Goodyear Tire & Rubber Co. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2013. Unaudited consolidated financial statements; amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $4.894 billion | $5.150 billion | $9.747 billion | $10.683 billion |
| Income before taxes | $256 million | $166 million | $306 million | $222 million |
| Goodyear net income | $188 million | $92 million | $221 million | $88 million |
| Net income available to common shareholders | $181 million | $85 million | $206 million | $73 million |
| Diluted EPS | $0.67 | $0.33 | $0.79 | $0.30 |
| Total segment operating income | $428 million | $336 million | $730 million | $628 million |
| Segment operating margin | 8.7% | 6.5% | 7.5% | 5.9% |
- Q2 sales declined 5.0%; first-half sales declined 8.8%. Q2 worldwide tire units rose 0.7% to 39.5 million, while first-half tire units fell 3.9% to 79.0 million.
- Q2 cost of goods sold was 78.6% of sales, down from 80.4%; first-half was 79.9%, down from 81.9%. Lower raw-material costs were the principal earnings tailwind, partly offset by weaker price/product mix, higher conversion costs and lower volume.
- First-half cash from operations was negative $462 million, versus negative $451 million. Investing cash flow was negative $502 million, including $493 million of capital expenditures; financing cash flow was positive $1.420 billion. Cash increased $283 million to $2.564 billion, aided by net borrowings.
- At June 30, cash was $2.564 billion and unused credit availability was $2.421 billion, down from $2.949 billion at year-end 2012. Current assets were $8.969 billion and current liabilities $5.175 billion.
- Debt and capital leases totaled approximately $6.450 billion, including current maturities; notes payable and overdrafts added $79 million. Long-term debt and capital leases rose from $4.984 billion at year-end, primarily reflecting new financing and borrowings. A $900 million issue of 6.5% senior notes due 2021 generated approximately $885 million net proceeds.
Material changes and segment results
- Q2 segment operating income improved by $92 million, chiefly because raw-material costs fell $230 million, more than offsetting $85 million of lower price/product mix and $61 million of higher conversion costs. First-half segment income rose $102 million, mainly from $517 million lower raw-material costs, partly offset by weaker price/mix, higher conversion costs and reduced volume.
- Q2 segment income increased in North America ($204 million), EMEA ($51 million), Latin America ($82 million) and Asia Pacific ($91 million), compared with the prior year. First-half EMEA income declined to $82 million from $109 million; the other three regions improved.
- First-half revenue declines reflected lower tire volumes, reduced third-party chemical sales, unfavorable currency translation and lower price/product mix. Q2 revenue also fell despite modestly higher tire shipments.
- Interest expense rose to $102 million in Q2 from $83 million, reflecting higher average debt and interest rates. Other income/expense included a $115 million Venezuela currency remeasurement loss in the first half; Q2 included an $8 million one-time royalty.
Outlook, risks and unusual items
- Management maintained its expectation that 2013 tire-unit volume will be similar to 2012, with second-half volume above the second half of 2012. It expected lower full-year raw-material costs and a net benefit from raw-material costs and price/product mix.
- Management expected $25 million to $50 million of incremental unabsorbed fixed costs in 2013; cost savings were expected to more than offset general inflation. Planned 2013 capital expenditures were approximately $1.1 billion, with interest expense estimated at $395 million to $415 million.
- Goodyear expected approximately $275 million to $325 million of 2013 contributions to funded pension plans, in addition to $834 million of discretionary contributions already made to fully fund frozen U.S. plans. Pension funding, interest rates and plan assumptions remain significant risks.
- The February 2013 Venezuelan bolivar devaluation caused the $115 million remeasurement loss. Currency controls restricted transfers from Venezuela; $324 million of cash was held there at June 30. Management cautioned that further currency changes or delayed settlements could cause additional losses.
- Rationalization charges were $13 million in Q2 and $20 million in the first half. The $222 million rationalization liability included $168 million related to the planned Amiens, France plant closure; completion timing remained uncertain. The EMEA farm-tire exit and closure were expected to improve annual operating income by about $75 million after closure.
- Contingencies include recorded liabilities of $311 million for general and product liability claims, including asbestos, and $44 million for environmental matters. Approximately 74,000 asbestos claims were pending; management noted possible material costs above reserves that could not be reasonably estimated. Greek former-employee litigation included estimated liability up to €37 million, plus possible social-security contributions up to €25 million; a separate severance claim was also pending.
- Other risks cited include weak or uncertain markets, competition, commodity-price volatility, substantial debt and variable-rate exposure, labor disruption, restricted subsidiary cash, tax assessments, and potential SRI alliance exit rights. The filing states Goodyear was in compliance with applicable material debt covenants at June 30.
Important facts for investors to verify
- Whether lower raw-material costs and cost savings continue to offset price/mix pressure, weak demand and higher conversion costs.
- Progress on second-half volume expectations, the Amiens closure and the expected EMEA earnings benefit.
- Cash generation, credit availability, debt maturities and the funding needs of pension plans.
- Developments in Venezuela’s exchange controls, pending U.S.-dollar settlements and the recoverability of the subsidy receivable.
- Changes in asbestos, Greek labor, environmental and tax exposures, including the adequacy of recorded reserves and insurance recoveries.