GOODYEAR TIRE & RUBBER CO quarterly report, Q3 FY2016

Goodyear Tire & Rubber Co. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2016. Goodyear manufactures tires globally and reports through Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific segments. Prior-period segment information was recast after combining North America and Latin America into Americas.

Financial performance and position

Metric	Q3 2016	Q3 2015	Nine months 2016	Nine months 2015
Net sales	$3.847 billion	$4.184 billion	$11.417 billion	$12.380 billion
Goodyear net income	$317 million	$271 million	$703 million	$687 million
Diluted EPS	$1.19	$0.99	$2.62	$2.51
Segment operating income	$556 million	$602 million	$1.506 billion	$1.540 billion
Segment operating margin	14.5%	14.4%	13.2%	12.4%

Consolidated gross margin was approximately 28.9% in Q3 versus 28.3% a year earlier, and 27.7% for the first nine months versus 26.6%. Goodyear net income margin was approximately 8.2% in Q3 versus 6.5%, and 6.2% for the nine months versus 5.5%. Q3 earnings benefited substantially from discrete tax adjustments.

Cash flow: Nine-month operating cash flow was $237 million, down from $635 million. Working capital used $950 million of cash; capital expenditures were $711 million, resulting in free cash flow of approximately negative $474 million before other investing items.
Liquidity: Cash was $975 million at September 30, 2016, down from $1.476 billion at year-end 2015. Unused credit availability was $3.005 billion, compared with $2.676 billion at year-end.
Debt: Balance-sheet notes payable, current maturities, and long-term debt and capital leases totaled approximately $6.03 billion, versus $5.71 billion at December 31, 2015. Forty percent of debt carried variable rates, averaging 5.66%. The company reported compliance with applicable material covenants.
Shareholder returns: Goodyear repurchased $200 million of shares and paid $56 million of dividends during the first nine months. The quarterly dividend was increased from $0.07 to $0.10 per share, payable December 1, 2016, subject to Board approval for future dividends.

Material changes versus the prior comparable period

Q3 sales declined 8.1%; nine-month sales declined 7.8%. Drivers included the Venezuelan subsidiary deconsolidation, lower volume in Americas and EMEA, foreign currency effects, the SRI alliance dissolution’s impact on related businesses, and weaker price and product mix.
Q3 worldwide tire shipments fell 1.0% to 42.0 million units; replacement volume rose 1.0%, while original-equipment volume fell 5.8%. For nine months, shipments increased 0.8% to 125.0 million units.
Segment operating income fell 7.6% in Q3 and 2.2% for nine months. Lower raw-material costs partly offset weaker volume, pricing/mix, Venezuelan deconsolidation, and lower income in other tire-related businesses.
Regional results diverged: Americas Q3 segment sales fell 13.7% and operating income 18.9%; EMEA Q3 operating income was nearly flat, despite lower sales; Asia Pacific Q3 sales rose 18.1% and operating income 37.5%, including the effect of consolidating Japan’s NGY business.
Interest expense declined 14.3% in Q3 and 11.5% for nine months, primarily reflecting lower average rates. Nine-month Goodyear net income rose modestly despite lower sales, aided by lower tax expense and interest, partly offset by the absence of 2015’s $155 million one-time royalty gain and higher rationalization charges.

Outlook, commentary, risks, and unusual items

2016 outlook: Management expected full-year tire unit volume to increase approximately 1%–2% from 2015 levels excluding Venezuela; raw-material costs to be approximately 4% lower than 2015, excluding cost-saving measures; and cost savings to more than offset general inflation. Foreign currency translation was expected to reduce segment operating income by approximately $25 million. Management cautioned that commodity-price volatility could materially change the raw-material estimate.
Cash needs: Management expected approximately $1.0 billion of 2016 capital expenditures, $360–$375 million of interest expense, $82 million of common dividends, $50–$75 million of non-U.S. pension contributions, and approximately $100 million of working-capital cash use. Management considered liquidity adequate for 2016 operating, investing, and debt-maturity needs.
Restructuring: Q3 rationalization charges were $135 million, including $116 million accrued for the announced closure of the Philippsburg, Germany tire plant, expected to reduce approximately 890 jobs; payments are expected through 2018. The plan remained subject to consultation with employee representatives.
Tax items: Q3 included a net tax benefit of $10 million, including $118 million of discrete tax adjustments, principally a $163 million benefit from changing the treatment of certain U.S. foreign taxes, partly offset by valuation-allowance and settlement charges. Management said a further valuation-allowance release of up to $340 million could be possible at year-end if profit and forecast conditions are met; it was not assured.
Other unusual items: The company issued $900 million of 5% notes due 2026 and used proceeds and cash to redeem $900 million of 6.5% notes due 2021, recording a $44 million redemption premium. A $24 million second-quarter out-of-period expense related primarily to prior-year intercompany-profit eliminations was described as not material to the periods affected.
Contingencies and risks: Approximately 64,500 asbestos claims were pending; related gross liabilities were $171 million, with a $129 million receivable for probable insurance recoveries. The company noted that additional asbestos losses could be material but could not be reasonably estimated. Approximately 800 former Amiens employees asserted claims totaling €117 million ($131 million); Goodyear said it could not estimate any ultimate payment. Other exposures include environmental, workers’ compensation, product-liability, tax, currency, commodity, competition, and debt-related risks.
Capital allocation: The announced 2017–2020 plan called for $1.8–$1.9 billion of growth capital expenditures, $800–$900 million of debt repayments, $700–$800 million of restructuring payments, and—subject to performance—$3.5–$4.0 billion of dividends and share repurchases.

Key facts investors should verify

Whether the Q3 tax benefit and potential valuation-allowance release are sustainable or primarily one-time items.
Whether working-capital use moderates and operating cash flow improves after the nine-month decline.
Whether volume, price/mix, and raw-material savings meet management’s outlook, especially in Americas and EMEA.
The final costs, timing, employee consultation outcome, and expected savings from the Philippsburg closure and other restructuring actions.
Developments in asbestos insurance recoveries and Amiens labor claims, including any change in estimates or reserves.
Debt, borrowing-base availability, and access to subsidiary cash subject to transfer restrictions.