Goodyear Tire & Rubber Co. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Goodyear manufactures tires and operates through Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific segments. Results are unaudited.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $3.598 billion | $3.830 billion |
| Goodyear net income (loss) | $(61) million | $75 million |
| Diluted EPS | $(0.26) | $0.31 |
| Total segment operating income | $190 million | $281 million |
| Segment operating margin | 5.3% | 7.3% |
| Cash flow from operations | $(364) million | $(389) million |
| Capital expenditures | $221 million | $248 million |
- Sales declined 6.1%; worldwide tire unit sales fell 2.6% to 38.0 million. Net sales included a $199 million unfavorable foreign-currency impact, $76 million from lower tire volumes, and $42 million from lower sales in other tire-related businesses; price and product mix added $84 million.
- Cost of goods sold was $2.879 billion, or 80.0% of sales, versus $2.976 billion, or 77.7%, a year earlier. Higher raw-material costs and product-mix costs partly offset lower volume and favorable currency effects. Selling, administrative and general expense was $547 million, or 15.2% of sales, versus $591 million, or 15.4%.
- Rationalization charges increased to $103 million from $37 million. Interest expense rose to $85 million from $76 million; the company cited higher average borrowing costs and debt balances. Income before tax was a loss of $38 million, with tax expense of $6 million.
- Segment operating income fell 32.4%. Americas generated $89 million (margin 4.7%), EMEA $54 million (4.4%), and Asia Pacific $47 million (9.4%); all were below prior-year income and margins.
Cash, debt and liquidity
- March 31 cash and cash equivalents were $860 million, up from $801 million at year-end. Cash, cash equivalents and restricted cash totaled $910 million.
- Operating cash outflow was $364 million, including $589 million of cash used for working capital. Investing cash outflow was $244 million; financing provided $645 million, primarily reflecting $713 million of net borrowings, partly offset by $37 million of dividends.
- Unused availability under credit agreements was $2.683 billion, down from $3.151 billion at December 31. The company reported $9.029 billion of total credit arrangements. Balance-sheet debt and finance leases were $6.011 billion, plus $495 million of notes payable and overdrafts; these figures exclude operating lease liabilities.
- Operating lease liabilities were $870 million following adoption of the new lease accounting standard. The standard also added $862 million of operating lease right-of-use assets and reduced retained earnings by $23 million at adoption; it did not materially affect results or cash flows.
- Forty percent of debt was variable-rate, at an average rate of 4.69%. Goodyear stated it was in compliance with applicable material debt covenants. Its $800 million European revolving facility was amended, extending maturity to 2024 and increasing commitments from €550 million.
Changes, outlook and significant items
- Management cited rising raw-material costs, a stronger U.S. dollar, weak conditions in China and volatility in Latin America. Raw-material costs were $111 million higher year over year, while cost-saving measures totaled about $55 million and exceeded general inflation.
- For full-year 2019, Goodyear expected raw-material costs to be about $300 million above 2018, excluding savings measures. It projected capital expenditures of about $900 million, interest expense of about $350 million, restructuring payments of about $50 million, common dividends of about $150 million, and working capital as a cash use of less than $100 million. It expected funded non-U.S. pension contributions of $25 million to $50 million.
- Management expected continued challenging industry conditions, including raw-material cost pressure, foreign-currency headwinds and emerging-market volatility. It cited potential benefits from the new Americas plant, TireHub, 2018 pricing actions and strong sales of 17-inch-and-above replacement tires. The company said it believed liquidity was adequate for 2019 operating, investing and debt-maturity needs.
- A proposed modernization of two German tire plants included $93 million of Q1 charges and approximately 1,100 proposed job reductions, subject to employee consultation. The plan was expected to improve EMEA annual segment operating income by $60 million to $70 million over a three-year period beginning in 2020; substantial payments were expected through 2023.
- Legal and other contingencies include approximately 43,200 pending asbestos claims, with $164 million of gross asbestos liabilities and a $107 million insurance receivable recorded. About 850 former Amiens, France employees asserted claims totaling approximately €120 million ($135 million); Goodyear said it could not estimate any ultimate payment. The filing also reports environmental, workers’ compensation, product-liability and tax contingencies.
Important facts for investors to verify
- Whether tire demand, especially in China and EMEA, stabilizes and whether price and product mix can offset raw-material inflation, currency effects and lower volumes.
- Whether projected 2019 cash needs, working-capital assumptions, capital spending and liquidity remain consistent with operating performance and available credit.
- Execution, employee consultation, timing, costs and anticipated savings of the German plant modernization and other rationalization programs.
- Debt levels, variable-rate exposure, borrowing-base availability, covenant compliance and renewal of backup liquidity commitments for the receivables securitization facility.
- Developments in asbestos, Amiens labor, product-liability and tax matters, including possible changes in reserves or insurance recoveries.