Goodyear Tire & Rubber Company — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing. Goodyear manufactures and sells tires and related products and services through Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific; it operated 48 manufacturing facilities in 22 countries.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Net sales | $15.377 billion | $15.158 billion | Up 1.4%; price/mix and currency gains more than offset lower unit volume. |
| Net income attributable to Goodyear | $346 million | $1.264 billion | Diluted EPS fell to $1.37 from $4.74. Consolidated net income was $365 million in 2017. |
| Gross profit | $3.658 billion | $4.186 billion | Gross margin was approximately 23.8%, versus 27.6%. |
| Segment operating income | $1.522 billion | $1.985 billion | Down 23.3%; segment margin declined to 9.9% from 13.1%. |
| Cash from operations | $1.158 billion | $1.557 billion | Down $399 million, primarily reflecting lower segment operating income. |
| Capital expenditures | $881 million | $996 million | Focused on manufacturing construction, expansion and modernization. |
| Cash and cash equivalents | $1.043 billion | $1.132 billion | Year-end balance; includes $3.196 billion of unused credit availability. |
| Debt and capital leases | $5.729 billion | $5.479 billion | Includes current and long-term debt, leases, and notes payable/overdrafts. |
Year-end current assets were $6.079 billion and current liabilities were $5.025 billion. Total shareholders’ equity was $4.850 billion. The company repurchased $400 million of shares and paid $110 million in common dividends during 2017.
Material changes versus 2016
- Worldwide tire shipments declined 4.2% to 159.2 million units. Replacement units fell 3.3% and OE units fell 6.4%, with weakness concentrated in Americas and EMEA.
- Price and product mix added $521 million to sales, while lower tire volume reduced sales by $569 million. Favorable currency translation added $178 million.
- Raw material costs rose approximately 16%; the $618 million cost impact more than offset higher pricing and mix. Cost of goods sold rose to 76.2% of sales from 72.4%.
- Segment operating income declined in all three regions: Americas to $825 million from $1.151 billion; EMEA to $355 million from $461 million; and Asia Pacific to $342 million from $373 million.
- Income tax expense was $513 million, versus a $77 million tax benefit in 2016. The 2017 result included a $299 million non-cash net charge related to U.S. tax reform; 2016 included substantial discrete tax benefits.
- Fourth-quarter 2017 Goodyear-attributable net loss was $96 million, including $315 million of discrete tax charges, primarily related to U.S. tax law changes.
Outlook, risks and unusual items
- For 2018, management expected tire unit volume to increase approximately 3%, cost savings to exceed general inflation by about $130 million, and unabsorbed fixed overhead costs to be approximately $60 million lower. Based on then-current spot prices, raw material costs were expected to be roughly flat year over year before savings.
- Management expected 2018 cash capital expenditures of approximately $1.0 billion, interest expense of $335–$360 million, restructuring payments of approximately $200 million, and working capital to use approximately $100 million of cash. Its 2018–2020 capital allocation plan provided for $400–$600 million of debt repayments and $1.5–$2.0 billion of dividends and repurchases, subject to performance.
- Management said it did not expect U.S. cash tax payments through 2025, citing tax attributes and tax reform. Tax Act accounting and related estimates were not yet complete at filing.
- Key risks include volatile raw material and energy costs, intense competition, weak demand, foreign exchange and political risks, labor negotiations, substantial debt and secured borrowing constraints, and reliance on financing and receivables programs. Variable-rate debt was approximately $1.963 billion.
- Contingencies include asbestos litigation (54,300 pending claimants; $167 million gross recorded liability and $113 million insurance receivable) and Amiens, France labor claims totaling €118 million ($142 million), for which the company said it could not estimate any eventual payment. The company also recorded $316 million for product liability and other tort claims and $46 million for environmental matters.
- Unusual 2017 items included $135 million of rationalization charges, $40 million of accelerated depreciation and asset write-offs, $14 million of hurricane-related expense, and debt-redemption costs. The Philippsburg, Germany plant closure and restructuring actions are expected to generate savings, but require execution and cash outlays.
Most important facts for investors to verify
- Whether tire volumes and segment margins recover, particularly in Americas and EMEA, and whether pricing and mix can keep pace with raw material inflation.
- Whether 2018 volume, cost-savings, raw-material, cash-flow and capital-spending expectations are achieved.
- The final impact of U.S. tax reform, realization of deferred tax assets, and management’s expectation of no U.S. cash taxes through 2025.
- Debt maturities, borrowing-base availability, covenant compliance, and continued access to supplier financing and receivables programs.
- Developments in asbestos claims and insurance recoveries, Amiens labor litigation, and other contingent liabilities.
- Whether planned restructuring and investments deliver projected savings while supporting dividends, repurchases and debt reduction.