THE GOODYEAR TIRE & RUBBER COMPANY All per share amounts are diluted and refer to
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 46 manufacturing facilities in 21 countries, includingthe United States . We operate our business through three operating segments representing our regional tire businesses:Americas ;Europe ,Middle East andAfrica ("EMEA"); andAsia Pacific . Results of Operations Our results for the second quarter and first half of 2020 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 due to a strongU.S. dollar, lower OE industry volume, softening demand inEurope , weak market conditions inChina and economic volatility inLatin America , particularlyBrazil , that persisted throughout 2019. We continue to take actions in response to COVID-19 to protect the health and wellbeing of our associates, customers and communities, which remain our top priority, to mitigate the near and long-term financial impacts on our operating results, and to ensure adequate liquidity and capital resources are available to maintain our operations until the auto industry and replacement tire demand recovers.
These actions include:
• On
production in
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
our chemical plants, began a limited ramp up of our commercial truck tire
manufacturing facilities in the
production in most of our consumer factories in
footprint in
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
Pacific, most notably at our Pulandian,
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
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 andPrevention 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
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
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
calculation of the facility's borrowing base, which improved our
availability under the facility by approximately
2020. In
to these important sources of liquidity, refer to "Liquidity and Capital
Resources."
• On April 16, 2020 , we announced that we have temporarily suspended thequarterly dividend on our common stock. These dividends total approximately
$37 million each quarter. 27
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• We are leveraging governmental relief efforts to defer payroll and other tax
payments, which benefited second quarter cash flows by
expected to benefit full-year cash flows by approximately
provides for a 50 percent refundable payroll tax credit on wages, including
continuing health benefits, paid to
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
million for the full year and reducing discretionary spending, including
other selling, administrative and general expenses, which decreased by more
than
Additionally, onApril 17, 2020 , we reached a tentative bargaining agreement and subsequently approved a plan to permanently close ourGadsden, Alabama manufacturing facility as part of our strategy to strengthen the competitiveness of our manufacturing footprint by curtailing production of tires for declining, less profitable segments of the tire market. Members of the local union approved the bargaining agreement onMay 1, 2020 . We estimate the total pre-tax charges associated with this plan to be$280 million to$295 million , of which$170 million to$180 million are expected to be cash charges. We recorded approximately$150 million of these charges during the second quarter of 2020 and expect to make cash payments of approximately$40 million in 2020, largely during the second half. The remaining charges will be recorded and the remaining cash payments will be made primarily in 2021 and 2022. We expect the combined impact of this plan and the previously announced rationalization actions related to ourGadsden, Alabama manufacturing facility will result in approximately$130 million in annual savings in 2021 when compared to 2019. Our results for the second quarter of 2020 include a 45.5% decrease in tire unit shipments compared to the second quarter of 2019, as industry 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 factory 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 cost savings of approximately$96 million , including raw material cost saving measures of approximately$18 million . Net sales in the second quarter of 2020 were$2,144 million , compared to$3,632 million in the second quarter of 2019. Net sales decreased in the second quarter of 2020 primarily due to lower global tire unit volume, lower sales in other tire-related businesses, primarily due to a decrease in third-party sales of chemical products inAmericas and lower aviation sales globally, and unfavorable foreign currency translation. These decreases were partially offset by improvements in price and product mix, primarily inAmericas and EMEA. In the second quarter of 2020,Goodyear net loss was$696 million , or$2.97 per share, compared to net income of$54 million , or$0.23 per share, in the second quarter of 2019. The change inGoodyear net income (loss) was driven by lower segment operating income, a non-cash impairment charge, and higher rationalization charges, partially offset by lower income tax expense. Our total segment operating loss for the second quarter of 2020 was$431 million , compared to income of$219 million in the second quarter of 2019. The$650 million change was primarily due to lower global tire unit volume of$338 million , higher conversion costs of$300 million , primarily inAmericas and EMEA, and lower income from other tire-related businesses of$104 million , driven by lower third-party chemical sales inAmericas and lower aviation sales globally. These decreases were partially offset by lower selling, administrative and general expense ("SAG") of$112 million , primarily due to lower wages and benefits and lower advertising expense relating to actions taken as a result of the COVID-19 pandemic. Refer to "Results of Operations - Segment Information" for additional information. Net sales in the first six months of 2020 were$5,200 million , compared to$7,230 million in the first six months of 2019. Net sales decreased in the first six months of 2020 primarily due to lower global tire unit volume, lower sales in other tire-related businesses, primarily due to a decrease in third-part sales of chemical products inAmericas and lower aviation sales globally, and unfavorable foreign currency translation. These decreases were partially offset by improvements in price and product mix, primarily inAmericas and EMEA. In the first six months of 2020,Goodyear net loss was$1,315 million , or$5.62 per share, compared to a net loss of$7 million , or$0.03 per share, in the first six months of 2019. The increase inGoodyear net loss was driven by lower segment operating income, non-cash impairment charges, and higher income tax expense. Our total segment operating loss for the first six months of 2020 was$478 million , compared to income of$409 million in the first six months of 2019. The$887 million change was primarily due to lower global tire unit volume of$458 million , higher conversion costs of$362 million , primarily inAmericas and EMEA, and lower income from other tire-related businesses of$112 million , driven by lower third-party chemical sales inAmericas and lower aviation sales globally. These decreases were partially offset by lower SAG of$75 million , primarily due to lower wages and benefits and lower advertising expense relating to actions taken as a result of the COVID-19 pandemic. Refer to "Results of Operations - Segment Information" for additional information. 28
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Table of contents Liquidity AtJune 30, 2020 , we had$1,006 million of cash and cash equivalents as well as$2,938 million of unused availability under our various credit agreements, compared to$908 million and$3,554 million , respectively, atDecember 31, 2019 . Cash and cash equivalents increased by$98 million fromDecember 31, 2019 primarily due to net borrowings of$1,414 million , partially offset by cash used for operating activities of$820 million , capital expenditures of$363 million , debt-related costs and other financing transactions of$53 million , and first quarter dividends paid of$37 million . Cash used for operating activities reflects 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$520 million , and rationalization payments of$101 million . Refer to "Liquidity and Capital Resources" for additional information.
Outlook
The COVID-19 pandemic has caused the temporary closure of many businesses throughout the world during the first half of 2020, 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 major markets during the second quarter of 2020 and 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 to adversely impact our aviation business. In total, the year-over-year earnings decline in our other tire-related businesses is expected to be$30 million to$50 million during the third quarter of 2020. For the full year of 2020, we now expect our raw material costs will be a benefit of approximately$100 million compared to 2019, excluding transactional foreign currency and raw material cost saving measures. Natural and synthetic rubber prices and other commodity prices historically have 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 endedDecember 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. RESULTS OF OPERATIONS
CONSOLIDATED
Three Months Ended
Net sales in the second quarter of 2020 were$2,144 million , decreasing$1,488 million , or 41.0%, from$3,632 million in the second quarter of 2019.Goodyear net loss was$696 million , or$2.97 per share, in the second quarter of 2020, compared to net income of$54 million , or$0.23 per share, in the second quarter of 2019. Net sales decreased in the second quarter of 2020, primarily due to lower global tire unit volume of$1,411 million , lower sales in other tire-related businesses of$165 million , primarily due to a decrease in third-party sales of chemical products inAmericas and lower aviation sales globally, and unfavorable foreign currency translation of$69 million , primarily in EMEA andAmericas . These decreases were partially offset by improvements in price and product mix of$158 million , primarily inAmericas and EMEA. Worldwide tire unit sales in the second quarter of 2020 were 20.4 million units, decreasing 17.0 million units, or 45.5%, from 37.4 million units in the second quarter of 2019. Replacement tire volume decreased 10.6 million units, or 39.2%, primarily inAmericas and EMEA. OE tire volume decreased 6.4 million units, or 61.7%, primarily due to lower vehicle production globally. Cost of goods sold ("CGS") in the second quarter of 2020 was$2,216 million , decreasing$639 million , or 22.4%, from$2,855 million in the second quarter of 2019. CGS decreased primarily due to lower global tire unit volume of$1,073 million , foreign currency translation of$67 million , primarily inAmericas and EMEA, and lower costs in other tire-related businesses of$61 million , driven by lower third-party chemical sales inAmericas . These decreases were partially offset by higher conversion costs 29
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of$300 million , primarily due to lower factory utilization and other period costs, and the write-off of work-in-process inventory of approximately$11 million , both as a direct result of suspending production at our manufacturing facilities, primarily inAmericas and EMEA, higher costs related to product mix of$156 million , primarily inAmericas and EMEA, and higher raw material costs of$19 million , primarily inAmericas and EMEA. CGS in the second quarter of 2020 and 2019 included pension expense of$4 million . CGS in the second quarter of 2020 included accelerated depreciation of$86 million ($65 million after-tax and minority), primarily related to the plan to permanently close ourGadsden, Alabama manufacturing facility, compared to$1 million ($1 million after-tax and minority) in 2019. CGS in the second quarter of 2020 and 2019 included incremental savings from rationalization plans of$28 million and$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$1 million and$4 million , respectively. SAG was 21.0% of sales in the second quarter of 2020, compared to 16.1% in the second quarter of 2019. We recorded a non-cash impairment charge of$148 million ($113 million after-tax and minority) related toTireHub in the second quarter of 2020. For further information, refer to Note to the Consolidated Financial Statements No. 9, Other Assets and Investments. We recorded net rationalization charges of$99 million ($76 million after-tax and minority) in the second quarter of 2020 and$4 million ($3 million after-tax and minority) in the second quarter of 2019. Net rationalization charges in the second quarter of 2020 primarily related to the plan to permanently close ourGadsden, 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 inGermany . Interest expense in the second quarter of 2020 was$85 million , decreasing$3 million , or 3.4%, from$88 million in the second quarter of 2019. The decrease was due to a lower average interest rate of 5.04% in the second quarter of 2020 compared to 5.32% in the second quarter of 2019, partially offset by a higher average debt balance of$6,753 million in the second quarter of 2020 compared to$6,622 million in the second quarter of 2019. Other (Income) Expense in the second quarter of 2020 was$34 million of expense, compared to$17 million of expense in the second quarter of 2019. Other (Income) Expense in the second quarter of 2020 included net losses on asset sales of$3 million ($3 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 theU.S. dollar, which was a loss of$4 million in the second quarter of 2020 and a gain of$11 million in the second quarter of 2019.
For the second quarter of 2020, we recorded a tax benefit of
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 endedJune 30, 2019 includes net discrete charges of$6 million ($6 million after minority interest), primarily related to adjusting our deferred tax assets in Luxembourg for a change in the tax rate.
For further information regarding income taxes, refer to Note to the Consolidated Financial Statements No. 5, Income Taxes.
Minority shareholders' net income (loss) in the second quarter of 2020 was a net
loss of
Six Months Ended
Net sales in the first six months of 2020 were$5,200 million , decreasing$2,030 million , or 28.1%, from$7,230 million in the first six months of 2019.Goodyear net loss was$1,315 million , or$5.62 per share, in the first six months of 2020, compared toGoodyear net loss of$7 million , or$0.03 per share, in the first six months of 2019. Net sales decreased in the first six months of 2020, primarily due to lower global tire unit volume of$1,935 million , lower sales in other tire-related business of$199 million , primarily due to a decrease in third-party sales of chemical products inAmericas and lower aviation sales globally, and unfavorable foreign currency translation of$139 million , primarily in EMEA andAmericas . These decreases were partially offset by improvements in price and product mix of$244 million , primarily inAmericas and EMEA. Worldwide tire unit sales in the first six months of 2020 were 51.7 million units, decreasing 23.7 million units, or 31.5%, from 75.4 million units in the first six months of 2019. Replacement tire volume decreased 15.0 million units, or 27.6%, primarily inAmericas and EMEA. OE tire volume decreased 8.7 million units, or 41.3%, primarily due to lower vehicle production globally. 30
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CGS in the first six months of 2020 was$4,768 million , decreasing$966 million , or 16.8%, from$5,734 million in the first six months of 2019. CGS decreased primarily due to lower global tire unit volume of$1,477 million , foreign currency translation of$124 million , primarily in EMEA andAmericas , and lower costs in other tire-related businesses of$87 million , driven by lower third-party chemical sales inAmericas . These decreases were partially offset by higher conversion costs of$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 inAmericas and EMEA, and higher costs related to product mix of$244 million , primarily inAmericas and EMEA. CGS in the first six months of 2020 and 2019 included pension expense of$8 million . CGS in the first six months of 2020 included accelerated depreciation of$90 million ($69 million after-tax and minority), primarily related to the plan to permanently close ourGadsden, Alabama manufacturing facility, compared to$1 million ($1 million after-tax and minority) in 2019. CGS in the first six months of 2020 and 2019 included incremental savings from rationalization plans of$28 million and$3 million , respectively. CGS was 91.7% of sales in the first six months of 2020 compared to 79.3% in the first six months of 2019. SAG in the first six months of 2020 was$1,032 million , decreasing$101 million , or 8.9%, from$1,133 million in the first six months of 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$26 million , primarily in EMEA andAmericas , and lower travel and entertainment expenses of$12 million . These decreases were partially offset by a$20 million increase in expense related to potentially uncollectible accounts receivable, primarily in EMEA andAmericas . SAG in the first six months of 2020 and 2019 included pension expense of$8 million . SAG in the first six months of 2020 and 2019 included incremental savings from rationalization plans of$2 million and$10 million , respectively. SAG was 19.8% of sales in the first six months of 2020, compared to 15.7% in the first six months of 2019. 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 toTireHub 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$108 million ($83 million after-tax and minority) in the first six months of 2020 and$107 million ($90 million after-tax and minority) in the first six months of 2019. Net rationalization charges in the first six months of 2020 primarily related to the plan to permanently close ourGadsden, 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 2019 primarily related to a plan to modernize two of our tire manufacturing facilities inGermany and a plan to reduce manufacturing headcount and improve operating efficiency inAmericas . Interest expense in the first six months of 2020 was$158 million , decreasing$15 million , or 8.7%, from$173 million in the first six months of 2019. The decrease was due to a lower average interest rate of 4.92% in the first six months of 2020 compared to 5.42% in the first six months of 2019, partially offset by a higher average debt balance of$6,423 million in the first six months of 2020 compared to$6,378 million in the first six months of 2019. Other (Income) Expense in the first six months of 2020 was$61 million of expense, compared to$39 million of expense in the first six months of 2019. Other (Income) Expense in the first six 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 theU.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 net gains on asset sales of$6 million ($5 million after-tax and minority), charges of$5 million ($4 million after-tax and minority) for legal claims related to discontinued products, and a net gain on insurance recoveries of$3 million ($3 million after-tax and minority) related to Hurricanes Harvey and Irma. In the first six months of 2020, 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 endedJune 30, 2020 includes net discrete charges of$293 million ($293 million after minority interest), primarily related to the establishment of a valuation allowance on deferred tax assets for foreign tax credits during the first quarter of 2020 as discussed below. In the first six months of 2019, we recorded income tax expense of$32 million on income before income taxes of$44 million . Income tax expense for the six months endedJune 30, 2019 includes net discrete charges of$13 million ($12 million after minority interest). The net discrete tax charge includes a second quarter charge of$6 million related to adjusting our deferred tax assets in Luxembourg for a change in the tax rate and various first quarter net discrete charges of$7 million . We record taxes based on overall estimated annual effective tax rates. The difference between our effective tax rate and theU.S. statutory rate of 21% for the six months endedJune 30, 2020 primarily relates to the discrete items noted above, a first quarter non-cash goodwill impairment charge of$182 million , and forecasted losses for the full year in foreign jurisdictions in which no tax benefits are recorded, which have been accentuated during 2020 by business interruptions resulting from the COVID-19 pandemic. The difference between our effective tax rate and theU.S. statutory rate of 21% for the six months endedJune 30 , 31
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2019 primarily relates to the discrete items noted above and the 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. AtJune 30, 2020 , we had approximately$1.1 billion ofU.S. federal, state and local deferred tax assets, net of valuation allowances totaling$308 million , primarily related to foreign tax credits with limited lives. Approximately$900 million of theseU.S. net deferred tax assets have unlimited lives and approximately$200 million have limited lives, substantially all of which expire after 2025. In theU.S. , we have cumulative positive profitability in the three-year period endedJune 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 significantU.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 ourU.S. net deferred tax assets in a future period. AtJune 30, 2020 andDecember 31, 2019 , ourU.S. deferred tax assets included approximately$118 million and$403 million of foreign tax credits, net of valuation allowances of$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 ourU.S. manufacturing facilities as a result of the COVID-19 pandemic, we expect to incur a significantU.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. AtJune 30, 2020 andDecember 31, 2019 , we had approximately$1.3 billion and$1.2 billion of foreign deferred tax assets and valuation allowances of$993 million and$969 million , respectively.
For further information regarding income taxes and the realizability of our deferred tax assets, including our foreign tax credits, refer to Note to the Consolidated Financial Statements No. 5, Income Taxes.
Minority shareholders' net income (loss) in the first six months of 2020 was a
net loss of
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, for further information and for a reconciliation of total segment
operating income to Income (Loss) before Income Taxes.
Total segment operating loss for the second quarter of 2020 was $431 million , a
change of $650 million from total segment operating income of $219 million in
the second quarter of 2019. Total segment operating margin (segment operating
income divided by segment sales) in the second quarter of 2020 was (20.1%),
compared to 6.0% in the second quarter of 2019. Total segment operating loss in
the first six months of 2020 was $478 million , a change of $887 million from
total segment operating income of $409 million in the first six months of 2019.
Total segment operating margin in the first six months of 2020 was (9.2%),
compared to 5.7% in the first six months of 2019.
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Table of contentsAmericas Three Months Ended June 30, Six Months Ended June 30, Percent Percent (In millions) 2020 2019 Change Change 2020 2019 Change Change Tire Units 8.5 17.1 (8.6 ) (50.4 )% 23.0 33.8 (10.8 ) (32.1 )% Net Sales$ 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
Americas unit sales in the second quarter of 2020 decreased 8.6 million units, or 50.4%, to 8.5 million units. Replacement tire volume decreased 5.8 million units, or 44.7%, primarily in our consumer business inthe United States ,Brazil andCanada due to lower sales resulting from the economic impacts of the COVID-19 pandemic, including the impact of a significant customer in theU.S. temporarily closing its auto care facilities. OE tire volume decreased 2.8 million units, or 68.4%, primarily in our consumer business inthe United States ,Brazil andCanada , driven by lower vehicle production as a result of the pandemic-related factory shutdowns at major OE manufacturers. Net sales in the second quarter of 2020 were$1,134 million , decreasing$837 million , or 42.5%, from$1,971 million in the second quarter of 2019. The decrease in net sales was driven by lower tire volume of$779 million , lower sales in other tire-related businesses of$123 million , primarily due to a decrease in third-party sales of chemical products and lower aviation and retail sales, and unfavorable foreign currency translation of$25 million , primarily related to the Brazilian real. These decreases were partially offset by improvements in price and product mix of$90 million , driven by higher proportionate sales of commercial tires. Operating loss in the second quarter of 2020 was$287 million , a change of$421 million from operating income of$134 million in the second quarter of 2019. The change in operating income (loss) was due to higher conversion costs of$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 earnings in other tire-related businesses of$64 million , primarily due to a decrease in third-party sales of chemical products and lower aviation and retail sales, unfavorable price and product mix of$18 million and higher raw material costs of$12 million . These decreases were partially offset by lower SAG of$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 includesTireHub 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 theTireHub 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 ourGadsden, Alabama manufacturing facility. Operating income (loss) in the second quarter of 2019 excluded rationalization charges of$2 million .
Six Months Ended
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 inthe United States ,Brazil andCanada 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 inthe United States ,Brazil andCanada , 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 a decrease in third-party sales of chemical products and lower aviation and retail sales, and unfavorable foreign currency translation of$50 million , primarily related to the Brazilian real. These decreases were partially offset by improvements in price and product mix of$131 million , driven by higher proportionate sales of commercial tires. 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
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Operating income (loss) in the first six months of 2020 excluded theTireHub 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 ourGadsden, Alabama manufacturing facility. Operating income (loss) in the first six months of 2019 excluded rationalization charges of$9 million .
Three Months Ended June 30, Six Months Ended June 30,
Percent Percent
(In millions) 2020 2019 Change Change 2020 2019 Change 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 Ended
Europe ,Middle East andAfrica 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 inEurope . 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. 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 other 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
Six Months Ended
Europe ,Middle East andAfrica 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 inEurope . 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$38 million , primarily due to lower motorcycle, aviation and racing sales. These decreases were partially offset by improvements in price and product mix of$92 million , driven by higher proportionate sales of commercial tires and our continued focus on 17-inch and above rim size consumer tires. Operating loss in the first six months of 2020 was$163 million , a change of$261 million from operating income of$98 million in the first six months of 2019. The change in operating income (loss) was primarily due to lower tire unit volume of$168 million , as well as higher conversion costs of$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
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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$1 million .Asia Pacific Three Months Ended June 30, Six Months Ended June 30, Percent Percent (In millions) 2020 2019 Change Change 2020 2019 Change Change Tire Units 4.6 7.0 (2.4 ) (35.6 )% 9.8 14.0 (4.2 ) (29.8 )% Net Sales$ 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 Ended
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 inIndia andChina , 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 lower earnings in other tire-related businesses of$21 million . These decreases were partially offset by lower SAG of$20 million , primarily related to lower advertising expense and lower wages and benefits relating to actions taken as a result of the COVID-19 pandemic.
Six Months Ended
Asia Pacific unit sales in the first six months of 2020 decreased 4.2 million units, or 29.8%, to 9.8 million units. OE tire volume decreased 2.3 million units, or 42.2%, primarily in our consumer business inChina andIndia , driven by lower vehicle production as a result of the pandemic-related factory shutdowns at major OE manufacturers. Replacement tire volume decreased 1.9 million units, or 21.8%, 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 first six months of 2020 were$722 million , decreasing$299 million , or 29.3%, from$1,021 million in the first six months of 2019. Net sales decreased due to lower tire unit volume of$277 million , unfavorable foreign currency translation of$24 million , primarily related to the weakening of the Australian dollar and Indian rupee, and lower sales in other tire-related businesses of$18 million , primarily due to lower aviation sales. These decreases were partially offset by improvements in price and product mix of$21 million . Operating loss in the first six months of 2020 was$28 million , a change of$116 million from operating income of$88 million in the first six months of 2019. The change in operating income (loss) was due to lower tire unit volume of$71 million , higher conversion costs of$31 million , primarily due to the impact of lower tire production on overhead absorption, lower earnings in other tire-related businesses of$24 million , and unfavorable price and product mix of$17 million . These decreases were partially offset by lower SAG of$22 million , primarily related to lower wages and benefits and lower advertising expense relating to actions taken as a result of the COVID-19 pandemic. 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.
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InApril 2020 , we amended and restated our$2.0 billion first lien revolving credit facility. Changes to the facility include extending the maturity toApril 9, 2025 and increasing the borrowing 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 atJune 30, 2020 . 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. InMay 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 onAugust 15, 2020 . AtJune 30, 2020 , we had$1,006 million in cash and cash equivalents, compared to$908 million atDecember 31, 2019 . For the six months endedJune 30, 2020 , net cash used by operating activities was$820 million , reflecting 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$520 million , and rationalization payments of$101 million . Net cash used by investing activities was$390 million , primarily representing capital expenditures of$363 million . Net cash provided by financing activities was$1,324 million , due to net borrowings of$1,414 million , partially offset by debt-related costs and other financing transactions of$53 million and cash used for first quarter dividends of$37 million . AtJune 30, 2020 , we had$2,938 million of unused availability under our various credit agreements, compared to$3,554 million atDecember 31, 2019 . The table below presents unused availability under our credit facilities at those dates: June 30, December 31, (In millions) 2020 2019
First lien 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
We have deposited our cash and cash equivalents and entered into various credit
agreements and derivative contracts with financial institutions that we
considered to be substantial and creditworthy at the time of such transactions.
We seek to control our exposure to these financial institutions by diversifying
our deposits, credit agreements and derivative contracts across multiple
financial institutions, by setting deposit and counterparty credit limits based
on long term credit ratings and other indicators of credit risk such as credit
default swap spreads, and by monitoring the financial strength of these
financial institutions on a regular basis. We also enter into master netting
agreements with counterparties when possible. By controlling and monitoring
exposure to financial institutions in this manner, we believe that we
effectively manage the risk of loss due to nonperformance by a financial
institution. However, we cannot provide assurance that we will not experience
losses or delays in accessing our deposits or lines of credit due to the
nonperformance of a financial institution. Our inability to access our cash
deposits or make draws on our lines of credit, or the inability of a
counterparty to fulfill its contractual obligations to us, could have a material
adverse effect on our liquidity, financial position or results of operations in
the period in which it occurs.
We expect our 2020 cash flow needs to include capital expenditures of up to $700
million . We also expect interest expense to be $350 million to $375 million ;
rationalization payments to be $200 million to $225 million ; income tax payments
to be approximately $60 million ; dividends on our common stock to be $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 . We expect working capital to be a source of cash for the full year of
2020.
Following the repayment of our outstanding $282 million 8.75% notes due August
15, 2020 , we expect our liquidity to remain strong in 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 our cash flow needs with our
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existing cash and available credit if they cannot be funded by cash generated from operating or other financing activities. We believe that our liquidity position is adequate to fund our operating and investing needs and debt maturities in 2020 and to provide us with the ability to respond to further changes in the business environment.
Our ability to service debt and operational requirements is also dependent, in part, on the ability of our subsidiaries to make distributions of cash to various other entities in our consolidated group, whether in the form of dividends, loans or otherwise. In certain countries where we operate, such asChina andSouth 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, which are subject to such requirements or limitations to be integral to our liquidity or our ability to service our debt and operational requirements. AtJune 30, 2020 , approximately$596 million of net assets, including$205 million of cash and cash equivalents, were subject to such requirements. The requirements we must comply with to transfer funds out ofChina andSouth Africa have not adversely impacted our ability to make transfers out of those countries. Operating Activities
Net cash used by operating activities was
The increase in net cash used by operating activities was driven by a decrease in operating income from our SBUs of$887 million and higher cash payments for rationalizations of$68 million , primarily due to cash payments made during 2020 related to the voluntary buy-out plan at ourGadsden, Alabama manufacturing facility. These uses of cash were partially offset by a decrease in cash used for working capital of$213 million , as well as the favorable impact of a$156 million change in Other Assets and Liabilities on the Balance Sheet, driven by reimbursements from foreign governments for furloughed associates, a decrease in equity investments primarily due to our 50% share ofTireHub's net losses and a decrease in deferred and other non-current income tax assets. The decrease in cash used for working capital reflects decreases in cash used for Accounts Receivable of$481 million and Inventory of$537 million , partially offset by an increase in cash used for Accounts Payable - Trade of$805 million . These changes were driven by the impacts of the COVID-19 pandemic, which included lower sales volume as well as mitigating actions taken by us, such as suspending production at our manufacturing facilities and reducing expenditures.
Investing Activities
Net cash used by investing activities was$390 million in the first six months of 2020, compared to$419 million in the first six months of 2019. Capital expenditures were$363 million in the first six months of 2020, compared to$401 million in the first six months of 2019. Beyond expenditures required to sustain our facilities, capital expenditures in 2020 and 2019 primarily related to investments in additional 17-inch and above capacity around the world.
Financing Activities
Net cash provided by financing activities was$1,324 million in the first six months of 2020, compared to net cash provided by financing activities of$811 million in the first six months of 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$926 million , which were partially offset by dividends on our common stock of$74 million .
Credit Sources
In aggregate, we had total credit arrangements of$9,751 million available atJune 30, 2020 , of which$2,938 million were unused, compared to$9,054 million available atDecember 31, 2019 , of which$3,554 million were unused. AtJune 30, 2020 , we had long term credit arrangements totaling$8,786 million , of which$2,702 million were unused, compared to$8,320 million and$3,189 million , respectively, atDecember 31, 2019 . AtJune 30, 2020 , we had short term committed and uncommitted credit arrangements totaling$965 million , of which$236 million were unused, compared to$734 million and$365 million , respectively, atDecember 31, 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 AtJune 30, 2020 , we had$4,115 million of outstanding notes compared to$3,311 million atDecember 31, 2019 . InMay 2020 , we issued$800 million in aggregate principal amount of 9.5% senior notes due 2025. 37
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OnApril 9, 2020 , we amended and restated our$2.0 billion first lien revolving credit facility. Changes to the facility include extending the maturity toApril 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. Up to$800 million in letters of credit 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 on (i) eligible accounts receivable and inventory ofThe Goodyear Tire & Rubber Company and certain of itsU.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 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 ofJune 30, 2020 , our borrowing base, and therefore our availability, under the facility was$331 million below the facility's stated amount of$2.0 billion .
At
At
Amended and Restated Second Lien Term Loan Facility due 2025
Our amended and restated second lien term loan facility matures onMarch 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
€800 million Amended and Restated Senior Secured European Revolving Credit Facility due 2024
Our amended and restated European revolving credit facility consists of (i) a €180 million German tranche that is available only toGoodyear Dunlop Tires Germany GmbH ("GDTG") and (ii) a €620 million all-borrower tranche that is available to GEBV,GDTG and Goodyear Dunlop Tires Operations S.A. Up to €175 million of swingline loans and €75 million in letters of credit are available for issuance under the all-borrower tranche. Amounts drawn under this facility will bear interest at LIBOR plus 150 basis points for loans denominated inU.S. dollars or pounds sterling and EURIBOR plus 150 basis points for loans denominated in euros, and undrawn amounts under the facility are subject to an annual commitment fee of 25 basis points. Subject to the consent of the lenders whose commitments are to be increased, we may request that the facility be increased by up to €200 million. AtJune 30, 2020 , there were no borrowings outstanding under the German tranche,$135 million (€120 million) of borrowings outstanding under the all-borrower tranche and no letters of credit outstanding under the European revolving credit facility. AtDecember 31, 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 sinceDecember 31, 2019 under the first lien facility andDecember 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 fromOctober 18, 2018 throughOctober 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 38
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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
AtJune 30, 2020 , the amounts available and utilized under this program totaled$157 million (€140 million). AtDecember 31, 2019 , the amounts available and utilized under this program totaled$327 million (€291 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. For these programs, we have concluded that there is generally no risk of loss to us from non-payment of the sold receivables. AtJune 30, 2020 , the gross amount of receivables sold was$349 million , compared to$548 million atDecember 31, 2019 . 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 atJune 30, 2020 andDecember 31, 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. Inthe United States , efforts to identify a set of alternativeU.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee that has been convened by theFederal Reserve Board and theFederal Reserve Bank of New York . Additionally, theInternational 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 inthe United States , theEuropean 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 have 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. We 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, refer to Note to the Consolidated Financial Statements No. 15, Financing Arrangements and Derivative Financial Instruments, in our 2019 Form 10K and Note to the Consolidated Financial Statements No. 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 ofGoodyear and its subsidiaries. 39
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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
(
cash equivalents ("Available Cash") plus our availability under our first
lien revolving credit facility is less than
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
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 itsU.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 consolidatedGoodyear entities. This financial covenant is also included in our pan-European accounts receivable securitization facility. AtJune 30, 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
The terms "Available Cash," "EBITDA," "Consolidated Interest Expense," "Consolidated Net Secured Indebtedness," "Pro Forma Senior Secured Leverage Ratio," "Consolidated Net GEBV Indebtedness" and "Consolidated GEBV EBITDA" have the meanings given them in the respective credit facilities.
Potential Future Financings
In addition to our previous financing activities, we may seek to undertake additional financing actions which could include restructuring bank debt or capital markets transactions, possibly including the issuance of additional debt or equity. Given the inherent uncertainty of market conditions, access to the capital markets cannot be assured. Our future liquidity requirements may make it necessary for us to incur additional debt. However, a substantial portion of our assets are already subject to liens securing our indebtedness. As a result, we are limited in our ability to pledge our remaining assets as security for additional secured indebtedness. In addition, no assurance can be given as to our ability to raise additional unsecured debt.
Dividends and Common Stock Repurchase Program
Under our primary credit facilities and some of our note indentures, we are permitted to pay dividends on and repurchase our capital stock (which constitute restricted payments) as long as no default will have occurred and be continuing, additional indebtedness can be incurred under the credit facilities or indentures following the payment, and certain financial tests are satisfied. In the first six months of 2020, we paid cash dividends of$37 million on our common stock, all of which was paid in the first quarter of 2020. This amount excludes dividends earned on stock-based compensation plans of approximately$1 million for the 40
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first six months of 2020. On
The restrictions imposed by our credit facilities and indentures did not affect our ability to pay the dividends on our common stock described above, and are not expected to affect our ability to pay similar dividends in the future when we reinstate our dividend. 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 byThe 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-ownedU.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, underU.S. federal bankruptcy law and comparable provisions ofU.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 lessthan 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 suchaction 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.
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