Goodyear Tire & Rubber Co. — Q1 2017 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. Goodyear is a global tire manufacturer reporting through Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. Management described mixed industry conditions, rising raw-material costs, and weaker demand in some markets.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $3.699 billion | $3.691 billion | Up 0.2% |
| Goodyear net income | $166 million | $184 million | Down 9.8% |
| Diluted EPS | $0.65 | $0.68 | Down $0.03 |
| Total segment operating income | $385 million | $419 million | Down 8.1% |
| Segment operating margin | 10.4% | 11.4% | Down 1.0 percentage point |
| Operating cash flow | $(286) million | $(372) million | Cash use improved by $86 million |
| Capital expenditures | $271 million | $253 million | Up $18 million |
Cost of goods sold was $2.765 billion, or 74.7% of sales, versus $2.701 billion, or 73.2%, a year earlier. Selling, administrative and general expense fell to $579 million from $615 million. Net income included $29 million of rationalization charges, compared with $11 million in Q1 2016. Cash used for operating activities and capital expenditures together was approximately $557 million.
Balance sheet and liquidity at March 31, 2017: Cash and cash equivalents were $961 million ($1.051 billion including restricted cash), versus $1.132 billion cash at year-end 2016. Current assets were $6.325 billion and current liabilities $4.915 billion. Debt and capital leases totaled approximately $5.933 billion, including $676 million due within one year; cash-adjusted debt was approximately $4.972 billion. Total credit arrangements were $9.057 billion, with $3.071 billion unused. About 27% of debt carried variable rates, averaging 6.10%.
Material changes and operating drivers
- Worldwide tire shipments declined 3.5% to 40.0 million units. Original-equipment volume fell 7.6%; replacement volume fell 1.7%.
- Sales were nearly flat: higher price and product mix and other tire-related sales were largely offset by lower tire volume. Segment operating income declined $34 million, mainly from lower volume and higher conversion costs; improved price and mix partly offset those pressures and raw-material cost increases.
- Americas segment income fell to $214 million from $260 million, with lower volume and higher under-absorbed overhead among the principal factors. EMEA income rose to $98 million from $80 million, helped by price and mix and lower SAG expense. Asia Pacific income decreased to $73 million from $79 million.
- Operating cash use reflected a $596 million working-capital outflow, including increased receivables and inventories. Net financing cash provided was $398 million, including $438 million of net borrowings.
Outlook, risks and unusual items
- Management’s 2017 outlook was for flat tire unit volume versus 2016, approximately $85 million more unabsorbed fixed overhead, and cost savings exceeding general inflation. Based on then-current spot rates, foreign currency translation was expected to reduce 2017 segment operating income by about $30 million.
- Based on then-current raw-material spot prices, Goodyear expected full-year 2017 raw-material costs to be about 20% above 2016, before cost-saving measures, with higher costs expected to be offset by price and mix improvements. Management cautioned that commodity prices are volatile.
- Expected 2017 cash needs included about $1.0 billion of capital expenditures, $340–$365 million of interest expense, approximately $150 million of restructuring payments, about $100 million of common dividends, $50–$75 million of non-U.S. pension contributions, and approximately $200 million of working-capital use. Management stated liquidity was adequate for 2017 needs and maturities.
- In March, Goodyear issued $700 million of 4.875% senior notes due 2027. After quarter-end, it announced redemption of $700 million of 7% notes due 2022 at a 103.5% redemption price, expecting a $25 million cash premium and $6 million deferred-financing-fee write-off.
- Rationalization actions included the planned Philippsburg, Germany tire-plant closure, expected to affect about 890 jobs; related accrued costs were $111 million. About 1,800 associates remained to be released under ongoing plans.
- Contingencies include approximately 61,700 pending asbestos claims, with a $173 million gross recorded liability and a $125 million insurance receivable. About 840 former Amiens, France employees asserted claims totaling approximately €117 million ($125 million); Goodyear said it could not estimate any ultimate payment. Environmental and workers’ compensation liabilities were $52 million and $252 million, respectively.
- Key stated risks include competition, economic and demand weakness, raw-material and energy price volatility, currency movements, substantial debt and variable-rate exposure, access to financing, labor disruptions, and uncertainty in litigation, insurance recoveries, and tax matters. Goodyear reported compliance with applicable material debt covenants and effective disclosure controls as of March 31, 2017.
Most important facts for investors to verify
- Whether price and product mix can offset the expected raw-material cost increase while tire volumes remain flat.
- Progress on working capital, cash generation, capital spending, and maintenance of available credit and covenant headroom.
- Execution and cash costs of the Philippsburg closure and other rationalization plans.
- Completion and actual cost of the announced 2022-note redemption, and subsequent debt and interest-expense effects.
- Developments in asbestos and Amiens claims, insurance recoveries, and other contingent liabilities.