GOODYEAR TIRE & RUBBER CO annual report, FY2011

Full document

Goodyear Tire & Rubber Company — FY2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone quarterly report; fourth-quarter figures are noted separately below. Goodyear manufactures and sells tires and related products and services through four regional segments.

Financial performance and liquidity

  • Revenue: $22.767 billion, up 20.9% from $18.832 billion in 2010. Price and product mix, other tire-related sales (notably chemicals), and favorable currency translation drove the increase. Worldwide tire unit sales were essentially flat at 180.6 million.
  • Profit: Consolidated net income was $417 million, versus a $164 million loss in 2010. Goodyear-attributable net income was $343 million; income available to common shareholders was $321 million, or $1.26 diluted per share, after $22 million of preferred dividends. The filing reports a 2011 net margin of approximately 1.8% on consolidated net income.
  • Cash flow: Operating cash flow was $773 million, down from $924 million. Investing activities used $902 million, including $1.043 billion of capital expenditures. Financing activities provided $994 million. Operating cash flow less capital expenditures was negative $270 million (calculated).
  • Margins: Gross profit was $3.946 billion; cost of goods sold was 82.7% of sales, versus 82.1% in 2010. Total segment operating income rose to $1.368 billion from $917 million; segment operating margin improved to 6.0% from 4.9%. These segment measures exclude certain items, including rationalization charges and interest.
  • Debt and liquidity: Debt and capital leases were approximately $5.2 billion at year-end. Cash and cash equivalents were $2.772 billion, and unused availability under credit agreements was $2.544 billion. The company reported $412 million of obligations due within one year, including notes payable and current long-term debt.
  • Balance sheet: Total assets were $17.629 billion; total shareholders’ equity was $1.017 billion. Inventories increased to $3.856 billion from $2.977 billion.
  • Fourth quarter: Net sales were $5.683 billion, compared with $5.072 billion a year earlier. Consolidated net income was $26 million, versus a $166 million loss; Goodyear net income available to common shareholders was $18 million, or $0.07 diluted per share.

Changes versus 2010

  • Revenue rose 20.9%, while tire unit volume edged down 0.1%. Price and product mix improved revenue per tire by 17%, excluding currency translation.
  • Raw material costs increased approximately 30%. Management said price and mix improvements of nearly $2.4 billion more than offset nearly $2.0 billion of raw material cost increases in segment operating income, before specified raw-material savings.
  • North American Tire operating income improved to $276 million from $18 million; EMEA rose to $627 million from $319 million. Latin American Tire declined to $231 million from $330 million, and Asia Pacific Tire declined to $234 million from $250 million.
  • Operating cash flow fell $151 million, with $650 million of cash used by working capital, compared with modest working-capital cash generation in 2010.

Outlook, commentary and risks

  • Management expected 2012 worldwide tire unit volume to be essentially flat with 2011, with near-term industry growth slower than previously forecast, particularly in Europe.
  • Goodyear forecast 2012 raw material costs up approximately 5% for the full year versus 2011, with significant quarterly variation and commodity-price uncertainty. It also expected approximately $250 million of cost reductions and $40–$60 million of recovery of under-absorbed fixed costs, partly offset by $40–$60 million of Pulandian start-up and Dalian closure costs.
  • Expected 2012 capital expenditures were $1.1–$1.3 billion; pension contributions to funded plans were expected at $550–$600 million; and interest expense was expected at $360–$385 million. Management stated that available cash and credit were adequate for 2012 needs, subject to business and financing risks.
  • Pension obligations are a significant exposure: funded-status shortfalls were $2.452 billion for U.S. pension plans and $645 million for non-U.S. plans at year-end. Management estimated U.S. funded-plan contributions of $425–$450 million in 2012 and $425–$475 million in 2013.
  • Other material risks include high debt and secured borrowing arrangements, variable-rate debt, volatile raw materials, competition, labor negotiations, economic weakness, currency controls and restricted cash transfers in Venezuela, and potential inability to access capital markets. Approximately $647 million of foreign net assets, including $534 million of cash, were subject to transfer restrictions or limitations.
  • Unusual events and items included Thai flooding, which affected fourth-quarter results by approximately $21 million after combining operating impact and insurance deductible; a U.S. tornado; rationalization and asset write-off charges; debt-redemption costs; and tax benefits, including release of a Canadian valuation allowance.
  • Contingencies include approximately 78,500 pending asbestos claims, with $138 million of recorded gross liabilities and $67 million of recorded insurance receivables. Brazilian tax assessments totaled approximately $97 million across two proceedings. Goodyear also disclosed DOJ and SEC review of alleged improper payments in Kenya and Angola; the company said the payments were not believed material and that it was cooperating. SRI had not notified Goodyear of any exercisable alliance exit rights as of filing.

Key facts for investors to verify

  • Whether price and product mix, cost reductions, and factory-footprint actions can sustain segment profitability against raw-material inflation and weak demand.
  • Cash conversion and working-capital trends, particularly the inventory increase and negative operating-cash-flow-less-capex result.
  • Debt maturities, borrowing-base availability, covenant compliance, and the extent to which overseas cash is accessible for parent-company obligations.
  • Pension funding assumptions, required contributions, and sensitivity to discount rates and plan-asset returns.
  • Developments in asbestos claims and insurance recoveries, Brazilian tax assessments, the African investigations, and any Sumitomo alliance exit-right triggers.