tire-manufacturing equipment from the PRC imported into the U.S. became subject to additional 10 percent duties effective September 24, 2018. These increased to 25 percent effective May 10, 2019. Future changes to duty percentages, if any, are unknown at this time. Retaliatory duties on U.S. products have been implemented by China in response to these additional duties.
The imposition of additional duties or other trade restrictions in the U.S. or elsewhere on raw materials or tire-manufacturing equipment used by the Company or on certain tires imported from the PRC or other countries will result in higher costs and potentially lower margins, or in the case of finished goods, in those tires being diverted to other regions of the world, such as Europe, Latin America or elsewhere in Asia, which could materially harm the Company’s results of operations, financial condition and liquidity.
The Company may be adversely affected by legal actions, including product liability claims which, if successful, could have a negative impact on its financial position, cash flows and results of operations.
The Company’s operations expose it to legal actions, including potential liability for personal injury or death as an alleged result of the failure of or conditions in the products that it designs, manufactures and sells. Specifically, the Company is a party to a number of product liability cases in which individuals involved in motor vehicle accidents seek damages resulting from allegedly defective tires that it manufactured. Product liability claims and lawsuits, including possible class action, may result in material losses in the future and cause the Company to incur significant litigation defense costs. The Company is largely self-insured against these claims. These claims and related reserves could have a significant effect on the Company’s financial position, cash flows and results of operations.
Periodically, the Company is also subject to audits, litigation or other commercial disputes and other legal proceedings relating to its business. Due to the inherent uncertainties of any litigation, commercial disputes or other legal proceedings, the Company cannot accurately predict their ultimate outcome, including the outcome of any related appeals. An unfavorable outcome could materially adversely impact the Company’s financial condition, cash flows and results of operations.
Compliance with legal and regulatory initiatives could increase the cost of operating the Company’s business.
The Company is subject to federal, state, local and foreign laws and regulations. Compliance with those laws now in effect, or that may be enacted, could require significant capital expenditures, increase the Company’s production costs and affect its earnings and results of operations. Periodic changes as the result of elections in the U.S. and worldwide make it difficult to predict the legislative and regulatory changes that may occur.
Several countries have or may implement labeling requirements for tires. This legislation could cause the Company’s products to be at a disadvantage in the marketplace resulting in a loss of market share or could otherwise impact the Company’s ability to distribute and sell its tires.
In addition, while the Company believes that its tires are free from design and manufacturing defects and comply with all applicable regulations and standards, it is possible that recalls of or other quality issues with the Company’s tires could occur in the future. A recall or other quality issue could harm the Company’s reputation, operating results and financial position.
The Company is also subject to legislation governing labor, environmental, privacy and data protection, occupational safety and health both in the U.S. and other countries. The related legislation can change over time making it more expensive for the Company to produce its products.
The Company could also, despite its best efforts to comply with these laws and regulations, be found liable and be subject to additional costs because of these laws and regulations.
Compliance with and changes in tax laws could materially and adversely impact our financial condition, results of operations and cash flows.
The Company is subject to extensive tax liabilities, including federal and state income taxes and transactional taxes such as excise, sales and use, payroll, franchise, withholding and property taxes. New tax laws and regulations and changes in existing tax laws and regulations could result in increased expenditures by the Company for tax liabilities in the future and could materially and adversely impact the Company's financial condition, results of operations and cash flows.
Additionally, the Company’s income tax returns are subject to examination by federal, state and local tax authorities in the U.S. and tax authorities outside the U.S. Based upon the outcome of tax examinations, judicial proceedings, or expiration of statutes of limitations, it is possible that the ultimate resolution of these unrecognized tax benefits, including those related to tax planning strategies regarding the Company's structure, may result in a payment that is materially different from the current estimate of the tax liabilities. Such factors could have an adverse effect on the Company’s provision for income taxes and the cash outlays required to satisfy income tax obligations.
The impact of proposed new accounting standards may have a negative impact on the Company’s financial statements.
The Financial Accounting Standards Board is considering or has issued for future adoption several projects which may result in the modification of accounting standards affecting the Company. Any such changes could have a negative impact on the Company’s financial statements.
The Company is facing risks relating to healthcare legislation.
The Company is facing risks emanating from legislation in the U.S., including the Patient Protection and Affordable Care Act and the related Healthcare and Education Reconciliation Act, which are collectively referred to as healthcare legislation. The future of this major legislation and any potential replacement is not clear and may be impacted by the results of recent and future elections in the U.S. The ultimate cost and the potentially adverse impact to the Company and its employees cannot be quantified at this time.
Environmental issues, including climate change, or legal, regulatory or market measures to address environmental issues, may negatively affect the Company's business and operations and cause it to incur significant costs.
The Company’s manufacturing facilities are subject to numerous federal, state, local and foreign laws and regulations designed to protect the environment, including increased government regulations to limit carbon dioxide and other greenhouse gas emissions as a result of concern over climate change, and the Company expects that additional requirements with respect to environmental matters will be imposed on it in the future.
There is also growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters. In the event that issues related to such climate change have a negative effect on the Company's business, it may be subjected to decreased availability or less favorable pricing for certain raw materials, including natural rubber. Natural disasters and extreme weather conditions may also disrupt the productivity of the Company's facilities or the operation of its supply chain.
In addition, the Company has contractual indemnification obligations for environmental remediation costs and liabilities that may arise relating to certain divested operations. Material future expenditures may be necessary if compliance standards change, if material unknown conditions that require remediation are discovered, or if required remediation of known conditions becomes more extensive than expected. If the Company fails to comply with present and future environmental laws and regulations, it could be subject to future liabilities or the suspension of production, which could harm its business or results of operations. Environmental laws could also restrict the Company’s ability to expand its facilities or could require it to acquire costly equipment or to incur other significant expenses in connection with its manufacturing processes.
General risk factors
The Company is facing heightened risks due to the uncertain business environment.
Current global and regional economic conditions have affected demand for the Company’s products, create volatility in raw material costs and affect the availability and cost of credit. These conditions also affect the Company’s customers and suppliers as well as the ultimate consumer.
Deterioration in the global macroeconomic environment or in specific regions, including availability of transportation, work stoppages, port strikes, public health emergencies, social unrest, political upheavals or other factors, could impact the Company, its customers or its suppliers and, depending upon the severity and duration of these factors, the Company’s profitability and liquidity position could be negatively impacted.
The Company’s competitors may also change their actions as a result of changes to the business environment, which could result in increased price competition and discounts, resulting in lower margins or reduced sales volumes for the business.
The financial distress of one or more of the Company's major customers as a result of the current economic environment, or other factors, could impact the timeliness of customer payments and, ultimately, the collectability of accounts receivable, which could harm the Company's results of operations, financial condition and liquidity. In addition, the bankruptcy, restructuring, financial condition, consolidation or other cooperation of one or more of the Company’s major suppliers, as well as the strategic actions of competitors, could result in a reduction in purchases of the Company’s products or a supply disruption to its facilities, which could harm the Company’s results of operations, financial condition and liquidity.
The Company conducts its manufacturing, sales and distribution operations on a worldwide basis and is subject to risks associated with doing business outside the U.S.
The Company has affiliate, subsidiary and joint venture operations worldwide, including in the U.S., Europe, Mexico, the PRC and Vietnam. The Company has a wholly-owned manufacturing entity, Cooper Kunshan Tire, and is the majority owner of GRT, both in the PRC. The Company also has COOCSA, a wholly-owned manufacturing entity in Mexico, after purchasing the remaining noncontrolling interest on January 24, 2020, and has established operations in Serbia and the U.K. Additionally, Cooper Vietnam recently formed a joint venture with Sailun Vietnam, which began commercially producing TBR tires in 2020. There are a number of risks in doing business abroad, including political and economic uncertainty, social unrest, sudden changes in laws and regulations, including those enacted in response to pandemics, ability to enforce existing or future contracts, shortages of trained labor and the uncertainties associated with entering into joint ventures or similar arrangements in foreign countries. These risks may impact the Company’s ability to expand its operations in different regions and otherwise achieve its objectives relating to its foreign operations, including utilizing these locations as suppliers to other markets. In addition, compliance with multiple and potentially conflicting foreign laws and regulations, import and export limitations and exchange controls is complex and expensive. For example, the Company could be adversely affected by violations of the Foreign Corrupt Practices Act (“FCPA”) and similar worldwide anti-bribery laws as well as export controls and economic sanction laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials and, in some cases, other persons, for the purpose of obtaining or retaining business or obtaining another improper benefit. Violations of these laws and regulations could result in civil and criminal fines, penalties and sanctions against the Company, its officers or its employees, prohibitions on the conduct of the Company’s business and on its ability to offer products and services in one or more countries, and could also harm the Company’s reputation, business and results of operations. The Company’s foreign operations also subject it to the risks of international terrorism and hostilities and to foreign currency risks, including exchange rate fluctuations and limits on the repatriation of funds. See also related comments under "The Company’s results could be impacted by changes in tariffs, trade agreements or other trade restrictions imposed by the U.S. or other governments on imported tires, raw materials or equipment used in tire manufacturing", "There are risks associated with the Company’s global strategy, which includes using joint ventures and partially-owned subsidiaries" and "The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets or the Company’s business."
The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets or the Company’s business.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. On January 23, 2020, the Withdrawal Act, after clearing all stages in the U.K. Parliament, received royal assent from the Queen. On December 24, 2020, the U.K. and the European Union announced an agreement on the EU-UK Trade and Cooperation Agreement ("EU-UK Agreement"). The trade deal was formally approved by the U.K. House of Commons on December 30, 2020 and is expected to be formally approved by the European Union legislature in March 2021. While the EU-UK Agreement moves to remove uncertainty and a significant amount of financial risk associated with the U.K.’s exit from the European Union, the Company is still assessing the agreement details and the related impact on the Company's U.K business and other operations. The new trading relationship between the U.K and the European Union will result in increased costs of goods imported into the U.K. from the European Union and exported from the U.K. into the European Union. The movement of goods between the U.K. and the European Union will continue to be subject to additional inspections and documentation checks, leading to possible delays at ports of entry and departure. Also, there will be additional costs related to goods that are deemed to originate outside of the U.K. or European Union, as well as Serbia, and for which the originating country has no trade agreement with the U.K.
These changes to the trading relationship between the U.K and European Union would likely result in increased cost of goods imported into and exported from the U.K. and may decrease the profitability of the Company's U.K. and other operations. Additional currency volatility could drive a weaker British pound, which increases the cost of goods imported into the U.K. operations and may decrease the profitability of the U.K. operations. A weaker British pound versus the U.S. dollar also causes local currency results of U.K. operations to be translated into fewer U.S. dollars during a reporting period. With a range of outcomes still possible, the impact from Brexit remains uncertain and will depend, in part, on the final outcome of tariff, trade, regulatory and other negotiations.
The Company has a risk due to volatility of the capital and financial markets.
The Company periodically requires access to the capital and financial markets as a significant source of liquidity for maturing debt payments or working capital needs or investments in the business that it cannot satisfy by cash on hand or operating cash flows. Substantial volatility in world capital markets and the banking industry may make it difficult for the Company to access credit markets and to obtain financing or refinancing, as the case may be, on satisfactory terms or at all. In addition, various additional factors, including a deterioration of the Company’s credit ratings or its business or financial condition, could further impair its access to the capital markets and bank financings. Additionally, any inability to access the capital markets or bank financings, could require the Company to defer critical capital expenditures, reduce or not pay dividends, reduce spending in areas of strategic importance, suspend stock repurchases, sell important assets or, in extreme cases, seek protection from creditors. See also related comments under “There are risks associated with the Company’s global strategy, which includes using joint ventures and partially-owned subsidiaries.”
The Company’s operations in Asia have been or will be financed in part using multiple loans from several lenders to finance working capital needs. These loans are generally for terms of one year or less. Therefore, debt maturities occur frequently and access to the capital markets and bank financings is crucial to the Company’s ability to maintain sufficient liquidity to support its operations in Asia.
LIBOR reform, increases in interest rates or changes in credit ratings may negatively impact the Company.
Certain of the Company's variable rate debt, including its Credit Facility, currently use LIBOR as a benchmark for establishing the interest rate. LIBOR is the subject of recent proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments with respect to LIBOR cannot be entirely predicted but could result in an increase in the cost of variable rate debt. The interest rates on the Company's term loans and revolving credit facilities can vary based on the Company's credit ratings. The Company's policy is to manage interest rate risk by entering into both fixed and variable rate debt arrangements. Interest rate swaps are also used to minimize worldwide financing cost and to achieve a desired mix of fixed and variable rate debt. The Company utilizes derivative financial instruments to enhance its ability to manage risk, including interest rate exposures that exist as part of ongoing business operations. The Company does not enter into contracts for trading purposes, nor is it a party to any leveraged derivative instruments. The use of derivative financial instruments is monitored through regular communication with senior management and the utilization of written guidelines. However, the Company's use of these instruments may not effectively limit or eliminate exposure to changes in interest rates. Therefore, the Company cannot provide assurance that future credit rating or interest rate changes will not have a material negative impact on its business, financial position or operating results.
A failure in the Company's internal financial controls could adversely affect the Company's business operations and financial performance.
The Company's operations are highly dependent on an ability to process and monitor, on a daily basis, a very large number of transactions, across numerous locations and currencies. These transactions must adhere to the Company's internal financial control structure, as well as legal and regulatory standards. Compliance with these legal and reporting requirements can be challenging, including in the current environment of remote connectivity, and the Company could be subject to regulatory fines and penalties for failing to follow these rules or to report timely, accurate and complete information in accordance with such rules. As such requirements expand, compliance with these rules and regulations has become more challenging. As the Company's customer base and geographical reach expands, the volume, speed, frequency and complexity of transactions, especially electronic transactions, increases. Developing and maintaining the Company's internal financial controls becomes more challenging, and the risk of system or human error in connection with such transactions increases. The Company must continuously monitor these internal financial controls to support the Company's operations and respond to changes in regulations and markets. A failure in such internal financial controls could harm the Company’s reputation, operating results and financial position.
The Company has been and may continue to be impacted by currency fluctuations, which may reduce reported results for the Company’s international operations and otherwise adversely affect the business.
Because the Company conducts transactions in various non-U.S. currencies, including the Euro, Canadian dollar, British pound sterling, Swiss franc, Swedish krona, Norwegian krone, Mexican peso, Columbian peso, Chinese yuan, Serbian dinar and Brazilian real, fluctuations in foreign currency exchange rates may impact the Company’s financial condition, results of operations and cash flows, despite currency hedging actions by the Company. The Company’s operating results are subject to the effects of fluctuations in the value of these currencies and fluctuations in the related currency exchange rates. As a result, the Company’s sales have historically been affected by, and may continue to be affected by, these fluctuations. Exchange rate movements between currencies in which the Company sells its products have been affected by and may continue to result in exchange losses that could materially affect results. During times of strength of the U.S. dollar, the reported revenues of the Company’s international operations will be reduced because local currencies will translate into fewer dollars. In addition, a strong U.S. dollar may increase the competitiveness of competitors based outside of the United States. As a result, continued strengthening of the U.S. dollar may have a material adverse effect on the Company’s financial condition, results of operations and cash flows. A weak U.S. dollar could increase the cost of goods imported into the Company's U.S. operations and other goods imported in U.S. dollars at other locations and may decrease the profitability of the Company's operations. As a result, continued weakening of the U.S. dollar may have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B.UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
Item 2.PROPERTIES
As shown in the following table, at December 31, 2020, the Company maintained 51 manufacturing facilities, distribution centers, retail stores, technical centers and office facilities worldwide. A majority of the manufacturing facilities are wholly-owned by the Company. Some manufacturing, distribution and office facilities are leased.
Americas Tire Operations International Tire Operations
Type of Facility North America Latin America Europe Asia Total
Manufacturing 4 1 * 2 3 ** 10
Distribution centers 12 1 5 1 19
Retail stores 3 - - - 3
Technical centers and offices 7 4 4 4 19
Total 26 6 11 8 51
* On January 24, 2020, the Company acquired the remaining 42 percent noncontrolling ownership interest in COOCSA, making COOCSA a wholly-
owned subsidiary.
** Asia includes two manufacturing facilities that are joint ventures, GRT, in the PRC, and ACTR, in Vietnam.
The Company believes its properties have been adequately maintained, generally are in good condition and are suitable and adequate to meet the demands of each segment’s business.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. LEGAL PROCEEDINGS
The Company is a defendant in various judicial proceedings arising in the ordinary course of business. A significant portion of these proceedings are product liability cases in which individuals involved in motor vehicle accidents seek damages resulting from allegedly defective tires manufactured by the Company. After reviewing all of these proceedings, and taking into account all relevant factors concerning them, the Company does not believe that any liabilities resulting from these proceedings are reasonably likely to have a material adverse effect on its liquidity, financial condition or results of operations in excess of amounts recorded at December 31, 2020. In the future, such costs could have a materially greater impact on the consolidated results of operations and financial position of the Company than in the past.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4.MINE SAFETY DISCLOSURES
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a)Market information
Cooper Tire & Rubber Company common stock is traded on the New York Stock Exchange under the symbol CTB.
Five-Year Stockholder Return Comparison
The Company includes in its annual report to stockholders a line graph presentation comparing cumulative five-year stockholder returns on an indexed basis with the Standard & Poor’s (“S&P”) Stock Index and the S&P 500 Auto Parts & Equipment Index. In 1993, the Company chose what is now the S&P 500 Auto Parts & Equipment Index as the most appropriate of the nationally recognized industry standards and has used that index for its stockholder return comparisons in all of its annual reports since that time.
The following chart assumes three hypothetical $100 investments on December 31, 2015, and shows the cumulative values at the end of each succeeding year resulting from appreciation or depreciation in the stock market price, assuming dividend reinvestment.
Total Return To Shareholders
(Includes reinvestment of dividends)
ANNUAL RETURN PERCENTAGE
Year Ended December 31,
Company / Index 2016 2017 2018 2019 2020
Cooper Tire & Rubber Company 3.86 % (8.00) % (7.21) % (9.77) % 42.83 %
S&P 500 Index 11.96 21.83 (4.38) 31.49 18.40
S&P 500 Auto Parts & Equipment (4.25) 45.58 (28.74) 45.16 23.40
Base
Period INDEXED RETURNS
Year Ended December 31,
Company / Index 2015 2016 2017 2018 2019 2020
Cooper Tire & Rubber Company $ 100.00 $ 103.86 $ 95.86 $ 88.65 $ 78.88 $ 121.71
S&P 500 Index 100.00 111.96 133.79 129.41 160.90 179.30
S&P 500 Auto Parts & Equipment 100.00 95.76 141.34 112.60 157.76 181.16
(b) Holders
The number of holders of record at December 31, 2020 was 1,507.
(c) Dividends
The Company has paid consecutive quarterly dividends on its common stock since 1973.
(d) Issuer purchases of equity securities
During the quarter ended December 31, 2020, the Company did not purchase any equity securities registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934.
On February 16, 2017, the Board of Directors increased the amount under and expanded the duration of the Company's existing share repurchase program (as amended, the "2017 Repurchase Program"). The 2017 Repurchase Program allowed the Company to repurchase up to $300,000,000, excluding commissions, of the Company’s common stock through December 31, 2019. The approximately $95,634,000 remaining authorization under the Company's existing share repurchase program as of February 16, 2017 was included in the $300,000,000 maximum amount authorized by the 2017 Repurchase Program. On December 3, 2019, the expiration of the 2017 Repurchase Program was extended to December 31, 2021. No other changes were made. The 2017 Repurchase Program does not obligate the Company to acquire any specific number of shares and can be suspended or discontinued at any time without notice. Shares can be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. All repurchases under the program listed above have been made using cash resources.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6.SELECTED FINANCIAL DATA
(Dollar amounts in thousands except per share amounts)
2020 2019 (a) 2018(b) 2017(c) 2016
Net sales $ 2,521,074 $ 2,752,639 $ 2,808,062 $ 2,854,656 $ 2,942,869
Operating profit (d)
$ 230,881 $ 174,455 $ 165,245 $ 309,247 $ 437,458
Income before income taxes $ 190,903 $ 109,672 $ 114,058 $ 243,925 $ 376,093
Net income attributable to Cooper Tire & Rubber Company $ 142,789 $ 96,404 $ 76,586 $ 95,400 $ 248,381
Earnings per share:
Basic $ 2.84 $ 1.92 $ 1.52 $ 1.83 $ 4.56
Diluted $ 2.83 $ 1.91 $ 1.51 $ 1.81 $ 4.51
Dividends per share $ 0.42 $ 0.42 $ 0.42 $ 0.42 $ 0.42
Weighted average shares outstanding (000s):
Basic 50,307 50,159 50,350 52,206 54,480
Diluted 50,505 50,378 50,597 52,673 55,090
Property, plant and equipment, net $ 1,077,624 $ 1,047,242 $ 1,001,921 $ 966,747 $ 864,227
Total assets (e), (f)
$ 2,971,573 $ 2,802,338 $ 2,634,205 $ 2,707,925 $ 2,731,677
Long-term debt and finance leases (g)
$ 314,265 $ 309,148 $ 121,284 $ 295,987 $ 297,094
Total equity $ 1,410,591 $ 1,327,733 $ 1,232,443 $ 1,185,756 $ 1,130,236
Capital expenditures $ 151,198 $ 202,722 $ 193,299 $ 197,186 $ 175,437
Depreciation and amortization $ 158,847 $ 148,054 $ 147,161 $ 140,228 $ 130,257
Number of employees (h)
9,839 8,720 9,027 9,204 9,149
(a)The Company recorded an income tax benefit of $18,606 in 2019 as a result of the implementation of a business realignment strategy in Europe.
(b)The Company recorded a non-cash goodwill impairment charge of $33,827 in 2018.
(c)The Company recorded $35,378 of deemed repatriation tax and $20,413 for the re-measurement of deferred tax assets in conjunction with U.S. tax reform, as well as a U.K. valuation allowance charge of $18,915, less the reversal of an Asia valuation allowance of $6,671 in 2017.
(d)The non-service cost components of net periodic benefit cost were reclassified outside of operating profit to Other pension and postretirement benefit expense in the amount of $37,523 and $53,071 in 2017 and 2016, respectively, as a result of the adoption of Accounting Standards Update ("ASU") 2017-07 in 2018.
(e)The Company has reclassified its volume and customer rebate program reserves from a contra-asset included within Accounts receivable to a liability within Accrued liabilities in the amount of $100,190 and $93,783 in 2017 and 2016, respectively, as a result of the adoption of Accounting Standards Codification ("ASC") 606 in 2018.
(f)The Company has reclassified its voluntary employee beneficiary association trust from a reduction of accrued benefits within Accrued liabilities to restricted cash included within Other assets of $18,499 in 2016 as a result of the adoption of ASC 2016-18 in 2018.
(g)In 2018, Long-term debt and finance leases reflect the short-term classification of $173,578 of unsecured notes due in December 2019. This amount was paid in 2019 and replaced with a new long-term borrowing.
(h)The number of employees in 2020 includes 1,157 members of the COOCSA workforce. Members of the COOCSA workforce were employed by an employment services company prior to the Company acquiring the remaining 42 percent noncontrolling ownership interest of COOCSA on January 24, 2020.

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

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to fluctuations in interest rates and currency exchange rates from its financial instruments. The Company actively monitors its exposure to risk from changes in foreign currency exchange rates and interest rates. Derivative financial instruments are used to reduce the impact of these risks. See the “Significant Accounting Policies - Derivative financial instruments” and “Fair Value of Financial Instruments” Notes to the Consolidated Financial Statements for additional information.
The Company has estimated its market risk exposures using sensitivity analyses. These analyses measure the potential loss in future earnings, cash flows or fair values of market sensitive instruments resulting from a hypothetical ten percent change in interest rates or foreign currency exchange rates.
The Company may be exposed to interest rate risk on borrowings that bear interest at floating rates. In certain cases, the Company utilizes derivative instruments to manage some of this risk. The Company does not enter into derivative instruments for trading or speculative purposes. At December 31, 2020, Cooper had $188 million of debt at a floating interest rate, which was effectively hedged. A hypothetical 10 percent change in interest rates would have an immaterial impact on interest expense for the years ended December 31, 2020 and 2019.
To manage the volatility of currency exchange exposures related to future sales and purchases in foreign currencies, the Company first nets the exposures to take advantage of natural offsets. Then, for the residual portion, the Company enters into forward exchange contracts with maturities of less than 12 months pursuant to the Company’s policies and hedging practices. The changes in fair value of these hedging instruments are offset, in part or in whole, by corresponding changes in the fair value of cash flows of the underlying exposures being hedged. The Company’s unprotected exposures to earnings and cash flow fluctuations due to changes in foreign currency exchange rates were not significant at December 31, 2020 and December 31, 2019.
The Company enters into foreign exchange contracts to manage its exposure to foreign currency denominated receivables and payables. The impact from a ten percent change in foreign currency exchange rates on the Company’s foreign currency denominated obligations and related foreign exchange contracts would not have been material to the Company’s results of operations and cash flows.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. FINANCIAL STATEMENTS
COOPER TIRE & RUBBER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands except per share amounts)
Twelve Months Ended December 31,
2020 2019 2018
Net sales $ 2,521,074 $ 2,752,639 $ 2,808,062
Cost of products sold 2,033,260 2,319,349 2,364,769
Gross profit 487,814 433,290 443,293
Selling, general and administrative expense 244,529 250,017 244,221
Restructuring expense 12,404 8,818 -
Goodwill impairment charge - - 33,827
Operating profit 230,881 174,455 165,245
Interest expense (22,707) (31,189) (32,181)
Interest income 3,569 9,458 10,216
Other pension and postretirement benefit expense (25,419) (41,567) (27,806)
Other non-operating income (expense) 4,579 (1,485) (1,416)
Income before income taxes 190,903 109,672 114,058
Income tax provision 46,999 11,355 33,495
Net income 143,904 98,317 80,563
Net income attributable to noncontrolling shareholders' interests 1,115 1,913 3,977
Net income attributable to Cooper Tire & Rubber Company $ 142,789 $ 96,404 $ 76,586
Earnings per share:
Basic $ 2.84 $ 1.92 $ 1.52
Diluted $ 2.83 $ 1.91 $ 1.51
See accompanying Notes to Consolidated Financial Statements.
COOPER TIRE & RUBBER COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
Twelve Months Ended December 31,
2020 2019 2018
Net income $ 143,904 $ 98,317 $ 80,563
Other comprehensive income (loss):
Cumulative currency translation adjustments 28,892 4,742 (24,430)
Currency loss charged to equity as part of acquisition of noncontrolling shareholder interest (11,748) - -
Financial instruments:
Change in the fair value of derivatives, net of reclassifications (8,429) (3,753) 2,628
Income tax provision on derivative instruments 2,206 1,054 (827)
Financial instruments, net of tax (6,223) (2,699) 1,801
Postretirement benefit plans:
Amortization of actuarial loss 35,257 35,843 37,203
Amortization of prior service cost (credit) 1,429 603 (541)
Actuarial (loss) gain (37,979) (12,877) 12,913
Pension settlement charges 4,155 4,262 -
Prior service effect of plan amendment (2,581) (3,069) (3,704)
Income tax impact on postretirement benefit plans (3,641) (9,333) (8,326)
Foreign currency translation loss (4,611) (2,668) (264)
Postretirement benefit plans, net of tax (7,971) 12,761 37,281
Other comprehensive income 2,950 14,804 14,652
Comprehensive income 146,854 113,121 95,215
Less: Comprehensive income attributable to noncontrolling shareholders' interests 3,394 2,708 1,740
Comprehensive income attributable to Cooper Tire & Rubber Company $ 143,460 $ 110,413 $ 93,475
See accompanying Notes to Consolidated Financial Statements.
COOPER TIRE & RUBBER COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share amounts)
December 31,
2020 2019
ASSETS
Current assets:
Cash and cash equivalents $ 625,758 $ 391,332
Notes receivable 9,076 535
Accounts receivable, less allowances of $11,162 at 2020 and $8,109 at 2019
506,305 544,257
Inventories:
Finished goods 264,785 326,839
Work in process 24,594 28,250
Raw materials and supplies 98,277 109,132
Total inventories 387,656 464,221
Other current assets 53,420 52,635
Total current assets 1,582,215 1,452,980
Property, plant and equipment:
Land and land improvements 57,941 53,516
Buildings 355,564 344,142
Machinery and equipment 2,154,000 2,042,578
Molds, cores and rings 266,671 262,444
Total property, plant and equipment 2,834,176 2,702,680
Less: Accumulated depreciation 1,756,552 1,655,438
Property, plant and equipment, net 1,077,624 1,047,242
Operating lease right-of-use assets, net of accumulated amortization of $46,045 at 2020 and $26,121 at 2019
91,884 80,752
Goodwill 18,851 18,851
Intangibles, net of accumulated amortization of $143,097 at 2020 and $123,735 at 2019
95,376 111,356
Deferred income tax assets 30,572 29,336
Investment in joint venture 53,494 48,912
Other assets 21,557 12,909
Total assets $ 2,971,573 $ 2,802,338
See accompanying Notes to Consolidated Financial Statements.
COOPER TIRE & RUBBER COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share amounts)
December 31,
(Continued) 2020 2019
LIABILITIES AND EQUITY
Current liabilities:
Short-term borrowings $ 15,614 $ 12,296
Accounts payable 297,578 276,732
Accrued liabilities 308,287 302,477
Income taxes payable 2,254 2,304
Current portion of long-term debt and finance leases 24,377 10,265
Total current liabilities 648,110 604,074
Long-term debt and finance leases 314,265 309,148
Noncurrent operating leases 71,391 55,371
Postretirement benefits other than pensions 221,395 227,216
Pension benefits 152,110 126,707
Other long-term liabilities 152,242 149,065
Deferred income tax liabilities 1,469 3,024
Equity:
Preferred stock, $1 par value; 5,000,000 shares authorized; none issued
- -
Common stock, $1 par value; 300,000,000 shares authorized; 87,850,292 shares issued at 2020 and 2019
87,850 87,850
Capital in excess of par value 20,815 22,175
Retained earnings 2,646,567 2,524,963
Accumulated other comprehensive loss (446,909) (447,580)
Parent stockholders' equity before treasury stock 2,308,323 2,187,408
Less: Common shares in treasury at cost (37,454,209 at 2020 and 37,647,058 at 2019)
(919,424) (922,783)
Total parent stockholders' equity 1,388,899 1,264,625
Noncontrolling shareholders' interests in consolidated subsidiaries 21,692 63,108
Total equity 1,410,591 1,327,733
Total liabilities and equity $ 2,971,573 $ 2,802,338
See accompanying Notes to Consolidated Financial Statements.
COOPER TIRE & RUBBER COMPANY
CONSOLIDATED STATEMENT OF EQUITY
(Dollar amounts in thousands except per share amounts)
Common
Stock $1 Par
Value Capital in
Excess of
Par
Value Retained
Earnings Cumulative
Other
Comprehensive
(Loss) Income Common
Shares in
Treasury Total Parent
Stockholders’
Equity Noncontrolling
Shareholders’
Interests in
Consolidated
Subsidiaries Total
Balance at
December 31, 2017 $ 87,850 $ 20,740 $ 2,394,372 $ (478,478) $ (897,388) $ 1,127,096 $ 58,660 $ 1,185,756
Net income - - 76,586 - - 76,586 3,977 80,563
Other comprehensive loss - - - 16,889 - 16,889 (2,237) 14,652
Share repurchase program - - - - (30,183) (30,183) - (30,183)
Stock compensation plans - 384 (106) - 2,515 2,793 - 2,793
Cash dividends - $0.42 per share
- - (21,138) - - (21,138) - (21,138)
Balance at
December 31, 2018 87,850 21,124 2,449,714 (461,589) (925,056) 1,172,043 60,400 1,232,443
Net income - - 96,404 - - 96,404 1,913 98,317
Other comprehensive income - - - 14,009 - 14,009 795 14,804
Stock compensation plans - 1,051 (87) - 2,273 3,237 - 3,237
Cash dividends - $0.42 per share
- - (21,068) - - (21,068) - (21,068)
Balance at
December 31, 2019 87,850 22,175 2,524,963 (447,580) (922,783) 1,264,625 63,108 1,327,733
Net income - - 142,789 - - 142,789 1,115 143,904
Other comprehensive income, excluding currency loss charged to equity as part of acquisition of noncontrolling shareholder interest - - - 12,419 - 12,419 2,279 14,698
Acquisition of noncontrolling shareholders' interest - (5,714) - (11,748) - (17,462) (44,810) (62,272)
Stock compensation plans - 4,354 (53) - 3,359 7,660 - 7,660
Cash dividends - $0.42 per share
- - (21,132) - - (21,132) - (21,132)
Balance at
December 31, 2020 $ 87,850 $ 20,815 $ 2,646,567 $ (446,909) $ (919,424) $ 1,388,899 $ 21,692 $ 1,410,591
See accompanying Notes to Consolidated Financial Statements.
COOPER TIRE & RUBBER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Twelve Months Ended December 31,
2020 2019 2018
Operating activities:
Net income $ 143,904 $ 98,317 $ 80,563
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 158,847 148,054 147,161
Deferred income taxes (2,855) 1,746 30,519
Stock-based compensation 6,053 4,362 3,868
Change in LIFO inventory reserve (10,365) 2,548 (3,026)
Amortization of unrecognized postretirement benefits 36,686 36,446 36,662
Goodwill impairment charge - - 33,827
Changes in operating assets and liabilities:
Accounts and notes receivable 36,434 8,980 (19,729)
Inventories 89,692 14,355 27,438
Other current assets 439 15,261 (2,080)
Accounts payable 15,147 9,809 10,646
Accrued liabilities (921) (4,517) 7,635
Pension and postretirement benefits (25,188) (49,714) (77,883)
Other items 11,266 4,946 (21,298)
Net cash provided by operating activities 459,139 290,593 254,303
Investing activities:
Additions to property, plant and equipment and capitalized software (151,198) (202,722) (193,299)
Investment in joint venture - (49,001) -
Proceeds from the sale of assets 146 119 160
Net cash used in investing activities (151,052) (251,604) (193,139)
Financing activities:
Issuance of short-term debt 324,614 12,296 19,423
Repayment of short-term debt (333,592) (15,288) (39,450)
Issuance of long-term debt 31,538 200,000 -
Repayment of long-term debt and finance lease obligations (14,247) (177,251) (1,395)
Acquisition of noncontrolling shareholder interest (62,272) - -
Payment of financing fees - (2,207) (1,230)
Repurchase of common stock - - (30,183)
Payments of employee taxes withheld from share-based awards (990) (1,376) (2,111)
Payment of dividends to Cooper Tire & Rubber Company stockholders (21,132) (21,068) (21,138)
Issuance of common shares related to stock-based compensation 2,638 232 306
Net cash used in financing activities (73,443) (4,662) (75,778)
Effects of exchange rate changes on cash 1,736 552 554
Net change in cash, cash equivalents and restricted cash 236,380 34,879 (14,060)
Cash, cash equivalents and restricted cash at beginning of period 413,125 378,246 392,306
Cash, cash equivalents and restricted cash at end of period $ 649,505 $ 413,125 $ 378,246
Cash and cash equivalents $ 625,758 $ 391,332 $ 356,254
Restricted cash included in Other current assets 22,780 20,305 19,967
Restricted cash included in Other assets 967 1,488 2,025
Total cash, cash equivalents and restricted cash $ 649,505 $ 413,125 $ 378,246
See accompanying Notes to Consolidated Financial Statements.
COOPER TIRE & RUBBER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share amounts)
Note 1. Significant Accounting Policies
Principles of consolidation - The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Acquired businesses are included in the consolidated financial statements from the dates of acquisition. All intercompany accounts and transactions have been eliminated.
The Company consolidates into its financial statements the accounts of the Company, all wholly-owned subsidiaries, and any partially-owned subsidiary that the Company has the power to control. Control generally equates to ownership percentage, whereby investments that are more than 50 percent owned are consolidated, investments in subsidiaries of 50 percent or less but greater than 20 percent are accounted for using the equity method, and investments in subsidiaries of 20 percent or less are measured at fair value or, if fair value is not readily available, at cost (less impairment, if any), adjusted for observable price changes in orderly transactions for the identical or a similar investment. The Company does not consolidate any entity for which it has a variable interest based solely on power to direct the activities and significant participation in the entity’s expected results that would not otherwise be consolidated based on control through voting interests. Further, the Company’s joint ventures are businesses established and maintained in connection with the Company’s operating strategy.
Cash and cash equivalents - The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents.
The Company’s objectives related to the investment of cash not required for operations is to preserve capital, meet the Company’s liquidity needs and earn a return consistent with these guidelines and market conditions. Investments deemed eligible for the investment of the Company’s cash include: 1) U.S. Treasury securities and general obligations fully guaranteed with respect to principal and interest by the government; 2) obligations of U.S. government agencies; 3) commercial paper or other corporate notes of prime quality purchased directly from the issuer or through recognized money market dealers; 4) time deposits, certificates of deposit or bankers’ acceptances of banks rated “A-” by Standard & Poor’s or “A3” by Moody’s; 5) collateralized mortgage obligations rated “AAA” by Standard & Poor’s and “Aaa” by Moody’s; 6) tax-exempt and taxable obligations of state and local governments of prime quality; and 7) mutual funds or outside managed portfolios that invest in the above investments. The Company had cash and cash equivalents totaling $625,758 and $391,332 at December 31, 2020 and December 31, 2019, respectively. The majority of the cash and cash equivalents were invested in eligible financial instruments in excess of amounts insured by the Federal Deposit Insurance Corporation and, therefore, subject to credit risk. Management believes that the probability of losses related to credit risk on investments classified as cash and cash equivalents is remote.
Restricted cash - The Company's restricted cash is comprised primarily of funds within a voluntary employees' beneficiary trust restricted to the future payment of employee benefit obligations.
Notes receivable - The Company has received bank secured notes from certain of its customers in the PRC to settle trade accounts receivable. These notes generally have maturities of six months or less and are redeemable at the bank of issuance. The Company evaluates the credit risk of the issuing bank prior to accepting a bank secured note from a customer which supports periodic assessment of expected credit losses. Management believes that the probability of material losses related to credit risk on notes receivable is remote.
Accounts receivable - The Company records trade accounts receivable when revenue is recorded in accordance with its revenue recognition policy and relieves accounts receivable when payments are received from customers.
Allowance for credit losses - In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which changes accounting requirements for the recognition of credit losses from an incurred or probable impairment methodology to a current expected credit losses (CECL) methodology. This standard is effective for interim and annual reporting periods beginning after December 15, 2019 and was adopted effective January 1, 2020. Trade receivables (including the allowance for credit losses) is the only financial instrument in scope for ASU 2016-13 currently held by the Company.
In implementing the standard, the Company amended its policy to utilize an expected loss methodology based on credit risk in place of the incurred loss methodology based on aging. The Company's updated policy includes the regular review of its outstanding accounts receivable portfolio to assess risk and likelihood of credit loss. This review includes consideration of potential credit loss over the asset's contractual life, along with historical experience, current conditions and forecasts based on management's judgment. The Company also performs periodic credit evaluations of customers’ financial conditions in order to assess credit worthiness and maintain appropriate credit limits. Accounts receivable, net of the allowance for credit losses, are
$506,305 and $544,257 as of December 31, 2020 and December 31, 2019, respectively. The Company recorded provisions for credit losses for receivables of $11,162 and $8,109 at the same dates. The adoption of this standard did not materially impact the Company's consolidated financial statements.
Inventories - Inventory costs are determined using the LIFO method for substantially all U.S. inventories. Costs of other inventories have been determined by the first-in, first-out ("FIFO") method. Inventories include direct material, direct labor, and applicable manufacturing and engineering overhead costs. FIFO inventories are valued at cost, which is not in excess of the net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. LIFO inventories are valued at the lower of cost or market.
Long-lived assets, including goodwill and right-of-use assets - Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the following expected useful lives:
Land improvements 10 to 20 years
Buildings 10 to 40 years
Machinery and equipment 5 to 14 years
Furniture and fixtures 5 to 10 years
Molds, cores and rings 4 to 10 years
The Company capitalizes certain internal and external costs incurred to acquire or develop internal-use software. Capitalized software costs are amortized over the estimated useful life of the software, which ranges from one to ten years.
Intangibles with definite lives include trademarks, technology and intellectual property which were fully amortized as of December 31, 2019. Land use rights are amortized over their remaining useful lives, which range from 35 to 42 years.
On January 1, 2019, the Company adopted ASC 842, "Leases," which requires lessees to record right-of-use assets and related lease obligations on the balance sheet, as well as disclose key information regarding leasing arrangements.
The Company evaluates the recoverability of long-lived assets, including property, plant and equipment and right-of-use assets for operating and finance leases, based on undiscounted projected cash flows, excluding interest and taxes, when any impairment is indicated. Goodwill and indefinite-lived intangibles are assessed for potential impairment at least annually or when events or circumstances indicate impairment may have occurred.
Earnings per common share - Net income per share is computed on the basis of the weighted average number of common shares outstanding each year. Diluted earnings per share includes the dilutive effect of stock options and other stock units. The following table sets forth the computation of basic and diluted earnings per share:
(Number of shares and dollar amounts in thousands except per share amounts)
2020 2019 2018
Numerator
Numerator for basic and diluted earnings per share - income from continuing operations available to common stockholders $ 142,789 $ 96,404 $ 76,586
Denominator
Denominator for basic earnings per share - weighted average shares outstanding 50,307 50,159 50,350
Effect of dilutive securities - stock options and other stock units 198 219 247
Denominator for diluted earnings per share - adjusted weighted average shares outstanding 50,505 50,378 50,597
Earnings per share:
Basic $ 2.84 $ 1.92 $ 1.52
Diluted 2.83 1.91 1.51
At December 31, 2020, 2019 and 2018, all options to purchase shares of the Company’s common stock were included in the computation of diluted earnings per share as the options’ exercise prices were less than the average market price of the common shares.
Derivative financial instruments - Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into financial instruments for trading or
speculative purposes. The Company offsets fair value amounts recognized on the Consolidated Balance Sheets for derivative financial instruments executed with the same counter-party.
The Company uses foreign currency forward contracts as hedges of the fair value of certain non-U.S. dollar denominated net asset and liability positions. Gains and losses resulting from the impact of currency exchange rate movements on these forward contracts are recognized in the accompanying Consolidated Statements of Income in the period in which the exchange rates change and offset the foreign currency gains and losses on the underlying exposure being hedged.
Foreign currency forward contracts are also used to hedge variable cash flows associated with forecasted sales and purchases denominated in currencies that are not the functional currency of certain entities. The forward contracts have maturities of less than twelve months pursuant to the Company’s policies and hedging practices. These forward contracts meet the criteria for and have been designated as cash flow hedges. Accordingly, the unrealized gains and losses on such forward contracts are recorded as a separate component of stockholders’ equity in the accompanying Consolidated Balance Sheets and reclassified into earnings as the hedged transaction affects earnings.
The Company is exposed to interest rate risk on borrowings that bear interest at floating rates. The Company utilizes derivative instruments to manage the risk associated with the floating rate debt and has effectively fixed the variable interest rate component on the notional amount of these swaps. The swaps qualify for hedge accounting and, therefore, changes in the fair value of the swaps have been recorded as a separate component of stockholders’ equity in the accompanying Consolidated Balance Sheets and reclassified into earnings as the hedged transaction affects earnings.
The Company assesses hedge effectiveness quarterly. In doing so, the Company monitors the actual and forecasted foreign currency sales and purchases versus the amounts hedged to identify any hedge ineffectiveness. The Company also performs regression analysis comparing the change in value of the hedging contracts versus the underlying foreign currency sales and purchases, which confirms a high correlation and hedge effectiveness.
The Company is exposed to price risk related to forecasted purchases of certain commodities that are used as raw materials, principally natural rubber. Accordingly, it uses commodity contracts with forward pricing for a portion of its production requirements. These contracts generally qualify for the normal purchase exception under guidance for derivative instruments and hedging activities, and therefore are not subject to its provisions.
Income taxes - Income tax expense is based on reported earnings or losses before income taxes in accordance with the tax rules and regulations of the specific legal entities within the various specific taxing jurisdictions where the Company’s income is earned. Taxable income may differ from earnings before income taxes for financial accounting purposes. To the extent that differences are due to revenue or expense items reported in one period for tax purposes and in another period for financial accounting purposes, a provision for deferred income taxes is made using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset may not be realized. Deferred income taxes generally are not recorded on the majority of undistributed earnings of international subsidiaries based on the Company’s intention that these earnings will continue to be reinvested. Upon enactment of the Tax Act, the Transition Tax was recorded based on approximately $495 million of unremitted foreign earnings. During 2020, the Company re-evaluated its position on potential earnings repatriation and has concluded that the repatriation implications of the Tax Act continue to have no impact on its indefinite reinvestment assertion, consistent with all years since 2018. As such, no change has been made with respect to that assertion for the year ended December 31, 2020.
Product liability - The Company accrues costs for asserted product liability claims at the time a loss is probable and the amount of loss can be estimated. The Company believes the probability of loss can be established and the amount of loss can be estimated only after certain minimum information is available, including verification that Company-produced product was involved in the incident giving rise to the claim, the condition of the product purported to be involved in the claim, the nature of the incident giving rise to the claim and the extent of the purported injury or damages. In cases where such information is known, each product liability claim is evaluated based on its specific facts and circumstances. A judgment is then made to determine the requirement for establishment or revision of an accrual for any potential liability. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. The liability often cannot be determined with precision until the claim is resolved.
Pursuant to ASC 450 "Contingencies," the Company accrues the minimum liability for each known claim when the estimated outcome is a range of probable loss and no one amount within that range is more likely than another. For such known claims, the Company accrues the minimum liability because the product liability claims faced by the Company are unique and widely variable, and accordingly, the resolutions of those claims have an enormous amount of variability. The costs have ranged from zero dollars to $33 million in one case with no average that is meaningful.
No specific accrual is made for individual unasserted claims or for premature claims, asserted claims where the minimum information needed to evaluate the probability of a liability is not yet known. However, an accrual is maintained for such claims based, in part, on management’s expectations for future litigation activity and the settled claims history maintained, including the historical number of claims and amount of settlements.
The Company periodically reviews its estimates and any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. Because of the speculative nature of litigation in the U.S., the Company does not believe a meaningful aggregate range of reasonably possible loss for asserted and unasserted claims can be determined. While the Company believes its reserves are reasonably stated, it is possible an individual claim from time to time may result in an aberration from the norm and could have a material impact.
The product liability expense reported by the Company includes amortization of insurance premium costs, adjustments to settlement reserves and legal costs incurred in defending claims against the Company. Legal costs are expensed as incurred and product liability insurance premiums are amortized over coverage periods.
Advertising expense - Expenses incurred for advertising include production and media and are generally expensed when incurred. Costs associated with dealer-earned cooperative advertising are recorded as a reduction of the revenue component of Net sales at the time of sale. Advertising expense for 2020, 2019 and 2018 was $53,662, $58,453 and $54,177, respectively.
Stock-based compensation - The Company’s incentive compensation plans allow the Company to grant awards to employees in the form of stock options, stock awards, restricted stock units, stock appreciation rights, performance stock units, dividend equivalents and other awards. Compensation related to these awards is determined based on the fair value on the date of grant and is amortized to expense over the vesting period. If awards can be settled in cash, these awards are recorded as liabilities and marked to market.
Warranties - Warranties are provided on the sale of certain of the Company’s products and an accrual for estimated future claims is recorded at the time revenue is recognized. Tire replacement under most of the warranties the Company offers is on a prorated basis. The Company provides for the estimated cost of product warranties based primarily on historical return rates, estimates of the eligible tire population and the value of tires to be replaced. The following table summarizes the activity in the Company’s product warranty liabilities, which are recorded in Accrued liabilities and Other long-term liabilities on the Company’s Consolidated Balance Sheets:
2020 2019 2018
Reserve at beginning of year $ 12,734 $ 12,431 $ 12,093
Additions 9,591 11,609 13,187
Payments (8,448) (11,306) (12,849)
Reserve at December 31 $ 13,877 $ 12,734 $ 12,431
Use of estimates - The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of: (1) revenues and expenses during the reporting period; and (2) assets and liabilities, as well as disclosure of contingent assets and liabilities, at the date of the consolidated financial statements. Actual results could differ from those estimates.
Revenue recognition - In accordance with ASC 606, revenues are recognized when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. Shipping and handling costs are recorded in cost of products sold. Allowance programs such as volume rebates and cash discounts are recorded at the time of sale as a reduction to revenue based on anticipated accrual rates for the year.
Research and development - Costs are charged to Cost of products sold as incurred and amounted to approximately $64,140, $69,928 and $64,007 during 2020, 2019 and 2018, respectively.
Related party transactions - Prior to becoming a wholly-owned subsidiary, the Company’s COOCSA joint venture paid $5,800, $26,589 and $28,023 in 2020, 2019 and 2018, respectively, to an employment services company in Mexico owned by members of the joint venture workforce. In addition, subsequent to the acquisition, payments of $15,984 were made to members of the prior joint venture workforce in connection with services rendered. COOCSA also recorded sales of $2,784, $4,373 and $4,713 to the now former noncontrolling shareholder in 2020, 2019 and 2018, respectively. The Company purchased $2,784, $10,920 and $775 of TBR tires from Sailun Vietnam in 2020, 2019 and 2018, respectively, through an off-take agreement between the two parties.
Pensions and Postretirement Benefits Other than Pensions - The Company provides certain pension and postretirement benefits other than pensions to employees and retired employees, including pensions, postretirement health care benefits, other postretirement benefits, and supplemental pensions. In general, the Company's policy is to fund its pension benefit obligation based on legal requirements, tax and liquidity considerations and local practices. The Company does not fund its postretirement benefit obligation.
Plan assets and obligations are measured using various actuarial assumptions, such as discount rates, rate of compensation increase, mortality rates, turnover rates and health care cost trend rates, which are determined as of the current year measurement date. The measurement of net periodic benefit cost is based on various actuarial assumptions, including discount rates, expected
return on plan assets and rate of compensation increase, which are determined as of the prior year measurement date. The Company reviews its actuarial assumptions on an annual basis and modifies these assumptions when appropriate. As required by GAAP, the effects of the modifications are recorded currently or are amortized over future periods.
The expected return on plan assets is determined using the expected long term rate of return. These computed rates of return are reviewed by the Company’s investment advisers and actuaries. Industry comparables and other outside guidance are also considered in the annual selection of the expected rates of return on pension assets.
The corridor approach is used in the valuation of defined benefit pension and postretirement benefit plans. The corridor approach defers all actuarial gains and losses resulting from variances between actual results and actuarial assumptions. Those unrecognized gains and losses are amortized when the net gains and losses exceed 10 percent of the greater of the market-related value of plan assets or the projected benefit obligation at the beginning of the year. The amount in excess of the corridor is amortized over the average remaining service period to retirement date of eligible plan participants.
Tariffs - The Company is subject to tariffs on the import of tires, raw materials and tire-manufacturing equipment in certain of the jurisdictions in which it operates. Tariff costs are included within inventory as they pertain to tires and raw materials, while tariffs on tire-manufacturing equipment are included as part of the cost of fixed assets. Material components of the Company's tariff costs include:
•Passenger Car and Light Truck Tire Tariffs - Antidumping and countervailing duty investigations into certain passenger car and light truck tires imported from the PRC into the United States were initiated on July 14, 2014. The determinations announced in both investigations were affirmative and resulted in the imposition of significant additional duties from each. The rates are subject to review annually and a material change in the new rates could have a significant impact on the Company's results.
•Truck and Bus Tire Tariffs - Antidumping and countervailing duty investigations into certain TBR tires imported from the PRC into the U.S. were initiated on January 29, 2016. On February 22, 2017, the ITC made a final determination that the U.S. market had not suffered material injury because of imports of TBR tires from the PRC. However, on November 1, 2018, the CIT remanded the case back to the ITC for reconsideration. On January 30, 2019, the ITC reversed its earlier decision and made an affirmative determination of material injury. On February 15, 2019, the determination was published in the Federal Register and countervailing duties of 42.16 percent were imposed on the Company's TBR tire imports into the U.S. from China. The ITC’s re-determination, along with comments from the parties regarding the re-determination, were filed with the CIT. The CIT affirmed the ITC re-determination on February 18, 2020. The rates are subject to review annually and a material change in the new rates could have a significant impact on the Company's results.
•Section 301 Tariffs - Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, passenger, light truck and truck and bus tires, raw materials and tire-manufacturing equipment from the PRC imported into the U.S. became subject to additional 10 percent duties effective September 24, 2018. These tariffs increased to 25 percent effective May 10, 2019.
•Duty Drawbacks - The enactment in December 2018 of the Modernized Drawback Final Rule under the Trade Enforcement and Trade Facilitation Act of 2015 expanded the Company's ability to recover Section 301 and Ad Valorem duties paid on goods imported into the U.S. when such goods, or similar items, are subsequently exported.
Recent Accounting Pronouncements
Each change to U.S. GAAP is established by the Financial Accounting Standards Board (“FASB”) in the form of an accounting standards update (“ASU”) to the FASB’s Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs.
Accounting Pronouncements - Recently adopted
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820)," which removes, modifies and adds various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. Such modifications to disclosures center around Level 3 fair value measurements and investments in entities that calculate net asset value. This standard is effective for interim and annual reporting periods beginning after December 15, 2019 and has been adopted by the Company effective January 1, 2020. The adoption of this standard did not materially impact the Company's consolidated financial statements.
Internal-Use Software
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)," which aligns the requirements for capitalizing implementation costs incurred in a service contract hosting arrangement with those of developing or obtaining internal-use software. This standard is effective for interim and annual reporting periods beginning after December 15, 2019 and has been adopted prospectively by the Company effective January 1, 2020. Capitalization of implementation costs incurred in a service contract hosting arrangement affects Intangibles, net of accumulated amortization, Cost of products sold, and Selling, general, and administrative expense within the consolidated financial statements. The adoption of this standard did not materially impact the Company's consolidated financial statements.
Accounting for Income Taxes
On December 18, 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," to, among other provisions, eliminate certain exceptions related to intra-period tax allocation and loss benefit limitations in interim periods, as well as certain rules pertaining to deferred taxes for equity method investees. This ASU also simplifies rules pertaining to franchise taxes and other taxes partially based on income, and changes the timing of when an entity recognizes effects of enacted tax law changes. This standard becomes effective in fiscal years beginning after December 15, 2020; however, the Company chose to early adopt as of January 1, 2020. The adoption of this standard did not materially impact the Company's consolidated financial statements.
Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)," which removes, modifies and adds various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. For example, disclosures around the effect of a one-percentage-point change in assumed health care costs was removed. This standard is effective for fiscal years ending after December 15, 2020. These amendments must be applied on a retrospective basis for all periods presented. The adoption of this standard did not materially impact the Company's consolidated financial statements and is reflected in Note 11 "Pensions and Postretirement Benefits Other than Pensions."
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)," which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The Company will utilize optional expediencies under ASC 848 on their cash flow designated hedges during LIBOR transition to continue to assess future LIBOR interest as probable beyond LIBOR’s termination, to document changes to critical terms of the derivative and the borrowings related to reference rate reform and to make changes to effectiveness assessments related to reference rate reform without dedesignating the hedge relationships. The adoption of this standard did not materially impact the Company's consolidated financial statements.
Note 2. COVID-19
In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The Company’s priorities during the COVID-19 pandemic have been protecting the health and safety of its employees, responsibilities to its broader communities, and commitments to its customers and other key stakeholders.
The Company’s consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse accounting impacts on the Company’s results of operations for the year ended December 31, 2020. Given the dynamic nature of the COVID-19 pandemic and related market conditions, the Company cannot reasonably estimate the period of time that these events will persist or the full extent of the impact they will have on the business. The Company continues to take actions designed to mitigate the adverse effects of this rapidly changing market environment.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment. The Company's payment of employer payroll taxes after enactment otherwise due in 2020 was delayed, with 50 percent due by December 31, 2021, and the remaining 50 percent by December 31, 2022. At December 31, 2020, the Company has deferred the remittance of $14,742 of employer taxes under the CARES Act. This liability is split evenly between the Company's Accrued liabilities and Other long-term liabilities in the Consolidated Balance Sheets. The Company continues to evaluate the potential applicability and related impact of the CARES Act. The CARES Act has had no further impact on the Company’s consolidated financial statements at December 31, 2020.
Note 3. Restructuring
2020 Activity
Reduction in Force
In the second quarter of 2020, the Company announced a reduction in its workforce as a result of the Company's continuing evaluation of the skills and roles required for the Company to succeed and grow into the future. As a result of this action, the Company incurred severance and other related costs of $1,474 for the three month period ended June 30, 2020. No further expenses were incurred for the year ended December 31, 2020.
Corporacion de Occidente SA de CV
On January 24, 2020, the Company acquired the remaining 41.57 percent noncontrolling ownership interest in COOCSA, making COOCSA a wholly-owned subsidiary in the Americas Segment. In this transaction, the Company acquired the remaining outstanding voting common stock of COOCSA for a total cash price of $54,500. In addition, subsequent to the acquisition, payments of $15,984 were made to members of the prior joint venture workforce in connection with services rendered.
In accordance with ASC 810, "Consolidation", the excess of the purchase price over the noncontrolling shareholder interest was recorded as a decrease to Capital in excess of par value to reflect the additional ownership. Payments to members of the joint venture workforce in connection with services rendered included $7,772 paid to members that were also shareholders of the non-controlling interest. This amount was also treated as part of the overall purchase price under ASC 810.
In addition to the payments made to the joint venture workforce for services rendered, the Company also incurred $2,712 of other costs associated with the transaction. For the three month period ended March 31, 2020, the Company incurred restructuring expense of $10,930 related to the COOCSA acquisition. There were no further restructuring expenses related to the COOCSA acquisition for the year ended December 31, 2020.
The full year period costs related to the reduction in force and COOCSA acquisition are comprised of:
Twelve Months Ended December 31, 2020
Reduction in force - severance $ 1,250
Reduction in force - other 224
COOCSA workforce services rendered 8,218
COOCSA professional and other costs 2,712
Total restructuring expense $ 12,404
At December 31, 2020, the Company did not have an accrued restructuring balance related to these actions.
2019 Activity
Cooper Tire Europe
On January 17, 2019, Cooper Tire Europe, a wholly-owned subsidiary of the Company, committed to a plan to cease substantially all light vehicle tire production at its Melksham, U.K. facility, which is included in the International Segment. The phasing out of light vehicle tire production was substantially completed in the third quarter of 2019. Approximately 300 roles were eliminated at the site. Cooper Tire Europe now obtains light vehicle tires to meet customer needs from other production sites within the Company’s global production network. Approximately 400 roles remain in Melksham to support the functions that continue there, including motorsports and motorcycle tire production, a materials business, Cooper Tire Europe headquarters, sales and marketing, and the Europe Technical Center. Costs related to the decision to cease light vehicle tire production at the Melksham, U.K. facility were $8,315 for the full year ended December 31, 2019. In connection with this business realignment, a one-time payment from the U.S. to Serbia was made during the fourth quarter of 2019 in order to allow the Serbian operations to improve their financial standing and serve as a reliable and fully operational contract manufacturer for the U.S.
Cooper Tire Asia
In the fourth quarter of 2019, the Company's Asian operations, included in the International Segment, completed a headcount optimization review. As a result of this optimization, the Company incurred $1,262 of restructuring expense during 2019.
For the year ended December 31, 2019, the Company recorded restructuring expense of $8,818, made up of employee severance, asset write-downs and other costs. At December 31, 2019, the Company's accrued restructuring balance was $1,398, composed primarily of severance costs related to the Asian operations.
Twelve Months Ended December 31, 2019
Cooper Tire Europe employee severance costs $ 5,308
Cooper Tire Europe asset write-downs & other costs 2,248
Cooper Tire Asia employee severance costs 1,262
Total restructuring expense $ 8,818
Beginning balance of accrued restructuring $ -
Accrued severance costs 6,630
Payment of severance costs (5,368)
Accrued professional fees 819
Payment of professional fees (683)
Balance of accrued restructuring at December 31, 2019 $ 1,398
Payment of severance costs (1,262)
Payment of professional fees (136)
Balance of accrued restructuring at December 31, 2020 $ -
In addition to the costs classified as restructuring expense on the Consolidated Statement of Income, the Company incurred additional costs of $759 in 2019 as a result of Cooper Tire Europe's decision to cease light vehicle production at its Melksham facility. These additional costs relate to professional fees associated with the Company's evaluation of its legal entity structure moving forward, as well as other matters, and are included within Selling, general and administrative expense on the Consolidated Statement of Income.
Note 4. Revenue from Contracts with Customers
Accounting policy
Revenue is measured based on the consideration specified in a contract with a customer and excludes any sales incentives or rebates. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer. This occurs with shipment or delivery, depending on the underlying terms with the customer. The transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, the Company estimates provisions for different forms of variable consideration (discounts and rebates) based on historical experience, current conditions and contractual obligations, as applicable. Payment terms with customers vary by region and customer, but are generally 30-90 days. The Company does not have significant financing components or significant payment terms. Incidental items that are immaterial in the context of the contract are expensed as incurred.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost and not as a separate performance obligation. Therefore, such items are accrued upon recognition of revenue.
Nature of goods and services
The following is a description of principal activities, separated by reportable segments, from which the Company generates its revenue. See Note 19 - Business Segments for additional details on the Company's reportable segments.
The Company’s reportable segments have the following revenue characteristics:
•Americas Tire Operations - The Americas Tire Operations segment manufactures and markets passenger car and light truck tires. The segment also markets and distributes racing, motorcycle and TBR tires.
•International Tire Operations - The International Tire Operations segment manufactures and markets passenger car, light truck, motorcycle, racing and TBR tires and tire retread material for global markets.
Disaggregation of revenue
In the following tables, revenue is disaggregated by major market channel for the twelve months ended December 31, 2020, 2019, and 2018, respectively:
Twelve Months Ended December 31, 2020
Americas International Eliminations Total
Light Vehicle (1)
$ 1,932,725 $ 354,398 $ (54,627) $ 2,232,496
Truck and bus radial 186,718 82,541 (76,843) 192,416
Other (2)
51,446 44,716 - 96,162
Net sales $ 2,170,889 $ 481,655 $ (131,470) $ 2,521,074
Twelve Months Ended December 31, 2019
Americas International Eliminations Total
Light Vehicle (1)
$ 2,096,864 $ 403,524 $ (68,658) $ 2,431,730
Truck and bus radial 200,088 80,797 (66,432) 214,453
Other (2)
56,774 49,682 - 106,456
Net sales $ 2,353,726 $ 534,003 $ (135,090) $ 2,752,639
Twelve Months Ended December 31, 2018
Americas International Eliminations Total
Light Vehicle (1)
$ 2,115,942 $ 481,499 $ (109,400) $ 2,488,041
Truck and bus radial 194,558 101,744 (86,160) 210,142
Other (2)
52,146 57,733 - 109,879
Net sales $ 2,362,646 $ 640,976 $ (195,560) $ 2,808,062
(1)Light vehicle includes passenger car and light truck tires
(2)Other includes motorcycle and racing tires, wheels, tire retread material, and other items
Contract liabilities
Contract liabilities relate to customer payments received in advance of shipment. As the Company does not generally have rights to consideration for work completed but not billed at the reporting date, the Company does not have any contract assets. Accounts receivable are not considered contract assets under the revenue standard as contract assets are conditioned upon the Company's future satisfaction of a performance obligation. Accounts receivable, in contrast, are unconditional rights to consideration.
Significant changes in the contract liabilities balance, included within the Company's Accrued liabilities on the Consolidated Balance Sheets, during the twelve months ended December 31, 2020 and 2019 are as follows:
Contract Liabilities
Contract liabilities at January 1, 2019 $ 947
Increases to deferred revenue for cash received in advance from customers 16,297
Decreases due to recognition of deferred revenue (16,164)
Contract liabilities at December 31, 2019 $ 1,080
Increases to deferred revenue for cash received in advance from customers 8,243
Decreases due to recognition of deferred revenue (8,550)
Contract liabilities at December 31, 2020 $ 773
Transaction price allocated to remaining performance obligations
For the twelve months ended December 31, 2020 and 2019, revenue recognized from performance obligations related to prior periods is not material.
Revenue expected to be recognized in any future period related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, contracts where revenue is recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, is not material.
The Company applies the practical expedient in ASC 606 "Revenue from Contracts with Customers" and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Note 5. Inventories
The Company uses the LIFO method for substantially all U.S. inventories. The current cost of the U.S. inventories under the FIFO method was $310,141 and $365,585 at December 31, 2020 and December 31, 2019, respectively. These FIFO values have been reduced by approximately $77,251 and $87,616 at December 31, 2020 and December 31, 2019, respectively, to arrive at the LIFO value reported on the Consolidated Balance Sheets. The Company's remaining inventories have been valued under the FIFO method. All LIFO inventories are valued at the lower of cost or market. All other inventories are stated at the lower of cost or net realizable value.
Note 6. Goodwill and Intangibles
Goodwill is recorded in the segment where it was generated by acquisitions. In 2011, the Company recorded $18,851 of goodwill related to the acquisition of additional ownership of COOCSA in the Americas Tire Operations segment and, in 2016, the Company recorded goodwill in the amount of $33,250 related to the acquisition of GRT in the International Tire Operations segment. Goodwill prior to 2011 was zero.
Purchased goodwill and indefinite-lived intangible assets are tested annually for impairment, unless indicators are present that would require an earlier test. On December 12, 2018, Cooper Vietnam and Sailun Vietnam entered into an equity joint venture contract to establish a joint venture in Vietnam to produce and sell TBR tires. The new joint venture began commercially producing tires in 2020. The capacity created by this planned facility decreased expected production requirements for Cooper's GRT joint venture. The Company included the expected impact of the new Vietnam joint venture on projected future cash flows in performing its annual goodwill impairment assessment on GRT in 2018. Based on the assessment performed, the goodwill balance was deemed to be fully impaired and resulted in a non-cash fourth quarter 2018 impairment charge of $33,827 recorded in the Consolidated Statement of Income. The fair value of GRT utilized in the goodwill impairment assessment was determined based upon internal and external inputs considering various market transactions and discounted cash flow valuation methods, among other factors. This valuation approach represented a Level 3 fair value measurement measured on a non-recurring basis in the fair value hierarchy due to the Company's use of Company-specific inputs and unobservable measurement inputs.
During the fourth quarter of 2020 and 2019, the Company completed its annual goodwill and intangible asset impairment tests and no impairment was indicated for the goodwill related to the 2011 acquisition of additional ownership of COOCSA or the Company's other indefinite-lived intangible assets.
The following table presents intangible assets and accumulated amortization balances as of December 31, 2020 and 2019:
December 31, 2020 December 31, 2019
Gross
Carrying
Amount Accumulated
Amortization Net
Carrying
Amount Gross
Carrying
Amount Accumulated
Amortization Net
Carrying
Amount
Definite-lived:
Capitalized software costs $ 213,015 $ (134,846) $ 78,169 $ 205,929 $ (115,090) $ 90,839
Land use rights 11,341 (4,001) 7,340 14,145 (3,545) 10,600
Trademarks and tradenames 3,800 (3,800) - 3,800 (3,800) -
Other 500 (450) 50 1,400 (1,300) 100
228,656 (143,097) 85,559 225,274 (123,735) 101,539
Indefinite-lived:
Trademarks 9,817 - 9,817 9,817 - 9,817
$ 238,473 $ (143,097) $ 95,376 $ 235,091 $ (123,735) $ 111,356
Estimated amortization expense over the next five years is as follows: 2021 - $19,727, 2022 - $17,938, 2023 - $16,737, 2024 - $15,463 and 2025 - $2,534.
Note 7. Accrued Liabilities
Accrued liabilities at December 31 were as follows:
2020 2019
Volume and customer rebate programs $ 102,232 $ 99,168
Payroll and employee benefits, excluding postemployment benefits 82,870 75,218
Operating lease liability 23,338 27,663
Taxes other than income taxes 21,542 12,505
Product liability 18,337 25,366
Other postretirement benefits 12,266 14,334
Advertising 11,266 13,281
Warranty 8,835 8,041
Other 27,601 26,901
Accrued liabilities $ 308,287 $ 302,477
Note 8. Income Taxes
Components of income (loss) from continuing operations before income taxes and noncontrolling shareholders’ interests were as follows:
2020 2019 2018
United States $ 161,885 $ (4,720) $ 108,838
Foreign 29,018 114,392 5,220
Total $ 190,903 $ 109,672 $ 114,058
The provision (benefit) for income tax for continuing operations consisted of the following:
2020 2019 2018
Current:
Federal $ 35,715 $ 2,659 $ 56
State and local 10,796 5,386 5,350
Foreign 3,343 9,733 7,214
49,854 17,778 12,620
Deferred:
Federal (5,919) 1,356 18,293
State and local 1,300 (4,027) 3,266
Foreign 1,764 (3,752) (684)
(2,855) (6,423) 20,875
$ 46,999 $ 11,355 $ 33,495
During the year ended December 31, 2018, the Company concluded its accounting under comprehensive U.S. tax legislation enacted in 2017 (the "Tax Act") and updated its SAB 118 provisional estimates with respect to remeasurement of U.S. deferred tax assets and the Transition Tax on unrepatriated foreign earnings. Tax benefit of $3,576 and tax expense of $5,026 were recorded, respectively. During the year ended December 31, 2019, final Transition Tax regulations were issued resulting in the Company recording an additional Transition Tax liability of $1,661. The Company's outstanding Transition Tax payable as a result of the enactment of the Tax Act, subsequent SAB 118 revisions, and adjustments related to the final regulations, was
$20,434 at December 31, 2020 and 2019. The Transition Tax payable is recorded in Other long-term liabilities and is payable over a period of three years beginning in 2022.
The Tax Act also subjects a U.S. parent shareholder to current tax on its global intangible low-taxed income ("GILTI"). For the year ended December 31, 2018, the Company determined that its accounting policy is to record GILTI as a period cost only in the period it is incurred. For the years ended December 31, 2019 and 2018, the Company recognized additional tax expense associated with GILTI, exclusive of GILTI foreign tax credits, which is reflected in the rate reconciliation below. No additional tax expense associated with GILTI was recognized for the year ended December 31, 2020.
Prior to enactment of the Tax Act, the Company did not recognize a deferred tax liability related to the U.S. federal and state income taxes and foreign withholding taxes on unremitted foreign earnings because it overcame the presumption of the repatriation of those earnings. Upon enactment of the Tax Act, the Transition Tax was recorded based on approximately $495 million of unremitted foreign earnings. During 2020, the Company re-evaluated its position on potential earnings repatriation and has concluded that the repatriation implications of the Tax Act continue to have no impact on its indefinite reinvestment assertion, consistent with all years since 2018. As such, no change has been made with respect to the Company's indefinite reinvestment assertion for the year ended December 31, 2020 and foreign income, foreign withholding, and state income tax liabilities have not been recorded on approximately $738 million of undistributed foreign earnings. Determination of the amount of any deferred income or withholding tax liability on these earnings is not practicable because of the complexities of the hypothetical calculation.
During the year ended December 31, 2020, the Company's effective tax rate was primarily driven by a change in the mix of earnings between the U.S. and non-U.S. jurisdictions as compared to 2019. The mix of earnings in 2019 resulted from a business realignment strategy executed to improve the Company's market share for its European light vehicle tire business. The mix of earnings in 2020 has reverted to a more heavily weighted U.S. share. The resulting tax effects of the 2019 earnings mix are reflected as the difference in effective tax rates of international operations in the rate reconciliation below.
The Company's Serbian operations are benefiting from a ten-year tax holiday that is based largely on historical investments in property, plant, and equipment which has the impact of reducing the effective tax rate in Serbia to approximately 1.5 percent. For the year ended December 31, 2020, the Company recognized a tax holiday benefit of $0.7 million. The tax holiday will expire in 2026.
A reconciliation of the income tax provision (benefit) for continuing operations to the tax based on the U.S. statutory rate is as follows:
2020 2019 2018
Income tax provision at 21% $ 40,090 $ 23,031 $ 23,952
Difference in effective tax rates of international operations (868) (21,399) (1,124)
State and local income tax, net of federal income tax effect 9,959 (2,366) 2,983
Valuation allowance 5,139 6,306 (2,433)
U.S. tax credits (3,444) (6,292) (4,401)
Income tax contingencies, net of federal income tax effect 3,077 4,246 1,263
Remeasurement of deferred taxes (3,653) - -
Reversal of outside basis difference in former minority investment (1,103) - -
Mexico inflationary deferred tax adjustments (626) (1,790) 259
Net U.S. GILTI inclusion - 8,419 1,455
U.S. tax reform - transition tax - 1,661 5,026
Goodwill Impairment - - 8,432
U.S. tax reform - remeasurement of deferred taxes - - (3,576)
Other - net (1,572) (461) 1,659
Income tax provision $ 46,999 $ 11,355 $ 33,495
Payments for income taxes in 2020, 2019 and 2018, net of refunds, were $42,933, $10,244 and $19,763, respectively.
Deferred tax assets and liabilities result from differences in the basis of assets and liabilities for tax and financial reporting purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31 were as follows:
2020 2019
Deferred tax assets:
Postretirement and other employee benefits $ 103,699 $ 94,581
Product liability 24,023 30,791
Net operating loss, capital loss, and tax credit carryforwards 17,862 14,291
All other items 41,439 37,296
Total deferred tax assets 187,023 176,959
Deferred tax liabilities:
Property, plant and equipment (114,641) (117,148)
All other items (8,134) (6,141)
Total deferred tax liabilities (122,775) (123,289)
64,248 53,670
Valuation allowances (35,145) (27,270)
Net deferred tax asset $ 29,103 $ 26,400
At December 31, 2020, the Company has gross U.S. federal and foreign tax losses available for carryforward of $6,608 and $90,531, respectively. U.S. federal and foreign tax attributes will expire from 2021 through 2040. For these jurisdictions, valuation allowances have been recorded against those attributes for which, based upon an assessment, it is more likely than not that some portion of deferred tax benefit may not be realized.
The Company considers, on a quarterly basis, all available positive and negative evidence in assessing whether it is more likely than not that some portion or all of its deferred tax assets are realizable. The Company considers the historical and projected financial results of the tax paying component recording the deferred tax asset as well as all other positive and negative evidence, including cumulative losses in recent years, a history of potential tax benefits expiring unused and whether a period of sustainable earnings has been demonstrated. During the year ended December 31, 2020, the Company has assessed all available positive and negative evidence and, based on the weight of significant negative evidence, including cumulative losses, the Company has maintained valuation allowances totaling $35,145 against deferred tax assets primarily in China and the U.K.
The Company applies the rules under ASC 740-10 in its Accounting for Uncertainty in Income Taxes for uncertain tax positions using a “more likely than not” recognition threshold. Pursuant to these rules, the Company will initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the “more likely than not” threshold, the measurement of the tax benefit will be based on the Company’s estimate of the largest amount that meets the more likely than not recognition threshold. The Company’s unrecognized tax benefits, exclusive of interest, totaled approximately $12,890 at December 31, 2020, as itemized in the tabular roll forward below. The unrecognized tax benefits at December 31, 2020 relate to uncertain tax positions in tax years 2012 through 2020. Based upon the outcome of tax examinations, judicial proceedings, or expiration of statutes of limitations, it is reasonably possible that the ultimate resolution of these unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities.
Unrecognized
Tax Benefits
Balance at January 1, 2018 $ 2,283
Settlements for tax positions of prior years (364)
Additions for tax positions of current year 2,555
Additions for tax positions of prior years 2,881
Statute lapses (830)
Balance at December 31, 2018 6,525
Settlements for tax positions of prior years (1,567)
Additions for tax positions of prior years 5,644
Statute lapses (668)
Balance at December 31, 2019 9,934
Additions for tax positions of the current year 4,598
Statute lapses (1,642)
Balance at December 31, 2020 $ 12,890
Of this amount of unrecognized tax benefits, the effective rate would change upon the recognition of approximately $11,532 of these unrecognized tax benefits, net of federal income tax effect. The Company recorded, through the tax provision, an immaterial amount of interest expense for 2020, approximately $1,262 of interest expense for 2019, and an immaterial amount of benefit on interest reductions for 2018. The Company had $1,366 and $1,353 of interest accrued as an ASC 740-10 reserve at December 31, 2020 and 2019, respectively.
The Company operates in multiple jurisdictions throughout the world. The Company has effectively settled U.S. federal tax examinations for tax years before 2017 and state and local examinations for tax years before 2015, with limited exceptions. Furthermore, the Company’s non-U.S. subsidiaries are generally no longer subject to income tax examinations in major foreign taxing jurisdictions for tax years prior to 2015. Income tax returns of certain of our subsidiaries in various jurisdictions are currently under examination and it is possible that these examinations could conclude within the next twelve months; however, the Company does not anticipate any significant increases or decreases in its total amount of unrecognized tax benefits within that period.
Note 9. Debt
On June 27, 2019, the Company amended its revolving Credit Facility with a consortium of several banks to provide up to $700,000 and is set to expire in June 2024. Of this amended borrowing capacity, $200,000 was allocated to a Delayed Draw Term Loan A ("Term Loan A"), while the remaining $500,000 was allocated to the revolving credit facility. The Term Loan A funds were drawn in December 2019 and used primarily to pay for the unsecured notes which matured at that time. The Credit Facility also includes a $110,000 letter of credit sub-facility. The Company may elect, with lender consent, to increase the commitments under the Credit Facility or incur one or more tranches of term loans in an aggregate amount of up to $300,000 (or an unlimited increase if the Proforma Secured Net Leverage Ratio is less than 1.75x). The Company may elect to add certain foreign subsidiaries as additional borrowers under the Credit Facility, subject to the satisfaction of certain conditions.
On July 11, 2019, the Company entered into forward-starting interest rate swaps to effectively hedge the cash flow exposure associated with the Company's Term Loan A variable-rate borrowings. See Note 10 - Fair Value Measurement for further information.
The Company has an accounts receivable securitization facility ("A/R Facility") that provides up to $100,000 in funding capacity based on eligible receivables and expires in December 2022. Funding capacity under the A/R Facility may be drawn in cash or utilized for letters of credit. Pursuant to the terms of the A/R Facility, the Company sells substantially all trade receivables on an ongoing basis to Cooper Receivables LLC (“CRLLC”), its wholly-owned, bankruptcy-remote subsidiary, which then, from time to time, sells an undivided ownership interest in the purchased trade receivables, without recourse, to the purchasers party to the A/R Facility. The assets and liabilities of CRLLC are consolidated with the Company, and the A/R Facility is treated as a secured borrowing for accounting purposes. CRLLC's sole business consists of the purchase or acceptance of the trade receivables and related rights from the Company and the subsequent retransfer of or granting of a security interest in such receivables and related rights to the purchasers party to the A/R Facility. CRLLC is a separate legal entity with its own separate creditors who will be entitled, upon liquidation, to be satisfied from CRLLC’s assets prior to any assets or value in CRLLC becoming available to its equity holders. The assets of CRLLC are not available to pay creditors of the Company or the Company’s Affiliates.
The Company had no borrowings under the revolving credit facility or the A/R Facility at December 31, 2020 or December 31, 2019. Amounts used to secure letters of credit totaled $37,682 at December 31, 2020 and $21,651 at December 31, 2019. The Company’s additional borrowing capacity, net of borrowings and amounts used to back letters of credit, and based on eligible collateral through use of its Credit Facility with its bank group and its accounts receivable securitization facility at December 31, 2020, was $544,918.
The Company’s consolidated operations in Asia have renewable unsecured credit lines that provide up to $68,180 of borrowings and do not contain financial covenants. The additional borrowing capacity on the Asian credit lines, based on eligible collateral and the short-term notes payable, totaled $63,566 at December 31, 2020.
On May 15, 2020, the Company entered into equipment financing arrangements in the amount of $31,538, of which $31,142 was advanced on May 15, 2020 and the remaining $396 was advanced on December 21, 2020. The equipment financings are secured by manufacturing equipment within the Company's U.S. operations and monthly amortized payments are made through maturity in 2025. The weighted average interest rate on the equipment financing arrangements is 3.05 percent and they contain no significant financial covenants.
On September 24, 2020, the Company entered into an aircraft lease agreement commencing in the first quarter of 2021. This new aircraft lease will replace the Company's existing aircraft lease, which expires in March, 2021. As part of this agreement, the Company signed an $11,000 promissory note that will be discharged upon the lease commencement. This non-cash transaction is reflected as an increase to Other assets and Short-term borrowings at December 31, 2020, and will be reclassified to Operating lease right-of-use asset and Operating lease liability upon lease commencement. The promissory note includes interest at 1.65 percent and contains no significant financial covenants.
In 2010 and 2017, Industrial Revenue Bonds (IRBs) were issued by the City of Texarkana to finance the design, equipping and construction of expansions, as well as the on-going operations of the Texarkana manufacturing facility, in return for real estate and equipment located at the Company’s Texarkana tire manufacturing plant. The assets related to the expansion and on-going plant operations provide security for the bonds issued by the City of Texarkana. As a result, the City retains title to the assets and, in turn, provides a 100 percent property tax exemption to the Company. However, the Company has recorded the property in its Consolidated Balance Sheets, along with a finance lease obligation to repay the proceeds of the IRBs, because the arrangements are cancelable at any time at the Company’s request. The Company has also purchased the IRBs and therefore is the bondholder, as well as the borrower/lessee of the property purchased with the IRB proceeds. The finance lease obligations and IRB assets are recorded net in the Consolidated Balance Sheets. At December 31, 2020 and 2019, the assets and liabilities associated with these City of Texarkana IRBs were $100,020 and $72,080, respectively.
The following is a summary of the Company's debt and finance leases as of December 31, 2020 and December 31, 2019.
Principal Balance Weighted Average Interest Rate Principal Balance Weighted Average Interest Rate
Current Long-Term Current Long-Term
Maturity Date December 31, 2020 December 31, 2019
Promissory Note February 2021 $ 11,000 $ - 1.653% $ - $ - n/a
Asia short term notes Various maturities 4,614 - 3.915% 12,296 - 4.701%
15,614 - 12,296 -
Term loan A June 2024 12,500 175,000 3.220% 10,000 187,500 3.300%
Unsecured notes March 2027 - 116,880 7.625% - 116,880 7.625%
Equipment financing May 2025 6,037 22,058 3.049% - - n/a
Finance leases and other Various maturities 5,840 1,332 1.509% 265 5,998 2.613%
24,377 315,270 10,265 310,378
Less: Unamortized debt issuance costs - 1,005 - 1,230
$ 39,991 $ 314,265 $ 22,561 $ 309,148
Additional Credit Capacity at December 31, 2020
Credit Facility $ 500,000
Accounts receivable securitization facility 100,000
Asia short term notes 68,180
668,180
Less, amounts used to secure letters of credit and other unavailable funds 59,696
$ 608,484
The Company’s revolving credit facilities contain restrictive covenants which limit or preclude certain actions based upon the measurement of certain financial covenant metrics. The covenants are structured such that the Company expects to have sufficient flexibility to conduct its operations. The Company was in compliance with all of its debt covenants as of December 31, 2020.
Over the next five years, the Company has payments related to the above debt of:
Future Debt Payments
2021 $ 39,213
2022 21,223
2023 23,915
2024 149,114
2025 2,807
Interest paid on debt during 2020, 2019 and 2018 was $24,798, $33,161 and $34,070, respectively. The amount of interest capitalized was $2,833, $2,233 and $2,663 during 2020, 2019 and 2018, respectively.
In addition, at December 31, 2020 and December 31, 2019, the Company had short-term notes payable of $4,614 and $12,296, respectively, due within twelve months, consisting of funds borrowed by the Company’s operations in the PRC. The weighted average interest rate of the short-term notes payable at December 31, 2020 and December 31, 2019 was 3.92 percent and 4.70 percent, respectively.
Note 10. Fair Value Measurements
Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into financial instruments for trading or speculative purposes. The derivative financial instruments include non-designated and cash flow hedges of foreign currency exposures. The change in values of the non-designated foreign currency hedges offset the exchange rate fluctuations related to assets and liabilities recorded on the Consolidated Balance Sheets. The cash flow hedges offset exchange rate fluctuations on the foreign currency-denominated intercompany loans and forecasted cash flows. The Company presently hedges exposures in various currencies, generally for transactions expected to occur within the next 12 months. Additionally, the Company utilizes cash flow hedges that hedge already recognized intercompany loans with maturities of up to one year. The notional amount of these foreign currency derivative instruments at December 31, 2020 and December 31, 2019 was $84,783 and $167,915, respectively. The counterparties to each of these agreements are major commercial banks.
The Company uses non-designated foreign currency forward contracts to hedge its net foreign currency monetary assets and liabilities primarily resulting from non-functional currency denominated receivables and payables of certain U.S. and foreign entities.
Foreign currency forward contracts are also used to hedge variable cash flows associated with forecasted sales and purchases denominated in currencies that are not the functional currency of certain entities. The fair value of these forward contracts is $(2,291) and $(1,033) as of December 31, 2020 and December 31, 2019. These contracts have maturities of less than twelve months pursuant to the Company’s policies and hedging practices. These contracts meet the criteria for and have been designated as cash flow hedges. Accordingly, the effective portion of the change in fair value of such forward contracts are recorded as a separate component of stockholders’ equity in the accompanying Consolidated Balance Sheets and are reclassified into earnings as the hedged transactions occur.
The Company utilizes cross-currency interest rate swaps to hedge the principal and interest repayment of some intercompany loans. The Company also utilizes designated foreign currency forward contracts to hedge the principal amounts of certain intercompany loans. The fair value of these contracts is $(2,345) and $(994) at December 31, 2020 and December 31, 2019, respectively. These contracts have maturities of up to one year and meet the criteria for and have been designated as cash flow hedges. Spot to spot changes are recorded in income and all other effective changes are recorded as a separate component of stockholders' equity. The Company assesses hedge effectiveness prospectively and retrospectively, based on regression of the change in foreign currency exchange rates. Time value of money is included in effectiveness testing.
On July 11, 2019, in order to hedge its Term Loan A variable rate debt, with an interest rate indexed to LIBOR plus 150 basis points, the Company entered into forward-starting interest rate swaps with effective dates of December 2, 2019 and termination dates of June 27, 2024. The initial notional amount of these swaps is $200,000 and decreases quarterly by varying amounts over the life of the swaps, in accordance with the Term Loan A repayment schedule. For the twelve months ending December 31, 2020, net payments have been made in the amount of $2,133. Net payments for the twelve months ending December 31, 2019 were immaterial. The interest rate swaps effectively fix the variable interest rate component on the notional amount of these swaps at 1.720 percent. The fair value of these swaps is $(8,602) and $(1,032) at December 31, 2020 and December 31, 2019, respectively. The swaps qualify for hedge accounting and, therefore, changes in the fair value of the swaps have been recorded in accumulated other comprehensive income. The Company assesses hedge effectiveness prospectively and retrospectively, based on regression of the period to period change in swap and hedged item values.
The derivative instruments are subject to master netting arrangements with the counterparties to the contracts. The following table presents the location and amounts of derivative instrument fair values in the Consolidated Balance Sheets:
Assets/(liabilities) December 31, 2020 December 31, 2019
Designated as hedging instruments:
Gross amounts recognized $ (13,238) $ (3,208)
Gross amounts offset - 149
Net amounts $ (13,238) $ (3,059)
Not designated as hedging instruments:
Gross amounts recognized $ (1,156) $ (1,118)
Gross amounts offset 148 76
Net amounts $ (1,008) $ (1,042)
Net amounts presented:
Accrued liabilities $ (8,591) $ (2,420)
Other long-term liabilities (5,655) (1,681)
The following table presents the location and amount of gains and losses on derivative instruments designated as cash flow hedges in the Consolidated Statements of Income:
Twelve Months Ended December 31,
2020 2019 2018
Amount of (Loss) Gain Recognized in Other Comprehensive (Loss) Income on Derivatives $ (9,073) $ (2,612) $ 5,040
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
Net sales $ 892 $ 988 $ 1,453
Interest expense (124) (123) (134)
Other non-operating income (expense) (1,412) 276 1,093
$ (644) $ 1,141 $ 2,412
The following table presents the location and amount of gains and losses on foreign exchange contract derivatives not designated as hedging instruments in the Consolidated Statements of Income.
Twelve Months Ended December 31,
2020 2019 2018
Other non-operating (expense) income $ (1,777) $ (2,674) $ 602
The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within the different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded on the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.
Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following.
a.Quoted prices for similar assets or liabilities in active markets;
b.Quoted prices for identical or similar assets or liabilities in non-active markets;
c.Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
d.Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.
Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
The valuation of foreign currency derivative instruments was determined using widely accepted valuation techniques. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including forward points. The Company incorporated credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as current credit ratings, to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2020 and December 31, 2019, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety were to be classified in Level 2 of the fair value hierarchy.
The valuation of stock-based liabilities was determined using the Company's stock price, and as a result, these liabilities are classified in Level 1 of the fair value hierarchy. The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and December 31, 2019:
December 31, 2020
Total
Liabilities Quoted Prices
in Active Markets
for Identical
Assets
Level (1) Significant
Other
Observable
Inputs
Level (2) Significant
Unobservable
Inputs
Level (3)
Foreign Currency Derivatives $ (5,644) $ - $ (5,644) $ -
Interest Rate Swaps (8,602) - (8,602) -
Stock-based Liabilities (18,712) (18,712) - -
December 31, 2019
Total
Liabilities Quoted Prices
in Active Markets
for Identical
Assets
Level (1) Significant
Other
Observable
Inputs
Level (2) Significant
Unobservable
Inputs
Level (3)
Foreign Currency Derivatives $ (3,069) $ - $ (3,069) $ -
Interest Rate Swaps (1,032) - (1,032) -
Stock-based Liabilities (14,971) (14,971) - -
The fair value of Cash and cash equivalents, Notes receivable, restricted cash included in Other current assets and Other assets, Short-term borrowings and the Current portion of long-term debt and finance leases at December 31, 2020 and December 31, 2019 are equal to their corresponding carrying values as reported on the Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019, respectively. Each of these classes of assets and liabilities is classified within Level 1 of the fair value hierarchy.
The fair value of Long-term debt and finance leases is $335,070 and $325,578 at December 31, 2020 and December 31, 2019, respectively, and is classified within Level 2 of the fair value hierarchy. The value of Long-term debt and finance leases is $315,270 and $310,378 as reported in the Debt footnote as of December 31, 2020 and December 31, 2019, respectively.
Note 11. Pensions and Postretirement Benefits Other than Pensions
The Company has a number of plans providing pension and retirement benefits. These plans include defined benefit and defined contribution plans. The plans cover substantially all U.S. domestic employees. There are also plans that cover employees in the U.K. and Germany. The Company has an unfunded, nonqualified supplemental retirement benefit plan in the U.S. covering certain employees whose participation in the qualified plan is limited by provisions of the Internal Revenue Code.
For defined benefit plans, benefits are generally based on compensation and length of service for salaried employees and length of service for hourly employees. In the U.S., the Company froze the pension benefits in its Spectrum (salaried employees) Plan in 2009. In 2012, the Company closed the U.S. pension plans for the bargaining units to new participants. Certain grandfathered participants in the bargaining unit plans continue to accrue pension benefits. Employees of certain of the Company’s international operations in the U.K. and Germany are covered by either contributory or non-contributory trusted pension plans. In 2012, the Company froze the benefits in the U.K. pension plan.
Participation in the Company’s defined contribution plans is voluntary. The Company matches plan participants’ contributions up to various limits. Participants’ contributions are limited based on their compensation and, for certain supplemental contributions which are not eligible for Company matching, based on their age. Certain employees covered by collective bargaining units receive company contributions. Expense for the defined contribution plans was $9,533, $13,370 and $12,424 for 2020, 2019 and 2018, respectively. In 2020, the Company temporarily suspended the Company match of plan participant contributions in response to the COVID-19 pandemic. The Company match was resumed in the fourth quarter of 2020.
The Company currently provides retiree health care and life insurance benefits to a portion of its U.S. salaried and hourly employees. U.S. salaried and non-bargained hourly employees hired on or after January 1, 2003 are not eligible for retiree health care or life insurance coverage. The Company has reserved the right to modify or terminate certain of these salaried benefits at any time.
The Company has implemented household caps on the amounts of retiree medical benefits it will provide to certain retirees in the U.S. The caps do not apply to individuals who retired prior to certain specified dates. Costs in excess of these caps will be paid by plan participants. The Company implemented increased cost sharing in 2004 in the retiree medical coverage provided to certain eligible current and future retirees. Since then, cost sharing has expanded such that nearly all covered retirees pay a charge to be enrolled.
In accordance with U.S. GAAP, the Company recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of its pension and OPEB plans and the net unrecognized actuarial losses and unrecognized prior service costs in the Consolidated Balance Sheets. The unrecognized actuarial losses and unrecognized prior service costs (components of Accumulated other comprehensive loss in the Equity section of the balance sheet) will be subsequently recognized as net periodic benefit costs pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit costs in the same periods will be recognized as a component of other comprehensive income.
The following table reflects changes in the projected obligations and fair market values of assets in all defined benefit pension and other postretirement benefit plans of the Company:
2020 Pension Benefits 2019 Pension Benefits Other Postretirement Benefits
Domestic International Total Domestic International Total 2020 2019
Change in benefit obligation:
Projected Benefit Obligation at beginning of year $ 1,106,877 $ 446,686 $ 1,553,563 $ 1,004,751 $ 404,629 $ 1,409,380 $ 241,550 $ 251,798
Service cost - employer 9,946 - 9,946 8,906 - 8,906 1,439 1,573
Interest cost 33,143 8,417 41,560 39,499 11,061 50,560 7,320 9,887
Actuarial loss/(gain) 102,678 54,268 156,946 113,828 48,721 162,549 (8,277) (9,664)
Benefits paid (66,339) (14,744) (81,083) (63,176) (14,542) (77,718) (8,371) (12,044)
Plan amendment 2,581 219 2,800 3,069 - 3,069 - -
Settlements - (16,653) (16,653) - (18,196) (18,196) - -
Foreign currency translation effect - 11,941 11,941 - 15,013 15,013 - -
Projected Benefit Obligation at December 31 $ 1,188,886 $ 490,134 $ 1,679,020 $ 1,106,877 $ 446,686 $ 1,553,563 $ 233,661 $ 241,550
Change in plans’ assets:
Fair value of plans’ assets at beginning of year $ 1,047,214 $ 379,342 $ 1,426,556 $ 912,129 $ 349,001 $ 1,261,130 $ - $ -
Actual return on plans’ assets 132,137 37,926 170,063 159,949 38,139 198,088 - -
Employer contribution 4,638 10,914 15,552 38,312 10,587 48,899 - -
Benefits paid (66,339) (14,744) (81,083) (63,176) (14,542) (77,718) - -
Settlements - (16,653) (16,653) - (18,196) (18,196) - -
Foreign currency translation effect - 12,475 12,475 - 14,353 14,353 - -
Fair value of plans’ assets at December 31 $ 1,117,650 $ 409,260 $ 1,526,910 $ 1,047,214 $ 379,342 $ 1,426,556 $ - $ -
Funded status $ (71,236) $ (80,874) $ (152,110) $ (59,663) $ (67,344) $ (127,007) $ (233,661) $ (241,550)
Amounts recognized in the balance sheets:
Accrued liabilities - - - (300) - (300) (12,266) (14,334)
Postretirement benefits other than pensions - - - - - - (221,395) (227,216)
Pension benefits (71,236) (80,874) (152,110) (59,363) (67,344) (126,707) - -
The actuarial loss for the Company's pension benefit obligations in 2020 and 2019 was primarily related to changes in discount rates (see assumptions below) and, to a lesser extent, changes in the mortality assumptions for the Company’s U.S. plans.
The actuarial loss/(gain) for the Company's other postretirement benefit obligation in 2020 and 2019 was related to a decrease in the discount rates (see assumptions below). These actuarial losses were offset by gains related to a decrease in the expected utilization of retiree medical benefits and variances between actual participant experience and expected participant experience.
Included in Accumulated other comprehensive loss at December 31, 2020 are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service costs of $7,266 ($5,454 net of tax) and unrecognized actuarial losses of $417,906 ($391,362 net of tax).
Included in Accumulated other comprehensive loss at December 31, 2019 are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service credits of $5,780 ($4,338 net of tax) and unrecognized actuarial losses of $413,676 ($384,507 net of tax).
The prior service cost and actuarial loss included in accumulated other comprehensive loss that are expected to be recognized in net periodic benefit cost during the fiscal year-ended December 31, 2021 are $1,714 and $33,550, respectively.
The accumulated benefit obligation for all defined benefit pension plans was $1,675,825 and $1,552,037 at December 31, 2020 and 2019, respectively.
In 2020 and 2019, lump-sum distributions out of the U.K. pension plan of $16,653 and $18,196, respectively, were made from plan assets. The vested benefit obligation associated with these former employees was approximately 3 percent of the U.K. plan's benefit obligation in 2020 and 4 percent in 2019. Due to the size of the lump-sum distributions, in accordance with U.S. GAAP, the Company was required to recognize a non-cash settlement charge of $4,155 and $4,262 for 2020 and 2019, respectively, settlements out of the U.K. plan.
Additionally, in both 2020 and 2019, an amendment to separate domestic pension plans resulted in a retroactive increase in benefit levels for plan participants and have been accounted for as a prior service cost deferred in Accumulated other comprehensive loss, to be amortized as a component of net periodic benefit cost in future periods. The domestic pension plan projected benefit obligation increased $2,581 and $3,069, respectively, as a result of the separate amendments in 2020 and 2019.
On October 26, 2018, in Lloyds Banking Group Pensions Trustees Limited vs. Lloyds Bank plc and Others, the High Court of Justice in the United Kingdom issued a ruling ("Court Ruling") requiring Lloyds Bank plc to equalize benefits payable to men and women under its U.K. defined benefit pension plan. The Court Ruling noted that the formulas used to determine guaranteed minimum pension (GMP) benefits violated gender-pay equality laws due to differences in the way benefits were calculated for men and women. As a result of this ruling, the U.K. pension plan was required to amend its benefit formulas and account for the higher pension payments resulting from GMP equalization. In accordance with ASC 715, this Court Ruling represents a change to the U.K. pension plan resulting in a retroactive increase in benefit levels for plan participants and has been accounted for as a prior service cost deferred in Other comprehensive loss, to be amortized as a component of net periodic benefit cost in future periods. The U.K. pension plan projected benefit obligation increased $3,704 as a result of the amendment required due to the Court Ruling.
Weighted average assumptions used to determine benefit obligations at December 31:
Pension Benefits Other Postretirement Benefits
2020 2019 2020 2019
All plans
Discount rate 2.00 % 2.78 % 2.36 % 3.12 %
Domestic plans
Discount rate 2.28 % 3.09 % 2.36 % 3.12 %
International plans
Discount rate 1.29 % 1.99 % - -
At December 31, 2020, the weighted average assumed annual rate of increase in the cost of medical benefits was 7.00 percent trending linearly to 4.50 percent per annum in 2030.
The following tables disclose the amount of net periodic benefit costs for the twelve months ended December 31, 2020 and 2019 for the Company’s defined benefit plans and other postretirement benefits:
Pension Benefits - Domestic
Twelve Months Ended December 31,
2020 2019 2018
Components of net periodic benefit cost:
Service cost $ 9,946 $ 8,906 $ 10,363
Interest cost 33,143 39,499 36,840
Expected return on plan assets (55,410) (48,034) (54,035)
Amortization of actuarial loss 31,533 32,432 32,939
Amortization of prior service cost 1,251 703 -
Net periodic benefit cost $ 20,463 $ 33,506 $ 26,107
Pension Benefits - International
Twelve Months Ended December 31,
2020 2019 2018
Components of net periodic benefit cost:
Interest cost $ 8,417 $ 11,061 $ 11,161
Expected return on plan assets (8,892) (11,554) (12,073)
Amortization of actuarial loss 4,146 3,411 4,264
Amortization of prior service cost 267 309 -
Effect of settlements 4,155 4,262 -
Net periodic benefit cost $ 8,093 $ 7,489 $ 3,352
Other Post Retirement Benefits
Twelve Months Ended December 31,
2020 2019 2018
Components of net periodic benefit cost:
Service cost $ 1,439 $ 1,573 $ 1,948
Interest cost 7,320 9,887 9,251
Amortization of actuarial gain (422) - -
Amortization of prior service credit (89) (409) (541)
Net periodic benefit cost $ 8,248 $ 11,051 $ 10,658
Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31:
Pension Benefits Other Postretirement Benefits
2020 2019 2018 2020 2019 2018
All plans
Discount rate 2.78 % 3.70 % 3.20 % 3.12 % 4.05 % 3.50 %
Expected return on plan assets 4.75 % 5.00 % 5.34 % - % - % - %
Domestic plans
Discount rate 3.09 % 4.05 % 3.50 % 3.12 % 4.05 % 3.50 %
Expected return on plan assets 5.68 % 5.66 % 6.25 % - % - % - %
International plans
Discount rate 1.99 % 2.80 % 2.50 % - % - % - %
Expected return on plan assets 2.45 % 3.34 % 3.19 % - % - % - %
The following table lists the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets at December 31, 2020 and 2019.
Domestic Plans International Plans
2020 2019 2020 2019
Projected benefit obligation $ 672,070 $ 606,138 $ 490,134 $ 446,686
Accumulated benefit obligation 668,875 604,612 490,134 446,686
Fair value of plan assets 570,958 530,548 409,260 379,342
The following table lists the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the Spectrum Plan, which had plan assets in excess of projected benefit obligations and accumulated benefit obligations at December 31, 2020 and 2019:
2020 2019
Projected benefit obligation $ 516,816 $ 500,739
Accumulated benefit obligation 516,816 500,739
Fair value of plan assets 546,692 516,666
The table below presents the weighted average asset allocations for the domestic and U.K. pension plans’ assets at December 31, 2020 and December 31, 2019 by asset category.
U.S. Plans U.K. Plan
Asset Category 2020 2019 2020 2019
Fixed Income Collective Trust Funds and Securities 64 % 65 % 70 % 68 %
Equity Collective Trust Funds and Securities 29 30 18 19
Other Investment Collective Trust Funds and Securities 3 3 11 12
Cash 4 2 1 1
Total 100 % 100 % 100 % 100 %
The Company manages the plans' asset allocation relative to the liability profile and funded status of the plans. It is expected that as the plan’s funded status improves, the portfolio will take less risk as to preserve the funded status of the plan framework. The plans follow a glide path whereby a target return-seeking allocation is followed based upon a given funded ratio level. The plans' position with respect to the glide path is monitored and asset allocation and strategy changes to the plans' portfolio are made as appropriate. The plans' strategy is also monitored in relation to the capital markets, interest rates, and the regulatory environment. The assets of the Company’s pension plan in Germany consist of investments in German insurance contracts.
The fair value of U.S. plan assets was $1,117,650 and $1,047,214 at December 31, 2020 and 2019, respectively. The fair value of the U.K. plan assets was $407,336 and $377,536 at December 31, 2020 and 2019, respectively. The fair value of the German pension plan assets was $1,924 and $1,806 at December 31, 2020 and 2019, respectively.
The table below classifies the assets of the U.S. and U.K. plans using the Fair Value Hierarchy described in Note 10 - Fair Value Measurements.
Fair Value Hierarchy
Total Level 1 Level 2 Level 3 NAV(1)
December 31, 2020
United States plans
Cash and cash equivalents $ 41,621 $ 41,621 $ - $ - $ -
Collective Trust Funds - Equity 319,143 - - - 319,143
Collective Trust Funds - Fixed income 718,702 - 30,019 - 688,683
Collective Trust Funds - Real Estate 38,184 - - - 38,184
$ 1,117,650 $ 41,621 $ 30,019 $ - $ 1,046,010
United Kingdom plan
Cash and cash equivalents $ 1,755 $ 1,755 $ - $ - $ -
Equity securities 73,963 73,963 - - -
Fixed income securities 288,068 288,068 - - -
Other investments 43,550 - 14,737 28,813 -
$ 407,336 $ 363,786 $ 14,737 $ 28,813 $ -
December 31, 2019
United States plans
Cash & Cash Equivalents $ 23,867 $ 23,867 $ - $ - $ -
Collective Trust Funds - Equity 309,794 - - - 309,794
Collective Trust Funds - Fixed Income 682,279 - 22,410 - 659,869
Collective Trust Funds - Real Estate 31,274 - - - 31,274
$ 1,047,214 $ 23,867 $ 22,410 $ - $ 1,000,937
United Kingdom plan
Cash & Cash Equivalents $ 1,802 $ 1,802 $ - $ - $ -
Equity securities 72,503 72,503 - - -
Fixed income securities 259,192 259,192 - - -
Other investments 44,039 - 13,859 30,180 -
$ 377,536 $ 333,497 $ 13,859 $ 30,180 $ -
(1) Investments in common/ collective trusts invest primarily in publicly traded securities and are valued using net asset value (NAV) of units of a bank collective trust. Therefore, these amounts have not been classified in the fair value hierarchy and are presented in the tables to reconcile the fair value hierarchy to the total fair value of plan assets.
Plan assets are measured at fair value. While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The Company’s valuation methodologies used for the plan assets measured at fair value are as follows:
Cash and cash equivalents - Cash and cash equivalents include cash on deposit and investments in money market mutual funds that invest mainly in short-term instruments and cash, both of which are valued using a market approach.
Equity securities - Common, preferred, and foreign stocks are valued using a market approach at the closing price on their principal exchange and are included in Level 1 of the fair value hierarchy.
Fixed income securities - Corporate and foreign bonds are valued using a market approach at the closing price reported on the active market on which the individual securities are traded and are included in Level 1 of the fair value hierarchy.
Collective trust funds - Collective trust funds are valued at the net asset value of units held at year end and are excluded from the fair value hierarchy. The Collective trust funds fair value has been included within the table above based on the underlying investment strategy.
•Equity Funds - Collective trust funds classified as Equity primarily invest in U.S. and non-U.S. securities in both small and large capitalization markets.
•Fixed Income Funds - Collective trust funds classified as Fixed Income primarily invest in debt securities, U.S. treasury securities, and fixed income securities.
•Real Estate Funds - Collective trust funds classified as Real Estate Funds are invested in global real estate securities.
The fair values of the Level 3 assets in the U.K. plan are determined by the fund manager using a discounted cash flow methodology. The future cash flows expected to be generated by the assets of the funds and made available to investors are estimated and then discounted back to the valuation date. The discount rate is derived by adding a risk premium to the risk-free interest rate applicable to the country in which the assets are located.
The following table details the activity in these investments for the years ended December 31, 2018, 2019 and 2020:
U.K. Plan
Level 3 Assets
Balance at January 1, 2018 $ 38,070
Change in fair value (7,294)
Foreign currency translation effect (1,838)
Balance at December 31, 2018 28,938
Change in fair value 97
Foreign currency translation effect 1,145
Balance at December 31, 2019 30,180
Change in fair value (2,172)
Foreign currency translation effect 805
Balance at December 31, 2020 $ 28,813
The Company had no minimum funding requirements for its domestic pension plans in 2020. Due to the potential impact of COVID-19 and related plans to manage capital resources, the Company reduced its level of funding to the domestic pension plans in 2020. In 2020, the Company contributed $15,552 to its domestic and international pension plans, and during 2021, the Company expects to contribute between $45,000 and $55,000 to its domestic and international pension plans.
The Company estimates its benefit payments for its domestic and international pension plans and other postretirement benefit plans during the next ten years to be as follows:
Pension
Benefits Other
Postretirement
Benefits
2021 $ 89,581 $ 12,266
2022 90,470 12,676
2023 90,385 12,801
2024 91,921 12,889
2025 92,164 12,987
2026 through 2030 456,605 62,913
Note 12. Lease Commitments
The Company leases certain warehouses, distribution centers, office space, material handling equipment, office equipment, cars and information technology hardware. The Company determines if an arrangement is a lease or contains an embedded lease at contract inception.
Upon implementing the new lease accounting standard in 2019, the Company elected the package of practical expedients, which permits a lessee to not reassess under the new standard its prior conclusions regarding lease identification, lease classification and initial direct costs.
Lease liabilities and their corresponding right-of-use assets, for leases with terms of 12 months or greater, are recorded based on the present value of lease payments over the expected lease term. The Company has elected not to present short term leases on the consolidated balance sheet, in accordance with the standard.
The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to
the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more. The exercise of lease renewal options is at the Company's sole discretion. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Certain of the Company's lease agreements include rental payments based on the use of the leased property over contractual levels. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company has lease agreements with lease and non-lease components, which are accounted for separately. Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would account for each lease component and the related non-lease component together as a single component. For certain building leases, including the lease of warehouses, distribution centers and office space, the Company accounts for the lease and non-lease components as a single lease component. For all other asset types, the Company accounts for lease and non-lease components separately.
For operating leases, the right-of-use asset is subsequently measured throughout the lease term at the carrying amount of the lease liability. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
For finance leases, the right-of-use asset is subsequently amortized using the straight-line method from the lease commencement date to the earlier of the end of its useful life or the end of the lease term. In cases where the lease term exceeds the useful life, the right-of-use asset is amortized over the useful life of the underlying asset. Amortization of the right-of-use asset is recognized and presented separately from interest expense on the lease liability.
Variable lease expense includes payments based on performance or usage, as well as changes to index and rate-based lease payments.
Right-of-use assets for operating and finance leases are periodically reviewed for impairment losses. The Company uses the long-lived assets impairment guidance in ASC Subtopic 360-10, "Property, Plant, and Equipment - Overall", to determine whether a right-of-use asset is impaired, and if so, the amount of the impairment loss to recognize. No impairment losses have been recognized to date.
The following table presents the location and amount of lease assets and liabilities in the Consolidated Balance Sheets:
Assets Location December 31, 2020 December 31, 2019
Operating lease assets, net Operating lease right-of-use assets, net $ 91,884 $ 80,752
Finance lease assets Property, plant and equipment 4,669 4,577
Total leased assets $ 96,553 $ 85,329
Liabilities Location
Current:
Operating Accrued liabilities $ 23,338 $ 27,663
Finance Current portion of long-term debt and finance leases 778 265
Noncurrent:
Operating Noncurrent operating leases 71,391 55,371
Finance Long-term debt and finance leases 1,332 935
Total lease liabilities $ 96,839 $ 84,234
The following table presents the location and amount of lease expense in the Consolidated Income Statement:
Lease cost Location Twelve Months Ended December 31, 2020 Twelve Months Ended December 31, 2019
Operating lease cost (a)
Cost of sales $ 35,305 $ 36,321
Operating lease cost Selling general & administrative expenses 6,785 5,632
Total operating lease cost 42,090 41,953
Amortization of finance lease assets Cost of sales $ 698 $ 352
Amortization of finance lease assets Selling general & administrative expenses 132 -
Interest on finance lease liabilities Interest expense 96 32
Total finance lease cost 926 384
Net lease cost $ 43,016 $ 42,337
(a) - Includes short-term lease costs of $7,904 and variable lease costs of $2,385 for the year ended December 31, 2020, $7,328 and $3,480, respectively for the year ended December 31, 2019.
The following table presents the future maturities of the Company's lease obligations:
December 31, 2020
Operating
Leases Finance
Leases Total
2021 $ 24,947 $ 855 $ 25,802
2022 21,143 781 21,924
2023 16,677 425 17,102
2024 13,315 224 13,539
2025 10,201 6 10,207
After 2025 15,921 - 15,921
Total lease payments 102,204 2,291 104,495
Less: Interest (7,475) (181) (7,656)
Present value of lease liabilities $ 94,729 $ 2,110 $ 96,839
The following table presents the weighted-average lease term and discount rates of the Company's lease obligations:
Weighted-average remaining lease term (years) December 31, 2020 December 31, 2019
Operating leases 5.10 4.90
Finance Leases 2.94 4.26
Weighted-average discount rate
Operating leases 5.20 % 5.76 %
Finance Leases 4.31 % 5.79 %
The following table presents the cash flow amounts related to lease liabilities included in the Company's Consolidated Statements of Cash Flows
Twelve Months Ended December 31, 2020 Twelve Months Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows from operating leases $ 32,482 $ 33,774
Financing cash outflows from finance leases 803 605
Leased assets obtained in exchange for new finance lease liabilities 67 43
Leased assets obtained in exchange for new operating lease liabilities 200 342
Note 13. Other Long-Term Liabilities
Other long-term liabilities at December 31 were as follows:
2020 2019
Product liability $ 77,002 $ 91,853
Long-term income taxes payable 20,434 20,434
Stock-based liabilities 17,807 14,778
Other 36,999 22,000
Other long-term liabilities $ 152,242 $ 149,065
Note 14. Share Repurchase Program
Share repurchase programs require the approval of the Company's Board of Directors. The following table summarizes the Company’s Board authorized share repurchase programs and related information for the twelve months ended December 31, 2020:
Program(1)
Date Authorized by Board of Directors
Expiration Date(2)
Amount Authorized (excluding commissions) Amount Spent as of December 31, 2020 (excluding commissions) Status
2017 Repurchase Program February 16, 2017 December 31, 2021 $ 300,000 $ 106,877 Active
(1)The repurchase program listed does not obligate the Company to acquire any specific number of shares and can be suspended or discontinued at any time without notice. Shares can be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. All repurchases under the program listed above have been made using cash resources.
(2)On December 3, 2019, the expiration of the 2017 Repurchase Program, scheduled for December 31, 2019, was extended to December 31, 2021. No other changes were made to the program.
The Company did not have any open market or 10b5-1 plan share repurchase activity during the twelve months ended December 31, 2020 or December 31, 2019 shares of the Company’s common stock at an average cost of $34.11 per share.
Reserved Shares
There were 1,980,709 common shares reserved for grants under compensation plans at December 31, 2020. The Company eliminated the option for plan participants in the Company’s defined contribution plans to purchase additional shares of the Company’s common stock in March 2014. Effective May 2019, common stock held in the Company's defined contribution plans can no longer receive quarterly dividends in the form of the Company's common stock. As a result of this change, common shares previously reserved for the Company's defined contribution plans have been released.
Note 15. Stock-Based Compensation
The Company’s incentive compensation plans allow the Company to grant awards to employees in the form of stock options, stock awards, restricted stock units, stock appreciation rights, performance stock units, dividend equivalents and other awards. Compensation related to these awards is determined based on the grant-date fair value and is amortized to expense over the vesting period. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire without forfeiture of the award. If awards can be settled in cash, these awards are recorded as liabilities and recorded at fair value at each reporting date.
The following table discloses the amount of stock-based compensation expense:
Year Ended December 31,
2020 2019 2018
Restricted stock units $ 3,729 $ 2,836 $ 3,196
Performance stock units 2,324 1,526 672
Total stock-based compensation $ 6,053 $ 4,362 $ 3,868
Stock Options
The 2010 and 2014 Incentive Compensation Plans provide for granting options to key employees to purchase common shares at prices not less than market at the date of grant. Options under these plans may have terms of up to ten years becoming exercisable in whole or in consecutive installments, cumulative or otherwise. The plans allow the granting of nonqualified stock options which are not intended to qualify for the tax treatment applicable to incentive stock options under provisions of the Internal Revenue Code.
No stock options have been granted to executives participating in the Long-Term Incentive Plan since February 2014. Outstanding options do not contain any performance-based criteria. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire.
Summarized information for the outstanding stock options follows:
Number of
Shares Weighted
Average
Exercise
Price (per share) Aggregate
Intrinsic
Value
(thousands)
Outstanding at December 31, 2019 238,748 $ 23.30
Exercised (117,324) 22.48
Expired (1,508) 23.96
Outstanding and Exercisable at December 31, 2020 119,916 $ 24.08 $ 1,969
Year Ended December 31,
2020 2019 2018
Aggregate intrinsic value of options exercised (thousands) 1,392 425 298
The weighted average remaining contractual life of options outstanding at December 31, 2020 is 2.6 years. All outstanding stock options are exercisable.
Segregated disclosure of options outstanding at December 31, 2020 was as follows:
Range of Exercise Prices
Less than or
equal to $15.63
Greater than
$15.63
Options outstanding 5,965 113,951
Weighted average exercise price $ 15.63 $ 24.53
Remaining contractual life 1.1 2.8
Options exercisable 5,965 113,951
Weighted average exercise price $ 15.63 $ 24.53
At December 31, 2020, the Company had fully amortized all expense related to its stock option awards.
Restricted Stock Units
Under the 2001 and 2014 Incentive Compensation Plans, restricted stock units may be granted to officers and certain other employees as awards for exceptional performance, as a hiring or retention incentive or as part of the Long-Term Incentive Plan. The restricted stock units granted in 2018, 2019 and 2020 have vesting periods of three to four years. Compensation expense related to the restricted stock units granted is determined based on the fair value of the Company’s stock on the date of grant. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire. Employees must remain employed for at least six months after the grant date to vest in the restricted stock units, even if retirement eligible.
The following table provides details of the Company's restricted stock units for 2020:
Number of
Restricted Units Weighted Average
Grant-Date Fair
Value (per share) Aggregate
Intrinsic
Value
(thousands)
Nonvested at December 31, 2019 230,962 $ 33.49
Granted 158,256 28.58
Vested (88,672) 35.04
Canceled (49,720) 30.02
Accrued dividend equivalents 4,376 30.62
Nonvested at December 31, 2020 255,202 $ 30.86
Vested but not released 1,508 18.04
Outstanding at December 31, 2020 256,710 $ 30.78 $ 7,902
Weighted-average remaining contractual term of shares outstanding (months) 20
Year Ended December 31,
2020 2019 2018
Weighted average grant-date fair value of restricted shares granted (per share) $ 28.58 $ 32.52 $ 34.53
Weighted average grant-date fair value of shares vested (thousands) $ 3,107 $ 3,336 $ 3,000
The number of vested restricted stock units at December 31, 2020 and 2019 was 1,508 and 1,483, respectively. At December 31, 2020, the Company has $1,896 of unvested compensation cost related to restricted stock units and this cost will be recognized as expense over a weighted average period of 27 months.
Performance Stock Units
Under the 2014 Incentive Compensation Plan, performance stock units may be granted as part of the Long-Term Incentive Plan. Compensation expense related to the performance stock units is determined based on the fair value of the Company’s stock on the date of grant combined with performance metrics. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire, and in accordance with the achievement of the underlying performance condition.
The following table provides details of the nonvested performance stock units earned under the Company’s Long-Term Incentive Plan:
Number of
Performance
Units Weighted
Average Grant-
Date Fair Value
(per share) Aggregate
Intrinsic
Value
(thousands)
Nonvested at December 31, 2019 59,335 $ 33.79
Earned 92,816 27.35
Vested (51,147) 31.50
Canceled (20,064) 29.33
Accrued dividend equivalents 1,014 33.85
Nonvested at December 31, 2020 81,954 $ 29.02
Vested but not released 49,376 31.39
Outstanding at December 31, 2020 131,330 $ 29.91 $ 3,928
Weighted-average remaining contractual term of performance stock units outstanding (months) 11
Year Ended December 31,
2020 2019 2018
Weighted average grant-date fair value of performance stock units granted (per share) $ 27.35 $ 33.27 $ 36.08
Weighted average grant-date fair value of performance stock units vested (thousands) $ 1,611 $ 1,073 $ 1,821
At December 31, 2020, the Company had $412 of unvested compensation cost related to performance stock units and this cost will be recognized as expense over a weighted average period of 19 months.
The Company’s nonvested restricted stock units and performance stock units are not participating securities. These units will be converted into shares of Company common stock in accordance with the distribution date indicated in the agreements. Restricted stock units earn dividend equivalents from the time of the award until distribution is made in common shares. Performance stock units earn dividend equivalents from the time the units have been earned based upon Company performance metrics until distribution is made in common shares. Dividend equivalents are only earned subject to vesting of the underlying restricted stock units or performance stock units. Accordingly, such units do not represent participating securities.
At December 31, 2020, the company had 1,980,709 shares available for future issuance under equity compensation plans.
Note 16. Changes in Accumulated Other Comprehensive (Loss) Income by Component
The following tables provide a quarterly reconciliation of each component of Accumulated other comprehensive (loss) income:
Cumulative Translation Adjustment Derivative Instruments Post- retirement Benefits Total
Ending Balance, December 31, 2019 $ (58,186) $ (549) $ (388,845) $ (447,580)
Other comprehensive income (loss) before reclassifications 14,865 (9,073) (37,979) (32,187)
Foreign currency translation effect - - (4,611) (4,611)
Income tax effect - 2,022 7,857 9,879
Amount reclassified from accumulated other comprehensive (loss) income
Cash flow hedges - 644 - 644
Amortization of prior service cost - - 1,429 1,429
Amortization of actuarial loss - - 35,257 35,257
Pension settlement charges - - 4,155 4,155
Prior service effect of plan amendment - - (2,581) (2,581)
Income tax effect - 184 (11,498) (11,314)
Other comprehensive income (loss) 14,865 (6,223) (7,971) 671
Ending Balance, December 31, 2020 $ (43,321) $ (6,772) $ (396,816) $ (446,909)
Cumulative Translation Adjustment Derivative Instruments Post- retirement Benefits Total
Ending Balance, December 31, 2018 $ (62,133) $ 2,150 $ (401,606) $ (461,589)
Other comprehensive income (loss) before reclassifications 3,947 (2,612) (12,877) (11,542)
Foreign currency translation effect - - (2,668) (2,668)
Income tax effect - 804 - 804
Amount reclassified from accumulated other comprehensive (loss) income
Cash flow hedges - (1,141) - (1,141)
Amortization of prior service credit - - 603 603
Amortization of actuarial losses - - 35,843 35,843
Pension settlement charge - - 4,262 4,262
Prior service effect of plan amendment - - (3,069) (3,069)
Income tax effect - 250 (9,333) (9,083)
Other comprehensive income (loss) 3,947 (2,699) 12,761 14,009
Ending Balance, December 31, 2019 $ (58,186) $ (549) $ (388,845) $ (447,580)
Note 17. Comprehensive Income Attributable to Noncontrolling Shareholders’ Interests
The following table provides the details of the comprehensive income (loss) attributable to noncontrolling shareholders' interests:
Twelve Months Ended December 31,
2020 2019 2018
Net income attributable to noncontrolling shareholders’ interests $ 1,115 $ 1,913 $ 3,977
Other comprehensive income (loss):
Currency translation adjustments 2,279 795 (2,237)
Comprehensive income attributable to noncontrolling shareholders’ interests $ 3,394 $ 2,708 $ 1,740
Note 18. Contingent Liabilities
Product Liability Claims
The Company is a defendant in various product liability claims brought in numerous jurisdictions in which individuals seek damages resulting from motor vehicle accidents allegedly caused by defective tires manufactured by the Company. Each of the product liability claims faced by the Company generally involves different types of tires and circumstances surrounding the accident such as different applications, vehicles, speeds, road conditions, weather conditions, driver error, tire repair and maintenance practices, service life conditions, as well as different jurisdictions and different injuries. In addition, in many of the Company’s product liability lawsuits the plaintiff alleges that his or her harm was caused by one or more co-defendants who acted independently of the Company. Accordingly, both the claims asserted and the resolutions of those claims have an enormous amount of variability. The aggregate amount of damages asserted at any point in time is not determinable since often times when claims are filed, the plaintiffs do not specify the amount of damages. Even when there is an amount alleged, at times the amount is wildly inflated and has no rational basis.
The fact that the Company is a defendant in product liability lawsuits is not surprising given the current litigation climate, which is largely confined to the United States. However, the fact that the Company is subject to claims does not indicate that there is a quality issue with the Company’s tires. The Company sells approximately 30 to 35 million passenger car, light truck, sport utility vehicle, TBR and motorcycle tires per year in North America. The Company estimates that approximately 300 million Company-produced tires made up of thousands of different specifications are still on the road in North America. While tire disablements do occur, it is the Company’s and the tire industry’s experience that the vast majority of tire failures relate to service-related conditions, which are entirely out of the Company’s control, such as failure to maintain proper tire pressure, improper maintenance, improper repairs, road hazard, and excessive speed.
The Company accrues costs for asserted product liability claims at the time a loss is probable and the amount of loss can be estimated. The Company believes the probability of loss can be established and the amount of loss can be estimated only after certain minimum information is available, including verification that Company-produced product was involved in the incident giving rise to the claim, the condition of the product purported to be involved in the claim, the nature of the incident giving rise to the claim and the extent of the purported injury or damages. In cases where such information is known, each product liability claim is evaluated based on its specific facts and circumstances. A judgment is then made to determine the requirement for establishment or revision of an accrual for any potential liability. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. The liability often cannot be determined with precision until the claim is resolved.
Pursuant to ASC 450 "Contingencies," the Company accrues the minimum liability for each known claim when the estimated outcome is a range of probable loss and no one amount within that range is more likely than another. For such known claims, the Company accrues the minimum liability because the product liability claims faced by the Company are unique and widely variable, and accordingly, the resolutions of those claims have an enormous amount of variability. The costs have ranged from zero dollars to $33 million in one case with no average that is meaningful.
No specific accrual is made for individual unasserted claims or for premature claims, asserted claims where the minimum information needed to evaluate the probability of a liability is not yet known. However, an accrual is maintained for such claims based, in part, on management’s expectations for future litigation activity and the settled claims history maintained, including the historical number of claims and amount of settlements.
The Company periodically reviews its estimates and any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. Because of the speculative nature of litigation in the U.S., the Company does not believe a meaningful aggregate range of reasonably possible loss for asserted and unasserted claims can be determined. While the Company believes its reserves are reasonably stated, it is possible an individual claim from time to time may result in an aberration from the norm and could have a material impact.
The time frame for the payment of a product liability claim is too variable to be meaningful. From the time a claim is filed to its ultimate disposition depends on the unique nature of the case, how it is resolved - claim dismissed, negotiated settlement, trial verdict or appeals process - and is highly dependent on jurisdiction, specific facts, the plaintiff’s attorney, the court’s docket and other factors. Given that some claims may be resolved in weeks and others may take five years or more, it is impossible to predict with any reasonable reliability the time frame over which the accrued amounts may be paid. However, the time frame from occurrence of the loss incident to reporting of the claim is monitored by the Company on an ongoing basis.
The Company regularly reviews the probable outcome of outstanding legal proceedings and the availability and limits of insurance coverage, and accrues for such legal proceedings at the time a loss is probable and the amount of the loss can be estimated. As part of its regular review, the Company monitors trends that may affect its ultimate liability and analyzes developments and variables likely to affect pending and anticipated claims against the Company and the reserves for such claims. The Company utilizes claims experience, as well as trends and developments in the litigation climate, in estimating its required accrual. Based on the Company's review completed in the third quarter of 2020, the Company recorded a benefit of $48,764. This
benefit reflects a reduction in the Company's estimate of the volume of anticipated product liability claims, as well as adjustments to existing reserves based upon settled claims history. As a result of the Company's review, coupled with normal activity, including the addition of another quarter of self-insured incidents, settlements and changes in the amount of reserves, the Company decreased its accrual to $95,339 at December 31, 2020, compared to $117,219 at December 31, 2019.
The addition of another twelve months of self-insured incidents through December 31, 2020 accounted for an increase of $34,809 in the Company's product liability reserve. Settlements, changes in the amount of reserves for cases where sufficient information is known to estimate a liability, and changes in assumptions, including the estimate of anticipated claims and settlement values, decreased the liability by $49,032 at December 31, 2020. During 2020, the Company paid $7,657 to resolve cases and claims.
The Company’s product liability reserve balance at December 31, 2020 totaled $95,339 (the current portion of $18,337 is included in Accrued liabilities and the long-term portion is included in Other long-term liabilities on the Consolidated Balance Sheets), and the balance at December 31, 2019 totaled $117,219 (current portion of $25,366).
The product liability expense reported by the Company includes amortization of insurance premium costs, adjustments to settlement reserves and legal costs incurred in defending claims against the Company. Legal costs are expensed as incurred and product liability insurance premiums are amortized over coverage periods.
Product liability expenses are included in Cost of products sold in the Consolidated Statements of Income. Product liability (benefit) expense was as follows:
Twelve Months Ended December 31,
2020 2019 2018
Product liability (benefit) expense $ (3,539) $ 40,309 $ 17,692
Other Litigation
In addition to the proceedings described above, the Company is involved in various other legal proceedings arising in the ordinary course of business. The Company regularly reviews the probable outcome of these proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and accrues for these proceedings at the time a loss is probable and the amount of the loss can be estimated. Although the outcome of these pending proceedings cannot be predicted with certainty and an estimate of any such loss cannot be made, the Company believes that any liabilities that may result from these proceedings are not reasonably likely to have a material adverse effect on the Company’s liquidity, financial condition or results of operations.
Employment Contracts and Agreements
No executives have employment agreements as of December 31, 2020. The Executive Officers and certain other employees are covered by the Cooper Tire & Rubber Company Change in Control Severance Pay Plan.
At December 31, 2020, approximately 42 percent of the Company’s workforce was represented by collective bargaining units.
Note 19. Business Segments
The Company has four segments under ASC 280, "Segments":
•North America, composed of the Company’s operations in the United States and Canada;
•Latin America, composed of the Company’s operations in Mexico, Central America and South America;
•Europe; and
•Asia.
North America and Latin America meet the criteria for aggregation in accordance with ASC 280, as they are similar in their production and distribution processes and exhibit similar economic characteristics. The aggregated North America and Latin America segments are presented as “Americas Tire Operations” in the segment disclosure. The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in the U.S. replacement market. The segment also has a manufacturing operation in Mexico, COOCSA, which supplies passenger car and light truck tires to the Mexican, North American, Central American and South American markets. On January 24, 2020, the Company acquired the remaining noncontrolling ownership interest in COOCSA, making COOCSA a wholly-owned subsidiary. The segment also markets and distributes racing, TBR and motorcycle tires. The racing and motorcycle tires are manufactured by the Company’s European segment and by others. TBR tires are sourced from GRT and ACTR, and through off-take agreements with PCT and Sailun Vietnam through December 31, 2020.
Major distribution channels and customers include independent tire dealers, wholesale distributors, regional and national retail tire chains, large retail chains that sell tires as well as other automotive products, mass merchandisers and digital channels. The segment does not currently sell its products directly to end users, except through three Company-owned retail stores. The segment sells a limited number of tires to OEMs.
Both the Europe and Asia segments have been determined to be individually immaterial, as they do not meet the quantitative requirements for segment disclosure under ASC 280. In accordance with ASC 280, information about operating segments that are not reportable shall be combined and disclosed in an all other category separate from other reconciling items. As a result, these two segments have been combined in the segment operating results discussion. The results of the combined Europe and Asia segments are presented as “International Tire Operations.” The European operations include manufacturing operations in the U.K. and Serbia. The U.K. entity primarily manufactures and markets motorcycle and racing tires and tire retread material for domestic and global markets. The Serbian entity manufactures passenger car and light truck tires primarily for the European markets and for export to the North American segment. The Asian operations are located in the PRC and Vietnam. Cooper Kunshan Tire, in the PRC, manufactures passenger car and light truck tires both for the Chinese domestic market and for export to markets outside of the PRC. GRT, a joint venture manufacturing facility located in the PRC, and ACTR, a joint venture manufacturing facility located in Vietnam, serve as global sources of TBR tire production for the Company. The segment also procured certain TBR tires under off-take agreements with PCT and Sailun Vietnam. The segment sells a majority of its tires in the replacement market, with a portion also sold to OEMs.
On January 17, 2019, Cooper Tire Europe, a wholly-owned subsidiary of the Company, committed to a plan to cease substantially all light vehicle tire production at its Melksham, U.K. facility. The phasing out of light vehicle tire production was substantially completed in the third quarter of 2019. Approximately 300 roles were eliminated at the site. Cooper Tire Europe now obtains light vehicle tires to meet customer needs from other production sites within the Company’s global production network. Approximately 400 roles remain in Melksham to support the functions that continue there, including motorsports and motorcycle tire production, a materials business, Cooper Tire Europe headquarters, sales and marketing, and the Europe Technical Center.
The following table details segment financial information:
Twelve Months Ended December 31,
2020 2019 2018
Net sales:
Americas Tire
External customers $ 2,148,828 $ 2,315,497 $ 2,330,457
Intercompany 22,061 38,229 32,189
2,170,889 2,353,726 2,362,646
International Tire
External customers 372,246 437,143 477,621
Intercompany 109,409 96,860 163,355
481,655 534,003 640,976
Eliminations (131,470) (135,090) (195,560)
Consolidated net sales $ 2,521,074 $ 2,752,639 $ 2,808,062
Operating profit (loss):
Americas Tire $ 280,349 $ 237,753 $ 229,500
International Tire 3,167 (13,390) (14,044)
Unallocated corporate charges (54,690) (49,968) (51,564)
Eliminations 2,055 60 1,353
Consolidated operating profit $ 230,881 $ 174,455 $ 165,245
Interest expense $ (22,707) $ (31,189) $ (32,181)
Interest income 3,569 9,458 10,216
Other pension and postretirement benefit expense (25,419) (41,567) (27,806)
Other non-operating income (expense) 4,579 (1,485) (1,416)
Income before income taxes $ 190,903 $ 109,672 $ 114,058
Depreciation and amortization expense:
Americas Tire (a)
$ 93,469 $ 95,761 $ 93,978
International Tire 41,654 31,654 34,564
Corporate (a)
23,724 20,639 18,619
Consolidated depreciation and amortization expense $ 158,847 $ 148,054 $ 147,161
Segment assets:
Americas Tire $ 1,478,125 $ 1,543,779 $ 1,513,534
International Tire 736,877 739,076 662,226
Corporate and other 756,571 519,483 458,445
Consolidated assets $ 2,971,573 $ 2,802,338 $ 2,634,205
Expenditures for long-lived assets:
Americas Tire $ 114,565 $ 111,819 $ 112,444
International Tire 31,383 62,334 71,667
Corporate 5,250 28,569 9,188
Consolidated expenditures for long-lived assets $ 151,198 $ 202,722 $ 193,299
Geographic information for long-lived assets follows:
As of December 31,
2020 2019 2018
Net sales
United States $ 2,071,981 $ 2,175,599 $ 2,196,424
Rest of world 449,093 577,040 611,638
Consolidated net sales $ 2,521,074 $ 2,752,639 $ 2,808,062
Long-lived assets (b)
United States $ 714,139 $ 683,769 $ 595,768
PRC 232,553 239,889 232,339
Rest of world 222,816 204,336 173,814
Consolidated long-lived assets $ 1,169,508 $ 1,127,994 $ 1,001,921
(a) - Depreciation and amortization of $51,210 and $36,713 has been reclassified in 2019 and 2018, respectively, from Corporate to Americas Tire to properly present such expense as reflected in the segment results for the corresponding periods. .
(b) - Beginning in 2019, the company includes Right of Use Assets in the Long-lived assets for each segment.
The following customer of the Americas Tire Operations segment contributed ten percent or more of the Company’s total consolidated net sales in 2020, 2019 or 2018. Net sales and percentage of consolidated Company net sales for these customers in 2020, 2019 and 2018 were as follows:
2020 2019 2018
Customer Net Sales Consolidated
Net Sales Net Sales Consolidated
Net Sales Net Sales Consolidated
Net Sales
American Tire Distributors, Inc. $ 329,631 13 % $ 311,559 11 % $ 310,070 11 %
Note 20. Subsequent Event
On February 22, 2021, the Company entered into a Merger Agreement by and among the Company, Goodyear and the Merger Sub, pursuant to which, subject to the satisfaction or (to the extent permissible) waiver of the conditions set forth therein, Goodyear will acquire the Company by way of the Merger, with the Company surviving such Merger as a wholly owned subsidiary of Goodyear. Under the terms of the Merger Agreement, at the effective time of the Merger, the Company’s stockholders will be entitled to receive $41.75 per share in cash and a fixed exchange ratio of 0.907 shares of Goodyear common stock per share of the Company’s common stock they own at the effective time (the “Merger Consideration”). Upon completion of the proposed Merger, it is expected that the Company’s stockholders will own approximately 16 percent and Goodyear stockholders will own approximately 84 percent of the combined company on a fully diluted basis. In addition, at the effective time of the Merger, as defined under the terms of the Merger Agreement, all outstanding restricted stock units and performance stock units of the Company will be converted into the right to receive the Merger Consideration, and the Company’s outstanding options will be converted into a right to receive a cash payment. The Company expects to complete the Merger in the second half of 2021, subject to the satisfaction of customary closing conditions, including receipt of required regulatory approvals and the approval of the Company’s stockholders.
The Company is party to a trust agreement which is intended to provide funding for benefits payable and other potential payments to directors, executive officers and certain other employees under various plans and agreements of the Company. The execution of the Merger Agreement constituted a “potential change in control” under such plans and agreements and as a result, the Company is required to fund the estimated value of the payments to be made to the beneficiaries under the trust agreement within five business days of signing the Merger Agreement. The Company will deposit an additional $58,812 with the trustee in connection with this funding obligation. Such cash will be treated as restricted cash on the consolidated financial statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Cooper Tire & Rubber Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cooper Tire & Rubber Company (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Product liability
Description of the matter As described in Notes 1 and 18, the Company is a defendant in various product liability claims brought in numerous jurisdictions in which individuals seek damages resulting from motor vehicle accidents allegedly caused by defective tires manufactured by the Company. The Company accrues costs for asserted product liability claims at the time a loss is probable and the amount of loss can be estimated. Each product liability claim is evaluated based on its specific facts and circumstances, and a judgment is then made to determine the requirement for establishment or revision of an accrual for any potential liability. An accrual for unasserted claims or for premature claims is based, in part, on management’s expectations for future litigation activity and the settled claims history maintained, including the historical number of claims and amounts of settlements. The Company periodically reviews such estimates, and any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. At December 31, 2020, the Company’s product liability reserve balance totaled $95.3 million.
Auditing management’s estimate of loss contingencies arising from product liability claims was complex and included evaluating the likelihood and amount of loss for asserted and unasserted claims, which are subjective and require significant judgment.
How we addressed the matter in our audit We evaluated the design and tested the operating effectiveness of internal controls over the Company’s identification and evaluation of product liability claims, including the reserve for unasserted claims, including management’s review of the estimation model used to establish the best estimate of the required reserve, and the data inputs used in the estimation model.
Our audit procedures to test the adequacy and completeness of management’s assessment of the probability of loss included, among others, reviews of legal correspondence related to claims identified by management, reviews of confirmation letters obtained from internal and external legal counsel, inquiries of internal and external legal counsel to discuss asserted and known unasserted claims, and review of written representations obtained from the Company. In order to test the measurement of the product liability reserve, we evaluated the Company’s estimation model used to establish the reserve for claims, asserted and unasserted, and tested the accuracy and completeness of the data used in management’s estimation model. In addition, we performed sensitivity analyses over management’s estimated range of losses in order to evaluate the magnitude of potential impact on the liability resulting from changes in assumptions.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1942.
Toledo, Ohio
February 22, 2021
SELECTED QUARTERLY DATA (Unaudited)
(Dollar amounts in thousands except per share amounts.)
First
Quarter Second
Quarter Third
Quarter Fourth
Quarter
Net sales $ 531,694 $ 496,259 $ 764,850 $ 728,271
Gross profit 55,913 65,640 237,275 128,987
Net income attributable to Cooper Tire & Rubber Company (11,591) (6,215) 122,604 37,991
(Loss) Earnings per share:
Basic (0.23) (0.12) 2.44 0.75
Diluted (0.23) (0.12) 2.42 0.75
Net sales:
Americas Tire $ 457,055 $ 425,523 $ 659,538 $ 628,773
International Tire 102,387 100,924 142,153 136,191
Eliminations (27,748) (30,188) (36,841) (36,693)
Consolidated net sales $ 531,694 $ 496,259 $ 764,850 $ 728,271
Operating profit (loss):
Americas Tire $ 10,416 $ 21,808 $ 175,747 $ 72,378
International Tire (10,279) 1,447 8,766 3,234
Unallocated corporate charges (6,951) (18,455) (13,355) (15,928)
Eliminations 586 511 349 607
Consolidated operating (loss) profit (6,228) 5,311 171,507 60,291
Interest expense (5,007) (6,507) (5,400) (5,793)
Interest income 1,696 650 559 664
Other pension and postretirement benefit expense (4,210) (5,582) (5,621) (10,007)
Other non-operating income (expense) 1,773 (397) 2,303 901
(Loss) Income before income taxes $ (11,976) $ (6,525) $ 163,348 $ 46,056
Net (loss) income $ (11,317) $ (5,643) $ 123,123 $ 37,741
Net (loss) income attributable to Cooper Tire & Rubber Company $ (11,591) $ (6,215) $ 122,604 $ 37,991
Basic and diluted (loss) earnings per share are computed independently for each quarter presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.
Each quarter's financial data is recorded here as disclosed in its respective 10-Q report. Therefore, the sum of quarterly information here may not equal the annual financial statement amounts due to rounding.
(Unaudited)
First
Quarter Second
Quarter Third
Quarter Fourth
Quarter (a)
Net sales $ 619,163 $ 679,130 $ 704,134 $ 750,212
Gross profit 88,259 99,141 114,366 131,524
Net income attributable to Cooper Tire & Rubber Company 6,979 8,821 29,344 51,259
Earnings per share:
Basic 0.14 0.18 0.58 1.02
Diluted 0.14 0.18 0.58 1.02
Net sales:
Americas Tire $ 514,936 $ 582,307 $ 601,957 $ 654,526
International Tire 143,785 138,514 132,270 119,434
Eliminations (39,558) (41,691) (30,093) (23,748)
Consolidated net sales $ 619,163 $ 679,130 $ 704,134 $ 750,212
Operating profit (loss):
Americas Tire $ 38,789 $ 46,814 $ 67,941 $ 84,209
International Tire (1,339) (1,296) (4,831) (5,924)
Unallocated corporate charges (10,453) (13,278) (11,051) (15,186)
Eliminations (566) (569) 710 484
Consolidated operating profit 26,431 31,671 52,769 63,583
Interest expense (8,314) (7,810) (7,476) (7,590)
Interest income 3,380 1,999 1,507 2,571
Other pension and postretirement benefit expense (b)
(9,362) (9,288) (9,562) (13,355)
Other non-operating income (loss) 1,380 (1,463) (509) (892)
Income before income taxes $ 13,515 $ 15,109 $ 36,729 $ 44,317
Net income $ 7,178 $ 9,258 $ 29,008 $ 52,871
Net income attributable to Cooper Tire & Rubber Company $ 6,979 $ 8,821 $ 29,344 $ 51,259
Basic and diluted earnings per share are computed independently for each quarter presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.
Each quarter's financial data is recorded here as disclosed in its respective 10-Q report. Therefore, the sum of quarterly information here may not equal the annual financial statement amounts due to rounding.
(a)In the fourth quarter, the Company recorded an income tax benefit of $18,606 as a result of a business realignment strategy implemented in Europe.
COOPER TIRE & RUBBER COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2020, 2019 and 2018
(Dollar amounts in thousands) Additions
Balance at
Beginning of
Year Charged to
Income Charged to Equity Acquisition of Business Deductions Balance at
End of Year
Year Ended December 31, 2018
Allowance for doubtful accounts $ 7,570 $ 2,019 $ - $ - $ 3,753 (a) $ 5,836
Tax valuation allowance $ 30,102 $ 456 $ - $ - $ 7,938 (b) $ 22,620
Year Ended December 31, 2019
Allowance for doubtful accounts $ 5,836 $ 3,401 $ - $ - $ 1,128 (a) $ 8,109
Tax valuation allowance $ 22,620 $ 13,178 $ (6,337) $ - $ 2,191 (b) $ 27,270
Year Ended December 31, 2020
Allowance for doubtful accounts $ 8,109 $ 4,925 $ - $ - $ 1,872 (a) $ 11,162
Tax valuation allowance $ 27,270 $ 5,834 $ 2,736 $ - $ 695 (b) $ 35,145
(a)Accounts written off during the year, net of recoveries of accounts previously written off.
(b)Net increase in tax valuation allowance is primarily the result of a net increase in unbenefitted losses. 2020 also includes remeasurement of deferred tax assets in the U.K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports the Company files or submits as defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934 (“Exchange Act”), as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) to allow timely decisions regarding required disclosures.
The Company, under the supervision and with the participation of management, including the CEO and CFO, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as of December 31, 2020 (“Evaluation Date”)). Based on its initial evaluation, the Company's CEO and CFO concluded that its disclosure controls and procedures were effective as of the Evaluation Date.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, management conducted an assessment, including testing, using the criteria in Internal Control - Integrated Framework (2013 framework), issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) as of December 31, 2020. The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on its assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2020, based on criteria in Internal Control - Integrated Framework (2013) issued by the COSO, and that the Company’s internal control over financial reporting was effective.
Ernst & Young LLP, the independent registered public accounting firm that has audited the Company’s consolidated financial statements included in this annual report, has issued its report on the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2020.
(c) Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Cooper Tire & Rubber Company
Opinion on Internal Control over Financial Reporting
We have audited Cooper Tire & Rubber Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Cooper Tire & Rubber Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) and our report dated February 22, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Toledo, Ohio
February 22, 2021
(d) Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B.OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning the Company’s directors, corporate governance guidelines, Compensation Committee and Nominating and Governance Committee will appear in the Company’s definitive Proxy Statement for its 2021 Annual Meeting of Stockholders, which will be herein incorporated by reference.
AUDIT COMMITTEE
Information regarding the Audit Committee, including the identification of the Audit Committee members and the “audit committee financial experts,” will appear in the Company’s definitive Proxy Statement for its 2021 Annual Meeting of Stockholders, which will be herein incorporated by reference.
CODE OF ETHICS
Information regarding the Company’s code of conduct is available on the Company’s website at http://www.coopertire.com. To access this information, first click on “Investors”, then click on “Governance” and then click on "Governance Documents" on the Company’s website. Then, select the “Code of Business Ethics and Conduct” link listed in the middle of the web page under Governance.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11.EXECUTIVE COMPENSATION
Information regarding executive and director compensation will appear in the Company’s definitive Proxy Statement for its 2021 Annual Meeting of Stockholders, which will be herein incorporated by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning the ownership of certain beneficial owners and management of the Company’s voting securities and equity securities will appear in the Company’s definitive Proxy Statement for its 2021 Annual Meeting of Stockholders, which will be herein incorporated by reference.
Equity Compensation Plan Information
The following table provides information as of December 31, 2020 regarding the Company’s equity compensation plans, all of which were approved by the Company’s security holders:
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights Weighted-average
exercise price of
outstanding options,
warrants and rights Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
Plan category (a) (b) (c)
Equity compensation plans approved by stockholders 119,916 $ 24.08 1,980,709
Equity compensation plans not approved by stockholders - - -
Total 119,916 $ 24.08 1,980,709
Additional information on the Company's equity compensation plans is contained in Note 15 - Stock-Based Compensation to the consolidated financial statements.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
There were no transactions with related persons that would require disclosure during 2020.
Information regarding the independence of the Company’s directors will appear in the Company’s definitive Proxy Statement for its 2021 Annual Meeting of Stockholders, which will be herein incorporated by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding the fees and services of the Company’s independent auditor will appear in the Company’s definitive Proxy Statement for its 2021 Annual Meeting of Stockholders, which will be herein incorporated by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
Page
reference
1. Consolidated Financial Statements
Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018 39
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018 40
Consolidated Balance Sheets at December 31, 2020 and 2019 41
Consolidated Statements of Equity for the years ended December 31, 2020, 2019 and 2018 43
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 44
Notes to Consolidated Financial Statements 45
Report of Independent Registered Public Accounting Firm 84
Selected Quarterly Data (Unaudited) 86
2. Financial Statement Schedule
Valuation and qualifying accounts - Allowance for doubtful accounts and tax valuation allowance 88
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedules, or because the information required is included in the Consolidated Financial Statements or the notes thereto.
3. Exhibits
The exhibits listed on the accompanying exhibit index are filed as part of this Annual Report on Form 10-K.