Goodyear Tire & Rubber Co. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unaudited consolidated results; dollar figures are in millions unless stated otherwise.
Business context and results
Goodyear operates four regional tire businesses: North America, Europe/Middle East/Africa (EMEA), Latin America, and Asia Pacific. Management reported softening industry conditions amid economic uncertainty, while higher pricing and improved product mix supported record third-quarter sales, net income, and segment operating income. Third-quarter tire unit shipments were flat year over year.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $6,062 | $4,962 | $17,084 | $13,760 |
| Income before taxes | $305 | $42 | $611 | $153 |
| Consolidated net income (loss) | $211 | ($13) | $391 | $2 |
| Goodyear net income (loss) | $168 | ($20) | $318 | ($39) |
| Goodyear diluted EPS available to common shareholders | $0.60 | ($0.08) | $1.19 | ($0.16) |
| Segment operating income | $463 | $234 | $1,172 | $693 |
| Segment operating margin | 7.6% | 4.7% | 6.9% | 5.0% |
| Cash from operating activities | Not separately stated for Q3 | ($972) | $83 |
Third-quarter consolidated gross margin, calculated from reported sales and cost of goods sold, was approximately 18.0%, versus 17.0% a year earlier. Selling, administrative and general expense was 11.2% of sales, down from 12.9%. The nine-month effective tax expense was $220 million on $611 million of pretax income; management cited tax settlements and increased reserves, including adverse foreign tax-court rulings.
At September 30, cash and cash equivalents were $2,126, versus $2,005 at year-end 2010. Unused credit availability was $1,692, for reported cash plus unused availability of approximately $3.8 billion. Total current assets were $10,512 and current liabilities $5,819. Debt and capital leases were $5,771 long term plus $212 due within one year; notes payable and overdrafts were a further $312. Thus these reported debt-related balances totaled approximately $6.1 billion, compared with approximately $4.7 billion at December 31, 2010. Half of debt carried variable rates, averaging 3.94%.
Material changes and management commentary
- Third-quarter sales grew 22.2%; nine-month sales grew 24.2%. Management attributed growth chiefly to price/product mix, favorable currency translation and tire-related businesses; nine-month sales also benefited from higher tire volume.
- Third-quarter segment operating income rose $229 million. Price and product mix contributed $739 million, more than offsetting a $506 million increase in raw-material costs. For the nine months, the corresponding contributions were $1,654 million and $1,239 million.
- Operating cash flow swung to a $972 million use, principally because working capital absorbed cash: trade working-capital outflows were $2,138 million, versus $806 million in the prior-year period. Investing activities used $715 million, including $806 million of capital expenditures. Financing provided $1,875 million, including $484 million net proceeds from preferred stock and increased borrowings.
- North American Tire operating income improved to $78 million from $5 million in Q3; EMEA rose to $260 million from $77 million. Latin American Tire declined to $62 million from $95 million, and Asia Pacific Tire increased to $63 million from $57 million.
- Goodyear issued 10 million shares of 5.875% mandatory convertible preferred stock in March, generating $484 million net proceeds. The shares are scheduled to convert on April 1, 2014, subject to the stated conversion terms, and carry quarterly dividends when declared.
Outlook, risks and unusual items
- Management lowered its 2011 unit-sales growth expectation to approximately 1%, from a prior range of 3%–5%, reflecting weaker industry conditions. It expected fourth-quarter raw-material costs to rise by more than 30%, or more than $600 million, compared with Q4 2010; management cautioned price and cost actions might not fully offset rapid increases in the near term.
- 2011 capital expenditures were expected to be $1.1–$1.2 billion, pension contributions approximately $225–$250 million, and interest expense approximately $330 million. Management stated it believed liquidity was adequate for operating needs, investment and 2011 maturities.
- Union City, Tennessee production ceased in July. The closure generated $30 million of charges in Q3 and $98 million in the first nine months, including accelerated depreciation and asset write-offs. Management expected approximately $80 million of annualized savings beginning in 2012.
- After severe flooding, the Bangkok consumer and aviation tire facility closed October 20, after quarter-end. The damage and reopening date were not yet known; management expected adverse effects on Q4 production and sales, but did not then expect a material impact on overall results. Insurance is available subject to deductibles.
- The proposed European farm-tire business sale remained conditional; management said completion by the November 30, 2011 put-option deadline was unlikely. If completed, the estimated loss was $50–$60 million, with estimated annualized EMEA operating-income benefit of $15–$20 million. The completed Latin American farm-tire sale was expected to reduce segment operating income by approximately $30–$35 million annually.
- Goodyear contested Brazilian value-added-tax assessments totaling approximately $97 million, including interest and penalties. The filing also disclosed asbestos liabilities and insurance uncertainties: recorded gross liabilities were $130 million, with a $69 million insurance receivable; estimated net liabilities could reasonably exceed recorded amounts by about $10 million, and further excess costs could not be reasonably estimated.
- Other stated risks include high raw-material costs, substantial debt and variable-rate exposure, pension underfunding, economic weakness, currency and country risks, competition, litigation, and access to financing. The company reported compliance with applicable material debt covenants at September 30, 2011.
Important facts for investors to verify
- Whether working-capital investment reverses and operating cash flow improves after the unusually large nine-month cash outflow.
- Whether pricing, product mix, cost savings and production levels can offset the forecast rise in raw-material costs and weaker demand.
- Debt maturities, borrowing-base availability, covenant headroom and the effect of additional borrowing on leverage and interest expense.
- The financial and production consequences of Thailand flood damage, plus the status of the European farm-tire sale and Union City savings.
- Potential cash exposure from Brazilian tax disputes, asbestos and other litigation, pension funding, and restrictions on transferring cash from certain foreign subsidiaries.