GOODYEAR TIRE & RUBBER CO quarterly report, Q1 FY2015

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Goodyear Tire & Rubber Co. — Q1 2015 Form 10-Q

Reporting period: Three months ended March 31, 2015. Unless noted, financial amounts are in millions of U.S. dollars. Goodyear operates tire businesses across North America, EMEA, Asia Pacific and Latin America.

Financial performance and liquidity

  • Revenue: Net sales were $4,024, down 10.0% from $4,469. Unfavorable currency translation reduced sales by $393; lower price and product mix, lower tire-related business sales and the EMEA farm tire exit also contributed. Tire unit volume rose 2.1% to 40.8 million.
  • Profit: Goodyear net income was $224, versus a $51 net loss a year earlier; diluted EPS was $0.82, versus a $0.23 loss. The 2015 result included a $155 pretax one-time gain from recognition of deferred royalty income. The 2014 comparison included a $157 Venezuelan currency remeasurement loss.
  • Margins: Cost of goods sold was 76.2% of sales, versus 78.7% a year earlier. Segment operating income rose to $391 from $373, and segment operating margin was 9.7% versus 8.3%. Segment operating income is a company-defined measure, not consolidated operating income.
  • Cash flow: Operating cash use was $262, compared with $1,543 in Q1 2014; the prior-year period included $1,167 of pension contributions, including $907 in discretionary funding. Q1 2015 operating cash use reflected $569 of working-capital needs. Investing cash use was $180, including $204 of capital expenditures; financing cash use was $34.
  • Cash and liquidity: Cash and equivalents were $1,613 at quarter-end, down $548 from December 31, 2014, primarily due to seasonal working capital and a $72 foreign-exchange impact. Unused credit availability was $1,888, down from $2,317. The current ratio was approximately 1.68, compared with 1.63 at year-end.
  • Debt: Debt and capital lease obligations were approximately $6,226, including short-term notes and obligations due within one year, versus approximately $6,394 at December 31, 2014. Total credit arrangements were $8,432. Goodyear reported compliance with currently applicable material covenants.

Changes versus Q1 2014

  • Segment operating income improved by $18, as lower raw-material costs ($104) and higher tire volume supported results, partly offset by unfavorable currency translation ($40), higher conversion costs ($58) and weaker price and product mix ($29).
  • Sales fell despite higher tire volume, principally because of foreign exchange, price and mix, and lower non-tire business sales. EMEA sales declined 20.6%, including a substantial currency effect; North America segment income rose 26.9%.
  • Reported earnings improved sharply, but the comparison includes the 2015 one-time royalty gain and the 2014 Venezuela remeasurement loss. Excluding these items, the year-over-year earnings change is materially less favorable than the headline comparison suggests.
  • Cash use improved substantially from Q1 2014, largely because the prior year included exceptional U.S. pension funding.

Outlook, commentary and risks

  • Management maintained its 2015 tire volume growth expectation of 1%–2% and expected cost savings to exceed general inflation. Based on then-current spot rates, it expected foreign currency translation to reduce 2015 segment operating income by approximately $200. Based on current raw-material prices, it expected full-year raw-material costs to be approximately 12% below 2014; commodity volatility could change that estimate.
  • Expected 2015 cash needs included approximately $1.1 billion in capital expenditures, $415–$440 of interest expense, $65 of common dividends and $50–$75 of contributions to funded non-U.S. pension plans. Management said existing cash and available credit, together with operating cash generation, were expected to fund needs and debt maturities.
  • The Amiens, France closure and EMEA farm tire exit were expected to result in approximately $320 of total net charges, with approximately $290 recorded through March 31; remaining charges were expected in 2015. Management cited $63 of cumulative savings through Q1 2015 and expected another $12 of incremental savings during the remainder of 2015.
  • Venezuela: Currency controls restricted fund transfers, with approximately $151 of settlements pending at quarter-end. Management said applying the approximately 190 bolivares-per-dollar SIMADI rate rather than the 12.0 SICAD rate would have caused an additional approximate $215 remeasurement loss. Further deterioration in operating control could lead to deconsolidation, an estimated one-time pretax charge exceeding $500 and removal of $296 of cash from consolidated statements.
  • Contingencies and unusual matters: Approximately 800 former Amiens employees asserted claims totaling €107 ($115); Goodyear said it could not estimate any eventual payment. Asbestos claims remained pending, with $152 of gross liabilities and a $71 insurance receivable recorded. The company also disclosed environmental, workers’ compensation, product-liability and tax exposures. In February 2015, it settled SEC cease-and-desist proceedings, agreeing to disgorgement of $14 plus $2 of prejudgment interest and annual remediation reporting for three years. Goodyear had commenced arbitration seeking dissolution of its global alliance with Sumitomo Rubber Industries; any net payment was uncertain.
  • Other stated risks include foreign-exchange and commodity volatility, competition, substantial debt and fixed costs, access to capital, labor matters, contingent liabilities and restrictions on cash transfers from certain countries.

Important facts for investors to verify

  1. How much of reported earnings is recurring after excluding the $155 royalty gain and considering the unusually adverse 2014 Venezuela comparison?
  2. Whether currency conditions, cash-transfer restrictions or operating-control changes in Venezuela could trigger further losses or deconsolidation.
  3. Whether projected volume, raw-material savings and cost reductions can offset the expected currency headwind and pressure on price and product mix.
  4. Whether working-capital demands, debt maturities, credit availability and planned capital spending support liquidity through the year.
  5. Developments in the Amiens labor claims, asbestos and other contingencies, and the SRI arbitration.