ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
All per share amounts are diluted and refer to Goodyear net income (loss).
OVERVIEW
The Goodyear Tire & Rubber Company is one of the world’s leading manufacturers of tires, with one of the most recognizable brand names in the world and operations in most regions of the world. We have a broad global footprint with
48
manufacturing facilities in
22
countries, including the United States. We operate our business through three operating segments representing our regional tire businesses: Americas; Europe, Middle East and Africa (“EMEA”); and Asia Pacific.
On April 16, 2018, we announced an agreement to form a 50/50 joint venture with Bridgestone Americas, Inc. (“Bridgestone”) that will combine our company-owned wholesale distribution business and Bridgestone’s tire wholesale warehouse business to create TireHub, LLC (“TireHub”), a leading tire distribution joint venture in the United States. TireHub will provide U.S. tire dealers and retailers with a comprehensive range of passenger and light truck tires from two of the world’s leading tire companies, with an emphasis on satisfying the rapidly growing demand for larger rim diameter premium tires. The transaction is expected to close in June 2018, subject to customary closing conditions and regulatory approvals. Upon closing, TireHub will become our sole authorized national tire distributor in the United States.
In connection with the ramp-up of TireHub’s operations, the Company plans to transition volume representing approximately 10 million units of annual sales to TireHub and other aligned distributors to maximize our geographic reach and customer service capabilities. TireHub initially will have more than 80 distribution and warehouse locations throughout the United States and is expected to have the scale to reach the vast majority of retail locations in the U.S. daily. TireHub is also expected to provide a superior, fully integrated distribution, warehousing, sales and delivery solution that is expected to provide enhanced fill rates and turnaround times — enabling dealers to quickly access the products they need and manage the growing complexity in the tire business driven by SKU proliferation.
Results of Operations
In the first quarter of 2018, we continued to experience challenging global industry conditions, including higher raw material costs and weak demand in many of our key markets. We experienced weak demand for original equipment and consumer replacement tires in Europe and the United States despite favorable trends in miles driven, gasoline prices and unemployment.
Our first quarter of 2018 results reflect a 2.5% decrease in tire unit shipments compared to the first quarter of 2017. In the first quarter of 2018, we realized approximately $75 million of cost savings, including raw material cost saving measures of approximately $20 million, which exceeded the impact of general inflation. Our raw material costs, including cost saving measures, increased by approximately 7% in the first quarter of 2018 compared to the first quarter of 2017.
Net sales in the first
quarter
of
2018
were
$3,830 million
, compared to
$3,699 million
in the first
quarter
of
2017
. Net sales increased in the first quarter of 2018 due to favorable foreign currency translation, primarily in EMEA, and improvements in price and product mix. These increases were partially offset by lower tire unit volumes in EMEA and Americas, partially offset by higher tire unit volumes in Asia Pacific.
In the first
quarter
of
2018
, Goodyear net income was
$75 million
, or
$0.31
per share, compared to
$166 million
, or
$0.65
per share, in the first
quarter
of
2017
. The decrease in Goodyear net income was primarily driven by lower segment operating income.
Our total segment operating income for the first
quarter
of
2018
was
$281 million
, compared to
$390 million
in the first
quarter
of
2017
. The
$109 million
decrease in segment operating income was due primarily to an increase in raw material costs of $73 million, primarily in EMEA and Americas, lower tire unit volume of $20 million, primarily in EMEA and Americas, lower price and product mix of $16 million, driven by Americas, and lower income from other tire-related businesses of $10 million. These decreases were partially offset by lower SAG of $12 million, primarily related to lower incentive compensation, and foreign currency translation of $11 million. Refer to "Results of Operations — Segment Information” for additional information.
At
March 31, 2018
, we had
$837 million
of Cash and cash equivalents as well as
$2,439 million
of unused availability under our various credit agreements, compared to
$1,043 million
and $3,196 million, respectively, at
December 31, 2017
. Cash and cash equivalents decreased by
$206 million
from
December 31, 2017
due primarily to cash used for working capital of $449 million, capital expenditures of $248 million, rationalization payments of $106 million and $59 million in common stock repurchases and dividends. These uses of cash were partially offset by net borrowings of $492 million and cash derived from net income of $80 million. Refer to "Liquidity and Capital Resources" for additional information.
Outlook
We now expect that our full-year tire unit volume for 2018 will be up approximately 2% compared to 2017, which reflects the transition of volume to TireHub, and for unabsorbed fixed overhead costs to be approximately $55 million lower in 2018 compared to 2017. We continue to expect cost savings to more than offset general inflation in 2018 by approximately $130 million. Based
on current spot rates, we now expect foreign currency translation to positively affect segment operating income by approximately $40 million in 2018 compared to 2017.
Based on current raw material spot prices, for the full year of 2018, we expect our raw material costs will be up approximately $50 million compared to 2017, excluding raw material cost saving measures, and we expect a headwind of approximately $25 million from price and product mix net of raw material costs. 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
2018
were
$3,830 million
, increasing
$131 million
, or
3.5%
, from
$3,699 million
in the first
quarter
of
2017
. Goodyear net income was
$75 million
, or
$0.31
per share, in the first
quarter
of
2018
, compared to
$166 million
, or
$0.65
per share, in the first
quarter
of
2017
.
Net sales increased in the first
quarter
of
2018
, due primarily to favorable foreign currency translation of $166 million, primarily in EMEA, and improvements in price and product mix of $64 million. These increases were partially offset by lower tire unit volume of $83 million and lower sales in other tire-related businesses of $17 million.
Worldwide tire unit sales in the first
quarter
of
2018
were
39.0 million
units, decreasing
1.0 million
units, or
2.5%
, from
40.0 million
units in the first
quarter
of
2017
. Replacement tire volume decreased
0.5 million
units, or
2.0%
, in Americas and EMEA. OE tire volume decreased
0.5 million
units, or
3.8%
, primarily in EMEA and Americas.
CGS in the first
quarter
of
2018
was
$2,976 million
, increasing
$216 million
, or
7.8%
, from
$2,760 million
in the first
quarter
of
2017
. CGS increased due to foreign currency translation of $127 million, primarily in EMEA, higher costs related to product mix of $80 million and higher raw material costs of $73 million. These increases were partially offset by lower tire unit volume of $63 million, primarily in EMEA and Americas.
CGS in the first
quarter
of
2018
and
2017
included pension expense of $4 million for each period. CGS in the first
quarter
of
2018
and 2017 also included accelerated depreciation of $1 million ($1 million after-tax and minority) and $8 million ($5 million after-tax and minority), respectively, primarily related to the closure of our manufacturing facility in Philippsburg, Germany. CGS in the first
quarter
of
2018
and
2017
also included incremental savings from rationalization plans of $13 million and $4 million, respectively. CGS was
77.7%
of sales in the first
quarter
of
2018
compared to 74.6% in the first
quarter
of
2017
.
SAG in the first
quarter
of
2018
was
$591 million
, increasing
$15 million
, or
2.6%
, from
$576 million
in the first
quarter
of
2017
.
SAG increased primarily due to foreign currency translation of $28 million, primarily in EMEA. This increase was partially offset by lower incentive compensation of $19 million.
SAG in the first
quarter
of
2018
and
2017
included pension expense of $4 million for each period. SAG in the first
quarter
of
2018
and
2017
also included incremental savings from rationalization plans of $9 million in each period. SAG was
15.4%
of sales in the first
quarter
of
2018
, compared to 15.6% in the first
quarter
of
2017
.
We recorded net rationalization charges of
$37 million
($26 million after-tax and minority) in the first
quarter
of
2018
and
$29 million
($20 million after-tax and minority) in the first
quarter
of
2017
. In the first
quarter
of
2018
, we recorded charges of $31 million for rationalization actions initiated during 2018, which primarily related to a global plan to reduce SAG headcount and a plan to improve operating efficiency in EMEA. We also recorded net charges of $6 million related to prior year plans, primarily related to the closure of our tire manufacturing facility in Philippsburg, Germany. 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 closure of our tire manufacturing facility in Philippsburg, Germany.
Interest expense in the first
quarter
of
2018
was
$76 million
, decreasing
$11 million
, or
12.6%
, from
$87 million
in the first
quarter
of
2017
. The decrease was due to a lower average interest rate of 5.07% in the first
quarter
of 2018 compared to 6.10% in the first
quarter
of 2017, partially offset by a higher average debt balance of $5,994 million in the first
quarter
of
2018
compared to $5,706 million in the first
quarter
of
2017
.
Other (Income) Expense in the first
quarter
of
2018
was
$37 million
of expense, compared to
$8 million
of expense in the first
quarter
of
2017
. Other (Income) Expense in 2018 included charges of $9 million ($7 million after-tax and minority) related to a one-time expense from the adoption of the new accounting standards update which no longer allows non-service related pension and other postretirement benefits cost to be capitalized in inventory, $4 million ($3 million after-tax and minority) for transaction costs related to TireHub, $3 million ($3 million after-tax and minority) for hurricane related expenses, and $2 million ($1 million after-tax and minority) of net losses on asset sales.
In the first
quarter
of
2018
, we recorded income tax expense of
$33 million
on income before income taxes of
$113 million
. Income tax expense for the three months ended
March 31, 2018
was unfavorably impacted by a charge of
$7 million
($7 million after-tax and minority) primarily to increase our provisional tax obligation for the one-time transition tax imposed by the Tax Cuts and Jobs Act (the "Tax Act") that was enacted on December 22, 2017 in the United States.
The one-time transition tax is a tax on certain previously untaxed accumulated earnings and profits of our foreign subsidiaries. We were able to reasonably estimate the one-time transition tax and record an initial provisional tax obligation of $77 million at December 31, 2017. The increase to our provisional tax obligation during the first quarter of 2018 is a consequence of revised guidance requiring the one-time transition tax to be calculated using year-end exchange rates as opposed to average exchange rates. Accordingly, as of March 31, 2018, we have now recorded a one-time transition tax obligation totaling
$84 million
. We also have established a provisional reserve of
$20 million
related to foreign withholding taxes that we would incur should we repatriate certain earnings. We continue to consider new guidance for these provisional amounts and are in the process of gathering and analyzing additional information with respect to our 2017 earnings and profits to more precisely compute the amount of the one-time transition tax.
In the first
quarter
of
2017
, we recorded income tax expense of
$70 million
on income before income taxes of
$239 million
. Income tax expense in the first
quarter
of
2017
was favorably impacted by $2 million ($2 million after minority interest) of various discrete tax adjustments.
We record taxes based on overall estimated annual effective tax rates. The difference between our effective tax rate for the three months ended March 31, 2018 and the U.S. statutory rate of 21% primarily relates to the impact of the change in the amount of our provisional one-time transition tax and an overall higher effective tax rate in the foreign jurisdictions in which we operate, partially offset by a benefit from our foreign derived intangible income deduction provided for in the Tax Act. The difference between our effective tax rate for the three months ended March 31, 2017 and the then applicable U.S. statutory rate of 35% was primarily attributable to an overall lower effective tax rate in the foreign jurisdictions in which we operate.
The Tax Act subjects a U.S. parent to the base erosion minimum tax ("BEAT") and a current tax on its global intangible low-taxed income ("GILTI"). We have elected to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred. We estimate that the effect from the BEAT and GILTI taxes on our estimated annual effective tax rate will not be material.
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 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. If recent positive evidence provided by the profitability in our Brazilian subsidiary continues, it will provide us the opportunity to apply greater significance to our forecasts in assessing the need for a valuation allowance. We believe it is reasonably possible that sufficient positive evidence required to release all, or a portion, of its valuation allowance will exist within the next twelve months. This may result in a reduction of the valuation allowance and a one-time tax benefit of up to
$25 million
.
Based on positive evidence and future sources of income in the U.S., it is more likely than not that our foreign tax credits of approximately
$750 million
will be fully utilized.
For the three months ending March 31, 2018, changes to our unrecognized tax benefits did not, and for the full year of 2018 are not expected to, have a significant impact on our financial position or results of operations.
Minority shareholders’ net income in the first
quarter
of
2018
was
$5 million
, compared to
$3 million
in
2017
.
SEGMENT INFORMATION
Segment information reflects our strategic business units (“SBUs”), which are organized to meet customer requirements and global competition and are segmented on a regional basis.
Results of operations are measured based on net sales to unaffiliated customers and segment operating income. Each segment exports tires to other segments. The financial results of each segment exclude sales of tires exported to other segments, but include operating income derived from such transactions. Segment operating income is computed as follows: Net Sales less CGS (excluding asset write-off and accelerated depreciation charges) and SAG (including certain allocated corporate administrative expenses). Segment operating income also includes certain royalties and equity in earnings of most affiliates. Segment operating income does
not include net rationalization charges (credits), asset sales and certain other items, including non-service related pension and other postretirement benefit costs and pension curtailments and settlements.
Management believes that total segment operating income is useful because it represents the aggregate value of income created by our SBUs and excludes items not directly related to the SBUs for performance evaluation purposes. Total segment operating income is the sum of the individual SBUs’ segment operating income. Refer to Note to the Consolidated Financial Statements No. 7, Business Segments, in this Form 10-Q for further information and for a reconciliation of total segment operating income to Income before Income Taxes.
Total segment operating income in the first
quarter
of
2018
was
$281 million
, decreasing
$109 million
, or
27.9%
, from
$390 million
in the first
quarter
of
2017
. Total segment operating margin in the first
quarter
of
2018
was
7.3%
, compared to
10.5%
in the first
quarter
of
2017
.
Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
Percent
|
|
(In millions)
|
2018
|
|
2017
|
|
Change
|
|
Change
|
|
Tire Units
|
16.7
|
|
|
17.2
|
|
|
(0.5
|
)
|
|
(2.9
|
)%
|
|
Net Sales
|
$
|
1,929
|
|
|
$
|
1,958
|
|
|
$
|
(29
|
)
|
|
(1.5
|
)%
|
|
Operating Income
|
127
|
|
|
216
|
|
|
(89
|
)
|
|
(41.2
|
)%
|
|
Operating Margin
|
6.6
|
%
|
|
11.0
|
%
|
|
|
|
|
|
Three Months Ended
March 31, 2018
and
2017
Americas unit sales in the first
quarter
of
2018
decreased
0.5 million
units, or
2.9%
, to
16.7 million
units. Replacement tire volume decreased
0.3 million
units, or
2.8%
, primarily in our consumer business in the U.S. and Mexico. Volume declines in the U.S. were driven by decreased industry demand. OE tire volume decreased
0.2 million
units, or
3.4%
, primarily in our consumer business in the U.S., driven by production declines, partially offset by an increase in our consumer business in Brazil.
Net sales in the first
quarter
of
2018
were
$1,929 million
, decreasing
$29 million
, or
1.5%
, from
$1,958 million
in the first
quarter
of
2017
. The decrease in net sales was primarily driven by lower tire unit volume of $44 million and unfavorable foreign currency translation of $4 million. These decreases were partially offset by improvements in price and product mix of $15 million and higher sales in our other tire-related businesses of $3 million.
Operating income in the first
quarter
of
2018
was
$127 million
, decreasing
$89 million
, or
41.2%
, from
$216 million
in the first
quarter
of
2017
. The decrease in operating income was due to an increase in raw material costs of $27 million, lower price and product mix of $26 million, lower tire unit volume of $12 million, higher conversion costs of $8 million, primarily due to increased under-absorbed overhead resulting from lower tire production, and incremental start-up costs of $5 million associated with our new plant in San Luis Potosi, Mexico. SAG included incremental savings from rationalization plans of $4 million.
Operating income in the first
quarter
of
2018
excluded rationalization charges of
$3 million
. Operating income in the first
quarter
of
2017
excluded rationalization charges of
$1 million
and net gains on asset sales of $1 million.
Europe, Middle East and Africa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
Percent
|
|
(In millions)
|
2018
|
|
2017
|
|
Change
|
|
Change
|
|
Tire Units
|
14.7
|
|
|
15.5
|
|
|
(0.8
|
)
|
|
(5.4
|
)%
|
|
Net Sales
|
$
|
1,330
|
|
|
$
|
1,239
|
|
|
$
|
91
|
|
|
7.3
|
%
|
|
Operating Income
|
78
|
|
|
101
|
|
|
(23
|
)
|
|
(22.8
|
)%
|
|
Operating Margin
|
5.9
|
%
|
|
8.2
|
%
|
|
|
|
|
|
Three Months Ended
March 31, 2018
and
2017
Europe, Middle East and Africa unit sales in the first
quarter
of
2018
decreased
0.8 million
units, or
5.4%
, to
14.7 million
units. OE tire volume decreased
0.6 million
units, or
13.8%
, primarily in our consumer business, driven by declines in the less than 17-inch rim size segment. Replacement tire volume decreased
0.2 million
units, or
1.9%
, primarily in our consumer business driven by decreased industry demand.
Net sales in the first
quarter
of
2018
were
$1,330 million
, increasing
$91 million
, or
7.3%
, from
$1,239 million
in the first
quarter
of
2017
. Net sales increased due to favorable foreign currency translation of $145 million, mainly driven by the euro, and improvements in price and product mix of $22 million. These increases were partially offset by lower tire unit volume of $59 million and lower sales in other tire-related businesses of $17 million, primarily in retread sales and race tires.
Operating income in the first
quarter
of
2018
was
$78 million
, decreasing
$23 million
, or
22.8%
, from
$101 million
in the first
quarter
of
2017
. Operating income decreased due to higher raw material costs of $35 million, which more than offset improvements in price and product mix of $2 million, lower tire unit volume of $14 million and lower income in other tire-related businesses of $9 million. These decreases were partially offset by lower SAG of $15 million, driven by lower wages and benefits, lower conversion costs of $9 million, primarily related to better plant utilization following the closure of our manufacturing facility in Philippsburg, Germany, and foreign currency translation of $9 million, mainly driven by the euro. SAG and conversion costs included incremental savings from rationalization plans of $5 million and $13 million, respectively.
Operating income in the first
quarter
of
2018
excluded net rationalization charges of
$27 million
, primarily related to rationalization plans initiated to reduce SAG headcount and improve operating efficiency in EMEA, net losses on asset sales of $2 million and accelerated depreciation of
$1 million
.
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 closure of our tire manufacturing facility in Philippsburg, Germany.
Asia Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
Percent
|
|
(In millions)
|
2018
|
|
2017
|
|
Change
|
|
Change
|
|
Tire Units
|
7.6
|
|
|
7.3
|
|
|
0.3
|
|
|
4.5
|
%
|
|
Net Sales
|
$
|
571
|
|
|
$
|
502
|
|
|
$
|
69
|
|
|
13.7
|
%
|
|
Operating Income
|
76
|
|
|
73
|
|
|
3
|
|
|
4.1
|
%
|
|
Operating Margin
|
13.3
|
%
|
|
14.5
|
%
|
|
|
|
|
|
Three Months Ended
March 31, 2018
and
2017
Asia Pacific unit sales in the first
quarter
of
2018
increased
0.3 million
units, or
4.5%
, to
7.6 million
units. OE tire volume increased
0.3 million
units, or
11.4%
, primarily in our consumer business due to growth in China. Replacement tire volume remained consistent.
Net sales in the first
quarter
of
2018
were
$571 million
, increasing
$69 million
, or
13.7%
, from
$502 million
in the first
quarter
of
2017
. Net sales increased due to improvements in price and product mix of $27 million, favorable foreign currency translation of $25 million, primarily related to the strengthening of the Chinese yuan, and higher tire unit volume of $20 million.
Operating income in the first
quarter
of
2018
was
$76 million
, increasing
$3 million
, or
4.1%
, from
$73 million
in the first
quarter
of
2017
. Operating income increased due to higher tire unit volume of $6 million and lower conversion costs of $6 million. These increases were partially offset by higher raw material costs of $11 million, which more than offset improvements in price and product mix of $8 million, and higher SAG of $4 million.
Operating income in the first
quarter
of
2018
excluded net rationalization charges of
$3 million
. Operating income in the first
quarter
of
2017
excluded net rationalization charges 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.
On March 7, 2018, we amended and restated our $400 million second lien term loan facility. As a result of the amendment, the term loan now matures on March 7, 2025 and continues to bear interest at 200 basis points over LIBOR.
At
March 31, 2018
, we had
$837 million
in Cash and cash equivalents, compared to
$1,043 million
at
December 31, 2017
. For the
quarter
ended
March 31, 2018
, net cash used by operating activities was
$389 million
, primarily driven by cash used for working capital of $449 million, partially offset by cash derived from net income of $80 million. Net cash used in investing activities was
$248 million
, primarily reflecting capital expenditures. Net cash provided by financing activities was
$399 million
, primarily due to net borrowings of $492 million, partially offset by cash used for common stock repurchases and dividends of $59 million.
At
March 31, 2018
, we had
$2,439 million
of unused availability under our various credit agreements, compared to $3,196 million at
December 31, 2017
. The table below presents unused availability under our credit facilities at those dates:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(In millions)
|
2018
|
|
2017
|
First lien revolving credit facility
|
$
|
1,397
|
|
|
$
|
1,667
|
|
European revolving credit facility
|
277
|
|
|
659
|
|
Chinese credit facilities
|
136
|
|
|
217
|
|
Other foreign and domestic debt
|
301
|
|
|
298
|
|
Notes payable and overdrafts
|
328
|
|
|
355
|
|
|
$
|
2,439
|
|
|
$
|
3,196
|
|
We have deposited our cash and cash equivalents and entered into various credit agreements and derivative contracts with financial institutions that we considered to be substantial and creditworthy at the time of such transactions. We seek to control our exposure to these financial institutions by diversifying our deposits, credit agreements and derivative contracts across multiple financial institutions, by setting deposit and counterparty credit limits based on long term credit ratings and other indicators of credit risk such as credit default swap spreads, and by monitoring the financial strength of these financial institutions on a regular basis. We also enter into master netting agreements with counterparties when possible. By controlling and monitoring exposure to financial institutions in this manner, we believe that we effectively manage the risk of loss due to nonperformance by a financial institution. However, we cannot provide assurance that we will not experience losses or delays in accessing our deposits or lines of credit due to the nonperformance of a financial institution. Our inability to access our cash deposits or make draws on our lines of credit, or the inability of a counterparty to fulfill its contractual obligations to us, could have a material adverse effect on our liquidity, financial position or results of operations in the period in which it occurs.
We expect our 2018 cash flow needs to include capital expenditures of approximately $1.0 billion. We also expect interest expense to range between $335 million and $360 million, restructuring payments to be approximately $200 million, dividends on our common stock to be approximately $135 million, and contributions to our funded non-U.S. pension plans to be approximately $25 million to $50 million. We expect working capital to be a use of cash of approximately $100 million in 2018. We intend to operate the business in a way that allows us to address these needs with our existing cash and available credit if they cannot be funded by cash generated from operations.
We believe that our liquidity position is adequate to fund our operating and investing needs and debt maturities in 2018 and to provide us with flexibility to respond to further changes in the business environment.
Our ability to service debt and operational requirements is also dependent, in part, on the ability of our subsidiaries to make distributions of cash to various other entities in our consolidated group, whether in the form of dividends, loans or otherwise. In certain countries where we operate, such as China and South Africa, transfers of funds into or out of such countries by way of dividends, loans, advances or payments to third-party or affiliated suppliers are generally or periodically subject to certain requirements, such as obtaining approval from the foreign government and/or currency exchange board before net assets can be transferred out of the country. In addition, certain of our credit agreements and other debt instruments limit the ability of foreign subsidiaries to make distributions of cash. Thus, we would have to repay and/or amend these credit agreements and other debt instruments in order to use this cash to service our consolidated debt. Because of the inherent uncertainty of satisfactorily meeting these requirements or limitations, we do not consider the net assets of our subsidiaries, including our Chinese and South African subsidiaries, that are subject to such requirements or limitations to be integral to our liquidity or our ability to service our debt and operational requirements. At
March 31, 2018
, approximately $850 million of net assets, including $155 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
$389 million
in the first
quarter
of
2018
, increasing $103 million compared to net cash used by operating activities of
$286 million
in the first
quarter
of
2017
.
The increase in cash used by operating activities was primarily due to a $109 million decrease in operating income from our SBUs and an increase of $88 million in cash used to fund rationalization payments, primarily related to the closure of our tire manufacturing facility in Philippsburg, Germany, partially offset by a decrease in cash used for inventory. Cash used for inventory decreased by $110 million during the first quarter of 2018, as average raw material prices during the quarter decreased relative to year-end. This compares to the first quarter of 2017 when average raw material prices during the quarter increased relative to the prior year-end.
Investing Activities
Net cash used in investing activities was
$248 million
in the first
quarter
of
2018
, compared to
$270 million
in the first
quarter
of
2017
. Capital expenditures were
$248 million
in the first
quarter
of
2018
, compared to
$271 million
in the first
quarter
of
2017
. Beyond expenditures required to sustain our facilities, capital expenditures in
2018
and 2017 primarily related to the construction of a new manufacturing facility in Mexico and investments in additional capacity around the world.
Financing Activities
Net cash provided by financing activities was
$399 million
in the first
quarter
of
2018
, compared to net cash provided by financing activities of
$398 million
in the first
quarter
of
2017
. Financing activities in
2018
included net borrowings of $492 million, which were partially offset by dividends on our common stock of $34 million, common stock repurchases of $25 million, and minority share repurchases of $22 million. 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.
Credit Sources
In aggregate, we had total credit arrangements of
$8,735 million
available at
March 31, 2018
, of which
$2,439 million
were unused, compared to $8,963 million available at
December 31, 2017
, of which $3,196 million were unused. At
March 31, 2018
, we had long term credit arrangements totaling
$8,075 million
, of which
$2,111 million
were unused, compared to $8,346 million and $2,841 million, respectively, at
December 31, 2017
. At
March 31, 2018
, we had short term committed and uncommitted credit arrangements totaling
$660 million
, of which
$328 million
were unused, compared to $617 million and $355 million, respectively, at
December 31, 2017
. The continued availability of the short term uncommitted arrangements is at the discretion of the relevant lender and may be terminated at any time.
Outstanding Notes
At
March 31, 2018
, we had
$3,334 million
of outstanding notes, compared to
$3,325 million
at
December 31, 2017
.
$2.0 Billion Amended and Restated First Lien Revolving Credit Facility due 2021
Our amended and restated first lien revolving credit facility is available in the form of loans or letters of credit, with letter of credit availability limited to $800 million.
Availability under the facility is subject to a borrowing base, which is based primarily on (i) eligible accounts receivable and inventory of The Goodyear Tire & Rubber Company and certain of its U.S. and Canadian subsidiaries, (ii) the value of our principal trademarks, and (iii) certain cash in an amount not to exceed $200 million. To the extent that our eligible accounts receivable and inventory and other components of the borrowing base decline in value, our borrowing base will decrease and the availability under the facility may decrease below $2.0 billion.
In addition, if the amount of outstanding borrowings and letters of credit under the facility exceeds the borrowing base, we are required to prepay borrowings and/or cash collateralize letters of credit sufficient to eliminate the excess. As of
March 31, 2018
, our borrowing base, and therefore our availability, under the facility was
$401 million
below the facility's stated amount of $2.0 billion. Based on our current liquidity, amounts drawn under this facility bear interest at LIBOR plus 125 basis points, and undrawn amounts under the facility will be subject to an annual commitment fee of 30 basis points.
At
March 31, 2018
, we had
$165 million
of borrowings and
$37 million
of letters of credit issued under the revolving credit facility. At
December 31, 2017
, we had no borrowings and
$37 million
of letters of credit issued under the revolving credit facility.
During 2016, we began entering into bilateral letter of credit agreements. At
March 31, 2018
, we had
$357 million
in letters of credit issued under these agreements.
$400 Million Amended and Restated Second Lien Term Loan Facility due 2025
In March 2018, we amended and restated our second lien term loan facility. As a result of the amendment, the term loan, which previously matured on April 30, 2019, now matures on March 7, 2025. Also, the term loan bears interest, at our option, at (i) 200 basis points over LIBOR or (ii) 100 basis points over an alternative base rate (the higher of (a) the prime rate, (b) the federal funds effective rate or the overnight bank funding rate plus 50 basis points or (c) LIBOR plus 100 basis points). After March 7, 2018 and prior to September 3, 2018, (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, 2018
and
December 31, 2017
, the amounts outstanding under this facility were
$400 million
.
€550 Million Amended and Restated Senior Secured European Revolving Credit Facility due 2020
Our amended and restated €550 million European revolving credit facility consists of (i) a
€125 million
German tranche that is available only to Goodyear Dunlop Tires Germany GmbH (“GDTG”) and (ii) a
€425 million
all-borrower tranche that is available to Goodyear Dunlop Tires Europe B.V. ("GDTE"), GDTG and Goodyear Dunlop Tires Operations S.A. Up to €150 million of swingline loans and
€50 million
in letters of credit are available for issuance under the all-borrower tranche. Amounts drawn under the facility will bear interest at LIBOR plus 175 basis points for loans denominated in U.S. dollars or pounds sterling and EURIBOR plus 175 basis points for loans denominated in euros, and undrawn amounts under the facility will be subject to an annual commitment fee of 30 basis points.
At
March 31, 2018
, there were
$154 million
(
€125 million
) of borrowings outstanding under the German tranche and there were
$247 million
(
€200 million
) of borrowings outstanding under the all-borrower tranche. At December 31, 2017, there were
no
borrowings outstanding under the European revolving credit facility. There were
no
letters of credit issued at
March 31, 2018
and December 31, 2017.
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
€30 million
and not more than
€450 million
. For the period from October 16, 2017 to October 15, 2018, the designated maximum amount of the facility was reduced to
€275 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, 2018.
At
March 31, 2018
, the amounts available and utilized under this program totaled
$153 million
(
€124 million
). At
December 31, 2017
, the amounts available and utilized under this program totaled
$224 million
(
€187 million
). The program does not qualify for sale accounting, and accordingly, these amounts are included in Long Term Debt and Capital Leases.
Accounts Receivable Factoring Facilities (Off-Balance Sheet)
We have sold certain of our trade receivables under off-balance sheet programs during the first
quarter
of 2018. For these programs, we have concluded that there is generally no risk of loss to us from non-payment of the sold receivables. At
March 31, 2018
, the gross amount of receivables sold w
as
$532 million
, comp
a
red to
$572 million
at
December 31, 2017
.
Supplier Financing
We have entered into payment processing agreements with several financial institutions. Under these agreements, the financial institution acts as our paying agent with respect to accounts payable due to our suppliers. These agreements also allow our suppliers to sell their receivables to the financial institutions at the sole discretion of both the supplier and the financial institution on terms that are negotiated between them. We are not always notified when our suppliers sell receivables under these programs.
Our obligations to our suppliers, including the amounts due and scheduled payment dates, are not impacted by our suppliers' decisions to sell their receivables under the programs. Agreements for such financing programs totaled up to $500 million at
March 31, 2018
and December 31, 2017.
Further Information
For a further description of the terms of our outstanding notes, first lien revolving credit facility, second lien term loan facility, European revolving credit facility and pan-European accounts receivable securitization facility, please refer to Note to the Consolidated Financial Statements No. 15, Financing Arrangements and Derivative Financial Instruments, in our 2017 Form 10-K and Note to the Consolidated Financial Statements No. 8, Financing Arrangements and Derivative Financial Instruments, in this Form 10-Q.
Covenant Compliance
Our first and second lien credit facilities and some of the indentures governing our notes contain certain covenants that, among other things, limit our ability to incur additional debt or issue redeemable preferred stock, pay dividends, repurchase shares or make certain other restricted payments or investments, incur liens, sell assets, incur restrictions on the ability of our subsidiaries to pay dividends or to make other payments to us, enter into affiliate transactions, engage in sale and leaseback transactions, and consolidate, merge, sell or otherwise dispose of all or substantially all of our assets. These covenants are subject to significant exceptions and qualifications. Our first and second lien credit facilities and the indentures governing our notes also have customary defaults, including cross-defaults to material indebtedness of Goodyear and its subsidiaries.
We have additional financial covenants in our first and second lien credit facilities that are currently not applicable. We only become subject to these financial covenants when certain events occur. These financial covenants and related events are as follows:
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We become subject to the financial covenant contained in our first lien revolving credit facility when the aggregate amount of our Parent Company (The Goodyear Tire & Rubber Company) and guarantor subsidiaries cash and cash equivalents (“Available Cash”) plus our availability under our first lien revolving credit facility is less than $200 million. If this were to occur, our ratio of EBITDA to Consolidated Interest Expense may not be less than 2.0 to 1.0 for the most recent period of four consecutive fiscal quarters. As of
March 31, 2018
, our availability under this facility of
$1,397 million
, plus our Available Cash of
$151 million
, totaled
$1,548 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, 2018
, we were in compliance with this financial covenant.
Our credit facilities also state that we may only incur additional debt or make restricted payments that are not otherwise expressly permitted if, after giving effect to the debt incurrence or the restricted payment, our ratio of EBITDA to Consolidated Interest Expense for the prior four fiscal quarters would exceed 2.0 to 1.0. Certain of our senior note indentures have substantially similar limitations on incurring debt and making restricted payments. Our credit facilities and indentures also permit the incurrence of additional debt through other provisions in those agreements without regard to our ability to satisfy the ratio-based incurrence test described above. We believe that these other provisions provide us with sufficient flexibility to incur additional debt necessary to meet our operating, investing and financing needs without regard to our ability to satisfy the ratio-based incurrence test.
Covenants could change based upon a refinancing or amendment of an existing facility, or additional covenants may be added in connection with the incurrence of new debt.
At
March 31, 2018
, we were in compliance with the currently applicable material covenants imposed by our principal credit facilities and indentures.
The terms “Available Cash,” “EBITDA,” “Consolidated Interest Expense,” “Consolidated Net Secured Indebtedness,” “Pro Forma Senior Secured Leverage Ratio,” “Consolidated Net J.V. Indebtedness” and “Consolidated European J.V. EBITDA” have the meanings given them in the respective credit facilities.
Potential Future Financings
In addition to our previous financing activities, we may seek to undertake additional financing actions which could include restructuring bank debt or capital markets transactions, possibly including the issuance of additional debt or equity. Given the inherent uncertainty of market conditions, access to the capital markets cannot be assured.
Our future liquidity requirements may make it necessary for us to incur additional debt. However, a substantial portion of our assets are already subject to liens securing our indebtedness. As a result, we are limited in our ability to pledge our remaining
assets as security for additional secured indebtedness. In addition, no assurance can be given as to our ability to raise additional unsecured debt.
Dividends and Common Stock Repurchase Program
Under our primary credit facilities and some of our note indentures, we are permitted to pay dividends on and repurchase our capital stock (which constitute restricted payments) as long as no default will have occurred and be continuing, additional indebtedness can be incurred under the credit facilities or indentures following the payment, and certain financial tests are satisfied.
In the first
quarter
of 2018, we paid cash dividends of
$34 million
on our common stock. On
April 9, 2018
, the Board of Directors (or a duly authorized committee thereof) declared cash dividends of
$0.14
per share of common stock, or approximately
$34 million
in the aggregate. The dividend will be paid on
June 1, 2018
to stockholders of record as of the close of business on
May 1, 2018
. Future quarterly dividends are subject to Board approval.
On
September 18, 2013
, the Board of Directors approved our common stock repurchase program. From time to time, the Board of Directors has approved increases in the amount authorized to be purchased under that program. On February 2, 2017, the Board of Directors approved a further increase in that authorization to an aggregate of
$2.1 billion
. This program expires on December 31, 2019. We intend to repurchase shares of common stock in open market transactions in order to offset new shares issued under equity compensation programs and to provide for additional shareholder returns. During the
first
quarter of
2018
, we repurchased
874,678
shares at an average price, including commissions, of
$28.58
per share, or
$25 million
in the aggregate. Since 2013, we repurchased
44,844,335
shares at an average price, including commissions, of
$29.85
per share, or
$1,338 million
in the aggregate.
The restrictions imposed by our credit facilities and indentures did not affect our ability to pay the dividends on or repurchase our capital stock as described above, and are not expected to affect our ability to pay similar dividends or make similar repurchases in the future.
Asset Dispositions
The restrictions on asset sales imposed by our material indebtedness have not affected our strategy of divesting non-core businesses, and those divestitures have not affected our ability to comply with those restrictions.
FORWARD-LOOKING INFORMATION — SAFE HARBOR STATEMENT
Certain information in this Form 10-Q (other than historical data and information) may constitute forward-looking statements regarding events and trends that may affect our future operating results and financial position. The words “estimate,” “expect,” “intend” and “project,” as well as other words or expressions of similar meaning, are intended to identify forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Such statements are based on current expectations and assumptions, are inherently uncertain, are subject to risks and should be viewed with caution. Actual results and experience may differ materially from the forward-looking statements as a result of many factors, including:
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if we do not successfully implement our strategic initiatives, our operating results, financial condition and liquidity may be materially adversely affected;
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we face significant global competition and our market share could decline;
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deteriorating economic conditions in any of our major markets, or an inability to access capital markets or third-party financing when necessary, may materially adversely affect our operating results, financial condition and liquidity;
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raw material and energy costs may materially adversely affect our operating results and financial condition;
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if we experience a labor strike, work stoppage or other similar event our business, results of operations, financial condition and liquidity could be materially adversely affected;
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we could be negatively impacted by the imposition of tariffs on tires and other goods;
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our international operations have certain risks that may materially adversely affect our operating results, financial condition and liquidity;
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we have foreign currency translation and transaction risks that may materially adversely affect our operating results, financial condition and liquidity;
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our long term ability to meet our obligations, to repay maturing indebtedness or to implement strategic initiatives may be dependent on our ability to access capital markets in the future and to improve our operating results;
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financial difficulties, work stoppages, supply disruptions or economic conditions affecting our major customers, dealers or suppliers could harm our business;
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our capital expenditures may not be adequate to maintain our competitive position and may not be implemented in a timely or cost-effective manner;
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we have a substantial amount of debt, which could restrict our growth, place us at a competitive disadvantage or otherwise materially adversely affect our financial health;
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any failure to be in compliance with any material provision or covenant of our debt instruments, or a material reduction in the borrowing base under our revolving credit facility, could have a material adverse effect on our liquidity and operations;
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our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly;
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we have substantial fixed costs and, as a result, our operating income fluctuates disproportionately with changes in our net sales;
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we may incur significant costs in connection with our contingent liabilities and tax matters;
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our reserves for contingent liabilities and our recorded insurance assets are subject to various uncertainties, the outcome of which may result in our actual costs being significantly higher than the amounts recorded;
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we are subject to extensive government regulations that may materially adversely affect our operating results;
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we may be adversely affected by any disruption in, or failure of, our information technology systems due to computer viruses, unauthorized access, cyber-attack, natural disasters or other similar disruptions;
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if we are unable to attract and retain key personnel, our business could be materially adversely affected; and
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we may be impacted by economic and supply disruptions associated with events beyond our control, such as war, acts of terror, political unrest, public health concerns, labor disputes or natural disasters.
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It is not possible to foresee or identify all such factors. We will not revise or update any forward-looking statement or disclose any facts, events or circumstances that occur after the date hereof that may affect the accuracy of any forward-looking statement.