Goodyear posts record sales in Q2, profit doubles; cites positive impact of debt transactions

By Paul Deckelman

New York, Aug. 5 - Goodyear Tire & Rubber Co., the world's largest tiremaker, rolled along to record sales in the 2005 second quarter ended June 30, the Akron, Ohio-based manufacturer said Friday. Along the way, its net profit more than doubled from year-ago levels - and it touted the impact of a series of debt and asset-sale transactions on its balance sheet and its overall financial health.

"We continued to make significant progress on our capital structure improvement plan in the second quarter," Robert J. Keegan, Goodyear's chairman, president and chief executive officer told analysts on a conference call following the release of the quarterly results.

He said that Goodyear had announced the sale of the Wingtack Adhesives resins business for approximately $65 million, and expects that to close some time in the current third quarter. He also said that two other pending sales - for its rubber plantation is Sumatra and its North American farm business - are both progressing.

Keegan noted that Goodyear had also completed a big bank-debt refinancing in April, and had issued $400 million of 9% senior unsecured notes due 2015 in June - the first time it had been able to issue unsecured, non-collateralized notes since 2001, "so that's a very positive step for us."

Goodyear used $200 million of the proceeds of the June 20 bond deal to repay the company's 4.9% bank debt before its July 5 maturity, and to replace $190 million of the cash it used to help pay $516 million of its 6 3/8% euro notes when they matured on June 6.

As for the debt financing, which was completed on April 8, Goodyear replaced about $3.28 billion of existing credit facilities with new facilities totaling $3.65 billion. The new facilities consisted of a $1.5 billion first-lien credit facility, (comprised of a $1 billion revolving facility and a $500 million deposit-funded facility); a $1.2 billion second-lien term loan facility; and the euro equivalent of approximately $650 million in credit facilities for the company's Goodyear Dunlop Tires Europe BV unit (comprised of about $450 million in revolving facilities and some $200 million in term loan facilities), all of which come due on April 30, 2010, as well as a $300 million third lien term loan facility due March 1, 2011.

As part of that refinancing, Goodyear paid down and retired its $1.3 billion asset-based credit facility, due March 2006 (the $800 million term loan portion of this facility was fully drawn prior to the refinancing); its $650 million asset-based term loan facility, due March 2006 (this facility was fully drawn prior to the refinancing); its $680 million deposit-funded credit facility due September 2007 (there were $492 million of letters of credit outstanding under this facility prior to the refinancing); and its $650 million senior secured European facilities due April 2005 (the $400 million term loan portion of this facility was fully drawn prior to the refinancing).

The company's chief executive officer, Richard J. Kramer, said that at the end of the quarter, Goodyear had a cash position of $1.621 billion, excluding $219 million of restricted cash.

Goodyear used cash during the quarter to pay down the 6 3/8% euronotes that matured in June, as well as to fund working capital and pension obligations.

Liquidity up $1 billion

Kramer said that between the $1.6 billion of cash and another $1.58 billion available under the company's various credit facilities, total liquidity stood at about $3.2 billion as of June 30 - around $1 billion more than it had a year earlier.

He noted that completion of the $3.7 billion debt refinancing in April, "gave us additional flexibility, with access to funds from revolving credit agreements."

The net impact of the April credit facility refinancing and the June bond issue, Kramer said, was that "we were able to lengthen substantially the maturity dates of our facilities, while also reducing the variable-rate interest rates we pay, and increasing our flexibility to repay portions of these facilities temporarily, which represents a real interest rate expense savings for us."

According to data distributed by the company as part of its presentation Friday, as of Dec. 31, 2004, Goodyear's balance sheet had shown some $1.192 billion of debt slated to come due this year - $542 million in bonds and $650 million in bank debt. As a result of the financing transactions, Goodyear now has no maturities due this year.

It also formerly had an even greater amount of debt coming due in 2006 - a total of $2.312 billion - and $980 million coming due in 2007, both years mostly in bank debt. However, Goodyear was able to remove $1.98 billion of loans due in 2006 and $680 million of credit facility debt due in 2007, leaving only $342 million of notes due in 2006, down slightly from $362 million at year's end, and $300 million in 2007 notes, unchanged from Dec. 31. The company's debt level for 2008 remained the same from quarter to quarter - $100 million of notes due - while accounts receivable securitizations due in '09 grew modestly to $332 million from $225 million as of Dec. 31.

The big change comes in 2010, with Goodyear having pushed $3.35 billion of new bank loans out to that year where before there had been no debt due in '10. In 2011, Goodyear has a total of $1.598 billion coming due - an addition of $300 million of new bank debt to some $1.298 billion of already outstanding bonds due that year. And the sale of the $400 million of new 2015 increases the bond maturities due after 2011 to $899 million from $499 million previously.

While the total amount of debt due through 2011 and beyond has increased somewhat, to an estimated $6.921 billion from $6.606 billion on Dec. 31, the vast bulk of it - about $5.847 billion - has been back-loaded out to 2010 and beyond, leaving only relatively modest obligations coming due till then, according to the company data.

Kramer said that "the improvement we've achieved in debt maturities and interest expense will help us to address the increasing pension obligations ahead of us."

Looking long term

The CFO said that while Goodyear is "pleased with the progress we've made in refinancing our obligations and extending our maturities, and while we will continue to opportunistically access the capital markets to address our pension funding needs, we are also now more focused on developing a longer-term strategy aimed at reducing our debt." He added that "asset sales and raising equity remain as potential options to do so."

Kramer, answering an analyst's question about how likely Goodyear is to use an equity issue to de-lever the balance sheet, said that "we've talked about this for a while as a longer-term solution to our leverage issue, and our thinking remains consistent with what we said - that at some point, it makes sense to do that."

He added, however that he didn't know "whether we're at that point today, and I think as we've said in the past - there are multiple factors that will go into that decision. Clearly, the price of our stock is one of them by definition - but it's not the only one."

The company's treasurer, Darren R. Wells, said that "the focus, now that we've made a lot of progress in extending our maturities, is going to be on de-leveraging the balance sheet, and we have a number of ways to do that. Certainly, we aren't leaving out operating cash flow, and working capital is going to be a big area of focus.

"We continue to make progress on asset sales, we announced another one this quarter; we're continuing on toward closing on the three divestitures that we've announced, and the question of equity is going to be a longer-term question for us. Obviously, whatever we do in that arena, we want to make sure it has a significant impact on the company's balance sheet and the credit rating we'll have going forward."

For the second quarter, Goodyear reported net income of $69 million (34 cents per diluted share), reflecting record sales of $5 billion and increased unit volume. The latest results are a sharp improvement from the second quarter of 2004, when the company had net income of $30 million (17 cents per share), on sales of $4.5 billion.

The increase in the latest period reflects improved pricing, product mix and volume, as well as the favorable impact of currency translation, Goodyear said.

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