Goodyear Tire & Rubber Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Goodyear manufactures tires and reports three regional segments: Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. Unless otherwise noted, amounts are in millions of U.S. dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $3,921 | $3,847 | $11,306 | $11,417 |
| Goodyear net income | $129 | $317 | $442 | $703 |
| Diluted EPS | $0.50 | $1.19 | $1.73 | $2.62 |
| Total segment operating income | $357 | $556 | $1,103 | $1,506 |
| Segment operating margin | 9.1% | 14.5% | 9.8% | 13.2% |
| Operating cash flow | Not stated for quarter | $(154) | $290 |
Q3 sales rose 1.9%, while Goodyear net income fell 59%. For the first nine months, sales declined 1.0% and net income declined 37%. Cost of goods sold was 78.3% of sales in Q3 versus 71.1% a year earlier, and 76.3% versus 72.3% for the nine-month periods.
Worldwide tire unit sales fell 5.2% in Q3 to 39.8 million and 6.3% for the nine months to 117.2 million. Price and product mix improved, but did not offset raw-material inflation and lower volumes. Q3 segment income fell $199 million: raw-material costs increased $268 million, exceeding the $131 million benefit from price and mix. Nine-month segment income fell $403 million, with raw-material costs up $446 million versus a $305 million price-and-mix benefit.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $822, down from $1,132 at December 31, 2016. Current assets were $6,727 and current liabilities $4,922.
- Balance-sheet debt and capital leases totaled approximately $6,391, including notes payable and current maturities, versus approximately $5,479 at year-end 2016. The filing reports $2,420 of unused credit availability, down from $2,970.
- Nine-month cash used in operations was $154, primarily reflecting a $1,056 working-capital use. Investing cash outflow was $675, including $683 in capital expenditures; financing cash inflow was $457, including $800 in net borrowings.
- Goodyear issued $700 of 4.875% senior notes due 2027 and redeemed $700 of 7% notes due 2022, paying a $25 redemption premium and recording $6 of deferred financing-fee expense. At quarter-end, 41% of debt carried variable interest rates, averaging 4.08%.
Material changes and notable items
- Raw-material costs, especially rubber and other commodity inputs, materially pressured margins. Lower tire volumes and higher conversion costs, including under-absorbed overhead, added to the decline.
- Price and product mix improved across regions. Lower selling, administrative and general expense (SAG), largely from reduced incentive compensation, and lower rationalization charges partly offset the operating pressures.
- Q3 results included $12 of hurricane-related expense; hurricanes Harvey and Irma reduced Americas segment operating income by about $5 and also weakened U.S. replacement-tire demand.
- Rationalization charges were $46 in Q3 and $102 for the nine months, compared with $135 and $194, respectively, in 2016. The Philippsburg, Germany plant closure is a significant ongoing restructuring action.
- Q3 2016 included $27 of asset-sale gains and a $118 favorable discrete tax adjustment; these comparisons contributed to the year-over-year decline in 2017 net income. Q3 2017 tax expense was $30, favorably affected by $12 of discrete adjustments.
- Goodyear said members of the United Steelworkers ratified a new five-year labor agreement, expiring in July 2022.
Outlook, risks and contingencies
- Management lowered its 2017 tire-volume expectation to approximately 5% below 2016 and forecast under-absorbed fixed overhead costs about $145 higher than in 2016. Cost savings were still expected to exceed general inflation.
- Based on current spot prices, full-year raw-material costs were expected to be approximately 20% higher than 2016, excluding cost-saving measures. Management expected those higher costs to exceed price-and-mix improvements by approximately $300; commodity-price volatility could materially change the estimate.
- Management expected 2017 capital expenditures of $800–$900, interest expense of $345–$355, restructuring payments of approximately $225, common dividends of approximately $110, and non-U.S. pension contributions of $50–$75. It expected working capital to use approximately $150 of cash and considered liquidity adequate for 2017 operating, investing and debt-maturity needs.
- Principal risks identified include competition and weak demand, raw-material and energy costs, substantial debt and variable-rate exposure, access to capital, labor and supply disruptions, currency movements, and natural disasters. Management reported compliance with applicable material debt covenants at quarter-end.
- Contingencies include approximately 61,200 pending asbestos claims; $177 of recorded gross asbestos liabilities and $121 of related insurance receivables. About 850 former Amiens employees asserted claims totaling €119 (approximately $140), for which Goodyear said it could not estimate any ultimate payment. Environmental liabilities were $52; workers’ compensation liabilities were $252, with approximately $30 of reasonably possible exposure above recorded amounts.
- The filing states that adopting the new lease-accounting standard is expected to materially affect the financial statements because of significant operating-lease commitments. Disclosure controls were reported effective at September 30, 2017.
Key investor verification points
- Track whether pricing, mix and cost savings can catch up with raw-material inflation, and whether tire volumes recover from the reported declines.
- Monitor cash conversion and working capital, capital spending, debt balances, credit availability and the refinancing of maturities.
- Reassess the $300 expected raw-material cost gap and the volume and fixed-overhead outlook as commodity prices and demand change.
- Review developments in asbestos insurance recoveries, Amiens labor litigation and other contingent liabilities.
- Check progress and cash costs of the Philippsburg closure and other rationalization plans, as well as the implementation impact of lease-accounting changes.