Goodyear Tire & Rubber Co. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in millions of dollars except per-share data. Goodyear manufactures tires and operates through Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. Comparisons are affected by the Cooper Tire acquisition, completed June 7, 2021; 2022 includes Cooper for the full periods, while 2021 includes it only after closing.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $5,212 | $3,979 | $10,120 | $7,490 |
| Goodyear net income | $166 | $67 | $262 | $79 |
| Diluted EPS | $0.58 | $0.27 | $0.91 | $0.32 |
| Segment operating income | $364 | $299 | $667 | $525 |
| Segment operating margin | 7.0% | 7.5% | 6.6% | 7.0% |
| Income before income taxes | $252 | $98 | $386 | $131 |
| Interest expense | $110 | $97 | $214 | $176 |
Q2 gross margin, calculated as sales less cost of goods sold, was approximately 20.0%, versus 22.6% a year earlier; for the first half it was approximately 19.6%, versus 22.2%. Higher raw-material, conversion, transportation and other inflationary costs weighed on margins. Price and product mix gains partly offset these pressures.
- Cash flow: First-half operating cash flow was negative $533, versus negative $71 in 2021. Working capital used $1,242 of cash, including cash uses of $1,024 from receivables and $890 from inventories, partly offset by $672 provided by trade payables.
- Investment and financing: First-half capital expenditures were $511. Investing cash flow was negative $403, including $108 proceeds from a sale-and-leaseback transaction. Financing cash flow was positive $1,132, primarily from net borrowings of $1,129.
- Liquidity: Cash and cash equivalents were $1,248 at June 30, up from $1,088 at year-end 2021. Unused credit availability was $3,210, down from $4,345. Current assets were $9,223 and current liabilities $7,121.
- Debt: Long-term debt and finance leases, including the current portion, totaled $7,885; notes payable and overdrafts were another $519. Approximately 27% of debt was variable-rate, averaging 4.07%. Goodyear reported compliance with applicable material covenants.
Material changes and operating performance
- Q2 sales increased 31.0% and first-half sales 35.1%. Management attributed the increases to Cooper Tire, price and product mix, and higher volumes in EMEA and Asia Pacific, partly offset by unfavorable foreign currency translation and lower legacy-business tire volume in Americas.
- Worldwide tire unit sales rose 21.5% in Q2 and 25.0% in the first half, with the acquisition contributing materially. Segment operating income rose, but segment margin declined year over year in both periods.
- Q2 segment operating income was $293 in Americas, $52 in EMEA and $19 in Asia Pacific. First-half operating income increased in Americas but declined in EMEA and Asia Pacific.
- Q2 net income included a $95 pretax gain ($71 after tax and minority interests) from sale-and-leaseback of retail locations. The transaction generated $108 cash proceeds and created operating lease right-of-use assets of $57. The gain was a major contributor to the improvement in reported earnings.
- First-half earnings also benefited from price and mix, lower rationalization expense and the absence of certain 2021 acquisition costs and Cooper inventory fair-value amortization. The prior-year comparison included a favorable Brazilian indirect-tax ruling and a U.S. winter storm that reduced 2021 earnings.
Outlook, commentary and risks
- For Q3 2022, management expected continued volume growth in EMEA and Asia Pacific. It expected price and product mix to more than offset raw-material cost increases, with a similar net earnings impact to Q1 and Q2; this is not full-year earnings guidance.
- Management expected raw-material costs to rise approximately $1.0 billion in the second half versus 2021, including approximately $600 in Q3. Other inflationary pressures, especially transportation, labor and energy, were expected to persist.
- Management forecast a Q3 foreign-currency translation earnings headwind of $25–$30 at then-current exchange rates. For 2022, it expected approximately $300 of working-capital investment, $1.1–$1.2 billion of capital expenditures, $450–$475 of interest expense, about $100 of rationalization payments, $150–$200 of income-tax payments excluding one-time items, and $25–$50 of funded pension contributions.
- Key operating uncertainties include COVID-related restrictions and supply disruption, semiconductor shortages affecting vehicle production, the Russia-Ukraine conflict and related sourcing pressures, inflation in materials and operating costs, labor availability, foreign exchange, and execution of Cooper integration and expected synergies. Goodyear said most tire plants were operating near full capacity; certain China facilities temporarily shut or limited production earlier in Q2.
- A Cooper integration rationalization plan approved in Q2 is expected to cost $54, including $44 of cash charges, and reduce approximately 490 positions. About $19 was accrued at June 30, with substantial payment expected through 2023. A tentative four-year USW labor agreement covering nearly 5,900 workers was reached July 30, subject to ratification.
- Contingencies include environmental liabilities of $80, workers’ compensation liabilities of $195, and general and product liability liabilities of $407. The company noted that asbestos-related costs could exceed reserves, but excess losses could not be reasonably estimated. It had 38,200 asbestos claims pending and recorded a $132 gross asbestos liability and a $77 insurance receivable.
Important facts for investors to verify
- How much of reported sales and earnings growth reflects Cooper Tire and price increases, versus organic unit growth; assess comparisons on a pro forma basis.
- Whether pricing and product mix can continue to offset raw-material inflation, and whether the forecast second-half cost increases and Q3 currency headwind materialize.
- Whether working-capital needs, especially inventory and receivables, improve after the first-half cash outflow, and how that affects borrowing and unused credit availability.
- The sustainability of earnings excluding the $95 sale-and-leaseback gain and other unusual or prior-period items.
- Debt levels, borrowing costs, variable-rate exposure, covenant headroom, and the continued availability of credit facilities.
- Progress on Cooper integration synergies and restructuring, labor-contract ratification, and exposure to asbestos, tax, environmental and other contingencies.