Goodyear Tire & Rubber Co. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results; dollar amounts are in millions except per-share data.
Business context
Goodyear operates four regional tire segments: North America, Europe/Middle East/Africa (EMEA), Latin America, and Asia Pacific. Management described uneven conditions: worldwide tire shipments fell 2.2% in Q2 year over year, while pricing and product mix strengthened revenue. Raw-material costs rose sharply.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $5,620 | $4,528 | $11,022 | $8,798 |
| Income before taxes | $120 | $82 | $306 | $111 |
| Net income (loss) attributable to Goodyear | $47 | $28 | $150 | $(19) |
| Net income (loss) available to common shareholders | $40 | $28 | $143 | $(19) |
| Diluted earnings (loss) per common share | $0.16 | $0.11 | $0.57 | $(0.08) |
| Total segment operating income | $382 | $219 | $709 | $459 |
| Segment operating margin | 6.8% | 4.8% | 6.4% | 5.2% |
For the six-month period, cash used in operating activities was $669, versus $183 provided in 2010; investing activities used $483, including $532 of capital expenditures. Financing activities provided $927. Cash and equivalents ended June 30 at $1,804, down from $2,005 at year-end 2010.
At June 30, total credit arrangements were $8,105, with $2,398 unused availability. Balance-sheet debt and capital leases were approximately $5,304, including $257 due within one year and $261 of notes payable and overdrafts. Total debt and capital leases were $4,745 at December 31, 2010. Current assets were $9,776 and current liabilities $5,919. Interest expense was $81 in Q2 and $155 for six months.
Cost of goods sold was 81.4% of sales in Q2, unchanged from 2010; for six months it was 82.0%, versus 81.2%. Selling, administrative and general expense was 13.4% of Q2 sales versus 14.8%, and 12.9% for six months versus 14.5%.
Material changes and drivers
- Sales rose 24.1% in Q2 and 25.3% for six months. Pricing and product mix, foreign exchange, and tire-related businesses contributed; six-month tire volume also increased.
- Q2 segment operating income increased $163, primarily as price and mix gains of $554 more than offset $381 of higher raw-material costs. Six-month segment operating income rose $250; $915 of price/mix gains more than offset $733 of higher raw-material costs, with lower conversion costs also helping.
- Regional segment results were mixed. Q2 operating income improved in North America and EMEA, while Latin America declined to $54 from $66 and Asia Pacific was nearly flat at $65. Six-month Latin American income fell to $121 from $142; Asia Pacific was $132 versus $133.
- Q2 other expense increased to $48 from $7, including $53 of financing charges tied to redeeming $350 principal amount of 10.5% notes. The redemption included a $37 cash premium and a $16 write-off of deferred financing costs and discount.
- The company issued 10 million mandatory convertible preferred shares in March, receiving net proceeds of approximately $485. The shares carry a 5.875% dividend and convert mandatorily in April 2014, potentially diluting common shareholders.
- Operating cash flow was pressured by $1,256 of trade-working-capital outflows, including higher receivables and inventories, reflecting higher prices and raw-material costs, seasonality, and weaker Q2 sales.
Outlook, risks and unusual items
- For 2011, Goodyear expected unit sales growth of 3%–5%, but toward the lower end. Its outlook included North American consumer replacement flat to up 2%, commercial replacement up 10%–15%; European consumer replacement up 4%–6% and commercial replacement up 7%–11%.
- Management expected second-half 2011 raw-material costs to exceed 2010 by more than 30%, or nearly $600 per quarter. It cautioned that pricing and other mitigation measures may not fully offset rapid cost increases in the near term.
- 2011 capital expenditures were expected at $1.1–$1.2 billion; pension contributions at approximately $250–$300; interest expense at $325–$350; and preferred dividends at $22 if declared. Management said available cash and credit were expected to fund operating and investing needs and 2011 maturities.
- Goodyear ceased production at its Union City, Tennessee facility on July 11. Total closure charges were estimated at approximately $290, including $175 cash and $115 non-cash; most remaining charges were expected by Q4 2011. Annualized savings of approximately $80 were expected beginning in 2012.
- The company recorded $55 of six-month rationalization charges and $34 of asset write-offs and accelerated depreciation. It also recognized an $11 Q2 pension settlement charge and $3 of tornado-related charges.
- Tax expense included unfavorable discrete items of $18 for six months, primarily prior-year settlements and increased reserves after foreign tax-court rulings. A full valuation allowance remained against U.S. federal and state deferred tax assets; possible foreign valuation-allowance releases could produce tax benefits of up to $130.
- Contingencies include asbestos litigation: 82,700 claims were pending; recorded gross liabilities were $128, with $68 of insurance receivables. The filing estimates gross liabilities net of probable insurance recoveries could exceed recorded amounts by about $10, while noting additional excess costs cannot be reasonably estimated. Environmental liabilities were $47; workers’ compensation liabilities $307; and product-liability and other tort liabilities $303.
- Other risks include raw-material volatility, substantial debt and variable-rate exposure, pension underfunding, foreign exchange and restricted cash transfers, litigation, and execution of restructuring and asset sales. Management reported compliance with applicable material debt covenants at June 30.
Important facts for investors to verify
- Whether pricing and product mix continue to offset rapidly rising raw-material costs, and whether the expected lower-end unit growth outlook is achieved.
- Working-capital trends, inventory levels, operating cash flow, and the company’s ability to fund planned capital expenditures and pension contributions.
- Debt maturities, credit availability, covenant compliance, and dilution and dividend obligations from the mandatory convertible preferred stock.
- Actual Union City closure costs, timing of remaining charges, and realization of expected annual savings.
- Progress and financial effects of the European farm-tire sale, Amiens social plan, and completed wire-business sale.
- Developments in asbestos and other claims, foreign tax disputes and valuation allowances, and Venezuela’s currency controls and settlement delays.