The Goodyear Tire & Rubber Company 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005
Commission File Number: 1-1927
THE GOODYEAR TIRE & RUBBER COMPANY
(Exact name of Registrant as specified in its charter)
|
|
|
OHIO
|
|
34-0253240 |
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.) |
|
|
|
1144 East Market Street, Akron, Ohio
(Address of Principal Executive Offices)
|
|
44316-0001
(Zip Code) |
(330) 796-2121
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Indicate the number of shares outstanding of each of the Registrants classes of common stock, as
of the latest practicable date.
Number of Shares of Common Stock,
Without Par Value, Outstanding at September 30, 2005: 176,403,442
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts) |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
NET SALES |
|
$ |
5,030 |
|
|
$ |
4,700 |
|
|
$ |
14,789 |
|
|
$ |
13,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold |
|
|
4,008 |
|
|
|
3,750 |
|
|
|
11,772 |
|
|
|
10,816 |
|
Selling, Administrative and General Expense |
|
|
707 |
|
|
|
703 |
|
|
|
2,139 |
|
|
|
2,079 |
|
Rationalizations (Note 2) |
|
|
9 |
|
|
|
29 |
|
|
|
(4 |
) |
|
|
63 |
|
Interest Expense |
|
|
103 |
|
|
|
95 |
|
|
|
306 |
|
|
|
268 |
|
Other (Income) and Expense (Note 3) |
|
|
(35 |
) |
|
|
38 |
|
|
|
(5 |
) |
|
|
117 |
|
Minority Interest in Net Income of Subsidiaries |
|
|
25 |
|
|
|
18 |
|
|
|
79 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes |
|
|
213 |
|
|
|
67 |
|
|
|
502 |
|
|
|
135 |
|
United States and Foreign Taxes on Income |
|
|
71 |
|
|
|
29 |
|
|
|
223 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
142 |
|
|
$ |
38 |
|
|
$ |
279 |
|
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER SHARE OF COMMON STOCK |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC |
|
$ |
0.81 |
|
|
$ |
0.22 |
|
|
$ |
1.59 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Shares Outstanding (Note 4) |
|
|
176 |
|
|
|
175 |
|
|
|
176 |
|
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED |
|
$ |
0.70 |
|
|
$ |
0.20 |
|
|
$ |
1.39 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Shares Outstanding (Note 4) |
|
|
209 |
|
|
|
207 |
|
|
|
209 |
|
|
|
175 |
|
The accompanying notes are an integral part of these consolidated financial statements.
-1-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
|
(In millions) |
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Assets: |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
1,662 |
|
|
$ |
1,968 |
|
Restricted Cash (Note 1) |
|
|
215 |
|
|
|
152 |
|
Accounts and Notes Receivable, less Allowance $137 ($144 in 2004) |
|
|
3,712 |
|
|
|
3,408 |
|
Inventories, net: |
|
|
|
|
|
|
|
|
Raw Materials |
|
|
617 |
|
|
|
586 |
|
Work in Process |
|
|
143 |
|
|
|
140 |
|
Finished Products |
|
|
2,134 |
|
|
|
2,059 |
|
|
|
|
|
|
|
|
|
|
|
2,894 |
|
|
|
2,785 |
|
|
|
|
|
|
|
|
|
|
Prepaid Expenses and Other Current Assets |
|
|
268 |
|
|
|
300 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
8,751 |
|
|
|
8,613 |
|
Other Assets |
|
|
492 |
|
|
|
669 |
|
Goodwill |
|
|
661 |
|
|
|
720 |
|
Other Intangible Assets |
|
|
154 |
|
|
|
163 |
|
Deferred Income Tax |
|
|
83 |
|
|
|
83 |
|
Deferred Pension Costs |
|
|
919 |
|
|
|
830 |
|
Properties and Plants, less Accumulated Depreciation $7,890 ($7,836 in 2004) |
|
|
5,179 |
|
|
|
5,455 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
16,239 |
|
|
$ |
16,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts Payable-Trade |
|
$ |
1,859 |
|
|
$ |
1,970 |
|
Compensation and Benefits |
|
|
1,084 |
|
|
|
1,029 |
|
Other Current Liabilities |
|
|
575 |
|
|
|
741 |
|
United States and Foreign Taxes |
|
|
331 |
|
|
|
271 |
|
Notes Payable (Note 5) |
|
|
252 |
|
|
|
221 |
|
Long Term Debt and Capital Leases due within one year (Note 5) |
|
|
252 |
|
|
|
1,010 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
4,353 |
|
|
|
5,242 |
|
Long Term Debt and Capital Leases (Note 5) |
|
|
4,944 |
|
|
|
4,449 |
|
Compensation and Benefits |
|
|
4,989 |
|
|
|
5,036 |
|
Deferred and Other Noncurrent Income Taxes |
|
|
385 |
|
|
|
406 |
|
Other Long Term Liabilities |
|
|
440 |
|
|
|
481 |
|
Minority Equity in Subsidiaries |
|
|
832 |
|
|
|
846 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
15,943 |
|
|
|
16,460 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingent Liabilities (Note 7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity: |
|
|
|
|
|
|
|
|
Preferred Stock, no par value: |
|
|
|
|
|
|
|
|
Authorized, 50 shares, unissued |
|
|
|
|
|
|
|
|
Common Stock, no par value: |
|
|
|
|
|
|
|
|
Authorized,
300 shares, Outstanding shares 176 (176 in 2004)
after deducting 19 treasury shares (20 in 2004) |
|
|
176 |
|
|
|
176 |
|
Capital Surplus |
|
|
1,397 |
|
|
|
1,392 |
|
Retained Earnings |
|
|
1,349 |
|
|
|
1,070 |
|
Accumulated Other Comprehensive Income (Loss) |
|
|
(2,626 |
) |
|
|
(2,565 |
) |
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
296 |
|
|
|
73 |
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
16,239 |
|
|
$ |
16,533 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
-2-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net Income (Loss) |
|
$ |
142 |
|
|
$ |
38 |
|
|
$ |
279 |
|
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Income (Loss) |
|
|
52 |
|
|
|
82 |
|
|
|
(151 |
) |
|
|
(22 |
) |
Less
Reclassification Adjustment for Recognition of Foreign Currency
Translation Loss in Net Income (Loss) Due to the Sale of a Subsidiary |
|
|
49 |
|
|
|
|
|
|
|
49 |
|
|
|
|
|
Minimum Pension Liability |
|
|
1 |
|
|
|
(4 |
) |
|
|
36 |
|
|
|
(2 |
) |
Deferred Derivative Gain (Loss) |
|
|
(2 |
) |
|
|
3 |
|
|
|
(18 |
) |
|
|
2 |
|
Reclassification Adjustment for Amounts Recognized in
Income (Loss) |
|
|
1 |
|
|
|
(2 |
) |
|
|
15 |
|
|
|
6 |
|
Tax on Derivative Reclassification Adjustment |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(4 |
) |
Unrealized Investment Gain |
|
|
6 |
|
|
|
2 |
|
|
|
9 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss) |
|
$ |
249 |
|
|
$ |
119 |
|
|
$ |
218 |
|
|
$ |
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-3-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
(In millions) |
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
279 |
|
|
$ |
(10 |
) |
Adjustments to reconcile net income (loss) to cash flows from operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
478 |
|
|
|
461 |
|
Rationalizations (Note 2) |
|
|
(14 |
) |
|
|
17 |
|
Net gain on the sale of assets (Note 3) |
|
|
(40 |
) |
|
|
(4 |
) |
Fire loss deductible (recoveries) expense (Note 3) |
|
|
(8 |
) |
|
|
12 |
|
Minority interest and equity earnings |
|
|
78 |
|
|
|
36 |
|
Net cash flows from sale of accounts receivable |
|
|
|
|
|
|
45 |
|
Pension contributions |
|
|
(332 |
) |
|
|
(119 |
) |
Changes in operating assets and liabilities,
net of asset acquisitions and dispositions: |
|
|
|
|
|
|
|
|
Accounts and notes receivable |
|
|
(345 |
) |
|
|
(937 |
) |
Inventories |
|
|
(212 |
) |
|
|
(56 |
) |
Accounts
payable trade |
|
|
(43 |
) |
|
|
(36 |
) |
Prepaid expenses and other current assets |
|
|
(5 |
) |
|
|
63 |
|
Compensation and benefits |
|
|
437 |
|
|
|
364 |
|
Other current liabilities |
|
|
(172 |
) |
|
|
(112 |
) |
Other long term liabilities |
|
|
(28 |
) |
|
|
110 |
|
United States and foreign taxes |
|
|
82 |
|
|
|
76 |
|
Other assets and liabilities |
|
|
34 |
|
|
|
108 |
|
|
|
|
|
|
|
|
Total adjustments |
|
|
(90 |
) |
|
|
28 |
|
|
|
|
|
|
|
|
TOTAL CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
189 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(370 |
) |
|
|
(278 |
) |
Acquisitions |
|
|
|
|
|
|
(62 |
) |
Proceeds from asset dispositions |
|
|
146 |
|
|
|
14 |
|
Other transactions |
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
(224 |
) |
|
|
(290 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term debt incurred |
|
|
166 |
|
|
|
163 |
|
Short term debt paid |
|
|
(124 |
) |
|
|
(106 |
) |
Long term debt incurred |
|
|
2,302 |
|
|
|
1,741 |
|
Long term debt paid |
|
|
(2,441 |
) |
|
|
(1,313 |
) |
Debt issuance costs |
|
|
(50 |
) |
|
|
(45 |
) |
Increase in restricted cash |
|
|
(63 |
) |
|
|
(62 |
) |
Other transactions |
|
|
(15 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
|
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
(225 |
) |
|
|
349 |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(46 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(306 |
) |
|
|
58 |
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at Beginning of the Period |
|
|
1,968 |
|
|
|
1,546 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of the Period |
|
$ |
1,662 |
|
|
$ |
1,604 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-4-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with
Form 10-Q instructions and in the opinion of management contain all adjustments (including normal
recurring adjustments) necessary to present fairly the financial position, results of operations
and cash flows for the periods presented. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. These interim
consolidated financial statements should be read in conjunction with the consolidated financial
statements and related notes thereto included in Current Report on Form 8-K for the year ended
December 31, 2004 filed on June 20, 2005.
Operating results for the three and nine month periods ended September 30, 2005 are not
necessarily indicative of the results expected in subsequent quarters or for the year ending
December 31, 2005.
Consolidation of Variable Interest Entities
In accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities (VIE) an Interpretation of ARB No. 51, as amended
by FASB Interpretation No. 46R (collectively, FIN 46), we consolidated two previously
unconsolidated investments, effective January 1, 2004. South Pacific Tyres (SPT), a 50% owned
manufacturer, marketer and exporter of tires in Australia and New Zealand, and Tire and Wheel
Assembly (T&WA), a 40% owned wheel mounting operation in the United States, which ships to original
equipment manufacturers, are consolidated in all periods presented in the accompanying consolidated
financial statements.
Restricted Cash
Restricted cash primarily consists of Goodyear contributions made related to the settlement of the
Entran II litigation and proceeds received pursuant to insurance settlements. Refer to Note 7,
Commitments and Contingent Liabilities, for further information about Entran II claims. In
addition, we will, from time to time, maintain balances on deposit at various financial
institutions as collateral for borrowings incurred by various subsidiaries, as well as cash
deposited in support of trade agreements and performance bonds. The availability of these balances
is restricted to the extent of the borrowings.
Stock-Based Compensation
We use the intrinsic value method to measure the cost of stock-based compensation. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the quoted market price
of our common stock at the date of the grant over the amount an employee must pay to acquire the
stock. Compensation cost for stock appreciation rights and performance units is recorded based on
the quoted market price of our stock at the end of the reporting period.
-5-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the pro forma effect from using the fair value method to measure
compensation cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
(In millions, except per share amounts) |
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income (loss) as reported |
|
$ |
142 |
|
|
$ |
38 |
|
|
$ |
279 |
|
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Stock-based compensation expense
included in net income (loss) (net of tax) |
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Stock-based compensation expense calculated
using the fair value method (net of tax) |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(13 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) as adjusted |
|
$ |
138 |
|
|
$ |
35 |
|
|
$ |
268 |
|
|
$ |
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.81 |
|
|
$ |
0.22 |
|
|
$ |
1.59 |
|
|
$ |
(0.06 |
) |
as adjusted |
|
|
0.79 |
|
|
|
0.20 |
|
|
|
1.53 |
|
|
|
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.70 |
|
|
$ |
0.20 |
|
|
$ |
1.39 |
|
|
$ |
(0.06 |
) |
as adjusted |
|
|
0.68 |
|
|
|
0.19 |
|
|
|
1.34 |
|
|
|
(0.12 |
) |
Recently Issued Accounting Standards
The FASB has issued Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123R). Under the provisions of SFAS 123R, companies are required to
measure the cost of employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exception). That cost will be recognized
over the period during which an employee is required to provide service in exchange for the award,
usually the vesting period. On April 14, 2005, the Securities and Exchange Commission (SEC)
approved a delay to the effective date of SFAS 123R. Under the new SEC rule, SFAS 123R is
effective for annual periods that begin after June 15, 2005. SFAS 123R applies to all awards
granted, modified, repurchased or cancelled by us after December 31, 2005 and to unvested options
at the date of adoption. We do not expect the adoption of SFAS 123R to have a material impact on
our results of operations, financial position or liquidity.
The FASB has issued Statement of Financial Accounting Standards No. 151, Inventory Costs an
amendment of ARB No. 43, Chapter 4 (SFAS 151). The provisions of SFAS 151 are intended to
eliminate narrow differences between the existing accounting standards of the FASB and the
International Accounting Standards Board (IASB) related to inventory costs, in particular, the
treatment of abnormal idle facility expense, freight, handling costs and spoilage. SFAS 151
requires that these costs be recognized as current period charges regardless of the extent to which
they are considered abnormal. The provisions of SFAS 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We are currently assessing the
potential impact of implementing SFAS 151 on the consolidated financial statements.
FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47)
an interpretation of FASB Statement No. 143, Accounting for Asset Retirement Obligations (SFAS
143), clarifies the term conditional asset retirement obligation as used in SFAS 143. The term
refers to a legal obligation to perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event that may or may not be within the control of
the entity. The obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or)
method of settlement may be conditional on a future event. Accordingly, an entity is required to
recognize a liability for the fair value of a conditional asset retirement obligation if the fair
value of the liability can be reasonably estimated. The fair value of a liability for the
conditional asset retirement obligation should be recognized when incurred generally upon
acquisition, construction, or development and (or) through the normal operation of the asset.
Uncertainty about the timing and (or) method of settlement of a conditional asset retirement
obligation should be factored into the measurement of the liability when sufficient information
exists. FIN 47 is effective for fiscal years ending after December 15, 2005. Retrospective
application for interim financial information is permitted but is not required. We are currently
evaluating the impact of FIN 47 on the consolidated financial statements and will implement this
new standard for the year ended December 31, 2005, in accordance with its requirements.
-6-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS
No. 154 is a replacement of APB No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on
the accounting for and reporting of accounting changes and error corrections. It establishes
retrospective application as the required method for reporting a change in accounting principle.
SFAS No. 154 provides guidance for determining whether retrospective application of a change in
accounting principle is impracticable and for reporting a change when retrospective application is
impracticable. The reporting of a correction of an error by restating previously issued financial
statements is also addressed by SFAS No. 154. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 31, 2005. We will adopt this
pronouncement beginning in fiscal year 2006.
In June 2005, the FASB staff issued FASB Staff Position 143-1 Accounting for Electronic
Equipment Waste Obligations (FSP 143-1) to address the accounting for obligations associated with
the Directive 2002/96/EC on Waste Electrical and Electronic Equipment (the Directive) adopted by
the European Union. The Directive effectively obligates a commercial user to incur costs
associated with the retirement of a specified asset that qualifies as historical waste equipment.
The commercial user should apply the provisions of SFAS 143 and FIN 47 discussed above. FSP 143-1
shall be applied the later of the first reporting period ending after June 8, 2005 or the date of
the adoption of the law by the applicable EU-member country. We adopted the FSP at certain of our
European operations where applicable legislation was adopted. The impact of the adoption on the
consolidated financial statements was not significant.
Reclassification
Certain items previously reported in specific financial statement captions have been reclassified
to conform to the current presentation.
NOTE 2. COSTS ASSOCIATED WITH RATIONALIZATION PROGRAMS
To maintain global competitiveness, we have implemented rationalization actions over the past
several years for the purpose of reducing excess capacity, eliminating redundancies and reducing
costs.
The following table shows the reconciliation of our liability for rationalization actions
between periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Associate- |
|
|
Other Than |
|
|
|
|
(In millions) |
|
related Costs |
|
|
Associate-related Costs |
|
|
Total |
|
Balance at December 31, 2004 |
|
$ |
41 |
|
|
$ |
27 |
|
|
$ |
68 |
|
First half charges |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Incurred |
|
|
(22 |
) |
|
|
(6 |
) |
|
|
(28 |
) |
Reversed |
|
|
(9 |
) |
|
|
(6 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005 |
|
|
11 |
|
|
|
16 |
|
|
|
27 |
|
Third quarter charges |
|
|
9 |
|
|
|
|
|
|
|
9 |
|
Incurred |
|
|
(6 |
) |
|
|
(1 |
) |
|
|
(7 |
) |
Reversed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005 |
|
$ |
14 |
|
|
$ |
15 |
|
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
2005 rationalization charges consisted of manufacturing and corporate support group associate
reductions in North American Tire; manufacturing associate reductions and a sales function
reorganization in European Union Tire, and sales, marketing, and research and development associate
reductions in Engineered Products.
During the third quarter of 2005, $9 million ($8 million after-tax or $0.04 per share) of new
charges were recorded for the plans initiated in 2005 primarily for associate severance costs,
including $1 million for non-cash pension special termination benefits. Approximately 265
associates will be released under programs initiated in 2005, of which approximately 175 were
released by September 30, 2005.
-7-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the first nine months of 2005, $4 million ($2 million after-tax or $0.01 per share) of net
reversals of reserves were recorded, which included $15 million ($12 million after-tax or $.06 per
share) of reversals for rationalization actions no longer needed for their originally-intended
purposes. These reversals were partially offset by $11 million ($10 million after-tax or $0.05 per
share) of new rationalization charges. The $15 million of reversals consisted of $9 million of
associate-related costs for plans initiated in 2004 and 2003, and $6 million primarily for
non-cancelable leases that were exited during the first quarter related to plans initiated in 2001
and earlier. The $11 million of charges primarily represented associate-related costs and consist
of $9 million for plans initiated in 2005 and $2 million for plans initiated in 2004.
The accrual balance of $29 million at September 30, 2005 includes approximately $10 million
related to long-term non-cancelable lease costs and approximately $19 million of other costs that
are expected to be substantially utilized within the next twelve months.
Accelerated depreciation charges were recorded for fixed assets that will be taken out of
service in connection with certain rationalization plans initiated in 2003 and 2004 in the
Engineered Products and European Union Tire Segments. During the third quarter of 2005 and 2004,
$1 million was recorded for accelerated depreciation charges as Cost of goods sold and $1 million
was recorded in 2004 as Selling, administrative and general expense. For the first nine months of
2005 and 2004, accelerated depreciation charges of $2 million and $6 million, respectively, were
recorded as Cost of goods sold. Accelerated depreciation charges of $2 million was recorded in the
first nine months of 2004 as Selling, administrative and general expense.
2004 rationalization activities consisted primarily of warehouse, manufacturing and sales and
marketing associate reductions in Engineered Products, a farm tire manufacturing consolidation in
European Union Tire, administrative associate reductions in North American Tire, European Union
Tire and corporate functional groups, and manufacturing, sales and research and development
associate reductions in North American Tire. In fiscal year 2004, net charges were recorded
totaling $56 million ($52 million after-tax or $0.27 per share). The net charges included
reversals of $39 million ($32 million after-tax or $0.17 per share) related to reserves from
rationalization actions no longer needed for their originally-intended purpose, and new charges of
$95 million ($84 million after-tax or $0.44 per share). Included in the $95 million of new charges
were $77 million for plans initiated in 2004, as described above. Approximately 1,400 associates
will be released under programs initiated in 2004, of which approximately 1,070 have been released
to date (430 during the first nine months of 2005). The costs of the 2004 actions consisted of $40
million related to future cash outflows, primarily for associate severance costs, $32 million in
non-cash pension curtailments and postretirement benefit costs and $5 million for non-cancelable
lease costs and other exit costs. Costs in 2004 also included $16 million related to plans
initiated in 2003, consisting of $14 million of non-cancelable lease costs and other exit costs and
$2 million of associate severance costs. The reversals are primarily the result of lower than
initially estimated associate severance costs of $35 million and lower leasehold and other exit
costs of $4 million. Of the $35 million of associate severance cost reversals, $12 million related
to previously-approved plans in Engineered Products that were reorganized into the 2004 warehouse,
manufacturing, and sales and marketing associate reductions.
Additional restructuring charges of $3 million related to previously announced rationalization
plans have not yet been recorded and are expected to be incurred and recorded during the next
twelve months.
-8-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. OTHER (INCOME) AND EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Financing fees and financial instruments |
|
$ |
10 |
|
|
$ |
29 |
|
|
$ |
99 |
|
|
$ |
90 |
|
Environmental insurance recoveries |
|
|
(9 |
) |
|
|
|
|
|
|
(29 |
) |
|
|
|
|
Interest income |
|
|
(13 |
) |
|
|
(9 |
) |
|
|
(40 |
) |
|
|
(23 |
) |
General & product liability
discontinued products |
|
|
|
|
|
|
8 |
|
|
|
4 |
|
|
|
25 |
|
Foreign currency exchange |
|
|
8 |
|
|
|
10 |
|
|
|
19 |
|
|
|
14 |
|
Equity in earnings of affiliates |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(8 |
) |
|
|
(6 |
) |
Gain on asset sales |
|
|
(28 |
) |
|
|
(1 |
) |
|
|
(41 |
) |
|
|
(6 |
) |
Miscellaneous |
|
|
|
|
|
|
3 |
|
|
|
(9 |
) |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(35 |
) |
|
$ |
38 |
|
|
$ |
(5 |
) |
|
$ |
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing fees and financial instruments in the nine months ended September 30, 2005 included $47
million of debt issuance costs written-off in connection with our refinancing activities during the
second quarter of 2005. This includes approximately $30 million of previously unamortized fees
related to replaced facilities and $17 million of costs related to the new facilities. In the
three and nine month periods ended September 30, 2004, $4 million and $17 million, respectively, of
deferred costs were written-off in connection with our refinancing activities during 2004.
Additionally, during the third quarter of 2004 we incurred higher amortization of financing fees of
approximately $12 million related to higher deferred fee levels and shorter amortization periods.
Refer to Note 5, Financing Arrangements, for further information on the 2005 refinancing
activities.
General & product liabilitydiscontinued products includes charges for claims against us
related to asbestos personal injury claims, anticipated liabilities related to Entran II claims and
settlements with certain insurance companies related to asbestos. During the three and nine months
ended September 30, 2005, we recorded gains of $14 million ($14 million after-tax or $0.07 per
share) and $61 million ($61 million after-tax or $0.29 per share), respectively, from settlements
with certain insurance companies related to environmental and asbestos coverage (included in
general and product liability discontinued products and environmental insurance recoveries). A
portion of the costs incurred by us related to these claims had been recorded in prior years.
Refer to Note 7, Commitments and Contingent Liabilities, for further information.
Interest income consisted primarily of amounts earned on cash deposits. The increase in 2005
was due primarily to higher levels of cash deposits in the United States.
Gain on asset sales for the third quarter of 2005 included a gain of $25 million ($25 million
after-tax or $0.12 per share) on the sale of the Wingtack adhesive resins business in the North
American Tire Segment. Refer to Note 11, Asset Dispositions, for further information on the sale of
Wingtack. Gain on asset sales for the third quarter of 2004 included a net gain of $2 million ($1
million after-tax or $0.01 per share) primarily on the sale of assets in the European Union Tire
Segment.
Gain on asset sales in the first nine months of 2005 included a gain of $25 million ($25
million after-tax or $0.12 per share) on the sale of the Wingtack adhesive resins business in the
North American Tire Segment and net gains of $16 million ($15 million after-tax or $0.07 per share)
on the sales of other assets primarily in the North American Tire Segment. Gain on asset sales in
the first nine months of 2004 included a net gain of $6 million ($4 million after-tax or $0.02 per
share) on the sale of assets in the North American Tire Segment, European Union Tire Segment and
Engineered Products.
Miscellaneous (income) expense included a gain $14 million ($7 million after-tax or $0.03 per
share) during the first nine months of 2005, related to a 2004 fire at a company facility in
Germany. The gain represents insurance recoveries in excess of the net book value of assets
destroyed and clean-up expenses incurred by us at this facility. Goodyear has reached final
settlement with its insurance providers. Miscellaneous (income) expense in the first nine months
of 2004 included $12 million ($12 million after-tax or $0.07 per share) of expense for insurance
fire loss deductibles related to fires at company facilities in Germany, France and Thailand.
-9-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. PER SHARE OF COMMON STOCK
Basic earnings per share has been computed based on the average number of common shares
outstanding.
In the fourth quarter of 2004, we adopted the provisions of Emerging Issues Task Force Issue
No. 04-08, The Effect of Contingently Convertible Debt on Diluted Earnings per Share. This
pronouncement requires shares issuable under contingent conversion provisions in a debt agreement
to be included in the calculation of diluted earnings per share regardless of whether the
provisions of the contingent feature have been met.
There are contingent conversion features included in our $350 million 4% Convertible Senior
Notes due 2034, issued on July 2, 2004. Accordingly, average shares outstanding diluted in the
three and nine month periods ended September 30, 2005 and the three month period ended September
30, 2004, includes approximately 29 million contingently issuable shares. Average shares
outstanding diluted for the nine month period ended September 30, 2004 does not include the
effects of the contingently issuable shares as inclusion would have been anti-dilutive due to a net
loss for the period. Net income per share diluted in the three month periods ended September 30,
2005 and 2004 and the nine month period ended September 30, 2005 also includes an earnings
adjustment representing avoided after-tax interest expense of $4 million, $4 million and $12
million, respectively, resulting from the assumed conversion of the Notes.
The Convertible Senior Notes became convertible on July 18, 2005 and remained convertible
through September 30, 2005, however, no Notes were converted. The Notes became convertible again
on October 18, 2005, at the option of the holder, and will remain convertible through December
31, 2005. If all outstanding notes were surrendered for conversion, the aggregate number of shares
of common stock issued would be approximately 29 million. The notes could be convertible after
December 31, 2005 if the sale price condition is met in any future fiscal quarter or if any of the
other conditions for conversion set forth in the indenture governing the Notes are met.
The following table presents the number of incremental weighted average shares used in
computing diluted per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Average shares outstanding basic |
|
|
176 |
|
|
|
175 |
|
|
|
176 |
|
|
|
175 |
|
4% Convertible Senior Notes due 2034 |
|
|
29 |
|
|
|
29 |
|
|
|
29 |
|
|
|
|
|
Stock Options and other dilutive securities |
|
|
4 |
|
|
|
3 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding diluted |
|
|
209 |
|
|
|
207 |
|
|
|
209 |
|
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine month periods ended September 30, 2005, approximately 23 million equivalent
shares related to stock options, restricted stock and performance grants with exercise prices that
were greater than the average market price of our common shares were excluded from average shares
outstanding diluted, as inclusion would have been anti-dilutive. For the three and nine month
periods ended September 30, 2004, approximately 22 million and 25 million, respectively, equivalent
shares related to stock options, restricted stock and performance grants with exercise prices that
were greater than the average market price of our common shares were excluded from average shares
outstanding diluted, as inclusion would have been anti-dilutive. In addition, for the first nine
months of 2004, 2 million equivalent shares of stock options, restricted stock and performance
grants with exercise prices that were less than the average market price of our common shares were
excluded from average shares outstanding diluted as we were in a net loss position and,
therefore, inclusion would have been anti-dilutive.
-10-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the computation of adjusted net income (loss) used in computing
net income (loss) per share diluted. The computation assumes that after-tax interest costs
incurred on the 4% Convertible Senior Notes due 2034 would have been avoided had the Notes been
converted as of July 1, 2005 and January 1, 2005 for the three and nine months ended September 30,
2005 and July 2, 2004 for the three months ended September 30, 2004. Net income (loss) for the
nine month period ended September 30, 2004 does not include the after-tax interest cost on the
Notes due to a net loss for the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net Income (Loss) |
|
$ |
142 |
|
|
$ |
38 |
|
|
$ |
279 |
|
|
$ |
(10 |
) |
After-tax impact of 4% Convertible Senior Notes due 2034 |
|
|
4 |
|
|
|
4 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income (Loss) |
|
$ |
146 |
|
|
$ |
42 |
|
|
$ |
291 |
|
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5. FINANCING ARRANGEMENTS
At September 30, 2005, we had credit arrangements totaling $7,544 million, of which $1,672 million
were unused.
Notes Payable, Long Term Debt due Within One Year and Short Term Financing Arrangements
At September 30, 2005, we had short term committed and uncommitted credit arrangements totaling
$462 million, of which $135 million related to consolidated VIEs. Of these amounts, $210 million
and $31 million, respectively, were unused. These arrangements are available primarily to certain
of our international subsidiaries through various banks at quoted market interest rates. There are
no commitment fees associated with these arrangements.
The following table presents information about amounts due within one year at September 30,
2005 and December 31, 2004:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2005 |
|
|
2004 |
|
Notes payable: |
|
|
|
|
|
|
|
|
International subsidiaries |
|
$ |
148 |
|
|
$ |
130 |
|
Amounts related to consolidated VIEs |
|
|
104 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
$ |
252 |
|
|
$ |
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average interest rate |
|
|
5.78 |
% |
|
|
6.74 |
% |
|
|
|
|
|
|
|
|
|
Long term debt due within one year: |
|
|
|
|
|
|
|
|
6 3/8% Euro Notes due 2005 |
|
$ |
|
|
|
$ |
542 |
|
5 3/8% Swiss franc bonds due 2006 |
|
|
122 |
|
|
|
|
|
Amounts related to consolidated VIEs |
|
|
57 |
|
|
|
24 |
|
European credit facilities |
|
|
|
|
|
|
400 |
|
Other (including capital leases) |
|
|
73 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
$ |
252 |
|
|
$ |
1,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average interest rate |
|
|
5.51 |
% |
|
|
6.78 |
% |
|
|
|
|
|
|
|
|
|
Total obligations due within one year |
|
$ |
504 |
|
|
$ |
1,231 |
|
|
|
|
|
|
|
|
Amounts related to VIEs in Notes payable represent short term debt of SPT. Amounts related to VIEs
in Long term debt due within one year represent amounts owed by
T&WA and SPT.
-11-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long Term Debt and Financing Arrangements
At September 30, 2005, we had long term credit arrangements totaling $7,082 million, of which
$1,462 million were unused.
The following table presents long term debt at September 30, 2005 and December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Interest |
|
(In millions) |
|
2005 |
|
|
Rate |
|
|
2004 |
|
|
Rate |
|
Notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 3/8% Euro notes due 2005 |
|
$ |
|
|
|
|
* |
|
|
$ |
542 |
|
|
|
* |
|
5 3/8% Swiss franc bonds due 2006 |
|
|
122 |
|
|
|
* |
|
|
|
139 |
|
|
|
* |
|
6 5/8% due 2006 |
|
|
217 |
|
|
|
* |
|
|
|
223 |
|
|
|
* |
|
8 1/2% due 2007 |
|
|
300 |
|
|
|
* |
|
|
|
300 |
|
|
|
* |
|
6 3/8% due 2008 |
|
|
100 |
|
|
|
* |
|
|
|
100 |
|
|
|
* |
|
7 6/7% due 2011 |
|
|
650 |
|
|
|
* |
|
|
|
650 |
|
|
|
* |
|
Floating rate notes due 2011 |
|
|
200 |
|
|
|
12.06 |
% |
|
|
200 |
|
|
|
9.99 |
% |
11% due 2011 |
|
|
448 |
|
|
|
* |
|
|
|
448 |
|
|
|
* |
|
9% due 2015 |
|
|
400 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
7% due 2028 |
|
|
149 |
|
|
|
* |
|
|
|
149 |
|
|
|
* |
|
4% Convertible Senior Notes due 2034 |
|
|
350 |
|
|
|
* |
|
|
|
350 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank term loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$400 million senior secured term loan European facilities due 2005 |
|
|
|
|
|
|
* |
|
|
|
400 |
|
|
|
6.33 |
|
$800 million senior secured asset-based term loan due 2006 |
|
|
|
|
|
|
* |
|
|
|
800 |
|
|
|
6.14 |
|
$650 million senior secured asset-based term loan due 2006 |
|
|
|
|
|
|
* |
|
|
|
650 |
|
|
|
7.03 |
|
$1.2 billion second lien term loan facility due 2010 |
|
|
1,200 |
|
|
|
6.32 |
|
|
|
|
|
|
|
|
|
$300 million third lien secured term loan due 2011 |
|
|
300 |
|
|
|
7.07 |
|
|
|
|
|
|
|
|
|
155 million senior secured term loan European facility due
2010 |
|
|
187 |
|
|
|
4.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pan-European accounts receivable facility due 2009 |
|
|
331 |
|
|
|
3.84 |
|
|
|
225 |
|
|
|
5.16 |
|
Revolving credit facilities due 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other domestic and international debt |
|
|
103 |
|
|
|
5.84 |
|
|
|
129 |
|
|
|
6.15 |
|
Amounts related to consolidated VIEs |
|
|
61 |
|
|
|
6.27 |
|
|
|
94 |
|
|
|
6.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,118 |
|
|
|
|
|
|
|
5,399 |
|
|
|
|
|
Capital lease obligations |
|
|
78 |
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,196 |
|
|
|
|
|
|
|
5,459 |
|
|
|
|
|
Less portion due within one year |
|
|
252 |
|
|
|
|
|
|
|
1,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,944 |
|
|
|
|
|
|
$ |
4,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents debt with fixed interest rate. |
The Swiss franc bonds, Convertible Senior Notes and other Notes have an aggregate book value amount
of $2,936 million at September 30, 2005 and are reported net of unamortized discounts totaling $3
million compared to $3,101 million and $4 million, respectively, at December 31, 2004. The
principal and interest of the Swiss franc bonds due 2006 were hedged by currency swap agreements at
September 30, 2005 and December 31, 2004.
$400 Million Senior Notes Offering
On June 23, 2005, we completed an offering of $400 million aggregate principal amount of 9.00%
Senior Notes due 2015 in a transaction under Rule 144A and Regulation S under the Securities Act.
The senior notes are guaranteed by our U.S. and Canadian subsidiaries that also guarantee our
obligations under our senior secured credit facilities. The guarantee is unsecured. The proceeds
were used to repay $200 million in borrowings under our U.S. first lien revolving credit facility,
-12-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and to replace $190 million of the cash, that we used to pay the $516 million principal amount of
our
6 3/8% Euro Notes due 2005 at maturity on June 6, 2005. In conjunction with the debt issuance,
we paid fees of approximately $10 million, which are being amortized over the term of the notes.
The Indenture governing the senior notes limits our ability and the ability of certain of our
subsidiaries to (i) incur additional debt or issue redeemable preferred stock, (ii) pay dividends,
or make certain other restricted payments or investments, (iii) incur liens, (iv) sell assets, (v)
incur restrictions on the ability of our subsidiaries to pay dividends to us, (vi) enter into
affiliate transactions, (vii) engage in sale and leaseback transactions, and (viii) consolidate,
merge, sell or otherwise dispose of all or substantially all of our assets. These covenants are
subject to significant exceptions and qualifications. For example, if the senior notes are assigned
an investment grade rating by Moodys and S&P and no default has occurred or is continuing, certain
covenants will be suspended.
The following table presents information about long term fixed rate debt at September 30, 2005
and December 31, 2004:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2005 |
|
|
2004 |
|
Carrying amount |
|
$ |
2,874 |
|
|
$ |
3,055 |
|
Fair value |
|
|
2,984 |
|
|
|
3,215 |
|
The fair value was estimated using quoted market prices or discounted future cash flows. The fair
value exceeded the carrying amount at September 30, 2005 and December 31, 2004 due primarily to
lower market interest rates. The fair value of the 6 5/8% Notes due 2006 was partially hedged by
floating rate swap contracts with notional principal amounts totaling $200 million at September
30, 2005 and December 31, 2004, respectively. The fair value of our variable rate debt
approximated its carrying amount at September 30, 2005 and December 31, 2004.
April 8, 2005 Refinancing
On April 8, 2005 we completed a refinancing in which we replaced approximately $3.28 billion of
credit facilities with new facilities aggregating $3.65 billion. The new facilities consist of:
|
|
|
a $1.5 billion first lien credit facility due April 30, 2010 (consisting of a $1.0
billion revolving facility and a $500 million deposit-funded facility); |
|
|
|
|
a $1.2 billion second lien term loan facility due April 30, 2010; |
|
|
|
|
the Euro equivalent of approximately $650 million in credit facilities for Goodyear
Dunlop Tires Europe B.V. (GDTE) due April 30, 2010 (consisting of approximately $450
million in revolving facilities and approximately $200 million in term loan
facilities); and |
|
|
|
|
a $300 million third lien term loan facility due March 1, 2011. |
In connection with the refinancing, we paid down and retired the following facilities:
|
|
|
our $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); |
|
|
|
|
our $650 million asset-based term loan facility, due March 2006 (this facility was
fully drawn prior to the refinancing); |
|
|
|
|
our $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 |
|
|
|
|
our $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). |
In conjunction with the refinancing, we paid fees of approximately $57 million. In addition,
we paid approximately $20 million of termination fees associated with the replaced facilities. We
recognized approximately $47 million of expense in the second quarter to write-off fees associated
with the refinancing, including approximately $30 million of previously unamortized fees related to
the replaced facilities. The remaining fees are being amortized over the term of the new
facilities.
-13-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The new facilities have customary representations and warranties including, as a condition to
borrowing, material adverse change representations in our financial condition since December 31,
2004.
$1.5 Billion First Lien Credit Facility
The new $1.5 billion first lien credit facility consists of a $1.0 billion revolving facility and a
$500 million deposit-funded facility. Our obligations under these facilities are guaranteed by
most of our wholly-owned U.S. subsidiaries and by our wholly-owned Canadian subsidiary, Goodyear
Canada Inc. Our obligations under this facility and our subsidiaries obligations under the related
guarantees are secured by collateral that includes, subject to certain exceptions:
|
|
|
first-priority security interests in certain U.S. and Canadian accounts
receivable and inventory; |
|
|
|
|
first-priority security interests in and mortgages on our U.S. corporate
headquarters and certain of our U.S. manufacturing facilities; |
|
|
|
|
first-priority security interests in the equity interests in our U.S.
subsidiaries and up to 65% of the equity interests in our foreign subsidiaries,
excluding GDTE and its subsidiaries and certain other subsidiaries; and |
|
|
|
|
first-priority security interests in substantially all other tangible and
intangible assets, including equipment, contract rights and intellectual property. |
The facility, which matures on April 30, 2010, contains certain covenants that, among other
things, limit our ability to incur additional unsecured and secured indebtedness (including a limit
on accounts receivable transactions), and make investments and sell assets beyond specified limits.
Under certain circumstances, borrowings under the facility are required to be prepaid with proceeds
of asset sales greater than $15 million. The facility limits the amount of dividends we may pay on
our common stock in any fiscal year to $10 million. This limit increases to $50 million in any
fiscal year if Moodys public senior implied rating and Standard & Poors (S&P) corporate credit
rating improve to Ba2 or better and BB or better, respectively. The facility also limits the amount
of capital expenditures we may make to $700 million in each year through 2010 (with increases for
the proceeds of equity issuances). Any unused capital expenditures for a year may be carried over
into succeeding years.
We are not permitted to allow the ratio of Consolidated EBITDA to Consolidated Interest
Expense to fall below a ratio of 2.00 to 1.00 for any period of four consecutive fiscal quarters.
In addition, our ratio of Consolidated Secured Indebtedness (net of cash in excess of $400 million)
to Consolidated EBITDA is not permitted to be greater than 3.50 to 1.00 at the end of any fiscal
quarter.
Availability under the facility is subject to a borrowing base, which is based on eligible
accounts receivable and inventory, with reserves which are subject to adjustment from time to time
by the administrative agent and the majority lenders at their discretion (not to be exercised
unreasonably). Adjustments are based on the results of periodic collateral and borrowing base
evaluations and appraisals. If at any time the amount of outstanding borrowings and letters of
credit under the facility exceeds the borrowing base, we are required to prepay borrowings and/or
cash collateralize letters of credit sufficient to eliminate the excess.
Interest rates on the facility are dependent on the amount of the facility that is available
and unused.
|
|
|
If the availability under the facility is greater than or equal to $400
million, then drawn amounts (including amounts outstanding under the deposit-funded
facility) will bear interest at a rate of 175 basis points over LIBOR, and undrawn
amounts under the facilities will be subject to an annual commitment fee of 50 basis
points; |
|
|
|
|
If the availability under the facility is less than $400 million and
greater than or equal to $250 million, then drawn amounts (including amounts
outstanding under the deposit-funded facility) will bear interest at a rate of 200
basis points over LIBOR, and undrawn amounts under the facilities will be subject to an
annual commitment fee of 40 basis points; and |
|
|
|
|
If the availability under the facility is less than $250 million, then
drawn amounts (including amounts outstanding under the deposit-funded facility) will
bear interest at a rate of 225 basis points over LIBOR, and undrawn amounts under the
facilities will be subject to an annual commitment fee of 37.5 basis points. |
-14-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
With respect to the deposit-funded facility, the lenders deposited the entire $500 million of
the facility in an account held by the administrative agent, and those funds are used to support
letters of credit or borrowings on a revolving basis, in each case subject to customary conditions.
The full amount of the deposit-funded facility is available for the issuance of letters of credit
or for revolving loans. As of September 30, 2005, there were $498 million of letters of credit
issued under the deposit-funded facility. There were no borrowings under the facility at September
30, 2005.
$1.2 Billion Second Lien Term Loan Facility
At closing, we used the entire availability under this facility to pay down and retire our prior
credit facilities. Our obligations under this facility are guaranteed by most of our wholly-owned
U.S. subsidiaries and by our wholly-owned Canadian subsidiary, Goodyear Canada Inc. and are secured
by second priority security interests in the same collateral securing the $1.5 billion asset-based
credit facility. The facility contains covenants similar to those in the $1.5 billion first lien
credit facility. However, the facility contains additional flexibility for the incurrence of
indebtedness, making of investments and asset dispositions, the payment of dividends and the making
of capital expenditures and does not contain the two financial covenants that are in the first lien
credit facility. Under certain circumstances, borrowings under the facility are required to be
prepaid with proceeds of asset sales greater than $15 million. Loans under this facility bear
interest at LIBOR plus 275 basis points. As of September 30, 2005, this facility was fully drawn.
Euro Equivalent of $650 Million (505 Million) Senior Secured European Credit Facilities
These facilities consist of (i) a 195 million European revolving credit facility, (ii) an
additional 155 million German revolving credit facility, and (iii) 155 million of German
term loan facilities. We secure the U.S. facilities described above and provide unsecured
guarantees to support these facilities. GDTE and certain of its subsidiaries in the United Kingdom,
Luxembourg, France and Germany also provide guarantees. GDTEs obligations under the facilities and
the obligations of subsidiary guarantors under the related guarantees are secured by collateral
that includes, subject to certain exceptions:
|
|
|
first-priority security interests in the capital stock of the principal
subsidiaries of GDTE; and |
|
|
|
|
first-priority security interests in and mortgages on substantially all the
tangible and intangible assets of GDTE and GDTEs subsidiaries in the United Kingdom,
Luxembourg, France and Germany, including certain accounts receivable, inventory, real
property, equipment, contract rights and cash and cash accounts, but excluding certain
accounts receivable and cash accounts in subsidiaries that are or may become parties to
securitization programs. |
The facilities contain covenants similar to those in the $1.5 billion first lien credit
facility, with special limits on the ability of GDTE and its subsidiaries to incur additional
unsecured and secured indebtedness, make investments and sell assets beyond specified limits. The
facilities also limit the amount of capital expenditures that GDTE may make to $200 million in
2005, $250 million in 2006 and $300 million per year thereafter, with the unused amount in any year
carried forward to the succeeding years. In addition, under the facilities we are not permitted to
allow the ratio of Consolidated Indebtedness (net of cash in excess of $100 million) to
Consolidated EBITDA of GDTE to be greater than 2.75 to 1.00 at the end of any fiscal quarter. Under
certain circumstances, borrowings under the term facility are required to be prepaid with proceeds
of asset sales by GDTE and its subsidiaries greater than $15 million. Loans under the term loan
facility bear interest at LIBOR plus 237.5 basis points. With respect to the revolving credit
facilities, we pay an annual commitment fee of 75 basis points on the undrawn portion of the
commitments and loans bear interest at LIBOR plus 275 basis points. As of September 30, 2005,
there were $4 million of letters of credit issued under the European revolving credit facility,
$187 million was drawn under the German term loan facilities and there were no borrowings under the
German or European revolving credit facilities.
-15-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
$300 Million Third Lien Secured Term Loan Facility
At closing, we used the availability under this facility to pay down and retire our prior credit
facilities and pay certain fees and expenses. Our obligations under this facility are guaranteed by
most of our wholly-owned U.S. subsidiaries and by our wholly-owned Canadian subsidiary, Goodyear
Canada Inc. and are secured by third priority security interests in the same collateral securing
the $1.5 billion asset-based credit facility (however, the facility is not secured by any of the
manufacturing facilities that secure the first and second lien facilities). The liens are
pari-passu with the liens securing our $650 million secured notes due 2011. The facility contains
covenants substantially identical to those contained in the $650 million secured notes due 2011,
which limit our ability to incur additional indebtedness or liens, pay dividends, make
distributions and stock repurchases, make investments and sell assets, among other limitations.
Loans under this facility bear interest at LIBOR plus 350 basis points. As of September 30, 2005,
this facility was fully drawn.
International Accounts Receivable Securitization Facilities (On-Balance-Sheet)
On December 10, 2004, GDTE and certain of its subsidiaries entered into a new five-year
pan-European accounts receivable securitization facility. The facility initially provided 165
million (approximately $225 million) of funding. The facility was subsequently expanded to 275
million (approximately $331 million) and is subject to customary annual renewal of back-up
liquidity lines.
The facility involves the twice-monthly sale of substantially all of the trade accounts
receivable of certain GDTE subsidiaries to a bankruptcy-remote French company controlled by one of
the liquidity banks in the facility. These subsidiaries retained servicing responsibilities. It is
an event of default under the facility if:
|
|
|
the ratio of our Consolidated EBITDA to our Consolidated Interest Expense falls below
2.00 to 1.00; |
|
|
|
|
the ratio of our Consolidated Secured Indebtedness (net of cash in excess of $400
million) to our Consolidated EBITDA is greater than 3.50 to
1.00; or |
|
|
|
|
the ratio of GDTEs third party indebtedness (net of cash held by GDTE and its
Consolidated subsidiaries in excess of $100 million) to its consolidated EBITDA is
greater than 2.75 to 1.00. |
The defined terms used in the events of default tests are similar to those in the European
Credit Facilities. As of September 30, 2005, and December 31, 2004, the amount outstanding and
fully-utilized under this program totaled $331 million and $225 million, respectively. The program
did not qualify for sale accounting pursuant to the provisions of Statement of Financial
Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, and accordingly, this amount is included in Long term debt and
capital leases.
In addition to the pan-European accounts receivable securitization facility discussed above,
SPT and other subsidiaries in Australia have accounts receivable programs totaling $58 million and
$63 million at September 30, 2005 and December 31, 2004, respectively. These amounts are included
in Notes payable.
Debt Maturities
The annual aggregate maturities of long term debt and capital leases for the five years subsequent
to September 30, 2005 are presented below. Maturities of debt credit agreements have been reported
on the basis that the commitments to lend under these agreements will be terminated effective at
the end of their current terms.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ending September 30, |
|
(In millions) |
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Domestic |
|
$ |
133 |
|
|
$ |
522 |
|
|
$ |
105 |
|
|
$ |
5 |
|
|
$ |
1,206 |
|
International |
|
|
119 |
|
|
|
4 |
|
|
|
4 |
|
|
|
7 |
|
|
|
523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
252 |
|
|
$ |
526 |
|
|
$ |
109 |
|
|
$ |
12 |
|
|
$ |
1,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-16-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6. PENSION, SAVINGS AND OTHER POSTRETIREMENT BENEFIT PLANS
We provide substantially all employees with pension or savings plan benefits and substantially all
domestic employees and employees at certain international subsidiaries with health care and life
insurance benefits upon retirement.
Pension cost follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Service cost benefits earned during the period |
|
$ |
24 |
|
|
$ |
22 |
|
|
$ |
73 |
|
|
$ |
67 |
|
Interest cost on projected benefit obligation |
|
|
104 |
|
|
|
104 |
|
|
|
317 |
|
|
|
315 |
|
Expected return on plan assets |
|
|
(93 |
) |
|
|
(87 |
) |
|
|
(281 |
) |
|
|
(259 |
) |
Amortization of unrecognized: prior service cost |
|
|
16 |
|
|
|
19 |
|
|
|
50 |
|
|
|
57 |
|
net losses |
|
|
36 |
|
|
|
29 |
|
|
|
108 |
|
|
|
90 |
|
transition amount |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
|
88 |
|
|
|
87 |
|
|
|
268 |
|
|
|
270 |
|
Curtailments / settlements |
|
|
|
|
|
|
9 |
|
|
|
1 |
|
|
|
10 |
|
Special termination benefits |
|
|
1 |
|
|
|
4 |
|
|
|
1 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension cost |
|
$ |
89 |
|
|
$ |
100 |
|
|
$ |
270 |
|
|
$ |
284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We currently expect to contribute approximately $490 million to our major funded domestic and
international pension plans in 2005. For the three and nine months ended September 30, 2005, we
contributed $176 million and $272 million, respectively, to our domestic plans and $18 and $60
million, respectively, to our international plans.
Substantially all employees in the U.S. and employees of certain international locations are
eligible to participate in a savings plan. Effective January 1, 2005, all newly-hired salaried
employees in the U.S. are eligible for a Company-funded contribution into the Salaried Savings
Plan, as they are not eligible to participate in our defined benefit pension plan. The expenses
recognized for Company contributions for these savings plans for the three months ended September
30, 2005 and 2004 were $4 million and $5 million, respectively, and $14 million and $13 million for
the nine months ended September 30, 2005 and 2004, respectively.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act (the
Act) was signed into law. The Act will provide plan sponsors a federal subsidy for certain
qualifying prescription drug benefits covered under the sponsors postretirement health care plans.
On May 19, 2004, the FASB issued Staff Position No. 106-2, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-2),
which requires measures of the accumulated postretirement benefit obligation and net periodic
postretirement benefit cost to reflect the effects of the Act in the first interim or annual period
beginning after June 15, 2004. On January 21, 2005 final regulations under the Act were issued.
Based on the clarifications provided in the final regulations, net periodic postretirement cost is
expected to be lower by approximately $63 million in 2005, of which $17 million and $46 million was
recorded in the three and nine months ended September 30, 2005, respectively. The change is
estimated to increase pre-tax earnings by approximately $53 million in 2005, of which $17 million
and $35 million was recorded in the three and nine months ended September 30, 2005, respectively.
The difference between the effect on net periodic postretirement costs and pre-tax earnings
represents the portion of net periodic postretirement cost that is carried as inventory at the
respective dates. The accumulated postretirement benefit obligation was reduced by $529 million.
The reduction is being amortized as a reduction of expense over the average remaining service life
of active employees.
-17-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Postretirement benefit cost follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Service cost benefits earned during the period |
|
$ |
5 |
|
|
$ |
6 |
|
|
$ |
17 |
|
|
$ |
19 |
|
Interest cost on projected benefit obligation |
|
|
36 |
|
|
|
47 |
|
|
|
116 |
|
|
|
145 |
|
Amortization of unrecognized: prior service cost |
|
|
11 |
|
|
|
11 |
|
|
|
33 |
|
|
|
35 |
|
net losses |
|
|
1 |
|
|
|
9 |
|
|
|
11 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement cost |
|
|
53 |
|
|
|
73 |
|
|
|
177 |
|
|
|
226 |
|
Curtailments / settlements |
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total postretirement cost |
|
$ |
53 |
|
|
$ |
86 |
|
|
$ |
177 |
|
|
$ |
239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7. COMMITMENTS AND CONTINGENT LIABILITIES
At September 30, 2005, we had binding commitments for raw materials and investments in land,
buildings and equipment of $1,160 million, and off-balance-sheet financial guarantees written and
other commitments totaling $9 million.
Environmental Matters
We have recorded liabilities totaling $42 million and $40 million for anticipated costs related to
various environmental matters, primarily the remediation of numerous waste disposal sites and
certain properties sold by us, at September 30, 2005 and December 31, 2004, respectively. Of these
amounts, $10 million and $9 million was included in Other current liabilities at September 30, 2005
and December 31, 2004, respectively. The costs include legal and consulting fees, site studies,
the design and implementation of remediation plans, post-remediation monitoring and related
activities that will be paid over several years. The amount of our ultimate liability in respect
of these matters may be affected by several uncertainties, primarily the ultimate cost of required
remediation and the extent to which other responsible parties contribute. See Asbestos below for
information regarding insurance settlements completed during the second and third quarters of 2005
related to both asbestos and environmental matters.
Workers Compensation
We have recorded liabilities, on a discounted basis, totaling $258 million and $231 million for
anticipated costs related to workers compensation at September 30, 2005 and December 31, 2004,
respectively. Of these amounts, $99 million was included in Current Liabilities as part of
Compensation and benefits at September 30, 2005 and December 31, 2004. The costs include an
estimate of expected settlements on pending claims, defense costs and a provision for claims
incurred but not reported. These estimates are based on our assessment of potential liability
using an analysis of available information with respect to pending claims, historical experience,
and current cost trends. The amount of our ultimate liability in respect of these matters may
differ from these estimates.
General and Product Liability and Other Litigation
We have recorded liabilities totaling $509 million and $549 million for potential product liability
and other tort claims, including related legal fees expected to be incurred, presently asserted
against us at September 30, 2005 and December 31, 2004, respectively. Of these amounts, $253
million and $266 million were included in Other current liabilities at September 30, 2005 and
December 31, 2004, respectively. The amounts recorded were estimated on the basis of an assessment
of potential liability using an analysis of available information with respect to pending claims,
historical experience and, where available, current trends. We have recorded insurance receivables
for potential product liability and other tort claims of $60 million at September 30, 2005 and $117
million at December 31, 2004. Of these amounts, $10 million and $14 million was included in
Current Assets as part of Accounts and notes receivable at September 30, 2005 and December 31,
2004, respectively.
-18-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Asbestos. We are a defendant in numerous lawsuits alleging various asbestos-related personal
injuries purported to result from alleged exposure to asbestos in certain rubber encapsulated
products or aircraft braking systems manufactured by us in the past, or to asbestos in certain of
our facilities. Typically, these lawsuits have been brought against multiple defendants in state
and Federal courts. To date, we have disposed of approximately 33,300 claims by defending and
obtaining the dismissal thereof or by entering into a settlement. The sum of our accrued
asbestos-related liability and gross payments to date, including legal costs, totaled approximately
$233 million through September 30, 2005 and $226 million through December 31, 2004.
A summary of approximate asbestos claims activity in recent years follows. Because claims are
often filed and disposed of by dismissal or settlement in large numbers, the amount and timing of
settlements and the number of open claims during a particular period can fluctuate significantly.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Year Ended December 31, |
|
(Dollars in millions) |
|
September 30, 2005 |
|
|
2004 |
|
|
2003 |
|
Pending claims, beginning of period |
|
|
127,300 |
|
|
|
118,000 |
|
|
|
99,700 |
|
New claims filed |
|
|
5,200 |
|
|
|
12,700 |
|
|
|
26,700 |
|
Claims settled/dismissed |
|
|
(6,700 |
) |
|
|
(3,400 |
) |
|
|
(8,400 |
) |
|
|
|
|
|
|
|
|
|
|
Pending claims, end of period |
|
|
125,800 |
|
|
|
127,300 |
|
|
|
118,000 |
|
|
|
|
|
|
|
|
|
|
|
Payments (1) |
|
$ |
18 |
|
|
$ |
30 |
|
|
$ |
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents amount spent by us and our insurers on asbestos litigation defense and claim
resolution. |
We engaged an independent asbestos valuation firm to review our existing reserves for pending
claims, provide a reasonable estimate of the liability associated with unasserted asbestos claims,
and determine our receivables from probable insurance recoveries.
We had recorded gross liabilities for both asserted and unasserted claims, inclusive of
defense costs, totaling $109 million at September 30, 2005 and $119 million at December 31, 2004.
The recorded liability represents our estimated liability over the next four years, which
represents the period over which the liability can be reasonably estimated. Due to the difficulties
in making these estimates, analysis based on new data and/or a change in circumstances arising in
the future could result in an increase in the recorded obligation in an amount that cannot be
reasonably estimated, and that increase could be significant. The portion of the liability
associated with unasserted asbestos claims and related defense costs was $30 million at September
30, 2005 and $38 million at December 31, 2004. At September 30, 2005, our liability with respect to
asserted claims and related defense costs was $79 million, compared to $81 million at December 31,
2004.
We maintain primary insurance coverage under coverage-in-place agreements, and also have
excess liability insurance with respect to asbestos liabilities. We have instituted coverage
actions against certain of these excess carriers. After consultation with our outside legal
counsel and giving consideration to relevant factors including the ongoing legal proceedings with
certain of our excess coverage insurance carriers, their financial viability, their legal
obligations and other pertinent facts, we determine an amount we expect is probable of recovery
from such carriers. We record a receivable with respect to such policies when we determine that
recovery is probable and we can reasonably estimate the amount of a particular recovery.
Based upon a model employed by the valuation firm, as of September 30, 2005, (i) we had
recorded a receivable related to asbestos claims of $56 million, compared to $108 million at
December 31, 2004, and (ii) we expect that approximately 50% of asbestos claim related losses would
be recoverable up to our accessible policy limits through the period covered by the estimated
liability. Of this amount, $10 million and $9 million was included in Current Assets as part of
Accounts and notes receivable at September 30, 2005 and December 31, 2004, respectively. The
receivable recorded consists of an amount we expect to collect under coverage-in-place agreements
with certain primary carriers as well as an amount we believe is probable of recovery from certain
of our excess coverage insurance carriers. During the second quarter of 2005, as a result of a
recent court determination, we further refined our method of allocating losses to excess coverage
policies, resulting in a reduction in available insurance coverage over the period covered by the
estimated liability. The recorded receivable also declined during the second and third quarters due
to settlements with certain excess insurance carriers, as discussed below.
-19-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We believe that, at September 30, 2005, we had at least $176 million in aggregate limits of
excess level policies potentially applicable to indemnity payments for asbestos products claims, in
addition to limits of available primary insurance policies. Some of these excess policies provide
for payment of defense costs in addition to indemnity limits. A portion of the availability of the
excess level policies is included in the $56 million insurance receivable recorded at September 30,
2005. We also had approximately $21 million in aggregate limits for products claims, as well as
coverage for premise claims on a per occurrence basis and defense costs, available with our primary
insurance carriers through coverage-in-place agreements at September 30, 2005.
We reached an agreement effective April 13, 2005, to settle our claims for insurance coverage
for asbestos and pollution related liabilities with respect to pre-1993 insurance policies issued
by certain underwriters at Lloyds, London, and reinsured by Equitas. The settlement agreement
generally provides for the payment of money to us in exchange for the release by us of past,
present and future claims under those policies and the cancellation of those policies; agreement by
us to indemnify the underwriters from claims asserted under those policies; and includes provisions
addressing the impact on the settlement should federal asbestos reform legislation be enacted on or
before January 3, 2007.
Under the agreement, Equitas paid $22 million to us and placed $39 million into a trust. The
trust funds may be used to reimburse us for a portion of costs we incur in the future to resolve
certain asbestos claims. Our ability to use any of the trust funds is subject to specified
confidential criteria, as well as limits on the amount that may be drawn from the trust in any one
month. If federal asbestos reform legislation is enacted into law on or prior to January 3, 2007,
then the trust would repay Equitas any amount it is required to pay with respect to our asbestos
liabilities as a result of such legislation up to the amount remaining in the trust at that time.
If such legislation is not enacted by that date, any funds remaining in the trust will be disbursed
to us to enable us to meet future asbestos-related liabilities or for other purposes.
We also reached an agreement effective July 27, 2005, to settle our claims for insurance
coverage for asbestos and pollution related liabilities with respect to insurance policies issued
by certain other non-Equitas excess insurance carriers which participated in policies issued in the
London Market. The settlement agreement generally provides for the payment of $25 million to us in
exchange for the release by us of past, present and future claims under those policies and the
cancellation of those policies; and agreement by us to indemnify the underwriters from claims
asserted under those policies. In conjunction with the settlement we recorded a gain of $14
million during the third quarter.
We believe that our reserve for asbestos claims, and the receivable for recoveries from
insurance carriers recorded in respect of these claims, reflect reasonable and probable estimates
of these amounts, subject to the exclusion of claims for which it is not feasible to make
reasonable estimates. The estimate of the assets and liabilities related to pending and expected
future asbestos claims and insurance recoveries is subject to numerous uncertainties, including,
but not limited to, changes in:
|
|
|
the litigation environment, |
|
|
|
|
Federal and state law governing the compensation of asbestos claimants, |
|
|
|
|
recoverability of receivables due to potential insolvency of carriers, |
|
|
|
|
our approach to defending and resolving claims, and |
|
|
|
|
the level of payments made to claimants from other sources, including other defendants. |
As a result, with respect to both asserted and unasserted claims, it is reasonably possible
that we may incur a material amount of cost in excess of the current reserve, however, such amount
cannot be reasonably estimated. Coverage under insurance policies is subject to varying
characteristics of asbestos claims including, but not limited to, the type of claim (premise vs.
product exposure), alleged date of first exposure to our products or premises and disease alleged.
Depending upon the nature of these characteristics, as well as the resolution of certain legal
issues, some portion of the insurance may not be accessible by us.
Heatway (Entran II). On June 4, 2004, we entered into an amended settlement agreement that was
intended to address the claims arising out of a number of Federal, state and Canadian actions filed
against us involving a rubber hose product, Entran II. We supplied Entran II from 1989 to 1993 to
Chiles Power Supply, Inc. (d/b/a Heatway Systems), a designer and seller of hydronic radiant
heating systems in the United States. Heating systems using Entran II are typically attached or
embedded in either indoor flooring or outdoor pavement, and use Entran II hose as a conduit to
circulate warm fluid as a source of heat. We had recorded liabilities related to Entran II claims
totaling $267 million at September 30, 2005 and $307 million at December 31, 2004.
-20-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On October 19, 2004, the amended settlement received court approval. As a result, we have
made, or will make annual cash contributions to a settlement fund of $60 million, $40 million, $15
million, $15 million and $20 million in 2004, 2005, 2006, 2007 and 2008, respectively. In addition
to these annual payments, we contributed approximately $170 million received from insurance
contributions to the settlement fund pursuant to the terms of the settlement agreement. We do not
expect to receive any additional insurance reimbursements for Entran II related matters.
Forty-one sites remain opted-out of the amended settlement. Two actions involving
approximately 10 of these sites are currently pending against us, and additional actions may be
filed against us in the future. Although any liability resulting from the opt-outs will not be
covered by the amended settlement, we will be entitled to assert a proxy claim against the
settlement fund for the payment such claimant would have been entitled to under the amended
settlement.
In addition to the sites that have been opted-out of the amended settlement, any liability
related to five actions in which we have received adverse judgments also will not be covered by the
amended settlement. With respect to two of these matters, however, we will be entitled to assert a
proxy claim against the settlement fund for amounts (if any) paid to plaintiffs in these actions.
The ultimate cost of disposing of Entran II claims is dependent upon a number of factors,
including our ability to resolve claims not subject to the amended settlement (including the cases
in which we have received adverse judgments), the extent to which the liability, if any, associated
with such a claim may be offset by our ability to assert a proxy claim against the settlement fund
and whether or not claimants opting-out of the amendment settlement pursue claims against us in the
future.
Other Actions. We are currently a party to various claims and legal proceedings in addition to
those noted above. If management believes that a loss arising from these matters is probable and
can reasonably be estimated, we record the amount of the loss, or the minimum estimated liability
when the loss is estimated using a range, and no point within the range is more probable than
another. As additional information becomes available, any potential liability related to these
matters is assessed and the estimates are revised, if necessary. Based on currently available
information, management believes that the ultimate outcome of these matters, individually and in
the aggregate, will not have a material adverse effect on our financial position or overall trends
in results of operations. However, litigation is subject to inherent uncertainties, and
unfavorable rulings could occur. An unfavorable ruling could include monetary damages or an
injunction prohibiting us from selling one or more products. If an unfavorable ruling were to
occur, there exists the possibility of a material adverse impact on the financial position and
results of operations of the period in which the ruling occurs, or future periods.
Guarantees
We are a party to various agreements under which we have undertaken obligations resulting from the
issuance of certain guarantees. Guarantees have been issued on behalf of certain of our affiliates
and customers. Normally there is no separate premium received by us as consideration for the
issuance of guarantees. Our performance under these guarantees would normally be triggered by the
occurrence of one or more events as provided in the specific agreements. Collateral and recourse
provisions available to us under these agreements were not significant.
Subsidiary Guarantees
Certain of our subsidiaries guarantee certain debt obligations of SPT and T&WA. Goodyear, Goodyear
Australia Limited, a wholly-owned subsidiary of Goodyear, and certain subsidiaries of Goodyear
Australia Limited guarantee SPTs obligations under credit facilities in the amount of $74 million,
which expire at various times through 2009. The maximum potential amount of payments totaled $74
million. The guarantees are unsecured. The SPT credit facilities are secured by certain
subsidiaries of SPT. As of September 30, 2005, the carrying amount of the secured assets of these
certain subsidiaries was $208 million, consisting primarily of accounts receivable, inventory and
fixed assets. We guarantee an industrial revenue bond obligation of T&WA in the amount of $5
million. The guarantee is unsecured.
Other Financing
We will from time to time issue guarantees to financial institutions on behalf of certain of our
unconsolidated affiliates or our customers. We generally do not require collateral in connection
with the issuance of these guarantees. In the event of non-payment by an affiliate, we are
obligated to make payment to the financial institution, and will typically have recourse to the
assets of that affiliate or customer. At September 30, 2005, we had affiliate and customer
guarantees outstanding under
-21-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
which the maximum potential amount of payments totaled $2 million and $6 million, respectively.
The affiliate and customer guarantees expire at various times through 2005 and 2019, respectively.
We are unable to estimate the extent to which our affiliates or customers assets, in the
aggregate, would be adequate to recover the maximum amount of potential payments with that
affiliate or customer.
Indemnifications
At September 30, 2005, we were a party to various agreements under which we had assumed obligations
to indemnify the counterparties from certain potential claims and losses. These agreements
typically involve standard commercial activities undertaken by us in the normal course of business;
the sale of assets by us; the formation of joint venture businesses to which we had contributed
assets in exchange for ownership interests; and other financial transactions. Indemnifications
provided by us pursuant to these agreements relate to various matters including, among other
things, environmental, tax and shareholder matters; intellectual property rights; government
regulations and employment-related matters; and dealer, supplier and other commercial matters.
Certain indemnifications expire from time to time, and certain other indemnifications are not
subject to an expiration date. In addition, our potential liability under certain indemnifications
is subject to maximum caps, while other indemnifications are not subject to caps. Although we have
been subject to indemnification claims in the past, we cannot reasonably estimate the number, type
and size of indemnification claims that may arise in the future. Due to these and other
uncertainties associated with the indemnifications, our maximum exposure to loss under these
agreements cannot be estimated.
We have determined that there are no guarantees other than liabilities for which amounts are
already recorded or reserved in our consolidated financial statements under which it is probable
that we have incurred a liability.
NOTE 8. BUSINESS SEGMENTS
Effective January 1, 2005, Chemical Products was integrated into North American Tire. Intercompany
sales from Chemical Products to other segments are no longer reflected in our segment sales. In
addition, segment operating income from intercompany sales from Chemical Products to other segments
is no longer reflected in our total segment operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Tire |
|
$ |
2,370 |
|
|
$ |
2,257 |
|
|
$ |
6,804 |
|
|
$ |
6,366 |
|
European Union Tire |
|
|
1,131 |
|
|
|
1,085 |
|
|
|
3,507 |
|
|
|
3,256 |
|
Eastern Europe, Middle East and Africa Tire |
|
|
394 |
|
|
|
344 |
|
|
|
1,076 |
|
|
|
928 |
|
Latin American Tire |
|
|
372 |
|
|
|
316 |
|
|
|
1,101 |
|
|
|
910 |
|
Asia/Pacific Tire |
|
|
356 |
|
|
|
319 |
|
|
|
1,065 |
|
|
|
970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tires |
|
|
4,623 |
|
|
|
4,321 |
|
|
|
13,553 |
|
|
|
12,430 |
|
Engineered Products |
|
|
407 |
|
|
|
379 |
|
|
|
1,236 |
|
|
|
1,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
5,030 |
|
|
|
4,700 |
|
|
|
14,789 |
|
|
|
13,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-22-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Segment Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Tire |
|
$ |
58 |
|
|
$ |
27 |
|
|
$ |
124 |
|
|
$ |
44 |
|
European Union Tire |
|
|
80 |
|
|
|
68 |
|
|
|
272 |
|
|
|
195 |
|
Eastern Europe, Middle East and Africa Tire |
|
|
64 |
|
|
|
60 |
|
|
|
160 |
|
|
|
148 |
|
Latin American Tire |
|
|
77 |
|
|
|
64 |
|
|
|
241 |
|
|
|
187 |
|
Asia/Pacific Tire |
|
|
24 |
|
|
|
19 |
|
|
|
63 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tires |
|
|
303 |
|
|
|
238 |
|
|
|
860 |
|
|
|
618 |
|
Engineered Products |
|
|
27 |
|
|
|
34 |
|
|
|
78 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Operating Income |
|
|
330 |
|
|
|
272 |
|
|
|
938 |
|
|
|
707 |
|
Rationalizations and asset sales |
|
|
19 |
|
|
|
(28 |
) |
|
|
45 |
|
|
|
(57 |
) |
Interest expense |
|
|
(103 |
) |
|
|
(95 |
) |
|
|
(306 |
) |
|
|
(268 |
) |
Foreign currency exchange |
|
|
(8 |
) |
|
|
(10 |
) |
|
|
(19 |
) |
|
|
(14 |
) |
Minority interest in net income of subsidiaries |
|
|
(25 |
) |
|
|
(18 |
) |
|
|
(79 |
) |
|
|
(43 |
) |
Financing fees and financial instruments |
|
|
(10 |
) |
|
|
(29 |
) |
|
|
(99 |
) |
|
|
(90 |
) |
General and
product liability discontinued products |
|
|
|
|
|
|
(8 |
) |
|
|
(4 |
) |
|
|
(25 |
) |
Recovery (expense) for fire loss deductibles |
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
(12 |
) |
Professional fees associated with the restatement |
|
|
|
|
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(27 |
) |
Environmental insurance recoveries |
|
|
9 |
|
|
|
|
|
|
|
29 |
|
|
|
|
|
Other |
|
|
1 |
|
|
|
(14 |
) |
|
|
(15 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes |
|
$ |
213 |
|
|
$ |
67 |
|
|
$ |
502 |
|
|
$ |
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rationalizations and portions of items reported as Other (Income) and Expense on the Consolidated
Statement of Income were not charged to the strategic business units (SBUs) for performance
evaluation purposes, but were attributable to the SBUs as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Rationalizations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Tire |
|
$ |
3 |
|
|
$ |
4 |
|
|
$ |
(6 |
) |
|
$ |
10 |
|
European Union Tire |
|
|
3 |
|
|
|
1 |
|
|
|
1 |
|
|
|
26 |
|
Latin American Tire |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Asia/Pacific Tire |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
Engineered Products |
|
|
3 |
|
|
|
23 |
|
|
|
3 |
|
|
|
23 |
|
Corporate |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rationalizations |
|
$ |
9 |
|
|
$ |
29 |
|
|
$ |
(4 |
) |
|
$ |
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Income) and Expense(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Tire |
|
$ |
(28 |
) |
|
$ |
|
|
|
$ |
(36 |
) |
|
$ |
(2 |
) |
European Union Tire |
|
|
|
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
Eastern Europe, Middle East and Africa Tire |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Engineered Products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Corporate |
|
|
(12 |
) |
|
|
31 |
|
|
|
23 |
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other (Income) and Expense |
|
$ |
(40 |
) |
|
$ |
30 |
|
|
$ |
(16 |
) |
|
$ |
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes equity in (earnings) losses of affiliates and foreign currency exchange. |
For the nine months ended September 30, 2005, we recorded approximately $8 million in net after-tax
expense relating to prior periods. These out-of-period adjustments increased Net sales by $9
million, Cost of goods sold by $15 million, Other income by $2 million, Selling, administrative and
general expenses and Minority interest, each by $1 million, and taxes by approximately $2 million.
-23-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The out-of-period adjustments identified in 2005 include net after tax charges of $6 million
to write-off negative equity of a minority partners interest in a consolidated affiliate,
recognized in North American Tire, $6 million to write-down the carrying value of certain fixed
assets in the Latin American Tire Segment, $3 million related to the elimination of intercompany
profit in inventory, primarily in the European Union Tire Segment and Corporate, and $2 million
related to the application of a tax law change in the European Union Tire Segment. These charges
were partially offset by after-tax, out-of-period income of $6 million primarily due to the
overaccrual of dealer incentives and $2 million related to the accounting for the minority interest
portion of losses incurred under an indemnification agreement with our minority partner in the GDTE
subsidiary of our European Union Tire Segment, and $1 million of net other, insignificant
out-of-period items.
NOTE 9. CONSOLIDATING FINANCIAL INFORMATION
Certain of our subsidiaries have guaranteed Goodyears obligations under the $650 million of Senior
Secured Notes issued in March 2004 and the $400 million aggregate principal amount of 9.00% Senior
Notes due 2015 issued on June 23, 2005. The following presents the condensed consolidating
financial information separately for:
(i) |
|
The Goodyear Tire & Rubber Company (the Parent Company), the issuer of the guaranteed
obligations; |
|
(ii) |
|
Guarantor subsidiaries, on a combined basis, as specified in the Indenture related to
Goodyears obligations under the $650 million of Senior Secured Notes issued on March 12, 2004
($450 million of 11% Senior Secured Notes due 2011 and
$200 million Senior Secured Floating Rate Notes
due 2011) and the Indenture related to Goodyears obligation under the $400 million aggregate
principal amount of 9.00% Senior Notes due 2015 issued on
June 23, 2005 (the Notes); |
|
(iii) |
|
Non-guarantor subsidiaries, on a combined basis; |
|
(iv) |
|
Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany
transactions and (b) eliminate the investments in our subsidiaries and (c) record
consolidating entries; and |
|
(v) |
|
The Goodyear Tire & Rubber Company and Subsidiaries on a consolidated basis. |
Each guarantor subsidiary is 100% owned by the Parent Company at the date of each balance
sheet presented. The Notes are fully and unconditionally guaranteed on a joint and several basis
by each guarantor subsidiary. Each entity in the consolidating financial information follows the
same accounting policies as described in the consolidated financial statements, except for using
the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated
upon consolidation.
Certain non-guarantor subsidiaries of the Parent Company are restricted from remitting funds
to it by means of dividends, advances or loans, primarily due to restrictions in credit facility
agreements entered into by those subsidiaries.
-24-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidating Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
Consolidating |
|
|
|
|
|
|
Parent |
|
|
Guarantor |
|
|
Guarantor |
|
|
Entries and |
|
|
|
|
(In millions) |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
832 |
|
|
$ |
22 |
|
|
$ |
808 |
|
|
$ |
|
|
|
$ |
1,662 |
|
Restricted Cash |
|
|
200 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
215 |
|
Accounts and Notes Receivable |
|
|
1,277 |
|
|
|
279 |
|
|
|
2,156 |
|
|
|
|
|
|
|
3,712 |
|
Accounts and Notes Receivables from Affiliates |
|
|
|
|
|
|
604 |
|
|
|
|
|
|
|
(604 |
) |
|
|
|
|
Inventories |
|
|
1,255 |
|
|
|
288 |
|
|
|
1,404 |
|
|
|
(53 |
) |
|
|
2,894 |
|
Prepaid Expenses and Other Current Assets |
|
|
70 |
|
|
|
14 |
|
|
|
176 |
|
|
|
8 |
|
|
|
268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
3,634 |
|
|
|
1,207 |
|
|
|
4,559 |
|
|
|
(649 |
) |
|
|
8,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
303 |
|
|
|
22 |
|
|
|
167 |
|
|
|
|
|
|
|
492 |
|
Goodwill |
|
|
|
|
|
|
32 |
|
|
|
430 |
|
|
|
199 |
|
|
|
661 |
|
Other Intangible Assets |
|
|
100 |
|
|
|
37 |
|
|
|
53 |
|
|
|
(36 |
) |
|
|
154 |
|
Deferred Income Tax |
|
|
|
|
|
|
14 |
|
|
|
69 |
|
|
|
|
|
|
|
83 |
|
Deferred Pension Costs |
|
|
549 |
|
|
|
190 |
|
|
|
180 |
|
|
|
|
|
|
|
919 |
|
Investments in Subsidiaries |
|
|
4,135 |
|
|
|
434 |
|
|
|
3,228 |
|
|
|
(7,797 |
) |
|
|
|
|
Properties and Plants |
|
|
2,023 |
|
|
|
304 |
|
|
|
2,828 |
|
|
|
24 |
|
|
|
5,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
10,744 |
|
|
$ |
2,240 |
|
|
$ |
11,514 |
|
|
$ |
(8,259 |
) |
|
$ |
16,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable-Trade |
|
$ |
568 |
|
|
$ |
72 |
|
|
$ |
1,219 |
|
|
$ |
|
|
|
$ |
1,859 |
|
Accounts Payable to Affiliates |
|
|
452 |
|
|
|
|
|
|
|
152 |
|
|
|
(604 |
) |
|
|
|
|
Compensation and Benefits |
|
|
725 |
|
|
|
50 |
|
|
|
309 |
|
|
|
|
|
|
|
1,084 |
|
Other Current Liabilities |
|
|
417 |
|
|
|
13 |
|
|
|
145 |
|
|
|
|
|
|
|
575 |
|
United States and Foreign Taxes |
|
|
65 |
|
|
|
39 |
|
|
|
227 |
|
|
|
|
|
|
|
331 |
|
Notes Payable |
|
|
|
|
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
252 |
|
Long Term Debt and Capital Leases due within
one year |
|
|
124 |
|
|
|
|
|
|
|
128 |
|
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
2,351 |
|
|
|
174 |
|
|
|
2,432 |
|
|
|
(604 |
) |
|
|
4,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Debt and Capital Leases |
|
|
4,335 |
|
|
|
1 |
|
|
|
608 |
|
|
|
|
|
|
|
4,944 |
|
Compensation and Benefits |
|
|
3,348 |
|
|
|
329 |
|
|
|
1,312 |
|
|
|
|
|
|
|
4,989 |
|
Deferred and Other Noncurrent Income Taxes |
|
|
68 |
|
|
|
(2 |
) |
|
|
312 |
|
|
|
7 |
|
|
|
385 |
|
Other Long Term Liabilities |
|
|
346 |
|
|
|
14 |
|
|
|
80 |
|
|
|
|
|
|
|
440 |
|
Minority Equity in Subsidiaries |
|
|
|
|
|
|
|
|
|
|
643 |
|
|
|
189 |
|
|
|
832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
10,448 |
|
|
|
516 |
|
|
|
5,387 |
|
|
|
(408 |
) |
|
|
15,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingent Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity (Deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
176 |
|
|
|
667 |
|
|
|
4,280 |
|
|
|
(4,947 |
) |
|
|
176 |
|
Capital Surplus |
|
|
1,397 |
|
|
|
5 |
|
|
|
869 |
|
|
|
(874 |
) |
|
|
1,397 |
|
Retained Earnings |
|
|
1,349 |
|
|
|
1,369 |
|
|
|
2,255 |
|
|
|
(3,624 |
) |
|
|
1,349 |
|
Accumulated Other Comprehensive Income (Loss) |
|
|
(2,626 |
) |
|
|
(317 |
) |
|
|
(1,277 |
) |
|
|
1,594 |
|
|
|
(2,626 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity (Deficit) |
|
|
296 |
|
|
|
1,724 |
|
|
|
6,127 |
|
|
|
(7,851 |
) |
|
|
296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
(Deficit) |
|
$ |
10,744 |
|
|
$ |
2,240 |
|
|
$ |
11,514 |
|
|
$ |
(8,259 |
) |
|
$ |
16,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-25-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidating Balance Sheet
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December 31, 2004 |
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|
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|
|
|
Consolidating |
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|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Entries and |
|
|
|
|
(In millions) |
|
Parent Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
1,004 |
|
|
$ |
50 |
|
|
$ |
914 |
|
|
$ |
|
|
|
$ |
1,968 |
|
Restricted Cash |
|
|
137 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
152 |
|
Accounts and Notes Receivable |
|
|
1,209 |
|
|
|
203 |
|
|
|
1,996 |
|
|
|
|
|
|
|
3,408 |
|
Accounts and Notes Receivable from Affiliates |
|
|
|
|
|
|
612 |
|
|
|
|
|
|
|
(612 |
) |
|
|
|
|
Inventories |
|
|
1,162 |
|
|
|
250 |
|
|
|
1,426 |
|
|
|
(53 |
) |
|
|
2,785 |
|
Prepaid Expenses and Other Current Assets |
|
|
90 |
|
|
|
13 |
|
|
|
187 |
|
|
|
10 |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
3,602 |
|
|
|
1,128 |
|
|
|
4,538 |
|
|
|
(655 |
) |
|
|
8,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
467 |
|
|
|
21 |
|
|
|
181 |
|
|
|
|
|
|
|
669 |
|
Goodwill |
|
|
|
|
|
|
35 |
|
|
|
470 |
|
|
|
215 |
|
|
|
720 |
|
Other Intangible Assets |
|
|
101 |
|
|
|
41 |
|
|
|
61 |
|
|
|
(40 |
) |
|
|
163 |
|
Deferred Income Tax |
|
|
|
|
|
|
14 |
|
|
|
69 |
|
|
|
|
|
|
|
83 |
|
Deferred Pension Costs |
|
|
432 |
|
|
|
179 |
|
|
|
219 |
|
|
|
|
|
|
|
830 |
|
Investments in Subsidiaries |
|
|
3,970 |
|
|
|
432 |
|
|
|
3,075 |
|
|
|
(7,477 |
) |
|
|
|
|
Properties and Plants |
|
|
2,089 |
|
|
|
332 |
|
|
|
3,011 |
|
|
|
23 |
|
|
|
5,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
10,661 |
|
|
$ |
2,182 |
|
|
$ |
11,624 |
|
|
$ |
(7,934 |
) |
|
$ |
16,533 |
|
|
|
|
|
|
|
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|
|
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|
|
|
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|
|
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Liabilities: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Current Liabilities: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable-Trade |
|
$ |
529 |
|
|
$ |
62 |
|
|
$ |
1,379 |
|
|
$ |
|
|
|
$ |
1,970 |
|
Accounts Payable to Affiliates |
|
|
528 |
|
|
|
|
|
|
|
84 |
|
|
|
(612 |
) |
|
|
|
|
Compensation and Benefits |
|
|
648 |
|
|
|
46 |
|
|
|
335 |
|
|
|
|
|
|
|
1,029 |
|
Other Current Liabilities |
|
|
428 |
|
|
|
17 |
|
|
|
296 |
|
|
|
|
|
|
|
741 |
|
United States and Foreign Taxes |
|
|
63 |
|
|
|
32 |
|
|
|
176 |
|
|
|
|
|
|
|
271 |
|
Notes Payable |
|
|
|
|
|
|
|
|
|
|
221 |
|
|
|
|
|
|
|
221 |
|
Long Term Debt and Capital Leases due within
one year |
|
|
563 |
|
|
|
|
|
|
|
447 |
|
|
|
|
|
|
|
1,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
2,759 |
|
|
|
157 |
|
|
|
2,938 |
|
|
|
(612 |
) |
|
|
5,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Debt and Capital Leases |
|
|
4,010 |
|
|
|
2 |
|
|
|
437 |
|
|
|
|
|
|
|
4,449 |
|
Compensation and Benefits |
|
|
3,336 |
|
|
|
312 |
|
|
|
1,388 |
|
|
|
|
|
|
|
5,036 |
|
Deferred and Other Noncurrent Income Taxes |
|
|
92 |
|
|
|
7 |
|
|
|
327 |
|
|
|
(20 |
) |
|
|
406 |
|
Other Long Term Liabilities |
|
|
391 |
|
|
|
9 |
|
|
|
81 |
|
|
|
|
|
|
|
481 |
|
Minority Equity in Subsidiaries |
|
|
|
|
|
|
|
|
|
|
632 |
|
|
|
214 |
|
|
|
846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
10,588 |
|
|
|
487 |
|
|
|
5,803 |
|
|
|
(418 |
) |
|
|
16,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingent Liabilities |
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|
|
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|
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|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity (Deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
176 |
|
|
|
669 |
|
|
|
4,191 |
|
|
|
(4,860 |
) |
|
|
176 |
|
Capital Surplus |
|
|
1,392 |
|
|
|
12 |
|
|
|
866 |
|
|
|
(878 |
) |
|
|
1,392 |
|
Retained Earnings |
|
|
1,070 |
|
|
|
1,291 |
|
|
|
2,082 |
|
|
|
(3,373 |
) |
|
|
1,070 |
|
Accumulated Other Comprehensive Income (Loss) |
|
|
(2,565 |
) |
|
|
(277 |
) |
|
|
(1,318 |
) |
|
|
1,595 |
|
|
|
(2,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity (Deficit) |
|
|
73 |
|
|
|
1,695 |
|
|
|
5,821 |
|
|
|
(7,516 |
) |
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
(Deficit) |
|
$ |
10,661 |
|
|
$ |
2,182 |
|
|
$ |
11,624 |
|
|
$ |
(7,934 |
) |
|
$ |
16,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-26-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidating Statement of Income (Loss)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Three Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
Consolidating |
|
|
|
|
|
|
Parent |
|
|
Guarantor |
|
|
Guarantor |
|
|
Entries and |
|
|
|
|
(In millions) |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
NET SALES |
|
$ |
2,405 |
|
|
$ |
589 |
|
|
$ |
4,240 |
|
|
$ |
(2,204 |
) |
|
$ |
5,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold |
|
|
2,138 |
|
|
|
506 |
|
|
|
3,620 |
|
|
|
(2,256 |
) |
|
|
4,008 |
|
Selling, Administrative and General
Expense |
|
|
285 |
|
|
|
49 |
|
|
|
375 |
|
|
|
(2 |
) |
|
|
707 |
|
Rationalizations |
|
|
4 |
|
|
|
1 |
|
|
|
4 |
|
|
|
|
|
|
|
9 |
|
Interest Expense |
|
|
93 |
|
|
|
9 |
|
|
|
43 |
|
|
|
(42 |
) |
|
|
103 |
|
Other (Income) and Expense |
|
|
(79 |
) |
|
|
|
|
|
|
(36 |
) |
|
|
80 |
|
|
|
(35 |
) |
Minority Interest in Net Income of
Subsidiaries |
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes and
Equity in (Earnings) Loss of
Subsidiaries |
|
|
(36 |
) |
|
|
24 |
|
|
|
209 |
|
|
|
16 |
|
|
|
213 |
|
United States and Foreign Taxes on
Income (Loss) |
|
|
|
|
|
|
3 |
|
|
|
67 |
|
|
|
1 |
|
|
|
71 |
|
Equity in (Earnings) Loss of Subsidiaries |
|
|
(178 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
142 |
|
|
$ |
31 |
|
|
$ |
142 |
|
|
$ |
(173 |
) |
|
$ |
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
Consolidating |
|
|
|
|
|
|
Parent |
|
|
Guarantor |
|
|
Guarantor |
|
|
Entries and |
|
|
|
|
(In millions) |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
NET SALES |
|
$ |
2,267 |
|
|
$ |
556 |
|
|
$ |
3,684 |
|
|
$ |
(1,807 |
) |
|
$ |
4,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold |
|
|
1,991 |
|
|
|
483 |
|
|
|
3,091 |
|
|
|
(1,815 |
) |
|
|
3,750 |
|
Selling, Administrative and General
Expense |
|
|
303 |
|
|
|
50 |
|
|
|
356 |
|
|
|
(6 |
) |
|
|
703 |
|
Rationalizations |
|
|
35 |
|
|
|
(7 |
) |
|
|
1 |
|
|
|
|
|
|
|
29 |
|
Interest Expense |
|
|
80 |
|
|
|
9 |
|
|
|
66 |
|
|
|
(60 |
) |
|
|
95 |
|
Other (Income) and Expense |
|
|
3 |
|
|
|
(5 |
) |
|
|
(32 |
) |
|
|
72 |
|
|
|
38 |
|
Minority Interest in Net Income of
Subsidiaries |
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
(2 |
) |
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes and
Equity in (Earnings) Loss of
Subsidiaries |
|
|
(145 |
) |
|
|
26 |
|
|
|
182 |
|
|
|
4 |
|
|
|
67 |
|
United States and Foreign Taxes on
Income (Loss) |
|
|
(72 |
) |
|
|
9 |
|
|
|
63 |
|
|
|
29 |
|
|
|
29 |
|
Equity in (Earnings) Loss of Subsidiaries |
|
|
(111 |
) |
|
|
(9 |
) |
|
|
(11 |
) |
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
38 |
|
|
$ |
26 |
|
|
$ |
130 |
|
|
$ |
(156 |
) |
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-27-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidating Statement of Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating |
|
|
|
|
|
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Entries and |
|
|
|
|
(In millions) |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
NET SALES |
|
$ |
7,067 |
|
|
$ |
1,675 |
|
|
$ |
12,795 |
|
|
$ |
(6,748 |
) |
|
$ |
14,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold |
|
|
6,273 |
|
|
|
1,460 |
|
|
|
10,901 |
|
|
|
(6,862 |
) |
|
|
11,772 |
|
Selling, Administrative and General
Expense |
|
|
856 |
|
|
|
143 |
|
|
|
1,147 |
|
|
|
(7 |
) |
|
|
2,139 |
|
Rationalizations |
|
|
|
|
|
|
1 |
|
|
|
(5 |
) |
|
|
|
|
|
|
(4 |
) |
Interest Expense |
|
|
269 |
|
|
|
27 |
|
|
|
143 |
|
|
|
(133 |
) |
|
|
306 |
|
Other (Income) and Expense |
|
|
(148 |
) |
|
|
(2 |
) |
|
|
(110 |
) |
|
|
255 |
|
|
|
(5 |
) |
Minority Interest in Net Income of
Subsidiaries |
|
|
|
|
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes and
Equity in (Earnings) Loss of
Subsidiaries |
|
|
(183 |
) |
|
|
46 |
|
|
|
640 |
|
|
|
(1 |
) |
|
|
502 |
|
United States and Foreign Taxes on
Income (Loss) |
|
|
(9 |
) |
|
|
15 |
|
|
|
217 |
|
|
|
|
|
|
|
223 |
|
Equity in (Earnings) Loss of Subsidiaries |
|
|
(453 |
) |
|
|
(34 |
) |
|
|
|
|
|
|
487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
279 |
|
|
$ |
65 |
|
|
$ |
423 |
|
|
$ |
(488 |
) |
|
$ |
279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
Consolidating |
|
|
|
|
|
|
Parent |
|
|
Guarantor |
|
|
Guarantor |
|
|
Entries and |
|
|
|
|
(In millions) |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
NET SALES |
|
$ |
6,503 |
|
|
$ |
1,567 |
|
|
$ |
10,895 |
|
|
$ |
(5,444 |
) |
|
$ |
13,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold |
|
|
5,782 |
|
|
|
1,355 |
|
|
|
9,167 |
|
|
|
(5,488 |
) |
|
|
10,816 |
|
Selling, Administrative and General
Expense |
|
|
864 |
|
|
|
136 |
|
|
|
1,095 |
|
|
|
(16 |
) |
|
|
2,079 |
|
Rationalizations |
|
|
41 |
|
|
|
(7 |
) |
|
|
29 |
|
|
|
|
|
|
|
63 |
|
Interest Expense |
|
|
226 |
|
|
|
27 |
|
|
|
176 |
|
|
|
(161 |
) |
|
|
268 |
|
Other (Income) and Expense |
|
|
(23 |
) |
|
|
(4 |
) |
|
|
(56 |
) |
|
|
200 |
|
|
|
117 |
|
Minority Interest in Net Income of
Subsidiaries |
|
|
|
|
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes and
Equity in (Earnings) Loss of
Subsidiaries |
|
|
(387 |
) |
|
|
60 |
|
|
|
441 |
|
|
|
21 |
|
|
|
135 |
|
United States and Foreign Taxes on
Income (Loss) |
|
|
(89 |
) |
|
|
15 |
|
|
|
185 |
|
|
|
34 |
|
|
|
145 |
|
Equity in (Earnings) Loss of Subsidiaries |
|
|
(288 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
(10 |
) |
|
$ |
65 |
|
|
$ |
256 |
|
|
$ |
(321 |
) |
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-28-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating |
|
|
|
|
|
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Entries and |
|
|
|
|
(In millions) |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CASH FLOWS FROM
OPERATING ACTIVITIES |
|
$ |
12 |
|
|
$ |
(24 |
) |
|
$ |
423 |
|
|
$ |
(222 |
) |
|
$ |
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(135 |
) |
|
|
(9 |
) |
|
|
(221 |
) |
|
|
(5 |
) |
|
|
(370 |
) |
Acquisitions |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
7 |
|
|
|
|
|
Asset sales |
|
|
140 |
|
|
|
2 |
|
|
|
11 |
|
|
|
(7 |
) |
|
|
146 |
|
Other transactions |
|
|
2 |
|
|
|
|
|
|
|
(109 |
) |
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CASH FLOWS FROM INVESTING
ACTIVITIES |
|
|
7 |
|
|
|
(7 |
) |
|
|
(326 |
) |
|
|
102 |
|
|
|
(224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term debt incurred |
|
|
|
|
|
|
4 |
|
|
|
162 |
|
|
|
|
|
|
|
166 |
|
Short term debt paid |
|
|
(4 |
) |
|
|
|
|
|
|
(120 |
) |
|
|
|
|
|
|
(124 |
) |
Long term debt incurred |
|
|
1,921 |
|
|
|
|
|
|
|
381 |
|
|
|
|
|
|
|
2,302 |
|
Long term debt paid |
|
|
(2,000 |
) |
|
|
(1 |
) |
|
|
(440 |
) |
|
|
|
|
|
|
(2,441 |
) |
Debt issuance costs |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50 |
) |
Increase in restricted cash |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63 |
) |
Other transactions |
|
|
5 |
|
|
|
|
|
|
|
(140 |
) |
|
|
120 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CASH FLOWS FROM FINANCING
ACTIVITIES |
|
|
(191 |
) |
|
|
3 |
|
|
|
(157 |
) |
|
|
120 |
|
|
|
(225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents |
|
|
|
|
|
|
|
|
|
|
(46 |
) |
|
|
|
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(172 |
) |
|
|
(28 |
) |
|
|
(106 |
) |
|
|
|
|
|
|
(306 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at Beginning of the Period |
|
|
1,004 |
|
|
|
50 |
|
|
|
914 |
|
|
|
|
|
|
|
1,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of the Period |
|
$ |
832 |
|
|
$ |
22 |
|
|
$ |
808 |
|
|
$ |
|
|
|
$ |
1,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-29-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
Consolidating |
|
|
|
|
|
|
Parent |
|
|
Guarantor |
|
|
Guarantor |
|
|
Entries and |
|
|
|
|
(In millions) |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CASH FLOWS FROM
OPERATING ACTIVITIES |
|
$ |
(154 |
) |
|
$ |
(8 |
) |
|
$ |
336 |
|
|
$ |
(156 |
) |
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(70 |
) |
|
|
(5 |
) |
|
|
(220 |
) |
|
|
17 |
|
|
|
(278 |
) |
Acquisitions |
|
|
(51 |
) |
|
|
|
|
|
|
(96 |
) |
|
|
85 |
|
|
|
(62 |
) |
Asset sales |
|
|
104 |
|
|
|
1 |
|
|
|
9 |
|
|
|
(100 |
) |
|
|
14 |
|
Other transactions |
|
|
33 |
|
|
|
2 |
|
|
|
34 |
|
|
|
(33 |
) |
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CASH FLOWS FROM INVESTING
ACTIVITIES |
|
|
16 |
|
|
|
(2 |
) |
|
|
(273 |
) |
|
|
(31 |
) |
|
|
(290 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term debt incurred |
|
|
41 |
|
|
|
|
|
|
|
122 |
|
|
|
|
|
|
|
163 |
|
Short term debt paid |
|
|
|
|
|
|
|
|
|
|
(106 |
) |
|
|
|
|
|
|
(106 |
) |
Long term debt incurred |
|
|
1,648 |
|
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
1,741 |
|
Long term debt paid |
|
|
(1,255 |
) |
|
|
|
|
|
|
(58 |
) |
|
|
|
|
|
|
(1,313 |
) |
Debt issuance costs |
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45 |
) |
Increase in restricted cash |
|
|
(54 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(62 |
) |
Other transactions |
|
|
|
|
|
|
|
|
|
|
(216 |
) |
|
|
187 |
|
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CASH FLOWS FROM FINANCING
ACTIVITIES |
|
|
335 |
|
|
|
|
|
|
|
(173 |
) |
|
|
187 |
|
|
|
349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents |
|
|
|
|
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
197 |
|
|
|
(10 |
) |
|
|
(129 |
) |
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at Beginning of the Period |
|
|
585 |
|
|
|
25 |
|
|
|
936 |
|
|
|
|
|
|
|
1,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of the Period |
|
$ |
782 |
|
|
$ |
15 |
|
|
$ |
807 |
|
|
$ |
|
|
|
$ |
1,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-30-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10. INCOME TAXES
For the first nine months of 2005, we recorded tax expense of $223 million on income before income
taxes and minority interest in net income of subsidiaries of $581 million. Included in this amount
was a net tax charge of $2 million, which is primarily related
to the settlement of prior years tax
liabilities. For the first nine months of 2004, we recorded tax expense of $145 million on income
before income taxes and minority interest in net income of subsidiaries of $178 million. Included
in this amount was a net tax benefit of $50 million, which is primarily related to the settlement
of prior years tax liabilities. The difference between our effective tax rate and the U.S.
statutory rate was primarily attributable to continuing to maintain a full valuation allowance
against our net Federal and state deferred tax assets. As a result of the valuation allowance,
deferred tax expense was not recorded on a significant portion of the results of our North American
Tire Segment. Improvement in these results significantly contributed to the lower effective tax
rate from 2004 to 2005.
NOTE 11. ASSET DISPOSITIONS
On August 9, 2005, we announced the completion of the sale of our natural rubber plantations in
Indonesia at a purchase price of approximately $62 million, subject to post-closing adjustments.
On September 1, 2005, we announced that we had completed the sale of our Wingtack adhesive resins
business to Sartomer Company, Inc. We received approximately $55 million in cash proceeds and
retained approximately $10 million in working capital in connection with the Wingtack sale. In
addition, the sales agreement provides for a three-year earnout whereby we may receive additional
consideration ($5 million per year, $15 million aggregate) for the sale based on future operating
performance of the business. We are also awaiting the necessary approvals to complete the sale of
assets of our North American farm tire business to Titan International for approximately $100
million. In connection with the transaction, we expect to record a
loss of approximately $70 million on the sale,
primarily related to pension and retiree medical costs. Also, on September 20, 2005, we announced
that we are exploring the possible sale of our Engineered Products business. Engineered Products
manufactures and markets engineered rubber products for industrial, military, consumer and
transportation original equipment end-users.
-31-
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(All per share amounts are diluted)
OVERVIEW
The Goodyear Tire & Rubber Company is one of the worlds leading manufacturers of tires and rubber
products with one of the most recognizable brand names in the world. We have a broad global
footprint with 101 manufacturing facilities in 28 countries. We operate our business through six
operating segments: North American Tire; European Union Tire; Latin American Tire; Eastern Europe,
Middle East and Africa Tire (Eastern Europe Tire); Asia/Pacific Tire; and Engineered Products.
In the third quarter of 2005 we continued to make progress on our turnaround strategy. For
the third quarter ended September 30, 2005, we recorded net income of $142 million compared to net
income of $38 million in the comparable period of 2004. Improvements in operating income in all
five of the tire segments contributed to the increase in net income. The improvement was driven by
our strategy to focus on the higher value replacement market and being more selective in the OE
market, strong performance of high performance and premium branded tires, our ability to recover
higher raw material costs through pricing actions and the results of our cost reduction programs.
To extend and enhance our turnaround strategy, we announced additional cost reduction initiatives
we plan to implement over the next several years. The initiatives include reducing our high-cost
manufacturing capacity by between 8 percent and 12 percent resulting in anticipated annual savings
of between $100 million and $150 million. In connection with the reduction in manufacturing
capacity, we anticipate incurring cash restructuring charges of approximately $150 million to $250
million over the next three years.
We continued our transformation to a market-driven, consumer-focused company with the
introduction in North America of the Fortera® featuring TripleTred TechnologyTM, a
premium SUV tire incorporating the same technology we introduced with the successful launch of our
Assurance® line of tires in 2004. In Europe, we introduced two new high performance winter tires,
the Goodyear Ultra Grip 7 and Dunlop SP Winter Sport 3D, both of which have received highly
favorable consumer reviews.
Set forth below are our expectations for industry volume growth in consumer and commercial
tires for 2005 and 2006 in both the OE and replacement segments in North America and the European
Union. Also included is the actual growth in these segments through September 30, 2005:
Industry Volume Estimates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OE |
|
Replacement |
|
|
|
|
Consumer |
|
Commercial |
|
Consumer |
|
Commercial |
North America |
|
2006 |
|
|
(1 |
%) |
|
|
5 |
% |
|
|
2 |
% |
|
|
2 |
% |
|
|
2005 |
|
|
(1)-0 |
% |
|
|
9-11 |
% |
|
|
2-2.5 |
% |
|
|
2.5-3 |
% |
|
|
Year-to-date |
|
|
(2 |
)% |
|
|
10 |
% |
|
|
3 |
% |
|
|
3 |
% |
|
European Union |
|
2006 |
|
|
0-1 |
% |
|
|
1-2 |
% |
|
|
0-1 |
% |
|
|
1 |
% |
|
|
2005 |
|
|
(2-3 |
)% |
|
|
6-7 |
% |
|
|
(1)-0 |
% |
|
|
(4-5 |
)% |
|
|
Year-to-date |
|
|
(3 |
)% |
|
|
11 |
% |
|
|
0 |
% |
|
|
(6 |
)% |
Given the industry estimates above, we expect slight industry volume improvement in the fourth
quarter in the OE consumer segment in North America and a decrease in industry volume in the commercial OE segment in the European
Union. Also, in the fourth quarter, industry replacement volumes are expected to be generally
consistent with those experienced through the first nine months, although we expect a slight
improvement in industry volumes for commercial replacement tires in the European Union.
-32-
We also continued to make progress on our capital structure improvement plan in the third
quarter with the completion of two asset dispositions. We completed the sale of our Indonesian
natural rubber plantations at a sale price of approximately $62 million, subject to post-closing
adjustments, and also completed the sale of our Wingtack adhesive resin business in which we
received approximately $55 million in cash and retained about
$10 million in working capital. We are also awaiting the
necessary approvals to complete the sale of assets of our North
American farm tire business to Titan International for approximately
$100 million. In connection with the transaction, we expect to
record a loss of approximately $70 million on the sale, primarily related to pension and retiree medical costs. We
also announced that we are exploring the possible sale of our Engineered Products business. While
our prior refinancing activities have improved our liquidity position, we continue to review
potential divestitures of other non-core assets and other financing options, including the issuance
of additional equity.
While our operating results continued to improve through the first nine months, we continue to
face several challenges, including rising raw material costs (for the full year 2005 raw material
costs are expected to increase approximately 10% compared to 2004 and in 2006 are expected to
increase approximately 8% to 10% compared to 2005), a high level of debt and significant legacy
costs, including required domestic pension funding obligations in 2006 of as much as $750 million.
Although our pension obligations are expected to peak in 2006, we anticipate being subject to
significant required pension funding obligations in 2007 and beyond.
On October 3, 2005, we announced that we had implemented temporary reductions in production at
our North American Tire facilities due to disruptions in the supply of certain raw materials
resulting from the impact of Hurricanes Katrina and Rita. As a result of the
supplier shortages, North American Tire production was initially reduced by approximately 30%. However,
tire production returned to pre-hurricane levels by mid-October. The continuing impact of the
hurricanes may subject us to additional supply shortages of key raw
materials that could result in intermittent production reductions at certain of our North American Tire facilities in the fourth
quarter. The hurricanes had an adverse impact of approximately $10 million on our results of
operations in the third quarter primarily reflecting the unabsorbed fixed costs related to the
temporary closures of our chemical plants on the Texas Gulf Coast and production cuts at our North
American Tire plants as well as the impairment of certain assets. We anticipate fourth quarter charges of approximately $20 million, primarily related to
reductions in production in October at our chemical plants and certain North American Tire
facilities. Despite the impact of the hurricanes, we anticipate year-over-year gains in operating
performance during the fourth quarter of 2005, however, the rate of those gains is expected to be
less than they were in the third quarter of 2005.
We remain subject to a Securities and Exchange Commission investigation into the facts
and circumstances surrounding the restatement of our historical financial statements. In connection
with this investigation, we received a Wells Notice from the staff of the SEC in August 2005. The
Wells Notice is described more fully in Legal Proceedings in Item I of Part II of this Form 10-Q.
Because the investigation is currently ongoing, the outcome cannot be predicted at this time. Also
as described in Item 4 of Part I of this Form 10-Q, we continue to have two material weaknesses in
our internal control over financial reporting. We continue to implement remedial measures to
address internal control matters.
Our results of operations, financial position and liquidity could be adversely affected in
future periods by loss of market share or lower demand in the replacement market or from the
original equipment industry, which would result in lower levels of plant utilization and an
increase in unit costs. Also, we could experience higher raw material and energy costs in future
periods. These costs, if incurred, may not be recoverable due to pricing pressures present in
todays highly competitive market and we may not be able to continue improving our product mix. Our
future results of operations are also dependent on our ability to (i) successfully implement cost
reduction programs to address, among other things, higher wage and benefit costs, and (ii) where
necessary, reduce excess manufacturing capacity. We are unable to predict future currency
fluctuations. Sales and earnings in future periods would be unfavorably impacted if the U.S. dollar
strengthens against various foreign currencies, or if economic conditions deteriorate in the United
States or Europe. Continued volatile economic conditions or changes in government policies in
emerging markets could adversely affect sales and earnings in future periods. We may also be
impacted by economic disruptions associated with global events including natural disasters, war,
acts of terror and civil obstructions.
-33-
RESULTS OF OPERATIONS
CONSOLIDATED
Three Months Ended September 30, 2005 and 2004
Net sales in the third quarter of 2005 were $5,030 million, increasing $330 million, or 7.0% from
$4,700 million in the 2004 third quarter. Net income of $142 million, or $0.70 per share, was
recorded in the 2005 third quarter compared to net income of $38 million, or $0.20 per share, in
the third quarter 2004.
Net sales in the third quarter of 2005 in our tire segments were impacted by favorable price
and product mix of approximately $182 million, higher volume of approximately $62 million and a
positive impact from currency translation of approximately $58 million. Sales also increased
approximately $28 million in the Engineered Products Division, mainly due to improvements in price
and product mix of approximately $19 million and currency translation of $11 million.
Worldwide tire unit sales in the third quarter of 2005 were 58.4 million units, an increase of
1.0 million units, or 1.8% compared to the 2004 period. This increase was driven by a 0.6 million,
or 1.6% unit increase in the consumer replacement market and a 0.6 million unit, or 4.6% increase
in the consumer OE market. The increase was offset by lower unit sales of 0.1 million units, or
1.7% in the commercial market and 0.1 million units, or 13% in other tire related businesses.
Cost of goods sold (CGS) in the third quarter of 2005 was $4,008 million, an increase of $258
million, or 6.9% compared to the third quarter 2004, while decreasing as a percentage of sales to
79.7% from 79.8% in the 2004 comparable period. CGS for our tire segments in the third quarter of
2005 increased due to higher raw material costs of approximately $141 million and higher volume of
approximately $49 million. Also contributing to the CGS increase was foreign currency translation
of approximately $20 million and product mix related manufacturing cost increases of approximately
$32 million. CGS also increased by $38 million in the Engineered Products Division, primarily
related to higher conversion costs of $10 million, increased raw material costs of $7 million and
foreign currency translation of $9 million. Partially offsetting these CGS increases was lower
conversion costs of approximately $13 million in our tire segments, driven by lower OPEB costs and
savings from rationalization programs.
Selling, administrative and general expense (SAG) was $707 million in the third quarter of
2005, compared to $703 million in 2004, an increase of $4 million. The increase was driven
primarily by higher wage and benefits expenses, which increased by $11 million in the quarter for
our tire segments, foreign currency translation of $6 million and charges of $4 million related to
the recent hurricanes. Partially offsetting these increases in SAG were lower product liability
expenses of $11 million and cost savings of $3 million from rationalization programs. SAG as a percentage
of sales was 14.1% in the third quarter 2005, compared to 14.9% in the third quarter of 2004.
Interest expense increased by $8 million to $103 million in the third quarter of 2005 from $95
million in the third quarter of 2004 primarily as a result of higher average interest rates and
interest penalties.
Other (income) and expense was $35 million of income in the 2005 third quarter, an improvement
of $73 million, compared to $38 million of expense in the 2004 third quarter. The increase was
primarily related to a gain of $25 million on the sale of the Wingtack adhesive resins business in
the North American Tire Segment and a gain of $14 million from an insurance settlement with certain
insurance companies related to environmental and asbestos coverage. In addition, in the third
quarter of 2005, we had $8 million of lower general & product liability expenses. Also in the three
months ended September 30, 2004, there was an additional $12 million of higher financing fee
expenses due to higher deferred fee levels and shorter amortization periods compared to the
comparable period in 2005.
For the third quarter of 2005, we recorded tax expense of $71 million on income before income
taxes and minority interest in net income of subsidiaries of $238 million. Included in this amount
was a net tax benefit of $3 million primarily related to the
settlement of prior years tax
liabilities. For the third quarter of 2004, we recorded tax expense of $29 million on income before
income taxes and minority interest in net income of subsidiaries of $85 million. Included in this
amount was a net tax benefit of $44 million primarily related to
the settlement of prior years tax
liabilities.
-34-
Rationalization Activity
2005 rationalization charges consisted of manufacturing and corporate support group associate
reductions in North American Tire, manufacturing associate reductions and a sales function
reorganization in European Union Tire, and sales, marketing, and research and development associate
reductions in Engineered Products.
During the third quarter of 2005, $9 million of new charges were recorded for the plans
initiated in 2005 primarily for associate severance costs, including $1 million for non-cash
pension special termination benefits. Approximately 265 associates will be released under programs
initiated in 2005, of which approximately 175 were released by September 30, 2005.
Accelerated depreciation charges were recorded for fixed assets that will be taken out of
service in connection with certain rationalization plans initiated in 2003 and 2004 in the
Engineered Products and European Union Tire Segments. During the third quarter of 2005 and 2004,
$1 million was recorded for accelerated depreciation charges as Cost of goods sold and $1 million
was recorded in 2004 as Selling, administrative and general expense.
Additional restructuring charges of $3 million related to previously announced rationalization
plans have not yet been recorded and are expected to be incurred and recorded within the next
twelve months. We estimate that SAG and CGS were reduced in the third quarter of 2005 by
approximately $9 million as a result of the implementation of the 2004 and 2005 plans.
For further information, refer to Note 2, Costs Associated with Rationalization Programs.
Nine Months Ended September 30, 2005 and 2004
Net sales in the first nine months of 2005 were $14,789 million, increasing $1,268 million, or 9.4%
from $13,521 million in the comparable period of 2004. Net income for the first nine months of
2005 was $279 million, or $1.39 per share compared to a net loss of $10 million, or a loss of $0.06
per share in the first nine months of 2004.
Net sales in the first nine months of 2005 for our tire segments were impacted by favorable
price and product mix of approximately $574 million, foreign currency translation of approximately
$283 million, and higher volume of approximately $149 million. Sales also increased approximately
$145 million due to improvements in the Engineered Products Division, primarily related to
increased volume, improved product mix and foreign currency translation.
Worldwide tire unit sales in the first nine months of 2005 were 170.7 million units, an
increase of 2.6 million units, or 1.5% compared to the 2004 period. This volume improvement in the
first nine months of 2005 was driven by a 2.4 million, or 2.2% unit increase in the consumer
replacement market and a 0.5 million, or 18.0% unit increase in the commercial OE market, partially
offset by a 0.2 million, or 7.8% unit decrease in the other tire businesses.
CGS was $11,772 million in the first nine months of 2005, an increase of $956 million, or 8.8%
compared to the first nine months of 2004, while decreasing as a percentage of sales to 79.6%
compared to 80.0% in the comparable period of 2004. The improvement
in our gross margin rate through the first nine months of
2005 (20.4% in 2005 versus 20.0% in 2004) reflects our ability to offset increasing raw material
costs through pricing, product mix improvements and cost reduction initiatives. CGS for our tire
segments in the first nine months of 2005 increased due to higher raw material costs of
approximately $371 million and product mix-related manufacturing cost increases of approximately
$144 million. CGS also increased due to foreign currency translation of approximately $164 million
and higher volume of approximately $120 million. CGS also increased by $154 million in the
Engineered Products Division primarily related to higher volume, increased raw material costs,
conversion costs and foreign currency translation.
In the first nine months of 2005, SAG was $2,139 million, compared to $2,079 million in 2004,
an increase of $60 million or 2.9%. The increase in our tire segments was driven primarily by
foreign currency translation, which added $35 million to SAG in the period. Wage and benefits
expenses increased by nearly $30 million when compared to the
comparable period in 2004. In addition, SAG increased by $16 million due to our acquisition of the remaining 50% interest of a Swedish retail subsidiary during the third quarter of 2004 and consolidation of their results beginning with the acquisition date.
Partially
offsetting these increases were lower professional fees associated with the restatement of $25 million. SAG as a
percentage of sales was 14.5% in the first nine months of 2005, compared to 15.4% in the 2004
period.
-35-
Interest expense increased by $38 million to $306 million in the first nine months of 2005
from $268 million in the first nine months of 2004 primarily as a result of higher average interest
rates, debt levels and interest penalties.
For the nine months ended September 30, 2005, Other (income) and expense was $5 million of
income, compared to $117 million of expense in the 2004 period, an improvement of $122 million. The
improvement was primarily related to gains on the sale of assets and insurance settlements.
Results for the nine months ended September 30, 2005, included net gains on asset sales of $41
million, primarily due to the sale of the Wingtack adhesive resins business and other assets in the
North American Tire Segment. Insurance settlement gains included $14 million related to the 2004
fire in Germany and $61 million for insurance settlements with certain insurance companies related
to asbestos and environmental coverage.
For the first nine months of 2005, we recorded tax expense of $223 million on income before
income taxes and minority interest in net income of subsidiaries of $581 million. Included in this
amount was a net tax charge of $2 million primarily related to
the settlement of prior years tax
liabilities. For the first nine months of 2004, we recorded tax expense of $145 million on income
before income taxes and minority interest in net income of subsidiaries of $178 million. Included
in this amount was a net tax benefit of $50 million primarily related to the settlement of prior
years tax liabilities. The difference between our effective tax rate and the U.S. statutory rate
was primarily attributable to continuing to maintain a full valuation allowance against our net
Federal and state deferred tax assets. As a result of the valuation allowance, deferred tax expense
was not recorded on a significant portion of the results of our North American Tire Segment.
Improvement in these results significantly contributed to the lower effective tax rate from 2004 to
2005.
Rationalization Activity
For the first nine months of 2005, $4 million of net reversals of reserves were recorded, which
included $15 million of reversals for rationalization actions no longer needed for their
originally-intended purposes. These reversals were partially offset by $11 million of new
rationalization charges. The $15 million of reversals consisted of $9 million of associate-related
costs for plans initiated in 2004 and 2003, and $6 million primarily for non-cancelable leases that
were exited during the first quarter related to plans initiated in 2001 and earlier. The $11
million of charges primarily represent associate-related costs and consist of $9 million for plans
initiated in 2005 and $2 million for plans initiated in 2004.
Accelerated depreciation charges were recorded for fixed assets that will be taken out of
service in connection with certain rationalization plans initiated in 2003 and 2004 in the
Engineered Products and European Union Tire Segments. For the first nine months of 2005 and 2004,
accelerated depreciation charges of $2 million and $6 million, respectively, were recorded as Cost
of goods sold. Accelerated depreciation charges of $2 million were recorded in the first nine
months of 2004 as Selling, administrative and general expense.
2004 rationalization activities consisted primarily of warehouse, manufacturing and sales and
marketing associate reductions in Engineered Products, a farm tire manufacturing consolidation in
European Union Tire, administrative associate reductions in North American Tire, European Union
Tire and corporate functional groups, and manufacturing, sales and research and development
associate reductions in North American Tire. In fiscal year 2004, net charges were recorded
totaling $56 million. The net charges included
reversals of $39 million related to reserves from
rationalization actions no longer needed for their originally-intended purpose, and new charges of
$95 million. Included in the $95 million of new charges
were $77 million for plans initiated in 2004, as described above. Approximately 1,400 associates
will be released under programs initiated in 2004, of which approximately 1,070 have been released
to date (430 during the first nine months of 2005). The costs of the 2004 actions consisted of $40
million related to future cash outflows, primarily for associate severance costs, $32 million in
non-cash pension curtailments and postretirement benefit costs and $5 million for non-cancelable
lease costs and other exit costs. Costs in 2004 also included $16 million related to plans
initiated in 2003, consisting of $14 million of non-cancelable lease costs and other exit costs and
$2 million of associate severance costs. The reversals are primarily the result of lower than
initially estimated associate severance costs of $35 million and lower leasehold and other exit
costs of $4 million. Of the $35 million of associate severance cost reversals, $12 million related
to previously-approved plans in Engineered Products that were reorganized into the 2004 warehouse,
manufacturing, and sales and marketing associate reductions.
We estimate that SAG and CGS were reduced in the nine months ended September 30, 2005 by
approximately $25 million as a result of the implementation of the 2004 and 2005 plans.
-36-
For further information, refer to the Note 2, Costs Associated with Rationalization Programs.
SEGMENT INFORMATION
Segment information reflects the results of our strategic business units (SBUs), which are
organized to meet customer requirements and global competition. The Tire businesses are segmented
on a regional basis. Engineered Products is managed on a global basis.
Effective January 1, 2005, Chemical Products was integrated into North American Tire.
Intercompany sales from Chemical Products to other segments are no longer reflected in our segment
sales. In addition, segment operating income from intercompany sales from Chemical Products to
other segments is no longer reflected in our total segment operating income.
Results of operations are measured based on net sales to unaffiliated customers and segment
operating income. Segment operating income is computed as follows: Net Sales less CGS (excluding
certain accelerated depreciation charges, asset impairment charges and asset write-offs) and SAG
(including certain allocated corporate administrative expenses).
Total
segment operating income was $330 million in the third quarter
of 2005, increasing $58
million from $272 million in the third quarter of 2004. Total segment operating margin (total
segment operating income divided by segment sales) in the third quarter of 2005 was 6.6% compared
to 5.8% in the third quarter of 2004.
In the first nine
months of 2005, total segment operating income was $938 million, increasing
$231 million, or 33% from $707 million in the 2004 period. Total segment operating margin in the
first nine months of 2005 was 6.3% compared to 5.2% in the 2004 comparable period.
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 as determined in accordance with Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related Information. Refer to
the Note 8, Business Segments, for further information and for a reconciliation of total segment
operating income to Income before Income Taxes.
North American Tire
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Change |
|
Tire Units |
|
|
26.6 |
|
|
|
26.6 |
|
|
|
|
|
|
|
|
% |
|
|
77.2 |
|
|
|
77.1 |
|
|
|
0.1 |
|
|
|
0.2 |
% |
Net Sales |
|
$ |
2,370 |
|
|
$ |
2,257 |
|
|
$ |
113 |
|
|
|
5.0 |
% |
|
$ |
6,804 |
|
|
$ |
6,366 |
|
|
$ |
438 |
|
|
|
6.9 |
% |
Segment Operating
Income |
|
|
58 |
|
|
|
27 |
|
|
|
31 |
|
|
|
114.8 |
% |
|
|
124 |
|
|
|
44 |
|
|
|
80 |
|
|
|
181.8 |
% |
Segment Operating
Margin |
|
|
2.4 |
% |
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
1.8 |
% |
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 and 2004
North American Tire unit sales in the 2005 third quarter remained flat from the prior year
comparable quarter as the increase in consumer OE units of 0.1 or 1.9% was offset by a 0.1 unit or
15.5% decrease in the commercial OE market.
Net sales increased 5.0% in the third quarter of 2005 from the comparable 2004 period due
primarily to favorable price and product mix of approximately $98 million, driven by price
increases to offset higher raw material costs and improved mix resulting from our strategy to focus
on the higher value replacement market and being more selective in the OE market. Also positively
impacting sales in the period were translation of approximately
$7 million and approximately $7
million from growth in other tire related businesses.
-37-
Operating
income increased $31 million, or 114.8% in the third quarter of
2005 from the comparable 2004 period. The improvement was driven by
our tire business'
improved price and product mix of approximately $83 million and
lower conversion costs of approximately $13 million, due in part
to lower OPEB costs. We also had an $11 million
improvement in the operating income of our other tire related
businesses. Overall, favorable SAG costs of $6 million primarily
resulted from lower general and product liability claim costs. These
favorable effects were partially offset by increased raw material
costs of approximately $80 million in our tire business.
Included in the 2005 results discussed above are $10 million of
costs associated with the hurricanes.
Operating income for the third quarter 2005 and 2004 did not include rationalization net
charges of $3 million and $4 million, respectively. Operating income also did not include third
quarter 2005 net gains on asset sales of $28 million.
Nine Months Ended September 30, 2005 and 2004
Unit sales in the first nine months of 2005 increased 0.1 million units or 0.2% from the 2004
period. Replacement unit volume increased 1.4 million units or 2.6 %, while OE volume decreased
1.2 million units or 4.9%.
Net sales increased 6.9% in the first nine months of 2005 from the 2004 period due primarily
to favorable price and product mix of approximately $256 million due to price increases to offset
rising raw material costs and improved mix from our strategy to focus on the higher value consumer
replacement market and being more selective in the consumer OE market
and improved volume of $16 million. Also positively impacting
sales for the period was growth in other tire related businesses
including the T&WA business of
approximately $139 million and translation of $27 million.
Operating
income increased $80 million, or 181.8% in the first
nine months of 2005 from the 2004 period. The improvement was
driven by improved price and product mix of approximately
$188 million, lower conversion costs of approximately
$73 million, primarily related to the implementation of cost
reduction initiatives resulting in productivity improvements, lower
OPEB costs and rationalization activities, including the closure of
the Huntsville plant, related to our tire business and by an
approximate $42 million improvement in the earnings of our
retail, external chemicals and other tire related businesses. The
2005 period was unfavorably impacted by increased raw material costs
of approximately $210 million in our tire business and an
increase in segment SAG costs of approximately $12 million,
primarily related to higher compensation costs. Included in the 2005
results discussed above are $10 million of costs associated with
the hurricanes.
Operating income in the first nine months of 2005 did not include rationalization net
reversals of $6 million and a net gain on asset sales of $36 million. Operating income in the
first nine months of 2004 did not include rationalization net charges totaling $10 million and a
gain on asset sales of $2 million.
During
the third quarter, in order to better reflect the actual operating
performance of the businesses within our North American Tire Segment,
we began to include raw material and manufacturing conversion
variances directly related to our other tire businesses in their
results for management reporting purposes. The change, which was
applied to all periods presented, resulted in approximately
$21 million of unfavorable variances previously included within
tire business results being reclassified to other tire related
business for the six month period ended June 30, 2005. The overall segment
operating income was not effected by this change.
European Union Tire
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Change |
|
Tire Units |
|
|
16.2 |
|
|
|
15.8 |
|
|
|
0.4 |
|
|
|
2.5 |
% |
|
|
48.1 |
|
|
|
47.5 |
|
|
|
0.6 |
|
|
|
1.3 |
% |
Net Sales |
|
$ |
1,131 |
|
|
$ |
1,085 |
|
|
$ |
46 |
|
|
|
4.2 |
% |
|
$ |
3,507 |
|
|
$ |
3,256 |
|
|
$ |
251 |
|
|
|
7.7 |
% |
Segment Operating Income |
|
|
80 |
|
|
|
68 |
|
|
|
12 |
|
|
|
17.6 |
% |
|
|
272 |
|
|
|
195 |
|
|
|
77 |
|
|
|
39.5 |
% |
Segment Operating Margin |
|
|
7.1 |
% |
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
7.8 |
% |
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 and 2004
European Union Tire segment unit sales in the 2005 third quarter increased 0.4 million units or
2.5% from the 2004 period. Replacement unit sales increased 0.4 million units or 3.9% while OE
volume was essentially flat compared to the third quarter of 2004.
Net sales in the third quarter of 2005 increased 4.2% compared to the third quarter of 2004
primarily due to price and product mix of approximately $51 million driven by price increases to
offset higher raw material costs and a favorable mix toward the consumer replacement and commercial
markets. Also contributing to the sales increase was a volume
-38-
increase of approximately $24 million, largely due to increases in the consumer replacement market.
This improvement was partially offset by the lower sales in other tire related business of $16
million and unfavorable currency translation totaling approximately $11 million.
For the third quarter of 2005, operating income increased $12 million, or 17.6% compared to
2004 due to improvements in price and product mix of approximately $40 million driven by price
increases to offset higher raw material costs and a continued shift towards higher value high
performance, ultra-high performance and commercial tires. Operating income was adversely affected
by higher raw material costs of approximately $13 million, higher SAG expense of approximately $10
million primarily related to higher selling and advertising expenses, and $6 million in higher
other tire related business expenses.
Operating income for the third quarter of 2005 and 2004 did not include rationalization net
charges totaling $3 million and $1 million, respectively. In 2004, operating income did not
include a $1 million gain on the sale of assets.
Nine Months Ended September 30, 2005 and 2004
Unit sales in the first nine months 2005 increased 0.6 million units or 1.3% from the 2004 period.
Replacement volume increased 0.9 million units or 2.5% while OE volume decreased 0.3 million units
or 1.8%.
Net sales in the first nine months of 2005 increased $251 million, or 7.7% compared to the
first nine months of 2004 primarily due to price and product mix improvements of approximately $168
million driven by price increases to offset higher raw material costs and a favorable mix toward
the consumer replacement and commercial markets and the favorable effect of currency translation
totaling approximately $76 million. Volume increases in the first nine months impacted sales by
approximately $37 million largely due to increases in the consumer replacement and OE commercial
market.
For the first nine months of 2005, operating income increased by $77 million, or 39.5%
compared to 2004 due primarily to improvements in price and product mix of approximately $117
million and increased volume of $9 million largely due to increases in the consumer replacement and
commercial OE markets. Operating income was adversely affected by higher raw material costs of
approximately $40 million in the first nine months of 2005 compared to 2004 and higher SAG expense
of $11 million, due primarily to increased advertising costs.
Operating income in the first nine months of 2005 did not include rationalization net charges
of $1 million and a gain on asset sales of $4 million. Operating income in the first nine months
of 2004 did not include rationalization net charges totaling $26 million and a gain on asset sales
of $3 million.
Eastern Europe, Middle East and Africa Tire
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Change |
|
Tire Units |
|
|
5.4 |
|
|
|
5.2 |
|
|
|
0.2 |
|
|
|
4.9 |
% |
|
|
14.9 |
|
|
|
14.4 |
|
|
|
0.5 |
|
|
|
3.8 |
% |
Net Sales |
|
$ |
394 |
|
|
$ |
344 |
|
|
$ |
50 |
|
|
|
14.5 |
% |
|
$ |
1,076 |
|
|
$ |
928 |
|
|
$ |
148 |
|
|
|
15.9 |
% |
Segment Operating Income |
|
|
64 |
|
|
|
60 |
|
|
|
4 |
|
|
|
6.7 |
% |
|
|
160 |
|
|
|
148 |
|
|
|
12 |
|
|
|
8.1 |
% |
Segment Operating Margin |
|
|
16.2 |
% |
|
|
17.4 |
% |
|
|
|
|
|
|
|
|
|
|
14.9 |
% |
|
|
15.9 |
% |
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 and 2004
Eastern Europe, Middle East and Africa Tire unit sales in the 2005 third quarter increased 0.2
million units or 4.9% from the comparable 2004 period primarily related to increased OE unit sales
of 0.2 million units or 22.5% driven by growth in emerging markets.
Net sales increased by $50 million, or 14.5% in the 2005 third quarter compared to 2004 mainly
due to price and product mix of approximately $20 million,
favorable currency translation of $11 million, increased volume of approximately $11 million, as well as increased retail sales of
approximately $6 million.
-39-
Operating income in the 2005 third quarter increased by $4 million, or 6.7% from the third
quarter of 2004. Operating income for the 2005 period was favorably impacted by price and product
mix of approximately $13 million, improved volume of approximately $5 million and foreign currency
translation of approximately $3 million. Negatively impacting operating income in the 2005 period
was higher raw material costs of approximately $8 million, higher conversion costs of approximately
$4 million and higher SAG costs of $5 million.
Nine Months Ended September 30, 2005 and 2004
Unit sales in the first nine months of 2005 increased 0.5 million units or 3.8% from the 2004
period. Replacement volume increased 0.2 million units or 2.0% and OE volume increased 0.3 million
units or 12.2%.
For the first nine months of 2005, net sales increased $148 million, or 15.9%, compared to
2004 mainly due to the favorable impact of currency translation of approximately $53 million.
Improved volume of approximately $24 million, price and product mix of approximately $51 million,
and increased retail sales of approximately $17 million positively impacted sales in the period.
Operating income in the first nine months of 2005 increased by $12 million, or 8.1% from the
first nine months of 2004. Operating income for 2005 was favorably impacted by positive foreign
currency translation of approximately $22 million, improved volume of approximately $11 million and
price and product mix of approximately $40 million, due primarily to price increases across the
region and growth in premium brands. Negatively impacting the 2005 period were higher raw material
costs of approximately $24 million and lower inter-segment sales volumes, which reduced operating
income by approximately $25 million. Also negatively impacting the period were increased SAG costs
of approximately $9 million, primarily related to higher advertising and marketing expenses.
Operating income in the first nine months of 2005 did not include a loss on asset sales of $1
million.
Latin American Tire
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Change |
|
Tire Units |
|
|
5.0 |
|
|
|
4.9 |
|
|
|
0.1 |
|
|
|
2.3 |
% |
|
|
15.4 |
|
|
|
14.5 |
|
|
|
0.9 |
|
|
|
5.9 |
% |
Net Sales |
|
$ |
372 |
|
|
$ |
316 |
|
|
$ |
56 |
|
|
|
17.7 |
% |
|
$ |
1,101 |
|
|
$ |
910 |
|
|
$ |
191 |
|
|
|
21.0 |
% |
Segment Operating Income |
|
|
77 |
|
|
|
64 |
|
|
|
13 |
|
|
|
20.3 |
% |
|
|
241 |
|
|
|
187 |
|
|
|
54 |
|
|
|
28.9 |
% |
Segment Operating Margin |
|
|
20.7 |
% |
|
|
20.3 |
% |
|
|
|
|
|
|
|
|
|
|
21.9 |
% |
|
|
20.5 |
% |
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 and 2004
Latin American Tire unit sales in the 2005 third quarter increased 0.1 million units or 2.3% from
the 2004 period primarily due to an increase in OE volume of 0.1 million units or 8.7%.
Net sales in the 2005 third quarter increased $56 million, or 17.7% from the 2004 period. Net
sales increased in 2005 due to favorable impact of currency translation, mainly in Brazil, of
approximately $37 million, favorable price and product mix of approximately $14 million and
increased volume of approximately $7 million.
Operating income in the third quarter 2005 increased $13 million, or 20.3% from the comparable
period in 2004. Operating income was favorably impacted by approximately $19 million related to
improved pricing and product mix, as well as approximately $2 million due to increased volumes and
approximately $24 million from the favorable impact of currency translation. Increased raw
material costs of approximately $29 million and higher conversion costs of approximately $6
million, due primarily to higher compensation costs, negatively impacted operating income compared
to the 2004 period.
Nine Months Ended September 30, 2005 and 2004
-40-
Unit sales in the first nine months 2005 increased 0.9 million units or 5.9% from the 2004 period.
OE volume increased 0.8 million units or 24.2% while replacement units increased 0.1 million units
or 0.4%.
For the first nine months of 2005 net sales increased $191 million, or 21.0% from the
comparable 2004 period. Net sales increased in 2005 due to improvements in price and product mix
of approximately $58 million, volume of approximately $49 million and the favorable impact of
currency translation, mainly in Brazil, of approximately $89 million.
Operating income in the first nine months of 2005 increased $54 million, or 28.9% from the
comparable period in 2004. Operating income was favorably impacted by approximately $79 million
related to improved pricing and product mix and the favorable impact of currency translation of
approximately $50 million. Increased raw material costs of approximately $65 million and higher
conversion costs of approximately $12 million, primarily due to higher compensation costs,
negatively impacted operating income compared to the 2004 period.
Operating income in the first nine months of 2004 did not include rationalization net charges
of $2 million.
Given Latin American Tires continued contribution to our operating income, significant
fluctuations in their sales, operating income and operating margins, may have a disproportionate
impact on our consolidated results of operations.
Asia / Pacific Tire
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Change |
|
Tire Units |
|
|
5.2 |
|
|
|
4.9 |
|
|
|
0.3 |
|
|
|
6.3 |
% |
|
|
15.1 |
|
|
|
14.6 |
|
|
|
0.5 |
|
|
|
2.9 |
% |
Net Sales |
|
$ |
356 |
|
|
$ |
319 |
|
|
$ |
37 |
|
|
|
11.6 |
% |
|
$ |
1,065 |
|
|
$ |
970 |
|
|
$ |
95 |
|
|
|
9.8 |
% |
Segment Operating Income |
|
|
24 |
|
|
|
19 |
|
|
|
5 |
|
|
|
26.3 |
% |
|
|
63 |
|
|
|
44 |
|
|
|
19 |
|
|
|
43.2 |
% |
Segment Operating Margin |
|
|
6.7 |
% |
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
5.9 |
% |
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 and 2004
Asia / Pacific Tire unit sales in the 2005 third quarter increased 0.3 million units or 6.3% from
the 2004 period. OE volume increased 0.4 million units or 29.0% while replacement units decreased
0.1 million units, or 1.7%.
Net sales in the 2005 quarter increased $37 million, or 11.6% compared to the 2004 period due
to favorable currency translation of approximately $14 million, a volume increase of approximately
$16 million and net favorable price and mix of approximately $3 million.
Operating income in the third quarter of 2005 increased $5 million, or 26.3% compared to the
2004 period due to improved price and product mix of approximately $13 million and higher volume of
approximately $4 million, offset in part by raw material cost increases of $11 million.
Nine Months Ended September 30, 2005 and 2004
Unit sales in the first nine months 2005 increased 0.5 million units or 2.9% from the 2004 period.
Replacement volume decreased 0.3 million units or 2.9% while OE volume increased 0.8 million units or
19.3%.
Net sales in the first nine months of 2005 increased $95 million, or 9.8% compared to the
first nine months of 2004 due to favorable price and product mix of approximately $30 million,
favorable currency translation of approximately $38 million and increased volume of approximately
$23 million.
Operating income in the first nine months of 2005 increased $19 million, or 43.2% compared to
the 2004 period due to improved price and product mix of approximately $36 million, driven by
price increases to offset raw material costs, and non-recurring FIN 46 related charges of
approximately $7 million in 2004, offset in part by raw material cost increases of $32 million and
higher SAG costs of $2 million. Also positively impacting income for the period were increased
volume of approximately $5 million and favorable foreign currency translation of approximately $2
million.
-41-
Operating income for the first nine months of 2005 did not include rationalization net
reversals of $2 million.
Engineered Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Change |
|
Net Sales |
|
$ |
407 |
|
|
$ |
379 |
|
|
$ |
28 |
|
|
|
7.4 |
% |
|
$ |
1,236 |
|
|
$ |
1,091 |
|
|
$ |
145 |
|
|
|
13.3 |
% |
Segment Operating Income |
|
|
27 |
|
|
|
34 |
|
|
|
(7 |
) |
|
|
(20.6) |
% |
|
|
78 |
|
|
|
89 |
|
|
|
(11 |
) |
|
|
(12.4 |
)% |
Segment Operating Margin |
|
|
6.6 |
% |
|
|
9.0 |
% |
|
|
|
|
|
|
|
|
|
|
6.3 |
% |
|
|
8.2 |
% |
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 and 2004
Engineered Products sales increased $28 million, or 7.4% in the third quarter of 2005 from 2004
levels due to improved price and product mix of approximately $19 million and the favorable effect
of currency translation of approximately $11 million.
Operating income decreased $7 million, or 20.6% in the third quarter of 2005 compared to the
2004 period due primarily to increased conversion costs of approximately $10 million, higher raw
material costs of approximately $7 million, and higher SAG expense of approximately $3 million
primarily due to higher bad debt expenses. Also negatively impacting earnings in the period were
higher freight costs of $3 million. Operating income was favorably impacted by improved volume of
approximately $3 million and improved price and product mix of approximately $15 million.
Operating income did not include $3 million and $23 million of rationalization net charges for
the three months ended September 30, 2005 and 2004, respectively.
Nine Months Ended September 30, 2005 and 2004
Sales increased $145 million, or 13.3% in the first nine months of 2005 from 2004 due to improved
volume of approximately $83 million, mainly in the industrial and military channels, improved price
and product mix of approximately $33 million and the favorable effect of currency translation of
approximately $30 million.
Operating income decreased $11 million, or 12.4% in the first nine months of 2005 compared to
the 2004 period due primarily to increased conversion costs of approximately $22 million, higher
raw material costs of approximately $21 million and higher SAG expense of approximately $13 million
primarily due to higher compensation, consulting and bad debt expenses. Higher product liability
expenses and freight costs aggregating $8 million also contributed to the decrease in operating
income. Operating income was favorably impacted by improved volume of approximately $35 million and
price and product mix of $16 million.
Operating income did not include rationalization net charges of $3 million and $23 million for
the nine months ended September 30, 2005 and 2004, respectively. Operating income for the first
nine months of 2004 did not include a gain on the sale of assets of $1 million.
On September 20, 2005 we announced that we are exploring the possible sale of our
Engineered Products business.
-42-
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2005, we had $1,662 million in cash and cash equivalents as well as $1,672 million
of unused availability under our various credit agreements, compared to $1,968 million and $1,116
million, respectively, at December 31, 2004. Cash and cash equivalents do not include restricted
cash. Restricted cash primarily consists of Goodyear contributions made related to the settlement
of the Entran II litigation and proceeds received pursuant to insurance settlements. In addition,
we will, from time to time, maintain balances on deposit at various financial institutions as
collateral for borrowings incurred by various subsidiaries, as well as cash deposited in support of
trade agreements and performance bonds. At September 30, 2005, cash balances totaling $215 million
were subject to such restrictions, compared to $152 million at December 31, 2004. The increase was
primarily due to a receipt of insurance settlements subject to restrictions, received in the second
quarter of 2005.
OPERATING ACTIVITIES
Cash flow
provided by operating activities was $189 million in the first nine months of 2005, an
improvement of $171 million from the comparable prior year period. The improvement was primarily
driven by net income of $279 million during the first nine months of 2005 compared to a net loss of
$10 million in the first nine months of 2004, and a favorable
net working capital change, partially offset by higher pension contributions of
$213 million.
INVESTING ACTIVITIES
Cash flow
used in investing activities of $224 million decreased by $66 million from the comparable
period, primarily due to the receipt of higher sales proceeds from
asset sales of
$132 million in the first nine months of
2005. The higher sales proceeds primarily related to the sale of Wingtack and our natural rubber
plantations. These proceeds were offset by higher capital expenditures of $92 million. 2005
capital expenditures of $370 million primarily represents spending for plant upgrades and
expansions and new tire molds. We expect full year 2005 capital expenditures to be approximately
$650 million.
FINANCING ACTIVITIES
Cash flows used in financing activities during the first nine months of 2005, was approximately
$225 million compared to $349 million of cash generated in the comparable period of 2004. The
change primarily reflects the repayment of net debt of $97 million
in 2005 compared to $485 million of net
debt issued in 2004.
Credit Sources
In aggregate, we had committed and uncommitted credit facilities of $7,544 million available at
September 30, 2005, of which $1,672 million were unused, compared to $7,295 million available at
December 31, 2004, of which $1,116 million were unused.
$400 Million
Senior Notes Offering and Repayment of 6 3/8% Euro Notes due 2005
On
June 23, 2005, we completed an offering of $400 million
aggregate principal amount of 9.00% Senior Notes due 2015 in a
transaction under Rule 144A and Regulation S of the
Securities Act of 1933. The senior notes are guaranteed by our U.S.
and Canadian subsidiaries that also guarantee our obligations under
our senior secured credit facilities. The guarantee is unsecured. The
proceeds were used to repay $200 million in borrowings under our
U.S. first lien revolving credit facility, and to replace
$190 million of the cash, that we used to pay the
$516 million principal amount of our 6 3/8% Euro Notes due 2005
at maturity on June 6, 2005. In conjunction with the debt
issuance, we paid fees of approximately $10 million, which will
be amortized over the term of the notes.
The Indenture governing the senior notes limits our ability and the
ability of certain of our subsidiaries to (i) incur additional debt
or issue redeemable preferred stock, (ii) pay dividends, or make
certain other restricted payments or investments, (iii) incur liens,
(iv) sell assets, (v) incur restrictions on the ability of our
subsidiaries to pay dividends to us, (vi) enter into affiliate
transactions, (vii) engage in sale and leaseback transactions, and
(viii) consolidate, merge, sell or otherwise dispose of all or
substantially all of our assets. These covenants are subject to
significant exceptions and qualifications. For example, if the senior
notes are assigned an investment grade rating by Moody's and S&P and
no default has occurred or is continuing, certain covenants will be
suspended.
April 8,
2005 Refinancing
As
previously reported, on April 8, 2005 we completed a refinancing
in which we replaced approximately $3.28 billion of credit
facilities with new facilities aggregating $3.65 billion. The
new facilities consist of:
|
|
|
|
|
a $1.5 billion first lien credit facility due
April 30, 2010 (consisting of a $1.0 billion revolving
facility and a $500 million deposit-funded facility); |
|
|
|
a $1.2 billion second lien term loan facility due
April 30, 2010; |
|
|
|
the Euro equivalent of approximately $650 million in credit
facilities for Goodyear Dunlop Tires Europe B.V.
(GDTE) due April 30, 2010 (consisting of
approximately $450 million in revolving facilities and
approximately $200 million in term loan
facilities); and |
|
|
|
a $300 million third lien term loan facility due
March 1, 2011. |
In connection with the refinancing, we paid down and retired the
following facilities:
|
|
|
|
|
our $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); |
|
|
|
our $650 million asset-based term loan facility, due March
2006 (this facility was fully drawn prior to the refinancing); |
|
|
|
our $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 |
|
|
|
our $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). |
In
conjunction with the refinancing, we paid fees of approximately
$57 million. In addition, we paid approximately
$20 million of termination fees associated with the replaced
facilities. We recognized approximately $47 million of expense
in the second quarter to write-off fees associated with the
refinancing, including approximately $30 million of previously
unamortized fees related to the replaced facilities. The remaining
fees will be amortized over the term of the new facilities.
$1.5 Billion First Lien Credit Facility
The $1.5 billion first lien credit facility consists of a $1.0 billion revolving facility and a
$500 million deposit-funded facility. Our obligations under these facilities are guaranteed by
most of our wholly-owned U.S. subsidiaries and by our wholly-owned Canadian subsidiary, Goodyear
Canada Inc. Our obligations under this facility and our subsidiaries obligations under the related
guarantees are secured by first priority security interests in a variety of collateral.
With respect to the deposit-funded facility, the lenders deposited the entire $500 million of
the facility in an account held by the administrative agent, and those funds are used to support
letters of credit or borrowings on a revolving basis, in each case subject to customary conditions.
The full amount of the deposit-funded facility is available for the issuance of letters of credit
or for revolving loans. As of September 30, 2005, there were $498 million of letters of credit
issued under the deposit-funded facility. There were no borrowings under the facility at
September 30, 2005.
-43-
$1.2 Billion Second Lien Term Loan Facility
Our obligations under this facility are guaranteed by most of our wholly-owned U.S. subsidiaries
and by our wholly-owned Canadian subsidiary, Goodyear Canada Inc. and are secured by second
priority security interests in the same collateral securing the $1.5 billion asset-based credit
facility. As of September 30, 2005 this facility was fully drawn.
$300 Million Third Lien Secured Term Loan Facility
Our obligations under this facility are guaranteed by most of our wholly-owned U.S. subsidiaries
and by our wholly-owned Canadian subsidiary, Goodyear Canada Inc. and are secured by third priority
security interests in the same collateral securing the $1.5 billion asset-based credit facility
(however, the facility is not secured by any of the manufacturing facilities that secure the first
and second lien facilities). As of September 30, 2005, this facility was fully drawn.
Euro Equivalent of $650 Million (505 Million) Senior Secured European Credit Facilities
These facilities consist of (i) a 195 million European revolving credit facility, (ii) an
additional 155 million German revolving credit facility, and (iii) 155 million of German term
loan facilities. We secure the U.S. facilities described above and provide unsecured guarantees to
support these facilities. GDTE and certain of its subsidiaries in the United Kingdom, Luxembourg,
France and Germany also provide guarantees. GDTEs obligations under the facilities and the
obligations of subsidiary guarantors under the related guarantees are secured by a variety of
collateral. As of September 30, 2005, there were $4 million of letters of credit issued under the
European revolving credit facility, $187 million was drawn under the German term loan facilities
and there were no borrowings under the German or European revolving credit facilities.
For a description of the collateral securing the above facilities as well as the covenants
applicable to them, please refer to Note 5, Financing Arrangements or the Liquidity and Capital
Resources section of our Quarterly Report on Form 10-Q for the period ended March 31, 2005.
Consolidated EBITDA (per Credit Agreements)
Under our primary credit facilities we are not permitted to fall below a ratio of 2.00 to 1.00 of
Consolidated EBITDA to Consolidated Interest Expense (as such terms are defined in each of the
relevant credit facilities) for any period of four consecutive fiscal quarters. In addition, our
ratio of Consolidated Net Secured Indebtedness to Consolidated EBITDA (as such terms are defined in
each of the relevant credit facilities) is not permitted to be greater than 3.50 to 1.00 at any
time.
Consolidated EBITDA is a non-GAAP financial measure that is presented not as a measure of
operating results, but rather as a measure under our debt covenants. It should not be construed as
an alternative to either (i) income from operations or (ii) cash flows from operating activities.
Our failure to comply with the financial covenants in our credit facilities could have a material
adverse effect on our liquidity and operations. Accordingly, we believe that the presentation of
Consolidated EBITDA will provide investors with information needed to assess our ability to
continue to comply with these covenants.
-44-
The following table presents the calculation of EBITDA and Consolidated EBITDA for the three
and nine month periods ended September 30, 2005 and 2004. Other companies may calculate similarly
titled measures differently than we do. Certain line items are presented as defined in the
restructured credit facilities, and do not reflect amounts as presented in the Consolidated
Statement of Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net Income (Loss) |
|
$ |
142 |
|
|
$ |
38 |
|
|
$ |
279 |
|
|
$ |
(10 |
) |
Interest Expense |
|
|
103 |
|
|
|
95 |
|
|
|
306 |
|
|
|
268 |
|
Income Tax |
|
|
71 |
|
|
|
29 |
|
|
|
223 |
|
|
|
145 |
|
Depreciation and Amortization Expense |
|
|
171 |
|
|
|
151 |
|
|
|
478 |
|
|
|
461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
487 |
|
|
|
313 |
|
|
|
1,286 |
|
|
|
864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Income) and Expense |
|
|
(35 |
) |
|
|
35 |
|
|
|
(5 |
) |
|
|
109 |
|
Minority Interest in Net Income (Loss) of Subsidiaries |
|
|
25 |
|
|
|
18 |
|
|
|
79 |
|
|
|
43 |
|
Consolidated Interest Expense Adjustment |
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
|
|
8 |
|
Rationalizations |
|
|
9 |
|
|
|
29 |
|
|
|
(4 |
) |
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated EBITDA |
|
$ |
487 |
|
|
$ |
398 |
|
|
$ |
1,359 |
|
|
$ |
1,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Foreign Credit Facilities
At September 30, 2005, we had short-term committed and uncommitted bank credit arrangements
totaling $462 million, of which $210 million were unused, compared to $339 million and $182 million
at December 31, 2004. The continued availability of these arrangements is at the discretion of the
relevant lender, and a portion of these arrangements may be terminated at any time.
International Accounts Receivable Securitization Facilities (On-Balance-Sheet)
On December 10, 2004, GDTE and certain of its subsidiaries entered into a new five-year
pan-European accounts receivable securitization facility. The facility initially provided 165
million (approximately $225 million) of funding. The facility was subsequently expanded to 275
million (approximately $331 million) and is subject to customary annual renewal of back-up
liquidity lines.
As of September 30, 2005, the amount outstanding and fully utilized under this program was
$331 million compared to $225 million as of December 31, 2004.
In addition to the pan-European accounts receivable securitization facility discussed above,
SPT and other subsidiaries in Australia have accounts receivable programs totaling $58 million and
$63 million at September 30, 2005 and December 31, 2004, respectively.
International Accounts Receivable Securitization Facilities (Off-Balance-Sheet)
Various other international subsidiaries have also established accounts receivable continuous sales
programs. At September 30, 2005 and December 31, 2004, proceeds available to these subsidiaries
from the sale of certain of their receivables totaled $5 million. These subsidiaries retain
servicing responsibilities.
Registration Obligations
We are a party to three registration rights agreements in connection with our private placement of
$350 million of convertible notes in July 2004, $650 million of senior secured notes in March 2004,
and $400 million of senior notes in June 2005.
-45-
The registration rights agreement for the convertible notes requires us to pay additional
interest to investors if we fail to file a registration statement to register the convertible notes
by November 7, 2004, or if such registration statement is not declared effective by the SEC by
December 31, 2004. The additional interest to investors is at a rate of 0.25% per year for the
first 90 days and 0.50% per year thereafter. Although we filed a registration statement on Form
S-1 for the convertible notes on August 29, 2005, we will continue to pay additional interest until
such time as the registration statement is declared effective. As of September 30, 2005, the
additional interest associated with the convertible notes was 0.50%.
The registration rights agreement for the $650 million of senior secured notes issued in March
2004, requires us to pay additional interest to investors if a registered exchange offer for the
notes is not completed by December 7, 2004. Although we filed a registration statement on Form S-4
on October 11, 2005 for the purpose of registering an exchange offer for the senior secured notes,
we will continue to pay additional interest until the exchange offer is completed. The additional
interest to investors is at a rate of 1.00% per year for the first 90 days, increasing in
increments of 0.25% every 90 days thereafter, to a maximum of 2.00% per year. If the rate of
additional interest payable reaches 2.00% per year then the interest rate for the secured notes
will be permanently increased by 0.25% per annum after the exchange offer is completed. As of
September 30, 2005, the additional interest associated with the senior secured notes was 1.75%.
The registration rights agreement for the $400 million of senior notes issued in June 2005,
requires us to pay additional interest to investors if an exchange offer is not completed by March
20, 2006. The annual interest rate borne by the notes will be increased by 0.25% per annum and an
additional 0.25% per annum every 90 days thereafter, up to a maximum additional cash interest of
1.00% per annum, until the exchange offer is completed, the registration statement is declared
effective, or the notes become freely tradable under the Securities Act. On October 11, 2005, we
filed a registration statement on Form S-4 for the purpose of registering an exchange offer for the
notes.
Credit Ratings
Our credit ratings as of the date of this filing are presented below:
|
|
|
|
|
|
|
|
|
|
|
S&P |
|
|
Moodys |
|
$1.5 Billion First Lien Credit Facility |
|
|
BB |
|
|
|
Ba3 |
|
$1.2 Billion Second Lien Term Loan Facility |
|
|
B+ |
|
|
|
B2 |
|
$300 Million Third Lien Secured Term Loan
Facility |
|
|
B- |
|
|
|
B3 |
|
European Facilities |
|
|
B+ |
|
|
|
B1 |
|
$650 Million Senior Secured Notes due 2011 |
|
|
B- |
|
|
|
B3 |
|
Corporate Rating (implied) |
|
|
B+ |
|
|
|
B1 |
|
Senior Unsecured Debt |
|
|
B- |
|
|
|
|
|
Outlook |
|
|
Stable |
|
|
|
Stable |
|
Although we do not request ratings from Fitch, the rating agency rates our secured debt
facilities (ranging from B+ to B- depending on facility) and our unsecured debt (CCC+).
As a result of these ratings and other related events, we believe that our access to capital
markets may be limited. Unless our debt credit ratings and operating performance improve, our
access to the credit markets in the future may be limited. Moreover, a reduction in our credit
ratings would further increase the cost of any financing initiatives we may pursue.
A rating reflects only the view of a rating agency, and is not a recommendation to buy, sell
or hold securities. Any rating can be revised upward or downward at any time by a rating agency if
such rating agency decides that circumstances warrant such a change.
Potential Future Financings
In addition to our previous financing activities, we plan to undertake additional financing actions
in the capital markets in order to ensure that our future liquidity requirements are addressed.
These actions may include the issuance of additional equity.
-46-
Because of our debt ratings, operating performance over the past few years and other factors,
access to the capital markets cannot be assured. Our ongoing ability to access the capital markets
is also dependent on the degree of success we have implementing our North American Tire turnaround
strategy. Successful implementation of the turnaround strategy is also crucial to ensuring that we
have sufficient cash flow from operations to meet our obligations. While we have made progress in
implementing the turnaround strategy, there is no assurance that our progress will continue, or
that we will be able to sustain any future progress to a degree sufficient to maintain access to
capital markets and meet liquidity requirements. As a result, failure to complete the turnaround
strategy successfully could have a material adverse effect on our financial position, results of
operations and liquidity.
Future liquidity requirements also may make it necessary for us to incur additional debt.
However, a substantial portion of our assets is 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, unless we sustain or improve our financial
performance, our ability to raise unsecured debt may be limited.
Dividends
On February 4, 2003, we announced that we eliminated our quarterly cash dividend. The dividend
reduction was decided on by the Board of Directors in order to conserve cash. Under the credit
facilities entered into in the April 8, 2005 refinancing, we are permitted to pay dividends on our
common stock of $10 million or less in any fiscal year. This limit increases to $50 million in any
fiscal year if Moodys senior (implied) rating and Standard & Poors (S&P) corporate rating improve
to Ba2 or better and BB or better, respectively.
Asset Dispositions
On August 9, 2005, we announced the completion of the sale of our natural rubber plantations in
Indonesia at a purchase price of approximately $62 million, subject to post-closing adjustments.
On September 1, 2005, we announced that we had completed the sale of our Wingtack adhesive resins
business to Sartomer Company, Inc. We received approximately $55 million in cash proceeds and
retained approximately $10 million in working capital in connection with the Wingtack sale. In
addition, the sales agreement provides for a three-year earnout whereby we may receive additional
consideration ($5 million per year, $15 million aggregate) for the sale based on future operating
performance of the business. We are also awaiting the necessary approvals to complete the sale of
assets of our North American farm tire business to Titan International for approximately $100
million. In connection with the transaction, we expect to record a
loss of approximately $70 million on the sale,
primarily related to pension and retiree medical costs. Also, on September 20, 2005, we announced
that we are exploring the possible sale of our Engineered Products business. Engineered Products
manufactures and markets engineered rubber products for industrial, military, consumer and
transportation original equipment end-users.
-47-
COMMITMENTS & CONTINGENCIES
The following table presents, at September 30, 2005, our obligations and commitments to make
future payments under contracts and contingent commitments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period as of September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 |
|
(In millions) |
|
Total |
|
|
1 Year |
|
|
2 Years |
|
|
3 Years |
|
|
4 Years |
|
|
5 Years |
|
|
Years |
|
Long Term Debt (1) |
|
$ |
5,370 |
|
|
$ |
497 |
|
|
$ |
518 |
|
|
$ |
100 |
|
|
$ |
4 |
|
|
$ |
1,720 |
|
|
$ |
2,531 |
|
Capital Lease
Obligations (2) |
|
|
111 |
|
|
|
12 |
|
|
|
13 |
|
|
|
13 |
|
|
|
12 |
|
|
|
12 |
|
|
|
49 |
|
Interest Payments (3) |
|
|
2,465 |
|
|
|
385 |
|
|
|
345 |
|
|
|
328 |
|
|
|
325 |
|
|
|
274 |
|
|
|
808 |
|
Operating Leases (4) |
|
|
1,468 |
|
|
|
321 |
|
|
|
258 |
|
|
|
193 |
|
|
|
144 |
|
|
|
108 |
|
|
|
444 |
|
Pension Benefits (5) |
|
|
1,215 |
|
|
|
490 |
|
|
|
725 |
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(5 |
) |
Other Postretirement
Benefits (6) |
|
|
2,284 |
|
|
|
264 |
|
|
|
262 |
|
|
|
252 |
|
|
|
243 |
|
|
|
233 |
|
|
|
1,030 |
|
Workers Compensation (7) |
|
|
345 |
|
|
|
66 |
|
|
|
49 |
|
|
|
36 |
|
|
|
25 |
|
|
|
19 |
|
|
|
150 |
|
Binding Commitments (8) |
|
|
1,160 |
|
|
|
930 |
|
|
|
41 |
|
|
|
27 |
|
|
|
25 |
|
|
|
20 |
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash
Obligations |
|
$ |
14,418 |
|
|
$ |
2,965 |
|
|
$ |
2,211 |
|
|
$ |
949 |
|
|
$ |
778 |
|
|
$ |
2,386 |
|
|
$ |
5,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long term debt payments include notes payable and reflect long term debt maturities as of
September 30, 2005. |
|
(2) |
|
The present value of capital lease obligations is $78 million. |
|
(3) |
|
These amounts represent future interest payments related to our existing debt obligations as
of September 30, 2005 based on fixed and variable interest rates specified in the associated
debt agreements. Payments related to variable debt are based on the six-month LIBOR rate at
September 30, 2005 plus the specified margin in the associated debt agreements for each period
presented. The amounts provided relate only to existing debt obligations and do not assume
the refinancing or replacement of such debt. |
|
(4) |
|
Operating leases do not include minimum sublease rentals of $50 million, $42 million, $34
million, $24 million, $16 million and $27 million in each of the periods above, respectively,
for a total of $193 million. Payments, net of minimum sublease
rentals total $1,275 million.
The present value of the net operating lease payments is $899 million. The operating leases relate
to, among other things, computers and office equipment, real estate and miscellaneous other
assets. No asset is leased from any related party. |
|
(5) |
|
The obligation related to pension benefits is actuarially determined and is reflective of
obligations as of December 31, 2004. Although subject to change, the amounts set forth in the
table represent our estimated funding requirements in 2005 and 2006 for domestic defined
benefit pension plans under ERISA, and approximately $82 million of expected contributions to
our funded international pension plans in 2005. The expected contributions are based upon a
number of assumptions, including: |
|
|
|
an ERISA liability interest rate of 6.10% for 2005 and 5.08% using a Treasury bond basis
for 2006, and |
|
|
|
plan asset returns of 8.5% in 2005. |
|
|
|
At the end of 2005, the current interest rate relief measures
used for domestic pension funding
calculations expire. If current measures are extended, we estimate that required
contributions in 2006 will be in the range of $550 million to $600 million. If new
legislation is not enacted, the interest rate used for 2006 and beyond will be based upon
a 30-year U.S. Treasury bond rate, as calculated and published by the U.S. government as a
proxy for the rate that could be attained if 30-year Treasury bonds were currently being
issued. Using an estimate of these rates would result in estimated required contributions
during 2006 in the range of $700 million to $750 million. The estimated amount set forth
in the table for 2006 represents the midpoint of this range. We likely will be subject to
additional statutory minimum funding requirements after 2006. We are not able to
reasonably estimate our future required contributions beyond 2006 due to uncertainties
regarding significant assumptions |
-48-
|
|
|
|
|
involved in estimating future required contributions to our defined benefit pension plans,
including: |
|
|
|
interest rate levels, |
|
|
|
the amount and timing of asset returns, |
|
|
|
what, if any, changes may occur in legislation, and |
|
|
|
how contributions in excess of the minimum requirements could impact the amounts and
timing of future contributions. |
|
|
|
We expect the amount of contributions required in years beyond 2006 will be substantial. |
|
(6) |
|
The payments presented above are expected payments for the next 10 years. The payments for
other postretirement benefits reflect the estimated benefit payments of the plans using the
provisions currently in effect. We reserve the right to modify or terminate the plans at any
time. The obligation related to other postretirement benefits is actuarially determined on an
annual basis. The estimated payments have been reduced to reflect the provisions of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003. |
|
(7) |
|
The payments for workers compensation are based upon recent historical payment patterns. The
present value of anticipated payments for workers compensation is $258 million. |
|
(8) |
|
Binding commitments are for our normal operations and are related primarily to obligations
to acquire land, buildings and equipment. In addition, binding commitments include obligations
to purchase raw materials through short-term supply contracts at fixed prices or at a formula price
related to market prices or negotiated prices. |
Additional other long-term liabilities include items such as income taxes, general and product
liabilities, environmental liabilities and miscellaneous other long-term liabilities. These other
liabilities are not contractual obligations by nature. We cannot, with any degree of reliability,
determine the years in which these liabilities might ultimately be settled. Accordingly, these
other long-term liabilities are not included in the above table.
In addition, the following contingent contractual obligations, the amounts of which cannot be
estimated, are not included in the table above:
|
|
|
The terms and conditions of our global alliance with Sumitomo as set forth in the
Umbrella Agreement between Sumitomo and us provide for certain minority exit rights
available to Sumitomo commencing in 2009. In addition, the occurrence of certain other
events enumerated in the Umbrella Agreement, including certain bankruptcy events or changes
in control of us, could trigger a right of Sumitomo to require us to purchase these
interests immediately. Sumitomos exit rights, in the unlikely event of exercise, could
require us to make a substantial payment to acquire Sumitomos interest in the alliance. |
|
|
|
|
Pursuant to an agreement entered into in 2001, Ansell Ltd. (Ansell) has the right,
during the period beginning August 13, 2005 and ending August 14, 2006, to require us to
purchase Ansells 50% interest in SPT. The purchase price is a formula price based on the
earnings of SPT, subject to various adjustments. If Ansell does not exercise its right, we
may require Ansell to sell its interest to us during the 180 days following the expiration
of Ansells right at a price established using the same formula. |
|
|
|
|
Pursuant to an agreement entered into in 2001, we shall purchase minimum amounts of
carbon black from a certain supplier from January 1, 2003 through December 31, 2006, at
agreed upon base prices that are subject to quarterly adjustments for changes in raw
material costs and natural gas costs and a one-time adjustment for other manufacturing
costs. |
We do not engage in the trading of commodity contracts or any related derivative contracts. We
generally purchase raw materials and energy through short-term, intermediate and long term supply
contracts at fixed prices or at formula prices related to market prices or negotiated prices. We
will, however, from time to time, enter into contracts to hedge our energy costs.
-49-
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement
involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or
a contingent interest in transferred assets, (3) an obligation under certain derivative instruments
or (4) any obligation arising out of a material variable interest in an unconsolidated entity that
provides financing, liquidity, market risk or credit risk support to a company, or that engages in
leasing, hedging or research and development arrangements with the company. The following table
presents off-balance sheet arrangements at September 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration per Period |
|
(In millions) |
|
Total |
|
|
1st Year |
|
|
2nd Year |
|
|
3rd Year |
|
|
4th Year |
|
|
5th Year |
|
|
Thereafter |
|
Customer Financing Guarantees |
|
$ |
6 |
|
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
2 |
|
Affiliate Financing Guarantees |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Guarantees |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements |
|
$ |
9 |
|
|
$ |
5 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently Issued Accounting Standards
The FASB has issued Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123R). Under the provisions of SFAS 123R, companies are required to
measure the cost of employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exception). That cost will be recognized
over the period during which an employee is required to provide service in exchange for the award,
usually the vesting period. On April 14, 2005, the Securities and Exchange Commission (SEC)
approved a delay to the effective date of SFAS 123R. Under the new SEC rule, SFAS 123R is
effective for annual periods that begin after June 15, 2005. SFAS 123R applies to all awards
granted, modified, repurchased or cancelled by us after December 31, 2005 and to unvested options
at the date of adoption. We do not expect the adoption of SFAS 123R to have a material impact on
our results of operations, financial position or liquidity.
The FASB has issued Statement of Financial Accounting Standards No. 151, Inventory Costs an
amendment of ARB No. 43, Chapter 4 (SFAS 151). The provisions of SFAS 151 are intended to
eliminate narrow differences between the existing accounting standards of the FASB and the
International Accounting Standards Board (IASB) related to inventory costs, in particular, the
treatment of abnormal idle facility expense, freight, handling costs and spoilage. SFAS 151
requires that these costs be recognized as current period charges regardless of the extent to which
they are considered abnormal. The provisions of SFAS 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We are currently assessing the
potential impact of implementing SFAS 151 on the consolidated financial statements.
FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47)
an interpretation of FASB Statement No. 143, Accounting for Asset Retirement Obligations (SFAS
143), clarifies the term conditional asset retirement obligation as used in SFAS 143. The term
refers to a legal obligation to perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event that may or may not be within the control of
the entity. The obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or)
method of settlement may be conditional on a future event. Accordingly, an entity is required to
recognize a liability for the fair value of a conditional asset retirement obligation if the fair
value of the liability can be reasonably estimated. The fair value of a liability for the
conditional asset retirement obligation should be recognized when incurred generally upon
acquisition, construction, or development and (or) through the normal operation of the asset.
Uncertainty about the timing and (or) method of settlement of a conditional asset retirement
obligation should be factored into the measurement of the liability when sufficient information
exists. FIN 47 is effective for fiscal years ending after December 15, 2005. Retrospective
application for interim financial information is permitted but is not required. We are currently
evaluating the impact of FIN 47 on the consolidated financial statements and will implement this
new standard for the year ended December 31, 2005, in accordance with its requirements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS
No. 154 is a replacement of APB No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on
the accounting for and reporting of accounting changes and error corrections. It establishes
retrospective application as the required method for reporting a change in accounting principle.
SFAS No. 154 provides guidance for determining whether retrospective
-50-
application of a change in accounting principle is impracticable and for reporting a change
when retrospective application is impracticable. The reporting of a correction of an error by
restating previously issued financial statements is also addressed by SFAS No. 154. SFAS No. 154
is effective for accounting changes and corrections of errors made in fiscal years beginning after
December 31, 2005. The Company will adopt this pronouncement beginning in fiscal year 2006.
In June 2005, the FASB staff issued a FASB Staff Position 143-1 Accounting for Electronic
Equipment Waste Obligations (FSP 143-1) to address the accounting for obligations associated with
the Directive 2002/96/EC on Waste Electrical and Electronic Equipment (the Directive) adopted by
the European Union. The Directive effectively obligates a commercial user to incur costs
associated with the retirement of a specified asset that qualifies as historical waste equipment.
The commercial user should apply the provisions of SFAS 143 and the related FIN 47 discussed above.
FSP 143-1 shall be applied the later of the first reporting period ending after June 8, 2005 or the
date of the adoption of the law by the applicable EU-member country. We adopted the FSP at certain
of our European operations where applicable legislation was adopted. The impact of the adoption on
the consolidated financial statements was not significant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
We continuously monitor our fixed and floating rate debt mix. Within defined limitations, we
manage the mix using refinancing and unleveraged interest rate swaps. We will enter into fixed and
floating interest rate swaps to alter our exposure to the impact of changing interest rates on
consolidated results of operations and future cash outflows for interest payments. Fixed rate
swaps are used to reduce our risk of increased interest costs during periods of rising interest
rates, and are normally designated as cash flow hedges. Floating rate swaps are used to convert
the fixed rates of long-term borrowings into short-term variable rates, and are normally designated
as fair value hedges. Interest rate swap contracts are thus used by us to separate interest rate
risk management from debt funding decisions. At September 30, 2005 and December 31, 2004, the
interest rates on 49% of our debt were fixed by either the nature of the obligation or through the
interest rate swap contracts. We also have from time to time entered into interest rate lock
contracts to hedge the risk-free component of anticipated debt issuances. As a result of credit
ratings our access to these instruments may be limited.
The following tables present information at September 30:
Interest Rate Swap Contracts
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
2005 |
|
|
2004 |
|
Fixed Rate Contracts: |
|
|
|
|
|
|
|
|
Notional principal amount |
|
$ |
|
|
|
$ |
15 |
|
Pay fixed rate |
|
|
|
% |
|
|
5.94 |
% |
Receive variable Australian Bank Bill Rate |
|
|
|
|
|
|
5.50 |
|
|
|
|
|
|
|
|
|
|
Average years to maturity |
|
|
|
|
|
|
0.8 |
|
Fair value liability |
|
|
|
|
|
|
|
|
Pro forma fair value liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating Rate Contracts: |
|
|
|
|
|
|
|
|
Notional principal amount |
|
$ |
200 |
|
|
$ |
200 |
|
Pay variable LIBOR |
|
|
5.22 |
% |
|
|
2.92 |
% |
Receive fixed rate |
|
|
6.63 |
|
|
|
6.63 |
|
|
|
|
|
|
|
|
|
|
Average years to maturity |
|
|
1.2 |
|
|
|
2.2 |
|
Fair value asset (liability) |
|
$ |
2 |
|
|
$ |
10 |
|
Pro forma fair value asset (liability) |
|
|
1 |
|
|
|
10 |
|
The pro forma fair value assumes a 10% increase in variable market interest rates at September 30,
2005 and 2004, and reflects the estimated fair value of contracts outstanding at that date under
that assumption.
Weighted average interest rate swap contract information follows:
-51-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(Dollars in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Fixed Rate Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional principal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
107 |
|
Pay fixed rate |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
5.00 |
% |
Receive variable LIBOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional principal (AUD 20 million) |
|
$ |
|
|
|
$ |
14 |
|
|
$ |
|
|
|
$ |
15 |
|
Pay fixed rate |
|
|
|
% |
|
|
5.94 |
% |
|
|
|
% |
|
|
5.94 |
% |
Receive variable Australian Bank Bill Rate |
|
|
|
|
|
|
5.48 |
|
|
|
|
|
|
|
5.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating Rate Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional principal |
|
$ |
200 |
|
|
$ |
200 |
|
|
$ |
200 |
|
|
$ |
200 |
|
Pay variable LIBOR |
|
|
5.22 |
% |
|
|
3.26 |
% |
|
|
4.68 |
% |
|
|
3.06 |
% |
Receive fixed rate |
|
|
6.63 |
|
|
|
6.63 |
|
|
|
6.63 |
|
|
|
6.63 |
|
The following table presents fixed rate debt information at September 30:
(In millions)
|
|
|
|
|
|
|
|
|
Fixed Rate
Debt: |
|
2005 |
|
|
2004 |
|
Fair value liability |
|
$ |
2,984 |
|
|
$ |
3,021 |
|
Carrying amount liability |
|
|
2,874 |
|
|
|
2,981 |
|
Pro forma fair value liability |
|
|
2,888 |
|
|
|
2,866 |
|
The pro forma information assumes a 100 basis point increase in market interest rates at September
30, 2005 and 2004, and reflects the estimated fair value of fixed rate debt outstanding at that
date under that assumption.
The sensitivity to changes in interest rates of our interest rate contracts and fixed rate
debt was determined with a valuation model based upon net modified duration analysis. The model
assumes a parallel shift in the yield curve. The precision of the model decreases as the assumed
change in interest rates increases.
Foreign Currency Exchange Risk
We enter into foreign currency contracts in order to reduce the impact of changes in foreign
exchange rates on consolidated results of operations and future foreign currency-denominated cash
flows. These contracts reduce exposure to currency movements affecting existing foreign
currency-denominated assets, liabilities, firm commitments and forecasted transactions resulting
primarily from trade receivables and payables, equipment acquisitions, intercompany loans and
royalty agreements and forecasted purchases and sales. In addition, the principal and interest on
our Swiss franc bond due 2006 is hedged by currency swap agreements.
Contracts hedging the Swiss franc bond are designated as a cash flow hedge. Contracts
hedging short-term trade receivables and payables normally have no hedging designation.
-52-
The following table presents foreign currency contract information at September 30:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2005 |
|
|
2004 |
|
Fair value asset (liability) |
|
$ |
43 |
|
|
$ |
71 |
|
Pro forma change in fair value |
|
|
(19 |
) |
|
|
(32 |
) |
Contract maturities |
|
|
10/05-10/19 |
|
|
|
10/04-10/19 |
|
We were not a party to any foreign currency option contracts at September 30, 2005 or 2004.
The pro forma change in fair value assumes a 10% change in foreign exchange rates at September
30 of each year, and reflects the estimated change in the fair value of contracts outstanding at
that date under that assumption. The sensitivity of our foreign currency positions to changes in
exchange rates was determined using current market pricing models.
Fair values are recognized on the Consolidated Balance Sheet at September 30 as follows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2005 |
|
|
2004 |
|
Fair value asset (liability): |
|
|
|
|
|
|
|
|
Swiss franc swap-current |
|
$ |
42 |
|
|
$ |
(1 |
) |
Swiss franc swap-long term |
|
|
|
|
|
|
46 |
|
Euro swaps-current |
|
|
|
|
|
|
33 |
|
Euro swaps-long term |
|
|
|
|
|
|
|
|
Other-current asset |
|
|
6 |
|
|
|
3 |
|
Other-current liability |
|
|
(5 |
) |
|
|
(10 |
) |
-53-
FORWARD-LOOKING INFORMATION SAFE HARBOR STATEMENT
Certain information set forth herein (other than historical data and information) may constitute
forward-looking statements regarding events and trends that may affect our future operating results
and financial position. The words estimate, expect, intend and project, as well as other
words or expressions of similar meaning, are intended to identify forward-looking statements. You
are cautioned not to place undue reliance on forward-looking statements, which speak only as of the
date of this Form 10-Q. Such statements are based on current expectations and assumptions, are
inherently uncertain, are subject to risks and should be viewed with caution. Actual results and
experience may differ materially from the forward-looking statements as a result of many factors,
including:
|
|
|
we have not yet completed the implementation of our plan to improve our
internal controls and, as described in Item 9A Controls and Procedures in our
Annual Report on Form 10-K for the year ended December 31, 2004 and Item 4 of Part I of
this Quarterly Report on Form 10-Q as of September 30, 2005, we have two material
weaknesses in our internal controls. If these material weaknesses are not remediated
or otherwise mitigated they could result in material misstatements in our financial
statements in the future, which would result in additional restatements or impact our
ability to timely file our financial statements in the future; |
|
|
|
|
pending litigation relating to our restatement could have a material adverse effect on our financial condition; |
|
|
|
|
an ongoing SEC investigation regarding our accounting restatement could materially adversely affect us; |
|
|
|
|
we experienced significant losses in 2001, 2002 and 2003. Although we recorded
net income in 2004 and the first nine months of 2005, we cannot provide assurance that
we will be able to achieve or sustain future profitability. Our future profitability
is dependent upon, among other things, our ability to continue to successfully implement our turnaround
strategy for our North American Tire segment; |
|
|
|
|
we face significant global competition, increasingly from lower cost
manufacturers, and our market share could decline; |
|
|
|
|
our secured credit facilities limit the amount of capital expenditures that we
may make; |
|
|
|
|
higher raw material and energy costs may materially adversely affect our
operating results and financial condition; |
|
|
|
|
continued pricing pressures from vehicle manufacturers may materially adversely
affect our business; |
|
|
|
|
our financial position, results of operations and liquidity could be materially
adversely affected if we experience a labor strike, work stoppage or other similar
difficulty; |
|
|
|
|
our U.S. pension plans are significantly underfunded and our required
contributions to those plans are expected to increase. Proposed legislation affecting
pension plan funding could result in the need for additional cash payments by us into
our U.S. pension plans and increase the insurance premiums we pay to the Pension
Benefit Guaranty Corporation; |
|
|
|
|
our long-term ability to meet current obligations and to repay maturing
indebtedness, is dependent on our ability to access capital markets in the future and
to improve our operating results; |
|
|
|
|
we have a substantial amount of debt, which could restrict our growth, place us
at a competitive disadvantage or otherwise materially adversely affect our financial
health; |
|
|
|
|
any failure to be in compliance with any material provision or covenant of our
secured credit facilities and the indenture governing our senior secured notes could
have a material adverse effect on our liquidity and our operations; |
-54-
|
|
|
our variable rate indebtedness subjects us to interest rate risk, which could
cause our debt service obligations to increase significantly; |
|
|
|
|
if healthcare costs continue to escalate, our financial results may be materially adversely affected; |
|
|
|
|
we may incur significant costs in connection with product liability and other tort claims; |
|
|
|
|
our reserves for product liability and other tort claims and our recorded
insurance assets are subject to various uncertainties, the outcome of which may result
in our actual costs being significantly higher than the amounts recorded; |
|
|
|
|
we may be required to deposit cash collateral to support an appeal bond if we
are subject to a significant adverse judgment, which may have a material adverse effect
on our liquidity; |
|
|
|
|
we are subject to extensive government regulations that may materially
adversely affect our ongoing operating results; |
|
|
|
|
potential changes in foreign laws and regulations could prevent repatriation
of future earnings to our parent company in the United States; |
|
|
|
|
our international operations have certain risks that may materially adversely
affect our operating results; |
|
|
|
|
we may be impacted by economic and supply disruptions associated with
global events including war, acts of terror, civil obstructions and natural disasters; |
|
|
|
|
the terms and conditions of our global alliance with Sumitomo Rubber
Industries, Ltd. (SRI) provide for certain exit rights available to SRI in 2009 or
thereafter, upon the occurrence of certain events, which could require us to make a
substantial payment to acquire SRIs interest in certain of our joint venture alliances
(which include much of our operations in Europe); |
|
|
|
|
we have foreign currency translation and transaction risks that may materially
adversely affect our operating results; and |
|
|
|
|
if we are unable to attract and retain key personnel, our business could be
materially adversely affected. |
It is not possible to foresee or identify all such factors. We will not revise or update any
forward-looking statement or disclose any facts, events or circumstances that occur after
the date hereof that may affect the accuracy of any forward-looking statement.
-55-
ITEM 4. CONTROLS AND PROCEDURES.
Material Weaknesses Identified in Managements Report on Internal Controls over Financial
Reporting.
Beginning with the year ended December 31, 2004, Section 404 of the Sarbanes-Oxley Act of 2002
(Section 404) requires our senior management to provide an annual report on internal controls
over financial reporting. This report must contain (i) a statement of managements responsibility
for establishing and maintaining adequate internal controls over our financial reporting, (ii) a
statement identifying the framework used by management to conduct the required evaluation of the
effectiveness of internal controls over financial reporting, (iii) managements assessment of the
effectiveness of internal controls over financial reporting as of the end of the most recent fiscal
year, including a statement as to whether or not our internal controls over financial reporting are
effective, and (iv) a statement that our independent auditors have issued an attestation report on
managements assessment of internal controls over financial reporting. In seeking to achieve
compliance with Section 404 within the prescribed period, management formed an internal control
steering committee, engaged outside consultants and adopted a detailed program to assess the
adequacy of internal controls over financial reporting, create or supplement documentation of
controls over financial reporting, remediate control weaknesses that may be identified, validate
through testing that the controls are functioning as documented and implement a continuous
reporting and improvement process for internal controls over financial reporting.
Managements report on internal controls over financial reporting as of December 31, 2004, was
included in our 2004 Form 10-K. In the report, management concluded that there were two material
weaknesses in our internal control over financial reporting. The management report described
these two material weaknesses as follows:
Account Reconciliations. At December 31, 2004, we did not maintain effective control
over the preparation and review of account reconciliations of certain general ledger
accounts. This control deficiency primarily related to account reconciliations of goodwill,
deferred charges, fixed assets, compensation and benefits, accounts payable-trade and the
accounts of a retail subsidiary in France. This control deficiency resulted in misstatements
that were part of the restatement of our consolidated financial statements for 2003, 2002
and 2001, for each of the quarters for the year ended December 31, 2003 and for the first,
second and third quarters for the year ended December 31, 2004. Additionally, this control
deficiency could result in a material misstatement to annual or interim consolidated
financial statements that would not be prevented or detected. Accordingly, management has
determined that this control deficiency constitutes a material weakness.
Segregation of Duties. At December 31, 2004, we did not maintain effective controls
over the segregation of duties at the application control level in certain information
technology environments as a result of not restricting the access of certain individuals in
both information technology and finance. These deficiencies existed in varying degrees in
certain business segments within the revenue and purchasing processes. This control
deficiency did not result in any adjustments to the annual or interim consolidated financial
statements; however, this control deficiency could result in a material misstatement to
annual or interim consolidated financial statements that would not be prevented or detected.
Accordingly, management has determined that this control deficiency constitutes a material
weakness.
These material weaknesses continued to exist as of September 30, 2005.
Material Changes in Internal Control
During the third quarter of 2005 we implemented the following changes to address the material
weakness in internal control over financial reporting related to segregation of duties:
|
|
We identified potential segregation of duty conflicts for each business process and conducted a global assessment
of existing employee system access rights relative to such potential conflicts. |
|
|
|
Where practicable, we removed certain employee access rights where such rights were considered to represent
potential conflicts. |
|
|
|
Where removal of access rights was not practicable or able to be performed on a timely basis, we identified
existing controls, or put in place new controls, to address the segregation of duties conflicts. |
|
|
|
We conducted testing of such controls, or new controls, to assess whether such controls were operating effectively. |
-56-
During the fourth quarter we have continued, and will continue to remediate and retest
deficiencies identified in the testing of controls referenced above.
In addition, we continued to conduct remedial activities previously described in prior filings
with respect to both material weaknesses. Management continues to monitor the effectiveness of the
remedial measures implemented in order to determine whether the account reconciliation and
segregation of duties material weaknesses can be considered to be appropriately remediated.
Disclosure Controls and Procedures
In connection with the preparation of this Form 10-Q, our senior management, with the participation
of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of September 30, 2005. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were ineffective, as of September 30, 2005 to provide reasonable
assurance that information required to be disclosed by us in reports that we file or submit under
the Securities Exchange Act of 1934 (the Act), is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms and to ensure that information
required to be disclosed by us in the reports that we file or submit under the Act is accumulated
and communicated to management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely decisions regarding
required disclosures. This conclusion is based primarily on the fact that we had material
weaknesses in our internal control over financial reporting as of such date. Through the date of
the filing of this Form 10-Q, we have employed various remedial measures, including those described
above, to address the deficiencies in our disclosure controls that existed on September 30, 2005
and have taken additional measures to verify the information in our financial statements. We
believe that, as a result of these remedial and other measures, this Form 10-Q properly reports all
information required to be included in such report. It should be noted that no system of controls
can provide complete assurance of achieving our objectives, and future events may impact the
effectiveness of a system of controls.
Changes in Internal Control over Financial Reporting
Other than the measures discussed in Material Changes in Internal Control above, which materially
affected our internal control over financial reporting, there have been no changes in our internal
control over financial reporting during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
-57-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Heatway Litigation and Amended Settlement
As previously reported, we have entered into an amended settlement agreement intended to
address claims arising out of a number of Federal, state and Canadian actions filed against us
involving a rubber hose product, Entran II, that we supplied from 1989 to 1993 to Chiles Power
Supply, Inc. (d/b/a Heatway Systems), a designer and seller of hydronic radiant heating systems in
the United States. A description of our financial obligations and the extent to which certain
claims are covered under the amended settlement is set forth in Item 3 of Part I of our 2004 Form
10-K.
Prior to entering into the amended settlement we received adverse judgements in a number of
actions, including Goodyear v. Vista Resorts, Inc., an action involving five homesites. In 2002,
the jury in Vista rendered a verdict in favor of the plaintiff real estate developer in the
aggregate amount of approximately $5.9 million, which damages were trebled under the Colorado
Consumer Protection Act. The total damages awarded were approximately $22.7 million. The state
court of appeals subsequently upheld the verdict in 2004 and we petitioned the Supreme
Court of Colorado to review the matter. On August 8, 2005, the Supreme Court of Colorado denied
our petition for writ of certiorari in Vista. Following the
Supreme Courts action, we paid the plaintiffs $25.6 million in satisfaction of the judgment, which included an amount
for interest on the judgment. The liability incurred in Vista was not covered by the amended
settlement.
Asbestos Litigation
As reported in the Form 10-Q for the quarter ended June 30, 2005, we were one of numerous
defendants in legal proceedings in certain state and Federal courts involving approximately 129,100
claimants relating to their alleged exposure to materials containing asbestos in products allegedly
manufactured by us or asbestos materials present in our facilities. During the third quarter of
2005, approximately 1,400 new claims were filed against us and approximately 4,700 were settled or
dismissed. The amount expended on asbestos defense and claim resolution by Goodyear and its
insurance carriers during the third quarter and first nine months of
2005 were $5 million and $18
million, respectively. At September 30, 2005, there were approximately 125,800 claims pending
against us relating to alleged asbestos-related diseases allegedly resulting from exposure to
asbestos in products manufactured by us or in materials containing asbestos present in our
facilities. The plaintiffs are seeking unspecified actual and punitive damages and other relief.
See Note 7 for additional information on Asbestos Litigation and related insurance settlements.
SEC Investigation
As previously disclosed, the SEC is conducting a formal investigation into the facts and
circumstances related to the restatement we announced in October 2003. In August 2005, we received
a Wells Notice from the staff of the SEC. The Wells Notice states that the SEC staff intends to
recommend that a civil or administrative enforcement action be brought against us for alleged
violations of provisions of the Securities and Exchange Act of 1934 relating to the maintenance of
books, records and internal accounting controls, the establishment of disclosure controls and
procedures, and the periodic SEC filing requirements, as set forth in sections 13(a) and
13(b)(2)(A) and (B) of the Act and SEC Rules 12b-20, 13a-13 and 13a-15(a). The alleged violations
relate to the account reconciliation matters giving rise to our initial decision to restate in
October 2003. Wells Notices have also been issued to a former chief financial officer and a former
chief accounting officer of ours. We continue to cooperate with the SEC in connection with this
matter.
Reference is made to Item 3 of Part I of the 2004 Form 10-K and Item 1 of Part II of the Form
10-Qs for the quarterly periods ended March 31, 2005 and June 30, 2005 for additional discussion of
legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information with respect to repurchases of common stock made by us
during the three months ended September 30, 2005. These shares were delivered to us by employees
as payment for the exercise price of stock options as well as the withholding taxes due upon the
exercise of the stock options.
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|
|
|
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|
|
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|
|
|
|
|
|
|
|
Total Number of |
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Maximum Number of |
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|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Shares that May Yet |
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
Be Purchased Under |
|
|
Total Number of |
|
Average Price Paid |
|
Announced Plans or |
|
the Plans or |
Period |
|
Shares Purchased |
|
Per Share |
|
Programs |
|
Programs |
7/1/05-7/31/05 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/1/05-8/31/05 |
|
|
2,115 |
|
|
|
17.65 |
|
|
|
|
|
|
|
|
|
9/1/05-9/30/05 |
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|
1,492 |
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|
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15.48 |
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|
|
|
|
|
|
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Total |
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|
3,607 |
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|
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16.75 |
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|
-58-
ITEM 6. EXHIBITS.
See the Index of Exhibits at page E-1, which is by specific reference incorporated into and
made a part of this Quarterly Report on
Form 10-Q.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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THE GOODYEAR TIRE & RUBBER COMPANY |
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(Registrant) |
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Date:
October 27, 2005 |
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/s/ Thomas A. Connell |
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Thomas A. Connell, Vice President
and Controller
(Signing on behalf of Registrant as a duly authorized
officer of Registrant and signing as the principal
accounting officer of Registrant.) |
-59-
THE GOODYEAR TIRE & RUBBER COMPANY
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2005
INDEX
OF EXHIBITS
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Exhibit |
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Table |
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Item |
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Exhibit |
No. |
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Description of Exhibit |
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Number |
3
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Articles of Incorporation and By-Laws |
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(a)
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Certificate of Amended Articles of Incorporation of The Goodyear Tire &
Rubber Company, dated December 20, 1954, and Certificate of Amendment to
Amended Articles of Incorporation of The Goodyear Tire & Rubber Company,
dated April 6, 1993, and Certificate of Amendment to Amended Articles of
Incorporation of the Company dated June 4, 1996, three documents comprising
the Companys Articles of Incorporation, as amended (incorporated by
reference, filed as Exhibit 4.1 to the Companys Registration Statement on
Form S-8, File No. 333-126566). |
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(b)
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Code of Regulations of The Goodyear Tire & Rubber Company, adopted November
22, 1955, and amended April 5, 1965, April 7, 1980, April 6, 1981, April 13,
1987, May 7, 2003 and April 26, 2005 (incorporated by reference, filed as
Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the period
ended March 31, 2005, File No. 1-1927). |
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4
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Instruments Defining the Rights of Security Holders, Including Indentures |
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(a)
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Specimen nondenominational Certificate for shares of the Common Stock,
Without Par Value, of the Company; EquiServe Trust Company, transfer agent
and registrar (incorporated by reference, filed as Exhibit 4.4 to the
Companys Registration Statement on Form S-3, File No. 333-90786). |
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(b)
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Indenture, dated as of March 15, 1996, between the Company and JPMorgan Chase
Bank, as Trustee, as supplemented on December 3, 1996, March 11, 1998, and
March 17, 1998 (incorporated by reference, filed as Exhibit 4.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 1998,
File No. 1-1927). |
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(c)
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Indenture, dated as of March 1, 1999, between the Company and JPMorgan Chase
Bank, as Trustee, as supplemented on March 14, 2000 in respect of
$300,000,000 principal amount of the Companys 8.50% Notes due 2007
(incorporated by reference, filed as Exhibit 4.1, to the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000, File No. 1-1927),
and as further supplemented on August 15, 2001, in respect of the Companys
$650,000,000 principal amount of the Companys 7.857% Notes due 2011
(incorporated by reference, filed as Exhibit 4.3 to the Companys Quarterly
Report on Form 10-Q for the period ended September 30, 2001, File No.
1-1927). |
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(d)
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First Lien Credit Agreement, dated as of April 8, 2005, among Goodyear, the
lenders party thereto, the issuing banks party thereto, Citicorp USA, Inc. as
Syndication Agent, Bank of America, N.A., as Documentation Agent, the CIT
Group/Business Credit, Inc., as Documentation Agent, General Electric Capital
Corporation, as Documentation Agent, GMAC Commercial Finance LLC, as
Documentation Agent and JPMorgan Chase Bank, N.A., as Administrative Agent
and Collateral Agent (incorporated by reference, filed as Exhibit 4.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2005,
File No. 1-1927). |
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(e)
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Second Lien Credit Agreement, dated as of April 8, 2005, among Goodyear, the
lenders party thereto, Deutsche Bank Trust Company Americas, as Collateral
Agent, and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated
by reference, filed as Exhibit 4.2 to the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2005, File No. 1-1927). |
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(f)
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Third Lien Credit Agreement, dated as of April 8, 2005, among Goodyear, the
subsidiary guarantors listed on the signature pages thereto, the lenders
party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent
(incorporated by reference, filed as Exhibit 4.3 to the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 2005, File No. 1-1927). |
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(g)
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Amended and Restated Term Loan and Revolving Credit Agreement, dated as of |
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E-1
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Exhibit |
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Table |
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Item |
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Exhibit |
No. |
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Description of Exhibit |
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Number |
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April 8, 2005, among Goodyear, Goodyear Dunlop Tires Europe B.V., Goodyear
Dunlop Tires Germany GmbH, Goodyear GmbH & Co. KG, Dunlop GmbH & Co. KG,
Goodyear Luxembourg Tires S.A., the lenders party thereto, J.P. Morgan Europe
Limited, as Administrative Agent, and JPMorgan Chase Bank, N.A., as
Collateral Agent, including Amendment and Restatement Agreement, dated as of
April 8, 2005 (incorporated by reference, filed as Exhibit 4.4 to the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2005,
File No. 1-1927). |
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(h)
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First Lien Guarantee and Collateral Agreement, dated as of April 8, 2005,
among Goodyear, the Subsidiaries of Goodyear identified therein and JPMorgan
Chase Bank, N.A., as Collateral Agent (incorporated by reference, filed as
Exhibit 4.5 to the Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005, File No. 1-1927). |
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(i)
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Second Lien Guarantee and Collateral Agreement, dated as of April 8, 2005,
among Goodyear, the Subsidiaries of Goodyear identified therein and Deutsche
Bank Trust Company Americas, as Collateral Agent (incorporated by reference,
filed as Exhibit 4.6 to the Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005, File No. 1-1927). |
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(j)
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Master Guarantee and Collateral Agreement, dated as of March 31, 2003, as
Amended and Restated as of February 20, 2004, and as further Amended and
Restated as of April 8, 2005, among Goodyear, Goodyear Dunlop Tires Europe
B.V., the other subsidiaries of Goodyear identified therein and JPMorgan
Chase Bank, N.A., as Collateral Agent, including Amendment and Restatement
Agreement, dated as of April 8, 2005 (incorporated by reference, filed as
Exhibit 4.7 to the Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005, File No. 1-1927). |
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(k)
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Lenders Lien Subordination and Intercreditor Agreement, dated as of April 8,
2005, among JPMorgan Chase Bank, N.A. as collateral agent for the First Lien
Secured Parties referred to therein, Deutsche Bank Trust Company Americas, as
collateral agent for the Second Lien Secured Parties referred to therein,
Goodyear, and the subsidiaries of Goodyear named therein (incorporated by
reference, filed as Exhibit 4.8 to the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2005, File No. 1-1927). |
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(l)
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Purchase Agreement, dated June 20, 2005, among Goodyear, certain subsidiaries
of Goodyear and Citigroup Global Markets Inc., as representative of the
several purchasers listed therein (incorporated by reference, filed as
Exhibit 4.1 to the Companys Current Report on Form 8-K filed June 24, 2005,
File No. 1-1927). |
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(m)
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Indenture, dated as of June 23, 2005 among Goodyear, the subsidiary
guarantors party thereto and Wells Fargo Bank, N.A., as Trustee (incorporated
by reference, filed as Exhibit 4.2 to the Companys Current Report on Form
8-K filed June 24, 2005, File No. 1-1927). |
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(n)
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Registration Rights Agreement, dated as of June 23, 2005, among Goodyear,
Citigroup Global Markets Inc., BNP Paribas Securities Corp., Credit Suisse
First Boston LLC, Goldman, Sachs & Co., J.P. Morgan Securities Inc., Calyon
Securities (USA) Inc., Deutsche Bank Securities, Inc., Natexis Bleichroeder
Inc. and KBC Financial Products USA, Inc. (incorporated by reference, filed
as Exhibit 4.3 to the Companys Current Report on Form 8-K filed June 24,
2005, File No. 1-1927). |
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(o)
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Amendment No. 2 to the General Master Purchase Agreement dated May 23, 2005
and August 26, 2005 between Ester Finance Titrisation, as Purchaser,
Eurofactor, as Agent, Calyon, as Joint Lead Arranger and as Calculation
Agent, Natexis Banques Populairies, as Joint Lead Arranger, Goodyear Dunlop
Tires Finance Europe B.V. and the Sellers listed therein (including Amended
and Restated General Master Purchase Agreement) (incorporated by reference,
filed as Exhibit 4.1 to the Companys Registration Statement on Form S-4,
File No. 333-128932). |
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(p)
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Amendment No. 2 to the Master Subordinated Deposit Agreement dated May 23,
2005 and August 26, 2005 between Eurofactor, as Agent, Calyon, as Calculation
Agent, Ester Finance Titrisation, as Purchaser, and Goodyear Dunlop Tires
Finance |
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E-2
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Exhibit |
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Table |
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Item |
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Exhibit |
No. |
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Description of Exhibit |
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Number |
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Europe B.V. (including Amended and Restated Master Subordinated
Deposit Agreement) (incorporated by reference, filed as Exhibit 4.3 to the
Companys Registration Statement on Form S-4, File No. 333-128932). |
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(q)
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Master Complementary Deposit Agreement dated December 10, 2004 between
Eurofactor, as Agent, Calyon, as Calculation Agent, Ester Finance
Titrisation, as Purchaser, and Goodyear Dunlop Tires Finance Europe B.V.
(incorporated by reference, filed as Exhibit 4.3 to Goodyears Annual Report
on Form 10-K for the year ended December 31, 2004, File No. l-1927). |
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(r)
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Indenture dated as of March 12, 2004 among Goodyear, the subsidiary
guarantors party thereto and Wells Fargo Bank, N.A., as Trustee (incorporated
by reference, filed as Exhibit 4.11 to Goodyears Annual Report on Form 10-K
for the year ended December 31, 2003, File No. 1-1927). |
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(s)
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Note Purchase Agreement dated as of March 12, 2004 among Goodyear, certain
subsidiaries of Goodyear and the investors listed therein (incorporated by
reference, filed as Exhibit 4.12 to Goodyears Annual Report on Form 10-K for
the year ended December 31, 2003, File No. 1-1927). |
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(t)
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Registration Rights Agreement dated as of March 12, 2004 among Goodyear,
certain subsidiaries of Goodyear and the investors listed therein
(incorporated by reference, filed as Exhibit 4.13 to Goodyears Annual Report
on Form 10-K for the year ended December 31, 2003, File No. 1-1927). |
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(u)
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Collateral Agreement dated as of March 12, 2004 among Goodyear, certain
subsidiaries of Goodyear and Wilmington Trust Company, as Collateral Agent
(incorporated by reference, filed as Exhibit 4.14 to Goodyears Annual Report
on Form 10-K for the year ended December 31, 2003, File No. 1-1927). |
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(v)
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Lien Subordination and Intercreditor Agreement dated as of March 12, 2004
among Goodyear, certain subsidiaries of Goodyear, JPMorgan Chase Bank and
Wilmington Trust Company (incorporated by reference, filed as Exhibit 4.15 to
Goodyears Annual Report on Form 10-K for the year ended December 31, 2003,
File No. 1-1927). |
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(w)
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Note Purchase Agreement, dated June 28, 2004, among Goodyear and the
purchasers listed therein (incorporated by reference, filed as Exhibit 4.3 to
Goodyears Form 10-Q for the quarter ended September 30, 2004, File No.
1-1927). |
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(x)
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Indenture, dated as of July 2, 2004, between Goodyear, as Company, and Wells
Fargo Bank, N.A., as Trustee (incorporated by reference, filed as Exhibit 4.4
to Goodyears Form 10-Q for the quarter ended September 30, 2004, File No.
1-1927). |
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(y)
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Registration Rights Agreement, dated as of July 2, 2004, among Goodyear,
Goldman, Sachs & Co., Deutsche Bank Securities Inc., and J.P. Morgan
Securities Inc. (incorporated by reference, filed as Exhibit 4.5 to
Goodyears Form 10-Q for the quarter ended September 30, 2004, File No.
1-1927). |
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In accordance with Item 601(b)(4)(iii) of Regulation S-K, agreements and
instruments defining the rights of holders of long-term debt of the Company
pursuant to which the amount of securities authorized thereunder does not
exceed 10% of the consolidated assets of the Company and its subsidiaries are
not filed herewith. The Company hereby agrees to furnish a copy of any such
agreement or instrument to the Securities and Exchange Commission upon
request. |
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10
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Material Contracts |
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(a)
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Amendment No. 3 to the Shareholders Agreement for the Europe JVC, dated
August 30, 2005, among the Company, Goodyear S.A., a French Corporation,
Goodyear S.A., a Luxembourg corporation, Goodyear Canada Inc. and Sumitomo
Rubber Industries, Ltd. (incorporated by reference, filed as Exhibit 10.1 to
Goodyears Registration Statement on Form S-4, File No. 333-128932). |
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(b)
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Forms of Stock Option Grant
Agreements for options and SARs granted under our 2005 performance
plan, Part I, Agreement for Incentive
Stock Options, Part II, Agreement for Non-Qualified Stock Options,
and Part III, Agreement for Non-Qualified Stock Options with tandem Stock
Appreciation Rights. |
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10.1 |
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E-3
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Exhibit |
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Table |
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Item |
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Exhibit |
No. |
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Description of Exhibit |
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Number |
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12
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Statement re Computation of Ratios |
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(a)
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Statement setting forth the Computation of Ratio of Earnings to Fixed Charges.
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12 |
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31
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302 Certifications |
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(a)
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Certificate of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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31.1 |
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(b)
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Certificate of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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31.2 |
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32
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906 Certifications |
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(a)
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Certificate of Chief Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.1 |
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E-4