Goodyear Tire & Rubber Co. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing; the supplied text also includes fourth-quarter results. Goodyear manufactures and sells tires and related products and services through Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific segments.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $15.158 billion | $16.443 billion |
| Net income | $1.284 billion | $376 million |
| Goodyear net income available to common shareholders | $1.264 billion | $307 million |
| Diluted earnings per share | $4.74 | $1.12 |
| Operating cash flow | $1.504 billion | $1.687 billion |
| Capital expenditures | $996 million | $983 million |
| Cash and cash equivalents, year-end | $1.132 billion | $1.476 billion |
| Debt and capital leases, year-end | $5.479 billion | $5.708 billion |
| Total shareholders’ equity, year-end | $4.725 billion | $4.142 billion |
Gross profit was $4.186 billion, or approximately 27.6% of sales, versus $4.279 billion, or approximately 26.0%, in 2015. Segment operating income was $1.985 billion (13.1% of segment sales), down from $2.020 billion (12.3%). Interest expense declined to $372 million from $438 million. The company reported a $77 million income tax benefit, compared with $232 million of tax expense in 2015. Year-end current assets were $5.718 billion and current liabilities were $4.817 billion. Unused availability under credit agreements was $2.970 billion.
Changes versus 2015
- Sales declined 7.8%, reflecting the Venezuelan deconsolidation, unfavorable currency translation, lower price and product mix, lower motorcycle tire-related sales after the Sumitomo alliance dissolution, and lower tire volume.
- Worldwide tire shipments were nearly flat at 166.1 million units. Replacement units rose 1.6%; OE units fell 3.7%.
- Segment operating income fell $35 million. Lower raw-material costs and selling, administrative and general expenses partly offset lost Venezuelan income, lower related-business income, unfavorable currency, lower volume, and a $24 million out-of-period expense adjustment.
- Reported net income rose substantially, but comparability is affected by the $646 million pretax Venezuelan deconsolidation loss in 2015 and significant 2016 tax benefits. The 2016 tax benefit included $458 million of net discrete tax adjustments, principally a $331 million release of valuation allowances and a $163 million benefit from changing certain U.S. foreign-tax elections.
- Americas sales and operating income fell to $8.172 billion and $1.151 billion, respectively. EMEA sales declined to $4.880 billion, while operating income improved to $461 million. Asia Pacific sales rose to $2.106 billion and operating income to $373 million, aided by NGY in Japan and growth in China and India.
- Cash from operations decreased $183 million. Cash declined by $344 million, with operating cash partly offsetting capital spending, share repurchases, debt repayments, and dividends.
Outlook, management commentary, and material items
- For 2017, management expected tire unit volume to increase approximately 1% and unabsorbed fixed overhead costs to be about $70 million higher. Cost savings were expected to exceed general inflation.
- At then-current spot rates, foreign currency translation was expected to reduce 2017 segment operating income by about $50 million. Management forecast raw-material costs approximately 27% higher than 2016, excluding cost-saving measures, with the increase expected to be offset by improved price and product mix; management cautioned that commodity volatility could materially change this estimate.
- Expected 2017 cash needs included about $1.0 billion of capital expenditures, $340–$365 million of interest expense, approximately $150 million of restructuring payments, $100 million of common dividends, $50–$75 million of non-U.S. pension contributions, and approximately $200 million of working-capital use. Management considered liquidity adequate for 2017 needs and debt maturities.
- The 2017–2020 capital allocation plan called for $1.8–$1.9 billion of growth capital expenditures, $800–$900 million of debt repayments, $700–$800 million of restructuring payments, and $3.5–$4.0 billion of dividends and repurchases, subject to performance.
- 2016 included $210 million of rationalization charges, primarily related to the planned Philippsburg, Germany plant closure and headcount reductions. Upon completion, the plans were expected to improve annual segment operating income by approximately $105 million.
- The company completed its Sumitomo Rubber Industries alliance dissolution in October 2015, acquiring full ownership of GDTE and NGY while disposing of GDTNA and certain other interests. Venezuela was deconsolidated effective December 31, 2015; 2016 results exclude its operations.
Risks, contingencies, and other investor considerations
- Key operating risks include global competition, uncertain tire demand, pressure on pricing and product mix, raw-material and energy volatility, currency movements, weakness in Brazil and U.S. commercial truck demand, and execution risk in strategic initiatives and capacity investments.
- Debt was approximately $5.5 billion including capital leases; $1.679 billion was variable-rate debt. Debt agreements impose restrictions, and revolver availability depends partly on a borrowing base. The company reported compliance with applicable material covenants at year-end.
- Liquidity relies partly on credit access, receivables factoring, supplier-financing programs, and cash held internationally. Approximately $735 million of foreign net assets, including $202 million of cash, was subject to transfer restrictions or limitations.
- Contingencies include asbestos litigation, with 64,400 pending claimants and a $171 million gross recorded asbestos liability; the company recorded a $123 million related insurance receivable. It cautioned that excess costs could be material but could not be reasonably estimated.
- Approximately 840 former Amiens, France employees asserted claims totaling €117 million ($123 million); Goodyear said it would defend the claims and could not estimate any ultimate payment. Environmental liabilities were $55 million, and workers’ compensation liabilities were $248 million.
- The U.S. Steelworkers master agreement covering approximately 6,800 employees was due to expire in July 2017; other non-U.S. union contracts covering approximately 16,000 employees had expired or were due to expire in 2017.
- Management and the independent auditor concluded internal control over financial reporting was effective as of December 31, 2016. The auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- How much of 2016 earnings growth reflects recurring operations versus discrete tax benefits and the prior-year Venezuela charge.
- Whether higher 2017 raw-material costs are offset by pricing, product mix, and cost savings as forecast.
- Progress on restructuring savings, the Philippsburg closure, capacity additions, and the stated growth and capital-allocation plans.
- Cash conversion, working-capital requirements, use of receivables factoring and supplier financing, and availability under borrowing-base facilities.
- Debt repayment capacity, variable-rate exposure, covenant headroom, and ability to sustain planned dividends and repurchases.
- Developments in asbestos insurance recoveries, Amiens labor claims, environmental matters, and expiring labor agreements.