ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
All per share amounts are diluted and refer to Goodyear net income (loss).
OVERVIEW
The Goodyear Tire & Rubber Company is one of the world’s leading manufacturers of tires, with one of the most recognizable brand names in the world and operations in most regions of the world. We have a broad global footprint with
48
manufacturing facilities in
22
countries, including the United States. We operate our business through three operating segments representing our regional tire businesses: Americas; Europe, Middle East and Africa (“EMEA”); and Asia Pacific.
During the third quarter of 2018, we formed a 50/50 joint venture with Bridgestone Americas, Inc. (“Bridgestone”) that combined our company-owned wholesale distribution business and Bridgestone’s tire wholesale warehouse business to create TireHub, LLC (“TireHub”), a national tire distributor in the United States. TireHub will provide U.S. tire dealers and retailers with a comprehensive range of passenger and light truck tires from two of the world’s leading tire companies, with an emphasis on satisfying the rapidly growing demand for larger rim diameter premium tires. The transaction closed on July 1, 2018, and TireHub became our sole authorized national tire distributor in the United States.
In connection with the ramp-up of TireHub’s operations, the Company plans to transition volume representing approximately 10 million units of annual sales to TireHub and other aligned distributors to maximize our geographic reach and customer service capabilities. TireHub has distribution and warehouse locations throughout the United States and is expected to have the scale to reach the vast majority of retail locations in the U.S. daily. TireHub is also expected to provide a superior, fully integrated distribution, warehousing, sales and delivery solution that is expected to provide enhanced fill rates and turnaround times — enabling dealers to quickly access the products they need and manage the growing complexity in the tire business driven by SKU proliferation.
Results of Operations
In the third quarter of 2018, we continued to experience strong demand for our products, particularly with respect to consumer replacement tires in the United States and Europe where we continued to grow share in the important 17-inch and larger segment of the market. However, challenging macro-economic industry conditions have persisted, including rising raw material costs, a stronger U.S. dollar, deteriorating market conditions in China, and growing economic volatility in Latin America, particularly in Brazil.
Our third quarter of 2018 results reflect a 1.9% increase in tire unit shipments compared to the third quarter of 2017. In the third quarter of 2018, we realized approximately $69 million of cost savings, including raw material cost saving measures of approximately $24 million, which exceeded the impact of general inflation.
Net sales in the
third
quarter of
2018
were
$3,928 million
, compared to
$3,921 million
in the
third
quarter of
2017
. Net sales increased in the
third
quarter of 2018 due primarily to higher tire unit volumes, improvements in price and product mix and higher sales in other tire-related businesses, primarily in Americas due to an increase in third-party sales of chemical products. These increases were partially offset by unfavorable foreign currency translation, primarily in EMEA and Americas.
In the
third
quarter of
2018
, Goodyear net income was
$351 million
, or
$1.48
per share, compared to $
129 million
, or
$0.50
per share, in the
third
quarter of
2017
. The increase in Goodyear net income was primarily driven by a gain, net of transaction costs, of $287 million recognized on the TireHub transaction, and lower rationalization charges. These increases in net income were partially offset by higher income taxes.
Our total segment operating income for the
third
quarter of
2018
was
$362 million
, compared to
$367 million
in the
third
quarter of 2017. The $5 million decrease in segment operating income was primarily due to higher selling, administrative and general expense ("SAG"), foreign currency translation and unfavorable price mix, which more than offset the benefits of lower raw material costs and increased volume. Refer to "Results of Operations — Segment Information” for additional information.
Net sales in the first
nine months
of
2018
were
$11,599 million
, compared to
$11,306 million
in the first
nine months
of
2017
. Net sales increased in the first
nine months
of 2018 due primarily to improvements in price and product mix, higher tire unit volumes and favorable foreign currency translation.
In the first
nine months
of
2018
, Goodyear net income was
$583 million
, or
$2.42
per share, compared to
$442 million
, or
$1.73
per share, in the first
nine months
of
2017
. The increase in Goodyear net income was primarily driven by the gain recognized on the TireHub transaction and lower rationalization charges, which were partially offset by lower segment operating income and higher income taxes.
Our total segment operating income for the first
nine months
of
2018
was
$967 million
, compared to
$1,126 million
in the first
nine months
of
2017
. The $159 million decrease in segment operating income was due primarily to higher raw material costs and
decreases in price and product mix, primarily in Americas, partially offset by net cost savings and higher volume. Refer to "Results of Operations — Segment Information” for additional information.
At
September 30, 2018
, we had
$896 million
of Cash and cash equivalents as well as
$2,132 million
of unused availability under our various credit agreements, compared to $1,043 million and $3,196 million, respectively, at
December 31, 2017
. Cash and cash equivalents decreased by
$147 million
from
December 31, 2017
due primarily to cash used for working capital of $826 million, capital expenditures of $615 million, common stock repurchases and dividends of $300 million, rationalization payments of $151 million and pension contributions and direct payments of $56 million. These uses of cash were partially offset by net borrowings of $903 million and net income of $598 million, which includes non-cash charges of $589 million for depreciation and amortization and non-cash gains of $273 million related to the TireHub transaction. Refer to "Liquidity and Capital Resources" for additional information.
Outlook
We now expect that our full-year tire unit volume for 2018 will be up approximately 1% compared to 2017 and for overhead absorption to be approximately $30 million better in 2018 compared to 2017, both of which were reduced from our prior outlook to reflect deteriorating market conditions in China and Brazil. We now expect cost savings to more than offset general inflation in 2018 by approximately $105 million. Based on current spot rates, we expect foreign currency translation to negatively affect segment operating income by approximately $30 million in 2018 compared to 2017.
Based on current raw material spot prices, for the full year of 2018, we expect our raw material costs will be up approximately $270 million compared to 2017, excluding raw material cost saving measures, and we now expect price and product mix to provide a benefit of approximately $45 million. Natural and synthetic rubber prices and other commodity prices historically have experienced significant volatility, and this estimate could change significantly based on fluctuations in the cost of these and other key raw materials. We are continuing to focus on price and product mix, to substitute lower cost materials where possible, to work to identify additional substitution opportunities, to reduce the amount of material required in each tire, and to pursue alternative raw materials.
Refer to “Forward-Looking Information — Safe Harbor Statement” for a discussion of our use of forward-looking statements in this Form 10-Q.
RESULTS OF OPERATIONS
CONSOLIDATED
Three Months Ended
September 30, 2018
and 2017
Net sales in the
third
quarter of 2018 were
$3,928 million
, increasing
$7 million
, or
0.2%
, from
$3,921 million
in the
third
quarter of 2017. Goodyear net income was
$351 million
, or
$1.48
per share, in the
third
quarter of 2018, compared to
$129 million
, or
$0.50
per share, in the
third
quarter of 2017.
Net sales increased in the
third
quarter of 2018, due primarily to higher tire unit volume of $72 million, primarily in Americas, increases in price and product mix of $53 million and higher sales in other tire-related businesses of $32 million, primarily due to an increase in third-party sales of chemical products in Americas. These increases were substantially offset by unfavorable foreign currency translation of $149 million, primarily in EMEA and Americas.
Worldwide tire unit sales in the
third
quarter of 2018 were
40.5 million
units, increasing
0.7 million
units, or
1.9%
, from
39.8 million
units in the
third
quarter of 2017. Replacement tire volume increased
1.1 million
units, or
4.1%
, primarily in Americas and EMEA. OE tire volume decreased
0.4 million
units, or
4.0%
, primarily in Asia Pacific.
Cost of goods sold (“CGS”) in the
third
quarter of 2018 was
$3,028 million
, decreasing
$26 million
, or
0.9%
, from
$3,054 million
in the
third
quarter of 2017. CGS decreased due to foreign currency translation of $111 million, primarily in EMEA and Americas, lower raw material costs of $22 million, a favorable indirect tax settlement in Brazil of $21 million, of which $19 million ($15 million after-tax and minority) is related to prior years, and lower conversion costs of $4 million. These decreases were partially offset by higher costs related to product mix of $63 million, higher tire unit volume of $57 million, primarily in Americas, and higher costs in other tire-related businesses of $34 million, driven by third-party chemical sales in Americas.
CGS in the
third
quarter of 2018 and 2017 included pension expense of $4 million for each period. CGS in the
third
quarter of 2018 included no accelerated depreciation or asset write-offs compared to $10 million ($7 million after-tax and minority) in the
third
quarter of 2017, primarily related to the closure of our manufacturing facility in Philippsburg, Germany. CGS in the
third
quarter of 2018 and 2017 also included incremental savings from rationalization plans of $9 million and $14 million, respectively. CGS was
77.1%
of sales in the
third
quarter of 2018 compared to
77.9%
in the
third
quarter of 2017.
SAG in the
third
quarter of 2018 was
$553 million
, increasing
$8 million
, or
1.5%
, from
$545 million
in the
third
quarter of 2017. SAG increased primarily due to higher administrative costs, driven by inflation, higher bad debt expense, primarily in Americas and Asia Pacific, and higher advertising costs. These increases were partially offset by foreign currency translation of $20 million.
SAG in the
third
quarter of 2018 included pension expense of $4 million, compared to $5 million in 2017. SAG in the
third
quarter of 2018 and 2017 also included incremental savings from rationalization plans of $9 million and $11 million, respectively. SAG was
14.1%
of sales in the
third
quarter of 2018, compared to
13.9%
in the
third
quarter of 2017.
We recorded net rationalization charges of
$5 million
($4 million after-tax and minority) in the
third
quarter of 2018 and
$46 million
($31 million after-tax and minority) in the
third
quarter of 2017. Rationalization charges recorded in the third quarter of 2018 primarily related to prior year plans to close our tire manufacturing facility in Philippsburg, Germany and to reduce manufacturing headcount in EMEA. In the
third
quarter of 2017, we recorded charges of $26 million for rationalization actions initiated during 2017, which primarily related to a global plan to reduce SAG headcount. We also recorded charges of $20 million related to prior year plans, primarily related to the closure of our tire manufacturing facility in Philippsburg, Germany and a separate global plan to reduce SAG headcount.
Interest expense in the
third
quarter of 2018 was
$82 million
, decreasing
$2 million
, or
2.4%
, from
$84 million
in the
third
quarter of 2017. The decrease was due to a lower average interest rate of 5.10% in the
third
quarter of 2018 compared to 5.39% in the
third
quarter of 2017, partially offset by a higher average debt balance of $6,434 million in the
third
quarter of 2018 compared to $6,234 million in the
third
quarter of 2017.
Other (Income) Expense in the
third
quarter of 2018 was
$253 million
of income, compared to
$30 million
of expense in the
third
quarter of 2017. Other (Income) Expense in the
third
quarter of 2018 included a net gain of $287 million ($219 million after-tax and minority) on the TireHub transaction, pension settlement charges of $10 million ($8 million after-tax and minority), charges of $4 million ($3 million after-tax and minority) for legal claims related to discontinued operations, $3 million ($2 million after-tax and minority) for interest income related to the favorable indirect tax settlement in Brazil, and $2 million ($2 million after-tax and minority) for continuing repair expenses related to Hurricanes Harvey and Irma. Other (Income) Expense in the
third
quarter of 2017 included pension settlement charges of $13 million ($8 million after-tax and minority), $12 million ($11 million after-tax and minority) for hurricane related expenses, and a benefit of $5 million ($3 million after-tax and minority) related to the recovery of past costs from certain asbestos insurers.
For the
third
quarter of
2018
, we recorded tax expense of
$159 million
on income before income taxes of
$513 million
. Income tax expense for the three months ended
September 30, 2018
includes discrete charges of
$31 million
($31 million after minority interest).
The Tax Cuts and Jobs Act (the "Tax Act") enacted on December 22, 2017 in the United States included a one-time tax on certain previously untaxed accumulated earnings and profits of foreign subsidiaries (the "transition tax"). During the second quarter of 2018, we received dividends, primarily from subsidiaries in Japan and Singapore, and recorded a
$25 million
discrete tax benefit to claim foreign tax credits for taxes that were not creditable for purposes of the transition tax obligation. On August 1, 2018, the Department of Treasury and the Internal Revenue Service released a proposed regulation regarding the transition tax. The proposed regulation provides that income taxes on income subject to the transition tax that are not creditable for purposes of the transition tax obligation, will not be a creditable foreign tax. As a result, we have recorded a third quarter discrete charge of
$25 million
primarily to reverse the tax benefit recorded in the second quarter. The proposed regulation also would require accumulated deficits of foreign subsidiaries to be excluded for purposes of calculating taxes creditable against the transition tax. As such, we recorded a third quarter charge of
$11 million
to adjust our transition tax obligation based upon that proposed regulation. Discrete charges for the three months ended September 30, 2018 also include a net benefit of
$5 million
for various other tax adjustments.
In the
third
quarter of 2017, we recorded tax expense of
$30 million
on income before income taxes of
$162 million
. Income tax expense for the three months ended
September 30, 2017
was favorably impacted by
$12 million
($12 million after minority interest) of various discrete tax adjustments. For further information, refer to Note to the Consolidated Financial Statements No. 5, Income Taxes, in this Form 10-Q.
Minority shareholders’ net income in the
third
quarter of 2018 and 2017 was
$3 million
for both periods.
Nine Months Ended
September 30, 2018
and 2017
Net sales in the first
nine months
of
2018
were
$11,599 million
, increasing
$293 million
, or
2.6%
, from
$11,306 million
in the first
nine months
of
2017
. Goodyear net income was
$583 million
, or
$2.42
per share, in the first
nine months
of
2018
, compared to
$442 million
, or
$1.73
per share, in the first
nine months
of
2017
.
Net sales increased in the first
nine months
of
2018
, due primarily to improvements in price and product mix of $143 million, higher tire unit volume of $119 million, primarily in EMEA and Americas, and favorable foreign currency translation of $27 million.
Worldwide tire unit sales in the first
nine months
of
2018
were
118.5 million
units, increasing
1.3 million
units, or
1.1%
, from
117.2 million
units in the first
nine months
of
2017
. Replacement tire volume increased
1.8 million
units, or
2.2%
, primarily in EMEA and Americas. OE tire volume decreased
0.5 million
units, or
1.5%
, in EMEA and Americas, offset by an increase in Asia Pacific.
CGS in the first
nine months
of
2018
was
$8,953 million
, increasing
$354 million
, or
4.1%
, from
$8,599 million
in the first
nine months
of
2017
. CGS increased due to higher costs related to product mix of $199 million, higher tire unit volume of $89 million, higher raw material costs of $85 million, higher costs in other tire-related businesses of $25 million, driven by third-party chemical sales in Americas, and foreign currency translation of $21 million. These increases were partially offset by lower conversion costs of $21 million, driven by cost savings initiatives primarily in EMEA and Asia Pacific, and the favorable indirect tax settlement in Brazil of $21 million, of which $19 million ($15 million after-tax and minority) is related to prior years.
CGS in the first
nine months
of
2018
included pension expense of $11 million, compared to $12 million in 2017. CGS in the first
nine months
of
2018
and 2017 also included accelerated depreciation of $2 million ($1 million after-tax and minority) and $39 million ($28 million after-tax and minority), respectively, primarily related to the closure of our manufacturing facility in Philippsburg, Germany. CGS in the first
nine months
of
2018
and
2017
also included incremental savings from rationalization plans of $39 million and $27 million, respectively. CGS was
77.2%
of sales in the first
nine months
of
2018
compared to
76.1%
in the first
nine months
of
2017
.
SAG in the first
nine months
of
2018
was
$1,732 million
, increasing
$32 million
, or
1.9%
, from
$1,700 million
in the first
nine months
of
2017
. SAG increased primarily due to higher administrative costs, driven by inflation, foreign currency translation of $13 million, primarily in EMEA, and increases in advertising costs of $11 million. These increases were partially offset by lower wages and benefits of $43 million, primarily related to lower incentive compensation.
SAG in the first
nine months
of
2018
included pension expense of $13 million, compared to $14 million in 2017. SAG in the first
nine months
of
2018
and
2017
also included incremental savings from rationalization plans of $27 million and $29 million, respectively. SAG was
14.9%
of sales in the first
nine months
of
2018
, compared to
15.0%
in the first
nine months
of
2017
.
We recorded net rationalization charges of
$40 million
($29 million after-tax and minority) in the first
nine months
of
2018
and
$102 million
($71 million after-tax and minority) in the first
nine months
of
2017
. In the first
nine months
of
2018
, we recorded charges of $33 million for rationalization actions initiated during 2018, which primarily related to a global plan to reduce SAG headcount and a plan to improve operating efficiency in EMEA. We also recorded net charges of $7 million related to prior year plans, primarily related to the closure of our tire manufacturing facility in Philippsburg, Germany. In the first
nine months
of
2017
, we recorded charges of $52 million for rationalization actions initiated during 2017, which primarily related to a global plan to reduce SAG headcount and plans to improve operating efficiency and reduce SAG headcount in EMEA. We also recorded net charges of $50 million related to prior year plans, primarily related to the closure of our tire manufacturing facility in Philippsburg, Germany, a separate global plan to reduce SAG headcount and a plan to reduce manufacturing headcount in EMEA.
Interest expense in the first
nine months
of
2018
was
$236 million
, decreasing
$24 million
, or
9.2%
, from
$260 million
in the first
nine months
of
2017
. The decrease was due to a lower average interest rate of 5.04% in the first
nine months
of 2018 compared to 5.80% in the first
nine months
of 2017, partially offset by a higher average debt balance of $6,244 million in the first
nine months
of
2018
compared to $5,981 million in the first
nine months
of
2017
. In addition, interest expense for the nine months ended September 30, 2017 included charges of $6 million ($4 million after-tax and minority) related to the write-off of deferred financing fees.
Other (Income) Expense in the first
nine months
of
2018
was
$171 million
of income, compared to
$54 million
of expense in the first
nine months
of
2017
. Other (Income) Expense in the first
nine months
of 2018 included a net gain of $273 million ($208 million after-tax and minority) on the TireHub transaction, pension settlement charges of $13 million ($10 million after-tax and minority), charges of $12 million ($12 million after-tax and minority) for hurricane related expenses, $9 million ($7 million after-tax and minority) related to a one-time expense from the adoption of the new accounting standards update which no longer allows non-service related pension and other postretirement benefits cost to be capitalized in inventory, charges of $4 million ($3 million after-tax and minority) for legal claims related to discontinued operations, a benefit of $3 million ($2 million after-tax and minority) related to the recovery of past costs from one of our asbestos insurers, and $3 million ($2 million after-tax and minority) for interest income related to the favorable indirect tax settlement in Brazil. Other (Income) Expense in the first
nine months
of 2017 included charges of $25 million ($15 million after-tax and minority) for the premium paid in conjunction with the redemption of our $700 million 7% senior notes due 2022, $14 million ($12 million after-tax and minority) in net gains on asset sales, including a gain on the sale of a former wire plant site in Luxembourg, pension settlement charges of $13 million ($8 million after-tax and minority), $12 million ($11 million after-tax and minority) for hurricane related expenses, and a benefit of $5 million ($3 million after-tax and minority) related to the recovery of past costs from certain asbestos insurers.
In the first
nine months
of
2018
, we recorded income tax expense of
$211 million
on income before income taxes of
$809 million
. Income tax expense for the
nine months
ended
September 30, 2018
includes a net discrete charge of
$10 million
($10 million after minority interest). Discrete charges for the nine months ended September 30, 2018 include a net tax charge of
$14 million
to adjust
our provisional transition tax obligation for guidance provided during 2018 and a net benefit of
$4 million
for various other tax adjustments.
In the first
nine months
of
2017
, we recorded income tax expense of
$136 million
on income before income taxes of
$591 million
. Income tax expense in the first nine months of 2017 was favorably impacted by $23 million ($23 million after minority interest) of various discrete tax adjustments. For further information, refer to Note to the Consolidated Financial Statements No. 5, Income Taxes, in this Form 10-Q.
For the nine months ending September 30, 2018, changes to our unrecognized tax benefits did not, and for the full year of 2018 are not expected to, have a significant impact on our financial position or results of operations.
Minority shareholders’ net income in the first
nine months
of
2018
was
$15 million
, compared to
$13 million
in
2017
.
SEGMENT INFORMATION
Segment information reflects our strategic business units (“SBUs”), which are organized to meet customer requirements and global competition and are segmented on a regional basis.
Results of operations are measured based on net sales to unaffiliated customers and segment operating income. Each segment exports tires to other segments. The financial results of each segment exclude sales of tires exported to other segments, but include operating income derived from such transactions. Segment operating income is computed as follows: Net Sales less CGS (excluding asset write-off and accelerated depreciation charges) and SAG (including certain allocated corporate administrative expenses). Segment operating income also includes certain royalties and equity in earnings of most affiliates. Segment operating income does not include net rationalization charges (credits), asset sales and certain other items, including non-service related pension and other postretirement benefit costs and pension curtailments and settlements.
Management believes that total segment operating income is useful because it represents the aggregate value of income created by our SBUs and excludes items not directly related to the SBUs for performance evaluation purposes. Total segment operating income is the sum of the individual SBUs’ segment operating income. Refer to Note to the Consolidated Financial Statements No. 7, Business Segments, in this Form 10-Q for further information and for a reconciliation of total segment operating income to Income before Income Taxes.
Total segment operating income in the
third
quarter of
2018
was
$362 million
, decreasing $5 million, or 1.4%, from $
367 million
in the
third
quarter of 2017. Total segment operating margin (segment operating income divided by segment sales) in the
third
quarter of 2018 was
9.2%
, compared to
9.4%
in the
third
quarter of 2017. Total segment operating income in the first
nine months
of
2018
was
$967 million
, decreasing
$159 million
, or
14.1%
, from
$1,126 million
in the first
nine months
of
2017
. Total segment operating margin in the first
nine months
of
2018
was
8.3%
, compared to
10.0%
in the first
nine months
of
2017
.
Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
Percent
|
(In millions)
|
2018
|
|
2017
|
|
Change
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
|
Change
|
Tire Units
|
17.8
|
|
|
17.1
|
|
|
0.7
|
|
|
3.7
|
%
|
|
51.8
|
|
|
51.4
|
|
|
0.4
|
|
|
0.8
|
%
|
Net Sales
|
$
|
2,107
|
|
|
$
|
2,041
|
|
|
$
|
66
|
|
|
3.2
|
%
|
|
$
|
6,054
|
|
|
$
|
6,028
|
|
|
$
|
26
|
|
|
0.4
|
%
|
Operating Income
|
194
|
|
|
196
|
|
|
(2
|
)
|
|
(1.0
|
)%
|
|
475
|
|
|
630
|
|
|
(155
|
)
|
|
(24.6
|
)%
|
Operating Margin
|
9.2
|
%
|
|
9.6
|
%
|
|
|
|
|
|
7.8
|
%
|
|
10.5
|
%
|
|
|
|
|
Three Months Ended
September 30, 2018
and 2017
Americas unit sales in the
third
quarter of
2018
increased
0.7 million
units, or
3.7%
, to
17.8 million
units. Replacement tire volume increased 0.7 million units, or 5.4%, primarily in our consumer business in the United States driven by growth with retailers and wholesale distributors. OE tire volume in the third quarter of 2018 remained relatively consistent with the third quarter of 2017.
Net sales in the
third
quarter of
2018
were
$2,107 million
, increasing
$66 million
, or
3.2%
, from
$2,041 million
in the
third
quarter of
2017
. The increase in net sales was primarily due to higher tire volume of $58 million, higher sales in other tire-related businesses of $42 million, primarily driven by an increase in third-party sales of chemical products, and increases in price and product mix of $27 million. These increases were partially offset by unfavorable foreign currency translation of $60 million, primarily related to the Brazilian real.
Operating income in the
third
quarter of
2018
was
$194 million
, decreasing
$2 million
, or
1.0%
, from
$196 million
in the
third
quarter of
2017
. The decrease in operating income was due to decreases in price and product mix of $11 million, higher conversion costs of $11 million, foreign currency translation of $9 million, primarily related to the Brazilian real, and higher raw material
costs of $6 million. These decreases in operating income were partially offset by the favorable indirect tax settlement in Brazil of $21 million, of which $19 million is related to prior years, and higher tire volume of $13 million. SAG included incremental savings from rationalization plans of $4 million.
Operating income in the
third
quarter of
2018
excluded the net gain recognized on the TireHub transaction of $287 million and net gains on asset sales of $1 million. Operating income in the third quarter of 2017 excluded rationalization charges of $4 million and net gains on asset sales of $1 million.
Nine Months Ended
September 30, 2018
and
2017
Americas unit sales in the first
nine months
of
2018
increased
0.4 million
units, or
0.8%
, to
51.8 million
units. Replacement tire volume increased 0.5 million units, or 1.4%, primarily in our consumer business in the United States driven by growth with our wholesale distribution channel as well as growth in retail, supported by increased sell out, partially offset by the impacts of the TireHub transaction and the national transportation strike in Brazil in May. OE tire volume decreased 0.1 million units, or 1.1%, primarily in our consumer business in the United States, partially offset by an increase in our consumer business in Brazil, despite the impact of the national transportation strike.
Net sales in the first
nine months
of
2018
were
$6,054 million
, increasing
$26 million
, or
0.4%
, from
$6,028 million
in the first
nine months
of
2017
. The increase in net sales was primarily due to higher sales in other tire-related businesses of $50 million, primarily due to an increase in third-party sales of chemical products, higher tire volume of $38 million and increases in price and product mix of $27 million. These increases were partially offset by unfavorable foreign currency translation of $88 million, primarily related to the Brazilian real.
Operating income in the first
nine months
of
2018
was
$475 million
, decreasing
$155 million
, or
24.6%
, from
$630 million
in the first
nine months
of
2017
. The decrease in operating income was due to lower price and product mix of $69 million, higher raw material costs of $60 million, higher conversion costs of $21 million, foreign currency translation of $14 million, higher SAG of $11 million, incremental start-up costs of $7 million associated with our new plant in San Luis Potosi, Mexico, and higher transportation costs of $6 million. These decreases in operating income were partially offset by the favorable indirect tax settlement in Brazil of $21 million, of which $19 million is related to prior years, higher income in other tire-related businesses of $8 million and higher tire unit volume of $7 million. SAG included incremental savings from rationalization plans of $12 million. During the second quarter of 2018, Americas operating income was negatively impacted by about $7 million ($5 million after-tax and minority) as a result of the national transportation strike in Brazil.
Operating income in the first
nine months
of
2018
excluded the net gain recognized on the TireHub transaction of $273 million, rationalization charges of $3 million and net gains on asset sales of $3 million. Operating income in the first nine months of 2017 excluded rationalization charges of $6 million and net gains on asset sales of $4 million.
Europe, Middle East and Africa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
Percent
|
(In millions)
|
2018
|
|
2017
|
|
Change
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
|
Change
|
Tire Units
|
15.2
|
|
|
14.9
|
|
|
0.3
|
|
|
2.8
|
%
|
|
44.1
|
|
|
43.4
|
|
|
0.7
|
|
|
1.8
|
%
|
Net Sales
|
$
|
1,290
|
|
|
$
|
1,311
|
|
|
$
|
(21
|
)
|
|
(1.6
|
)%
|
|
$
|
3,880
|
|
|
$
|
3,664
|
|
|
$
|
216
|
|
|
5.9
|
%
|
Operating Income
|
111
|
|
|
90
|
|
|
21
|
|
|
23.3
|
%
|
|
289
|
|
|
271
|
|
|
18
|
|
|
6.6
|
%
|
Operating Margin
|
8.6
|
%
|
|
6.9
|
%
|
|
|
|
|
|
7.4
|
%
|
|
7.4
|
%
|
|
|
|
|
Three Months Ended
September 30, 2018
and 2017
Europe, Middle East and Africa unit sales in the
third
quarter of
2018
increased
0.3 million
units, or
2.8%
, to
15.2 million
units.
Replacement tire volume increased 0.4 million units, or 3.8%, primarily due to higher consumer replacement volumes driven by increased customer demand. OE tire volume decreased 0.1 million units, or 0.9%.
Net sales in the
third
quarter of
2018
were $
1,290 million
, decreasing
$21 million
, or
1.6%
, from $
1,311 million
in the
third
quarter of
2017
. Net sales decreased primarily due to unfavorable foreign currency translation of $69 million, driven by the weakening of the Turkish lira and euro, and lower sales in other tire-related businesses of $8 million, mainly related to retread and race tire sales. These decreases were partially offset by higher tire unit volume of $34 million and improvements in price and product mix of $23 million.
Operating income in the
third
quarter of
2018
was
$111 million
, increasing
$21 million
, or
23.3%
, from $
90 million
in the
third
quarter of
2017
. Operating income increased due to lower raw material costs of $26 million, lower conversion costs of $10 million, primarily related to better plant utilization following the closure of our manufacturing facility in Philippsburg, Germany, improvements in price and product mix of $8 million and higher volume of $8 million. These increases in operating income were partially offset by higher SAG of $9 million, partially driven by higher advertising costs, lower income in other tire-related businesses of $6 million and unfavorable foreign currency translation of $6 million, mainly driven by the weakening of the Turkish lira and euro. SAG and conversion costs included incremental savings from rationalization plans of $5 million and $9 million, respectively.
Operating income in the third quarter of 2018 excluded net rationalization charges of $5 million. Operating income in the third quarter of 2017 excluded net rationalization charges of $25 million, primarily related to plans initiated to streamline operations and reduce complexity across EMEA, and accelerated depreciation of $10 million, related to the closure of our tire manufacturing facility in Philippsburg, Germany.
Nine Months Ended
September 30, 2018
and
2017
Europe, Middle East and Africa unit sales in the first
nine months
of
2018
increased
0.7 million
units, or
1.8%
, to
44.1 million
units. Replacement tire volume increased 1.4 million units, or 4.4%, primarily in our consumer business driven by increased industry demand. OE tire volume decreased 0.7 million units, or 5.1%, primarily in our consumer business, driven by declines in the less than 17-inch rim size segment, mainly as a result of lower industry demand.
Net sales in the first
nine months
of
2018
were
$3,880 million
, increasing
$216 million
, or
5.9%
, from
$3,664 million
in the first
nine months
of
2017
. Net sales increased due to favorable foreign currency translation of $104 million, primarily due to the strengthening of the euro, improvements in price and product mix of $77 million and higher tire unit volume of $71 million. These increases were partially offset by lower sales in other tire-related businesses of $37 million, primarily related to retread and race tire sales.
Operating income in the first
nine months
of
2018
was
$289 million
, increasing
$18 million
, or
6.6%
, from
$271 million
in the first
nine months
of
2017
. Operating income increased due to lower conversion costs of $27 million, primarily related to better plant utilization following the closure of our manufacturing facility in Philippsburg, Germany, improvements in price and product mix of $23 million and higher volume of $20 million. These increases in operating income were partially offset by lower income in other tire-related businesses of $24 million, higher raw material costs of $21 million and higher research and development costs of $6 million. SAG and conversion costs included incremental savings from rationalization plans of $15 million and $39 million, respectively.
Operating income in the first
nine months
of
2018
excluded net rationalization charges of
$31 million
, primarily related to rationalization plans initiated to reduce SAG headcount and improve operating efficiency in EMEA, net losses on asset sales of $2 million and accelerated depreciation of
$2 million
. Operating income in the first
nine months
of
2017
excluded net rationalization charges of
$78 million
, primarily related to rationalization plans initiated to streamline operations and reduce complexity across EMEA, accelerated depreciation of
$39 million
, primarily related to the closure of our tire manufacturing facility in Philippsburg, Germany, and net gains on asset sales of $10 million, primarily related to the sale of a former wire plant site in Luxembourg.
Asia Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
Percent
|
(In millions)
|
2018
|
|
2017
|
|
Change
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
|
Change
|
Tire Units
|
7.5
|
|
|
7.8
|
|
|
(0.3
|
)
|
|
(3.8
|
)%
|
|
22.6
|
|
|
22.4
|
|
|
0.2
|
|
|
0.8
|
%
|
Net Sales
|
$
|
531
|
|
|
$
|
569
|
|
|
$
|
(38
|
)
|
|
(6.7
|
)%
|
|
$
|
1,665
|
|
|
$
|
1,614
|
|
|
$
|
51
|
|
|
3.2
|
%
|
Operating Income
|
57
|
|
|
81
|
|
|
(24
|
)
|
|
(29.6
|
)%
|
|
203
|
|
|
225
|
|
|
(22
|
)
|
|
(9.8
|
)%
|
Operating Margin
|
10.7
|
%
|
|
14.2
|
%
|
|
|
|
|
|
12.2
|
%
|
|
13.9
|
%
|
|
|
|
|
Three Months Ended
September 30, 2018
and 2017
Asia Pacific unit sales in the
third
quarter of
2018
decreased
0.3 million
units, or
3.8%
, to
7.5 million
units. OE tire volume decreased
0.3 million
units, or
10.7%
, primarily in our consumer business in China. Replacement tire volume for the third quarter of 2018 remained relatively consistent with the third quarter of 2017.
Net sales in the
third
quarter of
2018
were $
531 million
, decreasing
$38 million
, or
6.7%
, from $
569 million
in the
third
quarter of
2017
. Net sales decreased due to lower tire unit volume of $20 million and unfavorable foreign currency translation of $20 million, primarily related to the weakening of the Australian dollar and Indian rupee.
Operating income in the
third
quarter of
2018
was $
57 million
, decreasing $24 million, or 29.6%, from $
81 million
in the
third
quarter of
2017
. Operating income decreased due to higher SAG of $10 million that was partially driven by higher bad debt expense, lower price and product mix of $7 million, which more than offset improvements in raw material costs of $2 million, lower tire unit volume of $6 million, higher research and development costs of $3 million, and unfavorable foreign currency translation of $3 million. These decreases in operating income were partially offset by lower conversion costs of $5 million, due to lower unabsorbed overhead.
Operating income in the first three months of 2017 excluded net rationalization charges of $1 million.
Nine Months Ended
September 30, 2018
and
2017
Asia Pacific unit sales in the first
nine months
of
2018
increased
0.2 million
units, or
0.8%
, to
22.6 million
units. OE tire volume increased
0.3 million
units, or
2.8%
, primarily in the ASEAN countries and China. Replacement tire volume decreased 0.1 million units, or 0.6%.
Net sales in the first
nine months
of
2018
were
$1,665 million
, increasing
$51 million
, or
3.2%
, from
$1,614 million
in the first
nine months
of
2017
. Net sales increased due to improvements in price and product mix of $39 million, favorable foreign currency translation of $11 million, primarily related to the strengthening of the Chinese yuan, partially offset by weakening of the Indian rupee, and higher tire unit volume of $10 million. These increases were partially offset by lower sales in other tire-related businesses of $10 million, primarily in the retail business.
Operating income in the first
nine months
of
2018
was
$203 million
, decreasing
$22 million
, or
9.8%
, from
$225 million
in the first
nine months
of
2017
. Operating income decreased due to higher research and development costs of $11 million, lower price and product mix of $10 million, higher SAG of $9 million, partially driven by higher bad debt expense, lower income in other tire-related businesses of $6 million, primarily in the retail business, and higher raw material costs of $4 million. These decreases in operating income were partially offset by lower conversion costs of $15 million, primarily due to lower unabsorbed overhead, favorable foreign currency translation of $4 million, and higher tire unit volume of $3 million.
Operating income in the first
nine months
of
2018
excluded net rationalization charges of
$3 million
. Operating income in the first
nine months
of
2017
excluded net rationalization charges of
$2 million
.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash generated from our operating and financing activities. Our cash flows from operating activities are driven primarily by our operating results and changes in our working capital requirements and our cash flows from financing activities are dependent upon our ability to access credit or other capital.
On March 7, 2018, we amended and restated our $400 million second lien term loan facility. As a result of the amendment, the term loan now matures on March 7, 2025 and continues to bear interest at 200 basis points over LIBOR.
On September 28, 2018, certain of our European subsidiaries amended and restated the definitive agreements for our pan-European accounts receivable securitization facility, extending the term through 2023.
At
September 30, 2018
, we had
$896 million
in cash and cash equivalents, compared to
$1,043 million
at
December 31, 2017
. For the
nine months
ended
September 30, 2018
, net cash used by operating activities was
$24 million
, primarily driven by cash used for working capital of $826 million, rationalization payments of $151 million, and pension contributions and direct payments of $56 million. These decreases in cash were partially offset by cash derived from net income of $598 million, which includes non-cash charges of $589 million for depreciation and amortization and non-cash gains on the TireHub transaction of $273 million. Net cash used in investing activities was
$664 million
, primarily reflecting capital expenditures. Net cash provided by financing activities was
$577 million
, primarily due to net borrowings of $903 million, partially offset by cash used for common stock repurchases and dividends of $300 million.
At
September 30, 2018
, we had
$2,132 million
of unused availability under our various credit agreements, compared to $3,196 million at
December 31, 2017
. The table below presents unused availability under our credit facilities at those dates:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(In millions)
|
2018
|
|
2017
|
First lien revolving credit facility
|
$
|
1,336
|
|
|
$
|
1,667
|
|
European revolving credit facility
|
277
|
|
|
659
|
|
Chinese credit facilities
|
116
|
|
|
217
|
|
Other foreign and domestic debt
|
167
|
|
|
298
|
|
Notes payable and overdrafts
|
236
|
|
|
355
|
|
|
$
|
2,132
|
|
|
$
|
3,196
|
|
We have deposited our cash and cash equivalents and entered into various credit agreements and derivative contracts with financial institutions that we considered to be substantial and creditworthy at the time of such transactions. We seek to control our exposure to these financial institutions by diversifying our deposits, credit agreements and derivative contracts across multiple financial institutions, by setting deposit and counterparty credit limits based on long term credit ratings and other indicators of credit risk such as credit default swap spreads, and by monitoring the financial strength of these financial institutions on a regular basis. We also enter into master netting agreements with counterparties when possible. By controlling and monitoring exposure to financial institutions in this manner, we believe that we effectively manage the risk of loss due to nonperformance by a financial institution. However, we cannot provide assurance that we will not experience losses or delays in accessing our deposits or lines of credit due to the nonperformance of a financial institution. Our inability to access our cash deposits or make draws on our lines of credit, or the inability of a counterparty to fulfill its contractual obligations to us, could have a material adverse effect on our liquidity, financial position or results of operations in the period in which it occurs.
We expect our 2018 cash flow needs to include capital expenditures of approximately $900 million. We also expect interest expense to range between $320 million and $330 million, restructuring payments to be approximately $185 million, dividends on our common stock to be approximately $137 million, and contributions to our funded non-U.S. pension plans to be approximately $25 million to $50 million. We expect working capital to be a use of cash of approximately $150 million in 2018. We intend to operate the business in a way that allows us to address these needs with our existing cash and available credit if they cannot be funded by cash generated from operations.
We believe that our liquidity position is adequate to fund our operating and investing needs and debt maturities in 2018 and to provide us with flexibility to respond to further changes in the business environment.
Our ability to service debt and operational requirements is also dependent, in part, on the ability of our subsidiaries to make distributions of cash to various other entities in our consolidated group, whether in the form of dividends, loans or otherwise. In certain countries where we operate, such as China and South Africa, transfers of funds into or out of such countries by way of dividends, loans, advances or payments to third-party or affiliated suppliers are generally or periodically subject to certain requirements, such as obtaining approval from the foreign government and/or currency exchange board before net assets can be transferred out of the country. In addition, certain of our credit agreements and other debt instruments limit the ability of foreign subsidiaries to make distributions of cash. Thus, we would have to repay and/or amend these credit agreements and other debt instruments in order to use this cash to service our consolidated debt. Because of the inherent uncertainty of satisfactorily meeting these requirements or limitations, we do not consider the net assets of our subsidiaries, including our Chinese and South African subsidiaries, that are subject to such requirements or limitations to be integral to our liquidity or our ability to service our debt and operational requirements. At
September 30, 2018
, approximately $685 million of net assets, including $172 million of cash and cash equivalents, were subject to such requirements. The requirements we must comply with to transfer funds out of China and South Africa have not adversely impacted our ability to make transfers out of those countries.
Operating Activities
Net cash used by operating activities was
$24 million
in the first
nine months
of
2018
, improving $130 million compared to net cash used by operating activities of
$154 million
in the first
nine months
of
2017
.
The $130 million improvement in net cash used by operating activities reflects a decrease in cash used for working capital of $230 million, partially offset by a $159 million decrease in operating income from our SBUs and a $55 million increase in cash used for rationalization payments. The decrease in cash used for working capital is attributable to accounts payable. Accounts Payable — Trade at September 30, 2018, net of foreign currency translation and payables related to capital expenditures, increased, providing a year-over-year cash benefit of $230 million. That increase in Accounts Payable — Trade was driven by increased production levels to support higher sales volumes and higher average raw material purchase prices during the third quarter of 2018.
Investing Activities
Net cash used in investing activities was
$664 million
in the first
nine months
of
2018
, compared to
$675 million
in the first
nine months
of
2017
. Capital expenditures were
$615 million
in the first
nine months
of
2018
, compared to
$683 million
in the first
nine months
of
2017
. Beyond expenditures required to sustain our facilities, capital expenditures in
2018
and 2017 primarily related to the construction of a new manufacturing facility in Mexico and investments in additional capacity around the world.
Financing Activities
Net cash provided by financing activities was
$577 million
in the first
nine months
of
2018
, compared to net cash provided by financing activities of
$457 million
in the first
nine months
of
2017
. Financing activities in
2018
included net borrowings of $903 million, which were partially offset by common stock repurchases of $200 million and dividends on our common stock of $100 million. Financing activities in 2017 included net borrowings of $800 million, which were partially offset by common stock repurchases of $205 million, dividends on our common stock of $75 million, and debt related costs and other transactions of $69 million, primarily due to debt refinancing activities.
Credit Sources
In aggregate, we had total credit arrangements of
$8,689 million
available at
September 30, 2018
, of which
$2,132 million
were unused, compared to $8,963 million available at
December 31, 2017
, of which $3,196 million were unused. At
September 30, 2018
, we had long term credit arrangements totaling
$8,008 million
, of which
$1,896 million
were unused, compared to $8,346 million and $2,841 million, respectively, at
December 31, 2017
. At
September 30, 2018
, we had short term committed and uncommitted credit arrangements totaling
$681 million
, of which
$236 million
were unused, compared to $617 million and $355 million, respectively, at
December 31, 2017
. The continued availability of the short term uncommitted arrangements is at the discretion of the relevant lender and may be terminated at any time.
Outstanding Notes
At
September 30, 2018
, we had
$3,317 million
of outstanding notes, compared to
$3,325 million
at
December 31, 2017
.
$2.0 Billion Amended and Restated First Lien Revolving Credit Facility due 2021
Our amended and restated first lien revolving credit facility is available in the form of loans or letters of credit, with letter of credit availability limited to $800 million.
Availability under the facility is subject to a borrowing base, which is based primarily on (i) eligible accounts receivable and inventory of The Goodyear Tire & Rubber Company and certain of its U.S. and Canadian subsidiaries, (ii) the value of our principal trademarks, and (iii) certain cash in an amount not to exceed $200 million. To the extent that our eligible accounts receivable and inventory and other components of the borrowing base decline in value, our borrowing base will decrease and the availability under the facility may decrease below $2.0 billion.
In addition, if the amount of outstanding borrowings and letters of credit under the facility exceeds the borrowing base, we are required to prepay borrowings and/or cash collateralize letters of credit sufficient to eliminate the excess. As of
September 30, 2018
, our borrowing base, and therefore our availability, under the facility was
$302 million
below the facility's stated amount of $2.0 billion. Based on our current liquidity, amounts drawn under this facility bear interest at LIBOR plus 125 basis points, and undrawn amounts under the facility will be subject to an annual commitment fee of 30 basis points.
At
September 30, 2018
, we had
$325 million
of borrowings and
$37 million
of letters of credit issued under the revolving credit facility. At
December 31, 2017
, we had no borrowings and
$37 million
of letters of credit issued under the revolving credit facility.
During 2016, we began entering into bilateral letter of credit agreements. At
September 30, 2018
, we had
$353 million
in letters of credit issued under these agreements.
$400 Million Amended and Restated Second Lien Term Loan Facility due 2025
In March 2018, we amended and restated our second lien term loan facility. As a result of the amendment, the term loan, which previously matured on April 30, 2019, now matures on March 7, 2025. The term loan bears interest, at our option, at (i) 200 basis points over LIBOR or (ii) 100 basis points over an alternative base rate (the higher of (a) the prime rate, (b) the federal funds effective rate or the overnight bank funding rate plus 50 basis points or (c) LIBOR plus 100 basis points). In addition, if the Total Leverage Ratio is equal to or less than 1.25 to 1.00, we have the option to further reduce the spreads described above by 25 basis points. "Total Leverage Ratio" has the meaning given it in the facility.
At
September 30, 2018
and
December 31, 2017
, the amounts outstanding under this facility were
$400 million
.
€550 Million Amended and Restated Senior Secured European Revolving Credit Facility due 2020
Our amended and restated €550 million European revolving credit facility consists of (i) a
€125 million
German tranche that is available only to Goodyear Dunlop Tires Germany GmbH (“GDTG”) and (ii) a
€425 million
all-borrower tranche that is available to Goodyear Dunlop Tires Europe B.V. ("GDTE"), GDTG and Goodyear Dunlop Tires Operations S.A. Up to €150 million of swingline loans and
€50 million
in letters of credit are available for issuance under the all-borrower tranche. Amounts drawn under
the facility will bear interest at LIBOR plus 175 basis points for loans denominated in U.S. dollars or pounds sterling and EURIBOR plus 175 basis points for loans denominated in euros, and undrawn amounts under the facility will be subject to an annual commitment fee of 30 basis points.
At
September 30, 2018
, there were
$140 million
(
€121 million
) of borrowings outstanding under the German tranche,
$220 million
(
€190 million
) of borrowings outstanding under the all-borrower tranche and no letters of credit outstanding under the European revolving credit facility. At December 31, 2017, there were
no
borrowings and
no
letters of credit outstanding under the European revolving credit facility.
Each of our first lien revolving credit facility and our European revolving credit facility have customary representations and warranties including, as a condition to borrowing, that all such representations and warranties are true and correct, in all material respects, on the date of the borrowing, including representations as to no material adverse change in our business or financial condition since December 31, 2015 under the first lien facility and December 31, 2014 under the European facility.
Accounts Receivable Securitization Facilities (On-Balance Sheet)
On September 28, 2018, GDTE and certain other of our European subsidiaries amended and restated the definitive agreements for our pan-European accounts receivable securitization facility, extending the term through 2023. The terms of the facility provide the flexibility to designate annually the maximum amount of funding available under the facility in an amount of not less than
€30 million
and not more than
€450 million
. For the period from October 16, 2017 to October 17, 2018, the designated maximum amount of the facility was
€275 million
. Effective October 18, 2018, the designated maximum amount of the facility was increased to
€320 million
.
The facility involves the ongoing daily sale of substantially all of the trade accounts receivable of certain GDTE subsidiaries. These subsidiaries retain servicing responsibilities.
Utilization under this facility is based on eligible receivable balances
.
The funding commitments under the facility will expire upon the earliest to occur of: (a) September 26, 2023, (b) the non-renewal and expiration (without substitution) of all of the back-up liquidity commitments, (c) the early termination of the facility according to its terms (generally upon an Early Amortisation Event (as defined in the facility), which includes, among other things, events similar to the events of default under our senior secured credit facilities; certain tax law changes; or certain changes to law, regulation or accounting standards), or (d) our request for early termination of the facility. The facility’s current back-up liquidity commitments will expire on October 17, 2019.
At
September 30, 2018
, the amounts available and utilized under this program totaled
$221 million
(
€191 million
). At
December 31, 2017
, the amounts available and utilized under this program totaled
$224 million
(
€187 million
). The program does not qualify for sale accounting, and accordingly, these amounts are included in Long Term Debt and Capital Leases.
Accounts Receivable Factoring Facilities (Off-Balance Sheet)
We have sold certain of our trade receivables under off-balance sheet programs during the first
nine months
of 2018. For these programs, we have concluded that there is generally no risk of loss to us from non-payment of the sold receivables. At
September 30, 2018
, the gross amount of receivables sold was
$540 million
, comp
a
red to
$572 million
at
December 31, 2017
.
Supplier Financing
We have entered into payment processing agreements with several financial institutions. Under these agreements, the financial institution acts as our paying agent with respect to accounts payable due to our suppliers. These agreements also allow our suppliers to sell their receivables to the financial institutions at the sole discretion of both the supplier and the financial institution on terms that are negotiated between them. We are not always notified when our suppliers sell receivables under these programs.
Our obligations to our suppliers, including the amounts due and scheduled payment dates, are not impacted by our suppliers' decisions to sell their receivables under the programs. Agreements for such financing programs totaled up to $500 million at
September 30, 2018
and December 31, 2017.
Further Information
For a further description of the terms of our outstanding notes, first lien revolving credit facility, second lien term loan facility, European revolving credit facility and pan-European accounts receivable securitization facility, please refer to Note to the Consolidated Financial Statements No. 15, Financing Arrangements and Derivative Financial Instruments, in our 2017 Form 10-K and Note to the Consolidated Financial Statements No. 8, Financing Arrangements and Derivative Financial Instruments, in this Form 10-Q.
Covenant Compliance
Our first and second lien credit facilities and some of the indentures governing our notes contain certain covenants that, among other things, limit our ability to incur additional debt or issue redeemable preferred stock, pay dividends, repurchase shares or make certain other restricted payments or investments, incur liens, sell assets, incur restrictions on the ability of our subsidiaries to pay dividends or to make other payments to us, enter into affiliate transactions, engage in sale and leaseback transactions, and consolidate, merge, sell or otherwise dispose of all or substantially all of our assets. These covenants are subject to significant exceptions and qualifications. Our first and second lien credit facilities and the indentures governing our notes also have customary defaults, including cross-defaults to material indebtedness of Goodyear and its subsidiaries.
We have additional financial covenants in our first and second lien credit facilities that are currently not applicable. We only become subject to these financial covenants when certain events occur. These financial covenants and related events are as follows:
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We become subject to the financial covenant contained in our first lien revolving credit facility when the aggregate amount of our Parent Company (The Goodyear Tire & Rubber Company) and guarantor subsidiaries cash and cash equivalents (“Available Cash”) plus our availability under our first lien revolving credit facility is less than $200 million. If this were to occur, our ratio of EBITDA to Consolidated Interest Expense may not be less than 2.0 to 1.0 for the most recent period of four consecutive fiscal quarters. As of
September 30, 2018
, our availability under this facility of
$1,336 million
, plus our Available Cash of
$153 million
, totaled
$1,489 million
, which is in excess of $200 million.
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We become subject to a covenant contained in our second lien credit facility upon certain asset sales. The covenant provides that, before we use cash proceeds from certain asset sales to repay any junior lien, senior unsecured or subordinated indebtedness, we must first offer to use such cash proceeds to prepay borrowings under the second lien credit facility unless our ratio of Consolidated Net Secured Indebtedness to EBITDA (Pro Forma Senior Secured Leverage Ratio) for any period of four consecutive fiscal quarters is equal to or less than 3.0 to 1.0.
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In addition, our European revolving credit facility contains non-financial covenants similar to the non-financial covenants in our first and second lien credit facilities that are described above and a financial covenant applicable only to GDTE and its subsidiaries. This financial covenant provides that we are not permitted to allow GDTE’s ratio of Consolidated Net J.V. Indebtedness to Consolidated European J.V. EBITDA for a period of four consecutive fiscal quarters to be greater than 3.0 to 1.0 at the end of any fiscal quarter. Consolidated Net J.V. Indebtedness is determined net of the sum of cash and cash equivalents in excess of $100 million held by GDTE and its subsidiaries, cash and cash equivalents in excess of $150 million held by the Parent Company and its U.S. subsidiaries, and availability under our first lien revolving credit facility if the ratio of EBITDA to Consolidated Interest Expense described above is not applicable and the conditions to borrowing under the first lien revolving credit facility are met. Consolidated Net J.V. Indebtedness also excludes loans from other consolidated Goodyear entities. This financial covenant is also included in our pan-European accounts receivable securitization facility. At
September 30, 2018
, we were in compliance with this financial covenant.
Our credit facilities also state that we may only incur additional debt or make restricted payments that are not otherwise expressly permitted if, after giving effect to the debt incurrence or the restricted payment, our ratio of EBITDA to Consolidated Interest Expense for the prior four fiscal quarters would exceed 2.0 to 1.0. Certain of our senior note indentures have substantially similar limitations on incurring debt and making restricted payments. Our credit facilities and indentures also permit the incurrence of additional debt through other provisions in those agreements without regard to our ability to satisfy the ratio-based incurrence test described above. We believe that these other provisions provide us with sufficient flexibility to incur additional debt necessary to meet our operating, investing and financing needs without regard to our ability to satisfy the ratio-based incurrence test.
Covenants could change based upon a refinancing or amendment of an existing facility, or additional covenants may be added in connection with the incurrence of new debt.
At
September 30, 2018
, we were in compliance with the currently applicable material covenants imposed by our principal credit facilities and indentures.
The terms “Available Cash,” “EBITDA,” “Consolidated Interest Expense,” “Consolidated Net Secured Indebtedness,” “Pro Forma Senior Secured Leverage Ratio,” “Consolidated Net J.V. Indebtedness” and “Consolidated European J.V. EBITDA” have the meanings given them in the respective credit facilities.
Potential Future Financings
In addition to our previous financing activities, we may seek to undertake additional financing actions which could include restructuring bank debt or capital markets transactions, possibly including the issuance of additional debt or equity. Given the inherent uncertainty of market conditions, access to the capital markets cannot be assured.
Our future liquidity requirements may make it necessary for us to incur additional debt. However, a substantial portion of our assets are already subject to liens securing our indebtedness. As a result, we are limited in our ability to pledge our remaining
assets as security for additional secured indebtedness. In addition, no assurance can be given as to our ability to raise additional unsecured debt.
Dividends and Common Stock Repurchase Program
Under our primary credit facilities and some of our note indentures, we are permitted to pay dividends on and repurchase our capital stock (which constitute restricted payments) as long as no default will have occurred and be continuing, additional indebtedness can be incurred under the credit facilities or indentures following the payment, and certain financial tests are satisfied.
In the first
nine months
of 2018, we paid cash dividends of
$100 million
, on our common stock. On
October 9, 2018
, the Board of Directors (or duly authorized committee thereof) declared cash dividends
$0.16
per share of common stock, or approximately
$37 million
in the aggregate, which represents an increase of $0.02 per share. The dividend will be paid on
December 3, 2018
to stockholders of record as of the close of business on
November 1, 2018
. Future quarterly dividends are subject to Board approval.
On
September 18, 2013
, the Board of Directors approved our common stock repurchase program. From time to time, the Board of Directors has approved increases in the amount authorized to be purchased under that program. On February 2, 2017, the Board of Directors approved a further increase in that authorization to an aggregate of
$2.1 billion
. This program expires on December 31, 2019. We intend to repurchase shares of common stock in open market transactions in order to offset new shares issued under equity compensation programs and to provide for additional shareholder returns. During the
third
quarter of
2018
, we repurchased
4,188,492
shares at an average price, including commissions, of
$23.87
per share, or
$100 million
in the aggregate. During the first
nine months
of
2018
, we repurchased
8,039,584
shares at an average price, including commissions, of
$24.88
per share, or
$200 million
in the aggregate. Since 2013, we repurchased
52,009,241
shares at an average price, including commissions, of
$29.10
per share, or
$1,514 million
in the aggregate.
The restrictions imposed by our credit facilities and indentures did not affect our ability to pay the dividends on or repurchase our capital stock as described above, and are not expected to affect our ability to pay similar dividends or make similar repurchases in the future.
Asset Dispositions
The restrictions on asset sales imposed by our material indebtedness have not affected our strategy of divesting non-core businesses, and those divestitures have not affected our ability to comply with those restrictions.
FORWARD-LOOKING INFORMATION — SAFE HARBOR STATEMENT
Certain information in this Form 10-Q (other than historical data and information) may constitute forward-looking statements regarding events and trends that may affect our future operating results and financial position. The words “estimate,” “expect,” “intend” and “project,” as well as other words or expressions of similar meaning, are intended to identify forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Such statements are based on current expectations and assumptions, are inherently uncertain, are subject to risks and should be viewed with caution. Actual results and experience may differ materially from the forward-looking statements as a result of many factors, including:
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if we do not successfully implement our strategic initiatives, our operating results, financial condition and liquidity may be materially adversely affected;
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we face significant global competition and our market share could decline;
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deteriorating economic conditions in any of our major markets, or an inability to access capital markets or third-party financing when necessary, may materially adversely affect our operating results, financial condition and liquidity;
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raw material and energy costs may materially adversely affect our operating results and financial condition;
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if we experience a labor strike, work stoppage or other similar event our business, results of operations, financial condition and liquidity could be materially adversely affected;
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we could be negatively impacted by the imposition of tariffs on tires and other goods;
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our international operations have certain risks that may materially adversely affect our operating results, financial condition and liquidity;
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we have foreign currency translation and transaction risks that may materially adversely affect our operating results, financial condition and liquidity;
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our long term ability to meet our obligations, to repay maturing indebtedness or to implement strategic initiatives may be dependent on our ability to access capital markets in the future and to improve our operating results;
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financial difficulties, work stoppages, supply disruptions or economic conditions affecting our major customers, dealers or suppliers could harm our business;
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our capital expenditures may not be adequate to maintain our competitive position and may not be implemented in a timely or cost-effective manner;
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we have a substantial amount of debt, which could restrict our growth, place us at a competitive disadvantage or otherwise materially adversely affect our financial health;
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any failure to be in compliance with any material provision or covenant of our debt instruments, or a material reduction in the borrowing base under our revolving credit facility, could have a material adverse effect on our liquidity and operations;
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our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly;
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we have substantial fixed costs and, as a result, our operating income fluctuates disproportionately with changes in our net sales;
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we may incur significant costs in connection with our contingent liabilities and tax matters;
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our reserves for contingent liabilities and our recorded insurance assets are subject to various uncertainties, the outcome of which may result in our actual costs being significantly higher than the amounts recorded;
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we are subject to extensive government regulations that may materially adversely affect our operating results;
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we may be adversely affected by any disruption in, or failure of, our information technology systems due to computer viruses, unauthorized access, cyber-attack, natural disasters or other similar disruptions;
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if we are unable to attract and retain key personnel, our business could be materially adversely affected; and
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we may be impacted by economic and supply disruptions associated with events beyond our control, such as war, acts of terror, political unrest, public health concerns, labor disputes or natural disasters.
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It is not possible to foresee or identify all such factors. We will not revise or update any forward-looking statement or disclose any facts, events or circumstances that occur after the date hereof that may affect the accuracy of any forward-looking statement.