Goodyear Tire & Rubber Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010. Goodyear manufactures tires and operates through four regional tire segments: North America; Europe, Middle East and Africa (EMEA); Latin America; and Asia Pacific. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $4.962 billion | $4.385 billion | $13.760 billion | $11.864 billion |
| Consolidated net income (loss) | $(13) million | $102 million | $2 million | $(499) million |
| Goodyear-attributable net income (loss) | $(20) million | $72 million | $(39) million | $(482) million |
| Goodyear diluted EPS | $(0.08) | $0.30 | $(0.16) | $(2.00) |
| Segment operating income | $234 million | $275 million | $693 million | $123 million |
| Segment operating margin | 4.7% | 6.3% | 5.0% | 1.0% |
- Sales increased 13.2% in Q3 and 16.0% year to date. Worldwide tire unit sales rose 6.0% in Q3 and 9.8% year to date. Management attributed growth to higher volumes, improved price and product mix, and sales in other tire-related businesses; currency effects were unfavorable in Q3 and favorable year to date.
- Cost of goods sold was 83.0% of sales in Q3 versus 80.3% a year earlier, implying gross margins of approximately 17.0% and 19.7%, respectively. Year-to-date cost of goods sold was 81.8% of sales versus 85.1%, implying gross margins of approximately 18.2% and 14.9%.
- Q3 segment income fell $41 million: higher raw-material costs of $381 million outweighed much of the $252 million benefit from improved price and mix. For the first nine months, segment income improved $570 million, mainly because price and mix, lower conversion costs and higher volume more than offset cost pressures.
- Cash flow: Operating cash flow was $83 million for the first nine months, down from $429 million. Trade working capital used $806 million of cash, primarily as receivables rose with sales. Capital expenditures were $618 million, compared with $502 million; operating cash flow less capital expenditures was negative $535 million, calculated from reported figures. Investing cash outflow was $574 million and financing cash inflow was $396 million.
- Liquidity: Cash and equivalents were $1.665 billion at September 30, down from $1.922 billion at year-end 2009. Unused credit availability was $2.357 billion, including $459 million restricted to Chinese facility projects. Management said liquidity was adequate for 2010 operating, investing and debt needs.
- Debt: Long-term debt and capital leases totaled $4.713 billion, including $118 million due within one year; notes payable and overdrafts were $259 million. Total of these reported debt balances was approximately $4.972 billion. Credit arrangements totaled $7.807 billion. Forty-five percent of debt bore variable rates, averaging 3.72%.
- Q3 interest expense was $90 million, compared with $85 million. Year-to-date interest expense was $241 million, compared with $228 million. Total assets were $15.656 billion and shareholders’ equity was $1.127 billion at quarter-end.
Material changes and unusual items
- Q3 earnings included $56 million of financing-related expense associated with redeeming $973 million of debt, including a $50 million cash premium. Other expense totaled $62 million, versus $4 million a year earlier.
- Year-to-date other expense was $173 million, including a $110 million first-quarter foreign-exchange loss following Venezuela’s currency devaluation. The company also reported $126 million of net foreign-exchange losses for the period.
- In August, Goodyear issued $1.0 billion of 8.25% senior notes due 2020 and, in September, redeemed its outstanding 2011 notes and 9% notes due 2015. The company said this paid off all material debt maturities due in 2011.
- Rationalization charges were $8 million in Q3 and $16 million year to date, compared with $16 million and $207 million in the respective 2009 periods. Q3 also included $4 million of asset write-offs and accelerated depreciation and $4 million of supplier-disruption expense.
- Cash decreased partly because of $618 million in capital expenditures and a reported $185 million remeasurement loss on Venezuelan cash. Venezuela’s official exchange rates and restrictions on currency transfers remain significant operating and liquidity considerations.
Outlook, risks and contingencies
- Management expected fourth-quarter 2010 raw-material costs to rise at least 35% from the prior-year quarter, higher than previously anticipated. The company cited natural rubber price volatility and said pricing, product mix, material substitution and cost initiatives may not fully offset rapid cost increases in the near term.
- For 2010, management forecast capital expenditures of $1.0–$1.1 billion, pension contributions of $300–$325 million, and interest expense of approximately $325 million. It expected working-capital needs to increase by about $200 million.
- Industry outlook was positive for 2010: North American consumer replacement and OE tire demand were forecast to increase approximately 4% and 30%; European consumer replacement and OE approximately 5% and 10%. Commercial replacement and OE forecasts were approximately 15% and 25% in North America, and 15% and 65% in Europe. Management cautioned that stronger OE recovery could adversely affect product mix.
- The company reported approximately $350 million in cost savings during the first nine months and announced high-cost capacity reductions of approximately 9 million units. Current rationalization plans were expected to reduce annual costs by about $13 million in cost of goods sold and $4 million in selling, administrative and general expense once completed.
- Goodyear cited substantial debt, variable-rate exposure, underfunded pensions, raw-material inflation, competition, possible work stoppages and supplier/customer disruptions, foreign-exchange and international-market risks, and access to capital as material risks. It was in compliance with applicable material debt covenants at September 30; certain financial covenants were not then applicable.
- At quarter-end, recorded liabilities included $342 million for general and product liability and other tort claims, $323 million for workers’ compensation, and $46 million for environmental matters. Asbestos claims numbered approximately 88,200; recorded gross liabilities were $131 million with a $67 million insurance receivable, and the company estimated net exposure could reasonably exceed recorded amounts by $15 million.
- A South African competition proceeding alleged anti-competitive conduct by Goodyear South Africa and other tire companies. The commission sought a penalty of approximately $30 million; Goodyear said it intended to defend itself. The filing also disclosed approximately $1.6 billion of binding raw-material and capital commitments and $104 million of off-balance-sheet guarantees and other commitments.
- Management stated disclosure controls were effective as of September 30, 2010. The filing does not provide a specific full-year earnings or EPS forecast.
Important facts for investors to verify
- Whether price increases and other savings can offset the expected sharp rise in raw-material costs, particularly natural rubber.
- Whether working-capital needs, pension funding and planned capital expenditures can be met while maintaining cash and access to credit.
- The future cash, earnings and currency impact of Venezuela’s exchange controls, exchange rates and operating disruptions.
- Debt refinancing costs and restrictions, pension funding exposure, and continued compliance with applicable credit-facility covenants.
- Potential outcomes and reserve adequacy for asbestos, product-liability, environmental and workers’ compensation matters, and the South African competition case.