Goodyear Tire & Rubber Co. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Amounts are in millions of dollars, except per-share data and tire units.
Business context and results
Goodyear operates regional tire businesses in the Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. Management said industry demand and tire volumes continued recovering from pandemic-related disruption, although the recovery varied by region and the business remained exposed to COVID-19 effects and supply-chain constraints.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $3,511 | $3,056 |
| Cost of goods sold | $2,751 | $2,552 |
| Gross profit / margin | $760 / 21.6% | $504 / 16.5% |
| Segment operating income (loss) | $226 | $(47) |
| Segment operating margin | 6.4% | (1.5)% |
| Income (loss) before income taxes | $33 | $(368) |
| Goodyear net income (loss) | $12 | $(619) |
| Diluted earnings (loss) per share | $0.05 | $(2.65) |
| Cash from operating activities | $(282) | $(561) |
| Capital expenditures | $185 | $211 |
Sales rose 14.9%; worldwide tire shipments increased 11.7% to 35.0 million units. Replacement volume rose 14.1% and original-equipment volume rose 5.2%. Segment operating income improved by $273 million. Management attributed the improvement principally to stronger price and product mix (+$75 million), lower conversion costs (+$75 million), higher volume (+$67 million), lower selling, administrative and general expense (+$34 million), and lower raw-material costs (+$15 million).
Regional sales and segment operating income were: Americas $1,787 and $114 (versus $1,673 and breakeven); EMEA $1,231 and $74 (versus $995 and a $53 loss); Asia Pacific $493 and $38 (versus $388 and $6). Regional operating income excludes specified items, including rationalization charges and goodwill impairment.
Liquidity, debt and balance sheet
- At March 31, cash and cash equivalents were $1,223, down from $1,539 at December 31, 2020. Cash, cash equivalents and restricted cash totaled $1,272.
- Unused availability under credit agreements was $3,396, down from $3,881 at year-end. Total credit arrangements were $9,318.
- Long-term debt and finance leases totaled $5,712, including $386 due within one year; notes payable and overdrafts were another $390. Approximately 25% of debt carried variable rates, averaging 2.87%.
- Current assets were $5,948 and current liabilities $5,333 (current ratio approximately 1.12). Total shareholders’ equity was $3,286.
- Operating cash use included $563 of working-capital outflow and $83 of rationalization payments. The company reported net borrowings of $175 in the quarter.
- The quarterly common dividend remained suspended; Goodyear paid no dividend in Q1 2021, compared with $37 in Q1 2020.
Outlook, material developments and risks
- Cooper Tire acquisition: Goodyear agreed to acquire Cooper for $41.75 cash and 0.907 Goodyear shares per Cooper share, with cash consideration expected to be up to approximately $2.3 billion. Closing was expected in the second half of 2021, subject to shareholder and regulatory approvals and other conditions. The quarter’s financial statements do not reflect the acquisition.
- Financing actions after quarter-end: On April 6, Goodyear issued $550 million of 5.25% notes due 2031 and $450 million of 5.625% notes due 2033, and gave notice to redeem $1.0 billion of 5.125% notes due 2023. It expected approximately $5 million of debt-extinguishment costs. The company also had a commitment for a bridge facility of up to $2.314 billion to support the acquisition; any borrowing would bear interest at LIBOR plus 3.5%, subject to a 0.5% LIBOR floor.
- 2021 expectations: Management projected Q2 production approximately 25 million units above Q2 2020 and expected Q2 volume to trend toward 2019 levels. It expected full-year working capital to use $450–$500 million, capital expenditures of $800–$850 million, interest expense of $350–$375 million, and raw-material costs to increase $325–$375 million based on current spot prices. Management expected Q2 price/mix benefits to exceed higher raw-material costs.
- Operating pressures: Pandemic uncertainty, renewed restrictions, semiconductor and other parts shortages affecting vehicle production, softening demand in Europe, currency headwinds, and weak aviation and travel activity remained concerns. A severe U.S. winter storm was estimated to reduce Q1 earnings by approximately $23 million before tax and minority interests.
- Unusual items: Q1 included $50 million of rationalization charges and $8 million of Cooper-related transaction costs. Goodyear also recorded $20 million of out-of-period expense related primarily to inventory valuation and foreign currency exchange, attributed mainly to 2016–2020; management said the adjustments were not material to the individual periods affected. Q1 2020 included a $182 million non-cash EMEA goodwill impairment and $290 million of discrete tax charges, primarily a valuation allowance on foreign tax credits.
- Tax uncertainty: The company reported a U.S. cumulative loss over the three years ended March 31, 2021 and cautioned that an additional valuation allowance against U.S. deferred tax assets could be required. It maintained approximately $923 million of valuation allowance on Luxembourg deferred tax assets.
- Contingencies: Recorded environmental liabilities were $66 million; workers’ compensation liabilities were $198 million, with reasonably possible additional exposure estimated at approximately $25 million. General and product liability reserves were $289 million. Asbestos liabilities were $148 million, with $89 million of related insurance receivables; the company said excess losses were reasonably possible but not reasonably estimable. Substantially all Amiens labor claims had reached settlement agreements during Q1.
- Merger-related litigation and execution: Cooper stockholder lawsuits alleged disclosure deficiencies and sought to enjoin the merger; Goodyear said it considered the allegations without merit. Risks include failure or delay of the merger, integration difficulties, expected dilution of existing Goodyear shareholders, and the need for additional debt financing.
Most important facts for investors to verify
- Whether the Cooper transaction closed on the anticipated timetable and its final cash, share-issuance and financing terms.
- Whether volume recovery, pricing and cost savings continue to offset raw-material inflation, supply constraints and pandemic-related disruption.
- Actual cash generation and working-capital investment relative to management’s 2021 estimates, including liquidity available under borrowing-base facilities.
- Debt levels, refinancing costs, variable-rate exposure and compliance with applicable covenants after acquisition financing and the announced note redemption.
- Future developments in deferred-tax-asset realizability, asbestos and other legal claims, and rationalization costs.