Goodyear Tire & Rubber Co. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Goodyear manufactures and sells tires globally through the Americas, EMEA, and Asia Pacific segments. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $3,465 | $3,802 | $8,665 | $11,032 |
| Income (loss) before tax | $(10) | $121 | $(1,267) | $165 |
| Goodyear net income (loss) | $(2) | $88 | $(1,317) | $81 |
| Diluted EPS | $(0.01) | $0.38 | $(5.62) | $0.35 |
| Total segment operating income (loss) | $162 | $294 | $(316) | $703 |
| Segment operating margin | 4.7% | 7.7% | (3.6)% | 6.4% |
- Q3 sales fell 8.9%; worldwide tire unit sales declined 9.1% to 36.6 million. Lower tire volume and foreign exchange were partly offset by $60 million of favorable price and product mix.
- Q3 cost of goods sold was 80.1% of sales, versus 78.0% a year earlier; selling, administrative and general expense was 16.0% of sales, versus 15.0%.
- For the first nine months, sales fell 21.5% and tire units declined 23.7% to 88.3 million. Lower volume, higher conversion costs, and impairment charges drove the year-to-date loss. Cost of goods sold was 87.1% of sales versus 78.9%; SAG was 18.3% versus 15.5%.
- Q3 segment operating income decreased $132 million, principally from lower tire volume ($73 million), higher conversion costs ($47 million), and lower income from other tire-related businesses ($26 million). Nine-month segment results declined by $1,019 million year over year.
- Regional Q3 operating income was $106 million in Americas, $22 million in EMEA, and $34 million in Asia Pacific. For nine months, Americas and EMEA reported operating losses of $181 million and $141 million, respectively; Asia Pacific income was $6 million.
Cash flow, liquidity and debt
- Nine-month operating cash flow was negative $239 million, compared with negative $139 million in 2019. Investing cash flow was negative $515 million, including $487 million of capital expenditures; financing cash flow was positive $955 million, primarily reflecting net borrowings.
- Cash and cash equivalents were $1,057 million at September 30, up from $908 million at year-end 2019. Unused availability under credit arrangements was $3,098 million, down from $3,554 million. Management said liquidity was adequate for operating and investing needs over the next 12 months.
- Balance-sheet debt and finance leases totaled approximately $6,648 million, including notes payable and overdrafts; cash was $1,057 million. Long-term debt and finance leases were $5,708 million. The filing reports $9,586 million of total credit arrangements, of which $3,098 million was unused.
- Goodyear issued $800 million of 9.5% senior notes due 2025 and repaid $282 million of 8.75% notes at maturity. It extended its $2.0 billion first-lien revolver to 2025. At quarter-end, 31% of debt was variable-rate, averaging 2.63%.
- The company used $37 million for common dividends in the first quarter and suspended the quarterly dividend in April. The filing’s full-year cash needs estimate included up to $700 million of capital expenditures, $200–$225 million of rationalization payments, approximately $350 million of interest, and approximately $40 million of income taxes.
Material changes, outlook and risks
- COVID-19 effects: Production was suspended or curtailed at many facilities during parts of the first half; phased restarts were completed in Q2, and most factories had returned to near-full capacity by Q3. Management said demand recovery in major markets exceeded expectations in Q3, but could not predict Q4 industry demand amid renewed case increases.
- Q3 included $47 million of unfavorable conversion costs from lower utilization and production restarts, partly offset by $57 million of temporary fixed-cost reductions and approximately $76 million of cost savings. For the first nine months, higher conversion costs were $409 million.
- Impairments and taxes: Nine-month results included $330 million of non-cash impairments: $182 million against EMEA goodwill and $148 million against the TireHub investment. A $295 million valuation allowance on foreign tax credits contributed to $278 million of net discrete tax charges for the period. Further tax valuation allowances or impairments may be needed if forecasts or market conditions worsen.
- Outlook: Goodyear expected Q4 production to increase based on inventory levels. It forecast a $20–$30 million year-over-year earnings decline in other tire-related businesses in Q4 and approximately $125 million of 2020 raw-material cost benefit versus 2019, excluding transactional currency effects and cost-saving measures. These estimates were subject to demand, pandemic, and commodity-price uncertainty.
- Restructuring: The Gadsden, Alabama facility was permanently closed, with approximately 470 job reductions. Estimated total pre-tax charges were $280–$295 million, including $170–$180 million expected to be cash charges; management expected approximately $130 million of annual savings in 2021 versus 2019 when combined with prior Gadsden actions.
- Contingencies: The company had $295 million reserved for general and product liability and other tort claims, including asbestos; it noted that asbestos losses above reserves were reasonably possible but not reasonably estimable. Approximately 850 former Amiens employees asserted claims totaling about €140 million; Goodyear accrued €26 million during the first nine months and appealed a labor-court ruling. Workers’ compensation liabilities were $204 million, with an estimated reasonably possible excess of approximately $25 million.
- Key risks include the duration and severity of COVID-19, weaker demand and factory utilization, working-capital and borrowing-base declines, substantial debt and fixed costs, raw-material and currency volatility, covenant access to European credit facilities, and uncertain legal, tax, and insurance outcomes. The company reported compliance with applicable material covenants at quarter-end.
Most important facts for investors to verify
- Whether tire demand, vehicle production, and factory utilization recover as assumed, and the resulting effect on margins and operating cash flow.
- Available liquidity and borrowing-base capacity, especially if receivables or inventory decline; also monitor debt maturities, interest costs, and covenant headroom.
- Whether deferred tax assets remain realizable and whether additional valuation allowances or impairment charges are required.
- Actual cash costs, timing, and savings from Gadsden and other rationalization plans.
- Developments in asbestos, Amiens labor, and other contingencies, including insurance recoverability and potential losses above recorded reserves.