UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
|☒||Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934|
For the fiscal year ended December 31, 2020
|☐||Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934|
Commission File Number 001-04329
COOPER TIRE & RUBBER COMPANY
(Exact name of registrant as specified in its charter)
|(State or Other Jurisdiction of Incorporation or Organization)|| ||(I.R.S. Employer Identification No.)|
701 Lima Avenue, Findlay, Ohio 45840
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|Common Stock, $1 par value per share||CTB||New York Stock Exchange|
|(Title of Each Class)||(Trading Symbol)||(Name of Each Exchange on which Registered)|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check One):
|Large accelerated filer||☒|| ||Accelerated filer|
| (Do not check if a smaller reporting company)||Smaller Reporting Company||☐|
|Emerging growth company||☐|
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of
the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
5tv7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting common stock held by non-affiliates of the registrant at June 30, 2020 was $1,329,884,078.
The number of shares outstanding of the registrant’s common stock as of February 19, 2021 was 50,437,470.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information from the registrant’s definitive proxy statement for its 2021 Annual Meeting of Stockholders will be herein incorporated by reference into Part III, Items 10 – 14, of this report.
TABLE OF CONTENTS
COOPER TIRE & RUBBER COMPANY – FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020
This Current Report on Form 10-K includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by words such as “anticipate,” “believe,” “could,” “design,” “estimate,” “expect,” “forecast,” “goal,” “guidance,” “imply,” “intend,” “may,” “objective,” “opportunity,” “outlook,” “plan,” “position,” “potential,” “predict,” “project,” “prospective,” “pursue,” “seek,” “should,” “strategy,” “target,” “will,” “would” or other similar expressions that convey the uncertainty of future events or outcomes. In accordance with “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements.
Forward-looking statements include, but are not limited to, statements that relate to, or statements that are subject to risks, contingencies or uncertainties that relate to:
•the ability to complete the proposed merger of the Company and Goodyear on anticipated terms and timetable;
•the effect of restructuring or reorganization of business components;
•uncertainty and weaknesses in global economic conditions, including the impact of the ongoing coronavirus (COVID-19) pandemic, or similar public health crises, on the Company’s and Goodyear’s financial condition, operations, distribution channels, customers and suppliers, as well as potentially exacerbating other factors discussed herein;
•continued volatility in raw material and energy prices, including those of rubber, steel, petroleum-based products and natural gas or the unavailability of such raw materials or energy sources, which may impact the price-adjustment calculations under sales contracts;
•the ability to cost-effectively achieve planned production rates or levels;
•the ability to successfully identify and consummate any strategic investments or development projects;
•the outcome of any contractual disputes with customers, joint venture partners or any other litigation or arbitration;
•impacts of existing and increasing governmental regulation and related costs and liabilities, including failure to receive or maintain required operating and environmental permits, approvals, modifications or other authorization of, or from, any governmental or regulatory entity and costs related to implementing improvements to ensure compliance with regulatory changes;
•the ability to maintain adequate liquidity, level of indebtedness and the availability of capital could limit cash flow available to fund working capital, planned capital expenditures, acquisitions and other general corporate purposes or ongoing needs of the business;
•the ability to continue to pay cash dividends, and the amount and timing of any cash dividends;
•availability of capital and ability to maintain adequate liquidity;
•the impact of labor problems, including labor disruptions at the Company, its joint ventures, or at one or more of its large customers or suppliers;
•the ability of our customers, joint venture partners and third party service providers to meet their obligations on a timely basis or at all;
•adverse changes in interest rates and tax laws; and
•the potential existence of significant deficiencies or material weakness in our internal control over financial reporting.
We have based our forward-looking statements on our current expectations, estimates and projections about our industry and our partnership. We caution that these statements are not guarantees of future performance and you should not rely unduly on them, as they involve risks, uncertainties, and assumptions that we cannot predict. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. While our management considers these assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Accordingly, our actual results may differ materially from the future performance that we have expressed or forecast in our forward-looking statements. Differences between actual results and any future performance suggested in our forward-looking statements could result from a variety of factors, including the following:
•the failure to obtain approval of the transaction by the stockholders of the Company and the failure to satisfy various other conditions to the closing of the transaction contemplated by the Merger Agreement;
•the failure to obtain governmental approvals of the transaction on the proposed terms and schedule, and any conditions imposed on the combined company in connection with consummation of the transaction;
•the risk that the cost savings and any other synergies from the transaction may not be fully realized or may take longer to realize than expected;
•disruption from the proposed transaction making it more difficult to maintain relationships with customers, partners, employees or suppliers;
•the risk that the proposed transaction may be less accretive than expected, or may be dilutive, and that the combined company may fail to realize the benefits expected from the Merger;
•risks relating to any unforeseen liabilities of Goodyear or the Company;
•the volatility in raw material and energy prices, including those of rubber, steel, petroleum-based products and natural gas or the unavailability of such raw materials or energy sources; extensive governmental regulation;
•changes to tariffs or trade agreements, or the imposition of new or increased tariffs or trade restrictions, imposed on tires, raw materials or manufacturing equipment which the Company uses, including changes related to tariffs on tires, raw materials and tire manufacturing equipment imported into the U.S. from China or other countries, as well as changes to trade agreements resulting from the United Kingdom's withdrawal from the European Union;
•future laws and regulations or the manner in which they are interpreted and enforced;
•the inability to obtain and/or renew permits necessary for the operations;
•existing and future indebtedness may limit cash flow available;
•operating expenses could increase significantly if the price of electrical power, fuel or other energy sources increases;
•changes in credit ratings issued by nationally recognized statistical rating organizations; risks involving the acts or omissions of our joint venture partners;
•natural disasters, weather conditions, disruption of energy, unanticipated geological conditions, equipment failures, and other unexpected events;
•a disruption in, or failure of our information technology systems, including those related to cybersecurity; failure of outside contractors and/or suppliers to perform;
•the cost and time to implement a strategic capital project may be greater than originally anticipated;
•reliance on estimates of recoverable reserves; and
•the risks that are described from time to time in Goodyear’s and the Company’s respective reports filed with the SEC.
We undertake no obligation to update any forward-looking statements except to the extent required by applicable law.
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.
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;
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.
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.
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.
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.
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.
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.
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:
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.
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.
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.
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. |
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.
Item 1B.UNRESOLVED STAFF COMMENTS
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-
** 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.
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.
Item 4.MINE SAFETY DISCLOSURES
Item 5.MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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 $100 investments on December 31, 2015, and shows the cumulative values at the end of each succeeding year resulting from appreciation or depreciation in the stock market price, assuming dividend reinvestment.
Total Return To Shareholders
(Includes reinvestment of dividends)
|ANNUAL RETURN PERCENTAGE|
Year Ended December 31,
|Company / Index||2016||2017||2018||2019||2020|
|Cooper Tire & Rubber Company||3.86 ||%||(8.00)||%||(7.21)||%||(9.77)||%||42.83 ||%|
|S&P 500 Index||11.96 ||21.83 ||(4.38)||31.49 ||18.40 |
|S&P 500 Auto Parts & Equipment||(4.25)||45.58 ||(28.74)||45.16 ||23.40 |
Year Ended December 31,
|Company / Index||2015||2016||2017||2018||2019||2020|
|Cooper Tire & Rubber Company||$||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 |
The number of holders of record at December 31, 2020 was 1,507.
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 $300,000,000 maximum amount authorized by the 2017 Repurchase Program. On December 3, 2019, the expiration of the 2017 Repurchase Program was extended to December 31, 2021. No other changes were made. The 2017 Repurchase Program does not obligate the Company to acquire any specific number of shares and can be suspended or discontinued at any time without notice. Shares can be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. All repurchases under the program listed above have been made using cash resources.
Item 6.SELECTED FINANCIAL DATA
|(Dollar amounts in thousands except per share amounts)|| || || || || |
|2020 ||2019 (a)||2018(b)||2017(c)||2016|
|Net sales||$||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.
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.
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 $41.75 per share in cash and a fixed exchange ratio of 0.907 shares of Goodyear common stock per share of the Company’s common stock they own at the effective time. Upon completion of the proposed Merger, it is expected that the Company’s stockholders will own approximately 16 percent and Goodyear stockholders will own approximately 84 percent of the combined company on a fully diluted basis.
The completion of the Merger is subject to the receipt of antitrust clearance in the United States. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”), and the rules promulgated thereunder, the Merger may not be completed until the Company and Goodyear have each filed notification and report forms with the United States Federal Trade Commission (“FTC”), and the Antitrust Division of the United States Department of Justice (“DOJ”), and the applicable waiting period (or any extension thereof) has expired or been terminated. The completion of the Merger is also subject to a number of foreign regulatory filings that will need to be completed.
The Company expects to complete the Merger in the second half of 2021, subject to the satisfaction of customary closing conditions, including receipt of required regulatory approvals and the approval of the Company’s stockholders.
Consolidated Statements of Income
|(Dollar amounts in thousands except per share amounts)|| |
| ||Twelve Months Ended December 31,|
|Americas Tire||$||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 |
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 $19 million from planning actions involving the Company's European tax structure which were executed in the fourth quarter of 2019.
The effects of inflation did not have a material effect on the results of operations of the Company in 2020.
Segment Operating Results
The Company has four segments under ASC 280:
•North America, composed of the Company’s operations in the U.S. and Canada;
•Latin America, composed of the Company’s operations in Mexico, Central America and South America;
North America and Latin America meet the criteria for aggregation in accordance with ASC 280, as they are similar in their production and distribution processes and exhibit similar economic characteristics. The aggregated North America and Latin America segments are presented as “Americas Tire Operations” in the segment disclosure.
Both the Europe and Asia segments have been determined to be individually immaterial, as they do not meet the quantitative requirements for segment disclosure under ASC 280. In accordance with ASC 280, information about operating segments that are not reportable shall be combined and disclosed in an all other category separate from other reconciling items. As a result, these
two segments have been combined in the segment operating results discussion. The results of the combined Europe and Asia segments are presented as “International Tire Operations” in the segment disclosure.
Americas Tire Operations Segment
|(Dollar amounts in thousands)||Twelve Months Ended December 31,|
|Sales||$||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:|
|Light truck tires|
|Total light vehicle tires|
The source of this information is the United States Tire Manufactures Association ("USTMA") and internal sources.
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.
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 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 $2 million of lower selling, general and administrative expenses and 1 million of lower other costs compared to 2019.
The segment utilizes an internal raw material index which is calculated based upon the underlying costs of the segment's key raw materials for the period and is utilized in comparing the cost of raw materials from period to period. The segment’s internally calculated raw material index of 142.2 for the year ended December 31, 2020 was a decrease of 9.6 percent from 2019.
International Tire Operations Segment
|(Dollar amounts in thousands)||Twelve Months Ended December 31,|
|Sales||$||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)%|
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.
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.
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.
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.
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 $188 million of debt at a floating interest rate, which was effectively hedged. A hypothetical 10 percent change in interest rates would have an immaterial impact on interest expense for the years ended December 31, 2020 and 2019.
To manage the volatility of currency exchange exposures related to future sales and purchases in foreign currencies, the Company first nets the exposures to take advantage of natural offsets. Then, for the residual portion, the Company enters into forward exchange contracts with maturities of less than 12 months pursuant to the Company’s policies and hedging practices. The changes in fair value of these hedging instruments are offset, in part or in whole, by corresponding changes in the fair value of cash flows of the underlying exposures being hedged. The Company’s unprotected exposures to earnings and cash flow fluctuations due to changes in foreign currency exchange rates were not significant at December 31, 2020 and December 31, 2019.
The Company enters into foreign exchange contracts to manage its exposure to foreign currency denominated receivables and payables. The impact from a ten percent change in foreign currency exchange rates on the Company’s foreign currency denominated obligations and related foreign exchange contracts would not have been material to the Company’s results of operations and cash flows.
Item 8. FINANCIAL STATEMENTS
|COOPER TIRE & RUBBER COMPANY|
|CONSOLIDATED STATEMENTS OF INCOME|
|(Dollar amounts in thousands except per share amounts)|
| ||Twelve Months Ended December 31,|
|Net sales||$||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 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 ||$||1.51 |
|See accompanying Notes to Consolidated Financial Statements.|
|COOPER TIRE & RUBBER COMPANY|
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME|
|(Dollar amounts in thousands)|
| ||Twelve Months Ended December 31,|
|Net income||$||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)||— ||— |
|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 |