Goodyear Tire & Rubber Co. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results; amounts in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $4.184 billion | $4.657 billion | $12.380 billion | $13.782 billion |
| Goodyear net income available to common shareholders | $271 million | $161 million | $687 million | $316 million |
| Diluted EPS | $0.99 | $0.58 | $2.51 | $1.15 |
| Segment operating income | $599 million | $520 million | $1.546 billion | $1.353 billion |
| Segment operating margin | 14.3% | 11.2% | 12.5% | 9.8% |
| Cash from operating activities | Not separately provided for quarter | $635 million | $(939) million |
- Q3 cost of goods sold was $3.000 billion, or 71.7% of sales, versus 75.5% a year earlier. Nine-month cost of goods sold was 73.4% of sales versus 76.7%.
- Q3 income before tax was $431 million; income tax expense was $126 million. Nine-month income before tax was $1.118 billion; tax expense was $369 million.
- At September 30, cash and cash equivalents were $1.690 billion. Total debt and capital leases were approximately $5.959 billion, plus $41 million of notes payable and overdrafts. Total credit availability was $8.829 billion, with $2.564 billion unused.
- Current assets were $7.922 billion and current liabilities $4.783 billion. Nine-month capital expenditures were $656 million; operating cash flow less capital expenditures was approximately negative $21 million.
Changes and drivers
- Q3 sales fell 10.2%; nine-month sales fell 10.2%. Foreign currency translation was the largest factor, reducing sales by $430 million in Q3 and $1.224 billion year to date. Lower chemical-related sales and price/mix also weighed on revenue; higher tire volumes partly offset the declines.
- Segment operating income rose $79 million in Q3 and $193 million year to date, primarily because raw-material costs fell by $189 million and $457 million, respectively. Currency effects, higher conversion costs and selling, administrative and general expenses offset part of the benefit.
- Q3 net income also benefited from a $43 million gain in discontinued-product liability expense, including asbestos insurance recoveries and revised recovery assumptions. Nine-month other income included a one-time $155 million pre-tax deferred royalty gain after termination of a licensing agreement. Prior-year results included a $155 million Venezuelan currency remeasurement loss.
- Cash increased year-on-year in operating activities from a $939 million use to $635 million provided, principally reflecting lower pension contributions and improved earnings. Cash nevertheless fell $471 million from year-end 2014, with working capital using $708 million.
- Debt and capital leases declined from $6.364 billion at December 31, 2014 to $5.959 billion at September 30, 2015; cash also declined from $2.161 billion to $1.690 billion.
Outlook, developments and risks
- Management expected 2015 tire-unit volume growth of 1%–2% versus 2014, raw-material costs approximately 11% lower, and lower raw-material costs to more than offset price/mix declines. It forecast foreign-currency translation to reduce 2015 segment operating income by approximately $160 million and cost savings to offset general inflation. Commodity-price volatility could change these estimates.
- Expected 2015 cash needs included $1.0–$1.1 billion of capital expenditures, $415–$425 million of interest expense, $68 million of common dividends, $50–$75 million of non-U.S. pension contributions and $50–$75 million of working-capital use.
- On October 1, 2015, Goodyear completed its global-alliance dissolution with Sumitomo Rubber Industries. Goodyear paid a net $271 million and issued a $56 million note; it expected a Q4 gain of $0–$30 million, subject to final valuations. The transactions were not reflected in the September 30 balance sheet.
- Management expected a non-cash Q4 pension settlement charge of approximately $100–$125 million from lump-sum pension offers; additional charges could follow from a separate salaried-plan program.
- Venezuela remains a material exposure: $292 million of cash was held there and currency controls constrained remittances. Remeasuring at the alternative SIMADI rate would have caused an estimated additional $228 million loss at September 30. Further deterioration in operating control could require deconsolidation, with an estimated pre-tax charge above $500 million and removal of approximately $293 million of cash from consolidated balances.
- Contingencies include approximately 69,600 pending asbestos claims, Amiens former-employee claims totaling €109 million ($123 million) that Goodyear intends to contest, and environmental and workers’ compensation liabilities. The company stated that outcomes are uncertain and adverse decisions could materially affect results.
- Goodyear reported compliance with applicable material debt covenants and effective disclosure controls as of September 30, 2015. Key broader risks include foreign exchange, raw-material prices, competition, debt and refinancing, labor, and economic and political conditions.
Important facts for investors to verify
- How much of earnings growth is recurring after removing the $155 million royalty gain, asbestos-related benefits and prior-year Venezuelan remeasurement loss.
- Whether raw-material savings persist and offset currency pressure, inflation, price/mix declines and regional weakness.
- Cash conversion, working-capital requirements, capital spending and debt maturities, especially following the SRI transaction.
- Developments in Venezuela’s exchange controls, access to cash and production inputs, and the potential accounting impact of deconsolidation.
- Final SRI transaction valuations and gain, Q4 pension settlement charges, tax valuation-allowance developments, and the resolution and insurance recovery assumptions for legal claims.