Goodyear Tire & Rubber Co. — 2013 Form 10-K Summary
Business context and period: The filing covers the fiscal year ended December 31, 2013. 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. It reported operations in 22 countries, approximately 69,000 employees, and 162.3 million tire units sold.
Financial performance
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Net sales | $19.540 billion | $20.992 billion | Down 6.9% |
| Net income, consolidated | $675 million | $237 million | Includes minority shareholders’ income |
| Goodyear net income | $629 million | $212 million | Attributable to Goodyear |
| Net income available to common shareholders | $600 million | $183 million | Diluted EPS: $2.28 vs. $0.74 |
| Gross profit | $4.118 billion | $3.829 billion | Gross margin approximately 21.1% vs. 18.2% |
| Total segment operating income | $1.580 billion | $1.248 billion | Segment operating margin 8.1% vs. 5.9% |
| Cash from operating activities | $938 million | $1.038 billion | Lower by $100 million |
| Capital expenditures | $1.168 billion | $1.127 billion | Investments included capacity expansion |
| Cash and cash equivalents | $2.996 billion | $2.281 billion | Unused credit availability was $2.726 billion |
| Debt and capital leases | $6.249 billion | $4.984 billion | Includes current and long-term amounts |
| Total shareholders’ equity | $1.868 billion | $625 million | Improved year over year |
Quarterly note
In the fourth quarter of 2013, sales were $4.791 billion, compared with $5.045 billion in the fourth quarter of 2012. Net income was $256 million versus a $7 million loss; income available to common shareholders was $228 million versus zero. The 2013 quarter included tax benefits and other specified items, so reported earnings should be assessed alongside those items.
Changes versus the prior comparable period
- Sales declined mainly because of lower third-party chemical-product sales, unfavorable currency translation, lower price and product mix, and reduced tire volume. Worldwide tire units fell 1.1%; replacement units declined 2.1%, while OE units rose 1.4%.
- Segment operating income rose by $332 million. Lower raw-material costs contributed $985 million, more than offsetting lower price and product mix ($321 million), higher conversion costs ($167 million), unfavorable currency translation ($63 million), and increased selling, administrative and general expense ($37 million).
- Raw-material costs in the tire businesses fell approximately 13%. Cost savings totaled approximately $388 million and exceeded general inflation.
- Operating cash flow decreased despite higher earnings, principally reflecting increased pension contributions. Working capital provided $415 million of cash in 2013.
- Debt and capital leases increased approximately $1.3 billion, alongside financing for pension contributions, working capital and capital spending. Goodyear issued $900 million of 6.5% senior notes due 2021.
Liquidity, debt and capital allocation
Year-end cash plus unused credit availability was approximately $5.7 billion. Management considered liquidity adequate for 2014 operating and investing needs and debt maturities. Approximately 34% of debt carried variable rates; variable-rate debt was about $2.1 billion. The company reported compliance with currently applicable material debt covenants. A substantial portion of assets is pledged, and revolving-credit availability depends partly on eligible receivables and inventory.
Goodyear reinstated a $0.05 quarterly common dividend in 2013 and authorized a $100 million share repurchase program, primarily intended to offset shares issued under compensation plans. The company also had $500 million of mandatory convertible preferred stock outstanding, scheduled to convert in April 2014, subject to its terms.
Outlook, management commentary and material risks
- 2014 outlook: Tire unit volume expected to increase 2%–3% from 2013. Management expected $75–$100 million of favorable impact from changes in unabsorbed fixed costs and expected raw-material costs to be lower, with raw-material savings and price/product mix expected to offset one another.
- Pensions: After year-end, Goodyear contributed approximately $1.15 billion to fully fund its hourly U.S. pension plans. Those plans were to be frozen to future accruals effective April 30, 2014. Management expected lower U.S. pension expense but approximately $1.3 billion of total 2014 pension contributions, including the contribution already made.
- EMEA restructuring: Goodyear ceased production at its Amiens, France facility and planned to close it in first-quarter 2014, while also exiting the EMEA farm tire business. Expected annual operating-income improvement was approximately $75 million after the actions, including about $40 million in 2014. Total net charges were estimated at approximately $290 million, with $220 million recorded through year-end 2013.
- Other investment and restructuring: Capital expenditures were forecast at $900 million–$1.0 billion for 2014. Expansion costs in Brazil were expected to reduce Latin America segment operating income by $20–$25 million; lower startup costs in China were expected to benefit Asia Pacific operating income by $15–$20 million.
- Key exposures: Management highlighted competitive and economic pressure, volatile raw-material and energy costs, labor negotiations and potential work stoppages, currency movements, high fixed costs, substantial debt and refinancing access, and risks to execution of restructuring and efficiency initiatives.
- Venezuela: The 2013 bolivar devaluation resulted in a $115 million remeasurement loss. Currency controls restricted repatriation and delayed settlements; cash held in Venezuela was $443 million at year-end. Further devaluations, import constraints, inflation, labor issues and price controls could affect results and liquidity.
- SRI alliance: Goodyear initiated arbitration in January 2014 seeking dissolution of its global alliance with Sumitomo Rubber Industries, damages and other relief. The outcome and any payment to acquire SRI’s interests in European and North American joint ventures were uncertain; SRI had not notified Goodyear of exercisable exit rights as of the filing.
- Contingencies: The filing reports approximately 74,000 pending asbestos claimants, $145 million of recorded gross asbestos liabilities and a $75 million insurance receivable. Other matters include Greek labor claims, a Brazilian tax assessment of approximately $39 million, competition proceedings in South Africa, and DOJ/SEC review of alleged improper payments in Kenya and Angola. Outcomes remain uncertain.
- Tax and unusual items: Goodyear maintained a substantial valuation allowance against deferred tax assets, including $2.4 billion on U.S. deferred tax assets. Management said sufficient future profitability could support a release, potentially during 2014; such a release would be a one-time benefit, not operating cash generation.
Important facts for investors to verify
- Whether 2014 volume, cost-saving and fixed-cost absorption targets were achieved, and whether lower raw-material costs were offset by pricing and mix.
- Actual pension funding, plan freeze effects, pension expense and post-contribution liquidity.
- Progress, total cash costs and realized savings from the Amiens closure and EMEA farm tire exit.
- Debt maturities, borrowing-base availability, covenant headroom and the durability of operating cash flow after pension funding.
- Developments in Venezuela currency controls and access to local cash, and the result and financial implications of the SRI arbitration.
- Changes in asbestos reserves and insurance recoverability, and outcomes of the disclosed tax, labor, competition and compliance matters.