Goodyear Tire & Rubber Co. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results; dollar amounts are in millions unless stated otherwise. Goodyear operates regional tire businesses in North America, EMEA, Latin America and Asia Pacific.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $5,150 | $5,620 | $10,683 | $11,022 |
| Income before taxes | $166 | $120 | $222 | $306 |
| Goodyear net income | $92 | $47 | $88 | $150 |
| Net income available to common shareholders | $85 | $40 | $73 | $143 |
| Diluted EPS | $0.33 | $0.16 | $0.30 | $0.57 |
| Total segment operating income | $336 | $382 | $628 | $709 |
| Segment operating margin | 6.5% | 6.8% | Not clearly stated | Not clearly stated |
Q2 cost of goods sold was $4,141, or 80.4% of sales, versus $4,572, or 81.4%, a year earlier. Selling, administrative and general expense was $697 (13.5% of sales), versus $753 (13.4%). Q2 consolidated net income was $103, including $11 attributable to minority shareholders.
For the six months, operating cash flow was negative $451, investing cash flow negative $512, and financing cash flow positive $343. Capital expenditures were $490. Cash declined $616 from year-end 2011 to $2,156, mainly due to seasonal working capital, capital spending and pension funding. Management attributed the lower operating cash use versus the prior-year period to reduced working-capital use.
At June 30, cash and cash equivalents were $2,156 and unused credit availability was $2,496, for approximately $4.7 billion of combined liquidity. Total debt and capital leases were approximately $5.67 billion, including current and long-term balances, compared with approximately $5.20 billion at December 31, 2011. Forty-five percent of debt was variable-rate, averaging 5.24%. The company reported compliance with currently applicable material debt covenants.
Material changes and operating results
- Q2 sales declined 8.4%; worldwide tire shipments fell 8.6% to 39.2 million. Replacement volume decreased 14.2%, partly offset by 6.0% growth in original-equipment volume. Lower volume and unfavorable currency translation outweighed higher pricing and product mix.
- Q2 segment operating income fell $46 to $336. Higher conversion costs and lower volume were partly offset by $313 of improved price and product mix; raw-material costs increased $171, including savings measures.
- North American Tire posted record Q2 segment operating income of $188, up $51. EMEA operating income fell to $19 from $126, reflecting severe replacement-volume weakness and higher under-absorbed fixed costs. Latin America earned $58 and Asia Pacific $71.
- For the first half, segment operating income declined $81 to $628. Price and product mix improved $838, more than offsetting $591 of higher raw-material costs, but lower volume and higher conversion costs weighed on results.
- Q2 interest expense was $83, up $2 year over year. First-half interest expense rose to $184 from $155, reflecting higher average debt and rates, plus a $13 out-of-period adjustment to correct previously capitalized interest.
- Other expense included $129 of financing fees in the first half, including $86 related to redeeming $650 of 10.5% notes and $24 related to amending the second-lien term loan. The company issued $700 of 7% notes due 2022 and extended maturities of its U.S. revolving and second-lien facilities to 2017 and 2019, respectively.
Outlook, commentary and risks
- Management expects full-year 2012 tire unit volume to decline approximately 5%–7% versus 2011, citing recessionary conditions in Europe and weakness elsewhere. It plans further production cuts and cost actions in the second half.
- Expected 2012 raw-material costs were revised to an increase of approximately 7% versus 2011; Q3 costs were expected to be essentially flat year over year. Commodity prices remain volatile, and Goodyear does not hedge commodity prices.
- Management now expects approximately $150 of 2012 cost from under-absorbed fixed costs, as production-cut impacts more than offset anticipated $80 savings from the Union City closure. It expects to slightly exceed its 2010–12 cost-savings goal of $1.0 billion.
- Expected 2012 capital expenditures were $1.1–$1.2 billion; funded pension contributions were expected at $550–$600, and interest expense at $350–$370. MAP-21, enacted after quarter-end, was expected to reduce U.S. minimum pension contributions by $375–$425 in aggregate over five years, with the largest benefit in 2013–14. Goodyear estimated U.S. pension contributions of $425–$450 in 2012 and $225–$275 in 2013.
- Risks include weak demand, raw-material and currency volatility, substantial debt and variable interest rates, pension underfunding, fixed-cost absorption, access to financing, and legal/product-liability exposures. Cash and net assets in some countries are subject to transfer restrictions; approximately $659 of net assets, including $519 of cash, were subject to such restrictions, including $315 of Venezuelan cash.
- Recorded contingencies included $47 of environmental liabilities, $309 of workers’ compensation liabilities and $305 of general/product-liability and other tort liabilities. Asbestos reserves were $136 gross, with a $69 insurance receivable; reasonably possible additional net exposure could exceed recorded amounts by about $10, while further excess costs could not be reasonably estimated. A Greek labor appeal, if unsuccessful, was estimated to expose the company to approximately €44 ($56), with outcome uncertain.
- Unusual items included a $20 Q2 charge for EMEA labor claims and $2 of Q2 repair costs related to 2011 tornado damage. The company also reported continuing ERP implementation in EMEA and Latin America; management said disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Whether weak European replacement demand and planned production cuts persist, and whether the 5%–7% full-year volume decline and $150 under-absorption estimate remain achievable.
- Whether pricing and product mix continue to offset raw-material inflation, and whether the targeted cost savings are realized.
- Cash conversion and liquidity after seasonal working-capital demands, capital expenditures, pension contributions and debt service; also review debt maturities, covenant headroom and restricted cash access.
- Actual pension funding after MAP-21 and the sensitivity of future contributions to interest rates and plan funding levels.
- Developments in asbestos, Greek labor and other litigation, and recoverability of related insurance claims.