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
49
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. Effective January 1, 2016, we combined our previous North America and Latin America strategic business units into one Americas strategic business unit. Accordingly, we have also combined the North America and Latin America reportable segments effective on that date to align with the new organizational structure and the basis used for reporting to our Chief Executive Officer.
On October 1, 2015, the Company completed the dissolution of its global alliance with Sumitomo Rubber Industries, Ltd. ("SRI") in accordance with the terms and conditions set forth in the Framework Agreement, dated as of June 4, 2015, by and between the Company and SRI. Pursuant to this agreement, the Company has sold to SRI its 75% interest in Goodyear Dunlop Tires North America Ltd. ("GDTNA"), 25% interest in Dunlop Goodyear Tires Ltd. ("DGT") in Japan and Huntsville, Alabama test track used by GDTNA. The Company has acquired SRI's 25% interest in Goodyear Dunlop Tires Europe B.V. ("GDTE") and 75% interest in Nippon Goodyear Ltd. ("NGY") in Japan.
Prior to October 1, 2015, GDTE’s assets and liabilities were included in our consolidated balance sheets and GDTE’s results of operations were included in our consolidated statements of operations, which also reflected SRI’s minority interest in GDTE. Subsequent to October 1, 2015, we continue to include GDTE in our consolidated balance sheets and consolidated statements of operations; however, there is no minority interest impact to our results of operations related to GDTE. Additionally, prior to October 1, 2015, we accounted for NGY under the equity method as we did not have a controlling financial interest in NGY. Subsequent to October 1, 2015, we have a controlling interest in NGY and, accordingly, NGY’s assets and liabilities are included in our consolidated balance sheets, and NGY’s results of operations are included in our consolidated statements of operations.
Effective December 31, 2015, we concluded that we did not meet the accounting criteria for control over our Venezuelan subsidiary. We deconsolidated the operations of our Venezuelan subsidiary and began reporting their results using the cost method of accounting. Our financial results for the second quarter and first six months of 2016 do not include the operating results of our Venezuelan subsidiary.
Results of Operations
In the second quarter of 2016, we continued to experience improving industry conditions in Europe, and saw stable industry conditions in the United States, although year-over-year industry growth in consumer replacement was impacted by abnormally high levels of imports in the second quarter of 2015. In emerging markets, we saw growth in the Asia Pacific region in Japan, due to the acquisition of a controlling interest in NGY, and in China, and continued recessionary economic conditions and political volatility in Brazil.
Our second quarter of 2016 results reflect a 1.7% increase in tire unit shipments compared to the second quarter of 2015 (2.4% when excluding the 0.3 million unit impact of the deconsolidation of our Venezuelan subsidiary). In the second quarter of 2016, we realized approximately $66 million of cost savings, including raw material cost saving measures of approximately $46 million, which exceeded the impact of general inflation.
Net sales in the
second
quarter of
2016
were
$3,879 million
, compared to
$4,172 million
in the
second
quarter of
2015
. Net sales decreased in the
second
quarter of 2016 due to the deconsolidation of our Venezuelan subsidiary, lower sales in other tire-related businesses, primarily related to motorcycle tire sales in Americas due to the dissolution of the global alliance with SRI, unfavorable foreign currency translation, primarily in Americas, and a decline in price and product mix, primarily in EMEA. These declines were partially offset by higher tire unit volume in Asia Pacific and EMEA.
In the
second
quarter of
2016
, Goodyear net income was
$202 million
, or
$0.75
per share, compared to
$192 million
, or
$0.70
per share, in the
second
quarter of
2015
. The increase in Goodyear net income in the
second
quarter of 2016 compared to the
second
quarter of 2015 was primarily due to lower income tax expense, a decrease in minority shareholders' net income, primarily due to the dissolution of the global alliance with SRI, and higher segment operating income in EMEA and Asia Pacific, which were partially offset by lower segment operating income in Americas.
Our total segment operating income for the
second
quarter of
2016
was
$531 million
, compared to
$550 million
in the
second
quarter of
2015
. The
$19 million
decrease in segment operating income was due primarily to the impact of the deconsolidation of our Venezuelan subsidiary of $36 million, an out of period adjustment of $24 million of expense related to the elimination of intracompany profit in Americas, primarily related to the years 2012 to 2015, with the majority attributable to 2012, lower income
in other tire-related businesses of $22 million and unfavorable foreign currency translation of $10 million. A decrease in price and product mix of $44 million was more than offset by a $95 million decline in raw material costs. The decrease in segment operating income was also partially offset by lower selling, administrative and general expense ("SAG") of $17 million. Refer to "Results of Operations — Segment Information” for additional information.
Net sales in the first
six
months of
2016
were
$7,570 million
, compared to
$8,196 million
in the first
six
months of
2015
. Net sales decreased in the first
six
months of
2016
due to unfavorable foreign currency translation, primarily in Americas, the deconsolidation of our Venezuelan subsidiary, lower sales in other tire-related businesses, primarily related to motorcycle tire sales in Americas due to the dissolution of the global alliance with SRI, and a decline in price and product mix, primarily in EMEA. These declines were partially offset by higher tire unit volume, primarily in Asia Pacific.
In the first
six
months of
2016
, Goodyear net income was
$386 million
, or
$1.43
per share, compared to
$416 million
, or
$1.52
per share, in the first
six
months of
2015
. The decrease in Goodyear net income in the first
six
months of 2016 compared to the first
six
months of
2015
was due to a one-time pre-tax gain of
$155 million
in 2015 on the recognition of deferred royalty income resulting from the termination of a licensing agreement associated with the sale of our former Engineered Products business and lower segment operating income in Americas. These decreases were partially offset by lower income tax expense and interest expense, a decrease in minority shareholders' net income, primarily due to the dissolution of the global alliance with SRI, and higher segment operating income in EMEA and Asia Pacific.
Our total segment operating income for the first
six
months of
2016
was
$950 million
, compared to
$938 million
in the first
six
months of
2015
. The
$12 million
increase in segment operating income was due primarily to a decline in raw material costs of $202 million, which more than offset decreases in price and product mix of $74 million, higher volume of $14 million, and lower conversion costs of $12 million. These increases were partially offset by the impact of the deconsolidation of our Venezuelan subsidiary of $58 million, lower income in other tire-related businesses of $27 million, an out of period adjustment of $24 million of expense related to the elimination of intracompany profit in Americas, primarily related to the years 2012 to 2015, with the majority attributable to 2012, and unfavorable foreign currency translation of $22 million. Refer to "Results of Operations — Segment Information” for additional information.
At
June 30, 2016
, we had
$1,138 million
of Cash and cash equivalents as well as
$2,426 million
of unused availability under our various credit agreements, compared to
$1,476 million
and $2,676 million, respectively, at
December 31, 2015
. Cash and cash equivalents decreased by
$338 million
from
December 31, 2015
due primarily to cash used for working capital of $686 million, capital expenditures of $466 million, common stock repurchases of $150 million and dividends paid on our common stock of $38 million. These uses of cash were partially offset by net borrowings of $440 million and net income of $397 million, which included non-cash depreciation and amortization charges of $355 million. Refer to "Liquidity and Capital Resources" for additional information.
Outlook
As of December 31, 2015, we deconsolidated the operations of our Venezuelan subsidiary. Our Venezuelan subsidiary contributed $119 million in segment operating income in 2015. The various outlook items summarized below exclude the impact of our Venezuelan operations in 2015 in order to provide greater clarity regarding our expectations with respect to the performance of our remaining businesses in 2016.
We continue to expect that our full-year tire unit volume for 2016 will be up approximately 3% from 164.8 million tire units (excluding our Venezuelan subsidiary) in 2015, and for unabsorbed fixed overhead costs to be a benefit of approximately $50 million in 2016 compared to 2015. We also continue to expect cost savings to more than offset general inflation in 2016 and foreign currency translation to negatively affect segment operating income by approximately $45 million in 2016 compared to 2015.
Based on current raw material spot prices, for the full year of 2016, we expect our raw material costs will be approximately 8% lower than 2015, including raw material cost saving measures, and we continue to expect the benefit of lower raw material costs to more than offset declines in price and product mix. However, natural and synthetic rubber prices and other commodity prices 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
June 30, 2016
and
2015
Net sales in the
second
quarter of
2016
were
$3,879 million
, decreasing
$293 million
, or
7.0%
, from
$4,172 million
in the
second
quarter of
2015
. Goodyear net income was
$202 million
, or
$0.75
per share, in the
second
quarter of
2016
, compared to
$192 million
, or
$0.70
per share, in the
second
quarter of
2015
.
Net sales decreased in the
second
quarter of
2016
, due primarily to lower sales of $115 million due to the deconsolidation of our Venezuelan subsidiary, lower sales of $86 million in other tire-related businesses, primarily related to motorcycle tire sales in Americas due to the dissolution of the global alliance with SRI, unfavorable foreign currency translation of $84 million, primarily in Americas, and a decline in price and product mix of $36 million, primarily in EMEA. These declines were partially offset by higher tire unit volume of $28 million, which was the result of volume increases in Asia Pacific and EMEA, partially offset by volume decreases in Americas. Volume increases in Asia Pacific were driven by the acquisition of a controlling interest in NGY in Japan.
Worldwide tire unit sales in the
second
quarter of
2016
were
41.5 million
units, increasing
0.7 million
units, or
1.7%
, from
40.8 million
units in the
second
quarter of
2015
. Replacement tire volume increased
1.2 million
units, or
4.3%
. Original equipment ("OE") tire volume decreased
0.5 million
units, or
4.0%
. Worldwide tire units were positively impacted by 1.1 million units due to the acquisition of a controlling interest in NGY in Japan. In addition, worldwide tire units were reduced by 0.4 million units due to the sale of GDTNA and 0.3 million units due to the deconsolidation of our Venezuelan subsidiary.
Cost of goods sold (“CGS”) in the
second
quarter of
2016
was
$2,813 million
, decreasing
$214 million
, or
7.1%
, from
$3,027 million
in the
second
quarter of
2015
. CGS decreased due to lower raw material costs of $95 million, primarily in Americas and EMEA, lower costs of $72 million due to the deconsolidation of our Venezuelan subsidiary, and lower costs in other tire-related businesses of $64 million, primarily related to motorcycle tire sales in Americas due to the dissolution of the global alliance with SRI. CGS also decreased due to foreign currency translation of $61 million, primarily in Americas. These decreases were partially offset by an out of period adjustment of $24 million ($15 million after-tax and minority) of expense related to the elimination of intracompany profit in Americas, primarily related to the years 2012 to 2015, with the majority attributable to 2012, higher tire volume of $22 million, and a $14 million ($14 million after-tax and minority) charge that resulted from the purchase of annuities to settle obligations of one of our U.K. pension plans.
CGS in the second quarter of 2016 included pension expense of $11 million, excluding the pension settlement charge of $14 million, which decreased from $27 million in the second quarter of 2015, primarily due to the deconsolidation of our Venezuelan subsidiary and the change in estimating interest and service costs in the measurement of pension expense effective January 1, 2016.
CGS in the
second
quarter of
2016
also included accelerated depreciation of $5 million ($5 million after-tax and minority) primarily related to our plan to close our Wolverhampton, U.K. mixing and retreading facility and to transfer the production to other manufacturing facilities in EMEA. CGS in the
second
quarter of 2016 and 2015 also included savings from rationalization plans of $2 million and $8 million, respectively. The savings in 2015 related to the closure of one of our manufacturing facilities in Amiens, France and our exit from the farm tire business in EMEA. CGS was
72.5%
of sales in the
second
quarter of
2016
compared to 72.6% in the
second
quarter of
2015
.
SAG in the
second
quarter of
2016
was
$593 million
, decreasing
$55 million
, or
8.5%
, from
$648 million
in the
second
quarter of
2015
. SAG decreased $17 million due to lower wages and benefits including incentive compensation costs, foreign currency translation of $13 million, primarily in Americas and EMEA, decreased bad debt expense of $13 million, and lower costs of $6 million due to the deconsolidation of our Venezuelan subsidiary.
SAG in the second quarter of 2016 included pension expense of $8 million, compared to $11 million in 2015, primarily due to the change in estimating interest and service costs in the measurement of pension expense effective January 1, 2016. SAG in the
second
quarter of
2016
and
2015
both also included savings from rationalization plans of $6 million. SAG was
15.3%
of sales in the
second
quarter of
2016
, compared to 15.5% in the
second
quarter of
2015
.
We recorded net rationalization charges of
$48 million
($44 million after-tax and minority) in the
second
quarter of
2016
and net rationalization charges of
$46 million
($32 million after-tax and minority) in the
second
quarter of
2015
. In the second quarter of 2016, we recorded charges of $43 million for rationalization actions initiated during the quarter, which primarily related to manufacturing headcount reductions in EMEA to improve operating efficiency. In addition, we initiated a plan to reduce SAG headcount. We also recorded charges of $5 million related to prior year plans, including additional associate-related and dismantling costs related to the closure of one of our manufacturing facilities in Amiens, France. In the second quarter of 2015, we recorded charges of $36 million for rationalization actions initiated during the quarter, which include a plan to close our Wolverhampton,
U.K. mixing and retreading facility and to transfer the production to other manufacturing facilities in EMEA and a plan to transfer consumer tire production from our manufacturing facility in Wittlich, Germany to other manufacturing facilities in EMEA. We also initiated plans for SAG headcount reductions in Americas and EMEA. In the second quarter of 2015, we recorded charges of $10 million related to prior year plans, including additional associate-related and dismantling costs related to the closure of one of our manufacturing facilities in Amiens, France.
Interest expense in the
second
quarter of
2016
was
$104 million
, decreasing
$6 million
, or
5.5%
, from
$110 million
in the
second
quarter of 2015. The decrease was due to a lower average interest rate of 6.76% in the
second
quarter of
2016
compared to 7.19% in the
second
quarter of
2015
, partially offset by charges of $9 million ($6 million after-tax and minority) related to the write-off of deferred financing fees. The average debt balance for the second quarter of 2016 was $6,156 million, as compared to $6,123 million for the second quarter of 2015.
Other (Income) Expense in the
second
quarter of
2016
was
$20 million
of expense, compared to
$13 million
of expense in the
second
quarter of 2015. Other (Income) Expense in the
second
quarter of 2016 included financing fees and financial instruments expense of
$52 million
, compared to
$11 million
in the
second
quarter of
2015
. Financing fees and financial instruments expense for the second quarter of 2016 includes a
$44 million
($28 million after-tax and minority) redemption premium related to the redemption of $900 million of 6.5% senior notes due 2021.
Other (Income) Expense in the second quarter of
2016
also included a benefit of
$14 million
in general and product liability expense (income) - discontinued products, compared to expense of
$4 million
in the second quarter of
2015
. The difference primarily relates to a benefit of
$4 million
($3 million after-tax and minority) for the recovery of past costs from one of our asbestos insurers and a benefit of
$10 million
related to changes in assumptions for probable insurance recoveries for asbestos claims in future periods. Additionally, Other (Income) Expense in the
second
quarter of 2016 included net foreign currency exchange gains of
$1 million
compared to losses of
$13 million
in the
second
quarter of
2015
.
Income tax expense in the
second
quarter of
2016
was
$93 million
on income before income taxes of
$301 million
. In the
second
quarter of
2015
, we recorded income tax expense of
$120 million
on income before income taxes of
$328 million
. Income tax expense in the
second
quarter of 2016 was unfavorably impacted by
$3 million
(
$3 million
after minority interest) of various discrete tax adjustments. Income tax expense in the second quarter of 2015 was unfavorably impacted by $3 million ($2 million after minority interest) of discrete tax adjustments, primarily related to the establishment a valuation allowance in EMEA.
We record taxes based on overall estimated annual effective tax rates. In 2016, the reduction of our effective tax rate compared to the U.S. statutory rate was primarily attributable to income in various foreign taxing jurisdictions where we maintain a full valuation allowance on certain deferred tax assets.
Minority shareholders’ net income in the
second
quarter of
2016
was
$6 million
, compared to
$16 million
in
2015
. The decrease in
2016
is due to the dissolution of the global alliance with SRI.
Six Months Ended
June 30, 2016
and
2015
Net sales in the first
six
months of
2016
were
$7,570 million
, decreasing
$626 million
, or
7.6%
, from
$8,196 million
in the first
six
months of
2015
. Goodyear net income was
$386 million
, or
$1.43
per share, in the first
six
months of
2016
, compared to
$416 million
, or
$1.52
per share, in the first
six
months of
2015
.
Net sales decreased in the first
six
months of
2016
, due primarily to unfavorable foreign currency translation of $225 million, primarily in Americas, lower sales of $209 million due to the deconsolidation of our Venezuelan subsidiary, lower sales of $138 million in other tire-related businesses, primarily related to motorcycle tire sales in Americas due to the dissolution of the global alliance with SRI, and a decline in price and product mix of $118 million, primarily in EMEA. These declines were partially offset by higher tire unit volume of $64 million, which was the result of volume increases in Asia Pacific and EMEA, partially offset by volume decreases in Americas. Volume increases in Asia Pacific were driven by the acquisition of a controlling interest in NGY in Japan.
Worldwide tire unit sales in the first
six
months of
2016
were
83.0 million
units, increasing
1.4 million
units, or
1.7%
, from
81.6 million
units in the first
six
months of
2015
. Replacement tire volume increased
1.6 million
units, or
2.9%
. OE tire volume decreased
0.2 million
units, or
1.0%
. Worldwide tire units were positively impacted by 2.0 million units due to the acquisition of a controlling interest in NGY in Japan. In addition, worldwide tire units were reduced by 0.7 million units due to the deconsolidation of our Venezuelan subsidiary and 0.7 million units due to the sale of GDTNA.
CGS in the first
six
months of
2016
was
$5,514 million
, decreasing
$579 million
, or
9.5%
, from
$6,093 million
in the first
six
months of
2015
. CGS decreased due to lower raw material costs of $202 million, primarily in Americas and EMEA, foreign currency translation of $171 million, primarily in Americas and EMEA, lower costs of $139 million due to the deconsolidation of our Venezuelan subsidiary, lower costs in other tire-related businesses of $111 million, primarily related to motorcycle tire sales in Americas due to the dissolution of the global alliance with SRI, lower product mix costs of $44 million, driven by lower commercial tire volume in Americas, and lower conversion costs of $12 million. These decreases were partially offset by higher
tire volume of $50 million, an out of period adjustment of $24 million of expense related to the elimination of intracompany profit in Americas, primarily related to the years 2012 to 2015, with the majority attributable to 2012, and a $14 million charge related to the settlement of obligations of one of our U.K. pension plans.
CGS in the first six months of 2016 included pension expense of $24 million, excluding the pension settlement charge of $14 million, which decreased from $47 million in the first six months of 2015, primarily due to the deconsolidation of our Venezuelan subsidiary and a change in estimating interest and service costs in the measurement of pension expense effective January 1, 2016.
CGS in the first
six
months of
2016
also included accelerated depreciation of $7 million ($7 million after-tax and minority) primarily related to our plan to close our Wolverhampton, U.K. mixing and retreading facility and to transfer the production to other manufacturing facilities in EMEA compared to $2 million ($2 million after-tax and minority) in the first
six
months of 2015 primarily related to the closure of one of our manufacturing facilities in Amiens, France and our exit from the farm tire business in EMEA. CGS in the first
six
months of 2016 and 2015 also included savings from rationalization plans of $3 million and $16 million, respectively. The savings in 2015 related to the closure of one of our manufacturing facilities in Amiens, France and our exit from the farm tire business in EMEA. CGS was
72.8%
of sales in the first
six
months of
2016
compared to
74.3%
in the first
six
months of
2015
.
SAG in the first
six
months of
2016
was
$1,208 million
, decreasing
$48 million
, or
3.8%
, from
$1,256 million
in the first
six
months of
2015
. SAG decreased due to foreign currency translation of $32 million, primarily in Americas and EMEA, lower costs of $11 million due to the deconsolidation of our Venezuelan subsidiary, and decreased bad debt expense of $10 million.
SAG in the first
six
months of
2016
included pension expense of $15 million, which decreased from $26 million in the first
six
months of 2015, primarily due to the change in estimating interest and service costs in the measurement of pension expense effective January 1, 2016. SAG in the first
six
months of
2016
and
2015
also included savings from rationalization plans of $14 million and $13 million, respectively. SAG was
16.0%
of sales in the first
six
months of
2016
, compared to
15.3%
in the first
six
months of
2015
.
We recorded net rationalization charges of
$59 million
($54 million after-tax and minority) in the first
six
months of
2016
and net rationalization charges of
$62 million
($44 million after-tax and minority) in the first
six
months of
2015
. In the first six months of 2016, we recorded charges of $43 million for rationalization actions initiated during 2016, which primarily related to manufacturing headcount reductions in EMEA to improve operating efficiency. In addition, we initiated a plan to reduce SAG headcount. We also recorded charges of $16 million related to prior year plans, including additional associate-related and dismantling costs related to the closure of one of our manufacturing facilities in Amiens, France. In the first six months of 2015, we recorded charges of $36 million for rationalization actions initiated during the year, which included a plan to close our Wolverhampton, U.K. mixing and retreading facility and to transfer the production to other manufacturing facilities in EMEA and a plan to transfer consumer tire production from our manufacturing facility in Wittlich, Germany to other manufacturing facilities in EMEA. We also initiated plans for SAG headcount reductions in Americas and EMEA. We recorded charges of $26 million related to prior year plans, including additional associate-related and dismantling costs related to the closure of one of our manufacturing facilities in Amiens, France.
Interest expense in the first
six
months of
2016
was
$195 million
, decreasing
$22 million
, or
10.1%
, from
$217 million
in the first
six
months of 2015. The decrease was due to lower average debt balances of $6,012 million in the first
six
months of 2016 compared to $6,195 million in the first
six
months of 2015. In addition, the average interest rate of 6.49% in the first
six
months of
2016
decreased compared to 7.01% in the first
six
months of
2015
. These decreases were partially offset by charges of $11 million related to the write-off of deferred financing fees.
Other (Income) Expense in the first
six
months of
2016
was
$26 million
of expense, compared to
$119 million
of income in the first
six
months of 2015. Other (Income) Expense in the first
six
months of 2016 included royalty income of
$14 million
, compared to
$175 million
in the first
six
months of
2015
. Royalty income in 2015 included a one-time pre-tax gain of
$155 million
on the recognition of deferred income resulting from the termination of a licensing agreement associated with the sale of our former Engineered Products business.
Other (Income) Expense in the first
six
months of 2016 included financing fees and financial instruments expense of
$68 million
, compared to
$23 million
in the first
six
months of
2015
. Financing fees and financial instruments expense in the first six months of 2016 includes a
$44 million
redemption premium related to the redemption of $900 million of 6.5% senior notes due 2021.
Other (Income) Expense in the first six months of
2016
also included a benefit of
$16 million
in general and product liability expense (income) - discontinued products, compared to expense of
$9 million
in the first six months of 2015. The difference primarily relates to a benefit of
$4 million
for the recovery of past costs from one of our asbestos insurers and a benefit of
$10 million
related to changes in assumptions for probable insurance recoveries for asbestos claims in future periods. Additionally, Other (Income) Expense in the first
six
months of 2016 included net foreign currency exchange gains of
$3 million
compared to losses of
$29 million
in the first
six
months of
2015
.
Income tax expense in the first
six
months of
2016
was
$171 million
on income before income taxes of
$568 million
. In the first
six
months of
2015
, we recorded income tax expense of
$243 million
on income before income taxes of
$687 million
. Income tax expense in the first
six
months of 2016 was favorably impacted by
$9 million
(
$8 million
after minority interest) primarily related to a
$7 million
tax benefit resulting from the release of a valuation allowance in our Americas operations and
$2 million
of tax benefits related to various discrete tax adjustments. Income tax expense in the first six months of 2015 was unfavorably impacted by $8 million ($8 million after minority interest) of discrete tax adjustments, primarily related to an audit of prior tax years and the establishment of a valuation allowance, both in EMEA.
We record taxes based on overall estimated annual effective tax rates. In 2016, the reduction of our effective tax rate compared to the U.S. statutory rate was primarily attributable to income in various foreign taxing jurisdictions where we maintain a full valuation allowance on certain deferred tax assets.
Our history of losses in various foreign taxing jurisdictions represented sufficient negative evidence to require us to maintain a full valuation allowance against certain of our net deferred tax assets. Each reporting period we assess available positive and negative evidence and estimate if sufficient future taxable income will be generated to utilize these existing deferred tax assets. As of June 30, 2016, certain of our subsidiaries, primarily in our EMEA operations, where we maintain a valuation allowance, are now in a position of cumulative profits for the most recent three-year period. While these entities have had a long history of operating losses this recent positive evidence provides us the opportunity to apply greater significance to our forecasts in assessing the need for a valuation allowance. Before we would change our judgment on the need for a full valuation allowance a sustained period of operating profitability is required. Considering the duration and magnitude of operating losses in these entities it is our judgment that we have not yet achieved profitability of a duration and magnitude sufficient to release our valuation allowance against our deferred tax assets. We believe that if these entities earn sufficient profits for the full year 2016 and are forecasted to earn sufficient profits for 2017 and beyond, that positive evidence will exist to require the release of all, or a portion, of these valuation allowances at year end 2016. This may result in a reduction of the valuation allowance and a one-time tax benefit of up to
$255 million
(
$255 million
after minority interest).
Minority shareholders’ net income in the first
six
months of
2016
was
$11 million
, compared to
$28 million
in
2015
. The decrease in
2016
is due to the dissolution of the global alliance with SRI in the fourth quarter of 2015.
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. Effective January 1, 2016, we combined our previous North America and Latin America SBUs into one Americas SBU. Accordingly, we have also combined the North America and Latin America reportable segments effective on that date to align with the new organizational structure and the basis used for reporting to our Chief Executive Officer.
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 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. 6, 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
second
quarter of
2016
was
$531 million
, decreasing
$19 million
, or
3.5%
, from
$550 million
in the
second
quarter of
2015
. Total segment operating margin (segment operating income divided by segment sales) in the
second
quarter of
2016
was
13.7%
, compared to
13.2%
in the
second
quarter of
2015
. Total segment operating income in the first
six
months of
2016
was
$950 million
, increasing
$12 million
, or
1.3%
, from
$938 million
in the first
six
months of
2015
. Total segment operating margin (segment operating income divided by segment sales) in the first
six
months of
2016
was
12.5%
, compared to
11.4%
in the first
six
months of
2015
.
Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
Percent
|
|
(In millions)
|
2016
|
|
2015
|
|
Change
|
|
Change
|
|
2016
|
|
2015
|
|
Change
|
|
Change
|
|
Tire Units
|
18.8
|
|
|
20.0
|
|
|
(1.2
|
)
|
|
(6.1
|
)%
|
|
36.8
|
|
|
39.2
|
|
|
(2.4
|
)
|
|
(6.1
|
)%
|
|
Net Sales
|
$
|
2,090
|
|
|
$
|
2,416
|
|
|
$
|
(326
|
)
|
|
(13.5
|
)%
|
|
$
|
4,041
|
|
|
$
|
4,659
|
|
|
$
|
(618
|
)
|
|
(13.3
|
)%
|
|
Operating Income
|
291
|
|
|
358
|
|
|
(67
|
)
|
|
(18.7
|
)%
|
|
551
|
|
|
606
|
|
|
(55
|
)
|
|
(9.1
|
)%
|
|
Operating Margin
|
13.9
|
%
|
|
14.8
|
%
|
|
|
|
|
|
13.6
|
%
|
|
13.0
|
%
|
|
|
|
|
Three Months Ended
June 30, 2016
and
2015
Americas unit sales in the
second
quarter of
2016
decreased
1.2 million
units, or
6.1%
, to
18.8 million
units. Americas unit volume decreased 0.4 million units due to the dissolution of the global alliance with SRI and 0.3 million units due to the impact of the deconsolidation of our Venezuelan subsidiary. OE tire volume decreased 0.9 million units, or 15.2%, primarily driven by the dissolution of the global alliance with SRI and a decline in tire volume, primarily in the U.S. and Brazil. Replacement tire volume decreased 0.3 million units, or 2.4%, due to the deconsolidation of our Venezuelan subsidiary.
Net sales in the
second
quarter of
2016
were
$2,090 million
, decreasing
$326 million
, or
13.5%
, from
$2,416 million
in the
second
quarter of
2015
. The decrease in net sales was due to the deconsolidation of our Venezuelan subsidiary of $115 million, lower sales in other tire-related businesses of $86 million, primarily driven by $43 million in motorcycle tire sales due to the dissolution of the global alliance with SRI and $32 million in our retail and retread businesses, lower volume of $82 million, and unfavorable foreign currency translation of $43 million, primarily in Brazil and Argentina.
Operating income in the
second
quarter of
2016
was
$291 million
, decreasing
$67 million
, or
18.7%
, from
$358 million
in the
second
quarter of
2015
. The decrease in operating income was due to the deconsolidation of our Venezuelan subsidiary of $36 million, unfavorable conversion cost of $29 million due to additional engineering activities and a shift in production to increase our capacity for high-value added ("HVA") tires, an out of period adjustment of $24 million of expense related to the elimination of intracompany profit, primarily related to the years 2012 to 2015, with the majority attributable to 2012, lower volume of $23 million and lower income in other tire-related businesses of $21 million, primarily due to decreased motorcycle tire sales as a result of the dissolution of the global alliance with SRI. Operating income was also negatively impacted by unfavorable foreign currency translation of $7 million. These decreases in operating income were partially offset by lower raw material costs of $52 million, lower SAG of $16 million, primarily due to a decrease in incentive compensation and other benefits, and an improvement in price and product mix of $3 million due to new product portfolios and increased sales of premium products.
Operating income in the
second
quarter of 2016 and 2015 excluded rationalization charges of $1 million and $5 million, respectively.
Six Months Ended
June 30, 2016
and
2015
Americas unit sales in the first
six
months of
2016
decreased
2.4 million
units, or
6.1%
, to
36.8 million
units. Americas unit volume decreased 0.7 million units due to the dissolution of the global alliance with SRI and 0.7 million units due to the impact of the deconsolidation of our Venezuelan subsidiary. OE tire volume decreased 1.3 million units, or 11.0%, primarily driven by the dissolution of the global alliance with SRI and a decline in Brazil OE tire volume. Replacement tire volume decreased 1.1 million units, or 4.1%, due to the deconsolidation of our Venezuelan subsidiary and lower U.S. replacement tire volume.
Net sales in the first
six
months of
2016
were
$4,041 million
, decreasing
$618 million
, or
13.3%
, from
$4,659 million
in the first
six
months of
2015
. The decrease in net sales was due to the deconsolidation of our Venezuelan subsidiary of $209 million, lower volume of $151 million, lower sales in other tire-related businesses of $130 million, primarily driven by $77 million in motorcycle tire sales due to the dissolution of the global alliance with SRI and $36 million in our retail and retread businesses, and unfavorable foreign currency translation of $120 million, primarily in Brazil and Argentina.
Operating income in the first
six
months of
2016
was
$551 million
, decreasing
$55 million
, or
9.1%
, from
$606 million
in the first
six
months of
2015
. The decrease in operating income was due to the deconsolidation of our Venezuelan subsidiary of $58 million, lower volume of $39 million, unfavorable conversion cost of $28 million due to additional engineering activities and a shift in production to increase our capacity for HVA tires, and lower income in other tire-related businesses of $27 million, primarily due to decreased motorcycle tire sales as a result of the dissolution of the global alliance with SRI. Operating income was also negatively impacted by an out of period adjustment of $24 million of expense related to the elimination of intracompany profit, primarily related to the years 2012 to 2015, with the majority attributable to 2012, and unfavorable foreign currency translation of $15 million. These decreases in operating income were partially offset by lower raw material costs of $106 million, lower SAG of $18 million, primarily due to a decrease in wages and other benefits, and an improvement in price and product mix of $16 million due to new product portfolios and increased sales of premium products.
Operating income in the first
six
months of 2016 and 2015 excluded rationalization charges of $4 million and $5 million, respectively.
Operating income for the first six months of 2015 excluded a net gain on asset sales of $1 million.
Europe, Middle East and Africa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
Percent
|
|
(In millions)
|
2016
|
|
2015
|
|
Change
|
|
Change
|
|
2016
|
|
2015
|
|
Change
|
|
Change
|
|
Tire Units
|
15.4
|
|
|
14.8
|
|
|
0.6
|
|
|
4.2
|
%
|
|
31.6
|
|
|
30.7
|
|
|
0.9
|
|
|
2.9
|
%
|
|
Net Sales
|
$
|
1,261
|
|
|
$
|
1,265
|
|
|
$
|
(4
|
)
|
|
(0.3
|
)%
|
|
$
|
2,512
|
|
|
$
|
2,596
|
|
|
$
|
(84
|
)
|
|
(3.2
|
)%
|
|
Operating Income
|
148
|
|
|
108
|
|
|
40
|
|
|
37.0
|
%
|
|
228
|
|
|
181
|
|
|
47
|
|
|
26.0
|
%
|
|
Operating Margin
|
11.7
|
%
|
|
8.5
|
%
|
|
|
|
|
|
9.1
|
%
|
|
7.0
|
%
|
|
|
|
|
Three Months Ended
June 30, 2016
and
2015
Europe, Middle East and Africa unit sales in the
second
quarter of
2016
increased
0.6 million
units, or
4.2%
, to
15.4 million
units. OE tire volume increased 0.3 million units, or 8.0%, primarily in our consumer business driven by increased industry demand. Replacement tire volume increased 0.3 million units, or 2.6%, primarily in our consumer business driven by increased industry demand throughout EMEA.
Net sales in the
second
quarter of
2016
were
$1,261 million
, decreasing
$4 million
, or
0.3%
, from
$1,265 million
in the
second
quarter of
2015
. Net sales decreased due to unfavorable price and product mix of $27 million, unfavorable foreign currency translation of $25 million and lower sales from other-tire related businesses of $2 million. These unfavorable impacts were substantially offset by higher tire volume of $51 million, which includes a $7 million negative impact from the dissolution of the global alliance with SRI resulting from SRI obtaining exclusive rights to sell Dunlop-brand tires in certain countries that were previously non-exclusive under the global alliance.
Operating income in the
second
quarter of
2016
was
$148 million
, increasing
$40 million
, or
37.0%
, from
$108 million
in the
second
quarter of
2015
. Operating income increased due primarily to lower conversion costs of $16 million, due to increased production levels, higher volume of $15 million, and lower SAG of $11 million. These favorable impacts were partially offset by lower price and product mix of $36 million, which more than offset the effect of lower raw material costs of $31 million. SAG and conversion costs both included savings from rationalization plans of $2 million.
Operating income in the
second
quarter of
2016
excluded net rationalization charges of
$45 million
, primarily related to programs initiated to reorganize operations and reduce complexity across EMEA, and accelerated depreciation of $5 million, primarily related to the closure of our Wolverhampton, U.K. mixing and retreading facility.
Operating income in the second quarter of 2015 excluded net rationalization charges of $39 million, primarily related to the closure of our Wolverhampton, U.K. mixing and retreading facility and one of our Amiens, France manufacturing facilities and our exit from the farm tire business, and a net loss on asset sales of $3 million.
Six Months Ended
June 30, 2016
and
2015
Europe, Middle East and Africa unit sales in the first
six
months of
2016
increased
0.9 million
units, or
2.9%
, to
31.6 million
units. OE tire volume increased 0.6 million units, or 6.5%, primarily in our consumer business driven by increased industry demand. Replacement tire volume increased 0.3 million units, or 1.5%, primarily in our consumer business driven by increased industry demand throughout EMEA.
Net sales in the first
six
months of
2016
were
$2,512 million
, decreasing
$84 million
, or
3.2%
, from
$2,596 million
in the first
six
months of
2015
. Net sales decreased due to unfavorable price and product mix of $79 million, unfavorable foreign currency translation of $63 million and lower sales from other-tire related businesses of $11 million. These impacts were partially offset by higher tire volume of $71 million, which includes an $18 million negative impact from the dissolution of the global alliance with SRI.
Operating income in the first
six
months of
2016
was
$228 million
, increasing
$47 million
, or
26.0%
, from
$181 million
in the first
six
months of
2015
. Operating income increased due primarily to lower conversion costs of $35 million, driven by increased production levels, and higher volume of $18 million. Lower price and product mix of $62 million was substantially offset by a decline in raw material costs of $61 million. SAG and conversion costs included savings from rationalization plans of $4 million and $3 million, respectively.
Operating income in the first
six
months of
2016
excluded net rationalization charges of
$53 million
, primarily related to programs initiated to reorganize operations and reduce complexity across EMEA, and accelerated depreciation of $7 million, primarily related to the closure of our Wolverhampton, U.K. mixing and retreading facility.
Operating income in the first six months of 2015 excluded net rationalization and accelerated depreciation charges of $54 million and $2 million, respectively, primarily related to the closure of our Wolverhampton, U.K. mixing and retreading facility and one of our Amiens, France manufacturing facilities and our exit from the farm tire business, a net loss on asset sales of $5 million and charges of $4 million related to labor claims with respect to a previously closed facility in Greece.
Asia Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
Percent
|
|
(In millions)
|
2016
|
|
2015
|
|
Change
|
|
Change
|
|
2016
|
|
2015
|
|
Change
|
|
Change
|
|
Tire Units
|
7.3
|
|
|
6.0
|
|
|
1.3
|
|
|
21.1
|
%
|
|
14.6
|
|
|
11.7
|
|
|
2.9
|
|
|
24.5
|
%
|
|
Net Sales
|
$
|
528
|
|
|
$
|
491
|
|
|
$
|
37
|
|
|
7.5
|
%
|
|
$
|
1,017
|
|
|
$
|
941
|
|
|
$
|
76
|
|
|
8.1
|
%
|
|
Operating Income
|
92
|
|
|
84
|
|
|
8
|
|
|
9.5
|
%
|
|
171
|
|
|
151
|
|
|
20
|
|
|
13.2
|
%
|
|
Operating Margin
|
17.4
|
%
|
|
17.1
|
%
|
|
|
|
|
|
16.8
|
%
|
|
16.0
|
%
|
|
|
|
|
Three Months Ended
June 30, 2016
and
2015
Asia Pacific unit sales in the
second
quarter of
2016
increased
1.3 million
units, or
21.1%
, to
7.3 million
units. Replacement tire volume increased 1.3 million units, or 37.8%, primarily in the consumer business, due to the acquisition of a controlling interest in NGY in Japan, which increased tire volume by 1.1 million units, and continued growth in China. OE tire volume increased 1%.
Net sales in the
second
quarter of
2016
were
$528 million
, increasing
$37 million
, or
7.5%
, from
$491 million
in the
second
quarter of
2015
. Net sales increased by $59 million due to higher tire volume, including $40 million related to the acquisition of a controlling interest in NGY. The increase was partially offset by unfavorable foreign currency translation of $16 million, primarily related to the strong U.S. dollar against all Asian currencies except the Japanese yen, and lower price and product mix of $7 million, driven primarily by the impact of lower raw material costs on pricing.
Operating income in the
second
quarter of
2016
was
$92 million
, increasing
$8 million
, or
9.5%
, from
$84 million
in the
second
quarter of
2015
. Operating income increased due primarily to higher tire volume of $14 million, lower raw material costs of $12 million, which more than offset the effect of lower price and product mix of $11 million, and lower conversion costs of $5 million, primarily driven by increased production levels. These increases were partially offset by higher SAG of $10 million, primarily driven by the acquisition of a controlling interest in NGY, and unfavorable foreign currency translation of $3 million.
Operating income in the
second
quarter of 2016 excluded net rationalization charges of $1 million. Operating income in the second quarter of 2015 excluded net gains on asset sales of $6 million and net rationalization charges of $2 million.
Six Months Ended
June 30, 2016
and
2015
Asia Pacific unit sales in the first
six
months of
2016
increased
2.9 million
units, or
24.5%
, to
14.6 million
units. Replacement tire volume increased 2.5 million units, or 39.5%, primarily in the consumer business, due to the acquisition of a controlling interest in NGY in Japan, which increased tire volume by 2.0 million units, and continued growth in China. OE tire volume increased 0.4 million units, or 7.6%, primarily in the consumer business, which reflected growth in China.
Net sales in the first
six
months of
2016
were
$1,017 million
, increasing
$76 million
, or
8.1%
, from
$941 million
in the first
six
months of
2015
. Net sales increased by $144 million due to higher tire volume, including $81 million related to the acquisition of a controlling interest in NGY. The increase was partially offset by unfavorable foreign currency translation of $42 million, primarily related to the strong U.S. dollar against all Asian currencies except the Japanese yen, and lower price and product mix of $29 million, driven primarily by the impact of lower raw material costs on pricing.
Operating income in the first
six
months of
2016
was
$171 million
, increasing
$20 million
, or
13.2%
, from
$151 million
in the first
six
months of
2015
. Operating income increased due primarily to higher tire volume of $35 million, lower raw material costs of $35 million, which more than offset the effect of lower price and product mix of $28 million, and lower conversion costs of $5 million, primarily driven by increased production levels. These increases were partially offset by higher SAG of $24 million, primarily driven by the acquisition of a controlling interest in NGY, and unfavorable foreign currency translation of $7 million.
Operating income in the first
six
months of 2016 excluded net gains on assets sales of $1 million and net rationalization charges of $1 million. Operating income in the first six months of 2015 excluded net gains on asset sales of $6 million and net rationalization charges of $3 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.
In the second quarter of 2016, we amended and restated our $2.0 billion first lien revolving credit facility to extend the maturity to 2021 and reduce the interest rate for loans under the facility by 25 basis points to LIBOR plus 125 basis points. We also redeemed our existing $900 million 6.5% senior notes due 2021 with the proceeds of a new issuance of $900 million 5% senior notes due 2026, together with cash and cash equivalents, which will result in annual interest expense savings of $14 million.
At
June 30, 2016
, we had
$1,138 million
in Cash and cash equivalents, compared to $1,476 million at
December 31, 2015
. For the
six
months ended
June 30, 2016
, net cash used by operating activities was
$120 million
due to the seasonal use of working capital of $686 million exceeding net income. Net cash used by investing activities was
$465 million
, reflecting capital expenditures of $466 million. Net cash provided by financing activities was
$225 million
, driven by net borrowings of $440 million, partially offset by common stock repurchases of $150 million and common stock dividends of $38 million.
At
June 30, 2016
, we had
$2,426 million
of unused availability under our various credit agreements, compared to $2,676 million at
December 31, 2015
. The table below presents unused availability under our credit facilities at those dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
(In millions)
|
2016
|
|
2015
|
|
First lien revolving credit facility
|
$
|
1,094
|
|
|
$
|
1,149
|
|
|
European revolving credit facility
|
544
|
|
|
598
|
|
|
Chinese credit facilities
|
65
|
|
|
66
|
|
|
Pan-European accounts receivable facility
|
—
|
|
|
151
|
|
|
Other foreign and domestic debt
|
283
|
|
|
294
|
|
|
Notes payable and overdrafts
|
440
|
|
|
418
|
|
|
|
$
|
2,426
|
|
|
$
|
2,676
|
|
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 2016 cash flow needs to include capital expenditures of approximately $1.0 billion to $1.1 billion. We also expect interest expense to range between $350 million and $375 million, dividends on our common stock to be $75 million, and contributions to our funded non-U.S. pension plans to be approximately $50 million to $75 million. We expect working capital to be a use of cash of approximately $50 million in 2016. 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 2016 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, South Africa and Argentina, 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, South African and Argentinian 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
June 30, 2016
, approximately $613 million of net assets, including $127 million of cash and cash equivalents, were subject to such requirements. The requirements we must comply with to transfer funds out of China, South Africa and Argentina have not adversely impacted our ability to make transfers out of those countries.
Operating Activities
Net cash used by operating activities was
$120 million
in the first
six
months of
2016
, compared to net cash provided of $274 million in the first
six
months of
2015
.
Net cash used by operating activities in the first
six
months of
2016
was driven by the seasonal use of cash for working capital needs of $686 million. The use of cash for working capital increased year-over-year, primarily due to an increase in inventory in Americas to support customer service levels following a period of low inventory levels during the first half of
2015
. Uses of cash in
2016
also included
$104 million
of compensation and benefit costs. These uses of cash were partially offset by net income of
$397 million
, which included non-cash charges of
$355 million
related to depreciation and amortization.
Net cash provided by operating activities in the first
six
months of
2015
was driven by net income of
$444 million
, which included non-cash charges for depreciation and amortization of
$349 million
, partially offset by the seasonal use of cash for working capital of $477 million and a non-cash gain that was included in net income of
$155 million
related to deferred royalty income (see Note to the Consolidated Financial Statements No. 3, Other (Income) Expense, in this Form 10-Q).
Investing Activities
Net cash used in investing activities was
$465 million
in the first
six
months of
2016
, compared to
$469 million
in the first
six
months of
2015
. Capital expenditures were
$466 million
in the first
six
months of
2016
, compared to
$448 million
in the first
six
months of
2015
. Beyond expenditures required to sustain our facilities, capital expenditures in
2016
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
$225 million
in the first
six
months of
2016
, compared to net cash used of
$267 million
in the first
six
months of
2015
. Financing activities in
2016
included net borrowings of $440 million, common stock repurchases of $150 million and dividends on our common stock of $38 million. Financing activities in 2015 included net debt repayments of $190 million, common stock repurchases of $52 million and dividends on our common stock of $32 million.
Credit Sources
In aggregate, we had total credit arrangements of
$8,792 million
available at
June 30, 2016
, of which
$2,426 million
were unused, compared to $8,699 million available at
December 31, 2015
, of which $2,676 million were unused. At
June 30, 2016
, we had long term credit arrangements totaling
$8,207 million
, of which
$1,986 million
were unused, compared to $8,232 million and $2,258 million, respectively, at
December 31, 2015
. At
June 30, 2016
, we had short term committed and uncommitted credit arrangements totaling
$585 million
, of which
$440 million
were unused, compared to $467 million and $418 million, respectively, at
December 31, 2015
. 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
June 30, 2016
, we had
$3,300 million
of outstanding notes, compared to
$3,565 million
at
December 31, 2015
.
In May 2016, we issued $900 million in aggregate principal amount of 5% senior notes due 2026. In June 2016, we used the proceeds from this offering, together with cash and cash equivalents, to redeem in full our $900 million 6.5% senior notes due 2021.
$2.0 Billion Amended and Restated First Lien Revolving Credit Facility due 2021
In April 2016, we amended and restated our $2.0 billion first lien revolving credit facility. As a result of the amendment, we extended the maturity to 2021 and reduced the interest rate for loans under the facility by 25 basis points to LIBOR plus 125 basis points, based on our current liquidity. In addition, the borrowing base will now include (i) the value of our principal trademarks and (ii) certain cash in an amount not to exceed $200 million.
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
June 30, 2016
, our borrowing base, and therefore our availability, under the facility was
$249 million
below the facility's stated amount of $2.0 billion.
At
June 30, 2016
, we had
$530 million
of borrowings and
$127 million
of letters of credit issued under the revolving credit facility. At
December 31, 2015
, we had
no
borrowings and
$315 million
of letters of credit issued under the revolving credit facility.
During 2016, we began entering into bilateral letter of credit agreements. At June 30, 2016, we had
$186 million
in letters of credit issued under these new agreements.
Amended and Restated Second Lien Term Loan Facility due 2019
The term loan bears interest at LIBOR plus 300 basis points, subject to a minimum LIBOR rate of 75 basis points. At both
June 30, 2016
and
December 31, 2015
, the amount outstanding under this facility was
$598 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 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.
At
June 30, 2016
, there were no borrowings outstanding under the German tranche and there were
$67 million
(
€60 million
) of borrowings outstanding under the all-borrower tranche. At
December 31, 2015
, there were
no
borrowings outstanding under the European revolving credit facility. There were
no
letters of credit issued at
June 30, 2016
and December 31, 2015.
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)
GDTE and certain of its subsidiaries are parties to a pan-European accounts receivable securitization facility that provides the flexibility to designate annually the maximum amount of funding available under the facility in an amount of not less than €45 million and not more than €450 million. For the period beginning October 16, 2015 to October 15, 2016, the designated maximum amount of the facility is
€340 million
.
The facility involves an ongoing daily sale of substantially all of the trade accounts receivable of certain GDTE subsidiaries. Utilization under the facility is based on eligible receivable balances.
The funding commitments under the facility will expire upon the earliest to occur of: (a) September 25, 2019, (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 15, 2016.
At
June 30, 2016
, the amounts available and utilized under this program totaled
$266 million
(
€239 million
). At
December 31, 2015
, the amounts available and utilized under this program totaled
$276 million
(
€254 million
) and
$125 million
(
€115 million
), respectively. The program does not qualify for sale accounting, and accordingly, these amounts are included in Long Term Debt and Capital Leases.
In addition to the pan-European accounts receivable securitization facility discussed above, subsidiaries in Australia have an accounts receivable securitization program that provides flexibility to designate semi-annually the maximum amount of funding available under the facility in an amount of not less than
60 million
Australian dollars and not more than
85 million
Australian dollars. For the period beginning January 1, 2016 to June 30, 2016, the designated maximum amount of the facility was
$52 million
(
70 million
Australian dollars). Availability under this program is based on eligible receivable balances. At
June 30, 2016
, the amounts available and utilized under this program were
$33 million
and
$20 million
, respectively. At December 31, 2015, the amounts available and utilized under this program were
$34 million
and
$19 million
, respectively. The receivables sold under this program also serve as collateral for the related facility. We retain the risk of loss related to these receivables in the event of non-payment. These amounts are included in Long Term Debt and Capital Leases.
Accounts Receivable Factoring Facilities (Off-Balance Sheet)
Various subsidiaries sold certain of their trade receivables under off-balance sheet programs during the first
six
months of 2016. For these programs, we have concluded that there is generally no risk of loss to us from non-payment of the sold receivables. At
June 30, 2016
, the gross amount of receivables sold was
$277 million
, compared to
$299 million
at
December 31, 2015
.
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
June 30, 2016
and December 31, 2015.
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 2015 Form 10-K and Note to the Consolidated Financial Statements No. 7, 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:
|
|
|
|
•
|
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
June 30, 2016
, our availability under this facility of
$1,094 million
, plus our Available Cash of
$330 million
, totaled
$1,424 million
, which is in excess of $200 million.
|
|
|
|
|
•
|
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.
|
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
June 30, 2016
, 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
June 30, 2016
, 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 challenges that we face and the uncertainties of the 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
six
months of 2016, we paid cash dividends of
$38 million
on our common stock. On
July 12, 2016
, the Board of Directors (or a duly authorized committee thereof) declared cash dividends of
$0.07
per share of common stock, or approximately
$18 million
in the aggregate. The dividend will be paid on
September 1, 2016
to stockholders of record as of the close of business on
August 1, 2016
. Future quarterly dividends are subject to Board approval.
On September 18, 2013, the Board of Directors authorized
$100 million
for use in our common stock repurchase program. On May 27, 2014, the Board of Directors approved an increase in that authorization to $450 million. On February 4, 2016, the Board of Directors approved a further increase in that authorization to $1.1 billion. This program expires on December 31, 2018. 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
second
quarter of
2016
, we repurchased
3,571,254
shares at an average price, including commissions, of
$28.00
per share, or
$100 million
in the aggregate. During the first
six
months of
2016
, we repurchased
5,162,630
shares at an average price, including commissions, of
$29.05
per share, or
$150 million
in the aggregate. Since 2013, we repurchased
19,670,348
shares at an average price, including commissions, of
$28.64
per share, or
$563 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 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:
|
|
|
|
•
|
if we do not successfully implement our strategic initiatives, our operating results, financial condition and liquidity may be materially adversely affected;
|
|
|
|
|
•
|
we face significant global competition and our market share could decline;
|
|
|
|
|
•
|
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;
|
|
|
|
|
•
|
our international operations have certain risks that may materially adversely affect our operating results, financial condition and liquidity;
|
|
|
|
|
•
|
we have foreign currency translation and transaction risks that may materially adversely affect our operating results, financial condition and liquidity;
|
|
|
|
|
•
|
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;
|
|
|
|
|
•
|
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;
|
|
|
|
|
•
|
financial difficulties, work stoppages, supply disruptions or economic conditions affecting our major OE customers, dealers or suppliers could harm our business;
|
|
|
|
|
•
|
our capital expenditures may not be adequate to maintain our competitive position and may not be implemented in a timely or cost-effective manner;
|
|
|
|
|
•
|
raw material and energy costs may materially adversely affect our operating results and financial condition;
|
|
|
|
|
•
|
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;
|
|
|
|
|
•
|
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;
|
|
|
|
|
•
|
our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly;
|
|
|
|
|
•
|
we have substantial fixed costs and, as a result, our operating income fluctuates disproportionately with changes in our net sales;
|
|
|
|
|
•
|
we may incur significant costs in connection with our contingent liabilities and tax matters;
|
|
|
|
|
•
|
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;
|
|
|
|
|
•
|
we are subject to extensive government regulations that may materially adversely affect our operating results;
|
|
|
|
|
•
|
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;
|
|
|
|
|
•
|
if we are unable to attract and retain key personnel, our business could be materially adversely affected; and
|
|
|
|
|
•
|
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.
|
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.