Goodyear slowly rolls on toward investment-grade goal despite operational challenges

By Paul Deckelman

New York, Jan. 10 - Goodyear Tire & Rubber Co. said Tuesday that it is continuing to make progress toward accomplishing an ambitious laundry-list of strategic goals it laid out last year that it hopes to achieve by its 2013 fiscal year - including getting its balance sheet back to investment-grade status.

The giant Akron, Ohio-based tire manufacturer's chief financial officer, Darren R. Wells, told participants attending the Deutsche Bank Securities Global Auto Industry Conference in Detroit that "we've continued our push and our focus on working capital and on driving cash in the business, and continue to keep our liquidity and our debt maturity profile where we want it to be."

Wells, who also serves as the company's executive vice president, added that "I think we feel very good about our delivery against strategy in 2011; as we come to 2012, [there's] plenty more to do - but some good progress during 2011."

Investment grade or bust

Goodyear's grand strategy, laid out in a presentation to investors in March of last year, calls for the company to generate $1.6 billion of operating earnings in fiscal 2013, including $450 million from its North American tire segment and the remaining $1.15 billion from its international businesses.

Wells said that goals include creating sustainable value, being profitable through the economic cycles, "and delivering positive cash flow and ultimately, an investment-grade rating, and these "remain targets for the company. Those remain focus areas for us."

Goodyear would appear to have some distance to go toward reaching that latter goal; Moody's Investors Service currently rates most of the company's bond debt at B1, except for its $149 million of 7% notes due 2028, which carry a B2 rating. Standard & Poor's meanwhile rates all of the issues at B+ and Fitch Ratings gives Goodyear a plain single-B rating.

During the question and answer portion of the proceedings following his formal presentation, Wells told one participant that while there are a number of metrics that the ratings agencies look at in deciding where to peg a company's ratings "the starting point for us has been looking to get to an adjusted [ratio of] debt-to-EBITDAP of 2.5 times or better - that's been our target and remains our target, so we're going to start there."

Goodyear defines EBITDAP as earnings before interest, taxes, depreciation, amortization and pension obligations; the latter, as of the end of 2010, totaled $3,146,000,000, down from $3,266,000,000 a year earlier.

Debt on the rise

According to data provided by the company as part of Wells' presentation, as of the end of the third quarter on Sept. 30, Goodyear's total debt had increased to $6.08 billion from $5.30 billion at the end of the second quarter on June 30, from $5.28 billion at the end of the first quarter on March 31, and from $4.75 billion at the end of 2010.

Among the factors behind the increased debt levels were the company's Goodyear Dunlop Tires Europe BV subsidiary having sold €250 million (equivalent to roughly $336 million) of 6¾% notes due 2019 last March, its having drawn $200 million from its previously undrawn $1.5 billion first-lien revolving credit facility due 2013, and its having substantially increased borrowings under its euro-denominated revolver due 2016, its pan-European accounts receivable facility due 2015 and its Chinese credit facilities.

Wells made no mention of the roughly $1.25 billion increase in total debt over the first three quarters of 2011.

However, as a result of various balance sheet maneuverings over the past year-and-a-half, the company has greatly improved its maturity profile.

Having taken out then-outstanding 2011 and 2015 bonds in late 2010, Goodyear's shortest bond obligation is now its 10½% notes due 2016, which was reduced in size to $617 million last May when Goodyear used the proceeds from the sale of a series of convertible preferred shares to take out 35% of the nearly $1 billion.

As of the end of the third quarter and subsequently, the company's capital structure also included $994 million of 8¼% notes due 2020 out of $1 billion issued in August 2010 and $264 million of 8¾% notes due 2020 out of the $282 million originally issued in March 2010 as part of an exchange offer transaction. There was also $149 million of 7% notes due 2028.

Ample liquidity available

Goodyear had some $3.9 billion of available liquidity as of Sept. 30, including $2.1 billion of cash and cash equivalents - well in excess of the $1 billion the company needs to fund its operations. Liquidity also included nearly $1.7 billion of availability under its various credit facilities - primarily, the roughly $1.3 billion not yet drawn from its $1.5 billion 2013 revolver.

Outstanding bank debt included the $200 million of borrowings from that facility, as well as $1.2 billion that was fully drawn under its second-lien revolver due 2014.

The company had a committed Pan-European securitization program of €450 million, or about $604 million, subject to available receivables. As of Sept. 30, €400 million, or about $537 million, was available and fully utilized.

A challenging environment

Wells noted in his presentation that the company faced some challenges in 2011, including soft sales volume across all regions, notably in Europe, where what the CFO called a "green winter" with relatively little snow has depressed demand for snowtires.

Other challenges included cost-savings coming in at less than inflation, including the lower-than-anticipated savings from the closing at mid-year of Goodyear's tire plant in Union City, Tenn. Wells also spoke of the continued difficulties - still going on - in negotiating the planned closing of its plant in Amiens, France.

He further said that flooding disrupted production at Goodyear's main aviation tire factory, in Thailand, and that declining commodity prices hurt results from its North American chemical operation.

Despite those bearish developments, the CFO said that the company posted strong results in 2011, putting it on a path to realizing its 2013 earnings goals, and said that long-term trends in the tire industry - in which Goodyear is the largest domestic player and one of the biggest in the world - remain attractive.

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