Goodyear Tire & Rubber Co. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Comparisons are with Q1 2012 unless stated otherwise. Amounts are in U.S. dollars and millions, except per-share data and tire volumes.
Business context and results
Goodyear manufactures tires through four regional segments: North America, Europe, Middle East and Africa (EMEA), Latin America, and Asia Pacific. Management cited weak industry conditions, particularly in Europe. Worldwide tire shipments fell 8.1% to 39.5 million units.
- Net sales declined 12.3% to $4,853, mainly from lower tire volumes, reduced chemical-product sales, and unfavorable currency translation.
- Net income attributable to Goodyear was $33, compared with a $4 loss. Income available to common shareholders was $26, or $0.10 per diluted share, versus an $11 loss, or $0.05 per share.
- Cost of goods sold was 81.2% of sales, versus 83.3%; calculated gross margin improved to approximately 18.8% from 16.7%. Segment operating income rose to $302 from $292, and segment operating margin improved to 6.2% from 5.3%.
- Interest expense fell to $85 from $101. Other expense increased to $126 from $92, including a $115 Venezuelan currency remeasurement loss.
Segment performance
- North America: Sales fell 13.3% to $2,166; operating income increased to $127 from $80, with margin of 5.9% versus 3.2%.
- EMEA: Sales fell 17.1% to $1,607; operating income declined to $31 from $90, with margin of 1.9% versus 4.6%. Unit volume decreased 16.1% amid weak demand and competition.
- Latin America: Sales slipped 1.5% to $513; operating income rose to $60 from $55, with margin of 11.7% versus 10.6%. Currency translation and the Venezuelan devaluation were significant pressures.
- Asia Pacific: Sales declined 1.7% to $567; operating income increased to $84 from $67, with margin of 14.8% versus 11.6%.
Cash flow, debt and liquidity
- Operating cash flow was negative $937, compared with negative $754. The principal drain was $908 of pension contributions and direct payments, including $834 of discretionary contributions to fully fund frozen U.S. pension plans.
- Investing cash flow was negative $283, including $271 of capital expenditures. Financing cash flow was positive $1,462, primarily reflecting net borrowings of $1,486.
- Cash and equivalents were $2,386 at quarter-end, up from $2,281 at December 31, 2012. Unused credit availability was $2,289, down from $2,949.
- Reported debt and capital leases totaled approximately $6,581, including $107 of notes payable and overdrafts, compared with approximately $5,086 at year-end. The increase largely reflected the $900 issuance of 6.5% senior notes due 2021 and additional borrowings. About 38% of debt carried variable rates, averaging 5.46%.
- Goodyear reported compliance with applicable material debt covenants. The first-lien revolver had no borrowings; availability is subject to a borrowing base and could decline if eligible receivables or inventory fall.
Outlook, management commentary and risks
- For 2013, management expected tire unit volume to be similar to 2012, reflecting weak conditions, especially in Europe. It forecast lower raw-material costs than in 2012 and a net benefit from raw materials and price/product mix, while warning that commodity-price volatility could materially alter that outlook.
- Management expected incremental unabsorbed fixed costs of approximately $25–$50 and cost savings to more than offset general inflation. It expected 2013 capital expenditures of $1.0–$1.2 billion and pension expense of $275–$325.
- Management said the pension funding and asset-allocation changes are expected to reduce annual pension contributions by approximately $125 beginning in 2014. It also estimated MAP-21 funding stabilization would reduce required U.S. contributions by approximately $375–$425 in aggregate through 2016.
- The announced EMEA farm-tire exit and Amiens, France facility closure are expected to improve annual EMEA operating income by approximately $75 versus 2012 after closure; timing was not yet estimable. Approximately 1,700 associates remained to be released under prior rationalization plans.
- Venezuela’s February 2013 exchange-rate change generated a $115 remeasurement loss. Currency controls restrict remittances; approximately $289 of cash was held in Venezuela, and $182 of requested U.S.-dollar liability settlements were pending before the currency exchange board. Further devaluation or exchange-rate changes could cause additional losses.
- Other disclosed exposures include asbestos litigation (about 73,500 pending claims; losses above reserves are reasonably possible but not estimable), workers’ compensation (potential excess over reserves estimated at about $40), environmental matters, tax disputes, and Greek labor litigation. The Greek judgments were estimated at approximately €50 ($64), with a separate €12 ($16) severance claim; appeals were pending.
- Additional risks include substantial debt, pension funding and interest-rate sensitivity, foreign exchange and commodity volatility, weak demand and competition, fixed-cost exposure, access to credit, and possible Sumitomo Rubber Industries minority exit rights. The company said SRI had not provided notice that exit rights were exercisable.
Most important facts for investors to verify
- Whether sales and tire volumes stabilize, particularly in EMEA, and whether segment margins hold as raw-material savings and pricing evolve.
- Whether cash generation improves after the exceptional frozen-pension funding, and how actual pension contributions compare with forecasts.
- Debt levels, available borrowing capacity, borrowing-base limits, covenant compliance, and the cost of variable-rate debt.
- The continuing financial and cash-flow impact of Venezuelan currency controls, pending settlements, and possible further devaluation.
- Developments in EMEA restructuring and material legal exposures, including the Greek labor cases and asbestos claims.