Goodyear Tire & Rubber Co. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Goodyear operates four regional tire segments: North America, EMEA, Latin America, and Asia Pacific.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $4,528 | $3,943 | $8,798 | $7,479 |
| Goodyear net income (loss) | $28 | ($221) | ($19) | ($554) |
| Diluted EPS | $0.11 | ($0.92) | ($0.08) | ($2.30) |
| Segment operating income (loss) | $219 | $24 | $459 | ($152) |
| Segment operating margin | 4.8% | 0.6% | 5.2% | (2.0)% |
- Q2 sales rose 14.8%; first-half sales rose 17.6%. Worldwide tire unit sales increased 9.9% in Q2 and 12.0% in the first half, with original-equipment volume recovering faster than replacement volume.
- Q2 segment operating income improved by $195 million, primarily due to lower conversion costs and better price/product mix. First-half improvement of $611 million reflected lower raw-material costs, lower conversion costs, improved price/product mix, and higher volume.
- Cost of goods sold was 81.4% of sales in Q2 versus 85.0% a year earlier, and 81.2% for the first half versus 87.9%. Selling, administrative and general expense was 14.8% of Q2 sales and 14.5% of first-half sales.
- Q2 consolidated net income was $39 million, including $11 million attributable to minority shareholders; first-half consolidated net income was $15 million, while the loss attributable to Goodyear was $19 million.
Cash flow, debt and liquidity
- First-half operating cash flow was $183 million, versus $13 million in 2009. The improvement in operating results was partly offset by a $518 million cash outflow for trade working capital, compared with a $246 million inflow in the prior-year period.
- Investing cash flow was a $353 million use, including $358 million of capital expenditures. Financing cash flow provided $165 million. Cash declined by $239 million to $1.683 billion at June 30, including the effect of Venezuela currency remeasurement and exchange rates.
- Current assets were $7.723 billion and current liabilities $4.426 billion. Long-term debt and capital leases were $4.288 billion, with $132 million due within one year; notes payable and overdrafts were $184 million. Total credit arrangements were $7.495 billion, of which $2.409 billion was unused.
- At June 30, 44% of debt carried variable rates, averaging 3.72%. The company reported compliance with applicable material principal-facility covenants. The first-lien revolver had no borrowings and $485 million of letters of credit outstanding.
- A March exchange offer swapped $262 million principal of 7.857% notes due 2011 for $282 million of 8.75% notes due 2020. The filing’s debt maturity schedule shows $727 million due in 2011.
Changes, outlook and management commentary
- Performance improved substantially from the recession-affected 2009 comparable periods. All four segments reported positive operating income in Q2 and the first half; North American Tire returned to a small first-half profit, while Latin America’s Q2 operating income declined year over year.
- Management cited a recovering global economy, higher vehicle production and replacement demand, but noted that demand in North America and Europe remained below historical levels and the recovery was uncertain. Raw-material costs remained volatile.
- For 2010, management expected working-capital increases of about $200 million, pension contributions of $275–$325 million, capital expenditures of $1.0–$1.1 billion, and interest expense of $325–$350 million. The Pension Relief Act was expected to delay near-term U.S. pension contributions; election options were still under review.
- Management revised selected 2010 industry assumptions upward: North American consumer OE growth to 25%–30%, consumer replacement to 3%–5%, commercial OE to 15%–20%, and commercial replacement to about 15%. European consumer OE was expected to grow 5%–10%, consumer replacement 1%–3%, commercial replacement 10%–15%, and commercial OE about 60%. Stronger OE recovery could weigh on product mix.
- Raw-material costs were expected to peak in Q3 2010, up about 30%–35% year over year, with Q4 costs up about 30%. Management said second-half costs should be lower than previously anticipated after some moderation in prices, particularly natural rubber.
- 2010 rationalization actions included a Taiwan plant closure and North American warehouse consolidation; approximately 400 associates were expected to be released. Completed plans were estimated to reduce annual costs by about $15 million.
Unusual items, risks and contingencies
- The January 2010 Venezuelan bolivar devaluation caused a $110 million first-quarter remeasurement loss, primarily on bolivar-denominated monetary balances. Management warned of further currency, operating and remittance risks; currency controls restricted access to funds, and about $125 million of U.S.-dollar liability settlements were pending before the exchange board at June 30.
- Venezuela’s devaluation, weak conditions and operational disruptions were expected to reduce Latin American Tire’s 2010 segment operating income by more than $75 million versus 2009. Reported first-half impact was about $60 million.
- Recorded general and product liability reserves were $335 million, including legal fees; the increase partly reflected an unfavorable appellate ruling in one claim. Asbestos liabilities were $129 million gross, with a $66 million insurance receivable; the company said reasonably possible net exposure could exceed recorded amounts by $15 million.
- Other obligations included approximately $1.5 billion of binding commitments for raw materials and capital investments, about $100 million of off-balance-sheet guarantees and other commitments, and $45 million of environmental liabilities. The company also cited underfunded pension plans, raw-material and energy-price exposure, substantial debt, litigation, foreign-exchange risk, and potential SRI minority exit rights. No SRI exit notice had been received as of the filing date.
- Management stated liquidity was adequate for 2010 operating needs, investment and debt maturities, while cautioning that adverse cash flow or reduced access to credit could materially weaken liquidity. Commodity prices were not hedged; derivative instruments were used for foreign-exchange and interest-rate risk management.
Important facts for investors to verify
- Whether improved volume and segment profitability persist as raw-material costs rise and demand remains uncertain; monitor price/mix and OE-versus-replacement trends.
- Actual cash conversion and working-capital needs, capital spending, pension contributions, and progress against the stated 2010 outlook.
- Liquidity available under borrowing-base and other facility restrictions, 2011 maturities, covenant headroom, and access to refinancing.
- Venezuela’s exchange rates, pending settlements, cash repatriation restrictions, and further effects on sales, earnings and liquidity.
- Developments in product-liability and asbestos claims, insurance recoveries, pension funding, and possible SRI exit rights.