Exhibit 99.1
COOPER TIRE & RUBBER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands except per share amounts)
Twelve Months Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Net sales | $ | 2,521,074 | $ | 2,752,639 | $ | 2,808,062 | ||||||
Cost of products sold | 2,033,260 | 2,319,349 | 2,364,769 | |||||||||
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Gross profit | 487,814 | 433,290 | 443,293 | |||||||||
Selling, general and administrative expense | 244,529 | 250,017 | 244,221 | |||||||||
Restructuring expense | 12,404 | 8,818 | — | |||||||||
Goodwill impairment charge | — | — | 33,827 | |||||||||
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Operating profit | 230,881 | 174,455 | 165,245 | |||||||||
Interest expense | (22,707 | ) | (31,189 | ) | (32,181 | ) | ||||||
Interest income | 3,569 | 9,458 | 10,216 | |||||||||
Other pension and postretirement benefit expense | (25,419 | ) | (41,567 | ) | (27,806 | ) | ||||||
Other non-operating income (expense) | 4,579 | (1,485 | ) | (1,416 | ) | |||||||
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Income before income taxes | 190,903 | 109,672 | 114,058 | |||||||||
Income tax provision | 46,999 | 11,355 | 33,495 | |||||||||
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Net income | 143,904 | 98,317 | 80,563 | |||||||||
Net income attributable to noncontrolling shareholders’ interests | 1,115 | 1,913 | 3,977 | |||||||||
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Net income attributable to Cooper Tire & Rubber Company | $ | 142,789 | $ | 96,404 | $ | 76,586 | ||||||
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Earnings per share: | ||||||||||||
Basic | $ | 2.84 | $ | 1.92 | $ | 1.52 | ||||||
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Diluted | $ | 2.83 | $ | 1.91 | $ | 1.51 | ||||||
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See accompanying Notes to Consolidated Financial Statements.
-1-
COOPER TIRE & RUBBER COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
Twelve Months Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Net income | $ | 143,904 | $ | 98,317 | $ | 80,563 | ||||||
Other comprehensive income (loss): | ||||||||||||
Cumulative currency translation adjustments | 28,892 | 4,742 | (24,430 | ) | ||||||||
Currency loss charged to equity as part of acquisition of noncontrolling shareholder interest | (11,748 | ) | — | — | ||||||||
Financial instruments: | ||||||||||||
Change in the fair value of derivatives, net of reclassifications | (8,429 | ) | (3,753 | ) | 2,628 | |||||||
Income tax provision on derivative instruments | 2,206 | 1,054 | (827 | ) | ||||||||
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Financial instruments, net of tax | (6,223 | ) | (2,699 | ) | 1,801 | |||||||
Postretirement benefit plans: | ||||||||||||
Amortization of actuarial loss | 35,257 | 35,843 | 37,203 | |||||||||
Amortization of prior service cost (credit) | 1,429 | 603 | (541 | ) | ||||||||
Actuarial (loss) gain | (37,979 | ) | (12,877 | ) | 12,913 | |||||||
Pension settlement charges | 4,155 | 4,262 | — | |||||||||
Prior service effect of plan amendment | (2,581 | ) | (3,069 | ) | (3,704 | ) | ||||||
Income tax impact on postretirement benefit plans | (3,641 | ) | (9,333 | ) | (8,326 | ) | ||||||
Foreign currency translation loss | (4,611 | ) | (2,668 | ) | (264 | ) | ||||||
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Postretirement benefit plans, net of tax | (7,971 | ) | 12,761 | 37,281 | ||||||||
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Other comprehensive income | 2,950 | 14,804 | 14,652 | |||||||||
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Comprehensive income | 146,854 | 113,121 | 95,215 | |||||||||
Less: Comprehensive income attributable to noncontrolling shareholders’ interests | 3,394 | 2,708 | 1,740 | |||||||||
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Comprehensive income attributable to Cooper Tire & Rubber Company | $ | 143,460 | $ | 110,413 | $ | 93,475 | ||||||
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See accompanying Notes to Consolidated Financial Statements.
-2-
COOPER TIRE & RUBBER COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share amounts)
December 31, | ||||||||
2020 | 2019 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 625,758 | $ | 391,332 | ||||
Notes receivable | 9,076 | 535 | ||||||
Accounts receivable, less allowances of $11,162 at 2020 and $8,109 at 2019 | 506,305 | 544,257 | ||||||
Inventories: | ||||||||
Finished goods | 264,785 | 326,839 | ||||||
Work in process | 24,594 | 28,250 | ||||||
Raw materials and supplies | 98,277 | 109,132 | ||||||
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Total inventories | 387,656 | 464,221 | ||||||
Other current assets | 53,420 | 52,635 | ||||||
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Total current assets | 1,582,215 | 1,452,980 | ||||||
Property, plant and equipment: | ||||||||
Land and land improvements | 57,941 | 53,516 | ||||||
Buildings | 355,564 | 344,142 | ||||||
Machinery and equipment | 2,154,000 | 2,042,578 | ||||||
Molds, cores and rings | 266,671 | 262,444 | ||||||
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Total property, plant and equipment | 2,834,176 | 2,702,680 | ||||||
Less: Accumulated depreciation | 1,756,552 | 1,655,438 | ||||||
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Property, plant and equipment, net | 1,077,624 | 1,047,242 | ||||||
Operating lease right-of-use assets, net of accumulated amortization of $46,045 at 2020 and $26,121 at 2019 | 91,884 | 80,752 | ||||||
Goodwill | 18,851 | 18,851 | ||||||
Intangibles, net of accumulated amortization of $143,097 at 2020 and $123,735 at 2019 | 95,376 | 111,356 | ||||||
Deferred income tax assets | 30,572 | 29,336 | ||||||
Investment in joint venture | 53,494 | 48,912 | ||||||
Other assets | 21,557 | 12,909 | ||||||
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Total assets | $ | 2,971,573 | $ | 2,802,338 | ||||
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See accompanying Notes to Consolidated Financial Statements.
-3-
COOPER TIRE & RUBBER COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share amounts)
December 31, | ||||||||
(Continued) | 2020 | 2019 | ||||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term borrowings | $ | 15,614 | $ | 12,296 | ||||
Accounts payable | 297,578 | 276,732 | ||||||
Accrued liabilities | 308,287 | 302,477 | ||||||
Income taxes payable | 2,254 | 2,304 | ||||||
Current portion of long-term debt and finance leases | 24,377 | 10,265 | ||||||
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Total current liabilities | 648,110 | 604,074 | ||||||
Long-term debt and finance leases | 314,265 | 309,148 | ||||||
Noncurrent operating leases | 71,391 | 55,371 | ||||||
Postretirement benefits other than pensions | 221,395 | 227,216 | ||||||
Pension benefits | 152,110 | 126,707 | ||||||
Other long-term liabilities | 152,242 | 149,065 | ||||||
Deferred income tax liabilities | 1,469 | 3,024 | ||||||
Equity: | ||||||||
Preferred stock, $1 par value; 5,000,000 shares authorized; none issued | — | — | ||||||
Common stock, $1 par value; 300,000,000 shares authorized; 87,850,292 shares issued at 2020 and 2019 | 87,850 | 87,850 | ||||||
Capital in excess of par value | 20,815 | 22,175 | ||||||
Retained earnings | 2,646,567 | 2,524,963 | ||||||
Accumulated other comprehensive loss | (446,909 | ) | (447,580 | ) | ||||
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Parent stockholders’ equity before treasury stock | 2,308,323 | 2,187,408 | ||||||
Less: Common shares in treasury at cost (37,454,209 at 2020 and 37,647,058 at 2019) | (919,424 | ) | (922,783 | ) | ||||
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Total parent stockholders’ equity | 1,388,899 | 1,264,625 | ||||||
Noncontrolling shareholders’ interests in consolidated subsidiaries | 21,692 | 63,108 | ||||||
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Total equity | 1,410,591 | 1,327,733 | ||||||
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Total liabilities and equity | $ | 2,971,573 | $ | 2,802,338 | ||||
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See accompanying Notes to Consolidated Financial Statements.
-4-
COOPER TIRE & RUBBER COMPANY
CONSOLIDATED STATEMENT OF EQUITY
(Dollar amounts in thousands except per share amounts)
Common Stock $1 Par Value | Capital in Excess of Par Value | Retained Earnings | Cumulative Other Comprehensive (Loss) Income | Common Shares in Treasury | Total Parent Stockholders’ Equity | Noncontrolling Shareholders’ Interests in Consolidated Subsidiaries | Total | |||||||||||||||||||||||||
Balance at December 31, 2017 | $ | 87,850 | $ | 20,740 | $ | 2,394,372 | $ | (478,478 | ) | $ | (897,388 | ) | $ | 1,127,096 | $ | 58,660 | $ | 1,185,756 | ||||||||||||||
Net income | — | — | 76,586 | — | — | 76,586 | 3,977 | 80,563 | ||||||||||||||||||||||||
Other comprehensive loss | — | — | — | 16,889 | — | 16,889 | (2,237 | ) | 14,652 | |||||||||||||||||||||||
Share repurchase program | — | — | — | — | (30,183 | ) | (30,183 | ) | — | (30,183 | ) | |||||||||||||||||||||
Stock compensation plans | — | 384 | (106 | ) | — | 2,515 | 2,793 | — | 2,793 | |||||||||||||||||||||||
Cash dividends - $0.42 per share | — | — | (21,138 | ) | — | — | (21,138 | ) | — | (21,138 | ) | |||||||||||||||||||||
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Balance at December 31, 2018 | 87,850 | 21,124 | 2,449,714 | (461,589 | ) | (925,056 | ) | 1,172,043 | 60,400 | 1,232,443 | ||||||||||||||||||||||
Net income | — | — | 96,404 | — | — | 96,404 | 1,913 | 98,317 | ||||||||||||||||||||||||
Other comprehensive income | — | — | — | 14,009 | — | 14,009 | 795 | 14,804 | ||||||||||||||||||||||||
Stock compensation plans | — | 1,051 | (87 | ) | — | 2,273 | 3,237 | — | 3,237 | |||||||||||||||||||||||
Cash dividends - $0.42 per share | — | — | (21,068 | ) | — | — | (21,068 | ) | — | (21,068 | ) | |||||||||||||||||||||
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Balance at December 31, 2019 | 87,850 | 22,175 | 2,524,963 | (447,580 | ) | (922,783 | ) | 1,264,625 | 63,108 | 1,327,733 | ||||||||||||||||||||||
Net income | — | — | 142,789 | — | — | 142,789 | 1,115 | 143,904 | ||||||||||||||||||||||||
Other comprehensive income, excluding currency loss charged to equity as part of acquisition of noncontrolling shareholder interest | — | — | — | 12,419 | — | 12,419 | 2,279 | 14,698 | ||||||||||||||||||||||||
Acquisition of noncontrolling shareholders’ interest | — | (5,714 | ) | — | (11,748 | ) | — | (17,462 | ) | (44,810 | ) | (62,272 | ) | |||||||||||||||||||
Stock compensation plans | — | 4,354 | (53 | ) | — | 3,359 | 7,660 | — | 7,660 | |||||||||||||||||||||||
Cash dividends - $0.42 per share | — | — | (21,132 | ) | — | — | (21,132 | ) | — | (21,132 | ) | |||||||||||||||||||||
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Balance at December 31, 2020 | $ | 87,850 | $ | 20,815 | $ | 2,646,567 | $ | (446,909 | ) | $ | (919,424 | ) | $ | 1,388,899 | $ | 21,692 | $ | 1,410,591 | ||||||||||||||
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See accompanying Notes to Consolidated Financial Statements.
-5-
COOPER TIRE & RUBBER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Twelve Months Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Operating activities: | ||||||||||||
Net income | $ | 143,904 | $ | 98,317 | $ | 80,563 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 158,847 | 148,054 | 147,161 | |||||||||
Deferred income taxes | (2,855 | ) | 1,746 | 30,519 | ||||||||
Stock-based compensation | 6,053 | 4,362 | 3,868 | |||||||||
Change in LIFO inventory reserve | (10,365 | ) | 2,548 | (3,026 | ) | |||||||
Amortization of unrecognized postretirement benefits | 36,686 | 36,446 | 36,662 | |||||||||
Goodwill impairment charge | — | — | 33,827 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts and notes receivable | 36,434 | 8,980 | (19,729 | ) | ||||||||
Inventories | 89,692 | 14,355 | 27,438 | |||||||||
Other current assets | 439 | 15,261 | (2,080 | ) | ||||||||
Accounts payable | 15,147 | 9,809 | 10,646 | |||||||||
Accrued liabilities | (921 | ) | (4,517 | ) | 7,635 | |||||||
Pension and postretirement benefits | (25,188 | ) | (49,714 | ) | (77,883 | ) | ||||||
Other items | 11,266 | 4,946 | (21,298 | ) | ||||||||
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Net cash provided by operating activities | 459,139 | 290,593 | 254,303 | |||||||||
Investing activities: | ||||||||||||
Additions to property, plant and equipment and capitalized software | (151,198 | ) | (202,722 | ) | (193,299 | ) | ||||||
Investment in joint venture | — | (49,001 | ) | — | ||||||||
Proceeds from the sale of assets | 146 | 119 | 160 | |||||||||
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Net cash used in investing activities | (151,052 | ) | (251,604 | ) | (193,139 | ) | ||||||
Financing activities: | ||||||||||||
Issuance of short-term debt | 324,614 | 12,296 | 19,423 | |||||||||
Repayment of short-term debt | (333,592 | ) | (15,288 | ) | (39,450 | ) | ||||||
Issuance of long-term debt | 31,538 | 200,000 | — | |||||||||
Repayment of long-term debt and finance lease obligations | (14,247 | ) | (177,251 | ) | (1,395 | ) | ||||||
Acquisition of noncontrolling shareholder interest | (62,272 | ) | — | — | ||||||||
Payment of financing fees | — | (2,207 | ) | (1,230 | ) | |||||||
Repurchase of common stock | — | — | (30,183 | ) | ||||||||
Payments of employee taxes withheld from share-based awards | (990 | ) | (1,376 | ) | (2,111 | ) | ||||||
Payment of dividends to Cooper Tire & Rubber Company stockholders | (21,132 | ) | (21,068 | ) | (21,138 | ) | ||||||
Issuance of common shares related to stock-based compensation | 2,638 | 232 | 306 | |||||||||
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Net cash used in financing activities | (73,443 | ) | (4,662 | ) | (75,778 | ) | ||||||
Effects of exchange rate changes on cash | 1,736 | 552 | 554 | |||||||||
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Net change in cash, cash equivalents and restricted cash | 236,380 | 34,879 | (14,060 | ) | ||||||||
Cash, cash equivalents and restricted cash at beginning of period | 413,125 | 378,246 | 392,306 | |||||||||
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Cash, cash equivalents and restricted cash at end of period | $ | 649,505 | $ | 413,125 | $ | 378,246 | ||||||
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Cash and cash equivalents | $ | 625,758 | $ | 391,332 | $ | 356,254 | ||||||
Restricted cash included in Other current assets | 22,780 | 20,305 | 19,967 | |||||||||
Restricted cash included in Other assets | 967 | 1,488 | 2,025 | |||||||||
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Total cash, cash equivalents and restricted cash | $ | 649,505 | $ | 413,125 | $ | 378,246 | ||||||
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See accompanying Notes to Consolidated Financial Statements.
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COOPER TIRE & RUBBER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share amounts)
Note 1. Significant Accounting Policies
Principles of consolidation – The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Acquired businesses are included in the consolidated financial statements from the dates of acquisition. All intercompany accounts and transactions have been eliminated.
The Company consolidates into its financial statements the accounts of the Company, all wholly-owned subsidiaries, and any partially-owned subsidiary that the Company has the power to control. Control generally equates to ownership percentage, whereby investments that are more than 50 percent owned are consolidated, investments in subsidiaries of 50 percent or less but greater than 20 percent are accounted for using the equity method, and investments in subsidiaries of 20 percent or less are measured at fair value or, if fair value is not readily available, at cost (less impairment, if any), adjusted for observable price changes in orderly transactions for the identical or a similar investment. The Company does not consolidate any entity for which it has a variable interest based solely on power to direct the activities and significant participation in the entity’s expected results that would not otherwise be consolidated based on control through voting interests. Further, the Company’s joint ventures are businesses established and maintained in connection with the Company’s operating strategy.
Cash and cash equivalents – The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents.
The Company’s objectives related to the investment of cash not required for operations is to preserve capital, meet the Company’s liquidity needs and earn a return consistent with these guidelines and market conditions. Investments deemed eligible for the investment of the Company’s cash include: 1) U.S. Treasury securities and general obligations fully guaranteed with respect to principal and interest by the government; 2) obligations of U.S. government agencies; 3) commercial paper or other corporate notes of prime quality purchased directly from the issuer or through recognized money market dealers; 4) time deposits, certificates of deposit or bankers’ acceptances of banks rated “A-” by Standard & Poor’s or “A3” by Moody’s; 5) collateralized mortgage obligations rated “AAA” by Standard & Poor’s and “Aaa” by Moody’s; 6) tax-exempt and taxable obligations of state and local governments of prime quality; and 7) mutual funds or outside managed portfolios that invest in the above investments. The Company had cash and cash equivalents totaling $625,758 and $391,332 at December 31, 2020 and December 31, 2019, respectively. The majority of the cash and cash equivalents were invested in eligible financial instruments in excess of amounts insured by the Federal Deposit Insurance Corporation and, therefore, subject to credit risk. Management believes that the probability of losses related to credit risk on investments classified as cash and cash equivalents is remote.
Restricted cash – The Company’s restricted cash is comprised primarily of funds within a voluntary employees’ beneficiary trust restricted to the future payment of employee benefit obligations.
Notes receivable – The Company has received bank secured notes from certain of its customers in the PRC to settle trade accounts receivable. These notes generally have maturities of six months or less and are redeemable at the bank of issuance. The Company evaluates the credit risk of the issuing bank prior to accepting a bank secured note from a customer which supports periodic assessment of expected credit losses. Management believes that the probability of material losses related to credit risk on notes receivable is remote.
Accounts receivable – The Company records trade accounts receivable when revenue is recorded in accordance with its revenue recognition policy and relieves accounts receivable when payments are received from customers.
Allowance for credit losses – In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which changes accounting requirements for the recognition of credit losses from an incurred or probable impairment methodology to a current expected credit losses (CECL) methodology. This standard is effective for interim and annual reporting periods beginning after December 15, 2019 and was adopted effective January 1, 2020. Trade receivables (including the allowance for credit losses) is the only financial instrument in scope for ASU 2016-13 currently held by the Company.
In implementing the standard, the Company amended its policy to utilize an expected loss methodology based on credit risk in place of the incurred loss methodology based on aging. The Company’s updated policy includes the regular review of its outstanding accounts receivable portfolio to assess risk and likelihood of credit loss. This review includes consideration of potential credit loss over the asset’s contractual life, along with historical experience, current conditions and forecasts based on management’s judgment. The Company also performs periodic credit evaluations of customers’ financial conditions in order to assess credit worthiness and maintain appropriate credit limits. Accounts receivable, net of the allowance for credit losses, are $506,305 and $544,257 as of December 31, 2020 and December 31, 2019, respectively. The Company recorded provisions for credit losses for receivables of $11,162 and $8,109 at the same dates. The adoption of this standard did not materially impact the Company’s consolidated financial statements.
-7-
Inventories – Inventory costs are determined using the LIFO method for substantially all U.S. inventories. Costs of other inventories have been determined by the first-in, first-out (“FIFO”) method. Inventories include direct material, direct labor, and applicable manufacturing and engineering overhead costs. FIFO inventories are valued at cost, which is not in excess of the net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. LIFO inventories are valued at the lower of cost or market.
Long-lived assets, including goodwill and right-of-use assets – Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the following expected useful lives:
Land improvements | 10 to 20 years | |||
Buildings | 10 to 40 years | |||
Machinery and equipment | 5 to 14 years | |||
Furniture and fixtures | 5 to 10 years | |||
Molds, cores and rings | 4 to 10 years |
The Company capitalizes certain internal and external costs incurred to acquire or develop internal-use software. Capitalized software costs are amortized over the estimated useful life of the software, which ranges from one to ten years.
Intangibles with definite lives include trademarks, technology and intellectual property which were fully amortized as of December 31, 2019. Land use rights are amortized over their remaining useful lives, which range from 35 to 42 years.
On January 1, 2019, the Company adopted ASC 842, “Leases,” which requires lessees to record right-of-use assets and related lease obligations on the balance sheet, as well as disclose key information regarding leasing arrangements.
The Company evaluates the recoverability of long-lived assets, including property, plant and equipment and right-of-use assets for operating and finance leases, based on undiscounted projected cash flows, excluding interest and taxes, when any impairment is indicated. Goodwill and indefinite-lived intangibles are assessed for potential impairment at least annually or when events or circumstances indicate impairment may have occurred.
Earnings per common share – Net income per share is computed on the basis of the weighted average number of common shares outstanding each year. Diluted earnings per share includes the dilutive effect of stock options and other stock units. The following table sets forth the computation of basic and diluted earnings per share:
(Number of shares and dollar amounts in thousands except per share amounts) | 2020 | 2019 | 2018 | |||||||||
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Numerator for basic and diluted earnings per share - income from continuing operations available to common stockholders | $ | 142,789 | $ | 96,404 | $ | 76,586 | ||||||
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Denominator for basic earnings per share - weighted average shares outstanding | 50,307 | 50,159 | 50,350 | |||||||||
Effect of dilutive securities - stock options and other stock units | 198 | 219 | 247 | |||||||||
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Denominator for diluted earnings per share - adjusted weighted average shares outstanding | 50,505 | 50,378 | 50,597 | |||||||||
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Earnings per share: | ||||||||||||
Basic | $ | 2.84 | $ | 1.92 | $ | 1.52 | ||||||
Diluted | 2.83 | 1.91 | 1.51 |
At December 31, 2020, 2019 and 2018, all options to purchase shares of the Company’s common stock were included in the computation of diluted earnings per share as the options’ exercise prices were less than the average market price of the common shares.
Derivative financial instruments – Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into financial instruments for trading or speculative purposes. The Company offsets fair value amounts recognized on the Consolidated Balance Sheets for derivative financial instruments executed with the same counter-party.
The Company uses foreign currency forward contracts as hedges of the fair value of certain non-U.S. dollar denominated net asset and liability positions. Gains and losses resulting from the impact of currency exchange rate movements on these forward contracts are recognized in the accompanying Consolidated Statements of Income in the period in which the exchange rates change and offset the foreign currency gains and losses on the underlying exposure being hedged.
-8-
Foreign currency forward contracts are also used to hedge variable cash flows associated with forecasted sales and purchases denominated in currencies that are not the functional currency of certain entities. The forward contracts have maturities of less than twelve months pursuant to the Company’s policies and hedging practices. These forward contracts meet the criteria for and have been designated as cash flow hedges. Accordingly, the unrealized gains and losses on such forward contracts are recorded as a separate component of stockholders’ equity in the accompanying Consolidated Balance Sheets and reclassified into earnings as the hedged transaction affects earnings.
The Company is exposed to interest rate risk on borrowings that bear interest at floating rates. The Company utilizes derivative instruments to manage the risk associated with the floating rate debt and has effectively fixed the variable interest rate component on the notional amount of these swaps. The swaps qualify for hedge accounting and, therefore, changes in the fair value of the swaps have been recorded as a separate component of stockholders’ equity in the accompanying Consolidated Balance Sheets and reclassified into earnings as the hedged transaction affects earnings.
The Company assesses hedge effectiveness quarterly. In doing so, the Company monitors the actual and forecasted foreign currency sales and purchases versus the amounts hedged to identify any hedge ineffectiveness. The Company also performs regression analysis comparing the change in value of the hedging contracts versus the underlying foreign currency sales and purchases, which confirms a high correlation and hedge effectiveness.
The Company is exposed to price risk related to forecasted purchases of certain commodities that are used as raw materials, principally natural rubber. Accordingly, it uses commodity contracts with forward pricing for a portion of its production requirements. These contracts generally qualify for the normal purchase exception under guidance for derivative instruments and hedging activities, and therefore are not subject to its provisions.
Income taxes – Income tax expense is based on reported earnings or losses before income taxes in accordance with the tax rules and regulations of the specific legal entities within the various specific taxing jurisdictions where the Company’s income is earned. Taxable income may differ from earnings before income taxes for financial accounting purposes. To the extent that differences are due to revenue or expense items reported in one period for tax purposes and in another period for financial accounting purposes, a provision for deferred income taxes is made using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset may not be realized. Deferred income taxes generally are not recorded on the majority of undistributed earnings of international subsidiaries based on the Company’s intention that these earnings will continue to be reinvested. Upon enactment of the Tax Act, the Transition Tax was recorded based on approximately $495 million of unremitted foreign earnings. During 2020, the Company re-evaluated its position on potential earnings repatriation and has concluded that the repatriation implications of the Tax Act continue to have no impact on its indefinite reinvestment assertion, consistent with all years since 2018. As such, no change has been made with respect to that assertion for the year ended December 31, 2020.
Product liability – The Company accrues costs for asserted product liability claims at the time a loss is probable and the amount of loss can be estimated. The Company believes the probability of loss can be established and the amount of loss can be estimated only after certain minimum information is available, including verification that Company-produced product was involved in the incident giving rise to the claim, the condition of the product purported to be involved in the claim, the nature of the incident giving rise to the claim and the extent of the purported injury or damages. In cases where such information is known, each product liability claim is evaluated based on its specific facts and circumstances. A judgment is then made to determine the requirement for establishment or revision of an accrual for any potential liability. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. The liability often cannot be determined with precision until the claim is resolved.
Pursuant to ASC 450 “Contingencies,” the Company accrues the minimum liability for each known claim when the estimated outcome is a range of probable loss and no one amount within that range is more likely than another. For such known claims, the Company accrues the minimum liability because the product liability claims faced by the Company are unique and widely variable, and accordingly, the resolutions of those claims have an enormous amount of variability. The costs have ranged from zero dollars to $33 million in one case with no average that is meaningful.
No specific accrual is made for individual unasserted claims or for premature claims, asserted claims where the minimum information needed to evaluate the probability of a liability is not yet known. However, an accrual is maintained for such claims based, in part, on management’s expectations for future litigation activity and the settled claims history maintained, including the historical number of claims and amount of settlements.
The Company periodically reviews its estimates and any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. Because of the speculative nature of litigation in the U.S., the Company does not believe a meaningful aggregate range of reasonably possible loss for asserted and unasserted claims can be determined. While the Company believes its reserves are reasonably stated, it is possible an individual claim from time to time may result in an aberration from the norm and could have a material impact.
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The product liability expense reported by the Company includes amortization of insurance premium costs, adjustments to settlement reserves and legal costs incurred in defending claims against the Company. Legal costs are expensed as incurred and product liability insurance premiums are amortized over coverage periods.
Advertising expense – Expenses incurred for advertising include production and media and are generally expensed when incurred. Costs associated with dealer-earned cooperative advertising are recorded as a reduction of the revenue component of Net sales at the time of sale. Advertising expense for 2020, 2019 and 2018 was $53,662, $58,453 and $54,177, respectively.
Stock-based compensation – The Company’s incentive compensation plans allow the Company to grant awards to employees in the form of stock options, stock awards, restricted stock units, stock appreciation rights, performance stock units, dividend equivalents and other awards. Compensation related to these awards is determined based on the fair value on the date of grant and is amortized to expense over the vesting period. If awards can be settled in cash, these awards are recorded as liabilities and marked to market.
Warranties – Warranties are provided on the sale of certain of the Company’s products and an accrual for estimated future claims is recorded at the time revenue is recognized. Tire replacement under most of the warranties the Company offers is on a prorated basis. The Company provides for the estimated cost of product warranties based primarily on historical return rates, estimates of the eligible tire population and the value of tires to be replaced. The following table summarizes the activity in the Company’s product warranty liabilities, which are recorded in Accrued liabilities and Other long-term liabilities on the Company’s Consolidated Balance Sheets:
2020 | 2019 | 2018 | ||||||||||
Reserve at beginning of year | $ | 12,734 | $ | 12,431 | $ | 12,093 | ||||||
Additions | 9,591 | 11,609 | 13,187 | |||||||||
Payments | (8,448 | ) | (11,306 | ) | (12,849 | ) | ||||||
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Reserve at December 31 | $ | 13,877 | $ | 12,734 | $ | 12,431 | ||||||
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Use of estimates – The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of: (1) revenues and expenses during the reporting period; and (2) assets and liabilities, as well as disclosure of contingent assets and liabilities, at the date of the consolidated financial statements. Actual results could differ from those estimates.
Revenue recognition – In accordance with ASC 606, revenues are recognized when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. Shipping and handling costs are recorded in cost of products sold. Allowance programs such as volume rebates and cash discounts are recorded at the time of sale as a reduction to revenue based on anticipated accrual rates for the year.
Research and development – Costs are charged to Cost of products sold as incurred and amounted to approximately $64,140, $69,928 and $64,007 during 2020, 2019 and 2018, respectively.
Related party transactions – Prior to becoming a wholly-owned subsidiary, the Company’s COOCSA joint venture paid $5,800, $26,589 and $28,023 in 2020, 2019 and 2018, respectively, to an employment services company in Mexico owned by members of the joint venture workforce. In addition, subsequent to the acquisition, payments of $15,984 were made to members of the prior joint venture workforce in connection with services rendered. COOCSA also recorded sales of $2,784, $4,373 and $4,713 to the now former noncontrolling shareholder in 2020, 2019 and 2018, respectively. The Company purchased $2,784, $10,920 and $775 of TBR tires from Sailun Vietnam in 2020, 2019 and 2018, respectively, through an off-take agreement between the two parties.
Pensions and Postretirement Benefits Other than Pensions – The Company provides certain pension and postretirement benefits other than pensions to employees and retired employees, including pensions, postretirement health care benefits, other postretirement benefits, and supplemental pensions. In general, the Company’s policy is to fund its pension benefit obligation based on legal requirements, tax and liquidity considerations and local practices. The Company does not fund its postretirement benefit obligation.
Plan assets and obligations are measured using various actuarial assumptions, such as discount rates, rate of compensation increase, mortality rates, turnover rates and health care cost trend rates, which are determined as of the current year measurement date. The measurement of net periodic benefit cost is based on various actuarial assumptions, including discount rates, expected return on plan assets and rate of compensation increase, which are determined as of the prior year measurement date. The Company reviews its actuarial assumptions on an annual basis and modifies these assumptions when appropriate. As required by GAAP, the effects of the modifications are recorded currently or are amortized over future periods.
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The expected return on plan assets is determined using the expected long term rate of return. These computed rates of return are reviewed by the Company’s investment advisers and actuaries. Industry comparables and other outside guidance are also considered in the annual selection of the expected rates of return on pension assets.
The corridor approach is used in the valuation of defined benefit pension and postretirement benefit plans. The corridor approach defers all actuarial gains and losses resulting from variances between actual results and actuarial assumptions. Those unrecognized gains and losses are amortized when the net gains and losses exceed 10 percent of the greater of the market-related value of plan assets or the projected benefit obligation at the beginning of the year. The amount in excess of the corridor is amortized over the average remaining service period to retirement date of eligible plan participants.
Tariffs – The Company is subject to tariffs on the import of tires, raw materials and tire-manufacturing equipment in certain of the jurisdictions in which it operates. Tariff costs are included within inventory as they pertain to tires and raw materials, while tariffs on tire-manufacturing equipment are included as part of the cost of fixed assets. Material components of the Company’s tariff costs include:
• | Passenger Car and Light Truck Tire Tariffs – Antidumping and countervailing duty investigations into certain passenger car and light truck tires imported from the PRC into the United States were initiated on July 14, 2014. The determinations announced in both investigations were affirmative and resulted in the imposition of significant additional duties from each. The rates are subject to review annually and a material change in the new rates could have a significant impact on the Company’s results. |
• | Truck and Bus Tire Tariffs – Antidumping and countervailing duty investigations into certain TBR tires imported from the PRC into the U.S. were initiated on January 29, 2016. On February 22, 2017, the ITC made a final determination that the U.S. market had not suffered material injury because of imports of TBR tires from the PRC. However, on November 1, 2018, the CIT remanded the case back to the ITC for reconsideration. On January 30, 2019, the ITC reversed its earlier decision and made an affirmative determination of material injury. On February 15, 2019, the determination was published in the Federal Register and countervailing duties of 42.16 percent were imposed on the Company’s TBR tire imports into the U.S. from China. The ITC’s re-determination, along with comments from the parties regarding the re-determination, were filed with the CIT. The CIT affirmed the ITC re-determination on February 18, 2020. The rates are subject to review annually and a material change in the new rates could have a significant impact on the Company’s results. |
• | Section 301 Tariffs – Pursuant to Section 301: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, passenger, light truck and truck and bus tires, raw materials and tire-manufacturing equipment from the PRC imported into the U.S. became subject to additional 10 percent duties effective September 24, 2018. These tariffs increased to 25 percent effective May 10, 2019. |
• | Duty Drawbacks – The enactment in December 2018 of the Modernized Drawback Final Rule under the Trade Enforcement and Trade Facilitation Act of 2015 expanded the Company’s ability to recover Section 301 and Ad Valorem duties paid on goods imported into the U.S. when such goods, or similar items, are subsequently exported. |
Recent Accounting Pronouncements
Each change to U.S. GAAP is established by the Financial Accounting Standards Board (“FASB”) in the form of an accounting standards update (“ASU”) to the FASB’s Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs.
Accounting Pronouncements – Recently adopted
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820),” which removes, modifies and adds various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. Such modifications to disclosures center around Level 3 fair value measurements and investments in entities that calculate net asset value. This standard is effective for interim and annual reporting periods beginning after December 15, 2019 and has been adopted by the Company effective January 1, 2020. The adoption of this standard did not materially impact the Company’s consolidated financial statements.
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Internal-Use Software
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40),” which aligns the requirements for capitalizing implementation costs incurred in a service contract hosting arrangement with those of developing or obtaining internal-use software. This standard is effective for interim and annual reporting periods beginning after December 15, 2019 and has been adopted prospectively by the Company effective January 1, 2020. Capitalization of implementation costs incurred in a service contract hosting arrangement affects Intangibles, net of accumulated amortization, Cost of products sold, and Selling, general, and administrative expense within the consolidated financial statements. The adoption of this standard did not materially impact the Company’s consolidated financial statements.
Accounting for Income Taxes
On December 18, 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” to, among other provisions, eliminate certain exceptions related to intra-period tax allocation and loss benefit limitations in interim periods, as well as certain rules pertaining to deferred taxes for equity method investees. This ASU also simplifies rules pertaining to franchise taxes and other taxes partially based on income, and changes the timing of when an entity recognizes effects of enacted tax law changes. This standard becomes effective in fiscal years beginning after December 15, 2020; however, the Company chose to early adopt as of January 1, 2020. The adoption of this standard did not materially impact the Company’s consolidated financial statements.
Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20),” which removes, modifies and adds various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. For example, disclosures around the effect of a one-percentage-point change in assumed health care costs was removed. This standard is effective for fiscal years ending after December 15, 2020. These amendments must be applied on a retrospective basis for all periods presented. The adoption of this standard did not materially impact the Company’s consolidated financial statements and is reflected in Note 11 “Pensions and Postretirement Benefits Other than Pensions.”
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The Company will utilize optional expediencies under ASC 848 on their cash flow designated hedges during LIBOR transition to continue to assess future LIBOR interest as probable beyond LIBOR’s termination, to document changes to critical terms of the derivative and the borrowings related to reference rate reform and to make changes to effectiveness assessments related to reference rate reform without dedesignating the hedge relationships. The adoption of this standard did not materially impact the Company’s consolidated financial statements.
Note 2. COVID-19
In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The Company’s priorities during the COVID-19 pandemic have been protecting the health and safety of its employees, responsibilities to its broader communities, and commitments to its customers and other key stakeholders.
The Company’s consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse accounting impacts on the Company’s results of operations for the year ended December 31, 2020. Given the dynamic nature of the COVID-19 pandemic and related market conditions, the Company cannot reasonably estimate the period of time that these events will persist or the full extent of the impact they will have on the business. The Company continues to take actions designed to mitigate the adverse effects of this rapidly changing market environment.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment. The Company’s payment of employer payroll taxes after enactment otherwise due in 2020 was delayed, with 50 percent due by December 31, 2021, and the remaining 50 percent by December 31, 2022. At December 31, 2020, the Company has deferred the remittance of $14,742 of employer taxes under the CARES Act. This liability is split evenly between the Company’s Accrued liabilities and Other long-term liabilities in the Consolidated Balance Sheets. The Company continues to evaluate the potential applicability and related impact of the CARES Act. The CARES Act has had no further impact on the Company’s consolidated financial statements at December 31, 2020.
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Note 3. Restructuring
2020 Activity
Reduction in Force
In the second quarter of 2020, the Company announced a reduction in its workforce as a result of the Company’s continuing evaluation of the skills and roles required for the Company to succeed and grow into the future. As a result of this action, the Company incurred severance and other related costs of $1,474 for the three month period ended June 30, 2020. No further expenses were incurred for the year ended December 31, 2020.
Corporacion de Occidente SA de CV
On January 24, 2020, the Company acquired the remaining 41.57 percent noncontrolling ownership interest in COOCSA, making COOCSA a wholly-owned subsidiary in the Americas Segment. In this transaction, the Company acquired the remaining outstanding voting common stock of COOCSA for a total cash price of $54,500. In addition, subsequent to the acquisition, payments of $15,984 were made to members of the prior joint venture workforce in connection with services rendered.
In accordance with ASC 810, “Consolidation”, the excess of the purchase price over the noncontrolling shareholder interest was recorded as a decrease to Capital in excess of par value to reflect the additional ownership. Payments to members of the joint venture workforce in connection with services rendered included $7,772 paid to members that were also shareholders of the non-controlling interest. This amount was also treated as part of the overall purchase price under ASC 810.
In addition to the payments made to the joint venture workforce for services rendered, the Company also incurred $2,712 of other costs associated with the transaction. For the three month period ended March 31, 2020, the Company incurred restructuring expense of $10,930 related to the COOCSA acquisition. There were no further restructuring expenses related to the COOCSA acquisition for the year ended December 31, 2020.
The full year period costs related to the reduction in force and COOCSA acquisition are comprised of:
Twelve Months Ended December 31, 2020 | ||||
Reduction in force - severance | $ | 1,250 | ||
Reduction in force - other | 224 | |||
COOCSA workforce services rendered | 8,218 | |||
COOCSA professional and other costs | 2,712 | |||
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Total restructuring expense | $ | 12,404 | ||
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At December 31, 2020, the Company did not have an accrued restructuring balance related to these actions.
2019 Activity
Cooper Tire Europe
On January 17, 2019, Cooper Tire Europe, a wholly-owned subsidiary of the Company, committed to a plan to cease substantially all light vehicle tire production at its Melksham, U.K. facility, which is included in the International Segment. The phasing out of light vehicle tire production was substantially completed in the third quarter of 2019. Approximately 300 roles were eliminated at the site. Cooper Tire Europe now obtains light vehicle tires to meet customer needs from other production sites within the Company’s global production network. Approximately 400 roles remain in Melksham to support the functions that continue there, including motorsports and motorcycle tire production, a materials business, Cooper Tire Europe headquarters, sales and marketing, and the Europe Technical Center. Costs related to the decision to cease light vehicle tire production at the Melksham, U.K. facility were $8,315 for the full year ended December 31, 2019. In connection with this business realignment, a one-time payment from the U.S. to Serbia was made during the fourth quarter of 2019 in order to allow the Serbian operations to improve their financial standing and serve as a reliable and fully operational contract manufacturer for the U.S.
Cooper Tire Asia
In the fourth quarter of 2019, the Company’s Asian operations, included in the International Segment, completed a headcount optimization review. As a result of this optimization, the Company incurred $1,262 of restructuring expense during 2019.
For the year ended December 31, 2019, the Company recorded restructuring expense of $8,818, made up of employee severance, asset write-downs and other costs. At December 31, 2019, the Company’s accrued restructuring balance was $1,398, composed primarily of severance costs related to the Asian operations.
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Twelve Months Ended December 31, 2019 | ||||
Cooper Tire Europe employee severance costs | $ | 5,308 | ||
Cooper Tire Europe asset write-downs & other costs | 2,248 | |||
Cooper Tire Asia employee severance costs | 1,262 | |||
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Total restructuring expense | $ | 8,818 | ||
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Beginning balance of accrued restructuring | $ | — | ||
Accrued severance costs | 6,630 | |||
Payment of severance costs | (5,368 | ) | ||
Accrued professional fees | 819 | |||
Payment of professional fees | (683 | ) | ||
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Balance of accrued restructuring at December 31, 2019 | $ | 1,398 | ||
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Payment of severance costs | (1,262 | ) | ||
Payment of professional fees | (136 | ) | ||
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Balance of accrued restructuring at December 31, 2020 | $ | — | ||
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In addition to the costs classified as restructuring expense on the Consolidated Statement of Income, the Company incurred additional costs of $759 in 2019 as a result of Cooper Tire Europe’s decision to cease light vehicle production at its Melksham facility. These additional costs relate to professional fees associated with the Company’s evaluation of its legal entity structure moving forward, as well as other matters, and are included within Selling, general and administrative expense on the Consolidated Statement of Income.
Note 4. Revenue from Contracts with Customers
Accounting policy
Revenue is measured based on the consideration specified in a contract with a customer and excludes any sales incentives or rebates. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer. This occurs with shipment or delivery, depending on the underlying terms with the customer. The transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, the Company estimates provisions for different forms of variable consideration (discounts and rebates) based on historical experience, current conditions and contractual obligations, as applicable. Payment terms with customers vary by region and customer, but are generally 30-90 days. The Company does not have significant financing components or significant payment terms. Incidental items that are immaterial in the context of the contract are expensed as incurred.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost and not as a separate performance obligation. Therefore, such items are accrued upon recognition of revenue.
Nature of goods and services
The following is a description of principal activities, separated by reportable segments, from which the Company generates its revenue. See Note 19 - Business Segments for additional details on the Company’s reportable segments.
The Company’s reportable segments have the following revenue characteristics:
• | Americas Tire Operations - The Americas Tire Operations segment manufactures and markets passenger car and light truck tires. The segment also markets and distributes racing, motorcycle and TBR tires. |
• | International Tire Operations - The International Tire Operations segment manufactures and markets passenger car, light truck, motorcycle, racing and TBR tires and tire retread material for global markets. |
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Disaggregation of revenue
In the following tables, revenue is disaggregated by major market channel for the twelve months ended December 31, 2020, 2019, and 2018, respectively:
Twelve Months Ended December 31, 2020 | ||||||||||||||||
Americas | International | Eliminations | Total | |||||||||||||
Light Vehicle (1) | $ | 1,932,725 | $ | 354,398 | $ | (54,627 | ) | $ | 2,232,496 | |||||||
Truck and bus radial | 186,718 | 82,541 | (76,843 | ) | 192,416 | |||||||||||
Other (2) | 51,446 | 44,716 | — | 96,162 | ||||||||||||
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Net sales | $ | 2,170,889 | $ | 481,655 | $ | (131,470 | ) | $ | 2,521,074 | |||||||
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Americas | International | Eliminations | Total | |||||||||||||
Light Vehicle (1) | $ | 2,096,864 | $ | 403,524 | $ | (68,658 | ) | $ | 2,431,730 | |||||||
Truck and bus radial | 200,088 | 80,797 | (66,432 | ) | 214,453 | |||||||||||
Other (2) | 56,774 | 49,682 | — | 106,456 | ||||||||||||
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Net sales | $ | 2,353,726 | $ | 534,003 | $ | (135,090 | ) | $ | 2,752,639 | |||||||
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Twelve Months Ended December 31, 2018 | ||||||||||||||||
Americas | International | Eliminations | Total | |||||||||||||
Light Vehicle (1) | $ | 2,115,942 | $ | 481,499 | $ | (109,400 | ) | $ | 2,488,041 | |||||||
Truck and bus radial | 194,558 | 101,744 | (86,160 | ) | 210,142 | |||||||||||
Other (2) | 52,146 | 57,733 | — | 109,879 | ||||||||||||
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Net sales | $ | 2,362,646 | $ | 640,976 | $ | (195,560 | ) | $ | 2,808,062 |
(1) | Light vehicle includes passenger car and light truck tires |
(2) | Other includes motorcycle and racing tires, wheels, tire retread material, and other items |
Contract liabilities
Contract liabilities relate to customer payments received in advance of shipment. As the Company does not generally have rights to consideration for work completed but not billed at the reporting date, the Company does not have any contract assets. Accounts receivable are not considered contract assets under the revenue standard as contract assets are conditioned upon the Company’s future satisfaction of a performance obligation. Accounts receivable, in contrast, are unconditional rights to consideration.
Significant changes in the contract liabilities balance, included within the Company’s Accrued liabilities on the Consolidated Balance Sheets, during the twelve months ended December 31, 2020 and 2019 are as follows:
Contract Liabilities | ||||
Contract liabilities at January 1, 2019 | $ | 947 | ||
Increases to deferred revenue for cash received in advance from customers | 16,297 | |||
Decreases due to recognition of deferred revenue | (16,164 | ) | ||
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Contract liabilities at December 31, 2019 | $ | 1,080 | ||
Increases to deferred revenue for cash received in advance from customers | 8,243 | |||
Decreases due to recognition of deferred revenue | (8,550 | ) | ||
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Contract liabilities at December 31, 2020 | $ | 773 | ||
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Transaction price allocated to remaining performance obligations
For the twelve months ended December 31, 2020 and 2019, revenue recognized from performance obligations related to prior periods is not material.
Revenue expected to be recognized in any future period related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, contracts where revenue is recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, is not material.
The Company applies the practical expedient in ASC 606 “Revenue from Contracts with Customers” and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Note 5. Inventories
The Company uses the LIFO method for substantially all U.S. inventories. The current cost of the U.S. inventories under the FIFO method was $310,141 and $365,585 at December 31, 2020 and December 31, 2019, respectively. These FIFO values have been reduced by approximately $77,251 and $87,616 at December 31, 2020 and December 31, 2019, respectively, to arrive at the LIFO value reported on the Consolidated Balance Sheets. The Company’s remaining inventories have been valued under the FIFO method. All LIFO inventories are valued at the lower of cost or market. All other inventories are stated at the lower of cost or net realizable value.
Note 6. Goodwill and Intangibles
Goodwill is recorded in the segment where it was generated by acquisitions. In 2011, the Company recorded $18,851 of goodwill related to the acquisition of additional ownership of COOCSA in the Americas Tire Operations segment and, in 2016, the Company recorded goodwill in the amount of $33,250 related to the acquisition of GRT in the International Tire Operations segment. Goodwill prior to 2011 was zero.
Purchased goodwill and indefinite-lived intangible assets are tested annually for impairment, unless indicators are present that would require an earlier test. On December 12, 2018, Cooper Vietnam and Sailun Vietnam entered into an equity joint venture contract to establish a joint venture in Vietnam to produce and sell TBR tires. The new joint venture began commercially producing tires in 2020. The capacity created by this planned facility decreased expected production requirements for Cooper’s GRT joint venture. The Company included the expected impact of the new Vietnam joint venture on projected future cash flows in performing its annual goodwill impairment assessment on GRT in 2018. Based on the assessment performed, the goodwill balance was deemed to be fully impaired and resulted in a non-cash fourth quarter 2018 impairment charge of $33,827 recorded in the Consolidated Statement of Income. The fair value of GRT utilized in the goodwill impairment assessment was determined based upon internal and external inputs considering various market transactions and discounted cash flow valuation methods, among other factors. This valuation approach represented a Level 3 fair value measurement measured on a non-recurring basis in the fair value hierarchy due to the Company’s use of Company-specific inputs and unobservable measurement inputs.
During the fourth quarter of 2020 and 2019, the Company completed its annual goodwill and intangible asset impairment tests and no impairment was indicated for the goodwill related to the 2011 acquisition of additional ownership of COOCSA or the Company’s other indefinite-lived intangible assets.
The following table presents intangible assets and accumulated amortization balances as of December 31, 2020 and 2019:
December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
Definite-lived: | ||||||||||||||||||||||||
Capitalized software costs | $ | 213,015 | $ | (134,846 | ) | $ | 78,169 | $ | 205,929 | $ | (115,090 | ) | $ | 90,839 | ||||||||||
Land use rights | 11,341 | (4,001 | ) | 7,340 | 14,145 | (3,545 | ) | 10,600 | ||||||||||||||||
Trademarks and tradenames | 3,800 | (3,800 | ) | — | 3,800 | (3,800 | ) | — | ||||||||||||||||
Other | 500 | (450 | ) | 50 | 1,400 | (1,300 | ) | 100 | ||||||||||||||||
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| |||||||||||||
228,656 | (143,097 | ) | 85,559 | 225,274 | (123,735 | ) | 101,539 | |||||||||||||||||
Indefinite-lived: | ||||||||||||||||||||||||
Trademarks | 9,817 | — | 9,817 | 9,817 | — | 9,817 | ||||||||||||||||||
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$ | 238,473 | $ | (143,097 | ) | $ | 95,376 | $ | 235,091 | $ | (123,735 | ) | $ | 111,356 | |||||||||||
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Estimated amortization expense over the next five years is as follows: 2021 - $19,727, 2022 - $17,938, 2023 - $16,737, 2024 - $15,463 and 2025 - $2,534.
-16-
Note 7. Accrued Liabilities
Accrued liabilities at December 31 were as follows:
2020 | 2019 | |||||||
Volume and customer rebate programs | $ | 102,232 | $ | 99,168 | ||||
Payroll and employee benefits, excluding postemployment benefits | 82,870 | 75,218 | ||||||
Operating lease liability | 23,338 | 27,663 | ||||||
Taxes other than income taxes | 21,542 | 12,505 | ||||||
Product liability | 18,337 | 25,366 | ||||||
Other postretirement benefits | 12,266 | 14,334 | ||||||
Advertising | 11,266 | 13,281 | ||||||
Warranty | 8,835 | 8,041 | ||||||
Other | 27,601 | 26,901 | ||||||
|
|
|
| |||||
Accrued liabilities | $ | 308,287 | $ | 302,477 |
Note 8. Income Taxes
Components of income (loss) from continuing operations before income taxes and noncontrolling shareholders’ interests were as follows:
2020 | 2019 | 2018 | ||||||||||
United States | $ | 161,885 | $ | (4,720 | ) | $ | 108,838 | |||||
Foreign | 29,018 | 114,392 | 5,220 | |||||||||
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| |||||||
Total | $ | 190,903 | $ | 109,672 | $ | 114,058 | ||||||
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|
|
The provision (benefit) for income tax for continuing operations consisted of the following:
2020 | 2019 | 2018 | ||||||||||
Current: | ||||||||||||
Federal | $ | 35,715 | $ | 2,659 | $ | 56 | ||||||
State and local | 10,796 | 5,386 | 5,350 | |||||||||
Foreign | 3,343 | 9,733 | 7,214 | |||||||||
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| |||||||
49,854 | 17,778 | 12,620 | ||||||||||
Deferred: | ||||||||||||
Federal | (5,919 | ) | 1,356 | 18,293 | ||||||||
State and local | 1,300 | (4,027 | ) | 3,266 | ||||||||
Foreign | 1,764 | (3,752 | ) | (684 | ) | |||||||
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| |||||||
(2,855) | (6,423) | 20,875 | ||||||||||
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| |||||||
$ | 46,999 | $ | 11,355 | $ | 33,495 | |||||||
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During the year ended December 31, 2018, the Company concluded its accounting under comprehensive U.S. tax legislation enacted in 2017 (the “Tax Act”) and updated its SAB 118 provisional estimates with respect to remeasurement of U.S. deferred tax assets and the Transition Tax on unrepatriated foreign earnings. Tax benefit of $3,576 and tax expense of $5,026 were recorded, respectively. During the year ended December 31, 2019, final Transition Tax regulations were issued resulting in the Company recording an additional Transition Tax liability of $1,661. The Company’s outstanding Transition Tax payable as a result of the enactment of the Tax Act, subsequent SAB 118 revisions, and adjustments related to the final regulations, was $20,434 at December 31, 2020 and 2019. The Transition Tax payable is recorded in Other long-term liabilities and is payable over a period of three years beginning in 2022.
The Tax Act also subjects a U.S. parent shareholder to current tax on its global intangible low-taxed income (“GILTI”). For the year ended December 31, 2018, the Company determined that its accounting policy is to record GILTI as a period cost only in the period it is incurred. For the years ended December 31, 2019 and 2018, the Company recognized additional tax expense associated with GILTI, exclusive of GILTI foreign tax credits, which is reflected in the rate reconciliation below. No additional tax expense associated with GILTI was recognized for the year ended December 31, 2020.
-17-
Prior to enactment of the Tax Act, the Company did not recognize a deferred tax liability related to the U.S. federal and state income taxes and foreign withholding taxes on unremitted foreign earnings because it overcame the presumption of the repatriation of those earnings. Upon enactment of the Tax Act, the Transition Tax was recorded based on approximately $495 million of unremitted foreign earnings. During 2020, the Company re-evaluated its position on potential earnings repatriation and has concluded that the repatriation implications of the Tax Act continue to have no impact on its indefinite reinvestment assertion, consistent with all years since 2018. As such, no change has been made with respect to the Company’s indefinite reinvestment assertion for the year ended December 31, 2020 and foreign income, foreign withholding, and state income tax liabilities have not been recorded on approximately $738 million of undistributed foreign earnings. Determination of the amount of any deferred income or withholding tax liability on these earnings is not practicable because of the complexities of the hypothetical calculation.
During the year ended December 31, 2020, the Company’s effective tax rate was primarily driven by a change in the mix of earnings between the U.S. and non-U.S. jurisdictions as compared to 2019. The mix of earnings in 2019 resulted from a business realignment strategy executed to improve the Company’s market share for its European light vehicle tire business. The mix of earnings in 2020 has reverted to a more heavily weighted U.S. share. The resulting tax effects of the 2019 earnings mix are reflected as the difference in effective tax rates of international operations in the rate reconciliation below.
The Company’s Serbian operations are benefiting from a ten-year tax holiday that is based largely on historical investments in property, plant, and equipment which has the impact of reducing the effective tax rate in Serbia to approximately 1.5 percent. For the year ended December 31, 2020, the Company recognized a tax holiday benefit of $0.7 million. The tax holiday will expire in 2026.
A reconciliation of the income tax provision (benefit) for continuing operations to the tax based on the U.S. statutory rate is as follows:
2020 | 2019 | 2018 | ||||||||||
Income tax provision at 21% | $ | 40,090 | $ | 23,031 | $ | 23,952 | ||||||
Difference in effective tax rates of international operations | (868 | ) | (21,399 | ) | (1,124 | ) | ||||||
State and local income tax, net of federal income tax effect | 9,959 | (2,366 | ) | 2,983 | ||||||||
Valuation allowance | 5,139 | 6,306 | (2,433 | ) | ||||||||
U.S. tax credits | (3,444 | ) | (6,292 | ) | (4,401 | ) | ||||||
Income tax contingencies, net of federal income tax effect | 3,077 | 4,246 | 1,263 | |||||||||
Remeasurement of deferred taxes | (3,653 | ) | — | — | ||||||||
Reversal of outside basis difference in former minority investment | (1,103 | ) | — | — | ||||||||
Mexico inflationary deferred tax adjustments | (626 | ) | (1,790 | ) | 259 | |||||||
Net U.S. GILTI inclusion | — | 8,419 | 1,455 | |||||||||
U.S. tax reform - transition tax | — | 1,661 | 5,026 | |||||||||
Goodwill Impairment | — | — | 8,432 | |||||||||
U.S. tax reform - remeasurement of deferred taxes | — | — | (3,576 | ) | ||||||||
Other - net | (1,572 | ) | (461 | ) | 1,659 | |||||||
|
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|
|
| |||||||
Income tax provision | $ | 46,999 | $ | 11,355 | $ | 33,495 | ||||||
|
|
|
|
|
|
Payments for income taxes in 2020, 2019 and 2018, net of refunds, were $42,933, $10,244 and $19,763, respectively.
-18-
Deferred tax assets and liabilities result from differences in the basis of assets and liabilities for tax and financial reporting purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31 were as follows:
2020 | 2019 | |||||||
Deferred tax assets: | ||||||||
Postretirement and other employee benefits | $ | 103,699 | $ | 94,581 | ||||
Product liability | 24,023 | 30,791 | ||||||
Net operating loss, capital loss, and tax credit carryforwards | 17,862 | 14,291 | ||||||
All other items | 41,439 | 37,296 | ||||||
|
|
|
| |||||
Total deferred tax assets | 187,023 | 176,959 | ||||||
Deferred tax liabilities: | ||||||||
Property, plant and equipment | (114,641 | ) | (117,148 | ) | ||||
All other items | (8,134 | ) | (6,141 | ) | ||||
|
|
|
| |||||
Total deferred tax liabilities | (122,775 | ) | (123,289 | ) | ||||
|
|
|
| |||||
64,248 | 53,670 | |||||||
Valuation allowances | (35,145 | ) | (27,270 | ) | ||||
|
|
|
| |||||
Net deferred tax asset | $ | 29,103 | $ | 26,400 | ||||
|
|
|
|
At December 31, 2020, the Company has gross U.S. federal and foreign tax losses available for carryforward of $6,608 and $90,531, respectively. U.S. federal and foreign tax attributes will expire from 2021 through 2040. For these jurisdictions, valuation allowances have been recorded against those attributes for which, based upon an assessment, it is more likely than not that some portion of deferred tax benefit may not be realized.
The Company considers, on a quarterly basis, all available positive and negative evidence in assessing whether it is more likely than not that some portion or all of its deferred tax assets are realizable. The Company considers the historical and projected financial results of the tax paying component recording the deferred tax asset as well as all other positive and negative evidence, including cumulative losses in recent years, a history of potential tax benefits expiring unused and whether a period of sustainable earnings has been demonstrated. During the year ended December 31, 2020, the Company has assessed all available positive and negative evidence and, based on the weight of significant negative evidence, including cumulative losses, the Company has maintained valuation allowances totaling $35,145 against deferred tax assets primarily in China and the U.K.
The Company applies the rules under ASC 740-10 in its Accounting for Uncertainty in Income Taxes for uncertain tax positions using a “more likely than not” recognition threshold. Pursuant to these rules, the Company will initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the “more likely than not” threshold, the measurement of the tax benefit will be based on the Company’s estimate of the largest amount that meets the more likely than not recognition threshold. The Company’s unrecognized tax benefits, exclusive of interest, totaled approximately $12,890 at December 31, 2020, as itemized in the tabular roll forward below. The unrecognized tax benefits at December 31, 2020 relate to uncertain tax positions in tax years 2012 through 2020. Based upon the outcome of tax examinations, judicial proceedings, or expiration of statutes of limitations, it is reasonably possible that the ultimate resolution of these unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities.
-19-
Unrecognized Tax Benefits | ||||
Balance at January 1, 2018 | $ | 2,283 | ||
Settlements for tax positions of prior years | (364 | ) | ||
Additions for tax positions of current year | 2,555 | |||
Additions for tax positions of prior years | 2,881 | |||
Statute lapses | (830 | ) | ||
|
| |||
Balance at December 31, 2018 | 6,525 | |||
Settlements for tax positions of prior years | (1,567 | ) | ||
Additions for tax positions of prior years | 5,644 | |||
Statute lapses | (668 | ) | ||
|
| |||
Balance at December 31, 2019 | 9,934 | |||
Additions for tax positions of the current year | 4,598 | |||
Statute lapses | (1,642 | ) | ||
|
| |||
Balance at December 31, 2020 | $ | 12,890 |
Of this amount of unrecognized tax benefits, the effective rate would change upon the recognition of approximately $11,532 of these unrecognized tax benefits, net of federal income tax effect. The Company recorded, through the tax provision, an immaterial amount of interest expense for 2020, approximately $1,262 of interest expense for 2019, and an immaterial amount of benefit on interest reductions for 2018. The Company had $1,366 and $1,353 of interest accrued as an ASC 740-10 reserve at December 31, 2020 and 2019, respectively.
The Company operates in multiple jurisdictions throughout the world. The Company has effectively settled U.S. federal tax examinations for tax years before 2017 and state and local examinations for tax years before 2015, with limited exceptions. Furthermore, the Company’s non-U.S. subsidiaries are generally no longer subject to income tax examinations in major foreign taxing jurisdictions for tax years prior to 2015. Income tax returns of certain of our subsidiaries in various jurisdictions are currently under examination and it is possible that these examinations could conclude within the next twelve months; however, the Company does not anticipate any significant increases or decreases in its total amount of unrecognized tax benefits within that period.
Note 9. Debt
On June 27, 2019, the Company amended its revolving Credit Facility with a consortium of several banks to provide up to $700,000 and is set to expire in June 2024. Of this amended borrowing capacity, $200,000 was allocated to a Delayed Draw Term Loan A (“Term Loan A”), while the remaining $500,000 was allocated to the revolving credit facility. The Term Loan A funds were drawn in December 2019 and used primarily to pay for the unsecured notes which matured at that time. The Credit Facility also includes a $110,000 letter of credit sub-facility. The Company may elect, with lender consent, to increase the commitments under the Credit Facility or incur one or more tranches of term loans in an aggregate amount of up to $300,000 (or an unlimited increase if the Proforma Secured Net Leverage Ratio is less than 1.75x). The Company may elect to add certain foreign subsidiaries as additional borrowers under the Credit Facility, subject to the satisfaction of certain conditions.
On July 11, 2019, the Company entered into forward-starting interest rate swaps to effectively hedge the cash flow exposure associated with the Company’s Term Loan A variable-rate borrowings. See Note 10 - Fair Value Measurement for further information.
The Company has an accounts receivable securitization facility (“A/R Facility”) that provides up to $100,000 in funding capacity based on eligible receivables and expires in December 2022. Funding capacity under the A/R Facility may be drawn in cash or utilized for letters of credit. Pursuant to the terms of the A/R Facility, the Company sells substantially all trade receivables on an ongoing basis to Cooper Receivables LLC (“CRLLC”), its wholly-owned, bankruptcy-remote subsidiary, which then, from time to time, sells an undivided ownership interest in the purchased trade receivables, without recourse, to the purchasers party to the A/R Facility. The assets and liabilities of CRLLC are consolidated with the Company, and the A/R Facility is treated as a secured borrowing for accounting purposes. CRLLC’s sole business consists of the purchase or acceptance of the trade receivables and related rights from the Company and the subsequent retransfer of or granting of a security interest in such receivables and related rights to the purchasers party to the A/R Facility. CRLLC is a separate legal entity with its own separate creditors who will be entitled, upon liquidation, to be satisfied from CRLLC’s assets prior to any assets or value in CRLLC becoming available to its equity holders. The assets of CRLLC are not available to pay creditors of the Company or the Company’s Affiliates.
-20-
The Company had no borrowings under the revolving credit facility or the A/R Facility at December 31, 2020 or December 31, 2019. Amounts used to secure letters of credit totaled $37,682 at December 31, 2020 and $21,651 at December 31, 2019. The Company’s additional borrowing capacity, net of borrowings and amounts used to back letters of credit, and based on eligible collateral through use of its Credit Facility with its bank group and its accounts receivable securitization facility at December 31, 2020, was $544,918.
The Company’s consolidated operations in Asia have renewable unsecured credit lines that provide up to $68,180 of borrowings and do not contain financial covenants. The additional borrowing capacity on the Asian credit lines, based on eligible collateral and the short-term notes payable, totaled $63,566 at December 31, 2020.
On May 15, 2020, the Company entered into equipment financing arrangements in the amount of $31,538, of which $31,142 was advanced on May 15, 2020 and the remaining $396 was advanced on December 21, 2020. The equipment financings are secured by manufacturing equipment within the Company’s U.S. operations and monthly amortized payments are made through maturity in 2025. The weighted average interest rate on the equipment financing arrangements is 3.05 percent and they contain no significant financial covenants.
On September 24, 2020, the Company entered into an aircraft lease agreement commencing in the first quarter of 2021. This new aircraft lease will replace the Company’s existing aircraft lease, which expires in March, 2021. As part of this agreement, the Company signed an $11,000 promissory note that will be discharged upon the lease commencement. This non-cash transaction is reflected as an increase to Other assets and Short-term borrowings at December 31, 2020, and will be reclassified to Operating lease right-of-use asset and Operating lease liability upon lease commencement. The promissory note includes interest at 1.65 percent and contains no significant financial covenants.
In 2010 and 2017, Industrial Revenue Bonds (IRBs) were issued by the City of Texarkana to finance the design, equipping and construction of expansions, as well as the on-going operations of the Texarkana manufacturing facility, in return for real estate and equipment located at the Company’s Texarkana tire manufacturing plant. The assets related to the expansion and on-going plant operations provide security for the bonds issued by the City of Texarkana. As a result, the City retains title to the assets and, in turn, provides a 100 percent property tax exemption to the Company. However, the Company has recorded the property in its Consolidated Balance Sheets, along with a finance lease obligation to repay the proceeds of the IRBs, because the arrangements are cancelable at any time at the Company’s request. The Company has also purchased the IRBs and therefore is the bondholder, as well as the borrower/lessee of the property purchased with the IRB proceeds. The finance lease obligations and IRB assets are recorded net in the Consolidated Balance Sheets. At December 31, 2020 and 2019, the assets and liabilities associated with these City of Texarkana IRBs were $100,020 and $72,080, respectively.
-21-
The following is a summary of the Company’s debt and finance leases as of December 31, 2020 and December 31, 2019.
Principal Balance | Weighted Average Interest Rate | Principal Balance | Weighted Average Interest Rate | |||||||||||||||||||||||||
Current | Long-Term | Current | Long-Term | |||||||||||||||||||||||||
Maturity Date | December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||
Promissory Note | February 2021 | $ | 11,000 | $ | — | 1.653 | % | $ | — | $ | — | n/a | ||||||||||||||||
Asia short term notes | Various maturities | 4,614 | — | 3.915 | % | 12,296 | — | 4.701 | % | |||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||
15,614 | — | 12,296 | — | |||||||||||||||||||||||||
Term loan A | June 2024 | 12,500 | 175,000 | 3.220 | % | 10,000 | 187,500 | 3.300 | % | |||||||||||||||||||
Unsecured notes | March 2027 | — | 116,880 | 7.625 | % | — | 116,880 | 7.625 | % | |||||||||||||||||||
Equipment financing | May 2025 | 6,037 | 22,058 | 3.049 | % | — | — | n/a | ||||||||||||||||||||
Finance leases and other | Various maturities | 5,840 | 1,332 | 1.509 | % | 265 | 5,998 | 2.613 | % | |||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||
24,377 | 315,270 | 10,265 | 310,378 | |||||||||||||||||||||||||
Less: Unamortized debt issuance costs | — | 1,005 | — | 1,230 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||
$ | 39,991 | $ | 314,265 | $ | 22,561 | $ | 309,148 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
Additional Credit Capacity at December 31, 2020 | ||||
Credit Facility | $ | 500,000 | ||
Accounts receivable securitization facility | 100,000 | |||
Asia short term notes | 68,180 | |||
|
| |||
668,180 | ||||
|
| |||
Less, amounts used to secure letters of credit and other unavailable funds | 59,696 | |||
|
| |||
$ | 608,484 | |||
|
|
The Company’s revolving credit facilities contain restrictive covenants which limit or preclude certain actions based upon the measurement of certain financial covenant metrics. The covenants are structured such that the Company expects to have sufficient flexibility to conduct its operations. The Company was in compliance with all of its debt covenants as of December 31, 2020.
Over the next five years, the Company has payments related to the above debt of:
Future Debt Payments | ||||
2021 | $ | 39,213 | ||
2022 | 21,223 | |||
2023 | 23,915 | |||
2024 | 149,114 | |||
2025 | 2,807 |
Interest paid on debt during 2020, 2019 and 2018 was $24,798, $33,161 and $34,070, respectively. The amount of interest capitalized was $2,833, $2,233 and $2,663 during 2020, 2019 and 2018, respectively.
In addition, at December 31, 2020 and December 31, 2019, the Company had short-term notes payable of $4,614 and $12,296, respectively, due within twelve months, consisting of funds borrowed by the Company’s operations in the PRC. The weighted average interest rate of the short-term notes payable at December 31, 2020 and December 31, 2019 was 3.92 percent and 4.70 percent, respectively.
-22-
Note 10. Fair Value Measurements
Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into financial instruments for trading or speculative purposes. The derivative financial instruments include non-designated and cash flow hedges of foreign currency exposures. The change in values of the non-designated foreign currency hedges offset the exchange rate fluctuations related to assets and liabilities recorded on the Consolidated Balance Sheets. The cash flow hedges offset exchange rate fluctuations on the foreign currency-denominated intercompany loans and forecasted cash flows. The Company presently hedges exposures in various currencies, generally for transactions expected to occur within the next 12 months. Additionally, the Company utilizes cash flow hedges that hedge already recognized intercompany loans with maturities of up to one year. The notional amount of these foreign currency derivative instruments at December 31, 2020 and December 31, 2019 was $84,783 and $167,915, respectively. The counterparties to each of these agreements are major commercial banks.
The Company uses non-designated foreign currency forward contracts to hedge its net foreign currency monetary assets and liabilities primarily resulting from non-functional currency denominated receivables and payables of certain U.S. and foreign entities.
Foreign currency forward contracts are also used to hedge variable cash flows associated with forecasted sales and purchases denominated in currencies that are not the functional currency of certain entities. The fair value of these forward contracts is $(2,291) and $(1,033) as of December 31, 2020 and December 31, 2019. These contracts have maturities of less than twelve months pursuant to the Company’s policies and hedging practices. These contracts meet the criteria for and have been designated as cash flow hedges. Accordingly, the effective portion of the change in fair value of such forward contracts are recorded as a separate component of stockholders’ equity in the accompanying Consolidated Balance Sheets and are reclassified into earnings as the hedged transactions occur.
The Company utilizes cross-currency interest rate swaps to hedge the principal and interest repayment of some intercompany loans. The Company also utilizes designated foreign currency forward contracts to hedge the principal amounts of certain intercompany loans. The fair value of these contracts is $(2,345) and $(994) at December 31, 2020 and December 31, 2019, respectively. These contracts have maturities of up to one year and meet the criteria for and have been designated as cash flow hedges. Spot to spot changes are recorded in income and all other effective changes are recorded as a separate component of stockholders’ equity. The Company assesses hedge effectiveness prospectively and retrospectively, based on regression of the change in foreign currency exchange rates. Time value of money is included in effectiveness testing.
On July 11, 2019, in order to hedge its Term Loan A variable rate debt, with an interest rate indexed to LIBOR plus 150 basis points, the Company entered into forward-starting interest rate swaps with effective dates of December 2, 2019 and termination dates of June 27, 2024. The initial notional amount of these swaps is $200,000 and decreases quarterly by varying amounts over the life of the swaps, in accordance with the Term Loan A repayment schedule. For the twelve months ending December 31, 2020, net payments have been made in the amount of $2,133. Net payments for the twelve months ending December 31, 2019 were immaterial. The interest rate swaps effectively fix the variable interest rate component on the notional amount of these swaps at 1.720 percent. The fair value of these swaps is $(8,602) and $(1,032) at December 31, 2020 and December 31, 2019, respectively. The swaps qualify for hedge accounting and, therefore, changes in the fair value of the swaps have been recorded in accumulated other comprehensive income. The Company assesses hedge effectiveness prospectively and retrospectively, based on regression of the period to period change in swap and hedged item values.
-23-
The derivative instruments are subject to master netting arrangements with the counterparties to the contracts. The following table presents the location and amounts of derivative instrument fair values in the Consolidated Balance Sheets:
Assets/(liabilities) | December 31, 2020 | December 31, 2019 | ||||||
Designated as hedging instruments: | ||||||||
Gross amounts recognized | $ | (13,238 | ) | $ | (3,208 | ) | ||
Gross amounts offset | — | 149 | ||||||
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| |||||
Net amounts | $ | (13,238 | ) | $ | (3,059 | ) | ||
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|
|
| |||||
Not designated as hedging instruments: | ||||||||
Gross amounts recognized | $ | (1,156 | ) | $ | (1,118 | ) | ||
Gross amounts offset | 148 | 76 | ||||||
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|
| |||||
Net amounts | $ | (1,008 | ) | $ | (1,042 | ) | ||
|
|
|
| |||||
Net amounts presented: | ||||||||
Accrued liabilities | $ | (8,591 | ) | $ | (2,420 | ) | ||
Other long-term liabilities | (5,655 | ) | (1,681 | ) |
The following table presents the location and amount of gains and losses on derivative instruments designated as cash flow hedges in the Consolidated Statements of Income:
Twelve Months Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Amount of (Loss) Gain Recognized in Other Comprehensive (Loss) Income on Derivatives | $ | (9,073 | ) | $ | (2,612 | ) | $ | 5,040 | ||||
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income | ||||||||||||
Net sales | $ | 892 | $ | 988 | $ | 1,453 | ||||||
Interest expense | (124 | ) | (123 | ) | (134 | ) | ||||||
Other non-operating income (expense) | (1,412 | ) | 276 | 1,093 | ||||||||
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|
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|
|
| |||||||
$ | (644 | ) | $ | 1,141 | $ | 2,412 | ||||||
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|
|
|
The following table presents the location and amount of gains and losses on foreign exchange contract derivatives not designated as hedging instruments in the Consolidated Statements of Income.
Twelve Months Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Other non-operating (expense) income | $ | (1,777 | ) | $ | (2,674 | ) | $ | 602 | ||||
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|
The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within the different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded on the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.
Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following.
a. | Quoted prices for similar assets or liabilities in active markets; |
b. | Quoted prices for identical or similar assets or liabilities in non-active markets; |
c. | Pricing models whose inputs are observable for substantially the full term of the asset or liability; and |
d. | Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability. |
-24-
Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
The valuation of foreign currency derivative instruments was determined using widely accepted valuation techniques. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including forward points. The Company incorporated credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as current credit ratings, to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2020 and December 31, 2019, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety were to be classified in Level 2 of the fair value hierarchy.
The valuation of stock-based liabilities was determined using the Company’s stock price, and as a result, these liabilities are classified in Level 1 of the fair value hierarchy. The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and December 31, 2019:
December 31, 2020 | ||||||||||||||||
Total Liabilities | Quoted Prices in Active Markets for Identical Assets Level (1) | Significant Other Observable Inputs Level (2) | Significant Unobservable Inputs Level (3) | |||||||||||||
Foreign Currency Derivatives | $ | (5,644 | ) | $ | — | $ | (5,644 | ) | $ | — | ||||||
Interest Rate Swaps | (8,602 | ) | — | (8,602 | ) | — | ||||||||||
Stock-based Liabilities | (18,712 | ) | (18,712 | ) | — | — | ||||||||||
December 31, 2019 | ||||||||||||||||
Total Liabilities | Quoted Prices in Active Markets for Identical Assets Level (1) | Significant Other Observable Inputs Level (2) | Significant Unobservable Inputs Level (3) | |||||||||||||
Foreign Currency Derivatives | $ | (3,069 | ) | $ | — | $ | (3,069 | ) | $ | — | ||||||
Interest Rate Swaps | (1,032 | ) | — | (1,032 | ) | — | ||||||||||
Stock-based Liabilities | (14,971 | ) | (14,971 | ) | — | — |
The fair value of Cash and cash equivalents, Notes receivable, restricted cash included in Other current assets and Other assets, Short-term borrowings and the Current portion of long-term debt and finance leases at December 31, 2020 and December 31, 2019 are equal to their corresponding carrying values as reported on the Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019, respectively. Each of these classes of assets and liabilities is classified within Level 1 of the fair value hierarchy.
The fair value of Long-term debt and finance leases is $335,070 and $325,578 at December 31, 2020 and December 31, 2019, respectively, and is classified within Level 2 of the fair value hierarchy. The value of Long-term debt and finance leases is $315,270 and $310,378 as reported in the Debt footnote as of December 31, 2020 and December 31, 2019, respectively.
Note 11. Pensions and Postretirement Benefits Other than Pensions
The Company has a number of plans providing pension and retirement benefits. These plans include defined benefit and defined contribution plans. The plans cover substantially all U.S. domestic employees. There are also plans that cover employees in the U.K. and Germany. The Company has an unfunded, nonqualified supplemental retirement benefit plan in the U.S. covering certain employees whose participation in the qualified plan is limited by provisions of the Internal Revenue Code.
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For defined benefit plans, benefits are generally based on compensation and length of service for salaried employees and length of service for hourly employees. In the U.S., the Company froze the pension benefits in its Spectrum (salaried employees) Plan in 2009. In 2012, the Company closed the U.S. pension plans for the bargaining units to new participants. Certain grandfathered participants in the bargaining unit plans continue to accrue pension benefits. Employees of certain of the Company’s international operations in the U.K. and Germany are covered by either contributory or non-contributory trusted pension plans. In 2012, the Company froze the benefits in the U.K. pension plan.
Participation in the Company’s defined contribution plans is voluntary. The Company matches plan participants’ contributions up to various limits. Participants’ contributions are limited based on their compensation and, for certain supplemental contributions which are not eligible for Company matching, based on their age. Certain employees covered by collective bargaining units receive company contributions. Expense for the defined contribution plans was $9,533, $13,370 and $12,424 for 2020, 2019 and 2018, respectively. In 2020, the Company temporarily suspended the Company match of plan participant contributions in response to the COVID-19 pandemic. The Company match was resumed in the fourth quarter of 2020.
The Company currently provides retiree health care and life insurance benefits to a portion of its U.S. salaried and hourly employees. U.S. salaried and non-bargained hourly employees hired on or after January 1, 2003 are not eligible for retiree health care or life insurance coverage. The Company has reserved the right to modify or terminate certain of these salaried benefits at any time.
The Company has implemented household caps on the amounts of retiree medical benefits it will provide to certain retirees in the U.S. The caps do not apply to individuals who retired prior to certain specified dates. Costs in excess of these caps will be paid by plan participants. The Company implemented increased cost sharing in 2004 in the retiree medical coverage provided to certain eligible current and future retirees. Since then, cost sharing has expanded such that nearly all covered retirees pay a charge to be enrolled.
In accordance with U.S. GAAP, the Company recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of its pension and OPEB plans and the net unrecognized actuarial losses and unrecognized prior service costs in the Consolidated Balance Sheets. The unrecognized actuarial losses and unrecognized prior service costs (components of Accumulated other comprehensive loss in the Equity section of the balance sheet) will be subsequently recognized as net periodic benefit costs pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit costs in the same periods will be recognized as a component of other comprehensive income.
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The following table reflects changes in the projected obligations and fair market values of assets in all defined benefit pension and other postretirement benefit plans of the Company:
2020 Pension Benefits | 2019 Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||||||||||
Domestic | International | Total | Domestic | International | Total | 2020 | 2019 | |||||||||||||||||||||||||
Change in benefit obligation: | ||||||||||||||||||||||||||||||||
Projected Benefit Obligation at beginning of year | $ | 1,106,877 | $ | 446,686 | $ | 1,553,563 | $ | 1,004,751 | $ | 404,629 | $ | 1,409,380 | $ | 241,550 | $ | 251,798 | ||||||||||||||||
Service cost - employer | 9,946 | — | 9,946 | 8,906 | — | 8,906 | 1,439 | 1,573 | ||||||||||||||||||||||||
Interest cost | 33,143 | 8,417 | 41,560 | 39,499 | 11,061 | 50,560 | 7,320 | 9,887 | ||||||||||||||||||||||||
Actuarial loss/(gain) | 102,678 | 54,268 | 156,946 | 113,828 | 48,721 | 162,549 | (8,277 | ) | (9,664 | )�� | ||||||||||||||||||||||
Benefits paid | (66,339 | ) | (14,744 | ) | (81,083 | ) | (63,176 | ) | (14,542 | ) | (77,718 | ) | (8,371 | ) | (12,044 | ) | ||||||||||||||||
Plan amendment | 2,581 | 219 | 2,800 | 3,069 | — | 3,069 | — | — | ||||||||||||||||||||||||
Settlements | — | (16,653 | ) | (16,653 | ) | — | (18,196 | ) | (18,196 | ) | — | — | ||||||||||||||||||||
Foreign currency translation effect | — | 11,941 | 11,941 | — | 15,013 | 15,013 | — | — | ||||||||||||||||||||||||
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Projected Benefit Obligation at December 31 | $ | 1,188,886 | $ | 490,134 | $ | 1,679,020 | $ | 1,106,877 | $ | 446,686 | $ | 1,553,563 | $ | 233,661 | $ | 241,550 | ||||||||||||||||
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Change in plans’ assets: | ||||||||||||||||||||||||||||||||
Fair value of plans’ assets at beginning of year | $ | 1,047,214 | $ | 379,342 | $ | 1,426,556 | $ | 912,129 | $ | 349,001 | $ | 1,261,130 | $ | — | $ | — | ||||||||||||||||
Actual return on plans’ assets | 132,137 | 37,926 | 170,063 | 159,949 | 38,139 | 198,088 | — | — | ||||||||||||||||||||||||
Employer contribution | 4,638 | 10,914 | 15,552 | 38,312 | 10,587 | 48,899 | — | — | ||||||||||||||||||||||||
Benefits paid | (66,339 | ) | (14,744 | ) | (81,083 | ) | (63,176 | ) | (14,542 | ) | (77,718 | ) | — | — | ||||||||||||||||||
Settlements | — | (16,653 | ) | (16,653 | ) | — | (18,196 | ) | (18,196 | ) | — | — | ||||||||||||||||||||
Foreign currency translation effect | — | 12,475 | 12,475 | — | 14,353 | 14,353 | — | — | ||||||||||||||||||||||||
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Fair value of plans’ assets at December 31 | $ | 1,117,650 | $ | 409,260 | $ | 1,526,910 | $ | 1,047,214 | $ | 379,342 | $ | 1,426,556 | $ | — | $ | — | ||||||||||||||||
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Funded status | $ | (71,236 | ) | $ | (80,874 | ) | $ | (152,110 | ) | $ | (59,663 | ) | $ | (67,344 | ) | $ | (127,007 | ) | $ | (233,661 | ) | $ | (241,550 | ) | ||||||||
Amounts recognized in the balance sheets: | ||||||||||||||||||||||||||||||||
Accrued liabilities | — | — | — | (300 | ) | — | (300 | ) | (12,266 | ) | (14,334 | ) | ||||||||||||||||||||
Postretirement benefits other than pensions | — | — | — | — | — | — | (221,395 | ) | (227,216 | ) | ||||||||||||||||||||||
Pension benefits | (71,236 | ) | (80,874 | ) | (152,110 | ) | (59,363 | ) | (67,344 | ) | (126,707 | ) | — | — |
The actuarial loss for the Company’s pension benefit obligations in 2020 and 2019 was primarily related to changes in discount rates (see assumptions below) and, to a lesser extent, changes in the mortality assumptions for the Company’s U.S. plans.
The actuarial loss/(gain) for the Company’s other postretirement benefit obligation in 2020 and 2019 was related to a decrease in the discount rates (see assumptions below). These actuarial losses were offset by gains related to a decrease in the expected utilization of retiree medical benefits and variances between actual participant experience and expected participant experience.
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Included in Accumulated other comprehensive loss at December 31, 2020 are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service costs of $7,266 ($5,454 net of tax) and unrecognized actuarial losses of $417,906 ($391,362 net of tax).
Included in Accumulated other comprehensive loss at December 31, 2019 are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service credits of $5,780 ($4,338 net of tax) and unrecognized actuarial losses of $413,676 ($384,507 net of tax).
The prior service cost and actuarial loss included in accumulated other comprehensive loss that are expected to be recognized in net periodic benefit cost during the fiscal year-ended December 31, 2021 are $1,714 and $33,550, respectively.
The accumulated benefit obligation for all defined benefit pension plans was $1,675,825 and $1,552,037 at December 31, 2020 and 2019, respectively.
In 2020 and 2019, lump-sum distributions out of the U.K. pension plan of $16,653 and $18,196, respectively, were made from plan assets. The vested benefit obligation associated with these former employees was approximately 3 percent of the U.K. plan’s benefit obligation in 2020 and 4 percent in 2019. Due to the size of the lump-sum distributions, in accordance with U.S. GAAP, the Company was required to recognize a non-cash settlement charge of $4,155 and $4,262 for 2020 and 2019, respectively, settlements out of the U.K. plan.
Additionally, in both 2020 and 2019, an amendment to separate domestic pension plans resulted in a retroactive increase in benefit levels for plan participants and have been accounted for as a prior service cost deferred in Accumulated other comprehensive loss, to be amortized as a component of net periodic benefit cost in future periods. The domestic pension plan projected benefit obligation increased $2,581 and $3,069, respectively, as a result of the separate amendments in 2020 and 2019.
On October 26, 2018, in Lloyds Banking Group Pensions Trustees Limited vs. Lloyds Bank plc and Others, the High Court of Justice in the United Kingdom issued a ruling (“Court Ruling”) requiring Lloyds Bank plc to equalize benefits payable to men and women under its U.K. defined benefit pension plan. The Court Ruling noted that the formulas used to determine guaranteed minimum pension (GMP) benefits violated gender-pay equality laws due to differences in the way benefits were calculated for men and women. As a result of this ruling, the U.K. pension plan was required to amend its benefit formulas and account for the higher pension payments resulting from GMP equalization. In accordance with ASC 715, this Court Ruling represents a change to the U.K. pension plan resulting in a retroactive increase in benefit levels for plan participants and has been accounted for as a prior service cost deferred in Other comprehensive loss, to be amortized as a component of net periodic benefit cost in future periods. The U.K. pension plan projected benefit obligation increased $3,704 as a result of the amendment required due to the Court Ruling.
Weighted average assumptions used to determine benefit obligations at December 31:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
All plans | ||||||||||||||||
Discount rate | 2.00 | % | 2.78 | % | 2.36 | % | 3.12 | % | ||||||||
Domestic plans | ||||||||||||||||
Discount rate | 2.28 | % | 3.09 | % | 2.36 | % | 3.12 | % | ||||||||
International plans | ||||||||||||||||
Discount rate | 1.29 | % | 1.99 | % | — | — |
At December 31, 2020, the weighted average assumed annual rate of increase in the cost of medical benefits was 7.00 percent trending linearly to 4.50 percent per annum in 2030.
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The following tables disclose the amount of net periodic benefit costs for the twelve months ended December 31, 2020 and 2019 for the Company’s defined benefit plans and other postretirement benefits:
Pension Benefits - Domestic Twelve Months Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Components of net periodic benefit cost: | ||||||||||||
Service cost | $ | 9,946 | $ | 8,906 | $ | 10,363 | ||||||
Interest cost | 33,143 | 39,499 | 36,840 | |||||||||
Expected return on plan assets | (55,410 | ) | (48,034 | ) | (54,035 | ) | ||||||
Amortization of actuarial loss | 31,533 | 32,432 | 32,939 | |||||||||
Amortization of prior service cost | 1,251 | 703 | — | |||||||||
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Net periodic benefit cost | $ | 20,463 | $ | 33,506 | $ | 26,107 | ||||||
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Pension Benefits - International Twelve Months Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Components of net periodic benefit cost: | ||||||||||||
Interest cost | $ | 8,417 | $ | 11,061 | $ | 11,161 | ||||||
Expected return on plan assets | (8,892 | ) | (11,554 | ) | (12,073 | ) | ||||||
Amortization of actuarial loss | 4,146 | 3,411 | 4,264 | |||||||||
Amortization of prior service cost | 267 | 309 | — | |||||||||
Effect of settlements | 4,155 | 4,262 | — | |||||||||
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Net periodic benefit cost | $ | 8,093 | $ | 7,489 | $ | 3,352 | ||||||
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Other Post Retirement Benefits Twelve Months Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Components of net periodic benefit cost: | ||||||||||||
Service cost | $ | 1,439 | $ | 1,573 | $ | 1,948 | ||||||
Interest cost | 7,320 | 9,887 | 9,251 | |||||||||
Amortization of actuarial gain | (422 | ) | — | — | ||||||||
Amortization of prior service credit | (89 | ) | (409 | ) | (541 | ) | ||||||
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Net periodic benefit cost | $ | 8,248 | $ | 11,051 | $ | 10,658 | ||||||
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Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||
2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||
All plans | ||||||||||||||||||||||||
Discount rate | 2.78 | % | 3.70 | % | 3.20 | % | 3.12 | % | 4.05 | % | 3.50 | % | ||||||||||||
Expected return on plan assets | 4.75 | % | 5.00 | % | 5.34 | % | — | % | — | % | — | % | ||||||||||||
Domestic plans | ||||||||||||||||||||||||
Discount rate | 3.09 | % | 4.05 | % | 3.50 | % | 3.12 | % | 4.05 | % | 3.50 | % | ||||||||||||
Expected return on plan assets | 5.68 | % | 5.66 | % | 6.25 | % | — | % | — | % | — | % | ||||||||||||
International plans | ||||||||||||||||||||||||
Discount rate | 1.99 | % | 2.80 | % | 2.50 | % | — | % | — | % | — | % | ||||||||||||
Expected return on plan assets | 2.45 | % | 3.34 | % | 3.19 | % | — | % | — | % | — | % |
The following table lists the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets at December 31, 2020 and 2019.
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Domestic Plans | International Plans | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Projected benefit obligation | $ | 672,070 | $ | 606,138 | $ | 490,134 | $ | 446,686 | ||||||||
Accumulated benefit obligation | 668,875 | 604,612 | 490,134 | 446,686 | ||||||||||||
Fair value of plan assets | 570,958 | 530,548 | 409,260 | 379,342 |
The following table lists the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the Spectrum Plan, which had plan assets in excess of projected benefit obligations and accumulated benefit obligations at December 31, 2020 and 2019:
2020 | 2019 | |||||||
Projected benefit obligation | $ | 516,816 | $ | 500,739 | ||||
Accumulated benefit obligation | 516,816 | 500,739 | ||||||
Fair value of plan assets | 546,692 | 516,666 |
The table below presents the weighted average asset allocations for the domestic and U.K. pension plans’ assets at December 31, 2020 and December 31, 2019 by asset category.
U.S. Plans | U.K. Plan | |||||||||||||||
Asset Category | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Fixed Income Collective Trust Funds and Securities | 64 | % | 65 | % | 70 | % | 68 | % | ||||||||
Equity Collective Trust Funds and Securities | 29 | 30 | 18 | 19 | ||||||||||||
Other Investment Collective Trust Funds and Securities | 3 | 3 | 11 | 12 | ||||||||||||
Cash | 4 | 2 | 1 | 1 | ||||||||||||
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Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
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The Company manages the plans’ asset allocation relative to the liability profile and funded status of the plans. It is expected that as the plan’s funded status improves, the portfolio will take less risk as to preserve the funded status of the plan framework. The plans follow a glide path whereby a target return-seeking allocation is followed based upon a given funded ratio level. The plans’ position with respect to the glide path is monitored and asset allocation and strategy changes to the plans’ portfolio are made as appropriate. The plans’ strategy is also monitored in relation to the capital markets, interest rates, and the regulatory environment. The assets of the Company’s pension plan in Germany consist of investments in German insurance contracts.
The fair value of U.S. plan assets was $1,117,650 and $1,047,214 at December 31, 2020 and 2019, respectively. The fair value of the U.K. plan assets was $407,336 and $377,536 at December 31, 2020 and 2019, respectively. The fair value of the German pension plan assets was $1,924 and $1,806 at December 31, 2020 and 2019, respectively.
The table below classifies the assets of the U.S. and U.K. plans using the Fair Value Hierarchy described in Note 10 - Fair Value Measurements.
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Fair Value Hierarchy | ||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | NAV(1) | ||||||||||||||||
December 31, 2020 | ||||||||||||||||||||
United States plans | ||||||||||||||||||||
Cash and cash equivalents | $ | 41,621 | $ | 41,621 | $ | — | $ | — | $ | — | ||||||||||
Collective Trust Funds - Equity | 319,143 | — | — | — | 319,143 | |||||||||||||||
Collective Trust Funds - Fixed income | 718,702 | — | 30,019 | — | 688,683 | |||||||||||||||
Collective Trust Funds - Real Estate | 38,184 | — | — | — | 38,184 | |||||||||||||||
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$ | 1,117,650 | $ | 41,621 | $ | 30,019 | $ | — | $ | 1,046,010 | |||||||||||
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Cash and cash equivalents | $ | 1,755 | $ | 1,755 | $ | — | $ | — | $ | — | ||||||||||
Equity securities | 73,963 | 73,963 | — | — | — | |||||||||||||||
Fixed income securities | 288,068 | 288,068 | — | — | — | |||||||||||||||
Other investments | 43,550 | — | 14,737 | 28,813 | — | |||||||||||||||
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$ | 407,336 | $ | 363,786 | $ | 14,737 | $ | 28,813 | $ | — | |||||||||||
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December 31, 2019 | ||||||||||||||||||||
United States plans | ||||||||||||||||||||
Cash & Cash Equivalents | $ | 23,867 | $ | 23,867 | $ | — | $ | — | $ | — | ||||||||||
Collective Trust Funds - Equity | 309,794 | — | — | — | 309,794 | |||||||||||||||
Collective Trust Funds - Fixed Income | 682,279 | — | 22,410 | — | 659,869 | |||||||||||||||
Collective Trust Funds - Real Estate | 31,274 | — | — | — | 31,274 | |||||||||||||||
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$ | 1,047,214 | $ | 23,867 | $ | 22,410 | $ | — | $ | 1,000,937 | |||||||||||
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Cash & Cash Equivalents | $ | 1,802 | $ | 1,802 | $ | — | $ | — | $ | — | ||||||||||
Equity securities | 72,503 | 72,503 | — | — | — | |||||||||||||||
Fixed income securities | 259,192 | 259,192 | — | — | — | |||||||||||||||
Other investments | 44,039 | — | 13,859 | 30,180 | — | |||||||||||||||
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$ | 377,536 | $ | 333,497 | $ | 13,859 | $ | 30,180 | $ | — | |||||||||||
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(1) | Investments in common/ collective trusts invest primarily in publicly traded securities and are valued using net asset value (NAV) of units of a bank collective trust. Therefore, these amounts have not been classified in the fair value hierarchy and are presented in the tables to reconcile the fair value hierarchy to the total fair value of plan assets. |
Plan assets are measured at fair value. While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The Company’s valuation methodologies used for the plan assets measured at fair value are as follows:
Cash and cash equivalents – Cash and cash equivalents include cash on deposit and investments in money market mutual funds that invest mainly in short-term instruments and cash, both of which are valued using a market approach.
Equity securities – Common, preferred, and foreign stocks are valued using a market approach at the closing price on their principal exchange and are included in Level 1 of the fair value hierarchy.
Fixed income securities – Corporate and foreign bonds are valued using a market approach at the closing price reported on the active market on which the individual securities are traded and are included in Level 1 of the fair value hierarchy.
Collective trust funds – Collective trust funds are valued at the net asset value of units held at year end and are excluded from the fair value hierarchy. The Collective trust funds fair value has been included within the table above based on the underlying investment strategy.
• | Equity Funds – Collective trust funds classified as Equity primarily invest in U.S. and non-U.S. securities in both small and large capitalization markets. |
• | Fixed Income Funds – Collective trust funds classified as Fixed Income primarily invest in debt securities, U.S. treasury securities, and fixed income securities. |
• | Real Estate Funds – Collective trust funds classified as Real Estate Funds are invested in global real estate securities. |
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The fair values of the Level 3 assets in the U.K. plan are determined by the fund manager using a discounted cash flow methodology. The future cash flows expected to be generated by the assets of the funds and made available to investors are estimated and then discounted back to the valuation date. The discount rate is derived by adding a risk premium to the risk-free interest rate applicable to the country in which the assets are located.
The following table details the activity in these investments for the years ended December 31, 2018, 2019 and 2020:
U.K. Plan Level 3 Assets | ||||
Balance at January 1, 2018 | $ | 38,070 | ||
Change in fair value | (7,294 | ) | ||
Foreign currency translation effect | (1,838 | ) | ||
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Balance at December 31, 2018 | 28,938 | |||
Change in fair value | 97 | |||
Foreign currency translation effect | 1,145 | |||
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Balance at December 31, 2019 | 30,180 | |||
Change in fair value | (2,172 | ) | ||
Foreign currency translation effect | 805 | |||
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Balance at December 31, 2020 | $ | 28,813 | ||
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The Company had no minimum funding requirements for its domestic pension plans in 2020. Due to the potential impact of COVID-19 and related plans to manage capital resources, the Company reduced its level of funding to the domestic pension plans in 2020. In 2020, the Company contributed $15,552 to its domestic and international pension plans, and during 2021, the Company expects to contribute between $45,000 and $55,000 to its domestic and international pension plans.
The Company estimates its benefit payments for its domestic and international pension plans and other postretirement benefit plans during the next ten years to be as follows:
Pension Benefits | Other Postretirement Benefits | |||||||
2021 | $ | 89,581 | $ | 12,266 | ||||
2022 | 90,470 | 12,676 | ||||||
2023 | 90,385 | 12,801 | ||||||
2024 | 91,921 | 12,889 | ||||||
2025 | 92,164 | 12,987 | ||||||
2026 through 2030 | 456,605 | 62,913 |
Note 12. Lease Commitments
The Company leases certain warehouses, distribution centers, office space, material handling equipment, office equipment, cars and information technology hardware. The Company determines if an arrangement is a lease or contains an embedded lease at contract inception.
Upon implementing the new lease accounting standard in 2019, the Company elected the package of practical expedients, which permits a lessee to not reassess under the new standard its prior conclusions regarding lease identification, lease classification and initial direct costs.
Lease liabilities and their corresponding right-of-use assets, for leases with terms of 12 months or greater, are recorded based on the present value of lease payments over the expected lease term. The Company has elected not to present short term leases on the consolidated balance sheet, in accordance with the standard.
The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
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Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more. The exercise of lease renewal options is at the Company’s sole discretion. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Certain of the Company’s lease agreements include rental payments based on the use of the leased property over contractual levels. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company has lease agreements with lease and non-lease components, which are accounted for separately. Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would account for each lease component and the related non-lease component together as a single component. For certain building leases, including the lease of warehouses, distribution centers and office space, the Company accounts for the lease and non-lease components as a single lease component. For all other asset types, the Company accounts for lease and non-lease components separately.
For operating leases, the right-of-use asset is subsequently measured throughout the lease term at the carrying amount of the lease liability. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
For finance leases, the right-of-use asset is subsequently amortized using the straight-line method from the lease commencement date to the earlier of the end of its useful life or the end of the lease term. In cases where the lease term exceeds the useful life, the right-of-use asset is amortized over the useful life of the underlying asset. Amortization of the right-of-use asset is recognized and presented separately from interest expense on the lease liability.
Variable lease expense includes payments based on performance or usage, as well as changes to index and rate-based lease payments.
Right-of-use assets for operating and finance leases are periodically reviewed for impairment losses. The Company uses the long-lived assets impairment guidance in ASC Subtopic 360-10, “Property, Plant, and Equipment - Overall”, to determine whether a right-of-use asset is impaired, and if so, the amount of the impairment loss to recognize. No impairment losses have been recognized to date.
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The following table presents the location and amount of lease assets and liabilities in the Consolidated Balance Sheets:
Assets | Location | December 31, 2020 | December 31, 2019 | |||||||
Operating lease assets, net | Operating lease right-of-use assets, net | $ | 91,884 | $ | 80,752 | |||||
Finance lease assets | Property, plant and equipment | 4,669 | 4,577 | |||||||
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| |||||||
Total leased assets | $ | 96,553 | $ | 85,329 | ||||||
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Liabilities | Location | |||||||||
Current: | ||||||||||
Operating | Accrued liabilities | $ | 23,338 | $ | 27,663 | |||||
Finance | Current portion of long-term debt and finance leases | 778 | 265 | |||||||
Noncurrent: | ||||||||||
Operating | Noncurrent operating leases | 71,391 | 55,371 | |||||||
Finance | Long-term debt and finance leases | 1,332 | 935 | |||||||
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| |||||||
Total lease liabilities | $ | 96,839 | $ | 84,234 | ||||||
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The following table presents the location and amount of lease expense in the Consolidated Income Statement:
Lease cost | Location | Twelve Months Ended December 31, 2020 | Twelve Months Ended December 31, 2019 | |||||||
Operating lease cost (a) | Cost of sales | $ | 35,305 | $ | 36,321 | |||||
Operating lease cost | Selling general & administrative expenses | 6,785 | 5,632 | |||||||
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| |||||||
Total operating lease cost | 42,090 | 41,953 | ||||||||
Amortization of finance lease assets | Cost of sales | $ | 698 | $ | 352 | |||||
Amortization of finance lease assets | Selling general & administrative expenses | 132 | — | |||||||
Interest on finance lease liabilities | Interest expense | 96 | 32 | |||||||
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| |||||||
Total finance lease cost | 926 | 384 | ||||||||
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| |||||||
Net lease cost | $ | 43,016 | $ | 42,337 | ||||||
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(a) | - Includes short-term lease costs of $7,904 and variable lease costs of $2,385 for the year ended December 31, 2020, $7,328 and $3,480, respectively for the year ended December 31, 2019. |
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The following table presents the future maturities of the Company’s lease obligations:
December 31, 2020 | ||||||||||||
Operating Leases | Finance Leases | Total | ||||||||||
2021 | $ | 24,947 | $ | 855 | $ | 25,802 | ||||||
2022 | 21,143 | 781 | 21,924 | |||||||||
2023 | 16,677 | 425 | 17,102 | |||||||||
2024 | 13,315 | 224 | 13,539 | |||||||||
2025 | 10,201 | 6 | 10,207 | |||||||||
After 2025 | 15,921 | — | 15,921 | |||||||||
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| |||||||
Total lease payments | 102,204 | 2,291 | 104,495 | |||||||||
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| |||||||
Less: Interest | (7,475 | ) | (181 | ) | (7,656 | ) | ||||||
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| |||||||
Present value of lease liabilities | $ | 94,729 | $ | 2,110 | $ | 96,839 | ||||||
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The following table presents the weighted-average lease term and discount rates of the Company’s lease obligations:
Weighted-average remaining lease term (years) | December 31, 2020 | December 31, 2019 | ||||||
Operating leases | 5.10 | 4.90 | ||||||
Finance Leases | 2.94 | 4.26 | ||||||
Weighted-average discount rate | ||||||||
Operating leases | 5.20 | % | 5.76 | % | ||||
Finance Leases | 4.31 | % | 5.79 | % |
The following table presents the cash flow amounts related to lease liabilities included in the Company’s Consolidated Statements of Cash Flows
Twelve Months Ended December 31, 2020 | Twelve Months Ended December 31, 2019 | |||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||
Operating cash outflows from operating leases | $ | 32,482 | $ | 33,774 | ||||
Financing cash outflows from finance leases | 803 | 605 | ||||||
Leased assets obtained in exchange for new finance lease liabilities | 67 | 43 | ||||||
Leased assets obtained in exchange for new operating lease liabilities | 200 | 342 |
Note 13. Other Long-Term Liabilities
Other long-term liabilities at December 31 were as follows:
2020 | 2019 | |||||||
Product liability | $ | 77,002 | $ | 91,853 | ||||
Long-term income taxes payable | 20,434 | 20,434 | ||||||
Stock-based liabilities | 17,807 | 14,778 | ||||||
Other | 36,999 | 22,000 | ||||||
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| |||||
Other long-term liabilities | $ | 152,242 | $ | 149,065 | ||||
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Note 14. Share Repurchase Program
Share repurchase programs require the approval of the Company’s Board of Directors. The following table summarizes the Company’s Board authorized share repurchase programs and related information for the twelve months ended December 31, 2020:
Program(1) | Date Authorized by Board of Directors | Expiration Date(2) | Amount Authorized (excluding commissions) | Amount Spent as of December 31, 2020 (excluding commissions) | Status | |||||||||||||||
2017 Repurchase Program | February 16, 2017 | December 31, 2021 | $ | 300,000 | $ | 106,877 | Active |
(1) | The repurchase program listed does not obligate the Company to acquire any specific number of shares and can be suspended or discontinued at any time without notice. Shares can be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. All repurchases under the program listed above have been made using cash resources. |
(2) | On December 3, 2019, the expiration of the 2017 Repurchase Program, scheduled for December 31, 2019, was extended to December 31, 2021. No other changes were made to the program. |
The Company did not have any open market or 10b5-1 plan share repurchase activity during the twelve months ended December 31, 2020 or December 31, 2019 shares of the Company’s common stock at an average cost of $34.11 per share.
Reserved Shares
There were 1,980,709 common shares reserved for grants under compensation plans at December 31, 2020. The Company eliminated the option for plan participants in the Company’s defined contribution plans to purchase additional shares of the Company’s common stock in March 2014. Effective May 2019, common stock held in the Company’s defined contribution plans can no longer receive quarterly dividends in the form of the Company’s common stock. As a result of this change, common shares previously reserved for the Company’s defined contribution plans have been released.
Note 15. Stock-Based Compensation
The Company’s incentive compensation plans allow the Company to grant awards to employees in the form of stock options, stock awards, restricted stock units, stock appreciation rights, performance stock units, dividend equivalents and other awards. Compensation related to these awards is determined based on the grant-date fair value and is amortized to expense over the vesting period. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire without forfeiture of the award. If awards can be settled in cash, these awards are recorded as liabilities and recorded at fair value at each reporting date.
The following table discloses the amount of stock-based compensation expense:
Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Restricted stock units | $ | 3,729 | $ | 2,836 | $ | 3,196 | ||||||
Performance stock units | 2,324 | 1,526 | 672 | |||||||||
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| |||||||
Total stock-based compensation | $ | 6,053 | $ | 4,362 | $ | 3,868 | ||||||
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|
|
Stock Options
The 2010 and 2014 Incentive Compensation Plans provide for granting options to key employees to purchase common shares at prices not less than market at the date of grant. Options under these plans may have terms of up to ten years becoming exercisable in whole or in consecutive installments, cumulative or otherwise. The plans allow the granting of nonqualified stock options which are not intended to qualify for the tax treatment applicable to incentive stock options under provisions of the Internal Revenue Code.
No stock options have been granted to executives participating in the Long-Term Incentive Plan since February 2014. Outstanding options do not contain any performance-based criteria. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire.
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Summarized information for the outstanding stock options follows:
Number of Shares | Weighted Average Exercise Price (per share) | Aggregate Intrinsic Value (thousands) | ||||||||||
Outstanding at December 31, 2019 | 238,748 | $ | 23.30 | |||||||||
Exercised | (117,324 | ) | 22.48 | |||||||||
Expired | (1,508 | ) | 23.96 | |||||||||
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| |||||||||||
Outstanding and Exercisable at December 31, 2020 | 119,916 | $ | 24.08 | $ | 1,969 | |||||||
|
|
Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Aggregate intrinsic value of options exercised (thousands) | 1,392 | 425 | 298 |
The weighted average remaining contractual life of options outstanding at December 31, 2020 is 2.6 years. All outstanding stock options are exercisable.
Segregated disclosure of options outstanding at December 31, 2020 was as follows:
Range of Exercise Prices | ||||||||
Less than or equal to $15.63 | Greater than $15.63 | |||||||
Options outstanding | 5,965 | 113,951 | ||||||
Weighted average exercise price | $ | 15.63 | $ | 24.53 | ||||
Remaining contractual life | 1.1 | 2.8 | ||||||
Options exercisable | 5,965 | 113,951 | ||||||
Weighted average exercise price | $ | 15.63 | $ | 24.53 |
At December 31, 2020, the Company had fully amortized all expense related to its stock option awards.
Restricted Stock Units
Under the 2001 and 2014 Incentive Compensation Plans, restricted stock units may be granted to officers and certain other employees as awards for exceptional performance, as a hiring or retention incentive or as part of the Long-Term Incentive Plan. The restricted stock units granted in 2018, 2019 and 2020 have vesting periods of three to four years. Compensation expense related to the restricted stock units granted is determined based on the fair value of the Company’s stock on the date of grant. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire. Employees must remain employed for at least six months after the grant date to vest in the restricted stock units, even if retirement eligible.
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The following table provides details of the Company’s restricted stock units for 2020:
Number of Restricted Units | Weighted Average Grant-Date Fair Value (per share) | Aggregate Intrinsic Value (thousands) | ||||||||||
Nonvested at December 31, 2019 | 230,962 | $ | 33.49 | |||||||||
Granted | 158,256 | 28.58 | ||||||||||
Vested | (88,672 | ) | 35.04 | |||||||||
Canceled | (49,720 | ) | 30.02 | |||||||||
Accrued dividend equivalents | 4,376 | 30.62 | ||||||||||
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Nonvested at December 31, 2020 | 255,202 | $ | 30.86 | |||||||||
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Vested but not released | 1,508 | 18.04 | ||||||||||
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Outstanding at December 31, 2020 | 256,710 | $ | 30.78 | $ | 7,902 | |||||||
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| |||||||||||
Weighted-average remaining contractual term of shares outstanding (months) | 20 |
Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Weighted average grant-date fair value of restricted shares granted (per share) | $ | 28.58 | $ | 32.52 | $ | 34.53 | ||||||
Weighted average grant-date fair value of shares vested (thousands) | $ | 3,107 | $ | 3,336 | $ | 3,000 |
The number of vested restricted stock units at December 31, 2020 and 2019 was 1,508 and 1,483, respectively. At December 31, 2020, the Company has $1,896 of unvested compensation cost related to restricted stock units and this cost will be recognized as expense over a weighted average period of 27 months.
Performance Stock Units
Under the 2014 Incentive Compensation Plan, performance stock units may be granted as part of the Long-Term Incentive Plan. Compensation expense related to the performance stock units is determined based on the fair value of the Company’s stock on the date of grant combined with performance metrics. The Company recognizes compensation expense based on the earlier of the vesting date or the date when the employee becomes eligible to retire, and in accordance with the achievement of the underlying performance condition.
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The following table provides details of the nonvested performance stock units earned under the Company’s Long-Term Incentive Plan:
Number of Performance Units | Weighted Average Grant- Date Fair Value (per share) | Aggregate Intrinsic Value (thousands) | ||||||||||
Nonvested at December 31, 2019 | 59,335 | $ | 33.79 | |||||||||
Earned | 92,816 | 27.35 | ||||||||||
Vested | (51,147 | ) | 31.50 | |||||||||
Canceled | (20,064 | ) | 29.33 | |||||||||
Accrued dividend equivalents | 1,014 | 33.85 | ||||||||||
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Nonvested at December 31, 2020 | 81,954 | $ | 29.02 | |||||||||
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Vested but not released | 49,376 | 31.39 | ||||||||||
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Outstanding at December 31, 2020 | 131,330 | $ | 29.91 | $ | 3,928 | |||||||
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Weighted-average remaining contractual term of performance stock units outstanding (months) | 11 |
Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Weighted average grant-date fair value of performance stock units granted (per share) | $ | 27.35 | $ | 33.27 | $ | 36.08 | ||||||
Weighted average grant-date fair value of performance stock units vested (thousands) | $ | 1,611 | $ | 1,073 | $ | 1,821 |
At December 31, 2020, the Company had $412 of unvested compensation cost related to performance stock units and this cost will be recognized as expense over a weighted average period of 19 months.
The Company’s nonvested restricted stock units and performance stock units are not participating securities. These units will be converted into shares of Company common stock in accordance with the distribution date indicated in the agreements. Restricted stock units earn dividend equivalents from the time of the award until distribution is made in common shares. Performance stock units earn dividend equivalents from the time the units have been earned based upon Company performance metrics until distribution is made in common shares. Dividend equivalents are only earned subject to vesting of the underlying restricted stock units or performance stock units. Accordingly, such units do not represent participating securities.
At December 31, 2020, the company had 1,980,709 shares available for future issuance under equity compensation plans.
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Note 16. Changes in Accumulated Other Comprehensive (Loss) Income by Component
The following tables provide a quarterly reconciliation of each component of Accumulated other comprehensive (loss) income:
Cumulative Translation Adjustment | Derivative Instruments | Post-retirement Benefits | Total | |||||||||||||
Ending Balance, December 31, 2019 | $ | (58,186 | ) | $ | (549 | ) | $ | (388,845 | ) | $ | (447,580 | ) | ||||
Other comprehensive income (loss) before reclassifications | 14,865 | (9,073 | ) | (37,979 | ) | (32,187 | ) | |||||||||
Foreign currency translation effect | — | — | (4,611 | ) | (4,611 | ) | ||||||||||
Income tax effect | — | 2,022 | 7,857 | 9,879 | ||||||||||||
Amount reclassified from accumulated other comprehensive (loss) income | ||||||||||||||||
Cash flow hedges | — | 644 | — | 644 | ||||||||||||
Amortization of prior service cost | — | — | 1,429 | 1,429 | ||||||||||||
Amortization of actuarial loss | — | — | 35,257 | 35,257 | ||||||||||||
Pension settlement charges | — | — | 4,155 | 4,155 | ||||||||||||
Prior service effect of plan amendment | — | — | (2,581 | ) | (2,581 | ) | ||||||||||
Income tax effect | — | 184 | (11,498 | ) | (11,314 | ) | ||||||||||
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Other comprehensive income (loss) | 14,865 | (6,223 | ) | (7,971 | ) | 671 | ||||||||||
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| |||||||||
Ending Balance, December 31, 2020 | $ | (43,321 | ) | $ | (6,772 | ) | $ | (396,816 | ) | $ | (446,909 | ) | ||||
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Cumulative Translation Adjustment | Derivative Instruments | Post-retirement Benefits | Total | |||||||||||||
Ending Balance, December 31, 2018 | $ | (62,133 | ) | $ | 2,150 | $ | (401,606 | ) | $ | (461,589 | ) | |||||
Other comprehensive income (loss) before reclassifications | 3,947 | (2,612 | ) | (12,877 | ) | (11,542 | ) | |||||||||
Foreign currency translation effect | — | — | (2,668 | ) | (2,668 | ) | ||||||||||
Income tax effect | — | 804 | — | 804 | ||||||||||||
Amount reclassified from accumulated other comprehensive (loss) income | ||||||||||||||||
Cash flow hedges | — | (1,141 | ) | — | (1,141 | ) | ||||||||||
Amortization of prior service credit | — | — | 603 | 603 | ||||||||||||
Amortization of actuarial losses | — | — | 35,843 | 35,843 | ||||||||||||
Pension settlement charge | — | — | 4,262 | 4,262 | ||||||||||||
Prior service effect of plan amendment | — | — | (3,069 | ) | (3,069 | ) | ||||||||||
Income tax effect | — | 250 | (9,333 | ) | (9,083 | ) | ||||||||||
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| |||||||||
Other comprehensive income (loss) | 3,947 | (2,699 | ) | 12,761 | 14,009 | |||||||||||
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| |||||||||
Ending Balance, December 31, 2019 | $ | (58,186 | ) | $ | (549 | ) | $ | (388,845 | ) | $ | (447,580 | ) | ||||
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Note 17. Comprehensive Income Attributable to Noncontrolling Shareholders’ Interests
The following table provides the details of the comprehensive income (loss) attributable to noncontrolling shareholders’ interests:
Twelve Months Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Net income attributable to noncontrolling shareholders’ interests | $ | 1,115 | $ | 1,913 | $ | 3,977 | ||||||
Other comprehensive income (loss): | ||||||||||||
Currency translation adjustments | 2,279 | 795 | (2,237 | ) | ||||||||
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Comprehensive income attributable to noncontrolling shareholders’ interests | $ | 3,394 | $ | 2,708 | $ | 1,740 | ||||||
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-40-
Note 18. Contingent Liabilities
Product Liability Claims
The Company is a defendant in various product liability claims brought in numerous jurisdictions in which individuals seek damages resulting from motor vehicle accidents allegedly caused by defective tires manufactured by the Company. Each of the product liability claims faced by the Company generally involves different types of tires and circumstances surrounding the accident such as different applications, vehicles, speeds, road conditions, weather conditions, driver error, tire repair and maintenance practices, service life conditions, as well as different jurisdictions and different injuries. In addition, in many of the Company’s product liability lawsuits the plaintiff alleges that his or her harm was caused by one or more co-defendants who acted independently of the Company. Accordingly, both the claims asserted and the resolutions of those claims have an enormous amount of variability. The aggregate amount of damages asserted at any point in time is not determinable since often times when claims are filed, the plaintiffs do not specify the amount of damages. Even when there is an amount alleged, at times the amount is wildly inflated and has no rational basis.
The fact that the Company is a defendant in product liability lawsuits is not surprising given the current litigation climate, which is largely confined to the United States. However, the fact that the Company is subject to claims does not indicate that there is a quality issue with the Company’s tires. The Company sells approximately 30 to 35 million passenger car, light truck, sport utility vehicle, TBR and motorcycle tires per year in North America. The Company estimates that approximately 300 million Company-produced tires made up of thousands of different specifications are still on the road in North America. While tire disablements do occur, it is the Company’s and the tire industry’s experience that the vast majority of tire failures relate to service-related conditions, which are entirely out of the Company’s control, such as failure to maintain proper tire pressure, improper maintenance, improper repairs, road hazard, and excessive speed.
The Company accrues costs for asserted product liability claims at the time a loss is probable and the amount of loss can be estimated. The Company believes the probability of loss can be established and the amount of loss can be estimated only after certain minimum information is available, including verification that Company-produced product was involved in the incident giving rise to the claim, the condition of the product purported to be involved in the claim, the nature of the incident giving rise to the claim and the extent of the purported injury or damages. In cases where such information is known, each product liability claim is evaluated based on its specific facts and circumstances. A judgment is then made to determine the requirement for establishment or revision of an accrual for any potential liability. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. The liability often cannot be determined with precision until the claim is resolved.
Pursuant to ASC 450 “Contingencies,” the Company accrues the minimum liability for each known claim when the estimated outcome is a range of probable loss and no one amount within that range is more likely than another. For such known claims, the Company accrues the minimum liability because the product liability claims faced by the Company are unique and widely variable, and accordingly, the resolutions of those claims have an enormous amount of variability. The costs have ranged from zero dollars to $33 million in one case with no average that is meaningful.
No specific accrual is made for individual unasserted claims or for premature claims, asserted claims where the minimum information needed to evaluate the probability of a liability is not yet known. However, an accrual is maintained for such claims based, in part, on management’s expectations for future litigation activity and the settled claims history maintained, including the historical number of claims and amount of settlements.
The Company periodically reviews its estimates and any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. Because of the speculative nature of litigation in the U.S., the Company does not believe a meaningful aggregate range of reasonably possible loss for asserted and unasserted claims can be determined. While the Company believes its reserves are reasonably stated, it is possible an individual claim from time to time may result in an aberration from the norm and could have a material impact.
The time frame for the payment of a product liability claim is too variable to be meaningful. From the time a claim is filed to its ultimate disposition depends on the unique nature of the case, how it is resolved - claim dismissed, negotiated settlement, trial verdict or appeals process - and is highly dependent on jurisdiction, specific facts, the plaintiff’s attorney, the court’s docket and other factors. Given that some claims may be resolved in weeks and others may take five years or more, it is impossible to predict with any reasonable reliability the time frame over which the accrued amounts may be paid. However, the time frame from occurrence of the loss incident to reporting of the claim is monitored by the Company on an ongoing basis.
The Company regularly reviews the probable outcome of outstanding legal proceedings and the availability and limits of insurance coverage, and accrues for such legal proceedings at the time a loss is probable and the amount of the loss can be estimated. As part of its regular review, the Company monitors trends that may affect its ultimate liability and analyzes developments and variables likely to affect pending and anticipated claims against the Company and the reserves for such claims. The Company utilizes claims experience, as well as trends and developments in the litigation climate, in estimating its required accrual. Based on the Company’s review completed in the third quarter of 2020, the Company
-41-
recorded a benefit of $48,764. This benefit reflects a reduction in the Company’s estimate of the volume of anticipated product liability claims, as well as adjustments to existing reserves based upon settled claims history. As a result of the Company’s review, coupled with normal activity, including the addition of another quarter of self-insured incidents, settlements and changes in the amount of reserves, the Company decreased its accrual to $95,339 at December 31, 2020, compared to $117,219 at December 31, 2019.
The addition of another twelve months of self-insured incidents through December 31, 2020 accounted for an increase of $34,809 in the Company’s product liability reserve. Settlements, changes in the amount of reserves for cases where sufficient information is known to estimate a liability, and changes in assumptions, including the estimate of anticipated claims and settlement values, decreased the liability by $49,032 at December 31, 2020. During 2020, the Company paid $7,657 to resolve cases and claims.
The Company’s product liability reserve balance at December 31, 2020 totaled $95,339 (the current portion of $18,337 is included in Accrued liabilities and the long-term portion is included in Other long-term liabilities on the Consolidated Balance Sheets), and the balance at December 31, 2019 totaled $117,219 (current portion of $25,366).
The product liability expense reported by the Company includes amortization of insurance premium costs, adjustments to settlement reserves and legal costs incurred in defending claims against the Company. Legal costs are expensed as incurred and product liability insurance premiums are amortized over coverage periods.
Product liability expenses are included in Cost of products sold in the Consolidated Statements of Income. Product liability (benefit) expense was as follows:
Twelve Months Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Product liability (benefit) expense | $ | (3,539 | ) | $ | 40,309 | $ | 17,692 |
Other Litigation
In addition to the proceedings described above, the Company is involved in various other legal proceedings arising in the ordinary course of business. The Company regularly reviews the probable outcome of these proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and accrues for these proceedings at the time a loss is probable and the amount of the loss can be estimated. Although the outcome of these pending proceedings cannot be predicted with certainty and an estimate of any such loss cannot be made, the Company believes that any liabilities that may result from these proceedings are not reasonably likely to have a material adverse effect on the Company’s liquidity, financial condition or results of operations.
Employment Contracts and Agreements
No executives have employment agreements as of December 31, 2020. The Executive Officers and certain other employees are covered by the Cooper Tire & Rubber Company Change in Control Severance Pay Plan.
At December 31, 2020, approximately 42 percent of the Company’s workforce was represented by collective bargaining units.
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Note 19. Business Segments
The Company has four segments under ASC 280, “Segments”:
• | North America, composed of the Company’s operations in the United States and Canada; |
• | Latin America, composed of the Company’s operations in Mexico, Central America and South America; |
• | Europe; and |
• | Asia. |
North America and Latin America meet the criteria for aggregation in accordance with ASC 280, as they are similar in their production and distribution processes and exhibit similar economic characteristics. The aggregated North America and Latin America segments are presented as “Americas Tire Operations” in the segment disclosure. The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, primarily for sale in the U.S. replacement market. The segment also has a manufacturing operation in Mexico, COOCSA, which supplies passenger car and light truck tires to the Mexican, North American, Central American and South American markets. On January 24, 2020, the Company acquired the remaining noncontrolling ownership interest in COOCSA, making COOCSA a wholly-owned subsidiary. The segment also markets and distributes racing, TBR and motorcycle tires. The racing and motorcycle tires are manufactured by the Company’s European segment and by others. TBR tires are sourced from GRT and ACTR, and through off-take agreements with PCT and Sailun Vietnam through December 31, 2020.
Major distribution channels and customers include independent tire dealers, wholesale distributors, regional and national retail tire chains, large retail chains that sell tires as well as other automotive products, mass merchandisers and digital channels. The segment does not currently sell its products directly to end users, except through three Company-owned retail stores. The segment sells a limited number of tires to OEMs.
Both the Europe and Asia segments have been determined to be individually immaterial, as they do not meet the quantitative requirements for segment disclosure under ASC 280. In accordance with ASC 280, information about operating segments that are not reportable shall be combined and disclosed in an all other category separate from other reconciling items. As a result, these two segments have been combined in the segment operating results discussion. The results of the combined Europe and Asia segments are presented as “International Tire Operations.” The European operations include manufacturing operations in the U.K. and Serbia. The U.K. entity primarily manufactures and markets motorcycle and racing tires and tire retread material for domestic and global markets. The Serbian entity manufactures passenger car and light truck tires primarily for the European markets and for export to the North American segment. The Asian operations are located in the PRC and Vietnam. Cooper Kunshan Tire, in the PRC, manufactures passenger car and light truck tires both for the Chinese domestic market and for export to markets outside of the PRC. GRT, a joint venture manufacturing facility located in the PRC, and ACTR, a joint venture manufacturing facility located in Vietnam, serve as global sources of TBR tire production for the Company. The segment also procured certain TBR tires under off-take agreements with PCT and Sailun Vietnam. The segment sells a majority of its tires in the replacement market, with a portion also sold to OEMs.
On January 17, 2019, Cooper Tire Europe, a wholly-owned subsidiary of the Company, committed to a plan to cease substantially all light vehicle tire production at its Melksham, U.K. facility. The phasing out of light vehicle tire production was substantially completed in the third quarter of 2019. Approximately 300 roles were eliminated at the site. Cooper Tire Europe now obtains light vehicle tires to meet customer needs from other production sites within the Company’s global production network. Approximately 400 roles remain in Melksham to support the functions that continue there, including motorsports and motorcycle tire production, a materials business, Cooper Tire Europe headquarters, sales and marketing, and the Europe Technical Center.
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The following table details segment financial information:
Twelve Months Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Net sales: | ||||||||||||
Americas Tire | ||||||||||||
External customers | $ | 2,148,828 | $ | 2,315,497 | $ | 2,330,457 | ||||||
Intercompany | 22,061 | 38,229 | 32,189 | |||||||||
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2,170,889 | 2,353,726 | 2,362,646 | ||||||||||
International Tire | ||||||||||||
External customers | 372,246 | 437,143 | 477,621 | |||||||||
Intercompany | 109,409 | 96,860 | 163,355 | |||||||||
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481,655 | 534,003 | 640,976 | ||||||||||
Eliminations | (131,470 | ) | (135,090 | ) | (195,560 | ) | ||||||
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Consolidated net sales | $ | 2,521,074 | $ | 2,752,639 | $ | 2,808,062 | ||||||
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Operating profit (loss): | ||||||||||||
Americas Tire | $ | 280,349 | $ | 237,753 | $ | 229,500 | ||||||
International Tire | 3,167 | (13,390 | ) | (14,044 | ) | |||||||
Unallocated corporate charges | (54,690 | ) | (49,968 | ) | (51,564 | ) | ||||||
Eliminations | 2,055 | 60 | 1,353 | |||||||||
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Consolidated operating profit | $ | 230,881 | $ | 174,455 | $ | 165,245 | ||||||
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Interest expense | $ | (22,707 | ) | $ | (31,189 | ) | $ | (32,181 | ) | |||
Interest income | 3,569 | 9,458 | 10,216 | |||||||||
Other pension and postretirement benefit expense | (25,419 | ) | (41,567 | ) | (27,806 | ) | ||||||
Other non-operating income (expense) | 4,579 | (1,485 | ) | (1,416 | ) | |||||||
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Income before income taxes | $ | 190,903 | $ | 109,672 | $ | 114,058 | ||||||
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Depreciation and amortization expense: | ||||||||||||
Americas Tire (a) | $ | 93,469 | $ | 95,761 | $ | 93,978 | ||||||
International Tire | 41,654 | 31,654 | 34,564 | |||||||||
Corporate (a) | 23,724 | 20,639 | 18,619 | |||||||||
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Consolidated depreciation and amortization expense | $ | 158,847 | $ | 148,054 | $ | 147,161 | ||||||
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Segment assets: | ||||||||||||
Americas Tire | $ | 1,478,125 | $ | 1,543,779 | $ | 1,513,534 | ||||||
International Tire | 736,877 | 739,076 | 662,226 | |||||||||
Corporate and other | 756,571 | 519,483 | 458,445 | |||||||||
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Consolidated assets | $ | 2,971,573 | $ | 2,802,338 | $ | 2,634,205 | ||||||
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Expenditures for long-lived assets: | ||||||||||||
Americas Tire | $ | 114,565 | $ | 111,819 | $ | 112,444 | ||||||
International Tire | 31,383 | 62,334 | 71,667 | |||||||||
Corporate | 5,250 | 28,569 | 9,188 | |||||||||
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Consolidated expenditures for long-lived assets | $ | 151,198 | $ | 202,722 | $ | 193,299 | ||||||
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Geographic information for long-lived assets follows:
As of December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Net sales | ||||||||||||
United States | $ | 2,071,981 | $ | 2,175,599 | $ | 2,196,424 | ||||||
Rest of world | 449,093 | 577,040 | 611,638 | |||||||||
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Consolidated net sales | $ | 2,521,074 | $ | 2,752,639 | $ | 2,808,062 | ||||||
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Long-lived assets (b) | ||||||||||||
United States | $ | 714,139 | $ | 683,769 | $ | 595,768 | ||||||
PRC | 232,553 | 239,889 | 232,339 | |||||||||
Rest of world | 222,816 | 204,336 | 173,814 | |||||||||
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Consolidated long-lived assets | $ | 1,169,508 | $ | 1,127,994 | $ | 1,001,921 | ||||||
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(a) | - Depreciation and amortization of $51,210 and $36,713 has been reclassified in 2019 and 2018, respectively, from Corporate to Americas Tire to properly present such expense as reflected in the segment results for the corresponding periods. . |
(b) | - Beginning in 2019, the company includes Right of Use Assets in the Long-lived assets for each segment. |
The following customer of the Americas Tire Operations segment contributed ten percent or more of the Company’s total consolidated net sales in 2020, 2019 or 2018. Net sales and percentage of consolidated Company net sales for these customers in 2020, 2019 and 2018 were as follows:
2020 | 2019 | 2018 | ||||||||||||||||||||||
Customer | Net Sales | Consolidated Net Sales | Net Sales | Consolidated Net Sales | Net Sales | Consolidated Net Sales | ||||||||||||||||||
American Tire Distributors, Inc. | $ | 329,631 | 13 | % | $ | 311,559 | 11 | % | $ | 310,070 | 11 | % |
Note 20. Subsequent Event
On February 22, 2021, the Company entered into a Merger Agreement by and among the Company, Goodyear and the Merger Sub, pursuant to which, subject to the satisfaction or (to the extent permissible) waiver of the conditions set forth therein, Goodyear will acquire the Company by way of the Merger, with the Company surviving such Merger as a wholly owned subsidiary of Goodyear. Under the terms of the Merger Agreement, at the effective time of the Merger, the Company’s stockholders will be entitled to receive $41.75 per share in cash and a fixed exchange ratio of 0.907 shares of Goodyear common stock per share of the Company’s common stock they own at the effective time (the “Merger Consideration”). Upon completion of the proposed Merger, it is expected that the Company’s stockholders will own approximately 16 percent and Goodyear stockholders will own approximately 84 percent of the combined company on a fully diluted basis. In addition, at the effective time of the Merger, as defined under the terms of the Merger Agreement, all outstanding restricted stock units and performance stock units of the Company will be converted into the right to receive the Merger Consideration, and the Company’s outstanding options will be converted into a right to receive a cash payment. The Company expects to complete the Merger in the second half of 2021, subject to the satisfaction of customary closing conditions, including receipt of required regulatory approvals and the approval of the Company’s stockholders.
The Company is party to a trust agreement which is intended to provide funding for benefits payable and other potential payments to directors, executive officers and certain other employees under various plans and agreements of the Company. The execution of the Merger Agreement constituted a “potential change in control” under such plans and agreements and as a result, the Company is required to fund the estimated value of the payments to be made to the beneficiaries under the trust agreement within five business days of signing the Merger Agreement. The Company will deposit an additional $58,812 with the trustee in connection with this funding obligation. Such cash will be treated as restricted cash on the consolidated financial statements.
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COOPER TIRE & RUBBER COMPANY
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2020, 2019 and 2018
(Dollar amounts in thousands) | Additions | |||||||||||||||||||||||||||
Balance at Beginning of Year | Charged to Income | Charged to Equity | Acquisition of Business | Deductions | Balance at End of Year | |||||||||||||||||||||||
Year Ended December 31, 2018 | ||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 7,570 | $ | 2,019 | $ | — | $ | — | $ | 3,753 | (a) | $ | 5,836 | |||||||||||||||
Tax valuation allowance | $ | 30,102 | $ | 456 | $ | — | $ | — | $ | 7,938 | (b) | $ | 22,620 | |||||||||||||||
Year Ended December 31, 2019 | ||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 5,836 | $ | 3,401 | $ | — | $ | — | $ | 1,128 | (a) | $ | 8,109 | |||||||||||||||
Tax valuation allowance | $ | 22,620 | $ | 13,178 | $ | (6,337 | ) | $ | — | $ | 2,191 | (b) | $ | 27,270 | ||||||||||||||
Year Ended December 31, 2020 | ||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 8,109 | $ | 4,925 | $ | — | $ | — | $ | 1,872 | (a) | $ | 11,162 | |||||||||||||||
Tax valuation allowance | $ | 27,270 | $ | 5,834 | $ | 2,736 | $ | — | $ | 695 | (b) | $ | 35,145 |
(a) | Accounts written off during the year, net of recoveries of accounts previously written off. |
(b) | Net increase in tax valuation allowance is primarily the result of a net increase in unbenefitted losses. 2020 also includes remeasurement of deferred tax assets in the U.K. |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Cooper Tire & Rubber Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cooper Tire & Rubber Company (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Product liability | ||
Description of the matter | As described in Notes 1 and 18, the Company is a defendant in various product liability claims brought in numerous jurisdictions in which individuals seek damages resulting from motor vehicle accidents allegedly caused by defective tires manufactured by the Company. The Company accrues costs for asserted product liability claims at the time a loss is probable and the amount of loss can be estimated. Each product liability claim is evaluated based on its specific facts and circumstances, and a judgment is then made to determine the requirement for establishment or revision of an accrual for any potential liability. An accrual for unasserted claims or for premature claims is based, in part, on management’s expectations for future litigation activity and the settled claims history maintained, including the historical number of claims and amounts of settlements. The Company periodically reviews such estimates, and any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. At December 31, 2020, the Company’s product liability reserve balance totaled $95.3 million. | |
Auditing management’s estimate of loss contingencies arising from product liability claims was complex and included evaluating the likelihood and amount of loss for asserted and unasserted claims, which are subjective and require significant judgment. |
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How we addressed the matter in our audit | We evaluated the design and tested the operating effectiveness of internal controls over the Company’s identification and evaluation of product liability claims, including the reserve for unasserted claims, including management’s review of the estimation model used to establish the best estimate of the required reserve, and the data inputs used in the estimation model. | |
Our audit procedures to test the adequacy and completeness of management’s assessment of the probability of loss included, among others, reviews of legal correspondence related to claims identified by management, reviews of confirmation letters obtained from internal and external legal counsel, inquiries of internal and external legal counsel to discuss asserted and known unasserted claims, and review of written representations obtained from the Company. In order to test the measurement of the product liability reserve, we evaluated the Company’s estimation model used to establish the reserve for claims, asserted and unasserted, and tested the accuracy and completeness of the data used in management’s estimation model. In addition, we performed sensitivity analyses over management’s estimated range of losses in order to evaluate the magnitude of potential impact on the liability resulting from changes in assumptions. |
/s/ Ernst & Young LLP |
We have served as the Company’s auditor since 1942. |
Toledo, Ohio |
February 22, 2021 |
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