Goodyear Tire & Rubber Co. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are U.S. dollars; financial statement figures are in millions unless noted.
Business context and results
Goodyear manufactures tires and operates through Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific segments. Management cited inflation and higher interest rates, weak global tire demand, reduced production, and operational disruptions. Global tire industry demand remained below 2019 levels.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $5,142 | $5,311 | $14,950 | $15,431 |
| Segment operating income | $336 | $373 | $585 | $1,040 |
| Income (loss) before taxes | $(59) | $106 | $(369) | $492 |
| Goodyear net income (loss) | $(89) | $44 | $(398) | $306 |
| Diluted earnings (loss) per share | $(0.31) | $0.16 | $(1.40) | $1.07 |
Q3 sales declined 3.2%; nine-month sales declined 3.1%. Segment operating margin was 6.5% in Q3 versus 7.0%, and 3.9% year to date versus 6.7%. Cost of goods sold was 81.1% of sales in Q3 in both years, but 83.5% year to date versus 80.6%. The filing does not report a consolidated operating margin as a headline metric.
Segments and drivers
- Americas: Q3 sales were $3,120 and segment operating income $258, down 5.6% and 15.7%. Nine-month operating income fell 46.0% to $440, reflecting lower volume, production-related conversion costs, and the Tupelo storm, partly offset by pricing and mix.
- EMEA: Q3 sales rose 1.2% to $1,374, while operating income fell 26.7% to $22. Nine-month operating income declined 92.2% to $11. Management cited weak replacement demand, high energy and conversion costs, and reduced production; price and mix provided a partial offset.
- Asia Pacific: Q3 operating income increased 51.4% to $56 on nearly flat sales; nine-month operating income rose 59.5% to $134 on sales growth of 1.8%.
Worldwide tire unit sales fell 2.8% in Q3 and 6.8% in the first nine months. Replacement volume declined 5.3% in Q3 and 10.5% year to date; original-equipment volume increased 5.7% and 6.4%, respectively.
Cash flow, debt and liquidity
- Nine-month operating cash flow was an outflow of $204, an improvement from an outflow of $627 a year earlier. Working capital used $811 of cash. Investing cash flow was an outflow of $818, including $807 of capital expenditures; financing provided $774, primarily from net borrowings of $787.
- Cash and cash equivalents were $1,002 at September 30, versus $1,227 at year-end 2022. Unused credit availability was $3,077, down from $4,035. Management said liquidity was adequate for operating and investing needs and debt maturities over the next 12 months.
- Long-term debt and finance leases were $8,344, including $277 due within one year; notes payable and overdrafts were another $322. Approximately 30% of debt carried variable rates, averaging 6.99%. Nine-month interest expense rose to $403 from $331.
- The company reported compliance with applicable material debt covenants. Certain cash and net assets in some countries are subject to transfer restrictions; approximately $960 of net assets, including $226 of cash, were subject to such requirements.
Outlook, material events and risks
- For Q4 2023, management expected replacement tire volume to decline approximately 3%–4% year over year and OE volume to increase approximately 5%. Raw material costs were expected to be about $300 lower; price and mix net of lower raw material costs were expected to benefit results by about $250. Non-raw-material inflation, net of savings, was expected to reduce segment operating income by approximately $65.
- Management expected Q4 impacts of approximately $40 from lower production in Q3 and approximately $15 from the Debica fire’s production disruption, plus about $5 of corporate expense for additional Debica insurance deductibles. These are estimates, not earnings guidance.
- For full-year 2023, the company expected working capital to provide approximately $150 of operating cash, capital expenditures of approximately $1.05 billion, rationalization payments of approximately $100, interest expense of approximately $540, income tax payments of approximately $200 excluding one-time items, and pension contributions of $25–$50.
- New restructuring plans include an EMEA workforce reorganization with a net reduction of about 700 positions and expected pretax charges of $210–$230, mostly cash, with completion expected in 2025. The Australia/New Zealand plan includes about 700 position reductions, nine warehouse exits, and sale or exit of about 100 stores; expected charges are $55–$65, with completion targeted by end-2024. Management estimated full run-rate savings from these actions of about $150 by 2025.
- Q3 rationalization charges were $198 versus $45 a year earlier; nine-month charges were $302 versus $82. The EMEA goodwill impairment test showed estimated fair value only about 15% above carrying value; a 0.5% decrease in projected operating margin would reduce the estimated excess to 0%. Management warned that weaker performance or adverse assumptions could lead to a material non-cash impairment charge.
- The Tupelo storm caused estimated nine-month earnings impact of $69 and sales impact of $110. The Debica fire caused an estimated Q3 earnings impact of $14; production was at about 70% of capacity, with full ramp-up not expected until Q4 2024. Insurance recovery timing and amounts remain dependent on claim completion.
- Other risks include persistent labor, energy and inflation costs; weak demand and fixed-cost absorption; foreign exchange and interest-rate exposure; substantial debt and financing access; tax-asset realization; and environmental, product-liability and asbestos contingencies. Asbestos claims pending were about 36,400; the filing says possible losses above reserves could be material but cannot be reasonably estimated.
Most important facts to verify
- Whether replacement demand and production levels recover as management expects, and whether pricing and cost savings offset continuing inflation and weak volumes.
- Delivery, timing, cash costs, workforce effects and savings from EMEA and Australia/New Zealand restructuring plans.
- Debica repair and insurance recovery progress, and final Tupelo-related insurance proceeds.
- Debt, interest expense, credit availability and working-capital trends, including the ability to fund capital expenditures and maturities.
- EMEA goodwill headroom and the assumptions supporting deferred tax asset realization, particularly foreign tax credits and foreign valuation allowances.
- Changes in asbestos, product-liability, environmental and other legal exposures, for which outcomes may differ from recorded estimates.