All per share amounts are diluted and refer to Goodyear net income.
OVERVIEW
The Goodyear Tire & Rubber Company is one of the world's leading manufacturers
of tires, with one of the most recognizable brand names in the world and
operations in most regions of the world. We have a broad global footprint with
57 manufacturing facilities in 23 countries, including the United States. We
operate our business through three operating segments representing our regional
tire businesses: Americas; Europe, Middle East and Africa ("EMEA"); and Asia
Pacific.
Results of Operations
During the first quarter of 2022, our operating results significantly improved
compared to 2021, driven by the acquisition of Cooper Tire & Rubber Company
("Cooper Tire") on June 7, 2021 (the "Closing Date"). While we experienced
continued recovery from the impacts of the COVID-19 pandemic, particularly as it
relates to the global replacement market, our results for the first quarter of
2022 were still influenced by the direct and indirect macroeconomic effects of
the ongoing pandemic. Our global businesses are experiencing varying stages of
recovery, as national and local efforts in many countries to contain the spread
of COVID-19 and its related variants, including renewed stay-at-home orders,
continue to impact economic conditions. Increased demand for consumer products
and supply chain disruptions as a result of the pandemic and other global
events, including port congestion and container shortages, has led to
inflationary cost pressures, including higher costs for certain raw materials,
higher transportation costs and higher energy costs. Also, shortages of certain
automobile parts, such as semiconductors, have affected OE manufacturers'
ability to produce consumer and commercial vehicles consistently.
Most of our global tire manufacturing facilities operated at or near full
capacity during the first quarter of 2022 to meet current demand, as well as to
increase the level of our finished goods inventory as we continue to restock in
order to fulfill anticipated near-term demand. However, more recently, some of
our facilities, including our facilities in Pulandian and Kunshan, China, have
had to temporarily shut down or limit production as a result of renewed
stay-at-home orders or other events. Additionally, we continue to experience
increased labor-related costs and manufacturing inefficiencies associated with
the ongoing tight labor supply, particularly in the U.S. Our decisions to change
production levels in the future will be based on an evaluation of market demand
signals and inventory and supply levels, as well as the availability of
sufficient qualified labor and our ability to continue to safeguard the health
of our associates.
We continue to monitor the pandemic on a local basis, taking actions to protect
the health and wellbeing of our associates, customers and communities, which
remain our top priority. We also continue to follow guidance from the Centers
for Disease Control and Prevention, which include preventative measures at our
facilities, as appropriate, including limiting visitor access and business
travel, remote and hybrid working, masking and social distancing practices, and
frequent disinfection.
We remain largely unable to operate our business in Ukraine and suspended all
shipments of tires to Russia during the first quarter of 2022. Goodyear's sales
in Ukraine and Russia represented 0.3% and 1.2%, respectively, of our total 2021
net sales of $17.5 billion. We do not have manufacturing operations in either
Ukraine or Russia, and we are taking numerous actions to ensure continuity of
supply for raw materials used in manufacturing, some of which are sourced from
the impacted area. These actions include increasing our safety stocks when
possible, identifying substitutes where appropriate and building alternate
supplier relationships where necessary. Nonetheless, the ongoing conflict has
aggravated the already challenging macroeconomic trends discussed above,
including global supply chain disruptions, higher costs for certain raw
materials and higher transportation and energy costs. The situation continues to
be very dynamic, and we are continually assessing all potential impacts on our
associates and business.
Our results for the first quarter of 2022 include a 28.7% increase in tire unit
shipments compared to 2021, reflecting the addition of the operating results of
Cooper Tire and continued strength in the global replacement market. In the
first quarter of 2022, we incurred $151 million of additional costs related to
inflation and other cost pressures, primarily higher transportation and energy
costs.
Net sales in the first quarter of 2022 were $4,908 million, compared to $3,511
million in the first quarter of 2021. Net sales increased in 2022 primarily due
to the addition of Cooper Tire's net sales of $869 million, global improvements
in price and product mix, higher tire volume, primarily in EMEA and Asia
Pacific, and higher sales in other tire-related businesses, driven by increased
third-party chemical sales in Americas and higher global aviation sales. These
increases were partially offset by unfavorable foreign currency translation,
primarily in EMEA, driven by the weakening of the Turkish lira and euro.
In the first quarter of 2022, Goodyear net income was $96 million, or $0.33 per
share, compared to $12 million, or $0.05 per share, in the first quarter of
2021. The increase in Goodyear net income was primarily due to higher segment
operating income and lower rationalization expense, partially offset by higher
interest expense. Additionally, our results in 2021 included the
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impact of a severe winter storm in the U.S. estimated to negatively impact
earnings for the first quarter of 2021 by $23 million ($17 million after-tax and
minority).
Total segment operating income for the first quarter of 2022 was $303 million,
compared to $226 million in the first quarter of 2021. The increase was
primarily due to global improvements in price and product mix of $511 million,
which more than offset higher raw material costs of $378 million, higher tire
volume of $28 million, primarily in EMEA, and the net impact of out of period
adjustments in 2021 totaling $13 million ($12 million after-tax and minority) of
expense in Americas. These increases were partially offset by increased
conversion costs of $68 million, higher transportation costs of $52 million, and
higher Selling, Administrative and General Expense ("SAG") of $46 million, all
driven by the inflationary cost trends discussed above. The remainder of the
change was driven by the addition of Cooper Tire's operating results. Refer to
"Results of Operations - Segment Information" for additional information.
Liquidity
At March 31, 2022, we had $1,053 million of cash and cash equivalents as well as
$3,374 million of unused availability under our various credit agreements,
compared to $1,088 million and $4,345 million, respectively, at December 31,
2021. The decrease in cash and cash equivalents of $35 million was primarily due
to cash used by operating activities of $711 million and capital expenditures of
$276 million, partially offset by net borrowings of $972 million. Cash used by
operating activities reflects cash used for working capital of $1,002 million
and rationalization payments of $36 million, partially offset by net income for
the period of $96 million, which includes non-cash charges for depreciation and
amortization of $244 million.
Outlook
While our first quarter operating results for our legacy Goodyear business were
significantly better than pre-pandemic 2019 levels, we continue to face
macroeconomic uncertainty. In China, recent governmental measures to slow the
resurgence of COVID-19 have reduced economic activity and mobility. Our
facilities in China are operating, although not yet at normalized levels of
production. We estimate the negative impact of COVID-related plant closures in
China to be approximately $10 million in the second quarter of 2022, although
this estimate could trend higher and is dependent on our ability to continue to
increase production and a recovery in commercial activity. Similarly, OE
manufacturers continue to be affected by shortages of components and materials,
which are limiting vehicle production. In addition, the conflict in Ukraine has
exacerbated continuing supply chain challenges and increases in the cost of
certain raw materials, as well as in energy and transportation costs. Our
ability to ship products, including to locations where we do not have
manufacturing as well as from certain Cooper Tire consumer and commercial
manufacturing facilities, could be impacted by ongoing disruptions in global
logistics.
In the second quarter, we expect continued volume recovery in EMEA. We expect
our raw material costs to increase approximately $400 million in the second
quarter of 2022 compared to 2021, excluding the raw material cost increases
related to Cooper Tire through June 7, 2022. We anticipate price and product mix
to more than offset raw material costs in the second quarter of 2022 based on
selling price increases we have already implemented. At today's spot rates, the
increase in raw material costs during the second half of 2022 would be similar
to the increase we expect to experience in the first half. Natural and synthetic
rubber prices and other commodity prices historically have been volatile, and
this estimate could change significantly based on future cost fluctuations and
changes in foreign exchange rates. We continue to focus on price and product
mix, to substitute lower cost materials where possible, to work to identify
additional substitution opportunities, to reduce the amount of material required
in each tire, and to pursue alternative raw materials to minimize the impact of
higher raw material costs.
In addition to the impact of raw material costs, we expect the impact of other
inflationary cost pressures as compared to 2021 to continue to persist,
particularly with respect to transportation, labor and energy costs. We continue
to focus on actions to offset costs other than raw materials through cost
savings initiatives, further price actions and improvements in product mix.
During 2022, we expect to reinvest approximately $300 million in working capital
as we continue to build our inventory levels to meet customer demand and support
service levels. We expect our capital expenditures to be between $1.3 billion
and $1.4 billion, focusing on long term sustainable growth in our business
including our recently announced plans to modernize our consumer tire
manufacturing facility in Amiens, France. Our capital expenditures in 2022 will
be focused on projects to modernize certain of our manufacturing facilities and
expand others to address supply constraints and growing demand, in addition to
capital expenditures sustaining our facilities.
Our results in 2022 will also be impacted by approximately $40 million of
amortization of intangible assets related to the Cooper Tire acquisition.
Refer to "Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q and in
the 2021 Form 10-K for a discussion of the factors that may impact our business,
results of operations, financial condition or liquidity and "Forward-Looking
Information - Safe Harbor Statement" in this Quarterly Report on Form 10-Q for a
discussion of our use of forward-looking statements.
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RESULTS OF OPERATIONS
CONSOLIDATED
Three Months Ended March 31, 2022 and 2021
Net sales in the first quarter of 2022 were $4,908 million, increasing $1,397
million, or 39.8%, from $3,511 million in the first quarter of 2021. Goodyear
net income was $96 million, or $0.33 per share, in the first quarter of 2022,
compared to $12 million, or $0.05 per share, in the first quarter of 2021.
Net sales increased in the first quarter of 2022, primarily due to the addition
of Cooper Tire's net sales of $869 million, global improvements in price and
product mix of $509 million, higher tire volume of $103 million, primarily in
EMEA and Asia Pacific, and higher sales in other tire-related businesses of $102
million, driven by increased third-party chemical sales in Americas and higher
global aviation sales. These increases were partially offset by unfavorable
foreign currency translation of $186 million, primarily in EMEA, driven by the
weakening of the Turkish lira and euro.
Worldwide tire unit sales in the first quarter of 2022 were 45.0 million units,
increasing 10.0 million units, or 28.7%, from 35.0 million units in the first
quarter of 2021. Replacement tire volume increased globally by 9.2 million
units, or 35.4%. OE tire volume increased by 0.8 million units, or 9.1%,
reflecting increases in Asia Pacific and Americas, partially offset by a
decrease in EMEA. The increase in both replacement and OE tire volume was driven
by the addition of Cooper Tire's units and continued strength in the global
replacement market.
Cost of Goods Sold ("CGS") in the first quarter of 2022 was $3,966 million,
increasing $1,215 million, or 44.2%, from $2,751 million in the first quarter of
2021. CGS increased primarily due to the addition of Cooper Tire's CGS of $719
million, higher raw material costs of $378 million, higher costs in other
tire-related businesses of $93 million, driven by higher third-party chemical
sales in Americas, higher tire volume of $75 million, primarily in EMEA and Asia
Pacific, and higher conversion costs of $68 million, driven by inflation and
higher energy costs. These increases were partially offset by foreign currency
translation of $146 million, primarily in EMEA, driven by the weakening of the
Turkish lira and euro. CGS in the first quarter of 2021 was impacted by net out
of period adjustments totaling $13 million of expense in Americas.
CGS in the first quarter of 2022 and 2021 included pension expense of $5 million
and $4 million, respectively. CGS in the first quarter of 2022 included $1
million of incremental savings from rationalization plans compared to $33
million in 2021. CGS was 80.8% of sales in the first quarter of 2022, compared
to 78.4% in the first quarter of 2021.
SAG in the first quarter of 2022 was $688 million, increasing $124 million, or
22.0%, from $564 million in the first quarter of 2021. SAG included increases
related to higher wages and benefits of $30 million, including the impact of
higher incentive compensation, and $37 million of other net cost increases
reflecting the inflationary cost pressures discussed above, partially offset by
foreign currency translation of $28 million, primarily in EMEA. The remainder of
the change was driven by the addition of Cooper Tire's operating results.
SAG in the first quarter of 2022 and 2021 included pension expense of $4 million
for each period. SAG in the first quarter of 2022 included $1 million of
incremental savings from rationalization plans compared to $2 million in 2021.
SAG was 14.0% of sales in the first quarter of 2022, compared to 16.1% in the
first quarter of 2021.
We recorded net rationalization charges of $11 million ($9 million after-tax and
minority) in the first quarter of 2022 and $50 million ($45 million after-tax
and minority) in the first quarter of 2021. Net rationalization charges in the
first quarter of 2022 primarily related to the permanent closure of our Gadsden,
Alabama tire manufacturing facility ("Gadsden") and the modernization of two of
our tire manufacturing facilities in Germany. Net rationalization charges in the
first quarter of 2021 primarily related to a plan to reduce SAG headcount in
EMEA, the modernization of two of our tire manufacturing facilities in Germany
and the permanent closure of Gadsden. For further information, refer to Note to
the Consolidated Financial Statements No. 4, Costs Associated with
Rationalization Programs.
Interest expense in the first quarter of 2022 was $104 million, increasing $25
million, or 31.6%, from $79 million in the first quarter of 2021. The average
interest rate was 5.28% in the first quarter of 2022 compared to 5.23% in the
first quarter of 2021. The average debt balance was $7,884 million in the first
quarter of 2022 compared to $6,046 million in the first quarter of 2021. The
increase in average debt is primarily due to the additional borrowings that were
used to partially fund the Cooper Tire acquisition in the second quarter of
2021.
Other (Income) Expense in the first quarter of 2022 was $5 million of expense,
compared to $34 million of expense in the first quarter of 2021. Other (Income)
Expense for the three months ended March 31, 2022 includes net gains on asset
sales of $4 million ($4 million after-tax and minority), primarily related to
the sale of an equity investment in Americas. Other (Income) Expense for the
three months ended March 31, 2021 includes $8 million ($6 million after-tax and
minority) of transaction costs related to the Cooper Tire acquisition and an out
of period adjustment of $7 million ($7 million after-tax and minority) of
expense
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related to foreign currency exchange in Americas. The remainder of the change
was driven by a $6 million increase in royalty income, primarily due to an
increase in chemical royalties in Americas.
For the first quarter of 2022, we recorded income tax expense of $38 million on
income before income taxes of $134 million. Income tax expense for the three
months ended March 31, 2022 includes net discrete tax expense of $4 million ($4
million after minority interest). Discrete tax expense includes a charge of $11
million to establish a full valuation allowance on our net deferred tax assets
in Russia, partially offset by a net benefit of $7 million for various other
items.
In the first quarter of 2021, we recorded income tax expense of $15 million on
income before income taxes of $33 million. Income tax expense for the three
months ended March 31, 2021 includes net discrete tax expense of $3 million ($3
million after minority interest).
We record taxes based on overall estimated annual effective tax rates. The
difference between our effective tax rate and the U.S. statutory rate of 21% for
both the three months ended March 31, 2022 and March 31, 2021 primarily relates
to losses in foreign jurisdictions in which no tax benefits are recorded and the
discrete items noted above.
At both March 31, 2022 and December 31, 2021, we had approximately $1.2 billion
of U.S. federal, state and local net deferred tax assets, net of valuation
allowances totaling $26 million primarily for state tax loss carryforwards with
limited lives. In the U.S., we have a cumulative loss for the three-year period
ending March 31, 2022. However, as the three-year cumulative loss in the U.S. is
driven by business disruptions created by the COVID-19 pandemic, primarily in
2020, and only include the favorable impact of the Cooper Tire acquisition since
the Closing Date, we also considered other objectively verifiable information in
assessing our ability to utilize our net deferred tax assets, including
continued favorable recovery trends in the tire industry and our tire volume as
well as expected continued improvement. In addition, the Cooper Tire acquisition
has generated significant incremental domestic earnings since the Closing Date
and provides opportunities for cost and other operating synergies to further
improve our U.S. profitability.
At both March 31, 2022 and December 31, 2021, our U.S. net deferred tax assets
include $339 million of foreign tax credits with limited lives, net of valuation
allowances of $3 million. Our earnings and forecasts of future profitability,
taking into consideration recent trends, along with three significant sources of
foreign income, provide us sufficient positive evidence that we will be able to
utilize these net foreign tax credits which expire through 2030. Our sources of
foreign income are (1) 100% of our domestic profitability can be
re-characterized as foreign source income under current U.S. tax law to the
extent domestic losses have offset foreign source income in prior years, (2)
annual net foreign source income, exclusive of dividends, primarily from
royalties, and (3) tax planning strategies, including capitalizing research and
development costs, accelerating income on cross border transactions, including
sales of inventory or raw materials to our subsidiaries, and reducing U.S.
interest expense by, for example, reducing intercompany loans through
repatriating current year earnings of foreign subsidiaries, all of which would
increase our domestic profitability.
We consider our current forecasts of future profitability in assessing our
ability to realize our deferred tax assets, including our foreign tax credits.
These forecasts include the impact of recent trends, including various
macroeconomic factors such as the impact of higher raw material, transportation,
labor and energy costs, on our profitability, as well as the impact of tax
planning strategies. These macroeconomic factors possess a high degree of
volatility and can significantly impact our profitability. As such, there is a
risk that future earnings will not be sufficient to fully utilize our U.S. net
deferred tax assets, including our foreign tax credits. However, we believe our
forecasts of future profitability along with the three significant sources of
foreign income described above provide us sufficient positive, objectively
verifiable evidence to conclude that it is more likely than not that, at March
31, 2022, our U.S. net deferred tax assets, including our foreign tax credits,
net of valuation allowances, will be fully utilized.
At both March 31, 2022 and December 31, 2021, we also had approximately $1.3
billion of foreign net deferred tax assets, and related valuation allowances of
$1.0 billion. Our losses in various foreign taxing jurisdictions in recent
periods represented sufficient negative evidence to require us to maintain a
full valuation allowance against certain of these net foreign deferred tax
assets. Most notably, in Luxembourg, we maintain a valuation allowance of
approximately $860 million on all of our net deferred tax assets. Each reporting
period, we assess available positive and negative evidence and estimate if
sufficient future taxable income will be generated to utilize these existing
deferred tax assets. We do not believe that sufficient positive evidence
required to release valuation allowances having a significant impact on our
financial position or results of operations will exist within the next twelve
months.
For further information regarding income taxes and the realizability of our
deferred tax assets, including our foreign tax credits, refer to Note to the
Consolidated Financial Statements No. 6, Income Taxes.
Minority shareholders' net income in the first quarter of 2022 was breakeven
compared to $6 million in 2021.
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SEGMENT INFORMATION
Segment information reflects our strategic business units ("SBUs"), which are
organized to meet customer requirements and global competition and are segmented
on a regional basis. Since the Closing Date, Cooper Tire's operating results
have been incorporated into each of our SBUs. We expect to discuss the impact of
Cooper Tire's net sales and operating income within each SBU until the periods
presented are fully comparable.
Results of operations are measured based on net sales to unaffiliated customers
and segment operating income. Each segment exports tires to other segments. The
financial results of each segment exclude sales of tires exported to other
segments, but include operating income derived from such transactions. Segment
operating income is computed as follows: Net Sales less CGS (excluding asset
write-off and accelerated depreciation charges) and SAG (including certain
allocated corporate administrative expenses). Segment operating income also
includes certain royalties and equity in earnings of most affiliates. Segment
operating income does not include net rationalization charges (credits), asset
sales and certain other items.
Total segment operating income for the first quarter of 2022 was $303 million,
an increase of $77 million, or 34.1%, from $226 million in the first quarter of
2021. Total segment operating margin in the first quarter of 2022 was 6.2%
compared to 6.4% in the first quarter of 2021.
Management believes that total segment operating income is useful because it
represents the aggregate value of income created by our SBUs and excludes items
not directly related to the SBUs for performance evaluation purposes. Total
segment operating income is the sum of the individual SBUs' segment operating
income. Refer to Note to the Consolidated Financial Statements No. 8, Business
Segments, for further information and for a reconciliation of total segment
operating income to Income before Income Taxes.
Americas
Three Months Ended March 31,
Percent
(In millions) 2022 2021 Change Change
Tire Units 22.2 15.5 6.7 43.8 %
Net Sales $ 2,915 $ 1,787 $ 1,128 63.1 %
Operating Income 216 114 102 89.5 %
Operating Margin 7.4 % 6.4 %
Three Months Ended March 31, 2022 and 2021
Americas unit sales in the first quarter of 2022 increased 6.7 million units, or
43.8%, to 22.2 million units. Replacement tire volume increased 6.6 million
units, or 54.8%, due to the addition of Cooper Tire's units. OE tire volume
increased 0.1 million units, or 4.5%, despite the ongoing negative impacts to
vehicle production as a result of global supply chain disruptions, including
shortages of key manufacturing components, such as semiconductors, and was
driven by the addition of Cooper Tire's units.
Net sales in the first quarter of 2022 were $2,915 million, increasing $1,128
million, or 63.1%, from $1,787 million in the first quarter of 2021. The
increase in net sales was primarily due to the addition of Cooper Tire's net
sales of $756 million, favorable price and product mix of $331 million, driven
by price increases, and higher sales in other tire-related businesses of $72
million, primarily due to an increase in third-party sales of chemical products
and higher aviation sales.
Operating income in the first quarter of 2022 was $216 million, increasing $102
million, or 89.5%, from $114 million in the first quarter of 2021. The increase
in operating income was due to improvements in price and product mix of $322
million, which more than offset higher raw material costs of $204 million, and
the net impact of out of period adjustments in 2021 totaling $13 million of
expense. These increases were partially offset by increased transportation costs
of $40 million, higher SAG of $23 million, primarily due to higher wages and
benefits and inflation, and higher conversion costs of $14 million, driven by
inflation. The remainder of the change was driven by the addition of Cooper
Tire's operating results. We estimate that the severe winter storm in the U.S.
negatively impacted Americas operating income in 2021 by approximately $17
million.
Operating income in the first quarter of 2022 excluded net rationalization
charges of $7 million and net gains on asset sales of $4 million. Operating
income in the first quarter of 2021 excluded net rationalization charges of $10
million.
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Europe, Middle East and Africa
Three Months Ended March 31,
Percent
(In millions) 2022 2021 Change Change
Tire Units 14.5 12.7 1.8 14.4 %
Net Sales $ 1,426 $ 1,231 $ 195 15.8 %
Operating Income 59 74 (15 ) (20.3 )%
Operating Margin 4.1 % 6.0 %
Three Months Ended March 31, 2022 and 2021
EMEA unit sales in the first quarter of 2022 increased 1.8 million units, or
14.4%, to 14.5 million units. Replacement tire volume increased 2.1 million
units, or 22.4%, primarily in our consumer business, reflecting increased
industry demand due to continued recovery from the COVID-19 pandemic, our
ongoing initiative to align distribution in Europe and the addition of Cooper
Tire's units. OE tire volume decreased 0.3 million units, or 9.4%, reflecting
the negative impact on vehicle production of global supply chain disruptions,
including shortages of key manufacturing components, such as semiconductors.
This was partially offset by share gains driven by new consumer fitments.
Net sales in the first quarter of 2022 were $1,426 million, increasing $195
million, or 15.8%, from $1,231 million in the first quarter of 2021. Net sales
increased primarily due to improvements in price and product mix of $164
million, driven by price increases, higher tire volume of $103 million, the
addition of Cooper Tire's net sales of $62 million and higher sales in other
tire-related businesses of $31 million, primarily due to growth in our Fleet
Solutions business and an increase in motorcycle, retread and aviation sales.
These increases were partially offset by unfavorable foreign currency
translation of $166 million, driven by a weaker Turkish lira and euro.
Operating income in the first quarter of 2022 was $59 million, decreasing $15
million, or 20.3%, from $74 million in the first quarter of 2021. The decrease
in operating income was primarily due to higher conversion costs of $49 million,
reflecting higher energy costs and other inflationary cost pressures, higher SAG
of $26 million, primarily related to higher wages and benefits and inflation,
and unfavorable foreign currency translation of $10 million, driven by a weaker
Turkish lira, Russian ruble and euro. These decreases were partially offset by
improvements in price and product mix of $166 million, which more than offset
higher raw material costs of $127 million, and higher tire volume of $28
million. Conversion costs and SAG each include incremental savings from
rationalization plans of $1 million.
Operating income in the first quarter of 2022 excluded net rationalization
charges of $5 million. Operating income in the first quarter of 2021 excluded
net rationalization charges of $36 million.
Asia Pacific
Three Months Ended March 31,
Percent
(In millions) 2022 2021 Change Change
Tire Units 8.3 6.8 1.5 21.5 %
Net Sales $ 567 $ 493 $ 74 15.0 %
Operating Income 28 38 (10 ) (26.3 )%
Operating Margin 4.9 % 7.7 %
Three Months Ended March 31, 2022 and 2021
Asia Pacific unit sales in the first quarter of 2022 increased 1.5 million
units, or 21.5%, to 8.3 million units. OE tire volume increased 1.0 million
units, or 42.2%. Replacement tire volume increased 0.5 million units, or 11.1%.
These increases were primarily due to the addition of Cooper Tire's units and
were partially offset by the unfavorable impact of renewed stay-at-home orders
in China, as well as the negative impact on vehicle production of global supply
chain disruptions, including shortages of key manufacturing components, such as
semiconductors.
Net sales in the first quarter of 2022 were $567 million, increasing $74
million, or 15.0%, from $493 million in the first quarter of 2021. Net sales
increased due to the addition of Cooper Tire's net sales of $51 million, higher
tire volume of $26 million and favorable price and product mix of $14 million,
driven by price increases. These increases were partially offset by unfavorable
foreign currency translation of $16 million, primarily related to the weakening
of the Japanese yen and Australian dollar.
Operating income in the first quarter of 2022 was $28 million, decreasing $10
million, or 26.3%, from $38 million in the first quarter of 2021. The decrease
in operating income was primarily due to higher raw material costs of $47
million and higher conversion costs of $5 million, driven by higher energy
costs. These decreases were partially offset by favorable price and product
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mix of $23 million, higher tire volume of $7 million, and lower SAG of $3
million, primarily related to lower bad debt expense. The remainder of the
change was driven by the addition of Cooper Tire's operating results.
Operating income in 2022 excluded net rationalization reversals of $1 million.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash generated from our operating and
financing activities. Our cash flows from operating activities are driven
primarily by our operating results and changes in our working capital
requirements and our cash flows from financing activities are dependent upon our
ability to access credit or other capital.
At March 31, 2022, we had $1,053 million in cash and cash equivalents, compared
to $1,088 million at December 31, 2021. For the three months ended March 31,
2022, net cash used by operating activities was $711 million, reflecting cash
used for working capital of $1,002 million and rationalization payments of $36
million, partially offset by net income for the period of $96 million, which
includes non-cash charges for depreciation and amortization of $244 million. Net
cash used by investing activities was $300 million, primarily representing
capital expenditures of $276 million. Cash provided by financing activities was
$982 million, primarily due to net borrowings of $972 million.
At March 31, 2022, we had $3,374 million of unused availability under our
various credit agreements, compared to $4,345 million at December 31, 2021. The
table below presents unused availability under our credit facilities at those
dates:
March 31, December 31,
(In millions) 2022 2021
First lien revolving credit facility $ 1,811 $ 2,314
European revolving credit facility
786 908
Chinese credit facilities 347 374
Mexican credit facility - 42
Other foreign and domestic debt 23 147
Short term credit arrangements 407 560
$ 3,374 $ 4,345We have deposited our cash and cash equivalents and entered into various credit
agreements and derivative contracts with financial institutions that we
considered to be substantial and creditworthy at the time of such transactions.
We seek to control our exposure to these financial institutions by diversifying
our deposits, credit agreements and derivative contracts across multiple
financial institutions, by setting deposit and counterparty credit limits based
on long term credit ratings and other indicators of credit risk such as credit
default swap spreads, and by monitoring the financial strength of these
financial institutions on a regular basis. We also enter into master netting
agreements with counterparties when possible. By controlling and monitoring
exposure to financial institutions in this manner, we believe that we
effectively manage the risk of loss due to nonperformance by a financial
institution. However, we cannot provide assurance that we will not experience
losses or delays in accessing our deposits or lines of credit due to the
nonperformance of a financial institution. Our inability to access our cash
deposits or make draws on our lines of credit, or the inability of a
counterparty to fulfill its contractual obligations to us, could have a material
adverse effect on our liquidity, financial condition or results of operations in
the period in which it occurs.
We expect our 2022 cash flow needs to include capital expenditures of $1.3
billion to $1.4 billion. We also expect interest expense to be $450 million to
$475 million; rationalization payments to be approximately $100 million; income
tax payments to be $150 million to $200 million, excluding one-time items; and
contributions to our funded pension plans to be $25 million to $50 million. We
expect working capital to be a use of cash for the full year of 2022 of
approximately $300 million.
We are continuing to actively monitor our liquidity and intend to operate our
business in a way that allows us to address our cash flow needs with our
existing cash and available credit if they cannot be funded by cash generated
from operating or other financing activities. We believe that our liquidity
position is adequate to fund our operating and investing needs and debt
maturities for the next twelve months and to provide us with the ability to
respond to further changes in the business environment.
Our ability to service debt and operational requirements is also dependent, in
part, on the ability of our subsidiaries to make distributions of cash to
various other entities in our consolidated group, whether in the form of
dividends, loans or otherwise. In certain countries where we operate, such as
China, South Africa, Serbia and Argentina, transfers of funds into or out of
such countries by way of dividends, loans, advances or payments to third-party
or affiliated suppliers are generally or periodically subject to certain
requirements, such as obtaining approval from the foreign government and/or
currency exchange board before net assets can be transferred out of the country.
In addition, certain of our credit agreements and other debt instruments limit
the ability of foreign subsidiaries to make distributions of cash. Thus, we
would have to repay and/or amend these credit agreements and other debt
instruments in order to use this cash to service our consolidated debt. Because
of the inherent uncertainty of satisfactorily meeting these requirements or
limitations, we do not consider the net assets of our subsidiaries, including
our
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Chinese, South African, Serbian and Argentinian subsidiaries, which are subject
to such requirements or limitations to be integral to our liquidity or our
ability to service our debt and operational requirements. At March 31, 2022,
approximately $960 million of net assets, including approximately $194 million
of cash and cash equivalents, were subject to such requirements. The
requirements we must comply with to transfer funds out of China, South Africa,
Serbia and Argentina have not adversely impacted our ability to make transfers
out of those countries.
Operating Activities
Net cash used by operating activities was $711 million in the first quarter of
2022, compared to net cash used by operating activities of $282 million in the
first quarter of 2021. The increase in net cash used by operating activities was
primarily due to a net increase in cash used for working capital of $439 million
and an unfavorable year-over-year change in Compensation and Benefits on the
Balance Sheet of $101 million, primarily due to higher incentive compensation
payments and a decrease in pension liabilities, which were partially offset by
higher earnings in our SBUs of $77 million and lower cash payments for
rationalizations of $47 million.
The net increase in cash used for working capital reflects increases in cash
used for Accounts Receivable of $316 million and Inventory of $178 million,
partially offset by an increase in cash provided by Accounts Payable - Trade of
$55 million. These changes were driven by the acquisition of Cooper Tire, higher
sales volume and an increase in finished goods inventory as we continue to
restock in order to meet anticipated near-term demand, as well as the impact of
current year inflationary cost pressures on our manufacturing operations and our
pricing.
Investing Activities
Net cash used by investing activities was $300 million in the first quarter of
2022, compared to $180 million in the first quarter of 2021. Capital
expenditures were $276 million in the first quarter of 2022, including $66
million related to Cooper Tire, compared to $185 million in the first quarter of
2021. Beyond expenditures required to sustain our facilities, capital
expenditures in 2022 and 2021 primarily related to the modernization and
expansion of tire manufacturing facilities around the world.
Financing Activities
Net cash provided by financing activities was $982 million in the first quarter
of 2022, compared to net cash provided by financing activities of $144 million
in the first quarter of 2021. Financing activities in the first quarter of 2022
included net borrowings of $972 million and net cash provided by other financing
transactions of $15 million, primarily due to an increase in our liability to
remit cash from factored accounts receivables to the purchaser of those
receivables. Financing activities in 2021 included net borrowings of $175
million, partially offset by $40 million of net cash used by other financing
transactions, primarily due to a decrease in our liability to remit cash from
factored account receivables to the purchaser of those receivables.
Credit Sources
In aggregate, we had total credit arrangements of $11,611 million available at
March 31, 2022, of which $3,374 million were unused, compared to $11,628 million
available at December 31, 2021, of which $4,345 million were unused. At March
31, 2022, we had long term credit arrangements totaling $10,620 million, of
which $2,967 million were unused, compared to $10,624 million and $3,785
million, respectively, at December 31, 2021. At March 31, 2022, we had short
term committed and uncommitted credit arrangements totaling $991 million, of
which $407 million were unused, compared to $1,004 million and $560 million,
respectively, at December 31, 2021. The continued availability of the short term
uncommitted arrangements is at the discretion of the relevant lender and may be
terminated at any time.
Outstanding Notes
At March 31, 2022, we had $5,580 million of outstanding notes compared to $5,591
million at December 31, 2021.
$2.75 billion Amended and Restated First Lien Revolving Credit Facility due 2026
Our amended and restated first lien revolving credit facility is available in
the form of loans or letters of credit. Up to $800 million in letters of credit
and $50 million of swingline loans are available for issuance under the
facility. Subject to the consent of the lenders whose commitments are to be
increased, we may request that the facility be increased by up to $250 million.
Based on our current liquidity, amounts drawn under this facility bear interest
at LIBOR plus 125 basis points, and undrawn amounts under the facility will be
subject to an annual commitment fee of 25 basis points.
Availability under the facility is subject to a borrowing base, which is based
on (i) eligible accounts receivable and inventory of The Goodyear Tire & Rubber
Company and certain of its U.S. and Canadian subsidiaries, (ii) the value of our
principal trademarks in an amount not to exceed $400 million, (iii) the value of
eligible machinery and equipment, and (iv) certain cash in an amount not to
exceed $275 million. To the extent that our eligible accounts receivable,
inventory and other components of the borrowing base decline in value, our
borrowing base will decrease and the availability under the facility may
decrease below
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$2.75 billion. As of March 31, 2022, our borrowing base, and therefore our
availability, under this facility was $321 million below the facility's stated
amount of $2.75 billion.
At March 31, 2022, we had $615 million of borrowings and $3 million of letters
of credit issued under the revolving credit facility. At December 31, 2021, we
had no borrowings and $19 million of letters of credit issued under the
revolving credit facility.
€800 million Amended and Restated Senior Secured European Revolving Credit
Facility due 2024
Our amended and restated European revolving credit facility consists of (i) a
€180 million German tranche that is available only to Goodyear Germany GmbH and
(ii) a €620 million all-borrower tranche that is available to Goodyear Europe
B.V. ("GEBV"), Goodyear Germany and Goodyear Operations S.A. Up to €175 million
of swingline loans and €75 million in letters of credit are available for
issuance under the all-borrower tranche. Amounts drawn under this facility will
bear interest at LIBOR plus 150 basis points for loans denominated in U.S.
dollars, EURIBOR plus 150 basis points for loans denominated in euros, and SONIA
plus 150 basis points for loans denominated in pounds sterling. Undrawn amounts
under the facility are subject to an annual commitment fee of 25 basis points.
Subject to the consent of the lenders whose commitments are to be increased, we
may request that the facility be increased by up to €200 million.
At March 31, 2022, there were no borrowings outstanding under the German
tranche, $102 million (€92 million) of borrowings outstanding under the
all-borrower tranche and no letters of credit outstanding under the European
revolving credit facility. At December 31, 2021, we had no borrowings and no
letters of credit outstanding under the European revolving credit facility.
Each of our first lien revolving credit facility and our European revolving
credit facility have customary representations and warranties including, as a
condition to borrowing, that all such representations and warranties are true
and correct, in all material respects, on the date of the borrowing, including
representations as to no material adverse change in our business or financial
condition since December 31, 2020 under the first lien facility and December 31,
2018 under the European facility.
Accounts Receivable Securitization Facilities (On-Balance Sheet)
GEBV and certain other of our European subsidiaries are parties to a
pan-European accounts receivable securitization facility that expires in 2027.
The terms of the facility provide the flexibility to designate annually the
maximum amount of funding available under the facility in an amount of not less
than €30 million and not more than €450 million. For the period from October 19,
2021 through October 19, 2022, the designated maximum amount of the facility is
€300 million.
The facility involves an ongoing daily sale of substantially all of the trade
accounts receivable of certain GEBV subsidiaries. These subsidiaries retain
servicing responsibilities. Utilization under this facility is based on eligible
receivable balances.
The funding commitments under the facility will expire upon the earliest to
occur of: (a) October 19, 2027, (b) the non-renewal and expiration (without
substitution) of all of the back-up liquidity commitments, (c) the early
termination of the facility according to its terms (generally upon an Early
Amortisation Event (as defined in the facility), which includes, among other
things, events similar to the events of default under our first lien revolving
credit facility; certain tax law changes; or certain changes to law, regulation
or accounting standards), or (d) our request for early termination of the
facility. The facility's current back-up liquidity commitments will expire on
October 19, 2022.
At March 31, 2022, the amounts available and utilized under this program totaled
$213 million (€192 million). At December 31, 2021, the amounts available and
utilized under this program totaled $279 million (€246 million). The program
does not qualify for sale accounting, and accordingly, these amounts are
included in Long Term Debt and Finance Leases.
Accounts Receivable Factoring Facilities (Off-Balance Sheet)
We have sold certain of our trade receivables under off-balance sheet programs.
For these programs, we have concluded that there is generally no risk of loss to
us from non-payment of the sold receivables. At March 31, 2022, the gross amount
of receivables sold was $537 million, compared to $605 million at December 31,
2021.
Letters of Credit
At March 31, 2022, we had $228 million in letters of credit issued under
bilateral letter of credit agreements and other foreign credit facilities.
Supplier Financing
We have entered into payment processing agreements with several financial
institutions. Under these agreements, the financial institution acts as our
paying agent with respect to accounts payable due to our suppliers. These
agreements also allow our suppliers to sell their receivables to the financial
institutions at the sole discretion of both the supplier and the financial
institution on terms that are negotiated between them. We are not always
notified when our suppliers sell receivables under these programs. Our
obligations to our suppliers, including the amounts due and scheduled payment
dates, are not impacted by our suppliers'
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decisions to sell their receivables under the programs. Agreements for such
financing programs totaled up to $750 million and $630 million at March 31, 2022
and December 31, 2021, respectively.
Further Information
On March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR
("IBA"), confirmed its previously announced plans to cease publication of USD
LIBOR on December 31, 2021 for the one week and two month USD LIBOR tenors, and
on June 30, 2023 for all other USD LIBOR tenors. In addition, the IBA ceased
publication of all tenors of euro and Swiss franc LIBOR and most tenors of
Japanese yen and British pound LIBOR on December 31, 2021. In the United States,
efforts to identify a set of alternative U.S. dollar reference interest rates
include proposals by the Alternative Reference Rates Committee that has been
convened by the Federal Reserve Board and the Federal Reserve Bank of New York
to encourage market participants' use of the Secured Overnight Financing Rate,
known as SOFR. Additionally, the International Swaps and Derivatives
Association, Inc. published amendments to its definition book to incorporate new
benchmark fallbacks for derivative contracts that reference certain interbank
offered rates, including LIBOR. We cannot currently predict the effect of the
discontinuation of, or other changes to, LIBOR or any establishment of
alternative reference rates in the United States, the United Kingdom, the
European Union or elsewhere on the global capital markets. The uncertainty
regarding the future of LIBOR, as well as the transition from LIBOR to any
alternative reference rate or rates, could have adverse impacts on floating rate
obligations, loans, deposits, derivatives and other financial instruments that
currently use LIBOR as a benchmark rate. We have identified and evaluated our
financing obligations and other contracts that refer to LIBOR and expect to be
able to transition those obligations and contracts to an alternative reference
rate upon the discontinuation of LIBOR. Our first lien revolving credit facility
and our European revolving credit facility, which constitute the most
significant of our LIBOR-based debt obligations, contain "fallback" provisions
that address the potential discontinuation of LIBOR and facilitate the adoption
of an alternate rate of interest. We have not issued any long term floating rate
notes. Our first lien revolving credit facility also contain express provisions
for the use, at our option, of an alternative base rate (the higher of (a) the
prime rate, (b) the federal funds effective rate or the overnight bank funding
rate plus 50 basis points or (c) LIBOR plus 100 basis points). We do not believe
that the discontinuation of LIBOR, or its replacement with an alternative
reference rate or rates, will have a material impact on our results of
operations, financial position or liquidity.
For a further description of the terms of our outstanding notes, first lien
revolving credit facility, European revolving credit facility and pan-European
accounts receivable securitization facility, refer to Note to the Consolidated
Financial Statements No. 16, Financing Arrangements and Derivative Financial
Instruments, in our 2021 Form 10K and Note to the Consolidated Financial
Statements No. 9, Financing Arrangements and Derivative Financial Instruments,
in this Form 10-Q.
Covenant Compliance
Our first lien revolving credit facility and some of the indentures governing
our notes contain certain covenants that, among other things, limit our ability
to incur additional debt or issue redeemable preferred stock, pay dividends,
repurchase shares or make certain other restricted payments or investments,
incur liens, sell assets, incur restrictions on the ability of our subsidiaries
to pay dividends or to make other payments to us, enter into affiliate
transactions, engage in sale and leaseback transactions, and consolidate, merge,
sell or otherwise dispose of all or substantially all of our assets. These
covenants are subject to significant exceptions and qualifications. Our first
lien revolving credit facility and the indentures governing our notes also have
customary defaults, including cross-defaults to material indebtedness of
Goodyear and its subsidiaries.
We have an additional financial covenant in our first lien revolving credit
facility that is currently not applicable. We become subject to that financial
covenant when the aggregate amount of our Parent Company (The Goodyear Tire &
Rubber Company) and guarantor subsidiaries cash and cash equivalents ("Available
Cash") plus our availability under our first lien revolving credit facility is
less than $275 million. If this were to occur, our ratio of EBITDA to
Consolidated Interest Expense may not be less than 2.0 to 1.0 for the most
recent period of four consecutive fiscal quarters. As of March 31, 2022, our
unused availability under this facility of $1,811 million, plus our Available
Cash of $317 million, totaled $2,128 million, which is in excess of $275
million.
In addition, our European revolving credit facility contains non-financial
covenants similar to the non-financial covenants in our first lien revolving
credit facility that are described above and a financial covenant applicable
only to GEBV and its subsidiaries. This financial covenant provides that we are
not permitted to allow GEBV's ratio of Consolidated Net GEBV Indebtedness to
Consolidated GEBV EBITDA for a period of four consecutive fiscal quarters to be
greater than 3.0 to 1.0 at the end of any fiscal quarter. Consolidated Net GEBV
Indebtedness is determined net of the sum of cash and cash equivalents in excess
of $100 million held by GEBV and its subsidiaries, cash and cash equivalents in
excess of $150 million held by the Parent Company and its U.S. subsidiaries, and
availability under our first lien revolving credit facility if the ratio of
EBITDA to Consolidated Interest Expense described above is not applicable and
the conditions to borrowing under the first lien revolving credit facility are
met. Consolidated Net GEBV Indebtedness also excludes loans from other
consolidated Goodyear entities. This financial covenant is also included in our
pan-European accounts receivable securitization facility. At March 31, 2022, we
were in compliance with this financial covenant.
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Our credit facilities also state that we may only incur additional debt or make
restricted payments that are not otherwise expressly permitted if, after giving
effect to the debt incurrence or the restricted payment, our ratio of EBITDA to
Consolidated Interest Expense for the prior four fiscal quarters would exceed
2.0 to 1.0. Certain of our senior note indentures have substantially similar
limitations on incurring debt and making restricted payments. Our credit
facilities and indentures also permit the incurrence of additional debt through
other provisions in those agreements without regard to our ability to satisfy
the ratio-based incurrence test described above. We believe that these other
provisions provide us with sufficient flexibility to incur additional debt
necessary to meet our operating, investing and financing needs without regard to
our ability to satisfy the ratio-based incurrence test.
Covenants could change based upon a refinancing or amendment of an existing
facility, or additional covenants may be added in connection with the incurrence
of new debt.
At March 31, 2022, we were in compliance with the currently applicable material
covenants imposed by our principal credit facilities and indentures.
The terms "Available Cash," "EBITDA," "Consolidated Interest Expense,"
"Consolidated Net GEBV Indebtedness" and "Consolidated GEBV EBITDA" have the
meanings given them in the respective credit facilities.
Potential Future Financings
In addition to the financing activities described above, we may seek to
undertake additional financing actions which could include restructuring bank
debt or capital markets transactions, possibly including the issuance of
additional debt or equity. Given the inherent uncertainty of market conditions,
access to the capital markets cannot be assured.
Our future liquidity requirements will make it necessary for us to incur
additional debt. However, a substantial portion of our assets are already
subject to liens securing our indebtedness. As a result, we are limited in our
ability to pledge our remaining assets as security for additional secured
indebtedness. In addition, no assurance can be given as to our ability to raise
additional unsecured debt.
Dividends and Common Stock Repurchases
Under our primary credit facilities and some of our note indentures, we are
permitted to pay dividends on and repurchase our capital stock (which constitute
restricted payments) as long as no default will have occurred and be continuing,
additional indebtedness can be incurred under the credit facilities or
indentures following the payment, and certain financial tests are satisfied.
We do not currently pay a quarterly dividend on our common stock.
We may repurchase shares delivered to us by employees as payment for the
exercise price of stock options and the withholding taxes due upon the exercise
of stock options or the vesting or payment of stock awards. During the first
quarter of 2022, we did not repurchase any shares from employees.
The restrictions imposed by our credit facilities and indentures are not
expected to significantly affect our ability to pay dividends or repurchase our
capital stock in the future.
Asset Dispositions
The restrictions on asset sales imposed by our material indebtedness have not
affected our ability to divest non-core businesses, and those divestitures have
not affected our ability to comply with those restrictions.
Supplemental Guarantor Financial Information
Certain of our subsidiaries, which are listed on Exhibit 22.1 to this Quarterly
Report on Form 10-Q and are generally holding or operating companies, have
guaranteed our obligations under the $800 million outstanding principal amount
of 9.5% senior notes due 2025, the $900 million outstanding principal amount of
5% senior notes due 2026, the $700 million outstanding principal amount of
4.875% senior notes due 2027, the $850 million outstanding principal amount of
5% senior notes due 2029, the $550 million outstanding principal amount of 5.25%
senior notes due April 2031, the $600 million outstanding principal amount of
5.25% senior notes due July 2031 and the $450 million outstanding principal
amount of 5.625% senior notes due 2033 (collectively, the "Notes").
The Notes have been issued by The Goodyear Tire & Rubber Company (the "Parent
Company") and are its senior unsecured obligations. The Notes rank equally in
right of payment with all of our existing and future senior unsecured
obligations and senior to any of our future subordinated indebtedness. The Notes
are effectively subordinated to our existing and future secured indebtedness to
the extent of the assets securing that indebtedness. The Notes are fully and
unconditionally guaranteed on a joint and several basis by each of our
wholly-owned U.S. and Canadian subsidiaries that also guarantee our obligations
under our first
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lien revolving credit facility (such guarantees, the "Guarantees"; and, such
guaranteeing subsidiaries, the "Subsidiary Guarantors"). The Guarantees are
senior unsecured obligations of the Subsidiary Guarantors and rank equally in
right of payment with all existing and future senior unsecured obligations of
our Subsidiary Guarantors. The Guarantees are effectively subordinated to
existing and future secured indebtedness of the Subsidiary Guarantors to the
extent of the assets securing that indebtedness.
The Notes are structurally subordinated to all of the existing and future debt
and other liabilities, including trade payables, of our subsidiaries that do not
guarantee the Notes (the "Non-Guarantor Subsidiaries"). The Non-Guarantor
Subsidiaries will have no obligation, contingent or otherwise, to pay amounts
due under the Notes or to make funds available to pay those amounts. Certain
Non-Guarantor Subsidiaries are limited in their ability to remit funds to us by
means of dividends, advances or loans due to required foreign government and/or
currency exchange board approvals or limitations in credit agreements or other
debt instruments of those subsidiaries.
The Subsidiary Guarantors, as primary obligors and not merely as sureties,
jointly and severally irrevocably and unconditionally guarantee on a senior
unsecured basis the performance and full and punctual payment when due of all
obligations of the Parent Company under the Notes and the related indentures,
whether for payment of principal of or interest on the Notes, expenses,
indemnification or otherwise. The Guarantees of the Subsidiary Guarantors are
subject to release in limited circumstances only upon the occurrence of certain
customary conditions.
Although the Guarantees provide the holders of Notes with a direct unsecured
claim against the assets of the Subsidiary Guarantors, under U.S. federal
bankruptcy law and comparable provisions of U.S. state fraudulent transfer laws,
in certain circumstances a court could cancel a Guarantee and order the return
of any payments made thereunder to the Subsidiary Guarantor or to a fund for the
benefit of its creditors.
A court might take these actions if it found, among other things, that when the
Subsidiary Guarantors incurred the debt evidenced by their Guarantee (i) they
received less than reasonably equivalent value or fair consideration for the
incurrence of the debt and (ii) any one of the following conditions was
satisfied:
•
the Subsidiary Guarantor was insolvent or rendered insolvent by reason of the
incurrence;
•
the Subsidiary Guarantor was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital; or
•
the Subsidiary Guarantor intended to incur, or believed (or reasonably should
have believed) that it would incur, debts beyond its ability to pay as those
debts matured.
In applying the above factors, a court would likely find that a Subsidiary
Guarantor did not receive fair consideration or reasonably equivalent value for
its Guarantee, except to the extent that it benefited directly or indirectly
from the issuance of the Notes. The determination of whether a guarantor was or
was not rendered "insolvent" when it entered into its guarantee will vary
depending on the law of the jurisdiction being applied. Generally, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its assets at a fair valuation or if
the present fair salable value of its assets is less than the amount that will
be required to pay its probable liability on its existing debts, including
contingent or unliquidated debts, as they mature.
Under Canadian federal bankruptcy and insolvency laws and comparable provincial
laws on preferences, fraudulent conveyances or other challengeable or voidable
transactions, the Guarantees could be challenged as a preference, fraudulent
conveyance, transfer at undervalue or other challengeable or voidable
transaction. The test to be applied varies among the different pieces of
legislation, but as a general matter these types of challenges may arise in
circumstances where:
•
such action was intended to defeat, hinder, delay, defraud or prejudice
creditors or others;
•
such action was taken within a specified period of time prior to the
commencement of proceedings under Canadian bankruptcy, insolvency or
restructuring legislation in respect of a Subsidiary Guarantor, the
consideration received by the Subsidiary Guarantor was conspicuously less than
the fair market value of the consideration given, and the Subsidiary Guarantor
was insolvent or rendered insolvent by such action and (in some circumstances,
or) such action was intended to defraud, defeat or delay a creditor;
•
such action was taken within a specified period of time prior to the
commencement of proceedings under Canadian bankruptcy, insolvency or
restructuring legislation in respect of a Subsidiary Guarantor and such action
was taken, or is deemed to have been taken, with a view to giving a creditor a
preference over other creditors or, in some circumstances, had the effect of
giving a creditor a preference over other creditors; or
•
a Subsidiary Guarantor is found to have acted in a manner that was oppressive,
unfairly prejudicial to or unfairly disregarded the interests of any
shareholder, creditor, director, officer or other interested party.
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In addition, in certain insolvency proceedings a Canadian court may subordinate
claims in respect of the Guarantees to other claims against a Subsidiary
Guarantor under the principle of equitable subordination if the court determines
that (1) the holder of Notes engaged in some type of inequitable or improper
conduct, (2) the inequitable or improper conduct resulted in injury to other
creditors or conferred an unfair advantage upon the holder of Notes and (3)
equitable subordination is not inconsistent with the provisions of the relevant
solvency statute.
If a court canceled a Guarantee, the holders of Notes would no longer have a
claim against that Subsidiary Guarantor or its assets.
Each Guarantee is limited, by its terms, to an amount not to exceed the maximum
amount that can be guaranteed by the applicable Subsidiary Guarantor without
rendering the Guarantee, as it relates to that Subsidiary Guarantor, voidable
under applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
Each Subsidiary Guarantor is a consolidated subsidiary of the Parent Company at
the date of each balance sheet presented. The following tables present
summarized financial information for the Parent Company and the Subsidiary
Guarantors on a combined basis after elimination of (i) intercompany
transactions and balances among the Parent Company and the Subsidiary Guarantors
and (ii) equity in earnings from and investments in any Non-Guarantor
Subsidiary.
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