Goodyear Tire & Rubber Co. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; amounts in millions of dollars except per-share data. Goodyear operates tire businesses in the Americas, EMEA, and Asia Pacific.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $3,632 | $3,841 | $7,230 | $7,671 |
| Income before tax | $82 | $183 | $44 | $296 |
| Net income (loss) attributable to Goodyear | $54 | $157 | $(7) | $232 |
| Diluted earnings (loss) per share | $0.23 | $0.65 | $(0.03) | $0.96 |
| Total segment operating income | $219 | $324 | $409 | $605 |
| Segment operating margin | 6.0% | 8.4% | 5.7% | 7.9% |
Q2 sales declined 5.4%; first-half sales declined 5.7%. Cost of goods sold was 78.6% of sales in Q2 versus 76.8% a year earlier, and 79.3% for the first half versus 77.2%. Q2 net income fell mainly because segment operating income declined. First-half results also reflected higher rationalization charges. Interest expense rose to $88 in Q2 from $78 and to $173 for the first half from $154.
Worldwide tire shipments declined 3.9% in Q2 and 3.3% in the first half. Original-equipment volume fell 11.1% in Q2 and 9.2% in the first half; replacement volume declined 0.8% in both periods. Management cited lower volumes, unfavorable currency, and weaker third-party chemical sales. Price and product mix provided partial offsets.
Segments and drivers
| Segment | Q2 2019 sales | Q2 operating income | Q2 margin | First-half operating income |
|---|---|---|---|---|
| Americas | $1,971 | $134 | 6.8% | $223 |
| EMEA | $1,141 | $44 | 3.9% | $98 |
| Asia Pacific | $520 | $41 | 7.9% | $88 |
All segments reported lower operating income year over year. Q2 segment income decreased $105, principally from higher raw-material costs ($56), lower tire volume ($32), higher selling, administrative and general expense ($16), and lower income from other tire-related businesses ($14); price and mix contributed a $20 offset. For the first half, segment income fell $196, with higher raw-material costs ($167), lower volume ($52), lower other tire-related income ($26), and currency effects ($25) partly offset by $62 of price and mix improvements.
Cash flow, balance sheet, debt and liquidity
- First-half operating cash flow was a use of $291, versus a use of $84 in 2018. Working capital used $733 of cash, including substantial receivables and inventory investment and a year-over-year trade-payables cash-use impact.
- Investing cash flow used $419, including $401 of capital expenditures. Financing cash flow provided $811, principally reflecting $926 of net borrowings, partly offset by $74 of common dividends.
- Cash and cash equivalents were $917 at June 30, up from $801 at year-end; cash, cash equivalents and restricted cash totaled $980. Unused credit availability was $2,525, down from $3,151 at year-end.
- Notes payable and overdrafts, current maturities, and long-term debt and finance leases totaled approximately $6,737 at June 30, compared with approximately $5,763 at December 31. This includes finance leases; operating lease liabilities of $864 were separately recognized following adoption of the lease standard.
- Total credit arrangements were $9,098; 42% of debt carried variable rates, averaging 4.68%. Goodyear reported compliance with applicable material covenants. The first-lien revolving facility’s borrowing base was $287 below its stated $2.0 billion commitment.
- Current assets were $6,781 and current liabilities $5,081. The company reported $5,049 of total shareholders’ equity.
Outlook, management commentary and significant items
- For 2019, management expected continued challenging industry conditions, including higher raw-material costs, currency headwinds, lower OE demand, and emerging-market volatility. Full-year raw-material costs were expected to increase approximately $275 versus 2018, before raw-material savings; management cautioned this estimate could change materially with commodity prices.
- Expected 2019 cash needs included capital expenditures of $850–$875, interest expense of approximately $350, restructuring payments of approximately $50, common dividends of approximately $150, and non-U.S. pension contributions of $25–$50. Working capital was expected to use less than $100. Management said liquidity was adequate for 2019 operating, investing, and debt-maturity needs.
- Management cited potential offsets from the new Americas plant ramp-up, TireHub, prior pricing actions, strong performance in 17-inch-and-larger replacement tires, and continuing cost savings. Q2 cost savings were approximately $59, including $25 from raw-material saving measures.
- First-half rationalization charges were $107, including $94 related to a proposed modernization of two German tire plants and approximately 1,100 anticipated job reductions. The plan remained subject to consultation; related charges were expected to be substantially paid through 2023.
- Lease accounting adoption added $882 of operating lease right-of-use assets at January 1 and resulted in a $23 cumulative reduction to retained earnings; it did not materially affect results or cash flows.
- Approximately 850 former Amiens, France facility employees asserted claims totaling about €120 ($137); Goodyear said it intended to defend the claims and could not estimate any eventual payment. Asbestos claims pending were approximately 40,100; recorded gross asbestos liabilities were $159 and related receivables were $105. The company said excess asbestos losses were reasonably possible but not reasonably estimable.
- Other recorded exposures included $48 for environmental matters, $219 for workers’ compensation (with reasonably possible excess of approximately $30), and $319 for product liability and other tort claims. Management stated that certain potential outcomes could nevertheless materially affect results or financial position.
- Key risks include raw-material and energy costs, foreign exchange, economic and demand conditions, competition, substantial debt and floating-rate exposure, borrowing-base reductions, access to financing, and contingent liabilities. Management said LIBOR transition was not expected to have a material effect, while noting uncertainty around future benchmark rates.
Important facts for investors to verify
- Whether the sales and volume declines, particularly in EMEA and Asia Pacific, stabilize and whether pricing and mix can offset raw-material inflation.
- Execution, timing, costs, and expected savings from the German plant modernization and other rationalization actions.
- Cash conversion and working-capital trends, capital-spending delivery, and whether credit availability remains sufficient as debt and interest costs rise.
- Progress against 2019 raw-material, restructuring, pension, dividend, and working-capital estimates; these are forward-looking expectations, not guarantees.
- Developments in Amiens labor claims, asbestos litigation and insurance recoveries, environmental matters, and other contingencies.