Goodyear Tire & Rubber Co. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Financial amounts are in U.S. dollars; unless stated otherwise, figures are in millions. Goodyear manufactures tires and operates three regional segments: Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. Results include Cooper Tire, acquired in June 2021, so year-over-year comparisons are not fully like-for-like.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $4,908 | $3,511 |
| Income before income taxes | $134 | $33 |
| Goodyear net income | $96 | $12 |
| Diluted earnings per share | $0.33 | $0.05 |
| Segment operating income | $303 | $226 |
| Segment operating margin | 6.2% | 6.4% |
| Cash used by operating activities | $711 | $282 |
| Capital expenditures | $276 | $185 |
- Sales increased 39.8%, including $869 of Cooper Tire sales. Other key sales drivers included improved price and product mix, higher tire volume and related-business sales; unfavorable foreign currency translation reduced sales by $186.
- Price and product mix improvements of $511 more than offset higher raw material costs of $378. Inflation also increased conversion, transportation, labor and other costs. Cost of goods sold was 80.8% of sales, versus 78.4%; implied gross margin was 19.2%, versus 21.6%.
- Segment operating income rose 34.1%, but segment margin declined from 6.4% to 6.2%. Americas operating income increased to $216; EMEA fell to $59 and Asia Pacific to $28.
- Interest expense increased to $104 from $79, reflecting higher average debt ($7,884 versus $6,046) following Cooper Tire acquisition financing. The effective tax expense was $38 on pretax income of $134.
Liquidity, debt and cash flow
- Cash and cash equivalents were $1,053 at March 31, 2022, down from $1,088 at year-end 2021. Unused credit availability was $3,374, down from $4,345.
- Operating cash outflow of $711 primarily reflected $1,002 of working-capital use, including increased receivables and inventory, and $36 of rationalization payments. Investing cash outflow was $300, principally capital expenditures. Financing provided $982, including net borrowings of $972.
- Long-term debt and finance leases totaled $7,800, including $350 due within one year; notes payable and overdrafts were another $570. Approximately 25% of debt bore variable rates, averaging 3.38%.
- Goodyear reported compliance with applicable material debt covenants. The first-lien revolver’s springing financial covenant was not applicable; available cash plus revolver availability was $2,128, above its $275 trigger.
- No dividends were declared or paid in the quarter.
Changes, outlook and risks
- Management attributed stronger earnings primarily to higher segment operating income and lower rationalization expense. Results also benefited from the absence of the estimated $23 adverse impact of the severe 2021 U.S. winter storm. Q1 2022 included $11 of rationalization charges, compared with $50 a year earlier.
- Management expected 2022 capital expenditures of $1.3–$1.4 billion, working-capital investment of about $300, interest expense of $450–$475, rationalization payments of about $100, income tax payments of $150–$200 (excluding one-time items), and funded pension contributions of $25–$50.
- For Q2, management expected raw-material costs to rise about $400 versus 2021, excluding Cooper-related increases through June 7, 2022, and expected price and mix to more than offset those costs. It estimated China COVID-related plant closures could reduce Q2 results by about $10, potentially more. These are forward-looking estimates, not guarantees.
- China restrictions, semiconductor and other supply shortages, labor tightness, inflation, transportation and energy costs, and Russia’s invasion of Ukraine were significant uncertainties. Goodyear suspended tire shipments to Russia and remained largely unable to operate in Ukraine; those markets represented 1.2% and 0.3% of 2021 sales, respectively. The company reported no direct material financial impact expected from those actions, while noting broader indirect risks.
- Environmental liabilities were $80; workers’ compensation liabilities were $195, with reasonably possible excess of about $25; general and product liability reserves were $399. Asbestos liabilities were $131, with a related insurance receivable of $77. The filing cautions that ultimate costs and insurance recoveries may differ, and asbestos losses beyond reserves could be material but could not be reasonably estimated.
- Goodyear established an $11 valuation allowance on Russian deferred tax assets during the quarter. It reported about $1.2 billion of U.S. net deferred tax assets and $1.3 billion of foreign net deferred tax assets, with $1.0 billion of foreign valuation allowances; realization depends on future taxable income and other assumptions.
- Management said liquidity was adequate for operating and investing needs and debt maturities over the next 12 months. It also highlighted substantial debt, borrowing-base and refinancing exposure, variable-rate risk, and sensitivity to raw-material prices, foreign exchange, supply disruptions and economic conditions.
Most important facts for investors to verify
- How much of sales and earnings growth reflects Cooper Tire and acquisition-related effects versus underlying volume, pricing and mix.
- Whether price increases continue to offset raw-material, labor, transportation, energy and other inflationary costs, and how segment margins develop.
- Whether working-capital use, inventory rebuilding and operating cash flow improve as expected, alongside planned capital spending and debt service.
- Whether China production and commercial activity recover, and how the Ukraine conflict and wider supply-chain disruptions affect costs and operations.
- Whether projected tax-asset realization and contingent-liability estimates remain supportable as earnings, claims and insurance recoveries evolve.