1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
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
-------- --------
-----------------------------------
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 June 30, 2001: 158,824,413
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
--------- --------- --------- ---------
NET SALES $ 3,582.5 $ 3,607.3 $ 6,996.7 $ 7,271.4
Cost of Goods Sold 2,912.1 2,850.6 5,697.7 5,784.6
Selling, Administrative and General Expense 565.8 553.3 1,113.7 1,113.0
Rationalizations - 4.7 79.0 4.7
Interest Expense 74.5 69.9 143.2 132.0
Other (Income) Expense 8.4 9.1 1.9 13.0
Foreign Currency Exchange (5.4) (1.4) (15.3) 3.7
Equity in Earnings of Affiliates 4.1 0.3 9.2 2.7
Minority Interest in Net Income of Subsidiaries 8.7 10.9 16.5 27.5
--------- --------- --------- ---------
Income (Loss) before Income Taxes 14.3 109.9 (49.2) 190.2
United States and Foreign Taxes on Income 6.5 32.8 (10.3) 64.9
--------- --------- --------- ---------
NET INCOME (LOSS) $ 7.8 $ 77.1 $ (38.9) $ 125.3
========= =========
Retained Earnings at Beginning of Period 3,558.8 3,706.9
CASH DIVIDENDS (95.3) (93.9)
--------- ---------
Retained Earnings at End of Period $ 3,424.6 $ 3,738.3
========= =========
NET INCOME (LOSS) PER SHARE OF COMMON STOCK - BASIC: $ 0.05 $ 0.49 $ (0.25) $ 0.80
========= ========= ========= =========
Average Shares Outstanding 158.8 156.4 158.5 156.4
NET INCOME (LOSS) PER SHARE OF COMMON STOCK - DILUTED: $ 0.05 $ 0.49 $ (0.25) $ 0.79
========= ========= ========= =========
Average Shares Outstanding 161.2 158.7 158.5 158.7
CASH DIVIDENDS PER SHARE $ 0.30 $ 0.30 $ 0.60 $ 0.60
========= ========= ========= =========
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)
JUNE 30, DECEMBER 31,
2001 2000
ASSETS: ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 287.4 $ 252.9
Accounts and notes receivable,
less allowance - $88.0 ($93.3 in 2000) 1,852.0 2,074.7
Inventories:
Raw materials 461.7 480.4
Work in process 115.9 123.5
Finished product 2,359.7 2,275.8
--------- ---------
2,937.3 2,879.7
Prepaid expenses and other current assets 251.1 259.9
--------- ---------
TOTAL CURRENT ASSETS 5,327.8 5,467.2
Long Term Accounts and Notes Receivable 101.7 92.8
Investments in Affiliates, at equity 117.0 102.0
Other Assets 264.8 183.8
Goodwill 567.9 588.4
Deferred Charges 1,611.5 1,612.8
Properties and Plants,
less accumulated depreciation - $5,944.9 ($5,862.6 in 2000) 5,249.1 5,521.0
--------- ---------
TOTAL ASSETS $13,239.8 $13,568.0
========= =========
LIABILITIES:
CURRENT LIABILITIES:
Accounts payable - trade $ 1,394.2 $ 1,505.2
Compensation and benefits 787.7 823.6
Other current liabilities 315.3 395.6
United States and foreign taxes 214.4 208.4
Notes payable 1,056.1 1,077.0
Sumitomo 1.2% Convertible Note Payable - 56.9
Long term debt due within one year 128.8 159.2
--------- ---------
TOTAL CURRENT LIABILITIES 3,896.5 4,225.9
Long Term Debt and Capital Leases 2,597.6 2,349.6
Compensation and Benefits 2,295.2 2,310.5
Other Long Term Liabilities 355.3 334.1
Minority Equity in Subsidiaries 820.2 844.9
--------- ---------
TOTAL LIABILITIES 9,964.8 10,065.0
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value:
Authorized 50.0 shares, unissued - -
Common Stock, no par value:
Authorized 300.0 shares
Outstanding shares - 158.8 (157.6 in 2000)
after deducting 36.9 treasury shares (38.1 in 2000) 158.8 157.6
Capital Surplus 1,148.7 1,092.4
Retained Earnings 3,424.6 3,558.8
Accumulated Other Comprehensive Income (1,457.1) (1,305.8)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 3,275.0 3,503.0
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $13,239.8 $13,568.0
========= =========
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
Common Capital Retained Other Total
Stock Surplus Earnings Comprehensive Shareholders'
Income Equity
---------------------------------------------------------------
Balance at December 31, 2000 $157.6 $ 1,092.4 $ 3,558.8 $(1,305.8) $3,503.0
Comprehensive income (loss) for 2001:
NET INCOME (LOSS) (38.9)
FOREIGN CURRENCY TRANSLATION (158.7)
MINIMUM PENSION LIABILITY 3.4
UNREALIZED INVESTMENT GAIN 9.0
(NET OF TAX OF $5.5)
TRANSITION ADJUSTMENT FROM
ADOPTION OF SFAS 133 5.4
DEFERRED DERIVATIVE LOSS (27.7)
LESS RECLASSIFICATION ADJUSTMENT FOR
AMOUNTS RECOGNIZED IN INCOME 17.3
TOTAL COMPREHENSIVE INCOME (LOSS) (190.2)
Cash dividends (95.3) (95.3)
Common stock issued from treasury:
Conversion of 1.2% Convertible Note Payable 1.1 55.1 56.2
Stock compensation plans 0.1 1.2 1.3
---------------------------------------------------------------
Balance at June 30, 2001 $158.8 $ 1,148.7 $3,424.6 $(1,457.1) $3,275.0
===============================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME 06/30/01 12/31/00
-------- --------
Foreign currency translation adjustment $(1,432.6) $(1,273.9)
Minimum pension liability adjustment (18.5) (21.9)
Unrealized investment loss (1.0) (10.0)
Deferred derivative loss (5.0) -
--------- ---------
TOTAL $(1,457.1) $(1,305.8)
========= =========
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
(In millions) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
------- ------- ------- -------
NET INCOME (LOSS) $7.8 $77.1 $(38.9) $125.3
Other comprehensive income (loss):
Foreign currency translation (40.7) (87.3) (158.7) (107.7)
Minimum pension liability 0.4 (1.6) 3.4 0.1
FAS 133 transition amount (net of tax of $3.3) - - 5.4 -
Deferred derivative gain (loss) (9.2) - (44.7) -
Tax on deferred derivative gain (loss) 3.5 - 17.0 -
Reclassification adjustment for amounts
recognized in income 8.6 - 27.9 -
Tax on derivative reclassification adjustment (3.3) - (10.6) -
Unrealized investment gain (loss) (3.7) 13.6 14.5 43.5
Tax on unrealized investment gain (loss) 1.4 (5.2) (5.5) (16.6)
------------------- --------------------
COMPREHENSIVE INCOME (LOSS) $(35.2) $(3.4) $(190.2) $44.6
=================== ====================
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 CASH FLOWS
Unaudited
(In millions) SIX MONTHS ENDED
JUNE 30,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES: ------ ------
NET INCOME (LOSS) $(38.9) $125.3
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 323.0 320.2
Rationalizations 57.1 5.2
Asset sales (13.9) -
Cash flows from sale of accounts receivable 285.8 (2.3)
Changes in operating assets and liabilities:
Accounts and notes receivable (179.9) (142.5)
Inventories (129.4) (269.7)
Accounts payable-trade (64.8) (72.6)
Other assets and liabilities (129.2) (107.4)
------ --------
Total adjustments 148.7 (269.1)
------ --------
TOTAL CASH FLOWS FROM OPERATING ACTIVITIES 109.8 (143.8)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (221.2) (266.7)
Asset sales 40.0 -
Other transactions (115.8) (16.3)
------ --------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (297.0) (283.0)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term debt incurred 82.7 713.4
Short term debt paid (537.2) (1,124.3)
Long term debt incurred 834.3 1,003.4
Long term debt paid (48.0) (46.0)
Common stock issued 1.3 1.4
Dividends paid to Sumitomo (10.0) (25.9)
Dividends paid to Goodyear shareholders (95.3) (93.9)
------ --------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 227.8 428.1
Effect of Exchange Rate Changes on Cash and Cash Equivalents (6.1) (5.9)
------ --------
Net Change in Cash and Cash Equivalents 34.5 (4.6)
Cash and Cash Equivalents at Beginning of the Period 252.9 241.3
------ --------
Cash and Cash Equivalents at End of the Period $287.4 $236.7
====== ========
The accompanying notes are an integral part of this financial statement.
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
All per share amounts in these Notes to Financial Statements are
diluted unless otherwise indicated.
ACCOUNTING POLICIES
- -------------------
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended and interpreted (SFAS 133).
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Derivative financial instrument contracts and nonderivative instruments
are utilized by the Company to manage interest rate and foreign exchange risks.
The Company has established a control environment that includes policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative financial instrument activities. Company policy prohibits holding or
issuing derivative financial instruments for trading purposes.
To qualify for hedge accounting, hedging instruments must be designated
as hedges and meet defined correlation and effectiveness criteria. These
criteria require that the anticipated cash flows and/or financial statement
effects of the hedging instrument substantially offset those of the position
being hedged.
Derivative contracts are reported at fair value on the Consolidated
Balance Sheet as both current and long term Accounts Receivable or Other
Liabilities. Deferred gains and losses on contracts designated as cash flow
hedges are recorded in Accumulated Other Comprehensive Income (OCI).
Ineffectiveness in hedging relationships is recorded as Other (Income) and
Expense in the current period.
INTEREST RATE CONTRACTS - Gains and losses on contracts designated as
cash flow hedges are initially deferred and recorded in OCI. Amounts are
transferred from OCI and recognized in income as Interest Expense in the same
period that the hedged item is recognized in income. Gains and losses on
contracts with no hedging designation are recorded in income currently as Other
(Income) and Expense.
FOREIGN CURRENCY CONTRACTS - Gains and losses on contracts designated
as cash flow hedges are initially deferred and recorded in OCI. Amounts are
transferred from OCI and recognized in income as Foreign Currency Exchange in
the same period that the hedged item is recognized in income. Gains and losses
on contracts with no hedging designation are recorded in income currently as
Foreign Currency Exchange.
The Company does not include premiums paid on forward currency
contracts in its assessment of hedge effectiveness. Premiums on contracts
designated as hedges are recognized in income as Foreign Currency Exchange over
the life of the contract.
NET INVESTMENT HEDGING - Nonderivative instruments denominated in
foreign currencies are used to hedge net investments in foreign subsidiaries.
Gains and losses on these instruments are deferred and recorded in OCI as
Foreign Currency Translation Adjustment. These gains and losses are only
recognized in income upon the complete or partial sale of the related investment
or the complete liquidation of the investment.
TERMINATION OF CONTRACTS - Deferred gains and losses in OCI are
recognized in income as Other (Income) and Expense when contracts are terminated
concurrently with the termination of the hedged position. To the extent that
such position remains outstanding, deferred gains and losses in OCI are
amortized to Interest Expense or Foreign Currency Exchange over the remaining
life of that position. Gains and losses on contracts that the Company
temporarily continues to hold after the early termination of a hedged position,
or that otherwise no longer qualify for hedge accounting, are recognized in
income as Other (Income) and Expense.
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- ---------------------------------------------
INTEREST RATE EXCHANGE CONTRACTS
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
hedge against the effects of adverse changes in 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, and are normally designated as cash flow hedges.
Floating rate swaps are used to convert the fixed rates of long term borrowings
into short term variable rates, and are normally designated as fair value
hedges. Interest rate swap contracts are thus used by the Company to separate
interest rate risk management from the debt funding decision.
Certain fixed rate contracts outstanding during 2001 mature during 2001
and have no hedge designation.
INTEREST RATE LOCK CONTRACTS
The Company will use, when appropriate, interest rate lock contracts to
hedge the risk-free rate component of anticipated long term debt issuances.
These contracts are designated as cash flow hedges of forecasted transactions.
Gains and losses on these contracts are amortized to income over the life of the
debt.
FOREIGN CURRENCY CONTRACTS
In order to reduce the impact of changes in foreign exchange rates on
consolidated results of operations and future foreign currency-denominated cash
flows, the Company will enter into foreign currency contracts. These contracts
reduce exposure to currency movements affecting existing foreign
currency-denominated assets, liabilities, firm commitments and forecasted
transactions resulting primarily from trade receivables and payables, equipment
acquisitions, intercompany loans and royalty agreements and forecasted purchases
and sales. In addition, the principal and interest on the Company's Swiss franc
bonds due 2006 and Euro300 million of the Eurobonds due 2005 are hedged by
currency swap agreements.
Contracts hedging the Swiss franc bonds, the Eurobonds and forecasted
transactions under intercompany royalty agreements are designated as cash flow
hedges. The hedged intercompany royalty transactions will occur during 2001 and
2002. Contracts hedging short-term trade receivables and payables normally have
no hedging designation.
Amounts are reclassified from OCI into earnings each period to offset
the effects of exchange rate movements on the principal and interest of the
Swiss franc bonds and the Eurobonds. Amounts are also reclassified concurrently
with the recognition of intercompany royalty expense.
HEDGES OF NET INVESTMENT IN FOREIGN OPERATIONS
In order to reduce the impact of changes in foreign exchange rates on
consolidated shareholders' equity, the Company has designated certain foreign
currency-denominated nonderivative instruments as hedges of its net investment
in various foreign operations.
On January 1, 2001, Euro100 million of the Company's 6 5/8% Eurobonds
due 2005 was designated as hedging the Company's net investment in European
subsidiaries which have the Euro as the functional currency. In addition, from
January 1 to February 6 of 2001, the Company's Y6,536,535,767 Sumitomo 1.2%
Convertible Note Payable Due August 2001 was designated as hedging the Company's
net investment in Japanese subsidiaries which have the Yen as the functional
currency. The Note Payable was converted into shares of the Common Stock of the
Company on February 6, 2001.
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (continued)
- ---------------------------------------------------------
RESULTS OF HEDGING ACTIVITIES
Ineffectiveness and premium amortization totaled $.4 million and $.9
million during the three and six months ended June 30, 2001, respectively.
Deferred net losses totaling $.9 million on hedges of forecasted transactions
are anticipated to be recognized in income during the twelve months ending June
30, 2002. It is not practicable to estimate the amount of deferred gains and
losses that will be recognized in income resulting from the remeasurement of the
derivative contracts of the Swiss franc bonds and the Eurobonds.
Deferred gains totaling $2.4 million and $5.6 million were recorded as
Foreign Currency Translation Adjustment during the three and six months ended
June 30, 2001, respectively, as a result of the designation of nonderivative
instruments as net investment hedges. These gains and losses are only
recognized in earnings upon the complete or partial sale of the related
investment or the complete liquidation of the investment.
RATIONALIZATIONS
- ----------------
The Company recorded a rationalization charge on the Consolidated
Statement of Income totaling $79.0 million ($57.1 million after tax) in the
2001 first quarter. Of this amount $40.7 million related to future cash
outflows, primarily associate severance costs and $38.3 million related to
non-cash charges, primarily $33.3 million for special termination benefits and
pension curtailments related to a voluntary exit program in the United States.
Of the $79.0 million charge, $66.5 million continued the rationalization
programs announced in the fourth quarter of 2000. These programs were for
global workforce reductions and manufacturing facility consolidations including
the closure of a tire plant in Latin America. The remaining $12.5 million
related to the closure of the Company's manufacturing facility in Italy
announced in 1999.
Associate-related rationalization costs for programs started in the
fourth quarter of 2000 totaled $152.0 million. Activity during 2001 is presented
below:
BALANCE AT 2001 BALANCE AT
(In millions) 12/31/00 CHARGES INCURRED 6/30/01
-------- ------- -------- -------
Plant downsizing and consolidation $48.0 $10.8 $ (56.4) $ 2.4
Worldwide associate reductions 25.2 48.6 (51.0) 22.8
----- ----- ------- -----
$73.2 $59.4 $(107.4) $25.2
===== ===== ======= =====
Under the above programs, the Company provided for the release of
approximately 7,100 associates around the world, primarily production and
support associates. To date, 5,300 associates have been released for which the
Company incurred costs totaling $107.4 million during the first half of 2001,
including 3,000 associates at a cost of $42.2 million in the second quarter. The
Company plans to release approximately 1,800 more associates under the above
program during 2001.
Rationalization costs, other than associate-related costs, for these
programs totaled $33.9 million and were primarily for the writeoff of equipment
taken out of service, scrap removal costs and noncancellable lease costs. The
Company plans to complete these actions during 2001. Activity during 2001 is
presented below:
BALANCE AT 2001 BALANCE AT
(In millions) 12/31/00 CHARGES INCURRED 6/30/01
-------- ------- -------- -------
Plant downsizing and consolidation $8.8 $7.1 $(10.7) $5.2
==== ==== ====== ====
The Company recorded a charge of $12.5 milllion in the first quarter
of 2001 related to the closing of a manufacturing facility in Italy. This
charge was for associate benefits accepted in the first quarter of 2001.
During 2001, $14 million of costs were incurred, including $4.9
million in the second quarter, primarily for the release of approximately 300
associates. In the second quarter of 2001, the Company finalized the closure of
the Italian manufacturing facility with the release of the remaining 35
associates. The remaining reserve of $2.8 million at June 30, 2001, relates
primarily to ongoing associate severance payments.
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
RATIONALIZATIONS (continued)
- ----------------------------
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 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.
During 2001, the Company incurred associate-related costs of $10.9
million for the release of approximately 600 associates, including approximately
400 associates at a cost of $5.4 million in the second quarter. At June 30,
2001, a balance of $12.5 million remained for the release of approximately 200
associates. The balance at June 30, 2001, for rationalization costs, other than
associate-related costs, was $8.9 million. The Company intends to complete these
actions by the end of the third quarter of 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 SIX MONTHS ENDED
(In millions) JUNE 30, JUNE 30,
2001 2000 2001 2000
----- ----- ----- -----
Average shares outstanding-basic 158.8 156.4 158.5 156.4
Stock options 2.4 - - -
1.2% Convertible Note - 2.3 - 2.3
----- ----- ----- -----
Average shares outstanding-diluted 161.2 158.7 158.5 158.7
===== ===== ===== =====
The average shares outstanding-diluted total for the first half of 2001
does not include the antidilutive impact of 2.2 million shares of potential
common stock associated with stock options and .3 million shares associated with
the Sumitomo 1.2% Convertible Note Payable.
NONCASH INVESTING AND FINANCING ACTIVITIES
- ------------------------------------------
The Consolidated Statement of Cash Flows is 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 Y13,073,070,934 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 Common Stock, without par value, of the
Company at a conversion price of Y5,731 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 Y13,073,070,934 (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 Common Stock, Y50 par value
per share, of Sumitomo at a conversion price of Y539 per share, subject to
certain adjustments. The principal amount of each Note was equivalent to $108.0
million at February 25, 1999.
The Company converted the Sumitomo Note in its entirety on July 27,
2000 into 24,254,306 shares of Sumitomo's Common Stock, which represents 10% of
Sumitomo's outstanding shares. Sumitomo converted Y6,536,535,167 principal
amount of the Company's Note into 1,138,030 shares of the Company's Common Stock
on August 15, 2000, and Sumitomo converted the remaining Y6,536,535,767
principal amount of the Company's replacement Note into 1,140,866 shares of the
Company's Common Stock on February 6, 2001.
-8-
10
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 $115.5 million at June 30, 2001 compared to $100.9
million at December 31, 2000. Changes in the fair value of the Sumitomo
Investment are reported in the Consolidated Balance Sheet as Accumulated Other
Comprehensive Income. The Sumitomo Investment was hedged during 1999 and 2000.
At June 30, 2001, the gross unrealized holding loss on the Sumitomo Investment,
net of the hedge, totaled $1.6 million ($1.0 million after tax).
ACCOUNTS RECEIVABLE
- -------------------
During the second quarter of 2001, the Company terminated its $550
million domestic accounts receivable continuous sale program and entered into a
new twelve-month revolving-period securitization program. The new program is
renewable for subsequent one-year periods upon request by the Company and
agreement by the participating financial institutions and results in the sale
of receivables through a special purpose company, up to a maximum of $800
million. The Company retained servicing responsibilities, subordinated
interests in the receivables transferred and a residual equity interest in the
special purpose company. Fees paid by the Company under this program are
based on certain variable market rate indices and are recorded as Other
(Income) and Expense. Results of operations and financial position of the
special purpose company are not included in the consolidated financial
statements of the Company.
The following table presents certain cash flows between the Company and
the special purpose company:
THREE MONTHS ENDED
(In millions) JUNE 30, 2001
--------------------
Proceeds from new securitizations $741.5
Proceeds from collections reinvested in
previous securtizations 915.3
Servicing fees received .6
Reimbursement for rebates and discounts issued (18.9)
At June 30, 2001, the level of net proceeds from sales under the program was
$744.7 million. In addition, the uncollected portion of receivables sold under
international agreements totaled $136.5 million at June 30, 2001.
OTHER (INCOME) AND EXPENSE
- --------------------------
Other (Income) and Expense in 2001 included a gain of $17.0 million
($13.9 million after tax) resulting from the sale of land and buildings in the
United Kingdom in the first quarter.
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 2001 presentation.
-9-
11
THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
SEGMENT INFORMATION
Unaudited
(In millions) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
-------- -------- -------- --------
SALES:
North American Tire $1,828.0 $1,757.5 $3,452.4 $3,487.6
European Union Tire 759.7 802.2 1,559.0 1,676.6
Eastern Europe, Africa and Middle East Tire 177.9 193.6 341.3 384.6
Latin American Tire 250.7 264.5 508.4 522.3
Asia Tire 128.4 137.9 247.4 275.9
-------- -------- -------- --------
TOTAL TIRES 3,144.7 3,155.7 6,108.5 6,347.0
Engineered Products 300.9 306.4 600.3 627.4
Chemical Products 271.6 293.8 563.2 571.8
-------- -------- -------- --------
TOTAL SEGMENT SALES 3,717.2 3,755.9 7,272.0 7,546.2
Inter-SBU Sales (133.3) (147.4) (283.4) (282.8)
Other (1.4) (1.2) 8.1 8.0
-------- -------- -------- --------
NET SALES $3,582.5 $3,607.3 $6,996.7 $7,271.4
======== ======== ======== ========
INCOME:
North American Tire $ 49.0 $ 86.1 $ 64.4 $ 136.3
European Union Tire 17.6 39.8 49.0 83.5
Eastern Europe, Africa and Middle East Tire 3.5 12.1 9.4 27.4
Latin American Tire 19.4 21.4 42.2 44.8
Asia Tire 6.7 6.3 10.6 16.1
-------- -------- -------- --------
TOTAL TIRES 96.2 165.7 175.6 308.1
Engineered Products 8.4 20.5 17.9 44.3
Chemical Products 12.9 30.0 29.3 53.4
-------- -------- -------- --------
TOTAL SEGMENT INCOME (EBIT) 117.5 216.2 222.8 405.8
Rationalizations and Asset sales - (4.7) (62.0) (4.7)
Interest expense (74.5) (69.9) (143.2) (132.0)
Foreign currency exchange 5.4 1.4 15.3 (3.7)
Minority interest in net income
of subsidiaries (8.7) (10.9) (16.5) (27.5)
Inter-SBU income (6.5) (8.0) (13.4) (17.4)
Other (18.9) (14.2) (52.2) (30.3)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES $ 14.3 $ 109.9 $ (49.2) $ 190.2
======== ======== ======== ========
-10-
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THE GOODYEAR TIRE & RUBBER COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
BUSINESS SEGMENTS
- -----------------
Portions of the items reported as Rationalizations and Other (Income)
and Expense on the Consolidated Statement of Income were not charged (credited)
to segment operating income (EBIT) but were attributable to the Company's seven
segments as follows:
(In millions) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
----- ----- ----- -----
North American Tire $ - $ (.7) $ 4.0 $ (.7)
European Union Tire - 6.0 6.2 6.0
Eastern Europe, Africa
and Middle East Tire - - 8.9 -
Latin American Tire - - - -
Asia Tire - - 3.6 -
----- ----- ----- -----
TOTAL TIRES - 5.3 22.7 5.3
Engineered Products - (.6) 3.0 (.6)
Chemical Products - - - -
----- ----- ----- -----
TOTAL SEGMENTS $ - $ 4.7 $25.7 $ 4.7
===== ===== ===== =====
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 SIX MONTHS ENDED
(In millions) JUNE 30, JUNE 30,
2001 2000 2001 2000
------ ------ ------ ------
NET SALES:
Asia Tire $128.4 $137.9 $247.4 $275.9
SPT 124.8 155.8 243.1 309.5
------ ------ ------ ------
$253.2 $293.7 $490.5 $585.4
====== ====== ====== ======
EBIT:
Asia Tire $ 6.7 $ 6.3 $ 10.6 $ 16.1
SPT (6.9) (.3) (13.9) (3.3)
------ ------ ------ ------
$ ( .2) $ 6.0 $ (3.3) $ 12.8
====== ====== ====== ======
-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 second quarter of 2001 were $3.58 billion, decreasing .7%
from $3.61 billion in the 2000 quarter. Net income of $7.8 million or $.05 per
share was recorded in the 2001 second quarter, compared to net income of $77.1
million or $.49 per share in the 2000 period.
In the first six months of 2001, sales of $7.0 billion decreased 3.8%
from $7.27 billion in 2000. A net loss of $38.9 million or $.25 per share was
recorded in the 2001 half compared to net income of $125.3 million or $.79 per
share in the 2000 first half.
Revenues decreased in both 2001 periods primarily due to lower tire
unit sales, the adverse impact of worldwide competitive pricing pressures and
the effect of currency translations on international results. The Company
estimates that versus 2000, currency translation adversely affected revenues by
approximately $145 million in the second quarter and $280 million in the six
months.
Worldwide tire unit sales in the second quarter of 2001 were 55.5
million units, a decrease of 427 thousand units or .8% compared to the 2000
period. North American (U.S. and Canada) volume increased 95.7 thousand units
or .3% in the quarter, while international unit sales decreased 522.7 thousand
units or 1.9%. Worldwide replacement unit sales increased .8% from the 2000
quarter, due to gains in North America. Original equipment unit sales were down
4.0% in the quarter, primarily in North America. Worldwide tire unit sales in
the first six months of 2001 decreased 2.3% from the 2000 period, with North
American units 4.6% lower and international units up .2%.
Cost of goods sold (CGS) was up in dollars and was 81.3% of sales in
the second quarter of 2001, compared to 79.0% in the 2000 period. CGS reflected
higher raw material and conversion costs combined with lower levels of plant
utilization. Costs in both years were favorably impacted by the effects of
rationalization actions, ongoing cost containment measures and synergies
realized from, among other actions, the strategic alliance with Sumitomo. CGS
was down in dollars for the first half of 2001 but rose to 81.4% of sales
compared to 79.6% in the first half of 2000.
Selling, administrative and general expense (SAG) in the second quarter
of 2001 was up in dollars and was 15.8% of sales
-12-
14
compared to 15.3% in the 2000 period primarily due to lower sales. SAG benefited
in both years from the favorable impact of ongoing worldwide cost containment
measures. SAG was 15.9% of sales for the first half of 2001 compared to 15.3% in
the year ago half.
The Company estimates the impact of foreign currency translation
reduced the 2001 quarter's and six month's operating income by approximately $30
million and $50 million, respectively.
Revenues in future periods may continue to be adversely affected by
competitive pricing pressures and changes in product mix and channels of
distribution. Revenues and earnings in future periods are likely to be
unfavorably impacted if the dollar strengthens versus various foreign
currencies. In addition, anticipated continued lower original equipment demand,
increases in energy costs and increases in labor costs, which may not be
recoverable in the market due to pricing pressures present in today's highly
competitive market, are also expected to adversely affect earnings in future
periods. Similarly, continued volatile economic conditions in emerging markets
could adversely affect sales and earnings in future periods. Currency
fluctuations and general economic and industry conditions may adversely impact
sales and earnings in future periods.
Interest expense of $74.5 million rose 6.6% in the 2001 second quarter
compared to the second quarter last year and 8.5% in the first six months of
2001 to $143.2 million compared to the first six months of 2000 due to higher
debt levels needed to fund working capital requirements.
Other (Income) and Expense was $8.4 million net expense in the 2001
second quarter compared to $9.1 million net expense in the 2000 period. For the
first half of 2001, Other (Income) and Expense was $1.9 million net expense
compared to $13.0 million net expense in 2000. The 2001 half included gains in
the first quarter of $17.0 million ($13.9 million after tax) resulting from the
sale of land and buildings in the United Kingdom.
Foreign currency exchange gain of $5.4 million rose $4.0 million from
last year's second quarter. For the first half of 2001, foreign currency
exchange gain was $15.3 million compared to foreign currency exchange expense of
$3.7 million in 2000. Foreign currency exchange in both 2001 periods benefited
from the impact of currency movements on U.S. dollar denominated monetary items,
primarily in Brazil.
For the 2001 first half, the Company's effective tax rate was 31.5%
compared to 29.8% in the first half of 2000.
RATIONALIZATION ACTIVITY
The Company recorded a rationalization charge on the Consolidated
Statement of Income totaling $79.0 million ($57.1
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15
million after tax) in the first quarter of 2001. The rationalization charge was
primarily related to associate severance and pension costs.
The Company continued in 2001 the rationalization programs announced in
the fourth quarter of 2000. These programs were for global workforce reductions
and manufacturing facility consolidations including the closure of a tire plant
in Latin America. Of the $79.0 million charge, $66.5 million related to the 2000
program and $12.5 million related to the closure of the Company's tire
manufacturing facility in Italy announced in 1999.
The Company provided for the release of approximately 7,100 associates
around the world, primarily production and support associates. To date,
approximately 5,300 associates have been released for which the Company incurred
costs totaling $107.4 million during the first half of 2001, including
approximately 3,000 associates at a cost of $42.2 million in the second quarter.
The Company plans to release approximately 1,800 more associates under the
program in 2001.
Rationalization costs, other than for associate-related costs, totaled
$33.9 million and were related to the writeoff of equipment taken out of
service, scrap removal costs and noncancellable lease costs.
The remaining reserve for these costs was $30.4 million at June 30,
2001.
The Company will substantially complete these actions during 2001.
Annual pretax savings of approximately $260 million are expected when the
planned actions have been fully implemented. The Company estimates that
operating costs were reduced by approximately $35 million in the first half of
2001, including approximately $25 million in the second quarter.
The Company recorded a charge of $12.5 million in the first quarter of
2001 related to the closing of a manufacturing facility in Italy. This charge
was for associate benefits accepted in the first quarter of 2001.
During 2001, $14 million of costs were incurred, including $4.9 million
in the second quarter, primarily for the release of approximately 300
associates. In the second quarter of 2001, the Company finalized the closure of
the Italian manufacturing facility with the release of the remaining associates.
The remaining reserve of $2.8 million at June 30, 2001, relates primarily to
ongoing associate severance payments.
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.
-14-
16
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. In
accordance with these actions approximately 600 associates were released at a
cost of $10.9 million during the first half of 2001, including approximately 400
associates in the second quarter at a cost of $5.4 million. The Company plans
to release approximately 200 more associates under this program during 2001.
The balance of the reserve for associate and other than associate-related costs
at June 30, 2001 was $21.4 million. The Company expects that these actions will
be completed during 2001, except for future rental payments under
noncancellable leases.
For further information, refer to the note to the financial statements,
Rationalizations.
NEW ACCOUNTING STANDARDS
The Company adopted 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 transition
adjustment resulting from the adoption of SFAS 133 increased Shareholders'
Equity by $5.4 million during the first half of 2001.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets," which addresses the accounting for goodwill and other
intangible assets. SFAS 142 specifies that, among other things, intangible
assets with an indefinite useful life and goodwill will no longer be amortized.
The standard requires goodwill to be periodically tested for impairment and
written down to fair value if considered impaired. The provisions of SFAS 142
are effective for fiscal years beginning after December 15, 2001, and are
effective for interim periods in the initial year of adoption. The Company is
currently assessing the financial statement impact of the adoption of SFAS 142.
SEGMENT INFORMATION
- -------------------
Segment EBIT was $117.5 million in the second quarter of 2001,
decreasing 45.7% from $216.2 million in the 2000 quarter. Segment operating
margin in the second quarter of 2001 was 3.2%, compared to 5.8% in the 2000
period.
In the six months, segment EBIT was $222.8 million, decreasing 45.1%
from $405.8 million in the 2000 period. Segment operating margin in the six
months was 3.1% compared to 5.4% in the 2000 period.
-15-
17
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 second quarter of 2001 were
$1.83 billion, increasing 4.0% from $1.76 billion in the 2000 quarter. In the
six months, sales of $3.45 billion decreased 1.0% from $3.49 billion in 2000.
Unit sales in the 2001 second quarter were 28.9 million, increasing .3%
from the 2000 period. Replacement unit sales increased 7.5% but original
equipment volume decreased 12.7%. Industry shipments of consumer replacement
tires were up about 1% during the second quarter compared with last year.
However, the Company's shipments in this segment grew approximately 10%.
Unit sales in the six months were 54.7 million, decreasing 4.6% from
the 2000 period. Replacement unit sales increased 2.4% and original equipment
volume decreased 17.4%.
Sales in both 2001 periods reflect the favorable impact of a change in
product mix to higher priced tires and price increases in the replacement
market. Sales were adversely affected in both 2001 periods by lower original
equipment volume resulting from production cutbacks by most of the Company's
original equipment customers that manufacture autos and commercial trucks.
On May 22, 2001, Ford Motor Company ("Ford") announced a customer
satisfaction program impacting 13 million units of a competitor's tires. Under
this program, Ford will replace such tires free of charge with approved brands.
Tire manufacturers have been requested to provide replacement products to
support Ford's program. The Company has increased production in response to this
request. Ford stated that about 2 million tires have been replaced, and it
expects to complete the program by the first quarter of 2002. The Company
supplied approximately 1 million tire units under this program during the second
quarter of 2001 which increased EBIT by approximately $20 million.
North American Tire segment EBIT was $49.0 million in the second
quarter of 2001, decreasing 43.1% from EBIT of $86.1 million in the 2000
quarter. Operating margin was 2.7%, compared to 4.9% in 2000.
In the six months, EBIT was $64.4 million, decreasing 52.8% from $136.3
million in 2000. Operating margin was 1.9%, compared to 3.9% in 2000.
EBIT was adversely affected in the 2001 periods by higher raw
-16-
18
material costs and higher conversion costs resulting from production cutbacks
to align inventory with demand.
EBIT in 2001 did not include rationalization charges, recorded in the
first quarter, totaling $4.0 million. EBIT in 2000 did not include the second
quarter reversal of $.7 million of 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, lower demand by original equipment customers, changes in product
mix, rising raw material and energy prices and general economic conditions.
EUROPEAN UNION TIRE
European Union Tire segment sales in the second quarter of 2001 were
$759.7 million, decreasing 5.3% from $802.2 million in the 2000 quarter. In the
six months, sales of $1.56 billion decreased 7.0% from $1.68 billion in 2000.
Unit sales in the 2001 second quarter were 15.0 million, decreasing
1.2% from the 2000 period. Replacement unit sales decreased 3.7% while original
equipment volume increased 4.1%.
Unit sales in the six months were 30.6 million, increasing .9% from the
2000 period. Replacement unit sales decreased 2.2% and original equipment volume
increased 7.9%
Revenues in the second quarter of 2001 decreased compared to 2000 due
to currency translation and lower volume in some market segments. Price
increases, however, had a favorable impact on revenues.
For the six months, revenues decreased compared to 2000 due to currency
translation and competitive pricing. Revenues were favorably impacted by higher
volume in the original equipment market.
The Company estimates that the effects of currency translation
adversely affected European Union Tire segment sales by approximately $60
million in the 2001 second quarter and $120 million in the six months compared
to the 2000 periods.
European Union Tire segment EBIT was $17.6 million in the second
quarter of 2001, decreasing 55.8% from $39.8 million in the 2000 quarter.
Operating margin was 2.3%, compared to 5.0% in 2000.
In the six months, EBIT was $49.0 million, decreasing 41.3% from $83.5
million in 2000. Operating margin was 3.1%, compared to 5.0% in 2000.
-17-
19
EBIT decreased in the 2001 quarter due to higher raw material costs,
competitive pricing, higher conversion costs due to production cuts, currency
translation and lower sales volume. EBIT was favorably impacted by lower SAG
costs from cost containment and rationalization programs.
For the six months, EBIT decreased compared to 2000 due to higher raw
material costs, higher conversion costs due to production cuts, currency
translation and competitive pricing. EBIT was favorably impacted by higher
sales volume and lower SAG costs from cost containment programs.
The Company estimates that the effects of currency translation,
especially the weak Euro versus the U.S. dollar, reduced operating income by
approximately $5 million in the 2001 second quarter and $10 million in the 2001
six months.
Rationalization charges totaling $23.2 million and the $17.0 million
gain on the sale of closed manufacturing and warehouse facilities in the United
Kingdom, both recorded in the first quarter, were not included in EBIT for 2001.
EBIT in 2000 did not include second quarter rationalization charges totaling
$6.0 million.
Revenues and EBIT in the European Union 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, currency
translation and general economic conditions.
EASTERN EUROPE, AFRICA AND MIDDLE EAST TIRE
Eastern Europe, Africa and Middle East Tire ("Eastern Europe Tire")
segment sales in the second quarter of 2001 were $177.9 million, decreasing 8.1%
from $193.6 million in the 2000 quarter. In the six months, sales of $341.3
million decreased 11.3% from $384.6 million in 2000.
Unit sales in the 2001 second quarter were 3.4 million, decreasing
11.1% from units sold in the 2000 period. Replacement unit sales decreased 8.0%
while original equipment volume decreased 20.1%.
Unit sales in the six months were 6.7 million, decreasing 6.0% from the
2000 period. Replacement unit sales decreased 3.9% while original equipment
volume decreased 12.1%.
Revenues in both 2001 periods decreased from the 2000 periods due to
currency devaluations in Turkey, South Africa and Slovenia and lower volume. The
Company estimates that the effects of currency translation adversely affected
Eastern Europe Tire segment sales by approximately $30 million in the second
quarter and $50 million in the six months compared to 2000.
-18-
20
Eastern Europe Tire segment EBIT was $3.5 million in the second quarter
of 2001, decreasing 71.1% from $12.1 million in the 2000 quarter. Operating
margin was 2.0%, compared to 6.3% in 2000.
In the six months, EBIT was $9.4 million, decreasing 65.7% from $27.4
million in 2000. Operating margin was 2.8%, compared to 7.1% in 2000.
EBIT in both 2001 periods decreased due primarily to the economic
crisis in Turkey, the effects of currency translation, and lower sales volume.
EBIT was favorably impacted by reduced SAG from cost containment and
rationalization programs. The Company estimates that the effects of currency
translation reduced operating income by approximately $10 million in the second
quarter and $20 million in the six months.
EBIT in 2001 did not include first quarter rationalization charges
totaling $8.9 million.
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, rising raw material and energy prices, continued
volatile economic conditions and currency translation.
LATIN AMERICAN TIRE
Latin American Tire segment sales in the second quarter of 2001 were
$250.7 million decreasing 5.2% from $264.5 million in the 2000 quarter. In the
six months, sales of $508.4 million decreased 2.7% from $522.3 million in 2000.
Unit sales in the 2001 second quarter were 5.0 million, increasing .6%
from the 2000 period. Replacement unit sales decreased 11.7% and original
equipment volume increased 40.8%.
Unit sales in the six months were 10.0 million, increasing 3.4% from
the 2000 period. Replacement unit sales decreased 7.4% and original equipment
volume increased 41.2%.
Revenues in both 2001 periods were adversely impacted by currency
translation, particularly in Brazil, and a shift in mix to the original
equipment market. Revenues benefited from higher volume and price increases in
some markets. The Company estimates that currency translation reduced sales by
approximately $25 million in the second quarter and $45 million in the six
months compared to 2000.
Latin American Tire segment EBIT was $19.4 million in the second
quarter of 2001, decreasing 9.3% from $21.4 million in the 2000 quarter.
Operating margin was 7.7%, compared to 8.1% in 2000.
-19-
21
In the six months, EBIT was $42.2 million, decreasing 5.8% from $44.8
million in 2000. Operating margin was 8.3%, compared to 8.6% in 2000.
EBIT in both 2001 periods reflected the favorable impact of price
increases, the benefits of cost reduction and rationalization programs and the
adverse effect of currency translation, higher raw material costs and a change
in mix to low margin original equipment tires. The Company estimates that the
effects of currency translation reduced operating income by approximately $10
million in the second quarter and $15 million in the six months.
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, continued volatile economic conditions and currency
translation.
ASIA TIRE
Asia Tire segment sales in the second quarter of 2001 were $128.4
million, decreasing 6.9% from $137.9 million in the 2000 quarter. In the six
months, sales of $247.4 million decreased 10.3% from $275.9 million in 2000.
Unit sales in the 2001 second quarter were 3.2 million, increasing 1.7%
from the 2000 period. Replacement unit sales decreased 2.0% while original
equipment volume increased 13.4%.
Unit sales in the six months were 6.1 million, decreasing 1.2% from the
2000 period. Replacement unit sales decreased 5.4% while original equipment
volume increased 12.5%.
Revenues decreased in both 2001 periods compared to the 2000 periods
reflecting the adverse impacts of currency translation and competitive pricing
pressures and for the six months, lower volume. The Company estimates that
currency translation reduced sales by approximately $15 million in the second
quarter and $25 million in the six months compared to 2000.
Asia Tire segment EBIT was $6.7 million in the second quarter of 2001,
increasing 6.3% from $6.3 million in the 2000 quarter. Operating margin was
5.2%, compared to 4.6% in 2000.
In the six months, EBIT was $10.6 million, decreasing 34.2% from $16.1
million in 2000. Operating margin was 4.3%, compared to 5.8% in 2000.
EBIT increased slightly in the second quarter of 2001 as the adverse
impact of price competition and currency translation was offset by lower SAG and
conversion costs from cost containment programs.
-20-
22
For the six months, EBIT decreased due to the adverse effects of
currency translation, intense price competition and reduced sales volume. EBIT
was favorably impacted by lower SAG and conversion costs as a result of cost
containment programs.
The Company estimates that the effects of currency translation reduced
operating income by approximately $5 million in the second quarter and $10
million in the six months.
EBIT in 2001 did not include a first quarter rationalization charge
totaling $3.6 million.
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 costs and currency translation.
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 SIX MONTHS ENDED
(In millions) JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
NET SALES:
Asia Tire $128.4 $137.9 $247.4 $275.9
SPT 124.8 155.8 243.1 309.5
------ ------ ------ ------
$253.2 $293.7 $490.5 $585.4
====== ====== ====== ======
EBIT:
Asia Tire $ 6.7 $ 6.3 $ 10.6 $ 16.1
SPT (6.9) (.3) (13.9) (3.3)
------ ------ ------ ------
$ (.2) $ 6.0 $ (3.3) $ 12.8
====== ====== ====== ======
ENGINEERED PRODUCTS
Engineered Products segment sales in the second quarter of 2001 were
$300.9 million, decreasing 1.8% from $306.4 million in the 2000 quarter. In the
six months, sales of $600.3 million decreased 4.3% from $627.4 million in 2000.
Revenues in both 2001 periods decreased from 2000 due primarily to unit
sales decreases in the hose, air springs, power transmission belt and molded
products businesses resulting from production cutbacks by the automotive
industry.
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23
Engineered Products segment EBIT was $8.4 million in the second quarter
of 2001, decreasing 59.0% from $20.5 million in the 2000 quarter. Operating
margin was 2.8%, compared to 6.7% in 2000.
In the six months, EBIT was $17.9 million, decreasing 59.6% from $44.3
million in 2000. Operating margin was 3.0%, compared to 7.1% in 2000.
EBIT in the 2001 periods decreased due primarily to lower revenues,
higher raw material costs and increased costs associated with reduced capacity
utilization resulting from reduced demand from the automotive industry.
EBIT in 2001 did not include first quarter rationalization charges
totaling $3.0 million.
Revenues and EBIT in the Engineered Products segment may be adversely
affected in future periods by lower original equipment demand, competitive
pricing pressures, expected continuing unfavorable economic conditions in
certain markets, adverse economic conditions globally in the mining,
construction and agriculture industries, increasing raw material and energy
prices and currency translation.
CHEMICAL PRODUCTS
Chemical Products segment sales in the second quarter of 2001 were
$271.6 million, decreasing 7.6% from $293.8 million in the 2000 quarter. In the
six months, sales of $563.2 million decreased 1.5% from $571.8 million in 2000.
Approximately 50% of Chemical Products segment sales were made to the Company's
other segments.
Chemical Products segment EBIT was $12.9 million in the second quarter
of 2001, decreasing 57.0% from $30.0 million in the 2000 quarter. Operating
margin was 4.7%, compared to 10.2% in 2000.
In the six months, EBIT was $29.3 million, decreasing 45.1% from $53.4
million in 2000. Operating margin was 5.2%, compared to 9.3%.
Revenues decreased in both 2001 periods compared to 2000 due primarily
to lower volumes resulting from the slowdown in the tire industry. EBIT in both
2001 periods was down as increases in raw material and energy prices outpaced
price increases due to the competitive pricing environment.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Net cash provided by operating activities was $109.8 million during the
first six months of 2001, as reported on the
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24
Consolidated Statement of Cash Flows. Working capital requirements increased
for inventories and accounts payable.
During the second quarter of 2001, the Company terminated its $550
million domestic accounts receivable continuous sale program and entered into a
new twelve-month revolving-period securitization program. The new program is
renewable for subsequent one-year periods upon request by the Company and
agreement by the participating financial institutions and results in the sale
of receivables through a special purpose company, up to a maximum of $800
million. The Company retained servicing responsibilities, subordinated
interests in the receivables transferred and a residual equity interest in the
special purpose company. Fees paid by the Company under this program are
based on certain variable market rate indices and are recorded as Other
(Income) and Expense. Results of operations and financial position of the
special purpose company are not included in the consolidated financial
statements of the Company.
Net cash used in investing activities was $297.0 million during the
first six months of 2001. Capital expenditures totaled $221.2 million, and were
primarily for plant modernizations and new tire molds.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(In millions) 2001 2000 2001 2000
---- ---- ---- ----
Capital Expenditures $117.3 $139.0 $221.2 $266.7
Depreciation and
amortization $162.6 $159.8 $323.0 $320.2
Cash inflows of $40.0 million were realized from asset sales, primarily
from the sale of closed manufacturing and warehouse facilities in the United
Kingdom.
Net cash provided by financing activities was $227.8 million during the
first half of 2001, which was used primarily to support the previously mentioned
operating and investing activities.
(Dollars in millions) 6/30/01 12/31/00 6/30/00
------- -------- -------
Consolidated Debt $ 3,782.5 $ 3,585.8 $ 3,919.2
Debt to Debt and Equity 53.6% 50.6% 51.1%
On February 6, 2001 Sumitomo converted the Company's 1.2% Convertible
Note Due August 16, 2001 in the principal amount of (Y)6,536,535,767 into
1,140,866 shares of the Common Stock of the Company.
On March 30, 2001, the Company borrowed $800 million for a period of
three years under a bank term loan agreement with 27 domestic and international
banks. The term loan is due on March 30, 2004, although the Company may prepay
without penalty at the
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end of any interest period. The loan bears interest at a floating rate at
a spread over LIBOR for interest periods of 1,2,3,6 or 12 months, as selected by
the Company. Proceeds from the borrowing were used to repay short term debt
outstanding.
Substantial short term and long term credit sources are available to
the Company globally under normal commercial practices. At June 30, 2001, the
Company had an aggregate of $200 million of commercial paper outstanding. In
addition, at June 30, 2001, the Company had short term committed and uncommitted
bank credit arrangements totaling $1.8 billion, of which $.9 billion were
unused. The Company also had available long term credit arrangements at June 30,
2001, totaling $4.2 billion, of which $1.5 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.
-24-
26
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 debt funding decisions. At June 30, 2001, the interest rate on 46% of the
Company's debt was fixed by either the nature of the obligation or through the
interest rate swap contracts, compared to 48% at December 31, 2000 and 48% at
June 30, 2000. 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
June 30:
(Dollars in millions)
INTEREST RATE SWAP CONTRACTS
2001 2000
---- ----
Notional principal amount $ 300.0 $ 75.0
Pay fixed rate 5.28% 6.24%
Receive variable LIBOR 3.88% 6.86%
Average years to maturity 2.2 1.0
Fair value - asset (liability) $ .3 $ .8
Pro forma fair value - asset (liability) .2 .4
The pro forma fair value assumes a 10% decrease in variable market
interest rates at June 30, 2001 and 2000, 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 SIX MONTHS ENDED
(Dollars in millions) JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
Notional principal $ 50.0 $ 75.0 $ 50.0 $ 75.0
Pay fixed rate 6.25% 6.24% 6.25% 6.24%
Receive variable LIBOR 5.56% 6.45% 6.11% 6.28%
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The following table presents fixed rate debt information at June 30:
(In millions)
FIXED RATE DEBT 2001 2000
---- ----
Fair value - liability $ 1,710.8 $ 1,989.7
Pro forma fair value - liability 1,771.2 2,069.8
The pro forma fair value assumes a 100 basis point decrease in market
interest rates at June 30, 2001 and 2000, 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 enters into forward exchange contracts. These contracts
reduce exposure to currency movements affecting existing foreign
currency-denominated assets, liabilities, firm commitments and forecasted
transactions resulting primarily from trade receivables and payables, equipment
acquisitions, intercompany loans and royalty agreements and forecasted purchases
and sales. In addition, the principal and interest on the Company's Swiss franc
bonds due 2006 and Euro300 million of the Eurobonds due 2005 are hedged by
currency swap agreements.
Contracts hedging the Swiss franc bonds, the Eurobonds and forecasted
transactions under intercompany royalty agreements are designated as cash flow
hedges. The hedged intercompany royalty transactions will occur during 2001.
Contracts hedging short term trade receivables and payables normally have no
hedging designation.
-26-
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The following table presents foreign exchange contract information at
June 30:
(In millions)
FOREIGN EXCHANGE CONTRACTS
2001 2000
---- ----
Spot value (unfavorable) favorable $ (25.9) $ 45.5
Pro forma change in spot value 35.3 11.6
Contract maturities 07/01-03/06 07/00-03/06
Fair value asset (liability):
Swiss franc swap-current $ - $ 30.6
Swiss franc swap-long term 1.2 11.8
Euro swaps-long term (25.5) -
Other-current (1.6) 3.1
The pro forma change in spot value assumes a 10% change in foreign
exchange rates at June 30, 2001 and 2000, respectively, and reflects the
estimated change in the spot 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
Reference is made to the Annual Report of The Goodyear Tire & Rubber
Company ("Goodyear") on Form 10-K for the year ended December 31, 2000 (the
"2000 10-K"), wherein at Item 3, paragraphs (F), (G) and (H), page 26, Goodyear
reported certain legal proceedings, and to the Quarterly Report of Goodyear on
Form 10-Q for the quarter ended March 31, 2001 (the "2001 1st Quarter 10-Q"),
wherein at Part II, Item 1, paragraphs (3) and (4), page 28, Goodyear reported
developments in respect of certain legal proceedings. Goodyear reports the
following developments in respect of the legal proceedings (3) and described at
paragraphs (F), (G) and (H) of Item 3 of the 2000 10-K and at paragraphs (3) and
(4) of Part II, Item 1 of the 2001 1st Quarter 10-Q:
(1) At paragraph (F), page 26, of the 2000 10-K and paragraph (3), page
28, of the 2001 1st Quarter 10-Q, Goodyear previously reported on certain class
action proceedings involving its load range E light truck tires. Goodyear also
has fourteen non-class action lawsuits related to deaths and/or serious injuries
allegedly involving our load range E light truck tires. At paragraph (G), page
26, of the 2000 10-K, Goodyear also previously reported on a National Highway
Traffic Safety Administration ("NHTSA") preliminary evaluation involving certain
of its load range E light truck tires. From 1991 to 2000, Goodyear produced and
sold approximately 23 million of these load range E tires of which Goodyear
believes many are no longer in service. Under the law and regulations governing
NHTSA, this evaluation could end in a dismissal, other action or could proceed
and ultimately result in a recall order. In any event, Goodyear believes that
its load range E tires are free of design and manufacturing defects.
(2) At paragraph (H), page 26, of the 2000 10-K and paragraph (4), page
28, of the 2001 1st Quarter 10-Q, Goodyear previously reported that it was one
of numerous defendants in legal proceedings involving claims of individuals
relating to alleged exposure to materials containing asbestos in products
allegedly manufactured by Goodyear or present in Goodyear's facilities. The
number of new asbestos-related claims filed against Goodyear has increased since
1998 with a substantial majority of all claims filed against Goodyear having
been filed in that period. Accordingly, Goodyear has limited experience in
resolving or otherwise disposing of these claims. The number of new claims filed
in the second quarter of 2001 was approximately 7,000 and at June 30, 2001,
approximately 58,000 claims were pending. Goodyear cannot predict the number of
claims which may be filed against Goodyear in the future. While Goodyear has
insurance policies that it believes address asbestos-related liabilities,
Goodyear also cannot predict the extent to which costs of these claims will be
covered by insurance.
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 June 30, 2001.
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S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GOODYEAR TIRE & RUBBER COMPANY
(Registrant)
Date: August 1, 2001 By /s/ Richard J. Kramer
--------------------------------------
Richard J. Kramer, Vice President
(Signing on behalf of Registrant as a
duly authorized officer of Registrant
and signing as the principal
accounting officer of Registrant.)
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THE GOODYEAR TIRE & RUBBER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
INDEX OF EXHIBITS
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO. * Description of Exhibit NUMBER
---------------- ---------------------- ------
3 ARTICLES OF INCORPORTATION AND BY-LAWS
--------------------------------------
(a) Certificate of Amended Articles of
Incorporation of The Goodyear Tire & Rubber
Company ("Goodyear"), dated December 20, 1954,
and Certificate of Amendment to Amended
Articles of Incorporation of Goodyear, dated
April 6, 1993, and Certificate of Amendment to
Amended Articles of Incorporation of Goodyear
dated June 4, 1996, three documents comprising
Goodyear's Articles of Incorporation as
amended (incorporated by reference, filed as
Exhibit 3.1 to Goodyear's Form 10-Q for the
quarter ended June 30, 1996, File No. 1-1927).
(b) Code of Regulations of Goodyear, 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 Goodyear'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 Goodyear; First Chicago Trust Company of
New York as transfer agent and registrar
(incorporated by reference, filed as Exhibit
4.3 to Goodyear's Form 10-Q for the quarter
ended September 30, 1996, File No. 1-1927).
- ----------
*Pursuant to Item 601 of Regulation S-K.
E-1
33
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO. * Description of Exhibit NUMBER
---------------- ---------------------- ------
4 (b) Conformed copy of Rights Agreement, dated
as of June 4, 1996, between Goodyear and First
Chicago Trust Company of New York, Rights
Agent (incorporated by reference, filed as
Exhibit 1 to Goodyear's Registration Statement
on Form 8-A dated June 11, 1996 and as Exhibit
4(a) to Goodyear's 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 Goodyear and First Chicago Trust
Company of New York, Rights Agent
(incorporated by reference, filed as Exhibit
4.1 to Goodyear's 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 Goodyear 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 as Exhibit 4.1 to Goodyear's
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 Goodyear and The Chase Manhattan
Bank, as Trustee, as supplemented on March 14,
2000 (incorporated by reference, filed as
Exhibit 4.1 to Goodyear's Form 10-Q for the
quarter ended March 31, 2000, File No.
1-1927).
(f) Conformed copy of Term Loan Agreement,
dated as of March 30, 2001, among Goodyear,
the Lenders named therein, The Chase Manhattan
Bank, as Agent, and Chase Manhattan
International Limited, as London Agent
(incorporated by reference, filed as Exhibit
4.1 to Goodyear's Form 10-Q for the quarter
ended March 31, 2001, File No. 1-1927).
- ----------
*Pursuant to Item 601 of Regulation S-K.
E-2
34
EXHIBIT EXHIBIT
------- -------
TABLE ITEM NO. * Description of Exhibit NUMBER
---------------- ---------------------- ------
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 June 30, 2001.
In accordance with paragraph (iii) to Item
601 (b)(4) 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 June 30, 2001 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 Receivables Purchase 10.1
Agreement, dated as of April 27, 2001,
between Goodyear and Wingfoot A/R LLC.
(b) Conformed copy of Base Indenture, dated as 10.2
of April 27, 2001, between Wingfoot A/R LLC and
The Chase Manhattan Bank, as Indenture Trustee.
10 (c) Conformed copy of Series 2001-1 Indenture 10.3
Supplement, dated as of April 27, 2001, among
Wingfoot A/R LLC, Goodyear, as Collection
Agent, the CP Conduit Purchasers named
therein, the APA Banks named therein, the
Funding Agents named therein, The Chase
Manhattan Bank, as Administrative Agent, and
The Chase Manhattan Bank, as Indenture
Trustee.
12 STATEMENT RE COMPUTATION
OF RATIOS
---------------------------------------------
Statement setting forth the computation of 12
Ratio of Earnings to Fixed Charges.
- ----------
*Pursuant to Item 601 of Regulation S-K.
E-3