Business context and reporting period
The Goodyear Tire & Rubber Company filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. Goodyear operates tire businesses in the Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. Q3 2022 and Q3 2021 results both include Cooper Tire for the full quarter; nine-month 2022 results include Cooper for the full period, while 2021 includes it only after the June 7, 2021 acquisition.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $5,311 | $4,934 | $15,431 | $12,424 |
| Income before income taxes | $106 | $187 | $492 | $318 |
| Goodyear net income | $44 | $132 | $306 | $211 |
| Diluted EPS | $0.16 | $0.46 | $1.07 | $0.82 |
| Total segment operating income | $373 | $372 | $1,040 | $897 |
| Segment operating margin | 7.0% | 7.5% | 6.7% | 7.2% |
- Q3 sales rose 7.6%; tire unit shipments fell 3.1% to 46.7 million. Higher price and product mix and other tire-related sales offset lower volume and unfavorable currency translation.
- Q3 segment operating income was nearly unchanged, but Goodyear net income fell to $44 million. The company cited higher other expense, rationalization charges, interest expense and taxes.
- Q3 cost of goods sold was 81.1% of sales, versus 78.9% a year earlier; selling, administrative and general expense was 13.1% versus 14.7%.
- Nine-month sales rose 24.2%, reflecting price and mix, Cooper Tire’s inclusion for the first six months of 2022, and higher sales in other tire-related businesses; stronger U.S. dollar translation partly offset growth. Nine-month net income increased, supported by segment results and a sale-and-leaseback gain.
- Cash flow from operations was negative $627 million for the first nine months, versus negative $2 million in 2021. Working capital used $1.78 billion, including cash use from receivables and inventory, partly offset by payables.
- Cash and cash equivalents were $1.243 billion at September 30, up from $1.088 billion at year-end 2021. Unused credit availability was $3.085 billion, down from $4.345 billion.
- Debt and finance leases were $8.105 billion, including current maturities; notes payable and overdrafts added $541 million. Approximately 29% of debt carried variable rates, averaging 4.55% at quarter-end. Nine-month interest expense was $331 million, versus $280 million.
- Capital expenditures were $765 million for the first nine months. The company reported total shareholders’ equity of $5.250 billion and total liabilities of $18.128 billion at quarter-end.
Material changes versus comparable periods
- Q3 price and product mix improved by $808 million, but raw material costs increased $538 million; inflation and other cost pressures also raised conversion, transportation and import-duty costs. Management cited approximately $239 million of additional inflation and other cost pressures in Q3.
- Q3 Americas segment operating income rose to $306 million from $259 million; EMEA fell to $30 million from $81 million; Asia Pacific increased to $37 million from $32 million. EMEA’s decline reflected weaker replacement demand, currency translation, and higher energy, conversion and other costs.
- Q3 replacement tire volume declined 9.0%; OE volume increased 25.6%. For the first nine months, reported tire shipments increased 13.8%, with Cooper’s inclusion contributing to the comparison.
- Nine-month total segment operating income increased 15.9%, but segment margin declined to 6.7% from 7.2%. Nine-month price and product mix improved $1.813 billion, while raw material costs increased $1.335 billion.
- Foreign currency translation reduced sales by $365 million in Q3 and $758 million in the first nine months. A $95 million pretax gain from an Americas sale-and-leaseback contributed to nine-month other income.
Outlook, commentary, risks and unusual items
- For Q4 2022, Goodyear expected Americas consumer replacement demand to be stable year over year, EMEA demand to decline, and Asia Pacific demand to grow; global consumer OE volume was expected to grow. It planned to reduce European production by about ten days, or approximately 1.5 million units, to address softer demand and inventory.
- Management expected Q4 raw material costs to rise approximately $500 million versus Q4 2021, and non-raw-material inflation to negatively affect results by $250 million to $300 million. It expected price and product mix to more than offset raw material costs, with a net earnings impact similar to Q3.
- Full-year 2022 expectations included working-capital use of $300 million to $500 million, capital expenditures of $1.0 billion to $1.1 billion, interest expense of approximately $460 million, rationalization payments of approximately $125 million, income tax payments of $150 million to $175 million excluding one-time items, and funded pension contributions of $25 million to $50 million.
- On October 13, 2022, the company approved a proposed Melksham, U.K. plant closure and related European production changes, subject to employee consultation. Expected charges were $80 million to $90 million, of which $60 million to $70 million were expected to be cash costs; most remaining charges and cash outflows were expected in 2023. The filing gives different estimates for affected jobs: approximately 340 in the rationalization note and approximately 320 in MD&A.
- A Q3 plan to exit South African retail operations was expected to cost $18 million and reduce approximately 930 jobs. A Cooper Tire integration plan targeted duplicative headcount and warehouse locations. New rationalization plans were expected to deliver approximately $30 million of full-run-rate savings by 2024.
- Other notable items included $14 million of Q3 expense for intellectual-property-related legal claims and $10 million of pension settlement charges. Nine-month results included the sale-and-leaseback gain; 2021 comparisons included a Brazilian indirect-tax ruling benefit and Cooper acquisition-related costs.
- Contingencies include environmental liabilities of $79 million, workers’ compensation liabilities of $196 million, and general and product liability liabilities of $416 million. The company had approximately 37,700 asbestos claims pending and recorded $132 million of gross asbestos liabilities and a $77 million insurance receivable. Management said excess asbestos losses are reasonably possible but cannot be reasonably estimated.
- Key risks cited include raw-material, transportation, labor and energy inflation; supply-chain disruption and vehicle-component shortages; COVID-19 restrictions; the Russia-Ukraine conflict; foreign exchange movements; competition; substantial debt and variable-rate exposure; and uncertainty around contingent liabilities and tax assets. The company said it was in compliance with applicable material debt covenants and believed liquidity was adequate for the next 12 months.
Most important facts for investors to verify
- Whether pricing and product mix can continue to offset raw-material and broader inflation, particularly against the stated Q4 cost expectations.
- Working-capital normalization, inventory levels, operating cash flow, and the use of borrowing to fund operations.
- Debt balances, variable-rate exposure, credit availability, and compliance with borrowing-base and covenant requirements.
- Demand and margin trends by region, especially the EMEA outlook and planned European production reductions.
- Execution, costs, timing, consultation status and projected savings for the Melksham, South Africa and Cooper integration plans; resolve the filing’s inconsistent Melksham job-reduction estimates.
- Realizability of deferred tax assets, including foreign tax credits, and changes in litigation, environmental and other contingency reserves or insurance recoveries.