Business context and reporting period
Goodyear Tire & Rubber Company’s Form 10-K covers the fiscal year ended December 31, 2019; quarterly figures below highlight Q4. Goodyear manufactures and sells tires and related products and services through Americas, EMEA, and Asia Pacific. It reported 2019 net sales of $14.745 billion and employed approximately 63,000 people.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $14.745 billion | $15.475 billion |
| Goodyear net income (loss) | $(311) million; $(1.33) diluted EPS | $693 million; $2.89 diluted EPS |
| Segment operating income | $945 million | $1.274 billion |
| Segment operating margin | 6.4% | 8.2% |
| Cash from operating activities | $1.207 billion | $916 million |
| Capital expenditures | $770 million | $811 million |
Cost of goods sold was 78.7% of sales, versus 77.3% in 2018. The filing reports cash and cash equivalents of $908 million and unused availability under credit agreements of $3.578 billion at year-end. Debt and finance leases totaled approximately $5.7 billion, including $1.837 billion of variable-rate debt. Interest expense was $340 million, up from $321 million. Cash from operations less capital expenditures was approximately $437 million.
Q4 2019 net sales were $3.713 billion, compared with $3.876 billion in Q4 2018. Goodyear reported a Q4 attributable net loss of $392 million, or $1.68 per diluted share, versus net income of $110 million in the prior-year quarter.
Material changes versus the prior comparable period
- Full-year sales fell 4.7%; worldwide tire unit shipments declined 2.4% to 155.3 million. OE units fell 8.5%, while replacement units were nearly flat.
- Segment operating income declined 25.8%. Key pressures included higher raw-material costs ($185 million), lower volume ($81 million), unfavorable currency translation ($38 million), higher conversion costs ($36 million), and higher selling, administrative and general expense ($47 million). Price and product mix improvements of $120 million partly offset these impacts.
- Sales were reduced by $451 million from unfavorable foreign-currency translation and by $307 million from lower volume. Americas sales declined 3.0%, EMEA 7.5%, and Asia Pacific 4.6%.
- Operating cash flow increased by $291 million, supported by working-capital changes and lower rationalization payments, despite lower segment operating income.
- Rationalization charges rose to $205 million from $44 million, principally for German plant modernization and production curtailments and buyouts at Gadsden, Alabama. Management estimated the 2019 plans could improve annual segment operating income by about $140 million when completed.
Outlook, management commentary, risks and unusual items
Management expected challenging industry conditions in 2020, including lower global OE demand, foreign-currency headwinds, weak European consumer replacement demand, and emerging-market volatility. It forecast consumer OE tire volume down about 2.0 million units and European consumer replacement volume down by as much as 1.5 million units due to planned distribution changes. Raw-material costs were expected to be essentially flat year over year, excluding transactional currency effects and cost-saving measures.
For 2020, the company expected approximately $800 million of capital expenditures, $350–$375 million of interest expense, $125–$150 million of restructuring payments, $150 million of common dividends, and $50–$100 million of working capital cash use. Management stated that available cash and credit were adequate for expected 2020 operating and investing needs and debt maturities.
- Q4 included $380 million of net discrete tax charges after tax and minority interest. For the full year, tax expense was $474 million on pretax income of $177 million. A $2.1 billion accelerated royalty-income transaction resulted in a $334 million U.S. tax charge; a $150 million Luxembourg valuation-allowance increase also weighed on results. These tax items were largely non-cash, but their accounting and future tax-credit realization merit attention.
- The 2018 comparison benefited from a $272 million net gain on formation of TireHub; Goodyear recorded no comparable gain in 2019. Goodyear’s 50% share of TireHub losses increased to $33 million from $15 million.
- A Beaumont, Texas chemical-facility flood caused $25 million of expense in 2019. The company also recognized favorable indirect-tax settlements and asset-sale gains that partly offset other charges.
- Management noted that the coronavirus outbreak in China had temporarily closed businesses, including its Pulandian facility, but excluded possible effects from its outlook because they could not then be reasonably estimated.
- Major risks include competition, raw-material and energy-price volatility, foreign exchange, labor negotiations, tariffs, demand weakness, execution of strategic and European distribution changes, debt and covenant constraints, and tax, environmental, product-liability and asbestos matters.
At year-end, approximately 39,600 asbestos claims were pending; recorded gross asbestos liabilities were $153 million and related insurance receivables were $95 million. About 850 former Amiens employees asserted claims totaling $157 million; Goodyear said it could not estimate any eventual payment. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether underlying operating performance and regional margins stabilize, especially in EMEA and Asia Pacific, and whether price/mix and cost savings offset volume and material-cost pressure.
- The cash, refinancing, and covenant implications of 2020 maturities, including the $282 million 8.75% notes due in August 2020, and the availability of borrowing-base-dependent credit.
- Whether the expected rationalization savings are achieved and whether European distribution changes cause greater-than-forecast sales disruption.
- Whether Goodyear can realize its remaining foreign tax credits and whether tax assessments or valuation allowances create additional expense or cash demands.
- Potential outcomes and insurance recoverability for asbestos claims, Amiens labor claims, and other contingent liabilities; also monitor the effects of the China outbreak, which were not quantified in the filing’s outlook.