Business context and reporting period
The Goodyear Tire & Rubber Company filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. Goodyear operates tire businesses across the Americas, EMEA, and Asia Pacific. Results include Cooper Tire from its June 7, 2021 acquisition date; comparisons with 2020 are therefore affected by both the acquisition and recovery from pandemic disruption.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $4.934 billion | $3.465 billion | $12.424 billion | $8.665 billion |
| Goodyear net income (loss) | $132 million | $(2) million | $211 million | $(1.317) billion |
| Diluted EPS | $0.46 | $(0.01) | $0.82 | $(5.62) |
| Segment operating income (loss) | $372 million | $162 million | $897 million | $(316) million |
| Segment operating margin | 7.5% | 4.7% | 7.2% | (3.6)% |
| Cash from operating activities | Not separately provided for the quarter | $(2) million | $(239) million |
Q3 cost of goods sold was 78.9% of sales versus 80.1% a year earlier; selling, administrative and general expense was 14.7% versus 16.0%. Nine-month cost of goods sold was 78.3% of sales versus 87.1%, and selling, administrative and general expense was 15.7% versus 18.3%.
At September 30, cash and cash equivalents were $1.187 billion, down from $1.539 billion at December 31, 2020. Unused availability under credit agreements was $4.195 billion. Current assets were $8.121 billion and current liabilities $6.893 billion. Balance-sheet debt, including notes payable and current maturities, was approximately $8.301 billion, compared with approximately $5.990 billion at year-end 2020. Capital expenditures were $666 million for the nine months.
Material changes versus the prior comparable period
- Q3 sales rose 42.4%; nine-month sales rose 43.4%. Growth reflected Cooper Tire, higher tire volume, improved price and product mix, and, for the nine-month period, favorable foreign currency translation.
- Q3 tire unit shipments increased 31.6% to 48.2 million; nine-month shipments increased 36.7% to 120.7 million. Replacement volumes recovered strongly, while Q3 original-equipment volume declined 7.3% amid vehicle-production constraints.
- Q3 segment operating income improved by $210 million. Better price and product mix contributed $332 million, partly offset by $161 million of higher raw-material costs. Nine-month segment operating income improved by $1.213 billion, also reflecting volume recovery and the absence of 2020 impairments.
- Cooper contributed $907 million of Q3 sales and $30 million of Goodyear net income for the period since acquisition. Nine-month acquisition-related inventory fair-value amortization reduced earnings by $110 million.
- Operating cash use improved from $239 million to $2 million, but working capital used $1.064 billion of cash during the 2021 nine-month period.
Outlook, management commentary, and risks
- Management expected Q4 2021 volume to be below Q4 2019 excluding Cooper; including Cooper, it expected trends similar to Q3 2021 versus 2019.
- Full-year 2021 raw-material cost increases were estimated at $450–$475 million, excluding Cooper’s incremental impact through Q2 2022. Q4 raw-material costs were expected to approach $300 million; management expected price and mix benefits to exceed those costs.
- Management forecast $300–$500 million of working-capital reinvestment in 2021 and expected Q4 operating cash flow to exceed capital expenditures due to normal seasonality. Full-year capital expenditures were expected to be approximately $1.0 billion.
- Management cited ongoing COVID-19 uncertainty, semiconductor and other component shortages, shipping disruption, higher raw-material, wage, benefit, transportation and energy costs, U.S. labor shortages and manufacturing inefficiencies, and rolling blackouts affecting Chinese facilities. A severe U.S. winter storm reduced nine-month earnings by an estimated $52 million before tax and minority interests.
- Goodyear reported $8.301 billion of balance-sheet debt and said 21% of debt carried variable rates. It reported covenant compliance at quarter-end; revolving-credit availability is subject to a borrowing base and may decline if eligible collateral values fall.
- Contingencies include asbestos and other product-liability claims, environmental matters, workers’ compensation, tax assessments, and other litigation. The company recorded $397 million for general and product liability and other tort claims, including asbestos, and disclosed that excess asbestos losses may be material but cannot be reasonably estimated.
- The Cooper purchase-price allocation remained preliminary; final fair values could differ materially. The company also noted uncertainty in realizing deferred tax assets, including foreign tax credits. No common dividends were declared or paid in 2021; the quarterly dividend had been suspended in April 2020.
Important facts for investors to verify
- Whether Cooper integration, synergies, and final purchase accounting support sustained earnings and cash generation.
- Whether pricing and product mix continue to offset raw-material inflation, labor, freight, and energy costs.
- Whether working-capital investment reverses as expected and operating cash flow improves after the acquisition-related outlays.
- Debt maturities, refinancing costs, borrowing-base availability, and ongoing covenant compliance.
- Developments in tax-asset recoverability and material asbestos, product-liability, environmental, and other legal exposures.