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 SeptemberJune 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 | 233,010,562 |
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 |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
(In millions, except per share amounts) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net Sales (Note 2) |
| $ | 2,144 |
|
| $ | 3,632 |
|
| $ | 5,200 |
|
| $ | 7,230 |
|
Cost of Goods Sold |
|
| 2,216 |
|
|
| 2,855 |
|
|
| 4,768 |
|
|
| 5,734 |
|
Selling, Administrative and General Expense |
|
| 451 |
|
|
| 586 |
|
|
| 1,032 |
|
|
| 1,133 |
|
Goodwill and Other Asset Impairments (Notes 8 and 9) |
|
| 148 |
|
|
| — |
|
|
| 330 |
|
|
| — |
|
Rationalizations (Note 3) |
|
| 99 |
|
|
| 4 |
|
|
| 108 |
|
|
| 107 |
|
Interest Expense |
|
| 85 |
|
|
| 88 |
|
|
| 158 |
|
|
| 173 |
|
Other (Income) Expense (Note 4) |
|
| 34 |
|
|
| 17 |
|
|
| 61 |
|
|
| 39 |
|
Income (Loss) before Income Taxes |
|
| (889 | ) |
|
| 82 |
|
|
| (1,257 | ) |
|
| 44 |
|
United States and Foreign Tax Expense (Benefit) (Note 5) |
|
| (186 | ) |
|
| 26 |
|
|
| 63 |
|
|
| 32 |
|
Net Income (Loss) |
|
| (703 | ) |
|
| 56 |
|
|
| (1,320 | ) |
|
| 12 |
|
Less: Minority Shareholders’ Net Income (Loss) |
|
| (7 | ) |
|
| 2 |
|
|
| (5 | ) |
|
| 19 |
|
Goodyear Net Income (Loss) |
| $ | (696 | ) |
| $ | 54 |
|
| $ | (1,315 | ) |
| $ | (7 | ) |
Goodyear Net Income (Loss) — Per Share of Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (2.97 | ) |
| $ | 0.23 |
|
| $ | (5.62 | ) |
| $ | (0.03 | ) |
Weighted Average Shares Outstanding (Note 6) |
|
| 234 |
|
|
| 233 |
|
|
| 234 |
|
|
| 232 |
|
Diluted |
| $ | (2.97 | ) |
| $ | 0.23 |
|
| $ | (5.62 | ) |
| $ | (0.03 | ) |
Weighted Average Shares Outstanding (Note 6) |
|
| 234 |
|
|
| 234 |
|
|
| 234 |
|
|
| 232 |
|
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(In millions, except per share amounts) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Net Sales (Note 2) | $ | 3,802 | $ | 3,928 | $ | 11,032 | $ | 11,599 | |||||||
Cost of Goods Sold | 2,965 | 3,028 | 8,699 | 8,953 | |||||||||||
Selling, Administrative and General Expense | 572 | 553 | 1,705 | 1,732 | |||||||||||
Rationalizations (Note 3) | 21 | 5 | 128 | 40 | |||||||||||
Interest Expense | 88 | 82 | 261 | 236 | |||||||||||
Other (Income) Expense (Note 4) | 35 | (253 | ) | 74 | (171 | ) | |||||||||
Income before Income Taxes | 121 | 513 | 165 | 809 | |||||||||||
United States and Foreign Tax Expense (Note 5) | 31 | 159 | 63 | 211 | |||||||||||
Net Income | 90 | 354 | 102 | 598 | |||||||||||
Less: Minority Shareholders’ Net Income | 2 | 3 | 21 | 15 | |||||||||||
Goodyear Net Income | $ | 88 | $ | 351 | $ | 81 | $ | 583 | |||||||
Goodyear Net Income — Per Share of Common Stock | |||||||||||||||
Basic | $ | 0.38 | $ | 1.49 | $ | 0.35 | $ | 2.45 | |||||||
Weighted Average Shares Outstanding (Note 6) | 233 | 236 | 233 | 238 | |||||||||||
Diluted | $ | 0.38 | $ | 1.48 | $ | 0.35 | $ | 2.42 | |||||||
Weighted Average Shares Outstanding (Note 6) | 234 | 238 | 234 | 241 |
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 |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net Income (Loss) |
| $ | (703 | ) |
| $ | 56 |
|
| $ | (1,320 | ) |
| $ | 12 |
|
Other Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation, net of tax of $4 and ($4) in 2020 ($2 and $4 in 2019) |
|
| (7 | ) |
|
| (16 | ) |
|
| (232 | ) |
|
| 14 |
|
Defined benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost, net of tax of $8 and $17 in 2020 ($8 and $16 in 2019) |
|
| 28 |
|
|
| 26 |
|
|
| 55 |
|
|
| 52 |
|
(Increase)/decrease in net actuarial losses, net of tax of ($2) and ($2) in 2020 ($3 and $4 in 2019) |
|
| (8 | ) |
|
| 9 |
|
|
| (9 | ) |
|
| 13 |
|
Immediate recognition of prior service cost and unrecognized gains and losses due to curtailments, settlements and divestitures, net of tax of $0 and ($1) in 2020 ($0 and $0 in 2019) |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Prior service cost from plan amendments, net of tax of $0 and $0 in 2020 ($0 and $0 in 2019) |
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| (1 | ) |
Deferred derivative gains (losses), net of tax of ($4) and $1 in 2020 ($0 and $0 in 2019) |
|
| 1 |
|
|
| (1 | ) |
|
| 19 |
|
|
| 4 |
|
Reclassification adjustment for amounts recognized in income, net of tax of $0 and $0 in 2020 (($1) and ($1) in 2019) |
|
| (4 | ) |
|
| (2 | ) |
|
| (8 | ) |
|
| (5 | ) |
Other Comprehensive Income (Loss) |
|
| 11 |
|
|
| 15 |
|
|
| (175 | ) |
|
| 77 |
|
Comprehensive Income (Loss) |
|
| (692 | ) |
|
| 71 |
|
|
| (1,495 | ) |
|
| 89 |
|
Less: Comprehensive Income (Loss) Attributable to Minority Shareholders |
|
| (7 | ) |
|
| 5 |
|
|
| (14 | ) |
|
| 22 |
|
Goodyear Comprehensive Income (Loss) |
| $ | (685 | ) |
| $ | 66 |
|
| $ | (1,481 | ) |
| $ | 67 |
|
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Net Income | $ | 90 | $ | 354 | $ | 102 | $ | 598 | |||||||
Other Comprehensive Income (Loss): | |||||||||||||||
Foreign currency translation, net of tax of ($1) and $3 in 2019 ($0 and ($8) in 2018) | (96 | ) | (86 | ) | (82 | ) | (235 | ) | |||||||
Defined benefit plans: | |||||||||||||||
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost, net of tax of $8 and $24 in 2019 ($8 and $24 in 2018) | 26 | 26 | 78 | 79 | |||||||||||
(Increase)/Decrease in net actuarial losses, net of tax of ($3) and $1 in 2019 (($4) and $2 in 2018) | (11 | ) | (20 | ) | 2 | (1 | ) | ||||||||
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 $4 in 2018) | — | 9 | — | 13 | |||||||||||
Prior service (cost) credit from plan amendments, net of tax of $0 and $0 in 2019 ($0 and $0 in 2018) | — | — | (1 | ) | — | ||||||||||
Deferred derivative gains (losses), net of tax of $4 and $4 in 2019 ($1 and $3 in 2018) | 10 | — | 14 | 6 | |||||||||||
Reclassification adjustment for amounts recognized in income, net of tax of $0 and ($1) in 2019 ($0 and $2 in 2018) | (3 | ) | 1 | (8 | ) | 6 | |||||||||
Other Comprehensive Income (Loss) | (74 | ) | (70 | ) | 3 | (132 | ) | ||||||||
Comprehensive Income | 16 | 284 | 105 | 466 | |||||||||||
Less: Comprehensive Income (Loss) Attributable to Minority Shareholders | (1 | ) | (6 | ) | 21 | (10 | ) | ||||||||
Goodyear Comprehensive Income | $ | 17 | $ | 290 | $ | 84 | $ | 476 |
The accompanying notes are an integral part of these consolidated financial statements.
2
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| June 30, |
|
| December 31, |
| |||
(In millions, except share data) |
| 2020 |
|
| 2019 |
| |||
Assets: |
|
|
|
|
|
|
|
| |
Current Assets: |
|
|
|
|
|
|
|
| |
Cash and Cash Equivalents |
| $ | 1,006 |
|
| $ | 908 |
| |
Accounts Receivable, less Allowance — $143 ($111 in 2019) |
|
| 1,727 |
|
|
| 1,941 |
| |
Inventories: |
|
|
|
|
|
|
|
| |
Raw Materials |
|
| 594 |
|
|
| 530 |
| |
Work in Process |
|
| 128 |
|
|
| 143 |
| |
Finished Products |
|
| 1,752 |
|
|
| 2,178 |
| |
|
|
| 2,474 |
|
|
| 2,851 |
| |
Prepaid Expenses and Other Current Assets |
|
| 206 |
|
|
| 234 |
| |
Total Current Assets |
|
| 5,413 |
|
|
| 5,934 |
| |
Goodwill (Note 8) |
|
| 383 |
|
|
| 565 |
| |
Intangible Assets (Note 8) |
|
| 135 |
|
|
| 137 |
| |
Deferred Income Taxes (Note 5) |
|
| 1,434 |
|
|
| 1,527 |
| |
Other Assets (Note 9) |
|
| 794 |
|
|
| 959 |
| |
Operating Lease Right-of-Use Assets |
|
| 869 |
|
|
| 855 |
| |
Property, Plant and Equipment, less Accumulated Depreciation — $10,293 ($10,488 in 2019) |
|
| 6,799 |
|
|
| 7,208 |
| |
Total Assets |
| $ | 15,827 |
|
| $ | 17,185 |
| |
|
|
|
|
|
|
|
|
| |
Liabilities: |
|
|
|
|
|
|
|
| |
Current Liabilities: |
|
|
|
|
|
|
|
| |
Accounts Payable — Trade |
| $ | 1,858 |
|
| $ | 2,908 |
| |
Compensation and Benefits (Notes 12 and 13) |
|
| 485 |
|
|
| 536 |
| |
Other Current Liabilities |
|
| 798 |
|
|
| 734 |
| |
Notes Payable and Overdrafts (Note 10) |
|
| 712 |
|
|
| 348 |
| |
Operating Lease Liabilities due Within One Year |
|
| 192 |
|
|
| 199 |
| |
Long Term Debt and Finance Leases due Within One Year (Note 10) |
|
| 581 |
|
|
| 562 |
| |
Total Current Liabilities |
|
| 4,626 |
|
|
| 5,287 |
| |
Operating Lease Liabilities |
|
| 698 |
|
|
| 668 |
| |
Long Term Debt and Finance Leases (Note 10) |
|
| 5,688 |
|
|
| 4,753 |
| |
Compensation and Benefits (Notes 12 and 13) |
|
| 1,273 |
|
|
| 1,334 |
| |
Deferred Income Taxes (Note 5) |
|
| 80 |
|
|
| 90 |
| |
Other Long Term Liabilities |
|
| 449 |
|
|
| 508 |
| |
Total Liabilities |
|
| 12,814 |
|
|
| 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 |
|
| 2,154 |
|
|
| 2,141 |
| |
Retained Earnings |
|
| 4,748 |
|
|
| 6,113 |
| |
Accumulated Other Comprehensive Loss |
|
| (4,302 | ) |
|
| (4,136 | ) | |
Goodyear Shareholders’ Equity |
|
| 2,833 |
|
|
| 4,351 |
| |
Minority Shareholders’ Equity — Nonredeemable |
|
| 180 |
|
|
| 194 |
| |
Total Shareholders’ Equity |
|
| 3,013 |
|
|
| 4,545 |
| |
Total Liabilities and Shareholders’ Equity |
| $ | 15,827 |
|
| $ | 17,185 |
|
September 30, | December 31, | ||||||
(In millions, except share data) | 2019 | 2018 | |||||
Assets: | |||||||
Current Assets: | |||||||
Cash and Cash Equivalents | $ | 868 | $ | 801 | |||
Accounts Receivable, less Allowance — $114 ($113 in 2018) | 2,748 | 2,030 | |||||
Inventories: | |||||||
Raw Materials | 546 | 569 | |||||
Work in Process | 155 | 152 | |||||
Finished Products | 2,264 | 2,135 | |||||
2,965 | 2,856 | ||||||
Prepaid Expenses and Other Current Assets | 280 | 238 | |||||
Total Current Assets | 6,861 | 5,925 | |||||
Goodwill | 550 | 569 | |||||
Intangible Assets | 134 | 136 | |||||
Deferred Income Taxes (Note 5) | 1,839 | 1,847 | |||||
Other Assets | 1,055 | 1,136 | |||||
Operating Lease Right-of-Use Assets (Note 8) | 828 | — | |||||
Property, Plant and Equipment, less Accumulated Depreciation — $10,457 ($10,161 in 2018) | 7,032 | 7,259 | |||||
Total Assets | $ | 18,299 | $ | 16,872 | |||
Liabilities: | |||||||
Current Liabilities: | |||||||
Accounts Payable — Trade | $ | 2,651 | $ | 2,920 | |||
Compensation and Benefits (Notes 11 and 12) | 539 | 471 | |||||
Other Current Liabilities | 690 | 737 | |||||
Notes Payable and Overdrafts (Note 9) | 486 | 410 | |||||
Operating Lease Liabilities due Within One Year (Note 8) | 197 | — | |||||
Long Term Debt and Finance Leases due Within One Year (Notes 8 and 9) | 610 | 243 | |||||
Total Current Liabilities | 5,173 | 4,781 | |||||
Operating Lease Liabilities (Note 8) | 642 | — | |||||
Long Term Debt and Finance Leases (Notes 8 and 9) | 5,580 | 5,110 | |||||
Compensation and Benefits (Notes 11 and 12) | 1,244 | 1,345 | |||||
Deferred Income Taxes (Note 5) | 91 | 95 | |||||
Other Long Term Liabilities | 534 | 471 | |||||
Total Liabilities | 13,264 | 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 | 2,132 | 2,111 | |||||
Retained Earnings | 6,543 | 6,597 | |||||
Accumulated Other Comprehensive Loss | (4,073 | ) | (4,076 | ) | |||
Goodyear Shareholders’ Equity | 4,835 | 4,864 | |||||
Minority Shareholders’ Equity — Nonredeemable | 200 | 206 | |||||
Total Shareholders’ Equity | 5,035 | 5,070 | |||||
Total Liabilities and Shareholders’ Equity | $ | 18,299 | $ | 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 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (696 | ) |
|
|
|
|
|
| (696 | ) |
|
| (7 | ) |
|
| (703 | ) |
Foreign currency translation (net of tax of $4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (7 | ) |
|
| (7 | ) |
|
|
|
|
|
| (7 | ) |
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost (net of tax of $8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 28 |
|
|
| 28 |
|
|
|
|
|
|
| 28 |
|
Increase in net actuarial losses (net of tax of ($2)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8 | ) |
|
| (8 | ) |
|
|
|
|
|
| (8 | ) |
Immediate recognition of prior service cost and unrecognized gains and losses due to curtailments, settlements and divestitures (net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1 |
|
|
| 1 |
|
|
|
|
|
|
| 1 |
|
Deferred derivative gains (net of tax of ($4)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1 |
|
|
| 1 |
|
|
|
|
|
|
| 1 |
|
Reclassification adjustment for amounts recognized in income (net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (4 | ) |
|
| (4 | ) |
|
|
|
|
|
| (4 | ) |
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 11 |
|
|
|
|
|
|
| 11 |
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (685 | ) |
|
| (7 | ) |
|
| (692 | ) |
Stock-based compensation plans |
|
|
|
|
|
|
|
|
|
| 8 |
|
|
|
|
|
|
|
|
|
|
| 8 |
|
|
|
|
|
|
| 8 |
|
Common stock issued from treasury |
|
| 13,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(after deducting 45,452,865 common treasury shares) |
|
| 233,010,562 |
|
| $ | 233 |
|
| $ | 2,154 |
|
| $ | 4,748 |
|
| $ | (4,302 | ) |
| $ | 2,833 |
|
| $ | 180 |
|
| $ | 3,013 |
|
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) | (7 | ) | (7 | ) | 19 | 12 | |||||||||||||||||||||||||
Foreign currency translation (net of tax of $4) | 11 | 11 | 3 | 14 | |||||||||||||||||||||||||||
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost (net of tax of $16) | 52 | 52 | 52 | ||||||||||||||||||||||||||||
Decrease in net actuarial losses (net of tax of $4) | 13 | 13 | 13 | ||||||||||||||||||||||||||||
Prior service costs from plan amendments (net of tax of $0) | (1 | ) | (1 | ) | (1 | ) | |||||||||||||||||||||||||
Deferred derivative gains (net of tax of $0) | 4 | 4 | 4 | ||||||||||||||||||||||||||||
Reclassification adjustment for amounts recognized in income (net of tax of ($1)) | (5 | ) | (5 | ) | (5 | ) | |||||||||||||||||||||||||
Other comprehensive income | 74 | 3 | 77 | ||||||||||||||||||||||||||||
Total comprehensive income | 67 | 22 | 89 | ||||||||||||||||||||||||||||
Adoption of new accounting standards update | (23 | ) | (23 | ) | (23 | ) | |||||||||||||||||||||||||
Stock-based compensation plans | 13 | 13 | 13 | ||||||||||||||||||||||||||||
Dividends declared | (75 | ) | (75 | ) | (4 | ) | (79 | ) | |||||||||||||||||||||||
Common stock issued from treasury | 350,127 | 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 | |||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||
Net income | 88 | 88 | 2 | 90 | |||||||||||||||||||||||||||
Foreign currency translation (net of tax of ($1)) | (93 | ) | (93 | ) | (3 | ) | (96 | ) | |||||||||||||||||||||||
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost (net of tax of $8) | 26 | 26 | 26 | ||||||||||||||||||||||||||||
Increase in net actuarial losses (net of tax of ($3)) | (11 | ) | (11 | ) | (11 | ) | |||||||||||||||||||||||||
Deferred derivative gains (net of tax of $4) | 10 | 10 | 10 | ||||||||||||||||||||||||||||
Reclassification adjustment for amounts recognized in income (net of tax of $0) | (3 | ) | (3 | ) | (3 | ) | |||||||||||||||||||||||||
Other comprehensive loss | (71 | ) | (3 | ) | (74 | ) | |||||||||||||||||||||||||
Total comprehensive income (loss) | 17 | (1 | ) | 16 | |||||||||||||||||||||||||||
Stock-based compensation plans | 8 | 8 | 8 | ||||||||||||||||||||||||||||
Dividends declared | (37 | ) | (37 | ) | (1 | ) | (38 | ) | |||||||||||||||||||||||
Common stock issued from treasury | 42,339 | ||||||||||||||||||||||||||||||
Balance at September 30, 2019 | |||||||||||||||||||||||||||||||
(after deducting 45,899,918 common treasury shares) | 232,563,509 | $ | 233 | $ | 2,132 | $ | 6,543 | $ | (4,073 | ) | $ | 4,835 | $ | 200 | $ | 5,035 |
We declared and paid cash dividends of $0.16 and $0.48 per Common Share for the three and ninesix months ended SeptemberJune 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 |
|
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 |
|
|
|
|
|
|
|
|
|
| 9 |
|
|
|
|
|
|
|
|
|
|
| 9 |
|
|
|
|
|
|
| 9 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (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 |
|
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 | 232 | 232 | 12 | 244 | |||||||||||||||||||||||||||
Foreign currency translation (net of tax of ($8)) | (133 | ) | (133 | ) | (16 | ) | (149 | ) | |||||||||||||||||||||||
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost (net of tax of $16) | 53 | 53 | 53 | ||||||||||||||||||||||||||||
Decrease in net actuarial losses (net of tax of $6) | 19 | 19 | 19 | ||||||||||||||||||||||||||||
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 (net of tax of $2) | 6 | 6 | 6 | ||||||||||||||||||||||||||||
Reclassification adjustment for amounts recognized in income (net of tax of $2) | 5 | 5 | 5 | ||||||||||||||||||||||||||||
Other comprehensive loss | (46 | ) | (16 | ) | (62 | ) | |||||||||||||||||||||||||
Total comprehensive income (loss) | 186 | (4 | ) | 182 | |||||||||||||||||||||||||||
Adoption of new accounting standards updates | (1 | ) | (1 | ) | (1 | ) | |||||||||||||||||||||||||
Stock-based compensation plans | 8 | 8 | 8 | ||||||||||||||||||||||||||||
Repurchase of common stock | (3,851,092 | ) | (4 | ) | (96 | ) | (100 | ) | (100 | ) | |||||||||||||||||||||
Dividends declared | (67 | ) | (67 | ) | (7 | ) | (74 | ) | |||||||||||||||||||||||
Common stock issued from treasury | 712,235 | 1 | 2 | 3 | 3 | ||||||||||||||||||||||||||
Purchase of minority shares | 5 | 5 | (29 | ) | (24 | ) | |||||||||||||||||||||||||
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 | |||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||
Net income | 351 | 351 | 3 | 354 | |||||||||||||||||||||||||||
Foreign currency translation (net of tax of $0) | (77 | ) | (77 | ) | (9 | ) | (86 | ) | |||||||||||||||||||||||
Amortization of prior service cost and unrecognized gains and losses included in total benefit cost (net of tax of $8) | 26 | 26 | 26 | ||||||||||||||||||||||||||||
Increase in net actuarial losses (net of tax of ($4)) | (20 | ) | (20 | ) | (20 | ) | |||||||||||||||||||||||||
Immediate recognition of prior service cost and unrecognized gains and losses due to curtailments, settlements and divestitures (net of tax of $2) | 9 | 9 | 9 | ||||||||||||||||||||||||||||
Deferred derivative gains (net of tax of $1) | — | — | — | ||||||||||||||||||||||||||||
Reclassification adjustment for amounts recognized in income (net of tax of $0) | 1 | 1 | 1 | ||||||||||||||||||||||||||||
Other comprehensive loss | (61 | ) | (9 | ) | (70 | ) | |||||||||||||||||||||||||
Total comprehensive income (loss) | 290 | (6 | ) | 284 | |||||||||||||||||||||||||||
Stock-based compensation plans | 6 | 6 | 6 | ||||||||||||||||||||||||||||
Repurchase of common stock | (4,188,492 | ) | (4 | ) | (96 | ) | (100 | ) | (100 | ) | |||||||||||||||||||||
Dividends declared | (34 | ) | (34 | ) | (1 | ) | (35 | ) | |||||||||||||||||||||||
Common stock issued from treasury | 182,793 | 1 | 1 | 1 | |||||||||||||||||||||||||||
Balance at September 30, 2018 | |||||||||||||||||||||||||||||||
(after deducting 45,453,381 common treasury shares) | 233,010,046 | $ | 233 | $ | 2,125 | $ | 6,525 | $ | (4,083 | ) | $ | 4,800 | $ | 200 | $ | 5,000 |
We declared and paid cash dividends of $0.14$0.16 and $0.42$0.32 per Common Share for the three and ninesix months ended SeptemberJune 30, 2018,2019, 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)
|
| Six Months Ended |
| |||||
|
| June 30, |
| |||||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net Income (Loss) |
| $ | (1,320 | ) |
| $ | 12 |
|
Adjustments to Reconcile Net Income (Loss) to Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
| 472 |
|
|
| 389 |
|
Amortization and Write-Off of Debt Issuance Costs |
|
| 6 |
|
|
| 9 |
|
Goodwill and Other Asset Impairments (Notes 8 and 9) |
|
| 330 |
|
|
| — |
|
Provision for Deferred Income Taxes (Note 5) |
|
| 58 |
|
|
| (31 | ) |
Net Pension Curtailments and Settlements |
|
| 3 |
|
|
| — |
|
Net Rationalization Charges (Note 3) |
|
| 108 |
|
|
| 107 |
|
Rationalization Payments |
|
| (101 | ) |
|
| (33 | ) |
Net (Gains) Losses on Asset Sales (Note 4) |
|
| 2 |
|
|
| (6 | ) |
Operating Lease Expense |
|
| 142 |
|
|
| 148 |
|
Operating Lease Payments |
|
| (130 | ) |
|
| (134 | ) |
Pension Contributions and Direct Payments |
|
| (33 | ) |
|
| (32 | ) |
Changes in Operating Assets and Liabilities, Net of Asset Acquisitions and Dispositions: |
|
|
|
|
|
|
|
|
Accounts Receivable |
|
| 36 |
|
|
| (445 | ) |
Inventories |
|
| 304 |
|
|
| (233 | ) |
Accounts Payable — Trade |
|
| (860 | ) |
|
| (55 | ) |
Compensation and Benefits |
|
| (11 | ) |
|
| 61 |
|
Other Current Liabilities |
|
| 29 |
|
|
| (37 | ) |
Other Assets and Liabilities |
|
| 145 |
|
|
| (11 | ) |
Total Cash Flows from Operating Activities |
|
| (820 | ) |
|
| (291 | ) |
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Capital Expenditures |
|
| (363 | ) |
|
| (401 | ) |
Asset Dispositions (Note 4) |
|
| — |
|
|
| 2 |
|
Short Term Securities Acquired |
|
| (30 | ) |
|
| (67 | ) |
Short Term Securities Redeemed |
|
| 46 |
|
|
| 67 |
|
Notes Receivable |
|
| (35 | ) |
|
| (7 | ) |
Other Transactions |
|
| (8 | ) |
|
| (13 | ) |
Total Cash Flows from Investing Activities |
|
| (390 | ) |
|
| (419 | ) |
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Short Term Debt and Overdrafts Incurred |
|
| 928 |
|
|
| 983 |
|
Short Term Debt and Overdrafts Paid |
|
| (521 | ) |
|
| (908 | ) |
Long Term Debt Incurred |
|
| 4,886 |
|
|
| 3,479 |
|
Long Term Debt Paid |
|
| (3,879 | ) |
|
| (2,628 | ) |
Common Stock Issued |
|
| — |
|
|
| 1 |
|
Common Stock Dividends Paid (Note 15) |
|
| (37 | ) |
|
| (74 | ) |
Transactions with Minority Interests in Subsidiaries |
|
| — |
|
|
| (25 | ) |
Debt Related Costs and Other Transactions |
|
| (53 | ) |
|
| (17 | ) |
Total Cash Flows from Financing Activities |
|
| 1,324 |
|
|
| 811 |
|
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash |
|
| (50 | ) |
|
| 6 |
|
Net Change in Cash, Cash Equivalents and Restricted Cash |
|
| 64 |
|
|
| 107 |
|
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period |
|
| 974 |
|
|
| 873 |
|
Cash, Cash Equivalents and Restricted Cash at End of the Period |
| $ | 1,038 |
|
| $ | 980 |
|
Nine Months Ended | |||||||
September 30, | |||||||
(In millions) | 2019 | 2018 | |||||
Cash Flows from Operating Activities: | |||||||
Net Income | $ | 102 | $ | 598 | |||
Adjustments to Reconcile Net Income to Cash Flows from Operating Activities: | |||||||
Depreciation and Amortization | 584 | 589 | |||||
Amortization and Write-Off of Debt Issuance Costs | 12 | 11 | |||||
Provision for Deferred Income Taxes | (33 | ) | 59 | ||||
Net Pension Curtailments and Settlements | 1 | 13 | |||||
Net Rationalization Charges (Note 3) | 128 | 40 | |||||
Rationalization Payments | (46 | ) | (151 | ) | |||
Net (Gains) Losses on Asset Sales (Note 4) | (5 | ) | (1 | ) | |||
Gain on TireHub Transaction, Net of Transaction Costs (Note 4) | — | (273 | ) | ||||
Operating Lease Expense (Note 8) | 221 | — | |||||
Operating Lease Payments (Note 8) | (201 | ) | — | ||||
Pension Contributions and Direct Payments | (51 | ) | (56 | ) | |||
Changes in Operating Assets and Liabilities, Net of Asset Acquisitions and Dispositions: | |||||||
Accounts Receivable | (785 | ) | (807 | ) | |||
Inventories | (166 | ) | (254 | ) | |||
Accounts Payable — Trade | (110 | ) | 235 | ||||
Compensation and Benefits | 129 | 7 | |||||
Other Current Liabilities | 16 | (119 | ) | ||||
Other Assets and Liabilities | 65 | 85 | |||||
Total Cash Flows from Operating Activities | (139 | ) | (24 | ) | |||
Cash Flows from Investing Activities: | |||||||
Capital Expenditures | (561 | ) | (615 | ) | |||
Asset Dispositions (Note 4) | 2 | 2 | |||||
Short Term Securities Acquired | (73 | ) | (61 | ) | |||
Short Term Securities Redeemed | 67 | 61 | |||||
Notes Receivable | (7 | ) | (50 | ) | |||
Other Transactions | (12 | ) | (1 | ) | |||
Total Cash Flows from Investing Activities | (584 | ) | (664 | ) | |||
Cash Flows from Financing Activities: | |||||||
Short Term Debt and Overdrafts Incurred | 1,451 | 1,458 | |||||
Short Term Debt and Overdrafts Paid | (1,357 | ) | (1,267 | ) | |||
Long Term Debt Incurred | 4,797 | 4,704 | |||||
Long Term Debt Paid | (3,941 | ) | (3,992 | ) | |||
Common Stock Issued | 1 | 4 | |||||
Common Stock Repurchased (Note 14) | — | (200 | ) | ||||
Common Stock Dividends Paid (Note 14) | (111 | ) | (100 | ) | |||
Transactions with Minority Interests in Subsidiaries | (26 | ) | (27 | ) | |||
Debt Related Costs and Other Transactions | (25 | ) | (3 | ) | |||
Total Cash Flows from Financing Activities | 789 | 577 | |||||
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash | (13 | ) | (37 | ) | |||
Net Change in Cash, Cash Equivalents and Restricted Cash | 53 | (148 | ) | ||||
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 | $ | 926 | $ | 962 |
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 ninesix months ended SeptemberJune 30, 20192020 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) |
| Americas |
|
| Europe, Middle East & Africa |
|
| Asia Pacific |
|
| Total |
| ||||
Balance at January 1, 2020 |
| $ | 38 |
|
| $ | 78 |
|
| $ | 10 |
|
| $ | 126 |
|
Current period provision |
|
| — |
|
|
| 14 |
|
|
| — |
|
|
| 14 |
|
Write-offs charged against the allowance |
|
| (1 | ) |
|
| (1 | ) |
|
| — |
|
|
| (2 | ) |
Translation |
|
| (3 | ) |
|
| (4 | ) |
|
| — |
|
|
| (7 | ) |
Balance at March 31, 2020 |
| $ | 34 |
|
| $ | 87 |
|
| $ | 10 |
|
| $ | 131 |
|
Current period provision |
|
| 8 |
|
|
| 2 |
|
|
| 1 |
|
|
| 11 |
|
Write-offs charged against the allowance |
|
| (1 | ) |
|
| (1 | ) |
|
| — |
|
|
| (2 | ) |
Translation |
|
| — |
|
|
| 3 |
|
|
| — |
|
|
| 3 |
|
Balance at June 30, 2020 |
| $ | 41 |
|
| $ | 91 |
|
| $ | 11 |
|
| $ | 143 |
|
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.
Effective April 1, 2020, we early adopted, as permitted, an accounting standards update with new guidance that changes the accounting for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted, and may be applied retrospectively or as of the beginning of the period of adoption.certain income tax transactions. The adoption of this accounting standards update isdid not expected to have a material impact on our consolidated financial statements.
7
Recently Issued Accounting Standards
In January 2017,2020, the FASBFinancial Accounting Standards Board issued an accounting standards update with new guidance intended to simplify the subsequent measurement of goodwill. The standards update which eliminates the requirement for an entity to calculate the implieddifferences in practice among fair value of goodwill to measure a goodwill impairment charge. Instead, an entity will perform its annual, or interim, goodwill impairment testing by comparing the fair value of a reporting unit with its carrying amount and recording an impairment charge for the amount by which the carrying amount exceeds the fair value. The standards update is effective prospectively for annual and interim goodwill impairment testing performed in fiscal years beginning after December 15, 2019, with early adoption permitted. The adoption of this 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:
|
| June 30, |
| |||||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Cash and Cash Equivalents |
| $ | 1,006 |
|
| $ | 917 |
|
Restricted Cash |
|
| 32 |
|
|
| 63 |
|
Total Cash, Cash Equivalents and Restricted Cash |
| $ | 1,038 |
|
| $ | 980 |
|
September 30, | |||||||
(In millions) | 2019 | 2018 | |||||
Cash and Cash Equivalents | $ | 868 | $ | 896 | |||
Restricted Cash | 58 | 66 | |||||
Total Cash, Cash Equivalents and Restricted Cash | $ | 926 | $ | 962 |
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 June 30, 2020 |
| |||||||||||||
|
|
|
|
|
| Europe, Middle East |
|
|
|
|
|
|
|
|
| |
(In millions) |
| Americas |
|
| and Africa |
|
| Asia Pacific |
|
| Total |
| ||||
Tire unit sales |
| $ | 835 |
|
| $ | 595 |
|
| $ | 304 |
|
| $ | 1,734 |
|
Other tire and related sales |
|
| 118 |
|
|
| 63 |
|
|
| 14 |
|
|
| 195 |
|
Retail services and service related sales |
|
| 128 |
|
|
| 17 |
|
|
| 16 |
|
|
| 161 |
|
Chemical sales |
|
| 49 |
|
|
| — |
|
|
| — |
|
|
| 49 |
|
Other |
|
| 4 |
|
|
| 1 |
|
|
| — |
|
|
| 5 |
|
Net Sales by reportable segment |
| $ | 1,134 |
|
| $ | 676 |
|
| $ | 334 |
|
| $ | 2,144 |
|
|
| Three Months Ended June 30, 2019 |
| |||||||||||||
|
|
|
|
|
| Europe, Middle East |
|
|
|
|
|
|
|
|
| |
(In millions) |
| Americas |
|
| and Africa |
|
| Asia Pacific |
|
| Total |
| ||||
Tire unit sales |
| $ | 1,547 |
|
| $ | 1,035 |
|
| $ | 472 |
|
| $ | 3,054 |
|
Other tire and related sales |
|
| 168 |
|
|
| 99 |
|
|
| 30 |
|
|
| 297 |
|
Retail services and service related sales |
|
| 138 |
|
|
| 7 |
|
|
| 17 |
|
|
| 162 |
|
Chemical sales |
|
| 114 |
|
|
| — |
|
|
| — |
|
|
| 114 |
|
Other |
|
| 4 |
|
|
| — |
|
|
| 1 |
|
|
| 5 |
|
Net Sales by reportable segment |
| $ | 1,971 |
|
| $ | 1,141 |
|
| $ | 520 |
|
| $ | 3,632 |
|
8
Three Months Ended September 30, 2019 |
| Six Months Ended June 30, 2020 |
| ||||||||||||||||||||||||||||
Europe, Middle East |
|
|
|
|
| Europe, Middle East |
|
|
|
|
|
|
|
|
| ||||||||||||||||
(In millions) | Americas | and Africa | Asia Pacific | Total |
| Americas |
|
| and Africa |
|
| Asia Pacific |
|
| Total |
| |||||||||||||||
Tire unit sales | $ | 1,624 | $ | 1,109 | $ | 500 | $ | 3,233 |
| $ | 2,141 |
|
| $ | 1,499 |
|
| $ | 647 |
|
| $ | 4,287 |
| |||||||
Other tire and related sales | 185 | 82 | 25 | 292 |
|
| 260 |
|
|
| 135 |
|
|
| 46 |
|
|
| 441 |
| |||||||||||
Retail services and service related sales | 136 | 12 | 23 | 171 |
|
| 261 |
|
|
| 35 |
|
|
| 28 |
|
|
| 324 |
| |||||||||||
Chemical sales | 99 | — | — | 99 |
|
| 140 |
|
|
| — |
|
|
| — |
|
|
| 140 |
| |||||||||||
Other | 5 | 2 | — | 7 |
|
| 5 |
|
|
| 2 |
| �� |
| 1 |
|
|
| 8 |
| |||||||||||
Net Sales by reportable segment | $ | 2,049 | $ | 1,205 | $ | 548 | $ | 3,802 |
| $ | 2,807 |
|
| $ | 1,671 |
|
| $ | 722 |
|
| $ | 5,200 |
|
|
| Six Months Ended June 30, 2019 |
| |||||||||||||
|
|
|
|
|
| Europe, Middle East |
|
|
|
|
|
|
|
|
| |
(In millions) |
| Americas |
|
| and Africa |
|
| Asia Pacific |
|
| Total |
| ||||
Tire unit sales |
| $ | 3,034 |
|
| $ | 2,155 |
|
| $ | 925 |
|
| $ | 6,114 |
|
Other tire and related sales |
|
| 311 |
|
|
| 190 |
|
|
| 62 |
|
|
| 563 |
|
Retail services and service related sales |
|
| 270 |
|
|
| 15 |
|
|
| 32 |
|
|
| 317 |
|
Chemical sales |
|
| 223 |
|
|
| — |
|
|
| — |
|
|
| 223 |
|
Other |
|
| 9 |
|
|
| 2 |
|
|
| 2 |
|
|
| 13 |
|
Net Sales by reportable segment |
| $ | 3,847 |
|
| $ | 2,362 |
|
| $ | 1,021 |
|
| $ | 7,230 |
|
Three Months Ended September 30, 2018 | |||||||||||||||
Europe, Middle East | |||||||||||||||
(In millions) | Americas | and Africa | Asia Pacific | Total | |||||||||||
Tire unit sales | $ | 1,638 | $ | 1,197 | $ | 479 | $ | 3,314 | |||||||
Other tire and related sales | 175 | 86 | 32 | 293 | |||||||||||
Retail services and service related sales | 145 | 6 | 19 | 170 | |||||||||||
Chemical sales | 146 | — | — | 146 | |||||||||||
Other | 3 | 1 | 1 | 5 | |||||||||||
Net Sales by reportable segment | $ | 2,107 | $ | 1,290 | $ | 531 | $ | 3,928 |
Nine Months Ended September 30, 2019 | |||||||||||||||
Europe, Middle East | |||||||||||||||
(In millions) | Americas | and Africa | Asia Pacific | Total | |||||||||||
Tire unit sales | $ | 4,658 | $ | 3,264 | $ | 1,425 | $ | 9,347 | |||||||
Other tire and related sales | 496 | 272 | 87 | 855 | |||||||||||
Retail services and service related sales | 406 | 27 | 55 | 488 | |||||||||||
Chemical sales | 322 | — | — | 322 | |||||||||||
Other | 14 | 4 | 2 | 20 | |||||||||||
Net Sales by reportable segment | $ | 5,896 | $ | 3,567 | $ | 1,569 | $ | 11,032 |
Nine Months Ended September 30, 2018 | |||||||||||||||
Europe, Middle East | |||||||||||||||
(In millions) | Americas | and Africa | Asia Pacific | Total | |||||||||||
Tire unit sales | $ | 4,693 | $ | 3,565 | $ | 1,508 | $ | 9,766 | |||||||
Other tire and related sales | 488 | 282 | 94 | 864 | |||||||||||
Retail services and service related sales | 426 | 28 | 60 | 514 | |||||||||||
Chemical sales | 437 | — | — | 437 | |||||||||||
Other | 10 | 5 | 3 | 18 | |||||||||||
Net Sales by reportable segment | $ | 6,054 | $ | 3,880 | $ | 1,665 | $ | 11,599 |
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 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 $32$26 million and $39$23 million at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. Deferred revenue included in Other Long Term Liabilities in the Consolidated Balance Sheets totaled $30$26 million and $39$31 million at SeptemberJune 30, 20192020 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 ninesix months ended SeptemberJune 30, 2019:2020:
(In millions) |
|
|
|
|
Balance at December 31, 2019 |
| $ | 54 |
|
Revenue deferred during period |
|
| 53 |
|
Revenue recognized during period |
|
| (55 | ) |
Impact of foreign currency translation |
|
| — |
|
Balance at June 30, 2020 |
| $ | 52 |
|
(In millions) | |||
Balance at December 31, 2018 | $ | 78 | |
Revenue deferred during period | 112 | ||
Revenue recognized during period | (128 | ) | |
Impact of foreign currency translation | — | ||
Balance at September 30, 2019 | $ | 62 |
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) |
|
| 99 |
|
|
| 8 |
|
|
| 107 |
|
Incurred, net of foreign currency translation of ($1) million and $0 million, respectively |
|
| (94 | ) |
|
| (8 | ) |
|
| (102 | ) |
Balance at June 30, 2020 |
| $ | 225 |
|
| $ | — |
|
| $ | 225 |
|
Associate- | |||||||||||
(In millions) | Related Costs | Other Exit Costs | Total | ||||||||
Balance at December 31, 2018 | $ | 80 | $ | 1 | $ | 81 | |||||
2019 Charges | 117 | 14 | 131 | ||||||||
Incurred, including net Foreign Currency Translation of $(6) million and $0 million, respectively | (38 | ) | (14 | ) | (52 | ) | |||||
Reversed to the Statement of Operations | (3 | ) | — | (3 | ) | ||||||
Balance at September 30, 2019 | $ | 156 | $ | 1 | $ | 157 |
(1) | Charges of $107 million in 2020 exclude net charges of $1 million for benefit plan curtailments and settlements recorded in Rationalizations in the Statement of Operations. |
On March 18, 2019,April 17, 2020, we reached a tentative bargaining agreement and subsequently approved a plan to modernize 2 ofpermanently close our tireGadsden, Alabama manufacturing facilities in Germany. The plan is in furtherancefacility (“Gadsden”) as part of our strategy to strengthen the competitiveness of our manufacturing footprint and increase production
9
manufacturing footprint by curtailing production of tires for declining, less profitable segments of the tire market. Eligible associates must submit applications for buy-outs between OctoberThe plan, which was approved by the membership of the local union on May 1, 2019 and November 1, 2019 and can revoke any submitted applications up to the November 1, 2019 deadline. As of September 30, 2019, we2020, will result in approximately 470 job reductions. We have $6$51 million accrued related to this plan. The total amountplan at June 30, 2020, which is expected to be incurredsubstantially paid through 2021.
During the first quarter of 2019, we approved a plan to modernize 2 of our tire manufacturing facilities in connection withGermany. We have $96 million accrued related to this plan at June 30, 2020, which is dependent upon the number of eligible associates who apply for buy-outs and our acceptance of those applications. As such, we cannot currently estimate the amount of the total cost, the amount for each major type of cost, or the amount of total future cash expenditures expected to be incurred in connection with this plan.
The remainder of the accrual balance at SeptemberJune 30, 20192020 is expected to be substantially utilized in the next 12 months and includes $27 million related to the closed Amiens, France manufacturing facility, $16 million related to plans to reduce manufacturing headcount and improve operating efficiency in Europe, Middle East and Africa ("EMEA"), $18$13 million related to global plans to reduce Selling, Administrative and General Expense ("SAG"(“SAG”) headcount, $9 million related to a plan primarily to offer voluntary buy-outs to certain associates at Gadsdenand $5$4 million related to a plan to reduce manufacturing headcount and improve operating efficiency in Americas.
The following table shows net rationalization charges included in Income (Loss) before Income Taxes:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Current Year Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Associate Severance and Other Related Costs |
| $ | 64 |
|
| $ | — |
|
| $ | 66 |
|
| $ | 98 |
|
Benefit Plan Termination Benefits |
|
| 5 |
|
|
| — |
|
|
| 5 |
|
|
| 1 |
|
Other Exit Costs |
|
| 2 |
|
|
| 3 |
|
|
| 2 |
|
|
| 4 |
|
Current Year Plans - Net Charges |
| $ | 71 |
|
| $ | 3 |
|
| $ | 73 |
|
| $ | 103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Year Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Associate Severance and Other Related Costs |
| $ | 27 |
|
| $ | — |
|
| $ | 33 |
|
| $ | — |
|
Benefit Plan Termination Benefits |
|
| — |
|
|
| (1 | ) |
|
| (4 | ) |
|
| (1 | ) |
Other Exit Costs |
|
| 1 |
|
|
| 2 |
|
|
| 6 |
|
|
| 5 |
|
Prior Year Plans - Net Charges |
|
| 28 |
|
|
| 1 |
|
|
| 35 |
|
|
| 4 |
|
Total Net Charges |
| $ | 99 |
|
| $ | 4 |
|
| $ | 108 |
|
| $ | 107 |
|
Asset Write-off and Accelerated Depreciation Charges(1) |
| $ | 86 |
|
| $ | 1 |
|
| $ | 90 |
|
| $ | 1 |
|
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Current Year Plans | |||||||||||||||
Associate Severance and Other Related Costs | $ | 17 | $ | — | $ | 115 | $ | 32 | |||||||
Benefit Plan Termination Benefits | — | — | 1 | — | |||||||||||
Other Exit Costs | 3 | 1 | 7 | 1 | |||||||||||
Current Year Plans - Net Charges | $ | 20 | $ | 1 | $ | 123 | $ | 33 | |||||||
Prior Year Plans | |||||||||||||||
Associate Severance and Other Related Costs | $ | (2 | ) | $ | 1 | $ | (2 | ) | $ | (6 | ) | ||||
Benefit Plan Termination Benefits | 1 | — | — | — | |||||||||||
Other Exit Costs | 2 | 3 | 7 | 13 | |||||||||||
Prior Year Plans - Net Charges | 1 | 4 | 5 | 7 | |||||||||||
Total Net Charges | $ | 21 | $ | 5 | $ | 128 | $ | 40 | |||||||
Asset Write-off and Accelerated Depreciation Charges | $ | 1 | $ | — | $ | 2 | $ | 2 |
(1) | Asset write-off and accelerated depreciation charges for the three and six months ended June 30, 2020 are primarily related to the permanent closure of Gadsden. |
Substantially all of the new charges for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 related to future cash outflows. Current year plan charges for the three and six months ended June 30, 2020 primarily related to the permanent closure of Gadsden, including a $5 million termination charge for one of our defined benefit pension plans. Net current year plan charges for the three and ninesix months ended SeptemberJune 30, 2019 include $11included $1 million and $105$94 million, respectively, relatedto a plan to modernize 2 of our tire manufacturing facilities in Germany and $2 million and $9 million, respectively, related to plansa plan to reduce manufacturing headcount and improve operating efficiency in EMEA and $9 million and $18 million, respectively, related to plans to reduce manufacturing headcount and improve operating efficiency in Americas. Net current year plan charges for the three and nine months ended September 30, 2018 include $1 million and $27 million, respectively, related to a global plan to reduce SAG headcount. Net current year plan charges for the nine months ended September 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 ninesix months ended SeptemberJune 30, 2019 were $12020 included $25 million related to additional termination benefits for associates at the closed Amiens, France manufacturing facility. Refer to Note to the Consolidated Financial Statements No. 14, Commitments and $5Contingent Liabilities. In addition, net prior year plan charges for the six months ended June 30, 2020 included $6 million respectively,related to a plan to modernize two of our tire manufacturing facilities in Germany and $4 million related to a plan primarily to offer voluntary buy-outs to certain associates at Gadsden. Net prior year plan charges for the six months ended June 30, 2020 also included a curtailment credit of $4 million for a postretirement benefit plan related to the exit of employees under an approved rationalization plan. Net prior year plan charges for the three and six months ended June 30, 2019 primarily related to EMEA manufacturing plans. Net prior year plan charges for the ninesix months ended SeptemberJune 30, 2019 also includeincluded reversals of $3$2 million for actions no longer needed for their originally intended purposes. Net prior year plan charges for the three and nine months ended September 30, 2018 include $2 million and $11 million, respectively, related to the closure of our tire manufacturing facility in Philippsburg, Germany and $2 million and $4 million, respectively, related to a plan to reduce manufacturing headcount in EMEA. Net prior year plan charges for the nine months ended September 30, 2018 also include $3 million related to a global plan to reduce SAG headcount. Net prior year plan charges for the three and nine months ended September 30, 2018 include reversals of $1 million and $13 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 $110$100 million is expected to be incurred in future periods.
Approximately 1,200550 associates will be released under new plans initiated in 2019,2020, of which approximately 250400 were released through SeptemberJune 30, 2019.2020. In the first ninesix months of 2019,2020, approximately 300850 associates were released under plans initiated in prior years. Approximately 1,200750 associates remain to be released under all ongoing rationalization plans.
10
NOTE 4. OTHER (INCOME) EXPENSE
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Non-service related pension and other postretirement benefits cost |
| $ | 25 |
|
| $ | 27 |
|
| $ | 51 |
|
| $ | 57 |
|
Financing fees and financial instruments expense |
|
| 5 |
|
|
| 10 |
|
|
| 12 |
|
|
| 18 |
|
Net foreign currency exchange (gains) losses |
|
| 4 |
|
|
| (11 | ) |
|
| 3 |
|
|
| (18 | ) |
General and product liability expense - discontinued products |
|
| 2 |
|
|
| 2 |
|
|
| 4 |
|
|
| 8 |
|
Royalty income |
|
| (4 | ) |
|
| (5 | ) |
|
| (9 | ) |
|
| (10 | ) |
Net (gains) losses on asset sales |
|
| 3 |
|
|
| (1 | ) |
|
| 2 |
|
|
| (6 | ) |
Interest income |
|
| (3 | ) |
|
| (4 | ) |
|
| (6 | ) |
|
| (7 | ) |
Miscellaneous (income) expense |
|
| 2 |
|
|
| (1 | ) |
|
| 4 |
|
|
| (3 | ) |
|
| $ | 34 |
|
| $ | 17 |
|
| $ | 61 |
|
| $ | 39 |
|
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Gain on TireHub transaction, net of transaction costs | $ | — | $ | (287 | ) | $ | — | $ | (273 | ) | |||||
Non-service related pension and other postretirement benefits cost | 28 | 33 | 85 | 92 | |||||||||||
Financing fees and financial instruments expense | 8 | 9 | 26 | 27 | |||||||||||
Net foreign currency exchange (gains) losses | 3 | (2 | ) | (15 | ) | (7 | ) | ||||||||
General and product liability expense - discontinued products | 2 | 5 | 10 | 3 | |||||||||||
Royalty income | (5 | ) | (5 | ) | (15 | ) | (15 | ) | |||||||
Net (gains) losses on asset sales | 1 | (1 | ) | (5 | ) | (1 | ) | ||||||||
Interest income | (5 | ) | (6 | ) | (13 | ) | (12 | ) | |||||||
Miscellaneous expense | 3 | 1 | 1 | 15 | |||||||||||
$ | 35 | $ | (253 | ) | $ | 74 | $ | (171 | ) |
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 nine months ended September 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 liability expense - 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 thirdsecond quarter of 2020, we recorded a tax benefit of $186 million on a loss before income taxes of $889 million. For the first six months of 2020, we recorded tax expense of $63 million on a loss before income taxes of $1,257 million. Income tax expense for the three and six months ended June 30, 2020 includes net discrete charges of $2 million and $293 million, respectively, including the establishment of a $295 million valuation allowance on deferred tax assets for foreign tax credits during the first quarter of 2020 as discussed below.
For the second quarter of 2019, we recorded tax expense of $31$26 million on income before income taxes of $121$82 million. For the first ninesix months of 2019, we recorded tax expense of $63$32 million on income before income taxes of $165$44 million. Income tax expense for the three and six months ended September 30, 2019 was favorably impacted by $6 million of various discrete tax adjustments. Income tax expense for the nine months ended SeptemberJune 30, 2019 includes net discrete charges of $7$6 million primarily related toand $13 million, respectively. Net discrete tax charges include a second quarter charge of $6 million related to adjustadjusting our deferred tax assets in Luxembourg for a newly enactedchange in the tax rate during the secondand various first quarter of 2019.
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 ninesix months ended SeptemberJune 30, 20192020 primarily relates to the discrete items noted above, a first quarter non-cash goodwill impairment charge of $182 million, and Septemberforecasted 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 and six months ended June 30, 20182019 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 June 30, 2020, we had approximately $1.1 billion of our U.S. federal, state and local deferred tax assets, was $114net of valuation allowances totaling $308 million, primarily related to deferred tax assets for foreign tax credits and our valuation allowance on our foreign deferred tax assets was $226 million. At December 31, 2018, our valuation allowance on certainwith limited lives. Approximately $900 million of these 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.
11
negative evidence of reduced profitability as a result of the continuing 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 expected to be temporary, there is considerable uncertainty around the extent and duration of that disruption and we are currently expecting to incur a significant U.S. tax loss during the second half of 2020 as a result. Depending upon the magnitude of this loss as well as the continuing duration of pandemic-related disruptions and the timing of the subsequent recovery, a valuation allowance may be required against all of our U.S. net deferred tax assets in a future period.
At June 30, 2020 and December 31, 2019, our U.S. deferred tax assets included approximately $118 million and $403 million of foreign tax credits, net of valuation allowances of $103$298 million and $3 million, respectively, generated primarily from the receipt of foreign dividends. During the first quarter of 2020, we established a valuation allowance of $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 temporary suspension of production at our U.S. manufacturing facilities as a result of the COVID-19 pandemic, we expect 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 concluded that it was 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 three significant sources of foreign income provide us sufficient positive evidence that we will be able to utilize theseour remaining foreign tax credits despite the negative evidence of their limited carryforward periods. Thosethat expire between 2025 and 2030. Our sources of foreign income are (1) 100% of our domestic profitability can be re-characterized as foreign source income under current U.S. tax law to the extent domestic losses have offset foreign source income in prior years, (2) annual net foreign source income, exclusive of dividends, primarily from royalties, and (3) tax planning strategies, including capitalizing research and development costs, accelerating income on cross border sales of inventory or raw materials to our subsidiaries and reducing U.S. interest expense by, for example, reducing intercompany loans through repatriating current year earnings of foreign subsidiaries, all of which would increase our domestic profitability.
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 than not that, the remainingat June 30, 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. Currently,utilized.
At June 30, 2020 and December 31, 2019, we are also evaluating the feasibilityhad approximately $1.3 billion and $1.2 billion of certainforeign deferred tax planning actions that would increase the likelihood that we would be able to fully utilize our foreign tax credits prior to their expiration, as well as the related tax consequences. If implemented, these tax planning actions may result in a non-cash increase in tax expense in the period implemented, partially offset by a reduction of ourassets and valuation allowances related to foreign tax credits.
For the ninesix months ending SeptemberJune 30, 2019,2020, 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 third 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 PER SHARE
Basic earnings per share are computed based on the weighted average number of common shares outstanding. Diluted earnings 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 per common share are calculated as follows:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
(In millions, except per share amounts) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Earnings (loss) per share — basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodyear net income (loss) |
| $ | (696 | ) |
| $ | 54 |
|
| $ | (1,315 | ) |
| $ | (7 | ) |
Weighted average shares outstanding |
|
| 234 |
|
|
| 233 |
|
|
| 234 |
|
|
| 232 |
|
Earnings (loss) per common share — basic |
| $ | (2.97 | ) |
| $ | 0.23 |
|
| $ | (5.62 | ) |
| $ | (0.03 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodyear net income (loss) |
| $ | (696 | ) |
| $ | 54 |
|
| $ | (1,315 | ) |
| $ | (7 | ) |
Weighted average shares outstanding |
|
| 234 |
|
|
| 233 |
|
|
| 234 |
|
|
| 232 |
|
Dilutive effect of stock options and other dilutive securities |
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
Weighted average shares outstanding — diluted |
|
| 234 |
|
|
| 234 |
|
|
| 234 |
|
|
| 232 |
|
Earnings (loss) per common share — diluted |
| $ | (2.97 | ) |
| $ | 0.23 |
|
| $ | (5.62 | ) |
| $ | (0.03 | ) |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(In millions, except per share amounts) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Earnings per share — basic: | |||||||||||||||
Goodyear net income | $ | 88 | $ | 351 | $ | 81 | $ | 583 | |||||||
Weighted average shares outstanding | 233 | 236 | 233 | 238 | |||||||||||
Earnings per common share — basic | $ | 0.38 | $ | 1.49 | $ | 0.35 | $ | 2.45 | |||||||
Earnings per share — diluted: | |||||||||||||||
Goodyear net income | $ | 88 | $ | 351 | $ | 81 | $ | 583 | |||||||
Weighted average shares outstanding | 233 | 236 | 233 | 238 | |||||||||||
Dilutive effect of stock options and other dilutive securities | 1 | 2 | 1 | 3 | |||||||||||
Weighted average shares outstanding — diluted | 234 | 238 | 234 | 241 | |||||||||||
Earnings per common share — diluted | $ | 0.38 | $ | 1.48 | $ | 0.35 | $ | 2.42 |
Weighted average shares outstanding -– diluted for the six months ended June 30, 2019 excludes the dilutive effect of approximately 2 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” options) as their inclusion would have been anti-dilutive due to the Goodyear net loss. There were 0 in-the-money options at June 30, 2020. Additionally, weighted average shares outstanding – diluted for the three and six months ended June 30, 2020 excludes approximately 3 million and 29 million equivalent shares related to options with exercise prices greater than the average market price of our common shares (i.e., "underwater" options) for the three and nine months ended September 30, 2019, respectively.. There were approximately 2 million equivalent shares related to underwater options with exercise prices greater than the average market price of our common shares for the three and ninesix months ended SeptemberJune 30, 2018.
NOTE 7. BUSINESS SEGMENTS
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
| $ | 1,134 |
|
| $ | 1,971 |
|
| $ | 2,807 |
|
| $ | 3,847 |
|
Europe, Middle East and Africa |
|
| 676 |
|
|
| 1,141 |
|
|
| 1,671 |
|
|
| 2,362 |
|
Asia Pacific |
|
| 334 |
|
|
| 520 |
|
|
| 722 |
|
|
| 1,021 |
|
Net Sales |
| $ | 2,144 |
|
| $ | 3,632 |
|
| $ | 5,200 |
|
| $ | 7,230 |
|
Segment Operating Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
| $ | (287 | ) |
| $ | 134 |
|
| $ | (287 | ) |
| $ | 223 |
|
Europe, Middle East and Africa |
|
| (110 | ) |
|
| 44 |
|
|
| (163 | ) |
|
| 98 |
|
Asia Pacific |
|
| (34 | ) |
|
| 41 |
|
|
| (28 | ) |
|
| 88 |
|
Total Segment Operating Income (Loss) |
| $ | (431 | ) |
| $ | 219 |
|
| $ | (478 | ) |
| $ | 409 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and Other Asset Impairments (Notes 8 and 9) |
| $ | 148 |
|
| $ | — |
|
| $ | 330 |
|
| $ | — |
|
Rationalizations (Note 3) |
|
| 99 |
|
|
| 4 |
|
|
| 108 |
|
|
| 107 |
|
Interest expense |
|
| 85 |
|
|
| 88 |
|
|
| 158 |
|
|
| 173 |
|
Other (income) expense (Note 4) |
|
| 34 |
|
|
| 17 |
|
|
| 61 |
|
|
| 39 |
|
Asset write-offs and accelerated depreciation (Note 3) |
|
| 86 |
|
|
| 1 |
|
|
| 90 |
|
|
| 1 |
|
Corporate incentive compensation plans |
|
| 7 |
|
|
| 14 |
|
|
| 10 |
|
|
| 15 |
|
Retained expenses of divested operations |
|
| 1 |
|
|
| 3 |
|
|
| 3 |
|
|
| 6 |
|
Other |
|
| (2 | ) |
|
| 10 |
|
|
| 19 |
|
|
| 24 |
|
Income (Loss) before Income Taxes |
| $ | (889 | ) |
| $ | 82 |
|
| $ | (1,257 | ) |
| $ | 44 |
|
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Sales: | |||||||||||||||
Americas | $ | 2,049 | $ | 2,107 | $ | 5,896 | $ | 6,054 | |||||||
Europe, Middle East and Africa | 1,205 | 1,290 | 3,567 | 3,880 | |||||||||||
Asia Pacific | 548 | 531 | 1,569 | 1,665 | |||||||||||
Net Sales | $ | 3,802 | $ | 3,928 | $ | 11,032 | $ | 11,599 | |||||||
Segment Operating Income: | |||||||||||||||
Americas | $ | 175 | $ | 194 | $ | 398 | $ | 475 | |||||||
Europe, Middle East and Africa | 66 | 111 | 164 | 289 | |||||||||||
Asia Pacific | 53 | 57 | 141 | 203 | |||||||||||
Total Segment Operating Income | $ | 294 | $ | 362 | $ | 703 | $ | 967 | |||||||
Less: | |||||||||||||||
Rationalizations | $ | 21 | $ | 5 | $ | 128 | $ | 40 | |||||||
Interest expense | 88 | 82 | 261 | 236 | |||||||||||
Other (income) expense (Note 4) | 35 | (253 | ) | 74 | (171 | ) | |||||||||
Asset write-offs and accelerated depreciation | 1 | — | 2 | 2 | |||||||||||
Corporate incentive compensation plans | 13 | (1 | ) | 28 | 6 | ||||||||||
Retained expenses of divested operations | 1 | 2 | 7 | 7 | |||||||||||
Other | 14 | 14 | 38 | 38 | |||||||||||
Income before Income Taxes | $ | 121 | $ | 513 | $ | 165 | $ | 809 |
13
Goodwill and other asset impairments, as described in Note to the Consolidated Financial Statements No. 8, Goodwill and Intangible Assets, and Note to the Consolidated Financial Statements No. 9, Other Assets and Investments; 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 to the strategic business units ("SBUs") for performance evaluation purposes but were attributable to the SBUs as follows:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Goodwill and Other Asset Impairments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
| $ | 148 |
|
| $ | — |
|
| $ | 148 |
|
| $ | — |
|
Europe, Middle East and Africa |
|
| — |
|
|
| — |
|
|
| 182 |
|
|
| — |
|
Total Goodwill and Other Asset Impairments |
| $ | 148 |
|
| $ | — |
|
| $ | 330 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rationalizations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
| $ | 69 |
|
| $ | 2 |
|
| $ | 72 |
|
| $ | 9 |
|
Europe, Middle East and Africa |
|
| 30 |
|
|
| 2 |
|
|
| 36 |
|
|
| 98 |
|
Total Rationalizations |
| $ | 99 |
|
| $ | 4 |
|
| $ | 108 |
|
| $ | 107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Gains) Losses on Asset Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East and Africa |
| $ | 3 |
|
| $ | (1 | ) |
| $ | 2 |
|
| $ | (6 | ) |
Total Net (Gains) Losses on Asset Sales |
| $ | 3 |
|
| $ | (1 | ) |
| $ | 2 |
|
| $ | (6 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Write-offs and Accelerated Depreciation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
| $ | 86 |
|
| $ | — |
|
| $ | 89 |
|
| $ | — |
|
Europe, Middle East and Africa |
|
| — |
|
|
| 1 |
|
|
| 1 |
|
|
| 1 |
|
Total Asset Write-offs and Accelerated Depreciation |
| $ | 86 |
|
| $ | 1 |
|
| $ | 90 |
|
| $ | 1 |
|
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Rationalizations: | |||||||||||||||
Americas | $ | 9 | $ | — | $ | 18 | $ | 3 | |||||||
Europe, Middle East and Africa | 12 | 5 | 110 | 31 | |||||||||||
Asia Pacific | — | — | — | 3 | |||||||||||
Total Segment Rationalizations | $ | 21 | $ | 5 | $ | 128 | $ | 37 | |||||||
Corporate | — | — | — | 3 | |||||||||||
Total Rationalizations | $ | 21 | $ | 5 | $ | 128 | $ | 40 | |||||||
Net (Gains) Losses on Asset Sales: | |||||||||||||||
Americas(1) | $ | — | $ | (288 | ) | $ | — | $ | (276 | ) | |||||
Europe, Middle East and Africa | 1 | — | (5 | ) | 2 | ||||||||||
Total Net (Gains) Losses on Asset Sales | $ | 1 | $ | (288 | ) | $ | (5 | ) | $ | (274 | ) | ||||
Asset Write-offs and Accelerated Depreciation: | |||||||||||||||
Europe, Middle East and Africa | $ | 1 | $ | — | $ | 2 | $ | 2 | |||||||
Total Asset Write-offs and Accelerated Depreciation | $ | 1 | $ | — | $ | 2 | $ | 2 |
Goodwill and intangible assets totaled $383 million and $135 million, respectively, at June 30, 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 contains 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 terms of less than 1 year to approximately 50 years. Most of our leases include options to extend the lease, with renewal terms ranging from 1 to 50 yearsqualitative 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 continuing COVID-19 pandemic and some include options to terminate the lease within 1 year. If it is reasonably certain that an option to extend or terminate a lease will be exercised, that option is consideredresulting decline in the lease term. Leasesmacroeconomic environment, as well as a significant decrease in our market capitalization, we performed a quantitative interim impairment analysis as of March 31, 2020 utilizing a discounted cash flow model.
At June 30, 2020, the goodwill associated with an initial termreporting units in our EMEA, Americas and Asia Pacific segments was $229 million, $91 million and $63 million, respectively.
During the first quarter of 12 months or less are not recorded on the balance sheet, and we recognize short-term lease expense for these leases on a straight-line basis over the lease term.
Since the first quarter of 2020, our forecasts as well as our market capitalization have both improved. Thus, we concluded, on a qualitative basis, that it was not more likely than not that the carrying values of our reporting units were less than their fair values during the second quarter of 2020. Nonetheless, if we make future adverse revisions to our significant assumptions, including as a result of business performance or market conditions, or if our market capitalization declines and if such a decline becomes indicative that the fair value of our reporting units has declined below their carrying values, we may need to record a material, non-cash goodwill impairment charge in a future period.
14
Intangible assets with indefinite lives totaled $118 million at both June 30, 2020 and December 31, 2019. We also conducted a qualitative assessment of our intangible assets with indefinite lives as of June 30, 2020, which indicated no impairment existed.
NOTE 9. OTHER ASSETS AND INVESTMENTS
Investment in TireHub, LLC
The carrying value 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 notU.S., was $88 million and $262 million at June 30, 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.
We regularly review our obligationinvestment in TireHub for potential impairment and will recognize an impairment charge if the estimated fair value of our investment declines below its recorded amount and such decline is determined to make lease payments arisingbe other-than-temporary. The most critical assumptions used in our discounted cash flow model for estimating the fair value of our investment during the second quarter of 2020 were forecasted tire unit volume for TireHub, including the extent and duration of, as well as the timing of the recovery from, the lease. Operating lease ROU assetsongoing impacts of the COVID-19 pandemic, and liabilities are recognized at the commencement date based ondiscount rate.
Our TireHub joint venture was initially formed during the presentsecond quarter of 2018 and, as previously disclosed, its net losses included higher than expected start-up expenses and additional costs incurred to build out TireHub’s distribution footprint for future growth. These additional costs as well as TireHub’s net losses were expected to moderate in 2020. However, higher than expected net losses for TireHub continued into 2020, driven by the impacts of the COVID-19 pandemic.
The severe macroeconomic impacts of the COVID-19 pandemic that began in the U.S. in March 2020 persisted during the second quarter of 2020, driving significant net losses for TireHub during the first half of the year. As a result, we evaluated our investment and concluded that there has now been an other-than-temporary decline in the fair value of lease payments overour investment. We conducted an impairment assessment and estimated the lease term. Generally, we use our incremental borrowing rate based on the information available at the commencement date in determining the presentfair value of lease payments, unless there isour investment utilizing current forecasts of TireHub’s tire unit volume, revised expectations as to the extent and duration of, as well as the timing of the recovery from, the COVID-19 pandemic and an updated discount rate reflective of current market conditions. As a rate statedresult, during the second quarter of 2020, we recognized a non-cash impairment charge of $148 million.
There remains a high degree of uncertainty as to the extent and duration of, and timing of the subsequent recovery from, the COVID-19 pandemic. If we make future adverse revisions to these or our other significant assumptions, including as a result of business performance or market conditions, we may need to record an additional material, non-cash impairment charge in a future period.
Other Assets
Other Assets at June 30, 2020 included a $30 million trade receivable from a customer that was refinanced into a collateral-backed note receivable in the lease agreement. Operating lease expense is recognized on a straight-line basis over the lease term.
Three Months Ended | Nine Months Ended | ||||||
September 30, | September 30, | ||||||
(In millions) | 2019 | 2019 | |||||
Operating Lease Expense | $ | 73 | $ | 221 | |||
Finance Lease Expense: | |||||||
Amortization of ROU Assets | 3 | 8 | |||||
Interest on Lease Liabilities | 6 | 16 | |||||
Short Term Lease Expense | 1 | 4 | |||||
Variable Lease Expense | 2 | 5 | |||||
Sublease Income | (3 | ) | (11 | ) | |||
Total Lease Expense | $ | 82 | $ | 243 |
Nine Months Ended | |||
September 30, | |||
(In millions) | 2019 | ||
Cash Paid for Amounts Included in the Measurement of Lease Liabilities | |||
Operating Cash Flows for Operating Leases | $ | 201 | |
Operating Cash Flows for Finance Leases | 16 | ||
Financing Cash Flows for Finance Leases | 5 | ||
ROU Assets Obtained in Exchange for Lease Obligations | |||
Operating Leases | 124 | ||
Finance Leases | 34 |
September 30, | |||
(In millions, except lease term and discount rate) | 2019 | ||
Operating Leases | |||
Operating Lease ROU Assets | $ | 828 | |
Operating Lease Liabilities due Within One Year | $ | 197 | |
Operating Lease Liabilities | 642 | ||
Total Operating Lease Liabilities | $ | 839 | |
Finance Leases | |||
Property, Plant and Equipment, at cost | $ | 256 | |
Accumulated Depreciation | (47 | ) | |
Property, Plant and Equipment, net | $ | 209 | |
Long Term Debt and Finance Leases due Within One Year | $ | 7 | |
Long Term Debt and Finance Leases | 238 | ||
Total Finance Lease Liabilities | $ | 245 | |
Weighted Average Remaining Lease Term | |||
Operating Leases | 6.9 years | ||
Finance Leases | 32.0 years | ||
Weighted Average Discount Rate | |||
Operating Leases | 6.72 | % | |
Finance Leases | 8.47 | % |
(In millions) | Operating Leases | Finance Leases | |||||
2019 (excluding the nine months ended September 30) | $ | 64 | $ | 6 | |||
2020 | 227 | 25 | |||||
2021 | 180 | 35 | |||||
2022 | 129 | 21 | |||||
2023 | 100 | 20 | |||||
Thereafter | 383 | 706 | |||||
Total Lease Payments | 1,083 | 813 | |||||
Less: Imputed Interest | 244 | 568 | |||||
Total | $ | 839 | $ | 245 |
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 SeptemberJune 30, 2019,2020, we had total credit arrangements of $9,036$9,751 million, of which $2,521$2,938 million were unused. At that date, 42%30% of our debt was at variable interest rates averaging 4.18%3.03%.
Notes Payable and Overdrafts, Long Term Debt and Finance Leases due Within One Year and Short Term Financing Arrangements
At SeptemberJune 30, 2019,2020, we had short term committed and uncommitted credit arrangements totaling $735$965 million, of which $232$236 million were unused. These arrangements are available primarily to certain of our foreign subsidiaries through various banks at quoted market interest rates.
15
The following table presents amounts due within one year:
|
| June 30, |
|
| December 31, |
| |||
(In millions) |
| 2020 |
|
| 2019 |
| |||
Chinese credit facilities |
| $ | 253 |
|
| $ | 118 |
| |
Other domestic and foreign debt |
|
| 459 |
|
|
| 230 |
| |
Notes Payable and Overdrafts |
| $ | 712 |
|
| $ | 348 |
| |
Weighted average interest rate |
|
| 4.73 | % |
|
| 4.92 | % | |
|
|
|
|
|
|
|
|
| |
Chinese credit facilities |
| $ | 40 |
|
| $ | 95 |
| |
8.75% due 2020 |
|
| 282 |
|
|
| 280 |
| |
Other domestic and foreign debt (including finance leases) |
|
| 259 |
|
|
| 187 |
| |
Long Term Debt and Finance Leases due Within One Year |
| $ | 581 |
|
| $ | 562 |
| |
Weighted average interest rate |
|
| 5.88 | % |
|
| 6.58 | % | |
Total obligations due within one year |
| $ | 1,293 |
|
| $ | 910 |
|
September 30, | December 31, | ||||||
(In millions) | 2019 | 2018 | |||||
Chinese credit facilities | $ | 140 | $ | 122 | |||
Other domestic and foreign debt | 346 | 288 | |||||
Notes Payable and Overdrafts | $ | 486 | $ | 410 | |||
Weighted average interest rate | 7.06 | % | 8.03 | % | |||
Chinese credit facilities | $ | 99 | $ | 32 | |||
8.75% note due 2020 | 280 | — | |||||
Other foreign and domestic debt (including finance leases) | 231 | 211 | |||||
Long Term Debt and Finance Leases due Within One Year | $ | 610 | $ | 243 | |||
Weighted average interest rate | 6.43 | % | 4.57 | % | |||
Total obligations due within one year | $ | 1,096 | $ | 653 |
At SeptemberJune 30, 2019,2020, we had long term credit arrangements totaling $8,301$8,786 million, of which $2,289$2,702 million were unused.
The following table presents long term debt and finance leases, net of unamortized discounts, and interest rates:
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||||||||||
|
|
|
|
|
| Interest |
|
|
|
|
|
| Interest |
| ||
(In millions) |
| Amount |
|
| Rate |
|
| Amount |
|
| Rate |
| ||||
Notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.75% due 2020 |
| $ | 282 |
|
|
|
|
|
| $ | 280 |
|
|
|
|
|
5.125% due 2023 |
|
| 1,000 |
|
|
|
|
|
|
| 1,000 |
|
|
|
|
|
3.75% Euro Notes due 2023 |
|
| 280 |
|
|
|
|
|
|
| 281 |
|
|
|
|
|
9.5% due 2025 |
|
| 803 |
|
|
|
|
|
|
| — |
|
|
|
|
|
5% due 2026 |
|
| 900 |
|
|
|
|
|
|
| 900 |
|
|
|
|
|
4.875% due 2027 |
|
| 700 |
|
|
|
|
|
|
| 700 |
|
|
|
|
|
7% due 2028 |
|
| 150 |
|
|
|
|
|
|
| 150 |
|
|
|
|
|
Credit Facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien revolving credit facility due 2025 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Second lien term loan facility due 2025 |
|
| 400 |
|
|
| 2.20 | % |
|
| 400 |
|
|
| 3.97 | % |
European revolving credit facility due 2024 |
|
| 135 |
|
|
| 1.59 | % |
|
| — |
|
|
| — |
|
Pan-European accounts receivable facility |
|
| 157 |
|
|
| 1.05 | % |
|
| 327 |
|
|
| 0.98 | % |
Mexican credit facility |
|
| 200 |
|
|
| 2.53 | % |
|
| 200 |
|
|
| 3.44 | % |
Chinese credit facilities |
|
| 194 |
|
|
| 4.62 | % |
|
| 195 |
|
|
| 4.87 | % |
Other foreign and domestic debt(1) |
|
| 857 |
|
|
| 2.61 | % |
|
| 661 |
|
|
| 4.02 | % |
|
|
| 6,058 |
|
|
|
|
|
|
| 5,094 |
|
|
|
|
|
Unamortized deferred financing fees |
|
| (35 | ) |
|
|
|
|
|
| (28 | ) |
|
|
|
|
|
|
| 6,023 |
|
|
|
|
|
|
| 5,066 |
|
|
|
|
|
Finance lease obligations(2) |
|
| 246 |
|
|
|
|
|
|
| 249 |
|
|
|
|
|
|
|
| 6,269 |
|
|
|
|
|
|
| 5,315 |
|
|
|
|
|
Less portion due within one year |
|
| (581 | ) |
|
|
|
|
|
| (562 | ) |
|
|
|
|
|
| $ | 5,688 |
|
|
|
|
|
| $ | 4,753 |
|
|
|
|
|
September 30, 2019 | December 31, 2018 | ||||||||||||
Interest | Interest | ||||||||||||
(In millions) | Amount | Rate | Amount | Rate | |||||||||
Notes: | |||||||||||||
8.75% due 2020 | $ | 280 | $ | 278 | |||||||||
5.125% due 2023 | 1,000 | 1,000 | |||||||||||
3.75% Euro Notes due 2023 | 272 | 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 | 300 | 3.21 | % | — | — | ||||||||
Second lien term loan facility due 2025 | 400 | 4.06 | % | 400 | 4.46 | % | |||||||
European revolving credit facility due 2024 | 356 | 3.39 | % | — | — | ||||||||
Pan-European accounts receivable facility | 306 | 0.96 | % | 335 | 1.01 | % | |||||||
Mexican credit facilities | 200 | 4.02 | % | 200 | 4.30 | % | |||||||
Chinese credit facilities | 202 | 4.87 | % | 219 | 5.03 | % | |||||||
Other foreign and domestic debt(1) | 909 | 3.84 | % | 884 | 5.35 | % | |||||||
5,975 | 5,352 | ||||||||||||
Unamortized deferred financing fees | (30 | ) | (36 | ) | |||||||||
5,945 | 5,316 | ||||||||||||
Finance lease obligations(2) | 245 | 37 | |||||||||||
6,190 | 5,353 | ||||||||||||
Less portion due within one year | (610 | ) | (243 | ) | |||||||||
$ | 5,580 | $ | 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 $2 million during the six month period ended June 30, 2020. |
NOTES
At SeptemberJune 30, 2019,2020, we had $3,302$4,115 million of outstanding notes, compared to $3,314$3,311 million at December 31, 2018.
$800 million 9.5% Senior Notes due 2025
On May 18, 2020, we issued $600 million in aggregate principal amount of 9.5% senior notes due 2025. These notes were sold at 100% of the principal amountand will mature on May 31, 2025. On May 22, 2020, we issued $200 million in aggregate principal amount of additional notes, which were sold at 101.75% of the principal amount at an effective yield of 9.056%. These notes are
16
unsecured senior obligations and are guaranteed by our U.S. and Canadian subsidiaries that also guarantee our obligations under our U.S. senior secured credit facilities described below.
We have the option to redeem these notes, in whole or in part, at any time on or after May 31, 2022 at a redemption price of 104.75%, 102.375% and 100% during the 12-month periods commencing on May 31, 2022, 2023 and 2024 and thereafter, respectively, plus accrued and unpaid interest to the redemption date. Prior to May 31, 2022, we may redeem these notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date. In addition, prior to May 31, 2022, we may redeem up to 35% of the original aggregate principal amount of these notes from the net cash proceeds of certain equity offerings at a redemption price equal to 109.5% of the principal amount plus accrued and unpaid interest to the redemption date.
The terms of the indenture for these notes, among other things, limit the ability of the Company and certain of its subsidiaries to (i) incur additional debt or issue redeemable preferred stock, (ii) pay dividends, repurchase shares or make certain other restricted payments or investments, (iii) incur liens, (iv) sell assets, (v) incur restrictions on the ability of our subsidiaries to pay dividends or to make other payments to us, (vi) enter into affiliate transactions, (vii) engage in sale and leaseback transactions, and (viii) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets. These covenants are subject to significant exceptions and qualifications. For example, if these notes are assigned an investment grade rating by at least two of Moody's, Standard and Poor's and Fitch and no default has occurred and is continuing, certain covenants will be suspended and we may elect to suspend the subsidiary guarantees. The indenture has customary defaults, including a cross-default to material indebtedness of Goodyear and our subsidiaries.
CREDIT FACILITIES
$2.0 billionAmended and Restated First Lien Revolving Credit Facility due 2021
On April 9, 2020, we amended and restated our $2.0 billion 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 as described below, and undrawn amounts under the facility will be subject to an annual commitment fee of 25 basis points.
Our amended and restated first lien revolving credit facility is available in the form of loans or letters of credit, with lettercredit. Up to $800 million in letters of credit availability limited to $800 million.and $50 million of swingline loans are available for issuance under the facility. 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 related guarantees are secured by first priority security interests in a variety of collateral. Based on our current liquidity, amounts drawn under this facility bear interest at LIBOR plus 125 basis points, and undrawn amounts under the facility will be subject to an annual commitment fee of 30 basis points.
Availability under the facility is subject to a borrowing base, which is based primarily on (i) eligible accounts receivable and inventory of The Goodyear Tire & Rubber Company and certain of its U.S. and Canadian subsidiaries, (ii) the value of our principal trademarks in an amount not to exceed $400 million, (iii) the value of eligible machinery and (iii)equipment, and (iv) 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 SeptemberJune 30, 2019,2020, our borrowing base, and therefore our availability, under this facility was $252$331 million below the facility's stated amount of $2.0 billion.
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.
If Available Cash (as defined in the facility) plus the availability under the facility is greater than $750 million, amounts drawn under the facility will bear interest, at our option, at (i) 175 basis points over LIBOR or (ii) 75 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). If Available Cash plus the availability under the facility is equal to or less than $750 million, then amounts drawn under the facility will bear interest, at our option, at (i) 200 basis points over LIBOR or (ii) 100 basis points over an alternative base rate.
At SeptemberJune 30, 2019,2020, we had $300 million of 0borrowings and $37$17 million of letters of credit issued under the revolving credit facility. At December 31, 2018,2019, we had 0 borrowings and $37 million of letters of credit issued under the revolving credit facility.
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 SeptemberJune 30, 20192020 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 SeptemberJune 30, 2019,2020, there were $100 million (€92 million) of0 borrowings outstanding under the German tranche, $256$135 million (€235120 million) of borrowings outstanding under the all-borrower tranche and 0no letters of credit outstanding under the European revolving credit facility. At December 31, 2018,2019, there were 0 borrowings and 0no 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 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 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 SeptemberJune 30, 2020, the amounts available and utilized under this program totaled $157 million (€140 million). At December 31, 2019, the amounts available and utilized under this program totaled $306$327 million (€281 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.
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 SeptemberJune 30, 2019,2020, the gross amount of receivables sold was $539$349 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 SeptemberJune 30, 2020 and December 31, 2019, the amounts available and utilized under these facilitiesthis facility were $200 million. At December 31, 2018, the amounts available and utilized under these facilities were $340 million and $200 million, respectively. 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 SeptemberJune 30, 20192020 and December 31, 2018,2019, the amounts available under these facilities were $717$825 million and $672$735 million, respectively. At SeptemberJune 30, 2019,2020, the amount utilized under these facilities was $342$447 million, of which $140$253 million wasrepresented notes payable and $202$194 million wasrepresented long term debt. At SeptemberJune 30, 2019, $992020, $40 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 SeptemberJune 30, 20192020 and December 31, 2018,2019, the unused amounts available under these facilities were $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:
|
| June 30, |
|
| December 31, |
| ||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Fair Values — Current asset (liability): |
|
|
|
|
|
|
|
|
Accounts receivable |
| $ | 6 |
|
| $ | 1 |
|
Other current liabilities |
|
| (20 | ) |
|
| (15 | ) |
September 30, | December 31, | ||||||
(In millions) | 2019 | 2018 | |||||
Fair Values — Current asset (liability): | |||||||
Accounts receivable | $ | 24 | $ | 7 | |||
Other current liabilities | (3 | ) | (6 | ) |
At SeptemberJune 30, 20192020 and December 31, 2018,2019, these outstanding foreign currency derivatives had notional amounts of $1,616$2,096 million and $1,240$1,707 million, respectively, and were primarily related to intercompany loans. Other (Income) Expense included net transaction gainslosses on derivatives of $31$41 million and $40$3 million for the three and ninesix months ended SeptemberJune 30, 2019, respectively,2020, respectively. Other (Income) Expense included transaction losses on derivatives of $6 million and net transaction gains on derivatives of $7 million and $52$9 million for the three and ninesix months ended SeptemberJune 30, 2018,2019, 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:
|
| June 30, |
|
| December 31, |
| ||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Fair Values — Current asset (liability): |
|
|
|
|
|
|
|
|
Accounts receivable |
| $ | — |
|
| $ | 9 |
|
Other current liabilities |
|
| (2 | ) |
|
| (3 | ) |
Fair Values — Long term asset (liability): |
|
|
|
|
|
|
|
|
Other assets |
| $ | — |
|
| $ | 1 |
|
Other long term liabilities |
|
| — |
|
|
| (1 | ) |
September 30, | December 31, | ||||||
(In millions) | 2019 | 2018 | |||||
Fair Values — Current asset (liability): | |||||||
Accounts receivable | $ | 15 | $ | 9 | |||
Other current liabilities | (1 | ) | (1 | ) | |||
Fair Values — Long term asset (liability): | |||||||
Other assets | $ | 4 | $ | 2 | |||
Other long term liabilities | — | — |
19
At SeptemberJune 30, 20192020 and December 31, 2018,2019, these outstanding foreign currency derivatives had notional amounts of $345$46 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 |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Amount of gains (losses) deferred to Accumulated Other Comprehensive Loss ("AOCL")(1) |
| $ | (3 | ) |
| $ | (1 | ) |
| $ | 20 |
|
| $ | 4 |
|
Reclassification adjustment for amounts recognized in Cost of Goods Sold ("CGS")(1) |
|
| (4 | ) |
|
| (3 | ) |
|
| (8 | ) |
|
| (6 | ) |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Amount of gains (losses) deferred to AOCL(1) | $ | 14 | $ | 1 | $ | 18 | $ | 9 | |||||||
Reclassification adjustment for amounts recognized in Cost of Goods Sold ("CGS")(1) | (3 | ) | 1 | (9 | ) | 8 |
(1) | |
Excluded components deferred to AOCL and excluded components reclassified from AOCL to CGS for the three and |
The estimated net amount of deferred gains at SeptemberJune 30, 20192020 that are expected to be reclassified to earnings within the next twelve months is $12$11 million.
The counterparties to our foreign currency contracts were considered by us to be substantial and creditworthy financial institutions that were 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.
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 SeptemberJune 30, 20192020 and December 31, 20182019:
|
| Total Carrying Value in the Consolidated Balance Sheets |
|
| 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 |
| $ | 10 |
|
| $ | 11 |
|
| $ | 10 |
|
| $ | 11 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Foreign Exchange Contracts |
|
| 6 |
|
|
| 11 |
|
|
| — |
|
|
| — |
|
|
| 6 |
|
|
| 11 |
|
|
| — |
|
|
| — |
|
Total Assets at Fair Value |
| $ | 16 |
|
| $ | 22 |
|
| $ | 10 |
|
| $ | 11 |
|
| $ | 6 |
|
| $ | 11 |
|
| $ | — |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts |
| $ | 22 |
|
| $ | 19 |
|
| $ | — |
|
| $ | — |
|
| $ | 22 |
|
| $ | 19 |
|
| $ | — |
|
| $ | — |
|
Total Liabilities at Fair Value |
| $ | 22 |
|
| $ | 19 |
|
| $ | — |
|
| $ | — |
|
| $ | 22 |
|
| $ | 19 |
|
| $ | — |
|
| $ | — |
|
20
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 | 43 | 18 | — | — | 43 | 18 | — | — | |||||||||||||||||||||||
Total Assets at Fair Value | $ | 53 | $ | 28 | $ | 10 | $ | 10 | $ | 43 | $ | 18 | $ | — | $ | — | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||
Foreign Exchange Contracts | $ | 4 | $ | 7 | $ | — | $ | — | $ | 4 | $ | 7 | $ | — | $ | — | |||||||||||||||
Total Liabilities at Fair Value | $ | 4 | $ | 7 | $ | — | $ | — | $ | 4 | $ | 7 | $ | — | $ | — |
The following table presents supplemental fair value information about long term fixed rate and variable rate debt, excluding finance leases, at SeptemberJune 30, 20192020 and December 31, 2018:2019:
|
| June 30, |
|
| December 31, |
| ||
(In millions) |
| 2020 |
|
| 2019 |
| ||
Fixed Rate Debt:(1) |
|
|
|
|
|
|
|
|
Carrying amount — liability |
| $ | 4,299 |
|
| $ | 3,434 |
|
Fair value — liability |
|
| 4,196 |
|
|
| 3,558 |
|
|
|
|
|
|
|
|
|
|
Variable Rate Debt:(1) |
|
|
|
|
|
|
|
|
Carrying amount — liability |
| $ | 1,724 |
|
| $ | 1,632 |
|
Fair value — liability |
|
| 1,626 |
|
|
| 1,632 |
|
September 30, | December 31, | ||||||
(In millions) | 2019 | 2018 | |||||
Fixed Rate Debt:(1) | |||||||
Carrying amount — liability | $ | 3,424 | $ | 3,609 | |||
Fair value — liability | 3,477 | 3,443 | |||||
Variable Rate Debt:(1) | |||||||
Carrying amount — liability | $ | 2,521 | $ | 1,707 | |||
Fair value — liability | 2,497 | 1,689 |
(1) | |
Excludes Notes Payable and Overdrafts of |
Long term debt with fair values of $3,717$4,364 million and $3,496$3,808 million at SeptemberJune 30, 20192020 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. |
|
| U.S. |
| ||||||||||
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Service cost |
| $ | 1 |
|
| $ | 1 |
|
| $ | 2 |
|
| $ | 2 |
|
Interest cost |
|
| 32 |
|
|
| 42 |
|
|
| 65 |
|
|
| 86 |
|
Expected return on plan assets |
|
| (48 | ) |
|
| (55 | ) |
|
| (97 | ) |
|
| (111 | ) |
Amortization of net losses |
|
| 28 |
|
|
| 28 |
|
|
| 55 |
|
|
| 56 |
|
Net periodic pension cost |
| $ | 13 |
|
| $ | 16 |
|
| $ | 25 |
|
| $ | 33 |
|
Net curtailments/settlements/termination benefits |
|
| 6 |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
Total defined benefit pension cost |
| $ | 19 |
|
| $ | 16 |
|
| $ | 32 |
|
| $ | 33 |
|
|
| Non-U.S. |
|
| Non-U.S. |
| ||||||||||
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Service cost |
| $ | 7 |
|
| $ | 7 |
|
| $ | 14 |
|
| $ | 14 |
|
Interest cost |
|
| 14 |
|
|
| 17 |
|
|
| 28 |
|
|
| 35 |
|
Expected return on plan assets |
|
| (13 | ) |
|
| (15 | ) |
|
| (27 | ) |
|
| (30 | ) |
Amortization of prior service cost |
|
| — |
|
|
| 1 |
|
|
| 1 |
|
|
| 1 |
|
Amortization of net losses |
|
| 9 |
|
|
| 7 |
|
|
| 19 |
|
|
| 14 |
|
Net periodic pension cost |
| $ | 17 |
|
| $ | 17 |
|
| $ | 35 |
|
| $ | 34 |
|
Net curtailments/settlements/termination benefits |
|
| — |
|
|
| (1 | ) |
|
| 1 |
|
|
| — |
|
Total defined benefit pension cost |
| $ | 17 |
|
| $ | 16 |
|
| $ | 36 |
|
| $ | 34 |
|
U.S. | U.S. | ||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Service cost | $ | — | $ | 1 | $ | 2 | $ | 3 | |||||||
Interest cost | 44 | 39 | 130 | 118 | |||||||||||
Expected return on plan assets | (56 | ) | (55 | ) | (167 | ) | (164 | ) | |||||||
Amortization of net losses | 28 | 28 | 84 | 84 | |||||||||||
Net periodic pension cost | $ | 16 | $ | 13 | $ | 49 | $ | 41 | |||||||
Net curtailments/settlements/termination benefits | 1 | — | 1 | 3 | |||||||||||
Total defined benefit pension cost | $ | 17 | $ | 13 | $ | 50 | $ | 44 |
Non-U.S. | Non-U.S. | ||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Service cost | $ | 6 | $ | 7 | $ | 20 | $ | 21 | |||||||
Interest cost | 17 | 17 | 52 | 52 | |||||||||||
Expected return on plan assets | (14 | ) | (17 | ) | (44 | ) | (53 | ) | |||||||
Amortization of prior service cost | — | — | 1 | — | |||||||||||
Amortization of net losses | 8 | 7 | 22 | 22 | |||||||||||
Net periodic pension cost | $ | 17 | $ | 14 | $ | 51 | $ | 42 | |||||||
Net curtailments/settlements/termination benefits | — | 10 | — | 10 | |||||||||||
Total defined benefit pension cost | $ | 17 | $ | 24 | $ | 51 | $ | 52 |
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.
For the thirdsecond quarter and first six months of 2018, we recognized a2020, pension settlement chargecharges of $9$1 million and $3 million, respectively, were recorded in Other (Income) Expense for our frozen U.K.and a pension plan. This settlementtermination benefits charge of $5 million was related primarily to an offer of lump sum payments over a limited time during 2018 to non-retiree participants of the plan. Lump sum payments of $74 million, primarilyrecorded in Rationalizations, related to this offer, were made from existing plan assets for the nine months ended September 30, 2018. As a result, total lump sum payments related to this plan exceeded annual interest cost for 2018.
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 expense (credit) for the three months ended SeptemberJune 30, 20192020 and 20182019 was $2 million and $1 million, respectively. Other postretirement benefits expense (credit) for both periods,the six months ended June 30, 2020
21
was ($1) million and included a curtailment credit of $4 million related to the exit of employees under an approved rationalization plan. Other postretirement benefits expense (credit) for the six months ended June 30, 2019 was $3 million.
We expect to contribute approximately $25 millionto our funded non-U.S. pension plans in 2020. For the three and six months ended June 30, 2020, we contributed $4 million and $11 million, respectively, to our non-U.S. plans.
The expense recognized for our contributions to defined contribution savings plans for the three months ended June 30, 2020 and 2019 was $20 million and $28 million, respectively, and for the ninesix months ended SeptemberJune 30, 2020 and 2019 and 2018 was $5$50 million and $8$56 million, respectively.
NOTE 12.13. STOCK COMPENSATION PLANS
Our Board of Directors granted 1.74.2 million stock options, 0.4 million restricted stock units and0.5 0.2 million performance share units during the ninesix months ended SeptemberJune 30, 20192020 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 $19.56$9.48 for restricted stock units and $18.01$7.80 for performance share units granted during the ninesix months ended SeptemberJune 30, 2019.
We recognized stock-based compensation expense of $7$8 million and $18$14 million during the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively. At SeptemberJune 30, 2019,2020, unearned compensation cost related to the unvested portion of all stock-based awards was approximately $42$31 million and is expected to be recognized over the remaining vesting period of the respective grants, through the fourthfirst quarter of 2022.2024. We recognized stock-based compensation expense of $6$8 million and $11 million during the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively.
NOTE 13.14. COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
We have recorded liabilities totaling $49 million and $45$48 million at Septemberboth June 30, 20192020 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$11 million and $10$13 million waswere included in Other Current Liabilities at SeptemberJune 30, 20192020 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 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 $220$202 million and $224$198 million for anticipated costs related to workers’ compensation at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. Of these amounts, $35$39 million and $42 million werewas included in Current Liabilities as part of Compensation and Benefits at Septemberboth June 30, 20192020 and December 31, 2018, respectively.2019. 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 SeptemberJune 30, 20192020 and December 31, 2018,2019, the liability was discounted using a risk-free rate of return. At SeptemberJune 30, 2019,2020, we estimate that it is reasonably possible that the liability could exceed our recorded amounts by approximately $30$25 million.
22
General and Product Liability and Other Litigation
We have recorded liabilities totaling $340$304 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 SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. Of these amounts, $72$53 million and $57$43 million werewas included in Other Current Liabilities at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. 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 SeptemberJune 30, 2019,2020, 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 $26$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.
|
| Six Months Ended |
|
| Year Ended |
| ||
(Dollars in millions) |
| June 30, 2020 |
|
| December 31, 2019 |
| ||
Pending claims, beginning of period |
|
| 39,600 |
|
|
| 43,100 |
|
New claims filed |
|
| 600 |
|
|
| 1,500 |
|
Claims settled/dismissed |
|
| (1,400 | ) |
|
| (5,000 | ) |
Pending claims, end of period |
|
| 38,800 |
|
|
| 39,600 |
|
Payments(1) |
| $ | 5 |
|
| $ | 22 |
|
Nine Months Ended | Year Ended | ||||||
(Dollars in millions) | September 30, 2019 | December 31, 2018 | |||||
Pending claims, beginning of period | 43,100 | 54,300 | |||||
New claims filed | 1,200 | 1,300 | |||||
Claims settled/dismissed | (4,400 | ) | (12,500 | ) | |||
Pending claims, end of period | 39,900 | 43,100 | |||||
Payments (1) | $ | 17 | $ | 18 |
(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 $161$154 million and $166$153 million at SeptemberJune 30, 20192020 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 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 $103 million and $108$95 million at Septemberboth June 30, 20192020 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 SeptemberJune 30, 20192020 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
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
23
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 ($131157 million) against Goodyear Dunlop Tires France.France SAS. On May 28, 2020, Goodyear France SAS received a judgment from the labor court with respect to approximately 790 of these former employees. As a result of this ruling, we accrued €22 million ($25 million) in the second quarter of 2020 for estimated damages. We intendhave appealed this ruling and will continue 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 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 $71$72 million and $73$74 million at SeptemberJune 30, 20192020 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 ($41 million) in connection with an indirect tax assessment in EMEA. This guarantee amount was subsequently increased to PLN 181 million ($46 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
24
venture entity. As of SeptemberJune 30, 2019,2020, 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 ninesix months of 2019,2020, we paid cash dividends of $111$37 million on our common stock.stock, all of which was paid in the first quarter of 2020. This amount excludes dividends earned on stock basedstock-based compensation plans of approximately $1 million forduring the first ninesix months of 2019.2020. On October 7, 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 December 2, 2019, to stockholders of record as of the close of business on November 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 ninesix months of 2019,2020, we did not0t repurchase any shares from employees.
25
NOTE 15.16. RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables present changes in AOCL, by component, for the ninesix months ended SeptemberJune 30, 20192020 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 |
|
| (223 | ) |
|
| (9 | ) |
|
| 19 |
|
|
| (213 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of tax |
|
| — |
|
|
| 55 |
|
|
| (8 | ) |
|
| 47 |
|
Balance at June 30, 2020 |
| $ | (1,379 | ) |
| $ | (2,937 | ) |
| $ | 14 |
|
| $ | (4,302 | ) |
(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 | (82 | ) | 1 | 14 | (67 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | — | 78 | (8 | ) | 70 | ||||||||||
Balance at September 30, 2019 | $ | (1,242 | ) | $ | (2,844 | ) | $ | 13 | $ | (4,073 | ) | ||||
(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 | (210 | ) | (1 | ) | 6 | (205 | ) | ||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | — | 92 | 6 | 98 | |||||||||||
Balance at September 30, 2018 | $ | (1,125 | ) | $ | (2,961 | ) | $ | 3 | $ | (4,083 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 | ) |
The following table presents reclassifications out of AOCL:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
|
|
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
|
| ||||
(In millions) (Income) Expense |
| Amount Reclassified |
|
| Amount Reclassified |
|
| Affected Line Item in the Consolidated | ||||||||||
Component of AOCL |
| from AOCL |
|
| from AOCL |
|
| Statements of Operations | ||||||||||
Amortization of prior service cost and unrecognized gains and losses |
| $ | 36 |
|
| $ | 34 |
|
| $ | 72 |
|
| $ | 68 |
|
| Other (Income) Expense |
Immediate recognition of prior service cost and unrecognized gains and losses due to curtailments, settlements and divestitures |
|
| 1 |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
| Other (Income) Expense / Rationalizations |
Unrecognized net actuarial losses and prior service costs, before tax |
|
| 37 |
|
|
| 34 |
|
|
| 71 |
|
|
| 68 |
|
|
|
Tax effect |
|
| (8 | ) |
|
| (8 | ) |
|
| (16 | ) |
|
| (16 | ) |
| United States and Foreign Taxes |
Net of tax |
| $ | 29 |
|
| $ | 26 |
|
| $ | 55 |
|
| $ | 52 |
|
| Goodyear Net Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred derivative (gains) losses, before tax |
| $ | (4 | ) |
| $ | (3 | ) |
| $ | (8 | ) |
| $ | (6 | ) |
| Cost of Goods Sold |
Tax effect |
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
| United States and Foreign Taxes |
Net of tax |
| $ | (4 | ) |
| $ | (2 | ) |
| $ | (8 | ) |
| $ | (5 | ) |
| Goodyear Net Income (Loss) |
Total reclassifications |
| $ | 25 |
|
| $ | 24 |
|
| $ | 47 |
|
| $ | 47 |
|
| Goodyear Net Income (Loss) |
Three Months Ended September 30, | Nine Months Ended September 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 | $ | 102 | $ | 103 | Other (Income) Expense | |||||||||
Immediate recognition of prior service cost and unrecognized gains and losses due to curtailments, settlements, and divestitures | — | 11 | — | 17 | Other (Income) Expense | |||||||||||||
Unrecognized Net Actuarial Losses and Prior Service Costs, before tax | 34 | 45 | 102 | 120 | ||||||||||||||
Tax effect | (8 | ) | (10 | ) | (24 | ) | (28 | ) | United States and Foreign Taxes | |||||||||
Net of tax | $ | 26 | $ | 35 | $ | 78 | $ | 92 | Goodyear Net Income | |||||||||
Deferred Derivative (Gains) Losses, before tax | $ | (3 | ) | $ | 1 | $ | (9 | ) | $ | 8 | Cost of Goods Sold | |||||||
Tax effect | — | — | 1 | (2 | ) | United States and Foreign Taxes | ||||||||||||
Net of tax | $ | (3 | ) | $ | 1 | $ | (8 | ) | $ | 6 | Goodyear Net Income | |||||||
Total reclassifications | $ | 23 | $ | 36 | $ | 70 | $ | 98 | Goodyear Net Income |
26
Condensed Consolidating Balance Sheet | |||||||||||||||||||
September 30, 2019 | |||||||||||||||||||
(In millions) | Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Entries and Eliminations | Consolidated | ||||||||||||||
Assets: | |||||||||||||||||||
Current Assets: | |||||||||||||||||||
Cash and Cash Equivalents | $ | 151 | $ | 26 | $ | 691 | $ | — | $ | 868 | |||||||||
Accounts Receivable, net | 808 | 154 | 1,786 | — | 2,748 | ||||||||||||||
Accounts Receivable From Affiliates | 325 | 251 | — | (576 | ) | — | |||||||||||||
Inventories | 1,539 | 65 | 1,403 | (42 | ) | 2,965 | |||||||||||||
Prepaid Expenses and Other Current Assets | 85 | 2 | 187 | 6 | 280 | ||||||||||||||
Total Current Assets | 2,908 | 498 | 4,067 | (612 | ) | 6,861 | |||||||||||||
Goodwill | 24 | 1 | 405 | 120 | 550 | ||||||||||||||
Intangible Assets | 116 | — | 18 | — | 134 | ||||||||||||||
Deferred Income Taxes | 1,448 | 24 | 363 | 4 | 1,839 | ||||||||||||||
Other Assets | 494 | 51 | 510 | — | 1,055 | ||||||||||||||
Investments in Subsidiaries | 3,732 | 431 | — | (4,163 | ) | — | |||||||||||||
Operating Lease Right-of-Use Assets | 548 | 12 | 268 | — | 828 | ||||||||||||||
Property, Plant and Equipment, net | 2,418 | 432 | 4,204 | (22 | ) | 7,032 | |||||||||||||
Total Assets | $ | 11,688 | $ | 1,449 | $ | 9,835 | $ | (4,673 | ) | $ | 18,299 | ||||||||
Liabilities: | |||||||||||||||||||
Current Liabilities: | |||||||||||||||||||
Accounts Payable — Trade | $ | 869 | $ | 128 | $ | 1,654 | $ | — | $ | 2,651 | |||||||||
Accounts Payable to Affiliates | — | — | 576 | (576 | ) | — | |||||||||||||
Compensation and Benefits | 296 | 15 | 228 | — | 539 | ||||||||||||||
Other Current Liabilities | 306 | (2 | ) | 386 | — | 690 | |||||||||||||
Notes Payable and Overdrafts | 20 | — | 466 | — | 486 | ||||||||||||||
Operating Lease Liabilities due Within One Year | 109 | 5 | 83 | — | 197 | ||||||||||||||
Long Term Debt and Finance Leases due Within One Year | 282 | — | 328 | — | 610 | ||||||||||||||
Total Current Liabilities | 1,882 | 146 | 3,721 | (576 | ) | 5,173 | |||||||||||||
Operating Lease Liabilities | 449 | 8 | 185 | — | 642 | ||||||||||||||
Long Term Debt and Finance Leases | 3,662 | 167 | 1,751 | — | 5,580 | ||||||||||||||
Compensation and Benefits | 513 | 87 | 644 | — | 1,244 | ||||||||||||||
Deferred Income Taxes | — | — | 91 | — | 91 | ||||||||||||||
Other Long Term Liabilities | 347 | 7 | 180 | — | 534 | ||||||||||||||
Total Liabilities | 6,853 | 415 | 6,572 | (576 | ) | 13,264 | |||||||||||||
Commitments and Contingent Liabilities | |||||||||||||||||||
Shareholders’ Equity: | |||||||||||||||||||
Goodyear Shareholders’ Equity: | |||||||||||||||||||
Common Stock | 233 | — | — | — | 233 | ||||||||||||||
Other Equity | 4,602 | 1,034 | 3,063 | (4,097 | ) | 4,602 | |||||||||||||
Goodyear Shareholders’ Equity | 4,835 | 1,034 | 3,063 | (4,097 | ) | 4,835 | |||||||||||||
Minority Shareholders’ Equity — Nonredeemable | — | — | 200 | — | 200 | ||||||||||||||
Total Shareholders’ Equity | 4,835 | 1,034 | 3,263 | (4,097 | ) | 5,035 | |||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 11,688 | $ | 1,449 | $ | 9,835 | $ | (4,673 | ) | $ | 18,299 |
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 September 30, 2019 | |||||||||||||||||||
(In millions) | Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Entries and Eliminations | Consolidated | ||||||||||||||
Net Sales | $ | 1,862 | $ | 384 | $ | 2,383 | $ | (827 | ) | $ | 3,802 | ||||||||
Cost of Goods Sold | 1,484 | 352 | 1,962 | (833 | ) | 2,965 | |||||||||||||
Selling, Administrative and General Expense | 276 | 8 | 288 | — | 572 | ||||||||||||||
Rationalizations | 8 | — | 13 | — | 21 | ||||||||||||||
Interest Expense | 56 | 7 | 33 | (8 | ) | 88 | |||||||||||||
Other (Income) Expense | (7 | ) | 4 | 21 | 17 | 35 | |||||||||||||
Income (Loss) before Income Taxes and Equity in Earnings of Subsidiaries | 45 | 13 | 66 | (3 | ) | 121 | |||||||||||||
United States and Foreign Taxes | 11 | 3 | 17 | — | 31 | ||||||||||||||
Equity in Earnings of Subsidiaries | 54 | 6 | — | (60 | ) | — | |||||||||||||
Net Income (Loss) | 88 | 16 | 49 | (63 | ) | 90 | |||||||||||||
Less: Minority Shareholders’ Net Income | — | — | 2 | — | 2 | ||||||||||||||
Goodyear Net Income (Loss) | $ | 88 | $ | 16 | $ | 47 | $ | (63 | ) | $ | 88 | ||||||||
Comprehensive Income (Loss) | $ | 17 | $ | 14 | $ | (33 | ) | $ | 18 | $ | 16 | ||||||||
Less: Comprehensive Income (Loss) Attributable to Minority Shareholders | — | — | (1 | ) | — | (1 | ) | ||||||||||||
Goodyear Comprehensive Income (Loss) | $ | 17 | $ | 14 | $ | (32 | ) | $ | 18 | $ | 17 |
Consolidating Statements of Operations | |||||||||||||||||||
Three Months Ended September 30, 2018 | |||||||||||||||||||
(In millions) | Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Entries and Eliminations | Consolidated | ||||||||||||||
Net Sales | $ | 1,922 | $ | 342 | $ | 2,373 | $ | (709 | ) | $ | 3,928 | ||||||||
Cost of Goods Sold | 1,547 | 319 | 1,879 | (717 | ) | 3,028 | |||||||||||||
Selling, Administrative and General Expense | 239 | 8 | 306 | — | 553 | ||||||||||||||
Rationalizations | 1 | — | 4 | — | 5 | ||||||||||||||
Interest Expense | 55 | 6 | 28 | (7 | ) | 82 | |||||||||||||
Other (Income) Expense | (295 | ) | 3 | 11 | 28 | (253 | ) | ||||||||||||
Income (Loss) before Income Taxes and Equity in Earnings of Subsidiaries | 375 | 6 | 145 | (13 | ) | 513 | |||||||||||||
United States and Foreign Taxes | 111 | 1 | 48 | (1 | ) | 159 | |||||||||||||
Equity in Earnings of Subsidiaries | 87 | 10 | — | (97 | ) | — | |||||||||||||
Net Income (Loss) | 351 | 15 | 97 | (109 | ) | 354 | |||||||||||||
Less: Minority Shareholders’ Net Income | — | — | 3 | — | 3 | ||||||||||||||
Goodyear Net Income (Loss) | $ | 351 | $ | 15 | $ | 94 | $ | (109 | ) | $ | 351 | ||||||||
Comprehensive Income (Loss) | $ | 290 | $ | (5 | ) | $ | (3 | ) | $ | 2 | $ | 284 | |||||||
Less: Comprehensive Income (Loss) Attributable to Minority Shareholders | — | — | (6 | ) | — | (6 | ) | ||||||||||||
Goodyear Comprehensive Income (Loss) | $ | 290 | $ | (5 | ) | $ | 3 | $ | 2 | $ | 290 |
Consolidating Statements of Operations | |||||||||||||||||||
Nine Months Ended September 30, 2019 | |||||||||||||||||||
(In millions) | Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Entries and Eliminations | Consolidated | ||||||||||||||
Net Sales | $ | 5,328 | $ | 1,046 | $ | 6,945 | $ | (2,287 | ) | $ | 11,032 | ||||||||
Cost of Goods Sold | 4,292 | 978 | 5,738 | (2,309 | ) | 8,699 | |||||||||||||
Selling, Administrative and General Expense | 796 | 25 | 884 | — | 1,705 | ||||||||||||||
Rationalizations | 17 | — | 111 | — | 128 | ||||||||||||||
Interest Expense | 168 | 20 | 99 | (26 | ) | 261 | |||||||||||||
Other (Income) Expense | 61 | 11 | (59 | ) | 61 | 74 | |||||||||||||
Income (Loss) before Income Taxes and Equity in Earnings of Subsidiaries | (6 | ) | 12 | 172 | (13 | ) | 165 | ||||||||||||
United States and Foreign Taxes | (21 | ) | 3 | 83 | (2 | ) | 63 | ||||||||||||
Equity in Earnings of Subsidiaries | 66 | (6 | ) | — | (60 | ) | — | ||||||||||||
Net Income (Loss) | 81 | 3 | 89 | (71 | ) | 102 | |||||||||||||
Less: Minority Shareholders’ Net Income | — | — | 21 | — | 21 | ||||||||||||||
Goodyear Net Income (Loss) | $ | 81 | $ | 3 | $ | 68 | $ | (71 | ) | $ | 81 | ||||||||
Comprehensive Income (Loss) | $ | 84 | $ | (3 | ) | $ | 22 | $ | 2 | $ | 105 | ||||||||
Less: Comprehensive Income (Loss) Attributable to Minority Shareholders | — | — | 21 | — | 21 | ||||||||||||||
Goodyear Comprehensive Income (Loss) | $ | 84 | $ | (3 | ) | $ | 1 | $ | 2 | $ | 84 |
Consolidating Statements of Operations | |||||||||||||||||||
Nine Months Ended September 30, 2018 | |||||||||||||||||||
(In millions) | Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Entries and Eliminations | Consolidated | ||||||||||||||
Net Sales | $ | 5,440 | $ | 980 | $ | 7,236 | $ | (2,057 | ) | $ | 11,599 | ||||||||
Cost of Goods Sold | 4,376 | 927 | 5,756 | (2,106 | ) | 8,953 | |||||||||||||
Selling, Administrative and General Expense | 756 | 26 | 950 | — | 1,732 | ||||||||||||||
Rationalizations | 6 | — | 34 | — | 40 | ||||||||||||||
Interest Expense | 165 | 16 | 73 | (18 | ) | 236 | |||||||||||||
Other (Income) Expense | (271 | ) | 13 | 19 | 68 | (171 | ) | ||||||||||||
Income (Loss) before Income Taxes and Equity in Earnings of Subsidiaries | 408 | (2 | ) | 404 | (1 | ) | 809 | ||||||||||||
United States and Foreign Taxes | 71 | (1 | ) | 140 | 1 | 211 | |||||||||||||
Equity in Earnings of Subsidiaries | 246 | 44 | — | (290 | ) | — | |||||||||||||
Net Income (Loss) | 583 | 43 | 264 | (292 | ) | 598 | |||||||||||||
Less: Minority Shareholders’ Net Income | — | — | 15 | — | 15 | ||||||||||||||
Goodyear Net Income (Loss) | $ | 583 | $ | 43 | $ | 249 | $ | (292 | ) | $ | 583 | ||||||||
Comprehensive Income (Loss) | $ | 476 | $ | 25 | $ | 29 | $ | (64 | ) | $ | 466 | ||||||||
Less: Comprehensive Income (Loss) Attributable to Minority Shareholders | — | — | (10 | ) | — | (10 | ) | ||||||||||||
Goodyear Comprehensive Income (Loss) | $ | 476 | $ | 25 | $ | 39 | $ | (64 | ) | $ | 476 |
Condensed Consolidating Statement of Cash Flows | |||||||||||||||||||
Nine Months Ended September 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 | $ | 129 | $ | (14 | ) | $ | (229 | ) | $ | (25 | ) | $ | (139 | ) | |||||
Cash Flows from Investing Activities: | |||||||||||||||||||
Capital Expenditures | (215 | ) | (29 | ) | (317 | ) | — | (561 | ) | ||||||||||
Asset Dispositions | — | — | 2 | — | 2 | ||||||||||||||
Short Term Securities Acquired | — | — | (73 | ) | — | (73 | ) | ||||||||||||
Short Term Securities Redeemed | — | — | 67 | — | 67 | ||||||||||||||
Capital Contributions and Loans Incurred | (319 | ) | — | — | 319 | — | |||||||||||||
Capital Redemptions and Loans Paid | 203 | — | — | (203 | ) | — | |||||||||||||
Notes Receivable | (7 | ) | — | — | — | (7 | ) | ||||||||||||
Other Transactions | — | — | (12 | ) | — | (12 | ) | ||||||||||||
Total Cash Flows from Investing Activities | (338 | ) | (29 | ) | (333 | ) | 116 | (584 | ) | ||||||||||
Cash Flows from Financing Activities: | |||||||||||||||||||
Short Term Debt and Overdrafts Incurred | 374 | — | 1,077 | — | 1,451 | ||||||||||||||
Short Term Debt and Overdrafts Paid | (379 | ) | — | (978 | ) | — | (1,357 | ) | |||||||||||
Long Term Debt Incurred | 2,340 | — | 2,457 | — | 4,797 | ||||||||||||||
Long Term Debt Paid | (1,992 | ) | — | (1,949 | ) | — | (3,941 | ) | |||||||||||
Common Stock Issued | 1 | — | — | — | 1 | ||||||||||||||
Common Stock Repurchased | — | — | — | — | — | ||||||||||||||
Common Stock Dividends Paid | (111 | ) | — | — | — | (111 | ) | ||||||||||||
Capital Contributions and Loans Incurred | — | 53 | 266 | (319 | ) | — | |||||||||||||
Capital Redemptions and Loans Paid | — | (15 | ) | (188 | ) | 203 | — | ||||||||||||
Intercompany Dividends Paid | — | — | (25 | ) | 25 | — | |||||||||||||
Transactions with Minority Interests in Subsidiaries | — | — | (26 | ) | — | (26 | ) | ||||||||||||
Debt Related Costs and Other Transactions | 1 | — | (26 | ) | — | (25 | ) | ||||||||||||
Total Cash Flows from Financing Activities | 234 | 38 | 608 | (91 | ) | 789 | |||||||||||||
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash | — | 1 | (14 | ) | — | (13 | ) | ||||||||||||
Net Change in Cash, Cash Equivalents and Restricted Cash | 25 | (4 | ) | 32 | — | 53 | |||||||||||||
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 | $ | 193 | $ | 26 | $ | 707 | $ | — | $ | 926 |
Condensed Consolidating Statement of Cash Flows | |||||||||||||||||||
Nine Months Ended September 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 | $ | 815 | $ | (5 | ) | $ | (295 | ) | $ | (539 | ) | $ | (24 | ) | |||||
Cash Flows from Investing Activities: | |||||||||||||||||||
Capital Expenditures | (248 | ) | (55 | ) | (311 | ) | (1 | ) | (615 | ) | |||||||||
Asset Dispositions | — | 2 | — | — | 2 | ||||||||||||||
Short Term Securities Acquired | — | — | (61 | ) | — | (61 | ) | ||||||||||||
Short Term Securities Redeemed | — | — | 61 | — | 61 | ||||||||||||||
Capital Contributions and Loans Incurred | (597 | ) | — | (213 | ) | 810 | — | ||||||||||||
Capital Redemptions and Loans Paid | 193 | — | 430 | (623 | ) | — | |||||||||||||
Notes Receivable | (50 | ) | — | — | — | (50 | ) | ||||||||||||
Other Transactions | 3 | — | (4 | ) | — | (1 | ) | ||||||||||||
Total Cash Flows from Investing Activities | (699 | ) | (53 | ) | (98 | ) | 186 | (664 | ) | ||||||||||
Cash Flows from Financing Activities: | |||||||||||||||||||
Short Term Debt and Overdrafts Incurred | 800 | — | 658 | — | 1,458 | ||||||||||||||
Short Term Debt and Overdrafts Paid | (775 | ) | — | (492 | ) | — | (1,267 | ) | |||||||||||
Long Term Debt Incurred | 2,305 | 15 | 2,384 | — | 4,704 | ||||||||||||||
Long Term Debt Paid | (1,982 | ) | — | (2,010 | ) | — | (3,992 | ) | |||||||||||
Common Stock Issued | 4 | — | — | — | 4 | ||||||||||||||
Common Stock Repurchased | (200 | ) | — | — | — | (200 | ) | ||||||||||||
Common Stock Dividends Paid | (100 | ) | — | — | — | (100 | ) | ||||||||||||
Capital Contributions and Loans Incurred | 213 | 52 | 545 | (810 | ) | — | |||||||||||||
Capital Redemptions and Loans Paid | (430 | ) | (14 | ) | (179 | ) | 623 | — | |||||||||||
Intercompany Dividends Paid | — | — | (540 | ) | 540 | — | |||||||||||||
Transactions with Minority Interests in Subsidiaries | — | — | (27 | ) | — | (27 | ) | ||||||||||||
Debt Related Costs and Other Transactions | 16 | — | (19 | ) | — | (3 | ) | ||||||||||||
Total Cash Flows from Financing Activities | (149 | ) | 53 | 320 | 353 | 577 | |||||||||||||
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash | — | (1 | ) | (36 | ) | — | (37 | ) | |||||||||||
Net Change in Cash, Cash Equivalents and Restricted Cash | (33 | ) | (6 | ) | (109 | ) | — | (148 | ) | ||||||||||
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 | $ | 168 | $ | 26 | $ | 768 | $ | — | $ | 962 |
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 4746 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
Our results for the thirdsecond quarter and first half of 2019, macro-economic2020 were highly influenced by the severe economic disruption caused by the ongoing COVID-19 pandemic. 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. The current environment has aggravated already challenging industry conditions in many of our key markets, including foreign currency headwinds have begundue to lessena strong U.S. dollar, lower OE industry volume, softening demand in several key areas, including improvingEurope, weak market conditions in China and economic volatility in Latin America, particularly Brazil, moderating raw material costs,that persisted throughout 2019.
We continue to take actions in response to COVID-19 to protect the health and continued strength in U.S. consumerwellbeing 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 sales. However, some negative industry conditions persist, including weak global light vehicletire 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 that allowed us to safely and promptly resume production as public health and market conditions improved. We completed a phased restart of our manufacturing facilities during the second quarter of 2020, without any significant subsequent COVID-19 related disruptions. In April 2020, we reopened some of our chemical plants, began a limited ramp up of our commercial truck tire manufacturing facilities in the U.S. and Europe and began to reopen tire production in most of our consumer factories in Europe. Throughout May and June 2020, we continued to ramp up tire production across our manufacturing footprint in Americas and EMEA, including at our consumer factories in the U.S. Our decisions to increase production further will be based on an evaluation of market demand signals, inventory and supply levels, as well as our ability to continue to safeguard the health of our associates. |
• | Throughout the second quarter and first half of 2020, production was also temporarily suspended or significantly limited in several locations in Asia Pacific, most notably at our Pulandian, China manufacturing facility. Our Pulandian facility began operating with all of its workforce by the end of the first quarter and has been able to meet customer demand. |
• | 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 have remained 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 are 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 second quarter 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 reduced our expenses by approximately $65 million during the second quarter of 2020, while taking advantage of governmental income replacement programs to ensure our associates were 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, which improved our availability under the facility by approximately $275 million at June 30, 2020. In May 2020, we further strengthened our liquidity position by issuing $800 million of 9.5% senior notes due 2025. For further discussion related to these important sources of liquidity, refer to “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. |
27
• | We are leveraging governmental relief efforts to defer payroll and other tax payments, which benefited second quarter cash flows by $12 million and are expected to benefit full-year cash flows by approximately $60 million in the U.S. alone. In addition, we are benefiting from a CARES Act provision that provides for a 50 percent refundable payroll tax credit on wages, including continuing health benefits, paid to U.S. employees retained but not working due to the COVID-19 pandemic. As a result, during the second quarter of 2020, we recorded a benefit of approximately $10 million as an offset to payroll tax expense. |
• | 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, including other selling, administrative and general expenses, which decreased by more than $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 weakening demand in Europe, and a strong U.S. dollar.
Our results reflectfor the second quarter of 2020 include a 0.7%45.5% decrease in tire unit shipments compared to the thirdsecond quarter of 2018,2019, as a resultindustry demand was significantly affected by the actions governments, businesses and consumers took to slow the spread of COVID-19. Our results for the second quarter of 2020 include an approximate $300 million unfavorable impact due to lower volume in EMEA that wasfactory utilization and other period costs directly related to the suspension of production and subsequent ramp up at our manufacturing facilities. These negative impacts were partially offset by volume growth in Asia Pacific and Americas, which included the impactcost savings of a strike during the quarter at a major OE customer. In the third quarter of 2019, we realized approximately $40$96 million, of cost savings, including raw material cost saving measures of approximately $21 million, which nearly offset the estimated impact of general inflation.
Net sales in the thirdsecond quarter of 20192020 were $3,802$2,144 million, compared to $3,928$3,632 million in the thirdsecond quarter of 2018.2019. Net sales decreased in the thirdsecond quarter of 20192020 primarily due to unfavorable foreign currency translation, primarily in EMEA and Asia Pacific,lower global tire unit volume, lower sales in other tire-related businesses, primarily due to a decrease in third-party sales of chemical products in Americas and lower tire unit volumes in EMEA, partially offset by volume improvements in Asia Pacificaviation sales globally, and Americas.unfavorable foreign currency translation. These decreases were partially offset by improvements in price and product mix, primarily in Americas and EMEA.
In the thirdsecond quarter of 2019,2020, Goodyear net incomeloss was $88$696 million, or $0.38$2.97 per share, compared to $351net income of $54 million, or $1.48$0.23 per share, in the thirdsecond quarter of 2018.2019. The decreasechange in Goodyear net income (loss) was primarily driven by a gain, net of transaction costs, of $287 million recognized on the TireHub transaction in the third quarter of 2018 and lower segment operating income. These decreases in net income, werea non-cash impairment charge, and higher rationalization charges, partially offset by lower income tax expense.
Our total segment operating incomeloss for the thirdsecond quarter of 20192020 was $294$431 million, compared to $362income of $219 million in the thirdsecond quarter of 2018.2019. The $68$650 million decrease in segment operating incomechange was primarily due to lower global tire unit volume of $338 million, higher conversion costs of $26$300 million, primarily in Americas and EMEA, and Asia Pacific, the 2018 favorable indirect tax settlement in Brazil of $21 million, higher raw material costs of $20 million, primarily in EMEA and Americas, higher selling, administrative and general expense ("SAG") of $14 million, primarily in Americas, lower income from other tire-related businesses of $12$104 million, driven by lower third-party chemical sales in Americas and lower tire unit volumes of $10 million, representing volumeaviation sales globally. These decreases in EMEA that were partially offset by volume improvements in Asia Pacificlower selling, administrative and Americas, which more than offset the benefitsgeneral expense (“SAG”) of improvements in price and product mix of $22$112 million, primarily in EMEAdue to lower wages and Americas,benefits and lower start-up costsadvertising expense relating to actions taken as a result of $10 million associated with our new plant in San Luis Potosi, Mexico.the COVID-19 pandemic. Refer to "Results“Results of Operations — Segment Information” for additional information.
Net sales in the first ninesix months of 20192020 were $11,032$5,200 million, compared to $11,599$7,230 million in the first ninesix months of 2018.2019. Net sales decreased in the first ninesix months of 20192020 primarily due to unfavorable foreign currency translation, primarily in EMEA and Americas, lower global tire unit volumes, primarily in EMEA and Asia Pacific, andvolume, lower sales in other tire-related businesses, primarily due to a decrease in third-partythird-part sales of chemical products in Americas.Americas and lower aviation sales globally, and unfavorable foreign currency translation. These decreases were partially offset by improvements in price and product mix, primarily in EMEAAmericas and Americas.
In the first ninesix months of 2019,2020, Goodyear net incomeloss was $81$1,315 million, or $0.35$5.62 per share, compared to Goodyeara net incomeloss of $583$7 million, or $2.42$0.03 per share, in the first ninesix months of 2018.2019. The decreaseincrease in Goodyear net incomeloss was primarily driven by a gain, net of transaction costs, of $273 million recognized on the TireHub transaction in the first nine months of 2018, lower segment operating income, non-cash impairment charges, and higher rationalization charges. These decreases in net income were partially offset by lower income tax expense.
Our total segment operating incomeloss for the first ninesix months of 20192020 was $703$478 million, compared to $967income of $409 million in the first ninesix months of 2018.2019. The $264$887 million decrease in segment operating incomechange was primarily due to lower global tire unit volume of $458 million, higher raw materialconversion costs of $187 million, lower tire unit volumes of $62$362 million, primarily in Americas and EMEA, and Asia Pacific, lower income from other tire-related businesses of $38$112 million, driven by lower third-party chemical sales in Americas the impactand lower aviation sales globally. These decreases were partially offset by lower SAG of unfavorable foreign currency translation of $29 million, and the 2018 favorable indirect tax settlement in Brazil of $21 million, which more than offset the benefits of improvements in price and product mix of $84$75 million, primarily in EMEAdue to lower wages and Americas,benefits and lower start-up costsadvertising expense relating to actions taken as a result of $28 million
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Liquidity
At SeptemberJune 30, 2019,2020, we had $868$1,006 million of cash and cash equivalents as well as $2,521$2,938 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 $67$98 million from December 31, 20182019 primarily due primarily to net borrowings of $950$1,414 million, partially offset by capital expenditures of $561 million, cash used for operating activities of $139$820 million, capital expenditures of $363 million, debt-related costs and other financing transactions of $53 million, and first quarter dividends paid of $111$37 million. Cash used for operating activities reflects cash used for working capital of $1,061 million which was partially offset byour net incomeloss for the period of $102$1,320 million, which includedincludes non-cash charges for depreciation and amortization of $584$472 million, goodwill and other asset impairments of $330 million and netrationalizations of $108 million, cash used for working capital of $520 million, and rationalization chargespayments of $128$101 million. Refer to "Liquidity and Capital Resources" for additional information.
Outlook
The COVID-19 pandemic has caused the ramp-uptemporary closure of our new Americas manufacturing facility and TireHub, pricing actions that we implemented in 2018 andmany businesses throughout the world during the first half of 2019, continued strong performance2020, which has limited global business activity. Most of our manufacturing facilities around the world suspended or significantly limited production during parts of the first half of 2020.
Given the limited visibility we have into vehicle production and replacement tire demand, we have difficulty projecting industry volumes for the remainder of the year. We completed a phased restart of our manufacturing facilities during the second quarter of 2020. Decisions to increase production further will be based on an evaluation of market demand signals, inventory and supply levels, as well as our ability to continue to safeguard the health of our associates.
We have seen a gradual recovery in tire demand in our salesmajor markets during the second quarter of 17-inch2020 and above consumer replacement tires,we currently believe that third quarter industry volumes will be down approximately 20% compared to the third quarter of 2019. Overhead absorption will also continue to be adversely affected by reduced plant production during the third quarter of 2020. We are currently planning for our production to be down approximately 5 million units versus the third quarter of 2019.
In addition, our other tire-related businesses are being significantly affected by the weak economic environment. Our retail and chemical businesses have both stabilized somewhat during the second quarter of 2020 and the decline in business and leisure travel is continuing net cost savings initiatives.
For the full year of 2019,2020, we now expect our raw material costs will be upa benefit of approximately $270$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 Annual Report on Form 10-K for the year ended December 31, 2019 (the “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
Three Months Ended SeptemberJune 30, 20192020 and 2018
Net sales in the thirdsecond quarter of 20192020 were $3,802$2,144 million, decreasing $126$1,488 million, or 3.2%41.0%, from $3,928$3,632 million in the thirdsecond quarter of 2018.2019. Goodyear net incomeloss was $88$696 million, or $0.38$2.97 per share, in the thirdsecond quarter of 2019,2020, compared to $351net income of $54 million, or $1.48$0.23 per share, in the thirdsecond quarter of 2018.
Net sales decreased in the thirdsecond quarter of 2019,2020, primarily due primarily to unfavorable foreign currency translationlower global tire unit volume of $61$1,411 million, primarily in EMEA and Asia Pacific, lower sales in other tire-related businesses of $48$165 million, primarily due to a decrease in third-party sales of chemical products in Americas and lower tire unit volumeaviation sales globally, and unfavorable foreign currency translation of $28$69 million, representing lower tire unit volumesprimarily in EMEA that were partially offset by volume improvements in Asia Pacific and Americas. These decreases were partially offset by improvements in price and product mix of $13$158 million, primarily in Americas and EMEA.
Worldwide tire unit sales in the thirdsecond quarter of 20192020 were 40.320.4 million units, decreasing 0.217.0 million units, or 0.7%45.5%, from 40.537.4 million units in the thirdsecond quarter of 2018.2019. Replacement tire volume decreased 10.6 million units, or 39.2%, primarily in Americas and EMEA. OE tire volume decreased 0.46.4 million units, or 5.2%61.7%, primarily due to lower vehicle production globally. Replacement tire volume increased 0.2 million units, or 0.8%, primarily in Americas and Asia Pacific, partially offset by decreased volume in EMEA.
Cost of goods sold (“CGS”) in the thirdsecond quarter of 20192020 was $2,965$2,216 million, decreasing $63$639 million, or 2.1%22.4%, from $3,028$2,855 million in the thirdsecond quarter of 2018.2019. CGS decreased primarily due to lower global tire unit volume of $1,073 million, foreign currency translation of $48$67 million, primarily in Americas and EMEA, and Asia Pacific, lower costs in other tire-related businesses of $36$61 million, driven by lower third-party chemical sales in Americas, lower tire unit volume of $18 million, and lower start-up costs of $10 million associated with our new plant in San Luis Potosi, Mexico.Americas. These decreases were partially offset by higher conversion costs
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of $300 million, driven byprimarily due to lower factory utilization and other period costs, and the impactwrite-off of lower tirework-in-process inventory of approximately $11 million, both as a direct result of suspending production on overhead absorptionat our manufacturing facilities, primarily in Americas and EMEA, higher costs related to product mix of $156 million, primarily in Americas and Asia Pacific, the 2018 favorable indirect tax settlement in Brazil of $21 million,EMEA, and higher raw material costs of $20$19 million, primarily in EMEAAmericas and Americas.
CGS in the thirdsecond quarter of 2020 and 2019 included pension expense of $3 million, compared to $4 million in 2018.million. CGS in the thirdsecond quarter of 20192020 included accelerated depreciation of $86 million ($65 million after-tax and minority), primarily related to the plan to permanently close our Gadsden, Alabama manufacturing facility, compared to $1 million ($1 million after-tax and minority). in 2019. CGS in the thirdsecond quarter of 2020 and 2019 included incremental savings from rationalization plans of $28 million and 2018$2 million, respectively. CGS was 103.4% of sales in the second quarter of 2020 compared to 78.6% in the second quarter of 2019.
SAG in the second quarter of 2020 was $451 million, decreasing $135 million, or 23.0%, from $586 million in the second quarter of 2019. SAG decreased primarily due to lower wages and benefits of $55 million and lower advertising expense of $44 million, both relating to actions taken as a result of the COVID-19 pandemic, foreign currency translation of $16 million, and lower travel and entertainment expenses of $12 million.
SAG in the second quarter of 2020 and 2019 included pension expense of $4 million. SAG in the second quarter of 2020 and 2019 also included incremental savings from rationalization plans of $3$1 million and $9$4 million, respectively. CGSSAG was 78.0%21.0% of sales in the thirdsecond quarter of 20192020, compared to 77.1%16.1% in the thirdsecond quarter of 2018.
We recorded a non-cash impairment charge of $148 million ($113 million after-tax and minority) related to TireHub in the thirdsecond quarter of 2019 was $572 million, increasing $19 million, or 3.4%, from $553 million in2020. For further information, refer to Note to the third quarter of 2018. SAG increased primarily due to higher wagesConsolidated Financial Statements No. 9, Other Assets and benefits of $30 million, primarily due to higher incentive compensation, partially offset by foreign currency translation of $9 million, primarily in EMEA.
We recorded net rationalization charges of $21$99 million ($1776 million after-tax and minority) in the thirdsecond quarter of 20192020 and $5$4 million ($43 million after-tax and minority) in the thirdsecond quarter of 2018.2019. Net rationalization charges in the second quarter of 2020 primarily related to the plan to permanently close our Gadsden, Alabama manufacturing facility and additional termination benefits for associates at the closed Amiens, France manufacturing facility. Net rationalization charges in the second quarter of 2019 primarily related to a plan to modernize two of our tire manufacturing facilities in Germany and the plan at our Gadsden, Alabama manufacturing facility. Rationalization charges in the third quarter of 2018 primarily related to the closure of our tire manufacturing facility in Philippsburg, Germany.
Interest expense in the thirdsecond quarter of 20192020 was $88$85 million, increasing $6decreasing $3 million, or 7.3%3.4%, from $82$88 million in the thirdsecond quarter of 2018.2019. The increasedecrease was due to a higherlower average interest rate of 5.25%5.04% in the thirdsecond quarter of 2020 compared to 5.32% in the second quarter of 2019, compared to 5.10% in the third quarter of 2018, andpartially offset by a higher average debt balance of $6,707$6,753 million in the thirdsecond quarter of 20192020 compared to $6,434$6,622 million in the thirdsecond quarter of 2018.
Other (Income) Expense in the thirdsecond quarter of 20192020 was $35$34 million of expense, compared to $253$17 million of incomeexpense in the thirdsecond quarter of 2018.2019. Other (Income) Expense in the thirdsecond quarter of 20192020 included chargesnet losses on asset sales of $5 million ($5 million after-tax and minority) related to flooding at our Beaumont, Texas chemical facility. Other (Income) Expense in the third quarter of 2018 included a net gain of $287 million ($219 million after-tax and minority) on the TireHub transaction, pension settlement charges of $10 million ($8 million after-tax and minority), charges of $4$3 million ($3 million after-tax and minority) for legal claims related. The increase in net other expense was primarily due to discontinued operations, $3foreign currency exchange as a result of the strengthening of the U.S. dollar, which was a loss of $4 million ($2in the second quarter of 2020 and a gain of $11 million after-tax and minority) for interest income related to a favorable indirect tax settlement in Brazil, and $2 million ($2 million after-tax and minority) for continuing repair expenses related to hurricanes Harvey and Irma.
For the thirdsecond quarter of 2019,2020, we recorded a tax expensebenefit of $31$186 million on incomea loss before income taxes of $121$889 million. Income tax expense for the three months ended SeptemberJune 30, 2020 includes net discrete charges of $2 million ($2 million after minority interest), related to various discrete tax adjustments.
For the second quarter of 2019, we recorded income tax expense of $26 million on a loss before income taxes of $82 million. Income tax expense for the three months ended June 30, 2019 was favorably impacted byincludes net discrete charges of $6 million ($6 million after minority interest) of various discrete, primarily related to adjusting our deferred tax adjustments.
For further information regarding income taxes, refer to Note to the Consolidated Financial Statements No. 5, Income Taxes, in this Form 10-Q.
Minority shareholders’ net income (loss) in the thirdsecond quarter of 20192020 was $2a net loss of $7 million, compared to $3net income of $2 million in 2018.
Six Months Ended SeptemberJune 30, 20192020 and 2018
Net sales in the first ninesix months of 20192020 were $11,032$5,200 million, decreasing $567$2,030 million, or 4.9%28.1%, from $11,599$7,230 million in the first ninesix months of 2018.2019. Goodyear net incomeloss was $81$1,315 million, or $0.35$5.62 per share, in the first ninesix months of 2019,2020, compared to Goodyear net incomeloss of $583$7 million, or $2.42$0.03 per share, in the first ninesix months of 2018.
Net sales decreased in the first ninesix months of 2019,2020, primarily due primarily to unfavorable foreign currency translation of $388 million, primarily in EMEA and Americas, lower global tire unit volume of $225$1,935 million, primarily in EMEA and Asia Pacific, and lower sales in other tire-related businessesbusiness of $126$199 million, primarily due to a decrease in third-party sales of chemical products in Americas and lower aviation sales globally, and unfavorable foreign currency translation of $139 million, primarily in EMEA and Americas. These decreases were partially offset by improvements in price and product mix of $173$244 million, primarily in EMEAAmericas and Americas.
Worldwide tire unit sales in the first ninesix months of 20192020 were 115.751.7 million units, decreasing 2.823.7 million units, or 2.4%31.5%, from 118.575.4 million units in the first ninesix months of 2018.2019. Replacement tire volume decreased 15.0 million units, or 27.6%, primarily in Americas and EMEA. OE tire volume decreased 2.78.7 million units, or 8.0%41.3%, primarily due to lower vehicle production globally. Replacement tire volume decreased 0.1 million units, or 0.2%, primarily in EMEA, partially offset by increased volume in Americas.
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CGS in the first ninesix months of 20192020 was $8,699$4,768 million, decreasing $254$966 million, or 2.8%16.8%, from $8,953$5,734 million in the first ninesix months of 2018.2019. CGS decreased primarily due to lower global tire unit volume of $1,477 million, foreign currency translation of $302$124 million, primarily in EMEA and Americas, lower tire unit volume of $163 million,and lower costs in other tire-related businesses of $88$87 million, driven by lower third-party chemical sales in Americas, and lower start-up costs of $28 million associated with our new plant in San Luis Potosi, Mexico.Americas. These decreases were partially offset by higher raw materialconversion costs of $187$362 million, primarily due to lower factory utilization and other period costs, and the write-off of work-in-process inventory of approximately $26 million, both as a direct result of suspending production at our manufacturing facilities, primarily in Americas and EMEA, and higher costs related to product mix of $89$244 million, primarily in Americas and the 2018 favorable indirect tax settlement in Brazil of $21 million.
CGS in the first ninesix months of 20192020 and 20182019 included pension expense of $11 million for each period.$8 million. CGS in the first ninesix months of 2019 and 20182020 included accelerated depreciation of $2$90 million ($2 million and $169 million after-tax and minority, respectively).minority), primarily related to the plan to permanently close our Gadsden, Alabama manufacturing facility, compared to $1 million ($1 million after-tax and minority) in 2019. CGS in the first ninesix months of 20192020 and 2018 also2019 included incremental savings from rationalization plans of $6$28 million and $39$3 million, respectively. CGS was 78.9%91.7% of sales in the first ninesix months of 20192020 compared to 77.2%79.3% in the first ninesix months of 2018.
SAG in the first ninesix months of 20192020 was $1,705$1,032 million, decreasing $27$101 million, or 1.6%8.9%, from $1,732$1,133 million in the first ninesix months of 2018.2019. SAG decreased primarily due to lower wages and benefits of $42 million and lower advertising expense of $39 million, both relating to actions taken as a result of the COVID-19 pandemic, foreign currency translation of $57$26 million, primarily in EMEA and Americas, and lower travel and entertainment expenses of $12 million. These decreases were partially offset by higher wagesa $20 million increase in expense related to potentially uncollectible accounts receivable, primarily in EMEA and benefits of $28 million, primarily due to higher incentive compensation.
SAG in the first ninesix months of 2020 and 2019 included pension expense of $11 million, compared to $13 million in 2018.$8 million. SAG in the first ninesix months of 20192020 and 2018 also2019 included incremental savings from rationalization plans of $15$2 million and $27$10 million, respectively. SAG was 15.5%19.8% of sales in the first ninesix months of 2019,2020, compared to 14.9%15.7% in the first ninesix months 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 and a $148 million non-cash impairment charge ($113 million after-tax and minority) related to TireHub during the first six months of 2020. For further information, refer to Note to the Consolidated Financial Statements No. 8, Goodwill and Intangible Assets, and Note to the Consolidated Financial Statements No. 9, Other Assets and Investments.
We recorded net rationalization charges of $128$108 million ($10783 million after-tax and minority) in the first ninesix months of 20192020 and $40$107 million ($2990 million after-tax and minority) in the first ninesix months of 2018. In2019. Net rationalization charges in the first ninesix months of 2019, we recorded2020 primarily related to the plan to permanently close our Gadsden, Alabama manufacturing facility and additional termination benefits for associates at the closed Amiens, France manufacturing facility. Net rationalization charges in the first six months of $123 million for rationalization actions initiated during 2019 which primarily related to a plan to modernize two of our tire manufacturing facilities in Germany and a plan to reduce manufacturing headcount and improve operating efficiency in Americas. We also recorded $5 million related to prior year plans. In the first nine months of 2018, we recorded charges of $33 million for rationalization actions initiated during 2018, which primarily related to a global plan to reduce SAG headcount and a plan to improve operating efficiency in EMEA. We also recorded charges of $20 million related to prior year plans, primarily related to the closure of our tire manufacturing facility in Philippsburg, Germany, and reversals of $13 million for actions no longer needed for their originally intended purpose.
Interest expense in the first ninesix months of 20192020 was $261$158 million, increasing $25decreasing $15 million, or 10.6%8.7%, from $236$173 million in the first ninesix months of 2018.2019. The increasedecrease was due to a higherlower average interest rate of 5.36%4.92% in the first ninesix months of 2020 compared to 5.42% in the first six months of 2019, compared to 5.04% in the first nine months of 2018, andpartially offset by a higher average debt balance of $6,488$6,423 million in the first ninesix months of 20192020 compared to $6,244$6,378 million in the first ninesix months of 2018.
Other (Income) Expense in the first ninesix months of 20192020 was $74$61 million of expense, compared to $171$39 million of incomeexpense in the first ninesix months of 2018.2019. Other (Income) Expense in the first ninesix months of 2020 included pension settlement charges of $3 million ($2 million after-tax and minority) and net losses on asset sales of $2 million ($2 million after-tax and minority). The increase in net other expense was primarily due to foreign currency exchange as a result of the strengthening of the U.S. dollar, which was a loss of $3 million in the first six months of 2020 and a gain of $18 million in the first six months of 2019. Other (Income) Expense in the first six months of 2019 included charges of $5 million ($5 million after-tax and minority) related to flooding at our Beaumont, Texas chemical facility, a net gaingains on asset sales of $5$6 million ($5 million after-tax and minority), charges of $5 million ($4 million after-tax and minority) for legal claims related to discontinued operations,products, and a net gain on insurance recoveries of $4$3 million ($3 million after-tax and minority) related to hurricanesHurricanes Harvey and Irma. Other (Income) Expense in
In the first ninesix months of 2018 included2020, we recorded income tax expense of $63 million on a loss before income taxes of $1,257 million. Income tax expense for the six months ended June 30, 2020 includes net gain of $273 million ($208 million after-tax and minority) on the TireHub transaction, pension settlementdiscrete charges of $13$293 million ($10293 million after-tax and minority)after minority interest), charges of $12 million ($12 million after-tax and minority) for hurricane related expenses, $9 million ($7 million after-tax and minority) related to a one-time expense from the adoption of the new accounting standards update which no longer allows non-service related pension and other postretirement benefits cost to be capitalized in inventory, charges of $4 million ($3 million after-tax and minority) for legal claims related to discontinued operations, a benefit of $3 million ($2 million after-tax and minority)primarily related to the recoveryestablishment of past costs from onea valuation allowance on deferred tax assets for foreign tax credits during the first quarter of our asbestos insurers, and $3 million ($2 million after-tax and minority) for interest income related to a favorable indirect tax settlement in Brazil.
In the first ninesix months of 2019, we recorded income tax expense of $63$32 million on income before income taxes of $165$44 million. Income tax expense for the ninesix months ended SeptemberJune 30, 2019 includes net discrete charges of $7$13 million ($612 million after minority interest), primarily due to. 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 enactedchange in the tax rate.
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 ninesix months ended SeptemberJune 30, 20192020 primarily relates to the discrete items noted above, a first quarter non-cash goodwill impairment charge of $182 million, and Septemberforecasted 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 six months ended June 30, 2018,
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2019 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 SeptemberJune 30, 2019, our valuation allowance on certain2020, we had approximately $1.1 billion of our U.S. federal, state and local deferred tax assets, was $114net of valuation allowances totaling $308 million, primarily related to foreign tax credits with limited lives. Approximately $900 million of these U.S. net deferred tax assets forhave unlimited lives and approximately $200 million have limited lives, substantially all of which expire after 2025. In the U.S., we have cumulative positive profitability in the three-year period ended June 30, 2020; however, negative evidence of reduced profitability as a result of the continuing 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 expected to be temporary, there is considerable uncertainty around the extent and duration of that disruption and we are currently expecting to incur a significant U.S. tax loss during the second half of 2020 as a result. Depending upon the magnitude of this loss as well as the continuing duration of pandemic-related disruptions and the timing of the subsequent recovery, a valuation allowance may be required against all of our U.S. net deferred tax assets in a future period.
At June 30, 2020 and December 31, 2019, our U.S. deferred tax assets included approximately $118 million and $403 million of foreign tax credits, net of valuation allowances of $298 million and our$3 million, respectively, generated primarily from the receipt of foreign dividends. During the first quarter of 2020, we established a 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 temporary suspension of production at our U.S. manufacturing facilities as a result of the COVID-19 pandemic, we expect 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 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 that expire between 2025 and 2030.
At June 30, 2020 and December 31, 2019, we had approximately $1.3 billion and $1.2 billion of foreign deferred tax assets was $226 million. At December 31, 2018, ourand valuation allowance on certain U.S. federal, state and local deferred tax assets was $113allowances of $993 million and our valuation allowance on our foreign deferred tax assets was $204 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 (loss) in the first ninesix months of 20192020 was $21a net loss of $5 million, compared to $15net income of $19 million in 2018.
SEGMENT INFORMATION
Segment information reflects our strategic business units (“SBUs”), which are organized to meet customer requirements and global competition and are segmented on a regional basis.
Results of operations are measured based on net sales to unaffiliated customers and segment operating income. Each segment exports tires to other segments. The financial results of each segment exclude sales of tires exported to other segments, but include operating income derived from such transactions. Segment operating income is computed as follows: Net Sales less CGS (excluding asset write-off and accelerated depreciation charges) and SAG (including certain allocated corporate administrative expenses). Segment operating income also includes certain royalties and equity in earnings of most affiliates. Segment operating income does not include net rationalization charges (credits), asset sales, goodwill and other asset 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 thirdsecond quarter of 20192020 was $294$431 million, decreasing $68a change of $650 million or 18.8%, from $362total segment operating income of $219 million in the thirdsecond quarter of 2018.2019. Total segment operating margin (segment operating income divided by segment sales) in the thirdsecond quarter of 20192020 was 7.7%(20.1%), compared to 9.2%6.0% in the thirdsecond quarter of 2018.2019. Total segment operating incomeloss in the first ninesix months of 20192020 was $703$478 million, decreasing $264a change of $887 million or 27.3%, from $967total segment operating income of $409 million in the first ninesix months of 2018.2019. Total segment operating margin in the first ninesix months of 20192020 was 6.4%(9.2%), compared to 8.3%5.7% in the first ninesix months of 2018.2019.
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Americas
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| 2020 |
|
| 2019 |
|
| Change |
|
| Percent Change |
|
| 2020 |
|
| 2019 |
|
| Change |
|
| Percent Change |
| ||||||||
Tire Units |
|
| 8.5 |
|
|
| 17.1 |
|
|
| (8.6 | ) |
|
| (50.4 | )% |
|
| 23.0 |
|
|
| 33.8 |
|
|
| (10.8 | ) |
|
| (32.1 | )% |
Net Sales |
| $ | 1,134 |
|
| $ | 1,971 |
|
| $ | (837 | ) |
|
| (42.5 | )% |
| $ | 2,807 |
|
| $ | 3,847 |
|
| $ | (1,040 | ) |
|
| (27.0 | )% |
Operating Income (Loss) |
|
| (287 | ) |
|
| 134 |
|
|
| (421 | ) |
|
| (314.2 | )% |
|
| (287 | ) |
|
| 223 |
|
|
| (510 | ) |
|
| (228.7 | )% |
Operating Margin |
|
| (25.3 | )% |
|
| 6.8 | % |
|
|
|
|
|
|
|
|
|
| (10.2 | )% |
|
| 5.8 | % |
|
|
|
|
|
|
|
|
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
Percent | Percent | ||||||||||||||||||||||||||||
(In millions) | 2019 | 2018 | Change | Change | 2019 | 2018 | Change | Change | |||||||||||||||||||||
Tire Units | 17.9 | 17.8 | 0.1 | 0.9 | % | 51.7 | 51.8 | (0.1 | ) | (0.2 | )% | ||||||||||||||||||
Net Sales | $ | 2,049 | $ | 2,107 | $ | (58 | ) | (2.8 | )% | $ | 5,896 | $ | 6,054 | $ | (158 | ) | (2.6 | )% | |||||||||||
Operating Income | 175 | 194 | (19 | ) | (9.8 | )% | 398 | 475 | (77 | ) | (16.2 | )% | |||||||||||||||||
Operating Margin | 8.5 | % | 9.2 | % | 6.8 | % | 7.8 | % |
Three Months Ended SeptemberJune 30, 20192020 and 2018
Americas unit sales in the thirdsecond quarter of 2019 increased 0.12020 decreased 8.6 million units, or 0.9%50.4%, to 17.98.5 million units. Replacement tire volume increased 0.4decreased 5.8 million units, or 3.2%, primarily in our consumer business due to increases in the United States driven by growth in 17-inch and above rim size tires and in Brazil due to new customers. OE tire volume decreased 0.3 million units, or 6.8%44.7%, primarily in our consumer business in the United States, Brazil and Canada due to lower sales resulting from the economic impacts of the COVID-19 pandemic, including the impact of a significant customer in the U.S. temporarily closing its auto care facilities. OE tire volume decreased 2.8 million units, or 68.4%, primarily in our consumer business in the United States, Brazil and Canada, driven by lower vehicle production includingas a result of the impact resulting from a strikepandemic-related factory shutdowns at a major OE customer, and our OE selectivity strategy.
Net sales in the thirdsecond quarter of 20192020 were $2,049$1,134 million, decreasing $58$837 million, or 2.8%42.5%, from $2,107$1,971 million in the thirdsecond quarter of 2018.2019. The decrease in net sales was driven by lower tire volume of $779 million, lower sales in other tire-related businesses of $52 million, primarily due to a decrease in third-party sales of chemical products, unfavorable price and product mix of $16 million, and unfavorable foreign currency translation of $4 million. These decreases were partially offset by higher tire volume of $14 million.
Operating incomeloss in the first nine monthssecond quarter of 20192020 was $398$287 million, decreasing $77a change of $421 million or 16.2%, from $475operating income of $134 million in the first nine monthssecond quarter of 2018.2019. The decreasechange in operating income (loss) was due to higher raw materialconversion costs of $107$182 million, primarily related to lower factory utilization and other period costs, and a write-off of work-in-process inventory of approximately $4 million, both as a direct result of suspending production at our manufacturing facilities, lower tire volume of $180 million, lower incomeearnings in other tire-related businesses of $36$64 million, primarily due to a decrease in third-party sales of chemical products the 2018 favorable indirect tax settlement in Braziland lower aviation and retail sales, unfavorable price and product mix of $21$18 million and higher raw material costs of $12 million. These decreases were partially offset by lower SAG of $21$41 million, primarily related to lower wages and benefits and lower advertising expense relating to actions taken as a result of the COVID-19 pandemic. Conversion costs included savings from rationalization plans of $26 million in 2020. Price and product mix includes TireHub equity losses of $14 million and $15 million in the second quarter of 2020 and 2019, respectively.
Operating income (loss) in the second quarter of 2020 excluded the TireHub non-cash impairment charge of $148 million, as well as asset write-offs and accelerated depreciation of $86 million and rationalization charges of $69 million, primarily related to the plan to permanently close our Gadsden, Alabama manufacturing facility. Operating income (loss) in the second quarter of 2019 excluded rationalization charges of $2 million.
Six Months EndedJune 30, 2020 and 2019
Americas unit sales in the first six months of 2020 decreased 10.8 million units, or 32.1%, to 23.0 million units. Replacement tire volume decreased 7.6 million units, or 29.7%, primarily in our consumer business in the United States, Brazil and Canada due to lower sales resulting from the economic impacts of the COVID-19 pandemic. OE tire volume decreased 3.2 million units, or 39.6%, primarily in our consumer business in the United States, Brazil and Canada, driven by lower vehicle production as a result of the pandemic-related factory shutdowns at major OE manufacturers.
Net sales in the first six months of 2020 were $2,807 million, decreasing $1,040 million, or 27.0%, from $3,847 million in the first six months of 2019. The decrease in net sales was driven by lower tire volume of $978 million, lower sales in other tire-related businesses of $143 million, primarily due to higher incentive compensationa decrease in third-party sales of chemical products and inflation,lower aviation and retail sales, and unfavorable foreign currency translation of $6 million. These decreases in operating income were partially offset by lower conversion costs of $39$50 million, primarily duerelated to the benefit of increased tire production on overhead absorption, improvements in price and product mix of $38 million, lower start-up costs of $28 million associated with our new plant in San Luis Potosi, Mexico, and lower import and transportation related costs of $15 million.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
Percent | Percent | ||||||||||||||||||||||||||||
(In millions) | 2019 | 2018 | Change | Change | 2019 | 2018 | Change | Change | |||||||||||||||||||||
Tire Units | 14.5 | 15.2 | (0.7 | ) | (5.6 | )% | 42.1 | 44.1 | (2.0 | ) | (4.7 | )% | |||||||||||||||||
Net Sales | $ | 1,205 | $ | 1,290 | $ | (85 | ) | (6.6 | )% | $ | 3,567 | $ | 3,880 | $ | (313 | ) | (8.1 | )% | |||||||||||
Operating Income | 66 | 111 | (45 | ) | (40.5 | )% | 164 | 289 | (125 | ) | (43.3 | )% | |||||||||||||||||
Operating Margin | 5.5 | % | 8.6 | % | 4.6 | % | 7.4 | % |
Operating loss in the first six months of 2020 was $287 million, a change of $510 million from operating income of $223 million in the first six months of 2019. The change in operating income (loss) was due to lower tire volume of $219 million, higher conversion costs of $213 million, primarily related to lower factory utilization and other period costs, and the write-off of work-in-process inventory of approximately $13 million, both as a direct result of suspending production at our manufacturing facilities, lower earnings in other tire-related businesses of $70 million, primarily due to a decrease in third-party sales of chemical products and lower retail and aviation sales, and unfavorable price and product mix of $10 million. These decreases were partially offset by lower SAG of $17 million, primarily related to lower advertising expense and lower wages and benefits relating to actions taken as a result of the COVID-19 pandemic. Conversion costs included savings from rationalization plans of
33
$26 million in 2020. Price and product mix includes TireHub equity losses of $26 million and $25 million in the first six months of 2020 and 2019, respectively.
Operating income (loss) in the first six months of 2020 excluded the TireHub non-cash impairment charge of $148 million, as well as asset write-offs and accelerated depreciation of $89 million and rationalization charges of $72 million, primarily related to the plan to permanently close our Gadsden, Alabama manufacturing facility. Operating income (loss) in the first six months of 2019 excluded rationalization charges of $9 million.
Europe, Middle East and Africa
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| Change |
|
| Percent Change |
|
| 2020 |
|
| 2019 |
|
| Change |
|
| Percent Change |
| ||||||||
Tire Units |
|
| 7.3 |
|
|
| 13.3 |
|
|
| (6.0 | ) |
|
| (44.5 | )% |
|
| 18.9 |
|
|
| 27.6 |
|
|
| (8.7 | ) |
|
| (31.5 | )% |
Net Sales |
| $ | 676 |
|
| $ | 1,141 |
|
| $ | (465 | ) |
|
| (40.8 | )% |
| $ | 1,671 |
|
| $ | 2,362 |
|
| $ | (691 | ) |
|
| (29.3 | )% |
Operating Income (Loss) |
|
| (110 | ) |
|
| 44 |
|
|
| (154 | ) |
|
| (350.0 | )% |
|
| (163 | ) |
|
| 98 |
|
|
| (261 | ) |
|
| (266.3 | )% |
Operating Margin |
|
| (16.3 | )% |
|
| 3.9 | % |
|
|
|
|
|
|
|
|
|
| (9.8 | )% |
|
| 4.1 | % |
|
|
|
|
|
|
|
|
Three Months EndedJune 30, 2020 and 2019
Europe, Middle East and Africa unit sales in the second quarter of 2020 decreased 6.0 million units, or 44.5%, to 7.3 million units. Replacement tire volume decreased 3.7 million units, or 37.5%, 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 2.3 million units, or 62.9%, primarily in our consumer business, driven by lower vehicle production as a result of the pandemic-related factory shutdowns at major OE manufacturers and our continued exit of declining, less profitable market segments.
Net sales in the second quarter of 2020 were $676 million, decreasing $465 million, or 40.8%, from $1,141 million in the second quarter of 2019. Net sales decreased primarily due to lower tire unit volume of $464 million, unfavorable foreign currency translation of $28 million, driven by the weakening of the Turkish lira, euro, South African rand and Russian ruble, and lower earnings in other tire-related businesses of $27 million, primarily due to lower aviation, motorcycle and racing sales. These decreases were partially offset by improvements in price and product mix of $54 million, driven by higher proportionate sales of commercial tires and our continued focus on 17-inch and above rim size consumer tires,tires.
Operating loss in the second quarter of 2020 was $110 million, a change of $154 million from operating income of $44 million in the second quarter of 2019. The change in operating income (loss) was primarily due to lower tire unit volume of $115 million, as well as higher conversion costs of $90 million, primarily related to lower factory utilization and higherother period costs, and the write-off of work-in-process inventory of approximately $7 million, both as a direct result of suspending production at our manufacturing facilities. Earnings in other tire-related businesses decreased by $19 million, primarily due to lower aviation and motorcycle sales. These decreases were partially offset by lower SAG of $51 million, primarily related to lower advertising expense and lower wages and benefits relating to actions taken as a result of the COVID-19 pandemic, and improvements in price and product mix of $25 million.
Operating income (loss) in the second quarter of 2020 excluded net rationalization charges of $30 million and net losses on asset sales of $3 million. Operating income (loss) in the second quarter of 2019 excluded net rationalization charges of $2 million, accelerated depreciation of $1 million and net gains on asset sales of $1 million.
Six Months EndedJune 30, 2020 and 2019
Europe, Middle East and Africa unit sales in the first six months of 2020 decreased 8.7 million units, or 31.5%, to 18.9 million units. Replacement tire volume decreased 5.5 million units, or 27.4%, 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 3.2 million units, or 42.4%, primarily in our consumer business, driven by lower vehicle production as a result of the pandemic-related factory shutdowns at major OE manufacturers and our continued exit of declining, less profitable market segments.
Net sales in the first six months of 2020 were $1,671 million, decreasing $691 million, or 29.3%, from $2,362 million in the first six months of 2019. Net sales decreased primarily due to lower tire unit volume of $680 million, unfavorable foreign currency translation of $65 million, driven by the weakening of the euro, Turkish lira and South African rand, and lower earnings in other tire-related businesses of $8 million.
Operating incomeloss in the third quarterfirst six months of 20192020 was $66$163 million, decreasing $45a change of $261 million or 40.5%, from $111operating income of $98 million in the third quarterfirst six months of 2018. Operating2019. The change in operating income decreased(loss) was primarily due to lower tire unit volume of $168 million, as well as higher conversion costs of $22$118 million, primarily related to lower factory utilization and other period costs, and the write-off of work-in-process inventory of approximately $12 million, both as a direct result of suspending production at
34
our manufacturing facilities. Earnings in other tire-related businesses decreased by $18 million, primarily due to lower aviation sales. These decreases were partially offset by lower SAG of $36 million, primarily related to lower advertising expense and lower wages and benefits relating to actions taken as a result of the COVID-19 pandemic, and improvements in price and product mix of $27 million.
Operating income (loss) in the first six months of 2020 excluded a non-cash goodwill impairment charge of $182 million, net rationalization charges of $36 million, net losses on asset sales of $2 million and accelerated depreciation of $1 million. Operating income (loss) in the first six months of 2019 excluded net rationalization charges of $98 million, net gains on asset sales of $6 million and accelerated depreciation of $1 million.
Asia Pacific
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||||||||||
(In millions) |
| 2020 |
|
| 2019 |
|
| Change |
|
| Percent Change |
|
| 2020 |
|
| 2019 |
|
| Change |
|
| Percent Change |
| ||||||||
Tire Units |
|
| 4.6 |
|
|
| 7.0 |
|
|
| (2.4 | ) |
|
| (35.6 | )% |
|
| 9.8 |
|
|
| 14.0 |
|
|
| (4.2 | ) |
|
| (29.8 | )% |
Net Sales |
| $ | 334 |
|
| $ | 520 |
|
| $ | (186 | ) |
|
| (35.8 | )% |
| $ | 722 |
|
| $ | 1,021 |
|
| $ | (299 | ) |
|
| (29.3 | )% |
Operating Income (Loss) |
|
| (34 | ) |
|
| 41 |
|
|
| (75 | ) |
|
| (182.9 | )% |
|
| (28 | ) |
|
| 88 |
|
|
| (116 | ) |
|
| (131.8 | )% |
Operating Margin |
|
| (10.2 | )% |
|
| 7.9 | % |
|
|
|
|
|
|
|
|
|
| (3.9 | )% |
|
| 8.6 | % |
|
|
|
|
|
|
|
|
Three Months EndedJune 30, 2020 and 2019
Asia Pacific unit sales in the second quarter of 2020 decreased 2.4 million units, or 35.6%, to 4.6 million units. OE tire volume decreased 1.3 million units, or 50.2%, primarily in our consumer business in India and China, driven by lower vehicle production as a result of the pandemic-related factory shutdowns at major OE manufacturers. Replacement tire volume decreased 1.1 million units, or 26.3%, primarily due to lower consumer replacement volumes reflecting decreased industry demand due to the economic impacts of the COVID-19 pandemic.
Net sales in the second quarter of 2020 were $334 million, decreasing $186 million, or 35.8%, from $520 million in the second quarter of 2019. Net sales decreased due to lower tire unit volume of $168 million, unfavorable foreign currency translation of $16 million, primarily related to the weakening of the Indian rupee and Australian dollar, and lower sales in other tire-related businesses of $15 million, primarily due to lower aviation sales. These decreases were partially offset by improvements in price and product mix of $14 million.
Operating loss in the second quarter of 2020 was $34 million, a change of $75 million from operating income of $41 million in the second quarter of 2019. The change in operating income (loss) was due to lower tire unit volume of $43 million, higher conversion costs of $28 million, primarily due to the impact of lower tire production on overhead absorption, and inflation, lower tire unit volumeearnings in other tire-related businesses of $19 million, higher raw material costs of $10 million, and unfavorable foreign currency translation of $3$21 million. These decreases in operating income were partially offset by improvements in price and product mix of $11 million and lower SAG of $4 million. SAG$20 million, primarily related to lower advertising expense and conversion costs included incremental savings from rationalization planslower wages and benefits relating to actions taken as a result of $4 million and $2 million, respectively.
Six Months Ended SeptemberJune 30, 20192020 and 2018
Asia Pacific unit sales in the first ninesix months of 20192020 decreased 2.04.2 million units, or 4.7%29.8%, to 42.19.8 million units. OE tire volume decreased 2.3 million units, or 42.2%, primarily in our consumer business in China and India, driven by lower vehicle production as a result of the pandemic-related factory shutdowns at major OE manufacturers. Replacement tire volume decreased 1.21.9 million units, or 3.8%21.8%, primarily due to lower consumer replacement volumes reflecting decreased industry demand and challenges in our distribution channels. OE tire volume decreased 0.8 million units, or 7.4%, primarily in our consumer business, driven by lower vehicle production and our exitdue to the economic impacts of declining, less profitable market segments.
Net sales in the first ninesix months of 20192020 were $3,567$722 million, decreasing $313$299 million, or 8.1%29.3%, from $3,880$1,021 million in the first ninesix months of 2018.2019. Net sales decreased primarily due to lower tire unit volume of $277 million, unfavorable foreign currency translation of $248$24 million, driven byprimarily related to the weakening of the euro, Turkish lira, British poundAustralian dollar and South African rand,Indian rupee, and lower tire unit volumesales in other tire-related businesses of $169 million.$18 million, primarily due to lower aviation sales. These decreases were partially offset by improvements in price and product mix of $103 million, driven by price increases on commercial tire sales and our continued focus on 17-inch and above rim size consumer tires.
Operating incomeloss in the first ninesix months of 20192020 was $164$28 million, decreasing $125a change of $116 million or 43.3%, from $289operating income of $88 million in the first ninesix months of 2018. Operating2019. The change in operating income decreased(loss) was due to higher raw material costs of $56 million, lower tire unit volume of $46$71 million, higher conversion costs of $27 million, primarily due to inflation, unfavorable foreign currency translation of $17 million, higher transportation costs of $8 million, higher SAG of $6 million, primarily due to inflation, and $5 million of start-up costs primarily at our new plant in Luxembourg. These decreases in operating income were partially offset by improvements in price and product mix of $56 million. SAG and conversion costs included incremental savings from rationalization plans of $13 million and $4 million, respectively.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
Percent | Percent | ||||||||||||||||||||||||||||
(In millions) | 2019 | 2018 | Change | Change | 2019 | 2018 | Change | Change | |||||||||||||||||||||
Tire Units | 7.9 | 7.5 | 0.4 | 5.4 | % | 21.9 | 22.6 | (0.7 | ) | (3.0 | )% | ||||||||||||||||||
Net Sales | $ | 548 | $ | 531 | $ | 17 | 3.2 | % | $ | 1,569 | $ | 1,665 | $ | (96 | ) | (5.8 | )% | ||||||||||||
Operating Income | 53 | 57 | (4 | ) | (7.0 | )% | 141 | 203 | (62 | ) | (30.5 | )% | |||||||||||||||||
Operating Margin | 9.7 | % | 10.7 | % | 9.0 | % | 12.2 | % |
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.
35
In the first quarter of 2019,April 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 and adding the value of eligible machinery and equipment, which improved our availability under the facility by approximately $275 million to €800 million, decreasing theat June 30, 2020. 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.
In May 2020, we further enhanced our liquidity position by issuing $800 million of 9.5% senior notes due 2025. We intend to use the net proceeds from the issuance of these notes for general corporate purposes, including repaying or redeeming our outstanding $282 million 8.75% notes at or prior to their maturity on August 15, 2020.
At SeptemberJune 30, 2019,2020, we had $868$1,006 million in cash and cash equivalents, compared to $801$908 million at December 31, 2018.2019. For the ninesix months ended SeptemberJune 30, 2019,2020, net cash used by operating activities was $139$820 million, primarily driven byreflecting our net loss for the period of $1,320 million, which includes non-cash charges for depreciation and amortization of $472 million, goodwill and other asset impairments of $330 million and rationalizations of $108 million, cash used for working capital of $1,061 million, pension contributions and direct payments of $51$520 million, and rationalization payments of $46$101 million. These decreases in cash were partially offset by cash derived from net income of $102 million, which includes non-cash charges of $584 million for depreciation and amortization and $128 million for net rationalization charges. Net cash used inby investing activities was $584$390 million, primarily reflectingrepresenting capital expenditures of $561$363 million. Net cash provided by financing activities was $789$1,324 million, primarily due to net borrowings of $950$1,414 million, partially offset by debt-related costs and other financing transactions of $53 million and cash used for first quarter dividends of $111$37 million.
At SeptemberJune 30, 2019,2020, we had $2,521$2,938 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) |
| June 30, 2020 |
|
| December 31, 2019 |
| ||
First lien revolving credit facility |
| $ | 1,651 |
|
| $ | 1,662 |
|
European revolving credit facility |
|
| 762 |
|
|
| 899 |
|
Chinese credit facilities |
|
| 251 |
|
|
| 290 |
|
Other domestic and international debt |
|
| 38 |
|
|
| 338 |
|
Notes payable and overdrafts |
|
| 236 |
|
|
| 365 |
|
|
| $ | 2,938 |
|
| $ | 3,554 |
|
September 30, | December 31, | ||||||
(In millions) | 2019 | 2018 | |||||
First lien revolving credit facility | $ | 1,411 | $ | 1,633 | |||
European revolving credit facility | 515 | 629 | |||||
Chinese credit facilities | 285 | 199 | |||||
Mexican credit facilities | — | 140 | |||||
Other domestic and international debt | 78 | 221 | |||||
Notes payable and overdrafts | 232 | 329 | |||||
$ | 2,521 | $ | 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, or
We expect our 20192020 cash flow needs to include capital expenditures of approximately $800 millionup to $825$700 million. We also expect interest expense to be approximately $350 million restructuringto $375 million; rationalization payments to be $200 million to $225 million; income tax payments to be approximately $65 million,$60 million; 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 usesource of cash for the full year of less than $1002020.
Following the repayment of our outstanding $282 million 8.75% notes due August 15, 2020, we expect our liquidity to remain strong in 2019.the second half of the year. However, 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, the amounts available to us from our pan-European accounts receivable securitization facility and other accounts receivable factoring programs have declined since December 31, 2019 due to the decline in our accounts receivable as a result of the impacts of the COVID-19 pandemic on our sales.
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, such as suspending production at most of our manufacturing facilities during parts of the first half of 2020, reducing our second quarter 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, issuing $800 million of 9.5% senior notes due 2025, 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
36
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 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 SeptemberJune 30, 2019,2020, approximately $703$596 million of net assets, including $147$205 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 $139$820 million in the first ninesix months of 2019,2020, increasing $115$529 million compared to net cash used by operating activities of $24$291 million in the first ninesix months of 2018.
The increase in net cash used by operating activities was driven by a decrease in operating income from our SBUs of $264$887 million and an increasehigher cash payments for rationalizations of $68 million, primarily due to cash payments made during 2020 related to the voluntary buy-out plan at our Gadsden, Alabama manufacturing facility. These uses of cash were partially offset by a decrease in cash used for working capital of $235 million. During$213 million, as well as the first nine monthsfavorable impact of 2019, cash flows from operating activities were favorably impacted by an increasea $156 million change in Other Assets and Liabilities on the Balance Sheet, accrualsdriven by reimbursements from foreign governments for Other Current Liabilities of $135 million,furloughed associates, a decrease in equity investments primarily due to changesour 50% share of TireHub’s net losses and a decrease in indirect taxes,deferred and Compensation and Benefits of $122 million, primarily due to higher wages and benefits, including higher incentive compensation. Cash flows from operating activities during the first nine months of 2019 also benefited from lower cash payments for rationalizations of $105 million, reflecting cash payments made during 2018 related to the closure of our tire manufacturing facility in Philippsburg, Germany.
The increasedecrease in cash used for working capital primarily related toreflects decreases in cash used for Accounts Payable—Trade, which decreased during the first nine monthsReceivable of 2019 as compared to$481 million and Inventory of $537 million, partially offset by an increase during the first nine monthsin cash used for Accounts Payable – Trade of 2018, resulting in a year-over-year use of cash of $345$805 million. That use of cash was primarilyThese changes were driven by raw material pricesthe impacts of the COVID-19 pandemic, which moderated during 2019 compared to increasing prices during 2018,included lower sales volume as well as the impact of lowermitigating actions taken by us, such as suspending production levels during the third quarter of 2019, primarily in EMEAat our manufacturing facilities and Asia Pacific. Cash used for inventories decreased during the first nine months of 2019, providing an operating cash flow benefit of $88 million, also as a result of moderating raw material prices and lower production levels.
Investing Activities
Net cash used by investing activities was $584$390 million in the first ninesix months of 2019,2020, compared to $664$419 million in the first ninesix months of 2018.2019. Capital expenditures were $561$363 million in the first ninesix months of 2019,2020, compared to $615$401 million in the first ninesix months 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 $789$1,324 million in the first ninesix months of 2019,2020, compared to net cash provided by financing activities of $577$811 million in the first ninesix months of 2018.2019. Financing activities in 2020 included net borrowings of $1,414 million, which were partially offset by debt-related costs and other financing transactions of $53 million and dividends on our common stock of $37 million. Financing activities in 2019 included net borrowings of $950$926 million, which were partially offset by dividends on our common stock of $111$74 million. Financing activities in 2018 included net borrowings of $903 million, which were partially offset by common stock repurchases of $200 million and dividends on our common stock of $100 million.
Credit Sources
In aggregate, we had total credit arrangements of $9,036$9,751 million available at SeptemberJune 30, 2019,2020, of which $2,521$2,938 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 SeptemberJune 30, 2019,2020, we had long term credit arrangements totaling $8,301$8,786 million, of which $2,289$2,702 million were unused, compared to $8,212$8,320 million and $2,822$3,189 million, respectively, at December 31, 2018.2019. At SeptemberJune 30, 2019,2020, we had short term committed and uncommitted credit arrangements totaling $735$965 million, of which $232$236 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 SeptemberJune 30, 2019,2020, we had $3,302$4,115 million of outstanding notes compared to $3,314$3,311 million at December 31, 2018.
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$2.0 Billionbillion Amended and Restated First Lien Revolving Credit Facility due 2021
On April 9, 2020, we amended and restated our $2.0 billion 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.
Our amended and restated first lien revolving credit facility is available in the form of loans or letters of credit, with lettercredit. Up to $800 million in letters of credit availability limited to $800 million.and $50 million of swingline loans are available for issuance under the facility. Availability under the facility is subject to a borrowing base, which is based primarily on (i) eligible accounts receivable and inventory of The Goodyear Tire & Rubber Company and certain of its U.S. and Canadian subsidiaries, (ii) the value of our principal trademarks in an amount not to exceed $400 million, (iii) the value of eligible machinery and (iii)equipment, and (iv) 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 SeptemberJune 30, 2019,2020, our borrowing base, and therefore our availability, under the facility was $252$331 million below the facility's stated amount of $2.0 billion. Based on our current liquidity, amounts drawn under this facility bear interest at LIBOR plus 125 basis points, and undrawn amounts under the facility will be subject to an annual commitment fee of
At June 30, basis points.
AtAt SeptemberJune 30, 2019,2020, we had $333 million$340 million in 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 SeptemberJune 30, 20192020 and December 31, 2018,2019, the amounts outstanding under this facility were $400 million.
€800 Millionmillion 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 SeptemberJune 30, 2019,2020, there were $100 million (€92 million) ofno borrowings outstanding under the German tranche, $256$135 million (€235120 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 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
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to law, regulation or accounting standards), or (d) our request for early termination of the facility. The facility’s current back-up liquidity commitments will expire on October 15, 2020.
At SeptemberJune 30, 2020, the amounts available and utilized under this program totaled $157 million (€140 million). At December 31, 2019, the amounts available and utilized under this program totaled $306$327 million (€281 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 nine 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 SeptemberJune 30, 2019,2020, the gross amount of receivables sold was $539$349 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 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 atSeptember June 30, 20192020 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 Committee that has been convened by the Federal Reserve Board and the Federal Reserve Bank of New York. Additionally, the 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 on2019 Form 10-K for the year ended December 31, 2018 (the "2018 Form 10‑K")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.
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We have additional financial covenants in our first and second lien credit facilities that are currently not applicable. We only become subject to these financial covenants when certain events occur. These financial covenants and related events are as follows:
• | We become subject to the financial covenant contained in our first lien revolving credit facility when the aggregate amount of our Parent Company (The Goodyear Tire & Rubber Company) and guarantor subsidiaries cash and cash equivalents (“Available Cash”) plus our availability under our first lien revolving credit facility is less than $200 million. If this were to occur, our ratio of EBITDA to Consolidated Interest Expense may not be less than 2.0 to 1.0 for the most recent period of four consecutive fiscal quarters. As of June 30, 2020, our availability under this facility of $1,651 million, plus our Available Cash of $222 million, totaled $1,873 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 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 SeptemberJune 30, 2019,2020, 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 limitations on incurring debt and making restricted payments. Our credit facilities and indentures also permit the incurrence of additional debt through other provisions in those agreements without regard to our ability to satisfy the ratio-based incurrence test described above. We believe that these other provisions provide us with sufficient flexibility to incur additional debt necessary to meet our operating, investing and financing needs without regard to our ability to satisfy the ratio-based incurrence test.
Covenants could change based upon a refinancing or amendment of an existing facility, or additional covenants may be added in connection with the incurrence of new debt.
At SeptemberJune 30, 2019,2020, 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
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 ninesix months of 2019,2020, we paid cash dividends of $111$37 million on our common stock.stock, all of which was paid in the first quarter of 2020. This amount excludes dividends earned on stock basedstock-based compensation plans of approximately $1 million for the
40
first ninesix months of 2019.2020. On October 7, 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 December 2, 2019 to stockholders of record as of the close of business on November 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 $800 million outstanding principal amount of 9.5% senior notes due 2025, 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 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.
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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 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) |
| June 30, 2020 |
|
| December 31, 2019 |
| ||
Total Current Assets(1) |
| $ | 4,474 |
|
| $ | 4,669 |
|
Total Non-Current Assets |
|
| 5,459 |
|
|
| 5,876 |
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
| $ | 1,876 |
|
| $ | 2,371 |
|
Total Non-Current Liabilities |
|
| 7,527 |
|
|
| 6,796 |
|
(1) | Includes receivables due from Non-Guarantor Subsidiaries of $2,256 million and $2,124 million as of June 30, 2020 and December 31, 2019, respectively. |
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|
| Summarized Statements of Operations |
| |||||
(In millions) |
| Six Months Ended June 30, 2020 |
|
| Year Ended December 31, 2019 |
| ||
Net Sales |
| $ | 2,676 |
|
| $ | 7,390 |
|
Cost of Goods Sold |
|
| 2,594 |
|
|
| 5,907 |
|
Selling, Administrative and General Expense |
|
| 515 |
|
|
| 1,136 |
|
Goodwill and Other Asset Impairments |
|
| 148 |
|
|
| — |
|
Rationalizations |
|
| 73 |
|
|
| 86 |
|
Interest Expense |
|
| 124 |
|
|
| 230 |
|
Other (Income) Expense |
|
| 17 |
|
|
| 11 |
|
Income (Loss) before Income Taxes(2) |
| $ | (795 | ) |
| $ | 20 |
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
| $ | (896 | ) |
| $ | 303 |
|
Goodyear Net Income (Loss) |
| $ | (896 | ) |
| $ | 303 |
|
(2) | Includes income from intercompany transactions with Non-Guarantor Subsidiaries of $212 million for the six months ended June 30, 2020, primarily from royalties, intercompany product sales, 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 material 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 SeptemberJune 30, 2019, 42%2020, 30% of our debt was at variable interest rates averaging 4.18%3.03%.
The following table presents information about long term fixed rate debt, excluding finance leases, at SeptemberJune 30, 2019:2020:
(In millions) |
|
|
|
|
Carrying amount — liability |
| $ | 4,299 |
|
Fair value — liability |
|
| 4,196 |
|
Pro forma fair value — liability |
|
| 4,354 |
|
(In millions) | |||
Carrying amount — liability | $ | 3,424 | |
Fair value — liability | 3,477 | ||
Pro forma fair value — liability | 3,561 |
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 SeptemberJune 30, 2019:2020:
(In millions) |
|
|
|
|
Fair value — asset (liability) |
| $ | (16 | ) |
Pro forma decrease in fair value |
|
| (213 | ) |
Contract maturities |
| 7/20-5/21 |
|
(In millions) | |||
Fair value — asset (liability) | $ | 39 | |
Pro forma decrease in fair value | (189 | ) | |
Contract maturities | 10/19-9/21 |
The pro forma decrease in fair value assumes a 10% adverse change in underlying foreign exchange rates at SeptemberJune 30, 2019,2020, 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 SeptemberJune 30, 20192020 as follows:
(In millions) |
|
|
|
|
Current asset (liability): |
|
|
|
|
Accounts receivable |
| $ | 6 |
|
Other current liabilities |
|
| (22 | ) |
|
|
|
|
|
Long term asset (liability): |
|
|
|
|
Other assets |
| $ | — |
|
Other long term liabilities |
|
| — |
|
(In millions) | |||
Current asset (liability): | |||
Accounts receivable | $ | 39 | |
Other current liabilities | (4 | ) | |
Long term asset (liability): | |||
Other assets | $ | 4 | |
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’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 SeptemberJune 30, 20192020 (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 third 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 ninesix months of 2019,2020, approximately 1,200600 new claims were filed against us and approximately 4,4001,400 were settled or dismissed. The amounts expended on asbestos defense and claim resolution by Goodyear and its insurance carriers during the thirdsecond quarter and the first ninesix months of 2019 were $62020 was $3 million and $17$5 million, respectively. At SeptemberJune 30, 2019,2020, there were approximately 39,90038,800 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.
Amiens Labor Claims
Approximately 850 former employees of the closed Amiens, France manufacturing facility have asserted wrongful termination or other claims totaling approximately €140 million ($157 million) against Goodyear France SAS. On May 28, 2020, Goodyear France SAS received a judgment from the labor court with respect to approximately 790 of these former employees. As a result of this ruling, we accrued €22 million ($25 million) in the second quarter of 2020 for estimated damages. We have appealed this ruling and will continue to vigorously defend ourselves against these claims and any additional claims that may be asserted against us.
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 and our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 20192020 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 volume, 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. Production was suspended or significantly limited at most of our manufacturing facilities around the world during parts of the first half of 2020. During the second quarter of 2020, we completed a phased restart of our manufacturing facilities and gradually increased tire production. Our decisions to increase production further will be based on an evaluation of market demand signals, inventory and supply levels, as well as our ability to continue to safeguard the health of our associates. While we intend to further increase production during the second half of 2020, we may experience unexpected delays or obstacles, such as disruptions in our supply chain or government mandates, that may hamper our ability to do so. Further, we may not be able to operate at optimal levels of efficiency given new work rules and procedures that were implemented to protect our associates. The suspension of production at some of our manufacturing facilities, or difficulties or inefficiencies in resuming or increasing 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 flows 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
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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 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 20182019 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. |
Reference is made to Item 1A of Part I of our 2019 Form 10-K and to Item 1A of Part II of our quarterly report on Form 10-Q for the quarterly period ended March 31, 2020 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 SeptemberJune 30, 2019
INDEX OF EXHIBITS
Exhibit Table Item No. | ||||||
Description of Exhibit | Exhibit Number | |||||
4 | Instruments Defining the Rights of Security Holders, Including Indentures | |||||
22 | ||||||
31 | Rule 13a-14(a) Certifications | |||||
(a) | 31.1 | |||||
(b) | 31.2 | |||||
32 | Section 1350 Certifications | |||||
(a) | 32.1 | |||||
101 | Interactive Data Files | |||||
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 |
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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: | July 31, 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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