Goodyear Tire & Rubber Co. — Q3 2012 Form 10-Q
Business context and period. Unaudited quarterly report for the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Goodyear operates four regional tire segments: North America, EMEA, Latin America, and Asia Pacific. Management described economic and industry conditions as difficult, especially in Europe.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $5.264bn | $6.062bn | $15.947bn | $17.084bn |
| Income before taxes | $186m | $305m | $408m | $611m |
| Net income attributable to Goodyear | $117m | $168m | $205m | $318m |
| Net income available to common shareholders | $110m | $161m | $183m | $303m |
| Diluted EPS | $0.41 | $0.60 | $0.73 | $1.19 |
| Segment operating income | $348m | $463m | $976m | $1.172bn |
| Segment operating margin | 6.6% | 7.6% | Not stated | Not stated |
- Q3 cost of goods sold was 82.0% of sales, unchanged from 2011. SAG expense was $652m, or 12.4% of sales, versus $677m, or 11.2%, a year earlier.
- For the first nine months, operating cash flow was negative $329m (versus negative $972m); capital expenditures were $788m, making operating cash flow less capital expenditures negative $1.117bn. Investing cash flow was negative $800m and financing cash flow was positive $598m.
- Cash and equivalents were $2.257bn at September 30, down $515m from year-end 2011. Unused credit availability was $2.198bn; management described cash plus unused availability as approximately $4.5bn.
- Balance-sheet debt and capital leases, including amounts due within one year and notes payable/overdrafts, totaled approximately $5.981bn, versus $5.201bn at December 31, 2011. At September 30, 48% of debt had variable rates, averaging 5.20%.
Material changes versus prior period
- Q3 sales fell 13.2%; worldwide tire unit sales declined 12.4%, with replacement volume down 16.3%. The company cited lower volumes, unfavorable currency translation, and lower chemical-product sales; improved price and product mix partly offset the declines.
- Q3 segment operating income decreased $115m. Price and mix contributed $159m and raw-material costs were $13m lower, but lower volume and increased conversion costs—especially under-absorbed overhead—more than offset those benefits.
- EMEA was the largest pressure point: Q3 segment sales fell 21.5% and operating income fell 59.6%. North American Tire operating income rose 66.7%; Asia Pacific income was slightly higher. Latin American income declined 21.0%.
- Nine-month sales declined 6.7% and segment operating income declined $196m. Price and mix improved $997m, partly offsetting a $578m increase in raw-material costs, higher conversion costs, and lower volume.
- Cash used in operations improved year over year mainly because working-capital cash use was lower, though pension contributions increased by $269m and earnings declined.
Outlook, management commentary, risks, and unusual items
- Management expected 2012 tire unit volume to decline approximately 8% from 2011 and planned further Q4 production cuts. It estimated full-year incremental under-absorbed fixed costs of $230m–$250m, net of Union City closure savings.
- Raw-material costs were expected to rise approximately 7% for full-year 2012 versus 2011, but decline approximately 10% in Q4 versus Q4 2011; management cautioned that commodity-price volatility could change the estimate. The filing provides regional industry-volume forecasts, with Europe expected to contract across consumer and commercial categories.
- Expected 2012 cash needs included pension contributions of $550m–$600m, capital expenditures of $1.0bn–$1.1bn, interest expense of $355m–$365m, and $29m of preferred dividends if declared. Management said liquidity was adequate for anticipated 2012 needs, while noting uncertainty around cash flows and capital-market access.
- Goodyear issued $700m of 7% senior notes due 2022 and redeemed $650m of 10.5% notes due 2016. It extended the maturities of its U.S. first-lien revolver to 2017 and second-lien term loan to 2019. The nine-month results included $86m of expense tied to the note redemption and $24m tied primarily to the term-loan amendment.
- Other notable items included $67m of nine-month rationalization charges; $20m of EMEA labor-claim expense; a $27m EMEA estimated 2012 obligation under a tire take-or-pay contract; a $9m U.K. pension settlement charge; and an out-of-period $13m interest adjustment for prior-period capitalized interest.
- Key risks include recession and competition, raw-material and currency volatility, high fixed costs, substantial debt and variable-rate exposure, underfunded pensions, financing/covenant access, and restrictions on moving cash between countries. Approximately $329m of cash was held in Venezuela and subject to currency controls; management noted possible additional losses if exchange rates or repatriation methods change.
- Contingencies include asbestos and other product-liability claims, environmental and workers’ compensation liabilities, tax disputes, and Greek labor litigation. The Greek cases could result in estimated liability of about €44m ($57m), plus possible payroll taxes and social-security contributions, if the company’s appeal fails. Management also disclosed that asbestos costs could exceed recorded amounts by about $10m, while larger excess costs are reasonably possible but not reasonably estimable.
Important facts for investors to verify
- Whether weak European replacement demand and further production cuts persist, and how they affect volumes, segment margins, and under-absorbed overhead.
- Whether price/mix gains and cost-saving initiatives can offset commodity costs, inflation, and lower utilization.
- Cash conversion, seasonal working-capital requirements, pension contributions, capital spending, and the availability and borrowing-base limits of credit facilities.
- Debt refinancing needs, variable-rate exposure, covenant compliance, and the practical availability of cash held in restricted jurisdictions.
- Resolution and potential cash impact of Greek labor, asbestos, tax, environmental, product-liability, and other legal contingencies.
- Progress on restructuring actions, the China facility relocation/closure, and expected insurance recoveries related to Thailand flood losses.