Goodyear Tire & Rubber Company — 2014 Form 10-K
Business context and reporting period
Goodyear manufactures and sells tires and related products and services worldwide through four regional segments: North America, Europe, Middle East and Africa (EMEA), Latin America, and Asia Pacific. This annual filing covers the fiscal year ended December 31, 2014; it is not a quarterly filing. Goodyear reported 162.0 million tire units sold, essentially flat year over year.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $18.138 billion | $19.540 billion |
| Goodyear net income | $2.452 billion | $629 million |
| Net income available to common shareholders | $2.445 billion | $600 million |
| Diluted EPS | $8.78 | $2.28 |
| Total segment operating income | $1.712 billion | $1.580 billion |
| Segment operating margin | 9.4% | 8.1% |
| Cash from operating activities | $340 million | $938 million |
| Capital expenditures | $923 million | $1.168 billion |
| Cash and cash equivalents | $2.161 billion | $2.996 billion |
| Total debt and capital leases | $6.364 billion | $6.235 billion |
| Unused credit availability | $2.317 billion | $2.726 billion |
Revenue fell about 7%, reflecting unfavorable foreign currency translation ($571 million), lower sales of other tire-related businesses ($407 million), lower price and product mix ($374 million), and lower tire volume ($57 million). Cost of goods sold fell 9.8%; gross profit was $4.232 billion, or approximately 23.3% of sales, versus $4.118 billion, or 21.1%, in 2013. The improvement in segment operating income reflected $553 million of lower raw-material costs and $101 million of lower conversion costs, partly offset by $376 million of lower price and product mix and $77 million of unfavorable currency translation.
Net income growth was substantially driven by a $1.834 billion income tax benefit, primarily from releasing substantially all of the valuation allowance on U.S. deferred tax assets. The benefit included a $2.179 billion release; management said it expects higher effective tax rates after the release, while anticipating no significant federal income tax payments over the next five years as tax credits and loss carryforwards are used. Operating cash flow decreased year over year, with pension contributions and working-capital dynamics among the factors; capital expenditures exceeded operating cash flow by $583 million. Year-end cash plus unused credit availability totaled approximately $4.478 billion.
Current assets were $7.724 billion and current liabilities $4.736 billion at year-end. Goodyear reported approximately $6.4 billion of debt including capital leases, with about $2.2 billion of variable-rate debt. It was in compliance with applicable material debt covenants at December 31, 2014.
Material changes versus 2013
- North America segment operating income rose to $803 million from $691 million; margin increased to 9.9% from 8.0%.
- EMEA segment operating income rose to $438 million from $298 million; margin increased to 7.1% from 4.5%. The Amiens, France facility closure and exit from remaining EMEA farm-tire production contributed to expected annualized savings of about $75 million.
- Latin America segment operating income fell to $170 million from $283 million, with margin declining to 9.5% from 13.7%, amid currency effects, inflation, lower production and weaker OE demand, particularly in Brazil and Venezuela.
- Asia Pacific segment operating income edged down to $301 million from $308 million, although tire units increased 5%.
- Cash declined $835 million, principally reflecting $1.338 billion of pension contributions and direct payments, capital investment, and currency effects. Goodyear contributed $1.167 billion to fully fund its hourly U.S. pension plans; the plans were frozen to future accruals effective April 30, 2014. The reported global unfunded pension liability was $714 million at year-end.
- The mandatory convertible preferred stock converted into approximately 27.6 million common shares in April 2014. The company repurchased $234 million of common stock and paid $60 million in common dividends.
Outlook, management commentary, risks and unusual items
For 2015, management expected tire unit volume to increase 1%–2%, raw-material costs to decline about 14% from 2014 levels, and cost savings to more than offset general inflation. Based on then-current spot rates, foreign currency translation was expected to reduce segment operating income by about $180 million. Management expected approximately $1.1 billion of capital expenditures, interest expense of $415–$440 million, and $50–$75 million of contributions to funded non-U.S. pension plans. Raw-material and currency estimates were expressly subject to volatility.
- Tax-driven earnings: The large 2014 tax benefit is nonrecurring in nature and materially affects comparisons with prior periods. Net income before tax was $687 million, compared with $813 million in 2013.
- Venezuela: Currency controls, inflation, import restrictions and government price controls constrained operations and cash repatriation. Goodyear recorded $200 million of Venezuelan currency losses in 2014. Approximately $289 million of cash was held there at year-end; management warned that further deterioration could lead to deconsolidation, with an estimated one-time pre-tax charge exceeding $500 million and removal of approximately $290 million of cash from consolidated balances.
- SRI alliance dispute: Goodyear initiated arbitration seeking dissolution of its global alliance with Sumitomo Rubber Industries; SRI filed counterclaims. Potential payments associated with dissolution or SRI exit rights could be substantial, though the amount and outcome were uncertain.
- Other unusual items and contingencies: Results included rationalization charges, pension curtailment and settlement charges, Greek labor settlements, a $16 million charge related to an African government investigation, indirect tax items and asset-sale gains. The filing reported about 73,800 pending asbestos claims and $151 million of gross recorded asbestos liabilities, partly offset by a $71 million insurance receivable; future costs could exceed reserves, but excess amounts could not be reasonably estimated.
- Industry and execution risks: Management cited economic weakness in EMEA, Latin American volatility, slower Asia Pacific growth, stronger U.S. dollar, intense competition, possible U.S. tariffs on certain China-imported tires, raw-material volatility, labor negotiations and substantial debt. The company also relied on supplier financing and receivables programs and warned that reduced availability could affect liquidity.
Important facts for investors to verify
- How much of 2014 earnings and EPS reflects the deferred-tax valuation-allowance release, and what sustainable effective tax rate and cash tax burden are likely going forward?
- Whether operating cash flow recovers after the large pension contributions, while funding planned capital expenditure, debt service, dividends and repurchases.
- Whether management achieves 2015 volume, cost-saving, raw-material and currency expectations, and how lower input costs translate into pricing and margins.
- Developments in Venezuela’s exchange system, cash accessibility, raw-material supply, operating control and potential deconsolidation.
- The outcome and possible financial terms of the SRI arbitration, alongside asbestos, tax, labor and other contingent exposures.
- Debt maturities, variable-rate exposure, borrowing-base availability, covenant headroom and dependence on factoring or supplier-financing programs.