Goodyear Tire & Rubber Co. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited results; amounts are in U.S. dollars unless noted.
Business context and results
Goodyear manufactures and sells tires through four regional segments: North America, Europe, Middle East and Africa (EMEA), Latin America, and Asia Pacific. Management cited increasingly challenging global economic conditions. Third-quarter tire shipments fell 1.6% year over year, primarily due to lower North American replacement volume and weaker Latin American original-equipment demand.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $4,657 million | $5,002 million | $13,782 million | $14,749 million |
| Income before tax | $299 million | $249 million | $561 million | $555 million |
| Net income | $199 million | $195 million | $393 million | $419 million |
| Goodyear net income available to common shareholders | $161 million | $166 million | $316 million | $372 million |
| Diluted EPS | $0.58 | $0.62 | $1.15 | $1.43 |
| Total segment operating income | $520 million | $431 million | $1,353 million | $1,161 million |
| Segment operating margin | 11.2% | 8.6% | 9.8% | 7.9% |
Q3 cost of goods sold was 75.5% of sales, versus 78.9% a year earlier. Segment income improved mainly on lower raw-material costs, partly offset by lower price and product mix, currency effects, and lower volume. For the first nine months, consolidated net income fell despite higher segment operating income, reflecting tax and foreign-exchange charges, rationalization costs, pension charges, and higher interest expense.
Cash flow and liquidity: Nine-month operating cash flow was negative $939 million, versus negative $298 million in 2013; investing cash outflow was $605 million, and financing cash inflow was $563 million. Cash declined to $1,744 million from $2,996 million at year-end 2013, mainly reflecting $1,167 million of U.S. pension contributions, working-capital needs, and currency translation. Capital expenditures were $634 million. Unused credit availability was $1,982 million, down from $2,726 million at year-end 2013.
Debt: At September 30, long-term debt and capital leases totaled $6,817 million, with $98 million due within one year; notes payable and overdrafts were another $38 million. At December 31, 2013, long-term debt and capital leases totaled $6,235 million and notes payable and overdrafts were $14 million. Thirty-eight percent of debt carried variable rates, averaging 5.40%. Goodyear reported compliance with applicable material covenants.
Margins and segments: Q3 segment operating income increased in North America ($210 million versus $161 million), EMEA ($181 million versus $115 million), and Asia Pacific ($80 million versus $66 million), but declined in Latin America ($49 million versus $89 million). For the first nine months, EMEA had the largest improvement, while Latin America and Asia Pacific were below prior-year results.
Material changes and notable items
- Sales declined 6.9% in Q3 and 6.6% in the first nine months. Management attributed the declines to currency translation, lower price and product mix, and lower sales in other tire-related businesses; Q3 volume was also lower.
- Q3 segment operating income rose 20.6%, and nine-month segment operating income rose 16.5%, largely due to lower raw-material costs and reduced conversion costs.
- Other expense was $66 million in Q3 versus zero in 2013, and $242 million for nine months versus $112 million. Nine-month foreign-exchange losses included a $155 million Venezuelan bolivar remeasurement loss.
- Q3 tax expense included $47 million of discrete adjustments, including valuation allowances on Venezuelan and Brazilian deferred tax assets and a Chilean tax-law change. Management said a U.S. deferred-tax valuation allowance could potentially be released if sufficient positive evidence is established; such a release would create a tax benefit but not immediately reduce cash taxes.
- Goodyear contributed $1,167 million to fully fund its hourly U.S. pension plans; future accruals were frozen effective April 30, 2014. The company expected total 2014 contributions of approximately $1.3 billion.
- All mandatory convertible preferred shares converted into approximately 27.6 million common shares on April 1, 2014. Goodyear repurchased $97 million of common stock in the first nine months and paid $43 million in common dividends.
Outlook, risks and contingencies
- 2014 outlook: Tire unit volume expected flat to up 1% versus 2013. Cost savings were expected to exceed inflation and additional advertising, marketing, and R&D spending by $130–$150 million. Management expected a $50–$75 million favorable impact from changes in unabsorbed fixed costs, raw-material costs approximately 5% below 2013, and foreign-currency translation to reduce segment operating income by about $100 million.
- 2015 outlook: Tire unit volume expected up 1%–2% versus 2014; cost savings expected to exceed inflation. Raw-material costs expected to remain at current levels or decline slightly, with net raw-material costs and price/mix expected to be positive versus 2014. Currency translation was expected to remain a headwind.
- The Amiens, France facility closure and EMEA farm-tire exit were expected to generate approximately $75 million in annualized savings; management expected about $50 million of savings in 2014 and completion of the remaining farm-tire exit through Q1 2015.
- Venezuela presents significant currency, import-approval, cash-repatriation, production, and government price-control risks. At September 30, $272 million of cash was held there. A further 10% weakening of the SICAD I rate was estimated to reduce Venezuelan operating income by about $11 million annually, before offsets. Revaluation at the SICAD II rate would have generated an additional estimated $224 million loss.
- Goodyear recorded a $16 million charge related to a U.S. Foreign Corrupt Practices Act investigation concerning alleged improper payments in Kenya and Angola; the timing and final amount of any resolution remain uncertain.
- Other exposures include asbestos and product-liability matters, environmental remediation, workers’ compensation, a Brazilian indirect-tax assessment of approximately $38 million, and Greek labor claims. Approximately 73,900 asbestos claims were pending; the company noted that excess costs beyond reserves could be material but could not be reasonably estimated.
- Goodyear commenced arbitration seeking dissolution of its global alliance with Sumitomo Rubber Industries. A resolution or exercise of minority exit rights could require a payment to acquire SRI’s interests; the amount and outcome are uncertain.
- Management said liquidity was adequate for operating and investing needs and 2014 debt maturities. Planned 2014 capital expenditures were approximately $900 million; 2015 capital expenditures were expected to be approximately $1.2 billion.
Important facts for investors to verify
- Whether operating cash flow improves as pension contributions and working-capital requirements normalize, and how cash balances and unused credit availability evolve.
- Progress against 2014–2015 volume, cost-saving, currency, and EMEA restructuring expectations.
- Further developments in Venezuela’s exchange rates, import approvals, restricted cash, and pending settlements.
- Any U.S. deferred-tax valuation-allowance release, and the resulting effect on reported earnings versus cash taxes.
- Outcomes and potential cash costs of the FCPA investigation, SRI arbitration, asbestos claims, and other disclosed contingencies.
- Debt levels, interest costs, covenant headroom, pension obligations, and the pace of share repurchases and dividends.