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
21
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.
Results of Operations
In the first quarter of 2017, we continued to experience volatile global industry conditions, including rising raw material costs and weaker demand in some markets. We experienced mixed industry conditions in Americas, where we experienced weakening demand for original equipment (“OE”) tires in the United States but began to see signs of economic recovery in Brazil. In EMEA, we continued to pursue our strategy of focusing on more profitable segments of the market, such as larger rim diameter tires, which drove increases in price and product mix. In Asia Pacific, declines in OE sales were offset by increased replacement sales in the region.
Our first quarter of 2017 results reflect a 3.5% decrease in tire unit shipments compared to the first quarter of 2016. In the first quarter of 2017, we realized approximately $71 million of cost savings, including raw material cost saving measures of approximately $30 million, which exceeded the impact of general inflation.
Net sales in the
first
quarter of
2017
were
$3,699 million
, compared to
$3,691 million
in the
first
quarter of
2016
. Net sales increased in the
first
quarter of 2017 due to increases in price and product mix and higher sales in other tire-related businesses, primarily related to higher prices for third-party chemical sales in Americas. These increases were partially offset by lower tire unit volumes in Americas and EMEA.
In the
first
quarter of
2017
, Goodyear net income was
$166 million
, or
$0.65
per share, compared to
$184 million
, or
$0.68
per share, in the
first
quarter of
2016
. The decrease in Goodyear net income in the
first
quarter of 2017 compared to the
first
quarter of 2016 was primarily driven by lower segment operating income and increased rationalization charges, primarily related to SAG headcount reductions in certain countries in EMEA and a plan to improve operating efficiency in EMEA.
Our total segment operating income for the
first
quarter of
2017
was
$385 million
, compared to
$419 million
in the
first
quarter of
2016
. The
$34 million
decrease in segment operating income was due to lower volume of $34 million, primarily in Americas and EMEA, higher conversion costs of $31 million, primarily due to higher under-absorbed overhead as a result of lower production volume, primarily in Americas and EMEA, and lower income in other tire-related businesses of $9 million. These declines were partially offset by an increase in price and product mix of $47 million, which exceeded increased raw material costs of $12 million, and a $21 million decrease in selling, administrative and general expense ("SAG"), primarily related to lower advertising costs, savings from rationalization plans, and lower incentive compensation. Refer to "Results of Operations — Segment Information” for additional information.
At
March 31, 2017
, we had
$961 million
of Cash and cash equivalents as well as
$3,071 million
of unused availability under our various credit agreements, compared to
$1,132 million
and $2,970 million, respectively, at
December 31, 2016
. Cash and cash equivalents decreased by
$171 million
from
December 31, 2016
due primarily to cash used for working capital of $596 million, capital expenditures of $271 million, and $50 million in common stock repurchases and dividends. These uses of cash were partially offset by net income of $169 million, which included non-cash depreciation and amortization charges of $185 million, and net borrowings of $438 million. Refer to "Liquidity and Capital Resources" for additional information.
Outlook
We now expect that our full-year tire unit volume for 2017 will be flat compared to 2016, and for unabsorbed fixed overhead costs to be approximately $85 million higher in 2017 compared to 2016. We continue to expect cost savings to more than offset general inflation in 2017. Based on current spot rates, we now expect foreign currency translation to negatively affect segment operating income by approximately $30 million in 2017 compared to 2016.
Based on current raw material spot prices, for the full year of 2017, we now expect our raw material costs will be approximately 20% higher than 2016, excluding raw material cost saving measures. We continue to expect those higher raw material costs to be offset by improvements in price and product mix. 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
Net sales in the
first
quarter of
2017
were
$3,699 million
, increasing
$8 million
, or
0.2%
, from
$3,691 million
in the
first
quarter of
2016
. Goodyear net income was
$166 million
, or
$0.65
per share, in the
first
quarter of
2017
, compared to
$184 million
, or
$0.68
per share, in the
first
quarter of
2016
.
Net sales increased in the
first
quarter of
2017
, due primarily to increases in price and product mix of $81 million and higher sales in other tire-related businesses of $46 million, primarily related to higher prices for third-party chemical sales in Americas. These increases were partially offset by lower tire unit volume of $118 million, primarily in Americas and EMEA.
Worldwide tire unit sales in the
first
quarter of
2017
were
40.0 million
units, decreasing
1.5 million
units, or
3.5%
, from
41.5 million
units in the
first
quarter of
2016
. OE tire volume decreased
1.0 million
units, or
7.6%
, primarily in Americas and Asia Pacific. Replacement tire volume decreased
0.5 million
units, or
1.7%
, primarily in EMEA.
Cost of goods sold (“CGS”) in the
first
quarter of
2017
was
$2,765 million
, increasing
$64 million
, or
2.4%
, from
$2,701 million
in the
first
quarter of
2016
. CGS increased due to higher costs in other tire-related businesses of $55 million, primarily related to third-party chemical sales in Americas, increases in product mix-related manufacturing costs of $34 million, higher conversion costs of $31 million, primarily due to increased under-absorbed overhead as a result of lower production volume in Americas and EMEA, higher raw material costs of $12 million, foreign currency translation of $5 million, and $5 million in incremental start-up costs associated with our new plant in Mexico. These increases were partially offset by lower tire volume of $84 million.
CGS in the
first
quarter of 2017 included pension expense of $12 million, which decreased from $13 million in the
first
quarter of 2016. CGS in the
first
quarter of
2017
included accelerated depreciation of $8 million ($5 million after-tax and minority) primarily related to our announced plan to close our manufacturing facility in Philippsburg, Germany compared to $2 million ($2 million after-tax and minority) in the first quarter of 2016 primarily related to our plan to close our Wolverhampton, U.K. facility. CGS in the
first
quarter of 2017 and 2016 also included incremental savings from rationalization plans of $4 million and $1 million, respectively. CGS was 74.7% of sales in the first quarter of 2017 compared to 73.2% in the first quarter of 2016.
SAG in the
first
quarter of
2017
was
$579 million
, decreasing
$36 million
, or
5.9%
, from
$615 million
in the
first
quarter of
2016
. SAG decreased primarily due to lower wages and benefits of $23 million, primarily due to lower incentive compensation, and lower advertising costs of $13 million.
SAG in the
first
quarter of 2017 included pension expense of $9 million, compared to $7 million in 2016. SAG in the
first
quarter of
2017
and
2016
also included incremental savings from rationalization plans of $9 million and $8 million, respectively. SAG was
15.7%
of sales in the
first
quarter of
2017
, compared to 16.7% in the
first
quarter of
2016
.
We recorded net rationalization charges of
$29 million
($20 million after-tax and minority) in the
first
quarter of
2017
and net rationalization charges of
$11 million
($10 million after-tax and minority) in the
first
quarter of
2016
. In the
first
quarter of 2017, we recorded charges of $23 million for rationalization actions initiated during the quarter, which primarily related to SAG headcount reductions and a plan to improve operating efficiency in EMEA. We also recorded charges of $6 million related to prior year plans, primarily related to the closure of our Wolverhampton, U.K. mixing and retreading facility and the plan to transfer consumer tire production from our manufacturing facility in Wittlich, Germany to other manufacturing facilities in EMEA, and the announced plan to close our tire manufacturing facility in Philippsburg, Germany. In the
first
quarter of 2016, we recorded charges of $11 million for rationalization actions related to prior plans, primarily the closure of one of our manufacturing facilities in Amiens, France.
Interest expense in the
first
quarter of
2017
was
$87 million
, decreasing
$4 million
, or
4.4%
, from
$91 million
in the
first
quarter of 2016. The decrease was due to a lower average debt balance of $5,706 million in the first quarter of 2017 as compared to $5,892 million in the first quarter of 2016, and a lower average interest rate of 6.10% in the
first
quarter of
2017
compared to 6.18% in the
first
quarter of
2016
.
Other (Income) Expense in the
first
quarter of
2017
was
$0 million
, compared to
$6 million
of expense in the
first
quarter of 2016. The decrease primarily relates to redemption premiums paid in connection with the redemption of notes during the first quarter of 2016.
In the
first
quarter of
2017
, we recorded tax expense of
$70 million
on income before income taxes of
$239 million
. The income tax expense for the three months ended
March 31, 2017
was favorably impacted by
$2 million
($2 million after minority interest) of various discrete tax adjustments. In the
first
quarter of 2016, we recorded tax expense of
$78 million
on income before income taxes of
$267 million
. Income tax expense for the three months ended March 31, 2016 was favorably impacted by
$12 million
($11 million after minority interest) of discrete tax adjustments, comprised of a
$7 million
tax benefit for the release of a valuation
allowance in Brazil due to the collection of a receivable that had previously been written off as uncollectible and
$5 million
of tax benefits for various other discrete tax adjustments.
We record taxes based on overall estimated annual effective tax rates. The difference between our effective tax rate and the U.S. statutory rate was primarily attributable to the discrete items noted above and an overall lower effective tax rate in the foreign jurisdictions in which we operate.
Our losses in various foreign taxing jurisdictions in recent periods represented sufficient negative evidence to require us to maintain a full valuation allowance against certain of our net foreign 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. We do not believe that sufficient positive evidence required to release all or a significant portion of these valuation allowances will exist within the next twelve months.
Minority shareholders’ net income in the
first
quarter of
2017
was
$3 million
, compared to
$5 million
in
2016
.
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 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
first
quarter of
2017
was
$385 million
, decreasing
$34 million
, or
8.1%
, from
$419 million
in the
first
quarter of
2016
. Total segment operating margin (segment operating income divided by segment sales) in the
first
quarter of
2017
was
10.4%
, compared to
11.4%
in the
first
quarter of
2016
.
Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
Percent
|
|
(In millions)
|
2017
|
|
2016
|
|
Change
|
|
Change
|
|
Tire Units
|
17.2
|
|
|
18.0
|
|
|
(0.8
|
)
|
|
(4.6
|
)%
|
|
Net Sales
|
$
|
1,958
|
|
|
$
|
1,951
|
|
|
$
|
7
|
|
|
0.4
|
%
|
|
Operating Income
|
214
|
|
|
260
|
|
|
(46
|
)
|
|
(17.7
|
)%
|
|
Operating Margin
|
10.9
|
%
|
|
13.3
|
%
|
|
|
|
|
|
Three Months Ended
March 31, 2017
and
2016
Americas unit sales in the first quarter of 2017 decreased 0.8 million units, or 4.6%, to 17.2 million units. OE tire volume decreased 0.6 million units, or 12.3%, primarily in consumer OE in the United States, driven by reduced OEM production. Replacement tire volume decreased 0.2 million units, or 1.5%, primarily in consumer replacement in the United States, partially offset by an increase in Brazil. Declines in consumer replacement volumes in the United States were driven by lower volumes in 16 inch and below rim size tires, which were partially offset by volume increases in 17 inch and above rim size tires.
Net sales in the
first
quarter of
2017
were
$1,958 million
, increasing
$7 million
, or
0.4%
, from
$1,951 million
in the
first
quarter of
2016
. The increase in net sales was driven by higher sales in our other tire-related businesses of $47 million, primarily due to an increase in price for third-party sales of chemical products, and favorable foreign currency translation of $35 million, primarily in Brazil. These increases were partially offset by lower tire volume of $71 million and unfavorable price and product mix of $4 million.
Operating income in the
first
quarter of
2017
was
$214 million
, decreasing
$46 million
, or
17.7%
, from
$260 million
in the
first
quarter of
2016
. The decrease in operating income was due to unfavorable conversion costs of $23 million, primarily due to
increased under-absorbed overhead resulting from lower tire production in both consumer and commercial, lower tire volume of $20 million, lower income in other tire-related businesses of $6 million, and incremental start-up costs of $5 million associated with our new plant in San Luis Potosi, Mexico. These decreases were partially offset by improved price and product mix of $4 million and lower raw material costs of $3 million. SAG included incremental savings from rationalization plans of $7 million.
Operating income in the
first
quarter of 2017 excluded rationalization charges of $1 million and net gains on asset sales of $1 million. Operating income in the first quarter of 2016 excluded rationalization charges of $3 million.
Europe, Middle East and Africa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
Percent
|
|
(In millions)
|
2017
|
|
2016
|
|
Change
|
|
Change
|
|
Tire Units
|
15.5
|
|
|
16.2
|
|
|
(0.7
|
)
|
|
(3.8
|
)%
|
|
Net Sales
|
$
|
1,239
|
|
|
$
|
1,251
|
|
|
$
|
(12
|
)
|
|
(1.0
|
)%
|
|
Operating Income
|
98
|
|
|
80
|
|
|
18
|
|
|
22.5
|
%
|
|
Operating Margin
|
7.9
|
%
|
|
6.4
|
%
|
|
|
|
|
|
Three Months Ended
March 31, 2017
and
2016
Europe, Middle East and Africa unit sales in the
first
quarter of
2017
decreased
0.7 million
units, or
3.8%
, to
15.5 million
units. Replacement tire volume decreased 0.6 million units, or 4.8%, driven by lower consumer replacement volumes in 16 inch and below rim size tires, primarily due to the Company's strategy to reduce exposure at the lower end of the market, which has been influenced by increased competition, including low-cost imports. This decrease was partially offset by volume increases in 17 inch and above rim size tires. OE tire volume decreased 0.1 million units, or 1.4%, primarily in our consumer business.
Net sales in the
first
quarter of
2017
were
$1,239 million
, decreasing
$12 million
, or
1.0%
, from
$1,251 million
in the
first
quarter of
2016
. Net sales decreased due to lower tire unit volume of $47 million and unfavorable foreign currency translation of $33 million, mainly driven by the devaluation of the euro. These decreases were partially offset by improvements in price and product mix of $68 million driven primarily by increased sales of larger rim size tires.
Operating income in the
first
quarter of
2017
was
$98 million
, increasing
$18 million
, or
22.5%
, from
$80 million
in the
first
quarter of
2016
. Operating income increased primarily due to improvements in price and product mix of $27 million, which more than offset increased raw material costs of $4 million, and lower SAG of $21 million, driven by lower advertising costs and incentive compensation. These increases were partially offset by lower tire unit volume of $13 million, higher conversion costs of $9 million, due to increased under-absorbed overhead resulting from lower tire production volumes, and unfavorable foreign currency translation of $5 million. SAG and conversion costs included incremental savings from rationalization plans of $2 million and $4 million, respectively, primarily related to plans initiated to streamline operations and reduce complexity across EMEA.
Operating income in the
first
quarter of
2017
excluded net rationalization charges of
$27 million
, primarily related to rationalization plans initiated to streamline operations and reduce complexity across EMEA, and accelerated depreciation of $8 million, primarily related to the announced plan to close our tire manufacturing facility in Philippsburg, Germany. Operating income in the first quarter of 2016 excluded net rationalization charges of $8 million, primarily related to the closure of one of our Amiens, France manufacturing facilities, and accelerated depreciation charges of $2 million related to the closure of our Wolverhampton, U.K. mixing and retreading facility.
Asia Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
Percent
|
|
(In millions)
|
2017
|
|
2016
|
|
Change
|
|
Change
|
|
Tire Units
|
7.3
|
|
|
7.3
|
|
|
—
|
|
|
(0.2
|
)%
|
|
Net Sales
|
$
|
502
|
|
|
$
|
489
|
|
|
$
|
13
|
|
|
2.7
|
%
|
|
Operating Income
|
73
|
|
|
79
|
|
|
(6
|
)
|
|
(7.6
|
)%
|
|
Operating Margin
|
14.5
|
%
|
|
16.2
|
%
|
|
|
|
|
|
Three Months Ended
March 31, 2017
and
2016
Asia Pacific unit sales in the
first
quarter of
2017
were consistent with the first quarter of 2016 at
7.3 million
units. Replacement tire volume increased 0.3 million units, or 6.8%, primarily in the consumer business due to growth in China. OE tire volume decreased 0.3 million units, or 9.2%, primarily related to reduced consumer OE demand in China.
Net sales in the
first
quarter of
2017
were
$502 million
, increasing
$13 million
, or
2.7%
, from
$489 million
in the
first
quarter of
2016
. Net sales increased by $17 million due to higher price and product mix, primarily related to the growth of the consumer replacement business in China. This increase was partially offset by lower sales in other tire-related businesses of $2 million and unfavorable foreign currency translation of $2 million, primarily related to the strengthening of the U.S. dollar against the Chinese yuan which more than offset favorable currency translation of the Australian dollar.
Operating income in the
first
quarter of
2017
was
$73 million
, decreasing
$6 million
, or
7.6%
, from
$79 million
in the
first
quarter of
2016
. Operating income decreased due to lower income in other tire-related businesses of $4 million and a decrease of $5 million in several other drivers, which included a decrease in incentives received for the expansion of our factory in China, lower tire volume, higher SAG and unfavorable foreign currency translation. These decreases were partially offset by higher price and product mix of $16 million, which more than offset the effect of higher raw material costs of $11 million.
Operating income in the first quarter of 2017 excluded net rationalization charges of $1 million. Operating income in the first quarter of 2016 excluded net gains on asset sales of $1 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.
At
March 31, 2017
, we had
$961 million
in Cash and cash equivalents, compared to $1,132 million at
December 31, 2016
. For the
three
months ended
March 31, 2017
, net cash used by operating activities was
$286 million
, primarily driven by cash used for working capital of $596 million, that was partially offset by net income of $169 million, which included non-cash charges for depreciation and amortization of $185 million. Net cash used in investing activities was
$270 million
, reflecting capital expenditures of $271 million. Net cash provided by financing activities was
$398 million
, primarily due to net borrowings of $438 million, partially offset by cash used for common stock repurchases and dividends of $50 million.
At
March 31, 2017
, we had
$3,071 million
of unused availability under our various credit agreements, compared to $2,970 million at
December 31, 2016
. The table below presents unused availability under our credit facilities at those dates:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(In millions)
|
2017
|
|
2016
|
First lien revolving credit facility
|
$
|
1,509
|
|
|
$
|
1,506
|
|
European revolving credit facility
|
587
|
|
|
579
|
|
Chinese credit facilities
|
225
|
|
|
252
|
|
Other foreign and domestic debt
|
452
|
|
|
319
|
|
Notes payable and overdrafts
|
298
|
|
|
314
|
|
|
$
|
3,071
|
|
|
$
|
2,970
|
|
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 2017 cash flow needs to include capital expenditures of approximately $1.0 billion. We also expect interest expense to range between $340 million and $365 million, restructuring payments to be approximately $150 million, dividends on our common stock to be approximately $100 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 $200 million in 2017. 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 2017 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
March 31, 2017
, approximately $751 million of net assets, including $198 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
$286 million
in the first
three
months of
2017
, compared to $372 million in the first
three
months of
2016
.
Net cash used by operating activities in the first three months of 2017 decreased compared to 2016 primarily due to a decrease of $169 million in cash used for accounts payable, primarily related to the timing of current year payments, with recent raw material price increases being included in Accounts Payable-Trade on the balance sheet at March 31, 2017. Lower compensation and benefits of $39 million also benefited the first three months of 2017, driven by lower incentive compensation. These positive impacts to cash flows from operating activities were partially offset by increased uses of cash for inventories and accounts receivable, reflecting the impact of higher raw material prices on our costs and pricing.
Investing Activities
Net cash used in investing activities was
$270 million
in the first
three
months of
2017
, compared to
$264 million
in the first
three
months of
2016
. Capital expenditures were
$271 million
in the first
three
months of
2017
, compared to
$253 million
in the first
three
months of
2016
. Beyond expenditures required to sustain our facilities, capital expenditures in
2017
and 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
$398 million
in the first
three
months of
2017
, compared to
$204 million
in the first
three
months of
2016
. Financing activities in
2017
included net borrowings of $438 million, which were partially offset by common stock repurchases of $25 million and dividends on our common stock of $25 million. Financing activities in 2016 included net borrowings $287 million, common stock repurchases of $50 million and dividends on our common stock of $19 million.
Credit Sources
In aggregate, we had total credit arrangements of
$9,057 million
available at
March 31, 2017
, of which
$3,071 million
were unused, compared to $8,491 million available at
December 31, 2016
, of which $2,970 million were unused. At
March 31, 2017
, we had long term credit arrangements totaling
$8,542 million
, of which
$2,773 million
were unused, compared to $7,932 million and $2,656 million, respectively, at
December 31, 2016
. At
March 31, 2017
, we had short term committed and uncommitted credit arrangements totaling
$515 million
, of which
$298 million
were unused, compared to $559 million and $314 million, respectively, at
December 31, 2016
. 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
March 31, 2017
, we had
$3,991 million
of outstanding notes, compared to
$3,287 million
at
December 31, 2016
.
$700 million 4.875% Senior Notes due 2027
In March 2017, we issued $700 million in aggregate principal amount of 4.875% senior notes due 2027. On April 14, 2017, we issued a redemption notice to redeem in full our $700 million 7% senior notes due 2022 on May 15, 2017 at a redemption price of 103.5% of the principal amount of the notes, plus accrued and unpaid interest to the redemption date. The transaction is expected to result in cash charges of $25 million for the redemption premium. We also expect to record $6 million of expense for the write-off of deferred financing fees as a result of the redemption. We intend to use the proceeds of the offering of our $700 million 4.875% senior notes due 2027, together with cash and cash equivalents, to effect the redemption.
$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
March 31, 2017
, our borrowing base, and therefore our availability, under the facility was
$451 million
below the facility's stated amount of $2.0 billion. 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
March 31, 2017
, we had
no
borrowings and
$40 million
of letters of credit issued under the revolving credit facility. At
December 31, 2016
, we had
$85 million
borrowings and
$40 million
of letters of credit issued under the revolving credit facility.
During 2016, we began entering into bilateral letter of credit agreements. At
March 31, 2017
, we had
$249 million
in letters of credit issued under these agreements.
Amended and Restated Second Lien Term Loan Facility due 2019
On March 7, 2017, we amended our second lien term loan facility. As a result of the amendment, the term loan now 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). After March 7, 2017 and prior to September 3, 2017, (i) loans under the facility may not be prepaid or repaid with the proceeds of term loan indebtedness, or converted into or replaced by new term loans, bearing interest at an effective interest rate that is less than the effective interest rate then applicable to such loans and (ii) no amendment of the facility may be made that, directly or indirectly, reduces the effective interest rate applicable to the loans under the facility, in each case unless we pay a fee equal to
1.0%
of the principal amount of the loans so affected. 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
March 31, 2017
and
December 31, 2016
, the amounts outstanding under this facility were
$399 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, and undrawn amounts under the facility will be subject to an annual commitment fee of 30 basis points.
At
March 31, 2017
and December 31, 2016, we had
no
borrowings and
no
letters of credit issued 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)
GDTE and certain other of our European 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, 2016 to October 15, 2017, the designated maximum amount of the facility is
€320 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, 2017.
At
March 31, 2017
, the amounts available and utilized under this program totaled
$185 million
(
€173 million
). At
December 31, 2016
, the amounts available and utilized under this program totaled
$198 million
(
€188 million
). 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 January 1, 2016 to
June 30, 2017
, the designated maximum amount of the facility is
60 million
Australian dollars. Availability under this program is based on eligible receivable balances. At
March 31, 2017
, the amounts available and utilized under this program were
$30 million
(AUD
39 million
) and
$12 million
(AUD
16 million
), respectively. At
December 31, 2016
, the amounts available and utilized under this program were
$28 million
(AUD
39 million
) and
$12 million
(AUD
16 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)
We have sold certain of our trade receivables under off-balance sheet programs during the first
three
months of 2017. For these programs, we have concluded that there is generally no risk of loss to us from non-payment of the sold receivables. At
March 31, 2017
, the gross amount of receivables sold was
$440 million
, compared to
$502 million
at
December 31, 2016
.
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
March 31, 2017
and December 31, 2016.
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 2016 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:
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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
March 31, 2017
, our availability under this facility of
$1,509 million
, plus our Available Cash of
$143 million
, totaled
$1,652 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
March 31, 2017
, 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
March 31, 2017
, 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
three
months of 2017, we paid cash dividends of
$25 million
on our common stock. On
April 10, 2017
, the Board of Directors (or a duly authorized committee thereof) declared cash dividends of
$0.10
per share of common stock, or approximately
$25 million
in the aggregate. The dividend will be paid on
June 1, 2017
to stockholders of record as of the close of business on
May 1, 2017
. 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
first
quarter of
2017
, we repurchased
696,494
shares at an average price, including commissions, of
$35.89
per share, or
$25 million
in the aggregate. Since 2013, we repurchased
31,910,604
shares at an average price, including commissions, of
$29.41
per share, or
$938 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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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 OE 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.