Goodyear Tire & Rubber Co. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Amounts are in U.S. dollars. Goodyear operates regional tire businesses in the Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $4.941 billion | $4.908 billion |
| Goodyear net income (loss) | $(101) million | $96 million |
| Diluted earnings (loss) per share | $(0.35) | $0.33 |
| Segment operating income | $125 million | $303 million |
| Segment operating margin | 2.5% | 6.2% |
| Cash from operating activities | $(775) million | $(711) million |
| Capital expenditures | $291 million | $276 million |
- Sales rose 0.7%, as $503 million in improved price and product mix and $32 million in higher sales from other tire-related businesses were largely offset by $338 million lower tire volume and $166 million of unfavorable currency translation.
- Worldwide tire shipments fell 7.1% to 41.8 million units. Replacement volume declined 11.2%; OE volume increased 8.2%.
- Cost of goods sold increased 5.7% to $4.193 billion and was 84.9% of sales, versus 80.8%. Inflation, lower production and fixed-cost absorption, transportation, and other cost pressures outweighed volume-related savings. Price and mix improvements more than offset higher raw-material costs.
- Interest expense increased 22.1% to $127 million; average interest rate rose to 6.01% from 5.28%. The loss also reflected higher rationalization charges and non-service pension costs. The effective tax benefit was only $1 million on a $100 million pretax loss.
- Segment results: Americas operating income was $79 million (down from $216 million); EMEA was $8 million (down from $59 million); Asia Pacific was $38 million (up from $28 million).
Cash, debt and liquidity
- Cash and cash equivalents were $1.082 billion at March 31, down from $1.227 billion at year-end. Operating cash use included $859 million used for working capital.
- Investing activities used $456 million, including $291 million of capital spending, $82 million for short-term securities and $76 million in loans to TireHub. Financing activities provided $1.075 billion, primarily from net borrowings. Cash, cash equivalents and restricted cash totaled $1.163 billion at quarter-end.
- Debt and finance-lease obligations, including short-term notes and amounts due within one year, totaled approximately $9.0 billion, versus approximately $7.9 billion at December 31, 2022. The filing reports $2.904 billion of unused credit availability, down from $4.035 billion. Approximately 31% of debt carried variable rates, averaging 6.26% at quarter-end.
- Management said liquidity was adequate for operating and investing needs and debt maturities over the next 12 months. Goodyear was in compliance with applicable material covenants; a first-lien facility financial covenant was not then applicable.
- Current assets were $9.213 billion and current liabilities $6.984 billion. Supplier-finance obligations confirmed to financial institutions were $611 million and included in trade accounts payable.
Outlook, commentary and notable items
- For Q2 2023, management expected replacement tire volume to decline about 5% and OE volume to increase about 10% year over year. It expected raw-material costs to rise about $100 million, with price and mix improvements exceeding that increase by about $200 million. Non-raw-material inflation was expected to reduce segment operating income by about $180 million, net of manufacturing savings or inefficiencies.
- Management expected relative demand stability in Q3 and a return to growth in Q4, while noting uncertainty from inflation, higher interest rates, lower consumer confidence and channel destocking. It planned Q2 production reductions of approximately 3.0 million units.
- For full-year 2023, Goodyear expected approximately $1.0 billion in capital expenditures, $100 million in rationalization payments, $500 million in interest expense, $200 million in income-tax payments excluding one-time items, and $25–$50 million in funded non-U.S. pension contributions. Working capital was expected to provide about $100 million of operating cash flow.
- Severe weather after quarter-end: Tornadoes on April 1 damaged and shut down the Tupelo tire plant and a Whiteland distribution center. Shipments resumed in April; production at Tupelo was expected to restart and ramp up beginning in June, with full ramp-up not expected until Q3. Management estimated Q2 Americas sales impact of $110–$130 million and operating-income impact of $60–$80 million, excluding potential business-interruption insurance recovery. A $15 million insurance deductible for property damage and cleanup was expected to be expensed in Q2.
- Restructuring: Q1 rationalization charges were $32 million, versus $11 million. April plans included an EMEA distribution-center closure, with approximately $18 million of expected pretax cash charges, and manufacturing staffing/capacity reductions, with approximately $3 million of expected charges.
- Contingencies and risks: Recorded liabilities included $435 million for general/product liability and other tort claims, including $126 million of gross asbestos liabilities, and $83 million for environmental matters. The company said asbestos losses above reserves were reasonably possible but not reasonably estimable; insurance recovery and ultimate claim costs remain uncertain. It also highlighted exposure to raw-material, labor, energy, transport, currency and interest-rate volatility, demand weakness, supply disruptions, leverage and tax-asset realization.
- Goodyear reported approximately $1.2 billion of U.S. net deferred tax assets and $1.3 billion of foreign net deferred tax assets; foreign valuation allowances were approximately $1.1 billion, including $909 million in Luxembourg. Management cautioned that future earnings may be insufficient to realize U.S. deferred tax assets, including foreign tax credits.
Most important facts for investors to verify
- Whether pricing and product mix continue to offset raw-material and broader inflation, and whether segment margins recover from Q1 levels.
- Whether tire demand, channel destocking and production cuts track management’s Q2 and second-half expectations.
- The pace and cost of Tupelo’s production recovery, actual lost sales and earnings, and timing and amount of insurance reimbursement.
- Whether negative operating cash flow and working-capital needs moderate, and whether forecast capital spending and rationalization payments are maintained.
- Debt growth, borrowing costs, availability under asset-based credit facilities, and covenant headroom if borrowing-base values or liquidity decline.
- Developments in asbestos and other claims, environmental remediation, and the recoverability of deferred tax assets.