GOODYEAR TIRE & RUBBER CO quarterly report, Q2 FY2023

Goodyear Tire & Rubber Company — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023. Comparisons are with the corresponding 2022 periods. Dollar amounts are in millions unless noted.

Business context

Goodyear is a global tire manufacturer operating through Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific segments. Management described a difficult macroeconomic environment, with inflation, higher interest rates and softer replacement demand. In the second quarter, tire shipments fell 10.7% year over year; replacement volumes weakened in the Americas and EMEA, while original-equipment demand improved.

Key financial results

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Net sales	$4,867	$5,212	$9,808	$10,120
Goodyear net income (loss)	$(208)	$166	$(309)	$262
Diluted earnings (loss) per share	$(0.73)	$0.58	$(1.08)	$0.91
Total segment operating income	$124	$364	$249	$667
Segment operating margin	2.5%	7.0%	2.5%	6.6%
Operating cash flow	Not separately provided for quarter	$(434)	$(533)

Q2 cost of goods sold was 84.7% of sales, versus 80.0% a year earlier; for the first half it was 84.8%, versus 80.4%. Q2 selling, administrative and general expense was 14.5% of sales, versus 13.8%.
Q2 segment operating income fell $240 million year over year. Higher conversion costs, lower tire volume, the Tupelo storm, transportation/import costs and unfavorable currency effects outweighed improved price and product mix. Price and mix improved $219 million in the quarter and $637 million in the first half, more than offsetting higher raw-material costs.
By segment, Q2 operating income was $103 million in Americas and $40 million in Asia Pacific; EMEA posted a $19 million operating loss. EMEA also reported a first-half operating loss of $11 million.
Interest expense was $138 million in Q2 and $265 million in the first half, up 25.5% and 23.8%, respectively. Average borrowing rates rose year over year.

Liquidity, debt and cash flows

At June 30, cash and cash equivalents were $1,049 million, down from $1,227 million at year-end 2022. Cash, cash equivalents and restricted cash totaled $1,112 million.
Unused availability under credit agreements was $3,133 million, compared with $4,035 million at December 31, 2022. Management said liquidity was adequate for operating and investing needs and debt maturities over the next 12 months.
Total debt and finance leases were approximately $8.8 billion, including $8,027 million of long-term debt and finance leases and $783 million due within one year. Approximately 29% of debt had variable interest rates, averaging 6.45% at quarter-end.
First-half operating cash use was $434 million; investing cash use was $645 million, including $536 million of capital expenditures; financing provided $876 million, primarily from net borrowings. Working capital used $550 million of cash in the first half.
Goodyear was in compliance with applicable material covenants at June 30, 2023. Its first-lien revolving-credit financial covenant was not applicable at that date; the company reported compliance with the applicable European facility covenant.

Material changes, unusual items and outlook

Net sales declined 6.6% in Q2 and 3.1% in the first half. Global tire unit sales fell 10.7% in Q2 and 8.9% in the first half, primarily on lower replacement demand. Selling-price and product-mix improvements partly offset lower volume and currency headwinds.
A severe April storm damaged and temporarily shut down the Tupelo, Mississippi facility. Management estimated a $77 million sales impact and a $64 million earnings impact for both Q2 and the first half, including a $15 million insurance deductible. Production neared full capacity by the end of July. Insurance proceeds for business interruption were not yet recorded as a receivable because the claim was not substantially complete.
Q2 included $72 million of rationalization charges, versus $26 million a year earlier; first-half charges were $104 million, versus $37 million. The new Fulda, Germany plan aims to reduce production capacity by about 50% and includes approximately 550 job reductions. Expected pretax charges are $105–$115 million, with most cash outflows expected in 2024. The plan remains subject to employee consultation.
Other items included a $59 million gain on a warehouse sale-and-leaseback in Q2 2023, compared with a $95 million gain on retail-property sale-and-leasebacks in Q2 2022; higher pension costs, including $36 million of settlement charges; and foreign-exchange losses related in part to the Turkish lira and Argentine peso.
Management expected Q3 2023 replacement tire volume to be 3%–4% below Q3 2022 and OE volume approximately flat. It forecast raw-material costs about $125 million lower year over year, with price/mix net of lower raw-material costs benefiting Q3 by about $100 million; non-raw-material inflation was expected to reduce segment operating income by about $80 million.
For full-year 2023, management continued to expect approximately $1.0 billion in capital expenditures, $100 million in rationalization payments, and working capital to provide about $100 million of operating cash. It expected interest expense of approximately $540 million and income-tax payments of approximately $200 million, excluding one-time items.
Risks highlighted include weak demand and channel destocking, persistent labor, energy and transportation inflation, raw-material volatility, supply-chain and labor disruptions, currency movements, substantial debt and variable-rate exposure, restricted movement of cash from certain countries, and contingent legal, environmental and tax liabilities.
At June 30, recorded liabilities included $79 million for environmental matters, $188 million for workers’ compensation and $442 million for general and product liability and other tort claims. The company reported about 37,000 pending asbestos claims; it noted that excess costs are reasonably possible but cannot be reasonably estimated.
The filing’s exhibit list references a July 25, 2023 cooperation agreement with Elliott Investment Management and related parties. The agreement’s terms are not described in the supplied filing text.

Important facts for investors to verify

Whether replacement demand, dealer and distributor destocking, and production levels evolve as management expected—and whether price and mix continue to offset costs.
The actual operational recovery, insurance reimbursement and final financial effects of the Tupelo storm.
Execution, consultation outcomes, cash costs and savings from the Fulda and other rationalization plans.
Debt maturities, borrowing costs, available credit and covenant headroom, particularly if operating cash flow remains weak.
Realizability of deferred tax assets: management cited about $1.2 billion of U.S. net deferred tax assets and a $940 million Luxembourg valuation allowance, while noting forecast and macroeconomic uncertainty.
The potential development of asbestos and other contingencies, and the terms and implications of the Elliott cooperation agreement.