Cooper Tire Acquisition

6 Months Ended

Jun. 30, 2021

NOTE 2. COOPER TIRE ACQUISITION

On June 7, 2021, we completed our acquisition of all of the outstanding shares of common stock of Cooper Tire pursuant to the terms of the Merger Agreement. Cooper Tire’s results of operations have been included in our consolidated financial statements since the Closing Date. Cooper Tire stockholders received $41.75 per share in cash and a fixed exchange ratio of 0.907 shares of Goodyear common stock per share of Cooper Tire common stock (the "Merger Consideration") as consideration pursuant to the terms of the Merger Agreement, which amounted to approximately $3.1 billion. The acquisition will expand Goodyear’s product offering by combining two portfolios of complementary brands.

We used the net proceeds from the issuance of new senior notes with an aggregate principal amount of $1.45 billion, together with cash on hand and borrowings under our first lien revolving credit facility, to finance the acquisition of Cooper Tire and related transaction costs. For further information regarding the new senior notes and the first lien revolving credit facility, refer to Note to the Consolidated Financial Statements No. 9, Financing Arrangements and Derivative Financial Instruments.

The calculation of the Merger Consideration is as follows:


(In millions, except share and per share amounts)	Shares		Per Share (4)		Total
Cash paid for Cooper Tire Shares(1)					$	2,121
Cash paid for other Cooper Tire incentive compensation awards(2)						34
Cash component of the Merger Consideration					$	2,155
Shares of Goodyear Common Stock issued to Cooper Tire Stockholders(3)		46,060,349	$	20.46		942
Merger Consideration					$	3,097

(1)

The cash component of the Merger Consideration is computed based on 100% of the outstanding shares of Cooper Tire common stock, including shares issuable pursuant to the conversion of certain equity-based awards outstanding under Cooper Tire’s equity-based incentive compensation plans (“Cooper Tire Shares”), being exchanged, in part, for the per share cash amount of $41.75. Awards outstanding under Cooper Tire equity-based incentive compensation plans that were converted include Cooper Tire restricted stock units and Cooper Tire performance stock units. These Cooper Tire equity-based awards were canceled and each share equivalent unit was converted, as appropriate, into the Merger Consideration.


(In millions, except share and per share amounts)	Shares		Per Share		Total
Shares of Cooper Tire Common Stock outstanding as of the Closing Date		50,523,922
Shares issuable pursuant to conversion of share units outstanding under Cooper Tire equity-based compensation plans		269,238
Cooper Tire Shares		50,793,160	$	41.75	$	2,121

(2)

Cash consideration for the settlement of outstanding Cooper Tire stock options, Cooper Tire performance cash units and Cooper Tire notional deferred stock units, all of which were cancelled at the Closing Date and paid in cash.

(3)

The stock component of the Merger Consideration is computed based on a fixed exchange ratio of 0.907 shares of Goodyear common stock per Cooper Tire Share being exchanged. Shares issued of 46,060,349 are comprised of 45,824,480 of newly issued shares and 235,869 of shares issued from treasury.


	Shares		Exchange Ratio		Total
Cooper Tire Shares		50,793,160
Less: Cooper Tire Shares settled in cash(5)		9,975
		50,783,185		0.907		46,060,349

(4)

Represents the closing market price of our common stock as of June 4, 2021, the last trading day prior to the Closing Date.

(5)

Represents fractional and certain other shares that were settled in cash.

The following table presents supplemental cash flow information related to the acquisition of Cooper Tire:


(In millions)
Cash component of the Merger Consideration	$	2,155
Less:
Cash acquired		231
Restricted cash acquired		68
Acquisition of Cooper Tire, net of cash and restricted cash acquired	$	1,856

The Consolidated Statements of Cash Flows are presented net of the stock component of the Merger Consideration, which represents a non-cash transaction.

The Merger Consideration was allocated on a preliminary basis as of the Closing Date. Assets acquired and liabilities assumed were recorded at estimated fair values based on management’s estimates, available information, and supportable assumptions that management considered reasonable. Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed of Cooper Tire are recognized and measured at fair value. The determination of the fair values of certain assets acquired, including Inventories, Property, Plant and Equipment, Goodwill, Intangible Assets, and Deferred Income Taxes, is dependent upon completion of further fair value analysis by the Company. The determination of the fair values of certain liabilities assumed is dependent upon completion of certain actuarial and other valuations and studies. Given the complex nature of the related valuations and analyses to be completed and the timing of the acquisition, the preliminary purchase price allocation is subject to change. The final valuation of assets acquired and liabilities assumed may be materially different from the estimated values shown below.

The following table sets forth the preliminary allocation of the Merger Consideration to the identifiable tangible and intangible assets acquired and liabilities assumed of Cooper Tire, with the excess recorded to Goodwill:


(In millions)	As of June 7, 2021
Cash and Cash Equivalents	$	231
Accounts Receivable		621
Inventories		693
Property, Plant and Equipment		1,372
Goodwill		475
Intangible Assets		1,086
Other Assets		362
		4,840

Accounts Payable — Trade		464
Compensation and Benefits		386
Debt, Finance Leases and Notes Payable and Overdrafts		151
Deferred Tax Liabilities, net		347
Other Liabilities		374
Minority Equity		21
		1,743
Merger Consideration	$	3,097

The estimated value of Inventory includes adjustments totaling $230 million, comprised of $121 million to adjust inventory valued on a last-in, first-out ("LIFO") basis to a current cost basis and $109 million to step-up inventory to estimated fair value. The fair value step-up will amortize to Cost of Goods Sold ("CGS") as the related inventory is sold, which negatively impacted the second quarter of 2021 by $38 million. We have eliminated the LIFO reserve on Cooper Tire’s U.S. inventories as we predominately determine the value of our inventory using the first-in, first-out ("FIFO") method. To estimate the fair value of inventory, we considered the components of Cooper Tire’s inventory, as well as estimates of selling prices and selling and distribution costs that were based on Cooper Tire’s historical experience.

The estimated value of Property, Plant and Equipment includes adjustments totaling $175 million to increase the net book value of $1,197 million to the preliminary fair value estimate of $1,372 million. This estimate is based on other comparable acquisitions and historical experience, and preliminary expectations as to the duration of time we expect to realize benefits from those assets, as we do not yet have sufficient information as to the underlying condition of Cooper Tire’s fixed assets.

The estimated fair values of identifiable intangible assets acquired were prepared using an income valuation approach, which requires a forecast of expected future cash flows either through the use of the relief-from-royalty method or the multi-period excess earnings method. The estimated useful lives are based on our historical experience and expectations as to the duration of time we expect to realize benefits from those assets. The estimated fair values of the identifiable intangible assets acquired, their estimated useful lives and the related valuation methodology are as follows:


(In millions)	Preliminary Fair Value		Range of Useful Lives	Valuation Methodology
Trade names (indefinite-lived)	$	310	N/A	Relief-from-royalty
Trade names (definite-lived)		40	13-15 years	Relief-from-royalty
Customer relationships		730	7-16 years	Multi-period excess earnings
Non-compete and other		6
	$	1,086

At the Closing Date, all of the calculated Goodwill of $475 million was allocated to our Americas segment. The goodwill consists of expected future economic benefits that will arise from expected future product sales, operating efficiencies and other synergies that may result from the Merger, including income tax synergies, and is not deductible for tax purposes.

Net sales and earnings related to Cooper Tire’s operations that have been included in our Consolidated Statements of Operations for the period from the Closing Date through June 30, 2021 are as follows:


(In millions)
Net Sales	$	256
Income (Loss) before Income Taxes		(20	)
Goodyear Net Income (Loss)		(6	)

During the three and six months ended June 30, 2021, we incurred transaction and other costs in connection with the Merger totaling $48 million and $55 million, respectively, including $10 million for a commitment fee related to a bridge term loan facility that was not utilized to finance the transaction and $6 million related to the post-combination settlement of certain Cooper Tire incentive compensation awards during the second quarter of 2021. In the three and six months ended June 30, 2021, $42 million and $49 million of these costs, respectively, are included in Other (Income) Expense, with the remainder included in CGS and Selling, Administrative and General Expense ("SAG") in our Consolidated Statements of Operations.

Pro forma financial information

The following table summarizes, on a pro forma basis, the combined results of operations of Goodyear and Cooper Tire as though the acquisition and the related financing had occurred as of January 1, 2020. The pro forma results are not necessarily indicative of either the actual consolidated results had the acquisition of Cooper Tire occurred on January 1, 2020, nor are they indicative of future consolidated operating results.


	Three Months Ended					Six Months Ended
	June 30,					June 30,
(In millions)	2021		2020			2021		2020
Net Sales	$	4,563	$	2,655		$	8,744	$	6,253
Income (Loss) before Income Taxes		232		(957	)		320		(1,638	)
Goodyear Net Income (Loss)		167		(748	)		220		(1,612	)

These pro forma amounts have been calculated after applying Goodyear’s accounting policies and making certain adjustments, which primarily include: (i) depreciation adjustments relating to fair value step-ups to property, plant and equipment; (ii) amortization adjustments relating to fair value estimates of acquired intangible assets; (iii) incremental interest expense associated with the $1.45 billion senior note issuance and additional borrowings under our first lien revolving credit facility used, in part, to fund the acquisition, related debt issuance costs, and fair value adjustments related to Cooper Tire's debt; (iv) CGS adjustments relating to fair value step-ups to inventory and the change from LIFO to FIFO; (v) executive severance and stock-based compensation that was accelerated and settled on the Closing Date; and (vi) transaction related costs of both Goodyear and Cooper Tire.