THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $228 million at March 31, 2006 and $248 million at December 31, 2005.
On October 19, 2004, the amended settlement received court approval. As a result, we have made cash contributions to a settlement fund totaling $100 million in 2004 and 2005, and will make additional contributions totaling $50 million between 2006 and 2008. In addition to these annual payments, we contributed approximately $174 million received from insurance contributions to a 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 have been opted-out of the amended settlement. One action is 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, we are appealing three actions in which we have received adverse judgments. Any liability related to these actions 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
-18-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Tax Matters
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize tax benefits to the extent that it is probable that our positions will be sustained when challenged by the taxing authorities. As of March 31, 2006, we had not recognized tax benefits of approximately $161 million ($120 million net of minority interest in net income of subsidiaries) relating to the reorganization of certain legal entities in 2001, which is the subject of a tax examination that could be resolved, in whole or in part, in 2006. Pursuant to the reorganization, our tax payments have been reduced by approximately $72 million through March 31, 2006. Should the ultimate outcome be unfavorable, we would be required to make a cash payment, with interest, for all tax benefits claimed as of that date.
Union Matters
In 2006 we will be working with the United Steelworkers (“USW”) to extend or renegotiate the master collective bargaining agreement that covers approximately 13,600 employees in the United States and expires in July 2006. The outcome of these collective bargaining negotiations cannot presently be determined. If we are unable to reach an agreement with the USW regarding the terms of a collective bargaining agreement, we may be subject to work interruptions or stoppages that could have a material adverse impact on our consolidated results of operations, financial position and liquidity.
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 Tire and Wheel Assembly (“T&WA”). We guarantee an industrial revenue bond obligation of T&WA in the amount of $5 million at March 31, 2006 and December 31, 2005. The guarantee is unsecured. At December 31, 2005, Goodyear, Goodyear Australia Limited, a wholly-owned subsidiary of Goodyear, and certain subsidiaries of Goodyear Australia Limited guaranteed SPT’s obligations under credit facilities in the amount of $108 million, which expire at various times through 2007. The maximum potential amount of payments totaled $42 million. The guarantees are unsecured. The South Pacific Tyres (SPT) credit facilities are secured by certain subsidiaries of SPT. As of December 31, 2005, the carrying amount of the secured assets of these certain subsidiaries was $199 million, consisting primarily of accounts receivable, inventory and fixed assets. In January 2006, we acquired the remaining 50% ownership interest in our SPT joint venture from Ansell Limited. See Note 11, Asset Acquisition for a discussion of the acquisition of the remaining interest in SPT in January 2006.
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 March 31, 2006, we had affiliate and customer guarantees outstanding under which the maximum potential amount of payments totaled $2 million and $6 million, respectively. At December 31, 2005, we had affiliate and customer guarantees outstanding under which the maximum potential amount of payments totaled $2 million and $8 million, respectively. The affiliate and customer guarantees expire at various times through 2008 and 2019, respectively.
-19-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 31, 2006, 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.
-20-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. BUSINESS SEGMENTS
| | | | | | | | | |
| | | Three Months Ended March 31, | |
| (In millions) | | 2006 | | | 2005 | |
Sales: | | | | | | | | |
| North American Tire | | $ | 2,239 | | | $ | 2,138 | |
| European Union Tire | | | 1,134 | | | | 1,198 | |
| Eastern Europe, Middle East and Africa Tire | | | 339 | | | | 340 | |
| Latin American Tire | | | 396 | | | | 348 | |
| Asia Pacific Tire | | | 353 | | | | 341 | |
| | | | | | | |
Total Tires | | | 4,461 | | | | 4,365 | |
| Engineered Products | | | 395 | | | | 402 | |
| | | | | | | |
Net Sales | | $ | 4,856 | | | $ | 4,767 | |
| | | | | | | |
| | | | | | | | | |
Segment Operating Income: | | | | | | | | |
| North American Tire | | $ | 43 | | | $ | 11 | |
| European Union Tire | | | 72 | | | | 107 | |
| Eastern Europe, Middle East and Africa Tire | | | 43 | | | | 47 | |
| Latin American Tire | | | 102 | | | | 87 | |
| Asia Pacific Tire | | | 22 | | | | 19 | |
| | | | | | | |
Total Tires | | | 282 | | | | 271 | |
| Engineered Products | | | 29 | | | | 21 | |
| | | | | | | |
Total Segment Operating Income | | | 311 | | | | 292 | |
| Rationalizations and asset sales | | | (39 | ) | | | 21 | |
| Interest expense | | | (103 | ) | | | (102 | ) |
| Foreign currency exchange | | | (1 | ) | | | (6 | ) |
| Minority interest in net income of subsidiaries | | | (12 | ) | | | (21 | ) |
| Financing fees and financial instruments | | | (10 | ) | | | (26 | ) |
| General and product liability — discontinued products | | | (5 | ) | | | (12 | ) |
| Latin America legal matter | | | 15 | | | | — | |
| Interest Income | | | 20 | | | | 14 | |
| Other | | | (25 | ) | | | (25 | ) |
| | | | | | | |
Income before Income Taxes | | $ | 151 | | | $ | 135 | |
| | | | | | | |
A favorable legal matter was resolved in Latin American Tire during the first quarter of 2006. As a result of the resolution, we recognized $15 million of income.
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 March 31, | |
| (In millions) | | 2006 | | | 2005 | |
Rationalizations: | | | | | | | | |
| North American Tire | | $ | — | | | $ | (4 | ) |
| European Union Tire | | | 26 | | | | (2 | ) |
| Eastern Europe, Middle East and Africa Tire | | | 6 | | | | — | |
| Asia Pacific Tire | | | 7 | | | | (2 | ) |
| Engineered Products | | | 3 | | | | — | |
| Corporate | | | (1 | ) | | | — | |
| | | | | | | |
Total Rationalizations | | $ | 41 | | | $ | (8 | ) |
| | | | | | | |
| | | | | | | | | |
Other (Income) and Expense:(1) | | | | | | | | |
| North American Tire | | $ | (1 | ) | | $ | (6 | ) |
| European Union Tire | | | (1 | ) | | | (5 | ) |
| Corporate | | | (22 | ) | | | 20 | |
| | | | | | | |
Total Other (Income) and Expense | | $ | (24 | ) | | $ | 9 | |
| | | | | | | |
| | |
| (1) | | Excludes equity in (earnings) losses of affiliates and foreign currency exchange. |
-21-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10. CONSOLIDATING FINANCIAL INFORMATION
Certain of our subsidiaries have guaranteed Goodyear’s 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 (collectively the “Notes”). The following presents the condensed consolidating financial information separately for:
| (i) | | The Goodyear Tire & Rubber Company (“Goodyear” or the “Parent Company”), the issuer of the guaranteed obligations; |
| |
| (ii) | | Guarantor subsidiaries, on a combined basis, as specified in the Indenture related to Goodyear’s obligations under the Notes; |
| |
| (iii) | | Non-guarantor subsidiaries, on a combined basis; |
| |
| (iv) | | Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions, (b) eliminate the investments in our subsidiaries, and (c) record consolidating entries; and |
| |
| (v) | | The Parent Company and all 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.
-22-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | | Consolidating Balance Sheet | |
| | | March 31, 2006 | |
| | | | | | | | | | | Non- | | | Consolidating | | | | |
| | | Parent | | | Guarantor | | | Guarantor | | | Entries and | | | | |
| (In millions) | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | | | | | | | | |
| Cash and Cash Equivalents | | $ | 669 | | | $ | 26 | | | $ | 890 | | | $ | — | | | $ | 1,585 | |
| Restricted Cash | | | 223 | | | | — | | | | 13 | | | | — | | | | 236 | |
| Accounts and Notes Receivable | | | 1,226 | | | | 221 | | | | 2,005 | | | | — | | | | 3,452 | |
| Accounts and Notes Receivables from Affiliates | | | — | | | | 650 | | | | — | | | | (650 | ) | | | — | |
| Inventories | | | 1,404 | | | | 319 | | | | 1,473 | | | | (53 | ) | | | 3,143 | |
| Prepaid Expenses and Other Current Assets | | | 108 | | | | 10 | | | | 150 | | | | 8 | | | | 276 | |
| | | | | | | | | | | | | | | | |
Total Current Assets | | | 3,630 | | | | 1,226 | | | | 4,531 | | | | (695 | ) | | | 8,692 | |
| | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | — | | | | 32 | | | | 445 | | | | 187 | | | | 664 | |
| Intangible Assets | | | 134 | | | | 33 | | | | 67 | | | | (65 | ) | | | 169 | |
| Deferred Income Tax | | | — | | | | 35 | | | | 67 | | | | — | | | | 102 | |
| Deferred Pension Costs and Other Assets | | | 614 | | | | 43 | | | | 210 | | | | — | | | | 867 | |
| Investments in Subsidiaries | | | 4,155 | | | | 481 | | | | 3,201 | | | | (7,837 | ) | | | — | |
| Properties and Plants | | | 1,990 | | | | 290 | | | | 2,898 | | | | 26 | | | | 5,204 | |
| | | | | | | | | | | | | | | | |
Total Assets | | $ | 10,523 | | | $ | 2,140 | | | $ | 11,419 | | | $ | (8,384 | ) | | $ | 15,698 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Accounts Payable-Trade | | $ | 583 | | | $ | 75 | | | $ | 1,325 | | | $ | — | | | $ | 1,983 | |
| Accounts Payable to Affiliates | | | 603 | | | | — | | | | 47 | | | | (650 | ) | | | — | |
| Compensation and Benefits | | | 802 | | | | 52 | | | | 310 | | | | — | | | | 1,164 | |
| Other Current Liabilities | | | 401 | | | | 13 | | | | 206 | | | | — | | | | 620 | |
| United States and Foreign Taxes | | | 68 | | | | 16 | | | | 307 | | | | — | | | | 391 | |
| Notes Payable | | | — | | | | — | | | | 220 | | | | — | | | | 220 | |
| Long Term Debt and Capital Leases due within one year | | | 518 | | | | — | | | | 50 | | | | — | | | | 568 | |
| | | | | | | | | | | | | | | | |
Total Current Liabilities | | | 2,975 | | | | 156 | | | | 2,465 | | | | (650 | ) | | | 4,946 | |
| | | | | | | | | | | | | | | | | | | | | |
| Long Term Debt and Capital Leases | | | 3,817 | | | | 1 | | | | 648 | | | | — | | | | 4,466 | |
| Compensation and Benefits | | | 3,132 | | | | 197 | | | | 1,209 | | | | — | | | | 4,538 | |
| Deferred and Other Noncurrent Income Taxes | | | 86 | | | | 5 | | | | 237 | | | | 8 | | | | 336 | |
| Other Long Term Liabilities | | | 320 | | | | 8 | | | | 86 | | | | — | | | | 414 | |
| Minority Equity in Subsidiaries | | | — | | | | — | | | | 615 | | | | 190 | | | | 805 | |
| | | | | | | | | | | | | | | | |
Total Liabilities | | | 10,330 | | | | 367 | | | | 5,260 | | | | (452 | ) | | | 15,505 | |
| | | | | | | | | | | | | | | | | | | | | |
| Commitments and Contingent Liabilities | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Shareholders’ Equity : | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | | — | | | | — | | | | — | | | | — | | | | — | |
| Common Stock | | | 177 | | | | 618 | | | | 4,479 | | | | (5,097 | ) | | | 177 | |
| Capital Surplus | | | 1,407 | | | | 5 | | | | 869 | | | | (874 | ) | | | 1,407 | |
| Retained Earnings | | | 1,372 | | | | 1,500 | | | | 2,206 | | | | (3,706 | ) | | | 1,372 | |
| Accumulated Other Comprehensive Income (Loss) | | | (2,763 | ) | | | (350 | ) | | | (1,395 | ) | | | 1,745 | | | | (2,763 | ) |
| | | | | | | | | | | | | | | | |
Total Shareholders’ Equity | | | 193 | | | | 1,773 | | | | 6,159 | | | | (7,932 | ) | | | 193 | |
| | | | | | | | | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 10,523 | | | $ | 2,140 | | | $ | 11,419 | | | $ | (8,384 | ) | | $ | 15,698 | |
| | | | | | | | | | | | | | | | |
-23-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | | Consolidating Balance Sheet | |
| | | December 31, 2005 | |
| | | | | | | | | | | Non- | | | Consolidating | | | | |
| | | Parent | | | Guarantor | | | Guarantor | | | Entries and | | | | |
| (In millions) | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | | | | | | | | |
| Cash and Cash Equivalents | | $ | 1,066 | | | $ | 35 | | | $ | 1,060 | | | $ | — | | | $ | 2,161 | |
| Restricted Cash | | | 228 | | | | — | | | | 13 | | | | — | | | | 241 | |
| Accounts and Notes Receivable | | | 1,137 | | | | 238 | | | | 1,783 | | | | — | | | | 3,158 | |
| Accounts and Notes Receivable from Affiliates | | | — | | | | 667 | | | | — | | | | (667 | ) | | | — | |
| Inventories | | | 1,290 | | | | 270 | | | | 1,340 | | | | (38 | ) | | | 2,862 | |
| Prepaid Expenses and Other Current Assets | | | 107 | | | | 11 | | | | 125 | | | | 8 | | | | 251 | |
| | | | | | | | | | | | | | | | |
Total Current Assets | | | 3,828 | | | | 1,221 | | | | 4,321 | | | | (697 | ) | | | 8,673 | |
| | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | — | | | | 32 | | | | 409 | | | | 196 | | | | 637 | |
| Other Intangible Assets | | | 100 | | | | 35 | | | | 58 | | | | (34 | ) | | | 159 | |
| Deferred Income Tax | | | — | | | | 35 | | | | 67 | | | | — | | | | 102 | |
| Deferred Pension Costs and Other Assets | | | 622 | | | | 43 | | | | 195 | | | | — | | | | 860 | |
| Investments in Subsidiaries | | | 4,011 | | | | 469 | | | | 3,195 | | | | (7,675 | ) | | | — | |
| Properties and Plants | | | 2,018 | | | | 296 | | | | 2,845 | | | | 20 | | | | 5,179 | |
| | | | | | | | | | | | | | | | |
Total Assets | | $ | 10,579 | | | $ | 2,131 | | | $ | 11,090 | | | $ | (8,190 | ) | | $ | 15,610 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Accounts Payable-Trade | | $ | 595 | | | $ | 73 | | | $ | 1,277 | | | $ | — | | | $ | 1,945 | |
| Accounts Payable to Affiliates | | | 595 | | | | — | | | | 72 | | | | (667 | ) | | | — | |
| Compensation and Benefits | | | 785 | | | | 50 | | | | 286 | | | | — | | | | 1,121 | |
| Other Current Liabilities | | | 483 | | | | 11 | | | | 177 | | | | — | | | | 671 | |
| United States and Foreign Taxes | | | 65 | | | | 31 | | | | 297 | | | | — | | | | 393 | |
| Notes Payable | | | — | | | | — | | | | 216 | | | | — | | | | 216 | |
| Long Term Debt and Capital Leases due within one year | | | 338 | | | | — | | | | 110 | | | | — | | | | 448 | |
| | | | | | | | | | | | | | | | |
Total Current Liabilities | | | 2,861 | | | | 165 | | | | 2,435 | | | | (667 | ) | | | 4,794 | |
| | | | | | | | | | | | | | | | | | | | | |
| Long Term Debt and Capital Leases | | | 4,118 | | | | 1 | | | | 623 | | | | — | | | | 4,742 | |
| Compensation and Benefits | | | 3,117 | | | | 200 | | | | 1,163 | | | | — | | | | 4,480 | |
| Deferred and Other Noncurrent Income Taxes | | | 86 | | | | 5 | | | | 206 | | | | 7 | | | | 304 | |
| Other Long Term Liabilities | | | 324 | | | | 9 | | | | 93 | | | | — | | | | 426 | |
| Minority Equity in Subsidiaries | | | — | | | | — | | | | 606 | | | | 185 | | | | 791 | |
| | | | | | | | | | | | | | | | |
Total Liabilities | | | 10,506 | | | | 380 | | | | 5,126 | | | | (475 | ) | | | 15,537 | |
| | | | | | | | | | | | | | | | | | | | | |
| Commitments and Contingent Liabilities | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Shareholders’ Equity : | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | | — | | | | — | | | | — | | | | — | | | | — | |
| Common Stock | | | 177 | | | | 617 | | | | 4,299 | | | | (4,916 | ) | | | 177 | |
| Capital Surplus | | | 1,398 | | | | 5 | | | | 869 | | | | (874 | ) | | | 1,398 | |
| Retained Earnings | | | 1,298 | | | | 1,483 | | | | 2,226 | | | | (3,709 | ) | | | 1,298 | |
| Accumulated Other Comprehensive Income (Loss) | | | (2,800 | ) | | | (354 | ) | | | (1,430 | ) | | | 1,784 | | | | (2,800 | ) |
| | | | | | | | | | | | | | | | |
Total Shareholders’ Equity | | | 73 | | | | 1,751 | | | | 5,964 | | | | (7,715 | ) | | | 73 | |
| | | | | | | | | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 10,579 | | | $ | 2,131 | | | $ | 11,090 | | | $ | (8,190 | ) | | $ | 15,610 | |
| | | | | | | | | | | | | | | | |
-24-
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | | Consolidating Statement of Income | |
| | | Three Months Ended March 31, 2006 | |
| | | | | | | | | | | Non- | | | Consolidating | | | | |
| | | Parent | | | Guarantor | | | Guarantor | | | Entries and | | | | |
| (In millions) | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
NET SALES | | $ | 2,301 | | | $ | 560 | | | $ | 4,105 | | | $ | (2,110 | ) | | $ | 4,856 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cost of Goods Sold | | | 2,043 | | | | 486 | | | | 3,498 | | | | (2,128 | ) | | | 3,899 | |
| Selling, Administrative and General Expense | | | 260 | | | | 48 | | | | 370 | | | | — | | | | 678 | |
| Rationalizations | | | 1 | | | | — | | | | 40 | | | | — | | | | 41 | |
| Interest Expense | | | 94 | | | | 9 | | | | 43 | | | | (43 | ) | | | 103 | |
| Other (Income) and Expense | | | (58 | ) | | | — | | | | (60 | ) | | | 90 | | | | (28 | ) |
| Minority Interest in Net Income of Subsidiaries | | | — | | | | — | | | | 12 | | | | — | | | | 12 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income before Income Taxes and Equity in (Earnings) Loss of Subsidiaries | | | (39 | ) | | | 17 | | | | 202 | | | | (29 | ) | | | 151 | |
| United States and Foreign Taxes on Income (Loss) | | | 2 | | | | 6 | | | | 71 | | | | (2 | ) | | | 77 | |
| Equity in (Earnings) Loss of Subsidiaries | | | (115 | ) | | | (6 | ) | | | — | | | | 121 | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
NET INCOME (LOSS) | | $ | 74 | | | $ | 17 | | | $ | 131 | | | $ | (148 | ) | | $ | 74 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, 2005 | |
| | | | | | | | | | | Non- | | | Consolidating | | | | |
| | | Parent | | | Guarantor | | | Guarantor | | | Entries and | | | | |
| (In millions) | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
NET SALES | | $ | 2,274 | | | $ | 529 | | | $ | 4,230 | | | $ | (2,266 | ) | | $ | 4,767 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cost of Goods Sold | | | 2,044 | | | | 464 | | | | 3,606 | | | | (2,295 | ) | | | 3,819 | |
| Selling, Administrative and General Expense | | | 270 | | | | 48 | | | | 374 | | | | (6 | ) | | | 686 | |
| Rationalizations | | | (3 | ) | | | — | | | | (5 | ) | | | — | | | | (8 | ) |
| Interest Expense | | | 89 | | | | 9 | | | | 56 | | | | (52 | ) | | | 102 | |
| Other (Income) and Expense | | | (43 | ) | | | (1 | ) | | | (42 | ) | | | 98 | | | | 12 | |
| Minority Interest in Net Income of Subsidiaries | | | — | | | | — | | | | 21 | | | | — | | | | 21 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income before Income Taxes and Equity in (Earnings) Loss of Subsidiaries | | | (83 | ) | | | 9 | | | | 220 | | | | (11 | ) | | | 135 | |
| United States and Foreign Taxes on Income (Loss) | | | (7 | ) | | | 4 | | | | 70 | | | | — | | | | 67 | |
| Equity in (Earnings) Loss of Subsidiaries | | | (144 | ) | | | (15 | ) | | | — | | | | 159 | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
NET INCOME (LOSS) | | $ | 68 | | | $ | 20 | | | $ | 150 | | | $ | (170 | ) | | $ | 68 | |
| | | | | | | | | | | | | | | | |
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | | Condensed Consolidating Statement of Cash Flows | |
| | | Three Months Ended March 31, 2006 | |
| | | | | | | | | | | 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 | | $ | (216 | ) | | $ | (6 | ) | | $ | (65 | ) | | $ | (15 | ) | | $ | (302 | ) |
| | | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | | (47 | ) | | | (3 | ) | | | (63 | ) | | | (3 | ) | | | (116 | ) |
| Asset dispositions | | | 1 | | | | — | | | | 2 | | | | — | | | | 3 | |
| Asset acquisitions | | | (39 | ) | | | — | | | | (2 | ) | | | — | | | | (41 | ) |
| Decrease in restricted cash | | | 5 | | | | — | | | | — | | | | — | | | | 5 | |
| Other transactions | | | — | | | | — | | | | (2 | ) | | | 2 | | | | — | |
| | | | | | | | | | | | | | | | |
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES | | | (80 | ) | | | (3 | ) | | | (65 | ) | | | (1 | ) | | | (149 | ) |
| | | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Short term debt incurred | | | — | | | | — | | | | 41 | | | | — | | | | 41 | |
| Short term debt paid | | | (22 | ) | | | (1 | ) | | | (37 | ) | | | — | | | | (60 | ) |
| Long term debt incurred | | | — | | | | — | | | | 15 | | | | — | | | | 15 | |
| Long term debt paid | | | (82 | ) | | | — | | | | (68 | ) | | | — | | | | (150 | ) |
| Other transactions | | | 3 | | | | — | | | | (16 | ) | | | 16 | | | | 3 | |
| | | | | | | | | | | | | | | | |
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES | | | (101 | ) | | | (1 | ) | | | (65 | ) | | | 16 | | | | (151 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | — | | | | 1 | | | | 25 | | | | — | | | | 26 | |
| | | | | | | | | | | | | | | | |
Net Change in Cash and Cash Equivalents | | | (397 | ) | | | (9 | ) | | | (170 | ) | | | — | | | | (576 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Cash and Cash Equivalents at Beginning of the Period | | | 1,066 | | | | 35 | | | | 1,060 | | | | — | | | | 2,161 | |
| | | | | | | | | | | | | | | | |
Cash and Cash Equivalents at End of the Period | | $ | 669 | | | $ | 26 | | | $ | 890 | | | $ | — | | | $ | 1,585 | |
| | | | | | | | | | | | | | | | |
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | | Condensed Consolidating Statement of Cash Flows | |
| | | Three Months Ended March 31, 2005 | |
| | | | | | | | | | | 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 | | $ | (110 | ) | | $ | (40 | ) | | $ | 10 | | | $ | (30 | ) | | $ | (170 | ) |
| | | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | | (35 | ) | | | (2 | ) | | | (52 | ) | | | (3 | ) | | | (92 | ) |
| Asset dispositions | | | 16 | | | | 1 | | | | 6 | | | | (7 | ) | | | 16 | |
| Asset acquisitions | | | — | | | | — | | | | (7 | ) | | | 7 | | | | — | |
| Increase in restricted cash | | | (9 | ) | | | — | | | | (2 | ) | | | — | | | | (11 | ) |
| Other transactions | | | 4 | | | | — | | | | (108 | ) | | | 111 | | | | 7 | |
| | | | | | | | | | | | | | | | |
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES | | | (24 | ) | | | (1 | ) | | | (163 | ) | | | 108 | | | | (80 | ) |
| | | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Short term debt incurred | | | 1 | | | | — | | | | 71 | | | | — | | | | 72 | |
| Short term debt paid | | | — | | | | — | | | | (34 | ) | | | — | | | | (34 | ) |
| Long term debt incurred | | | — | | | | 2 | | | | 24 | | | | — | | | | 26 | |
| Long term debt paid | | | (19 | ) | | | — | | | | (2 | ) | | | — | | | | (21 | ) |
| Other transactions | | | 2 | | | | 5 | | | | 73 | | | | (78 | ) | | | 2 | |
| | | | | | | | | | | | | | | | |
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES | | | (16 | ) | | | 7 | | | | 132 | | | | (78 | ) | | | 45 | |
| | | | | | | | | | | | | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | — | | | | (1 | ) | | | (29 | ) | | | — | | | | (30 | ) |
| | | | | | | | | | | | | | | | |
Net Change in Cash and Cash Equivalents | | | (150 | ) | | | (35 | ) | | | (50 | ) | | | — | | | | (235 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Cash and Cash Equivalents at Beginning of the Period | | | 1,004 | | | | 50 | | | | 901 | | | | — | | | | 1,955 | |
| | | | | | | | | | | | | | | | |
Cash and Cash Equivalents at End of the Period | | $ | 854 | | | $ | 15 | | | $ | 851 | | | $ | — | | | $ | 1,720 | |
| | | | | | | | | | | | | | | | |
NOTE 11. ASSET ACQUISITION
In January 2006, we acquired the remaining 50% ownership interest in our South Pacific Tyres (SPT) joint venture from Ansell Limited. SPT is the largest tire manufacturer in Australia and New Zealand. In connection with the acquisition we paid Ansell approximately $40 million and repaid approximately $50 million of outstanding loans from Ansell to SPT. As a result of the acquisition, we have recorded goodwill of approximately $16 million. The purchase price has been allocated on a preliminary basis, and we are in the process of completing the asset and pension valuations. We expect to finalize the allocation by the end of the second quarter of 2006. SPT has approximately 4,000 associates. SPT’s results have been consolidated in our financial statements since January 1, 2004. Assuming that the acquisition of the remaining 50% acquisition occurred on January 1, 2005, the proforma impact to the Statement of Income is insignificant.
NOTE 12. SUBSEQUENT EVENTS
On April 11, 2006, our shareholders approved a proposal to amend our Amended Articles of Incorporation to increase the number of shares of common stock authorized to be issued by us from 300,000,000 to 450,000,000. As a result of the amendment, we are authorized to have issued and outstanding 500,000,000 shares, consisting of (a) 450,000,000 shares of common stock, without par value, and (b) 50,000,000 shares of preferred stock, without par value, issuable in one or more series.
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ITEM 2. MANAGEMENT’S 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 world’s leading manufacturers of tires and rubber products. We have a broad global footprint with 102 manufacturing facilities in 29 countries and we manufacture and sell tires and other products under a variety of well known and recognizable brand names including Goodyear, our flagship brand, as well as such brand names as Dunlop, Kelly, Fulda, Debica, and Sava. We operate our business through six operating segments: North American Tire; European Union Tire; Eastern Europe, Middle East and Africa Tire (“Eastern Europe Tire”); Latin American Tire; Asia Pacific Tire; and Engineered Products.
In the first quarter of 2006 we recorded net income of $74 million compared to net income of $68 million in the comparable period of 2005. In addition, in the first quarter of 2006 our total segment operating income was $311 million, an increase of $19 million from $292 million in the first quarter of 2005. This increase included favorable settlements with certain raw material suppliers of $36 million, and a pension plan curtailment gain in Brazil of $19 million. See “Results of Operations — Segment Information” for additional information.
As we move beyond the completion of our turnaround strategy, we remain focused on improving the operating performance of our business units through cost reductions, including the reduction of our high-cost manufacturing capacity, and the implementation of a consumer-focused marketing and product development strategy with an emphasis on higher margin tires. We also plan to improve our balance sheet through the sale of non-core assets as well as appropriate financing actions.
In North American Tire, we experienced weaker demand in the replacement segment. Although demand for our Goodyear and Dunlop brands remained relatively strong, we had a reduction in market share in the consumer replacement segment due to lower sales of private label and other lower value tires. Despite the softening of demand, North American Tire improved its segment operating income from $11 million in the first quarter of 2005 to $43 million in the first quarter of 2006. This improvement was driven by strong performance in our other tire related businesses as well as the supplier settlements referred to above.
In European Union Tire we experienced a year-over-year decrease in segment operating income from $107 million in 2005 to $72 million in 2006. Sales in European Union Tire also declined $64 million to $1,134 million in the first quarter of 2006 from $1,198 million in the comparable prior year period. Higher conversion costs from increased energy costs and increased production of high performance tires, coupled with a weaker Euro and increased competitive pressures challenged the business. These factors had a similar impact on the results of Eastern Europe Tire, although to a lesser extent.
Latin American Tire benefited from a strong OE consumer market and continued to perform well despite a difficult pricing environment and weaker replacement markets. Asia Pacific also maintained its performance due, in part, to continued improvement in mix. Although Engineered Products experienced a significant anticipated reduction in military sales, it achieved higher earnings due, in part, to strong results in the industrial business.
Other developments in the first quarter include:
| | • | | New Product Development. During the first quarter we introduced our newest Goodyear brand tire for North America, the Eagle ResponsEdge with carbon fiber. The Eagle ResponsEdge features an asymmetrical construction and tread that combine to provide a smooth and comfortable ride and ultra-high performance type grip. It will be available to consumers beginning in May. |
| |
| | • | | Cost Reduction. In the first quarter of 2006, we began the implementation of our plan to reduce high-cost manufacturing capacity with the announcement of our intent to close a European Union Tire facility located in the U.K. When complete, the closure of the U.K. facility is expected to generate annual cost savings of approximately $18 million. Our cost reduction efforts also drove a reduction in Selling, administrative and general expense in the first quarter of 2006. |
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Challenges we continue to face include:
| | • | | Rising raw material costs. Globally, rising raw material costs continue to challenge the tire industry. For the first quarter of 2006, our raw material costs increased approximately 14%. We expect a similar rate of increase for the full year. Prior to the first quarter, we have generally been successful in offsetting these increases with pricing actions as well as continued focus on improving our mix. However, in the first quarter of 2006 we were unable to do so. |
| |
| | • | | Union contract negotiations. We will be working with the United Steelworkers of America (“USW”) to extend or renegotiate the master collective bargaining agreement that covers approximately 13,600 employees in the United States and expires in July 2006. If we are unable to reach an agreement with the USW regarding the terms of a collective bargaining agreement, we may be subject to work interruptions or stoppages. |
| |
| | • | | Pension funding requirements. Legislation pending before Congress could reduce the amount we will be required to contribute to our domestic pension plans in 2006 to between $550 million to $600 million. Without the legislation, we estimate our required contribution will be between $700 million and $750 million. |
RESULTS OF OPERATIONS
CONSOLIDATED
Net sales in the first quarter of 2006 were $4,856 million, increasing $89 million or 2% from $4,767 million in the 2005 first quarter. Net income of $74 million, or $0.37 per diluted share, was recorded in the 2006 first quarter compared to $68 million, or $0.35 per diluted share, in the first quarter of 2005.
Net sales in the first quarter of 2006 were favorably impacted by price and product mix of approximately $264 million, mainly in North American Tire, and approximately $96 million in other tire related businesses. These were offset by decreased volume of approximately $117 million, primarily in North American Tire, and approximately $74 million of translation, primarily related to European Union Tire. Net sales in 2005 included approximately $79 million of sales related to the Farm Tire and Wingtack businesses.
Worldwide tire unit sales in the first quarter of 2006 were 54.0 million units, a decrease of 1.9 million units, or 3.5% compared to the 2005 period. The change was driven by a decrease of 2.0 million units, or 5.4%, in consumer replacement units, primarily in North American Tire. North American Tire volume decreased 1.7 million units, or 6.7%, which included a 0.3 million unit decline due to the Farm Tire divestiture. Further, international unit sales decreased 0.2 million units or 0.9%.
Cost of goods sold (CGS) in the first quarter of 2006 was $3,899 million, an increase of $80 million, or 2% compared to $3,819 million in the first quarter 2005, while increasing as a percentage of sales to 80.3% from 80.1% in the 2005 period. CGS in the first quarter of 2006 increased due to higher raw material costs of approximately $185 million, product mix-related cost increases of approximately $85 million, mostly related to North American Tire and European Union Tire, and approximately $30 million of higher conversion costs related to higher energy costs and increased production of high performance tires, primarily in European Union. CGS decreased due to foreign currency translation of approximately $74 million, primarily in Europe, and decreased volume of approximately $91 million, largely in North American Tire. Also decreasing CGS was a pension plan curtailment gain of approximately $15 million and approximately $36 million related to favorable settlements with certain raw material suppliers.
Selling, administrative and general expense (SAG) was $678 million in the first quarter of 2006, compared to $686 million in 2005, a decrease of $8 million or 1%. The decrease was driven primarily by favorable foreign currency translation of approximately $17 million and lower advertising expenses of approximately $15 million, primarily in Europe. SAG in 2006 benefited from approximately $3 million in savings from rationalization programs. Unfavorably impacting SAG was approximately $6 million of general and product liability expenses and increased wage and benefits expenses of approximately $15 million, including stock compensation expense of $7 million, and approximately $2 million increase in bad debt expense. SAG as a percentage of sales was 14.0% in the first quarter 2006, compared to 14.4% in the 2005 period.
Other (income) and expense was $28 million of income in the 2006 first quarter, an improvement of $40 million, compared to $12 million of expense in the 2005 first quarter. The improvement was primarily related to $15 million of income
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resulting from the favorable resolution of a legal matter in Latin American Tire and $16 million in lower financing fee expenses due to lower deferred fee levels. Also, higher interest income of $6 million on cash deposits contributed to the increase over the prior year.
For the first three months of 2006, we recorded tax expense of $77 million on income before income taxes and minority interest in net income of subsidiaries of $163 million. 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. For the first quarter of 2005, we recorded tax expense of $67 million on a loss before income taxes and minority interest in net income of subsidiaries of $156 million.
Rationalization Activity
In the first quarter of 2006, the Company initiated plans to close its European Union Tire Segment’s Washington passenger tire manufacturing facility in the United Kingdom. Additional restructuring actions consisted of the closure of retail stores in the European Union Tire Segment, the reduction of headcount within various segments and the initiation of the closure of the bicycle tire and tube production facility in Debica, Poland.
During 2006, $41 million of net charges were recorded, which included $42 million of new rationalization charges. The charges were partially offset by $1 million of associate-related costs no longer needed for their originally-intended purposes. The $42 million of charges represent $41 million for plans initiated in 2006 and $1 million of associate-related costs for plans initiated in the fourth quarter of 2005. The $41million of charges for plans initiated in 2006 include $39 million of associate severance costs and $2 million primarily for non-cancelable lease costs. Approximately 1,380 associates will be released under programs initiated in 2006, of which 85 were released by March 31, 2006.
In the first quarter of 2006, $9 million was incurred primarily for associate severance payments and $2 million primarily for non-cancelable lease costs.
In the first quarter of 2005 no new rationalization actions were initiated. During 2005, net reversals of $8 million were recorded, which included reversals of $10 million of reserves for rationalization actions no longer needed for their originally-intended purposes, partially offset by charges related to plans initiated in 2004 of $2 million. The reversals consisted of $4 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 quarter related to plans initiated in 2001 and earlier periods.
Additional rationalization charges of $12 million related to the rationalization plans initiated in the first quarter of 2006 have not yet been recorded and are expected to be incurred and recorded during the next twelve months. As a result of the Company’s closure of the Washington passenger tire manufacturing facility, approximately $44 million of accelerated depreciation is expected to be recorded in the second quarter of 2006.
Upon completion of the 2006 plans, we estimate that annual operating costs will be reduced by approximately $43 million (approximately $21 million SAG and approximately $22 million CGS).
For further information, refer to the Note 2, Costs Associated with Rationalization Programs.
SEGMENT INFORMATION
Segment information reflects 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.
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).
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Total segment operating income was $311 million in the first quarter of 2006, increasing from $292 million in the first quarter of 2005. Total segment operating margin (total segment operating income divided by segment sales) in the first quarter of 2006 was 6.4%, compared to 6.1% in the first quarter of 2005.
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 9, 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 March 31, |
| | | | | | | | | | | | | | | Percentage |
| (In millions) | | 2006 | | 2005 | | Change | | Change |
| Tire Units | | | 23.7 | | | | 25.4 | | | | (1.7 | ) | | | (6.7 | )% |
| Net Sales | | $ | 2,239 | | | $ | 2,138 | | | $ | 101 | | | | 5 | |
| Operating Income | | | 43 | | | | 11 | | | | 32 | | | | 291 | |
| Operating Margin | | | 1.9 | % | | | 0.5 | % | | | | | | | | |
North American Tire unit sales in the 2006 first quarter decreased 1.7 million units or 6.7% from the 2005 period. The decrease was primarily related to a decline in consumer replacement volume of 1.4 million units or 8.5% due to an overall market decline in the consumer replacement volume market as well as further strategic share reduction in the lower value segment, partially offset by increased share of our higher value branded products. Unit sales also decreased 0.3 million units due to the Farm Tire divestiture.
Net sales increased $101 million or 5% in the first quarter of 2006 from the 2005 period due primarily to favorable price and product mix of approximately $142 million, and increased chemical and other tire related business’ sales of approximately $109 million. Sales were negatively impacted by decreased volume of approximately $78 million. Net sales in 2005 included approximately $79 million of sales related to the Farm Tire and Wingtack businesses.
Operating income increased $32 million or 291% in the first quarter of 2006 from the 2005 period. Favorable price and product mix of approximately $84 million, increases in chemical and other tire related businesses of approximately $23 million and approximately $21 million of favorable settlements with certain raw material suppliers positively impacted operating income. The 2006 period was unfavorably impacted by increased raw material costs of approximately $74 million, lower volume of approximately $8 million and increased SAG of approximately $6 million due to higher product liability costs. Operating income in 2005 included approximately $11 million related to the Farm Tire, Wingtack and Sumatra businesses.
Operating income did not include first quarter rationalization net reversals of $4 million in 2005. Operating income also did not include first quarter gains on asset sales of $1 million in 2006 and $6 million in 2005.
European Union Tire
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | | | | | | | | | | | Percentage |
| (In millions) | | 2006 | | 2005 | | Change | | Change |
| Tire Units | | | 15.6 | | | | 16.0 | | | | (0.4 | ) | | | (2.7 | )% |
| Net Sales | | $ | 1,134 | | | $ | 1,198 | | | $ | (64 | ) | | | (5 | ) |
| Operating Income | | | 72 | | | | 107 | | | | (35 | ) | | | (33 | ) |
| Operating Margin | | | 6.3 | % | | | 8.9 | % | | | | | | | | |
European Union Tire segment unit sales in the 2006 first quarter decreased 0.4 million units or 2.7% from the 2005 period. Replacement unit sales decreased 0.3 million units or 2.9% while OE volume decreased 0.1 million units or 2.1%.
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Net sales in the first quarter of 2006 decreased $64 million or 5% compared to the first quarter of 2005. Unfavorably impacting the 2006 period was foreign currency translation of approximately $98 million, lower volume of approximately $30 million, largely due to lower replacement volume in the consumer market, and lower sales in other tire related businesses of approximately $14 million. Price and product mix improved by approximately $79 million driven by price increases to offset higher raw material costs.
For the first quarter of 2006, operating income decreased $35 million or 33% compared to 2005 due to higher raw material costs of approximately $42 million in the first quarter of 2006 compared to 2005. Operating income was also adversely affected by approximately $14 million of higher conversion costs due to increased energy costs and increased production of high performance tires, approximately $7 million in lower volume, approximately $5 million of lower volume in other tire related businesses, approximately $5 million of higher research and development and approximately $5 million of currency translation. Continued improvement in price and product mix of approximately $33 million, favorable SAG expenses of approximately $6 million due to decreased advertising and approximately $6 million of favorable settlements with certain raw material suppliers partially offset these adverse factors.
Operating income did not include first quarter rationalization net charges of $26 million in 2006 and net reversals of $2 million in 2005. Operating income also did not include first quarter net gains on asset sales of $1 million in 2006 and $5 million in 2005.
Eastern Europe, Middle East and Africa Tire
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | | | | | | | | | | | Percentage |
| (In millions) | | 2006 | | 2005 | | Change | | Change |
| Tire Units | | | 4.6 | | | | 4.8 | | | | (0.2 | ) | | | (3.6 | )% |
| Net Sales | | $ | 339 | | | $ | 340 | | | $ | (1 | ) | | | — | |
| Operating Income | | | 43 | | | | 47 | | | | (4 | ) | | | (9 | ) |
| Operating Margin | | | 12.7 | % | | | 13.8 | % | | | | | | | | |
Eastern Europe, Middle East and Africa Tire unit sales in the 2006 first quarter decreased 0.2 million units or 3.6% from the 2005 period. Replacement unit sales decreased 0.2 million units or 6.0% due primarily due to changes in market seasonality in Central Europe.
Net sales decreased $1 million in the 2006 first quarter compared to 2005. Price and mix increased approximately $14 million in the period mainly due to price increases to recover high raw material costs and favorable product mix due to continued growth of high performance tires and premium brands. The favorable price and mix was offset by decreased volume of approximately $9 million, and unfavorable foreign currency translation of approximately $6 million.
Operating income in the 2006 quarter decreased $4 million or 9% from the first quarter 2005. Operating income for the 2006 period was favorably impacted by price and product mix of approximately $8 million. Negatively impacting the 2006 period were higher raw material costs of approximately $13 million.
Operating income did not include first quarter rationalization net charges of $6 million in 2006.
Latin American Tire
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | | | | | | | | | | | Percentage |
| (In millions) | | 2006 | | 2005 | | Change | | Change |
| Tire Units | | | 5.3 | | | | 5.0 | | | | 0.3 | | | | 6.0 | % |
| Net Sales | | $ | 396 | | | $ | 348 | | | $ | 48 | | | | 14 | |
| Operating Income | | | 102 | | | | 87 | | | | 15 | | | | 17 | |
| Operating Margin | | | 25.8 | % | | | 25.0 | % | | | | | | | | |
Latin American Tire unit sales in the 2006 first quarter increased 0.3 million units or 6.0% from the 2005 period. Replacement unit sales increased 0.1 million units or 1.7% and OE volume increased 0.2 million units or 19.0%.
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Net sales in the 2006 first quarter increased $48 million or 14% from the 2005 period. Net sales increased in 2006 due to the favorable impact of currency translation, mainly in Brazil, of approximately $32 million and increased volume of approximately $20 million, mainly in the consumer and commercial OE business. Unfavorable price and mix of approximately $3 million negatively impacted sales.
Operating income in the first quarter of 2006 increased $15 million or 17% from the same period in 2005. Operating income was favorably impacted by currency translation of approximately $23 million, a pension plan curtailment gain of approximately $17 million, and approximately $6 million in improved volume. Increased raw material costs of approximately $28 million negatively impacted operating income compared to the 2005 period.
Asia Pacific Tire
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | | | | | | | | | | | Percentage |
| (In millions) | | 2006 | | 2005 | | Change | | Change |
| Tire Units | | | 4.8 | | | | 4.7 | | | | 0.1 | | | | 0.8 | % |
| Net Sales | | $ | 353 | | | $ | 341 | | | $ | 12 | | | | 4 | |
| Operating Income | | | 22 | | | | 19 | | | | 3 | | | | 16 | |
| Operating Margin | | | 6.2 | % | | | 5.6 | % | | | | | | | | |
Asia Pacific Tire unit sales in the 2006 first quarter increased 0.1 million units or 0.8% from the 2005 period. Replacement unit sales decreased 0.1 million units or 3.4% and OE volume increased 0.2 million units or 11.1%.
Net sales in the 2006 quarter increased $12 million or 4% compared to the 2005 period due to favorable price and product mix of approximately $21 million and approximately $2 million in increased volume. This was offset in part by unfavorable foreign currency translation of $12 million.
Operating income in the first quarter of 2006 increased $3 million or 16% compared to the 2005 period due to improved price and product mix of approximately $24 million and approximately $2 million in favorable settlements with certain raw material suppliers. Unfavorably impacting operating income was approximately $17 million of increased raw material costs, approximately $4 million of higher SAG costs due to development of our branded retail and global sourcing infrastructure in China and approximately $3 million in higher conversion costs.
Operating income did not include first quarter rationalization net charges of $7 million in 2006 and net reversals of $2 million in 2005.
See Note 11, Asset Acquisition for a discussion of the acquisition of the remaining interest in SPT in January 2006.
Engineered Products
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | | | | | | | | | | | Percentage |
| (In millions) | | 2006 | | 2005 | | Change | | Change |
| Net Sales | | $ | 395 | | | $ | 402 | | | $ | (7 | ) | | | (2 | )% |
| Operating Income | | | 29 | | | | 21 | | | | 8 | | | | 38 | |
| Operating Margin | | | 7.3 | % | | | 5.2 | % | | | | | | | | |
Engineered Products sales decreased $7 million or 2% in the first quarter of 2006 from 2005 due to decreased volume of approximately $22 million, due to anticipated declines in military sales, offset partially by higher sales in the industrial and replacement channels. Positively impacting sales were improved price and mix of approximately $11 million and the favorable effect of currency translation of approximately $4 million.
Operating income increased $8 million or 38% in the first quarter of 2006 compared to the 2005 period due primarily to improved price and mix of approximately $11 million, approximately $6 million in favorable settlements with
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certain raw material suppliers, and approximately $2 million in other income including a pension plan curtailment gain in Brazil. Also favorably impacting operating income was approximately $6 million of lower conversion costs. Operating income was negatively impacted by higher raw material costs of approximately $11 million, approximately $5 million of lower volume and approximately $2 million in bad debt expense.
Operating income in the first quarter of 2006 did not include net restructuring charges of $3 million.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2006, we had $1,585 million in cash and cash equivalents as well as $1,688 million of unused availability under our various credit agreements, compared to $2,161 million and $1,677 million at December 31, 2005. Cash and cash equivalents decreased primarily due to payments of debt maturities and funding of seasonal working capital. 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 March 31, 2006, cash balances totaling $236 million were subject to such restrictions, compared to $241 million at December 31, 2005.
OPERATING ACTIVITIES
Cash flows used in operating activities was $302 million in the first quarter of 2006, compared to $170 million in the comparable prior year period. The decrease in operating cash flows was driven by lower insurance recoveries and timing of payments of certain compensation plans.
INVESTING ACTIVITIES
Cash flows used in investing activities of $149 million increased $69 million from the first quarter of 2005. The increase was primarily the result of acquisitions of $41 million and $24 million in additional capital expenditures. Capital expenditures are expected to be approximately $720 million in 2006. This amount includes expenditures for capitalized software of approximately $55 million, which are included in capital expenditures in our Consolidated Statements of Cash Flows; however are not treated as capital expenditures under our credit agreements.
We revised the classification for certain items, including changes in restricted cash, in our Consolidated Statements of Cash Flows. Restricted cash is now presented as an investing activity. The revised classified classifications have also been reflected in the comparative prior year amounts for purposes of consistency.
FINANCING ACTIVITIES
Cash flows used in financing activities of $151 million increased by $196 million from the prior year quarter primarily due to a net repayment of debt of $197 million, including the 5 3/8% Swiss franc bonds of $120 million.
Credit Sources
In aggregate, we had credit arrangements of $7,378 million available at March 31, 2006, of which $1,688 million were unused, compared to $7,510 million available at December 31, 2005, of which $1,677 million were unused.
$1.5 Billion First Lien Credit Facility
Our $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
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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 March 31, 2006, there were $500 million in letters of credit issued under the deposit-funded facility ($499 million at December 31, 2005) and $7 million in letters of credit issued under the revolving facility (no letters of credit were issued under the revolving credit facility at December 31, 2005). There were no borrowings under this facility at March 31, 2006 and at December 31, 2005.
$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. At March 31, 2006 and December 31, 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. The facility, however, is not secured by any of the manufacturing facilities that secure the first and second lien facilities. As of March 31, 2006 and December 31, 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) a €155 million German revolving credit facility, and (iii) a €155 million of German term loan facilities. We provide unsecured guarantees to support these facilities. GDTE and certain of its subsidiaries in the United Kingdom, Luxembourg, France and Germany also provide guarantees. GDTE’s obligations under the facilities and the obligations of subsidiary guarantors under the related guarantees are secured by a variety of collateral. As of March 31, 2006, there were $4 million of letters of credit issued under the European revolving credit facility ($4 million at December 31, 2005), $188 million was fully drawn under the German term loan facilities ($183 million at December 31, 2005) and there were no borrowings under the German and European revolving credit facilities (no borrowings at December 31, 2005).
For a description of the collateral securing the above facilities as well as the covenants applicable to them, please refer to Note No. 10, Financing Arrangements and Derivative Financial Instruments, in our 2005 10-K.
Other Foreign Credit Facilities
At March 31, 2006, we had short-term committed and uncommitted bank credit arrangements totaling $415 million, of which $195 million were unused, compared to $398 million and $182 million at December 31, 2005. 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)
GDTE and certain of its subsidiaries are a party to a five-year pan-European accounts receivable securitization facility. The facility provides €275 million of funding, and is subject to customary annual renewal of back-up liquidity lines.
As of March 31, 2006, and December 31, 2005, the amount available and fully-utilized under this program totaled $333 million and $324 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, certain subsidiaries in Australia had transferred accounts receivable under other programs totaling $63 million and $67 million at March 31, 2006 and December 31, 2005, respectively. These amounts are included in Notes payable.
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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 Senior Secured Indebtedness to Consolidated EBITDA (as such terms are defined in each of the relevant credit facilities) is not permitted to be greater than 3.5 to 1 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 convenants. 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.
The following table presents the calculation of EBITDA and Consolidated EBITDA for the three month periods ended March 31, 2006 and 2005. 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 March 31, | |
| (In millions) | | 2006 | | | 2005 | |
Net Income | | $ | 74 | | | $ | 68 | |
| Consolidated Interest Expense | | | 103 | | | | 102 | |
| U.S. and Foreign Taxes on Income | | | 77 | | | | 67 | |
| Depreciation and Amortization Expense | | | 158 | | | | 157 | |
| | | | | | | |
EBITDA | | | 412 | | | | 394 | |
| | | | | | | | | |
Credit Agreement Adjustments: | | | | | | | | |
| Other (Income) and Expense | | | (28 | ) | | | 7 | |
| Minority Interest in Net Income (Loss) of Subsidiaries | | | 12 | | | | 21 | |
| Consolidated Interest Expense Adjustment | | | 1 | | | | 2 | |
| Rationalizations | | | 41 | | | | (8 | ) |
| | | | | | | |
Consolidated EBITDA | | $ | 438 | | | $ | 416 | |
| | | | | | | |
Credit Ratings
Our credit ratings as of the date of this filing are presented below:
| | | | | | | | | |
| | | S&P | | Moody’s |
| $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.
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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
We plan to take appropriate financing actions which could include restructuring bank debt or a capital markets transaction, possibly including the issuance of additional equity.
Given the challenges that we face and the uncertainities of market conditions, 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 improving the performance in our North American Tire Segment. This success is also crucial to ensuring that we have sufficient cash flow from operations to meet our obligations. While we have made progress in improving results in North American Tire, 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. Failure to do so 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, no assurance can be given as to our ability to raise additional unsecured debt.
Dividends
Under our primary credit facilities 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 Moody’s senior (implied) rating and Standard & Poor’s (S&P) corporate rating improve to Ba2 or better and BB or better, respectively.
Recently Issued Accounting Standards
The FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”) in February 2006. SFAS No. 155 amends SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), and SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No. 140”) and addresses the application of SFAS No. 133 to beneficial interests in securitized financial assets. SFAS No. 155 establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. Additionally, SFAS No. 155 permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS No. 155 is effective for financial instruments acquired or issued after January 1, 2007. We are currently assessing the impact SFAS No. 155 will have on our consolidated financial statements.
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. 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 March 31, 2006, the interest rates on 48% 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 actions and other related events, our access to these instruments may be limited.
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The following table presents information at March 31:
Interest Rate Swap Contracts
| | | | | | | | | |
| (Dollars in millions) | | 2006 | | 2005 |
| Fixed Rate Contracts: | | | | | | | | |
| Notional principal amount | | $ | — | | | $ | 15 | |
| Pay fixed rate | | | — | % | | | 5.94 | % |
| Receive variable Australian Bank Bill Rate | | | — | % | | | 5.89 | % |
| | | | | | | | | |
| Average years to maturity | | | — | | | | 0.25 | |
| Fair value — liability | | | — | | | | — | |
| Pro forma fair value — liability | | | — | | | | — | |
| | | | | | | | | |
| Floating Rate Contracts: | | | | | | | | |
| Notional principal amount | | $ | 200 | | | $ | 200 | |
| Pay variable LIBOR | | | 6.27 | % | | | 4.31 | % |
| Receive fixed rate | | | 6.63 | % | | | 6.63 | % |
| | | | | | | | | |
| Average years to maturity | | | 0.7 | | | | 1.7 | |
| Fair value — asset (liability) | | $ | — | | | $ | 4 | |
| Pro forma fair value — asset (liability) | | | — | | | | 4 | |
The pro forma fair value assumes a 10% increase in variable market interest rates at March 31, 2006 and 2005, respectively, and reflects the estimated fair value of contracts outstanding at that date under that assumption.
Weighted average interest rate swap contract information follows:
| | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| (Dollars in millions) | | 2006 | | 2005 |
| Fixed Rate Contracts: | | | | | | | | |
| Notional principal amount | | $ | — | | | $ | 15 | |
| Pay fixed rate | | | — | % | | | 5.94 | % |
| Receive variable Australian Bank Bill Rate | | | — | % | | | 5.89 | % |
| | | | | | | | | |
| Floating Rate Contracts: | | | | | | | | |
| Notional principal amount | | $ | 200 | | | $ | 200 | |
| Pay variable LIBOR | | | 6.27 | % | | | 4.31 | % |
| Receive fixed rate | | | 6.63 | % | | | 6.63 | % |
The following table presents fixed rate debt information at March 31:
(In millions)
| | | | | | | | | |
| | | 2006 | | 2005 |
Fixed Rate Debt | | | | | | | | |
| Carrying amount — liability | | $ | 2,724 | | | $ | 3,007 | |
| Fair value — liability | | | 2,855 | | | | 3,155 | |
| Pro forma fair value — liability | | | 2,933 | | | | 3,235 | |
The pro forma information assumes a 100 basis point decrease in market interest rates at March 31, 2006 and 2005, respectively, 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.
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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 bonds were hedged by currency swap agreements until they both matured in March 2006.
Contracts hedging the Swiss franc bonds were designated as cash flow hedges until they both matured in March 2006. Contracts hedging short-term trade receivables and payables normally have no hedging designation.
The following table presents foreign currency contract information at March 31:
| | | | | | | | | |
| (In millions) | | 2006 | | 2005 |
| Fair value — asset (liability) | | $ | 2 | | | $ | 93 | |
| Pro forma change in fair value | | | (36) | | | | (54) | |
| Contract maturities | | | 4/06-10/19 | | | | 4/05-10/19 | |
We were not a party to any foreign currency option contracts at March 31, 2006 or 2005.
The pro forma change in fair value assumes a 10% decrease in foreign exchange rates at March 31 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 March 31 as follows:
| | | | | | | | | |
| (In millions) | | 2006 | | 2005 |
| Fair value — asset (liability): | | | | | | | | |
| Swiss franc swap-current | | $ | — | | | $ | 53 | |
| Euro swaps-current | | | — | | | | 40 | |
| Other-current asset | | | 3 | | | | 4 | |
| Other — long term assets | | | 1 | | | | 1 | |
| Other — current liability | | | (2 | ) | | | (2 | ) |
| Other — long term liability | | | — | | | | (3 | ) |
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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:
| | • | | Although we recorded net income in 2004 and 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 successfully implement our cost reduction strategies; |
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| | • | | we face significant global competition, increasingly from lower cost manufacturers, and our market share could decline; |
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| | • | | our pension plans are significantly underfunded and our required contributions to those plans are substantial. Proposed U.S. 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; |
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| | • | | higher raw material and energy costs may materially adversely affect our operating results and financial condition; |
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| | • | | continued pricing pressures from vehicle manufacturers may materially adversely affect our business; |
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| | • | | our financial position, results of operations and liquidity could be materially adversely affected if we or one or more of our customers experience a labor strike, work stoppage or other similar difficulty; |
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| | • | | pending litigation relating to our 2003 restatement could have a material adverse effect on our financial condition; |
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| | • | | 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; |
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| | • | | 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; |
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| | • | | 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; |
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| | • | | our secured credit facilities limit the amount of capital expenditures that we may make; |
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| | • | | our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly; |
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| | • | | we may incur significant costs in connection with product liability and other tort claims; |
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| | • | | 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; |
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| | • | | 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; |
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| | • | | we are subject to extensive government regulations that may materially adversely affect our operating results; |
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| | • | | our international operations have certain risks that may materially adversely affect our operating results; |
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| | • | | we have foreign currency translation and transaction risks that may materially adversely affect our operating results; |
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| | • | | 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 SRI’s interest in certain of our joint venture alliances (which include much of our operations in Europe); |
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| | • | | if we are unable to attract and retain key personnel, our business could be materially adversely affected; and |
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| | • | | we may be impacted by economic and supply disruptions associated with global events including war, acts of terror, civil obstructions and natural disasters. |
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.
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ITEM 4. CONTROLS AND PROCEDURES.
Management’s Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures to ensure that the information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that such information is accumulated and communicated to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective, as of March 31, 2006 (the end of the period covered by this Quarterly Report on Form 10-Q).
Changes in 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Heatway Litigation and Amended Settlement
As previously reported in our 2005 10-K 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 2005 10-K.
Prior to entering into the amended settlement we received adverse judgments in a number of actions, includingLoughridge v. Goodyear and Chiles Power Supply, an action in which a federal jury awarded 34 homeowners aggregate damages of $8 million, 50% of which was allocated to us. On March 20, 2006, the United States Court of Appeals for the Tenth Circuit denied our petition for rehearing, effectively terminating the litigation with respect to all but two of theLoughridge homeowners. The Court of Appeals also ruled that two homeowners whose claims had been rejected by the trial court were entitled to a new trial. Following the ruling of the Court of Appeals, we paid the plaintiffs $10 million in satisfaction of the judgment, which included an amount for interest on the judgment. The liability incurred inLoughridgewas not covered by the amended settlement.
The Court of Appeals also denied our petition for rehearing inMalek, et al. v. Goodyear,a case involving 25 homesites, in which a federal jury awarded the plaintiffs aggregate damages of $8.1 million of which 40% was allocated to us. Following the ruling, we paid theMalekplaintiffs $8 million in satisfaction of the judgment, which included an amount for interest on the judgment. The liability incurred inMalekwas not covered by the amended settlement; however, we are entitled to assert a proxy claim against the settlement fund for the payment theMalekplaintiffs would have been entitled to under the amended settlement.
Asbestos Litigation
As reported in our 2005 Form 10-K we were one of numerous defendants in legal proceedings in certain state and Federal courts involving approximately 125,500 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 first quarter of 2006, approximately 900 new claims were filed against us and approximately 700 were settled or dismissed. The amount expended on asbestos defense and claim resolution by Goodyear and its insurance carriers during the first quarter of 2006 was $4 million. At March 31, 2006, there were approximately 125,700 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
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present in our facilities. The plaintiffs are seeking unspecified actual and punitive damages and other relief. See Note 8, “Commitments and Contingent Liabilities” in this Form 10-Q for additional information on Asbestos litigation.
SEC Investigation
As reported in our 2005 10-K we were subject to a SEC investigation into accounting matters included in our restatement of financial results, which was announced in October 2003, and in subsequent public filings. On March 28, 2006, we were notified that the staff of the SEC had terminated its investigation and would not recommend an enforcement action against us. We were also informed that the SEC has terminated its investigation and would not recommend enforcement action against our former chief financial officer and former chief accounting officer.
Securities Litigation
As previously reported in our 2005 10-K we are subject to the following three consolidated actions in the United States District Court for the Northern District of Ohio arising out of the restatement we announced in October 2003: (i) a purported securities class action alleging that Goodyear and certain current and former officers and directors violated the federal securities laws by artificially inflating and maintaining the price of Goodyear securities; (ii) a derivative lawsuit against certain current and former officers and directors alleging, among other things, breach of fiduciary duty and corporate waste arising out of the same facts and circumstances upon which the purported securities class action is based; and (iii) an action against Goodyear and certain current and former officers, directors and associates by a putative class of participants in Goodyear’s employee savings plans asserting breach of fiduciary claims under the Employee Retirement Income Security Act (“ERISA”). In November 2004, the defendants filed motions to dismiss each of the consolidated cases. On March 20, 2006, the Court granted Goodyear’s motion to dismiss the purported securities class action. The Court has yet to rule on the motions to dismiss the two remaining actions.
Reference is made to Item 3 of Part I of the 2005 10-K for additional discussion of legal proceedings.
ITEM 1A. RISK FACTORS
Our 2005 Annual Report on Form 10-K includes a detailed discussion of our risk factors. The information presented below amends, updates and should be read in conjunction with the risk factors and information disclosed in that Form 10-K.
Due to developments in the previously disclosed SEC investigation as set forth under “SEC Investigation” in Part II, Item 1 of this Form
10-Q, the risk factor titled “An ongoing SEC investigation regarding our accounting restatement could materially adversely affect us” is no longer applicable to us.
Due to developments in the previously disclosed securities litigation as set forth under “Securities Litigation” in Part II, Item 1 of this Form 10-Q, the risk factor titled “Pending litigation relating to our 2003 restatement could have a material adverse effect on our financial position, cash flows and results of operation” has been updated as set forth below:
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Pending litigation relating to our 2003 restatement could have a material adverse effect on our financial position, cash flows and results of operation.
At least 36 lawsuits were filed against us and certain of our current or former officers or directors following our October 2003 announcement regarding the restatement of our previously issued financial results. These actions have been consolidated into three separate actions in the United States District Court for the Northern District of Ohio. One of these consolidated actions, a purported securities class action alleging fraud, has been dismissed by the District Court. We intend to vigorously defend these lawsuits. However, we cannot currently predict or determine the outcome or resolution of these proceedings or the timing for their resolution, or reasonably estimate the amount, or potential range, of possible loss, if any. In addition to any damages that we may suffer, our management’s efforts and attention may be diverted from our ordinary business operations in order to address these claims. The final resolution of these lawsuits could have a material adverse effect on our financial position, cash flows and results of operation.
The risk factors set forth in our 2005 Annual Report on Form 10-K have been supplemented with the following risk factor:
Work stoppages or supply disruptions at our major OE customers could harm our business.
Although sales to our OE customers account for less than 20% of our net sales, demand for our products in the OE segment and production levels at our facilities are directly related to automotive vehicle production. Automotive production can be affected by labor relations issues. Two of our largest OE customers have announced restructuring plans aimed at realigning their cost structure which include the negotiation with their respective unionized workforces. In addition, certain major OE suppliers are in financial distress and may attempt to seek significant concessions from their unionized workforces. The outcome of these labor relations matters is uncertain and it is possible that our OE customers could experience a work stoppage or a disruption in supply resulting from a work stoppage at an OE supplier. Such events may cause an OE customer to reduce or suspend vehicle production. In such an event, the affected OE customer could halt or significantly reduce purchases of our products, which would increase our production costs and harm our results of operations and financial condition.
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 March 31, 2006. 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 option or payment of stock unit award.
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Total Number of | | Maximum Number |
| | | | | | | | | | | Shares Purchased as | | of Shares that May |
| | | | | | | | | | | Part of Publicly | | Yet Be Purchased |
| | | Total Number of | | Average Price Paid | | Announced Plans or | | Under the Plans or |
| Period | | Shares Purchased | | Per Share | | Programs | | Programs |
| 1/1/06 - 1/31/06 | | | 13,905 | | | $ | 17.73 | | | | — | | | | — | |
| 2/1/06 - 2/28/06 | | | — | | | | — | | | | — | | | | — | |
| 3/1/06 - 3/31/06 | | | 25,371 | | | | 13.28 | | | | — | | | | — | |
| Total | | | 39,376 | | | | 14.86 | | | | — | | | | — | |
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Goodyear was held on April 11, 2006 (the “Annual Meeting”). Proxies for the Annual Meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Act”), there was no solicitation in opposition to the five nominees of the Board of Directors of Goodyear listed in Goodyear’s Proxy Statement, dated February 28, 2006 (the “Proxy Statement”), and the five nominees were elected.
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The following matters were acted upon by Goodyear shareholders at the Annual Meeting, at which 157,550,881 shares of common stock, without par value, or approximately 89.0 percent of the 177,061,899 shares of common stock outstanding and entitled to vote at the Annual Meeting, were present in person or by proxies:
1. Election of Directors.Five persons were nominated by the Goodyear Board of Directors for election as directors of Goodyear. James C. Boland, Steven A. Minter and Michael R. Wessel were nominated as Class III directors, each to hold office for a three year term expiring at the 2009 annual meeting and until his successor is duly elected and qualified. John G. Breen and William J. Hudson, Jr. were nominated as Class II directors, to hold office for the remaining year of a three year term expiring at the 2007 annual meeting and until his successor is duly qualified. Each nominee was an incumbent director. No other person was nominated. Each nominee was elected. The votes cast for, or withheld or abstained with respect to, each nominee were as follows:
| | | | | | | | | |
| | | Shares of Common | | Shares of Common Stock |
| Name of Director | | Stock Voted For | | Withheld or Abstained |
| James C. Boland | | | 151,856,047 | | | | 5,694,834 | |
| Steven A. Minter | | | 151,032,709 | | | | 6,518,172 | |
| Michael R. Wessel | | | 150,852,817 | | | | 6,698,064 | |
| John G. Breen | | | 148,213,000 | | | | 9,337,881 | |
| William J. Hudson, Jr. | | | 148,230,428 | | | | 9,320,453 | |
The seven directors whose terms of office continued after the Annual Meeting were: (A) Robert J. Keegan, Rodney O’Neal and Shirley D. Peterson whose terms expire in 2007; and (B) Gary D. Forsee, Denise M. Morrison, G. Craig Sullivan and Thomas H. Weidemeyer whose terms expire in 2008. In connection with the adoption of the amendment to the Company’s Code of Regulations requiring the annual election of directors as described below, each director has agreed to shorten his or her term so that it concludes at the 2007 Annual Meeting of Shareholders.
2. Approval of Amendment to Code of Regulations.A resolution proposed by the Board of Directors that the shareholders approve an amendment to the Code of Regulations to require the annual election of directors was submitted to the shareholders. There were 152,687,061 votes cast in favor of, and 3,545,281 votes cast against, the resolution. The holders of 1,318,539 shares of common stock abstained and there were no “broker non-votes”. Accordingly, the resolution received the affirmative vote of at least a majority of the shares of common stock entitled to vote at the Annual Meeting and, therefore was adopted. Information relating to the amendment is set forth at page 11 of the Proxy Statement. The amendment is set forth in its entirety at page B-1 of the Proxy Statement.
3. Approval of Amendment to Amended Articles of Incorporation.A resolution proposed by the Board of Directors that the shareholders approve an amendment to the Company’s Amended Articles of Incorporation increasing the number of shares of common stock authorized to be issued by the Company from 300,000,000 to 450,000,000 was submitted to the shareholders. There were 142,910,105 votes cast in favor of, and 13,115,603 votes cast against, the resolution. The holders of 1,525,173 shares of common stock abstained and there were no “broker non-votes”. Accordingly, the resolution received the affirmative vote of at least two-thirds of the shares of common stock entitled to vote at the Annual Meeting and, therefore was adopted. Information relating to the amendment is set forth at pages 12 and 13 of the Proxy Statement. The amendment is set forth in its entirety at page C-1 of the Proxy Statement.
4. Ratification of Appointment of Independent Accountants.A resolution that the shareholders ratify the action of the Audit Committee in selecting and appointing PricewaterhouseCoopers LLP as independent accountants for Goodyear for the year ending December 31, 2006 was submitted to, and voted upon by, the shareholders. There were 150,208,881 shares of common stock voted in favor of, and 5,997,831 shares of common stock voted against, said resolution. The holders of 1,344,169 shares of common stock abstained. There were no “broker non-votes”. The resolution, having received the affirmative vote of the holders of a majority of the shares of common stock outstanding and entitled to vote at the Annual Meeting, was adopted and the appointment of PricewaterhouseCoopers LLP as the independent accountants for Registrant for 2006 was ratified by the shareholders.
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5. Shareholder Proposal.A resolution submitted by a shareholder requesting that “simple majority” voting be implemented to the “greatest extent possible” was voted on at the Annual Meeting. There were 77,512,520 shares of Common Stock voted in favor of, and 28,225,531 shares of common stock voted against, the resolution. In addition, the holders of 2,950,695 shares of common stock abstained and there were 48,862,135 “broker non-votes.” The resolution, having failed to receive the affirmative vote of at least a majority of the shares of common stock entitled to vote at the Annual Meeting, was not adopted. The resolution and related statements in support thereof and in opposition thereto are set forth under the caption “Shareholder Proposal” at pages 13 and 14 of the Proxy Statement.
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.
THE GOODYEAR TIRE & RUBBER COMPANY
(Registrant)
| | | | | | | |
| Date: May 4, 2006 | | By | | /s/ Thomas A. Connell | | |
| | | 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.) | | |
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THE GOODYEAR TIRE & RUBBER COMPANY
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2006
INDEX OF EXHIBITS
| | | | | | | |
| Exhibit | | | | |
| Table | | | | |
| Item | | | | Exhibit |
| No. | | Description of Exhibit | | Number |
3 | | Articles of Incorporation and By-Laws | | | | |
| | | | | | | |
| (a) | | Certificate of Amended Articles of Incorporation of The Goodyear Tire & Rubber Company, dated December 20, 1954, and Certificates of Amendment to Amended Articles of Incorporation, dated April 6, 1993, June 4, 1996, and April 20, 2006, four documents comprising the Company’s Articles of Incorporation, as amended. | | | 3.1 | |
| | | | | | | |
| (b) | | 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, April 26, 2005 and April 11, 2006. | | | 3.2 | |
| | | | | | | |
4 | | Instruments Defining the Rights of Security Holders, Including Indentures | | | | |
| | | | | | | |
| (a) | | 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 Company’s Registration Statement on Form S-3, File No. 333-90786). | | | | |
| | | | | | | |
| (b) | | 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 Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, File No. 1-1927). | | | | |
| | | | | | | |
| (c) | | 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 Company’s 8.50% Notes due 2007 (incorporated by reference, filed as Exhibit 4.1, to the Company’s 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 Company’s $650,000,000 principal amount of the Company’s 7.857% Notes due 2011 (incorporated by reference, filed as Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2001, File No. 1-1927). | | | | |
| | | | | | | |
| (d) | | 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 Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, File No. 1-1927). | | | | |
| | | | | | | |
| (e) | | 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 Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, File No. 1-1927). | | | | |
| | | | | | | |
| (f) | | 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 Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, File No. 1-1927). | | | | |
| | | | | | | |
| (g) | | Amended and Restated Term Loan and Revolving Credit Agreement, dated as of 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 | | | | |
E-1
| | | | | | | |
| Exhibit | | | | |
| Table | | | | |
| Item | | | | Exhibit |
| No. | | Description of Exhibit | | Number |
| | | Agent, including Amendment and Restatement Agreement, dated as of April 8, 2005 (the “European Term Loan and Revolving Credit Agreement”) (incorporated by reference, filed as Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, File No. 1-1927). | | | | |
| | | | | | | |
| (h) | | First Amendment dated as of December 22, 2005 to the European Term Loan and Revolving Credit Agreement (incorporated by reference, filed as Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, File No. 1-1927). | | | | |
| | | | | | | |
| (i) | | 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 Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, File No. 1-1927). | | | | |
| | | | | | | |
| (j) | | 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 Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, File No. 1-1927). | | | | |
| | | | | | | |
| (k) | | 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 Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, File No. 1-1927). | | | | |
| | | | | | | |
| (l) | | 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 Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, File No. 1-1927). | | | | |
| | | | | | | |
| (m) | | 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 Company’s Current Report on Form 8-K filed June 24, 2005, File No. 1-1927). | | | | |
| | | | | | | |
| (n) | | 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 Company’s Current Report on Form 8-K filed June 24, 2005, File No. 1-1927). | | | | |
| | | | | | | |
| (o) | | 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 Company’s Current Report on Form 8-K filed June 24, 2005, File No. 1-1927). | | | | |
| | | | | | | |
| (p) | | 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 Company’s Registration Statement on Form S-4, File No. 333-128932). | | | | |
| | | | | | | |
| (q) | | Amendment No. 2 to the Master Subordinated Deposit Agreement dated May 23, 2005 and August 26, 2005 between Eurofactor, as Agent, Calyon, as Calculation | | | | |
E-2
| | | | | | | |
| Exhibit | | | | |
| Table | | | | |
| Item | | | | Exhibit |
| No. | | Description of Exhibit | | Number |
| | | Agent, Ester Finance Titrisation, as Purchaser, and Goodyear Dunlop Tires Finance Europe B.V. (including Amended and Restated Master Subordinated Deposit Agreement) (incorporated by reference, filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-4, File No. 333-128932). | | | | |
| | | | | | | |
| (r) | | 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 Goodyear’s Annual Report on Form 10-K for the year ended December 31, 2004, File No. l-1927). | | | | |
| | | | | | | |
| (s) | | 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 Goodyear’s Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-1927). | | | | |
| | | | | | | |
| (t) | | 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 Goodyear’s Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-1927). | | | | |
| | | | | | | |
| (u) | | 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 Goodyear’s Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-1927). | | | | |
| | | | | | | |
| (v) | | 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 Goodyear’s Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-1927). | | | | |
| | | | | | | |
| (w) | | 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 Goodyear’s Annual Report on Form 10-K for the year ended December 31, 2003, File No. 1-1927). | | | | |
| | | | | | | |
| (x) | | Note Purchase Agreement, dated June 28, 2004, among Goodyear and the purchasers listed therein (incorporated by reference, filed as Exhibit 4.3 to Goodyear’s Form 10-Q for the quarter ended September 30, 2004, File No. 1-1927). | | | | |
| | | | | | | |
| (y) | | 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 Goodyear’s Form 10-Q for the quarter ended September 30, 2004, File No. 1-1927). | | | | |
| | | | | | | |
| (z) | | 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 Goodyear’s Form 10-Q for the quarter ended September 30, 2004, File No. 1-1927). | | | | |
| | | | | | | |
| | | 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. | | | | |
| | | | | | | |
10 | | Material Contracts | | | | |
| | | | | | | |
| (a) | | Form of Performance Share Unit Grant Agreement for the 2005 Performance Plan (incorporated by reference, filed as Exhibit 10.1 to Goodyear’s Current Report on Form 8-K filed February 27, 2006, File No. 1-1927.) | | | | |
| | | | | | | |
| (b) | | Schedule of Salary and Bonus for Named Executive Officers (incorporated by reference, filed as Exhibit 10.1 to Post-Effective Amendment No. 1 to Goodyear’s Registration Statement on Form S-1, File No. 333-127918). | | | | |
E-3
| | | | | | | |
| Exhibit | | | | |
| Table | | | | |
| Item | | | | Exhibit |
| No. | | Description of Exhibit | | Number |
12 | | Statement re Computation of Ratios | | | | |
| | | | | | | |
| (a) | | Statement setting forth the Computation of Ratio of Earnings to Fixed Charges. | | | 12 | |
| | | | | | | |
31 | | 302 Certifications | | | | |
| | | | | | | |
| (a) | | Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | 31.1 | |
| | | | | | | |
| (b) | | Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | 31.2 | |
| | | | | | | |
32 | | 906 Certifications | | | | |
| | | | | | | |
| (a) | | Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | 32.1 | |
E-4
