Goodyear Tire & Rubber Co. — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Goodyear operates tire businesses across North America, EMEA, Latin America and Asia Pacific.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $4.469 billion | $4.853 billion |
| Income (loss) before taxes | $(30) million | $50 million |
| Goodyear net income (loss) | $(51) million | $33 million |
| Net income (loss) available to common shareholders | $(58) million; $(0.23) per diluted share | $26 million; $0.10 per diluted share |
| Total segment operating income | $373 million; 8.3% of sales | $302 million; 6.2% of sales |
| Cash from operating activities | $(1.543) billion | $(937) million |
| Cash from investing activities | $(211) million | $(283) million |
| Cash from financing activities | $795 million | $1.462 billion |
Cost of goods sold was 78.7% of sales, versus 81.2% a year earlier; selling, administrative and general expense was 14.9% of sales, versus 13.3%. Cash and cash equivalents were $1.853 billion at quarter-end, down from $2.996 billion at December 31, 2013. Total unused credit availability was $1.751 billion, down from $2.726 billion.
Balance-sheet debt, including notes payable and current maturities, was approximately $7.120 billion at March 31, versus $6.249 billion at year-end; cash less this debt was approximately $5.267 billion, versus $3.253 billion. The current ratio was approximately 1.63, compared with 1.72 at year-end. These figures are calculated from reported balance-sheet amounts.
Material changes and management commentary
- Sales fell 7.9%, principally because of lower third-party chemical sales, unfavorable currency translation and lower price/product mix; tire shipments increased 1.2% to 40.0 million units.
- Segment operating income rose $71 million. Lower raw-material costs contributed $155 million and lower conversion costs $54 million, partly offset by lower price/product mix of $81 million, higher SAG expense and unfavorable currency translation.
- Goodyear moved from common-shareholder earnings of $26 million to a loss of $58 million. Drivers included a $157 million Venezuelan bolivar remeasurement loss, increased rationalization charges, pension curtailment and settlement costs, and higher interest expense. Interest expense rose to $105 million from $85 million.
- Operating cash use included $1.223 billion of pension contributions and direct payments and $590 million of working-capital use. Capital expenditures were $229 million.
- North America and EMEA segment operating income improved to $156 million and $110 million, respectively. Latin America fell to $42 million and Asia Pacific to $65 million.
Outlook, risks and unusual items
- Management expects 2014 tire unit volume to increase 2%–3% from 2013, cost savings to offset general inflation and additional advertising, marketing and R&D spending, and raw-material costs to be lower year over year based on current spot prices. Net raw-material costs and price/product mix are expected to be slightly positive; commodity volatility could materially change this expectation.
- Management expects $50–$75 million of favorable unabsorbed fixed-cost impact in 2014. Closing the Amiens, France facility and exiting the EMEA farm-tire business are expected to generate approximately $75 million of annualized savings, including approximately $40 million in 2014.
- 2014 expectations include capital expenditures of approximately $900 million–$1.0 billion, interest expense of $430–$455 million, and pension contributions of approximately $1.3 billion, including first-quarter contributions. Management said existing cash and available credit should fund expected needs.
- Venezuela remains a significant exposure: currency controls, exchange-rate uncertainty, import constraints, price and profit controls, social unrest and labor disruption may affect results and cash repatriation. Management estimated that Venezuelan conditions could reduce Latin America’s 2014 operating income by $40–$60 million versus 2013; Brazilian expansion costs are expected to reduce it by a further $20–$25 million. Applying the SICAD II rate instead of SICAD I at March 31 would have caused an estimated additional $235 million remeasurement loss.
- Goodyear maintained a full valuation allowance on approximately $2.4 billion of U.S. deferred tax assets, but said a 2014 release of all or a significant portion was reasonably possible if profitability evidence continued. Certain foreign tax valuation allowances could also decline, potentially producing a one-time benefit of up to $80 million.
- A potential one-time gain of approximately $170 million may result if the announced sale of the former Engineered Products business is completed and the related licensing agreement is terminated.
- Goodyear commenced arbitration seeking dissolution of its global alliance with Sumitomo Rubber Industries; SRI filed counterclaims. The company did not expect a material adverse impact from resolution, but a payment to acquire SRI’s interests may be required. Other contingencies include asbestos claims, environmental and product-liability matters, and a Brazilian indirect-tax assessment of approximately $40 million.
- All 10 million mandatory convertible preferred shares converted on April 1, 2014 into approximately 27.6 million common shares, increasing common-share count. A $0.05-per-share common dividend was declared after quarter-end.
Important facts for investors to verify
- Whether operating improvement and projected cost savings persist despite lower sales and price/product mix pressure.
- Actual pension cash contributions, operating cash generation, working-capital needs and remaining credit availability.
- Developments in Venezuela’s exchange rates, currency approvals, labor conditions and government controls, including potential further remeasurement charges.
- Progress on U.S. profitability and any valuation-allowance release, including the noncash and cash-tax implications.
- Outcomes and potential cash consequences of the SRI arbitration, asbestos and other litigation, and the Brazilian tax assessment.
- Completion of the former Engineered Products sale and whether the estimated licensing-related gain is recognized.
- Effects of the preferred-stock conversion and future common dividends on per-share results and shareholder returns.