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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
COMMISSION FILE NUMBER: 1-1927
THE GOODYEAR TIRE & RUBBER COMPANY
(Exact name of Registrant as specified in its charter)
OHIO 34-0253240
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1144 EAST MARKET STREET, AKRON, OHIO 44316-0001
(Address of Principal Executive Offices) (Zip Code)
(330) 796-2121
(Registrant's Telephone Number, Including Area Code)
-----------------------------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes No
---- ----
-----------------------------------
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Number of Shares of Common Stock,
Without Par Value, Outstanding at March 31, 2000: 156,368,543
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2
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
Unaudited
(In millions, except per share) THREE MONTHS ENDED
MARCH 31,
2000 1999
------------ ------------
NET SALES $ 3,536.5 $ 2,991.2
Cost of Goods Sold 2,788.6 2,331.4
Selling, Administrative and General Expense 559.7 444.8
Rationalizations - 167.4
Interest Expense 62.1 37.7
Other Expense 3.9 5.3
Foreign Currency Exchange 5.1 (34.6)
Minority Interest in Net Income of Subsidiaries 16.6 4.5
------------ ------------
Income before Income Taxes 100.5 34.7
United States and Foreign Taxes on Income 36.9 9.2
------------ ------------
NET INCOME 63.6 25.5
Retained Earnings at Beginning of Period 3,531.4 3,477.8
CASH DIVIDENDS (47.1) (46.9)
------------ ------------
Retained Earnings at End of Period $ 3,547.9 $ 3,456.4
============ ============
NET INCOME PER SHARE OF COMMON STOCK - BASIC: $ 0.41 $ 0.16
============ ============
Average Shares Outstanding 156.3 156.0
NET INCOME PER SHARE OF COMMON STOCK - DILUTED: $ 0.40 $ 0.16
============ ============
Average Shares Outstanding 158.7 157.8
CASH DIVIDENDS PER SHARE $ 0.30 $ 0.30
============ ============
The accompanying notes are an integral part of this financial statement.
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Unaudited
(In millions)
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 229.8 $ 241.3
Accounts and notes receivable,
less allowance - $86.7 ($81.9 in 1999) 2,395.3 2,296.3
Inventories:
Raw materials 338.8 389.7
Work in process 102.4 99.2
Finished product 1,943.4 1,798.3
----------- -----------
2,384.6 2,287.2
Sumitomo 1.2% Convertible Note Receivable Due 8/00 136.0 107.2
Prepaid expenses and other current assets 366.3 329.2
----------- -----------
TOTAL CURRENT ASSETS 5,512.0 5,261.2
Long Term Accounts and Notes Receivable 89.3 97.7
Investments in Affiliates, at equity 107.0 115.4
Other Assets 89.1 79.0
Goodwill 544.9 516.9
Deferred Charges 1,240.6 1,271.4
Properties and Plants,
less accumulated depreciation - $5,629.6 ($5,551.4 in 1999) 5,664.1 5,761.0
----------- -----------
TOTAL ASSETS $ 13,247.0 $ 13,102.6
=========== ===========
LIABILITIES:
CURRENT LIABILITIES:
Accounts payable - trade $ 1,320.6 $ 1,417.5
Compensation and benefits 777.3 794.5
Other current liabilities 301.2 294.5
United States and foreign taxes 261.8 249.0
Notes payable 1,193.0 862.3
Sumitomo 1.2% Convertible Note Payable Due 8/00 126.6 127.8
Long term debt due within one year 181.4 214.3
----------- -----------
TOTAL CURRENT LIABILITIES 4,161.9 3,959.9
Long Term Debt and Capital Leases 2,279.2 2,347.9
Compensation and Benefits 2,147.7 2,137.4
Other Long Term Liabilities 139.5 149.1
Minority Equity in Subsidiaries 884.7 891.2
----------- -----------
TOTAL LIABILITIES 9,613.0 9,485.5
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value:
Authorized 50,000,000 shares, unissued - -
Common Stock, no par value:
Authorized 300,000,000 shares
Outstanding shares - 156.4 (156.3 in 1999)
after deducting 39.3 treasury shares (39.3 in 1999) 156.4 156.3
Capital Surplus 1,030.1 1,029.6
Retained Earnings 3,547.9 3,531.4
Accumulated Other Comprehensive Income (1,100.4) (1,100.2)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 3,634.0 3,617.1
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,247.0 $ 13,102.6
=========== ===========
The accompanying notes are an integral part of this financial statement.
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unaudited
(In millions) Accumulated Other
Comprehensive Income
-----------------------------------
Common Capital Retained Foreign Minimum Unrealized Total
Stock Surplus Earnings Currency Pension Investment Shareholders'
Translation Liability Gains Equity
-------------------------------------------------------------------------------
Balance at December 31, 1999 $156.3 $ 1,029.6 $3,531.4 $ (1,072.2) $ (15.2) $ (12.8) $ 3,617.1
Comprehensive income for 2000:
NET INCOME 63.6
FOREIGN CURRENCY TRANSLATION (20.4)
MINIMUM PENSION LIABILITY 1.7
UNREALIZED INVESTMENT GAIN 18.5
(NET OF TAX OF $11.4)
TOTAL COMPREHENSIVE INCOME 63.4
Cash dividends (47.1) (47.1)
Common stock issued 0.1 0.5 0.6
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Balance at March 31, 2000 $156.4 $ 1,030.1 $3,547.9 $ (1,092.6) $ (13.5) $ 5.7 $ 3,634.0
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Accumulated Other
Comprehensive Income
-------------------------
Common Capital Retained Foreign Minimum Total
Stock Surplus Earnings Currency Pension Shareholders'
Translation Liability Equity
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Balance at December 31, 1998 $ 155.9 $ 1,015.9 $ 3,477.8 $ (877.6) $ (26.2) $ 3,745.8
COMPREHENSIVE INCOME FOR 1999:
NET INCOME 25.5
FOREIGN CURRENCY TRANSLATION (161.1)
MINIMUM PENSION LIABILITY 4.6
TOTAL COMPREHENSIVE INCOME (131.0)
Cash dividends (46.9) (46.9)
Common stock transactions 0.1 0.7 0.8
--------------------------------------------------------------------------------
Balance at March 31, 1999 $ 156.0 $ 1,016.6 $ 3,456.4 $ (1,038.7) $ (21.6) $ 3,568.7
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The accompanying notes are an integral part of this financial statement.
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
(In millions)
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 63.6 $ 25.5
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 160.4 140.1
Rationalizations - 116.0
Changes in operating assets and liabilities, net of noncash
rationalizations:
Accounts and notes receivable (151.9) (226.3)
Inventories (130.7) (0.5)
Accounts payable-trade (76.7) (24.5)
Other assets and liabilities 0.9 (131.1)
-------- --------
Total adjustments (198.0) (126.3)
-------- --------
TOTAL CASH FLOWS FROM OPERATING ACTIVITIES (134.4) (100.8)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (127.7) (148.8)
Other transactions 19.7 (47.7)
-------- --------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (108.0) (196.5)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term debt incurred 536.2 380.8
Short term debt paid (830.9) (70.0)
Long term debt incurred 600.7 14.7
Long term debt paid (26.3) (16.1)
Common stock issued 0.5 0.7
Dividends paid (47.1) (46.9)
-------- --------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 233.1 263.2
Effect of Exchange Rate Changes on Cash and Cash Equivalents (2.2) (13.9)
-------- --------
Net Change in Cash and Cash Equivalents (11.5) (48.0)
Cash and Cash Equivalents at Beginning of the Period 241.3 239.0
-------- --------
Cash and Cash Equivalents at End of the Period $ 229.8 $ 191.0
======== ========
The accompanying notes are an integral part of this financial statement.
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
All per share amounts in these Notes to Financial Statements are
diluted unless otherwise indicated.
RATIONALIZATIONS
Rationalization charges were recorded on the Consolidated Statement of
Income, as follows:
(In millions, except per share) THREE MONTHS ENDED
MARCH 31, 1999
Rationalizations $ 167.4
=========
After Tax 116.0
=========
The 1999 first quarter charge related primarily to the termination of tire
production at the Company's Gadsden, Alabama facility and the downsizing and
consolidation of tire manufacturing facilities at Freeport, Illinois and 12
other locations in Europe and Latin America. Of the $167.4 million charge
recorded, $28.4 million related to non-cash writeoffs and $139.0 million related
to future cash outflows, primarily for associate severance costs. Of the $167.4
million of rationalization actions recorded during the first quarter of 1999,
$33.4 million and $11.3 million related to Gadsden were reversed in the 1999
third and fourth quarters, respectively. The reversals resulted from the
Company's decision to resume production of certain tire lines in a portion of
the Gadsden facility due to higher than expected demand.
1999 PROGRAM - The Company committed to a number of rationalization actions in
the first, third and fourth quarters of 1999 totaling $240.1 million, of which
$167.4 million was recorded in the 1999 first quarter. The balance of the
provisions recorded under the 1999 program totaled $24.8 million and $41.2
million at March 31, 2000 and December 31, 1999, respectively.
Associate-related rationalization costs totaling $171.6 million were
recorded in 1999 and were incurred during the 2000 first quarter, as follows:
Balance at Balance at
(In millions) 12/31/99 INCURRED 3/31/00
------- ------- -------
North American Tire staffing $ 11.1 $ (4.2) $ 6.9
European associate reductions 6.2 (.7) 5.5
Asset sales and other exit costs 5.8 (.1) 5.7
Termination of tire production 5.6 (2.7) 2.9
Plant downsizing and consolidation .4 (.4) -
Withdrawal of support for CART/IRL .3 (.3) -
------- ------- -------
$ 29.4 $ (8.4) $ 21.0
======= ======= =======
Under the above programs, during the 2000 first quarter, approximately 200
associates, primarily production and support associates at a Latin American
facility were released. The Company plans to release approximately 600 more
associates under the above programs during 2000.
Rationalization costs, other than associate-related costs, totaling $68.5
million were recorded in 1999 and were incurred during the 2000 first quarter,
as follows:
Balance at Balance at
(In millions) 12/31/99 INCURRED 3/31/00
------- ------- -------
Withdrawal of support for CART/IRL $ 9.5 $ (6.8) $ 2.7
Termination of tire production 2.1 (1.2) .9
Plant downsizing and consolidation .1 - .1
Asset sales and other exit costs .1 - .1
------- ------- -------
$ 11.8 $ (8.0) $ 3.8
======= ======= =======
The Company will complete these actions during 2000.
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
RATIONALIZATIONS (continued)
- ----------------------------
1997 PROGRAM - Associate-related rationalization costs totaling $146.1 million
were recorded in 1997 and were incurred during the 2000 first quarter, as
follows:
Balance at Balance at
(In millions) 12/31/99 Incurred 3/31/00
-------- -------- -------
Kelly-Springfield consolidation $ 10.3 $ (1.5) $ 8.8
Plant downsizing and closure activities 4.8 (4.4) .4
Consolidation of North American
distribution facilities 5.3 (.8) 4.5
------- ------- -------
$ 20.4 $ (6.7) $ 13.7
======= ======= =======
During the 2000 first quarter, approximately 150 associates were released under
the above programs. Under the 1997 program, the Company plans to release
approximately 250 more associates during 2000, primarily hourly associates at
manufacturing and distribution locations in the United States and certain
supervisory and staff associates in the United States.
Rationalization costs, other than associate-related costs, totaling
$119.1 million were recorded in 1997 and were incurred during the 2000 first
quarter, as follows:
Balance at Balance at
(In millions) 12/31/99 Incurred 3/31/00
------- ------- -------
Kelly-Springfield consolidation $ 12.1 $ (.1) $ 12.0
Consolidation of North American
distribution facilities .4 (.3) .1
------- ------- -------
$ 12.5 $ (.4) $ 12.1
======= ======= =======
The Company will complete these actions during 2000.
DUNLOP RATIONALIZATIONS
- -----------------------
The following rationalization actions have been recorded as adjustments
to the purchase price allocation in respect of the acquired Dunlop businesses,
and did not affect the Consolidated Statement of Income.
2000 DUNLOP PROGRAM - The Company committed to certain rationalization actions
in the first quarter of 2000 related to the Dunlop businesses acquired from
Sumitomo on September 1, 1999 for the purpose of optimizing market growth
opportunities and maximizing cost efficiencies. The Company recorded $17.0
million related to these actions, all of which related to future cash outflows,
primarily for associate severance costs. The balance of these provisions totaled
$15.3 million at March 31, 2000.
Associate-related rationalization costs were recorded in the first
quarter of 2000 and were incurred during 2000, as follows:
Balance at
(In millions) Recorded Incurred 3/31/00
-------- -------- -------
Birmingham associate reductions $17.0 $(1.7) $15.3
======= ======= =======
The first quarter 2000 charges provide for the release of approximately 650
operating, engineering and support associates in Birmingham, England. During the
2000 first quarter, approximately 150 associates were released. The Company
plans to release approximately 500 more associates by March 31, 2001.
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
RATIONALIZATIONS (continued)
- ----------------------------
1999 DUNLOP PROGRAM - Associate-related rationalization costs totaling $4.4
million were recorded in 1999, and were incurred during the 2000 first quarter,
as follows:
Balance at Balance at
(In millions) 12/31/99 Incurred 3/31/00
-------- -------- -------
Research and development reorganization $ 1.9 $ (.9) $ 1.0
Associate downsizing and relocation 1.4 (.4) 1.0
------ ------ ------
$ 3.3 $ (1.3) $ 2.0
====== ====== ======
During the 2000 first quarter, approximately 60 associates primarily in research
and development operations were released or relocated. The Company plans to
release approximately 20 more associates during 2000 under this program.
Rationalization costs, other than associate-related costs, totaling $2.5
million were recorded in 1999, and were incurred during the 2000 first quarter,
as follows:
Balance at Balance at
(In millions) 12/31/99 Incurred 3/31/00
---------- -------- ----------
Closure of United Kingdom retail outlets $ 2.1 $ (.1) $ 2.0
====== ====== ======
The Company expects that these actions will be completed during 2000, except for
future rental payments under noncancellable leases.
The Company has been undergoing an extensive analysis and assessment of
the various activities of the combined businesses and is formulating, but has
not completed, plans to further integrate the businesses in order to optimize
market growth opportunities as well as maximize cost efficiencies. The actions
contemplated under the plans will include the downsizing or consolidation of
various manufacturing, distribution, sales, support and administrative
operations. The execution of the plan is contingent upon the completion of the
analysis of the optimal integration of manufacturing, distribution and sales
operations and facilities, information systems, research and development
activities and the appropriate staffing levels for various other functions. The
plans are expected to be finalized by the third quarter of 2000. The Company
anticipates that some of these actions will result in charges to future
operations while others will result in an adjustment to the acquisition cost.
The Company anticipates that it may incur additional rationalization charges in
future periods, in the range of $15 million to $18 million, related to the
closure of the Italian plant.
Further actions contemplated by the Company related to the Dunlop
businesses acquired on September 1, 1999 are expected to result in costs
totaling $50 million to $80 million. These costs include associate severance
costs and noncancellable lease obligations. The costs will be recorded as an
adjustment to the acquisition cost and will result in increased values assigned
to goodwill.
PER SHARE OF COMMON STOCK
- -------------------------
Basic earnings per share have been computed based on the average number
of common shares outstanding. The following table presents the number of
incremental weighted average shares used in computing diluted per share amounts:
THREE MONTHS ENDED
MARCH 31,
2000 1999
----- -----
Average share outstanding - basic 156.3 156.0
Stock options .1 1.1
1.2% Convertible Note 2.3 .7
----- -----
Average shares outstanding - diluted 158.7 157.8
===== =====
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INVESTMENTS AND NONCASH INVESTING ACTIVITIES
- --------------------------------------------
The Consolidated Statement of Cash Flows is presented net of the
following transactions.
In connection with the Company's strategic alliance with Sumitomo, on
February 25, 1999 the Company issued to Sumitomo at par its 1.2% Convertible
Note Due August 16, 2000, in the principal amount of Yen13,073,070,934. The
Company's Note is convertible, if not earlier redeemed, during the period
beginning July 16, 2000 through August 15, 2000 into 2,281,115 shares of the
Common Stock, without par value, of the Company at a conversion price of
Yen5,731 per share, subject to certain adjustments. In addition, on February 25,
1999, the Company purchased at par from Sumitomo a 1.2% Convertible Note Due
August 16, 2000, in the principal amount of Yen13,073,070,934 (the "Sumitomo
Note"). The Sumitomo Note is convertible, if not earlier redeemed, during the
period beginning July 16, 2000 through August 15, 2000 into 24,254,306 shares of
the Common Stock, Yen50 par value per share, of Sumitomo at a conversion price
of Yen539 per share, subject to certain adjustments. The principal amount of
each Note was equivalent to $126.6 million at March 31, 2000. The Company and
Sumitomo have agreed not to redeem their respective Notes, and to convert the
Notes, if the joint ventures are operating on July 1, 2000.
The Company has classified its investment in the Sumitomo Note as
available-for-sale, as provided in Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The
fair value of the Sumitomo Note as an equity instrument was $136.0 million at
March 31, 2000. Changes in the fair value of the Sumitomo Note are reported in
the Consolidated Balance Sheet as Accumulated Other Comprehensive Income. The
Company's 1.2% Convertible Note Payable has been designated as a hedge of the
exchange exposure of the Sumitomo Note. To the extent the hedge is effective,
the effect of exchange rate changes on the Company's Note are reported on the
Consolidated Balance Sheet as Accumulated Other Comprehensive Income. At March
31, 2000 the gross unrealized holding gain on the Sumitomo Note, net of the
hedge, totaled $9.2 million ($5.7 million after tax).
NON-CONSOLIDATED OPERATIONS - SOUTH PACIFIC TYRE
- ------------------------------------------------
In addition to its consolidated operations in the Asia region, the Company
owns a 50% interest in South Pacific Tyres Ltd (SPT), a partnership with Pacific
Dunlop Ltd of Australia. SPT is the largest tire manufacturer, marketer and
exporter in Australia and New Zealand. The Company is required to use the equity
method to account for its interest in the results of operations and financial
position of SPT.
The following table presents sales and EBIT of the Company's Asia Tire
segment and 100% of the operations of SPT:
(In millions) THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
------ ------
NET SALES:
Asia Tire $134.7 $141.0
SPT 150.1 154.6
------ ------
$284.8 $295.6
====== ======
EBIT:
Asia Tire $ 9.8 $ 3.6
SPT (3.0) 8.8
------ ------
$ 6.8 $ 12.4
====== ======
ADJUSTMENTS
- -----------
All adjustments, consisting of normal recurring adjustments, necessary for
a fair statement of the results of these unaudited interim periods have been
included.
RECLASSIFICATION
- ----------------
Certain items previously reported in specific financial statement captions
have been reclassified to conform to the 2000 presentation.
-8-
10
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
STRATEGIC ALLIANCE
- ------------------
The following table presents supplemental pro forma estimated results
of operations as if the joint ventures had commenced operations on January 1,
1999.
THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
(In millions, except per share)
Net Sales $ 3,536.5 $ 3,569.5
============ ============
Net Income $ 63.6 $ 30.6
============ ============
Net Income Per Share - Basic $ .41 $ .19
============ ============
Net Income Per Share - Diluted $ .40 $ .19
============ ============
BUSINESS SEGMENTS
- -----------------
Portions of the items reported as Rationalizations on the Consolidated
Statement of Income were not charged to segment operating income (EBIT) but were
attributable to the Company's seven segments as follows:
(In millions) THREE MONTHS ENDED
MARCH 31, 1999
------------------
RATIONALIZATIONS
----------------
North American Tire $ 95.5
European Union Tire 6.7
Eastern Europe, Africa
and Middle East Tire 2.1
Latin American Tire 42.5
Asia Tire 1.5
------
TOTAL TIRES 148.3
Engineered Products 9.1
Chemical Products 3.1
------
TOTAL SEGMENTS 160.5
Corporate 6.9
------
TOTAL RATIONALIZATIONS $167.4
=======
-9-
11
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
SEGMENT INFORMATION
Unaudited
(In millions) THREE MONTHS ENDED
MARCH 31,
2000 1999
--------- ---------
SALES:
North American Tire $ 1,653.4 $ 1,507.1
European Union Tire 846.5 503.5
Eastern Europe, Middle East & Africa Tire 187.2 181.2
Latin American Tire 253.3 240.6
Asia Tire 134.7 141.0
---------- ----------
TOTAL TIRES 3,075.1 2,573.4
Engineered Products 314.6 308.7
Chemical Products 273.0 228.4
---------- ----------
TOTAL SEGMENT SALES 3,662.7 3,110.5
Inter-SBU Sales (135.4) (120.4)
Other 9.2 1.1
---------- ----------
NET SALES $ 3,536.5 $ 2,991.2
========== ==========
INCOME:
North American Tire $ 71.6 $ 91.7
European Union Tire 43.7 45.3
Eastern Europe, Middle East & Africa Tire 15.3 9.8
Latin American Tire 23.4 30.1
Asia Tire 9.8 3.6
---------- ----------
TOTAL TIRES 163.8 180.5
Engineered Products 23.5 20.5
Chemical Products 22.5 28.7
---------- ----------
TOTAL SEGMENT INCOME (EBIT) 209.8 229.7
Rationalizations - (167.4)
Interest expense (62.1) (37.7)
Foreign currency exchange (5.1) 34.6
Minority interest in net income of subsidiaries (16.6) (4.5)
Inter-SBU income (9.4) (14.0)
Other (16.1) (6.0)
---------- ----------
INCOME BEFORE INCOME TAXES $ 100.5 $ 34.7
========== ==========
- 10 -
12
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
CONSOLIDATED
(All per share amounts are diluted)
Sales in the first quarter of 2000 were $3.54 billion, increasing 18.3%
from $2.99 billion in the 1999 quarter. Net income in the 2000 quarter was $63.6
million or $.40 per share, compared to $25.5 million or $.16 per share in the
1999 period, which included after-tax rationalization charges of $116.0 million
or $.74 per share.
Worldwide tire unit sales in the 2000 quarter were 54.8 million units, an
increase of 9.1 million units or 19.8% compared to the 1999 period, including
8.9 million units contributed by the Dunlop businesses acquired from Sumitomo on
September 1, 1999. North American (U.S. and Canada) volume increased 3.1 million
units or 12.3% (including 2.9 million units from Dunlop operations), while
international unit sales increased 5.9 million units or 29.1% (including 6
million units contributed by Dunlop operations) in the 2000 quarter. Worldwide
replacement unit sales increased 17.7% from the 1999 quarter, primarily in
Europe. Original equipment unit sales increased 24.7%, due primarily to
increased volume in Europe.
Sales increased in the 2000 quarter due primarily to higher tire unit sales
resulting from the addition of the Dunlop businesses. The Dunlop businesses
contributed $576.8 million to 2000 first quarter sales. Revenues in the 2000
quarter were adversely impacted by the effect of currency translations on
international results. The Company estimates that versus the 1999 quarter,
currency movements adversely affected revenues by approximately $50 million. In
addition, revenues were adversely affected by continued worldwide competitive
pricing pressures and a shift in mix to lower priced tires. All business units
of the Company have announced price increases to offset increasing raw material
costs, however revenues in future periods may continue to be adversely affected
by competitive pricing pressures and currency translations.
- 11 -
13
EBIT (sales less cost of goods sold and selling, administrative and general
expense) decreased in the first quarter of 2000 due to the worldwide competitive
pricing environment, increased cost of goods sold due primarily to higher raw
material costs and a change in product and market mix to lower priced and lower
margin tires. The Company estimates that versus the 1999 quarter, currency
movements adversely affected EBIT by approximately $5 million. EBIT in the 2000
first quarter was favorably affected by the acquisition of the Dunlop
businesses, which contributed $44.1 million in EBIT.
The Company is unable to predict the impact of currency fluctuations and
economic conditions on its sales and EBIT in future periods. Reported EBIT in
future periods is likely to be unfavorably impacted if the dollar strengthens
versus various foreign currencies and by anticipated increases in energy and raw
material prices and labor costs, which may not be recoverable in the market due
to pricing pressures present in today's highly competitive market conditions.
Similarly, continued weak economic conditions in Latin America could adversely
affect EBIT in future periods.
The following table presents cost of goods sold (CGS) and selling,
administrative and general expense (SAG) as a percent of sales:
Three Months Ended March 31,
2000 1999
---- ----
CGS 78.9% 77.9%
SAG 15.8 14.9
Cost of goods sold increased in dollars due primarily to the addition of the
Dunlop businesses. Costs of goods sold increased in dollars and as a percent to
sales due primarily to increased raw material costs. SAG increased in the first
quarter of 2000 in dollars and as a percent to sales due to higher SAG levels at
the Dunlop businesses.
Interest expense rose 64.4% in the 2000 quarter due to higher debt levels
incurred primarily to fund the acquisition of the Dunlop businesses.
Foreign currency exchange losses of $5.1 million reduced first quarter 2000
earnings, compared to a gain of $34.6 million in the 1999 period, primarily due
to the revaluation of the Brazilian real.
U.S. and foreign taxes on income in the 2000 quarter reflected an increase
in the Company's estimated annual effective tax rate to 31.5%. The effective tax
rate in the 1999 first period was 23.5%, reflecting rationalization charges in
that period.
- 12 -
14
RATIONALIZATION ACTIVITY - Rationalization charges were recorded on the
Consolidated Statement of Income in the 1999 first quarter as follows:
(In millions, except per share) THREE MONTHS ENDED
MARCH 31, 1999
------------------
Rationalization Actions $167.4
After Tax 116.0
Per Share $ .74
The 1999 first quarter charge related primarily to the termination of tire
production at the Company's Gadsden, Alabama facility and the downsizing and
consolidation of tire manufacturing facilities at Freeport, Illinois and 12
other locations in Europe and Latin America. Of the $167.4 million charge
recorded, $28.4 million related to non-cash writeoffs and $139.0 million related
to future cash outflows, primarily for associate severance costs. Of the $167.4
million of rationalization actions recorded during the first quarter of 1999,
$33.4 million and $11.3 million related to Gadsden were reversed in the 1999
third and fourth quarters, respectively. The reversals resulted from the
Company's decision to resume production of certain tire lines in a portion of
the Gadsden facility due to higher than expected demand.
1999 RATIONALIZATION PROGRAM - The Company committed to a number of
rationalization actions in the first, third and fourth quarters of 1999 totaling
$240.1 million, of which $167.4 million ($116.0 million after tax or $.74 per
share) was recorded in the 1999 first quarter. The balance of the provisions
recorded under the 1999 program totaled $24.8 million and $41.2 million at March
31, 2000 and December 31, 1999, respectively.
Under the 1999 program, during the first quarter of 2000, approximately 200
associates, primarily production and support associates at a Latin American
facility, were released at a cost of $8.4 million. The Company plans to release
approximately 600 more associates under the 1999 program during 2000. The
remaining reserve related to the completion of the 1999 program was $21.0
million and $29.4 million at March 31, 2000 and December 31, 1999, respectively.
Rationalization costs, other than for associate-related costs, totaling
$8.0 million were incurred during the first quarter of 2000, primarily for
contract settlement costs as a result of the Company's exit from the
Championship Auto Racing Teams and Indy Racing League (CART/IRL) racing series.
The balance of the reserve at March 31, 2000 totaled $3.8 million compared to
$11.8 million at December 31, 1999.
- 13 -
15
The Company will complete these actions during 2000. Annual pretax savings
of approximately $219 million are expected when the planned actions have been
fully implemented.
1997 RATIONALIZATION PROGRAM - During the first quarter of 2000, approximately
150 associates in North American operations were released under the 1997 program
at a cost of $6.7 million. The Company plans to release approximately 250 more
associates under the 1997 program during 2000 and had reserved $13.7 million for
that cost at March 31, 2000, compared to $20.4 million at December 31, 1999.
Rationalization costs, other than for associate-related costs, totaling $.4
million were incurred during the first quarter of 2000. The balance of the
reserve at March 31, 2000 totaled $12.1 million compared to $12.5 million at
December 31, 1999.
The Company will complete the 1997 program during 2000. Annual pretax
savings of approximately $200 million are expected when the planned actions have
been fully implemented.
DUNLOP RATIONALIZATIONS - The following rationalization actions have been
recorded as adjustments to the purchase price allocation in respect of the
acquired Dunlop businesses, and did not affect the Consolidated Statement of
Income.
2000 DUNLOP RATIONALIZATION PROGRAM - The Company committed to certain
rationalization actions in the first quarter of 2000 related to the Dunlop
businesses acquired from Sumitomo on September 1, 1999 for the purpose of
optimizing market growth opportunities and maximizing cost efficiencies. The
Company recorded $17.0 million related to these actions, all of which related to
future cash outflows, primarily for associate severance costs. The balance of
these provisions totaled $15.3 million at March 31, 2000.
The first quarter 2000 charges provide for the release of approximately
650 operating, engineering and support associates in Birmingham, England. During
the first quarter of 2000, approximately 150 associates were released at a cost
of $1.7 million. The Company plans to release approximately 500 more associates
under the 2000 Dunlop program by March 31, 2001 and had reserved $15.3 million
for that cost at March 31, 2000.
1999 DUNLOP RATIONALIZATION PROGRAM - During the first quarter of 2000,
approximately 60 associates were released or relocated under the 1999 Dunlop
program at a cost of $1.3 million. The Company plans to release approximately
20 more associates under the 1999 Dunlop program during 2000 and had reserved
$2.0 million for that cost at March 31, 2000, compared to $3.3 million at
December 31, 1999.
- 14 -
16
Under the 1999 Dunlop program, rationalization costs, other than for
associate-related costs, totaling $.1 million were incurred during the first
quarter of 2000. The balance of the reserve at March 31, 2000 totaled $2.0
million compared to $2.1 million at December 31, 1999.
The Company expects that these actions will be completed during 2000,
except for future rental payments under noncancellable leases. Annual pretax
savings of approximately $11 million are expected when the planned actions have
been fully implemented.
For further information, refer to the note to the financial statements,
Rationalizations.
The Company has been undergoing an extensive analysis and assessment of the
various activities of the combined businesses and is formulating, but has not
completed, plans to further integrate the businesses in order to optimize market
growth opportunities as well as maximize cost efficiencies. The actions
contemplated under the plans will include the downsizing or consolidation of
various manufacturing, distribution, sales, support and administrative
operations. The execution of the plan is contingent upon the completion of the
analysis of the optimal integration of manufacturing, distribution and sales
operations and facilities, information systems, research and development
activities and the appropriate staffing levels for various other functions. The
plans are expected to be finalized by the third quarter of 2000. The Company
anticipates that some of these actions will result in charges to future
operations while others will result in an adjustment to the acquisition cost.
Further actions contemplated by the Company related to the businesses
acquired are expected to result in costs totaling $50 million to $80 million.
These costs include associate severance costs and noncancellable lease
obligations. The costs will be recorded as an adjustment to the acquisition cost
and will result in increased values assigned to goodwill.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 requires all derivatives to be
recognized as either assets or liabilities on the balance sheet and measured at
fair value. Changes in such fair value are required to be recognized in earnings
to the extent that the derivatives are not effective as hedges. The provisions
of SFAS 133, as amended, are effective for fiscal years beginning January 1,
2001 for companies on a calendar year reporting basis and are effective for
interim periods in the initial year of adoption. The Company is currently
assessing the financial statement impact of the adoption of SFAS 133.
- 15 -
17
SEGMENT INFORMATION
Segment EBIT was $209.8 million in the first quarter of 2000, decreasing
8.7% from $229.7 million in the 1999 quarter. Segment operating margin in the
first quarter of 2000 was 5.7%, compared to 7.4% in the 1999 period. Segment
EBIT did not include rationalization charges attributable to operating segments
totaling $160.5 million in the 1999 first quarter.
NORTH AMERICAN TIRE
North American Tire segment sales in the first quarter of 2000 were $1.65
billion, increasing 9.7% from $1.51 billion in the 1999 quarter.
Unit sales in the 2000 quarter increased 3.1 million units or 12.3% from
the 1999 period. Dunlop operations contributed 2.9 million units. Replacement
unit sales increased 14.8% and original equipment volume increased 8.2%.
Sales in the 2000 quarter increased from the 1999 period due to the
acquisition of the Dunlop Tire businesses in the United States and Canada. The
Dunlop businesses contributed $178.7 million to 2000 first quarter sales.
Revenues in the first quarter of 2000 were adversely impacted by competitive
pricing pressures and a shift in mix in the replacement market to lower priced
tires and less profitable channels of distribution. Revenues in future periods
are likely to be adversely affected by competitive pricing pressures and a
change in the channel mix in the replacement market.
EBIT in North America was $71.6 million in the first quarter of 2000,
decreasing 21.9% from $91.7 million in the 1999 quarter. The Dunlop businesses
contributed $16.1 million to 2000 first quarter EBIT. Operating margin in 2000
was 4.3%, compared to 6.1% in 1999.
EBIT in the first quarter of 2000 decreased from the 1999 period due
primarily to increased raw material costs and a change in product and channel
mix. EBIT was favorably affected in the first quarter of 2000 by the acquisition
of the Dunlop Tire businesses in the United States and Canada.
EBIT in the 1999 period did not include rationalizations totaling $95.5
million.
In addition to potential adverse changes in pricing and mix, EBIT in
future periods is likely to be adversely affected by higher raw material costs.
- 16 -
18
EUROPEAN UNION TIRE
European Union Tire segment sales in the first quarter of 2000 were $846.5
million, increasing 68.1% from $503.5 million in the 1999 period.
Unit sales in the 2000 quarter increased 5.7 million units or 60.4% from
the 1999 period. Dunlop operations contributed 5.9 million units. Replacement
unit sales increased 48.7% and original equipment volume increased 96.2%.
Sales in the 2000 quarter increased from the 1999 period due to the
acquisition of the Dunlop Tire businesses, which contributed $395.9 million to
2000 first quarter sales. Revenues in the 2000 quarter were adversely impacted
by the effects of currency translation (which the Company estimates to be
approximately $50 million in the European Union), competitive pricing pressures
and a shift in mix to lower priced tires.
European Union Tire segment EBIT was $43.7 million in the 2000 quarter,
decreasing 3.5% from $45.3 million in the 1999 period. The Dunlop businesses
contributed $27.7 million to 2000 first quarter EBIT. Operating margin in 2000
was 5.2%, compared to 9.0% in 1999.
EBIT in the 2000 quarter decreased from the 1999 period due primarily to
additional costs related to discontinuing production in Italy and servicing
customers during the closure period, the adverse margin impact of competitive
market conditions and cost differentials driven by a weak Euro versus the
British pound.
EBIT in the 1999 period did not include rationalizations totaling $6.7
million. The Company anticipates that it may incur additional rationalization
charges in future periods, in the range of $15 million to $18 million, related
to the closure of the Italian plant.
The Company anticipates continued fluctuations in the value of the U.S.
dollar relative to the Euro and other Western European currencies. Revenues and
EBIT in the European Union Tire segment may be affected in future periods by the
effects of currency translations and continued competitive pricing in the
various markets. Additionally, EBIT in future periods may be adversely affected
by rising raw material prices.
EASTERN EUROPE, AFRICA AND MIDDLE EAST TIRE
Eastern Europe, Africa and Middle East Tire ("Eastern Europe Tire") segment
sales in the first quarter of 2000 were $187.2 million, increasing 3.3% from
$181.2 million in the 1999 quarter.
Unit sales in the 2000 first quarter decreased slightly from 1999.
Replacement unit sales were 4.5% lower but OE volume increased 11.9%.
- 17 -
19
Revenues in the 2000 first quarter increased from the 1999 period despite
slightly lower tire unit sales, due primarily to a more favorable product mix,
improved pricing and a general improvement in the economic conditions in Eastern
Europe and South Africa. Revenues included Dunlop sales of $2.2 million.
Eastern Europe Tire EBIT was $15.3 million in the 2000 first quarter,
increasing 56.1% from $9.8 million in the 1999 period. Operating margin in 2000
was 8.2%, compared to 5.4% in 1999.
EBIT in the 2000 first quarter increased from the 1999 period due primarily
to higher margins, higher factory utilization levels and a general market
upturn.
EBIT in the 1999 period did not include rationalization charges totaling
$2.1 million.
Revenues and EBIT in future periods may be adversely affected by
competitive pricing pressures and economic conditions in the markets served by
the Eastern Europe segment. Additionally, EBIT in future periods may be
adversely affected by rising raw material prices.
The Company anticipates continued fluctuations in the value of the U.S.
dollar relative to the various currencies in the markets served by Eastern
Europe Tire. Revenues and EBIT in Eastern Europe Tire are likely to be adversely
affected in future periods by the effects of currency translations if the dollar
strengthens against the currencies in the region.
LATIN AMERICAN TIRE
Latin American Tire segment sales in the first quarter of 2000 were $253.3
million, increasing 5.3% from $240.6 million in the 1999 period.
Unit sales in the 2000 quarter increased 2.1% from the 1999 period.
Replacement unit sales decreased 1% but original equipment volume increased
15.8%.
Revenues in the first quarter of 2000 increased from the 1999 period due
primarily to the effects of currency translation on Brazilian and Mexican
results. Revenues in the 2000 quarter were adversely affected by competitive
pricing pressures and adverse economic conditions in the region.
EBIT in Latin America was $23.4 million in the first quarter of 2000,
decreasing 22.3% from $30.1 million in the 1999 quarter. Operating margin in
2000 was 9.2%, compared to 12.5% in 1999.
EBIT in the 2000 first quarter decreased from the 1999 period due primarily
to increased raw material prices and competitive pricing. EBIT was favorably
impacted by the effects of currency translation on results in Brazil and Mexico.
- 18 -
20
EBIT in the 1999 period did not include rationalization charges totaling
$42.5 million.
The Company anticipates continued fluctuations in the value of the U.S.
dollar relative to Latin American currencies. Revenues and EBIT in the Latin
American Tire segment in future periods are likely to be adversely affected by
continued competitive pricing pressures, the effects of currency translations
and by the expected continuing unfavorable economic conditions in the region.
Additionally, EBIT in future periods may be adversely affected by rising raw
material prices.
ASIA TIRE
Asia Tire segment sales in the first quarter of 2000 were $134.7 million,
decreasing 4.5% from $141.0 million in the 1999 period.
Unit sales in the 2000 quarter increased 5.3% from the 1999 period.
Replacement unit sales decreased 1.5%, but original equipment volume increased
35.5%.
Revenues in the first quarter of 2000 decreased from the 1999 period due
primarily to the deconsolidation of the replacement tire business transferred to
the Company's joint venture with Sumitomo in Japan, which contributed
approximately $13 million in the 1999 period, a less favorable product mix and
competitive pricing. Currency translation had a minimal positive impact.
EBIT in Asia was $9.8 million in the first quarter of 2000, increasing from
$3.6 million in the 1999 quarter. Operating margin in 2000 was 7.3%, compared to
2.6% in 1999. EBIT in the 2000 period increased due primarily to cost
efficiencies associated with higher volume.
EBIT in the first quarter of 1999 did not include rationalization charges
totaling $1.5 million.
The Company anticipates continued fluctuations in the value of the U.S.
dollar relative to Asian currencies. Revenues and EBIT in the Asia Tire segment
in future periods may be affected by the effects of currency translations. In
addition, changing economic conditions in the region may adversely affect future
revenues and EBIT. Revenues and EBIT in future periods may be adversely affected
by competitive pricing pressures and higher raw material costs.
- 19 -
21
Sales and EBIT of the Asia Tire segment reflect the results of the
Company's majority-owned tire business in the region. In addition, the Company
owns a 50% interest in South Pacific Tyres Ltd. (SPT), the largest tire
manufacturer, marketer and exporter in Australia and New Zealand. Results of
operations of SPT are not reported in segment results, and are reflected in the
Company's Consolidated Statement of Income using the equity method.
The following table presents the sales and EBIT of the Company's Asia Tire
segment together with 100% of the sales and EBIT of SPT:
THREE MONTHS ENDED
MARCH 31,
(In millions) 2000 1999
---- ----
NET SALES:
Asia Tire $134.7 $141.0
SPT 150.1 154.6
------ ------
$284.8 $295.6
====== ======
EBIT:
Asia Tire $ 9.8 $ 3.6
SPT (3.0) 8.8
------ ------
$ 6.8 $ 12.4
====== ======
ENGINEERED PRODUCTS
Sales in Engineered Products in the first quarter of 2000 were $314.6
million, increasing 1.9% from $308.7 million in the 1999 period.
EBIT in Engineered Products was $23.5 million in the first quarter of 2000,
increasing 14.6% from $20.5 million in the 1999 quarter. Operating margin in
2000 was 7.5%, compared to 6.6% in 1999.
Revenues in the 2000 quarter increased from the 1999 period on strong sales
of power transmission products and molded products. Revenues increased despite
the exit from the interior trim business, which contributed $24.2 million to
1999 sales, and reduced demand for conveyor belting from the mining and
agriculture industries. EBIT in the 2000 quarter increased due primarily to
lower unit costs due to increased volume and various manufacturing cost
reduction programs.
The Company anticipates continued fluctuations in the value of the U.S.
dollar relative to Latin American currencies. Revenues and EBIT in the
Engineered Products segment in future periods are likely to be adversely
affected by continued competitive pricing pressures, the effects of currency
translations, expected continuing unfavorable economic conditions in Latin
America, adverse economic conditions globally in the mining and agriculture
industries and increasing raw material and energy prices.
EBIT in the 1999 quarter did not include rationalization charges totaling
$9.1 million.
- 20 -
22
CHEMICAL PRODUCTS
Sales in Chemical Products in the first quarter of 2000 were $273.0
million, increasing 19.5% from $228.4 million in the 1999 period on higher
pricing and volume. Approximately 50% of Chemical Products sales are to the
Company's other segments.
EBIT in Chemical Products was $22.5 million in the first quarter of 2000,
decreasing 21.6% from $28.7 million in the 1999 period. Operating margin in 2000
was 8.2%, compared to 12.6% in 1999. EBIT in the 2000 quarter decreased from the
1999 period due primarily to increased raw material and energy prices.
EBIT in the first quarter of 1999 did not include a rationalization charge
of $3.1 million for the anticipated loss on the sale of a rubber plantation in
Asia.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Net cash used in operating activities was $134.4 million during the first
quarter of 2000, as reported on the Consolidated Statement of Cash Flows.
Working capital requirements increased for accounts receivable, inventories and
accounts payable.
Net cash used in investing activities was $108.0 million during the 2000
first quarter, including capital expenditures totaling $127.7 million, primarily
for plant modernizations and expansions and new tire molds.
Net cash provided by financing activities was $233.1 million during the
first quarter of 2000, which was used primarily to support the previously
mentioned operating and investing activities.
(Dollars in millions) 3/31/00 12/31/99
-------- --------
Consolidated Debt $3,653.6 $3,424.5
Debt to Debt and Equity 50.1% 48.6%
During the first quarter of 2000, the Company issued $300 million of its 8.125%
Notes due 2003 and $300 million of its 8.50% Notes due 2007. The proceeds from
the issuance of the Notes were used to repay outstanding commercial paper and
short term bank borrowings.
- 21 -
23
In connection with the Company's strategic alliance with Sumitomo, on
February 25, 1999 the Company issued to Sumitomo at par a 1.2% Convertible Note
Due August 16, 2000 in the principal amount of Yen13,073,070,934 (equivalent to
$126.6 million at March 31, 2000). The Company's Note is convertible, if not
earlier redeemed, during the period beginning July 16, 2000 through August 15,
2000 into 2,281,115 shares of the Common Stock, without par value, of the
Company at a conversion price of Yen5,731 per share, subject to certain
adjustments. Consolidated Debt and Debt to Debt and Equity as stated above do
not reflect the issuance of the Company's 1.2% Convertible Note.
In addition, on February 25, 1999 the Company purchased at par from
Sumitomo a 1.2% Convertible Note Due August 16, 2000 in the principal amount of
Yen13,073,070,934 (also equivalent to $126.6 million at March 31, 2000). The
Sumitomo Note is convertible, if not earlier redeemed, during the period
beginning July 16, 2000 through August 15, 2000 into 24,254,306 shares of the
Common Stock, Yen50 par value per share, of Sumitomo at a conversion price of
Yen539 per share, subject to certain adjustments. Upon conversion of the
Sumitomo Note into Sumitomo Common Stock, the Company would own 10% of
Sumitomo's outstanding shares. The Company accounts for the Sumitomo note as an
available-for-sale equity instrument. The fair value of the note at March 31,
2000 was $136.0 million.
The Company and Sumitomo have each agreed to convert and not redeem its
convertible note if the Goodyear/Dunlop joint ventures are operating on July 1,
2000.
Substantial short term and long term credit sources are available to
the Company globally under normal commercial practices. At March 31, 2000, the
Company had an aggregate of $.95 billion of commercial paper outstanding. In
addition, at March 31, 2000, the Company had short term committed and
uncommitted bank credit arrangements totaling $2.81 billion, of which $1.76
billion were unused. The Company also had available long term credit
arrangements at March 31, 2000 totaling $3.66 billion, of which $2.00 billion
were unused.
- 22 -
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
INTEREST RATE RISK
The Company actively manages its fixed and floating rate debt mix, within
defined limitations, using refinancings and unleveraged interest rate swaps. The
Company will enter into fixed and floating interest rate swaps to alter its
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 the Company's risk of increased interest costs during periods of rising
interest rates. Floating rate swaps are used to convert the fixed rates of long
term borrowings into short term variable rates. Interest rate swap contracts are
thus used by the Company to separate interest rate risk management from the debt
funding decision. At March 31, 2000, the interest rate on 36% of the Company's
debt was fixed by either the nature of the obligation or through the interest
rate contracts, compared to 28% at December 31, 1999 and 46% at March 31, 1999.
Interest rate lock contracts are used to hedge the risk-free component of
anticipated long term debt issuances.
The following table presents information at March 31:
(Dollars in millions)
INTEREST RATE SWAP CONTRACTS 2000 1999
- ---------------------------- ---- ----
Notional principal amount $ 75.0 $100.0
Pay fixed rate 6.24% 6.17%
Receive variable LIBOR 6.09% 5.05%
Average years to maturity 1.3 1.9
Fair value - asset (liability) $ .6 $ (1.6)
Carrying amount - (liability) - (.1)
Pro forma fair value - asset (liability) .1 (2.5)
INTEREST RATE LOCK CONTRACTS
- ----------------------------
EURO CONTRACTS 2000 1999
- -------------- ---- ----
Notional $191.2 $ -
Average contract rate 4.82% -
Fair value - asset 0.7 -
Carrying amount - -
Pro forma fair value - (liability) (3.2) -
The pro forma fair value assumes a 10% decrease in variable market interest
rates at March 31, 2000 and 1999, respectively, and reflects the estimated fair
value of contracts outstanding at that date under that assumption.
- 23 -
25
Weighted average interest rate contract information follows:
THREE MONTHS ENDED MARCH 31,
(Dollars in millions) 2000 1999
---- ----
Notional principal $ 75.0 $100.0
Pay fixed rate 6.24% 6.17%
Receive variable LIBOR 6.09% 5.13%
The following table presents fixed rate debt information at March 31:
(In millions)
FIXED RATE DEBT 2000 1999
- --------------- ---- ----
Fair value - liability $1,451.9 $ 980.0
Carrying amount - liability 1,456.2 955.6
Pro forma fair value - liability 1,518.7 1,035.2
The pro forma fair value assumes a 100 basis point decrease in market interest
rates at March 31, 2000 and 1999, 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 the Company's 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, and the precision of the model decreases as the assumed change in
interest rates increases.
FOREIGN CURRENCY EXCHANGE RISK
In order to reduce the impact of changes in foreign exchange rates on
consolidated results of operations and future foreign currency denominated cash
flows, the Company was a party to various foreign currency forward exchange
contracts at March 31, 2000 and 1999. These contracts reduce exposure to
currency movements affecting existing foreign currency denominated assets,
liabilities and firm commitments resulting primarily from trade receivables and
payables, equipment acquisitions, intercompany loans and the Company's Swiss
franc debt. The contract maturities match the maturities of the currency
positions. Changes in the fair value of forward exchange contracts are
substantially offset by changes in the fair value of the hedged positions.
The following table presents foreign exchange contract information at March
31:
(In millions) 2000 1999
---- ----
Fair value - favorable $43.9 $73.7
Carrying amount - asset 47.8 79.9
Pro forma change in fair value 10.7 12.6
- 24 -
26
The pro forma change in fair value assumes a 10% change in foreign exchange
rates at March 31, 2000 and 1999, respectively, and reflects the estimated
change in the fair value of contracts outstanding at that date under that
assumption.
The sensitivity to changes in exchange rates of the Company's foreign
currency positions was determined using current market pricing models.
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 which may affect the Company's 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. Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date of this quarterly
report. Such statements are based on current expectations, 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: changes in general economic and industry
conditions in the various markets served by the Company's operations; increased
competitive activity; demand for Goodyear's products; fluctuations in the prices
paid for raw materials and energy; the ability to control costs and expenses;
changes in the monetary policies of various countries where the Company has
significant operations; changes in interest rates; changes in the relative
values of currencies; and other unanticipated events and conditions. It is not
possible to foresee or identify all such factors. The Company disclaims any
intention, commitment or obligation to revise or to update any forward-looking
statement, or to disclose any facts, events or circumstances that occur after
the date hereof which may affect the accuracy of any forward-looking statement.
- 25 -
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Annual Report of The Goodyear Tire & Rubber
Company ("Registrant") on Form 10-K for the year ended December 31, 1999 (the
"1999 10-K"), wherein at Item 3, pages 23, 24, 25 and 26, Registrant reported
certain legal proceedings. Registrant reports the following developments in
respect of the legal proceedings described at paragraph (D) of Item 3 of the
1999 10-K:
On December 27, 1999, China Tire Holdings Limited, a Bermuda
corporation ("China Tire"), filed a civil action (China Tire v. Goodyear, et
al., Case No. 5:99CV3163) in the United States District Court for the North
District of Ohio, Eastern Division, against Registrant and Goodyear
International Corporation ("GIC") alleging that (1) Registrant committed
violations of Section 1962(b) and Section 1962(c) of the Racketeer Influenced
and Corrupt Organization Act in connection with the Registrant's acquisition of
a 75% interest in a tire manufacturing facility in Dalian, People's Republic of
China (the "Dalian Facility") in 1994, (2) Registrant and GIC committed trade
libel by intentionally publishing statements known to be untrue concerning China
Tire to various parties that were for the purpose of disparaging and causing
monetary harm to China Tire, and (3) Registrant and GIC violated the Ohio
Deceptive Trade Practices Act in negotiations regarding the Dalian Facility.
China Tire is seeking an aggregate of $3.5 billion of actual and punitive
damages, prejudgment interest, attorneys' fees and costs, and such further
relief as the court deems proper. On January 14, 2000, Registrant and GIC filed
a motion to dismiss on the grounds that, among other things, the claims are
barred as a result of Orion Tire Corporation, et al. vs. Goodyear, et al. (Cause
No. SACV95-221), a civil action that was dismissed by the United States District
Court for the Central District of California, which dismissal is currently on
appeal before the United States Court of Appeals for the Ninth Circuit, are time
barred as a matter of law and fail to state claims upon which relief can be
granted. On March 3, 2000, the court issued an order and related opinion
granting the motion to dismiss based on its finding that the claims made by
China Tire are barred by the doctrine of claims preclusion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Registrant was held on April 10,
2000 (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 four nominees of the
Board of Directors of Registrant listed in Registrant's Proxy Statement, dated
February 25, 2000, for the Annual Meeting (the "Proxy Statement"), filed with
the Securities and Exchange Commission, and said four nominees were elected.
The following matters were acted upon by the shareholders of Registrant
at the Annual Meeting, at which 136,219,797 shares of the Common Stock, without
par value, of Registrant (the
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"Common Stock", the only class of voting securities of Registrant outstanding),
or approximately 87.1 percent of the 156,353,770 shares of Common Stock
outstanding and entitled to vote at the Annual Meeting, were present in person
or by proxies:
1. ELECTION OF DIRECTORS. Four persons were nominated by the Board of
Directors of Registrant for election as directors of Registrant. Thomas H.
Cruikshank, Katherine G. Farley, Steven A. Minter and Agnar Pytte were nominated
as Class III directors, each to hold office for a three year term expiring at
the 2003 Annual Meeting of Shareholders and until his or her successor shall
have been duly elected and 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
Thomas H. Cruikshank 132,571,200 3,648,597
Katherine G. Farley 132,642,610 3,577,187
Steven A. Minter 132,590,881 3,628,916
Agnar Pytte 132,548,445 3,671,352
The seven directors whose terms of office continue after the Annual Meeting are:
(A) John G. Breen, William E. Butler and George H. Schofield, whose terms expire
in 2001; and (B) Samir G. Gibara, William J. Hudson, Jr., William C. Turner and
Martin D. Walker, whose terms expire in 2002.
2. RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS. A resolution
proposed by the Board of Directors of Registrant that the shareholders ratify
the action of the Board of Directors in selecting and appointing
PricewaterhouseCoopers LLP as independent accountants for Registrant for the
year ending December 31, 2000 was submitted to, and voted upon by, the
shareholders of Registrant. There were 133,908,008 shares of Common Stock voted
in favor of, and 1,378,156 shares of Common Stock voted against, said
resolution. The holders of 933,633 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
2000 was ratified by the shareholders.
ITEM 5. OTHER INFORMATION
(A) ISSUANCE OF $300,000,000 OF 8.125% NOTES DUE 2003. On March 17,
2000, Registrant issued $3000,000,000 in principal amount of its 8.125% Notes
due 2003 (the "8.125% Notes") pursuant to that certain Indenture, dated March 1,
1999 (the "Indenture"), between
-27-
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Registrant and The Chase Manhattan Bank. The net proceeds to Registrant from the
sale of the 8.125% Notes were $298,245,000, before deducting expenses payable by
Registrant which are estimated to be approximately $378,126. The net proceeds
were used to repay a portion of Registrant's outstanding commercial paper and
short term bank borrowings. The terms and conditions of the 8.125% Notes are set
forth in the Indenture and the supplement thereto evidenced by that certain
Officers' Certificate, dated March 17, 2000, and in the form of Global Note
attached as Annex A to said Officers' Certificate, all of which are filed as
Exhibit 4.1 to this Quarterly Report on Form 10-Q and are hereby incorporated by
reference herein and made an integral part hereof.
(B) ISSUANCE OF $300,000,000 OF 8.50% NOTES DUE 2007. On March 17,
2000, Registrant issued $300,000,000 in principal amount of its 8.50% Notes due
2007 (the "8.50% Notes") pursuant to the Indenture. The net proceeds to
Registrant from the sale of the 8.50% Notes were $298,125,000, before deducting
expenses payable by Registrant which are estimated to be approximately $378,126.
The net proceeds were used to repay a portion of Registrant's outstanding
commercial paper and short term bank borrowings. The terms and conditions of the
8.50% Notes are set forth in the Indenture and the supplement thereto evidenced
by that certain Officers' Certificate, dated March 17, 2000, and in the form of
Global Note attached to said Officers' Certificate as Annex A, all of which are
filed as Exhibit 4.1 to this Quarterly Report on Form 10-Q and are hereby
incorporated by reference herein and made an integral part hereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 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.
(b) REPORTS ON FORM 8-K. No Current Report on Form 8-K was filed by The
Goodyear Tire & Rubber Company during the quarter ended March 31, 2000.
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: April 14, 2000 By /s/ RICHARD J. KRAMER
------------------------------------
Richard J. Kramer, Vice President
(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, 2000
INDEX OF EXHIBITS (1)
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO.* DESCRIPTION OF EXHIBIT NUMBER
--------------- ----------------------------------------------- ------
3 ARTICLES OF INCORPORTATION AND BY-LAWS
--------------------------------------
(a) Certificate of Amended Articles of
Incorporation of Registrant, dated December
20, 1954, and Certificate of Amendment to
Amended Articles of Incorporation of
Registrant, dated April 6, 1993, and
Certificate of Amendment to Amended Articles
of Incorporation of Registrant dated June 4,
1996, three documents comprising Registrant's
Articles of Incorporation as amended
(incorporated by reference, filed with the
Securities and Exchange Commission as Exhibit
3.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996).
(b) Code of Regulations of The Goodyear Tire &
Rubber Company, adopted November 22, 1955, as
amended April 5, 1965, April 7, 1980, April 6,
1981 and April 13, 1987 (incorporated by
reference, filed as Exhibit 4.1(B) to
Registrant's Registration Statement on Form
S-3, File No. 333-1995).
4 INSTRUMENTS DEFINING
THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES `
------------------------------------------------
(a) Specimen nondenominational Certificate for
shares of the Common Stock, Without Par Value,
of Registrant; First Chicago Trust Company of
New York as transfer agent and registrar
(incorporated by reference, filed with the
Securities and Exchange Commission as Exhibit
4.3 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996,
File No. 1-1927).
- --------------
*Pursuant to Item 601 of Regulation S-K.
E-1
31
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO.* DESCRIPTION OF EXHIBIT NUMBER
--------------- ------------------------------------------------ ------
4 (b) Conformed copy of Rights Agreement, dated
as of June 4, 1996, between Registrant and
First Chicago Trust Company of New York,
rights Agent (incorporated by reference, filed
with the Securities and Exchange Commission as
Exhibit 1 to Registrant's Registration
Statement on Form 8-A dated June 11, 1996 and
as Exhibit 4(a) to Registrant's Current Report
on Form 8-K dated June 4, 1996, File No.
1-1927).
(c) Conformed copy of Amendment to Rights
Agreement, dated as of February 8, 2000,
between Registrant and First Chicago Trust
Company of New York, Rights Agent
(incorporated by reference, filed with the
Securities and Exchange Commission as Exhibit
4.1 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999, File No.
1-1927).
(d) Conformed copy of Revolving Credit
Facility Agreement, dated as of July 15, 1994,
among Registrant, the Lenders named therein
and Chemical Bank, as Agent (incorporated by
reference, filed with the Securities and
Exchange Commission as Exhibit A to
Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994, File No.
1-1927).
(e) Conformed copy of Replacement and
Restatement Agreement, dated as of July 15,
1996, among Registrant, the Lenders named
therein and The Chase Manhattan Bank (formerly
Chemical Bank), as Agent (incorporated by
reference, filed with the Securities and
Exchange Commission as Exhibit 4.5 to
Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, File 1-1927).
(f) Conformed copy of First Amendment to
Replacement and Restatement Agreement, dated
as of March 31, 1997, among Registrant, the
Lenders named therein and The Chase Manhattan
Bank (formerly Chemical Bank), as Agent
(incorporated by reference, filed with the
Securities and Exchange Commission as Exhibit
4.5 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, File
1-1927).
- --------------
*Pursuant to Item 601 of Regulation S-K.
E-2
32
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO.* DESCRIPTION OF EXHIBIT NUMBER
--------------- ----------------------------------------------- ------
4 (g) Conformed copy of Second Replacement and
Restatement Agreement, dated as of July 13, 1998,
among Registrant, the Lender named therein and The
Chase Manhattan Bank, as Agent (incorporated by
reference, filed with the Securities and Exchange
Commission as Exhibit 4 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1998, File No. 1-1927).
(h) Form of Indenture, dated as of March 15, 1996,
between Registrant and Chemical Bank (now The Chase
Manhattan Bank), as Trustee, as supplemented on
December 3, 1996, March 11, 1998 and March 17, 1998
(incorporated by reference, filed with the
Securities and Exchange Commission as Exhibit 4.1 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, File No. 1-1927).
(i) Form of Indenture, dated as of March 1, 1999, 4.1
between Registrant and The Chase Manhattan Bank,
as Trustee, as supplemented on March 14, 2000 in
respect of Registrant's $300,000,000 principal
amount of 8.125% Notes due 2003 and $300,000,000
principal amount of 8.50% Notes due 2007.
No instrument defining the rights of holders
of long-term debt which relates to securities
having an aggregate principal amount in excess
of 10% of the consolidated assets of
Registrant and its subsidiaries was entered
into during the quarter ended March 31, 2000.
In accordance with paragraph (iii) to Part 4
of Item 601 of Regulation S-K, agreements and
instruments defining the rights of holders of
certain items of long term debt entered into
during the quarter ended March 31, 2000 which
relate to securities having an aggregate
principal amount less than 10% of the
consolidated assets of Registrant and its
Subsidiaries are not filed herewith. The
Registrant hereby agrees to furnish a copy of
any such agreements or instruments to the
Securities and Exchange Commission upon
request.
- --------------
*Pursuant to Item 601 of Regulation S-K.
E-3
33
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO.* DESCRIPTION OF EXHIBIT NUMBER
--------------- ------------------------------------------------- ------
12 STATEMENT RE COMPUTATION
OF RATIOS
-------------------------------------------------
Statement setting forth the computation of Ratio of 12
Earnings to Fixed Charges.
27 FINANCIAL DATA SCHEDULE
-------------------------------------------------
Financial Data Schedule for quarter ended March 31, 27
2000.
- --------------
*Pursuant to Item 601 of Regulation S-K.
E-4