GOODYEAR TIRE & RUBBER CO annual report, FY2018

Full document

Business context and reporting period

The Goodyear Tire & Rubber Company’s 2018 Form 10-K covers the fiscal year ended December 31, 2018; fourth-quarter figures are also shown. Goodyear manufactures and sells tires and related products and services through Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. It reported 159.2 million tire units sold, unchanged from 2017.

Financial performance and liquidity

  • Revenue: Full-year net sales were $15.475 billion, up 0.6% from $15.377 billion. Price and product mix added $217 million, partly offset by $139 million of unfavorable currency translation. Fourth-quarter sales were $3.876 billion versus $4.071 billion.
  • Earnings: Goodyear net income was $693 million ($2.89 diluted EPS), compared with $346 million ($1.37) in 2017. Fourth-quarter Goodyear net income was $110 million ($0.47 diluted EPS), compared with a $96 million loss ($0.39 loss per diluted share) in fourth-quarter 2017. The 2018 result included material one-time gains and tax items.
  • Margins and segment results: Gross profit was $3.514 billion, or 22.7% of sales, versus $3.697 billion, or 24.0%, in 2017. Segment operating income fell 18.1% to $1.274 billion; segment operating margin declined to 8.2% from 10.1%. Americas operating income fell to $654 million from $847 million; EMEA was $363 million versus $367 million; Asia Pacific was $257 million versus $342 million.
  • Cash flow and investment: Operating cash flow was $916 million, down from $1.158 billion. Capital expenditures were $811 million, versus $881 million. Cash and cash equivalents ended the year at $801 million, down from $1.043 billion.
  • Debt and liquidity: Debt and capital leases totaled approximately $5.8 billion at year-end. Goodyear reported $3.151 billion of unused availability under credit arrangements and was in compliance with applicable material covenants. Current liabilities were $4.781 billion and current assets were $5.925 billion.
  • Shareholder returns: Goodyear paid $138 million in common dividends and repurchased $220 million of shares during 2018. The quarterly dividend increased from $0.14 to $0.16 per share beginning with the December 2018 payment.

Material changes versus the prior comparable period

  • Operating performance weakened despite slightly higher annual sales: segment operating income decreased $282 million, primarily from higher raw-material costs, lower income in other tire-related businesses, increased selling, administrative and general expense, currency effects, and weaker price and mix in Americas.
  • Raw-material costs, including savings measures, rose approximately 4%. Goodyear realized approximately $301 million of cost savings, including about $80 million from raw-material cost-saving measures.
  • Replacement tire units rose 1.5% to 115.1 million, while OE units fell 3.6% to 44.1 million. Americas and Asia Pacific segment income declined notably; EMEA sales and replacement demand improved.
  • Net income increased substantially, but included a $272 million pre-tax net gain from forming TireHub and lower tax expense than in 2017, when the Tax Act produced a large discrete tax charge. The TireHub gain is not representative of recurring operating performance.
  • Operating cash flow fell $242 million, chiefly reflecting the reduction in segment operating income. Year-end cash declined by $242 million.

Outlook, management commentary, risks and unusual items

  • Management expected challenging global conditions in 2019, including higher raw-material costs, currency headwinds and emerging-market volatility. It estimated 2019 raw-material costs would be about $300 million higher than 2018, before cost-saving measures.
  • For 2019, management expected approximately $900 million of capital expenditures, $325–$350 million of interest expense, about $50 million of restructuring payments, $150 million of common dividends, and less than $100 million of working-capital cash use. It stated liquidity was adequate for 2019 needs and did not expect significant share repurchases in 2019.
  • Management anticipated benefits from TireHub, the ramp-up of its new Americas manufacturing facility, 2018 pricing actions, and continued strength in consumer replacement tires with rim sizes of 17 inches and above. The San Luis Potosi facility was expected to be fully operational by the end of 2019.
  • Unusual items: TireHub was formed as a 50/50 joint venture with Bridgestone; Goodyear recognized a $272 million net gain before tax and transaction costs. Favorable Brazilian indirect-tax settlements contributed $53 million to cost-of-goods-sold benefit and $38 million of interest income. Fourth-quarter 2018 included $56 million of favorable indirect-tax benefits and $55 million of discrete tax charges.
  • Key risks: Raw-material and energy price volatility, competitive and demand pressures, foreign-exchange movements, labor negotiations and possible disruptions, tariffs, international operating risks, debt and refinancing needs, covenant and borrowing-base constraints, and reliance on successful strategic initiatives. Approximately 15,000 employees outside the U.S. were covered by union contracts expired or expiring in 2019.
  • Contingencies: Goodyear reported 43,100 pending asbestos claimants, gross asbestos liabilities of $166 million and an associated insurance receivable of $108 million; it cautioned that excess losses could be material but were not reasonably estimable. Approximately 850 former Amiens employees asserted claims totaling €120 million ($137 million); the company said it could not estimate any eventual payment. Environmental liabilities were $45 million. The filing also disclosed a shareholder derivative action concerning G159 tires.
  • Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.

Important facts for investors to verify

  1. How much of 2018 earnings growth came from recurring operations versus the TireHub gain, favorable tax settlements, and other discrete tax effects.
  2. Whether Goodyear can offset the projected 2019 raw-material cost increase through pricing, product mix, substitution and productivity savings.
  3. Debt maturities, borrowing-base availability, covenant headroom, and the continued availability of receivables factoring and supplier-financing programs.
  4. Progress and costs associated with TireHub and the new Americas manufacturing facility, including expected benefits and execution risks.
  5. Developments in asbestos insurance recoveries, Amiens labor claims, tax-credit utilization and other litigation or contingent liabilities.