SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORMFORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2019
Commission File Number: 1-1927
THE GOODYEAR TIRE & RUBBER COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Ohio | 34-0253240 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
200 Innovation Way, Akron, Ohio | 44316-0001 | |||||
(Address of Principal Executive Offices) | (Zip Code) |
(330) 796-2121
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, Without Par Value | GT | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☑ No☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
☑No☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes☐No☑
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Number of Shares of Common Stock, Without Par Value, Outstanding at | 232,997,550 |
TABLE OF CONTENTS
EX-101.INS INSTANCE DOCUMENT | |||
EX-101.SCH SCHEMA DOCUMENT | |||
EX-101.CAL CALCULATION LINKBASE DOCUMENT | |||
EX-101.DEF DEFINITION LINKBASE DOCUMENT | |||
EX-101.LAB LABELS LINKBASE DOCUMENT | |||
EX-101.PRE PRESENTATION LINKBASE DOCUMENT | |||
EX-104 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
(In millions, except per share amounts) |
| 2020 |
|
| 2019 |
| ||
Net Sales (Note 2) |
| $ | 3,056 |
|
| $ | 3,598 |
|
Cost of Goods Sold |
|
| 2,552 |
|
|
| 2,879 |
|
Selling, Administrative and General Expense |
|
| 581 |
|
|
| 547 |
|
Goodwill Impairment (Note 8) |
|
| 182 |
|
|
| — |
|
Rationalizations (Note 3) |
|
| 9 |
|
|
| 103 |
|
Interest Expense |
|
| 73 |
|
|
| 85 |
|
Other (Income) Expense (Note 4) |
|
| 27 |
|
|
| 22 |
|
Income (Loss) before Income Taxes |
|
| (368 | ) |
|
| (38 | ) |
United States and Foreign Tax Expense (Note 5) |
|
| 249 |
|
|
| 6 |
|
Net Income (Loss) |
|
| (617 | ) |
|
| (44 | ) |
Less: Minority Shareholders’ Net Income |
|
| 2 |
|
|
| 17 |
|
Goodyear Net Income (Loss) |
| $ | (619 | ) |
| $ | (61 | ) |
Goodyear Net Income (Loss) — Per Share of Common Stock |
|
|
|
|
|
|
|
|
Basic |
| $ | (2.65 | ) |
| $ | (0.26 | ) |
Weighted Average Shares Outstanding (Note 6) |
|
| 234 |
|
|
| 232 |
|
Diluted |
| $ | (2.65 | ) |
| $ | (0.26 | ) |
Weighted Average Shares Outstanding (Note 6) |
|
| 234 |
|
|
| 232 |
|
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(In millions, except per share amounts) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Net Sales (Note 2) | $ | 3,632 | $ | 3,841 | $ | 7,230 | $ | 7,671 | |||||||
Cost of Goods Sold | 2,855 | 2,949 | 5,734 | 5,925 | |||||||||||
Selling, Administrative and General Expense | 586 | 588 | 1,133 | 1,179 | |||||||||||
Rationalizations (Note 3) | 4 | (2 | ) | 107 | 35 | ||||||||||
Interest Expense | 88 | 78 | 173 | 154 | |||||||||||
Other (Income) Expense (Note 4) | 17 | 45 | 39 | 82 | |||||||||||
Income before Income Taxes | 82 | 183 | 44 | 296 | |||||||||||
United States and Foreign Tax Expense (Note 5) | 26 | 19 | 32 | 52 | |||||||||||
Net Income | 56 | 164 | 12 | 244 | |||||||||||
Less: Minority Shareholders’ Net Income | 2 | 7 | 19 | 12 | |||||||||||
Goodyear Net Income (Loss) | $ | 54 | $ | 157 | $ | (7 | ) | $ | 232 | ||||||
Goodyear Net Income (Loss) — Per Share of Common Stock | |||||||||||||||
Basic | $ | 0.23 | $ | 0.66 | $ | (0.03 | ) | $ | 0.97 | ||||||
Weighted Average Shares Outstanding (Note 6) | 233 | 239 | 232 | 240 | |||||||||||
Diluted | $ | 0.23 | $ | 0.65 | $ | (0.03 | ) | $ | 0.96 | ||||||
Weighted Average Shares Outstanding (Note 6) | 234 | 241 | 232 | 242 |
The accompanying notes are an integral part of these consolidated financial statements.
1
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Net Income (Loss) |
| $ | (617 | ) |
| $ | (44 | ) |
Other Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
Foreign currency translation, net of tax of ($8) in 2020 ($2 in 2019) |
|
| (225 | ) |
|
| 30 |
|
Defined benefit plans: |
|
|
|
|
|
|
|
|
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost, net of tax of $9 in 2020 ($8 in 2019) |
|
| 27 |
|
|
| 26 |
|
(Increase)/Decrease in net actuarial losses, net of tax of $0 in 2020 ($1 in 2019) |
|
| (1 | ) |
|
| 4 |
|
Immediate recognition of prior service cost and unrecognized gains and losses due to curtailments, settlements and divestitures, net of tax of ($1) in 2020 ($0 in 2019) |
|
| (1 | ) |
|
| — |
|
Deferred derivative gains, net of tax of $5 in 2020 ($0 in 2019) |
|
| 18 |
|
|
| 5 |
|
Reclassification adjustment for amounts recognized in income, net of tax of $0 in 2020 ($0 in 2019) |
|
| (4 | ) |
|
| (3 | ) |
Other Comprehensive Income (Loss) |
|
| (186 | ) |
|
| 62 |
|
Comprehensive Income (Loss) |
|
| (803 | ) |
|
| 18 |
|
Less: Comprehensive Income (Loss) Attributable to Minority Shareholders |
|
| (7 | ) |
|
| 17 |
|
Goodyear Comprehensive Income (Loss) |
| $ | (796 | ) |
| $ | 1 |
|
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Net Income | $ | 56 | $ | 164 | $ | 12 | $ | 244 | |||||||
Other Comprehensive Income (Loss): | |||||||||||||||
Foreign currency translation, net of tax of $2 and $4 in 2019 (($6) and ($8) in 2018) | (16 | ) | (231 | ) | 14 | (149 | ) | ||||||||
Defined benefit plans: | |||||||||||||||
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost, net of tax of $8 and $16 in 2019 ($8 and $16 in 2018) | 26 | 26 | 52 | 53 | |||||||||||
Decrease in net actuarial losses, net of tax of $3 and $4 in 2019 ($5 and $6 in 2018) | 9 | 16 | 13 | 19 | |||||||||||
Immediate recognition of prior service cost and unrecognized gains and losses due to curtailments, settlements, and divestitures, net of tax of $0 and $0 in 2019 ($2 and $2 in 2018) | — | 4 | — | 4 | |||||||||||
Prior service (cost) credit from plan amendments, net of tax of $0 and $0 in 2019 ($0 and $0 in 2018) | (1 | ) | — | (1 | ) | — | |||||||||
Deferred derivative gains (losses), net of tax of $0 and $0 in 2019 ($4 and $2 in 2018) | (1 | ) | 10 | 4 | 6 | ||||||||||
Reclassification adjustment for amounts recognized in income, net of tax of ($1) and ($1) in 2019 ($1 and $2 in 2018) | (2 | ) | 2 | (5 | ) | 5 | |||||||||
Other Comprehensive Income (Loss) | 15 | (173 | ) | 77 | (62 | ) | |||||||||
Comprehensive Income (Loss) | 71 | (9 | ) | 89 | 182 | ||||||||||
Less: Comprehensive Income (Loss) Attributable to Minority Shareholders | 5 | (11 | ) | 22 | (4 | ) | |||||||||
Goodyear Comprehensive Income | $ | 66 | $ | 2 | $ | 67 | $ | 186 |
The accompanying notes are an integral part of these consolidated financial statements.
2
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| March 31, |
|
| December 31, |
| |||
(In millions, except share data) |
| 2020 |
|
| 2019 |
| |||
Assets: |
|
|
|
|
|
|
|
| |
Current Assets: |
|
|
|
|
|
|
|
| |
Cash and Cash Equivalents |
| $ | 971 |
|
| $ | 908 |
| |
Accounts Receivable, less Allowance — $131 ($111 in 2019) |
|
| 2,025 |
|
|
| 1,941 |
| |
Inventories: |
|
|
|
|
|
|
|
| |
Raw Materials |
|
| 589 |
|
|
| 530 |
| |
Work in Process |
|
| 87 |
|
|
| 143 |
| |
Finished Products |
|
| 2,243 |
|
|
| 2,178 |
| |
|
|
| 2,919 |
|
|
| 2,851 |
| |
Prepaid Expenses and Other Current Assets |
|
| 258 |
|
|
| 234 |
| |
Total Current Assets |
|
| 6,173 |
|
|
| 5,934 |
| |
Goodwill (Note 8) |
|
| 369 |
|
|
| 565 |
| |
Intangible Assets (Note 8) |
|
| 135 |
|
|
| 137 |
| |
Deferred Income Taxes (Note 5) |
|
| 1,261 |
|
|
| 1,527 |
| |
Other Assets (Note 9) |
|
| 941 |
|
|
| 959 |
| |
Operating Lease Right-of-Use Assets |
|
| 873 |
|
|
| 855 |
| |
Property, Plant and Equipment, less Accumulated Depreciation — $10,324 ($10,488 in 2019) |
|
| 6,939 |
|
|
| 7,208 |
| |
Total Assets |
| $ | 16,691 |
|
| $ | 17,185 |
| |
|
|
|
|
|
|
|
|
| |
Liabilities: |
|
|
|
|
|
|
|
| |
Current Liabilities: |
|
|
|
|
|
|
|
| |
Accounts Payable — Trade |
| $ | 2,645 |
|
| $ | 2,908 |
| |
Compensation and Benefits (Notes 12 and 13) |
|
| 470 |
|
|
| 536 |
| |
Other Current Liabilities |
|
| 648 |
|
|
| 734 |
| |
Notes Payable and Overdrafts (Note 10) |
|
| 691 |
|
|
| 348 |
| |
Operating Lease Liabilities due Within One Year |
|
| 191 |
|
|
| 199 |
| |
Long Term Debt and Finance Leases due Within One Year (Note 10) |
|
| 621 |
|
|
| 562 |
| |
Total Current Liabilities |
|
| 5,266 |
|
|
| 5,287 |
| |
Operating Lease Liabilities |
|
| 693 |
|
|
| 668 |
| |
Long Term Debt and Finance Leases (Note 10) |
|
| 5,212 |
|
|
| 4,753 |
| |
Compensation and Benefits (Notes 12 and 13) |
|
| 1,254 |
|
|
| 1,334 |
| |
Deferred Income Taxes (Note 5) |
|
| 86 |
|
|
| 90 |
| |
Other Long Term Liabilities |
|
| 483 |
|
|
| 508 |
| |
Total Liabilities |
|
| 12,994 |
|
|
| 12,640 |
| |
Commitments and Contingent Liabilities (Note 14) |
|
|
|
|
|
|
|
| |
Shareholders’ Equity: |
|
|
|
|
|
|
|
| |
Goodyear Shareholders’ Equity: |
|
|
|
|
|
|
|
| |
Common Stock, no par value: |
|
|
|
|
|
|
|
| |
Authorized, 450 million shares, Outstanding shares — 233 million in 2020 and 2019 |
|
| 233 |
|
|
| 233 |
| |
Capital Surplus |
|
| 2,146 |
|
|
| 2,141 |
| |
Retained Earnings |
|
| 5,444 |
|
|
| 6,113 |
| |
Accumulated Other Comprehensive Loss |
|
| (4,313 | ) |
|
| (4,136 | ) | |
Goodyear Shareholders’ Equity |
|
| 3,510 |
|
|
| 4,351 |
| |
Minority Shareholders’ Equity — Nonredeemable |
|
| 187 |
|
|
| 194 |
| |
Total Shareholders’ Equity |
|
| 3,697 |
|
|
| 4,545 |
| |
Total Liabilities and Shareholders’ Equity |
| $ | 16,691 |
|
| $ | 17,185 |
|
June 30, | December 31, | ||||||
(In millions, except share data) | 2019 | 2018 | |||||
Assets: | |||||||
Current Assets: | |||||||
Cash and Cash Equivalents | $ | 917 | $ | 801 | |||
Accounts Receivable, less Allowance — $117 ($113 in 2018) | 2,473 | 2,030 | |||||
Inventories: | |||||||
Raw Materials | 573 | 569 | |||||
Work in Process | 153 | 152 | |||||
Finished Products | 2,365 | 2,135 | |||||
3,091 | 2,856 | ||||||
Prepaid Expenses and Other Current Assets | 300 | 238 | |||||
Total Current Assets | 6,781 | 5,925 | |||||
Goodwill | 570 | 569 | |||||
Intangible Assets | 135 | 136 | |||||
Deferred Income Taxes (Note 5) | 1,865 | 1,847 | |||||
Other Assets | 1,071 | 1,136 | |||||
Operating Lease Right-of-Use Assets (Note 8) | 854 | — | |||||
Property, Plant and Equipment, less Accumulated Depreciation — $10,492 ($10,161 in 2018) | 7,194 | 7,259 | |||||
Total Assets | $ | 18,470 | $ | 16,872 | |||
Liabilities: | |||||||
Current Liabilities: | |||||||
Accounts Payable — Trade | $ | 2,750 | $ | 2,920 | |||
Compensation and Benefits (Notes 11 and 12) | 507 | 471 | |||||
Other Current Liabilities | 653 | 737 | |||||
Notes Payable and Overdrafts (Note 9) | 480 | 410 | |||||
Operating Lease Liabilities due Within One Year (Note 8) | 200 | — | |||||
Long Term Debt and Finance Leases due Within One Year (Notes 8 and 9) | 491 | 243 | |||||
Total Current Liabilities | 5,081 | 4,781 | |||||
Operating Lease Liabilities (Note 8) | 664 | — | |||||
Long Term Debt and Finance Leases (Notes 8 and 9) | 5,766 | 5,110 | |||||
Compensation and Benefits (Notes 11 and 12) | 1,277 | 1,345 | |||||
Deferred Income Taxes (Note 5) | 94 | 95 | |||||
Other Long Term Liabilities | 539 | 471 | |||||
Total Liabilities | 13,421 | 11,802 | |||||
Commitments and Contingent Liabilities (Note 13) | |||||||
Shareholders’ Equity: | |||||||
Goodyear Shareholders’ Equity: | |||||||
Common Stock, no par value: | |||||||
Authorized, 450 million shares, Outstanding shares — 233 and 232 million in 2019 and 2018 | 233 | 232 | |||||
Capital Surplus | 2,124 | 2,111 | |||||
Retained Earnings | 6,492 | 6,597 | |||||
Accumulated Other Comprehensive Loss | (4,002 | ) | (4,076 | ) | |||
Goodyear Shareholders’ Equity | 4,847 | 4,864 | |||||
Minority Shareholders’ Equity — Nonredeemable | 202 | 206 | |||||
Total Shareholders’ Equity | 5,049 | 5,070 | |||||
Total Liabilities and Shareholders’ Equity | $ | 18,470 | $ | 16,872 |
The accompanying notes are an integral part of these consolidated financial statements.
3
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
| Minority |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
| Goodyear |
|
| Shareholders' |
|
| Total |
| ||||
|
| Common Stock |
|
| Capital |
|
| Retained |
|
| Comprehensive |
|
| Shareholders' |
|
| Equity — Non- |
|
| Shareholders' |
| |||||||||||
(Dollars in millions, except per share amounts) |
| Shares |
|
| Amount |
|
| Surplus |
|
| Earnings |
|
| Loss |
|
| Equity |
|
| Redeemable |
|
| Equity |
| ||||||||
Balance at December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(after deducting 45,813,109 common treasury shares) |
|
| 232,650,318 |
|
| $ | 233 | �� |
| $ | 2,141 |
|
| $ | 6,113 |
|
| $ | (4,136 | ) |
| $ | 4,351 |
|
| $ | 194 |
|
| $ | 4,545 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (619 | ) |
|
|
|
|
|
| (619 | ) |
|
| 2 |
|
|
| (617 | ) |
Foreign currency translation (net of tax of ($8)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (216 | ) |
|
| (216 | ) |
|
| (9 | ) |
|
| (225 | ) |
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost (net of tax of $9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 27 |
|
|
| 27 |
|
|
|
|
|
|
| 27 |
|
Increase in net actuarial losses (net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1 | ) |
|
| (1 | ) |
|
|
|
|
|
| (1 | ) |
Immediate recognition of prior service cost and unrecognized gains and losses due to curtailments, settlements and divestitures (net of tax of ($1)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1 | ) |
|
| (1 | ) |
|
|
|
|
|
| (1 | ) |
Deferred derivative gains (net of tax of $5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 18 |
|
|
| 18 |
|
|
|
|
|
|
| 18 |
|
Reclassification adjustment for amounts recognized in income (net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (4 | ) |
|
| (4 | ) |
|
|
|
|
|
| (4 | ) |
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (177 | ) |
|
| (9 | ) |
|
| (186 | ) |
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (796 | ) |
|
| (7 | ) |
|
| (803 | ) |
Adoption of new accounting standards update (Note 1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (12 | ) |
|
|
|
|
|
| (12 | ) |
|
|
|
|
|
| (12 | ) |
Stock-based compensation plans |
|
|
|
|
|
|
|
|
|
| 7 |
|
|
|
|
|
|
|
|
|
|
| 7 |
|
|
|
|
|
|
| 7 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (38 | ) |
|
|
|
|
|
| (38 | ) |
|
|
|
|
|
| (38 | ) |
Common stock issued from treasury |
|
| 347,232 |
|
|
|
|
|
|
| (2 | ) |
|
|
|
|
|
|
|
|
|
| (2 | ) |
|
|
|
|
|
| (2 | ) |
Balance at March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(after deducting 45,465,877 common treasury shares) |
|
| 232,997,550 |
|
| $ | 233 |
|
| $ | 2,146 |
|
| $ | 5,444 |
|
| $ | (4,313 | ) |
| $ | 3,510 |
|
| $ | 187 |
|
| $ | 3,697 |
|
Accumulated | Minority | ||||||||||||||||||||||||||||||
Other | Goodyear | Shareholders' | Total | ||||||||||||||||||||||||||||
Common Stock | Capital | Retained | Comprehensive | Shareholders' | Equity — Non- | Shareholders' | |||||||||||||||||||||||||
(Dollars in millions, except per share amounts) | Shares | Amount | Surplus | Earnings | Loss | Equity | Redeemable | Equity | |||||||||||||||||||||||
Balance at December 31, 2018 | |||||||||||||||||||||||||||||||
(after deducting 46,292,384 common treasury shares) | 232,171,043 | $ | 232 | $ | 2,111 | $ | 6,597 | $ | (4,076 | ) | $ | 4,864 | $ | 206 | $ | 5,070 | |||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||
Net income (loss) | (61 | ) | (61 | ) | 17 | (44 | ) | ||||||||||||||||||||||||
Foreign currency translation (net of tax of $2) | 30 | 30 | 30 | ||||||||||||||||||||||||||||
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost (net of tax of $8) | 26 | 26 | 26 | ||||||||||||||||||||||||||||
Decrease in net actuarial losses (net of tax of $1) | 4 | 4 | 4 | ||||||||||||||||||||||||||||
Deferred derivative gains (losses) (net of tax of $0) | 5 | 5 | 5 | ||||||||||||||||||||||||||||
Reclassification adjustment for amounts recognized in income (net of tax of $0) | (3 | ) | (3 | ) | (3 | ) | |||||||||||||||||||||||||
Other comprehensive income | 62 | — | 62 | ||||||||||||||||||||||||||||
Total comprehensive income | 1 | 17 | 18 | ||||||||||||||||||||||||||||
Adoption of new accounting standards update (Note 1) | (23 | ) | (23 | ) | (23 | ) | |||||||||||||||||||||||||
Stock-based compensation plans (Note 12) | 4 | 4 | 4 | ||||||||||||||||||||||||||||
Dividends declared (Note 14) | (37 | ) | (37 | ) | (37 | ) | |||||||||||||||||||||||||
Common stock issued from treasury | 299,670 | (1 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||||||
Balance at March 31, 2019 | |||||||||||||||||||||||||||||||
(after deducting 45,992,714 common treasury shares) | 232,470,713 | $ | 232 | $ | 2,114 | $ | 6,476 | $ | (4,014 | ) | $ | 4,808 | $ | 223 | $ | 5,031 | |||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||
Net income (loss) | 54 | 54 | 2 | 56 | |||||||||||||||||||||||||||
Foreign currency translation (net of tax of $2) | (19 | ) | (19 | ) | 3 | (16 | ) | ||||||||||||||||||||||||
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost (net of tax of $8) | 26 | 26 | 26 | ||||||||||||||||||||||||||||
Decrease in net actuarial losses (net of tax of $3) | 9 | 9 | 9 | ||||||||||||||||||||||||||||
Prior service (cost) credit from plan amendments (net of tax of $0) | (1 | ) | (1 | ) | (1 | ) | |||||||||||||||||||||||||
Deferred derivative gains (losses) (net of tax of $0) | (1 | ) | (1 | ) | (1 | ) | |||||||||||||||||||||||||
Reclassification adjustment for amounts recognized in income (net of tax of ($1)) | (2 | ) | (2 | ) | (2 | ) | |||||||||||||||||||||||||
Other comprehensive income | 12 | 3 | 15 | ||||||||||||||||||||||||||||
Total comprehensive income | 66 | 5 | 71 | ||||||||||||||||||||||||||||
Stock-based compensation plans (Note 12) | 9 | 9 | 9 | ||||||||||||||||||||||||||||
Dividends declared (Note 14) | (38 | ) | (38 | ) | (4 | ) | (42 | ) | |||||||||||||||||||||||
Common stock issued from treasury | 50,457 | 1 | 1 | 1 | |||||||||||||||||||||||||||
Purchase of minority shares | 1 | 1 | (22 | ) | (21 | ) | |||||||||||||||||||||||||
Balance at June 30, 2019 | |||||||||||||||||||||||||||||||
(after deducting 45,942,257 common treasury shares) | 232,521,170 | $ | 233 | $ | 2,124 | $ | 6,492 | $ | (4,002 | ) | $ | 4,847 | $ | 202 | $ | 5,049 |
We declared and paid cash dividends of $0.16 and $0.32 per Common Share for the three and six months ended June 30, 2019, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
4
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
| Minority |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
| Goodyear |
|
| Shareholders' |
|
| Total |
| ||||
|
| Common Stock |
|
| Capital |
|
| Retained |
|
| Comprehensive |
|
| Shareholders' |
|
| Equity — Non- |
|
| Shareholders' |
| |||||||||||
(Dollars in millions, except per share amounts) |
| Shares |
|
| Amount |
|
| Surplus |
|
| Earnings |
|
| Loss |
|
| Equity |
|
| Redeemable |
|
| Equity |
| ||||||||
Balance at December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(after deducting 46,292,384 common treasury shares) |
|
| 232,171,043 |
|
| $ | 232 |
|
| $ | 2,111 |
|
| $ | 6,597 |
|
| $ | (4,076 | ) |
| $ | 4,864 |
|
| $ | 206 |
|
| $ | 5,070 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (61 | ) |
|
|
|
|
|
| (61 | ) |
|
| 17 |
|
|
| (44 | ) |
Foreign currency translation (net of tax of $2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 30 |
|
|
| 30 |
|
|
|
|
|
|
| 30 |
|
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost (net of tax of $8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 26 |
|
|
| 26 |
|
|
|
|
|
|
| 26 |
|
Decrease in net actuarial losses (net of tax of $1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4 |
|
|
| 4 |
|
|
|
|
|
|
| 4 |
|
Deferred derivative gains (net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5 |
|
|
| 5 |
|
|
|
|
|
|
| 5 |
|
Reclassification adjustment for amounts recognized in income (net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3 | ) |
|
| (3 | ) |
|
|
|
|
|
| (3 | ) |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 62 |
|
|
| — |
|
|
| 62 |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1 |
|
|
| 17 |
|
|
| 18 |
|
Adoption of new accounting standards update |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (23 | ) |
|
|
|
|
|
| (23 | ) |
|
|
|
|
|
| (23 | ) |
Stock-based compensation plans |
|
|
|
|
|
|
|
|
|
| 4 |
|
|
|
|
|
|
|
|
|
|
| 4 |
|
|
|
|
|
|
| 4 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (37 | ) |
|
|
|
|
|
| (37 | ) |
|
|
|
|
|
| (37 | ) |
Common stock issued from treasury |
|
| 299,670 |
|
|
|
|
|
|
| (1 | ) |
|
|
|
|
|
|
|
|
|
| (1 | ) |
|
|
|
|
|
| (1 | ) |
Balance at March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(after deducting 45,992,714 common treasury shares) |
|
| 232,470,713 |
|
| $ | 232 |
|
| $ | 2,114 |
|
| $ | 6,476 |
|
| $ | (4,014 | ) |
| $ | 4,808 |
|
| $ | 223 |
|
| $ | 5,031 |
|
Accumulated | Minority | ||||||||||||||||||||||||||||||
Other | Goodyear | Shareholders' | Total | ||||||||||||||||||||||||||||
Common Stock | Capital | Retained | Comprehensive | Shareholders' | Equity — Non- | Shareholders' | |||||||||||||||||||||||||
(Dollars in millions, except per share amounts) | Shares | Amount | Surplus | Earnings | Loss | Equity | Redeemable | Equity | |||||||||||||||||||||||
Balance at December 31, 2017 | |||||||||||||||||||||||||||||||
(after deducting 38,308,825 common treasury shares) | 240,154,602 | $ | 240 | $ | 2,295 | $ | 6,044 | $ | (3,976 | ) | $ | 4,603 | $ | 247 | $ | 4,850 | |||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||
Net income | 75 | 75 | 5 | 80 | |||||||||||||||||||||||||||
Foreign currency translation (net of tax of ($2)) | 80 | 80 | 2 | 82 | |||||||||||||||||||||||||||
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost (net of tax of $8) | 27 | 27 | 27 | ||||||||||||||||||||||||||||
Decrease in net actuarial losses (net of tax of $1) | 3 | 3 | 3 | ||||||||||||||||||||||||||||
Deferred derivative gains (losses) (net of tax of ($2)) | (4 | ) | (4 | ) | (4 | ) | |||||||||||||||||||||||||
Reclassification adjustment for amounts recognized in income (net of tax of $1) | 3 | 3 | 3 | ||||||||||||||||||||||||||||
Other comprehensive income | 109 | 2 | 111 | ||||||||||||||||||||||||||||
Total comprehensive income | 184 | 7 | 191 | ||||||||||||||||||||||||||||
Adoption of new accounting standards updates | (1 | ) | (1 | ) | (1 | ) | |||||||||||||||||||||||||
Stock-based compensation plans (Note 12) | 4 | 4 | 4 | ||||||||||||||||||||||||||||
Repurchase of common stock (Note 14) | (850,284 | ) | (1 | ) | (24 | ) | (25 | ) | (25 | ) | |||||||||||||||||||||
Dividends declared (Note 14) | (34 | ) | (34 | ) | (34 | ) | |||||||||||||||||||||||||
Common stock issued from treasury | 524,564 | 1 | 1 | 1 | |||||||||||||||||||||||||||
Purchase of minority shares | 5 | 5 | (29 | ) | (24 | ) | |||||||||||||||||||||||||
Balance at March 31, 2018 | |||||||||||||||||||||||||||||||
(after deducting 38,634,545 common treasury shares) | 239,828,882 | $ | 240 | $ | 2,280 | $ | 6,084 | $ | (3,867 | ) | $ | 4,737 | $ | 225 | $ | 4,962 | |||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||
Net income | 157 | 157 | 7 | 164 | |||||||||||||||||||||||||||
Foreign currency translation (net of tax of ($6)) | (213 | ) | (213 | ) | (18 | ) | (231 | ) | |||||||||||||||||||||||
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost (net of tax of $8) | 26 | 26 | 26 | ||||||||||||||||||||||||||||
Decrease in net actuarial losses (net of tax of $5) | 16 | 16 | 16 | ||||||||||||||||||||||||||||
Immediate recognition of prior service cost and unrecognized gains and losses due to curtailments, settlements and divestitures (net of tax of $2) | 4 | 4 | 4 | ||||||||||||||||||||||||||||
Deferred derivative gains (losses) (net of tax of $4) | 10 | 10 | 10 | ||||||||||||||||||||||||||||
Reclassification adjustment for amounts recognized in income (net of tax of $1) | 2 | 2 | 2 | ||||||||||||||||||||||||||||
Other comprehensive income (loss) | (155 | ) | (18 | ) | (173 | ) | |||||||||||||||||||||||||
Total comprehensive income (loss) | 2 | (11 | ) | (9 | ) | ||||||||||||||||||||||||||
Stock-based compensation plans (Note 12) | 4 | 4 | 4 | ||||||||||||||||||||||||||||
Repurchase of common stock (Note 14) | (3,000,808 | ) | (3 | ) | (72 | ) | (75 | ) | (75 | ) | |||||||||||||||||||||
Dividends declared (Note 14) | (33 | ) | (33 | ) | (7 | ) | (40 | ) | |||||||||||||||||||||||
Common stock issued from treasury | 187,671 | 2 | 2 | 2 | |||||||||||||||||||||||||||
Balance at June 30, 2018 | |||||||||||||||||||||||||||||||
(after deducting 41,447,682 common treasury shares) | 237,015,745 | $ | 237 | $ | 2,214 | $ | 6,208 | $ | (4,022 | ) | $ | 4,637 | $ | 207 | $ | 4,844 |
We declared and paid cash dividends of $0.14 and $0.28$0.16 per Common Share for the three and six months ended June 30, 2018, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
5
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net Income (Loss) |
| $ | (617 | ) |
| $ | (44 | ) |
Adjustments to Reconcile Net Income (Loss) to Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
| 196 |
|
|
| 193 |
|
Amortization and Write-Off of Debt Issuance Costs |
|
| 2 |
|
|
| 4 |
|
Goodwill Impairment (Note 8) |
|
| 182 |
|
|
| — |
|
Provision for Deferred Income Taxes (Note 5) |
|
| 235 |
|
|
| (23 | ) |
Net Pension Curtailments and Settlements |
|
| 2 |
|
|
| — |
|
Net Rationalization Charges (Note 3) |
|
| 9 |
|
|
| 103 |
|
Rationalization Payments |
|
| (73 | ) |
|
| (18 | ) |
Net (Gains) Losses on Asset Sales (Note 4) |
|
| (1 | ) |
|
| (5 | ) |
Operating Lease Expense |
|
| 69 |
|
|
| 74 |
|
Operating Lease Payments |
|
| (66 | ) |
|
| (71 | ) |
Pension Contributions and Direct Payments |
|
| (19 | ) |
|
| (18 | ) |
Changes in Operating Assets and Liabilities, Net of Asset Acquisitions and Dispositions: |
|
|
|
|
|
|
|
|
Accounts Receivable |
|
| (206 | ) |
|
| (425 | ) |
Inventories |
|
| (170 | ) |
|
| (93 | ) |
Accounts Payable — Trade |
|
| (106 | ) |
|
| (71 | ) |
Compensation and Benefits |
|
| (57 | ) |
|
| 31 |
|
Other Current Liabilities |
|
| (30 | ) |
|
| (11 | ) |
Other Assets and Liabilities |
|
| 89 |
|
|
| 10 |
|
Total Cash Flows from Operating Activities |
|
| (561 | ) |
|
| (364 | ) |
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Capital Expenditures |
|
| (211 | ) |
|
| (221 | ) |
Short Term Securities Acquired |
|
| (6 | ) |
|
| (31 | ) |
Short Term Securities Redeemed |
|
| 4 |
|
|
| 31 |
|
Notes Receivable |
|
| (35 | ) |
|
| (7 | ) |
Other Transactions |
|
| (9 | ) |
|
| (16 | ) |
Total Cash Flows from Investing Activities |
|
| (257 | ) |
|
| (244 | ) |
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Short Term Debt and Overdrafts Incurred |
|
| 629 |
|
|
| 571 |
|
Short Term Debt and Overdrafts Paid |
|
| (239 | ) |
|
| (485 | ) |
Long Term Debt Incurred |
|
| 2,188 |
|
|
| 1,850 |
|
Long Term Debt Paid |
|
| (1,600 | ) |
|
| (1,223 | ) |
Common Stock Dividends Paid (Note 15) |
|
| (37 | ) |
|
| (37 | ) |
Debt Related Costs and Other Transactions |
|
| (2 | ) |
|
| (31 | ) |
Total Cash Flows from Financing Activities |
|
| 939 |
|
|
| 645 |
|
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash |
|
| (59 | ) |
|
| — |
|
Net Change in Cash, Cash Equivalents and Restricted Cash |
|
| 62 |
|
|
| 37 |
|
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period |
|
| 974 |
|
|
| 873 |
|
Cash, Cash Equivalents and Restricted Cash at End of the Period |
| $ | 1,036 |
|
| $ | 910 |
|
Six Months Ended | |||||||
June 30, | |||||||
(In millions) | 2019 | 2018 | |||||
Cash Flows from Operating Activities: | |||||||
Net Income | $ | 12 | $ | 244 | |||
Adjustments to Reconcile Net Income to Cash Flows from Operating Activities: | |||||||
Depreciation and Amortization | 389 | 392 | |||||
Amortization and Write-Off of Debt Issuance Costs | 9 | 8 | |||||
Provision for Deferred Income Taxes | (31 | ) | (55 | ) | |||
Net Pension Curtailments and Settlements | — | 3 | |||||
Net Rationalization Charges (Note 3) | 107 | 35 | |||||
Rationalization Payments | (33 | ) | (131 | ) | |||
Net (Gains) Losses on Asset Sales (Note 4) | (6 | ) | — | ||||
Operating Lease Expense (Note 8) | 148 | — | |||||
Operating Lease Payments (Note 8) | (134 | ) | — | ||||
Pension Contributions and Direct Payments | (32 | ) | (42 | ) | |||
Changes in Operating Assets and Liabilities, Net of Asset Acquisitions and Dispositions: | |||||||
Accounts Receivable | (445 | ) | (475 | ) | |||
Inventories | (233 | ) | (222 | ) | |||
Accounts Payable — Trade | (55 | ) | 253 | ||||
Compensation and Benefits | 61 | (30 | ) | ||||
Other Current Liabilities | (37 | ) | (100 | ) | |||
Other Assets and Liabilities | (11 | ) | 36 | ||||
Total Cash Flows from Operating Activities | (291 | ) | (84 | ) | |||
Cash Flows from Investing Activities: | |||||||
Capital Expenditures | (401 | ) | (442 | ) | |||
Asset Dispositions (Note 4) | 2 | 2 | |||||
Short Term Securities Acquired | (67 | ) | (30 | ) | |||
Short Term Securities Redeemed | 67 | 38 | |||||
Notes Receivable | (7 | ) | — | ||||
Other Transactions | (13 | ) | (38 | ) | |||
Total Cash Flows from Investing Activities | (419 | ) | (470 | ) | |||
Cash Flows from Financing Activities: | |||||||
Short Term Debt and Overdrafts Incurred | 983 | 1,012 | |||||
Short Term Debt and Overdrafts Paid | (908 | ) | (920 | ) | |||
Long Term Debt Incurred | 3,479 | 3,544 | |||||
Long Term Debt Paid | (2,628 | ) | (2,933 | ) | |||
Common Stock Issued | 1 | 3 | |||||
Common Stock Repurchased (Note 14) | — | (100 | ) | ||||
Common Stock Dividends Paid (Note 14) | (74 | ) | (67 | ) | |||
Transactions with Minority Interests in Subsidiaries | (25 | ) | (26 | ) | |||
Debt Related Costs and Other Transactions | (17 | ) | 6 | ||||
Total Cash Flows from Financing Activities | 811 | 519 | |||||
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash | 6 | (25 | ) | ||||
Net Change in Cash, Cash Equivalents and Restricted Cash | 107 | (60 | ) | ||||
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period | 873 | 1,110 | |||||
Cash, Cash Equivalents and Restricted Cash at End of the Period | $ | 980 | $ | 1,050 |
The accompanying notes are an integral part of these consolidated financial statements.
6
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by The Goodyear Tire & Rubber Company (the “Company,” “Goodyear,” “we,” “us” or “our”) in accordance with Securities and Exchange Commission (“SEC”) rules and regulations and generally accepted accounting principles in the United States of America ("USU.S. GAAP") and in the opinion of management contain all adjustments (including normal recurring adjustments) necessary to fairly state the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with USU.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 20182019 (the “2018“2019 Form 10-K”).
We maintain a robust business continuity plan to adequately respond to situations such as the COVID-19 pandemic, including a framework for remote work arrangements, in order to effectively maintain operations, including financial reporting systems, internal controls over financial reporting and disclosure controls and procedures.
Effective January 1, 2020, we early adopted, as permitted, SEC amendments to the financial disclosure requirements for registered debt securities with subsidiary guarantees. The amendments replace the condensed consolidating financial information with summarized financial information of the issuers and guarantors, require expanded qualitative disclosures with respect to information about guarantors, the terms and conditions of guarantees and the factors that may affect payment, and permit these disclosures to be provided outside the footnotes to the parent company’s audited annual and interim consolidated financial statements. We have elected to provide this information in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Operating results for the three and six months ended June 30, 2019March 31, 2020 are not necessarily indicative of the results expected in subsequent quarters or for the year ending December 31, 2019.
Recently Adopted Accounting Standards
Effective January 1, 2019,2020, we adopted an accounting standards update with new guidance intended to increase transparency and comparability among organizations relating to leases.on accounting for credit losses on financial instruments. The new guidance requires lessees to recognize a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. The standards update retained a dualincludes an impairment model for lease classification, requiring leases to be classified as finance or operating leases to determine recognition inestimating credit losses that is based on expected losses, rather than incurred losses. As a result of using the statements of operations and cash flows; however, substantially all leases are now required to be recognized on the balance sheet. The standards update also requires quantitative and qualitative disclosures regarding key information about leasing arrangements. We elected the optional transition method and applied the new guidance at the date ofmodified retrospective adoption without adjusting the comparative periods presented. We also elected the practical expedients permitted under the transition guidance that retain the lease classification and initial direct costs for any leases that existed prior to adoption of the standard, and we have elected to not evaluate land easements that existed as of, or expired before, adoption of the new standard. In addition, we did not reassess whether any contracts entered into prior to adoption are leases.
The following table presents the balance of using the modified retrospective adoption approach. The adoption of this standards update did not have a material impact onallowances for credit losses, which represents our results of operations or cash flows.
(In millions) |
| Balance at January 1, 2020 |
|
| Current period provision |
|
| Write-offs charged against the allowance |
|
| Recoveries of amounts previously written off |
|
| Translation |
|
| Balance at March 31, 2020 |
| ||||||
Americas |
| $ | 38 |
|
| $ | — |
|
| $ | (1 | ) |
| $ | — |
|
| $ | (3 | ) |
| $ | 34 |
|
Europe, Middle East & Africa |
|
| 78 |
|
|
| 14 |
|
|
| (1 | ) |
|
| — |
|
|
| (4 | ) |
|
| 87 |
|
Asia |
|
| 10 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10 |
|
Total |
| $ | 126 |
|
| $ | 14 |
|
| $ | (2 | ) |
| $ | — |
|
| $ | (7 | ) |
| $ | 131 |
|
Balance at | Adjustment for | Balance at | |||||||||
(In millions) | December 31, 2018 | New Standard | January 1, 2019 | ||||||||
Deferred Income Taxes — Asset | $ | 1,847 | $ | 7 | $ | 1,854 | |||||
Operating Lease Right-of-Use Assets | — | 882 | 882 | ||||||||
Property, Plant and Equipment, less Accumulated Depreciation | 7,259 | (16 | ) | 7,243 | |||||||
Operating Lease Liabilities due Within One Year | — | 204 | 204 | ||||||||
Operating Lease Liabilities | — | 684 | 684 | ||||||||
Long Term Debt and Finance Leases | 5,110 | 14 | 5,124 | ||||||||
Other Long Term Liabilities | 471 | (6 | ) | 465 | |||||||
Retained Earnings | 6,597 | (23 | ) | 6,574 |
Effective January 1, 2019,2020, we adopted an accounting standards update with new guidance intended to reduce complexity in hedge accounting and make hedge results easier to understand. This includes simplifying how hedge results are presented and disclosed in the financial statements, expanding the types of hedge strategies allowed and providing relief around the documentation and assessment requirements. The adoption of this standards update did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In January 2020, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which clarifies the interaction between the accounting for investments in equity securities, equity method investments and certain derivative instruments. The new standard is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. The standards update is effective prospectively for fiscal years and interim periods beginning after December 15, 2020, with early adoption permitted. We are currently assessing the impact of this standards update on our consolidated financial statements.
7
In December 2019, the FASB issued an accounting standards update with new guidance that changes the accounting for certain income tax transactions. The standards update is effective for fiscal years and interim periods beginning after December 15, 2019,2020, with early adoption permitted, and maypermitted. The amendments in this update related to separate financial statements of legal entities that are not subject to tax should be applied retrospectivelyon a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or as of the beginning of the period of adoption.foreign subsidiaries should be applied on a modified retrospective basis. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis. All other amendments should be applied on a prospective basis. The adoption of this accounting standards update is not expected to have a material impact on our consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of all legal entities in which we hold a controlling financial interest. A controlling financial interest generally arises from our ownership of a majority of the voting shares of our subsidiaries. We would also hold a controlling financial interest in variable interest entities if we are considered to be the primary beneficiary. Investments in companies in which we do not own a majority interest and we have the ability to exercise significant influence over operating and financial policies are accounted for using the equity method. Investments in other companies are carried at cost. All intercompany balances and transactions have been eliminated in consolidation.
Restricted Cash
The following table provides a reconciliation of Cash, Cash Equivalents and Restricted Cash as reported within the Consolidated Statements of Cash Flows:
|
| March 31, |
| |||||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Cash and Cash Equivalents |
| $ | 971 |
|
| $ | 860 |
|
Restricted Cash |
|
| 65 |
|
|
| 50 |
|
Total Cash, Cash Equivalents and Restricted Cash |
| $ | 1,036 |
|
| $ | 910 |
|
June 30, | |||||||
(In millions) | 2019 | 2018 | |||||
Cash and Cash Equivalents | $ | 917 | $ | 975 | |||
Restricted Cash | 63 | 75 | |||||
Total Cash, Cash Equivalents and Restricted Cash | $ | 980 | $ | 1,050 |
Restricted Cash, which is included in Prepaid Expenses and Other Current Assets in the Consolidated Balance Sheets, primarily represents amounts required to be set aside in connection with accounts receivable factoring programs. The restrictions lapse when cash from factored accounts receivable is remitted to the purchaser of those receivables.
Reclassifications and Adjustments
Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation.
NOTE 2. NET SALES
The following tables show disaggregated net sales from contracts with customers by major source:
|
| Three Months Ended March 31, 2020 |
| |||||||||||||
|
|
|
|
|
| Europe, Middle East |
|
|
|
|
|
|
|
|
| |
(In millions) |
| Americas |
|
| and Africa |
|
| Asia Pacific |
|
| Total |
| ||||
Tire unit sales |
| $ | 1,306 |
|
| $ | 904 |
|
| $ | 343 |
|
| $ | 2,553 |
|
Other tire and related sales |
|
| 142 |
|
|
| 72 |
|
|
| 32 |
|
|
| 246 |
|
Retail services and service related sales |
|
| 133 |
|
|
| 18 |
|
|
| 12 |
|
|
| 163 |
|
Chemical sales |
|
| 91 |
|
|
| — |
|
|
| — |
|
|
| 91 |
|
Other |
|
| 1 |
|
|
| 1 |
|
|
| 1 |
|
|
| 3 |
|
Net Sales by reportable segment |
| $ | 1,673 |
|
| $ | 995 |
|
| $ | 388 |
|
| $ | 3,056 |
|
Three Months Ended June 30, 2019 |
| Three Months Ended March 31, 2019 |
| ||||||||||||||||||||||||||||
Europe, Middle East |
|
|
|
|
| Europe, Middle East |
|
|
|
|
|
|
|
|
| ||||||||||||||||
(In millions) | Americas | and Africa | Asia Pacific | Total |
| Americas |
|
| and Africa |
|
| Asia Pacific |
|
| Total |
| |||||||||||||||
Tire unit sales | $ | 1,556 | $ | 1,058 | $ | 472 | $ | 3,086 |
| $ | 1,487 |
|
| $ | 1,120 |
|
| $ | 453 |
|
| $ | 3,060 |
| |||||||
Other tire and related sales | 159 | 80 | 30 | 269 |
|
| 143 |
|
|
| 91 |
|
|
| 32 |
|
|
| 266 |
| |||||||||||
Retail services and service related sales | 138 | 3 | 17 | 158 |
|
| 132 |
|
|
| 8 |
|
|
| 15 |
|
|
| 155 |
| |||||||||||
Chemical sales | 114 | — | — | 114 |
|
| 109 |
|
|
| — |
|
|
| — |
|
|
| 109 |
| |||||||||||
Other | 4 | — | 1 | 5 |
|
| 5 |
|
|
| 2 |
|
|
| 1 |
|
|
| 8 |
| |||||||||||
Net Sales by reportable segment | $ | 1,971 | $ | 1,141 | $ | 520 | $ | 3,632 |
| $ | 1,876 |
|
| $ | 1,221 |
|
| $ | 501 |
|
| $ | 3,598 |
|
Three Months Ended June 30, 2018 | |||||||||||||||
Europe, Middle East | |||||||||||||||
(In millions) | Americas | and Africa | Asia Pacific | Total | |||||||||||
Tire unit sales | $ | 1,568 | $ | 1,152 | $ | 511 | $ | 3,231 | |||||||
Other tire and related sales | 159 | 98 | 32 | 289 | |||||||||||
Retail services and service related sales | 144 | 9 | 19 | 172 | |||||||||||
Chemical sales | 143 | — | — | 143 | |||||||||||
Other | 4 | 1 | 1 | 6 | |||||||||||
Net Sales by reportable segment | $ | 2,018 | $ | 1,260 | $ | 563 | $ | 3,841 |
Six Months Ended June 30, 2019 | |||||||||||||||
Europe, Middle East | |||||||||||||||
(In millions) | Americas | and Africa | Asia Pacific | Total | |||||||||||
Tire unit sales | $ | 3,049 | $ | 2,201 | $ | 925 | $ | 6,175 | |||||||
Other tire and related sales | 296 | 152 | 62 | 510 | |||||||||||
Retail services and service related sales | 270 | 7 | 32 | 309 | |||||||||||
Chemical sales | 223 | — | — | 223 | |||||||||||
Other | 9 | 2 | 2 | 13 | |||||||||||
Net Sales by reportable segment | $ | 3,847 | $ | 2,362 | $ | 1,021 | $ | 7,230 |
Six Months Ended June 30, 2018 | |||||||||||||||
Europe, Middle East | |||||||||||||||
(In millions) | Americas | and Africa | Asia Pacific | Total | |||||||||||
Tire unit sales | $ | 3,074 | $ | 2,361 | $ | 1,029 | $ | 6,464 | |||||||
Other tire and related sales | 294 | 203 | 62 | 559 | |||||||||||
Retail services and service related sales | 281 | 24 | 41 | 346 | |||||||||||
Chemical sales | 291 | — | — | 291 | |||||||||||
Other | 7 | 2 | 2 | 11 | |||||||||||
Net Sales by reportable segment | $ | 3,947 | $ | 2,590 | $ | 1,134 | $ | 7,671 |
Tire unit sales consist of consumer, commercial, farm and off-the-road tire sales, including the sale of new Company-branded tires through Company-owned retail channels. Other tire and related sales consist of aviation, race, motorcycle and all-terrain vehicle tire sales, retread sales and other tire related sales. Sales of tires in this category are not included in reported tire unit information. Retail services and service related sales consist of automotive services performed for customers through our
8
Company-owned retail channels, and includes service related products. Chemical sales relate to the sale of synthetic rubber and other chemicals to
When we receive consideration from a customer prior to transferring goods or services under the terms of a sales contract, we record deferred revenue, which represents a contract liability. Deferred revenue included in Other Current Liabilities in the Consolidated Balance Sheets totaled $35$24 million and $39$23 million at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. Deferred revenue included in Other Long Term Liabilities in the Consolidated Balance Sheets totaled $28 million and $31 million and $39 million at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. We recognize deferred revenue after we have transferred control of the goods or services to the customer and all revenue recognition criteria are met.
The following table presents the balance of deferred revenue related to contracts with customers, and changes during the sixthree months ended June 30, 2019:March 31, 2020:
(In millions) |
|
|
|
|
Balance at December 31, 2019 |
| $ | 54 |
|
Revenue deferred during period |
|
| 29 |
|
Revenue recognized during period |
|
| (31 | ) |
Impact of foreign currency translation |
|
| — |
|
Balance at March 31, 2020 |
| $ | 52 |
|
(In millions) | |||
Balance at December 31, 2018 | $ | 78 | |
Revenue deferred during period | 71 | ||
Revenue recognized during period | (83 | ) | |
Impact of foreign currency translation | — | ||
Balance at June 30, 2019 | $ | 66 |
NOTE 3. COSTS ASSOCIATED WITH RATIONALIZATION PROGRAMS
In order to maintain our global competitiveness, we have implemented rationalization actions over the past several years to reduce high-cost and excess manufacturing capacity and associate headcount.
The following table shows the roll-forward of our liability between periods:
|
| Associate- |
|
|
|
|
|
|
|
|
| |
(In millions) |
| Related Costs |
|
| Other Costs |
|
| Total |
| |||
Balance at December 31, 2019 |
| $ | 220 |
|
| $ | — |
|
| $ | 220 |
|
2020 Charges(1) |
|
| 8 |
|
|
| 5 |
|
|
| 13 |
|
Incurred, net of foreign currency translation of $(4) million and $0 million, respectively |
|
| (72 | ) |
|
| (5 | ) |
|
| (77 | ) |
Reversed to the Statement of Operations |
|
| — |
|
|
| — |
|
|
| — |
|
Balance at March 31, 2020 |
| $ | 156 |
|
| $ | — |
|
| $ | 156 |
|
Associate- | |||||||||||
(In millions) | Related Costs | Other Exit Costs | Total | ||||||||
Balance at December 31, 2018 | $ | 80 | $ | 1 | $ | 81 | |||||
2019 Charges | 100 | 9 | 109 | ||||||||
Incurred, including net Foreign Currency Translation of $0 million and $0 million, respectively | (23 | ) | (10 | ) | (33 | ) | |||||
Reversed to the Statement of Operations | (2 | ) | — | (2 | ) | ||||||
Balance at June 30, 2019 | $ | 155 | $ | — | $ | 155 |
(1) | Charges of $13 million in 2020 exclude a $4 million credit for benefit plan curtailments and settlements recorded in Rationalizations in the Statement of Operations. |
During the first quarter of 2019, we approved a plan that proposes to modernize two2 of our tire manufacturing facilities in Germany. The plan is in furtherance of our strategy to strengthen the competitiveness of our manufacturing footprint and increase production of premium, large-rim diameter consumer tires. The plan, which remains subject to consultation with relevant employee representative bodies, would result in approximately 1,100 job reductions as a result of changes to the layout of the plants, efficiency gains from new equipment and a reduction in the production of tires for declining, less profitable market segments. We accrued $94have $99 million in chargesaccrued related to thethis plan in the first six months of 2019,at March 31, 2020, which areis expected to be substantially paid through 2023.
9
The following table shows net rationalization charges included in Income (Loss) before Income Taxes:
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Current Year Plans |
|
|
|
|
|
|
|
|
Associate Severance and Other Related Costs |
| $ | 2 |
|
| $ | 98 |
|
Benefit Plan Termination Benefits |
|
| — |
|
|
| 1 |
|
Other Exit Costs |
|
| — |
|
|
| 1 |
|
Current Year Plans - Net Charges |
| $ | 2 |
|
| $ | 100 |
|
|
|
|
|
|
|
|
|
|
Prior Year Plans |
|
|
|
|
|
|
|
|
Associate Severance and Other Related Costs |
| $ | 6 |
|
| $ | — |
|
Benefit Plan Termination Benefits |
|
| (4 | ) |
|
| — |
|
Other Exit Costs |
|
| 5 |
|
|
| 3 |
|
Prior Year Plans - Net Charges |
|
| 7 |
|
|
| 3 |
|
Total Net Charges |
| $ | 9 |
|
| $ | 103 |
|
Asset Write-off and Accelerated Depreciation Charges |
| $ | 4 |
|
| $ | — |
|
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Current Year Plans | |||||||||||||||
Associate Severance and Other Related Costs | $ | — | $ | 1 | $ | 98 | $ | 32 | |||||||
Benefit Plan Termination Benefits | — | — | 1 | — | |||||||||||
Other Exit Costs | 3 | — | 4 | — | |||||||||||
Current Year Plans - Net Charges | $ | 3 | $ | 1 | $ | 103 | $ | 32 | |||||||
Prior Year Plans | |||||||||||||||
Associate Severance and Other Related Costs | $ | — | $ | (6 | ) | $ | — | $ | (8 | ) | |||||
Benefit Plan Termination Benefits | (1 | ) | — | (1 | ) | — | |||||||||
Other Exit Costs | 2 | 3 | 5 | 11 | |||||||||||
Prior Year Plans - Net Charges | 1 | (3 | ) | 4 | 3 | ||||||||||
Total Net Charges | $ | 4 | $ | (2 | ) | $ | 107 | $ | 35 | ||||||
Asset Write-off and Accelerated Depreciation Charges | $ | 1 | $ | 1 | $ | 1 | $ | 2 |
Substantially all of the new charges for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 related to future cash outflows. Net currentCurrent year plan charges for the three and six months ended June 30,March 31, 2019 include $1$93 million and $94 million, respectively, related to a proposed plan to modernize two2 of our tire manufacturing facilities in Germany and $2$7 million and $9 million, respectively, related to a plan to reduce manufacturing headcount and improve operating efficiency in Americas. Net current year plan charges for the three and six months ended June 30, 2018 include $1 million and $26 million, respectively, related to a global plan to reduce SAG headcount. Net current year plan charges for the six months ended June 30, 2018 also include charges of $6 million related to a plan to improve operating efficiency in EMEA.
Net prior year plan charges for the three and six months ended June 30,March 31, 2020 were $7 million and included $5 million related to a plan to modernize two of our tire manufacturing facilities in Germany and $3 million related to a plan primarily to offer voluntary buy-outs to certain associates at our Gadsden, Alabama manufacturing facility. Net prior year plan charges for the three months ended March 31, 2020 also included a curtailment credit of $4 million for one of our postretirement benefit plans, related to the exit of employees under an approved rationalization plan. Net prior year plan charges for the three months ended March 31, 2019 were $1$3 million, and $6 million, respectively, primarily related to EMEA manufacturing plans. Net prior year plan charges for the sixthree months ended June 30,March 31, 2019 also includeincluded reversals of $2 million for actions no longer needed for their originally intended purposes. Net prior year plan charges for the three and six months ended June 30, 2018 include charges of $2 million and $9 million, respectively, related to the closure of our tire manufacturing facility in Philippsburg, Germany. Net prior year plan charges for the three and six months ended June 30, 2018 also include reversals of $7 million and $12 million, respectively, for actions no longer needed for their originally intended purposes.
Ongoing rationalization plans had approximately $720$930 million in charges incurred prior to 20192020 and approximately $45 million is expected to be incurred in future periods.
Approximately 1,05050 associates will be released under new plans initiated in 2019, of which approximately 250 were released through June 30, 2019.2020. In the first sixthree months of 2019,2020, approximately 250600 associates were released under plans initiated in prior years. Approximately 1,100900 associates remain to be released under all ongoing rationalization plans.
Approximately 850 former associates of the closed Amiens, France manufacturing facility have asserted wrongful termination or other claims against us. Refer to Note to the Consolidated Financial Statements No. 13,14, Commitments and Contingent Liabilities, in this Form 10-Q.
NOTE 4. OTHER (INCOME) EXPENSE
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Non-service related pension and other postretirement benefits cost |
| $ | 26 |
|
| $ | 30 |
|
Financing fees and financial instruments expense |
|
| 7 |
|
|
| 8 |
|
Net foreign currency exchange (gains) losses |
|
| (1 | ) |
|
| (7 | ) |
General and product liability expense - discontinued products |
|
| 2 |
|
|
| 6 |
|
Royalty income |
|
| (5 | ) |
|
| (5 | ) |
Net (gains) losses on asset sales |
|
| (1 | ) |
|
| (5 | ) |
Interest income |
|
| (3 | ) |
|
| (3 | ) |
Miscellaneous (income) expense |
|
| 2 |
|
|
| (2 | ) |
|
| $ | 27 |
|
| $ | 22 |
|
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Non-service related pension and other postretirement benefits cost | $ | 27 | $ | 25 | $ | 57 | $ | 59 | |||||||
Financing fees and financial instruments expense | 10 | 9 | 18 | 18 | |||||||||||
Net foreign currency exchange (gains) losses | (11 | ) | 2 | (18 | ) | (5 | ) | ||||||||
General and product liability expense (income) - discontinued products | 2 | (3 | ) | 8 | (2 | ) | |||||||||
Royalty income | (5 | ) | (5 | ) | (10 | ) | (10 | ) | |||||||
Net (gains) losses on asset sales | (1 | ) | (2 | ) | (6 | ) | — | ||||||||
Interest income | (4 | ) | (2 | ) | (7 | ) | (6 | ) | |||||||
Miscellaneous (income) expense | (1 | ) | 21 | (3 | ) | 28 | |||||||||
$ | 17 | $ | 45 | $ | 39 | $ | 82 |
Non-service related pension and other postretirement benefits cost consists primarily of the interest cost, expected return on plan assets and amortization components of net periodic cost, as well as curtailments and settlements which are not related to rationalization plans. Non-service related pension and other postretirement benefits cost for the six months ended June 30, 2018 includes expense of $9 million related to 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. For further information, refer to Note to the Consolidated Financial Statements No. 11,12, Pension, Savings and Other Postretirement Benefit Plans, in this Form 10-Q.
Other (Income) Expense also includes financing fees and financial instruments expense which consists of commitment fees and charges incurred in connection with financing transactions; net foreign currency exchange (gains) and losses; general and product
10
liability expense (income) - discontinued products, which consists of charges for claims against us related primarily to asbestos personal injury claims, net of probable insurance recoveries; royalty income which is derived primarily from licensing arrangements; net (gains) and losses on asset sales; and interest income.
NOTE 5. INCOME TAXES
For the secondfirst quarter of 2020, we recorded tax expense of $249 million on a loss before income taxes of $368 million. Income tax expense for the three months ended March 31, 2020 includes net discrete charges of $290 million, primarily related to the establishment of a valuation allowance on deferred tax assets for foreign tax credits.
In the first quarter of 2019, we recorded tax expense of $26$6 million on incomea loss before income taxes of $82 million. For the first six months of 2019, we recorded tax expense of $32 million on income before income taxes of $44$38 million. Income tax expense for the three and six months ended June 30,March 31, 2019 includes net discrete charges of $6 million and $13 million, respectively. Net discrete tax charges include a second quarter charge of $6 million related to adjusting our deferred tax assets in Luxembourg for a newly enacted tax rate and various first quarter net discrete charges of $7 million.
We record taxes based on overall estimated annual effective tax rates. The difference between our effective tax ratesrate and the U.S. statutory rate of 21% for the three and six months ended June 30,March 31, 2020 primarily relates to the discrete items noted above, a non-cash goodwill impairment charge of $182 million, and forecasted losses for the full year in foreign jurisdictions in which no tax benefits are recorded, which have been accentuated during 2020 by business interruptions resulting from the COVID-19 pandemic. The difference between our effective tax rate and the U.S. statutory rate of 21% for the three months ended March 31, 2019 and June 30, 2018 primarily relates to the discrete items noted above and anthe 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 provideddeduction. For further information regarding the non-cash goodwill impairment charge, refer to Note to the Consolidated Financial Statements No. 8, Goodwill and Intangible Assets.
We consider both positive and negative evidence when measuring the need for a valuation allowance. The weight given to the evidence is commensurate with the extent to which it may be objectively verified. Current and cumulative financial reporting results are a source of objectively verifiable evidence. We give operating results during the most recent three-year period a significant weight in our analysis. We typically only consider forecasts of future profitability when positive cumulative operating results exist in the Tax Act.
At March 31, 2020, we had approximately $1.0 billion of our U.S. federal, state and local deferred tax assets, was $113 million,net of valuation allowances primarily related to foreign tax credits with limited lives totaling $308 million. In the U.S., we have cumulative positive profitability in the three-year period ended December 31, 2019; however, negative evidence of reduced profitability as a result of the business disruption created by the COVID-19 pandemic must be considered in our assessment of our ability to realize our net deferred tax assets. While the disruption to our business is currently expected to be temporary, there is considerable uncertainty around the extent and duration of that disruption. If our profitability deteriorates enough that our future results for a three-year period are no longer positive, a valuation allowance may be required against all of our U.S. net deferred tax assets.
At December 31, 2019, our U.S. deferred tax assets for foreign tax credits, and our valuation allowance on our foreign deferred tax assets was $233 million. At December 31, 2018, our valuation allowance on certain U.S. federal, state and local deferred tax assets was $113 million, and our valuation allowance on our foreign deferred tax assets was $204 million.
We consideredconsider our current forecasts of future profitability in assessing our ability to realize our deferred tax assets, including our foreign tax credits. These forecasts include the impact of recent trends, including various macroeconomic factors such as raw material prices,the impact of the COVID-19 pandemic, on our profitability, as well as the impact of tax planning strategies. Macroeconomic factors, including raw material prices,the impact of the COVID-19 pandemic, possess a high degree of volatility and can significantly impact our profitability. As such, there is a risk that future foreign source incomeearnings will not be sufficient to fully utilize theseour U.S. net deferred tax assets, including our remaining foreign tax credits. However, we believe our forecasts of future profitability along with the three significant sources of foreign income described above provide us sufficient positive evidence to conclude that it is more likely
11
than not that, the remainingat March 31, 2020, our U.S. net deferred tax assets, including our foreign tax credits, net of valuation allowances, will be fully utilized prior to their various expiration dates.
At March 31, 2020, we had approximately $1.2 billion of foreign deferred tax assets and a valuation allowance of $939 million. 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. In Luxembourg, we maintain a valuation allowance of approximately $850 million on all 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. We do not believe that sufficient positive evidence required to release all orvaluation allowances having a significant portionimpact on our financial position or results of these valuation allowancesoperations will exist within the next twelve months.
For the sixthree months ending June 30, 2019,March 31, 2020, changes to our unrecognized tax benefits did not, and for the full year of 20192020 are not expected to, have a significant impact on our financial position or results of operations.
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), a substantial tax and spending package intended to provide economic stimulus to address the impact of the COVID-19 pandemic. The CARES Act allows corporations with net operating losses generated in 2018, 2019 and 2020 to elect to carryback those losses for a period of five years and relaxes the limitation for business interest deductions for 2019 and 2020. We do not anticipate that these provisions will have a material impact on our operating results. We will, however, benefit from a CARES Act provision that accelerates the ability of corporations to claim a refund of alternative minimum tax credit carryforwards. Under this provision, we anticipate receiving a refund of approximately $5 million during the second quarter of 2020 that would otherwise have been received in 2 equal annual installments in 2021 and 2022.
We are open to examination in the United States for 20182019 and in Germany from 2016 onward. Generally, for our remaining tax jurisdictions, years from 20132014 onward are still open to examination.
NOTE 6. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are computed based on the weighted average number of common shares outstanding. Diluted earnings (loss) per share are calculated to reflect the potential dilution that could occur if securities or other contracts were exercised or converted into common stock.
Basic and diluted earnings (loss) per common share are calculated as follows:
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
(In millions, except per share amounts) |
| 2020 |
|
| 2019 |
| ||
Earnings (loss) per share — basic: |
|
|
|
|
|
|
|
|
Goodyear net income (loss) |
| $ | (619 | ) |
| $ | (61 | ) |
Weighted average shares outstanding |
|
| 234 |
|
|
| 232 |
|
Earnings (loss) per common share — basic |
| $ | (2.65 | ) |
| $ | (0.26 | ) |
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — diluted: |
|
|
|
|
|
|
|
|
Goodyear net income (loss) |
| $ | (619 | ) |
| $ | (61 | ) |
Weighted average shares outstanding |
|
| 234 |
|
|
| 232 |
|
Dilutive effect of stock options and other dilutive securities |
|
| — |
|
|
| — |
|
Weighted average shares outstanding — diluted |
|
| 234 |
|
|
| 232 |
|
Earnings (loss) per common share — diluted |
| $ | (2.65 | ) |
| $ | (0.26 | ) |
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(In millions, except per share amounts) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Earnings (loss) per share — basic: | |||||||||||||||
Goodyear net income (loss) | $ | 54 | $ | 157 | $ | (7 | ) | $ | 232 | ||||||
Weighted average shares outstanding | 233 | 239 | 232 | 240 | |||||||||||
Earnings (loss) per common share — basic | $ | 0.23 | $ | 0.66 | $ | (0.03 | ) | $ | 0.97 | ||||||
Earnings (loss) per share — diluted: | |||||||||||||||
Goodyear net income (loss) | $ | 54 | $ | 157 | $ | (7 | ) | $ | 232 | ||||||
Weighted average shares outstanding | 233 | 239 | 232 | 240 | |||||||||||
Dilutive effect of stock options and other dilutive securities | 1 | 2 | — | 2 | |||||||||||
Weighted average shares outstanding — diluted | 234 | 241 | 232 | 242 | |||||||||||
Earnings (loss) per common share — diluted | $ | 0.23 | $ | 0.65 | $ | (0.03 | ) | $ | 0.96 |
Weighted average shares outstanding -– diluted for the sixthree months ended June 30,March 31, 2019 excludes the dilutive effect of approximately 23 million equivalent shares related primarily to options with exercise prices less than the average market price of our common shares (i.e., "in-the-money"“in-the-money” options), as their inclusion would have been anti-dilutive due to the Goodyear net loss. There were 0 in-the-money options at March 31, 2020. Additionally, weighted average shares outstanding - diluted for the three and six months ended June 30,March 31, 2020 and 2019 excludesexclude approximately 9 million and 2 million equivalent shares, respectively, related to options with exercise prices greater than the average market price of our common shares (i.e., "underwater" options). There were approximately 2 million and 1 million equivalent shares related to options with exercise prices greater than the average market price
12
Table of our common shares for the three and six months ended June 30, 2018, respectively.
NOTE 7. BUSINESS SEGMENTS
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Sales: |
|
|
|
|
|
|
|
|
Americas |
| $ | 1,673 |
|
| $ | 1,876 |
|
Europe, Middle East and Africa |
|
| 995 |
|
|
| 1,221 |
|
Asia Pacific |
|
| 388 |
|
|
| 501 |
|
Net Sales |
| $ | 3,056 |
|
| $ | 3,598 |
|
Segment Operating Income (Loss): |
|
|
|
|
|
|
|
|
Americas |
| $ | — |
|
| $ | 89 |
|
Europe, Middle East and Africa |
|
| (53 | ) |
|
| 54 |
|
Asia Pacific |
|
| 6 |
|
|
| 47 |
|
Total Segment Operating Income (Loss) |
| $ | (47 | ) |
| $ | 190 |
|
Less: |
|
|
|
|
|
|
|
|
Goodwill impairment (Note 8) |
| $ | 182 |
|
| $ | — |
|
Rationalizations (Note 3) |
|
| 9 |
|
|
| 103 |
|
Interest expense |
|
| 73 |
|
|
| 85 |
|
Other (income) expense (Note 4) |
|
| 27 |
|
|
| 22 |
|
Asset write-offs and accelerated depreciation |
|
| 4 |
|
|
| — |
|
Retained expenses of divested operations |
|
| 2 |
|
|
| 3 |
|
Other |
|
| 24 |
|
|
| 15 |
|
Income (Loss) before Income Taxes |
| $ | (368 | ) |
| $ | (38 | ) |
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Sales: | |||||||||||||||
Americas | $ | 1,971 | $ | 2,018 | $ | 3,847 | $ | 3,947 | |||||||
Europe, Middle East and Africa | 1,141 | 1,260 | 2,362 | 2,590 | |||||||||||
Asia Pacific | 520 | 563 | 1,021 | 1,134 | |||||||||||
Net Sales | $ | 3,632 | $ | 3,841 | $ | 7,230 | $ | 7,671 | |||||||
Segment Operating Income: | |||||||||||||||
Americas | $ | 134 | $ | 154 | $ | 223 | $ | 281 | |||||||
Europe, Middle East and Africa | 44 | 100 | 98 | 178 | |||||||||||
Asia Pacific | 41 | 70 | 88 | 146 | |||||||||||
Total Segment Operating Income | $ | 219 | $ | 324 | $ | 409 | $ | 605 | |||||||
Less: | |||||||||||||||
Rationalizations | $ | 4 | $ | (2 | ) | $ | 107 | $ | 35 | ||||||
Interest expense | 88 | 78 | 173 | 154 | |||||||||||
Other (income) expense (Note 4) | 17 | 45 | 39 | 82 | |||||||||||
Asset write-offs and accelerated depreciation | 1 | 1 | 1 | 2 | |||||||||||
Corporate incentive compensation plans | 14 | 3 | 15 | 7 | |||||||||||
Intercompany profit elimination | (2 | ) | (1 | ) | (6 | ) | (4 | ) | |||||||
Retained expenses of divested operations | 3 | 2 | 6 | 5 | |||||||||||
Other | 12 | 15 | 30 | 28 | |||||||||||
Income before Income Taxes | $ | 82 | $ | 183 | $ | 44 | $ | 296 |
Non-cash goodwill impairment charges, as described in Note to the Consolidated Financial Statements No. 8, Goodwill and Intangible Assets; rationalizations, as described in Note to the Consolidated Financial Statements No. 3, Costs Associated with Rationalization Programs, in this Form 10-Q,Programs; net (gains) losses on asset sales, as described in Note to the Consolidated Financial Statements No. 4, Other (Income) Expense, in this Form 10-Q,Expense; and asset write-offs and accelerated depreciation were not charged (credited) to the strategic business units ("SBUs") for performance evaluation purposes but were attributable to the SBUs as follows:
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Goodwill Impairment: |
|
|
|
|
|
|
|
|
Europe, Middle East and Africa |
| $ | 182 |
|
| $ | — |
|
Total Goodwill Impairment |
| $ | 182 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
Rationalizations: |
|
|
|
|
|
|
|
|
Americas |
| $ | 3 |
|
| $ | 7 |
|
Europe, Middle East and Africa |
|
| 6 |
|
|
| 96 |
|
Total Rationalizations |
| $ | 9 |
|
| $ | 103 |
|
|
|
|
|
|
|
|
|
|
Net (Gains) Losses on Asset Sales: |
|
|
|
|
|
|
|
|
Europe, Middle East and Africa |
| $ | (1 | ) |
| $ | (5 | ) |
Total Net (Gains) Losses on Asset Sales |
| $ | (1 | ) |
| $ | (5 | ) |
|
|
|
|
|
|
|
|
|
Asset Write-offs and Accelerated Depreciation: |
|
|
|
|
|
|
|
|
Americas |
| $ | 4 |
|
| $ | — |
|
Total Asset Write-offs and Accelerated Depreciation |
| $ | 4 |
|
| $ | — |
|
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Rationalizations: | |||||||||||||||
Americas | $ | 2 | $ | — | $ | 9 | $ | 3 | |||||||
Europe, Middle East and Africa | 2 | (1 | ) | 98 | 26 | ||||||||||
Asia Pacific | — | — | — | 3 | |||||||||||
Total Segment Rationalizations | $ | 4 | $ | (1 | ) | $ | 107 | $ | 32 | ||||||
Corporate | — | (1 | ) | — | 3 | ||||||||||
Total Rationalizations | $ | 4 | $ | (2 | ) | $ | 107 | $ | 35 | ||||||
Net (Gains) Losses on Asset Sales: | |||||||||||||||
Americas | $ | — | $ | (2 | ) | $ | — | $ | (2 | ) | |||||
Europe, Middle East and Africa | (1 | ) | — | (6 | ) | 2 | |||||||||
Total Net (Gains) Losses on Asset Sales | $ | (1 | ) | $ | (2 | ) | $ | (6 | ) | $ | — | ||||
Asset Write-offs and Accelerated Depreciation: | |||||||||||||||
Europe, Middle East and Africa | $ | 1 | $ | 1 | $ | 1 | $ | 2 | |||||||
Total Asset Write-offs and Accelerated Depreciation | $ | 1 | $ | 1 | $ | 1 | $ | 2 |
13
NOTE 8. LEASES
Goodwill and intangible assets totaled $369 million and $135 million, respectively, at March 31, 2020, compared to $565 million and $137 million, respectively, at December 31, 2019. Goodwill and intangible assets with indefinite useful lives are tested for impairment annually either on a quantitative or qualitative basis, or more frequently when events or circumstances change that indicate the fair value of the asset may be below its carrying amount. As a result of the COVID-19 pandemic and the resulting decline in the macroeconomic environment, as well as a significant decrease in our market capitalization, we performed an arrangement is or containsinterim impairment analysis as of March 31, 2020 utilizing a lease at inception. We enter into leases primarily for our wholesale distribution facilities, manufacturing equipment, administrative offices, retail stores, vehicles and data processing equipment under varying terms and conditions. Our leases have remaining lease termsdiscounted cash flow model.
The most critical assumptions used in the calculation of less than 1 year to approximately 50 years. Mostthe estimated fair value of our leases include options to extendreporting units are the lease, with renewal terms rangingextent and duration of, as well as the timing of the recovery from, 1 to 50 years or more,the ongoing COVID-19 pandemic, the projected long term operating margin and some include options to terminate the lease within 1 year. If it is reasonably certain thatdiscount rate. Since the date of our last annual quantitative goodwill impairment assessment, the overall discount rate increased, reflecting an option to extend or terminate a lease will be exercised, that option is consideredincrease in the lease term at inception. Leases with an initial termrisk premium components of 12 months or less are not recordedthe rate partially offset by a decrease in the risk-free interest rate component as a result of the current macroeconomic environment. Based on our current forecasts, we also gave consideration to the expected near-term negative cash flow impact of the ongoing COVID-19 pandemic and subsequent recovery, as well as the decrease in our market capitalization. Based on the balance sheet, and we recognize short-term lease expense for these leases on a straight-line basis over the lease term.
Intangible assets with indefinite lives totaled $118 million at both March 31, 2020 and December 31, 2019. We also conducted an index are determined based on the initial index at commencement, and the variability based on changesassessment of our intangible assets with indefinite lives as of March 31, 2020, which indicated no impairment existed.
NOTE 9. OTHER ASSETS AND INVESTMENTS
The balance of our investment in TireHub, LLC (“TireHub”), a distribution joint venture in the index is accounted for as it changes. The variable portion of payments is notUnited States, was $252 million and $262 million at March 31, 2020 and December 31, 2019, respectively, and was included in the initial measurement of the right-of-use asset or lease liability due to the uncertainty of the payment amount and are recorded as lease expense in the period incurred. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We have lease agreements with lease and non-lease components, which are accounted for separately.
Three Months Ended | Six Months Ended | ||||||
June 30, | June 30, | ||||||
(In millions) | 2019 | 2019 | |||||
Operating Lease Expense | $ | 74 | $ | 148 | |||
Finance Lease Expense: | |||||||
Amortization of ROU Assets | 3 | 5 | |||||
Interest on Lease Liabilities | 5 | 10 | |||||
Short Term Lease Expense | 2 | 3 | |||||
Variable Lease Expense | 1 | 3 | |||||
Sublease Income | (4 | ) | (8 | ) | |||
Total Lease Expense | $ | 81 | $ | 161 |
Six Months Ended | |||
June 30, | |||
(In millions) | 2019 | ||
Cash Paid for Amounts Included in the Measurement of Lease Liabilities | |||
Operating Cash Flows for Operating Leases | $ | 134 | |
Operating Cash Flows for Finance Leases | 10 | ||
Financing Cash Flows for Finance Leases | 3 | ||
ROU Assets Obtained in Exchange for Lease Obligations | |||
Operating Leases | 90 | ||
Finance Leases | 32 |
June 30, | |||
(In millions, except lease term and discount rate) | 2019 | ||
Operating Leases | |||
Operating Lease ROU Assets | $ | 854 | |
Operating Lease Liabilities due Within One Year | $ | 200 | |
Operating Lease Liabilities | 664 | ||
Total Operating Lease Liabilities | $ | 864 | |
Finance Leases | |||
Property, Plant and Equipment, at cost | $ | 259 | |
Accumulated Depreciation | (45 | ) | |
Property, Plant and Equipment, net | $ | 214 | |
Long Term Debt and Finance Leases due Within One Year | $ | 6 | |
Long Term Debt and Finance Leases | 242 | ||
Total Finance Lease Liabilities | $ | 248 | |
Weighted Average Remaining Lease Term | |||
Operating Leases | 6.9 years | ||
Finance Leases | 32.2 years | ||
Weighted Average Discount Rate | |||
Operating Leases | 6.72 | % | |
Finance Leases | 8.48 | % |
(In millions) | Operating Leases | Finance Leases | |||||
2019 (excluding the six months ended June 30) | $ | 128 | $ | 12 | |||
2020 | 222 | 24 | |||||
2021 | 174 | 35 | |||||
2022 | 123 | 21 | |||||
2023 | 96 | 20 | |||||
Thereafter | 369 | 713 | |||||
Total Lease Payments | 1,112 | 825 | |||||
Less: Imputed Interest | 248 | 577 | |||||
Total | $ | 864 | $ | 248 |
2024 and | |||||||||||||||||||||||||||
(In millions) | 2019 | 2020 | 2021 | 2022 | 2023 | Beyond | Total | ||||||||||||||||||||
Capital Leases | |||||||||||||||||||||||||||
Minimum lease payments | $ | 8 | $ | 7 | $ | 18 | $ | 3 | $ | 2 | $ | 23 | $ | 61 | |||||||||||||
Imputed interest | (3 | ) | (3 | ) | (3 | ) | (1 | ) | (1 | ) | (13 | ) | (24 | ) | |||||||||||||
Present value | $ | 5 | $ | 4 | $ | 15 | $ | 2 | $ | 1 | $ | 10 | $ | 37 | |||||||||||||
Operating Leases | |||||||||||||||||||||||||||
Minimum lease payments | $ | 266 | $ | 214 | $ | 161 | $ | 110 | $ | 84 | $ | 391 | $ | 1,226 | |||||||||||||
Minimum sublease rentals | (15 | ) | (12 | ) | (8 | ) | (5 | ) | (3 | ) | (6 | ) | (49 | ) | |||||||||||||
$ | 251 | $ | 202 | $ | 153 | $ | 105 | $ | 81 | $ | 385 | $ | 1,177 | ||||||||||||||
Imputed interest | (263 | ) | |||||||||||||||||||||||||
Present value | $ | 914 |
NOTE 9.10. FINANCING ARRANGEMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
At June 30, 2019,March 31, 2020, we had total credit arrangements of $9,098$8,618 million, of which $2,525$2,278 million were unused. At that date, 42%41% of our debt was at variable interest rates averaging 4.68%3.41%.
Notes Payable and Overdrafts, Long Term Debt and Finance Leases due Within One Year and Short Term Financing Arrangements
At June 30, 2019,March 31, 2020, we had short term committed and uncommitted credit arrangements totaling $753$869 million, of which $257$169 million were unused. These arrangements are available primarily to certain of our foreign subsidiaries through various banks at quoted market interest rates.
14
The following table presents amounts due within one year:
|
| March 31, |
|
| December 31, |
| ||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Chinese credit facilities |
| $ | 174 |
|
| $ | 118 |
|
Other domestic and foreign debt |
|
| 517 |
|
|
| 230 |
|
Notes Payable and Overdrafts |
| $ | 691 |
|
| $ | 348 |
|
Weighted average interest rate |
|
| 5.27 | % |
|
| 4.92 | % |
|
|
|
|
|
|
|
|
|
Chinese credit facilities |
| $ | 93 |
|
| $ | 95 |
|
8.75% note due 2020 |
|
| 281 |
|
|
| 280 |
|
Other domestic and foreign debt (including finance leases) |
|
| 247 |
|
|
| 187 |
|
Long Term Debt and Finance Leases due Within One Year |
| $ | 621 |
|
| $ | 562 |
|
Weighted average interest rate |
|
| 5.98 | % |
|
| 6.58 | % |
Total obligations due within one year |
| $ | 1,312 |
|
| $ | 910 |
|
June 30, | December 31, | ||||||
(In millions) | 2019 | 2018 | |||||
Chinese credit facilities | $ | 151 | $ | 122 | |||
Other domestic and foreign debt | 329 | 288 | |||||
Notes Payable and Overdrafts | $ | 480 | $ | 410 | |||
Weighted average interest rate | 8.26 | % | 8.03 | % | |||
Chinese credit facilities | $ | 78 | $ | 32 | |||
Mexican credit facilities | 90 | — | |||||
Other foreign and domestic debt (including finance leases) | 323 | 211 | |||||
Long Term Debt and Finance Leases due Within One Year | $ | 491 | $ | 243 | |||
Weighted average interest rate | 4.09 | % | 4.57 | % | |||
Total obligations due within one year | $ | 971 | $ | 653 |
At June 30, 2019,March 31, 2020, we had long term credit arrangements totaling $8,345$7,749 million, of which $2,268$2,109 million were unused.
The following table presents long term debt and finance leases, net of unamortized discounts, and interest rates:
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||||||||||
|
|
|
|
|
| Interest |
|
|
|
|
|
| Interest |
| ||
(In millions) |
| Amount |
|
| Rate |
|
| Amount |
|
| Rate |
| ||||
Notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.75% due 2020 |
| $ | 281 |
|
|
|
|
|
| $ | 280 |
|
|
|
|
|
5.125% due 2023 |
|
| 1,000 |
|
|
|
|
|
|
| 1,000 |
|
|
|
|
|
3.75% Euro Notes due 2023 |
|
| 274 |
|
|
|
|
|
|
| 281 |
|
|
|
|
|
5% due 2026 |
|
| 900 |
|
|
|
|
|
|
| 900 |
|
|
|
|
|
4.875% due 2027 |
|
| 700 |
|
|
|
|
|
|
| 700 |
|
|
|
|
|
7% due 2028 |
|
| 150 |
|
|
|
|
|
|
| 150 |
|
|
|
|
|
Credit Facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien revolving credit facility due 2021 |
|
| 420 |
|
|
| 1.92 | % |
|
| — |
|
|
| — |
|
Second lien term loan facility due 2025 |
|
| 400 |
|
|
| 3.20 | % |
|
| 400 |
|
|
| 3.97 | % |
European revolving credit facility due 2024 |
|
| 66 |
|
|
| 1.50 | % |
|
| — |
|
|
| — |
|
Pan-European accounts receivable facility |
|
| 166 |
|
|
| 1.10 | % |
|
| 327 |
|
|
| 0.98 | % |
Mexican credit facility |
|
| 200 |
|
|
| 3.41 | % |
|
| 200 |
|
|
| 3.44 | % |
Chinese credit facilities |
|
| 188 |
|
|
| 4.62 | % |
|
| 195 |
|
|
| 4.87 | % |
Other foreign and domestic debt(1) |
|
| 868 |
|
|
| 2.98 | % |
|
| 661 |
|
|
| 4.02 | % |
|
|
| 5,613 |
|
|
|
|
|
|
| 5,094 |
|
|
|
|
|
Unamortized deferred financing fees |
|
| (27 | ) |
|
|
|
|
|
| (28 | ) |
|
|
|
|
|
|
| 5,586 |
|
|
|
|
|
|
| 5,066 |
|
|
|
|
|
Finance lease obligations(2) |
|
| 247 |
|
|
|
|
|
|
| 249 |
|
|
|
|
|
|
|
| 5,833 |
|
|
|
|
|
|
| 5,315 |
|
|
|
|
|
Less portion due within one year |
|
| (621 | ) |
|
|
|
|
|
| (562 | ) |
|
|
|
|
|
| $ | 5,212 |
|
|
|
|
|
| $ | 4,753 |
|
|
|
|
|
June 30, 2019 | December 31, 2018 | ||||||||||||
Interest | Interest | ||||||||||||
(In millions) | Amount | Rate | Amount | Rate | |||||||||
Notes: | |||||||||||||
8.75% due 2020 | $ | 279 | $ | 278 | |||||||||
5.125% due 2023 | 1,000 | 1,000 | |||||||||||
3.75% Euro Notes due 2023 | 285 | 286 | |||||||||||
5% due 2026 | 900 | 900 | |||||||||||
4.875% due 2027 | 700 | 700 | |||||||||||
7% due 2028 | 150 | 150 | |||||||||||
Credit Facilities: | |||||||||||||
First lien revolving credit facility due 2021 | 430 | 3.63 | % | — | — | ||||||||
Second lien term loan facility due 2025 | 400 | 4.40 | % | 400 | 4.46 | % | |||||||
European revolving credit facility due 2024 | 220 | 3.90 | % | — | — | ||||||||
Pan-European accounts receivable facility | 266 | 1.05 | % | 335 | 1.01 | % | |||||||
Mexican credit facilities | 290 | 4.06 | % | 200 | 4.30 | % | |||||||
Chinese credit facilities | 210 | 4.88 | % | 219 | 5.03 | % | |||||||
Other foreign and domestic debt(1) | 910 | 4.30 | % | 884 | 5.35 | % | |||||||
6,040 | 5,352 | ||||||||||||
Unamortized deferred financing fees | (31 | ) | (36 | ) | |||||||||
6,009 | 5,316 | ||||||||||||
Finance lease obligations(2) | 248 | 37 | |||||||||||
6,257 | 5,353 | ||||||||||||
Less portion due within one year | (491 | ) | (243 | ) | |||||||||
$ | 5,766 | $ | 5,110 |
(1) | |
Interest rates are weighted average interest rates related to various foreign credit facilities with customary terms and conditions. |
(2) | Includes non-cash financing additions of $1 million during the three month period ended March 31, 2020. |
NOTES
At June 30, 2019 and DecemberMarch 31, 2018,2020, we had $3,314$3,305 million of outstanding notes.
CREDIT FACILITIES
$2.0 billionAmended 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. Subject to the consent of the lenders whose commitments are to be increased, we may request that the facility be increased by up to $250 million. Our obligations under the facility are guaranteed by most of our wholly-owned U.S. and Canadian subsidiaries. Our obligations under the facility and our subsidiaries' obligations under the
15
related guarantees are secured by first priority security interests in a variety of collateral. Based on our current liquidity,During the quarter ended March 31, 2020, amounts drawn under this facility bearbore interest at LIBOR plus 125 basis points, and undrawn amounts under the facility will bewere subject to an annual commitment fee of 30 basis points.
Availability under the facility is subject to a borrowing base, which iswas 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. As of June 30, 2019,March 31, 2020, our borrowing base, and therefore our availability, under this facility was $287$501 million below the facility's stated amount of $2.0 billion.
At March 31, 2020, we had $420 million of borrowings and $17 million of letters of credit issued under the revolving credit facility. At December 31, 2019, we had 0 borrowings and $37 million of letters of credit issued under the revolving credit facility.
On April 9, 2020, we amended and restated the first lien revolving credit facility. Changes to the facility include extending the maturity to April 9, 2025 and increasing the borrowing base for the facility by increasing the amount attributable to the value of our principal trademarks by $100 million and adding the value of eligible machinery and equipment. The interest rate for loans under the facility increased by 50 basis points to LIBOR plus 175 basis points, based on our current liquidity, and undrawn amounts under the facility will be subject to an annual commitment fee of 25 basis points.
The facility has 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, 2015.2019. The facility also has customary defaults, including a cross-default to material indebtedness of Goodyear and our subsidiaries.
Amended and Restated Second Lien Term Loan Facility due2025
Our amended and restated second lien term loan facility matures on March 7, 2025. The term loan bears interest, at our option, at (i) 200 basis points over LIBOR or (ii) 100 basis points over an alternative base rate (the higher of (a) the prime rate, (b) the federal funds effective rate or the overnight bank funding rate plus 50 basis points or (c) LIBOR plus 100 basis points). In addition, if the Total Leverage Ratio is equal to or less than 1.25 to 1.00, we have the option to further reduce the spreads described above by 25 basis points. "Total Leverage Ratio" has the meaning given it in the facility.
Our obligations under our second lien term loan facility are guaranteed by most of our wholly-owned U.S. and Canadian subsidiaries and are secured by second priority security interests in the same collateral securing the $2.0 billion first lien revolving credit facility.
At June 30, 2019March 31, 2020 and December 31, 2018,2019, the amounts outstanding under this facility were $400 million.
€800 millionAmended and Restated Senior Secured European Revolving Credit Facility due 2024
Our amended and restated our European revolving credit facility. Significant changes to the European revolving credit facility include extending the maturity to March 27, 2024, increasing the available commitments thereunder from €550 million to €800 million, decreasing the interest rate margin by 25 basis points and decreasing the annual commitment fee by 5 basis points to 25 basis points. Loans will now bear interest at LIBOR plus 150 basis points for loans denominated in U.S. dollars or pounds sterling and EURIBOR plus 150 basis points for loans denominated in euros.
GEBV and certain of its subsidiaries in the United Kingdom, Luxembourg, France and Germany provide guarantees to support the facility. The German guarantors secure the German tranche on a first-lien basis and the all-borrower tranche on a second-lien basis. GEBV and its other subsidiaries that provide guarantees secure the all-borrower tranche on a first-lien basis and generally do not provide collateral support for the German tranche. The Company and its U.S. and Canadian subsidiaries that guarantee our U.S. senior secured credit facilities described above also provide unsecured guarantees in support of the facility.
The facility has 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, 2018. The facility also has customary defaults, including a cross-default to material indebtedness of Goodyear and our subsidiaries.
At June 30, 2019,March 31, 2020, there were $100 million (€88 million)0 of borrowings outstanding under the German tranche, $120$66 million (€10560 million) of borrowings outstanding under the all-borrower tranche and no letters of credit outstanding under the European revolving credit facility. At December 31, 2018,2019, there were no0 borrowings and no letters of credit outstanding under the European revolving credit facility.
Accounts Receivable Securitization Facilities (On-Balance Sheet)
GEBV and certain other of our European subsidiaries are parties to a pan-European accounts receivable securitization facility that expires in 2023. The terms of the facility provide the flexibility to designate annually the maximum amount of funding
16
available under the facility in an amount of not less than €30 million and not more than €450 million. For the period from October 18, 2018 through October 17, 2019,15, 2020, the designated maximum amount of the facility is €320 million.
The facility involves the ongoing daily sale of substantially all of the trade accounts receivable of certain GEBV subsidiaries. These subsidiaries retain servicing responsibilities. Utilization under this facility is based on eligible receivable balances.
The funding commitments under the facility will expire upon the earliest to occur of: (a) September 26, 2023, (b) the non-renewal and expiration (without substitution) of all of the back-up liquidity commitments, (c) the early termination of the facility according
At June 30,March 31, 2020, the amounts available and utilized under this program totaled $166 million (€151 million). At December 31, 2019, the amounts available and utilized under this program totaled $266$327 million (€234 million). At December 31, 2018, the amounts available and utilized under this program totaled $335 million (€293291 million). The program does not qualify for sale accounting, and accordingly, these amounts are included in Long Term Debt and Finance Leases.
For a description of the collateral securing the credit facilities described above as well as the covenants applicable to them, refer to Note to the Consolidated Financial Statements No. 15, Financing Arrangements and Derivative Financial Instruments, in our 20182019 Form 10-K.
Accounts Receivable Factoring Facilities (Off-Balance Sheet)
We have sold certain of our trade receivables under off-balance sheet programs. For these programs, we have concluded that there is generally no risk of loss to us from non-payment of the sold receivables. At June 30, 2019,March 31, 2020, the gross amount of receivables sold was $582$460 million, compared to $568$548 million at December 31, 2018.
Other Foreign Credit Facilities
A Mexican subsidiary and a U.S. subsidiary have several financing arrangementsa revolving credit facility in Mexico. At June 30,March 31, 2020 and December 31, 2019, the amounts available and utilized under these facilitiesthis facility were $290 million, of which $90 million is due within a year. At December 31, 2018, the amounts available and utilized under these facilities were $340 million and $200 million, respectively.million. The facilitiesfacility ultimately maturematures in 2020. The facilities contain2022, has covenants relating to the Mexican and U.S. subsidiary, and havehas customary representations and warranties and default provisions relating to the Mexican and U.S. subsidiary’s ability to perform its respective obligations under the applicable facilities.
A Chinese subsidiary has several financing arrangements in China. At June 30, 2019March 31, 2020 and December 31, 2018,2019, the amounts available under these facilities were $704$723 million and $672$735 million, respectively. At June 30, 2019,March 31, 2020, the amount utilized under these facilities was $361$362 million, of which $151$174 million wasrepresented notes payable and $210$188 million wasrepresented long term debt. At June 30, 2019, $78March 31, 2020, $93 million of the long term debt was due within a year. At December 31, 2018,2019, the amount utilized under these facilities was $341$313 million, of which $122$118 million wasrepresented notes payable and $219$195 million wasrepresented long term debt. At December 31, 2018, $322019, $95 million of the long term debt was due within a year. The facilities contain covenants relating to the Chinese subsidiary and have customary representations and warranties and defaults relating to the Chinese subsidiary’s ability to perform its obligations under the facilities. Certain of the facilities can only be used to finance the expansion of our manufacturing facility in China and, at June 30, 2019March 31, 2020 and December 31, 2018,2019, the unused amounts available under these facilities were $109$107 million and $116$106 million, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
We utilize derivative financial instrument contracts and nonderivative instruments to manage interest rate, foreign exchange and commodity price risks. We have established a control environment that includes policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. We do not hold or issue derivative financial instruments for trading purposes.
Foreign Currency Contracts
We enter into foreign currency contracts in order to manage the impact of changes in foreign exchange rates on our consolidated results of operations and future foreign currency-denominated cash flows. These contracts may be used to reduce exposure to currency movements affecting existing foreign currency-denominated assets, liabilities, firm commitments and forecasted transactions resulting primarily from trade purchases and sales, equipment acquisitions, intercompany loans and royalty agreements. Contracts hedging short term trade receivables and payables normally have no hedging designation.
The following table presents the fair values for foreign currency hedge contracts that do not meet the criteria to be accounted for as cash flow hedging instruments:
|
| March 31, |
|
| December 31, |
| ||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Fair Values — Current asset (liability): |
|
|
|
|
|
|
|
|
Accounts receivable |
| $ | 30 |
|
| $ | 1 |
|
Other current liabilities |
|
| (8 | ) |
|
| (15 | ) |
June 30, | December 31, | ||||||
(In millions) | 2019 | 2018 | |||||
Fair Values — Current asset (liability): | |||||||
Accounts receivable | $ | 5 | $ | 7 | |||
Other current liabilities | (15 | ) | (6 | ) |
17
At June 30, 2019March 31, 2020 and December 31, 2018,2019, these outstanding foreign currency derivatives had notional amounts of $1,617$2,104 million and $1,240$1,707 million, respectively, and were primarily related to intercompany loans. Other (Income) Expense included net transaction losses on derivatives of $6 million and net transaction gains on derivatives of $9$39 million and $15 million for the three and six months ended June 30,March 31, 2020 and 2019, respectively, and net transaction gains on derivatives of $43 million and $45 million for the three and six months ended June 30, 2018, respectively. These amounts were substantially offset in Other (Income) Expense by the effect of changing exchange rates on the underlying currency exposures.
The following table presents the fair values for foreign currency hedge contracts that meet the criteria to be accounted for as cash flow hedging instruments:
|
| March 31, |
|
| December 31, |
| ||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Fair Values — Current asset (liability): |
|
|
|
|
|
|
|
|
Accounts receivable |
| $ | 20 |
|
| $ | 9 |
|
Other current liabilities |
|
| — |
|
|
| (3 | ) |
Fair Values — Long term asset (liability): |
|
|
|
|
|
|
|
|
Other assets |
| $ | 4 |
|
| $ | 1 |
|
Other long term liabilities |
|
| — |
|
|
| (1 | ) |
June 30, | December 31, | ||||||
(In millions) | 2019 | 2018 | |||||
Fair Values — Current asset (liability): | |||||||
Accounts receivable | $ | 9 | $ | 9 | |||
Other current liabilities | (1 | ) | (1 | ) | |||
Fair Values — Long term asset (liability): | |||||||
Other assets | $ | 1 | $ | 2 | |||
Other long term liabilities | — | — |
At June 30, 2019March 31, 2020 and December 31, 2018,2019, these outstanding foreign currency derivatives had notional amounts of $330$342 million and $347$365 million, respectively, and primarily related to U.S. dollar denominated intercompany transactions.
We enter into master netting agreements with counterparties. The amounts eligible for offset under the master netting agreements are not material and we have elected a gross presentation of foreign currency contracts in the Consolidated Balance Sheets.
The following table presents the classification of changes in fair values of foreign currency hedge contracts that meet the criteria to be accounted for as cash flow hedging instruments (before tax and minority):
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Amount of gains (losses) deferred to Accumulated Other Comprehensive Loss ("AOCL")(1) |
| $ | 23 |
|
| $ | 5 |
|
Reclassification adjustment for amounts recognized in Cost of Goods Sold ("CGS")(1) |
|
| (4 | ) |
|
| (3 | ) |
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(In millions) (Income) Expense | 2019 | 2018 | 2019 | 2018 | |||||||||||
Amounts deferred to AOCL(1) | $ | 1 | $ | (14 | ) | $ | (4 | ) | $ | (8 | ) | ||||
Amount of deferred (gain) loss reclassified from AOCL into Cost of Goods Sold ("CGS")(1) | (3 | ) | 3 | (6 | ) | 7 |
(1) | |
Excluded components deferred to AOCL and excluded components reclassified from AOCL to CGS for the three |
The estimated net amount of deferred gains at June 30, 2019March 31, 2020 that are expected to be reclassified to earnings within the next twelve months is $5$16 million.
The counterparties to our foreign currency contracts were considered by us to be substantial and creditworthy financial institutions that arewere recognized market makers at the time we entered into those contracts. We seek to control our credit exposure to these counterparties by diversifying across multiple counterparties, by setting counterparty credit limits based on long term credit ratings and other indicators of counterparty credit risk such as credit default swap spreads, and by monitoring the financial strength of these counterparties on a regular basis. We also enter into master netting agreements with counterparties when possible. By controlling and monitoring exposure to counterparties in this manner, we believe that we effectively manage the risk of loss due to nonperformance by a counterparty. However, 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.
18
NOTE 10.11. FAIR VALUE MEASUREMENTS
The following table presents information about assets and liabilities recorded at fair value on the Consolidated Balance Sheets at June 30, 2019March 31, 2020 and December 31, 2018:2019:
|
| Total Carrying Value in the Consolidated Balance Sheet |
|
| Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||||||||||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
| $ | 9 |
|
| $ | 11 |
|
| $ | 9 |
|
| $ | 11 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Foreign Exchange Contracts |
|
| 54 |
|
|
| 11 |
|
|
| — |
|
|
| — |
|
|
| 54 |
|
|
| 11 |
|
|
| — |
|
|
| — |
|
Total Assets at Fair Value |
| $ | 63 |
|
| $ | 22 |
|
| $ | 9 |
|
| $ | 11 |
|
| $ | 54 |
|
| $ | 11 |
|
| $ | — |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts |
| $ | 8 |
|
| $ | 19 |
|
| $ | — |
|
| $ | — |
|
| $ | 8 |
|
| $ | 19 |
|
| $ | — |
|
| $ | — |
|
Total Liabilities at Fair Value |
| $ | 8 |
|
| $ | 19 |
|
| $ | — |
|
| $ | — |
|
| $ | 8 |
|
| $ | 19 |
|
| $ | — |
|
| $ | — |
|
Total Carrying Value in the Consolidated Balance Sheet | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||
Investments | $ | 10 | $ | 10 | $ | 10 | $ | 10 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Foreign Exchange Contracts | 15 | 18 | — | — | 15 | 18 | — | — | |||||||||||||||||||||||
Total Assets at Fair Value | $ | 25 | $ | 28 | $ | 10 | $ | 10 | $ | 15 | $ | 18 | $ | — | $ | — | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||
Foreign Exchange Contracts | $ | 16 | $ | 7 | $ | — | $ | — | $ | 16 | $ | 7 | $ | — | $ | — | |||||||||||||||
Total Liabilities at Fair Value | $ | 16 | $ | 7 | $ | — | $ | — | $ | 16 | $ | 7 | $ | — | $ | — |
The following table presents supplemental fair value information about long term fixed rate and variable rate debt, excluding finance leases, at June 30, 2019March 31, 2020 and December 31, 2018:2019:
|
| March 31, |
|
| December 31, |
| ||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Fixed Rate Debt:(1) |
|
|
|
|
|
|
|
|
Carrying amount — liability |
| $ | 3,436 |
|
| $ | 3,434 |
|
Fair value — liability |
|
| 3,111 |
|
|
| 3,558 |
|
|
|
|
|
|
|
|
|
|
Variable Rate Debt:(1) |
|
|
|
|
|
|
|
|
Carrying amount — liability |
| $ | 2,150 |
|
| $ | 1,632 |
|
Fair value — liability |
|
| 1,889 |
|
|
| 1,632 |
|
June 30, | December 31, | ||||||
(In millions) | 2019 | 2018 | |||||
Fixed Rate Debt:(1) | |||||||
Carrying amount — liability | $ | 3,409 | $ | 3,609 | |||
Fair value — liability | 3,420 | 3,443 | |||||
Variable Rate Debt:(1) | |||||||
Carrying amount — liability | $ | 2,600 | $ | 1,707 | |||
Fair value — liability | 2,575 | 1,689 |
(1) | |
Excludes Notes Payable and Overdrafts of |
Long term debt with fair values of $3,687$3,300 million and $3,496$3,808 million at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, were estimated using quoted Level 1 market prices.The carrying value of the remaining long term debt approximateswas based upon internal estimates of fair value since the terms of the financing arrangements arederived from market prices for similar to terms that could be obtained under current lending market conditions.
NOTE 11.12. PENSION, SAVINGS AND OTHER POSTRETIREMENT BENEFIT PLANS
We provide employees with defined benefit pension or defined contribution savings plans.
Defined benefit pension cost follows:
|
| U.S. |
| |||||
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Service cost |
| $ | 1 |
|
| $ | 1 |
|
Interest cost |
|
| 33 |
|
|
| 44 |
|
Expected return on plan assets |
|
| (49 | ) |
|
| (56 | ) |
Amortization of net losses |
|
| 27 |
|
|
| 28 |
|
Net periodic pension cost |
| $ | 12 |
|
| $ | 17 |
|
Net curtailments/settlements/termination benefits |
|
| 1 |
|
|
| — |
|
Total defined benefit pension cost |
| $ | 13 |
|
| $ | 17 |
|
19
|
| Non-U.S. |
| |||||
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Service cost |
| $ | 7 |
|
| $ | 7 |
|
Interest cost |
|
| 14 |
|
|
| 18 |
|
Expected return on plan assets |
|
| (14 | ) |
|
| (15 | ) |
Amortization of prior service cost |
|
| 1 |
|
|
| — |
|
Amortization of net losses |
|
| 10 |
|
|
| 7 |
|
Net periodic pension cost |
| $ | 18 |
|
| $ | 17 |
|
Net curtailments/settlements/termination benefits |
|
| 1 |
|
|
| 1 |
|
Total defined benefit pension cost |
| $ | 19 |
|
| $ | 18 |
|
U.S. | U.S. | ||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Service cost | $ | 1 | $ | 1 | $ | 2 | $ | 2 | |||||||
Interest cost | 42 | 39 | 86 | 79 | |||||||||||
Expected return on plan assets | (55 | ) | (54 | ) | (111 | ) | (109 | ) | |||||||
Amortization of net losses | 28 | 28 | 56 | 56 | |||||||||||
Net periodic pension cost | $ | 16 | $ | 14 | $ | 33 | $ | 28 | |||||||
Net curtailments/settlements/termination benefits | — | 3 | — | 3 | |||||||||||
Total defined benefit pension cost | $ | 16 | $ | 17 | $ | 33 | $ | 31 |
Non-U.S. | Non-U.S. | ||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Service cost | $ | 7 | $ | 7 | $ | 14 | $ | 14 | |||||||
Interest cost | 17 | 17 | 35 | 35 | |||||||||||
Expected return on plan assets | (15 | ) | (18 | ) | (30 | ) | (36 | ) | |||||||
Amortization of prior service cost | 1 | — | 1 | — | |||||||||||
Amortization of net losses | 7 | 8 | 14 | 15 | |||||||||||
Net periodic pension cost | $ | 17 | $ | 14 | $ | 34 | $ | 28 | |||||||
Net curtailments/settlements/termination benefits | (1 | ) | — | — | — | ||||||||||
Total defined benefit pension cost | $ | 16 | $ | 14 | $ | 34 | $ | 28 |
Service cost is recorded in CGS or SAG. Other components of net periodic pension cost are recorded in Other (Income) Expense. Net curtailments, settlements and termination benefits are recorded in Other (Income) Expense or Rationalizations if related to a rationalization plan.
We also provide certain U.S. employees and employees at certain non-U.S. subsidiaries with health care benefits or life insurance benefits upon retirement. Other postretirement benefits (credit) expense for the three months ended June 30, 2019 and 2018March 31, 2020 was $1($3) million and $3included the curtailment credit of ($4) million respectively, anddiscussed below. Other postretirement benefits (credit) expense for the sixthree months ended June 30,March 31, 2019 was $2 million.
During the first quarter of 2020, we recognized settlement charges of $2 million for defined benefit pension plans in Other (Income) Expense and 2018a curtailment credit of ($4) million for one of our non-U.S. other postretirement benefit plans in Rationalizations, related to the exit of employees under an approved rationalization plan.
We expect to contribute approximately $25 million to $50 million to our funded non-U.S. pension plans in 2020. For the three months ended March 31, 2020, we contributed $7 million to our non-U.S. plans.
The expense recognized for our contributions to defined contribution savings plans for the three months ended March 31, 2020 and 2019 was $3$30 million and $6$28 million, respectively.
NOTE 12.13. STOCK COMPENSATION PLANS
Our Board of Directors granted 1.64.2 million stock options, 0.3 million restricted stock units and0.5 0.2 million performance share units during the sixthree months ended June 30, 2019March 31, 2020 under our stock compensation plans.
Expected term: 7.5 years
Interest rate: 1.29%
Volatility: 41.28%
Dividend yield: 6.54%
We measure the fair value of grants of restricted stock units and performance share units based primarily on the closing market price of a share of our common stock on the date of the grant, modified as appropriate to take into account the features of such grants. The weighted average fair value per share was $20.09$10.12 for restricted stock units and $18.01$7.80 for performance share units granted during the sixthree months ended June 30, 2019.
We recognized stock-based compensation expense of $8$6 million and $11$3 million during the three and six months ended June 30,March 31, 2020 and 2019, respectively. At June 30, 2019,March 31, 2020, unearned compensation cost related to the unvested portion of all stock-based awards was approximately $49$39 million and is expected to be recognized over the remaining vesting period of the respective grants, through the fourthfirst quarter of 2022. We recognized stock-based compensation expense of $3 million and $5 million during the three and six months ended June 30, 2018, respectively.
NOTE 13.14. COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
We have recorded liabilities totaling $48 million and $45 million at June 30, 2019both March 31, 2020 and December 31, 2018, respectively,2019 for anticipated costs related to various environmental matters, primarily the remediation of numerous waste disposal sites and certain properties sold by us. Of these amounts, $12 million and $10$13 million waswere included in Other Current Liabilities at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. The costs include legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring and related activities, and will be paid over several years. The amount of our ultimate liability in respect of these matters may be affected by several uncertainties, primarily the ultimate cost of required remediation and the
20
extent to which other responsible parties contribute. We have limited potential insurance coverage for future environmental claims.
Since many of the remediation activities related to environmental matters vary substantially in duration and cost from site to site and the associated costs for each vary depending on the mix of unique site characteristics, in some cases we cannot reasonably estimate a range of possible losses. Although it is not possible to estimate with certainty the outcome of all of our environmental matters, management believes that potential losses in excess of current reserves for environmental matters, individually and in the aggregate, will not have a material adverse effect on our financial position, cash flows or results of operations.
Workers’ Compensation
We have recorded liabilities, on a discounted basis, totaling $219 million and $224$198 million for anticipated costs related to workers’ compensation at June 30, 2019both March 31, 2020 and December 31, 2018, respectively.2019. Of these amounts, $37$40 million and $42$39 million were included in Current Liabilities as part of Compensation and Benefits at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. The costs include an estimate of expected settlements on pending claims, defense costs and a provision for claims incurred but not reported. These estimates are based on our assessment of potential liability using an analysis of available information with respect to pending claims, historical experience, and current cost trends. The amount of our ultimate liability in respect of these matters may differ from these estimates. We periodically, and at least annually, update our loss development factors based on actuarial analyses. At June 30, 2019March 31, 2020 and December 31, 2018,2019, the liability was discounted using a risk-free rate of return. At June 30, 2019,March 31, 2020, we estimate that it is reasonably possible that the liability could exceed our recorded amounts by approximately $30$25 million.
General and Product Liability and Other Litigation
We have recorded liabilities totaling $319$303 million and $322$293 million, including related legal fees expected to be incurred, for potential product liability and other tort claims, including asbestos claims, at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. Of these amounts, $58$43 million and $57 million werewas included in Other Current Liabilities at June 30, 2019both March 31, 2020 and December 31, 2018, respectively.2019. The amounts recorded were estimated based on an assessment of potential liability using an analysis of available information with respect to pending claims, historical experience and, where available, recent and current trends. Based upon that assessment, at June 30, 2019,March 31, 2020, we do not believe that estimated reasonably possible losses associated with general and product liability claims in excess of the amounts recorded will have a material adverse effect on our financial position, cash flows or results of operations. However, the amount of our ultimate liability in respect of these matters may differ from these estimates.
We have recorded an indemnification asset within Accounts Receivable of $5$3 million and within Other Assets of $25$22 million for Sumitomo Rubber Industries, Ltd.'s ("SRI") obligation to indemnify us for certain product liability claims related to products manufactured by a formerly consolidated joint venture entity, subject to certain caps and restrictions.
Asbestos.
We are a defendant in numerous lawsuits alleging various asbestos-related personal injuries purported to result from alleged exposure to asbestos in certain products manufactured by us or present in certain of our facilities. Typically, these lawsuits have been brought against multiple defendants in state and federal courts. To date, we have disposed of approximatelyA summary of recent approximate asbestos claims activity follows. Because claims are often filed and disposed of by dismissal or settlement in large numbers, the amount and timing of settlements and the number of open claims during a particular period can fluctuate significantly.
|
| Three Months Ended |
|
| Year Ended |
| ||
(Dollars in millions) |
| March 31, 2020 |
|
| December 31, 2019 |
| ||
Pending claims, beginning of period |
|
| 39,600 |
|
|
| 43,100 |
|
New claims filed |
|
| 300 |
|
|
| 1,500 |
|
Claims settled/dismissed |
|
| (700 | ) |
|
| (5,000 | ) |
Pending claims, end of period |
|
| 39,200 |
|
|
| 39,600 |
|
Payments(1) |
| $ | 2 |
|
| $ | 22 |
|
Six Months Ended | Year Ended | ||||||
(Dollars in millions) | June 30, 2019 | December 31, 2018 | |||||
Pending claims, beginning of period | 43,100 | 54,300 | |||||
New claims filed | 800 | 1,300 | |||||
Claims settled/dismissed | (3,800 | ) | (12,500 | ) | |||
Pending claims, end of period | 40,100 | 43,100 | |||||
Payments (1) | $ | 11 | $ | 13 |
(1) | |
Represents cash payments made during the period by us and our insurers on asbestos litigation defense and claim resolution. |
We periodically, and at least annually, review our existing reserves for pending claims, including a reasonable estimate of the liability associated with unasserted asbestos claims, and estimate our receivables from probable insurance recoveries. We recorded gross liabilities for both asserted and unasserted claims, inclusive of defense costs, totaling $159$154 million and $166$153 million at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. In determining the estimate of our asbestos liability, we evaluated claims over the next ten-year period. Due to the difficulties in making these estimates, analysis based on new data and/or a change in circumstances arising in the future may result in an increase in the recorded obligation, and that increase could be significant.
We maintain certain primary and excess insurance coverage under coverage-in-place agreements, and also have additional excess liability insurance with respect to asbestos liabilities. After consultation with our outside legal counsel and giving consideration
21
to agreements with certain of our insurance carriers, the financial viability and legal obligations of our insurance carriers and other relevant factors, we determine an amount we expect is probable of recovery from such carriers. We record a receivable with respect to such policies when we determine that recovery is probable and we can reasonably estimate the amount of a particular recovery.
We recorded a receivable related to asbestos claims of $105 million and $108$95 million at June 30, 2019both March 31, 2020 and December 31, 2018, respectively.2019. We expect that approximately 65%60% of asbestos claim related losses would be recoverable through insurance during the ten-year period covered by the estimated liability. Of these amounts, $13 million was included in Current Assets as part of Accounts Receivable at both June 30, 2019March 31, 2020 and December 31, 2018, respectively.2019. The recorded receivable consists of an amount we expect to collect under coverage-in-place agreements with certain primary and excess insurance carriers as well as an amount we believe is probable of recovery from certain of our other excess insurance carriers.
We believe that, at December 31, 2018,2019, we had approximately $565$555 million in excess level policy limits applicable to indemnity and defense costs for asbestos products claims under coverage-in-place agreements. We also had additional unsettled excess level policy limits potentially applicable to such costs. We had coverage under certain primary policies for indemnity and defense costs for asbestos products claims under remaining aggregate limits pursuant to a coverage-in-place agreement, as well as coverage for indemnity and defense costs for asbestos premises claims pursuant to coverage-in-place agreements.
With respect to both asserted and unasserted claims, it is reasonably possible that we may incur a material amount of cost in excess of the current reserve; however, such amounts cannot be reasonably estimated. Coverage under insurance policies is subject to varying characteristics of asbestos claims including, but not limited to, the type of claim (premise vs. product exposure), alleged date of first exposure to our products or premises and disease alleged. Recoveries may be limited by insurer insolvencies or financial difficulties. Depending upon the nature of these characteristics or events, as well as the resolution of certain legal issues, some portion of the insurance may not be accessible by us.
Amiens Labor Claims
Approximately 850 former employees of the closed Amiens, France manufacturing facility have asserted wrongful termination or other claims totaling approximately €120€140 million ($137154 million) against Goodyear Dunlop Tires France.France SAS. We intend to vigorously defend ourselves against these claims, and any additional claims that may be asserted against us, and cannot estimate the amounts, if any, that we may ultimately pay in respect of such claims.
Other Actions
We are currently a party to various claims, indirect tax assessments and legal proceedings in addition to those noted above. If management believes that a loss arising from these matters is probable and can reasonably be estimated, we record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Based on currently available information, management believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations.
Our recorded liabilities and estimates of reasonably possible losses for the contingent liabilities described above are based on our assessment of potential liability using the information available to us at the time and, where applicable, any past experience and recent and current trends with respect to similar matters. Our contingent liabilities are subject to inherent uncertainties, and unfavorable judicial or administrative decisions could occur which we did not anticipate. Such an unfavorable decision could include monetary damages, fines or other penalties or an injunction prohibiting us from taking certain actions or selling certain products. If such an unfavorable decision were to occur, it could result in a material adverse impact on our financial position and results of operations in the period in which the decision occurs, or in future periods.
Income Tax Matters
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize income tax benefits to the extent that it is more likely than not that our positions will be sustained when challenged by the taxing authorities. We derecognize income tax benefits when based on new information we determine that it is no longer more likely than not that our position will be sustained. To the extent we prevail in matters for which liabilities have been established, or determine we need to derecognize tax benefits recorded in prior periods, our results of operations and effective tax rate in a given period could be materially affected. An unfavorable tax settlement would require use of our cash, and lead to recognition of expense to the extent the settlement amount exceeds recorded liabilities and, in the case of an income tax settlement, result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction of expense to the extent the settlement amount is lower than recorded liabilities and, in the case of an income tax settlement, would result in a reduction in our effective tax rate in the period of resolution.
While the Company applieswe apply consistent transfer pricing policies and practices globally, supportssupport transfer prices through economic studies, seeksseek advance pricing agreements and joint audits to the extent possible and believes itsbelieve our transfer prices to be appropriate, such transfer
22
prices, and related interpretations of tax laws, are occasionally challenged by various taxing authorities globally. We have received various tax assessments challenging our interpretations of applicable tax laws in various jurisdictions. Although we believe we have complied with applicable tax laws, have strong positions and defenses and have historically been successful in defending such claims, our results of operations could be materially adversely affected in the case we are unsuccessful in the defense of existing or future claims.
Guarantees
We have off-balance sheet financial guarantees and other commitments totaling approximately $70 million and $74 million and $73 million at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. We issue guarantees to financial institutions or other entities on behalf of certain of our affiliates, lessors or customers. We generally do not require collateral in connection with the issuance of these guarantees.
In 2017, we issued a guarantee of approximately PLN165 million ($4440 million) in connection with an indirect tax assessment in EMEA. This guarantee amount was subsequently increased to PLN 181 million ($44 million). We have concluded our performance under this guarantee is not probable and, therefore, have not recorded a liability for this guarantee. In 2015, as a result of the dissolution of the global alliance with SRI, we issued a guarantee of approximately $46 million to an insurance company related to SRI's obligation to pay certain outstanding workers' compensation claims of a formerly consolidated joint venture entity. As of June 30, 2019,March 31, 2020, this guarantee amount has been reduced to $29$26 million. We have concluded the probability of our performance to be remote and, therefore, have not recorded a liability for this guarantee. While there is no fixed duration of this guarantee, we expect the amount of this guarantee to continue to decrease over time as the formerly consolidated joint venture entity pays its outstanding claims. If our performance under these guarantees is triggered by non-payment or another specified event, we would be obligated to make payment to the financial institution or the other entity, and would typically have recourse to the affiliate, lessor, customer, or SRI. Except for the workers' compensation guarantee described above, the guarantees expire at various times through 2020.2021. We are unable to estimate the extent to which our affiliates’, lessors’, customers’, or SRI's assets would be adequate to recover any payments made by us under the related guarantees.
NOTE 14.15. CAPITAL STOCK
Dividends
In the first sixthree months of 2019,2020, we paid cash dividends of $74$37 million on our common stock. This amount excludes dividends earned on stock basedstock-based compensation plans of approximately $1 million forduring the first six monthsquarter of 2019.2020. On July 12, 2019,April 16, 2020, we announced that we have temporarily suspended the Board of Directors (or duly authorized committee thereof) declared cash dividends of $0.16 per share ofquarterly dividend on our common stock, or approximately $37 million in the aggregate. The dividend will be paid on September 3, 2019, to stockholders of record as of the close of business on August 1, 2019. Future quarterly dividends are subject to Board approval.
Common Stock Repurchases
We may repurchase shares delivered to us by employees as payment for the exercise price of stock options and the withholding taxes due upon the exercise of stock options or the vesting or payment of stock awards. During the first six months of 2019,quarter 2020, we did not0t repurchase any shares from employees.
23
NOTE 15.16. RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables present changes in AOCL, by component, for the sixthree months ended June 30, 2019March 31, 2020 and 2018:2019:
(In millions) Income (Loss) |
| Foreign Currency Translation Adjustment |
|
| Unrecognized Net Actuarial Losses and Prior Service Costs |
|
| Deferred Derivative Gains (Losses) |
|
| Total |
| ||||
Balance at December 31, 2019 |
| $ | (1,156 | ) |
| $ | (2,983 | ) |
| $ | 3 |
|
| $ | (4,136 | ) |
Other comprehensive income (loss) before reclassifications, net of tax |
|
| (216 | ) |
|
| (1 | ) |
|
| 18 |
|
|
| (199 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of tax |
|
| — |
|
|
| 26 |
|
|
| (4 | ) |
|
| 22 |
|
Balance at March 31, 2020 |
| $ | (1,372 | ) |
| $ | (2,958 | ) |
| $ | 17 |
|
| $ | (4,313 | ) |
(In millions) Income (Loss) | Foreign Currency Translation Adjustment | Unrecognized Net Actuarial Losses and Prior Service Costs | Deferred Derivative Gains (Losses) | Total | |||||||||||
Balance at December 31, 2018 | $ | (1,160 | ) | $ | (2,923 | ) | $ | 7 | $ | (4,076 | ) | ||||
Other comprehensive income (loss) before reclassifications, net of tax | 11 | 12 | 4 | 27 | |||||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | — | 52 | (5 | ) | 47 | ||||||||||
Balance at June 30, 2019 | $ | (1,149 | ) | $ | (2,859 | ) | $ | 6 | $ | (4,002 | ) | ||||
(In millions) Income (Loss) | Foreign Currency Translation Adjustment | Unrecognized Net Actuarial Losses and Prior Service Costs | Deferred Derivative Gains (Losses) | Total | |||||||||||
Balance at December 31, 2017 | $ | (915 | ) | $ | (3,052 | ) | $ | (9 | ) | $ | (3,976 | ) | |||
Other comprehensive income (loss) before reclassifications, net of tax | (133 | ) | 19 | 6 | (108 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | — | 57 | 5 | 62 | |||||||||||
Balance at June 30, 2018 | $ | (1,048 | ) | $ | (2,976 | ) | $ | 2 | $ | (4,022 | ) |
(In millions) Income (Loss) |
| Foreign Currency Translation Adjustment |
|
| Unrecognized Net Actuarial Losses and Prior Service Costs |
|
| Deferred Derivative Gains (Losses) |
|
| Total |
| ||||
Balance at December 31, 2018 |
| $ | (1,160 | ) |
| $ | (2,923 | ) |
| $ | 7 |
|
| $ | (4,076 | ) |
Other comprehensive income (loss) before reclassifications, net of tax |
|
| 30 |
|
|
| 4 |
|
|
| 5 |
|
|
| 39 |
|
Amounts reclassified from accumulated other comprehensive loss, net of tax |
|
| — |
|
|
| 26 |
|
|
| (3 | ) |
|
| 23 |
|
Balance at March 31, 2019 |
| $ | (1,130 | ) |
| $ | (2,893 | ) |
| $ | 9 |
|
| $ | (4,014 | ) |
The following table presents reclassifications out of AOCL:
|
| Three Months Ended March 31, |
|
|
| |||||
|
| 2020 |
|
| 2019 |
|
|
| ||
(In millions) (Income) Expense |
| Amount Reclassified |
|
| Affected Line Item in the Consolidated | |||||
Component of AOCL |
| from AOCL |
|
| Statements of Operations | |||||
Amortization of prior service cost and unrecognized gains and losses |
| $ | 36 |
|
| $ | 34 |
|
| Other (Income) Expense |
Immediate recognition of prior service cost and unrecognized gains and losses due to curtailments, settlements and divestitures |
|
| (2 | ) |
|
| — |
|
| Other (Income) Expense / Rationalizations |
Unrecognized net actuarial losses and prior service costs, before tax |
|
| 34 |
|
|
| — |
|
|
|
Tax effect |
|
| (8 | ) |
|
| (8 | ) |
| United States and Foreign Taxes |
Net of tax |
| $ | 26 |
|
| $ | 26 |
|
| Goodyear Net Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
Deferred derivative (gains) losses, before tax |
| $ | (4 | ) |
| $ | (3 | ) |
| Cost of Goods Sold |
Tax effect |
|
| — |
|
|
| — |
|
| United States and Foreign Taxes |
Net of tax |
| $ | (4 | ) |
| $ | (3 | ) |
| Goodyear Net Income (Loss) |
Total reclassifications |
| $ | 22 |
|
| $ | 23 |
|
| Goodyear Net Income (Loss) |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||
(In millions) (Income) Expense | Amount Reclassified | Amount Reclassified | Affected Line Item in the Consolidated Statements of Operations | |||||||||||||||
Component of AOCL | from AOCL | from AOCL | ||||||||||||||||
Amortization of prior service cost and unrecognized gains and losses | $ | 34 | $ | 34 | $ | 68 | $ | 69 | Other (Income) Expense | |||||||||
Immediate recognition of prior service cost and unrecognized gains and losses due to curtailments, settlements, and divestitures | — | 6 | — | 6 | Other (Income) Expense | |||||||||||||
Unrecognized Net Actuarial Losses and Prior Service Costs, before tax | 34 | 40 | 68 | 75 | ||||||||||||||
Tax effect | (8 | ) | (10 | ) | (16 | ) | (18 | ) | United States and Foreign Taxes | |||||||||
Net of tax | $ | 26 | $ | 30 | $ | 52 | $ | 57 | Goodyear Net Income (Loss) | |||||||||
Deferred Derivative (Gains) Losses, before tax | $ | (3 | ) | $ | 3 | $ | (6 | ) | $ | 7 | Cost of Goods Sold | |||||||
Tax effect | 1 | (1 | ) | 1 | (2 | ) | United States and Foreign Taxes | |||||||||||
Net of tax | $ | (2 | ) | $ | 2 | $ | (5 | ) | $ | 5 | Goodyear Net Income (Loss) | |||||||
Total reclassifications | $ | 24 | $ | 32 | $ | 47 | $ | 62 | Goodyear Net Income (Loss) |
On April 17, 2020, we reached a tentative bargaining agreement and subsequently approved a plan to permanently close our Gadsden, Alabama manufacturing facility as part of our subsidiaries have guaranteedstrategy to strengthen the competitiveness of our obligations undermanufacturing footprint by curtailing production of tires for declining, less profitable segments of the $282tire market. The tentative bargaining agreement remains subject to approval by the membership of the local union. We estimate the total pre-tax charges associated with this plan to be $280 million outstanding principal amountto $295 million, of 8.75% notes duewhich $170 million to $180 million are expected to be cash charges, primarily for severance and other associate-related costs of approximately $55 million and $40 million, respectively, and other closure costs of $75 million to $85 million. Non-cash charges, primarily related to asset write-offs and accelerated depreciation, are expected to be $110 million to $115 million. We expect to record approximately $170 million of these charges in the second quarter of 2020 the $1.0 billion outstanding principal amountand make cash payments of 5.125% senior notes due 2023, the $900approximately $45 million outstanding principal amount of 5% senior notes due 2026in 2020. The remaining charges will be recorded and the $700 million outstanding principal amount of 4.875% senior notes due 2027 (collectively, the “notes”). The following presents the condensed consolidating financial information separately for:
24
Condensed Consolidating Balance Sheet | |||||||||||||||||||
June 30, 2019 | |||||||||||||||||||
(In millions) | Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Entries and Eliminations | Consolidated | ||||||||||||||
Assets: | |||||||||||||||||||
Current Assets: | |||||||||||||||||||
Cash and Cash Equivalents | $ | 242 | $ | 42 | $ | 633 | $ | — | $ | 917 | |||||||||
Accounts Receivable, net | 797 | 137 | 1,539 | — | 2,473 | ||||||||||||||
Accounts Receivable From Affiliates | 305 | 228 | — | (533 | ) | — | |||||||||||||
Inventories | 1,555 | 68 | 1,506 | (38 | ) | 3,091 | |||||||||||||
Prepaid Expenses and Other Current Assets | 88 | 3 | 205 | 4 | 300 | ||||||||||||||
Total Current Assets | 2,987 | 478 | 3,883 | (567 | ) | 6,781 | |||||||||||||
Goodwill | 24 | 1 | 421 | 124 | 570 | ||||||||||||||
Intangible Assets | 116 | — | 19 | — | 135 | ||||||||||||||
Deferred Income Taxes | 1,456 | 25 | 379 | 5 | 1,865 | ||||||||||||||
Other Assets | 502 | 50 | 519 | — | 1,071 | ||||||||||||||
Investments in Subsidiaries | 3,759 | 433 | — | (4,192 | ) | — | |||||||||||||
Operating Lease Right-of-Use Assets | 561 | 14 | 279 | — | 854 | ||||||||||||||
Property, Plant and Equipment, net | 2,435 | 431 | 4,350 | (22 | ) | 7,194 | |||||||||||||
Total Assets | $ | 11,840 | $ | 1,432 | $ | 9,850 | $ | (4,652 | ) | $ | 18,470 | ||||||||
Liabilities: | |||||||||||||||||||
Current Liabilities: | |||||||||||||||||||
Accounts Payable — Trade | $ | 904 | $ | 121 | $ | 1,725 | $ | — | $ | 2,750 | |||||||||
Accounts Payable to Affiliates | — | — | 533 | (533 | ) | — | |||||||||||||
Compensation and Benefits | 275 | 15 | 217 | — | 507 | ||||||||||||||
Other Current Liabilities | 299 | (5 | ) | 359 | — | 653 | |||||||||||||
Notes Payable and Overdrafts | 24 | — | 456 | — | 480 | ||||||||||||||
Operating Lease Liabilities due Within One Year | 109 | 4 | 87 | — | 200 | ||||||||||||||
Long Term Debt and Finance Leases due Within One Year | 3 | — | 488 | — | 491 | ||||||||||||||
Total Current Liabilities | 1,614 | 135 | 3,865 | (533 | ) | 5,081 | |||||||||||||
Operating Lease Liabilities | 461 | 9 | 194 | — | 664 | ||||||||||||||
Long Term Debt and Finance Leases | 4,070 | 167 | 1,529 | — | 5,766 | ||||||||||||||
Compensation and Benefits | 511 | 92 | 674 | — | 1,277 | ||||||||||||||
Deferred Income Taxes | — | — | 94 | — | 94 | ||||||||||||||
Other Long Term Liabilities | 337 | 8 | 194 | — | 539 | ||||||||||||||
Total Liabilities | 6,993 | 411 | 6,550 | (533 | ) | 13,421 | |||||||||||||
Commitments and Contingent Liabilities | |||||||||||||||||||
Shareholders’ Equity: | |||||||||||||||||||
Goodyear Shareholders’ Equity: | |||||||||||||||||||
Common Stock | 233 | — | — | — | 233 | ||||||||||||||
Other Equity | 4,614 | 1,021 | 3,098 | (4,119 | ) | 4,614 | |||||||||||||
Goodyear Shareholders’ Equity | 4,847 | 1,021 | 3,098 | (4,119 | ) | 4,847 | |||||||||||||
Minority Shareholders’ Equity — Nonredeemable | — | — | 202 | — | 202 | ||||||||||||||
Total Shareholders’ Equity | 4,847 | 1,021 | 3,300 | (4,119 | ) | 5,049 | |||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 11,840 | $ | 1,432 | $ | 9,850 | $ | (4,652 | ) | $ | 18,470 |
Condensed Consolidating Balance Sheet | |||||||||||||||||||
December 31, 2018 | |||||||||||||||||||
(In millions) | Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Entries and Eliminations | Consolidated | ||||||||||||||
Assets: | |||||||||||||||||||
Current Assets: | |||||||||||||||||||
Cash and Cash Equivalents | $ | 127 | $ | 30 | $ | 644 | $ | — | $ | 801 | |||||||||
Accounts Receivable, net | 672 | 110 | 1,248 | — | 2,030 | ||||||||||||||
Accounts Receivable From Affiliates | 294 | 280 | — | (574 | ) | — | |||||||||||||
Inventories | 1,425 | 71 | 1,387 | (27 | ) | 2,856 | |||||||||||||
Prepaid Expenses and Other Current Assets | 76 | 3 | 155 | 4 | 238 | ||||||||||||||
Total Current Assets | 2,594 | 494 | 3,434 | (597 | ) | 5,925 | |||||||||||||
Goodwill | 24 | 1 | 420 | 124 | 569 | ||||||||||||||
Intangible Assets | 117 | — | 19 | — | 136 | ||||||||||||||
Deferred Income Taxes | 1,422 | 27 | 395 | 3 | 1,847 | ||||||||||||||
Other Assets | 524 | 48 | 564 | — | 1,136 | ||||||||||||||
Investments in Subsidiaries | 3,758 | 445 | — | (4,203 | ) | — | |||||||||||||
Operating Lease Right-of-Use Assets | — | — | — | — | — | ||||||||||||||
Property, Plant and Equipment, net | 2,482 | 430 | 4,371 | (24 | ) | 7,259 | |||||||||||||
Total Assets | $ | 10,921 | $ | 1,445 | $ | 9,203 | $ | (4,697 | ) | $ | 16,872 | ||||||||
Liabilities: | |||||||||||||||||||
Current Liabilities: | |||||||||||||||||||
Accounts Payable — Trade | $ | 960 | $ | 131 | $ | 1,829 | $ | — | $ | 2,920 | |||||||||
Accounts Payable to Affiliates | — | — | 574 | (574 | ) | — | |||||||||||||
Compensation and Benefits | 286 | 14 | 171 | — | 471 | ||||||||||||||
Other Current Liabilities | 310 | (4 | ) | 431 | — | 737 | |||||||||||||
Notes Payable and Overdrafts | 25 | — | 385 | — | 410 | ||||||||||||||
Operating Lease Liabilities due Within One Year | — | — | — | — | — | ||||||||||||||
Long Term Debt and Finance Leases Due Within One Year | 2 | — | 241 | — | 243 | ||||||||||||||
Total Current Liabilities | 1,583 | 141 | 3,631 | (574 | ) | 4,781 | |||||||||||||
Operating Lease Liabilities | — | — | — | — | — | ||||||||||||||
Long Term Debt and Finance Leases | 3,550 | 167 | 1,393 | — | 5,110 | ||||||||||||||
Compensation and Benefits | 569 | 93 | 683 | — | 1,345 | ||||||||||||||
Deferred Income Taxes | — | — | 95 | — | 95 | ||||||||||||||
Other Long Term Liabilities | 355 | 8 | 108 | — | 471 | ||||||||||||||
Total Liabilities | 6,057 | 409 | 5,910 | (574 | ) | 11,802 | |||||||||||||
Commitments and Contingent Liabilities | |||||||||||||||||||
Shareholders’ Equity: | |||||||||||||||||||
Goodyear Shareholders’ Equity: | |||||||||||||||||||
Common Stock | 232 | — | — | — | 232 | ||||||||||||||
Other Equity | 4,632 | 1,036 | 3,087 | (4,123 | ) | 4,632 | |||||||||||||
Goodyear Shareholders’ Equity | 4,864 | 1,036 | 3,087 | (4,123 | ) | 4,864 | |||||||||||||
Minority Shareholders’ Equity — Nonredeemable | — | — | 206 | — | 206 | ||||||||||||||
Total Shareholders’ Equity | 4,864 | 1,036 | 3,293 | (4,123 | ) | 5,070 | |||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 10,921 | $ | 1,445 | $ | 9,203 | $ | (4,697 | ) | $ | 16,872 |
Consolidating Statements of Operations | |||||||||||||||||||
Three Months Ended June 30, 2019 | |||||||||||||||||||
(In millions) | Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Entries and Eliminations | Consolidated | ||||||||||||||
Net Sales | $ | 1,793 | $ | 335 | $ | 2,263 | $ | (759 | ) | $ | 3,632 | ||||||||
Cost of Goods Sold | 1,437 | 316 | 1,865 | (763 | ) | 2,855 | |||||||||||||
Selling, Administrative and General Expense | 267 | 9 | 310 | — | 586 | ||||||||||||||
Rationalizations | 3 | — | 1 | — | 4 | ||||||||||||||
Interest Expense | 57 | 7 | 33 | (9 | ) | 88 | |||||||||||||
Other (Income) Expense | (6 | ) | 3 | 1 | 19 | 17 | |||||||||||||
Income (Loss) before Income Taxes and Equity in Earnings of Subsidiaries | 35 | — | 53 | (6 | ) | 82 | |||||||||||||
United States and Foreign Taxes | (6 | ) | — | 35 | (3 | ) | 26 | ||||||||||||
Equity in Earnings of Subsidiaries | 13 | 3 | — | (16 | ) | — | |||||||||||||
Net Income (Loss) | 54 | 3 | 18 | (19 | ) | 56 | |||||||||||||
Less: Minority Shareholders’ Net Income | — | — | 2 | — | 2 | ||||||||||||||
Goodyear Net Income (Loss) | $ | 54 | $ | 3 | $ | 16 | $ | (19 | ) | $ | 54 | ||||||||
Comprehensive Income (Loss) | $ | 66 | $ | (3 | ) | $ | (2 | ) | $ | 10 | $ | 71 | |||||||
Less: Comprehensive Income (Loss) Attributable to Minority Shareholders | — | — | 5 | — | 5 | ||||||||||||||
Goodyear Comprehensive Income (Loss) | $ | 66 | $ | (3 | ) | $ | (7 | ) | $ | 10 | $ | 66 |
Consolidating Statements of Operations | |||||||||||||||||||
Three Months Ended June 30, 2018 | |||||||||||||||||||
(In millions) | Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Entries and Eliminations | Consolidated | ||||||||||||||
Net Sales | $ | 1,834 | $ | 329 | $ | 2,406 | $ | (728 | ) | $ | 3,841 | ||||||||
Cost of Goods Sold | 1,464 | 335 | 1,899 | (749 | ) | 2,949 | |||||||||||||
Selling, Administrative and General Expense | 258 | 8 | 322 | — | 588 | ||||||||||||||
Rationalizations | (1 | ) | — | (1 | ) | — | (2 | ) | |||||||||||
Interest Expense | 56 | 5 | 22 | (5 | ) | 78 | |||||||||||||
Other (Income) Expense | 14 | 3 | 8 | 20 | 45 | ||||||||||||||
Income (Loss) before Income Taxes and Equity in Earnings of Subsidiaries | 43 | (22 | ) | 156 | 6 | 183 | |||||||||||||
United States and Foreign Taxes | (37 | ) | (5 | ) | 62 | (1 | ) | 19 | |||||||||||
Equity in Earnings of Subsidiaries | 77 | 12 | — | (89 | ) | — | |||||||||||||
Net Income (Loss) | 157 | (5 | ) | 94 | (82 | ) | 164 | ||||||||||||
Less: Minority Shareholders’ Net Income | — | — | 7 | — | 7 | ||||||||||||||
Goodyear Net Income (Loss) | $ | 157 | $ | (5 | ) | $ | 87 | $ | (82 | ) | $ | 157 | |||||||
Comprehensive Income (Loss) | $ | 2 | $ | (25 | ) | $ | (123 | ) | $ | 137 | $ | (9 | ) | ||||||
Less: Comprehensive Income (Loss) Attributable to Minority Shareholders | — | — | (11 | ) | — | (11 | ) | ||||||||||||
Goodyear Comprehensive Income (Loss) | $ | 2 | $ | (25 | ) | $ | (112 | ) | $ | 137 | $ | 2 |
Consolidating Statements of Operations | |||||||||||||||||||
Six Months Ended June 30, 2019 | |||||||||||||||||||
(In millions) | Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Entries and Eliminations | Consolidated | ||||||||||||||
Net Sales | $ | 3,466 | $ | 662 | $ | 4,562 | $ | (1,460 | ) | $ | 7,230 | ||||||||
Cost of Goods Sold | 2,808 | 626 | 3,776 | (1,476 | ) | 5,734 | |||||||||||||
Selling, Administrative and General Expense | 520 | 17 | 596 | — | 1,133 | ||||||||||||||
Rationalizations | 9 | — | 98 | — | 107 | ||||||||||||||
Interest Expense | 112 | 13 | 66 | (18 | ) | 173 | |||||||||||||
Other (Income) Expense | 68 | 7 | (80 | ) | 44 | 39 | |||||||||||||
Income (Loss) before Income Taxes and Equity in Earnings of Subsidiaries | (51 | ) | (1 | ) | 106 | (10 | ) | 44 | |||||||||||
United States and Foreign Taxes | (32 | ) | — | 66 | (2 | ) | 32 | ||||||||||||
Equity in Earnings of Subsidiaries | 12 | (12 | ) | — | — | — | |||||||||||||
Net Income (Loss) | (7 | ) | (13 | ) | 40 | (8 | ) | 12 | |||||||||||
Less: Minority Shareholders’ Net Income | — | — | 19 | — | 19 | ||||||||||||||
Goodyear Net Income (Loss) | $ | (7 | ) | $ | (13 | ) | $ | 21 | $ | (8 | ) | $ | (7 | ) | |||||
Comprehensive Income (Loss) | $ | 67 | $ | (17 | ) | $ | 55 | $ | (16 | ) | $ | 89 | |||||||
Less: Comprehensive Income (Loss) Attributable to Minority Shareholders | — | — | 22 | — | 22 | ||||||||||||||
Goodyear Comprehensive Income (Loss) | $ | 67 | $ | (17 | ) | $ | 33 | $ | (16 | ) | $ | 67 |
Consolidating Statements of Operations | |||||||||||||||||||
Six Months Ended June 30, 2018 | |||||||||||||||||||
(In millions) | Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Entries and Eliminations | Consolidated | ||||||||||||||
Net Sales | $ | 3,518 | $ | 638 | $ | 4,863 | $ | (1,348 | ) | $ | 7,671 | ||||||||
Cost of Goods Sold | 2,829 | 608 | 3,877 | (1,389 | ) | 5,925 | |||||||||||||
Selling, Administrative and General Expense | 517 | 18 | 644 | — | 1,179 | ||||||||||||||
Rationalizations | 5 | — | 30 | — | 35 | ||||||||||||||
Interest Expense | 110 | 10 | 45 | (11 | ) | 154 | |||||||||||||
Other (Income) Expense | 24 | 10 | 8 | 40 | 82 | ||||||||||||||
Income (Loss) before Income Taxes and Equity in Earnings of Subsidiaries | 33 | (8 | ) | 259 | 12 | 296 | |||||||||||||
United States and Foreign Taxes | (40 | ) | (2 | ) | 92 | 2 | 52 | ||||||||||||
Equity in Earnings of Subsidiaries | 159 | 34 | — | (193 | ) | — | |||||||||||||
Net Income (Loss) | 232 | 28 | 167 | (183 | ) | 244 | |||||||||||||
Less: Minority Shareholders’ Net Income | — | — | 12 | — | 12 | ||||||||||||||
Goodyear Net Income (Loss) | $ | 232 | $ | 28 | $ | 155 | $ | (183 | ) | $ | 232 | ||||||||
Comprehensive Income (Loss) | $ | 186 | $ | 30 | $ | 32 | $ | (66 | ) | $ | 182 | ||||||||
Less: Comprehensive Income (Loss) Attributable to Minority Shareholders | — | — | (4 | ) | — | (4 | ) | ||||||||||||
Goodyear Comprehensive Income (Loss) | $ | 186 | $ | 30 | $ | 36 | $ | (66 | ) | $ | 186 |
Condensed Consolidating Statement of Cash Flows | |||||||||||||||||||
Six Months Ended June 30, 2019 | |||||||||||||||||||
(In millions) | Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Entries and Eliminations | Consolidated | ||||||||||||||
Cash Flows from Operating Activities: | |||||||||||||||||||
Total Cash Flows from Operating Activities | $ | (77 | ) | $ | (19 | ) | $ | (174 | ) | $ | (21 | ) | $ | (291 | ) | ||||
Cash Flows from Investing Activities: | |||||||||||||||||||
Capital Expenditures | (153 | ) | (20 | ) | (228 | ) | — | (401 | ) | ||||||||||
Asset Dispositions | — | — | 2 | — | 2 | ||||||||||||||
Short Term Securities Acquired | — | — | (67 | ) | — | (67 | ) | ||||||||||||
Short Term Securities Redeemed | — | — | 67 | — | 67 | ||||||||||||||
Capital Contributions and Loans Incurred | (223 | ) | — | — | 223 | — | |||||||||||||
Capital Redemptions and Loans Paid | 169 | — | — | (169 | ) | — | |||||||||||||
Notes Receivable | (7 | ) | — | — | — | (7 | ) | ||||||||||||
Other Transactions | — | — | (13 | ) | — | (13 | ) | ||||||||||||
Total Cash Flows from Investing Activities | (214 | ) | (20 | ) | (239 | ) | 54 | (419 | ) | ||||||||||
Cash Flows from Financing Activities: | |||||||||||||||||||
Short Term Debt and Overdrafts Incurred | 355 | — | 628 | — | 983 | ||||||||||||||
Short Term Debt and Overdrafts Paid | (355 | ) | — | (553 | ) | — | (908 | ) | |||||||||||
Long Term Debt Incurred | 1,781 | — | 1,698 | — | 3,479 | ||||||||||||||
Long Term Debt Paid | (1,302 | ) | — | (1,326 | ) | — | (2,628 | ) | |||||||||||
Common Stock Issued | 1 | — | — | — | 1 | ||||||||||||||
Common Stock Repurchased | — | — | — | — | — | ||||||||||||||
Common Stock Dividends Paid | (74 | ) | — | — | — | (74 | ) | ||||||||||||
Capital Contributions and Loans Incurred | — | 49 | 174 | (223 | ) | — | |||||||||||||
Capital Redemptions and Loans Paid | — | — | (169 | ) | 169 | — | |||||||||||||
Intercompany Dividends Paid | — | — | (21 | ) | 21 | — | |||||||||||||
Transactions with Minority Interests in Subsidiaries | — | — | (25 | ) | — | (25 | ) | ||||||||||||
Debt Related Costs and Other Transactions | 1 | — | (18 | ) | — | (17 | ) | ||||||||||||
Total Cash Flows from Financing Activities | 407 | 49 | 388 | (33 | ) | 811 | |||||||||||||
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash | — | 2 | 4 | — | 6 | ||||||||||||||
Net Change in Cash, Cash Equivalents and Restricted Cash | 116 | 12 | (21 | ) | — | 107 | |||||||||||||
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period | 168 | 30 | 675 | — | 873 | ||||||||||||||
Cash, Cash Equivalents and Restricted Cash at End of the Period | $ | 284 | $ | 42 | $ | 654 | $ | — | $ | 980 |
Condensed Consolidating Statement of Cash Flows | |||||||||||||||||||
Six Months Ended June 30, 2018 | |||||||||||||||||||
(In millions) | Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Entries and Eliminations | Consolidated | ||||||||||||||
Cash Flows from Operating Activities: | |||||||||||||||||||
Total Cash Flows from Operating Activities | $ | 457 | $ | (9 | ) | $ | (336 | ) | $ | (196 | ) | $ | (84 | ) | |||||
Cash Flows from Investing Activities: | |||||||||||||||||||
Capital Expenditures | (180 | ) | (41 | ) | (220 | ) | (1 | ) | (442 | ) | |||||||||
Asset Dispositions | — | 2 | — | — | 2 | ||||||||||||||
Short Term Securities Acquired | — | — | (30 | ) | — | (30 | ) | ||||||||||||
Short Term Securities Redeemed | — | — | 38 | — | 38 | ||||||||||||||
Capital Contributions and Loans Incurred | (306 | ) | — | (213 | ) | 519 | — | ||||||||||||
Capital Redemptions and Loans Paid | 69 | — | 430 | (499 | ) | — | |||||||||||||
Notes Receivable | — | — | — | — | — | ||||||||||||||
Other Transactions | (38 | ) | — | — | — | (38 | ) | ||||||||||||
Total Cash Flows from Investing Activities | (455 | ) | (39 | ) | 5 | 19 | (470 | ) | |||||||||||
Cash Flows from Financing Activities: | |||||||||||||||||||
Short Term Debt and Overdrafts Incurred | 575 | — | 437 | — | 1,012 | ||||||||||||||
Short Term Debt and Overdrafts Paid | (575 | ) | — | (345 | ) | — | (920 | ) | |||||||||||
Long Term Debt Incurred | 1,605 | 15 | 1,924 | — | 3,544 | ||||||||||||||
Long Term Debt Paid | (1,267 | ) | — | (1,666 | ) | — | (2,933 | ) | |||||||||||
Common Stock Issued | 3 | — | — | — | 3 | ||||||||||||||
Common Stock Repurchased | (100 | ) | — | — | — | (100 | ) | ||||||||||||
Common Stock Dividends Paid | (67 | ) | — | — | — | (67 | ) | ||||||||||||
Capital Contributions and Loans Incurred | 213 | 52 | 254 | (519 | ) | — | |||||||||||||
Capital Redemptions and Loans Paid | (430 | ) | — | (69 | ) | 499 | — | ||||||||||||
Intercompany Dividends Paid | — | — | (197 | ) | 197 | — | |||||||||||||
Transactions with Minority Interests in Subsidiaries | — | — | (26 | ) | — | (26 | ) | ||||||||||||
Debt Related Costs and Other Transactions | 7 | — | (1 | ) | — | 6 | |||||||||||||
Total Cash Flows from Financing Activities | (36 | ) | 67 | 311 | 177 | 519 | |||||||||||||
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash | — | (2 | ) | (23 | ) | — | (25 | ) | |||||||||||
Net Change in Cash, Cash Equivalents and Restricted Cash | (34 | ) | 17 | (43 | ) | — | (60 | ) | |||||||||||
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period | 201 | 32 | 877 | — | 1,110 | ||||||||||||||
Cash, Cash Equivalents and Restricted Cash at End of the Period | $ | 167 | $ | 49 | $ | 834 | $ | — | $ | 1,050 |
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 47 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
National efforts by many countries to mitigate the secondCOVID-19 pandemic have caused a deep contraction in vast areas of the global economy, with many workers and businesses, including Goodyear, facing profound challenges. The tire industry has been particularly negatively impacted by this evolving situation, characterized by a sudden and sharp decline in replacement tire demand and original equipment (“OE”) manufacturers suspending or severely limiting automobile production globally. Our results for the first quarter of 2019,2020 were highly influenced by this economic disruption, which aggravated already challenging macro-economic industry conditions have persisted,in many of our key markets, including higher raw material costs,foreign currency headwinds due to a strongerstrong U.S. dollar, lower OE industry volumes, softening demand in Europe, weak market conditions in China and economic volatility in Latin America, particularly Brazil, that persisted throughout 2019.
We are proactively taking actions in Brazil.response to COVID-19 to protect the health and wellbeing of our associates, customers and communities, which remain our top priority, to mitigate the near and long-term financial impacts on our operating results, and to ensure adequate liquidity and capital resources are available to maintain our operations until the auto industry and replacement tire demand recovers.
These actions include:
• | On March 17, 2020 and March 18, 2020, we announced the suspension of production in Europe and the Americas, respectively, due to the COVID-19 pandemic. These temporary measures were implemented in a way to allow us to promptly resume production when public health and market conditions improve. We plan a phased restart of production during the second quarter. Earlier in April, we reopened some of our chemical plants and began a limited ramp-up of our commercial truck tire manufacturing facilities in the U.S. and Europe. More recently, we also began to reopen tire production in most of our consumer factories in Europe. Our decisions to resume production will be based on an evaluation of market demand signals, inventory and supply levels, as well as our ability to safeguard the health of our associates. Throughout the first quarter of 2020, production was also temporarily suspended or significantly limited in several other locations globally, most notably at our Pulandian, China manufacturing facility. Our Pulandian facility is now operating with all of its workforce, is able to meet customer demand, and is expected to continue ramping up production during the second quarter of 2020. |
• | As our business is deemed essential in the U.S. and most other parts of the world, in order to maintain customer service, warehouses, commercial truck service centers and retail operations remain largely operational on a reduced staffing schedule and with strong social distancing practices in place. We continue to closely monitor local conditions surrounding these operations, as well as inventory and supply levels, to continue delivery of our products. |
• | We are following guidance from the Centers for Disease Control and Prevention and have introduced a number of preventative measures at our facilities that remain open, including limiting visitor access and business travel, implementing remote working and social distancing practices, and increasing the frequency of disinfection. |
• | On April 2, 2020, we announced actions to reduce our payroll costs through a combination of furloughs, temporary salary reductions and salary deferrals covering over 9,000 of our corporate and business unit associates, including substantial salary reductions and deferrals for our CEO, officers and directors. These and other similar actions are expected to save nearly $65 million of cash spend during the second quarter of 2020 and take advantage of governmental income replacement programs to ensure our associates are supported. |
• | On April 9, 2020, we amended and restated our $2.0 billion first lien revolving credit facility, extending the maturity date from April 2021 to April 2025. The refinancing includes favorable adjustments to the calculation of the facility’s borrowing base, further strengthening our liquidity position. Other significant changes to the facility are discussed in “Liquidity and Capital Resources.” |
• | On April 16, 2020, we announced that we have temporarily suspended the quarterly dividend on our common stock. These dividends total approximately $37 million each quarter. |
• | We are leveraging governmental relief efforts to defer payroll and other tax payments, which are expected to benefit our cash flows by approximately $60 million for 2020 in the U.S. alone. |
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• | We have taken, and will continue to take, other actions to reduce costs and preserve cash in order to successfully navigate the current economic environment, including limiting capital expenditures to no more than $700 million for the full year and reducing discretionary spending, such as marketing and other administrative and general expenses, by approximately $75 million in the second quarter of 2020. |
Additionally, on April 17, 2020, we reached a tentative bargaining agreement and subsequently approved a plan to permanently close our Gadsden, Alabama manufacturing facility as part of our strategy to strengthen the competitiveness of our manufacturing footprint by curtailing production of tires for declining, less profitable segments of the tire market. The tentative bargaining agreement remains subject to approval by the membership of the local union. We estimate the total pre-tax charges associated with this plan to be $280 million to $295 million, of which $170 million to $180 million are expected to be cash charges. We expect to record approximately $170 million of these charges in the second quarter of 20192020 and make cash payments of approximately $45 million in 2020. The remaining charges will be recorded and the remaining cash payments will be made thereafter, primarily in 2021 and 2022. We expect the combined impact of this plan and the previously announced rationalization actions related to Gadsden will result in approximately $130 million in annual savings in 2021 when compared to 2019.
Our results reflectfor the first quarter of 2020 include a 3.9%17.6% decrease in tire unit shipments compared to the second quarter of 2018. In the secondfirst quarter of 2019, we realizedreflective of the current economic environment. Our results for the first quarter of 2020 include an approximate $65 million unfavorable impact due to lower factory utilization and other period costs, both directly related to the suspension of production at our manufacturing facilities. These negative impacts were partially offset by cost savings of approximately $59$38 million, of cost savings, including raw material cost saving measures of approximately $25 million, which exceeded the impact of general inflation.
Net sales in the secondfirst quarter of 20192020 were $3,632$3,056 million, compared to $3,841$3,598 million in the secondfirst quarter of 2018.2019. Net sales decreased in the secondfirst quarter of 20192020 primarily due to lower global tire unit volumes, unfavorable foreign currency translation, primarily in EMEA and Americas, lower tire unit volumes, and lower sales in other tire-related businesses, primarily due to a decrease in third-party sales of chemical products in Americas. These decreases were partially offset by improvements in price and product mix, primarily in EMEAAmericas and Americas.
In the secondfirst quarter of 2019,2020, Goodyear net incomeloss was $54$619 million, or $0.23$2.65 per share, compared to $157a net loss of $61 million, or $0.65$0.26 per share, in the secondfirst quarter of 2018.2019. The decreaseincrease in Goodyear net incomeloss was primarily driven by higher income tax expense due to the establishment of a valuation allowance on certain deferred tax assets for foreign tax credits, lower segment operating income.
Our total segment operating incomeloss for the secondfirst quarter of 20192020 was $219$47 million, compared to $324income of $190 million in the secondfirst quarter of 2018.2019. The $105$237 million decrease in segment operating incomechange was primarily due to lower global tire unit volume of $120 million, higher raw materialconversion costs of $56$62 million, lower tire unit volumes of $32 million,primarily in Americas and EMEA, higher selling, administrative and general expense ("SAG"(“SAG”) of $16$37 million, primarily in Americas and EMEA, the write-off of work in process inventory of approximately $15 million due to suspending production at our manufacturing facilities, primarily in Americas and EMEA, and lower income from other tire-related businesses of $14$8 million, driven by lower third-party chemical sales in Americas which more thanand a decline in retail sales globally, partially offset the benefitsby lower raw material costs of improvements in price and product mix of $20 million, primarily in EMEA.$30 million. Refer to "Results of Operations — Segment Information” for additional information.
Liquidity
At June 30, 2019,March 31, 2020, we had $917$971 million of cash and cash equivalents as well as $2,525$2,278 million of unused availability under our various credit agreements, compared to $801$908 million and $3,151$3,554 million, respectively, at December 31, 2018.2019. Cash and cash equivalents increased by $116$63 million from December 31, 20182019 due primarily to net borrowings of $926$978 million, partially offset by capital expenditures of $401 million, cash used for operating activities of $291$561 million, capital expenditures of $211 million, and dividends paid of $74$37 million. Cash used for operating activities reflects cash used for working capital of $733 million which was partially offset by the Company's net income for the period, which included non-cash charges for depreciation and amortization of $389$482 million and rationalization chargespayments of $107$73 million. Refer to "Liquidity and Capital Resources" for additional information.
Outlook
The COVID-19 pandemic has caused the temporary closure of many businesses throughout the world during the first quarter of 2020, including most of our manufacturing facilities, which has limited global business activity.
Given the limited visibility we expect to continue to experience challenging globalhave into vehicle production and replacement tire demand, we have difficulty projecting industry conditions, including higher raw material costs, foreign currency headwinds, lower OE industry demand,volumes for the year. We are planning a phased restart of production during the second quarter of 2020, which began earlier in April with the reopening of some of our chemical plants and volatility in emerging markets. We expect to see benefits from thea limited ramp-up of our new Americascommercial truck tire manufacturing facilityfacilities in the U.S. and TireHub, pricing actionsEurope. More recently, we also began to reopen tire production in most of our consumer factories in Europe. We expect most of our manufacturing facilities to resume operations by the end of May. Decisions regarding production will be based on an evaluation of market demand signals, inventory and supply levels, as well as our ability to safeguard the health of our associates.
We currently believe that we implementedour largest volume declines will occur in 2018the second quarter of 2020, with volumes down approximately 50% compared to the second quarter of 2019. Overhead absorption will also continue to be adversely affected by reduced plant
26
production during the second quarter of 2020. We are currently planning for our production to be down almost 25 million units versus the second quarter of 2019 in order to reflect expected demand and to reduce inventory.
In addition, our other tire-related businesses are also being significantly affected by the weakening economic environment. Traffic and volume at our retail locations is low and the first halfsharp drop in business and leisure travel is adversely impacting our aviation business. Our chemicals business is also feeling the effects of 2019, continued strong performancethe decline in tire production. In total, the year-over-year earnings decline in our salesother tire-related businesses is expected to be about $150 million during the second quarter of 17-inch and above consumer replacement tires, and continuing net cost savings initiatives.
For the full year of 2019,2020, we now expect our raw material costs will be up approximately $275a benefit of $50 million to $100 million compared to 2018,2019, excluding transactional foreign currency and raw material cost saving measures. Natural and synthetic rubber prices and other commodity prices historically have experienced significant volatility,been volatile, 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 “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and in our 2019 Form 10-K for a discussion of the factors that may impact our business, results of operations, financial condition or liquidity and “Forward-Looking Information — Safe Harbor Statement” in this Quarterly Report on Form 10-Q for a discussion of our use of forward-looking statements in this Form 10-Q.
RESULTS OF OPERATIONS
CONSOLIDATED
Net sales in the secondfirst quarter of 20192020 were $3,632$3,056 million, decreasing $209$542 million, or 5.4%15.1%, from $3,841$3,598 million in the secondfirst quarter of 2018.2019. Goodyear net incomeloss was $54$619 million, or $0.23$2.65 per share, in the secondfirst quarter of 2019,2020, compared to $157a net loss of $61 million, or $0.65$0.26 per share, in the secondfirst quarter of 2018.
Net sales decreased in the secondfirst quarter of 2019,2020, primarily due primarily to lower global tire unit volume of $524 million, unfavorable foreign currency translation of $128$70 million, primarily in EMEA and Americas, lower tire unit volume of $121 million, and lower sales in other tire-related businesses of $36$34 million, primarily due to a decrease in third-party sales of chemical products in Americas. These decreases were partially offset by improvements in price and product mix of $76$86 million, primarily in EMEAAmericas and Americas.
Worldwide tire unit sales in the secondfirst quarter of 20192020 were 37.431.3 million units, decreasing 1.66.7 million units, or 3.9%17.6%, from 39.038.0 million units in the secondfirst quarter of 2018.2019. Replacement tire volume decreased 4.5 million units, or 16.2%, primarily in EMEA and Americas. OE tire volume decreased 1.42.2 million units, or 11.1%21.2%, primarily due to lower vehicle production. Replacement tire volume decreased 0.2 million units, or 0.8%, primarily in EMEA and Asia Pacific, partially offset by increased volume in Americas.
Cost of goods sold (“CGS”) in the secondfirst quarter of 20192020 was $2,855$2,552 million, decreasing $94$327 million, or 3.2%11.4%, from $2,949$2,879 million in the secondfirst quarter of 2018.2019. CGS decreased primarily due to lower global tire unit volume of $404 million, foreign currency translation of $96$57 million, primarily in EMEA and Americas, lower tire unit volumeraw material costs of $89$30 million, and lower costs in other tire-related businesses of $22$26 million, driven by lower third-party chemical sales in Americas.Americas, and lower start-up costs of $6 million associated with our new plant in San Luis Potosi, Mexico. These decreases were partially offset by higher raw material costs of $56 million, primarily in Americas and EMEA, and higher costs related to product mix of $56 million.
CGS in the secondfirst quarter of 2020 and 2019 included pension expense of $4 million compared to $3 million in 2018.for each period. CGS in the secondfirst quarter of 2019 and 20182020 included accelerated depreciation of $1$4 million ($14 million after-tax and minority). CGS in the secondfirst quarter of 2019 and 2018 also included incremental savings from rationalization plans of $2 million and $17 million, respectively.$1 million. CGS was 78.6%83.5% of sales in the secondfirst quarter of 20192020 compared to 76.8%80.0% in the secondfirst quarter of 2018.
SAG in the secondfirst quarter of 20192020 was $586$581 million, decreasing $2increasing $34 million, or 0.3%6.2%, from $588$547 million in the secondfirst quarter of 2018.2019. SAG decreasedincreased primarily due to foreign currency translation of $21 million, partially offset by higher wages and benefits of $13 million, primarily in Americas as the result of an acquisition during the fourth quarter of 2019, higher bad debt expense of $11 million, driven byprimarily in EMEA, higher incentive compensation,inflation of $6 million, primarily in EMEA and Americas, higher advertising expense of $5 million, primarily in Americas, and higher advertising costsinformation technology expense of $4 million.
SAG in the secondfirst quarter of 2020 and 2019 included pension expense of $4 million compared to $5 million in 2018.for each period. SAG in the secondfirst quarter of 20192020 and 2018 also2019 included incremental savings from rationalization plans of $4$1 million and $9$6 million, respectively. SAG was 16.1%19.0% of sales in the secondfirst quarter of 2019,2020, compared to 15.3%15.2% in the secondfirst quarter of 2018.
We recorded a non-cash goodwill impairment charge of $182 million ($178 million after-tax and minority) related to our EMEA reporting unit in the first quarter of 2020. For further information, refer to Note to the Consolidated Financial Statements No. 8, Goodwill and Intangible Assets.
27
We recorded net rationalization charges of $4$9 million ($37 million after-tax and minority) in the secondfirst quarter of 20192020 and net rationalization reversals of $2$103 million ($186 million after-tax and minority) in the secondfirst quarter of 2018.2019. Net rationalization charges in the first quarter of 2020 and 2019 primarily related to a proposed plan to modernize two of our tire manufacturing facilities in Germany. The second quarter of 2018 reflects reversals of $7 million for actions no longer needed for their originally intended purpose, partially offset by charges of $5 million primarily related to the closure of our tire manufacturing facility in Philippsburg, Germany.
Interest expense in the first six monthsquarter of 20192020 was $173$73 million, increasing $19decreasing $12 million, or 12.3%14.1%, from $154$85 million in the first six monthsquarter of 2018.2019. The increasedecrease was due to a higherlower average interest rate of 5.42%4.79% in the first six monthsquarter of 20192020 compared to 5.01%5.54% in the first six monthsquarter of 2018,2019, and a higherlower average debt balance of $6,379$6,094 million in the first six monthsquarter of 20192020 compared to $6,149$6,135 million in the first six monthsquarter of 2018.
Other (Income) Expense in the first six monthsquarter of 20192020 was $39$27 million of expense, compared to $82$22 million of expense in the first six monthsquarter of 2018.2019. Other (Income) Expense in the first six monthsquarter of 2019 included gains on asset sales of $6 million ($5 million after-tax and minority), charges of $5 million ($4 million after-tax and minority) for legal claims related to discontinued products,operations, gains on asset sales of $5 million ($4 million after-tax and minority), and a net gain on insurance recoveries of $3 million ($32 million after-tax and minority) related to Hurricanes Harvey and Irma. Other Expense
For the first quarter of 2020, we recorded tax expense of $249 million on a loss before income taxes of $368 million. Income tax expense for the first sixthree months of 2018 includedended March 31, 2020 includes net discrete charges of $14$290 million ($11290 million after-tax and minority) for transaction costs related to TireHub, $11 million ($11 million after-tax and minority) for hurricane related expenses, $9 million ($7 million after-tax and minority) related to a one-time expense from the adoption of the new accounting standards update which no longer allows non-service related pension and other postretirement benefits cost to be capitalized in inventory, pension settlement charges of $3 million ($2 million after-tax and minority)after minority interest), and a benefit of $2 million ($1 million after-tax and minority)primarily related to the recoveryestablishment of past costs from one of our asbestos insurers.
In the first six monthsquarter of 2019, we recorded income tax expense of $32$6 million on incomea loss before income taxes of $44$38 million. Income tax expense for the sixthree months ended June 30,March 31, 2019 includes net discrete charges of $13$7 million ($126 million after minority interest). The net discrete tax charge includes a second quarter charge of $6 million related to adjusting our deferred tax assets in Luxembourg for a newly enacted tax rate and various first quarter net discrete charges of $7 million.
We record taxes based on overall estimated annual effective tax rates. The difference between our effective tax rate and the U.S. statutory rate of 21% for the sixthree months ended June 30,March 31, 2020 primarily relates to the discrete items noted above, the non-cash goodwill impairment charge of $182 million, and forecasted losses for the full year in foreign jurisdictions in which no tax benefits are recorded, which have been accentuated during 2020 by business interruptions resulting from the COVID-19 pandemic. The difference between our effective tax rate and the U.S. statutory rate of 21% for the three months ended March 31, 2019 and June 30, 2018, primarily relates to the discrete items noted above and anthe 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.
At June 30, 2019, our valuation allowance on certainMarch 31, 2020, we had approximately $1.0 billion of our U.S. federal, state and local deferred tax assets, was $113 million,net of valuation allowances primarily related to foreign tax credits with limited lives totaling $308 million. In the U.S., we have cumulative positive profitability in the three-year period ended December 31, 2019; however, negative evidence of reduced profitability as a result of the business disruption created by the COVID-19 pandemic must be considered in our assessment of our ability to realize our net deferred tax assets. While the disruption to our business is currently expected to be temporary, there is considerable uncertainty around the extent and duration of that disruption. If our profitability deteriorates enough that our future results for a three-year period are no longer positive, a valuation allowance may be required against all of our U.S. net deferred tax assets.
At December 31, 2019, our U.S. deferred tax assets forincluded $403 million of foreign tax credits, and ournet of valuation allowances of $3 million, generated primarily from the receipt of foreign dividends. During the first quarter of 2020, we established an additional valuation allowance onof $295 million against substantially all of these foreign tax credits with expiration dates through 2025. Due to the sudden and sharp decline in industry demand and the suspension of production at our U.S. manufacturing facilities as a result of the COVID-19 pandemic, we are expecting to incur a significant U.S. tax loss for 2020. As loss carry-forwards must be utilized prior to foreign tax credits in offsetting future income for tax purposes, we have now concluded that it is no longer more likely than not that we will be able to utilize these foreign tax credits prior to their expiration. Our earnings and forecasts of future profitability along with our sources of foreign income provide us sufficient positive evidence that we will be able to utilize our remaining foreign tax credits of $108 million that expire between 2025 and 2028.
At March 31, 2020, we had approximately $1.2 billion of foreign deferred tax assets was $233with a valuation allowance of $939 million. At December 31, 2018, our valuation allowance on certain2019, we had approximately $1.3 billion of U.S. federal, state and local deferred tax assets was $113with a valuation allowance of $13 million, and our valuation allowance on our$1.2 billion of foreign deferred tax assets was $204with a valuation allowance of $969 million.
For further information regarding income taxes includingand the realizability of our deferred tax assets, including our foreign tax credits, refer to Note to the Consolidated Financial Statements No. 5, Income Taxes, in this Form 10-Q.
Minority shareholders’ net income in the first six monthsquarter of 20192020 was $19$2 million, compared to $12$17 million in 2018.2019. The increasedecrease primarily relates to a $17 million indirect tax itembenefit in EMEA during the first quarter of 2019.
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
28
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, goodwill impairment charges and certain other items.
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 (Loss) before Income Taxes.
Total segment operating income inloss for the secondfirst quarter of 20192020 was $219$47 million, decreasing $105a change of $237 million or 32.4%, from $324total segment operating income of $190 million in the secondfirst quarter of 2018.2019. Total segment operating margin (segment operating income divided by segment sales) in the secondfirst quarter of 20192020 was 6.0%(1.5%), compared to 8.4% in the second quarter of 2018. Total segment operating income5.3% in the first six monthsquarter of 2019 was $409 million, decreasing $196 million, or 32.4%, from $605 million in the first six months of 2018. Total segment operating margin in the first six months of 2019 was 5.7%, compared to 7.9% in the first six months of 2018.2019.
Americas
|
| Three Months Ended March 31, |
| |||||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| Change |
|
| Percent Change |
| ||||
Tire Units |
|
| 14.5 |
|
|
| 16.7 |
|
|
| (2.2 | ) |
|
| (13.4 | )% |
Net Sales |
| $ | 1,673 |
|
| $ | 1,876 |
|
| $ | (203 | ) |
|
| (10.8 | )% |
Operating Income (Loss) |
|
| — |
|
|
| 89 |
|
|
| (89 | ) |
|
| (100.0 | )% |
Operating Margin |
|
| — |
|
|
| 4.7 | % |
|
|
|
|
|
|
|
|
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
Percent | Percent | ||||||||||||||||||||||||||||
(In millions) | 2019 | 2018 | Change | Change | 2019 | 2018 | Change | Change | |||||||||||||||||||||
Tire Units | 17.1 | 17.3 | (0.2 | ) | (1.4 | )% | 33.8 | 34.0 | (0.2 | ) | (0.7 | )% | |||||||||||||||||
Net Sales | $ | 1,971 | $ | 2,018 | $ | (47 | ) | (2.3 | )% | $ | 3,847 | $ | 3,947 | $ | (100 | ) | (2.5 | )% | |||||||||||
Operating Income | 134 | 154 | (20 | ) | (13.0 | )% | 223 | 281 | (58 | ) | (20.6 | )% | |||||||||||||||||
Operating Margin | 6.8 | % | 7.6 | % | 5.8 | % | 7.1 | % |
Three Months Ended June 30,March 31, 2020 and 2019 and 2018
Americas unit sales in the secondfirst quarter of 20192020 decreased 0.22.2 million units, or 1.4%13.4%, to 17.114.5 million units. OEReplacement tire volume decreased 0.41.8 million units, or 9.1%14.4%, primarily in our consumer business in the United States and Canada due to slow sell-out resulting from the economic impacts of the COVID-19 pandemic across all channels and rim-sizes. OE tire volume decreased 0.4 million units, or 10.2%, primarily in our consumer business in Brazil, Canada and the United States, driven by lower vehicle production and ouras a result of the COVID-19 pandemic-related factory shutdowns at major OE selectivity strategy. Replacement tire volume increased 0.2 million units, or 1.2%, primarily due to a 4.2% increase in our consumer business in the United States driven by growth in 17-inch and above rim size tires, primarily through our retailers.
Net sales in the secondfirst quarter of 20192020 were $1,971$1,673 million, decreasing $47$203 million, or 2.3%10.8%, from $2,018$1,876 million in the secondfirst quarter of 2018.2019. The decrease in net sales was driven by lower tire volume of $199 million, unfavorable foreign currency translation of $31$25 million, primarily related to the Argentine peso and the Brazilian real, and lower sales in other tire-related businesses of $25$20 million, primarily driven bydue to a decrease in third-party sales of chemical products, and lower tire volume of $21 million.products. These decreases were partially offset by improvements in price and product mix of $30$41 million.
Operating results in the first quarter of 2020 were breakeven, decreasing $89 million primarily dueas compared to the impact of higher raw material costs on pricing.
Price and product mix improvements includeincludes TireHub equity losses of $15 million.
Operating income (loss) in the secondfirst quarter of 2020 excluded asset write-offs and accelerated depreciation of $4 million and rationalization charges of $3 million. Operating income (loss) in the first quarter of 2019 excluded rationalization charges of $2$7 million. Operating income in the second quarter of 2018 excluded net gains on asset sales of $2 million.
Six Months Ended June 30, 2019 and 2018
|
| Three Months Ended March 31, |
| |||||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| Change |
|
| Percent Change |
| ||||
Tire Units |
|
| 11.6 |
|
|
| 14.4 |
|
|
| (2.8 | ) |
|
| (19.6 | )% |
Net Sales |
| $ | 995 |
|
| $ | 1,221 |
|
| $ | (226 | ) |
|
| (18.5 | )% |
Operating Income (Loss) |
|
| (53 | ) |
|
| 54 |
|
|
| (107 | ) |
|
| (198.1 | )% |
Operating Margin |
|
| (5.3 | )% |
|
| 4.4 | % |
|
|
|
|
|
|
|
|
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
Percent | Percent | ||||||||||||||||||||||||||||
(In millions) | 2019 | 2018 | Change | Change | 2019 | 2018 | Change | Change | |||||||||||||||||||||
Tire Units | 13.3 | 14.2 | (0.9 | ) | (6.0 | )% | 27.6 | 28.9 | (1.3 | ) | (4.3 | )% | |||||||||||||||||
Net Sales | $ | 1,141 | $ | 1,260 | $ | (119 | ) | (9.4 | )% | $ | 2,362 | $ | 2,590 | $ | (228 | ) | (8.8 | )% | |||||||||||
Operating Income | 44 | 100 | (56 | ) | (56.0 | )% | 98 | 178 | (80 | ) | (44.9 | )% | |||||||||||||||||
Operating Margin | 3.9 | % | 7.9 | % | 4.1 | % | 6.9 | % |
Europe, Middle East and Africa unit sales in the secondfirst quarter of 20192020 decreased 2.8 million units, or 19.6%, to 11.6 million units. Replacement tire volume decreased 1.9 million units, or 18.1%, primarily due to lower consumer replacement volumes reflecting decreased industry demand due to the economic impacts of the COVID-19 pandemic and expected declines resulting from our initiative to align distribution in Europe. OE tire volume decreased 0.9 million units, or 6.0%, to 13.3 million units. OE tire volume decreased 0.6 million units, or 12.7%23.4%, primarily in our consumer business, driven by lower vehicle production as a result of the COVID-19 pandemic-related factory shutdowns at major OE manufacturers and our exit of declining, less profitable market segments. Replacement tire volume decreased 0.3 million units, or 3.2%, primarily due to lower consumer replacement volumes driven by decreased industry demand.
Net sales in the secondfirst quarter of 20192020 were $1,141$995 million, decreasing $119$226 million, or 9.4%18.5%, from $1,260$1,221 million in the secondfirst quarter of 2018.2019. Net sales decreased primarily due to unfavorable foreign currency translation of $79 million, driven by the weakening of the euro, Turkish lira and South African rand, lower tire unit volume of $71 million, and lower sales in other tire-related businesses of $7 million. These decreases were partially offset by improvements in price and product mix of $39 million, driven by our continued focus on 17-inch and above rim size consumer tires.
Operating incomeloss in the first six monthsquarter of 20192020 was $98$53 million, decreasing $80a change of $107 million, or 44.9%, from $178operating income of $54 million in the first six monthsquarter of 2018. Operating2019. The change in operating income decreased(loss) was primarily due to higher raw material costs of $46 million, lower tire unit volume of $27 million, unfavorable foreign currency translation of $14 million, higher transportation costs of $10 million, higher SAG of $10 million, primarily due to inflation, and$53 million; higher conversion costs of $28 million, primarily related to lower factory utilization and other period costs, and the write-off of work in process inventory of approximately $5 million.million, both as a direct result of suspending production at our manufacturing facilities; and higher SAG of $15 million driven by higher bad debt expense. These decreasesincreases in operating income (loss) were partially offset by improvements in price and product mixraw material costs of $45$8 million. SAG and conversion costs included incremental savings from rationalization plans of $9 million and $2 million, respectively.
Operating income (loss) in the first six monthsquarter of 2020 excluded a non-cash goodwill impairment charge of $182 million, net rationalization charges of $6 million, and net gains on asset sales of $1 million. Operating income (loss) in the first quarter of 2019 excluded net rationalization charges of $98$96 million and net gains on asset sales of $6 million and accelerated depreciation of $1$5 million. Operating income in the first six months of 2018 excluded net rationalization charges of $26 million, net losses on asset sales of $2 million and accelerated depreciation of $2 million.
Asia Pacific
|
| Three Months Ended March 31, |
| |||||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| Change |
|
| Percent Change |
| ||||
Tire Units |
|
| 5.2 |
|
|
| 6.9 |
|
|
| (1.7 | ) |
|
| (23.9 | )% |
Net Sales |
| $ | 388 |
|
| $ | 501 |
|
| $ | (113 | ) |
|
| (22.6 | )% |
Operating Income |
|
| 6 |
|
|
| 47 |
|
|
| (41 | ) |
|
| (87.2 | )% |
Operating Margin |
|
| 1.5 | % |
|
| 9.4 | % |
|
|
|
|
|
|
|
|
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
Percent | Percent | ||||||||||||||||||||||||||||
(In millions) | 2019 | 2018 | Change | Change | 2019 | 2018 | Change | Change | |||||||||||||||||||||
Tire Units | 7.0 | 7.5 | (0.5 | ) | (5.7 | )% | 14.0 | 15.1 | (1.1 | ) | (7.2 | )% | |||||||||||||||||
Net Sales | $ | 520 | $ | 563 | $ | (43 | ) | (7.6 | )% | $ | 1,021 | $ | 1,134 | $ | (113 | ) | (10.0 | )% | |||||||||||
Operating Income | 41 | 70 | (29 | ) | (41.4 | )% | 88 | 146 | (58 | ) | (39.7 | )% | |||||||||||||||||
Operating Margin | 7.9 | % | 12.4 | % | 8.6 | % | 12.9 | % |
Three Months Ended June 30,March 31, 2020 and 2019 and 2018
Asia Pacific unit sales in the secondfirst quarter of 20192020 decreased 0.51.7 million units, or 5.7%23.9%, to 7.05.2 million units. OE tire volume decreased 0.40.9 million units, or 11.9%34.2%, primarily in our consumer business in China and India due to lower vehicle production.India. Replacement tire volume decreased 0.10.8 million units, or 1.2%17.2%, primarily in our consumer business in China.
Net sales in the secondfirst quarter of 20192020 were $520$388 million, decreasing $43$113 million, or 7.6%22.6%, from $563$501 million in the secondfirst quarter of 2018.2019. Net sales decreased due to lower tire unit volume of $29$109 million and unfavorable foreign currency translation of $18$8 million, primarily related to the weakening of the Chinese yuan, Australian dollar and Indian rupee.Chinese yuan. These decreases were partially offset by improvements in price and product mix of $7 million.
Operating income in the secondfirst quarter of 20192020 was $6 million, decreasing $41 million, decreasing $29 million, or 41.4%87.2%, from $70$47 million in the secondfirst quarter of 2018. Operating2019. The decrease in operating income decreasedwas due to lower tire unit volume of $8$28 million, higher raw material costs of $8 million, higher conversion costs of $5 million, primarily due to the impact of lower tire production on overhead absorption, unfavorable price and product mix of $4$12 million, higher SAGconversion costs of $3 million and unfavorable foreign currency translationlower earnings in other tire-related businesses of $2 million, primarily related to the weakening of the Chinese yuan.
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 April 9, 2020, we amended and restated our European$2.0 billion first lien revolving credit facility. Significant changesChanges to the facility include extending the maturity to March 27, 2024,April 9, 2025 and increasing the available commitments from €550borrowing base for the facility by increasing the amount attributable to the value of our principal trademarks by $100 million to €800 million, decreasingand adding the value of eligible machinery and equipment. The interest rate marginfor loans under the facility increased by 2550 basis points to LIBOR plus 175 basis points, based on our current liquidity, and decreasingundrawn amounts under the facility will be subject to an annual commitment fee by 5of 25 basis points.
30
At June 30, 2019,March 31, 2020, we had $917$971 million in cash and cash equivalents, compared to $801$908 million at December 31, 2018.2019. For the sixthree months ended June 30, 2019,March 31, 2020, net cash used by operating activities was $291$561 million, primarily driven by cash used for working capital of $733$482 million and rationalization payments of $33 million and pension contributions and direct payments $32$73 million. These decreases in cash were partially offset by cash derived from net income of $12 million, which includes non-cash charges of $389
At June 30, 2019,March 31, 2020, we had $2,525$2,278 million of unused availability under our various credit agreements, compared to $3,151$3,554 million at December 31, 2018.2019. The table below presents unused availability under our credit facilities at those dates:
(In millions) |
| March 31, 2020 |
|
| December 31, 2019 |
| ||
First lien revolving credit facility |
| $ | 1,062 |
|
| $ | 1,662 |
|
European revolving credit facility |
|
| 812 |
|
|
| 899 |
|
Chinese credit facilities |
|
| 230 |
|
|
| 290 |
|
Other domestic and international debt |
|
| 5 |
|
|
| 338 |
|
Notes payable and overdrafts |
|
| 169 |
|
|
| 365 |
|
|
| $ | 2,278 |
|
| $ | 3,554 |
|
June 30, | December 31, | ||||||
(In millions) | 2019 | 2018 | |||||
First lien revolving credit facility | $ | 1,246 | $ | 1,633 | |||
European revolving credit facility | 690 | 629 | |||||
Chinese credit facilities | 239 | 199 | |||||
Mexican credit facilities | — | 140 | |||||
Other domestic and international debt | 93 | 221 | |||||
Notes payable and overdrafts | 257 | 329 | |||||
$ | 2,525 | $ | 3,151 |
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, orthe 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 20192020 cash flow needs to include capital expenditures of approximately $850 millionup to $875$700 million. We also expect interest expense to be approximately $350 million to $375 million; restructuring payments to be $175 million to $200 million; cash tax payments to be approximately $50$60 million, approximately $30 million of which were already paid during the first quarter of 2020; dividends on our common stock to be approximately $150$37 million, which reflects the dividend already paid in the first quarter of 2020; 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 source of cash for the full year of 2020, but a use of cash during the second quarter of less than $1002020.
We could use approximately $1.0 billion of cash in the second quarter of 2020. As a result, we expect our liquidity to decline over the course of the second quarter of 2020, before recovering in the second half of the year. For example, the borrowing base under our first lien revolving credit facility is dependent, in significant part, on our eligible accounts receivable and inventory, which have declined as a result of our lower sales and production levels due to the COVID-19 pandemic. A decline in our borrowing base would reduce our availability under the first lien revolving credit facility. Additionally, our European revolving credit facility contains a leverage ratio covenant applicable to Goodyear Europe B.V. (“GEBV”) and its subsidiaries. While we are currently in compliance with this covenant, if we were unable to satisfy this covenant in the future or obtain a waiver from our lenders, we would no longer be able to access our €800 million European revolving credit facility or our pan-European accounts receivable securitization facility. See “Credit Sources – Covenant Compliance” below for more information regarding this covenant.
We are actively monitoring our liquidity, including the covenant in 2019.our European revolving credit facility, and have taken a number of actions aimed at mitigating the negative consequences of the COVID-19 pandemic on our cash flows and liquidity, such as suspending production at most of our manufacturing facilities, reducing our payroll costs through a combination of furloughs, temporary salary reductions and salary deferrals, refinancing our first lien revolving credit facility to extend its maturity and increase its borrowing base, temporarily suspending the quarterly dividend on our common stock, reducing capital expenditures and discretionary spending, and using governmental relief efforts to defer payroll and other tax payments globally. We intend to operate the business in a way that allows us to address theseour cash flow needs with our existing cash and available credit if they cannot be funded by cash generated from operations.
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
31
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, thatwhich are subject to such requirements or limitations to be integral to our liquidity or our ability to service our debt and operational requirements. At June 30, 2019,March 31, 2020, approximately $651$621 million of net assets, including $105$158 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 $291$561 million in the first six monthsquarter of 2019,2020, increasing $207$197 million compared to net cash used by operating activities of $84$364 million in the first six monthsquarter of 2018.
The increase in net cash used by operating activities was primarily due to an increase in cash used for working capital of $289 million anddriven by a decrease in operating income from our SBUs of $196$237 million partially offset by lowerand higher cash payments for
The decrease in cash used for working capital reflects a decrease in cash used for Accounts Receivable of $219 million, partially offset by an increase in cash used for Inventory of $77 million and Accounts Payable — Trade. Accounts Payable —– Trade decreased during the first six months of 2019 as compared to an increase during the first six months of 2018, resulting in a year-over-year use of cash of $308$35 million. That use of cash was primarilyThese changes were driven by raw material pricesthe impacts of the COVID-19 pandemic, which moderated during the first half of 2019 compared to increasing prices during the first half of 2018,included lower sales volumes as well as the impact of lowermitigating actions taken by us, such as suspending production levels during the second quarter of 2019, primarily in Asia Pacific.
Investing Activities
Net cash used by investing activities was $419$257 million in the first six monthsquarter of 2019,2020, compared to $470$244 million in the first six monthsquarter of 2018.2019. Capital expenditures were $401$211 million in the first six monthsquarter of 2019,2020, compared to $442$221 million in the first six monthsquarter of 2018.2019. Beyond expenditures required to sustain our facilities, capital expenditures in 20192020 and 20182019 primarily related to investments in additional 17-inch and above capacity around the world.
Financing Activities
Net cash provided by financing activities was $811$939 million in the first six monthsquarter of 2019,2020, compared to net cash provided by financing activities of $519$645 million in the first six monthsquarter of 2018.2019. Financing activities in 20192020 included net borrowings of $926$978 million, which were partially offset by dividends on our common stock of $74$37 million. Financing activities in 20182019 included net borrowings of $703$713 million, which were partially offset by common stock repurchases of $100 million and dividends on our common stock of $67$37 million.
Credit Sources
In aggregate, we had total credit arrangements of $9,098$8,618 million available at June 30, 2019,March 31, 2020, of which $2,525$2,278 million were unused, compared to $8,971$9,054 million available at December 31, 2018,2019, of which $3,151$3,554 million were unused. At June 30, 2019,March 31, 2020, we had long term credit arrangements totaling $8,345$7,749 million, of which $2,268$2,109 million were unused, compared to $8,212$8,320 million and $2,822$3,189 million, respectively, at December 31, 2018.2019. At June 30, 2019,March 31, 2020, we had short term committed and uncommitted credit arrangements totaling $753$869 million, of which $257$169 million were unused, compared to $759$734 million and $329$365 million, respectively, at December 31, 2018.2019. The continued availability of the short term uncommitted arrangements is at the discretion of the relevant lender and may be terminated at any time.
Outstanding Notes
At June 30, 2019 and DecemberMarch 31, 2018,2020, we had $3,314$3,305 million of outstanding notes.
$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 iswas based primarily on (i) eligible accounts receivable and inventory of The Goodyear Tire & Rubber Company and certain of its U.S. and Canadian subsidiaries, (ii) the value of our principal trademarks, and (iii) certain cash in an amount not to exceed $200 million. To the extent that our eligible accounts receivable and inventory and other components of the borrowing base decline in value, our borrowing base will decrease and the availability under the facility may decrease below $2.0 billion. In addition, if the amount of outstanding borrowings and letters of credit under the facility exceeds the borrowing base, we are required to prepay borrowings and/or cash collateralize letters of credit sufficient to eliminate the excess. As of June 30, 2019,March 31, 2020, our borrowing base, and therefore our availability, under the facility was $287$501 million below the facility's stated amount of $2.0 billion. Based on our current liquidity,During the quarter ended March 31, 2020, amounts drawn under this facility bearbore interest at LIBOR plus 125 basis points, and undrawn amounts under the facility will bewere subject to an annual commitment fee of 30 basis points.
At June 30, 2019,March 31, 2020, we had $430$420 million of borrowings and $37$17 million of letters of credit issued under the revolving credit facility. At December 31, 2018,2019, we had no borrowings and $37 million of letters of credit issued under the revolving credit facility.
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At June 30, 2019,Table of contents
On April 9, 2020, we hadamended and restated the first lien revolving credit facility. Changes to the facility include extending the maturity to April 9, 2025 and increasing the borrowing base for the facility by increasing the amount attributable to the value of our principal trademarks by $100 million and adding the value of eligible machinery and equipment. The interest rate for loans under the facility increased by 50 basis points to LIBOR plus 175 basis points, based on our current liquidity, and undrawn amounts under the facility will be subject to an annual commitment fee of 25 basis points.
At March 31, 2020, we had$343331 millionin letters of credit issued under bilateral letter of credit agreements.
Amended and Restated Second Lien Term Loan Facility due 2025
Our amended and restated second lien term loan facility matures on March 7, 2025. The term loan bears interest, at our option, at (i) 200 basis points over LIBOR or (ii) 100 basis points over an alternative base rate (the higher of (a) the prime rate, (b) the federal funds effective rate or the overnight bank funding rate plus 50 basis points or (c) LIBOR plus 100 basis points). In addition, if the Total Leverage Ratio is equal to or less than 1.25 to 1.00, we have the option to further reduce the spreads described above by 25 basis points. "Total Leverage Ratio" has the meaning given it in the facility.
At June 30, 2019March 31, 2020 and December 31, 2018,2019, the amounts outstanding under this facility were $400 million.
€800 Million Amended and Restated Senior Secured European Revolving Credit Facility due 2024
Our amended and restated our European revolving credit facility. Significant changes to the European revolving credit facility include extending the maturity to March 27, 2024, increasing the available commitments thereunder from €550 million to €800 million, decreasing the interest rate margin by 25 basis points and decreasing the annual commitment fee by 5 basis points to 25 basis points. Loans will now bear interest at LIBOR plus 150 basis points for loans denominated in U.S. dollars or pounds sterling and EURIBOR plus 150 basis points for loans denominated in euros.
At June 30, 2019,March 31, 2020, there were $100 million (€88 million)no of borrowings outstanding under the German tranche, $120$66 million (€10560 million) of borrowings outstanding under the all-borrower tranche and no letters of credit outstanding under the European revolving credit facility. At December 31, 2018,2019, there were no borrowings and no letters of credit outstanding under the European revolving credit facility.
Each of our first lien revolving credit facility and our European revolving credit facility have customary representations and warranties including, as a condition to borrowing, that all such representations and warranties are true and correct, in all material respects, on the date of the borrowing, including representations as to no material adverse change in our business or financial condition since December 31, 20152019 under the first lien facility and December 31, 2018 under the European facility.
Accounts Receivable Securitization Facilities (On-Balance Sheet)
GEBV and certain other of our European subsidiaries are parties to a pan-European accounts receivable securitization facility that expires in 2023. The terms of the facility provide the flexibility to designate annually the maximum amount of funding available under the facility in an amount of not less than €30 million and not more than €450 million. For the period from October 18, 2018 through October 17, 2019,15, 2020, the designated maximum amount of the facility is €320 million.
The facility involves the ongoing daily sale of substantially all of the trade accounts receivable of certain GEBV subsidiaries. These subsidiaries retain servicing responsibilities. Utilization under this facility is based on eligible receivable balances.
The funding commitments under the facility will expire upon the earliest to occur of: (a) September 26, 2023, (b) the non-renewal and expiration (without substitution) of all of the back-up liquidity commitments, (c) the early termination of the facility according to its terms (generally upon an Early Amortisation Event (as defined in the facility), which includes, among other things, events similar to the events of default under our senior secured credit facilities; certain tax law changes; or certain changes to law, regulation or accounting standards), or (d) our request for early termination of the facility. The facility’s current back-up liquidity commitments will expire on October 17, 2019.
At June 30,March 31, 2020, the amounts available and utilized under this program totaled $166 million (€151 million). At December 31, 2019, the amounts available and utilized under this program totaled $266$327 million (€234 million). At December 31, 2018, the amounts available and utilized under this program totaled $335 million (€293291 million). The program does not qualify for sale accounting, and accordingly, these amounts are included in Long Term Debt and Finance Leases.
Accounts Receivable Factoring Facilities (Off-Balance Sheet)
We have sold certain of our trade receivables under off-balance sheet programs during the first six months of 2019.programs. For these programs, we have concluded that there is generally no risk of loss to us from non-payment of the sold receivables. At June 30, 2019,March 31, 2020, the gross amount of receivables sold was $582$460 million, comparedcompared to $568$548 million at December 31, 2018.
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
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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 atJune 30, 2019 March 31, 2020 and December 31, 2018.2019.
Further Information
After 2021, it is unclear whether banks will continue to provide LIBOR submissions to the administrator of LIBOR, and no consensus currently exists as to what benchmark rate or rates may become accepted alternatives to LIBOR. In the United States,
efforts to identify a set of alternative U.S. dollar reference interest rates include proposals by the Alternative Reference Rates
International Swaps and Derivatives Association, Inc. launched a consultation on technical issues related to new benchmark fallbacks for derivative contracts that reference certain interbank offered rates, including LIBOR. We cannot currently predict the effect of the discontinuation of, or other changes to, LIBOR or any establishment of alternative reference rates in the United States, the European Union or elsewhere on the global capital markets. The uncertainty regarding the future of LIBOR, as well as the transition from LIBOR to any alternative reference rate or rates, could have adverse impacts on floating rate obligations, loans, deposits, derivatives and other financial instruments that currently use LIBOR as a benchmark rate. We are in the process of evaluatinghave identified and evaluated our financing obligations and other contracts that refer to LIBOR and expect to be able to transition those obligations and contracts to an alternative reference rate in the event of the discontinuation of LIBOR. Our amended and restated first lien revolving credit facility, our second lien term loan facility and our European revolving credit facility, which constitute the most significant of our LIBOR-based debt obligations that mature after 2021, contain “fallback” provisions that address the potential discontinuation of LIBOR and facilitate the adoption of an alternate rate of interest. Our first lien revolving credit facility matures in 2021 and weWe have not issued any long term floating rate notes. Our amended and restated first lien revolving credit facility and second lien term loan facility also contain express provisions for the use, at our option, of 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). We do not believe that the discontinuation of LIBOR, or its replacement with an alternative reference rate or rates, will have a material impact on our results of operations, financial position or liquidity.
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 Annual Report on Form 10-K for the year ended December 31, 20182019 (the "2018"2019 Form 10‑K") and Note to the Consolidated Financial Statements No. 9,10, Financing Arrangements and Derivative Financial Instruments, in this Form 10-Q.
Covenant Compliance
Our first and second lien credit facilities and some of the indentures governing our notes contain certain covenants that, among other things, limit our ability to incur additional debt or issue redeemable preferred stock, pay dividends, repurchase shares or make certain other restricted payments or investments, incur liens, sell assets, incur restrictions on the ability of our subsidiaries to pay dividends or to make other payments to us, enter into affiliate transactions, engage in sale and leaseback transactions, and consolidate, merge, sell or otherwise dispose of all or substantially all of our assets. These covenants are subject to significant exceptions and qualifications. Our first and second lien credit facilities and the indentures governing our notes also have customary defaults, including cross-defaults to material indebtedness of Goodyear and its subsidiaries.
We have additional financial covenants in our first and second lien credit facilities that are currently not applicable. We only become subject to these financial covenants when certain events occur. These financial covenants and related events are as follows:
• | We become subject to the financial covenant contained in our first lien revolving credit facility when the aggregate amount of our Parent Company (The Goodyear Tire & Rubber Company) and guarantor subsidiaries cash and cash equivalents (“Available Cash”) plus our availability under our first lien revolving credit facility is less than $200 million. If this were to occur, our ratio of EBITDA to Consolidated Interest Expense may not be less than 2.0 to 1.0 for the most recent period of four consecutive fiscal quarters. As of March 31, 2020, our availability under this facility of $1,062 million, plus our Available Cash of $139 million, totaled $1,201 million, which is in excess of $200 million. |
• | We become subject to a covenant contained in our second lien credit facility upon certain asset sales. The covenant provides that, before we use cash proceeds from certain asset sales to repay any junior lien, senior unsecured or subordinated indebtedness, we must first offer to use such cash proceeds to prepay borrowings under the second lien credit facility unless our ratio of Consolidated Net Secured Indebtedness to EBITDA (Pro Forma Senior Secured Leverage Ratio) for any period of four consecutive fiscal quarters is equal to or less than 3.0 to 1.0. |
In addition, our European revolving credit facility contains non-financial covenants similar to the non-financial covenants in our first and second lien credit facilities that are described above and a financial covenant applicable only to GEBV and its subsidiaries. This financial covenant provides that we are not permitted to allow GEBV’s ratio of Consolidated Net GEBV Indebtedness to Consolidated GEBV 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 GEBV Indebtedness is determined net of the sum of cash and cash equivalents in
34
excess of $100 million held by GEBV 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 GEBV Indebtedness also excludes loans from other consolidated Goodyear entities. This financial covenant is also included in our pan-European accounts receivable securitization facility. At June 30, 2019,March 31, 2020, 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
Covenants could change based upon a refinancing or amendment of an existing facility, or additional covenants may be added in connection with the incurrence of new debt.
At June 30, 2019,March 31, 2020, 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 GEBV Indebtedness” and “Consolidated GEBV 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 sixthree months of 2019,2020, we paid cash dividends of $74$37 million on our common stock. This amount excludes dividends earned on stock basedstock-based compensation plans of approximately $1 million for the first sixthree months of 2019.2020. On July 12, 2019,April 16, 2020, we announced that we have temporarily suspended the Board of Directors (or duly authorized committee thereof) declared cash dividends $0.16 per share of common stock, or approximately $37 million in the aggregate. Thequarterly dividend will be paid on September 3, 2019 to stockholders of record as of the close of business on August 1, 2019. Future quarterly dividends are subject to Board approval.
The restrictions imposed by our credit facilities and indentures did not affect our ability to pay the dividends on or repurchase our capitalcommon 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 ability to divest non-core businesses, and those divestitures have not affected our ability to comply with those restrictions.
Supplemental Guarantor Financial Information
Certain of our subsidiaries, which are listed on Exhibit 22 to this Quarterly Report on Form 10-Q and are generally holding companies or smaller operating companies, have guaranteed our obligations under the $282 million outstanding principal amount of 8.75% notes due 2020, the $1.0 billion outstanding principal amount of 5.125% senior notes due 2023, the $900 million outstanding principal amount of 5% senior notes due 2026 and the $700 million outstanding principal amount of 4.875% senior notes due 2027 (collectively, the “Notes”).
The Notes have been issued by The Goodyear Tire & Rubber Company (the “Parent Company”) and are its senior unsecured obligations. The Notes rank equally in right of payment with all of our existing and future senior unsecured obligations and senior to any of our future subordinated indebtedness. The Notes are effectively subordinated to our existing and future secured indebtedness to the extent of the assets securing that indebtedness. The Notes are fully and unconditionally guaranteed on a joint
35
and several basis by each of our wholly-owned U.S. and Canadian subsidiaries that also guarantee our obligations under certain of our senior secured credit facilities (such guarantees, the “Guarantees”; and, such guaranteeing subsidiaries, the “Subsidiary Guarantors”). The Guarantees are senior unsecured obligations of the Subsidiary Guarantors and rank equally in right of payment with all existing and future senior unsecured obligations of our Subsidiary Guarantors. The Guarantees are effectively subordinated to existing and future secured indebtedness of the Subsidiary Guarantors to the extent of the assets securing that indebtedness.
The Notes are structurally subordinated to all of the existing and future debt and other liabilities, including trade payables, of our subsidiaries that do not guarantee the Notes (the “Non-Guarantor Subsidiaries”). The Non-Guarantor Subsidiaries will have no obligation, contingent or otherwise, to pay amounts due under the Notes or to make funds available to pay those amounts. Certain Non-Guarantor Subsidiaries are limited in their ability to remit funds to us by means of dividends, advances or loans due to required foreign government and/or currency exchange board approvals or limitations in credit agreements or other debt instruments of those subsidiaries.
The Subsidiary Guarantors, as primary obligors and not merely as sureties, jointly and severally irrevocably and unconditionally guarantee on a senior unsecured basis the performance and full and punctual payment when due of all obligations of the Parent Company under the Notes and the related indentures, whether for payment of principal of or interest on the Notes, expenses, indemnification or otherwise. The Guarantees of the Subsidiary Guarantors are subject to release in limited circumstances only upon the occurrence of certain customary conditions.
Although the Guarantees provide the holders of Notes with a direct unsecured claim against the assets of the Subsidiary Guarantors, under U.S. federal bankruptcy law and comparable provisions of U.S. state fraudulent transfer laws, in certain circumstances a court could cancel a Guarantee and order the return of any payments made thereunder to the Subsidiary Guarantor or to a fund for the benefit of its creditors.
A court might take these actions if it found, among other things, that when the Subsidiary Guarantors incurred the debt evidenced by their Guarantee (i) they received less than reasonably equivalent value or fair consideration for the incurrence of the debt and (ii) any one of the following conditions was satisfied:
• | the Subsidiary Guarantor was insolvent or rendered insolvent by reason of the incurrence; |
• | the Subsidiary Guarantor was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital; or |
• | the Subsidiary Guarantor intended to incur, or believed (or reasonably should have believed) that it would incur, debts beyond its ability to pay as those debts matured. |
In applying the above factors, a court would likely find that a Subsidiary Guarantor did not receive fair consideration or reasonably equivalent value for its Guarantee, except to the extent that it benefited directly or indirectly from the issuance of the Notes. The determination of whether a guarantor was or was not rendered “insolvent” when it entered into its guarantee will vary depending on the law of the jurisdiction being applied. Generally, an entity would be considered insolvent if the sum of its debts (including contingent or unliquidated debts) is greater than all of its assets at a fair valuation or if the present fair salable value of its assets is less than the amount that will be required to pay its probable liability on its existing debts, including contingent or unliquidated debts, as they mature.
Under Canadian federal bankruptcy and insolvency laws and comparable provincial laws on preferences, fraudulent conveyances or other challengeable or voidable transactions, the Guarantees could be challenged as a preference, fraudulent conveyance, transfer at undervalue or other challengeable or voidable transaction. The test to be applied varies among the different pieces of legislation, but as a general matter these types of challenges may arise in circumstances where:
• | such action was intended to defeat, hinder, delay, defraud or prejudice creditors or others; |
• | such action was taken within a specified period of time prior to the commencement of proceedings under Canadian bankruptcy, insolvency or restructuring legislation in respect of a Subsidiary Guarantor, the consideration received by the Subsidiary Guarantor was conspicuously less than the fair market value of the consideration given, and the Subsidiary Guarantor was insolvent or rendered insolvent by such action and (in some circumstances, or) such action was intended to defraud, defeat or delay a creditor; |
• | such action was taken within a specified period of time prior to the commencement of proceedings under Canadian bankruptcy, insolvency or restructuring legislation in respect of a Subsidiary Guarantor and such action was taken, or is deemed to have been taken, with a view to giving a creditor a preference over other creditors or, in some circumstances, had the effect of giving a creditor a preference over other creditors; or |
• | a Subsidiary Guarantor is found to have acted in a manner that was oppressive, unfairly prejudicial to or unfairly disregarded the interests of any shareholder, creditor, director, officer or other interested party. |
In addition, in certain insolvency proceedings a Canadian court may subordinate claims in respect of the Guarantees to other claims against a Subsidiary Guarantor under the principle of equitable subordination if the court determines that (1) the holder
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of Notes engaged in some type of inequitable or improper conduct, (2) the inequitable or improper conduct resulted in injury to other creditors or conferred an unfair advantage upon the holder of Notes and (3) equitable subordination is not inconsistent with the provisions of the relevant solvency statute.
If a court canceled a Guarantee, the holders of Notes would no longer have a claim against that Subsidiary Guarantor or its assets.
Each Guarantee is limited, by its terms, to an amount not to exceed the maximum amount that can be guaranteed by the applicable Subsidiary Guarantor without rendering the Guarantee, as it relates to that Subsidiary Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally.
Each Subsidiary Guarantor is a consolidated subsidiary of the Parent Company at the date of each balance sheet presented. The following tables present summarized financial information for the Parent Company and the Subsidiary Guarantors on a combined basis after elimination of (i) intercompany transactions and balances among the Parent Company and the Subsidiary Guarantors and (ii) equity in earnings from and investments in any Non-Guarantor Subsidiary.
|
| Summarized Balance Sheets |
| |||||
(In millions) |
| March 31, 2020 |
|
| December 31, 2019 |
| ||
Total Current Assets(1) |
| $ | 4,760 |
|
| $ | 4,669 |
|
Total Non-Current Assets |
|
| 5,620 |
|
|
| 5,876 |
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
| $ | 2,208 |
|
| $ | 2,371 |
|
Total Non-Current Liabilities |
|
| 7,182 |
|
|
| 6,796 |
|
(1) | Includes receivables due from Non-Guarantor Subsidiaries of $2,201 million and $2,124 million as of March 31, 2020 and December 31, 2019, respectively. |
|
| Summarized Statements of Operations |
| |||||
(In millions) |
| Three Months Ended March 31, 2020 |
|
| Year Ended December 31, 2019 |
| ||
Net Sales |
| $ | 1,553 |
|
| $ | 7,390 |
|
Cost of Goods Sold |
|
| 1,318 |
|
|
| 5,894 |
|
Selling, Administrative and General Expense |
|
| 289 |
|
|
| 1,136 |
|
Rationalizations |
|
| 5 |
|
|
| 86 |
|
Interest Expense |
|
| 58 |
|
|
| 230 |
|
Other (Income) Expense |
|
| 28 |
|
|
| 24 |
|
Income (Loss) before Income Taxes(2) |
| $ | (145 | ) |
| $ | 20 |
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
| $ | (410 | ) |
| $ | 303 |
|
Goodyear Net Income (Loss) |
| $ | (410 | ) |
| $ | 303 |
|
(2) | Includes income from intercompany transactions with Non-Guarantor Subsidiaries of $119 million for the three months ended March 31, 2020, primarily from royalties, interest and dividends, and $515 million for the year ended December 31, 2019, primarily from royalties, intercompany product sales, commissions and dividends. |
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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:
• | our future results of operations, financial condition and liquidity are expected to be adversely impacted by the COVID-19 pandemic, and that impact may be material; |
• | if we do not successfully implement our strategic initiatives, our operating results, financial condition and liquidity may be materially adversely affected; |
• | we face significant global competition and our market share could decline; |
• | deteriorating economic conditions in any of our major markets, or an inability to access capital markets or third-party financing when necessary, may materially adversely affect our operating results, financial condition and liquidity; |
• | raw material and energy costs may materially adversely affect our operating results and financial condition; |
• | if we experience a labor strike, work stoppage or other similar event our business, results of operations, financial condition and liquidity could be materially adversely affected; |
• | our international operations have certain risks that may materially adversely affect our operating results, financial condition and liquidity; |
• | we have foreign currency translation and transaction risks that may materially adversely affect our operating results, financial condition and liquidity; |
• | our long term ability to meet our obligations, to repay maturing indebtedness or to implement strategic initiatives may be dependent on our ability to access capital markets in the future and to improve our operating results; |
• | financial difficulties, work stoppages, supply disruptions or economic conditions affecting our major OE customers, dealers or suppliers could harm our business; |
• | our capital expenditures may not be adequate to maintain our competitive position and may not be implemented in a timely or cost-effective manner; |
• | we have a substantial amount of debt, which could restrict our growth, place us at a competitive disadvantage or otherwise materially adversely affect our financial health; |
• | any failure to be in compliance with any material provision or covenant of our debt instruments, or a material reduction in the borrowing base under our revolving credit facility, could have a material adverse effect on our liquidity and operations; |
• | our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly; |
• | we have substantial fixed costs and, as a result, our operating income fluctuates disproportionately with changes in our net sales; |
• | we may incur significant costs in connection with our contingent liabilities and tax matters; |
• | our reserves for contingent liabilities and our recorded insurance assets are subject to various uncertainties, the outcome of which may result in our actual costs being significantly higher than the amounts recorded; |
• | we are subject to extensive government regulations that may materially adversely affect our operating results; |
• | we may be adversely affected by any disruption in, or failure of, our information technology systems due to computer viruses, unauthorized access, cyber-attack, natural disasters or other similar disruptions; |
• | if we are unable to attract and retain key personnel, our business could be materially adversely affected; and |
• | we may be impacted by economic and supply disruptions associated with events beyond our control, such as war, acts of terror, political unrest, public health concerns, labor disputes or natural disasters. |
It is not possible to foresee or identify all such factors. We will not revise or update any forward-looking statement or disclose any facts, events or circumstances that occur after the date hereof that may affect the accuracy of any forward-looking statement.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We utilize derivative financial instrument contracts and nonderivative instruments to manage interest rate, foreign exchange and commodity price risks. We have established a control environment that includes policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. We do not hold or issue derivative financial instruments for trading purposes.
Commodity Price Risk
The raw materialmaterials costs to which our operations are principally exposed include the cost of natural rubber, synthetic rubber, carbon black, fabrics, steel cord and other petrochemical-based commodities. Approximately two-thirds of our raw materials are petroleum-based, the cost of which may be affected by fluctuations in the price of oil. We currently do not hedge commodity prices. We do, however, use various strategies to partially offset cost increases for raw materials, including centralizing purchases of raw materials through our global procurement organization in an effort to leverage our purchasing power, expanding our capabilities to substitute lower cost raw materials, and reducing the amount of material required in each tire.
Interest Rate Risk
We continuously monitor our fixed and floating rate debt mix. Within defined limitations, we manage the mix using refinancing. At June 30, 2019, 42%March 31, 2020, 41% of our debt was at variable interest rates averaging 4.68%3.41%.
The following table presents information about long term fixed rate debt, excluding finance leases, at June 30, 2019:March 31, 2020:
(In millions) |
|
|
|
|
Carrying amount — liability |
| $ | 3,436 |
|
Fair value — liability |
|
| 3,111 |
|
Pro forma fair value — liability |
|
| 3,243 |
|
(In millions) | |||
Carrying amount — liability | $ | 3,409 | |
Fair value — liability | 3,420 | ||
Pro forma fair value — liability | 3,526 |
The pro forma information assumes a 100 basis point decrease in market interest rates at
Foreign Currency Exchange Risk
We enter into foreign currency contracts in order to reduce the impact of changes in foreign exchange rates on our consolidated results of operations and future foreign currency-denominated cash flows. These contracts reduce exposure to currency movements affecting existing foreign currency-denominated assets, liabilities, firm commitments and forecasted transactions resulting primarily from trade purchases and sales, equipment acquisitions, intercompany loans and royalty agreements. Contracts hedging short term trade receivables and payables normally have no hedging designation.
The following table presents net foreign currency contract information at June 30, 2019:March 31, 2020:
(In millions) |
|
|
|
|
Fair value — asset (liability) |
| $ | 46 |
|
Pro forma decrease in fair value |
|
| (224 | ) |
Contract maturities |
| 4/20-2/22 |
|
(In millions) | |||
Fair value — asset (liability) | $ | (1 | ) |
Pro forma decrease in fair value | (190 | ) | |
Contract maturities | 7/19-6/21 |
The pro forma decrease in fair value assumes a 10% adverse change in underlying foreign exchange rates at June 30, 2019,March 31, 2020, and reflects the estimated change in the fair value of contracts outstanding at that date under that assumption. The sensitivity of our foreign currency positions to changes in exchange rates was determined using current market pricing models.
Fair values are recognized on the Consolidated Balance Sheet at June 30, 2019March 31, 2020 as follows:
(In millions) |
|
|
|
|
Current asset (liability): |
|
|
|
|
Accounts receivable |
| $ | 50 |
|
Other current liabilities |
|
| (8 | ) |
|
|
|
|
|
Long term asset (liability): |
|
|
|
|
Other assets |
| $ | 4 |
|
Other long term liabilities |
|
| — |
|
(In millions) | |||
Current asset (liability): | |||
Accounts receivable | $ | 14 | |
Other current liabilities | (16 | ) | |
Long term asset (liability): | |||
Other assets | $ | 1 | |
Other long term liabilities | — |
For further information on foreign currency contracts, refer to Note to the Consolidated Financial Statements No. 9,10, Financing Arrangements and Derivative Financial Instruments, in this Form 10-Q.Instruments. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for a discussion of our management of counterparty risk.
ITEM 4. CONTROLS AND PROCEDURES.
Management’s Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” which, consistent with Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, we define to mean controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of June 30, 2019March 31, 2020 (the end of the period covered by this Quarterly Report on Form 10-Q).
Changes in Internal Control Over Financial Reporting
There werehave been no changes in our internal control over financial reporting during the second quarter of 2019period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We implemented new internal controls during the first quarter
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Asbestos Litigation
As reported in our Form 10-K for the year ended December 31, 2018,2019, we were one of numerous defendants in legal proceedings in certain state and federal courts involving approximately 43,10039,600 claimants relating to their alleged exposure to materials containing asbestos in products allegedly manufactured by us or asbestos materials present in our facilities. During the first sixthree months of 2019,2020, approximately 800300 new claims were filed against us and approximately 3,800700 were settled or dismissed. The amountamounts expended on asbestos defense and claim resolution by Goodyear and its insurance carriers during the secondfirst quarter and the first six months of 20192020 was $9 million and $11 million, respectively.$2 million. At June 30, 2019,March 31, 2020, there were approximately 40,10039,200 asbestos claims pending against us. The plaintiffs are seeking unspecified actual and punitive damages and other relief. Refer to Note to the Consolidated Financial Statements No. 13,14, Commitments and Contingent Liabilities, in this Form 10-Q for additional information on asbestos litigation.
Reference is made to Item 3 of Part I of our 20182019 Form 10-K and to Item 1 of Part II of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019 for additional discussion of legal proceedings.
ITEM 1A. RISK FACTORS
Our results of operations have been adversely impacted by the COVID-19 pandemic. Our future results of operations, financial condition and liquidity are expected to be adversely impacted by the COVID-19 pandemic, and that impact may be material.
The COVID-19 pandemic has resulted in significant volatility in the global economy and led to a dramatic reduction in economic activity worldwide. International, federal, state and local public health and governmental authorities have taken extraordinary actions to contain and combat the outbreak and spread of COVID-19 throughout most regions of the world, including travel bans, quarantines, “stay-at-home” orders and similar mandates that have caused many individuals to substantially restrict their daily activities and many businesses to curtail or cease normal operations.
The tire industry has been particularly negatively impacted by this evolving situation, characterized by a sudden and sharp decline in replacement tire demand and original equipment manufacturers suspending or severely limiting automobile production globally. Our results have been, and are likely to continue to be, adversely impacted by this economic disruption, including lower tire unit volumes, sales, income and cash flow. In addition, our ability to continue implementing important strategic initiatives and capital expenditures may be reduced as we devote time and other resources to responding to the impacts of the COVID-19 pandemic.
In March 2020, we announced the suspension of production at our manufacturing facilities in Europe and the Americas due to the COVID-19 pandemic. Throughout the first quarter of 2020, production was also suspended or significantly limited in several other locations globally, most notably at our Pulandian, China manufacturing facility. Our Pulandian facility resumed production in February 2020 and we currently plan a phased restart of production in Europe and the Americas during the second quarter. Our decisions to resume production will be based on an evaluation of market demand signals, inventory and supply levels, as well as our ability to safeguard the health of our associates. While we intend to resume production as described above, we may experience unexpected delays or obstacles, such as disruptions in our supply chain or government mandates, that may hamper our ability to resume operations. Further, we may not be able to operate at optimal levels of efficiency given new work rules and procedures that will need to be implemented to protect our associates. The continued suspension of production at our manufacturing facilities, or difficulties or inefficiencies in resuming production, is likely to adversely impact our future results of operations, financial condition and liquidity, and that impact may be material.
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. If the COVID-19 pandemic continues for an extended period of time or worsens, our liquidity position may deteriorate. While we are actively monitoring our liquidity and have taken a number of actions aimed at mitigating the negative consequences of the COVID-19 pandemic on our cash flows and liquidity, our cash flow from operating activities may continue to decline if global economic activity remains low and we may be unable to have sufficient access to credit or other capital. For example, the borrowing base under our first lien revolving credit facility is dependent, in significant part, on our eligible accounts receivable and inventory, which have declined as a result of our lower sales and production levels due to the COVID-19 pandemic. Additionally, our European revolving credit facility contains a leverage ratio covenant applicable to Goodyear Europe B.V. and its subsidiaries. While we are currently in compliance with this covenant, if we were unable to satisfy this covenant in the future or obtain a waiver from our lenders, we would no longer be able to access our €800 million European revolving credit facility or our pan-European accounts receivable securitization facility.
The full impact of the COVID-19 pandemic on our results of operations, financial condition and liquidity will depend on future developments, such as the ultimate duration and scope of the pandemic, its impact on our customers and suppliers, how quickly normal economic conditions, operations and the demand for our products can resume, and whether the pandemic leads to recessionary conditions in any of our key markets. Government-sponsored liquidity or stimulus programs in response to the
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COVID-19 pandemic may not be available to us or our customers or suppliers, and if available, may be insufficient to address the full impact of the COVID-19 pandemic. Accordingly, the ultimate impact on our results of operations, financial condition and liquidity cannot be determined at this time.
The COVID-19 pandemic has exacerbated several of the risks disclosed in "Item 1A. Risk Factors" in our 2019 Form 10-K, including, but not limited to, the following (which are identified by their caption):
• | If we do not successfully implement our strategic initiatives, our operating results, financial condition and liquidity may be materially adversely affected. |
• | Our long term ability to meet our obligations, to repay maturing indebtedness or to implement strategic initiatives may be dependent on our ability to access capital markets in the future and to improve our operating results. |
• | Financial difficulties, work stoppages, supply disruptions or economic conditions affecting our major customers, dealers or suppliers could harm our business. |
• | Our capital expenditures may not be adequate to maintain our competitive position and may not be implemented in a timely or cost-effective manner. |
• | We have a substantial amount of debt, which could restrict our growth, place us at a competitive disadvantage or otherwise materially adversely affect our financial health. |
• | Any failure to be in compliance with any material provision or covenant of our debt instruments, or a material reduction in the borrowing base under our revolving credit facility, could have a material adverse effect on our liquidity and operations. |
• | We have substantial fixed costs and, as a result, our operating income fluctuates disproportionately with changes in our net sales. |
Refer to "Item 1A. Risk Factors" in our 20182019 Form 10-K for a discussion of our risk factors.
ITEM 6. EXHIBITS
.Refer to the Index of Exhibits, which is by specific reference incorporated into and made a part of this Quarterly Report on Form 10-Q.
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THE GOODYEAR TIRE & RUBBER COMPANY
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2019
INDEX OF EXHIBITS
Exhibit Table Item No. | ||||||
Description of Exhibit | Exhibit Number | |||||
10 | Material Contracts | |||||
(a) | 10.1 | |||||
(b) | 10.2 | |||||
(c) | ||||||
(d) | ||||||
(e) | ||||||
(f) | ||||||
22 | ||||||
31 | Rule 13a-14(a) Certifications | |||||
(a) | 31.1 | |||||
(b) | 31.2 | |||||
32 | Section 1350 Certifications | |||||
(a) | 32.1 | |||||
101 | Interactive Data | |||||
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | 101.INS | |||||
Inline XBRL Taxonomy Extension Schema Document. | 101.SCH | |||||
Inline XBRL Taxonomy Extension Calculation Linkbase Document. | 101.CAL | |||||
Inline XBRL Taxonomy Extension Definition Linkbase Document. | 101.DEF | |||||
Inline XBRL Taxonomy Extension Label Linkbase Document. | 101.LAB | |||||
Inline XBRL Taxonomy Extension Presentation Linkbase Document. | 101.PRE | |||||
104 | Cover Page Interactive Data File | |||||
The cover page from the Company's Quarterly Report on Form10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL (included as Exhibit 101). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE GOODYEAR TIRE & RUBBER COMPANY | |||||
(Registrant) | |||||
Date: | April 30, 2020 | By | /s/ E VAN M. SCOCOS | ||
Evan M. Scocos, Vice President and Controller (Signing on behalf of the Registrant as a duly authorized officer of the Registrant and signing as the Principal Accounting Officer of the Registrant.) |
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