Goodyear Tire & Rubber Co. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited results; amounts in U.S. dollars unless stated otherwise.
Business context
Goodyear manufactures and sells tires globally through the Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific segments. Effective January 1, 2016, it combined its former North America and Latin America segments into the Americas segment; prior-period segment data was restated. Following the 2015 dissolution of its alliance with Sumitomo Rubber Industries, Goodyear now owns GDTE and NGY outright and no longer owns GDTNA or DGT. It also deconsolidated its Venezuelan subsidiary at year-end 2015, so Q1 2016 results exclude that subsidiary’s operating results.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $3.691 billion | $4.024 billion |
| Income before taxes | $267 million | $359 million |
| Net income attributable to Goodyear | $184 million | $224 million |
| Diluted EPS | $0.68 | $0.82 |
| Segment operating income | $419 million | $388 million |
| Segment operating margin | 11.4% | 9.6% |
| Operating cash flow | $(381) million | $(262) million |
| Capital expenditures | $253 million | $204 million |
Cost of goods sold was 73.2% of sales, versus 76.2% a year earlier; selling, administrative and general expense was 16.7% of sales, versus 15.1%. Net income margin was approximately 5.0%, compared with 5.6% in Q1 2015.
Cash and cash equivalents were $1.079 billion at March 31, down from $1.476 billion at year-end 2015. Unused credit availability was $1.988 billion, down from $2.676 billion. Operating cash use reflected a seasonal $611 million working-capital outflow. Total debt, including notes payable and current maturities, was approximately $6.1 billion, versus approximately $5.7 billion at December 31, 2015. Forty percent of debt carried variable rates, averaging 5.45%. Management said liquidity was adequate for 2016 needs and debt maturities.
Material changes and management commentary
- Sales declined 8.3%, affected by $141 million of unfavorable currency translation, $94 million from Venezuela’s deconsolidation, $82 million from lower price and product mix, and $52 million of lower sales in other tire-related businesses. Higher tire volume partly offset these factors. Worldwide tire unit sales rose 1.7% to 41.5 million.
- Segment operating income increased $31 million. Lower raw-material costs contributed $107 million and lower conversion costs $20 million, partly offset by $30 million of lower price and product mix, Venezuela’s $22 million contribution in the prior comparable results, higher SG&A, and unfavorable currency effects.
- Goodyear net income fell year over year in part because Q1 2015 included a one-time $155 million pretax gain from recognition of deferred royalty income related to the Veyance divestiture. Lower interest expense and improved segment operating income partly offset the difference.
- Segment results: Americas operating income was $260 million (up 4.8%) on sales of $1.951 billion; EMEA was $80 million (up 9.6%) on sales of $1.251 billion; Asia Pacific was $79 million (up 17.9%) on sales of $489 million.
Outlook, risks and unusual items
- For 2016, Goodyear continued to expect tire unit volume to increase approximately 3% from 164.8 million units in 2015, excluding Venezuela, and unabsorbed fixed overhead costs to benefit results by approximately $50 million. It expected cost savings to more than offset general inflation and currency translation to reduce segment operating income by approximately $45 million.
- Based on then-current spot prices, management expected full-year raw-material costs to be approximately 6% below 2015, including cost-saving measures, with the benefit more than offsetting price and mix declines. It cautioned that commodity-price volatility could materially change this estimate.
- Expected 2016 cash requirements included capital expenditures of $1.0–$1.1 billion, interest expense of $350–$375 million, common dividends of $75 million, non-U.S. pension contributions of $50–$75 million, and approximately $50 million of working-capital use.
- On April 7, 2016, the company amended its first-lien revolving facility, extending maturity to 2021 and reducing the spread by 25 basis points to LIBOR plus 125 basis points. The borrowing base was also expanded to include principal trademarks and up to $200 million of certain cash.
- Potential tax valuation-allowance releases could provide a one-time tax benefit of up to $275 million, subject to future profitability and forecasts. The filing says a sustained period of operating profitability is needed before releasing the allowance.
- Contingencies include approximately 65,800 pending asbestos claims; recorded asbestos liabilities of $169 million and related insurance receivables of $117 million. Approximately 800 former Amiens employees asserted claims totaling €112 million ($128 million); Goodyear said it could not estimate any eventual payment. The company also disclosed environmental, workers’ compensation, product-liability and tax matters.
- Key risks include raw-material and currency volatility, substantial debt and variable-rate exposure, credit availability and borrowing-base changes, economic weakness and political volatility in Brazil, international fund-transfer restrictions, litigation and other contingent liabilities. Management reported compliance with applicable material debt covenants at March 31.
Important facts for investors to verify
- Whether the expected raw-material savings, pricing and product mix, and 2016 volume assumptions are being realized.
- How working-capital seasonality, capital spending, borrowing and reduced credit availability affect cash and net debt through the year.
- Whether foreign operations achieve the profitability needed for any valuation-allowance release and potential tax benefit.
- Developments in asbestos, Amiens labor and other claims, including the adequacy and collectability of insurance recoveries.
- The effects of the SRI transaction, NGY consolidation and Venezuela deconsolidation on year-over-year comparability.