Goodyear Tire & Rubber Co. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited consolidated results. Goodyear manufactures tires and reports through four regional tire segments.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Net sales | $5.402 billion | $4.270 billion; up 26.5% |
| Goodyear net income (loss) | $103 million; $0.42 per share | $(47) million; $(0.19) per share |
| Income before income taxes | $186 million | $29 million |
| Total segment operating income | $327 million; 6.1% margin | $240 million; 5.6% margin |
| Operating cash flow | $(433) million | $123 million |
| Capital expenditures | $284 million | $141 million |
| Cash and cash equivalents | $2.215 billion | $2.005 billion at December 31, 2010 |
| Unused credit availability | $2.096 billion | $2.475 billion at December 31, 2010 |
| Total debt and capital leases | $5.039 billion long-term, including $244 million due within one year; plus $245 million notes payable and overdrafts | $4.507 billion long-term, including $188 million due within one year; plus $238 million notes payable and overdrafts |
Cash from operations was pressured by a $754 million increase in accounts receivable and a $292 million increase in inventories; trade working capital used $770 million of cash. Cash rose chiefly because of $485 million in net preferred-stock proceeds and $489 million of increased net borrowings. Cost of goods sold was 82.6% of sales, versus 80.9%; SG&A was 12.4%, versus 14.2%.
Material changes and segment performance
- Worldwide tire shipments increased 6.5% to 46.8 million units. Revenue growth reflected $512 million of improved price and product mix, $219 million from higher tire volume, $125 million of favorable currency translation, and $276 million of increased tire-related business sales.
- Raw-material costs rose $351 million year over year. Price and product mix nearly offset raw-material cost increases at the segment level; management cited $69 million of cost savings and recovery of approximately $81 million in under-absorbed fixed overhead.
- North American Tire sales rose 29.7% to $2.307 billion and operating income improved to $40 million from a $14 million loss. EMEA sales rose 28.1% to $1.959 billion and operating income increased 40.4% to $153 million.
- Latin American Tire sales rose 22.4% to $585 million, but operating income fell 11.8% to $67 million; tire units declined 4.6%. Asia Pacific sales rose 13.8% to $551 million, while operating income declined 2.9% to $67 million.
- The prior-year quarter included a $110 million foreign-exchange loss, primarily from Venezuela’s currency devaluation; Q1 2011 foreign-exchange losses were $3 million. This was a major factor in the year-over-year earnings improvement.
Outlook, risks and unusual items
- For 2011, management expected tire unit sales to increase 3%–5%, now toward the higher end. It projected raw-material costs for the last three quarters to rise 25%–30% versus 2010 and warned that price and product-mix actions may not fully offset rapid increases in the near term.
- Expected 2011 needs included $1.1–$1.2 billion of capital expenditures, $250–$300 million of pension contributions, and $325–$350 million of interest expense. Preferred dividends were expected to be $22 million when declared. Management said existing cash and available credit should fund needs, while noting liquidity could deteriorate if operating cash flow or credit access weakens.
- Goodyear issued 10 million mandatory convertible preferred shares on March 31, raising $485 million net. The 5.875% shares are scheduled to convert on April 1, 2014, subject to the stated conversion terms. The company planned to redeem $350 million of 10.5% notes for $387 million plus accrued interest, including a $37 million premium.
- After quarter-end, GDTE issued €250 million of 6.75% notes due 2019 and amended its European revolving facility, extending maturity to 2016 while reducing commitments. A new Akron headquarters project is expected to cost $160 million, with approximately $60 million funded through government financing and incentives.
- The Latin American farm-tire sale closed April 1 for $99 million before withholding taxes and adjustments; management expected a small second-quarter gain. The European sale remained subject to a social plan and consultations. Management estimated annualized operating-income effects after sales of approximately $20–$25 million favorable in EMEA, excluding an estimated sale loss of $50–$75 million, and $30–$35 million adverse in Latin America.
- Key risks include raw-material inflation, substantial debt and variable-rate exposure (45% of debt at variable rates), underfunded pensions, foreign-exchange and Venezuela-related restrictions, competition, and litigation. Asbestos liabilities, net of estimated insurance recoveries, could reasonably possibly exceed recorded amounts by approximately $10 million; additional excess costs were possible but not reasonably estimable. Goodyear reported compliance with applicable material debt covenants at March 31.
Important facts for investors to verify
- Whether pricing and product mix continue to keep pace with sharply higher raw-material costs and whether the projected 2011 unit-growth outlook is achieved.
- Working-capital cash use, capital spending, pension funding, and the availability and borrowing-base terms of credit facilities.
- Completion and financial impact of the European farm-tire sale, and the costs and financing associated with the planned note redemption and Akron headquarters project.
- Potential cash and earnings effects from Venezuela’s currency controls, tax valuation allowances, asbestos and other litigation, and pension obligations.
- The preferred stock’s dividend, conversion and dilution implications, together with the effect of subsequent debt refinancing on interest expense and liquidity.