Business context and reporting period
Goodyear Tire & Rubber Company’s Form 10-K covers the fiscal year ended December 31, 2015. Goodyear manufactures and sells tires globally, with four 2015 reporting segments: North America, EMEA, Asia Pacific and Latin America. It operated 49 manufacturing facilities in 22 countries and employed approximately 66,000 people. From January 1, 2016, North America and Latin America were combined into an Americas reporting unit.
Key financial results
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $16.443 billion | $18.138 billion |
| Net income (consolidated) | $376 million | $2.521 billion |
| Goodyear net income available to common shareholders | $307 million; $1.12 diluted EPS | $2.445 billion; $8.78 diluted EPS |
| Gross profit / gross margin | $4.279 billion / approximately 26.0% | $4.232 billion / approximately 23.3% |
| Segment operating income / margin | $2.022 billion / 12.3% | $1.712 billion / 9.4% |
| Cash from operating activities | $1.687 billion | $340 million |
| Cash and cash equivalents at year-end | $1.476 billion | $2.161 billion |
| Total debt and capital leases at year-end | $5.756 billion | $6.364 billion |
Sales fell 9% year over year, primarily due to $1.563 billion of unfavorable currency translation and lower chemical-related sales; higher tire volume partly offset the decline. Worldwide tire units rose 2.6% to 166.2 million. Cost of goods sold declined to 74.0% of sales from 76.7%, supported by lower raw-material costs. Segment operating income increased 18.1%; North America and Asia Pacific posted record segment operating income.
Operating cash flow improved mainly because pension contributions and direct payments were $1.235 billion lower than in 2014, when Goodyear made large discretionary U.S. pension contributions. Capital expenditures were $983 million. Unused availability under credit agreements was $2.676 billion at year-end. Approximately 31% of debt was variable-rate, with $1.769 billion outstanding at variable rates.
Material changes and unusual items
- Goodyear deconsolidated its Venezuelan subsidiary on December 31, 2015, citing currency controls and government restrictions that impaired its ability to direct operations. The resulting pre-tax charge was $646 million ($577 million after tax); $320 million of cash was removed from the consolidated balance sheet. Venezuela had contributed $119 million of 2015 segment operating income, which will not be included in future consolidated results.
- 2015 earnings also included a $155 million pre-tax one-time royalty gain following termination of a licensing agreement, a $137 million pre-tax pension settlement charge, and a $57 million financing-related charge associated mainly with redeeming $1.0 billion of 8.25% notes.
- The 2014 comparison benefited from a $1.834 billion income tax benefit, chiefly from releasing substantially all of the U.S. deferred-tax valuation allowance. This makes the sharp decline in reported 2015 net income an imperfect indicator of underlying operating performance.
- Goodyear completed the dissolution of its global alliance with Sumitomo Rubber Industries (SRI): it acquired SRI’s interests in GDTE and Nippon Goodyear, sold its interests in GDTNA and DGT, and paid SRI a net $271 million plus issued a $56 million note. The transaction generated a reported $48 million pre-tax gain, separate from the $30 million gain on selling SRI shares.
- The fourth quarter recorded a $380 million loss attributable to Goodyear, largely reflecting the Venezuela charge and other listed items.
Outlook, risks and contingencies
For 2016, management expected tire volume to increase approximately 3% from 164.8 million units (excluding Venezuela), raw-material costs to decline about 9%, and currency translation to reduce segment operating income by approximately $45 million. Lower raw-material costs were expected to more than offset price and product-mix declines; management cautioned that commodity-price volatility could change this estimate. It also expected a roughly $50 million benefit from unabsorbed fixed overhead and cost savings to exceed general inflation.
Management forecast 2016 capital expenditures of $1.0–$1.1 billion, interest expense of $350–$375 million, a $50 million working-capital cash use and $50–$75 million of contributions to funded non-U.S. pension plans. It stated that available cash and credit were adequate for anticipated 2016 needs. The company was pursuing manufacturing investment, cost reduction, profitable product mix and shareholder returns; its repurchase authorization was increased to $1.1 billion in February 2016.
Principal risks include foreign-exchange movements, economic and political weakness in markets including Brazil and Venezuela, competition and pricing pressure, raw-material volatility, labor negotiations, execution of restructuring and capacity investments, substantial debt and financing covenants, and potential constraints on cash transfers from some countries. Contingencies include approximately 67,400 pending asbestos claims, with a $171 million gross recorded liability and a $117 million insurance receivable; management warns actual costs and recoveries remain uncertain. Approximately 800 former Amiens employees asserted claims totaling €111 million ($121 million); Goodyear said it could not estimate any eventual payment. Environmental, product-liability, tax and workers’ compensation matters also remain.
Most important facts for investors to verify
- Underlying earnings and cash generation excluding Venezuela deconsolidation, the prior-year tax benefit and other unusual gains and charges.
- Whether 2016 volume, raw-material savings, pricing and product-mix assumptions translated into sustained segment margins.
- Post-deconsolidation exposure to Venezuela, including ability to receive cash from inventory sales, dividends or royalties.
- Debt maturities, variable-rate exposure, borrowing-base availability, covenant compliance and continued access to receivables and supplier-financing programs.
- Actual cash requirements and outcomes for capital projects, pension funding, restructuring and the asbestos and Amiens claims.