GOODYEAR TIRE & RUBBER CO annual report, FY2012

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Goodyear Tire & Rubber Company — FY 2012 Form 10-K

Business context and period. Goodyear is a global tire manufacturer and related-services provider, operating through North American, EMEA, Latin American and Asia Pacific segments. This annual report covers the fiscal year ended December 31, 2012; the filing also provides unaudited fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.

Financial performance and position

  • Revenue: Net sales were $20.992 billion, down 7.8% from $22.767 billion in 2011. Lower tire volume, unfavorable currency translation and reduced chemical-product sales more than offset improved price and product mix.
  • Profit: Consolidated net income was $237 million, compared with $417 million. Goodyear net income was $212 million, or $0.74 diluted per common share after preferred dividends, versus $343 million, or $1.26, in 2011. Income before taxes declined to $440 million from $618 million; income-tax expense was $203 million.
  • Margins: Gross profit was $3.829 billion, or approximately 18.2% of sales, versus $3.946 billion, or approximately 17.3%, in 2011. Cost of goods sold was 81.8% of sales versus 82.7%. Total segment operating income fell to $1.248 billion from $1.368 billion; segment operating margin was 5.9% versus 6.0%. Segment operating income excludes specified items and is not consolidated operating income.
  • Cash flow: Operating cash flow was $1.038 billion, up from $773 million. Investing cash outflow was $1.123 billion, including $1.127 billion of capital expenditures; financing cash outflow was $426 million. Cash and cash equivalents fell to $2.281 billion from $2.772 billion.
  • Liquidity: Goodyear reported $2.949 billion of unused availability under credit agreements at year-end, for approximately $5.2 billion of cash plus unused availability. Management stated liquidity was adequate for 2013 operating and investing needs.
  • Debt and equity: Debt and capital leases totaled approximately $5.086 billion at year-end, compared with $5.201 billion at year-end 2011; $96 million was due within one year. Total shareholders’ equity declined to $625 million from $1.017 billion. The company reported $1.9 billion of variable-rate debt in its risk disclosures.
  • Volume and operating segments: Worldwide tire unit sales declined 9.2% to 164.0 million, chiefly due to replacement-tire weakness, especially in EMEA. North American segment operating income rose to $514 million from $276 million; EMEA fell to $252 million from $627 million; Latin America was $223 million versus $231 million; Asia Pacific increased to $259 million from $234 million.
  • Fourth quarter: Net sales were $5.045 billion versus $5.683 billion in Q4 2011. Consolidated net loss was $7 million; Goodyear net income was $7 million and preferred dividends were $7 million, leaving common-shareholder earnings reported as zero per share. The quarter included $84 million of net rationalization charges, primarily related to the planned Amiens closure.

Material changes versus 2011

  • Sales decreased $1.775 billion as tire units fell 9.2%; price and product mix improved revenue per tire, excluding currency effects, by 8% and contributed $1.223 billion to the sales bridge.
  • Raw-material costs increased approximately 7% year over year. Lower volume and production contributed to higher under-absorbed fixed costs, particularly in EMEA.
  • Net income available to common shareholders declined to $183 million from $321 million. Reported 2012 results included $325 million of net after-tax charges and $35 million of net after-tax gains; 2011 included $217 million of net after-tax charges and $51 million of net after-tax benefits.
  • Operating cash flow improved, supported by a $457 million working-capital benefit, but cash declined amid capital spending, pension funding and net debt repayments. Pension contributions and direct payments were $684 million versus $294 million in 2011.

Outlook, commentary, risks and unusual items

  • 2013 outlook: Management expected low-single-digit tire-unit growth versus 2012 and raw-material costs below 2012 levels, with an expected net benefit from raw materials and price/product mix. Forecast market conditions varied by region and channel; Europe consumer OE was expected to decline about 5%.
  • Costs and investment: Management expected 2013 capital expenditures of $1.0–$1.2 billion, global pension contributions of $275–$325 million, and interest expense of $365–$390 million. It expected Pulandian start-up cost reductions to improve Asia Pacific operating income by $10–$20 million versus 2012.
  • Restructuring: Goodyear announced exit from EMEA farm tires and closure of its Amiens, France facility, subject to consultation. Together, the actions were expected to improve EMEA operating income by approximately $75 million annually after closure; timing was not yet estimable. The company also estimated approximately $152 million of annual segment operating-income improvement upon completion of 2012 rationalization plans.
  • Venezuela: After year-end, the government announced a bolivar devaluation from 4.3 to 6.3 per U.S. dollar, effective February 13, 2013. Goodyear expected a first-quarter 2013 remeasurement charge of approximately $100 million, net of tax; the 2012 financial statements were not affected. Currency controls and delayed repatriation also constrained access to cash.
  • Pensions: Pension plans were significantly underfunded: projected-benefit-obligation deficits were $2.656 billion for U.S. plans and $866 million for non-U.S. plans. Lower discount rates increased obligations; further funding needs and pension expense are sensitive to rates and asset returns.
  • Other risks and contingencies: Key exposures include substantial debt and restrictive covenants, capital-market access, volatile commodities, labor negotiations and potential work stoppages, foreign-exchange and country risks, regulatory requirements, and product-liability, environmental and tax matters. Approximately 73,200 asbestos claims were pending; recorded general/product-liability and tort liabilities totaled $298 million, including $139 million of gross asbestos liabilities, with a $73 million asbestos-insurance receivable. The filing also describes Brazilian tax assessments and South African competition proceedings.
  • Financing and unusual items: Goodyear issued $700 million of 7% senior notes due 2022 and redeemed $650 million of 10.5% notes due 2016, incurring related charges. It extended the U.S. revolving-credit maturity to 2017 and second-lien term-loan maturity to 2019. The company reported compliance with applicable material debt covenants at year-end.
  • Controls and audit: Management and PwC concluded internal control over financial reporting was effective as of December 31, 2012; PwC issued an unqualified opinion on the financial statements.

Important facts for investors to verify

  • Review the reconciliation of segment operating income to pretax income and the nature and recurrence of 2012 charges and gains.
  • Assess whether forecast tire growth, lower raw-material costs and price/mix improvements materialized, particularly amid continued EMEA weakness.
  • Monitor pension funding, discount-rate assumptions, planned contributions and the company’s ability to access debt markets to fund its strategy.
  • Confirm the realized impact and timing of the Amiens closure and EMEA improvement plan, including consultation outcomes and savings.
  • Track Venezuela’s devaluation charge, exchange-control restrictions, cash availability and any subsequent exchange-rate changes.
  • Evaluate debt maturities, collateral and covenant headroom, and distinguish reported credit availability from cash that can be freely transferred among subsidiaries.
  • Follow developments in asbestos, tax, competition and labor matters, and compare any settlements or judgments with recorded reserves.