GOODYEAR TIRE & RUBBER CO quarterly report, Q1 FY2020

Goodyear Tire & Rubber Co. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020. Goodyear manufactures and sells tires through its Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific segments. Results were significantly affected by COVID-19 disruptions, including lower demand and production suspensions.

Financial performance

Metric	Q1 2020	Q1 2019 / comparison
Net sales	$3.056 billion	$3.598 billion; down 15.1%
Goodyear net loss	$619 million; $(2.65) per share	$61 million; $(0.26) per share
Segment operating income (loss)	$(47) million; (1.5)% margin	$190 million; 5.3% margin
Operating cash flow	$(561) million	$(364) million
Capital expenditures	$211 million	$221 million
Cash and cash equivalents at period end	$971 million	$908 million at Dec. 31, 2019

Cost of goods sold was $2.552 billion, or 83.5% of sales, versus 80.0% a year earlier. Tire shipments fell 17.6% to 31.3 million units. Sales declines reflected lower volumes and unfavorable currency translation, partly offset by improved price and product mix. Management attributed the segment operating deterioration mainly to lower volume, higher conversion costs from reduced factory utilization, higher selling and administrative expense, and inventory write-offs; lower raw-material costs partly offset these pressures.

Q1 operating cash use included $482 million used for working capital and $73 million of rationalization payments. Financing provided $939 million, including net borrowings of $978 million. Cash, cash equivalents and restricted cash totaled $1.036 billion at quarter-end.

Balance sheet, debt and liquidity

• Total assets were $16.691 billion and total shareholders’ equity was $3.697 billion at March 31, 2020, compared with $17.185 billion and $4.545 billion, respectively, at year-end 2019.
• Debt and finance lease obligations, including notes payable and overdrafts, totaled approximately $6.524 billion at March 31, 2020, versus approximately $5.663 billion at Dec. 31, 2019. The filing reports 41% of debt at variable rates, averaging 3.41%.
• Unused availability under credit arrangements was $2.278 billion, down from $3.554 billion at year-end. Together with cash and cash equivalents, reported liquidity was approximately $3.249 billion.
• On April 9, after quarter-end, Goodyear extended its $2.0 billion first-lien revolving facility maturity to April 2025 and amended its borrowing base; pricing on drawn loans increased to LIBOR plus 175 basis points.
• At March 31, Goodyear reported compliance with applicable material covenants, including the European facility leverage covenant. Availability under the U.S. revolver depends partly on receivables and inventory, which could decline with sales and production.

Material changes and unusual items

• Goodyear recorded a $182 million non-cash goodwill impairment for EMEA following COVID-19-related economic deterioration and a decline in market capitalization. EMEA goodwill fell from $400 million to $218 million; further impairment could result if assumptions or market conditions worsen.
• Income tax expense was $249 million on a $368 million pretax loss. It included $290 million of net discrete charges, primarily a valuation allowance against foreign tax credits. The company recorded a $295 million additional allowance against substantially all such credits expiring through 2025.
• Rationalization charges were $9 million, versus $103 million in Q1 2019. Goodwill impairment, rationalization charges and other specified items are excluded from segment operating income.
• Foreign currency translation reduced other comprehensive income by $225 million. Goodyear paid $37 million in common dividends during the quarter, then announced a temporary dividend suspension on April 16.

Outlook, management actions and risks

• Management cited limited visibility into vehicle production and replacement-tire demand. It expected the largest volume declines in Q2, with volumes down approximately 50% year over year, and planned production nearly 25 million units below Q2 2019. It expected most manufacturing facilities to resume operations by the end of May, subject to demand, inventory, supply and employee-safety conditions.
• Management estimated Q2 year-over-year earnings pressure of about $150 million from other tire-related businesses. For full-year 2020, raw-material costs were expected to benefit results by $50 million to $100 million versus 2019, excluding transactional currency and cost-saving measures.
• Full-year plans included capital expenditures of up to $700 million, interest expense of $350 million to $375 million, restructuring payments of $175 million to $200 million, cash taxes of about $60 million, and non-U.S. pension contributions of $25 million to $50 million. Management expected working capital to provide cash for the year but use cash in Q2, and said Q2 cash use could be approximately $1.0 billion.
• COVID-19 response measures included production suspensions and phased restarts, payroll and discretionary-cost reductions, deferred tax payments, and lower capital spending. Management said these actions were intended to preserve liquidity and considered liquidity adequate for 2020 needs, while warning that the pandemic’s duration and impact remained uncertain.
• On April 17, Goodyear announced a tentative agreement and plan to permanently close its Gadsden, Alabama facility, subject to union approval. Estimated pretax charges were $280 million to $295 million, including $170 million to $180 million in cash charges; about $170 million was expected in Q2. The combined plan and prior Gadsden actions were expected to yield about $130 million in annual savings in 2021 versus 2019.
• Key risks include prolonged demand or production disruption, liquidity deterioration, reduced revolver borrowing availability, failure to meet the European leverage covenant, substantial debt and fixed costs, commodity and foreign-exchange exposure, and uncertainty around deferred-tax-asset realization. Other contingencies include asbestos claims, Amiens labor claims of approximately €140 million, and workers’ compensation liabilities that could reasonably exceed reserves by about $25 million.

Most important facts for investors to verify

• Whether production restarts and demand recovery matched management’s Q2 expectations, and the resulting effects on volumes, cash flow and liquidity.
• Actual cash use, borrowing-base availability, covenant headroom and access to the European revolving and receivables facilities.
• Whether deferred tax assets remain realizable and whether additional valuation allowances or goodwill impairments are required.
• Final approval, charges, cash payments and savings from the Gadsden closure plan.
• Developments in material legal and contingent exposures, particularly asbestos and Amiens claims.