Goodyear Tire & Rubber Co. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and reporting period
Goodyear manufactures tires and operates through Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. Results improved markedly from the pandemic-affected 2020 comparison period as tire demand and production recovered. Goodyear completed its acquisition of Cooper Tire on June 7, 2021; Cooper’s results are included only from that date.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $3,979 | $2,144 | $7,490 | $5,200 |
| Goodyear net income (loss) | $67 | $(696) | $79 | $(1,315) |
| Diluted EPS | $0.27 | $(2.97) | $0.32 | $(5.62) |
| Total segment operating income (loss) | $299 | $(431) | $525 | $(478) |
| Segment operating margin | 7.5% | (20.1)% | 7.0% | (9.2)% |
| Operating cash flow | Not separately stated for quarter | $(71) | $(820) |
Q2 tire unit shipments rose 84.3% year over year to 37.5 million; first-half shipments increased 40.3% to 72.5 million. Q2 segment operating income improved by $730 million, primarily from higher volume, lower conversion costs, improved price and product mix, and a favorable Brazilian indirect-tax ruling. Six-month improvement was $1,003 million. The Brazilian ruling contributed $69 million in cost-of-goods-sold benefit and $48 million of interest income in Q2.
Cost of goods sold was 77.4% of sales in Q2 versus 103.4% a year earlier, and 77.8% for the first half versus 91.7%. Selling, administrative and general expense was 16.5% of Q2 sales and 16.3% of first-half sales. Interest expense was $97 million in Q2 and $176 million for the first half.
At June 30, cash and cash equivalents were $1,030, down from $1,539 at year-end 2020. Cash used in investing was $2,233, including $1,856 net cash consideration for Cooper and $385 of capital expenditures. Financing provided $1,820, primarily from net borrowings of $1,889. Goodyear reported $4,112 of unused credit availability. Long-term debt and finance leases totaled $7,513, including $535 due within one year; notes payable and overdrafts were another $459. Working capital was a significant operating cash use as receivables and inventories rose during the recovery and restocking.
Material changes and acquisition
Cooper was acquired for approximately $3.1 billion in cash and stock, including $2,155 cash consideration and 46.1 million Goodyear shares issued. Its post-close contribution was $256 in sales and a $6 Goodyear net loss; Cooper’s operating loss included purchase-accounting effects. Goodyear’s purchase-price allocation remains preliminary, including estimated goodwill of $475 and intangible assets of $1,086. Inventory fair-value adjustments reduced Q2 results by $38.
Goodyear issued $1.45 billion of senior notes to help fund the acquisition and amended its first-lien revolving facility, increasing capacity from $2.0 billion to $2.75 billion and extending maturity to June 2026. It also issued $1.0 billion of notes in April and used proceeds and cash to redeem $1.0 billion of notes due 2023.
Compared with 2020, the recovery in volume and lower factory conversion costs were major earnings drivers. The 2020 comparison included $330 of first-half goodwill and other asset impairments, versus none in 2021. First-half 2021 also included $68 of rationalization charges and $55 of acquisition transaction and other costs. The company reported no common dividends in the first half of 2021; the quarterly dividend had been suspended in 2020.
Outlook, risks and unusual items
- Management expected Q3 production at or near pre-pandemic levels, while industry volume was expected to remain below 2019 levels, with some improvement from the first half.
- For 2021, Goodyear expected $300–$500 of working-capital investment, approximately $1.0 billion of capital expenditures, $400–$425 of interest expense, approximately $225 of rationalization payments, $125–$150 of income tax payments excluding one-time items, and $50–$75 of pension contributions.
- Based on then-current spot prices, expected 2021 raw-material cost increases were $425–$475, excluding Cooper’s incremental impact. Management expected price and product mix benefits to exceed higher raw-material costs in Q3. Purchase-accounting amortization was expected to total about $100 in the second half, including approximately $85 in Q3.
- Management cited COVID-19 uncertainty, semiconductor shortages constraining vehicle production, global logistics disruption, raw-material inflation, and possible renewed restrictions. A severe U.S. winter storm was estimated to have reduced first-half earnings by $40 after tax and minority interests.
- Goodyear said liquidity was adequate for operating and investing needs and debt maturities over the next 12 months, but noted substantial debt, borrowing-base sensitivity to receivables and inventory, and restrictions on moving some foreign-subsidiary funds. It was in compliance with applicable material debt covenants at June 30.
- Contingencies include $71 of environmental liabilities, $202 of workers’ compensation liabilities, and $395 of general and product liability and other litigation liabilities. Asbestos liabilities were $147, with an $88 insurance receivable; the filing says excess asbestos losses are reasonably possible but cannot be reasonably estimated. A shareholder derivative case concerning G159 tires was revived on appeal and remanded; Cooper merger-related stockholder suits were voluntarily dismissed.
- Other unusual items included an $8 out-of-period freight-income adjustment in Q2 and $20 of first-quarter expense adjustments, which management said were not material to the periods affected. Management reported disclosure controls were effective; integration of Cooper’s internal controls was ongoing.
Important facts for investors to verify
- How quickly Cooper integration and expected synergies translate into earnings, and how the preliminary purchase-price allocation changes as valuations are finalized.
- Whether demand, production, and supply-chain conditions support the outlook, particularly amid semiconductor and logistics constraints.
- Actual raw-material inflation, pricing and mix recovery, and working-capital needs relative to management’s estimates.
- Debt service, refinancing capacity, borrowing-base availability, and progress through the scheduled debt maturities.
- Realizability of deferred tax assets and foreign tax credits, including sensitivity to future profitability and valuation allowances.
- Developments in asbestos, product-liability, environmental, tax, and G159 litigation matters, including potential losses beyond recorded reserves.