Goodyear Tire & Rubber Co. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited consolidated results. Goodyear operates through four regional tire segments.
Financial performance
- Revenue: $5.533 billion, up 2.4% from $5.402 billion. Price and product mix added $604 million, more than offsetting lower volume, unfavorable currency translation, and the divested farm tire business.
- Profitability: Segment operating income was $292 million, down from $327 million; segment margin fell to 5.3% from 6.1%. Net income was $8 million, including $12 million attributable to minority shareholders. Goodyear reported a $4 million net loss; after $7 million of preferred dividends, the loss available to common shareholders was $11 million, or $0.05 per diluted share, versus income of $103 million, or $0.42 per share, a year earlier.
- Margins and costs: Cost of goods sold was 83.3% of sales versus 82.6%. Raw material costs rose approximately 26% year over year. Price and mix improved revenue per tire by 16%, excluding currency effects.
- Cash flow: Operating cash flow was negative $754 million versus negative $433 million. Investing cash flow was negative $295 million, including $276 million of capital expenditures; financing cash flow was positive $326 million. Cash flow after capital expenditures was approximately negative $1.03 billion. Cash declined $689 million to $2.083 billion, principally from seasonal working capital and capital spending.
- Liquidity and debt: Cash plus unused credit availability totaled approximately $4.3 billion at quarter-end. Unused availability was $2.207 billion, down from $2.544 billion at year-end. Debt and capital leases, including amounts due within one year, plus notes payable and overdrafts totaled approximately $5.631 billion, versus $5.201 billion at December 31, 2011. Forty-four percent of debt carried variable rates, averaging 4.03%.
- Other obligations: Goodyear expected 2012 pension contributions of $550–$600 million, capital expenditures of $1.1–$1.3 billion, interest expense of $360–$385 million, and $28 million of preferred dividends if declared.
Material changes and segment results
- Worldwide tire unit sales fell 8.1% to 43.0 million units, as replacement volume declined 12.4%, partly offset by 3.6% growth in original equipment tires.
- North American Tire sales rose 8.2% to $2.497 billion and operating income doubled to $80 million, supported by price and mix.
- EMEA sales declined 1.1% to $1.938 billion and operating income fell 41.2% to $90 million, amid weaker demand, higher conversion costs, and increased selling expenses.
- Latin American Tire sales fell 10.9% to $521 million and operating income declined 17.9% to $55 million, reflecting lower volume, competition, currency effects, and the farm tire divestiture.
- Asia Pacific sales increased 4.7% to $577 million; operating income was unchanged at $67 million. Pulandian start-up costs and Thailand flood-related effects influenced results.
Outlook, risks, and unusual items
- Management expected full-year 2012 tire unit volume to decline approximately 2% from 2011, citing ongoing economic weakness, particularly in Europe. It forecast raw material costs up approximately 9% for the year and about 12%, or $250 million, higher in Q2 versus Q2 2011. Estimates are subject to commodity-price volatility.
- Management no longer expected to recover under-absorbed fixed costs in 2012; it expected the net full-year impact to be flat, with Union City savings offset by production cuts. Asia Pacific operating income was expected to be adversely affected by $40–$60 million from China start-up and under-absorption costs.
- In February, Goodyear issued $700 million of 7% senior notes due 2022 and used proceeds to redeem $650 million of 10.5% notes due 2016. Redemption generated $86 million of financing charges, including a $59 million cash premium and $27 million debt-cost write-off. The quarter also included a $13 million out-of-period interest expense adjustment.
- After quarter-end, Goodyear extended its $1.5 billion first-lien revolver to 2017 and increased commitments to $2.0 billion; it extended its $1.2 billion second-lien term loan to 2019. The company expected approximately $24 million of second-quarter debt issuance expense.
- Goodyear recorded a net $6 million benefit from Thailand flood insurance recoveries exceeding recognized losses. It expected production and sales disruption to continue into Q2, with lower losses; insurance recovery timing could lag incurred losses.
- Key risks include high debt and refinancing access, variable interest rates, volatile raw material costs, weak markets and competition, pension funding demands, foreign exchange and transfer restrictions, and litigation. At quarter-end, approximately $499 million of cash was in jurisdictions subject to transfer restrictions, including $304 million in Venezuela. Venezuela currency controls also delayed settlement of $167 million of U.S.-dollar liabilities.
- Contingencies include asbestos claims, for which recorded gross liabilities were $138 million and estimated net exposure could reasonably exceed recorded amounts by about $10 million; management said further excess costs were possible but not reasonably estimable. Brazilian tax assessments totaled approximately $99 million. The company was cooperating with DOJ and SEC reviews of alleged improper payments involving joint-venture operations in Kenya and Angola; the outcome was uncertain.
- Management stated disclosure controls were effective as of March 31, 2012, and the company was in compliance with applicable material debt covenants.
Important facts for investors to verify
- Whether price and mix can continue to offset lower replacement demand and raw material inflation, particularly in EMEA.
- Actual operating cash generation and working-capital needs relative to the quarter’s substantial seasonal cash use.
- Debt maturities, borrowing-base availability, covenant headroom, and the effect of the April 2012 facility amendments and related costs.
- Actual pension contributions, commodity costs, capital spending, and segment performance compared with management’s 2012 expectations.
- Developments in asbestos and Brazilian tax matters, DOJ/SEC reviews, Venezuela cash-transfer restrictions, and Thailand insurance recoveries.