Goodyear Tire & Rubber Company — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited consolidated results; amounts are in U.S. dollars unless noted. Goodyear operates four regional tire segments: North America, EMEA, Asia Pacific and Latin America.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $4,172 million | $4,656 million | $8,196 million | $9,125 million |
| Income before taxes | $328 million | $292 million | $687 million | $262 million |
| Goodyear net income | $192 million | $213 million | $416 million | $162 million |
| Diluted EPS | $0.70 | $0.76 | $1.52 | $0.58 |
| Total segment operating income | $556 million | $460 million | $947 million | $833 million |
| Segment operating margin | 13.3% | 9.9% | 11.6% | 9.1% |
| Operating cash flow | Not separately presented for the quarter | $274 million | $(1,134) million |
Q2 gross margin was approximately 27.4%, versus 24.1% a year earlier; six-month gross margin was approximately 25.7%, versus 22.7%. Goodyear’s net margin was approximately 4.6% in Q2 and 5.1% for the first six months.
- Revenue and earnings: Q2 sales fell 10.4%, mainly from $401 million of unfavorable currency translation, lower other tire-related sales and the EMEA farm tire exit. Six-month sales declined 10.2%. Q2 net income declined despite higher pretax income, principally because of higher tax expense. Six-month net income rose substantially, aided by a one-time royalty gain and lower currency losses.
- Cash and liquidity: Cash was $1.638 billion at June 30, down $523 million from year-end. Unused credit availability was $2.389 billion, compared with $2.317 billion at December 31, 2014. Current assets were $7.695 billion and current liabilities $4.741 billion.
- Debt: Balance-sheet debt, including short-term borrowings and current maturities, totaled approximately $6.103 billion, versus $6.394 billion at year-end; cash-adjusted debt was approximately $4.465 billion. Interest expense was $106 million in Q2 and $209 million for six months. At quarter-end, 32% of debt carried variable rates, averaging 5.77%.
- Cash flows and investment: Six-month operating cash flow improved to $274 million from a $1.134 billion use in 2014, mainly because prior-year U.S. pension contributions were much larger and earnings improved. Working capital used $477 million. Capital expenditures were $448 million; investing cash use was $469 million and financing cash use was $267 million.
Segments and material changes
| Segment | Q2 2015 sales | Q2 operating income | Six-month operating income | Key comparison |
|---|---|---|---|---|
| North America | $2,026 million | $321 million | $519 million | Q2 operating income rose $113 million; volume and lower raw-material costs helped. |
| EMEA | $1,265 million | $108 million | $181 million | Currency and lower volumes pressured results; six-month operating income fell $46 million. |
| Asia Pacific | $491 million | $84 million | $151 million | Operating income increased in both periods, aided by lower raw-material costs and volume. |
| Latin America | $390 million | $43 million | $96 million | Q2 operating income fell $16 million amid weaker Brazilian conditions and higher conversion costs. |
Across segments, lower raw-material costs were the main driver of improved segment operating income, partly offset by currency effects, conversion costs and lower price/product mix. Worldwide tire unit sales increased 0.6% in Q2 and 1.4% for the first six months. EMEA and Latin America experienced notable sales declines, largely from currency translation.
Outlook, transactions and risks
- 2015 outlook: Management maintained its expectation for tire unit volume growth of 1%–2% and cost savings exceeding general inflation. At then-current spot rates, foreign currency translation was expected to reduce segment operating income by about $200 million versus 2014. Raw-material costs were expected to be about 10% below 2014, with benefits expected to exceed price/mix declines; management cautioned that commodity-price volatility could change this estimate.
- Cash needs: Management expected 2015 capital expenditures of approximately $1.1 billion, interest expense of $415–$440 million, common dividends of $65 million and non-U.S. pension contributions of $50–$75 million. It expected working capital not to be a significant cash source or use and considered available cash and credit adequate for 2015 needs.
- SRI alliance dissolution: The June 2015 agreement provides for Goodyear to pay SRI approximately $271 million net, issue a roughly $55 million promissory note, acquire certain interests and rights, and sell other interests and assets. Closing was expected in Q4 2015, subject to approvals and other conditions, including a labor agreement. Failure or delay to close could have significant financial consequences.
- Venezuela: Currency controls restrict remittances and access to foreign currency. At June 30, $304 million of cash was held in Venezuela; approximately $150 million of requested currency settlements remained pending. Using the SIMADI rate rather than the rate applied would have produced an estimated additional $230 million remeasurement loss. Further deterioration in operating control could require deconsolidation, with an estimated pretax charge exceeding $500 million and removal of approximately $305 million of cash from consolidated statements.
- Contingencies and unusual items: Six-month earnings included a $155 million pretax one-time deferred royalty gain related to the former Veyance business; 2014 included a $157 million Venezuela currency remeasurement loss. Approximately 800 former Amiens employees asserted claims totaling €109 million ($122 million); Goodyear said it could not estimate any eventual payment. Asbestos claims numbered approximately 73,400 at quarter-end; recorded gross liability was $159 million, with a $78 million related receivable. Workers’ compensation liabilities were $310 million, and the company estimated reasonably possible exposure could exceed reserves by about $30 million.
- Other risks: The filing highlights competition, economic weakness, foreign exchange and commodity volatility, labor disruptions, substantial debt and variable-rate exposure, contingent liabilities, access to capital, and potential restrictions on subsidiary cash transfers. The company reported compliance with applicable material debt covenants and effective disclosure controls at June 30, 2015.
Important facts for investors to verify
- Whether the SRI transaction closed on the expected terms and timetable, including its net cash cost and note obligations.
- Whether the $155 million royalty gain and unusually favorable year-over-year comparison materially overstate recurring earnings improvement.
- How raw-material prices, pricing and product mix, currency movements, and segment volumes affect margins against management’s 2015 outlook.
- Developments in Venezuela’s exchange rates, pending settlements, cash accessibility and Goodyear’s ability to maintain control of its subsidiary.
- Progress on cash generation, working capital, capital spending, debt reduction and refinancing availability.
- Developments in Amiens labor claims, asbestos litigation and other contingencies, including reserve adequacy and insurance recoveries.