Goodyear Tire & Rubber Co. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results; dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $3,928 | $3,921 | $11,599 | $11,306 |
| Goodyear net income | $351 | $129 | $583 | $442 |
| Diluted EPS | $1.48 | $0.50 | $2.42 | $1.73 |
| Total segment operating income | $362 | $367 | $967 | $1,126 |
| Segment operating margin | 9.2% | 9.4% | 8.3% | 10.0% |
| Operating cash flow | Not separately provided for quarter | $(24) | $(154) |
- Third-quarter sales were essentially flat year over year. Tire unit shipments rose 1.9% to 40.5 million; replacement volume increased 4.1%, while original-equipment volume fell 4.0%.
- For the first nine months, sales increased 2.6%, while segment operating income declined 14.1%. Higher raw-material costs and weaker price/product mix, particularly in the Americas, were key pressures.
- Cost of goods sold was 77.1% of sales in Q3 versus 77.9%; for the nine months it was 77.2% versus 76.1%. Q3 selling, administrative and general expense was 14.1% of sales versus 13.9%; nine-month expense was 14.9% versus 15.0%.
- Q3 income before tax was $513 and tax expense was $159; the nine-month figures were $809 and $211. Q3 results included $31 of net discrete tax charges.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $896, down from $1,043 at year-end 2017. Current assets were $6,753 and current liabilities $5,047.
- Debt and capital leases, including short-term notes payable and amounts due within one year, totaled approximately $6,520, compared with approximately $5,729 at December 31, 2017. Forty percent of debt carried variable rates, averaging 4.42%.
- Unused availability under credit arrangements was $2,132, down from $3,196 at year-end. The company reported compliance with applicable material covenants; the first-lien revolving facility’s availability is subject to a borrowing base.
- Nine-month investing cash outflow was $664, including $615 of capital expenditures. Financing cash inflow was $577, including net borrowings of $903; share repurchases and dividends used $200 and $100, respectively.
Material changes and unusual items
- Q3 and nine-month earnings benefited from the TireHub transaction: Goodyear formed a 50/50 U.S. tire-distribution joint venture with Bridgestone, which began operations July 1. The transaction generated a net gain of $287 in Q3 and $273 for the nine-month period. Management plans to transition about 10 million annual units to TireHub and other aligned distributors.
- Excluding the transaction gain, the headline increase in net income is substantially less pronounced. Segment operating income declined in Q3 and year to date despite the reported earnings improvement.
- Nine-month rationalization charges declined to $40 from $102. The remaining rationalization liability was $100, expected to be substantially utilized within 12 months.
- Shareholders received $200 of share repurchases during the first nine months. The board declared a subsequent quarterly dividend of $0.16 per share, payable December 3, 2018, subject to the stated record date.
- Goodyear adopted new revenue-recognition guidance in 2018; the filing says its effect on nine-month sales and net income was increases of $7 and $5, respectively. The company expects adoption of the new lease standard to materially affect its financial statements because of significant operating leases.
Outlook, management commentary and risks
- Management lowered its 2018 outlook, citing deteriorating conditions in China and Brazil. It expected full-year tire unit volume to rise about 1% versus 2017 and overhead absorption to improve by about $30.
- Management expected cost savings to exceed general inflation by about $105; foreign-currency translation to reduce segment operating income by about $30; raw-material costs to increase about $270 before cost-saving measures; and price/product mix to contribute about $45. These estimates were based on then-current assumptions and spot rates.
- Expected 2018 cash needs included approximately $900 of capital expenditures, $320–$330 of interest expense, $185 of restructuring payments, $137 of common dividends, and $25–$50 of non-U.S. pension contributions. Working capital was expected to use about $150 of cash. Management stated liquidity was adequate for anticipated operating, investing and debt-maturity needs.
- Key disclosed risks include volatile raw-material and energy costs, foreign-exchange movements, weaker market conditions, competition, tariffs, labor disruption, substantial debt and variable-rate exposure, reduced borrowing-base availability, and uncertainty around contingent liabilities and tax matters.
- Contingencies include approximately 43,700 pending asbestos claims, with $176 of gross recorded asbestos liabilities and $121 of related insurance receivables. About 850 former Amiens facility employees asserted claims totaling €120 ($139); the company said it could not estimate any eventual payment. A shareholder derivative action concerning G159 tires was filed October 24, 2018.
Important facts for investors to verify
- How much of reported earnings growth is attributable to the one-time TireHub gain, and how the joint venture affects future sales, margins and distribution economics.
- Whether the lower 2018 volume outlook and raw-material, pricing and currency assumptions are achieved, particularly in China, Brazil and the Americas.
- Whether working-capital needs, capital spending, restructuring costs and debt levels remain consistent with management’s liquidity expectations.
- Developments in asbestos insurance recoveries, Amiens labor claims, the G159 litigation and tax estimates, including the provisional transition-tax obligation.
- The eventual balance-sheet impact of lease-standard adoption and any changes in available credit or covenant headroom.