GOODYEAR TIRE & RUBBER CO quarterly report, Q2 FY2020

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Goodyear Tire & Rubber Company — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. Goodyear manufactures tires and related products and services through its Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific segments. Results were severely affected by COVID-19 disruption to vehicle production, replacement-tire demand, and manufacturing.

Financial results and key metrics

  • Q2 revenue: $2.144 billion, down 41.0% from $3.632 billion a year earlier. First-half revenue was $5.200 billion, down 28.1% from $7.230 billion.
  • Profit: Q2 Goodyear net loss was $696 million, or $2.97 per diluted share, versus net income of $54 million, or $0.23 per share, in Q2 2019. First-half net loss was $1.315 billion, or $5.62 per share, versus a $7 million loss a year earlier.
  • Operating performance: Q2 segment operating loss was $431 million, compared with income of $219 million; segment margin was (20.1%), versus 6.0%. First-half segment operating loss was $478 million, versus income of $409 million; margin was (9.2%), versus 5.7%. All three regions reported segment operating losses in Q2.
  • Costs and margins: Q2 cost of goods sold was $2.216 billion, or 103.4% of sales, versus 78.6% a year earlier. Selling, administrative and general expense was $451 million, or 21.0% of sales, versus $586 million and 16.1%. Lower volume and plant utilization drove costs higher relative to sales.
  • Cash flow: First-half operating cash outflow was $820 million, compared with an outflow of $291 million in 2019. Investing cash outflow was $390 million, including $363 million in capital expenditures; financing provided $1.324 billion. Cash and cash equivalents were $1.006 billion at June 30, up from $908 million at year-end.
  • Liquidity and debt: Unused availability under credit agreements was $2.938 billion, down from $3.554 billion at year-end. Balance-sheet notes payable, long-term debt and finance leases totaled approximately $6.981 billion, versus $5.663 billion at December 31, 2019. The company issued $800 million of 9.5% senior notes due 2025; 30% of debt was at variable rates.
  • Assets and equity: Total assets were $15.827 billion, versus $17.185 billion at year-end; total shareholders’ equity was $3.013 billion, versus $4.545 billion. Goodwill and other asset impairments were $330 million for the first half, including $182 million related to EMEA goodwill and $148 million related to TireHub.

Material changes versus the prior comparable period

  • Worldwide tire unit sales fell 45.5% in Q2 to 20.4 million units; first-half sales fell 31.5% to 51.7 million. Replacement and original-equipment volumes both declined sharply.
  • Management attributed the Q2 segment operating result deterioration primarily to lower tire volume ($338 million adverse), higher conversion costs ($300 million adverse), and lower income from other tire-related businesses ($104 million adverse). Cost reductions, including lower SAG expense, partly offset these pressures.
  • Production was suspended or significantly curtailed at many facilities during the first half, followed by a phased restart during Q2. Management cited approximately $300 million of Q2 unfavorable impact from lower factory utilization and related period costs.
  • Financing was increased to support liquidity: the first-lien revolver was amended to extend maturity to 2025, and $800 million of 9.5% notes were issued. The quarterly common-stock dividend was temporarily suspended in April.

Outlook, commentary and risks

  • Management said visibility into demand and vehicle production remained limited. It expected Q3 2020 industry volumes to be down approximately 20% year over year and planned production to be down approximately 5 million units versus Q3 2019. Plant utilization was expected to remain a headwind.
  • Management expected a $30 million to $50 million year-over-year earnings decline in other tire-related businesses in Q3, reflecting ongoing weakness, particularly in aviation.
  • For full-year 2020, raw material costs were expected to benefit results by approximately $100 million versus 2019, excluding transactional foreign currency and raw-material cost-saving measures. Capital expenditures were capped at no more than $700 million.
  • For 2020, management estimated interest expense of $350 million–$375 million, rationalization payments of $200 million–$225 million, income tax payments of approximately $60 million, and non-U.S. pension contributions of approximately $25 million. It expected working capital to be a source of cash. These are estimates, not assurances.
  • The Gadsden, Alabama facility closure was expected to generate total pre-tax charges of $280 million–$295 million, including $170 million–$180 million in cash charges, and approximately $130 million of annual savings in 2021 compared with 2019. Approximately $150 million of charges were recorded in Q2.
  • Tax uncertainty is material: a $295 million valuation allowance was established against foreign tax credits in Q1. Goodyear warned a further valuation allowance against U.S. deferred tax assets could be needed, depending on the pandemic’s duration, losses, and recovery.
  • Key risks include prolonged or renewed COVID-19 disruption, weaker demand, supply or production interruptions, fixed-cost deleverage, raw-material and foreign-exchange volatility, substantial debt, and reduced borrowing-base availability as receivables and inventory decline. The company reported compliance with applicable material debt covenants at June 30, 2020.

Contingencies and unusual items

  • Approximately 850 former Amiens, France employees asserted claims totaling about €140 million. A labor-court ruling covering approximately 790 claimants led to a €22 million ($25 million) accrual in Q2; Goodyear appealed.
  • Recorded liabilities included $304 million for general and product liability and other tort claims, including asbestos, and $48 million for environmental matters. The company noted that actual outcomes may differ from estimates.
  • Approximately 38,800 asbestos claims were pending at June 30, 2020. Goodyear reported $154 million of gross accrued asbestos liabilities and a $95 million insurance receivable; it said excess losses could be material but could not be reasonably estimated.
  • Workers’ compensation liabilities were $202 million; management estimated reasonably possible losses could exceed recorded amounts by approximately $25 million.
  • Management stated disclosure controls and procedures were effective as of June 30, 2020, with no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether tire demand, vehicle production, and factory utilization recovered in line with the Q3 assumptions and subsequent outlook.
  • Actual cash generation, working-capital movements, capital spending, and availability under borrowing-base-dependent facilities.
  • Debt balances, refinancing costs, maturities, and the company’s ability to maintain covenant compliance and liquidity.
  • Whether the Gadsden closure charges, cash payments, and expected savings track management’s estimates.
  • Any further goodwill, TireHub, or deferred-tax-asset impairments, and developments in the Amiens, asbestos, product-liability, and environmental matters.