UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
Commission File Number:
(Exact Name of Registrant as Specified in Its Charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
☑ |
Accelerated filer |
☐ |
Non-accelerated filer |
☐ |
Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Number of Shares of Common Stock, Without Par Value, Outstanding at October 31, 2021: |
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION |
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ITEM 1. FINANCIAL STATEMENTS |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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ITEM 4. CONTROLS AND PROCEDURES |
PART II. OTHER INFORMATION |
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ITEM 1. LEGAL PROCEEDINGS |
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ITEM 1A. RISK FACTORS |
EX-101.INS INSTANCE DOCUMENT |
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EX-101.SCH SCHEMA DOCUMENT |
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EX-101.CAL CALCULATION LINKBASE DOCUMENT |
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EX-101.DEF DEFINITION LINKBASE DOCUMENT |
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EX-101.LAB LABELS LINKBASE DOCUMENT |
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EX-101.PRE PRESENTATION LINKBASE DOCUMENT |
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EX-104 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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(In millions, except per share amounts) |
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2021 |
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2020 |
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2021 |
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2020 |
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Net Sales (Note 3) |
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$ |
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$ |
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Cost of Goods Sold |
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Selling, Administrative and General Expense |
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Goodwill and Other Asset Impairments |
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Rationalizations (Note 4) |
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Interest Expense |
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Other (Income) Expense (Note 5) |
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Income (Loss) before Income Taxes |
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United States and Foreign Tax Expense (Benefit) (Note 6) |
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Net Income (Loss) |
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Less: Minority Shareholders’ Net Income (Loss) |
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Goodyear Net Income (Loss) |
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$ |
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Goodyear Net Income (Loss) — Per Share of Common Stock |
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Basic |
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Weighted Average Shares Outstanding (Note 7) |
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Diluted |
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Weighted Average Shares Outstanding (Note 7) |
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The accompanying notes are an integral part of these consolidated financial statements.
1
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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(In millions) |
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2021 |
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2020 |
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2021 |
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2020 |
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Net Income (Loss) |
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$ |
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$ |
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$ |
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Other Comprehensive Income (Loss): |
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Foreign currency translation, net of tax of $ |
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Unrealized gains (losses) from securities, net of tax of $ |
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Defined benefit plans: |
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Amortization of prior service cost and unrecognized gains and losses included in total benefit cost, net of tax of $ |
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Decrease/(increase) in net actuarial losses, net of tax of $ |
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Immediate recognition of prior service cost and unrecognized gains and losses due to curtailments, settlements and divestitures, net of tax of $ |
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Deferred derivative gains (losses), net of tax of $ |
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Reclassification adjustment for amounts recognized in income, net of tax of $ |
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Other Comprehensive Income (Loss) |
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Comprehensive Income (Loss) |
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Less: Comprehensive Income (Loss) Attributable to Minority Shareholders |
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Goodyear Comprehensive Income (Loss) |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
2
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30, |
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December 31, |
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(In millions, except share data) |
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2021 |
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2020 |
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Assets: |
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Current Assets: |
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Cash and Cash Equivalents |
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$ |
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$ |
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Accounts Receivable, less Allowance — $ |
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Inventories: |
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Raw Materials |
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Work in Process |
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Finished Products |
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Prepaid Expenses and Other Current Assets |
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Total Current Assets |
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Goodwill |
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Intangible Assets |
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Deferred Income Taxes (Note 6) |
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Other Assets |
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Operating Lease Right-of-Use Assets |
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Property, Plant and Equipment, less Accumulated Depreciation — $ |
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Total Assets |
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$ |
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$ |
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Liabilities: |
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Current Liabilities: |
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Accounts Payable — Trade |
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$ |
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$ |
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Compensation and Benefits (Notes 11 and 12) |
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Other Current Liabilities |
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Notes Payable and Overdrafts (Note 9) |
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Operating Lease Liabilities due Within One Year |
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Long Term Debt and Finance Leases due Within One Year (Note 9) |
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Total Current Liabilities |
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Operating Lease Liabilities |
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Long Term Debt and Finance Leases (Note 9) |
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Compensation and Benefits (Notes 11 and 12) |
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Deferred Income Taxes (Note 6) |
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Other Long Term Liabilities |
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Total Liabilities |
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Shareholders’ Equity: |
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Goodyear Shareholders’ Equity: |
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Common Stock, |
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Authorized, |
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Capital Surplus |
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Retained Earnings |
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Accumulated Other Comprehensive Loss |
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Goodyear Shareholders’ Equity |
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Minority Shareholders’ Equity — Nonredeemable |
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Total Shareholders’ Equity |
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Total Liabilities and Shareholders’ Equity |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
3
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
(Unaudited)
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Accumulated |
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Minority |
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Other |
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Goodyear |
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Shareholders' |
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Total |
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Common Stock |
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Capital |
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Retained |
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Comprehensive |
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Shareholders' |
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Equity — Non- |
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Shareholders' |
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(Dollars in millions, except per share amounts) |
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Shares |
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Amount |
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Surplus |
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Earnings |
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Loss |
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Equity |
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Redeemable |
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Equity |
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Balance at December 31, 2020 |
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(after deducting |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Net income (loss) |
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Other comprehensive income (loss) |
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( |
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Total comprehensive income (loss) |
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Common stock issued |
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Stock-based compensation plans |
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Dividends declared |
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Common stock issued from treasury |
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Acquisition of Cooper Tire's minority interests |
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Balance at June 30, 2021 |
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(after deducting |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Net income (loss) |
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Other comprehensive income (loss) |
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( |
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( |
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( |
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( |
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Total comprehensive income (loss) |
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Stock-based compensation plans |
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Dividends declared |
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( |
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Common stock issued from treasury |
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Balance at September 30, 2021 |
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(after deducting |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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There were
The accompanying notes are an integral part of these consolidated financial statements.
4
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
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Accumulated |
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Minority |
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Other |
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Goodyear |
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Shareholders' |
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Total |
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Common Stock |
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Capital |
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Retained |
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Comprehensive |
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Shareholders' |
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Equity — Non- |
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Shareholders' |
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(Dollars in millions, except per share amounts) |
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Shares |
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Amount |
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Surplus |
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Earnings |
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Loss |
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Equity |
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Redeemable |
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Equity |
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Balance at December 31, 2019 |
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(after deducting |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Net income (loss) |
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( |
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( |
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( |
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( |
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Other comprehensive income (loss) |
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( |
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( |
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( |
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( |
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Total comprehensive income (loss) |
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( |
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( |
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( |
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( |
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( |
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( |
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Stock-based compensation plans |
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Dividends declared |
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( |
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( |
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( |
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Common stock issued from treasury |
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( |
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( |
) |
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( |
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Balance at June 30, 2020 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
(after deducting |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||||
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Stock-based compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||||||
Common stock issued from treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Balance at September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
(after deducting |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
We declared and paid cash dividends of $
The accompanying notes are an integral part of these consolidated financial statements.
5
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended |
|
|||||
|
|
September 30, |
|
|||||
(In millions) |
|
2021 |
|
|
2020 |
|
||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
||
Net Income (Loss) |
|
$ |
|
|
$ |
( |
) |
|
Adjustments to Reconcile Net Income (Loss) to Cash Flows from Operating Activities: |
|
|
|
|
|
|
||
Depreciation and Amortization |
|
|
|
|
|
|
||
Amortization and Write-Off of Debt Issuance Costs |
|
|
|
|
|
|
||
Amortization of Inventory Fair Value Adjustment Related to the Cooper Tire Acquisition (Note 2) |
|
|
|
|
|
|
||
Transaction and Other Costs Related to the Cooper Tire Acquisition (Note 2) |
|
|
|
|
|
|
||
Cash Payments for Transaction and Other Costs Related to the Cooper Tire Acquisition |
|
|
( |
) |
|
|
|
|
Goodwill and Other Asset Impairments |
|
|
|
|
|
|
||
Provision for Deferred Income Taxes (Note 6) |
|
|
( |
) |
|
|
|
|
Net Pension Curtailments and Settlements |
|
|
|
|
|
|
||
Net Rationalization Charges (Note 4) |
|
|
|
|
|
|
||
Rationalization Payments |
|
|
( |
) |
|
|
( |
) |
Net (Gains) Losses on Asset Sales (Note 5) |
|
|
( |
) |
|
|
|
|
Operating Lease Expense |
|
|
|
|
|
|
||
Operating Lease Payments |
|
|
( |
) |
|
|
( |
) |
Pension Contributions and Direct Payments |
|
|
( |
) |
|
|
( |
) |
Changes in Operating Assets and Liabilities, Net of Asset Acquisitions and Dispositions: |
|
|
|
|
|
|
||
Accounts Receivable |
|
|
( |
) |
|
|
( |
) |
Inventories |
|
|
( |
) |
|
|
|
|
Accounts Payable — Trade |
|
|
|
|
|
( |
) |
|
Compensation and Benefits |
|
|
|
|
|
|
||
Other Current Liabilities |
|
|
|
|
|
|
||
Other Assets and Liabilities |
|
|
|
|
|
|
||
Total Cash Flows from Operating Activities |
|
|
( |
) |
|
|
( |
) |
Cash Flows from Investing Activities: |
|
|
|
|
|
|
||
Acquisition of Cooper Tire, net of cash and restricted cash acquired (Note 2) |
|
|
( |
) |
|
|
|
|
Capital Expenditures |
|
|
( |
) |
|
|
( |
) |
Asset Dispositions |
|
|
|
|
|
|
||
Short Term Securities Acquired |
|
|
( |
) |
|
|
( |
) |
Short Term Securities Redeemed |
|
|
|
|
|
|
||
Notes Receivable |
|
|
|
|
|
( |
) |
|
Other Transactions |
|
|
|
|
|
( |
) |
|
Total Cash Flows from Investing Activities |
|
|
( |
) |
|
|
( |
) |
Cash Flows from Financing Activities: |
|
|
|
|
|
|
||
Short Term Debt and Overdrafts Incurred |
|
|
|
|
|
|
||
Short Term Debt and Overdrafts Paid |
|
|
( |
) |
|
|
( |
) |
Long Term Debt Incurred |
|
|
|
|
|
|
||
Long Term Debt Paid |
|
|
( |
) |
|
|
( |
) |
Common Stock Issued |
|
|
|
|
|
|
||
Common Stock Dividends Paid (Note 14) |
|
|
|
|
|
( |
) |
|
Transactions with Minority Interests in Subsidiaries |
|
|
( |
) |
|
|
( |
) |
Debt Related Costs and Other Transactions |
|
|
( |
) |
|
|
( |
) |
Total Cash Flows from Financing Activities |
|
|
|
|
|
|
||
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash |
|
|
( |
) |
|
|
( |
) |
Net Change in Cash, Cash Equivalents and Restricted Cash |
|
|
( |
) |
|
|
|
|
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period |
|
|
|
|
|
|
||
Cash, Cash Equivalents and Restricted Cash at End of the Period |
|
$ |
|
|
$ |
|
The accompanying notes are an integral part of these consolidated financial statements.
6
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by The Goodyear Tire & Rubber Company (the “Company,” “Goodyear,” “we,” “us” or “our”) in accordance with Securities and Exchange Commission (“SEC”) rules and regulations and generally accepted accounting principles in the United States of America ("U.S. GAAP") and in the opinion of management contain all adjustments (including normal recurring adjustments) necessary to fairly state the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).
Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results expected in subsequent quarters or for the year ending December 31, 2021.
On June 7, 2021 (the “Closing Date”), we completed the previously announced acquisition of Cooper Tire & Rubber Company (“Cooper Tire”), pursuant to the terms of the Agreement and Plan of Merger, dated as of February 22, 2021 (the “Merger Agreement”), by and among Goodyear, Vulcan Merger Sub Inc., a direct, wholly owned subsidiary of Goodyear (“Merger Sub”), and Cooper Tire. On the Closing Date, Merger Sub merged with and into Cooper Tire, with Cooper Tire surviving the merger and becoming a wholly owned subsidiary of Goodyear (the “Merger”). As a result of the Merger, Cooper Tire, along with its subsidiaries, became subsidiaries of Goodyear. For further information about the Merger, refer to Note to the Consolidated Financial Statements No. 2, Cooper Tire Acquisition.
Recently Adopted Accounting Standards
Acquisitions
We include the results of operations of the businesses in which we acquire a controlling financial interest in our consolidated financial statements beginning as of the acquisition date. On the acquisition date, we recognize, separate from goodwill, the assets acquired, including separately identifiable intangible assets, and the liabilities assumed at their fair values. The excess of the consideration transferred over the fair values assigned to the net identifiable assets and liabilities of the acquired business is recognized as goodwill. Transaction costs are recognized separately from the acquisition and are expensed as incurred.
Principles of Consolidation
The consolidated financial statements include the accounts of all legal entities in which we hold a controlling financial interest. A controlling financial interest generally arises from our ownership of a majority of the voting shares of our subsidiaries. We would also hold a controlling financial interest in variable interest entities if we are considered to be the primary beneficiary. Investments in companies in which we do not own a majority interest and we have the ability to exercise significant influence over operating and financial policies are accounted for using the equity method. Investments in other companies are primarily carried at cost. All intercompany balances and transactions have been eliminated in consolidation.
7
Restricted Cash
The following table provides a reconciliation of Cash, Cash Equivalents and Restricted Cash as reported within the Consolidated Statements of Cash Flows:
|
|
September 30, |
|
|||||
(In millions) |
|
2021 |
|
|
2020 |
|
||
Cash and Cash Equivalents |
|
$ |
|
|
$ |
|
||
Restricted Cash(1) |
|
|
|
|
|
|
||
Total Cash, Cash Equivalents and Restricted Cash |
|
$ |
|
|
$ |
|
(1)
Reclassifications and Adjustments
Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation. In the second quarter of 2021, we recorded an out of period totaling $
NOTE 2. COOPER TIRE ACQUISITION
On June 7, 2021, we completed our acquisition of all of the outstanding shares of common stock of Cooper Tire pursuant to the terms of the Merger Agreement. Cooper Tire’s results of operations have been included in our consolidated financial statements since the Closing Date. Cooper Tire stockholders received $
We used the net proceeds from the issuance of new senior notes with an aggregate principal amount of $
The calculation of the Merger Consideration is as follows:
(In millions, except share and per share amounts) |
|
Shares |
|
|
Per Share (4) |
|
|
Total |
|
|||
Cash paid for Cooper Tire Shares(1) |
|
|
|
|
|
|
|
$ |
|
|||
Cash paid for other Cooper Tire incentive compensation awards(2) |
|
|
|
|
|
|
|
|
|
|||
Cash component of the Merger Consideration |
|
|
|
|
|
|
|
$ |
|
|||
Shares of Goodyear Common Stock issued to Cooper Tire Stockholders(3) |
|
|
|
|
$ |
|
|
|
|
|||
Merger Consideration |
|
|
|
|
|
|
|
$ |
|
8
(In millions, except share and per share amounts) |
|
Shares |
|
|
Per Share |
|
|
Total |
|
|||
Shares of Cooper Tire Common Stock outstanding |
|
|
|
|
|
|
|
|
|
|||
Shares issuable pursuant to conversion of share units outstanding |
|
|
|
|
|
|
|
|
|
|||
Cooper Tire Shares |
|
|
|
|
$ |
|
|
$ |
|
|
|
Shares |
|
|
Exchange |
|
|
Total |
|
|||
Cooper Tire Shares |
|
|
|
|
|
|
|
|
|
|||
Less: Cooper Tire Shares settled in cash(5) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
The following table presents supplemental cash flow information related to the acquisition of Cooper Tire:
(In millions) |
|
|
|
|
Cash component of the Merger Consideration |
|
$ |
|
|
Less: |
|
|
|
|
Cash acquired |
|
|
|
|
Restricted cash acquired |
|
|
|
|
Acquisition of Cooper Tire, net of cash and restricted cash acquired |
|
$ |
|
The Consolidated Statements of Cash Flows are presented net of the stock component of the Merger Consideration, which represents a non-cash transaction.
Under the acquisition method of accounting, the Merger Consideration is allocated, as of the Closing Date, to the identifiable assets acquired and liabilities assumed of Cooper Tire, which are recognized and measured at fair value based on management’s estimates, available information, and supportable assumptions that management considers reasonable. The determination of the fair values of certain assets acquired, including Property, Plant and Equipment, Goodwill and Intangible Assets, are preliminary and are dependent upon completion of further fair value analysis by the Company. The determination of the fair values of certain liabilities assumed are also preliminary and dependent upon completion of certain actuarial and other valuations and studies. Given the complex nature of the related valuations and analyses to be completed and the timing of the acquisition, the preliminary purchase price allocation is subject to change. The final valuation of assets acquired and liabilities assumed may be materially different from the estimated values shown below.
During the third quarter of 2021, progress was made in completing certain of our additional valuations and analyses. As such, we updated our initial allocation of the Merger Consideration that was completed during the second quarter of 2021. Principle changes include (i) decreasing the value attributed to customer relationships primarily to reflect updated assumptions related to customer attrition rates, (ii) increasing the value attributed to indefinite-lived trade names to reflect our long-term view of how each acquired brand fits into the overall product portfolio of the combined company and the appropriate royalty rate to value each acquired brand based on expected profitability, and (iii) decreasing the value attributed to Property, Plant and Equipment primarily to reflect updated assumptions related to the remaining expected useful lives of certain assets acquired. These adjustments were recorded net of adjustments to Deferred Tax Liabilities with the corresponding offset recorded to Goodwill.
9
The following table sets forth measurement period changes during the third quarter of 2021, as well as the updated and initial preliminary allocation of the Merger Consideration to the estimated fair value of the identifiable tangible and intangible assets acquired and liabilities assumed of Cooper Tire, with the excess recorded to Goodwill as of the Closing Date:
(In millions) |
|
Updated Preliminary |
|
|
Measurement |
|
|
Initial Preliminary |
|
|||
Cash and Cash Equivalents |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Accounts Receivable |
|
|
|
|
|
|
|
|
|
|||
Inventories |
|
|
|
|
|
( |
) |
|
|
|
||
Property, Plant and Equipment |
|
|
|
|
|
( |
) |
|
|
|
||
Goodwill |
|
|
|
|
|
|
|
|
|
|||
Intangible Assets |
|
|
|
|
|
( |
) |
|
|
|
||
Other Assets |
|
|
|
|
|
( |
) |
|
|
|
||
|
|
|
|
|
|
( |
) |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|||
Accounts Payable — Trade |
|
|
|
|
|
|
|
|
|
|||
Compensation and Benefits |
|
|
|
|
|
( |
) |
|
|
|
||
Debt, Finance Leases and Notes Payable and Overdrafts |
|
|
|
|
|
|
|
|
|
|||
Deferred Tax Liabilities, net |
|
|
|
|
|
( |
) |
|
|
|
||
Other Liabilities |
|
|
|
|
|
( |
) |
|
|
|
||
Minority Equity |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
( |
) |
|
|
|
||
Merger Consideration |
|
$ |
|
|
$ |
|
|
$ |
|
The estimated value of Inventory includes adjustments totaling $
The estimated value of Property, Plant and Equipment includes adjustments totaling $
The estimated fair values of identifiable intangible assets acquired were prepared using an income valuation approach, which requires a forecast of expected future cash flows either through the use of the relief-from-royalty method or the multi-period excess earnings method. The estimated useful lives are based on our historical experience and expectations as to the duration of time we expect to realize benefits from those assets.
(In millions, except years) |
|
Updated |
|
|
Measurement |
|
|
Initial |
|
|
Weighted Average |
|
Valuation Methodology |
|||
Trade names (indefinite-lived) |
|
$ |
|
|
$ |
|
|
$ |
|
|
N/A |
|
Relief-from-royalty |
|||
Trade names (definite-lived) |
|
|
|
|
|
( |
) |
|
|
|
|
|
Relief-from-royalty |
|||
Customer relationships |
|
|
|
|
|
( |
) |
|
|
|
|
|
Multi-period excess earnings |
|||
Non-compete and other |
|
|
|
|
|
|
|
|
|
|
|
Discounted cash flow |
||||
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
10
At the Closing Date, all of the calculated Goodwill of $
Net sales and earnings related to Cooper Tire’s operations that have been included in our Consolidated Statements of Operations for the period from the Closing Date through September 30, 2021 are as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||
|
|
September 30, |
|
|
September 30, |
|
||
(In millions) |
|
2021 |
|
|
2021 |
|
||
Net Sales |
|
$ |
|
|
$ |
|
||
Income (Loss) before Income Taxes |
|
|
|
|
|
|
||
Goodyear Net Income (Loss) |
|
|
|
|
|
|
During the nine months ended September 30, 2021, we incurred transaction and other costs in connection with the Merger totaling $
Pro forma financial information
The following table summarizes, on a pro forma basis, the combined results of operations of Goodyear and Cooper Tire as though the acquisition and the related financing had occurred as of January 1, 2020. The pro forma results are not necessarily indicative of either the actual consolidated results had the acquisition of Cooper Tire occurred on January 1, 2020, nor are they indicative of future consolidated operating results.
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
(In millions) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Net Sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Income (Loss) before Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Goodyear Net Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
NOTE 3. NET SALES
The following tables show disaggregated net sales from contracts with customers by major source:
|
|
Three Months Ended September 30, 2021 |
|
|||||||||||||
|
|
|
|
|
Europe, Middle East |
|
|
|
|
|
|
|
||||
(In millions) |
|
Americas |
|
|
and Africa |
|
|
Asia Pacific |
|
|
Total |
|
||||
Tire unit sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other tire and related sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Retail services and service related sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Chemical sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net Sales by reportable segment |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
11
|
|
Three Months Ended September 30, 2020 |
|
|||||||||||||
|
|
|
|
|
Europe, Middle East |
|
|
|
|
|
|
|
||||
(In millions) |
|
Americas |
|
|
and Africa |
|
|
Asia Pacific |
|
|
Total |
|
||||
Tire unit sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other tire and related sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Retail services and service related sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Chemical sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net Sales by reportable segment |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Nine Months Ended September 30, 2021 |
|
|||||||||||||
|
|
|
|
|
Europe, Middle East |
|
|
|
|
|
|
|
||||
(In millions) |
|
Americas |
|
|
and Africa |
|
|
Asia Pacific |
|
|
Total |
|
||||
Tire unit sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other tire and related sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Retail services and service related sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Chemical sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net Sales by reportable segment |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Nine Months Ended September 30, 2020 |
|
|||||||||||||
|
|
|
|
|
Europe, Middle East |
|
|
|
|
|
|
|
||||
(In millions) |
|
Americas |
|
|
and Africa |
|
|
Asia Pacific |
|
|
Total |
|
||||
Tire unit sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other tire and related sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Retail services and service related sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Chemical sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net Sales by reportable segment |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Tire unit sales consist of consumer, commercial, farm and off-the-road tire sales, including the sale of new Company-branded tires through Company-owned retail channels. Other tire and related sales consist of aviation, race and motorcycle tire sales, retread sales and other tire related sales. Sales of tires in this category are not included in reported tire unit information. Retail services and service related sales consist of automotive services performed for customers through our Company-owned retail channels, and includes service related products. Chemical sales relate to the sale of synthetic rubber and other chemicals to third parties, and exclude intercompany sales. Other sales include items such as franchise fees and ancillary tire parts.
When we receive consideration from a customer prior to transferring goods or services under the terms of a sales contract, we record deferred revenue, which represents a contract liability. Deferred revenue included in Other Current Liabilities in the Consolidated Balance Sheets totaled $
The following table presents the balance of deferred revenue related to contracts with customers, and changes during the nine months ended September 30, 2021:
|
|
|
|
|
(In millions) |
|
|
|
|
Balance at December 31, 2020 |
|
$ |
|
|
Revenue deferred during period |
|
|
|
|
Revenue recognized during period |
|
|
( |
) |
Impact of foreign currency translation |
|
|
|
|
Balance at September 30, 2021 |
|
$ |
|
12
NOTE 4. COSTS ASSOCIATED WITH RATIONALIZATION PROGRAMS
In order to maintain our global competitiveness, we have implemented rationalization actions over the past several years to reduce high-cost and excess manufacturing capacity and operating and administrative costs.
The following table presents a roll-forward of the liability balance between periods:
|
|
Associate- |
|
|
|
|
|
|
|
|||
(In millions) |
|
Related Costs |
|
|
Other Costs |
|
|
Total |
|
|||
Balance at December 31, 2020 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
2021 Charges |
|
|
|
|
|
|
|
|
|
|||
Incurred, net of foreign currency translation of $( |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Reversed to the Statement of Operations |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Balance at September 30, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
During the first quarter of 2021, we approved a plan primarily designed to reduce SAG in Europe, Middle East and Africa (“EMEA”). We have $
During the first quarter of 2021, we increased by $
The remainder of the accrual balance at September 30, 2021 is expected to be substantially utilized in the next 12 months and includes $
The following table shows net rationalization charges included in Income (Loss) before Income Taxes:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
(In millions) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Current Year Plans |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Associate Severance and Other Related Costs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Benefit Plan Curtailments/Settlements/Termination Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other Exit Costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current Year Plans - Net Charges |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Prior Year Plans |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Associate Severance and Other Related Costs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Benefit Plan Curtailments/Settlements/Termination Benefits |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Other Exit Costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Prior Year Plans - Net Charges |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total Net Charges |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Asset Write-off and Accelerated Depreciation Charges(1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Substantially all of the new charges for the three and nine months ended September 30, 2021 and 2020 related to future cash outflows. Net current year plan charges for the nine months ended September 30, 2021 primarily related to a plan to reduce SAG headcount in EMEA. Net current year plan charges for the three and nine months ended September 30, 2020 primarily related to the permanent closure of Gadsden, including pension settlement and termination benefits of $
13
Net prior year plan charges for the three and nine months ended September 30, 2021 included $
Ongoing rationalization plans had approximately $
Approximately
NOTE 5. OTHER (INCOME) EXPENSE
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
(In millions) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Non-service related pension and other postretirement benefits cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest income on a favorable indirect tax ruling in Brazil |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Financing fees and financial instruments expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net foreign currency exchange (gains) losses |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
General and product liability expense - discontinued products |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Royalty income |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net (gains) losses on asset sales |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Interest income |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Transaction costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Miscellaneous (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Non-service related pension and other postretirement benefits cost consists primarily of the interest cost, expected return on plan assets and amortization components of net periodic cost, as well as curtailments and settlements which are not related to rationalization plans. For further information, refer to Note to the Consolidated Financial Statements No. 11, Pension, Savings and Other Postretirement Benefit Plans.
We, along with other companies, had previously filed various claims with the Brazilian tax authorities challenging the legality of the government's calculation of certain indirect taxes dating back to 2001. During the second quarter of 2021, the Brazilian Supreme Court rendered a final ruling that was favorable to companies on certain of the remaining open aspects of these claims. As a result of this ruling, we recorded a gain in CGS of $
Financing fees and financial instruments expense consists of commitment fees and charges incurred in connection with financing transactions. Financing fees and financial instruments expense for the nine months ended September 30, 2021 include a $
Net foreign currency exchange (gains) losses include $
Net gains on asset sales for the three and nine months ended September 30, 2021 of $
Transaction costs include legal, consulting and other expenses incurred by us in connection with the Cooper Tire acquisition.
Other (Income) Expense also includes general and product liability expense - discontinued products, which consists of charges for claims against us related primarily to asbestos personal injury claims, net of probable insurance recoveries; royalty income which is derived primarily from licensing arrangements; and interest income.
14
NOTE 6. INCOME TAXES
For the third quarter of 2021, we recorded income tax expense of $
For the third quarter of 2020, we recorded an income tax benefit of $
We record taxes based on overall estimated annual effective tax rates. The difference between our effective tax rate and the U.S. statutory rate of
We consider both positive and negative evidence when measuring the need for a valuation allowance. The weight given to the evidence is commensurate with the extent to which it may be objectively verified. Current and cumulative financial reporting results are a source of objectively verifiable evidence. We give operating results during the most recent three-year period a significant weight in our analysis. We typically only consider forecasts of future profitability when positive cumulative operating results exist in the most recent three-year period. We perform scheduling exercises to determine if sufficient taxable income of the appropriate character exists in the periods required in order to realize our deferred tax assets with limited lives (such as tax loss carryforwards and tax credits) prior to their expiration. We consider tax planning strategies available to accelerate taxable amounts if required to utilize expiring deferred tax assets. A valuation allowance is not required to the extent that, in our judgment, positive evidence exists with a magnitude and duration sufficient to result in a conclusion that it is more likely than not that our deferred tax assets will be realized.
At September 30, 2021 and December 31, 2020, we had approximately $
At September 30, 2021 and December 31, 2020, our U.S. net deferred tax assets included $
15
We consider our current forecasts of future profitability in assessing our ability to realize our deferred tax assets, including our foreign tax credits. As noted above, these forecasts include the impact of recent trends, including various macroeconomic factors such as the impact of the COVID-19 pandemic, on our profitability, as well as the impact of tax planning strategies. Macroeconomic factors, including the impact of the COVID-19 pandemic, possess a high degree of volatility and can significantly impact our profitability. As such, there is a risk that future earnings will not be sufficient to fully utilize our U.S. net deferred tax assets, including our remaining foreign tax credits. However, we believe our forecasts of future profitability along with the three significant sources of foreign income described above provide us sufficient positive, objectively verifiable evidence to conclude that it is more likely than not that, at September 30, 2021, our U.S. net deferred tax assets, including our foreign tax credits, net of valuation allowances, will be fully utilized.
At September 30, 2021 and December 31, 2020, we had approximately $
For the nine months ended September 30, 2021, changes to our unrecognized tax benefits did not, and for the full year of 2021 are not expected to, have a significant impact on our financial position or results of operations.
We are open to examination in the United States for 2020 and in Germany from 2018 onward. Cooper Tire, our newly acquired wholly owned subsidiary, is open to examination in the United States from 2017 onward. Generally, for our remaining tax jurisdictions, years from 2016 onward are still open to examination.
NOTE 7. EARNINGS PER SHARE
Basic earnings per share are computed based on the weighted average number of common shares outstanding. Diluted earnings per share are calculated to reflect the potential dilution that could occur if securities or other contracts were exercised or converted into common stock.
Basic and diluted earnings per common share are calculated as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
(In millions, except per share amounts) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Earnings (loss) per share — basic: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Goodyear net income (loss) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings (loss) per common share — basic |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings (loss) per share — diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Goodyear net income (loss) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive effect of stock options and other dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding — diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings (loss) per common share — diluted |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
Weighted average shares outstanding — diluted for the three and nine months ended September 30, 2021 excludes approximately
16
NOTE 8. BUSINESS SEGMENTS
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
(In millions) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Europe, Middle East and Africa |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asia Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net Sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Segment Operating Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
Europe, Middle East and Africa |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Asia Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Segment Operating Income (Loss) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Goodwill and other asset impairments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Rationalizations (Note 4) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other (income) expense (Note 5) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asset write-offs and accelerated depreciation (Note 4) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate incentive compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Retained expenses of divested operations |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other(1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income (Loss) before Income Taxes |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
Goodwill and other asset impairments; rationalizations, as described in Note to the Consolidated Financial Statements No. 4, Costs Associated with Rationalization Programs; net (gains) losses on asset sales, as described in Note to the Consolidated Financial Statements No. 5, Other (Income) Expense; and asset write-offs and accelerated depreciation were not charged to the strategic business units ("SBUs") for performance evaluation purposes but were attributable to the SBUs as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
(In millions) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Goodwill and Other Asset Impairments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Europe, Middle East and Africa |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Segment Goodwill and Other Asset Impairments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rationalizations: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Europe, Middle East and Africa |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asia Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Segment Rationalizations |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net (Gains) Losses on Asset Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Europe, Middle East and Africa |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Total Segment Net (Gains) Losses on Asset Sales |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Corporate |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asset Write-offs and Accelerated Depreciation: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Europe, Middle East and Africa |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Segment Asset Write-offs and Accelerated Depreciation |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
17
The following table presents segment assets:
|
|
September 30, |
|
|
December 31, |
|
||
(In millions) |
|
2021 |
|
|
2020 |
|
||
Assets |
|
|
|
|
|
|
||
Americas |
|
$ |
|
|
$ |
|
||
Europe, Middle East and Africa |
|
|
|
|
|
|
||
Asia Pacific |
|
|
|
|
|
|
||
Total Segment Assets |
|
|
|
|
|
|
||
Corporate(1) |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
The increases from December 31, 2020 were driven by the acquisition of Cooper Tire.
NOTE 9. FINANCING ARRANGEMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
At September 30, 2021, we had total credit arrangements of $
Notes Payable and Overdrafts, Long Term Debt and Finance Leases due Within One Year and Short Term Financing Arrangements
At September 30, 2021, we had short term committed and uncommitted credit arrangements totaling $
The following table presents amounts due within one year:
|
|
September 30, |
|
|
December 31, |
|
||
(In millions) |
|
2021 |
|
|
2020 |
|
||
Chinese credit facilities |
|
$ |
|
|
$ |
|
||
Other foreign and domestic debt |
|
|
|
|
|
|
||
Notes Payable and Overdrafts |
|
$ |
|
|
$ |
|
||
Weighted average interest rate |
|
|
% |
|
|
% |
||
|
|
|
|
|
|
|
||
Chinese credit facilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|||
Other foreign and domestic debt (including finance leases) |
|
|
|
|
|
|
||
Long Term Debt and Finance Leases due Within One Year |
|
$ |
|
|
$ |
|
||
Weighted average interest rate |
|
|
% |
|
|
% |
||
Total obligations due within one year |
|
$ |
|
|
$ |
|
18
Long Term Debt and Finance Leases and Financing Arrangements
At September 30, 2021, we had long term credit arrangements totaling $
The following table presents long term debt and finance leases, net of unamortized discounts, and interest rates:
|
|
September 30, 2021 |
|
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December 31, 2020 |
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Interest |
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Interest |
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(In millions) |
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Amount |
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Rate |
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Amount |
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Rate |
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Notes: |
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$ |
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Credit Facilities: |
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First lien revolving credit facility due 2026 |
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Second lien term loan facility due 2025 |
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% |
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% |
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European revolving credit facility due 2024 |
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Pan-European accounts receivable facility |
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% |
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% |
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Mexican credit facility |
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% |
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% |
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Chinese credit facilities |
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% |
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% |
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Other foreign and domestic debt(1) |
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% |
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% |
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Unamortized deferred financing fees |
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( |
) |
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( |
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Finance lease obligations(2) |
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Less portion due within one year |
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( |
) |
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( |
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$ |
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$ |
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NOTES
At September 30, 2021, we had $
€400 million 2.75% Senior Notes due 2028 of GEBV
On September 28, 2021, we issued €
We have the option to redeem these notes, in whole or in part, at any time on or after August 15, 2024 at a redemption price of
19
unpaid interest to the redemption date. In addition, prior to August 15, 2024, we may redeem up to
The terms of the indenture for these notes, among other things, limit our ability and the ability of certain of our subsidiaries to (i) incur certain liens, (ii) engage in sale and leaseback transactions, and (iii) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets. These covenants are subject to significant exceptions and qualifications.
€250 million 3.75% Senior Notes due 2023 of GEBV
On October 28, 2021, we repaid in full our €
$550 million 5.25% Senior Notes due April 2031 and $450 million 5.625% Senior Notes due 2033
On April 6, 2021, we issued $
$1.0 billion 5.125% Senior Notes due 2023
On May 6, 2021, we repaid in full our $
$850 million 5% Senior Notes due 2029 and $600 million 5.25% Senior Notes due July 2031
On May 18, 2021, we issued $
$117 million 7.625% Senior Notes due 2027 of Cooper Tire
Following the Cooper Tire acquisition, $
CREDIT FACILITIES
$2.75 billion Amended and Restated First Lien Revolving Credit Facility due 2026
On June 7, 2021, we amended and restated our $
Our amended and restated first lien revolving credit facility is available in the form of loans or letters of credit. Up to $
Our obligations under the facility are guaranteed by most of our wholly-owned U.S. and Canadian subsidiaries, including, as of July 2, 2021, Cooper Tire and certain of its subsidiaries. Our obligations under the facility and our subsidiaries' obligations under the related guarantees are secured by first priority security interests in a variety of collateral.
Availability under the facility is subject to a borrowing base, which is based on (i) eligible accounts receivable and inventory of The Goodyear Tire & Rubber Company and certain of its U.S. and Canadian subsidiaries, (ii) the value of our principal trademarks in an amount not to exceed $
20
borrowing base decline in value, our borrowing base will decrease and the availability under the facility may decrease below $
The facility has customary representations and warranties including, as a condition to borrowing, that all such representations and warranties are true and correct, in all material respects, on the date of the borrowing, including representations as to no material adverse change in our business or financial condition since December 31, 2020. The facility also has customary defaults, including a cross-default to material indebtedness of Goodyear and our subsidiaries.
If Available Cash (as defined in the facility) plus the availability under the facility is greater than $
At September 30, 2021, we had
Amended and Restated Second Lien Term Loan Facility due 2025
Our amended and restated second lien term loan facility matures on March 7, 2025. The term loan bears interest, at our option, at (i)
Our obligations under our second lien term loan facility are guaranteed by most of our wholly-owned U.S. and Canadian subsidiaries, including, as of July 2, 2021, Cooper Tire and certain of its subsidiaries, and are secured by second priority security interests in the same collateral securing the $
At both September 30, 2021 and December 31, 2020, the amount outstanding under this facility was $
€
Our amended and restated European revolving credit facility consists of (i) a €
GEBV and certain of its subsidiaries in the United Kingdom, Luxembourg, France and Germany provide guarantees to support the facility. The German guarantors secure the German tranche on a first-lien basis and the all-borrower tranche on a second-lien basis. GEBV and its other subsidiaries that provide guarantees secure the all-borrower tranche on a first-lien basis and generally do not provide collateral support for the German tranche. The Company and its U.S. and Canadian subsidiaries that guarantee our U.S. senior secured credit facilities described above also provide unsecured guarantees in support of the facility.
The facility has customary representations and warranties including, as a condition to borrowing, that all such representations and warranties are true and correct, in all material respects, on the date of the borrowing, including representations as to no material adverse change in our business or financial condition since December 31, 2018. The facility also has customary defaults, including a cross-default to material indebtedness of Goodyear and our subsidiaries.
At both September 30, 2021 and December 31, 2020, there were
Accounts Receivable Securitization Facilities (On-Balance Sheet)
On October 11, 2021, GEBV and certain other of our European subsidiaries amended and restated the definitive agreements for our pan-European accounts receivable securitization facility, extending the term through 2027. The terms of the facility provide the flexibility to designate annually the maximum amount of funding available under the facility in an amount of not less than €
21
maximum amount for the facility was €
The facility involves the ongoing daily sale of substantially all of the trade accounts receivable of certain GEBV subsidiaries. These subsidiaries retain servicing responsibilities. Utilization under this facility is based on eligible receivable balances.
The funding commitments under the facility will expire upon the earliest to occur of: (a) October 19, 2027, (b) the non-renewal and expiration (without substitution) of all of the back-up liquidity commitments, (c) the early termination of the facility according to its terms (generally upon an Early Amortisation Event (as defined in the facility), which includes, among other things, events similar to the events of default under our senior secured credit facilities; certain tax law changes; or certain changes to law, regulation or accounting standards), or (d) our request for early termination of the facility. The facility’s current back-up liquidity commitments will expire on October 19, 2022.
At September 30, 2021, the amounts available and utilized under this program totaled $
For a description of the collateral securing the credit facilities described above as well as the covenants applicable to them, refer to Note to the Consolidated Financial Statements No. 15, Financing Arrangements and Derivative Financial Instruments, in our 2020 Form 10-K.
Accounts Receivable Factoring Facilities (Off-Balance Sheet)
We have sold certain of our trade receivables under off-balance sheet programs. For these programs, we have concluded that there is generally no risk of loss to us from non-payment of the sold receivables. At September 30, 2021, the gross amount of receivables sold was $
Other Foreign Credit Facilities
A Mexican subsidiary and a U.S. subsidiary have a revolving credit facility in Mexico. At September 30, 2021, the amounts available and utilized under this facility were $
A Chinese subsidiary has several financing arrangements in China. At September 30, 2021 and December 31, 2020, the amounts available under these facilities were $
DERIVATIVE FINANCIAL INSTRUMENTS
We utilize derivative financial instrument contracts and nonderivative instruments to manage interest rate, foreign exchange and commodity price risks. We have established a control environment that includes policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. We do not hold or issue derivative financial instruments for trading purposes.
Foreign Currency Contracts
We enter into foreign currency contracts in order to manage the impact of changes in foreign exchange rates on our consolidated results of operations and future foreign currency-denominated cash flows. These contracts may be used to reduce exposure to currency movements affecting existing foreign currency-denominated assets, liabilities, firm commitments and forecasted transactions resulting primarily from trade purchases and sales, equipment acquisitions, intercompany loans and royalty agreements. Contracts hedging short term trade receivables and payables normally have no hedging designation.
22
The following table presents the fair values for foreign currency hedge contracts that do not meet the criteria to be accounted for as cash flow hedging instruments:
|
|
September 30, |
|
|
December 31, |
|
||
(In millions) |
|
2021 |
|
|
2020 |
|
||
Fair Values — Current asset (liability): |
|
|
|
|
|
|
||
Accounts receivable |
|
$ |
|
|
$ |
|
||
Other current liabilities |
|
|
( |
) |
|
|
( |
) |
At September 30, 2021 and December 31, 2020, these outstanding foreign currency derivatives had notional amounts of $
The following table presents fair values for foreign currency hedge contracts that meet the criteria to be accounted for as cash flow hedging instruments:
|
|
September 30, |
|
|
December 31, |
|
||
(In millions) |
|
2021 |
|
|
2020 |
|
||
Fair Values — Current asset (liability): |
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|
|
|
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|
||
Accounts receivable |
|
$ |
|
|
$ |
|
||
Other current liabilities |
|
|
|
|
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( |
) |
At September 30, 2021 and December 31, 2020, these outstanding foreign currency derivatives had notional amounts of $
We enter into master netting agreements with counterparties. The amounts eligible for offset under the master netting agreements are not material and we have elected a gross presentation of foreign currency contracts in the Consolidated Balance Sheets.
The following table presents the classification of changes in fair values of foreign currency contracts that meet the criteria to be accounted for as cash flow hedging instruments (before tax and minority):
|
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Three Months Ended |
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Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
(In millions) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Amount of gains (losses) deferred to Accumulated Other Comprehensive Loss ("AOCL") |
|
$ |
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$ |
( |
) |
|
$ |
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|
$ |
|
|||
Reclassification adjustment for amounts recognized in CGS |
|
|
|
|
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( |
) |
|
|
( |
) |
|
|
( |
) |
The estimated net amount of deferred gains at September 30, 2021 that are expected to be reclassified to earnings within the next twelve months is $
The counterparties to our foreign currency contracts were considered by us to be substantial and creditworthy financial institutions that were recognized market makers at the time we entered into those contracts. We seek to control our credit exposure to these counterparties by diversifying across multiple counterparties, by setting counterparty credit limits based on long term credit ratings and other indicators of counterparty credit risk such as credit default swap spreads, and by monitoring the financial strength of these counterparties on a regular basis. We also enter into master netting agreements with counterparties when possible. By controlling and monitoring exposure to counterparties in this manner, we believe that we effectively manage the risk of loss due to nonperformance by a counterparty. However, the inability of a counterparty to fulfill its contractual obligations to us could have a material adverse effect on our liquidity, financial position or results of operations in the period in which it occurs.
23
NOTE 10. FAIR VALUE MEASUREMENTS
The following table presents information about assets and liabilities recorded at fair value on the Consolidated Balance Sheets at September 30, 2021 and December 31, 2020:
|
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Total Carrying Value |
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|
Quoted Prices in Active |
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Significant Other |
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Significant |
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(In millions) |
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2021 |
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2020 |
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2021 |
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|
2020 |
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2021 |
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2020 |
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2021 |
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2020 |
|
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Assets: |
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||||||||
Investments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Foreign Exchange Contracts |
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Total Assets at Fair Value |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Liabilities: |
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||||||||
Foreign Exchange Contracts |
|
$ |
|
|
$ |
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|
$ |
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|
$ |
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|
$ |
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|
$ |
|
|
$ |
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|
$ |
|
||||||||
Total Liabilities at Fair Value |
|
$ |
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|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
The following table presents supplemental fair value information about long term fixed rate and variable rate debt, excluding finance leases, at September 30, 2021 and December 31, 2020:
|
|
September 30, |
|
|
December 31, |
|
||
(In millions) |
|
2021 |
|
|
2020 |
|
||
Fixed Rate Debt:(1) |
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|
||
Carrying amount — liability |
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$ |
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$ |
|
||
Fair value — liability |
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||
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||
Variable Rate Debt:(1) |
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|
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Carrying amount — liability |
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$ |
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|
$ |
|
||
Fair value — liability |
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|
Long term debt with fair values of $
NOTE 11. PENSION, SAVINGS AND OTHER POSTRETIREMENT BENEFIT PLANS
We provide employees with defined benefit pension or defined contribution savings plans.
Defined benefit pension cost follows:
|
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U.S. |
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U.S. |
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Three Months Ended |
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Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
(In millions) |
|
2021 |
|
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2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Interest cost |
|
|
|
|
|
|
|
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|
||||
Expected return on plan assets |
|
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( |
) |
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( |
) |
|
|
( |
) |
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( |
) |
Amortization of net losses |
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|
||||
Net periodic pension cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net curtailments/settlements/termination benefits |
|
|
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|
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|
|
|
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|
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|
||||
Total defined benefit pension cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
24
|
|
Non-U.S. |
|
|
Non-U.S. |
|
||||||||||
|
|
Three Months Ended |
|
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Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
(In millions) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Amortization of prior service cost |
|
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|
|
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|
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|
||||
Amortization of net losses |
|
|
|
|
|
|
|
|
|
|
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|
||||
Net periodic pension cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net curtailments/settlements/termination benefits |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total defined benefit pension cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
The net funded (unfunded) status of Cooper Tire's defined benefit pension plans at the Closing Date was $
Service cost is recorded in CGS or SAG. Other components of net periodic pension cost are recorded in Other (Income) Expense. Net curtailments, settlements and termination benefits are recorded in Other (Income) Expense or Rationalizations if related to a rationalization plan.
In the third quarter and first nine months of 2021, pension settlement charges of $
In the third quarter and first nine months of 2020, pension settlement charges of $
We also provide certain U.S. employees and employees at certain non-U.S. subsidiaries with health care benefits or life insurance benefits upon retirement. Other postretirement benefits expense for the three months ended September 30, 2021 and 2020 was $
We expect to contribute $
The expense recognized for our contributions to defined contribution savings plans for the three months ended September 30, 2021 and 2020 was $
NOTE 12. STOCK COMPENSATION PLANS
Our Board of Directors granted
We recognized stock-based compensation expense of $
25
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
We have recorded liabilities totaling $
Since many of the remediation activities related to environmental matters vary substantially in duration and cost from site to site and the associated costs for each vary depending on the mix of unique site characteristics, in some cases we cannot reasonably estimate a range of possible losses. Although it is not possible to estimate with certainty the outcome of all of our environmental matters, management believes that potential losses in excess of current reserves for environmental matters, individually and in the aggregate, will not have a material adverse effect on our financial position, cash flows or results of operations.
Workers’ Compensation
We have recorded liabilities, on a discounted basis, totaling $
General and Product Liability and Other Litigation
We have recorded liabilities totaling $
We have recorded an indemnification asset within Accounts Receivable of $
Asbestos. We are a defendant in numerous lawsuits alleging various asbestos-related personal injuries purported to result from alleged exposure to asbestos in certain products manufactured by us or present in certain of our facilities. Typically, these lawsuits have been brought against multiple defendants in state and federal courts. To date, we have disposed of approximately
26
A summary of recent approximate asbestos claims activity follows. Because claims are often filed and disposed of by settlement or dismissal in large numbers, the amount and timing of filings, settlements and dismissals and the number of open claims during a particular period can fluctuate significantly.
|
|
Nine Months Ended |
|
|
Year Ended |
|
||
(Dollars in millions) |
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||
Pending claims, beginning of period |
|
|
|
|
|
|
||
New claims filed |
|
|
|
|
|
|
||
Claims settled/dismissed |
|
|
( |
) |
|
|
( |
) |
Pending claims, end of period |
|
|
|
|
|
|
||
Payments(1) |
|
$ |
|
|
$ |
|
We periodically, and at least annually, review our existing reserves for pending claims, including a reasonable estimate of the liability associated with unasserted asbestos claims, and estimate our receivables from probable insurance recoveries. We recorded gross liabilities for both asserted and unasserted claims, inclusive of defense costs, totaling $
We maintain certain primary and excess insurance coverage under coverage-in-place agreements, and also have additional excess liability insurance with respect to asbestos liabilities. After consultation with our outside legal counsel and giving consideration to agreements with certain of our insurance carriers, the financial viability and legal obligations of our insurance carriers and other relevant factors, we determine an amount we expect is probable of recovery from such carriers. We record a receivable with respect to such policies when we determine that recovery is probable and we can reasonably estimate the amount of a particular recovery.
We recorded an insurance receivable related to asbestos claims of $
We believe that, at December 31, 2020, we had approximately $
With respect to both asserted and unasserted claims, it is reasonably possible that we may incur a material amount of cost in excess of the current reserve; however, such amounts cannot be reasonably estimated. Coverage under insurance policies is subject to varying characteristics of asbestos claims including, but not limited to, the type of claim (premise vs. product exposure), alleged date of first exposure to our products or premises and disease alleged. Recoveries may also be limited by insurer insolvencies or financial difficulties. Depending upon the nature of these characteristics or events, as well as the resolution of certain legal issues, some portion of the insurance may not be accessible by us.
Amiens Labor Claims
Approximately
27
Other Actions
We are currently a party to various claims, indirect tax assessments and legal proceedings in addition to those noted above. If management believes that a loss arising from these matters is probable and can reasonably be estimated, we record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Based on currently available information, management believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations.
Our recorded liabilities and estimates of reasonably possible losses for the contingent liabilities described above are based on our assessment of potential liability using the information available to us at the time and, where applicable, any past experience and recent and current trends with respect to similar matters. Our contingent liabilities are subject to inherent uncertainties, and unfavorable judicial or administrative decisions could occur which we did not anticipate. Such an unfavorable decision could include monetary damages, fines or other penalties or an injunction prohibiting us from taking certain actions or selling certain products. If such an unfavorable decision were to occur, it could result in a material adverse impact on our financial position and results of operations in the period in which the decision occurs, or in future periods.
Tax Matters
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize income tax benefits to the extent that it is more likely than not that our positions will be sustained when challenged by the taxing authorities. We derecognize income tax benefits when based on new information we determine that it is no longer more likely than not that our position will be sustained. To the extent we prevail in matters for which liabilities have been established, or determine we need to derecognize tax benefits recorded in prior periods, our results of operations and effective tax rate in a given period could be materially affected. An unfavorable tax settlement would require use of our cash, and lead to recognition of expense to the extent the settlement amount exceeds recorded liabilities and, in the case of an income tax settlement, result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction of expense to the extent the settlement amount is lower than recorded liabilities and, in the case of an income tax settlement, would result in a reduction in our effective tax rate in the period of resolution.
While the Company applies consistent transfer pricing policies and practices globally, supports transfer prices through economic studies, seeks advance pricing agreements and joint audits to the extent possible and believes its transfer prices to be appropriate, such transfer prices, and related interpretations of tax laws, are occasionally challenged by various taxing authorities globally. We have received various tax assessments challenging our interpretations of applicable tax laws in various jurisdictions. Although we believe we have complied with applicable tax laws, have strong positions and defenses and have historically been successful in defending such claims, our results of operations could be materially adversely affected in the case we are unsuccessful in the defense of existing or future claims.
Guarantees
We have off-balance sheet financial guarantees and other commitments totaling $
In 2017, we issued a guarantee of approximately PLN
28
at various times through 2022. We are unable to estimate the extent to which our lessors’, customers’, or SRI's assets would be adequate to recover any payments made by us under the related guarantees.
NOTE 14. CAPITAL STOCK
Dividends
In the first nine months of 2020, we paid cash dividends of $
Common Stock Repurchases
We may repurchase shares delivered to us by employees as payment for the exercise price of stock options and the withholding taxes due upon the exercise of stock options or the vesting or payment of stock awards. During the first nine months of 2021, we did
Cooper Tire Acquisition
In connection with the acquisition of Cooper Tire, we issued
29
NOTE 15. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables present changes in AOCL, by component, for the nine months ended September 30, 2021 and 2020, after tax and minority interest.
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(In millions) Income (Loss) |
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Foreign |
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Unrealized Gains (Losses) from Securities |
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Unrecognized |
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Deferred |
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Total |
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Balance at December 31, 2020 |
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$ |
( |
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$ |
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$ |
( |
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$ |
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$ |
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Other comprehensive income (loss) |
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( |
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( |
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Amounts reclassified from accumulated other comprehensive loss |
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( |
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Balance at September 30, 2021 |
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$ |
( |
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$ |
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$ |
( |
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$ |
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$ |
( |
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(In millions) Income (Loss) |
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Foreign |
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Unrecognized |
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Deferred |
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Total |
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Balance at December 31, 2019 |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss) before |
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( |
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Amounts reclassified from accumulated other |
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Balance at September 30, 2020 |
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$ |
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$ |
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$ |
( |
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The following table presents reclassifications out of AOCL:
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Three Months Ended |
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Nine Months Ended |
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2021 |
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2020 |
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2021 |
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2020 |
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(In millions) (Income) Expense |
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Amount Reclassified |
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Amount Reclassified |
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Affected Line Item in the Consolidated |
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Component of AOCL |
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from AOCL |
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from AOCL |
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Statements of Operations |
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Amortization of prior service cost and |
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$ |
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Other (Income) Expense |
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Immediate recognition of prior service cost |
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Other (Income) Expense / Rationalizations |
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Unrecognized net actuarial losses and |
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Tax effect |
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United States and Foreign Taxes |
Net of tax |
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$ |
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$ |
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$ |
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$ |
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Goodyear Net Income (Loss) |
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Deferred derivative (gains) losses, before tax |
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$ |
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$ |
( |
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$ |
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Cost of Goods Sold |
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Tax effect |
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United States and Foreign Taxes |
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Net of tax |
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$ |
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Goodyear Net Income (Loss) |
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Total reclassifications |
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$ |
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$ |
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$ |
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$ |
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Goodyear Net Income (Loss) |
The following table presents the details of comprehensive income (loss) attributable to minority shareholders:
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2020 |
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2021 |
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2020 |
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Net Income (Loss) Attributable to Minority Shareholders |
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$ |
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$ |
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$ |
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$ |
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Other Comprehensive Income (Loss): |
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Foreign currency translation |
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Comprehensive Income (Loss) Attributable to Minority Shareholders |
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$ |
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$ |
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$ |
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$ |
( |
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30
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
All per share amounts are diluted and refer to Goodyear net income (loss).
OVERVIEW
The Goodyear Tire & Rubber Company is one of the world’s leading manufacturers of tires, with one of the most recognizable brand names in the world and operations in most regions of the world. We have a broad global footprint with 55 manufacturing facilities in 23 countries, including the United States. We operate our business through three operating segments representing our regional tire businesses: Americas; Europe, Middle East and Africa (“EMEA”); and Asia Pacific.
Cooper Tire Acquisition
On June 7, 2021 (the "Closing Date"), we completed our previously announced acquisition of Cooper Tire & Rubber Company (“Cooper Tire”) pursuant to the terms of the Agreement and Plan of Merger, dated February 22, 2021 (the “Merger Agreement”), by and among Goodyear, Vulcan Merger Sub Inc., a direct, wholly owned subsidiary of Goodyear (“Merger Sub”), and Cooper Tire. Goodyear acquired Cooper Tire by way of the merger of Merger Sub with and into Cooper Tire (the “Merger”), with Cooper Tire surviving the Merger as a wholly owned subsidiary of Goodyear. In accordance with the terms of the Merger Agreement, upon closing of the transaction, Cooper Tire stockholders received $41.75 per share in cash and a fixed exchange ratio of 0.907 shares of Goodyear common stock per share of Cooper Tire common stock (the "Merger Consideration"). The cash component of the Merger Consideration totaled $2,155 million and the stockholders of Cooper Tire received 46.1 million shares of Goodyear common stock valued at $942 million, based on the closing market price of Goodyear common stock on the last trading day prior to the Closing Date. For further information, refer to Note to the Consolidated Financial Statements No. 2, Cooper Tire Acquisition.
The descriptions of, and references to, the Merger Agreement included in this Quarterly Report on Form 10-Q are qualified in their entirety by the full text of the Merger Agreement, which is attached as Exhibit 2.1 to our Current Report on Form 8-K filed on February 25, 2021.
On May 18, 2021, we issued $850 million in aggregate principal amount of 5% senior notes due 2029 and $600 million in aggregate principal amount of 5.25% senior notes due July 2031. The net proceeds from these notes, together with cash and cash equivalents and borrowings under our first lien revolving credit facility, were used to fund the cash component of the Merger Consideration and related transaction costs.
On June 7, 2021, we amended and restated our $2.0 billion first lien revolving credit facility. Changes to the facility include extending the maturity to June 8, 2026 and increasing the amount of the facility to $2.75 billion. The interest rate for loans under the facility decreased by 50 basis points to LIBOR plus 125 basis points.
The results of Cooper Tire’s operations have been included in our consolidated financial statements since the Closing Date.
Transaction and other costs related to the acquisition of Cooper Tire totaled $55 million during the nine months ended September 30, 2021, of which $49 million ($41 million after-tax and minority) of these costs were included in Other (Income) Expense and $6 million ($4 million after-tax and minority) were included in Cost of Goods Sold ("CGS") and Selling, General and Administrative Expense ("SAG"). There were no transaction costs related to the acquisition of Cooper Tire during the third quarter of 2021.
The Merger Consideration was allocated on a provisional basis to the estimated fair value of the assets acquired and liabilities assumed from Cooper Tire as of the Closing Date. Certain of these fair value estimates, including those related to Property, Plant and Equipment, Goodwill and Intangible Assets, are preliminary and subject to change as management completes further analyses and studies. For further information, refer to Note to the Consolidated Financial Statements No. 2, Cooper Tire Acquisition, and "Critical Accounting Policies".
Results of Operations
During the third quarter and first nine months of 2021, our operating results significantly improved compared to 2020, as the overall negative impacts of the COVID-19 pandemic on tire industry demand, auto production, miles driven and our tire volume moderated and continued to improve, compared to the severe global economic disruption experienced throughout much of 2020, particularly in the first half of the year.
Nonetheless, our results for the third quarter and first nine months of 2021 continued to be negatively influenced by the direct and indirect macroeconomic effects of the ongoing pandemic. Our global businesses are experiencing varying stages of recovery, as national and local efforts in many countries to contain the spread of COVID-19, including renewed stay-at-home orders, continue to impact economic conditions. Increased demand for consumer products and supply chain disruptions as a result of the pandemic and other global events, including port congestion and container shortages, has led to inflationary cost pressures,
31
including higher costs for certain raw materials, higher transportation costs and higher energy costs, as well as shortages of certain automobile parts, such as semiconductors, which have affected OE manufacturers’ ability to produce consumer and commercial vehicles consistently.
Most of our global tire manufacturing facilities are operating at or near full capacity to meet current demand, as well as to increase the level of our finished goods inventory as we continue to restock in order to fulfill anticipated near-term demand. However, like many companies, we are experiencing shortages of qualified and reliable workers, particularly in the U.S. Absenteeism, a tight labor supply and elevated turnover are resulting in manufacturing inefficiencies, increased training costs and higher wages. To address this issue, we have accelerated hiring, increased training capacity and started to adjust future investment plans to consider not just the cost, but also the availability of qualified workers. Our decisions to change production levels in the future will be based on an evaluation of market demand signals and inventory and supply levels, as well as the availability of sufficient qualified labor and our ability to continue to safeguard the health of our associates.
We continue to monitor the pandemic on a local basis, taking actions to protect the health and wellbeing of our associates, customers and communities, which remain our top priority. We also continue to follow guidance from the Centers for Disease Control and Prevention, which include preventative measures at our facilities as appropriate, including limiting visitor access and business travel, remote and hybrid working, masking and social distancing practices, and frequent disinfection.
In addition, during the first quarter of 2021, a severe winter storm in the U.S. caused temporary shutdowns of three of our chemical facilities, limited production at three tire manufacturing facilities, and impacted more than 170 consumer and commercial retail locations. We estimate that the negative impact on our earnings, primarily in Americas, for the three and nine months ended September 30, 2021 was approximately $2 million ($2 million after-tax and minority) and $52 million ($42 million after-tax and minority), respectively.
Our results for the third quarter of 2021 include a 31.6% increase in tire unit shipments compared to 2020, reflecting the addition of Cooper Tire's operating results, as well as the pandemic-related recovery noted above. Year-over-year cost savings, including the impact of temporary fixed cost reductions in 2020, were unfavorable by $65 million.
Net sales in the third quarter of 2021 were $4,934 million, compared to $3,465 million in the third quarter of 2020. Net sales increased in the third quarter of 2021 primarily due to the addition of Cooper Tire's net sales of $907 million, improvements in price and product mix, primarily in Americas and EMEA, higher sales in other tire-related businesses, driven by increased third-party chemical sales in Americas and increased global aviation tire sales, and higher tire volume, primarily in Americas and EMEA.
In the third quarter of 2021, Goodyear net income was $132 million, or $0.46 per share, compared to a net loss of $2 million, or $0.01 per share, in the third quarter of 2020. The favorable change in Goodyear net income (loss) was primarily due to higher segment operating income, partially offset by higher income tax expense.
Our total segment operating income for the third quarter of 2021 was $372 million, compared to $162 million in the third quarter of 2020. The $210 million increase was primarily due to improvements in price and product mix of $332 million, primarily in Americas and EMEA, the addition of Cooper Tire’s operating income of $48 million, lower conversion costs of $26 million, primarily reflecting favorable overhead absorption as a result of higher global factory utilization more than offsetting the nonrecurrence of pandemic-related temporary cost reductions in 2020, inflationary cost pressures and labor-related manufacturing inefficiencies, higher earnings in other tire-related businesses of $23 million, driven by increased global aviation tire sales and increased retail sales in Americas, and higher tire volume of $22 million. These improvements in segment operating income were partially offset by higher raw material costs of $161 million and higher SAG of $49 million.
Net sales in the first nine months of 2021 were $12,424 million, compared to $8,665 million in the first nine months of 2020. Net sales increased in the first nine months of 2021 primarily due to higher global tire volume, the addition of Cooper Tire's net sales since the Closing Date of $1,163 million, higher sales in other tire-related businesses, driven by increased third-party chemical, retread and retail sales in Americas, increased Fleet Solutions sales in EMEA and increased global aviation tire sales, improvements in price and product mix, and favorable foreign currency translation, primarily in EMEA and Asia Pacific.
In the first nine months of 2021, Goodyear net income was $211 million, or $0.82 per share, compared to a net loss of $1,317 million, or $5.62 per share, in the first nine months of 2020. The favorable change in Goodyear net income (loss) was primarily due to higher segment operating income, a decrease in goodwill and other asset impairment charges and lower rationalization expense, partially offset by higher income tax expense and higher interest expense.
Our total segment operating income for the first nine months of 2021 was $897 million, compared to an operating loss of $316 million in the first nine months of 2020. The $1,213 million favorable change was primarily due to improvements in price and product mix of $583 million, primarily in Americas and EMEA, lower conversion costs of $384 million, primarily due to favorable overhead absorption as a result of higher global factory utilization, higher global tire volume of $357 million, higher earnings in other tire-related businesses of $115 million, driven by increased third-party chemical and retail sales in Americas,
32
as well as increased global aviation sales, and a favorable indirect tax ruling in Brazil of $69 million. These improvements in segment operating income were partially offset by higher raw material costs of $176 million and higher SAG of $130 million. Total segment operating income for the first nine months of 2021 includes operating income of $32 million related to Cooper Tire. Refer to "Results of Operations — Segment Information" for additional information.
Liquidity
At September 30, 2021, we had $1,187 million of cash and cash equivalents as well as $4,195 million of unused availability under our various credit agreements, compared to $1,539 million and $3,881 million, respectively, at December 31, 2020. Cash and cash equivalents decreased by $352 million from December 31, 2020 primarily due to payment of the $1,856 million cash component of the Merger Consideration, net of cash and restricted cash acquired, and capital expenditures of $666 million, partially offset by net borrowings of $2,257 million, including $1,450 million of new senior notes used to fund the Cooper Tire acquisition. In addition, cash used for operating activities was $2 million in the first nine months of 2021. Cash used for operating activities reflects cash used for working capital of $1,064 million and rationalization payments of $162 million, largely offset by net income for the period of $223 million, which includes non-cash charges for depreciation and amortization of $645 million and an inventory fair value step-up adjustment of $110 million related to the Cooper Tire acquisition. Refer to "Liquidity and Capital Resources" for additional information.
On April 6, 2021, we completed a public offering of $550 million in aggregate principal amount of 5.25% senior notes due April 2031 and $450 million in aggregate principal amount of 5.625% senior notes due 2033. Net proceeds from these offerings, together with cash and cash equivalents, were used to redeem our $1.0 billion 5.125% senior notes due 2023 on May 6, 2021 at a price of 100% of the principal amount, plus accrued and unpaid interest to the redemption date.
On September 28, 2021, we issued €400 million in aggregate principal amount of Goodyear Europe B.V. (“GEBV”) 2.75% senior notes due 2028. A portion of the net proceeds from these notes were used to redeem our existing €250 million 3.75% senior notes due 2023 on October 28, 2021.
Outlook
While markets have recovered considerably, we continue to face uncertainty in many countries around the globe as governments continue to implement measures to slow the pandemic that have the potential to reduce economic activity and mobility. In addition, OE manufacturers have continued to be affected by shortages of components and materials, which have limited automobile production globally. Also, our ability to ship products, particularly to locations where we do not have manufacturing, will continue to be impacted by ongoing disruptions in global logistics. In this environment, we expect volume in the fourth quarter of 2021 to be below the fourth quarter of 2019, excluding the benefit of volume added from the Cooper Tire acquisition. However, with the added volume of Cooper Tire, volume trends in the fourth quarter of 2021 are expected to be similar to the third quarter of 2021, when compared to 2019.
For the full year of 2021, we expect our raw material costs to increase $450 million to $475 million, including the benefit of raw material cost saving measures. This expectation excludes raw material cost increases related to Cooper Tire, which we acquired on June 7, 2021, as the incremental impact of Cooper Tire on our results will be reported separately through the second quarter of 2022. Natural and synthetic rubber prices and other commodity prices historically have been volatile, and this estimate could change significantly based on fluctuations in the cost of these and other key raw materials and foreign exchange rates. We are continuing to focus on price and product mix, to substitute lower cost materials where possible, to work to identify additional substitution opportunities, to reduce the amount of material required in each tire, and to pursue alternative raw materials. In the fourth quarter of 2021, we expect the benefits of price and product mix will continue to exceed the impact of higher raw material costs, which are anticipated to approach $300 million.
In addition to the impact of higher raw material costs, we expect continued inflationary pressures from incremental wage, benefit, transportation and energy costs to negatively impact our fourth quarter 2021 results in excess of our ability to offset these costs with cost savings measures. We also expect higher manufacturing costs to negatively impact our fourth quarter 2021 results due to our facilities in the U.S. being affected by higher costs related to higher turnover and the need to train newly hired staff. Our manufacturing facilities in China are being affected by rolling blackouts. As a result, we anticipate the need to focus on price and product mix to manage the impact of these cost pressures in addition to the impact of higher raw material costs.
During 2021, including the impact of Cooper Tire, we expect to reinvest $300 million to $500 million in working capital. We expect to experience normal seasonality in working capital during the fourth quarter of 2021, resulting in positive cash flows from operating activities in excess of capital expenditures.
Our results for the fourth quarter of 2021 will also be impacted by the amortization of purchase accounting adjustments of approximately $10 million based on our preliminary allocation of the Merger Consideration.
33
Refer to “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”) and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 for a discussion of the factors that may impact our business, results of operations, financial condition or liquidity and “Forward-Looking Information — Safe Harbor Statement” in this Quarterly Report on Form 10-Q for a discussion of our use of forward-looking statements.
RESULTS OF OPERATIONS
CONSOLIDATED
Three months ended September 30, 2021 and 2020
Net sales in the third quarter of 2021 were $4,934 million, increasing $1,469 million, or 42.4%, from $3,465 million in the third quarter of 2020. Goodyear net income was $132 million, or $0.46 per share, in the third quarter of 2021, compared to a net loss of $2 million, or $0.01 per share, in the third quarter of 2020.
Net sales increased in the third quarter of 2021 primarily due to the addition of Cooper Tire's net sales of $907 million, improvements in price and product mix of $297 million, primarily in Americas and EMEA, higher sales in other tire-related businesses of $128 million, driven by increased third-party chemical sales in Americas and increased global aviation tire sales, higher tire volume of $95 million, primarily in Americas and EMEA, and favorable foreign currency translation of $40 million.
Worldwide tire unit sales in the third quarter of 2021 were 48.2 million units, increasing 11.6 million units, or 31.6%, from 36.6 million units in the third quarter of 2020. Replacement tire volume increased globally by 12.1 million units, or 44.2%. OE tire volume decreased by 0.5 million units, or 7.3%, reflecting decreases in Americas and EMEA, which were partially offset by an increase in Asia Pacific.
CGS in the third quarter of 2021 was $3,894 million, increasing $1,119 million, or 40.3%, from $2,775 million in the third quarter of 2020. CGS increased primarily due to the addition of Cooper Tire's CGS of $771 million, which includes $72 million ($53 million after-tax and minority) of amortization related to a fair value adjustment to the Closing Date inventory that was acquired by Goodyear, higher raw material costs of $161 million, higher costs in other tire-related businesses of $105 million, driven by increased third-party chemical sales in Americas, higher tire volume of $73 million, primarily in Americas and EMEA, and foreign currency translation of $30 million. These increases were partially offset by lower costs related to product mix of $35 million, driven by Americas, and lower conversion costs of $26 million, primarily reflecting favorable overhead absorption as a result of higher global factory utilization more than offsetting the nonrecurrence of pandemic-related temporary cost reductions in 2020, inflationary cost pressures and labor-related manufacturing inefficiencies.
CGS in the third quarter of 2021 and 2020 included pension expense of $6 million and $4 million, respectively. CGS in the third quarter of 2020 included an unfavorable indirect tax settlement in Mexico of $6 million ($5 million after-tax and minority). CGS in the third quarter of 2020 also included asset write-offs of $4 million ($3 million after-tax and minority), primarily related to the permanent closure of our Gadsden, Alabama manufacturing facility (“Gadsden"). CGS in the third quarter of 2021 included incremental savings from rationalization plans of $2 million, compared to $38 million in 2020. CGS was 78.9% of sales in the third quarter of 2021, compared to 80.1% in the third quarter of 2020.
SAG in the third quarter of 2021 was $727 million, increasing $172 million, or 31.0%, from $555 million in the third quarter of 2020. SAG increased primarily due to the addition of Cooper Tire's SAG of $98 million, higher wages and benefits of $26 million, higher advertising expense of $9 million, higher third-party contracting costs of $8 million, and foreign currency translation of $7 million.
SAG in the third quarter of 2021 and 2020 included pension expense of $4 million and $5 million, respectively. SAG in both the third quarter of 2021 and 2020 included incremental savings from rationalization plans of $2 million. SAG was 14.7% of sales in the third quarter of 2021, compared to 16.0% in the third quarter of 2020.
We recorded net rationalization charges of $13 million ($11 million after-tax and minority) in the third quarter of 2021 and $25 million ($20 million after-tax and minority) in the third quarter of 2020. Net rationalization charges in the third quarter of 2021 primarily related to the permanent closure of Gadsden and the plan to modernize two of our tire manufacturing facilities in Germany. Net rationalization charges in the third quarter of 2020 primarily related to the permanent closure of Gadsden and additional termination benefits for associates at the closed Amiens, France manufacturing facility. For further information, refer to Note to the Consolidated Financial Statements No. 4, Costs Associated with Rationalization Programs.
Interest expense in the third quarter of 2021 was $104 million, increasing $16 million, or 18.2%, from $88 million in the third quarter of 2020. The average interest rate was 5.11% in the third quarter of 2021 compared to 5.17% in the third quarter of 2020. The average debt balance was $8,137 million in the third quarter of 2021 compared to $6,815 million in the third quarter of 2020.
34
Other (Income) Expense in the third quarter of 2021 was $9 million of expense, compared to $32 million of expense in the third quarter of 2020. Other (Income) Expense for the three months ended September 30, 2021 includes pension settlement charges of $11 million ($8 million after-tax and minority) and net gains (losses) on asset and other sales of $10 million ($7 million after-tax and minority) and $(3) million ($(2) million after-tax and minority), respectively, primarily related to the sale of land in Hanau, Germany. Other (Income) Expense in the third quarter of 2020 included pension settlement charges of $16 million ($12 million after-tax and minority). The remainder of the change in Other (Income) Expense between the third quarter of 2021 and 2020 was driven by a decrease in the other components of non-service related pension and other postretirement benefits cost, primarily as a result of lower interest cost from decreases in discount rates.
For the third quarter of 2021, we recorded income tax expense of $53 million on income before income taxes of $187 million. In the third quarter of 2020, we recorded a tax benefit of $13 million on a loss before income taxes of $10 million. The income tax benefit for the three months ended September 30, 2020 includes discrete tax benefits of $14 million ($14 million after minority interest), primarily to adjust our deferred tax assets in England for an enacted change in the tax rate during 2020. For further information regarding income taxes, refer to Note to the Consolidated Financial Statements No. 6, Income Taxes.
Minority shareholders’ net income in the third quarter of 2021 was $2 million, compared to $5 million in 2020.
Nine Months Ended September 30, 2021 and 2020
Net sales in the first nine months of 2021 were $12,424 million, increasing $3,759 million, or 43.4%, from $8,665 million in the first nine months of 2020. Goodyear net income was $211 million, or $0.82 per share, in the first nine months of 2021, compared to a net loss of $1,317 million, or $5.62 per share, in the first nine months of 2020.
Net sales increased in the first nine months of 2021, primarily due to higher global tire volume of $1,673 million, the addition of Cooper Tire's net sales of $1,163 million, higher sales in other tire-related businesses of $381 million, driven by increased third-party chemical and retail sales in Americas and higher retread sales in Americas and EMEA, improvements in price and product mix of $346 million, and favorable foreign currency translation of $194 million, primarily in EMEA and Asia Pacific.
Worldwide tire unit sales in the first nine months of 2021 were 120.7 million units, increasing 32.4 million units, or 36.7%, from 88.3 million units in the first nine months of 2020. Replacement tire volume increased globally by 28.2 million units, or 42.2%. OE tire volume increased globally by 4.2 million units, or 19.5%.
CGS in the first nine months of 2021 was $9,723 million, increasing $2,180 million, or 28.9%, from $7,543 million in the first nine months of 2020. CGS increased primarily due to higher global tire volume of $1,316 million, the addition of Cooper Tire's CGS of $1,006 million, which includes $110 million ($82 million after-tax and minority) of amortization related to a fair value adjustment to the Closing Date inventory that was acquired by Goodyear, higher costs in other tire-related businesses of $266 million, driven by higher third-party chemical and retread sales in Americas, higher raw material costs of $176 million, and foreign currency translation of $143 million, primarily in EMEA and Asia Pacific. These increases were partially offset by lower conversion costs of $384 million, primarily due to favorable overhead absorption as a result of higher global factory utilization and savings from rationalization plans, lower costs related to product mix of $237 million, primarily in Americas, a favorable indirect tax ruling in Brazil of $69 million, of which $66 million ($43 million after-tax and minority) related to prior years, and $26 million of pandemic-related work in process inventory write-offs in 2020, primarily in Americas and EMEA.
CGS in the first nine months of 2021 and 2020 included pension expense of $15 million and $12 million, respectively. CGS in the first nine months of 2020 included accelerated depreciation of $94 million ($72 million after-tax and minority), primarily related to the permanent closure of Gadsden. CGS in the first nine months of 2020 also included an unfavorable indirect tax settlement in Mexico of $6 million ($5 million after-tax and minority). CGS in the first nine months of 2021 included incremental savings from rationalization plans of $60 million, primarily in Americas, compared to $66 million in 2020. CGS was 78.3% of sales in the first nine months of 2021, compared to 87.1% in the first nine months of 2020.
SAG in the first nine months of 2021 was $1,949 million, increasing $362 million, or 22.8%, from $1,587 million in the first nine months of 2020. SAG increased primarily due to the addition of Cooper Tire's SAG of $140 million, higher wages and benefits of $104 million and higher advertising expense of $34 million, both relating to pandemic-related actions taken in 2020, and foreign currency translation of $48 million, primarily in EMEA and Asia Pacific.
SAG in the first nine months of 2021 and 2020 included pension expense of $13 million for each period. SAG in the first nine months of 2021 included incremental savings from rationalization plans of $7 million, compared to $4 million in 2020. SAG was 15.7% of sales in the first nine months of 2021, compared to 18.3% in the first nine months of 2020.
In the first nine months of 2020, we recorded a non-cash impairment charge of $182 million ($178 million after-tax and minority) related to goodwill of our EMEA reporting unit and a $148 million non-cash impairment charge ($113 million after-tax and minority) related to our investment in TireHub.
35
We recorded net rationalization charges of $81 million ($72 million after-tax and minority) in the first nine months of 2021 and $133 million ($104 million after-tax and minority) in the first nine months of 2020. Net rationalization charges in the first nine months of 2021 primarily related to the plan to modernize two of our manufacturing facilities in Germany, the permanent closure of Gadsden, and a plan to reduce SAG headcount in EMEA. Net rationalization charges in the first nine months of 2020 primarily related to the permanent closure of Gadsden and additional termination benefits for associates at the closed Amiens, France manufacturing facility. For further information, refer to Note to the Consolidated Financial Statements No. 4, Costs Associated with Rationalization Programs.
Interest expense in the first nine months of 2021 was $280 million, increasing $34 million, or 13.8%, from $246 million in the first nine months of 2020. The average interest rate was 5.28% in the first nine months of 2021 compared to 5.00% in the first nine months of 2020. The average debt balance was $7,073 million in the first nine months of 2021 compared to $6,554 million in the first nine months of 2020. Interest expense in the first nine months of 2021 included a $5 million ($4 million after-tax and minority) charge related to the redemption of our existing $1.0 billion 5.125% senior notes due 2023.
Other (Income) Expense in the first nine months of 2021 was $73 million of expense, compared to $93 million of expense in the first nine months of 2020. Other (Income) Expense for the nine months ended September 30, 2021 includes $48 million ($32 million after-tax and minority) of interest income related to the favorable indirect tax ruling in Brazil, net gains (losses) on asset and other sales of $10 million ($7 million after-tax and minority) and $(3) million ($(2) million after-tax and minority), respectively, primarily related to the sale of land in Hanau, Germany, $49 million of transaction and other costs related to the acquisition of Cooper Tire, and pension settlement charges of $30 million ($22 million after-tax and minority). Other (Income) Expense in the first nine months of 2021 also includes an out of period adjustment of $7 million ($7 million after-tax and minority) of expense related to foreign currency exchange in Americas. Other (Income) Expense in the first nine months of 2020 included pension settlement charges of $19 million ($14 million after-tax and minority) and net losses on asset sales of $2 million ($2 million after-tax and minority). The remainder of the change in Other (Income) Expense between the first nine months of 2021 and 2020 was driven by a decrease in the other components of non-service related pension and other postretirement benefits cost, primarily as a result of lower interest cost from decreases in discount rates.
For the first nine months of 2021, we recorded income tax expense of $95 million on income before income taxes of $318 million. Income tax expense for the nine months ended September 30, 2021 includes a net discrete benefit of $30 million ($30 million after minority interest), primarily related to adjusting our deferred tax assets in England for a recently enacted increase in the tax rate, partially offset by net discrete charges for various items, including the settlement of a tax audit in Poland.
In the first nine months of 2020, we recorded income tax expense of $50 million on a loss before income taxes of $1,267 million. Income tax expense for the nine months ended September 30, 2020 includes net discrete charges of $278 million ($279 million after minority interest), including the establishment of a $295 million valuation allowance on certain deferred tax assets for foreign tax credits during the first quarter of 2020.
We record taxes based on overall estimated annual effective tax rates. The difference between our effective tax rate and the U.S. statutory rate of 21% for the nine months ended September 30, 2021 primarily relates to the tax on the favorable indirect tax ruling in Brazil during the second quarter, losses in foreign jurisdictions in which no tax benefits are recorded, and the discrete items noted above. The difference between our effective tax rate and the U.S. statutory rate of 21% for the nine months ended September 30, 2020 primarily relates to the discrete items noted above, a first quarter non-cash goodwill impairment charge of $182 million, and forecasted losses for the full year in foreign jurisdictions in which no tax benefits are recorded, which were accentuated during 2020 by business interruptions resulting from the COVID-19 pandemic.
At September 30, 2021 and December 31, 2020, we had approximately $800 million and $1.2 billion of U.S. federal, state and local net deferred tax assets, respectively, net of valuation allowances totaling $368 million primarily for foreign tax credits with limited lives. At September 30, 2021, approximately $500 million of these U.S. net deferred tax assets have unlimited lives and approximately $300 million have limited lives and expire between 2025 and 2041. The decrease in our U.S. net deferred tax assets from December 31, 2020 primarily reflects the establishment of deferred tax liabilities for the tax impacts of certain fair value and other purchase accounting adjustments related to the Cooper Tire acquisition. In the U.S., we have a cumulative loss for the three-year period ending September 30, 2021. However, as the three-year cumulative loss in the U.S. is driven by business disruptions created by the COVID-19 pandemic, primarily in 2020, we also considered other objectively verifiable information in assessing our ability to utilize our net deferred tax assets, including recent favorable recovery trends in the tire industry and our tire volume as well as expected continued improvement. In addition, the Cooper Tire acquisition is expected to generate incremental domestic earnings and provide opportunities for cost and other operating synergies to further improve our U.S. profitability. These favorable trends, together with tax planning strategies, may provide sufficient objectively verifiable information to reverse a portion or all of our U.S. valuation allowance for foreign tax credits within the next twelve months.
At September 30, 2021 and December 31, 2020, our U.S. net deferred tax assets included $160 million and $133 million, respectively, of foreign tax credits with limited lives, net of valuation allowances of $328 million, generated primarily from the
36
receipt of foreign dividends. Our earnings and forecasts of future profitability, taking into consideration recent trends, along with three significant sources of foreign income provide us sufficient positive evidence that we will be able to utilize our remaining foreign tax credits that expire between 2025 and 2031. Our sources of foreign income are (1) 100% of our domestic profitability can be re-characterized as foreign source income under current U.S. tax law to the extent domestic losses have offset foreign source income in prior years, (2) annual net foreign source income, exclusive of dividends, primarily from royalties, and (3) tax planning strategies, including capitalizing research and development costs, accelerating income on cross border transactions, including sales of inventory or raw materials to our subsidiaries, and reducing U.S. interest expense by, for example, reducing intercompany loans through repatriating current year earnings of foreign subsidiaries, all of which would increase our domestic profitability.
We consider our current forecasts of future profitability in assessing our ability to realize our deferred tax assets, including our foreign tax credits. As noted above, these forecasts include the impact of recent trends, including various macroeconomic factors such as the impact of the COVID-19 pandemic, on our profitability, as well as the impact of tax planning strategies. Macroeconomic factors, including the impact of the COVID-19 pandemic, possess a high degree of volatility and can significantly impact our profitability. As such, there is a risk that future earnings will not be sufficient to fully utilize our U.S. net deferred tax assets, including our remaining foreign tax credits. However, we believe our forecasts of future profitability along with the three significant sources of foreign income described above provide us sufficient positive, objectively verifiable evidence to conclude that it is more likely than not that, at September 30, 2021, our U.S. net deferred tax assets, including our foreign tax credits, net of valuation allowances, will be fully utilized.
At September 30, 2021 and December 31, 2020, we had approximately $1.3 billion of foreign deferred tax assets and valuation allowances of $1.0 billion and $1.1 billion, respectively. Our losses in various foreign taxing jurisdictions in recent periods represented sufficient negative evidence to require us to maintain a full valuation allowance against certain of these net foreign deferred tax assets. Most notably, in Luxembourg, we maintain a valuation allowance of approximately $897 million on all of our net deferred tax assets. Each reporting period, we assess available positive and negative evidence and estimate if sufficient future taxable income will be generated to utilize these existing deferred tax assets. We do not believe that sufficient positive evidence required to release valuation allowances having a significant impact on our financial position or results of operations will exist within the next twelve months.
For further information regarding income taxes and the realizability of our deferred tax assets, including our foreign tax credits, refer to Note to the Consolidated Financial Statements No. 6, Income Taxes.
Minority shareholders’ net income in the first nine months of 2021 was $12 million, compared to break-even in 2020.
SEGMENT INFORMATION
Segment information reflects our strategic business units (“SBUs”), which are organized to meet customer requirements and global competition and are segmented on a regional basis.
Results of operations are measured based on net sales to unaffiliated customers and segment operating income. Each segment exports tires to other segments. The financial results of each segment exclude sales of tires exported to other segments, but include operating income derived from such transactions. Segment operating income is computed as follows: Net Sales less CGS (excluding asset write-off and accelerated depreciation charges) and SAG (including certain allocated corporate administrative expenses). Segment operating income also includes certain royalties and equity in earnings of most affiliates. Segment operating income does not include net rationalization charges (credits), asset sales, goodwill and other asset impairment charges, and certain other items.
Management believes that total segment operating income is useful because it represents the aggregate value of income created by our SBUs and excludes items not directly related to the SBUs for performance evaluation purposes. Total segment operating income is the sum of the individual SBUs’ segment operating income. Refer to Note to the Consolidated Financial Statements No. 8, Business Segments, for further information and for a reconciliation of total segment operating income to Income (Loss) before Income Taxes.
Total segment operating income for the third quarter of 2021 was $372 million, increasing $210 million from $162 million in the third quarter of 2020. Total segment operating margin (segment operating income divided by segment sales) in the third quarter of 2021 was 7.5% compared to 4.7% in the third quarter of 2020. Total segment operating income for the first nine months of 2021 was $897 million, a favorable change of $1,213 million from total segment operating loss of $316 million in the first nine months of 2020. Total segment operating margin in the first nine months of 2021 was 7.2% compared to (3.6)% in the first nine months of 2020.
37
Americas
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||||||||||
(In millions) |
|
2021 |
|
|
2020 |
|
|
Change |
|
|
Percent |
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|
Percent |
|
||||||||
Tire Units |
|
|
25.9 |
|
|
|
16.2 |
|
|
|
9.7 |
|
|
|
59.3 |
% |
|
|
60.4 |
|
|
|
39.2 |
|
|
|
21.2 |
|
|
|
54.1 |
% |
Net Sales |
|
$ |
2,967 |
|
|
$ |
1,823 |
|
|
$ |
1,144 |
|
|
|
62.8 |
% |
|
$ |
7,010 |
|
|
$ |
4,630 |
|
|
$ |
2,380 |
|
|
|
51.4 |
% |
Operating Income (Loss) |
|
|
259 |
|
|
|
106 |
|
|
|
153 |
|
|
|
144.3 |
% |
|
|
606 |
|
|
|
(181 |
) |
|
|
787 |
|
|
NM |
|
|
Operating Margin |
|
|
8.7 |
% |
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
8.6 |
% |
|
|
(3.9 |
)% |
|
|
|
|
|
|
Three months ended September 30, 2021 and 2020
Americas unit sales in the third quarter of 2021 increased 9.7 million units, or 59.3%, to 25.9 million units. Replacement tire volume increased 10.2 million units, or 82.7%, primarily due to the addition of Cooper Tire's units and an increase in our consumer business in the United States, driven by continued recovery from the economic impacts of the COVID-19 pandemic. OE tire volume decreased 0.5 million units, or 15.8%, primarily in our consumer business in the United States. Consumer OE tire volume continued to be negatively affected by impacts to vehicle production driven by global supply chain disruptions, including shortages of key manufacturing components, such as semiconductors.
Net sales in the third quarter of 2021 were $2,967 million, increasing $1,144 million, or 62.8%, from $1,823 million in the third quarter of 2020. The increase in net sales was driven by the addition of Cooper Tire’s net sales of $795 million, improvements in price and product mix of $137 million, higher sales in other tire-related businesses of $105 million, primarily due to an increase in third-party sales of chemical products and higher retread and aviation sales, higher tire volume of $87 million, and favorable foreign currency translation of $21 million, primarily related to the strengthening of the Brazilian real, Canadian dollar and Mexican peso.
Operating income in the third quarter of 2021 was $259 million, increasing $153 million, or 144.3%, from $106 million in the third quarter of 2020. The increase in operating income was due to improvements in price and product mix of $186 million, which more than offset higher raw material costs of $77 million, the addition of Cooper Tire’s operating income of $44 million, higher tire volume of $20 million, higher earnings in other tire-related businesses of $13 million, primarily due to higher retail and aviation sales and an increase in third-party sales of chemical products, and lower conversion costs of $11 million, primarily reflecting favorable overhead absorption as a result of higher factory utilization more than offsetting the nonrecurrence of pandemic-related temporary cost reductions in 2020, inflationary cost pressures and labor-related manufacturing inefficiencies. These increases were partially offset by higher SAG of $25 million, primarily related to higher wages and benefits, inflation and warehousing costs, and increased transportation costs of $22 million. SAG and conversion costs include incremental savings from rationalization plans of $2 million and $1 million, respectively. Price and product mix includes TireHub equity income of $1 million in 2021, while 2020 includes losses of $4 million. We estimate that the national strike in Colombia and the severe winter storm in the U.S. that occurred in the first half of 2021 negatively impacted Americas operating income for the third quarter of 2021 by approximately $5 million ($5 million after-tax and minority) and $1 million, respectively.
Operating income in the third quarter of 2021 excluded rationalization charges of $11 million, primarily related to the permanent closure of Gadsden. Operating income in the third quarter of 2020 excluded rationalization charges of $9 million and asset write-offs of $4 million, primarily related to Gadsden.
Nine Months Ended September 30, 2021 and 2020
Americas unit sales in the first nine months of 2021 increased 21.2 million units, or 54.1%, to 60.4 million units. Replacement tire volume increased 20.0 million units, or 65.8%, and OE tire volume increased 1.2 million units, or 13.5%, primarily due to the addition of Cooper Tire's units and an increase in our consumer business in the United States, Brazil and Mexico, driven by continued recovery from the economic impacts of the COVID-19 pandemic. Consumer OE tire volume continued to be negatively affected by impacts to vehicle production driven by global supply chain disruptions, including shortages of key manufacturing components, such as semiconductors.
Net sales in the first nine months of 2021 were $7,010 million, increasing $2,380 million, or 51.4%, from $4,630 million in the first nine months of 2020. The increase in net sales was driven by the addition of Cooper Tire’s net sales of $1,018 million, higher tire volume of $966 million, higher sales in other tire-related businesses of $307 million, primarily due to an increase in third-party sales of chemical products and higher retail, retread and aviation sales, and favorable price and product mix of $87 million. We estimate that the severe winter storm in the U.S. negatively impacted Americas net sales for the first nine months of 2021 by approximately $35 million.
38
Operating income in the first nine months of 2021 was $606 million, a change of $787 million, from an operating loss of $181 million in the first nine months of 2020. The increase in operating income was due to improvements in price and product mix of $356 million, which more than offset higher raw material costs of $99 million, lower conversion costs of $218 million, primarily due to favorable overhead absorption as a result of higher factory utilization, higher tire volume of $174 million, higher earnings in other tire-related businesses of $90 million, primarily due to an increase in third-party sales of chemical products and higher retail and aviation sales, the favorable indirect tax ruling in Brazil of $69 million, Cooper Tire's operating income of $30 million, and $13 million of pandemic-related work in process inventory write-offs in 2020. These increases were partially offset by higher SAG of $54 million, primarily due to higher wages and benefits relating to pandemic-related actions taken in 2020, inflation and higher warehousing costs, and the net impact of out of period adjustments totaling $6 million ($6 million after-tax and minority) of expense primarily related to inventory and accrued freight charges. Conversion costs and SAG include incremental savings from rationalization plans of $55 million and $6 million, respectively, primarily related to Gadsden. Price and product mix includes TireHub equity income of $2 million in the first nine months of 2021 compared to a loss of $30 million in the first nine months of 2020. We estimate that the severe winter storm in the U.S. and the national strike in Colombia that occurred in the first half of 2021 negatively impacted Americas operating income for the first nine months of 2021 by approximately $42 million and $9 million ($9 million after-tax and minority), respectively.
Operating income in the first nine months of 2021 excluded rationalization charges of $29 million, primarily related to the permanent closure of Gadsden. Operating income in the first nine months of 2020 excluded the TireHub non-cash impairment charge of $148 million, as well as asset write-offs and accelerated depreciation of $93 million and rationalization charges of $81 million, primarily related to Gadsden.
Europe, Middle East and Africa
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||||||||||
(In millions) |
|
2021 |
|
|
2020 |
|
|
Change |
|
|
Percent |
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|
Percent |
|
||||||||
Tire Units |
|
|
14.2 |
|
|
|
13.2 |
|
|
|
1.0 |
|
|
|
7.7 |
% |
|
|
38.9 |
|
|
|
32.1 |
|
|
|
6.8 |
|
|
|
21.2 |
% |
Net Sales |
|
$ |
1,397 |
|
|
$ |
1,156 |
|
|
$ |
241 |
|
|
|
20.8 |
% |
|
$ |
3,858 |
|
|
$ |
2,827 |
|
|
$ |
1,031 |
|
|
|
36.5 |
% |
Operating Income (Loss) |
|
|
81 |
|
|
|
22 |
|
|
|
59 |
|
|
|
268.2 |
% |
|
|
198 |
|
|
|
(141 |
) |
|
|
339 |
|
|
NM |
|
|
Operating Margin |
|
|
5.8 |
% |
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
5.1 |
% |
|
|
(5.0 |
)% |
|
|
|
|
|
|
Three months ended September 30, 2021 and 2020
Europe, Middle East and Africa unit sales in the third quarter of 2021 increased 1.0 million units, or 7.7%, to 14.2 million units. Replacement tire volume increased 1.5 million units, or 14.2%, primarily in our consumer business, reflecting increased industry demand due to continued recovery from the economic impacts of the COVID-19 pandemic, the recovery of some tire volume lost in 2020 as a result of our ongoing initiative to align distribution in Europe, and the addition of Cooper Tire’s units. OE tire volume decreased 0.5 million units, or 17.8%, reflecting the negative impact on vehicle production of global supply chain disruptions, including shortages of key manufacturing components, such as semiconductors.
Net sales in the third quarter of 2021 were $1,397 million, increasing $241 million, or 20.8%, from $1,156 million in the third quarter of 2020. Net sales increased primarily due to improvements in price and product mix of $128 million, the addition of Cooper Tire's net sales of $65 million, higher sales in other tire-related businesses of $23 million, driven by growth in our Fleet Solutions business and increased aviation sales, higher tire volume of $16 million, and favorable foreign currency translation of $7 million, driven by a stronger euro, South African rand and British pound partially offset by a weaker Turkish lira.
Operating income in the third quarter of 2021 was $81 million, an increase of $59 million, from $22 million in the third quarter of 2020. The increase in operating income was primarily due to improvements in price and product mix of $118 million, which more than offset higher raw material costs of $53 million, lower conversion costs of $12 million, primarily due to favorable overhead absorption as a result of higher factory utilization, higher earnings in other tire-related businesses of $6 million, primarily due to increases in aviation and racing sales, and higher tire volume of $4 million. These increases were partially offset by higher SAG of $16 million, primarily related to higher advertising expenses and higher wages and benefits, both relating to pandemic-related actions taken in 2020 as well as inflation, higher transportation costs of $8 million, and higher plant industrialization costs of $5 million. Conversion costs include incremental savings from rationalization plans of $1 million.
Operating income in the third quarter of 2021 excluded a net gain on asset sales of $8 million, rationalization charges of $2 million and accelerated depreciation of $1 million. Operating income in the third quarter of 2020 excluded net rationalization charges $12 million.
39
Nine Months Ended September 30, 2021 and 2020
Europe, Middle East and Africa unit sales in the first nine months of 2021 increased 6.8 million units, or 21.2%, to 38.9 million units. Replacement tire volume increased 5.6 million units, or 22.2%, primarily in our consumer business, reflecting increased industry demand due to continued recovery from the economic impacts of the COVID-19 pandemic and the recovery of some tire volume lost in 2020 as a result of our ongoing initiative to align distribution in Europe. OE tire volume increased 1.2 million units, or 17.6%, reflecting share gains driven by new consumer fitments, partially offset by the negative impact on vehicle production of global supply chain disruptions, including shortages of key manufacturing components, such as semiconductors.
Net sales in the first nine months of 2021 were $3,858 million, increasing $1,031 million, or 36.5%, from $2,827 million in the first nine months of 2020. Net sales increased primarily due to higher tire volume of $509 million, improvements in price and product mix of $237 million, favorable foreign currency translation of $126 million, driven by a stronger euro, South African rand and British pound partially offset by a weaker Turkish lira, the addition of Cooper Tire's net sales of $83 million, and higher sales in other tire-related businesses of $75 million, primarily due to growth in our Fleet Solutions business and increased motorcycle, retread and racing tire sales.
Operating income in the first nine months of 2021 was $198 million, a change of $339 million, from an operating loss of $141 million in the first nine months of 2020. The increase in operating income was primarily due to improvements in price and product mix of $189 million, which more than offset higher raw material costs of $50 million, higher tire volume of $134 million, lower conversion costs of $120 million, primarily due to favorable overhead absorption as a result of higher factory utilization, and $12 million of pandemic-related work in process inventory write-offs in 2020. These increases were partially offset by higher SAG of $48 million, primarily related to higher wages and benefits and higher advertising expenses, both relating to pandemic-related actions taken in 2020 as well as higher warehousing costs and inflation, higher transportation costs of $11 million, and higher plant industrialization costs of $10 million. Conversion costs and SAG include incremental savings from rationalization plans of $5 million and $1 million, respectively.
Operating income in the first nine months of 2021 excluded net rationalization charges of $46 million, a net gain on asset sales of $8 million and accelerated depreciation of $1 million. Operating income in the first nine months of 2020 excluded a non-cash goodwill impairment charge of $182 million, net rationalization charges of $48 million, net losses on asset sales of $2 million and accelerated depreciation of $1 million.
Asia Pacific
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||||||||||
(In millions) |
|
2021 |
|
|
2020 |
|
|
Change |
|
|
Percent |
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|
Percent |
|
||||||||
Tire Units |
|
|
8.1 |
|
|
|
7.2 |
|
|
|
0.9 |
|
|
|
12.6 |
% |
|
|
21.4 |
|
|
|
17.0 |
|
|
|
4.4 |
|
|
|
25.9 |
% |
Net Sales |
|
$ |
570 |
|
|
$ |
486 |
|
|
$ |
84 |
|
|
|
17.3 |
% |
|
$ |
1,556 |
|
|
$ |
1,208 |
|
|
$ |
348 |
|
|
|
28.8 |
% |
Operating Income |
|
|
32 |
|
|
|
34 |
|
|
|
(2 |
) |
|
|
(5.9 |
)% |
|
|
93 |
|
|
|
6 |
|
|
|
87 |
|
|
NM |
|
|
Operating Margin |
|
|
5.6 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
6.0 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
Three months ended September 30, 2021 and 2020
Asia Pacific unit sales in the third quarter of 2021 increased 0.9 million units, or 12.6%, to 8.1 million units. Replacement tire volume increased 0.4 million units, or 10.0%. OE tire volume increased 0.5 million units, or 17.7%. These increases were primarily due to the addition of Cooper Tire's units.
Net sales in the third quarter of 2021 were $570 million, increasing $84 million, or 17.3%, from $486 million in the third quarter of 2020. Net sales increased due to the addition of Cooper Tire’s net sales of $47 million, favorable price and product mix of $32 million, and favorable foreign currency translation of $12 million, primarily related to a stronger Chinese yuan and Australian dollar.
Operating income in the third quarter of 2021 was $32 million, a decrease of $2 million, or 5.9%, from $34 million in the third quarter of 2020. The decrease in operating income was primarily due to higher raw material costs of $31 million and higher SAG of $8 million, primarily related to higher advertising expenses and higher wages and benefits, both relating to pandemic-related actions taken in 2020. These decreases were partially offset by improvements in price and product mix of $28 million, higher earnings in other tire-related businesses of $4 million, primarily due to higher aviation sales, the addition of Cooper Tire's operating income of $3 million, and lower conversion costs of $3 million, primarily due to favorable overhead absorption as a result of higher factory utilization.
Operating income in the third quarter of 2020 excluded net rationalization charges of $4 million.
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Nine Months Ended September 30, 2021 and 2020
Asia Pacific unit sales in the first nine months of 2021 increased 4.4 million units, or 25.9%, to 21.4 million units. Replacement tire volume increased 2.6 million units, or 23.3%. OE tire volume increased 1.8 million units, or 31.3%. These increases were primarily due to continued recovery from the economic impacts of the COVID-19 pandemic and the addition of Cooper Tire’s units, partially offset by the impact on vehicle production of global supply chain disruptions, including shortages of key manufacturing components, such as semiconductors.
Net sales in the first nine months of 2021 were $1,556 million, increasing $348 million, or 28.8%, from $1,208 million in the first nine months of 2020. Net sales increased due to higher tire volume of $198 million, favorable foreign currency translation of $66 million, primarily related to a stronger Australian dollar and Chinese yuan, the addition of Cooper Tire’s net sales of $62 million, and favorable price and product mix of $22 million.
Operating income in the first nine months of 2021 was $93 million, an increase of $87 million, from $6 million in the first nine months of 2020. The increase in operating income was primarily due to higher tire volume of $49 million, lower conversion costs of $46 million, primarily due to favorable overhead absorption as a result of higher factory utilization, favorable price and product mix of $38 million, higher earnings in other tire-related businesses of $9 million, primarily due to higher aviation sales, and the addition of Cooper Tire's operating income of $3 million. These increases were partially offset by higher SAG of $28 million, primarily related to higher advertising expenses and higher wages and benefits, both relating to pandemic-related actions taken in 2020, and higher raw material costs of $27 million.
Operating income in the first nine months of 2020 excluded net rationalization charges of $4 million.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash generated from our operating and financing activities. Our cash flows from operating activities are driven primarily by our operating results and changes in our working capital requirements and our cash flows from financing activities are dependent upon our ability to access credit or other capital.
In 2021, we completed several financing actions to provide funding for the acquisition of Cooper Tire and to improve our debt maturity profile.
On April 6, 2021, we issued $550 million of 5.25% senior notes due April 2031 and $450 million of 5.625% senior notes due 2033. The net proceeds from these notes, together with cash and cash equivalents, were used to redeem our existing $1.0 billion 5.125% senior notes due 2023 on May 6, 2021 at a redemption price of 100% of the principal amount, plus accrued and unpaid interest to the redemption date.
On May 18, 2021, we issued $850 million of 5% senior notes due 2029 and $600 million of 5.25% senior notes due July 2031. The net proceeds from these notes, together with cash and cash equivalents and borrowings under our first lien revolving credit facility, were used to fund the cash component of the Merger Consideration and related transaction costs.
On June 7, 2021, we amended and restated our $2.0 billion first lien revolving credit facility. Changes to the facility include extending the maturity to June 8, 2026, increasing the amount of the facility to $2.75 billion, and including Cooper Tire's accounts receivable and inventory in the borrowing base for the facility. The interest rate for loans under the facility decreased by 50 basis points to LIBOR plus 125 basis points.
Following the Cooper Tire acquisition, $117 million in aggregate principal amount of Cooper Tire's 7.625% senior notes due 2027 remain outstanding. These notes also included a $19 million fair value step-up, which is being amortized against interest expense over the remaining life of the notes. Amortization during the third quarter of 2021 was approximately $1 million.
On September 28, 2021, we issued €400 million in aggregate principal amount of GEBV's 2.75% senior notes due 2028. A portion of the net proceeds from these notes was used to redeem our existing €250 million 3.75% senior notes due 2023 on October 28, 2021 at a redemption price of 100% of the principal amount, plus accrued and unpaid interest to the redemption date. The remaining net proceeds will be used for general corporate purposes, which may include repayment of outstanding borrowings under revolving credit facilities.
At September 30, 2021, we had $1,187 million in cash and cash equivalents, compared to $1,539 million at December 31, 2020. For the nine months ended September 30, 2021, net cash used by operating activities was $2 million, reflecting cash used for working capital of $1,064 million and rationalization payments of $162 million, largely offset by net income for the period of $223 million, which includes non-cash charges for depreciation and amortization of $645 million and an inventory fair value step-up adjustment related to the Cooper Tire acquisition of $110 million. Net cash used by investing activities was $2,491 million, primarily representing the $1,856 million cash component of the Merger Consideration, net of cash and restricted cash acquired, and capital expenditures of $666 million. Cash provided by financing activities was $2,155 million, primarily due to net borrowings of $2,257 million.
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At September 30, 2021, we had $4,195 million of unused availability under our various credit agreements, compared to $3,881 million at December 31, 2020. The table below presents unused availability under our credit facilities at those dates:
(In millions) |
|
September 30, |
|
|
December 31, |
|
||
First lien revolving credit facility |
|
$ |
2,336 |
|
|
$ |
1,535 |
|
European revolving credit facility |
|
|
927 |
|
|
|
982 |
|
Chinese credit facilities |
|
|
326 |
|
|
|
297 |
|
Mexican credit facility |
|
|
— |
|
|
|
48 |
|
Other foreign and domestic debt |
|
|
141 |
|
|
|
380 |
|
Short term credit arrangements |
|
|
465 |
|
|
|
639 |
|
|
|
$ |
4,195 |
|
|
$ |
3,881 |
|
We have deposited our cash and cash equivalents and entered into various credit agreements and derivative contracts with financial institutions that we considered to be substantial and creditworthy at the time of such transactions. We seek to control our exposure to these financial institutions by diversifying our deposits, credit agreements and derivative contracts across multiple financial institutions, by setting deposit and counterparty credit limits based on long term credit ratings and other indicators of credit risk such as credit default swap spreads, and by monitoring the financial strength of these financial institutions on a regular basis. We also enter into master netting agreements with counterparties when possible. By controlling and monitoring exposure to financial institutions in this manner, we believe that we effectively manage the risk of loss due to nonperformance by a financial institution. However, we cannot provide assurance that we will not experience losses or delays in accessing our deposits or lines of credit due to the nonperformance of a financial institution. Our inability to access our cash deposits or make draws on our lines of credit, or the inability of a counterparty to fulfill its contractual obligations to us, could have a material adverse effect on our liquidity, financial condition or results of operations in the period in which it occurs.
We expect our 2021 cash flow needs to include capital expenditures of approximately $1.0 billion. We also expect interest expense to be approximately $400 million; rationalization payments to be approximately $225 million; income tax payments to be approximately $150 million, excluding one-time items; and contributions to our funded pension plans to be $50 million to $75 million. We expect working capital to be a use of cash for the full year of 2021 of $300 million to $500 million.
We are continuing to actively monitor our liquidity and intend to operate our business in a way that allows us to address our cash flow needs with our existing cash and available credit if they cannot be funded by cash generated from operating or other financing activities. We believe that our liquidity position is adequate to fund our operating and investing needs and debt maturities for the next twelve months and to provide us with the ability to respond to further changes in the business environment.
Our ability to service debt and operational requirements is also dependent, in part, on the ability of our subsidiaries to make distributions of cash to various other entities in our consolidated group, whether in the form of dividends, loans or otherwise. In certain countries where we operate, such as China, South Africa, Serbia and Argentina, transfers of funds into or out of such countries by way of dividends, loans, advances or payments to third-party or affiliated suppliers are generally or periodically subject to certain requirements, such as obtaining approval from the foreign government and/or currency exchange board before net assets can be transferred out of the country. In addition, certain of our credit agreements and other debt instruments limit the ability of foreign subsidiaries to make distributions of cash. Thus, we would have to repay and/or amend these credit agreements and other debt instruments in order to use this cash to service our consolidated debt. Because of the inherent uncertainty of satisfactorily meeting these requirements or limitations, we do not consider the net assets of our subsidiaries, including our Chinese, South African, Serbian and Argentinian subsidiaries, which are subject to such requirements or limitations to be integral to our liquidity or our ability to service our debt and operational requirements. At September 30, 2021, approximately $1,010 million of net assets, including approximately $180 million of cash and cash equivalents, were subject to such requirements. The requirements we must comply with to transfer funds out of China, South Africa, Serbia and Argentina have not adversely impacted our ability to make transfers out of those countries.
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Operating Activities
Net cash used by operating activities was $2 million in the first nine months of 2021, compared to net cash used by operating activities of $239 million in the first nine months of 2020.
The $237 million improvement in net cash used by operating activities was primarily due to an increase in operating income from our SBUs of $1,213 million, which includes a non-cash charge of $110 million for an inventory fair value step-up adjustment related to the Cooper Tire acquisition. This improvement to cash flows from operating activities was partially offset by (i) a net increase in cash used for working capital of $792 million, (ii) an increase in cash income tax payments of $132 million, primarily as a result of higher earnings in 2021 and the receipt of certain tax refunds in 2020, (iii) year-over-year changes in balance sheet accounts for Compensation and Benefits, Other Current Liabilities and Other Assets and Liabilities totaling $97 million, driven by prior year cost actions, payroll tax deferrals and other pandemic-related impacts to our 2020 balance sheet, (iv) cash paid for transaction and other costs related to the Cooper Tire acquisition of $41 million, (v) higher pension contributions and direct payments of $31 million, and (vi) an $18 million increase in cash used for rationalization payments.
The net increase in cash used for working capital reflects increases in cash used for Inventory of $1,452 million and Accounts Receivable of $461 million, partially offset by an increase in cash provided by Accounts Payable – Trade of $1,121 million. These changes were driven by our continued recovery from the impacts of the COVID-19 pandemic, which include higher sales volume and an increase in finished goods inventory as we continue to restock in order to meet anticipated near-term demand.
Investing Activities
Net cash used by investing activities was $2,491 million in the first nine months of 2021, compared to $515 million in the first nine months of 2020. Net cash used by investing activities in the first nine months of 2021 includes the payment of the $1,856 million cash component of the Merger Consideration, net of cash and restricted cash acquired. Capital expenditures were $666 million in the first nine months of 2021, including $119 million related to Cooper Tire since the Closing Date, compared to $487 million in the first nine months of 2020. Beyond expenditures required to sustain our facilities, capital expenditures in 2021 and 2020 primarily related to investments in additional 17-inch and above capacity around the world.
Financing Activities
Net cash provided by financing activities was $2,155 million in the first nine months of 2021, compared to net cash provided by financing activities of $955 million in the first nine months of 2020. Financing activities in the first nine months of 2021 included net borrowings of $2,257 million, which were partially offset by debt-related costs and other financing transactions of $98 million. Financing activities in 2020 included net borrowings of $1,009 million, which were partially offset by dividends on our common stock of $37 million.
Credit Sources
In aggregate, we had total credit arrangements of $12,377 million available at September 30, 2021, of which $4,195 million were unused, compared to $9,707 million available at December 31, 2020, of which $3,881 million were unused. At September 30, 2021, we had long term credit arrangements totaling $11,382 million, of which $3,730 million were unused, compared to $8,632 million and $3,242 million, respectively, at December 31, 2020. At September 30, 2021, we had short term committed and uncommitted credit arrangements totaling $995 million, of which $465 million were unused, compared to $1,075 million and $639 million, respectively, at December 31, 2020. The continued availability of the short term uncommitted arrangements is at the discretion of the relevant lender and may be terminated at any time.
Outstanding Notes
At September 30, 2021, we had $5,892 million of outstanding notes compared to $3,860 million at December 31, 2020. The increase from December 31, 2020 was primarily due to the issuance of $1.45 billion of senior notes to fund a portion of the acquisition of Cooper Tire, the issuance of €400 million of GEBV senior notes, and $135 million of Cooper Tire senior notes.
$2.75 billion Amended and Restated First Lien Revolving Credit Facility due 2026
On June 7, 2021, we amended and restated our $2.0 billion first lien revolving credit facility. Changes to the facility include extending the maturity to June 8, 2026, increasing the amount of the facility to $2.75 billion, and including Cooper Tire's accounts receivable and inventory in the borrowing base for the facility. The interest rate for loans under the facility decreased by 50 basis points to LIBOR plus 125 basis points, based on our current liquidity as described below.
Our amended and restated first lien revolving credit facility is available in the form of loans or letters of credit. Up to $800 million in letters of credit and $50 million of swingline loans are available for issuance under the facility. Subject to the consent of the lenders whose commitments are to be increased, we may request that the facility be increased by up to $250 million.
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Availability under the facility is subject to a borrowing base, which is based on (i) eligible accounts receivable and inventory of The Goodyear Tire & Rubber Company and certain of its U.S. and Canadian subsidiaries, (ii) the value of our principal trademarks in an amount not to exceed $400 million, (iii) the value of eligible machinery and equipment, and (iv) certain cash in an amount not to exceed $275 million. To the extent that our eligible accounts receivable, inventory and other components of the borrowing base decline in value, our borrowing base will decrease and the availability under the facility may decrease below $2.75 billion. As of September 30, 2021, our borrowing base, and therefore our availability, under this facility was $395 million below the facility's stated amount of $2.75 billion.
If Available Cash (as defined in the facility) plus the availability under the facility is greater than $750 million, amounts drawn under the facility will bear interest, at our option, at (i) 125 basis points over LIBOR or (ii) 25 basis points over an alternative base rate (the higher of (a) the prime rate, (b) the federal funds effective rate or the overnight bank funding rate plus 50 basis points or (c) LIBOR plus 100 basis points). If Available Cash plus the availability under the facility is equal to or less than $750 million, then amounts drawn under the facility will bear interest, at our option, at (i) 150 basis points over LIBOR or (ii) 50 basis points over an alternative base rate. Undrawn amounts under the facility will be subject to an annual commitment fee of 25 basis points.
At September 30, 2021, we had no borrowings and $19 million of letters of credit issued under the revolving credit facility. At December 31, 2020, we had no borrowings and $11 million of letters of credit issued under the revolving credit facility.
At September 30, 2021, we had $318 million in letters of credit issued under bilateral letter of credit agreements.
Amended and Restated Second Lien Term Loan Facility due 2025
Our amended and restated second lien term loan facility matures on March 7, 2025. The term loan bears interest, at our option, at (i) 200 basis points over LIBOR or (ii) 100 basis points over an alternative base rate (the higher of (a) the prime rate, (b) the federal funds effective rate or the overnight bank funding rate plus 50 basis points or (c) LIBOR plus 100 basis points). In addition, if the Total Leverage Ratio is equal to or less than 1.25 to 1.00, we have the option to further reduce the spreads described above by 25 basis points. "Total Leverage Ratio" has the meaning given it in the facility.
At both September 30, 2021 and December 31, 2020, the amount outstanding under this facility was $400 million.
€800 million Amended and Restated Senior Secured European Revolving Credit Facility due 2024
Our amended and restated European revolving credit facility consists of (i) a €180 million German tranche that is available only to Goodyear Dunlop Tires Germany GmbH ("GDTG") and (ii) a €620 million all-borrower tranche that is available to GEBV, GDTG and Goodyear Operations S.A. Up to €175 million of swingline loans and €75 million in letters of credit are available for issuance under the all-borrower tranche. Amounts drawn under this facility will bear interest at LIBOR plus 150 basis points for loans denominated in U.S. dollars or pounds sterling and EURIBOR plus 150 basis points for loans denominated in euros, and undrawn amounts under the facility are subject to an annual commitment fee of 25 basis points. Subject to the consent of the lenders whose commitments are to be increased, we may request that the facility be increased by up to €200 million.
At both September 30, 2021 and December 31, 2020, there were no borrowings and no letters of credit outstanding under the European revolving credit facility.
Each of our first lien revolving credit facility and our European revolving credit facility have customary representations and warranties including, as a condition to borrowing, that all such representations and warranties are true and correct, in all material respects, on the date of the borrowing, including representations as to no material adverse change in our business or financial condition since December 31, 2020 under the first lien facility and December 31, 2018 under the European facility.
Accounts Receivable Securitization Facilities (On-Balance Sheet)
On October 11, 2021, GEBV and certain other of our European subsidiaries amended and restated the definitive agreements for our pan-European accounts receivable securitization facility, extending the term through 2027. The terms of the facility provide the flexibility to designate annually the maximum amount of funding available under the facility in an amount of not less than €30 million and not more than €450 million. For the period from October 16, 2020 through October 18, 2021, the designated maximum amount for the facility was €280 million. For the period from October 19, 2021 through October 19, 2022, the designated maximum amount of the facility was increased to €300 million.
The facility involves the ongoing daily sale of substantially all of the trade accounts receivable of certain GEBV subsidiaries. These subsidiaries retain servicing responsibilities. Utilization under this facility is based on eligible receivable balances.
The funding commitments under the facility will expire upon the earliest to occur of: (a) October 19, 2027, (b) the non-renewal and expiration (without substitution) of all of the back-up liquidity commitments, (c) the early termination of the facility according to its terms (generally upon an Early Amortisation Event (as defined in the facility), which includes, among other things, events similar to the events of default under our senior secured credit facilities; certain tax law changes; or certain changes
44
to law, regulation or accounting standards), or (d) our request for early termination of the facility. The facility’s current back-up liquidity commitments will expire on October 19, 2022.
At September 30, 2021, the amounts available and utilized under this program totaled $308 million (€266 million). At December 31, 2020, the amounts available and utilized under this program totaled $291 million (€237 million). The program does not qualify for sale accounting, and accordingly, these amounts are included in Long Term Debt and Finance Leases.
Accounts Receivable Factoring Facilities (Off-Balance Sheet)
We have sold certain of our trade receivables under off-balance sheet programs. For these programs, we have concluded that there is generally no risk of loss to us from non-payment of the sold receivables. At September 30, 2021, the gross amount of receivables sold was $523 million, compared to $451 million at December 31, 2020. The increase from December 31, 2020 is primarily due to the addition of Cooper Tire's off-balance sheet factoring programs.
Supplier Financing
We have entered into payment processing agreements with several financial institutions. Under these agreements, the financial institution acts as our paying agent with respect to accounts payable due to our suppliers. These agreements also allow our suppliers to sell their receivables to the financial institutions at the sole discretion of both the supplier and the financial institution on terms that are negotiated between them. We are not always notified when our suppliers sell receivables under these programs. Our obligations to our suppliers, including the amounts due and scheduled payment dates, are not impacted by our suppliers' decisions to sell their receivables under the programs. Agreements for such financing programs totaled up to $520 million and $500 million at September 30, 2021 and December 31, 2020, respectively.
Further Information
On March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR (“IBA”), confirmed its previously announced plans to cease publication of USD LIBOR on December 31, 2021 for the one week and two month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors. In addition, the IBA will also cease publication of all tenors of euro, Swiss franc, Japanese yen and British pound LIBOR on December 31, 2021. In the United States, efforts to identify a set of alternative U.S. dollar reference interest rates include the recommendation by the Alternative Reference Rates Committee that has been convened by the Federal Reserve Board and the Federal Reserve Bank of New York to use the Secured Overnight Financing Rate, known as SOFR. Additionally, the International Swaps and Derivatives Association, Inc. launched consultations on technical issues related to new benchmark fallbacks for derivative contracts that reference certain interbank offered rates, including LIBOR, and has developed documentation to incorporate fallback provisions into relevant derivative contracts. We cannot currently predict the effect of the discontinuation of, or other changes to, LIBOR or any establishment of alternative reference rates in the United States, the United Kingdom, the European Union or elsewhere on the global capital markets. The uncertainty regarding the future of LIBOR, as well as the transition from LIBOR to any alternative reference rate or rates, could have adverse impacts on floating rate obligations, loans, deposits, derivatives and other financial instruments that currently use LIBOR as a benchmark rate. We have identified and evaluated our financing obligations and other contracts that refer to LIBOR and expect to be able to transition those obligations and contracts to an alternative reference rate upon the discontinuation of LIBOR. Our amended and restated first lien revolving credit facility, our second lien term loan facility and our European revolving credit facility, which constitute the most significant of our LIBOR-based debt obligations, contain fallback provisions that address the potential discontinuation of LIBOR and facilitate the adoption of an alternate rate of interest. We have not issued any long term floating rate notes. Our amended and restated first lien revolving credit facility and second lien term loan facility also contain express provisions for the use, at our option, of an alternative base rate (the higher of (a) the prime rate, (b) the federal funds effective rate or the overnight bank funding rate plus 50 basis points or (c) LIBOR plus 100 basis points). We do not believe that the discontinuation of LIBOR, or its replacement with an alternative reference rate or rates, will have a material impact on our results of operations, financial position or liquidity.
For a further description of the terms of our outstanding notes, first lien revolving credit facility, second lien term loan facility, European revolving credit facility and pan-European accounts receivable securitization facility, refer to Note to the Consolidated Financial Statements No. 15, Financing Arrangements and Derivative Financial Instruments, in our 2020 Form 10‑K and Note to the Consolidated Financial Statements No. 9, Financing Arrangements and Derivative Financial Instruments, in this Form 10-Q.
Covenant Compliance
Our first and second lien credit facilities and some of the indentures governing our notes contain certain covenants that, among other things, limit our ability to incur additional debt or issue redeemable preferred stock, pay dividends, repurchase shares or make certain other restricted payments or investments, incur liens, sell assets, incur restrictions on the ability of our subsidiaries to pay dividends or to make other payments to us, enter into affiliate transactions, engage in sale and leaseback transactions, and consolidate, merge, sell or otherwise dispose of all or substantially all of our assets. These covenants are subject to significant
45
exceptions and qualifications. Our first and second lien credit facilities and the indentures governing our notes also have customary defaults, including cross-defaults to material indebtedness of Goodyear and its subsidiaries.
We have additional financial covenants in our first and second lien credit facilities that are currently not applicable. We only become subject to these financial covenants when certain events occur. These financial covenants and related events are as follows:
In addition, our European revolving credit facility contains non-financial covenants similar to the non-financial covenants in our first and second lien credit facilities that are described above and a financial covenant applicable only to GEBV and its subsidiaries. This financial covenant provides that we are not permitted to allow GEBV’s ratio of Consolidated Net GEBV Indebtedness to Consolidated GEBV EBITDA for a period of four consecutive fiscal quarters to be greater than 3.0 to 1.0 at the end of any fiscal quarter. Consolidated Net GEBV Indebtedness is determined net of the sum of cash and cash equivalents in excess of $100 million held by GEBV and its subsidiaries, cash and cash equivalents in excess of $150 million held by the Parent Company and its U.S. subsidiaries, and availability under our first lien revolving credit facility if the ratio of EBITDA to Consolidated Interest Expense described above is not applicable and the conditions to borrowing under the first lien revolving credit facility are met. Consolidated Net GEBV Indebtedness also excludes loans from other consolidated Goodyear entities. This financial covenant is also included in our pan-European accounts receivable securitization facility. At September 30, 2021, we were in compliance with this financial covenant.
Our credit facilities also state that we may only incur additional debt or make restricted payments that are not otherwise expressly permitted if, after giving effect to the debt incurrence or the restricted payment, our ratio of EBITDA to Consolidated Interest Expense for the prior four fiscal quarters would exceed 2.0 to 1.0. Certain of our senior note indentures have substantially similar limitations on incurring debt and making restricted payments. Our credit facilities and indentures also permit the incurrence of additional debt through other provisions in those agreements without regard to our ability to satisfy the ratio-based incurrence test described above. We believe that these other provisions provide us with sufficient flexibility to incur additional debt necessary to meet our operating, investing and financing needs without regard to our ability to satisfy the ratio-based incurrence test.
Covenants could change based upon a refinancing or amendment of an existing facility, or additional covenants may be added in connection with the incurrence of new debt.
At September 30, 2021, we were in compliance with the currently applicable material covenants imposed by our principal credit facilities and indentures.
The terms “Available Cash,” “EBITDA,” “Consolidated Interest Expense,” “Consolidated Net Secured Indebtedness,” “Pro Forma Senior Secured Leverage Ratio,” “Consolidated Net GEBV Indebtedness” and “Consolidated GEBV EBITDA” have the meanings given them in the respective credit facilities.
Potential Future Financings
In addition to the financing activities described above, we may seek to undertake additional financing actions which could include restructuring bank debt or capital markets transactions, possibly including the issuance of additional debt or equity. Given the inherent uncertainty of market conditions, access to the capital markets cannot be assured.
Our future liquidity requirements will make it necessary for us to incur additional debt. However, a substantial portion of our assets are already subject to liens securing our indebtedness. As a result, we are limited in our ability to pledge our remaining assets as security for additional secured indebtedness. In addition, no assurance can be given as to our ability to raise additional unsecured debt.
46
Dividends and Common Stock Repurchases
Under our primary credit facilities and some of our note indentures, we are permitted to pay dividends on and repurchase our capital stock (which constitute restricted payments) as long as no default will have occurred and be continuing, additional indebtedness can be incurred under the credit facilities or indentures following the payment, and certain financial tests are satisfied.
In the first nine months of 2020, we paid cash dividends of $37 million on our common stock, all of which was paid in the first quarter of 2020. This amount excludes dividends earned on stock-based compensation plans of approximately $1 million. On April 16, 2020, we announced that we have suspended the quarterly dividend on our common stock.
We may repurchase shares delivered to us by employees as payment for the exercise price of stock options and the withholding taxes due upon the exercise of stock options or the vesting or payment of stock awards. During the first nine months of 2021, we did not repurchase any shares from employees.
The restrictions imposed by our credit facilities and indentures are not expected to affect our ability to pay dividends or repurchase our capital stock in the future.
Asset Dispositions
The restrictions on asset sales imposed by our material indebtedness have not affected our ability to divest non-core businesses, and those divestitures have not affected our ability to comply with those restrictions.
Supplemental Guarantor Financial Information
Certain of our subsidiaries, which are listed on Exhibit 22.1 to this Quarterly Report on Form 10-Q and are generally holding or operating companies, have guaranteed our obligations under the $800 million outstanding principal amount of 9.5% senior notes due 2025, the $900 million outstanding principal amount of 5% senior notes due 2026, the $700 million outstanding principal amount of 4.875% senior notes due 2027, the $850 million outstanding principal amount of 5% senior notes due 2029, the $550 million outstanding principal amount of 5.25% senior notes due April 2031, the $600 million outstanding principal amount of 5.25% senior notes due July 2031 and the $450 million outstanding principal amount of 5.625% senior notes due 2033 (collectively, the “Notes”).
The Notes have been issued by The Goodyear Tire & Rubber Company (the “Parent Company”) and are its senior unsecured obligations. The Notes rank equally in right of payment with all of our existing and future senior unsecured obligations and senior to any of our future subordinated indebtedness. The Notes are effectively subordinated to our existing and future secured indebtedness to the extent of the assets securing that indebtedness. The Notes are fully and unconditionally guaranteed on a joint and several basis by each of our wholly-owned U.S. and Canadian subsidiaries that also guarantee our obligations under certain of our senior secured credit facilities (such guarantees, the “Guarantees”; and, such guaranteeing subsidiaries, the “Subsidiary Guarantors”). The Guarantees are senior unsecured obligations of the Subsidiary Guarantors and rank equally in right of payment with all existing and future senior unsecured obligations of our Subsidiary Guarantors. The Guarantees are effectively subordinated to existing and future secured indebtedness of the Subsidiary Guarantors to the extent of the assets securing that indebtedness.
The Notes are structurally subordinated to all of the existing and future debt and other liabilities, including trade payables, of our subsidiaries that do not guarantee the Notes (the “Non-Guarantor Subsidiaries”). The Non-Guarantor Subsidiaries will have no obligation, contingent or otherwise, to pay amounts due under the Notes or to make funds available to pay those amounts. Certain Non-Guarantor Subsidiaries are limited in their ability to remit funds to us by means of dividends, advances or loans due to required foreign government and/or currency exchange board approvals or limitations in credit agreements or other debt instruments of those subsidiaries.
The Subsidiary Guarantors, as primary obligors and not merely as sureties, jointly and severally irrevocably and unconditionally guarantee on a senior unsecured basis the performance and full and punctual payment when due of all obligations of the Parent Company under the Notes and the related indentures, whether for payment of principal of or interest on the Notes, expenses, indemnification or otherwise. The Guarantees of the Subsidiary Guarantors are subject to release in limited circumstances only upon the occurrence of certain customary conditions.
Although the Guarantees provide the holders of Notes with a direct unsecured claim against the assets of the Subsidiary Guarantors, under U.S. federal bankruptcy law and comparable provisions of U.S. state fraudulent transfer laws, in certain circumstances a court could cancel a Guarantee and order the return of any payments made thereunder to the Subsidiary Guarantor or to a fund for the benefit of its creditors.
47
A court might take these actions if it found, among other things, that when the Subsidiary Guarantors incurred the debt evidenced by their Guarantee (i) they received less than reasonably equivalent value or fair consideration for the incurrence of the debt and (ii) any one of the following conditions was satisfied:
In applying the above factors, a court would likely find that a Subsidiary Guarantor did not receive fair consideration or reasonably equivalent value for its Guarantee, except to the extent that it benefited directly or indirectly from the issuance of the Notes. The determination of whether a guarantor was or was not rendered “insolvent” when it entered into its guarantee will vary depending on the law of the jurisdiction being applied. Generally, an entity would be considered insolvent if the sum of its debts (including contingent or unliquidated debts) is greater than all of its assets at a fair valuation or if the present fair salable value of its assets is less than the amount that will be required to pay its probable liability on its existing debts, including contingent or unliquidated debts, as they mature.
Under Canadian federal bankruptcy and insolvency laws and comparable provincial laws on preferences, fraudulent conveyances or other challengeable or voidable transactions, the Guarantees could be challenged as a preference, fraudulent conveyance, transfer at undervalue or other challengeable or voidable transaction. The test to be applied varies among the different pieces of legislation, but as a general matter these types of challenges may arise in circumstances where:
In addition, in certain insolvency proceedings a Canadian court may subordinate claims in respect of the Guarantees to other claims against a Subsidiary Guarantor under the principle of equitable subordination if the court determines that (1) the holder of Notes engaged in some type of inequitable or improper conduct, (2) the inequitable or improper conduct resulted in injury to other creditors or conferred an unfair advantage upon the holder of Notes and (3) equitable subordination is not inconsistent with the provisions of the relevant solvency statute.
If a court canceled a Guarantee, the holders of Notes would no longer have a claim against that Subsidiary Guarantor or its assets.
Each Guarantee is limited, by its terms, to an amount not to exceed the maximum amount that can be guaranteed by the applicable Subsidiary Guarantor without rendering the Guarantee, as it relates to that Subsidiary Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally.
48
Each Subsidiary Guarantor is a consolidated subsidiary of the Parent Company at the date of each balance sheet presented. The following tables present summarized financial information for the Parent Company and the Subsidiary Guarantors on a combined basis after elimination of (i) intercompany transactions and balances among the Parent Company and the Subsidiary Guarantors and (ii) equity in earnings from and investments in any Non-Guarantor Subsidiary. On July 2, 2021, Cooper Tire and certain of its subsidiaries were added as Subsidiary Guarantors.
|
|
Summarized Balance Sheets |
|
|||||
(In millions) |
|
September 30, |
|
|
December 31, |
|
||
Total Current Assets(1) |
|
$ |
5,516 |
|
|
$ |
4,662 |
|
Total Non-Current Assets |
|
|
7,886 |
|
|
|
5,426 |
|
|
|
|
|
|
|
|
||
Total Current Liabilities |
|
$ |
2,906 |
|
|
$ |
1,960 |
|
Total Non-Current Liabilities |
|
|
9,420 |
|
|
|
7,538 |
|
|
|
Summarized Statements of Operations |
|
|||||
(In millions) |
|
Nine Months Ended |
|
|
Year Ended |
|
||
Net Sales |
|
$ |
6,652 |
|
|
$ |
6,114 |
|
Cost of Goods Sold |
|
|
5,351 |
|
|
|
5,277 |
|
Selling, Administrative and General Expense |
|
|
1,054 |
|
|
|
1,094 |
|
Goodwill and Other Asset Impairments |
|
|
— |
|
|
|
148 |
|
Rationalizations |
|
|
28 |
|
|
|
95 |
|
Interest Expense |
|
|
239 |
|
|
|
257 |
|
Other (Income) Expense |
|
|
(17 |
) |
|
|
(58 |
) |
Income (Loss) before Income Taxes(2) |
|
$ |
(3 |
) |
|
$ |
(699 |
) |
|
|
|
|
|
|
|
||
Net Income (Loss) |
|
$ |
(16 |
) |
|
$ |
(806 |
) |
Goodyear Net Income (Loss) |
|
$ |
(16 |
) |
|
$ |
(806 |
) |
49
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to the financial statements. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may alter such estimates and affect our results of operations and financial position in future periods.
Acquisitions. We allocate the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess value of the purchase price for an acquired business over the estimated fair value of the assets acquired and liabilities assumed is recognized as goodwill. The valuation of the acquired assets and liabilities will impact the determination of future operating results. We use a variety of information sources to determine the fair value of acquired assets and liabilities including: third-party appraisers for the values and lives of property, identifiable intangibles and inventories; and actuaries and other third-party specialists for defined benefit pension plans, workers' compensation and general and product liabilities. Goodwill is assigned to reporting units as of the date of the related acquisition. If goodwill is assigned to more than one reporting unit, we utilize a method that is consistent with the manner in which the amount of goodwill in a business combination is determined. Transaction costs related to the acquisition of a business are expensed as incurred.
We estimate the fair value of acquired customer relationships using the multi-period excess earnings method. Fair value is estimated as the present value of the benefits anticipated from ownership of the asset in excess of the returns required on the investment in contributory assets which are necessary to realize those benefits. The intangible asset’s estimated earnings are determined as the residual earnings after quantifying estimated earnings from contributory assets. Assumptions used in these calculations are considered from a market participant perspective and include revenue growth rates, estimated earnings, contributory asset charges, customer attrition rates and discount rates.
We estimate the fair value of trade names (definite and indefinite) using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the assets. Assumed royalty rates are applied to projected revenue for the remaining useful lives of the assets to estimate the royalty savings. Assumptions used in the determination of the fair value of a trade name include revenue growth rates, the royalty rate and the discount rate.
While we use our best estimates and assumptions, fair value estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the consolidated statement of operations.
Future changes in the judgments, assumptions and estimates that are used in our acquisition valuations and intangible asset and goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year.
Refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies" in our 2020 Form 10-K for a discussion of our other critical accounting policies, including those related to pensions and other postretirement benefits, workers' compensation, general and product liability and other litigation, and recoverability of goodwill.
FORWARD-LOOKING INFORMATION — SAFE HARBOR STATEMENT
Certain information in this Form 10-Q (other than historical data and information) may constitute forward-looking statements regarding events and trends that may affect our future operating results and financial position. The words “estimate,” “expect,” “intend” and “project,” as well as other words or expressions of similar meaning, are intended to identify forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Such statements are based on current expectations and assumptions, are inherently uncertain, are subject to risks and should be viewed with caution. Actual results and experience may differ materially from the forward-looking statements as a result of many factors, including:
50
It is not possible to foresee or identify all such factors. We will not revise or update any forward-looking statement or disclose any facts, events or circumstances that occur after the date hereof that may affect the accuracy of any forward-looking statement.
51
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We utilize derivative financial instrument contracts and nonderivative instruments to manage interest rate, foreign exchange and commodity price risks. We have established a control environment that includes policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. We do not hold or issue derivative financial instruments for trading purposes.
Commodity Price Risk
The raw material costs to which our operations are principally exposed include the cost of natural rubber, synthetic rubber, carbon black, fabrics, steel cord and other petrochemical-based commodities. Approximately two-thirds of our raw materials are petroleum-based, the cost of which may be affected by fluctuations in the price of oil. We currently do not hedge commodity prices. We do, however, use various strategies to partially offset cost increases for raw materials, including centralizing purchases of raw materials through our global procurement organization in an effort to leverage our purchasing power, expanding our capabilities to substitute lower cost raw materials, and reducing the amount of material required in each tire.
Interest Rate Risk
We continuously monitor our fixed and floating rate debt mix. Within defined limitations, we manage the mix using refinancing. At September 30, 2021, 21% of our debt was at variable interest rates averaging 3.31%.
The following table presents information about long term fixed rate debt, excluding finance leases, at September 30, 2021:
(In millions) |
|
|
|
|
Carrying amount — liability |
|
$ |
6,077 |
|
Fair value — liability |
|
|
6,449 |
|
Pro forma fair value — liability |
|
|
6,722 |
|
The pro forma information assumes a 100 basis point decrease in market interest rates at September 30, 2021, and reflects the estimated fair value of fixed rate debt outstanding at that date under that assumption. The sensitivity of our fixed rate debt to changes in interest rates was determined using current market pricing models.
Foreign Currency Exchange Risk
We enter into foreign currency contracts in order to reduce the impact of changes in foreign exchange rates on our consolidated results of operations and future foreign currency-denominated cash flows. These contracts reduce exposure to currency movements affecting existing foreign currency-denominated assets, liabilities, firm commitments and forecasted transactions resulting primarily from trade purchases and sales, equipment acquisitions, intercompany loans and royalty agreements. Contracts hedging short term trade receivables and payables normally have no hedging designation.
The following table presents net foreign currency contract information at September 30, 2021:
(In millions) |
|
|
|
|
Fair value — asset (liability) |
|
$ |
20 |
|
Pro forma decrease in fair value |
|
|
(102 |
) |
Contract maturities |
|
10/21-9/22 |
|
The pro forma decrease in fair value assumes a 10% adverse change in underlying foreign exchange rates at September 30, 2021, and reflects the estimated change in the fair value of contracts outstanding at that date under that assumption. The sensitivity of our foreign currency positions to changes in exchange rates was determined using current market pricing models.
Fair values are recognized on the Consolidated Balance Sheet at September 30, 2021 as follows:
(In millions) |
|
|
|
|
Current asset (liability): |
|
|
|
|
Accounts receivable |
|
$ |
23 |
|
Other current liabilities |
|
|
(3 |
) |
For further information on foreign currency contracts, refer to Note to the Consolidated Financial Statements No. 9, Financing Arrangements and Derivative Financial Instruments. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for a discussion of our management of counterparty risk.
52
ITEM 4. CONTROLS AND PROCEDURES.
Management’s Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” which, consistent with Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, we define to mean controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of September 30, 2021 (the end of the period covered by this Quarterly Report on Form 10-Q).
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the third quarter of 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. On June 7, 2021, we completed the acquisition of Cooper Tire, which operated under its own set of systems and internal controls. Subsequent to the acquisition, we began the process of integrating certain of Cooper Tire's processes to our internal control over financial reporting environment. This integration will continue during the first year of the business combination.
53
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Asbestos Litigation
As reported in our Form 10-K for the year ended December 31, 2020, we were one of numerous defendants in legal proceedings in certain state and federal courts involving approximately 38,700 claimants relating to their alleged exposure to materials containing asbestos in products allegedly manufactured by us or asbestos materials present in our facilities. During the first nine months of 2021, approximately 800 claims were filed against us and approximately 1,000 were settled or dismissed. The amounts expended on asbestos defense and claim resolution by us and our insurers during the first nine months of 2021 was $11 million. At September 30, 2021, there were approximately 38,500 asbestos claims pending against us. The plaintiffs are seeking unspecified actual and punitive damages and other relief. Refer to Note to the Consolidated Financial Statements No. 13, Commitments and Contingent Liabilities, for additional information on asbestos litigation.
Reference is made to Item 3 of Part I of our 2020 Form 10-K and to Item 1 of Part II of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 and our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021 for additional discussion of legal proceedings.
ITEM 1A. RISK FACTORS.
Refer to “Item 1A. Risk Factors” in our 2020 Form 10-K and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 for a discussion of our risk factors.
ITEM 6. EXHIBITS.
Refer to the Index of Exhibits, which is by specific reference incorporated into and made a part of this Quarterly Report on Form 10-Q.
54
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2021
INDEX OF EXHIBITS
Exhibit Table Item No. |
|
Description of Exhibit |
|
Exhibit Number |
|
|
|
|
|
4 |
|
Instruments Defining the Rights of Security Holders, Including Indentures |
|
|
|
|
|
|
|
(a) |
|
|
|
|
|
|
|
|
|
22 |
|
Subsidiary Guarantors of Guaranteed Securities |
|
|
|
|
|
|
|
(a) |
|
|
22.1 |
|
|
|
|
|
|
31 |
|
Rule 13a-14(a) Certifications |
|
|
|
|
|
|
|
(a) |
|
|
31.1 |
|
|
|
|
|
|
(b) |
|
|
31.2 |
|
|
|
|
|
|
32 |
|
Section 1350 Certifications |
|
|
|
|
|
|
|
(a) |
|
|
32.1 |
|
|
|
|
|
|
101 |
|
Interactive Data Files |
|
|
|
|
|
|
|
|
|
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
101.INS |
|
|
|
|
|
|
|
Inline XBRL Taxonomy Extension Schema Document. |
|
101.SCH |
|
|
|
|
|
|
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
101.CAL |
|
|
|
|
|
|
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
101.DEF |
|
|
|
|
|
|
|
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
101.LAB |
|
|
|
|
|
|
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
101.PRE |
|
|
|
|
|
104 |
|
Cover Page Interactive Data File |
|
|
|
|
|
|
|
|
|
The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL (included as Exhibit 101). |
|
|
55
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
THE GOODYEAR TIRE & RUBBER COMPANY |
|
|
|
(Registrant) |
|
|
|
|
|
Date: |
November 5, 2021 |
By |
/s/ EVAN M. SCOCOS |
|
|
Evan M. Scocos, Vice President and Controller (Signing on behalf of the Registrant as a duly authorized officer of the Registrant and signing as the Principal Accounting Officer of the Registrant.) |
56