Goodyear Tire & Rubber To Cut 1200 Jobs As Part Of Reorganization Plan; A Critical Examination Of The Company’s Debt Situation

Goodyear Tire & Rubber is set to implement a significant workforce reduction, amounting to approximately 1,200 job cuts, as part of a comprehensive rationalization and workforce reorganization plan encompassing Europe, the Middle East, and Africa, as disclosed in a regulatory filing released by the company on Friday.

 

The decision to undertake this restructuring initiative was catalyzed by activist investor Elliott Investment Management’s critique of Goodyear’s operational management, pointing out its perceived deficiencies and its trailing position compared to competitors such as Michelin and Bridgestone.

Elliott, holding a notable 10% stake in Goodyear, had also exerted pressure on the company to conduct an in-depth operational review and consider divesting its retail outlets.

In addition to the anticipated workforce reduction, Goodyear expects to realize substantial cost savings spanning from 2024 to 2025. The primary objective of this initiative is to enhance the efficiency and cost structure of the organization as it seeks to streamline its operations.

The company, headquartered in Ohio and boasting a rich history spanning 125 years, foresees incurring total pre-tax expenses ranging from $210 million to $230 million by 2025 as a direct result of this restructuring effort.

Furthermore, Goodyear plans to share its comprehensive strategy with investors in the upcoming fourth quarter; the decision to disclose a broader plan follows the company’s recent financial performance, where it reported a second-quarter loss of 73 cents per share, marking a stark contrast to the 58 cents per share profit recorded in the same period the previous year.

Goodyear’s Debt Equation
Goodyear Tire & Rubber appears to be heavily reliant on debt, a concern that investors are closely examining.

As of March 2023, the company’s debt stood at US$8.76 billion, up from US$8.13 billion in the previous year. However, it held a cash reserve of US$1.08 billion, resulting in a net debt of approximately US$7.67 billion.

The company’s balance sheet reported liabilities of US$6.98 billion due within the next 12 months, with additional liabilities of US$10.8 billion maturing beyond 12 months.
In contrast, it possessed US$1.08 billion in cash and US$3.23 billion in receivables due within a year. The sum of its liabilities exceeded its cash and near-term receivables by US$13.4 billion.

Assessing Goodyear’s debt in relation to its earnings power, its net debt-to-EBITDA ratio stands at 4.6, indicating some reliance on debt. However, the company’s interest coverage is weak, at 1.7, implying a high level of leverage. This is partially attributed to significant depreciation and amortization expenses, which might overstate its EBITDA as a measure of earnings and potentially amplify the debt’s burden.

Caution For Investors
Li Lu, a prominent fund manager with backing from Berkshire Hathaway’s Charlie Munger, emphasizes the importance of avoiding permanent capital loss, indicating that evaluating a company’s debt is vital in assessing its riskiness.

Excessive debt can undermine a company’s financial stability, making it a critical consideration for shareholders; thus, it’s essential to understand that it becomes problematic when a company struggles to repay it, either by generating capital or using its cash flow.

While bankruptcies are relatively uncommon, heavily indebted companies may face dilution of shareholder value as they are forced to raise capital at distressed prices.

However, many companies manage their debt efficiently, leveraging it to their advantage. Examining a company’s cash position alongside debt is a fundamental step in evaluating its debt.

This discrepancy places a significant burden on the company; therefore, monitoring Goodyear Tire & Rubber’s balance sheet is crucial, as the company may require substantial recapitalization if it has to meet its obligations to creditors immediately.

While examining debt levels, the balance sheet is a natural starting point, but future earnings will be the key factor determining Goodyear Tire & Rubber’s ability to maintain a healthy financial position.

Shareholders should be aware that interest expenses seem to have had a substantial impact on the company’s financials lately. Moreover, Goodyear Tire & Rubber’s EBIT witnessed a 32% decline over the past year, raising concerns about its ability to service its debt if earnings continue to decline.

Lastly, the ability to pay down debt hinges on generating cash rather than paper profits. Over the last three years, Goodyear Tire & Rubber recorded negative free cash flow, indicating that the company struggled to generate sufficient cash to cover its obligations; this amplifies the risk associated with its debt load, and shareholders may hope for an improvement in this regard.

The Last Bit, both the growth rate of Goodyear Tire & Rubber’s earnings before interest and taxes (EBIT) and its track record of managing total liabilities raise concerns about its debt levels.

Furthermore, the company’s weak interest coverage adds to these worries. Considering these factors, it’s apparent that Goodyear Tire & Rubber is carrying a substantial debt burden, which warrants careful monitoring.