GOODYEAR TIRE & RUBBER CO quarterly report, Q3 FY2019

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Goodyear Tire & Rubber Co. — Q3 2019 Form 10-Q

Reporting period: Three and nine months ended September 30, 2019; comparisons are to the same 2018 periods. Amounts are in U.S. dollars unless stated otherwise. The filing is unaudited.

Business context and performance

Goodyear operates tire businesses across the Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. Management described mixed conditions: China and Brazil improved, raw-material cost pressures moderated, and U.S. consumer replacement demand remained strong, while global vehicle production was weak, European demand weakened, and the U.S. dollar remained strong.

  • Q3 revenue: $3.802 billion, down 3.2% from $3.928 billion. The decline reflected currency translation, lower sales of other tire-related products (particularly third-party chemical sales), and lower EMEA tire volume; price and product mix partly offset the decreases.
  • Q3 earnings: Goodyear net income was $88 million, or $0.38 per diluted share, versus $351 million, or $1.48, a year earlier. The comparison was heavily affected by the $287 million net TireHub transaction gain recorded in Q3 2018; segment operating income also declined.
  • Q3 segment results: Total segment operating income was $294 million versus $362 million; segment operating margin was 7.7% versus 9.2%. Americas operating income was $175 million (down 9.8%), EMEA $66 million (down 40.5%), and Asia Pacific $53 million (down 7.0%).
  • First nine months: Revenue was $11.032 billion, down 4.9%; Goodyear net income was $81 million, or $0.35 per diluted share, versus $583 million, or $2.42. Segment operating income fell to $703 million from $967 million, and segment margin declined to 6.4% from 8.3%.

Financial position, cash flow and liquidity

  • Cash and liquidity: Cash and cash equivalents were $868 million at September 30, up from $801 million at year-end 2018. Unused availability under credit agreements was $2.521 billion, down from $3.151 billion. Cash, cash equivalents and restricted cash totaled $926 million.
  • Cash flow, nine months: Operating activities used $139 million, compared with $24 million used in 2018. Working capital used $1.061 billion. Investing activities used $584 million, including $561 million of capital expenditures; financing activities provided $789 million, principally reflecting $950 million of net borrowings.
  • Debt: Notes payable and overdrafts were $486 million; long-term debt and finance leases due within one year were $610 million; and long-term debt and finance leases were $5.580 billion. These balance-sheet categories total approximately $6.676 billion, including finance leases. Management reported that 42% of debt was variable-rate, averaging 4.18%.
  • Liquidity assessment: Management said liquidity was adequate to fund operating and investing needs and debt maturities for the next 12 months. The company was in compliance with applicable material covenants at quarter-end.
  • Shareholder returns: Goodyear paid $111 million of common dividends during the first nine months and made no common-stock repurchases. A $0.16-per-share dividend was declared after quarter-end; future dividends remain subject to Board approval.

Material changes and drivers

  • Q3 worldwide tire unit shipments declined 0.7%; nine-month shipments fell 2.4%. OE volume was down 5.2% in Q3 and 8.0% year to date, primarily reflecting lower vehicle production. Q3 replacement volume increased 0.8%.
  • For the first nine months, management cited higher raw-material costs ($187 million), lower tire volume, lower other tire-related income, unfavorable currency translation, and the prior-year Brazil indirect-tax settlement as pressures on segment operating income. Price and product-mix improvements of $84 million and lower Mexico plant start-up costs partly offset them.
  • Rationalization charges rose to $128 million for the first nine months from $40 million. The company accrued $96 million for German plant modernization, expected to involve approximately 1,100 job reductions, and $6 million for a Gadsden, Alabama voluntary buyout plan whose total cost was not yet estimable.
  • Adoption of the new lease accounting standard added $828 million of operating-lease right-of-use assets and $839 million of operating-lease liabilities at September 30. Adoption reduced retained earnings by $23 million; management said it did not materially affect earnings or cash flows.

Outlook, commentary and risks

  • For full-year 2019, Goodyear expected raw-material costs to be approximately $270 million higher than in 2018, before raw-material savings. Management noted that commodity prices are volatile.
  • Management expected benefits from the ramp-up of its new Americas manufacturing facility and TireHub, prior pricing actions, strong sales of consumer replacement tires sized 17 inches and above, and continuing cost savings. Q3 cost savings were approximately $40 million, including about $21 million from raw-material cost actions.
  • Full-year cash needs were forecast to include capital expenditures of $800–$825 million, interest expense of approximately $350 million, restructuring payments of approximately $65 million, common dividends of approximately $150 million, and non-U.S. pension contributions of $25–$50 million. Working capital was expected to use less than $100 million for the year.
  • Key exposures include weak vehicle production and European demand, foreign exchange, raw-material and energy prices, interest rates, customer or labor disruptions, substantial debt, and the availability of financing. Goodyear does not currently hedge commodity prices; 42% of debt was variable-rate.
  • Contingencies include approximately 39,900 pending asbestos claims; gross recorded asbestos liabilities of $161 million and related insurance receivables of $103 million. The company said excess asbestos losses are reasonably possible but cannot be reasonably estimated. Approximately 850 former Amiens employees asserted claims totaling about €120 million ($131 million); Goodyear said it could not estimate any ultimate payment. Environmental liabilities were $49 million, and workers’ compensation liabilities were $220 million; the latter could reasonably exceed recorded amounts by approximately $30 million.
  • Goodyear recorded $5 million of Q3 expense related to flooding at its Beaumont, Texas chemical facility. Management also cautioned that adverse legal, tax, insurance, or environmental outcomes could materially affect results in the period incurred.

Important facts for investors to verify

  • Whether operating cash flow and working capital improve from the substantial cash use reported through September, and whether the full-year working-capital forecast is achieved.
  • Whether pricing, product mix, cost savings, and plant ramp-ups can offset raw-material inflation and continuing volume or currency pressures.
  • Progress and cash costs of the German and Gadsden restructuring plans, including the final cost and timing of the Gadsden buyouts.
  • Debt maturities, variable-rate exposure, borrowing-base availability, and continued covenant compliance as liquidity availability has declined.
  • Developments in asbestos insurance recoveries and the Amiens labor claims, including any changes to recorded reserves or management’s assessments.
  • Whether forecast capital expenditures and other 2019 cash requirements remain consistent with management’s outlook.