Goodyear Tire & Rubber Company — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Goodyear manufactures and sells tires globally through its Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific segments. The statements are unaudited.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $3.879 billion | $4.172 billion | $7.570 billion | $8.196 billion |
| Goodyear net income | $202 million | $192 million | $386 million | $416 million |
| Diluted EPS | $0.75 | $0.70 | $1.43 | $1.52 |
| Segment operating income | $531 million | $550 million | $950 million | $938 million |
| Segment operating margin | 13.7% | 13.2% | 12.5% | 11.4% |
- Margins and costs: Cost of goods sold was 72.5% of sales in Q2 versus 72.6% a year earlier; for the first half it was 72.8% versus 74.3%. First-half selling, administrative and general expense was 16.0% of sales versus 15.3%.
- Cash flow: First-half operating cash flow was negative $120 million, compared with positive $274 million in 2015. Investing cash flow was negative $465 million, including $466 million of capital expenditures; financing cash flow was positive $225 million. Cash declined $338 million from year-end to $1.138 billion.
- Liquidity and debt: At June 30, cash was $1.138 billion and unused credit availability was $2.426 billion. Debt and capital lease obligations totaled approximately $6.236 billion, including current maturities and notes payable. Total credit arrangements were $8.792 billion; 42% of debt carried variable rates, averaging 5.41%.
- Balance sheet: Current assets were $6.468 billion and current liabilities $4.594 billion. Total assets were $16.860 billion and shareholders’ equity $4.408 billion.
Changes versus comparable periods
- Q2 sales fell 7.0%; first-half sales fell 7.6%. Drivers included Venezuelan deconsolidation, unfavorable currency translation, reduced motorcycle-related business following the SRI alliance dissolution, and lower price/product mix. Tire unit shipments rose 1.7% in both periods.
- Q2 Goodyear net income increased despite lower segment operating income. Lower taxes, reduced minority interest after the SRI alliance dissolution, and stronger EMEA and Asia Pacific segment results more than offset weaker Americas performance.
- First-half segment operating income increased $12 million, while Goodyear net income declined $30 million. The comparison was affected by a $155 million one-time royalty gain included in 2015 results.
- Americas segment operating income declined in both periods; EMEA and Asia Pacific operating income increased. First-half 2016 raw-material cost reductions helped offset lower price/product mix.
- Operating cash flow turned negative, principally because of seasonal working-capital use of $686 million, including higher Americas inventory. Cash use for working capital was greater than in the prior-year period.
Outlook, commentary, risks and unusual items
- Management maintained its 2016 outlook, excluding Venezuelan operations from the 2015 comparison: tire unit volume up approximately 3% from 164.8 million units; unabsorbed fixed-overhead costs a benefit of about $50 million; and foreign-currency translation a negative impact of about $45 million on segment operating income.
- Based on then-current spot prices, management expected full-year raw-material costs to be about 8% below 2015, including cost-saving measures, with the benefit expected to more than offset declines in price and product mix. Management cautioned that commodity prices are volatile.
- Expected 2016 needs included capital expenditures of $1.0–$1.1 billion, interest expense of $350–$375 million, common dividends of $75 million, non-U.S. pension contributions of $50–$75 million, and working capital use of about $50 million. Management considered liquidity adequate for 2016 needs and maturities.
- Management cited improving EMEA industry conditions, stable U.S. conditions, and recessionary and politically volatile conditions in Brazil. Cost savings exceeded general inflation in Q2.
- Unusual items: Q2 included a $24 million out-of-period expense for intercompany-profit elimination; a $44 million premium on redeeming $900 million of 6.5% notes; $9 million of deferred-financing-fee write-offs; and a $14 million U.K. pension settlement charge. Q2 also included $14 million of benefit for discontinued-product liability matters, including asbestos insurance recoveries and revised recovery assumptions.
- A potential release of tax valuation allowances, primarily in EMEA, could produce a one-time tax benefit of up to $255 million if profitability and forecasts support it; no release was assured. The company recorded $59 million of first-half rationalization charges and expected about $25 million of future charges on ongoing plans.
- Key risks and contingencies: substantial debt and variable-rate exposure; raw-material, currency and market volatility; credit-facility borrowing-base changes and covenant requirements; restricted movement of some foreign subsidiary funds; and litigation, tax, environmental and other contingent liabilities. Approximately 800 former Amiens employees asserted claims totaling €116 million ($129 million); Goodyear said it could not estimate any eventual payment. Asbestos claims remained subject to material uncertainty despite recorded reserves and estimated insurance recoveries.
- Goodyear issued $900 million of 5% notes due 2026 and used the proceeds, with cash, to redeem $900 million of 6.5% notes due 2021. The refinancing was expected to reduce annual interest expense by $14 million. The company repurchased $150 million of shares in the first half and declared a $0.07-per-share dividend payable in September, subject to the stated record date.
Important facts for investors to verify
- Whether shipment growth, especially in Asia Pacific, translates into sustained revenue and segment-profit growth after separating acquisition, divestiture and Venezuelan effects.
- Whether raw-material savings continue to outweigh price/product-mix declines and whether management’s 2016 volume, currency and cost assumptions remain achievable.
- Working-capital and operating-cash-flow trends, planned capital spending, and the resulting cash and unused credit availability.
- Debt maturities, variable-rate exposure, borrowing-base availability and compliance with applicable covenants.
- Developments in the potential tax valuation-allowance release and the resolution or reassessment of asbestos, Amiens labor, environmental and other claims.