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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 SEPTEMBER 30, 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 X No
--- ---
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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 September 30, 2000: 157,552,562
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
Unaudited
(In millions, except per share) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
NET SALES $ 3,482.4 $ 3,288.8 $ 10,493.6 $ 9,328.7
Cost of Goods Sold 2,865.3 2,764.6 8,395.1 7,531.2
Selling, Administrative and General Expense 549.2 515.4 1,662.2 1,435.4
Rationalizations 1.2 6.1 5.9 163.9
Interest Expense 73.7 46.2 205.7 123.5
Other (Income) Expense 4.4 (159.2) 17.4 (148.2)
Foreign Currency Exchange (2.9) (1.3) 0.8 (34.8)
Minority Interest in Net Income of Subsidiaries 10.0 12.1 37.5 23.1
---------- ---------- ---------- ----------
Income (Loss) before Income Taxes (18.5) 104.9 169.0 234.6
United States and Foreign Taxes on Income (11.9) (4.2) 52.3 34.3
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (6.6) $ 109.1 $ 116.7 $ 200.3
========== ==========
Retained Earnings at Beginning of Period 3,531.4 3,477.8
CASH DIVIDENDS (141.1) (140.6)
---------- ----------
Retained Earnings at End of Period $ 3,507.0 $ 3,537.5
========== ==========
NET INCOME (LOSS) PER SHARE OF COMMON STOCK - BASIC: $ (0.04) $ 0.70 $ 0.75 $ 1.28
========== ========== ========== ==========
Average Shares Outstanding 157.0 156.3 156.6 156.1
NET INCOME (LOSS) PER SHARE OF COMMON STOCK - DILUTED: $ (0.04) $ 0.69 $ 0.74 $ 1.26
========== ========== ========== ==========
Average Shares Outstanding 158.2 159.5 158.6 159.0
CASH DIVIDENDS PER SHARE $ 0.30 $ 0.30 $ 0.90 $ 0.90
========== ========== ========== ==========
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)
SEPTEMBER 30, DECEMBER 31,
2000 1999
ASSETS: --------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 236.8 $ 241.3
Accounts and notes receivable,
less allowance - $87.7 ($81.9 in 1999) 2,514.0 2,296.3
Inventories:
Raw materials 336.9 389.7
Work in process 92.7 99.2
Finished product 1,989.6 1,798.3
--------- ---------
2,419.2 2,287.2
Sumitomo 1.2% Convertible Note Receivable Due 8/00 -- 107.2
Prepaid expenses and other current assets 312.3 263.9
--------- ---------
TOTAL CURRENT ASSETS 5,482.3 5,195.9
Long Term Accounts and Notes Receivable 85.0 97.7
Investments in Affiliates, at equity 98.7 115.4
Other Assets 224.1 79.0
Goodwill 573.2 516.9
Deferred Charges 1,279.3 1,336.7
Properties and Plants,
less accumulated depreciation - $5,733.9 ($5,551.4 in 1999) 5,521.9 5,761.0
--------- ---------
TOTAL ASSETS $13,264.5 $13,102.6
========= =========
LIABILITIES:
CURRENT LIABILITIES:
Accounts payable - trade $ 1,313.2 $ 1,417.5
Compensation and benefits 754.3 794.5
Other current liabilities 326.2 294.5
United States and foreign taxes 150.8 249.0
Notes payable 1,508.7 862.3
Sumitomo 1.2% Convertible Note Payable Due 8/01 60.4 127.8
Long term debt due within one year 176.1 214.3
--------- ---------
TOTAL CURRENT LIABILITIES 4,289.7 3,959.9
Long Term Debt and Capital Leases 2,319.6 2,347.9
Compensation and Benefits 2,131.0 2,137.4
Other Long Term Liabilities 203.0 149.1
Minority Equity in Subsidiaries 835.0 891.2
--------- ---------
TOTAL LIABILITIES 9,778.3 9,485.5
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value:
Authorized 50 shares, unissued -- --
Common Stock, no par value:
Authorized 300 shares
Outstanding shares - 157.6 (156.3 in 1999)
after deducting 38.1 treasury shares (39.3 in 1999) 157.6 156.3
Capital Surplus 1,089.9 1,029.6
Retained Earnings 3,507.0 3,531.4
Accumulated Other Comprehensive Income (1,268.3) (1,100.2)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 3,486.2 3,617.1
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $13,264.5 $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
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Common Capital Retained Foreign Minimum Unrealized Total
Stock Surplus Earnings Currency Pension Investment Shareholders'
Translation Liability Gains Equity
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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 116.7
Foreign currency translation (196.1)
Minimum pension liability 0.2
Unrealized investment gain 27.8
(net of tax of $17.0)
TOTAL COMPREHENSIVE INCOME (51.4)
Cash dividends (141.1) (141.1)
Common stock issued from treasury:
Conversion of debt 1.1 58.8 59.9
Stock compensation plans 0.2 1.5 1.7
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BALANCE AT SEPTEMBER 30, 2000 $157.6 $1,089.9 $3,507.0 $(1,268.3) $ (15.0) $15.0 $ 3,486.2
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The accompanying notes are an integral part of this financial statement.
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
(In millions) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------- ------- ------- -------
NET INCOME $ (6.6) $ 109.1 $ 116.7 $ 200.3
Other comprehensive income:
Foreign currency translation (88.4) 8.0 (196.1) (169.4)
Less reclassification adjustment for
recognition of FCTA in net income -- 15.3 -- 15.3
due to the sale of subsidiaries
Minimum pension liability 0.1 1.3 0.2 6.1
Unrealized investment gain 1.3 (49.0) 44.8 12.6
Tax on unrealized investment gain (0.4) 18.6 (17.0) (4.8)
--------------------- ---------------------
COMPREHENSIVE INCOME $ (94.0) $ 103.3 $ (51.4) $ 60.1
===================== =====================
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) NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES: -------- --------
NET INCOME $ 116.7 $ 200.3
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 475.7 411.6
Rationalizations 6.4 125.7
Asset sales (3.2) (154.8)
Changes in operating assets and liabilities, net of noncash
rationalizations:
Accounts and notes receivable (369.5) (355.0)
Inventories (237.6) 294.7
Accounts payable-trade (35.4) (197.8)
Other assets and liabilities (106.8) (83.6)
-------- --------
Total adjustments (270.4) 40.8
-------- --------
TOTAL CASH FLOWS FROM OPERATING ACTIVITIES (153.7) 241.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (411.1) (560.0)
Asset sales 38.4 49.5
Asset acquisitions -- (845.6)
Other transactions (13.3) (79.5)
-------- --------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (386.0) (1,435.6)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term debt incurred 1,217.9 1,434.4
Short term debt paid (1,469.8) (86.8)
Long term debt incurred 1,065.8 23.2
Long term debt paid (101.0) (38.1)
Common stock issued 1.6 13.5
Dividends paid to Sumitomo (27.1) --
Dividends paid to Goodyear shareholders (141.1) (140.6)
-------- --------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 546.3 1,205.6
Effect of Exchange Rate Changes on Cash and Cash Equivalents (11.1) (16.7)
-------- --------
Net Change in Cash and Cash Equivalents (4.5) (5.6)
Cash and Cash Equivalents at Beginning of the Period 241.3 239.0
-------- --------
Cash and Cash Equivalents at End of the Period $ 236.8 $ 233.4
======== ========
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
RATIONALIZATIONS
Rationalization charges were recorded on the Consolidated Statement of
Income, as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions) 2000 1999 2000 1999
------- ------- ------- -------
Rationalizations $ 1.2 $ 6.1 $ 5.9 $ 163.9
======= ======= ======= =======
After Tax $ 1.2 $ 15.7 $ 6.4 $ 125.7
======= ======= ======= =======
The Company recorded rationalization charges totaling $1.2 million in the third
quarter of 2000 ($1.2 million after tax) related to the closing of its tire
manufacturing facility in Italy initiated in 1999 (which is for negotiated
benefits accepted in the third quarter of 2000). The Company also recorded net
rationalization charges totaling $4.7 million ($5.2 million after tax) in the
second quarter of 2000 related to the closing of the Italian manufacturing
facility, associate reductions due to sales office consolidation in Europe
following the Company's Dunlop acquisition, and the reversal of reserves
identified as no longer needed for their originally intended purposes. In the
fourth quarter of 1999, the Company took a charge for the closure of the Italian
facility, however that charge did not include certain associate benefit amounts
that had not been negotiated at that time.
The Company recorded a charge of $167.4 million in the first quarter of
1999 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. During the 1999 third and fourth
quarters, $33.4 million and $11.3 million, respectively, of the first quarter
charges related to Gadsden were reversed as a result of the Company's decision
to resume production of certain tire lines in a portion of the Gadsden facility
due to higher than expected demand.
The third quarter of 1999 also included charges totaling $46.5 million
($42.4 million after tax) related to the decision to terminate tire production
at a facility in Latin America, the reduction of staffing levels in North
American Tire operations and the exit from the CART/IRL racing series. In
addition, the first nine months of 1999 included pretax income of $16.6 million
($11.0 million after tax) from the reversal of certain other rationalization
reserves that were no longer needed for the 1996, 1997 and 1999 programs. Of
these reversals, $7.0 million ($5.0 million after tax) was recorded in the third
quarter of 1999.
2000 PROGRAM - The Company committed to rationalization actions in the second
quarter to reduce costs and increase productivity and efficiency. The actions
provide for the release of approximately 50 sales, distribution and
administrative associates due to sales office consolidation in Europe following
the Company's Dunlop acquisition. The Company recorded charges totaling $2.0
million ($2.0 million after tax) all of which related to future cash outflows
for associate severance costs. Associate-related rationalization costs were
recorded and incurred during 2000 as follows:
BALANCE AT
(In millions) RECORDED INCURRED 9/30/00
-------- -------- -------
European associate reductions $2.0 $(.1) $1.9
====== ====== ======
Under the above program, 5 associates were released in second quarter of 2000 at
a cost of $.1 million. These associates were salary associates in Europe. The
Company plans to release approximately 45 more associates under the above
programs during 2000.
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
$46.5 million was recorded in the 1999 third quarter. The balance of the
provisions recorded under the 1999 program totaled $13.0 million and $41.2
million at September 30, 2000 and December 31, 1999, respectively.
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
RATIONALIZATIONS (CONTINUED)
The Company also recorded charges under this program of $5.2 million in
the second and third quarters of 2000, related to the closure of the Company's
manufacturing facility in Italy for associates that accepted negotiated benefits
in those respective periods. The Company anticipates that it may record
additional rationalization charges in income related to the closure of its
manufacturing facility in Italy totaling approximately $1 million in 2000 and
$10 million to $12 million in 2001. These charges will be recorded as associates
accept negotiated benefits.
Associate-related rationalization costs totaling $171.6 million were
recorded in 1999. Activity during 2000 is presented below:
(In millions) BALANCE AT 2000 BALANCE AT
12/31/99 CHARGES INCURRED 9/30/00
-------- ------- -------- -------
North American Tire staffing $11.1 $-- $(5.9) $ 5.2
European associate reductions 6.2 5.2 (5.4) 6.0
Asset sales and other exit costs 5.8 (.5) (5.3) --
Termination of tire production 5.6 -- (4.5) 1.1
Plant downsizing and consolidation .4 -- (.4) --
Withdrawal of support for CART/IRL .3 -- (.3) --
----- ----- ----- -----
$29.4 $ 4.7 $(21.8) $12.3
===== ===== ===== =====
Under the above programs, approximately 380 associates were released in 2000 at
a cost of $21.8 million, including approximately 80 associates in the third
quarter at a cost of $5.9 million. These associates were primarily hourly and
staff associates in Italy and production and support associates at a Latin
American facility. The Company plans to release approximately 420 more
associates under the above programs during 2000 and 2001.
Rationalization costs, other than associate-related costs, totaling
$68.5 million were recorded in 1999. Activity during 2000 follows:
(In millions) BALANCE AT 2000 BALANCE AT
12/31/99 CHARGES INCURRED 9/30/00
-------- ------- -------- -------
Withdrawal of support for CART/IRL $ 9.5 $ (.7) $(8.7) $ .1
Termination of tire production 2.1 -- (1.5) .6
Plant downsizing and consolidation .1 -- (.1) --
Asset sales and other exit costs .1 (.1) -- --
----- ----- ----- -----
$11.8 $ (.8) $(10.3) $ .7
===== ===== ===== =====
1997 PROGRAM - In 1997, the Company recorded $265.2 million for rationalization
activities, of which $146.1 million related to the release of associates and
$119.1 million related to other activities. During 2000, 280 associates were
released under the program at a cost of $11.4 million, including 30 associates
during the third quarter at a cost of $.7 million. At September 30, 2000, the
Company had remaining reserves of $21.0 million, including noncancellable lease
payments of $12 million and benefit costs for employees released under the plan
to be paid in subsequent periods and employees yet to be released.
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
RATIONALIZATIONS (CONTINUED)
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.
The Company committed to certain rationalization actions 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 costs in 1999 and 2000 totaling $67.1 million, substantially
all of which were for future cash outflows. Under these rationalization
programs, associate related costs for the release or relocation of approximately
2,000 production, support, technical, retail and administrative associates
totaling $52.8 million were recorded, and rationalization costs, other than
associate-related costs, totaling $14.3 million were recorded primarily for
lease cancellations and noncancellable leases. Through September 30, 2000, costs
totaling $24.5 million had been incurred. The remaining balance of these
provisions at September 30, 2000 totaled $42.6 million.
During the third quarter of 2000, associate-related costs totaling
$15.4 million were recorded for the release of approximately 670 associates.
Approximately 150 associates were released during the third quarter at a cost of
$3.9 million. The following table presents activity during 2000:
(In millions) BALANCE AT BALANCE AT
12/31/99 RECORDED INCURRED 9/30/00
-------- -------- -------- -------
$3.3 $48.4 $(21.4) $30.3
====== ======= ====== ======
During the third quarter of 2000, rationalization costs, other than
associate-related costs, totaling $9.9 million were recorded. Costs totaling
$1.3 million were incurred in the third quarter of 2000. The following table
presents activity during 2000:
(In millions) BALANCE AT BALANCE AT
12/31/99 RECORDED INCURRED 9/30/00
-------- --------- -------- -------
$2.1 $11.8 $(1.6) $12.3
====== ======= ====== ======
The Company intends to complete these actions in 2000 and 2001.
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 Nine Months Ended
(In millions) September 30, September 30,
2000 1999 2000 1999
----- ----- ----- -----
Average shares outstanding-basic 157.0 156.3 156.6 156.1
Stock options -- .9 -- 1.1
1.2% Convertible Note 1.2 2.3 2.0 1.8
----- ----- ----- -----
Average shares outstanding-diluted 158.2 159.5 158.6 159.0
===== ===== ===== =====
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9
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NONCASH INVESTING AND FINANCING 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 Yen 13,073,070,934 pursuant
to a Note Purchase Agreement dated February 25, 1999 (the "Note Agreement"). The
Company's Note was convertible 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 Yen 5,731 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 Yen 13,073,070,934 (the "Sumitomo Note"). The Sumitomo Note was
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, Yen 50 par
value per share, of Sumitomo at a conversion price of Yen 539 per share, subject
to certain adjustments. The principal amount of each Note was equivalent to
$108.0 million at February 25, 1999.
On June 14, 1999, the Company and Sumitomo agreed that they would not
redeem the respective Notes and would convert the Notes, subject to the
condition that the global alliance between the Company and Sumitomo was
operating at July 1, 2000. On July 7, 2000, the Company and Sumitomo amended the
Purchase Agreement and on August 15, 2000: (1) Sumitomo converted
Yen 6,536,535,167 principal amount of the Note into approximately 1,140,557
shares of the Common Stock of the Company; (2) the Company paid Yen 223,933,167
of interest on the Note; and (3) Sumitomo surrendered the Note and the Company
issued a replacement note in the principal amount of Yen 6,536,535,767 due on
August 16, 2001 and payable at the Company's option in cash or in shares of
Common Stock at a conversion price of Yen 5,731, subject to adjustment. The
replacement note bears interest at the rate of 1.2% per annum from August 15,
2000 until the fifteenth day prior to maturity (or, if earlier, conversion) and
is convertible into Common Stock of the Company at a conversion price of
Yen 5,731 per share, subject to adjustment, at any time prior to maturity. The
Company converted the Sumitomo Note in its entirety on July 27, 2000 into
24,254,306 shares of the Common Stock of Sumitomo, which represents 10% of
Sumitomo's outstanding shares.
On September 1, 1999, the Company completed its global alliance with
Sumitomo. The Company's acquisition cost included the approximately $307 million
fair value of 25% of its businesses contributed to the European joint venture.
The Company also assumed debt totaling $130 million in Dunlop's European and
North American businesses.
In the third quarter of 1999, a tire manufacturing subsidiary recorded
fixed assets totaling $43.4 million acquired under a capital lease.
INVESTMENTS
The Company has classified the previously mentioned investment in
Sumitomo Common Stock ("the Sumitomo Investment") 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 Investment was $144.7 million at September 30, 2000. Changes in the
fair value of the Sumitomo Investment 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 Investment. 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 September 30, 2000
the gross unrealized holding gain on the Sumitomo Investment, net of the hedge,
totaled $24.2 million ($15.0 million after tax).
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10
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
OTHER (INCOME) AND EXPENSE
Other (Income) and Expense in 2000 included a third quarter gain of
$5.0 million ($3.2 million after tax or $.02 per share) on the sale of land at a
manufacturing facility in Mexico. Other (Income) and Expense in 1999 included a
third quarter gain of $149.7 million ($143.7 million after tax or $.90 per
share) on the change in control of 25% of the European businesses contributed to
Goodyear Dunlop Tires Europe B.V. by the Company. In addition, proceeds of $17.0
million ($11.1 million after tax or $.07 per share) were realized in the 1999
third quarter from the Company's sale of customer lists and formulations in
connection with its exit from the production of certain rubber chemicals.
STRATEGIC ALLIANCE
The following table presents supplemental pro forma estimated results of
operations of the Company as if the joint ventures had commenced operations on
January 1, 1999. Historical results of the acquired businesses have been
adjusted to exclude non-recurring items and to reflect changes in the carrying
amounts and depreciable lives of certain fixed assets. The pro forma information
also reflects amortization of goodwill recorded by the Company and interest
expense at 6% associated with the debt incurred to finance the Company's cash
payment of $931.6 million to Sumitomo and its affiliates.
THREE MONTHS ENDED NINE MONTHS ENDED
(In millions, except per share) SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
NET SALES $ 3,482.4 $ 3,672.6 $ 10,493.6 $ 10,906.5
========== ========== ========== ==========
NET INCOME $ (6.6) $ 96.8 $ 116.7 $ 203.0
========== ========== ========== ==========
NET INCOME PER SHARE - BASIC $ (.04) $ .62 $ .75 $ 1.30
========== ========== ========== ==========
NET INCOME PER SHARE - DILUTED $ (.04) $ .61 $ .74 $ 1.28
========== ========== ========== ==========
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:
THREE MONTHS ENDED NINE MONTHS ENDED
(In millions) SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------- ------- ------- -------
NET SALES:
Asia Tire $ 126.0 $ 150.0 $ 395.5 $ 439.8
SPT 123.4 158.7 425.5 489.8
------- ------- ------- -------
$ 249.4 $ 308.7 $ 821.0 $ 929.6
======= ======= ======= =======
EBIT:
Asia Tire $ 3.5 $ 5.5 $ 19.6 $ 16.9
SPT (3.6) 7.8 (6.9) 27.0
------- ------- ------- -------
$ (.1) $ 13.3 $ 12.7 $ 43.9
======= ======= ======= =======
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11
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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.
BUSINESS SEGMENTS
Portions of the items reported as Rationalizations and Other (Income) and
Expense 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------- ------- ------- -------
RATIONALIZATIONS
North American Tire $ -- $ (21.7) $ (.7) $ 64.6
European Union Tire 1.2 (7.1) 7.2 (.5)
Eastern Europe, Africa
and Middle East Tire -- .1 -- 2.2
Latin American Tire -- 34.8 -- 77.3
Asia Tire -- -- -- 1.5
------- ------- ------- -------
TOTAL TIRES 1.2 6.1 6.5 145.1
Engineered Products -- -- (.6) 8.8
Chemical Products -- -- -- 3.1
------- ------- ------- -------
TOTAL SEGMENTS 1.2 6.1 5.9 157.0
Corporate -- -- -- 6.9
------- ------- ------- -------
RATIONALIZATIONS $ 1.2 $ 6.1 $ 5.9 $ 163.9
======= ======= ======= =======
OTHER (INCOME) AND EXPENSE
North American Tire $ -- $ -- $ -- $ --
European Union Tire -- (149.7) -- (149.7)
Eastern Europe, Africa
and Middle East Tire -- -- -- --
Latin American Tire (5.0) -- (5.0) --
Asia Tire -- -- -- --
------- ------- ------- -------
TOTAL TIRES (5.0) (149.7) (5.0) (149.7)
Engineered Products -- -- -- --
Chemical Products -- (17.0) -- (17.0)
------- ------- ------- -------
TOTAL SEGMENTS $ (5.0) $(166.7) $ (5.0) $(166.7)
======= ======= ======= =======
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12
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
SEGMENT INFORMATION
Unaudited
(In millions) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------- --------- --------- ---------
SALES:
North American Tire $ 1,745.3 $ 1,622.5 $ 5,075.6 $ 4,709.4
European Union Tire 731.2 661.5 2,351.8 1,635.8
Eastern Europe, Africa and Middle East Tire 211.1 212.3 588.0 582.8
Latin American Tire 258.2 234.7 771.3 694.5
Asia Tire 126.0 150.0 395.5 439.8
--------- --------- --------- ---------
TOTAL TIRES 3,071.8 2,881.0 9,182.2 8,062.3
Engineered Products 276.1 297.9 890.1 935.3
Chemical Products 272.4 231.5 834.0 683.1
--------- --------- --------- ---------
TOTAL SEGMENT SALES 3,620.3 3,410.4 10,906.3 9,680.7
Inter-SBU Sales (139.6) (122.4) (422.4) (355.7)
Other 1.7 0.8 9.7 3.7
--------- --------- --------- ---------
NET SALES $ 3,482.4 $ 3,288.8 $10,493.6 $ 9,328.7
========= ========= ========= =========
INCOME:
North American Tire $ 32.0 $ (108.6) $ 172.6 $ 7.4
European Union Tire 12.3 42.7 95.8 123.3
Eastern Europe, Africa and Middle East Tire 19.0 13.1 46.4 34.3
Latin American Tire 10.1 12.5 54.9 58.6
Asia Tire 3.5 5.5 19.6 16.9
--------- --------- --------- ---------
TOTAL TIRES 76.9 (34.8) 389.3 240.5
Engineered Products 0.8 8.9 45.0 60.2
Chemical Products 6.2 36.5 52.7 95.4
--------- --------- --------- ---------
TOTAL SEGMENT INCOME (EBIT) 83.9 10.6 487.0 396.1
Rationalizations, Asset Sales and other Actions 3.8 160.6 (0.9) 2.8
Interest expense (73.7) (46.2) (205.7) (123.5)
Foreign currency exchange 2.9 1.3 (0.8) 34.8
Minority interest in net income (10.0) (12.1) (37.5) (23.1)
of subsidiaries
Inter-SBU income (5.4) (15.2) (22.8) (41.4)
Other (20.0) 5.9 (50.3) (11.1)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES $ (18.5) $ 104.9 $ 169.0 $ 234.6
========= ========= ========= =========
-11-
13
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 third quarter of 2000 were $3.48 billion, increasing 5.9%
from $3.29 billion in the 1999 quarter. A net loss of $6.6 million or $.04 per
share was recorded in the quarter, compared to net income of $109.1 million or
$.69 per share in the 1999 period.
In the nine months, sales of $10.49 billion increased 12.5% from $9.33
billion in 1999. Net income was $116.7 million or $.74 per share, decreasing
41.7% from $200.3 million or $1.26 per share in 1999.
Worldwide tire unit sales in the third quarter of 2000 were 56.9
million units, an increase of 4.6 million units or 8.7% compared to the 1999
period. The Dunlop businesses acquired from Sumitomo on September 1, 1999
contributed 9.4 million units in the 2000 quarter, compared to 4.1 million units
in the 1999 quarter. North American (U.S. and Canada) volume increased 1.2
million units or 4.3% in the quarter (including an increase of 2.3 million units
from Dunlop operations), while international unit sales increased 3.3 million
units or 13.8% (including an increase of 3.0 million units contributed by Dunlop
operations). Worldwide replacement unit sales increased 9.6% from the 1999
quarter, primarily in the European Union. Original equipment unit sales were
6.3% higher in the quarter, increasing in the European Union, Latin America and
Asia. Unit sales in the first nine months of 2000 increased 15.8% from the 1999
period, with North American units 7.1% higher and international units up 26.8%.
Sales increased in the 2000 quarter and nine months due primarily to
higher tire unit sales resulting from the acquisition of the Dunlop businesses.
The Dunlop businesses contributed $539.8 million to 2000 third quarter sales and
$1.7 billion to sales in the nine months, compared to $231.7 million in each of
the 1999 periods. However, North American Tire shipments in the 2000 third
quarter were adversely impacted by production cutbacks by original equipment
customers in the auto and commercial truck industries. Revenues in both 2000
periods were adversely affected by continuing worldwide competitive pricing
pressures and a shift in mix to lower priced tires. In addition, price increases
implemented earlier in 2000 met with resistance in the marketplace and as a
result negatively impacted sales of commercial and value-priced consumer tires
in North America. Unit sales and revenues in the North American and European
replacement markets continue to be negatively impacted by marketplace resistance
to price increases.
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14
Revenues in both 2000 periods also were adversely impacted by the
effect of currency translations on international results, primarily in Europe,
where the value of the Euro versus the U.S. dollar has dropped 13% from the
end of 1999. The Company estimates that versus 1999, currency movements
adversely affected revenues by approximately $135 million in the third quarter
and $265 million in the nine months.
Revenues in future periods may continue to be adversely affected by
competitive pricing pressures, changes in product mix and channels of
distribution, and currency translations.
EBIT (sales less cost of goods sold and selling, administrative and
general expense) was $67.9 million in the 2000 quarter and $436.3 million in the
nine months, compared to $8.8 million and $362.1 million in the respective 1999
periods. EBIT increased in the 2000 quarter and nine months due to the
acquisition of the Dunlop businesses. EBIT in both 2000 periods was adversely
affected by the worldwide competitive pricing environment and a change in
product and market mix to lower margin tires. In addition, cost of goods sold
increased due to higher raw material and energy costs and production cutbacks to
align inventory with demand. Raw material costs increased more than 3% from the
second quarter of 2000 and approximately 8% during the year. Energy costs have
doubled from the prior year. EBIT was also adversely impacted by the previously
mentioned currency movements.
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. The Company is unable to predict the impact of currency
fluctuations and economic conditions on its sales and EBIT in future periods.
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,
general and administrative expense (SAG) as a percent of sales:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
CGS 82.3% 84.1% 80.0% 80.7%
SAG 15.8 15.7 15.8 15.4
Cost of goods sold increased in dollars in both 2000 periods due
primarily to the acquisition of the Dunlop businesses. In addition, CGS was
adversely impacted by the previously mentioned increased raw material and energy
costs and production cutbacks to align inventory with demand. CGS decreased as a
percent of sales due primarily to the inclusion in the 1999 third quarter of
charges for inventory writeoffs and adjustments resulting from the realignment
of brand positioning and replacement market distribution strategies occasioned
by the addition of the Dunlop
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15
businesses, and from the Company's exit from CART and IRL racing. Cost of goods
sold in 1999 was also adversely affected by higher than normal unit costs
resulting from production cutbacks and nonrecurring costs related to operational
changes at the Company's Danville tire plant. SAG increased in dollars and as a
percent of sales in both 2000 periods due primarily to the higher SAG levels of
the Dunlop businesses.
Interest expense rose 59.5% in the 2000 quarter and 66.6% in the nine
months due to higher debt levels incurred primarily to fund the acquisition of
the Dunlop businesses, increased market interest rates and an increase in the
Company's cost of borrowing.
Other (Income) and Expense in the third quarter of 2000 included a gain
of $5.0 million ($3.2 million after tax or $.02 per share) on the sale of land
at a manufacturing facility in Mexico. Other (Income) and Expense in the third
quarter of 1999 included a gain of $149.7 million ($143.7 million after tax or
$.90 per share) on the change in control of 25% of the European businesses
contributed to Goodyear Dunlop Tires Europe B.V. by the Company. In addition,
proceeds of $17.0 million ($11.1 million after tax or $.07 per share) were
realized in the 1999 third quarter from the Company's sale of customer lists and
formulations in connection with its exit from the production of certain rubber
chemicals.
Foreign currency exchange increased pretax earnings by $2.9 million in
the 2000 third quarter, but reduced earnings by $.8 million in the nine months.
Exchange gains in the 1999 nine months resulted primarily from the impact of
currency movement on U.S. dollar denominated monetary items, principally in
Brazil.
U.S. and foreign taxes on income in the 2000 quarter reflected a
decrease from the prior quarter in the Company's estimated annual effective tax
rate to 25.3% resulting from strategies that allowed the Company to manage
global cash flows and minimize tax expense. The corresponding tax rate in the
first nine months of 1999 was 13.3%, which reflected the nontaxable character of
the gain resulting from the change in control of 25% of Goodyear's businesses
contributed to the European joint venture with Sumitomo.
RATIONALIZATION ACTIVITY - Rationalization charges were recorded on the
Consolidated Statement of Income, as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
(In millions) SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------- -------- -------- --------
Rationalizations $ 1.2 $ 6.1 $ 5.9 $ 163.9
======== ======== ======== ========
After Tax $ 1.2 $ 15.7 $ 6.4 $ 125.7
======== ======== ======== ========
Per Share $ .01 $ .10 $ .04 $ .80
======== ======== ======== ========
The Company recorded rationalization charges totaling $1.2 million in the third
quarter of 2000 ($1.2 million after tax or $.01 per share) related to the
closing of its tire manufacturing
-14-
16
facility in Italy initiated in 1999, (which is for negotiated benefits accepted
in the third quarter of 2000). The Company also recorded net rationalization
charges totaling $4.7 million ($5.2 million after tax or $.03 per share) in the
second quarter of 2000 related to the closure of the Italian manufacturing
facility, associate reductions due to sales office consolidation in Europe
following the Company's Dunlop acquisition, and the reversal of reserves
identified as no longer needed for their originally intended purposes. In the
fourth quarter of 1999, the Company took a charge for the closure of the Italian
facility, however that charge did not include certain associate benefit amounts
that had not been negotiated at that time. The Company anticipates that it may
record additional rationalization charges in income related to the closure of
its manufacturing facility in Italy totaling approximately $1 million in 2000
and $10 million to $12 million in 2001. These charges will be recorded as
associates accept negotiated benefits.
The Company recorded a charge of $167.4 million in the first quarter of
1999 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. During the 1999 third and fourth
quarters, $33.4 million and $11.3 million, respectively, of the first quarter
charges related to Gadsden were reversed as a result of the Company's decision
to resume production of certain tire lines in a portion of the Gadsden facility
due to higher than expected demand.
The third quarter of 1999 included charges totaling $46.5 million
($42.4 million after tax or $.27 per share) related to the decision to terminate
tire production at a facility in Latin America, the reduction of staffing levels
in North American Tire operations and the exit from the CART/IRL racing series.
The first nine months of 1999 also included pretax income of $16.6 million
($11.0 million after tax) from the reversal of certain other rationalization
reserves that were no longer needed for the 1996, 1997 and 1999 programs. Of
these amounts, $7.0 million ($5.0 million after tax) was recorded in the third
quarter of 1999.
2000 PROGRAM - The Company committed to rationalization actions in the second
quarter to reduce costs and increase productivity and efficiency. The actions
provide for the release of approximately 50 sales, distribution and
administrative associates due to sales office consolidation in Europe following
the Company's Dunlop acquisition. The Company recorded charges totaling $2.0
million ($2.0 million after tax or $.01 per share), all of which related to
future cash outflows for associate severance costs.
-15-
17
Under the 2000 program, 5 associates were released in the second
quarter at a cost of $.1 million. The Company plans to release approximately 45
more associates under the 2000 program. The remaining reserve for costs related
to the completion of the 2000 program was $1.9 million at September 30, 2000.
The Company will complete these actions during 2000. Annual pretax
savings of approximately $1 million are expected when the planned actions have
been fully implemented.
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
$46.5 million was recorded in the 1999 third quarter. An additional charge
totaling $5.2 million ($5.2 million after tax or $.04 per share) related to the
1999 program was recorded in 2000, resulting from contract settlements
negotiated in the second and third quarters as part of the closure of the
Company's tire manufacturing facility in Italy. Charges recorded in the second
and third quarters are for associates who accepted negotiated benefits in those
respective periods. The balance of the provisions recorded under the 1999
program totaled $13.0 million and $41.2 million at September 30, 2000 and
December 31, 1999, respectively. The Company reversed $1.3 million of
rationalization reserves during the second quarter of 2000 identified as no
longer needed for their originally intended purposes.
Under the 1999 program, approximately 380 associates were released in
2000 at a cost of $21.8 million, including approximately 80 associates in the
third quarter at a cost of $5.9 million. These associates were primarily hourly
and staff associates in Italy and production and support associates at a Latin
American facility. The Company plans to release approximately 420 more
associates under the 1999 program during 2000 and 2001. The remaining reserve
for associate-related costs related to the completion of the 1999 program was
$12.3 million and $29.4 million at September 30, 2000 and December 31, 1999,
respectively.
Rationalization costs, other than for associate-related costs, totaling
$10.3 million were incurred during 2000. These costs were 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 remaining
reserve for other than associate-related costs related to the completion of the
1999 program was $.7 million and $11.8 million at September 30, 2000 and
December 31, 1999, respectively. 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.
-16-
18
1997 RATIONALIZATION PROGRAM - In 1997, the Company recorded $265.2 million for
rationalization activities, of which $146.1 million related to the release of
associates and $119.1 million related to other activities. During 2000, 280
associates were released under the program at a cost of $11.4 million, including
30 associates during the third quarter at a cost of $.7 million. At September
30, 2000, the Company had remaining reserves of $21.0 million, including
noncancellable lease payments of $12 million and benefit costs for employees
released under the plan to be paid in subsequent periods and employees yet to be
released. Annual pretax savings of approximately $200 million are expected when
the planned actions are 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.
The Company committed to certain rationalization actions 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 costs in 1999 and 2000 totaling $67.1 million, substantially
all of which were for future cash outflows. Under these rationalization
programs, associate related costs for the release or relocation of approximately
2,000 production, support, technical, retail and administrative associates
totaling $52.8 million were recorded, and rationalization costs, other than
associate-related costs, totaling $14.3 million were recorded primarily for
lease cancellations and noncancellable leases. Through September 30, 2000, costs
totaling $24.5 million had been incurred. The remaining balance of these
provisions at September 30, 2000 totaled $42.6 million.
The Company expects that these actions will be completed during 2000
and 2001, except for future rental payments under noncancellable leases. Annual
pretax savings of approximately $90 million are expected when the planned
actions have been fully implemented.
For further information, refer to the note to the financial statements,
Rationalizations.
In connection with the acquisition of the Dunlop businesses, the
Company undertook an extensive analysis and assessment of the various activities
of the combined businesses in order to optimize market growth opportunities as
well as maximize cost efficiencies. The actions under the plan included the
downsizing or consolidation of various manufacturing, sales, support and
distribution operations. The Company has finalized and implemented the
integration plan and recorded $67.1 million as adjustments to the acquisition
cost since September 1, 1999. Although the integration plan has been
implemented, certain actions have not yet been fully executed and will be
completed in 2001.
-17-
19
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 assets or liabilities and measured at fair value. Changes in such
fair value will impact earnings to the extent of any ineffectiveness in hedging
relationships. The provisions of SFAS 133 and related amendments and
interpretations are effective for the Company beginning January 1, 2001,
including the interim periods of that year. The Company intends to adopt SFAS
133 on January 1, 2001, and does not expect there to be any significant adverse
impact on its interest rate or foreign exchange risk management activities. In
addition, based on the market valuations of outstanding derivative contracts at
September 30, 2000, the Company does not expect there to be any material adverse
impact on its results of operations, financial position or liquidity resulting
from the adoption of SFAS 133.
SEGMENT INFORMATION
Segment EBIT was $83.9 million in the third quarter of 2000, compared
to $10.6 million in the 1999 quarter. Segment operating margin in the third
quarter of 2000 was 2.3%, compared to .3% in the 1999 period.
In the nine months, segment EBIT was $487.0 million, increasing 22.9%
from $396.1 million in the 1999 period. Segment operating margin in the nine
months was 4.5%, compared to 4.1% in the 1999 period.
Segment EBIT does not include the previously discussed rationalizations
and certain other items. For further information, refer to the note to the
financial statements, Business Segments.
NORTH AMERICAN TIRE
North American Tire segment sales in the third quarter of 2000 were
$1.75 billion, increasing 7.6% from $1.62 billion in the 1999 quarter. In the
nine months, sales of $5.08 billion increased 7.8% from $4.71 billion in 1999.
Unit sales in the 2000 third quarter were 29.5 million, increasing 4.3%
from the 1999 period. Dunlop operations contributed 3.3 million units, compared
to 1.0 million in 1999. Replacement unit sales increased 9.4% and original
equipment volume decreased 7.0%.
Unit sales in the nine months were 86.8 million, increasing 7.1% from
the 1999 period. Dunlop operations contributed 9.3 million units, compared to
1.0 million in 1999. Replacement unit sales increased 9.8% and original
equipment volume increased 2.1%.
-18-
20
Sales in both 2000 periods increased from 1999 due to the acquisition
of the Dunlop businesses in the United States and Canada. The Dunlop businesses
contributed $193.3 million to sales in the 2000 third quarter and $555.7 million
in the nine months, compared to $64.5 million in each of the 1999 periods. Sales
in both periods benefited from the shipment of more than 2.5 million tires of
the size and type being used to replace the 6.5 million recalled Firestone
tires. The Company is producing more than 28,000 tires a day to serve as
replacements for those recalled. Sales reflected improved customer fill rates,
but revenues were adversely impacted by reduced tire shipments in the quarter
resulting from production cutbacks by original equipment customers in the auto
and commercial truck industries. Revenues in future periods are likely to be
adversely affected by competitive pricing pressures and changing distribution
channels in the replacement market. In addition, price increases implemented
earlier in 2000 met with resistance in the marketplace and as a result
negatively impacted sales of commercial and value-priced consumer tires. Unit
sales and revenues in the replacement market continue to be negatively impacted
by marketplace resistance to price increases.
North America Tire segment EBIT was $32.0 million in the third quarter
of 2000, compared to an EBIT loss of $108.6 million in the 1999 quarter.
Operating margin was 1.8%, compared to (6.7)% in 1999. In the nine months, EBIT
was $172.6 million, compared to $7.4 million in 1999. Operating margin was 3.4%,
compared to .2% in 1999.
EBIT increased in the third quarter and nine months due to the
acquisition of the Dunlop businesses in the United States and Canada and lower
SAG resulting from cost reduction programs. In addition, the 1999 third quarter
included charges for inventory writeoffs and adjustments resulting from the
realignment of brand positioning and replacement market distribution strategies
occasioned by the addition of the Dunlop businesses, and from the Company's exit
from CART and IRL racing. EBIT in the 1999 nine months also included higher than
normal unit costs resulting from production cutbacks and nonrecurring costs
related to operational changes at the Company's Danville tire plant.
EBIT was adversely affected in both 2000 periods by higher raw material
and energy costs and production cutbacks to better align inventory with demand.
Raw material and energy costs increased during both periods. EBIT in 2000 was
also adversely impacted by changes in product and channel mix, but benefited
from increased shipments of higher margin tires due to the Firestone recall.
EBIT in the second quarter of 2000 did not include the reversal of $.7
million of rationalization reserves identified as no longer needed for their
originally intended purposes. EBIT in 1999 did not include first quarter
rationalization charges totaling $95.5 million and credits totaling $9.2 million
in the second
-19-
21
quarter and $21.7 million in the third quarter resulting from the reversal of
certain rationalization reserves identified as no longer needed for their
originally intended purposes.
Revenues and EBIT in the North American Tire segment may be adversely
affected in future periods by the effects of continued competitive pricing
conditions, changes in mix, rising raw material and energy prices and currency
translations. General economic conditions may affect demand from OE customers.
EUROPEAN UNION TIRE
European Union Tire segment sales in the third quarter of 2000 were
$731.2 million, increasing 10.5% from $661.5 million in the 1999 quarter. In the
nine months, sales of $2.35 billion increased 43.8% from $1.64 billion in 1999.
Unit sales in the 2000 third quarter were 14.9 million, increasing
24.9% from the 1999 period. Dunlop operations contributed 6.1 million units,
compared to 3.0 million in 1999. Replacement unit sales increased 24.5% and
original equipment volume increased 25.8%.
Unit sales in the nine months were 45.3 million, increasing 50.7% from
the 1999 period. Dunlop operations contributed 18.7 million units, compared to
3.0 million in 1999. Replacement unit sales increased 44.6% and original
equipment volume increased 67.8%.
Sales in both 2000 periods increased from 1999 due to the acquisition
of the Dunlop businesses. The Dunlop businesses contributed $345.3 million to
sales in the 2000 third quarter and $1.1 billion in the nine months, compared to
$167.2 million in each of the 1999 periods. Revenues were adversely impacted by
the decrease in the value of the Euro versus the U.S. dollar, competitive
pricing, especially in England and Germany, lower volume in some market segments
and a change in mix to lower priced tires. The Company estimates that the
effects of currency translation adversely affected European Union Tire segment
sales by approximately $90 million in the 2000 third quarter and $180 million in
the nine months.
European Union Tire segment EBIT was $12.3 million in the third quarter
of 2000, decreasing 71.2% from $42.7 million in the 1999 quarter. Operating
margin was 1.7%, compared to 6.5% in 1999.
In the nine months, EBIT was $95.8 million, decreasing 22.3% from
$123.3 million in 1999. Operating margin was 4.1%, compared to 7.5% in 1999.
EBIT decreased in both 2000 periods due to competitive market
conditions, manufacturing inefficiencies resulting from the ongoing relocation
of tire production from England to the European continent and the closure of a
tire plant in Italy, and higher raw
-20-
22
material and energy prices. In addition, the Company estimates that the effects
of currency movements, especially the weak Euro versus the U.S. dollar and
British pound, reduced operating income by approximately $10 million in the
third quarter and $39 million in the nine months. EBIT was favorably affected
in both 2000 periods by higher tire unit sales resulting from the acquisition
of the Dunlop businesses.
EBIT in 2000 did not include rationalization charges totaling $1.2
million in the third quarter and $6.0 million in the second quarter related to
the closure of the Italian manufacturing facility and sales office
consolidation. EBIT in 1999 did not include first quarter rationalization
charges totaling $6.7 million and credits totaling $7.1 million in the third
quarter resulting from the reversal of rationalization reserves that were no
longer needed. A third quarter gain totaling $149.7 million resulting from the
change in control of 25% of the Company's businesses contributed to the European
joint venture was not included in EBIT.
The Company anticipates that it may incur additional rationalization
charges totaling approximately $1 million in 2000 and $10 million to $12 million
in 2001, related to the closure of its tire manufacturing facility in Italy.
These charges will be recorded as associates accept negotiated benefits.
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 adversely affected in future
periods by the effects of currency translations, continued competitive pricing
conditions, changes in mix and rising raw material and energy prices.
EASTERN EUROPE, AFRICA AND MIDDLE EAST TIRE
Eastern Europe, Africa and Middle East Tire ("Eastern Europe Tire")
segment sales in the third quarter of 2000 were $211.1 million, decreasing
slightly from $212.3 million in the 1999 quarter. In the nine months, sales of
$588.0 million increased .9% from $582.8 million in 1999.
Unit sales in the 2000 third quarter were 4.5 million, increasing 2.4%
from the 1999 period. Replacement unit sales increased 3.0% and original
equipment volume decreased 0.1%.
Unit sales in the nine months were 11.7 million, increasing 4.1% from
the 1999 period. Replacement unit sales increased 2.8% and original equipment
volume increased 8.9%.
Revenues decreased slightly in the quarter due to a downturn in the
replacement market and the effects of currency translation. Revenues in the
nine months benefited from generally improved pricing in the region and a
general improvement in the economic conditions in Eastern Europe and South
Africa. The Company estimates that the effects of currency translation
adversely affected Eastern Europe Tire segment sales by approximately $25
million in the third quarter and $50 million in the nine months.
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23
Eastern Europe Tire segment EBIT was $19.0 million in the third quarter
of 2000, increasing 45.0% from $13.1 million in the 1999 quarter. Operating
margin was 9.0%, compared to 6.2% in 1999.
In the nine months, EBIT was $46.4 million, increasing 35.3% from $34.3
million in 1999. Operating margin was 7.9%, compared to 5.9% in 1999.
EBIT in both 2000 periods increased due primarily to increased factory
utilization levels and improved market conditions. EBIT in the 2000 nine months
was adversely impacted by an industry-wide strike in Turkey and in the 1999 nine
months by an earthquake in Turkey.
EBIT in 1999 did not include first quarter rationalization charges
totaling $2.1 million.
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 the Eastern Europe Tire segment may be
adversely affected in future periods by the effects of continued competitive
pricing conditions, changes in mix, and rising raw material and energy prices
and currency translations.
LATIN AMERICAN TIRE
Latin American Tire segment sales in the third quarter of 2000 were
$258.2 million, increasing 10.0% from $234.7 million in the 1999 quarter. In the
nine months, sales of $771.3 million increased 11.1% from $694.5 million in
1999.
Unit sales in the 2000 third quarter were 5.0 million, increasing 10.4%
from the 1999 period. Replacement unit sales decreased 2.6% and original
equipment volume increased 62.5%.
Unit sales in the nine months were 14.7 million, increasing 10.9% from
the 1999 period. Replacement unit sales increased 4.3% and original equipment
volume increased 37.8%.
Revenues in both 2000 periods increased from 1999 due primarily to
higher tire unit sales. Revenues in 2000 were adversely affected by competitive
pricing pressures and continued adverse economic conditions in the region.
Latin American Tire segment EBIT was $10.1 million in the third quarter
of 2000, decreasing 19.2% from $12.5 million in the 1999 quarter. Operating
margin was 3.9%, compared to 5.3% in 1999.
In the nine months, EBIT was $54.9 million, decreasing 6.3% from $58.6
million in 1999. Operating margin was 7.1%, compared to 8.4% in 1999.
-22-
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EBIT decreased in both 2000 periods due to continued pricing pressures
and higher raw material and labor costs.
EBIT in 2000 did not include a $5.0 million third quarter gain on the
sale of land at a manufacturing facility in Mexico. EBIT in 1999 did not include
rationalization charges totaling $42.5 million in the first quarter and $34.8
million in the third quarter.
The Company anticipates continued fluctuations in the value of the U.S.
dollar relative to Latin American currencies. Revenues and EBIT in future
periods may be adversely affected by the effects of continued competitive
pricing conditions, changes in mix, rising raw material and energy prices and
currency translations.
ASIA TIRE
Asia Tire segment sales in the third quarter of 2000 were $126.0
million, decreasing 16.0% from $150.0 million in the 1999 quarter. In the nine
months, sales of $395.5 million decreased 10.1% from $439.8 million in 1999.
Revenues decreased in both 2000 periods due primarily to the
deconsolidation of the replacement tire business transferred to the Company's
joint venture with Sumitomo in Japan, which contributed revenues of
approximately $15.6 million and $49.7 million in the 1999 third quarter and nine
months, respectively. In addition, revenues were adversely affected by
competitive pricing, a less favorable product mix and currency translations.
Unit sales in the 2000 third quarter were 3.0 million, decreasing 7.0%
from the 1999 period. Replacement unit sales decreased 14.2% while original
equipment volume increased 22.5%.
Unit sales in the nine months were 9.1 million, decreasing 0.8% from
the 1999 period. Replacement unit sales decreased 7.4% while original equipment
volume increased 27.2%.
Asia Tire segment EBIT was $3.5 million in the third quarter of 2000,
decreasing 36.4% from $5.5 million in the 1999 quarter. Operating margin was
2.8%, compared to 3.7% in 1999.
In the nine months, EBIT was $19.6 million, increasing 16.0% from $16.9
million in 1999. Operating margin was 5.0%, compared to 3.8% in 1999.
EBIT decreased in the third quarter of 2000 due primarily to lower tire
unit sales, competitive pricing conditions driven in part by increased low cost
imports into the region and a shift in mix to lower margin tires. EBIT in the
nine months increased due primarily to the inclusion in 1999 results of a $5.2
million charge to write off obsolete equipment in India. EBIT was adversely
affected in both periods by higher raw material and energy costs and price
competition.
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EBIT in 1999 did not include first quarter 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 future periods may be
adversely affected by the effects of currency translations, continued
competitive pricing conditions, changes in mix and rising raw material prices.
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 NINE MONTHS ENDED
(In millions) SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------- ------- ------- -------
NET SALES:
Asia Tire $ 126.0 $ 150.0 $ 395.5 $ 439.8
SPT 123.4 158.7 425.5 489.8
------- ------- ------- -------
$ 249.4 $ 308.7 $ 821.0 $ 929.6
======= ======= ======= =======
EBIT:
Asia Tire $ 3.5 $ 5.5 $ 19.6 $ 16.9
SPT (3.6) 7.8 (6.9) 27.0
------- ------- ------- -------
$ (.1) $ 13.3 $ 12.7 $ 43.9
======= ======= ======= =======
SPT sales and EBIT decreased in both 2000 periods due primarily to competitive
pressures from low cost imported tires, production inefficiencies, the effects
of currency translation and higher raw material costs.
ENGINEERED PRODUCTS
Engineered Products segment sales in the third quarter of 2000 were
$276.1 million, decreasing 7.3% from $297.9 million in the 1999 quarter. In the
nine months, sales of $890.1 million decreased 4.8% from $935.3 million in 1999.
Engineered Products segment EBIT was $.8 million in the third quarter
of 2000, decreasing 91.0% from $8.9 million in the 1999 quarter. Operating
margin was .3%, compared to 3.0% in 1999.
In the nine months, EBIT was $45.0 million, decreasing 25.2% from $60.2
million in 1999. Operating margin was 5.1%, compared to 6.4% in 1999.
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Revenues in both 2000 periods decreased from 1999 due primarily to the
Company's exit from the interior trim business, which contributed revenues of
approximately $17.1 million and $68.0 million in the 1999 third quarter and nine
months, respectively. In addition, revenues were adversely affected by reduced
demand for conveyor belting for the mining and agriculture industries, and third
quarter revenues reflected reduced demand for hose and power transmission
products in the North American replacement market.
EBIT in both 2000 periods decreased due primarily to reduced demand,
reduced capacity utilization and competitive pricing.
EBIT in the second quarter of 2000 did not include the reversal of $.6
million of rationalization reserves identified as no longer needed for their
originally intended purposes. EBIT in 1999 did not include first quarter
rationalization charges totaling $9.1 million and the second quarter reversal of
$.3 million of rationalization reserves identified as no longer needed for their
originally intended purposes.
The Company anticipates continued fluctuations in the value of the U.S.
dollar relative to currencies in the markets served by the Engineered Products
segment. Revenues and EBIT in the Engineered Products segment may be adversely
affected in future periods by competitive pricing pressures, currency
translations, expected continuing unfavorable economic conditions in certain
markets, adverse economic conditions globally in the mining and agriculture
industries and increasing raw material and energy prices.
CHEMICAL PRODUCTS
Chemical Products segment sales in the third quarter of 2000 were
$272.4 million, increasing 17.7% from $231.5 million in the 1999 quarter. In the
nine months, sales of $834.0 million increased 22.1% from $683.1 million in
1999. Approximately 50% of Chemical Products segment sales are made to the
Company's other segments.
Chemical Products segment EBIT was $6.2 million in the third quarter of
2000, decreasing 83.0% from $36.5 million in the 1999 quarter. Operating margin
was 2.3%, compared to 15.8% in 1999.
In the nine months, EBIT was $52.7 million, decreasing 44.8% from $95.4
million in 1999. Operating margin was 6.3%, compared to 14.0% in 1999.
Revenues increased in both 2000 periods due primarily to price
increases and higher sales volume. EBIT in both 2000 periods decreased due
primarily to increased raw material and energy prices and the inability to
recover cost increases due to the competitive pricing environment.
EBIT in 1999 did not include a first quarter rationalization charge of
$3.1 million and third quarter proceeds of $17 million
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from the sale of customer lists and formulations in connection with the
Company's exit from the production of certain rubber chemicals.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $153.7 million during the
first nine months of 2000, as reported on the Consolidated Statement of Cash
Flows. Working capital requirements increased for inventories, accounts
receivable and accounts payable.
Net cash used in investing activities was $386.0 million during the
first nine months of 2000. Capital expenditures totaled $411.1 million, and were
primarily for plant modernizations and expansions and new tire molds.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions) 2000 1999 2000 1999
------- ------- ------- -------
Capital Expenditures $ 144.4 $ 206.6 $ 411.1 $ 560.0
Depreciation and
amortization 155.5 146.2 475.7 411.6
Net cash provided by financing activities was $546.3 million during the
first nine months of 2000, which was used primarily to support the previously
mentioned operating and investing activities.
(Dollars in millions) 9/30/00 12/31/99 9/30/99
-------- -------- -------
Consolidated Debt $4,004.4 $3,424.5 $3,444.2
Debt to Debt and Equity 53.5% 48.6% 48.4%
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. On June 6, 2000,
the Company issued Euro400 million ($384.4 million at June 6, 2000) of its
6.375% Notes due 2005. The proceeds from the issuance of these Notes were used
to repay outstanding commercial paper and short term bank borrowings.
In connection with the Company's planned strategic alliance with
Sumitomo Rubber Industries, Ltd., 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 Yen 13,073,070,934 (equivalent to $108.0 million at February 25,
1999). The Company's Note was convertible 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 Yen 5,731 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.
-26-
28
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
Yen 13,073,070,934 (also equivalent to $108.0 million at February 25, 2000).
The Sumitomo Note was convertible during the period beginning July 16, 2000
through August 15, 2000 into 24,254,306 shares of the Common Stock, Yen 50 par
value per share, of Sumitomo at a conversion price of Yen 539 per share,
subject to certain adjustments. On July 27, 2000 the Company converted the
Sumitomo Note into 24,254,306 shares of Sumitomo Common Stock. As a result, the
Company owns 10% of Sumitomo's outstanding shares. The fair value of the
Sumitomo Common Stock at September 30, 2000 was $144.7 million. For further
information, refer to the note to the financial statements, Investments.
On June 14, 1999, the Company and Sumitomo agreed that they would not
redeem their respective Notes and would convert the Notes, subject to the
condition that the global alliance between the Company and Sumitomo was
operating at July 1, 2000. On July 7, 2000, the Company and Sumitomo amended
the Purchase Agreement and on August 15, 2000: (1) Sumitomo converted Yen
6,536,535,167 principal amount of the Company's Note into approximately
1,140,557 shares of the Common Stock of the Company; (2) the Company paid Yen
223,933,167 of interest on the Note; and (3) Sumitomo surrendered the Note and
the Company issued a replacement note in the principal amount of Yen
6,536,535,767 due on August 16, 2001 and payable at the Company's option in
cash or in shares of Common Stock at a conversion price of Yen 5,731, subject
to adjustment. The replacement note bears interest at the rate of 1.2% per
annum from August 15, 2000 until the fifteenth day prior to maturity (or, if
earlier, conversion) and is convertible into Common Stock of the Company at a
conversion price of Yen 5,731 per share, subject to adjustment, at any time
prior to maturity.
Substantial short term and long term credit sources are available to
the Company globally under normal commercial practices. At September 30, 2000,
the Company had an aggregate of $1.01 billion of commercial paper outstanding.
In addition, at September 30, 2000, the Company had short term committed and
uncommitted bank credit arrangements totaling $2.21 billion, of which $1.27
billion were unused. The Company also had available long term credit
arrangements at September 30, 2000 totaling $3.56 billion, of which $1.50
billion were unused.
Funds generated by operations, together with funds available under existing
credit arrangements, are expected to be sufficient to meet the Company's
currently anticipated operating cash requirements.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 September 30, 2000, the interest rate on 45%
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. The
Company also from time to time enters into interest rate lock contracts to hedge
the risk-free component of anticipated long term debt issuances.
The following table presents interest rate swap contract information at
September 30:
(Dollars in millions) 2000 1999
-------- --------
Notional principal amount $ 75.0 $ 100.0
Pay fixed rate 6.24% 6.17%
Receive variable LIBOR 6.88% 5.26%
Average years to maturity .8 1.4
Fair value - asset (liability) $ .5 $ (.4)
Carrying amount - asset (liability) .2 (.3)
Pro forma fair value - asset (liability) .1 (1.1)
The pro forma fair value assumes a 10% decrease in variable market
interest rates at September 30, 2000 and 1999, 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 NINE MONTHS ENDED
(Dollars in millions) SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------- -------- -------- --------
Notional principal $ 75.0 $ 100.0 $ 75.0 $ 100.0
Pay fixed rate 6.24% 6.17% 6.24% 6.17%
Receive variable LIBOR 6.87% 5.18% 6.48% 5.12%
-28-
30
The following table presents fixed rate debt information at September
30:
(In millions)
FIXED RATE DEBT 2000 1999
- --------------- ---- ----
Fair value - liability $1,915.5 $ 981.4
Carrying amount - liability 1,905.7 996.1
Pro forma fair value - liability 1,991.8 1,029.8
The pro forma fair value assumes a 100 basis point decrease in market interest
rates at September 30, 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 September 30, 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
September 30:
(In millions) 2000 1999
------- -------
Fair value - favorable $ 38.4 $ 63.4
Net carrying amount - asset 38.0 70.2
Pro forma change in fair value 9.0 13.0
The pro forma change in fair value assumes a 10% change in foreign
exchange rates at September 30, 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.
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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 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.
-30-
32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Annual Report of The Goodyear Tire & Rubber
Company (the "Company" or "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, the
Company reported certain legal proceedings, and to the Quarterly Report of the
Company Form 10-Q for the quarter ended March 31, 2000, wherein at Part II, Item
1 (page 26), the Company reported the dismissal of China Tire v. Goodyear, et
al., by the United States District Court for the Northern District of Ohio,
Eastern Division, which dismissal was not appealed.
The Company reports the following developments with respect to
proceedings reported in the 1999 10-K:
(A) As reported at paragraph (A) of Item 3 of the 1999 10-K, the
Company is the defendant in a series of 66 civil actions filed in
the United States District Court for the District of Maryland by
certain former employees of a former subsidiary of the Company
relating the development of lung disease, cancer and other
diseases alleged to be the result of exposure to allegedly toxic
substances while working at a tire plant of the subsidiary
located in Maryland, which plant was closed in 1987. On January
28, 1999, the District Court granted the Company's motion for
summary judgement on causation and issued a Final Judgement Order
dismissing each case with prejudice and assessing costs to the
plaintiffs. The plaintiffs appealed the Final Judgement Order to
the United States Court of Appeals for the Fourth Circuit and, on
July 27, 2000, the Court of Appeals vacated the judgment of the
District Court and remanded the cases for further proceedings,
instructing the District Court to reconsider whether the
plaintiffs are entitled to limited additional discovery.
(B) As reported at paragraph (E) of Item 3 of the 1999 10-K, in
Goodyear v. Chiles Power Supply Inc., a civil action filed by
the Company to collect $2.07 million due for products sold to
Chiles Power Supply Inc. ("Heatway"), the Company prevailed at
trial as the jury rejected the counterclaims of Heatway and
found that the Company did not breach the implied warranty of
merchantability in respect of the Entran 2 hose it sold to
Heatway. The United States District Court for the Northern
District of Ohio, Eastern Division, entered an order terminating
and dismissing all of the counterclaims of Heatway and entering
the judgement against Heatway for $2.07 million, plus interest
and costs. The order and judgment were not appealed by Heatway,
which filed a voluntary petition (under Chapter 11 of the
Bankruptcy Code) in the United States Bankruptcy Court, Western
Division of Missouri, on February 25, 2000. Accordingly, this
civil action is concluded. In a related class action, Anderson,
et al. v. Goodyear, et. al., filed in November of 1988 in
District Court of Eagle County, Colorado, against the Company
and Heatway on behalf of a putative class of real property
owners in
-31-
33
Colorado on whose property heating systems using Entran 2 hose
have been installed and who have suffered or may suffer damage to
their property due to the alleged defective nature of the Heatway
systems and/or Entran 2 hose, the court declined to certify the
class in July of 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On February 25, 1999, the Company issued its 1.2% Convertible Note Due
August 16, 2000 in the principal amount of Yen13,073,070,934 (the "Note") to
Sumitomo Rubber Industries, Ltd. ("Sumitomo") pursuant to a Note Purchase
Agreement dated February 25, 1999 between the Company and Sumitomo (the
"Purchase Agreement"). The Note was convertible into approximately 2,281,115
shares of the Common Stock of the Company at a conversion price of Yen5,731 per
share, subject to certain adjustments. The issuance of the Note was previously
reported at Item 5 of the Company's Annual Reports on Form 10-K for the years
ended December 31, 1998 and 1999, respectively, and at Item 2 of Part II of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
On June 14, 1999, the Company and Sumitomo agreed that the Company
would not redeem the Note and that Sumitomo would convert the Note into shares
of the Common Stock of the Company at maturity, subject to the condition that
the global alliance between the Company and Sumitomo was operating at July 1,
2000. On July 7, 2000, the Company and Sumitomo amended the Purchase Agreement
to provide that on August 15, 2000: (1) Sumitomo would convert Yen6,536,535,167
principal amount of the Note into approximately 1,140,557 shares of the Common
Stock of the Company; (2) the Company would pay Yen223,933,167 of interest on
the Note; and (3) Sumitomo would surrender the Note and the Company would issue
a replacement note in the principal amount of Yen6,536,535,767 due on August
16, 2001 and payable at the Company's option in cash or in shares of Common
Stock of the Company at a conversion price of Yen5,731, subject to adjustment.
On August 15, 2000, Sumitomo presented the Note for partial conversion,
at which time Yen6,536,535,167 of the principal amount of the Note was converted
into, and the Company issued to Sumitomo, 1,138,030 shares of the Common Stock
of the Company and the Company issued its 1.2% Convertible Note due August 16,
2001 in the principal amount of Yen6,536,535,767. The replacement note is
convertible into shares of the Common Stock of the Company at any time through
August 15, 2001 at a conversion price of Yen5,731 per share, subject to certain
adjustments (the "Conversion Price"), and at maturity is payable in cash or
shares of the Common Stock of the Company, if not theretofore converted. The
replacement note bears interest at the rate of 1.2% per annum from August 15,
2000 until the fifteenth day prior to maturity (or, if earlier, conversion) and
will be convertible into Common Stock of the Company at the Conversion Price at
any time prior to maturity.
The replacement note is not transferable. The Company determined that
the sale of the Note (and the delivery of the replacement note upon the partial
conversion and cancellation of the Note) was, and the issuance of Common Stock
of the Company to Sumitomo upon the partial conversion of the Note was, and the
issuance of Common Stock of the Company upon the conversion of the replacement
note will be, exempt from registration under the Securities Act of
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34
1933, as amended (the "Act"), pursuant to Section 4(2) of the Act, as
transactions by an issuer not involving any public offering.
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 September 30, 2000.
SIGNATURES
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: October 25, 2000 By: /s/ Richard J. Kramer
--------------------------------------------------
Richard J. Kramer, Vice President - Corporate Finance
(Signing on behalf of Registrant as a duly
authorized officer of Registrant and signing
as the principal accounting officer of
registrant.)
-33-
35
THE GOODYEAR TIRE & RUBBER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30,2000
INDEX OF EXHIBITS
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO. * Description of Exhibit NUMBER
- ---------------- ------------------------------------------------- ------
3 ARTICLES OF INCORPORATION 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
36
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) 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).
(e) Form of Indenture, dated as of March 1, 1999,
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
(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, 2000).
(f) Conformed copy of Five Year Revolving Credit 4.1
Agreement, dated as of August 15, 2000, among
Registrant, the Lenders named therein and The
Chase Manhattan Bank, as Agent.
- ------------------
*Pursuant to Item 601 of Regulation S-K.
E-2
37
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO. * Description of Exhibit NUMBER
- ---------------- ------------------------------------------------- ------
(g) Conformed copy of 364-Day Revolving Credit 4.2
Agreement, dated as of August 15, 2000, among
Registrant, the Lenders named therein and The
Chase Manhattan Bank, as Agent.
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 September 30, 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 September 30, 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.
10 MATERIAL CONTRACTS
------------------
(a) Conformed copy of letter Agreement, dated 10.1
September 11, 2000, between Registrant and Robert
J. Keegan.
(b) Conformed copy of Restricted Stock Purchase 10.2
Agreement, dated October 3, 2000, between
Registrant and Robert J. Keegan, President and
Chief Operating Officer of Registrant.
(c) Conformed copy of Stock Option Grant Agreement, 10.3
dated October 3, 2000, between Registrant and
Robert J. Keegan, President and Chief Operating
Officer of Registrant.
12 STATEMENT RE COMPUTATION
OF RATIOS
------------------------------------------------------
Statement setting forth the computation of Ratio 12
of Earnings to Fixed Charges.
- ------------------
*Pursuant to Item 601 of Regulation S-K.
E-3
38
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO. * Description of Exhibit NUMBER
- ---------------- -------------------------------------------------- --------
27 FINANCIAL DATA SCHEDULE
--------------------------------------------------
Financial Data Schedule for period ended September 27
30, 2000.
- --------------
*Pursuant to Item 601 of Regulation S-K.
E-4